EXHIBIT 10.1
 
NOTE PURCHASE AGREEMENT
 
THIS NOTE PURCHASE AGREEMENT (“Agreement”) is made and entered into as of
_____________, 2007 by and among Small World Kids, Inc., a Nevada corporation
(the “Parent”), SMALL WORLD TOYS, a California corporation (“Subsidiary”) (the
Parent and the Subsidiary, each a “Company” and collectively the “Companies”),
the investors listed on Exhibit A attached hereto (each a “Purchaser” and
collectively the “Purchasers”).
 
RECITALS
 
A. The Companies are willing to sell to the Purchasers secured subordinated
convertible notes (the “Notes”) in the face amount of not less than $833,332
(the “Face Amount”) with an investment amount of not less than $750,000 (the
“Investment Amount”), upon the terms and subject to the conditions set forth in
this Agreement.
 
B. Purchasers desire to purchase the Notes from the Companies upon the terms and
subject to the conditions set forth in this Agreement.
 
C. The capitalized terms used in this Agreement shall have the meanings assigned
to them in Annex A.
 
TERMS AND CONDITIONS
 
NOW, THEREFORE, in consideration of their respective promises contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged by the parties, the Companies and Purchasers hereby
agree as follows:
 
1.  Issuance of the Notes and Warrants.
 
 1.1  Note Terms. Subject to the terms and conditions set forth in this
Agreement, and in reliance upon the representations and warranties contained
herein, the Companies, in consideration for the receipt of the Investment
Amount, agree to issue to Purchasers, and each Purchaser, severally and not
jointly, agrees to purchase and accept from the Companies a Note in the amount
of its Face Amount. Interest on the Face Amount shall accrue and be payable
monthly in arrears until March 31, 2008, at which time all accrued and unpaid
interest, and the unpaid Face Amount, shall become immediately due and payable.
The Notes will be convertible into shares of Class A-2 Convertible Preferred
Stock of the Parent (the “Class A-2 Preferred Stock”) at a conversion price of
$1.00 per share. The Notes shall be substantially in the form of Exhibit B.
 
(a)  Stock Purchase Warrants. Concurrently with the issuance of the Notes, the
Companies hereby agree to issue to each Purchaser a Class A-2 Preferred Stock
Purchase Warrants (each a “Warrant” and collectively, the “Warrants”) providing
fifty percent (50%) warrant coverage with respect to the Face Amount of such
Purchaser’s Note and having an Exercise Price of $1.00 per share of Class A-2
Preferred Stock. The Warrants shall be substantially in the form of Exhibit C.
 
 1.2  Closing.
 
(a)  The initial closing of the issuance of the Notes and the Warrants (the
“Closing”) shall take place remotely via exchange of the documents and
signatures by 5:00 p.m. P.D.T. on April 20, 2007, at such other time and place
as the Companies and Purchasers mutually agree upon, orally or in writing (which
time and place and designated as the “Initial Closing”). In the event there is
more than one closing, the term “Closing” shall apply to each such closing
unless otherwise specified.
 

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(b)  At each Closing, the Companies shall deliver the Notes and the Warrants to
Purchasers, and Purchasers shall pay to the Companies their respective
Investment Amounts.
 
(c)  The date of the Closing is referred to herein as the Closing Date.
 
2.  Security Interest.
 
 2.1  Grant of Security Interest. To secure prompt payment to Purchasers of the
Obligations, each Company hereby assigns, pledges and grants to Purchasers, to
the extent of their respective interests, a continuing security interest in and
Lien upon all of the Collateral. The security interest granted to Purchasers
hereunder shall be of even priority and in pari passu with the security interest
granted to Purchasers pursuant to that certain Note Purchase Agreement, dated as
of October 6, 2006, as amended.
 
 2.2  Perfection of Security Interest. Each Company hereby authorizes
Purchasers, to the extent of their respective interests, to file any financing
statements, continuation statements or amendments thereto that (a) indicate the
Collateral (i) as all assets and personal property of such Company or words of
similar effect, regardless of whether any particular asset comprised in the
Collateral falls within the scope of Article 9 of the UCC of such jurisdiction,
or (ii) as being of an equal or lesser scope or with greater detail, and (b)
contain any other information required by Part 5 of Article 9 of the UCC for the
sufficiency or filing office acceptance of any financing statement, continuation
statement or amendment.
 
 2.3  Non-Exclusive License. Each Company hereby grants to Purchasers, to the
extent of their respective interests, an irrevocable, non-exclusive license
(exercisable upon the termination of this Agreement due to an occurrence and
during the continuance of an Event of Default without payment of royalty or
other compensation to such Company) to use, transfer, license or sublicense any
Intellectual Property now owned, licensed to, or hereafter acquired by such
Company, and wherever the same may be located, and including in such license
access to all media in which any of the licensed items may be recorded.
 
3.  Purchaser’s Representations and Warranties. Each Purchaser, severally but
not jointly, hereby represents and warrants to the Companies as follows:
 
 3.1  Investment Purposes; Compliance With Securities Act. Purchaser is
acquiring its Note, and upon conversion thereof, the shares of Class A-2
Preferred Stock issuable upon such conversion (the “Note Shares”), and the
Warrants, and upon exercise thereof, the shares of Class A-2 Preferred Stock
issuable upon such exercise (the “Warrant Shares”) (collectively, the
“Securities”) for its own account, for investment only and not with a view
towards, or in connection with, the public sale or distribution thereof, except
pursuant to sales registered under or exempt from the Securities Act of 1933, as
amended (the “Securities Act”).
 
 3.2  Accredited Purchaser Status. Purchaser is an “accredited investor” as that
term is defined in Rule 501(a) of Regulation D. Purchaser is a sophisticated
purchaser and has such knowledge and experience in financial and business
matters that Purchaser is capable of evaluating the merits and risks of an
investment made pursuant to this Agreement.
 
 3.3  Reliance on Exemptions. Purchaser understands the Securities are being
offered and sold to in reliance on specific exemptions from the registration
requirements of the applicable United States federal and state securities laws
and that the Companies are relying upon the truth and accuracy of, and each
Purchaser’s compliance with, the representations, warranties, acknowledgments,
understandings, agreements and covenants of Purchasers set forth herein in order
to determine the availability of such exemptions and the eligibility of
Purchasers to acquire the Securities.
 
 3.4  Information. Purchaser and the advisors of the Purchaser, if any, have
been furnished with all material information relating to the business, finances
and operations of the Company and material information relating to the offer and
sale of the Securities that have been requested by the Purchaser. Purchaser and
Purchaser’s advisors, if any, have been afforded the opportunity to ask all
questions of the Companies as they have in their discretion deemed advisable.
 
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 3.5  Transfer or Resale. Purchaser understands that: (i) none of the Securities
has been registered under the Securities Act or any state securities laws, and
may not be offered for sale, sold, assigned or transferred unless either (a)
subsequently registered thereunder or (b) Purchaser shall have delivered to the
Parent an opinion by counsel reasonably satisfactory to the Parent, in form,
scope and substance reasonably satisfactory to the Parent, to the effect that
the Note, the Note Shares, the Warrant or the Warrants Shares, as the case may
be, to be sold, assigned or transferred may be sold, assigned or transferred
pursuant to an exemption from such registration, and (ii) except as expressly
provided herein, neither the Companies nor any other person is under any
obligation to register the Securities under the Securities Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder.
 
 3.6  Authority, Validity and Enforceability. This Agreement has been duly and
validly authorized, executed and delivered by Purchaser and is the valid and
binding agreement of Purchaser enforceable in accordance with its terms, except
as enforceability may be limited by bankruptcy, insolvency, moratorium,
liquidation, or similar laws relating to, or affecting, generally the
enforcement of creditors’ rights and remedies or by other equitable principles
of general application.
 
4.  Representations and Warranties of the Company. Each Company, jointly and
severally, hereby represents and warrants to Purchasers as follows:
 
 4.1  Organization and Qualification. It is a corporation, duly organized,
validly existing and in good standing under the laws of its jurisdictions or
organization. It has the corporate power and authority to own and operate its
properties and assets and, insofar as it is or shall be a party thereto, (i) to
execute and deliver this Agreement and the Ancillary Agreements, (ii) to issue
and sell the Notes and the Notes Shares upon conversion of the Notes, (iii) to
issue and sell the Warrants and the Warrant Shares upon exercise of the
Warrants, and (iv) to carry out the provisions of this Agreement and the
Ancillary Agreements and to carry on its business as presently conducted. It is
duly qualified and is authorized to do business and is in good standing as a
foreign corporation in all jurisdictions in which the nature or location of its
activities and of its properties (both owned and leased) makes such
qualification necessary, except for those jurisdictions in which failure to do
so has not had, or could not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect.
 
