-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UQ5JY/2T93rFF3AdTe/rMoQ6BbXIQh8ko3UdrbLFtFAA9CrhOmGTGJy+usoqYmKv 27bqqWDA776/GjfQ36mGpg== 0001017386-06-000013.txt : 20060131 0001017386-06-000013.hdr.sgml : 20060131 20060131153542 ACCESSION NUMBER: 0001017386-06-000013 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20060131 DATE AS OF CHANGE: 20060131 GROUP MEMBERS: Q.A.T. INVESTMENTS S.A. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ELEPHANT TALK COMMUNICATIONS INC CENTRAL INDEX KEY: 0001084384 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 954557538 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-81348 FILM NUMBER: 06565865 BUSINESS ADDRESS: STREET 1: 438 EAST KATELLA AVENUE STREET 2: SUITE 217 CITY: ORANGE STATE: CA ZIP: 92867 BUSINESS PHONE: 714-288-1570 MAIL ADDRESS: STREET 1: 438 EAST KATELLA AVENUE STREET 2: SUITE 217 CITY: ORANGE STATE: CA ZIP: 92867 FORMER COMPANY: FORMER CONFORMED NAME: STARUNI CORP DATE OF NAME CHANGE: 20000202 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: Rising Water Capital AG CENTRAL INDEX KEY: 0001351207 IRS NUMBER: 000000000 STATE OF INCORPORATION: V8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: BAARERSTRASSE 12 CITY: ZUG STATE: V8 ZIP: 6300 BUSINESS PHONE: (0041)41-763-5353 MAIL ADDRESS: STREET 1: BAARERSTRASSE 12 CITY: ZUG STATE: V8 ZIP: 6300 SC 13D 1 etlk_schedule13d-qat.txt Q.A.T. INVESTMENTS AND RISING WATER CAPITAL SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D (Rule 13d-1) ELEPHANT TALK COMMUNICATIONS, INC. ---------------------------------- (Name of Issuer) Common Stock, no par value ---------------------------- (Title of Class of Securities) 286202106 ------------ (CUSIP Number) Russell Choi, President 438 East Katella Avenue, Suite 217 Orange, California 92867 (714) 288-1570 -------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) December 15, 2005 ----------------------------------------------------- (Date of Event Which Requires Filing of This Statement) Copies To: Harold H. Martin, Esq. Law Offices of Harold H. Martin, P.A. 17115 Kenton Drive, Suite 202A Cornelius, North Carolina 28031 Tel: (704) 584-0268 Fax: (704) 895-1528 1 If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box. - --- ---------------------------------------------------------------------------- 1 Name of Reporting Persons: Q.A.T. Investments S.A. (owner of 51.3% of the capital stock of Rising Water Capital A.G.) I.R.S. Identification No. of Above Persons (entities only) - --- ---------------------------------------------------------------------------- 2 Check the Appropriate Box if a Member of a Group (See Instructions) (a) |_| (b) |_| - --- ---------------------------------------------------------------------------- 3 SEC USE ONLY - --- ---------------------------------------------------------------------------- 4 Source of Funds (See Instructions) OO - --- ---------------------------------------------------------------------------- 5 Check if Disclosure of Legal Proceedings is Required |_| Pursuant to Items 2(d) or 2(e) - --- ---------------------------------------------------------------------------- 6 Citizenship or Place of Organization Luxembourg - ---------------------------------------------- -------- ------------------------ Number of 7 Sole Voting Power Shares 0 Beneficially -------- ------------------------------------- Owned by Each 8 Shared Voting Power Reporting 0 Person with -------- ------------------------------------- 9 Sole Dispositive Power 0 -------- ------------------------------------- 10 Shared Dispositive Power 0 - --- ---------------------------------------------------------------------------- 11 Aggregate Amount Beneficially Owned by Each Reporting Person 146,892,830 - --- ---------------------------------------------------------------------------- 12 Check Box if the Aggregate Amount in Row (11) Excludes |_| Certain Shares (See Instructions) - --- ---------------------------------------------------------------------------- 13 Percent of Class Represented by Amount in Row (11) 58.8% - --- ---------------------------------------------------------------------------- 14 Type of Reporting Person (See Instructions) IV - --- ---------------------------------------------------------------------------- 2 If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box. - --- ---------------------------------------------------------------------------- 1 Name of Reporting Persons: Rising Water Capital, A.G. I.R.S. Identification No. of Above Persons (entities only) - --- ---------------------------------------------------------------------------- 2 Check the Appropriate Box if a Member of a Group (See Instructions) (a) |_| (b) |_| - --- ---------------------------------------------------------------------------- 3 SEC USE ONLY - --- ---------------------------------------------------------------------------- 4 Source of Funds (See