NEITHER THIS
SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS
CONVERTIBLE
HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION
OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES
ACT"), AND,
ACCORDINGLY,
MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN
AVAILABLE EXEMPTION
FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF
THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE
STATE
SECURITIES LAWS AS
EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT,
THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO
THE
COMPANY.
Original Issue Date:
February 7, 2007
Original Conversion Price (subject to adjustment herein):
$1.00
8% Senior Secured Convertible Note #1
$10,000,000.00
8% SENIOR SECURED CONVERTIBLE NOTE
----------------------------------
FOR
VALUE RECEIVED, PETROSEARCH ENERGY
CORPORATION, a Nevada corporation,
(the "COMPANY"),
having its principal place of business at 675
Bering Drive,
Suite 200,
Houston, Texas 77057, promises to pay to the order of RCH
PETRO
INVESTORS, LP,
a Delaware limited partnership, or
its registered assigns (the
"HOLDER"), the
principal sum of TEN MILLION AND NO/100 DOLLARS (US
$10,000,000.00) on
the three (3) year anniversary of the
Original Issue Date
hereof or such earlier date as this 8% Senior Secured
Convertible Note (this
"CONVERTIBLE NOTE") is required or permitted to be repaid as
provided hereunder,
whether by
acceleration or
otherwise (such three (3) year anniversary date, or
such earlier
date, the "MATURITY DATE"), and to pay
interest to the Holder on
the aggregate
unconverted
and then outstanding principal amount of this
Convertible Note
in accordance with the provisions hereof.
This
Convertible
Note is a duly authorized and validly
issued 8% Senior
Secured Convertible
Note of the Company
(collectively, the "CONVERTIBLE NOTE")
designated as
its 8% Senior Secured Convertible Note by the Company in
the
aggregate principal
amount of $10,000,000, issued in registered form under that
certain Note
and Warrant Purchase Agreement (together with all amendments,
supplements and
modifications thereto
in accordance with the terms hereof from
time to time, herein called the "PURCHASE AGREEMENT"), dated of even
date
herewith, by
and among the Company
and the Holder, to which Purchase Agreement
reference is
hereby made for additional rights, duties
and obligations of the
Company and
the Holder. This Convertible Note is secured by the
Collateral
described herein
and is subject to the following additional provisions:
1
<PAGE>
Section 1.
Definitions. For
the purposes hereof, in addition to
the
----------
-----------
terms defined
elsewhere in this Convertible Note, (a) capitalized
terms not
otherwise defined
herein shall have the meanings set forth in the
Purchase
Agreement and
(b) the following terms shall have the following meanings:
"Affiliate" means,
with respect to a specified Person, any other
---------
Person, whether
now in existence or hereafter created, directly or
indirectly
controlling,
controlled by or under
direct or indirect common
control with
such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, "controlling,"
"controlled
by,"
and "under common control with") means the
power to direct or cause
the
direction of the management and policies of
such Person, directly or
indirectly, whether through the ownership of voting securities, by
contract
or otherwise.
"Barnett Petrosearch"
means Barnett Petrosearch, L.L.C., a Texas
--------------------
limited liability
company.
"Barnett Shale
Project" means the project located in the
Fort Worth
-----------------------
basin of Texas
comprised a 2 million acre, 8-county contract area directed
by
the Partnership (as defined in the Pledge and Security
Agreement) in
which the Company indirectly owns a 5.54455% interest.
