-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OCHTmH3lBwbOLX6rF6Ydqrymg/B0yn4FPpUdteQclOtqbzE0ktQ/fWtbp1+mFVg4 ORi3/1yGL/mnY+SgCwX8LQ== 0001144204-04-014928.txt : 20040923 0001144204-04-014928.hdr.sgml : 20040923 20040923143424 ACCESSION NUMBER: 0001144204-04-014928 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040915 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20040923 DATE AS OF CHANGE: 20040923 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SMALL WORLD KIDS INC CENTRAL INDEX KEY: 0001157564 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 870678991 STATE OF INCORPORATION: UT FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-68532 FILM NUMBER: 041042641 BUSINESS ADDRESS: STREET 1: 5711 BUCKINGHAM PARKWAY CITY: CULVER CITY STATE: CA ZIP: 90230 BUSINESS PHONE: (310) 645-9680 MAIL ADDRESS: STREET 1: 5711 BUCKINGHAM PARKWAY CITY: CULVER CITY STATE: CA ZIP: 90230 FORMER COMPANY: FORMER CONFORMED NAME: SAVON TEAM SPORTS INC DATE OF NAME CHANGE: 20010814 8-K 1 v06955.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): SEPTEMBER 15, 2004 ---------- SMALL WORLD KIDS, INC. (Exact Name Of Registrant Specified In Charter) NEVADA 333-68532 95-388130 (State Of Incorporation) (COMMISSION FILE NUMBER) (IRS Employer Identification No.) 5711 Buckingham Parkway, Culver City, CA 90230 (Address Of Principal Executive Offices) (Zip Code) (310) 645-9680 (Registrant's Telephone Number, Including Area Code) ----------------------------------------------------------------- (Former Name or Former Address, is Changed Since Last Report) ================================================================================ Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions: |_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) Item 1.01. Entry into a Material Agreement On September 15, 2004, we entered into a Note Purchase Agreement with St. Cloud Capital Partners L.P. ("St. Cloud"), pursuant to which we issued to St. Cloud a 10% Promissory Note in the aggregate amount of $2,000,000, due September 15, 2005. In connection with the issuance of the Note we issued St. Cloud 650,000 shares of common stock and warrants to purchase an additional 350,000 shares of common stock. The Promissory Note, shares and warrants were issued pursuant to an exemption from registration provided by Section 4(2) of the Securities Act, 1933, as amended. On September 16, 2004, we entered into a Note Purchase Agreement with Strome Hedgecap Ltd. ("Storme"), pursuant to which we issued to Strome a 10% Note in the aggregate amount of $1,200,000, due September 16, 2005. In connection with the issuance of the Note we issued Strome warrants to purchase an additional 1,344,000 shares of common stock. The Promissory Note and the warrants were issued pursuant to an exemption from registration provided by Section 4(2) of the Securities Act, 1933, as amended. Item 8.01. Other Events We filed a press release on September 23, 2004 related to the acquisition of certain assets from Neurosmith, LLC. The press release is attached hereto as Exhibit 99.1 Item 9.01. Financial Statements and Exhibits. Exhibits ---------------------------------------------------------------------------- 4.1 Note Purchase Agreement, dated September 15, 2004 ---------------------------------------------------------------------------- 4.2 Note Purchase Agreement, dated September 16, 2004 ---------------------------------------------------------------------------- 4.3 Asset Purchase Agreement, dated September 17, 2004 ---------------------------------------------------------------------------- 991. Press Release ---------------------------------------------------------------------------- 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SMALL WORLD KIDS, INC. Date: September 24, 2004 By: /s/ Debra Fine ------------------------------- Name: Debra Fine Title: Chief Executive Officer EX-4.1 2 v06955_ex4-1.txt NOTE PURCHASE AGREEMENT By and Between St. Cloud Capital Partners L.P. and Small World Kids, Inc. Dated: As of September 7, 2004 NOTE PURCHASE AGREEMENT Note Purchase Agreement dated as of September 7, 2004 (this "Agreement") by and between Small World Kids, Inc., a Nevada corporation (the "Company"), and St. Cloud Capital Partners L.P. ("Purchaser"). RECITALS A. Purchaser desires to purchase from the Company, and the Company desires to sell to Purchaser, upon the terms and subject to the conditions of this Agreement, a note (the "Note") in the aggregate principal amount of two million dollars ($2,000,000) (the "Loan Amount"). B. The Company shall issue to Purchaser, without additional consideration, an aggregate of 650,000 shares of the Company's Common Stock (the "Shares") and warrants (the "Warrants") in the form of Exhibit B attached hereto, evidencing Purchaser's right to acquire an aggregate of 350,000 shares of the Company's Common Stock (the "Warrant Shares"); C. The Company and the Purchaser are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") and the provisions of Regulation D ("Regulation D") as promulgated thereunder; and D. This Agreement, the Note, the Warrants, the Letter Agreement (as hereinafter defined) and the Lock-Up Agreement (as hereinafter defined) are sometimes hereinafter collectively referred to as the "Transaction Documents." AGREEMENTS NOW, THEREFOR, in consideration of their respective promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties, the Company and Purchaser hereby agree as follows: 1. ISSUANCE SALE AND DELIVERY OF SECURITIES. a. Issuance of the Note. Subject to the terms and conditions set forth in this Agreement and in reliance upon the representations and warranties contained herein, the Company agrees to issue and sell to Purchaser and Purchaser hereby agrees to purchase from the Company, the Note. The Note or any portion thereof shall (a) at the option of Purchaser, be convertible into shares of the Company's Common Stock (the "Note Shares") and (b) be substantially in the form attached hereto as Exhibit A. b. Closing. The closing of the purchase and sale of the Note (the "Closing") shall be held at the offices of Loeb & Loeb LLP in Los Angeles, California, or at such other location as shall be agreed upon by the parties hereto on or before September 15, 2004 (the "Outside Date"). At the Closing, the Company shall deliver the Note, the Warrants and the Shares to Purchaser and Purchaser shall pay to the Company the Loan Amount, less a closing fee of $80,000 (the "Closing Fee"), by cashiers' check, certified funds or wire transfer. Concurrently with the receipt of the Loan Amount, the Company shall also pay to St. Cloud Capital LLC a management fee (the "Management Fee") of $80,000 pursuant to the Letter Agreement attached as Exhibit C. Notwithstanding anything to the contrary, if the conditions to Closing set forth in Article 6 have been satisfied by the Company by the Outside Date, and (a) the Closing occurs after the Outside Date, no Closing Fee shall be paid or deducted, and (b) if the Closing occurs after September 17, 2004, no Management Fee shall be payable. The date of the Closing is referred to herein as the Closing Date. 2. PURCHASER'S REPRESENTATIONS AND WARRANTIES. Purchaser understands, agrees with, and represents and warrants to the Company with respect to the purchase hereunder, that: a. Investment Purposes; Compliance With Securities Act. Purchaser is acquiring the Note, the Warrants and the Shares for Purchaser's own account, for investment only and not with a view towards, or in connection with, the public sale or distribution thereof, except pursuant to sales registered under or exempt from the Securities Act. b. Accredited Purchaser Status. Purchaser is an "accredited Purchaser" as that term is defined in Rule 501 (a) of Regulation D. Purchaser is a sophisticated purchaser and has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of an investment made pursuant to this Agreement. c. Reliance on Exemptions. Purchaser understands the Note, the Warrants and the Shares are being offered and sold to in reliance on specific exemptions from the registration requirements of the applicable United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and Purchaser's compliance with, the representations, warranties, acknowledgments, understandings, agreements and covenants of the Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of Purchaser to acquire the Note, the Warrants and the Shares. d. Information. Purchaser and the advisors of the Purchaser, if any, have been furnished with all material information relating to the business, finances and operations of the Company and material information relating to the offer and sale of the Note, the Warrants and the Shares that have been requested by the Purchaser. Purchaser and Purchaser's advisors, if any, have been afforded the opportunity to ask all such questions of the Company as they have in their discretion deemed advisable. Purchaser understands that Purchaser's investment in the Note, the Warrants and the Shares involves a high degree of risk. Purchaser has sought such accounting, legal and tax advice as it has considered necessary to an informed investment decision with respect to the investment made pursuant to this Agreement. e. Transfer or Resale. Purchaser understands that: (i) the Note, the Warrants, the Warrant Shares, the Note Shares and the Shares have not been registered under the Securities Act of 1933, as amended (the "Securities Act") or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless either (a) subsequently registered thereunder or (b) Purchaser shall have delivered to the Company an opinion by counsel reasonably satisfactory to the Company, in form, scope and substance reasonably satisfactory to the Company, to the effect that the Note, the Note Shares, the Shares and/or the Warrants, as the case may be, to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, and (ii) except as expressly provided herein, neither the Company nor any other person is under any obligation to register such Note, the Note Shares, the Shares, the Warrant Shares and/or the Warrants under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. 2 f. Legends. The Note, the Warrants, the Shares, the Note Shares and the Warrant Shares shall bear the following legend: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR, IF APPLICABLE, STATE SECURITIES LAWS. THIS SECURITY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENSE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SMALL WORLD KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED." g. Authorization; Enforcement. The Transaction Documents as to which Purchaser is a party have been duly and validly authorized, executed and delivered by Purchaser and are each and collectively valid and binding agreements of Purchaser enforceable in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, liquidation, or similar laws relating to, or affecting, generally the enforcement of creditors' rights and remedies or by other equitable principles of general application. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company understands, agrees with, and represents and warrants to Purchaser that: a. Organization and Qualification. The Company and its subsidiaries are duly organized and existing in good standing under the laws of the respective jurisdictions in which they are incorporated and have the requisite corporate power to own their properties and to carry on their business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where the failure so to qualify would have a Material Adverse Effect. "Material Adverse Effect" as used herein means any material adverse effect on the operations, properties or financial condition of the Company and its subsidiaries taken as a whole. b. Authorization; Enforcement. (i) The Company has the requisite corporate power and authority to enter into and perform the Transaction Documents, to issue and sell the Note in accordance with the terms hereof, and to perform its obligations under the Note in accordance with the requirements of the same, (ii) the execution, delivery and performance of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its shareholders is required, (iii) the Transaction Documents have been duly and validly authorized, executed and delivered by the Company, and (iv) the Transaction Documents constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting, generally, the enforcement of creditors' rights and remedies or by other equitable principles of general application. 3 c. No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Articles of Incorporation or Bylaws of the Company or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a material adverse effect). d. Consents. Except for the filing of a Form D with the United States Securities and Exchange Commission, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under the Transaction Documents. e. SEC Reports. The Company has filed all proxy statements, reports and other documents required to be filed by it under the Securities Exchange Act of 1934 as amended (the "Exchange Act"). The Company has furnished Purchaser with copies of (i) its Annual Report on Form 10-K for the fiscal year ended June 30, 2003, Form 8-K filed June 4, 2004, as amended on June 16, 2004 and August 31, 2004, and its Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004, as amended on August 31, 2004 (collectively, the "SEC Reports"). The SEC Reports were in substantial compliance with the requirements of its respective form and neither the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. f. Absence of Certain Changes. Since June 30, 2004, there has been no material adverse change and no material adverse development in the business, properties, operation, financial condition, results of operations or prospects of the Company. g. Absence of Litigation. Except as set forth on Schedule 3(g), there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company, threatened against or affecting the Company, wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein. 4 h. Title to Assets and Liens. Except as set forth on Schedule 3(h), the Company has good and marketable title to the Assets owned by it and the valid and enforceable right to receive and/or use each of the Assets in which the Company has any other interest, free and clear of all Liens. As used herein (i) "Liens" shall mean any lien, encumbrance, pledge, mortgage, security interest, lease, charge, conditional sales contract, option, restriction, reversionary interest, right of first refusal, voting trust arrangement, preemptive right, claim under bailment or storage contract, easement or any other adverse claim or right whatsoever; and (ii) "Assets" shall mean all of the goodwill, assets, properties and rights of every nature, kind and description, whether tangible or intangible, real, personal or mixed, wherever located and whether or not carried or reflected on the books and records of the Company, which are owned by the Company or in which the Company has any interest (including the right to use). i. Capitalization. Attached as Schedule 3(i) is a true and correct description of the capitalization of the Company. Additionally, the Company owns 10,000 shares of Small World Toys, Inc. representing all of the issued and outstanding capital stock of Small World Toys. j. Minute Books. The minute books of the Company provided to Purchaser contain a complete summary of all meetings of directors and shareholders since the time of incorporation and reflect all transactions referred to in such minutes accurately in all material respects. 4. COVENANTS. a. Best Efforts. Each party shall use its best efforts timely to satisfy each of the conditions to be satisfied by it as provided in Sections 5 and 6 of this Agreement. b. Securities Laws. The Company agrees to timely file all reports and other documents required to be filed with the SEC, specifically, a Form D (or equivalent form required by applicable state law) with respect to the Note Shares and Warrants if and as required under Regulation D and applicable state securities laws and to provide a copy thereof to Purchaser promptly after such filing. c. Expenses. Each party shall pay such party's expenses in connection with the transactions contemplated by the Agreement except that the Company concurrently with the execution of this Agreement will pay to Purchaser up to $5,000 to cover in full Purchaser's legal costs in connection with this Agreement. d. Use of Proceeds. The Company shall use the net proceeds from the sale of the Note for working capital and general corporate purposes. 5 e. Board Seat. During the period that the Note is outstanding, Cary Fitchey will be appointed to the Company's board of directors for such period, provided that the Company shall have no obligation to provide Mr. Fitchey with any compensation otherwise made available to its other outside directors except that Mr. Fitchey shall be entitled to be reimbursed for his reasonable out of pocket expenses upon providing documentation therefor. In addition, as long as Purchaser owns in excess of 500,000 shares of the Company (subject to adjustment for stock splits, recapitalizations, etc.), a designee of Purchaser reasonably acceptable to the Company shall be entitled to an observer seat on the board of directors. On or before the Closing, Mr. Fitchey shall submit to the Company an undated letter of resignation in connection with his board of directors' appointment. f. Security Interest. Purchaser has been advised by the Company that (a) the Company's credit agreement with Manufacturers' Bank prohibits the placing of liens on the property of Small World Toys without the consent of such bank, and (b) the Company is currently engaged in discussions with one or more financial institutions for a replacement credit facility. It shall be a condition to the Company entering into any such replacement credit facility that the lender permit the Company to grant a security interest in favor of Purchaser in the assets of Small World Toys which security interest will be subordinate to the lien of such lender pursuant to an intercreditor's agreement reasonably acceptable to Purchaser. Notwithstanding the foregoing, if for whatever reason the Company has not granted to Purchaser a security interest in the assets of Small World Toys, Inc. which security interest shall have the priority described in the Note (or such other credit enhancement reasonably acceptable to Purchaser) by November 30, 2004, then the number of Warrant Shares shall increase by 100,000 without any further action on the part of the parties and Purchaser shall issue a new Warrant for such increased number of Warrant Shares on the same terms as Exhibit B. 5. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligations of the Company hereunder are subject to the satisfaction, on or before the Closing, unless otherwise specified, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: a. Each of the Company and Purchaser shall have executed the Transaction Documents as to which it is a party. b. The representations and warranties of Purchaser shall be true and correct in all material respects as of the Closing as though made at that time (except for representations and warranties that speak as of a specific date). Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by Purchaser at or prior to the Closing. c. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated herein. 6 d. All consents, approval, authorizations and orders required to be obtained and all registrations, filings and notices required to be made with or given to any regulatory authority or person as provided herein shall have been made. e. Purchaser shall have entered into the Lock Up Agreement attached hereto as Exhibit D with respect to the Shares, the Warrant Shares and the Note Shares. f. Purchaser shall execute such documentation as may be reasonably requested by the Company to subordinate the obligations of the Company under the Note to the Senior Indebtedness of the Company (as such term is defined in the Note) from time to time outstanding. 6. CONDITIONS TO PURCHASER'S OBLIGATION TO PURCHASE. The obligations of Purchaser are subject to the satisfaction, on or before the Closing, unless otherwise specified, of each of the following conditions, provided that these conditions are for the sole benefit of Purchaser and may be waived by Purchaser at any time in its sole discretion: a. The Company shall have executed the Transaction Documents. b. The representations and warranties of the Company shall be true and correct in all material respects as of the Closing (except for representations and warranties that speak as of a specific date). The Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing. The Purchaser may require a certificate, executed by the Chief Executive Officer of the Company, dated as of the Closing, to the foregoing effect and as to such other matters as may be reasonably requested by Purchaser. c. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated herein. d. All consents, approval, authorizations and orders required to be obtained and all registrations, filings and notices required to be made with or given to any regulatory authority or person as provided herein shall have been made. e. Purchaser shall receive evidence reasonably satisfactory to it that the holder of the Term Note (as such term is defined in the Note) agrees to defer payment of principal under the Term Note until the Note is paid in full. 7. REGISTRATION The Company shall include the Shares, the Note Shares and the Warrant Shares in a registration statement to be filed by the Company in connection with the resale of shares of the Company's Common Stock (the "Put Financing") issuable pursuant to Stock Purchase Agreements dated as of September 3, 2004 (the "Purchase Agreements) between the Company and each of Pewter Hill Partners, LLC, Infinium Investment Partners, LLC and Wire Mill Partners III, LLC (the "Put Purchasers"). 7 8. GOVERNING LAW; MISCELLANEOUS. a. Governing Law and Venue. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California without regard to the principles of conflict of laws. In the event of any litigation regarding the interpretation or application of this Agreement, the parties irrevocably consent to jurisdiction in any of the state or federal courts located in the City of Los Angeles, State of California and waive their rights to object to venue in any such court, regardless of the convenience or inconvenience thereof to any party. Service of process in any civil action relating to or arising out of this Agreement (including also all Exhibits or Schedules hereto) or the transaction(s) contemplated herein may be accomplished in any manner provided by law. The parties hereto agree that a final, non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. b. Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and signature pages from such counterparts have been delivered. c. Headings; Gender, Etc. The headings of this Agreement are for convenience of reference and shall not form a part of, or affect the interpretation of this Agreement. As used herein, the masculine shall refer to the feminine and neuter, the feminine to the masculine and neuter, and the neuter to the masculine and feminine, as the context may require. As used herein, unless the context clearly requires otherwise, the words "herein," "hereunder" and "hereby," shall refer to this entire Agreement and not only to the Section or paragraph in which such word appears. If any date specified herein falls upon a Saturday, Sunday or public or legal holidays, the date shall be construed to mean the next business day following such Saturday, Sunday or public or legal holiday. For purposes of this Agreement, a "business day" is any day other than a Saturday, Sunday or public or legal holiday. d. Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. e. Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. 8 f. Notices. Any notices required or permitted to be given under the terms of this Agreement shall be sent by U.S. Mail or delivered personally or by courier or via facsimile (if via facsimile, to be followed within three (3) business days by an original of the notice document via U.S. Mail or courier) and shall be effective five (5) days after being placed in the mail, if mailed, certified or registered, return receipt requested, or upon receipt, if delivered personally or by courier or by facsimile, in each case properly addressed to the party to receive the same. The addresses for such communications shall be: If to the Company: Small World Kids, Inc. 5711 Bunkingham Parkway Culver City, California 90230 Attention: Debra Fine Fax Number: 310-258-1194 With a copy to: Loeb & Loeb LLP 10100 Santa Monica Boulevard, Suite 2200 Los Angeles, California 90067 Attention: David L. Ficksman Fax Number: 310-282-2200 If to Purchaser: St. Cloud Capital Partners L.P. 10866 Wilshire Boulevard, Suite 1450 Los Angeles, California 90024 Attention: Cary S. Fitchey Fax Number: 310-553-0257 With a copy to: Latham and Watkins, LLP 633 West Fifth Street, Suite 4000 Los Angeles, California 90071 Attention: Alex Voxman Fax Number: 213-891-8763 If to the Purchaser, at the address on the signature of this Agreement. Each party shall provide written notice to the other party of any change in address. g. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. Neither the Company nor Purchaser shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other (which consent shall not be unreasonably withheld), and in any event any assignee of Purchaser shall be an accredited investor (as defined in Regulation D), in the written opinion of counsel who is reasonably satisfactory to Company, and such assignment shall be in form, substance and scope reasonably satisfactory to the Company. Notwithstanding anything herein to the contrary, Purchaser may pledge the Note as collateral for a bona fide loan with a third party lender, and such pledge shall not be considered an assignment in violation of this Agreement so long as it is made in compliance with all applicable law. 9 h. No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. i. Survival. The representations and warranties of the Company and Purchaser contained in Sections 2 and 3 and the agreements and covenants set forth in Section 4 shall survive the final Closing of the purchase and sale of the Note purchased and sold hereby. j. Further Assurance. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. k. Remedies. No provision of this Agreement providing for any specific remedy to a party shall be construed to limit such party to the specific remedy described, and any other remedy that would otherwise be available to such party at law or in equity shall be so available. Nothing in this Agreement shall limit any rights a party may have with any applicable federal or state securities laws with respect to the transactions contemplated hereby. l. Termination. If the Company has satisfied all of the conditions set forth in Section 6, if the Closing has not occurred by the Outside Date, in addition to any other right or remedy, at law or in equity, the Company shall have the right to terminate this Agreement by notice to the Purchaser. [Remainder of the page intentionally left blank] 10 IN WITNESS WHEREOF, Purchaser and the Company have caused this Note Purchase Agreement to be duly executed as of the date first written above. THE COMPANY: SMALL WORLD KIDS, INC. By: ----------------------------- Name: Debra Fine Title: Chief Executive Officer PURCHASER: ST. CLOUD CAPITAL PARTNERS L.P. By: SCGP, LLC Its: General Partner By: ----------------------------- Name: Cary S. Fitchey Title: Senior Managing Member 11 Schedule 3(g) Litigation o The Company has received a letter from an attorney claiming that Small World Kids owes $180,000 as a finder's fee in connection with the acquisition of Small World Toys which claim is subject to indemnification by Eddy Goldwasser. Schedule 3(h) Pledged Assets o Promissory Note dated May 20, 2004 in the aggregate principal amount of five million dollars ($5,000,000) executed by Small World Kids, Inc. in favor of SWT, LLC is secured by a majority (8,333) shares of Small World Toys. o Credit Facility by and between Small World Toys, as Borrower and Manufacturer's Bank as Lender is secured by all of the assets of Small World Toys. o 1,667 shares of Small World Toys have been pledged to Eddy Goldwasser to secure two promissory notes dated May 20, 2004 to Mr. Goldwasser. Schedule 3(i) Capitalization Small World Kids Capitalization Table Beneficial Ownership
