CONVERTIBLE NOTE AGREEMENT

 

This Agreement by and between ________________________________________

a corporation duly organized and existing under the laws of the State of ____________ and _______________________ (hereinafter called "Company") and those individuals listed on Exhibit A which is attached hereto and incorporated by reference (hereinafter called "Note Holders").

 

W I T N E S S E T H:

 

WHEREAS, Note Holders are willing to lend Company the aggregate sum of ___________ be evidenced by ________________________ percent Convertible Promissory Notes.

 

In consideration of the mutual covenants and conditions herein contained, the parties hereby agree, represent and warrant as follows:

 

1.  Issue of Notes

 

A.   The Company will authorize the issue of its ______________ percent Convertible notes (hereinafter called "Notes") in the aggregate principal amount of ____________ to be dated ____________________ (date) to mature on ____________ (date) to bear interest on the unpaid principal thereof at the rate of _________________ percent per annum until maturity, payable _______________on the _____________day of _____________________ in each year, commencing on ______________________, ______ (year), and after maturity at the rate of ________ percent per annum until paid, and to be substantially in the form of Exhibit A attached hereto.  For the purposes of calculating interest for any period for which the interest shall be payable, such interest shall be calculated on the basis of a ____________ day month and a___________ day year.  The Company will promptly and punctually pay to Note Holders or their nominee the interest on any of the Notes held by Note Holders without presentment of the Notes.  In the event that Note Holders shall sell or transfer any of the Notes, they shall notify the Company of the name and address of the transferee.  In the event the Company defaults on any installment of interest or principal, then any Holder of these Notes may, at his option, without notice, declare the entire principal and the interest accrued thereon immediately due and payable and may proceed to enforce the collection thereof.  All the Notes shall contain a confession of judgment provision.

 

B.  The Company will also authorize the issue of _______________ shares of its common stock (hereinafter called "The Stock") and will authorize the issuance of and reserve for such purchase such a number of additional shares of common stock (hereinafter called the "Conversion Stock") as may from time to time be the maximum number required for issuance upon conversion of the Notes pursuant to the conversion privileges hereinafter stated.

 

2.  Sale and Purchase of Notes and Stock

 

The Company will sell the Notes to the purchasers listed on Exhibit A, each of whom agrees to purchase the principal amount of the Notes set opposite their names, subject to the terms and conditions hereof and in reliance upon the representations and warranties of the Company contained herein, at the purchase price of ____________ Percent of the principal amount.

 

3.  Representations and Warranties by the Company

 

A.  Company is a corporation duly organized and existing in good standing under the laws of the State of ________________________ has the corporate power to own its own property and to carry on in the business as it is now being conducted.

 

B.  Company has on its corporate records the names of the following individuals who each own _______________________ shares of common stock which constitute all the issue and outstanding capital stock of the Company as of this date.

 

C.  The Company has furnished to the Note Holders an Offering Circular which is attached hereto as Exhibit B.  The financial statements contained therein are true and correct and have been prepared in accordance with generally accepted accounting principles consistently followed throughout the period indicated.

 

D.  There is no action or proceeding pending or, to the knowledge of the Company, threatened against the Company before any court or administrative agency, the determination of which might result in any material adverse change in the business of the Company.

 

E.  The Company has title to the respective properties and assets including the properties and assets reflected on the financial statement for the year ending ____________ (month & day), _____ (year) and which assets and properties are subject to no liens, mortgages, encumbrances or charges except a security interest to ____________________________________________________________________.

 

F.  The Company is not a party to any contract or agreement or subject to any restriction which materially and adversely affects its business, property or assets, or financial condition, and neither the execution nor delivery of this Agreement, nor the confirmation of the transactions contemplated herein, nor the fulfillment of the terms hereof, nor the compliance with the terms and provisions hereof and of the Notes, will conflict with or result in the breach of the terms, conditions or provisions or constitute a default, under the Articles of Incorporation or Code of Regulations of the Company or of any Agreement or instrument to which the Company is now a party.

 

G.  The Company has not declared, set aside, paid or made any dividend or other distributions with respect to its capital stock and has not made or caused to be made directly or indirectly, any payment or other distribution of any nature whatsoever to any of the holders of its capital stock except for regular salary payments for services rendered and the reimbursement of business expenses.

 

H.  All of the equipment and automobiles of the Company are in good condition and repair.

 

I.  There are no outstanding options or rights to purchase shares of the Company and no outstanding securities with the right of conversion into shares of the Company.

 

J.  The Company owns or possesses adequate licenses or other rights to use, all patents, trademarks, trade names, trade secrets, and copyrights used in its business.  No one has asserted to the Company that its operations infringe on the patents, trademarks, trade secrets or other rights utilized in the operation of its business.