"Bankruptcy Event"
means any of the following events: (a) the Company
-----------------
or
any Significant
Subsidiary thereof commences a case or other proceeding
under any bankruptcy, reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or
similar law of
any
jurisdiction
relating to the Company or any Significant
Subsidiary
thereof; (b)
there is commenced against the Company or any
Significant
Subsidiary thereof any such case or proceeding that is not
dismissed within
60
days after commencement; (c) the
Company or any Significant Subsidiary
thereof is
adjudicated
insolvent or bankrupt or any order of relief
or
other order
approving any such case or proceeding is entered; (d)
the
Company or
any Significant Subsidiary thereof
suffers any appointment of
any
custodian or the like for it or any substantial
part of its property
that
is not discharged or stayed within 60 calendar days after such
appointment; (e) the
Company or any Significant Subsidiary thereof makes a
general assignment
for the benefit of creditors; (f) the
Company or any
Significant Subsidiary thereof calls a meeting of its creditors
with a view
to
arranging a composition, adjustment or
restructuring of its debts; or
(g)
the Company or any Significant Subsidiary thereof, by any act or
failure to
act, expressly indicates its consent to, approval of or
acquiescence in any of the foregoing or takes any corporate or
other action
for
the purpose of effecting any of the foregoing.
"Business Day"
means any day except Saturday, Sunday,
any day which
-------------
shall be a federal legal holiday in the
United States or any day on which
banking institutions in the State of New York are authorized or
required by
law
or other governmental action to close.
2
<PAGE>
"Capital Lease"
means a lease with respect to which the lessee
is
--------------
required concurrently
to recognize the acquisition of an asset and
the
incurrence of
a liability in accordance with GAAP.
"Collateral" has
the meaning set forth in the Pledge and
Security
----------
Agreement and
includes without limitation the following:
(a)
25% of the membership interests (ownership
interests)
owned by the Company
in Exploration Holding (the "EXPLORATION HOLDING
MEMBERSHIP
INTEREST");
(b)
all products
and proceeds of the foregoing
Exploration
Holding Membership
Interest, including, without limitation, all
revenues,
distributions,
dividends, stock
dividends, securities and
other property,
rights, and interests that the Company is at any time
entitled to
receive on account of the same.
"Collateral Value" means 25% of the Fair Market Value of all assets
of
----------------
Barnett Petrosearch
(as long as Barnett
Petrosearch continues to be owned
directly, or
indirectly,
by the Company).
"Common Stock" means
the common stock, par value $0.001 per share, of
-------------
the
Company and stock of any other class of securities into
which such
securities may
hereafter be reclassified or changed into.
"Exchange Act" means
the Securities Exchange Act of 1934, as amended,
-------------
and
the rules and regulations promulgated thereunder.
"Exploration Holding"
means Exploration
Holding Co., L.L.C., a Texas
--------------------
limited liability
company.
"Fair Market
Value" means the amount at which property
would change
-------------------
hands between a willing buyer and a willing seller, neither being
under any
compulsion to
buy or sell and both having reasonable knowledge
of the
relevant facts.
"GAAP" means
generally accepted accounting principles in
the United
----
States set
forth in the opinions and pronouncements of the
Accounting
Principles Board and the American Institute of Certified Public
Accountants
and
statements
and pronouncements of the Financial Accounting
Standards
Board or such other
principles as may be approved by a significant segment
of
the accounting profession in the
United States, that are applicable to
the
circumstances
as of the date of determination,
consistently applied.
"Guarantee" means, as to any Person, (a) any obligation, contingent
or
---------
otherwise, of
such Person guaranteeing or having the
economic effect of
guaranteeing any Indebtedness or other obligation payable or
performable by
another Person
(the "primary
obligor") in any manner, whether directly or
---------------
indirectly, and
including any obligation of such Person, direct or
indirect, (i)
to purchase or pay (or advance or supply funds for
the
purchase or
payment of) such Indebtedness or other obligation,
(ii) to
purchase or
lease
3
<PAGE>
property, securities or services for the purpose of assuring the
obligee in
respect of
such Indebtedness or other obligation of the payment or
performance of
such Indebtedness or other obligation, (iii) to
maintain
working capital,
equity capital or any other financial statement condition
or
liquidity or level of income or cash flow of
the primary obligor so as
to
enable the primary obligor to pay such Indebtedness or other
obligation,
or
(iv) entered into for the purpose of assuring
in any other manner the
obligee in respect of
such Indebtedness or other obligation of the payment
or
performance
thereof or to protect
such obligee against loss in respect
thereof (in whole or in part), or (b) any Lien on any assets of
such Person
securing any
Indebtedness or other obligation of any other Person, whether
or
not such Indebtedness
or other obligation is assumed by such Person (or
any
right, contingent or otherwise, of any
holder of such Indebtedness to
obtain any such Lien). The amount of any Guarantee shall be deemed
to be an
amount equal
to the stated or determinable amount
of the related primary
obligation, or portion
thereof, in respect of which such Guarantee is made
or,
if not stated or determinable, the maximum reasonably
anticipated
liability in
respect thereof as determined by the
guaranteeing Person in
good
faith. The term "Guarantee" as a verb has a
corresponding meaning.