Sav-On Purchase Exchange Team of Ruben Agmt Sports 05/20/04 05/20/04 Shares Total Shares Russell and Debra Fine, as trustees of FFT 1,648,714 13,509,843 15,158,557 SWT Investments, LLC 1,846,467 15,130,261 16,976,728 Phoenix Capital Opportunity, LLC 820,652 6,724,560 7,545,212 David Marshall, Inc. 1,173,134 9,612,858 10,785,992 David L. Ficksman and Maxine B. Ficksman, as trustees of the Ficksman Family Trust 41,033 336,228 377,261 Michael Ruben 650,000 650,000 Other Holders 977,000 977,000 Debra Fine John Nelson Bob Rankin All other employees Shares remaining for issuance ------------------------------------------------------- Total Shares 5,530,000 45,313,750 1,627,000 52,470,750 ======================================================= Percentage Options Fully Diluted Percentage Russell and Debra Fine, as trustees of FFT 28.9% 15,158,557 25.9% SWT Investments, LLC 32.4% 16,976,728 29.0% Phoenix Capital Opportunity, LLC 14.4% 7,545,212 12.9% David Marshall, Inc. 20.6% 10,785,992 18.4% David L. Ficksman and Maxine B. Ficksman, as trustees of the Ficksman Family Trust 0.7% 377,261 0.6% Michael Ruben 1.2% 650,000 1.1% Other Holders 1.9% 977,000 1.7% Debra Fine 2,600,000 2,600,000 4.4% John Nelson 600,000 600,000 1.0% Bob Rankin 520,000 520,000 0.9% All other employees 2,400,000 2,400,000 4.1% Shares remaining for issuance ---------------------------------------------- Total Shares 100.0% 6,120,000 58,590,750 100% ==============================================
PROMISSORY NOTE THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR, IF APPLICABLE, STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SMALL WORLD KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED. NOTE FOR VALUE RECEIVED, Small World Kids, Inc. a Nevada corporation (the "Borrower") with principal offices located at 5711 Buckingham Parkway, Culver City, California 90230, hereby promises to pay to St. Cloud Capital Partners L.P. (the "Holder") or order, without demand, the sum of Two Million Dollars ($2,000,000) with interest at the rate of 10% per annum. The principal amount of the Note shall be due and payable on the Maturity Date (as hereinafter defined). Capitalized term used herein but not otherwise defined shall have the meaning assigned to those terms in that certain Note Purchase Agreement dated September 7, 2004, between the Borrower, the Holder and the other holders of notes of the Borrower. The following terms shall apply to this Note: ARTICLE I PAYMENT 1.1 Payment of Interest. Interest shall be due and payable in full on the Maturity Date. However, that if the Note has not been paid in full by February ___, 2005, commencing on the last day of the next month and on the last day of each month thereafter until the Note is paid in full, Borrower shall make interest payments on the unpaid principal amount, provided that any such installment of interest may be deferred if, in the reasonable judgment of the Company, such payment would impair the Company's ability to meet its obligations as they become due. During the occurance and continuation of an Event of Default the interest rate shall be increased by five (5%) per annum commencing on the date when the Event of Default was declared by Holder. 1.2 Maturity Date. On the Maturity Date, the entire principal amount and any accrued and unpaid interest shall be paid to the Holder without offset or deduction of any kind. The Maturity Date shall be twelve (12) months from the Closing Date. 1.3 Prepayment. The Note may be prepaid in whole or in part (subject to a minimum payment of $100,000), without premium or penalty. 1.4 Priority. The Note shall rank senior to the Company's indebtedness in the aggregate principal amount of five million dollars ($5,000,000) to SWT, LLC evidenced by the Term Note dated as of May 20, 2004 (the "Term Note") to the effect that no payment of principal may be made under the Term Note until this Note is paid in full . The Note shall be subordinated to all existing or reasonably approved Senior Indebtedness of the Company. Senior Indebtedness shall mean all indebtedness of the Company regardless of whether incurred on, before or after the Closing Date (i) for money borrowed from any bank, savings and loan association, insurance company or any other financial institution engaged in the business of lending funds which is evidenced by notes, bonds, debentures or other written obligations and (ii) any other indebtedness in writing signed by the Company which, by its terms, provides that it is senior in priority to the payment to the Note. 1.5 Mandatory Repayment. The Company shall pay to Holder seventy-five percent (75%) of the net proceeds received by the Company from the Put Financing (and, to the extent permitted by the terms of such investment, any other equity financing) to be applied to the repayment of the Note until the Note is repaid in full, such prepayments to be applied first to accrued interest and then to unpaid principal. Notwithstanding the foregoing, if the Company enters into any other debt financing up to a cumulative amount of $750,000 (which in any event shall be on terms reasonably acceptable to Purchaser) which requires prepayment from the net proceeds of equity financings, the Company shall have the right to apply such seventy-five percent (75%) between Holder and any other holders of debt on a pari passu basis. ARTICLE II EVENTS OF DEFAULT 2.1 Events of Default. The occurrence of any of the following events of default ("Event of Default") shall, at the option of the Holder hereof, make the principal balance then remaining unpaid hereon and all other amounts payable hereunder immediately due and payable: (a) Failure to Pay Principal and/or Interest. The Borrower fails to pay any installment of principal or interest hereon when due and such failure continues for a period of ten (10) days after the due date. (b) Breach of Covenant. The Borrower breaches any material covenant or other term or condition of this Note or the Note Purchase Agreement in any material respect and such breach, if subject to cure, continues for a period of thirty (30) days after written notice to the Borrower from the Holder. (c) Breach of Representations and Warranties. Any material representation or warranty of the Borrower made herein in any Transactional Document shall be false or misleading in any material respect. (d) Receiver or Trustee. The Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwise be appointed. 2 (e) Judgments. Any money judgment, writ or similar final process, shall be entered or filed against Borrower or any of its property or other assets for more than $500,000, and shall remain unvacated, unbonded or unstayed for a period of forty-five (45) days. (g) Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower and if instituted against Borrower are not dismissed within 60 days of initiation. 2.2 Enforcement. Upon the occurrence of any Event of Default, the Holder may thereupon proceed to protect and enforce its rights either by suit in equity and/or by action at law or by other appropriate proceedings whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in this Note or in aid of the exercise of any power granted in this Note, and proceed to enforce the payment of this Note held by it, and to enforce any other legal or equitable right of the Holder. ARTICLE III CONVERSION 3.1 Right to Convert. In the event that the Borrower elects to exercise its put rights under the Put Financing, it shall provide notice to Holder (the "Put Notice") concurrently with its notice under the Purchase Agreements. Upon receipt of such Notice, Holder shall have the right to convert any unpaid principal portion and accrued interest on this Note into shares of Borrower's Common Stock (the "Conversion Shares") by delivery to Borrower of a Notice of Conversion within three business days from formal receipt of the Put Notice at the conversion price equal to the average price per share of the Put Financing for all tranches with respect to which the Borrower has the right to exercise (the "Conversion Price"). Holder shall be entitled to exercise its conversion rights hereunder only one time. 3.2 Issuance of Shares. Upon the delivery to Borrower of a Notice of Conversion of the Holder's written request for conversion, Borrower shall issue and deliver to the Holder within five (5) business days from the Conversion Notice that number of shares of Common Stock for the portion of the Note converted in accordance with the foregoing. The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing that portion of the principal and accrued interest under the Note to be converted by the Conversion Price. In the event that, after the Conversion, shares have been issued pursuant to the Put Financing so that the average price of the Put Financing becomes lower than the Conversion Price, the Borrower shall issue to Holder such number of additional Conversion Shares based upon such lower average price. 3 ARTICLE IV MISCELLANEOUS 4.1 Failure or Indulgence Not Waiver. No failure or delay on the part of Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 4.2 Notices. Any notice herein required or permitted to be given shall be in writing and may be personally served or sent by fax transmission (with copy sent by certified or registered mail or by overnight courier). For the purposes hereof, the address and fax number of the Holder is set forth on the signature page hereto. The address and fax number of the Borrower is 5711 Bunkingham Parkway, Culver City, California 90230, facsimile (310) 258-1194. Both Holder and Borrower may change the address and fax number for service by service of notice to the other as herein provided. 4.3 Amendment Provision. The term "Note" and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented. 4.4 Assignability. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder. 4.5 Cost of Collection. If default is made in the payment of this Note, Borrower shall pay the Holder hereof reasonable costs of collection, including reasonable attorneys' fees. 4.6 Maximum Payments. Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Borrower to the Holder and thus refunded to the Borrower. 4.7 Governing Law and Venue. This Note shall be governed by and interpreted in accordance with the laws of the State of California without regard to the principles of conflict of laws. In the event of any litigation regarding the interpretation or application of this Note, the parties irrevocably consent to jurisdiction in any of the state or federal courts located in the City of Los Angeles, State of California and waive their rights to object to venue in any such court, regardless of the convenience or inconvenience thereof to any party. Service of process in any civil action relating to or arising out of this Agreement or the transaction(s) contemplated herein may be accomplished in any manner provided by law. The parties hereto agree that a final, non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. 4 IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its President on this __ day of September, 2004. SMALL WORLD KIDS, INC. By: --------------------------------- Name: Debra Fine Title: Chief Executive Officer Address of Borrower: 5711 Buckingham Parkway Culver City, California 90230 5 WARRANT NEITHER THE SECURITIES REPRESENTED HEREBY NOR THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS WARRANT OR SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS WARRANT OR SUCH SECURITIES, AS APPLICABLE, MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED HEREIN. September __, 2004 350,000 Common Stock Purchase Warrant SMALL WORLD KIDS, INC. Incorporated under the laws of the State of Nevada Certificate for Common Stock Purchase Warrants THIS CERTIFIES that, for value received, St. Cloud Capital Partners L.P. (together with all permitted assigns, the "Holder") is entitled to subscribe for, and purchase from, SMALL WORLD KIDS, INC., a Nevada corporation (the "Company"), upon the terms and conditions set forth herein, at any time or from time to time during the period commencing on the date hereof and terminating four years from the date hereof (the "Exercise Period"), up to three hundred fifty thousand (350,000) shares of Common Stock (the "Warrant Shares"). This Warrant is exercisable at an exercise price per share equal to the lesser of $.50 per share (as such price may be adjusted as provided herein, the "Exercise Price") or the average price of the Put Financing; provided, however, that upon the occurrence of any of the events specified in Sections 5 or 6 hereof, the rights granted by this Warrant, including the number of shares of Common Stock to be received upon such exercise, shall be adjusted as therein specified. Capitalized term used herein but not otherwise defined shall have the meaning assigned to those terms in that certain Note Purchase Agreement dated as of September 7, 2004, between the Holder and the Company. 6 1. Exercise of Warrant. This Warrant may be exercised during the Exercise Period, either in whole or in part, by the surrender of this Warrant (with the election at the end hereof duly executed) to the Company at its office at 5711 Buckingham Parkway, Culver City, California 90230 or at such other place as is designated in writing by the Company, together with a certified or bank cashier's check payable to the order of the Company in an amount equal to the product of the Exercise Price and the number of Warrant Shares for which this Warrant is being exercised. 2. Rights Upon Exercise; Delivery of Securities. Upon each exercise of the Holder's rights to purchase Warrant Shares, the Holder shall be deemed to be the holder of record of the Warrant Shares, notwithstanding that the transfer books of the Company shall then be closed or certificates representing the Warrant Shares with respect to which this Warrant was exercised shall not then have been actually delivered to the Holder. As soon as practicable after each such exercise of this Warrant, the Company shall issue and deliver to the Holder a certificate or certificates representing the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a Warrant evidencing the right of the Holder to purchase the balance of the aggregate number of Warrant Shares purchasable hereunder as to which this Warrant has not been exercised or assigned. 3. Registration of Transfer and Exchange. Any Warrants issued upon the transfer or exercise in part of this Warrant shall be numbered and shall be registered in a warrant register (the "Warrant Register") as they are issued. The Company shall be entitled to treat the registered holder of any Warrant on the Warrant Register as the owner in fact thereof for all purposes, and shall not be bound to recognize any equitable or other claim to, or interest in, such Warrant on the part of any other person, and shall not be liable for any registration or transfer of Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with the actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration of transfer, or with the knowledge of such facts that its participation therein amounts to bad faith. This Warrant shall be transferable on the books of the Company only upon delivery thereof duly endorsed by the Holder or by his duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment, or authority to transfer. In all cases of transfer by an attorney, executor, administrator, guardian, or other legal representative, duly authenticated evidence of his, her, or its authority shall be produced. Upon any registration of transfer, the Company shall deliver a new Warrant or Warrants to the person entitled thereto. This Warrant may be exchanged, at the option of the Holder thereof, for another Warrant, or other Warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrant Shares (or portions thereof), upon surrender to the Company or its duly authorized agent. Notwithstanding the foregoing, the Company shall have no obligation to cause Warrants to be transferred on its books to any person if, in the opinion of counsel to the Company, such transfer does not comply with the provisions of the Securities Act and the rules and regulations thereunder. 7 4. Reservation of Shares. The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of the Warrants, such number of shares of Common Stock as shall, from time to time, be sufficient therefor. The Company represents that all shares of Common Stock issuable upon exercise of this Warrant are duly authorized and, upon receipt by the Company of the full payment for such Warrant Shares, will be validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof and will not be issued in violation of any preemptive or similar rights of stockholders. 5. Antidilution. (a) In the event that the Company shall at any time; (i) declare a dividend on the outstanding Common Stock payable in shares of its capital stock, (ii) subdivide the outstanding Common Stock; (iii) combine the outstanding Common Stock into a smaller number of shares; or (iv) issue any shares of its capital stock by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each case, the Exercise Price per Warrant Share in effect at the time of the record date for the determination of stockholders entitled to receive such dividend or distribution or of the effective date of such subdivision, combination, or reclassification shall be adjusted so that it shall equal the price determined by multiplying such Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action, and the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action. Such adjustment shall be made successively whenever any event listed above shall occur and shall become effective at the close of business on such record date or at the close of business on the date immediately preceding such effective date, as applicable. (b) All calculations under this Section 5 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (c) In any case in which this Section 5 shall require that an adjustment in the number of Warrant Shares be made effective as of a record date for a specified event, the Company may elect to defer, until the occurrence of such event, issuing to the Holder, if the Holder exercised this Warrant after such record date, the Warrant Shares, if any, issuable upon such exercise over and above the number of Warrant Shares issuable upon such exercise on the basis of the number of shares of Common Stock in effect prior to such adjustment; provided, however, that the Company shall deliver to the Holder a due bill or other appropriate instrument evidencing the Holder's right to receive such additional shares of Common Stock upon the occurrence of the event requiring such adjustment. (d) Whenever there shall be an adjustment as provided in this Section 5, the Company shall within 15 days thereafter cause written notice thereof to be sent by registered mail, postage prepaid, to the Holder, at its address as it shall appear in the Warrant Register, which notice shall be accompanied by an officer's certificate setting forth the number of Warrant Shares issuable and the Exercise Price thereof after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the computation thereof, which officer's certificate shall be conclusive evidence of the correctness of any such adjustment absent manifest error. 8 (e) The Company shall not be required to issue fractions of shares of Common Stock or other capital stock of the Company upon the exercise of this Warrant. If any fraction of a share of Common Stock would be issuable on the exercise of this Warrant (or specified portions thereof), the Company shall purchase such fraction for an amount in cash equal to the same fraction of the average closing sale price (or average of the closing bid and asked prices, if closing sale price is not available) of Common Stock for the 10 trading days ending on and including the date of exercise of this Warrant. (f) No adjustment in the Exercise Price per Warrant Share shall be required if such adjustment is less than $0.05; provided, however, that any adjustments which by reason of this Section 5 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (g) Whenever the Exercise Price payable upon exercise of this Warrant is adjusted pursuant to subsection (a) above, the number of Warrant Shares issuable upon exercise of this Warrant shall simultaneously be adjusted by multiplying the number of Warrant Shares theretofore issuable upon exercise of this Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. 6. Reclassification; Reorganization; Merger, etc. (a) In case of any capital reorganization, other than in the cases referred to in Section 5(a) hereof, or the consolidation or merger of the Company with or into another corporation (other than a merger or consolidation in which the Company is the continuing corporation, and which does not result in any reclassification of the outstanding shares of Common Stock or the conversion of such outstanding shares of Common Stock into shares of other stock or other securities or property), or in the case of any sale, lease, or conveyance to another corporation of the property and assets of any nature of the Company as an entirety or substantially as an entirety (such actions being hereinafter collectively referred to as "Reorganizations"), there shall thereafter be deliverable upon exercise of this Warrant (in lieu of the number of Warrant Shares theretofore deliverable) the number of shares of stock or other securities or property to which a holder of the respective number of Warrant Shares which would otherwise have been deliverable upon the exercise of this Warrant would have been entitled upon such Reorganization if this Warrant had been exercised in full immediately prior to such Reorganization. In case of any Reorganization, appropriate adjustment, as determined in good faith by the Board of Directors of the Company, shall be made in the application of the provisions herein set forth with respect to the rights and interests of the Holder so that the provisions set forth herein shall thereafter be applicable, as nearly as possible, in relation to any shares or other property thereafter deliverable upon exercise of this Warrant. Any such adjustment shall be made by, and set forth in, a supplemental agreement between the Company, or any successor thereto, and the Holder, with respect to this Warrant, and shall for all purposes hereof conclusively be deemed to be an appropriate adjustment. The Company shall not effect any such Reorganization unless, upon or prior to the consummation thereof, the successor corporation, or if the Company shall be the surviving corporation in any such Reorganization and is not the issuer of the shares of stock or other securities or property to be delivered to holders of shares of the Common Stock outstanding at the effective time thereof, then such issuer, shall assume by written instrument the obligation to deliver to the Holder such shares of stock, securities, cash, or other property as such Holder shall be entitled to purchase in accordance with the foregoing provisions. In the event of sale, lease, or conveyance or other transfer of all or substantially all of the assets of the Company as part of a plan for liquidation of the Company, all rights to exercise this Warrant shall terminate 30 days after the Company gives written notice to the Holder that such sale or conveyance or other transfer has been consummated. 