NOTE PURCHASE AGREEMENT
This
Note
Purchase Agreement (“Agreement”) is made and entered into as of October 6, 2006
by and among Small World Kids, Inc., a Nevada corporation (the “Parent”), SMALL
WORLD TOYS, a California corporation (“Subsidiary”) (the Parent and the
Subsidiary, each a “Company” and collectively the “Companies”), HONG KONG LEAGUE
CENTRAL CREDIT UNION, a Hong Kong Credit Union (“HKLCCU”), XXXXXXX XXXXXX &
COMPANY, a sole proprietorship (“KM & Co.”) (SBI and KM & Co., each a
“Purchaser” and collectively the “Purchasers”), and SBI ADVISORS, LLC, a
California limited liability company, in its capacity as administrative agent
for the Purchasers (in such capacity, the “Administrative Agent”).
RECITALS
A. Companies
are willing to sell to HKLCCU a note (the “HKLCCU Note”) in the face amount of
$302,500 (the “HKLCCU Face Amount”) with an investment amount of $275,000 (the
“HKLCCU Investment Amount”), upon the terms and subject to the conditions set
forth in this Agreement.
B. The
Companies are willing to sell to KM & Co. a note (the “KM & Co. Note”)
in the face amount of $27,500 (the “KM & Co. Face Amount”) with an
investment amount of $25,000 (the “KM & Co. Investment Amount”), upon the
terms and subject to the conditions set forth in this Agreement.
C. For
purposes of this Agreement, the term “Notes” refers collectively to the HKLCCU
Note and the KM & Co. Note, the term “Face Amount” means the aggregate of
the HKLCCU Face Amount and the KM & Co. Face Amount, and the term
“Investment Amount” means the aggregate of the HKLCCU Investment Amount and the
KM & Co. Investment Amount.
D. Purchasers
desire to purchase the Notes from the Companies upon the terms and subject
to
the conditions set forth in this Agreement.
E. The
capitalized terms used in this Agreement shall have the meanings assigned to
them in Annex
A.
TERMS
AND CONDITIONS
NOW,
THEREFORE, 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 Companies, Purchasers and the
Administrative Agent hereby agree as follows:
1. Issuance
of the Notes.
1.1 Note
Terms.
Subject
to the terms and conditions set forth in this Agreement, and in reliance upon
the representations and warranties contained herein, the Companies, in
consideration for the receipt of the Investment Amount, agrees to issue to
Purchasers, and each Purchaser, severally and not jointly, agrees to purchase
and accept from the Companies its Note. Interest on the Face Amount shall accrue
and be payable monthly in arrears until March 31, 2008, at which time all
accrued and unpaid interest, and the unpaid Face Amount, shall become
immediately due and payable. The Notes will be convertible into shares of the
Common Stock of the Parent (the “Note Shares”) at $1.10 per share (subject to
adjustment). The Notes shall be substantially in the form of Exhibit
A.
1.2 Stock
Purchase Warrants.
Concurrently
with the issuance of the Notes, the Companies hereby agree to issue Common
Stock
Purchase Warrants (each a “Warrant” and collectively, the “Warrants”) as
follows:
(a) To
Administrative Agent, a Warrant covering 137,500 shares of Parent’s Common Stock
with an exercise price of $1.10 per share, and
(b) To
KM
& Co., a Warrant covering 12,500 shares of Parent’s Common Stock with an
exercise price of $1.10 per share.
The
Common Stock Purchase Warrants shall be substantially in the form of
Exhibit
B.
1.3 Closing.
The
closing of the issuance of the Notes and the Warrants (the “Closing”) shall be
held at the offices of Xxxx & Xxxxx in Los Angeles, California, or at such
other location as shall be agreed upon by the parties hereto on or before
September 29, 2006. At the Closing, the Companies shall deliver the Notes
and the Warrants to Purchasers, and Purchasers shall pay to the Companies their
respective Investment Amounts. The date of the Closing is referred to herein
as
the Closing Date.
2. Security
Interest.
2.1 Grant
of Security Interest.
To
secure
prompt payment to Purchasers of the Obligations, each Company hereby assigns,
pledges and grants to Administrative Agent, for the benefit of Purchasers to
the
extent of their interests, a continuing security interest in and Lien upon
all
of the Collateral.
2.2 Perfection
of Security Interest.
Each
Company hereby authorizes Administrative Agent, for the benefit of Purchasers
to
the extent of their interests, to file any financing statements, continuation
statements or amendments thereto that (a) indicate the Collateral (i) as all
assets and personal property of such Company or words of similar effect,
regardless of whether any particular asset comprised in the Collateral falls
within the scope of Article 9 of the UCC of such jurisdiction, or (ii) as being
of an equal or lesser scope or with greater detail, and (b) contain any other
information required by Part 5 of Article 9 of the UCC for the sufficiency
or
filing office acceptance of any financing statement, continuation statement
or
amendment.
2.3 Non-Exclusive
License.
Each
Company hereby grants to Administrative Agent, for the benefit of Purchasers
to
the extent of their interests, an irrevocable, non-exclusive license
(exercisable upon the termination of this Agreement due to an occurrence and
during the continuance of an Event of Default without payment of royalty or
other compensation to such Company) to use, transfer, license or sublicense
any
Intellectual Property now owned, licensed to, or hereafter acquired by such
Company, and wherever the same may be located, and including in such license
access to all media in which any of the licensed items may be
recorded.
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3. Purchaser’s
Representations and Warranties.
Each
Purchaser, severally but not jointly, hereby represents and warrants to the
Companies as follows:
3.1 Investment
Purposes; Compliance With Securities Act.
Purchaser
is acquiring its Note, and upon conversion thereof, the Note Shares, and the
Warrants, and upon exercise thereof, the shares of Common Stock issuable upon
such exercise (the “Warrant Shares”) (collectively, the “Securities”) for its
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 of 1933, as amended (the
“Securities Act”).
3.2 Accredited
Purchaser Status.
Purchaser
is an “accredited investor” 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 Purchaser is capable of evaluating the
merits and risks of an investment made pursuant to this Agreement.
3.3 Reliance
on Exemptions.
Purchaser
understands the Securities 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 Companies are relying upon the
truth and accuracy of, and each Purchaser’s compliance with, the
representations, warranties, acknowledgments, understandings, agreements and
covenants of Purchasers set forth herein in order to determine the availability
of such exemptions and the eligibility of Purchasers to acquire the
Securities.
3.4 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 Securities that
have
been requested by the Purchaser. Purchaser and Purchaser’s advisors, if any,
have been afforded the opportunity to ask all questions of the Companies as
they
have in their discretion deemed advisable.
3.5 Transfer
or Resale.
Purchaser
understands that: (i) none of the Securities has been registered under 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 Parent an opinion by
counsel reasonably satisfactory to the Parent, in form, scope and substance
reasonably satisfactory to the Parent, to the effect that the Note, the Note
Shares, the Warrant or the Warrants Shares, 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 Companies nor any other person is under any obligation to register
the Securities under the Securities Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder.
3.6 Authority,
Validity and Enforceability.
This
Agreement has been duly and validly authorized, executed and delivered by
Purchaser and is the valid and binding agreement of Purchaser enforceable in
accordance with its 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.
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4. Representations
and Warranties of the Company.
Each
Company, jointly and severally, hereby represents and warrants to Purchasers
as
follows:
4.1 Organization
and Qualification.
It
is a
corporation, duly organized, validly existing and in good standing under the
laws of its jurisdictions or organization. It has the corporate power and
authority to own and operate its properties and assets and, insofar as it is
or
shall be a party thereto, (i) to execute and deliver this Agreement and the
Ancillary Agreements, (ii) to issue and sell the Notes and the Notes Shares
upon
conversion of the Notes, (iii) to issue and sell the Warrants and the Warrant
Shares upon exercise of the Warrants, and (iv) to carry out the provisions
of
this Agreement and the Ancillary Agreements and to carry on its business as
presently conducted. It is duly qualified and is authorized to do business
and
is in good standing as a foreign corporation in all jurisdictions in which
the
nature or location of its activities and of its properties (both owned and
leased) makes such qualification necessary, except for those jurisdictions
in
which failure to do so has not had, or could not reasonably be expected to
have,
individually or in the aggregate, a Material Adverse Effect.
4.2 Capitalization.
(a) The
authorized capital stock of the Parent, as of the date hereof, consists of
115,000,000 shares, of which 100,000,000 are share of Common Stock, par value
$0.001 per shares, 5,410,575 shares of which are issued and outstand, and
15,000,000 are shares of preferred stock, par value $0.01 per share of which
10,312,703 shares of Class A-1 Preferred Stock are issued and
outstanding.
(b) Except
as
disclosed on Schedule
4.2,
other
than: (i) the shares reserved for issuance upon the Parent’s stock option plans;
and (ii) shares which may be issued pursuant to this Agreement and the Ancillary
Agreements, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy or
stockholder agreements, or arrangements or agreements of any kind for the
purchase or acquisition from the Companies of any of its securities. Except
as
disclosed on Schedule
4.2,
neither
the offer, issuance or sale of any of the Notes or Warrants or the issuance
of
any of the Note Shares or Warrant Shares, nor the consummation of any
transaction contemplated hereby will result in a change in the price or number
of any securities of the Companies outstanding, under anti-dilution or other
similar provisions contained in or affecting any such securities.
(c) All
issued and outstanding shares of the Companies’ Common Stock and Preferred
Stock: (i) have been duly authorized and validly issued and are fully paid
and
non-assessable; and (ii) were issued in compliance with all applicable state
and
federal laws concerning the issuance of securities.
(d) The
rights, preferences, privileges and restrictions of the shares of Common Stock
and Preferred Stock are as stated in the Certificate of Incorporation (the
“Charter”) of the Companies. The Note Shares and the Warrant Shares have been
duly and validly reserved for issuance. When issued in compliance with the
provisions of this Agreement and the Parent’s Charter, the Note Shares and the
Warrant Shares will be validly issued, fully paid and non-assessable and will
be
free of any liens or encumbrances; provided, however, that such Note Shares
and
Warrant Shares may be subject to restrictions on transfer under state and/or
federal securities laws as set forth herein or as otherwise required by such
laws at the time a transfer is proposed.
