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EXHIBIT 10.1
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES
MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF
COUNSEL IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE
TRANSACTIONS
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD
PURSUANT TO RULE
144 OR REGULATION S UNDER SAID ACT.
CALLABLE SECURED CONVERTIBLE NOTE
Vernon, British Columbia, Canada
January 31, 2008
$123,108.90
FOR VALUE RECEIVED, AQUATIC CELLULOSE INTERNATIONAL CORP., a
Nevada
corporation (hereinafter called the "BORROWER"), hereby promises to
pay to the
order of AJW Master Fund, Ltd. or registered assigns (the "HOLDER")
the sum of
$123,108.90, on January 31, 2011 (the "MATURITY DATE"), and to pay
interest on
the unpaid principal balance hereof at the rate of two percent (2%)
per annum
from January 31, 2008 (the "ISSUE DATE") until the same becomes due
and payable,
whether at maturity or upon acceleration or by prepayment or
otherwise. Any
amount of principal or interest on this Note which is not paid when
due shall
bear interest at the rate of fifteen percent (15%) per annum from
the due date
thereof until the same is paid ("DEFAULT INTEREST"). Interest shall
commence
accruing on the issue date, shall be computed on the basis of a
365-day year and
the actual number of days elapsed and shall be payable, quarterly
on March 31,
June 30, September 30 and December 31 of each year beginning on the
last day of
the first full quarter after Issue Date. All payments due hereunder
(to the
extent not converted into common stock, $.001 par value per share,
of the
Borrower (the "COMMON STOCK") in accordance with the terms hereof)
shall be made
in lawful money of the United States of America. All payments shall
be made at
such address as the Holder shall hereafter give to the Borrower by
written
notice made in accordance with the provisions of this Note.
Whenever any amount
expressed to be due by the terms of this Note is due on any day
which is not a
business day, the same shall instead be due on the next succeeding
day which is
a business day and, in the case of any interest payment date which
is not the
date on which this Note is paid in full, the extension of the due
date thereof
shall not be taken into account for purposes of determining the
amount of
interest due on such date. As used in this Note, the term "business
day" shall
mean any day other than a Saturday, Sunday or a day on which
commercial banks in
the city of New York, New York are authorized or required by law or
executive
order to remain closed. Each capitalized term used herein, and not
otherwise
defined, shall have the meaning ascribed thereto in that certain
Securities
Purchase Agreement, dated January 31, 2008 (the "PURCHASE
AGREEMENT").
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This Note is free from all taxes, liens, claims and encumbrances
with
respect to the issue thereof and shall not be subject to preemptive
rights or
other similar rights of shareholders of the Borrower and will not
impose
personal liability upon the holder thereof. The obligations of the
Borrower
under this Note shall be secured by that certain Security Agreement
by and
between the Borrower and the Holder of even date herewith.
The following terms shall apply to this Note:
ARTICLE I. CONVERSION RIGHTS
1.1
CONVERSION RIGHT. The Holder shall have the right from time to
time, and at any time on or prior to the earlier of (i) the
Maturity Date and
(ii) the date of payment of the Default Amount (as defined in
Article III)
pursuant to Section 1.6(a) or Article III, the Optional Prepayment
Amount (as
defined in Section 5.1) or (iii) any payments pursuant to Section
1.7, each in
respect of the remaining outstanding principal amount of this Note
to convert
all or any part of the outstanding and unpaid principal amount of
this Note into
fully paid and non-assessable shares of Common Stock, as such
Common Stock
exists on the Issue Date, or any shares of capital stock or other
securities of
the Borrower into which such Common Stock shall hereafter be
changed or
reclassified at the conversion price (the "CONVERSION PRICE")
determined as
provided herein (a "CONVERSION"); PROVIDED, HOWEVER, that in no
event shall the
Holder be entitled to convert any portion of this Note in excess of
that portion
of this Note upon conversion of which the sum of (1) the number of
shares of
Common Stock beneficially owned by the Holder and its affiliates
(other than
shares of Common Stock which may be deemed beneficially owned
through the
ownership of the unconverted portion of the Notes or the
unexercised or
unconverted portion of any other security of the Borrower
(including, without
limitation, the warrants issued by the Borrower pursuant to the
Purchase
Agreement) subject to a limitation on conversion or exercise
analogous to the
limitations contained herein) and (2) the number of shares of
Common Stock
issuable upon the conversion of the portion of this Note with
respect to which
the determination of this proviso is being made, would result in
beneficial
ownership by the Holder and its affiliates of more than 4.9% of the
outstanding
shares of Common Stock. For purposes of the proviso to the
immediately preceding
sentence, beneficial ownership shall be determined in accordance
with Section
13(d) of the Securities Exchange Act of 1934, as amended, and
Regulations 13D-G
thereunder, except as otherwise provided in clause (1) of such
proviso. The
number of shares of Common Stock to be issued upon each conversion
of this Note
shall be determined by dividing the Conversion Amount (as defined
below) by the
applicable Conversion Price then in effect on the date specified in
the notice
of conversion, in the form attached hereto as Exhibit A (the
"NOTICE OF
CONVERSION"), delivered to the Borrower by the Holder in accordance
with Section
1.4 below; provided that the Notice of Conversion is submitted by
facsimile (or
by other means resulting in, or reasonably expected to result in,
notice) to the
Borrower before 6:00 p.m., New York, New York time on such
conversion date (the
"CONVERSION Date"). The term "CONVERSION AMOUNT" means, with
respect to any
conversion of this Note, the sum of (1) the principal amount of
this Note to be
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converted in such conversion PLUS (2) accrued and unpaid interest,
if any, on
such principal amount at the interest rates provided in this Note
to the
Conversion Date PLUS (3) Default Interest, if any, on the amounts
referred to in
the immediately preceding clauses (1) and/or (2) PLUS (4) at the
Holder's
option, any amounts owed to the Holder pursuant to Sections 1.3 and
1.4(g)
hereof or pursuant to Section 2(c) of that certain Registration
Rights
Agreement, dated as of January 31, 2008, executed in connection
with the initial
issuance of this Note and the other Notes issued on the Issue Date
(the
"REGISTRATION RIGHTS AGREEMENT").
1.2
CONVERSION PRICE.
(A)
CALCULATION OF CONVERSION PRICE. The Conversion Price
shall be the lesser of (i) the Variable Conversion Price (as
defined herein) and
(ii) the Fixed Conversion Price (as defined herein) (subject, in
each case, to
equitable adjustments for stock splits, stock dividends or rights
offerings by
the Borrower relating to the Borrower's securities or the
securities of any
subsidiary of the Borrower, combinations, recapitalization,
reclassifications,
extraordinary distributions and similar events). The "VARIABLE
CONVERSION PRICE"
shall mean the Applicable Percentage (as defined herein) multiplied
by the
Market Price (as defined herein). "MARKET PRICE" means the average
of the lowest
three (3) Trading Prices (as defined below) for the Common Stock
during the
twenty (20) Trading Day period ending one Trading Day prior to the
date the
Conversion Notice is sent by the Holder to the Borrower via
facsimile (the
"CONVERSION DATE"). "TRADING PRICE" means, for any security as of
any date, the
intraday trading price on the Over-the-Counter Bulletin Board (the
"OTCBB") as
reported by a reliable reporting service mutually acceptable to and
hereafter
designated by Holders of a majority in interest of the Notes and
the Borrower
or, if the OTCBB is not the principal trading market for such
security, the
intraday trading price of such security on the principal securities
exchange or
trading market where such security is listed or traded or, if no
intraday
trading price of such security is available in any of the foregoing
manners, the
average of the intraday trading prices of any market makers for
such security
that are listed in the "pink sheets" by the National Quotation
Bureau, Inc. If
the Trading Price cannot be calculated for such security on such
date in the
manner provided above, the Trading Price shall be the fair market
value as
mutually determined by the Borrower and the holders of a majority
in interest of
the Notes being converted for which the calculation of the Trading
Price is
required in order to determine the Conversion Price of such Notes.
"TRADING DAY"
shall mean any day on which the Common Stock is traded for any
period on the
OTCBB, or on the principal securities exchange or other securities
market on
which the Common Stock is then being traded. "APPLICABLE
PERCENTAGE" shall mean
30%.
(B)
CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS.
Notwithstanding anything contained in Section 1.2(a) to the
contrary, in the
event the Borrower (i) makes a public announcement that it intends
to
consolidate or merge with any other corporation (other than a
merger in which
the Borrower is the surviving or continuing corporation and its
capital stock is
unchanged) or sell or transfer all or substantially all of the
assets of the
Borrower or (ii) any person, group or entity (including the
Borrower) publicly
announces a tender offer to purchase 50% or more of the Borrower's
Common Stock
(or any other takeover scheme) (the date of the announcement
referred to in
clause (i) or (ii) is hereinafter referred to as the "ANNOUNCEMENT
DATE"), then
the Conversion Price shall, effective upon the Announcement Date
and continuing
through the Adjusted Conversion Price Termination Date (as defined
below), be
equal to the lower of (x) the Conversion Price which would have
been applicable
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for a Conversion occurring on the Announcement Date and (y) the
Conversion Price
that would otherwise be in effect. From and after the Adjusted
Conversion Price
Termination Date, the Conversion Price shall be determined as set
forth in this
Section 1.2(a). For purposes hereof, "ADJUSTED CONVERSION PRICE
TERMINATION
DATE" shall mean, with respect to any proposed transaction or
tender offer (or
takeover scheme) for which a public announcement as contemplated by
this Section
1.2(b) has been made, the date upon which the Borrower (in the case
of clause
(i) above) or the person, group or entity (in the case of clause
(ii) above)
consummates or publicly announces the termination or abandonment of
the proposed
transaction or tender offer (or takeover scheme) which caused this
Section
1.2(b) to become operative.