Instructions) OO - --- ---------------------------------------------------------------------------- 5 Check if Disclosure of Legal Proceedings is Required |_| Pursuant to Items 2(d) or 2(e) - --- ---------------------------------------------------------------------------- 6 Citizenship or Place of Organization Switzerland - ---------------------------------------------- -------- ------------------------ Number of 7 Sole Voting Power Shares 146,892,830 Beneficially -------- ------------------------------------- Owned by Each 8 Shared Voting Power Reporting 0 Person with -------- ------------------------------------- 9 Sole Dispositive Power 146,892,830 -------- ------------------------------------- 10 Shared Dispositive Power 0 - --- ---------------------------------------------------------------------------- 11 Aggregate Amount Beneficially Owned by Each Reporting Person 146,892,830 - --- ---------------------------------------------------------------------------- 12 Check Box if the Aggregate Amount in Row (11) Excludes |_| Certain Shares (See Instructions) - --- ---------------------------------------------------------------------------- 13 Percent of Class Represented by Amount in Row (11) 58.8% - --- ---------------------------------------------------------------------------- 14 Type of Reporting Person (See Instructions) IV - --- ---------------------------------------------------------------------------- 3 Item 1. Security and Issuer. ------------------- This Statement relates to shares of common stock, no par value (the "Common Stock"), of Elephant Talk Communications, Inc., a California corporation (the "Issuer"), whose principal executive offices are located at 438 East Katella Avenue, Suite 217, Orange, California 92867. At present, there are 203,107,170 issued and outstanding shares of the Issuer's Common Stock, and a total of 250,000,000 authorized shares of Common Stock. The Reporting Persons are Q.A.T. Investments S.A., a company organized under the laws of Luxembourg ("Q.A.T. Investments"), and Rising Water Capital A.G., a company organized under the laws of Switzerland ("Rising Water Capital"), which are the beneficial owners of 146,892,830 shares of the Issuer's Common Stock, representing 58.8% of the Issuer's issued and outstanding shares of Common Stock, assuming conversion to the fullest extent permissible of a Convertible Promissory Note, dated December 15, 2005 (the "Convertible Promissory Note"), which Convertible Promissory Note was issued to Rising Water Capital and is hereinafter described. Q.A.T. Investments, which owns 51.3% of the capital stock of Rising Water Capital, is deemed to be a beneficial owner of the 146,892,830 shares of the Issuer's Common Stock under Rule 13d-3 of the Securities and Exchange Act of 1934, as amended. Item 2. Identity and Background. ----------------------- a. The names of the Reporting Persons are Q.A.T. Investments and Rising Water Capital. b. The business address of Q.A.T. Investments is 16, Rue Jean-Pierre Brasseur, L - 1258, Luxembourg. The business address of Rising Water Capital is Baarerstrasse 12, c/o Dr. Martin Neese, 6300 Zug, Switzerland. c. Q.A.T. Investments' principal business is acting as a venture capital fund, and its principal address is 16, Rue Jean-Pierre Brasseur, L - 1258, Luxembourg. Rising Water Capital's principal business is acting as a venture capital fund, and it principal address is Baarerstrasse 12, c/o Dr. Martin Neese, 6300 Zug, Switzerland. d. During the past five years, neither Q.A.T. Investments nor Rising Water Capital have been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). e. During the past five years, neither Q.A.T. Investments nor Rising Water Capital has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which proceeding either of them was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws, or finding any violation with respect to such laws. 4 f. Q.A.T. Investments is a company organized and existing under the laws of Luxembourg. Rising Water Capital is a company organized and existing under the laws of Switzerland. Item 3. Source and Amount of Funds or Other Consideration. ------------------------------------------------- The source and amount of funds or other consideration used in making the purchases reported on this statement are as follows: (1) $4,000,000 of venture capital funds from investors in Rising Water Capital were used by Rising Water Capital to purchase on June 27, 2005, a total of 100,000,000 shares of the Issuer's Common Stock; and (2) $2,700,000 of loans from shareholders of Rising Water Capital were advanced by Rising Water Capital on December 15, 2005 pursuant to the Convertible Promissory Note. The principal balance of such Note is convertible into shares of the Issuer's Common Stock at a conversion price of US$0.035 per share. There are currently 203,107,170 shares of Common Stock issued and