Document:

Exhibit 10.1

 

FIRST
AMENDMENT TO

LICENSE
AGREEMENT

 

This First Amendment to the License Agreement
(“First Amendment”) is made effective as of October 10, 2005, by and between
INNOVO GROUP INC., a Delaware corporation, with its principle place of business
at 5804 East Slauson Avenue, Commerce, California 90040, (hereinafter referred
to as “INNOVO”) and JD DESIGN LLC, a California limited liability company, with
its principle place of business at 5900 S. Eastern Avenue, Commerce, California
90040, (hereinafter referred to as “JD DESIGN”) and collectively know as (the “Parties”).

 

W I T
N E S S E T H:

 

WHEREAS, the Parties
entered into that certain License Agreement (the “License Agreement”) dated
effective as of February 7, 2001 pursuant to which JD DESIGN granted to
INNOVO an exclusive, non-assignable right to use certain marks, including the
Joe’s® and JD symbol, in connection with the manufacture and/or importation and
sale of certain Licensed Products (capitalized terms not otherwise defined
herein shall have the same meaning as ascribed to them in the License
Agreement) bearing the Trademarks in the Territory; and

 

WHEREAS, INNOVO and
JD DESIGN have been in discussions regarding the licensing of certain kids
products under the License Agreement which INNOVO, through its wholly-owned
subsidiary Joe’s Jeans, Inc. (“JOE’S JEANS”) is not actively producing or
selling; and

 

WHEREAS, in
connection with the License Agreement between the Parties, the Parties wish to
amend the License Agreement to provide, subject to certain restrictions and
conditions as more fully set forth hereinbelow, for a release by INNOVO to JD
DESIGN of certain of the Licensed Products set forth in Schedule A attached
to the License Agreement and incorporated therein relating to the right to exploit
the Trademarks in connection with “Boyswear Licensed Products,” “Girlswear
Licensed Products” and “Infants and Toddlers Licensed Products”; and

 

NOW, THEREFORE, the Parties
to this First Amendment hereby agree as follows:

 

1.                                       INNOVO
hereby releases to JD DESIGN its rights to the following Licensed Products from
Schedule A of the License Agreement:

 

(a)                                  “Boyswear Licensed
Products,” sizes 4-20, as follows: boy’s dress, knit and woven sport shirts,
suits, sportcoats, vests, sweaters, topcoats, neckwear, long and short pants
and slacks, jeans, socks, gloves, underwear, pajamas, hats and caps,
handkerchiefs and swimsuits, and such other items as may from time-to-time be
designated upon written agreement by the parties.

 

(b)                                 “Girlswear Licensed
Products,” sizes 3-14, as follows: shirts, blouses, knit shirts, dresses,
coats, sport jackets, sweaters, slacks, jeans, socks, gloves, hats, scarves,
swimwear,

 

1

 

handkerchiefs, and skirts and such other items as may from time-to-time
be designated upon written agreement by the parties.

 

(c)                                  “Infants and Toddlers
Licensed Products,” sizes 0-4 as follows: 
newborn, infant and toddler apparel including without limitation
playwear, sportswear, outerwear and sleepwear.

 

(The Licensed Products mentioned above in
Paragraphs 1(a), (b) and (c) shall hereinafter be referred to as the “Released
Products.”)

 

2.                                       (a)                                  In
connection with the release of the Released Products from Schedule A
of the License Agreement and the reversion of the rights related thereto to JD
DESIGN and in consideration of the efforts by INNOVO and JOE’S JEANS with the
exploitation of the original Trademarks and any and all subsequent marks, JD
DESIGN hereby grants to INNOVO the right to receive a 5% commission on all Net
Sales of the Released Products (the “Commission”).  “Net Sales” shall have the same meaning and
be calculated in the same manner as set forth in the License Agreement between
INNOVO and JD DESIGN.  For purposes of
this First Amendment, it shall specifically be understood that INNOVO shall not
be obligated to pay to JD DESIGN the three percent (3%) commission as set forth
in Section 6.1 of the License Agreement for any sales of the Released
Products.

 

(b)                                 In addition so long as
JD DESIGN meets the following minimum Net Sales and pays the guaranteed minimum
royalties (“GMR”) of Released Products according to the following schedule, the
rights granted to JD DESIGN under this First Amendment shall remain in effect:

 

	
  Annual Periods of Initial Term

  	
   

  	
  Minimum

  Net Sales

  	
   

  	
  GMR

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  December 1, 2005 – May 31, 2007 (“Year
  1”)

  	
   

  	
  $

  	
  1,000,000

  	
   

  	
  $

  	
  50,000

  	
   

  
	
  June 1, 2007 – May 31, 2008 (“Year
  2”)

  	
   

  	
  $

  	
  2,000,000

  	
   

  	
  $

  	
  100,000

  	
   

  
	
  June 1, 2008 – May 31, 2009 (“Year
  3”)

  	
   

  	
  $

  	
  3,000,000

  	
   

  	
  $

  	
  150,000

  	
   

  

 

(c)                                  All GMR’s paid during
the term shall be creditable against the Commission otherwise owed in Paragraph
2 of this First Amendment.  Any excess
GMR paid for during the

 

2

 

respective term shall not be credited against GMR’s owed in any
subsequent terms.

