CHINA EDUCATION ALLIANCE, INC. 3% CONVERTIBLE SUBORDINATED NOTE DUE SEPTEMBER 30, 2007
Exhibit
99.3
NEITHER
THIS NOTE NOR THE SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK OR COMMON
STOCK
OR WARRANTS ISSUABLE UPON CONVERSION OF THIS NOTE HAS BEEN REGISTERED UNDER
THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW, AND SUCH
SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR STATE LAW OR AN OPINION
OF
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
CHINA
EDUCATION ALLIANCE, INC.
3%
CONVERTIBLE SUBORDINATED NOTE DUE SEPTEMBER 30, 2007
FOR
VALUE
RECEIVED, China Education Alliance, Inc., a North Carolina corporation (the
“Company”), hereby promises to pay to the order of EOS Holdings or registered
assigns (the “Holder”), the principal amount of one hundred twenty five thousand
dollars ($125,000) on September 30, 2007 (“Maturity Date”). Interest on the
outstanding principal balance shall be paid at the rate of three percent
(3%)
per annum, payable on the Maturity Date. Interest shall be computed on the
basis
of a 360-day year, using the number of days actually elapsed. This Note is
issued pursuant to a securities purchase agreement (the “Agreement”) dated May
8, 2007, by and among the Company, ▇▇▇▇▇▇ Partners LP and the other Investors
named therein. All terms defined in the Agreement and used in this Note shall
have the same meaning in this Note as in the Agreement.
Article
1.
Covenants
of the Company
(a) Amendment
to Certificate of Incorporation.
The
Company shall, (i) file the Proxy Statement with the SEC, not later than
thirty
(30) days from the issuance of this Note, (ii) mail the information statement
to
stockholders within five (5) business days after the SEC has completed its
review of the information statement, of, if the SEC does not review the
information statement, within fifteen (15) business days after the information
statement is filed with the SEC, and (iii) file
the
Certificate of Amendment and the Certificate of Designation with the Secretary
of State of the State of North Carolina promptly, but not later than three
(3)
business days the stockholders have approved the Certificate of
Amendment.
(b) Fundamental
Transaction.
The
Company shall not enter into any agreement with respect to any Fundamental
Transaction, as defined in the Agreement, or consummate any Fundamental
Transaction without the approval of the Holder.
Article
2.
Events
of Default; Acceleration
(a) Events
of Default Defined.
The
entire unpaid principal amount of this Note, together with interest thereon
shall, on written notice to the Company given by the holders of this Note,
forthwith become and be due and payable if any one or more the following
events
(“Events of Default”) shall have occurred (for any reason whatsoever and whether
such happening shall be voluntary or involuntary or be affected or come about
by
operation of law pursuant to or in compliance with any judgment, decree,
or
order of any court or any order, rule or regulation of any administrative
or
governmental body) and be continuing. An Event of Default shall
occur:
(i) if
failure shall be made in the payment of the principal or interest on the
Note
when and as the same shall become due and such failure shall continue for
a
period of five (5) business days after such payment is due; or
(ii) if
the
Company shall violate or breach any of the representations, warranties and
covenants contained in the Note or the Agreement and such violation or breach
shall continue for thirty (30) days after written notice of such breach shall
been received by the Company from the Holder; or
(iii) if
the
Company or any Significant Subsidiary (which term shall mean any subsidiary
of
the Company which would be considered a significant subsidiary, as defined
in
Rule 1-02 of Regulation S-X of the SEC shall consent to the appointment of
a
receiver, trustee or liquidator of itself or of a substantial part of its
property, or shall admit in writing its inability to pay its debts generally
as
they become due, or shall make a general assignment for the benefit of
creditors, or shall file a voluntary petition in bankruptcy, or an answer
seeking reorganization in a proceeding under any bankruptcy law (as now or
hereafter in effect) or an answer admitting the material allegations of a
petition filed against the Company or any Significant Subsidiary, in any
such
proceeding, or shall by voluntary petition, answer or consent, seek relief
under
the provisions of any other now existing or future bankruptcy or other similar
law providing for the reorganization or winding up of corporations, or an
arrangement, composition, extension or adjustment with its or their creditors,
or shall, in a petition in bankruptcy filed against it or them be adjudicated
a
bankrupt, or the Company or any Significant Subsidiary or their directors
or a
majority of its stockholders shall vote to dissolve or liquidate the Company
or
any Significant Subsidiary other than a liquidation involving a transfer
of
assets from a Subsidiary to the Company or another Subsidiary; or
(iv) if
an
involuntary petition shall be filed against the Company or any Significant
Subsidiary seeking relief against the Company or any Significant Subsidiary
under any now existing or future bankruptcy, insolvency or other similar
law
providing for the reorganization or winding up of corporations, or an
arrangement, composition, extension or adjustment with its or their creditors,
and such petition shall not be vacated or set aside within ninety (90) days
from
the filing thereof; or
(v) if
a
court of competent jurisdiction shall enter an order, judgment or decree
appointing, without consent of the Company or any Significant Subsidiary,
a
receiver, trustee or liquidator of the Company or any Significant Subsidiary,
or
of all or any substantial part of the property of the Company or any Significant
Subsidiary, or approving a petition filed against the Company or any Significant
Subsidiary seeking a reorganization or arrangement of the Company or any
Significant Subsidiary under the Federal bankruptcy laws or any other applicable
law or statute of the United States of America or any State thereof, or any
substantial part of the property of the Company or any Significant Subsidiary
shall be sequestered; and such order, judgment or decree shall not be vacated
or
set aside within ninety (90) days from the date of the entry thereof;
or
(vi) if,
under
the provisions of any law for the relief or aid of debtors, any court of
competent jurisdiction shall assume custody or control of the Company or
any
Significant Subsidiary or of all or any substantial part of the property
of the
Company or any Significant Subsidiary and such custody or control shall not
be
terminated within ninety (90) days from the date of assumption of such custody
or control.