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4.3 Authorization;
Binding Obligations.
All
corporate action on its part (including its officers and directors) necessary
for the authorization of this Agreement and the Ancillary Agreements, the
performance of all of its obligations hereunder and under the Ancillary
Agreement on the Closing Date and, the authorization, issuance and delivery
of
the Notes and the Warrants have been taken or will be taken prior to the Closing
Date. This Agreement and the Ancillary Agreements, when executed and delivered
and to the extent it is a party there, will be its valid and binding obligations
enforceable against it in accordance with its terms, except (i) as limited
by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
of
general application affecting the enforcement of creditors’ rights; and (ii)
general principals of equity that restrict the availability of equitable or
legal remedies. The issuance of the Notes and the subsequent conversion of
the
Notes for the Note Shares is not and will not be subject to any preemptive
rights or rights of first refusal that have not been properly waived or complied
with. The issuance of the Warrants and the subsequent exercise of the Warrants
for the Warrant Shares is not and will not be subject to any preemptive rights
or rights of first refusal that have not been properly waived or complied
with.
4.4 Liabilities.
Neither
it nor any of its Subsidiaries has any liability, except current liabilities
incurred in the ordinary course of business and liabilities disclosed in any
Exchange Act Filings.
4.5 Agreements.
Except
as
set forth on Schedule
4.5
or as
disclosed in any Exchange Act Filings:
(a) There
are
no agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which it or any of its Subsidiaries
is a
party or to its knowledge by which it is bound which may involve: (i)
obligations (contingent or otherwise) of, or payments to, it or any of its
Subsidiaries in excess of $50,000 (other than obligations of, or payments to,
it
or any of its Subsidiaries arising from purchase or sale agreements entered
into
in the ordinary course of business); or (ii) the transfer or license of any
patent, copyright, trade secret or other proprietary right to or from it (other
than licenses arising from the purchase of “off the shelf” or other standard
products); or (iii) provisions restricting the development, manufacture or
distribution or its or any of its Subsidiaries’ products or services; or (iv)
indemnification by it or any of its Subsidiaries with respect to infringements
of proprietary rights.
(b) Since
June 30, 2006 (the “Balance Sheet Date”) neither it nor any of its Subsidiaries
has: (i) declared or paid any dividend or authorized or made any distribution
upon or with respect to any class or series of its capital stock; (ii) incurred
any indebtedness for money borrowed or other liabilities (other than ordinary
course obligations) individually in excess of $50,000 or, in the case of
indebtedness and/or liabilities individually less than $50,000, in excess of
$100,000 in the aggregate; (iii) made any loans or advances to any Person not
in
excess, individually or in the aggregate, of $100,000, other than ordinary
course advances for travel expenses; or (iv) sold, exchanged or otherwise
disposed or any of its assets or rights, other than the sale of its inventory
in
the ordinary course of business.
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4.6 Title
to Properties and Assets; Liens, Etc.
Except
as
set forth on Schedule
4.6,
it and
each of its Subsidiaries has good and marketable title to its and their
respective properties and assets, and good title to its and their leasehold
interests, in each case subject to no Liens. All facilities, Equipment,
Fixtures, vehicles and other properties owned, leased or used by it or any
of
its Subsidiaries are in good operating condition and repair and are reasonably
fit and usable for the purposes for which they are being used. Except as set
forth on Schedule
4.6,
it and
each of its Subsidiaries is in compliance with al material terms of each lease
to which it is a party or otherwise bound.
4.7 Intellectual
Property.
(a) It
and
each of its Subsidiaries owns or possesses sufficient legal rights to all
Intellectual Property necessary for their respective businesses as now conducted
and, to its knowledge as presently proposed to be conducted, without any known
infringement of the right of others. There are no outstanding options, licenses
or agreements of any kind relating to its or any of its Subsidiaries’
Intellectual Property, nor is it or any of its Subsidiaries bound by or a party
to any options, licenses or agreements of any kind with respect to the
Intellectual Property of any other Person other than such licenses or agreements
arising from the purchase of “of the shelf” or standard products.
(b) Neither
it nor any of its Subsidiaries has received any communication alleging that
it
or any of its Subsidiaries has violated the Intellectual Property or other
proprietary rights or any other Person, nor is it or any of its Subsidiaries
aware of any basis therefore.
(c) Neither
it nor any of its Subsidiaries believes it is or will be necessary to utilize
any inventions, trade secrets or proprietary information of any of its employees
made prior to their employment by it or any of its Subsidiaries, except for
inventions, trade secrets or proprietary information that have been rightfully
assigned to it or any of its Subsidiaries.
4.8 Compliance
with Other Instruments.
Neither
it nor any of its Subsidiaries is in violation or default of (i) any term of
its
Charter or Bylaws, or (ii) any provisions of any indebtedness, mortgage,
indenture, contract, agreement, or instrument to which it is a party or by
which
it is bound or any judgment, decree, order or writ, which violation or default,
in the cause of this clause (ii) has had, or could reasonably be expected to
have, either individually or in the aggregate, a Material Adverse Effect. The
execution, delivery and performance of and compliance with this Agreement and
the Ancillary Agreements to which it is a party, and the issuance of the Notes
and the Warrants and the other Securities each pursuant hereto and thereto,
will
not, with or without the passage of time or giving of notice, result in any
such
material violation, or be in conflict with or constitute a default under any
such term or provision, or result in the creation of any Lien upon any of its
or
any of its Subsidiary’s properties or assets or the suspension, revocation,
impairment, forfeiture or non-renewal of any permit, license, authorization
or
approval applicable to it or any of its Subsidiaries, their businesses or
operations or any of their assets or properties.
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4.9 Compliance
with Laws; Permits.
Neither
it nor any of its Subsidiaries is in violation of the Xxxxxxxx-Xxxxx Act of
2002
or any regulation or rule promulgated thereunder or any rule or regulation
related thereto adopted at any time by the Securities and Exchange Commission
(the “SEC”) or any other applicable statute, rule, regulation, order or
restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of
its
properties which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. No governmental
orders, permissions, consents, approvals or authorizations are required to
be
obtained and no registration or declarations are required to be filed in
connection with the execution and delivery of this Agreement and any Ancillary
Agreement and with the issuance of any of the Securities, except as such as
have
been duly and validly obtained or file, or with respect to any filings that
must
be made after the Closing Date, as will be filed in a timely manner. It and
each
of its Subsidiaries has all material franchises, permits, licenses and any
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could, either individually or in the
aggregate, reasonably be expected to have a Material Adverse
Effect.
4.10 SEC
Reports.
Except
as
set forth on Schedule
4.10,
the
Companies have 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 Companies have furnished Purchasers with copies of: (i) its
Annual Report on Form 10-K for the fiscal year ended December 31, 2005, (ii)
its
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006,
and
(iii) its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
2006 (collectively, the “SEC Reports”). Except as set forth on Schedule
4.10,
each
SEC Report was, at the time of its filing, in substantial compliance with the
requirements of its respective form and none of the SEC Reports, nor the
financial statements (and the notes thereto) included in the SEC Reports, as
of
their respective filing dates, 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. Such financial statements have been prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the
notes thereto or (ii) in the case of unaudited interim statements, to the extent
they may not include footnotes or may be condensed) and fairly present in all
material respects the financial condition, the results of operations and cash
flows of the Companies and Subsidiaries, or a consolidated basis, as of, and
for, the periods presented in each such SEC Report.
4.11 Absence
of Certain Changes.
Since
June 30, 2006, there has been no material adverse change in the business,
properties, operation, financial condition, results of operations or prospects
of the Companies.
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4.12 Absence
of Litigation.
Except
as
set forth on Schedule
4.12,
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.
4.13 Registration
Rights.
Except
as
set forth on Schedule
4.13,
and
except as disclosed in Exchange Act Filings, neither it nor any of its
Subsidiaries is presently under any obligation, and neither it nor any of its
Subsidiaries has granted any rights, to register any of its or any of its
Subsidiaries’ presently outstanding securities or any of its securities that may
hereafter be issued.
4.14 Valid
Offering.
Assuming
the accuracy of the representations and warranties of Purchasers contained
in
this Agreement, the offer and issuance of the Notes and the Warrants, the offer
and issuance of the Note Shares upon the conversion of the Notes, and the offer
issuance of the Warrant Shares upon exercise of the Warrants, will be exempt
for
the registration requirements of the Securities Act, and will have been
registered or qualified (or exempt from registration and qualification) under
the registration, permit or qualification requirement of all applicable state
securities laws.
4.15 No
Integrated Offering.
Neither
it nor any of its subsidiaries or Affiliates, nor any Person acting on its
or
their behalf, has directly or indirectly made ay offers or sales of any security
or solicited any offers to buy any security under circumstances that would
cause
the offering of the Securities pursuant to this Agreement or any Ancillary
Agreement to be integrated with prior offerings by it for purposes of the
Securities Act which would prevent it from issuing such Securities, or any
of
them, pursuant to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions, nor will it or any of its
Affiliates or Subsidiaries take any action or steps that would cause the
offering of the Securities to be integrated with other offerings.
4.16 Stop
Transfer.
The
Securities are restricted securities as of the date of this Agreement. Neither
Company will issue any stop transfer order or other order impeding the sale
and
delivery of any of the Securities at such time as the Securities are registered
for public sale or an exemption form registration is available, except as
required by state and federal securities laws.
4.17 Dilution.
It
specifically acknowledges that the Parent’s obligation to issue the Note Shares
upon conversion of the Notes and the Warrant Shares upon exercise of the
Warrants is binding upon the Parent and enforceable regardless of the dilution
such issuances may have on the ownership interests of other shareholders of
the
Parent.
4.18 Patriot
Act.
