THIS NOTE AND THE COMMON SHARES
ISSUABLE UPON
CONVERSION OF THIS
NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. THIS NOTE AND THE COMMON SHARES
ISSUABLE UPON
CONVERSION OF
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER
SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY
SATISFACTORY TO AMERICAN TECHNOLOGIES GROUP, INC. THAT SUCH
REGISTRATION IS NOT
REQUIRED.
SECURED CONVERTIBLE TERM NOTE A
FOR VALUE
RECEIVED, each of
AMERICAN TECHNOLOGIES
GROUP, INC., a
Nevada
corporation (the "Parent"), and the other
Companies listed on EXHIBIT A attached
hereto (such other companies together with the Parent, each a "COMPANY" and
collectively, the "COMPANIES"), jointly and
severally, promises to pay to LAURUS
MASTER FUND, LTD., c/o M&C Corporate
Services Limited,
P.O. Box 309 GT,
Ugland
House, South Church Street, George Town, Grand Cayman, Cayman Islands, Fax:
345-949-8080 (the "HOLDER") or its
registered assigns or successors in interest,
the sum of Three Million Dollars ($3,000,000), together with any accrued and
unpaid interest hereon, on September 6,
2008 (the "MATURITY DATE") if not sooner
paid.
This
Secured Convertible Term Note (this "NOTE") is intended to be a
registered obligation within the meaning of Treasury Regulation Section
1.871-14(c)(1)(i) and each Company (or its agent)
shall register this Note (and
thereafter shall maintain such
registration) as to both principal and any stated
interest. Notwithstanding any document,
instrument or agreement relating to this
Note to the contrary, transfer of this Note (or the right to any
payments of
principal or stated interest thereunder) may only be effected
by (i) surrender
of this Note and either the reissuance by the Company of this Note to the
new
holder or the issuance by the Company of a
new instrument to the new holder, or
(ii) transfer through a book entry system maintained by the Company (or its
agent), within the meaning of Treasury
Regulation Section 1.871-14(c)(1)(i)(B).
Capitalized terms used
herein without
definition shall have the meanings
ascribed to such terms in that certain
Security Agreement dated as of the date
hereof by and among the Companies and the Holder (as
amended, modified
and/or
supplemented from time to time, the
"SECURITY AGREEMENT").
The
following terms shall apply to this Note:
ARTICLE I
CONTRACT RATE AND AMORTIZATION
1.1
CONTRACT RATE. Subject
to Sections 4.2 and 5.10, interest payable on
the outstanding principal amount of this Note (the
"PRINCIPAL
AMOUNT") shall
accrue at a rate per annum equal to the "prime rate" published in THE WALL
STREET JOURNAL from time to time (the
"PRIME RATE"), plus
two percent (2%) (the
"CONTRACT RATE"). The Contract Rate shall be
increased or decreased as the case
may be for each increase or decrease in the Prime Rate in an amount
equal to
such increase or decrease in the Prime
Rate; each change to
be effective as of
the day of the change in the Prime Rate.
Subject to Section
1.2, the Contract
Rate shall not at any time be less than
eight and one-quarter of one percent
(8.25%). Interest shall be (i) calculated on the basis of a 360
day year, and
(ii) payable monthly, in arrears, commencing on October 1, 2005 on the
first
business day of each consecutive calendar
month thereafter through and including
the Maturity Date, and on the Maturity Date, whether by acceleration or
otherwise.