 

K.  Neither the Company nor any agent or employee acting in its behalf has offered the Notes or the Stock or any portion thereof for sale to or solicited in any offer to buy the same or any thereof from any person or persons other than the purchasers listed in the attached Exhibit A and five (5) other persons, and neither the Company nor any agent or employee acting in its behalf will sell or offer for sale the Notes or Stock or any portion thereof to or solicit any offer to buy the Notes or the Stock from any person or persons so as to bring the issuance or sale thereof within the provisions of Section 5 of the Securities Act of 1933.

 

4.  Representations and Warranties by the Note Holders

The Note Holders represent and warrant that:

 

A. The Note Holders are subscribing for the Notes and Stock for investment purposes and not with the view to or for sale in connection with any distribution thereof and that they have no present intent to sell, give or otherwise transfer the Notes or Stock.

 

B.  The Note Holders state that they are and residents of the State of _______________.

 

C.  The Note Holders understand that this is a highly speculative investment in a Company which is insolvent both from a legal and an equity standpoint.

 

D. Individuals represent and warrant that they have a net worth in excess of ____________________ DOLLARS exclusive of their residences and that they are sophisticated investors who are knowledgeable about the _______________________ business.

1

E.  Note Holders state that they will be active in the affairs of the business of the Company.

 

5.  Prepayment of the Notes

 

Company shall have the right to make prepayments on principal of the Notes at any time on _________ days written notice.  Such prepayment shall be accompanied by a payment of all accrued interest to date.  There shall be no premium for the amount so prepaid.

 

6.  Conversion.

 

A.  The Holder of any of the Notes at any time up to and including the maturity date (or, as to any of the Notes to which notice of prepayment shall have been given, at any time up to the close of business on the third business day prior to the day fixed for prepayment) but not thereafter may convert the Notes in whole or in part into as many fully paid and nonassessable shares of Common Stock of the Company as the principal amount of the Note so converted in a multiple of ______________________ per share, and upon surrender of the certificate representing the Notes to the Company at its principal office in the City of _________________________________.  If any of the Notes shall be converted in part, the Company shall, at its option and without charge to the Holder, either (I) execute and deliver to the Holder Notes for the balance of the principal amount so converted, or (ii) make note thereon of the principal of the amount converted.

 

B.  Upon conversion of any of the Notes, all accrued and unpaid interest on the principal amount converted shall be paid to the Holder by the Company. 

 

C.  The Company shall take all necessary steps to maintain the registration for the shares held subject to the conversion privilege as described in this section. 

 

D.     In the case the Company shall issue or sell any share of its Common Stock (other than the Stock Shares issued upon conversion of any of the Notes) without consideration or for consideration per share less than the conversion price of ____________________ per share, then forthwith upon such issuance or sale, the conversion price shall be adjusted to a price (computed to the nearest cent) determined by dividing (i) an amount equal to the sum of the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by ________________ and the consideration, if any, received by the Company upon such issue or sale, by (ii) the total amount of shares of Common Stock immediately outstanding after such issue or sale.

 

E.  In case the Company shall at any time divide its outstanding shares of Common Stock into a greater number of shares, the conversion price in effect immediately prior to such subdivision should be proportionately reduced, and, conversely, in the case of outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the actual conversion price in effect immediately prior to such combination shall be proportionately increased.

 

F.  In case the Company shall declare a dividend or make a distribution of any Stock of the Company payable in Common Stock or in Convertible Securities, the aggregate maximum number of shares of Common Stock issuable in payment of such dividend or distribution, or upon conversion of or in exchange for such Convertible Securities issuable in payment of such dividend or distribution, shall be deemed to have been issued or sold without consideration.

 

G.  No fractional share of Common Stock shall be issued upon conversion of any of the Notes.  If any Holder of the Notes shall have converted all the Notes held by him other than a principal amount so small that less than a whole share of Common Stock would be issuable upon conversion thereof, the Company may elect to prepay such balance, with interest accrued thereon to the date fixed for prepayment, or leave the same outstanding until the maturity of the Note.

 

H.  In any reclassification or change of outstanding shares of Common Stock issuable upon conversion of the Notes (other than a change in stated value or from no par to par value) or in the case of any consolidation or merger of the Company with any other corporation, or in the case of the sale and conveyance to another to another corporation or person of the property of the Company in its entirety or substantially as an entirety, the Company shall, as a condition precedent to such transaction, case effective provisions to be made that each Holder of the Notes then outstanding shall have the right thereafter to convert the Notes into the kind and amount of shares of Stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a Holder of the number of shares of Common Stock in the Company into which such Notes might have been converted immediately prior to such reclassification, change, consolidation, merger, sale or conveyance.

