NOTE PURCHASE AGREEMENT
By and Between
St. Cloud Capital Partners L.P.
and
Small World Kids, Inc.
Dated:
As of September 7, 2004
NOTE PURCHASE AGREEMENT
Note Purchase Agreement dated as of September 7, 2004 (this "Agreement")
by and between Small World Kids, Inc., a Nevada corporation (the "Company"), and
St. Cloud Capital Partners L.P. ("Purchaser").
RECITALS
A. Purchaser desires to purchase from the Company, and the Company desires
to sell to Purchaser, upon the terms and subject to the conditions of this
Agreement, a note (the "Note") in the aggregate principal amount of two million
dollars ($2,000,000) (the "Loan Amount").
B. The Company shall issue to Purchaser, without additional consideration,
an aggregate of 650,000 shares of the Company's Common Stock (the "Shares") and
warrants (the "Warrants") in the form of Exhibit B attached hereto, evidencing
Purchaser's right to acquire an aggregate of 350,000 shares of the Company's
Common Stock (the "Warrant Shares");
C. The Company and the Purchaser are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act")
and the provisions of Regulation D ("Regulation D") as promulgated thereunder;
and
D. This Agreement, the Note, the Warrants, the Letter Agreement (as
hereinafter defined) and the Lock-Up Agreement (as hereinafter defined) are
sometimes hereinafter collectively referred to as the "Transaction Documents."
AGREEMENTS
NOW, THEREFOR, in consideration of their respective promises contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged by the parties, the Company and Purchaser hereby
agree as follows:
1. ISSUANCE SALE AND DELIVERY OF SECURITIES.
a. Issuance of the Note. Subject to the terms and conditions set
forth in this Agreement and in reliance upon the representations and warranties
contained herein, the Company agrees to issue and sell to Purchaser and
Purchaser hereby agrees to purchase from the Company, the Note. The Note or any
portion thereof shall (a) at the option of Purchaser, be convertible into shares
of the Company's Common Stock (the "Note Shares") and (b) be substantially in
the form attached hereto as Exhibit A.
b. Closing. The closing of the purchase and sale of the Note (the
"Closing") shall be held at the offices of Loeb & Loeb LLP in Los Angeles,
California, or at such other location as shall be agreed upon by the parties
hereto on or before September 15, 2004 (the "Outside Date"). At the Closing, the
Company shall deliver the Note, the Warrants and the Shares to Purchaser and
Purchaser shall pay to the Company the Loan Amount, less a closing fee of
$80,000 (the "Closing Fee"), by cashiers' check, certified funds or wire
transfer. Concurrently with the receipt of the Loan Amount, the Company shall
also pay to St. Cloud Capital LLC a management fee (the "Management Fee") of
$80,000 pursuant to the Letter Agreement attached as Exhibit C. Notwithstanding
anything to the contrary, if the conditions to Closing set forth in Article 6
have been satisfied by the Company by the Outside Date, and (a) the Closing
occurs after the Outside Date, no Closing Fee shall be paid or deducted, and (b)
if the Closing occurs after September 17, 2004, no Management Fee shall be
payable. The date of the Closing is referred to herein as the Closing Date.
2. PURCHASER'S REPRESENTATIONS AND WARRANTIES.
Purchaser understands, agrees with, and represents and warrants to the
Company with respect to the purchase hereunder, that:
a. Investment Purposes; Compliance With Securities Act. Purchaser is
acquiring the Note, the Warrants and the Shares for Purchaser's own account, for
investment only and not with a view towards, or in connection with, the public
sale or distribution thereof, except pursuant to sales registered under or
exempt from the Securities Act.
b. Accredited Purchaser Status. Purchaser is an "accredited
Purchaser" as that term is defined in Rule 501 (a) of Regulation D. Purchaser is
a sophisticated purchaser and has such knowledge and experience in financial and
business matters that the Purchaser is capable of evaluating the merits and
risks of an investment made pursuant to this Agreement.
c. Reliance on Exemptions. Purchaser understands the Note, the
Warrants and the Shares are being offered and sold to in reliance on specific
exemptions from the registration requirements of the applicable United States
federal and state securities laws and that the Company is relying upon the truth
and accuracy of, and Purchaser's compliance with, the representations,
warranties, acknowledgments, understandings, agreements and covenants of the
Purchaser set forth herein in order to determine the availability of such
exemptions and the eligibility of Purchaser to acquire the Note, the Warrants
and the Shares.
d. Information. Purchaser and the advisors of the Purchaser, if any,
have been furnished with all material information relating to the business,
finances and operations of the Company and material information relating to the
offer and sale of the Note, the Warrants and the Shares that have been requested
by the Purchaser. Purchaser and Purchaser's advisors, if any, have been afforded
the opportunity to ask all such questions of the Company as they have in their
discretion deemed advisable. Purchaser understands that Purchaser's investment
in the Note, the Warrants and the Shares involves a high degree of risk.
Purchaser has sought such accounting, legal and tax advice as it has considered
necessary to an informed investment decision with respect to the investment made
pursuant to this Agreement.
e. Transfer or Resale. Purchaser understands that: (i) the Note, the
Warrants, the Warrant Shares, the Note Shares and the Shares have not been
registered under the Securities Act of 1933, as amended (the "Securities Act")
or any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless either (a) subsequently registered thereunder or (b)
Purchaser shall have delivered to the Company an opinion by counsel reasonably
satisfactory to the Company, in form, scope and substance reasonably
satisfactory to the Company, to the effect that the Note, the Note Shares, the
Shares and/or the Warrants, as the case may be, to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration, and (ii) except as expressly provided herein, neither the
Company nor any other person is under any obligation to register such Note, the
Note Shares, the Shares, the Warrant Shares and/or the Warrants under the
Securities Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder.
