THIS SUBORDINATED CONVERTIBLE NOTE REPLACES A SUBORDINATED CONVERTIBLE NOTE BETWEEN GEORGE D. SCHAEFER AND S2 NEW YORK DESIGN CORP. THIS NOTE WAS ASSUMED AND REISSUED BY INCA DESIGNS, INC. PURSUANT TO TERMS OF THE SECURITIES EXCHANGE AGREEMENT BETWEEN...
THIS
SUBORDINATED CONVERTIBLE NOTE REPLACES A SUBORDINATED CONVERTIBLE NOTE BETWEEN
XXXXXX X. XXXXXXXX AND S2 NEW YORK DESIGN CORP. THIS NOTE WAS ASSUMED AND
REISSUED BY INCA DESIGNS, INC. PURSUANT TO TERMS OF THE SECURITIES EXCHANGE
AGREEMENT BETWEEN INCA DESIGNS, INC. AND S2 NEW YORK DESIGN CORP. DATED MAY
21,
2007, MAKING THE ORIGINAL INSTRUMENT NULL AND VOID. ALL TERMS CONTAINED HEREIN
ARE THE SAME AS THE TERMS IN THE ORIGINAL INSTRUMENT WITH THE EXCEPTION THAT
THE
NAME OF THE COMPANY WAS CHANGED TO INCA DESIGNS, INC. AND ALL TERMS OUTLINED
THEREIN NOW RELATE TO THE COMMON STOCK OF INCA DESIGNS, INC.
THIS
NOTE
AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. 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 OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
FOR
VALUE
RECEIVED, INCA
Designs, Inc.,
a
Nevada company (hereinafter called “Borrower”), hereby promises to pay to
Xxxxxx
X. Xxxxxxxx,
(the
“Holder”) or its registered assigns or successors in interest or order, without
demand, the sum of One Hundred Thousand Dollars ($100,000) (“Principal Amount”),
with simple and unpaid interest thereon, on or before September 30, 2007 (the
“Maturity Date”), if not sooner paid.
This
Note
has been entered into pursuant to the terms of a Securities Purchase Agreement
between the Borrower, the Holder and certain other holders (the “Other Holders”)
of convertible Notes (the “Other Notes”), dated of even date herewith (the
“Securities Purchase Agreement”), and shall be governed by the terms of such
Securities Purchase Agreement. Unless otherwise separately defined herein,
all
capitalized terms used in this Note shall have the same meaning as is set forth
in the Securities Purchase Agreement. The following terms shall apply to this
Note:
ARTICLE
I
INTEREST;
AMORTIZATION
1.1. Interest
Rate.
Subject
to Section 5.7 hereof, interest payable on this Note shall accrue at a rate
per
annum (the “Interest Rate”) of twenty-four percent (24%). Interest on the
Principal Amount shall accrue from the date of this Note and shall be payable
on
the Maturity Date. Interest on the Notes will be computed on the basis of a
360-day year of twelve 30-day months.
1.2
Default
Interest Rate.
Following the occurrence and during the continuance of an Event of Default,
which, if susceptible to cure is not cured within twenty (20) days, otherwise
then from the first date of such occurrence, the annual interest rate on this
Note shall (subject to Section 5.7) automatically be increased to the highest
percentage allowed by law.
ARTICLE
II
CONVERSION
RIGHTS
2.1. Holder’s
Conversion Rights.
Subject
to Section 2.2, the Holder shall have the right, but not the obligation at
any
time from the date of issuance of this Note, to convert all or any portion
of
the then aggregate outstanding Principal Amount of this Note, into shares of
Common Stock, subject to the terms and conditions set forth in this Article
II
at a forty percent (40%) discount to the market price of the Borrower’s Common
Stock or $.50 per share, whichever is lower. The “market price” shall be
determined at the average of the closing bid of the Company’s Common Stock for
the twenty (20) trading days immediately prior to the date of conversion. The
Holder may exercise such right by delivery to the Borrower of a written Notice
of Conversion pursuant to Section 3.3.
2.2. Conversion
Limitation.