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(b) Rights
of Note Holder.
Nothing
in this Note shall be construed to modify, amend or limit in any way the
right
of the holder of this Note to bring an action against the Company.
Article
3.
Conversion
(a) Automatic
Conversion.
Upon
the filing of both the Restated Certificate and the Certificate of Designation,
the principal and interest of this Note shall be converted into such number
of
shares of Series A Preferred Stock and Warrants to purchase the number of
shares
of Common Stock as is set forth on Schedule A to this Agreement. Such shares
of
Series A Preferred Stock and Warrants are referred to as the Automatic
Conversion Securities. Upon such conversion, this Note and the Company’s
obligations under this Note (including the obligation to pay interest) shall
terminate.
(b) Conversions
at Option of Holder.
This
Note shall be initially convertible (subject to the 4.9% Limitations, as
defined
in Section 3(d) of this Note), in whole at any time or in part from time
to time
into such number of shares of Common Stock and Warrants to purchase such
number
of shares of Common Stock as is determined by multiplying each element of
the
Optional Conversion Securities by a fraction, the numerator of which is the
principal amount being converted and the denominator of which is the initial
principal amount of this Note. The Optional Conversion Securities are set
forth
on Schedule B to this Agreement. Holders shall effect conversions by providing
the Company with the form of conversion notice attached hereto as Annex
A
(a
“Notice
of Conversion”)
executed by the Holder, together with the delivery by the Holder to the Company
of this Note, with this Note being duly endorsed in full for transfer to
the
Company or with an applicable stock power duly executed by the Holder in
the
manner and form as deemed reasonable by the transfer agent of the Common
Stock;
provided, however, that at the election of the Holder, the Holder may execute
the Notice of Conversion and transmit the Notice of Conversion to the Company.
Each Notice of Conversion shall specify the principal amount of this Note
to be
converted, the principal amount of this Note outstanding prior to the conversion
at issue, the principal amount of this Note owned subsequent to the conversion
at issue, and the date on which such conversion is to be effected, which
date
may not be prior to the date the Holder delivers such Notice of Conversion
and
the Note to the Company by overnight delivery service or by telecopier or
PDF
(the “Conversion
Date”).
If no
Conversion Date is specified in a Notice of Conversion, the Conversion Date
shall be the Trading Day immediately following the date that such Notice
of
Conversion and applicable stock certificates are received by the Company.
The
calculations and entries set forth in the Notice of Conversion shall control
in
the absence of manifest or mathematical error. The principal amount of this
Note
being converted into Optional Conversion Securities in accordance with the
terms
of this Section 3(b) shall be canceled and may not be reissued.
(c) Automatic
Conversion Upon Change of Control.
This
Note shall be automatically converted into the Optional Conversion Securities
upon the close of business on the business day immediately preceding the
date
fixed for consummation of any transaction resulting in a Change of Control
of
the Company (an “Automatic
Conversion Event”).
A
“Change in Control” means a consolidation or merger of the Company with or into
another company or entity in which the Company is not the surviving entity
or
the sale of all or substantially all of the assets of the Company to another
company or entity not controlled by the then existing stockholders of the
Company in a transaction or series of transactions. The Company shall not
be
obligated to issue certificates evidencing the Common Stock and Warrants
or
other consideration issuable upon such conversion unless this Note is either
delivered to the Company or its transfer agent or the Holder notifies the
Company or its transfer agent in writing that such certificates have been
lost,
stolen, or destroyed and executes an agreement satisfactory to the Company
to
indemnify the Company from any loss incurred by it in connection therewith.
Upon
the conversion of this Note pursuant to this Section 3(c), the Company shall
promptly send written notice thereof, by hand delivery or by overnight delivery,
to the Holder at its address then shown on the records of the Company, which
notice shall state that this Note must be surrendered at the office of the
Company (or of its transfer agent for the Common Stock, if
applicable).
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(d) Beneficial
Ownership Limitation.
