EXHIBIT 10.44

 

NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF
THIS NOTE HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY STATE SECURITIES LAW, AND SUCH SECURITIES MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT
OR STATE LAW OR AN OPINION OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

 

$________________.

 

Huntington , New York

               January 12, 2010

 

AMERICAN TONERSERV CORP.

 

10% CONVERTIBLE NOTE DUE JULY 31, 2011

 

            FOR VALUE RECEIVED, American Tonerserv Corp., a Delaware corporation
(the “Company”), hereby promises to pay to the order of Galt Asset Management
LLC or registered assigns (the “Holder”), the principal amount of _____________
($_______) on July 31, 2011 (the “Maturity Date”).  Interest on the outstanding
principal balance shall be paid at the rate of ten percent (10%) per annum,
payable on the last day of March, June, September and December, commencing on
March 31, 2010, with any accrued interest being paid on the Maturity Date. 
Interest shall be computed on the basis of a 360-day year, using the number of
days actually elapsed.  This Note is issued pursuant to that certain Note
Purchase Agreement (the “Agreement”), dated January 12, 2010, by and among the
Company and Galt Asset Management LLC (“Galt”).  All terms defined in the
Agreement and used in this Note shall have the same meaning in this Note as in
the Agreement.  This Note is issued in respect of a loan made by Galt to the
Company on December 31, 2009 (the “Loan Date”), and interest at the rate stated
herein shall accrue from the Loan Date.  Payment of this Note is guaranteed
joint and severally by Optima Technologies, LLC and NC TonerServ, LLC, both
Delaware limited liability companies (the “Guarantors”), and is secured by a
security interest in assets of the Guarantors as set forth in a security
agreement dated January 12, 2010 by and among the Company, Galt and the
Guarantors. All terms defined in the Agreement and not otherwise defined in this
Note shall have the same meanings in this Note as in the Agreement.

 

           Article 1. 

COVENANTS OF THE COMPANY

(a)                Payment of Principal and Interest.  The Company pay principal
and interest on this Note in the time and in the manner set forth in the
introductory paragraph of this Note.  From and after the occurrence of an Event
of Default, the rate of interest payable on this Note shall, to the extent
permitted by law, be equal to the lesser of (i) 18% per annum or (ii) the
maximum interest rate that may legally be charged.

(b)               Security Agreement.  The Company shall take all action and
shall cause the Guarantors to take all action necessary to comply with their
obligations under the Security Agreement.

(c)                Merger, Consolidation or Sale of Assets.  The Company shall
not merge or consolidate with, or sell all or a significant part of its business
and assets, taken on a consolidated basis, or enter into any agreements with
respect to the foregoing without giving the Holder thirty (30) days prior
written notice thereof.

 

 

 

 

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(d)               No Payment of Dividends.  As long as this Note is outstanding,
the Company shall not pay any dividends on its Common Stock or purchase shares
of its Common Stock.  Notwithstanding the foregoing, the Company may, with the
consent of the Holder, exercise its right of first refusal with respect to
5,100,256 shares of Common Stock held by a bank as security for a $750,000 loan.

            Article 2.

Events of Default; Acceleration

 

(a)                Events of Default Defined.  The entire unpaid principal
amount of this Note, together with interest thereon shall, on written notice to
the Company given by the holders of this Note, forthwith become and be due and
payable if any one or more the following events (“Events of Default”) shall have
occurred (for any reason whatsoever and whether such happening shall be
voluntary or involuntary or be affected or come about by operation of law
pursuant to or in compliance with any judgment, decree, or order of any court or
any order, rule or regulation of any administrative or governmental body) and be
continuing.  An Event of Default shall occur:

(i)                  if failure shall be made in the payment of interest on the
Note when and as the same shall become due and such failure shall continue for a
period of five (5) business days after such payment is due; or

(ii)                if failure shall be made in the payment of principal on the
Note when and as the same shall become due, whether on the Maturity Date or upon
acceleration; or

(iii)               if the Company shall violate or breach in any material
respect any of the representations, warranties and covenants contained in this
Note, the Agreement or the Security Agreement (other than Section 3(b) of the
Security Agreement) and such violation or breach shall continue for thirty (30)
days after written notice of such breach shall been received by the Company from
the Holder; or 

