may not be exercised for a specific Tranche if the Note is not outstanding on the applicable Vesting Date.

 

(b)            Closing .  The closing of the issuance of the Replacement Note (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 November 10, 2005.  At the Closing, the Company shall deliver the Replacement Note and the Warrants to Purchaser and all unpaid interest through the date of Closing, and Purchaser shall return to the Company the Restated Note and deliver the Lock-up Agreement referred to in Section 4(f) .  The date of the Closing is referred to herein as the Closing Date.  Additionally, at the Closing the Company shall pay to Purchaser a closing fee of $11,000.

 

(c)            Default Interest .  Notwithstanding anything herein to the contrary, the Company shall pay to Purchaser at the Closing interest on the principal amount at the rate of 15% per annum from the period September 15, 2005 through the Closing.

 

2.              PURCHASER’S REPRESENTATIONS AND WARRANTIES.

 

Purchaser understands, agrees with, and represents and warrants to the Company with respect to the purchase hereunder, that:

 

(a)            Investment Purposes; Compliance With Securities Act .  Purchaser is acquiring the Warrants for Purchaser’s own account, for investment only and not with a view towards, or in connection with, the public sale or distribution thereof, except pursuant to sales registered under or exempt from the Securities Act of 1933, as amended (the “Securities Act”).

 

(b)            Accredited Purchaser Status .  Purchaser is an “accredited Purchaser” as that term is defined in Rule 501(a) of Regulation D.  Purchaser is a sophisticated purchaser and has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of an investment made pursuant to this Agreement. 

 

(c)            Reliance on Exemptions .  Purchaser understands the Warrants are being offered and sold to in reliance on specific exemptions from the registration requirements of the applicable United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and Purchaser’s compliance with, the representations, warranties, acknowledgments, understandings, agreements and covenants of the Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of Purchaser to acquire the Warrants.

 

(d)            Information .  Purchaser and the advisors of the Purchaser, if any, have been furnished with all material information relating to the business, finances and operations of the Company and material information relating to the offer and sale of the Warrants that have been requested by the Purchaser.  Purchaser and Purchaser’s advisors, if any, have been afforded the opportunity to ask all such questions of the Company as they have in their discretion deemed advisable.  Purchaser understands that Purchaser’s investment in the Warrants involves a high degree of risk.  Purchaser has sought such accounting, legal and tax advice as it has considered necessary to an informed investment decision with respect to the investment made pursuant to this Agreement.

 

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(e)            Transfer or Resale .  Purchaser understands that:  (i) the Warrants, the Warrant Shares and the Note Shares have not 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 Company an opinion by counsel reasonably satisfactory to the Company, in form, scope and substance reasonably satisfactory to the Company, to the effect that the Note Shares, Warrant Shares, and/or the Warrants, as the case may be, to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, and (ii) except as expressly provided herein, neither the Company nor any other person is under any obligation to register the Note Shares, the Warrant Shares and/or the Warrants under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder.

 

(f)             Legends .  The Warrants, the Note Shares and the Warrant Shares shall bear the following legend:

 

“THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR, IF APPLICABLE, STATE SECURITIES LAWS.  THIS SECURITY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENSE OF AN EFFECTIVE REGISTRATION STATEMENT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SMALL WORLD KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(g)            Authorization; Enforcement .  This Amendment 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.

 

3.              REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

 

The Company understands, agrees with, and represents and warrants to Purchaser that:

 

(a)            Organization and Qualification .  The Company and its subsidiaries are duly organized and existing in good standing under the laws of the respective jurisdictions in which they are incorporated and have the requisite corporate power to own their properties and to carry on their business as now being conducted.  Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary and where the failure so to qualify would have a Material Adverse Effect.  “Material Adverse Effect” as used herein means any material adverse effect on the operations, properties or financial condition of the Company and its subsidiaries taken as a whole. 