 4.2  Capitalization.
 
(a)  The authorized capital stock of the Parent, as of the date hereof, consists
of the following: 115,000,000 shares, of which 100,000,000 are shares of Common
Stock, par value $0.001 per share, 5,410,575 shares of which are issued and
outstanding, and [15,000,000] are shares of Convertible Preferred Stock, no par
value, of which 12,000,000 shares of 6% Class A-1 Convertible Preferred Stock
are authorized and 10,312,703 shares are issued and outstanding, 5,000,000
shares of 10% Class A Convertible Preferred Stock are authorized and 2,500,000
shares are issued and outstanding, and 2,500,000 shares of Class A-2 Convertible
Preferred Stock are authorized and no shares are issued and outstanding.
 
(b)  Except as disclosed on Schedule 4.2, other than: (i) the shares reserved
for issuance upon the Parent’s stock option plans; and (ii) shares which may be
issued pursuant to this Agreement and the Ancillary Agreements, there are no
outstanding options, warrants, rights (including conversion or preemptive rights
and rights of first refusal), proxy or stockholder agreements, or arrangements
or agreements of any kind for the purchase or acquisition from the Companies of
any of its securities. Except as disclosed on Schedule 4.2, neither the offer,
issuance or sale of any of the Notes or Warrants or the issuance of any of the
Note Shares or Warrant Shares, nor the consummation of any transaction
contemplated hereby will result in a change in the price or number of any
securities of the Companies outstanding, under anti-dilution or other similar
provisions contained in or affecting any such securities.
 
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(c)  All issued and outstanding shares of the Companies’ Common Stock and
Preferred Stock: (i) have been duly authorized and validly issued and are fully
paid and non-assessable; and (ii) were issued in compliance with all applicable
state and federal laws concerning the issuance of securities.
 
(d)  The rights, preferences, privileges and restrictions of the shares of
Common Stock and Preferred Stock are as stated in the Certificate of
Incorporation, as amended by Certificate(s) of Designation (collectively, the
“Charter”) of the Companies. The Note Shares and the Warrant Shares have been
duly and validly reserved for issuance. When issued in compliance with the
provisions of this Agreement and the Parent’s Charter, the Note Shares and the
Warrant Shares will be validly issued, fully paid and non-assessable and will be
free of any liens or encumbrances; provided, however, that such Note Shares and
Warrant Shares may be subject to restrictions on transfer under state and/or
federal securities laws as set forth herein or as otherwise required by such
laws at the time a transfer is proposed.
 
 4.3  Authorization; Binding Obligations. All corporate action on its part
(including its officers and directors) necessary for the authorization of this
Agreement and the Ancillary Agreements, the performance of all of its
obligations hereunder and under the Ancillary Agreement on the Closing Date and,
the authorization, issuance and delivery of the Notes and the Warrants have been
taken or will be taken prior to the Closing Date. This Agreement and the
Ancillary Agreements, when executed and delivered and to the extent it is a
party there, will be its valid and binding obligations enforceable against it in
accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
affecting the enforcement of creditors’ rights; and (ii) general principals of
equity that restrict the availability of equitable or legal remedies. The
issuance of the Notes and the subsequent conversion of the Notes for the Note
Shares is not and will not be subject to any preemptive rights or rights of
first refusal that have not been properly waived or complied with. The issuance
of the Warrants and the subsequent exercise of the Warrants for the Warrant
Shares is not and will not be subject to any preemptive rights or rights of
first refusal that have not been properly waived or complied with.
 
 4.4  Liabilities. Neither it nor any of its Subsidiaries has any liability,
except current liabilities incurred in the ordinary course of business and
liabilities disclosed in any Exchange Act Filings.
 
 4.5  Agreements. Except as set forth on Schedule 4.5 or as disclosed in any
Exchange Act Filings:
 
(a)  There are no agreements, understandings, instruments, contracts, proposed
transactions, judgments, orders, writs or decrees to which it or any of its
Subsidiaries is a party or to its knowledge by which it is bound which may
involve: (i) obligations (contingent or otherwise) of, or payments to, it or any
of its Subsidiaries in excess of $50,000 (other than obligations of, or payments
to, it or any of its Subsidiaries arising from purchase or sale agreements
entered into in the ordinary course of business); or (ii) the transfer or
license of any patent, copyright, trade secret or other proprietary right to or
from it (other than licenses arising from the purchase of “off the shelf” or
other standard products); or (iii) provisions restricting the development,
manufacture or distribution or its or any of its Subsidiaries’ products or
services; or (iv) indemnification by it or any of its Subsidiaries with respect
to infringements of proprietary rights.
 
(b)  Since December 31, 2006 (the “Balance Sheet Date”) neither it nor any of
its Subsidiaries has: (i) declared or paid any dividend or authorized or made
any distribution upon or with respect to any class or series of its capital
stock; (ii) incurred any indebtedness for money borrowed or other liabilities
(other than ordinary course obligations) individually in excess of $50,000 or,
in the case of indebtedness and/or liabilities individually less than $50,000,
in excess of $100,000 in the aggregate, except for draw downs under the existing
credit facilities provided by Laurus Master Fund, Ltd. (“Laurus”) and Horizon
Financial Services Group USA (“Horizon”); (iii) made any loans or advances to
any Person not in excess, individually or in the aggregate, of $100,000, other
than ordinary course advances for travel expenses; or (iv) sold, exchanged or
otherwise disposed or any of its assets or rights, other than the sale of its
inventory in the ordinary course of business.
 
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 4.6  Title to Properties and Assets; Liens, Etc. Except as set forth on
Schedule 4.6, it and each of its Subsidiaries has good and marketable title to
its and their respective properties and assets, and good title to its and their
leasehold interests, in each case subject to no Liens. All facilities,
Equipment, Fixtures, vehicles and other properties owned, leased or used by it
or any of its Subsidiaries are in good operating condition and repair and are
reasonably fit and usable for the purposes for which they are being used. Except
as set forth on Schedule 4.6, it and each of its Subsidiaries is in compliance
with al material terms of each lease to which it is a party or otherwise bound.
 
 4.7  Intellectual Property.
 
(a)  It and each of its Subsidiaries owns or possesses sufficient legal rights
to all Intellectual Property necessary for their respective businesses as now
conducted and, to its knowledge as presently proposed to be conducted, without
any known infringement of the right of others. There are no outstanding options,
licenses or agreements of any kind relating to its or any of its Subsidiaries’
Intellectual Property, nor is it or any of its Subsidiaries bound by or a party
to any options, licenses or agreements of any kind with respect to the
Intellectual Property of any other Person other than such licenses or agreements
arising from the purchase of “of the shelf” or standard products.
 
(b)  Neither it nor any of its Subsidiaries has received any communication
alleging that it or any of its Subsidiaries has violated the Intellectual
Property or other proprietary rights or any other Person, nor is it or any of
its Subsidiaries aware of any basis therefore.
 
(c)  Neither it nor any of its Subsidiaries believes it is or will be necessary
to utilize any inventions, trade secrets or proprietary information of any of
its employees made prior to their employment by it or any of its Subsidiaries,
except for inventions, trade secrets or proprietary information that have been
rightfully assigned to it or any of its Subsidiaries.
 
 4.8  Compliance with Other Instruments. Neither it nor any of its Subsidiaries
is in violation or default of (i) any term of its Charter or Bylaws, or (ii) any
provisions of any indebtedness, mortgage, indenture, contract, agreement, or
instrument to which it is a party or by which it is bound or any judgment,
decree, order or writ, which violation or default, in the cause of this clause
(ii) has had, or could reasonably be expected to have, either individually or in
the aggregate, a Material Adverse Effect. The execution, delivery and
performance of and compliance with this Agreement and the Ancillary Agreements
to which it is a party, and the issuance of the Notes and the Warrants and the
other Securities each pursuant hereto and thereto, will not, with or without the
passage of time or giving of notice, result in any such material violation, or
be in conflict with or constitute a default under any such term or provision, or
result in the creation of any Lien upon any of its or any of its Subsidiary’s
properties or assets or the suspension, revocation, impairment, forfeiture or
non-renewal of any permit, license, authorization or approval applicable to it
or any of its Subsidiaries, their businesses or operations or any of their
assets or properties.
 
 4.9  Compliance with Laws; Permits. Neither it nor any of its Subsidiaries is
in violation of the Sarbanes-Oxley Act of 2002 or any regulation or rule
promulgated thereunder or any rule or regulation related thereto adopted at any
time by the Securities and Exchange Commission (the “SEC”) or any other
applicable statute, rule, regulation, order or restriction of any domestic or
foreign government or any instrumentality or agency thereof in respect of the
conduct of its business or the ownership of its properties which has had, or
could reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect. No governmental orders, permissions, consents,
approvals or authorizations are required to be obtained and no registration or
declarations are required to be filed in connection with the execution and
delivery of this Agreement and any Ancillary Agreement and with the issuance of
any of the Securities, except as such as have been duly and validly obtained or
file, or with respect to any filings that must be made after the Closing Date,
as will be filed in a timely manner. It and each of its Subsidiaries has all
material franchises, permits, licenses and any similar authority necessary for
the conduct of its business as now being conducted by it, the lack of which
could, either individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.
 
