HK UNIVERSITY OF SCIENCE & TECHNOLOGY THE MBA PROGRAM VENTURE CAPITAL & PRIVATE EQUITY by Prof. Laurence C. Franklin SESSION FIVE CASELETSVENTURE CAPITAL & PRIVATE EQUITY TERM SHEETS .estions on the First Term Sheet Proposing investment in HITECH ‘he (1) HITECH diagram of Ovnership Structure; (2) the First Term Sheets and 3) the File memo from an Analyt foe Seller before answering the following questions ‘The Questions refer to the First Term Shoo. (Note: Assume the First Term Shoots presented to BLUECHIP in September 2001 and the ‘expected Closing i December, 2001.) 1. Consider Issuer. A. Why might Investor prof buy shares in NEWCO rather than in HITECH directly? B. Why might Investor prefer to buy shares in HITECH directly rather than in NEWCO? 2. Consider Investment Size. Why is Investor requiring Sponsor BLUECHIP to invest [USS2 million in Common Shares? 43. Consider Types of Instrument. Why is Investor asking for Redeemable Convertible Notes (RCN) rather than Common Shares? Give at least 2 reasons. 4. Consider Vield to Maturity. In the event there is no conversion, the Investor is proposing a yield to maturity of 10% pa. Is this reasonable? Give reasons for your position, 5. Consider Conversion and Conversion Mechanism. The RCN are convertible atthe option ofthe Investor at any tnte dui lng the 3-year life ot the RCN. The conversion pce is based on HITECH's NPAT for FY 2002. Closing (the time for ‘he investment) is expected in December 2001. For the Seller, sre these 3 facts consistent and desirable? Why or why nor? 6. Consider Conversion Mechanism, item 3), inthe event NPAT for FY 2002 is USSX ‘million or above. What benefit does this formula give the Investor? 7. Consider Warrants. Investor proposes an addtional US82 milion in waren ‘A. Why is this desirable for the Investor? B. Why might this be desirable fr the Seller? 8. Consider Tag-along Rights. Can Seller sell some of NEWCO without riggering this provision? Explain15, 16. VENTURE CAPITAL & PRIVATE EQUITY TERM SHEETS Questions on the First Term Sheet ‘Proposing investment in HITECH Consider Anti-ditution, Does this seem reasonable to you, ftom bot the Investor's and the Seller's point of view? Why or why n0"? ‘Consider Listing Undertaking. Is this reasonable from the Seller's rerspective?” Why ‘or why not? Is this ressonable from the perspective of management of HITECH? Why for why not? Consider Put Option and Call Option. Do they appear tobe balanced and reasonable? ‘Why or why not? ‘Consider Board Representation. Ifthe NEWCO Board has 5 Directors, HITECH does ‘well in FY 2002, and Investor converts and has a 9% shareholding ia NEWCO, should Investor be entitled toa Board seat? Consider Transfer Restrictions, For the Seller is this provision reasonable? Wht ‘might you as Seller counterpropose? Consider Conditions Precedent to Closing, For the Seller, how might you want to restructure this provision? Consider Confidentiality. BLUECHIP isa HK-lsted company. How might you want to rewrite this provision? Consider File Memo, the pricing discussion. BLUECHIP is looking fora pre-money Yaluation of HITECH of USD 40 MM, based upon an expected FY 2001 NPAT of USD ‘41MM, or 10 times NPAT. Investor has indicated it wants to invest ata pre-money ‘eluation of USD 20 MM, the same price BLUECHIP paid one year crler, on NPAT of USD 2. MM. What are some reasons you as BLUECHIP might give for the reasonableness of your pre-maney valuation, of forthe unveasonablensss of Investor's ‘proposed pre-money valuation? ‘Based upon what you know of Investor from the Term Sheet, what was Tavesto's final pre-money valuation offer? Did the deal got done?BLUBCHD Hong Kong 100% NEWCO an 515% OUTSIDE CHINA CHINA 32.5% SOE 1o%_{ prc HITECH, PRC Sino-foreign Equity 1V Management Company Oe Faenkbcnrest TERM sHeeT HITECH Co. Ltd. Draft Term Sheet for Discussion Purposes Only Background Issuer Sponsor Investor Investment Size Types of Maturity Date ofthe RCN Yield to Matucity Use of Proceeds Conversion Confidentiat FHITECH is a Sino-foreign equity joint venture established in the People’s Republic of China (‘PRC’). HITECH is currently 57.5% owned by NEWCO (as defined below), 32.5% owned by PRC management company, and 10.0% owned by a PRC state-owned enterprise, ‘NEWCO (ihe "Company", a company incorporated jn the British Virgin Islands with limited lability. [BLUBCHIP, « Hong Kong corporate which currently owm 100% of ‘the common shares of the Company (“Common Shares") A find ("Fund") managed by an insurance company or a pension fond in Asi. 