<PAGE>
As filed with the Securities and Exchange Commission on ___________, 2000
Registration No. ________________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
The Singing Machine Company, Inc.
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 5065 95-3795478
-------------------------------- ----------------------------- ------------------
(State or other jurisdiction (Primary Standard (IRS Employer
of incorporation or organization) Industrial Classification) Identification No.)
</TABLE>
6601 Lyons Road
Building A-7
Coconut Creek, FL 33073
Telephone: (954) 596-1000
Facsimile: (954) 596-2000
(Address and telephone number of principal executive offices)
----------------------------
Copy to:
David A. Carter, Esq.
David A. Carter, P.A.
2300 Glades Road
Suite 210, West Tower
Boca Raton, Florida 33431
Telephone: (561) 750-6999
Facsimile: (561) 367-0960
Approximate Date of Commencement of Proposed Sale to the Public: As Soon as
practicable after the Registration Statement becomes effective.
================================================================================
<PAGE>
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Registration Statement is expected to be made pursuant
to Rule 434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to be Offering Price per Aggregate Offering Amount of Registration
Registered Registered (1) Security(2) Price(2) Fee
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 2,447,249 $3.50 $8,565,371.50 $2,261.25
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------
(1) Pursuant to Rule 416, there are also registered hereby such additional
indeterminate number of shares of common stock as may become issuable by
reason of stock splits, stock dividends and other adjustments to the
securities registered hereby.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
-ii-
<PAGE>
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting on offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
Subject to Completion, Dated February ____, 2000
PROSPECTUS
2,447,249 shares of Common Stock
[GRAPHIC OMITTED]
This is an offering of 2,447,249 shares of common stock of The Singing
Machine Company, Inc., held by certain of our Securityholders. Of the 2,447,249
shares being offered by the Selling Securityholders, 284,500 shares are issuable
upon exercise of Options owned by certain of the Selling Securityholders,
1,000,000 shares are issuable upon the conversion of preferred stock owned by
certain of the Selling Securityholders, 723,200 shares are issuable upon
exercise of Warrants held by certain of the Selling Securityholders, and 439,549
Shares comprise common stock held by certain Selling Securityholders. We will
not receive any proceeds from the sale of the Shares, but we will receive
proceeds from the Selling Securityholders if they exercise their Warrants and
Options.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"SING". On __________, 2000, the closing bid price per share of our common stock
as reported by the OTC Bulletin Board was $_____.
This investment involves a high degree of risk. You should purchase
shares only if you can afford a complete loss of your investment. See "Risk
Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is ___________, 2000.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary...................................................
Risk Factors.........................................................
Use of Proceeds......................................................
Dividend Policy......................................................
Market Price of Common Stock.........................................
Selected Financial Data..............................................
Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................
Business.............................................................
Management...........................................................
Certain Transactions.................................................
Principal Securityholders............................................
Description of Securities............................................
Selling Securityholders..............................................
Plan of Distribution.................................................
Legal Matters........................................................
Experts..............................................................
Where You Can Find Additional Information............................
Index to Consolidated Financial Statements...........................
We have not authorized any dealer, sales person or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this Prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy these securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sale made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of The Singing
Machine Company, Inc. have not changed since the date hereof.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
-2-
<PAGE>
PROSPECTUS SUMMARY
The following summary may not contain all the information that may be
important to you. Before making an investment decision, you should read this
entire prospectus. Upon the completion of this offering, the only class of our
capital stock outstanding will be our common stock. Except where otherwise
indicated, all information in this prospectus assumes the conversion of all
Warrants, Options, and Preferred Stock into common stock. In this prospectus,
the "Company", "The Singing Machine", "we", "us" and "our" refer to The Singing
Machine Company, Inc., unless the context otherwise requires.
The Company
We incorporated in Delaware in 1994, and together with our wholly owned
subsidiary, International (SMC) HK, Ltd., engage in the production and
distribution of karaoke audio software and electronic recording equipment. Our
electronic karaoke machines and audio software products are marketed under The
Singing Machine(R) trademark. Our corporate offices are located at 6601 Lyons
Road, Building A-7, Coconut Creek, Florida 33073, and our telephone number is
(954) 596-1000.
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common stock offered.................................2,447,249 shares of Common Stock
Common stock issued and
outstanding prior to this offering..................2,931,975
Common stock issued and
outstanding after this offering.....................4,939,675 (1)
Use of proceeds......................................Expansion of music library, purchase of tooling for new
machine models, and other general corporate purposes
</TABLE>
- ----------------------
(1) assuming full exercise of all Options and Warrants and full conversion of
the Preferred Stock.
-3-
<PAGE>
Selected Financial Information
The selected financial information set forth below is derived from, and
should be read in conjunction with, the more detailed financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. See
"Consolidated Financial Statements")
Income Statement Items
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
1998 1999 1998 1999
---------- -------- -------- ---------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net Sales $ 6,056 $ 9,548 $ 8,504 $ 16,968
Cost of Sales 5,052 7,029 6,351 12,495
Selling, General and
Administrative Expenses 2,642 1,545 1,125 1,922
Income (loss) from operations (1,638) 974 1,027 2,551
Interest income, interest
expense and other income (147) (220) (159) (380)
Extraordinary item 4,490 - - -
Income before income tax benefit 2,705 754 868 2,171
Net tax benefit - 170 - -
Net income $ 2,705 $ 924 $ 868 $ 2,171
Net income per common share
basic $ 7.16 $ .37 $ .35 $ .75
Net income (loss) per common
share diluted $ 7.16 $ .36 $ .35 $ .53
Shares used in computing net
income (loss) per common
share - basic 378 2,475 2,468 2,899
Shares used in computing net
income (loss) per common
share - diluted 378 2,592 2,468 4,110
</TABLE>
Balance Sheet Items
<TABLE>
<CAPTION>
Nine Months As adjusted
Year Ended Ended for Exercise
March 31, December 31, of Options and
1999 1998 1999 Warrants(1)
--------- ---------- ------------- ------------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Cash (including restricted cash) $ 49 $ 8 $ 833 $ 2,183
Total current assets 1,813 847 6,075 7,425
Working capital (deficit) 399 (370) 3,948 5,298
Total Assets 2,379 1,555 6,611 7,961
Current liabilities 1,415 1,218 2,127 2,127
Long term obligations - - - -
Total shareholders' equity $ 965 $ 25 $ 4,484 $ 5,834
</TABLE>
- --------------------------------------------
(1) Adjusted to reflect the exercise of all Options and Warrants.
-4-
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below before making an investment
decision. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also impair our business operations.
These factors, among others, may cause actual results, events, or performance to
differ materially from those expressed in any forward-looking statements made in
this registration.
If any of the following events actually occurs, our business, financial
condition, or operating results could be materially and adversely affected. In
such case, the value of your investment may decline, and you may lose all or
part of your investment.
We have a limited post On April 11, 1997, we filed a voluntary Chapter 11
bankruptcy operating bankruptcy petition in the United States Bankruptcy
history upon which you Court for the Southern District of Florida seeking to
may evaluate us. reorganize our company. Our Amended Plan of
Reorganization (the "Plan") was confirmed by the
Bankruptcy Court on March 17, 1998. For the fiscal year
ended March 31, 1999, we had a net profit of $924,000.
For the six month period ended September 30, 1999, we
had a net profit of $1,056,000. There is no assurance
that we will continue to operate at a profit in the
future.
We do no generate At our current level of development, we do not
enough cash from generate net cash from operations sufficient to meet
operations to fund our our rapid growth. To fund our growth plan, we require
growth plan. either additional financing or a restructure of our
credit facilities to meet the ongoing liquidity needs
of our operations. There can be no assurance, however,
that our liquidity goals will be reached in the
immediate future, if ever.
We have significant We may need to raise significant additional funds
future capital needs beginning in 2000 to expand our concept. To fund our
which are subject to rapid sales growth, we will need to raise $2,000,000 in
the uncertainty of the form of additional capital or a credit facility. If
additional financing adequate funds are not available on acceptable terms,
or at all, we may be unable to sustain our rapid
growth, which would have a material adverse effect on
our business, results of operations, and financial
condition.
Your investment may If additional funds are raised through the
be diluted issuance of equity securities, your percentage
ownership in the Company's equity will be reduced.
Also, you may experience additional dilution in net
book value per share, and the equity securities may
have rights, preferences, or privileges senior to those
of yours.
-5-
<PAGE>
Our ability to manage To manage our growth, we must implement systems,
growth could hurt our and train and manage our employees. We may not be able
business to implement these action items in a timely manner, or
at all. Our inability to manage growth effectively
could have a material adverse effect on our business
operating results, and financial conditions. There can
be no assurance that we will achieve our planned
expansion goals, manage our growth effectively, or
operate profitably.
Our inability to The business in which we are engaged is highly
compete and maintain competitive. In addition, we must compete with all
our niche in the other existing forms of entertainment including, but
entertainment industry not limited to, motion pictures, video arcade games,
could hurt our business home video games, theme parks, nightclubs, television
and prerecorded tapes, CD's and video cassettes.
Competition in the Company's markets is based primarily
on price, product performance, reputation, delivery
times, and customer support. We believe that new
product introduction and enhancements of existing
products are material factors for our continuing growth
and profitability. Many of our competitors are
substantially larger and have significantly greater
financial, marketing and operating resources than we
have. No assurance can be given that we will continue
to be successful in introducing new products or further
enhancing existing products.
We rely on sales to key As a percentage of total revenues, the Company's
customers which net sales in the aggregate to its five largest
subjects us to risk customers during the fiscal years ended March 31, 1998
and 1999, were approximately 89% and 91% respectively.
For the fiscal 1999 period, three major retailers
accounted for 31%, 21%, and 21% each of total revenues.
During fiscal year 2000, the Company has made
significant progress in broadening its base of
customers. Although we have long- established
relationships with many of our customers, we do not
have long-term contractual arrangements with any of
them. A decrease in business from any of our major
customers could have a material adverse effect on our
results of operations and financial condition.
We have significant We sell products to retailers, including
reliance on large department stores, lifestyle merchants, direct mail
retailers which are catalogs and showrooms, national chains, specialty
subject to changes in stores, and warehouse clubs. Certain of such retailers
the economy have engaged in leveraged buyouts or transactions in
which they incurred a significant amount of debt, and
some are currently operating under the protection of
bankruptcy laws. Despite the difficulties experienced
by retailers in recent years, we have not suffered
significant credit losses to date. A deterioration in
the financial condition of our major customers could
have a material adverse effect on our future
profitability.
-6-
<PAGE>
We are subject to the We are dependent upon foreign companies for the
risks of doing business manufacture of all of our electronic products. Our
abroad arrangements with manufacturers are subject to the
risks of doing business abroad, such as import duties,
trade restrictions, work stoppages, foreign currency
fluctuations, political instability, and other factors
which could have an adverse impact on the business of
the Company. We believe that the loss of any one or
more of our suppliers would not have a long-term
material adverse effect on us, because other
manufacturers with whom we do business would be able to
increase production to fulfill our requirements.
However, the loss of certain of our suppliers, could,
in the short-term, adversely affect our business until
alternative supply arrangements were secured. During
fiscal 1998 and 1999, and the six months ended
September 30, 1999, three manufacturers located in the
People's Republic of China accounted for approximately
all of our hardware product purchases. If Most Favored
Nation ("MFN") status for China is restricted or
revoked in the future, the costs of goods purchased
from Chinese vendors is likely to increase. Management
continues to closely monitor the situation and has
determined that the production capabilities in
countries outside China which have MFN status and,
therefore, have favorable duty rates, would meet
production needs. Such a change in suppliers may have a
short-term adverse effect on operations and, possibly,
earnings.
We are subject to We have experienced, and will experience in the
seasonality which is future, significant fluctuations in sales and operating
affected by various results from quarter to quarter. This is due largely to
economic conditions and the fact that a significant portion of our business is
changes resulting in derived from a limited number of relatively large
fluctuations in customer orders, the timing of which cannot be
quarterly results predicted. Furthermore, as is typical in the karaoke
industry, the quarters ended September 30 and December
31 includes increased revenues from sales made during
the holiday season. Additional factors that can cause
our sales and operating results to vary significantly
from period to period include, among others, the mix of
products, fluctuating market demand, price competition,
new product introductions by competitors, fluctuations
in foreign currency exchange rates, disruptions in
delivery of components, political instability, general
economic conditions, and the other considerations
described in this section. Accordingly, period-to-
period comparisons may not necessarily be meaningful
and should not be relied on as indicative of future
performance. Historically, the third quarter of our
fiscal year, the three months ended December 31, have
been the most profitable quarter, and the fourth
quarter of our fiscal year, the three months ended
March 31, have been the least profitable quarter.
-7-
<PAGE>
Our proprietary Our success depends on our proprietary technology.
technology may not We rely on a combination of contractual rights,
be sufficiently patents, trade secrets, know-how, trademarks,
protected non-disclosure agreements and technical measures to
establish and protect our rights. We cannot assure you
that we can protect our rights to prevent third parties
from using or copying our technology.
We may be subject We believe that we independently developed our
to claims from third technology and that it does not infringe on the
parties for proprietary rights or trade secrets of others. However,
unauthorized use of we cannot assure you that we have not infringed on the
their proprietary technologies of third parties or those third parties
technology will not make infringement violation claims against us.
Any infringement claims may have a negative effect on
our ability to manufacture our products.
Consumer Purchases of karaoke audio software and electronic
discretionary recording equipment are considered discretionary for
spending may affect consumers. Our success will therefore be influenced by
karaoke purchases a number of economic factors affecting discretionary
and is affected by consumer spending, such as employment levels, business
various economic conditions, interest rates, and taxation rates, all of
conditions and which are not under our control. Adverse economic
changes changes affecting these factors may restrict consumer
spending and thereby adversely affect our growth and
profitability.
We depend on third We rely on third party suppliers to produce the
party suppliers, and parts and materials we use to manufacture our products.
if we cannot obtain If our suppliers are unable to provide us with the
supplies as needed, parts and supplies, we will be unable to produce our
our operations will products. We cannot guarantee that we will be able to
be severely damaged purchase the parts we need at reasonable prices or in a
timely fashion. If we are unable to purchase the
supplies and parts we need to manufacture our products,
we will experience severe production problems, which
may possibly result in the termination of our
operations.
We may not be The development of our business has been largely
able to attract dependent on the efforts of Edward Steele and John
and retain key Klecha. Although we have entered into employment
personnel contracts with Messrs. Steele and Klecha, the loss of
the services of either of these individuals could have
a material adverse affect on the Company. We believe
that our future success also will depend significantly
upon our ability to attract, motivate, and retain
additional highly skilled managerial personnel.
Competition for such personnel is intense, and there
can be no assurance that we will be successful in
attracting, assimilating, and retaining the personnel
we require to grow and operate profitability.
-8-
<PAGE>
There is only a limited Our securities are currently not listed in the
market for our stock Nasdaq Small Cap Market. Our Common Stock is traded on
and we cannot assure a the OTC Bulletin Board under the symbol "SING". As a
more significant market result, an investor may find it more difficult to
will ever develop dispose of, or to obtain accurate quotations as to the
market value of, our Common Stock.
Our securities may If no exclusions from the definition of a "penny
be subject to "penny stock" under applicable SEC regulations are available,
stock" trading our securities would be subject to the penny stock
requirements rules, which impose additional sales practice
requirements on broker-dealers who sell such securities
to persons other than established customers and
accredited investors. Consequently, the ability of
broker-dealers to sell our securities to prospective
purchasers and your ability to sell your securities in
the secondary market may be limited.
-9-
<PAGE>
USE OF PROCEEDS
The Company will receive no proceeds from the sale of the Shares by the
Selling Securityholders. The Company will receive net proceeds of approximately
$1,349,655 if all our Options and Warrants are exercised.
We currently intend to use the proceeds, assuming all Warrants and
Options are exercised, approximately as set forth below:
<TABLE>
<CAPTION>
Use Amount Percent
- --- ------ -------
<S> <C> <C>
Expansion of Music Library $ 100,000 7.4%
Tooling for New Products 200,000 14.8%
Working Capital and other General Corporate Purposes 1,049,655 77.8%
--------- -------
TOTAL $1,349,655 100.00%
</TABLE>
The foregoing represents our best estimate of the allocation of the
proceeds of the offering based upon the present state of our business,
operations, and plans, and current business conditions. We will have broad
discretion to determine the use of a substantial portion of the proceeds of the
offering. Conditions may develop which could cause us to reallocate proceeds
from the categories listed above.
Pending the above uses, we will invest the net proceeds in government
securities and other short-term, investment-grade, interest-bearing instruments.
The proceeds received from the exercise of the Warrants will be used entirely by
us and will not benefit parties affiliated with us.
-10-
<PAGE>
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to dividends when,
as and if declared by the Board of Directors out of funds legally available
therefor. We do not anticipate the declaration or payment of any dividends in
the foreseeable future. We intend to retain earnings, if any, to finance the
development and expansion of its business. Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent upon
future earnings, if any, the Company's financial condition, capital
requirements, general business conditions and other factors. Therefore, there
can be no assurance that any dividends of any kind will ever be paid by the
Company.
-11-
<PAGE>
MARKET PRICES OF COMMON STOCK
Our Common Stock trades on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board under the symbol "SING". Set forth below is
the range of high and low bid information for the Company's Common Stock for the
two most recent fiscal years. This information represents prices between dealers
and does not reflect retail mark-up or mark-down or commissions, and may not
necessarily represent actual market transactions.
<TABLE>
<CAPTION>
Fiscal Period *High Bid *Low Bid
<S> <C> <C>
1998:
- -----
First Quarter (April 1 - June 30, 1997) $0.60 $0.60
Second Quarter (July 1 - September 30, 1997 0.60 0.60
Third Quarter (October 1 - December 31, 1997 0.60 0.60
Fourth Quarter (January 1 - March 31, 1998) 2.50 0.60
1999:
- -----
First Quarter (April 1 - June 30, 1998) $1.01 $0.17
Second Quarter (July 1 - September 30, 1998) 0.73 0.43
Third Quarter (October 1 - December 31, 1998) 0.50 0.43
Fourth Quarter (January 1 - March 31, 1999) 2.50 0.48
2000:
- -----
First Quarter (April 1 - June 30, 1999) $2.81 $1.34
Second Quarter (July 1 - September 30, 1999) 2.00 1.63
Third Quarter (October 1 - December 31, 1999) 2.13 1.63
Fourth Quarter (January 1, 2000 - _________, 2000)
</TABLE>
*All data has been adjusted to reflect a one-for-ten reverse split for the
Company's Common Stock which was effected on April 1, 1998.
On _________________, 2000, the closing sale price of our Common Stock
as reported on the OTC Bulletin Board was $___ per share.
As of December 31, 1999, there were approximately 311 record holders of
our outstanding Common Stock. Moreover, additional shares of our Common Stock
are held for stockholders at brokerage firms and/or clearing houses, and
therefore, the Company was unable to determine the precise number of beneficial
owners of our Common Stock as of December 31, 1999.
-12-
<PAGE>
SELECTED FINANCIAL DATA
Income Statement Items
- ----------------------
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
1998 1999 1998 1999
-------- -------- -------- ------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net Sales $ 6,056 $ 9,548 $ 8,504 $ 16,968
Cost of Sales 5,052 7,029 6,351 12,495
Selling, General and
Administrative Expenses 2,642 1,545 1,125 1,922
Income (loss) from operations (1,638) 974 1,027 2,551
Interest income, interest
expense and other income (147) (220) (159) (380)
Extraordinary item 4,490 - - -
Income before income tax benefit 2,705 754 868 2,171
Net tax benefit - 170 - -
Net income $ 2,705 $ 924 $ 868 $ 2,171
Net income per common share
basic $ 7.16 $ .37 $ .35 $ .75
Net income (loss) per common
share diluted $ 7.16 $ .36 $ .35 $ .53
Shares used in computing net
income (loss) per common
share - basic 378 2,475 2,468 2,899
Shares used in computing net
income (loss) per common
share - diluted 378 2,592 2,468 4,110
</TABLE>
Balance Sheet Items
- -------------------
<TABLE>
<CAPTION>
Nine Months As adjusted
Year Ended Ended for Exercise
March 31, December 31, of Options and
1999 1998 1999 Warrants(1)
--------- ---------- ------------- ------------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Cash (including restricted cash) $ 49 $ 8 $ 833 $ 2,183
Total current assets 1,813 847 6,075 7,425
Working capital (deficit) 399 (370) 3,948 5,298
Total Assets 2,379 1,555 6,611 7,961
Current liabilities 1,415 1,218 2,127 2,127
Long term obligations - - - -
Total shareholders' equity $ 965 $ 25 $ 4,484 $ 5,834
</TABLE>
- --------------------------------------------
(1) Adjusted to reflect the exercise of all Options and Warrants
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and the notes appearing elsewhere in
this prospectus.
Results of Operations
The following table sets forth, for the periods illustrated, certain
statements of operations data expressed as percentages of total revenues.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
1999 1998 1999 1998
---------- ---------- -------- ------
(Unaudited)
<S> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100%
Cost of goods sold 73.6 83.4 73.6 74.7
Selling, General and
Administrative Expenses 16.2 43.6 11.3 13.2
Income (loss) from operations 10.2 (27.0) 15.0 12.1
Interest income, interest
expense and other income 2.3 2.4 2.2 1.9
Extraordinary item - 74.1 - -
Income before income tax benefit 7.9 44.7 12.8 10.2
Income tax benefit 1.8 - - -
Net income (loss) 9.7 44.7 12.8 10.2
</TABLE>
Nine Months Ended December 31, 1999 as Compared
to Nine Months Ended December 31, 1998
Revenues - Total revenues increased by approximately $8,462,705 or 99%
during the first nine months of fiscal 2000 compared to the first nine months of
fiscal 1999. The increase in revenues can be attributed to a growing popularity
of the Company's CD Plus Graphics machines, as well as a growing market for the
music used in these machines. The CD Plus Graphics machines can be easily
attached to the consumer's television set. When a special CD, which includes
graphics, is played on the machine, the lyrics can be seen on the television
screen for ease of following along with the music.
Gross Profit - Gross profit for the first nine months of fiscal 2000
increased approximately 208% from $2,152,492 for the first nine months of fiscal
1999 to $4,472,876. The increased gross profit is in direct proportion to the
increase in sales for this period and therefore, the reasoning for increased
revenues can be carried to gross profit also.
Selling, General Administrative Expenses - Selling, general &
administrative expenses increased approximately $797,000 or 71%, during the
first nine months of fiscal 2000 compared to the first nine months of fiscal
1999. The increase is primarily due to the increase in sales related expenses,
including commissions, royalties and advertising. There is also a slight
increase in salary related expenses due to an increase in office staff.
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Depreciation and Amortization Expenses - Depreciation and amortization
expense increased approximately $34,886 or 72% for the nine months ended
December 31, 1999, as compared to the same period of the prior year. The
increase can be attributed to the addition of year 2000 compliant computer
equipment and leasehold improvements for the new facility. Another factor
contributing to the increase is the amortization of reorganization intangibles.
These intangibles came about as a result of the Fresh Start Accounting beginning
in the fiscal year 1998. The remainder of these intangibles will continue to be
amortized over the next thirty- nine (39) months.
Other Expenses - Net interest expense increased approximately $32,000
during the first nine months of fiscal 2000 compared to the same period a year
ago. The increase can be attributed to the increased use of credit line
facilities to fund the inventory necessary to meet demand of the Company's
product.
Loss on sales of accounts receivable was 2.0% and 1.8% of total
revenues during the first nine months of fiscal 2000 and 1999 respectively. The
loss increased from $156,574 in fiscal 1999 to $347,689 in fiscal 2000. The
increase is due primarily to the increase in sales and invoices factored during
the first nine months of fiscal 2000.
The Year Ended March 31, 1999 As Compared
to the Year Ended March 31, 1998
Revenues - Total revenues increased to $9.5 million for the fiscal year
ended March 31, 1999, compared to the $6.1 million reported for fiscal 1998. The
increase was primarily due to increased funding and lines of credit established
during the fiscal year ended March 31, 1999, to purchase additional inventory
and the introduction and subsequent sales of two (2) new CD with graphics
players and innovative music packages.
Gross Profit - Gross profit increased $1.51 million or 151% to $2.52
million in fiscal year ended 1999 or 26.4% of net sales from $1.1 million or
16.6% of net sales in fiscal year end 1998. The overall increase in gross profit
was attributable to the significant increase in net sales. The increase in the
gross profit margin of 9.8% of net sales was due primarily to the increased
sales of new models of CDG players and CDG music with higher margins than some
of our other products.
Selling, General Administrative Expenses - Selling, general and
administrative expenses decreased $1.10 million or 58.5% to $1.54 million, or
16.2% of net sales in fiscal year end 1999, from $2.64 million or 43.6% of net
sales, in fiscal year end 1998. This decrease was primarily due to management's
commitment to reduce total overhead and write off various intangible assets
during the reorganization under Chapter 11 of fiscal year 1998. As a result of
the emergence from bankruptcy legal and accounting fees were reduced
significantly. We also had significant reductions in temporary help, rent,
advertising, insurance and maintenance expense as a result of the downsized
facility. Warehousing operations were moved to a west coast warehouse, reducing
the Florida warehousing requirements and reducing ocean freight costs of
hardware sold during fiscal year end 1999.
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Depreciation and Amortization Expenses - Depreciation and amortization
expense decreased approximately $34,000 to $144,234 during the fiscal year ended
March 31, 1999. The decrease was primarily due to full depreciation of certain
tools during fiscal year 1998 and the continued use of those tools during fiscal
year 1999 after their value was fully depreciated.
Other Expenses - Net interest expense increased approximately $101,000
to $222,000 during fiscal year end 1999 compared to $121,000 during fiscal year
end 1998. During fiscal year end 1999, we were able to acquire various short
term loans to purchase inventory which contributed toward higher sales.
Loss on sales of accounts receivable was 2.3% and 1.5% of total
revenues for the fiscal years 1999 and 1998, respectively. Although more
accounts receivable were factored during fiscal year 1999 versus fiscal year
1998, we were able to change factors during May of 1998 resulting in a lower
factoring rate.
Net income for fiscal 1999 was approximately $924,000 versus a loss of
$1,785,000 for fiscal year 1998. Management has significantly reduced overhead
and been able to increase gross margins through new product introductions and
innovative marketing and packaging programs.
The Year Ended March 31, 1998 As Compared
to the Year Ended March 31, 1997
Revenues - Total revenues dropped to $6.2 million for the fiscal year
ended March 31, 1998, compared to the $10.7 million reported for fiscal 1997.
The decrease was primarily attributable to limited funding to purchase
additional inventory during operations under Chapter 11 federal bankruptcy.
Gross Profit - Cost of equipment sales for the year ended March 31,
1998 decreased from $3,326,000 for fiscal 1997. The cost of music sales
decreased $777,000 for the year ended March 31, 1998 from fiscal 1997. This
decrease in the cost of music sales reflects approximately $529,000 in
adjustment to inventory values during fiscal year 1997 and the reduced cost of
returns from distributors during fiscal year 1998.
Selling, General Administrative Expenses - Other operating expenses
decreased approximately $396,000 or 69% for fiscal 1998, compared to the prior
year. The decrease reflects management's efforts to control operating expenses
and primarily reflects lower warehouse rent, occupancy costs, and warehouse
personnel expense.
Selling, general and administrative expenses ("SG&A expenses")
decreased $87,000 or 4% for fiscal 1998 compared to fiscal 1997. This decrease
was primarily due to management's commitment to reduce total overhead.
Categories which decreased include salaries and benefits, promotional expenses
including catalog, advertising and show/convention costs, product development,
travel and entertainment, and insurance. These decreases were partially offset
by higher professional fees.
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Depreciation and Amortization Expenses - Depreciation and amortization
expense decreased approximately $223,000 or 56% to $177,000 during the fiscal
year ended March 31, 1998. The decrease was primarily due to the write-off of
certain fixed assets, trademark and costs in excess of net assets (goodwill) as
of March 31, 1998 and 1997.
Other Expenses - As a result of the significant decline in music sales
during fiscal 1997 and 1998, the Company reviewed the carrying value of costs in
excess of net assets acquired (goodwill) and trademarks carried on its balance
sheet. As a result of this review, the Company recorded a reduction in the
carrying value of such asset relating to music sales in the amount of $1,081,000
for fiscal 1997, which amount was charged to operations.
The operating loss for fiscal 1998 was approximately $1.6 million,
which was a reduction of $2.9 million from fiscal 1997. As a percentage of total
revenues, the operating loss decreased to 24% for fiscal 1998 from 32% in the
prior year. Excluding accounting adjustments, the fiscal 1997 operating loss
would have been $1.3 million. Gross profit as a percentage of sales continues to
increase, and during fiscal year 1999, the Company has secured sufficient
capital to fund inventory purchases and increase sales. The improvement in gross
profit from music sales was primarily because of management's change in policy
to reduce returned merchandise and the impact of inventory valuation adjustments
in the prior year.
Net interest expenses decreased $145,000 or 84% from the prior year due
to a stay of interest as a result of the bankruptcy filing and subsequent
reorganization.
Loss on sales of accounts receivable was 1.5% and 2.2% of total
revenues for the fiscal years 1998 and 1997, respectively. The decrease of
approximately $140,000 was primarily because of a decrease in sales.
Liquidity and Capital Resources
Liquidity - At December 31, 1999, the Company had current assets of
$6,075,091, compared to $1,813,098 at March 31, 1999; total assets of $6,610,985
as compared to $2,379,335 at March 31, 1999; current liabilities of $2,126,916
as compared to $1,414,595 at March 31, 1999, and a current net worth of
$4,484,069 as compared to $964,740 at March 31, 1999. The increase is primarily
due to additional capital raised through the sale of preferred shares of the
Company in a Private Placement Offering during the quarter ended June 30, 1999
(See Note 4 to Financial Statements), and the increase in net income for the
nine months ended December 31, 1999.
Capital Resources - The Company has obtained significant financing for
continuing operations and growth. Five specific lines of credit have been
opened, two financing agreements in Hong Kong and three financing agreements
through its U.S. operations.
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Effective May 19, 1999, the Company, through its Hong Kong subsidiary,
International SMC(HK) Ltd., obtained a credit facility of (US) $2,000,000 from
Belgian Bank, Hong Kong, a subsidiary of Generale Bank, Belgium. This facility
is a revolving line based upon drawing down a maximum of 15% of the value of
export letters of credit lodged with Belgian Bank. There is no expiration except
that Belgian Bank reserves the right to revise the terms and conditions at the
Bank's discretion. The cost of this credit facility is the U.S. Dollar prime
rate plus 1.25%. Repayment of principal plus interest shall be made upon
negotiation of the export letters of credit, but not later than ninety (90) days
after the advance.
Effective July 7, 1999, through our Hong Kong subsidiary, International
SMC(HK) Ltd., we obtained a credit facility of $300,000 (US) from Hong Kong
Bank. This facility is a revolving line based upon drawing down a maximum of 15%
of the value of export letters of credit lodged with Hong Kong Bank. There is no
expiration except that Hong Kong Bank reserves the right to revise the terms and
conditions at the Bank's discretion. The cost of this credit facility is the
U.S. dollar prime rate plus 1.50%. Repayment of principal plus interest shall be
made upon negotiation of the export letters of credit, but not later than ninety
(90) days after the advance.
We entered into a factoring agreement, dated December 1, 1999, with
Main Factors, Inc. ("Main Factors") pursuant to which Main Factors purchases
certain accounts receivable. Under the agreement, Main Factors purchases certain
selected accounts receivable from us and advances to us 70% - 85% of the face
value of those receivables. The accounts receivable are purchased by Main
Factors without recourse and Main Factors therefore performs an intensive credit
review prior to purchase the receivable. The factoring agreement is personally
guaranteed by John Klecha, our Chief Operating Officer and Chief Financial
Officer.
We are charged a fixed percentage fee of the invoice. The purchase of
our receivables by Main Factors is absolute and is a true sale of receivables.
Main Factors has placed no maximum limit on the amount of accounts receivable
they will purchase.
We also entered into an agreement on July 19, 1999, with EPK Financial
Corporation ("EPK") whereby EPK will open letters of credit with the Company's
factories to import inventory for distribution to our customers. This allows us
to purchase domestic hardware inventory for distribution to customers in less
than container load quantities and provides the flexibility to customers of not
opening a letter of credit in our favor. The selling price to these customers is
considerably higher because we pay financing costs to EPK and incurs costs of
ocean freight, duty, and handling charges. Upon shipment of product from these
financed transactions, the receivables are factored by Main Factor, thereby
buying the shipments and related interest from EPK.
We pay EPK a flat fee per transaction, which is negotiated for each
shipment, and the maximum purchase price per transaction is $1,000,000. There
has been no maximum total shipments established under this agreement. Main
Factors has entered into this agreement as a third party agreeing to purchase
all receivables invoiced under these transactions. The transactions financed by
EPK are supported by personal guarantees of Edward Steele, our Chairman and
Chief Executive Officer and John Klecha, our Chief Operating Officer, and Chief
Financial Officer. The agreement is in effect until July 1, 2001, unless
terminated by either party upon thirty (30) days written notice.
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On September 1, 1999, we received a $1,000,000 letter of credit
facility from Bank Julius Baer of New York. This facility is used to open
letters of credit to its factories. This allows us to purchase additional
karaoke hardware inventory to sell from its domestic warehouses during the
fiscal third quarter. This facility is supported by a $200,000 fixed deposit and
a corporate repayment guaranty.
We have no present commitment that is likely to result in liquidity
increasing or decreasing in any material way. In addition, we know of no trend,
additional demand, event or uncertainty that will result in, or that are
reasonably likely to result in, liquidity increasing or decreasing in any
material way.
We have no material commitments for capital expenditures. We know of no
material trends, favorable or unfavorable, in our capital resources. We have no
additional outstanding credit lines or credit commitments in place and has no
additional current need for financial credit.
Year 2000
All of our computer systems are Year 2000 compliant. The Year 2000
compliance issue has not and it is anticipated that it will not pose operational
problems.
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BUSINESS
Cautionary Statement Relating
to Forward Looking Information
We have included some forward-looking statements in this section and
other places in the prospectus regarding our expectations after completion of
this offering. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, levels of
activity, performance or achievements, or industry results, to be materially
different from any future results, levels of activity, performance or
achievements express or implied by these forward-looking statements. Some of
these forward-looking statements can be identified by the use of forward-looking
terminology including "believes", "expects", "may", "will", "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategies involve risks and uncertainties.
You should read statements that contain these words carefully because they:
o discuss our future expectations
o contain projections of our future operating results or of our future
financial condition; or
o state other "forward looking" information
We believe it is important to communicate our expectations to you, but
events may occur in the future over which we have no control and which we are
not accurately able to predict.
Introduction to Business
The Singing Machine Company, Inc. (the "Company", "we", or "us") is
engaged in the distribution and marketing of electronic karaoke audio equipment
which plays backing tracks (music without lyrics) of popular songs and records
the vocal accompaniment of professional and amateur singers to those backing
tracks. We contract for the manufacture of all electronic equipment products
with manufacturers located in the Far East. We also produce and market karaoke
audio software, including CD plus, graphics, and audio cassette tapes containing
music and lyrics of popular songs for use with karaoke recording equipment. One
track of those tapes offers complete music and vocals for practice and the other
track is instrumental only for performance by the participant. Virtually all
audio cassette software sold by us are accompanied by printed lyrics, and our
karaoke CD's with graphics contain lyrics which appear on the video screen. We
contract for the reproduction of audio cassette software, which is produced by
us or by an independent producer.
We were incorporated in California in 1982. We originally sold our
products exclusively to professional and semi-professional singers. In 1988, we
began marketing karoake equipment for home use. We believe we were the first to
offer karaoke electronic recording equipment and audio software for home use in
the United States.
In May 1994, we merged into a wholly-owned subsidiary incorporated in
Delaware with the same name. As a result of that merger, the Delaware
corporation became the successor to the business and operations of the
California corporation and retained the name The Singing Machine Company, Inc.
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Bankruptcy Reorganization
On April 11, 1997, we filed a voluntary bankruptcy petition in the
United States Bankruptcy Court for the Southern District of Florida seeking
relief pursuant to 11 U.S.C. Chapter 11. Our First Amended Plan of
Reorganization (the "Plan") was confirmed by the Bankruptcy Court on March 17,
1998. The material terms of the Plan permitted us to issue to unsecured
creditors securities in our newly reorganized company in payment of pre-petition
claims and, further, to reduce by 90% the equity interests of pre-petition
Securityholders, Warrantholders, and Optionholders.
As a result of the bankruptcy reorganization, we were able to
effectively reduce the size of our corporate offices, warehousing operations,
personnel, and inventory resulting in an aggregate savings of $18,000 per month.
During the Chapter 11, we were able to retain our core customer base of major
retail accounts as well as begin a new customer relationship with Best Buy. We
were also able to settle certain pending legal matters through the Plan which,
when viewed with the fact that over ninety percent (90%) of the unsecured
creditors converted debt to equity in our company, resulted in a significant
reduction of liabilities on our post-reorganization balance sheet. As of June
10, 1998, we had fully implemented the Plan.
Product lines
We currently have a product line of 11 different models of recording
and playback units incorporating such features as a CD graphics player, graphic
equalizer and high-output stereo amplifier and markets its products under its
registered trademark, The Singing Machine(R). We also license our trademark, on
a non-exclusive basis, to others for sale around the world. We believe that we
are the only major company in the karaoke industry in the United States which
sells both hardware and software.
The 11 different models of electronic recording and playback equipment
sell at retail prices ranging from $30 for basic units to $400 for
semi-professional units with CD plus graphics player sound enhancement, graphic
equalizers, echo tape record/playback features, and multiple inputs and outputs
for connection to compact disc players and video cassette records. We currently
offer our audio software in two formats - multiplex cassettes and CD plus
graphics with retail prices ranging from $6.95 to $19.95. We purchase recordings
from an independent producer and currently have a song library of over 2,700
songs. Our backing track product line covers the entire range of musical tastes
including popular hits, golden oldies, country, standards, rock and roll, and
rap. We even have backing tracks for opera and certain foreign language
recordings. During the fiscal year ended March 31, 1999, we introduced three new
models of recording equipment. We are producing 40 new CDG titles and 160 songs.
The Market
Based upon Japanese industry estimates, the karoake industry exceeds
sales of $10 billion in the Far East. The current North American market for
karaoke products is estimated at less than $400 million. Therefore, we believe
that there is tremendous growth potential not only in the North American market,
but also in South America and Europe as well.
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Although there are other electronic component competitors for our
hardware products, and other audio software competitors, we believe we are the
only major company specializing in karaoke category that offers complete lines
of hardware including CD+graphics machines as well as an extensive software
library.
Sales, Marketing and Distribution
Marketing
We rely on managements ability to determine the existence and extent of
available markets for our products. Our management has considerable marketing
and sales background and devotes a significant portion of its time to
marketing-related activities. We achieve both domestic and direct sales by
marketing our hardware and software products primarily through our own sales
force and approximately 21 independent sales representatives. Our
representatives are located in various states and are paid a commission based
upon sales in their respective territories. The sales representative agreements
are generally one (1) year agreements which automatically renew on an annual
basis, unless terminated by either party on 90 days notice. We work closely with
our major customers to determine marketing and advertising plans.
We also market our products at various national and international trade
shows each year. We regularly attend the following trade shows and conventions:
CES ("Consumer Electronics Show") each January in Las Vegas; Hong Kong
Electronics Show each October in Hong Kong; and the American Toy Fair each
February in New York.
Our electronic recording products and audio software are marketed under
The Singing Machine(R) trademark throughout the United States, primarily through
department stores, lifestyle merchants, mass merchandisers, direct mail catalogs
and showrooms, music and record stores, national chains, specialty stores, and
warehouse clubs. Our karaoke machines and karaoke music is currently sold in
such stores as Target, J.C. Penney, Fingerhut, Best Buy, and Sears.
Sales
As a percentage of total revenues, our net sales in the aggregate to
our five largest customers during the fiscal years ended March 31, 1998 and
1999, were approximately 89% and 91% respectively. For the fiscal 1999 period,
three major retailers accounted for 31%, 21%, and 21% each of total revenues.
During fiscal year 2000, we made significant progress in broadening our base of
customers.
Although we have long-established relationships with many of our
customers, we do not have long-term contractual arrangements with any of them. A
decrease in business from any of our major customers could have a material
adverse effect on our results of operations and financial condition.
At March 31, 1999 and December 31, 1999, we had approximately
$1,786,000 and $1,949,000, respectively, net of cancellations, of unfilled
customer orders. The amount of unfilled orders at any particular time is
affected by a number of factors, including scheduling of manufacturing and
shipping of products, which in some instances is dependent on the needs of the
customer.
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Returns of electronic hardware and software products by our customers
are generally not permitted except in approved situations involving quality
defects, damaged goods, or goods shipped in error. We sell returned hardware
products in closeout markets. Our policy is to give credit to our distributors
for audio software returned in conjunction with the receipt of new replacement
purchase orders. The returned software is resold by us. Our credit policies are
tailored to our customer base. We have not suffered significant credit losses to
date.
Distribution
We distribute hardware products to retailers and wholesale distributors
through two methods: shipment of products from inventory (domestic sales), and
shipments directly from our Hong Kong subsidiary or manufacturers in the Far
East of products sold by our sales force (direct sales). Domestic sales, which
account for substantially all of our audio software sales, are made to customers
located throughout the United States from inventories maintained at our
warehouse facility in Florida or directly from the software producers.
We fill domestic 1. Domestic Sales: Our strategy of selling
orders from our U.S. products from a domestic warehouse enables us to
warehouses provide timely delivery and serve as a "domestic
supplier of imported goods". We purchase electronic
recording products overseas for our own account and
warehouse the products in leased facilities in Florida
and California. We are responsible for costs of
shipping, insurance, customs clearance, duties, storage
and distribution related to such warehouse products
and, therefore, warehouse sales command higher sales
prices than direct sales. We generally sell from our
own inventory in less than container sized lots.