 

3.                                       Any
additional consents or references to permission, specifically the language of Section 2.1
of the License Agreement, by Licensee for Licensor to subsequently grant third
parties the right to manufacture, sell and/or import the Released Products is
hereby expressly granted.

 

4.                                       The
rights granted under this First Amendment shall remain in effect for a period
of five (5) years from the date hereof (“Initial Term”) with the option to
renew by JD DESIGN for up to the total term granted to Innovo under the License
Agreement dated February 7, 2001, so long as JD DESIGN shall not be in
default of its existing obligations under this First Amendment.  This First Amendment shall automatically
renew unless terminated in writing by JD Design.

 

5.                                       It
is agreed to by the Parties that JD DESIGN shall agree to employ at least one (1) salesperson
responsible for sales of Released Products.

 

6.                                       It
is agreed to by the Parties that JD DESIGN shall agree to ship its first
substantial quantities of Released Products no later than March 2006.

 

7.                                       It
is agreed to by the Parties that all sales of Released Products shall be made
only to better department and better specialty stores, and that JD DESIGN shall
have discretion on any close-out sales up to twenty percent (20%) of all Net
Sales of Released Products.

 

8.                                       At
its sole discretion, JD Design shall decide the extent of the product line to
be offered under this Release, and no Event of Default shall occur as against
JD Design as long as the GMR  payment
across all three Released Products categories is met.  For purposes of this First Amendment, an Event
of Default shall have the same meaning as set forth in Section 9.1 of the
License Agreement.

 

10.                                 Except
as set forth herein or as amended by this First Amendment, all other terms and
conditions of the License Agreement shall remain the same and shall be in full
force and effect.  Any capitalized terms
not otherwise defined herein shall have the same meaning as set forth in the
License Agreement.  In the event of a
conflict between this First Amendment and the License Agreement, the License
Agreement shall govern.

 

11.                                 This
First Amendment may be executed in two or more counterparts, each of which
shall be deemed to be an original, and all of which, taken together, shall
constitute one and the same instrument.

 

[REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK. 
SIGNATURE PAGE TO FOLLOW.]

 

3

 

IN WITNESS WHEREOF,
the parties have executed this First Amendment, as of the date first written
above.

 

 

	
  INNOVO GROUP INC.

  	
   

  	
  JD DESIGN LLC

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  /s/      Marc
  Crossman

  	
   

  	
   

  	
              /s/
  Joe Dahan

  
	
  By:

  	
  Marc Crossman

  	
   

  	
  By: Joe Dahan

  
	
  Title:

  	
  President

  	
   

  	
  Title: Chief Manager

  
					

 

4Exhibit 4.1

 

NEITHER THIS
SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT
BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. 
THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN
SECURED BY SUCH SECURITIES.

 

COMMON
STOCK PURCHASE WARRANT

 

To
Purchase 375,000 Shares of Common Stock of

 

SMALL
WORLD KIDS, INC.

 

THIS COMMON
STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value
received, Cambria Capital, LLC (the “Holder”), is entitled, upon the
terms and subject to the limitations on exercise and the conditions hereinafter
set forth, at any time on or after the date hereof (the “Initial Exercise
Date”) and on or prior to the close of business on the five year
anniversary of the Initial Exercise Date (the “Termination Date”) but
not thereafter, to subscribe for and purchase from Small World Kids, Inc.,
a Nevada corporation (the “Company”), up to 375,000 shares (the “Warrant
Shares”) of Common Stock, par value $0.001 per share, of the Company (the “Common
Stock”).  The purchase price of one
share of Common Stock under this Warrant shall be equal to the Exercise Price,
as defined in Section 2(b).

 

Section 1.                                            Definitions.  Capitalized terms used and not otherwise
defined herein shall have the meanings set forth in that certain Securities
Purchase Agreement (the “Purchase Agreement”), dated September 30,
2005, among the Company and the purchasers signatory thereto.

 

Section 2.                                            Exercise.