'USS10 million, comprising the following tranches: 1) Tranche A USSS million tobe subscribed by te Investor 2) ‘Tranche B - USS2 million to he subscribed by the Sponsor ‘The investment would value HITECH and NEWCO at a pre-money ‘valuation of [US$20.0 million} and [USS11.5 millen respectively, except that in respect of Tranche A, the pre-money valuation would bbe subject to adjustment as detailed in the Conversion Mechanism set out below. 1) Tranche A - Redeemable Convertible Notes RCN") 2) Tranche B - New Common Shares 3 years from closing, ‘Unless previously converted, the RCN willbe redeemed at maturity ata redemption price to provide a yield of [10%] per annum, ‘The investment proceods will be applied to incresse NEWCO's stake in HITECH from $7.5% to [69 6)% HITECH will in earn apply the proceeds 10 fund expansion and new product, evelopment ‘Subject tothe Conversion Mechanism as st forth balow, the RCN shall be convertible, atthe option ofthe Investor, «any time into Common Shares. The Investor shall be required to convert al (and ‘ot pat) ofthe RCN, Sbeenbln’HITECH Co, Lid. Draft Term Sheet for Discussion Purposes Only Conversion ‘The conversion mechanism would depend on HITECH's FY 2002 ‘Mechanism net profit ater tx ("NPAT") as reported (i conversion occurs after the fiscal 2002 year end) or as forecast by NEWCO's reporting aauditor/appointed underwriter and exhibited in che prospectus or ‘other publicly available docoments published fo the purpose of the PO Gf the conversion occurs before the fiscal 2002 yearend), and is detailed a follows 1) IFHITECH's FY 2002 NPAT is [USS7 million} or below, the RCN. shall be converted into. shareholding. equivalent 10 [40.0%] of the total issued capital of the NEWCO (effectively valuing HITECH and NEWCO at the presmoney valuation of [8820.0 milion} and (USB11.5 million] respectively) 2) IFHITECH’s FY 2002 NPAT is more than [USS7 million] but below [USSX million], the RCN shall be converted into shareholding as determined based on the following formula: 40.0% - ((40%-¥%6 * (FY 2002. NPAT - USE? illion)) { USSXmillion-US87 million) 3) IFHITECH’s FY 2002 NPAT is [USSX nillioa) or above, the RCN shall be converted into shareholding equivalent to [¥%]! ofthe total issued capital of NEWCO respectively) ‘Warrants In connection with the purchase of RCN by the Irvestor, NEWCO ‘ill issue warrants at 20 cost to the Investor, whic will provide the right, (but not the obligation) for the Investor to purchase up to ‘USS? milion worth of Common Shares in NEWCO at an exercise pice based on a premoney valuation as determined by the Conversion Mechanism. The warrants will be exercisable at any time within 3 years from closing. Pro-emptive ‘The Investor shall have the first right of refuse for a pro-rata Rights portion of any new equity or equitylinked issue of NEWCO, In ‘addition, NEWCO will have the frst right of refusal for a pro-rata portion of any new equity or equty-linked ive of AITECH. Tagalong In the event of the Sponsor's selling its sharcholding in the Rights ‘NEWCO resulting ina change in management como), the Investor shall have the sight to sell its entire shareholding along with Sponsor on identical terms, "Te ge-mcvalmtnstinen woul e po NEWCO tt ot TCH, Thao, NEWCO rug omeap HITEC al bathe hey te det © Confident 2 Ob Gerth:HITECH Co. Ltd: Draft Term Sheet for Diseussion Purposes Only Anti-ilution Listing ‘Undertaking Pat Option call Option Board ‘Representation Investor's Information Confidential Further to the Conversion Mechanism, the intial conversion price of the RCN and exercise price of the Warrants willbe subject to proportional adjustment for stock dividends, stock spits, recaptalizations or aay changes 10 the share’ capital of the NEWCO. If subsequent financings are done at >rices lower than the initial coaversion price and exercise price (as adjusted), the conversion price and exercise price willbe adjusted proportionally. ‘The Sponsor undertakes to seek a listing ofthe Common Shares on an international stock exchange approved by the Investor within three years fom closing ‘The Investor will have the right to put the RCN tc the Sponsor at a yield to put of 10%] per annum it 1) The NEWCO is not listed within three years fom closing, or 2), The IPO value of NEWCO is lees than [USSZ. mila}. ‘To the extent not converted, NEWCO has the right to redeem the RCN at any time two years after closing at a