9 (b) In case of any reclassification or change of the shares of Common Stock issuable upon exercise of this Warrant (other than a change in par value or from a specified par value to no par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), or in case of any consolidation or merger of another corporation into the Company in which the Company is the continuing corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), the Holder or holders of this Warrant shall have the right thereafter to receive upon exercise of this Warrant solely the kind and amount of shares of stock and other securities, property, cash, or any combination thereof receivable upon such reclassification, change, consolidation, or merger by a holder of the number of Warrant Shares for which this Warrant might have been exercised immediately prior to such reclassification, change, consolidation, or merger. Thereafter, appropriate provision shall be made for adjustments which shall be as nearly equivalent as practicable to the adjustments in Section 5. (c) The above provisions of this Section 6 shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales, leases, or conveyances. 7. Notice of Certain Events. In case at any time the Company shall propose: (a) to pay any dividend or make any distribution on shares of Common Stock in shares of Common Stock or make any other distribution (other than regularly scheduled cash dividends which are not in a greater amount per share than the most recent such cash dividend) to all holders of Common Stock; or (b) to issue any rights, warrants, or other securities to all holders of Common Stock entitling them to purchase any additional shares of Common Stock or any other rights, warrants, or other securities; or (c) to effect any reclassification or change of outstanding shares of Common Stock or any consolidation, merger, sale, lease, or conveyance of property, as described in Section 6; or 10 (d) to effect any liquidation, dissolution, or winding-up of the Company; (e) to take any other action which would cause an adjustment to the Exercise Price per Warrant Share; then, and in any one or more of such cases, the Company shall give written notice thereof by registered mail, postage prepaid, to the Holder at the Holder's address as it shall appear in the Warrant Register, mailed at least 15 days prior to; (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividend, distribution, rights, warrants, or other securities are to be determined; (ii) the date on which any such reclassification, change of outstanding shares of Common Stock, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up is expected to become effective and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, change of outstanding shares, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up; or (iii) the date of such action which would require an adjustment to the Exercise Price per Warrant Share. 8. Charges and Taxes. The issuance of any shares or other securities upon the exercise of this Warrant and the delivery of certificates or other instruments representing such shares or other securities shall be made without charge to the Holder for any tax or other charge in respect of such issuance. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 9. Periodic Reports. The Company agrees that until all the Warrant Shares shall have been sold pursuant to Rule 144 under the Securities Act, it shall use its best efforts to keep current in filing all reports, statements, and other materials required to be filed with the Commission to permit holders of the Warrant Shares to sell such securities under Rule 144 under the Securities Act. 10. Legend. Until sold pursuant to the provisions of Rule 144 or otherwise registered under the Securities Act, the Warrant Shares issued on exercise of the Warrants shall be subject to a stop transfer order and the certificate or certificates representing the Warrant Shares shall bear the following legend: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD ,PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR(2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THE SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS. 11 11. Loss; Theft; Destruction; Mutilation. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant (and upon surrender of any Warrant if mutilated), and upon receipt by the Company of reasonably satisfactory indemnification, the Company shall execute and deliver to the Holder thereof a new Warrant of like date, tenor, and denomination. 12. Stockholder Rights. The Holder of any Warrant shall not have, solely on account of such status, any rights of a stockholder of the Company, either at law or in equity, or to any notice of meetings of stockholders or of any other proceedings of the Company, except as provided in this Warrant. 13. Governing Law. This Warrant shall be construed in accordance with the laws of the State California applicable to contracts made and performed within such State, without regard to principles of conflicts of law. [Remainder of page intentionally left blank; signatures follow] 12 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed on the __ day of September, 2004. SMALL WORLD KIDS, INC. By: ---------------------------------- Name: Debra Fine Title: Chief Executive Officer HOLDER - ------------------------------ Name: Title: 13 FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the attached Warrant.) FOR VALUE RECEIVED, ________________ hereby sells, assigns, and transfers unto __________________ a Warrant to purchase _________ shares of Common Stock, $.001 par value, of Small World Kids, Inc., a Nevada corporation (the "Company"), and does hereby irrevocably constitute and appoint __________ attorney to transfer such Warrant on the books of the Company, with full power of substitution. Dated: _____________ Signature: _____________ 14 ELECTION TO EXERCISE To: Small World Kids, Inc. 5711 Buckingham Parkway Culver City, California 90230 Attention: Debra Fine Fax: 310-258-1194 The undersigned hereby exercises his, her, or its rights to purchase ______________ shares of Common Stock, $.001 par value ("the Common Stock"), of Small World Kids, Inc. a Nevada corporation (the "Company"), covered by the within Warrant and tenders payment herewith in the amount of $______ in accordance with the terms thereof, and requests that certificates for the securities constituting such shares of Common Stock be issued in the name of, and delivered to: ----------------------------------------------------------------------- (Print Name, Address, and Social Security or Tax Identification Number) Further, if such number of shares of Common Stock shall not constitute all such shares of Common Stock covered by the within Warrant, that a new Warrant for the balance of the shares of Common Stock covered by the within Warrant shall be registered in the name of, and delivered to, the undersigned at the address stated below. Dated: Name: ----------------------------- -------------------------- (Print) Address: ------------------------ -------------------------- (Signature) ------------------------ ------------------------ 15 Exhibit D LOCK-UP AGREEMENT September __, 2004 To St. Cloud Capital Partners L.P. ("Purchaser") Re: Lock-Up Agreement Ladies and Gentlemen: Reference is made to that certain Note Purchase Agreement dated as of September __, 2004 by and between Small World Kids, Inc., a Nevada corporation (the "Company") and Purchaser (the "Note Purchase Agreement"), pursuant to which (i) the Purchaser shall loan to the Company a gross amount of $2,000,000 (the "Loan"), (ii) the Company shall issue a note (the "Note") to Purchaser evidencing the Company's obligation to repay the Loan plus interest, in the principal amount of $2,000,000 which Note is convertible at the option of Purchaser into shares of the Company's Common Stock (the "Note Shares"), and (iii) as additional consideration for the investment, the Company shall issue to Purchaser 650,000 shares of its Common Stock (the "Shares") and warrants (the "Warrants") evidencing Purchaser's right to acquire 350,000 shares of its Common Stock (the "Warrant Shares"). Pursuant to the Note Purchase Agreement and the transactions contemplated therein, the Company has granted Purchaser certain registration rights whereby the Company agreed to include the Warrant Shares, the Shares and the Note Shares (collectively the "Purchaser Securities") in the registration statement ("Registration Statement") which will be filed by the Company with the Securities and Exchange Commission (the "SEC") in connection with the equity financing of $12,000,000 contemplated by the Securities Purchase Agreements, dated as of September 3, 2004 by and between the Company and each of Wire Mill Partners III, LLC, Infinium Investment Partners, LLC and Pewter Hill Partners, LLC. In light of the foregoing transactions, the Company has determined that the prospect of sales of the Purchaser Securities held by the Purchaser within three months, in the case of the Warrant Shares, and one year, in the case of the Shares and the Note Shares, from the date that the Registration Statement is declared effective by the SEC (each, a "Lock-Up Period") could be detrimental to the Company. Therefor, the Company has requested that, except as set forth herein, Purchaser agrees not to sell certain of the Purchaser Securities until the expiration of the applicable Lock-Up Period. The undersigned recognizes that the Purchaser Securities are, or may be, subject to certain restrictions on its transferability, including those imposed by the federal and securities laws. Notwithstanding these restrictions, Purchaser has agreed to enter into this letter agreement to further assure certain of the Purchaser Securities, now held by Purchaser, will not enter the public market. 16 Purchaser, therefor, hereby acknowledges and agrees that Purchaser will not, directly or indirectly, without the prior written consent of the Company, sell, offer, contract to sell, pledge, grant any option to purchase or otherwise dispose (collectively, a "Disposition") any of the Purchaser Securities (the "Lock-Up Shares"), at any time during the applicable Lock-Up Period. The foregoing restriction is expressly agreed to preclude, among other Dispositions, the holder of Lock-Up Shares from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Lock-Up Shares during the applicable Lock-Up Period, even if such Lock-Up Shares would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Lock-Up Shares or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Lock-Up Shares. Notwithstanding the foregoing, Purchaser may transfer the Lock-Up Shares (i) as a bona fide gift or gifts, (ii) as a distribution to limited partners or shareholders of such person; provided, however, that in any such case it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding the Lock-Up Shares subject to the provisions of this letter agreement. Any transferor transferring pursuant to subsections (i) or (ii) above shall notify the Company in writing prior to the transfer. There shall be no further transfer of such Lock-Up Shares except in accordance with this letter agreement. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of any Lock-Up Shares. Further, the transfer agent shall deliver a consent in writing to the Company, confirming its obligation to notify the Company in writing upon each removal of the stop transfer instructions. Executed this __ day of September, 2004. Very truly yours, ST. CLOUD CAPITAL PARTNERS L.P. By: ------------------------------ Name: Title: 17 EX-4.2 3 v06955_ex4-2.txt NOTE PURCHASE AGREEMENT By and Between STROME HEDGECAP LTD. and SMALL WORLD KIDS, INC. Dated: As of September 16, 2004 NOTE PURCHASE AGREEMENT Note Purchase Agreement dated as of September 16, 2004 (this "Agreement") by and between Small World Kids, Inc., a Nevada corporation (the "Company"), and Strome Hedgecap Ltd, a corporation organized under the laws of the Grand Cayman Islands ("Purchaser"). RECITALS A. Purchaser desires to purchase from the Company, and the Company desires to sell to Purchaser, upon the terms and subject to the conditions of this Agreement, a note (the "Note"), substantially in the form attached hereto as Exhibit A, in the aggregate principal amount of one million two hundred thousand ($1,200,000) (the "Loan Amount"). B. The Company shall issue to the Purchaser, without additional consideration, warrants (the "Warrants") in the form of Exhibit B attached hereto, evidencing Purchaser's right to acquire up to one million three hundred forty-four thousand (1,344,000) shares of the Company's Common Stock (the "Warrant Shares"); C. The Company and the Purchaser are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act") and the provisions of Regulation D ("Regulation D") as promulgated thereunder; and D. This Agreement, the Note, the Warrants, and the Lock-Up Agreement (as hereinafter defined) are sometimes hereinafter collectively referred to as the "Transaction Documents." AGREEMENTS 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 Company and the Purchaser hereby agree as follows: 1. ISSUANCE SALE AND DELIVERY OF SECURITIES. a. Issuance of the Note. Subject to the terms and conditions set forth in this Agreement and in reliance upon the representations and warranties contained herein, the Company agrees to issue and sell to the Purchaser and the Purchaser hereby agrees to purchase from the Company, the Note. The Note or any portion thereof shall at the option of Purchaser, be convertible into shares of the Company's Common Stock (the "Note Shares"). b. Closing. The closing of the purchase and sale of the Note (the "Closing") shall be held at the offices of Loeb & Loeb LLP in Los Angeles, California, or at such other location as shall be agreed upon by the parties hereto on or before September 24, 2004 (the "Closing Date"). At the Closing, the Company shall deliver the Note and the Warrants to the Purchaser and Purchaser shall pay to the Company the Loan Amount, less a closing fee of ninety six thousand dollars ($96,000), by cashiers' check, certified funds or wire transfer. 2. PURCHASER'S REPRESENTATIONS AND WARRANTIES. The Purchaser understands, agrees with, and represents and warrants to the Company with respect to the purchase hereunder, that: a. Investment Purposes; Compliance With Securities Act. The Purchaser is acquiring the Note and the Warrants for the Purchaser's own account, for investment only and not with a view towards, or in connection with, the public sale or distribution thereof, except pursuant to sales registered under or exempt from the Securities Act. b. Accredited Purchaser Status. The Purchaser is an "accredited Investor" as that term is defined in Rule 501 (a) of Regulation D. The Purchaser is a sophisticated purchaser and has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of an investment made pursuant to this Agreement. c. Reliance on Exemptions. The Purchaser understands the Note and the Warrants are being offered and sold to in reliance on specific exemptions from the registration requirements of the applicable United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and Purchaser's compliance with, the representations, warranties, acknowledgments, understandings, agreements and covenants of the Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of the Purchaser to acquire the Note, and the Warrants. d. Information. The Purchaser and the advisors of the Purchaser, if any, have been furnished with all material information relating to the business, finances and operations of the Company and material information relating to the offer and sale of the Note, and the Warrants that have been requested by the Purchaser. The Purchaser and Purchaser's advisors, if any, have been afforded the opportunity to ask all such questions of the Company as they have in their discretion deemed advisable. Purchaser understands that the Purchaser's investment in the Note and, the Warrants involves a high degree of risk. Purchaser has sought such accounting, legal and tax advice as it has considered necessary to an informed investment decision with respect to the investment made pursuant to this Agreement. e. Transfer or Resale. Purchaser understands that: (i) the Note, the Warrants, the Warrant Shares, and the Note Shares have not been registered under the Securities Act of 1933, as amended (the "Securities Act") or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless either (a) subsequently registered thereunder or (b) the Purchaser shall have delivered to the Company an opinion by counsel reasonably satisfactory to the Company, in form, scope and substance reasonably satisfactory to the Company, to the effect that the Note, the Note Shares, the Warrants and/or the Warrant 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 Company nor any other person is under any obligation to register such Note, the Notes Shares, the Warrant Shares and/or the Warrants under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. 2 f. Legends. The Note, the Note Shares, the Warrants, and the Warrant Shares shall bear the following legend: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR, IF APPLICABLE, STATE SECURITIES LAWS. THIS SECURITY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SMALL WORLD KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED." g. Authorization; Enforcement. The Transaction Documents as to which the Purchaser is a party have been duly and validly authorized, executed and delivered by the Purchaser and are each and collectively valid and binding agreements of the Purchaser enforceable in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, moratorium, liquidation, or similar laws relating to, or affecting, generally the enforcement of creditors' rights and remedies or by other equitable principles of general application. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company understands, agrees with, and represents and warrants to the Purchaser that: a. Organization and Qualification. The Company and its subsidiaries are duly organized and existing in good standing under the laws of the respective jurisdictions in which they are incorporated and have the requisite corporate power to own their properties and to carry on their business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where the failure so to qualify would have a Material Adverse Effect. "Material Adverse Effect" as used herein means any material adverse effect on the operations, properties or financial condition of the Company and its subsidiaries taken as a whole. b. Authorization; Enforcement. (i) The Company has the requisite corporate power and authority to enter into and perform the Transaction Documents, to issue and sell the Note in accordance with the terms hereof, and to perform its obligations under the Note in accordance with the requirements of the same, (ii) the execution, delivery and performance of the Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its shareholders is required, (iii) the Transaction Documents have been duly and validly authorized, executed and delivered by the Company, and (iv) the Transaction Documents constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting, generally, the enforcement of creditors' rights and remedies or by other equitable principles of general application. 3 c. No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Articles of Incorporation or Bylaws of the Company or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a material adverse effect). d. Consents. Except for the filing of a Form D with the United States Securities and Exchange Commission, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under the Transaction Documents. The Company has obtained the of from Manufacturers Bank for the transactions contemplated hereby. e. SEC Reports. The Company has filed all proxy statements, reports and other documents required to be filed by it under the Securities Exchange Act of 1934 as amended (the "Exchange Act"). The Company has furnished Purchaser with copies of (i) its Annual Report on Form 10-K for the fiscal year ended June 30, 2003, Form 8-K filed June 4, 2004, as amended on June 16, 2004 and August 31, 2004, and its Quarterly Report on Form 10-QSB for the quarter ended June 30, 2004, as amended on August 31, 2004 (collectively, the "SEC Reports"). The SEC Reports were in substantial compliance with the requirements of its respective form and neither the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. f. Absence of Certain Changes. Since June 30, 2004, there has been no material adverse change and no material adverse development in the business, properties, operation, financial condition, results of operations or prospects of the Company. g. Absence of Litigation. Except as set forth on Schedule 3(g), there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending or, to the knowledge of the Company, threatened against or affecting the Company, wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein. h. Title to Assets and Liens. Except as set forth on Schedule 3(h), the Company has good and marketable title to the Assets owned by it and the valid and enforceable right to receive and/or use each of the Assets in which the Company has any other interest, free and clear of all Liens. As used herein (i) "Liens" shall mean any lien, encumbrance, pledge, mortgage, security interest, lease, charge, conditional sales contract, option, restriction, reversionary interest, right of first refusal, voting trust arrangement, preemptive right, claim under bailment or storage contract, easement or any other adverse claim or right whatsoever; and (ii) "Assets" shall mean all of the goodwill, assets, properties and rights of every nature, kind and description, whether tangible or intangible, real, personal or mixed, wherever located and whether or not carried or reflected on the books and records of the Company, which are owned by the Company or in which the Company has any interest (including the right to use). 4 i. Capitalization. Attached as Schedule 3(i) is a true and correct description of the capitalization of the Company. Additionally, the Company owns 10,000 shares of Small World Toys, Inc. representing all of the issued and outstanding capital stock of Small World Toys. j. Financial Statements. The audited consolidated financial statements of the Company as of and for each of the fiscal years ended December 31, 2001 and 2002, and the unaudited financial statements for fiscal year ended December 31, 2003, and for the six (6) month period ended June 30, 2004 (collectively, the "Financial Statements"), including in each case a balance sheet, a statement of income and retained earnings, and a statement of cash flows are complete and correct, in all material respects, are in accordance with the books and records of the Company (which are also complete and accurate in all respects), accurately state the assets, liabilities, cash flows, results of operations and the financial condition of the Company as of the dates and for the periods indicated, and have been prepared in accordance with GAAP. The Company does not have any debt, liability or obligation of any nature, whether accrued, absolute, contingent or otherwise, whether due or to become due, including without limitation liability for charges, long-term leases or forward or long-term commitments, that are not reflected or reserved against in the Financial Statements, except for those (i) that have been incurred after December 31, 2003 in the ordinary course of business consistent with prior practices and which are usual and normal in nature and amount, both individually and in the aggregate, and are individually and in the aggregate not material to the unaudited Financial Statements as of December 31, 2003, or (ii ) the Promissory Note to St. Cloud Capital Partners LP in the aggregate amount of $2,000,000 (iii) which are not required to be reflected in, reserved against or otherwise described on a balance sheet or the notes thereto in accordance with GAAP. k. Intellectual Property. The Company possesses all patents, patent licenses, copyrights, know-how, formulae and other proprietary and trade rights necessary for the conduct of it business as now conducted. To the Company's best knowledge none, its products patents, licenses, copyrights, know-how, formulae and other proprietary and trade rights violate or conflict with the intellectual property rights of any other person. The Company has not infringed and is not now infringing any proprietary right belonging to any other Person. 