It
certifies that, to the best of its knowledge, neither it nor any of its
Subsidiaries, has been designated, nor is or shall be owned or controlled,
by a
“suspected terrorist” as defined in Executive Order 13224. It hereby
acknowledges that Purchasers seek to comply with all applicable laws concerning
money laundering and related activities. In furtherance of those efforts, it
hereby represents and warrants and covenants that: (i) none of the cash or
property that it or any of its Subsidiaries will pay or will contribute to
Purchasers has been or shall be derived from, or related to, any activity that
is deemed criminal under United States law; and (ii) no contribution or payment
by it or any of its Subsidiaries to Purchasers, to the extent that they are
within its or any such Subsidiary’s control shall cause Purchasers to be in
violation of the United States Bank Secrecy Act, the United States International
Money Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. It shall promptly
notify Purchasers if any of these representations, warranties and covenants
cease to be true and accurate regarding it or any of its Subsidiaries. It shall
provide Purchasers with any additional information regarding it and each
Subsidiary thereof that Purchasers deem necessary or convenient to ensure
compliance with all applicable laws concerning money laundering and similar
activities. It understands and agrees that if at any time it is discovered
that
any of the foregoing representations, warranties and covenants are incorrect,
or
if otherwise required by applicable law or regulation related to money
laundering or similar activities, Purchasers may undertake appropriate action
to
ensure compliance with applicable law and regulation, including, but not limited
to, segregation and/or redemption of Purchasers’ investment in it. It further
understands that Purchasers may release confidential information about it and
its Subsidiaries and, if applicable, any underlying beneficial owners, to proper
authorities if Purchasers, in their sole discretion, determine that it is in
their best interests in light of relevant rules and regulations under the laws
set for in subsection (ii) above.
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4.19 Company
Name; Location of Offices.
Schedule
4.19
sets
forth each Company’s name as its appears in official filings in the state of its
organization, the type of entity of each Company, the organizational
identification number issued by each Company’s state of organization or a
statement that no such number has been issued, each Company’s state of
organization, and the location of each Company’s chief executive office,
corporate offices, warehouses, other locations of Collateral and locations
where
records with respect to Collateral are kept (including in each case the county
of such locations) and, except as set forth on Schedule
4.19,
such
locations have not changed during the preceding twelve months. As of the Closing
Date, during the prior five years, except as set forth on Schedule
4.19,
no
company has been known as or conducted business in any other name (including
trade names). Each Company has only one state of organization.
4.20 Full
Disclosure.
Neither
this Agreement or the Ancillary Agreements nor the exhibits or schedules hereto
or thereto nor any other document delivered by it to Purchasers or their
attorneys or agents in connection herewith or therewith or with the transactions
contemplated hereby or thereby, contain any untrue statement of a material
fact
not omit to state a material fact necessary in order to make the statements
contained herein or therein, in light of the circumstances in which they are
made, not misleading.
5. Negative
Covenants.
So
long
as any Obligations are owed under the Notes, without the prior written consent
of the Administrative Agent, neither of the Companies shall:
5.1 Incur
Indebtedness.
Incur
any
debt for borrowed money except for indebtedness owing to Laurus Master Fund,
Ltd. (“Laurus”) and St. Cloud Capital Partners, L.P. (“St. Cloud”) as
such facilities may exist from time to time, including any extensions or
modifications thereto;
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5.2 Distributions.
Make
any
cash payments in respect of its capital stock whether by dividends, redemption
or otherwise;
5.3 Sell
or Encumber Assets.
Sell,
transfer, mortgage, assign, pledge, lease, exchange, grant a security interest
in, or encumber any such Company’s assets, except to Purchasers, Laurus,
St. Cloud or otherwise in the ordinary course of business;
5.4 Change
of Business.
Engage
in
any business activities substantially different than those in which such Company
is presently engaged, or cease operations, liquidate, merge, transfer, acquire,
or consolidate with any other entity or dissolve;
5.5 Change
Name or Location.
Change
its legal name or trade name or any location of it chief executive offices,
corporate offices, warehouses or other locations of Collateral.
6. Conditions
to Issuance and Acceptance of the Notes.
6.1 Conditions
to Companies’ Obligations to Issue the Notes.
The
obligations of the Companies 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 Companies’ sole benefit
and may be waived by the Companies at any time in its sole
discretion:
(a) Each
Company and Purchaser shall have executed this Agreement and all of the
Ancillary Agreements as to which it is a party.
(b) The
representations and warranties of Purchasers 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). Purchasers
shall have performed, satisfied and complied in all material respects with
the
covenants, agreements and conditions required by this Agreement and the
Ancillary Agreements to be performed, satisfied or complied with by Purchasers
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.
(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) Purchasers
shall execute such reasonable subordination agreements with Laurus,
St. Cloud and the Goldwassers necessary to affirm that the Obligations of
the Company under the Notes are and will continue to be subordinated to existing
indebtedness owed to Laurus, St. Cloud and the Goldwassers.
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6.2 Conditions
to Purchasers’ Obligation to Accept the Notes.
The
obligations of Purchasers 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 Purchasers and may
be
waived by Purchasers at any time in their sole discretion:
(a) Each
Company and Purchaser shall have executed this Agreement and all Ancillary
Agreements as to which it is a party.
(b) The
representations and warranties of the Companies 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 Companies shall have performed, satisfied
and complied in all material respects with the covenants, agreements and
conditions required by this Agreement and the Ancillary Agreements to be
performed, satisfied or complied with by the Companies at or prior to the
Closing. The Purchaser may require a certificate, executed by the Chief
Executive Officer of each of the Companies, dated as of the Closing, to the
foregoing effect and as to such other matters as may be reasonably requested
by
Purchasers.
(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) The
Companies and KM & Co. shall have entered into a consulting services
agreement acceptable to Administrative Agent.
(f) Laurus
shall have provided to the Company net proceeds of at least $1,500,000 as an
over-advance under its existing credit facility, or under a new credit facility,
on terms acceptable to Purchasers.
(g) The
Company shall have received net proceeds of at least $200,000 from the sale
of
shares of Common Stock.
(h) The
Company shall have executed and delivered to the Purchasers a Registration
Rights Agreement substantially in the form of Exhibit
C.
7. Expenses.
The
Companies shall jointly and severally pay all of Purchasers’ out-of-pocket costs
and expenses, including reasonable fees and disbursements of in-house or outside
counsel and appraisers, in connection with (i) the preparation, execution and
delivery of this Agreement and the Ancillary Agreements; (ii) any amendments
hereto or thereto or consents proposed or executed in connection with the
transactions contemplated by this Agreement or the Ancillary Agreements; (iii)
the prosecution or defense of any action, contest, dispute, suit or proceeding
concerning any matters in nay way arising out of, related to or connected with
this Agreement or any Ancillary Agreement; and (iv) any attempts to inspect,
verify, protect, collect, sell, liquidate or otherwise dispose of any
Collateral.
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8. Event
of Default.
Any
one
or more of the following events shall constitute an “Event of Default” by the
Companies under this Agreement:
8.1 Payment
Default.
If
the
Companies fails to pay, within three days after the date such payment is due,
any of the Obligations;
8.2 Covenant
Default.
(a) If
either
of the Companies fails to perform any obligation (other than payment
obligations) under this Agreement or any of the Ancillary Agreements within
thirty days after the Companies have been given notice thereof, provided,
however, that if the default cannot by its nature be cured within such thirty
period or cannot after diligent attempts by the Companies be cured within such
thirty day period, and such default is likely to be cured within a reasonable
time, then the Companies shall have an additional reasonable period (which
shall
not in any case exceed an additional thirty days so that the total duration
of
the cure period will not exceed sixty days) to attempt to cure such default,
and
within such reasonable time period the failure to have cured such default shall
not be deemed an Event of Default; or
(b) If
there
occurs any circumstance or circumstances that would reasonably be expected
to
have a Material Adverse Effect;
(c) If
any
portion of either of the Companies’ assets is attached, seized, subjected to a
writ or distress warrant, or is levied upon, or comes into the possession of
any
trustee, receiver or person acting in a similar capacity and such attachment,
seizure, writ or distress warrant or levy has not been removed, discharged
or
rescinded within thirty days, or if either of the Companies is enjoined,
restrained, or in any way prevented by court order from continuing to conduct
all or any material part of its business affairs, or if a judgment or other
claim becomes a lien or encumbrance upon any material portion of either of
the
Companies’ assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of either Company’s assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, and the same is not paid
within thirty days after notice thereof; provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or
an
adequate bond has been posted pending a good faith contest by the
Companies;
(d) If
either
Company becomes Insolvent, or if an Insolvency Proceeding is commenced by
Borrower, or if an Insolvency Proceeding is commenced against Borrower and
is
not dismissed or stayed within thirty days;
(e) If
there
is any Event of Default under any agreement with or obligation owed by either
Company to Laurus, St. Cloud or Xxxxxxxxxx; or
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(f) If
any
material misrepresentation or material misstatement exists now or hereafter
in
any warranty or representation set forth herein or in any Ancillary Agreement
or
in any exhibit hereto or thereto or any certificate delivered to Purchasers
or
the Administrative Agent pursuant to this Agreement or any Ancillary
Agreements.
8.3 Change
of Control.
If
there
is a Change of Control to which the Purchasers do not approve.
9. Purchasers’
Rights and Remedies.
9.1 Rights
and Remedies.
Upon
the
occurrence of an Event of Default and the giving of any notice required pursuant
to Section 8, the Administrative Agent may without further notice of his
election and without demand, do any one or more of the following, all of which
are authorized by the Companies:
(a) Declare
all Obligations, whether evidenced by this Agreement or any of the Ancillary
Agreements, or otherwise, immediately due and payable;
(b) Settle
or
adjust disputes and claims directly with account debtors for amounts, upon
terms
and in whatever order that the Administrative Agent reasonably considers
advisable;
(c) Make
such
payments and do such acts as the Administrative Agent considers necessary or
reasonable to protect its security interest in the Collateral. The Companies
agree to assemble the Collateral if the Administrative Agent so requires, and
to
make the Collateral available to the Administrative Agent as the Administrative
Agent may designate. The Companies authorize the Administrative Agent to enter
the premises where the Collateral is located, to take and maintain possession
of
the Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in the Administrative Agent’s
determination appears to be prior or superior to its security interest and
to
pay all expenses incurred in connection therewith. With respect to any of the
Companies’ owned premises, the Companies hereby grant the Administrative Agent a
license to enter into possession of such premises and to occupy the same,
without charge, in order to exercise any of the Administrative Agent’s rights or
remedies provided herein, at law, in equity, or otherwise;
(d) Ship,
reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise
for sale, and sell (in the manner provided for herein) the Collateral. The
Administrative Agent is hereby granted a license or other right to use, without
charge, the Companies’ labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale, and selling any Collateral
and,
in connection with the Administrative Agent’s exercise of its rights hereunder,
the Companies’ rights under all licenses and all franchise agreements shall
inure to the Administrative Agent’s benefit;
(e) Dispose
of the Collateral by way of one or more contracts or transactions, for cash
or
on terms, in such manner and at such places (including the Companies’ premises)
as the Administrative Agent determines is commercially reasonable, and apply
any
proceeds to the Obligations in whatever manner or order the Administrative
Agent
deems appropriate;
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(f) The
Administrative Agent may credit bid and purchase at any public sale;
and
(g) Any
deficiency that exists after disposition of the Collateral as provided above
will be paid immediately by the Companies.