We fill foreign 2. Direct Sales - Hong Kong: The formation of our
orders through our subsidiary, International SMC(HK) Ltd.
international ("International") is attributable to the advent of
subsidiary in Hong foreign equipment sales. Some hardware products sold by
Kong us are shipped directly to customers from the Far East
through International, a Hong Kong trading company.
Sales made through International are completed by
either delivering products to the customers' common
carriers at the shipping point or by shipping the
products to the customers' distribution centers,
warehouses, or stores. Direct sales are made in larger
quantities (generally container sized lots) to
customers in Italy, England, Canada, and the United
States, who pay International pursuant to their own
international, irrevocable, transferable letters of
creditor or on open credit with our suppliers in the
Far East.
Manufacturing and Production
The electronic recording devices sold by us are manufactured and
assembled by third parties pursuant to design specifications provided by us. Our
electronic recording devices are assembled by three factories in the People's
Republic of China. The finished products are packaged and labeled under our
registered trademark, The Singing Machine(R) brand name.
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Our products contain electronic components manufactured by other
companies such as Panasonic, Toshiba, and Sony. The electronic components are
installed in cabinets manufactured by three manufacturers. Certain tools and
dies used in the production of certain models of the electronic audio equipment
sold by us are owned by LTD.
We presently purchase and import virtually all of our electronic
recording products from three suppliers located in the People's Republic of
China. In fiscal 1999 and 1998, suppliers in the People's Republic of China
accounted for in excess of 88% and 91%, respectively, of the total product
purchases, including virtually all of our hardware purchases. Our primary
suppliers of electronic recording products are located in the Shenzen province
of the People's Republic of China.
While we purchase our products from a small number of large suppliers
with whom we maintain a close alliance, all of the electronic components and raw
materials used by us are available from several sources of supply, and we do not
anticipate that the loss of any single supplier would have a material long-term
adverse effect on our business, operations, or financial condition. To ensure
our high standards of product quality and that shipping schedules are met by
suppliers, we utilize Hong Kong based agents as representatives. Those agents
include product inspectors who are knowledgeable about product specifications
and work closely with the suppliers to verify that such specifications are met.
Additionally, our key officers frequently visit suppliers for quality assurance
and to support good working relationships.
All of the electronic equipment sold by us is warranted against
manufacturing defects for a period of ninety (90) days for labor and parts. All
audio software sold is similarly warranted for a period of 30 days. During the
fiscal years ended March 31, 1999 and 1998, warranty claims have not been
material to our results of operations.
Subsidiaries
In June 1996, we organized a wholly-owned subsidiary in Hong Kong under
the name International SMC (HK) Ltd. ("International") to coordinate our
production and finance in the Far East. International assists with the
coordination of product shipments from China and other foreign factories as well
as the negotiation of foreign letters of credit.
Competition
Our business is highly competitive. In addition, we compete with all
other existing forms of entertainment including, but not limited to, motion
pictures, video arcade games, home video games, theme parks, nightclubs,
television and prerecorded tapes, CD's, and video cassettes. Our financial
position depends, among other things, on our ability to keep pace with such
changes and developments and to respond to the requirements of our customers.
Many of our competitors have significantly greater financial, marketing, and
operating resources and broader product lines than we do. Our major electronic
component competitors include Grand Prix, Casio, and New Tech. Our major audio
software competitors are Pocket Songs and Sound Choice.
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We believe that competition in our markets is based primarily on price,
product performance, reputation, delivery times, and customer support. We
believe that, due to our proprietary know-how, we have the ability to develop
and produce hardware and software on a cost-effective basis.
Trademarks and Licenses
We hold federal and international copyrights to substantially all of
the audio productions comprising our song library. However, since each of those
productions is a re-recording of an original work by others, we are subject to
both contractual and statutory licensing agreements with the publishers who own
or control the copyrights of the underlying musical compositions and are
obligated to pay royalties to the holders of such copyrights for the original
music and lyrics of all of the songs in our library that have not passed into
the public domain. Since most audio software distributed is accompanied by
printed lyrics, we are also subject to written print royalty license agreements.
We are currently a party to more than 13,000 different written copyright license
agreements covering more than 30,000 separate copyright holders.
The Federal Copyright Act (the "Act") creates a compulsory statutory
license for all non- dramatic musical works which have been distributed to the
public in the United States. Under the Act, with respect to each work included
in an audio software product distributed by us under a compulsory license, we
are required to pay a royalty of the greater of $0.0710 per song or $0.013 per
minute of playing time or fraction thereof with respect to each item of audio
software produced and distributed by us (the "Statutory Rate"). Royalties due
under compulsory licenses are payable monthly. We currently have compulsory
statutory licenses for approximately 200 songs in our song library.
The Act allows a deferral of royalty payments for products sold subject
to a right of return. The practice in the recorded music industry is to permit
retailers to return for exchange merchandise. Accordingly, each audio production
sold by us is sold subject to a right of return for credit against future
purchases or exchange. Royalties are due with respect to such sales on the
earlier to occur of nine months after the date of distribution or the date on
which the revenue from the sale is recognized in accordance with generally
accepted accounting principles. We have reached agreement on a 25% reserve with
a music publisher representing over 22% of its print licenses, which agreement
requires the payment of deferred royalties no later than nine months after the
date of distribution. With regard to the other principal copyright royalty
holders, we have deferred, and intend to continue to defer, approximately 25% of
royalty payments for approximately nine months, an amount and period which we
believe is appropriate for the karaoke industry.
The majority of the songs in our song library are subject to written
copyright license agreements. Our written licensing agreements for audio
software ("mechanical licenses") typically provide for royalties at the
Statutory Rate although some provide for lower royalty rates. Written licenses
typically provide for quarterly royalty payments. We also have written license
agreements for substantially all of the printed lyrics which are distributed
with our audio software products ("print licenses"), which licenses also
typically provide for quarterly payments of royalties at the Statutory Rate.
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Government Regulation
In the spring of 1999, the President of the United States renewed the
People's Republic of China's "Most Favored Nation" ("MFN") treatment for entry
of goods into the United States for an additional year. In the context of United
States tariff legislation, MFN treatment means that products are subject to
favorable duty rates upon entry into the United States. IF MFN status for China
is restricted or revoked in the future, our cost of goods purchased from Chinese
vendors is likely to increase. A resultant change in suppliers would likely have
an adverse effect on our operations and, possibly, earnings, although management
believes such adversity would be short- term as a result of its ability to find
alternative suppliers. We continue to closely monitor the situation and have
determined that the production capabilities in countries outside China which
have MFN status and, therefore, have favorable duty rates, would meet our
production needs.
Employees
As of the date of this Prospectus, we had 12 full-time employees, 4 of
whom were engaged in warehousing and technical support, and 8 in marketing and
administrative functions.
Properties
On March 31, 1999, we entered into a lease for an 8,000 square foot
office and warehouse facility located in Coconut Creek, Florida for a term of
sixty-one (61) months at a cost of $4,487 per month for the first twelve (12)
month period and $4,820 for the second twelve (12) month period. Under the
lease, we must pay costs for maintenance, insurance, and real estate taxes
approximating $9,000 per year. We believe that the facilities are well
maintained, in substantial compliance with environmental laws and regulations,
and adequately covered by insurance. We also believe that the leased facility is
not unique and could be replaced, if necessary, at the end of the term of the
existing lease.
Legal Proceedings
We filed a voluntary petition ("Petition") for relief under Chapter 11
of the Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the Southern District of Florida (the "Bankruptcy Court"), case number
97-22199-BKC-RBR, on April 11, 1997 (the "Petition Date"). On March 17, 1998,
the U.S. Bankruptcy Court confirmed our First Amended Plan of Reorganization.
The Plan has been fully implemented.
We are not a party to any material legal proceeding, nor to the
knowledge of management, are any legal proceedings threatened against us. From
time to time, we may be involved in litigation relating to claims arising out of
our operations in the normal course of business.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to our
executive officers and directors as of the date of this prospectus.
Name Age Position
- ---- --- --------
Edward Steele 70 Chief Executive Officer,
President and Director
John F. Klecha 49 Chief Operating Officer,
Chief Financial Officer,
Secretary, Treasurer
and Director
Allen Schor 57 Director
Josef A. Bauer 62 Director
All directors hold office until the next annual meeting of
Securityholders or until their successors have been duly elected and qualified.
With the exception of Mr. Steele and Mr. Klecha who have employment agreements
with the company, our executive officers are appointed and serve at the
discretion of the Board of Directors. There are no family relationships among
any of our directors and executive officers. However, one of our key personnel,
John Steele, our National Sales Director, is the son of Director and Chief
Executive Officer Edward Steele.
Edward Steele joined the Company in 1988 and has served as the Chief
Executive Officer, President, and as a director of the Company since September
1991. From October 1988 to September 1991, Mr. Steele was responsible for the
development of our electronic hardware products in the Far East and was our
sales director. Prior to joining the Company, Mr. Steele served in executive
capacities at a number of companies in the toy and electronics fields, including
as Managing Director in charge of worldwide sales of Concept 2000, a
manufacturer of consumer electronics, from 1971 to 1978; as President of Wicely
Corp., a distributor of electronic toys and consumer electronics from 1978 to
1983; and as President of Justin Products Corp., an electronic toy manufacturer
from 1983 to 1988.
John Klecha has been the Chief Financial Officer, Secretary, Treasurer
and a Director of the Company since October 10, 1997. Since June 28, 1999,
Mr. Klecha has served as Chief Operating Officer. Mr. Klecha is in charge of
all financial, administrative, and operational functions of the Company. Prior
to joining us, Mr. Klecha served in executive and senior
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<PAGE>
management capacities at a number of companies in the toy and other consumer
products fields, including as the senior financial and administrative executive
of a privately held toy design, manufacturing and distribution company since
1987; Vice President, Director and Chief Financial Officer of Sussex Nautilus
from 1984 to 1987; and Vice President of Finance and Administration for
Lazzaroni Sarrono, Ltd. from 1982 to 1984.
Allen Schor was appointed to the Board of Directors effective
June 28, 1999. Since 1969, Mr. Schor has served as the President and Chief
Executive Officer of El Mar Plastics, Inc., an international marketing and
production company of plastics products for the tape-recording industry
headquartered in Carson, California,. Additionally, Mr. Schor is the General
Manager of CD Media Masters, Inc. In 1995, CD Media Masters was formed by five
(5) international investors to create a CD master making facility. This facility
is located at the El Mar Plastics, Inc. facility.
Josef A. Bauer was appointed to the Board of Directors effective
October 15, 1999. Since 1992, Mr. Bauer has been a managing director and
principal stockholder of Dero Research Ltd. in Hong Kong, which serves as a
manufacturer's representative for the sale of telephone and electronic products.
From 1970 to 1993, Mr. Bauer served as a managing director and was a principal
stockholder of Dero Research Corporation in Tokyo, Japan, which was engaged in
the design, engineering and manufacture of automobile audio equipment. He served
as a director from 1991 to 1994, of AmeriData Technologies, Inc., a publicly
traded computer products and service company. In December 1994, Mr. Bauer was
elected to the Board of Directors of Go- Video, Inc., a publicly trade video
electronics manufacturer and distributor. Mr. Bauer has also served as President
of Banisa Corporation, a privately owned investment company, since 1975. Mr.
Bauer is also President of Magna (a position he has held since 1989) and was
formerly a directors of the Company from February 1990 until September 1991, and
February 1995 until May, 1998.
Board Committees
On October 15, 1999, the Board of Directors appointed Audit and
Executive Compensation/Stock Option Committees. The Audit Committee consists of
Messrs. Steele, Bauer and Schor, and the Executive Compensation/Stock Option
Committee consists of Messrs. Klecha, Bauer and Schor. The Audit Committee
recommends the engagement of independent auditors to the board, initiates and
oversees investigations into matters relating to audit functions, reviews the
plans and results of audits with the Company's independent auditors, reviews the
Company's internal accounting controls, and approves services to be performed by
the Company's independent auditors. The Executive Compensation/Stock Option
Committee considers and authorizes remuneration arrangements for senior
management and grants Options under, and administers, the Company's 1994
Employee Stock Option Plan. The entire Board of Directors operates as a
nominating committee.
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<PAGE>
Director's Compensation
We currently reimburse each director for expenses incurred in
connection with attendance at each meeting of the Board of Directors or a
committee on which he serves. In addition, non- employee directors are entitled
to be paid a fee of $1,000 for each Securityholder and board meeting attended
and each Director is entitled to receive 5,000 common stock Options per year.
Limitations on Liability and Indemnification Matters
We have adopted provisions in our articles of incorporation and bylaws
that will limit the liability of our directors to the fullest extent permitted
by the by the Delaware General Corporation Law. Pursuant to such provisions, no
director will be liable to the Company or its Securityholders for monetary
damages for breaches of certain fiduciary duties as a director of the Company.
The limitation of liability will not affect a director's liability for a breach
of the director's duty of loyalty to the company or its Securityholders, an act
or omission not in good faith or that involves intentional misconduct or a
knowing violation of the law, any unlawful distributions, or a transaction from
which the director receives an improper personal benefit. The limitation of
liability also will not affect the availability of equitable remedies such as
injunctive relief or rescission.
Our articles of incorporation will permit, and our bylaws will require,
us to indemnify officers and directors to the fullest extent permitted by law.
We have also entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, judgments, fines and settlement amounts incurred by them
in any action or proceeding, including any action by or in the right of the
company, arising out of the person's services as a director or executive officer
of the company or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified directors and executive officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling person based on
the foregoing provisions, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
and is, therefore, unenforceable.
Executive Compensation
The following table sets forth annual remuneration of $100,000 or more
paid for the fiscal years ended March 31, 1998 and 1999 and proposed to be paid
for the fiscal year ended March 31, 2000 to certain officers and directors of
the Company:
The following table sets forth certain compensation information for the
fiscal years ended March 31, 1997, 1998 and 1999 with regard to the Company's
Chief Executive Officer and one other executive officer whose combined salary
and bonus was in excess of $100,000 (the "Named Officers"):
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<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long Term Compensation
------------------- ----------------------
Awards Payments
------ --------
Restricted Securities
Name of Individual Other Annual Stock Underlying/LTIP All Other
and Principal Position Year Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
- ---------------------- ---- ------ ----- ----- ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Edward Steele 1999 $180,692 $52,369 $7,228 -0- -0- -0- -0-
President 1998 $166,500 $ 3,180 $7,200 -0- -0- -0- -0-
1997 $170,167 $ -0- $7,200 -0- -0- -0- -0-
John Klecha 1999 $ 88,200 $26,184 $3,614 -0- -0- -0- -0-
Chief Financial Officer 1998 $ 43,654 $ 1,442 $2,100 -0- -0- -0- -0-
</TABLE>
The following table sets forth information concerning Options granted to our
officers and directors during the year ended March 31, 1999, pursuant to our
Stock Option Plan. No stock appreciation rights ("SAR's") were granted.
<TABLE>
<CAPTION>
Percent of
Number of Total Options
Shares Granted to
Underlying Employees in Exercise Price
Name of Individual Options Granted Fiscal Year Per Share Expiration Date
- ------------------ --------------- -------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Edward Steele 350,000 70.1% $ .43 12/9/05
John Klecha 100,000 20.0% $ .43 12/9/05
</TABLE>
The following table sets forth information as to Options held by the
executive officers named in the Summary Compensation Table
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at at Fiscal
Fiscal Year End Year End
Shares --------------- -------------
Acquired Value Exercisable/ Exercisable/
Name of Individual Upon Exercise Realized Unexercisable Unexercisable
- ------------------ ------------- -------- --------------- -------------
<S> <C> <C> <C> <C>
Edward Steele N/A N/A 7,500 / 350,000 0 / 483,870
John Klecha N/A N/A 0 / 100,000 0 / 138,250
</TABLE>
Stock Option Plans
Under the 1994 Employee Stock Option Plan (the "Option Plan"), the
Company reserved 400,000 shares of Common Stock for the grant of options. Under
the Option Plan, the Board of Directors in its discretion may grant stock
options to purchase common stock of the Company to
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officers and employees, including Directors who are employees of the Company. Of
the 400,000 options, 275,000 were granted and 125,000 options remained reserved.
After the Company's bankruptcy reorganization, taking into consideration the
post-bankruptcy 1-for-10 reverse split, there remained 27,500 outstanding
options.
In December, 1998, the Company authorized the grant of 494,000 options
subject to the approval by the Company's shareholders of the reservation of an
aggregate of 600,000 options. The Company's shareholders approved the
reservation of the 600,000 options in March, 1999. On November 10, 1999, 27,500
options expired unexercised.
Therefore, of the aggregate 600,000 reserved, 494,000 were granted at
an exercise price of $.43 per share with fifty percent (50%) of the options
vesting during December, 1999, and fifty percent (50%) during December, 2000.
The remaining 106,000 options were granted with an exercise price of $1.66 per
share, all 106,000 options having vested in December, 1999.
As of December 31, 1999, no Options remain available for future grant.
Additional Options may become available for future grant. Additional options may
become available to the extent that outstanding options terminate or expire
unexercised.
Stock Option activity since March 31, 1998, is summarized as follows:
Number Weighted Average
of Shares Exercise Price
--------- --------------
Outstanding, March 31, 1998 ................ 27,500 (1) $4.87
Granted.................................... 600,000 .65
Exercised................................... - -
Cancelled................................... (27,500)(1) 4.87
Outstanding, December 31, 1999.............. 600,000 .65
Employment Agreements
We executed an employment agreement with Mr. Steele which commenced
March 1, 1998, for a period of three years. Pursuant to Mr. Steele's employment
agreement, he is entitled to receive base compensation of $180,000 per year,
which amount automatically increases during the second and third fiscal years by
the greater of 5% or the annual increase in the Consumer
- -------
(1) The Company's March 31, 1999 Consolidated Financial Statements reflect a
beginning outstanding option balance of 47,870 options. The difference
reflects options held by employees whose employment was terminated prior to
March 31, 1998, but whose options were cancelled subsequent to March 31,
1998.
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<PAGE>
Price Index. The agreement also provides for bonuses based on a percentage of a
bonus pool tied to the annual pre-tax net income (as defined in the agreement)
of the Company. No such bonuses were paid for the 1998 or 1997 fiscal years. Mr.
Steele would receive 50% of the bonus pool. In the event of a termination of his
employment following a change-in-control, Mr. Steele would be entitled to a lump
sum payment of 300% of the amount of his total compensation in the twelve months
preceding such termination. During the term of his employment agreement and for
a period of one year after his termination for cause, or his voluntary
termination of his employment agreement, Mr. Steele could not directly or
indirectly compete with the Company in the karaoke industry in the United
States.
We executed an employment agreement with Mr. Klecha which commenced
March 1, 1998, for period of two years with an automatic term extension for one
additional year unless terminated by us or the employee. Pursuant to Mr.
Klecha's employment agreement, he is entitled to receive base compensation of
$92,000 per year, which amount automatically increases during the second and
third fiscal years by the greater of 5% or the annual increase in the Consumer
Price Index. The agreement also provides for bonuses based on a percentage of a
bonus pool tied to the annual pre-tax net income (as defined in the agreement)
of the Company. No such bonuses were paid for the 1998 or 1997 fiscal years. Mr.
Klecha would receive 25% of the bonus pool. In the event of a termination of his
employment following a change-in-control in the twelve months preceding such
termination, Mr. Klecha would be entitled to a lump sum payment of 100% of the
amount of his total compensation in the twelve months preceding such
termination. During the term of his employment agreement and for a period of one
year after his termination for cause, or his voluntary termination of his
employment agreement, Mr. Klecha could not directly or indirectly compete with
the Company in the karaoke industry in the United States.
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<PAGE>
CERTAIN TRANSACTIONS
Company Loans to Officers and Directors
Edward Steele, a Director and Chief Executive Officer, has a promissory
note outstanding to us in the principal amount of $13,880 as of September 30,
1999. The original note for $30,650 granted on March 31, 1998 has been extended
until March 31, 2000 with an interest rate of 9% per annum on the unpaid
balance.
On July 1, 1999, we loaned Edward Steele, our Chief Executive Officer,
President and Director $55,000 for the purchase of two (2) units of our Private
Placement. The Note including interest of 9% matures on June 30, 2000. The Note
is secured by the securities comprising the Private Placement Units.
On July 1, 1999, we loaned John Klecha, our Chief Operating Officer,
Chief Financial Officer and Director $55,000 for the purchase of two (2) units
of our Private Placement. The Note including interest of 9% matures on June 30,
2000. The Note is secured by the securities comprising the Private Placement
Units.
Stock Grants for Credit Facility and Letter of Credit Guarantees
In June, 1999, we arranged a credit facility with Main Factors, Inc.,
whereby Main Factors, Inc. purchases certain of our accounts receivable. Under
the agreement, we receive 75% - 85% of the face value of those receivables
without recourse. To secure the credit facility, John Klecha, our Chief
Operating Officer and Chief Financial Officer, provided his personal payment
guaranty. The average outstanding balance of this credit facility is $300,000.
In July, 1999, we entered into an agreement with EPK Financial
Corporation ("EPK") whereby EPK provided letters of credit with our factories to
import inventory for distribution to our customers. The EPK agreement allows us
to purchase domestic hardware inventory in less than container load quantities
and provide our customers with the flexibility of not having to own letters of
credit. To secure the letter of credit, Edward Steele, our Chief Executive
Officer and President, and John Klecha, our Chief Operating Officer and Chief
Financial Officer, provide their personal guarantees. The average outstanding
balance of this letter of credit is $300,000.
In consideration for providing their personal guarantees, we issued to
Mr. Steele 200,000 shares of our Common Stock and issued to Mr. Klecha 150,000
shares of our Common Stock.
Other Relationships
We have an agreement with FLX (a china manufacturer of consumer
electronics products) to produce electronic recording equipment based on our
specifications. Paul Wu, a former director of the Company, is Chairman of the
Board and a principal stockholder of FLX.
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<PAGE>
During the fiscal years ended March 31, 1998, and 1999, we purchased
approximately $1.7 million and $1.0 million respectively, in equipment from FLX.
We believe that all of the foregoing transactions with FLX have been on
terms no less favorable to us than could have been obtained from unaffiliated
third parties in arms-length transactions under similar circumstances.
Financial Advisory Agreements
We entered into Financial Advisory Agreements on July 8, 1999, with
Dunedin, Inc., FRS Investments, Inc., and Portfolio Research Associates, Inc. We
contracted with these companies to provide us with a range of advisory services
designed to provide us with new favorable sources of financing, assistance in
raising new equity, possible business combination candidates, feedback
concerning our public image, review of management, and development of a
strategic plan. Under the Agreements, Dunedin, Inc. and FRS Investments, Inc.
were each to receive 64,200 Common Stock Purchase Warrants upon execution of the
Agreements and 5,200 Common Stock Purchase Warrants each month thereafter for
the three (3) year term of the Agreements. Portfolio Research Associates, Inc.
was to receive 61,600 Common Stock Purchase Warrants upon execution of the
Agreement, and 3,600 Common Stock Purchase Warrants each month thereafter for
the three (3) year term of the Agreement. All of the Warrants are exercisable at
any time during the term of the Agreements at an exercise price of $1.375 per
share. Additionally, each advisor executed a proxy in favor of our Company for
each Common Share exercised.
We have terminated the Financial Advisory Agreements of FRS
Investments, Inc. and Portfolio Research Associates, Inc. as of October 1, 1999,
and Dunedin, Inc. as of November 26, 1999. We issued to Portfolio Research
Associates, Inc. 76,000 Common Stock Purchase Warrants, to FRS Investments, Inc.
85,000 Common Stock Purchase Warrants, and to Dunedin, Inc. 92,200 Common Stock
Purchase Warrants, in full satisfaction of their respective Agreements.
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<PAGE>
PRINCIPAL SECURITYHOLDERS
The following table sets forth, as of the date of this Prospectus,
certain information concerning beneficial ownership of our Common Stock by (i)
each person known to us to own 5% or more of our outstanding Common Stock, (ii)
all directors of the Company and (iii) all directors and officers of the Company
as a group:
<TABLE>
<CAPTION>
Percentage of Shares (1)
Name & Address Position with Company Number of Shares Before Offering After Offering
-------------- --------------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
John Klecha Director, Chief Operating
6601 Lyons Road, Building A-7 Officer, and Chief Financial 483,274 (4) 16.5% 9.8%
Coconut Creek, Florida 33073 Officer
Edward Steele (7) Director, Chief Executive
6601 Lyons Road, Building A-7 Officer, and President 457,924 (3) 15.6% 9.3%
Coconut Creek, Florida 33073
Alan and Deana Schor Director
840 East Walnut 324,643 11.1% 6.6%
Carson, California 90746
Josef A. Bauer Director
130 Sunrise Avenue, #312 116,886(5) 4.0% 2.4%
Palm Beach, FL 33480
The Harry Fox Agency
711 Third Avenue, 8th Floor 410,675 14.0% 8.3%
New York, NY 10017
FLX(HK) Ltd.
Unit 19 5/F Vanta Ind. Centre
21-33 Tai Lin Pai Road 237,932(2) 8.1% 4.8%
Kwaichung N.T. Kowloon
Hong Kong
Colony Electronics
500 Hennessy Road 129,300(2) 4.4% 2.6%
Causeway, Hong Kong
Gemco Pacific, Inc
500 Hennessy Road 25,667(2) .9% 0.5%
Causeway, Hong Kong
All Directors and Executive 1,382,727(6) 47.2% 28.0%
Officers as a Group (4 per
</TABLE>
(1) As used herein, the term beneficial ownership with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934 as
consisting of sole or shared voting power (including the power to vote or
direct the vote) and/or sole or shared investment power (including the
power to dispose or direct the disposition of) with respect to the security
through any contract, arrangement, understanding, relationship or
otherwise, including a right to acquire such power(s) during the next 60
days. Unless otherwise noted, beneficial ownership consists of sole
ownership, voting and investment rights.
(2) Mr. Paul Wu is a former director of the Company. Mr. Wu is a director of
Colony Electronics. Mr. Wu disclaims any beneficial ownership of the shares
of Colony Electronics. Mr. Wu is a director of FLX(HK) Ltd. and disclaims
any beneficial ownership of the shares of FLX (HK) Ltd. Mr. Wu is a
director of Gemco Pacific, Inc. ("Gemco"). Mr. Wu disclaims beneficial
ownership of the shares owned by Gemco.
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<PAGE>
(3) Includes immediately exercisable Options to purchase 205,000 shares of
Common Stock and immediately exercisable Warrants to purchase 8,000 shares
of Common Stock.
(4) Includes immediately exercisable Options to purchase 39,000 shares of
Common Stock and immediately exercisable Warrants to purchase 24,000 shares
of Common Stock.
(5) Includes immediately exercisable Warrants to purchase 8,000 shares of
Common Stock.
(6) Includes immediately exercisable Options to purchase 244,000 shares of
Common Stock and immediately exercisable Warrants to purchase 40,000 shares
of Common Stock.
(7) Mr. Steele disclaims beneficial ownership of 100 shares owned by his wife.
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<PAGE>
DESCRIPTION OF SECURITIES
The Company is authorized to issue 74,000,000 shares of Common Stock,
$.01 par value per share, and 1,000,000 shares of Preferred Stock, $1.00 par
value per share. As of the date of this Prospectus, there are 2,931,975 shares
of Common Stock issued and outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted for the election of
directors can elect all of the directors. The holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the Common Stock. Holders of
shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and, except as noted herein, there are no redemption
provisions applicable to the Common Stock. All of the outstanding shares of
Common Stock are, and the Shares, when issued and paid for as set forth in this
Prospectus, will be, fully paid and nonassessable.
The holders of Common Stock do not have any subscription, redemption or
conversion rights, nor do they have any preemptive or other rights to acquire or
subscribe for additional, unissued or treasury shares. Accordingly, if the
Company were to elect to sell additional shares of Common Stock following this
Offering, persons acquiring Common Stock in this Offering would have no right to
purchase additional shares, and, as a result, their percentage equity interest
in the Company would be reduced. Pursuant to the Company's Bylaws, except for
any matters which, pursuant to corporate law, require a greater percentage vote
for approval (including, for example certain mergers and consolidations and the
amendment of certain provisions of the Company's Bylaws) , the holders of
majority of the issued and outstanding Common Stock entitled to vote, if present
in person or by proxy, are necessary and sufficient to constitute a quorum for
the transaction of business at meetings of the Company's stockholders. Further,
except as to any matter which, pursuant to corporate law, requires a greater
percentage vote for approval (including, for example, certain mergers,
consolidations, sales of substantially all of the assets, and amendments to
certain provisions of the charter and Bylaws, of the Company), the affirmative
vote of the holders of a majority of the Common Stock voted on the matter
(provided a quorum as aforesaid is present) is necessary and sufficient to
authorize, affirm or ratify any act or action except the election of directors,
which is by a plurality of the votes cast.
The holders of Common Stock do not have cumulative voting rights.
Accordingly, the holders of more than half of the outstanding shares of Common
Stock can elect all of the directors to be elected in any election. In such
event, the holders of the remaining shares of Common Stock would not be able to
elect any directors. The Board of Directors is empowered to fill any vacancies
on the Board of Directors created by the resignation, death or removal of
directors.
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<PAGE>
In addition to voting at duly called meetings at which a quorum is
present in person or by proxy, corporate law, the Charter and the Company's
Bylaws provide that stockholders may take action without the holding of a
meeting by written consent or consents signed by the holders of that number of
the outstanding shares of the capital stock of the Company entitled to vote
thereon which would be required to take the subject action. Prompt notice of the
taking of any action without a meeting by less than unanimous consent of the
stockholders will be given to those stockholders who do not consent in writing
to the action. The purposes of this provision are to facilitate action by
stockholders and to reduce the corporate expense associated with annual and
special meetings of stockholders. Pursuant to the rules and regulations of the
Commission, if stockholder action is taken by written consent, the Company will
be required to send to each stockholder entitled to vote on the matter acted on,
but whose consent was not solicited, an information statement containing
information substantially similar to that which would have been contained in a
proxy statement.
After the offering and after giving effect to the conversion of all
preferred stock, exercise of all Warrants and outstanding Options, the Company's
executive officers and directors will beneficially own approximately 28% of the
outstanding shares of Common Stock, and may accordingly be in a position to
significantly influence the voting results of certain actions required or
permitted to be taken by stockholders of the Company, including the election of
directors. As a result, the officers and directors of the Company may be in a
position to control the outcome of substantially all matters on which
stockholders are entitled to vote, including the election of directors.
Convertible Preferred Stock
The Company's Board of Directors has the authority, without further
action by the stockholders, to issue up to 1,000,000 shares of preferred stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and the
number of shares constituting any series or the designation of such series,
without any further vote or action by shareholders as of the date of this
Prospectus, all of the preferred shares have been issued. The issuance of
preferred stock could also adversely affect the voting power of holders of
common stock and the likelihood that such holders will receive dividend payments
and payments upon liquidation and could have the effect of delaying, deferring
or preventing a change in control of the Company. Accordingly, the issuance of
shares of preferred stock may discourage bids for the common stock or may
otherwise adversely affect the market price of the common stock. The Company has
no present plan to issue any additional shares of preferred stock.
A brief description of the Company's "Convertible Preferred Stock"
including the preferences, dividends, conversion and other rights, all as set by
the Board of Directors of the Company, is as follows. A more detailed
explanation regarding the Preferred Stock may be found in the Amendment to the
Company's Articles of Incorporation.
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<PAGE>
Designation and Initial Number. The class of shares of Preferred Stock
hereby classified shall be designated the "Convertible Preferred Stock"
(hereinafter referred to as the "Preferred Stock"). The initial number of
authorized shares of the Preferred Stock is 1,000,000.
Dividends. There shall be a nine percent (9%) dividend paid on the
Preferred Stock prior to the date of conversion.
Conversion. Each share of Preferred Stock will automatically convert at
5:00 p.m. eastern time on April 1, 2000. Upon conversion, each holder of one (1)
share of Preferred Stock shall receive from the Company one (1) share of the
Company's Common Stock.
Liquidation or Dissolution. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of Preferred Stock then outstanding shall be entitled to be paid out of the
assets of the Company available for distribution to its stockholders, before any
payment shall be made to the holders of any stock of the Company ranking junior
to Preferred Stock.
A merger or consolidation of the Company with or into any other
corporation, share exchange or a sale or conveyance of all or any part of the
assets of the Company (which shall not in fact result in the liquidation of the
Company and the distribution of assets to stockholders) shall not be deemed to
be a voluntary or involuntary liquidation, dissolution or winding up of the
Company.
Common Stock Public Warrants
In 1994, we sold 1,200,000 Common Stock Public Warrants (individually
"Public Warrant" or collectively "Public Warrants) pursuant to our initial
public offering. In 1995, we declared a dividend to our shareholders payable in
the form of Public Warrants. As a result of the dividend, we issued an
additional 456,000 Public Warrants. As of the date of this Prospectus, there are
1,656,000 Public Warrants issued and outstanding.
The following is a brief summary of the provisions of the Public
Warrants:
Term. The original term of the Public Warrants was five (5) years from
the date of our Initial Public Offering dated November 10, 1994. The Public
Warrants issued as a dividend in 1995 expire at the same time the original
Public Warrants expire. On October 29, 1999, our Board of Directors extended the
expiration date of the Public Warrants by one (1) year to November 10, 2000.
Exercise Price. Ten (10) Public Warrants are required to purchase one
(1) share of our common stock. Ten (10) Public Warrants entitle the holder
thereof to purchase at any time on or before November 10, 2000 (the "Expiration
Date") one (1) share of our common stock at a price of $36.00 per share. After
the expiration date, Warrantholders have no further rights. The Public Warrants
are subject to adjustments in their exercise price and in the number of shares
of common stock or other securities deliverable upon the exercise thereof in the
event of a stock dividend, stock split, reclassification, reorganization,
consolidation, or merger. Warrantholders do not have any voting or any other
rights as shareholders of the Company.
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<PAGE>
The Public Warrants may be exercised by surrendering the certificate
evidencing such Public Warrant, with the Form of Election to purchase on the
reverse side of such certificate properly completed and executed, together with
payment of the exercise price and any transfer tax, to the Warrant Agent. If
less than all of the Public Warrants evidenced by a Warrant Certificate are
exercised, a new certificate will be issued for the remaining number of Public
Warrants. Payment of the exercise price may be made by cash, bank draft, or
official bank or certified check equal to the exercise price.
The exercise price of the PublicWarrants bears no relation to any
objective criteria of value and should in no event be regarded as an indication
of any future market price of the securities.
We have authorized and reserved for issuance a sufficient number of
common stock to permit the exercise of all Public Warrants to be issued. All
common stock issued upon exercise of the Public Warrants, if exercised in
accordance with their terms, will be fully paid and non- assessable.
Adjustments. The exercise price and the number of common shares
purchasable upon exercise of the Public Warrants are subject to adjustment upon
the occurrence of certain events. The original Public Warrants issued in
connection with our Initial Public Offering were subject to adjustment on two
occasions. The first occurrence was the 1995 dividend paid to shareholders and
the second occurrence the 1997 bankruptcy reorganization of the Company. In
1995, we issued 456,000 Public Warrants as a dividend to shareholders increasing
the aggregate number of outstanding Public Warrants to 1,656,000. On April 11,
1997, we filed a voluntary bankruptcy petition to reorganize pursuant to Chapter
11. The Company's Amended Plan of Reorganization (the "Plan") was confirmed by
the Bankruptcy Court on March 17, 1998. In accordance with the Plan, on April 1,
1998, we effectuated a one-for-ten (1:10) reverse stock split. As a result of
the reorganization, ten (10) Public Warrants are now required to purchase one
(1) share of common stock, at $36.00 per share. The Company, however, may extend
the expiration date of the Public Warrants and/or adjust the exercise price.
Transfer, Exchange and Exercise. The Public Warrants are in registered
form and may be presented for transfer, exchange or exercise at any time before
the expiration date of November 10, 2000, at which time the Public Warrants
become wholly void and of no value.
Warrantholder not Shareholder. The Public Warrants do not confer upon
holders any dividend, voting, preemptive or any other rights as a shareholder of
the Company.
Transfer Agent and Warrant Agent
The transfer agent and the warrant agent for our Common Stock and
Public Warrants is Continental Stock Transfer & Trust Co., 2 Broadway, New York,
New York 10004.
-40-
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth, for each Selling Securityholder, the
amount of Common Stock of the Company owned, the number of shares of Common
Stock offered hereby, and the number of shares of Common Stock owned after the
offering (assuming the sale of all shares offered under this Prospectus).
<TABLE>
<CAPTION>
Shares of Common
Stock Beneficially Shares that May be Shares of Common
Selling Owned Prior to Offered Pursuant to Stock Owned
Securityholder this Offering (1)(2) this Prospectus (1)(2) After Offering
---------------- --------------------- ------------------------ ---------------
<S> <C> <C> <C>
Itamar Jones Zac 24,000 24,000 0
Jack Robbins 310,500 270,000 40,500
Aton Trust Reg. 240,000 240,000 0
Bank Sal. OppenheimJr.
& CIE (Switzerland) Ltd. 240,000 240,000 0
Albert Wardi 12,000 12,000 0
Wolcot Capital Inc.
Money Purchase Plan 24,000 24,000 0
Sebastian Angelico 24,000 24,000 0
Anthony Broy 24,000 24,000 0
Wendy Blauner 24,000 24,000 0
Jon Blauner 54,000 24,000 30,000
Entropy Holdings LLC 60,000 60,000 0
Benchmark Capital 96,000 96,000 0
Josef A. Bauer 116,866 65,549 51,317
Sil Venturi 24,000 24,000 0
Frederick A. Merz 27,000 24,000 3,000
Union Atlantic LC 20,000 20,000 0
Clarion Finanz A.G. 90,000 90,000 0
SISM Research and
Investment Services 10,000 10,000 0
Dunedin, Inc. 143,400 92,200 51,200
Portfolio Research
Associates, Inc. 76,000 76,000 0
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
Shares of Common
Stock Beneficially Shares that May be Shares of Common
Selling Owned Prior to Offered Pursuant to Stock Owned
Securityholder this Offering (1)(2) this Prospectus (1)(2) After Offering
---------------- --------------------- ------------------------ ---------------
<S> <C> <C> <C>
FRS Investments, Inc. 215,000 85,000 130,000
Melody L. Rawski 5,000 5,000 0
Teresa Marco 25,010 15,000 10,010
John Steele 25,000 25,000 0
Terri Phillips 2,500 2,500 0
Brian Cino 2,500 2,500 0
Jorge R. Otacqui 1,500 1,500 0
Adolf H. Nelson 1,500 1,500 0
April Green 5,000 5,000 0
John Klecha 483,274 383,000 100,274
Edward Steele 457,924 395,000 62,924
David A. Carter 28,000 28,000 0
Bert L. Gusrae 28,000 28,000 0
Walter Haskamp 2,500 2,500 0
Susan Massinger 4,000 4,000 0
</TABLE>
- ------------------
(1) Assumes that all of our preferred stock is converted into shares and all of
our Warrants are exercised into Shares. No assurance can be given as to the
timing of the conversion of the preferred stock or the exercise of the
Warrants or as to whether all or any of the preferred stock will be
converted or all or any of the Warrants will be exercised.
(2) Assumes that all Options are exercised into Shares. No assurance can be
given as to the timing of the exercise of the Options or as to whether all
or any of the Options will be exercised.
-42-
<PAGE>
PLAN OF DISTRIBUTION
The securities registered pursuant to this Prospectus (the "Offered
Stock") may be sold from time to time by the Selling Securityholders or by
pledgees, donees, transferees or other successors-in interest. The Offered Stock
may be sold in transactions on the OTC Bulletin Board, in privately negotiated
transactions, through the writing of Options on the shares, or a combination of
such methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of the sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Securityholders may effect such
transactions by the sale of the Offered Stock to or through broker- dealers, and
such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers of the Offered Stock for whom such broker-dealers may act as agent or
to whom they may sell as principal, or both.
The Selling Securityholders may also pledge the Offered Stock to a
broker-dealer and upon default under such pledge the broker-dealer may effect
sales of the Offered Stock pledged pursuant to this Prospectus. In addition, the
Offered Stock covered by this Prospectus may be sold in private transactions or
under Rule 144, rather than pursuant to this Prospectus.
The Company will not receive any of the proceeds from the sale of the
Offered Stock by the Selling Securityholders. We will receive the exercise price
of the Warrants and Options, if such Warrants and Options are exercised, but
will receive no proceeds from the resale of the underlying shares which may be
offered hereby.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the shares may not
be sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
The Selling Securityholders and any broker-dealers or agents that
participate with the Selling Securityholders in the distribution of the shares
may be deemed to be "underwriters" within the meaning of the Securities Act, and
any commissions received by them and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act of 1933 as amended (the "Securities Act").
-43-
<PAGE>
We will pay all costs and expenses incurred in connection with the
registration under the Securities Act. This includes:
o all registration and filing fees;
o printing expenses; and
o fees and disbursements of our counsel and accountants.
The Selling Securityholders will bear all commissions and discounts, if
any, attributable to the sales of the shares.
The Selling Securityholders are under no obligation to sell all or any of
the shares. The Selling Securityholders are not restricted as to the prices at
which they may sell their shares and sales of such shares at less than the
market price may depress the market price of our common stock.
-44-
<PAGE>
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon by
David A. Carter, P.A., 2300 Glades Road, Suite 210, West Tower, Boca Raton,
Florida 33433. The sole stockholder of and counsel to David A. Carter, P.A. are
the beneficial owners of an aggregate of 56,000 shares of common stock of the
Company.
EXPERTS
The consolidated balance sheets as of March 31, 1998 and the
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended March 31, 1998, included in this prospectus, have been included
herein in reliance on the report of Samuel F. May, Jr. & Company, CPA's as
independent accountants for the consolidated balance sheets, given on the
authority as experts in accounting and auditing.