Except
as provided in Section 3(c) of this Note, which shall apply as stated therein
if
an Automatic Conversion Event shall occur, the Company shall not effect any
conversion of this Note, and the Holder shall not have the right to convert
any
portion of this Note to the extent that after giving effect to such conversion,
the Holder (together with the Holder’s Affiliates) would beneficially own in
excess of 4.9% of the number of shares of the Common Stock outstanding
immediately after giving effect to such conversion. For purposes of the
foregoing sentence, the number of shares of Common Stock beneficially owned
by
the Holder and its affiliates shall include the number of shares of Common
Stock
issuable upon conversion of the Note and upon exercise of the Warrants issued
upon conversion of this Note with respect to which the determination of
beneficial ownership is being made, but shall exclude the number of shares
of
Common Stock which would be issuable upon (A) conversion of the remaining,
non-converted portion of this Note beneficially owned by the Holder or any
of
its affiliates, and (B) exercise or conversion of the unexercised or
non-converted portion of any other securities of the Company (including
warrants) subject to a limitation on conversion or exercise analogous to
the
limitation contained herein beneficially owned by the Holder or any of its
affiliates, so long as such other securities of the Company are not exercisable
nor convertible within sixty (60) days from the date of such
determination. For purposes of this Section 3(f), in determining the
number of outstanding shares of Common Stock, the Holder may rely on the
number
of outstanding shares of Common Stock as reflected in the most recent of
the
following: (A) the Company’s most recent quarterly reports, Form 10-Q, Form
10-QSB, Annual Reports, Form 10-K, or Form 10-KSB, as the case may be, as
filed
with the Commission under the Exchange Act (B) a more recent public announcement
by the Company or (C) any other written notice by the Company or the Company’s
transfer agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of the Holder, the Company
shall within two (2) Trading Days confirm orally and in writing to the Holder
the number of shares of Common Stock then outstanding. In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Company, including
the
Note, by the Holder or its affiliates since the date as of which such number
of
outstanding shares of Common Stock was publicly reported by the Company.
Beneficial ownership shall be calculated in accordance with Section 13(d)
of the
Exchange Act. This Section 3(f) may be not be waived or amended. The limitation
set forth in this Section 3(f) is referred to as the “4.9%
Limitation.”
(e) Mechanics
of Conversion.
The
following provision shall relate to the delivery of the shares of Common
Stock
issuable as part of the Optional Conversion Securities and Default Conversion
Securities and are referred to as the “Conversion Shares.”
(i) Delivery
of Certificate Upon Conversion.
Except
as otherwise set forth herein, not later than three Trading Days after each
Conversion Date (the “Share
Delivery Date”),
the
Company shall deliver to the Holder a certificate or certificates which,
after
the Effective Date, shall be free of restrictive legends and trading
restrictions (other than those required by the Agreement and the 1933 Act)
representing the number of shares of Common Stock and Warrants being acquired
upon the conversion of this Note. After the effective date of the Conversion
Shares Registration Statement, as defined in the Certificate of Designation,
the
Company shall, upon request of the Holder, deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Company or another established
clearing Company performing similar functions if the Company’s transfer agent
has the ability to deliver shares of Common Stock in such manner. If in the
case
of any Notice of Conversion such certificate or certificates are not delivered
to or as directed by the applicable Holder by the third Trading Day after
the
Conversion Date, the Holder shall be entitled to elect by written notice
to the
Company at any time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Company shall
immediately return the this Note to the Holder.
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(ii) Obligation
Absolute; Partial Liquidated Damages.
The
Company’s obligations to issue and deliver the Conversion Shares upon conversion
of this Note in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same,
any
waiver or consent with respect to any provision hereof, the recovery of any
judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Company
or any
violation or alleged violation of law by the Holder or any other person,
and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of
such
Conversion Shares. In the event a Holder shall elect to convert any or all
of
this Note, the Company may not refuse conversion based on any claim that
such
Holder or any one associated or affiliated with the Holder of has been engaged
in any violation of law, agreement or for any other reason (other than the
inability of the Company to issue shares of Common Stock as a result of the
4.9%
Limitation) unless, an injunction from a court, on notice, restraining and
or
enjoining conversion of all or part of this Note shall have been sought and
obtained and the Company posts a surety bond for the benefit of the Holder
in
the amount of 150% of the Conversion Value of the principal amount of the
Note
outstanding (i.e.,
the
value of the shares of Common Stock issued upon conversion of such principal
amount of this Note) which is subject to the injunction, which bond shall
remain
in effect until the completion of arbitration/litigation of the dispute and
the
proceeds of which shall be payable to such Holder to the extent it obtains
judgment. In the absence of an injunction precluding the same, the Company
shall
issue Conversion Shares upon a properly noticed conversion. If the Company
fails
to deliver to the Holder such certificate or certificates pursuant to Section
3(e)(i) within two Trading Days of the Share Delivery Date applicable to
such
conversion, the Company shall pay to such Holder, in cash, as liquidated
damages
and not as a penalty, for each $5,000 of Conversion Value of Note being
converted, $50 per Trading Day (increasing to $100 per Trading Day after
three
(3) Trading Days and increasing to $200 per Trading Day six (6) Trading Days
after such damages begin to accrue) for each Trading Day after the Share
Delivery Date until such certificates are delivered. Nothing herein shall
limit
a Holder’s right to pursue actual damages for the Company’s failure to deliver
certificates representing shares of Common Stock and Warrants upon conversion
within the period specified herein and such Holder shall have the right to
pursue all remedies available to it hereunder, at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief.
Terms defined in the Certificate of Designation and used in this Section
3(e)
shall have the same meaning in this Section 3(e) as in the Certificate of
Designation.
