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THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT
PURPOSES ONLY AND NEITHER THIS NOTE
NOR THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAS
BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR UNDER
ANY APPLICABLE STATE SECURITIES LAWS. NEITHER THIS NOTE NOR THE
SECURITIES
ISSUABLE UPON CONVERSION OF THIS NOTE MAY BE SOLD OR OTHERWISE
TRANSFERRED OR
PLEDGED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION OR
EXCLUSION FROM THE
REGISTRATION REQUIREMENTS THEREUNDER AND IN COMPLIANCE WITH
APPLICABLE STATE
SECURITIES LAWS.
NO. ____ $__________
HOUSTON AMERICAN ENERGY CORP.
8.0% SUBORDINATED CONVERTIBLE NOTE DUE MAY 1, 2010
Section 1. General.
FOR VALUE RECEIVED, Houston American Energy Corp., a
Delaware
corporation (the "COMPANY"), hereby promises to pay to the order
of_____________
_____________________, or its registered assigns (the
"INVESTOR"), the principal
sum of ____________________________ DOLLARS AND ZERO CENTS
($_________), or such
lesser amount as shall then equal the outstanding principal
amount hereof,
together with interest thereon at a rate equal to 8% (the
"Interest Rate") per
annum, simple interest computed on the basis of the actual
number of days
elapsed and a year of 360 days comprised of twelve 30 day
months. Unless
earlier redeemed in accordance with Section 2 or converted in
accordance with
Section 5, all unpaid principal, together with any then unpaid
and accrued
interest and other amounts payable hereunder, shall be due and
payable on the
earlier of (i) May 1, 2010 (the "MATURITY DATE"); or (ii) when
such amounts
become due and payable as a result of, and following, an Event
of Default in
accordance with Section 3. All payments required to be made
hereunder, if any,
shall be made in such coin or currency of the United States of
America as at the
time of payment shall be legal tender therein for the payment of
public and
private debts. Interest shall accrue on the unpaid balance of
the principal
amount of this Note (without any compounding) from and including
the date hereof
to, but excluding, the date on which the principal amount of
this Note is paid
in full (or converted in accordance with Section 5 hereof) and
shall be payable
on April 20 and October 20 of each year until the outstanding
principal amount
hereof shall be paid in full, with the first such payment of
interest being due
October 20, 2005.
This is one of a duly authorized issue of notes (this note
being
referred to as the "NOTE" and, collectively, all similar notes
issued by the
Company pursuant to the Note Offering being referred to as the
"NOTES") of the
Company in an anticipated aggregate principal amount of up to
US$2,500,000 (the
"NOTE OFFERING"). Nothing herein shall restrict the ability of
the Company to
either increase or decrease the aggregate principal amount of
Notes offered in
the Note Offering.
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<PAGE>
SECTION 2. REDEMPTION.
(a) Redemption at Option of the Company. At any time after May
1,
2007 and prior to the Maturity Date, the Company, at its sole
election, may
redeem this Note, in whole or in part, upon giving at least two
business days
prior written notice of intent to redeem, by paying to the
Investor an amount
equal to (i) for redemptions occurring after May 1, 2007 and
before January 1,
2008, 103% of the portion of this Note being redeemed, plus
accrued and unpaid
interest on the portion of the Note being redeemed, (ii) for
redemptions
occurring during calendar year 2008, 102% of the portion of this
Note being
redeemed, plus accrued and unpaid interest on the portion of the
Note being
redeemed, (iii) for redemptions occurring during calendar year
2009, 101% of the
portion of this Note being redeemed, plus accrued and unpaid
interest on the
portion of the Note being redeemed, and (iv) for redemptions
occurring during
calendar year 2010, 100% of the portion of this Note being
redeemed, plus
accrued and unpaid interest on the portion of the Note being
redeemed. Except
as set forth above, the Company shall have no right to prepay
the Note, in whole
or in part, prior to the Maturity Date.