The consolidated balance sheets as of March 31, 1999 and the consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended March 31, 1999, included in this prospectus, have been included herein in
reliance on the report of Weinberg & Company, P.A., as independent accountants
for the consolidated balance sheets, given on the authority as experts in
accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement"), pursuant to the Securities Act of 1933, as amended (the "Act"),
with respect to the offer, issuance and sale of 2,447,249 shares of The Singing
Machine Company, Inc. Common Stock (the "Shares"). This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. The statements contained in this Prospectus as to the contents
of any contract or other document identified as exhibits in this Prospectus are
not necessarily complete, and in each instance, reference is made to a copy of
such contract or document filed as an exhibit to the Registration Statement,
each statement being qualified in any and all respects by such reference. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and exhibits thereof
which may be inspected without charge at the principal office of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, and in accordance therewith, files reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; at its New York Regional Office, Room 1400, 7 World Trade Center,
New York, New York 10048; and at its Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and copies of such material can be
obtained from the Public Reference Section at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission at http://www.sec.gov. The Company intends to furnish its
Securityholders with annual reports containing audited financial statements and
such other reports as the Company deems appropriate or as may be required by
law.
-45-
<PAGE>
THE SINGING MACHINE COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1999
Financial Statements:
Report of Independent Accountants..........................................
Consolidated Balance Sheets................................................
Consolidated Statement of Income...........................................
Consolidated Statements of Shareholders' Equity............................
Consolidated Statement of Cash Flows.......................................
Notes to Consolidated Financial Statements.................................
YEAR ENDED MARCH 31, 1998
Financial Statements:
Report of Independent Accountants..........................................
Consolidated Balance Sheets................................................
Consolidated Statement of Operations.......................................
Consolidated Statements of Shareholders' Equity (Deficit)..................
Consolidated Statement of Cash Flows.......................................
Notes to Consolidated Financial Statements.................................
F-1
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholders
The Singing Machine Company, Inc.
and Subsidiary
We have audited the accompanying consolidated balance sheet of The Singing
Machine Company, Inc. and Subsidiary as of March 31, 1999, and the related
consolidated statement of operation, stockholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Singing Machine
Company, Inc. and Subsidiary at March 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Weinberg & Company, P.A.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
July 23, 1999
F-2
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
ASSETS
CURRENT ASSETS
Cash $ 49,288
Trade accounts receivable, net of allowance
for doubtful accounts of $19,900 1,127,970
Due from officer 13,880
Inventories, net 424,806
Prepaid expenses and other current assets 27,154
Deferred tax asset 170,000
-----------
Total Current Assets 1,813,098
-----------
PROPERTY AND EQUIPMENT, NET 16,447
OTHER ASSETS
Reorganization intangible - net 549,790
-----------
TOTAL ASSETS $ 2,379,335
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 830,088
Accrued expenses 392,926
Notes payable 63,000
Due to factor 128,581
-----------
Total Current Liabilities 1,414,595
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 1,000,000
shares authorized, none issued and outstanding -
Common stock, $.01 par value;
75,000,000 shares authorized;
2,498,451 shares issued and outstanding 24,984
Additional paid-in capital 15,600
Retained Earnings 924,156
-----------
Total Shareholders' Equity 964,740
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,379,335
===========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1999
NET SALES $ 9,547,816
COST OF SALES 7,029,359
-----------
GROSS PROFIT 2,518,457
-----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,544,806
-----------
INCOME FROM OPERATIONS 973,651
-----------
OTHER INCOME (EXPENSES):
Other Income 2,784
Interest expense (5,427)
Interest income 3,254
Factoring fees (220,106)
-----------
Net other expenses (219,495)
-----------
INCOME BEFORE INCOME TAX BENEFIT 754,156
INCOME TAX BENEFIT 170,000
-----------
NET INCOME $ 924,156
===========
NET INCOME PER COMMON SHARE:
Basic $ 0.3733
===========
Diluted $ 0.3565
===========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Basic 2,475,308
===========
Diluted 2,592,167
===========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
---------------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1998 2,468,066 $ 24,680 $ - $ - $ 24,680
Issuance of
common stock for
services 30,385 304 15,600 - 15,904
Net Income 1999 - - - 924,156 924,156
--------- ------- -------- ---------- ---------
BALANCE AT
MARCH 31, 1999 2,498,451 $ 24,984 $ 15,600 $ 924,156 $ 964,740
========= ======== ======== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 924,156
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation and amortization 144,234
Issuance of common stock for services 15,904
Deferred tax benefit (170,000)
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable (769,127)
Inventories (14,513)
Prepaid expenses and other assets 17,600
Increase (decrease) in:
Trade accounts payable (25,465)
Accrued expenses (126,456)
---------
Net cash used in
operating activities (3,667)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchase of
computer equipment (3,023)
Decrease due from officer 11,609
---------
Net cash provided by
investing activities 8,586
---------
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable (37,000)
Due from factor 73,599
---------
Net cash provided by
financing activities 36,599
---------
Increase in cash and cash equivalents 41,518
Cash and cash equivalents beginning of year 7,770
---------
CASH AND CASH EQUIVALENTS END OF YEAR $ 49,288
=========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 10,327
=========
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
Note 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
The Singing Machine Company, Inc. and Subsidiary (the "Company") is
primarily engaged in the production, marketing and sale of consumer karaoke
audio equipment, accessories, and recordings. The products are sold
directly to distributors and retail customers.
(B) Principles of Consolidation
The consolidated financial statements include the accounts of The Singing
Machine Company, Inc. and its wholly-owned Hong Kong Subsidiary,
International SMC (HK) Limited ("Hong Kong Subsidiary"). All significant
intercompany balances and transactions have been eliminated in the
consolidation.
(C) Foreign Currency Translation
The functional currency of the Company's international Hong Kong Subsidiary
is the local currency. The financial statements of the subsidiary are
translated to United States dollars using year-end rates of exchange for
assets and liabilities, and average rates of exchange for the year for
revenues, costs, and expenses. Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statements of
operations and were not significant during the periods presented. The
cumulative translation adjustment, and effect of exchange rate changes on
cash at March 31, 1999 was not material.
(D) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(E) Cash and Cash Equivalents
For purposes of the cash flow statement the Company considers all highly
liquid investments with maturities of three months or less at the time of
purchase to be cash equivalents.
(F) Inventories
Inventories primarily consist of finished goods, which are comprised of
electronic karaoke audio equipment, accessories, audio tapes and compact
discs. Inventories are stated at the lower of cost or market, as determined
using the first in, first out method.
F-7
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
Note 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)
(G) Investment in Song Library
Investment in song library consists of costs incurred in the production or
purchase of master song tapes. The carrying value of the investment in song
library is periodically reviewed to determine if the facts and
circumstances suggest that it may be impaired. If this review indicates
that the investment will not be recoverable, as determined based on the
estimated undiscounted cash flow over the remaining amortization period,
the Company's carrying value of the investment is reduced by the estimated
shortfall. As of March 31, 1999, the carrying value of the investment in
song library has been reduced to zero. Amortization expense charged to
operations during 1999 totaled $46,590.
(H) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Expenditures for repairs and maintenance are charged to
expense as incurred. Depreciation is provided using an accelerated method
over the estimated useful lives of the related assets.
(I) Income Taxes
Income taxes are accounted for under the asset and liability method of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes ("SFAS 109"). Under SFAS 109 deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(J) Revenue Recognition
Revenue from the sale of equipment, accessories and recordings are
recognized upon shipment and are reported net of actual and estimated
future returns and allowances. Commission income is recognized as earned.
(K) Net Income Per Common Share
Net income per common share for the year ended March 31, 1999 is computed
based on the weighted average common shares and dilutive common stock
equivalents outstanding during the year as defined by Financial Accounting
Standards, No 128, "Earnings Per Share".
F-8
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
Note 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
(L) Reorganization Under United States Bankruptcy Code and Fresh Start
Reporting
On April 11, 1997 the Company filed for protection under the provisions of
the United States Bankruptcy Code. In March 1998, the United States
Bankruptcy Court approved the Company's Plan of Reorganization, as Amended,
and the Company emerged from Chapter 11 Bankruptcy. At that time, the
Company applied Fresh Start Reporting in accordance with the American
Institute of Certified Public Accountants' Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code ("SOP 90-7"). As a result of the application of SOP 90-7, the Company
restated its assets and liabilities to their fair values as necessary, and
reclassified its accumulated deficit of $6,841,684 against available
additional paid-in capital of $6,200,262 resulting in a reorganization
intangible asset of $641,422, which is being amortized on a straight line
basis over a period of seven years. (See Note 4).
NOTE 2 - ACCOUNTS RECEIVABLE AND FACTOR AGREEMENT
The Company sells certain trade accounts receivable, without recourse,
pursuant to a factoring agreement (the "Agreement"). Under the agreement,
the factor advances 70% of the face value of these receivables to the
Company. The Company is charged a variable percentage fee based upon the
length of the collection period. Factoring fees, sales returns and
uncollectible accounts are charged against the 30% factor reserve held by
the factor and the balance is remitted to the Company periodically as
accounts are collected by the factor. For the year ending March 31, 1999
the Company incurred $220,106 in factoring fees. All of the Company's
accounts receivable, inventories, and intangibles are pledged as collateral
under this agreement. At March 31, 1999, the outstanding balance of such
receivables was approximately $416,000 of which $128,581 is advanced and
due to the factor. The Company terminated this agreement during June 1999.
(See Note 12).
F-9
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999 is as follows:
Estimated
Useful Lives
(Years)
-----
Computer equipment 5 $ 59,235
Office equipment 7 42,915
-------
102,150
Less accumulated depreciation (85,703)
-------
Totals $ 16,447
=======
Depreciation expense on equipment for the year ended March 31, 1999 was
$6,012.
NOTE 4 - REORGANIZATION INTANGIBLE
The reorganization intangible resulted in March 1998 from the application
of Fresh Start Accounting pursuant to the American Institute of Certified
Public Accountants Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" (See Note 1(L)). The
reorganization intangible is being amortized over a period of seven years
using a straight line basis.
The reorganization intangible at March 31, 1999 consisted of the following:
Reorganization intangible $ 641,422
Less accumulated amortization 91,632
---------
Balance at March 31, 1999 $ 549,790
=========
Amortization expense on the reorganization intangible for the year ended
March 31, 1999 was $91,632.
F-10
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 5 - NOTES PAYABLE
As of March 31, 1999 notes payable consist of the following:
Note payable, bearing annual interest at 10%,
due upon demand $ 43,000
Note payable, bearing annual interest at 12%, due
September 30, 1999 $ 20,000
--------
Totals $ 63,000
=========
NOTE 6 - COMMITMENTS AND CONTINGENCIES
(A) Leases
On March 31, 1999, the Company entered into a lease for an office and
warehouse facility for a term of 61 months. The term is expected to begin
in late July 1999. Pursuant to the terms of the lease, the Company must pay
maintenance and real estate taxes of approximately $9,000 per year. The
Company entered into a lease for office equipment payable monthly at $289,
through August 1999. Total rent expense was approximately $60,953 for the
year ended March 31, 1999. Future minimum lease payments under
noncancellable, operating leases are as follows:
Year Ending March 31:
2000 $ 57,200
2001 56,800
2002 59,500
2003 61,900
Thereafter 80,700
--------
$316,100
========
(B) Year 2000 Issues
The Company is aware of the issues associated with the programming code in
existing computer systems. As the millennium (Year 2000) approaches. The
"Year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit
year to 00. The issue is whether the computer system will properly
recognize date-sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate erroneous
data or cause a system to fail.
F-11
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
(B) Year 2000 Issues - (CONT'D)
Management has compiled a list of both internally and externally supplied
information systems that utilize imbedded data codes which could experience
operational difficulties in the year 2000. The Company uses third party
applications or suppliers for all high level systems and reporting.
Management has determined that their primary accounting and reporting
software is not Year 2000 compliant. Management is currently testing new
systems for which it is responsible. The Company is planning a complete
internal computer system replacement which is totally year 2000 compliant.
The Company has not incurred any material costs to date relating to
investigating the Year 2000 issue. Initial costs for new Year 2000
compliant hardware and software are estimated to be approximately $36,000
for this conversion. It is the Company's objective to be in Year 2000
compliance by the end of September 1999, however, no assurance can be given
that such objective will be met.
(C) Lines and Letters of Credit
The Company has entered into a financing agreement with a financing
corporation. The financing corporation opens letters of credits on behalf
of the Company to purchase inventory. Under terms of the agreement, the
Company pays a flat fee negotiated based on each letter of credit and the
maximum amount of a single letter of credit can not exceed $300,000. The
financing agreement expires on July 1, 1999 (Note 12). At March 31, 1999,
the Company has letters of credit open with the financing corporation of
$226,588. The factor (see Note 2) has agreed under a third party agreement
to factor receivables related to these letters of credit and pays the
financing corporation directly.
The Company through its Hong Kong Subsidiary has entered into an agreement
with Delta Asia Financial Group, Hong Kong ("Delta") to provide it with a
United States letter of credit facility of $200,000. The cost of the credit
facility is prime plus 2 1/2% and bank charges for opening letters of
credit. The facility terminated under the agreement on May 31, 1999 and was
not renewed. This facility is guaranteed by a former director of the
Company.
F-12
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 7 - RELATED PARTY TRANSACTIONS
At March 31, 1999, the amount due from officer bears interest monthly at 9%
per annum and is due on March 31, 2000.
The Company's Hong Kong Subsidiary, operates as an intermediary to purchase
karaoke hardware from factories located in China on behalf of the Company.
The Company purchased certain karaoke audio equipment and accessories from
a Far East company controlled by a shareholder of the Company. The total
goods purchased from this Company aggregated approximately $1,700,000
during 1999.
NOTE 8 - STOCKHOLDERS' EQUITY
(A) Reverse Stock Split
On April 1, 1998 the Company effected a one-for-ten (1:10) reverse stock
split. The primary purpose of the split is pursuant to the Company's Plan
of Reorganization, as Amended, on March 17, 1998. Trading in the post-
split shares commenced at the opening of business on April 1, 1998. No
additional shares were issued in connection with the reverse split and
those stockholders entitled to receive fractional shares received shares
based on rounding to the nearest whole number.
(B) Amendment to Authorized Common Shares
During April 1998, subsequent to the reorganization, the Company filed an
amendment to its Articles of Incorporation increasing the authorized
shares of the Company's common stock to ten million (10,000,000) shares
from one million (1,000,000) shares. (See Note 12)
(C) Common Stock Warrants
Pursuant to the Company's initial public offering in November 1994, the
company issued 1,656,000, 87,750, and 144,000 public warrants, bridge
warrants and underwriter warrants, respectively, as adjusted for a January
1995 20% common stock split. Each warrant provided for the purchase of one
share of the Company's common stock at an exercise price of $3.60, $1.20
and $4.50 for the public, bridge and underwriter warrants, respectively, as
adjusted for the January 1995 common stock split. In addition, the
underwriter warrants entitle the holder to acquire an additional 144,000
warrants to acquire 144,000 shares of common stock at a price of $5.40 per
share.
F-13
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 8 - STOCKHOLDERS' EQUITY - (CONT'D)
(C) Common Stock Warrants - (CONT'D)
As a result of the March 1998 reorganization (see Note 1(L)), all of the
warrants have been amended whereby ten warrants must now be exchanged for
each share of common stock with the exercise price per warrant remaining
the same. The warrants became exercisable on November 10, 1995 and expire
on November 10, 1999. Through the date of this report, none of the warrants
have been exercised.
(D) Stock Options
Effective May 3, 1994, as amended on June 29, 1994 and March 18,1999, the
Board of Directors adopted a Stock Option Plan (the "Plan"). The plan was
developed to provide a means whereby directors and selected employees,
officers, consultants, and advisors of the Company may be granted incentive
or non-qualified stock options to purchase common stock of the Company. As
of March 31, 1999, the Plan authorizes options up to an aggregate of
600,000 shares of the Company's common stock.
The authorized 600,000 options are a result of the application of a one-
for-ten reverse common stock split (see Note 8(A)) on the original 480,000
authorized options and a March 18, 1999 amendment to the plan increasing
the authorized stock options to 600,000.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been
recognized for options issued under the plan as of March 31, 1999. Had
compensation cost for the Company's stock-based compensation plan been
determined on the fair value at the grant dates for awards under that plan,
consistent with Statement of Accounting Standards No 123, "Accounting for
Stock Based Compensation" (Statement No. 123), the Company's net income for
the year ended March 31, 1999 would have been decreased to the pro-forma
amounts indicated below.
Net income As reported $ 924,156
Pro forma $ 824,356
Net income per share-basic As reported $ 0.3733
Pro forma $ 0.3330
Net income per share-diluted As reported $ 0.3565
Pro forma $ 0.3180
F-14
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 8 - STOCKHOLDERS' EQUITY - (CONT'D)
(D) Stock Options - (CONT'D)
The effect of applying Statement No. 123 is not likely to be representative
of the effects on reported net income for future years due to, among other
things, the effects of vesting.
For financial statement disclosure purposes the fair market value of each
stock option granted during 1999 was estimated on the date of grant using
the Black-Scholes Model in accordance with Statement No. 123 using the
following weighted-average assumptions: expected dividend yield 0%, risk-
free interest rate of 5.59%, volatility 65% and expected term of three
years.
A summary of the Company's Stock Option Plan as of March 31, 1999 and
changes during the year is presented below:
Weighted
Number of Average
Options Exercise Price
--------- --------------
Stock Options
Balance at beginning of period 47,870 $ 4.87
Granted 499,000 $ 0.43
Exercised - -
Forfeited (20,370) $ 4.33
-------- ------
Balance at end of period 526,500 $ 0.68
======== ======
Options exercisable at end
of period 27,500 $ 5.27
Weighted average fair value
of options granted during
the period $ 0.20
======
F-15
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 8 - STOCKHOLDERS' EQUITY - (CONT'D)
(D) Stock Options - (CONT'D)
The following table summarizes information about stock options outstanding
at March 31, 1999:
Options Outstanding Options Exercisable
- --------------------------------------------- -----------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise At March 31 Exercise
Price March 31, 1999 Life Price 1998 Price
- ------- -------------- ----------- -------- ----------- --------
$5.00-$5.50 22,500 0.25 Years $ 5.33 22,500 $ 5.33
$5.00 5,000 4.17 Years $ 5.00 5,000 $ 5.00
$0.43 499,000 4.75 Years $ 0.43 - $ -
------- -------
526,500 4.55 Years $ 4.45 27,500 $ 5.27
======= =======
Subsequent to March 31, 1999, 75,000 options exercisable at $5.50, and
3,000 options exercisable at $5.00 have been terminated due to attrition of
the holders.
NOTE 9 - INCOME TAXES
The Company files separate tax returns for the parent and for the Hong Kong
Subsidiary. The income tax expense (benefit) for federal, foreign and state
income taxes in the consolidated statement of income consisted of the
following components for 1999:
Current:
U.S. Federal $ -
Foreign -
State -
---------
-
---------
Deferred:
U.S. Federal (170,000)
Foreign -
---------
Total $(170,000)
=========
F-16
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 9 - INCOME TAXES - (CONT'D)
The actual tax expense differs from the "expected" tax expense for the year
ended March 31, 1999 (computed by applying the U.S. Federal Corporate tax
rate of 34 perccent to income before taxes) as follows:
<TABLE>
<CAPTION>
<S> <C>
Computed "expected" tax expense $ 256,413
Benefit of U.S. and foreign net operating
loss carryforwards (256,413)
Change in the beginning of the year
valuation allowance for deferred tax
assets allocated to income tax benefit (170,000)
----------
$ (170,000)
==========
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and
liabilities at March 31, 1999 are as follows:
Deferred tax assets:
U.S. net operating loss carryforward $2,169,421
Foreign net operating loss carryforward 14,280
----------
Total gross deferred tax assets 2,183,701
Less valuation allowance 2,013,701
----------
Net deferred tax assets $ 170,000
==========
</TABLE>
At March 31, 1999, the Company had net operating loss carryforwards of
approximately $6,381,000 for income tax purposes, available to offset future
taxable income of the U.S. entity expiring on various dates beginning in 2003
through 2013. Usage of approximately $4,057,000 of the net operating loss is
limited to $14,000 per year due to a change in ownership under Internal Revenue
Code Section 382, which occurred in 1991. These net operating losses expire from
2003 to 2007.
At March 31, 1999 the Company's Honk Kong Subsidiary had approximately $42,000
in net operating loss carryforwards available to offset future taxable income of
the Subsidiary. The resulting deferred tax asset has been fully offset by a
valuation allowance.
The valuation allowance at April 1, 1998 was approximately $2,440,000. The net
change in the valuation allowance during the year ended March 31, 1999 was a
decrease of approximately $426,000.
F-17
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
Note 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company derives primarily all of its revenues from retailers of
products in the United States. Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist of accounts
receivable. The Company's allowance for doubtful accounts is based upon
management's estimates and historical experience. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral.
During the fiscal 1999, 91% of the Company's total revenues were derived
from sales to five customers. Sales derived from three customers who
individually purchased greater than 10% of total revenues in 1999 were 31%,
21%, and 21%, respectively.
NOTE 11 EMPLOYMENT AGREEMENTS
The Company has entered into employment contracts with two key officers.
The agreements call for base salaries of $180,000 and $92,000, respectively
with annual cost of living adjustments and travel allowances. The
agreements also call for performance bonuses equal to five percent and two
and one-half percent, respectively of net income before interest and taxes.
NOTE 12 - SUBSEQUENT EVENTS
During April 1999, the Company filed an amendment to its Articles of
Incorporation increasing the authorized shares of the Company's common
stock to seventy-five million shares (75,000,000) from ten million
(10,000,000) shares. (See Note 8(B)). The change in authorized shares has
been shown retroactively in the consolidated financial statements as of
March 31, 1999.
During April 1999, the Company filed an amendment to its Articles of
Incorporation to authorize one million (1,000,000) shares of preferred
stock. Each share of preferred stock is entitled to 9% dividends, preferred
liquidation distribution, conversion to common stock and no voting powers.
The new authorized shares of preferred stock has been shown retroactively
in the consolidated financial statements as of March 31, 1999.
During April 1999 the Company issued a private placement memorandum,
pursuant to Rule 506 of Regulation D of the 1933 Securities Act, as
amended, to offer a minimum of 40 units and a maximum of 50 units of stock
and warrants. Each unit consists of 20,000 shares of the Company's
convertible preferred stock and 4,000 common stock purchase warrants. The
purchase price for each unit is $ 27,500. Each share of preferred stock is
convertible, at the option of the holder, into one
F-18
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 12 - SUBSEQUENT EVENTS - (CONT'D)
share of the Company's common stock at any time after issuance. Each share
of preferred stock will automatically convert into one share of common
stock on April 1, 2000. Each warrant entitles the holder to purchase one
share of the Company's common stock at $2.00 per share. The warrants expire
three years from the private placement memorandum date. The Company's net
proceeds after placement discount and commissions but before offering
expenses are estimated to be 90% of the amount raised. As of the date of
this report 50 units have been sold and $1,375,000 gross funds have been
raised.
Effective May 19, 1999, the Company, through its Hong Kong Subsidiary,
obtained a credit facility of (US) $2,000,000 from Belgian Bank, Hong Kong,
a subsidiary of Generale Bank, Belgium. This facility is a revolving line
based upon drawing down a maximum of 15% of the value of export letters of
credit lodged with Belgian Bank. There is no expiration except that Belgian
Bank reserves the right to revise the terms and conditions at the Bank's
discretion. The cost of this credit facility is the U.S. Dollar prime rate
plus 1.25%. Repayment of principal plus interest shall be made upon
negotiation of the export letters of credit, but not later than ninety (90)
days after the advance.
During June 1999, the Company entered into a new factor agreement with
Maine Factors, Inc. Under the terms of the agreement, the factor advances
73.5% of the factored invoices to the Company. The Company will pay a base
fee of 3.5 % of the total accounts receivable factored. All of the
Company's accounts receivable, inventories and intangibles are pledged as
collateral under the agreement. There is no limit on the amount of accounts
receivable that can be factored under the agreement.
During July 1999, the Company entered into a new financing agreement with a
financing company. Under the terms of the new agreement, the Company pays a
flat fee negotiated based on each letter of credit and the maximum amount
of a single letter of credit cannot exceed $1,000,000. The financing
agreement expires on July 1, 2001.
F-19
<PAGE>
Samuel F. May Jr. and Company
Certified Public Accounts
Member: AICPA
FICPA
Barnett Bank Building
23123 State Road 7, Suite 210
Boca Raton, Florida 33428
Office: (561) 487-0670 Fax: (561) 852-1646
Report of Independent Certified Public Accountant
Board of Directors and Shareholders
The Singing Machine Company, Inc.
and Subsidiary
Pompano Beach, Florida
I have audited the accompanying consolidated balance sheet of The Singing
Machine Company, Inc. and Subsidiary as of March 31, 1998, and the related
consolidated statements of operation, shareholders' equity and cash flows for
the year ended March 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these consolidated financial statements based on my audit The
financial statements of The Singing Machine Company, Inc. as of March 31, 1997,
were audited by other auditors whose report, dated December 3, 1997, expressed a
qualified opinion on those statements.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that our audit provides a reasonable basis for
my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Singing Machine
Company, Inc. and Subsidiary at March 31, 1998, and the results of their
operations and their cash flows for the year ended March 31, 1998, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that The Singing Machine Company, Inc. and Subsidiary will continue as a going
concern.
As discussed in Note 13 to the consolidated financial statements, the Company's
March 31, 1998 accounts receivable, retained earnings (accumulated deficit) and
additional paid in capital accounts previously reported as $532,765,
($10,453,257) and $9,986,867, respectively, should have been $358,844, -0- and
- -0-. This discovery was made subsequent to the issuance of the consolidated
financial statements. The consolidated financial statements have been restated
to reflect these corrections.
/s/ Samuel F. May Jr. & Company
Samuel F. May Jr. & Company
Certified Public Accountants
Boca Raton, Florida
July 20, 1999, except for
Note 13, as to which date
is October 12, 1998
F-20
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 1998
<TABLE>
<CAPTION>
ASSETS
(Restated)
----------
<S> <C>
CURRENT ASSETS:
Cash $ 7,770
Trade accounts receivable, net of allowance
for doubtful accounts of $80,000 358,844
Due from officer 25,489
Inventories, net 410,293
Prepaid expenses and other current assets 44,754
------------
Total current assets 847,150
------------
EQUIPMENT, net of accumulated
depreciation of $163,064 19,435
------------
INTANGIBLE ASSET:
Investment in song library, net of accumulated
amortization of $398,328 46,590
Reorganization Costs 641,422
------------
Total intangible assets 688,012
------------
Total assets $ 1,544,597
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 271,656
Trade accounts payable to related parties 229,754
Accrued expenses 519,382
Royalties payable 41,809
Loans payable 100,000
Due to factor 54,982
------------
Total current liabilities 1,217,583
------------
COMMITMENTS AND CONTINGENCIES
Trade accounts payable of subsidiary 312,334
------------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000,000 shares
authorized; 2,468,066 shares issued and outstanding 24,680
Additional paid-in capital -
Retained earnings (accumulated deficit) -
------------
Total shareholders' equity 24,680
------------
Total liabilities and shareholders' equity $ 1,554,597
============
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended March 31,
------------------------------------
1998 1997
------------ --------------
(Restated)
<S> <C> <C>
REVENUES:
Equipment sales, net $ 5,354,678 $ 8,953,462
Music sales, net 693,885 1,610,594
Commission income - related party - 90,583
Other income 7,538 20,240
------------ --------------
Total revenues 6,056,101 10,674,879
------------ --------------
COST AND EXPENSES:
Cost of equipment sales 4,734,633 8,060,973
Cost of music sales 317,644 1,084,386
Other operating expenses 181,005 576,602
Selling, general and administrative expenses 2,283,590 2,370,746
Depreciation and amortization 177,268 400,084
Impairment of long-lived assets - 1,609,973
------------ --------------
Total costs and expenses 7,694,140 14,102,764
------------ --------------
Loss from operations (1,638,039) (3,427,885)
------------ --------------
OTHER (EXPENSES) INCOME:
Interest expense (28,514) (173,639)
Interest income 2,870 5,033
Factoring fees (95,257) (235,312)
Gain (loss) on sale or abandonment of
property and equipment (25,822) (43,325)
------------ --------------
Total other expenses (146,723) (447,243)
------------ --------------
LOSS BEFORE EXTRAORDINARY ITEM (1,784,762) (3,875,128)
Extraordinary item:
Early extinguishment of debt, net of income taxes 4,489,750 -
------------ --------------
Income before provision for income taxes 2,704,988 -
PROVISION FOR INCOME TAXES - -
------------ --------------
NET INCOME (LOSS) $ 2,704,988 $ (3,875,128)
============ ==============
NET INCOME (LOSS)
PER COMMON SHARE (Basic and Diluted) $ 7,157 $ (13.759)
============ ==============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
(Basic and Diluted) 377,936 281,651
============ ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended March 31, 1998 (Restated) and 1997
<TABLE>
<CAPTION>
Common Stock Retained Total
$.01 Par Value Additional Earnings Shareholders'
------------------------- Paid-In (Accumulated Equity
Shares Amount Capital Deficit) (Deficit)
---------------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996 281,159 $ 2,812 $ 5,852,473 $ (5,671,544) $ 183,741
Issuance of common shares for
debt settlement 7,200 72 17,927 - 17,999
Net loss for the year ended
March 31, 1997 - - - (3,875,128) (3,875,128)
--------- --------- ------------ ------------ -----------
Balance at March 31, 1997 288,359 $ 2,884 $ 5,870,400 $ (9,546,672) $(3,673,388)
Issuance of common shares for
debt settlement 2,068,576 20,685 330,973 - 351,658
Issuance of common shares for
settlement with former officer 111,131 1,111 (1,111) - -
Reorganization due to fresh
start accounting - - (6,200,262) 6,041,684 641,422
Net income for the year ended
March 31, 1998 - - - 2,704,988 2,704,988
--------- -------- ------------ ------------ -----------
Balance at March 31, 1998 2,468,066 $ 24,680 $ - $ - $ 24,680
========= ======== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended March 31,
-----------------------------------
1998 1997
------------ -------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 2,704,985 $ (3,875,128)
Adjustments to reconcile net loss to net cash
provided by (used in) operations:
Depreciation and amortization 177,268 400,084
Impairment of long-lived assets - 1,609,973
(Gain) Loss on sale or abandonment of
property and equipment 25,822 43,325
Changes in operating assets and liabilities:
Trade accounts receivable (49,364) (124,873)
Due from factor (3) 33,833
Inventories 759,724 1,136,415
Prepaid expenses and other 8,080 50,037
Income tax receivable - -
Bank overdraft (10,599) 10,599
Trade accounts payable (1,956,456) 1,101,286
Trade accounts payable to related parties (195,109) (80,771)
Accrued expenses (434,928) (53,127)
Royalties payable (678,456) (123,784)
------------ -------------
Net cash provided by operating activities 350,967 127,869
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment - (732)
Proceeds from sale of property and equipment - -
Additions to song library - -
Due from officer 5,689 (975)
------------ -------------
Net cash used in investing activities 5,689 (1,707)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to factor (167,461) 222,443
Issuance of common stock for debt settlement 351,658 -
Issuance of bridge warrants - -
Loans payable (543,305) (338,496)
------------ -------------
Net cash used in financing activities (359,108) (116,053)
------------ -------------
Net increase (decrease) in cash (2,452) 10,109
Cash at beginning of year 10,222 113
------------ -------------
Cash at end of year $ 7,770 $ 10,222
============ =============
SUPPLEMENTAL CASH FLOW INFORMATION
Issuance of common stock for debt settlement $ 4,137,152 $ 17,999
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization and Basis of Presentation - The Singing Machine Company,
Inc. and Subsidiary (the Company) is primarily engaged in the production,
distribution, and marketing of karaoke music recordings, as well as the
distribution and marketing of electronic karaoke audio equipment and
accessories. The Company also acts as the exclusive commissioned sales
agent for a related party which sells karaoke audio equipment to both
unrelated parties located in the United States and internationally, and
to the Company for distribution within the United States.
On November 18, 1994, the Company completed an initial public offering of
its common stock on Form SB-2.
On April 11, 1997, The Singing Machine Company, Inc. filed a voluntary
petition for relief pursuant to Chapter 11 of the United States
Bankruptcy Act. Accordingly, all debts have bene classified as debts
subject to compromise. See Note 12 to the consolidated financial
statements related to the Company's Plan of Reorganization, as Amended.
2. Principles of Consolidation - The consolidated financial statements
include the accounts of The Singing Machine Company, Inc. and its
wholly-owned foreign subsidiary. All significant intercompany
transactions have been eliminated.
3. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
4. Foreign Currency Translation - Local currency is generally considered the
functional currency outside the United States. Assets and liabilities are
translated at the year-end exchange rate. Income and expense items are
translated at average rates of exchange prevailing during the year. The
related translation adjustment is not material.
5. Inventories - Inventories are substantially all finished goods, which
consist primarily of electronic karaoke audio equipment accessories,
audio and compact discs. Inventories are stated at the lower of cost
(first-in, first-out method) or market. As of March 31, 1997, the
carrying value of all audio and video tapes was reviewed by the Company
and based upon the outcome of such review, the Company has recorded a
reduction in the carrying value of such assets in the amount of $529,414,
which was charged to cost of sales.
6. Cash Equivalents - The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash
equivalents.
F-25
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Investment in Song Library - Investment in song library consists of costs
incurred in the production or purchase of master song tapes. The carrying
value of investment in song library is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates
that the investment in song library will not be recoverable, as
determined based on the estimated undiscounted cash of the entity
acquired over the remaining amortization period, the Company's carrying
value of the investment in song library is reduced by the estimated
shortfall of discounted cash flows. Amortization expense charged to
operations for the fiscal years ended March 31, 1998 and 1997 amounted to
$44,492 and $126,507, respectively.
8. Property and Equipment - Property and equipment is recorded at cost less
accumulated depreciation and amortization. Depreciation is provided using
an accelerated method over the estimated useful lives of the related
assets. During July, 1997, the Company moved to more cost effective
facilities. All leasehold improvements and equipment associated with the
prior facility were written down to $-0- value.
9. Costs in Excess of Net Assets Acquired and Trademarks - The carrying
value of goodwill and trademarks are reviewed if the facts and
circumstances suggest it may be impaired. If this review indicates that
the goodwill and trademarks will not be recoverable, as determined based
on the estimated undiscounted cash of the entity acquired over the
remaining amortization period, the Company's carrying value of the
goodwill and trademarks is reduced by the estimated shortfall of
discounted cash flows. As of March 31, 1997, the carrying value of
goodwill and trademarks was reviewed by the Company and based upon the
outcome of such review, the Company has recorded a reduction in the
carrying value of such assets relating to music sales in the amount of
$1,080,828. Accordingly, the write down of goodwill and trademarks has
been charged to operations.
10. Income Taxes - Income taxes are accounted for under the asset and
liability method of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities or a change in tax rate is recognized
in income in the period that includes the enactment date. Deferred tax
assets are reduced to estimated amounts to be realized by use of a
valuation allowance.
The principal types of temporary differences between assets and
liabilities for financial statement and tax return purposes are net
operating loss carryforwards and allowances for doubtful accounts.
F-26
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Revenue Recognition - Revenue from the sale of equipment and music are
recognized upon shipment and are reported net of returns and allowances.
Commission income is recognized as earned.
12. Loss Per Common Share - Loss per common share is calculated based on the
weighted average number of common shares and dilutive common stock
equivalents outstanding during the period. For the fiscal 1998 and 1997
periods, the effect of the common stock equivalents would be antidilutive
and has not been included in the calculation.
13. Pronouncements - In fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share," which supercedes Accounting Principles Board Opinion No. 15.
Pursuant to SFAS No. 128, earnings (loss) per common share is computed by
dividing net income (loss) available to common stockholders by the
weighted average number of shares outstanding during the period. Diluted
earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock.
For the fiscal years ended March 31, 1998 and 1997, there is no
difference between basic and diluted net loss per share or between the
basic and diluted net loss per share as previously reported. Potential
common shares from stock options, warrants, and convertible preferred
stock are excluded in computing basic and diluted net loss per share as
their effects would be antidilutive. The adoption of SFAS No. 128 did not
have a material impact on the Company's consolidated financial
statements.
14. Fair Market Value of Financial Instruments - The carrying amount reported
in the consolidated balance sheet for cash and cash equivalents, note
payable, accounts payable, and accrued liabilities approximates fair
market value due to the immediate or short-term maturity of these
financial instruments. The Company's liabilities are subject to
compromise as discussed in note 12 to the consolidated financial
statements.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the accompanying
consolidated financial statements, the Company incurred losses and there is an
accumulated deficit of $10,453,257 at March 31, 1998. Management of the Company
believes that it has instituted certain initiatives, including an enhanced sales
focus and cost reductions that will result in returning the Company to
profitable operations in fiscal 1999, and the Company's backlog of orders placed
by customers indicate this strategy is working.
F-27
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 3 - SALE OF RECEIVABLES WITH RECOURSE
The Company sells certain trade accounts receivable, subject to full recourse
provisions, pursuant to a factoring agreement, as amended. At March 31, 1998,
the outstanding balance of such receivables for which the Company is
contingently liable was approximately $532,765.
The Company received proceeds of approximately $1,987,000 and $2,855,000 in the
fiscal 1998 period and fiscal 1997, respectively, upon the sale of trade
accounts receivable under this agreement, and incurred approximately $95,257 and
$235,000 in factor fees, respectively. All of the Company's accounts
receivables, inventories, and intangibles are pledged as collateral under this
agreement, and the factor holds back 50% of the approved receivable face amount
as security. Minimum factor fees were $6,667 per month.
NOTE 4 - EQUIPMENT
A summary of equipment as of March 31, 1998 is as follows:
Estimated
Useful Lives
(Years)
------------
Computer equipment 5 $ 56,212
Office equipment 7 42,915
----------
99,127
Less accumulated depreciation 79,692
----------
Totals $ 19,435
==========
Depreciation and amortization expense on property and equipment for the fiscal
1998 and fiscal 1997 periods is approximately $177,268 and $139,152,
respectively.
NOTE 5 - LOANS PAYABLE
As of March 31, 1998, loan payable consists of the following:
<TABLE>
<CAPTION>
<S> <C>
Note payable, bearing annual interest at 10%, due upon demand and
subject to compromise $ 20,000
Note payable, bearing annual interest at 12% due
September 30, 1998, and subject to compromise to an officer and director 80,000
-----------
Totals $ 100,000
===========
</TABLE>
F-28
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 6 - COMMITMENTS AND CONTINGENCIES
On May 1, 1997, the Company entered into a lease for an office and warehouse
facility for a term of 25 months. Pursuant to the terms of the lease, the
Company must pay maintenance, insurance, and real estate taxes. Total rent
expense was approximately $77,724 and $203,000 in the 1998 and fiscal 1997
periods, respectively. Future minimum lease commitments under noncancellable,
the operating lease are as follows:
Year Ending March 31:
--------------------
1999 $ 78,703
2000 26,234
2001 -
----------
$ 104,937
==========
NOTE 7 - RELATED PARTY TRANSACTIONS
At March 31, 1998, the amount due from officer bears interest monthly at 9% per
annum and is due on March 31, 1999.
The Company's Hong Kong wholly-owned subsidiary, International SMC (HK) Ltd.,
operates as an intermediary to purchase Karaoke hardware from factories located
in China.
During the fiscal 1998 and 1997 periods, the Company purchased certain karaoke
audio equipment and accessories from Far East companies (related party
suppliers) controlled by a director. During fiscal 1998, the Company purchased
goods from FLX (HK) Limited, a company related through a common director, in the
amount of approximately $1,200,000. During fiscal 1997, the Company purchased
approximately $1,900,000.
NOTE 8 - SHAREHOLDERS' DEFICIT
Effective May 3, 1994, the Company adopted a stock option plan (the Plan), which
provides for the granting of both incentive and nonqualified stock options to
key personnel, including officers, directors, consultants, and advisors of the
Company, based upon the determination of the Board of Directors. The Plan was
amended on June 29,1994, and incentive stock options were granted under the Plan
to purchase 293,700 shares of the Company's common stock. The incentive stock
options expire in 1999 and 2004.
On April 1, 1998, the Company effectuated a one for ten (1:10) reverse stock
split. The primary purpose of the split is pursuant to the Company's Plan of
Reorganization as Amended on March 17, 1998. Trading in the post-split shares
commenced at the opening of business on April 1, 1998. No additional shares were
issued in connection with the reverse split and those stockholders entitled to
receive fractional shares received shares based on rounding to the nearest whole
number. During April, 1998, the Company filed an amendment to its Articles of
Incorporation increasing the authorized shares of the Company's common stock to
ten million (10,000,000) shares.
F-29
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 8 - SHAREHOLDERS' DEFICIT (continued)
The company's creditors, pursuant to the Company's Plan of Reorganization, as
Amended, who elected to receive shares will be issued an aggregate of 2,068,576
post-split shares of common stock. The Company's legal counsel has written to
each creditor requesting that the necessary information be completed and
returned in order to issue the common stock. The financial statements reflect
the issuance of 2,068,576 post-split shares of common stock to the Company's
creditors.
These financial statements reflect the one for ten (1:10) reverse stock split in
computing the weighted average common and common equivalent shares outstanding
and the net loss per common share amounts and accounts for the subsequent
increase of authorized common shares pursuant to the Company's amendment to its
Articles of Incorporation during April, 1998.
At March 31, 1998, 215,000 of these options are currently exercisable, and the
remaining 78,700, held by three individuals, become exercisable in maximum
increments of 20,000 each year through June 29,1999. Additional incentive or
nonqualified stock options may be granted to purchase up to 191,300 shares of
the Company's common stock. At March 31, 1998, 485,000 shares of common stock
have been reserved for issuance under the Plan.
On November 18, 1994, the Company closed the initial public offering of
1,380,000 shares of its common stock and 1,380,000 warrants (the Public
Warrants) for an aggregate purchase price of approximately $7,080,000. The
Public Warrants may be exercised at anytime beginning November 10, 1995, and
continuing thereafter until November 10, 1999.