(iv)              if any Guarantor shall violate or breach any of the
representations, warranties and covenants contained in the Guaranty or the
Security Agreement (other than Section 3(b) of the Security Agreement) and such
violation or breach shall continue for thirty (30) days after written notice of
such breach shall been received by the Company from the Holder; or

(v)                if the Company or any Guarantor shall breach the covenants
contained in Section 3(b) of the Security Agreement; or

(vi)              if the Common Stock is not traded on the OTC Bulletin Board or
on The NASDAQ Stock Market or the New York Stock Exchange or any of their
respective markets, including, in the case of the New York Stock Exchange, the
American Stock Exchange; or

(vii)             if there is an order from the SEC or any court which stops or
restricts trading in the Common Stock; or

(viii)           if the Company, any Guarantor or any Significant Subsidiary
(which term shall mean any subsidiary of the Company which would be considered a
significant subsidiary, as defined in Rule 1-02 of Regulation S-X of the SEC
shall consent to the appointment of a receiver, trustee or liquidator of itself
or of a substantial part of its property, or shall admit in writing its
inability to pay its debts generally as they become due, or shall make a general
assignment for the benefit of creditors, or shall file a voluntary petition in
bankruptcy, or an answer seeking reorganization in a proceeding under any
bankruptcy law (as now or hereafter in effect) or an answer admitting the
material allegations of a

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petition filed against the Company, any Guarantor or any Significant Subsidiary,
in any such proceeding, or shall by voluntary petition, answer or consent, seek
relief under the provisions of any other now existing or future bankruptcy or
other similar law providing for the reorganization or winding up of
corporations, or an arrangement, composition, extension or adjustment with its
or their creditors, or shall, in a petition in bankruptcy filed against it or
them be adjudicated a bankrupt, or the Company or any Guarantor or any
Significant Subsidiary or their directors or a majority of its stockholders
shall vote to dissolve or liquidate the Company, any Guarantor or any
Significant Subsidiary other than a liquidation involving a transfer of assets
from a Subsidiary (other than a Guarantor) to the Company or another Subsidiary;
or

(ix)              if an involuntary petition shall be filed against the Company,
any Guarantor or any Significant Subsidiary seeking relief against the Company,
any Guarantor or any Significant Subsidiary under any now existing or future
bankruptcy, insolvency or other similar law providing for the reorganization or
winding up of corporations, or an arrangement, composition, extension or
adjustment with its or their creditors, and such petition shall not be vacated
or set aside within ninety (90) days from the filing thereof; or

(x)                if a court of competent jurisdiction shall enter an order,
judgment or decree appointing, without consent of the Company, any Guarantor or
any Significant Subsidiary, a receiver, trustee or liquidator of the Company,
any Guarantor or any Significant Subsidiary, or of all or any substantial part
of the property of the Company, any Guarantor or any Significant Subsidiary, or
approving a petition filed against the Company, any Guarantor or any Significant
Subsidiary seeking a reorganization or arrangement of the Company, any Guarantor
or any Significant Subsidiary under the Federal bankruptcy laws or any other
applicable law or statute of the United States of America or any State thereof,
or any substantial part of the property of the Company, any Guarantor or any
Significant Subsidiary shall be sequestered;  and such order, judgment or decree
shall not be vacated or set aside within ninety (90) days from the date of the
entry thereof; or

(xi)              if, under the provisions of any law for the relief or aid of
debtors, any court of competent jurisdiction shall assume custody or control of
the Company, any Guarantor or any Significant Subsidiary or of all or any
substantial part of the property of the Company, any Guarantor or any
Significant Subsidiary and such custody or control shall not be terminated
within ninety (90) days from the date of assumption of such custody or control.

(b)               Rights of Note Holder.  Nothing in this Note shall be
construed to modify, amend or limit in any way the right of the holder of this
Note to bring an action against the Company.

Article 3. 