9.2 Power
of Attorney.
Effective
only upon the occurrence and during the continuance of an Event of Default,
the
Companies hereby irrevocably appoints the Administrative Agent as the Companies’
true and lawful attorney to: (i) send requests for verification of Accounts
or
notify account debtors of the Administrative Agent’s security interest in the
Accounts; (ii) endorse the Companies’ names on any checks or other forms of
payment or security that may come into the Administrative Agent’s possession;
(iii) sign Companies’ names on any invoice or xxxx of lading relating to any
Account, drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (iv) dispose of
any
Collateral; (v) make, settle, and adjust all claims under and decisions with
respect to the Companies’ policies of insurance; (vi) settle and adjust disputes
and claims respecting the Accounts directly with account debtors, for amounts
and upon terms which the Administrative Agent determines to be reasonable;
(vii)
to file, in its sole discretion, one or more financing or continuation
statements and amendments thereto, relative to any of the Collateral; and (viii)
to transfer the Intellectual Property Collateral into the name of the
Administrative Agent or a third party to the extent permitted under the UCC.
The
appointment of the Administrative Agent as the Companies’ attorney in fact, and
each and every one of the Administrative Agent’s rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have
been
fully repaid and performed.
9.3 Accounts
Collection.
At
any
time upon the occurrence and during the continuance of an Event of Default,
the
Administrative Agent may notify any Person owing funds to any of the Companies
of the Administrative Agent’s security interest in such funds and verify the
amount of such Account. The Companies shall collect all amounts owing to the
Companies for the Administrative Agent, receive in trust all payments as the
Administrative Agent’s trustee, and immediately deliver such payments to the
Administrative Agent in their original form as received from the account debtor,
with proper endorsements for deposit.
9.4 Purchasers’
Expenses.
If
the
Companies fail to pay any amounts or furnish any required proof of payment
due
to third persons or entities, as required under the terms of this Agreement
or
any Ancillary Agreements, then the Administrative Agent may do any or all of
the
following after reasonable notice to the Companies: (i) make payment of the
same
or any part thereof; or (ii) obtain and maintain insurance policies of the
type
typically carried by the Companies, and take any action with respect to such
policies as the Administrative Agent deems prudent. Any amounts so paid or
deposited by the Administrative Agent shall be immediately due and payable,
and
shall bear interest at the then applicable default rate under the Notes, and
shall be secured by the Collateral. Any payments made by the Administrative
Agent shall not constitute an agreement by the Administrative Agent to make
similar payments in the future or a waiver by the Administrative Agent or
Purchasers of any Event of Default under this Agreement or any Ancillary
Agreements.
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9.5 Liability
for Collateral.
So
long
as the Administrative Agent is not grossly negligent and does not engage in
willful misconduct, the Administrative Agent shall not in any way or manner
be
liable or responsible for: (i) the safekeeping of the Collateral; (ii) any
loss
or damage thereto occurring or arising in any manner or fashion from any cause;
(iii) any diminution in the value thereof; or (iv) any act or default of any
carrier, warehouseman, bailee, forwarding agency, or other person whomsoever.
All risk of loss, damage or destruction of the Collateral shall be borne by
the
Companies.
9.6 Remedies
Cumulative.
The
Administrative Agent’s rights and remedies under this Agreement and any
Ancillary Agreements shall be cumulative. The Administrative Agent shall have
all other rights and remedies not inconsistent herewith as provided under the
UCC, by law, or in equity. No exercise by the Administrative Agent of one right
or remedy shall be deemed an election, and no waiver by the Administrative
Agent
of any Event of Default on the Companies’ part shall be deemed a continuing
waiver. No delay by the Administrative Agent shall constitute a waiver,
election, or acquiescence by it. No waiver by the Administrative Agent shall
be
effective unless made in a written document signed on behalf of the
Administrative Agent and then shall be effective only in the specific instance
and for the specific purpose for which it was given.
9.7 Demand;
Protest.
Each
Company hereby waives demand, protest, notice of protest, notice of default
or
dishonor, notice of payment and nonpayment, notice of any default, nonpayment
at
maturity, release, compromise, settlement, extension, or renewal of accounts,
documents, instruments, chattel paper, and guarantees at any time held by the
Administrative Agent on which such Company may in any way be liable.
10. Administrative
Agent.
10.1 Appointment.
Each
Purchaser hereby irrevocably designates and appoints the Administrative Agent
as
its agent under this Agreement and the Ancillary Agreements, and each Purchaser
irrevocably authorizes the Administrative Agent, in such capacity, to take
such
action on its behalf under the provisions of this Agreement and the Ancillary
Agreements and to exercise such powers and perform such duties as are expressly
delegated to the Administrative Agent by the terms of this Agreement and the
Ancillary Agreements, together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary elsewhere
in
this Agreement, the Administrative Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Purchaser, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any of the Ancillary Agreements or otherwise exist against the
Administrative Agent.
10.2 Time
Spent on Administrative Agent Services.
The
Administrative Agent is not under any obligation to spend any specific amount
of
time in providing his services as Administrative Agent under this Agreement
and
the Ancillary Agreements.
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10.3 Delegation
of Duties.
The
Administrative Agent may execute any of his duties under this Agreement and
the
Ancillary Agreements by or through agents or attorneys-in-fact and shall be
entitled to advice of counsel concerning all matters pertaining to such duties.
The Administrative Agent shall not be responsible for the negligence or
misconduct of any agents or attorneys-in-fact selected by it with reasonable
care.
10.4 Exculpatory
Provisions.
The
Administrative Agent shall not be (i) liable for any action lawfully taken
or
omitted to be taken by it or any of its agents or attorneys-in-fact under or
in
connection with this Agreement or any of the Ancillary Agreements (except for
its or its agents’ or attorneys’-in-fact own gross negligence or willful
misconduct) or (ii) responsible in any manner to any of Purchasers for any
recitals, statements, representations or warranties made by the Companies or
any
officer thereof contained in this Agreement or any of the Ancillary Agreements
or in any certificate, report, statement or other document referred to or
provided for in, or received by the Administrative Agent under or in connection
with, this Agreement or any of the Ancillary Agreements or for the value,
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement or the Ancillary Agreements or for any failure of the Companies to
perform its obligations hereunder or thereunder. The Administrative Agent shall
not be under any obligation to any Purchaser to ascertain or to inquire as
to
the observance or performance of any of the agreements contained in, or
conditions of, this Agreement or the Ancillary Agreements, or to inspect the
assets and properties, including the Collateral, or books or records of the
Companies.
10.5 Reliance
by Administrative Agent.
The
Administrative Agent shall be entitled to rely, and shall be fully protected
in
relying, upon any writing, resolution, notice, consent, certificate, affidavit,
letter, telecopy, telex or teletype message, statement, order or other document
or conversation believed by it to be genuine and correct and to have been
signed, sent or made by the proper person(s) and upon advice and statements
of
legal counsel, independent accountants and other experts selected by the
Administrative Agent. The Administrative Agent may treat the payee of any Note
as the owner thereof for all purposes unless a written notice of assignment,
negotiation or transfer thereof has been delivered to the Administrative Agent.
The Administrative Agent shall be fully justified in failing or refusing to
take
any action under this Agreement or any Ancillary Agreements unless it shall
first receive such advice or concurrence of SBI or it shall first be indemnified
to its satisfaction by Purchasers against any and all liability and expense
which may be incurred by it by reason of taking or continuing to take any such
action. The Administrative Agent shall in all cases be fully protected in
acting, or in refraining from acting, under this Agreement and the Ancillary
Agreements in accordance with a request of SBI, and such request and any action
taken or failure to act pursuant thereto shall be binding upon all Purchasers
and all future holders of any Note.
10.6 Notice
of Default.
The
Administrative Agent shall not be deemed to have knowledge or notice of the
occurrence of any Event of Default hereunder unless the Administrative Agent
has
received notice from a Purchaser or any of the Companies referring to this
Agreement, describing such Event of Default and stating that such notice is
a
“notice of default” or otherwise has actual knowledge of such Event of Default.
In the event that the Administrative Agent receives such a notice, the
Administrative Agent shall give notice thereof to Purchasers. The Administrative
Agent shall take such action with respect to such Event of Default as shall
be
reasonably directed by SBI; provided that unless and until the Administrative
Agent shall have received such directions, the Administrative Agent may (but
shall not be obligated to) take such action, or refrain from taking such action,
with respect to such Event of Default as it shall deem advisable in the best
interests of Purchasers. Nothing in this Section limits the rights of the
Purchasers to elect remedies otherwise available to them.
-16-
10.7 Non-Reliance
on Administrative Agent and Other Purchasers.
Each
Purchaser expressly acknowledges that neither the Administrative Agent nor
any
of its agents or attorneys-in-fact has made any representations or warranties
to
it and that no act by the Administrative Agent hereinafter taken, including
any
review of the affairs of the Companies, shall be deemed to constitute any
representation or warranty by the Administrative Agent to any Purchaser. Each
Purchaser represents to the Administrative Agent that it has, independently
and
without reliance upon the Administrative Agent or any other Purchaser, and
based
on such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
financial and other condition and creditworthiness of the Companies and made
its
own decision to purchase its Note and enter into this Agreement and the
Ancillary Agreements. Each Purchaser also represents that it will, independently
and without reliance upon the Administrative Agent or any other Purchaser,
and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the Ancillary Agreements,
and to make such investigation as it deems necessary to inform itself as to
the
business, operations, property, financial and other condition and
creditworthiness of the Companies. Except for notices, reports and other
documents expressly required to be furnished to Purchasers by the Administrative
Agent hereunder, the Administrative Agent shall not have any duty or
responsibility to provide any Purchaser with any credit or other information
concerning the business, operations, property, condition (financial or
otherwise), prospects or creditworthiness of the Companies which may come into
the possession of the Administrative Agent or any of its agents or
attorneys-in-fact.