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f. Legends. The Note, the Warrants, the Shares, the Note Shares and
the Warrant Shares shall bear the following legend:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR, IF APPLICABLE, STATE SECURITIES LAWS. THIS SECURITY MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENSE OF AN EFFECTIVE
REGISTRATION STATEMENT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SMALL
WORLD KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED."
g. Authorization; Enforcement. The Transaction Documents as to which
Purchaser is a party have been duly and validly authorized, executed and
delivered by Purchaser and are each and collectively valid and binding
agreements of Purchaser enforceable in accordance with their terms, except as
enforceability may be limited by bankruptcy, insolvency, moratorium,
liquidation, or similar laws relating to, or affecting, generally the
enforcement of creditors' rights and remedies or by other equitable principles
of general application.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company understands, agrees with, and represents and warrants to
Purchaser that:
a. Organization and Qualification. The Company and its subsidiaries
are duly organized and existing in good standing under the laws of the
respective jurisdictions in which they are incorporated and have the requisite
corporate power to own their properties and to carry on their business as now
being conducted. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary and where the failure so to qualify would have a Material Adverse
Effect. "Material Adverse Effect" as used herein means any material adverse
effect on the operations, properties or financial condition of the Company and
its subsidiaries taken as a whole.
b. Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform the Transaction
Documents, to issue and sell the Note in accordance with the terms hereof, and
to perform its obligations under the Note in accordance with the requirements of
the same, (ii) the execution, delivery and performance of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated hereby and thereby have been duly authorized by the Company's Board
of Directors and no further consent or authorization of the Company, its Board
of Directors, or its shareholders is required, (iii) the Transaction Documents
have been duly and validly authorized, executed and delivered by the Company,
and (iv) the Transaction Documents constitute the valid and binding obligations
of the Company enforceable against the Company in accordance with their
respective terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting, generally, the enforcement of creditors' rights and
remedies or by other equitable principles of general application.
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c. No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby will not (i) result in a violation of the Articles of
Incorporation or Bylaws of the Company or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party, or result in a violation of
any law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations) applicable to the Company or any of its
subsidiaries or by which any property or asset of the Company or any of its
subsidiaries is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a material adverse effect).
d. Consents. Except for the filing of a Form D with the United
States Securities and Exchange Commission, the Company is not required to obtain
any consent, authorization or order of, or make any filing or registration with,
any court or governmental agency in order for it to execute, deliver or perform
any of its obligations under the Transaction Documents.
e. SEC Reports. The Company has filed all proxy statements, reports
and other documents required to be filed by it under the Securities Exchange Act
of 1934 as amended (the "Exchange Act"). The Company has furnished Purchaser
with copies of (i) its Annual Report on Form 10-K for the fiscal year ended June
30, 2003, Form 8-K filed June 4, 2004, as amended on June 16, 2004 and August
31, 2004, and its Quarterly Report on Form 10-QSB for the quarter ended June 30,
2004, as amended on August 31, 2004 (collectively, the "SEC Reports"). The SEC
Reports were in substantial compliance with the requirements of its respective
form and neither the SEC Reports, nor the financial statements (and the notes
thereto) included in the SEC Reports, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
f. Absence of Certain Changes. Since June 30, 2004, there has been
no material adverse change and no material adverse development in the business,
properties, operation, financial condition, results of operations or prospects
of the Company.
g. Absence of Litigation. Except as set forth on Schedule 3(g),
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board or body pending or, to the knowledge of the Company,
threatened against or affecting the Company, wherein an unfavorable decision,
ruling or finding would have a Material Adverse Effect or which would adversely
affect the validity or enforceability of, or the authority or ability of the
Company to perform its obligations under, this Agreement or any of the documents
contemplated herein.
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h. Title to Assets and Liens. Except as set forth on Schedule 3(h),
the Company has good and marketable title to the Assets owned by it and the
valid and enforceable right to receive and/or use each of the Assets in which
the Company has any other interest, free and clear of all Liens. As used herein
(i) "Liens" shall mean any lien, encumbrance, pledge, mortgage, security
interest, lease, charge, conditional sales contract, option, restriction,
reversionary interest, right of first refusal, voting trust arrangement,
preemptive right, claim under bailment or storage contract, easement or any
other adverse claim or right whatsoever; and (ii) "Assets" shall mean all of the
goodwill, assets, properties and rights of every nature, kind and description,
whether tangible or intangible, real, personal or mixed, wherever located and
whether or not carried or reflected on the books and records of the Company,
which are owned by the Company or in which the Company has any interest
(including the right to use).
i. Capitalization. Attached as Schedule 3(i) is a true and correct
description of the capitalization of the Company. Additionally, the Company owns
10,000 shares of Small World Toys, Inc. representing all of the issued and
outstanding capital stock of Small World Toys.
j. Minute Books. The minute books of the Company provided to
Purchaser contain a complete summary of all meetings of directors and
shareholders since the time of incorporation and reflect all transactions
referred to in such minutes accurately in all material respects.
4. COVENANTS.
a. Best Efforts. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 5
and 6 of this Agreement.
b. Securities Laws. The Company agrees to timely file all reports
and other documents required to be filed with the SEC, specifically, a Form D
(or equivalent form required by applicable state law) with respect to the Note
Shares and Warrants if and as required under Regulation D and applicable state
securities laws and to provide a copy thereof to Purchaser promptly after such
filing.
c. Expenses. Each party shall pay such party's expenses in
connection with the transactions contemplated by the Agreement except that the
Company concurrently with the execution of this Agreement will pay to Purchaser
up to $5,000 to cover in full Purchaser's legal costs in connection with this
Agreement.
d. Use of Proceeds. The Company shall use the net proceeds from the
sale of the Note for working capital and general corporate purposes.
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e. Board Seat. During the period that the Note is outstanding, Xxxx
Xxxxxxx will be appointed to the Company's board of directors for such period,
provided that the Company shall have no obligation to provide Xx. Xxxxxxx with
any compensation otherwise made available to its other outside directors except
that Xx. Xxxxxxx shall be entitled to be reimbursed for his reasonable out of
pocket expenses upon providing documentation therefor. In addition, as long as
Purchaser owns in excess of 500,000 shares of the Company (subject to adjustment
for stock splits, recapitalizations, etc.), a designee of Purchaser reasonably
acceptable to the Company shall be entitled to an observer seat on the board of
directors. On or before the Closing, Xx. Xxxxxxx shall submit to the Company an
undated letter of resignation in connection with his board of directors'
appointment.
f. Security Interest. Purchaser has been advised by the Company that
(a) the Company's credit agreement with Manufacturers' Bank prohibits the
placing of liens on the property of Small World Toys without the consent of such
bank, and (b) the Company is currently engaged in discussions with one or more
financial institutions for a replacement credit facility. It shall be a
condition to the Company entering into any such replacement credit facility that
the lender permit the Company to grant a security interest in favor of Purchaser
in the assets of Small World Toys which security interest will be subordinate to
the lien of such lender pursuant to an intercreditor's agreement reasonably
acceptable to Purchaser. Notwithstanding the foregoing, if for whatever reason
the Company has not granted to Purchaser a security interest in the assets of
Small World Toys, Inc. which security interest shall have the priority described
in the Note (or such other credit enhancement reasonably acceptable to
Purchaser) by November 30, 2004, then the number of Warrant Shares shall
increase by 100,000 without any further action on the part of the parties and
Purchaser shall issue a new Warrant for such increased number of Warrant Shares
on the same terms as Exhibit B.
5. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligations of the Company hereunder are subject to the satisfaction,
on or before the Closing, unless otherwise specified, of each of the following
conditions, provided that these conditions are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion:
a. Each of the Company and Purchaser shall have executed the
Transaction Documents as to which it is a party.
b. The representations and warranties of Purchaser shall be true and
correct in all material respects as of the Closing as though made at that time
(except for representations and warranties that speak as of a specific date).
Purchaser shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by Purchaser at or prior to the Closing.
c. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
herein.
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d. All consents, approval, authorizations and orders required to be
obtained and all registrations, filings and notices required to be made with or
given to any regulatory authority or person as provided herein shall have been
made.
e. Purchaser shall have entered into the Lock Up Agreement attached
hereto as Exhibit D with respect to the Shares, the Warrant Shares and the Note
Shares.
f. Purchaser shall execute such documentation as may be reasonably
requested by the Company to subordinate the obligations of the Company under the
Note to the Senior Indebtedness of the Company (as such term is defined in the
Note) from time to time outstanding.
6. CONDITIONS TO PURCHASER'S OBLIGATION TO PURCHASE.
The obligations of Purchaser are subject to the satisfaction, on or before
the Closing, unless otherwise specified, of each of the following conditions,
provided that these conditions are for the sole benefit of Purchaser and may be
waived by Purchaser at any time in its sole discretion:
a. The Company shall have executed the Transaction Documents.
b. The representations and warranties of the Company shall be true
and correct in all material respects as of the Closing (except for
representations and warranties that speak as of a specific date). The Company
shall have performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the Company at or prior to the Closing. The
Purchaser may require a certificate, executed by the Chief Executive Officer of
the Company, dated as of the Closing, to the foregoing effect and as to such
other matters as may be reasonably requested by Purchaser.
c. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
herein.
d. All consents, approval, authorizations and orders required to be
obtained and all registrations, filings and notices required to be made with or
given to any regulatory authority or person as provided herein shall have been
made.
e. Purchaser shall receive evidence reasonably satisfactory to it
that the holder of the Term Note (as such term is defined in the Note) agrees to
defer payment of principal under the Term Note until the Note is paid in full.
7. REGISTRATION
The Company shall include the Shares, the Note Shares and the Warrant
Shares in a registration statement to be filed by the Company in connection with
the resale of shares of the Company's Common Stock (the "Put Financing")
issuable pursuant to Stock Purchase Agreements dated as of September 3, 2004
(the "Purchase Agreements) between the Company and each of Pewter Hill Partners,
LLC, Infinium Investment Partners, LLC and Wire Mill Partners III, LLC (the "Put
Purchasers").
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8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law and Venue. This Agreement 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 Agreement, 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 Agreement (including also all Exhibits or
Schedules hereto) or the transaction(s) contemplated herein may be accomplished
in any manner provided by law. The parties hereto agree 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.
b. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and signature pages from such counterparts have been delivered.
c. Headings; Gender, Etc. The headings of this Agreement are for
convenience of reference and shall not form a part of, or affect the
interpretation of this Agreement. As used herein, the masculine shall refer to
the feminine and neuter, the feminine to the masculine and neuter, and the
neuter to the masculine and feminine, as the context may require. As used
herein, unless the context clearly requires otherwise, the words "herein,"
"hereunder" and "hereby," shall refer to this entire Agreement and not only to
the Section or paragraph in which such word appears. If any date specified
herein falls upon a Saturday, Sunday or public or legal holidays, the date shall
be construed to mean the next business day following such Saturday, Sunday or
public or legal holiday. For purposes of this Agreement, a "business day" is any
day other than a Saturday, Sunday or public or legal holiday.
d. Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor Purchaser makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.
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f. Notices. Any notices required or permitted to be given under the
terms of this Agreement shall be sent by U.S. Mail or delivered personally or by
courier or via facsimile (if via facsimile, to be followed within three (3)
business days by an original of the notice document via U.S. Mail or courier)
and shall be effective five (5) days after being placed in the mail, if mailed,
certified or registered, return receipt requested, or upon receipt, if delivered
personally or by courier or by facsimile, in each case properly addressed to the
party to receive the same. The addresses for such communications shall be:
If to the Company: Small World Kids, Inc.
0000 Xxxxxxxxxx Xxxxxxx
Xxxxxx Xxxx, Xxxxxxxxxx 00000
Attention: Xxxxx Xxxx
Fax Number: 000-000-0000
With a copy to: Loeb & Loeb LLP
00000 Xxxxx Xxxxxx Xxxxxxxxx, Xxxxx 0000
Xxx Xxxxxxx, Xxxxxxxxxx 00000
Attention: Xxxxx X. Xxxxxxxx
Fax Number: 000-000-0000
If to Purchaser: St. Cloud Capital Partners L.P.
00000 Xxxxxxxx Xxxxxxxxx, Xxxxx 0000
Xxx Xxxxxxx, Xxxxxxxxxx 00000
Attention: Xxxx X. Xxxxxxx
Fax Number: 000-000-0000
With a copy to: Xxxxxx and Xxxxxxx, LLP
000 Xxxx Xxxxx Xxxxxx, Xxxxx 0000
Xxx Xxxxxxx, Xxxxxxxxxx 00000
Attention: Xxxx Xxxxxx
Fax Number: 000-000-0000
If to the Purchaser, at the address on the signature of this Agreement. Each
party shall provide written notice to the other party of any change in address.
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns.
Neither the Company nor Purchaser shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other (which
consent shall not be unreasonably withheld), and in any event any assignee of
Purchaser shall be an accredited investor (as defined in Regulation D), in the
written opinion of counsel who is reasonably satisfactory to Company, and such
assignment shall be in form, substance and scope reasonably satisfactory to the
Company. Notwithstanding anything herein to the contrary, Purchaser may pledge
the Note as collateral for a bona fide loan with a third party lender, and such
pledge shall not be considered an assignment in violation of this Agreement so
long as it is made in compliance with all applicable law.
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h. No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. The representations and warranties of the Company and
Purchaser contained in Sections 2 and 3 and the agreements and covenants set
forth in Section 4 shall survive the final Closing of the purchase and sale of
the Note purchased and sold hereby.
j. Further Assurance. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
k. Remedies. No provision of this Agreement providing for any
specific remedy to a party shall be construed to limit such party to the
specific remedy described, and any other remedy that would otherwise be
available to such party at law or in equity shall be so available. Nothing in
this Agreement shall limit any rights a party may have with any applicable
federal or state securities laws with respect to the transactions contemplated
hereby.
l. Termination. If the Company has satisfied all of the conditions
set forth in Section 6, if the Closing has not occurred by the Outside Date, in
addition to any other right or remedy, at law or in equity, the Company shall
have the right to terminate this Agreement by notice to the Purchaser.