CONVERSION

 

(a)                Conversion.  The principal and accrued interest on this Note
shall be convertible in whole at any time or in part from time to time,
commencing on the Initial Conversion Date, as hereinafter defined, into such
number of shares of Common Stock, as is determined by dividing the principal and
interest on this Note which is being converted by the Conversion Price, as
hereinafter defined. The Holder shall effect conversion by providing the Company
with the form of conversion notice attached hereto as Annex A (a “Notice of
Conversion”) executed by the Holder together with the Note Delivery
Documentation, as hereinafter defined.  Each Notice of Conversion shall specify
the principal amount of this Note to be converted, the principal amount of this
Note outstanding prior to the conversion at issue, the principal amount of this
Note owned subsequent to the conversion at issue, and the date on which such
conversion is to be effected, which date may not be prior to the date the Holder
delivers such

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Notice of Conversion and the Note Delivery Documentation to the Company by
overnight delivery service or by telecopier or PDF (the “Conversion Date”). If
no Conversion Date is specified in a Notice of Conversion, the Conversion Date
shall be the Trading Day immediately following the date that such Notice of
Conversion is received by the Company. The calculations and entries set forth in
the Notice of Conversion shall control in the absence of manifest or
mathematical error.

(b)               Definitions.  As used in this Article 3, the following terms
shall have the following meanings.

(i)                  All terms defined in the Agreement used in this Note shall
have the same meanings in this Note as in the Agreement.

(ii)                The “Initial Conversion Date” shall mean the first to occur
of:

(A)              The first to occur of (x) May 1, 2011 or (y) one year after the
Company completes the private placement of securities pursuant to a proposed
offering of shares of Series E Convertible Preferred Stock as described in a
private placement memorandum dated December 18, 2009 or any offering of
securities in lieu thereof; or

(B)              The date on which an Event of Default or an event which, with
the passage of time or the giving of notice would result in an Event of Default,
shall have occurred; or

(C)              The date on which a Change of Control shall occur.

(iii)               The “Conversion Price” shall mean the lower of the Stated
Conversion Price or the Variable Conversion Price; except that, during the
period between the date this Note becomes convertible pursuant to Section
3(b)(ii)(B) of this Note and the date when this Note would become convertible
pursuant to Section 3(b)(ii)(A) or Section 3(b)(ii)(C) of this Note, the
Conversion Price shall mean the Stated Conversion Price.

(iv)              The “Stated Conversion Price” shall be $0.125 per share, and
shall be subject to adjustment as hereinafter provided in this Article 3.  All
references to Stated Conversion Price shall refer to the Stated Conversion Price
in effect on the date that the determination of the Stated Conversion Price is
being made.

(v)                The “Variable Conversion Price” shall mean 80% of the simple
arithmetic average of the VWAPs as shown on Bloomberg for the twenty (20)
trading days preceding the date on which the Conversion Shares are sold (as the
same may be adjusted for events described in Section 3(d)(i) of this Note.

(vi)              “VWAP” means, for any date, the price determined by the first
of the following clauses that applies: (a) if the Common Stock is then listed or
quoted on The NASDAQ Stock Market or the New York Stock Exchange (including any
exchange operated by the New York Stock Exchange, including the American Stock
Exchange, or the OTC Bulletin Board, the daily volume weighted average price of
the Common Stock for such date (or the nearest preceding date) on such market on
which the Common Stock is then listed or quoted for trading as reported by
Bloomberg Financial L.P. through its “Volume at Price” functions (based on a
Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
time); or (b)  if the Common Stock is not then quoted for trading on the OTC
Bulletin Board and if prices for the Common Stock are then reported in the “Pink
Sheets” published by Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the average of the highest
closing bid price and lowest closing ask price of any of the market makers for

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such security as reported, and in each of the foregoing clauses ignoring any
block trade (which for purposes of this definition means any transfer of more
than 100,000 shares). If the VWAP cannot be calculated for such security on such
date on any of the foregoing bases, the VWAP of such security on such date shall
be the fair market value as mutually determined by the Company and the Holders
of at least a majority in aggregate principal amount of the Notes then
outstanding that were issued pursuant to the Agreement.

(vii)             The “Note Delivery Documentation” shall mean:

(A)              If all of the outstanding principal or and accrued interest on
the Note is being converted, the Note Delivery Documentation shall mean the
Note, which shall be deemed delivered if transmitted by telecopier or PDF with
the Holder advising the Company that the original is being sent by overnight
courier service.

(B)              If part, and not all, of the Note is being converted, the Note
Delivery Documentation shall mean a copy of the Note which is marked to clearly
set forth the amount of principal and interest being converted, with such
notation being initialed by the Holder.  Physical delivery of the Note shall not
be required for a partial exercise.

