ORIGINAL ISSUE DISCOUNT SECURED NOTE
THIS
NOTE HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE
SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.
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No.
1
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Original
Issue Date: December 7, 2006
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Holder:
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Xxxx
Xxxx
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Address:
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000
Xxxx Xxxxxx Xxxxx
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Suite
301
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Chicago,
IL 60601
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This
Note
is one of a duly authorized issue of Notes of PHANTOM ENTERTAINMENT, INC.,
a
Delaware corporation, having a principal place of business at 000 Xxxxx Xxxxxx,
Xxxxx 0000, Xxxxxxx, Xxxxxxxxxx 00000 (the “Company”),
designated as its Note (the “Note”)
in an
aggregate face amount of up to Eighty Three Thousand Three Hundred Thirty Three
and 00/100 Dollars ($83,333.00) (the “Maturity Amount”). The Note shall be due
(i) on January 7, 2007, or (ii) upon an event of default, as defined below
(collectively, the “Maturity Date”).
FOR
VALUE
RECEIVED, the Company promises to pay the Maturity Amount to the Holder or
registered assigns on the Maturity Date. Upon an event of default the Maturity
Amount shall bear interest at the rate of 18% per annum from the day such
interest is due hereunder through and including the date of payment. The
principal of, and interest on, this Note are payable in such coin or currency
of
the United States of America as at the time of payment is legal tender for
payment of public and private debts, at the address of the Holder last appearing
on the Note Register.
This
Note
is subject to the following additional provisions:
Section
1. The
Notes
are exchangeable for an equal aggregate principal amount of Notes of different
authorized denominations, as requested by the Holder surrendering the same
but
shall not be issuable in denominations of less than integral multiples of Ten
Thousand Dollars ($10,000) unless such amount represents the full principal
balance of Notes outstanding to such Holder. No service charge will be made
for
such registration of transfer or exchange.
Section
2. Transfer
of Note.
(a) The
Holder, by acceptance hereof, agrees to give written notice to the Company
before transferring this Note; such notice will describe briefly the proposed
transfer and will give the Company the name, address, and tax identification
number of the proposed transferee, and will further provide the Company with
an
opinion of the Holder’s counsel that such transfer can be accomplished in
accordance with federal and applicable state securities laws. Promptly upon
receiving such written notice, the Company shall present copies thereof to
the
Company’s counsel.
(i) If
in the
opinion of such counsel the proposed transfer may be effected without
registration or qualification (under any federal or state securities laws),
the
Company, as promptly as practicable, shall
notify
the Holder of such opinion, whereupon the Holder shall be entitled to transfer
this Note or to dispose of Underlying Shares received upon the previous
conversion of this Note, all in accordance with the terms of the notice
delivered by the Holder to the Company; provided that an appropriate legend
may
be endorsed on this Note respecting restrictions upon transfer thereof necessary
or advisable in the opinion of counsel and satisfactory to the Company to
prevent further transfers which would be in violation of Section 5 of the
Securities Act and applicable state securities laws; and provided further that
the prospective transferee or purchaser shall execute such documents and make
such representations, warranties, and agreements as may be required solely
to
comply with the exemptions relied upon by the Company for the transfer or
disposition of the Note.
(ii) If
in the
opinion of the counsel referred to in this Section 2, the proposed transfer
or
disposition of this Note described in the written notice given pursuant to
this
Section 2 may not be effected without registration or qualification of this
Note, the Company shall promptly give written notice thereof to the Holder,
and
the Holder will limit its activities in respect to such as, in the opinion
of
such counsel, are permitted by law.
(b) Prior
to
transfer of this Note in compliance with this Section 2, the Company and any
agent of the Company may treat the person in whose name this Note is duly
registered on the Note Register as the owner hereof for the purpose of receiving
payment as herein provided and for all other purposes, whether or not this
Note
is overdue, and neither the Company nor any such agent shall be affected by
notice to the contrary.
Section
3. Events
of Default.