Also, included in the offering were 144,000 warrants issued to the Company's
underwriters (the Representative's Warrants). The Representative's Warrants
entitle the registered holders to purchase one share of the Company's common
stock and a warrant to purchase an additional share of common stock. The
warrants became exercisable November 10, 1995, and will continue thereafter
until November 10, 1999.
During April, 1995, 272,250 Bridge Warrants were exercised resulting in net
proceeds to the Company of $320,578.
During March, 1997, the Company issued 7,200 shares post-split of common stock
to settle outstanding debt of approximately $18,000.
NOTE 9 - INCOME TAXES
On September 3, 1991, the Company underwent a change of ownership (as defined by
Internal Revenue Code Section 382). This change limits the Company's ability to
utilize its approximately $4,057,000 of net operating loss carryforwards (NOLs)
as of March 31, 1997, to $14,000 per year (these NOLs expire from 2003 to 2007).
At March 31, 1998, the Company has net operating loss carryforwards of
approximately $10,635,490 (which are not subject to the above limitations) that
expire through 2012. A valuation allowance of approximately $4,136,300 has been
recognized to offset primarily all of the deferred tax assets related to these
carryforwards.
F-30
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 9 - INCOME TAXES (continued)
The differences between the statutory United States federal income tax rate and
the effective tax rate are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1998 March 31, 1997
------------------ ----------------
<S> <C> <C>
Statutory rate (34.0)% (34.0)%
State income tax effect, net of
federal benefit (4.6)% (4.6)%
Changes in valuation allowance 38.6% 38.6%
--------- -------------
Effective rate -% -%
========= =============
</TABLE>
At March 31, 1998, the components of the cumulative effect of temporary
differences in the deferred income tax liability and income tax asset balances
are as follows:
Total
-------------
Assets:
Net operating loss carryforwards $ 4,105,300
Reserves for bad debts, sales returns and warranties 31,000
-------------
Sub-totals 4,136,300
Valuation allowance (4,136,300)
-------------
Net deferred tax assets $ -
=============
The net change in the valuation allowance during the fiscal 1998 period was an
increase of $1,436,300.
NOTE 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company derives primarily all of its equipment and music sales revenues from
distributors and retailers of such products in the United States. Financial
instruments, which potentially subject the company to concentrations of credit
risk, consist principally of cash and accounts receivable (including receivables
sold to factor with recourse). The credit risk associated with cash is
considered low due to the credit quality of the depository institution. The
Company's allowance for doubtful accounts is based upon management's estimates
and historical experience. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral.
F-31
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS (continued)
During the fiscal 1998 and 1997 periods, 91% and 79%, respectively, of the
Company's total revenues were derived from sales to five customers. Sales
derived from customers who individually purchased greater than 10% of total
revenues were as follows:
Fiscal Fiscal
1998 1997
----------- --------
Target 36% 47%
JC Penney 19% 13%
Best Buy 22% --
Fingerhut 11% --
NOTE 11 - FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
The following is a summary of certain year-end adjustment that are considered
material in the aggregate to the results of the fourth quarter.
Fiscal Fiscal
1998 1997
------ ----------
Inventory write-down $ - $ 529,414
Impairment of long-lived assets - 1,900,568
Adjustment of royalties payable - (290,595)
------ ----------
NOTE 12 - DESCRIPTION OF PETITION
On April 11, 1997, The Singing Machine Company, Inc. filed a voluntary petition
of relief pursuant to Chapter 11 of the United States Bankruptcy Act. Under
Chapter 11, certain claims against the Debtor in existence prior to the filing
of the petitions for relief under the federal bankruptcy laws are stayed while
the Debtor continues business operations as Debtor-in-possession. These claims
are reflected in the March 31, 1998, balance sheet as "liabilities subject to
compromise." Additional claims (liabilities subject to compromise) may arise
subsequent to the filing date resulting from rejection of executory contracts,
including leases, and from the determination by the court (or agreed to by
parties in interest) of allowed claims for contingencies and other disputed
amounts. Claims secured against the Debtor's assets ("secured claims") also are
stayed, although the holders of such claims have the right to move the court for
relief from the stay. Secured claims are secured primarily by liens on the
Debtor's property, plant, and equipment.
F-32
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 12 - DESCRIPTION OF PETITION (continued)
On March 17, 1998, the United States Bankruptcy Court approved the Company's
Plan of Reorganization, as Amended, and the Company emerged from Chapter 11
Bankruptcy.
NOTE 13 - FRESH START ACCOUNTING
The Company's consolidated financial statements have been restated on July 20,
1999 to reflect the changes in the trade accounts receivable common stock,
additional paid in capital, retained earnings (accumulated deficit) account as
of March 31, 1998.
F-33
<PAGE>
PART II
Information Not Required in Prospectus
--------------------------------------
Item 24. Indemnification of Directors and Officers
Article 10 of the Company's Certificate of Incorporation, as amended,
and Section 6 of the By- Laws of the Company, contain the following provisions
with respect to indemnifying officers and directors of the Company:
Certificate of Incorporation
Article 10. To the fullest extent permitted by Delaware statutory or decisional
law, as amended or interpreted, no director of the Company shall be personally
liable to the Company or the Company's Shareholders for monetary damages for
breach of a fiduciary duty as a director. Article 10 does not affect the
availability of equitable remedies for breach of fiduciary duties.
By-Laws
Indemnification of employees and other agents of the Company (including persons
who serve the Company's request as employees or other agents of another
organization in which it owns shares or of which it is a creditor) may be
provided by the Company to whatever extent shall be authorized by the directors
before or after the occurrence of any event as to or in consequence of which
indemnification may be sought. Any indemnification to which a person is entitled
under these provisions may be provided although the person to be indemnified is
no longer a director, officer, employee, or agent of the Company or of such
other organization. It is the intent of these provisions to indemnify directors
and offices to the fullest extent not specifically prohibited by law, including
indemnification against claims brought derivatively, in the name of the Company,
and that such directors and officers need not exhaust any other remedies.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth various expenses which will be incurred
in connection with the registration of the Company's securities. Other than the
SEC Registration Fee, the amounts set forth below are estimates:
SEC Registration Fee.........................................$ 2,261.25
Printing & Engraving Expenses................................
Legal Fees and Expenses......................................
Accounting Fees and Expenses.................................
Blue Sky Fees and Expenses...................................
TOTAL:............................$
=========
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
The Company was incorporated in the State of Delaware in May, 1994,
with 1,000,000 authorized common shares. Currently, the Company has authorized
capital of 74,000,000 shares of common stock, $.01 par value. The Company has
2,931,975 shares of common stock issued and outstanding prior to this
registration. See "Principal Securityholders" and "Description of Securities".
In April, 1998, the Company amended its Certificate of Incorporation to
increase the number of authorized common shares from 1,000,000 shares to
10,000,000.
The Registrant issued 2,174,212 shares of the Company's common stock to
pre-petition bankruptcy creditors pursuant to the Company's First Amended Plan
of Reorganization (the "Plan") confirmed by the Bankruptcy Court on March 17,
1998. As of June 10, 1998, the Plan had been fully implemented.
In January, 1999, the Company issued 30,000 shares of common stock to
three (3) persons in consideration for professional services.
In April, 1999, the Company amended its Certificate of Incorporation
increase the number of authorized shares of common stock from 10,000,000 shares
to 74,000,000 shares.
In April, 1999, the Company issued 30,000 shares of common stock to
three (3) persons in consideration for professional services.
In April, 1999, the Company issued 2,500 shares of common stock to
outside director, Walter Haskamp as consideration for serving as a Director of
the Company.
Registrant has sold and issued the securities described below pursuant
to and in accordance with Regulation D under the Securities Act of 1933, as
amended (the "Act") within the past three years where were not registered under
the Act:
<TABLE>
<CAPTION>
Number Number of Number of
Date Purchase Of Convertible Common
of Price Units Preferred Stock Net
Name Purchase Per Unit Purchase Shares Warrants Proceeds
- ---- -------- -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Itamar Jones Zac 5/12/99 $27,500 1 20,000 4,000 $ 27,500
Jack Robbins 5/12/99 $27,500 5 100,000 20,000 $137,500
Aton Trust Reg. 5/12/99 $27,500 10 200,000 40,000 $275,000
Bank Sal. Oppenheim 5/12/99 $27,500 10 200,000 40,000 $275,000
Albert Wardi 5/12/99 $27,500 1/2 10,000 2,000 $ 13,750
Wolcot Capital Inc. 5/12/99 $27,500 1 20,000 4,000 $ 27,500
John Klecha 5/12/99 $27,500 6 120,000 24,000 $165,000
Sebastian Angelico 5/12/99 $27,500 1 20,000 4,000 $ 27,500
Anthony Broy 5/12/99 $27,500 1 20,000 4,000 $ 27,500
Wendy Blauner 5/12/99 $27,500 1 20,000 4,000 $ 27,500
John Blauner 5/12/99 $27,500 1 20,000 4,000 $ 27,500
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Number of Number of
Date Purchase Of Convertible Common
of Price Units Preferred Stock Net
Name Purchase Per Unit Purchase Shares Warrants Proceeds
- ---- -------- -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Entropy Holdings LLC 5/12/99 $27,500 2 1/2 50,000 10,000 $ 68,750
Benchmark Capital LLC 5/12/99 $27,500 4 80,000 16,000 $110,000
Josef A. Bauer 6/28/99 $27,500 2 40,000 8,000 $ 55,000
Sil Venturi 6/28/99 $27,500 1 20,000 4,000 $ 27,500
Frederick A. Merz 6/28/99 $27,500 1 20,000 4,000 $ 27,500
Edward Steele 6/28/99 $27,500 2 40,000 8,000 $ 55,000
</TABLE>
In May, 1999, the Company issued 17,549 shares of common stock to
Memcorp, Inc. in consideration of $35,098 of product, or $2.00 per share.
In June, 1999, the Company issued 200,000 shares of common stock to
Edward Steele, a Director and Chief Executive Officer of the Company, in
consideration for his personal guaranty of the Company's credit facility with
EPK Financial.
In June, 1999, the Company issued 150,000 shares of common stock to
John Klecha, a Director, Chief Operating Officer and Chief Financial Officer of
the Company, in consideration for his personal guaranty of the Company's credit
facilities with Main Factors and EPK Financial.
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
3.1 Certificate of Incorporation and Certificate of Amendments Thereto of Registrant
3.2 By-Laws of Registrant
4.1 Form of Certificate Evidencing Shares of Common Stock
5.1 Opinion re: Legality of the Securities Being Registered
10.1 Edward Steele Employment Agreement 3/1/98 - 3/1/01
10.2 John Klecha Employment Agreement 3/1/98 - 3/1/00
10.3 Main Factors, Inc. Agreement 6/99
10.4 EPK Financial Corporation Agreement 7/99
10.5 Bankruptcy Plan of Reorganization
10.6 Order Confirming Plan of Reorganization
23.1 Consent of Counsel - David A. Carter, P.A.
23.2 Consent of Accountant - Weinberg & Company, P.A.
23.3 Consent of Accountant - Samuel F. May, Jr. & Company, CPA's
24.1 Power of Attorney
</TABLE>
II-3
<PAGE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934, as amended) that is incorporated
by reference in the Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF COCONUT CREEK, COUNTY OF BROWARD, STATE OF
FLORIDA, ON ____________________, 2000.
The Singing Machine Company, Inc.
Dated: _____________, 2000 By:______________________________________
John F. Klecha, Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
Signature Title
___________________________ Chairman of the Board of Directors and
Edward Steele Chief Executive Officer
__________________________ Chief Operating Officer,
John F. Klecha Chief Financial Officer and Director
__________________________ Director
Josef A. Bauer
__________________________ Director
Alan Schor
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
3.1 Certificate of Incorporation and Certificate of Amendments Thereto of Registrant
3.2 By-Laws of Registrant
4.1 Form of Certificate Evidencing Shares of Common Stock
5.1 Opinion re: Legality of the Securities Being Registered
10.1 Edward Steele Employment Agreement 3/1/98 - 3/1/01
10.2 John Klecha Employment Agreement 3/1/98 - 3/1/00
10.3 Main Factors, Inc. Agreement 6/99
10.4 EPK Financial Corporation Agreement 7/99
10.5 Bankruptcy Plan of Reorganization
10.6 Order Confirming Plan of Reorganization
23.1 Consent of Counsel - David A. Carter, P.A.
23.2 Consent of Accountant - Weinberg & Company, P.A.
23.3 Consent of Accountant - Samuel F. May, Jr. & Company, CPA's
24.1 Power of Attorney
</TABLE>
<PAGE>
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF "THE SINGING MACHINE COMPANY, INC.", FILED IN THIS OFFICE ON
THE FIFTEENTH DAY OF FEBRUARY, A.D. 1994, AT 9 O'CLOCK A.M.
[STATE OF DELAWARE SEAL]
[SECRETARY'S OFFICE SEAL] /s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
<PAGE>
CERTIFICATE OF INCORPORATION
OF
THE SINGING MACHINE COMPANY, INC.
I, the undersigned, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the provisions of the General
Corporation Law of the State of Delaware, do hereby certify as follows:
FIRST: The name of the Corporation is:
The Singing Machine Company, Inc.
SECOND: The registered office of the Corporation in the State of
Delaware is to be located at 32 Loockerman Square, Suite L-100, Dover, Kent
County, Delaware 19901. The name of the Corporation's registered agent at that
address is The Prentice-Hall Corporation, Inc., a Delaware corporation.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is l1,000,000 shares, consisting of
10,000,000 shares of Common Stock par value $0.01 per share and 1,000,000 shares
of Preferred Stock, par value $1.00 per share ("Preferred Stock"). The Board
of Directors shall have authority by resolution to issue the shares of
Preferred Stock from time to time on such terms as it may determine and to
divide the Preferred Stock into one or more series and, in connection with the
creation of any such series, to determine and fix by the resolution or
resolutions providing for the issuance of shares thereof:
(a) the distinctive designation of such series, the number of
shares which shall constitute such series, which number may be increased or
decreased (but not below the number of shares then outstanding) from time to
time by action of the Board of Directors, and the stated value thereof, if
different from the par value thereof;
(b) the dividend rate, the times of payment of dividends on the
shares of such series, whether dividends shall be cumulative, and, if so, from
what date or dates, and the preference or relation which such dividends will
bear to the dividends payable on any shares of stock of any other class or any
other series of this class;
<PAGE>
(c) the price or prices at which, and the terms and conditions
on which, the shares of such series may be redeemed;
(d) whether or not the shares of such series shall be entitled
to the benefit of a retirement or sinking fund to be applied to the purchase or
redemption of such shares and, if so entitled, the amount of such fund and the
terms and provisions relative to the operation thereof;
(e) whether or not the shares of such series shall be
convertible into, or exchangeable for, any other shares of stock of the
Corporation or any other securities and, if so convertible or exchangeable, the
conversion price or prices, or the rates of exchange, and any adjustments
thereof, at which such conversion or exchange may be made, and any other terms
and conditions of such conversion or exchange;
(f) the rights of the shares of such series in the event of
voluntary or involuntary liquidation, dissolution or winding up, or upon any
distribution of the assets, of the Corporation;
(g) whether or not the shares of such series shall have
priority over or parity with or be junior to the shares of any other class or
series in any respect, or shall be entitled to the benefit of limitations
restricting (i) the creation of indebtedness of the Corporation, (ii) the
issuance of shares of any other class or series having priority over or being on
a parity with the shares of such series in any respect, or (iii) the payment of
dividends on, the making of other distributions in respect of, or the purchase
or redemption of shares of any other class or series on a parity with or ranking
junior to the shares of such series as to dividends or assets, and the terms of
any such restrictions, or any other restriction with respect to shares of any
other class or series on a parity with or ranking junior to the shares of such
series in any respect;
(h) whether such series shall have voting rights, in addition
to any voting rights provided by law and, if so, the terms of such voting
rights, which may be general or limited; and
(i) any other powers, preferences, privileges, and relative,
participating, optional, or other special rights of such series, and the
qualifications, limitations or restrictions thereof, to the full extent now or
hereafter permitted by law.
The powers, preferences and relative, participating, option and
other special rights of each series of Preferred Stock, and the qualifications,
limitations or restrictions thereof, it any, may differ from those of any and
all other series at any time outstanding. All shares of any one series of
2
<PAGE>
Preferred Stock shall be identical in all respects with all other shares of such
series, except that shares of any one series issued at different times may
differ as to the dates from which dividends thereon shall be cumulative.
FIFTH: The name and the mailing address of the sole incorporator is:
Name Mailing Address
---- ---------------
Ms. Anne Cohen Proskauer Rose Goetz & Mendelsohn
2121 Avenue of the Stars
Suite 2700
Los Angeles, California 90067
SIXTH: The number of directors of the Corporation shall be the number
from time to time fixed by, or in the manner provided in, the bylaws of the
Corporation. Elections of directors need not be by ballot unless the bylaws of
the Corporation shall so provide.
SEVENTH: In furtherance and not in limitation of the powers conferred
upon the Board of Directors by law, the Board of Directors shall have power to
make, adopt, alter, amend and repeal from time to time the bylaws of the
Corporation, subject to the right of the stockholders entitled to vote with
respect thereto to alter and repeal bylaws made by the Board of Directors.
EIGHTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
3
<PAGE>
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
NINTH: The Corporation reserves the right to amend, alter, change or
repeal any provisions contained in this certificate, and to add or insert other
provisions authorized by the laws of the State of Delaware at the time in force,
in the manner now or hereafter prescribed by law, and all rights and powers
conferred herein on shareholders, directors and officers are granted subject to
this reservation.
TENTH: A director of this Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of
Delaware or (iv) for any transaction from which the director derived an improper
personal benefit. The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have power
to indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section and, as
provided in said section, shall advance expenses, including reasonable
attorneys' fees, of any and all such persons, and the indemnification and
advancement of expenses provided for herein shall not be deemed exclusive of any
other rights to which a person seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
IN WITNESS WHEREOF, I have hereunto set my hand this 11th day of
February, 1994.
/s/ Anne Cohen
-----------------
Anne Cohen,
Sole Incorporator
4
<PAGE>
State of Delaware
PAGE 1
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AGREEMENT OF MERGER, WHICH MERGES:
"THE SINGING MACHINE COMPANY, INC.", A CALIFORNIA CORPORATION,
WITH AND INTO "THE SINGING MACHINE COMPANY, INC." UNDER THE NAME OF
"THE SINGING MACHINE COMPANY, INC.", A CORPORATION ORGANIZED AND EXISTING UNDER
THE LAWS OF THE STATE OF DELAWARE, AS RECEIVED AND FILED IN THIS OFFICE THE
THIRD DAY OF MAY, A.D. 1994, AT 9 O'CLOCK A.M.
[SEAL] /s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
0272817
AUTHENTICATION:
DATE: 02-23-00
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 05/03/1994
944077763 - 2376345
AGREEMENT OF MERGER
-------------------
THIS AGREEMENT OF MERGER (this "Merger Agreement") is made and entered
into as of February 28, 1994, by and between THE SINGING MACHINE COMPANY, INC.,
a Delaware corporation ("TSMC"), and THE SINGING MACHINE COMPANY, INC., a
California corporation (*TSMC II").
R E C I T A L
The Boards of Directors of TSMC and TSMC II deem it advisable for the
mutual benefit of TSMC and TSMC II and their respective holders of capital stock
that TSMC II be merged with and into TSMC in accordance with the laws of the
States of Delaware and California.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, the parties hereto hereby agree as follows:
1. Merger. At the Effective Time of the Merger (as hereinafter
defined), TSMC II shall be merged with and into TSMC under the laws of the
States of Delaware and California (the "Merger"), whereupon the separate
existence of TSMC II shall cease and TSMC, as the surviving corporation, shall
succeed without other transfer to all the rights and properties of TSMC II and
shall be subject to all the debts and liabilities of TSMC II in the same manner
as if TSMC had incurred them in accordance with the laws of the States of
Delaware and California. (For purposes hereof, TSMC is sometimes referred to as
the "Surviving Corporation.")
2. Filing And Effective Time. TSMC shall file with the Delaware
Secretary of State and California Secretary of State copies of this Merger
Agreement and appropriate officers' certificates pursuant to Section 252 of the
Delaware corporation Law (the "Delaware Law") and Section 1108 of the
California corporations Code (the "California Code"). In lieu of filing a copy
of this Merger Agreement, TSMC may file a certificate of merger or such other
instrument as is acceptable for filing under Delaware Law or the California Code
in order to accomplish the Merger. The effective time of the Merger (the
"Effective Time") shall be the time at which the Merger Agreement and
appropriate officers, certificates shall have been filed with the Delaware
Secretary of State, and the Merger shall be consummated upon completion of such
filing.
<PAGE>
3. Certificate Of Incorporation. Upon consummation of the Merger, the
Certificate of Incorporation of TSMC in effect immediately prior to the
Effective Time shall be the Certificate of Incorporation of the Surviving
Corporation.
4. Bylaws. The Bylaws of TSMC in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Corporation.
5. Conversion of Shares. The effect on the capital stock of TSMC and
TSMC II as the constituent corporations in the Merger shall be as follows:
a. Conversion Of TSMC II Shares. At the Effective Time, each
outstanding share of TSMC II Common Stock "TSMC II Common Stock"), other than
Dissenting Shares (as hereinafter defined), shall be converted into 243.67127
shares of TSMC Common Stock, par value $0.01 per share ("TSMC Common Stock").
b. Cancellation of TSMC Common Stock. At the Effective Time, the
100 shares of TSMC Common Stock currently issued and outstanding in the name of
TSMC II shall be cancelled and retired, and no shares of TSMC Common Stock or
other securities of TSMC shall be issued in respect thereof.
c. Dissenters' Rights. Notwithstanding anything in this Merger
Agreement to the contrary, shares of TSMC II Common Stock which are issued and
outstanding immediately prior to the Effective Time and which are held by
shareholders who have not voted such shares in favor of the Merger and who have
delivered a written demand upon TSMC to purchase such shares in the manner
provided in Chapter 13 of the California Code (the "Dissenting Shares") shall
not be converted into or be exchangeable for the right to receive the
consideration provided in Paragraph 5.a hereof unless and until such holder
shall have failed to perfect or shall have effectively withdrawn or lost the
holder's right to appraisal and payment under Chapter 13 of the California Code.
If such holder shall have so failed to perfect or shall have effectively
withdrawn or lost such right, such holder's shares shall thereupon be deemed, at
the Effective Time, to have been converted into and to have become exchangeable
for the right to receive the consideration provided for in Paragraph 5.a hereof,
without any interest thereon.
d. Fractional Shares. No certificates or scrip representing
fractional shares of TSMC Common Stock shall be issued as the result of the
Merger. If the number of shares computed pursuant to Paragraph 5.a is not a
whole number, then the holder of any fraction of a share of TSMC II Common Stock
shall be entitled to payment of the fair value of such fraction
2
<PAGE>
of a share as of the Effective Time as determined by the Board of Directors of
TSMC in its sole discretion.
e. Tender Of Shares. The conversion of shares of TSMC II Common
Stock into shares of TSMC Common Stock as provided by this Merger Agreement
shall occur automatically at the Effective Time without action by the holders
thereof. Each holder of such shares shall tender such holder's original share
certificate or certificates to TSMC or to an exchange agent designated by TSMC,
and upon receipt of such certificates, TSMC or the designated exchange agent
shall deliver and exchange therefor a new TSMC share certificate representing
the appropriate number of shares of TSMC Common Stock to which such holder shall
be entitled, as set forth above.
6. Termination. Notwithstanding the approval of this Merger Agreement
by the holders of capital stock of TSMC and TSMC II, this Merger Agreement may
be terminated at any time prior to the Effective Time by mutual agreement of the
Boards of Directors of TSMC and TSMC II. In the event of the termination of this
Merger Agreement, this Merger Agreement shall immediately become void, and there
shall be no liability on the part of any of the parties hereto or their
respective officers, directors or holders of capital stock.
7. Amendment. This Merger Agreement may be amended with the approval of
the Boards of Directors of TSMC and TSMC II at any time prior to the filing of
this Merger Agreement with the Secretary of State of Delaware or California,
provided that any amendment made subsequent to the adoption of this Merger
Agreement by the stockholders of TSMC or TSMC II shall not (a) alter or change
the amount or kind of shares and cash in lieu of fractional shares to be
received by the stockholders of TSMC II on conversion of the shares of common
stock of TSMC II, (b) alter or change any term of the Certificate of
Incorporation of the Surviving Corporation or (3) alter or change any of the
terms and conditions of this Merger Agreement if such alteration or change would
adversely effect the holders of common stock of TSMC or TSMC II.
8. Governing Law. This Merger Agreement shall be construed in
accordance with and governed by the laws of the State of Delaware, without
resort to choice of law principles.
9. Further Assurances. Each of the parties hereto shall take or cause
to be taken all actions, and do or cause to be done all things, necessary,
proper or advisable to effectuate the Merger.
3
<PAGE>
10. Counterparts. This Merger Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, and both of which taken
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Merger
Agreement to be duly executed by their respective officers.
"TSMC" "TSMC II"
THE SINGING MACHINE COMPANY, THE SINGING MACHINE COMPANY,
INC., INC.,
a Delaware Corporation a California Corporation
By:/s/Edward Steele By:/s/Edward Steele
--------------------------- -----------------------------
Edward Steele, Edward Steele,
Chief Executive Officer Chief Executive Officer
and Treasurer and Treasurer
By:/s/Eugene B. Settler By:/s/Eugene B. Settler
--------------------------- -----------------------------
Eugene B. Settler, Eugene B. Settler,
President and Secretary President and Secretary
4
<PAGE>
CERTIFICATE OF THE SECRETARY
OF
THE SINGING MACHINE COMPANY, INC.
(a Delaware Corporation)
I, Eugene B. Settler, the Secretary of THE SINGING MACHINE COMPANY,
INC., hereby certify that the Agreement of Merger to which this certificate is
attached, after having been first duly signed on behalf of the corporation by
the President and Secretary under the corporate seal of such corporation, was
duly approved and adopted by unanimous written consent of the stockholders on
February 28, 1994.
WITNESS my hand this 28th day of February, 1994.
By:/s/ Eugene B. Settler
----------------------------
Eugene B. Settler,
Secretary
<PAGE>
CERTIFICATE OF THE SECRETARY
OF
THE SINGING MACHINE COMPANY, INC.
(a California Corporation)
I, Eugene B. Settler, the Secretary of THE SINGING MACHINE COMPANY,
INC., hereby certify that the Agreement of Merger to which this certificate is
attached, after having been first duly signed on behalf of the corporation by
the President and Secretary under the corporate seal of such corporation, was
duly approved and adopted by unanimous written consent of the stockholders on
February 28, 1994.
WITNESS my hand this 28th day of February, 1994
By:/s/ Eugene B. Settler
----------------------------
Eugene B. Settler,
Secretary
<PAGE>
State of Delaware PAGE 1
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "THE SINGING MACHINE COMPANY, INC.", FILED IN THIS OFFICE ON THE
NINETEENTH DAY OF JULY, A.D. 1994, AT 9 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT
COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL] /s/ Edward J. Freel
-----------------------------------
Edward J. Freel, Secretary of State
2376345 8100 AUTHENTICATION: 7185006
944132335 DATE: 07-19-94
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE SINGING MACHINE COMPANY, INC.
THE SINGING MACHINE COMPANY, INC. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware (the "Statute"), does hereby certify:
FIRST: That on July 11, 1994, the Board of Directors of
the Corporation, pursuant to unanimous written consent of all of its
members in lieu of holding a special meeting, adopted a resolution
setting forth a proposed amendment to the Corporation's Certificate
of Incorporation, declaring said amendment to be advisable and
resolving that said amendment be considered and voted upon by the
Corporation's stockholders. Said resolution proposed to amend
Article FOURTH of the Corporation's Certificate of Incorporation in
its entirety to read as follows:
"FOURTH: The total number of shares of all classes of
stock that the Corporation shall have authority to issue is
11,000,000 shares, of which 9,900,000 shares shall be Common Stock
having a par value of $.01 per share ("Common Stock"), 100,000
shares shall be Class A Common Stock having a par value of $.01 per
share ("Class A Common Stock"), and 1,000,000 shares shall be
Preferred Stock having a par value of $1.00 per share ("Preferred
Stock").
(a) Common Stock and Class A Common Stock. Except as set
forth in this Article FOURTH, the Common Stock and the Class A
Common Stock shall have the same rights and
<PAGE>
privileges and shall rank equally, share ratably and be identical
in all respects as to all matters.
(1) Dividends, Combinations, Subdivisions
and Mergers.
(i) Subject to any preferential
or other rights granted to the holders of any
series of Preferred Stock, holders of Common Stock
and Class A Common Stock shall be entitled to
receive such dividends, payable in cash, as may be
declared thereon by the Board of Directors from
time to time out of assets or funds of the
Corporation legally available therefor, provided
that all such dividends shall be paid in equal
amounts, share for share, to the holders of Common
Stock and Class A Common Stock as if a single
class.
(ii) If the Corporation shall in
any manner split, subdivide or combine the
outstanding shares of Common Stock, the outstanding
shares of Class A Common Stock shall not (unless
otherwise specifically provided by Resolution of
the Board of Directors at the time of such split,
subdivision or combination) be split, subdivided or
combined. If the Corporation shall in any manner
split, subdivide or combine the outstanding shares
of Class A Common Stock, the outstanding shares of
Common Stock may (if so provided by resolution of
the Board of Directors at the time of such split,
subdivision or combination), but need not, be
split, subdivided or combined in the same manner.
(iii) In the event of any merger
or consolidation of the Corporation with or into any
other entity (whether or not the Corporation is the
surviving entity) the holders of Common Stock and
Class A Common Stock shall be entitled to receive
the same per share consideration, if any.
(2) Rights on Liquidation. Subject to any
preferential or other rights granted to the holders
of any series of Preferred Stock, in the event of
any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the
assets of the Corporation available for distribution
to stockholders shall be distributed in equal
amounts per share to the holders of the Common Stock
and the holders of the Class A Common Stock, as if
such classes constituted a single class. For
purposes of this paragraph, a consolidation or
merger of the Corporation with any other
corporation, or the sale, transfer or lease by the
2
<PAGE>
Corporation of all or substantially all of its
assets, shall not constitute or be deemed a
liquidation, dissolution or winding up of the
Corporation.
(3) Voting. Subject to the voting powers,
if any, granted to the holders of any series of
Preferred Stock, and except as otherwise required
by law, the Common Stock shall have the exclusive
right to vote for the election of directors and
for all other purposes and each holder of Common
Stock shall be entitled to one vote for each share
of Common Stock held. Except as otherwise required
by law, the Class A Common Stock shall have no
voting rights on any matter.
(4) Conversion of Class A Common Stock.
(i) Upon the first to occur of (A)
April 1, 1995 or (B) the date on which a
registration statement filed by the Corporation with
the Securities and Exchange Commission ("SEC") for a
public offering and sale of the Common Stock of the
Corporation (other than a registration statement on
Form S-4 or Form S-8, or their successors, or any
other form for a limited purpose, or any
registration statement covering only securities
proposed to be issued in exchange for securities or
assets of another corporation) is declared effective
by the SEC, such shares of Class A Common Stock
shall, without any further act or deed on the part
of the Corporation, the holder(s) thereof or any
other person, be automatically converted on a
share-for-share basis into shares of Common Stock.
At such time, all rights of the holder of such
shares of Class A Common Stock as such shall cease
and the person or persons in whose name or names a
certificate or certificates are to be issued
representing the shares of Common Stock into which
such shares of Class A Common Stock have been
converted shall be treated for all purposes as
having become the record holder or holders of such
shares of Common Stock at such time; provided,
however, that any such surrender on any date when
the stock transfer books of the Corporation shall be
closed shall constitute the person or persons in
whose name or names the certificate or certificates
representing shares of Common Stock are to be issued
as the record holder or holders thereof for all
purposes immediately prior to the close of business
on the next succeeding day on which such stock
transfer books are open.
3
<PAGE>
(ii) As promptly as practical
after the conversion of shares of Class A Common
Stock in the manner provided in subparagraph (4)
(i) above, the Corporation will deliver or cause
to be delivered a certificate or certificates
representing the number of full shares of Common
Stock issuable upon such conversion, issued in the
name or names of such appropriate holder(s).
(iii) The Corporation covenants
that it will at all times reserve and keep
available, solely for the purpose of issuance upon
conversion of the outstanding shares of Class A
Common Stock, such number of shares of Common Stock
as shall be issuable upon the conversion of all
such outstanding shares, provided, however, that
nothing contained herein shall be construed to
preclude the Corporation from satisfying its
obligations in respect of the conversion of the
outstanding shares of Class A Common Stock by
delivery of purchased shares of Common Stock which
are held in the treasury of the Corporation. The
Corporation covenants that if any shares of Common
Stock, required to be reserved for purposes of
conversion hereunder, require registration or
approval with any governmental authority under any
federal or state law before such shares of Common
Stock may be issued upon conversion, the
Corporation will cause such shares to be duly
registered or approved, as the case may be.
(b) Preferred Stock. The Board of Directors shall
have authority by resolution to issue the shares of
Preferred Stock from time to time on such terms as it may
determine and to divide the Preferred Stock into one or more
series and, in connection with the creation of any such
series, to determine and fix by the resolution or resolutions
providing for the issuance of shares thereof:
(1) the distinctive designation of such
series, the number of shares which shall constitute
such series, which number may be increased or
decreased (but not below the number of shares then
outstanding) from time to time by action of the
Board of Directors, and the stated value thereof, if
different from the par value thereof;
(2) the dividend rate, the times of payment
of dividends on the shares of such series, whether
dividends shall be cumulative, and, if so, from what
date or dates, and the preference or relation which
such dividends will bear to the dividends
4
<PAGE>
payable on any shares of stock of any other class
or any other series of this class;
(3) the price or prices at which, and the
terms and conditions on which, the shares of such
series may be redeemed;
(4) whether or not the shares of such
series shall be entitled to the benefit of a
retirement or sinking fund to be applied to the
purchase or redemption of such shares and, if so
entitled, the amount of such fund and the terms and
provisions relative to the operation thereof;
(5) whether or not the shares of such
series shall be convertible into, or exchangeable
for, any other shares of stock of the Corporation
or any other securities and, if so convertible or
exchangeable, the conversion price or prices, or
the rates of exchange, and any adjustments thereof,
at which such conversion or exchange may be made,
and any other terms and conditions of such
conversion or exchange;
(6) the rights of the shares of such
series in the event of voluntary or involuntary
liquidation, dissolution or winding up, or upon any
distribution of the assets, of the Corporation;
(7) whether or not the shares of such series
shall have priority over or parity with or be junior
to the shares of any other class or series in any
respect, or shall be entitled to the benefit of
limitations restricting (i) the creation of
indebtedness of the corporation, (ii) the issuance of
shares of any other class or series having priority
over or being on a parity with the shares of such
series in any respect, or (iii) the payment of
dividends on, the making of other distributions in
respect of, or the purchase or redemption of shares
of any other class or series on a parity with or
ranking junior to the shares of such series as to
dividends or assets, and the terms of any such
restrictions, or any other restriction with respect
to shares of any other class or series on a parity
with or ranking junior to the shares of such series
in any respect;
(8) whether such series shall have voting
rights, in addition to any voting rights provided by
law and, if so, the terms of such voting rights,
which may be general or limited; and
5
<PAGE>
(9) any other powers, preferences,
privileges, and relative, participating, optional,
or other special rights of such series, and the
qualifications, limitations or restrictions thereof,
to the full extent now or hereafter permitted by
law.
The powers, preferences and relative, participating,
option and other special rights of each series of Preferred
Stock, and the qualifications, limitations or restrictions
thereof, if any, may differ from those of any and all other
series at any time outstanding. All shares of any one series
of Preferred Stock shall be identical in all respects with
all other shares of such series, except that shares of any
one series issued at different times may differ as to the
dates from which dividends thereon shall be cumulative;"
SECOND: That thereafter, pursuant to the resolution of its
Board of Directors and Section 228 of the Statute, the holders of all
of the outstanding capital stock of the Corporation entitled to vote
thereon adopted the proposed resolution and approved the amendment set
forth herein by written consent on July 15, 1994.
THIRD: That said amendment was duly adopted in accordance
with the provisions of Section 242 of the Statute.
FOURTH: That the capital of the Corporation shall not be
reduced under or by reason of said amendment.
6
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to
be hereunder affixed and this Certificate to be signed by Eugene B. Settler,
its President, this 18th day of July, 1994.
By:/s/Eugene B. Settler
-------------------------------
Eugene B. Settler, President
STATE OF FLORIDA )
) SS:
COUNTY OF PALM BEACH )
The foregoing instrument was acknowledged before me this 18th day of
July, 1994 by Eugene B. Settler, as President, of THE SINGING MACHINE COMPANY,
INC., a Delaware corporation, on behalf of the corporation, and he is
personally known to me.
/s/ Donald E. Thompson, II
--------------------------------
DONALD E. THOMPSON II Notary Public
[seal] MY COMMISSION #CC229728 EXPIRES
September 21, 1996
BONDED THRU TROY FARM INSURANCE, INC. /s/ Donald E. Thompson, II
--------------------------------
Type, Print, or Stamp Name
7
<PAGE>
State of Delaware
PAGE 1
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "THE SINGING MACHINE COMPANY, INC.", FILED IN THIS OFFICE ON THE
TWENTY-SIXTH DAY OF JULY, A.D. 1994, AT 3 O'CLOCK P.M.
/s/ Edward J. Freel
[seal] -----------------------------------
Edward J. Freel, Secretary of State
2376345 8100
AUTHENTICATION: 0272816
001088795 DATE: 02-23-00
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 03:00 PM 07/26/1994
944138111 - 2376345
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE SINGING MACHINE COMPANY, INC.
THE SINGING MACHINE COMPANY, INC. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware (the "Statute"), does hereby certify:
FIRST: That on July 11, 1994, the Board of Directors of the
Corporation, pursuant to unanimous written consent of all of its members
in lieu of holding a special meeting, adopted a resolution setting forth
a proposed amendment to the Corporation's Certificate of Incorporation,
declaring said amendment to be advisable and resolving that said
amendment be considered and voted upon by the Corporation's
stockholders. Said resolution proposed to amend Article FOURTH of the
Corporation's Certificate of Incorporation by adding to the and thereof
the following two new paragraphs:
"(c) Reverse Stock Split. Upon the Effective Date,
each share of the Corporation's then issued and
outstanding Common Stock shall be converted on a basis of
one (1) share for each 1.87476 shares of Common Stock
outstanding (the "Reverse Stock Split"). Any stock
certificate that, immediately prior to the Effective Date,
represents shares of Common Stock issued and outstanding,
shall, from and after the Effective Date, automatically
and without the necessity of presenting the same for
<PAGE>
exchange, represent the number of shares of Common
Stock which equals the quotient of the number of
shares of Common Stock issued and outstanding
immediately prior to the Effective Date represented
by such certificate divided by a factor of 1.87476.
For purposes of this paragraph, the term "Effective
Date" shall mean the date upon which this amendment
is filed with the Delaware Secretary of State."
No fractional shares resulting from the
Reverse Stock Split representing Common Stock shall be
issued. After giving effect to the Reverse Stock
Split, any share of Common Stock of any certificate
representing a fraction of such a share shall be
rounded up to the next whole share of Common Stock;"
SECOND: That thereafter, pursuant to the resolution of its
Board of Directors and Section 228 of the Statute, the holders of all
of the outstanding capital stock of the Corporation entitled to vote
thereon adopted the proposed resolution and approved the amendment set
forth herein by written consent on July 15, 1994.
THIRD: That said amendment was duly adopted in accordance with
the provisions of Section 242 of the Statute.
FOURTH: That the capital of the Corporation shall not be
reduced under or by reason of said amendment.
2
<PAGE>
IN WITNESS WHEREOF, the corporation has caused its corporate seal to
be hereunder affixed and this Certificate to be signed by Eugene B. Settler, its
President, this 19th day of July, 1994.
By:/s/Eugene B. Settler
--------------------------------
Eugene B. Settler,
President
STATE OF FLORIDA )
) SS:
COUNTY OF PALM BEACH )
The foregoing instrument was acknowledged before me this 19th day of
July, 1994 by Eugene B. Settler, as President of THE SINGING MACHINE COMPANY,
INC., a Delaware corporation, on behalf of the corporation, and he is
personally known to me.
/s/Donald E. Thompson II
--------------------------
DONALD E. THOMPSON II Notary Public
[seal] MY COMMISSION #CC229728 EXPIRES
September 21, 1996 /s/Donald E. Thompson II
BONDED THRU TROY FARM INSURANCE, INC. --------------------------
Type, Print, or Stamp Name
3
<PAGE>
State of Delaware
PAGE 1
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "THE SINGING MACHINE COMPANY, INC.", FILED IN THIS OFFICE ON THE
FOURTH DAY OF NOVEMBER, A.D. 1994, AT 10:45 O'CLOCK A.M.
/s/Edward J. Freel
[seal] -----------------------------------
Edward J. Freel, Secretary of State
2376345 8100
AUTHENTICATION: 0272815
001088795 DATE: 02-23-00
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 10:45 AM 11/04/1994
944212026- 2376345
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE SINGING MACHINE COMPANY, INC.
THE SINGING MACHINE COMPANY, INC. (the "Corporation"), a
corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware (the "Statute"),
does hereby certify:
FIRST; That on October 27, 1994, the Board of Directors
of the Corporation, pursuant to unanimous written consent of
all of its members in lieu of holding a special meeting,
adopted a resolution setting forth a proposed amendment to the
Corporation's Certificate of Incorporation, declaring said
amendment to be advisable and resolving that said amendment be
considered and voted upon by the Corporation's stockholders.
