MAKE GOOD ESCROW AGREEMENT
This
Make
Good Escrow Agreement (the "Make Good Agreement"), dated effective as of May
31,
2007, is entered into by and among China Water and Drinks Inc., a Nevada
corporation (the "Company"), The Pinnacle Fund, L.P., as agent (“Agent”), Xx. Xx
Hong Bin, in his individual capacity ("Make Good Pledgor"), and Loeb & Loeb
LLP, as escrow agent ("Escrow Agent").
WHEREAS,
each of the investors in the private offering of securities of the Company
(the
"Investors") has entered into a Securities Purchase Agreement, dated May 31,
2007 (the "SPA"), evidencing their participation in the Company's private
offering (the "Offering")
of
securities. As an inducement to the Investors to participate in the Offering
and
as set forth in the SPA, Make Good Pledgor agreed to place the Escrow Shares
(as
defined in Section 2 hereto) into escrow for the benefit of the Investors in
the
event the Company failed to satisfy certain Guaranteed After-Tax Net Income
thresholds.
WHEREAS,
pursuant to the requirements of the SPA, the Company and Make Good Pledgor
have
agreed to establish an escrow on the terms and conditions set forth in this
Make
Good Agreement;
WHEREAS,
the Escrow Agent has agreed to act as escrow agent pursuant to the terms and
conditions of this Make Good Agreement; and
WHEREAS,
all capitalized terms used but not defined herein shall have the meanings
assigned them in the SPA;
NOW,
THEREFORE, in consideration of the mutual promises of the parties and the terms
and conditions hereof, the parties hereby agree as follows:
1.
Appointment of Escrow Agent.
Make
Good Pledgor and the Company hereby appoint Escrow Agent to act in accordance
with the terms and conditions set forth in this Make Good Agreement, and Escrow
Agent hereby accepts such appointment and agrees to act in accordance with
such
terms and conditions.
2.
Establishment of Escrow.
No later
than the date of the closing of the Offering, Make Good Pledgor shall deliver,
or cause to be delivered, to the Escrow Agent certificates evidencing an
aggregate of 22,388,060 shares
of
the Company’s common stock, par value $0.001 per share (the "Escrow Shares"),
along with bank signature stamped stock powers executed in blank (or such other
signed instrument of transfer acceptable to the Company’s Transfer Agent).
One-half of the Escrow Shares (the “2007 Make Good Shares”) shall be pledged to
secure the Company’s commitment to achieve the 2007 Guaranteed ATNI (as defined
below) and one-half of the Escrow Shares (the “2008 Make Good Shares”) shall be
pledged to secure the Company’s commitment to achieve the 2008 Guaranteed ATNI
(as defined below). As used in this Make Good Agreement, “Transfer Agent” means
Island Stock Transfer, or such other entity hereafter retained by the Company
as
its stock transfer agent as specified in a writing from the Company to the
Escrow Agent and Agent.
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3. Representations
of Make Good Pledgor.
Make
Good Pledgor hereby represents and warrants to Agent as follows:
(i)
All
of the Escrow Shares are validly issued, fully paid and nonassessable shares
of
the Company, and free and clear of all pledges, liens and encumbrances. Upon
any
transfer of Escrow Shares to Investors hereunder, Investors will receive good
title to such shares of Common Stock of the Company.
(ii) Performance
of this Make Good Agreement and compliance with the provisions hereof will
not
violate any provision of any applicable law and will not conflict with or result
in any breach of any of the terms, conditions or provisions of, or constitute
a
default under, or result in the creation or imposition of any lien, charge
or
encumbrance upon, any of the properties or assets of Make Good Pledgor pursuant
to the terms of any indenture, mortgage, deed of trust or other agreement or
instrument binding upon Make Good Pledgor, other than such breaches, defaults
or
liens which would not have a material adverse effect taken as a whole.
4.
Disbursement of Escrow Shares.
a. Fiscal
Year Ended December 31, 2007.