"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, interest on, or other obligations
in
respect of, this Note, free of any claim of subordination, as and when the
same
shall become due and payable, (whether on the Maturity Date or by acceleration
or otherwise), and said default in payment is not cured within five (5) business
days; or
(ii) the
Company or any Pledgor shall fail to observe or perform any other covenant,
agreement or warranty contained in, or otherwise commit any breach of, this
Note
or the Stock Pledge Agreement, including, but not limited to, the obligation
of
the Pledgor to issue the True-up Shares and the Company’s failure to offer the
Holder a right of first refusal with respect to the issuance by the Company
of
common stock, or any instruments convertible or exercisable into common stock,
as set forth in Section 5 of this Note, and such failure or breach shall not
have been remedied within 10 days after the date on which notice of such failure
or breach shall have been given; or
(iii) the
Company shall commence a voluntary case under the United States Bankruptcy
Code
or insolvency laws as now or hereafter in effect or any successor thereto (the
"Bankruptcy
Code");
or an
involuntary case is commenced against the Company under the Bankruptcy Code
and
the petition is not controverted within 30 days, or is not dismissed within
60
days, after commencement of such involuntary case; or a "custodian" (as defined
in the Bankruptcy Code) is appointed for, or takes charge of, all or any
substantial part of the property of the Company or the Company 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 the Company or
there
is commenced against the Company any such proceeding which remains undismissed
for a period of 60 days; or the Company is adjudicated insolvent or bankrupt;
or
any order of relief or other order approving any such case or proceeding is
entered; or the Company 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 the Company makes a general assignment for the benefit
of
creditors; or the Company shall fail to pay, or shall state that it is unable
to
pay its debts generally as they become due; the Company shall call a meeting
of
all of its creditors with a view to arranging a composition or adjustment of
its
debts; or the Company shall by any act or failure to act indicate its consent
to, approval of or acquiescence in any of the foregoing; or any corporate or
other action is taken by the Company for the purpose of effecting any of the
foregoing; or
(iv) the
Company shall default in any of its obligations under any mortgage, credit
agreement or other facility, indenture, agreement or other instrument under
which there may be issued, or by which there may be secured or evidenced any
indebtedness of the Company in an amount exceeding $2,500,000.00, whether such
indebtedness now exists or shall hereafter be created and such default shall
result in such indebtedness becoming or being declared due and payable prior
to
the date on which it would otherwise become due and payable; or
(v) the
Company shall be a party to any Change of Control Transaction (as defined in
Section 7), shall sell or dispose of all or in excess of 49% of its assets
(based on book value calculation as reflected in the Company’s most recent
financial statements) in one or more transactions (whether or not such sale
would constitute a Change of Control Transaction); or
(vi) the
Company shall have its common stock suspended or delisted from trading for
in
excess of three (3) Trading Days; or
(vii) the
Company shall fail to file any reports required by Section 13 or 15(d) of the
Exchange Act in a timely manner; or
(viii) a
determination by the U.S. Securities and Exchange Commission or National
Association of Securities Dealers that the Company has violated U.S. Securities
Laws; or
(ix) the
representations and warranties of the Company and Guarantor are not true and
correct in all material respects as of the date when made and as of the Closing
Date as though made at that time, except for representations and warranties
that
are expressly made as of a particular date, which shall be true and correct
in
all material respects as of such date;
(x) an
action, suit or proceeding in the ordinary course of business is commenced
against the Company seeking damages in an amount against which the Company
is
not insured exceeding $2,500,000;
(xi) an
action, suit or proceeding not in the ordinary course of business is commenced
against the Company seeking damages in an amount against which the Company
is
not insured exceeding $2,500,000;
(xii) the
Company enters into a transaction or a series of transactions that would trigger
the “twenty percent rule” if the Company’s common stock is listed for trading on
the New York Stock Exchange, the American Stock Exchange, the Nasdaq or the
Nasdaq Capital Market, notwithstanding the fact that the Company’s common stock
is not listed for trading on such markets;
(xiii) a
decline
in the value of the Pledged Shares (as defined in Section 14 of this Note)
in an
amount equal to less than two and one-quarters (2.25) times the Maturity Amount,
measured by the average daily volume weighted average price of the Company's
common stock for the five (5) trading days subsequent to the most recent weekly
anniversary date of this Note ; provided that, sufficient True-up Shares are
not
delivered by the Company to the Holder on or prior to 5 business days after
such
a decline in value; or
(xiv) a
decline
in the value of the Pledged Shares in an amount equal to less than the Maturity
Amount, measured by the closing bid price of the Company common stock on the
trading day prior to such a decline in value.
Upon
the
occurrence and during the continuation of any Event of Default specified
in this
Section 3, at the option of the Holder the Company shall pay to the Holder
an amount equal to the sum of (1) the outstanding principal amount of this
Note
plus
(2)
accrued and unpaid default interest, if any, thereon at the rate provided
in
this Note to the date of payment, (X) the Holder shall be entitled to exercise
all rights and remedies under the Stock Pledge Agreement and Guaranty,
and (Y)
the Holder shall be entitled to exercise all other rights and remedies
available
at law or in equity
Section
4. Interest
Rate Limitation.