(iii) Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion.
If the
Company fails to deliver to the Holder such certificate or certificates pursuant
to Section 6(e)(i) by a Share Delivery Date, and if after such Share Delivery
Date the Holder purchases (in an open market transaction or otherwise) Common
Stock to deliver in satisfaction of a sale by such Holder of the Conversion
Shares which the Holder was entitled to receive upon the conversion relating
to
such Share Delivery Date (a “Buy-In”),
then
the Company shall pay in cash to the Holder the amount by which (x) the Holder’s
total purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number of
shares
of Common Stock that such Holder was entitled to receive from the conversion
at
issue multiplied by (2) the price at which the sell order giving rise to
such
purchase obligation was executed. For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect
to
an attempted conversion of a portion of this Note with respect to which the
aggregate sale price giving rise to such purchase obligation is $10,000,
under
clause (A) of the immediately preceding sentence the Company shall be required
to pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In, together
with applicable confirmations and other evidence reasonably requested by
the
Company. Nothing herein shall limit a ▇▇▇▇▇▇’s right to pursue any other
remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with
respect to the Company’s failure to timely deliver certificates representing
shares of Common Stock upon conversion of this Note as required pursuant
to the
terms hereof.
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(iv) Reservation
of Shares Issuable Upon Conversion.
The
Company covenants that it will at all times reserve and keep available out
of
its authorized and unissued shares of Common Stock solely for the purpose
of
issuance upon conversion of this Note and upon conversion of the Series A
Preferred Stock issuable upon conversion of this Note and upon exercise of
the
Warrants issuable upon conversion of this Note, each as herein provided,
free
from preemptive rights or any other actual contingent purchase rights of
persons
other than the Holders, not less than such number of shares of the Common
Stock
as shall (subject to any additional requirements of the Company as to
reservation of such shares set forth in the Purchase Agreement) be issuable
upon
the conversion of this Note including shares of Common Stock issuable upon
exercise of any Warrants issued or issuable upon conversion of this Note.
The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
non-assessable and, if the Conversion Shares Registration Statement is then
effective under the 1933 Act, registered for public sale in accordance with
such
Conversion Shares Registration Statement.
(v) Fractional
Shares.
Upon a
conversion hereunder, the Company shall not be required to issue stock
certificates representing fractions of shares of the Common Stock. All
fractional shares shall be carried forward and any fractional shares which
remain after the Holder converts the full principal amount of this Note shall
be
dropped and eliminated.
(vi) Transfer
Taxes.
The
issuance of certificates for shares of the Common Stock and Warrants on
conversion of this Note shall be made without charge to the Holders thereof
for
any documentary stamp or similar taxes that may be payable in respect of
the
issue or delivery of such certificate, provided that the Company shall not
be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any such certificate upon conversion in a
name
other than that of the Holder, and the Company shall not be required to issue
or
deliver such certificates unless or until the person or persons requesting
the
issuance thereof shall have paid to the Company the amount of such tax or
shall
have established to the satisfaction of the Company that such tax has been
paid.
(vii) Absolute
Obligation.
Except
as expressly provided herein, no provision of this Note shall alter or impair
the obligation of the Company, which is absolute and unconditional, to pay
the
liquidated damages (if any) on, this Note at the time, place, and rate, and
in
the coin or currency, herein prescribed.
(f) Certain
Adjustments.
(i) Stock
Dividends and Stock Splits.
If the
Company, at any time from and after the Closing Date, while this Note is
outstanding: (A) shall pay a stock dividend or otherwise make a distribution
or
distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock (which, for avoidance
of
doubt, shall not include any shares of Common Stock issued by the Company
pursuant to this Note), (B) subdivide outstanding shares of Common Stock
into a
larger number of shares, (C) combine (including by way of reverse stock split)
outstanding shares of Common Stock into a smaller number of shares, or (D)
issue
by reclassification of shares of the Common Stock any shares of capital stock
of
the Company, then the number of shares of Common Stock in the Optional
Conversion Securities shall be multiplied by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding after such event
and
of which the denominator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such event. Any
adjustment made pursuant to this Section 3(f)(i) shall become effective
immediately after the record date for the determination of stockholders entitled
to receive such dividend or distribution and shall become effective immediately
after the effective date in the case of a subdivision, combination or
re-classification.
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(ii) Price
Adjustment.
From
and after the Closing Date and until such time as this Note is no longer
outstanding, except for (i) Exempt Issuances, (ii) issuances covered by Sections
3(f)(i) and 3(f)(iii) of this Note, or (iii) an issuance of Common Stock
upon
exercise or upon conversion of warrants, options or other convertible securities
for which an adjustment has already been made pursuant to this Section 3(f),
as
to all of which this Section 3(f)(ii) does not apply, if the Company closes
on
the sale or issuance of Common Stock at a price, or issues warrants, options,
convertible debt or equity securities with a exercise price per share or
conversion price which is less than the Conversion Price then in effect (such
lower sales price, conversion or exercise price, as the case may be, being
referred to as the “Lower Price”), the number of shares of Common Stock issuable
as part of the Optional Conversion Securities shall be to a number determined
by
fraction, the numerator of which is thirty seven cents ($.37) and the
denominator of which is the Lower Price. For purpose of determining the exercise
price of warrants issued by the Company, the price, if any, paid per share
for
the warrants shall be added to the exercise price of the warrants.