 

(b)            Authorization; Enforcement .  (i) The Company has the requisite corporate power and authority to enter into and perform this Amendment and the Replacement Note, and to issue

 

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the Warrants in accordance with the terms hereof, (ii) the execution, delivery and performance of this Amendment, the Replacement Note and the Warrants (the “Transaction Documents”) by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by the Company’s Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its shareholders is required, (iii) the Transaction Documents have been duly and validly authorized, executed and delivered by the Company, and (iv) the Transaction Documents constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting, generally, the enforcement of creditors’ rights and remedies or by other equitable principles of general application.

 

(c)            No Conflicts .  The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Articles of Incorporation or Bylaws of the Company or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or any of its subsidiaries or by which any property or asset of the Company or any of its subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a material adverse effect). 

 

(d)            Consents .  Except for the filing of a Form D with the United States Securities and Exchange Commission, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under the Transaction Documents.

 

(e)            SEC Reports .  The Company has filed all proxy statements, reports and other documents required to be filed by it under the Securities Exchange Act of 1934 as amended (the “Exchange Act”).  The Company has furnished Purchaser with copies of (i) its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, and its Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (collectively, the “SEC Reports”).  The SEC Reports were in substantial compliance with the requirements of its respective form and neither the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

 

(f)             Absence of Certain Changes .  Since June 30, 2005, there has been no Material Adverse Change in the business, properties, operation, financial condition, results of operations or prospects of the Company.

 

(g)            Absence of Litigation .  Except as set forth on Schedule 3(g), there is no action, suit, proceeding, inquiry or investigation before or by any court, public board or body pending

 

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or, to the knowledge of the Company, threatened against or affecting the Company, wherein an unfavorable decision, ruling or finding would have a Material Adverse Effect or which would adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein.

 

(h)            Title to Assets and Liens .  Except as set forth on Schedule 3(h), the Company has good and marketable title to the Assets owned by it and the valid and enforceable right to receive and/or use each of the Assets in which the Company has any other interest, free and clear of all Liens.  As used herein (i) ”Liens” shall mean any lien, encumbrance, pledge, mortgage, security interest, lease, charge, conditional sales contract, option, restriction, reversionary interest, right of first refusal, voting trust arrangement, preemptive right, claim under bailment or storage contract, easement or any other adverse claim or right whatsoever; and (ii) ”Assets” shall mean all of the goodwill, assets, properties and rights of every nature, kind and description, whether tangible or intangible, real, personal or mixed, wherever located and whether or not carried or reflected on the books and records of the Company, which are owned by the Company or in which the Company has any interest (including the right to use).

 

(i)             Capitalization .  Attached as Schedule 3(i) is a true and correct description of the capitalization of the Company.  Additionally, the Company owns 10,000 shares of Small World Toys, Inc. representing all of the issued and outstanding capital stock of Small World Toys.

 

(j)             Minute Books .  The minute books of the Company provided to Purchaser contain a complete summary of all meetings of directors and shareholders since the time of incorporation and reflect all transactions referred to in such minutes accurately in all material respects.

 

(k)            Security Interest .  The Company hereby affirms the security interest granted to Purchaser to secure the obligations under the Restated Note and acknowledges that such security interest shall apply to the obligations of the Company under the Replacement Note.

 

4.              COVENANTS.

 

(a)            Best Efforts .  Each party shall use its best efforts timely to satisfy each of the conditions to be satisfied by it as provided in Sections 5 and 6 of this Agreement.

 

(b)            Securities Laws .  The Company agrees to timely file all reports and other documents required to be filed with the SEC, specifically, a Form D (or equivalent form required by applicable state law) with respect to the Warrants if and as required under Regulation D and applicable state securities laws and to provide a copy thereof to Purchaser promptly after such filing.

 

(c)            Expenses .  Each party shall pay such party’s expenses in connection with the transactions contemplated by the Agreement.