4. COVENANTS. a. Best Efforts. Each party shall use its best efforts timely to satisfy each of the conditions to be satisfied by it as provided in Sections 5 and 6 of this Agreement. 5 b. Securities Laws. The Company agrees to timely file all reports and other documents required to be filed with the SEC, specifically, a Form D (or equivalent form required by applicable state law) with respect to the Notes or the warrants if and as required under Regulation D and applicable state securities laws and to provide a copy thereof to Purchaser promptly after such filing. c. Expenses. Each party shall pay such party's expenses in connection with the transactions contemplated by the Agreement. d. Use of Proceeds. The Company shall use the net proceeds from the sale of the Note for working capital and general corporate purposes. e. Security Interest. Purchaser has been advised by the Company that (a) the Company's credit agreement with Manufacturers' Bank prohibits the placing of liens on the property of Small World Toys without the consent of such bank, and (b) the Company is currently engaged in discussions with one or more financial institutions for a replacement credit facility. It shall be a condition to the Company entering into any such replacement credit facility that the lender permits the Company to grant a security interest in favor of Purchaser in the assets of Small World Toys which security interest will be subordinate to the lien of such lender pursuant to an intercreditor's agreement reasonably acceptable to Purchaser. Notwithstanding the foregoing, if for whatever reason the Company has not granted to Purchaser a security interest in the assets of Small World Toys, Inc. which security interest shall have the priority described in the Note (or such other credit enhancement reasonably acceptable to Purchaser) by November 30, 2004, then the number of Warrant Shares shall increase by sixty thousand (60,000) without any further action on the part of the parties and Purchaser shall issue a new Warrant for such increased number of Warrant Shares on the same terms as Exhibit B. The Company will take all action necessary to perfect any such security interest. 5. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligations of the Company hereunder are subject to the satisfaction, on or before the Closing, unless otherwise specified, of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion: a. Each of the Company and Purchaser shall have executed the Transaction Documents as to which it is a party. b. The representations and warranties of Purchaser shall be true and correct in all material respects as of the Closing as though made at that time (except for representations and warranties that speak as of a specific date). Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by Purchaser at or prior to the Closing. c. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated herein. 6 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 Purchaser shall have entered into the Lock-Up Agreement attached hereto as Exhibit C with respect the Warrant Shares and the Note Shares. f. The Purchaser shall execute such documentation as may be reasonably requested by the Company to subordinate the obligations of the Company under the Note to the Senior Indebtedness of the Company (as such term is defined in the Note) from time to time outstanding. 6. CONDITIONS TO PURCHASER'S OBLIGATION TO PURCHASE. The obligations of Purchaser are subject to the satisfaction, on or before the Closing, unless otherwise specified, of each of the following conditions, provided that these conditions are for the sole benefit of Purchaser and may be waived by Purchaser at any time in its sole discretion: a. The Company shall have executed the Transaction Documents. b. The representations and warranties of the Company shall be true and correct in all material respects as of the Closing (except for representations and warranties that speak as of a specific date). The Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing. The Purchaser may require a certificate, executed by the Chief Executive Officer of the Company, dated as of the Closing, to the foregoing effect and as to such other matters as may be reasonably requested by Purchaser. c. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated herein. d. All consents, approval, authorizations and orders required to be obtained and all registrations, filings and notices required to be made with or given to any regulatory authority or person as provided herein shall have been made. e. Purchaser shall receive evidence reasonably satisfactory to it that the holder of the Term Note (as such term is defined in the Note) agrees to defer payment of principal under the Term Note until the Note is paid in full. 7 7. REGISTRATION The Company shall include the Note Shares and the Warrant Shares in a registration statement to be filed by the Company in connection with the resale of shares of the Company's Common Stock (the "Put Financing") issuable pursuant to Stock Purchase Agreements dated as of September ___, 2004 (the "Purchase Agreements) between the Company and each of Pewter Hill Partners, LLC and Wire Mill Partners III, LLC (the "Put Purchasers"). 8. GOVERNING LAW; MISCELLANEOUS. a. Governing Law and Venue. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California without regard to the principles of conflict of laws. In the event of any litigation regarding the interpretation or application of this Agreement, the parties irrevocably consent to jurisdiction in any of the state or federal courts located in the City of Los Angeles, State of California and waive their rights to object to venue in any such court, regardless of the convenience or inconvenience thereof to any party. Service of process in any civil action relating to or arising out of this Agreement (including also all Exhibits or Schedules hereto) or the transaction(s) contemplated herein may be accomplished in any manner provided by law. The parties hereto agree that a final, non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. b. Counterparts. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and signature pages from such counterparts have been delivered. c. Headings; Gender, Etc. The headings of this Agreement are for convenience of reference and shall not form a part of, or affect the interpretation of this Agreement. As used herein, the masculine shall refer to the feminine and neuter, the feminine to the masculine and neuter, and the neuter to the masculine and feminine, as the context may require. As used herein, unless the context clearly requires otherwise, the words "herein," "hereunder" and "hereby," shall refer to this entire Agreement and not only to the Section or paragraph in which such word appears. If any date specified herein falls upon a Saturday, Sunday or public or legal holidays, the date shall be construed to mean the next business day following such Saturday, Sunday or public or legal holiday. For purposes of this Agreement, a "business day" is any day other than a Saturday, Sunday or public or legal holiday. d. Severability. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. e. Entire Agreement; Amendments. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. 8 f. Notices. Any notices required or permitted to be given under the terms of this Agreement shall be sent by U.S. Mail or delivered personally or by courier or via facsimile (if via facsimile, to be followed within three (3) business days by an original of the notice document via U.S. Mail or courier) and shall be effective five (5) days after being placed in the mail, if mailed, certified or registered, return receipt requested, or upon receipt, if delivered personally or by courier or by facsimile, in each case properly addressed to the party to receive the same. The addresses for such communications shall be: If to the Company: Small World Kids, Inc. 5711 Buckingham Parkway Culver City, California 90230 Attention: Debra Fine Facsimile: 310-258-1194 With a copy to: Loeb & Loeb LLP 10100 Santa Monica Boulevard, Suite 2200 Los Angeles, California 90067 Attention: David L. Ficksman Facsimile: 310-282-2200 If to Purchaser: Strome Investment Management 100 Wilshire Blvd. Suite 1500 Santa Monica, CA 90401 Attention: Facsimile: If to the Purchaser, at the address on the signature of this Agreement. Each party shall provide written notice to the other party of any change in address. g. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. Neither the Company nor the Purchaser shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other (which consent shall not be unreasonably withheld), and in any event any assignee of the Purchaser shall be an accredited investor (as defined in Regulation D), in the written opinion of counsel who is reasonably satisfactory to Company, and such assignment shall be in form, substance and scope reasonably satisfactory to the Company. Notwithstanding anything herein to the contrary, the Purchaser may pledge the Note as collateral for a bona fide loan with a third party lender, and such pledge shall not be considered an assignment in violation of this Agreement so long as it is made in compliance with all applicable law. 9 h. No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person. i. Survival. The representations and warranties of the Company and Purchaser contained in Sections 2 and 3 and the agreements and covenants set forth in Section 4 shall survive the final Closing of the purchase and sale of the Note purchased and sold hereby. j. Further Assurance. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. k. Remedies. No provision of this Agreement providing for any specific remedy to a party shall be construed to limit such party to the specific remedy described, and any other remedy that would otherwise be available to such party at law or in equity shall be so available. Nothing in this Agreement shall limit any rights a party may have with any applicable federal or state securities laws with respect to the transactions contemplated hereby. [Remainder of the page intentionally left blank] 10 IN WITNESS WHEREOF, Purchaser and the Company have caused this Note Purchase Agreement to be duly executed as of the date first written above. THE COMPANY: SMALL WORLD KIDS, INC. By: ----------------------------- Name: Debra Fine Title: Chief Executive Officer PURCHASER: STROME HEDGECAP LTD. By: ----------------------------- Name: Mark Strome Title: Director 11 Schedule 3(g) Litigation o The Company has received a letter from an attorney claiming that Small World Kids owes $180,000 as a finder's fee in connection with the acquisition of Small World Toys which claim is subject to indemnification by Eddy Goldwasser. Schedule 3(h) Pledged Assets o Promissory Note dated May 20, 2004 in the aggregate principal amount of five million dollars ($5,000,000) executed by Small World Kids, Inc. in favor of SWT, LLC is secured by a majority (8,333) shares of Small World Toys. o Credit Facility by and between Small World Toys, as Borrower and Manufacturer's Bank as Lender is secured by all of the assets of Small World Toys. o 1,667 shares of Small World Toys have been pledged to Eddy Goldwasser to secure two promissory notes dated May 20, 2004 to Mr. Goldwasser. o Commitment to grant a security interest to St. Cloud Capital Partners L.P. Small World Kids Capitalization Table Beneficial Ownership
SaVon Bridge Purchase of Exchange Team Notes Total Ruben 05/20/04 Agmt 05/20/04 Shares Shares Shares Percentage -------------- ------------- -------- ---------- ---------- ---------- Russell and Debra Fine, as trustees of FFT 1,648,714 13,509,843 15,158,557 28.5% SWT Investments, LLC 1,846,467 15,130,261 16,976,728 32.0% Phoenix Capital Opportunity, LLC 820,652 6,724,560 7,545,212 14.2% David Marshall, Inc. 1,173,134 9,612,858 10,785,992 20.3% David L. Ficksman and Maxine B. Ficksman, as trustees of the Ficksman Family Trust 41,033 336,228 377,261 0.7% Michael Ruben 650,000 0 650,000 1.2% Other Holders 977,000 0 977,000 1.8% St.Cloud 650,000 650,000 1.2% Debra Fine John Nelson Bob Rankin All other employees Shares remaining for issuance ------------------------------------------------------------------------------------ Total Shares 5,530,000 45,313,750 1,627,000 650,000 53,120,750 100.0% ==================================================================================== Authorized: Common Stock Options outstanding Restricted Stock/Options Exercised Shares remaining for issuance Authorized: Employee stock options Bridge Notes Fully Warrants Options Diluted Percentage ------------ ---------- ----------- ---------- 15,158,557 25.4% Russell and Debra Fine, as trustees of FFT 16,976,728 28.5% SWT Investments, LLC 7,545,212 12.7% Phoenix Capital Opportunity, LLC 10,785,992 18.1% David Marshall, Inc. David L. Ficksman and Maxine B. Ficksman, 377,261 0.6% as trustees of the Ficksman Family Trust 650,000 1.1% Michael Ruben 977,000 1.6% Other Holders 350,000 1,000,000 1.7% St.Cloud 2,600,000 2,600,000 4.4% Debra Fine 600,000 600,000 1.0% John Nelson 520,000 520,000 0.9% Bob Rankin 2,400,000 2,400,000 4.0% All other employees Shares remaining for issuance ---------------------------------------------- 350,000 6,120,000 59,590,750 100% Total Shares ============================================== Authorized: Common Stock Options outstanding Restricted Stock/Options Exercised Shares remaining for issuance Authorized: Employee stock options
Exhibit A PROMISSORY NOTE THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR, IF APPLICABLE, STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SMALL WORLD KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED. NOTE FOR VALUE RECEIVED, Small World Kids, Inc. a Nevada corporation (the "Borrower") with principal offices located at 5711 Buckingham Parkway, Culver City, California 90230, hereby promises to pay to Strome Investment Management (the "Holder") or order, without demand, the sum of one million two hundred thousand dollars ($1,200,000) with interest at the rate of 10% per annum. The principal amount of the Note shall be due and payable on the Maturity Date (as hereinafter defined). Capitalized term used herein but not otherwise defined shall have the meaning assigned to those terms in that certain Note Purchase Agreement dated September 16, 2004, between the Borrower, the Holder and the other holders of notes of the Borrower. The following terms shall apply to this Note: ARTICLE I PAYMENT 1.1 Payment of Interest. Interest shall be due and payable in full on the Maturity Date. However, that if the Note has not been paid in full by February 16, 2005, commencing on the last day of the next month and on the last day of each month thereafter until the Note is paid in full, Borrower shall make interest payments on the unpaid principal amount, provided that any such installment of interest may be deferred if, in the reasonable judgment of the Company, such payment would impair the Company's ability to meet its obligations as they become due. During the occurrence and continuation of an Event of Default the interest rate shall be increased by five (5%) per annum commencing on the date when the Event of Default was declared by Holder. Notwithstanding the forging, any such increase in interest shall be limited as required by applicable usury laws. 1.2 Maturity Date. On the Maturity Date, the entire principal amount and any accrued and unpaid interest shall be paid to the Holder without offset or deduction of any kind. The Maturity Date shall be twelve (12) months from the Closing Date. 1.3 Prepayment. The Note may be prepaid in whole or in part (subject to a minimum payment of one hundred thousand dollars ($100,000), without premium or penalty. 1.4 Priority. The Note shall rank senior to the Company's indebtedness in the aggregate principal amount of five million dollars ($5,000,000) to SWT, LLC evidenced by the Term Note dated as of May 20, 2004 (the "Term Note") to the effect that no payment of principal may be made under the Term Note until this Note is paid in full. The Note shall rank pari passu with the two million dollar note ($2,000,000) to St. Cloud Capital Partners L.P. The Note shall be subordinated to all existing or reasonably approved Senior Indebtedness of the Company. Senior Indebtedness shall mean all indebtedness of the Company regardless of whether incurred on, before or after the Closing Date (i) for money borrowed from any bank, savings and loan association, insurance company or any other financial institution engaged in the business of lending funds which is evidenced by notes, bonds, debentures or other written obligations and (ii) any other indebtedness in writing signed by the Company which, by its terms, provides that it is senior in priority to the payment to the Note. 1.5 Mandatory Repayment. The Company shall pay to Holder seventy-five percent (75%) of the net proceeds received by the Company from the Put Financing (and, to the extent permitted by the terms of such investment, any other equity financing) to be applied to the repayment of the Note until the Note is repaid in full, such prepayments to be applied first to accrued interest and then to unpaid principal. Notwithstanding the foregoing, the Company shall have the right to apply such seventy-five percent (75%) between Holder and any other holders of debt on a pari passu basis. ARTICLE II EVENTS OF DEFAULT 2.1 Events of Default. The occurrence of any of the following events of default ("Event of Default") shall, at the option of the Holder hereof, make the principal balance then remaining unpaid hereon and all other amounts payable hereunder immediately due and payable: (a) Failure to Pay Principal and/or Interest. The Borrower fails to pay any installment of principal or interest hereon when due and such failure continues for a period of ten (10) days after the due date. (b) Breach of Covenant. The Borrower breaches any material covenant or other term or condition of this Note or the Note Purchase Agreement in any material respect and such breach, if subject to cure, continues for a period of thirty (30) days after written notice to the Borrower from the Holder. (c) Breach of Representations and Warranties. Any material representation or warranty of the Borrower made herein in any Transactional Document shall be false or misleading in any material respect. (d) Receiver or Trustee. The Borrower shall make an assignment for the benefit of creditors, or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of its property or business; or such a receiver or trustee shall otherwise be appointed. 2 (e) Judgments. Any money judgment, writ or similar final process, shall be entered or filed against Borrower or any of its property or other assets for more than $500,000, and shall remain unvacated, unbonded or unstayed for a period of forty-five (45) days. (g) Bankruptcy. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings or relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Borrower and if instituted against Borrower are not dismissed within 60 days of initiation. 2.2 Enforcement. Upon the occurrence of any Event of Default, the Holder may thereupon proceed to protect and enforce its rights either by suit in equity and/or by action at law or by other appropriate proceedings whether for the specific performance (to the extent permitted by law) of any covenant or agreement contained in this Note or in aid of the exercise of any power granted in this Note, and proceed to enforce the payment of this Note held by it, and to enforce any other legal or equitable right of the Holder. ARTICLE III CONVERSION 3.1 Right to Convert. In the event that the Borrower elects to exercise its put rights under the Put Financing, it shall provide notice to Holder (the "Put Notice") concurrently with its notice under the Purchase Agreements. Upon receipt of such the Put Notice, Holder shall have the right to convert any unpaid principal portion and accrued interest on this Note into shares of Borrower's Common Stock (the "Conversion Shares") by delivery to Borrower of a Notice of Conversion within three business days from formal receipt of the Put Notice at the conversion price equal to the average price per share of the Put Financing for all tranches with respect to which the Borrower has the right to exercise (the "Conversion Price"). Holder shall be entitled to exercise its conversion rights hereunder only one time. 3.2 Issuance of Shares. Upon the delivery to Borrower of a Notice of Conversion of the Holder's written request for conversion, Borrower shall issue and deliver to the Holder within five (5) business days from the Conversion Notice that number of shares of Common Stock for the portion of the Note converted in accordance with the foregoing. The number of shares of Common Stock to be issued upon each conversion of this Note shall be determined by dividing that portion of the principal and accrued interest under the Note to be converted by the Conversion Price. In the event that, after the Conversion, shares have been issued pursuant to the Put Financing so that the average price of the Put Financing becomes lower than the Conversion Price, the Borrower shall issue to Holder such number of additional Conversion Shares based upon such lower average price. ARTICLE IV MISCELLANEOUS 4.1 Failure or Indulgence Not Waiver. No failure or delay on the part of Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 3 4.2 Notices. Any notice herein required or permitted to be given shall be in writing and may be personally served or sent by fax transmission (with copy sent by certified or registered mail or by overnight courier). For the purposes hereof, the address and fax number of the Holder is set forth on the signature page hereto. The address and fax number of the Borrower is 5711 Buckingham Parkway, Culver City, California 90230, facsimile (310) 258-1194. Both Holder and Borrower may change the address and fax number for service by service of notice to the other as herein provided. 4.3 Amendment Provision. The term "Note" and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented, then as so amended or supplemented. 4.4 Assignability. This Note shall be binding upon the Borrower and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder. 4.5 Cost of Collection. If default is made in the payment of this Note, Borrower shall pay the Holder hereof reasonable costs of collection, including reasonable attorneys' fees. 4.6 Maximum Payments. Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Borrower to the Holder and thus refunded to the Borrower. 4.7 Governing Law and Venue. This Note shall be governed by and interpreted in accordance with the laws of the State of California without regard to the principles of conflict of laws. In the event of any litigation regarding the interpretation or application of this Note, the parties irrevocably consent to jurisdiction in any of the state or federal courts located in the City of Los Angeles, State of California and waive their rights to object to venue in any such court, regardless of the convenience or inconvenience thereof to any party. Service of process in any civil action relating to or arising out of this Agreement or the transaction(s) contemplated herein may be accomplished in any manner provided by law. The parties hereto agree that a final, non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. 4 IN WITNESS WHEREOF, Borrower has caused this Note to be signed in its name by its President on this 17th day of September, 2004. SMALL WORLD KIDS, INC. By: ----------------------------------- Name: Debra Fine Title: Chief Executive Officer Address of Borrower: 5711 Buckingham Parkway Culver City, California 90230 5 Exhibit B WARRANT NEITHER THE SECURITIES REPRESENTED HEREBY NOR THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS WARRANT OR SUCH SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT THIS WARRANT OR SUCH SECURITIES, AS APPLICABLE, MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THIS WARRANT IS RESTRICTED AS DESCRIBED HEREIN. September 16, 2004 1,344,000 Common Stock Purchase Warrant SMALL WORLD KIDS, INC. Incorporated under the laws of the State of Nevada Certificate for Common Stock Purchase Warrants THIS CERTIFIES that, for value received, Strome Hedgecap Ltd. (together with all permitted assigns, the "Holder") is entitled to subscribe for, and purchase from, SMALL WORLD KIDS, INC., a Nevada corporation (the "Company"), upon the terms and conditions set forth herein, at any time or from time to time during the period commencing on the date hereof and terminating four years from the date hereof (the "Exercise Period"), up to one million, three hundred and forty-four thousand (1,344,000) shares of Common Stock (the "Warrant Shares"). This Warrant is exercisable at an exercise price per share equal to the lesser of $.50 per share (as such price may be adjusted as provided herein, the "Exercise Price") or the average price of the Put Financing; provided, however, that upon the occurrence of any of the events specified in Sections 5 or 6 hereof, the rights granted by this Warrant, including the number of shares of Common Stock to be received upon such exercise, shall be adjusted as therein specified. Capitalized term used herein but not otherwise defined shall have the meaning assigned to those terms in that certain Note Purchase Agreement dated as of September 16, 2004, between the Holder and the Company. 