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.
1
<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:
2
<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
3
<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.
4
<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 t