(viii)           A “Change of Control” means a consolidation or merger of the
Company with or into another company or entity in which the Company is not the
surviving entity or the sale of all or substantially all of the assets of the
Company to another company or entity not controlled by the then existing
stockholders of the Company in a transaction or series of transactions.  A
change of control shall also occur or be deemed to have occurred if (A) any
“person” (as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act)
is or becomes the beneficial owner, directly or indirectly, of securities of the
Company representing forty percent (40%) or more of the combined voting power of
the Company’s then outstanding securities, or (B) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Company’s board of directors cease for any reason to constitute a least a
majority of the members of the board of directors unless the election of each
new director was nominated, ratified or approved by at least two‑thirds of the
directors then still in office who were either directors on the date of this
Note or who were elected or appointed with the approval or ratification of at
least two‑thirds of the directors who were directors on the date of this Note,
or (C) the board of directors shall have determined that an event, other than as
described in clauses (A) and (B) of this Section 3(b)(v), results in a change of
control.  It is understood that the election of independent directors by the
present board of directors does not constitute a change of control as long as
such election is approved by two-thirds of the present board of directors.

(ix)              “Conversion Shares” shall mean the shares of Common Stock or
other securities issuable upon conversion of this Note.

(x)                “Convertible Security” shall mean any option, warrant, right,
convertible debt or equity security of any kind and description or other
security upon the exercise or conversion of which or pursuant to the terms of
which shares of Common Stock or other Convertible Securities may be issued.

(c)                Mechanics of Conversion.  The following provision shall
relate to the delivery of the Conversion Shares.

(i)                  Delivery of Conversion Shares Upon Conversion. Except as
otherwise set forth herein, not later than three Trading Days after each
Conversion Date (the “Share Delivery Date”), the Company shall deliver to the
Holder a certificate or certificates which, after, if the Conversion Shares
shall be issued more than six months from the Loan Date, shall be free of
restrictive legends and trading

 

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restrictions representing the number of shares of Common Stock being acquired
upon the conversion of this Note. The Company shall, upon request of the Holder,
deliver any Conversion Shares electronically through the Depository Trust
Company or another established clearing Company performing similar functions. If
such certificate or certificates are not delivered to or as directed by the
applicable Holder by the third Trading Day after the Conversion Date, the Holder
shall be entitled to elect by written notice to the Company at any time on or
before its receipt of such certificate or certificates thereafter, to rescind
such conversion, in which event the Company shall immediately return this Note
to the Holder.

 

(ii)                Obligation Absolute; Partial Liquidated Damages. The
Company’s obligations to issue and deliver the Conversion Shares upon conversion
of this Note in accordance with the terms hereof are absolute and unconditional,
irrespective of any action or inaction by the Holder to enforce the same, any
waiver or consent with respect to any provision hereof, the recovery of any
judgment against any Person or any action to enforce the same, or any setoff,
counterclaim, recoupment, limitation or termination, or any breach or alleged
breach by the Holder or any other Person of any obligation to the Company or any
violation or alleged violation of law by the Holder or any other person, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Company to the Holder in connection with the issuance of such
Conversion Shares.  In the event the Holder shall elect to convert any or all of
this Note, the Company may not refuse conversion based on any claim that such
Holder or any one associated or affiliated with the Holder of has been engaged
in any violation of law, agreement or for any other reason unless an injunction
from a court, on notice, restraining and or enjoining conversion of all or part
of this Note shall have been sought and obtained and the Company posts a surety
bond for the benefit of the Holder in the amount of 150% of the Conversion Value
of the principal amount of the Note outstanding (i.e., the value of the
Conversion Shares issued or issuable upon conversion of such principal amount of
and interest on this Note) which is subject to the injunction, which bond shall
remain in effect until the completion of arbitration/litigation of the dispute
and the proceeds of which shall be payable to such Holder to the extent it
obtains judgment.  In the absence of an injunction precluding the same, the
Company shall issue Conversion Shares upon a properly noticed conversion. If the
Company fails to deliver to the Holder such certificate or certificates pursuant
to Section 3(c)(i) within one Trading Day of the Share Delivery Date applicable
to such conversion, the Company shall pay to such Holder, in cash, as liquidated
damages and not as a penalty, for each $5,000 of Conversion Value of Note being
converted, $50 per Trading Day (increasing to $100 per Trading Day after three
(3) Trading Days and increasing to $200 per Trading Day six (6) Trading Days
after such damages begin to accrue) for each Trading Day after the Share
Delivery Date until such certificates are delivered. Nothing herein shall limit
a Holder’s right to pursue actual damages for the Company’s failure to deliver
certificates representing shares of Common Stock upon conversion within the
period specified herein and such Holder shall have the right to pursue all
remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief.