10.8 Indemnification.
Purchasers
agree to indemnify the Administrative Agent in its capacity as such (to the
extent not reimbursed by the Companies and without limiting the obligation
of
the Companies to do so), ratably according to their respective Face Amounts,
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind whatsoever which may at any time (including, without limitation, at any
time following the payment of the amounts owing hereunder and the Notes) be
imposed on, incurred by or asserted against the Administrative Agent in any
way
relating to or arising out of this Agreement, the Ancillary Agreements, or
any
documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by the
Administrative Agent under or in connection with any of the foregoing; provided
that no Purchaser shall be liable for the payment of any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting solely from the Administrative
Agent’s gross negligence or willful misconduct. The indemnifications in this
Section shall survive the payment of the Notes and all other Obligations
hereunder.
10.9 Administrative
Agent in Its Individual Capacity.
The
Administrative Agent may make loans to, accept deposits from and generally
engage in any kind of business with the Company as though the Administrative
Agent were not the Administrative Agent under this Agreement and the Ancillary
Agreements.
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10.10 Successor
Administrative Agent.
The
Administrative Agent may resign as Administrative Agent upon thirty days’ notice
to Purchasers. If the Administrative Agent resigns under this Agreement and
the
Ancillary Agreements, then SBI shall appoint a successor agent for Purchasers,
whereupon such successor agent shall succeed to the rights, powers and duties
of
the Administrative Agent, and the term “Administrative Agent” shall mean such
successor agent effective upon such appointment and approval, and the former
Administrative Agent’s rights, powers and duties as Administrative Agent shall
be terminated, without any other or further act or deed on the part of such
former Administrative Agent or any of the parties to this Agreement or any
holders of the Notes. After any retiring Administrative Agent’s resignation as
Administrative Agent, the provisions of this Section shall inure to its benefit
as to any actions taken or omitted to be taken by it while it was Administrative
Agent under this Agreement and any of the Ancillary Agreements.
11. Legends.
The
Securities, when issued, shall bear the following legend, or a substantially
similar 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.
12. Waiver
of Jury Trial; Alternative Proceedings.
12.1 Waiver
of Jury Trial.
TO
THE
FULLEST EXTENT PERMITTED BY LAW, THE COMPANIES AND PURCHASERS EACH HEREBY WAIVE
THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF ANY OF THIS AGREEMENT AND THE ANCILLARY AGREEMENTS OR
ANY
OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN, INCLUDING CONTRACT CLAIMS,
TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY
CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES
A
MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS
AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT
IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
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12.2 Judicial
Reference.
If
and
only if the jury trial waiver set forth in Section 12.1 of this Agreement is
invalidated for any reason by a court of law, statute or otherwise, the
reference provisions set forth below shall be substituted in place of the jury
trial waiver. So long as the jury trial waiver remains valid, the reference
provisions set forth in this Section shall be inapplicable.
(a) Each
controversy, dispute or claim (each, a “Claim”) between the parties arising out
of or relating to this Agreement or any Ancillary Agreement, other than (i)
all
matters in connection with nonjudicial foreclosure of security interests in
real
or personal property; or (ii) the appointment of a receiver or the exercise
of
other provisional remedies (any of which may be initiated pursuant to applicable
law) that are not settled in writing within fifteen days after the date on
which
a party to this Agreement or any of the Ancillary Agreements gives written
notice to all other parties that a Claim exists (the “Claim Date”) shall be
resolved by a reference proceeding in California in accordance with the
provisions of Section 638 et seq. of the California Code of Civil Procedure,
or
their successor sections (“CCP”), which shall constitute the exclusive remedy
for the resolution of any Claim concerning this Agreement or any of the
Ancillary Agreements, including whether such Claim is subject to the reference
proceeding. Except as set forth in this section, the parties waive the right
to
initiate legal proceedings against each other concerning each such Claim. Venue
for these proceedings shall be in the Superior Court in Los Angeles County
(the
“Court”). By mutual agreement, the parties shall select a retired Judge of the
Court to serve as referee, and if they cannot so agree within fifteen days
after
the Claim Date, the parties shall request that the Presiding Judge of the Court
(or his or her representative) promptly select the referee. A request for
appointment of a referee may be heard on an ex parte or expedited basis. The
referee shall be appointed to sit as a temporary judge, with all the powers
for
a temporary judge, as authorized by law, and upon selection should take and
subscribe to the oath of office as provided for in Rule 244 of the California
Rules of Court (or any subsequently enacted Rule). Purchasers (acting together))
and the Companies (acting together) shall each have one peremptory challenge
pursuant to CCP § 170.6. Upon being selected, the referee shall (a) be
requested to set the matter for a status and trial-setting conference within
fifteen days after the date of selection and (b) if practicable, try any and
all
issues of law or fact and report a statement of decision upon them within ninety
days of the date of selection. The referee will have power to expand or limit
the amount of discovery the parties may employ. Any decision rendered by the
referee will be final, binding and conclusive, and judgment shall be entered
pursuant to CCP § 644 in any court in the State of California having
jurisdiction. The parties shall complete all discovery no later than fifteen
days before the first trial date established by the referee. The referee may
extend such period in the event of a party’s refusal to provide requested
discovery for any reason whatsoever, including, without limitation, legal
objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to “priority” in conducting
discovery. The parties may take depositions upon seven days written notice,
and
shall respond to requests for production or inspection of documents within
ten
days after service. All disputes relating to discovery which cannot be resolved
by the parties shall be submitted to the referee whose decision shall be final
and binding upon the parties. Pending appointment of the referee as provided
herein, the Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
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(b) Except
as
expressly set forth herein, the referee shall determine the manner in which
the
reference proceeding is conducted including the time and place of all hearings,
the order of presentation of evidence, and all other questions that arise with
respect to the course of the reference proceeding. Except for trial, all
proceedings and hearings conducted before the referee shall be conducted without
a court reporter unless a party requests a court reporter. The party making
such
a request shall have the obligation to arrange for and pay for the court
reporter. Subject to the referee’s power to award costs to the prevailing party,
the parties shall equally bear the costs of the court reporter at the trial
and
the referee’s expenses.
(c) The
referee shall determine all issues in accordance with existing California case
and statutory law. California rules of evidence applicable to proceedings at
law
will apply to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or provisional
remedies and to enter equitable orders that shall be binding upon the parties.
At the close of the reference proceeding, the referee shall issue a single
judgment at disposing of all the claims of the parties that are the subject
of
the reference. The parties reserve the right (i) to contest or appeal from
the
final judgment or any appealable order or appealable judgment entered by the
referee and (ii) to obtain findings of fact, conclusions of laws, a written
statement of decision, and (iii) to move for a new trial or a different
judgment, which new trial, if granted, shall be a reference proceeding under
this provision.
(d) If
the
enabling legislation which provides for appointment of a referee is repealed
(and no successor statute is enacted), any dispute between the parties that
would otherwise be determined by the reference procedure herein described will
be resolved and determined by arbitration conducted by a retired judge of the
Court, in accordance with the California Arbitration Act §§ 1280
through 1294.2 of the CCP as amended from time to time. The limitations with
respect to discovery as set forth in this Section shall apply to any such
arbitration proceeding.
13. 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.
14. 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.
-20-
15. Notices.
Any
notices required or permitted to be given under the terms of this Amendment
shall be sent by U.S. Mail or delivered personally or by courier or via
facsimile (if via facsimile, to be followed within three business days by an
original of the notice document via U.S. Mail or courier) and shall be effective
five 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 any Company:
|
Small
World Kids, Inc.
0000
Xxxxxxxxxx Xxxxxxx
Xxxxxx
Xxxx, Xxxxxxxxxx 00000
Attention:
Xxxxx Xxxx
Fax
Number: 000-000-0000
|
|
With
a copy to:
|
Xxxx
& Xxxxx
0000
Xxxxxxx Xxxx Xxxx, 00xx Xxxxx
Xxx
Xxxxxxx, Xxxxxxxxxx 00000
Attention:
Xxxxx X. Xxxxxxxx
Fax
Number: 000-000-0000
|
|
If
to Purchasers:
|
Hong
Kong League Central Credit Union
x/x
XXX Advisors, LLC
000
Xxxxxxx Xxxxxx Xxxxx, Xxxxx 0000
Xxxxxxx
Xxxxx, Xxxxxxxxxx 00000
Attention:
Xxxxx Xxxx
Fax
Number: 000-000-0000
|
|
Xxxxxxx
Xxxxxx & Company
0000
Xxxxx Xxxxxxxx
Xxxxx
Xxx, Xxxxxxxxxx 00000
Attention:
Xxxxx X. Xxxxxxx
Fax
Number: 000-000-0000
|
|
|
With
a copy to:
|
Xxxxx
Xxxxxxx Xxxx Xxxxxx Xxxxxxx & Xxxxxx, LLP
0000
Xxxx Xxxxxx, 0xx Xxxxx
Xxxxxx,
Xxxxxxxxxx 00000
Attention:
Xxxxx X. XxXxxxxxx III
Fax
Number: 000-000-0000
|
|
If
to Administrative Agent:
|
SBI
Advisors, LLC
000
Xxxxxxx Xxxxxx Xxxxx, Xxxxx 0000
Xxxxxxx
Xxxxx, Xxxxxxxxxx 00000
Attention:
Xxxxxx Xxxxxxx
Fax
Number: 000-000-0000
|
Each
party shall provide written notice to the other party of any change in
address.
-21-
16. 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.
17. 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.
18. Survival.
The
representations and warranties of the Companies and Purchasers contained in
Sections 3 and 4 and the agreements and covenants set forth in herein and in
the
Ancillary Agreements- shall survive the Closing of the purchase and sale of
the
Notes and the Warrants.
19. 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.
20. 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 Companies nor Purchasers
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 Purchasers shall be an “accredited
investor” (as defined in Regulation D), in the written opinion of counsel who is
reasonably satisfactory to the Parent, and such assignment shall be in form,
substance and scope reasonably satisfactory to the Parent. Notwithstanding
anything herein to the contrary, Purchasers may pledge their Notes 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.