(iii) Warrants
and Series A Preferred Stock.
The
number of shares of Series A Preferred Stock and the number of shares of
Common
Stock issuable upon exercise of the Warrants shall be adjusted as provided
in
the Certificate of Designation and in the Warrants, respectively, with respect
to any events of the type described in this Section 3(f) which occur subsequent
to the Closing Date.
(g) Pro
Rata Distributions.
The
Company shall not, at any time while this Note is outstanding, make any
distribution to holders of Common Stock of evidences of its indebtedness
or
assets or rights or warrants to subscribe for or purchase any
security.
(h) Calculations.
All
calculations under this Section 3 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be.
(i) Notice
to Holders.
(i) Adjustment
to Conversion Price.
Whenever the number of shares of Common Stock issuable as part of the Optional
Conversion Securities is adjusted pursuant to this Section 3, the Company
shall
promptly mail to each Holder a notice setting forth the adjustment and setting
forth a brief statement of the facts requiring such adjustment. If the Company
issues a variable rate security, despite the prohibition thereon in the Purchase
Agreement, the Company shall be deemed to have issued Common Stock or Common
Stock equivalents at the lowest possible conversion or exercise price at
which
such securities may be converted or exercised in the case of a Variable Rate
Transaction (as defined in the Purchase Agreement), or the lowest possible
adjustment price in the case of an MFN Transaction (as defined in the Purchase
Agreement).
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(ii) Notices
of Other Events.
If (A)
the Company shall declare a dividend (or any other distribution) on the Common
Stock; (B) the Company shall declare a redemption of the Common Stock; (C)
the
Company shall authorize the granting to all holders of the Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights; (D) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock
or
any Fundamental Transaction, (E) the
Company shall authorize the voluntary or involuntary dissolution, liquidation
or
winding up of the affairs of the Company; then in each case, the Company
shall
cause to be filed at each office or agency maintained for the purpose of
conversion of this Note, and shall cause to be mailed
to
the Holders at their last addresses as they shall appear upon the stock
books of
the
Company, at least 30 calendar days prior to the applicable record or effective
date hereinafter specified, a notice stating (x)
the
date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken,
the date as of which the holders of the Common Stock of record to be entitled
to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification is expected to
become
effective or close, and the date as of which it is expected that holders
of the
Common Stock of record shall be entitled to exchange their shares of the
Common
Stock for securities, cash or other property deliverable upon such
reclassification or Fundamental Transaction; provided, that the failure to
mail
such notice or any defect therein or in the mailing thereof shall not affect
the
validity of the corporate action required to be specified in such
notice.
(j) Exempt
Issuance.
Notwithstanding the foregoing, no adjustment in the Conversion Price will
be
made in respect of an Exempt Issuance.
(k) Fundamental
Transaction.
If, at
any time while this Note is outstanding, (A) the Company effects any merger
or
consolidation of the Company with or into another Person, (B) the Company
effects any sale of all or substantially all of its assets in one or a series
of
related transactions, (C) any tender offer or exchange offer (whether by
the
Company or another Person) is completed pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities,
cash or property, or (D) the Company effects any reclassification of the
Common
Stock or any compulsory share exchange pursuant to which the Common Stock
is
effectively converted into or exchanged for other securities, cash or property
(in any such case, a “Fundamental Transaction”), then upon any subsequent
conversion of this Note, the Holder shall have the right to receive, for
each
Conversion Share that would have been issuable upon such conversion absent
such
Fundamental Transaction, the same kind and amount of securities, cash or
property as it would have been entitled to receive upon the occurrence of
such
Fundamental Transaction if it had been, immediately prior to such Fundamental
Transaction, the holder of one share of Common Stock (the “Alternate
Consideration”). For purposes of any such conversion, the determination of the
Conversion Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in
respect
of one share of Common Stock in such Fundamental Transaction, and the Company
shall apportion the Conversion Price among the Alternate Consideration in
a
reasonable manner reflecting the relative value of any different components
of
the Alternate Consideration. If holders of Common Stock are given any choice
as
to the securities, cash or property to be received in a Fundamental Transaction,
then the Holder shall be given the same choice as to the Alternate Consideration
it receives upon any conversion of this Note following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions,
any
successor to the Company or surviving entity in such Fundamental Transaction
shall assume this Note.
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8 -
(l) Default
Conversion Rights.
If the
Certificate of Amendment and the Certificate of Designation shall not have
been
filed with the Secretary of State of the State of North Carolina by September
30, 2007, this Note may be convertible into the number of shares of Common
Stock
set forth in Schedule C to this Agreement (the “Default Conversion
Securities”).
Article
4.
Subordination
(a) Agreement
of Subordination.
The
Company, for itself, its successors and assigns, covenants and agrees, and
the
Holder of this Note by his or her acceptance of this Note likewise covenants
and
agrees, that the payment of the principal of and interest on this Note is
hereby
expressly subordinated, to the extent and in the manner hereinafter set forth,
to the prior payment in full of all Senior Indebtedness, as hereinafter defined.