 

(a)                                  Exercise of
Warrant.  Exercise of the purchase
rights represented by this Warrant may be made, in whole or in part, at any
time or times on or after the Initial Exercise Date and on or before the
Termination Date by delivery to the Company of a duly executed facsimile copy
of the Notice of Exercise Form annexed hereto (or such other office or
agency of the Company as it may designate by notice in writing to the
registered Holder at the address of such Holder appearing on the books of the
Company); provided, however, within 5 

 

 

Trading Days of the date said Notice of Exercise is delivered to the
Company, if this Warrant is exercised in full, the Holder shall have
surrendered this Warrant to the Company and the Company shall have received
payment of the aggregate Exercise Price of the shares thereby purchased by wire
transfer or cashier’s check drawn on a United States bank.  Notwithstanding anything herein to the
contrary, the Holder shall not be required to physically surrender this Warrant
to the Company until the Holder has purchased all of the Warrant Shares
available hereunder and the Warrant has been exercised in full.  Partial exercises of this Warrant resulting
in purchases of a portion of the total number of Warrant Shares available
hereunder shall have the effect of lowering the outstanding number of Warrant
Shares purchasable hereunder in an amount equal to the applicable number of Warrant
Shares purchased.  The Holder and the
Company shall maintain records showing the number of Warrant Shares purchased
and the date of such purchases.  The
Company shall deliver any objection to any Notice of Exercise Form within
1 Business Day of receipt of such notice. 
In the event of any dispute or discrepancy, the records of the Holder
shall be controlling and determinative in the absence of manifest error. The
Holder and any assignee, by acceptance of this Warrant, acknowledge and agree
that, by reason of the provisions of this paragraph, following the purchase of
a portion of the Warrant Shares hereunder, the number of Warrant Shares
available for purchase hereunder at any given time may be less than the amount
stated on the face hereof.

 

(b)                                 Exercise Price.  The exercise price of the Common Stock under
this Warrant shall be $.40, subject to adjustment hereunder (the “Exercise
Price”).

 

(c)                                  Cashless Exercise.  If at any time after one year from the date
of issuance of this Warrant there is no effective Registration Statement
registering, or no current prospectus available for, the resale of the Warrant
Shares by the Holder, then this Warrant may also be exercised at such time by
means of a “cashless exercise” in which the Holder shall be entitled to receive
a certificate for the number of Warrant Shares equal to the quotient obtained
by dividing [(A-B) (X)] by (A), where:

 

(A) =                    the
VWAP on the Trading Day immediately preceding the date of such election;

 

(B) =                      the
Exercise Price of this Warrant, as adjusted; and

 

(X) =                     the
number of Warrant Shares issuable upon exercise of this Warrant in accordance
with the terms of this Warrant by means of a cash exercise rather than a
cashless exercise.

 

Notwithstanding
anything herein to the contrary, on the Termination Date, this Warrant shall be
automatically exercised via cashless exercise pursuant to this Section 2(c).

 

(d)                                 Exercise Limitations.

 

(i)                                     Holder’s
Restrictions.  The Company shall not
effect any exercise of this Warrant, and a Holder shall not have the right to
exercise any portion of this Warrant, pursuant to Section 2(c) or
otherwise, to the extent that after giving effect to such issuance after
exercise, such Holder (together with such Holder’s affiliates, and any other
person or entity acting as a group together with such Holder or any of such
Holder’s affiliates), as set 

 

2

 

