SECURED SUBORDINATED CONVERTIBLE NOTE
EXHIBIT
4.2
THIS
NOTE, AND THE SHARES OF PREFERRED STOCK ISSUABLE UPON CONVERSION OF THIS
NOTE,
AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE PREFERRED
STOCK
(COLLECTIVELY, THE “SECURITIES”) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES OR “BLUE SKY” LAWS.
THE SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, ASSIGNED, TRANSFERRED,
PLEDGED
OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH
RESPECT TO THE SECURITIES UNDER SUCH ACT AND APPLICABLE LAWS OR SOME OTHER
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND APPLICABLE LAWS
OR
AN OPINION OF COUNSEL SATISFACTORY TO PARENT THAT SUCH REGISTRATION IS NOT
REQUIRED.
FOR
VALUE
RECEIVED, Small World Kids, Inc. a Nevada corporation (“Parent”), and Small
World Toys, a California corporation (“Subsidiary”) (Parent and Subsidiary, each
a “Borrower” and collectively the “Borrowers”), with principal offices located
at ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, hereby jointly
and
severally promise to pay to «M_1», at «M_2» (the “Holder”) or order, without
demand, the sum of «M_3» Dollars ($«M_4») (the “Face Amount”) with interest on
the Face Amount at the rate of 10% per annum. The Face Amount of the Note
shall
be due and payable on the Maturity Date (as hereinafter defined).
This
Note
is one of a series of Notes (the “Notes”) being issued concurrently by Borrowers
pursuant to the terms of (i) that certain Note Purchase Agreement, dated
as of
April 23, 2007, between the Borrowers, the Holder and others, and (ii) that
certain Note Purchase Agreement, dated as of October 6, 2007, as amended
(collectively, the “Purchase Agreements”). The “Issue Date” shall be the date
that this Note is issued by the Borrowers to the initial Holder described
herein
as evidenced by the date indicated immediately above the signature block
for the
Borrowers. Capitalized terms used herein but not otherwise defined shall
have
the meaning assigned to those terms in the Purchase Agreements.
The
following terms shall apply to this Note:
1.
Payment.
1.1 Interest.
Interest hereunder shall accrue from the Issue Date and is payable monthly
in
arrears on the last day of each month until the Maturity Date. During the
occurrence and continuation of an Event of Default the interest rate shall
be
increased by two percent (2%) per annum commencing on the date when the Event
of
Default was declared by ▇▇▇▇▇▇, and the applicable payments shall be increased
accordingly.
1.2 Maturity
Date.
On the
Maturity Date, the entire Face Amount and any accrued and unpaid interest
shall
be paid to the Holder without offset or deduction of any kind. The term
“Maturity Date” shall mean March 31, 2008.
1.3 Prepayment.
The
Note may be prepaid at any time in whole or in part; provided, the Holder
is
given at least ten (10) days prior written notice thereof and an opportunity
to
convert all or any portion of the Face Amount hereof. If paid in part, such
prepayment shall be applied first against the accrued but unpaid interest
with
the balance applied to the unpaid Face Amount.
1.4 Miscellaneous
Payment Terms.
All
payments of principal and interest in respect of this Note shall be made
in
lawful money of the United States of America in same day funds at the address
of
the Holder as provided in the Purchase Agreements, or to such other place
as the
Holder may direct. Whenever any payment on this Note shall be stated to be
due
on a day that is not a Business Day, such payment shall instead be made on
the
next succeeding Business Day, and such extension of time shall be included
in
the computation of interest payable on this Note. Each payment hereunder
shall
be credited first to interest then due and the remainder of such payment
shall
be credited to principal in inverse order of maturity.
2.
Conversion
Rights.
2.1 Conversion
into Parent’s Preferred Stock.
The
Holder shall have the right from and after the issuance of this Note and
thereafter at any time until this Note is fully paid, to convert the Face
Amount
of this Note into fully paid and non-assessable shares of Class A-2 Convertible
Preferred Stock of Parent (the “Class A-2 Preferred Stock”). as such stock
exists on the date of issuance of this Note, or any shares of capital stock
or
other securities of Parent into which such stock shall hereafter be changed
or
reclassified, at the Conversion Price. Upon delivery to Parent of a Notice
of
Conversion, in the form of Exhibit A attached hereto (the date of giving
of such
notice of conversion being a “Conversion Date”), Borrowers shall issue and
deliver to the Holder within three (3) business days from the Conversion
Date
that number of shares of Class A-2 Preferred Stock for the Face Amount of
the
Note converted in accordance with the foregoing together with all accrued
and
unpaid interest. Except as otherwise provided herein, the number of shares
of
Class A-2 Preferred Stock to be issued upon such conversion of this Note
shall
be determined by dividing that portion of the Face Amount of the Note to
be
converted, by the Conversion Price. Upon partial conversion of this Note,
a new
Note containing the same date and provisions of this Note shall, at the request
of the Holder, be issued by the Borrowers to the Holder for the unpaid Face
Amount of this Note which shall not have been converted or paid.