 

(d)            Board Seat .  During the period that the Restated Note is outstanding, Robert Lautz will be appointed to the Company’s board of directors for such period, and the Company shall provide Mr. Lautz with the same compensation made available to its other outside directors.  In addition, as long as Purchaser owns in excess of 300,000 shares (taking into account the issuance of the Note Shares and Warrant Shares) of the Company (subject to adjustment for stock splits,

 

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recapitalizations, etc.), a designee of Purchaser reasonably acceptable to the Company shall be entitled to an observer seat on the board of directors.  On or before the Closing, Mr. Lutz shall submit to the Company an undated letter of resignation in connection with his board of directors’ appointment.  Notwithstanding the foregoing, any stock options available to Mr. Lautz shall be issued to Purchaser and any fees or other compensation otherwise payable to him shall be paid to Purchaser.  Upon receipt by the Company of evidence that the stock option granted by the Company to Cary Fitchey has been terminated by Mr. Fitchey, the Company will reissue such option to Purchaser on the same terms as granted to Mr. Fitchey (4,000 shares, exercise price of $5.10 per share and ten year term from January 25, 2005), it being understood however that the right of Purchaser to exercise the Option shall terminate three months after the Company’s obligation to appoint a designee of Purchaser has expired.  The terms of the Option shall be set forth in a Stock Option Agreement consistent with the foregoing.

 

(e)            Management Fee .  The Company shall pay a Management Fee equivalent to $80,000 per year.  This fee shall be paid $20,000 upon Closing and $20,000 on each of the following dates if the Replacement Note has not been paid prior to such date:  January 1, 2006, April 1, 2006, and July 1, 2006.

 

(f)             Lock-up Agreement .  Purchaser agrees that the Note Shares and Warrant Shares shall be subject to a Lock-up Agreement to be delivered at the Closing (the “Lock-up Agreement”).

 

5.              CONDITIONS TO THE COMPANY’S OBLIGATION TO ISSUE THE REPLACEMENT NOTE.

 

The obligations of the Company hereunder are subject to the satisfaction, on or before the Closing, unless otherwise specified, of each of the following conditions, provided that these conditions are for the Company’s sole benefit and may be waived by the Company at any time in its sole discretion:

 

(a)            Each of the Company and Purchaser shall have executed the Transaction Documents as to which it is a party.

 

(b)            The representations and warranties of Purchaser shall be true and correct in all material respects as of the Closing as though made at that time (except for representations and warranties that speak as of a specific date).  Purchaser shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by Purchaser at or prior to the Closing.

 

(c)            No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated herein.

 

(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.

 

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(e)            Purchaser shall execute such documentation as may be reasonably requested by the Company to subordinate the obligations of the Company under the Replacement Note to the Senior Indebtedness of the Company (as such term is defined in the Replacement Note) from time to time outstanding.

 

6.              CONDITIONS TO PURCHASER’S OBLIGATION TO ACCEPT THE REPLACEMENT NOTE.

 

The obligations of Purchaser are subject to the satisfaction, on or before the Closing, unless otherwise specified, of each of the following conditions, provided that these conditions are for the sole benefit of Purchaser and may be waived by Purchaser at any time in its sole discretion:

 

(a)            The Company shall have executed the Transaction Documents.

 

(b)            The representations and warranties of the Company shall be true and correct in all material respects as of the Closing (except for representations and warranties that speak as of a specific date).  The Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing.  The Purchaser may require a certificate, executed by the Chief Executive Officer of the Company, dated as of the Closing, to the foregoing effect and as to such other matters as may be reasonably requested by Purchaser.

 

(c)            No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction or any self regulatory organization having authority over the matters contemplated hereby which restricts or prohibits the consummation of any of the transactions contemplated herein.

 

(d)            All consents, approval, authorizations and orders required to be obtained and all registrations, filings and notices required to be made with or given to any regulatory authority or person as provided herein shall have been made.