The
Holder shall not be entitled to convert on a Conversion Date that amount of
the
Note in connection with that number of shares of Common Stock which would be
in
excess of the sum of (i) the number of shares of Common Stock beneficially
owned
by the Holder and its affiliates on a Conversion Date, (ii) any Common Stock
issuable in connection with the unconverted portion of the Note, and (iii)
the
number of shares of Common Stock issuable upon the conversion of the Note with
respect to which the determination of this provision is being made on a
Conversion Date, which would result in beneficial ownership by the Holder and
its affiliates of more than 4.99% of the outstanding shares of Common Stock
of
the Borrower on such Conversion Date. For the purposes of the provision to
the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder
shall not be limited to aggregate conversions of only 4.99% and aggregate
conversion by the Holder may exceed 4.99%. The Holder shall have the authority
and obligation to determine whether the restriction contained in this Section
2.2 will limit any conversion hereunder and to the extent that the Holder
determines that the limitation contained in this Section applies, the
determination of which portion of the Notes are convertible shall be the
responsibility and obligation of the Holder. The Holder may waive the conversion
limitation described in this Section 2.2, in whole or in part, upon and
effective after 61 days prior written notice to the Borrower.
2.3. Mechanics
of Holder’s Conversion.
(a) In
the
event that the Holder elects to convert any amounts outstanding under this
Note
into Common Stock, the Holder shall give notice of such election by delivering
an executed and completed notice of conversion (a “Notice of Conversion”) to the
Borrower, which Notice of Conversion shall provide a breakdown in reasonable
detail of the Principal Amount, accrued interest and amounts being converted.
The original Note is not
required
to be surrendered to the Borrower
until
all sums due under the Note have been paid. 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. Each date on which a Notice of Conversion
is
delivered or telecopied to the Borrower in accordance with the provisions hereof
shall be deemed a “Conversion Date.” A form of Notice of Conversion
to be employed by the Holder is annexed hereto as Exhibit A.
(b) Pursuant
to the terms of a Notice of Conversion, the Borrower will issue instructions
to
the transfer agent accompanied by an opinion of counsel, if so required by
the
Borrower’s transfer agent and shall cause the transfer agent to issue
and
deliver at such office to the Holder a certificate or certificates for the
number of Common Shares to which such Holder shall be entitled as aforesaid.
The
person or persons entitled to receive the Common Shares issuable upon such
conversion shall be treated for all purposes as the record holder or holders
of
such shares of Common Stock on the later of the date of the Conversion Notice
or
the date of compliance by the Holder with all the provisions of this Section
2.3.
2
2.4. Conversion
Mechanics.
(a) The
number of shares of Common Stock to be issued upon each conversion of this
Note
pursuant to this Article II shall be determined by dividing that portion of
the
Principal Amount and interest and fees to be converted, if any, by the then
applicable Fixed Conversion Price .
(b) The
number and kind of shares or other securities to be issued upon conversion
shall
be subject to adjustment from time to time upon the happening of certain events
while this conversion right remains outstanding, as follows:
i. Merger,
Sale of Assets, etc.
If the
Borrower at any time shall consolidate with or merge into or sell or convey
all
or substantially all its assets to any other corporation, this Note, as to
the
unpaid principal portion thereof and accrued interest thereon, shall thereafter
be deemed to evidence the right to purchase such number and kind of shares
or
other securities and property as would have been issuable or distributable
on
account of such consolidation, merger, sale or conveyance, upon or with respect
to the securities subject to the conversion or purchase right immediately prior
to such consolidation, merger, sale or conveyance. The foregoing provision
shall
similarly apply to successive transactions of a similar nature by any such
successor or purchaser. Without limiting the generality of the foregoing, the
anti-dilution provisions of this Section shall apply to such securities of
such
successor or purchaser after any such consolidation, merger, sale or
conveyance.
ii. Reclassification,
etc.
If the
Borrower at any time shall, by reclassification or otherwise, change the Common
Stock into the same or a different number of securities of any class or classes,
this Note, as to the unpaid principal portion thereof and accrued interest
thereon, shall thereafter be deemed to evidence the right to purchase an
adjusted number of such securities and kind of securities as would have been
issuable as the result of such change with respect to the Common Stock
immediately prior to such reclassification or other change.
iii. Stock
Splits, Combinations and Dividends.
If the
shares of Common Stock are subdivided or combined into a greater or smaller
number of shares of Common Stock, or if a dividend is paid on the Common Stock
in shares of Common Stock, the Conversion Price shall be proportionately reduced
in case of subdivision of shares or stock dividend or proportionately increased
in the case of combination of shares, in each such case by the ratio which
the
total number of shares of Common Stock outstanding immediately after such event
bears to the total number of shares of Common Stock outstanding immediately
prior to such event.
(c) Whenever
the Conversion Price is adjusted pursuant to Section 2.4(b) above, the Borrower
shall promptly mail to the Holder a notice setting forth the Conversion Price
after such adjustment and setting forth a statement of the facts requiring
such
adjustment.
(d) Nothing
herein contained shall prohibit the Company from raising additional funds at
a
purchase price higher than the Fixed Conversion Price and any issuance of shares
under these circumstances will not effect he number of shares to be issued
hereunder.