---------
"Indebtedness" means
as to the Company at a
particular time, without
------------
duplication, all of
the following, whether or not included as indebtedness
or
liabilities
in accordance with GAAP:
(i) all obligations of the Company for borrowed money and
all
obligations of the Company evidenced by bonds, debentures, notes,
loan
agreements or
other similar instruments;
(ii) all direct or
contingent obligations of the Company arising
under letters
of credit (including
standby and commercial), bankers'
acceptances, bank
guaranties,
surety bonds and
similar instruments;
(iii) net obligations of the Company under any Swap
Contract;
(iv) all obligations
of the Company to pay the deferred purchase
price of property or services (other than trade
accounts payable in
the ordinary course of
business that are not unpaid for more than 120
days after the date on
which such trade account payable was created);
(v) indebtedness
(excluding prepaid interest thereon) secured by
a Lien on property
owned or being purchased by the Company (including
indebtedness arising
under conditional sales or other title retention
agreements), whether
or not such indebtedness shall have been assumed
by the Company or is limited in recourse;
(vi) Capital
Lease Obligations and
Synthetic Lease Obligations;
(vii) all obligations of the Company to purchase, redeem,
retire,
defease or
otherwise make any payment in respect of any equity
interest in the Company or any other entity or company, valued, in
the
case of a redeemable preferred interest, at the greater of its
voluntary or
involuntary
liquidation
preference
plus
4
<PAGE>
accrued and unpaid dividends (but excluding undeclared dividends
where
the Company
is not required to declare such dividends); and
(viii) all
Guarantees
of the Company in respect of any of
the
foregoing.
"Initial Registration
Statement" means the
registration statement on
--------------------------------
Form
SB-2 registering the Note Shares, as provided in the
Registration
Rights Agreement.
"Lien" means any
mortgage, pledge, hypothecation, assignment, deposit
----
arrangement, encumbrance, lien (statutory or other), charge, or
preference,
priority or
other security interest or preferential arrangement in
the
nature of a security interest of any kind or
nature whatsoever (including
any
conditional
sale or other title retention agreement, any
easement,
right of way or other encumbrance on title to real property, and
any
financing lease having substantially the same economic effect as
any of the
foregoing).
"Note Shares" means the shares of Common Stock (i) to which the
Holder
-----------
is
entitled upon conversion of this Convertible Note and (ii)
that have
been
issued in lieu of cash interest payments
under this Convertible Note
at
the time of filing the
applicable Registration Statement (as defined in
the
Registration Rights
Agreement) or Piggyback Registration Statement (as
defined in
the Registration Rights Agreement).
"Optional Redemption
Amount" means the sum of (i) 110% of the
----------------------------
principal amount
of the Convertible Note then outstanding and (ii)
all
accrued but
unpaid interest.
"Original Issue
Date" means the date of the first issuance of
the
---------------------
Convertible Note,
regardless of any
transfers of any Convertible Note and
regardless of
the number of instruments which may be issued
to evidence
such
Convertible
Note.
"Outstanding
Principal" means
the outstanding principal balance
of
----------------------
this
Convertible Note at
the time and excludes any principal that has been
converted into shares
of Common Stock of the Company pursuant to the terms
of
this Convertible Note, if, and to the extent that, the Holder
has
received its Note Shares from the Company with respect to any such
excluded
converted
principal.
