HEADLINERS ENTERTAINMENT GROUP, INC. Secured Convertible Debenture

 

                                                       Dated:   August 19, 2005

 

   NEITHER THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS

   CONVERTIBLE HAVE 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.

 

No. CCP-2                                                             $7,953,698

 

                     HEADLINERS ENTERTAINMENT GROUP, INC.

                        Secured Convertible Debenture

 

                               Due July 1, 2007

 

      This Secured Convertible Debenture (the "Debenture") is issued by

HEADLINERS ENTERTAINMENT GROUP, INC., a Delaware corporation (the

"Obligor"), to CORNELL CAPITAL PARTNERS, LP (the "Holder"), pursuant to that

certain Securities Purchase Agreement (the "Securities Purchase Agreement")

of even date herewith.

 

        WHEREAS, on January 25, 2005, the Obligor issued a 12% secured

promissory note to the Holder in the principal amount of Four Million Five

Hundred Thousand Dollars ($4,500,000) (the "January Promissory Note") which

was secured by a pledge of assets by the Obligor in accordance with the

Security Agreement dated January 25, 2005 between the Obligor and the Holder

(the "January Security Agreement");

 

        WHEREAS, on March 21, 2005, the Obligor issued a 12% secured

promissory note to the Holder in the principal amount of Three Million

Dollars ($3,000,000) (the "March Promissory Note") which was secured by a

pledge of assets by the Obligor in accordance with the Security Agreement

dated March 21, 2005 between the Obligor and the Holder (the "March Security

Agreement") and a pledge of 100,000,000 shares of the Obligor's Common Stock

in accordance with the Pledge and Escrow Agreement dated March 21, 2005

among the Obligor, the Holder, and David Gonzalez, Esq. (the "Pledge

Agreement");

 

        WHEREAS, in connection with an additional loan the Holder made to the

Obligor in the form of a convertible debenture on June 28, 2005, the Obligor

and the Holder amended the Pledge Agreement (the "Amended Pledge Agreement")

so that the shares pledged as security for the March Promissory Note were

also pledged to secure the obligations of the Obligor under the January

Promissory Note and the June 28, 2005 convertible debenture.  

 

        WHEREAS, the parties desire that this Debenture amend and supersede

the January Promissory Note and the March Promissory Note and that all

amounts owed to the Holder under the January Promissory Note and the March

Promissory Note are hereinafter memorialized by and contained in this

Debenture;  

 

         WHEREAS, the principal amount of this Debenture shall include the

entire outstanding principal sum of the January Promissory Note of Four

Million Five Hundred Thousand Dollars ($4,500,000) plus the accrued and

unpaid interest of $305,767 on the January Promissory Note from January 25,

2005 through the date hereof and the entire outstanding principal sum of the

March Promissory Note of Three Million Dollars ($3,000,000) plus the accrued

and unpaid interest of $148,931 on the March Promissory Note from March 21,

2005 through the date hereof; and

 

        WHEREAS, this Debenture shall be secured by a pledge of assets of the

Obligor pursuant to the January Security Agreement and the March Security

Agreement, and secured by the pledge of 100,000,000 shares of Common Stock

pursuant to the Amended Pledge Agreement.  

 

      FOR VALUE RECEIVED, the Obligor hereby promises to pay to the Holder

or its successors and assigns the principal sum of Seven Million Nine

Hundred Fifty Three Thousand Six Hundred Ninety Eight Dollars ($7,953,698)

together with accrued but unpaid interest on or before July 1, 2007 (the

"Maturity Date") in accordance with the following terms:

 

        Interest.   Interest shall accrue on the outstanding principal balance

hereof at an annual rate equal to twelve percent (12%).   Interest shall be

calculated on the basis of a 360-day year and the actual number of days

elapsed, to the extent permitted by applicable law.   Interest hereunder will

be paid to the Holder or its assignee   (as defined in Section 4) in whose

name this Debenture is registered on the records of the Obligor regarding

registration and transfers of Debentures (the "Debenture Register").

 

        Monthly Payments.   The Obligor shall make monthly scheduled payments

("Scheduled Payments") consisting of principal and accrued interest as set

forth on the Payment Schedule attached as "Schedule A".   The first Scheduled

Payment shall be due and payable on December 1, 2005, and each subsequent

Scheduled Payment shall be due and payable on the first day of each

subsequent calendar month until the Maturity Date.   Each Scheduled Payment

shall consist of $400,000 of principal, plus accrued and unpaid interest as

set forth in the Payment Schedule. All payments in respect of the

indebtedness evidenced hereby shall be made in collected funds, and shall be

applied to principal, accrued interest and charges and expenses owing under

or in connection with this Debenture in such order as the Holder elects,

except that payments shall be applied to accrued interest before principal.  

