Exhibit 10.1

18% SUBORDINATED NOTE

$325,000

 

March 20, 2009

FOR VALUE RECEIVED, Baywood International, Inc., a Nevada corporation (the
“Maker”), with its primary offices located at 9380 E. Bahia Dr., Suite A201,
Scottsdale, AZ  85260, promises to pay to the order of Eric Skae (the “Payee”),
upon the terms set forth below, the principal sum of Three Hundred Twenty-Five
Thousand Dollars ($325,000) plus interest on the unpaid principal sum
outstanding at the rate of 18% per annum (this “Note”).  For purposes of
calculating interest, the effective date of this Note is March 17, 2009.

Notwithstanding anything herein to the contrary, in the event of any
liquidation, insolvency, bankruptcy, reorganization, or similar proceedings
relating to the Maker, all sums payable on the Senior Notes to Vineyard Bank
(“Senior Notes”), shall first be paid in full, with interest, if any, before any
cash payment is made upon this Note, and, in any such event, any cash payment
which shall be made in respect of this Note shall be paid over to the holders of
the Senior Notes for application to the payment thereof, unless and until the
obligations under the Senior Notes shall have been paid and satisfied in full.

1.

Payments.

(a)

The full amount of principal and accrued interest under this Note shall be due
on April 12, 2009 (the “Maturity Date”), unless due earlier in accordance with
the terms of this Note.

(b)

The Maker shall pay interest to the Payee on the aggregate then outstanding
principal amount of this Note at the rate of 18% per annum, payable on the
Maturity Date.

(c)

All overdue accrued and unpaid principal and interest to be paid hereunder shall
entail a late fee at the rate of 22% per annum (or such lower maximum amount of
interest permitted to be charged under applicable law) which will accrue daily,
from the date such principal and/or interest is due hereunder through and
including the date of payment.

(d)

Absent the occurrence of an Event of Default (unless waived in writing by the
Payee), the Maker may prepay this Note for 100% of the full principal amount of
this Note, together with all accrued interest thereon, at any time prior to the
Maturity Date, without penalty.

2.

Events of Default.

(a)

“Event of Default”, wherever used herein, means any one of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):

(i)

any default in the payment of the principal of, or the interest on, this Note,
as and when the same shall become due and payable;

(ii)

Maker or any of its subsidiaries shall commence, or there shall be commenced
against Maker or any subsidiary a case under any applicable bankruptcy or
insolvency laws as now or hereafter in effect or any successor thereto, or Maker
or any subsidiary commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or

--------------------------------------------------------------------------------

liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to Maker or any subsidiary, or there is commenced against Maker
or any subsidiary any such bankruptcy, insolvency or other proceeding which
remains undismissed for a period of 60 days; or Maker or any subsidiary is
adjudicated insolvent or bankrupt; or any order of relief or other order
approving any such case or proceeding is entered; or Maker or any subsidiary
suffers any appointment of any custodian or the like for it or any substantial
part of its property which continues undischarged or unstayed for a period of 60
days; or Maker or any subsidiary makes a general assignment for the benefit of
creditors; or Maker or any subsidiary shall call a meeting of its creditors with
a view to arranging a composition, adjustment or restructuring of its debts; or
Maker or any subsidiary shall by any act or failure to act expressly indicate
its consent to, approval of or acquiescence in any of the foregoing; or any
corporate or other action is taken by Maker or any subsidiary for the purpose of
effecting any of the foregoing;

(iii)

any monetary judgment, writ or similar final process shall be entered or filed
against the Maker, any subsidiary or any of their respective property or other
assets for more than $300,000, and such judgment, writ or similar final process
shall remain unvacated, unbonded or unstayed for a period of 15 calendar days.

(b)

If any Event of Default occurs (unless waived in writing by the Payee), the full
principal amount of this Note, together with all accrued interest thereon, shall
become, at the Payee's election, immediately due and payable in cash. Commencing
5 days after the occurrence of any Event of Default that results in the
acceleration of this Note, the interest rate on this Note shall accrue at the
rate of 22% per annum, or such lower maximum amount of interest permitted to be
charged under applicable law. The Payee need not provide and Maker hereby waives
any presentment, demand, protest or other notice of any kind, and the Payee may
immediately and without expiration of any grace period enforce any and all of
its rights and remedies hereunder and all other remedies available to it under
applicable law. Such declaration may be rescinded and annulled by Payee at any
time prior to payment hereunder. No such rescission or annulment shall affect
any subsequent Event of Default or impair any right consequent thereon.

3.