"Partnership" means
the DDJET Limited, LLP, a Texas limited liability
-----------
limited partnership as
further described in the recitals to the Pledge and
Security
Agreement.
"Partnership Interest" means the 5.54455% limited partnership
interest
--------------------
in
the Partnership owned by Barnett Petrosearch.
"Permitted Amount"
means the amount by which the Collateral Value
-----------------
exceeds the
Outstanding
Principal.
"Person" means
an individual or corporation, partnership, trust,
------
incorporated or
unincorporated
association,
joint venture, limited
liability company,
joint stock company, government (or an agency or
subdivision thereof)
or other entity of any kind.
5
<PAGE>
"Pledge and
Security Agreement" means the Pledge and Security
--------------------------------
Agreement, dated
of even date herewith, by and between the Company as
pledgor and
the Holder as secured party.
"Purchase Agreement"
shall have the meaning set forth on page 1
of
-------------------
this
Convertible
Note.
"Prime Rate"
shall mean the "prime rate" as published in
the money
-----------
rates section
of the Wall Street Journal (Southwest Edition)
-------------------------------------------
"Proved Reserves" means collectively, the Proved Developed Oil and
Gas
---------------
Reserves and
Proved Undeveloped Reserves of the Company and its
subsidiaries, as
such terms are defined
in Sec. 210.4-10(a) of Regulation
S-X.
"PV-10 Value" means the estimated future gross revenue to be
generated
-----------
from
the production of Proved Reserves of the Company and its
subsidiaries,
net
of estimated
production and future development costs, using prices and
costs in effect at the determination date, without giving effect to
non-property related
expenses such as general and administrative expenses,
debt
service and future income tax expense or to
depreciation, depletion
and
amortization,
discounted
using an annual discount rate of 10%.
"Registration Rights
Agreement"
means the Registration Rights
-------------------------------
Agreement, dated
as of the date of the Purchase Agreement, among
the
Company and the original Holders, as amended, modified or
supplemented from
time
to time in accordance with its terms.
"Registration Statement" means a registration statement that
registers
----------------------
the
resale of the Note Shares and names such Holder as a "selling
stockholder" therein, and meets the requirements of the
Registration Rights
Agreement.
"SEC" means
the United States Securities and Exchange
Commission.
---
"Securities Act" means the Securities Act of 1933, as amended, and
the
--------------
rules and regulations promulgated thereunder.
"Significant Subsidiary" shall mean (i) Exploration Holding or
Barnett
----------------------
Petrosearch and
(ii) any other Significant Subsidiary (as such
term is
defined in
Rule 1-02(w) of Regulation S-X ) but, at the option of
the
Company, shall
exclude any Significant Subsidiary (other than the
Significant
Subsidiaries listed
in foregoing clause (i)), which has
Indebtedness for
which recourse is exclusive to the assets of any
such
Significant Subsidiary
and as to which there is no recourse to the Company
or
to the Company's other subsidiaries, from
the Indebtedness incurrence
test
set forth in Section 7(a)(i) hereof.
6
<PAGE>
"Swap Contract"
means (a) any and all rate swap
transactions, basis
--------------
swaps, credit derivative transactions, forward rate transactions,
commodity
swaps, commodity
options, forward commodity contracts,
commodity futures
contracts, equity
or equity index swaps
or options, bond or bond price or
bond
index swaps or options or forward bond or forward bond price or
forward bond
index transactions, interest rate options, forward
foreign
exchange transactions,
cap transactions, floor transactions, collar
transactions, currency
swap transactions, cross-currency rate swap
transactions, currency
options, spot contracts, or any other similar
transactions or
any combination of any of the foregoing (including
any
options to
enter into any of the foregoing), whether or not any
such
transaction is
governed by or subject to any master agreement, and (b) any
and
all transactions of
any kind, and the related confirmations, which are
subject to the terms
and conditions of, or governed by, any form of master
agreement published by the International Swaps and Derivatives
Association,
Inc., any international foreign exchange master agreement, or any
other
master agreement
(any such master agreement, together with any
related
schedules, a
"Master Agreement"), including any such obligations or
-----------------
liabilities under
any Master Agreement.