<PAGE>
1.2
CONTRACT RATE
ADJUSTMENTS AND
PAYMENTS. The Contract Rate shall be
calculated on the last business day of each
calendar month hereafter (other than
for increases or decreases in the Prime Rate which shall be
calculated
and
become effective in accordance with the
terms of Section 1.1) until the Maturity
Date (each a "DETERMINATION DATE") and shall be subject to
adjustment
as set
forth herein. If (i) the Parent shall have
registered the shares
of the Common
Stock underlying the conversion of this
Note, each Warrant and each Option on a
registration statement declared effective by the Securities and Exchange
Commission (the "SEC"), and (ii) the market price (the
"MARKET PRICE") of
the
Common Stock as reported by Bloomberg, L.P.
on the Principal Market for the five
(5) trading days immediately preceding a Determination Date exceeds the then
applicable Fixed Conversion Price by at least twenty-five percent (25%), the
Contract Rate for the succeeding
calendar month shall
automatically be
reduced
by 200 basis points (200 b.p.) (2%) for each
incremental
twenty-five
percent
(25%) increase in the Market Price of the
Common Stock above the then applicable
Fixed Conversion Price. Notwithstanding the foregoing (and anything to the
contrary contained herein), in no event shall the Contract
Rate at any time be
less than zero percent (0%).
1.3
PRINCIPAL PAYMENTS.
Amortizing
payments of the
aggregate
principal
amount outstanding under this Note at any
time (the "PRINCIPAL AMOUNT") shall be
made, jointly and severally, by the Companies on January 1, 2005 and on the
first business day of each succeeding month
thereafter through and including the
Maturity Date (each, an "AMORTIZATION DATE"). Subject to Article III below,
commencing on the first Amortization Date, the Companies shall, jointly and
severally, make monthly payments to the
Holder on each Repayment Date, each such
payment in the amount of (a) $50,000 on the first Business Day of each month
from January, 2005 through March, 2005 and
(b) $98,275 on the first Business Day
of each succeeding month thereafter until the Maturity Date, in each case,
together with any accrued and unpaid
interest on such
portion of the Principal
Amount plus any and all other
unpaid amounts which are then owing under
this
Note, the Security Agreement and/or any
other Ancillary Agreement (collectively,
the "MONTHLY AMOUNT"). Any outstanding Principal Amount together with any
accrued and unpaid interest and any and all other
unpaid amounts which are then
owing by the Companies to the Holder under this Note,
the Security
Agreement
and/or any other Ancillary Agreement shall be due and payable on the
Maturity
Date.
2
<PAGE>
ARTICLE II
CONVERSION AND REDEMPTION
2.1
PAYMENT OF MONTHLY AMOUNT.
(a) PAYMENT IN CASH OR COMMON STOCK. If the Monthly Amount (or a
portion of such Monthly Amount if not all
of the Monthly Amount may be converted
into shares of Common Stock pursuant to Section 3.2) is
required to be paid in
cash pursuant to Section 2.1(b), then the Companies shall, jointly and
severally, pay the Holder an amount in cash
equal to 100% of the Monthly Amount
(or such portion of such Monthly Amount to
be paid in cash) due and owing to the
Holder on the Amortization Date. If the Monthly Amount (or a portion of such
Monthly Amount if not all of the Monthly
Amount may be converted into shares of
Common Stock pursuant to Section 3.2) is
required to be paid in shares of Common
Stock pursuant to Section 2.1(b),
the number of such
shares to be issued by the
Parent to the Holder on such Amortization Date (in respect of such
portion of
the Monthly Amount converted into shares of Common Stock
pursuant to
Section
2.1(b)), shall be the number determined by dividing (i) the portion of the
Monthly Amount converted into shares of Common Stock, by (ii) the then
applicable Fixed Conversion Price. For purposes hereof,
subject to Section
3.6
hereof, the initial "FIXED CONVERSION
PRICE" means $0.0033.
