-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QdwQas9m+XZNOf56StZMJ7EbAJzKBJdiq7Q26RtNLvWePo7eomI4E8gRWumsYpNw keeZj/7d30YPT0FUaWpcHw== 0001005477-99-002646.txt : 19990624 0001005477-99-002646.hdr.sgml : 19990624 ACCESSION NUMBER: 0001005477-99-002646 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990511 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990525 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KIDEO PRODUCTIONS INC CENTRAL INDEX KEY: 0000946073 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MOTION PICTURE & VIDEO TAPE PRODUCTION [7812] IRS NUMBER: 133729350 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-28158 FILM NUMBER: 99633831 BUSINESS ADDRESS: STREET 1: 611 BROADWAY STE 523 CITY: NEW YORK STATE: NY ZIP: 10022 MAIL ADDRESS: STREET 1: 611 BROADWAY STREET 2: STE 523 CITY: NEW YORK STATE: NY ZIP: 10012 8-K 1 FORM 8-K ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------------- FORM 8-K CURRENT REPORT ----------------------------------- Filed pursuant to Section 13 of the Securities Exchange Act of 1934 ----------------------------------- KIDEO PRODUCTIONS, INC. (Exact Name of Registrant as Specified in Charter) Delaware 0-28158 13-3729350 (State or other (Commission File (IRS Employer jurisdiction Number) Identification No.) of incorporation) 611 Broadway, Suite 523, New York, NY 10012 (Address of Principal Executive Offices) (Zip Code) 212-505-6605 fax 212-505-2142 (Registrant's Telephone Number) May 11, 1999 (Date of Report -- Date of Earliest Event Reported) ================================================================================ Item 5. Other Events On May 11, 1999, the Company entered into a Note and Warrant Purchase Agreement (the "Purchase Agreement") with Felton Investments Ltd., Greatview Investments Ltd. and Mermaid Investments Ltd. (collectively, the "Purchasers"). Pursuant to the Purchase Agreement, the Company agreed to sell, and the Purchasers agreed to buy, in two separate transactions, (1) convertible notes having an aggregate principal amount of $1,400,001 due May 15, 2000 and (2) warrants to purchase an aggregate of 1,400,001 shares of common stock of the Company, par value $.0001 per share (the "Common Stock"), exercisable after August 31, 1999 through August 31, 2004 at an exercise price of $0.80 per share. The notes bear interest at the rate of 10% per annum and are convertible into shares of common stock of the Company at $.80 per share (a total of 1,750,001 shares of the Common Stock). Payment under the notes is secured by all of the assets of the Company. The first closing under the Purchase Agreement occurred on May 12, 1999. At such closing the Company received $1,000,002 and delivered to the Purchasers (1) notes in such amount and (2) warrants to purchase an aggregate of 1,000,002 shares of the Common Stock. The Purchasers are obligated to consummate the second closing on or before May 25, 1999. The Company will file a registration statement with respect to the shares of common stock underlying (1) the notes and warrants sold pursuant to the Purchase Agreement, (2) warrants issued as a fee in connection with the Purchase Agreement and (3) other warrants issued as a result of adjustments to previously outstanding warrants. Gerard, Klauer, Mattison & Co. acted as placement agent for the Company in connection with the transactions described above and received a fee of $70,000 and warrants to purchase 70,000 shares of the Common Stock at an exercise price of $.80 per share. Item 7. Financial Statements and Exhibits Item 7(c) Exhibits. Exh. No. Description 10.1 Form of Note and Warrant Purchase Agreement, dated as of May 11, 1999, between the Company and Felton Investments Ltd., Greatview Investments Ltd. and Mermaid Investments Ltd. (collectively, the 2 Purchasers"). 10.2 Form of Security Agreement, dated as of May 12, 1999, between the Company and the Purchasers. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. KIDEO PRODUCTIONS, INC. By /s/ Richard L. Bulman --------------------------- Richard L. Bulman Chief Executive Officer Date: May 24, 1999 3 EX-10.1 2 NOTE AND WARRANT PURCHASE AGREEMENT ==================================================== NOTE AND WARRANT PURCHASE AGREEMENT AMONG KIDEO PRODUCTIONS, INC. AND FELTON INVESTMENTS LTD. GREATVIEW INVESTMENTS LTD. AND MERMAID INVESTMENTS LTD. Dated as of May 11, 1999 ==================================================== 4 NOTE AND WARRANT PURCHASE AGREEMENT NOTE AND WARRANT PURCHASE AGREEMENT, dated as of May 11, 1999 (the "Agreement"), among Kideo Productions, Inc., a Delaware corporation (the "Company"), and Felton Investments Ltd., Greatview Investments Ltd. and Mermaid Investments Ltd., each a corporation organized under the laws of the Turk & Caicos Islands (each a "Buyer" and collectively the "Buyers"). WHEREAS, the Buyers wish to acquire from the Company (a) separate convertible notes in the aggregate principal amount of $1,400,001 bearing interest at the rate of 10% per annum, due May 15, 2000, in the form attached hereto as Exhibit A (each a "Note" and collectively the "Notes") and (b) warrants to purchase 1,400,001 shares of its common stock, par value $.0001 per share (the "Common Stock"), in the form attached hereto as Exhibit B (each a "Warrant" and collectively the "Warrants"); and WHEREAS, the Company is willing to sell to the Buyers the Notes and the Warrants in consideration of the aggregate payment to the Company by the Buyers of $1,400,001. NOW, THEREFORE, in consideration of the foregoing premises and the respective representations warranties, covenants, agreements and conditions hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows: 1 THE CLOSING. 1.1 Time and Place of Closing. Subject to the terms and conditions hereof, the consummation of the transactions contemplated by this Agreement (the "Closing") will take place by exchange of all documents and instruments required hereby at the offices of Solovay Edlin & Eiseman, P.C., 845 Third Avenue, New York, New York, at 9:30 A.M. (local time) on the May 11, 1999 or at such other place or time or both as the parties may agree 1.2 Purchase and Sale of the Notes and the Warrants. At the Closing, the Company will issue and sell to the Buyers the Notes and the Warrants and the Buyers will acquire, accept and pay for, as hereinafter provided, the Notes and the Warrants. 1.3 Consideration for the Notes and the Warrants. Except as provided in the Notes, the aggregate consideration for the Notes and the Warrants shall consist of immediately available funds in the aggregate amount of $1,400,001 (the "Consideration"). 1.4 Deliveries by the Company. At the Closing, the Company shall deliver the following to each Buyer: 1 1.4.1 A duly executed copy of this Agreement. 1.4.2 A duly executed Note. 1.4.3 A duly executed certificate representing the Warrant in the name of such Buyer. 1.4.4 A duly executed security agreement in the form attached hereto as Exhibit C (the "Security Agreement"). 1.4.5 Any other documents and instruments incident to the transactions contemplated hereby as the Buyers may reasonably request. 1.5 Deliveries by the Buyers. At the Closing, the Buyers shall deliver the following to the Company: 1.5.1 A duly executed copy of this Agreement. 1.5.2 Except as provided in the Notes, cash in immediately available funds in the aggregate amount of $1,400,001 by wire transfer to the account listed on Schedule 1 hereto. 1.5.3 Any other documents and instruments incident to the transactions contemplated hereby as the Company may reasonably request. 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Buyers as follows: 2.1 Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into this Agreement, to issue and sell the Notes and the Warrants and to carry out the terms of this Agreement, the Notes, the Warrants and the Security Agreement (collectively, the "Operative Agreements"). 2.2 Authority Relative to this Agreement. The Company has full corporate power and authority to execute and deliver the Operative Agreements and to consummate the transactions contemplated thereby. The execution and delivery of the Operative Agreements and the consummation of the transactions contemplated thereby have been duly and validly authorized by the Board of Directors of the Company and no other corporate proceedings on the 2 part of the Company are necessary to authorize the Operative Agreements or to consummate the transactions contemplated thereby. The Operative Agreements have been duly and validly executed and delivered by the Company and constitute valid and binding agreements or obligations of the Company, enforceable against the Company in accordance with their respective terms. 2.3 Reports. The Company has filed all forms, reports, statements and other documents required to be filed with (i) the Securities and Exchange Commission (the "SEC") including, without limitation, (A) all Annual Reports on Form 10-KSB, (B) all Quarterly Reports on Form 10-QSB, (C) all Reports on Form 8-K, (D) all other reports or registration statements and (E) all amendments and supplements to all such reports and registration statements (collectively referred to as the "SEC Reports") and (ii) any other applicable state securities authorities (all such forms, reports, statements and other documents in (i) and (ii) of this Section 2.3 being referred to herein, collectively, as the "Reports"). The Reports (i) were prepared in all material respects in accordance with the requirements of applicable law (including, with respect to the SEC Reports, the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"), as the case may be, and the rules and regulations of the SEC thereunder applicable to such SEC Reports) and (ii) did not at the time they were filed contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. 2.4 Concerning the Shares. The authorized capital stock of the Company consists of (a) 15,000,000 shares of Common Stock, $.0001 par value per share, of which 3,775,886 shares are issued and outstanding on the date hereof, and (b) 5,000,000 shares of preferred stock, par value $.01 per share, none of which are outstanding on the date hereof. All of the outstanding shares of Common Stock of the Company have been duly and validly authorized and issued and are fully paid and nonassessable. No shares of Common Stock are subject to preemptive or similar rights. Except as specifically disclosed on Schedule 2.4 hereto, there are no outstanding options, warrants, rights to subscribe to, calls or commitments of any character whatsoever relating to, or, except as a result of the purchase and sale of the Notes and the Warrants, securities, rights or obligations convertible into or exchangeable for, or giving any person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company or any subsidiary is or may become bound to issue additional shares of Common Stock or securities or rights convertible or exchangeable into shares of Common Stock. 