forth on the applicable Notice of Exercise, would beneficially own in
excess of 4.99% of the number of shares of the Common Stock outstanding
immediately after giving effect to such issuance.  For purposes of the foregoing sentence, the
number of shares of Common Stock beneficially owned by such Holder and its
affiliates shall include the number of shares of Common Stock issuable upon
exercise of this Warrant with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (A) exercise of the remaining, nonexercised
portion of this Warrant beneficially owned by such Holder or any of its
affiliates and (B) exercise or conversion of the unexercised or
nonconverted portion of any other securities of the Company (including, without
limitation, any other Debentures or Warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by such Holder or any of its affiliates.  Except as set forth in the preceding
sentence, for purposes of this Section 2(d)(i), beneficial ownership shall
be calculated in accordance with Section 13(d) of the Exchange Act
and the rules and regulations promulgated thereunder, it being
acknowledged by a Holder that the Company is not representing to such Holder
that such calculation is in compliance with Section 13(d) of the
Exchange Act and such Holder is solely responsible for any schedules required
to be filed in accordance therewith.   To
the extent that the limitation contained in this Section 2(d) applies,
the determination of whether this Warrant is exercisable (in relation to other
securities owned by such Holder) and of which a portion of this Warrant is
exercisable shall be in the sole discretion of a Holder, and the submission of
a Notice of Exercise shall be deemed to be each Holder’s determination of whether
this Warrant is exercisable (in relation to other securities owned by such
Holder) and of which portion of this Warrant is exercisable, in each case
subject to such aggregate percentage limitation, and the Company shall have no
obligation to verify or confirm the accuracy of such determination.   In addition, a determination as to any group
status as contemplated above shall be determined in accordance with Section 13(d) of
the Exchange Act and the rules and regulations promulgated
thereunder.  For purposes of this Section 2(d),
in determining the number of outstanding shares of Common Stock, a Holder may
rely on the number of outstanding shares of Common Stock as reflected in (x)
the Company’s most recent Form 10-Q or Form 10-K, as the case may be,
(y) a more recent public announcement by the Company or (z) any other notice by
the Company or the Company’s Transfer Agent setting forth the number of shares
of Common Stock outstanding.  Upon the
written or oral request of a Holder, the Company shall within two Trading Days
confirm orally and in writing to such Holder the number of shares of Common
Stock then outstanding.  In any case, the
number of outstanding shares of Common Stock shall be determined after giving effect
to the conversion or exercise of securities of the Company, including this
Warrant, by such Holder or its affiliates since the date as of which such
number of outstanding shares of Common Stock was reported.  The provisions of this Section 2(d) may
be waived by such Holder, at the election of such Holder, upon not less than 61
days’ prior notice to the Company, and the provisions of this Section 2(d) shall
continue to apply until such 61st day (or such later date, as determined by
such Holder, as may be specified in such notice of waiver). The provisions of
this paragraph shall be implemented in a manner otherwise than in strict
conformity with the terms of this Section 2(d) to correct this
paragraph (or any portion hereof) which may be defective or inconsistent with
the intended 4.99% beneficial ownership limitation herein contained or to make
changes or supplements necessary or desirable to properly give effect to such
4.99% limitation. The limitations contained in this paragraph shall apply to a
successor holder of this Warrant. The holders of Common Stock of the Company
shall be third party beneficiaries of this Section 2(d)

 

3

 

and the Company may not waive this Section 2(d) without the
consent of holders of a majority of its Common Stock.

 

(ii)                                  [RESERVED].

 

(e)                                  Mechanics of
Exercise.

 

(i)                                     Authorization
of Warrant Shares.  The Company
covenants that all Warrant Shares which may be issued upon the exercise of the
purchase rights represented by this Warrant will, upon exercise of the purchase
rights represented by this Warrant, be duly authorized, validly issued, fully
paid and nonassessable and free from all taxes, liens and charges in respect of
the issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue).

 

(ii)                                  Delivery of
Certificates Upon Exercise. 
Certificates for shares purchased hereunder shall be transmitted by the
transfer agent of the Company to the Holder by crediting the account of the
Holder’s prime broker with the Depository Trust Company through its Deposit
Withdrawal Agent Commission (“DWAC”) system if the Company is a
participant in such system, and otherwise by physical delivery to the address
specified by the Holder in the Notice of Exercise within 3 Trading Days from
the delivery to the Company of the Notice of Exercise Form, surrender of this
Warrant (if required) and payment of the aggregate Exercise Price as set forth
above (“Warrant Share Delivery Date”). 
This Warrant shall be deemed to have been exercised on the date the Exercise
Price is received by the Company.  The
Warrant Shares shall be deemed to have been issued, and Holder or any other
person so designated to be named therein shall be deemed to have become a
holder of record of such shares for all purposes, as of the date the Warrant
has been exercised by payment to the Company of the Exercise Price and all
taxes required to be paid by the Holder, if any, pursuant to Section 2(e)(vii) prior
to the issuance of such shares, have been paid.

 

(iii)                               Delivery of New
Warrants Upon Exercise.  If this
Warrant shall have been exercised in part, the Company shall, at the request of
a Holder and upon surrender of this Warrant certificate, at the time of
delivery of the certificate or certificates representing Warrant Shares, deliver
to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased Warrant Shares called for by this Warrant, which new Warrant shall
in all other respects be identical with this Warrant.

 

(iv)                              Rescission Rights.  If the Company fails to cause its transfer
agent to transmit to the Holder a certificate or certificates representing the
Warrant Shares pursuant to this Section 2(e)(iv) by the Warrant Share
Delivery Date, then the Holder will have the right to rescind such exercise.