2.2 Conversion
Price.
Subject
to adjustment as provided elsewhere in this Section 2, the initial Conversion
Price per share of Preferred Stock shall be $1.00.
3.
Reservation
of Stock Issuable Upon Conversion.
Parent
shall at all times reserve and keep available out of its authorized but unissued
shares of Class A-2 Preferred Stock and Common Stock, as the case may be,
solely
for the purpose of effecting the conversion of the Notes such number of its
shares of Class A-2 Preferred Stock and Common Stock as shall from time to
time
be sufficient to effect the conversion of the Notes and the conversion of
the
Class A-2 Preferred Stock; as the case may be, and if at any time the number
of
authorized but unissued shares of Class A-2 Preferred Stock or Common Stock
shall not be sufficient to effect the conversion of the Notes, in addition
to
such other remedies as shall be available to the Holder of this Note, Parent
will use its best efforts to take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued shares
of
Class A-2 Preferred Stock or Common Stock, as the case may be, to such number
of
shares as shall be sufficient for such purposes.
4.
No
Impairment.
Parent
will not, by amendment of its Articles of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or
sale of securities or any other voluntary action, avoid or seek to avoid
the
observance or performance of any of the terms to be observed or performed
hereunder by Parent, but will at all times in good faith assist in the carrying
out of all the provisions of this Note and in the taking of all such action
as
may be necessary or appropriate in order to protect the conversion rights
of the
Holder against impairment.
5.
Registration
Rights.
The
Holder has been granted certain registration rights by Parent pursuant to
the
terms of that certain First Amended and Restated Registration Rights Agreement
entered into by Parent, Holder and others dated as of the date hereof, as
the
same may be amended, modified and/or supplemented from time to
time.
6.
Security.
This
Note, and the other Notes issued pursuant to the Purchase Agreements, are
secured pursuant to the terms of the Purchase Agreements.
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7.
Subordination.
The
indebtedness evidenced by this Note and the other Notes is hereby expressly
subordinated, to the extent and in the manner hereinafter set forth, in right
of
payment to the prior payment in full of the Borrowers’ Senior Indebtedness, as
hereinafter defined.
7.1 Senior
Indebtedness.
As used
in this Note, the term “Senior Indebtedness” shall mean and is solely limited
to, the amount owed or owing by the Borrowers, or either of them, to (a)
Laurus
Master Funds, Ltd. to the extent provided in that certain Subordination
Agreement, as amended, (b) St. Cloud Capital Partners L.P. pursuant to that
certain Intercreditor and Subordination Agreement, as amended, and (c) ▇▇▇▇
▇▇▇▇▇▇▇▇▇▇ to the extent provided in that certain Subordination Agreement,
as
amended.
7.2 Effect
of Subordination.
The
extent and effect of the subordination is set forth in the respective
Subordination Agreements described in Section 5.1 above, which are incorporated
herein by this reference.
7.3 Undertaking.
By its
acceptance of this Note, the Holder agrees to execute and deliver such documents
as may be reasonably requested from time to time by Parent or any lender
of the
Senior Indebtedness in order to implement the foregoing provisions of Section
5.1 hereof.
8.
Event
of Default.
8.1 Events
of Default.
The
occurrence of any of the following events (“Event of Default”) shall, at the
option of the Holders of Notes representing a majority of the unpaid Face
Amounts thereof (collectively, the “Majority Holders”), cause the then unpaid
Face Amount hereon and the Face Amount of all of the other Notes, and all
other
amounts payable hereunder or thereunder, immediately due and
payable:
(a) The
Borrowers fail to pay any installment of principal or interest under this
Note
or any of the Notes when due and such failure continues for a period of three
(3) days after the due date.
(b) The
occurrence of any “Event of Default” under the Purchase Agreements or any
Ancillary Agreement.