Negative Covenants. So long as any portion of this Note is outstanding, the
Maker will not and will not permit any of its Subsidiaries to directly or
indirectly, unless consented to in writing by the Payee:

(a)

other than Permitted Indebtedness, enter into, create, incur, assume, guarantee
or suffer to exist any indebtedness for borrowed money of any kind, including
but not limited to, a guarantee, on or with respect to any of its property or
assets now owned or hereafter acquired or any interest therein or any income or
profits therefrom;

(b)

other than Permitted Liens, enter into, create, incur, assume or suffer to exist
any liens of any kind, on or with respect to any of its property or assets now
owned or hereafter acquired or any interest therein or any income or profits
therefrom;

(c)

amend its certificate of incorporation, bylaws or other charter documents so as
to adversely affect any rights of the Payee other than to increase the number of
authorized common shares;

(d)

except as contractually required by the Maker as of the date of issuance of this
Note, repay, repurchase or offer to repay, repurchase or otherwise acquire more
than a de minimis number of securities;

--------------------------------------------------------------------------------

(e)

enter into any agreement with respect to any of the foregoing; or

“Permitted Indebtedness” shall mean (a) the indebtedness of the Maker existing
on the date of issuance of this Note, (b) lease obligations and purchase money
indebtedness incurred in connection with the acquisition of capital assets and
lease obligations with respect to newly acquired or leased assets (c)
indebtedness incurred by the Maker that does not mature or require payments of
principal prior to the Maturity Date of this Note and is made expressly
subordinate in right of payment to the indebtedness evidenced by this Note, as
reflected in a written agreement acceptable to the Payee and approved by the
Payee in writing, and (d) trade receivables in the ordinary course of business.

“Permitted Lien” shall mean the individual and collective reference to the
following: (a) liens for taxes, assessments and other governmental charges or
levies not yet due or liens for taxes, assessments and other governmental
charges or levies being contested in good faith and by appropriate proceedings
for which adequate reserves (in the good faith judgment of the management of the
Maker) have been established in accordance with generally accepted accounting
procedures, (b) liens imposed by law which were incurred in the ordinary course
of business, such as carriers’, warehousemen’s and mechanics’ liens, statutory
landlords’ liens, and other similar liens arising in the ordinary course of
business, and (x) which do not individually or in the aggregate materially
detract from the value of such property or assets or materially impair the use
thereof in the operation of the business of the Maker and its consolidated
subsidiaries or (y) which are being contested in good faith by appropriate
proceedings, which proceedings have the effect of preventing the forfeiture or
sale of the property or asset subject to such lien and (c) liens of the Maker
existing on the date of issuance of this Note, including liens incurred in
connection with the Permitted Indebtedness.

4.

No Waiver of Payee’s Rights. All payments of principal and interest shall be
made without setoff, deduction or counterclaim. No delay or failure on the part
of the Payee in exercising any of its options, powers or rights, nor any partial
or single exercise of its options, powers or rights shall constitute a waiver
thereof or of any other option, power or right, and no waiver on the part of the
Payee of any of its options, powers or rights shall constitute a waiver of any
other option, power or right. Maker hereby waives presentment of payment,
protest, and all notices or demands in connection with the delivery, acceptance,
performance, default or endorsement of this Note. Acceptance by the Payee of
less than the full amount due and payable hereunder shall in no way limit the
right of the Payee to require full payment of all sums due and payable hereunder
in accordance with the terms hereof.

5.

Modifications. No term or provision contained herein may be modified, amended or
waived except by written agreement or consent signed by the party to be bound
thereby.

6.

Cumulative Rights and Remedies; Usury. The rights and remedies of Payee
expressed herein are cumulative and not exclusive of any rights and remedies
otherwise available under this Note or applicable law (including at equity). The
election of Payee to avail itself of any one or more remedies shall not be a bar
to any other available remedies, which Maker agrees Payee may take from time to
time. If it shall be found that any interest due hereunder shall violate
applicable laws governing usury, the applicable rate of interest due hereunder
shall be reduced to the maximum permitted rate of interest under such law.

7.

Use of Proceeds. Maker shall use the proceeds from this Note hereunder for
working capital purposes and not for the satisfaction of any portion of Maker’s
or subsidiary’s debt (other than payment of trade payables in the ordinary
course of Maker's business and prior practices), to redeem any of Maker’s or
subsidiary’s equity or equity-equivalent securities or to settle any outstanding
litigation.

--------------------------------------------------------------------------------

8.

Collection Expenses. If Payee shall commence an action or proceeding to enforce
this Note, then Maker shall reimburse Payee for its costs of collection and
reasonable attorneys fees incurred with the investigation, preparation and
prosecution of such action or proceeding.