redemption price ‘which provides a yield of 45%] per annum tothe lavestr. The Investor will have th sight to nominate and lect the mumber ‘of directors tothe Board of NEWCO in proportior to the Investor's shareholding in NEWCO with a minimum of oxe director at any time. NEWCO. also undertakes to nominate at least one representative ftom the Investor to sit onthe Board of Directors of HITECH. ‘As Jong asthe Investor retains seats on the Doard of Directors of [NEWCO / HITECH, the dcector() representing :he Investor will be provided with and have access to all materils, financial or ‘otherwise, provided to members of the Board of the NEWCO / HITECH. The director(s) representing the Tavestor will have the right to advise and consult with management.HITECH Co. Ltd. Draft Term Sheet for Dis Purposes Only Covenants ‘The RON porchase agreement will contain stndard covenants including, without limitation, provisions regarding payments, financial reporting, maintenance of corporate existence, use of investment proceeds, no affiliate trassactions except on an arm's length bess, events of default incoding crossdefault to the Sponsor. In particular, NEWCO / HITECH mt seck tke consent of the Investor on certsin major corporate events ‘or NEWCO or HITECH, including + Material change in the seope of business; = All connected party transactions exceeding USS[XJ in value; = Material changes to the Sharcholders” Agreement or Atcles of ‘Association; = Disposition of any asset of NEWCO J HITECH representing [1% or more ofits net assets, + Any new equity or eqitylinked issue by the NEWCO / HITECH; = Payment of dividends by the NEWCO / HITECH; = Changes inthe share capital or registered capital in the NEWCO / HITECH; = [others] ‘Transfer ‘The RCN would be freely transferable, in whole cr in par, subject Restrictions to compliance with securities laws, Representations: The Investor will receive customary representation, warranties and and Warranties covenants from NEWCO and HITECH, including en, among other things, the NEWCO / HITECH’s ‘consolidated audited and ‘management accounts, good standing of the NEWCO / HITECH and ils subsidiaries and alates, ownership and validity of the investment and businesses of the NEWCO / HITECH, value of the ‘NEWCO / HITECH’s assets, ownership and validity of all trademarks, patents, licenses and other intellectua properties used by the NEWCO / HITECH, fill disclosure of all significant contracts and absence of any undisclosed liabilities, tigation and taxation Non ‘The Sponsor and its subsidiaries or aliites undertake that they ‘competition ‘vill not engage ia, or invert in, another business which directly ‘competes with NEWCO or HITECH. @ Confentiah ‘ Ovmerltas,HITECH Co, Lid. Draft Term Sheet for Discussion Purposes Only Conditions (1) Completion of business, financial and legal due diligence Precedent to satisfactory tothe Investor; Closing @) Approval of the Investor’ Investment Committee, the NEWCO's Board of Direciore and HITECH's Board of Directors; @) Execution of investment documents in form and manner mutually acceptable tothe Investor and NEWCO; (@) Review of formal contracts with key management personnel of HITECH; (6) Obtaining of all relevant consents and agprovals for the transaction fiom the government, relevant regulatory sathorities; and (© Any other consitions precedent to be reasonsbly requested by the Investor Save as otherwise expressly provided in the definitive legal documentation to be entered into by the parties, each party sball bear its own legal costs and expenses in connection with this Confidentiality: Those draft terms of investment are delivered on te understanding that neither these terms nor the fat that negotitions are taking place between parties shall be disclosed to any person other than NEWCO/MITECH or the Investor and ite affiates and their respective legal counsel, accountants or other professional advisors ‘who need to know sich information forthe purpore of assisting the ‘NEWCO / HITECH or the Investor in this transaction, Closing ate to be mutually agreed, Subject to ‘This term sheet is subject to contract, and further legal Contract documentation and should not be interpreted asa legal commitment by the partes, other than the sections on Confidentiality and Fees and Expenses. Governing Law : English Law Confidential 5 OfekTe File Prom: Analyst for Seller Subject: Draft ‘Term Sheet from Investor Analyst for Seller spoke with the Investor to lari the approval process an some items ‘onthe Term Shoet 1. Approval Process. vestor suid the internal “Concept Paper” hus been written for this investment, Once the Term Sheet is agreed, the Tecm Sheet will be attached to the Concept Paper and presented to the Investment Committee for “concept approval”. After concept approval, the Investor will proceed with due diligence. 