3 2.5 Reporting Company Status. The Company has registered its Common Stock pursuant to Section 12 of the Exchange Act and the Common Stock is traded on the bulletin board. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12(g) or 15(d) of the Exchange Act. The Company has complied in all material respects and to the extent applicable with all reporting obligations, under either Section 13(a) or 15(d) of the Exchange Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Securities. 2.6 Authorized Shares. The Company has sufficient authorized and unissued Shares as may be reasonably necessary to effect the conversion of the Notes and the exercise of the Warrants. The Shares have been duly authorized and, when issued upon conversion of the Notes and upon exercise of the Warrants, will be duly and validly issued, fully paid and non-assessable and will not subject the holder thereof to personal liability by reason of being such holder. 2.7 Non-contravention. The execution and delivery of this Agreement, the Security Agreement and the Notes by the Company, the issuance of the Notes and the Warrants, and the consummation by the Company of the other transactions contemplated by this Agreement, the Security Agreement, the Notes, and the Warrants do not and will not conflict with or result in a breach by the Company of any of the terms or provisions of, or constitute a default under (i) the articles of incorporation or by-laws of the Company, each as currently in effect, (ii) any indenture, mortgage, deed of trust, or other material agreement or instrument to which the Company is a party or by which it or any of its properties or assets are bound, including any "lock-up" or similar provision of any underwriting or similar agreements except as herein set forth, (iii) to its knowledge, any existing applicable law, rule, or regulation or any applicable decree, judgment, or (iv) to its knowledge, order of any court, United States federal or state regulatory body, administrative agency, or other governmental body having jurisdiction over the Company or any of its properties or assets, except such conflict, breach or default which would not have a material adverse effect on the transactions contemplated herein. 2.8 Compliance with Law. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for possible violations that either singly or in the aggregate would not be expected to have a material adverse effect on the business or financial condition of the Company, or materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement. The Company is not required under federal, state or 4 local law, rule or regulation 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 this Agreement or issue and sell the Common Stock, Notes, or the Warrants, in accordance with the terms hereof 2.9 Approvals. No authorization, approval or consent of any court, governmental body, regulatory agency, self-regulatory organization, or market or the stockholders of the Company is required to be obtained by the Company for the issuance and sale of the Notes and the Warrants to the Buyers as contemplated by this Agreement, except such authorizations, approvals and consents that have been obtained. 2.10 Use of Proceeds and Modification of Prior Agreement. The proceeds of from the sale of the Notes and the Warrants shall be used by the Company to, among other things, retire all outstanding indebtedness owed to the purchasers (the "1998 Buyers") of certain notes and warrants of the Company under an agreement, dated as of January 30, 1998, between the Company and the 1998 Buyers. In addition, the 1998 Buyers have agreed that the exercise price of all warrants to be issued to the 1998 Buyers in accordance with a certain letter agreement, dated May 3, 1999, between the Company and the 1998 Buyers shall be increased to eighty cents ($.80) per share of Common Stock. 2.11 Full Disclosure. There is no fact known to the Company (other than general economic conditions known to the public generally) or as disclosed to the Buyers in writing that (i) would reasonably be expected to have a material adverse effect on the business or financial condition of the Company or (ii) would reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement. 2.12 Security Interest. The Security Agreement creates and grants to the Buyers a legal and valid security interest in the Collateral identified therein. Such Collateral is not subject to any liens whatsoever, except for the Prior Interest (as defined in the Security Agreement). 3 REPRESENTATIONS AND WARRANTIES OF THE BUYERS. The Buyers severally and not jointly represent and warrant to the Company as follows: 3.1 Each Buyer is sufficiently experienced in financial and business matters to be capable of evaluating the merits and risks of this investment and to make an informed decision relating 5 thereto. Each Buyer has the financial capability for making the investment, can afford a complete loss of the investment, and the investment is a suitable one for such Buyer. 3.2 Prior to the execution of this Agreement, each Buyer has had the opportunity to ask questions of and receive answers from representatives of the Company concerning the finances, operations, business and prospects of the Company. 3.3 Each Buyer understands that the Company shall not be deemed to have made to such Buyer any representation or warranty other than as expressly made in this Agreement. 3.4 Each Buyer understands that the Note and Warrant (and the Common Stock into for which the Warrant may be exercised and into which the Note may be converted) purchased by such Buyer are not registered under the Securities Act, and are not registered under any state "blue sky" laws, and the Note and Warrant (and such Common Stock) may not be transferred except in compliance with such laws. 3.5 Each Buyer understands that the Note and Warrant (and such Common Stock) purchased by such Buyer are "restricted securities" as that term is defined in Rule 144 under the Securities Act and that the Note and Warrant (and such Common Stock) purchased by such Buyer must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. The Buyers understands that in the case of sales in which Rule 144 is not available, compliance with Regulation A under the Securities Act or some other exemption under the Securities Act will be required. 3.6 Each Buyer represents that such Buyer is purchasing the Note and Warrant for such Buyer's own account for investment and not with a view to the distribution thereof or with any present intention of distributing or selling any of the Note and Warrant. Each Buyer further represents that such Buyer is an "accredited investor" within the meaning of Rule 501 under the Securities Act. 4 CERTAIN AGREEMENTS. 4.1 Registration and Limitations on Sale. 4.1.1 The Company agrees to include the 2.7 million (as appropriately adjusted for any stock splits, stock dividends or similar events) shares of Common Stock for which the Warrant may be exercised and into which the Note may be converted (the "Registrable Securities") in a registration statement (the "Registration Statement") which shall be filed as promptly as practicable following the Closing but in no event later than thirty (30) days after the receipt of the entire amount of the 6 Consideration (such date in referred to as the "Start Date"). The Company will use its reasonable best efforts to have the Registration Statement declared effective as promptly as practicable thereafter but in no event later than ninety (90) days after the Start Date and shall keep the Registration Statement effective in order to permit a public offering and sale of the Registrable Securities thereunder. If the Registration Statement covering the Registrable Securities required to be filed by the Company pursuant to this Section 4. 1.1 hereof has not been filed within thirty (30) days from the Start Date and/or has not been declared effective by the earlier of (i) five (5) business days after the Company receives a notice from the SEC that the Registration Statement may be declared effective and (ii) ninety (90) days following the Start Date, then the Company will make payments to each Buyer as liquidated damages for such failure and not as a penalty, which payment shall be equal to one percent (1%) of such Buyer's pro rata share of the Consideration paid by all Buyers for the Notes purchased hereunder for the initial thirty (30) day period until the Registration Statement has been filed and/or declared effective, which shall be pro rated for such periods less than thirty (30) days and two percent (2%) of such Buyer's pro rata share for each thirty (30) day period thereafter until the Registration Statement has been filed and/or declared effective (which shall be also pro rated, as aforesaid). The liquidated damages shall be paid by the Company in cash upon demand. The Company shall also use its best efforts to register or qualify all of the Registrable Securities under such other securities or blue sky laws of such States of the United States of America where an exemption is not available and as the Buyers shall reasonably request. 4.1.2 The Company will pay all Registration Expenses (as defined below) in connection with the Registration Statement. "Registration Expenses" means all costs, fees and expenses incident to the Company's performance of or compliance with its obligation to register the Registrable Securities, including, without limitation, all registration, filing and NASD fees, all fees and expenses of complying with securities or blue sky laws, all printing expenses, and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, the fees and disbursements of counsel to the Buyers for the review of the Registration Statement prior to filing with the SEC, and any fees and disbursements customarily paid by issuers or sellers of securities (excluding any underwriting discounts or commissions or transfer taxes with respect to the Registrable Securities and the fees and disbursements of more than one counsel for the Buyers). 4.1.3 The Company may require, and the Buyers hereby agree, to furnish the Company such information regarding the Buyers and the distribution of the Registrable Securities as 7 the Company may from time to time reasonably request in writing. 4.1.4 The Company will use its reasonable best efforts to keep the Registration Statement effective in order to permit a public offering and sale of any Registrable Securities registered thereunder until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement, (ii) the date the Buyers may sell such securities under the provisions of Rule 144(k) and (iii) the third anniversary of the effective date of the Registration Statement. 