1.3
AUTHORIZED SHARES. Subject to the completion of the Charter
Amendment Actions (as defined in the Purchase Agreement), the
Borrower covenants
that during the period the conversion right exists, the Borrower
will reserve
from its authorized and unissued Common Stock a sufficient number
of shares,
free from preemptive rights, to provide for the issuance of Common
Stock upon
the full conversion of this Note and the other Notes issued
pursuant to the
Purchase Agreement. The Borrower is required at all times to have
authorized and
reserved two times the number of shares that is actually issuable
upon full
conversion of the Notes (based on the Conversion Price of the Notes
or the
Exercise Price of the Warrants in effect from time to time) (the
"RESERVED
AMOUNT"). The Reserved Amount shall be increased from time to time
in accordance
with the Borrower's obligations pursuant to Section 4(h) of the
Purchase
Agreement. The Borrower represents that upon issuance, such shares
will be duly
and validly issued, fully paid and non-assessable. In addition, if
the Borrower
shall issue any securities or make any change to its capital
structure which
would change the number of shares of Common Stock into which the
Notes shall be
convertible at the then current Conversion Price, the Borrower
shall at the same
time make proper provision so that thereafter there shall be a
sufficient number
of shares of Common Stock authorized and reserved, free from
preemptive rights,
for conversion of the outstanding Notes. The Borrower (i)
acknowledges that it
has irrevocably instructed its transfer agent to issue certificates
for the
Common Stock issuable upon conversion of this Note, and (ii) agrees
that its
issuance of this Note shall constitute full authority to its
officers and agents
who are charged with the duty of executing stock certificates to
execute and
issue the necessary certificates for shares of Common Stock in
accordance with
the terms and conditions of this Note.
If, at any time a Holder of this Note submits a Notice of
Conversion,
and the Borrower does not have sufficient authorized but unissued
shares of
Common Stock available to effect such conversion in accordance with
the
provisions of this Article I (a "CONVERSION DEFAULT"), subject to
Section 4.8,
the Borrower shall issue to the Holder all of the shares of Common
Stock which
are then available to effect such conversion. The portion of this
Note which the
Holder included in its Conversion Notice and which exceeds the
amount which is
then convertible into available shares of Common Stock (the "EXCESS
AMOUNT")
shall, notwithstanding anything to the contrary contained herein,
not be
convertible into Common Stock in accordance with the terms hereof
until (and at
the Holder's option at any time after) the date additional shares
of Common
Stock are authorized by the Borrower to permit such conversion, at
which time
the Conversion Price in respect thereof shall be the lesser of (i)
the
Conversion Price on the Conversion Default Date (as defined below)
and (ii) the
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Conversion Price on the Conversion Date thereafter elected by the
Holder in
respect thereof. In addition, the Borrower shall pay to the Holder
payments
("CONVERSION DEFAULT PAYMENTS") for a Conversion Default in the
amount of (x)
the SUM OF (1) the then outstanding principal amount of this Note
PLUS (2)
accrued and unpaid interest on the unpaid principal amount of this
Note through
the Authorization Date (as defined below) PLUS (3) Default
Interest, if any, on
the amounts referred to in clauses (1) and/or (2), MULTIPLIED BY
(y) .24,
MULTIPLIED BY (z) (N/365), where N = the number of days from the
day the holder
submits a Notice of Conversion giving rise to a Conversion Default
(the
"CONVERSION DEFAULT DATE") to the date (the "AUTHORIZATION DATE")
that the
Borrower authorizes a sufficient number of shares of Common Stock
to effect
conversion of the full outstanding principal balance of this Note.
The Borrower
shall use its best efforts to authorize a sufficient number of
shares of Common
Stock as soon as practicable following the earlier of (i) such time
that the
Holder notifies the Borrower or that the Borrower otherwise becomes
aware that
there are or likely will be insufficient authorized and unissued
shares to allow
full conversion thereof and (ii) a Conversion Default. The Borrower
shall send
notice to the Holder of the authorization of additional shares of
Common Stock,
the Authorization Date and the amount of Holder's accrued
Conversion Default
Payments. The accrued Conversion Default Payments for each calendar
month shall
be paid in cash or shall be convertible into Common Stock (at such
time as there
are sufficient authorized shares of Common Stock) at the applicable
Conversion
Price, at the Borrower's option, as follows:
(A)
In the event the Borrower elects to make such payment in
cash, cash payment shall be made to Holder by the fifth (5th) day
of the month
following the month in which it has accrued; and
(B)
In the event the Borrower elects to make such payment in
Common Stock, the Holder may convert such payment amount into
Common Stock at
the Conversion Price (as in effect at the time of conversion) at
any time after
the fifth day of the month following the month in which it has
accrued in
accordance with the terms of this Article I (so long as there is
then a
sufficient number of authorized shares of Common Stock).
The Borrower's election shall be made in writing to the Holder at
any
time prior to 6:00 p.m., New York, New York time, on the third day
of the month
following the month in which Conversion Default payments have
accrued. If no
election is made, the Borrower shall be deemed to have elected to
remit Common
Stock. Nothing herein shall limit the Holder's right to pursue
actual damages
(to the extent in excess of the Conversion Default Payments) for
the Borrower's
failure to maintain a sufficient number of authorized shares of
Common Stock,
and each holder shall have the right to pursue all remedies
available at law or
in equity (including degree of specific performance and/or
injunctive relief).
1.4
METHOD OF CONVERSION.
(A)
MECHANICS OF CONVERSION. Subject to Section 1.1, this
Note may be converted by the Holder in whole or in part at any time
from time to
time after the Issue Date, by (A) submitting to the Borrower a
Notice of
Conversion (by facsimile or other reasonable means of communication
dispatched
on the Conversion Date prior to 6:00 p.m., New York, New York time)
and (B)
subject to Section 1.4(b), surrendering this Note at the principal
office of the
Borrower.
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(B)
SURRENDER OF NOTE UPON CONVERSION. Notwithstanding
anything to the contrary set forth herein, upon conversion of this
Note in
accordance with the terms hereof, the Holder shall not be required
to physically
surrender this Note to the Borrower unless the entire unpaid
principal amount of
this Note is so converted. The Holder and the Borrower shall
maintain records
showing the principal amount so converted and the dates of such
conversions or
shall use such other method, reasonably satisfactory to the Holder
and the
Borrower, so as not to require physical surrender of this Note upon
each such
conversion. In the event of any dispute or discrepancy, such
records of the
Borrower shall be controlling and determinative in the absence of
manifest
error. Notwithstanding the foregoing, if any portion of this Note
is converted
as aforesaid, the Holder may not transfer this Note unless the
Holder first
physically surrenders this Note to the Borrower, whereupon the
Borrower will
forthwith issue and deliver upon the order of the Holder a new Note
of like
tenor, registered as the Holder (upon payment by the Holder of any
applicable
transfer taxes) may request, representing in the aggregate the
remaining unpaid
principal amount of this Note. The Holder and any assignee, by
acceptance of
this Note, acknowledge and agree that, by reason of the provisions
of this
paragraph, following conversion of a portion of this Note, the
unpaid and
unconverted principal amount of this Note represented by this Note
may be less
than the amount stated on the face hereof.
(C)
PAYMENT OF TAXES. The Borrower shall not be required to
pay any tax which may be payable in respect of any transfer
involved in the
issue and delivery of shares of Common Stock or other securities or
property on
conversion of this Note in a name other than that of the Holder (or
in street
name), and the Borrower shall not be required to issue or deliver
any such
shares or other securities or property unless and until the person
or persons
(other than the Holder or the custodian in whose street name such
shares are to
be held for the Holder's account) requesting the issuance thereof
shall have
paid to the Borrower the amount of any such tax or shall have
established to the
satisfaction of the Borrower that such tax has been paid.
(D) DELIVERY OF COMMON STOCK
UPON CONVERSION. Upon receipt
by the Borrower from the Holder of a facsimile transmission (or
other reasonable
means of communication) of a Notice of Conversion meeting the
requirements for
conversion as provided in this Section 1.4, the Borrower shall
issue and deliver
or cause to be issued and delivered to or upon the order of the
Holder
certificates for the Common Stock issuable upon such conversion
within five (5)
business days after such receipt (and, solely in the case of
conversion of the
entire unpaid principal amount hereof, surrender of this Note)
(such second
business day being hereinafter referred to as the "Deadline") in
accordance with
the terms hereof and the Purchase Agreement (including, without
limitation, in
accordance with the requirements of Section 2(g) of the Purchase
Agreement that
certificates for shares of Common Stock issued on or after the
effective date of
the Registration Statement upon conversion of this Note shall not
bear any
restrictive legend).