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 4.10  SEC Reports. Except as set forth on Schedule 4.10, the Companies have
filed all proxy statements, reports and other documents required to be filed by
it under the Securities Exchange Act of 1934 as amended (the “Exchange Act”).
The Companies have furnished, or when they are filed will furnish, Purchasers
with copies of: (i) its Annual Report on Form 10-K for the fiscal year ended
December 31, 2006, and (ii) its Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2007, (collectively, the “SEC Reports”). Except as set
forth on Schedule 4.10, each SEC Report was, at the time of its filing, in
substantial compliance with the requirements of its respective form and none of
the SEC Reports, nor the financial statements (and the notes thereto) included
in the SEC Reports, as of their respective filing dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Such financial
statements have been prepared in accordance with GAAP applied on a consistent
basis during the periods involved (except (i) as may be otherwise indicated in
such financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed) and fairly present in all material respects the financial condition,
the results of operations and cash flows of the Companies and Subsidiaries, or a
consolidated basis, as of, and for, the periods presented in each such SEC
Report.
 
 4.11  Absence of Certain Changes. Since December 31, 2006, there has been no
material adverse change in the business, properties,  operation, financial
condition, results of operations or prospects of the Companies.
 
 4.12  Absence of Litigation. Except as set forth on Schedule 4.12, there is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board or body pending or, to the knowledge of the Company, threatened
against or affecting the Company, wherein an unfavorable decision, ruling or
finding would have a Material Adverse Effect or which would adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, this Agreement or any of the documents
contemplated herein.
 
 4.13  Registration Rights. Except as set forth on Schedule 4.13, and except as
disclosed in Exchange Act Filings, neither it nor any of its Subsidiaries is
presently under any obligation, and neither it nor any of its Subsidiaries has
granted any rights, to register any of its or any of its Subsidiaries’ presently
outstanding securities or any of its securities that may hereafter be issued.
 
 4.14  Valid Offering. Assuming the accuracy of the representations and
warranties of Purchasers contained in this Agreement, the offer and issuance of
the Notes and the Warrants, the offer and issuance of the Note Shares upon the
conversion of the Notes, and the offer issuance of the Warrant Shares upon
exercise of the Warrants, will be exempt for the registration requirements of
the Securities Act, and will have been registered or qualified (or exempt from
registration and qualification) under the registration, permit or qualification
requirement of all applicable state securities laws.
 
 4.15  No Integrated Offering. Neither it nor any of its subsidiaries or
Affiliates, nor any Person acting on its or their behalf, has directly or
indirectly made ay offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the
Securities pursuant to this Agreement or any Ancillary Agreement to be
integrated with prior offerings by it for purposes of the Securities Act which
would prevent it from issuing such Securities, or any of them, pursuant to Rule
506 under the Securities Act, or any applicable exchange-related stockholder
approval provisions, nor will it or any of its Affiliates or Subsidiaries take
any action or steps that would cause the offering of the Securities to be
integrated with other offerings.
 
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 4.16  Stop Transfer. The Securities are restricted securities as of the date of
this Agreement. Neither Company will issue any stop transfer order or other
order impeding the sale and delivery of any of the Securities at such time as
the Securities are registered for public sale or an exemption form registration
is available, except as required by state and federal securities laws.
 
 4.17  Dilution. It specifically acknowledges that the Parent’s obligation to
issue the Note Shares upon conversion of the Notes and the Warrant Shares upon
exercise of the Warrants is binding upon the Parent and enforceable regardless
of the dilution such issuances may have on the ownership interests of other
shareholders of the Parent.
 
 4.18  Patriot Act. It certifies that, to the best of its knowledge, neither it
nor any of its Subsidiaries, has been designated, nor is or shall be owned or
controlled, by a “suspected terrorist” as defined in Executive Order 13224. It
hereby acknowledges that Purchasers seek to comply with all applicable laws
concerning money laundering and related activities. In furtherance of those
efforts, it hereby represents and warrants and covenants that: (i) none of the
cash or property that it or any of its Subsidiaries will pay or will contribute
to Purchasers has been or shall be derived from, or related to, any activity
that is deemed criminal under United States law; and (ii) no contribution or
payment by it or any of its Subsidiaries to Purchasers, to the extent that they
are within its or any such Subsidiary’s control shall cause Purchasers to be in
violation of the United States Bank Secrecy Act, the United States International
Money Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. It shall promptly
notify Purchasers if any of these representations, warranties and covenants
cease to be true and accurate regarding it or any of its Subsidiaries. It shall
provide Purchasers with any additional information regarding it and each
Subsidiary thereof that Purchasers deem necessary or convenient to ensure
compliance with all applicable laws concerning money laundering and similar
activities. It understands and agrees that if at any time it is discovered that
any of the foregoing representations, warranties and covenants are incorrect, or
if otherwise required by applicable law or regulation related to money
laundering or similar activities, Purchasers may undertake appropriate action to
ensure compliance with applicable law and regulation, including, but not limited
to, segregation and/or redemption of Purchasers’ investment in it. It further
understands that Purchasers may release confidential information about it and
its Subsidiaries and, if applicable, any underlying beneficial owners, to proper
authorities if Purchasers, in their sole discretion, determine that it is in
their best interests in light of relevant rules and regulations under the laws
set for in subsection (ii) above.
 
 4.19  Company Name; Location of Offices. Schedule 4.19 sets forth each
Company’s name as its appears in official filings in the state of its
organization, the type of entity of each Company, the organizational
identification number issued by each Company’s state of organization or a
statement that no such number has been issued, each Company’s state of
organization, and the location of each Company’s chief executive office,
corporate offices, warehouses, other locations of Collateral and locations where
records with respect to Collateral are kept (including in each case the county
of such locations) and, except as set forth on Schedule 4.19, such locations
have not changed during the preceding twelve months. As of the Closing Date,
during the prior five years, except as set forth on Schedule 4.19, no company
has been known as or conducted business in any other name (including trade
names). Each Company has only one state of organization.
 
 4.20  Full Disclosure. Neither this Agreement or the Ancillary Agreements nor
the exhibits or schedules hereto or thereto nor any other document delivered by
it to Purchasers or their attorneys or agents in connection herewith or
therewith or with the transactions contemplated hereby or thereby, contain any
untrue statement of a material fact not omit to state a material fact necessary
in order to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading.
 
5.  Negative Covenants. So long as any Obligations are owed under the Notes,
without the prior written consent of Purchasers holding at least a majority in
Face Amount of the Notes issued hereunder (the “Majority Purchasers”), neither
of the Companies shall:
 
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 5.1  Incur Indebtedness. Incur any debt for borrowed money except for
indebtedness owing to Laurus, Horizon and St. Cloud Capital Partners, L.P. (“St.
Cloud”) as such facilities may exist from time to time, including any extensions
or modifications thereto, and existing obligations owed to Eddy Goldwasser;
 
 5.2  Distributions. Make any cash payments in respect of its capital stock
whether by dividends, redemption or otherwise;
 
 5.3  Sell or Encumber Assets. Sell, transfer, mortgage, assign, pledge, lease,
exchange, grant a security interest in, or encumber any such Company’s assets,
except to Purchasers, Laurus, St. Cloud or otherwise in the ordinary course of
business;
 
 5.4  Change of Business. Engage in any business activities substantially
different than those in which such Company is presently engaged, or cease
operations, liquidate, merge, transfer, acquire, or consolidate with any other
entity or dissolve;
 
 5.5  Change Name or Location. Change its legal name or trade name or any
location of it chief executive offices, corporate offices, warehouses or other
locations of Collateral.
 
6.  Conditions to Issuance and Acceptance of the Notes and the Warrants.
 
 6.1  Conditions to Companies’ Obligations to Issue the Notes and the Warrants.
The obligations of the Companies hereunder are subject to the satisfaction, on
or before the Closing, unless otherwise specified, of each of the following
conditions, provided that these conditions are for the Companies’ sole benefit
and may be waived by the Companies at any time in its sole discretion:
 
(a)  Each Company and Purchaser shall have executed this Agreement and all of
the Ancillary Agreements as to which it is a party.
 
(b)  The representations and warranties of Purchasers shall be true and correct
in all material respects as of the Closing as though made at that time (except
for representations and warranties that speak as of a specific date). Purchasers
shall have performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement and the
Ancillary Agreements to be performed, satisfied or complied with by Purchasers
at or prior to the Closing.
 
(c)  No statute, rule, regulation, executive order, decree, ruling or injunction
shall have been enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction or any self regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
herein.
 
