Exhibit 4.2


 


THIS NOTE
HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
STATE SECURITIES LAWS.  THIS NOTE MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO SMALL WORLD
KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.


 


SECURED NON-CONVERTIBLE TERM NOTE


 


FOR VALUE
RECEIVED, each of SMALL WORLD KIDS, INC., a Nevada corporation (the “Parent”), and the other companies listed on Exhibit A
attached hereto (such other companies together with the Parent, each a “Company” and collectively, the “Companies”),
jointly and severally, promises to pay to LAURUS MASTER FUND, LTD., c/o M&C
Corporate Services Limited, P.O. Box 309 GT, Ugland House, South Church Street,
George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the “Holder”) or its registered assigns or successors in
interest, the sum of Two Million Dollars ($2,000,000), together with any
accrued and unpaid interest hereon, on February 28, 2008 (the “Maturity Date”) if not sooner paid.


 


Capitalized terms
used herein without definition shall have the meanings ascribed to such terms
in the Security Agreement among the Companies and the Holder dated as of the
date hereof (as amended, modified and/or supplemented from time to time, the “Security Agreement”).


 


The
following terms shall apply to this Secured Non-Convertible Term Note (this “Note”):


 


ARTICLE I

CONTRACT RATE


 


1.1           Contract Rate.  Subject to Sections 4.2 and 5.10, interest
payable on the outstanding principal amount of this Note (the “Principal Amount”) shall accrue at a rate per annum equal to
the “prime rate” published in The Wall Street Journal from time to time
(the “Prime Rate”), plus three percent (3.0%)
(the “Contract Rate”).  The Contract Rate shall be increased or
decreased as the case may be for each increase or decrease in the Prime Rate in
an amount equal to such increase or decrease in the Prime Rate; each change to
be effective as of the day of the change in the Prime Rate.  The Contract Rate shall not at any time be
less than nine percent (9.0%).   Interest
shall be (i) calculated on the basis of a 360 day year, and (ii) payable monthly,
in arrears, commencing on March 1, 2006 on the first business day of each
consecutive calendar month thereafter through and including the Maturity Date
and on the Maturity Date, whether by acceleration or otherwise.


 


1.2           Contract Rate
Payments.  The Contract Rate shall be
calculated on the last business day of each calendar month hereafter (other
than for increases or decreases in the Prime


 


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Rate which shall
be calculated and become effective in accordance with the terms of Section 1.1)
until the Maturity Date (each a “Determination Date”).


 


1.3           Principal
Payments.  Amortizing payments of the
aggregate principal amount outstanding under this Note at any time (the “Principal Amount”) shall be made by the Company on April 1,
2006 and on the first business day of each succeeding month thereafter through
and including the Maturity Date (each, an “Amortization Date”).  Commencing on the first Amortization Date,
the Company shall make monthly payments to the Holder on each Amortization
Date, each such payment in the amount of $33,333 together with any accrued and
unpaid interest on such portion of the Principal Amount plus any and all other
unpaid amounts which are then owing under this Note, the Security Agreement
and/or any other Ancillary Agreement (collectively, the “Monthly
Amount”).  Any outstanding
Principal Amount together with any accrued and unpaid interest and any and all
other unpaid amounts which are then owing by the Company to the Holder under
this Note, the Security Agreement and/or any other Ancillary Agreement shall be
due and payable on the Maturity Date.


 


ARTICLE II

LOANS; PAYMENTS UNDER THIS NOTE


 


2.1           Loans.  All Loans evidenced by this Note shall be
made in accordance with the terms and provisions of the Security Agreement.


 


2.2           [Intentionally
Omitted].


