EXHIBIT
10.42
THIS NOTE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “
SECURITIES ACT ”), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE
TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT
THERETO IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE
STATE SECURITIES LAWS, OR (2) THE COMPANY (AS DEFINED BELOW)
RECEIVES AN OPINION OF COUNSEL TO THE COMPANY, THAT THIS NOTE MAY
BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN
THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES
LAWS.
________________________________________________________________
BAYWOOD INTERNATIONAL,
INC.
12% Subordinated Note
Baywood International, Inc., a Nevada
corporation (the “ Company ”), for value
received, hereby promises to pay to the order of O. Lee Tawes, III
or the subsequent registered holder of this Note pursuant to
Section 7A hereof (the “ Payee ”) on the date
(the “ Maturity Date ”) which is the earliest to
occur of (i) July 14, 2009; (ii) consummation of a Change of
Control Transaction (as defined herein); and (iii) fifteen (15)
business days following the closing of a debt or equity financing
or series of debt or equity financings in which the Company
receives at least $3,000,000 of gross proceeds (a “
Qualified Placement ”), the principal sum of Two
Hundred Thousand Dollars ($200,000) or such lesser principal amount
as shall at such time be outstanding hereunder (the “
Principal Amount ”).
“ Change in Control
Transaction ” means the occurrence of (i) an acquisition
by any person, including any syndicate or group deemed to be a
“person” under Section 13(d)(3) of the Securities
Exchange Act of 1934, of beneficial ownership, directly or
indirectly, through purchase, merger or other acquisition
transaction or series of purchases, mergers or other acquisition
transactions of capital stock of the Company entitling that person
to fifty percent (50%) or more of the total voting power of all
capital stock of the Company or (ii) 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, business or assets, other than (in the
case of this clause (ii) only) (1) any transaction (A) that does
not result in any reclassification, conversion, exchange or
cancellation of outstanding capital stock of the Company and (B)
pursuant to which holders of the Company’s capital stock
immediately prior to such transaction have the right to exercise,
directly or indirectly, fifty percent (50%) or more of the total
voting power of all ownership interests or capital stock of the
continuing or surviving person immediately after such transaction;
or (2) any merger solely for the purpose of changing the
Company’s jurisdiction of
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formation and resulting in a
reclassification, conversion or exchange of outstanding capital
stock into ownership interests or capital stock of the surviving
entity.
Interest on this Note shall accrue on the
Principal Amount outstanding from time to time at a rate per annum
computed in accordance with Section 2 hereof and shall be payable
on the Maturity Date or earlier upon conversion of this Note in
accordance with the provisions of Section 5 hereof.
Each payment by the Company pursuant to
this Note shall be made without set-off or counterclaim and shall
be made in lawful currency of the United States of America and in
immediately available funds.
The Company (i) waives presentment,
demand, protest or notice of any kind in connection with this Note
and (ii) agrees to pay to the Payee, on demand, all costs and
expenses (including reasonable legal fees and expenses) incurred in
connection with the enforcement and collection of this
Note.
1.
Prepayment . The Principal Amount of this Note and accrued
interest thereon may be prepaid by the Company in whole or in part
at any time without penalty.
2.
Computation of Interest
. All computations of interest
hereunder shall be made on the basis of a 360-day year, consisting
of twelve (12) thirty (30) calendar day periods, and shall accrue
daily (including the first day but excluding the last day during
which any such Principal Amount is outstanding).
A.
Base Interest Rate
. Subject to Section 2B below, the
outstanding Principal Amount shall bear interest at the rate of
twelve percent (12%) per annum.
B.
Maximum Rate . In the event that it is determined that,
under the laws relating to usury applicable to the Company or the
indebtedness evidenced by this Note (“ Applicable Usury
Laws ”), the interest charges and fees payable by the
Company in connection herewith or in connection with any other
document or instrument executed and delivered in connection
herewith cause the effective interest rate applicable to the
indebtedness evidenced by this Note to exceed the maximum rate
allowed by law (the “ Maximum Rate ”), then such
interest shall be recalculated for the period in question and any
excess over the Maximum Rate paid with respect to such period shall
be credited, without further agreement or notice, to the Principal
Amount outstanding hereunder to reduce said balance by such amount
with the same force and effect as though the Company had
specifically designated such extra sums to be so applied to
principal and the Payee had agreed to accept such extra payment(s)
as a premium-free prepayment. All such deemed prepayments
shall be applied to the principal balance payable at maturity.
