SECURED CONVERTIBLE TERM NOTE B

 

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 B

 

 

        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 Two   Million   Dollars   ($2,000,000),   together   with any   accrued and

unpaid   interest   hereon,   on March 6, 2007 (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   "CONTRACT   RATE"):   (a) twelve percent

(12%) from the date hereof   through   the date   immediately   preceding   the first

anniversary   of the date hereof and (b)   eighteen   percent   (18%) from the first

anniversary   of the date hereof and at all times   thereafter.   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.

 

 

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        1.2 Principal Payments.   The total 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.

 

                                   ARTICLE II

                            CONVERSION AND REDEMPTION

 

        2.1 Payment of Principal Amount.

 

        (a)   Payment   in Cash or Common   Stock.   If the   Principal   Amount (or a

portion   of the   Principal   Amount   if not all of the   Principal   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   Principal

Amount   (or such   portion   of the   Principal   Amount to be paid in cash) due and

owing to the Holder on the Maturity Date. If the Principal   Amount (or a portion

of the Principal Amount if not all of the Principal 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 the   Maturity   Date (in   respect of such

portion of the Principal   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 Principal   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 $0.00111.

 

        (b) Principal 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   Principal   Amount due on the   Maturity   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 the Maturity 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 the Maturity Date. If subsection (i) of the

Conversion Criteria is met but subsection (ii) of the Conversion Criteria is not

met as to the entire Principal   Amount,   the Holder shall convert only such part

of the Principal Amount that meets   subsection (ii) of the Conversion   Criteria.

Any portion of the Principal Amount due on the Maturity 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 on the Maturity

Date at the rate of 100% of the Principal   Amount   otherwise due on the Maturity

Date.

 

 

                                       2

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        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.

 

        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 percent (100%) 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   "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

limitation   described   in this Section 3.2 shall   automatically   become null and

void   following   notice   to the   Company   upon the   occurrence   and   during   the

continuance of an Event of Default,   or upon 75 days prior notice to the Parent.

Notwithstanding   anything   contained   herein to the contrary,   the provisions of

this   Section   3.2 are   irrevocable   and may not be waived by the   Holder or the

Parent.

 

 

                                       3

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        3.3   Mechanics   of   Holder's   Conversion.   In the event   that the Holder

elects to convert this Note into Common   Stock,   the Holder shall give notice of

such election by   delivering   an executed and completed   notice of conversion in

substantially the form of Exhibit B hereto   (appropriate   completed) ("NOTICE OF

CONVERSION")   to the   Parent   and such   Notice   of   Conversion   shall   provide a

breakdown in reasonable   detail of the Principal   Amount,   accrued   interest and

fees that are being converted.   On each Conversion Date (as hereinafter defined)

and in   accordance   with its Notice of   Conversion,   the   Holder   shall make the

appropriate   reduction to the   Principal   Amount,   accrued   interest and fees as

entered in its records and shall provide   written   notice   thereof to the Parent

within two (2) business   days after the   Conversion   Date.   Each date on which a

Notice of Conversion is delivered or telecopied to the Parent in accordance with

the provisions hereof shall be deemed a Conversion Date (the "CONVERSION DATE").

Pursuant   to the terms of the   Notice   of   Conversion,   the   Parent   will   issue

instructions   to the transfer agent   accompanie