outstanding. Accordingly, the conversion privilege under the Convertible Promissory Note is limited because there are only 250,000,000 shares of authorized Common Stock. At present, the Convertible Promissory Note could be converted in part into a total of 46,892,830 shares, and, in the event of such conversion, Rising Water Capital would be the owner of 146,892,830 shares of Common Stock, representing 58.8% of the issued and outstanding shares of Common Stock. As previously reported herein, the Reporting Persons are considered to be the beneficial owners of such shares pursuant to Rule 13d-3 under the Securities and Exchange Act of 1934, as amended. Item 4. Purpose of Transaction. ---------------------- The purpose of the transactions described herein is for Rising Water Capital to acquire control of the Issuer. Pursuant to a Stock Purchase Agreement, dated June 30, 2005 (the "Stock Purchase Agreement"), the Issuer agreed to sell, and Rising Water Capital agreed to purchase, 195,947,395 shares of the Issuer's Common Stock for an aggregate purchase price of $7,837,896. Section 4 of the Stock Purchase Agreement provided that Rising Water Capital would be entitled to appoint six out of eleven directors of the Issuer. In addition, Rising Water Capital agreed to retain the current management of the Issuer for a five year term. The Issuer had previously filed a Preliminary Information Statement on Schedule 14C with the Commission on April 26, 2005, with respect to an amendment to its Articles of Incorporation to increase the number of authorized shares from 255 million (250 million of common stock and 5 million of preferred stock) to 655 million (650 million of common stock and 5 million of preferred stock), a copy of which is incorporated herein by reference, in order to authorize sufficient Common Stock to complete the purchase and sale under the Stock Purchase Agreement. The Commission had numerous comments on the Schedule 14C which were set forth in its letter dated May 25, 2005, and the Issuer is in the process of addressing them. However, there can be no assurances if or when the comments of the staff will be satisfactorily answered, or when a Definitive Information Statement on Schedule 14C will be filed and mailed to shareholders, which will permit the Issuer to amend its Articles of Incorporation in order to increase its authorized capital. 5 On December 15, 2005, the Convertible Promissory Note was issued by the Issuer to Rising Water Capital for an initial advance of $2.7 million, both parties agreeing that the principal amount of the Note would not be convertible in whole at a conversion price of US$0.035 per share until the Issuer was able to file and mail a Definitive Information Statement on Schedule 14C, which would permit the Issuer to amend its Articles of Incorporation in order to increase its authorized capital. Rising Water Capital currently owns 100,000,000 shares of the Issuer's Common Stock, representing 49.2% of the issued and outstanding Common Stock. In the event that a Definitive Information Statement on Schedule 14C is filed and mailed to shareholders and the Issuer's authorized capital is increased, Rising Water Capital will acquire an additional 95,947,395 shares of Common Stock pursuant to the Stock Purchase Agreement, and will own 195,947,395 shares of Common Stock, representing 65.5% of the issued and outstanding Common Stock. If Rising Water Capital additionally were to convert in whole the Convertible Promissory Note with a principal balance of $2.7 million, it would own 273,090,252 shares of Common Stock, representing 72.6% of the issued and outstanding Common Stock. If the Convertible Promissory Note is converted in part to the fullest extent permissible, so that Rising Water Capital acquires and additional 46,892,830 shares of Common Stock, Rising Water Capital will own 146,892,830 shares of Common Stock, representing 58.8% of the Issuer's Common Stock. In each of the scenarios described above, the shareholdings of Rising Water Capital in the Issuer will go from 49.2% to a majority, and it will have the ability to exercise complete control over the Issuer. Currently, management of the Issuer takes the position that Rising Water Capital does not control the Issuer within the meaning of Rule 405 under the Securities Act of 1933, as amended, despite the large minority position owned by Rising Water Capital. Rising Water Capital's plans are to acquire and exercise control over the Issuer. As part of the acquisition of control, Rising Water Capital has infused capital into the Issuer to enable it to enter into agreements to acquire strategic acquisitions in the telephone and related industries, and it plans to operate the companies that are acquired. Other than as heretofore described, neither Q.A.T. Investments nor Rising Water Capital has any plans or proposals which relate to or would result