(E)
OBLIGATION OF BORROWER TO DELIVER COMMON STOCK. Upon
receipt by the Borrower of a Notice of Conversion, the Holder shall
be deemed to
be the holder of record of the Common Stock issuable upon such
conversion, the
outstanding principal amount and the amount of accrued and unpaid
interest on
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this Note shall be reduced to reflect such conversion, and, unless
the Borrower
defaults on its obligations under this Article I, all rights with
respect to the
portion of this Note being so converted shall forthwith terminate
except the
right to receive the Common Stock or other securities, cash or
other assets, as
herein provided, on such conversion. If the Holder shall have given
a Notice of
Conversion as provided herein, the Borrower's obligation to issue
and deliver
the certificates for Common Stock shall be absolute and
unconditional,
irrespective of the absence of any action by the Holder to enforce
the same, any
waiver or consent with respect to any provision thereof, the
recovery of any
judgment against any person or any action to enforce the same, any
failure or
delay in the enforcement of any other obligation of the Borrower to
the holder
of record, or any setoff, counterclaim, recoupment, limitation or
termination,
or any breach or alleged breach by the Holder of any obligation to
the Borrower,
and irrespective of any other circumstance which might otherwise
limit such
obligation of the Borrower to the Holder in connection with such
conversion. The
Conversion Date specified in the Notice of Conversion shall be the
Conversion
Date so long as the Notice of Conversion is received by the
Borrower before 6:00
p.m., New York, New York time, on such date.
(F)
DELIVERY OF COMMON STOCK BY ELECTRONIC TRANSFER. In lieu
of delivering physical certificates representing the Common Stock
issuable upon
conversion, provided the Borrower's transfer agent is participating
in the
Depository Trust Company ("DTC") Fast Automated Securities Transfer
("FAST")
program, upon request of the Holder and its compliance with the
provisions
contained in Section 1.1 and in this Section 1.4, the Borrower
shall use its
best efforts to cause its transfer agent to electronically transmit
the Common
Stock issuable upon conversion to the Holder by crediting the
account of
Holder's Prime Broker with DTC through its Deposit Withdrawal Agent
Commission
("DWAC") system.
(G)
FAILURE TO DELIVER COMMON STOCK PRIOR TO DEADLINE.
Without in any way limiting the Holder's right to pursue other
remedies,
including actual damages and/or equitable relief, the parties agree
that if
delivery of the Common Stock issuable upon conversion of this Note
is more than
two (2) days after the Deadline (other than a failure due to the
circumstances
described in Section 1.3 above, which failure shall be governed by
such Section)
the Borrower shall pay to the Holder $2,000 per day in cash, for
each day beyond
the Deadline that the Borrower fails to deliver such Common Stock.
Such cash
amount shall be paid to Holder by the fifth day of the month
following the month
in which it has accrued or, at the option of the Holder (by written
notice to
the Borrower by the first day of the month following the month in
which it has
accrued), shall be added to the principal amount of this Note, in
which event
interest shall accrue thereon in accordance with the terms of this
Note and such
additional principal amount shall be convertible into Common Stock
in accordance
with the terms of this Note.
1.5
CONCERNING THE SHARES. The shares of Common Stock issuable upon
conversion of this Note may not be sold or transferred unless (i)
such shares
are sold pursuant to an effective registration statement under the
Act or (ii)
the Borrower or its transfer agent shall have been furnished with
an opinion of
counsel (which opinion shall be in form, substance and scope
customary for
opinions of counsel in comparable transactions) to the effect that
the shares to
be sold or transferred may be sold or transferred pursuant to an
exemption from
such registration or (iii) such shares are sold or transferred
pursuant to Rule
144 under the Act (or a successor rule) ("RULE 144") or (iv) such
shares are
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transferred to an "affiliate" (as defined in Rule 144) of the
Borrower who
agrees to sell or otherwise transfer the shares only in accordance
with this
Section 1.5 and who is an Accredited Investor (as defined in the
Purchase
Agreement). Except as otherwise provided in the Purchase Agreement
(and subject
to the removal provisions set forth below), until such time as the
shares of
Common Stock issuable upon conversion of this Note have been
registered under
the Act as contemplated by the Registration Rights Agreement or
otherwise may be
sold pursuant to Rule 144 without any restriction as to the number
of securities
as of a particular date that can then be immediately sold, each
certificate for
shares of Common Stock issuable upon conversion of this Note that
has not been
so included in an effective registration statement or that has not
been sold
pursuant to an effective registration statement or an exemption
that permits
removal of the legend, shall bear a legend substantially in the
following form,
as appropriate:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER SAID ACT, OR AN OPINION OF COUNSEL IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN
COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED
UNDER
SAID ACT UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER
SAID ACT."
The legend set forth above shall be removed and the Borrower shall
issue
to the Holder a new certificate therefor free of any transfer
legend if (i) the
Borrower or its transfer agent shall have received an opinion of
counsel, in
form, substance and scope customary for opinions of counsel in
comparable
transactions, to the effect that a public sale or transfer of such
Common Stock
may be made without registration under the Act and the shares are
so sold or
transferred, (ii) such Holder provides the Borrower or its transfer
agent with
reasonable assurances that the Common Stock issuable upon
conversion of this
Note (to the extent such securities are deemed to have been
acquired on the same
date) can be sold pursuant to Rule 144 or (iii) in the case of the
Common Stock
issuable upon conversion of this Note, such security is registered
for sale by
the Holder under an effective registration statement filed under
the Act or
otherwise may be sold pursuant to Rule 144 without any restriction
as to the
number of securities as of a particular date that can then be
immediately sold.
Nothing in this Note shall (i) limit the Borrower's obligation
under the
Registration Rights Agreement or (ii) affect in any way the
Holder's obligations
to comply with applicable prospectus delivery requirements upon the
resale of
the securities referred to herein.
1.6
EFFECT OF CERTAIN EVENTS.
(A)
EFFECT OF MERGER, CONSOLIDATION, ETC. At the option of
the Holder, the sale, conveyance or disposition of all or
substantially all of
the assets of the Borrower, the effectuation by the Borrower of a
transaction or
series of related transactions in which more than 50% of the voting
power of the
Borrower is disposed of, or the consolidation, merger or other
business
combination of the Borrower with or into any other Person (as
defined below) or
Persons when the Borrower is not the survivor shall either: (i) be
deemed to be
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<PAGE>
an Event of Default (as defined in Article III) pursuant to which
the Borrower
shall be required to pay to the Holder upon the consummation of and
as a
condition to such transaction an amount equal to the Default Amount
(as defined
in Article III) or (ii) be treated pursuant to Section 1.6(b)
hereof. "PERSON"
shall mean any individual, corporation, limited liability company,
partnership,
association, trust or other entity or organization.
(B)
ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any
time when this Note is issued and outstanding and prior to
conversion of all of
the Notes, there shall be any merger, consolidation, exchange of
shares,
recapitalization, reorganization, or other similar event, as a
result of which
shares of Common Stock of the Borrower shall be changed into the
same or a
different number of shares of another class or classes of stock or
securities of
the Borrower or another entity, or in case of any sale or
conveyance of all or
substantially all of the assets of the Borrower other than in
connection with a
plan of complete liquidation of the Borrower, then the Holder of
this Note shall
thereafter have the right to receive upon conversion of this Note,
upon the
basis and upon the terms and conditions specified herein and in
lieu of the
shares of Common Stock immediately theretofore issuable upon
conversion, such
stock, securities or assets which the Holder would have been
entitled to receive
in such transaction had this Note been converted in full
immediately prior to
such transaction (without regard to any limitations on conversion
set forth
herein), and in any such case appropriate provisions shall be made
with respect
to the rights and interests of the Holder of this Note to the end
that the
provisions hereof (including, without limitation, provisions for
adjustment of
the Conversion Price and of the number of shares issuable upon
conversion of the
Note) shall thereafter be applicable, as nearly as may be
practicable in
relation to any securities or assets thereafter deliverable upon
the conversion
hereof. The Borrower shall not effect any transaction described in
this Section
1.6(b) unless (a) it first gives, to the extent practicable, thirty
(30) days
prior written notice (but in any event at least fifteen (15) days
prior written
notice) of the record date of the special meeting of shareholders
to approve, or
if there is no such record date, the consummation of, such
merger,
consolidation, exchange of shares, recapitalization, reorganization
or other
similar event or sale of assets (during which time the Holder shall
be entitled
to convert this Note) and (b) the resulting successor or acquiring
entity (if
not the Borrower) assumes by written instrument the obligations of
this Section
1.6(b). The above provisions shall similarly apply to successive
consolidations,
mergers, sales, transfers or share exchanges.
(C)
ADJUSTMENT DUE TO DISTRIBUTION. If the Borrower shall
declare or make any distribution of its assets (or rights to
acquire its assets)
to holders of Common Stock as a dividend, stock repurchase, by way
of return of
capital or otherwise (including any dividend or distribution to the
Borrower's
shareholders in cash or shares (or rights to acquire shares) of
capital stock of
a subsidiary (i.e., a spin-off)) (a "DISTRIBUTION"), then the
Holder of this
Note shall be entitled, upon any conversion of this Note after the
date of
record for determining shareholders entitled to such Distribution,
to receive
the amount of such assets which would have been payable to the
Holder with
respect to the shares of Common Stock issuable upon such conversion
had such
Holder been the holder of such shares of Common Stock on the record
date for the
determination of shareholders entitled to such Distribution.