Said resolution proposed to add a new Article ELEVENTH of the
Corporation's Certificate of Incorporation by adding the
following;
"ELEVENTH: In addition to any affirmative vote required
by law, any of the following actions shall require the
affirmative vote of the holders of at least a majority
of the outstanding shares Of capital stock of the
Corporation entitled to vote thereon in order to be
approved: (i) the adoption of any plan or proposal for
the liquidation or dissolution of the Corporation,
(ii) any merger or consolidation to which the
Corporation is a party and in which the Corporation is
not the surviving entity in such merger or
consolidation or (iii) any sale, lease or exchange of
all or substantially all
<PAGE>
of the Corporation's a property and assets;
provided, however, that the provisions of this
Article ELEVENTH shall only apply to the extant any
such actions occur during the five year period
immediately following the closing date of any
initial public offering of securities by the
Corporation."
SECOND: That thereafter, pursuant to the resolution
of its Board of Directors and Section 228 of the Statute,
the holders of all of the outstanding capital stock of the
Corporation entitled to vote thereon adopted the proposed
resolution and approved the amendment set forth herein by
written consent on November 2, 1994.
THIRD: That said amendment was duly adopted in
accordance with the provisions of Section 242 of the Statute
and upon the filing hereof shall become a part of the
Corporation's Certificate of Incorporation.
FOURTH: That the capital of the Corporation shall
not be reduced under or by reason of said amendment.
IN WITNESS WHEREOF, the corporation has caused its corporate
seal to be hereunder affixed and this Certificate to be signed by
Eugene B. Settler, its President, this 3rd day of November, 1994.
By:/s/ Eugene B. Settler
----------------------------
Eugene B. Settler, President
2
<PAGE>
STATE OF FLORIDA )
) SS:
COUNTY OF PALM BEACH )
The foregoing instrument was acknowledged before me this
3rd day of November, 1994 by Eugene B. Settler, as President of
THE SINGING MACHINE COMPANY, INC., a Delaware corporation, on
behalf of the corporation, and he is personally known to me.
/s/ Donald E. Thompson II
--------------------------
Notary Public
DONALD E. THOMPSON II
[seal] MY COMMISSION #CC229728 EXPIRES
September 21, 1996
BONDED THRU TROY FARM INSURANCE, INC.
--------------------------
Type, Print, or Stamp Name
<PAGE>
State of Delaware
PAGE 1
Office of the Secretary of State
---------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY
OF THE CERTIFICATE OF RENEWAL OF "THE SINGING MACHINE COMPANY,
INC.", FILED IN THIS OFFICE ON THE SECOND DAY OF APRIL, A.D. 1998,
AT 9 O'CLOCK A.M.
/s/Edward J. Freel
[seal] -----------------------------------
Edward J. Freel, Secretary of State
2376345 8100
AUTHENTICATION: 0272814
001089795
DATE: 02-23-00
<PAGE>
STATE OF DELAWARE
CERTIFICATE FOR RENEWAL AND
REVIVAL OF CHARTER
The Singing Maching Company Inc., a corporation organized under the
laws of Delaware, the charter of which was voided for non-payment of taxes, now
desires to procure a restoration, renewal and revival of its charter, and hereby
certifies as follows:
1. The name of this corporation is The Singing Machine Company, Inc.
2. Its registered office in the State of Delaware is located at 1013
CENTER ROAD Street, City of WILMINGTON Zip Code 19805 County of
NEW CASTLE the name and address of its registered agent is
CORPORATION SERVICE COMPANY.
3. The date of filing of the original Certificate of Incorporation
in Delaware was FEBRUARY 15, 1994.
4. The date when resstoration, renewal, and revival of the charter
of this company is to commence is the 28TH day of FEBRUARY
1998, same being prior to the date of the expiration of the
charter. This renewal and revival of the charter of this
corporation is to be perpetual.
5. This corporation was duly organized and carried on the business
authorized by its charter until the 1ST day of MARCH A.D. 1998,
at which time its charter became inoperative and void for non-
payment of taxes and this certificate for renewal and revival is
is filed by authority of the duly elected directors of the
corporation in accordance with the laws of the State of Delaware.
IN TESTIMONY WHEREOF, and in compliance with the provisions of
Section 312 of the General Corporation Law of the State of Delaware, as amended,
providing for the renewal, extension and restoration of charters, JOHN KLECHA
the last and acting authorized officer hereunto set his/her hand to this
certificate this 30TH day of MARCH 1998.
By:/s/John Klecha
-----------------------------------
Authorized Officer
Name:/s/John Klecha
-----------------------------------
Print of Type
Title:/s/ Secretary
-----------------------------------
<PAGE>
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT
COPY OF THE CERTIFICATE OF AMENDMENT OF "THE SINGING MACHINE
COMPANY, INC.", FILED IN THIS OFFICE ON THE TWENTIETH DAY OF
APRIL, A.D. 1998, AT 4:01 O'CLOCK P.M.
/s/Edward J. Freel
[seal] -----------------------------------
Edward J. Freel, Secretary of State
2376345 8100 AUTHENTICATION: 9039988
DATE: 04-22-98
981150048
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE SINGING MACHINE COMPANY, INC.
THE SINGING MACHINE COMPANY, INC., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
FIRST: that the Board of Directors of said corporation, by the
unanimous written consent of its members, filed with the minutes of the Board,
and pursuant to the Company's Plan of Reorganization, as amended on March 17,
1998, adopted a resolution proposing and declaring advisable the following
amendment to the Certification of Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of The
Singing Machine Company, Inc. be amended by deleting the first
paragraph of Article Three to the Articles of Incorporation of
the Company and to insert the following in its place and stead:
"The aggregate number of shares of all classes of
capital stock that this Company shall have authority to
issue is One Million One Hundred Thousand (1,100,000)
shares, consisting of Nine Hundred and Ninety Thousand
(990,000) shares of Common Stock, par value $.01 per
share (the "Common Stock); and (ii) Ten Thousand
(10,000) shares of Class A Common Stock, par value $.01
per share (the "Class A Stock"); and One Hundred
Thousand (100,000) shares of Preferred Stock, par value
$1.00 per (the "Preferred Stock").
-1-
<PAGE>
SECOND, that is lieu of a meeting and vote of stockholder, the
stockholders given unanimous written consent to said amendment in
accordance with the provisions of Section 228 of the General Corporation
Law of the State of Delaware.
THIRD, that the aforesaid amendment was duly adopted in
accordance with the applicable provisions of Section 242 and 228 of the
General Corporation Law of the State of Delaware.
IT WITNESS WHEREOF, The Singing Machine Company, Inc. has caused
this Certificate to be signed by John Klecha, its Secretary, this 23rd day
of March, 1998.
THE SINGING MACHINE COMPANY, INC.
By:/s/John Klecha
-----------------------------------
John Klecha, Secretary
-2-
<PAGE>
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "THE SINGING MACHINE COMPANY, INC.", FILED IN THIS OFFICE ON THE
SEVENTH DAY OF MAY, A.D. 1998, AT 4:30 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
/s/ Edward J. Freel
[seal] -----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 9070088
2376345 8100
DATE: 05-08-98
981176853
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE SINGING MACHINE COMPANY, INC.
THE SINGING MACHINE COMPANY, INC., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does certify:
FIRST: that pursuant to the Company's Plan of Reorganization, as
amended on March 17, 1998, and pursuant to the unanimous written consent of the
Board of Directors of said corporation, the Board adopted a resolution dated
March 23, 1998, amending Article Three to the Articles of Incorporation of the
Company to fix the aggregate number of shares of Capital Stock that the Company
shall have authority to issue at One Million One Hundred Thousand (1,100,000)
shares.
SECOND: that in lieu of a meeting and vote of stockholders, and in
accordance with the provisions of Section 303 of the General Corporation Law of
the State of Delaware, the Board of Directors of said corporation, by the
unanimous written consent of its members, an necessary to effectuate the
Company's Plan of Reorganization, as Amended on March 17, 1998, adopted a
resolution proposing and declaring advisable the following amendment to the
Certificate of Incorporation of said Corporation:
RESOLVED, that the Certificate of Incorporation of The Singing
Machine Company, Inc. be amended by deleting
-1-
<PAGE>
the first paragraph of Article Three to the Articles of
incorporation of the Company and to insert the
following in its place and stead;
"The aggregate number of shares of all classes of capital
stock that this Company shall have authority to issue is
Eleven Million (11,000,000) shares, consisting of Nine
Million, Nine Hundred Thousand (9,900,000) shares of
Common Stock, par value $.01 per share (the "Common
Stock"); and (ii) one Hundred Thousand (100,000) shares of
Class A Common Stock, par value $.01 per share (the
"Class A Stock"); and One Million (1,000,000) shares of
Preferred Stock, par value $1.00 per (the "Preferred
stock").
THIRD: that the aforesaid amendment was duly adopted in
accordance with the applicable provisions of Section 242 of the
General Corporation Law of the State of Delaware.
IT WITNESS WHEREOF, The Singing Machine Company, Inc.
has caused this Certificate to be signed by John Klecha, its
Secretary, this 30th day of April, 1998.
THE SINGING MACHINE COMPANY, INC.
/s/ John Klecha
--------------------------------
By:John Klecha, Secretary
-2-
<PAGE>
State of Delaware PAGE 1
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "THE SINGING MACHINE COMPANY, INC.", FILED IN THIS OFFICE ON THE
THIRTEENTH DAY OF APRIL, A.D. 1999, AT 12:30 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS.
/s/ Edward J. Freel
[seal] ------------------------------------
Edward J. Freel, Seciretary of State
2376345 8100
AUTHEDMCATION: 9689972
991143980
DATE: 04-16-99
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE SINGING MACHINE COMPANY, INC.
THE SINGING MACHINE COMPANY, INC., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does certify;
FIRST: that pursuant to the Company's Annual Meeting on March 19,
1999, and approval by a majority vote of the majority of the shareholders of
said corporation, the Board is authorized to amend Article Four to the Articles
of Incorporation of the Company to fix the aggregate number of shares of Capital
Stock that the Company shall have authority to issue Seventy Five Million
(75,000,000) shares, as follows:
RESOLVED, that the Certificate of Incorporation of The
Singing Machine Company, Inc. be amended by deleting the first
paragraph of Article Four to the Articles of Incorporation of the
Company and to insert the following in its place and stead:
"The aggregate number of shares of all classes of capital
stock that this Company shall have authority to issue is
Seventy Five Million (75,000,000) shares, consisting of
Seventy Three Million, Nine Hundred Thousand (73,900,000)
shares of Common Stock, par value $.01 per share (the
"Common Stock"); and (ii) One Hundred Thousand (100,000)
shares of Class A Common Stock, par value $.01 per share
(the "Class A Stock"); and One Million (1,000,000) shares
of Preferred Stock, par value $1.00 per (the "Preferred
Stock").
Page 1 of 2
<PAGE>
SECOND: that in lieu of a meeting and vote of stockholders, and in
accordance with the provisions of Section 242 of the General Corporation Law of
the State of Delaware, the Board of Directors of said corporation, by the
unanimous written consent of its members, adopted a resolution proposing and
declaring advisable the following amendment to the Certificate of Incorporation
of said Corporation:
RESOLVED, that the Certificate of Incorporation of The Singing
Machine Company, Inc. be amended to include the Third Article as follows:
"The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware".
THIRD: that the aforesaid amendments were duly adopted in accordance
with the applicable provisions of Sections 242 of the General Corporation Law of
the State of Delaware.
IT WITNESS WHEREOF, The Singing Machine Company, Inc. has caused
this Certificate to be signed by John Klecha, its Secretary, this 1st day of
April, 1999.
THE SINGING MACHINE COMPANY, INC.
By:/s/John Klecha
------------------------------------
John Klecha, Secretary
Page 2 of 2
<PAGE>
State of Delaware PAGE 1
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
DESIGNATION OF "THE SINGING MACHINE COMPANY, INC.", FILED IN THIS OFFICE ON THE
FIFTEENTH DAY OF APRIL, A.D. 1999, AT 4:30 O'CLOCK P.M.
/s/Edward J. Freel
[seal] -----------------------------------
Edward J. Freel, Secretary of State
2376345 8100
AUTHENTICATION: 0272813
001088795
DATE: 02-23-00
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:30 PM 04/15/1999
991149655 - 2376345
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF PREFERRED STOCK
OF
THE SINGING MACHINE COMPANY, INC.
The Singing Machine Company, Inc. (the "Company"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware DOES HEREBY CERTIFY:
THAT, pursuant to authority conferred upon the Board of Directors by
the Certificate of Incorporation, as Amended, of said corporation, and pursuant
to the provisions of Section 151 of Title 8 of the Delaware Code of 1953, said
Board of Directors at a Special Meeting held on March 24, 1999, by the unanimous
written consent of its members, filed with the minutes of the Board, adopted a
resolution in conjunction with the issuance of the Company's securities pursuant
to that certain Private Placement Memorandum dated April 1, 1999, to designate
the 1,000,000 authorized shares of Preferred Stock subject to the preference,
dividends, conversion and other rights which resolution is as follows;
RESOLVED, that the Board of Directors designate the 1,000,000
authorized shares of Preferred Stock subject to the preferences, dividends,
conversion and other rights an set forth by the Board of Directors, as follows:
Designation and Initial Number. The class of shares of Preferred
Stock hereby classified shall be designated
<PAGE>
the Convertible Preferred Stock" (hereinafter referred to as the
"Preferred Stock"). The initial number of authorized shares of
the Preferred Stock is 1,000,000.
Dividends. There shall be a nine percent (9%)
dividend paid on the Preferred Stock prior to the date of
conversion as set forth below.
Conversion. Each share of Preferred Stock will
automatically convert at 5:00 p.m. eastern time on April 1, 2000,
which is one (1) year after the date of this Memorandum. Upon
conversion, each holder of one (1) share of Preferred Stock shall
receive from the Company one (1) share of the Company's Common
Stock, which shall not have been registered with the Commission.
The Company, however, will use its best efforts to file a
registration statement with the Commission to register the
Company's Common Stock underlying the securities comprising the
Units within ninety (90) days after the completion of this
Offering.
Liquidation or Dissolution. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Company, the holders of Preferred Stock then outstanding shall be
entitled to be paid out of the assets of the Company available
for distribution to its stockholders, before any payment shall be
made to the holders of any stock of the Company ranking junior to
Preferred Stock.
<PAGE>
A merger or consolidation of the Company with or into any other
corporation, share exchange or a sale or conveyance of all or any part
of the assets of the Company (which shall not in fact result in the
liquidation of the Company and the distribution of assets to
stockholders) shall not be deemed to be a voluntary or involuntary
liquidation, dissolution or winding up of the Company.
Voting. The Preferred Stock shall have no voting rights.
IN WITNESS WHEREOF, the Board of Directors has authorized this
Certificate to be signed by John F. Klecha, its Secretary, this 9th day
of April, 1999.
THE SINGING MACHINE COMPANY, INC.
By: /s/John F. Klecha
-----------------------------------------
John F. Klecha, Secretary
<PAGE>
BY-LAWS
OF
THE SINGING MACHINE COMPANY, INC.
1. MEETINGS OF STOCKHOLDERS.
1.1 Annual Meeting. The annual meeting of stockholders shall be held on
the first Day of May in each year, or as soon thereafter as practicable, and
shall be held at a place and time determined by the board of directors (the
"Board").
1.2 Special Meetings. Special meetings of the stockholders may be
called by resolution of the Board or the president and shall be called by the
president or secretary upon the written request (stating the purpose or purposes
of the meeting) of a majority of the directors then in office or of the holders
of a majority of the outstanding shares entitled to vote. Only business related
to the purposes set forth in the notice of the meeting may be transacted at a
special meeting.
1.3 Place and Time of Meetings. Meetings of the stockholders may be
held in or outside Delaware at the place and time specified by the Board or the
officers or stockholders requesting the meeting.
1.4 Notice of Meetings; Waiver of Notice. Written notice of each
meeting of stockholders shall be given to each stockholder entitled to vote at
the meeting, except that (a) it shall not be necessary to give notice to any
stockholder who submits a signed waiver of notice before or after the meeting,
and (b) no notice of an adjourned meeting need be given, except when required
under section 1.5 below or by law. Each notice of a meeting shall be given,
personally or by mail, not fewer than 10 nor more than 60 days before the
meeting and shall state the time and place of the meeting, and, unless it is the
annual meeting, shall state at whose direction or request the meeting is called
and the purposes for which it is called. If mailed, notice shall be considered
given when mailed to a stockholder at his address on the corporation's records.
The attendance of any stockholder at a meeting, without protesting at the
beginning of the meeting that the meeting is not lawfully called or convened,
shall constitute a waiver of notice by him.
1.5 Quorum. At any meeting of stockholders, the presence in person or
by proxy of the holders of a majority of the shares entitled to vote shall
constitute a quorum for the transaction of any business. In the absence of a
quorum, a majority in voting interest of those present or, if no stockholders
are present, any officer entitled to preside at or to act as secretary of the
meeting, may adjourn the meeting until a quorum is
<PAGE>
present. At any adjourned meeting at which a quorum is present, any action may
be taken that might have been taken at the meeting as originally called. No
notice of an adjourned meeting need be given, if the time and place are
announced at the meeting at which the adjournment is taken, except that, if
adjournment is for more than 30 days or if, after the adjournment, a new record
date is fixed for the meeting, notice of the adjourned meeting shall be given
pursuant to section 1.4.
1.6 Voting; Proxies. Each stockholder of record shall be entitled to
one vote for each share registered in his name. Corporate action to be taken by
stockholder vote, other than the election of directors, shall be authorized by a
majority of the votes cast at a meeting of stockholders, except as otherwise
provided by law or by section 1.8. Directors shall be elected in the manner
provided in section 2.1. Voting need not be by ballot, unless requested by a
majority of the stockholders entitled to vote at the meeting or ordered by the
chairman of the meeting. Each stockholder entitled to vote at any meeting of
stockholders or to express consent to or dissent from corporate action in
writing without a meeting may authorize another person to act for him by proxy.
No proxy shall be valid after three years from its date, unless it provides
otherwise.
1.7 List of Stockholders. Not fewer than 10 days prior to the date of
any meeting of stockholders, the secretary of the corporation shall prepare a
complete list of stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in his name. For a period of not fewer than 10 days prior to
the meeting, the list shall be available during ordinary business hours for
inspection by any stockholder for any purpose germane to the meeting. During
this period, the list shall be kept either (a) at a place within the city where
the meeting is to be held, if that place shall have been specified in the notice
of the meeting, or (b) if not so specified, at the place where the meeting is to
be held. The list shall also be available for inspection by stockholders at the
time and place of the meeting.
1.8 Action by Consent Without a Meeting. Any action required or
permitted to be taken at any meeting of stockholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not fewer than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voting. Prompt notice of the taking of any such
action shall be given to those stockholders who did not consent in writing.
-2-
<PAGE>
2. BOARD OF DIRECTORS.
2.1 Number, Qualification, Election and Term of Directors. The business
of the corporation shall be managed by the entire Board, which initially shall
consist of three (3) directors. The number of directors may be changed by
resolution of a majority of the Board or by the stockholders, but no decrease
may shorten the term of any incumbent director. Directors shall be elected at
each annual meeting of stockholders by a plurality of the votes cast and shall
hold office until the next annual meeting of stockholders and until the election
and qualification of their respective successors, subject to the provisions of
section 2.9. As used in these by-laws, the term "entire Board" means the total
number of directors the corporation would have, if there were no vacancies on
the Board.
2.2 Quorum and Manner of Acting. A majority of the entire Board shall
constitute a quorum for the transaction of business at any meeting, except as
provided in section 2.10. Action of the Board shall be authorized by the vote of
the majority of the directors present at the time of the vote, if there is a
quorum, unless otherwise provided by law or these by-laws. In the absence of a
quorum, a majority of the directors present may adjourn any meeting from time to
time until a quorum is present.
2.3 Place of Meetings. Meetings of the Board may be held in or outside
Delaware.
2.4 Annual and Regular Meetings. Annual meetings of the Board, for the
election of officers and consideration of other matters, shall be held either
(a) without notice immediately after the annual meeting of stockholders and at
the same place, or (b) as soon as practicable after the annual meeting of
stockholders, on notice as provided in section 2.6. Regular meetings of the
Board may be held without notice at such times and places as the Board
determines. If the day fixed for a regular meeting is a legal holiday, the
meeting shall be held on the next business day.
2.5 Special Meetings. Special meetings of the Board may be called by
the president or by a majority of the directors.
2.6 Notice of Meetings; Waiver of Notice. Notice of the time and place
of each special meeting of the Board, and of each annual meeting not held
immediately after the annual meeting of stockholders and at the same place,
shall be given to each director by mailing it to him at his residence or usual
place of business at least three days before the meeting, or by delivering or
telephoning or telegraphing it to him at least two days before the meeting.
Notice of a special meeting also shall state the purpose or purposes for which
the meeting is called. Notice need not be given to any director who submits a
signed waiver of notice before or after the meeting or who attends the meeting
without protesting at the beginning of the meeting the transaction of any
business
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<PAGE>
because the meeting was not lawfully called or convened. Notice of any adjourned
meeting need not be given, other than by announcement at the meeting at which
the adjournment is taken.
2.7 Board or Committee Action Without a Meeting. Any action required or
permitted to be taken by the Board or by any committee of the Board may be taken
without a meeting, if all the members of the Board or the committee consent in
writing to the adoption of a resolution authorizing the action. The resolution
and the written consents by the members of the Board or the committee shall be
filed with the minutes of the proceedings of the Board or the committee.
2.8 Participation in Board or Committee Meetings by Conference
Telephone. Any or all members of the Board or any committee of the Board may
participate in a meeting of the Board or the committee by means of a conference
telephone or similar communications equipment allowing all persons participating
in the meeting to hear each other at the same time. Participation by such means
shall constitute presence in person at the meeting.
2.9 Resignation and Removal of Directors. Any director may resign at
any time by delivering his resignation in writing to the president or secretary
of the corporation, to take effect at the time specified in the resignation; the
acceptance of a resignation, unless required by its terms, shall not be
necessary to make it effective. Any or all of the directors may be removed at
any time, either with or without cause, by vote of the stockholders.
2. 10 Vacancies. Any vacancy in the Board, including one created by an
increase in the number of directors, may be filled for the unexpired term by a
majority vote of the remaining directors, though less than a quorum.
2.11 Compensation. Directors shall receive such compensation as the
Board determines, together with reimbursement of their reasonable expenses in
connection with the performance of their duties. A director also may be paid for
serving the corporation or its affiliates or subsidiaries in other capacities.
3. COMMITTEES.
3.1 Executive Committee. The Board at its direction, by resolution
adopted by a majority of the entire Board, may designate an executive committee
of one or more directors, which shall have all the powers and authority of the
Board, except as otherwise provided in the resolution, section 141(c) of the
General Corporation Law of Delaware or any other applicable law. The members of
the executive committee shall serve at the pleasure of the Board. All action of
the executive committee shall be reported to the Board at its next meeting.
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<PAGE>
3.2 Other Committees. The Board, by resolution adopted by a majority of
the entire Board, may designate other committees of one or more directors, which
shall serve at the Board's pleasure and have such powers and duties as the Board
determines.
3.3 Rules Applicable to Committees. The Board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In case of the absence
or disqualification of any member of a committee, the member or members present
at a meeting of the committee and not disqualified, whether or not a quorum, may
unanimously appoint another director to act at the meeting in place of the
absent or disqualified member. All action of a committee shall be reported to
the Board at its next meeting. Each committee shall adopt rules of procedure and
shall meet as provided by those rules or by resolutions of the Board.
4. OFFICERS.
4.1 Number; Security. The executive officers of the corporation shall
be the president, one or more vice presidents (including an executive vice
president, if the Board so determines), a secretary and a treasurer. Any two or
more offices may be held by the same person. The board may require any officer,
agent or employee to give security for the faithful performance of his duties.
4.2 Election; Term of Office. The executive officers of the corporation
shall be elected annually by the Board, and each such officer shall hold office
until the next annual meeting of the Board and until the election of his
successor, subject to the provisions of section 4.4.
4.3 Subordinate Officers. The Board may appoint subordinate officers
(including assistant secretaries and assistant treasurers), agents or employees,
each of whom shall hold office for such period and have such powers and duties
as the Board determines. The Board may delegate to any executive officer or
committee the power to appoint and define the powers and duties of any
subordinate officers, agents or employees.
4.4 Resignation and Removal of Officers. Any officer may resign at any
time by delivering his resignation in writing to the president or secretary of
the corporation, to take effect at the time specified in the resignation; the
acceptance of a resignation, unless required by its terms, shall not be
necessary to make it effective. Any officer elected or appointed by the Board or
appointed by an executive officer or by a committee may be removed by the Board
either with or without cause, and in the case of an officer appointed by an
executive officer or by a committee, by the officer or committee that appointed
him or by the president.
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<PAGE>
4.5 Vacancies. A vacancy in any office may be filled for the unexpired
term in the manner prescribed in sections 4.2 and 4.3 for election or
appointment to the office.
4.6 The President. The president shall be the chief executive officer
of the corporation. Subject to the control of the Board, he shall have general
supervision over the business of the corporation and shall have such other
powers and duties as presidents of corporations usually have or as the Board
assigns to him.
4.7 Vice President. Each vice president shall have such powers and
duties as the Board or the president assigns to him.
4.8 The Treasurer. The treasurer shall be the chief financial
officer of the corporation and shall be in charge of the corporation's books and
accounts. Subject to the control of the Board, he shall have such other powers
and duties as the Board or the president assigns to him.
4.9 The Secretary. The secretary shall be the secretary of, and keep
the minutes of, all meetings of the Board and the stockholders, shall be
responsible for giving notice of all meetings of stockholders and the Board, and
shall keep the seal and, when authorized by the Board, apply it to any
instrument requiring it. Subject to the control of the Board, he shall have such
powers and duties as the Board or the president assigns to him. In the absence
of the secretary from any meeting, the minutes shall be kept by the person
appointed for that purpose by the presiding officer.
4.10 Salaries. The Board may fix the officers' salaries, if any, or it
may authorize the president to fix the salary of any other officer.
5. SHARES.
5.1 Certificates. The corporation's shares shall be represented by
certificates in the form approved by the Board. Each certificate shall be signed
by the president or a vice president, and by the secretary or an assistant
secretary or the treasurer or an assistant treasurer, and shall be sealed with
the corporation's seal or a facsimile of the seal. Any or all of the signatures
on the certificate may be a facsimile.
5.2 Transfers. Shares shall be transferable only on the corporation's
books, upon surrender of the certificate for the shares, properly endorsed. The
Board may require satisfactory surety before issuing a new certificate to
replace a certificate claimed to have been lost or destroyed.
5.3 Determination of Stockholders of Record. The Board may fix, in
advance, a date as the record date for the
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<PAGE>
determination of stockholders entitled to notice of or to vote at any meeting of
the stockholders, or to express consent to or dissent from any proposal without
a meeting, or to receive payment of any dividend or the allotment of any rights,
or for the purpose of any other action. The record date may not be more than 60
or fewer than 10 days before the date of the meeting or more than 60 days before
any other action.
6. INDEMNIFICATION AND INSURANCE.
6.1 Right to Indemnification. Each person who was or is a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he, or a person of whom he is the
legal representative, is or was a director or officer of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action or inaction in an
official capacity or in any other capacity while serving as director, officer,
employee or agent, shall be indemnified and held harmless by the corporation to
the fullest extent permitted by the General Corporation Law of Delaware, as
amended from time to time, against all costs, charges, expenses, liabilities and
losses (including attorneys, fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith, and that indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his heirs, executors and administrators;
provided, however, that, except as provided in section 6.2, the corporation
shall indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by that person, only if that proceeding
(or part thereof) was authorized by the Board. The right to indemnification
conferred in these by-laws shall be a contract right and shall include the right
to be paid by the corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, if the
General Corporation Law of Delaware, as amended from time to time, requires, the
payment of such expenses incurred by a director or officer in his capacity as a
director or officer (and not in any other capacity in which service was or is
rendered by that person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding shall be made only upon delivery to the corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced, if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under these by-laws or otherwise. The
corporation may, by action of its Board, provide indemnification to employees
and agents of
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<PAGE>
the corporation with the same scope and effect as the foregoing indemnification
of directors and officers.
6.2 Right of Claimant to Bring Suit. If a claim under section 6.1 is
not paid in full by the corporation within 30 days after a written claim has
been received by the corporation, the claimant may at any time thereafter bring
suit against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant also shall be entitled to be paid
the expense of prosecuting that claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition, where the required
undertaking, if any, is required and has been tendered to the corporation) that
the claimant has failed to meet a standard of conduct that makes it permissible
under Delaware law for the corporation to indemnify the claimant for the amount
claimed. Neither the failure of the corporation (including its Board, its
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
permissible in the circumstances because he has met that standard of conduct,
nor an actual determination by the corporation (including its Board, its
independent counsel or its stockholders) that the claimant has not met that
standard of conduct, shall be a defense to the action or create a presumption
that the claimant has failed to meet that standard of conduct.
6.3 Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this section 6 shall not be exclusive of any other
right any person may have or hereafter acquire under any statute, provision of
the certificate of incorporation, by-law, agreement, vote of stockholders or
disinterested directors or otherwise.
6.4 Insurance. The corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against that expense,
liability or loss under Delaware law.
6.5 Expenses as a Witness. To the extent any director, officer,
employee or agent of the corporation is by reason of such position, or a
position with another entity at the request of the corporation, a witness in any
action, suit or proceeding, he shall be indemnified against all costs and
expenses actually and reasonably incurred by him or on his behalf in connection
therewith.
6.6 Indemnity Agreements. The corporation may enter into agreement with
any director, officer, employee or agent of the
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<PAGE>
corporation providing for indemnification to the fullest extent permitted by
Delaware law.
7. OFFICES.
7.1 Registered Office. The registered office shall be established and
maintained at the office of The Prentice-Hall Corporation, 32 Loockerman Square,
Suite L-100, in the City of Dover, in the County of Kent, in the State of
Delaware, and said corporation shall be the registered agent of this corporation
in charge thereof.
7.2 Other Offices. The corporation may have other offices, either
within or without the State of Delaware, at such place or places as the Board of
Directors may from time to time appoint or the business of the corporation may
require.
8. MISCELLANEOUS.
8.1 Seal. The Board shall adopt a corporate seal, which shall be in the
form of a circle and shall bear the corporation's name and the year and state in
which it was incorporated.
8.2 Fiscal Year. The Board may determine the corporation's fiscal year.
Until changed by the Board, the last day of the corporation's fiscal year shall
be December 31.
8.3 Voting of Shares in other Corporations. Shares in other
corporations held by the corporation may be represented and voted by an officer
of this corporation or by a proxy or proxies appointed by one of them. The Board
may, however, appoint some other person to vote the shares.
8.4 Amendments. These By-Laws may be altered or repealed, and By-Laws
may be made at any annual meeting of the stockholders or at any special meeting
thereof if notice of the proposed alteration or repeal or By-Law or By-Laws to
be made be contained in the notice of such special meeting, by the affirmative
vote of a majority of the stock issued and outstanding and entitled to vote
thereat, or by the affirmative vote of a majority of the Board of Directors, at
any regular meeting of the Board of Directors, or at any special meeting of the
Board of Directors, if notice of the proposed alteration or repeal, or By-Law or
By-Laws to be made, be contained in the notice of such special meeting.
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<PAGE>
COMMON STOCK COMMON STOCK
0334 THE SINGING MACHINE(R) SPECIMEN
CUSIP 829322 30 4
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR CERTAIN DEFINITIONS
- --------------------------------------------------------------------------------
This Certifies that
SPECIMEN
Is the Registered Holder of
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01 PER
SHARE, OF
The Singing Machine Company, Inc.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this Certificate properly
endorsed. This certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated: /s/ John Klecko [GRAPHIC OMITTED] XXXXXXXX
------------------- --------------
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, N.J.) TRANSFER AGENT AND REGISTRAR
SPECIMEN
AUTHORIZED SIGNATURE
<PAGE>
THE SINGING MACHINE COMPANY, INC.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT _________ Custodian ________
TEN ENT - as tenants in entireties (Cust) (Minor)
JT TEN - as joint tenants with right
of survivorship and not as Under Uniform Gifts to Minors
tenants in common
Act - _________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, _______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- -------------------------------------- SPECIMEN
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please print or typewrite name and address of assignee
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------- Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint______________________________________________
- --------------------------------------------------------------------------------
Attorney to transfer the said shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated, _________________
__________________________________________________
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement or any change whatever.
<PAGE>
DAVID A. CARTER, P.A.
ATTORNEY AT LAW
2300 GLADES ROAD
SUITE 210, WEST TOWER
DAVID A. CARTER* BOCA RATON, FLORIDA 33431 NEW YORK OFFICE
------------ -------------- GUSRAE, KAPLAN & BRUNO
OF COUNSEL (561) 750-6999 120 WALL STREET
BERT L. GUSRAE** FACSIMILE (561) 367-0960 NEW YORK, NY 10005
(212) 269-1400
*MEMBER OF FLA. AND IOWA BAR
**MEMBER OF N.Y. BAR ONLY
February 24, 2000
Board of Directors
The Singing Machine Company, Inc.
6601 Lyons Road, Building A-7
Coconut Creek, Florida 33073
Gentlemen:
Reference is made to your Registration Statement on Form SB-2 (the
"Registration Statement") filed with the United States Securities and Exchange
Commission (the "Commission") with respect to the proposed sale by the Selling
Securityholders of the Company of 2,753,249 shares of common stock, $.001 par
value (the "Common Stock").
Based upon the Registration Statement (including the Prospectus
contained therein and the exhibits thereto), a certificate of the Secretary of
State of the State of Delaware and the financial statements of the Company, we
are of the opinion that:
1. The Company is duly organized and existing under the laws
of the State of Delaware;
2. All of the issued and outstanding shares of the Common
Stock of the Company have been validly authorized,
legally issued, fully paid and non-assessable;
3. The 2,753,249 shares of Common Stock proposed to be sold by
the Selling Securityholders for sale to the public assuming
exercise of all Options and Warrants, will be validly
authorized, legally issued, fully paid and non- assessable.
In arriving at the foregoing opinion, we have relied, among other
things, upon the examination of the corporate records of the Company and
certificates of officers of the Company and of public officials. We hereby
consent to the use of this opinion in the Registration Statement and all
amendments thereto, and to the reference to our firm name under the caption
"Legal Matters" of the Prospectus which is included as part of the Registration
Statement.
Very truly yours,
DAVID A. CARTER, P.A.
------------------------
DAVID A. CARTER, P.A.
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement") made as of the 1st day of March 1998
by and between THE SINGING MACHINE COMPANY, INC., a Delaware corporation with
its principal office at 3101 N.W. 25th Avenue, Pompano Beach, Florida 30069 (the
"Company") and Edward Steele, whose residence address is 19653 Oakbrook Court,
Boca Raton, Florida 33434 (the "Executive").
The Company and the Executive hereby agree as follows with respect to
the Executive's relationship with the Company:
1. Relationship; Term. The Company shall retain the Executive and the
Executive shall be retained by the Company, on the terms and conditions
hereinafter set forth, as an Executive for a period (the "Employment Period")
commencing on March 1, 1998 (the "Commencement Date"), and ending on February
28, 2001 (the "Termination Date"), unless terminated sooner pursuant to the
provisions hereof. Such period of employment shall be automatically extended for
one (1) one-year term unless either the Company or the Executive notifies the
other in writing at least sixty (60) days prior to the end of the then current
term that it or he does not intend to renew such employment, in which case such
employment will expire at the end of the then current term. During the entire
term of this Aareement, the Executive shall be the Company's Chief Executive
Officer/President, subject to the direction of the Board of Directors.
2. Efforts on Company's Behalf. The Executive shall devote all of his
time, and his best efforts, skills and attention to the business and affairs of
the Company, shall serve the Company faithfully and competently and shall at all
times act in the Company's best interest. The services to be rendered by
Executive during the term hereof shall be Chief Executive Officer/President,
subject at all times to the direction and control of the Company's Board of
Directors. Nothing herein shall be construed to prevent Executive from investing
in or participating in the management of companies or other entities which do
not compete with the Company or from serving on the board of directors of any
other company.
3. Base Compensation.
(a) The Company shall pay to the Executive, and the Executive agrees
to accept, minimum base compensation of One Hundred Eighty Thousand Dollars and
No/100 Cents ($180,000) per year (the "Base Compensation"), pursuant to the
payroll policies of the Company.
(b) Executive's Base Compensation shall automatically increase over
the prior year's Base Compensation each year during the term hereof by not less
than the greater of:
(i) Five percent (5%); or
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<PAGE>
(ii) An amount calculated by multiplying the prior year's Base
Compensation by a fraction, the numerator of which shall be
the consumer price index ("Consumer Price Index"), as
hereafter defined, for the month of January in the year of
adjustment and the denominator of which shall be the
Consumer Price Index for the month of January in the prior
year. The "Consumer Price Index" shall mean the Consumer
Price Index for All Urban Consumers, U.S. City Average
(1982-84=100) All Items, Bureau of Labor Statistics of the
United States Department of Labor.
4. Bonus Compensation.
(a) Executive shall be entitled to receive a bonus (the "Profit
Bonus") for each fiscal year of the Company ("Fiscal Year") during the
Employment Period based on a percentage of a bonus pool (the "Bonus Pool"). The
Bonus Pool shall be equal to ten percent (10%) of the fiscal year-end profit of
the Company (net income before taxes and interest as listed in the Company's
audited year end financial statements).
(b) Executive's Profit Bonus shall be equal to fifty percent (50%)
of the Bonus Pool unless modified by the Company in its sole and absolute
discretion.
(c) For purposes of this Paragraph 4, PTNI shall be based on the
Company's year end audited financial statements as determined in the course of
the Company's normal audit for the Fiscal Years ending, during the Employment
Period increased by any amounts payable for, or expenses associated with, the
Bonus Pool for any Fiscal Year; provided, however, that in no event shall PTNI
include: (i) income from extraordinary gains as set forth in the Financial
Statements (as hereinafter defined) (except that income from extraordinary gains
shall be applied to offset any extraordinary loss for the same Fiscal Year),
(ii) expenses related to the provision of key man life insurance acquired during
the lives of Executive or other key executive employees. The Company undertakes
to use its best efforts to cause the preparation and completion of audited
financial statements for all Fiscal Years within ninety (90) days of the end of
such Fiscal Year (the "Financial Statements"); provided, however, Executive
shall not have any right to complain or contest any failure by the Company to
complete such audited Financial Statements within such time frame if Executive
is then employed by the Company on substantially the same terms as provided
herein. The determination of PTNI by the Company's independent certified public
accountants shall be conclusive and binding upon the Company and Executive.
(d) The Profit Bonus due Executive, if any, with respect to a
particular Fiscal Year shall be payable in cash within thirty (30) days after
receipt by the Company of the Financial Statements for said Fiscal Year, but in
no event prior to completion of the audit of such Financial Statements. If
Executive's employment is terminated for any reason (including expiration of the
term of this Agreement) prior to the end of any Fiscal Year during the
Employment Period, the Profit Bonus due Executive for such Fiscal Year shall be
for the entire Fiscal Year.
2
<PAGE>
(e) In consideration of Executive's services hereunder, the
Executive shall be granted the option to purchase shares of common stock of the
Company in accordance with the terms of a Stock Option Agreement to be executed
between the Company and Employee after the effective date of this Agreement.
5. Benefit Plans. The payments provided in Paragraphs 3 and 4 hereof
shall be in addition to any benefits to which Executive may be, or become,
entitled under any group hospitalization, health, dental care, or sick-leave
plan, life or other insurance or death benefit plan, travel or accident
insurance, auto allowance or auto lease plan, or executive contingent
compensation plan, including, without limitation, capital accumulation and
termination pay programs, restricted or stock purchase plan, stock option plan,
retirement income or pension plan, or other present or future group employee
benefit plan or program of the Company for which key Executives are or shall
become eligible, and Executive shall be eligible to receive during the term
hereof, and during, any subsequent period for which he shall be entitled to
receive payments from the Company under Paragraph 9(e) below, all benefits and
emoluments for which key Executives are eligible under every such plan or
program to the extent permissible under the general terms and provisions of such
plans or programs and in accordance with the provisions thereof. Notwithstanding
the foregoing, during the term hereof the Executive shall at all times be
provided with:
(a) Medical insurance for himself and his spouse;
(b) Disability insurance;
(c) Directors' and Officers' Liability Insurance;
(d) Indemnification by the Company to the fullest extent permitted
by law;
(e) A private executive office commensurate with the office of the
Company's most senior executive;
(f) An automobile allowance of $600 per month, which allowance shall
automatically increase by five percent (5%) over the prior year's base allowance
each year during the term hereof, and reimbursement for all automobile expenses
including, but not limited to, insurance, gasoline, oil and repairs;
(g) A travel allowance of $3,000 per year to allow the Executive's
spouse to accompany Executive on those business trips that are approved by the
Company; and
(h) In the event that the Company purchases insurance on the life of
Executive, Executive shall be entitled to purchase said policy from the Company
in the event of his termination, pursuant to the terms hereof, for an amount
equal to the cash surrender value thereof.
3
<PAGE>
6. Business Expenses. The Executive shall be reimbursed for all usual
and customary expenses incurred on behalf of the Company, in accordance with
Company practices and procedures; provided that each such expense is of a nature
qualifying it as a proper deduction on the Federal income tax returns of the
Company, exclusive of any limitation rules as a business expense of the Company
and not as compensation to Executive, and Executive furnishes the Company with
adequate documentary evidence to substantiate such expenses.
7. Vacation. Executive shall be entitled to a paid vacation of four (4)
weeks each year during the term hereof. Any unused vacation time for each year
of the term hereof shall be accrued by Executive if not used during such year
or, at the option of the Executive, the Company shall pay the Executive within
30 days from the end of the Fiscal Year any unused vacation at Executive's
current Base Compensation. Executive shall also be entitled to all paid holidays
made generally available by the Company to its executive officers.