in any of the matters set forth in Items 4(a) through (j) of this Schedule. Item 5. Interest in Securities of the Issuer. ------------------------------------ a. At present, the Issuer has issued and outstanding 203,107,170 shares of Common Stock, of which Q.A.T. Investments and Rising Water Capital beneficially own 146,892,830 shares of Common Stock . Q.A.T. Investments and Rising Water Capital are not part of a group within the meaning of Section 13(d)(3) of the Act. b. The following table indicates the number of shares as to which Rising Water Capital has sole power to vote or to direct the vote, shared power to vote or to direct the vote, sole power to dispose or to direct the disposition, or shared power to dispose or to direct the disposition. 6 Sole Voting Power ----------------- Name of Person Number of Shares Percent Outstanding -------------- ---------------- ------------------- Rising Water Capital 146,892,830 58.8% Shared Voting Power ------------------- Name of Person Number of Shares Percent Outstanding -------------- ---------------- ------------------- Rising Water Capital 0 0% Sole Dispositive Power ---------------------- Name of Person Number of Shares Percent Outstanding -------------- ---------------- ------------------- Rising Water Capital 146,892,830 58.8% Shared Dispositive Power ------------------------ Name of Person Number of Shares Percent Outstanding -------------- ---------------- ------------------- Rising Water Capital 0 0% c. Not applicable. d. None. e. Not applicable. Item 6. Contracts, Arrangements, Understandings or Relationships With Respect --------------------------------------------------------------------- to Securities of the Issuer. ---------------------------- None. Item 7. Material to be Filed as Exhibits. -------------------------------- (a) Exhibit 10.1 - Stock Purchase Agreement, dated June 30, 2005 (b) Exhibit 10.2 - Convertible Promissory Note, dated December 10, 2005 7 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Q.A.T. INVESTMENTS S.A. By: /s/ Steven van der Velden Name: Steven van der Velden Title: C.E.O and Director Date: January 11, 2006 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. RISING WATER CAPITAL A.G. By /s/ Marion Schumacher Name: Marion Schumacher Title: Managing Director Date: January 11, 2006 8 EX-10.2 2 exhibit_10-1.txt STOCK PURCHASE AGREEMENT Exhibit 10.1 STOCK PURCHASE AGREEMENT The parties to this Stock Purchase Agreement ("Agreement") are Elephant Talk Communications, Inc. ("ETCI"), a California corporation, and Rising Water Capital AG ("RWC"), registered in Zug, Switzerland. When executed by RWC and ETCI, this Agreement will set out ETCI's and RWC's understanding and agreement regarding this proposed transaction. 1. RWC wishes to purchase from ETCI, and ETCI wishes to sell to RWC, 195,947,395 restricted common shares ("Shares"), for a total consideration of US$7,837,896. 2. The Shares to be issued to RWC shall be distributed as and when payment is received from RWC to ETCI for such Shares. 3. As a restriction, these Shares will have a lock up period of twelve (12) months. ETCI will take care that all shareholders will agree to only sell shares after getting approval of all other shareholders to sell such shares. 4. RWC will be entitled to appoint six (6) out of eleven (11) directors in ETCI. Current ETCI management will stay in place and will be contracted for a five (5) year term. 5. The parties to this Agreement acknowledge the following (a) That ETCI has closed its 60% acquisition of a company herein referred as "True Precise"; (b) That after the closing of its acquisition of True Precise, the total number of issued and outstanding Shares of ETCI amounted to 80,259,670 shares; (c) That this acquisition and its internal growth will bring ETCI a general 2005 turnover of approximately US$10 million, with a positive Earnings Before Interest Taxes Depreciation and Amortization (EBITDA); (d) That ETCI is entering into the telecommunications market in Europe through the acquisition of various telecommunication assets, and has entered into an agreement to purchase all the issued and outstanding shares of a European telecommunication company in exchange for a cash consideration of US$5,900,000; (e) That ETCI has planned to take over the companies that own the right of use of a dark fiber optic network covering 4,400 km in Mainland China in exchange for 64,128,238 new Shares of ETCI to be issued; (f) That ETCI is seeking additional funding to further expand its growth in both China and Europe to create a strong niche player in 10.1-1 outsourced telecom provisioning, value added services and integrated VoIP solutions, covering markets in Europe, the Far East and the USA; (g) That ETCI will issue 24,938,759 additional Shares to management. 