(d)  All consents, approval, authorizations and orders required to be obtained
and all registrations, filings and notices required to be made with or given to
any regulatory authority or person as provided herein shall have been made.
 
(e)  Purchasers shall execute such reasonable subordination agreements with
Laurus, St. Cloud and the Goldwassers necessary to affirm that the Obligations
of the Company under the Notes are and will continue to be subordinated to
existing indebtedness owed to Laurus, St. Cloud and the Goldwassers.
 
(f)  The Companies shall have received the requisite consent and approval from
the holders of the Class A-1 Convertible Preferred Stock to the creation of the
Class A-2 Preferred Stock.
 
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 6.2  Conditions to Purchasers’ Obligation to Accept the Notes and the Warrants.
The obligations of Purchasers are subject to the satisfaction, on or before the
Closing, unless otherwise specified, of each of the following conditions,
provided that these conditions are for the sole benefit of Purchasers and may be
waived by Purchasers at any time in their sole discretion:
 
(a)  Each Company and Purchaser shall have executed this Agreement and all
Ancillary Agreements as to which it is a party.
 
(b)  The representations and warranties of the Companies shall be true and
correct in all material respects as of the Closing (except for representations
and warranties that speak as of a specific date). The Companies shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement and the Ancillary
Agreements to be performed, satisfied or complied with by the Companies at or
prior to the Closing. The Purchaser may require a certificate, executed by the
Chief Executive Officer of each of the Companies, dated as of the Closing, to
the foregoing effect and as to such other matters as may be reasonably requested
by Purchasers.
 
(c)  No statute, rule, regulation, executive order, decree, ruling or injunction
shall have been enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction or any self regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
herein.
 
(d)  All consents, approval, authorizations and orders required to be obtained
and all registrations, filings and notices required to be made with or given to
any regulatory authority or person as provided herein shall have been made.
 
(e)  The Company shall have executed and delivered to the Purchasers a First
Amended and Restated Registration Rights Agreement substantially in the form of
Exhibit D.
 
(f)  The Companies shall have received the requisite consent and approval from
the holders of the Class A-1 Convertible Preferred Stock to the creation of the
Class A-2 Preferred Stock.
 
(g)  With respect to the initial Closing, the Company shall have received
Investment Amounts aggregating at least $750,000.
 
7.  Expenses. The Companies shall jointly and severally pay all of Purchasers’
out-of-pocket costs and expenses, including reasonable fees and disbursements of
in-house or outside counsel and appraisers, in connection with (i) the
preparation, execution and delivery of this Agreement and the Ancillary
Agreements; (ii) any amendments hereto or thereto or consents proposed or
executed in connection with the transactions contemplated by this Agreement or
the Ancillary Agreements; (iii) the prosecution or defense of any action,
contest, dispute, suit or proceeding concerning any matters in nay way arising
out of, related to or connected with this Agreement or any Ancillary Agreement;
and (iv) any attempts to inspect, verify, protect, collect, sell, liquidate or
otherwise dispose of any Collateral.
 
8.  Event of Default. Any one or more of the following events shall constitute
an “Event of Default” by the Companies under this Agreement:
 
 8.1  Payment Default. If the Companies fails to pay, within three days after
the date such payment is due, any of the Obligations;
 
 8.2  Covenant Default.
 
(a)  If either of the Companies fails to perform any obligation (other than
payment obligations) under this Agreement or any of the Ancillary Agreements
within thirty days after the Companies have been given notice thereof, provided,
however, that if the default cannot by its nature be cured within such thirty
period or cannot after diligent attempts by the Companies be cured within such
thirty day period, and such default is likely to be cured within a reasonable
time, then the Companies shall have an additional reasonable period (which shall
not in any case exceed an additional thirty days so that the total duration of
the cure period will not exceed sixty days) to attempt to cure such default, and
within such reasonable time period the failure to have cured such default shall
not be deemed an Event of Default; or
 
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(b)  If there occurs any circumstance or circumstances that would reasonably be
expected to have a Material Adverse Effect;
 
(c)  If any portion of either of the Companies’ assets is attached, seized,
subjected to a writ or distress warrant, or is levied upon, or comes into the
possession of any trustee, receiver or person acting in a similar capacity and
such attachment, seizure, writ or distress warrant or levy has not been removed,
discharged or rescinded within thirty days, or if either of the Companies is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of either of
the Companies’ assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of either Company’s assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, and the same is not paid
within thirty days after notice thereof; provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by the Companies;
 
(d)  If either Company becomes Insolvent, or if an Insolvency Proceeding is
commenced by Borrower, or if an Insolvency Proceeding is commenced against
Borrower and is not dismissed or stayed within thirty days;
 
(e)  If there is any Event of Default under any agreement with or obligation
owed by either Company to Laurus, Horizon, St. Cloud or Goldwasser and such
Event of Default has not been cured or waived; or
 
(f)  If any material misrepresentation or material misstatement exists now or
hereafter in any warranty or representation set forth herein or in any Ancillary
Agreement or in any exhibit hereto or thereto or any certificate delivered to
Purchasers pursuant to this Agreement or any Ancillary Agreements.
 
8.3  Change of Control. If there is a Change of Control which has not been
approved by the Majority Purchasers.
 
9.  Purchasers’ Rights and Remedies.
 
 9.1  Rights and Remedies. Upon the occurrence of an Event of Default and the
giving of any notice required pursuant to Section 8, the Majority Purchasers may
without further notice of their election and without demand, do any one or more
of the following, all of which are authorized by the Companies:
 
(a)  Declare all Obligations, whether evidenced by this Agreement or any of the
Ancillary Agreements, or otherwise, immediately due and payable;
 
(b)  Settle or adjust disputes and claims directly with account debtors for
amounts, upon terms and in whatever order that the Majority Purchasers
reasonably consider advisable;
 
(c)  Make such payments and do such acts as the Majority Purchasers considers
necessary or reasonable to protect its security interest in the Collateral. The
Companies agree to assemble the Collateral if the Majority Purchasers so
require, and to make the Collateral available to the Majority Purchasers as the
Majority Purchasers may designate. The Companies authorize any representative of
the Majority Purchasers to enter the premises where the Collateral is located,
to take and maintain possession of the Collateral, or any part of it, and to
pay, purchase, contest, or compromise any encumbrance, charge, or lien which in
the Majority Purchasers’ determination appears to be prior or superior to its
security interest and to pay all expenses incurred in connection therewith. With
respect to any of the Companies’ owned premises, the Companies hereby grant any
authorized representative of the Majority Purchasers a license to enter into
possession of such premises and to occupy the same, without charge, in order to
exercise any of the Majority Purchasers’ rights or remedies provided herein, at
law, in equity, or otherwise;
 
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(d)  Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale,
advertise for sale, and sell (in the manner provided for herein) the Collateral.
The Majority Purchasers are hereby granted a license or other right to use,
without charge, the Companies’ labels, patents, copyrights, rights of use of any
name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and, in connection with the Majority Purchasers’ exercise of its rights
hereunder, the Companies’ rights under all licenses and all franchise agreements
shall inure to the benefit of the Majority Purchasers;
 
(e)  Dispose of the Collateral by way of one or more contracts or transactions,
for cash or on terms, in such manner and at such places (including the
Companies’ premises) as the Majority Purchasers determine is commercially
reasonable, and apply any proceeds to the Obligations in whatever manner or
order the Majority Purchasers deem appropriate;
 
(f)  Any Purchaser may credit bid and purchase at any public sale; and
 
(g)  Any deficiency that exists after disposition of the Collateral as provided
above will be paid immediately by the Companies.
 
 9.2  Power of Attorney. Effective only upon the occurrence and during the
continuance of an Event of Default, the Companies hereby irrevocably appoints
the Majority Purchasers, or their authorized representative, as the Companies’
true and lawful attorney to: (i) send requests for verification of Accounts or
notify account debtors of the Purchasers’ security interest in the Accounts;
(ii) endorse the Companies’ names on any checks or other forms of payment or
security that may come into the Majority Purchasers’ possession; (iii) sign
Companies’ names on any invoice or bill of lading relating to any Account,
drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (iv) dispose of any
Collateral; (v) make, settle, and adjust all claims under and decisions with
respect to the Companies’ policies of insurance; (vi) settle and adjust disputes
and claims respecting the Accounts directly with account debtors, for amounts
and upon terms which the Majority Purchasers determine to be reasonable; (vii)
to file, in its sole discretion, one or more financing or continuation
statements and amendments thereto, relative to any of the Collateral; and (viii)
to transfer the Intellectual Property Collateral into the name of the Majority
Purchasers or their authorized representative or a third party to the extent
permitted under the UCC. The appointment of the Majority Purchasers or their
authorized representative as the Companies’ attorney in fact, and each and every
one of their rights and powers, being coupled with an interest, is irrevocable
until all of the Obligations have been fully repaid and performed.
 
