NOTE PURCHASE
AGREEMENT
This Note Purchase Agreement
(“Agreement”) is made and entered into as of October 6,
2006 by and among Small World Kids, Inc., a Nevada corporation (the
“Parent”), SMALL WORLD TOYS, a California corporation
(“Subsidiary”) (the Parent and the Subsidiary, each a
“Company” and collectively the
“Companies”), HONG KONG LEAGUE CENTRAL CREDIT UNION, a
Hong Kong Credit Union (“HKLCCU”), KERSHAW MACKIE &
COMPANY, a sole proprietorship (“KM & Co.”) (SBI
and KM & Co., each a “Purchaser” and collectively
the “Purchasers”), and SBI ADVISORS, LLC, a California
limited liability company, in its capacity as administrative agent
for the Purchasers (in such capacity, the “Administrative
Agent”).
RECITALS
A. Companies are willing to sell to HKLCCU a note
(the “HKLCCU Note”) in the face amount of $302,500 (the
“HKLCCU Face Amount”) with an investment amount of
$275,000 (the “HKLCCU Investment Amount”), upon the
terms and subject to the conditions set forth in this
Agreement.
B. The Companies are willing to sell to KM &
Co. a note (the “KM & Co. Note”) in the face amount
of $27,500 (the “KM & Co. Face Amount”) with an
investment amount of $25,000 (the “KM & Co. Investment
Amount”), upon the terms and subject to the conditions set
forth in this Agreement.
C. For purposes of this Agreement, the term
“Notes” refers collectively to the HKLCCU Note and the
KM & Co. Note, the term “Face Amount” means the
aggregate of the HKLCCU Face Amount and the KM & Co. Face
Amount, and the term “Investment Amount” means the
aggregate of the HKLCCU Investment Amount and the KM & Co.
Investment Amount.
D. Purchasers desire to purchase the Notes from
the Companies upon the terms and subject to the conditions set
forth in this Agreement.
E. The capitalized terms used in this Agreement
shall have the meanings assigned to them in Annex A
.
TERMS AND
CONDITIONS
NOW, THEREFORE, in consideration of their
respective promises contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties, the Companies, Purchasers and the
Administrative Agent hereby agree as follows:
1. Issuance of the Notes .
1.1 Note Terms . Subject to the terms and conditions set forth
in this Agreement, and in reliance upon the representations and
warranties contained herein, the Companies, in consideration for
the receipt of the Investment Amount, agrees to issue to
Purchasers, and each Purchaser, severally and not jointly, agrees
to purchase and accept from the Companies its Note. Interest on the
Face Amount shall accrue and be payable monthly in arrears until
March 31, 2008, at which time all accrued and unpaid interest, and
the unpaid Face Amount, shall become immediately due and payable.
The Notes will be convertible into shares of the Common Stock of
the Parent (the “Note Shares”) at $1.10 per share
(subject to adjustment). The Notes shall be substantially in the
form of Exhibit A .
1.2 Stock Purchase Warrants . Concurrently with the issuance of the Notes,
the Companies hereby agree to issue Common Stock Purchase Warrants
(each a “Warrant” and collectively, the
“Warrants”) as follows:
(a) To Administrative Agent, a Warrant covering
137,500 shares of Parent’s Common Stock with an exercise
price of $1.10 per share, and
(b) To KM & Co., a Warrant covering 12,500
shares of Parent’s Common Stock with an exercise price of
$1.10 per share.
The Common Stock Purchase Warrants shall be
substantially in the form of Exhibit B .
1.3 Closing . The closing of the issuance of the Notes and
the Warrants (the “Closing”) shall be held at the
offices of Troy & Gould in Los Angeles, California, or at such
other location as shall be agreed upon by the parties hereto on or
before September 29, 2006. At the Closing, the Companies shall
deliver the Notes and the Warrants to Purchasers, and Purchasers
shall pay to the Companies their respective Investment Amounts. The
date of the Closing is referred to herein as the Closing
Date.