6. In connection with this transaction, ETCI hereby represents that: (a) It has due corporate authority to enter into this Agreement and to perform the transaction contemplated herein. (b) ETCI has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which RWC could be obligated or liable. (c) RWC will not have any anti-dilution rights in the Shares to be issued. (d) The execution, delivery and performance of this Agreement by ETCI and the consummation by ETCI of the transaction contemplated herein does not and will not result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which ETCI is subject, or by which any property or asset of ETCI is bound or affected. 7. In connection with this transaction, RWC hereby represents that: (a) RWC is duly organized, validly existing and in good standing under the laws of its jurisdiction, and has the necessary authority to enter into this transaction. (b) RWC is an accredited investor as the meaning is set forth under Regulation D of the Securities Act of 1933 as amended (the "Act"). (c) RWC was not solicited by ETCI or any of ETCI's representatives for the purchase of these shares. (d) RWC has received all of the information from its independent professional, legal and/or tax advisors as it considers necessary or appropriate for determining whether to purchase the shares. RWC is familiar with the business, affairs, risks and properties of ETCI, and RWC has had an opportunity to make inquiries of ETCI and its officers, directors and representatives. (e) RWC has such knowledge and expertise in financial and business matters that it is capable of evaluating the merits and substantial risks of an investment in the shares to be issued and is able to bear the economic risks relevant to the purchase of the Shares hereunder. 10.1-2 (f) RWC understands that there may be no market for the Shares to be issued. (g) RWC's financial condition is such that RWC is under no present or contemplated future need to dispose of any portion of the Shares to satisfy any existing or contemplated undertaking, need or indebtedness. (h) RWC has no liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which ETCI could become liable or obligated. (i) RWC acknowledges that ETCI has not made any representations or warranties as to the past, present or future operations of ETCI or of the price or activity of ETCI's Shares. (j) The execution, delivery and performance of this Agreement by RWC and the consummation by it of the transaction contemplated herein does not and will not result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which RWC is subject. 8. ETCI and RWC agree to execute such additional documents and take whatever actions reasonably necessary to effectuate this transaction or otherwise carry out the intent and purpose of this Agreement, or subsequently transfer the Shares to be issued. 9. This Agreement sets forth the entire understanding between the parties and no other prior written or oral agreement shall be recognized or enforced. 10. If any clause or provision of this Agreement is later determined to be invalid, illegal or unenforceable, the other clauses and provisions of this Agreement shall remain in full force and effect. 11. Every right and remedy provided herein shall be cumulative with every other right and remedy, whether conferred herein, at law or in equity, and may be enforced concurrently herewith, and no waiver by the parties in the performance of any obligation by the other shall be construed as a waiver of the same or other default then, theretofore or thereafter occurring or existing. At any time prior to the issuance or exchange of the Shares as contemplated herein, this Agreement may be amended by a writing signed by all parties hereto. 12. This Agreement may be executed in counterparts, each of which shall constitute an original and which together, shall constitute one and the same document. 10.1-3 Date: June 30, 2005 Elephant Talk Communications, Inc. --------------------- By: /s/ Russelle Choi Russelle Choi President Date: June 30, 2005 Rising Water Capital AG --------------------- By: /s/ Marion Schumacher Marion Schumacher Managing Director Stock Purchase Agreement June 30, 2005.RWC 10.1-4 EX-10.2 3 exhibit_10-2.txt CONVERTIBLE PROMISSORY NOTE Exhibit 10.2 ELEPHANT TALK COMMUNICATIONS, INC. Convertible Promissory Note Original Principal Amount December 15, 2005 US$3,500,000.00 --------------- ELEPHANT TALK COMMUNICATIONS, INC., a California corporation (the "Company"), for value received, promises to pay to Rising Water Capital AG, a company registered in Zug, Switzerland (the "Holder"), located at Baarerstrasse 12, 6300 Zug, or its registered assigns, the principal sum of US$3,500,000.00 (the "Principal Amount"). The Company will pay to the Holder Payments (defined below) of principal and accrued interest thereon at the Interest Rate described in Section 1 below from the date of receipt of funds under this Note, and to which interest will be paid (computed daily on the