The
parties intend to conform strictly to the applicable usury laws in effect
from
time to time during the term of the Loan. Accordingly, if any transaction
contemplated hereby would be usurious under such laws, then notwithstanding
any
other provision hereof: (i) the aggregate of all interest that is contracted
for, charged, or received under this Agreement or under any other Loan
Document
shall not exceed the maximum amount of interest allowed by applicable law
(the
"Highest Lawful Rate"), and any excess shall be promptly credited to Borrower
by
Lender (or, to the extent that such consideration shall have been paid,
such
excess shall be promptly refunded to Borrower by Xxxxxx); (ii) neither
Borrower
nor any other Person now or hereafter liable hereunder shall be obligated
to pay
the amount of such interest to the extent that it is in excess of the Highest
Lawful Rate; and (iii) the effective rate of interest shall be reduced
to the
Highest Lawful Rate. All sums paid, or agreed to be paid, to Lender for
the use,
forbearance, and detention of the debt of Borrower to Lender shall, to
the
extent permitted by applicable law, be allocated throughout the full term
of the
Note until payment is made in full so that the actual rate of interest
does not
exceed the Highest Lawful Rate in effect at any particular time during
the full
term thereof. If at any time the rate of interest under the Note exceeds
the
Highest Lawful Rate, the rate of interest to accrue pursuant to this Agreement
shall be limited, notwithstanding anything to the contrary in this Agreement,
to
the Highest Lawful Rate, but any subsequent reductions in the Base Rate
shall
not reduce the interest to accrue pursuant to this Agreement below the
Highest
Lawful Rate until the total amount of interest accrued equals the amount
of
interest that would have accrued if a varying rate per annum equal to the
interest rate under the Note had at all times been in effect. If the total
amount of interest paid or accrued pursuant to this Agreement under the
foregoing provisions is less than the total amount of interest that would
have
accrued if a varying rate per annum equal to the interest rate under the
Note
had been in effect, then Borrower agrees to pay to Lender an amount equal
to the
difference between (x) the lesser of (A) the amount of interest that would
have
accrued if the Highest Lawful Rate had at all times been in effect, or
(B) the
amount of interest that would have accrued if a varying rate per annum
equal to
the interest rate under the Note had at all times been in effect, and (y)
the
amount of interest accrued in accordance with the other provisions of this
Agreement.
Section
5. Right
of First Refusal. From
the
date hereof until the one
hundred eightieth (180th)
day
following the date that all the outstanding principal amount of this Note is
repaid by the Company, upon
any
financing (a “Subsequent Financing”) by the Company of its common stock or
securities convertible or exercisable into shares of common stock, the Holder
shall have the right to participate in up to 100% of such Subsequent Financing.
At least five (5) Business Days prior to the closing of the Subsequent
Financing, the Company shall deliver to the Holder a written notice of its
intention to effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice
shall ask the Holder if it wants to review the details of such financing (such
additional notice, a “Subsequent Financing Notice”). Upon the request of the
Holder, and only upon a request by the Holder, for a Subsequent Financing
Notice, the Company shall promptly, but no later than one Business Day after
such request, deliver a Subsequent Financing Notice to the Holder.
Subsequent Financing Notice shall describe in reasonable detail the proposed
terms of such Subsequent Financing, the amount of proceeds intended to be raised
thereunder, and attached to which shall be a term
sheet
or
similar document relating thereto. The
Holder
shall
notify the Company by 5:00 p.m. (New York City time) on the fifth (5th)
Business Day after receipt of the Subsequent Financing Notice of its willingness
to provide the Subsequent Financing on the terms described in the Subsequent
Financing Notice, subject to completion of mutually acceptable documentation.
If
the
Holder
fails to
notify the Company of its willingness to provide all of the Subsequent
Financing, the Company may effect the Subsequent Financing. Notwithstanding
the
foregoing, this Section 5 shall not apply in respect of the issuance of (a)
shares of common stock or options to employees, consultants, officers or
directors of the Company pursuant to any stock or option plan duly adopted
by a
majority of the Board of Directors of the Company, (b) securities upon the
exercise of or conversion of any convertible securities, options or warrants
issued and outstanding on the date of this Note, (c) securities issued pursuant
to a merger, acquisition or strategic transaction approved by a majority of
the
Board of Directors of the Company (collectively, “Excluded
Issuances”).
Section
6. Prepayment.
(a) The
Company shall have the right to prepay this Note in whole or in part thereon
prior to the Maturity Date.
(b) The
Company shall give at least five (5) business days, but not more than ten (10)
business days, written notice of any intention to prepay this Note prior to
the
Maturity Date to the Holder which notice shall specify the “Prepayment
Date”.
Section
7. Definitions.
For the
purposes hereof, the following terms shall have the following
meanings:
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"Business
Day"
means any day except Saturday, Sunday and any day which shall be
a legal
holiday or a day on which banking institutions in the State of New
York
are authorized or required by law or other government action to
close.