2. Security Interest .
2.1 Grant of Security Interest
. To secure prompt payment to
Purchasers of the Obligations, each Company hereby assigns, pledges
and grants to Administrative Agent, for the benefit of Purchasers
to the extent of their interests, a continuing security interest in
and Lien upon all of the Collateral.
2.2 Perfection of Security Interest
. Each Company hereby authorizes
Administrative Agent, for the benefit of Purchasers to the extent
of their interests, to file any financing statements, continuation
statements or amendments thereto that (a) indicate the Collateral
(i) as all assets and personal property of such Company or words of
similar effect, regardless of whether any particular asset
comprised in the Collateral falls within the scope of Article 9 of
the UCC of such jurisdiction, or (ii) as being of an equal or
lesser scope or with greater detail, and (b) contain any other
information required by Part 5 of Article 9 of the UCC for the
sufficiency or filing office acceptance of any financing statement,
continuation statement or amendment.
2.3 Non-Exclusive License . Each Company hereby grants to Administrative
Agent, for the benefit of Purchasers to the extent of their
interests, an irrevocable, non-exclusive license (exercisable upon
the termination of this Agreement due to an occurrence and during
the continuance of an Event of Default without payment of royalty
or other compensation to such Company) to use, transfer, license or
sublicense any Intellectual Property now owned, licensed to, or
hereafter acquired by such Company, and wherever the same may be
located, and including in such license access to all media in which
any of the licensed items may be recorded.
3. Purchaser’s Representations and
Warranties . Each
Purchaser, severally but not jointly, hereby represents and
warrants to the Companies as follows:
3.1 Investment Purposes; Compliance With Securities
Act . Purchaser is
acquiring its Note, and upon conversion thereof, the Note Shares,
and the Warrants, and upon exercise thereof, the shares of Common
Stock issuable upon such exercise (the “Warrant
Shares”) (collectively, the “Securities”) for its
own account, for investment only and not with a view towards, or in
connection with, the public sale or distribution thereof, except
pursuant to sales registered under or exempt from the Securities
Act of 1933, as amended (the “Securities
Act”).
3.2 Accredited Purchaser Status
. Purchaser is an “accredited
investor” as that term is defined in Rule 501(a) of
Regulation D. Purchaser is a sophisticated purchaser and has such
knowledge and experience in financial and business matters that
Purchaser is capable of evaluating the merits and risks of an
investment made pursuant to this Agreement.
3.3 Reliance on Exemptions . Purchaser understands the Securities are being
offered and sold to in reliance on specific exemptions from the
registration requirements of the applicable United States federal
and state securities laws and that the Companies are relying upon
the truth and accuracy of, and each Purchaser’s compliance
with, the representations, warranties, acknowledgments,
understandings, agreements and covenants of Purchasers set forth
herein in order to determine the availability of such exemptions
and the eligibility of Purchasers to acquire the
Securities.
3.4 Information . Purchaser and the advisors of the Purchaser,
if any, have been furnished with all material information relating
to the business, finances and operations of the Company and
material information relating to the offer and sale of the
Securities that have been requested by the Purchaser. Purchaser and
Purchaser’s advisors, if any, have been afforded the
opportunity to ask all questions of the Companies as they have in
their discretion deemed advisable.
3.5 Transfer or Resale . Purchaser understands that: (i) none of the
Securities has been registered under the Securities Act or any
state securities laws, and may not be offered for sale, sold,
assigned or transferred unless either (a) subsequently registered
thereunder or (b) Purchaser shall have delivered to the Parent an
opinion by counsel reasonably satisfactory to the Parent, in form,
scope and substance reasonably satisfactory to the Parent, to the
effect that the Note, the Note Shares, the Warrant or the Warrants
Shares, as the case may be, to be sold, assigned or transferred may
be sold, assigned or transferred pursuant to an exemption from such
registration, and (ii) except as expressly provided herein, neither
the Companies nor any other person is under any obligation to
register the Securities under the Securities Act or any state
securities laws or to comply with the terms and conditions of any
exemption thereunder.
3.6 Authority, Validity and
Enforceability . This
Agreement has been duly and validly authorized, executed and
delivered by Purchaser and is the valid and binding agreement of
Purchaser enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency,
moratorium, liquidation, or similar laws relating to, or affecting,
generally the enforcement of creditors’ rights and remedies
or by other equitable principles of general application.
