As filed with the Securities and Exchange Commission on March 27, 2001
Registration No. 333- ______
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 (Primary Standard (IRS Employer
jurisdiction of Industrial Classification) Identification No.)
incorporation
or organization)
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Edward Steele
Chief Executive Officer
The Singing Machine Company, Inc.
Edward Steele
6601 Lyons Road 6601 Lyons Road,
Building A-7 Building A-7
Coconut Creek, FL 33073 Coconut Creek, FL 33073
Telephone: (943) 596-1000 Telephone: (954) 596-1000
Facsimile: (954) 596-2000 Facsimile: (954) 596-2000
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(Address and telephone number, (Name, address and telephone
including area code of Registrant's number of agent for service)
principal executive offices)
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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. [ ]
(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, based on the average of the high and low sales prices of the common stock as reported by the American Stock Exchange on March 21, 2001 in accordance with Rule 457 under the Securities Act of 1933.
(3) Pursuant to Rule 429, the registration fee does not include $1,146.96 paid previously in connection with the registration of 1,260,400 shares of our common stock that are being carried forward from Registration Statement No. 333-31882.
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.
Pursuant to Rule 429 promulgated under the Securities Act of 1933, the prospectus that constitutes part of this Registration Statement is a combined prospectus and also relates to an aggregate of 1,025,400 shares of our common stock which were previously registered for sale in a
Registration Statement on Form SB-2 , Registration No. 333-31882. This Registration Statement also constitutes post-effective amendment no. 1 to Registration Statement No. 333-31882. This post-effective amendment shall become effective concurrently with the effectiveness of this Registration Statement in accordance with Section 8(c) of the Securities Act of 1933, as amended.
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 March 26, 2001
PROSPECTUS
1,375,400 Shares of Common Stock
[GRAPHIC OMITTED]
This is an offering of 1,375,400 shares of common stock of The Singing Machine Company, Inc., held by certain of our stockholders. Of the 1,375,400 shares being offered by the selling stockholders, 417,400 shares are issuable upon exercise of warrants held by certain of the selling stockholders and 958,000 shares comprise common stock held by certain selling stockholders. We will not receive any proceeds from the sale of the shares, but we will receive proceeds from the selling stockholders if they exercise their warrants.
Our common stock is quoted on the American Stock Exchange under the symbol "SMD". On March 21, 2001, the closing price per share of our common stock as reported by the American Stock Exchange was $5.05.
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 March 26, 2001
TABLE OF CONTENTS
Prospectus Summary..................................................... 6 Risk Factors........................................................... 9 Use of Proceeds....................................................... 14 Dividend Policy....................................................... 14 Market Price of Common Stock.......................................... 14 Selected Financial Data............................................... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 17 Business.............................................................. 23 Management............................................................ 31 Certain Transactions.................................................. 36 Principal Stockholders................................................ 39 Description of Securities............................................. 40 Selling Stockholders.................................................. 43 Plan of Distribution.................................................. 45 Shares Eligible for Future Sale....................................... 48 Legal Matters......................................................... 49 Experts............................................................... 49 Where You Can Find Additional Information............................. 49 Index to Consolidated Financial Statements............................ 50 |
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
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON SHARES. WE ENCOURAGE YOU TO READ THE ENTIRE PROSPECTUS CAREFULLY ,INCLUDING THE SECTION ENTITLED "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS.
The Company
We are engaged 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(TM) 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 ...................... 1,375,400 shares of Common Stock
Common stock issued and
outstanding prior to this offering........ 4,362,920
Common stock issued and
outstanding after this offering........... 4,780,320(1)
Use of proceeds ........................... All funds received by us upon the
exercise of the warrants will be
used for general corporate
purposes. We will receive gross
proceeds of approximately $687,925
if all the warrants are exercised.
We will not receive any proceeds
from the sale of common stock from
the selling securityholders. See
"Use of Proceeds."
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(1) Assuming full exercise of the 417,400 warrants registered in this prospectus.
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."