basis of a year of 360 days and the actual number of days elapsed), until the entire Principal Amount and accrued interest have been paid, or until the Maturity Date described below. Payment shall be in the coin or currency of the United State of America which at the time of payment is legal tender for the payment of public and private debts. The Company may, at its option, prepay this Note in whole or in part, at any time and from time to time, without premium or penalty. All amounts received by Holder hereunder from the Company shall be applied first to accrued interest and, upon the payment of all accrued and unpaid interest, thereafter shall be applied against outstanding principal. The Company may borrow under the terms of this Note, from time to time, from the Holder up to a maximum of US$3,500,00.00. The Company will not enter into any additional financing without the prior written approval of the Holder, and will provide to the Holder any reasonable detailed reporting and access to all Company information. 1. Term; Interest Rate. This Note shall have a term of thirty (30) months, during which time interest on the Principal Amount will accrue from the date of this Note at an annual interest rate of 10%. The Note will be paid in full at the end of the thirty month term with a balloon payment of principal and interest accrued. 2. Payments. The person in whose name the Note is registered at the close of business on the last day of the calendar month preceding a Payment Date shall be entitled to receive the Payment on the Payment Date. Payments shall be applied first to accrued interest and, upon the payment of all accrued and unpaid interest, thereafter shall be applied against the outstanding Principal Amount. On the Maturity Date, the Company shall pay the Holder the entire unpaid portion of the Principal Amount of this Note and all accrued and unpaid interest thereon. Subject to the provisions set forth in Section 3 with respect to the conversion of the Note into common stock of the Company, the Company may prepay or redeem the Note at any time, in whole or in part, prior to the Maturity Date. In case the Company desires to prepay the Note, Holder will have the option to convert the full or partial amount of Note into Common Shares of the Company during a thirty day period after being informed of the Company's intention of 10.2-1 prepayment of the Note. This Note does not entitle the Holder to any voting or other rights as a shareholder of the Company, or to any other rights whatsoever except those expressly set forth herein. No dividends are payable or will accrue on this Note. 3. Conversion. This Note shall be convertible during the term, in whole or in part, into shares of common stock, no par value (the "Common Stock"), at the conversion price of three and one-half cents (US$0.035) per share of Common Stock (the "Conversion Price"); provided, however, that this Note shall not be convertible during the term when the Company has insufficient authorized common stock to issue to the Holder when a demand for conversion is made. In this regard, the Company has agreed in Section 10 hereof to take certain steps as promptly as practicable to assure that sufficient shares of common stock are authorized to permit the full exercise of the Holder's conversion rights. 4. Security. The Note will be secured by shares owned or to be owned by the Company in the entities Beijing Chinawind Communications Information Technology Co. Ltd., ET Middle East and ETC Holding. 5. Default. (a) Events of Default. Each of the following shall constitute an event of default (an "Event of Default") under this Note: (1) The failure to make any Payment to the Holder, as required by Section 2 above, when the same becomes due and payable, and the continuance of such failure for a period of thirty (30) days after such payment becomes due. (2) The failure to pay the portion of the Principal Amount of this Note remaining unpaid on the Maturity Date and all accrued and unpaid interest thereon, as required by Section 2 above, when the same becomes due and payable, and the continuance of such failure for a period of thirty (30) days after such payment becomes due. (3) The failure on the part of the Company duly to perform or observe any other agreement, covenant, term or condition hereof which nonperformance or nonobservance has continued for a period of ninety (90) days after written notice specifying the nonperformance or nonobservance is received by the Company from the holder of the Note. (4) Commencement by the Company of a voluntary case or other proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency, or other similar laws now or hereafter in effect seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or any substantial part of its property, or consent by the Company to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or the making of a general