 9.3  Accounts Collection. At any time upon the occurrence and during the
continuance of an Event of Default, the Majority Purchasers or their authorized
representative may notify any Person owing funds to any of the Companies of
Purchasers’ security interest in such funds and verify the amount of such
Account. The Companies shall collect all amounts owing to the Companies for the
Purchasers, receive in trust all payments as the Purchasers’ trustee, and
immediately deliver such payments to the Majority Purchasers of their authorized
representative in their original form as received from the account debtor, with
proper endorsements for deposit.
 
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 9.4  Purchasers’ Expenses. If the Companies fail to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement or any Ancillary Agreements, then the Majority
Purchasers or their authorized representative may do any or all of the following
after reasonable notice to the Companies: (i) make payment of the same or any
part thereof; or (ii) obtain and maintain insurance policies of the type
typically carried by the Companies, and take any action with respect to such
policies as the Majority Purchasers deem prudent. Any amounts so paid or
deposited by any Purchasers shall be immediately due and payable, and shall bear
interest at the then applicable default rate under the Notes, and shall be
secured by the Collateral. Any payments made by or on behalf of any Purchasers
shall not constitute an agreement by Purchasers, or any of them, to make similar
payments in the future or a waiver by Purchasers of any Event of Default under
this Agreement or any Ancillary Agreements.
 
 9.5  Liability for Collateral. So long as Purchasers are not grossly negligent
and do not engage in willful misconduct, Purchasers shall not in any way or
manner be liable or responsible for: (i) the safekeeping of the Collateral; (ii)
any loss or damage thereto occurring or arising in any manner or fashion from
any cause; (iii) any diminution in the value thereof; or (iv) any act or default
of any carrier, warehouseman, bailee, forwarding agency, or other person
whomsoever. All risk of loss, damage or destruction of the Collateral shall be
borne by the Companies.
 
 9.6  Remedies Cumulative. Purchasers’ rights and remedies under this Agreement
and any Ancillary Agreements shall be cumulative. Purchasers shall have all
other rights and remedies not inconsistent herewith as provided under the UCC,
by law, or in equity. No exercise by Purchasers, or any of them, of one right or
remedy shall be deemed an election, and no waiver by Purchasers, or any of them.
of any Event of Default on the Companies’ part shall be deemed a continuing
waiver. No delay by Purchasers, or any of them, shall constitute a waiver,
election, or acquiescence by it. No waiver by Purchasers, or any of them, shall
be effective unless made in a written document signed by the Majority Purchasers
on behalf of Purchasers and then shall be effective only in the specific
instance and for the specific purpose for which it was given.
 
 9.7  Demand; Protest. Each Company hereby waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Purchasers on which such Company may in any way
be liable.
 
10.   Legends. The Securities, when issued, shall bear the following legend, or
a substantially similar legend:
 
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS AND
MAY NOT BE OFFERED, SOLD ,PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED UNLESS (1)
A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN
OPINION OF COUNSEL TO THE HOLDER OF THE SECURITIES, WHICH COUNSEL AND OPINION
ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH SECURITIES MAY BE OFFERED,
SOLD, PLEDGED, ASSIGNED, OR OTHERWISE TRANSFERRED IN THE MANNER CONTEMPLATED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR
APPLICABLE STATE SECURITIES LAWS.
 
11.   Waiver of Jury Trial; Alternative Proceedings.
 
 11.1  Waiver of Jury Trial. TO THE FULLEST EXTENT PERMITTED BY LAW, THE
COMPANIES AND PURCHASERS EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THIS
AGREEMENT AND THE ANCILLARY AGREEMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
HEREIN OR THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND
AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO
ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS
REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL.
 
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 11.2   Judicial Reference. If and only if the jury trial waiver set forth in
Section 11.1 of this Agreement is invalidated for any reason by a court of law,
statute or otherwise, the reference provisions set forth below shall be
substituted in place of the jury trial waiver. So long as the jury trial waiver
remains valid, the reference provisions set forth in this Section shall be
inapplicable.
 
(a)  Each controversy, dispute or claim (each, a “Claim”) between the parties
arising out of or relating to this Agreement or any Ancillary Agreement, other
than (i) all matters in connection with nonjudicial foreclosure of security
interests in real or personal property; or (ii) the appointment of a receiver or
the exercise of other provisional remedies (any of which may be initiated
pursuant to applicable law) that are not settled in writing within fifteen days
after the date on which a party to this Agreement or any of the Ancillary
Agreements gives written notice to all other parties that a Claim exists (the
“Claim Date”) shall be resolved by a reference proceeding in California in
accordance with the provisions of Section 638 et seq. of the California Code of
Civil Procedure, or their successor sections (“CCP”), which shall constitute the
exclusive remedy for the resolution of any Claim concerning this Agreement or
any of the Ancillary Agreements, including whether such Claim is subject to the
reference proceeding. Except as set forth in this section, the parties waive the
right to initiate legal proceedings against each other concerning each such
Claim. Venue for these proceedings shall be in the Superior Court in Los Angeles
County (the “Court”). By mutual agreement, the parties shall select a retired
Judge of the Court to serve as referee, and if they cannot so agree within
fifteen days after the Claim Date, the parties shall request that the Presiding
Judge of the Court (or his or her representative) promptly select the referee. A
request for appointment of a referee may be heard on an ex parte or expedited
basis. The referee shall be appointed to sit as a temporary judge, with all the
powers for a temporary judge, as authorized by law, and upon selection should
take and subscribe to the oath of office as provided for in Rule 244 of the
California Rules of Court (or any subsequently enacted Rule). Purchasers (acting
together)) and the Companies (acting together) shall each have one peremptory
challenge pursuant to CCP § 170.6. Upon being selected, the referee shall (a) be
requested to set the matter for a status and trial-setting conference within
fifteen days after the date of selection and (b) if practicable, try any and all
issues of law or fact and report a statement of decision upon them within ninety
days of the date of selection. The referee will have power to expand or limit
the amount of discovery the parties may employ. Any decision rendered by the
referee will be final, binding and conclusive, and judgment shall be entered
pursuant to CCP § 644 in any court in the State of California having
jurisdiction. The parties shall complete all discovery no later than fifteen
days before the first trial date established by the referee. The referee may
extend such period in the event of a party’s refusal to provide requested
discovery for any reason whatsoever, including, without limitation, legal
objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to “priority” in conducting
discovery. The parties may take depositions upon seven days written notice, and
shall respond to requests for production or inspection of documents within ten
days after service. All disputes relating to discovery which cannot be resolved
by the parties shall be submitted to the referee whose decision shall be final
and binding upon the parties. Pending appointment of the referee as provided
herein, the Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
 
(b)  Except as expressly set forth herein, the referee shall determine the
manner in which the reference proceeding is conducted including the time and
place of all hearings, the order of presentation of evidence, and all other
questions that arise with respect to the course of the reference proceeding.
Except for trial, all proceedings and hearings conducted before the referee
shall be conducted without a court reporter unless a party requests a court
reporter. The party making such a request shall have the obligation to arrange
for and pay for the court reporter. Subject to the referee’s power to award
costs to the prevailing party, the parties shall equally bear the costs of the
court reporter at the trial and the referee’s expenses.
 
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(c)  The referee shall determine all issues in accordance with existing
California case and statutory law. California rules of evidence applicable to
proceedings at law will apply to the reference proceeding. The referee shall be
empowered to enter equitable as well as legal relief, to provide all temporary
and/or provisional remedies and to enter equitable orders that shall be binding
upon the parties. At the close of the reference proceeding, the referee shall
issue a single judgment at disposing of all the claims of the parties that are
the subject of the reference. The parties reserve the right (i) to contest or
appeal from the final judgment or any appealable order or appealable judgment
entered by the referee and (ii) to obtain findings of fact, conclusions of laws,
a written statement of decision, and (iii) to move for a new trial or a
different judgment, which new trial, if granted, shall be a reference proceeding
under this provision.
 
(d)  If the enabling legislation which provides for appointment of a referee is
repealed (and no successor statute is enacted), any dispute between the parties
that would otherwise be determined by the reference procedure herein described
will be resolved and determined by arbitration conducted by a retired judge of
the Court, in accordance with the California Arbitration Act §§ 1280 through
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth in this Section shall apply to any such arbitration
proceeding.
 
 12.    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.
 
 13.    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.
 