(D)
ADJUSTMENT DUE TO DILUTIVE ISSUANCE. If, at any time
when any Notes are issued and outstanding, the Borrower issues or
sells, or in
accordance with this Section 1.6(d) hereof is deemed to have issued
or sold, any
9
<PAGE>
shares of Common Stock for no consideration or for a consideration
per share
(before deduction of reasonable expenses or commissions or
underwriting
discounts or allowances in connection therewith) less than the
Fixed Conversion
Price in effect on the date of such issuance (or deemed issuance)
of such shares
of Common Stock (a "DILUTIVE ISSUANCE"), then immediately upon the
Dilutive
Issuance, the Fixed Conversion Price will be reduced to the amount
of the
consideration per share received by the Borrower in such Dilutive
Issuance;
PROVIDED that only one adjustment will be made for each Dilutive
Issuance.
The Borrower shall be deemed to have issued or sold shares of
Common
Stock if the Borrower in any manner issues or grants any warrants,
rights or
options, whether or not immediately exercisable, to subscribe for
or to purchase
Common Stock or other securities convertible into or exchangeable
for Common
Stock ("CONVERTIBLE SECURITIES") (such warrants, rights and options
to purchase
Common Stock or Convertible Securities are hereinafter referred to
as "OPTIONS")
and the price per share for which Common Stock is issuable upon the
exercise of
such Options is less than the Fixed Conversion Price then in
effect, then the
Fixed Conversion Price shall be equal to such price per share. For
purposes of
the preceding sentence, the "price per share for which Common Stock
is issuable
upon the exercise of such Options" is determined by dividing (i)
the total
amount, if any, received or receivable by the Borrower as
consideration for the
issuance or granting of all such Options, plus the minimum
aggregate amount of
additional consideration, if any, payable to the Borrower upon the
exercise of
all such Options, plus, in the case of Convertible Securities
issuable upon the
exercise of such Options, the minimum aggregate amount of
additional
consideration payable upon the conversion or exchange thereof at
the time such
Convertible Securities first become convertible or exchangeable, by
(ii) the
maximum total number of shares of Common Stock issuable upon the
exercise of all
such Options (assuming full conversion of Convertible Securities,
if
applicable). No further adjustment to the Conversion Price will be
made upon the
actual issuance of such Common Stock upon the exercise of such
Options or upon
the conversion or exchange of Convertible Securities issuable upon
exercise of
such Options.
Additionally, the Borrower shall be deemed to have issued or sold
shares
of Common Stock if the Borrower in any manner issues or sells any
Convertible
Securities, whether or not immediately convertible (other than
where the same
are issuable upon the exercise of Options), and the price per share
for which
Common Stock is issuable upon such conversion or exchange is less
than the Fixed
Conversion Price then in effect, then the Fixed Conversion Price
shall be equal
to such price per share. For the purposes of the preceding
sentence, the "price
per share for which Common Stock is issuable upon such conversion
or exchange"
is determined by dividing (i) the total amount, if any, received or
receivable
by the Borrower as consideration for the issuance or sale of all
such
Convertible Securities, plus the minimum aggregate amount of
additional
consideration, if any, payable to the Borrower upon the conversion
or exchange
thereof at the time such Convertible Securities first become
convertible or
exchangeable, by (ii) the maximum total number of shares of Common
Stock
issuable upon the conversion or exchange of all such Convertible
Securities. No
further adjustment to the Fixed Conversion Price will be made upon
the actual
issuance of such Common Stock upon conversion or exchange of such
Convertible
Securities.
10
<PAGE>
(E)
PURCHASE RIGHTS. If, at any time when any Notes are
issued and outstanding, the Borrower issues any convertible
securities or rights
to purchase stock, warrants, securities or other property (the
"PURCHASE
RIGHTS") pro rata to the record holders of any class of Common
Stock, then the
Holder of this Note will be entitled to acquire, upon the terms
applicable to
such Purchase Rights, the aggregate Purchase Rights which such
Holder could have
acquired if such Holder had held the number of shares of Common
Stock acquirable
upon complete conversion of this Note (without regard to any
limitations on
conversion contained herein) immediately before the date on which a
record is
taken for the grant, issuance or sale of such Purchase Rights or,
if no such
record is taken, the date as of which the record holders of Common
Stock are to
be determined for the grant, issue or sale of such Purchase
Rights.
(F)
NOTICE OF ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price as a result of
the events
described in this Section 1.6, the Borrower, at its expense, shall
promptly
compute such adjustment or readjustment and prepare and furnish to
the Holder of
a certificate setting forth such adjustment or readjustment and
showing in
detail the facts upon which such adjustment or readjustment is
based. The
Borrower shall, upon the written request at any time of the Holder,
furnish to
such Holder a like certificate setting forth (i) such adjustment
or
readjustment, (ii) the Conversion Price at the time in effect and
(iii) the
number of shares of Common Stock and the amount, if any, of other
securities or
property which at the time would be received upon conversion of the
Note.
1.7
TRADING MARKET LIMITATIONS. Unless permitted by the applicable
rules and regulations of the principal securities market on which
the Common
Stock is then listed or traded, in no event shall the Borrower
issue upon
conversion of or otherwise pursuant to this Note and the other
Notes issued
pursuant to the Purchase Agreement more than the maximum number of
shares of
Common Stock that the Borrower can issue pursuant to any rule of
the principal
United States securities market on which the Common Stock is then
traded (the
"MAXIMUM SHARE AMOUNT"), which shall be 19.99% of the total shares
outstanding
on the Closing Date (as defined in the Purchase Agreement), subject
to equitable
adjustment from time to time for stock splits, stock dividends,
combinations,
capital reorganizations and similar events relating to the Common
Stock
occurring after the date hereof. Once the Maximum Share Amount has
been issued
(the date of which is hereinafter referred to as the "MAXIMUM
CONVERSION DATE"),
if the Borrower fails to eliminate any prohibitions under
applicable law or the
rules or regulations of any stock exchange, interdealer quotation
system or
other self-regulatory organization with jurisdiction over the
Borrower or any of
its securities on the Borrower's ability to issue shares of Common
Stock in
excess of the Maximum Share Amount (a "TRADING MARKET PREPAYMENT
EVENT"), in
lieu of any further right to convert this Note, and in full
satisfaction of the
Borrower's obligations under this Note, the Borrower shall pay to
the Holder,
within fifteen (15) business days of the Maximum Conversion Date
(the "TRADING
MARKET PREPAYMENT DATE"), an amount equal to 130% TIMES the SUM of
(a) the then
outstanding principal amount of this Note immediately following the
Maximum
Conversion Date, PLUS (b) accrued and unpaid interest on the unpaid
principal
amount of this Note to the Trading Market Prepayment Date, PLUS (c)
Default
Interest, if any, on the amounts referred to in clause (a) and/or
(b) above,
PLUS (d) any optional amounts that may be added thereto at the
Maximum
Conversion Date by the Holder in accordance with the terms hereof
(the then
outstanding principal amount of this Note immediately following the
Maximum
Conversion Date, PLUS the amounts referred to in clauses (b), (c)
and (d) above
11
<PAGE>
shall collectively be referred to as the "REMAINING CONVERTIBLE
AMOUNT"). With
respect to each Holder of Notes, the Maximum Share Amount shall
refer to such
Holder's PRO RATA share thereof determined in accordance with
Section 4.8 below.
In the event that the sum of (x) the aggregate number of shares of
Common Stock
issued upon conversion of this Note and the other Notes issued
pursuant to the
Purchase Agreement PLUS (y) the aggregate number of shares of
Common Stock that
remain issuable upon conversion of this Note and the other Notes
issued pursuant
to the Purchase Agreement, represents at least one hundred percent
(100%) of the
Maximum Share Amount (the "TRIGGERING EVENT"), the Borrower will
use its best
efforts to seek and obtain Shareholder Approval (or obtain such
other relief as
will allow conversions hereunder in excess of the Maximum Share
Amount) as soon
as practicable following the Triggering Event and before the
Maximum Conversion
Date. As used herein, "SHAREHOLDER APPROVAL" means approval by the
shareholders
of the Borrower to authorize the issuance of the full number of
shares of Common
Stock which would be issuable upon full conversion of the then
outstanding Notes
but for the Maximum Share Amount.