Notwithstanding the foregoing, this Debenture shall become due and

immediately payable, including all accrued but unpaid interest, upon the

closing of a Funding Event (as defined in Section 4 hereof) or pursuant to

an Event of Default (as defined in Section 2 hereof).

 

        Right of Redemption.   If the closing bid price of the of the Obligor's

Common Stock, as reported by Bloomberg, LP, is less than the Conversion

Price, the Obligor at its option shall have the right, with three (3)

business days advance written notice (the "Redemption Notice"), to redeem a

portion or all amounts outstanding under this Debenture prior to the

Maturity Date or any Scheduled Payment date in an amount equal to the

principal amount outstanding and accrued interest being redeemed, plus a

redemption premium of ten percent (10%) of the principal amount paid

("Redemption Premium") (collectively referred to as the "Redemption

Amount").   The Obligor shall deliver to the Holder the Redemption Amount on

the third (3rd) business day after the Redemption Notice.  

 

        In the event that the Obligor redeems a portion of the amount

outstanding under this Debenture, or the Holder converts a portion of the

principal amount outstanding and accrued interest under this Debenture as

contemplated herein, the Obligor shall be entitled to an off-set of the

amount of principal and accrued interest due pursuant to the Schedule

Payment equal to the amount of principal and accrued interest redeemed or

converted (the "Off-Set Amount").   In such event the Obligor shall still be

obligated to make a Scheduled Payment reduced by the Off-Set Amount as

contemplated hereunder.  

 

        Notwithstanding the foregoing in the event that the Obligor has

elected to redeem a portion of the outstanding principal amount and accrued

interest under this Debenture the Holder shall still be entitled to

effectuate Conversions as contemplated hereunder.  

 

      Security Agreements.   This Debenture is secured by the January

Security Agreement, the March Security Agreement, and the Amended Pledge

Agreement.

 

        Consent   of Holder to Sell Capital Stock or Grant Security Interests.

Except for the   capital stock to be issued pursuant to the Standby Equity

Distribution Agreement of even date herewith between the Obligor and Cornell

Capital Partners, LP, so long as any of the principal amount or interest on

this Debenture remains unpaid and unconverted, the Obligor shall not,

without the prior consent of the Holder, (i) issue or sell any common stock

or preferred stock with or without consideration, (ii) issue or sell any

preferred stock, warrant, option, right, contract, call, or other security

or instrument granting the holder thereof the right to acquire common stock

with or without consideration, (iii) enter into any security instrument

granting the holder a security interest in any of the assets of the Obligor,

or (iv) file any registration statements on Form S-8.

 

        This Debenture is subject to the following additional provisions:

 

         Section 1.      This Debenture is exchangeable for an equal aggregate

principal amount of Debentures of different authorized denominations, as

requested by the Holder surrendering the same. No service charge will be

made for such registration of transfer or exchange.

 

         Section 2.      Events of Default.

 

        (a)      An "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 charges in respect of this Debenture, free of any claim of

subordination, as and when the same shall become due and payable (whether on

a Scheduled Payment due date, a Conversion Date or the Maturity Date or by

acceleration or otherwise);

 

                (ii)     The Obligor shall fail to observe or perform any other

covenant, agreement or warranty contained in, or otherwise commit any breach

or default of any provision of this Debenture (except as may be covered by

Section 2(a)(i) hereof) or any Transaction Document (as defined in Section

4) which is not cured with in the time prescribed;

 

                (iii)    The Obligor or any subsidiary of the Obligor shall

commence, or there shall be commenced against the Obligor or any subsidiary

of the Obligor under any applicable bankruptcy or insolvency laws as now or

hereafter in effect or any successor thereto, or the Obligor or any

subsidiary of the Obligor 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 Obligor or any subsidiary

of the Obligor or there is commenced against the Obligor or any subsidiary

of the Obligor any such bankruptcy, insolvency or other proceeding which

remains undismissed for a period of 61 days; or the Obligor or any

subsidiary of the Obligor is adjudicated insolvent or bankrupt; or any order

of relief or other order approving any such case or proceeding is entered;

or the Obligor or any subsidiary of the Obligor suffers any appointment of

any custodian, private or court appointed receiver or the like for it or any

substantial part of its property which continues undischarged or unstayed

for a period of sixty one (61) days; or the Obligor or any subsidiary of the

Obligor makes a general assignment for the benefit of creditors; or the

Obligor or any subsidiary of the Obligor shall fail to pay, or shall state

that it is unable to pay, or shall be unable to pay, its debts generally as

they become due; or the Obligor or any subsidiary of the Obligor shall call

a meeting of its creditors with a view to arranging a composition,

adjustment or restructuring of its debts; or the Obligor or any subsidiary

of the Obligor shall by any act or failure to act expressly indicate its

consent to, approval of or acquiescence in any of the foregoing; or any

corporate or other action is taken by the Obligor or any subsidiary of the

Obligor for the purpose of effecting any of the foregoing;