4. Representations and Warranties of the
Company . Each Company,
jointly and severally, hereby represents and warrants to Purchasers
as follows:
4.1 Organization and Qualification
. It is a corporation, duly
organized, validly existing and in good standing under the laws of
its jurisdictions or organization. It has the corporate power and
authority to own and operate its properties and assets and, insofar
as it is or shall be a party thereto, (i) to execute and deliver
this Agreement and the Ancillary Agreements, (ii) to issue and sell
the Notes and the Notes Shares upon conversion of the Notes, (iii)
to issue and sell the Warrants and the Warrant Shares upon exercise
of the Warrants, and (iv) to carry out the provisions of this
Agreement and the Ancillary Agreements and to carry on its business
as presently conducted. It is duly qualified and is authorized to
do business and is in good standing as a foreign corporation in all
jurisdictions in which the nature or location of its activities and
of its properties (both owned and leased) makes such qualification
necessary, except for those jurisdictions in which failure to do so
has not had, or could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse
Effect.
4.2 Capitalization .
(a) The authorized capital stock of the Parent, as
of the date hereof, consists of 115,000,000 shares, of which
100,000,000 are share of Common Stock, par value $0.001 per shares,
5,410,575 shares of which are issued and outstand, and 15,000,000
are shares of preferred stock, par value $0.01 per share of which
10,312,703 shares of Class A-1 Preferred Stock are issued and
outstanding.
(b) Except as disclosed on Schedule 4.2 ,
other than: (i) the shares reserved for issuance upon the
Parent’s stock option plans; and (ii) shares which may be
issued pursuant to this Agreement and the Ancillary Agreements,
there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy
or stockholder agreements, or arrangements or agreements of any
kind for the purchase or acquisition from the Companies of any of
its securities. Except as disclosed on Schedule 4.2 ,
neither the offer, issuance or sale of any of the Notes or Warrants
or the issuance of any of the Note Shares or Warrant Shares, nor
the consummation of any transaction contemplated hereby will result
in a change in the price or number of any securities of the
Companies outstanding, under anti-dilution or other similar
provisions contained in or affecting any such
securities.
(c) All issued and outstanding shares of the
Companies’ Common Stock and Preferred Stock: (i) have been
duly authorized and validly issued and are fully paid and
non-assessable; and (ii) were issued in compliance with all
applicable state and federal laws concerning the issuance of
securities.
(d) The rights, preferences, privileges and
restrictions of the shares of Common Stock and Preferred Stock are
as stated in the Certificate of Incorporation (the
“Charter”) of the Companies. The Note Shares and the
Warrant Shares have been duly and validly reserved for issuance.
When issued in compliance with the provisions of this Agreement and
the Parent’s Charter, the Note Shares and the Warrant Shares
will be validly issued, fully paid and non-assessable and will be
free of any liens or encumbrances; provided, however, that such
Note Shares and Warrant Shares may be subject to restrictions on
transfer under state and/or federal securities laws as set forth
herein or as otherwise required by such laws at the time a transfer
is proposed.
4.3 Authorization; Binding Obligations
. All corporate action on its part
(including its officers and directors) necessary for the
authorization of this Agreement and the Ancillary Agreements, the
performance of all of its obligations hereunder and under the
Ancillary Agreement on the Closing Date and, the authorization,
issuance and delivery of the Notes and the Warrants have been taken
or will be taken prior to the Closing Date. This Agreement and the
Ancillary Agreements, when executed and delivered and to the extent
it is a party there, will be its valid and binding obligations
enforceable against it in accordance with its terms, except (i) as
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting the
enforcement of creditors’ rights; and (ii) general principals
of equity that restrict the availability of equitable or legal
remedies. The issuance of the Notes and the subsequent conversion
of the Notes for the Note Shares is not and will not be subject to
any preemptive rights or rights of first refusal that have not been
properly waived or complied with. The issuance of the Warrants and
the subsequent exercise of the Warrants for the Warrant Shares is
not and will not be subject to any preemptive rights or rights of
first refusal that have not been properly waived or complied
with.
