Convertible notes at June 30, 2005, consist of promissory notes to four entities. Some of the owners of the entities are also shareholders of the Company. A note exists with Advantage Fund, LLC ("Advantage") which was originated in January 2003. Advantage, is the holder of a Series A Convertible Note from the Company which has been amended at various times from January 7, 2003 to March 2004. In August 2004, Advantage sold a total of $400,000 worth of such convertible note to Cornell Capital Partners, LLP ("Cornell"). The Note bears interest at a rate of 6.5% per annum and is convertible into shares of the Company's common stock with a conversion price per share equal to the lesser of the average of the lowest of three day trading prices during the five trading days immediately prior to the conversion date multiplied by .70 or, the average of the lowest of three day trading prices during the five trading dates immediately prior to the funding dates. On May 12, 2005 as part of the proceeds from the financing arrangement with Highgate House, LLC ("Highgate"), the Company elected to redeem $257,006 of the notes at a rate of 125% of the principal balance of the note. The additional redemption costs, less interest, has been recorded as a financing expense. The convertible notes matured in December 2004 and as of June 30, 2005 are in default. The Company has not been notified of any actions related to this default from Advantage or Cornell.
During the six months ended June 30, 2005, Advantage funded the Company and the note increased by $60,000. During the six months ended June 30, 2005, Cornell elected to convert $26,000 of its promissory notes into 1,532,431 shares of the Company's common stock.
The Company has promissory notes with two unrelated third parties ("Alpha and Gamma"), representing the $225,000 assigned to them. The notes matured on December 31, 2004 and bear interest at a rate of 6.5% per annum. The notes are convertible into shares of the Company's common stock at a conversion price equal to the lesser of (1) the average of the lowest of the three day trading price during the five trading days immediately prior to the conversion date, multiplied by .80%, or (2) the average of the lowest of three day trading prices during the five trading days immediately prior to the funding date. During the six months ended June 30, 2005, Gamma converted $25,000 of its note into 747,004 shares of the Company's common stock and Alpha converted $50,000 of its note into 3,125,000 shares of the Company's common stock. As of June 30, 2005 the promissory notes are in default. The Company has not been notified of any action related to this default by either Alpha or Gamma.
-------------------------------------------------------------------------------- Pursuant to the terms of the notes, the Company entered into a Security Agreement with a collateral agent, on behalf of Advantage, Cornell, Alpha and Gamma, the holders' granting the collateral agent a security interest in the Company's inventory, equipment and fixtures. In June 2004, the Company received $50,000 from Triple Crown Consulting, Inc. ("Triple Crown"), and entered into a $50,000 Series B 6.5% Convertible Promissory Note. The note provides the holder with the right at any time to convert into common stock of the Company as follows: The Conversion Price per share shall be equal to the lesser of (1) the average of the lowest of three-day trading prices during the five trading days immediately prior to the Conversion Date multiplied by .70, or (2) the average of the lowest of three-day trading prices during the five trading days immediately prior to the funding date(s). In May, 2005, Triple Crown elected to convert this promissory note into Series IV preferred stock.
In April, 2005, the Company entered into a Convertible Promissory Note for repayment of funds due to a former Company officer that were advanced to the Company in the amount of $86,790. The note has a 3-year term with an interest rate of 8%. The Company has an option on the three year anniversary of the debenture to pay the debenture in full or convert into the Company's shares of common stock.
A note with Latitude, a related party for $135,000, was settled in January 31, 2005, through the issuance of 5,500,000 shares of the Company's common stock.
In summary, the following are represented on the consolidated balance sheet.
Advantage Funds $ 530,002 Cornell Capital 75,163 Alpha and Gamma 152,500 David Goldberg 86,790 ------------- Total: $ 844,455 =============
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