CONVERTIBLE PROMISSORY NOTE


 


	Borrower:	 	XLNT VETERINARY CARE, Inc.	 	Lender:	 	ST. CLOUD CAPITAL PARTNERS, L.P.	 
	 	 	15466 Los Gatos Blvd., Suite 109-352	 	 	 	10866 Wilshire Blvd., Suite 1450	 
	 	 	Los Gatos, CA 95032	 	 	 	Los Angeles, CA 90024	 






			
	Principal Amount: $1,600,000.00	 	Interest Rate: 12.000%	 	Date of Note: November 4, 2005	 








PROMISE TO PAY. XLNT VETERINARY CARE, Inc. (“Borrower”) promises to pay to ST. CLOUD CAPITAL PARTNERS, L.P. (“Lender”), or order, in lawful money of the United States of America,
the principal amount of One Million Six Hundred Thousand Dollars ($1,600,000.00), together with interest at the rate of 12.000% per annum on the unpaid principal balance from the date of each advance, until paid in full (or earlier converted as provided below).


 


PAYMENT. Unless earlier converted as provided below, Borrower will pay this loan in sixty (60) payments. Commencing December 1, 2005, and continuing on the first day of each month after that, Borrower will pay forty-two
(42) regular monthly payments of accrued, unpaid interest. Commencing June 1, 2009, and continuing on the first day of each month after that, Borrower will pay seventeen (17) monthly payments of accrued, unpaid interest, plus principal in the sum of Twenty Two Thousand Two Hundred Twenty
Two Dollars ($22,222.00). Borrower's final payment will be due November 1, 2010 (unless earlier converted, the “Maturity Date”) and will be for all principal and all accrued interest not yet paid. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. Interest on this Note is computed on a 30/360 simple interest basis; that is,
with the exception of odd days in the first payment period, monthly interest is calculated by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by a month of 30 days. Interest for the odd days is calculated on the basis of the actual days
to the next full month and a 360-day year. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing.


 



PREPAYMENT FEE; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Lender hereby acknowledges and agrees that the Borrower can
prepay all or any portion of this Note at anytime, subject to a Prepayment Change if prepaid within the first three (3) years of the loan term as described below. Any prepayment amount shall be in installments not less than the
lessor of (i) fifty percent (50%) of the original principal amount of this Note; and (ii) the remaining outstanding principal balance on this Note. The Prepayment Charge, if any, shall be due in the event of voluntary or involuntary
prepayment in full or in part, whether due to acceleration by the Lender or otherwise, within the first three (3) years of the loan term. If for any reason there is a prepayment of the Note within the first two years of the loan term,
the Prepayment Charge is three percent (3%) of the principal amount of the repayment plus the amount of interest that would accrue on the principal amount of the repayment for twenty-four months less the interest actually paid. The Prepayment
Charge shall be three percent (3.0%) of the principal amount of the prepayment during the third year of the loan term, provided that Borrower shall not be responsible for the interest that would accrue on the prepayment about during the third
year of the loan term. There shall be no Prepayment Charge after the third year of the loan term. Partial prepayment is subject to the Prepayment Charge. The Prepayment Charge shall be payable at the time of prepayment and is in addition to accrued
interest. Borrower’s initials            Commencing three years after the Date of the Note, Borrower may pay all or a portion of the amount owed earlier than it is due without penalty. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, early payments will reduce the principal balance due and may result in Borrower's making fewer payments. Borrower
agrees not to send Lender payments marked “paid in full”, “without recourse”, or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain
obligated to pay any further amount owed to Lender. Borrower shall provide Lender with at least fifteen (15) calendar days prior written notice of any such prepayment whether partial or in full, and during such fifteen (15) calendar day
period Lender shall be entitled to exercise its voluntary conversion feature set forth below.








page 2


PROMISSORY NOTE


LATE CHARGE. If a payment is 10 days or more late, and without waiving any events of default, Borrower will be
charged 2.000% of the regularly scheduled payment or $50.00, whichever is greater.


 


INTEREST AFTER DEFAULT. Upon Borrower's failure to pay all amounts declared due pursuant to this section,
including failure to pay upon final maturity, and in addition to any Late Charge, Lender, at its option, may, if permitted under applicable law, increase the interest rate on this Note to 17.50%
per annum, effective as of the date of the breach or default. Subject to any right of Lender to increase the interest rate on this Note in the event of a breach or other default, the interest rate
will continue at the stated Note rate.


 


VOLUNTARY CONVERSION. All or part of the outstanding principal, and the accrued and unpaid interest thereon through the date of such conversion, of this Note may be converted at any time or from time to time prior to the Maturity
Date, at the option of the Holder, into shares of Common Stock of the Borrower, $.0001 par value, at a conversion price per share equal to Two Dollars and Eighty Cents ($2.80) (the “Conversion Price”) by delivering a notice of such
conversion (the “Conversion Notice”) to the Borrower along with the original of this Note. To receive a certificate representing the shares of Common Stock into which the original of this Note shall be converted pursuant to this Section,
the Lender shall surrender the original of this Note accompanied by a Conversion Notice to the Borrower at its principal executive office set forth above. The Borrower shall, as soon as practicable, but not later than fifteen (15) business days
after the date of receipt of this Note accompanied by a Conversion Notice, issue and deliver to a location in the United States designated by the Lender a certificate for the number of shares of the Borrower's Common Stock to which the
Lender shall be entitled as aforesaid. Such conversion shall be deemed to have been made on the date of the Conversion Notice if conversion (the “Conversion Date”), and the Lender shall be treated for all purposes as the record holder of such
shares of Common Stock as of such Conversion Date. If the Lender elects to convert part, but not all, of the outstanding principal amount and accrued but unpaid interest, then together with a stock certificate evidencing the applicable number
of shares of Common Stock, the Borrower shall also issue a replacement Note with a principal amount equal to the principal amount not converted by the Lender into Common Stock. The Borrower shall not be required to issue fractions
of shares upon conversion. If any fraction of a share would, but for this provision, be issuable upon any conversion, in lieu of such fractional share, Lender shall, upon delivery of a certificate representing the shares into which this Note shall
be converted, be paid in cash the dollar amount (rounded to the nearest whole cent) determined by multiplying such fraction by the Conversion Price. The Borrower shall reserve and shall at all times have reserved out of its authorized but
unissued shares of Common Stock a sufficient number of shares to permit the conversion of the unpaid amount (including principal and accrued interest) of this Note. All shares of Common Stock that may be issued upon conversion of this Note
shall be validly issued, fully paid and nonassessable.