9.

Severability. If any provision of this Note is declared by a court of competent
jurisdiction to be in any way invalid, illegal or unenforceable, the balance of
this Note shall remain in effect, and if any provision is inapplicable to any
person or circumstance, it shall nevertheless remain applicable to all other
persons and circumstances. If it shall be found that any interest or other
amount deemed interest due hereunder shall violate applicable laws governing
usury, the applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum permitted rate of interest.

10.

Successors and Assigns. This Note shall be binding upon Maker and its successors
and shall inure to the benefit of the Payee and its successors and assigns. The
term "Payee" as used herein, shall also include any endorsee, assignee or other
holder of this Note.

11.

Lost or Stolen Promissory Note. If this Note is lost, stolen, mutilated or
otherwise destroyed, Maker shall execute and deliver to the Payee a new
promissory note containing the same terms, and in the same form, as this Note.
In such event, Maker may require the Payee to deliver to Maker an affidavit of
lost instrument and customary indemnity in respect thereof as a condition to the
delivery of any such new promissory note.

12.

Due Authorization. This Note has been duly authorized, executed and delivered by
Maker and is the legal obligation of Maker, enforceable against Maker in
accordance with its terms except as limited by general equitable principles and
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors’ rights generally. No
consent of any other party and no consent, license, approval or authorization
of, or registration or declaration with, any governmental authority, bureau or
agency is required in connection with the execution, delivery or performance by
the Maker, or the validity or enforceability of this Note other than such as
have been met or obtained. The execution, delivery and performance of this Note
and all other agreements and instruments executed and delivered or to be
executed and delivered pursuant hereto or thereto or the securities issuable
upon conversion of this Note will not violate any provision of any existing law
or regulation or any order or decree of any court, regulatory body or
administrative agency or the certificate of incorporation or by-laws of the
Maker or any mortgage, indenture, contract or other agreement to which the Maker
is a party or by which the Maker or any property or assets of the Maker may be
bound.

13.

Governing Law. All questions concerning the construction, validity, enforcement
and interpretation of this Note shall be governed by and construed and enforced
in accordance with the internal laws of the State of Arizona, without regard to
the principles of conflicts of law thereof.  Each of Maker and Payee agree that
all legal proceedings concerning the interpretations, enforcement and defense of
this Note shall be commenced in the state and federal courts sitting in the City
of Phoenix (the "Phoenix Courts").  Each of Maker and Payee hereby irrevocably
submit to the exclusive jurisdiction of the Phoenix Courts for the adjudication
of any dispute hereunder (including with respect to the enforcement of this
Note), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is
improper. Each of Maker and Payee hereby irrevocably waive personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof via registered or certified mail or
overnight delivery (with evidence of delivery) to the other at the address in
effect for notices to it under this Note and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law. Each of Maker and Payee hereby

--------------------------------------------------------------------------------

irrevocably waive, to the fullest extent permitted by applicable law, any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Note or the transactions contemplated hereby.

14.

Notice. Any and all notices or other communications or deliveries to be provided
by the Payee hereunder, including, without limitation, any conversion notice,
shall be in writing and delivered personally, by facsimile, sent by a nationally
recognized overnight courier service or sent by certified or registered mail,
postage prepaid, addressed to the Maker, or such other address or facsimile
number as the Maker may specify for such purposes by notice to the Payee
delivered in accordance with this paragraph. Any and all notices or other
communications or deliveries to be provided by the Maker hereunder shall be in
writing and delivered personally, by facsimile, sent by a nationally recognized
overnight courier service or sent by certified or registered mail, postage
prepaid, addressed to the Payee at the address of the Payee appearing on the
books of the Maker, or if no such address appears, at the principal place of
business of the Payee. Any notice or other communication or deliveries hereunder
shall be deemed given and effective on the earliest of (i) the date of
transmission if delivered by hand or by telecopy that has been confirmed as
received by 5:00 P.M. on a business day, (ii) one business day after being sent
by nationally recognized overnight courier or received by telecopy after 5:00
P.M. on any day, or (iii) five business days after being sent by certified or
registered mail, postage and charges prepaid, return receipt requested.

[signature page follows]

--------------------------------------------------------------------------------

The undersigned signs this Note as a maker and not as a surety or guarantor or
in any other capacity.

BAYWOOD INTERNATIONAL, INC.

 

 

 

 

 

 

 

By:

/s/ Neil Reithinger

 

Name:

Neil Reithinger

 

Title:

Chief Financial Officer