Make
Good
Pledgor agrees that if the After-Tax Net Income for the fiscal year ended
December
31,
2007
reported in the Company’s Annual Report on Form 10-KSB for the fiscal year
ending December 31, 2007, as filed with the Commission (the “2007 Annual
Report”) is less than $19,000,000 (the “2007 Guaranteed ATNI”), Agent
shall provide written instruction (with a copy to the Company) to the Escrow
Agent to release
to each
Investor on a pro rata basis (based upon such Investor’s Investment Amount
specified on Exhibit
A
attached
hereto relative to the aggregate Investment Amounts of all Investors specified
on Exhibit
A
attached
hereto), for no additional consideration, 11,194,030 shares
of
Common Stock (as
equitably adjusted for any stock splits, stock combinations, stock dividends
or
similar transactions)
(the
“2007 Make Good Shares”) and shall instruct the Transfer Agent to transfer into
the name of each Investor, the number of 2007 Make Good Shares released to
such
Investor. The
Escrow Agent need only rely on the letter of instruction from Agent in this
regard and will disregard any contrary instructions. The Escrow Agent shall
be
entitled to rely on the calculations provided by Agent with the letter of
instruction in releasing the Escrow Shares for disbursement, with no further
responsibility to calculate or confirm amounts. If the Company’s audited
consolidated financial statements for the fiscal year ended December 31, 2007
specify that the 2007 Guaranteed ATNI shall have been achieved (i.e. the
After-Tax Net Income reported in the 2007 Annual Report is equal to or greater
than the 2007 Guaranteed ATNI), the Agent shall provide written instruction
(with a copy to the Company) to the Escrow Agent to release all 2007 Make Good
Shares deposited with the Escrow Agent to the Make Good Pledgor within 10
Business Days after the date which the 2007 Annual Report is filed with the
Commission, provided that Escrow Agent is given notice of the 2007 Annual
Report’s filing and results. Any releases of 2007 Make Good Shares to Investors
required under this Section shall be made to Investors within 10 Business Days
after the date which the 2007 Annual Report is filed with the Commission,
provided that Escrow Agent is given notice of the 2007 Annual Report’s filing
and results.
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b. Fiscal
Year Ending December 31, 2008.
Make
Good Pledgor agrees that in the event that either (A) (i) the After-Tax Net
Income for the fiscal year ended December 31, 2008 reported in the Company’s
Annual Report on Form 10-KSB for the fiscal year ending December 31, 2008,
as
filed with the Commission (the “2008 Annual Report”) plus
(ii) the
amount of any charges recorded against the Company’s After-Tax Net Income that
were attributable to the release or transfer of any or all of the 2007 Make
Good
Shares is less than $30,000,000 (the “2008 Guaranteed ATNI”) or (B) the earnings
per share reported in the 2008 Annual Report is less than $0.300 on a fully
diluted basis (as equitably adjusted for any stock splits, stock combinations,
stock dividends or similar transactions) (the “2008 Guaranteed EPS”), Agent
shall provide written instruction (with a copy to the Company) to the Escrow
Agent to release to each Investor on a pro rata basis (based upon such
Investor’s Investment Amount specified on Exhibit
A
attached
hereto relative to the aggregate Investment Amounts of all Investors specified
on Exhibit
A
attached
hereto), for no additional consideration, 11,194,030
shares of Common Stock (as
equitably adjusted for any stock splits, stock combinations, stock dividends
or
similar transactions)
(the
“2008 Make Good Shares”) and shall instruct the Transfer Agent to transfer into
the name of each Investor, the number of 2008 Make Good Shares released to
such
Investor. The
Escrow Agent need only rely on the letter of instruction from Agent in this
regard and will disregard any contrary instructions. The Escrow Agent shall
be
entitled to rely on the calculations provided by Agent with the letter of
instruction in releasing the Escrow Shares for disbursement, with no further
responsibility to calculate or confirm amounts. If the Company’s audited
consolidated financial statements for the fiscal year ended December 31, 2008
specify that both (i) the 2008 Guaranteed ATNI and (ii) 2008 Guaranteed EPS
shall each have been achieved (i.e. both (i) the After-Tax Net Income reported
in the 2008 Annual Report plus
the
amount of any charges recorded against the Company’s After-Tax Net Income that
were attributable to the release or transfer of any or all of the 2007 Make
Good
Shares is equal to or greater than the 2008 Guaranteed ATNI and (ii) the
earnings per share reported in the 2008 Annual Report is equal to or greater
than the 2008 Guaranteed EPS), the Agent shall provide written instruction
(with
a copy to the Company) to the Escrow Agent to release all 2008 Make Good Shares
deposited with the Escrow Agent to the Make Good Pledgor within 10 Business
Days
after the date which the 2008 Annual Report is filed with the Commission,
provided that Escrow Agent is given notice of the 2008 Annual Report’s filing
and results. Any releases of 2008 Make Good Shares required to be made to
Investors under this Section shall be made to Investors within 10 Business
Days
after the date which the 2008 Annual Report is filed with the Commission,
provided that Escrow Agent is given notice of the 2008 Annual Report’s filing
and results.