 

                (iv)     The Obligor or any subsidiary of the Obligor shall

default in any of its obligations under any other debenture or any mortgage,

credit agreement or other facility, indenture agreement, factoring agreement

or other instrument under which there may be issued, or by which there may be

secured or evidenced any indebtedness for borrowed money or money due under

any long term leasing or factoring arrangement of the Obligor or any

subsidiary of the Obligor in an amount exceeding $100,000, 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;

 

                (v)      The Common Stock shall cease to be quoted for trading or

listed for trading on either the Nasdaq OTC Bulletin Board ("OTC"), Nasdaq

SmallCap Market, New York Stock Exchange, American Stock Exchange or the

Nasdaq National Market (each, a "Subsequent Market") and shall not again be

quoted or listed for trading thereon within five (5) Trading Days of such

delisting;

                (vi)     The Obligor or any subsidiary of the Obligor shall be a

party to any Change of Control Transaction (as defined in Section 4);

 

                (vii)    The Obligor shall fail to file the Underlying Shares

Registration Statement   (as defined in Section 4) with the Commission (as

defined in Section 4), or the Underlying Shares Registration Statement shall

not have been declared effective by the Commission, in each case within the

time periods set forth in the Registration Rights Agreement of even date

herewith between the Obligor and the Holder;

 

                (viii)   If the effectiveness of the Underlying Shares

Registration Statement lapses for any reason or the Holder shall not be

permitted to resell the shares of Common Stock underlying this Debenture

under the Underlying Shares Registration Statement, in either case, for more

than five (5) consecutive Trading Days or an aggregate of eight Trading Days

(which need not be consecutive Trading Days);

 

                (ix)     The Obligor shall fail for any reason to deliver Common

Stock certificates to a Holder prior to the fifth (5th) Trading Day after a

Conversion Date or the Obligor shall provide notice to the Holder, including

by way of public announcement, at any time, of its intention not to comply

with requests for conversions of this Debenture in accordance with the terms

hereof;

 

                (x)      The Obligor shall fail for any reason to deliver the

payment in cash pursuant to a Buy-In (as defined herein) within three (3)

days after notice is claimed delivered hereunder;

 

        (b)     During the time that any portion of this Debenture is

outstanding, if any Event of Default has occurred, the full principal amount

of this Debenture, together with interest and other amounts owing in respect

thereof, to the date of acceleration shall become at the Holder's election,

immediately due and payable in cash, provided however, the Holder may

request (but shall have no obligation to request) payment of such amounts in

Common Stock of the Obligor.   If an Event of Default occurs and remains

uncured, the Conversion Price shall be reduced to Two Cents ($0.02).   In

addition to any other remedies, the Holder shall have the right (but not the

obligation) to convert this Debenture at any time after (x) an Event of

Default or (y) the Maturity Date at the Conversion Price then in-effect.  

The Holder need not provide and the Obligor hereby waives any presentment,

demand, protest or other notice of any kind, and the Holder may immediately

and without expiration of any grace period enforce any and all of its rights

and remedies hereunder and all other remedies available to it under

applicable law. Such declaration may be rescinded and annulled by Holder at

any time prior to payment hereunder. No such rescission or annulment shall

affect any subsequent Event of Default or impair any right consequent

thereon.   Upon an Event of Default, notwithstanding any other provision of

this Debenture or any Transaction Document, the Holder shall have no

obligation to comply with or adhere to any limitations, if any, on the

conversion of this Debenture or the sale of the Underlying Shares.  

 

        Section 3.      Conversion.

 

        (a) (i)    Conversion at Option of Holder.

 

                (A)      This Debenture shall be convertible into shares of

Common Stock at the option of the Holder, in whole or in part at any time and

from time to time, after the Original Issue Date (as defined in Section 4)

(subject to the limitations on conversion set forth in Section 3(a)(ii)

hereof). The number of shares of Common Stock issuable upon a conversion

hereunder equals the quotient obtained by dividing (x) the outstanding

amount of this Debenture to be converted by (y) the Conversion Price (as

defined in Section 3(c)(i)).   The Obligor shall deliver Common Stock

certificates to the Holder prior to the Fifth (5th) Trading Day after a

Conversion Date.