1.8
STATUS AS SHAREHOLDER. Upon submission of a Notice of
Conversion
by a Holder, (i) the shares covered thereby (other than the shares,
if any,
which cannot be issued because their issuance would exceed such
Holder's
allocated portion of the Reserved Amount or Maximum Share Amount)
shall be
deemed converted into shares of Common Stock and (ii) the Holder's
rights as a
Holder of such converted portion of this Note shall cease and
terminate,
excepting only the right to receive certificates for such shares of
Common Stock
and to any remedies provided herein or otherwise available at law
or in equity
to such Holder because of a failure by the Borrower to comply with
the terms of
this Note. Notwithstanding the foregoing, if a Holder has not
received
certificates for all shares of Common Stock prior to the tenth
(10th) business
day after the expiration of the Deadline with respect to a
conversion of any
portion of this Note for any reason, then (unless the Holder
otherwise elects to
retain its status as a holder of Common Stock by so notifying the
Borrower) the
Holder shall regain the rights of a Holder of this Note with
respect to such
unconverted portions of this Note and the Borrower shall, as soon
as
practicable, return such unconverted Note to the Holder or, if the
Note has not
been surrendered, adjust its records to reflect that such portion
of this Note
has not been converted. In all cases, the Holder shall retain all
of its rights
and remedies (including, without limitation, (i) the right to
receive Conversion
Default Payments pursuant to Section 1.3 to the extent required
thereby for such
Conversion Default and any subsequent Conversion Default and (ii)
the right to
have the Conversion Price with respect to subsequent conversions
determined in
accordance with Section 1.3) for the Borrower's failure to convert
this Note.
ARTICLE II. CERTAIN COVENANTS
2.1
DISTRIBUTIONS ON CAPITAL STOCK. So long as the Borrower shall
have any obligation under this Note, the Borrower shall not without
the Holder's
written consent (a) pay, declare or set apart for such payment, any
dividend or
other distribution (whether in cash, property or other securities)
on shares of
capital stock other than dividends on shares of Common Stock solely
in the form
of additional shares of Common Stock or (b) directly or indirectly
or through
any subsidiary make any other payment or distribution in respect of
its capital
stock except for distributions pursuant to any shareholders' rights
plan which
is approved by a majority of the Borrower's disinterested
directors.
12
<PAGE>
2.2
RESTRICTION ON STOCK REPURCHASES. So long as the Borrower shall
have any obligation under this Note, the Borrower shall not without
the Holder's
written consent redeem, repurchase or otherwise acquire (whether
for cash or in
exchange for property or other securities or otherwise) in any one
transaction
or series of related transactions any shares of capital stock of
the Borrower or
any warrants, rights or options to purchase or acquire any such
shares.
2.3
BORROWINGS. So long as the Borrower shall have any obligation
under this Note, the Borrower shall not, without the Holder's
written consent,
create, incur, assume or suffer to exist any liability for borrowed
money in
excess of $50,000, except (a) borrowings in existence or committed
on the date
hereof and of which the Borrower has informed Holder in writing
prior to the
date hereof, (b) indebtedness to trade creditors or financial
institutions
incurred in the ordinary course of business or (c) borrowings, the
proceeds of
which shall be used to repay this Note.
2.4
SALE OF ASSETS. So long as the Borrower shall have any
obligation under this Note, the Borrower shall not, without the
Holder's written
consent, sell, lease or otherwise dispose of any significant
portion of its
assets outside the ordinary course of business. Any consent to the
disposition
of any assets may be conditioned on a specified use of the proceeds
of
disposition.
2.5
ADVANCES AND LOANS. So long as the Borrower shall have any
obligation under this Note, the Borrower shall not, without the
Holder's written
consent, lend money, give credit or make advances to any person,
firm, joint
venture or corporation, including, without limitation, officers,
directors,
employees, subsidiaries and affiliates of the Borrower, except
loans, credits or
advances (a) in existence or committed on the date hereof and which
the Borrower
has informed Holder in writing prior to the date hereof, (b) made
in the
ordinary course of business or (c) not in excess of $50,000.
2.6
CONTINGENT LIABILITIES. So long as the Borrower shall have any
obligation under this Note, the Borrower shall not, without the
Holder's written
consent, assume, guarantee, endorse, contingently agree to purchase
or otherwise
become liable upon the obligation of any person, firm, partnership,
joint
venture or corporation, except by the endorsement of negotiable
instruments for
deposit or collection and except assumptions, guarantees,
endorsements and
contingencies (a) in existence or committed on the date hereof and
which the
Borrower has informed Holder in writing prior to the date hereof,
and (b)
similar transactions in the ordinary course of business.
ARTICLE III. EVENTS OF DEFAULT
If any of the following events of default (each, an "EVENT OF
DEFAULT")
shall occur:
3.1
FAILURE TO PAY PRINCIPAL OR INTEREST. The Borrower fails to pay
the principal hereof or interest thereon when due on this Note,
whether at
maturity, upon a Trading Market Prepayment Event pursuant to
Section 1.7, upon
acceleration or otherwise;
13
<PAGE>
3.2
CONVERSION AND THE SHARES. The Borrower fails to issue shares
of
Common Stock to the Holder (or announces or threatens that it will
not honor its
obligation to do so) upon exercise by the Holder of the conversion
rights of the
Holder in accordance with the terms of this Note (for a period of
at least sixty
(60) days, if such failure is solely as a result of the
circumstances governed
by Section 1.3 and the Borrower is using its best efforts to
authorize a
sufficient number of shares of Common Stock as soon as
practicable), fails to
transfer or cause its transfer agent to transfer (electronically or
in
certificated form) any certificate for shares of Common Stock
issued to the
Holder upon conversion of or otherwise pursuant to this Note as and
when
required by this Note or the Registration Rights Agreement, or
fails to remove
any restrictive legend (or to withdraw any stop transfer
instructions in respect
thereof) on any certificate for any shares of Common Stock issued
to the Holder
upon conversion of or otherwise pursuant to this Note as and when
required by
this Note or the Registration Rights Agreement (or makes any
announcement,
statement or threat that it does not intend to honor the
obligations described
in this paragraph) and any such failure shall continue uncured (or
any
announcement, statement or threat not to honor its obligations
shall not be
rescinded in writing) for ten (10) days after the Borrower shall
have been
notified thereof in writing by the Holder;
3.3 BREACH OF
COVENANTS. The Borrower breaches any material covenant
or other material term or condition contained in Sections 1.3, 1.6
or 1.7 of
this Note, or Sections 4(c), 4(e), 4(h), 4(i), 4(j) or 5 of the
Purchase
Agreement and such breach continues for a period of ten (10) days
after written
notice thereof to the Borrower from the Holder;
3.4
BREACH OF REPRESENTATIONS AND WARRANTIES. Any representation or
warranty of the Borrower made herein or in any agreement, statement
or
certificate given in writing pursuant hereto or in connection
herewith
(including, without limitation, the Purchase Agreement and the
Registration
Rights Agreement), shall be false or misleading in any material
respect when
made and the breach of which has (or with the passage of time will
have) a
material adverse effect on the rights of the Holder with respect to
this Note,
the Purchase Agreement or the Registration Rights Agreement;
3.5
RECEIVER OR TRUSTEE. The Borrower or any subsidiary of the
Borrower shall make an assignment for the benefit of creditors, or
apply for or
consent to the appointment of a receiver or trustee for it or for a
substantial
part of its property or business, or such a receiver or trustee
shall otherwise
be appointed;
3.6 JUDGMENTS. Any
money judgment, writ or similar process shall be
entered or filed against the Borrower or any subsidiary of the
Borrower or any
of its property or other assets for more than $50,000, and shall
remain
unvacated, unbonded or unstayed for a period of twenty (20) days
unless
otherwise consented to by the Holder, which consent will not be
unreasonably
withheld;
3.7
BANKRUPTCY. Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings for relief under any
bankruptcy law
or any law for the relief of debtors shall be instituted by or
against the
Borrower or any subsidiary of the Borrower;
3.8
DELISTING OF COMMON STOCK. The Borrower shall fail to maintain
the listing of the Common Stock on at least one of the OTCBB or an
equivalent
replacement exchange, the Nasdaq National Market, the Nasdaq
SmallCap Market,
the New York Stock Exchange, or the American Stock Exchange; or
14
<PAGE>
3.9
DEFAULT UNDER OTHER NOTES. An Event of Default has occurred and
is continuing under any of the other Notes issued pursuant to the
Purchase
Agreement, then, upon the occurrence and during the continuation of
any Event of
Default specified in Section 3.1, 3.2, 3.3, 3.4, 3.5, 3.7, 3.9, or
3.10, at the
option of the Holders of a majority of the aggregate principal
amount of the
outstanding Notes issued pursuant to the Purchase Agreement
exercisable through
the delivery of written notice to the Borrower by such Holders (the
"DEFAULT
NOTICE"), and upon the occurrence of an Event of Default specified
in Section
3.6 or 3.8, the Notes shall become immediately due and payable and
the Borrower
shall pay to the Holder, in full satisfaction of its obligations
hereunder, an
amount equal to the greater of (i) 130% TIMES the SUM of (w) the
then
outstanding principal amount of this Note PLUS (x) accrued and
unpaid interest
on the unpaid principal amount of this Note to the date of payment
(the
"MANDATORY PREPAYMENT DATE") PLUS (y) Default Interest, if any, on
the amounts
referred to in clauses (w) and/or (x) PLUS (z) any amounts owed to
the Holder
pursuant to Sections 1.3 and 1.4(g) hereof or pursuant to Section
2(c) of the
Registration Rights Agreement (the then outstanding principal
amount of this
Note to the date of payment PLUS the amounts referred to in clauses
(x), (y) and
(z) shall collectively be known as the "DEFAULT SUM") or (ii) the
"parity value"
of the Default Sum to be prepaid, where parity value means (a) the
highest
number of shares of Common Stock issuable upon conversion of or
otherwise
pursuant to such Default Sum in accordance with Article I, treating
the Trading
Day immediately preceding the Mandatory Prepayment Date as the
"Conversion Date"
for purposes of determining the lowest applicable Conversion Price,
unless the
Default Event arises as a result of a breach in respect of a
specific Conversion
Date in which case such Conversion Date shall be the Conversion
Date),
MULTIPLIED BY (b) the highest Closing Price for the Common Stock
during the
period beginning on the date of first occurrence of the Event of
Default and
ending one day prior to the Mandatory Prepayment Date (the "DEFAULT
AMOUNT") and
all other amounts payable hereunder shall immediately become due
and payable,
all without demand, presentment or notice, all of which hereby are
expressly
waived, together with all costs, including, without limitation,
legal fees and
expenses, of collection, and the Holder shall be entitled to
exercise all other
rights and remedies available at law or in equity. If the Borrower
fails to pay
the Default Amount within five (5) business days of written notice
that such
amount is due and payable, then the Holder shall have the right at
any time, so
long as the Borrower remains in default (and so long and to the
extent that
there are sufficient authorized shares), to require the Borrower,
upon written
notice, to immediately issue, in lieu of the Default Amount, the
number of
shares of Common Stock of the Borrower equal to the Default Amount
divided by
the Conversion Price then in effect.