4.4 Liabilities . Neither it nor any of its Subsidiaries has any
liability, except current liabilities incurred in the ordinary
course of business and liabilities disclosed in any Exchange Act
Filings.
4.5 Agreements . Except as set forth on Schedule 4.5 or
as disclosed in any Exchange Act Filings:
(a) There are no agreements, understandings,
instruments, contracts, proposed transactions, judgments, orders,
writs or decrees to which it or any of its Subsidiaries is a party
or to its knowledge by which it is bound which may involve: (i)
obligations (contingent or otherwise) of, or payments to, it or any
of its Subsidiaries in excess of $50,000 (other than obligations
of, or payments to, it or any of its Subsidiaries arising from
purchase or sale agreements entered into in the ordinary course of
business); or (ii) the transfer or license of any patent,
copyright, trade secret or other proprietary right to or from it
(other than licenses arising from the purchase of “off the
shelf” or other standard products); or (iii) provisions
restricting the development, manufacture or distribution or its or
any of its Subsidiaries’ products or services; or (iv)
indemnification by it or any of its Subsidiaries with respect to
infringements of proprietary rights.
(b) Since June 30, 2006 (the “Balance Sheet
Date”) neither it nor any of its Subsidiaries has: (i)
declared or paid any dividend or authorized or made any
distribution upon or with respect to any class or series of its
capital stock; (ii) incurred any indebtedness for money borrowed or
other liabilities (other than ordinary course obligations)
individually in excess of $50,000 or, in the case of indebtedness
and/or liabilities individually less than $50,000, in excess of
$100,000 in the aggregate; (iii) made any loans or advances to any
Person not in excess, individually or in the aggregate, of
$100,000, other than ordinary course advances for travel expenses;
or (iv) sold, exchanged or otherwise disposed or any of its assets
or rights, other than the sale of its inventory in the ordinary
course of business.
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.
4.10 SEC Reports . Except as set forth on Schedule 4.10 ,
the Companies have filed all proxy statements, reports and other
documents required to be filed by it under the Securities Exchange
Act of 1934 as amended (the “Exchange Act”). The
Companies have furnished Purchasers with copies of: (i) its Annual
Report on Form 10-K for the fiscal year ended December 31, 2005,
(ii) its Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 2006, and (iii) its Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2006 (collectively, the “SEC
Reports”). Except as set forth on Schedule 4.10 , each
SEC Report was, at the time of its filing, in substantial
compliance with the requirements of its respective form and none of
the SEC Reports, nor the financial statements (and the notes
thereto) included in the SEC Reports, as of their respective filing
dates, contained any untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under
which they were made, not misleading. Such financial statements
have been prepared in accordance with GAAP applied on a consistent
basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii)
in the case of unaudited interim statements, to the extent they may
not include footnotes or may be condensed) and fairly present in
all material respects the financial condition, the results of
operations and cash flows of the Companies and Subsidiaries, or a
consolidated basis, as of, and for, the periods presented in each
such SEC Report.
4.11 Absence of Certain Changes
. Since June 30, 2006, there has
been no material adverse change in the business, properties,
operation, financial condition, results of operations or prospects
of the Companies.
4.12 Absence of Litigation . Except as set forth on Schedule 4.12 ,
there is no action, suit, proceeding, inquiry or investigation
before or by any court, public board or body pending or, to the
knowledge of the Company, threatened against or affecting the
Company, wherein an unfavorable decision, ruling or finding would
have a Material Adverse Effect or which would adversely affect the
validity or enforceability of, or the authority or ability of the
Company to perform its obligations under, this Agreement or any of
the documents contemplated herein.
4.13 Registration Rights . Except as set forth on Schedule 4.13 ,
and except as disclosed in Exchange Act Filings, neither it nor any
of its Subsidiaries is presently under any obligation, and neither
it nor any of its Subsidiaries has granted any rights, to register
any of its or any of its Subsidiaries’ presently outstanding
securities or any of its securities that may hereafter be
issued.
