EXHIBIT
10.3
AMENDED AND RESTATED
INTERCREDITOR AND SUBORDINATION AGREEMENT
THIS AMENDED AND RESTATED INTERCREDITOR AND
SUBORDINATION AGREEMENT is entered into as of _____________, 2007, among
ST. CLOUD CAPITAL PARTNERS, L.P. (“ Senior
Creditor ”), and the subordinated creditors
executing this Agreement (each hereinafter referred to as a “
Subordinated Creditor ” and collectively, as
the “ Subordinated Creditors ”), and
SBI Advisors, LLC, a California limited liability company, in its
capacity as administrative agent for the Original Subordinated
Creditors (“ Administrative Agent ”),
in light of the following:
R E C I T A L
S
A. This Agreement amends and restates the
Intercreditor and Subordination Agreement entered into as of
February __, 2007, effective as of November 6, 2006, among (i)
Senior Creditor, (ii) Hong Kong League Central Credit Union, a Hong
Kong credit union (“HKLCCU”), (iii) Kershaw/Mackie
& Company, a sole proprietorship (“KM&C”)
(HKLCCU and KM&C are hereafter referred to as the “
Original Subordinated Creditors .” For
purposes hereof, the term “ New Subordinated
Creditors ” means and refers to those Subordinated
Creditors other than the Original Subordinated
Creditors.
B. Senior Creditor and SMALL WORLD KIDS, INC., a
Nevada corporation (“ Debtor ”), have
entered into that certain Note Purchase Agreement dated as of
September 7, 2004 (as amended and modified by (i) that certain
Amendment to Note Purchase Agreement dated as of July 20, 2005,
(ii) that certain Second Amendment Note Purchase Agreement dated as
of November 9, 2005, and (iii) that certain Third Amendment to Note
Purchase Agreement dated as of May 31, 2006) (the “
Note Purchase Agreement ”).
C. Pursuant to the Note Purchase Agreement, Senior
Creditor made a loan to Debtor in the amounts set forth in the Note
Purchase Agreement.
D. To secure repayment of the amounts loaned to
Debtor and performance of the other covenants, agreements and
undertakings of Debtor under the Note Purchase Agreement, Debtor
executed a Commercial Security Agreement pursuant to which Debtor
granted to Senior Creditor a lien upon and security interest in
certain “Collateral” as therein defined.
E. The Original Subordinated Creditors have made
loans to Debtor in the principal amount of $330,000 and the New
Subordinated Creditors intend to make loans to Debtor in the
minimum principal amount of $833,333 and the maximum principal
amount of $1,333,333 (collectively, the “
Subordinated Creditor Obligations ”), and,
as security for the prompt payment and performance of the
Subordinated Creditor Obligations, Debtor has granted Subordinated
Creditor a lien upon and security interest in certain property of
Debtor, which property constitutes the Collateral.
F. Debtor, Subordinated Creditors and
Administrative Agent have requested that Senior Creditor consent to
Debtor’s incurrence of the Subordinated Creditor Obligations
and the grant to Subordinated Creditor of a security interest in
property of Debtor which comprises the Collateral.
G. On or about September 6, 2006, Debtor and
KM&C entered into an agreement (the “ KM&C
Agreement ”) pursuant to which KM&C agreed to
provide certain services to Debtor in consideration for which
Debtor agreed to pay certain fees and commissions to the KM&C
as set forth in the KM&C Agreement.
H. Senior Creditor, Subordinated Creditors, and
the Administrative Agent wish to agree as to the respective rights
of Senior Creditor and Subordinated Creditors to repayment by, and
rights to, liens upon and security interests in the assets of
Debtor, and as to certain other rights, priorities, and interests
as between Senior Creditor and Subordinated Creditor.
A G R E E M E N
T
In consideration of the foregoing, the mutual
covenants contained herein, and for other good and valuable
considerations, the receipt of which Senior Creditor and
Subordinated Creditors hereby acknowledge, Senior Creditor,
Subordinated Creditors and the Administrative Agent hereby agree as
follows:
1.
Definitions
. The following terms, as used in
this Agreement, shall have the following meanings:
“ Agreement ” means this
Amended and Restated Intercreditor and Subordination Agreement
together with any and all amendments, extensions, modifications,
riders, addenda, exhibits, and schedules hereto.