[Remainder of the page intentionally left blank]
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IN WITNESS WHEREOF, Purchaser and the Company have caused this Note
Purchase Agreement to be duly executed as of the date first written above.
THE COMPANY:
SMALL WORLD KIDS, INC.
By:
-----------------------------
Name: Xxxxx Xxxx
Title: Chief Executive Officer
PURCHASER:
ST. CLOUD CAPITAL PARTNERS L.P.
By: SCGP, LLC
Its: General Partner
By:
-----------------------------
Name: Xxxx X. Xxxxxxx
Title: Senior Managing Member
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Schedule 3(g)
Litigation
o The Company has received a letter from an attorney claiming that Small
World Kids owes $180,000 as a finder's fee in connection with the
acquisition of Small World Toys which claim is subject to indemnification
by Xxxx Xxxxxxxxxx.
Schedule 3(h)
Pledged Assets
o Promissory Note dated May 20, 2004 in the aggregate principal amount of
five million dollars ($5,000,000) executed by Small World Kids, Inc. in
favor of SWT, LLC is secured by a majority (8,333) shares of Small World
Toys.
o Credit Facility by and between Small World Toys, as Borrower and
Manufacturer's Bank as Lender is secured by all of the assets of Small
World Toys.
o 1,667 shares of Small World Toys have been pledged to Xxxx Xxxxxxxxxx to
secure two promissory notes dated May 20, 2004 to Xx. Xxxxxxxxxx.
Schedule 3(i)
Capitalization
Small World Kids
Capitalization Table
Beneficial Ownership
Sav-On
Purchase Exchange Team
of Xxxxx Agmt Sports
05/20/04 05/20/04 Shares Total Shares
Xxxxxxx and Xxxxx Xxxx, as trustees of FFT 1,648,714 13,509,843 15,158,557
SWT Investments, LLC 1,846,467 15,130,261 16,976,728
Phoenix Capital Opportunity, LLC 820,652 6,724,560 7,545,212
Xxxxx Xxxxxxxx, Inc. 1,173,134 9,612,858 10,785,992
Xxxxx X. Xxxxxxxx and Xxxxxx X. Xxxxxxxx, as
trustees of the Ficksman Family Trust 41,033 336,228 377,261
Xxxxxxx Xxxxx 650,000 650,000
Other Holders 977,000 977,000
Xxxxx Xxxx
Xxxx Xxxxxx
Xxx Xxxxxx
All other employees
Shares remaining for issuance
-------------------------------------------------------
Total Shares 5,530,000 45,313,750 1,627,000 52,470,750
=======================================================
Percentage Options Fully Diluted Percentage
Xxxxxxx and Xxxxx Xxxx, as trustees of FFT 28.9% 15,158,557 25.9%
SWT Investments, LLC 32.4% 16,976,728 29.0%
Phoenix Capital Opportunity, LLC 14.4% 7,545,212 12.9%
Xxxxx Xxxxxxxx, Inc. 20.6% 10,785,992 18.4%
Xxxxx X. Xxxxxxxx and Xxxxxx X. Xxxxxxxx, as
trustees of the Ficksman Family Trust 0.7% 377,261 0.6%
Xxxxxxx Xxxxx 1.2% 650,000 1.1%
Other Holders 1.9% 977,000 1.7%
Xxxxx Xxxx 2,600,000 2,600,000 4.4%
Xxxx Xxxxxx 600,000 600,000 1.0%
Xxx Xxxxxx 520,000 520,000 0.9%
All other employees 2,400,000 2,400,000 4.1%
Shares remaining for issuance
----------------------------------------------
Total Shares 100.0% 6,120,000 58,590,750 100%
==============================================
PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
OR, IF APPLICABLE, 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 OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO SMALL WORLD KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.
NOTE
FOR VALUE RECEIVED, Small World Kids, Inc. a Nevada corporation (the
"Borrower") with principal offices located at 0000 Xxxxxxxxxx Xxxxxxx, Xxxxxx
Xxxx, Xxxxxxxxxx 00000, hereby promises to pay to St. Cloud Capital Partners
L.P. (the "Holder") or order, without demand, the sum of Two Million Dollars
($2,000,000) with interest at the rate of 10% per annum. The principal amount of
the Note shall be due and payable on the Maturity Date (as hereinafter defined).
Capitalized term used herein but not otherwise defined shall have the meaning
assigned to those terms in that certain Note Purchase Agreement dated September
7, 2004, between the Borrower, the Holder and the other holders of notes of the
Borrower.
The following terms shall apply to this Note:
ARTICLE I
PAYMENT
1.1 Payment of Interest. Interest shall be due and payable in full
on the Maturity Date. However, that if the Note has not been paid in full by
February ___, 2005, commencing on the last day of the next month and on the last
day of each month thereafter until the Note is paid in full, Borrower shall make
interest payments on the unpaid principal amount, provided that any such
installment of interest may be deferred if, in the reasonable judgment of the
Company, such payment would impair the Company's ability to meet its obligations
as they become due. During the occurance and continuation of an Event of Default
the interest rate shall be increased by five (5%) per annum commencing on the
date when the Event of Default was declared by Holder.
1.2 Maturity Date. On the Maturity Date, the entire principal amount
and any accrued and unpaid interest shall be paid to the Holder without offset
or deduction of any kind. The Maturity Date shall be twelve (12) months from the
Closing Date.
1.3 Prepayment. The Note may be prepaid in whole or in part (subject
to a minimum payment of $100,000), without premium or penalty.
1.4 Priority. The Note shall rank senior to the Company's
indebtedness in the aggregate principal amount of five million dollars
($5,000,000) to SWT, LLC evidenced by the Term Note dated as of May 20, 2004
(the "Term Note") to the effect that no payment of principal may be made under
the Term Note until this Note is paid in full . The Note shall be subordinated
to all existing or reasonably approved Senior Indebtedness of the Company.
Senior Indebtedness shall mean all indebtedness of the Company regardless of
whether incurred on, before or after the Closing Date (i) for money borrowed
from any bank, savings and loan association, insurance company or any other
financial institution engaged in the business of lending funds which is
evidenced by notes, bonds, debentures or other written obligations and (ii) any
other indebtedness in writing signed by the Company which, by its terms,
provides that it is senior in priority to the payment to the Note.