21. 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.
22. 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.
-22-
23. Entire
Agreement; Amendments.
This
Agreement, the Ancillary Agreements, and any exhibits hereto or thereto and
any
certificates required to be delivered by this Agreement or the Ancillary
Agreements, 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 Companies nor Purchasers or the Administrative Agent
makes any representation, warranty, covenant or undertaking with respect to
such
matters. No provision of this Agreement or the Ancillary Agreements may be
waived or amended other than by an instrument in writing signed by the party
to
be charged with enforcement.
IN
WITNESS WHEREOF, the Companies, Purchasers and the Administrative Agent have
caused this Agreement to be duly executed as of the date first written
above.
| THE COMPANIES: | ||
| SMALL WORLD KIDS, INC. | ||
| |
|
|
| By: | ||
|
Name:
Xxxxx Xxxx
Title:
Chief Executive Officer
|
||
| SMALL WORLD TOYS | ||
| |
|
|
| By: | ||
|
Name:
Xxxxx Xxxx
Title:
Chief Executive Officer
|
||
| PURCHASERS: | ||
| HONG KONG LEAGUE CENTRAL CREDIT UNION | ||
| |
|
|
| By: | ||
|
Name:
Title:
|
||
| XXXXXXX XXXXXX & COMPANY | ||
| |
|
|
| By: | ||
|
Name:
Title:
|
||
-23-
| ADMINISTRATIVE AGENT: | ||
| SBI ADVISORS, LLC | ||
| |
|
|
| By: | ||
|
Name:
Title:
|
||
-24-
ANNEX
A
DEFINITIONS
“Accounts”
means all “accounts”, as such term is defined in the UCC, now owned or hereafter
acquired by any Person.
“Administrative
Agent” has the meaning given such term in the Preamble.
“Affiliate”
means, with respect to any Person, (a) any other Person (other than one of
the
Subsidiaries) which, directly or indirectly, is in control of, is controlled
by,
or is under common control with such Person or (b) any Person who is a director
or officer (i) of such Person, (ii) of any Subsidiary of such Person or (iii)
of
any Person described in clause (a) above. For the purposes of this definition,
control of a Person shall mean the power (direct or indirect) to direct or
cause
the direction of the management and policies of such Person whether by contract
or otherwise.
“Agreement”
has the meaning given such term in the Preamble.
“Ancillary
Agreements” means, the Notes, the Warrants, the Registration Rights Agreement,
the Subordination Agreements, and all other agreements, instruments, documents,
mortgages, pledges, powers of attorney, consents, assignments, contracts,
notices, security agreements, trust agreements and guarantees whether
heretofore, concurrently, or hereafter executed by or on behalf of any Company,
any of its Subsidiaries or any other Person or delivered to either Purchaser,
relating to this Agreement or to the transaction contemplated by this Agreement
or otherwise relating to the relationship between or among any Company and
the
Purchasers, as the same may be amended, supplemented, rested or otherwise
modified from time to time.
“Assets”
has the meaning given such term in Section 4.13.
“Balance
Sheet Date” has the meaning given such term in Section 4.5(b).
“Books
and Records” means all books, records, board minutes, contracts, licenses,
insurance policies, environmental audits, business plans, files, computer files,
computer discs and other data and software storage and media devices, accounting
books and records, financial statements (actual and pro forma), filings with
Governmental Authorities and any and all records and instruments relating to
the
Collateral or otherwise necessary or helpful in the collection thereof or the
realization thereupon.
“CCP”
has
the meaning given such term in Section 12.2(a).
“Change
of Control” means a change in ownership or control of the Corporation effected
through any of the following transactions: (i) a stockholder-approved merger,
consolidation or other reorganization in which securities representing more
than
50% of the total combined voting power of the Parent’s outstanding securities
become beneficially owned, directly or indirectly, by a person or related group
of persons (other than a person or related group of persons that, immediately
prior to such transaction, directly or indirectly controlled, was controlled
by,
or was under common control with, the Parent; (ii) a
stockholder-approved sale, transfer or other disposition of all or substantially
all of either or both of the Companies’ assets to any person or related group of
persons (other than a person or related group of persons that, immediately
prior
to such transaction, directly or indirectly controlled, was controlled by,
or
was under common control with, the Parent); or (iii) the acquisition, directly
or indirectly, by any person or related group of persons (other than either
Company or a person that directly or indirectly controls, is controlled by,
or
is under common control with, the Parent), of beneficial ownership (within
the
meaning of Rule 13-d3 of the Exchange Act) of securities possessing more than
50% of the total combined voting power of the Parent’s outstanding securities
from a person or persons other than the Parent.
ANNEX
A
-1-
“Charter”
has the meaning given such term in Section 4.2(e).
“Claim”
has the meaning given such term in Section 12.2(a).
“Claim
Date” has the meaning given such terms defined in Section 12.2(a).
“Closing”
has the meaning given such terms defined in Section 1.3.
“Closing
Date” has the meaning given such terms defined in Section 1.3.
“Collateral”
means all of each Company’s property and assets, whether real or personal,
tangible or intangible, and whether now owned or hereafter acquired, or in
which
it now has or at any time in the future may acquire any right, title or
interests including all of the following property in which it now has or at
any
time in the future may acquire any right, title or interest: (a) all Inventory;
(b) all Equipment; (c) all Fixtures; (d) all Goods; (e) all General Intangibles;
(f) all Accounts; (g) all Deposit Accounts, other bank accounts and all funds
on
deposit therein; (h) all Investment Property; (i) all Stock; (j) all Chattel
Paper; (k) all Letter-of-Credit Rights; (l) all Instruments; (m) all commercial
tort claims; (n) all Books and Records; (o) all Intellectual Property
(including, without limitation, all Patents and Trademarks); (p) all Supporting
Obligations, including letters of credit and guarantees issued in support of
Accounts, Chattel Paper, General Intangibles and Investment Property; (q) (i)
all money, cash and cash equivalents and (ii) all cash held as cash collateral
to the extent not otherwise constituting Collateral, all other cash or property
at any time on deposit with or held by Purchasers for the account of any Company
(whether for safekeeping, custody, pledge, transmission or otherwise); and
® all
products and Proceeds of all or any of the foregoing, tort claims and all claims
and other rights to payment (i) including insurance claims against third parties
for loss of, damage to, or destruction or, the foregoing Collateral and (ii)
payments due or to become due under leases, rentals and hires of any or all
of
the foregoing and Proceeds payable thereunder, or unearned premiums with respect
to policies of insurance in whatever form.
“Common
Stock” means the shares of stock representing the Parent’s common equity
interests.
“Company”
and “Companies” have the meanings given such terms in the Preamble.
“Equipment”
means all “equipment” as such term is defined in the UCC, now owned or hereafter
acquired by any Person, wherever located, including any and all machinery,
apparatus, equipment, fittings, furniture, Fixtures, motor vehicles and other
tangible personal property (other than Inventory) of every kind and description
that may be now or hereafter used in such Person’s operations or that are owned
by such Person or in which such Person may have an inters, and all parts,
accessories and accessions thereto and substitutions and replacements
therefor.
DEFINITIONS
-2-
“Event
of
Default” means the occurrence of any of the events set forth in Section
8.
“Exchange
Act” has the meaning given such term in Section 4.10.
“Exchange
Act Filings” means the Parent’s filings under the Exchange Act made prior to the
date of this Agreement.
“Face
Amount” has the meaning given such term in Recital C.
“Fixtures”
means all fixtures” as such term is defined in the UCC, now owned or hereafter
acquired by any Person.
“GAAP”
means generally accepted accounting principles, practices and procedures in
effect from time to time in the United States of America.
“General
Intangibles” means all “general intangibles” as such term is defined in the UCC,
now owned or hereafter acquired by any Person, including all right, title and
interest that such Person may now or hereafter have in or under any contract,
all Payment Intangibles, customer lists, Licenses, Intellectual Property,
interests in partnerships, joint ventures and other business associations,
permits, proprietary or confidential information, inventions (whether or not
patented or patentable), technical information, procedures, designs, knowledge,
know-how, Software, data bases, data, skill, expertise, experience, processes,
models, drawings, materials, Books and Records, Goodwill (including the Goodwill
associated with any Intellectual Property), all rights and claims in or under
insurance polices (including insurance for fire, damage, loss, and casualty,
whether covering personal property, real property, tangible rights or intangible
rights, all liability, life, key-person, and business interruption insurance,
and all unearned premiums), uncertificated securities, choses in action, deposit
accounts, rights to receive tax refunds and other payments, rights to receive
dividends, distributions, cash, instruments and other property in respect of
or
in exchange for pledged Stock and Investment Property, and rights of
indemnification.
“Xxxxxxxxxx”
means Xxxx Xxxxxxxxxx and Xxxx X. Xxxxxxxxxx, Trustee of the Xxxx X. Xxxxxxxxxx
and Xxxx Xxxxxxxxx Family Trust.
“Goodwill”
means all goodwill, trade secrets, proprietary or confidential information,
technical information, procedures, formulae, quality control standards, designs,
operating and training manuals, customer lists, and distribution agreements
now
owned or hereafter acquired by any Person.
“HKLCCU”
has the meaning given such term in the Preamble.
“HKLCCU
Face Amount” has the meaning given such term in Recital A.
DEFINITIONS
-3-
“HKLCCU
Investment Amount” has the meaning given such term in Recital A.
“HKLCCU
Note” has the meaning given such term in Recital A.
“Instruments”
means all “instruments”, a such term is defined in the UCC, now or hereafter
acquired by any Person, wherever located, including all certificated securities
and all promissory notes and other evidences of indebtedness, other than
instruments that constitute, or are a part of a group of writings that
constitute, Chattel Paper.
“Intellectual
Property” means any and all patents, trademarks, service marks, trade names,
copyrights, trade secrets, Licenses, information and other proprietary rights
and processes.
“Inventory”
means all “inventory” as such term is defined in the UCC, now owned or hereafter
acquired by any Person, wherever located, including all inventory, merchandise,
goods and other personal property that are held by or on behalf of such Person
for sale or lease or are furnished or at to be finished under a contract of
service or that constitute raw materials, work in process, finished goods,
returned goods, or materials or supplies of any kind, nature or description
used
or consumed or to be used or consumed in such Person’s business or in the
processing, production, packaging, promotion, delivery or shipping of the same,
including all supplies and embedded software.