3
2.5. Reservation.
During
the period the conversion right exists, Borrower will reserve from its
authorized and unissued Common Stock not less than
one
hundred
seventy-five
percent
(175%)
of the
number of shares to provide for the issuance of Common Stock upon the full
conversion of this Note.
Borrower represents that upon issuance, such shares will be duly and validly
issued, fully
paid and
non-assessable. Borrower agrees that its issuance of this Note shall constitute
full authority to its officers, agents, and transfer agents who are charged
with
the duty of executing and issuing stock certificates to execute and issue the
necessary certificates for shares of Common Stock upon the conversion of this
Note.
2.6 Issuance
of Replacement Note.
Upon
any partial conversion of this Note, a replacement Note containing the same
date
and provisions of this Note shall,
at the
written request of the Holder, be
issued
by the Borrower to the Holder for the outstanding Principal Amount of this
Note
and accrued interest which shall not have been converted or paid, provided
Holder has surrendered an original Note to the Company. In the event that the
Holder elects not to surrender a Note for reissuance upon partial payment or
conversion, the Holder hereby indemnifies the Borrower against any and all
loss
or damage attributable to a third-party claim in an amount in excess of the
actual amount then due under the Note.
ARTICLE
III
EVENTS
OF DEFAULT
The
occurrence of any of the following events of default (“Event of Default”) shall,
at the option of the Holder hereof, make all sums of principal and interest
then
remaining unpaid hereon and all other amounts payable hereunder immediately
due
and payable, upon demand, without presentment, or grace period, all of which
hereby are expressly waived, except as set forth below:
3.1 Failure
to Pay Principal or Interest.
The
Borrower fails to pay any installment of Principal Amount, interest or other
sum
due under this Note or any Transaction Document when due and such failure
continues for a period of ten (10) business days after the due
date.
3.2 Breach
of Covenant.
The
Borrower breaches any material covenant or other term or condition of the
Securities Purchase Agreement, this Note or Transaction Document in any material
respect and such breach, if subject to cure, continues for a period of ten
(10)
business days after written notice to the Borrower from the Holder.
3.3 Breach
of Representations and Warranties.
Any
material representation or warranty of the Borrower made herein, in the
Securities Purchase Agreement, Transaction Document or in any agreement,
statement or certificate given in writing pursuant hereto or in connection
herewith or therewith shall be false or misleading in any material respect
as of
the date made and the Closing Date.
3.4 Receiver
or Trustee.
The
Borrower or any Subsidiary of Borrower shall make an assignment for the benefit
of creditors, or apply for or consent to the appointment of a receiver or
trustee for them or for a substantial part of their property or business; or
such a receiver or trustee shall otherwise be appointed.
3.5 Judgments.
Any
money judgment, writ or similar final process shall be entered or filed against
Borrower or any subsidiary of Borrower or any of their property or other assets
for more than $25,000
and shall remain unvacated, unbonded or unstayed for a period of forty-five
(45)
days.
4
3.6 Non-Payment.
The
Borrower shall have received a notice of default, which remains uncured for
a
period of more than twenty (20) business days, on the payment of any one or
more
debts or obligations aggregating in excess of $25,000 beyond any applicable
grace period;
3.7 Bankruptcy.
Bankruptcy, insolvency, reorganization or liquidation proceedings or other
proceedings or relief under any bankruptcy law or any law, or the issuance
of
any notice in relation to such event, for the relief of debtors shall be
instituted by or against the Borrower or any Subsidiary of Borrower and if
instituted against them are not dismissed within sixty (60) days
of
initiation.
3.8 Failure
to Deliver Common Stock or Replacement Note.
Borrower’s failure to timely deliver Common Stock to the Holder pursuant to and
in the form required by this Note or the Securities Purchase Agreement, and,
if
requested by Borrower, a replacement Note,
and
such failure continues for a period of five (5) business days after the due
date.
3.9 Reverse
Splits.
The
Borrower effectuates a reverse split of its Common Stock without twenty days
prior written notice to the Holder.
3.10 Cross
Default.
A
default by the Borrower of a material term, covenant, warranty or undertaking
of
any Transaction Document or other agreement to which the Borrower and Holder
are
parties, or the occurrence of a material event of default under any such other
agreement which is not cured after any required notice and/or cure
period.
ARTICLE
IV
MISCELLANEOUS
4.1 Failure
or Indulgence Not Waiver.
No
failure or delay on the part of Holder hereof in the exercise of any power,
right or privilege hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing hereunder are cumulative to, and not exclusive
of,
any rights or remedies otherwise available.