assignment for the benefit of creditors, or a failure generally to pay its debts as they become due. 10.2-2 (5) An involuntary case or other proceeding shall be commenced against the Company seeking liquidation, reorganization, or other relief with respect to it or its debts under any bankruptcy, insolvency, or other similar laws now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of ninety (90) consecutive days. (6) The Company shall have, after three months from the date of this Note, failed to file with the U.S. Securities and Exchange Commission a Definitive Information Statement on Schedule 14C or shall have failed to mail the same to shareholders, which filing and mailing relates to an amendment to its Articles of Incorporation to increase the number of authorized shares from 255 million (250 million of common stock and 5 million of preferred stock) to 655 million (650 million of common stock and 5 million of preferred stock). It shall also constitute an Event of Default if the Company shall fail to amend, within three months of the date of this Note, its Articles of Incorporation to increase its authorized common stock with the Office of the Secretary of State of California. (b) Remedy: Acceleration and Conversion. Upon the occurrence and continuance of an Event of Default, the Holder of the Note may, by notice in writing to the Company, declare the entire unpaid principal of the Note to be, and all of the unpaid principal of the Note shall then be, forthwith due and payable together with interest accrued thereon. Thereafter, the remedy of the Holder in the event of nonpayment by the Company shall be conversion of this Note into Common Stock in accordance with Section 3 above or take the securities in Section 4 as payment towards the unpaid principal of the Note together with interest accrued thereon.. (c) Waiver. The Holder of the Note may by written notice to the Company waive any past Event of Default and its consequences. On waiver, the underlying Event of Default shall be deemed cured for all purposes of the Note. No waiver shall extend to a subsequent or other Event of Default, or impair any right consequent thereto. (d) Rescission of Acceleration. The Holder of the Note may by written notice to the Company rescind and annul a declaration of acceleration if the Company pays all accrued interest on the Note then outstanding and the unpaid portion of the Principal Amount of the Note then outstanding which have become due otherwise than by the declaration. No rescission and annulment shall extend to a subsequent or other Event of Default, or impair any right consequent thereto. 6. Payment; Waiver. The Company shall make Payments of the Principal Amount and interest on this Note pursuant to the terms of Sections 1 and 2 above. Payment shall be made by check mailed to the registered Holder in accordance with Section 11, without presentment of the Note and without notation of payment being made on the Note. The Company hereby waives grace, notice of intent to accelerate, protest, demand, presentment for payment and diligence in the 10.2-3 collection of this Note, and in the filing of suit hereon. It is further agreed that upon this Note becoming due or being declared due and upon the same being placed in the hands of attorneys for collection, collected by suit, or collected through a court of bankruptcy, the Company agrees to pay a reasonable amount as collection or attorneys' fees. 7. Transfer. This Note is transferable only on the books of the Company (at its office or agency to be maintained in the Hong Kong Special Administrative Region of the People's Republic of China) by the registered Holder in person or by his attorney duly authorized in writing, on surrender of this Note properly endorsed. No service charge shall be made for any registration of transfer or exchange of this Note, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer, registration or transfer or exchange. THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY APPLICABLE STATE LAW. THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE RE-OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AND THE STATE SECURITIES ACT OR BLUE SKY ACT OF ANY STATE HAVING JURISDICTION THEREOF OR (B) A PRIOR OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES ACT OR BLUE SKY ACT OF ANY STATE HAVING JURISDICTION WITH RESPECT THERETO. 8. Registered Owner. Prior to the presentment for registration of transfer of this Note, the Company and any agent of the Company may treat the registered Holder as the absolute owner of this Note for all purposes, whether or not the Note is overdue. Neither the Company nor the agent shall be affected by any notice to the contrary (including any notation of ownership or other writing on the Note made by anyone other than the Company). 