8. Death or Disability.
(a) Notwithstanding anything to the contrary contained in Paragraph
1 above if, during the term hereof, the Executive suffers a disability (as
defined below) the Company shall, subject to the provisions of Paragraph 8(c)
hereof, continue to pay Executive the compensation provided in Paragraphs 3 and
4 hereof during the period of his disability; provided, however, that, in the
event Executive is disabled for a continuous period of ninety (90) consecutive
days or for shorter periods aggregating ninety (90) days in any twelve-month
period that the Employee is incapable of substantially fulfilling the duties set
forth in Section 2 or hereafter assigned to him by the Board of Directors of the
Company because of physical, mental or emotional incapacity resulting from
injury, sickness or disease as determined by an independent physician agreed
upon by both the Company and the Executive, the Company may, at its election,
terminate this Agreement. In the event of such termination, the Company shall
continue to be obligated to pay Executive his compensation earned up to the date
of termination.
(b) As used in this Agreement, the term "disability" shall mean the
substantial inability of Executive to perform his duties under this Agreement as
determined by an independent physician agreed upon by both the Company and the
Executive.
(c) In the event that Executive's employment ceases prior to the end
of a calendar month as a result of his death or disability or in the event of a
termination described in Paragraph 11 below, the Company shall pay Executive or
his legal representatives, as the case may be, in addition to any other amounts
payable by the Company hereunder, a lump cash sum which shall in no event be
less than the salary plus any bonus to which Executive would have been entitled,
had he continued to be affiliated with the Company until the end of the calendar
month during which his affiliation terminates.
4
<PAGE>
9. Change of Control.
(a) For the purposes of this Agreement, a "Change of Control" shall
be deemed to have taken place if: (i) any person, including a "group" as defined
in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes
the owner or beneficial owner of Company securities, after the date of this
Agreement, having 30% or more of the combined voting power of the then
outstanding securities of the Company that may be case for the election of
directors of the Company (other than as a result of an issuance of securities
initiated by the Company, or open market purchases approved by the Board, as
long as the majority of the Board approving the purchases is the majority at the
time the purchases are made), or (ii) the persons who were directors of the
Company before such transactions shall cease to constitute a majority of the
Board of the Company, or any successor to the Company, as the direct or indirect
result of, or in connection with, any cash tender or exchange offer, merger or
other business combination, sale of assets or contested election, or any
combination of the foregoing transactions.
(b) The Company and Executive hereby agree that, if Executive is
affiliated with the Company on the date on which a Change of Control occurs (the
"Change of Control Date") the Company (or, if Executive is affiliated with a
subsidiary, the subsidiary) will continue to retain Executive and Executive will
remain affiliated with the Company (or subsidiary), for the period commencing on
the Change of Control Date and ending on the first anniversary of such date to
exercise such authority and perform such executive duties as are commensurate
with the authority being exercised and duties being performed by the Executive
immediately prior to the Change of Control Date.
(c) During the remaining term hereof after the Change of Control
Date, the Company (or Subsidiary) will (i) continue to pay Executive a salary at
not less than the level applicable to Executive on the Change of Control Date,
(ii) pay Executive bonuses in amounts not less in amount than those paid during
the twelve month period preceding the Change of Control Date, and (iii) continue
employee benefit programs as to Executive at levels in effect on the Change of
Control Date (but subject to such reductions as may be required to maintain such
plans in compliance with applicable federal law regulating employee benefit
programs).
(d) If during the remaining term hereof after the Change of Control
Date (i) Executive's employment is terminated by the Company (or subsidiary), or
(ii) there shall have occurred a material reduction in Executive's compensation
or employment related benefits, or a material change in Executive's status,
working conditions, management responsibilities or titles, and Executive
voluntarily terminates his relationship with the Company within sixty (60) days
of any such occurrence, or the last in a series of occurrences, then Executive
shall be entitled to receive, subject to the provisions of subparagraphs (e) and
(f) below, a lump sum payment equal to 300% of Executive's "base period income"
as determined under (e) below. Such amount will be paid to Executive within
fifteen (15) business days after his termination of affiliation with the
Company.
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(e) The Executive's "base period income" shall be his base salary
and annual incentive bonuses paid or payable to him during or with respect to
the twelve month period preceding the date of his termination of affiliation.
(f) The amounts payable to Executive under any other compensation
arrangement maintained by the Company (or a subsidiary) which became payable
after payment of the lump sum provided for in (a), upon or as a result of the
exercise by Executive of rights which are contingent on a Change of Control (and
would be considered a "parachute payment" under Internal Revenue Code ss. 280G
and regulations thereunder), shall be increased by an additional amount
representing a gross-up of any federal income tax liability arising from an
excess parachute payment or otherwise.
10. Location of Principal Place of Employment.
(a) The Executive's principal business location hereunder shall be
Pompano Beach, Florida.
(b) If, for any reason, Executive is requested, and, in his sole
and absolute discretion, consents to change his principal business location, the
Company will reimburse the Executive for his reasonable relocation expenses,
including without limitation, moving expenses, temporary living and travel
expenses for a reasonable time while arranging to move his residence to the
changed location, closing costs, if any, associated with the sale of his
existing residence and the purchase of a replacement residence at the changed
location, plus an additional amount representing a gross-up of any state or
federal taxes payable by Executive as a result of any such reimbursements. If
the Executive shall not consent to change his business location, the Executive
may continue to provide the services required of him hereunder in the counties
of Palm Beach or Broward, Florida, and the Company shall continue to maintain an
office for Executive at that location commensurate with the Company's office
prior to its relocation.
11. Termination.
(a) Termination Without Cause. The Company may terminate this
Agreement without cause at any time upon written notice to the Executive,
whereupon this Agreement shall terminate on the date specified therein. The
Company shall pay the Executive a severance amount equal to three (3) years of
Executive's Base Compensation payable as follows: one years salary within five
(5) days from the date specified therein, plus any bonuses, pursuant to Section
4 hereof, to which Executive would have been entitled to for the next fiscal
year from the date specified therein, i.e., Executive is terminated on September
30, Executive is entitled to participate in the Bonus Pool for the remainder of
that fiscal year. The payment for the salary for years two and three shall be
due and payable in full within eighteen (18) months from the date of
termination. These payouts shall be payable in accordance with the normal
payroll policies of the Company (hereinafter, the "Severance Payout Period") and
shall be subject to all usual and customary payroll deductions, including
applicable withholding taxes.
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(b) Termination For Cause. This Agreement may be immediately
terminated by the Company at any time during the Employment Period for "cause".
In such an event of termination, the Company shall be obligated only to continue
to pay to Executive his Base Salary earned up to the effective date of
termination. "Cause" for purposes hereof shall mean a breach of any of the
provisions of this Agreement by Executive, unsatisfactory performance of
Executive's duties hereunder as reasonably determined by the Company's Board of
Directors and Executive has not caused within sixty (60) days from receipt of
such notice, willful misconduct or neglect of duties, conviction of any
criminal offense involving a felony, gross negligence, malfeasance or a crime of
moral turpitude.
(c) Reduction in Responsibilities/Activities. [TO FOLLOW]
(d) Continuing Effect. Notwithstanding any termination of the
Executive as provided in this Section 11 or otherwise, the provisions of Section
13 and 14 shall remain in full force and effect and shall be binding on the
Executive and his legal representatives, successors and assigns.
12. Consolidation, Merger or Sale of Assets. Nothing in this Agreement
shall preclude the Company from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement, and all obligations of the Company hereunder, in
writing. Upon such consolidation, merger, or transfer of assets and assumption,
the term "the Company" as used herein, shall mean such other corporation and
this Agreement shall continue in full force and effect.
13. Restrictive Covenants.
(a) The Executive acknowledges that his services and
responsibilities are unique in character and are of particular significance to
the Company, that the Company is a competitive business and that the Executive's
continued and exclusive service to the Company under this Agreement is of a high
degree of importance to the Company. Therefore, during the Employment Period and
for the applicable periods specified below (each, the "Noncompete Period"), the
Executive shall not, directly or indirectly, as owner, partner, joint venturer,
Executive, broker, agent, corporate officer, principal, licensor, shareholder
(unless as owner of no more than five percent (5%) of the issued and outstanding
capital stock of such entity if such stock is traded on a major securities
exchange) or in any other capacity whatsoever, engage in or have any connection
with any business which is competitive with the Company, and which operates
anywhere in the United States, European or Far East corridors on the effective
date of termination of this Agreement:
Reason for Termination Noncompete Period
---------------------- -----------------
Termination without cause N/A
Termination for cause 1 year
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For purposes of this Agreement, a business will be deemed to be competitive with
the Company if it is an importer/re-seller of Karaoke hardware and software
specializing in the United States mass merchant marketplace.
(b) In addition to the restrictions set forth in Section 13(a),
during the Noncompete Period, the Executive shall not:
(i) directly or indirectly, by initiating contact or otherwise,
induce, influence, combine or conspire with, or attempt to induce,
influence, combine or conspire with, any of the officers, Executives
or agents of the Company to terminate his, her or its employment or
relationship with or to compete against the Company; or
(ii) directly or indirectly, by initiating contact or
otherwise, divert or attempt to divert any or all of any customers'
or suppliers' business with the Company.
(c) If, in any judicial proceedings, a court shall refuse to
enforce any of the covenants included in this Section 13 due to extent,
geographic scope or duration thereof, or otherwise, then such unenforceable
covenant shall be amended to relate to such lesser extent, geographic scope or
duration and this Section 13 shall be enforceable, as amended. In the event the
Company should bring any legal action or other proceeding against Executive for
enforcement of this Agreement, the calculation of the Noncompete Period shall
not include the period of time commencing with the filing of legal action or
other proceeding to enforce this Agreement through the date of final judgment or
final resolution, including all appeals, if any, of such legal action or other
proceeding unless the Company is receiving the practical benefits of this
Section 13 during such time. The existence of any claim or cause of action by
the Executive against the Company predicated on this Agreement or otherwise
shall not constitute a defense to the enforcement by the Company of these
covenants.
(d) The Executive has carefully considered the nature and extent of
the restrictions upon the Executive and the rights and remedies conferred upon
the Company under this Section 13, and the Executive hereby acknowledges that
the restrictions on his activity as contained herein are reasonably required for
the Company's protection, would not operate as a bar to the Executive's sole
means of support, are fully required to protect the legitimate interests of the
Company, do not confer a benefit on the Company disproportionate to the
detriment to the Executive and are material inducements to the Company to enter
into this Agreement. The Executive hereby agrees that in the event of a
violation by him of any of the provisions of this Agreement, the Company will be
entitled to institute and prosecute proceedings at law or in equity to obtain
damages with respect to such violation or to enforce the specific performance of
this Agreement by the Executive or to enjoin the Executive from engaging in any
activity in violation hereof.
14. Treatment and Ownership of Confidential Information. The Executive
acknowledges that during his employment he will learn and will have access to
Confidential Information regarding the Company. For purposes of this Agreement,
the term "Confidential
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Information" shall mean all of the materials and information which Executive
makes use of, acquires or develops or has made use of, acquired or developed, in
whole or in part, in connection with Executive's employment with the Company
(whether before or after the date of this Agreement), including any financial
data, client names and addresses, employee data, discoveries, processes,
formulas, inventions, know-how, techniques and any other materials or
information related to the business or activities of the Company which are no[
generally known to others engaged in similar businesses or activities. The
Executive acknowledges that such Confidential Information as is acquired and
used by the Company or its affiliates is a special, valuable and unique asset.
The Executive will not, except in connection with and as required by his
performance of his duties under this Agreement, for any reason use for his own
benefit, or the benefit of any person or entity with which he may be associated,
or disclose any such Confidential Information to any person, firm, corporation,
association or other entity for any reason or purpose whatsoever without the
prior written consent of the Company's Board of Directors, unless such
Confidential Information previously shall have become public knowledge through
no action by or omission of the Executive. The Executive covenants and agrees
that all right, title and interest in any Confidential Information shall be and
shall remain the exclusive property of the Company. The Executive agrees to
promptly disclose to the Company all Confidential Information developed in whole
or in part by the Executive within the scope of this Agreement and to assign to
the Company any right, title or interest the Executive may have in such
Confidential Information. The Executive agrees to turn over to the Company all
physical manifestations of the Confidential Information in his possession or
under his control at the request of the Company.
15. Executive Representations and Warranties. The Executive represents
and warrants that he is not a party to, or bound by, any other employment
agreements. The Executive further represents and warrants to the Company that he
is free of known physical and mental disabilities that would, with or without
reasonable accommodations that would create an undue hardship for the Company,
impair his performance hereunder and he is fully empowered to enter and perform
his obligations under this Agreement. Without limiting the generality of the
foregoing, the Executive represents and warrants that he is under no
restrictive covenants to any person or entity that will be violated by his
entering into and performing this Agreement.
16. Arbitration. Except as provided in sections 13 and 26 hereof, any
dispute, controversy or claim arising under, out of, in connection with, or in
relation to this Agreement, or the breach, termination, validity or
enforceability of any provision of this Agreement, will be settled by final and
binding confidential arbitration conducted in accordance with, and before a
single arbitrator (the "Arbitrator") chosen according to, the rules of the
American Arbitration Association's National Rules for Resolution of Employment
Disputes, with the additional proviso that all steps necessary to insure the
confidentiality of the proceedings will be added to the basic rules. Unless
otherwise mutually agreed upon by the parties, the arbitration hearings shall be
held in the Broward County, Florida. The parties hereby agree that the
Arbitrator has full power and authority to hear and determine the controversy
and make an award in writing in the form of a reasoned judicial opinion. The
parties hereby stipulate in advance that the award is binding and final. The
parties hereto also agree that judgment upon the arbitration award may be
entered in any federal or state
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court having jurisdiction thereof. Each party is responsible for his or its own
legal fees and out-of-pocket expenses incurred in connection with such
arbitration.
17. Binding Effect. Except as herein otherwise provided, this
Agreement shall inure to the benefit of and shall be binding upon the parties
hereto, their personal representatives, successors, heirs and assigns.
18. Severability. Invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provisions.
19. Terminology. All personal pronouns used in this Agreement, whether
used in the masculine, feminine or neuter gender, shall include all other
genders; the singular shall include the plural and vice versa. Titles of
Paragraphs are for convenience only, and neither limit nor amplify the
provisions of the Agreement itself.
20. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Florida.
21. Entire Agreement. This Agreement contains the entire understanding
between the parties and may not be changed or modified except by an Agreement in
writing signed by all the parties.
22. Notice. Any notice required or permitted to be delivered hereunder
shall be deemed to be delivered when deposited in the United States mail,
postage prepaid, registered or certified mail, return receipt requested,
addressed to the parties at the addresses first stated herein, or to such other
address as either party hereto shall from time to time designate to the other
party by notice in writing as provided herein.
23. No Publicity. The Executive agrees that he will not engage in any
conduct that is injurious to the Company's reputation and interests, including,
but not limited to, publicly disparaging (or inducing or encouraging others to
publicly disparage) the Company or any of the Company's directors, officers,
employees or agents.
24. Cooperation. Executive agrees to cooperate fully with the Company
by providing information to the Company and its representatives, agents or
advisors regarding any business matters with which the Executive may become
involved with during the terms of this Agreement and to cooperate fully in the
event of any litigation or legal, administrative or reulatory proceeding by
providing information, including but not limited to, providing truthful
testimony at any legal, administrative or regulatory proceeding, regarding any
facts or information of which Executive has knowledge and/or any business
matters of which Executive has or had knowledge.
25. Assignability. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Company, provided that such successor or assign shall acquire all
or substantially all of the assets and
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<PAGE>
business of the Company and, further provided that any such assignment shall not
release the Company from its obligations to the Executive hereunder. The
Executive's rights and obligations hereunder may not be assigned or alienated
without the prior written consent of the Company and any attempt to do so by the
Executive will be void.
26. Attorneys' Fees. If any legal action or other proceeding is brought
by the Company for the enforcement of section 13 of this Agreement, or because
of an alleged dispute, breach, default or misrepresentation by the Executive in
connection with any provision of this Agreement, the Company or the Executive
shall be responsible for its own attorneys' fees, sales and use taxes, court
costs and other expenses incurred in that action or proceeding.
27. Injunctive Relief. The Executive acknowledges and agrees that in
the event Executive violates any term, covenant or provision of Section 13 of
this Agreement, the Company will suffer irreparable harm for which the Company
will have no adequate remedy at law. The Executive agrees that the Company shall
be entitled to injunctive relief for any breach or violation of Section 13 of
this Agreement, including but not limited to the issuance of an ex parte
preliminary injunction, in addition to and not in limitation of any and all
other remedies available to the Company at law or in equity.
28. No Offsets. The existence of any claim or cause of action of the
Executive against the Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company of
this Agreement.
29. Executive Acknowledgment. The Executive acknowledges and agrees
that Executive has read and understands the terms set forth in this Agreement
and has been given a reasonable opportunity to consult with an attorney prior to
execution of this Agreement.
30. Other Instruments. The parties hereby covenant and agree that they
will execute such other and further instruments and documents as are or may
become necessary or convenient to effectuate and carry out the terms of this
Agreement.
31. Counterparts. This Agreement may be executed in any number of
counterparts and each such counterpart shall for all purposes be deemed an
original.
32. Assignability. This Agreement shall not be assigned by either
party, except with the written consent of the other.
[SIGNATURE PAGE ON NEXT PAGE]
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IN WITNESS WHEREOF, this Agreement has been duly signed by the
Executive and on behalf of the Company on the day and year first above written.
THE SINGING MACHINE COMPANY, INC.
By: Edward Pearson By: Paul Wu
--------------------------------- ---------------------------------
Edward Pearson (Director) Paul Wu (Director)
Edward Steele
---------------------------------
Edward Steele
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EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement") made as of the 1st day of March 1998
by and between THE SINGING MACHINE COMPANY, INC., a Delaware corporation with
its principal office at 3101 N.W. 25th Avenue, Pompano Beach, Florida 33069 (the
"Company") and John F. Klecha whose residence address is 5571 Winston Park Blvd.
North, #304, Coconut Creek, FL 33073 (the "Employee").
The Company and the Employee hereby agree as follows with respect to
the Employee's relationship with the Company:
1. Relationship; Term. The Company shall retain the Employee and the
Employee shall be retained by the Company, on the terms and conditions
hereinafter set forth, as an Employee for a period (the "Employment Period")
commencing on March 1, 1998 (the "Commencement Date"), and ending on February
28, 2000 (the "Termination Date"), unless terminated sooner pursuant to the
provisions hereof. Such period of employment shall be automatically extended for
one (1) one-year term unless either the Company or the Employee notifies the
other in writing at least sixty (60) days prior to the end of the then current
term that it or he does not intend to renew such employment, in which case such
employment will expire at the end of the then current term. During the entire
term of this Agreement, the Employee shall be the Company's Chief Financial
Officer/Treasurer, subject to the direction of the Board of Directors.
2. Efforts on Company's Behalf. The Employee shall devote all of his
time, and his best efforts, skills and attention to the business and affairs of
the Company, shall serve the Company faithfully and competently and shall at all
times act in the Company's best interest. The services to be rendered by
Employee during the term hereof shall be as Chief Financial Officer/Treasurer,
subject at all times to the direction and control of the Company's Board of
Directors. Nothing herein shall be construed to prevent Employee from investing
in or participating in the management of companies or other entities which do
not compete with the Company or from serving on the board of directors of any
other company.
3. Base Compensation.
(a) The Company shall pay to the Employee, and the Employee agrees
to accept, minimum base compensation of Eighty Thousand Dollars and No/100 Cents
($80,000) per year (the "Base Compensation"), payable in accordance with normal
payroll policies of the Company and shall be subject to all usual and customary
payroll deductions including all applicable withholding taxes.
(b) Employee's Base Compensation shall automatically increase over
the prior year's Base Compensation each year during the term hereof by not less
than the greater of:
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(i) Five percent (5%); or
(ii) An amount calculated by multiplying the prior year's Base
Compensation by a fraction, the numerator of which shall be the
consumer price index ("Consumer Price Index"), as hereafter
defined, for the month of January in the year of adjustment and the
denominator of which shall be the Consumer Price Index for the
month of January in the prior year. The "Consumer Price Index"
shall mean the Consumer Price Index for All Urban Consumers, U.S.
City Average (1982-84=100) All Items, Bureau of Labor Statistics of
the United States Department of Labor.
4. Bonus Compensation.
(a) Employee shall be entitled to receive a bonus (the "Profit
Bonus") for each fiscal year of the Company ("Fiscal Year") during the
Employment Period based on a percentage of a bonus pool (the "Bonus Pool"). The
Bonus Pool shall be equal to ten percent (10%) of the fiscal year-end profit of
the Company (net income before taxes and interest as listed in the Company's
audited year end financial statements).
(b) Employee's Profit Bonus shall be equal to fifteen percent (20%)
of the Bonus Pool unless modified by the Company in its sole and absolute
discretion.
(c) For purposes of this Paragraph 4, PTNI shall be based on the
Company's year end audited financial statements as determined in the course of
the Company's normal audit for the Fiscal Years ending during the Employment
Period increased by any amounts payable for, or expenses associated with, the
Bonus Pool for any Fiscal Year; provided, however, that in no event shall PTNI
include: (i) income from extraordinary gains as set forth in the Financial
Statements (as hereinafter defined) (except that income from extraordinary gains
shall be applied to offset any extraordinary loss for the same Fiscal Year),
(ii) expenses related to the provision of key man life insurance acquired during
the lives of Executive or other key executive employees. The Company undertakes
to use its best efforts to cause the preparation and completion of audited
financial statements for all Fiscal Years within ninety (90) days of the end of
such Fiscal Year (the "Financial Statements"); provided, however, Employee shall
not have any right to complain or contest any failure by the Company to complete
such audited Financial Statements within such time frame if Employee is then
employed by the Company on substantially the same terms as provided herein. The
determination of PTNI by the Company's independent certified public accountants
shall be conclusive and binding upon the Company and Employee.
(d) The Profit Bonus due Employee, if any, with respect to a
particular Fiscal Year shall be payable in cash within thirty (30) days after
receipt by the Company of the Financial Statements for said Fiscal Year, but in
no event prior to completion of the audit of such Financial Statements. If
Employee's employment is terminated for any reason (including expiration of the
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term of this Agreement) prior to the end of any Fiscal Year during the
Employment Period, the Profit Bonus due Executive for such Fiscal Year shall be
for the entire Fiscal Year.
(e) In consideration of Employee's services hereunder, the Employee
shall be granted the option to purchase shares of common stock of the Company in
accordance with the terms of a Stock Option Agreement to be executed between the
Company and Employee after the effective date of this Agreement.
5. Benefit Plans.
(a) The Employee shall be entitled to participation in all
Company-sponsored benefit plans in accordance with terms, conditions and costs
with usual or customary Company policy.
(b) An automobile allowance of $300 per month, which allowance
shall automatically increase by five percent (5%) over the prior year's base
allowance each year during the term hereof, and reimbursement for all automobile
expenses including, but not limited to, insurance, gasoline, oil and repairs;
(c) In the event that the Company purchases insurance on the life
of Employee, Employee shall be entitled to purchase said policy from the Company
in the event of his termination, pursuant to the terms hereof, for an amount
equal to the cash surrender value thereof.
6. Business Expenses. The Employee shall be reimbursed for all usual
and customary expenses incurred on behalf of the Company, in accordance with
Company practices and procedures; provided that each such expense is of a nature
qualifying it as a proper deduction on the Federal income tax returns of the
Company, exclusive of any limitation rules as a business expense of the Company
and not as compensation to Employee, and Employee furnishes the Company with
adequate documentary evidence to substantiate such expenses.
7. Vacation. Employee shall be entitled to a paid vacation of two (2)
weeks for the first year of this Agreement and three (3) weeks for each year
thereafter. Such vacation time allowance shall cumulatively accrue, and any
unused vacation time for each year can be used in the following year. The
Company shall make all reasonable efforts to enable employee to use his vacation
leave each year. Employee shall also be entitled to all paid holidays made
generally available by the Company to its executive officers.
8. Death or Disabilitv.
(a) Notwithstanding anything to the contrary contained in Paragraph
1 above if, during the term hereof, the Employee suffers a disability (as
defined below) the Company shall, subject to the provisions of Paragraph 8(c)
hereof, continue to pay Employee the compensation provided in Paragraph 3 hereof
during the period of his disability; provided, however, that, in the event
Employee is disabled for a continuous period of ninety (90) consecutive days or
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for shorter periods aggregating ninety (90) days in any twelve-month period that
the Employee is incapable of substantially fulfilling the duties set forth in
Section 2 or hereafter assigned to him by the Chief Executive Officer/President
or Board of Directors because of physical, mental or emotional incapacity
resulting from injury, sickness or disease as determined by an independent
physician agreed upon by both the Company and the Employee, the Company may, at
its election, terminate this Agreement. In the event of such termination, the
Company shall continue to be obligated to pay Employee his compensation earned
up to the date of termination.
(b) As used in this Agreement, the term "disability" shall mean the
substantial inability of Employee to perform his duties under this Agreement as
determined by an independent physician agreed upon by both the Company and the
Employee.
(c) In the event that Employee's employment ceases prior to the end
of a calendar month as a result of his death or disability or in the event of a
termination described in Paragraph 10 below, the Company shall pay Employee or
his legal representatives, as the case may be, in addition to any other amounts
payable by the Company hereunder, a lump cash sum which shall in no event be
less than the salary plus any bonus to which Employee would have been entitled,
had he continued to be affiliated with the Company until the end of the calendar
month during which his affiliation terminates.
9. Change of Control.
(a) For the purposes of this Agreement, a "Change of Control" shall
be deemed to have taken place if: (i) any person, including a "group" as defined
in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes
the owner or beneficial owner of Company securities, after the date of this
Agreement, having 30% or more of the combined voting power of the then
outstanding securities of the Company that may be cast for the election of
directors of the Company (other than as a result of an issuance of securities
initiated by the Company, or open market purchases approved by the Board, as
long as the majority of the Board approving the purchases is the majority at the
time the purchases are made), or (ii) the persons who were directors of the
Company before such transactions shall cease to constitute a majority of the
Board of the Company, or any successor to the Company, as the direct or indirect
result of, or in connection with, any cash tender or exchange offer, merger or
other business combination, sale of assets or contested election, or any
combination of the foregoing transactions.
(b) The Company and Employee hereby agree that, if Employee is
affiliated with the Company on the date on which a Change of Control occurs (the
"Change of Control Date") the Company (or, if Employee is affiliated with a
subsidiary, the subsidiary) will continue to retain Employee and Employee will
remain affiliated with the Company (or subsidiary), for the period commencing on
the Change of Control Date and ending on the first anniversary of such date, to
exercise such authority and perform such Employee duties as are commensurate
with the authority being exercised and duties being performed by the Employee
immediately prior to the Change of Control Date.
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(c) During the remaining term hereof after the Change of Control
Date, the Company (or subsidiary) will (i) continue to pay Employee a salary at
not less than the level applicable to Employee on the Change of Control Date,
(ii) pay Employee bonuses in amounts not less in amount than those paid during
the twelve month period preceding the Change of Control Date, and (iii) continue
employee benefit programs as to Employee at levels in effect on the Change of
Control Date (but subject to such reductions as may be required to maintain such
plans in compliance with applicable federal law regulating employee benefit
programs).
(d) If during the remaining term hereof after the Change of Control
Date (i) Employee's employment is terminated by the Company (or subsidiary), or
(ii) there shall have occurred a material reduction in Employee's compensation
or employment related benefits, or a material change in Employee's status,
working conditions, management responsibilities or titles, and Employee
voluntarily terminates his relationship with the Company within sixty (60) days
of any such occurrence, or the last in a series of occurrences, then Employee
shall be entitled to receive, subject to the provisions of subparagraphs (e) and
(f) below, a lump sum payment equal to 100% of Employee's "base period income"
as determined under (e) below. Such amount will be paid to Employee within
thirty (30) business days after his termination of affiliation with the Company.
(e) The Employee's "base period income" shall be his base salary
and annual incentive bonuses paid or payable to him during or with respect to
the twelve month period preceding the date of his termination of affiliation.
(f) The amounts payable to Employee under any other compensation
arrangement maintained by the Company (or a subsidiary) which became payable
after payment of the lump sum provided for in (a), upon or as a result of the
exercise by Employee of rights which are contingent on a Change of Control (and
would be considered a "parachute payment" under Internal Revenue Code ss.280G
and regulations thereunder), shall be increased by an additional amount
representing a gross-up of any federal income tax liability arising from an
excess parachute payment or otherwise.
10. Termination.
(a) Termination Without Cause. The Company may terminate this
Agreement without cause at any time upon written notice to the Employee,
whereupon this Agreement shall terminate on the date specified therein. The
Company shall pay the Employee a severance amount equal to six months, of
Employee's Base Compensation, (the "Severance Amount"), payable in full within
five (5) days from the date specified therein (hereinafter, the "Severance
Payout Period") and shall be subject to all usual and customary payroll
deductions, including applicable withholding taxes. After the first year of this
Agreement, the Severance Amount shall be increased to one (1) year of Employee's
Base Compensation.
(b) Termination For Cause. This Agreement may be immediately
terminated by the Company at any time during the Employment Period for "cause".
In such an event of termination, the Company shall be obligated only to continue
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to pay to Employee his Base Salary earned up to the effective date of
termination. "Cause" for purposes hereof shall mean a breach of any of the
provisions of this Agreement by Employee, unsatisfactory performance of
Employee's duties hereunder as reasonably determined by the Company's Board of
Directors, willful misconduct or neglect of duties, conviction of any criminal
offense involving a felony, gross negligence, malfeasance or a crime of moral
turpitude.
(c) Continuing Effect. Notwithstanding any termination of the
Employee as provided in this Section 10 or otherwise, the provisions of Section
12 and 13 shall remain in full force and effect and shall be binding on the
Employee and his legal representatives, successors and assigns.
11. Consolidation, Merger or Sale of Assets. Nothing in this Agreement
shall preclude the Company from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement, and all obligations of the Company hereunder, in
writing. Upon such consolidation, merger, or transfer of assets and assumption,
the term "the Company" as used herein, shall mean such other corporation and
this Agreement shall continue in full force and effect.
12. Restrictive Covenants.
(a) The Employee acknowledges that his services and
responsibilities are unique in character and are of particular significance to
the Company, that the Company is a competitive business and that the Employee's
continued and exclusive service to the Company under this Agreement is of a high
degree of importance to the Company. Therefore, during the Employment Period and
for the applicable periods specified below (each, the "Noncompete Period"), the
Employee shall not, directly or indirectly, as owner, partner, joint venturer,
Employee, broker, agent, corporate officer, principal, licensor, shareholder
(unless as owner of no more than five percent (5%) of the issued and
outstanding capital stock of such entity if such stock is traded on a major
securities exchange) or in any other capacity whatsoever, engage in or have any
connection with any business which is competitive with the Company, and which
operates anywhere in the [United States] on the effective date of termination of
this Agreement:
Reason for Termination Noncompete Period
---------------------- -----------------
Termination without cause Severance Payout Period
Termination for cause 1 year
For purposes of this Agreement, a business will be deemed to be competitive with
the Company if it is an importer/re-seller of Karaoke hardware and software
specializing in the United States mass merchant marketplace.
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(b) In addition to the restrictions set forth in Section 12(a),
during the Noncompete Period, the Employee shall not:
(i) directly or indirectly, by initiating contact or otherwise,
induce, influence, combine or conspire with, or attempt to induce,
influence, combine or conspire with, any of the officers, Employees
or agents of the Company to terminate his, her or its employment
or relationship with or to compete against the Company; or
(ii) directly or indirectly, by initiating contact or
otherwise, divert or attempt to divert any or all of any customers'
or suppliers' business with the Company.
(c) If, in any judicial proceedings, a court shall refuse to
enforce any of the covenants included in this Section 12 due to extent,
geographic scope or duration thereof, or otherwise, then such unenforceable
covenant shall be amended to relate to such lesser extent, geographic scope or
duration and this Section 12 shall be enforceable, as amended. In the event the
Company should bring any legal action or other proceeding against Employee for
enforcement of this Agreement, the calculation of the Noncompete Period shall
not include the period of time commencing with the filing of legal action or
other proceeding to enforce this Agreement through the date of final judgment or
final resolution, including all appeals, if any, of such legal action or other
proceeding unless the Company is receiving the practical benefits of this
Section 12 during such time. The existence of any claim or cause of action by
the Employee against the Company predicated on this Agreement or otherwise shall
not constitute a defense to the enforcement by the Company of these covenants.
(d) The Employee has carefully considered the nature and extent of
the restrictions upon the Employee and the rights and remedies conferred upon
the Company under this Section 12, and the Employee hereby acknowledges that the
restrictions on his activity as contained herein are reasonably required for the
Company's protection, would not operate as a bar to the Employee's sole means of
support, are fully required to protect the legitimate interests of the Company,
do not confer a benefit on the Company disproportionate to the detriment to the
Employee and are material inducements to the Company to enter into this
Agreement. The Employee hereby agrees that in the event of a violation by him of
any of the provisions of this Agreement, the Company will be entitled to
institute and prosecute proceedings at law or in equity to obtain damages with
respect to such violation or to enforce the specific performance of this
Agreement by the Employee or to enjoin the Employee from engaging in any
activity in violation hereof.
13. Treatment and Ownership of Confidential Information. The Employee
acknowledges that during his employment he will learn and will have access to
Confidential Information regarding the Company. For purposes of this Agreement,
the term "Confidential Information" shall mean all of the materials and
information which Employee makes use of, acquires or develops or has made use
of, acquired or developed, in whole or in part, in connection with Employee's
employment with the Company (whether before or after the date of this
Agreement), including any financial data, client names and addresses, employee
data, discoveries, processes, formulas, inventions, know-how, techniques and any
7
<PAGE>
other materials or information related to the business or activities of the
Company which are not generally known to others engaged in similar businesses or
activities. The Employee acknowledges that such Confidential Information as is
acquired and used by the Company or its affiliates is a special, valuable and
unique asset. The Employee will not, except in connection with and as required
by his performance of his duties under this Agreement, for any reason use for
his own benefit, or the benefit of any person or entity with which he may be
associated, or disclose any such Confidential Information to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever
without the prior written consent of the Company's Board of Directors, unless
such Confidential Information previously shall have become public knowledge
through no action by or omission of the Employee. The Employee covenants and
agrees that all right, title and interest in any Confidential Information shall
be and shall remain the exclusive property of the Company. The Employee agrees
to promptly disclose to the Company all Confidential Information developed in
whole or in part by the Employee within the scope of this Agreement and to
assign to the Company any right, title or interest the Employee may have in such
Confidential Information. The Employee agrees to turn over to the Company all
physical manifestations of the Confidential Information in his possession or
under his control at the request of the Company.
14. Employee Representations and Warranties. The Employee represents
and warrants that he is not a party to, or bound by, any other employment
agreements. The Employee further represents and warrants to the Company that he
is free of known physical and mental disabilities that would, with or without
reasonable accommodations that would create an undue hardship for the Company,
impair his performance hereunder and he is fully empowered to enter and perform
his obligations under this Agreement. Without limiting the generality of the
foregoing, the Employee represents and warrants that he is under no restrictive
covenants to any person or entity that will be violated by his entering into and
performing this Agreement.
15. Arbitration. Except as provided in sections 12 and 25 hereof, any
dispute, controversy or claim arising under, out of, in connection with, or in
relation to this Agreement, or the breach, termination, validity or
enforceability of any provision of this Agreement, will be settled by final and
binding confidential arbitration conducted in accordance with, and before a
single arbitrator (the "Arbitrator") chosen according to, the rules of the
American Arbitration Association's National Rules for Resolution of Employment
Disputes, with the additional proviso that all steps necessary to insure the
confidentiality of the proceedings will be added to the basic rules. Unless
otherwise mutually agreed upon by the parties, the arbitration hearings shall be
held in the Broward County, Florida. The parties hereby agree that the
Arbitrator has full power and authority to hear and determine the controversy
and make an award in writing in the form of a reasoned judicial opinion. The
parties hereby stipulate in advance that the award is binding and final. The
parties hereto also agree that judgment upon the arbitration award may be
entered in any federal or state court having thereof. Each party is responsible
for their own legal fees and out-of-pocket expenses.
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16. Binding Effect. Except as herein otherwise provided, this Agreement
shall inure to the benefit of and shall be binding upon the parties hereto,
their personal representatives, successors, heirs and assigns.
17. Severability. Invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provisions.
18. Terminology. All personal pronouns used in this Agreement, whether
used in the masculine, feminine or neuter gender, shall include all other
genders; the singular shall include the plural and vice versa. Titles of
Paragraphs are for convenience only, and neither limit nor amplify the
provisions of the Agreement itself.
19. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Florida.
20. Entire Agreement. This Agreement contains the entire understanding
between the parties and may not be changed or modified except by an Agreement in
writing signed by all the parties.
21. Notice. Any notice required or permitted to be delivered hereunder
shall be deemed to be delivered when deposited in the United States mail,
postage prepaid, registered or certified mail, return receipt requested,
addressed to the parties at the addresses first stated herein, or to such other
address as either party hereto shall from time to time designate to the other
party by notice in writing as provided herein.
22. No Publicity. The Employee agrees that he will not engage in any
conduct that is injurious to the Company's reputation and interests, including,
but not limited to, publicly disparaging (or inducing or encouraging others to
publicly disparage) the Company or any of the Company's directors, officers,
employees or agents.
23. Cooperation. Employee agrees to cooperate fully with the Company by
providing information to the Company and its representatives, agents or advisors
regarding any business matters with which the Employee may become involved with
during the terms of this Agreement and to cooperate fully in the event of any
litigation or legal, administrative or regulatory proceeding by providing
information, including but not limited to, providing truthful testimony at any
legal, administrative or regulatory proceeding, regarding any facts or
information of which Employee has knowledge and/or any business matters of which
Employee has or had knowledge.
24. Assignability. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of the Company, provided that such successor or assign shall acquire all
or substantially all of the assets and business of the Company and, further
provided that any such assignment shall not release the Company from its
obligations to the Employee hereunder. The Employee's rights and obligations
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<PAGE>
hereunder may not be assigned or alienated without the prior written consent of
the Company and any attempt to do so by the Employee will be void.
25. Attorneys' Fees. If any legal action or other proceeding is brought
by the Company for the enforcement of Section 12 of this Agreement, or because
of an alleged dispute, breach, default or misrepresentation by the Employee in
connection with any provision of this Agreement, the Company or the Employee in
such legal action or other proceeding, shall be responsible for its own
attorneys' fees, sales and use taxes, court costs and other expenses incurred in
that action or proceeding.
26. Injunctive Relief. The Employee acknowledges and agrees that in the
event Employee violates any term, covenant or provision of Section 12 of this
Agreement, the Company will suffer irreparable harm for which the Company will
have no adequate remedy at law. The Employee agrees that the Company shall be
entitled to injunctive relief for any breach or violation of Section 12 of this
Agreement, including but not limited to the issuance of an ex parte preliminary
injunction, in addition to and not in limitation of any and all other remedies
available to the Company at law or in equity.
27. No Offsets. The existence of any claim or cause of action of the
Employee against the Company, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by the Company of this
Agreement.
28. Employee Acknowledgement. The Employee acknowledges and agrees that
Employee has read and understands the terms set forth in this Agreement and has
been given a reasonable opportunity to consult with an attorney prior to
execution of this Agreement.
29. Other Instruments. The parties hereby covenant and agree that they
will execute such other and further instruments and documents as are or may
become necessary or convenient to effectuate and carry out the terms of this
Agreement.
30. Counterparts. This Agreement may be executed in any number of
counterparts and each such counterpart shall for all purposes be deemed an
original.
31. Assignability. This Agreement shall not be assigned by either
party, except with the written consent of the other.
[SIGNATURE PAGE ON NEXT PAGE]
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IN WITNESS WHEREOF, this Agreement has been duly signed by the Employee
and on behalf of the Company on the day and year first above written.
THE SINGING MACHINE COMPANY. INC.
By: /s/ Edward Steele
-----------------------------
Edward Steele, President
/s/ John F. Klecha
-----------------------------
John F. Klecha
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THE SINGING MACHINE COMPANY, INC.
FACTORING AGREEMENT
Main Factors, Inc.
P.O. Box 50608
Dallas, TX 75250
Gentlemen:
The following is the agreement between us, effective the date of your
acceptance, by which you shall act as our sole factor.
1. We agree to sell to you as absolute owner and you agree to purchase from us
all accounts, notes, chattel paper, instruments, bills, acceptances or other
forms of obligation (hereinafter collectively referred to as "receivables")
arising out of the sale of merchandise and/or rendition of services (hereinafter
collectively referred to as "sales"). All of our sales shall be made in our
name, but the purchase price shall be paid only and directly to you and all of
our factored invoices to our customers shall clearly state on their face in form
and manner satisfactory to you that the receivables represented by such invoices
have been assigned and are payable only to you. Our sales of receivables to you
include all of our right, title, and interest in and to the merchandise
represented thereby, including such merchandise as may be returned by customers,
and all of our rights of stoppage in transit, replevin, and reclamation and as
unpaid seller and/or lienor. As our receivables are created, we shall execute
and deliver to you such further and confirmatory instruments of sales, on an
account by account basis, transfer and assignment thereof in such form and
manner as you may from time to time require together with a copy of each
invoice, all shipping or delivery receipts and such other proof of sale and
delivery or performance as you may from time to time require; and you shall not
be required to make advances upon or to remit to us any sums credited for the
purchase price of receivables until we provide you therewith as to such
receivables. We shall deliver to you copies of all credit memos issued by us. We
shall execute and deliver to you and/or file at such times and places as you may
designate such further instruments as you may from time to time require for the
protection of your rights hereunder. We shall notify you promptly of all
returned merchandise and shall set aside and mark and hold the same for your
account as owner.
