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
Delaware 5065 95-3795478
-------------------------------- ----------------------------- ------------------
(State or other jurisdiction (Primary Standard (IRS Employer
of incorporation or organization) Industrial Classification) Identification No.)
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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.
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
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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
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Common Stock 2,447,249 $3.50 $8,565,371.50 $2,261.25
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(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.
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.
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.
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.
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
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
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(1) assuming full exercise of all Options and Warrants and full conversion of the Preferred Stock.
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
Nine Months Ended
Year Ended March 31, December 31,
1998 1999 1998 1999
---------- -------- -------- ---------
(Unaudited)
(In thousands, except per share data)
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
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Balance Sheet Items
Nine Months As adjusted
Year Ended Ended for Exercise
March 31, December 31, of Options and
1999 1998 1999 Warrants(1)
--------- ---------- ------------- ------------
(Unaudited)
(In thousands)
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
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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.
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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.
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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.
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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.
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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.
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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:
Use Amount Percent
--- ------ -------
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%
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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.
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.
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.
Fiscal Period *High Bid *Low Bid 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) |
*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.
SELECTED FINANCIAL DATA
Nine Months Ended
Year Ended March 31, December 31,
1998 1999 1998 1999
-------- -------- -------- ------
(Unaudited)
(In thousands, except per share data)
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
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Nine Months As adjusted
Year Ended Ended for Exercise
March 31, December 31, of Options and
1999 1998 1999 Warrants(1)
--------- ---------- ------------- ------------
(Unaudited)
(In thousands)
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
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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.
Nine Months Ended
Year Ended March 31, December 31,
1999 1998 1999 1998
---------- ---------- -------- ------
(Unaudited)
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
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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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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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.
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.
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.
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.
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
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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
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.
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"):
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
---------------------- ---- ------ ----- ----- ------- ------------ ------- ------------
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-
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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.
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
------------------ --------------- -------------- ---------- ---------------
Edward Steele 350,000 70.1% $ .43 12/9/05
John Klecha 100,000 20.0% $ .43 12/9/05
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The following table sets forth information as to Options held by the executive officers named in the Summary Compensation Table
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
------------------ ------------- -------- --------------- -------------
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
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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
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
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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
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.
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.
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.
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:
Percentage of Shares (1)
Name & Address Position with Company Number of Shares Before Offering After Offering
-------------- --------------------- ---------------- --------------- --------------
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
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(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.
(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.
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.
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.
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.
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.
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).
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
---------------- --------------------- ------------------------ ---------------
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
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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
---------------- --------------------- ------------------------ ---------------
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
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(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.
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").
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.
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.
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.................................
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 |
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.
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.
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1999
Additional Total
Common Stock Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
---------------- ---------- -------- -------------
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
========= ======== ======== ========== =========
|
See accompanying notes to consolidated financial statements.
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.
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.
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".
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).
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.
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.
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.
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.
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
|
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
======
|
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)
=========
|
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:
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
==========
|
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.
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
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.
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 |
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 1998
ASSETS
(Restated)
----------
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
============
|
The accompanying notes are an integral part of these statements.
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31,
------------------------------------
1998 1997
------------ --------------
(Restated)
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
============ ==============
|
The accompanying notes are an integral part of these statements.
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended March 31, 1998 (Restated) and 1997
Common Stock Retained Total
$.01 Par Value Additional Earnings Shareholders'
------------------------- Paid-In (Accumulated Equity
Shares Amount Capital Deficit) (Deficit)
---------------------------------------------------------- -----------
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
========= ======== ============ ============ ===========
|
The accompanying notes are an integral part of these statements.
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended March 31,
-----------------------------------
1998 1997
------------ -------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
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
============ =============
|
The accompanying notes are an integral part of these statements.
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.
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.
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.
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:
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
===========
|
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.
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.
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:
Year Ended Year Ended
March 31, 1998 March 31, 1997
------------------ ----------------
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 -% -%
========= =============
|
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.
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.
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.
PART II
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:............................$
=========
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II-1
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:
Number Number of Number of
Date Purchase Of Convertible Common
of Price Units Preferred Stock Net
Name Purchase Per Unit Purchase Shares Warrants Proceeds
---- -------- -------- -------- ------ -------- --------
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
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II-2
Number Number of Number of
Date Purchase Of Convertible Common
of Price Units Preferred Stock Net
Name Purchase Per Unit Purchase Shares Warrants Proceeds
---- -------- -------- -------- ------ -------- --------
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
|
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
Exhibit No. Description of Exhibit ---------- ---------------------- 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 |
II-3
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
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
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit ---------- ---------------------- 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 |
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
|
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;
(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
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
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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,
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 |
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
|
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 05/03/1994
944077763 - 2376345
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.
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
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.