2. Timing, The Investor suid it would have a decision on concept approval within § business days afer the Term Sheet is agreed. Once concept approvals piven, the Investor estimated final due diligence could be completed in 3-4 weeks Seller asked for clarification of certain points in the Term Sheet (© p2. Warants. Seer asked Investor to invest USD 8 MM in this round. Investor has added the idea of USD 2 MM in warrants on op of the USD 8 MM investment because of a constraint on the Investors side: Investor's Fund has a minimum investment size of USDIO MM Exceptions are rare and sequie a lot of explanation. So the §-+2~ 10 -will meet the Fund's minimum, The warrants ‘effectively permit an addtional USD 2 MM investment by the Investor, a is option, any time during the next 3 years, a the entry price fortis round, (Gp. Investment Size. Original Entry Price. The Investor has proposed in this ‘Term Sheet an Investor entry price effectively the same as what Seller paid for its entry price one year ago, USD20 million The Investor said all of ‘ho torms in brackets are “negriable”, but this was the Investor's “conservative tating pat” uring the conversation, Analyst understood the Investor to say it doesnot intend to ‘own more than 25% of HITECH. This point is not entirely clear, If sorrec, then this would suggest the Investor is really thinking of a minimum past-money ‘valuation for HITECH of USD 32 MM (8/32 = 25%), meaning a pre-money valuation for HITECH of USD 22 MM (32 ~ [8 +2] 22). This suggests the Investor's eal starting point is a pre-money valuation for HITECH of USD 22 MM, or 10% more than the price indicated. Of course, USD 22 MM is sila long way ‘rom our desired pre-maney valuation for HITECH of USD 40 MM. (@ pt. Types of Instruments. The Investor has proposed a Redeemable Convertible [Note rather than a straight investment in common stock No reason given, Note A convertible note is a common form of investment for insurance companies, snd pension funds. The Investor then has what it thinks of as « debt instrument swith an equity upside Note : As debt, it hus a due date for principal repayment and an interest rate (here, ‘proposed to be 10% per anmm). This is different than an equity stake with corresponding upside and downside. ®© Oh FebGv) p41. Conversion. The conversion to common stock it proposed to bet the option ofthe Investor anytime during the 3 year term ofthe Note. (%) 2. Conversion Mechanism. Basically, the number of common shares is ‘determined by reference to HITECH’'s NPAT in FY2002. ‘Note : Paragraph 3 under Coaversion Mechanism provides further protition forthe Investor, giving the Investor a certain minimum percentage in HITECH even if [NPAT greatly exceeds the benchmark. (W p3. Listing Undertaking. The Investor wants to approve the stock exchange Selected for listing (il) p3. Put Option The Investor proposes the right 10 pat fo the Spontor (act NEWCO) ata miniaum yield-to-put of 10% pa, ‘Note : Sponsor's borrowing rate is 7% pa. (viiyp3. Call Option, The Tavestor proposes to give NEWCO a call optiox only on the debe, not the common stock held by the Investor, for only the fist 2 years after closing, ata proposed redemption price of investment plus 45% pa, (ix) pa, Transfer Restrictions. The Investor proposes that it be fee tose: the Note to Ihird parties without a right of first refusal given to the Sponsor The Investor explained although its Fund usually holds investments, the Fund might wish to Tiguidate early, thereby necessitating an early sale. ‘We need to sit rogether to discuss this draft Term Sheet and respond promptly to the Investor with a “YES”, "NO" or counterproposal. Please give me your comments ad final position as soon at possible. Quchyst Analyst for SellerVENTURE CAPITAL & PRIVATE EQUITY TERM SHEETS Questions on the Second Term Sheet Proposing investment in HITECH Please review the &-page Preliminary Term Sheet submittd by a second potential investor. The VC Puna, in respect of & USS § millon investment in HHTECH. These Questions refer to this Second Term Sheet, and by comparison, tothe Fist Term Sheet. (Note: Assume the Second Term Sheet is presented to BLUECHID in September 2001 and the ‘expected Closing is December, 2001), 1. Consider p. 1, paragraph 2. What does the assumption the fll registered capital of the ‘current joint venture (HITECH) isto move to an offshore company." mean? 2. Consider p. 1, Type and number of securities. Copital sructue, Why did BLUECHIP ‘hough NEWCO invest in HITECH, a PRC company, by means of what eppests tobe 40% ‘equity "outstanding commen shares") and 60% shareholder loan? 3. Consider Type of Seeurity. Look at the entire Term Sheet. Are these Series Common Shares ‘ssentally the same as the existing eommoa shares, or more like prefered shares? 4. Consider Purchase Priee, ‘The USD 43.0 million pre-money valuation i contingent upon 6 items. Are each of those reasonable from the Sponsor's point of view? 5. Consider Closing and Exclusivity. Why might the “exclusive rights of investment” provision be troublesome fo BLUECHIP at this point in the negotiations? 6, Consider Liquidation Preference. A. Ina liquidation, which shareholders get pad fist, then thereafter, and how much in each cass? (Think very earefully). B. Assume Livestor invests, Seller subsequently sells 50.1% to a third party. Is the Liquidation Preference stivated”? 7. Consider Antidilution Provision, What kinds of issuance (say of common shares) might be “carved out" (exempt from) the operation of the Antdilution Provision? Name 3 likely exempt groups.VENTURE CAPITAL & PRIVATE EQUITY TERM SHEETS Questions on the Second Term Sheet Proposing investment in HITECH 8. Consider Additional Rights, Tag Along rights. A. If BLUECHIP wants soll 1% ofits existing Series A shares to a third party, would this provision apply? If yes is that reasonable? BB. Compare the provision here with the Draft Term Sheet. Are the Tag Along rghts here cesscataly the same as the Tag Along rights in the Draft Term Sheet? 9. Consider Protective Provisions. Compare with the Covenants section on pin the Draft Term Sheet. Are these two sections estenilly the same? 10. Consider Board of Directors, second paragraph. Why might the VC Fund want to appoint an ‘outside (anafiiated to the inside directors of the VC Fund) director? 11. Consider Use of Proceeds. From BLUECHIP'S point of view, is this provision reasonable? 12, Consider Confidentiality. From BLUECHIP's point of view, is this provision reasonable? 13, Consider Intellectual Property. From BLUECHIP's point of view, i this provision 14. Consider Expenses. Why does Investor want HITECH to pay 1% ofthe amunt invested (how ‘much is thie?) toward the cot of issuing the Series B Common? 15. Consider Indemities, Is this provision essential, or just “legalese™? 16, Consider Conditions of Purchs ‘conditions? ‘and Sale. How might BLUECHIP reaetto this ist of 7 17, Consider Legal Counsel for investors. I this provision reasonable? 18, Based upon what you know of this Investor, she VC Fund, from the Term Sheet, what was Investors final pro-money Valuation offer? Did the deal gt dane?BLUECH Hong Kong. 100% NEWCO By SOB, Sino-foreign Equity V Qu FoltaSE Cons FEM Site ‘THE VC FUND and BLUECHIP and HITEC SERIES B COMMON SHARE FINANCING PRELIMINARY TERM SHEET September 18,2001 ‘Te Intent ofthis docament iso describe, fr negotiation purposes oly, som Lay ts fie proposed aeseement ‘tween The VC Fund (Invest) BLUBCHTP Sponsor) andthe nw offhoeceblishnen of whit snow Inown as AITECH ("HITPCH). This document is ot ntended to abiding apeement berwecn nvestoe, [BLUECHIP, and the new ofsore company, NEWCO (de "Company, with respect tothe bec ter hero, except fr the provisions heei eating to indempticaten obligations, confidently, paymeat of expenses end foveming law and joistiction. A binding agreement wil at occur unless a ut al ecesry documentation ‘ceptable to all pitis and ther respective couse. Until execution ad delivery of och legal documentation all aris shal ve the absolt ight enna all negations for any reason without coxprate approvals have xh ‘haned and the pares have negotiated, approve, eneeuted sad delved he appropiate baal ability hector ‘Tis preliminary term sheets based onthe assumption that the fl ester capt ofthe current jolt ‘venture GHTTECID is to move tan ofshore company and the current shareholders loan so be everied o common shares. Issuer: NEWweo Amount of Financing $10 milion of which Sponsor wilinvest $2.0 nllion Investor wil invest $80 million into Series B Common Shares, ‘Typeand mumber of