1.5 Mandatory Repayment. The Company shall pay to Holder
seventy-five percent (75%) of the net proceeds received by the Company from the
Put Financing (and, to the extent permitted by the terms of such investment, any
other equity financing) to be applied to the repayment of the Note until the
Note is repaid in full, such prepayments to be applied first to accrued interest
and then to unpaid principal. Notwithstanding the foregoing, if the Company
enters into any other debt financing up to a cumulative amount of $750,000
(which in any event shall be on terms reasonably acceptable to Purchaser) which
requires prepayment from the net proceeds of equity financings, the Company
shall have the right to apply such seventy-five percent (75%) between Holder and
any other holders of debt on a pari passu basis.
ARTICLE II
EVENTS OF DEFAULT
2.1 Events of Default. The occurrence of any of the following events
of default ("Event of Default") shall, at the option of the Holder hereof, make
the principal balance then remaining unpaid hereon and all other amounts payable
hereunder immediately due and payable:
(a) Failure to Pay Principal and/or Interest. The Borrower fails to
pay any installment of principal or interest hereon when due and such failure
continues for a period of ten (10) days after the due date.
(b) Breach of Covenant. The Borrower breaches any material covenant
or other term or condition of this Note or the Note Purchase Agreement in any
material respect and such breach, if subject to cure, continues for a period of
thirty (30) days after written notice to the Borrower from the Holder.
(c) Breach of Representations and Warranties. Any material
representation or warranty of the Borrower made herein in any Transactional
Document shall be false or misleading in any material respect.
(d) Receiver or Trustee. The Borrower shall make an assignment for
the benefit of creditors, or apply for or consent to the appointment of a
receiver or trustee for it or for a substantial part of its property or
business; or such a receiver or trustee shall otherwise be appointed.
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(e) Judgments. Any money judgment, writ or similar final process,
shall be entered or filed against Borrower or any of its property or other
assets for more than $500,000, and shall remain unvacated, unbonded or unstayed
for a period of forty-five (45) days.
(g) Bankruptcy. Bankruptcy, insolvency, reorganization or
liquidation proceedings or other proceedings or relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or against the
Borrower and if instituted against Borrower are not dismissed within 60 days of
initiation.
2.2 Enforcement. Upon the occurrence of any Event of Default, the
Holder may thereupon proceed to protect and enforce its rights 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 this Note held by it, and to
enforce any other legal or equitable right of the Holder.
ARTICLE III
CONVERSION
3.1 Right to Convert. In the event that the Borrower elects to
exercise its put rights under the Put Financing, it shall provide notice to
Holder (the "Put Notice") concurrently with its notice under the Purchase
Agreements. Upon receipt of such Notice, Holder shall have the right to convert
any unpaid principal portion and accrued interest on this Note into shares of
Borrower's Common Stock (the "Conversion Shares") by delivery to Borrower of a
Notice of Conversion within three business days from formal receipt of the Put
Notice at the conversion price equal to the average price per share of the Put
Financing for all tranches with respect to which the Borrower has the right to
exercise (the "Conversion Price"). Holder shall be entitled to exercise its
conversion rights hereunder only one time.
3.2 Issuance of Shares. Upon the delivery to Borrower of a Notice of
Conversion of the Holder's written request for conversion, Borrower shall issue
and deliver to the Holder within five (5) business days from the Conversion
Notice that number of shares of Common Stock for the portion of the Note
converted in accordance with the foregoing. The number of shares of Common Stock
to be issued upon each conversion of this Note shall be determined by dividing
that portion of the principal and accrued interest under the Note to be
converted by the Conversion Price. In the event that, after the Conversion,
shares have been issued pursuant to the Put Financing so that the average price
of the Put Financing becomes lower than the Conversion Price, the Borrower shall
issue to Holder such number of additional Conversion Shares based upon such
lower average price.
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ARTICLE IV
MISCELLANEOUS
4.1 Failure or Indulgence Not Waiver. No failure or delay on the
part of 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.
4.2 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 Holder is set forth on
the signature page hereto. The address and fax number of the Borrower is 0000
Xxxxxxxxxx Xxxxxxx, Xxxxxx Xxxx, Xxxxxxxxxx 00000, facsimile (000) 000-0000.
Both Holder and Borrower may change the address and fax number for service by
service of notice to the other as herein provided.
4.3 Amendment Provision. The term "Note" and all reference 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.
4.4 Assignability. This Note shall be binding upon the Borrower 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.
4.5 Cost of Collection. If default is made in the payment of this
Note, Borrower shall pay the Holder hereof reasonable costs of collection,
including reasonable attorneys' fees.
4.6 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
permitted by such law, any payments in excess of such maximum shall be credited
against amounts owed by the Borrower to the Holder and thus refunded to the
Borrower.
4.7 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 Agreement or the transaction(s) contemplated
herein may be accomplished in any manner provided by law. The parties hereto
agree 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.
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IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name
by its President on this __ day of September, 2004.
SMALL WORLD KIDS, INC.
By:
---------------------------------
Name: Xxxxx Xxxx
Title: Chief Executive Officer
Address of Borrower:
0000 Xxxxxxxxxx Xxxxxxx
Xxxxxx Xxxx, Xxxxxxxxxx 00000
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WARRANT
NEITHER THE SECURITIES REPRESENTED HEREBY NOR THE SECURITIES ISSUABLE UPON THE
EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE
OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF THIS WARRANT OR SUCH SECURITIES, WHICH
COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS
WARRANT OR SUCH SECURITIES, AS APPLICABLE, MAY BE OFFERED, SOLD, PLEDGED,
ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE
SECURITIES LAWS.
THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED HEREIN.
September __, 2004 350,000 Common Stock
Purchase Warrant
SMALL WORLD KIDS, INC.
Incorporated under the laws of the State of Nevada
Certificate for Common Stock Purchase Warrants
THIS CERTIFIES that, for value received, St. Cloud Capital Partners L.P.
(together with all permitted assigns, the "Holder") is entitled to subscribe
for, and purchase from, SMALL WORLD KIDS, INC., a Nevada corporation (the
"Company"), upon the terms and conditions set forth herein, at any time or from
time to time during the period commencing on the date hereof and terminating
four years from the date hereof (the "Exercise Period"), up to three hundred
fifty thousand (350,000) shares of Common Stock (the "Warrant Shares"). This
Warrant is exercisable at an exercise price per share equal to the lesser of
$.50 per share (as such price may be adjusted as provided herein, the "Exercise
Price") or the average price of the Put Financing; provided, however, that upon
the occurrence of any of the events specified in Sections 5 or 6 hereof, the
rights granted by this Warrant, including the number of shares of Common Stock
to be received upon such exercise, shall be adjusted as therein specified.