In no event shall any agreed-to or actual exaction as
consideration for this Note exceed the limits imposed or provided
by Applicable Usury Laws in the jurisdiction in which the Company
is resident applicable to the use or detention of money or to
forbearance in seeking its collection in the jurisdiction in which
the Company is resident.
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3.
Covenants of Company
.
A.
Affirmative Covenants
. The Company covenants and agrees
that, so long as this Note shall be outstanding, it will perform
the obligations set forth in this Section 3A:
(i)
Taxes and Levies
. The Company will promptly pay and
discharge all material taxes, assessments, and governmental charges
or levies imposed upon the Company or upon its income and profits,
or upon any of its property, before the same shall become
delinquent, as well as all material claims for labor, materials and
supplies which, if unpaid, might become a lien or charge upon such
properties or any part thereof; provided , however ,
that the Company shall not be required to pay and discharge any
such tax, assessment, charge, levy or claim so long as the validity
thereof shall be contested in good faith by appropriate proceedings
and the Company shall set aside on its books adequate reserves in
accordance with generally accepted accounting principles (“
GAAP ”) with respect to any such tax, assessment,
charge, levy or claim so contested.
(ii)
Maintenance of Existence
. The Company will do or cause to
be done all things reasonably necessary to preserve and keep in
full force and effect its corporate existence, rights and
franchises and comply with all laws applicable to the Company,
except where the failure to comply would not have a material
adverse effect on the Company or otherwise in connection with an
acquisition of the Company.
(iii)
Books and Records
. The Company will at all times
keep true and correct books, records and accounts reflecting all of
its business affairs and transactions in accordance with GAAP.
(iv)
Notice of Certain Events
. The Company will give prompt
written notice (with a description in reasonable detail) to the
Payee of the occurrence of any Event of Default (as defined herein)
or any event which, with the giving of notice or the lapse of time,
would constitute an Event of Default.
(v)
Use of Proceeds
. The Company agrees to use the
proceeds from the issuance of this Note for working capital
purposes.
B.
Negative Covenants
. The Company covenants and agrees
that, so long as this Note shall be outstanding, it will perform
the obligations set forth in this Section 3B, except as consented
to in writing by the Payee:
(i)
Liquidation, Dissolution
. The Company will not liquidate or
dissolve or consolidate with, or merge into or with, any
corporation or entity, except if the Company is the surviving
corporation of such merger or consolidation and no Event of Default
shall occur as a result thereof.
(ii)
Proration of Payments
. The Company shall not make or
permit any payment or other recovery (whether voluntary,
involuntary, by application of setoff or otherwise) on account of
the Principal Amount or interest payable hereunder in excess of the
Payee’s pro rata share of payments then being made in
respect of all Notes.
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(iii)
Indebtedness . The Company will not create, incur, assume or
suffer to exist, contingently or otherwise, any indebtedness for
borrowed money that is either pari passu or senior in right of
payment to the Notes, except indebtedness outstanding on the date
hereof and up to $2,000,000 of additional indebtedness
(“Permitted New Debt”) except for the Qualified
Financing.
(iv)
Dividends . The Company will not declare or pay any cash
dividends or distributions on any of its outstanding common stock
until this Note is paid in full.
4.
Events of Default
.
A.
The term “ Event of Default
” shall mean any of the events set forth in this Section
4A:
(i)
Non-Payment of Obligations
. The Company shall default in the
payment of the Principal Amount and accrued interest pursuant to
Section 2 hereof when and as the same shall become due and payable,
whether by acceleration or otherwise, which default shall continue
uncured for three (3) business days.
(ii)
Non-Performance of Affirmative
Covenants . The Company
shall default in any material respect in the due observance or
performance of any covenant set forth in Section 3A, which default
shall continue uncured for twenty (20) business days.
(iii)
Non-Performance of Negative
Covenants . The Company
shall default in any material respect in the due observance or
performance of any covenant set forth in Section 3B.
(iv)
Non-Performance of Other
Obligations . The
Company shall default in the due observance or performance of any
other materi