The provisions of this Article 4 shall constitute a continuing offer to all
persons who, in reliance upon such provision, become holders of, or continue
to
hold, Senior Indebtedness, and such provisions are made for the benefit of
the
holders of Senior Indebtedness, and such holders are hereby made obligees
hereunder the same as if their names were written herein as such, and they
and/or each of them may proceed to enforce such provisions.
(b) Company
Not to Make Payments with Respect to Note in Certain
Circumstances.
(i) Upon
the
maturity of any Senior Indebtedness by lapse of time, acceleration or otherwise,
all principal thereof and premium, if any, and interest thereon shall first
be
paid in full, or such payment duly provided for in cash or in a manner
satisfactory to the holder or holders of such Senior Indebtedness, before
any
payment is made by the Company (A) on account of the principal of or interest
on
this Note or (B) to acquire this Note.
(ii) Upon
the
happening of an event of default with respect to any Senior Indebtedness,
as
such event of default is defined therein or in the instrument under which
it is
outstanding, permitting the holders to accelerate the maturity thereof, then,
unless and until such event of default shall have been cured or waived or
shall
have ceased to exist, no payment shall be made by the Company (A) on account
of
the principal of or interest on this Note or (B) to acquire this
Note.
(iii) Subject
to Paragraphs 4(b)(i) and (ii), as long as any Senior Indebtedness shall
be
outstanding, (A) the Company shall not make any payment of principal on this
Note except upon the Maturity Date, and (B) the Company may pay interest
on this
Note as long as the payment of such principal or interest will not result
in an
event of default under the terms of the instruments pursuant to which the
Senior
Indebtedness is issued.
(iv) In
the
event that, notwithstanding the provision of this Paragraph 4(b), the Company
shall make any payment to the Holder of this Note on account of the principal
of
or interest on this Note after the happening of a default in payment of the
principal of or premium, if any, or interest on Senior Indebtedness or after
receipt by the Company of written notice of an event of default with respect
to
any Senior Indebtedness, then unless and until such default or event of default
shall have been cured or waived or shall have ceased to exist, such payment
shall be held by the holder of this Note in trust for the benefit of, and
shall
be paid forthwith over and delivered to, the holders of Senior Indebtedness
(pro
rata as to each of such holders on the basis of the respective amounts of
Senior
Indebtedness held by them) or their representative or the trustee under the
indenture or other agreement (if any) pursuant to which any instruments
evidencing any Senior Indebtedness may have been issued, as their respective
interests may appear, for application to the payment of all Senior Indebtedness
remaining unpaid to the extent necessary to pay all Senior Indebtedness in
full
in accordance with the terms of such Senior Indebtedness, after giving effect
to
any concurrent payment or distribution to or for the holders of Senior
Indebtedness.
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(c) Notes
Subordinated to Prior Payment of all Senior Indebtedness on Dissolution,
Liquidation or Reorganization of Company.
Upon
any distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization of the Company (whether in bankruptcy, insolvency
or receivership proceedings or upon an assignment for the benefit of creditors
or otherwise):
(i) The
holders of all Senior Indebtedness shall first be entitled to receive payment
in
full of the principal thereof, premium, if any, and interest due thereon
before
the holder of this Note are entitled to receive any payment on account of
the
principal of or interest on this Note (other than securities of the Company
or
any other entity provided for by a plan of reorganization or readjustment
which
stock and securities are subordinated to the payment of all Senior Indebtedness
and securities received in lieu thereof which may at the time be outstanding);
and
(ii) Any
payment or distribution of assets of the Company of any kind or character
whether in cash, property or securities (other than securities that are
subordinated to the payment of all Senior Indebtedness and securities received
in lieu thereof which may at the time be outstanding), to which the holder
of
this Note would be entitled except for the provisions of this Article 4,
shall
be paid by the liquidating trustee or agent or other person making such payment
of distribution, whether a trustee in bankruptcy, a receiver or liquidating
trustee or other trustee or agent, directly to the holders of Senior
Indebtedness or their representative or representatives, or to the trustee
or
trustees under any indenture under which any instruments evidencing any of
such
Senior Indebtedness may have been issued, to the extent necessary to make
payment in full of all Senior Indebtedness remaining unpaid, after giving
effect
to any concurrent payment or distribution or provision therefor to the holders
of such Senior Indebtedness.
(iii) In
the
event that, notwithstanding the foregoing provision of this Paragraph 4(c),
any
payment or distribution of assets of the Company of any kind or character,
whether in cash, property or securities (other than shares representing equity
of the Company as reorganized or readjusted, or securities of the Company
or any
other entity provided for by a plan of reorganization or readjustment which
stock and securities are subordinated to the payment of all Senior Indebtedness
and securities received in lieu thereof which may at the time be outstanding),
shall be received by the holder of this Note on account of principal of or
interest on this Note before all Senior Indebtedness is paid in full, or
effective provision made for its payment or distribution, such payment or
distribution shall be received and held in trust for and shall be paid over
to
the holders of the Senior Indebtedness remaining unpaid or unprovided for
or
their representative or representatives, or to the trustee or trustees under
any
indenture under which any instruments evidencing any of such Senior Indebtedness
may have been issued, for application to the payment of such Senior Indebtedness
until all such Senior Indebtedness shall have been paid in full, after giving
effect to any concurrent payment or distribution or provision therefor to
the
holders of such Senior Indebtedness.