Capitalized term used herein but not otherwise defined shall have the
meaning assigned to those terms in that certain Note Purchase Agreement dated as
of September 7, 2004, between the Holder and the Company.
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1. Exercise of Warrant.
This Warrant may be exercised during the Exercise Period, either in whole
or in part, by the surrender of this Warrant (with the election at the end
hereof duly executed) to the Company at its office at 0000 Xxxxxxxxxx Xxxxxxx,
Xxxxxx Xxxx, Xxxxxxxxxx 00000 or at such other place as is designated in writing
by the Company, together with a certified or bank cashier's check payable to the
order of the Company in an amount equal to the product of the Exercise Price and
the number of Warrant Shares for which this Warrant is being exercised.
2. Rights Upon Exercise; Delivery of Securities.
Upon each exercise of the Holder's rights to purchase Warrant Shares, the
Holder shall be deemed to be the holder of record of the Warrant Shares,
notwithstanding that the transfer books of the Company shall then be closed or
certificates representing the Warrant Shares with respect to which this Warrant
was exercised shall not then have been actually delivered to the Holder. As soon
as practicable after each such exercise of this Warrant, the Company shall issue
and deliver to the Holder a certificate or certificates representing the Warrant
Shares issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a Warrant
evidencing the right of the Holder to purchase the balance of the aggregate
number of Warrant Shares purchasable hereunder as to which this Warrant has not
been exercised or assigned.
3. Registration of Transfer and Exchange.
Any Warrants issued upon the transfer or exercise in part of this Warrant
shall be numbered and shall be registered in a warrant register (the "Warrant
Register") as they are issued. The Company shall be entitled to treat the
registered holder of any Warrant on the Warrant Register as the owner in fact
thereof for all purposes, and shall not be bound to recognize any equitable or
other claim to, or interest in, such Warrant on the part of any other person,
and shall not be liable for any registration or transfer of Warrants which are
registered or to be registered in the name of a fiduciary or the nominee of a
fiduciary unless made with the actual knowledge that a fiduciary or nominee is
committing a breach of trust in requesting such registration of transfer, or
with the knowledge of such facts that its participation therein amounts to bad
faith. This Warrant shall be transferable on the books of the Company only upon
delivery thereof duly endorsed by the Holder or by his duly authorized attorney
or representative, or accompanied by proper evidence of succession, assignment,
or authority to transfer. In all cases of transfer by an attorney, executor,
administrator, guardian, or other legal representative, duly authenticated
evidence of his, her, or its authority shall be produced. Upon any registration
of transfer, the Company shall deliver a new Warrant or Warrants to the person
entitled thereto. This Warrant may be exchanged, at the option of the Holder
thereof, for another Warrant, or other Warrants of different denominations, of
like tenor and representing in the aggregate the right to purchase a like number
of Warrant Shares (or portions thereof), upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall have no
obligation to cause Warrants to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Securities Act and the rules and regulations thereunder.
7
4. Reservation of Shares.
The Company shall at all times reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of providing for
the exercise of the Warrants, such number of shares of Common Stock as shall,
from time to time, be sufficient therefor. The Company represents that all
shares of Common Stock issuable upon exercise of this Warrant are duly
authorized and, upon receipt by the Company of the full payment for such Warrant
Shares, will be validly issued, fully paid, and nonassessable, without any
personal liability attaching to the ownership thereof and will not be issued in
violation of any preemptive or similar rights of stockholders.
5. Antidilution.
(a) In the event that the Company shall at any time; (i) declare a
dividend on the outstanding Common Stock payable in shares of its capital stock,
(ii) subdivide the outstanding Common Stock; (iii) combine the outstanding
Common Stock into a smaller number of shares; or (iv) issue any shares of its
capital stock by reclassification of the Common Stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), then, in each case, the Exercise Price
per Warrant Share in effect at the time of the record date for the determination
of stockholders entitled to receive such dividend or distribution or of the
effective date of such subdivision, combination, or reclassification shall be
adjusted so that it shall equal the price determined by multiplying such
Exercise Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such action, and the
denominator of which shall be the number of shares of Common Stock outstanding
after giving effect to such action. Such adjustment shall be made successively
whenever any event listed above shall occur and shall become effective at the
close of business on such record date or at the close of business on the date
immediately preceding such effective date, as applicable.
(b) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may be.
(c) In any case in which this Section 5 shall require that an
adjustment in the number of Warrant Shares be made effective as of a record date
for a specified event, the Company may elect to defer, until the occurrence of
such event, issuing to the Holder, if the Holder exercised this Warrant after
such record date, the Warrant Shares, if any, issuable upon such exercise over
and above the number of Warrant Shares issuable upon such exercise on the basis
of the number of shares of Common Stock in effect prior to such adjustment;
provided, however, that the Company shall deliver to the Holder a due xxxx or
other appropriate instrument evidencing the Holder's right to receive such
additional shares of Common Stock upon the occurrence of the event requiring
such adjustment.
(d) Whenever there shall be an adjustment as provided in this
Section 5, the Company shall within 15 days thereafter cause written notice
thereof to be sent by registered mail, postage prepaid, to the Holder, at its
address as it shall appear in the Warrant Register, which notice shall be
accompanied by an officer's certificate setting forth the number of Warrant
Shares issuable and the Exercise Price thereof after such adjustment and setting
forth a brief statement of the facts requiring such adjustment and the
computation thereof, which officer's certificate shall be conclusive evidence of
the correctness of any such adjustment absent manifest error.
8
(e) The Company shall not be required to issue fractions of shares
of Common Stock or other capital stock of the Company upon the exercise of this
Warrant. If any fraction of a share of Common Stock would be issuable on the
exercise of this Warrant (or specified portions thereof), the Company shall
purchase such fraction for an amount in cash equal to the same fraction of the
average closing sale price (or average of the closing bid and asked prices, if
closing sale price is not available) of Common Stock for the 10 trading days
ending on and including the date of exercise of this Warrant.
(f) No adjustment in the Exercise Price per Warrant Share shall be
required if such adjustment is less than $0.05; provided, however, that any
adjustments which by reason of this Section 5 are not required to be made shall
be carried forward and taken into account in any subsequent adjustment.
(g) Whenever the Exercise Price payable upon exercise of this
Warrant is adjusted pursuant to subsection (a) above, the number of Warrant
Shares issuable upon exercise of this Warrant shall simultaneously be adjusted
by multiplying the number of Warrant Shares theretofore issuable upon exercise
of this Warrant by the Exercise Price in effect on the date hereof and dividing
the product so obtained by the Exercise Price, as adjusted.