ARTICLE IV. MISCELLANEOUS
4.1
FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the
part of the Holder in the exercise of any power, right or privilege
hereunder
shall operate as a waiver thereof, nor shall any single or partial
exercise of
any such power, right or privilege preclude other or further
exercise thereof or
of any other right, power or privileges. All rights and remedies
existing
hereunder are cumulative to, and not exclusive of, any rights or
remedies
otherwise available.
15
<PAGE>
4.2
NOTICES. Any notice herein required or permitted to be given
shall be in writing and may be personally served or delivered by
courier or sent
by United States mail and shall be deemed to have been given upon
receipt if
personally served (which shall include telephone line facsimile
transmission) or
sent by courier or three (3) days after being deposited in the
United States
mail, certified, with postage pre-paid and properly addressed, if
sent by mail.
For the purposes hereof, the address of the Holder shall be as
shown on the
records of the Borrower; and the address of the Borrower shall be
2504 43rd
Street, Suite 5, Vernon, British Columbia, Canada VIT GL1,
facsimile number:
250-558-3846. Both the Holder and the Borrower may change the
address for
service by service of written notice to the other as herein
provided.
4.3
AMENDMENTS. This Note and any provision hereof may only be
amended by an instrument in writing signed by the Borrower and the
Holder. The
term "Note" and all reference thereto, as used throughout this
instrument, shall
mean this instrument (and the other Notes issued pursuant to the
Purchase
Agreement) as originally executed, or if later amended or
supplemented, then as
so amended or supplemented.
4.4
ASSIGNABILITY. This Note shall be binding upon the Borrower and
its successors and assigns, and shall inure to be the benefit of
the Holder and
its successors and assigns. Each transferee of this Note must be an
"accredited
investor" (as defined in Rule 501(a) of the 1933 Act).
Notwithstanding anything
in this Note to the contrary, this Note may be pledged as
collateral in
connection with a BONA FIDE margin account or other lending
arrangement.
4.5
COST OF COLLECTION. If default is made in the payment of this
Note, the Borrower shall pay the Holder hereof costs of collection,
including
reasonable attorneys' fees.
4.6
GOVERNING LAW. THIS NOTE SHALL BE ENFORCED, GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE,
WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICT OF LAWS. THE BORROWER HEREBY SUBMITS
TO THE
EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED
IN NEW YORK,
NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS NOTE, THE
AGREEMENTS
ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR
THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN
INCONVENIENT FORUM TO
THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER
AGREE THAT
SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE
DEEMED IN
EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY
SUCH SUIT OR
PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO
SERVE PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A
FINAL
NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE
CONCLUSIVE AND
MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR
IN ANY OTHER
LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE
ARISING UNDER
THIS NOTE SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING
ATTORNEYS'
FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH
DISPUTE.
16
<PAGE>
4.7
CERTAIN AMOUNTS. Whenever pursuant to this Note the Borrower is
required to pay an amount in excess of the outstanding principal
amount (or the
portion thereof required to be paid at that time) plus accrued and
unpaid
interest plus Default Interest on such interest, the Borrower and
the Holder
agree that the actual damages to the Holder from the receipt of
cash payment on
this Note may be difficult to determine and the amount to be so
paid by the
Borrower represents stipulated damages and not a penalty and is
intended to
compensate the Holder in part for loss of the opportunity to
convert this Note
and to earn a return from the sale of shares of Common Stock
acquired upon
conversion of this Note at a price in excess of the price paid for
such shares
pursuant to this Note. The Borrower and the Holder hereby agree
that such amount
of stipulated damages is not plainly disproportionate to the
possible loss to
the Holder from the receipt of a cash payment without the
opportunity to convert
this Note into shares of Common Stock.
4.8
ALLOCATIONS OF MAXIMUM SHARE AMOUNT AND RESERVED AMOUNT. The
Maximum Share Amount and Reserved Amount shall be allocated pro
rata among the
Holders of Notes based on the principal amount of such Notes issued
to each
Holder. Each increase to the Maximum Share Amount and Reserved
Amount shall be
allocated pro rata among the Holders of Notes based on the
principal amount of
such Notes held by each Holder at the time of the increase in the
Maximum Share
Amount or Reserved Amount. In the event a Holder shall sell or
otherwise
transfer any of such Holder's Notes, each transferee shall be
allocated a pro
rata portion of such transferor's Maximum Share Amount and Reserved
Amount. Any
portion of the Maximum Share Amount or Reserved Amount which
remains allocated
to any person or entity which does not hold any Notes shall be
allocated to the
remaining Holders of Notes, pro rata based on the principal amount
of such Notes
then held by such Holders.
4.9
DAMAGES SHARES. The shares of Common Stock that may be issuable
to the Holder pursuant to Sections 1.3 and 1.4(g) hereof and
pursuant to Section
2(c) of the Registration Rights Agreement ("DAMAGES SHARES") shall
be treated as
Common Stock issuable upon conversion of this Note for all purposes
hereof and
shall be subject to all of the limitations and afforded all of the
rights of the
other shares of Common Stock issuable hereunder, including without
limitation,
the right to be included in the Registration Statement filed
pursuant to the
Registration Rights Agreement. For purposes of calculating interest
payable on
the outstanding principal amount hereof, except as otherwise
provided herein,
amounts convertible into Damages Shares ("DAMAGES AMOUNTS") shall
not bear
interest but must be converted prior to the conversion of any
outstanding
principal amount hereof, until the outstanding Damages Amounts is
zero.
4.10
DENOMINATIONS. At the request of the Holder, upon surrender of
this Note, the Borrower shall promptly issue new Notes in the
aggregate
outstanding principal amount hereof, in the form hereof, in such
denominations
of at least $50,000 as the Holder shall request.
4.11
PURCHASE AGREEMENT. By its acceptance of this Note, each Holder
agrees to be bound by the applicable terms of the Purchase
Agreement.
17
<PAGE>
4.12
NOTICE OF CORPORATE EVENTS. Except as otherwise provided below,
the Holder of this Note shall have no rights as a Holder of Common
Stock unless
and only to the extent that it converts this Note into Common
Stock. The
Borrower shall provide the Holder with prior notification of any
meeting of the
Borrower's shareholders (and copies of proxy materials and other
information
sent to shareholders). In the event of any taking by the Borrower
of a record of
its shareholders for the purpose of determining shareholders who
are entitled to
receive payment of any dividend or other distribution, any right to
subscribe
for, purchase or otherwise acquire (including by way of merger,
consolidation,
reclassification or recapitalization) any share of any class or any
other
securities or property, or to receive any other right, or for the
purpose of
determining shareholders who are entitled to vote in connection
with any
proposed sale, lease or conveyance of all or substantially all of
the assets of
the Borrower or any proposed liquidation, dissolution or winding up
of the
Borrower, the Borrower shall mail a notice to the Holder, at least
twenty (20)
days prior to the record date specified therein (or thirty (30)
days prior to
the consummation of the transaction or event, whichever is
earlier), of the date
on which any such record is to be taken for the purpose of such
dividend,
distribution, right or other event, and a brief statement regarding
the amount
and character of such dividend, distribution, right or other event
to the extent
known at such time. The Borrower shall make a public announcement
of any event
requiring notification to the Holder hereunder substantially
simultaneously with
the notification to the Holder in accordance with the terms of this
Section
4.12.
4.13
REMEDIES. The Borrower acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holder, by
vitiating
the intent and purpose of the transaction contemplated hereby.
Accordingly, the
Borrower acknowledges that the remedy at law for a breach of its
obligations
under this Note will be inadequate and agrees, in the event of a
breach or
threatened breach by the Borrower of the provisions of this Note,
that the
Holder shall be entitled, in addition to all other available
remedies at law or
in equity, and in addition to the penalties assessable herein, to
an injunction
or injunctions restraining, preventing or curing any breach of this
Note and to
enforce specifically the terms and provisions thereof, without the
necessity of
showing economic loss and without any bond or other security being
required.