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"Change
of Control Transaction"
means the occurrence of any of (i) an acquisition after the date
hereof by
an individual or legal entity or "group" (as described in Rule 13d-5(b)(1)
promulgated under the Exchange Act) of in excess of 49% of the voting
securities of the Company coupled with a replacement of more than
one-half
of the members of the Company's board of directors which is not approved
by those individuals who are members of the board of directors on
the date
hereof in one or a series of related transactions, or (ii) the merger
of
the Company with or into another entity, consolidation or sale of
all or
substantially all of the assets of the Company in one or a series
of
related transactions, unless following such transaction, the holders
of
the Company's securities continue to hold at least 40% of such securities
following such transaction. The execution by the Company of an agreement
to which the Company is a party or by which it is bound providing
for any
of the events set forth above in (i) or (ii) does not constitute
the
occurrence of the event until after the event in fact occurs.
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Section
8. 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
principal of, interest and liquidated damages (if any) on, this Note at the
time, place, and rate, and in the coin or currency, herein prescribed. This
Note
is a direct obligation of the Company.
Section
9. If
this
Note shall be mutilated, lost, stolen or destroyed, the Company shall execute
and deliver, in exchange and substitution for and upon cancellation of a
mutilated Note, or in lieu of or in substitution for a
lost,
stolen or destroyed Note, a new Note for the principal amount of this Note
so
mutilated, lost, stolen or destroyed but only upon receipt of evidence of such
loss, theft or destruction of such Note, and of the ownership hereof,
and indemnity, if requested, all reasonably satisfactory to the
Company.
Section
10. Choice
of Law and Venue; Submission to Jurisdiction; Service of
Process.
(a) THE
VALIDITY OF THIS NOTE, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND
THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA (WITHOUT REFERENCE
TO THE CHOICE OF LAW PRINCIPLES THEREOF). THE PARTIES AGREE THAT ALL ACTIONS
OR
PROCEEDINGS ARISING IN CONNECTION WITH THIS NOTE SHALL BE TRIED AND LITIGATED
ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF FLORIDA, STATE
OF
FLORIDA OR, AT THE SOLE OPTION OF HOLDER, IN ANY OTHER COURT IN WHICH HOLDER
SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER
JURISDICTION OVER THE MATTER IN CONTROVERSY.
(b) COMPANY
HEREBY SUBMITS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, TO THE JURISDICTION OF THE AFORESAID COURTS AND WAIVES, TO
THE
EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO ASSERT THE
DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY
PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION.
(c) COMPANY
HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT, OR OTHER PROCESS
ISSUED IN ANY ACTION OR PROCEEDING AND AGREES THAT SERVICE OF SUCH SUMMONS,
COMPLAINT, OR OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO COMPANY.
(d) NOTHING
IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF HOLDER
TO
SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE
ENFORCEMENT BY HOLDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE
TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER
APPROPRIATE FORUM OR JURISDICTION.
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(e)
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To
the extent determined by such court, the Company shall reimburse
the
Holder for any reasonable legal fees and disbursements incurred by
the
Holder in enforcement of or protection of any of its rights under
any of
this Note.
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Section
11. Any
waiver by the Company or the Holder of a breach of any provision of this Note
shall not operate as or be construed to be a waiver of any other breach of
such
provision or of any breach of any other provision of this Note. The failure
of
the Company or the Holder to insist upon strict adherence to any term of this
Note on one or more occasions shall not be considered a waiver or deprive that
party of the right thereafter to insist upon strict adherence to that term
or
any other term of this Note. Any waiver must be in writing.
Section
12. If
any
provision of this Note is 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.
Section
13. Whenever
any payment or other obligation hereunder shall be due on a day other than
a
Business Day, such payment shall be made on the next succeeding Business Day
(or, if such next succeeding Business Day falls in the next calendar month,
the
preceding Business Day in the appropriate calendar month).
Section
14. Security.
The
obligation of the Company for payment of principal, interest and all other
sums
hereunder, in the event of a default and failure of the Company to perform
hereunder, is secured by the pledge of 130,000,000 shares of common stock (the
“Pledged
Shares”)
by the
Company as Pledgor under the terms and conditions of a Stock Pledge Agreement,
and a Guaranty executed and delivered by Xxxxxxx Xxxxxxx.
Section
15. Payment
of Legal Fees.
The
Company shall pay legal fees and expenses incurred by the Holder in connection
with negotiating and entering into the Note in an amount not to exceed Five
Thousand ($5,000) Dollars.
Section
16. Waiver
of Jury Trial.
THE
COMPANY HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE . COMPANY REPRESENTS
THAT
EACH HAS REVIEWED THIS WAIVER AND KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A
TRIAL BY THE COURT.
IN
WITNESS WHEREOF,
the
Company has caused this instrument to be duly executed by an officer duly
authorized for such purpose, as of the date first above indicated.
By:
/s/
Xxxx
Xxxxx
Name:
Xxxx
Xxxxx
Title:
Chief
Executive Officer