"Synthetic Lease Obligation" means the monetary obligation of a
Person
--------------------------
under a so-called synthetic, off-balance sheet or tax retention lease.
"Trading Day"
means a day on which the principal Trading
Market is
------------
open
for business.
"Trading Market" means the following markets or exchanges on which
the
--------------
Common Stock
is listed or quoted
for trading on the date in question: the
American Stock
Exchange, the Nasdaq Capital Market, the Nasdaq Global
Market, the Nasdaq Global Select Market, the New York Stock
Exchange or the
OTC
Bulletin Board.
"VWAP" means,
for any date, the
price determined by the first of the
----
following clauses
that applies: (a) if
the Common Stock is then listed or
quoted on a Trading
Market, the daily volume weighted average price of the
Common Stock
for such date (or the
nearest preceding date) on the Trading
Market on which the Common Stock is then listed or
quoted for trading as
reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m.
(New York
City
time) to 4:02 p.m. (New York City time); (b) if the OTC Bulletin
Board
is
not a Trading Market, the volume
weighted average price of the Common
Stock for such date (or the nearest preceding date) on
the OTC Bulletin
Board; (c)
if the Common Stock is not then
quoted for trading on the OTC
Bulletin Board and if
prices for the Common Stock are then reported in the
"Pink Sheets"
published by Pink
Sheets, LLC (or a similar organization or
agency succeeding
to its functions of reporting
prices), the most recent
bid
price per share of the Common Stock so
reported; or (d) in all other
cases, the fair market value of a share of Common Stock as
determined by an
independent appraiser
selected in good faith
by the Holder and reasonably
acceptable to
the Company.
7
<PAGE>
Section 2.
Interest.
----------
--------
a)
Payment of
Interest. Interest
shall accrue at the rate of the
---------------------
lesser of (i) eight percent (8%) per annum; and (ii) the maximum
nonusurious interest
rate under applicable law (except that interest shall
accrue at the 8.5% per
annum interest rate described below (limited by the
maximum nonusurious
rate) in the specified
circumstance) on the principal
balance of
this Convertible Note
from time to time outstanding commencing
on
the Original Issue Date. Accrued interest from such time through
February 28,
2007 shall be paid by the Company to
the Holder on March 1,
2007. Thereafter,
commencing
on April 1, 2007, the Company shall
pay in
cash
to the Holder, on the aggregate unconverted and then
outstanding
principal amount
of this Convertible Note, accrued
interest quarterly in
arrears and
continuing
on each July 1,
October 1, January 1, and April 1
thereafter throughout
the term of this Convertible Note and shall pay
accrued interest on
each Conversion Date (as to that principal amount then
being converted), on each Redemption Date (as to that principal
amount then
being redeemed)
and on the Maturity Date (each of the
foregoing dates of
payment, an "INTEREST PAYMENT DATE"). If any Interest Payment Date
is not a
Business Day,
then the applicable payment shall be due on the next
succeeding Business
Day and the amount of the accrued interest shall
include such additional Business Day or Days. At the sole
discretion of the
Company, interest
shall accrue at the
rate of the lesser of (i) eight and
1/2
percent (8.5%) per annum; or (ii) the maximum nonusurious rate
of
interest under
applicable law, if,
and to the extent that Company opts to
pay
such interest in Common Stock of the
Company priced using the closing
price of the last Trading Day of each quarter
immediately preceding the
quarterly Interest Payment Date, or the date preceding the
Conversion Date,
each
Redemption
Date or the Maturity Date. All cash
payments of interest
payments shall
be paid to the Holder in accordance with wire
transfer
instructions provided
by the Holder to the
Company. All interest payments
made
with Common Stock shall be made by delivery to the Holder by
overnight
courier to the address for the Holder provided under
Section 11 hereof.