 

7.              PIGGYBACK REGISTRATION.

 

Subject only to any required approval of Gamma Opportunity Capital Partners LP and Bushido Capital Master Fund as to a registration statement filed by the Company covering the resale of securities issued to such investors (which approval the Company shall use best efforts to obtain), if at any time, the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans (the “Registration Statement”), then the Company shall send to Purchaser written notice of such determination and if, within fifteen days after receipt of such notice, Purchaser shall so request in writing, the Company shall include in such registration statement all or any part of the Note Shares and the

 

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Warrant Shares (the “Covered Shares”) Purchaser requests to be registered subject to customary underwriter cutbacks.  If Purchaser requests that the Covered Shares are to be included in the Registration Statement and such Shares are not so included, then the Company shall be obligated to file a registration statement covering the resale of the Covered Shares and such other shares of Common Stock issuable upon exercise of Purchaser’s Warrants or owned by Purchaser (collectively, “Registrable Securities”) as Purchaser designates within ninety days of written notice by Purchaser.  The Company shall use its best efforts to have such registration statement declared effective as soon as practicable.

 

8.              RELEASES; COVENANT NOT TO SUE .

 

8.1            Release of All Parties .  With the exception of the obligations, representations and warranties that are expressly set forth in this Amendment and the Replacement Note, each party to this agreement (the “ Releasing Party ”), on behalf of itself and on behalf of its successors and assigns, hereby generally and unconditionally releases and forever discharges, from and after the Closing, each other party to this agreement (a “ Released Party ”) and the Released Party’s directors, officers, shareholders, employees, successors and assigns from any and all claims, demands, rights, causes of action, suits, liabilities, obligations, damages, losses, expenses (including, without limitation, attorneys’ fees except as otherwise expressly set forth in this Agreement), penalties and costs of any kind and character whatsoever, whether legal, contractual, statutory, administrative or equitable in nature or otherwise, whether known or unknown, suspected or unsuspected, direct or indirect, absolute, fixed or contingent, that Releasing Party may now or at any subsequent time have or hold against Released Party or the other released persons described in this sentence and that relate to, or otherwise arise out of any action or inaction by Releasing Party, Released Party or any other person during any period prior to the date of this Agreement.  The claims, demands, rights, causes of action, suits, liabilities, obligations, damages, losses, expenses, penalties and costs that have been released and discharged by the Releasing Parties pursuant to this Agreement collectively are referred to as the “ Released Claims .”  Notwithstanding the foregoing, Released Parties shall not include Cary Fitchey.

 

8.2            Unknown Claims and Risks Released .  With respect to the Released Claims, the Releasing Parties hereby knowingly, voluntarily and expressly waive and relinquish, from and after the Closing, any and all rights and benefits that they may have under Section 1542 of the California Civil Code, or under any similar provision of law of any state or territory of the United States or any other jurisdiction and under any similar or analogous principle of common law.  The Releasing Parties understand that Section 1542 of the California Civil Code provides as follows:

 

“ A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release which, if known by him, must have materially affected his settlement with the debtor. ”

 

The Releasing Parties agree and acknowledge that they are familiar with Section 1542 of the California Civil Code.  They further agree and acknowledge that their respective waivers of all rights or any similar benefits under Section 1542 and under any similar statutes of

 

8

 

any other jurisdiction are essential terms of this Agreement without which the consideration given pursuant to this Agreement would not have been given by the Releasing Parties.

 

8.3            Unknown Claims . 

 

8.3.1         The Releasing Parties acknowledge that there is a risk that, after the execution of this Agreement, or after the Closing, they may discover or incur claims that were unknown or unanticipated at the time of this Agreement, including, without limitation, unknown or unanticipated claims that arise from, are based upon or are related to any facts underlying the Released Claims, which had they been known or more fully understood may have affected the Releasing Parties’ decisions to execute the Agreement as it currently is written.  The Releasing Parties knowingly and expressly assume the risk of these unknown and unanticipated claims and agree that this Agreement and the general releases set forth within it apply to all such unknown, unanticipated or potential claims.