 14.    Notices. Any notices required or permitted to be given under the terms
of this Amendment shall be sent by U.S. Mail or delivered personally or by
courier or via facsimile (if via facsimile, to be followed within three business
days by an original of the notice document via U.S. Mail or courier) and shall
be effective five days after being placed in the mail, if mailed, certified or
registered, return receipt requested, or upon receipt, if delivered personally
or by courier or by facsimile, in each case properly addressed to the party to
receive the same. The addresses for such communications shall be:
 
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If to any Company:
Small World Kids, Inc.
5711 Buckingham Parkway
Culver City, California 90230
Attention: Debra Fine
Fax Number: 310-258-1194
   
With a copy to:
Troy & Gould
1801 Century Park East, 16th Floor
Los Angeles, California 90067
Attention: David L. Ficksman, Esq.
Fax Number: 310-789-1490
   
If to Purchasers:
at their respective addresses indicated on the signature page or on Exhibit A
   
With a copy to:
Allen Matkins Leck Gamble Mallory & Natsis, LLP
1900 Main Street, 5th Floor
Irvine, California 92614
Attention: James E. McCormick III, Esq.
Fax Number: 949-553-8354
   

Each party shall provide written notice to the other party of any change in
address.
 
 15.    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.
 
 16.    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.
 
 17.    Survival. The representations and warranties of the Companies and
Purchasers contained in Sections 3 and 4 and the agreements and covenants set
forth in herein and in the Ancillary Agreements- shall survive the Closing of
the purchase and sale of the Notes and the Warrants.
 
 18.    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.
 
 19.    Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors and assigns.
Neither the Companies nor Purchasers shall assign this Agreement or any rights
or obligations hereunder without the prior written consent of the other (which
consent shall not be unreasonably withheld), and in any event any assignee of
Purchasers shall be an “accredited investor” (as defined in Regulation D), in
the written opinion of counsel who is reasonably satisfactory to the Parent, and
such assignment shall be in form, substance and scope reasonably satisfactory to
the Parent. Notwithstanding anything herein to the contrary, Purchasers may
pledge their Notes as collateral for a bona fide loan with a third party lender,
and such pledge shall not be considered an assignment in violation of this
Agreement so long as it is made in compliance with all applicable law.
 
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 20.    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.
 
 21.    Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
signature pages from such counterparts have been delivered.
 
 22.    Entire Agreement; Amendments. This Agreement, the Ancillary Agreements,
and any exhibits hereto or thereto and any certificates required to be delivered
by this Agreement or the Ancillary Agreements, contain the entire understanding
of the parties with respect to the matters covered herein and therein and,
except as specifically set forth herein or therein, neither the Companies nor
Purchasers makes any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement or the Ancillary
Agreements may be waived or amended other than by an instrument in writing
signed by the Companies and the Majority Purchasers, which amendment or waiver
shall be binding on all Purchasers.
 
 IN WITNESS WHEREOF, the Companies and the Administrative Agent have caused this
Agreement to be duly executed as of the date first written above.
 

       
THE COMPANIES:
 
SMALL WORLD KIDS, INC.
 
   
   
    By:      

--------------------------------------------------------------------------------

Name: Debra Fine
Title:   Chief Executive Officer
   

       
 
 
SMALL WORLD KIDS, INC.
 
 
Date:  By:    

--------------------------------------------------------------------------------

Name: Debra Fine   Title:   Chief Executive Officer

 
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IN WITNESS WHEREOF, the undersigned Purchaser has caused this Note Purchase
Agreement to be duly executed as of the date first written above.
 

 
PURCHASER:                                                                     
                            
                                                                 
 
 
By: 
Name:                                                                 
Title:                                                                  
 
Address:            
                                                                 
 
                                                                                              
                            
                                                                 
 
Attention:            
                                                              
Fax Number: (____)                                                          
 
 
Face Amount of Note: $                                                   
 
 
Investment Amount of Note: $                                       

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ANNEX A
 
DEFINITIONS
 
“Accounts” means all “accounts”, as such term is defined in the UCC, now owned
or hereafter acquired by any Person.
 
“Affiliate” means, with respect to any Person, (a) any other Person (other than
one of the Subsidiaries) which, directly or indirectly, is in control of, is
controlled by, or is under common control with such Person or (b) any Person who
is a director or officer (i) of such Person, (ii) of any Subsidiary of such
Person or (iii) of any Person described in clause (a) above. For the purposes of
this definition, control of a Person shall mean the power (direct or indirect)
to direct or cause the direction of the management and policies of such Person
whether by contract or otherwise.
 
“Agreement” has the meaning given such term in the Preamble.
 
“Ancillary Agreements” means, the Notes, the Warrants, the First Amended and
Restated Registration Rights Agreement, the Subordination Agreements required to
be executed and delivered pursuant to the Agreement, the Notes, the Note
Purchase Agreement, dated as of October 6, 2006, as amended, or the Notes issued
pursuant thereto, and all other agreements, instruments, documents, mortgages,
pledges, powers of attorney, consents, assignments, contracts, notices, security
agreements, trust agreements and guarantees whether heretofore, concurrently, or
hereafter executed by or on behalf of any Company, any of its Subsidiaries or
any other Person or delivered to either Purchaser, relating to this Agreement or
to the transaction contemplated by this Agreement or otherwise relating to the
relationship between or among any Company and the Purchasers, as the same may be
amended, supplemented, rested or otherwise modified from time to time.
 
“Assets” has the meaning given such term in Section 4.13.
 
“Balance Sheet Date” has the meaning given such term in Section 4.5(b).
 
“Books and Records” means all books, records, board minutes, contracts,
licenses, insurance policies, environmental audits, business plans, files,
computer files, computer discs and other data and software storage and media
devices, accounting books and records, financial statements (actual and pro
forma), filings with Governmental Authorities and any and all records and
instruments relating to the Collateral or otherwise necessary or helpful in the
collection thereof or the realization thereupon.
 
“CCP” has the meaning given such term in Section 12.2(a).
 
“Change of Control” means a change in ownership or control of either of the
Companies effected through any of the following transactions: (i) a
stockholder-approved merger, consolidation or other reorganization in which
securities representing more than 50% of the total combined voting power of the
Parent’s outstanding securities become beneficially owned, directly or
indirectly, by a person or related group of persons (other than a person or
related group of persons that, immediately prior to such transaction, directly
or indirectly controlled, was controlled by, or was under common control with,
the Parent; (ii) a stockholder-approved sale, transfer or other disposition of
all or substantially all of either or both of the Companies’ assets to any
person or related group of persons (other than a person or related group of
persons that, immediately prior to such transaction, directly or indirectly
controlled, was controlled by, or was under common control with, the Parent); or
(iii) the acquisition, directly or indirectly, by any person or related group of
persons (other than either Company or a person that directly or indirectly
controls, is controlled by, or is under common control with, the Parent), of
beneficial ownership (within the meaning of Rule 13-d3 of the Exchange Act) of
securities possessing more than 50% of the total combined voting power of the
Parent’s outstanding securities from a person or persons other than the Parent.
 
ANNEX A
- 1 -

--------------------------------------------------------------------------------

 
“Charter” has the meaning given such term in Section 4.2(e).
 
“Claim” has the meaning given such term in Section 12.2(a).
 
“Claim Date” has the meaning given such terms defined in Section 12.2(a).
 
“Closing” has the meaning given such terms defined in Section 1.3.
 
“Closing Date” has the meaning given such terms defined in Section 1.3.
 
“Collateral” means all of each Company’s property and assets, whether real or
personal, tangible or intangible, and whether now owned or hereafter acquired,
or in which it now has or at any time in the future may acquire any right, title
or interests including all of the following property in which it now has or at
any time in the future may acquire any right, title or interest: (a) all
Inventory; (b) all Equipment; (c) all Fixtures; (d) all Goods; (e) all General
Intangibles; (f) all Accounts; (g) all Deposit Accounts, other bank accounts and
all funds on deposit therein; (h) all Investment Property; (i) all Stock; (j)
all Chattel Paper; (k) all Letter-of-Credit Rights; (l) all Instruments; (m) all
commercial tort claims; (n) all Books and Records; (o) all Intellectual Property
(including, without limitation, all Patents and Trademarks); (p) all Supporting
Obligations, including letters of credit and guarantees issued in support of
Accounts, Chattel Paper, General Intangibles and Investment Property; (q) (i)
all money, cash and cash equivalents and (ii) all cash held as cash collateral
to the extent not otherwise constituting Collateral, all other cash or property
at any time on deposit with or held by Purchasers for the account of any Company
(whether for safekeeping, custody, pledge, transmission or otherwise); and ® all
products and Proceeds of all or any of the foregoing, tort claims and all claims
and other rights to payment (i) including insurance claims against third parties
for loss of, damage to, or destruction or, the foregoing Collateral and (ii)
payments due or to become due under leases, rentals and hires of any or all of
the foregoing and Proceeds payable thereunder, or unearned premiums with respect
to policies of insurance in whatever form.
 
“Common Stock” means the shares of stock representing the Parent’s common equity
interests.
 
“Company” and “Companies” have the meanings given such terms in the Preamble.
 