(iii)               Compensation for Buy-In on Failure to Timely Deliver
Certificates Upon Conversion. If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 3(c)(i) by a Share Delivery
Date, and if after such Share Delivery Date the Holder purchases (in an open
market transaction or otherwise) Common Stock to deliver in satisfaction of a
sale by such Holder of the Conversion Shares which the Holder was entitled to
receive upon the conversion relating to such Share Delivery Date (a “Buy-In”),
then the Company shall pay in cash to the Holder the amount by which (x) the
Holder’s total purchase price (including brokerage commissions, if any) for the
Common Stock so purchased exceeds (y) the product of (x) the aggregate number of
shares of Common Stock that such Holder was entitled to receive from the
conversion at issue multiplied by (y) the price at which the sell order giving
rise to such purchase obligation was executed. For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an

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attempted conversion of a portion of this Note with respect to which the
aggregate sale price giving rise to such purchase obligation is $10,000, under
clause (A) of the immediately preceding sentence the Company shall be required
to pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In, together
with applicable confirmations and other evidence reasonably requested by the
Company. Nothing herein shall limit a Holder’s right to pursue any other
remedies available to it hereunder, at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief with
respect to the Company’s failure to timely deliver certificates representing
shares of Common Stock upon conversion of this Note as required pursuant to the
terms hereof.

 

(iv)              Reservation of Shares Issuable Upon Conversion. The Company
covenants that it will at all times reserve and keep available out of its
authorized and unissued shares of Common Stock solely for the purpose of
issuance upon conversion of this Note, free from preemptive rights or any other
actual contingent purchase rights of persons other than the Holders, not less
than such number of shares of the Common Stock as shall (subject to any
additional requirements of the Company as to reservation of such shares set
forth in the Agreement) be issuable upon the conversion of this Note; provided,
that if, as a result of the Authorized Stock Proviso, it is necessary for the
Company to increase the number of authorized shares of Common Stock, the Company
shall comply with its obligations under Section 4(h) of the Agreement.  The
Company covenants that all shares of Common Stock that shall be so issuable
shall, upon issue, be duly and validly authorized, issued and fully paid,
non-assessable.

(v)                Fractional Shares. Upon a conversion hereunder, the Company
shall not be required to issue stock certificates representing fractions of
shares of the Common Stock. All fractional shares shall be carried forward and
any fractional shares which remain after the Holder converts the full principal
amount of this Note shall be rounded up to the nearest whole share of Common
Stock.

(vi)              Transfer Taxes.  The issuance of certificates for shares of
the Common Stock on conversion of this Note shall be made without charge to the
Holders thereof for any documentary stamp or similar taxes that may be payable
in respect of the issue or delivery of such certificate, provided that the
Company shall not be required to pay any tax that may be payable in respect of
any transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder, and the Company shall not be
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.

(vii)             Absolute Obligation.  Except as expressly provided herein, no
provision of this Note shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the liquidated damages (if any) on,
this Note at the time, place, and rate, and in the coin or currency, herein
prescribed.

(d)               Certain Adjustments.