b)
Default Interest. The
Company further
agrees that if the
------------------
Company shall
default in the payment of any payment
required hereunder,
whether payment
of principal,
interest, or fees or otherwise, and whether
paid
in cash or with Common
Stock, the Company promises to pay, on demand,
interest on
any such unpaid amounts, from the date
the payment is due to
the
date of actual
payment, at the rate (the "DEFAULT RATE") of the lesser
of
(i) the Prime Rate plus 5.00% per annum; and (ii) the maximum
nonusurious rate
permitted by applicable law.
c)
Interest Calculations.
Interest shall be calculated on the
----------------------
basis of a 360-day
year, consisting of twelve 30 calendar day periods, and
shall accrue
daily commencing on
the Original Issue Date until payment in
full of the principal sum, together with all
accrued and unpaid interest
and
other amounts which may become due
hereunder, has been made. Interest
shall cease
to accrue with respect to any principal amount
converted,
provided that the Company actually delivers the Note Shares within
the time
period required
by Section 4(c)(iii) herein. Interest
hereunder will be
paid
to the Person in
8
<PAGE>
whose name
this Convertible Note is registered on the records of the
Company regarding
registration and transfers of this Convertible Note (the
"CONVERTIBLE NOTE
REGISTER").
d)
Prepayment. Except
for Company's right to redeem this
----------
Convertible Note in accordance with the provisions of Section 6
hereof, the
Company may
not prepay any portion of the principal amount of this
Convertible Note,
without the prior written consent of the Holder.
e)
Maturity. On
the Maturity Date, the outstanding principal
---------
balance on
this Convertible Note, together with all accrued and
unpaid
interest shall
be paid by the Company
to the Holder in cash in accordance
with
wire transfer instructions previously provided
by the Holder to the
Company for
use in connection with cash interest payments.
Section 3.
Registration of
Transfers and Exchanges.
-----------
-------------------------------------------
a)
Different Denominations. This Convertible Note is exchangeable,
----------- from
time to time, for Convertible Note in
different
denominations and
in the names of one or more different
designees, nominees or assignees, in an aggregate principal amount
equal to
the
aggregate principal balance outstanding on
the Convertible Note being
exchanged at the time, as requested by the Holder surrendering the
same. No
service charge
will be payable for such exchanges, transfers, or
registrations of
transfers.
b)
Investment
Representations. This
Convertible
Note has been
---------------------------
issued subject to certain investment representations of the
original Holder
set
forth in the Purchase Agreement and may be
transferred or exchanged
only
in compliance with the Purchase
Agreement and applicable federal and
state securities
laws and regulations.
c)
Reliance on Convertible Note Register. Prior to due presentment
-------------------------------------
to
the Company for transfer of this
Convertible Note, the Company and any
agent of the Company may treat the Person in
whose name this Convertible
Note
is duly registered on the Convertible Note Register as the
owner
hereof for the purpose
of receiving payment as herein provided and for all
other purposes, whether or not this Convertible Note is overdue, and
neither the
Company nor any such
agent shall be affected by notice to the
contrary.
Section 4.
Conversion.
-----------
----------
a)
Voluntary Conversion.
This Convertible Note shall be
---------------------
convertible, in whole or in part, into shares of Common Stock at a
price of
$1.00 per share at the
option of the Holder at the earlier to occur of (i)
one
year after the Original Issue Date or (ii) three months after
the
Initial Registration
Statement becomes effective with the
Securities and
Exchange Commission.
The Holder shall
effect conversions by delivering to
the Company a Notice of
Conversion, the form of which is attached hereto as
Annex A (a "NOTICE OF CONVERSION"), specifying therein the
principal amount
-------
of
this Convertible Note to be converted and the date on which such
conversion shall be effected (such date,
9
<PAGE>
the
"CONVERSION
DATE"). If no
Conversion Date is specified in a Notice of
Conversion, the
Conversion
Date shall be the date that such Notice of
Conversion is deemed
delivered hereunder. To effect conversions hereunder,
the
Holder shall not be required to
physically surrender this Convertible
Note
to the Company unless
the entire principal amount of this Convertible
Note, plus all accrued
and unpaid interest thereon, has been so converted.