c. The
Make
Good Pledgor’s obligation to transfer shares of Common Stock to Investors
pursuant to Section 4.11 of the SPA shall continue to run to the benefit of
an
Investor who shall have transferred or sold all or any portion of its
Securities, and each Investor shall have the right to assign its rights to
receive all or any such shares of Common Stock to other persons in conjunction
with negotiated sales or transfers of any of its Securities.
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d. The
Company and Make Good Pledgor covenant and agree to provide the Escrow Agent
with certified tax identification numbers by furnishing appropriate forms W-9
or
W-8 and such other forms and documents that the Escrow Agent may request,
including appropriate W-9 or W-8 forms for each Investor. The Company and Make
Good Pledgor understand that if such tax reporting documentation is not provided
and certified to the Escrow Agent, the Escrow Agent may be required by the
Internal Revenue Code of 1986, as amended, and the Regulations promulgated
thereunder, to withhold a portion of any interest or other income earned on
the
investment of the Escrow Shares.
5.
Duration.
This
Make Good Agreement shall terminate upon the distribution of all the Escrow
Shares. 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.
6.
Escrow Shares.
If any
Escrow Shares are deliverable to the Investors pursuant to the SPA and in
accordance with this Make Good Agreement, (i) Make Good Pledgor covenants and
agrees to execute all such instruments of transfer (including stock powers
and
assignment documents) as are customarily executed to evidence and consummate
the
transfer of the Escrow Shares from Make Good Pledgor to the Investors, to the
extent not done so in accordance with Section 2, and (ii) following its receipt
of the documents referenced in Section 6(i), the Company and Escrow Agent
covenant and agree to cooperate with the Transfer Agent so that the Transfer
Agent promptly reissues such Escrow Shares in the applicable Investor’s name and
delivers the same as directed by such Investor. Until such time as (if at all)
the Escrow Shares are required to be delivered pursuant to the SPA and in
accordance with this Make Good Agreement, any dividends payable in respect
of
the Escrow Shares and all voting rights applicable to the Escrow Shares shall
be
retained by Make Good Pledgor. 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 the Make Good Pledgor and shall not be invested or
held
for any time longer than is needed to effectively re-route such items to the
Make Good Pledgor. In the event that the Escrow Agent receives a
communication requiring the conversion of the Escrow Shares to cash or
the exchange of the Escrow Shares for that of an acquiring company, the Escrow
Agent shall solicit and follow the written instructions of the Make Good
Pledgor; provided that the cash or exchanged shares are instructed to be
redeposited into the Escrow Account. Make Good Pledgor shall be responsible
for
all taxes resulting from any such conversion or exchange.
7.
Interpleader.
Should
any controversy arise among the parties hereto with respect to this Make Good
Agreement or with respect to the right to receive the Escrow Shares, Escrow
Agent and/or 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 and/or Agent are also each hereby authorized to institute
an appropriate interpleader action upon receipt of a written letter of direction
executed by the parties so directing either Escrow Agent or Agent. If Escrow
Agent or 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 7 shall be filed
in any court of competent jurisdiction in the State of New York, and the Escrow
Shares in dispute shall be deposited with the court and in such event Escrow
Agent and Agent shall be relieved of and discharged from any and all obligations
and liabilities under and pursuant to this Make Good Agreement with respect
to
the Escrow Shares and any other obligations hereunder.