9. No Recourse. No recourse shall be had for payment of the principal or interest on this Note, or for any claim based hereon against an incorporator, stockholder, officer or director as such (whether past, present or future) of the Company or any successor corporation, either directly through the Company or successor corporation or otherwise, whether by virtue of a constitution, statute or rule of law or by the enforcement of an assessment or penalty or otherwise. All such liability is expressly released and waived by the acceptance of this Note and as part of the consideration for its issuance. 10. SEC Filings and Amendment to Articles of Incorporation. The Company hereby agrees that it shall make all necessary filings with the U.S. Securities and Exchange Commission and the Office of the Secretary of State of California to perfect an amendment to its Articles of Incorporation in order to increase its authorized shares from 255 million (250 million of common stock and 5 million of preferred stock) to 655 million (650 million of common stock and 5 million of preferred stock), all such actions to be undertaken as promptly as practicable so that the Holder will enjoy a full conversion privilege. 11. Notices; Addresses. All notices to the Holder or to the Company shall be given in writing by first class mail, postage prepaid, addressed: (1) if to the 10.2-4 Holder, at its address most recently furnished by it to the Company for that purpose; or (2) if to the Company, at its principal executive offices located at 438 East Katella Avenue, Suite 217, Orange, California 92867 (Attention: Mr. Russelle Choi) or at such other address as the Company may specify by notice to the Holder. Notice shall be deemed given at the time so mailed. A notice by the Company of change of address of its office or agency for any payment on this Note shall be given at least ten business days before the date the change is to become effective, and shall specify such date. Checks may be sent to Holders by first class mail, postage prepaid, to the address indicated in clause (1) and shall be deemed delivered at the time so mailed. 12. Maximum Interest Rate. It is expressly stipulated and agreed to be the intent of the Company and Holder at all times to comply with applicable California law governing the maximum rate or amount of interest payable on or in connection with this Note (or applicable United States federal law to the extent that it permits the Holder to contract for, charge, take, reserve or receive a greater amount of interest than under California law). If the applicable law is ever judicially interpreted so as to render usurious any amount called for under this Note, or if acceleration of the maturity of this Note or any prepayment by the Company results in the Company having paid or the Holder having received any interest in excess of that permitted by law, then it is the express intent of the Company and Holder that all excess amounts theretofore collected by the Holder be credited on the principal balance of this Note (or, if this Note has been or would thereby be paid in full, refunded to the Company), and the provisions of this Note immediately be deemed reformed and the amounts thereafter collectible hereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder and thereunder. The right to accelerate maturity of this Note or any other indebtedness does not include the right to accelerate any interest which has not otherwise accrued on the date of such acceleration, and Holder does not intend to collect any unearned interest in the event of acceleration. All sums or detention of the indebtedness evidenced hereby shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full so that the rate or amount of interest on account of such indebtedness does not exceed the applicable usury ceiling. 13. Successors. All the covenants, stipulations, promises, agreements and obligations under this Note by or of the Company shall bind the Company's successors and assigns whether so expressed or not. 14. Headings. The headings used in this Note have been inserted for convenience of reference only and do not define or limit the provisions hereof. 15. Governing Law. This Note shall be governed by and construed in accordance with the Laws of the State of California applicable to an agreement executed and performed in such State without giving effect to the conflicts of laws principles thereof; and the courts of such state and the applicable United States District Court shall be the exclusive courts of jurisdiction and venue for any litigation, special proceeding or other proceeding as between the parties that may be brought, or arise out of, in connection with, or by reason of this Agreement. The Holder hereby consents to the jurisdiction of such courts. 10.2-5 Dated as of the 15th day of December, 2005. ELEPHANT TALK COMMUNICATIONS, INC. By: /s/ Russelle Choi Russelle Choi President Convertible 10.2-6 -----END PRIVACY-ENHANCED MESSAGE-----