(c) If
the
Borrowers or either of them shall file a petition in bankruptcy or for
reorganization or for an arrangement or any composition, readjustment,
liquidation, dissolution or similar relief pursuant to title 11 of the United
States Code or under any similar present or future federal law or the law
of any
other jurisdiction or shall be adjudicated a bankrupt or become insolvent,
or
consent to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian, sequestrator (or other similar official) of
the
Borrowers or either of them or for all or any substantial part of the property
of the Borrowers or either of them, or shall make an assignment for the benefit
of its creditors, or shall admit in writing its inability to pay its debts
generally as they become due, or shall take any corporate action, in furtherance
of any of the foregoing; or
(d) If
a
petition or answer shall be filed proposing the adjudication of the Borrowers
or
either of them as a bankruptcy or its reorganization or arrangement or any
composition, readjustment, liquidation, dissolution or similar relief with
respect to it pursuant to title 11 of the United States Code or under any
similar present or future federal law or the law of any other jurisdiction
applicable to the Borrowers or either of them, and the Borrowers or either
of
them shall consent to or acquiesce in the filing thereof, or such petition
or
answer shall not be discharged or denied within 60 days after the filing
thereof; or
(e) If
a
decree or order is rendered by a court having jurisdiction (i) for the
appointment or a receiver or custodian or liquidator or trustee or sequestrator
assignee (or similar official) in bankruptcy or insolvency of the Borrowers
or
either of them or of all or a substantial part of the their or its property,
or
for the winding up or liquidation of its affairs, and such decree or order
shall
have remained in force undischarged and unstayed for a period of sixty (60)
days, or (ii) for the sequestration or attachment of any property of the
Borrowers or either of them without its return to the possession of the
Borrowers or either of them or its release from such sequestration or attachment
within sixty (60) days thereafter;
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(f) Any
Event
of Default under any Senior Indebtedness, or other similar event thereunder
which constitutes a breach or default that has not been cured, or requires
any
waiver, consent or approval that has not been obtained.
8.2 Enforcement.
Upon
the occurrence of any Event of Default, the Majority Holders may thereupon
proceed to protect and enforce the rights of the Holders either by suit in
equity and/or by action at law or by other appropriate proceedings whether
for
the specific performance (to the extent permitted by law) of any covenant
or
agreement contained in this Note or in aid of the exercise of any power granted
in this Note, and proceed to enforce the payment of the Notes and to enforce
any
other legal or equitable right of the Holders. In addition to any other remedies
available to the Holders, if any Event of Default shall have occurred and
be
continuing:
(a) the
Majority Holders may, by notice to Parent, declare the entire outstanding
principal of the Notes, and all accrued and unpaid interest thereon, to be
due
and payable immediately, and upon any such declaration the entire outstanding
principal of the Notes, and said accrued and unpaid interest shall become
and be
immediately due and payable, without presentment, demand, protest or other
notice whatsoever, all of which are hereby expressly waived; and/or
(b) the
Majority Holders may enforce their rights in aid of the exercise of any power
granted in this Note or the Purchase Agreements.
8.3 Conduct
No Waiver; Collection Expenses.
No
course of dealing on the part of any Holder, nor any delay or failure on
the
part of any Holder to exercise any of its rights, shall operate as a waiver
of
such right or otherwise prejudice such Holder’s rights, powers and
remedies.
8.4 Remedies
Cumulative.
No
right or remedy conferred upon or reserved to the Holder under this Note
or the
Purchase Agreements is intended to be exclusive or any other right or remedy,
and every right and remedy shall be cumulative and in addition to every other
right or remedy given hereunder or not or hereafter existing under any
applicable law. Every right and remedy given by this Note or the Purchase
Agreements or by applicable law to the Holder may be exercised from time
to time
and as often as may be deemed expedient by the Holder.
9.
No
Stockholder Rights.
Nothing
contained in this Note shall be construed as conferring upon the Holder or
any
other person the right to vote or to consent or to receive notice as a
stockholder in respect of meetings of stockholders for the election of directors
of Parent or any other matters or any rights whatsoever as a stockholder
of
Parent, except as provided in Section 11, until, and only to the extent that,
this Note shall have been converted.