(b) Redemption at Option of the Investor. Prior to the
Maturity
Date, the Investor, at its sole election, may require the
Company to redeem this
Note (an "INVESTOR REDEMPTION"), in whole or in part, by
providing written
notice to the Company (an "INVESTOR REDEMPTION NOTICE") of its
election to cause
the Company to redeem this Note and the portion of the Note to
be redeemed. The
Company shall redeem the portion of the Note for which an
Investor Redemption
Notice is provided by paying to the Investor, within ten
business days following
receipt of such Investor Redemption Notice, an amount equal to
100% of the
portion of the Note to be redeemed, plus accrued and unpaid
interest on the
portion of the Note to be redeemed; provided, however, that an
Investor
Redemption Notice shall only be effective and the Company shall
only be required
to carry out an Investor Redemption following the occurrence of
one or more of
the following "DESIGNATED EVENTS":
(i) the acquisition by any person, including any syndicate
or
group deemed to be a "person" under Section 13(d)(3) of the
Exchange Act,
of beneficial ownership, directly or indirectly, through a
purchase, merger
or other acquisition transaction or series of purchases, mergers
or other
acquisition transactions of shares of the Company's capital
stock entitling
that person to exercise 50% or more of the total voting power of
all shares
of the Company's capital stock entitled to vote generally in
elections of
directors, other than any acquisition by (A) the Company, (B)
any of the
Company's subsidiaries, (C) any of the Company's employee
benefit plans,
(D) John F. Terwilliger or (E) any holders of Notes; or
(ii) one or more persons file a Statement on Schedule TO or
a
Statement on Schedule 13D (or any successors thereto) stating
that they
have become and actually are beneficial owners of voting stock
representing
more than 80%, in the aggregate, of the voting power of all of
the
Company's classes of voting stock entitled to vote generally in
the
election of the members of the Company's board of directors;
or
(iii) the consolidation or merger of the Company with or
into
any other person, any merger of another person into the Company,
or any
conveyance, transfer, sale, lease or other disposition of all
or
substantially all of the Company's properties and assets to
another person,
other than:
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<PAGE>
(A) any transaction: (i) that does not result in any
reclassification, conversion, exchange or cancellation of
outstanding
shares of the Company's capital stock; and (ii) pursuant to
which
holders of the Company's capital stock immediately prior to
such
transaction have the right to exercise, directly or indirectly,
50% or
more of the total voting power of all shares of the Company's
capital
stock entitled to vote generally in elections of directors of
the
continuing or surviving person immediately after giving effect
to such
issuance; or
(B) any merger solely for the purpose of changing the
Company's jurisdiction of incorporation and resulting in a
reclassification, conversion or exchange of outstanding shares
of
common stock solely into shares of common stock of the
surviving
entity.
Section 3. Defaults.
The occurrence of any of the following shall constitute an
"EVENT OF
DEFAULT" under this Note:
(a) The Company shall fail to pay (i) when due any principal
or
interest payment hereof on the due date hereunder or (ii) any
other payment
required under the terms of this Note on the date due and such
payment
shall not have been made within five (5) days of Company's
receipt of
Investor's written notice to Company of such failure to pay;
or
(b) The Company shall fail to observe or perform any other
covenant, obligation, condition or agreement contained in this
Note (other
than those specified in Section 3(a)) and such failure shall
continue for
ten (10) days after written notice thereof is delivered to the
Company; or
(c) Any representation, warranty, certificate, or other
statement
(financial or otherwise) made or furnished by or on behalf of
the Company
to the Investor in writing in connection with this Note, or as
an
inducement to the Investor to purchase this Note, shall be
false,
incorrect, incomplete or misleading in any material respect when
made or
furnished; or
(d) The Company shall (i) fail to make any payment when due
under
the terms of any bond, debenture, note or other evidence of
indebtedness to
be paid by the Company (excluding this Note, which default is
addressed by
Section 3(a) above, but including any other evidence of
indebtedness of the
Company to the Investor) and such failure shall continue beyond
any period
of grace provided with respect thereto, or (ii) default in the
observance
or performance of any other agreement, term or condition
contained in any
such bond, debenture, note or other evidence of indebtedness,
and the
effect of such failure or default is to cause, or permit the
holder thereof
to cause, indebtedness in an aggregate amount of One Million
Dollars
($1,000,000) or more to become due prior to its stated date of
maturity; or
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<PAGE>
(e) The Company shall (i) apply for or consent to the
appointment
of a receiver, trustee, liquidator or custodian of itself or of
all or a
substantial part of its property, (ii) be unable, or admit in
writing its
inability, to pay its debts generally as they mature, (iii) make
a general
assignment for the benefit of its or any of its creditors, (iv)
be
dissolved or liquidated in full or in part (v) commence a
voluntary case or
other proceeding seeking liquidation, reorganization or other
relief with
respect to itself or its debts under any bankruptcy, insolvency
or other
similar law now or hereafter in effect or consent to any such
relief or to
the appointment of or taking possession of its property by any
official in
an involuntary case or other proceeding commenced against it, or
(vi) take
any action for the purpose of effecting any of the foregoing;
or
(f) Proceedings for the appointment of a receiver, trustee,
liquidator or custodian of the Company or of all or a
substantial part of
the property thereof, or an involuntary case or other
proceedings seeking
liquidation, reorganization or other relief with respect to the
Company or
the debts thereof under any bankruptcy, insolvency or other
similar law now
or hereafter in effect shall be commenced and an order for
relief entered
or such proceeding shall not be dismissed or discharged within
thirty (30)
days of commencement; or
(g) One or more judgments for the payment of money in an amount
in
excess of One Million Five Hundred Thousand Dollars ($1,500,000)
in the
aggregate, outstanding at any one time, shall be rendered
against the
Company and the same shall remain undischarged for a period of
thirty (30)
days during which execution shall not be effectively stayed, or
any
judgment, writ, assessment, warrant of attachment, or execution
or similar
process shall be issued or levied against a substantial part of
the
property of the Company and such judgment, writ, or similar
process shall
not be released, stayed, vacated or otherwise dismissed within
thirty (30)
days after issue or levy.
