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
Oxford, Mississippi
August 31, 2005 $765,000
FOR VALUE RECEIVED , MODERN TECHNOLOGY CORP., a
Nevada corporation (hereinafter called the " Borrower "),
hereby promises to pay to the order of AJW OFFSHORE, LTD. or
registered assigns (the " Holder ") the sum of Seven Hundred
and Sixty-Five Thousand Dollars ($765,000), on August 31, 2008 (the
"Maturity Date "), and to pay interest on the unpaid
principal balance hereof at the rate of nine percent (9%) per annum
from August 31, 2005 (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 provided that no interest shall be due
and payable for any month in which the Trading Price (as such term
is defined below) is greater than $[ ] for each Trading Day (as
such term is defined below) of the month. All payments due
hereunder (to the extent not converted into common stock, $.0001
par value per share (the "Common Stock" ) in accordance with
the terms hereof) shall be made in lawful money of the United
States of America and shall commence on September 30, 2005. 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 August 31, 2005, pursuant to which this Note was originally
issued (the " Purchase Agreement ").
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 and that certain
Intellectual Property Security Agreement, each dated August 31,
2005, by and between the Borrower and the Holder.
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
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 Preferred Shares
and 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 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 August 31, 2005, 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 Debentures 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 Debentures being converted for
which the calculation of the Trading Price is required in order to
determine the Conversion Price of such Debentures. " 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 60%.
The " Fixed Conversion Price " shall mean $.04.
(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 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 . 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 and Preferred
Shares 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
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
Holder elects to take such payment in cash, cash payment shall be
made to Holder by the fifth (5 th ) day of the month
following the month in which it has accrued; and
(b) In the event
Holder elects to take 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 Holder's election shall be made in writing to the Borrower
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 Holder
shall be deemed to have elected to receive cash. 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.
(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 two (2) 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 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 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 B