6 1. Exercise of Warrant. This Warrant may be exercised during the Exercise Period, either in whole or in part, by the surrender of this Warrant (with the election at the end hereof duly executed) to the Company at its office at 5711 Buckingham Parkway, Culver City, California 90230 or at such other place as is designated in writing by the Company, together with a certified or bank cashier's check payable to the order of the Company in an amount equal to the product of the Exercise Price and the number of Warrant Shares for which this Warrant is being exercised. 2. Rights Upon Exercise; Delivery of Securities. Upon each exercise of the Holder's rights to purchase Warrant Shares, the Holder shall be deemed to be the holder of record of the Warrant Shares, notwithstanding that the transfer books of the Company shall then be closed or certificates representing the Warrant Shares with respect to which this Warrant was exercised shall not then have been actually delivered to the Holder. As soon as practicable after each such exercise of this Warrant, the Company shall issue and deliver to the Holder a certificate or certificates representing the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a Warrant evidencing the right of the Holder to purchase the balance of the aggregate number of Warrant Shares purchasable hereunder as to which this Warrant has not been exercised or assigned. 3. Registration of Transfer and Exchange. Any Warrants issued upon the transfer or exercise in part of this Warrant shall be numbered and shall be registered in a warrant register (the "Warrant Register") as they are issued. The Company shall be entitled to treat the registered holder of any Warrant on the Warrant Register as the owner in fact thereof for all purposes, and shall not be bound to recognize any equitable or other claim to, or interest in, such Warrant on the part of any other person, and shall not be liable for any registration or transfer of Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with the actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration of transfer, or with the knowledge of such facts that its participation therein amounts to bad faith. This Warrant shall be transferable on the books of the Company only upon delivery thereof duly endorsed by the Holder or by his duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment, or authority to transfer. In all cases of transfer by an attorney, executor, administrator, guardian, or other legal representative, duly authenticated evidence of his, her, or its authority shall be produced. Upon any registration of transfer, the Company shall deliver a new Warrant or Warrants to the person entitled thereto. This Warrant may be exchanged, at the option of the Holder thereof, for another Warrant, or other Warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrant Shares (or portions thereof), upon surrender to the Company or its duly authorized agent. Notwithstanding the foregoing, the Company shall have no obligation to cause Warrants to be transferred on its books to any person if, in the opinion of counsel to the Company, such transfer does not comply with the provisions of the Securities Act and the rules and regulations thereunder. 7 4. Reservation of Shares. The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of the Warrants, such number of shares of Common Stock as shall, from time to time, be sufficient therefor. The Company represents that all shares of Common Stock issuable upon exercise of this Warrant are duly authorized and, upon receipt by the Company of the full payment for such Warrant Shares, will be validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof and will not be issued in violation of any preemptive or similar rights of stockholders. 5. Antidilution. (a) In the event that the Company shall at any time; (i) declare a dividend on the outstanding Common Stock payable in shares of its capital stock, (ii) subdivide the outstanding Common Stock; (iii) combine the outstanding Common Stock into a smaller number of shares; or (iv) issue any shares of its capital stock by reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then, in each case, the Exercise Price per Warrant Share in effect at the time of the record date for the determination of stockholders entitled to receive such dividend or distribution or of the effective date of such subdivision, combination, or reclassification shall be adjusted so that it shall equal the price determined by multiplying such Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action, and the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action. Such adjustment shall be made successively whenever any event listed above shall occur and shall become effective at the close of business on such record date or at the close of business on the date immediately preceding such effective date, as applicable. (b) All calculations under this Section 5 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (c) In any case in which this Section 5 shall require that an adjustment in the number of Warrant Shares be made effective as of a record date for a specified event, the Company may elect to defer, until the occurrence of such event, issuing to the Holder, if the Holder exercised this Warrant after such record date, the Warrant Shares, if any, issuable upon such exercise over and above the number of Warrant Shares issuable upon such exercise on the basis of the number of shares of Common Stock in effect prior to such adjustment; provided, however, that the Company shall deliver to the Holder a due bill or other appropriate instrument evidencing the Holder's right to receive such additional shares of Common Stock upon the occurrence of the event requiring such adjustment. (d) Whenever there shall be an adjustment as provided in this Section 5, the Company shall within 15 days thereafter cause written notice thereof to be sent by registered mail, postage prepaid, to the Holder, at its address as it shall appear in the Warrant Register, which notice shall be accompanied by an officer's certificate setting forth the number of Warrant Shares issuable and the Exercise Price thereof after such adjustment and setting forth a brief statement of the facts requiring such adjustment and the computation thereof, which officer's certificate shall be conclusive evidence of the correctness of any such adjustment absent manifest error. 8 (e) The Company shall not be required to issue fractions of shares of Common Stock or other capital stock of the Company upon the exercise of this Warrant. If any fraction of a share of Common Stock would be issuable on the exercise of this Warrant (or specified portions thereof), the Company shall purchase such fraction for an amount in cash equal to the same fraction of the average closing sale price (or average of the closing bid and asked prices, if closing sale price is not available) of Common Stock for the 10 trading days ending on and including the date of exercise of this Warrant. (f) No adjustment in the Exercise Price per Warrant Share shall be required if such adjustment is less than $0.05; provided, however, that any adjustments which by reason of this Section 5 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (g) Whenever the Exercise Price payable upon exercise of this Warrant is adjusted pursuant to subsection (a) above, the number of Warrant Shares issuable upon exercise of this Warrant shall simultaneously be adjusted by multiplying the number of Warrant Shares theretofore issuable upon exercise of this Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. 6. Reclassification; Reorganization; Merger, etc. (a) In case of any capital reorganization, other than in the cases referred to in Section 5(a) hereof, or the consolidation or merger of the Company with or into another corporation (other than a merger or consolidation in which the Company is the continuing corporation, and which does not result in any reclassification of the outstanding shares of Common Stock or the conversion of such outstanding shares of Common Stock into shares of other stock or other securities or property), or in the case of any sale, lease, or conveyance to another corporation of the property and assets of any nature of the Company as an entirety or substantially as an entirety (such actions being hereinafter collectively referred to as "Reorganizations"), there shall thereafter be deliverable upon exercise of this Warrant (in lieu of the number of Warrant Shares theretofore deliverable) the number of shares of stock or other securities or property to which a holder of the respective number of Warrant Shares which would otherwise have been deliverable upon the exercise of this Warrant would have been entitled upon such Reorganization if this Warrant had been exercised in full immediately prior to such Reorganization. In case of any Reorganization, appropriate adjustment, as determined in good faith by the Board of Directors of the Company, shall be made in the application of the provisions herein set forth with respect to the rights and interests of the Holder so that the provisions set forth herein shall thereafter be applicable, as nearly as possible, in relation to any shares or other property thereafter deliverable upon exercise of this Warrant. Any such adjustment shall be made by, and set forth in, a supplemental agreement between the Company, or any successor thereto, and the Holder, with respect to this Warrant, and shall for all purposes hereof conclusively be deemed to be an appropriate adjustment. The Company shall not effect any such Reorganization unless, upon or prior to the consummation thereof, the successor corporation, or if the Company shall be the surviving corporation in any such Reorganization and is not the issuer of the shares of stock or other securities or property to be delivered to holders of shares of the Common Stock outstanding at the effective time thereof, then such issuer, shall assume by written instrument the obligation to deliver to the Holder such shares of stock, securities, cash, or other property as such Holder shall be entitled to purchase in accordance with the foregoing provisions. In the event of sale, lease, or conveyance or other transfer of all or substantially all of the assets of the Company as part of a plan for liquidation of the Company, all rights to exercise this Warrant shall terminate 30 days after the Company gives written notice to the Holder that such sale or conveyance or other transfer has been consummated. 9 (b) In case of any reclassification or change of the shares of Common Stock issuable upon exercise of this Warrant (other than a change in par value or from a specified par value to no par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), or in case of any consolidation or merger of another corporation into the Company in which the Company is the continuing corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from no par value to a specified par value, or as a result of a subdivision or combination, but including any change in the shares into two or more classes or series of shares), the Holder or holders of this Warrant shall have the right thereafter to receive upon exercise of this Warrant solely the kind and amount of shares of stock and other securities, property, cash, or any combination thereof receivable upon such reclassification, change, consolidation, or merger by a holder of the number of Warrant Shares for which this Warrant might have been exercised immediately prior to such reclassification, change, consolidation, or merger. Thereafter, appropriate provision shall be made for adjustments which shall be as nearly equivalent as practicable to the adjustments in Section 5. (c) The above provisions of this Section 6 shall similarly apply to successive reclassifications and changes of shares of Common Stock and to successive consolidations, mergers, sales, leases, or conveyances. 7. Notice of Certain Events. In case at any time the Company shall propose: (a) to pay any dividend or make any distribution on shares of Common Stock in shares of Common Stock or make any other distribution (other than regularly scheduled cash dividends which are not in a greater amount per share than the most recent such cash dividend) to all holders of Common Stock; or (b) to issue any rights, warrants, or other securities to all holders of Common Stock entitling them to purchase any additional shares of Common Stock or any other rights, warrants, or other securities; or (c) to effect any reclassification or change of outstanding shares of Common Stock or any consolidation, merger, sale, lease, or conveyance of property, as described in Section 6; or 10 (d) to effect any liquidation, dissolution, or winding-up of the Company; (e) to take any other action which would cause an adjustment to the Exercise Price per Warrant Share; then, and in any one or more of such cases, the Company shall give written notice thereof by registered mail, postage prepaid, to the Holder at the Holder's address as it shall appear in the Warrant Register, mailed at least 15 days prior to; (i) the date as of which the holders of record of shares of Common Stock to be entitled to receive any such dividend, distribution, rights, warrants, or other securities are to be determined; (ii) the date on which any such reclassification, change of outstanding shares of Common Stock, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up is expected to become effective and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, change of outstanding shares, consolidation, merger, sale, lease, conveyance of property, liquidation, dissolution, or winding-up; or (iii) the date of such action which would require an adjustment to the Exercise Price per Warrant Share. 8. Charges and Taxes. The issuance of any shares or other securities upon the exercise of this Warrant and the delivery of certificates or other instruments representing such shares or other securities shall be made without charge to the Holder for any tax or other charge in respect of such issuance. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 9. Periodic Reports. The Company agrees that until all the Warrant Shares shall have been sold pursuant to Rule 144 under the Securities Act, it shall use its best efforts to keep current in filing all reports, statements, and other materials required to be filed with the Commission to permit holders of the Warrant Shares to sell such securities under Rule 144 under the Securities Act. 10. Legend. Until sold pursuant to the provisions of Rule 144 or otherwise registered under the Securities Act, the Warrant Shares issued on exercise of the Warrants shall be subject to a stop transfer order and the certificate or certificates representing the Warrant Shares shall bear the following legend: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD ,PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR(2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THE SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS. 11 11. Loss; Theft; Destruction; Mutilation. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant (and upon surrender of any Warrant if mutilated), and upon receipt by the Company of reasonably satisfactory indemnification, the Company shall execute and deliver to the Holder thereof a new Warrant of like date, tenor, and denomination. 12. Stockholder Rights. The Holder of any Warrant shall not have, solely on account of such status, any rights of a stockholder of the Company, either at law or in equity, or to any notice of meetings of stockholders or of any other proceedings of the Company, except as provided in this Warrant. 13. Governing Law. This Warrant shall be construed in accordance with the laws of the State California applicable to contracts made and performed within such State, without regard to principles of conflicts of law. [Remainder of page intentionally left blank; signatures follow] 12 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed on the 17th day of September, 2004. SMALL WORLD KIDS, INC. By: ---------------------------------- Name: Debra Fine Title: Chief Executive Officer HOLDER - ------------------------------ Name: Mark Strome Title: Director 13 FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the attached Warrant.) FOR VALUE RECEIVED, ________________ hereby sells, assigns, and transfers unto __________________ a Warrant to purchase _________ shares of Common Stock, $.001 par value, of Small World Kids, Inc., a Nevada corporation (the "Company"), and does hereby irrevocably constitute and appoint __________ attorney to transfer such Warrant on the books of the Company, with full power of substitution. Dated: _____________ Signature: __________________ 14 ELECTION TO EXERCISE To: Small World Kids, Inc. 5711 Buckingham Parkway Culver City, California 90230 Attention: Debra Fine Facsimile: 310-258-1194 The undersigned hereby exercises his, her, or its rights to purchase ______________ shares of Common Stock, $.001 par value ("the Common Stock"), of Small World Kids, Inc. a Nevada corporation (the "Company"), covered by the within Warrant and tenders payment herewith in the amount of $______ in accordance with the terms thereof, and requests that certificates for the securities constituting such shares of Common Stock be issued in the name of, and delivered to: ----------------------------------------------------------------------- (Print Name, Address, and Social Security or Tax Identification Number) Further, if such number of shares of Common Stock shall not constitute all such shares of Common Stock covered by the within Warrant, that a new Warrant for the balance of the shares of Common Stock covered by the within Warrant shall be registered in the name of, and delivered to, the undersigned at the address stated below. Dated: Name: ---------------------------- ---------------------------------- (Print) Address: -------------------------- ---------------------------------- (Signature) -------------------------- -------------------------- 15 Exhibit C LOCK-UP AGREEMENT September __, 2004 STROME HEDGECAP LTD.("Purchaser") Re: Lock-Up Agreement Ladies and Gentlemen: Reference is made to that certain Note Purchase Agreement dated as of September 16, 2004 by and between Small World Kids, Inc., a Nevada corporation (the "Company") and the Purchaser (the "Note Purchase Agreement"), pursuant to which (i) the Purchaser shall loan to the Company a gross amount of one million two hundred thousand dollars $1,200,000 (the "Loan"), (ii) the Company shall issue a note (the "Note") to the Purchaser evidencing the Company's obligation to repay the Loan plus interest, in the principal amount of one million two hundred thousand dollars $1,200,000 which Note is convertible at the option of the Purchaser into shares of the Company's Common Stock (the "Note Shares"), and (iii) warrants (the "Warrants") evidencing the Purchaser's right to acquire one million three hundred thousand forty four thousand (1,344,000) shares of its Common Stock (the "Warrant Shares"). Pursuant to the Note Purchase Agreement and the transactions contemplated therein, the Company has granted the Purchaser certain registration rights whereby the Company agreed to include the Warrant Shares and the Note Shares (collectively the "Purchaser Securities") in the registration statement ("Registration Statement") which will be filed by the Company with the Securities and Exchange Commission (the "SEC") in connection with the equity financing of $12,000,000 contemplated by the Securities Purchase Agreements, dated as of September __, 2004 by and between the Company and each of Wire Mill Partners III, LLC and Pewter Hill Partners, LLC. In light of the foregoing transactions, the Company has determined that the prospect of sales of the Purchaser Securities held by the Purchaser within three months, in the case of the Warrant Shares, and one year, in the case of the Note Shares, from the date that the Registration Statement is declared effective by the SEC (each, a "Lock-Up Period") could be detrimental to the Company. Therefor, the Company has requested that, except as set forth herein, the Purchaser agrees not to sell certain of the Purchaser Securities until the expiration of the applicable Lock-Up Period. The undersigned recognizes that the Purchaser Securities are, or may be, subject to certain restrictions on its transferability, including those imposed by the federal and securities laws. Notwithstanding these restrictions, the Purchaser has agreed to enter into this letter agreement to further assure certain of the Purchaser Securities, now held by the Purchaser, will not enter the public market. 16 The Purchaser, therefor, hereby acknowledges and agrees that the Purchaser will not, directly or indirectly, without the prior written consent of the Company, sell, offer, contract to sell, pledge, grant any option to purchase or otherwise dispose (collectively, a "Disposition") any of the Purchaser Securities (the "Lock-Up Shares"), at any time during the applicable Lock-Up Period. The foregoing restriction is expressly agreed to preclude, among other Dispositions, the holder of Lock-Up Shares from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Lock-Up Shares during the applicable Lock-Up Period, even if such Lock-Up Shares would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Lock-Up Shares or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Lock-Up Shares. Notwithstanding the foregoing, the Purchaser may transfer the Lock-Up Shares (i) as a bona fide gift or gifts, (ii) as a distribution to limited partners or shareholders of such person; provided, however, that in any such case it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding the Lock-Up Shares subject to the provisions of this letter agreement. Any transferor transferring pursuant to subsections (i) or (ii) above shall notify the Company in writing prior to the transfer. There shall be no further transfer of such Lock-Up Shares except in accordance with this letter agreement. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of any Lock-Up Shares. Further, the transfer agent shall deliver a consent in writing to the Company, confirming its obligation to notify the Company in writing upon each removal of the stop transfer instructions. Executed this 17th day of September, 2004. Very truly yours, STROME HEDGECAP LTD., a Cayman Islands corporation By: ----------------------------------------------- Name: Mark Strome Title: Director 17 EX-4.3 4 v06955_ex4-3.txt ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (this "Agreement"), dated as of September 17, 2004, is made and entered into by and between SMALL WORLD TOYS a California corporation ("Small World"), and NEUROSMITH, LLC, a California limited liability company ("Neurosmith"). A. Neurosmith has been engaged in the business of designing, producing and selling various "smart" toys and related products for children (as defined below, the "Products"). B. Small World wishes to purchase from Neurosmith, and Neurosmith wishes to sell to Small World, the Purchased Assets (as defined below), upon the terms and conditions of this Agreement. In consideration of the mutual promises and covenants set forth herein, the parties hereby agree as follows: ARTICLE I SALE AND PURCHASE OF ASSETS 1.1 Assets to be Transferred. Subject to the terms and conditions set forth in this Agreement and in reliance upon the representations and warranties of Neurosmith and Small World herein set forth, at the Closing Neurosmith shall sell, transfer, convey, assign and deliver to Small World, by appropriate deeds, bills of sale, assignments and other instruments as set forth herein, and Small World shall purchase from Neurosmith, all of Neurosmith's right, title and interest, as of the Effective Time, in and to the Purchased Assets. 