(i)                  Stock Dividends and Stock Splits.  If the Company, at any
time from and after the Closing Date, while this Note is outstanding: (A) shall
pay a stock dividend or otherwise make a distribution or distributions on shares
of its Common Stock or any other equity or equity equivalent securities payable
in shares of Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Company pursuant to this Note), (B)
subdivide outstanding shares of Common Stock into a larger number of shares, (C)
combine (including by way of reverse stock split) outstanding shares of Common
Stock into a smaller number of shares, or (D) issue by reclassification of
shares of the Common Stock any shares of capital stock of the Company, then the
Stated Conversion Price shall be adjusted to a new Stated Conversion Price
determined by multiplying

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the Stated Conversion Price then in effect by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding before such event and
of which the denominator shall be the number of shares of Common Stock
(excluding, in each case, treasury shares, if any) outstanding after such
event.  Any adjustment made pursuant to this Section 3(d)(i) shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re‑classification. For the avoidance of doubt, shares of Common
Stock or Convertible Securities issued as a dividend on a class or series of
capital stock other than Common Stock shall be subject to the provisions of
Section 3(d)(ii) and not this Section 3(d)(i).

 

(ii)                Adjustment to Stated Conversion Price. From and after the
date of this Notes until such time as this Note is no longer outstanding, except
for (i) Exempt Issuances, (ii) issuances covered by Section 3(d)(i) of this
Note, or (iii) an issuance of Common Stock upon exercise or upon conversion of
warrants, options or other Convertible Securities for which an adjustment has
already been made pursuant to this Section 3(d)(ii), as to all of which this
Section 3(d)(ii) does not apply, if the Company issues or sells Common Stock at
a price, or issues Convertible Securities with a exercise price per share or
conversion price which is less than the Stated Conversion Price then in effect
(such lower sales price, conversion or exercise price, as the case may be, being
referred to as the “Lower Price”), the Stated Conversion Price shall be the
Lower Price.  The issuance of Common Stock or Convertible Securities in
satisfaction of an obligation shall be treated as if the Common Stock or
Convertible Securities were sold for the amount of the obligation. If the
conversion or exercise price of a Convertible Security shall be reduced as a
result of an anti-dilution or price protection provision and the resulting
conversion or exercise price (including an adjustment resulting from the
issuance of this Note or any shares of Common Stock issuable pursuant to the
Agreement) is a Lower Price, then the Stated Conversion Price shall be reduced
to the Lower Price.  For purpose of determining the exercise price of warrants,
options or rights issued by the Company, the price, if any, paid per share for
the warrants, rights or options shall be added to the exercise price of the
warrants.  In the event that any Convertible Securities shall provide for a
change in the conversion or exercise price, other than as a result of an
anti-dilution or price protection adjustment or an adjustment of the type
described in Section 3(d)(i) of this Note, the conversion or exercise price
applicable to such Convertible Security shall be the lowest conversion price or
exercise price set forth in such Convertible Security.

(iii)               Issuance of Units which Include Convertible Securities. 
  In the event that the Company issues securities in units which contain Common
Stock and one or more Convertible Securities or in units which contain more than
one Convertible Security, the price at which the Company shall be deemed to have
sold securities, for purposes of Section 3(d)(ii) of this Note, shall be equal
to the lower of (x) the lowest conversion or exercise price applicable to any
Convertible Security included in the units or (y) the price at which the unit is
sold, with each Convertible Security included in the unit being deemed to have a
value equal to 15% of the price of the unit, with the price of the Common Stock
being deemed to be determined by subtracting the value of the Convertible
Securities included in the unit from the price of the unit and dividing the
result by the number of shares of Common Stock included in the unit.  The price
per share of Common Stock determined pursuant to this Section 3(d)(iii) would be
used to determine whether the Common Stock is sold for a Lower Price pursuant to
Section 3(d)(ii) of this Note.  For example, if the Company were to sell units
at $0.16, with each unit being comprised of one share common stock and warrants
to purchase two shares of common stock at $0.125 per share, the price of the
Common Stock would be determined as follows.  Under clause (x), the price of the
Common Stock would be $0.125, which is the exercise price of the warrants. 
Under clause (y), the price of the Common Stock would be $0.112 per share, which
is determined by allocated 30% of the purchase price to the warrants to purchase
two shares of Common Stock, with the remaining 70% being allocated to the Common
Stock.

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(e)                Pro Rata Distributions. The Company shall not, at any time
while this Note is outstanding, make any distribution to holders of Common Stock
of evidences of its indebtedness or assets or rights or warrants to subscribe
for or purchase any security.  Notwithstanding the foregoing, the Company may
make a rights offering to its stockholders if the Holder is offered the same
rights as would be offered to the Holder if the Holder owned the number of
shares of Common Stock as would be issuable upon conversion of this Note on the
record date for determining stockholders entitled to receive such rights;
provided, however, that for purpose of determining the Conversion Rate on such
record date, the Variable Conversion Price shall be based on the twenty (20)
trading day VWAP ending on the trading day prior to such record date. For the
avoidance of doubt, the issuance of rights pursuant to this Section 3(e) shall
be an issuance subject to Section 3(d)(ii) of this Note. 