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8. Exculpation
and Indemnification of Escrow Agent and 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
Make
Good 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 Make Good Agreement and
instructions to Escrow Agent pursuant to the terms of this Make Good 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. Agent’s sole obligation under this Make Good Agreement is to
provide written instruction to Escrow Agent (following such time as the Company
files certain periodic financial reports as specified in Section 4 hereof)
directing the distribution of the Escrow Shares. Agent will provide such written
instructions upon review of the relevant After-Tax Net Income amount reported
in
such periodic financial reports as specified in Section 4 hereof. Agent is
not
charged with any obligation to conduct any investigation into the financial
reports or make any other investigation related thereto. In the event of any
actual or alleged mistake or fraud of the Company, its auditors or any other
person (other than Agent) in connection with such financial reports of the
Company, Agent shall have no obligation or liability to any party
hereunder.
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 Make Good 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.
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c. The
Company and Make Good Pledgor each hereby, jointly and severally, indemnify
and
hold harmless each of Escrow Agent, 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 or Agent in connection with any
claim
or demand, which, in any way, directly or indirectly, arises out of or relates
to this Make Good Agreement or the services of Escrow Agent or Agent hereunder;
except, that if Escrow Agent or Agent is guilty of willful misconduct or gross
negligence under this Make Good Agreement, then Escrow Agent or Agent, as the
case may be, 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 or 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
or Agent, as the case may be, 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 8 shall survive the termination
of
this Make Good Agreement, and the resignation or removal of the Escrow Agent.
9.
Compensation of Escrow Agent.
Escrow
Agent shall be entitled to compensation for its services as stated in the fee
schedule attached hereto as Exhibit
B,
which
compensation shall be paid by the Company. The fee agreed upon for the services
rendered hereunder is intended as full compensation for Escrow Agent's services
as contemplated by this Make Good Agreement; provided,
however,
that in
the event that Escrow Agent renders any material service not contemplated in
this Make Good Agreement, or there is any assignment of interest in the subject
matter of this Make Good 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 Make Good 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 which are not related to
litigation prior to receiving written approval from the Company, which approval
shall not be unreasonably withheld.
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10.
Resignation of Escrow Agent.
At any
time, upon ten (10) days' written notice to the Company, 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 the Escrow 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 shall have failed to
appoint a successor escrow agent, Escrow Agent may interplead the Escrow Shares
into the registry of any court having jurisdiction.
11.
Records.
Escrow
Agent shall maintain accurate records of all transactions hereunder. Promptly
after the termination of this Make Good 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.
12.
Notice.
All
notices, communications and instructions required or desired to be given under
this Make Good 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.
13.
Execution in Counterparts.
This
Make Good 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.
14.
Assignment and Modification.
This
Make Good 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 Make Good 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 Make Good Agreement. No portion
of
the Escrow 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 Make Good Agreement. This Make Good
Agreement may be amended or modified only in writing signed by all of the
parties hereto.
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15.
Applicable Law.
This
Make Good 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.
16.
Headings.
The
headings contained in this Make Good Agreement are for convenience of reference
only and shall not affect the construction of this Make Good Agreement.
17.
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 Make Good 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.
18.
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 Make Good 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.
[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
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IN
WITNESS WHEREOF, the parties have duly executed this Make Good Agreement as
of
the date set forth opposite their respective names.
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COMPANY:
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CHINA
WATER AND DRINKS INC.
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| By: |
Name:
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Title:
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Address:
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0000
Xxxx Xxxxxx, Xxxxx 000-000
Xxx
Xxxxx, XX 00000
Facsimile:
x00 0000 0000 0000
Attn.:
President
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XX.
XX HONG BIN:
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Address:
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[REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE FOR OTHER PARTIES
FOLLOWS]
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ESCROW
AGENT:
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LOEB
& LOEB LLP, as
Escrow Agent
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| By: |
Name:
Title:
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Address:
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Attn.:
Facsimile:
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AGENT:
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THE
PINNACLE FUND, L.P.,
as Agent
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| By: |
Name:
Title:
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Address:
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Attn.:
Facsimile:
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10
Exhibit
A
(attached as a MS Excel spreadsheet)
ESCROW
SHARES TO BE ISSUED TO INVESTORS
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Investor’s
Legal Name
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Investor’s
Investment Amount
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Make
Good Shares (2007)
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Make
Good Shares (2008)
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11
Exhibit
B
ESCROW
AGENT FEES
12