 


2.3           Optional
Redemption in Cash.  The Companies
will have the option of prepaying this Note (“Optional
Redemption”) by paying to the Holder a sum of money equal to (i) to
the extent such prepayment occurs prior to the first anniversary of the Closing
Date, one hundred twenty-five percent (125%) and (ii) to the extent such
prepayment occurs on or after the first anniversary of the Closing Date but
prior to the Maturity Date, one hundred twenty percent (120%), in each case, of
the principal amount of this Note together with accrued but unpaid interest
thereon and any and all other sums due, accrued or payable to the Holder
arising under this Note, the Security Agreement, or any other Ancillary
Agreement (the “Redemption Amount”) outstanding on
the Redemption Payment Date (as defined below). 
The Company shall deliver to the Holder a written notice of redemption
(the “Notice of Redemption”) specifying the
date for such Optional Redemption (the “Redemption Payment Date”),
which date shall be no later than ten (10) days after the date of the Notice of
Redemption (the “Redemption Period”).  On the Redemption Payment Date, the
Redemption Amount (plus any additional interest and fees accruing on the Notes
during the Redemption Period) must be irrevocably paid in full in immediately
available funds to the Holder.  In the
event the Companies fail to pay the Redemption Amount on the Redemption Payment
Date, then such Redemption Notice shall be null and void.


 


ARTICLE III

[INTENTIONALLY OMITTED]


 


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ARTICLE IV

EVENTS OF DEFAULT AND DEFAULT RELATED PROVISIONS


 


4.1           Events of Default.  The occurrence of an Event of Default under
the Security Agreement shall constitute an event of default (“Event of Default”) hereunder.


 


4.2           Default Interest.  Following the occurrence and during the
continuance of an Event of Default, the Companies shall, jointly and severally,
pay additional interest on the outstanding principal balance of this Note in an
amount equal to two percent (2%) per month, and all outstanding Obligations,
including unpaid interest, shall continue to accrue interest at such additional
interest rate from the date of such Event of Default until the date such Event
of Default is cured or waived.


 


4.3           Default Payment.  Following the occurrence and during the
continuance of an Event of Default, the Holder, at its option, may elect, in
addition to all rights and remedies of the Holder under the Security Agreement
and the other Ancillary Agreements and all obligations and liabilities of each
Company under the Security Agreement and the other Ancillary Agreements, to
require the Companies, jointly and severally, to make a Default Payment (“Default Payment”). 
The Default Payment shall be one hundred ten percent (110%) of the
outstanding principal amount of the Note, plus accrued but unpaid interest, all
other fees then remaining unpaid, and all other amounts payable hereunder.  The Default Payment shall be applied first to
any fees due and payable to the Holder pursuant to the Notes, the Security
Agreement and/or the Ancillary Agreements, then to accrued and unpaid interest
due on the Notes, the Security Agreement and then to the outstanding principal
balance of the Notes.  The Default
Payment shall be due and payable immediately on the date that the Holder has
exercised its rights pursuant to this Section 4.3.


 


ARTICLE V

MISCELLANEOUS


 


5.1           Issuance of New
Note.  Upon any partial payment 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 Companies to the Holder
for the principal balance of this Note and interest which shall not have been
paid.


 


5.2           Cumulative
Remedies.  The remedies under this
Note shall be cumulative.


 


5.3           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.


 


5.4           Notices.    Any notice herein required or permitted to
be given shall be in writing and shall be deemed effective: (a) upon personal
delivery to the party notified, (b) when sent by confirmed telex or facsimile
if sent during normal business hours of the recipient, if not, then on the next
business day, (c) five days after having been sent by registered or certified
mail,


 


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return receipt
requested, postage prepaid, or (d) one day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written
verification of receipt.  All
communications shall be sent to the respective Company at the address provided
for such Company in the Security Agreement executed in connection herewith, and
to the Holder at the address provided in the Security Agreement for such
Holder, with a copy to John E. Tucker, Esq., 825 Third Avenue, 14th Floor, New York,
New York 10022, facsimile number (212) 541-4434, or at such other address as
the respective Company or the Holder may designate by ten days advance written
notice to the other parties hereto.


 


5.5           Amendment
Provision.  The term “Note” and all
references thereto, as used throughout this instrument, shall mean this
instrument as originally executed, or if later amended or supplemented, then as
so amended or supplemented, and any successor instrument as such successor
instrument may be amended or supplemented.