Conversions hereunder
shall have the effect of reducing the
outstanding
principal amount
of this Convertible Note in an amount equal to the
applicable conversion
of principal. The Holder and the Company shall
maintain records
showing the principal amount(s) converted and the date of
such
conversion(s).
The Company may
deliver an objection to any Notice of
Conversion within
two (2) Business Days of delivery of such Notice of
Conversion based
on an inaccuracy in such Notice but not on any
other
basis. In the event of any dispute or discrepancy, the
records of the
Holder shall
be controlling and determinative in
the absence of manifest
error. THE HOLDER, AND ANY ASSIGNEE BY ACCEPTANCE OF THIS
CONVERTIBLE NOTE,
ACKNOWLEDGE AND AGREE
THAT, BY REASON OF THE PROVISIONS OF THIS PARAGRAPH,
FOLLOWING CONVERSION
OF A PORTION OF THIS CONVERTIBLE NOTE, THE UNPAID AND
UNCONVERTED PRINCIPAL AMOUNT OF THIS CONVERTIBLE NOTE WILL BE LESS
THAN THE
AMOUNT STATED
ON THE FACE HEREOF.
b)
Conversion Price.
The conversion price in effect on any
-----------------
Conversion Date
shall be $1.00 per share (the "CONVERSION PRICE").
c)
Mechanics of
Conversion.
-------------------------
i.
Note Shares Issuable
Upon Conversion of Principal Amount.
---------------------------------------------------------
The number
of shares of Common Stock issuable upon a conversion
hereunder shall be determined by the quotient obtained by dividing
(x)
the outstanding
principal amount of this Convertible Note to be
converted by
(y) the Conversion Price.
ii.
Delivery of
Certificate Upon
Conversion. Not later than
-----------------------------------------
three (3) Trading Days after each Conversion Date (the "SHARE
DELIVERY
DATE"), the
Company shall deliver, or cause to be
delivered, to the
Holder (A) a
certificate or certificates representing the Note Shares
which, shall
bear an appropriate restrictive legend and trading
restrictions as
required by the Purchase Agreement
representing the
number of shares of Common Stock being acquired upon the conversion
of
this Convertible
Note and (B) a bank check in the amount
of accrued
and unpaid interest
(if the Company has elected or is required to pay
accrued interest
in cash).
iii.
Failure to Deliver
Certificates. If in
the case of any
--------------------------------
Notice of Conversion such certificate or certificates are not
delivered to
or as directed by the applicable Holder by the
fifth
Trading Day after the Conversion Date, the Holder shall be entitled
to
elect by written notice to the Company at any time
on or before its
receipt of
such certificate or certificates, to rescind such
Conversion, in
which event the Company shall promptly
return to the
Holder any original
Convertible Note delivered to the Company and the
Holder shall
promptly return
10
<PAGE>
the Common
Stock certificates representing the principal amount
of
this Convertible
Note tendered for conversion to the Company.
iv.
Obligation Absolute.
The Company's
obligations to issue
--------------------
and
deliver the Note Shares upon conversion of
this Convertible Note
in accordance
with the terms hereof are absolute and
unconditional,
irrespective of
any action or inaction by the Holder
to enforce the
same, any waiver or
consent with respect to any provision hereof, the
recovery of
any judgment against
any Person or any action to enforce
the same, or any setoff, counterclaim, recoupment, limitation or
termination, or
any breach or alleged breach by the Holder or
any
other Person
of any obligation to the Company or any violation
or
alleged violation
of law by the Holder or any other Person, and
irrespective of
any other circumstance which might otherwise
limit
such obligation
of th