1.2 Title to Purchased Assets. The Purchased Assets shall be conveyed free and clear of all liabilities, obligations and Liens, excepting only the Permitted Liens 1.3 No Other Assets. The Purchased Assets consist solely of those assets defined as part of the Purchased Assets pursuant to Section 12.1 and shall not include any other properties or rights, tangible or intangible. Without limiting the foregoing, the Purchased Assets shall not include any of the following: (a) cash, cash equivalents, securities, stocks, and negotiable financial instruments; (b) Tangible Personal Property (including leases thereof) other than the Tooling, Prototypes, Models and Chips; (c) Prepaid Items; (d) Licenses and Permits; (e) real property or interests in leases of real property; (f) accounts receivable; (g) Books and Records; (h) claims, causes of action, choices in action, rights of recovery and rights of set-off; and (i) rights to receive mail and other communications. Although Neurosmith will retain ownership of the Books and Records, after the Closing it shall provide Small World upon request with reasonable access to any Books and Records that Small World requires and that are reasonably necessary for its business purposes relating to the Purchased Assets. 1.4 No Assumption of Liabilities. Small World shall not assume or be liable for any liabilities or obligations of Neurosmith, direct or indirect, fixed, contingent or otherwise, known or unknown, which exist at the Effective Time or which arise thereafter as a result of any act, omission or circumstance taking place prior to the Effective Time, and whether or not the same are reflected on Neurosmith's financial statements, including, without limitation, the following liabilities or obligations: 1.4.1 any liability of Neurosmith for unpaid taxes or for income, transfer, sales, use and other Taxes, other than Taxes described in Section 2.3, and 1.4.2 any liability of Neurosmith for costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby. ARTICLE II PURCHASE PRICE, PAYMENT AND RELATED MATTERS 2.1 Purchase Price; Payment of the Purchase Price. The purchase price (the "Purchase Price") for the Purchased Assets shall be Eight Hundred Thousand Dollars ($800,000). Six Hundred Thousand Dollars ($600,000) of the Purchase Price shall be paid to Neurosmith upon Closing (the "Closing Payment") and the remaining Two Hundred Thousand Dollars ($200,000) shall be paid by making the "T&C Payment" on behalf of Neurosmith as defined in Section 2.2. 2.2 Tinkers & Chance. 2.2.1 Background. Neurosmith previously had various contacts with Tinkers & Chance, a partnership comprised of Warren Heit and Brian Marcus (individually and collectively "T&C"). T&C claims (as defined in Section 12.1, the "T&C Claims") that some of the Products infringe upon or violate certain issued and/or pending patent claims and applications of T&C (as defined in Section 12.1, the "T&C Rights".) In connection with the foregoing, Neurosmith and T&C entered into a binding Memorandum of Understanding (the "MOU") pursuant to which T&C and Neurosmith entered into various agreements some of which related to the T&C Rights and their use by Neurosmith. One of the provisions called for a Two Hundred Thousand Dollar ($200,000) payment (defined in the MOU as the "Payment") that Neurosmith would make to T&C if certain transactions occurred on or before March 31, 2004. There is a pending dispute between T&C as to whether any of the Transactions occurred on or before March 31, 2004 and therefore whether the Payment was due and owing. 2.2.2 Payment. Prior to or concurrently with the Closing, Small World will pay T&C the sum of Two Hundred Thousand Dollars ($200,000) (the "T&C Payment") and obtain from Tinkers & Chance a full and complete general release (the "T&C Release") of all claims, damages, liabilities etc. that T&C may have against Neurosmith and any of its affiliates, owners, managers, directors, employees, attorneys, agents and other representatives (past and present) (individually and collectively, the "Neurosmith Parties"). The T&C Payment shall explicitly represent a payment by Small World on behalf of Neurosmith in consideration of T&C's claims against Neurosmith and for the T&C Release provided by Tinkers & Chance. Neurosmith agrees execute a general release in favor of Tinkers & Chance and its partners (the "Neurosmith Release"). The forms of T&C Release and Neurosmith Release are attached hereto Exhibit "B". 2.3 Taxes. Small World shall pay documentary and transfer taxes including sales, use and excise taxes if any, arising out of the sale of the Purchased Assets hereunder. It is also understood that all of the Chips and Tooling are currently outside of the United States and are to be transferred to Small World where they are. 2 ARTICLE III CLOSING 3.1 Time and Place. The closing shall take place at the offices of Loeb & Loeb LLP, 10100 Santa Monica Boulevard, Suite 2200, Los Angeles, California 90067, at 10:00 a.m. local time at such time as Small World and Neurosmith mutually agree (the "Closing"). The Closing and the transfer of title, possession and control of the Purchased Assets shall be effective as of the Effective Time, and all transactions and deliveries at the Closing shall be deemed to have occurred simultaneously. The "Effective Time" shall mean 12:01 a.m. Los Angeles time on the day after the Closing. 3.2 Transactions at the Closing. At the Closing, the following shall occur: 3.2.1 Small World shall deliver the Closing Payment by wire transfer in accordance with instructions from Neurosmith; 3.2.2 Small World shall deliver to Neurosmith evidence reasonably satisfactory to Neurosmith that the T&C Payment has been delivered to T&C; 3.2.3 Small World shall deliver to Neurosmith the T&C Release executed and delivered by T&C; 3.2.4 Small World shall deliver to Neurosmith the certificates referred to in Sections 9.1 and 9.2; 3.2.5 Neurosmith shall deliver to Small World assignments in registrable form of all trademarks, service marks, patents, copyrights and registrations or applications for the same included within the Purchased Assets and a bill of sale and assignment covering the balance of the Purchased Assets, in forms reasonably acceptable to Neurosmith and Small World, together with such other instruments of sale, transfer, conveyance, assignment and confirmation as are reasonably required by Small World but in form reasonably acceptable to Neurosmith. It is understood and agreed that none of the representations or warranties in the foregoing assignments or bills of sale will supercede, increase, modify or amend any of the representations or warranties of Neurosmith in this Agreement nor limit in any manner any of the limitations of liabilities or disclaimers set forth in this Agreement (so that, it shall be deemed as if the only representations or warranties made by Neurosmith in the bills of sale and assignments shall be those set forth herein, the representations and warranties in the bills of sale and assignments shall be of no force or effect and that this Agreement shall prevail in all respects in the event of any conflict between those documents and this Agreement); 3.2.6 Neurosmith shall physically deliver the Models and Prototypes in its possession. The Tooling and Chips are in the possession of third parties as described on Exhibit A. Neurosmith shall deliver the Tooling and Chips solely by providing notice to the third parties described on Exhibit A informing such third parties of Small World's ownership, in form acceptable to Small World; and 3 3.2.7 Neurosmith shall deliver to Small World the certificates referred to in Sections 8.1 and 8.2. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF NEUROSMITH Neurosmith hereby represents and warrants to Small World that: 4.1 Organization; Authority; Due Authorization. Neurosmith is a limited liability company duly organized, validly existing and in good standing under the laws of the State of California and has all requisite power to own, lease and operate its assets, properties and business and to carry on its business as conducted. Neurosmith has all requisite power, authority and approvals required to enter into, execute and deliver this Agreement and all of the other transaction documents to which it is a party, and to perform fully Neurosmith's obligations hereunder and thereunder. Neurosmith has taken all actions of a limited liability company necessary to authorize it to enter into and perform fully its obligations under this Agreement and all of the other transaction documents to be executed by it and to consummate the transactions contemplated herein and therein. This Agreement has been duly and validly executed by Neurosmith and (assuming the due authorization, execution and delivery by Small World) constitutes the legal, valid and binding obligation of Neurosmith, enforceable in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting creditors' rights generally or by general equitable principles affecting the enforcement of contracts. 4.2 No Violation. Neither the execution or delivery by Neurosmith of this Agreement and all other transaction documents to which Neurosmith is a party, nor the consummation of the transactions contemplated hereby and thereby will (with or without notice or lapse of time or both): (i) violate any provision of the Articles of Organization, Operating Agreement, bylaws or other charter documents of Neurosmith; (ii) require the consent of any party; (iii) violate in any material respect any Applicable Law or Order, the violation of which may affect the Purchased Assets or Small World's rights therein; or (iv) result in the creation of any Lien or other encumbrance upon any of the Purchased Assets. 4.3 Regulatory Approvals and Other Consents. No consent, approval, authorization, or exemption from, nor any notice to or filing with, any Governmental Authority is required to consummate the transactions contemplated herein. 4.4 Title to Tangible Assets. Section 4.4 of Neurosmith's Disclosure Schedule sets forth a description of the Models, Tooling and Chips, including the location thereof. Except as indicated in Section 4.4 of Neurosmith's Disclosure 4 Schedule and except for Permitted Liens: (a) Neurosmith has good and marketable title owned by it to each item of Tangible Assets, free and clear of all Liens or other encumbrances; (b) no officer, director, shareholder or employee of Neurosmith, nor any Affiliate thereof, owns directly or indirectly, in whole or in part, any item of the Tangible Assets or has any other interest therein; (c) Neurosmith has the valid and enforceable right to receive and/or use each of the items of Tangible Assets in which Neurosmith has any other interest, free and clear of all Liens; and (d) the delivery to Small World of the instruments of transfer of ownership of the Tangible Assets contemplated by this Agreement will at the Effective Time vest good and marketable title to, or the valid and enforceable right to receive and/or use, the Tangible Property in Small World, free and clear of all Liens. Neurosmith makes no representation or warranty whatsoever as to the physical condition of any Tangible Assets (including whether any such Tangible Asset is in good operating condition and repair or usable in the ordinary course of business). Neurosmith also makes no representation or warranty that the Products will conform to any Applicable Laws or meet any applicable health and safety, consumer protection or environmental protection rules, regulations orders or laws. 4.5 Intellectual Assets. Except as set forth in Neurosmith's Disclosure Schedule 4.5 and except for the T&C Claims, to the Knowledge of Neurosmith: (i) Neurosmith is the owner of all right, title and interest in and to each of the Intellectual Assets (excluding the Miscellaneous Assets, which are transferred "as is" without representation) free and clear of all Liens, other than Permitted Liens; (ii) none of the Intellectual Assets (other than Miscellaneous Assets) is subject to any Taxes, maintenance fees or actions falling due within 90 days after the date hereof (it being understood that not all of trademarks have been registered and that this representation does not relate to registration fees or actions for trademarks); (iii) there are no pending claims, actions, judicial or other adversary proceedings, disputes or disagreements involving Neurosmith concerning any item of the Intellectual Assets, and no such action, proceeding, dispute or disagreement is threatened; (iv) the Intellectual Assets do not infringe upon the Intellectual Property Rights of any third person, including patent, copyright, and trade secrets; (iii) all officers, employees and consultants of Neurosmith who were involved in any material manner in developing any of the Intellectual Assets) have executed and delivered to Neurosmith agreements regarding the protection of proprietary information and the assignment to Neurosmith of all Intellectual Property Rights arising from the services performed for Neurosmith by such Persons, and Neurosmith has made available to Small World or its counsel copies of all such agreements; and (iv) no employee or consultant of Neurosmith violated any term of any employment Contract, disclosure agreement, non-competition agreement or any other Contract or restrictive covenant relating to the right of such Person to be employed or engaged by Neurosmith or to use the Intellectual Property rights of others. Neurosmith makes no representation that any Intellectual Property Right in any Intellectual Asset is valid and enforceable. A list of trademarks and patents and patent applications is set forth on Exhibit C. 4.6 Contracts. There are no executory obligations or liabilities arising from any Contracts relating to the Purchased Assets that could be or may result in a Lien or otherwise affect the Purchased Assets after the sale and transfer to Small World. 4.7 Litigation. Except as set forth in Section 4.7 of Neurosmith's Disclosure Schedule and except for the T&C Claims, to Neurosmith's Knowledge, there is no action, suit, proceeding or investigation pending or threatened: (i) against Neurosmith by any Person with respect to any of the Purchased Assets or which could create a Lien or other obligation against or relating to the ownership of the Purchased Assets; (ii) seeking to prohibit or restrict the sale and purchase of the Purchased Assets or the carrying out of any of the other transactions contemplated by this Agreement. Neurosmith is not subject to any judgment, order, decree, award, writ, injunction, decision, ruling or finding that may have an adverse affect on this Agreement or the rights of Small World in and to the Purchased Assets. 5 4.8 Applicable Law. To Neurosmith's knowledge, Neurosmith has, in all material respects, complied with and is now in all material respects, in compliance with all Applicable Laws and Orders. 4.9 Representations and Warranties on Closing. The representations and warranties contained in this ARTICLE IV shall be true and complete in all material respects at and as of the Effective Time with the same force and effect as though such representations and warranties had been made at and as of the Effective Time. ARTICLE V REPRESENTATIONS AND WARRANTIES OF SMALL WORLD Small World represents and warrants to Neurosmith as follows: 5.1 Due Incorporation; Power. Small World is a corporation duly organized, validly existing and in good standing under the Applicable Laws of its jurisdiction of incorporation. Small World has all requisite power, authority and approvals required to enter into, execute and deliver this Agreement and all of the other transaction documents to which it is a party, and to perform fully Small World's obligations hereunder and thereunder. 5.2 Authority to Execute and Perform Agreements. Small World has all requisite power, authority and approval required to enter into, execute and deliver this Agreement and the other Small World Documents and to perform fully Small World's obligations hereunder and thereunder. 5.3 Due Authorization; Enforceability. Small World has taken all corporate actions necessary to authorize it to enter into and perform its obligations under this Agreement and all other documents to which it is a party and to consummate the transactions contemplated herein and therein. This Agreement has been duly and validly executed by Small World and (assuming the due authorization, execution and delivery by Neurosmith) constitutes the legal, valid and binding obligations of Small World, enforceable in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar Applicable Laws affecting creditors' rights generally or by general equitable principles affecting the enforcement of contracts. 5.4 No Violation. Neither the execution and delivery of this Agreement and all other transaction documents to which Small World is a party, nor the consummation of the transactions contemplated hereby and thereby will (with or without notice or lapse of time or both): (i) violate any provision of the Articles of Incorporation or bylaws of Small World; (ii) require the consent of any party; or (iii) violate in any material respect any Applicable Laws or Orders, the violation of which may affect the transactions contemplated by this Agreement. 6 5.5 Regulatory Approvals. No consent, approval, authorization, notice, filing, or exemption is required to consummate the transactions contemplated herein. 5.6 Representations and Warranties on Closing. The representations and warranties contained in this ARTICLE V shall be true and complete in all material respects at and as of the Effective Time. ARTICLE VI COVENANTS AND AGREEMENTS OF THE PARTIES EFFECTIVE PRIOR TO CLOSING The parties hereto covenant and agree as follows: 6.1 Business Examinations and Physical Investigations of Assets. Prior to the Effective Time, Small World shall be entitled, through its employees and representatives, including, without limitation, Loeb & Loeb LLP and Lewis Anten, to make such investigations and examinations relating to the Purchased Assets as Small World may reasonably request (including where reasonably related to the Purchased Assets the Books and Records of Neurosmith). Neurosmith shall furnish Small World and its representatives during such period with all information concerning the affairs of Neurosmith as Small World or such representatives may request and cause Neurosmith's officers, employees, consultants, agents, accountants and attorneys to cooperate fully with Small World and such representatives and to make full disclosure of all information and documents requested by Small World and/or such representatives. No investigation by Small World shall, however, diminish or obviate in any way, or affect Small World's right to rely upon, any of the representations, warranties, covenants or agreements of Neurosmith contained in this Agreement. 6.2 Conduct of Business. From the date hereof through the Effective Time, Neurosmith shall not undertake, and shall use reasonable commercial efforts to avoid failing to undertake, any action if such action or failure would render any of its warranties and representations untrue as of the Effective Time. The failure of Neurosmith to fulfill its obligations shall, if material, permit Small to terminate this Agreement as Small World's sole and exclusive remedy for such failure. 6.3 Arrangements with Employees. From the date hereof until the Effective Time, Neurosmith shall permit Small World to approach and negotiate with any or all of the ex-employees of Neurosmith with respect to their employment by Small World following the Closing. Neurosmith shall use reasonable efforts to assist Small World in such negotiations. 6.4 No Solicitation or Negotiation. Neurosmith and its members shall not cause, suffer or permit any of Neurosmith's members, directors, officers, employees, representatives, agents, investment bankers, advisors, accountants or attorneys to (a) initiate or solicit any inquiries or the making of any proposal, or (b) engage in negotiations or discussions with any Person, or (c) provide any confidential information or data to any Person, with respect to any acquisition, business combination or purchase of all of any significant part of the Purchased Assets. 7 6.5 Risk of Loss. Neurosmith hereby assumes all risk of material adverse change, loss, damage and destruction to all or any part of the Purchased Assets until the Effective Time from any cause whatsoever. 6.6 Title to Chips and Tooling Small World and Neurosmith shall obtain confirmation from the factories holding the Tooling and Chips that, upon the Effective Date the Tooling and Chips will be the sole property of Small World and that such factories are not owed any amount from Neurosmith or otherwise with respect to the Purchased Assets. In connection therewith, it is understood that Neurosmith's representations regarding title to the Tooling and Chips are subject to the receipt of such confirmations without the payment of any monies by Neurosmith. If such confirmation is not obtained, the sole right of either party shall be to terminate this Agreement and there shall be no breach of this Agreement or claim of default in such circumstance. ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATION OF EACH PARTY TO CLOSE The obligations of Neurosmith and Small World to consummate the transactions contemplated herein shall be subject to the fulfillment, at or prior to the Closing of all of the conditions set forth below in this ARTICLE VII. 7.1 No Action or Proceeding. No action, suit, or proceeding shall have been instituted or threatened before any court or governmental body seeking to challenge or restrain the transactions contemplated herein which presents a substantial risk that such transactions will be restrained or that either party hereto may suffer material damages or other relief as a result of consummating such transactions. 7.2 Governmental and Other Approvals. Any and all permits and approvals from any Authority required for the lawful consummation of the transaction contemplated herein shall have been obtained. 7.3 Tinkers & Chance License Agreement; Release. Small World shall have entered into a license agreement with T&C in form and substance reasonably acceptable to Small World and Neurosmith (solely as to the T&C Release) pursuant to which T&C will grant a non-exclusive worldwide license under those patent and patent applications owned by T&C relating to the Products. T&C will have executed and delivered the T&C Release. ARTICLE VIII CONDITIONS PRECEDENT TO THE OBLIGATION OF SMALL WORLD TO CLOSE The obligation of Small World to consummate the transactions contemplated herein shall be subject to the fulfillment, at or before the Closing Date, of all of the conditions set forth below in this ARTICLE VIII. 8 8.1 Representations and Warranties. The representations and warranties of Neurosmith contained in this Agreement and in each other transaction document shall have been true and correct when made and shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, other than such representations and warranties as are made as of another specified date, which shall be true and correct as of such date, and at the Closing, Neurosmith shall deliver to Small World a certificate to such effect. 8.2 Performance of Covenants. Each obligation of Neurosmith to be performed by it on or before the Closing Date pursuant to the terms of this Agreement and each other transaction document shall have been duly performed on or before the Closing Date, and at the Closing Neurosmith shall have delivered to Small World a certificate to such effect. 8.3 Updated Schedules. Neurosmith shall have delivered to Small World an updated Neurosmith's Disclosure Schedule reasonably acceptable to Small World and dated no later than one business day prior to the Closing Date. ARTICLE IX CONDITIONS PRECEDENT TO THE OBLIGATION OF NEUROSMITH TO CLOSE The obligation of Neurosmith to consummate the transactions contemplated herein shall be subject to the fulfillment, at or before the Closing Date, of all the conditions set forth below in this ARTICLE IX. 9.1 Representations and Warranties. The representations and warranties of Small World contained in this Agreement shall be true on and as of the Closing Date in all material respects with the same force and effect as though made on and as of the Closing Date, other than such representations and warranties as are made as of another specified date, which shall be true and correct as of such date, and at the Closing Small World shall have delivered to Neurosmith a certificate to such effect. 9.2 Performance of Covenants. Each of the obligations of Small World to be performed by it on or before the Closing Date pursuant to the terms of this Agreement shall gave been duly performed on or before the Closing Date, and, at the Closing, Small World shall have delivered to Neurosmith a certificate to such effect. ARTICLE X INDEMNIFICATION 10.1 Indemnification by Neurosmith. Neurosmith shall, indemnify, defend and hold harmless (i) Small World, (ii) each of Small World's Affiliates, assigns and successors in interest, and (iii) each of their respective shareholders, directors, officers, employees, agents, attorneys and representatives, from and against any and all damages, awards, judgments, payments, diminutions in value and other losses (including, without limitation, legal fees and expenses) however suffered or characterized, which may be incurred or suffered by any such 9 party and which may arise out of or result from (i) any breach of any representation, warranty, covenant or agreement of Neurosmith contained in this Agreement; (ii) litigation, arbitration, governmental investigation, suit, action or other proceedings related to the Purchased Assets of Neurosmith arising from any occurrence prior to the Effective Time; (iii) any tax obligation of Neurosmith relating to any period prior to the Effective Time; (iv) any debt, liability or obligation of Neurosmith direct or indirect, fixed, contingent or otherwise, now or as of the Effective Time known or unknown, and whether or not then due or payable, which exists at or as of the Effective Time or which arises after the Effective Time but which is based upon or arises from any act, omission, transaction, circumstance, sale of goods or services, state of facts or other condition which occurred or existed at or before the Effective Time; and (v) any and all actions, suits, proceedings, claims, demands, assessments, judgments, costs and expenses (including, without limitation, legal fees and expenses) incurred in enforcing this indemnity. 