6. Reclassification; Reorganization; Merger, etc.
(a) In case of any capital reorganization, other than in the cases
referred to in Section 5(a) hereof, or the consolidation or merger of the
Company with or into another corporation (other than a merger or consolidation
in which the Company is the continuing corporation, and which does not result in
any reclassification of the outstanding shares of Common Stock or the conversion
of such outstanding shares of Common Stock into shares of other stock or other
securities or property), or in the case of any sale, lease, or conveyance to
another corporation of the property and assets of any nature of the Company as
an entirety or substantially as an entirety (such actions being hereinafter
collectively referred to as "Reorganizations"), there shall thereafter be
deliverable upon exercise of this Warrant (in lieu of the number of Warrant
Shares theretofore deliverable) the number of shares of stock or other
securities or property to which a holder of the respective number of Warrant
Shares which would otherwise have been deliverable upon the exercise of this
Warrant would have been entitled upon such Reorganization if this Warrant had
been exercised in full immediately prior to such Reorganization. In case of any
Reorganization, appropriate adjustment, as determined in good faith by the Board
of Directors of the Company, shall be made in the application of the provisions
herein set forth with respect to the rights and interests of the Holder so that
the provisions set forth herein shall thereafter be applicable, as nearly as
possible, in relation to any shares or other property thereafter deliverable
upon exercise of this Warrant. Any such adjustment shall be made by, and set
forth in, a supplemental agreement between the Company, or any successor
thereto, and the Holder, with respect to this Warrant, and shall for all
purposes hereof conclusively be deemed to be an appropriate adjustment. The
Company shall not effect any such Reorganization unless, upon or prior to the
consummation thereof, the successor corporation, or if the Company shall be the
surviving corporation in any such Reorganization and is not the issuer of the
shares of stock or other securities or property to be delivered to holders of
shares of the Common Stock outstanding at the effective time thereof, then such
issuer, shall assume by written instrument the obligation to deliver to the
Holder such shares of stock, securities, cash, or other property as such Holder
shall be entitled to purchase in accordance with the foregoing provisions. In
the event of sale, lease, or conveyance or other transfer of all or
substantially all of the assets of the Company as part of a plan for liquidation
of the Company, all rights to exercise this Warrant shall terminate 30 days
after the Company gives written notice to the Holder that such sale or
conveyance or other transfer has been consummated.
9
(b) In case of any reclassification or change of the shares of
Common Stock issuable upon exercise of this Warrant (other than a change in par
value or from a specified par value to no par value, or as a result of a
subdivision or combination, but including any change in the shares into two or
more classes or series of shares), or in case of any consolidation or merger of
another corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change (including a
change to the right to receive cash or other property) of the shares of Common
Stock (other than a change in par value, or from no par value to a specified par
value, or as a result of a subdivision or combination, but including any change
in the shares into two or more classes or series of shares), the Holder or
holders of this Warrant shall have the right thereafter to receive upon exercise
of this Warrant solely the kind and amount of shares of stock and other
securities, property, cash, or any combination thereof receivable upon such
reclassification, change, consolidation, or merger by a holder of the number of
Warrant Shares for which this Warrant might have been exercised immediately
prior to such reclassification, change, consolidation, or merger. Thereafter,
appropriate provision shall be made for adjustments which shall be as nearly
equivalent as practicable to the adjustments in Section 5.
(c) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of shares of Common Stock and to
successive consolidations, mergers, sales, leases, or conveyances. 7. Notice of
Certain Events.
In case at any time the Company shall propose:
(a) to pay any dividend or make any distribution on shares of Common
Stock in shares of Common Stock or make any other distribution (other than
regularly scheduled cash dividends which are not in a greater amount per share
than the most recent such cash dividend) to all holders of Common Stock; or
(b) to issue any rights, warrants, or other securities to all
holders of Common Stock entitling them to purchase any additional shares of
Common Stock or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding shares
of Common Stock or any consolidation, merger, sale, lease, or conveyance of
property, as described in Section 6; or
10
(d) to effect any liquidation, dissolution, or winding-up of the
Company;
(e) to take any other action which would cause an adjustment to the
Exercise Price per Warrant Share; then, and in any one or more of such cases,
the Company shall give written notice thereof by registered mail, postage
prepaid, to the Holder at the Holder's address as it shall appear in the Warrant
Register, mailed at least 15 days prior to; (i) the date as of which the holders
of record of shares of Common Stock to be entitled to receive any such dividend,
distribution, rights, warrants, or other securities are to be determined; (ii)
the date on which any such reclassification, change of outstanding shares of
Common Stock, consolidation, merger, sale, lease, conveyance of property,
liquidation, dissolution, or winding-up is expected to become effective and the
date as of which it is expected that holders of record of shares of Common Stock
shall be entitled to exchange their shares for securities or other property, if
any, deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up; or (iii) the date of such action which would require
an adjustment to the Exercise Price per Warrant Share.
8. Charges and Taxes.
The issuance of any shares or other securities upon the exercise of this
Warrant and the delivery of certificates or other instruments representing such
shares or other securities shall be made without charge to the Holder for any
tax or other charge in respect of such issuance. The Company shall not, however,
be required to pay any tax which may be payable in respect of any transfer
involved in the issue and delivery of any certificate in a name other than that
of the Holder and the Company shall not be required to issue or deliver any such
certificate unless and until the person or persons requesting the issue thereof
shall have paid to the Company the amount of such tax or shall have established
to the satisfaction of the Company that such tax has been paid.
9. Periodic Reports.
The Company agrees that until all the Warrant Shares shall have been sold
pursuant to Rule 144 under the Securities Act, it shall use its best efforts to
keep current in filing all reports, statements, and other materials required to
be filed with the Commission to permit holders of the Warrant Shares to sell
such securities under Rule 144 under the Securities Act.
10. Legend.
Until sold pursuant to the provisions of Rule 144 or otherwise registered
under the Securities Act, the Warrant Shares issued on exercise of the Warrants
shall be subject to a stop transfer order and the certificate or certificates
representing the Warrant Shares shall bear the following legend:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE OFFERED, SOLD ,PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1)
A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR(2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF THE SECURITIES, WHICH COUNSEL AND OPINION
ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED,
SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
APPLICABLE STATE SECURITIES LAWS.