“Equipment” means all “equipment” as such term is defined in the UCC, now owned
or hereafter acquired by any Person, wherever located, including any and all
machinery, apparatus, equipment, fittings, furniture, Fixtures, motor vehicles
and other tangible personal property (other than Inventory) of every kind and
description that may be now or hereafter used in such Person’s operations or
that are owned by such Person or in which such Person may have an inters, and
all parts, accessories and accessions thereto and substitutions and replacements
therefor.
 
“Event of Default” means the occurrence of any of the events set forth in
Section 8.
 
“Exchange Act” has the meaning given such term in Section 4.10.
 
“Exchange Act Filings” means the Parent’s filings under the Exchange Act made
prior to the date of this Agreement.
 
“Face Amount” has the meaning given such term in Recital A.
 
“Fixtures” means all fixtures” as such term is defined in the UCC, now owned or
hereafter acquired by any Person.
 
“GAAP” means generally accepted accounting principles, practices and procedures
in effect from time to time in the United States of America.
 
DEFINITIONS
- 2 -

--------------------------------------------------------------------------------

 
“General Intangibles” means all “general intangibles” as such term is defined in
the UCC, now owned or hereafter acquired by any Person, including all right,
title and interest that such Person may now or hereafter have in or under any
contract, all Payment Intangibles, customer lists, Licenses, Intellectual
Property, interests in partnerships, joint ventures and other business
associations, permits, proprietary or confidential information, inventions
(whether or not patented or patentable), technical information, procedures,
designs, knowledge, know-how, Software, data bases, data, skill, expertise,
experience, processes, models, drawings, materials, Books and Records, Goodwill
(including the Goodwill associated with any Intellectual Property), all rights
and claims in or under insurance polices (including insurance for fire, damage,
loss, and casualty, whether covering personal property, real property, tangible
rights or intangible rights, all liability, life, key-person, and business
interruption insurance, and all unearned premiums), uncertificated securities,
choses in action, deposit accounts, rights to receive tax refunds and other
payments, rights to receive dividends, distributions, cash, instruments and
other property in respect of or in exchange for pledged Stock and Investment
Property, and rights of indemnification.
 
“Goldwasser” means Eddy Goldwasser and Gail S. Goldwasser, Trustee of the Gail
S. Goldwasser and Mark Chatinsky Family Trust.
 
“Goodwill” means all goodwill, trade secrets, proprietary or confidential
information, technical information, procedures, formulae, quality control
standards, designs, operating and training manuals, customer lists, and
distribution agreements now owned or hereafter acquired by any Person.
 
“Horizon” has the meaning given such term in Section 4.5(b).
 
“Instruments” means all “instruments”, a such term is defined in the UCC, now or
hereafter acquired by any Person, wherever located, including all certificated
securities and all promissory notes and other evidences of indebtedness, other
than instruments that constitute, or are a part of a group of writings that
constitute, Chattel Paper.
 
“Intellectual Property” means any and all patents, trademarks, service marks,
trade names, copyrights, trade secrets, Licenses, information and other
proprietary rights and processes.
 
“Inventory” means all “inventory” as such term is defined in the UCC, now owned
or hereafter acquired by any Person, wherever located, including all inventory,
merchandise, goods and other personal property that are held by or on behalf of
such Person for sale or lease or are furnished or at to be finished under a
contract of service or that constitute raw materials, work in process, finished
goods, returned goods, or materials or supplies of any kind, nature or
description used or consumed or to be used or consumed in such Person’s business
or in the processing, production, packaging, promotion, delivery or shipping of
the same, including all supplies and embedded software.
 
“Investment Amount” has the meaning given such term in Recital C.
 
“Laurus” has the meaning given such term in Section 4.5(b).
 
“License” means any rights under any written agreement now or hereafter acquired
by any Person to sue any trademark, trademark registration, copyright, copyright
registration or invention for which a patent is in existence or other license of
rights or interests now held or hereafter acquired by any Person.
 
“Liens” means any mortgage, deed of trust, pledge, security interest,
assignment, charge or encumbrance, lien, or other type of preferential
arrangement.
 
“Material Adverse Effect” means a material adverse effect on (a) the business,
assets, liabilities, condition (financial or otherwise), properties, operations
or prospects of any Company or any of its Subsidiaries (taken individually or as
a whole), (b) any Company’s or any of its Subsidiary’s inability to pay or
perform Obligations in accordance with there terms of the Agreement or any
Ancillary Agreement, (c) the value of the Collateral, the Liens on the
Collateral or the priority of any such Lien, or (d) the practical realization of
the benefits of Purchasers’ rights and remedies under this Agreement and the
Ancillary Agreements.
 
DEFINITIONS
- 3 -

--------------------------------------------------------------------------------

 
“Notes” has the meaning given such term in Recital A.
 
“Note Shares” has the meaning given such term in Section 3.1.
 
“Obligations” means all loans, liabilities, obligations, covenants and duties
owning by each Company and each of its Subsidiaries to the Purchasers (including
the Purchasers pursuant to that certain Note Purchase Agreement, dated as of
October 6, 2006, as amended) of every kind and description (whether or nor
evidenced by the Notes or other instrument and whether or not for the payment of
money or the performance or non-performance of any act), direct or indirect,
absolute or contingent, due or to become due, contractual or tortuous,
liquidated or unliquidated, whether existing by operation of law or otherwise
now existing or hereafter arising including any debt, liability or obligation
owing from any Company and/or each of its Subsidiaries to other which Purchasers
have obtained by assignment or otherwise and further including all interest
(including interest accruing at the then applicable rate provided in the Notes
after the filing of any petition in bankruptcy, or the commencement of any
insolvency, reorganization or like proceeding, whether or not a claim for
post-filing or post-petition interest is allowed or allowable in such
proceeding), charges or other payments each Company and each of its Subsidiaries
is required to make by law or otherwise arising under or as a result of this
Agreement, the Ancillary Agreements or otherwise, together with all reasonable
expenses and reasonable attorneys’ fees chargeable to the Companies” or any of
their Subsidiaries’ accounts or incurred by the Purchasers in connection
therewith.
 
“Patents” means all registered and pending applications and those patents which
are hereafter adopted or acquired by a Company or any of its Subsidiaries, and
all right, title and interest therein and thereto, and all registrations.
 
“Parent” has the meaning given such term in the Preamble.
 
“Person” means any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, public benefic
corporation, entity or government (whether federal, state, county, city,
municipal or other wide, including any instrumentality, division, agency, body
or department thereof) and shall include such Person’s successors and assigns.
 
“Purchaser” and “Purchasers” have the meanings given such terms in the Preamble.
 
“SEC” has the meaning given such term in Section 4.9.
 
“SEC Reports” has the meaning given such term in Section 4.10.
 
“Securities” has the meaning given such term in Section 3.1.
 
“Securities Act” has the meaning given such term in Section 3.1.
 
“Software” means all “software” as such term is defined in the UCC, now owned or
hereafter acquired by an Person, including all computer programs and all
supporting information provided in connection with a transaction related to any
program.
 
“St. Cloud” has the meaning given such term in Section 5.1.
 
“Subsidiary” has the meaning given such term in the Preamble and also includes,
with respect to any Person, (i) any other Person whose shares of stock or other
ownership interests having ordinary voting power (other than stock or other
ownership interests having such power only by reason of the happening of a
contingency) to elect a majority of the directors or other governing body of
such other Person, are owned, directly or indirectly, by such Person or (ii) any
other Person in which such Person owns, directly or indirectly, more than 50% of
the equity interests at such time.
 
DEFINITIONS
- 4 -

--------------------------------------------------------------------------------

 
“Subsidiaries” is the plural of Subsidiary.
 
“Trademarks” mean the registered trademarks and pending applications of a
Company or any of its Subsidiaries (whether on an intent to use basis or
otherwise) and those trademarks which are hereafter adopted or acquired by a
Company or any of its Subsidiaries, and all right, title and interest therein
and thereto, and all registrations, applications, and recordings thereof,
including, without limitation, applications, registrations and recordings in the
United States Patent and Trademark Office or in any similar office or agency of
the United States, any State thereof, or any foreign country, all whether now
owned or hereafter acquired by a Company or its Subsidiaries.
 
“UCC” means the Uniform Commercial Code as the same may, from time to time be in
effect in the State of California; provided, that in the event that, buy reason
of mandatory provisions of law, any or all of the attachment, perfection or
priority of, or remedies with respect to, the Purchasers Lien on any Collateral
is governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of California, the term “UCC” shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions of
this Agreement relating to such attachment, perfection, priority or remedies and
for purposes of definitions related o such provisions; provided, further, that
to the extent that UCC is used to define any term herein or in any Ancillary
Agreement and such term is defined differently in different Articles or
Divisions of the UCC, the definition of such term contained in Article or
Divisions 9 shall govern.
 
“Warrant” and “Warrants” have the meanings given such terms in Section 1.2.
 
“Warrant Shares” has the meaning given such term in Section 3.1.
 