10. Assignment.
Subject
to the restrictions on transfer described elsewhere in this Note, the rights
and
obligations of the Borrowers and the Holder of this Note shall be binding
upon
and benefit their successors, assigns and transferees. With respect to any
offer, sale or other disposition of this Note or securities into which such
Note
may be converted, the Holder will give written notice to the Borrowers prior
thereto, describing briefly the manner thereof, together with a written opinion
of such ▇▇▇▇▇▇’s counsel, to the effect that such offer, sale or other
distribution may be effected without registration or qualification (under
any
federal or state law then in effect). Promptly upon receiving such written
notice and reasonably satisfactory opinion, if so requested, the Borrowers,
as
promptly as practicable, shall notify such Holder that such Holder may sell
or
otherwise dispose of this Note or such securities, all in accordance with
the
terms of the notice delivered to Parent. If a determination has been made
pursuant to this Section that the opinion of counsel for the Holder is not
reasonably satisfactory to the Borrowers, the Borrowers shall so notify Holder
promptly after such determination has been made. Each Note thus transferred
and
each certificate representing the securities thus transferred shall bear
a
legend as to the applicable restrictions on transferability in order to ensure
compliance with the Act, unless in the opinion of counsel for the Borrowers
such
legend is not required in order to ensure compliance with the Securities
Act of
1933, as amended. The Borrowers may issue stop transfer instructions to its
transfer agent in connection with such restrictions.
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11. Waiver
and Amendment.
Any
provision of this Note may be amended, waived or modified upon the written
consent of the Borrowers and the Majority Holders, and such amendment, waiver
or
modification shall be binding on the Holder. Any amendment to the Certificate
of
Designation creating the Class A-2 Preferred Stock or waiver of any rights
with
respect to the Class A-2 Preferred Stock shall be approved by Parent and
the
Majority Holders.
12. Failure
or Indulgence Not Waiver.
No
failure or delay on the part of the 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.
13. Notices.
Any
notice herein required or permitted to be given shall be in writing and may
be
personally served or sent by fax transmission (with copy sent by certified
or
registered mail or by overnight courier). For the purposes hereof, the address
and fax number of the Borrowers is ▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, facsimile (▇▇▇) ▇▇▇-▇▇▇▇. The Borrowers may change their
address and fax number as provided in the Purchase Agreements.
14. Cost
of Collection.
If
default is made in the payment of this Note, Borrowers, jointly and severally,
shall pay the Holder hereof all reasonable costs of collection, including
reasonable attorneys’ fees and costs.
15. Maximum
Interest 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 Borrowers to the
Holder and thus refunded to the Borrowers.
16. Governing
Law and Venue.
This
Note shall be governed by and interpreted in accordance with the laws of
the
State of California without regard to the principles of conflict of laws.
In the
event of any litigation regarding the interpretation or application of this
Note, the parties irrevocably consent to jurisdiction in any of the state
or
federal courts located in the City of Los Angeles, State of California and
waive
their rights to object to venue in any such court, regardless of the convenience
or inconvenience thereof to any party. Service of process in any civil action
relating to or arising out of this Note may be accomplished in any manner
provided by law. The Borrowers and ▇▇▇▇▇▇ each agrees that a final,
non-appealable judgment in any such suit or proceeding shall be conclusive
and
may be enforced in other jurisdictions by suit on such judgment or in any
other
lawful manner.
IN
WITNESS WHEREOF, the Borrowers have caused this Note to be signed in its
respective names on this ____ day of April 2007.
| SMALL WORLD KIDS, INC. | ||
| |
|
|
| By: | ||
|
Name:
▇▇▇▇▇ ▇▇▇▇
Title:
Chief Executive Officer
|
||
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| SMALL WORLD KIDS, INC. | ||
| |
|
|
| By: | ||
|
Name:
▇▇▇▇▇ ▇▇▇▇
Title:
Chief Executive Officer
|
||
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NOTICE
OF CONVERSION
(To
Be
Signed Only Upon Conversion of Note)
TO
SMALL
WORLD KIDS, INC.
The
undersigned, the holder of the foregoing Note, hereby surrenders such Note
for
conversion into ____________ shares of Class A-2 Preferred Stock of SMALL
WORLD
KIDS, INC., a Nevada corporation (the “Parent”), to the extent of $
____________________ unpaid Face Amount of such Note and $__________________
unpaid interest on such unpaid Face Amount, and requests that the certificates
for such securities be issued in the name of, and delivered to:
__________________________________________, whose address is
_____________________________________________________________________.
The
undersigned hereby confirms to Parent that the representations and warranties
set forth in Section 3 of the Purchase Agreement are true, correct and accurate
on and as of the date hereof and hereby makes and reaffirms that such
representations and warranties to Parent on and as of the date
hereof.
Dated:
| (Signature must conform in all respects to name of holder as specified on the face of the Note) | |
|
(Address)
|
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