 

(v)                                 Compensation for
Buy-In on Failure to Timely Deliver Certificates Upon Exercise.  In addition to any other rights available to
the Holder, if the Company fails to cause its transfer agent to transmit to the
Holder a certificate or certificates representing the Warrant Shares pursuant
to an exercise on or before the Warrant Share Delivery Date, and if after such
date the Holder is required by its broker to purchase (in an open market
transaction or otherwise) shares of Common Stock to deliver in satisfaction of
a sale by the 

 

4

 

Holder of the Warrant Shares which the Holder anticipated receiving
upon such exercise (a “Buy-In”), then the Company shall (1) pay in
cash to the Holder the amount by which (x) the Holder’s total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (y) the amount obtained by multiplying (A) the number of
Warrant Shares that the Company was required to deliver to the Holder in
connection with the exercise at issue times (B) the price at which the
sell order giving rise to such purchase obligation was executed, and (2) at
the option of the Holder, either reinstate the portion of the Warrant and
equivalent number of Warrant Shares for which such exercise was not honored or
deliver to the Holder the number of shares of Common Stock that would have been
issued had the Company timely complied with its exercise and delivery
obligations hereunder.  For example, if
the Holder purchases Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted exercise of shares of Common Stock
with an aggregate sale price giving rise to such purchase obligation of
$10,000, under clause (1) of the immediately preceding sentence the
Company shall be required to pay the Holder $1,000. The Holder shall provide
the Company written notice indicating the amounts payable to the Holder in
respect of the Buy-In, together with applicable confirmations and other
evidence reasonably requested by the Company. 
Nothing herein shall limit a Holder’s right to pursue any other remedies
available to it hereunder, at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief with respect to the Company’s
failure to timely deliver certificates representing shares of Common Stock upon
exercise of the Warrant as required pursuant to the terms hereof.

 

(vi)                              No Fractional Shares
or Scrip.  No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant.  As to any fraction of a share
which Holder would otherwise be entitled to purchase upon such exercise, the
Company shall pay a cash adjustment in respect of such final fraction in an
amount equal to such fraction multiplied by the Exercise Price.

 

(vii)                           Charges, Taxes and
Expenses.  Issuance of certificates
for Warrant Shares shall be made without charge to the Holder for any issue or
transfer tax or other incidental expense in respect of the issuance of such certificate,
all of which taxes and expenses shall be paid by the Company, and such
certificates shall be issued in the name of the Holder or in such name or names
as may be directed by the Holder; provided, however, that in the
event certificates for Warrant Shares are to be issued in a name other than the
name of the Holder, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the
Holder; and the Company may require, as a condition thereto, the payment of a
sum sufficient to reimburse it for any transfer tax incidental thereto.

 

(viii)                        Closing of Books.  The Company will not close its stockholder
books or records in any manner which prevents the timely exercise of this
Warrant, pursuant to the terms hereof.

 

Section 3.                                            Certain
Adjustments.

 

(a)                                  Stock Dividends
and Splits.  If the Company, at any
time while this Warrant is outstanding: (A) pays a stock dividend or
otherwise make a distribution or distributions on shares of its Common Stock or
any other equity or equity equivalent securities 

 

5

 

payable in shares of Common Stock (which, for avoidance of doubt, shall
not include any shares of Common Stock issued by the Company pursuant to this
Warrant), (B) subdivides outstanding shares of Common Stock into a larger
number of shares, (C) combines (including by way of reverse stock split)
outstanding shares of Common Stock into a smaller number of shares, or (D) issues
by reclassification of shares of the Common Stock any shares of capital stock
of the Company, then in each case the Exercise Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding immediately before such event
and of which the denominator shall be the number of shares of Common Stock
outstanding immediately after such event and the number of shares issuable upon
exercise of this Warrant shall be proportionately adjusted.  Any adjustment made pursuant to this Section 3(a) shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re classification.

 

(b)                                 [RESERVED]

 

(c)                                  Pro Rata
Distributions.  If the Company, at
any time prior to the Termination Date, shall distribute to all holders of
Common Stock (and not to Holders of the Warrants) evidences of its indebtedness
or assets (including cash and cash dividends) or rights or warrants to
subscribe for or purchase any security), then in each such case the Exercise
Price shall be adjusted by multiplying the Exercise Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
VWAP determined as of the record date mentioned above, and of which the
numerator shall be such VWAP on such record date less the then per share fair
market value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith.  In either case the adjustments shall be
described in a statement provided to the Holder of the portion of assets or
evidences of indebtedness so distributed or such subscription rights applicable
to one share of Common Stock.  Such
adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date mentioned above.

 

(d)                                 Fundamental
Transaction.  If, at any time while
this Warrant is outstanding, (A) the Company effects any merger or
consolidation of the Company with or into another Person, (B) the Company
effects any sale of all or substantially all of its assets in one or a series
of related transactions, (C) any tender offer or exchange offer (whether
by the Company or another Person) is completed pursuant to which holders of
Common Stock are permitted to tender or exchange their shares for other
securities, cash or property, or (D) the Company effects any
reclassification of the Common Stock or any compulsory share exchange pursuant
to which the Common Stock is effectively converted into or exchanged for other
securities, cash or property (in any such case, a “Fundamental Transaction”),
then, upon any subsequent exercise of this Warrant, the Holder shall have the
right to receive, for each Warrant Share that would have been issuable upon
such exercise immediately prior to the occurrence of such Fundamental
Transaction, at the option of the Holder, (a) upon exercise of this
Warrant, the number of shares of Common Stock of the successor or acquiring
corporation or of the Company, if it is the surviving corporation, and any
additional consideration (the “Alternate Consideration”) 