4.14 Valid Offering . Assuming the accuracy of the representations
and warranties of Purchasers contained in this Agreement, the offer
and issuance of the Notes and the Warrants, the offer and issuance
of the Note Shares upon the conversion of the Notes, and the offer
issuance of the Warrant Shares upon exercise of the Warrants, will
be exempt for the registration requirements of the Securities Act,
and will have been registered or qualified (or exempt from
registration and qualification) under the registration, permit or
qualification requirement of all applicable state securities
laws.
4.15 No Integrated Offering . Neither it nor any of its subsidiaries or
Affiliates, nor any Person acting on its or their behalf, has
directly or indirectly made ay offers or sales of any security or
solicited any offers to buy any security under circumstances that
would cause the offering of the Securities pursuant to this
Agreement or any Ancillary Agreement to be integrated with prior
offerings by it for purposes of the Securities Act which would
prevent it from issuing such Securities, or any of them, pursuant
to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions, nor will it or
any of its Affiliates or Subsidiaries take any action or steps that
would cause the offering of the Securities to be integrated with
other offerings.
4.16 Stop Transfer . The Securities are restricted securities as of
the date of this Agreement. Neither Company will issue any stop
transfer order or other order impeding the sale and delivery of any
of the Securities at such time as the Securities are registered for
public sale or an exemption form registration is available, except
as required by state and federal securities laws.
4.17 Dilution . It specifically acknowledges that the
Parent’s obligation to issue the Note Shares upon conversion
of the Notes and the Warrant Shares upon exercise of the Warrants
is binding upon the Parent and enforceable regardless of the
dilution such issuances may have on the ownership interests of
other shareholders of the Parent.
4.18 Patriot Act . It certifies that, to the best of its
knowledge, neither it nor any of its Subsidiaries, has been
designated, nor is or shall be owned or controlled, by a
“suspected terrorist” as defined in Executive Order
13224. It hereby acknowledges that Purchasers seek to comply with
all applicable laws concerning money laundering and related
activities. In furtherance of those efforts, it hereby represents
and warrants and covenants that: (i) none of the cash or property
that it or any of its Subsidiaries will pay or will contribute to
Purchasers has been or shall be derived from, or related to, any
activity that is deemed criminal under United States law; and (ii)
no contribution or payment by it or any of its Subsidiaries to
Purchasers, to the extent that they are within its or any such
Subsidiary’s control shall cause Purchasers to be in
violation of the United States Bank Secrecy Act, the United States
International Money Laundering Control Act of 1986 or the United
States International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001. It shall promptly notify Purchasers if any
of these representations, warranties and covenants cease to be true
and accurate regarding it or any of its Subsidiaries. It shall
provide Purchasers with any additional information regarding it and
each Subsidiary thereof that Purchasers deem necessary or
convenient to ensure compliance with all applicable laws concerning
money laundering and similar activities. It understands and agrees
that if at any time it is discovered that any of the foregoing
representations, warranties and covenants are incorrect, or if
otherwise required by applicable law or regulation related to money
laundering or similar activities, Purchasers may undertake
appropriate action to ensure compliance with applicable law and
regulation, including, but not limited to, segregation and/or
redemption of Purchasers’ investment in it. It further
understands that Purchasers may release confidential information
about it and its Subsidiaries and, if applicable, any underlying
beneficial owners, to proper authorities if Purchasers, in their
sole discretion, determine that it is in their best interests in
light of relevant rules and regulations under the laws set for in
subsection (ii) above.
4.19 Company Name; Location of Offices
. Schedule 4.19 sets forth
each Company’s name as its appears in official filings in the
state of its organization, the type of entity of each Company, the
organizational identification number issued by each Company’s
state of organization or a statement that no such number has been
issued, each Company’s state of organization, and the
location of each Company’s chief executive office, corporate
offices, warehouses, other locations of Collateral and locations
where records with respect to Collateral are kept (including in
each case the county of such locations) and, except as set forth on
Schedule 4.19 , such locations have not changed during the
preceding twelve months. As of the Closing Date, during the prior
five years, except as set forth on Schedule 4.19 , no
company has been known as or conducted business in any other name
(including trade names). Each Company has only one state of
organization.