“ Bankruptcy Case ” means any
proceeding commenced by or against Debtor, under any provision of
the Bankruptcy Code or under any other federal or state bankruptcy
or insolvency law, including assignments for the benefit of
creditors, the appointment of a receiver, formal or informal
moratoria, compositions, extensions generally with its creditors,
or proceedings seeking reorganization, arrangement, liquidation,
dissolution, or the winding up of Debtor, or other similar relief,
and all converted or succeeding cases in respect
thereof.
“ Bankruptcy Code ” means the
United States Bankruptcy Code (11 U.S.C. Section 101, et seq.) as
amended, and any successor statute.
“ Collateral ” means all of
Debtor’s presently existing and hereafter acquired personal
property as described in the Commercial Security Agreement between
Senior Creditor and Debtor.
“ Enforcement Action ” means
any action by Subordinated Creditors or the Administrative Agent to
enforce payment or performance by Debtor of any of its Subordinated
Creditor Obligations or Subordinated Creditor Agreements,
including, but not limited to, any of the following: (a)
acceleration of the maturity of Subordinated Creditor Obligations;
(b) commencement of, prosecution of, or participation in any
lawsuit, action or proceeding, whether private, judicial,
equitable, administrative, or otherwise (including the commencement
or joining with any other creditors in the commencement of any
Bankruptcy Case) against Debtor; (c) exercise of any right of
setoff for the collection of any amounts due in respect of the
Subordinated Creditor Obligations; (d) exercise of any Security
Creditor Remedy; or (e) in the event of a Bankruptcy Case: (i)
prosecuting a motion for relief from the automatic stay to exercise
an Enforcement Action; (ii) objecting to Senior Creditor’s
motion for relief from the automatic stay to foreclose on and sell
any of the Collateral; (iii) seeking to provide
debtor-in-possession loans or advances to Debtor wherein Senior
Creditor’s liens would be subordinated in priority; (iv)
seeking or acquiesce in any request to convert the Bankruptcy Case
under chapter 11 of Title 11 of the Bankruptcy Code to a case under
chapter 7 of Title 11 of the Bankruptcy Code; (v) seeking the
appointment of a trustee or examiner with expanded powers for
Debtor or any of its subsidiaries or affiliates, if any; (vi)
opposing the confirmation of Debtor’s plan of reorganization
if such action might adversely affect Debtor’s business or
Debtor’s ability to repay the Senior Creditor Obligations.
Notwithstanding the foregoing, none of the following shall
constitute an “Enforcement Action” for purposes of this
Agreement: (x) the delivery of any notice of default or other
notice to Debtor pursuant to or in connection with the Subordinated
Creditor Agreements, (y) the acceleration of the Subordinated
Creditor Obligations if Senior Creditor has already notified
Subordinated Creditors and Debtor in writing that it has
accelerated the Senior Creditor Obligations and has not rescinded
such notice in writing, (z) the filing by Subordinated Creditors of
a proof of claim in a Bankruptcy Case, which proof of claim
indicates Subordinated Creditors’ subordination
hereunder.
“ Secured Creditor ” means
either of Senior Creditor or Subordinated Creditors, or any
successor or assignee of any of them, in its capacity as a secured
creditor under the Senior Creditor Agreements or the Subordinated
Creditor Agreements, respectively.
“ Secured Creditor Remedies ”
means any action by a Secured Creditor in furtherance of the sale,
foreclosure, realization upon, or the repossession or liquidation
of any of the Collateral, including without limitation, (i) the
exercise of any remedies or rights of a “Secured
Creditor” under Division 9 of the UCC, such as, without
limitation, the notification of account debtors; (ii) the exercise
of any remedies available to a judgment creditor; or (iii) any
other remedy available in respect of the Collateral available to
such Secured Creditor under the Senior Creditor Agreements or the
Subordinated Creditor Agreements, as the case may be.
“ Senior Creditor Agreements
” means, collectively, the Note Purchase Agreement, the
Commercial Security Agreement and any other document, instrument,
or agreement entered into by or in favor of Senior Creditor and
Debtor in connection with the Senior Creditor Obligations and the
Collateral, together with any amendments, replacements,
substitutions, or restatements thereof.