ARTICLE V. CALL OPTION
5.1
CALL OPTION. Notwithstanding anything to the contrary contained
in this Article V, so long as (i) no Event of Default or Trading
Market
Prepayment Event shall have occurred and be continuing, (ii) the
Borrower has a
sufficient number of authorized shares of Common Stock reserved for
issuance
upon full conversion of the Notes, then at any time after the Issue
Date, and
(iii) the Common Stock is trading at or below $.04 per share, the
Borrower shall
have the right, exercisable on not less than ten (10) Trading Days
prior written
notice to the Holders of the Notes (which notice may not be sent to
the Holders
of the Notes until the Borrower is permitted to prepay the Notes
pursuant to
this Section 5.1), to prepay all of the outstanding Notes in
accordance with
this Section 5.1. Any notice of prepayment hereunder (an "OPTIONAL
PREPAYMENT")
shall be delivered to the Holders of the Notes at their registered
addresses
appearing on the books and records of the Borrower and shall state
(1) that the
Borrower is exercising its right to prepay all of the Notes issued
on the Issue
Date and (2) the date of prepayment (the "OPTIONAL PREPAYMENT
NOTICE"). On the
18
<PAGE>
date fixed for prepayment (the "OPTIONAL PREPAYMENT DATE"), the
Borrower shall
make payment of the Optional Prepayment Amount (as defined below)
to or upon the
order of the Holders as specified by the Holders in writing to the
Borrower at
least one (1) business day prior to the Optional Prepayment Date.
If the
Borrower exercises its right to prepay the Notes, the Borrower
shall make
payment to the holders of an amount in cash (the "OPTIONAL
PREPAYMENT AMOUNT")
equal to either (i) 135% (for prepayments occurring within thirty
(30) days of
the Issue Date), (ii) 145% for prepayments occurring between
thirty-one (31) and
ninety (90) days of the Issue Date, or (iii) 150% (for prepayments
occurring
after the ninetieth (90th) day following the Issue Date),
multiplied by the sum
of (w) the then outstanding principal amount of this Note PLUS (x)
accrued and
unpaid interest on the unpaid principal amount of this Note to the
Optional
Prepayment Date PLUS (y) Default Interest, if any, on the amounts
referred to in
clauses (w) and (x) PLUS (z) any amounts owed to the Holder
pursuant to Sections
1.3 and 1.4(g) hereof or pursuant to Section 2(c) of the
Registration Rights
Agreement (the then outstanding principal amount of this Note to
the date of
payment PLUS the amounts referred to in clauses (x), (y) and (z)
shall
collectively be known as the "OPTIONAL PREPAYMENT SUM").
Notwithstanding notice
of an Optional Prepayment, the Holders shall at all times prior to
the Optional
Prepayment Date maintain the right to convert all or any portion of
the Notes in
accordance with Article I and any portion of Notes so converted
after receipt of
an Optional Prepayment Notice and prior to the Optional Prepayment
Date set
forth in such notice and payment of the aggregate Optional
Prepayment Amount
shall be deducted from the principal amount of Notes which are
otherwise subject
to prepayment pursuant to such notice. If the Borrower delivers an
Optional
Prepayment Notice and fails to pay the Optional Prepayment Amount
due to the
Holders of the Notes within two (2) business days following the
Optional
Prepayment Date, the Borrower shall forever forfeit its right to
redeem the
Notes pursuant to this Section 5.1.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Note to be signed in
its
name by its duly authorized officer this 31st day of January,
2008.
AQUATIC CELLULOSE INTERNATIONAL CORP.
By: /s/ Sheridan B. Westgarde
------------------------------
Sheridan B. Westgarde
Chief Executive Officer
20
<PAGE>
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Notes)
The undersigned hereby irrevocably elects to convert
$__________
principal amount of the Note (defined below) into shares of common
stock, par
value $.001 per share ("COMMON STOCK"), of Aquatic Cellulose
International
Corp., a Nevada corporation (the "BORROWER") according to the
conditions of the
convertible Notes of the Borrower dated as of January 31, 2008 (the
"Notes"), as
of the date written below. If securities are to be issued in the
name of a
person other than the undersigned, the undersigned will pay all
transfer taxes
payable with respect thereto and is delivering herewith such
certificates. No
fee will be charged to the Holder for any conversion, except for
transfer taxes,
if any. A copy of each Note is attached hereto (or evidence of
loss, theft or
destruction thereof).
The Borrower shall electronically transmit the Common Stock
issuable
pursuant to this Notice of Conversion to the account of the
undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission
system ("DWAC
TRANSFER").
Name of DTC Prime
Broker:_____________________________________________
Account
Number:_______________________________________________________
In lieu of receiving shares of Common Stock issuable pursuant to
this
Notice of Conversion by way of a DWAC Transfer, the undersigned
hereby requests
that the Borrower issue a certificate or certificates for the
number of shares
of Common Stock set forth below (which numbers are based on the
Holder's
calculation attached hereto) in the name(s) specified immediately
below or, if
additional space is necessary, on an attachment hereto:
Name:_________________________________________________________________
Address:______________________________________________________________
The undersigned represents and warrants that all offers and sales
by the
undersigned of the securities issuable to the undersigned upon
conversion of the
Notes shall be made pursuant to registration of the securities
under the
Securities Act of 1933, as amended (the "ACT"), or pursuant to an
exemption from
registration under the Act.
Date of Conversion:_____________________________
Applicable Conversion Price:____________________
Number of Shares of Common Stock to be Issued Pursuant to
Conversion of the Notes:______________
Signature:______________________________________
Name:___________________________________________
Address:________________________________________
A-1
<PAGE>
The Borrower shall issue and deliver shares of Common Stock to an
overnight
courier not later than three business days following receipt of the
original
Note(s) to be converted, and shall make payments pursuant to the
Notes for the
number of business days such issuance and delivery is late.
A-2
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES
MAY NOT BE
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION
STATEMENT FOR THE SECURITIES UNDER SAID ACT, OR AN OPINION OF
COUNSEL IN FORM,
SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE
TRANSACTIONS
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR UNLESS SOLD
PURSUANT TO RULE
144 OR REGULATION S UNDER SAID ACT.
CALLABLE SECURED CONVERTIBLE NOTE
Vernon, British Columbia, Canada
January 31, 2008
$48,302.13
FOR VALUE RECEIVED, AQUATIC CELLULOSE INTERNATIONAL CORP., a
Nevada
corporation (hereinafter called the "BORROWER"), hereby promises to
pay to the
order of New Millennium Capital Partners II, LLC or registered
assigns (the
"HOLDER") the sum of $48,302.13, on January 31, 2011 (the "MATURITY
DATE"), and
to pay interest on the unpaid principal balance hereof at the rate
of two
percent (2%) per annum from January 31, 2008 (the "ISSUE DATE")
until the same
becomes due and payable, whether at maturity or upon acceleration
or by
prepayment or otherwise. Any amount of principal or interest on
this Note which
is not paid when due shall bear interest at the rate of fifteen
percent (15%)
per annum from the due date thereof until the same is paid
("DEFAULT INTEREST").
Interest shall commence accruing on the issue date, shall be
computed on the
basis of a 365-day year and the actual number of days elapsed and
shall be
payable, quarterly on March 31, June 30, September 30 and December
31 of each
year beginning on the last day of the first full quarter after
Issue Date. All
payments due hereunder (to the extent not converted into common
stock, $.001 par
value per share, of the Borrower (the "COMMON STOCK") in accordance
with the
terms hereof) shall be made in lawful money of the United States of
America. All
payments shall be made at such address as the Holder shall
hereafter give to the
Borrower by written notice made in accordance with the provisions
of this Note.
Whenever any amount expressed to be due by the terms of this Note
is due on any
day which is not a business day, the same shall instead be due on
the next
succeeding day which is a business day and, in the case of any
interest payment
date which is not the date on which this Note is paid in full, the
extension of
the due date thereof shall not be taken into account for purposes
of determining
the amount of interest due on such date. As used in this Note, the
term
"business day" shall mean any day other than a Saturday, Sunday or
a day on
which commercial banks in the city of New York, New York are
authorized or
required by law or executive order to remain closed. Each
capitalized term used
herein, and not otherwise defined, shall have the meaning ascribed
thereto in
that certain Securities Purchase Agreement, dated January 31, 2008
(the
"PURCHASE AGREEMENT").
1
<PAGE>
This Note is free from all taxes, liens, claims and encumbrances
with
respect to the issue thereof and shall not be subject to preemptive
rights or
other similar rights of shareholders of the Borrower and will not
impose
personal liability upon the holder thereof. The obligations of the
Borrower
under this Note shall be secured by that certain Security Agreement
by and
between the Borrower and the Holder of even date herewith.