 

8.3.2         It is the intention of the Releasing Parties, by entering into this Agreement, to settle and release fully, finally and forever from and after the Closing all Released Claims.  In furtherance of the Releasing Parties’ intention, the releases given within this Agreement shall be and remain in effect from and after the Closing as full and complete releases and discharges of the Released Claims notwithstanding the discovery by either the Releasing Parties of the existence of any additional or different claims or the facts relative to any such claims.

 

8.4            Covenant Not to Sue .  From and after the Closing, each of the Releasing Parties agrees to forever refrain from commencing, instituting or prosecuting any lawsuit, action or other proceeding, in law, equity or otherwise, against the Released Parties (or against any of the other persons who have been released by the Releasing Parties in this Section 8), in any way arising out of or relating to the Released Claims.

 

8.5            Injunctive Relief .  The Releasing Parties acknowledge and agree that monetary damages alone may be inadequate to compensate any released person for injury caused or threatened by a breach of Section 8.4 and that preliminary and permanent injunctive relief restraining and prohibiting the prosecution of any action or proceeding brought or instituted in violation of Section 8.4 may be a necessary and appropriate remedy in the event of such a breach.  Nothing contained in this Section 8.5, however, shall be interpreted or construed to prohibit or in any way to limit the right of a non-breaching party (or any other released person) to obtain, in addition to injunctive relief, an award of monetary damages against a party breaching this Agreement.

 

9.              GOVERNING LAW; MISCELLANEOUS.

 

(a)            Governing Law and Venue .  This Agreement shall be governed by and interpreted in accordance with the laws of the State of California without regard to the principles of conflict of laws.  In the event of any litigation regarding the interpretation or application of this Agreement, the parties irrevocably consent to jurisdiction in any of the state or federal courts located in the City of Los Angeles, State of California and waive their rights to object to venue in any such court, regardless of the convenience or inconvenience thereof to any party.  Service of

 

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process in any civil action relating to or arising out of this Agreement (including also all Exhibits or Schedules hereto) or the transaction(s) contemplated herein may be accomplished in any manner provided by law.  The parties hereto agree that a final, non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner.

 

(b)            Counterparts .  This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and signature pages from such counterparts have been delivered.

 

(c)            Headings; Gender, Etc .  The headings of this Agreement are for convenience of reference and shall not form a part of, or affect the interpretation of this Agreement.  As used herein, the masculine shall refer to the feminine and neuter, the feminine to the masculine and neuter, and the neuter to the masculine and feminine, as the context may require.  As used herein, unless the context clearly requires otherwise, the words “herein,” “hereunder” and “hereby,” shall refer to this entire Agreement and not only to the Section or paragraph in which such word appears.  If any date specified herein falls upon a Saturday, Sunday or public or legal holidays, the date shall be construed to mean the next business day following such Saturday, Sunday or public or legal holiday.  For purposes of this Agreement, a “business day” is any day other than a Saturday, Sunday or public or legal holiday.

 

(d)            Severability .  If any provision of this Amendment shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

 

(e)            Entire Agreement; Amendments .  This Amendment and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters.  No provision of this Amendment may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement.  Notwithstanding any herein to the contrary, (a) the covenants of the Company in the Note Purchase Agreement to the extent not inconsistent with the provisions of this Amendment, and (b) the Lock-up Agreement shall remain in force and effect.