 


5.6           Assignability.  This Note shall be binding upon each Company
and its successors and assigns, and shall inure to the benefit of the Holder
and its successors and assigns, and may be assigned by the Holder in accordance
with the requirements of the Security Agreement.  No Company may assign any of its obligations
under this Note without the prior written consent of the Holder, any such
purported assignment without such consent being null and void.


 


5.7           Cost of
Collection.  In case of any Event of
Default under this Note, the Companies shall, jointly and severally, pay the
Holder’s reasonable costs of collection, including reasonable attorneys’ fees.


 


5.8           Governing Law,
Jurisdiction and Waiver of Jury Trial.


 


(a)           THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.


 


(b)           EACH COMPANY HEREBY CONSENTS AND
AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK,
STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY
CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND, AND THE HOLDER, ON THE
OTHER HAND, PERTAINING TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OF THE OTHER
ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE,
THE SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTS; PROVIDED,
THAT EACH COMPANY ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO
BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW
YORK; AND FURTHER  PROVIDED, THAT NOTHING IN THIS NOTE SHALL BE
DEEMED OR OPERATE TO PRECLUDE THE HOLDER FROM BRINGING SUIT OR TAKING OTHER
LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE
ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE HOLDER.  EACH


 


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COMPANY EXPRESSLY SUBMITS
AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN
ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS.  EACH COMPANY HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE
COMPANY AT THE ADDRESS SET FORTH IN THE SECURITY AGREEMENT AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.


 


(c)           EACH COMPANY DESIRES THAT ITS
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS.  THEREFORE, TO ACHIEVE THE BEST COMBINATION OF
THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, EACH COMPANY HERETO
WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT
TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN
THE HOLDER, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR
INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS
NOTE, THE SECURITY AGREEMENT, ANY OTHER ANCILLARY AGREEMENT OR THE TRANSACTIONS
RELATED HERETO OR THERETO.


 


5.9           Severability.  In the event that any provision of this Note
is invalid or unenforceable under any applicable statute or rule of law, then
such provision shall be deemed inoperative to the extent that it may conflict
therewith and shall be deemed modified to conform with such statute or rule of
law.  Any such provision which may prove
invalid or unenforceable under any law shall not affect the validity or
enforceability of any other provision of this Note.


 


5.10         Maximum 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 rate
permitted by such law, any payments in excess of such maximum rate shall be
credited against amounts owed by the Companies to the Holder and thus refunded
to the Companies.


 


5.11         Security Interest.  The Holder has been granted a security
interest (i) in certain assets of the Companies as more fully described in the
Security Agreement and (ii) pursuant to the Stock Pledge Agreement dated as of
the date hereof.


 


5.12         Construction.  Each party acknowledges that its legal
counsel participated in the preparation of this Note and, therefore, stipulates
that the rule of construction that ambiguities are to be resolved against the
drafting party shall not be applied in the interpretation of this Note to favor
any party against the other.


 


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5.13         Registered
Obligation.  This Note is intended to
be a registered obligation within the meaning of Treasury Regulation Section
1.871-14(c)(1)(i) and the Companies (or their agent) shall register this Note
(and thereafter shall maintain such registration) as to both principal and any
stated interest.  Notwithstanding any
document, instrument or agreement relating to this Note to the contrary,
transfer of this Note (or the right to any payments of principal or stated
interest thereunder) may only be effected by (i) surrender of this Note and
either the reissuance by the Companies of this Note to the new holder or the
issuance by the Company of a new instrument to the new holder, or (ii) transfer
through a book entry system maintained by the Company (or its agent), within
the meaning of Treasury Regulation Section 1.871-14(c)(1)(i)(B).


 


[Balance of page
intentionally left blank; signature page follows]


 


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IN WITNESS WHEREOF, each Company has caused
this Secured Non-Convertible Term Note to be signed in its name effective as of
this 28 day of February 2006.


 


	
  WITNESS:

  	
  SMALL WORLD KIDS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
  WITNESS:

  	
  SMALL WORLD TOYS

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 


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EXHIBIT A


 


OTHER COMPANIES


 


Small World Toys,
a California corporation


 


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