2. The amount, delivery and terms of each sale shall be submitted to your credit
department for written approval before we accept or fill any of our customer's
orders and you shall have the right to withdraw such approval at any time prior
to delivery. Sales approved in writing and accepted by you (hereinafter referred
to as "approved receivables"), when purchased by you, shall be without recourse
to us except as hereinafter provided; sales made by us without such written
approval (hereinafter referred to as "non-approved receivables"), when purchased
by you, shall be with full recourse to us. Receivables for freight or samples
shall always be deemed to be non approved receivables notwithstanding any
written approval from you. In the event you decline to give your written
approval on any order received by us from a customer and, in advising us of such
decline, you furnish us with information as to the credit standing of the
customer, such information shall be deemed to have been requested of you by us
and your advice
FACTORING AGREEMENT PAGE 1 INITIAL JK
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containing such information is recognized as a privileged communication. We
agree that the information furnished to us shall not be given to our customer or
to our salesman; if necessary, we shall merely advise our customer or our
salesman that credit has been declined on the account and that any questions
arising should be directed to you.
3. The purchase price of all receivables shall be the net amount thereof (net
amount of receivables wherever used herein being the gross amount less all
discounts - the net amount due on the shortest terms). Your charge for ledgering
receivables, checking the credit of our customers, bookkeeping, agings,
statements, supervising collection of receivables, assuming the credit risk on
approved receivables, and other services provided us hereunder shall be One and
one-half percent (1-1/2%) of the net amount of receivables purchased, on all
sales using our regular terms. Our regular terms of sale are net 20, net 30, net
45 and net 60. We understand that you will not purchase invoices with terms
greater than net 45. Should factored sales exceed three and one-half million
dollars ($3,500,000.00) in a calendar year, then you will reduce our factors
commission to 1.35% on all sales over $3,500,000. Should factored sales
exceed five and one-half million dollars ($5,500,000.00), you will reduce our
factors commission to 1.15% on all sales over $5,500,000.00. Should factored
sales exceed seven million five hundred thousand dollars ($7,500,000.00), you
will reduce our factors commission to 1.00% on all sales over $7,500,000.00. We
understand that the charge amount will be considered as an advance for purposes
of computing the interest charge. We shall have no right to vary the terms of
sale set forth in the invoice relating to any receivable, after such receivable
has been purchased by you, without your consent. If we require any such
variation in terms, it is recognized that you will incur the same bookkeeping
expense as if you had purchased a new and separate receivable, and you shall
therefore be entitled to receive, as a condition precedent to approving such
change, a sum equal to an additional charge calculated on the new amount
computed in the same manner as if the receivable had been newly purchased by you
on the date we requested a variation in the terms of sale.
The additional charge may be referred to in accounting records as a dating
charge, and may in your sole discretion, if in your opinion the circumstances
justify a reduction, be less than the full charge determined as if the
receivable had been newly purchased. The charges on all receivables purchased by
you during each month as well as all other additional charges hereunder shall be
debited to our account as of the fifteenth day of that calendar month. You shall
credit our account with the net amount of each receivable purchased by you three
(3) days after your receipt of payment thereof, or on the fourth month following
the month during which such receivable becomes due, whichever first occurs, and
upon such date you shall remit the same to us, less all sums previously
advanced, remitted, paid or otherwise charged or debited to or for our account.
All terms of sale which are less than thirty (30) days shall be deemed to be
thirty (30) day terms for the purpose of computing the due date. You shall, at
any time after assignment of receivables to you, at our request, advance to us
up to seventy-five percent (75%) of the purchase price thereof and charge our
account therewith, less your charge. We agree to pay any related wire charges if
funds are wired at our request. You shall not be required to make any advances
on or remit the purchase price of non approved receivables until actual receipt
by you of payment of such receivables from our customers, and the making of all
advances and remittances by you shall be subject to your right to maintain a
reasonable reserve if you deem your security to require it which reserve may be
revised, upward or downward, at any time, in your sole and absolute discretion.
We understand that you may, from time to time, request written verification from
our customers and/or the delivery company that the goods sold by us have been
delivered and/or services have been completed and accepted by our customer. We
FACTORING AGREEMENT PAGE 2 INITIAL JK
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understand that you must be satisfied with such verification before you will
make any advances. We understand that you will not advance on sales to new
customers until you have received written acknowledgment from them that their
receivables have been assigned and are payable to you.
4. All remittances received by us with respect to receivables purchased by you
shall be held in trust by us as your property, separate and apart from our own
properties and funds, and we will immediately deliver to you the identical
checks, monies or other forms of payment received and you shall have the right
to endorse our name on any and all checks or other forms of remittance received,
where such endorsement is required to effect collection, and we shall confirm
your title thereto by executing such instrument, as you may from time to time
require. In order to collect any receivable assigned to you, you have the right
to bring suit in your name or ours. In addition, we hereby constitute and
appoint you or such person as you may name, including substitution, as our
attorney-in-fact to exercise, and at our cost and expense, to execute all
necessary documents in our name and do all other things necessary to carry out
this agreement. We hereby ratify and approve all acts of the attorney and agree
that neither you nor the attorney will be liable for any acts of commission or
omission nor for any error of judgment or mistake of fact or law. This power
being coupled with an interest is irrevocable so long as any receivable assigned
and sold to you remains unpaid or we are indebted to you in any manner.
5. We make the following representations, warranties and agreements, in order to
induce you to enter into this agreement, which shall be deemed to be
incorporated by reference in each confirmatory schedule of receivables or other
form of assignment delivered to you from time to time by us, and shall be deemed
repeated and confirmed with respect to each receivable as it is created or
otherwise acquired by you and shall be deemed continuing:
(a) each and every factored receivable
(i) will constitute a valid and legally enforceable indebtedness resulting
from an actual sale and delivery to and acceptance by the customer of the
goods sold or from the rendition of services in the ordinary course of our
business, in full compliance and conformity with the specification of the
customer, the amount represented as owing by the customer is the correct
amount actually owing by such customer and the payment thereof is not
contingent or conditioned on the fulfillment of any contract, condition or
warranty, past or future, expressed or implied,
(ii) will be subject to no dispute or claim by the customer as to price,
terms, quality, quantity, delay in shipment, offsets, counterclaims, contra
accounts or any other defense of any other kind and character,
(iii) will be subject to no discounts, deduction, allowances, offsets,
counterclaims, or other contra items or to no special terms of payment
which are not shown on the face of the invoice thereof,
(iv) will not represent a delivery of merchandise upon "consignment",
"guaranteed sale", "sale or return", "payment on reorder" or similar terms,
and
(v) will not represent a "pack, bill and hold" transaction;
FACTORING AGREEMENT PAGE 3 INITIAL JK
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(b) we will offer to you selected receivables created in the regular course of
business;
(c) all receivables and all goods giving rise thereto are, and for the duration
of our financing arrangements with you, will remain free of any liens, charges,
security interests, encumbrances and adverse claims, except for your benefit,
the original invoice with respect to each factored receivable bears notice of
its sale to you as required hereunder and we now have and will have absolute and
good title to said receivables and the right to sell the same to you, and has no
knowledge of any fact which would impair the validity thereof;
(d) we are duly organized, validly existing and in good standing under the laws
of the State of Delaware, are qualified to do business in every jurisdiction in
which such qualification is necessary, and have the power and authority to own
our properties and to carry on our business as now being conducted;
(e) we will not pledge, sell, assign, transfer, encumber or create a security
interest in any of our present or future accounts and other collateral in which
we have granted a security interest to you hereunder except for your benefit;
(f) our address as set forth below is our mailing address, our place of
business, our chief executive office and sole office at which our records
concerning the receivables are located and we shall not effect any change in
such address without first giving you ten (10) days prior written notice,
thereof; 6601 Lyons Road, Building A-7, Coconut Creek, FL 33073.
(g) the trade name or trade styles, if any, which are set forth below are the
only trade names or styles under which we transact business and the receivables
as may be sold to you hereunder on invoices of said trade names or styles are
wholly owned by us and all of the undertakings and liabilities held in
connection therewith under the terms of said trade names or styles shall be
identical and of the same force and effect as though those invoices bore our
name: None
(h) we shall neither pledge nor grant a security interest in any of our
inventory to another party unless prior written permission for such pledge is
given by you.
6. We shall immediately advise you of all disputes and claims and attempt to
adjust the same promptly at our expense. We agree that you may, with respect to
any receivable, deposit any and all remittances as received in payment of
receivables irrespective of any deductions shown in notations appearing on said
remittances and charge back to our account any deficiencies therein other than
deficiencies in the payment of approved receivables not subject to charge back
as hereinafter provided. You shall have the right at all times to charge to our
account all non approved receivables that have not been paid within fifty-eight
(58) days from due date for any reason. On approved receivables, you assume the
credit risk of the customer and have no recourse against us for non payment
thereof unless a claim or dispute is asserted as to any such receivable, or in
the event we breach any warranty relating to such a receivable, in which event,
you may charge such receivable to our account. The term "claim or dispute" shall
mean any claim or dispute, or assertion thereof, by a customer as to its
obligations to pay a receivable in full other than its financial inability to
pay, including, but not limited to, claims or disputes as to prices, terms,
quantity, quality, breach of contract or warranty, defense, setoff, deduction or
contra charge. In addition to your right of charge back and not in lieu thereof,
you shall have the right at all times of settling or of litigating any
receivables subject to a claim or dispute directly with our customer or other
claimant and/or to take possession of and to sell or cause to be sold
FACTORING AGREEMENT PAGE 4 INITIAL JK
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without notice to us any rejected or returned merchandise at such prices, to
such purchasers and upon such terms as you in your sole discretion may deem
advisable, and to charge the deficiencies, costs and expenses, including legal
expenses, to us - or if you have charged back the receivables involved therein,
to credit us with the actual amount of cash received by you thereon less your
costs and expenses including legal expenses. The charge back of any receivables
shall not be deemed as a reassignment thereof, and title thereto and to the
merchandise represented thereby shall remain in you until you have been fully
reimbursed therefor.
7. You shall render an accounting to us at about the fifteenth day of each
calendar month in the form of month end statements including a summary sheet (a
gross summary of all activity), a "Monthly Reserve Sheet" (reflecting daily
activity and all credits and debits relating to receivables purchased by you)
and a "Net Cash Employed Charge Calculation" report (reflecting the sums
credited by us, the sums debited to us and the resulting balance) for the
preceding calendar month. All advances shall bear interest which shall be
charged and reflected in the "Net Cash Employed Charge Calculation" report as of
the end of each calendar month. A debit balance shown below on a "Net Cash
Employed Charge Calculation" report shall be payable by us on your demand.
Interest, wherever provided for in this agreement shall, except as otherwise
provided hereinafter, be at an annual rate equal to the lesser of (i) the
"Maximum Rate" or (ii) the "Formula Rate", as those terms are defined
hereinafter. If at any time hereafter the Formula Rate exceeds the Maximum Rate
the rate of interest shall be limited to the Maximum Rate but any subsequent
reduction in the Formula Rate shall not reduce the rate of interest below the
Maximum Rate until the total amount of interest accrued equals the amount of
interest which would have accrued if the Formula Rate had at all times been in
effect. Interest shall be calculated at a daily rate equal to 1/360th of the
annual rate stated, subject however to the limitation that the effective
interest rate may never exceed the Maximum Rate. Each account rendered shall be
deemed acceptable to and binding upon us unless we give you written notice of
any exception thereto within thirty (30) days after your rendition thereof.
The "Maximum Rate" shall mean at the particular time in question the highest
lawful rate of interest which, under the laws of the United States of America
applicable to contracts made or performed in the State of Texas, including,
without limitation, 12 U.S.C. 86(a), as amended to the date hereof and as the
same may be amended at any time and from time to time hereafter and any other
statute of the United States of America now or at any time hereafter prescribing
maximum rates of interest on loans and extensions of credit, and the laws of the
State of Texas, including without limitation, article 1.04 Title 79, Revised
Civil Statute of Texas, 1925, as amended to the date hereof by H.B. 1228 and as
the same may be amended at any time and from time to time hereafter ("Article
1.04") and any other statute of the State of Texas now or at any time hereafter
prescribing maximum rates of interest on loans and extensions of credit (all the
foregoing hereinafter referred to as the "Applicable Law"), you are then
permitted to charge us. If the highest lawful rate of interest which, under
Applicable Law, you are permitted to charge us shall change after the date
hereof, the Maximum Rate shall be automatically increased, as the case may be,
from time to time as of the effective time of each change in the Maximum Rate
without notice to us. For purposes of determining the Maximum Rate under the
Applicable Law of the State of Texas, the applicable rate ceiling shall be the
indicated rate ceiling described in and computed in accordance with the
provisions of Section (a)(1) of Article 1.04, provided, that at any time such
indicated rate ceiling shall be less than eighteen percent (18%) per annum or
more than twenty four percent (24%) per annum, the provisions of Sections (b)(1)
and (2) of Article 1.04 shall control for purposes of such determination, as
applicable.
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The "Formula Rate" shall mean a rate of interest two percent (2%) above the
Prime Rate charged by Bank One, Texas, N.A., or its successors, as announced or
published by the bank, or its successors, from time to time. If the Prime Rate
of said bank, or its successors, shall change after the date hereof, the Formula
Rate shall be automatically increased or decreased, as the case may be, from
time to time on the effective date of each change in the Prime Rate of said
bank, or its successors, without prior notice to us.
8. We hereby grant to you a general and continuing lien and security interest in
all of our accounts, instruments, documents, chattel paper, contract rights and
general intangibles, all of our present and future credit balances and reserves,
funds, monies and other properties coming into your hands, all monies payable by
us to you hereunder or otherwise, and all proceeds (including insurance
proceeds) and products of the foregoing as security for the payment and
satisfaction of any and all or our present and future liabilities, indebtedness
and obligations to you, whether absolute or contingent, liquidated or
unliquidated, arising under this agreement or otherwise, including any amounts
owing by us to you for merchandise purchased from any other concern factored or
financed by you or otherwise. Recourse to any of the foregoing collateral shall
not at any time be required and we hereby authorize you to charge our account
for the amounts of any or all of the liabilities, indebtedness and obligation
which are secured thereby. You may treat all indebtedness owed by us to you as
an entire single indebtedness for which we shall remain liable for full payment
without demand and you may, at your option, apply any funds, receivables,
credits or property of ours coming into your possession to any particular
portion of the indebtedness. We agree to pay all expenses (including reasonable
attorney fees) incurred by you in collecting any indebtedness owed by us to you
or in enforcing the terms of this agreement. We shall execute and deliver to you
and/or file at such places and at such times as you may designate such further
instruments as you may from time to time require for the protection of your
rights hereunder. We agree to pay all expenses related to all tax and lien
searches and filings you may perform related to our account.
9. We shall keep at our cost and expense proper books of account showing all
transactions relating to sales, and you may, at all reasonable times, inspect,
verify and check all of our books, accounts, records, orders and correspondence
and papers which you deem relevant to the receivables in which you have an
interest hereunder, and inspect and audit our books, records, accounts, files or
inventory and make extracts thereof. We will provide you promptly with such
signed financial statements and related information in such form, from time to
time, as requested by you. We will provide with at least thirty (30) days prior
written notice of any material change in our ownership, control or management.
10. This agreement shall become effective upon your acceptance hereof, shall be
deemed dated as of the date set forth hereinafter and shall continue in full
force and effect from month to month thereafter until terminated as to future
transactions by either party giving to the other not less than thirty (30) days
advance written notice by mail, but any such notice given by us shall not be
effective prior to the end of the first year or any succeeding year, as the case
may be. Of course, termination will not effect any of our obligations hereunder
to you of any kind prior to the effective date of termination, and pending final
accounting you may withhold any balance in our account unless you are supplied
with an indemnity satisfactory to you. In the event of such termination, all of
our obligations to you shall become due and payable on the effective date of
such termination, irrespective of any maturity dates established prior thereto.
You may, at your election, immediately terminate this agreement as to future
transactions, without notice, if we
FACTORING AGREEMENT PAGE 6 INITIAL JK
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shall fail to perform any of our obligations hereunder or shall breach any
warranty contained herein, or if we shall become insolvent or suspend business
or if a petition under any chapter of the Federal Bankruptcy Act or any other
insolvency or debtor statute or receivership proceedings shall be filed by or
against us, or if any guaranty of our obligations hereunder shall be terminated
by the guarantor, or if you determine, in your sole discretion, that there has
been a material change in our ownership, control or management, or if you should
otherwise deem yourself insecure. We agree to reimburse you upon demand for all
attorney fees, court costs and other expenses incurred by you in enforcing any
of your rights against us under this agreement.
All notices provided herein shall be given at the addresses set forth:
Main Factors, Inc. The Singing Machine Company, Inc.
P.O. Box 50608 6601 Lyons Road, Building A-7
Dallas, TX 75250 Coconut Creek, FL 33073
11. This agreement, when accepted by you, constitutes a security agreement under
the provisions of the Uniform Commercial Code then in effect in the State of
Texas and all of our obligations are performable and/or payable in the City of
Dallas, Dallas County, Texas, and we waive the right to be sued elsewhere on any
cause of action asserted by or against us. Your books and records showing the
account between us shall be admissible in evidence in any action or proceeding,
shall be binding upon us for the purpose establishing the items therein set
forth and also shall constitute prima facie proof thereof. This agreement may
only be changed, modified, supplemented or amended by written document signed by
you. This agreement shall be construed according to the laws of the State of
Texas. Should any paragraph, provision or clause of this agreement be found or
held contrary to, or unenforceable at law or in equity, such finding shall not
effect the others, which shall, notwithstanding, continue in all force and
effect, it being the express intention of the parties hereto that the invalidity
of any one or more paragraphs, provisions or clauses shall in no way affect the
others. This agreement represents the full agreement between us and shall be
binding upon both of us, our successors and assigns. No delay or failure on your
part in exercising of your rights, privileges or options hereunder shall operate
as a waiver of such rights, privileges or options and no waiver whatsoever shall
be valid unless it is in writing and signed by you and then only to the extent
set forth therein.
THE SINGING MACHINE COMPANY, INC.
By /s/ Edward Steele By /s/ John Klecha
----------------------------- ------------------------------
Edward Steele, President John Klecha, Secretary
Main Factors, Inc.
Accepted in Dallas, Texas this 1st day of December, 1999
By /s/ Iain Michie
-----------------------
Iain Michie - President
FACTORING AGREEMENT PAGE 7 INITIAL JK
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MASTER AGREEMENT
This Master Agreement dated as of July 31, 1999 is by and between The
Singing Machine Company, Inc. a Delaware corporation (the "Manager") and EPK
Financial Corporation, a Texas corporation ("EPK").
PRELIMINARY MATTERS
A. The Manager may, from time to time, identify trading
opportunities involving the purchase and resale of goods.
B. The Parties wish to set forth their agreement regarding the terms
upon which EPK may agree to purchase and resell such goods and the provision of
management services by, and compensation of, the Manager in connection
therewith.
AGREEMENT
In consideration of the premises, and of the representations,
warranties, covenants, agreements, and conditions contained herein, and for
other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Manager and EPK hereby agree as follows:
ARTICLE I
INTERPRETATION
1.1 Certain Definitions. As used in this Agreement, the following
terms have the meanings specified:
"Affiliate" when used with respect to a Person, means any other
Person whom directly or indirectly through one or more intermediaries
controls, or is controlled by, or is under common control with, such
Person. The term "control" (including the correlative term
"controlled") means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies
of a Person, whether through the ownership of voting stock, by contract
or otherwise.
"Agreement" has the meaning specified in Section 1.4.
"Business Day" means any day which is not a Saturday, a Sunday or
a day on which national banks in the State of Texas are authorized or
required by law to be closed.
"Confirmation" means a confirmation in the form of Exhibit A or
such other form of written instrument as to which the Parties may
agree.
"Credit Enhancement," with respect to a Transaction and if
applicable, means the letter of credit, guaranty, bond or other form of
credit support with respect to the obligations of the Purchaser under
such Transaction, provided by the Credit Enhancer for such Transaction.
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"Credit Enhancer" with respect to a Transaction, means the
Person, if any, identified as such in the Confirmation with respect to
such Transaction.
"EPK" has the meaning specified in the preamble to this Agreement.
"EPK Minimum Proceeds" with respect to a Transaction, has the
meaning specified in the Confirmation for such Transaction.
"EPK Purchase Price," with respect to a Transaction, means the
aggregate purchase price payable to the Vendor for the Goods under such
Transaction as set forth in the Vendor Invoice for such Transaction and
the Confirmation with respect to such Transaction.
"Event of Default" has the meaning specified in Section 4.1.
"FCPA" means the U.S. Foreign Corrupt Practices Act, 15 U.S.C.
78a, et seq., as amended, supplemented and replaced from time to time.
"Governmental Authority" means any government or any political
subdivision or agency, department or instrumentality thereof,
including, without limitation any court or administrative body.
"Goods," with respect to a Transaction, means the goods identified
as such in the Confirmation with respect to such Transaction.
"Guarantor" means Edward Steele and John Klecha. The Guarantor
constitutes a Credit Enhancer with respect to all Transactions
hereunder.
"Guaranty" means the guaranty of the Guarantor, in form acceptable
to EPK, delivered pursuant to Section 5.14. The Guaranty shall
constitute Credit Enhancement with respect to all Transactions
hereunder.
"Manager's Compensation," with respect to a Transaction and
subject to Section 2.5, the compensation of the Manager for performing
his obligations in respect of such Transaction under the Agreement, as
specified in the Confirmation with respect to such Transaction.
"Party" means EPK or the Manager.
"Person" means collectively, any individual, partnership,
corporation, limited liability company, business trust, joint stock
company, trust, unincorporated organization, joint venture, firm or
other entity, or Governmental Authority.
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"Purchase Order" with respect to a Transaction, means the
agreement referring to purchase orders from the Purchaser for the Goods
with respect to such Transaction.
"Purchaser" with respect to a Transaction, means the Person
identified as such in the Confirmation with respect to such
Transaction.
"Purchaser Purchase Price," with respect to a Transaction, means
the aggregate purchase price payable by the Purchaser for the Goods
under such transaction as set forth in the Purchase Order for such
Transaction and the Confirmation with respect to such Transaction.
"Solvent," as to any Person, such Person (a) owns property whose
fair salable value is greater than the amount required to pay all of
such Person's indebtedness (including contingent debts), (b) is able to
pay all of the indebtedness as such indebtedness matures and (c) has
capital sufficient to carry on its business and transactions and all
business and transactions in which it is about to engage.
"Taxes" means all taxes, tariffs, duties, stamp taxes or fees of
any description due any Governmental Authority arising out of or in
connection with any Transaction, excepting only United States federal
income taxation of EPK and any State of Texas tax based on the net
income of EPK.
"Transaction" means a particular transaction governed by the terms
of this Agreement, including the terms set forth in the Confirmation
with respect to such transaction.
"Vendor" with respect to a Transaction, means the Person
identified as such in the Confirmation with respect to such
Transaction.
"Vendor Pro Forma Invoice" with respect to a Transaction, means
the contract from the Vendor for the Goods with respect to such
Transaction.
1.2 Other Definitional Provisions.
a. Unless otherwise specified therein, all terms defined in this
Agreement have the above-defined meanings when used in any Confirmation,
certificate, amendment, report or other document made or delivered pursuant
hereto.
b. Each term defined in the singular form in Section 1.1 shall
mean the plural thereof when the plural form of such term is used in this
Agreement or any Confirmation, certificate, amendment, report or other document
made or delivered pursuant hereto, and each term defined in the plural form in
Section 1.1 shall mean the singular thereof when the singular form of such term
is used herein or therein.
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c. The words "hereof," "herein," "hereunder" and similar terms
when used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement, and section, schedule and exhibit
references herein are references to sections, schedules and exhibits to this
Agreement unless otherwise specified.
d. The word "including" when used herein shall mean "including
without limitation."
e. Unless otherwise specified herein, all times set forth herein
are Dallas, Texas time.
1.3 Inconsistency. In the event of any inconsistency between the
provisions of any Confirmation and this Agreement, such Confirmation will
prevail for the purpose of (but only for the purpose of) the relevant
Transaction.
1.4 Single Agreement. All Transactions are entered into in reliance on
the fact that this Master Agreement and all Confirmations form a single
agreement between the Parties (collectively referred to as this "Agreement"),
and the parties would not otherwise enter into any Transactions.
ARTICLE II
TRANSACTIONS
2.1 Offer. The Manager may, from time to time propose a Transaction by
submitting to EPK a proposed Confirmation setting forth for such Transaction the
Goods, the EPK Minimum Proceeds, the Manager's Compensation, the EPK Purchase
Price, the Vendor, the Purchaser Purchase Price, the Purchaser, information
sufficient to enable to EPK to determine the relative credit worthiness of the
Purchaser, the Purchaser's terms and method of payment in the transaction, and,
if applicable, the Credit Enhancer, and attaching copies of the Vendor Invoice,
the Purchase Order and, if applicable, the Credit Enhancement (other than the
Guaranty) with respect to the proposed Transaction.
2.2 Acceptance. EPK shall have no obligation to enter into any proposed
Transaction. In the event that EPK and the Manager agree upon a proposed
Transaction, such agreement shall be evidenced by the execution and delivery
(which may be by telecopy) of a Confirmation setting forth the terms of such
Transaction. The Confirmation with respect to a Transaction shall become
effective upon all of the following having occurred (i) execution and delivery
thereof by both of the Parties; (ii) assignment (or other means of transfer) to
EPK acceptable to EPK of any Credit Enhancement with respect to the Transaction;
(iii) if requested by EPK, deliver to EPK a letter from each and every creditor
of Manager that now or hereafter holds a security interest in or lien on any and
all of Manager's Inventory and Accounts whereunder each of them shall have
consented to the Transactions contemplated by this Agreement and shall have
acknowledged EPK's sole and exclusive ownership in the Goods and all proceeds
thereof, and (iv) if requested by EPK, the establishment of a lock box account
over which EPK shall have sole access, dominion and control at a state or
national bank located in Dallas, Texas acceptable to EPK (the "Lock Box") at the
sole cost and expense of Manager.
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2.3 Services of the Management. Unless otherwise specified in the
Confirmation relevant to a Transaction, the Manager shall: (a) cause the Goods
to be shipped to the Purchaser in accordance with the Purchase Order relevant to
such Transaction and bear all costs, including any shipping costs and messenger
expenses and legal costs, incidental to such Transaction; (b) indemnify and hold
EPK harmless from and against any loss caused by the failure of (i) the Vendor
or any shipper timely to deliver Goods which conform to the requirements of the
Vendor Invoice, the Purchase Order and applicable law, or (ii) the Manager to
truthfully represent the Purchaser's credit information or the terms and method
of payments in the transaction as contemplated in Section 3.1; (c) indemnify
and hold EPK harmless from and against any claim of or liability to any Person
arising out of the Transaction, including without limitation any claim of or
liability to the Purchaser or any other Person in respect of the Goods; (d) pay,
and indemnify and hold EPK harmless from and against, any Taxes due in
connection with such Transaction; and (e) be responsible for performing all
administrative and ministerial tasks relating to the collection of such invoices
to the Purchaser; provided, however, that the foregoing shall in no way limit
EPK's right at any time and from time to time to collect amounts owing under
such invoices directly; and provided, further, that the foregoing shall not
constitute a guaranty by Manager of the payment or collection of such invoices.
2.4 Maximum EPK Purchase Price. Unless otherwise specified in the
Confirmation relevant to a Transaction, the maximum EPK Purchase Price shall be
$ 1,000,000.00.
2.5 Compensation of the Manager. The compensation of the Manager in
respect of its services in connection with a particular Transaction shall be the
Manager's Compensation set forth in the Confirmation with respect to such
Transaction; provided, that unless otherwise specified in the Confirmation with
respect to such Transaction, the compensation of the Manager in respect of a
particular Transaction shall be payable solely from the proceeds received by EPK
from the Purchaser and, if applicable, the Credit Enhancer with respect to such
Transaction and only to the extent that such proceeds exceed the EPK Minimum
Proceeds for such Transaction.
2.6 Further Assurances. The Manager hereby agrees that at any time and
from time to time after the execution of this Agreement, Manager shall, upon
request of EPK, execute and deliver such further acts and things as EPK may
request in order to fully effect the purposes of this Agreement and to protect
EPK's interests in the Goods and/or Credit Enhancements, including, but not
limited to, furnishing any and all documents necessary to enable EPK or its
insurer to defend itself in any litigation arising in connection herewith.
Manager shall give EPK written notice of any action known by Manager to have
been taken by a third party which may jeopardize EPK's rights in the Goods
and/or Credit Enhancement promptly after Manager becomes aware of the same.
Manager hereby agrees to reimburse EPK for all out-of-pocket costs and expenses
(including but not limited to reasonable attorneys fees) incurred by EPK in
connection with (i) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by EPK, the Vendor, the Purchaser, Manager or any other
person) in any way relating to the Goods, the transactions or this Agreement,
(ii) any attempt to enforce any of EPK's rights in the Goods or Credit
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Enhancements in the transactions or under this Agreement against Manager, the
Vendor, the Purchaser or any other person, and/or (iii) any attempt to verify,
protect, sell, liquidate or otherwise dispose of the Goods and/or Credit
Enhancements.
2.7 Title. All Goods shall at all times be and remain the sole and
exclusive property of EPK and titled in the name of EPK or such tradestyle as
may be acceptable to EPK.
2.8 Insurance on Goods. Manager shall obtain insurance on behalf of
EPK which insures the Goods against all risks or physical loss or damage with
warehouse to warehouse coverage. All such policies of insurance shall name EPK
as the sole insured party and as exclusive loss-payee thereunder.
2.9 Collection of Purchaser Purchase Price. All invoices shall
instruct the Purchaser to remit their payments directly to the Lock Box. Without
limiting the foregoing, in the event that Manager shall receive any remittances
from any Purchaser from time-to-time on account of transactions, such
remittances shall be and remain EPK's property and Manager shall hold such
remittances as trustee of an express trust for EPK's benefit and immediately
deliver over to EPK for deposit or cause to be deposited the same in the Lock
Box or to EPK or to such other account designated by EPK. Manager acknowledges
that such remittances are the sole and exclusive property of EPK. All payments
of the Purchaser's Purchase Price which are made through presentment of a letter
of credit shall instruct the collecting or paying bank of said letter of credit
to make payment by wire transfer of immediately available funds to the Lock Box,
to EPK or to such other account designated by EPK. All funds deposited in said
special account are the sole and exclusive property of EPK. EPK and its
directors, officers and agents shall have the right to sign and endorse on
behalf of Manager all checks, drafts and other forms of payment received by EPK
in connection with the payment of any account. Manager appoints EPK or any other
person EPK may from time to time designate, as Manager's attorney-in-fact with
power to:
(a) endorse Manager's name on any checks, drafts or other forms of
payment or security that may come into possession;
(b) sign Manager's name on notices of assignment, financing
statements, verifications of Accounts and notices to Account
Debtors;
(c) receive, open and dispose of all mail addressed to Manager and
received by EPK;
(d) send requests for verification of Contracts/Purchase Orders,
Accounts to current and/or potential future Accounts Debtors;
and
(e) do all things necessary to carry out the terms of this
agreement.
2.10 Access to Information and Control Over Goods. Manager shall
provide EPK with any and all information which EPK may reasonably request
concerning the Goods, the Purchaser, the Vendors, Manager, and/or any other
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parties involved with the Goods, including, but not limited to, the inspection
of the books and records of Manager by EPK and its representatives. Manager
shall provide EPK with immediate access to any and all Goods in Manager's
possession, actual or constructive, upon request by EPK. In the event that EPK
determines in good faith that it is necessary for EPK to assert or enforce its
rights as owner of the Goods in order to adequately protect its interests, EPK
shall be permitted to take, and Manager shall assist EPK in taking any and all
action as EPK deems necessary, including, but not limited to, (i) notifying
freight forwarders, the Purchasers, the Vendors and other third parties of EPK's
interest in the Goods, and (ii) taking immediate and complete physical control
over the Goods as the proceeds thereof
2.11 NO WARRANTIES ON GOODS. ALL GOODS COVERED BY THE AGREEMENT ARE
RESOLD BY EPK "AS IS" AND "WITH ALL FAULTS," AND MANAGER ACKNOWLEDGES THAT NO
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE ARE TO BE
IMPLIED IN THE AGREEMENT. EPK GIVES NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE
DESCRIPTION, QUALITY, MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE,
PRODUCTIVENESS, OR ANY OTHER MATTER OF ANY OF THE GOODS. EPK SHALL BE IN NO WAY
RESPONSIBLE FOR THE PROPER USE OR SERVICE OF THE GOODS.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 The Manager. The Manager hereby represents and warrants, and the
delivery by the Manager of each Confirmation shall constitute the further
representation and warranty of the Manager, that:
(a) The Manager is a corporation duly organized and validly
existing and in good standing under the laws of Delaware.
(b) the Manager has all requisite authority to enter into this
Agreement and to perform all the obligations required to be performed
by it hereunder;
(c) neither the execution and delivery by the Manager of this
Agreement, nor the consummation of any of the Transactions herein
contemplated, nor compliance with the terms and provisions hereof, will
(i) materially contravene or conflict with the articles of
incorporation or bylaws of the Manager, any requirement of law to which
the Manager is subject, or any indenture, mortgage, deed of trust, or
other agreement or instrument to which the Manager is a party or by
which the Manager may be bound, or to which the property of the Manager
may be subject, or (ii) result in the creation or imposition of any
lien on the property of the Manager;
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(d) this Agreement is the legal, valid and binding obligation of
the Manager, enforceable against the Manager in accordance with its
terms;
(e) there is no material fact relevant to the transactions
contemplated by this Agreement (and in the case of each Confirmation,
there is no material fact relevant to the Transaction set forth in such
Confirmation) known to the Manager that the Manager has not disclosed
to EPK;
(f) the Manager is not (and in the case of each Confirmation, to
the knowledge of the Manager after due inquiry, neither the Purchaser
nor the Vendor thereunder is) in default under any loan agreement,
mortgage, security agreement or other material agreement or obligation
to which it is a party or by which any of its property is bound;
(g) there are no material actions, suits or legal, equitable,
arbitration or administrative proceedings pending, or to the knowledge
of the Manager threatened, against the Manager (and in the case of each
Confirmation, to the knowledge of the Manager after due inquiry, there
are no material actions, suits or legal, equitable, arbitration or
administrative proceedings pending, or threatened, against the
Purchaser or the Vendor thereunder);
(h) all tax returns required to be filed by the Manager in any
jurisdiction have been filed and all taxes, assessments, fees and other
governmental charges upon the Manager or upon any of its properties,
income or franchises have been paid prior to the time that such taxes
could give rise to a lien thereon;
(i) neither the execution and delivery of this Agreement nor the
consummation of any of the transactions contemplated hereby requires
the consent or approval of, the giving of notice to, or the
registration, recording or filing by the Manager or any other Person of
any document with, or the taking of any other action in respect of, any
Governmental Authority which has jurisdiction over the Manager (or, in
the case of each Confirmation, the Purchaser or the Vendor thereunder)
or any of its property;
j) the Manager has delivered to EPK a list of all creditors of the
Manager, copies of the income statement and balance sheet of the
Manager as of December 31, 1997, the balance sheet of the Manager as
of February 28, 1998 and the US Federal income tax returns of the
Manager for the years 1995 and 1996, such lists, statements, balance
sheets and tax returns are accurate in all material respects;
(k) the Manager (and, in the case of each Confirmation, to the
best knowledge of the Manager, the Purchaser and the Vendor thereunder)
is Solvent;
(1) none of the Purchaser, the Vendor or the Credit Enhancer with
respect to any Transaction is an Affiliate of the Manager; and
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(m) all information furnished by the Manager in each Confirmation
is true and correct.
All representations and warranties by the Manager herein shall survive until all
obligations of the Manager under this Agreement have been irrevocably paid in
full, and any investigation at any time made by or on behalf of EPK shall not
diminish the right of EPK to rely thereon.
ARTICLE IV
DEFAULT; REMEDIES
4.1 Event of Default. An Event of Default shall exist if any one or
more of the following occurs:
(a) The Manager fails to make any payment due hereunder on the
date that such payment is due;
(b) the Manager fails to observe or perform any other term,
covenant or agreement set forth in this Agreement on its part to be
performed or observed and such failure continues unremedied for five
(5) Business Days past the date when such observance or performance is
due;
(c) any material statement, warranty or representation by or on
behalf of the Manager contained this Agreement, (including any
Confirmation or other writing furnished in connection with this
Agreement) proves to have been incorrect or misleading in any material
respect when made or deemed made;
(d) any provision of this Agreement shall for any reason cease to
be in full force and effect, or be declared null and void or
unenforceable in whole or in part, or the validity or enforceability of
any such document shall be challenged or denied; or
(e) (i) the commencement by the Manager or any Credit Enhancer as
debtor of any case or proceeding under any bankruptcy, insolvency,
reorganization, liquidation, dissolution or similar law, or the seeking
by the Manager or any Credit Enhancer of the appointment of a receiver,
trustee, custodian or similar official for such Person or any
substantial part of its property, (ii) the commencement of any such
case or proceeding against the Manager, (iii) the making by the Manager
or any Credit Enhancer of a general assignment for the benefit of its
creditors, or (iv) the admission in writing by the Manager or any
Credit Enhancer that it is unable to pay its debts as they become due.
4.2 Remedies. Upon the occurrence of an Event of Default, all
obligations of EPK hereunder shall be suspended and EPK may exercise all rights
and remedies granted in this Agreement in any Credit Enhancement and/or under
applicable law, and may offset all Manager's compensation then due against any
sums due EPK.
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ARTICLE V
MISCELLANEOUS
5.1 Term. This Agreement may be terminated by EPK immediately upon
written notice to the Manager or by the Manager upon 30 days after Manager
delivers written notice to EPK and shall terminate without notice by either
Party on July 31, 2001; provided, that notwithstanding the termination of this
Agreement, this Agreement shall continue in full force and effect with respect
to any Transactions with respect to which Manager has not fully performed its
obligations hereunder until such time as such performance is completed.
5.2 Entire Agreement. Amendments. etc. This Agreement constitutes the
entire agreement and understanding of the Manager with respect to its subject
matter and supersedes all oral communications and prior writings with respect
thereto. No amendment or waiver of any provision of this Agreement nor any
consent to any departure by either Party herefrom shall in any event be
effective unless the same shall be in writing and signed by the Party against
whom enforcement of such amendment, waiver or consent is sought, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
5.3 No Waiver, Remedies. No failure on the part of EPK to exercise,
and no delay on the part of EPK in exercising, any right hereunder shall operate
as a waiver of such right; nor shall any single or partial exercise of any right
by EPK preclude any further or subsequent exercise of the same or any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.
5.4 Notices. etc. Any notice or other communication in respect of this
Agreement may be given in any form set forth below to the address or number or
in accordance with the electronic messaging system details provided on Schedule
I and will be deemed effective as indicated:
(i) If in writing and delivered in person or by courier, on the
date it is delivered;
(ii) if sent by facsimile transmission, on the date that
transmission is received by a responsible employee of the recipient in
legible form (it being agreed that the burden of proving receipt will
be on the sender and will not be met by a transmission report generated
by the sender's facsimile machine); or
(iii) if sent by certified or registered mail or the equivalent
(return receipt requested) on the date it is delivered.
Either Party may by written notice to the other change the address or facsimile
number or electronic messaging system details at which notices are to be given
to it.
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5.5 Captions. The captions in this Agreement are for convenience of
reference only and are not to be given any substantive meaning or significance
whatever in construing the terms and provisions of this Agreement.
5.6 Transfer. Neither this Agreement nor any interest or obligation in
or under this Agreement may be transferred (whether by way of security or
otherwise) by the Manager without the prior written consent EPK. EPK may, with
written notice to the Manager, assign or transfer all or any part of its
interests and obligations herein to any other Person, and such other Person
shall thereupon become vested with all rights and obligations in respect thereof
granted to and assumed by EPK herein or otherwise.
5.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF TEXAS.
5.8 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN
NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN
DALLAS COUNTY, TEXAS. AS PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND
REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR OTHER PRINCIPAL PLACE OF
BUSINESS OF MANAGER OR EPK, MANAGER HEREBY CONSENTS AND AGREES THAT THE DISTRICT
COURT OF DALLAS COUNTY, TEXAS, OR, AT EPK'S OPTION, THE UNITED STATES DISTRICT
COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN MANAGER AND
EPK PERTAINING TO THIS AGREEMENT OR TO ANY OTHER MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT. MANAGER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO
SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND MANAGER
HEREBY WAIVES ANY OBJECTION WHICH MANAGER MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE
GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH
COURT. MANAGER HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND
OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO MANAGER AT THE ADDRESS LAST KNOWN TO EPK AND THAT SERVICE SO MADE
SHALL BE DEEMED COMPLETED UPON THE EARLIER OF MANAGER'S ACTUAL RECEIPT THEREOF
OR 3 DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN
THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF EPK TO SERVE
LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE
ENFORCEMENT BY MANAGER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE
11
<PAGE>
TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER
APPROPRIATE FORUM OR JURISDICTION.
5.9 JURY TRIAL; DAMAGES. THE MANAGER AND EPK HEREBY (a) IRREVOCABLY
AND UNCONDITIONALLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY
IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY
COUNTERCLAIM THEREIN; (b) IRREVOCABLY WAIVES, TO THE EXTENT NOT PROHIBITED BY
LAW, ANY RIGHT THEY MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY
SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES OTHER THAN, OR
IN ADDITION TO, ACTUAL DAMAGES; (c) CERTIFY THAT NO PARTY HERETO NOR ANY
REPRESENTATIVE OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR
OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION,
SEEK TO ENFORCE THE FOREGOING WAIVERS; AND (d) ACKNOWLEDGE THAT THEY ENTERED
INTO THE AGREEMENT, AND THE TRANSACTIONS CONTEMPLATED HEREBY, BASED UPON, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION.
5.10 Attorneys' Fees. Each Party agrees that in the event of any
litigation concerning this Agreement, the non-prevailing Party shall pay the
fees and expenses of the prevailing Party. Except as set forth in the preceding
sentence, and subject to Sections 2.3 and 2.6, each Party shall pay its own
legal fees and expenses in connection herewith.
5.11 No Rights Conferred Upon Third Parties. This Agreement is for
the benefit of the Parties hereto and nothing contained herein shall be
construed to give any third party any benefits or rights hereunder.