(f)                 Calculations.  All calculations under this Article 3 shall
be made to the nearest tenth of a cent or the nearest 1/100th of a share, as the
case may be.

(g)                Notice to Holders.

(i)                  Notice of Adjustment to Stated Conversion Price.  Whenever
the Stated Conversion Price is adjusted pursuant to this Article 3, the Company
shall promptly mail to each Holder a notice setting forth the adjustment and
setting forth a brief statement of the facts requiring such adjustment. If the
Company issues a variable rate security, despite the prohibition thereon in the
Purchase Agreement, the Company shall be deemed to have issued Common Stock or
Common Stock equivalents at the lowest possible conversion or exercise price at
which such securities may be converted or exercised in the case of a Variable
Rate Transaction (as defined in the Purchase Agreement), or the lowest possible
adjustment price in the case of an MFN Transaction (as defined in the Purchase
Agreement).

(ii)                Notices of Other Events.  If (A) the Company shall declare a
dividend (or any other distribution) on the Common Stock; (B) the Company shall
declare a redemption of the Common Stock; (C) the Company shall authorize the
granting to all holders of the Common Stock rights or warrants to subscribe for
or purchase any shares of capital stock of any class or of any rights; (D) the
approval of any stockholders of the Company shall be required in connection with
any reclassification of the Common Stock or any Fundamental Transaction, (E) the
Company shall authorize the voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Company; then in each case, the Company shall
cause to be filed at each office or agency maintained for the purpose of
conversion of this Note, and shall cause to be mailed to the Holders at their
last addresses as they shall appear upon the  stock books of the Company, at
least 30 calendar days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record is to be
taken for the purpose of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as of which the holders of
the Common Stock of record to be entitled to such dividend, distributions,
redemption, rights or warrants are to be determined or (y) the date on which
such reclassification is expected to become effective or close, and the date as
of which it is expected that holders of the Common Stock of record shall be
entitled to exchange their shares of the Common Stock for securities, cash or
other property deliverable upon such reclassification or Fundamental
Transaction; provided, that the failure to mail such notice or any defect
therein or in the mailing thereof shall not affect the validity of the corporate
action required to be specified in such notice.

(h)                Exempt Issuance. Notwithstanding the foregoing, no adjustment
in the Stated Conversion Price will be made in respect of an Exempt Issuance.

(i)                  Fundamental Transaction. If, at any time while this Note is
outstanding, (A) the Company effects any merger or consolidation of the Company
with or into another Person, (B) the Company

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effects any sale of all or substantially all of its assets in one or a series of
related transactions, (C) any tender offer or exchange offer (whether by the
Company or another Person) is completed pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities,
cash or property, or (D) the Company effects any reclassification of the Common
Stock or any compulsory share exchange pursuant to which the Common Stock is
effectively converted into or exchanged for other securities, cash or property
(in any such case, a “Fundamental Transaction”), then at the request of the
Holder, either, (x) the principal of and interest on the Note shall be paid on
or prior to the effective time of the Fundamental Transaction, or (y) that 
Company and the surviving entity shall agree that the provisions of this Article
3 shall continue to apply, with the Stated Conversion Price being adjusted to
reflect the terms of the transaction, in a manner which is satisfactory to the
Holder.  To the extent necessary to effectuate the foregoing provisions, any
successor to the Company or surviving entity in such Fundamental Transaction
shall assume this Note.

  Article 4. 

MISCELLANEOUS

 

(a)                Transferability.  This Note shall not be transferred except
in a transaction exempt from registration pursuant to the 1933 Act and
applicable state securities law.  The Company shall treat as the owner of this
Note the person shown as the owner on its books and records.

(b)               No Right of Prepayment.  The Company shall have no right to
prepay this Note without the prior written consent of the Holder, which consent
may be given or withheld by the Holder in its sole discretion.  Any prepayment
shall be accompanied by interest on this Note to the date of prepayment.