4.1.5 If Company shall inform the Buyers in writing that in the good faith judgement of the Company's counsel, the sale or transfer of shares of Registrable Securities by the Buyers would, at such time, require the disclosure of material information that the Company has a bona fide business purpose for preserving as confidential or the Company would be required to provide information required by the SEC or the Securities Act (or the rules and regulations promulgated thereunder), such as pro forma financial information, that at such time the Company would be unable to provide, the Company may postpone or suspend effectiveness of the Registration Statement and the Buyers will not sell Registrable Securities; provided, that in no event shall the Company prohibit any sales pursuant to the foregoing for more than 20 consecutive days or more than 45 days in any 12 month period. 4.1.6 The Company shall (a) promptly notify the Buyers upon discovery that, or upon the happening of any event as a result of which, the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made, and (b) at the request of any Buyer, promptly prepare and furnish to such Buyer a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. The Buyers agree that, upon receipt of any notice from the Company of the happening of any event of the kind described in this Section 4.1.6, the Buyers will forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement until the receipt by the Buyers of the copies of the supplemented or amended prospectus and, if so directed by the Company, will promptly deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in the Buyers' possession of the prospectus relating 8 to such Registrable Securities current at the time of receipt of such notice; provided, that in no event shall the Company prohibit the Buyers' disposition of Registrable Securities for more than 20 consecutive days or more than 45 days in any 12 month period. 4.2 Expenses. Except as provided in Section 4.1.2 and except for reasonable legal fees and expenses of the Buyers not to exceed $15,000 in aggregate, which will be paid by the Company, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby will be paid by the party incurring such costs and expenses. 4.3 Best Efforts. Subject to the terms and conditions of this Agreement, each of the parties hereto will use its best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. 4.4 Restrictions on Transfer of Notes and Warrants. The Notes and the Warrants issued under this Agreement, including any Notes or Warrants issued upon the transfer of the Notes or the Warrants, shall be stamped or otherwise imprinted with a legend in substantially the following form: "This [security] has not been registered under the Securities Act of 1933, as amended, or applicable State securities laws, if any, and may not be transferred in the absence of such registration or receipt by the Company of an opinion of counsel reasonably satisfactory to the Company that the transfer may be properly made under an exemption from registration under such Act and such laws." 4.5 Information. From and after the date hereof and through May 15, 2000, the Company shall provide each Buyer with such information related to the Company as may be reasonably requested by such Buyer, subject to the Buyers' agreement, which is hereby made, to (i) maintain the confidentiality of any such information which is confidential and (ii) to refrain from trading the Common Stock while in possession of material confidential information. 4.6 Indemnification in Connection with the Registration Statement. 4.6.1 Indemnification by the Company. The Company will, and hereby does, indemnify and hold harmless, the Buyers and their directors, officers, affiliates, agents, successors and assigns from and against any losses, claims, damages or 9 liabilities to which the Buyers may become subject under the Securities Act or otherwise, including, without limitation, the fees and expenses of legal counsel, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances in which they were made not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and the Company will promptly reimburse the Buyers for any legal or any other expenses reasonably incurred by the Buyers in connection with investigating or defending any such loss, claim, liability, action or proceeding; provided, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by or on behalf of any Buyer specifically stating that it is for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Buyers and shall survive the transfer of the Registrable Securities by the Buyers. 4.6.2 Indemnification by the Buyers. The Buyers hereby agree to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 4.6.1) the Company, and each director, officer and employee of the Company, with respect to any untrue statement or alleged untrue statement of a material fact contained in or any omission or alleged omission to state therein a material fact in the Registration Statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by or on behalf of the Buyers specifically stating that it is for use in the preparation of the Registration Statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement; provided, however, that the liability of the Buyers under this Section 4.6.2 shall be limited to the amount of proceeds received by the Buyers in the offering giving rise to such liability. Such indemnity shall remain in 10 full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or employee and shall survive the transfer of such securities by such seller. 4.6.3 Notices of Claims. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in this Section 4.6, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Section 4.6, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if the indemnified party reasonably believes it is advisable for it to be represented by separate counsel because there exists a conflict of interest between its interests and those of the indemnifying party with respect to such claim, or there exist defenses available to such indemnified party which may not be available to the indemnifying party, or if the indemnifying party shall fail to assume responsibility for such defense, the indemnified party may retain counsel satisfactory to it and the indemnifying party shall pay all fees and expenses of such counsel. No indemnifying party shall be liable for any settlement of any action or proceeding effected without its written consent, which consent shall not be unreasonably withheld or delayed. No indemnifying party shall, without the consent of the indemnified party, consent to entry or any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation or which requires action other than the payment of money by the indemnifying party. Each indemnified party shall furnish such information regarding itself or the claim in question as an indemnifying party may reasonably request in writing and as shall be reasonably requested in connection with the defense of such claim and litigation resulting therefrom. 4.6.4 Contribution. If the indemnification provided for in this Section 4.6 shall for any reason be held by a 11 court of competent jurisdiction to be unavailable to an indemnified party in respect of any loss, claim, damage or liability, or any action in respect thereof, then, in lieu of the amount paid or payable under Section 4.6.1 or 4.6.2 hereof, the indemnified party and the indemnifying party shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating the same), (a) in such proportion as is appropriate to reflect the relative fault of the Company and the Buyers in connection with the statement or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable consideration (the relative fault of the Company and such prospective sellers to be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Buyers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission) or (b) if the allocation provided by clause (a) above is not permitted by applicable law, in such proportion as shall be appropriate to reflect the relative benefits received by the Company and the Buyers from the offering of the securities covered by the Registration Statement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. In addition, no person shall be obligated to contribute hereunder any amounts in payment of any settlement of any action or claim effected without such person's consent, which consent shall not be unreasonably withheld or delayed. 4.6.5 Other Indemnification. Indemnification and contribution similar to that specified in the preceding sections of this Section 4.6 (with appropriate modifications) shall be given by the Company and the Buyers with respect to any required registration or other qualification of securities under any federal or state law, rule or regulation of any governmental authority other than the Securities Act. 4.6.6 Indemnification Payments. The indemnification and contribution required by this Section 4.6 shall be made by prompt periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. 4.7 Existing and Future Warrants. The Company will not, without the prior written consent of the Buyers, reduce the exercise price of any warrants that are outstanding as of the date hereof. The Company will not, without the prior written consent of the Buyers, which consent will not be unreasonably withheld or delayed, issue additional warrants to purchase Common 12 Stock other than as set forth on Schedule 2.4 hereof. 4.8 Perfection of Security Interest. Promptly after the Closing and prior to the second funding under the Notes, the Company will file, or cause to be filed, UCC financing statements (whether Form UCC-1 naming the Buyers as the Secured Party or Form UCC-3 assigning the financing statements currently on file to the Buyers) with the Secretary of State of New York and the County Clerk of New York county. 5 MISCELLANEOUS PROVISIONS. 5.1 Survival of Representations. All representations and warranties made by either party pursuant to this Agreement shall survive the Closing. 5.2 Indemnification. In addition to the indemnification provided for in Section 4.6, each of the parties hereto (the "Indemnifying Party") shall, to the fullest extent permitted under applicable law, indemnify and hold the other (the "Indemnified Party") harmless against any losses, claims, damages, liabilities, actions, judgments, causes of action, costs or expenses including without limitation, interest, penalties and attorneys' fees and expenses (the "Liabilities") asserted against, resulting from, imposed upon or incurred or suffered by an Indemnified Party as a result of, arising out of or relating to any breach of a representation, warranty, covenant or agreement contained in the Operative Agreements. All procedural and operating terms of such indemnification shall be as set forth in Section 4.6. 