 

(f)             Notices .  Any notices required or permitted to be given under the terms of this Amendment shall be sent by U.S. Mail or delivered personally or by courier or via facsimile (if via facsimile, to be followed within three (3) business days by an original of the notice document via U.S. Mail or courier) and shall be effective five (5) days after being placed in the mail, if mailed, certified or registered, return receipt requested, or upon receipt, if delivered personally or by courier or by facsimile, in each case properly addressed to the party to receive the same.  The addresses for such communications shall be:

 

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If to the Company:	Small World Kids, Inc.
	5711 Buckingham Parkway
	Culver City, California 90230
	Attention:     Debra Fine
	Fax Number: 310-258-1194
With a copy to:	Troy & Gould
	1801 Century Park East, 16 th Floor
	Los Angeles, California 90067
	Attention:    David L. Ficksman
	Fax Number: 310-789-1490
If to Purchaser:	St. Cloud Capital Partners L.P.
	10866 Wilshire Boulevard, Suite 1450
	Los Angeles, California 90024
	Attention:    Robert Lautz
	Fax Number: 310-553-0257
With a copy to:	Latham and Watkins, LLP
	633 West Fifth Street, Suite 4000
	Los Angeles, California 90071
	Attention:     Alex Voxman
	Fax Number: 213-891-8763

 

If to the Purchaser, at the address on the signature of this Agreement.  Each party shall provide written notice to the other party of any change in address.

 

(g)            Successors and Assigns .  This Amendment shall be binding upon and inure to the benefit of the parties and their respective successors and assigns.  Neither the Company nor Purchaser shall assign this Amendment or any rights or obligations hereunder without the prior written consent of the other (which consent shall not be unreasonably withheld), and in any event any assignee of Purchaser shall be an accredited investor (as defined in Regulation D), in the written opinion of counsel who is reasonably satisfactory to Company, and such assignment shall be in form, substance and scope reasonably satisfactory to the Company. Notwithstanding anything herein to the contrary, Purchaser may pledge the Note as collateral for a bona fide loan with a third party lender, and such pledge shall not be considered an assignment in violation of this Agreement so long as it is made in compliance with all applicable law.

 

(h)            No Third Party Beneficiaries .  This Amendment is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

 

(i)             Survival .  The representations and warranties of the Company and Purchaser contained in Sections 2 and 3 and the agreements and covenants set forth in Section 4 shall survive the final Closing of the purchase and sale of the Restated Note purchased and sold hereby.

 

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(j)             Further Assurance .  Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

 

(k)            Remedies .  No provision of this Amendment providing for any specific remedy to a party shall be construed to limit such party to the specific remedy described, and any other remedy that would otherwise be available to such party at law or in equity shall be so available.  Nothing in this Agreement shall limit any rights a party may have with any applicable federal or state securities laws with respect to the transactions contemplated hereby.

 

IN WITNESS WHEREOF, Purchaser and the Company have caused this Second Amendment to Note Purchase Agreement to be duly executed as of the date first written above.

 

	THE COMPANY:
	SMALL WORLD KIDS, INC.
	By:
				Name:		Debra Fine
				Title:		Chief Executive Officer
	PURCHASER:
	ST. CLOUD CAPITAL PARTNERS L.P.
	By:		SCGP, LLC.
	Its:		General Partner
			By:
					Name:		Robert Lautz
					Title:		Senior Managing Member

 

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Schedule 3(g)

 

Litigation

 

•               The Company has received a letter from an attorney claiming that Small World Kids owes $180,000 as a finder’s fee in connection with the acquisition of Small World Toys which claim is subject to indemnification by Eddy Goldwasser.

 

•               The Company has been sued by Small Play Inc. in United States District Court for the Southern District of New Jersey that Small World Kids owes $1,000,000 in damages from not executing a licensing agreement.  The license only contemplated a $12,000 guaranteed royalty payment so $1,000,000 in alleged damages is believed excessive.

 

•               The Company has been sued by Gemini Partners claiming a finder’s fee in connection with the reverse merger and the financing with St. Cloud.

 

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Schedule 3(h)

 

Pledged Assets

 

•               Credit Facility by and between Small World Toys, as Borrower and PNC Bank as Lender is secured by all of the assets of Small World Toys.

 

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

 

•               Promissory Notes dated July 20, 2005 issued to various holders in the aggregate principal amount of $500,000.