 

6

 

receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets by a Holder of
the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event or (b) if the Company is acquired in an
all cash transaction, cash equal to the value of this Warrant as determined in
accordance with the Black-Scholes option pricing formula.  For purposes of any such exercise, the
determination of the Exercise Price shall be appropriately adjusted to apply to
such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Exercise Price among the
Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration.  If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any exercise of this Warrant following such
Fundamental Transaction.  To the extent
necessary to effectuate the foregoing provisions, any successor to the Company
or surviving entity in such Fundamental Transaction shall issue to the Holder a
new warrant consistent with the foregoing provisions and evidencing the Holder’s
right to exercise such warrant into Alternate Consideration. The terms of any
agreement pursuant to which a Fundamental Transaction is effected shall include
terms requiring any such successor or surviving entity to comply with the
provisions of this Section 3(d) and insuring that this Warrant (or
any such replacement security) will be similarly adjusted upon any subsequent
transaction analogous to a Fundamental Transaction.

 

(e)                                  Calculations.  All calculations under this Section 3
shall be made to the nearest cent or the nearest 1/100th of a share, as the
case may be. For purposes of this Section 3, the number of shares of
Common Stock deemed to be issued and outstanding as of a given date shall be
the sum of the number of shares of Common Stock (excluding treasury shares, if
any) issued and outstanding.

 

(f)                                    Voluntary
Adjustment By Company.  The Company
may at any time during the term of this Warrant reduce the then current
Exercise Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.

 

(g)                                 Notice to Holders.

 

(i)                                     Adjustment to
Exercise Price.  Whenever the
Exercise Price is adjusted pursuant to this Section 3, the Company shall
promptly mail to each Holder a notice setting forth the Exercise Price after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment. If the Company issues a variable rate security, despite the prohibition
thereon in the Purchase Agreement, the Company shall be deemed to have issued
Common Stock or Common Stock Equivalents at the lowest possible conversion or
exercise price at which such securities may be converted or exercised in the
case of a Variable Rate Transaction (as defined in the Purchase Agreement).

 

(ii)                                  Notice to Allow
Exercise by Holder.  If (A) the
Company shall declare a dividend (or any other distribution) on the Common
Stock; (B) the Company shall declare a special nonrecurring cash dividend
on or a redemption of the Common Stock; (C) the Company shall authorize
the granting to all holders of the Common Stock rights or warrants to subscribe
for or purchase any shares of capital stock of any class or of any rights; (D) the

 

7

 

approval of any stockholders of the Company shall be required in
connection with any reclassification of the Common Stock, any consolidation or
merger to which the Company is a party, any sale or transfer of all or substantially
all of the assets of the Company, of any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or property; (E) the
Company shall authorize the voluntary or involuntary dissolution, liquidation
or winding up of the affairs of the Company; then, in each case, the Company
shall cause to be mailed to the Holder at its last address as it shall appear
upon the Warrant Register of the Company, at least 20 calendar days prior to
the applicable record or effective date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange; provided, that
the failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice.  The Holder is entitled
to exercise this Warrant during the 20-day period commencing on the date of
such notice to the effective date of the event triggering such notice.

 

Section 4.                                            Transfer
of Warrant.

 

(a)                                  Transferability.  Subject to compliance with any applicable
securities laws and the conditions set forth in Sections 5(a) and 4(d) hereof,
this Warrant and all rights hereunder are transferable, in whole or in part,
upon surrender of this Warrant at the principal office of the Company, together
with a written assignment of this Warrant substantially in the form attached
hereto duly executed by the Holder or its agent or attorney and funds
sufficient to pay any transfer taxes payable upon the making of such
transfer.  Upon such surrender and, if
required, such payment, the Company shall execute and deliver a new Warrant or
Warrants in the name of the assignee or assignees and in the denomination or
denominations specified in such instrument of assignment, and shall issue to
the assignor a new Warrant evidencing the portion of this Warrant not so assigned,
and this Warrant shall promptly be cancelled. 
A Warrant, if properly assigned, may be exercised by a new holder for
the purchase of Warrant Shares without having a new Warrant issued.

 

(b)                                 New Warrants.  This Warrant may be divided or combined with
other Warrants upon presentation hereof at the aforesaid office of the Company,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued, signed by the Holder or its agent or attorney.  Subject to compliance with Section 4(a),
as to any transfer which may be involved in such division or combination, the
Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice.