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 |
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 |
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
|
State of Delaware PAGE 1
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
|
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
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
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.
(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
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
(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.
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
|
State of Delaware
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
|
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
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.
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
|
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
|
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
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 |
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.
State of Delaware
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
|
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 ----------------------------------- |
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
|
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").
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 |
State of Delaware
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
|
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
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 |
State of Delaware PAGE 1
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
|
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").
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 |
State of Delaware PAGE 1
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
|
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
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.
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
|
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
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. 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
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.
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.
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
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
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
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.
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
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
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SECRETARY PRESIDENT
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COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, N.J.) TRANSFER AGENT AND REGISTRAR
SPECIMEN
AUTHORIZED SIGNATURE
|
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.
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)
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Additional abbreviations may also be used though not in the above list.
For value received, _______________ hereby sell, assign and transfer unto
------------------------------------------------------------------------- Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint______________________________________________
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.
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
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*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,
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
(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.
(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.
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.
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.
(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.
(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 |
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
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
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
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]
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)
|
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:
(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
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
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.
(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
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.
(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
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.
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
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]
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
|
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
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
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;
(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
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.
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
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 |
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.
"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.
"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.
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.
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
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
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;
(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
(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.
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.
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
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.
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]
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
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EPK:
EPK FINANCIAL CORPORATION
By: /s/ Edward P. King
-----------------------------
Edward P. King
Title: President
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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
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.
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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
TABLE OF CONTENTS
Page
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(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
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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.
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.
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.
The holder of an Administrative Claim.
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
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.
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.
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.
One of the numbered Articles of the Plan.
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.
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.
A day other than a Saturday, a Sunday or a day on which commercial banks in South Florida are authorized or required to close.
This Chapter 11 Case No. 97-22199-BKC-RBR United States Bankruptcy Court for the Southern District of Florida.
(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.
A group of Claims or Interests classified together pursuant to the Plan.
The unsecured priority claims of employees of the Debtor as described, classified and treated in Article 3.5 of the Plan.
The Secured Claim of Bankers Capital as described, classified and treated in Article 3.6 of the Plan.
The Secured Claim of Toyota Motor Credit Corporation as described, classified and treated in Article 3.7 of the Plan.
The Claims of Convenience Claims as described, classified and treated in Article 3.8 of the Plan.
The Claims of general unsecured creditors as described, classified and treated in Article 3.9 of the Plan.
The equity interests of the holders of common shares of the Debtor as described, classified and treated in Article 3.10 of the Plan.
The Bankruptcy Code, 11 U.S.C. Section 101 et seq.
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.
The entry by the Court of the Confirmation Order.
The date on which the Clerk of the Court enters the Confirmation Order on the docket.
A hearing held by the Court on confirmation of the Plan pursuant to
Section 1128 of the Code.
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.
The Claims by those general unsecured creditors which are equal to or less than $300.00 in amount.
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.
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.
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.
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.
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.
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.
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.
The tenth day after the Confirmation Order becomes final, or such other date as this Court shall order.
The estate created in the Case pursuant to Section 541 of the Code.
A contract or unexpired lease to which Debtor is a party and that is executory within the meaning of Section 365 of the Code.
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.
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.
April 11, 1997, the date the Debtor filed its Chapter 11 petition with the Court.
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.
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.
Equity interest of the holders of common stock of the Debtor.
A charge against or interest in any item of Property of the Estate to secure payment of a debt or performance of an obligation.
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).
This Plan of Reorganization in the present form or as it may be modified, amended or supplemented from time to time.
A Claim (other than an Administrative Claim) that is entitled to priority under Section 507 of the Code.
A Claim (other than an Administrative Claim) that is entitled to priority under Section 507(a)(8) of the Code.
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.
The property defined in Section 541 of the Code and any other property right or interest of the Debtor.
The Debtor
An Executory Contract that is rejected at any time during the Case or pursuant to Article VI of the Plan.
A Claim arising under Section 502(g) of the Code in its Allowed Amount.
The Federal Rules of Bankruptcy Procedure, the Federal Rules of Civil Procedure and/or the Local Rules of the Bankruptcy Court.
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.
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.
The holder of a Secured Claim.
Ad valorem taxes assessed against the personal property owned by the Debtor.
Following the occurrence of Confirmation, the date that the first dividend is distributed to creditors.
A Claim other than a Secured Claim, a Priority Claim or an Administrative Claim.
The holder of a unsecured Claim
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.
The following rules of construction shall be applicable for all purposes of the Plan unless the context clearly requires otherwise:
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.
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.
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;
(b) upon such other terms as may be agreed to between the Debtor and each such Administrative Claimant.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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;
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.
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 |
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
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.
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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 |
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
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
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
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)
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
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
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*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. |
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
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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
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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 |