“ Senior Creditor Obligations
” means any and all presently existing or hereafter arising
indebtedness, claims, debts, liabilities, and obligations of Debtor
owing to Senior Creditor under the Senior Creditor Agreements
(including but not limited to debtor-in-possession loans or
advances, any obligation to make adequate protection payments
relative to proceedings involving the use of cash collateral or
motions for relief from the automatic stay in a Bankruptcy Case, or
otherwise, whether direct or indirect, contingent or of any other
nature, character, or description, including all interest accruing
after commencement of any case, proceeding, or other action
relating to the bankruptcy, insolvency, or reorganization of
Debtor, including both amounts and interest that are allowable
claims in such proceeding and all amounts and interest that, but
for the provision of the Bankruptcy Code, would have accrued and
become due).
“ Subordinated Creditor Agreements
” means, collectively, any other document, instrument, or
agreement now existing or in the future entered into by or in favor
of Subordinated Creditors and Debtor in connection with the
Subordinated Creditor Obligations or the Collateral, together with
any amendments, replacements, substitutes, or restatements
thereof.
“ Subordinated Creditor Obligations
” means any and all presently existing or hereafter arising
indebtedness, claims, debts, liabilities, and obligations of Debtor
owing to Subordinated Creditor under the Subordinated Creditor
Agreements, or otherwise, whether direct or indirect, whether
contingent or of any other nature, character, or description
(including all interest accruing after commencement of any case,
proceeding, or other action relating to the bankruptcy, insolvency,
or reorganization of Debtor to the extent such interest is an
allowable claim in any such proceedings).
“ UCC ” means the Uniform
Commercial Code as adopted in the State of California, or in such
other jurisdiction as governs the perfection of the liens and
security interests in the Collateral for the purposes of the
provisions hereof relating to such perfection or effect of
perfection.
2.
Subordination and
Standstill .
(a)
Indebtedness
. Subordinated Creditors hereby
subordinate any and all Subordinated Creditor Obligations to the
Senior Creditor Obligations. Except as provided in Section 2(b)
and 2(c) hereof, until the Senior Creditor Obligations has been
indefeasibly paid in full, in cash, and the Senior Creditor
Agreements have been irrevocably terminated, Subordinated Creditors
and the Administrative Agent shall not accept or receive, by
payment, setoff, or in any other manner, from Debtor or any other
obligor under the Subordinated Creditor Obligations, the whole or
any part of any sums, however such payments are characterized or
denominated, including but not limited to payment of or for
adequate protection in a Bankruptcy Case, which may now or
hereafter be owing to Subordinated Creditors on account of the
Subordinated Creditor Obligations. In the event that,
notwithstanding the foregoing, Debtor shall make any payment to
Subordinated Creditors prohibited by the foregoing provisions of
this Section 2(a) , then and in such event such payment
shall be segregated by Subordinated Creditors and held in trust for
the benefit of and immediately shall be paid over to Senior
Creditor (in the same form received, with all necessary
endorsements) for application against the Senior Creditor
Obligations remaining unpaid until the Senior Creditor Obligations
is indefeasibly paid in full, in cash, and the Senior Creditor
Agreements have been irrevocably terminated. Notwithstanding any
provision of this Agreement to the contrary, so long as the Senior
Creditor Obligations have not been indefeasibly paid in full,
Subordinated Creditors may accrue, but not accept or retain,
default interest on or with respect to the Subordinated Creditor
Obligations in the event of any default thereunder.
(b)
Payment of Interest and Legal
Fees on Creditor Obligations . Notwithstanding any other provision of this
Agreement, so long as no event of default has occurred in respect
of the Senior Creditor Obligations, Debtor may pay to Subordinated
Creditors, and Subordinated Creditors may accept from Debtor and
retain, (i) monthly payments of contract rate (and not default
rate) interest on account of the Subordinated Creditor Obligations,
and (ii) reimbursement of legal fees and costs incurred or to be
incurred with respect to the negotiation and execution of, and as
permitted under, the Subordinated Creditor Agreements.
(c)
Exclusion for Payments under the
KM&C Agreement .