 

(c)                                  Warrant Register.  The Company shall register this Warrant, upon
records to be maintained by the Company for that purpose (the “Warrant
Register”), in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered

 

8

 

Holder of this Warrant as the absolute owner hereof for the purpose of
any exercise hereof or any distribution to the Holder, and for all other
purposes, absent actual notice to the contrary.

 

(d)                                 Transfer
Restrictions.  If, at the time of the
surrender of this Warrant in connection with any transfer of this Warrant, the
transfer of this Warrant shall not be registered pursuant to an effective
registration statement under the Securities Act and under applicable state
securities or blue sky laws, the Company may require, as a condition of
allowing such transfer (i) that the Holder or transferee of this Warrant,
as the case may be, furnish to the Company a written opinion of counsel (which
opinion shall be in form, substance and scope customary for opinions of counsel
in comparable transactions) to the effect that such transfer may be made
without registration under the Securities Act and under applicable state
securities or blue sky laws, (ii) that the holder or transferee execute
and deliver to the Company an investment letter in form and substance
acceptable to the Company and (iii) that the transferee be an “accredited
investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8) promulgated
under the Securities Act or a qualified institutional buyer as defined in Rule 144A(a) under
the Securities Act.

 

Section 5.                                            Miscellaneous.

 

(a)                                  Title to Warrant.  Prior to the Termination Date and subject to
compliance with applicable laws and Section 4 of this Warrant, this
Warrant and all rights hereunder are transferable, in whole or in part, at the
office or agency of the Company by the Holder in person or by duly authorized
attorney, upon surrender of this Warrant together with the Assignment Form annexed
hereto properly endorsed.  The transferee
shall sign an investment letter in form and substance reasonably satisfactory
to the Company.

 

(b)                                 No Rights as
Shareholder Until Exercise.  This
Warrant does not entitle the Holder to any voting rights or other rights as a
shareholder of the Company prior to the exercise hereof.  Upon the surrender of this Warrant and the
payment of the aggregate Exercise Price (or by means of a cashless exercise),
the Warrant Shares so purchased shall be and be deemed to be issued to such
Holder as the record owner of such shares as of the close of business on the
later of the date of such surrender or payment.

 

(c)                                  Loss, Theft,
Destruction or Mutilation of Warrant. 
The Company covenants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant or any stock certificate relating to the Warrant Shares, and in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it (which, in the case of the Warrant, shall not include the
posting of any bond), and upon surrender and cancellation of such Warrant or
stock certificate, if mutilated, the Company will make and deliver a new
Warrant or stock certificate of like tenor and dated as of such cancellation,
in lieu of such Warrant or stock certificate.

 

(d)                                 Saturdays, Sundays,
Holidays, etc.  If the last or
appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday, Sunday or a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
day not a Saturday, Sunday or legal holiday.

 

9

 

(e)                                  Authorized Shares.  The Company covenants that during the period
the Warrant is outstanding, it will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of the
Warrant Shares upon the exercise of any purchase rights under this Warrant.  The Company further covenants that its
issuance of this Warrant shall constitute full authority to its officers who
are charged with the duty of executing stock certificates to execute and issue
the necessary certificates for the Warrant Shares upon the exercise of the
purchase rights under this Warrant.  The
Company will take all such reasonable action as may be necessary to assure that
such Warrant Shares may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of the Trading Market upon
which the Common Stock may be listed.

 

Except and to
the extent as waived or consented to by the Holder, the Company shall not by
any action, including, without limitation, amending its certificate of
incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of
this Warrant, but will at all times in good faith assist in the carrying out of
all such terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of Holder as set forth in this Warrant
against impairment.  Without limiting the
generality of the foregoing, the Company will (a) not increase the par
value of any Warrant Shares above the amount payable therefore upon such
exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable Warrant Shares upon the
exercise of this Warrant, and (c) use commercially reasonable efforts to
obtain all such authorizations, exemptions or consents from any public
regulatory body having jurisdiction thereof as may be necessary to enable the
Company to perform its obligations under this Warrant.

 

Before taking
any action which would result in an adjustment in the number of Warrant Shares
for which this Warrant is exercisable or in the Exercise Price, the Company
shall obtain all such authorizations or exemptions thereof, or consents
thereto, as may be necessary from any public regulatory body or bodies having
jurisdiction thereof.

 

(f)                                    Jurisdiction.  All questions concerning the construction,
validity, enforcement and interpretation of this Warrant shall be determined in
accordance with the provisions of the Purchase Agreement.

 

(g)                                 Restrictions.  The Holder acknowledges that the Warrant
Shares acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws.