Any accounting terms used in this Agreement that are not specifically defined
shall have the meanings customarily given to them in accordance with GAAP and
all financial computations shall be computed, unless specifically provided
herein, in accordance with GAAP consistently applied. All other terms used in
this Agreement and defined in the UCC shall have the meaning given therein
unless otherwise defined herein.
 
DEFINITIONS
- 5 -

--------------------------------------------------------------------------------

 
SCHEDULE 4.2
 
Capitalization Table and Beneficial Ownership
 
Small World Kids, Inc. Capitalization
Current
 
Total
 
%
 
Common Stock
 
Warrants
 
Class A-1 Convertible Preferred Shares
 
Convertible Debentures
 
Options
 
Gamma Opportunity Capital Partners LP Class A
   
765,485
   
3.5
%
       
415,485
   
350,000
             
Gamma Opportunity Capital Partners LP Class C
   
765,485
   
3.5
%
       
415,485
   
350,000
             
Bushido Capital Master Fund LP
   
1,758,243
   
8.1
%
       
830,970
   
927,273
             
SWT Investments, LLC
   
1,297,673
   
6.0
%
 
1,297,673
   
-
                   
SBI Advisors
   
331,178
   
1.5
%
 
93,678
   
237,500
   
-
             
Russell and Debra Fine as Co-Trustees of the Fine Family Trust
   
2,201,879
   
10.1
%
 
1,721,543
   
3,063
   
477,273
             
SWT, LLC
   
5,112,241
   
23.6
%
       
204,082
   
4,908,159
             
Strome Offshore Ltd.
   
134,400
   
0.6
%
       
134,400
                   
Phoenix Capital Opportunity Fund, LP
   
70,000
   
0.3
%
 
70,000
                         
St. Cloud Capital Partners, LP
   
762,500
   
3.5
%
 
81,250
   
118,750
         
562,500
       
David Marshall, Inc.
   
1,146,718
   
5.3
%
 
1,146,718
         
-
             
Sid Marshall Enterprises
   
391,818
   
1.8
%
 
206,500
   
3,500
   
181,818
             
David L. Ficksman and Maxine B. Ficksman, as trustees of the Ficksman Family
Trust
   
37,726
   
0.2
%
 
37,726
                         
Cambria Capital
   
128,977
   
0.6
%
       
128,977
                   
Jon Larrick
   
50,000
   
0.2
%
 
50,000
                         
Curried Clover LLC
   
249,809
   
1.2
%
 
249,809
                         
Frontera Group, LLC
   
564,952
   
2.6
%
 
64,077
   
875
   
500,000
             
Edward Kummer
   
15,613
   
0.1
%
 
15,613
                         
Jark Holdings, LLC
   
39,591
   
0.2
%
 
16,426
   
438
   
22,727
             
Lawrence S. Bond
   
15,613
   
0.1
%
 
15,613
                         
Robert J. Bond
   
15,613
   
0.1
%
 
15,613
                         
Mathew Marshall
   
31,226
   
0.1
%
 
31,226
                         
Charlene and Steve Ustin Revocable Trust
   
62,452
   
0.3
%
 
62,452
                         
Juliette Trattne
   
54,333
   
0.3
%
 
54,333
                         
The Pindus Family Trust
   
47,955
   
0.2
%
 
1,625
   
875
   
45,455
             
Laurus Master Funds, LTD
   
1,721,185
   
7.9
%
       
1,721,185
                   
George Karfunkel
   
227,273
   
1.0
%
             
227,273
             
Michael Karfunkel
   
227,273
   
1.0
%
             
227,273
             
C.E. Unterberg, Towbin Capital Partners 1, L.P.
   
554,545
   
2.6
%
       
100,000
   
454,545
             
The Shebson Trust
   
90,909
   
0.4
%
             
90,909
             
Bart Gurewitz
   
31,818
   
0.1
%
             
31,818
             
John Nelson
   
31,818
   
0.1
%
             
31,818
             
The UCLA Foundation (Gifted by John Matise)
   
31,818
   
0.1
%
             
31,818
             
Trinad Capital Master Fund
   
454,545
   
2.1
%
             
454,545
             
HIT Credit Union
   
290,909
   
1.3
%
             
290,909
             
Hong Kong League Central Credit Union
   
788,636
   
3.6
%
             
513,636
   
275,000
       
PCCW Credit Union
   
104,545
   
0.5
%
             
104,545
             
Vintage Filings LLC
   
90,909
   
0.4
%
             
90,909
             
Kershaw Makie & Company
   
37,500
   
0.2
%
       
12,500
         
25,000
       
David Fuchs
   
67,614
   
0.3
%
       
67,614
                   
Public Float
   
178,700
   
0.8
%
 
178,700
                         
Options - Directors and Employees
   
722,000
   
3.3
%
                         
722,000
 
 
                            -                                                  
         
Total
   
21,703,477
   
100.0
%
 
5,410,575
   
4,395,699
   
10,312,703
   
862,500
   
722,000
 

 
SCHEDULE 4.2
Page 1

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SCHEDULE 4.5
 
List of Agreements
 
All material agreements have been disclosed and attached as exhibits to Parent’s
Form 10-Ks, Form 10-Qs and Form 8-Ks.
 
SCHEDULE 4.5
Page 1

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SCHEDULE 4.6
 
Pledged Assets
 

·  
Credit Facility between Small World Toys, as Borrower and Laurus Master Fund,
Ltd. as Lender is secured by all of the assets of Small World Kids, Inc. and its
Subsidiaries.

 

·  
Note Purchase Agreement, as amended, with St. Cloud Capital Partners, L.P. as
Purchaser is secured by all of the assets of Small World Toys.

 

·  
1,667 shares of Small World Toys have been pledged to Eddy Goldwasser to secure
one promissory note dated May 20, 2004 to Mr. Goldwasser.

 

·  
Purchase Order Revolving Credit Line from Horizon Financial Services Group USA
that is collateralized by a security interest, junior in position to that of
senior lender, Laurus Master Fund, Ltd., to the assets related to the PO Credit
Line transactions.

 

·  
$330,000 Notes issued to Hong Kong League Central Credit Union and Kershaw
Mackie & Company pursuant to the Note Purchase Agreement, dated as of October 6,
2006, is secured by all of the assets of the Companies.

 
SCHEDULE 4.6
Page 1

--------------------------------------------------------------------------------

 
SCHEDULE 4.7
 
Intellectual Property
 
The Companies have received notice that the collapsible soccer net it had been
selling may infringe the patent rights of a third-party. The Companies intend to
discontinue the sale of this item.
 
SCHEDULE 4.7
Page 1

--------------------------------------------------------------------------------

SCHEDULE 4.10
 
SEC Reports Exceptions
 
None.
 
SCHEDULE 4.10
Page 1

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SCHEDULE 4.11
 
Litigation
 

·  
Ryan Yanigihara, the Parent’s former controller, has filed a complaint with the
US Department of Labor alleging violation of Section 806 of the Sarbanes-Oxley
Act protecting whistle-blowers.

 

·  
See also disclosure on Schedule 4.7.

 
SCHEDULE 4.11
Page 1

--------------------------------------------------------------------------------

 
SCHEDULE 4.13
 
Outstanding List Of Registration Rights
 

·  
The Company filed a Registration Statement on Form S-1 on June 15, 2006 and
Amendment Number 1 on October 4, 2006 with the SEC complying with all
registration rights obligations through the date of filing.

 

·  
Subsequent to June 15, 2006, the Company sold $50,000 of Class A-1 Preferred
Stock that has piggy-back registration rights.

 

·  
The Company is a party to a Registration Rights Agreement, dated as of October
6, 2006, with Hong Kong Central League Credit Union, Kershaw Mackie & Company
and SBI Advisors, LLC, which agreement has been or will be amended and wholly
restated as part of the First Amended and Restated Registration Rights Agreement
with Hong Kong Central League Credit Union, Kershaw Mackie & Company and SBI
Advisors, LLC and the Purchasers

 
SCHEDULE 4.13
Page 1

--------------------------------------------------------------------------------

 
SCHEDULE 4.19
 
List of Names and Locations
 
Small World Kinds, Inc., a Nevada corporation, EIN 86-0678911
 
Corporate location: 5711 Buckingham Parkway, Culver City, CA 90230
 

 
Small World Toys, a California corporation
 
Office headquarters: 5711 Buckingham Parkway, Culver City, CA 90230
 
Warehouse location: 24640 S. Main Street, Carson, CA 90745
 
Third party warehouse (Target) location: 13204 Philadelphia Avenue, Fontana, CA
92337
 

Fine Ventures, LLC, a Delaware LLC—no locations nor operating assets

Fashion Angels Enterprises, Inc., a Wisconsin corporation—no locations nor
operating assets
 
SCHEDULE 4.19
Page 1

--------------------------------------------------------------------------------