(d) Noteholder
to be Subrogated to Right of Holders of Senior Indebtedness.
Subject
to the payment in full of all Senior Indebtedness, the holders of the Notes
shall be subrogated, pro rata, to the rights of the holders of Senior
Indebtedness to receive payments or distributions of assets of the Company
applicable to the Senior Indebtedness until all amounts owing on the Notes
shall
be paid in full, and, for the purpose of such subrogation, no payments or
distributions to the holders of the Senior Indebtedness by or on behalf of
the
Company or by or on behalf of the holder of this Notes by virtue of this
Article
4 which otherwise would have been made to the holder of this Notes shall,
as
between the Company and the holder of this Note, be deemed to be payment
by the
Company to or on account of the Senior Indebtedness, it being understood
that
the provisions of this Article 4 are, and are intended solely, for the purpose
of defining the relative rights of the holders of the Notes, on the one hand,
and the holders of the Senior Indebtedness, on the other hand.
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10 -
(e) Obligation
of the Company Unconditional.
Nothing
contained in this Article 4 or elsewhere in this Note is intended to or shall
impair as between the Company and the holder of this Note, the obligation
of the
Company, which is absolute and unconditional, to pay to the holder of this
Note
the principal of and interest on this Note as and when the same shall become
due
and payable in accordance with its terms, or is intended to or shall affect
the
relative rights of the holder of this Note and creditors of the Company other
than the holders of the Senior Indebtedness, nor shall anything herein or
therein prevent the holder of this Note of this Note from exercising all
remedies otherwise permitted by applicable law upon default under this Note,
subject to the rights, if any, under this Article 4 of the holders of Senior
Indebtedness in respect of cash, property or securities of the Company received
upon the exercise of any such remedy; provided, however, that the holder
of this
Note shall not exercise any remedies if the exercise of such remedies would
result in an event of default under the terms of the Senior Indebtedness.
Upon
any distribution of assets of the Company referred to in this Article 4,
the
holders of this Note shall be entitled to rely upon any order or decree made
by
any court of competent jurisdiction in which any dissolution, winding up,
liquidation or reorganization proceedings are pending, or a certificate of
the
liquidating trustee or agent or other person making any distribution to the
holder of this Note for the purpose of ascertaining the persons entitled
to
participate in such distribution, the holders of the Senior Indebtedness
and
other indebtedness of the Company, the amount thereof or payable thereon,
the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article 4. In no event shall any provision of this Article
4
be interpreted as limiting or abrogating the right of the holder of this
Note to
convert principal and interest thereon pursuant to Article 3 of this
Note.
(f) Subordination
Rights Not Impaired by Acts or Omissions of the Company or Holders of Senior
Indebtedness.
No
right of any present or future holders of any Senior Indebtedness to enforce
subordination as herein provided shall at any time in any way be prejudiced
or
impaired by any act or failure to act on the part of the Company or by any
act
or failure to act, in good faith, by any such holder, or by any noncompliance
by
the Company with the terms, provisions and covenants of this Note, regardless
of
any knowledge thereof which any such holder may have or be otherwise charged
with.
(g) Definition
of Senior Indebtedness.
The
term “Senior Indebtedness” is defined to mean the principal of and premium, if
any, and interest on and any obligations of the Company with respect to the
Company’s indebtedness to all indebtedness and obligations (other than the
Notes) of the Company to banks, insurance companies and other institutional
lenders.
(h) Additional
Agreement.
The
holder of this Note, by its acceptance of this Note, agrees to execute any
formal instruments of subordination which may be reasonably requested by
any
holder of Senior Indebtedness.
Article
5.
Miscellaneous
(a) Transferability.
This
Note shall not be transferred except in a transaction exempt from registration
pursuant to the 1933 Act and applicable state securities law. The Company
shall
treat as the owner of this Note the person shown as the owner on its books
and
records.
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11 -
(b) Limited
Right of Prepayment.
The
Company shall have no right to prepay this Note without the prior written
consent of the Holder, which consent may be given or withheld by the Holder
in
its sole discretion. Any prepayment shall be accompanied by interest on this
Note to the date of prepayment.
(c) WAIVER
OF TRIAL BY JURY.
IN ANY
LEGAL PROCEEDING TO ENFORCE PAYMENT OF THIS NOTE, THE COMPANY WAIVES TRIAL
BY
JURY.
(d) WAIVER
OF ANY RIGHT OF COUNTERCLAIM.
EXCEPT
AS PROHIBITED BY LAW, THE COMPANY HEREBY WAIVES ANY RIGHT TO ASSERT ANY CLAIM
IT
MAY HAVE AGAINST THE HOLDER OF THIS NOTE BY WAY OF A COUNTERCLAIM (OTHER
THAN A
COMPULSORY COUNTERCLAIM) IN ANY ACTION ON THIS NOTE.
(e) Usury
Saving Provision.