11
11. Loss; Theft; Destruction; Mutilation.
Upon receipt of evidence satisfactory to the Company of the loss, theft,
destruction, or mutilation of any Warrant (and upon surrender of any Warrant if
mutilated), and upon receipt by the Company of reasonably satisfactory
indemnification, the Company shall execute and deliver to the Holder thereof a
new Warrant of like date, tenor, and denomination.
12. Stockholder Rights.
The Holder of any Warrant shall not have, solely on account of such
status, any rights of a stockholder of the Company, either at law or in equity,
or to any notice of meetings of stockholders or of any other proceedings of the
Company, except as provided in this Warrant.
13. Governing Law.
This Warrant shall be construed in accordance with the laws of the State
California applicable to contracts made and performed within such State, without
regard to principles of conflicts of law.
[Remainder of page intentionally left blank; signatures follow]
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IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly
executed on the __ day of September, 2004.
SMALL WORLD KIDS, INC.
By:
----------------------------------
Name: Xxxxx Xxxx
Title: Chief Executive Officer
HOLDER
------------------------------
Name:
Title:
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FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, ________________ hereby sells, assigns, and transfers
unto __________________ a Warrant to purchase _________ shares of Common Stock,
$.001 par value, of Small World Kids, Inc., a Nevada corporation (the
"Company"), and does hereby irrevocably constitute and appoint __________
attorney to transfer such Warrant on the books of the Company, with full power
of substitution.
Dated: _____________ Signature: _____________
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ELECTION TO EXERCISE
To: Small World Kids, Inc.
0000 Xxxxxxxxxx Xxxxxxx
Xxxxxx Xxxx, Xxxxxxxxxx 00000
Attention: Xxxxx Xxxx
Fax: 000-000-0000
The undersigned hereby exercises his, her, or its rights to purchase
______________ shares of Common Stock, $.001 par value ("the Common Stock"), of
Small World Kids, Inc. a Nevada corporation (the "Company"), covered by the
within Warrant and tenders payment herewith in the amount of $______ in
accordance with the terms thereof, and requests that certificates for the
securities constituting such shares of Common Stock be issued in the name of,
and delivered to:
-----------------------------------------------------------------------
(Print Name, Address, and Social Security or Tax Identification Number)
Further, if such number of shares of Common Stock shall not constitute all such
shares of Common Stock covered by the within Warrant, that a new Warrant for the
balance of the shares of Common Stock covered by the within Warrant shall be
registered in the name of, and delivered to, the undersigned at the address
stated below.
Dated: Name:
----------------------------- --------------------------
(Print)
Address:
------------------------ --------------------------
(Signature)
------------------------
------------------------
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Exhibit D
LOCK-UP AGREEMENT
September __, 2004
To St. Cloud Capital Partners L.P. ("Purchaser")
Re: Lock-Up Agreement
Ladies and Gentlemen:
Reference is made to that certain Note Purchase Agreement dated as of
September __, 2004 by and between Small World Kids, Inc., a Nevada corporation
(the "Company") and Purchaser (the "Note Purchase Agreement"), pursuant to which
(i) the Purchaser shall loan to the Company a gross amount of $2,000,000 (the
"Loan"), (ii) the Company shall issue a note (the "Note") to Purchaser
evidencing the Company's obligation to repay the Loan plus interest, in the
principal amount of $2,000,000 which Note is convertible at the option of
Purchaser into shares of the Company's Common Stock (the "Note Shares"), and
(iii) as additional consideration for the investment, the Company shall issue to
Purchaser 650,000 shares of its Common Stock (the "Shares") and warrants (the
"Warrants") evidencing Purchaser's right to acquire 350,000 shares of its Common
Stock (the "Warrant Shares").
Pursuant to the Note Purchase Agreement and the transactions contemplated
therein, the Company has granted Purchaser certain registration rights whereby
the Company agreed to include the Warrant Shares, the Shares and the Note Shares
(collectively the "Purchaser Securities") in the registration statement
("Registration Statement") which will be filed by the Company with the
Securities and Exchange Commission (the "SEC") in connection with the equity
financing of $12,000,000 contemplated by the Securities Purchase Agreements,
dated as of September 3, 2004 by and between the Company and each of Wire Mill
Partners III, LLC, Infinium Investment Partners, LLC and Pewter Hill Partners,
LLC.
In light of the foregoing transactions, the Company has determined that
the prospect of sales of the Purchaser Securities held by the Purchaser within
three months, in the case of the Warrant Shares, and one year, in the case of
the Shares and the Note Shares, from the date that the Registration Statement is
declared effective by the SEC (each, a "Lock-Up Period") could be detrimental to
the Company. Therefor, the Company has requested that, except as set forth
herein, Purchaser agrees not to sell certain of the Purchaser Securities until
the expiration of the applicable Lock-Up Period.
The undersigned recognizes that the Purchaser Securities are, or may be,
subject to certain restrictions on its transferability, including those imposed
by the federal and securities laws. Notwithstanding these restrictions,
Purchaser has agreed to enter into this letter agreement to further assure
certain of the Purchaser Securities, now held by Purchaser, will not enter the
public market.
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Purchaser, therefor, hereby acknowledges and agrees that Purchaser will
not, directly or indirectly, without the prior written consent of the Company,
sell, offer, contract to sell, pledge, grant any option to purchase or otherwise
dispose (collectively, a "Disposition") any of the Purchaser Securities (the
"Lock-Up Shares"), at any time during the applicable Lock-Up Period. The
foregoing restriction is expressly agreed to preclude, among other Dispositions,
the holder of Lock-Up Shares from engaging in any hedging or other transaction
which is designed to or reasonably expected to lead to or result in a
Disposition of Lock-Up Shares during the applicable Lock-Up Period, even if such
Lock-Up Shares would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Lock-Up Shares or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Lock-Up Shares.
Notwithstanding the foregoing, Purchaser may transfer the Lock-Up Shares
(i) as a bona fide gift or gifts, (ii) as a distribution to limited partners or
shareholders of such person; provided, however, that in any such case it shall
be a condition to the transfer that the transferee execute an agreement stating
that the transferee is receiving and holding the Lock-Up Shares subject to the
provisions of this letter agreement. Any transferor transferring pursuant to
subsections (i) or (ii) above shall notify the Company in writing prior to the
transfer. There shall be no further transfer of such Lock-Up Shares except in
accordance with this letter agreement.
The undersigned also agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of any
Lock-Up Shares. Further, the transfer agent shall deliver a consent in writing
to the Company, confirming its obligation to notify the Company in writing upon
each removal of the stop transfer instructions.
Executed this __ day of September, 2004.
Very truly yours,
ST. CLOUD CAPITAL PARTNERS L.P.
By:
------------------------------
Name:
Title:
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