4.20 Full Disclosure . Neither this Agreement or the Ancillary
Agreements nor the exhibits or schedules hereto or thereto nor any
other document delivered by it to Purchasers or their attorneys or
agents in connection herewith or therewith or with the transactions
contemplated hereby or thereby, contain any untrue statement of a
material fact not omit to state a material fact necessary in order
to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading.
5. Negative Covenants . So long as any Obligations are owed under the
Notes, without the prior written consent of the Administrative
Agent, neither of the Companies shall:
5.1 Incur Indebtedness . Incur any debt for borrowed money except for
indebtedness owing to Laurus Master Fund, Ltd.
(“Laurus”) and St. Cloud Capital Partners, L.P.
(“St. Cloud”) as such facilities may exist from
time to time, including any extensions or modifications
thereto;
5.2 Distributions . Make any cash payments in respect of its
capital stock whether by dividends, redemption or
otherwise;
5.3 Sell or Encumber Assets . Sell, transfer, mortgage, assign, pledge,
lease, exchange, grant a security interest in, or encumber any such
Company’s assets, except to Purchasers, Laurus,
St. Cloud or otherwise in the ordinary course of
business;
5.4 Change of Business . Engage in any business activities
substantially different than those in which such Company is
presently engaged, or cease operations, liquidate, merge, transfer,
acquire, or consolidate with any other entity or
dissolve;
5.5 Change Name or Location . Change its legal name or trade name or any
location of it chief executive offices, corporate offices,
warehouses or other locations of Collateral.
6. Conditions to Issuance and Acceptance of the
Notes .
6.1 Conditions to Companies’ Obligations to
Issue the Notes . The
obligations of the Companies hereunder are subject to the
satisfaction, on or before the Closing, unless otherwise specified,
of each of the following conditions, provided that these conditions
are for the Companies’ sole benefit and may be waived by the
Companies at any time in its sole discretion:
(a) Each Company and Purchaser shall have executed
this Agreement and all of the Ancillary Agreements as to which it
is a party.
(b) The representations and warranties of
Purchasers shall be true and correct in all material respects as of
the Closing as though made at that time (except for representations
and warranties that speak as of a specific date). Purchasers shall
have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by this
Agreement and the Ancillary Agreements to be performed, satisfied
or complied with by Purchasers at or prior to the
Closing.
(c) No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of
competent jurisdiction or any self regulatory organization having
authority over the matters contemplated hereby which restricts or
prohibits the consummation of any of the transactions contemplated
herein.
(d) All consents, approval, authorizations and
orders required to be obtained and all registrations, filings and
notices required to be made with or given to any regulatory
authority or person as provided herein shall have been
made.
(e) Purchasers shall execute such reasonable
subordination agreements with Laurus, St. Cloud and the
Goldwassers necessary to affirm that the Obligations of the Company
under the Notes are and will continue to be subordinated to
existing indebtedness owed to Laurus, St. Cloud and the
Goldwassers.
6.2 Conditions to Purchasers’ Obligation to
Accept the Notes . The
obligations of Purchasers are subject to the satisfaction, on or
before the Closing, unless otherwise specified, of each of the
following conditions, provided that these conditions are for the
sole benefit of Purchasers and may be waived by Purchasers at any
time in their sole discretion:
(a) Each Company and Purchaser shall have executed
this Agreement and all Ancillary Agreements as to which it is a
party.
(b) The representations and warranties of the
Companies shall be true and correct in all material respects as of
the Closing (except for representations and warranties that speak
as of a specific date). The Companies shall have performed,
satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement and the
Ancillary Agreements to be performed, satisfied or complied with by
the Companies at or prior to the Closing. The Purchaser may require
a certificate, executed by the Chief Executive Officer of each of
the Companies, dated as of the Closing, to the foregoing effect and
as to such other matters as may be reasonably requested by
Purchasers.
(c) No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of
competent jurisdiction or any self regulatory organization having
authority over the matters contemplated hereby which restricts or
prohibits the consummation of any of the transactions contemplated
herein.
(d) All consents, approval, authorizations and
orders required to be obtained and all registrations, filings and
notices required to be made with or given to any regulatory
authority or person as provided herein shall have been
made.