The following terms shall apply to this Note:
ARTICLE I. CONVERSION RIGHTS
1.1
CONVERSION RIGHT. The Holder shall have the right from time to
time, and at any time on or prior to the earlier of (i) the
Maturity Date and
(ii) the date of payment of the Default Amount (as defined in
Article III)
pursuant to Section 1.6(a) or Article III, the Optional Prepayment
Amount (as
defined in Section 5.1) or (iii) any payments pursuant to Section
1.7, each in
respect of the remaining outstanding principal amount of this Note
to convert
all or any part of the outstanding and unpaid principal amount of
this Note into
fully paid and non-assessable shares of Common Stock, as such
Common Stock
exists on the Issue Date, or any shares of capital stock or other
securities of
the Borrower into which such Common Stock shall hereafter be
changed or
reclassified at the conversion price (the "CONVERSION PRICE")
determined as
provided herein (a "CONVERSION"); PROVIDED, HOWEVER, that in no
event shall the
Holder be entitled to convert any portion of this Note in excess of
that portion
of this Note upon conversion of which the sum of (1) the number of
shares of
Common Stock beneficially owned by the Holder and its affiliates
(other than
shares of Common Stock which may be deemed beneficially owned
through the
ownership of the unconverted portion of the Notes or the
unexercised or
unconverted portion of any other security of the Borrower
(including, without
limitation, the warrants issued by the Borrower pursuant to the
Purchase
Agreement) subject to a limitation on conversion or exercise
analogous to the
limitations contained herein) and (2) the number of shares of
Common Stock
issuable upon the conversion of the portion of this Note with
respect to which
the determination of this proviso is being made, would result in
beneficial
ownership by the Holder and its affiliates of more than 4.9% of the
outstanding
shares of Common Stock. For purposes of the proviso to the
immediately preceding
sentence, beneficial ownership shall be determined in accordance
with Section
13(d) of the Securities Exchange Act of 1934, as amended, and
Regulations 13D-G
thereunder, except as otherwise provided in clause (1) of such
proviso. The
number of shares of Common Stock to be issued upon each conversion
of this Note
shall be determined by dividing the Conversion Amount (as defined
below) by the
applicable Conversion Price then in effect on the date specified in
the notice
of conversion, in the form attached hereto as Exhibit A (the
"NOTICE OF
CONVERSION"), delivered to the Borrower by the Holder in accordance
with Section
1.4 below; provided that the Notice of Conversion is submitted by
facsimile (or
by other means resulting in, or reasonably expected to result in,
notice) to the
Borrower before 6:00 p.m., New York, New York time on such
conversion date (the
"CONVERSION Date"). The term "CONVERSION AMOUNT" means, with
respect to any
2
<PAGE>
conversion of this Note, the sum of (1) the principal amount of
this Note to be
converted in such conversion PLUS (2) accrued and unpaid interest,
if any, on
such principal amount at the interest rates provided in this Note
to the
Conversion Date PLUS (3) Default Interest, if any, on the amounts
referred to in
the immediately preceding clauses (1) and/or (2) PLUS (4) at the
Holder's
option, any amounts owed to the Holder pursuant to Sections 1.3 and
1.4(g)
hereof or pursuant to Section 2(c) of that certain Registration
Rights
Agreement, dated as of January 31, 2008, executed in connection
with the initial
issuance of this Note and the other Notes issued on the Issue Date
(the
"REGISTRATION RIGHTS AGREEMENT").
1.2
CONVERSION PRICE.
(A)
CALCULATION OF CONVERSION PRICE. The Conversion Price
shall be the lesser of (i) the Variable Conversion Price (as
defined herein) and
(ii) the Fixed Conversion Price (as defined herein) (subject, in
each case, to
equitable adjustments for stock splits, stock dividends or rights
offerings by
the Borrower relating to the Borrower's securities or the
securities of any
subsidiary of the Borrower, combinations, recapitalization,
reclassifications,
extraordinary distributions and similar events). The "VARIABLE
CONVERSION PRICE"
shall mean the Applicable Percentage (as defined herein) multiplied
by the
Market Price (as defined herein). "MARKET PRICE" means the average
of the lowest
three (3) Trading Prices (as defined below) for the Common Stock
during the
twenty (20) Trading Day period ending one Trading Day prior to the
date the
Conversion Notice is sent by the Holder to the Borrower via
facsimile (the
"CONVERSION DATE"). "TRADING PRICE" means, for any security as of
any date, the
intraday trading price on the Over-the-Counter Bulletin Board (the
"OTCBB") as
reported by a reliable reporting service mutually acceptable to and
hereafter
designated by Holders of a majority in interest of the Notes and
the Borrower
or, if the OTCBB is not the principal trading market for such
security, the
intraday trading price of such security on the principal securities
exchange or
trading market where such security is listed or traded or, if no
intraday
trading price of such security is available in any of the foregoing
manners, the
average of the intraday trading prices of any market makers for
such security
that are listed in the "pink sheets" by the National Quotation
Bureau, Inc. If
the Trading Price cannot be calculated for such security on such
date in the
manner provided above, the Trading Price shall be the fair market
value as
mutually determined by the Borrower and the holders of a majority
in interest of
the Notes being converted for which the calculation of the Trading
Price is
required in order to determine the Conversion Price of such Notes.
"TRADING DAY"
shall mean any day on which the Common Stock is traded for any
period on the
OTCBB, or on the principal securities exchange or other securities
market on
which the Common Stock is then being traded. "APPLICABLE
PERCENTAGE" shall mean
30%.
(B)
CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS.
Notwithstanding anything contained in Section 1.2(a) to the
contrary, in the
event the Borrower (i) makes a public announcement that it intends
to
consolidate or merge with any other corporation (other than a
merger in which
the Borrower is the surviving or continuing corporation and its
capital stock is
unchanged) or sell or transfer all or substantially all of the
assets of the
Borrower or (ii) any person, group or entity (including the
Borrower) publicly
announces a tender offer to purchase 50% or more of the Borrower's
Common Stock
(or any other takeover scheme) (the date of the announcement
referred to in
clause (i) or (ii) is hereinafter referred to as the "ANNOUNCEMENT
DATE"), then
the Conversion Price shall, effective upon the Announcement Date
and continuing
through the Adjusted Conversion Price Termination Date (as defined
below), be
equal to the lower of (x) the Conversion Price which would have
been applicable
3
<PAGE>
for a Conversion occurring on the Announcement Date and (y) the
Conversion Price
that would otherwise be in effect. From and after the Adjusted
Conversion Price
Termination Date, the Conversion Price shall be determined as set
forth in this
Section 1.2(a). For purposes hereof, "ADJUSTED CONVERSION PRICE
TERMINATION
DATE" shall mean, with respect to any proposed transaction or
tender offer (or
takeover scheme) for which a public announcement as contemplated by
this Section
1.2(b) has been made, the date upon which the Borrower (in the case
of clause
(i) above) or the person, group or entity (in the case of clause
(ii) above)
consummates or publicly announces the termination or abandonment of
the proposed
transaction or tender offer (or takeover scheme) which caused this
Section
1.2(b) to become operative.
1.3
AUTHORIZED SHARES. Subject to the completion of the Charter
Amendment Actions (as defined in the Purchase Agreement), the
Borrower covenants
that during the period the conversion right exists, the Borrower
will reserve
from its authorized and unissued Common Stock a sufficient number
of shares,
free from preemptive rights, to provide for the issuance of Common
Stock upon
the full conversion of this Note and the other Notes issued
pursuant to the
Purchase Agreement. The Borrower is required at all times to have
authorized and
reserved two times the number of shares that is actually issuable
upon full
conversion of the Notes (based on the Conversion Price of the Notes
or the
Exercise Price of the Warrants in effect from time to time) (the
"RESERVED
AMOUNT"). The Reserved Amount shall be increased from time to time
in accordance
with the Borrower's obligations pursuant to Section 4(h) of the
Purchase
Agreement. The Borrower represents that upon issuance, such shares
will be duly
and validly issued, fully paid and non-assessable. In addition, if
the Borrower
shall issue any securities or make any change to its capital
structure which
would change the number of shares of Common Stock into which the
Notes shall be
convertible at the then current Conversion Price, the Borrower
shall at the same
time make proper provision so that thereafter there shall be a
sufficient number
of shares of Common Stock authorized and reserved, free from
preemptive rights,
for conversion of the outstanding Notes. The Borrower (i)
acknowledges that it
has irrevocably instructed its transfer agent to issue certificates
for the
Common Stock issuable upon conversion of this Note, and (ii) agrees
that its
issuance of this Note shall constitute full authority to its
officers and agents
who are charged with the duty of executing stock certificates to
execute and
issue the necessary certificates for shares of Common Stock in
accordance with
the terms and conditions of this Note.
If, at any time a Holder of this Note submits a Notice of
Conversion,
and the Borrower does not have sufficient authorized but unissued
shares of
Common Stock available to effect such conversion in accordance with
the
provisions of this Article I (a "CONVERSION DEFAULT"), subject to
Section 4.8,
the Borrower shall issue to the Holder all of the shares of Common
Stock which
are then available to effect such conversion. The portion of this
Note which the
Holder included in its Conversion Notice and which exceeds the
amount which is
then convertible into available shares of Common Stock (the "EXCESS
AMOUNT")
shall, notwithstanding anything to the contrary contained herein,
not be
convertible into Common Stock in accordance with the terms hereof
until (and at
the Holder's option at any time after) the date additional shares
of Common
Stock are authorized by the Borrower to permit such conversion, at
which time
the Conver