(b) MONTHLY
AMOUNT CONVERSION CONDITIONS. Subject to Sections
2.1(a), 2.2, and 3.2 hereof, the Holder shall convert into shares of Common
Stock all or a portion of the Monthly
Amount due on each
Amortization
Date if
the following conditions (the "CONVERSION CRITERIA") are satisfied:
(i) the
average closing price of the Common Stock
as reported by Bloomberg, L.P. on the
Principal Market for the five (5) trading days immediately preceding such
Amortization Date shall be greater than or
equal to 120% of the Fixed Conversion
Price and (ii) the amount of such
conversion does not exceed twenty-five percent
(25%) of the aggregate dollar trading volume of the
Common Stock for the period
of twenty-two (22) trading days immediately
preceding such Amortization Date. If
subsection (i) of the Conversion Criteria is met but subsection (ii) of the
Conversion Criteria is not met as to the
entire Monthly Amount, the Holder shall
convert only such part of the Monthly
Amount that meets
subsection (ii) of
the
Conversion Criteria. Any portion of the Monthly Amount
due on an
Amortization
Date that the Holder has not been able to
convert into
shares of Common
Stock
due to the failure to meet the Conversion
Criteria, shall be paid in cash by the
Companies at the rate of 100% of the Monthly Amount otherwise due on such
Amortization Date, within three (3)
business days of such Amortization Date.
2.2 NO
EFFECTIVE
REGISTRATION.
Notwithstanding
anything to the contrary
herein, none of the Companies'
obligations to the
Holder may be converted into
Common Stock unless (a) either (i) an
effective current
Registration
Statement
(as defined in the Registration
Rights Agreement)
covering the shares of Common
Stock to be issued in connection with
satisfaction of such obligations exists or
(ii) an exemption from registration for
resale of all of the Common Stock issued
and issuable is available pursuant to Rule 144 of the
Securities Act and (b) no
Event of Default (as hereinafter defined)
exists and is continuing, unless such
Event of Default is cured within any
applicable cure period or otherwise waived
in writing by the Holder.
3
<PAGE>
2.3
OPTIONAL REDEMPTION IN CASH. The Companies may prepay this Note
("OPTIONAL Redemption") by paying to the Holder a sum of money equal to one
hundred twenty percent (120%) of the
Principal Amount
outstanding at such
time
together with accrued but unpaid interest thereon and any and all other
sums
due, accrued or payable to the Holder
arising under this Note, the Security
Agreement or any other Ancillary Agreement
(the "REDEMPTION AMOUNT") outstanding
on the Redemption Payment Date (as defined below).
The Companies shall
deliver
to the Holder a written notice of redemption (the "NOTICE OF REDEMPTION")
specifying the date for such Optional Redemption (the "REDEMPTION PAYMENT
DATE"), which date shall be seven (7)
business days after the date of the Notice
of Redemption (the "REDEMPTION PERIOD"). A Notice of Redemption
shall not be
effective with respect to any portion of this Note for which the Holder
has
previously delivered a Notice of Conversion (as hereinafter defined) or for
conversions elected to be made by the Holder
pursuant to Section 3.3 during the
Redemption Period. The Redemption Amount
shall be determined as if the Holder's
conversion elections had been completed immediately prior to the date of the
Notice of Redemption. On the Redemption
Payment Date, the Redemption Amount must
be paid in good funds to the Holder.
In the event the
Companies fail to pay the
Redemption Amount on the Redemption Payment
Date as set forth herein, then such
Redemption Notice will be null and
void.
ARTICLE III
HOLDER'S CONVERSION RIGHTS
3.1
OPTIONAL CONVERSION. Subject to the terms set forth in
this Article
III, the Holder shall have the right, but
not the obligation, to
convert all or
any portion of the issued and outstanding Principal Amount and/or accrued
interest and fees due and payable into
fully paid and
nonassessable shares
of
Common Stock at the Fixed Conversion Price. The shares of Common Stock to
be
issued upon such conversion are herein
referred to as, the "CONVERSION SHARES."
3.2
CONVERSION LIMITATION.
Notwithstanding
anything contained
herein to
the contrary, the Holder shall not be entitled
to convert pursuant to the terms
of this Note an amount that would be
convertible into that
number of Conversion
Shares which would exceed the difference between (i) 4.99% of the issued
and
outstanding shares of Common Stock and (ii)
the number of shares of Common Stock
beneficially owned by the Holder For purposes of the immediately preceding
sentence, beneficial ownership shall be determined in accordance
with Section
13(d) of the Exchange Act and Regulation
13d-3 thereunder. The
Conversion Share
limi