 

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Schedule 3(i)

 

Capitalization Table

Beneficial Ownership

 

		Shares				Fully Diluted
		Outstanding		%		Shares		%
Russell and Debra Fine, as trustees of FFT		1,721,543		31.8	%	2,151,825		24.8	%
SWT Investments, LLC / Shelly Singal		1,297,673		24.0	%	2,056,010		23.7	%
Phoenix Capital Opportunity, LLC		754,521		13.9	%	1,045,338		12.1	%
David Marshall, Inc.		1,078,599		19.9	%	1,085,870		12.5	%
Sid Marshall Enterprises		206,500		3.8	%	210,000		2.4	%
Sid Marshall as trustee of Memorial Gift Trust						247,194		2.9	%
David L. Ficksman and Maxine B. Ficksman, as trustees of the Ficksman Family Trust		37,726		0.7	%	37,726		0.4	%
Michael Rubin		65,000		1.2	%	65,000		0.7	%
Other Holders		97,700		1.8	%	97,700		1.1	%
St. Cloud		81,250		1.5	%	125,000		1.4	%
Strome						134,400		1.5	%
John Nelson						70,000		0.8	%
Bob Rankin						52,000		0.6	%
Alex Gerstenzang						4,000		0.0	%
David Swartz						4,000		0.0	%
Carey Fitchey						4,000		0.0	%
Gary Adelson						4,000		0.0	%
Lane Nemeth						4,000		0.0	%
John Matise						4,000		0.0	%
All other employees						225,000		2.6	%
Consultants		16,000		0.3	%	208,000		2.4	%
Conversion of $5M Note to Convertible Preferred - Other						87,245		1.0	%
$.5 Bridge Note		4,063		0.1	%	6,250		0.1	%
Imagiix Purchase		50,000		0.9	%	50,000		0.6	%
Bushido Capital Partners LTD						328,125		3.8	%
Gamma Opportunity Partners LP						328,125		3.8	%
Cambria Funds - warrants						37,500		0.4	%
Total Shares		5,410,575		100.0	%	8,672,307		100.0	%
Officers & Directors		3,100,466		57.3	%	4,478,835		51.6	%
Employees		0		0.0	%	225,000		2.6	%
Consultants		16,000		0.3	%	208,000		2.4	%
Existing Investors		2,077,347		38.4	%	2,760,527		31.8	%
Public Share Investors		162,700		3.0	%	162,700		1.9	%
New		54,063		1.0	%	837,245		9.7	%
Total		5,410,575		100.0	%	8,672,307		100.0	%

 

15

 

EXHIBIT A

 

PROMISSORY NOTE

 

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR, IF APPLICABLE, STATE SECURITIES LAWS.  THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO SMALL WORLD KIDS, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

 

NOTE

 

FOR VALUE RECEIVED, Small World Kids, Inc. a Nevada corporation (the “Borrower”) with principal offices located at 5711 Buckingham Parkway, Culver City, California 90230, hereby promises to pay to St. Cloud Capital Partners L.P. (the “Holder”) or order, without demand, the sum of Two Million Five Hundred Thousand Dollars ($2,500,000) with interest at the rate of 10% per annum.  The principal amount of the Note shall be due and payable on the Maturity Date (as hereinafter defined).  Capitalized term used herein but not otherwise defined shall have the meaning assigned to those terms in that certain Second Amendment to Note Purchase Agreement dated as of November 9, 2005, between the Borrower and the Holder (the “Amendment”).

 

The following terms shall apply to this Note:

 

ARTICLE I

PAYMENT

 

1.1            Payment of Interest .  Interest shall be due and payable in full on the Maturity Date.  On the last day of each quarter commencing the quarter beginning on October 1, 2005, until the Note is paid in full, Borrower shall make interest payments on the unpaid principal amount.  During the occurrence and continuation of an Event of Default the interest rate shall be increased by five (5%) pe