(c)                WAIVER OF TRIAL BY JURY.  IN ANY LEGAL PROCEEDING TO ENFORCE
PAYMENT OF THIS NOTE, THE COMPANY WAIVES TRIAL BY JURY.

(d)               WAIVER OF ANY RIGHT OF COUNTERCLAIM.  EXCEPT AS PROHIBITED BY
LAW, THE COMPANY HEREBY WAIVES ANY RIGHT TO ASSERT ANY CLAIM IT MAY HAVE AGAINST
THE HOLDER OF THIS NOTE BY WAY OF A COUNTERCLAIM (OTHER THAN A COMPULSORY
COUNTERCLAIM) IN ANY ACTION ON THIS NOTE.

(e)                Usury Saving Provision.  All payment obligations arising
under this Note are subject to the express condition that at no time shall the
Company be obligated or required to pay interest at a rate which could subject
the holder of this Note to either civil or criminal liability as a result of
being in excess of the maximum rate which the Company is permitted by law to
contract or agree to pay.  If by the terms of this Note, the Company is at any
time required or obligated to pay interest at a rate in excess of such maximum
rate, the applicable rate of interest shall be deemed to be immediately reduced
to such maximum rate, and interest thus payable shall be computed at such
maximum rate, and the portion of all prior interest payments in excess of such
maximum rate shall be applied and shall be deemed to have been payments in
reduction of principal.

(f)                 Notice to Company.  Notice to the Company shall be given to
the Company at its principal executive offices, presently located at 420
Aviation Blvd., Suite 103 Santa Rosa, CA 95403, Attention of Ryan Vice, Chief
Financial Officer, or to such other address or person as the Company may, from
time to time, advise the Holder of this Note, or to the Holder of this Note at
the address set forth on the Company’s records. Notice shall be given by hand
delivery, certified or registered mail, return receipt requested, overnight
courier service which provides evidence of delivery, or by telecopier or e-mail
if confirmation of receipt is given or of confirmation of transmission is sent
as herein provided.

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(g)                Governing Law.  This Note shall be governed by the laws of
the State of New York applicable to agreements executed and to be performed
wholly within such state.  The Company hereby (i) consents to the exclusive
jurisdiction of the United States District Court for the Southern District of
New York and Supreme Court of the State of New York in the County of New York in
any action relating to or arising out of this Note, (ii) agrees that any process
in any such action may be served upon it either (x) by certified or registered
mail, return receipt requested, or by an overnight courier service which obtains
evidence of delivery, with the same full force and effect as if personally
served upon him in New York City or (y) any other manner permitted by law, and
(iii) waives any claim that the jurisdiction of any such tribunal is not a
convenient forum for any such action and any defense of lack of in personam
jurisdiction with respect thereto.

(h)                Expenses.  In the event that the Holder commences a legal
proceeding in order to enforce its rights under this Note, the Company shall pay
all reasonable legal fees and expenses incurred by the holder with respect
thereto.

            IN WITNESS WHEREOF, the Company has executed this Note as of the
date and year first aforesaid.

 

                                                                              
     AMERICAN TONERSERV CORP.

 

 

                                                                                   
By:______________________________

                                                                                   
Name:  Chuck Mache, Chief ExecutiveOfficer

 

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NOTICE OF CONVERSION

 

 

[To be Signed Only Upon Conversion of Part or All of Notes]

 

American Tonerserv Corp.

 

            The undersigned, the holder of the foregoing Note, hereby surrenders
such Note for conversion into shares of Common Stock of American Tonerserv, Inc.
to the extent of the \unpaid principal amount of and interest due on such Note
as set forth below, and requests that the certificates for such shares be issued
in the name of                                                                  
, and delivered to                                                          ,
whose address is                                           
                                                            .

 

Principal amount outstanding prior to
conversion:                                              

Principal amount being
converted:                                                                    

Principal amount remaining after
conversion:                                         

Accrued interest prior to
conversion:                                                    

Interest being
converted:                                                                                  

Interest remaining after
conversion:                                                       

 

 

Dated:                                                 

           

 

 

                                               
                                                                 

            (Signature)

 

(Signature must conform in all respects to name of Holder as specified on the
face of the Note.)

 

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