4.2 Notices.
All
notices, demands, requests, consents, approvals, and other communications
required or permitted hereunder shall be in writing and, unless otherwise
specified herein, shall be (i) personally served, (ii) deposited in the mail,
registered or certified, return receipt requested, postage prepaid, (iii)
delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram, or facsimile, addressed as set forth
below or to such other address as such party shall have specified most recently
by written notice. Any notice or other communication required or permitted
to be
given hereunder shall be deemed effective (a) upon hand delivery or delivery
by
facsimile, with accurate confirmation generated by the transmitting facsimile
machine, at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be:
5
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for
the Company:
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INCA
Designs, Inc.
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00
Xxxx 00xx
Xxxxxx, 0xx
Xxxxx
|
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Xxx
Xxxx, XX 00000
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Tel:
(000) 000-0000
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Fax: (000)
000-0000
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for
the Holder:
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Xxxxxx
X. Xxxxxxxx
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0000
Xxxxx Xxxx
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Xxxx
Xxxxxx, XX 00000
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4.3 Amendment
Provision.
The
term “Note” and all reference thereto, as used throughout this instrument, shall
mean this instrument as originally executed, or if later amended or
supplemented, then as so amended or supplemented.
4.4 Assignability.
This
Note shall be binding upon the Borrower and its successors and assigns, and
shall inure to the benefit of the Holder and its successors and
assigns.
4.5 Cost
of Collection.
If
default is made in the payment of this Note, Borrower shall pay the Holder
hereof reasonable costs of collection, including reasonable attorneys’
fees.
4.6 Governing
Law.
This
Note
shall be governed by and construed in accordance with the laws of the State
of
New York, without regard to conflicts
of laws
principles that would result in the application of the substantive laws of
another jurisdiction. Any
action brought by either party against the other concerning the transactions
contemplated by this Agreement shall be brought only in the state courts of
New
York or in the federal courts located in the State of New York. The
prevailing party shall be entitled to recover from the other party its
reasonable attorney’s fees and costs. In the event that any provision of this
Note is invalid or unenforceable under any applicable statute or rule of law,
then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed modified to conform with such statute
or
rule of law. Any such provision which may prove invalid or unenforceable under
any law shall not affect the validity or unenforceability of any other provision
of this Note. Nothing contained herein shall be deemed or operate to preclude
the Holder from bringing suit or taking other legal action against the Borrower
in any other jurisdiction to collect on the Borrower’s obligations to Holder, to
realize on any collateral or any other security for such obligations, or to
enforce a judgment or other court in favor of the Holder.
4.7 Maximum
Payments.
Nothing
contained herein shall be deemed to establish or require the payment of a rate
of interest or other charges in excess of the maximum permitted by applicable
law. In the event that the rate of interest required to be paid or other charges
hereunder exceed the maximum permitted by such law, any payments in excess
of
such maximum shall be credited against amounts owed by the Borrower to the
Holder and thus refunded to the Borrower.
4.8. Construction.
Each
party acknowledges that its legal counsel participated in the preparation of
this Note and, therefore, stipulates that the rule of construction that
ambiguities are to be resolved against the drafting party shall not be applied
in the interpretation of this Note to favor any party against
the other.
4.9 Shareholder
Status.
The
Holder shall not have rights as a shareholder of the Borrower with respect
to
unconverted portions of this Note. However, the Holder will have the rights
of a
shareholder of the Borrower with respect to the Shares of Common Stock to be
received after delivery by the Holder of a Conversion Notice to the
Borrower.
6
IN
WITNESS WHEREOF,
Borrower has caused this Note to be signed in its name by an authorized officer
as of the 20th
day of
November, 2006.
| INCA DESIGNS, INC. | ||
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| By: | /s/ Xxxxxx X. Xxxxxxxxxxxx | |
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| Xxxxxx X. Xxxxxxxxxxxx, President | ||
7
NOTICE
OF CONVERSION
(To
be
executed by the Registered Holder in order to convert the Note)
The
undersigned hereby elects to convert $_________ of the principal and $_________
of the interest due on the Note issued by INCA Designs, Inc. (the “Borrower”) on
November 20, 2006 into Shares of Common Stock of the Borrower according to
the
conditions set forth in such Note, as of the date written below.
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Date
of Conversion:
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Conversion Price:
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Number
of
Shares of Common Stock Beneficially Owned on the Conversion Date:
Less
than 4.99% of the outstanding Common Stock of Borrower
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Shares
To Be Delivered:
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Signature:
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Print
Name:
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Address:
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