(e) The Companies and KM & Co. shall have
entered into a consulting services agreement acceptable to
Administrative Agent.
(f) Laurus shall have provided to the Company net
proceeds of at least $1,500,000 as an over-advance under its
existing credit facility, or under a new credit facility, on terms
acceptable to Purchasers.
(g) The Company shall have received net proceeds of
at least $200,000 from the sale of shares of Common
Stock.
(h) The Company shall have executed and delivered
to the Purchasers a Registration Rights Agreement substantially in
the form of Exhibit C .
7. Expenses . The Companies shall jointly and severally pay
all of Purchasers’ out-of-pocket costs and expenses,
including reasonable fees and disbursements of in-house or outside
counsel and appraisers, in connection with (i) the preparation,
execution and delivery of this Agreement and the Ancillary
Agreements; (ii) any amendments hereto or thereto or consents
proposed or executed in connection with the transactions
contemplated by this Agreement or the Ancillary Agreements; (iii)
the prosecution or defense of any action, contest, dispute, suit or
proceeding concerning any matters in nay way arising out of,
related to or connected with this Agreement or any Ancillary
Agreement; and (iv) any attempts to inspect, verify, protect,
collect, sell, liquidate or otherwise dispose of any
Collateral.
8. Event of Default . Any one or more of the following events shall
constitute an “Event of Default” by the Companies under
this Agreement:
8.1 Payment Default . If the Companies fails to pay, within three
days after the date such payment is due, any of the
Obligations;
8.2 Covenant Default .
(a) If either of the Companies fails to perform any
obligation (other than payment obligations) under this Agreement or
any of the Ancillary Agreements within thirty days after the
Companies have been given notice thereof, provided, however, that
if the default cannot by its nature be cured within such thirty
period or cannot after diligent attempts by the Companies be cured
within such thirty day period, and such default is likely to be
cured within a reasonable time, then the Companies shall have an
additional reasonable period (which shall not in any case exceed an
additional thirty days so that the total duration of the cure
period will not exceed sixty days) to attempt to cure such default,
and within such reasonable time period the failure to have cured
such default shall not be deemed an Event of Default; or
(b) If there occurs any circumstance or
circumstances that would reasonably be expected to have a Material
Adverse Effect;
(c) If any portion of either of the
Companies’ assets is attached, seized, subjected to a writ or
distress warrant, or is levied upon, or comes into the possession
of any trustee, receiver or person acting in a similar capacity and
such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within thirty days, or if
either of the Companies is enjoined, restrained, or in any way
prevented by court order from continuing to conduct all or any
material part of its business affairs, or if a judgment or other
claim becomes a lien or encumbrance upon any material portion of
either of the Companies’ assets, or if a notice of lien,
levy, or assessment is filed of record with respect to any of
either Company’s assets by the United States Government, or
any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, and the same is
not paid within thirty days after notice thereof; provided that
none of the foregoing shall constitute an Event of Default where
such action or event is stayed or an adequate bond has been posted
pending a good faith contest by the Companies;
(d) If either Company becomes Insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency
Proceeding is commenced against Borrower and is not dismissed or
stayed within thirty days;
(e) If there is any Event of Default under any
agreement with or obligation owed by either Company to Laurus,
St. Cloud or Goldwasser; 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 or the Administrative Agent pursuant to this Agreement
or any Ancillary Agreements.
8.3 Change of Control . If there is a Change of Control to which the
Purchasers do not approve.
9. Purchasers’ Rights and Remedies
.
9.1 Rights and Remedies . Upon the occurrence of an Event of Default
and the giving of any notice required pursuant to Section 8, the
Administrative Agent may without further notice of his election and
without demand, do any one or more of the following, all of which
are authorized by the Companies:
(a) Declare all Obligations, whether evidenced by
this Agreement or any of the Ancillary Agreements, or otherwise,
immediately due and payable;
(b) Settle or adjust disputes and claims directly
with account debtors for amounts, upon terms and in whatever order
that the Administrative Agent reasonably considers
advisable;
(c) Make such payments