10.2 Indemnification by Small World. Small World shall, indemnify, defend and hold harmless (i) Neurosmith (ii) each of Neurosmith's Affiliates, assigns and successors in interest, and (iii) each of their respective shareholders, members, directors, officers, employees, agents, attorneys and representatives, from and against any and all damages, awards, judgments, payments, diminutions in value and other losses (including, without limitation, legal fees and expenses) however suffered or characterized, which may be incurred or suffered by any such party and which may arise out of or result from (i) any breach of any representation, warranty, covenant or agreement of Small World contained in this Agreement; (ii) litigation, arbitration, governmental investigation, suit, action or other proceedings related to the Purchased Assets arising from any occurrence from and after the Effective Time (including any such matters raised by T&C with arising from the Purchased Assets after the Effective Time); (iii) any tax obligation of Small World relating to any period from and after the Effective Time; (iv) any debt, liability or obligation of Small World, direct or indirect, fixed, contingent or otherwise, known or unknown, and whether or not then due or payable, which arises from and after the Effective Time; and (v) any and all actions, suits, proceedings, claims, demands, assessments, judgments, costs and expenses (including, without limitation, legal fees and expenses) incurred in enforcing this indemnity. ARTICLE XI TERMINATION; REMEDIES 11.1 Termination Without Default. Anything herein to the contrary notwithstanding, this Agreement may otherwise be terminated before the Closing only as follows (and in no other manner): 11.1.1 Mutual Consent. By the mutual consent in writing of the parties. 11.1.2 Conditions to Small World's Performance Impossible. By Small World upon written notice to Neurosmith if any event occurs which would render impossible the satisfaction of one or more conditions to the obligations of Small World set forth in ARTICLE VII and ARTICLE VIII. 10 11.1.3 Conditions to Neurosmith's Performance Impossible. By Neurosmith upon written notice to Small World if any event occurs which would render impossible the satisfaction of one or more conditions to the obligations of Neurosmith set forth in ARTICLE VII and ARTICLE IX. 11.2 Termination Upon Default. Either party may terminate this Agreement by giving notice to the other on or prior to the Closing Date, without prejudice to any rights or obligations it may have, if (i) after written notice of the default and the passage of thirty (30) Business Days, or such shorter period as may end upon the scheduled Closing Date, in the case of a default which by its nature is capable of being cured and is not cured by the end of such period, the other party has failed in the due and timely performance of any of its covenants or agreements herein contained or there shall have been a breach of the other's warranties or representations herein contained, and (ii) such failure or breach could reasonably be expected to give the non-defaulting party grounds not to close pursuant to ARTICLES VII, VIII, and IX, as the case may be. In any such event the party who is not guilty of the breach may, in addition to all of its other rights and remedies, recover all Losses incurred by it from the party responsible for the breach. 11.3 Specific Performance. The parties acknowledge that the Purchased Assets are unique and cannot be obtained by Small World except from Neurosmith and for that reason, among others, Small World will be irreparably damaged in the absence of the consummation of this Agreement. Therefore, in the event of any breach by Neurosmith of this Agreement, Small World shall have the right, at its election, to obtain an order for specific performance of this Agreement, without the need to post a bond or other security, to prove any actual damage or to prove that money damages would not provide an adequate remedy. 11.4 Attorneys' Fees. If Neurosmith or Small World shall bring an action against the other by reason of any alleged breach of any covenant, provision or condition hereof, or otherwise arising out of this Agreement, the unsuccessful party shall pay to the prevailing party all attorneys' fees and costs actually incurred by the prevailing party, in addition to any other relief to which it may be entitled. As used in this Section 11.4 and elsewhere in this Agreement, "actual attorneys' fees" or "attorneys' fees actually incurred" means the full and actual cost of any legal services actually performed in connection with the matter for which such fees are sought calculated on the basis of the usual fees charged by the attorneys performing such services, and shall not be limited to "reasonable attorneys' fees" as that term may be defined in statutory or decisional authority. ARTICLE XII DEFINITIONS 12.1 Definitions. When used in this Agreement, the following terms shall have the respective meanings set forth below: "Affiliate" shall mean with respect to any Person (i) a Person directly or indirectly controlling, controlled by or under common control with such Person; (ii) a Person owning or controlling 10% or more of the outstanding voting securities of such Person; or (iii) an officer, director, member or partner of such Person. When the Affiliate is an officer, director, member or partner of such Person, any other Person for which the Affiliate acts in that capacity shall also be considered an Affiliate. For these purposes, control means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether its the ownership of voting securities, by contract or otherwise. 11 "Agreement" shall mean this Asset Purchase Agreement, including all exhibits and schedules thereto, as the same may hereafter be amended, modified or supplemented from time to time in accordance with the provisions of Section 13.6. "Applicable Law" shall mean, with respect to any Person, any domestic or foreign, federal, state or local statute, law, ordinance, rule, administrative interpretation, regulation, Order, writ, injunction, directive, judgment, decree or other requirement of any Authority applicable to such Person or any of its Affiliates or any of their respective properties, assets, officers, directors, general partners, managers, employees, consultants or agents (in connection with such officer's, director's, general partner's, manager's, employee's, consultant's or agent's activities on behalf of such Person or any of its Affiliates). "Authority" shall mean any governmental, regulatory or administrative body, agency or authority, any court of judicial authority, any arbitrator or any public, private or industry regulatory authority, whether Federal, state, local or foreign. "Books and Records" of a Person shall mean all books and records, ledgers, employee records, customer lists, files, correspondence, computer data bases, accounting information and other records of every kind, whether written, computerized or maintained in any other medium, which are owned by that Person or in which that Person has any interest. "Chips" shall mean those computer chips and other parts listed on Exhibit "B". "Closing Date" shall mean the date upon which the Closing occurs. "Contracts" of a Person shall mean all contracts, agreements, warranties, guaranties, indentures, bonds, options, leases, subleases, easements, mortgages, plans, collective bargaining agreements, licenses, commitments or binding arrangements of any nature whatsoever, express or implied, written or unwritten, and all amendments thereto, entered into or binding upon that Person or to which any property of that Person may be subject. "Intellectual Assets" shall mean all Intellectual Property Rights in the Products and in the Miscellaneous Rights. 12 "Intellectual Property Rights" shall mean: (i) all registered and unregistered trademarks, service marks, trade names (including product names), trade dress, logos, corporate names, tag lines, slogans and commercial symbols associated with such asset, including all applications therefore, and all associated goodwill; (ii) all statutory, common law and registered copyrights, all applications therefore and all associated goodwill required for the manufacture and exploitation of such asset; (iii) all patents and patent applications, all associated technical information, shop rights, know-how, trade secrets, processes, operating, maintenance and other manuals, drawings and specifications, process flow diagrams and related data, and all associated goodwill required for the manufacture and exploitation of such asset; (iv) all software (source and object code) required for the manufacture and exploitation of such asset and all documentation thereof (including all electronic data processing systems and program specifications, functional specifications, source and object codes, algorithms, architecture, input data, report layouts and format, record file layouts, diagrams, narrative descriptions and flow charts) other than "off the shelf" software purchased in retail transactions; (v) all other mask works, moral rights, inventions, discoveries, conceptions, improvements, reductions to practice, plans (including advertising materials), processes, formulae (secret or otherwise), data, drawings, specifications, trade secrets, confidential information, financial, pricing and cost models and information, operating procedures, supplier lists required for the manufacture and exploitation of such asset; (vii) all drawings, copy, art (including packaging artwork), Product content (including any rights to music and any licenses for such music, to the extent transferable), records, books or other tangible media embodying the foregoing; (viii) all rights to obtain and rights to register patents, trademarks and copyrights; (ix) all rights, if any in the URL "Neurosmith.com" and the "content" for such URL. For purposes of this Agreement, Intellectual Property Rights does not include any rights to sue or recover and retain damages and costs and attorneys fees for infringement of any of the foregoing arising prior to the Effective Time. "Knowledge" shall mean, with respect to Neurosmith, the actual knowledge of each Barre Rorabaugh, John Sosoka and Brooke Abercrombie. "Licenses and Permits" of a Person shall mean all licenses and permits issued to that Person or in which that Person has any interest (including the right to use). "Lien" shall mean any lien, pledge, mortgage, security interest, lease, charge, conditional sales contract, option, restriction, reversionary interest, right of first refusal, voting trust arrangement, preemptive right, claim under bailment or storage contract, easement or any other adverse claim or right whatsoever. "Miscellaneous Assets" shall mean those items of Intellectual Property Rights listed on Exhibit "B". "Models" shall mean models of Products that were in development for 2004; models are non-working mock-ups of Products in various stages. "Order" shall mean any decree, order, judgment, writ, award, injunction, rule or consent of or by an Authority. "Permitted Liens" shall mean Liens set forth on Section 4.4 of Neurosmith's Disclosure Schedule. "Person" shall mean any entity, corporation, company, association, joint venture, joint stock company, partnership, trust, organization, individual (including personal representatives, executors and heirs of a deceased individual), nation, state, government (including agencies, departments, bureaus, boards, divisions and instrumentalities thereof), trustee, receiver or liquidator, as well as any syndicate or group that would be deemed to be a Person under Section 13(d)(3) of the Securities Exchange Act of 1934. 13 "Prepaid Items" of a Person shall mean all prepaid items (such as insurance deposits, municipal or local tax payments or deposits, utility deposits and the like), deferred charges, reserve accounts and other security and similar deposits owned by that Person or in which that Person has any interest. "Products" shall mean those toys and related items described as products on Exhibit "A". "Purchased Intellectual Property" shall mean all intangible rights in the Products and all Intellectual Property Rights associated with such toys and related products, together with all rights in the name "Neurosmith". "Prototypes" shall mean those prototypes of Products that were under development for 2004; a prototype is a model of a product with some working features, although there is no representation as to completeness of the Prototype. "Purchased Assets" shall mean solely the Purchased Intellectual Property, the Prototypes, the Models, the Chips and the Miscellaneous Assets. "Neurosmith's Disclosure Schedule" shall mean the schedule entitled "Neurosmith's Disclosure Schedule", dated of even date herewith, delivered to Small World and executed by Neurosmith. Neurosmith's Disclosure Schedule shall be considered a part of this Agreement. "Tangible Assets" means the Tooling, Chips, Models and Prototypes. "Tangible Personal Property" of a Person shall mean all tooling, chips, equipment, furniture, trade fixtures, computers, supplies, spare parts, tools, inventories, stores, Books and Records and other tangible personal property owned by that Person, leased by that Person or in which that Person has any other interest (including the right to use). "Tax" shall mean any federal, state, local or foreign tax, charge, fee, levy, deficiency or other assessment of whatever kind or nature (including without limitation, any net income, gross income, gross receipts, sales, use, value added, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, unemployment, excise, estimated, severance, stamp, occupation, real property, personal property, intangible property, occupancy, recording, minimum, environmental and windfall profits tax, including any liability therefore as a transferee (including without limitation under Section 6901 of the Code or any similar provision of Applicable Law), as a result of Treasury Regulation Section 1.1502-6 or any similar provision of Applicable Law, or as a result of any tax sharing or similar agreement, together with any interest, penalty, addition to tax or additional amount imposed by any Tax Authority. "Taxing" and Taxable" shall have the correlative meanings. "T&C Claims" shall mean any and all claims, demands, cause of actions and similar rights that T&C may at any time assert against the Purchased Assets or Neurosmith including any claims that any of the Purchased Assets or the Intellectual Property Rights therein violate or infringe upon in any manner any of the T&C Rights. 14 "T&C Rights" shall mean any Intellectual Property Rights claimed by T&C, including rights in patents and patent applications and the subject inventions, as well as all other Intellectual Property Rights in such inventions. 12.2 Other Defined Terms. In addition to those terms defined above, the following terms shall have the respective meanings given to them in the Sections indicated below: Term Section Effective Time Section 4.1 Purchase Price Section 2.1 Small World Preamble Neurosmith Preamble T&C Section 2.1 T&C Payment Section 2.2 Neurosmith Parties Section 2.2 Neurosmith Release Section 2.2 12.3 Other Interpretive Provisions. References in this Agreement to "Articles," "Sections," "Exhibits" and "Schedules," shall be to the Articles, Sections, Exhibits and Schedules of this Agreement, unless otherwise specifically provided; where the context or construction requires, all words applied in the plural shall be deemed to have been used in the singular, and vice versa; the masculine shall include the feminine and neuter, and vice versa; and the present tense shall include the past and future tense, and vice versa; the words "herein", "hereof" and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement; and except as otherwise specified in this Agreement, all references in this Agreement (a) to any Person shall be deemed to include such Person's permitted heirs, personal representatives, successors and assigns, (b) to any agreement, any document or any other written instrument shall be a reference to such agreement, document or instrument together with all exhibits, schedules, attachments and appendices thereto, and in each case as amended, restated, supplemented or otherwise modified from time to time in accordance with the terms thereof prior to the Effective Time and (c) to any law, statute or regulation shall be deemed references to such law, statute or regulation as the same may be supplemented, amended, consolidated, superseded or modified from time to time prior to the Effective Time. All accounting terms used herein have the meanings ascribed to them under GAAP. ARTICLE XIII MISCELLANEOUS 13.1 Expenses of Sale. Each Party shall bear its own direct and indirect expenses incurred in connection with the negotiation and preparation of this Agreement and the other transaction documents and the consummation and performance of the transactions contemplated herein and therein. 15 13.2 Publicity. No publicity release or announcement concerning this Agreement or the transactions contemplated herein shall be issued without advance written approval of both parties, except as may be required by applicable securities laws in which case the parties shall consult with each other with respect to text and means of communication of any such release or announcement. 13.3 Notices. All notices, requests and other communications hereunder shall be in writing and shall be delivered by courier or other means of personal service (including by means of a nationally recognized courier service or a professional messenger service), or sent by telex or telecopy or mailed first class, postage prepaid, by certified mail, return receipt requested, in all cases, addressed to the other party at its last known address. 13.4 Survival of Representations and Warranties; No Other Representations. The representations, warranties, covenants and agreements made by the parties hereto in the Agreement, and any schedule or document delivered pursuant to the Agreement, shall survive the Closing for a period of two (2) years. Neither party is making any representation or warranty not expressly set forth herein and all other representations and warranties, including those of merchantability, fitness for a particular purpose and infringement, are hereby disclaimed. 13.5 Further Assurances. Each of the parties shall use its reasonable and diligent best efforts to proceed promptly with the transactions contemplated herein, to fulfill the conditions precedent for such party's benefit or to cause the same to be fulfilled and to execute such further documents and other papers and perform such further acts as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated herein. Without limiting the foregoing, Neurosmith shall take such further actions, as Small World may reasonably deem necessary or desirable in order to transfer, convey and assign to Small World, and to confirm Small World's title to, all of the Purchased Assets to assist Small World in exercising all rights with respect thereto (provided that any material cost of such assistance shall be borne by Small World.) 13.6 Amendments. This Agreement may be modified or amended only by a written instrument signed by the party sought to be bound. 13.7 Entire Agreement. This Agreement, and any documents attached hereto or incorporated herein by reference, constitutes the entire agreement between the parties with respect to the subject matter hereof. 13.8 Governing Law and Venue. This Agreement is to be governed by and construed in accordance with the laws of the State of California without regard to the conflicts of laws principles thereof. Any suit brought hereon, whether in contract, tort, equity or otherwise, shall be brought in the state or federal courts sitting in Los Angeles, California, the parties hereto hereby waiving any claim or defense that such forum is not convenient or proper. 13.9 Arbitration. Except as otherwise provided in this Section 14.9, the exclusive method for resolving any disputes, controversies or claims of any nature, including those arising out of or relating to this Agreement, or the making, validity, interpretation, performance or breach of this Agreement, shall be arbitration in Los Angeles, California, U.S.A. before a single arbitrator under the auspices of, and in accordance with the commercial arbitration rules of, the American Arbitration Association. The single arbitrator shall have the power to award any and all remedies and relief whatsoever that is deemed appropriate under the circumstances, including, without limitation, money damages and equitable relief. The award shall be final, binding and enforceable, and may be enforced by any court of competent jurisdiction. The procedure whereby the evidence (oral and/or written) relating to the matter is presented in the arbitration shall be as agreed to by the parties hereto, and in the absence of such agreement, shall be as determined by the arbitrator; provided, that each party hereto shall have the right to discovery, to call witnesses and to cross-examine (either through legal counsel, expert witnesses or both). The decision of the arbitrator shall be rendered within thirty (30) days following the conclusion of the arbitration proceeding, but in the event that the arbitrator does not render an award within such period the arbitrator shall nonetheless retain jurisdiction of the matter for the purpose of making an award as soon as reasonably possible. Such arbitration proceedings shall be the exclusive means to resolve any disputes, controversies or claims between the parties hereto; provided, however, that either party hereto shall have the right to seek temporary and/or preliminary injunctive relief in any court of competent jurisdiction to enjoin violations of this Agreement pending final resolution of the controversy in arbitration. 16 13.10 Attorneys' Fees. If either party shall bring an action against the other arising out of or related to this Agreement, the unsuccessful party shall pay to the prevailing party all attorneys' fees and costs actually incurred by the prevailing party, in addition to any other relief to which it may be entitled. 13.11 Binding Effect. This Agreement and the rights, covenants, conditions and obligations of the respective parties hereto and any instrument or agreement executed pursuant hereto shall be binding upon the parties and their respective successors, assigns and legal representatives. 13.12 Assignment. Neurosmith may not assign or transfer any of its rights or obligations under this Agreement. Small World may assign its rights and obligations to any of its affiliates or subsidiaries without Neurosmith's consent. 13.13 Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 13.14 Severability. In the event that any provision or any part of any provision of this Agreement shall be void or unenforceable for any reason whatsoever, then such provision shall be stricken and of no force and effect. However, unless such stricken provision goes to the essence of the consideration bargained for by a party, the remaining provisions of this Agreement shall continue in full force and effect, and to the extent required, shall be modified to preserve their validity. 13.15 No Third Party Rights. This Agreement is not made for the benefit of any third party except for Small World's successors and assign. 17 13.16 Construction. The language in all parts of this Agreement shall in all cases be construed simply, according to its fair meaning, and not strictly for or against any of the parties hereto. Without limitation, there shall be no presumption against any party on the ground that such party was responsible for drafting this Agreement or any part thereof. 13.17 Limitation on Liability and Damages. In no event shall either party be liable or responsible for any type of damages other than actual, direct damages. Without limiting the foregoing, neither party shall be liable for any consequential, special, indirect, punitive or other type of damage, whether or not such party has knowledge of any such other damages or facts that would result in such damage. In addition, in no event shall either party have any liability for any amounts which in the aggregate exceed the Purchase Price (including the T&C Payment), provided that the foregoing shall not limit indemnification claims under Article 10 with respect to liabilities or claims of third parties. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.