5.12 Counterparts. This Agreement may be executed in counterparts, each
of which shall be an original but all of which together shall constitute one and
the same instrument.
5.13 COMPLIANCE WITH LAWS. MANAGER SHALL STRICTLY OBSERVE AND COMPLY
WITH ALL FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS WHICH GOVERN THE
MANUFACTURE, SALE, HANDLING AND DISPOSAL OF ANY PRODUCTS HEREIN SPECIFIED.
MANAGER ALSO AGREES TO COMPLY WITH THE PROVISIONS RELATING TO THE FCCA SET FORTH
IN EXHIBIT B. IF MANAGER VIOLATES ANY OF SUCH LAWS OR REGULATIONS OR IS
OFFICIALLY CHARGED WITH SUCH VIOLATIONS, EPK IN ITS SOLE DISCRETION MAY TREAT
THIS CONDUCT AS A BREACH OF THIS WHOLE AGREEMENT AND IN ADDITION TO ANY OTHER
REMEDIES, MAY IMMEDIATELY TERMINATE THIS AGREEMENT.
12
<PAGE>
5.14 Guaranty. The Manager shall cause the Guarantor to execute and
deliver the Guaranty and take all actions reasonably requested by EPK to cause
the Guarantor to perform its obligations under the Guaranty.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
13
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date set forth above.
MANAGER:
THE SINGING MACHINE COMPANY, INC.
By: /s/ John Klecha
-----------------------------
John Klecha
Title: Secretary/Treasurer
EPK:
EPK FINANCIAL CORPORATION
By: /s/ Edward P. King
-----------------------------
Edward P. King
Title: President
14
<PAGE>
SCHEDULE I
TO
MASTER AGREEMENT
EXECUTED AND DELIVERED AS OF ______________ 1999 BETWEEN
THE SINGING MACHINE COMPANY, INC. (the "Manager")
AND
EPK FINANCIAL CORPORATION ("EPK")
ADDRESSES FOR NOTICES
Address for notices to the Manager:
Address: 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073
Attention: John Klecha
Facsimile (954) 596-2000 Phone: (954) 596-1000
Address for notices to EPK:
Address: 2711 Cedar Springs Dallas, TX 75201
Attention: Edward P. King
Facsimile: 214/999-0289 Phone: 214/871-0055
1
<PAGE>
EXHIBIT 10.5
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF FLORIDA
IN RE: CASE NO.: 97-22199-BKC-RBR
THE SINGING MACHINE COMPANY, INC., CHAPTER 11
Tax ID# 95-3795478
Debtor.
- -----------------------------------/
DEBTOR'S AMENDED PLAN OF REORGANIZATION
---------------------------------------
FURR AND COHEN, P.A.
Attorneys for Debtor
By: Robert C. Furr, Esq. and
Lisa J. Chaiklin Aflalo, Esq.
1499 West Palmetto Park Road
Suite 412
Boca Raton, FL 33486
(561) 395-0500
<PAGE>
TABLE OF CONTENTS
Page
----
(a) Definitions - Article I 1
(b) Classification of Claims and Interests -
Article II 11
(c) Treatment of Claims and Interests under the
Plan - Article III 11
(d) Impairment - Article IV 15
(e) Means of Execution and Security for
Installment Payments - Article V 15
(f) Executory Contracts - Article VI 16
(g) Effect of Confirmation - Article VII 17
(h) Cram Down, Modification, Substantive
Consolidation - Article VIII 17
(i) Retention of Jurisdiction - Article IX 18
(j) Officers and Directors - Article X 19
(k) Miscellaneous - Article XI 20
<PAGE>
DEBTOR'S AMENDED PLAN OF REORGANIZATION
---------------------------------------
ARTICLE I
---------
Definitions
-----------
As used in this Plan, the following terms shall have the respective
meanings set forth below, and such meanings shall be equally applicable to the
singular and plural forms of the terms defined unless the context requires
otherwise. Those terms no specifically defined in this Plan shall have the
meanings ascribed to them by the code.
Actions
-------
All actions that a trustee or debtor-in-possession is empowered to
bring pursuant to 11 U.S.C. Sections 542-553 of the Code, and any other cause of
action, lawsuit, adversary proceeding, contested matter, claim objection, or
right of the Debtor or the Estate against any Person.
Administrative Claim
--------------------
A Claim for payment of an administrative expense under Section 503 of
the Code that is entitled to priority under Section 507(a)(1) of the Code.
Administrative Claims include claims for the provision of goods or services that
are incurred by the Debtor in the ordinary course of business.
Administrative Claimant
-----------------------
The holder of an Administrative Claim.
Allowed Amount
--------------
With Respect to a Claim, (a) the amount of a Claim that was listed in
the Debtor's Schedules (as originally filed in the Case) as not disputed,
contingent or unliquidated, if the holder of such Claim has not filed a proof of
claim with the Court within the applicable period of limitation fixed by the
Court pursuant to Rule 3003(c)(3) of the Rules, or (b) if a holder of a Claim
<PAGE>
has filed a proof of claim with the Court within the applicable period of
limitation fixed by the Court pursuant to Rule 3003(c)(3) of the Rules: (I) the
amount stated in such proof of claim or in the Schedules if no objection to such
proof of claim or amount listed in the Schedules has been interposed within the
applicable period of limitation fixed by the Code or Rules, or as otherwise
fixed by the Court, or (ii) such amount as shall be fixed by an order of the
Court which has become a Final Order, if an objection has been interposed within
the applicable period of limitation fixed by the Code, the Rules, or the Court,
or (c) with respect to a Fee Request, such amount as shall be fixed by an order
of the Court which has become a Final Order. In no event shall the Allowed
Amount of any Priority Claim or Unsecured Claim include interest accrued on such
Claim after the Filing Date.
Allowed Claim
-------------
Any Claim which is not a Disputed Claim for which an Allowed Amount has
been finally determined in such Allowed Amount. The Allowed Amount of each
Secured Claim shall include, pursuant to Section 506(b) of the Code, interest on
such Claim, and any reasonable fees, costs, or charges provided for under the
agreement(s) under which such Claim arose incurred as a result of any breach or
default, act or omission occurring through the Effective Date or by reason of
the Plan, Confirmation or Substantial Consummation.
Allowed Interest
----------------
Any Interest which has not been timely disputed, or if timely disputed,
which has been allowed by order of the Court which has become a Final Order.
Article
-------
One of the numbered Articles of the Plan.
Assets
------
All of the right, title and interest of the Debtors in and to property
of any type or nature including the patents, licenses, technologies and the
Actions and all other Property of the Estate.
2
<PAGE>
Assumed Contract
----------------
An Executory Contract (as modified or amended pursuant to the Plan,
prior order of the Court or by agreement of the parties) that is assigned to the
Reorganized Debtor pursuant to the Plan.
Business Day
------------
A day other than a Saturday, a Sunday or a day on which commercial
banks in South Florida are authorized or required to close.
Case
----
This Chapter 11 Case No. 97-22199-BKC-RBR United States Bankruptcy
Court for the Southern District of Florida.
Claim
-----
(a) A right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed or contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured, or unsecured; (b) a right to an
equitable remedy for breach of performance if such breach gives rise to a right
to payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured,
or unsecured; and (c) without limiting the generality of the foregoing, all
Administrative Claims, Priority Claims, Secured Claims and unsecured Claims.
Class
-----
A group of Claims or Interests classified together pursuant to the
Plan.
Class 1
-------
The unsecured priority claims of employees of the Debtor as described,
classified and treated in Article 3.5 of the Plan.
3
<PAGE>
Class 2
-------
The Secured Claim of Bankers Capital as described, classified and
treated in Article 3.6 of the Plan.
Class 3
-------
The Secured Claim of Toyota Motor Credit Corporation as described,
classified and treated in Article 3.7 of the Plan.
Class 4
-------
The Claims of Convenience Claims as described, classified and treated
in Article 3.8 of the Plan.
Class 5
-------
The Claims of general unsecured creditors as described, classified and
treated in Article 3.9 of the Plan.
Class 6
-------
The equity interests of the holders of common shares of the Debtor as
described, classified and treated in Article 3.10 of the Plan.
Code
----
The Bankruptcy Code, 11 U.S.C. Section 101 et seq.
Common Stock
------------
The Common Stock, par value $0.01 per share, of the Debtor to be issued
to certain Claim holders and Interest Holders pursuant to the Plan.
Confirmation
------------
The entry by the Court of the Confirmation Order.
4
<PAGE>
Confirmation Date
-----------------
The date on which the Clerk of the Court enters the Confirmation Order
on the docket.
Confirmation Hearing
--------------------
A hearing held by the Court on confirmation of the Plan pursuant to
Section 1128 of the Code.
Confirmation Order
------------------
The order entered by the Court confirming the Plan, which shall contain
such provisions as the Proponent desires and shall otherwise be in form and
substance satisfactory to the Proponent.
Convenience Claims
------------------
The Claims by those general unsecured creditors which are equal to or
less than $300.00 in amount.
Court
-----
The United States Bankruptcy Court, Southern District of Florida
including any Bankruptcy Judge thereof and any court having competent
jurisdiction to hear appeals from the Bankruptcy Judges thereof.
Creditor
--------
Any Person holding a Claim or Interest, including Administrative
Claimants and Claims of the kind specified in Sections 502(b), 502(h) and 502(i)
of the Code, and such Person's heirs, successors, assigns, executors and
personal representatives.
Debtor or Debtor in Possession
------------------------------
The Singing Machine Company, Inc. Any reference in the Plan to the
"Debtor" shall also include the Debtor in its capacity as debtor in possession
in the Case, and vice versa.
5
<PAGE>
Disclosure Statement
--------------------
The Disclosure Statement filed by the Debtor in connection with the
Plan and approved by the Court for submission to Creditors as the same may be
amended from time to time.
Disputed Amount
---------------
With respect to a particular Disputed Claim, that amount which is equal
to the difference, if any, between the Face Amount of such Claim and the amount,
if any, of such Claim which the party objecting thereto concedes.
Disputed Claim
--------------
Any Claim for which an Allowed Amount has not yet been determined and
with respect to which an objection has been interposed on or prior to the
Confirmation Date or such other date as may be fixed by the Court.
Disputed Interest
-----------------
Any Interest which has not yet been allowed and with respect to which
an objection has been interposed on or prior to the Confirmation Date or such
other date fixed by the Court.
Effective Date
--------------
The tenth day after the Confirmation Order becomes final, or such other
date as this Court shall order.
Estate
------
The estate created in the Case pursuant to Section 541 of the Code.
Executory Contract
------------------
A contract or unexpired lease to which Debtor is a party and that is
executory within the meaning of Section 365 of the Code.
6
<PAGE>
Face Amount
-----------
With respect to a particular Claim, (a) if the holder of such Claim has
not filed a proof of claim with the Court within the applicable period of
limitation fixed by the Court pursuant to Rule 3003(c)(3) of the Rules, the
amount of such Claim that was listed in the Schedules (as originally filed in
the Case) as not disputed, contingent or unliquidated; or (b) if the holder of
such Claim has filed a proof of claim with the Court within the applicable
period of limitation fixed by the Court pursuant to Rule 3003(c)(3) of the
Rules, the amount stated in such proof of claim, or (c) with respect to a Fee
Request, the net amount to which the applicant would be entitled if its
application were to be granted in full.
Fee Request
-----------
An application or request for payment by the Estate of fees,
compensation for services rendered or reimbursement of expenses, pursuant to
Rule 2016 of the Rules or other applicable provision of the Code or the Rules.
Filing Date
-----------
April 11, 1997, the date the Debtor filed its Chapter 11 petition with
the Court.
Final Order
-----------
An order or judgment of the Court as entered on the docket that has not
been reversed, stayed, modified or amended, and respecting which the time to
appeal, petition for certiorari or seek reargument, review or rehearing has
expired and as to which no appeal, reargument, petition for certiorari, review
or rehearing is pending or as to which any right to appeal, reargue, petition
for certiorari or seek review or rehearing has been waived in writing in a
manner satisfactory to the Proponents, or, if any appeal, reargument, petition
for certiorari, review or rehearing thereof as been denied, the time to take any
further appeal or to seek certiorari or further rehearing, review of reargument
has expired.
7
<PAGE>
If any provision of the Plan requires the entry of a Final Order as a
condition to the occurrence or performance of an act, the Debtor may waive such
requirement.
Interest Holders
----------------
Equity interest of the holders of common stock of the Debtor.
Lien
----
A charge against or interest in any item of Property of the Estate to
secure payment of a debt or performance of an obligation.
Person
------
Any individual, sole proprietorship, partnership (general or limited),
joint venture, trust, unincorporated organization, association, corporation,
institution, entity or government (whether federal, state, county, city,
municipal or otherwise, including, without limitation, any instrumentality,
division, agency, body, political subdivision or department thereof).
Plan
----
This Plan of Reorganization in the present form or as it may be
modified, amended or supplemented from time to time.
Priority Claim
--------------
A Claim (other than an Administrative Claim) that is entitled to
priority under Section 507 of the Code.
Priority Tax Claim
------------------
A Claim (other than an Administrative Claim) that is entitled to
priority under Section 507(a)(8) of the Code.
8
<PAGE>
Pro Rata
--------
Proportionately, so that the ratio of the amount of consideration
distributed on account of a particular Allowed Claim to the Allowed Amount of
such Claim is the same as the ratio of the amount of consideration distributed
on account of all Allowed Claims of the Class in which the particular Claim is
included to the amount of all Allowed Claims of that Class. Whenever a Disputed
Claim has not been finally resolved, an appropriate reserve for payment of such
Disputed Claim shall be established so that there will be sufficient monies
available to make a Pro Rata distribution to the holder of such Disputed Claim
upon final resolution of the dispute.
Property of the Estate
----------------------
The property defined in Section 541 of the Code and any other property
right or interest of the Debtor.
Proponent
---------
The Debtor
Rejected Contract
-----------------
An Executory Contract that is rejected at any time during the Case or
pursuant to Article VI of the Plan.
Rejection Claim
---------------
A Claim arising under Section 502(g) of the Code in its Allowed Amount.
Rules
-----
The Federal Rules of Bankruptcy Procedure, the Federal Rules of Civil
Procedure and/or the Local Rules of the Bankruptcy Court.
Schedules
---------
The schedules of assets and liabilities originally filed by the Debtor
with the Court and as the same may be amended from time to time.
9
<PAGE>
Secured Claim
-------------
A Claim secured by a lien on property in which the Estate has an
interest or that is subject to set-off under Section 553 of the Code to the
extent of the value of the interest attributable to such Claim in the Estate's
interest in such property or to the extent of the amount subject to set-off.
Secured Creditor
----------------
The holder of a Secured Claim.
Secured Tax Claims
------------------
Ad valorem taxes assessed against the personal property owned by the
Debtor.
Substantial Consummation
------------------------
Following the occurrence of Confirmation, the date that the first
dividend is distributed to creditors.
Unsecured Claim
---------------
A Claim other than a Secured Claim, a Priority Claim or an
Administrative Claim.
Unsecured Creditor
------------------
The holder of a unsecured Claim
Wage Claims
-----------
The claims of employees for wages, salaries or commissions earned
within ninety (90) days before the date of the filing of the Petition to the
extent of $4,000.00 as provided in Section 507(a)(3) of the Code.
Rules of Construction and Interpretation
----------------------------------------
The following rules of construction shall be applicable for all
purposes of the Plan unless the context clearly requires otherwise:
10
<PAGE>
The terms "include," "including" and similar terms shall be construed
as if followed by the phrase "without being limited to."
1. Words of masculine, feminine or neuter gender shall mean and include
the correlative words of the other genders, and words importing the singular
number shall mean and include the plural number, and vice versa.
2. All article, section and exhibit or appendix captions are used for
convenience and reference only and in no way define, limit or describe the scope
or intent of, on in any way affect, any such article, section, exhibit or
appendix.
ARTICLE II
----------
Classification of Claims and Interests
--------------------------------------
2.1 An allowed Claim is part of a particular class only to the
extent that the Allowed Claim qualifies within the definition of that Class and,
is in a different Class to the extent that the remainder of the Claim qualifies
within the description of a different Class.
ARTICLE III
-----------
Treatment of Claims and Interests Under the Plan
------------------------------------------------
3.1 General. All payments under this Plan shall commence ten days
after confirmation.
3.2 Administrative Claims. All Allowed Administrative Claims shall
be paid:
(a) in full on the Effective Date or, if such Claim is objected to,
the Date of a Final Order allowing any such Administrative Claim;
OR
--
(b) upon such other terms as may be agreed to between the Debtor and
each such Administrative Claimant.
11
<PAGE>
Administrative costs are estimated to be approximately $100,000.00
above what has been paid to Furr and Cohen as a retainer.
All case related payments for services, costs, and expenses will be
subject to Court approval. All payments shall be from cash on hand.
3.3 All fees due under 11 U.S.C.ss.1129(a)(12) shall be paid as
required by 28 U.S.C. ss. 1930.
3.4 Tax Claims. - Allowed Tax Claims, estimated by management to
total $7,500.00, specified in 11 U.S.C. Section 507(a)(8) shall be paid in full
at confirmation.
3.5 Class 1 -- Wage Claims
Description: Class 1 consists of the unsecured priority claims of
employees of the Debtor. The Debtor estimates the aggregate amount of Class 1
Claims to be $10,000.00.
Treatment: Class 1 Claimants will be paid up to a maximum of $4,000.00
per claimant in accordance with the provisions of Sections 507 of the Code on
the Effective Date.
Impairment. Class 1 Claims are unimpaired.
3.6 Class 2 -- Bankers Capital.
Description: Class 2 consists of the secured claim of Bankers Capital
in the amount of $124,000.00, secured by a lien on certain of the Debtor's
Assets, as described in the factoring agreement and as approved by prior Court
Orders.
Treatment: The Class 2 claim of Bankers Capital shall be paid according
to the terms of its contract with the Debtor, which contract is current.
Impairment. Class 2 claim is unimpaired.
3.7 Class 3 -- Toyota Motor Credit Corporation
Description: Class 3 consists of the Secured Claim of Toyota Motor
Credit Corporation, which is secured by a Lien on a forklift.
12
<PAGE>
Treatment: The Class 3 claim shall be paid according to its contract,
which is current.
Impairment. Class 3 Claim is unimpaired.
3.8 Class 4 -- Administrative Convenience Claims
Description: Class 4 consists of Convenience Claims.
Treatment: Class 4 claims will receive a cash payment of ten percent
(10%) of the amount of their Allowed Claim on the Effective Date.
Impairment: Class 4 is impaired.
3.9 Class 5 -- General Unsecured Claims
Description: Class 5 consists of the claims of general unsecured
creditors.
Treatment: Unsecured creditors will be given a choice at confirmation
to elect the following:
Option A: a cash payment of ten percent (10%) of the amount of their
Allowed Claim, payable five percent (5%) on the Effective Date and five percent
(5%) six (6) months thereafter;
or
Option B: issuance on the Effective Date of shares of New Common
Stock of the reorganized Company on the following basis: for each Two Dollars
($2.00) of an Allowed Claim, each Claimant shall receive one share of New Common
Stock.
Creditors will elect Option A or Option B on the ballot. In the event a creditor
fails to elect a treatment on the ballot or fails to vote, such creditor will be
deemed to have elected Option B.
Impairment. Class 5 is impaired.
13
<PAGE>
3.10 Class 6 -- Interest Holders
Description: Class 6 consists of the equity interests of the holders of
the Old Common Stock of the Debtor.
Treatment: Interest Holders will have their interest diluted by ninety
percent (90%) at confirmation, so that for each share of existing pre-petition
common stock owned, they will receive one- tenth (1/10) of a share of New Common
Stock in the reorganized Company (1 x 10 reverse split).
Impairment. Class 6 is impaired.
Agreement to Less Favorable Treatment
Any Creditor of Interest Holder may agree to less favorable treatment
than is provided for such Creditor in the Plan. The obligations of the Debtor
under this Plan may be prepaid in full or in part without penalty.
3.11 Payment of U.S. Trustee's Fees: Notwithstanding any other
provisions of the Plan to the contrary, the Debtor shall pay the United States
Trustee the appropriate sum required pursuant to 28 U.S.C ss. 1930(a)(6), within
ten (10) days of the entry of the order confirming this Plan, for pre-
confirmation periods and simultaneously provide to the United States Trustee an
appropriate affidavit indicating the cash disbursements for the relevant period.
The Debtor, as a reorganized Debtor, shall further pay the United States Trustee
the appropriate sum required pursuant to 28 U.S.C. ss. 1930(a)(6), until the
earlier of the closing of this case by the issuance of a Final Decree by the
Bankruptcy Court, or upon the entry of an Order by the Bankruptcy court
dismissing this case or converting this case to another Chapter under the United
States Bankruptcy Code, and the reorganized Debtor shall provide to the United
States Trustee upon the payment of each post-confirmation payment an appropriate
affidavit indicating all the cash disbursements from the relevant period.
3.12 Blank Ballots Any Ballot not filed in accordance with the
filing instructions on the Ballot pertaining to this Plan shall not be counted
for voting purposes.
14
<PAGE>
ARTICLE IV
----------
Impairment
----------
4.1 Claims in Classes 4, 5 and 6 are impaired under this Plan.
Impaired classes will be treated as fully set forth in Article III above.
ARTICLE V
---------
Means of Execution and Security for Payments
--------------------------------------------
5.1 The distribution of cash required under the Plan, shall be made
from available funds of the Debtor or as may be available for distribution on or
before the Effective Date or, as otherwise agreed to by Debtor and the holders
of Allowed Priority Claims and Allowed Unsecured Claims.
5.2 The Distribution of cash required under Article III of the Plan
shall, as set forth in such Article, be made from the continuing operations of
Debtor prior to the Effective Date or by the reorganized Debtor following the
Effective Date.
5.3 [Omitted]
5.4 Upon the entry of the Confirmation Order, the reorganized Debtor
shall be vested with all of its property free and clear of all claims and
interests of creditors, except as otherwise provided for herein.
5.5 After the entry of an Order of Confirmation, the reorganized
Debtor shall continue its business and manage its affairs without further
supervision of the Court.
5.6 Furr and Cohen shall be the initial disbursing agent and shall
be responsible for making the payments under the Plan due on the Effective Date.
All payments thereafter will be made by the Debtor. The payments shall be as
provided in Article III.
15
<PAGE>
5.7 Unclaimed Distributions. Any checks mailed by the disbursing
agent for the initial payment to a particular creditor which remains unclaimed
ninety (90) days after mailing, shall constitute "unclaimed funds" which shall
become the Debtor's property. A distribution of funds is unclaimed, if, without
limitation, the holder of a Claim entitled thereto does not cash a check or
returns a check or if the check mailed to the holder at the address set forth in
the Debtor's Schedule of Liabilities or set forth in a proof of claim filed by
such holder is returned by the United States Postal Service as undeliverable.
Any funds unclaimed shall be forfeited by the holder otherwise entitled thereto,
and all rights, title and interest therein shall thereupon vest in the
Reorganized Debtor.
ARTICLE VI
----------
Executory contracts
-------------------
6.1 Any and all Executory Contracts and unexpired leases of the
Debtor not expressly assumed herein, assumed prior to the Confirmation Date, or
not at the Confirmation Date the subject of pending application to assume, shall
be deemed to be rejected.
6.2 Debtor has present intentions to assume certain leases of office
equipment and its music licensing contracts. The debtor intends to file motions
to assume same prior to the Confirmation date.
6.3 Any claims for rejected contracts shall be paid in Class 5 upon
determination by agreement or by the Court. Any proof of claim for damages
arising from the rejection must be filed with ;the Court within thirty (30) days
after the entry of an Order allowing the rejection of the contract.
16
<PAGE>
ARTICLE VII
Effect of Confirmation
7.1 Discharge - Except as otherwise provided in this Plan,
Confirmation of the Plan and full compliance and performance with the Plan,
shall be deemed to have discharged the Debtor from any Claim that arose on or
prior to the confirmation Date, and any Claim of a kind specified in Section
502(g), (h) or (i) of the Code, whether or not:
(a) a Proof of the Claim is filed or deemed to be filed under
Sections 501 and 1111(a) of the Code;
(b) such Claim is allowed under Section 502 of the Code; or
(c) the holder of such Claim has accepted the Plan.
The payments to be made by Debtor pursuant to this Plan shall be in
full settlement and satisfaction of all Claims against Debtor.
ARTICLE VIII
------------
Cram Down, Modification, Substantive Consolidation
--------------------------------------------------
UTILIZATION OF CRAM DOWN
------------------------
If all of the applicable provisions of 11 U.S.C. ss. 1129(a) other
than paragraph (8), are found to have been met with respect to the Plan, Debtor
may seek confirmation pursuant to 11 U.S.C. ss. 1129(b) of the Code. For the
purposes of seeking confirmation under the Cram-down provisions of the Code,
should that alternative means of confirmation prove to be necessary, Debtor
reserves the right to modify or vary the treatment of the claims of the
rejecting Classes so as to comply with ss. 1129(6) of the Code.
17
<PAGE>
MODIFICATION OF PLAN
--------------------
Prior to Confirmation At any time prior to the Confirmation Date,
the Proponent may modify the Plan, but may not modify the Plan so that the Plan
as modified fails to meet the requirements of Sections 1122 and 1123 of the
Code. If the Proponent files a modification with the Court, the Plan as modified
shall become the Plan.
After Confirmation. At any time after the Confirmation Date, and
before Substantial Consummation, the Proponent may modify the Plan but may not
modify the Plan so that the Plan as modified fails to meet the requirements of
Sections 1122 and 1123 of the Code. The Plan as modified under this Section
becomes the Plan only if the Court, after notice and a hearing, confirms such
Plan, as modified, under Section 1129 of the Code.
ARTICLE IX
----------
Retention of Jurisdiction
-------------------------
9.1 From and after entry of the Confirmation order, the Bankruptcy
Court shall retain such jurisdiction as is legally permissible over the
reorganization Case for the following purposes:
(a) to hear and determine any and all objections to the allowance on
any Claim or any controversy as to the classification of Claims;
(b) to hear and determine any and all applications for compensation
and reimbursement of expenses to professionals as well as to hear and determine
claims entitled to priority under Section 507(a)(1) of Title 11;
(c) to enable the Debtor to prosecute any and all proceedings which
may be brought to set aside liens or encumbrances and to recover any transfers,
assets, properties or damages to which the Debtor may be entitled under
applicable provision of the Code or any other Federal, State or local laws;
18
<PAGE>
including causes of action, controversies, disputes, and conflicts between the
Debtor and any other party, including but not limited to any causes of action
for objections to claims, preferences or fraudulent transfers and obligations or
equitable subordination; and to enter any Order assuring that good, sufficient
and marketable legal title is conveyed to the purchaser of the Debtor's
property.
(d) to consider any necessary valuation issues under Section 506 of
the Code, and any proceeding to determine the amount, validity and priority of
liens, in connection with the Debtor's property.
(e) to determine the rights of any party in respect of the
assumption or rejection of any executory contracts or unexpired leases.
(f) to correct any defect, cure any omission, or reconcile any
inconsistency in the Plan or Order of Confirmation, as may be necessary to carry
out the purposes and intent of this Plan.
(g) to modify this Plan after Confirmation, pursuant to the Code.
(h) to enforce and interpret the terms and conditions of the Plan.
(i) to enter Orders to enforce the title, rights and power of the
Estate as the Court may deem necessary.
(j) to enter Orders concluding and closing this case.
ARTICLE X
---------
Officers and Directors
----------------------
The following individuals shall hold the position indicated as an
officer and/or director of the Reorganized Debtor, at the compensation stated,
subject to change by action of the Board of Directors. They are insiders.
President, CEO and Director Edward Steele $167,500.00
Vice President And Director Edward Pearson $ 75,000.00
Secretary & Treasurer John Klecha $ 75,000.00
Director Paul Wu $ NONE
19
<PAGE>
ARTICLE XI
----------
Miscellaneous
-------------
11.1 Headings. Headings are utilized in this Plan for the
convenience of reference only, and shall not constitute a part of this Plan for
any other purpose.
11.2 Defects, Omissions and Amendments. This Plan may be altered,
amended or modified by Debtor before or after the Confirmation Date as provided
in Section 1127 of the Code.
11.3 Governing Law. Except to the extent that the Code is
applicable, all rights and obligations arising under this Plan shall be governed
by, and construed and enforced in accordance with, the laws of the State of
Florida.
11.4 Severability. Should any provision in this Plan be determined
to be unenforceable, such determination shall in no way limit or affect the
enforceability and operative effect of any or all other provisions of this plan.
11.5 Regulatory Approval. No regulatory approval is necessary for
the confirmation of this Plan.
11.6 Savings Clause. Any minor defect or inconsistency in the Plan
may be corrected or amended by the Confirmation Order.
11.7 No Admissions. The preparation and filing of this Plan and the
Disclosure Statement were undertaken, in part, as a means of settling disputes
among various parties in interest in the Case and is offered by the Proponent,
in part, as an offer in compromise by the Proponent in the Plan to other parties
in interest in the Case. No statement or omission by Proponent in the Plan or
20
<PAGE>
the Disclosure Statement, including any statement concerning the estimated
Allowed Amount of any Claim, shall preclude or estop the Proponent from
objecting to any Claim, and no such statement or omission shall constitute, or
be deemed to constitute, any type of admission, waiver or estoppel on the part
of the Proponent, and nothing stated or unstated by the Proponent shall be
admissible against the Proponent except in the hearings on the adequacy of the
Disclosure Statement and the confirmation of the Plan.
DATED: December 17, 1997
The Singing Machine Company, Inc.
By: /s/ John Klecha
------------------------------
John Klecha, Secy./Treas.
I HEREBY CERTIFY that I am admitted to the Bar of the United States District
Court for the Southern District of Florida and I am in compliance with the
additional qualifications to practice in this Court set forth in Local Rule
910(A).
FURR AND COHEN, P.A.
Attorney for Debtor
1499 W. Palmetto Park Road
Suite 412
Boca Raton, FL 33486
561-395-0500
By /s/ Robert C. Furr
--------------------------------
ROBERT C. FURR, ESQ.
Florida Bar No. 210854
LISA J. CHAIKLIN AFLALO, ESQ.
Florida Bar No. 873179
21
<PAGE>
EXHIBIT 10.6
UNITED STATES BANKRUPTCY COURT FOR THE
SOUTHERN DISTRICT OF FLORIDA
Case No.: 97-22199-BKC-RBR
Chapter 11
In re:
THE SINGING MACHINE COMPANY, INC.,
_________________________________ Debtor./
ORDER CONFIRMING DEBTOR'S AMENDED PLAN
A hearing was held on February 26, 1998 to consider the confirmation of
an amended plan, dated December 17, 1997, filed by The Singing Machine Company,
Inc., under chapter 11 of the Bankruptcy Code (the "plan").
The plan having been transmitted to creditors and equity security
holders; and
It having been determined after hearing on notice that:
1. The plan has been accepted in writing by the creditors and equity
holders whose acceptance is required by law; and
2. The provisions of chapter 11 of the Code have been complied with and
that the plan has been proposed in good faith and not by any means forbidden by
law; and
3, With respect to each impaired class of claims or interests, each
holder of a claim or interest has accepted the plan, or will receive or retain
under the plan on account of such claim or interest property of a value, as of
the effective date of the plan, that is not less than the amount that such
holder would receive or retain if the debtor were liquidated under chapter 7 of
the Bankruptcy Code on such date. The plan does not discriminate unfairly, and
is fair and equitable, with respect to each class of claims or interests that
are impaired under the plan, and had not accepted the plan; and
<PAGE>
4. All payments made or promised by the debtor or by a person issuing
securities or acquiring property under the plan or by any other person for
services or for costs and expenses in, or in connection with, the plan and
incident to the case, have been fully disclosed to the court and are reasonable
or, if to be fixed after confirmation of the plan, will be subject to approval
of the court; and
5. The identity, qualifications, and affiliations of the persons who
are to be directors or officers, or voting trustees, if any, of the debtor,
after confirmation of the plan, have been fully disclosed, and the appointment
of such persons to such offices, or their continuance therein, is equitable and
consistent with the interests of the creditors and equity security holders and
with public policy; and
6. The identity of any insider that will be employed or retained by the
debtor and compensation to such insider has been fully disclosed; and
7. The confirmation of the plan is not likely to be followed by the
liquidation, or the need for further financial reorganization, of the debtor or
any successor to the debtor under the plan, unless such liquidation or further
reorganization is proposed in the plan.
IT IS THEREFORE:
ORDERED that the plan is confirmed; and it is further
ORDERED that the post-petition financing with Bankers Capital approved
in this Court's Order dated September 5, 1997 is hereby ratified and shall
continue with the reorganized debtor under the same terms of such Order; and it
is further
2
<PAGE>
ORDERED that the Court shall retain jurisdiction as provided in the
plan until there is substantial consummation of the plan; the plan is modified
if it calls for retention of jurisdiction beyond that point; and it is further
ORDERED that the debtor shall pay the United States Trustee the
appropriate sum required pursuant to 28 U.S.C. Section 1930(a)(6) within ten
(10) days of the entry of this order for pre-confirmation periods and
simultaneously provide to the United States Trustee an appropriate affidavit
indicating the cash disbursements for the relevant period; and the reorganized
debtor shall further pay the United States Trustee the appropriate sum required
pursuant to 28 U.S.C. ss. 1930(a)(6) for post-confirmation periods within the
time period set forth in 28 U.S.C. ss. 1930(a)(6), until the earlier of the
closing of this case by the issuance of a Final Decree by the Court, or upon the
entry of an Order by this Court dismissing this case or converting this case to
another chapter under the United States Bankruptcy Code, and the party
responsible for paying the post-confirmation United States Trustee fees shall
provide to the United States Trustee upon the payment of each post-confirmation
payment an appropriate affidavit indicating all the cash disbursements for the
relevant period; and it is further
ORDERED that Robert C. Furr, Esq. of Furr and Cohen, P.A., is named as
disbursing agent without additional compensation; bond is waived; the disbursing
agent is directed to make all first installment payments on the effective date
of the plan. The disbursing agent shall, not later than sixty (60) days after
this Order becomes final, file a Final Report of Estate and Motion for Final
Decree Closing Case on the Court approved local form. Failure to timely file the
Final Report of Estate and Motion For Final Decree Closing Case will result in
the imposition of sanctions against the debtor's counsel, which may include the
return of attorney's fees; and it is further
3
<PAGE>
ORDERED, that the Court will conduct a post-confirmation status
conference on June 19, 1998 at 9:30 A.M., in Courtroom 308, U.S. Courthouse, 299
East Broward Blvd., Ft. Lauderdale, FL, to determine: (i) whether the debtor has
complied with he provisions of this Order, and (ii) whether the disbursing agent
and the plan proponent have timely filed the required Final Report of Estate and
Motion For Final Decree Closing Case. At the status conference, the Court will
consider the propriety of dismissal or conversion to chapter 7, and/or the
imposition of sanctions against the debtor and/or the debtor's disbursing agent
for failure to timely file the Final Report of Estate and Motion For Final
Decree Closing Case or for failure to comply with the provisions of this Order.
DONE and ORDERED this 26 day of February, 1998.
/s/ Raymond B. Ray
------------------------------
Raymond B. Ray, Judge
United States Bankruptcy Court
xc: Attorney for Debtor
U.S. Trustee
ALL CREDITORS (The Debtor's counsel is directed to immediately mail a
conformed copy of this Order to all creditors and parties in interest and file a
certificate of mailing with the Court)
4
<PAGE>
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF FLORIDA
IN RE: CASE NO. 97-22199-BKC-RBR
THE SINGING MACHINE COMPANY, INC. CHAPTER 11
Tax ID#95-3795478
Debtor.
- ----------------------------------/
ORDER AMENDING AMENDED PLAN OF REORGANIZATION
AND ORDER CONFIRMING DEBTOR'S AMENDED PLAN
This cause came before the Court upon the Debtor's Ex-Parte Motion to
Amend the Plan of Reorganization and Confirmation Order wherein the Debtor
requested that the Amended Plan of Reorganization and Confirmation Order entered
by this Court on February 26, 1998 be amended to provide that the record date
and payable date for purposes of effectuating the reverse stock split of the
Debtor's securities and the issuance of shares to those creditors that are
exchanging debt for equity, be extended for fourteen (14) days from and after
approval of the amendment to provide the Debtor with the opportunity to comply
with the National Association of Securities Dealers, Inc. ("NASD") regulations.
After review of the Motion and finding that good cause to Amend the Confirmation
Order, it is
ORDERED AND ADJUDGED as follows:
1. The Debtor's Amended Plan of Reorganization and the Order Confirming
Debtor's Amended Plan of Reorganization entered by the Court on February 26,
1998 are amended to add and include the following paragraph:
ORDERED THAT the record date and payable date for purposes of
effectuating the reverse stock split of the Debtor's securities and the
issuance of shares to the creditors whose debt is being converted to
stock is extended fourteen (14) days from the date of this Order to
provide the Debtor with the opportunity to comply with the National
Association of Securities Dealers, Inc. ("NASD") regulations.
DONE AND ORDERED in the Southern District of Florida this 17th day of
March, 1998.
/s/ Raymond B. Ray
-----------------------------------------
RAYMOND B. RAY, Judge
UNITED STATES BANKRUPTCY JUDGE
COPIES FURNISHED TO:
Robert C. Furr, Esq.
Furr and Cohen, P.A.
1499 W. Palmetto Pk.Rd.#412
Boca Raton, Florida 33486
Office of Asst. U.S. Trustee
51 S.W. 1 Avenue
Room 1204
Miami, Florida 33130
The Singing Machine Company, Inc.
3101 Northwest 25th Avenue
Pompano Beach, FL 33069
Susan Sherrill, Esq.
Securities & Exchange Commission
Branch of Reorganization
Suite 1000
3475 Lenox Road, NE
Atlanta, GA 30326-1323
David Carter, Esq.
Special Counsel to DIP
2300 Glades Road
Boca Raton, FL 33431
<PAGE>
DAVID A. CARTER, P.A.
ATTORNEY AT LAW
2300 GLADES ROAD
SUITE 210, WEST TOWER
DAVID A. CARTER* BOCA RATON, FLORIDA 33431 NEW YORK OFFICE
---------- -------------- GUSRAE, KAPLAN & BRUNO
OF COUNSEL (561) 750-6999 120 WALL STREET
BERT L. GuSRAE** FACSIMILE (561) 367-0960 NEW YORK, NY 10005
(212) 269-1400
*MEMBER OF FLA. AND IOWA BAR
**MEMBER N.Y, SAFI ONLY
February 24, 2000
Board of Directors
The Singing Machine Company, Inc.
6601 Lyons Road, Building A-7
Coconut Creek, Florida 33073
Gentlemen:
Reference is made to your Registration Statement on Form SE-2 (the
"Registration Statement") filed with the United States Securities and Exchange
Commission (the "Commission") with respect to the proposed sale by the Selling
Securityholders of the Company of 2,753,249 shares of common stock, $.001 par
value (the "Common Stock").
Based upon the Registration Statement (including the Prospectus
contained therein and the exhibits thereto), a certificate of the Secretary of
State of the State of Delaware and the financial statements of the Company, we
are of the opinion that:
1. The Company is duly organized and existing under the laws of the
State of Delaware;
2. All of the issued and outstanding shares of the Common Stock of the
Company have been validly authorized, legally issued, fully paid and
non-assessable;
3. The 2,753,249 shares of Common Stock proposed to be sold by the
Selling Securityholders for sale to the public assuming exercise of
all Options and Warrants, will be validly authorized, legally issued,
fully paid and non-assessable.
In arriving at the foregoing opinion, we have relied, among other
things, upon the examination of the corporate records of the Company and
certificates of officers of the Company and of public officials. We hereby
consent to the use of this opinion in the Registration Statement and all
amendments thereto, and to the reference to our firm name under the caption
"Legal Matters" of the Prospectus which is included as part of the
Registration Statement.
Very truly yours,
/s/ DAVID A. CARTER, P.A
---------------------------
DAVID A. CARTER, P.A.
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in the Form SB-2 Registration Statement of The
Singing Machine Company, Inc. our report as of March 31, 1999, dated July 23,
1999 relating to the consolidated financial statements of The Singing Machine
Company, Inc. which appear in such Form SB-2, and to the reference to our Firm
under the heading "Experts" in the prospectus.
/s/ WEINBERG & COMPANY, P.A.
--------------------------------
WEINBERG & COMPANY, P.A.
Certified Public Accountants
Boca Raton, Florida
March 1, 2000
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in the Form SB-2 Registration Statement of The
Singing Machine Company, Inc. our report as of March 31, 1998, dated October 12,
1998, relating to the consolidated financial statements of The Singing Machine
Company, Inc. which appear in such Form SB-2, and to the reference to our Firm
under the heading "Experts" in the prospectus.
/s/ SAMUEL F. MAY JR. & COMPANY
-------------------------------
SAMUEL F. MAY JR. & COMPANY
Certified Public Accountants
Boca Raton, Florida
March 1, 2000
<PAGE>
POWER OF ATTORNEY
We, the undersigned officers and directors of THE SINGING MACHINE
COMPANY, INC. do hereby constitute and appoint JOHN KLECHA our true and lawful
attorney and agent to do any and all acts and things and to execute any and all
instruments which said attorney and agent may deem necessary and advisable to
enable said corporation to comply with the Securities Act of 1933, as amended,
and any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Registration Statement or any registration
statement for the same offering that is effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, as amended, including, specifically,
but without limitation, power and authority to sign for us or any of us and all
amendments hereto; and we do hereby ratify and confirm all that the said
attorney and agent shall do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form SB-2 has been signed herein below
by the following persons in the capacities and on the dates indicated.
Signature Title
- --------- -----
___________________________ Chairman of the Board of Directors and
Edward Steele Chief Executive Officer
__________________________ Chief Operating Officer,
John F. Klecha Chief Financial Officer and Director
__________________________ Director
Josef A. Bauer
__________________________ Director
Alan Schor