Notwithstanding any other provision of this Agreement, Debtor may
make, and KM&C may receive, payments in accordance with the
terms of the KM&C Agreement for services rendered by KM&C
to Debtor in accordance therewith The term of the KM&C
Agreement may, upon prior notice to Senior Creditor, be extended at
any time or from time to time; provided, however, that any such
extension or extensions, shall not, in the aggregate, operate to
extend the term of the KM&C Agreement for a date more than one
(1) year, and, further, provided, that such payment, and the
frequency thereof, shall be limited to the amounts presently set
forth in the KM&C Agreement without amendment, revision or
modification thereof. During the term of the KM&C Agreement,
and any extension thereof, KM&C shall provide copies of all
billings to Debtor.
(d)
Enforcement
. Until the Senior Creditor
Obligations has been indefeasibly paid in full, in cash, and the
Senior Creditor Agreements have been irrevocably terminated,
Subordinated Creditors and the Administrative Agent shall not (i)
commence, prosecute, or participate in any Enforcement Action, (ii)
sell, assign, exchange, redeem, transfer, pledge, or grant a
security interest in the Subordinated Creditor Obligations other
than to pursuant to a transaction in which the buyer, assignee,
transferee, pledgee or secured party acknowledges in writing and
takes subject to this Agreement, (iii) incur any obligation to, or
receive any loans, advances, or gifts from, Debtor except as
permitted in Sections 2(b) and (c) hereof, or (iv) commence,
prosecute, or participate in any action or proceeding that in
Senior Creditor’s sole judgment might adversely affect
Debtor’s business or Debtor’s ability to repay the
Senior Creditor Obligations.
(e)
Guaranties
. In the event Subordinated
Creditors or the Administrative Agent acquire any guaranty with
respect to the Subordinated Creditor Obligations, whether secured
or unsecured, from any affiliate of Debtor, Subordinated Creditors
and the Administrative Agent agree that all rights with respect to
such guaranty (including any collateral therefor) shall at all
times be junior, subordinate, and subject to the rights of Senior
Creditor with respect to any guaranties (including any collateral
therefor) Senior Creditor may receive from such affiliates with
respect to the Senior Creditor Obligations.
3.
Permitted Liens and Relative
Priorities . As between
the Secured Creditors, notwithstanding:
(a) the terms (including the description of
collateral), dating, execution, or delivery of any document,
instrument, or agreement, the time, order, occurrence, method, or
manner of granting, or perfection of any security interest or lien,
the time of filing or recording of any financing statements,
assignments, deeds of trust, mortgages, or any other documents,
instruments, or agreements under the UCC or any other applicable
law;
(b) the existence of (or the order in which any
Secured Creditor becomes a party to or a beneficiary of) any
collateral agency arrangement with any party other than a Secured
Creditor, or the appointment of such other party as a collateral
agent to perfect the Secured Creditors’ liens and security
interests, in all or any part of the Collateral;
(c)
the existence of any control
agreement in favor of any Secured Creditor; or
(d)
whether the Subordinated Creditor
Obligations or the liens or security interests securing the Senior
Creditor Obligations, are held to be unperfected, deficient,
invalid, void, voidable, voided, unenforceable, subordinated,
reduced, or discharged, or are set aside by a court of competent
jurisdiction, including, without limitation, pursuant to any
Bankruptcy Case;
(e) any provision of the UCC or any other applicable
statute, rule, laws, or court decision to the contrary, the Secured
Creditors agree that, as to the Collateral of Debtor:
(i) Senior Creditor shall have a security interest
in and lien on the Collateral to secure the Senior Creditor
Obligations which is prior to any security interest in and lien on
the Collateral of the Subordinated Creditors; and
(ii)
Subordinated Creditors shall have a
security interest in and lien on the Collateral to secure the
Subordinated Creditor Obligations which is junior and subordinate
to the lien and security interest therein of Senior
Creditor.
For purposes of the foregoing allocation of
priorities, any claim or a right to a set-off shall be treated in
all respects as a security interest, and no claimed right of
set-off shall be asserted to defeat or diminish the rights or
priorities provided for herein.
4.
No Alteration of
Priority . The lien and
security interest priorities provided in Section 3 shall not be
altered or otherwise affected by any amendment, modification,
supplement, extension, renewal, restatement, or refinancing of any
of the Secured Creditor Obligations, nor by any action or inaction
which either Secured Creditor may take or fail to take in respect
of the Collateral, or otherwise. Each Secured Creditor consents to
Debtor’s granting to each other Secured Creditor the liens
and security interests reflected in Section 3 . Subordinated
Creditor agrees that it will not directly or indirectly take any
action to contest or challenge the validity, legality, perfection,
priority, avoidability, or enforceability of the liens or security
interests of Senior Creditor upon the Collateral or seek to have
the same avoided, disallowed, set aside, or otherwise invalidated
in any judicial proceeding or otherwise.