“Investment
Amount” has the meaning given such term in Recital C.
KM
&
Co. has the meaning given such term in the Preamble.
“KM
&
Co. Face Amount” has the meaning given such term in Recital B.
“KM
&
Co. Investment Amount” has the meaning given such term in Recital
B.
“KM
&
Co. Note” has the meaning given such term in Recital B.
“Laurus”
has the meaning given such term in Section 5.1.
“License”
means any rights under any written agreement now or hereafter acquired by any
Person to xxx any trademark, trademark registration, copyright, copyright
registration or invention for which a patent is in existence or other license
of
rights or interests now held or hereafter acquired by any Person.
“Liens”
means any mortgage, deed of trust, pledge, security interest, assignment, charge
or encumbrance, lien, or other type of preferential arrangement.
“Material
Adverse Effect” means a material adverse effect on (a) the business, assets,
liabilities, condition (financial or otherwise), properties, operations or
prospects of any Company or any of its Subsidiaries (taken individually or
as a
whole), (b) any Company’s or any of its Subsidiary’s inability to pay or perform
Obligations in accordance with there terms of the Agreement or any Ancillary
Agreement, (c) the value of the Collateral, the Liens on the Collateral or
the
priority of any such Lien, or (d) the practical realization of the benefits
of
Purchasers’ rights and remedies under this Agreement and the Ancillary
Agreements.
DEFINITIONS
-4-
“Notes”
has the meaning given such term in Recital C.
“Note
Shares” has the meaning given such term in Section 1.1.
“Obligations”
means all loans, liabilities, obligations, covenants and duties owning by each
Company and each of its Subsidiaries to the Purchasers of every kind and
description (whether or nor evidenced by the Notes or other instrument and
whether or not for the payment of money or the performance or non-performance
of
any act), direct or indirect, absolute or contingent, due or to become due,
contractual or tortuous, liquidated or unliquidated, whether existing by
operation of law or otherwise now existing or hereafter arising including any
debt, liability or obligation owing from any Company and/or each of its
Subsidiaries to other which Purchasers have obtained by assignment or otherwise
and further including all interest (including interest accruing at the then
applicable rate provided in the Notes after the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding, whether or not a claim for post-filing or post-petition interest
is
allowed or allowable in such proceeding), charges or other payments each Company
and each of its Subsidiaries is required to make by law or otherwise arising
under or as a result of this Agreement, the Ancillary Agreements or otherwise,
together with all reasonable expenses and reasonable attorneys’ fees chargeable
to the Companies” or any of their Subsidiaries’ accounts or incurred by the
Purchasers in connection therewith.
“Patents”
means all registered and pending applications and those patents which are
hereafter adopted or acquired by a Company or any of its Subsidiaries, and
all
right, title and interest therein and thereto, and all
registrations.
“Parent”
has the meaning given such term in the Preamble.
“Person”
means any individual, sole proprietorship, partnership, limited liability
partnership, joint venture, trust, unincorporated organization, association,
corporation, limited liability company, institution, public benefic corporation,
entity or government (whether federal, state, county, city, municipal or other
wide, including any instrumentality, division, agency, body or department
thereof) and shall include such Person’s successors and assigns.
“Purchaser”
and “Purchasers” have the meanings given such terms in the
Preamble.
“SEC”
has
the meaning given such term in Section 4.9.
“SEC
Reports” has the meaning given such term in Section 4.10.
“Securities”
has the meaning given such term in Section 3.1.
“Securities
Act” has the meaning given such term in Section 3.1.
“Software”
means all “software” as such term is defined in the UCC, now owned or hereafter
acquired by an Person, including all computer programs and all supporting
information provided in connection with a transaction related to any
program.
“St. Cloud”
has the meaning given such term in Section 5.1.
DEFINITIONS
-5-
“Subsidiary”
has the meaning given such term in the Preamble and also includes, with respect
to any Person, (i) any other Person whose shares of stock or other ownership
interests having ordinary voting power (other than stock or other ownership
interests having such power only by reason of the happening of a contingency)
to
elect a majority of the directors or other governing body of such other Person,
are owned, directly or indirectly, by such Person or (ii) any other Person
in
which such Person owns, directly or indirectly, more than 50% of the equity
interests at such time.
“Subsidiaries”
is the plural of Subsidiary.
“Trademarks”
mean the registered trademarks and pending applications of a Company or any
of
its Subsidiaries (whether on an intent to use basis or otherwise) and those
trademarks which are hereafter adopted or acquired by a Company or any of its
Subsidiaries, and all right, title and interest therein and thereto, and all
registrations, applications, and recordings thereof, including, without
limitation, applications, registrations and recordings in the United States
Patent and Trademark Office or in any similar office or agency of the United
States, any State thereof, or any foreign country, all whether now owned or
hereafter acquired by a Company or its Subsidiaries.
“UCC”
means the Uniform Commercial Code as the same may, from time to time be in
effect in the State of California; provided, that in the event that, buy reason
of mandatory provisions of law, any or all of the attachment, perfection or
priority of, or remedies with respect to, the Purchasers Lien on any Collateral
is governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of California, the term “UCC” shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions
of
this Agreement relating to such attachment, perfection, priority or remedies
and
for purposes of definitions related o such provisions; provided, further, that
to the extent that UCC is used to define any term herein or in any Ancillary
Agreement and such term is defined differently in different Articles or
Divisions of the UCC, the definition of such term contained in Article or
Divisions 9 shall govern.
“Warrant”
and “Warrants” have the meanings given such terms in Section 1.2.
“Warrant
Shares” has the meaning given such term in Section 3.1.
Any
accounting terms used in this Agreement that are not specifically defined shall
have the meanings customarily given to them in accordance with GAAP and all
financial computations shall be computed, unless specifically provided herein,
in accordance with GAAP consistently applied. All other terms used in this
Agreement and defined in the UCC shall have the meaning given therein unless
otherwise defined herein.
DEFINITIONS
-6-
SCHEDULE
4.2
Capitalization
Table and Beneficial Ownership
|
|
|
Shares
|
|
|
|
Fully
Diluted
|
|
|
|
||||
|
|
|
Outstanding
|
|
%
|
|
Shares
|
|
%
|
|
||||
|
Xxxxxxx
and Xxxxx Xxxx, as trustees of FFT
|
1,721,543
|
31.8
|
%
|
3,243,850
|
15.8
|
%
|
|||||||
|
SWT
Investments, LLC / Xxxxxx Xxxxxx
|
1,641,160
|
30.3
|
%
|
5,557,105
|
27.0
|
%
|
|||||||
|
Phoenix
Capital Opportunity, LLC
|
70,000
|
1.3
|
%
|
70,000
|
0.3
|
%
|
|||||||
|
Xxxxx
Xxxxxxxx, Inc.
|
1,146,718
|
21.2
|
%
|
1,167,280
|
5.7
|
%
|
|||||||
|
Xxx
Xxxxxxxx Enterprises
|
206,500
|
3.8
|
%
|
391,818
|
1.9
|
%
|
|||||||
|
Xxx
Xxxxxxxx as trustee of Memorial Gift Trust
|
869,081
|
4.2
|
%
|
||||||||||
|
Xxxxx X.
Xxxxxxxx and Xxxxxx X. Xxxxxxxx, as trustees of the Ficksman Family
Trust
|
37,726
|
0.7
|
%
|
37,726
|
0.2
|
%
|
|||||||
|
Xxxxxxx
Xxxxx
|
65,000
|
1.2
|
%
|
65,000
|
0.3
|
%
|
|||||||
|
Other
Holders
|
97,700
|
1.8
|
%
|
97,700
|
0.5
|
%
|
|||||||
|
St.
Cloud
|
81,250
|
1.5
|
%
|
802,500
|
3.9
|
%
|
|||||||
|
Xxxxxx
|
134,400
|
0.7
|
%
|
||||||||||
|
Xxxx
Xxxxxx
|
101,818
|
0.5
|
%
|
||||||||||
|
Xxx
Xxxxxx
|
52,000
|
0.3
|
%
|
||||||||||
|
Xxxx
Xxxxxxxxxxx
|
44,000
|
0.2
|
%
|
||||||||||
|
Xxxxx
Xxxxxx
|
44,000
|
0.2
|
%
|
||||||||||
|
Xxxx
Xxxxxxx
|
44,000
|
0.2
|
%
|
||||||||||
|
Xxxx
Xxxxxx
|
44,000
|
0.2
|
%
|
||||||||||
|
Xxxx
Xxxxxx
|
35,818
|
0.2
|
%
|
||||||||||
|
All
other employees
|
146,000
|
0.7
|
%
|
||||||||||
|
Consultants
|
16,000
|
0.3
|
%
|
66,000
|
0.3
|
%
|
|||||||
|
$5M
Note/ Preferred - Other
|
210,463
|
3.9
|
%
|
595,080
|
2.9
|
%
|
|||||||
|
$.5
Bridge Note
|
2,438
|
0.0
|
%
|
117,387
|
0.6
|
%
|
|||||||
|
Imagiix
Purchase
|
50,000
|
0.9
|
%
|
50,000
|
0.2
|
%
|
|||||||
|
Bushido
Capital Partners LTD
|
1,758,242
|
8.5
|
%
|
||||||||||
|
Gamma
Opportunity Partners LP
|
—
|
1,530,969
|
7.4
|
%
|
|||||||||
|
Cambria
Funds - warrants
|
196,591
|
1.0
|
%
|
||||||||||
|
Laurus
Funds
|
1,036,000
|
4.9
|
%
|
||||||||||
|
X.X.Xxxxxxxxx
Towbin
|
554,545
|
2.7
|
%
|
||||||||||
|
Frontera
Group, LLC
|
64,077
|
1.2
|
%
|
661,743
|
3.2
|
%
|
|||||||
|
Xxxxxx
Capital
|
454,545
|
2.2
|
%
|
||||||||||
|
Other
New Equity Investors
|
622,727
|
3.0
|
%
|
||||||||||
|
Total
Shares
|
5,410,575
|
100.0
|
%
|
20,591,926
|
100.0
|
%
|
|||||||
SCHEDULE
4.2
Page
1 of
2
136,364
shares of Class A-1 Preferred Stock have been allocated to Frontera Group,
LLC
but payment has not been received by the Parent. Payment is expected in or
about
November 2006.