 

                (B)      Notwithstanding anything to the contrary contained

herein, if on any Conversion Date:   (1) the number of shares of Common Stock

at the time authorized, unissued and unreserved for all purposes, or held as

treasury stock, is insufficient to pay principal and interest hereunder in

shares of Common Stock; (2) the Common Stock is not listed or quoted for

trading on the OTC or on a Subsequent Market; (3) the Obligor has failed to

timely satisfy its conversion; or (4) the issuance of such shares of Common

Stock would result in a violation of Section 3(a)(ii), then, at the option

of the Holder, the Obligor, in lieu of delivering shares of Common Stock

pursuant to Section 3(a)(i)(A), shall deliver, within three (3) Trading Days

of each applicable Conversion Date, an amount in cash equal to the product

of the outstanding principal amount to be converted plus any interest due

therein divided by the Conversion Price and multiplied by the highest

closing price of the stock from date of the conversion notice till the date

that such cash payment is made.

 

        Further, if the Obligor shall not have delivered any cash due in

respect of conversion of this Debenture or as payment of interest thereon by

the fifth (5th) Trading Day after the Conversion Date, the Holder may, by

notice to the Obligor, require the Obligor to issue shares of Common Stock

pursuant to Section 3(c), except that for such purpose the Conversion Price

applicable thereto shall be the lesser of the Conversion Price on the

Conversion Date and the Conversion Price on the date of such Holder demand.

Any such shares will be subject to the provisions of this Section.

 

                (C)      The Holder shall effect conversions by delivering to the

Obligor a completed notice in the form attached hereto as Exhibit A (a

"Conversion Notice").   The date on which a Conversion Notice is delivered is

the "Conversion Date." Unless the Holder is converting the entire principal

amount outstanding under this Debenture, the Holder is not required to

physically surrender this Debenture to the Obligor in order to effect

conversions.   Conversions hereunder shall have the effect of lowering the

outstanding principal amount of this Debenture plus all accrued and unpaid

interest thereon in an amount equal to the applicable conversion. The Holder

and the Obligor shall maintain records showing the principal amount

converted and the date of such conversions. In the event of any dispute or

discrepancy, the records of the Holder shall be controlling and

determinative in the absence of manifest error.

 

                (ii)     Certain Conversion Restrictions.

 

                 (A)      A Holder may not convert this Debenture or receive

shares of Common Stock as payment of interest hereunder to the extent such

conversion or receipt of such interest payment would result in the Holder,

together with any affiliate thereof, beneficially owning (as determined in

accordance with Section 13(d) of the Exchange Act and the rules promulgated

thereunder) in excess of 4.9% of the then issued and outstanding shares of

Common Stock, including shares issuable upon conversion of, and payment of

interest on, this Debenture held by such Holder after application of this

Section.   Since the Holder will not be obligated to report to the Obligor

the number of shares of Common Stock it may hold at the time of a conversion

hereunder, unless the conversion at issue would result in the issuance of

shares of Common Stock in excess of 4.9% of the then outstanding shares of

Common Stock without regard to any other shares which may be beneficially

owned by the Holder or an affiliate thereof, the Holder shall have the

authority and obligation to determine whether the restriction contained in

this Section will limit any particular conversion hereunder and to the

extent that the Holder determines that the limitation contained in this

Section applies, the determination of which portion of the principal amount

of this Debenture is convertible shall be the responsibility and obligation

of the Holder.   If the Holder has delivered a Conversion Notice for a

principal amount of this Debenture that, without regard to any other shares

that the Holder or its affiliates may beneficially own, would result in the

issuance in excess of the permitted amount hereunder, the Obligor shall

notify the Holder of this fact and shall honor the conversion for the

maximum principal amount permitted to be converted on such Conversion Date

in accordance with the periods described in Section 3(a)(i)(A) and, at the

option of the Holder, either retain any principal amount tendered for

conversion in excess of the permitted amount hereunder for future

conversions or return such excess principal amount to the Holder. The

provisions of this Section may be waived by a Holder (but only as to itself

and not to any other Holder) upon not less than 65 days prior notice to the

Obligor. Other Holders shall be unaffected by any such waiver.

 

        (b) (i)    Nothing herein shall limit a Holder's right to pursue

actual damages or declare an Event of Default pursuant to Section 2 herein

for the Obligor 's failure to deliver certificates representing shares of

Common Stock upon conversion within the period specified herein and such

Holder shall have the right to pursue all remedies available to it at law or

in equity including, without limitation, a decree of specific performance

and/or injunctive relief, in each case without the need to post a bond or

provide other security. The exercise of any such rights shall not prohibit

the Holder from seeking to enforce damages pursuant to any other Section

hereof or under applicable law.

 

                (ii)     In addition to any other rights available to the Holder,

if the Obligor fails to deliver to the Holder such certificate or

certificates pursuant to Section 3(a)(i)(A) by the fifth (5th) Trading Day

after the Conversion Date, and if after such fifth (5th) Trading Day the

Holder purchases (in an open market transaction or otherwise) Common Stock

to deliver in satisfaction of a sale by such Holder of the Underlying