 

7.  Covenants

 

A.  The Company covenants that so long as the Notes are in existence, it will deliver to the Holders thereof (i) as soon as practical, in any event within fortyfive (45) days after the end of such quarterly period, in each fiscal year, consolidated income and surplus statements of the Company; (ii) as soon as practical , and in any event within ninety (90) days after the end of each fiscal year, a consolidated income and surplus statement of the Company, and (iii) with reasonable promptness, such other financial data as the Holders may request in writing.

 

B.  The Company covenants that, so long as any of the Notes are outstanding, it will permit any Holder of the Notes to visit and inspect, at the Holder's expense, any of the property of the Company, including its books and records, and to discuss affairs, finances and accounts with its officers.

 

C.     The Company covenants that, without the written consent of the Holders of

_____________________________________ in principal amount of the Notes, it will not:

 

1)  Create or suffer to exist any mortgage, pledge, encumbrance, lien or charge of any kind on any of its properties or assets, whether now owned or hereafter acquired except for (i) mortgages, encumbrances, liens or charges which are now in existence; (ii) mortgages, liens, charges and encumbrances (a) for taxes, assessments or governmental charges or levies on property of the Company if the same shall not be due or delinquent or thereafter can be paid without penalty, or being contested in good faith and by appropriate proceedings; (b) of mechanics and material men for sums not yet due or being contested in good faith and by appropriate proceedings; or (c) in connection with workers' compensation, unemployment insurance and other state employment legislation.

 

(2)  Make any loan or advance to any person, firm or corporation.

 

(3)  Assume, guarantee, endorse or otherwise become liable in connection with the obligations, stock or dividends of any person, firm or corporation except in the ordinary course of business by endorsement of a negotiable instrument in the course of collection.

 

(4)  Merge or consolidate with any other corporation or sell, lease or transfer or otherwise dispose of all or a substantial part of its assets to any person, firm or corporation.

 

(5)  Enter into any material transaction in which any stockholder owning of record or beneficially more than ten percent (10%) of the Common Stock of the Company shall have, at the time, a beneficial interest, direct or indirect.

 

8.  Event of Default

 

A.  The breach of any of the events or conditions contained in Section 7 of this Agreement shall constitute an event of default under this Agreement.  Any one or more of the Holders of the Notes may give written notice of such breach and if the Company shall within thirty (30) days after receipt of such written notice have failed to correct such occurrence or condition, then the Holder of any one of the Notes may, at its option and without notice, declare the entire principal and interest accrued thereon immediately due and payable and may proceed with collection.

 

B.  If the Company has made a material misrepresentation in connection with this Agreement or with the transactions contemplated by this Agreement, or if the Company makes an assignment for the benefit of creditors, or a trustee or receiver is appointed for the Company; or if any proceeding involving the Company is commenced under any bankruptcy, reorganization, arrangement, insolvency, statute or law, such event shall be deemed a default which will immediately entitled Holders of the Notes, at their option and without notice, to declare the entire amount of interest accrued thereon immediately due and payable and proceed to enforce the collection thereof.

 

C.  In case of default in the payment of any installment or principal, the Holders of the Notes may, at their option and without notice, declare the entire principal and the interest accrued thereof immediately due and payable and may proceed to enforce the collection thereof.

 

9.  Miscellaneous

 

A.  Any and all notices, approvals or other communications to be sent to the parties shall be deemed validly and properly given if made in writing and delivered by hand or by registered or certified mail, return receipt requested, and addressed to the Company at its principal office or to the Holders of the Notes at the addresses given to the Company by such Note Holders.

 

B.  This Agreement may not be modified, amended or terminated except by written agreement executed by all the parties hereto.

 

C.  The waiver of any breach or default hereunder shall not be considered valid unless in writing and signed by the party giving such notice and no waiver shall be deemed a waiver of any subsequent breach or default of same.

 

D.  The paragraph headings contained herein are for the purpose of convenience only and are not intended to define or limit the contents of such.

 

E.  The validity, construction, interpretation and enforceability of this Agreement and the Notes executed pursuant to this Agreement shall be determined and governed by the laws of the State of ______________________________.

 

F.  This Agreement shall be binding upon and inure to the benefit of the company and its successors and assigns.

 

G.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original.

 

 

________________________________________________

Secretary

 

___________________________________(SEAL) Note Holder ___________________________________(SEAL) Note Holder

___________________________________(SEAL) Note Holder

 

___________________________________

President