Vintage
Filings has paid the Parent $50,000 but has not yet received its shares of
Class
A-1 Preferred Stock.
SCHEDULE
4.2
Page 2
of 2
SCHEDULE
4.5
List
of Agreements
Laurus
has given the Companies an over-advance of $750,000 and has committed to
over-advance an additional $750,000 subject to: (1) conclusion of the loan
transactions contemplated by this Agreement; and (2) receipt by the Companies
of
net proceeds of at least $200,000 from the sale of shares of Common
Stock.
SCHEDULE
4.5
Page 1
SCHEDULE
4.6
Pledged
Assets
|
·
|
Credit
Facility between Small World Toys, as Borrower and Laurus
Master Fund, Ltd. as
Lender is secured by all of the assets of Small World Kids, Inc.
and its
Subsidiaries.
|
|
·
|
Note
Purchase Agreement, as amended, with St. Cloud Capital Partners, L.P.
as Purchaser is secured by all of the assets of Small World
Toys.
|
|
·
|
1,667
shares of Small World Toys have been pledged to Xxxx Xxxxxxxxxx to
secure
one promissory note dated May 20, 2004 to
Xx. Xxxxxxxxxx.
|
|
·
|
Purchase
Order Revolving Credit Line from Horizon Financial Services Group
USA that
is collaterialized by a security interest, junior in position to
that of
senior lender, Laurus Master Fund, Ltd., to the assets related to
the PO
Credit Line transactions.
|
SCHEDULE
4.6
Page 1
SCHEDULE
4.7
Intellectual
Property
The
Companies have received notice that the collapsible soccer net it had been
selling may infringe the patent rights of a third-party. The Companies intend
to
discontinue the sale of this item.
SCHEDULE
4.7
Page 1
SCHEDULE
4.10
SEC
Reports Exceptions
None.
SCHEDULE
4.10
Page 1
SCHEDULE
4.11
Litigation
|
·
|
The
Company’s former controller has filed a complaint with the US Department
of Labor alleging violation of Section 806 of the Xxxxxxxx-Xxxxx
Act
protecting whistle-blowers.
|
|
·
|
See
also disclosure on Schedule 4.7.
|
SCHEDULE
4.11
Page 1
SCHEDULE
4.13
Outstanding
List Of Registration Rights
|
·
|
The
Company filed a Registration Statement on Form S-1 on June 15, 2006
with
the SEC complying with all registration rights obligations through
the
date of filing.
|
|
·
|
Subsequent
to June 15, 2006, the Company sold $50,000 of Class A-1 Preferred
Stock
that has piggy-back registration
rights.
|
SCHEDULE
4.13
Page 1
SCHEDULE
4.19
List
of Names and Locations
Small
World Kinds, Inc.,
a
Nevada corporation, EIN 00-0000000
Corporate
location: 0000
Xxxxxxxxxx Xxxxxxx, Xxxxxx Xxxx, XX 00000
Small
World Toys,
a
California corporation
Office
headquarters: 0000
Xxxxxxxxxx Xxxxxxx, Xxxxxx Xxxx, XX 00000
Warehouse
location: 00000
X.
Xxxx Xxxxxx, Xxxxxx, XX 00000
Third
party warehouse (Target) location: 00000
Xxxxxxxxxxxx Xxxxxx, Xxxxxxx, XX 00000
Fine
Ventures, LLC,
a
Delaware LLC—no locations nor operating assets
Fashion
Angels Enterprises, Inc.,
a
Wisconsin corporation—no locations nor operating assets
SCHEDULE
4.19
Page 1
by
and
among
SMALL
WORLD KIDS, INC.,
SMALL
WORLD TOYS
HONG
KONG
LEAGUE CENTRAL CREDIT UNION
XXXXXXX
XXXXXX & CO.
AND
SBI
ADVISORS, LLC
Dated:
As
of
September 29, 006
TABLE
OF CONTENTS
|
Page
|
|||||
|
1.
|
Issuance of the Notes |
1
|
|||
|
1.1
|
Note
Terms
|
1
|
|||
|
1.2
|
Stock
Purchase Warrants
|
2
|
|||
|
1.3
|
Closing
|
2
|
|||
|
2.
|
Security Interest |
2
|
|||
|
2.1
|
Grant
of Security Interest
|
2
|
|||
|
2.2
|
Perfection
of Security Interest
|
2
|
|||
|
2.3
|
Non-Exclusive
License
|
2
|
|||
|
|
|||||
|
3.
|
Purchaser’s Representations and Warranties |
3
|
|||
|
3.1
|
Investment
Purposes; Compliance With Securities Act
|
3
|
|||
|
3.2
|
Accredited
Purchaser Status
|
3
|
|||
|
3.3
|
Reliance
on Exemptions
|
3
|
|||
|
3.4
|
Information
|
3
|
|||
|
3.5
|
Transfer
or Resale
|
3
|
|||
|
3.6
|
Authority,
Validity and Enforceability
|
3
|
|||
|
|
|||||
|
4.
|
Representations and Warranties of the Company |
4
|
|||
|
4.1
|
Organization
and Qualification
|
4
|
|||
|
4.2
|
Capitalization
|
4
|
|||
|
4.3
|
Authorization;
Binding Obligations
|
5
|
|||
|
4.4
|
Liabilities
|
5
|
|||
|
4.5
|
Agreements
|
5
|
|||
|
4.6
|
Title
to Properties and Assets; Liens, Etc
|
6
|
|||
|
4.7
|
Intellectual
Property
|
6
|
|||
|
4.8
|
Compliance
with Other Instruments
|
6
|
|||
|
4.9
|
Compliance
with Laws; Permits
|
7
|
|||
|
4.10
|
SEC
Reports
|
7
|
|||
|
4.11
|
Absence
of Certain Changes
|
7
|
|||
|
4.12
|
Absence
of Litigation
|
8
|
|||
|
4.13
|
Registration
Rights
|
8
|
|||
|
4.14
|
Valid
Offering
|
8
|
|||
|
4.15
|
No
Integrated Offering
|
8
|
(i)
|
Page
|
|||||
|
4.16
|
Stop
Transfer
|
8
|
|||
|
4.17
|
Dilution
|
8
|
|||
|
4.18
|
Patriot
Act
|
8
|
|||
|
4.19
|
Company
Name; Location of Offices
|
9
|
|||
|
4.20
|
Full
Disclosure
|
9
|
|||
|
|
|||||
|
5.
|
Negative Covenants |
9
|
|||
|
5.1
|
Incur
Indebtedness
|
9
|
|||
|
5.2
|
Distributions
|
10
|
|||
|
5.3
|
Sell
or Encumber Assets
|
10
|
|||
|
5.4
|
Change
of Business
|
10
|
|||
|
5.5
|
Change
Name or Location
|
10
|
|||
|
|
|||||
|
6.
|
Conditions to Issuance and Acceptance of the Notes |
10
|
|||
|
6.1
|
Conditions
to Companies’ Obligations to Issue the Notes
|
10
|
|||
|
6.2
|
Conditions
to Purchasers’ Obligation to Accept the Notes
|
11
|
|||
|
|
|||||
|
7.
|
Expenses |
11
|
|||
|
|
|||||
|
8.
|
Event of Default |
12
|
|||
|
8.1
|
Payment
Default
|
12
|
|||
|
8.2
|
Covenant
Default
|
12
|
|||
|
8.3
|
Change
of Control
|
13
|
|||
|
|
|||||
|
9.
|
Purchasers’ Rights and Remedies |
13
|
|||
|
9.1
|
Rights
and Remedies
|
13
|
|||
|
9.2
|
Power
of Attorney
|
14
|
|||
|
9.3
|
Accounts
Collection
|
14
|
|||
|
9.4
|
Purchasers’
Expenses
|
14
|
|||
|
9.5
|
Liability
for Collateral
|
15
|
|||
|
9.6
|
Remedies
Cumulative
|
15
|
|||
|
9.7
|
Demand;
Protest
|
15
|
|||
|
|
|||||
|
10.
|
Administrative Agent |
15
|
|||
|
10.1
|
Appointment
|
15
|
|||
|
10.2
|
Time
Spent on Administrative Agent Services
|
15
|
|||
|
10.3
|
Delegation
of Duties
|
16
|
|||
|
10.4
|
Exculpatory
Provisions
|
16
|
|||
(ii)
|
|
Page
|
||||
|
|
10.5
|
Reliance
by Administrative Agent
|
16
|
||
|
10.6
|
Notice
of Default
|
16
|
|||
|
10.7
|
Non-Reliance
on Administrative Agent and Other Purchasers
|
17
|
|||
|
10.8
|
Indemnification
|
17
|
|||
|
10.9
|
Administrative
Agent in Its Individual Capacity
|
17
|
|||
|
10.10
|
Successor
Administrative Agent
|
18
|
|||
|
|
|||||
|
11.
|
Legends |
18
|
|||
|
|
|||||
|
12.
|
Waiver of Jury Trial; Alternative Proceedings |
18
|
|||
|
12.1
|
Waiver
of Jury Trial
|
18
|
|||
|
12.2
|
Judicial
Reference
|
19
|
|||
|
|
|||||
|
13.
|
Further Assurance |
20
|
|||
|
|
|||||
|
14.
|
Governing Law and Venue |
20
|
|||
|
15.
|
Notices |
21
|
|||
|
|
|||||
|
16.
|
Headings; Gender, Etc |
22
|
|||
|
|
|||||
|
17.
|
Severability |
22
|
|||
|
|
|||||
|
18.
|
Survival |
22
|
|||
|
|
|||||
|
19.
|
Remedies |
22
|
|||
|
|
|||||
|
20.
|
Successors and Assigns |
22
|
|||
|
|
|||||
|
21.
|
No Third Party Beneficiaries |
22
|
|||
|
|
|||||
|
22.
|
Counterparts |
22
|
|||
|
|
|||||
|
23.
|
Entire Agreement; Amendments |
23
|
|||
(iii)