Investment into nowy issued Series B Comvn Shares (Seis 8 Comman ") Sectities: ‘This teem sheet assumes po-Gnancng (oe confimes) capitalization a fot Curent Afercontesion —Pro-Fomma Outstanding common shares 57.U2,886 M8740 142,857.40 Loan $tobeconverted 85,714,286 ‘Total shares MzasTig0 142887, 142,857,140 ean aS 4Closing and Exctsiity: [Rights and Preferences of Dividend Right: iguidation Preference: fraSnas aco temeatont sv pocsersscm ‘ergs B Common ; RMB 249830 per share or US$0.01 per share (he "Buschase Pie") ra pre-ovey valuation of USSAB.O lion ona uly dltad ‘uss, RMB is converted at USS to RMBS3. The pe-noaey valation of ‘USS43,0 milion is contingent upon the following" 1) Inventory of HITECH must aoe othe matching principle a id xt by Inteatonal Accounting Standards (1AS) and must be current bale. Obsolete avenary mst be appropiate writen of HITECH is ‘0 warrant that thee no abolete nent. 2) A doaled listing ofl aroun resivable of HITECH onttanding as ‘of Dec 31,2000 and Jane 30.200). HITECH i waren hat all futtapding rcsables are collectible 3) The reconciliation of audited accounts of HITECH a of Dee 31, 2000 t0 Ls. 4) HITECH isto waran that ll he source code ofthe sofware ‘evelopment safly kept and FITCH shee and beni owas ofthe sree cole 5) Amoffshore holding company i egalyetabied where all shies of [HITECH are issod and fully pid and oo asssable 6) Allnew cath eto be eld in USS in offhor coun oly nd any ‘canter isto be ened ase only to HITCH, ‘Ctosng wil be as soon as practical withthe intent to Fine the doa bythe 3st ‘of Deceaber, 2001; Tavese will ein exclusive right of ivestment nti he Istof February, 2002. HITCH agrees not to resea o, gait follow pon amy ober potesal inves unl ht date. ‘The Seis B common would e ented to an anu pe share dividend equal to £8 ofthe Purchase Price US carey, pale upon quo, rerio, neg or sale of HITECH or whea and as declared byte Board of Directors. (he "Board", but not payable ona Qualified IPO. The viens would be ‘mmlaive No dividends sal be payable on any shares of te capt tek of [DITECH at ara higher onan as-coavertd to coumen shar bass, han Aividends on the Saris 8 Common, Inthe vent of any sale, ligation, solution or winding up of NEWCO, the bales ofthe Series B Caranon would be ened to resive in US currency, prior any distribution tote holder of de Commen Shue ce any ther Prfeqod Share, an amoast waa tothe apliealeorginl ae pice pe hare aval acerued dividends The cash investors of Satis 4 Common wllalso be foted to receive anazoust gut th aplicable orignal me pice pet ‘hace. Thereafter, isto will be provata amongst common shareholders, 1 te amount tote dstibated is ass the purchase price md seemed dividend ofAtiiation Provision ‘Voting Rips: Aional Rights: Proactive Provisions Series B Common an cash investments of Stiet A Common, te distin il ede ca aproaa basis. A merger or cosoldaten of HITECH in which "Rs shucholdts uot retain 2 ajo ofthe voting power in the surviving ‘exporation, ora sale fall er substnally all HITECHs asses, Wold each be zero to be a ligudtion, issouton or winding up of HITECH wales determined oterwise by holders of mario he Sees B Connon Preemptive righ : Serie I Common shall ave the rg to pars its pro rata share (sed ont perentage HITECH outcanding common shires calunted ‘ona fly ited bass) fay new equity ce debt offeings by HITECH (aber thn ina transaction reltred under the Secures Act 1935, amended (the "1938 Act) em the tne pie and terms and conionyw HITECH oes sch surest ther potential purchaser "This ight wold oot apply othe fasuances that ar cared out frm the operation ofthe anidiution provisions and woald terminate upon Qulfod Pubic Ontsing ach sie of Series B Common would cary a numberof vets equal othe usher of Common States. The Serie B Common would general vote Aopetber wit the Commas and not as a separate clas. “Tag Aloog sigs: Series Common shall have the sghto tg along on any sal of securities bythe existing management and major shea, wh proposed to sellall ra portion of th shaze toa hind party, elders of the Series B Common hersunder must pecmited at tee oton 1 sll ‘proportionate part oftheir shares on the sme ts feed bythe propor ‘eansfeee. Thisright woald terminate upon te closing sf a Qualifed IP. [Rights of fistful: SeretB Common shal have trig off fil to ‘oy with respect tothe sale of any ety interests by ler sharable of HITECH, "he afimative vote of Investor is reuited fr the following: @)—snysale by HITECEL