5.3 Amendment and Modification. This Agreement may be amended, modified or supplemented only by written agreement of the Company and each Buyer. 5.4 Waiver of Compliance; Consents. Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party or parties entitled to the benefits thereof only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 5.3. 5.5 Investigations. The respective representations and warranties of the Company and the Buyers contained herein shall not be deemed waived or otherwise affected by any investigation made by any party hereto. 13 5.6 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered faxed to the numbers set forth below with a record of receipt, personally or mailed by registered or certified mail (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by like notice, provided that notices of a change of address shall be effective only upon receipt thereof): (a) if to the Company, to Kideo Productions, Inc. 611 Broadway Suite 523 New York, New York 10012 Attention: President Fax: 212-505-6605 with a copy to Solovay Edlin & Eiseman, P.C. 845 Third Avenue New York, New York 10022 Attention: Michael B. Solovay, Esq. Fax: 212-355-4608 14 (b) if to the Buyers, to Gretton House P.O. Box 65 Duke Street Turks & Caicos Islands With a copy to Parker Chapin Flattau & Klimpl, LLP 1211 Avenue of the Americas New York, New York 10036 Attention: Christopher S. Auguste, Esq. Fax: 212-704-6288 5.7 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties, nor is this Agreement intended to confer upon any other person except the parties hereto any rights or remedies hereunder. 5.8 Governing Law. This Agreement shall be governed by the laws of the State of Delaware (regardless of the laws that might otherwise govern under applicable Delaware principles of conflicts of law) as to all matters, including but not limited to matters of validity, construction, effect, performance and remedies. 5.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5.10 Interpretation. The article and section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement. 5.11 Entire Agreement. This Agreement, including the exhibits hereto and the documents and instruments referred to herein, embodies the entire agreement and understanding of the parties hereto in respect of the transactions contemplated by this Agreement. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such transactions. 15 5.12 Survival of Certain Agreements. All agreements contained in this Agreement which by their terms shall survive the Closing hereunder, including, without limitation, the agreements contained in Sections 4.1 through 4.6 and 5.2 hereof and this Section 5.12, shall survive the Closing for an indefinite period of time. (Signature Page Follows) 16 IN WITNESS WHEREOF, the Company and the Buyers have caused this Agreement to be signed by their respective duly authorized officers as of the date first above written. KIDEO PRODUCTIONS, INC. By: /s/ Richard Bulman ---------------------------------- Richard Bulman, President FELTON INVESTMENTS LTD. By: /s/ C.B. Williams ---------------------------------- C.B. Williams on behalf of Turks & Caicos First Secretarial Ltd secretary of Felton Investments Ltd. GREATVIEW INVESTMENTS LTD. By: /s/ B.A. Simmons ---------------------------------- B.A. Simmons on behalf of Gretton Secretarial Ltd Director of Greatview Investments Ltd. MERMAID INVESTMENTS LTD. By: /s/ B.A. Simmons ---------------------------------- B.A. Simmons on behalf of Gretton Secretarial Ltd Director of Greatview Investments Ltd. 17 EXHIBIT A FORM OF NOTE This Note has not been registered under the Securities Act of 1933, as amended, or applicable State securities laws, if any, and may not be transferred in the absence of such registration or receipt by the Company of an opinion of counsel reasonably satisfactory to the Company that the transfer may be properly made under an exemption from registration under such Act and such laws. CONVERTIBLE SECURED PROMISSORY NOTE $ May 12, 1999 For value received, the undersigned, KIDEO PRODUCTIONS, INC., a Delaware corporation ("Maker"), promises to pay to _____________________ ("Holder"), at the office of Maker at 611 Broadway, Suite 515, New York, New York 10012, or at such other place as Holder may designate, the principal sum of ______________________________________ ($_______), together with interest on the unpaid balance of this Note, beginning as of the date hereof, before or after maturity or judgment, at the rate of ten percent (10%) per annum, which rate shall be computed monthly on the basis of a Three Hundred Sixty Five (365) day year and actual days elapsed, according to the following schedule: Date Amount ---- ------ February 15, 2000 $[15%] March 15, 2000 $[15%] April 15, 2000 $[20%] May 15, 2000 $[50%] Interest on the principal amount outstanding under this Note shall be due and payable, in arrears, at the rate set forth herein, commencing on June 30, 1999 and continuing on the last day of each and every September, December and March thereafter until this Note is paid in full. If Maker shall fail to pay any amount owing to Holder under this Note when due (whether at stated due date, upon acceleration or otherwise), then to the extent permitted by law Maker will pay interest to Holder, payable on demand, on the amount in default from the date such payment became due until payment in full at the rate of 15% per annum. Transfer of Funds. Holder shall transfer to Maker an additional $133,333 on or before the tenth (10th) business day after the date hereof and receive an additional note in the form hereof. Until Maker has received such amount, the rights of conversion contained herein shall be suspended. Events of Default. The occurrence at any time of any one or more of the following events shall constitute an "Event of Default" under this Note: (a) Maker's failure to pay any interest when due under this Note which failure continues for more than three (3) days following the date such payment is due; (b) Maker's failure to pay principal or other amount (other than interest) when due under this Note; (c) failure of Maker to perform in any material respect its agreements and obligations, or a material breach of any of Maker's representations and warranties, under the Note and Warrant Purchase Agreement, dated May 11, 1999, between Maker and Holder (the "Purchase Agreement"); (d) the dissolution, liquidation or termination of legal existence of Maker; (e) the appointment of a receiver, trustee or similar judicial officer or agent to take charge of or liquidate any property of assets of Maker, or action by any court to take jurisdiction of all or substantially all of the property or assets of Maker; (f) the sale of all or substantially all of Maker's property or assets; (g) the commencement of any proceeding under any provision of the Bankruptcy Code of the United States, as now in existence or hereafter amended, or of any other proceeding under any federal or state law, now existing or hereafter in effect, relating to bankruptcy, reorganization, insolvency, liquidation or otherwise, for the relief of debtors or readjustment of indebtedness, by or against Maker. Effect of Default. Maker agrees that upon the occurrence of an Event of Default, the entire indebtedness with accrued interest thereon due under this Note shall, at the option of the Holder, be immediately due and payable without notice. Failure to exercise such option shall not constitute a waiver of the right to exercise the same in the event of any subsequent Event of Default. Prepayment. Any amount, outstanding under this Note may be prepaid, in whole or in part, by Maker at any time. Conversion. Subject to "Transfer of Funds" above, all or any part of the principal amount due and owing under this Note may be converted by Holder into shares of the common stock, par value $.0001 per share, of Maker (the "Common Stock") at any time and from time to time after the date hereof. The number of shares of the Common Stock to be received upon conversion shall be determined by dividing (i) the principal amount of the portion of this Note which is being converted, plus accrued and unpaid interest, by (ii) $.80 (the "Conversion Price"), subject to the adjustments described below under "Adjustments." To exercise the right of conversion, Holder must give written notice to Maker. Such notice shall specify the principal amount of this Note Holder desires to convert. Holder hereby agrees to take all steps reasonably requested by Maker to assist Maker in complying with any such conversion request, including, without limitation, delivering this Note to Maker so that a replacement Note reflecting a reduced principal amount may be issued to Holder following any conversion. At all times during which Holder has the right to convert this Note or any portion hereof, the Company agrees to reserve and keep available an authorized number of shares of the Common Stock sufficient to permit the conversion in full of this Note and the Company represents and warrants that all of the shares of Common Stock issued upon conversion of this Note shall be duly and validly issued, fully paid and nonassessable. 19 Adjustments. The number of shares of Common Stock into which this Note may be converted and the effective conversion price shall be adjusted for the same events and in the same manner as the number of shares of Common Stock underlying, and the exercise price of, the Warrant issued to Holder concurrently herewith. Security. This Note and the obligations of Maker under this Note are secured by all of the properties and assets of Maker as granted and set forth in the Security Agreement dated as of the date hereof. Notice. Any notice required to be given under this Note shall be given in the same manner and subject to the same terms and conditions as set forth in Section 5.6 of the Purchase Agreement. Failure by the Holder to insist upon the strict performance by Maker of any terms and provisions herein shall not be deemed to be a waiver of any terms and provisions herein, and the Holder shall retain the right thereafter to insist upon strict performance by the Maker of any and all terms and provisions of this Note or any document securing the repayment of this Note. Maker waives diligence, demand, presentment for payment, notice of nonpayment, protest and notice of protest, and notice of any renewals or extensions of this Note. This Note shall be governed by and construed in accordance with the laws of the State of New York (without regard to principles of conflicts of law provisions). Maker hereby consents to the exclusive jurisdiction of any State or Federal court located in New York County. KIDEO PRODUCTIONS, INC. By: ------------------------- RICHARD BULMAN, President 20 EXHIBIT B FORM OF WARRANT THIS WARRANT CERTIFICATE, AND THE SHARES TO BE ISSUED UPON ITS EXERCISE, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED UNLESS REGISTERED UNDER THE ACT, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. WARRANT CERTIFICATE Dated: May 12, 1999 Warrant to Purchase up to 466,667 shares of Common Stock, par value $.0001 per share, of KIDEO PRODUCTIONS, INC. VOID AFTER MIDNIGHT, NEW YORK, NEW YORK LOCAL TIME ON AUGUST 31, 2004 KIDEO PRODUCTIONS, INC., a Delaware corporation (the "Company"), hereby certifies that ___________________, its successors and assigns (the "Holder"), is entitled to purchase from the Company at any time after August 31, 1999 and before Midnight, New York, New York local time on August 31, 2004, up to 466,667 shares of common stock, par value $.0001 per share, of the Company (the "Common Stock"), at the price of $.80 per share (the "Exercise Price", subject to adjustment as provided herein). 