SMALL WORLD TOYS NEUROSMITH, LLC A California corporation A California limited liability company By: By: ---------------------------------------- ------------------------------------------------- Debra Fine, Chief Executive Officer Mark R. Herron, Chief Executive Officer
18 ASSET PURCHASE AGREEMENT Between SMALL WORLD KIDS, INC. as purchaser and NEUROSMITH, LLC as seller Dated: September 16, 2004 TABLE OF CONTENTS
Page ARTICLE I SALE AND PURCHASE OF ASSETS...................................................................1 1.1 Assets to be Transferred......................................................................1 1.2 No Other Assets...............................................................................1 1.3 Title to Purchased Assets.....................................................................1 1.4 No Assumption of Liabilities..................................................................1 ARTICLE II PURCHASE PRICE, PAYMENT AND RELATED MATTERS...................................................2 2.1 Purchase Price; Payment of the Purchase Price.................................................2 2.2 Tinkers &Chance...............................................................................2 2.3 Taxes.........................................................................................2 ARTICLE III CLOSING.......................................................................................3 3.1 Time and Place................................................................................3 3.2 Transactions at the Closing...................................................................3 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF NEUROSMITH..................................................4 4.1 Organization; Authority; Due Authorization....................................................4 4.2 No Violation..................................................................................4 4.3 Regulatory Approvals and Other Consents.......................................................4 4.4 Title to Tangible Assets......................................................................4 4.5 Intellectual Assets...........................................................................5 4.6 Contracts.....................................................................................5 4.7 Litigation....................................................................................5 4.8 Applicable Law................................................................................6 4.9 Representations and Warranties on Closing ....................................................6 ARTICLE V REPRESENTATIONS AND WARRANTIES OF SMALL WORLD.................................................6 5.1 Due Incorporation.............................................................................6 5.2 Authority to Execute and Perform Agreements...................................................6 5.3 Due Authorization; Enforceability.............................................................6 5.4 No Violation..................................................................................6 5.5 Regulatory Approvals..........................................................................7 5.6 Representations and Warranties on Closing.....................................................7 ARTICLE VI COVENANTS AND AGREEMENTS OF THE PARTIES EFFECTIVE PRIOR TO CLOSING............................7 6.1 Business Examinations and Physical Investigations of Assets...................................7 6.2 Conduct of Business...........................................................................7 6.3 Arrangements with Employees...................................................................7 6.4 No Solicitation or Negotiation................................................................7 6.5 Risk of Loss..................................................................................7 6.6 Title to Chips and Tooling....................................................................8
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ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATION OF EACH PARTY TO CLOSE.................................8 7.1 No Action or Proceeding.......................................................................8 7.2 Governmental and Other Approvals..............................................................8 7.3 Tinkers & Chance License Agreement............................................................8 ARTICLE VIII CONDITIONS PRECEDENT TO THE OBLIGATION OF SMALL WORLD TO CLOSE................................8 8.1 Representations and Warranties................................................................9 8.2 Performance of Covenants......................................................................9 8.3 Updated Schedules.............................................................................9 ARTICLE IX CONDITIONS PRECEDENT TO THE OBLIGATION OF NEUROSMITH TO CLOSE.................................9 9.1 Representations and Warranties................................................................9 9.2 Performance of Covenants......................................................................9 ARTICLE X INDEMNIFICATION...............................................................................9 10.1 Indemnification by Neurosmith.................................................................9 10.2 Indemnification by Neurosmith.................................................................9 ARTICLE XI TERMINATION; REMEDIES........................................................................10 11.1 Termination Without Default..................................................................10 11.2 Termination Upon Default.....................................................................11 11.3 Specific Performance.........................................................................11 11.4 Attorneys' Fees..............................................................................11 ARTICLE XII DEFINITIONS..................................................................................11 12.1 Definitions..................................................................................11 12.2 Other Defined Terms..........................................................................15 12.3 Other Interpretive Provisions................................................................15 ARTICLE XIII MISCELLANEOUS................................................................................15 13.1 Expenses of Sale.............................................................................15 13.2 Publicity....................................................................................16 13.3 Notices......................................................................................16 13.4 Survival of Representations and Warranties; No Other.........................................16 13.5 Further Assurances...........................................................................16 13.6 Amendments...................................................................................16 13.7 Entire Agreement.............................................................................16 13.8 Governing Law and Venue......................................................................16 13.9 Arbitration..................................................................................16 13.10 Attorneys' Fees..............................................................................17
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13.11 Binding Effect...............................................................................17 13.12 Assignment...................................................................................17 13.13 Counterparts.................................................................................17 13.14 Severability.................................................................................17 13.15 No Third Party Rights........................................................................17 13.16 Construction.................................................................................18 13.17 Limitations on Liabilities and Damages.......................................................18
iii Exhibit A Purchased Assets Products 1. Proposed 2004 Products. The following Products were proposed to be manufactured and produced by Neurosmith as its 2004 new Products. These toys were never reduced to production and exist only in various stages of development. There is no tooling for these Products. The Intellectual Property Rights in these products are provided only in the actual stage of development and not as completed Products: (1) Mozart's Rolling Orchestra; (2) Touch `N Sing Animal Block (3 sets); (3) Pinball Math; (4) Lingo the Learning Bird; (5) Pet Me Platypus (revised); (6) Together Tunes Sing-Along Book; (7) Edgar (the Elephant); (8) Abigail (the Alligator") and (7) a special private version of Sunshine Symphony. Prior to the Closing, Neurosmith will provide to Small World all design documentation, marketing data, electronic engineering documents (including schematics) and manufacturing data, to the extent those items exist. The design documents include industrial design, fabric design, decoration design and packaging design. Industrial design documents may include 2-D and 3-D drawings to assist in creating tools for injection molding. Marketing data may include competitive marketing analysis, focus group test reports, play group test results, budget analysis and detailed schedules. Manufacturing data includes quotes from manufacturing vendors, cost of goods results, vendor correspondence and financial analysis. Neurosmith will also deliver preliminary programming code and original and code level audio recordings to the extent these exist. (The foregoing deliveries are referred to herein as the "Proprietary Data".) Prior to the Closing, Neurosmith will provide Small World with all existing Prototypes and Models for the above-Products. By Closing, Small World will be acknowledging that it has received all Prototypes and Models to be provided by Neurosmith pursuant to this Agreement. Except as expressly set forth in Article IV of the Agreement and subject to the disclaimers in the Schedules hereto, Neurosmith makes no representations or warranties regarding the foregoing and, without limiting the foregoing, makes no representation as to the completeness of the Proprietary Data, the accuracy thereof or whether the programming has any errors. By effectuating the Closing, Small World will be acknowledging that it is satisfied that it has done its own review of the Proprietary Data provided and that such Proprietary Data is sufficient for its purposes and therefore that the Proprietary Data constitutes full and complete delivery by Neurosmith of everything regarding the Products that Neurosmith is obligated to provide. Notwithstanding the foregoing, if Neurosmith later learns of additional information or data that has not been provided to Small World, Neurosmith will promptly deliver such additional data and/or information to Small World. 2. 2003 and Before and Cartridges a. 2003 Products. The following Products were manufactured and produced by Neurosmith as its 2003 new Products: (1) Music Blocks Composer; (2) Music Block Creativity Cartridge; (3) Pet Me Platypus; (4) Grow & Discover Block; (5) Alphabet Ball; (6) Together Tunes; (7) Musini Preschool; (8) Magnaphonics; (9) Musini Preschool Quintet Cartridge; and (10) Musini Magic Wand Set. b. Pre-2003 Products. The following Products were manufactured and produced by Neurosmith prior to 2003. Those Products that were discontinued by 2004 are noted: (1) Music Blocks; (2) Jumbo Music Blocks (Discontinued); Sunshine Symphony; (4) Little Linguist (Discontinued); and (5) Phonics Tiles (Discontinued). (6); (6) Babbler; (7) Little Linguist; (8) Magic Sensor (i.e., Musini Wand) (Discontinued); (9) Rhythm Roller (Discontinued); and (10) Phonics Blocks (Discontinued). c. Cartridges. All "Cartridges" for any of the other Products, such as for Music Blocks, Jumbo Music Blocks, Music Blocks Composer, Phonics Tiles, Together Tunes, including the following: Rhythms (Target), Orchestra, Jazz (Target), Opera, Bach, Nutcracker, Rock (Target), Cinderella, Pooh, Poppins, World, Kids Classics, Classical. d. Products. Wild Instruments - This line of toys was never developed past the model stage. At or before the Closing, Neurosmith will provide to Small World all Proprietary Data regarding all of the foregoing Products in a., b. and c. above (the "Old Products"), to the extent such data exists. It is understood that, because the Old Products have already been manufactured, some of the Proprietary Data for the Old Products may no longer remain in Neurosmith's possession (but may be in the hands of the companies that manufactured such items). On the other hand, the Proprietary Data for the Old Products may contain additional types of data, such as purchasing information and sales reports. Except as expressly set forth in Article IV of the Agreement and subject to the disclaimers in the Schedules hereto, Neurosmith makes no representations or warranties regarding the foregoing and, without limiting the foregoing, makes no representation as to the completeness of the Proprietary Data, the accuracy thereof or whether the programming has any errors. By effectuating the Closing, Small World will be acknowledging that it is satisfied that it has done its own review of the Proprietary Data provided and that such Proprietary Data is sufficient for its purposes and therefore that the Proprietary Data constitutes full and complete delivery by Neurosmith of everything regarding the Products that Neurosmith is obligated to provide. Notwithstanding the foregoing, if Neurosmith later learns of additional information or data that has not been provided to Small World, Neurosmith will promptly deliver such additional data and/or information to Small World. Chips and Other Parts Neurosmith will deliver all of the following chips and other items. Except as set forth in Article IV of the Agreement and subject to the disclosures in the schedule hereto, Neurosmith makes no representation as to items to be provided, including as to their condition or the exact quantity. 1. Items believed to be in the possession of Verifan, Ltd. a. Roms for Music Block Cartridges, for Mozart, Rhythms, Orchestra, Bach, Jazz, Nutcracker, Opera, Cinderella, Pooh, Poppins, Rock, Mozart v.2.0; OSC for Mozart v.2.0, Controller 3-1 Cart. b. Neurosmith has provided Small World with a "Physical Inventory" dated April 1, 2004 from Verifan and an Inventory Analysis of Neurosmith dated as of November 30, 2003. Neurosmith makes no representation as to the correct amount of such items (i.e., how many are part of the Purchased Assets), their condition or any claims or Liens that Verifan may assert. 2. Items believed to be in the possession of Jetta a. Roms for Maestro Edition, World Music, Classical Collection, Phonics Tiles, Rock Around the Block, Maestro (Ed Bulk Pack), SC615 (Challenge Cart), Magnaphonics; Together Tunes; I/C for Phonics Tiles (SC614). b. Neurosmith has provided Small World with an Inventory Analysis of Neurosmith dated as of November 30, 2003. Neurosmith makes no representation as to the correct amount of such items (i.e., how many are part of the Purchased Assets), their condition or any claims or Liens that Jetta may assert. 3. Items believed to be in the possession of Wynnewood a. Roms for Quintet, Preschool Favorites, Musini Preschool. b. Neurosmith has provided Small World with an Inventory Analysis of Neurosmith dated as of November 30, 2003. Neurosmith makes no representation as to the correct amount of such items (i.e., how many are part of the Purchased Assets), their condition or any claims or Liens that Wynnewood may assert. c. The Inventory Analysis shows inventory for Roms for Sequence Cartridge. Neurosmith does not know the present location, if any, of such Roms, although Wynnewood was the manufacturer of that cartridge. All rights to such Roms are part of the Purchased Assets, but Neurosmith makes no representation as to the correct amount of such items (i.e., how many are part of the Purchased Assets), their condition or any claims or Liens that Wynnewood may assert. Miscellaneous Assets The URL: "Neurosmith.com" and any of the trade or service marks listed on Exhibit "C" that do not relate to Products that were actually produced or marketed. The list of Purchased Assets is intended to cover all Products in which Neurosmith has any Intellectual Property Rights, including all discontinued Products. In the event that it is later determined that there are any Products not listed, such Products shall be transferred to Small World as Products under this Agreement; however, Neurosmith makes no representation or warranty of any nature whatsoever about any such Product or any Intellectual Property Rights therein. Exhibit "B" Form of Releases Exhibit "C" Trademarks and Patents and Patent Applications Trademarks 1. Music Blocks - U.S. Application 75459420. Reg. 2545293 (Supplemental) (No separate registration for Music Block Composer or Music Block Creativity Cartridge. 2. Pet Me Platypus - U.S. Application 76497493 3. Grow & Discover Block - U.S. Application 76570542 4. Alphabet Ball - No application 5. Together Tunes - U.S. Application 76497490 6. Musini - U.S. Application 76381083 (No separate application for Musini Preschool or Magic Wand or Preschool Quintet Cartridge) 7. Magnaphonics - U.S. Application 76497492 8. Phonics Tile - U.S. Application Abandoned (Product Discontinued) 9. Jumbo Music Block - U.S. Application 2641320 Reg. 2641320 (Supplemental) 10. Sunshine Symphony - U.S Application 78044454. Reg. 2807383 11. Little Linguist - U.S. Application 754588875. Reg. 2423716 12. Babbler - No application 13. Mozart's Rolling Orchestra - No Application and no trademark search 14. Touch `N Sing Animal Block (3 sets) - Registration Abandoned 15. Pinball Math - No Application and no search 16. Lingo the Learning Bird - U.S. Application 76570549 17. Together Tunes Sing-Along Book - No separate application from Together Tunes 18. Edgar (the Elephant) - No U.S. Application and no search 19. Abigail (the Alligator - No U.S. Application and no search 20. Smart Toys for Developing Minds - (Tagline) No U.S. Application and no search 21. Phonics Block - U.S. Application 75465684; Reg. 2485558 22. Magic Sensor - U.S. Application 76449802 - Abandoned 23. Touch `N Sing - U.S. Application 76566213 24. Rhythm Roller - U.S. Application 76570547 25. Cyber Cartridge - U.S Application 75709657; Reg 2621740 Patents and Patent Applications. U.S. Patent 6,353,168 (March 5, 2000) - Educational Musical Instrument for Children U.S. Patent D410,972 (June 5, 1999) - Design for Music Blocks U.S. Provisional Patent Application Entitled: Interactive Sound Generator Application Serial No.: 60/355,776; Filing Date: February 9, 2002, as superceded by U.S. Patent Application Entitled: Interactive Sound Generator Application Serial No.: 10/360,416; Filing Date: February 7, 2003 Disclosure Schedules Schedule 4.4 All chips and tooling are in the possession of the manufacturers of the applicable products, such as Wynnewood, Jetta and Qualiman. Although Neurosmith and Small World have each contacted these manufacturers, it is not clear whether these manufacturers are making any claims that they own or have a lien on such chips and/or tooling, including as to whether they must be paid any amounts before Neurosmith and/or any successor to Neurosmith, such as Small World may have possession of or title thereto. Neurosmith is delivering to Small World only such title in chips and tooling as Neurosmith may have, not including any claims that such manufacturers may make and such claims are exceptions to Neurosmith's representations hereunder, including those in Article IV. The description of the chips and tooling and the exceptions to representations set forth therein set forth in Exhibit "A" are incorporated herein. Schedule 4.5 There are no known exceptions. However, Neurosmith did not undertake trademark searches on most proposed names for its 2004 Products Schedule 4.7 Pierre Belvedere, Inc. ("Belvedere"), a Canadian distribution company, has filed suit in Canada claiming that Neurosmith wrongfully terminated Belvedere as Neurosmith's Canadian distributor. Neurosmith is contesting this matter. Belvedere has claimed damages of between $300,000 and $400,000 Canadian dollars. This matter should not affect the Purchased Assets; Neurosmith shall indemnify Small World with respect to this matter. KB Toys of Massachusetts, Inc. ("KB"), a purchaser of Neurosmith Products, notified Neurosmith in a letter dated August 26, 2004, that KB, which is in Chapter 11 Bankruptcy proceedings in Delaware, is owed $125,224.71 as a pre-petition claim. Neurosmith is investigating this matter, but its initial review shows nothing to support this claim. In any event, the matter should not affect the Purchased Assets and Neurosmith shall indemnify KP with respect to such claim. Schedule 4.8 The Musini Wand may not comply with all FCC requirements. 7The battery case for an earlier design of Sunshine Symphony was found to permit the positive and negative contacts to touch in extreme circumstances, which could lead to "warming". This defect was fixed. It is noted that this defect was reported to the Consumer Protection Safety Commission which did not consider the defect to be a safety hazard, because the warming was not enough to cause burns or start a fire. Any liability relating to the sale of the Sunshine Symphony with the earlier design of the battery case remains Neurosmith's, subject to the indemnification obligations hereunder. Some Pet Me Platypus products were incorrectly manufactured by Qualiman and were recalled. While Neurosmith retains any liability for any such products that were sold by Neurosmith prior to the Effective Date, Small World shall have full responsibility for products sold after the Effective Date. EX-99 5 ex99.txt Exhibit 99.1 NEWS RELEASE CONTACTS: Gary S. Maier/Sophie Xu Maier & Company, Inc. (310) 442-9852 JP Lincoln / Susan Robbins Crier Communications (310) 274-1072 SMALL WORLD KIDS ANNOUNCES ACQUISITION OF NEUROSMITH ASSETS -- Developmental Toy Company Adds Electronic Learning to Mix-- CULVER CITY, CA. -September 23, 2004 - Small World Kids, Inc. (OTCBB: SWKD) today announced it has acquired electronic learning and related intellectual property from Neurosmith, a California-based developer of electronic educational toys for infants and preschoolers. Terms were not disclosed. "The acquisition complements our corporate strategy to expand the company both organically and through synergistic acquisitions. Neurosmith is a highly regarded brand with significant growth potential, supported by innovative products and strong consumer interest in child development," said Debra Fine, president and chief executive officer. Fine emphasized Neurosmith's reputation for developing educational musical toys with unsurpassed sound quality and the successful integration of the latest child research and technology to create open-ended learning toys for young children. "The addition of electronic learning products to our existing line-up of quality infant and preschool developmental toys represents a tremendous opportunity and we look forward to building upon Neurosmith's brand name awareness," Fine added. "Researchers have discovered that children learn best by touching, tasting, moving and exploring the world around them. Neurosmith successfully combines state-of-the-art technology with a compelling interface for toddlers - primarily by focusing on learning through music," said Renatta Cooper, a child development expert at Pacific Oaks College and Playing for Keeps board member. "Interacting with music exercises the areas of the brain that guide language development and math skills. By combining open-ended, self-directed play, which strengthens comprehension skills, you provide your child with great tools to prepare them for the challenges they will face throughout their lives," Cooper added. About Neurosmith Founded in 1997, Neurosmith is an innovative "smart toy" company that produces quality educational toys designed to engage and educate children though music. Its award-winning products include Music Blocks, which enables a child to create over a million different mixes and match musical compositions; Sunshine Symphony, designed to put beautiful classical music at a baby's fingertips; and Together Tunes Block, a large "toddler-sized" musical activity block that combines sing-along nursery rhymes with six fun educational activities. Neurosmith toys have received numerous awards, including multiple Oppenheimer Toy Awards, Toy of the Year from Family Fun magazine, Best Toys of the Year from Parents, Parenting and Child magazines, among others. About Small World Kids Small World Kids develops, manufacturers, markets and distributes high quality toys and educational products for children. With sales categories spanning early learning, imaginative play and active play, Small World Kids supports the development of the whole child - mind, body and spirit. Its unique products stimulate the mind and build key developmental skills, encourage active play and promote social interaction with caregivers and peers through award-winning brands: IQ Baby, IQ Preschool, Puzzibilities, Ryan's Room, All About Baby, Gertie Balls and Active Edge. For more information, visit www.smallworldtoys.com. Forward Looking Statements Statements in this press release relating to plans, expected synergistic opportunities of the Neurosmith acquisitions, economic performance and trends, projections of results of specific activities or investments, and other statements that are not descriptions of historical facts may be forward-looking statements. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors which include but are not limited to risk factors inherent in doing business. Although the company's management believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. The company has no obligation to update these forward-looking statements. -----END PRIVACY-ENHANCED MESSAGE-----