of xbstanally aloft sets, i) any merger of HITECH wth another ent ftowing which he holders Of HITECH capital share do aot hold a major ofthe ustanding hares of the surviving company, (6) any iuiation oe winding up of HITECH, (@v) any Hens of substantially all of HITECH’s thology or assets: (©) aay reduction aint inthe sa ofthe Bost (i) ny purchase or redemption by HITBCH ofan sects (ther thn 8 repurchase of vested shares at reign purchase price o = specified ia resited stock spreements approvd bythe Hoard ia ‘ounection with mination fa savice provias Service to HITCH ny:"Terms of the Stick Pease Agreement und Rights ‘Agreement: Bose of Director: tenses ecodiomnstnot (i) effecting any redemption, repurchase, payment of dividends oe ther istbution with espect ote Comme shes (ii) loaning ce advancing money to an employes or guaratcing osm outdo the exdnary course of business Gx) ncquiting secustis of any ety or aouingspiicnt nets (2) colerng into uansactons wih employee and aliiates; (63) entringinto «non-core tne of asnest (i) he smance of sees senior to arco parity wth he Seis B (Common; (i) the amendment of he Cerifcat o nccrpration or by aw ony ctor agement so as at to adversely affect th Serie B Common of Salve fay ober evens; (iv) change the place or cutecy af payment of stat vale or guidaton efereace oor viendo, ay Series B Consmon; (6) impr ihe sight institut sit forthe enforeeent of any payment or vith respect o any Series B Common (i) edace the percentage of outstanding Seis B Common necessary 19 roy or amend the ene teoof oto grat valves (ev) eutrng into any mortgage or pedping or creating a scuty interest in aller substantially all ef the assets ofthe Company ‘The Series B Common sal seo be ett to anyother poet voting ‘rovsions or any mare favvable sighs not efleted herein an eld by Boere ‘fexsing Series A Common, ‘The pace uses u Series B Conan would be mide parantto @ Shae Purchase Agreement and a Rights Agreemeat reasonably ceepable to AITECA, Iivestor and Spenser, which aseemect weld contain, anong cbr things, customary repeseatons and warranties of HITECH, corns of HITCH ‘eflacting the provision forth ern, and appropriate onto of eloxing, ‘including an opinion f counsel for HITECE, ‘The Company's Ailes of Icosporation nd bylaws wold provide for «Board of seven (7) authrized directa: The Company wll ov defor casomary Indemnification of ts decors and wil reimburse ects for ll eaconble expenses incur in consection withthe serie. The hoard af rectors will ois of two dectrs appointed by HITECH, thee spoited by BLUECHIP, sd two appointed by iver. Inthe event ht either Investor or BLUECHIP appeint an outside (aati) ‘rector, that pry shall ave Bod observation igs wich wil noe the Fight to receive all infomation provided to board meme.se of Process: Information Rights Registration Rights: seas astosronahatroe [HITECH would use th roced from he Serie B Common Fiansig foe ‘working capital, produ: develope, and general pups. No excandinry payments to employes or sharholders are peed, Solong asthe shares of Series B Common ae casting, HITECH would liver to each bolder ofthe shares of Sexes 8 Comsnen, respectively, (audited annual Snail statements within 90 days afar the cad of ach fiscal year) uandited quarterly Sancial stamens Within dys ofthe end of ach Fiscal quarter (i) united monty fntocal sates within 30 day of ‘eend of each mont; nd Gv) an anal badgt within 30 days prio to he cod cf each sal year. Faso Jog asthe hare of Series Comman ate ‘uttandig, sth boldere would have standard inspec rg. Investor andthe ‘vei shal te eatided to seceive al information isso longa ey bal eas 100.000 shares of Series B Common, Thess ffm ad inspection Fights woald terminate upon HITECH's ata pablcoerng (2) Domund, 8-3 and Pigsback Rights: The holders ofthe ss of Series B (Common would have elsvaie eights cusiony in innings of this nate, ‘The specific eam of sich reginrton rigs woaldincade a lst the following: (i040 demand regsatins upon request of older of 15% ofthe Series 8 Common at any tine ater the earlier of sQalfod IPO und July 1, 2002 (i unlimited registrations on Form S-3, wiea te company iS lige, so Teng as each such regiaton wa fora least $3 millon of tock; (i) nln ‘igyback registrations in conection wit eisations of shares for he acount OfTITECH or selling savehaldrsexrsing demand ight and Gv) ct take vison providing tat regstrsons after he intial public offing mst Incinde at east 30% of th shares requested