1. Exercise of Warrants. In order to exercise the rights to purchase Common Stock evidenced by this Warrant Certificate, the Holder must, subject to Section 7 below, present and surrender this Warrant Certificate with the attached Purchase Form duly executed at the principal office of the Company. This Warrant Certificate may be exercised with respect to all of the Common Stock subject hereto or any portion thereof. 2. Exchange and Transfer. This Warrant Certificate at any time prior to the exercise hereof, upon presentation and surrender to the Company, may be exchanged, alone or with other Warrant Certificates, if any, of like tenor registered in the name of the same Holder, for another Warrant Certificate(s) of like tenor in the name of such Holder or any permissible transferee exercisable for the same aggregate number of shares of Common Stock as the Warrant Certificate(s) surrendered. 3. Rights and Obligations of the Holder of the Warrant Certificate. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or in equity; provided, however, in the event that any certificate representing shares of the Common Stock is issued to the Holder upon exercise of this Warrant Certificate, such Holder shall, for all purposes, be deemed to have become the holder of record of such Common Stock on the date on which this Warrant Certificate, together with a duly executed Purchase Form, was surrendered and payment of the Exercise Price was made, irrespective of the date of delivery of such share certificate. The rights of the Holder of this Warrant Certificate are limited to those expressed herein and the Holder, by acceptance hereof, consents to and agrees to be bound by and comply with all the provisions of this Warrant Certificate and the agreement, dated May 11, 1999, between the Holder and the Company, providing for, among other things, the issuance of this Warrant Certificate (the "Purchase Agreement"). In addition, the Holder agrees that the Company may deem and treat the person in whose name this Warrant Certificate is registered as the absolute, true and lawful owner for all purposes whatsoever, unless and until such time as the Company has received written notice to the contrary. 4. Common Stock. (a) The Company covenants and agrees that this Warrant Certificate is duly and validly authorized and issued, and free from all stamp-taxes, liens, and charges with respect to the delivery or purchase thereof. In addition, the Company agrees at all times to reserve and keep available an authorized number of shares of Common Stock sufficient to permit the exercise in full of this Warrant Certificate. (b) The Company covenants and agrees that all shares of Common Stock delivered upon exercise of this Warrant Certificate, will, upon delivery, be duly and validly authorized and issued, fully-paid and non-assessable, and free from all stamp-taxes, liens, and charges with respect to the purchase thereof. 5. Disposition of the Warrant and Common Stock. The Holder hereby agrees and represents that (a) this Warrant Certificate and the Common Stock issuable upon exercise are being acquired for the Holder's account, and not with a view to or in connection with any offering or distribution; and (b) no public distribution of this Warrant Certificate of the Common Stock will be made in violation of the provisions of the Securities Act of 1933, as amended (the "Act"), or in violation of the provisions of applicable sate laws. The Holder further agrees that if any distribution of Warrant Certificate or any of such Common Stock issued hereunder is proposed to be made, such action shall be taken only after submission to the Company of an opinion of counsel reasonably satisfactory to the Company, to the effect that the proposed distribution will not be in violation of the Act or any applicable sate law. Furthermore, it shall be a condition to the transfer of any rights set forth in this Warrant Certificate that any transferee thereof deliver to the Company 2 his or its written agreement to accept and be bound by all of the terms and conditions of this Warrant Certificate and the Purchase Agreement. The Holder is responsible for any transfer taxes due as a result of any transfer of this Warrant Certificate. 6. Registration Rights. The Holder shall have those registration rights with respect to the Common Stock issued or issuable upon exercise of this Warrant Certificate set forth in the Purchase Agreement. 7. Exercise of This Warrant Certificate. After August 31, 1999 and on or prior to Midnight, New York, New York local time, on August 31, 2004, the Holder shall have the right to acquire up to 466,667 shares of Common Stock on the following terms and conditions: (a) Exercise Price: Fractional Shares. The Exercise Price shall be a price per share of Common Stock equal to Eighty Cents ($.80), subject to adjustment as set forth below. All calculations of shares of Common Stock to be issued in connection with any exercise hereunder shall be rounded to the nearest one-hundredth of a whole share. (b) Exercise Procedure. (1) Payment for Shares. The Holder shall deliver to the Company this Warrant Certificate and a duly completed Purchase Form at the Company's principal executive office along with a certified or bank cashier's check payable to the Company in the amount of the Exercise Price then in effect times the number of shares of Common Stock being purchased. (2) Effective Date of Exercise. Each exercise will be deemed to have been effected as of the close of business on the date that the Purchase Form and full payment is received by the Company at the principal office of the Company at 611 Broadway, Suite 515, New York, New York 10012. At such time as such exercise has been effected, the person (or entity) or persons (or entities) in whose name or names any certificate(s) for shares of Common Stock are to be issued upon such exercise will be deemed to have become the holder or holders of record of the shares of Common Stock represented. (c) Delivery of Certificates. As soon as practicable after an exercise has been effected (but in any event within five (5) business days), the Company will deliver to the Holder: (1) a certificate or certificates representing the number of shares of Common Stock issuable by reason of such exercise in such name(s) and such denomination(s) as the Holder has specified; (2) a new Warrant Certificate entitling the Holder to purchase the number of shares of Common Stock as to which the original Warrant Certificate was not exercised and reflecting any changes to the Exercise Price which have theretofore been effectuated and which Warrant Certificate shall otherwise be in form and substance identical to that delivered by the 3 Holder to the Company for said exercise. (d) Closure of Issuer Books. The Company will not close its books against the transfer of Warrant Certificates or of Common Stock issued or issuable upon exercise of Warrant Certificates in any manner which interferes with the timely exercise of Warrant Certificates. (e) Payment of Taxes. The Company will pay all taxes and other governmental charges (other than taxes measured by the revenue or income of the Holder) that may be imposed in respect of the issue or delivery of shares of Common Stock upon exercise of this Warrant Certificate; provided, however, that the Holder shall pay any such tax which is due because shares of Common Stock are issued in a name other than such Holder's. (f) Notices of Record Date. In the event of (i) any taking by the Company of a record of the holders of any class or series of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution or (ii) any reclassification or recapitalization of the capital stock of the Company, any merger or consolidation of the Company, or any transfer of all or substantially all the assets of the Company to any other corporation, entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, the Company shall mail to the Holder at least twenty (20) days prior to the record date specified therein (the "Notice Period"), a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective, and (C) the time, if any is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up. During the Notice Period, the Holder shall have the exercise rights provided elsewhere in this Warrant Certificate. In addition, the Company shall mail to the Holder advance notice of any determination by the Company to register any shares of Common Stock (not including the shares of Common Stock purchasable upon the exercise of this Warrant or the other warrants, if any, issued on the date hereof) promptly upon the making of such determination by the Company. 8. Exercise Price Adjustments. The Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be subject to adjustment from time to time as set forth below; however, no adjustment in the Exercise Price need be made unless the adjustment would require an increase or decrease of at least 1% in the Exercise Price. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment. (a) Adjustment for Common Stock Splits and Combinations. If the Company shall at any time or from time to time after the date hereof effect a subdivision of the outstanding 4 Common Stock, the Exercise Price then in effect immediately before that subdivision shall be proportionately decreased; conversely, if the Company shall at any time or from time to time after the date hereof reduce the outstanding shares of Common Stock by combination or otherwise, the Exercise Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 8(a) shall become effective at the close of business on the date the subdivision or combination becomes effective. (b) Adjustment for Certain Dividends and Distributions of Common Stock. In the event the Company at any time or from time to time after the date hereof shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Exercise Price then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Exercise Price then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Exercise Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Exercise Price shall be adjusted pursuant to this Section 8(b) as of the time of actual payment of such dividends or distributions. (3) Whenever the Exercise Price payable upon exercise of this Warrant is adjusted pursuant to this paragraph 8(b), the number of shares of Common Stock purchasable upon exercise of this Warrant shall simultaneously be adjusted by multiplying the number of shares initially issuable upon the exercise of this Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. (c) Adjustment for Other Dividends and Distributions. In the event the Company at any time or from time to time after the date hereof shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company other than shares of Common Stock, then and in each such event provision shall be made so that Holder shall receive upon exercise of this Warrant Certificate in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Company that it would have received had this Warrant Certificate been exercised on the date of such event and had thereafter, during the period from the date of such event to and including the exercise date, retained such securities receivable by it as aforesaid during such 5 period giving application to all adjustments called for during such period under this Warrant Certificate with respect to the rights of the Holder. (d) Adjustment for Reclassification, Exchange or Substitution. If the Common Stock issuable upon the exercise of this Warrant Certificate shall be changed into the same or a different number of shares of any class or classes of stock, whether by reclassification, exchange, substitution or other change (other than a reorganization, merger, consolidation or sale of assets provided for in Section 8(e) below), then and in each such event, the Holder shall have the right thereafter to exercise this Warrant Certificate into the kind and amounts of shares of stock and other securities and property receivable upon such reclassification, exchange, substitution or other change, by holders of the number of shares of Common Stock into which this Warrant Certificate might have been exercised immediately prior to such reclassification, exchange, substitution, or other change, all subject to further adjustment as provided herein. (e) Reorganization, Mergers, Consolidations or Sales of Assets. If at any time or from time to time there shall be a reorganization of the Common Stock (other than a reclassification, exchange or substitution of shares provided for in Section 8(d) above) or a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all the Company's properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant Certificate, the number of shares of stock or other securities or property of the Company or of the successor corporation resulting from such reorganization, merger, consolidation or sale, to which a holder of that number of shares of Common Stock deliverable upon exercise of this Warrant Certificate would have been entitled on such reorganization, merger, consolidation or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this Warrant Certificate with respect to the rights of the Holder after the reorganization, merger, consolidation or sale to the end that the provisions of this Warrant Certificate (including adjustment of the number of shares issuable upon exercise of this Warrant Certificate) shall be applicable after that event as nearly equivalent as may be practicable; or (f) Sales of Shares Below Exercise Price. (1) Adjustment of Exercise Price. Subject to Subsection 8(f)(5) below, if at any time or from time to time after the date hereof, the Company shall issue or sell Additional Shares of Common Stock (as hereinafter defined), other than as a dividend as provided in Section 8(b) above, and other than upon a subdivision or combination of shares of Common Stock as provided in Section 8(a) above, for a consideration per share less than the Minimum Value (as hereinafter defined), then and in each case the Exercise Price shall be reduced, as of the opening of business on the date of such issuance or sale, to a price (calculated to the nearest cent) determined by multiplying such prior Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance or sale plus the number of shares of Common Stock which the aggregate consideration received by the Company for the 6 total number of Additional Shares of Common Stock so issued or sold would purchase at such prior Exercise Price, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance or sale plus the total number of Additional Shares of Common Stock so issued or sold. (2) Determination of Consideration. For the purpose of making any adjustment in the Exercise Price or number of shares of Common Stock purchasable on exercise of this Warrant certificate as provided above, the consideration received by the Company for any issue or sale of securities shall, i. to the extent it consists of cash, be computed at the gross amount of cash received by the Company in connection with such issue or sale, ii. to the extent it consists of services or property other than cash, be computed at the fair value of such services or property as determined in good faith by the Company's Board of Directors (the "Board"), and iii. if Additional Shares of Common Stock, Convertible Securities (as hereinafter defined), or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for a consideration that covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (3) Convertible Securities. For the purpose of the adjustment provided in Subsection 8(f)(1) hereof, if at any time or from time to time after the date hereof the Company shall issue any rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being hereinafter referred to as "Convertible Securities"), then, in each case, if the Effective Price (as hereinafter defined) of such rights, options or Convertible Securities shall be less than the then existing Exercise Price, the Company shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such rights or options or Convertible Securities, plus, in the case of such options or rights, the minimum amounts of consideration, if any, payable to the Company upon exercise or conversion of such options or rights. For purposes of the foregoing, "Effective Price" shall mean the quotient determined by dividing the total of all such consideration by such maximum number of Additional Shares of Common Stock. No further adjustment of the Exercise Price adjusted upon the issuance of such rights, options or Convertible Securities shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been 7 exercised, the Exercise Price adjusted upon the issuance of such rights, options or Convertible Securities shall be readjusted to the Exercise Price that would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted plus the consideration, if any, actually received by the Company on the conversion of such Convertible Securities. (4) Rights or Options for Convertible Securities. For the purpose of the adjustment provided for in Subsection 8(f)(1) hereof, if at any time or from time to time after the date hereof, the Company shall issue any rights or options for the purchase of Convertible Securities, then, in each such case, if the Effective Price thereof is less than the current Exercise Price, the Company shall be deemed to have issued at the time of the issuance of such rights or options the maximum number of Additional Shares of Common Stock issuable upon conversion of the total amount of Convertible Securities covered by such rights or options and to have received as consideration for the issuance of such Additional Shares of Common Stock an amount equal to the amount of consideration, if any, received by the Company for the issuance of such rights or options, plus the minimum amounts of consideration, if any, payable to the Company upon the conversion of such Convertible Securities. For purposes of the foregoing, "Effective Price" shall mean the quotient determined by dividing the total amount of such consideration by such maximum number of Additional Shares of Common Stock. No further adjustment of such Exercise Price adjusted upon the issuance of such rights or options shall be made as a result of the actual issuance of the Convertible Securities upon the exercise of such rights or options or upon the actual issuance of Additional Shares of Common Stock upon the conversion of such Convertible Securities. The provisions of Subsection 8(f)(3) above for the readjustment of such Exercise Price upon the expiration of rights or options or the rights of conversion of Convertible Securities shall apply mutatis mutandis to the rights, options and Convertible Securities referred to in this Subsection 8(f)(4). (5) Certain Exceptions. Notwithstanding the provisions of Subsection 8(f)(1) above, no adjustment shall be made to the Exercise Price with respect to the issuance of Additional Shares of Common Stock in connection with the conversion, exercise or exchange of warrants or notes issued by the Company and outstanding on the date hereof or for the issuance or sale of Additional Shares of Common Stock for a consideration per share equal to or greater than the Minimum Value. For the purposes of this Section 8(f), the issuance of not more than 10% of the then outstanding shares of Common Stock (on a then fully-diluted basis, assuming the conversion or exercise of all then outstanding Convertible Securities) to employees or consultants or the Company pursuant to stock option or stock purchase plans approved by the Board (including the reissuance of shares purchased by the Company from employee or consultants of the Company) shall not be considered the issuance or sale of Additional Shares of Common 8 Stock. (6) Definition. The term "Additional Shares of Common Stock" as used herein shall mean all shares of Common Stock issued or deemed issued by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company. Notwithstanding anything to the contrary contained herein, Common Stock issued in connection with the conversion, exercise or exchange of warrants or notes issued by the Company and outstanding on the date hereof and other warrant certificates, if any, issued pursuant to the terms of the Purchase Agreement shall not be deemed to be Additional Shares of Common Stock or Convertible Securities for purposes of causing an adjustment to the Exercise Price. The term "Minimum Value" as used herein shall mean the lesser of (a) the Exercise Price as the same may be adjusted from time to time and (b) the Closing Bid Price (as hereafter defined). The term "Closing Bid Price" means the closing bid price of the