5.
Perfection
. Subordinated Creditors shall be
solely responsible for perfecting and maintaining the perfection of
their lien or security interest in any of the
Collateral.
6.
Management of
Collateral .
Notwithstanding anything to the contrary contained in any of the
Senior Creditor Agreements or the Subordinated Creditor Agreements,
until the Senior Creditor Obligations has been indefeasibly paid in
full, in cash, and the Senior Creditor Agreements have been
irrevocably terminated: (i) Senior Creditor shall have the
exclusive right to manage the Collateral, including the exclusive
right to perform and enforce the terms of the Senior Creditor
Agreements with respect to the Collateral and to exercise and
enforce all privileges and rights thereunder according to Senior
Creditor’s reasonable discretion, including, without
limitation, the exclusive right to enforce or settle insurance
claims with respect to the Collateral, to pay, compromise, or
settle competing claims, liens, or security interests affecting the
Collateral, to take or retake control or possession of the
Collateral, and to hold, prepare for sale, sell, lease, or
liquidate the Collateral; (ii) neither Subordinated Creditor nor
any party acting on its behalf, shall exercise any Secured Creditor
Remedies with respect to the Collateral; and (iii) any and all
Collateral or proceeds thereof which shall come into the
possession, control, or custody of Subordinated Creditors will be
deemed to have been received for the account of Senior Creditor and
shall be immediately delivered or paid, as applicable, over to
Senior Creditor. In connection with the provisions of clause 6(i)
above, Subordinated Creditors waive any and all rights to affect
the method or challenge the appropriateness of any action by any
Senior Creditor with respect to the Collateral, and waive any
claims or defenses it may have against Senior Creditor, including
any such claims or defenses based on any actions or omissions of
any such person, in connection with the perfection, maintenance,
enforcement, foreclosure, sale, liquidation, or release of any lien
or security interest therein by Senior Creditor, or any
modification or waiver of any Senior Creditor Agreements, except as
provided or limited under this Agreement.
7.
Sale of Collateral
. Until the Senior Creditor
Obligations has been indefeasibly paid in full, in cash, and the
Senior Creditor Agreements have been irrevocably terminated: (i)
only Senior Creditor shall have the right to restrict or permit, or
approve or disapprove, the sale or disposition of the Collateral;
and (ii) Subordinated Creditor will, immediately upon the request
of Senior Creditor, release, reconvey, or otherwise terminate its
liens and security interests upon the Collateral, to the extent
such Collateral is sold or disposed of by Debtor with the consent
of Senior Creditor in accordance with the Senior Creditor
Agreements, or is sold by or on behalf of Senior Creditor in
connection with the exercise of its Secured Creditor Remedies, and
Subordinated Creditors will promptly deliver (at Debtor’s
expense) such release, reconveyance, and termination documents as
Senior Creditor or any Debtor may reasonably require in connection
therewith.
8.
Insurance . In the event of the occurrence of a fire or
other casualty resulting in damage to all or any portion of any
Collateral (collectively, a “Casualty”):
(a)
Subordinated Creditors and the
Administrative Agent hereby waive any right to participate or join
in any adjustment, compromise, or settlement of any claim resulting
from a Casualty with respect to any Collateral;
(b) all proceeds received or to be received on
account of a Casualty shall be applied in the manner or manners
provided for in the Senior Creditor Agreements; and
(c)
Subordinated Creditor and the
Administrative Agent agree to execute and deliver to Senior
Creditor any documents, instruments, agreements or further
assurances reasonably required to effectuate any of the
foregoing.
(a)
This Agreement (including all rights
and priorities set forth herein) shall continue in full force and
effect upon the commencement of a Bankruptcy Case as contemplated
under Section 510(a) of the Bankruptcy Code (all references herein
to Debtor being deemed to apply to debtor as a debtor-in-possession
and to a trustee for Debtor’s estate in a Bankruptcy Case),
and irrespective of the terms of any plan of reorganization adopted
therein, and shall apply with full force and effect with respect to
all Collateral acquired by Debtor, and to all Senior Creditor
Obligation