All
payment obligations arising under this Note are subject to the express condition
that at no time shall the Company be obligated or required to pay interest
at a
rate which could subject the holder of this Note to either civil or criminal
liability as a result of being in excess of the maximum rate which the Company
is permitted by law to contract or agree to pay. If by the terms of this
Note,
the Company is at any time required or obligated to pay interest at a rate
in
excess of such maximum rate, the applicable rate of interest shall be deemed
to
be immediately reduced to such maximum rate, and interest thus payable shall
be
computed at such maximum rate, and the portion of all prior interest payments
in
excess of such maximum rate shall be applied and shall be deemed to have
been
payments in reduction of principal.
(f) Notice
to Company.
Notice
to the Company shall be given to the Company at its principal executive offices,
presently located at ▇▇
▇▇▇▇
▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇, ▇▇▇▇▇ 150090,
attention of Mr. ▇▇▇▇▇ ▇▇, CEO, with a copy to ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇ PC, ▇▇▇▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ LLP, ▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇ ▇▇▇▇▇, or to such other
address or person as the Company may, from time to time, advise the holder
of
this Note, or to the holder of this Note at the address set forth on the
Company’s records. Notice shall be given by hand delivery, certified or
registered mail, return receipt requested, overnight courier service which
provides evidence of delivery, or by telecopier if confirmation of receipt
is
given or of confirmation of transmission is sent as herein
provided.
(g) Governing
Law.
This
Note shall be governed by the laws of the State of New York applicable to
agreements executed and to be performed wholly within such state. The Company
hereby (i) consents to the exclusive jurisdiction of the United States District
Court for the Southern District of New York and Supreme Court of the State
of
New York in the County of New York in any action relating to or arising out
of
this Note, (ii) agrees that any process in any such action may be served
upon it
either (x) by certified or registered mail, return receipt requested, or
by an
overnight courier service which obtains evidence of delivery, with the same
full
force and effect as if personally served upon him in New York City or (y)
any
other manner permitted by law, and (iii) waives any claim that the jurisdiction
of any such tribunal is not a convenient forum for any such action and any
defense of lack of in personam jurisdiction with respect thereto.
(h) Expenses.
In the
event that the Holder commences a legal proceeding in order to enforce its
rights under this Note, the Company shall pay all reasonable legal fees and
expenses incurred by the holder with respect thereto.
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12 -
IN
WITNESS WHEREOF, the Company has executed this Note as of the date and year
first aforesaid.
CHINA
EDUCATION ALLIANCE, INC.
By:
/s/ ▇▇▇▇▇ ▇▇
▇▇▇▇▇ ▇▇,
Chief
Executive Officer
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13 -
NOTICE
OF
CONVERSION
[To
be
Signed Only Upon Conversion
of
Part
or All of Notes]
China
Education Alliance, Inc.
The
undersigned, the holder of the foregoing Note, hereby surrenders such Note
for
conversion into shares of Common Stock of China Education Alliance, Inc.
to the
extent of $ * unpaid principal amount
of due on such Note, and requests that the certificates for such shares and
Warrants be issued in the name of ,
and
delivered to ,
whose
address is .
Dated:
(Signature)
(Signature
must conform in all respects to name of holder as specified on the face of
the
Note.)
* Insert
here the unpaid principal amount of the Note (or, in the case of a partial
conversion,
the
portion thereof as to which the Note is being converted). In the case of
a
partial conversion, a new Note will be issued and delivered, representing
the
unconverted portion of the unpaid principal amount of this Note, to or upon
the
order of the holder surrendering such Note.
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14 -
Schedule
A
-
Automatic
Conversion Securities
The
number determined by dividing the principal amount of this Note by $2,400,000
and multiplying the result by each of the following (i) 6,486,486 shares
of the
Company’s Series A Convertible Preferred Stock, (ii) Warrants to purchase
6,000,000 shares of Common Stock at $.69 per share, (iii) Warrants to purchase
3,000,000 shares of Common Stock at $.80 per share, and (iv) Warrants to
purchase 3,000,000 shares of Common Stock at $1.00 per share. The number
of
shares of Common Stock and the number of shares of Common Stock issuable
upon
exercise of Warrants that were issued as Optional Conversion Securities shall
reduce, on a share for share basis, the number of shares of Series A Preferred
Stock and the number of shares issuable upon exercise of Warrants, respectively,
issuable as Automatic Conversion Securities.
Schedule
B - Optional Conversion Securities
The
number determined by dividing the principal amount of this Note by $2,400,000
and multiplying the result by each of the following (i) 6,486,486 shares
of the
Common Stock, (ii) Warrants to purchase 6,000,000 shares of Common Stock
at $.69
per share, (iii) Warrants to purchase 3,000,000 shares of Common Stock at
$.80
per share, and (iv) Warrants to purchase 3,000,000 shares of Common Stock
at
$1.00 per share.
Schedule
C - Default Conversion Securities
The
number determined by dividing the principal amount of this Note by $2,400,000
and multiplying the result by 18,486,486 shares of the Common Stock. The
number
of shares of Common Stock and the number of shares of Common Stock issuable
upon
exercise of Warrants that were issued as Optional Conversion Securities shall
reduce, on a share for share basis, the number of shares of Common Stock
issuable as Default Conversion Securities.
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