Common Stock on the trading day immediately preceding the date of issuance of Additional Shares of Common Stock. (g) Certificate of Adjustment. In each case of an adjustment or readjustment of the Exercise Price, the Company, at its expense, shall prepare a certificate showing such adjustment or readjustment signed by the duly elected Treasurer or Chief Financial Officer of the Company (the "Adjustment Certificate) and shall mail the Adjustment Certificate, by first class mail, postage prepaid, to the Holder at the Holder's address as shown in the Company's books. The Adjustment Certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based including a statement of the Exercise Price and the number of shares of Common Stock or other securities issuable upon exercise of this Warrant Certificate immediately before and after giving effect to the applicable adjustment or readjustment. If the holders of a majority of the shares of Common Stock represented by all outstanding Warrant Certificates being issued concurrently herewith do not in good faith believe that such adjustment or readjustment was calculated in accordance with the terms of this Warrant Certificate, such holders shall have the right to challenge such adjustment or readjustment, or method of calculating the same, by delivering written notice to the Company at 611 Broadway, Suite 515, New York, New York 10012, Attention: Richard L. Bulman, within thirty (30) days after the Holder's receipt of the Adjustment Certificate. In the event such holders deliver such written notice to the Company, the Company, at its expense, shall cause independent certified public accountants of recognized standing selected by the Company (who may be the independent certified public accountants then auditing the books of the Company) to recompute such adjustment or readjustment in accordance herewith and prepare a certificate signed by such accountants (the "Accountant's Adjustment Certificate") showing such adjustment or readjustment. The Company shall then mail the Accountant's Adjustment Certificate, by first class mail, postage prepaid, to the Holder at the Holder's address as shown in the Company's books. In the event of any conflict between the Adjustment Certificate and the Accountant's Adjustment Certificate, the Accountant's Adjustment Certificate shall control. 9. Survival. The various rights and obligations of the Holder hereof and of this Company as set forth in Sections 5, 6, and 7 hereof, as may be applicable, shall survive the exercise 9 of this Warrant Certificate or the surrender of this Warrant Certificate, and upon the surrender of this Warrant Certificate and the exercise of all the rights represented hereby, each party shall, if requested, deliver to the other hereof its written acknowledgement of its continuing obligations under said Sections. 10. Mutilated or Missing Warrant Certificates. In case this Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company will, upon request, issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution of the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest, but only upon receipt of evidence satisfactory to the Company of such loss, theft, or destruction of such Warrant Certificate and, in the case of a lost, stolen or destroyed Warrant Certificate, indemnity, if requested, also satisfactory to the Company. Applicants for such substitute Warrant Certificate shall also comply with such other reasonable regulations and pay such reasonable charges as the Company may prescribe. 11. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first class registered or certified mail, postage prepaid, return receipt requested, as follows: if the Holders, at the address of the Holder as shown on the Company's registry books, and, if to the Company, at 611 Broadway, Suite 515, New York, New York 10012, Attention: Richard L. Bulman. 12. Governing Law. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflicts of law. 13. Binding Effect. This Warrant Certificate shall be binding upon and inure to the benefit of the Company and the Holder. Nothing in this Warrant Certificate is intended or shall be construed to confer upon any other person any right, remedy or claim, in equity or at law, or to impose upon any other person any duty, liability or obligation. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed as of the date first above written. KIDEO PRODUCTIONS, INC. By: -------------------------------------- Richard L. Bulman, President 10 PURCHASE FORM ____________, _____ KIDEO PRODUCTIONS, INC. 611 Broadway Suite 515 New York, NY 10012 The undersigned hereby irrevocably elects to exercise the attached Warrant Certificate to the extent of ______ shares of common stock of Kideo Productions, Inc., $.0001 par value per share, and hereby makes payment of $__________ in payment of the purchase price thereof. INSTRUCTIONS FOR REGISTRATION OF SECURITIES Name:_____________________________________________________________________ (Please typewrite or print in block letters) DELIVER SECURITIES TO: Address:__________________________________ __________________________________ __________________________________ Holder:___________________________________________________________ [Signature of Holder of Warrant Certificate, if an individual] Holder:___________________________________________________________ By:________________________________________________________ Its:_______________________________________________ [Signature of Holder of Warrant Certificate, if a corporation, partnership or other entity] EX-10.2 3 FORM OF SECURITY AGREEMENT FORM OF SECURITY AGREEMENT SECURITY AGREEMENT SECURITY AGREEMENT, dated as of May 12, 1999, made by KIDEO PRODUCTIONS, INC., a Delaware corporation ("Debtor"), in favor of FELTON INVESTMENTS LTD., GREATVIEW INVESTMENTS LTD. and MERMAID INVESTMENTS LTD. (each a "Secured Party", and collectively, the "Secured Parties"). W I T N E S E T H : WHEREAS, pursuant to that certain Note and Warrant Purchase Agreement, dated the date hereof, among Debtor and the Secured Parties (as the same may from time to time be amended, modified or supplemented, the "Purchase Agreement"), the Secured Parties have agreed, severally and not jointly, to lend in the aggregate $1,400,001 (the "Loan") to Grantor; WHEREAS, the Secured Parties are willing to make the Loan but only upon the condition, among others, that Grantor shall have executed and delivered to the Secured Parties this Security Agreement. WHEREAS, the Debtor is delivering to each Secured Party a promissory note in the principal amount equal to each Secured Party's pro rata amount of the Loan and $1,000,002 in the aggregate (the "First Note") and, upon the funding of an additional $399,999 will deliver a promissory note to each Secured Party equal to such Secured Party's pro rata portion of such amount (together with the First Note, the "Notes"). WHEREAS, as a condition to its acceptance of the Notes, Secured Parties are requiring that the performance and payment of all obligations, liabilities and indebtedness of the Debtor to the Secured Parties under the Notes be secured by the Debtor's grant of a security interest pursuant to the terms and condition of this Security Agreement. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Grant of Security Interest. As collateral security for the prompt and complete payment and performance when due of all indebtedness, liabilities and obligations of the Debtor to the Secured Parties under the Notes, including interest 1 (collectively, the "Obligations"), the Debtor hereby assigns, conveys, mortgages, pledges, hypothecates and transfers to the Secured Parties, and hereby grants to the Secured Parties, a continuing security interest in the Debtor's right, title and interest in, to and under all of the following (all of which are hereinafter collectively referred to as "Collateral"): (i) any and all present and future "accounts" (as defined in the Code referred to below), accounts receivable, contract rights, general intangibles, instruments and chattel paper and including without limitation any and all purchase orders, instruments and other documents, evidencing obligations for and representing payment for goods sold or leased and/or services rendered by Debtor, proceeds of and the goods represented by any of the foregoing and all books and records pertaining to same (the "Accounts Receivable"); (ii) any and all "equipment" (as defined in the Code) now or hereafter owned or leased by Debtor, including, without limitation, all leasehold improvements, machinery, furniture, tools, attachments, and other equipment of any kind and nature, whether affixed to real property or not, that is now owned or hereafter owned by the Debtor, wherever located, and any additions and accessions thereto, substitutions therefor, replacements thereof, and the Proceeds of any of the foregoing and all of the Debtor's books and records pertaining to all of the foregoing (the "Equipment"); (iii) any and all "inventory" (as defined in the Code) of every nature and description belonging to the Debtor, wherever located, whether now owned or in existence or hereafter acquired and including without limitation, all raw materials, work in process, all finished goods, now owned or hereafter acquired by the Debtor and wherever located and in all returns and refunds (applicable thereto), all parts and accessories thereof and additions thereto, the Proceeds of any of the foregoing and the right to collect the same and all books and records pertaining to same (the "Inventory"); (iv) any and all "general intangibles" (as such term is defined in the Code) now or hereafter owned by Debtor and including but not limited to all marks, trademarks, trademark applications, trademark registrations, patents, patent registrations, patent applications, copyrights, goodwill of the Debtor's business symbolized by any of the foregoing, license rights, license agreements, permits, franchises and patents; and (v) all "proceeds" (as defined in the Code) 2 including, without limitation, (x) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to the Debtor from time to time with respect to any of the Collateral, (y) any and all payments (in any form whatsoever) made or due and payable to the Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental body, authority, bureau or agency (or any other person whether or not acting under color or governmental authority), and (z) any and all other amounts from time to time paid or payable under or in connection with any of the Collateral. Notwithstanding anything to the contrary in this Security Agreement, (a) nothing herein shall be construed so as to require the Secured Parties to provide any future credit to the Debtor and (b) each Secured Party acknowledges and agrees that the security interest granted hereby will be delivered and perfected as promptly as practicable after the date hereof following the release of a prior security interest in the Collateral (the "Prior Interest") held by a prior lender to the Debtor. 