to be inloed by the hades of ‘epitable securities and employees. direc, must be cut back before the holes of repistable secuies would he cu tack, (2) Expenses: HITECH would bear the registration expenses (xcinging dering discounts nd commissions anal otbercutomaryexpns related {ome repistation) of al such demand, pgsyeace an Ss restrain chang the fees of couse tothe holders provided that inthe cx of demand ‘registrations, ITECHs obligation shall be inited to fs of one spacial connse tothe holders of not mere than US$20,000 () Runsferof Rights: The registration sighs may be tnsfered solely tou ‘tanaferee whichis determined in good fib the Board of rectors tobe a omptior of HITECH and which hols, flowing uch rane, leat 5,000 shes of soc Seis B Comme. (4) Termination: The reisratin sights would emninat 7 year fer the ‘losing of his financing and would not apply to any bolder who can sll al of such bolder’ sires in any three-month ptid Witioatrepiseton para 2 Role 144 promulgated under the 1933 Act‘Confident information ad Tnventlons Assignment Agreement Confidentiality: ‘Representations & Warranties: Intellectual Property: denis ‘se pocssnsss (5) Adkitona Resisration Rights: HITECH wouldnt grant registration rights "any ther holder of the HITECH's secu specie inthe agopato to hose ‘ried othe holders ofthe Series B Common without prior ppeoval of «| naj ofthe Sees B Common. ach officer emplosee and constant of TTTECH would have cotted into an ceptable confident information and inventions asignen prement ‘The terms and condions dsr in this Term Stet tcladng is existence shal e confidential information ad sal not be discord tant pay. If iter party determines hati raquied by lw to cle information regding ‘his Tenn Shoot it shal a easopsble time before making ny such disclosure cr fling, consul withthe ose party regarding such disloaecr ling and sek ‘coufdetial Ueatieat for auch prton ofthe dchear or fling amy be requested by the other pay ‘Customary presentations relating to organization and quinn ‘ater authorization execution and delivery valli and enforceability of grcmentieuane ofthe Series B Prefered, regulon reprtsstons ‘ending, compliance wit laws and eavronmeatalrgulins, goveramental ‘onset taxes, insurance adequacy, no cont with pcement snd charter ovisons, capitalization, aes and no mati adverse hang [HITEC shal epreseat nthe Sbre Purchase Ages hat (the LUETECH has ownership of or the nresected right to al nelectaak propery sed in HITECH 's busines, (i) its best knovledge HITECH, ‘snot infknging te intelleeal property ight of any td pay Gi as nt received an notices fom tind parts alleging ch iningement, Gv ll employes and founder of HITEC hae assigned aMLinellecl popes ights elated othe busines of STECH to aITECH -HITEH stl bese ite own leg foe an ether expense with espe fo the ‘eansacton and sal pay fr 1 the amon investors he expenses of Series B Common, [HITECH shall indent lavstr and BLUBCHIP and tt respective dieetos, fiers and employees against al Ieses and damage ealing frm the ‘ransicion ther thin ch loess and damages ackng cat of ros meligece ot fa misconductConditions of Purchase aad Sale Jory Waiver: Governing Law And Jurisdiction: ‘Legal Counsel for investors: ‘The purchase and sale of he Series B Common woul he subject to cxnain conditions, ineladings 1. the ssistactory completion of al busines, Finandal and legal ve iligence, 2. the receipt ofa egal opinion of HITECH's coun saistctory to ‘he Purse, relator coneents (en), const required if snp) from HITECH 's existing creditors, 3. the final composition ofthe Board of Directors, considered satisfactory to Investor and BLUECHD; 4. the completion of detailed monthly badges for 2001 ‘considered stisactory to Investor and BLUECHP, 5. asummary of evteal goals, actions, key mewics and milestones {or HITECH in 2002 with accountability and timsines, inform sssactory to Investor and BLUECHDP; 6. anid organization chart defining key roles & responsibilities ‘ofeach senior leadership team member, 2nd 17. the absence ofthe occurence of any mitral adverse event ‘The partes erat waive ll ight total by ary in any action, suit or proceeding brought f0 enforce or defend any rights oremedics arising tnder or in connection with this eter or ay of the deitive docaments, wheter grounded intr, contract or atherise Hoong Kong ‘Toe Appointed by Investor 5For and on behalf of ‘The VC Fund Tite Due Accepted by ‘BLUECHIP Tite Die. Accepted by HITECH Title sv.nocssnnecw