 


RIGHT OF FIRST REFUSAL. In the event that the Company consummates an equity or convertible debt financing in which the proceeds of such financing will be used to prepay the entire outstanding principal balance and accured interest
on this Note and the price per share or a conversion price, as the case may be, pursuant to such financing is equal to (i) if such financing is consummated at any time during the first six (6) months of the loan term, $2.40 or less; (ii) if such
financing is consummated at any time during the second six (6) months of the loan term, $2.60 or less; or (iii) if such financing is consummated at any time during the second year of the loan term, $2.80 or less (each a “Payoff Financing”),
then the Lender shall have an option, for a period of fifteen (15) calendar days from Lender's receipt of written notice by the Borrower of any such Payoff financing, to elect to participate directly in such Payoff Financing up to an aggregate
investment amount of the original principal balance of this Note. The Lender may exercise such option by notifying the Borrower in writing before the expiration of the fifteen (15) day period as to the number of shares or aggregate principal
amount of debt, as the case may be, it wishes to purchase and delivering by check or wire transfer of the purchase price of such investment, as offset by the prepayment amount paid to Lender from the proceeds of the Payoff Financing. In
connection with the Lender's participation in any such Payoff Financing, the Lender hereby agrees to execute and deliver to Borrower any and all documents evidencing Lender's investment, including, without limitation, subscription
documents relating to the applicable Payoff Financing. To the extent Lender has not exercised its right to participate in such Payoff Financing within the foregoing time period. this right of first refusal shall terminate with respect to such
Payoff Financing and shall be null and void.


 


DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note:









page 3



PROMISSORY NOTE


 


Payment Default. Borrower fails to make any payment within five (5) business days of when due under the Note.


 


Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.


 


Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform their respective obligations under this Note or any of the related documents.


 


Environmental Default. Failure of any party to comply with or perform when due any term, obligations,
covenant or condition contained in any environmental agreement executed in connection with any Loan.


 


False Statements. Any warranty, representation, or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement, the Note, or the Related Documents is false or misleading in any
material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.


 


Death or Insolvency. The dissolution of Borrower (regardless of whether election to continue is made), any shareholder withdraws from Borrower, or any other termination of Borrower's existence as a going business or
the death of any shareholder, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.


 


Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any
governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a
good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and
deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.



 


Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender in good faith believes the prospect of payment or performance of the Note is impaired.


 


Cure Provisions. If any default, other than a default in payment which shall not be considered a default if paid within five (5) business days of when due, is curable and if Borrower has not been given a notice of a breach of
the same provision of the Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a)
cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.


 


LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and the Borrower will pay that amount. Lender shall also have all other rights
available under the Related Documents, at law, or in equity upon any event of default.


 


RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys,
delivers, pledges, and transfers to Lender all Borrower's rights, title, and interest in and to, Borrower's accounts with
Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with







page 4



PROMISSORY NOTE


someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh
accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, after the occurrence of a default hereunder
 and to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts.


  


ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note
if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses,
whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and
appeals. Borrower also will pay any court costs, in addition to all other sums provided by law.


  


GOVERNING LAW AND VENUE. This Note will be governed by, construed and enforced in accordance
with federal law and the laws of the State of California. This Note has been accepted by Lender in the State of California. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of San Diego County, State of California.


  


WAIVER OF JURY TRIAL. Lender and Borrower hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Borrower against the other.


  


DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower makes a payment
on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored.


  


CALIFORNIA UNIFORM COMMERCIAL CODE DEFINITIONS. All terms used herein, if not otherwise
specifically defined, shall have the meaning defined by the current or any future version of the California Uniform Commercial Code, as revised, amended, or modified.


  


AGENCY. Nothing in this Agreement shall be construed to constitute the creation of a
partnership or joint venture between Lender and borrower or any contractor. Lender is not an agent or representative of Borrower. This Agreement does not create a contractual
relationship with and shall not be construed to benefit or bind Lender in any way with or create any contractual duties by Lender to any contractor, subcontractor, materialman,
laborer, or any other person.


  


NO CHANGE IN JURISDICTION. Borrower will not change its jurisdiction of organization without
prior notice to Lender.


  


OTHER DEFAULT WITH LENDER. In the event Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other agreement in favor of Lender that may materially affect any of Borrower's property or Borrower's ability
to repay the Note or any of the Related Documents, it shall be considered an event of Default (“Event of Default”) under the Note.


  


SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon
Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.


  


GENERAL PROVISIONS: Lender may delay or forego enforcing any of its rights or remedies under
this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of
limitations, presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who
signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend
(repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the
collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several.










page 5




PROMISSORY NOTE 


PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE. BORROWER
AGREES TO THE TERMS OF THE NOTE.



BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.



	BORROWER:
	XLNT VETERINARY CARE, INC.

	 	a Delaware corporation

	 	 
	 	By: 

	 	Robert Wallace, Chief Executive Officer