2. Representations, Warranties and Covenants. The Debtor hereby represents, warrants and covenants as follows: (a) The Debtor's chief executive office and the place where its records concerning the Collateral are kept is located at 611 Broadway, Suite 515, New York, New York 10012. (b) The Debtor is the sole owner of the Collateral, free and clear of any liens, mortgages, security interests, pledges, charges or encumbrances of any kind or nature whatsoever (collectively, the "Liens") except as may be granted to the Secured Parties herein and except for the Prior Interest. (c) No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office except with respect to the Prior Interest. (d) The Debtor shall give the Secured Parties at least thirty (30) days' prior written notice of any change in the Debtor's name, trade style or the location of its chief executive office. (e) The Debtor shall, at its own expense, keep the Collateral free of all Liens except the security interest of the Secured Parties. 3 (f) The Debtor shall not, directly or indirectly, sell, transfer or otherwise dispose of the Collateral or any interest therein, except in the ordinary course of its business. (g) The Debtor shall not remove any of the Equipment from 611 Broadway, Suite 515, New York, New York 10012. (h) The Debtor shall at all times keep the Equipment in good operating condition and repair. (i) The Debtor will furnish to each Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as each Secured Party may reasonably request, all in reasonable detail. (j) Following the closing under the Purchase Agreement, the Debtor will from time to time pay or cause to be paid all Liens, taxes, assessments and governmental charges levied, assessed or imposed upon any of the Collateral, unless and to the extent only that the same shall be contested in good faith and by appropriate proceedings by the Debtor. 3. Secured Party Appointed as Attorney-in-Fact. (a) The Debtor hereby irrevocably constitutes and appoints ______________________, as agent for the Secured Parties, and his agents, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Debtor and in the name of the Debtor or in his own name, from time to time in his discretion, but only upon the occurrence of an Event of Default under this Security Agreement or any Obligation, for the purpose of carrying out the terms of this Security Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement. The Debtor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (b) The powers conferred on the Secured Parties and the other attorneys appointed hereunder are solely to protect the interests of the Secured Parties in the Collateral and shall not impose any duty upon them to exercise any such powers. The Secured Parties and the other attorneys appointed hereunder shall be accountable only for amounts that they actually receive as a result of the exercise of such powers and neither they, nor any of 4 their agents, shall be responsible to the Debtor for any act or failure to act, except for their gross negligence or willful misconduct. (c) The Debtor also authorizes the Secured Parties, as agent for the Debtor, at any time after the occurrence of an Event of Default, and from time to time, to communicate in his own names with any party to any contract, agreement or instrument included in the Collateral with regard to the assignment thereof hereunder and other matters relating thereto. 4. Performance by Secured Party of Debtor's Obligations. If the Debtor fails to perform or comply with any of its agreements contained herein, or in the observance or performance of any other agreement or obligation to the Debtor, as provided for by the terms of this Security Agreement, in the event the Secured Parties shall perform or comply, or otherwise cause performance or compliance, with such agreement, the expenses of the Secured Parties incurred in connection with such performance or compliance, together with interest thereon at the rate of ten percent (10%) per annum, shall be payable by the Debtor to the Secured Parties, on a pro rata basis, on demand and, until such payment, shall constitute Obligations secured hereby. 5. Events of Default. The occurrence of any of the following shall be an "Event of Default" hereunder: (a) an Event of Default (as defined in the Purchase Agreement or the Notes) shall have occurred; or (b) any representation or warranty made by the Debtor in connection with this Security Agreement or the Purchase Agreement shall prove to have been untrue or misleading in any material respect when made; or (c) default by the Debtor in the observance or performance of any other covenant or agreement contained in this Security Agreement, and the continuance of the same for thirty (30) days after the occurrence thereof. If any such event specified above shall occur, a Secured Party may declare, by notice to the Debtor, the Obligations to be due and payable, whereupon the Obligations shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the Obligations to the contrary notwithstanding. 6. Remedies, Rights Upon Default. (a) If an Event of Default shall occur and be 5 continuing, the Agent may exercise in addition to all other rights and remedies granted to the Secured Parties in this Security Agreement, all rights and remedies of secured parties under the Uniform Commercial Code as the same may be in effect from time to time in New York (referred to in this Security Agreement as the "Code") and any other Uniform Commercial Code in any relevant jurisdiction. Without limiting the generality of the foregoing, the Debtor agrees that in any such event, the Agent may forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and may forthwith sell, lease, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales, at the Secured Party's offices or elsewhere at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Debtor further agrees, at the request of the Agent, to assemble the Collateral and make it available to the Secured Parties at places which any of the Secured Parties shall reasonably select, whether at the Debtor's premises or elsewhere. To the extent permitted by applicable law, the Debtor waives all claims, damages and demands against the Secured Parties arising out of the repossession, retention or sale of the Collateral. The Debtor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which the Secured Parties are entitled, the Debtor also being liable for the reasonable fees of any attorneys employed by the Agent to collect such deficiency. The Debtor also agrees to pay all costs of the Secured Parties, including reasonable attorney's fees, incurred with respect to the collection of any of the Obligations and the enforcement of any of its rights hereunder. The Debtor hereby waives presentment, demand, protest or any notice (to the extent permitted by applicable law and except as stated herein) of any kind in connection with this Security Agreement or any Collateral. 7. Limitation on Duty of the Agent in Respect of Collateral. Beyond the use of reasonable and prudent care in the custody and preservation thereof, the Secured Parties shall not have any duty as to any Collateral in their possession or control or in the possession or control of their agents or nominees or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto. 8. Notices. All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing, and shall be deemed to have been duly given or made on the date when the same is delivered by hand or sent by telecopier or, if mailed, seventy-two (72) hours after the same is deposited with the United States mail, by registered or certified mail, postage prepaid, return receipt requested, and addressed at the address set forth on the signature page hereto or at such 6 other address which any party shall designate by written notice to the others in accordance with the provisions of this Section 8. 9. Severability. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10. Financing Statements; Further Assurances. The Debtor authorizes the Secured Parties to sign and file financing statements at any time and from time to time with respect to the Collateral without the Debtor's signature. The Debtor agrees that at any time and from time to time upon the written request of any Secured Party, the Debtor will promptly execute and deliver any and all such further instruments and documents and do such further acts as a Secured Party may request in order to carry out the purposes of this Security Agreement and obtain for the Secured Parties the full benefits of the security interest granted to the Secured Parties hereby. 11. Definitions. Capitalized terms used and not otherwise defined herein shall have the respective meanings ascribed to such terms in the Purchase Agreement. 12. Waivers; Amendments; Cumulative Remedies. The Secured Party shall not by any act, delay, omission or otherwise be deemed to have waived any rights or remedies hereunder and no waiver shall be valid unless in writing, signed by each Secured Party, and then only to the extent therein set forth. A waiver by a Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which such Secured Party would otherwise have had on any future occasion. No failure to exercise, nor any delay in exercising, on the part of a Secured Party of any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. None of the terms and provisions of this Security Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by the parties hereto. 13. Successors and Assigns; Governing Law. This Security Agreement and all obligations of the Debtor hereunder shall be binding upon the successors and assigns of the Debtor, 7 and shall inure to the benefit of each of the Secured Parties and their successors and assigns. This Security Agreement shall be governed by, and be construed and interpreted in accordance with, the laws of the State of New York, without regard to principles of conflicts of laws. 14. Further Indemnification. The Debtor agrees to pay, and to save the Secured Parties harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Security Agreement. (Signature Page Follows) 8 IN WITNESS WHEREOF, the Debtor and each Secured Party have each caused this Security Agreement to be executed on the date first set forth above. KIDEO PRODUCTIONS, INC. By: ------------------------------------ Richard Bulman, President FELTON INVESTMENTS LTD. By: ------------------------------------ GREATVIEW INVESTMENTS LTD. By: ------------------------------------ MERMAID INVESTMENTS LTD. By: ------------------------------------ 9 -----END PRIVACY-ENHANCED MESSAGE-----