Section 4. Rights Of Investor Upon Default.
Upon the occurrence or existence of any Event of Default (other
than
an Event of Default referred to in Sections 3(f) or 3(g) hereof)
and at any time
thereafter during the continuance of such Event of Default, the
Investor may, by
written notice to the Company, declare all outstanding amounts
payable by the
Company hereunder to be immediately due and payable without
presentment, demand,
protest or any other notice of any kind, all of which are hereby
expressly
waived, anything contained herein to the contrary
notwithstanding. Upon the
occurrence or existence of any Event of Default described in
Sections 3(f) or
3(g) hereof, immediately and without notice, all outstanding
amounts payable by
the Company hereunder shall automatically become immediately due
and payable,
without presentment, demand, protest or any other notice of any
kind, all of
which are hereby expressly waived, anything contained herein to
the contrary
notwithstanding. In addition to the foregoing remedies, upon the
occurrence or
existence of any Event of Default, the Investor may exercise any
other right,
power or remedy permitted to it by law, either by suit in equity
or by action at
law, or both.
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<PAGE>
Section 5. Conversion.
(a) Investor Conversion. At any time, and from time to time,
the
Investor may, at its sole and exclusive option, convert all or
any part of the
principal (but not interest) outstanding under this Note into
fully paid and
nonassessable shares of common stock (the "Common Stock") of the
Company at a
conversion price per share of Common Stock equal to $1.00,
subject to adjustment
as provided in Section 6 hereof (the "Conversion Price").
(b) Automatic Conversion. The entire principal outstanding
under
this Note (but not interest) shall be automatically converted
into shares of
Common Stock, at the Conversion Price upon the closing of an
underwritten public
offering (a "PUBLIC OFFERING") of Common Stock in which (i)
gross proceeds to
the Company are equal to or greater than $5 million and (ii) the
price-per-share
of the Common Stock sold in the Public Offering is equal to or
greater than 150%
of the then applicable Conversion Price.
(c) Company Conversion. At any time after May 1, 2006 and
prior
to the Maturity Date, the Company may, at its sole option and
effective upon the
date (the "COMPANY CONVERSION DATE") on which written notice
(the "COMPANY
CONVERSION NOTICE") of conversion is sent to the Investor, cause
all or part of
the principal outstanding under this Note (but not interest) to
be converted
into shares of Common Stock, at the Conversion Price, provided
that the Market
Price (as defined below) of the Common Stock on the Company
Conversion Date, and
for at least 20 of the 30 trading days ending on the Company
Conversion Date, is
in excess of 200% of the then applicable Conversion Price. For
purposes hereof,
"MARKET PRICE" shall mean the closing sale price of the Common
Stock (or if no
closing sale price is reported, the average of the closing bid
and closing ask
prices or, if more than one in either case, the average of the
average closing
bid and average closing ask prices) on such date as reported in
composite
transactions for the principal United States securities exchange
on which the
common stock is traded or, if the common stock is not listed on
a United States
national or regional securities exchange, as reported by the
Nasdaq System or by
the National Quotation Bureau Incorporated. In the absence of
such a quotation,
the Company's board of directors will determine the closing sale
price on the
basis it considers appropriate.
(d) MECHANICS AND EFFECT OF CONVERSION . No fractional shares
of
Common Stock shall be issued upon conversion of this Note. Upon
the conversion
of the entire principal outstanding under this Note, in lieu of
the Company
issuing any fractional shares to the Investor in cash, the
Company shall pay to
the Investor the amount of outstanding principal that is not so
converted. On
partial conversion of this Note, the Company shall issue to the
Investor (i) the
shares of Common Stock into which a portion of this Note is
converted and (ii) a
new subordinated convertible promissory note having identical
terms to this
Note, except that the principal amount thereof shall equal the
difference
between (A) the principal amount of this Note immediately prior
to such
conversion minus (B) the portion of such principal amount
converted into Common
Stock. Upon conversion of this Note pursuant to this Section
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