 

(h)                                 Nonwaiver and
Expenses.  No course of dealing or
any delay or failure to exercise any right hereunder on the part of Holder
shall operate as a waiver of such right or otherwise prejudice Holder’s rights,
powers or remedies, notwithstanding the fact that all rights hereunder
terminate on the Termination Date.  If
the Company willfully and knowingly fails to comply with any provision of this
Warrant, which results in any material damages to the Holder, the Company shall
pay to Holder such amounts as shall be sufficient to cover any costs and
expenses including, but not limited to, reasonable attorneys’ fees, including
those of 

 

10

 

appellate proceedings, incurred by Holder in collecting any amounts due
pursuant hereto or in otherwise enforcing any of its rights, powers or remedies
hereunder.

 

(i)                                     Notices.  Any notice, request or other document
required or permitted to be given or delivered to the Holder by the Company
shall be delivered in accordance with the notice provisions of the Purchase
Agreement.

 

(j)                                     Limitation of
Liability.  No provision hereof, in
the absence of any affirmative action by Holder to exercise this Warrant or
purchase Warrant Shares, and no enumeration herein of the rights or privileges
of Holder, shall give rise to any liability of Holder for the purchase price of
any Common Stock or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.

 

(k)                                  Remedies.  Holder, in addition to being entitled to
exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Warrant.  The Company agrees that monetary damages
would not be adequate compensation for any loss incurred by reason of a breach
by it of the provisions of this Warrant and hereby agrees to waive the defense
in any action for specific performance that a remedy at law would be adequate.

 

(l)                                     Successors and
Assigns.  Subject to applicable
securities laws, this Warrant and the rights and obligations evidenced hereby
shall inure to the benefit of and be binding upon the successors of the Company
and the successors and permitted assigns of Holder.  The provisions of this Warrant are intended
to be for the benefit of all Holders from time to time of this Warrant and
shall be enforceable by any such Holder or holder of Warrant Shares.

 

(m)                               Amendment.  This Warrant may be modified or amended or
the provisions hereof waived with the written consent of the Company and the
Holder.

 

(n)                                 Severability.  Wherever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Warrant.

 

(o)                                 Headings.  The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.

 

(p)                                 Registration Rights.  The Warrant Shares shall be deemed to be
Registerable Securities as defined in the Registration Rights Agreement
executed in connection with the Purchase Agreement.

 

 

********************

 

11

 

IN WITNESS
WHEREOF, the Company has caused this Warrant to be executed by its officer
thereunto duly authorized.

 

	
  Dated:  October 7, 2006

  	
   

  	
  SMALL WORLD KIDS, INC. 

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
    Name:

  	
   

  
	
   

  	
   

  	
   

  	
    Title:

  	
   

  

 

12

 

NOTICE
OF EXERCISE

 

TO:                            SMALL
WORLD KIDS, INC.

 

(1)                                  The undersigned
hereby elects to purchase             
Warrant Shares of the Company pursuant to the terms of the attached Warrant
(only if exercised in full), and tenders herewith payment of the exercise price
in full, together with all applicable transfer taxes, if any.

 

(2)                                  Payment shall take
the form of (check applicable box):

 

o                                    in
lawful money of the United States; or

 

o                                    the
cancellation of such number of Warrant Shares as is necessary, in accordance
with the formula set forth in subsection 2(c), to exercise this Warrant
with respect to the maximum number of Warrant Shares purchasable pursuant to
the cashless exercise procedure set forth in subsection 2(c).

 

(3)                                  Please issue a
certificate or certificates representing said Warrant Shares in the name of the
undersigned or in such other name as is specified below:

 

	
   

  	
   

  	
   

  

 

The Warrant
Shares shall be delivered to the following:

 

	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

(4)                                  Accredited
Investor.  The undersigned is an “accredited
investor” as defined in Regulation D promulgated under the Securities Act of
1933, as amended.

 

 

[SIGNATURE OF
HOLDER]

 

	
  Name of Investing Entity:

  	
   

  
	
  Signature of Authorized Signatory of
  Investing Entity:

  	
   

  
	
  Name of Authorized Signatory:

  	
   

  
	
  Title of Authorized Signatory:

  	
   

  
	
  Date:

  	
   

  
						

 

13

 

ASSIGNMENT
FORM

 

 

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

 

FOR VALUE
RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby
assigned to                                                                                                                             
whose address is                                                                                                                                                                                .

 

	
   

  	
  Dated:

  	
   

  

 

 

	
  Holder’s
  Signature:

  	
   

  
	
   

  	
   

  
	
  Holder’s
  Address:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  

 

 

	
  Signature Guaranteed:

  	
   

  

 

 

NOTE:  The signature to this
Assignment Form must correspond with the name as it appears on the face of
the Warrant, without alteration or enlargement or any change whatsoever, and
must be guaranteed by a bank or trust company. 
Officers of corporations and those acting in a fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.

 

14

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