Nine Months Ended
Year Ended March 31, December 31,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
(In thousands, except per share data)
Net Sales $ 19,032 $ 9,548 $ 38,863 $ 16,968
Cost of Sales 13,727 7,029 29,350 12,495
Total Operating
Expenses 3,779 1,545 4,806 1,922
Income from operations 1,526 974 4,708 2,551
Other Expenses, net 948 220 561 380
Income before income tax
benefit/expense 578 754 4,147 2,171
Net tax benefit/(expense) 160 170 (760) 0
Net income $ 738 $ 924 $ 3,386 $ 2,171
Net income per common
share basic $ .23 $ .37 $ .81 $ .75
Net income (loss) per common
share diluted $ .19 $ .36 $ .69 $ .53
Shares used in computing net
income (loss) per common
share - basic 2,726 2,475 4,190 2,899
Shares used in computing net
income (loss) per common
share - diluted 3,342 2,592 4,907 4,110
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Nine Months As adjusted
Year Ended Ended for Exercise
March 31, December 31, of the
2000 1999 2000 Warrants(1)
---- ---- ------------ ---------------
(Unaudited)
(In thousands)
Cash (including restricted cash) $ 379 $ 49 $ 411 $ 1,099
Total current assets 3,789 1,813 11,595 12,283
Working capital 3,348 399 7,364 8,052
Total Assets 4,347 2,379 12,276 12,964
Current liabilities 441 1,415 4,231 4,231
Long term obligations -- -- -- --
Total shareholders' equity $ 3,906 $ 965 $ 8,045 $ 8,733
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YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER
INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO PURCHASE OUR COMMON STOCK.
RISKS RELATED TO THE SINGING MACHINE'S BUSINESS AND OPERATIONS
OUR INABILITY TO COMPETE AND MAINTAIN OUR NICHE IN THE ENTERTAINMENT INDUSTRY COULD HURT OUR BUSINESS
The business in which we are engaged is highly competitive. In addition, we must compete with all the 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. Competition in the karaoke industry is based primarily on price, product performance, reputation, delivery times, and customer support. We believe that our new product introductions 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 CUSTOMERS WHICH SUBJECTS US TO RISK
As a percentage of total revenues, our net sales to our five largest customers during the fiscal years ended March 31, 1999 and 2000, were approximately 91% and 70% respectively. For the nine months ended December 31, 2000, two major retailers accounted for 36% and 19% each of our total revenues. During fiscal year 2001, we have 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.
WE HAVE SIGNIFICANT RELIANCE ON LARGE RETAILERS WHICH ARE SUBJECT TO CHANGES IN THE ECONOMY
We sell products to retailers, including department stores, lifestyle merchants, direct mail retailers which are catalogs and showrooms, national chains, specialty stores, and warehouse clubs. Certain of such retailers 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.
WE ARE SUBJECT TO THE RISKS OF DOING BUSINESS ABROAD
We are dependent upon foreign companies for manufacture of all of our electronic products. Our 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 our business. 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 2000 and 1999, suppliers in the People's Republic of China accounted for 88% and 93%, respectively of our total product purchases, including virtually all of our hardware purchases. If Most Favored Nation 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 HAVE SIGNIFICANT FUTURE CAPITAL NEEDS WHICH ARE SUBJECT TO THE UNCERTAINTY OF ADDITIONAL FINANCING
We may need to raise significant additional funds to fund our rapid sales growth and/or implement other business strategies. If 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.
WE ARE SUBJECT TO SEASONALITY WHICH IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS AND CHANGES RESULTING IN FLUCTUATIONS IN QUARTERLY RESULTS
We have experienced, and will experience in the future, significant fluctuations in sales and operating results from quarter to quarter. This is due largely to the fact that a significant portion of our business is derived from a limited number of relatively large customer orders, the timing of which cannot be 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 other considerations described in this section entitled "Risk Factors." 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.
OUR PROPRIETARY TECHNOLOGY MAY NOT BE SUFFICIENTLY PROTECTED
Our success depends on our proprietary technology. We rely on a combination of contractual rights, patents, trade secrets, know-how, trademarks, 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 TO CLAIMS FROM THIRD PARTIES FOR UNAUTHORIZED USE OF THEIR PROPRIETARY TECHNOLOGY
We believe that we independently developed our technology and that it does not infringe on the proprietary rights or trade secrets of others. However, we cannot assure you that we have not infringed on the technologies of third parties or those third parties will not make infringement violation claims against us. Any infringement claims may have a negative effect on our ability to manufacture our products.
CONSUMER DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS AND CHANGES
Our business and financial performance may be damaged more than most companies by adverse financial conditions affecting our business or by a general weakening of the economy. Purchases of karaoke audio software and electronic recording equipment are considered discretionary for consumers. Our success will therefore be influenced by a number of economic factors affecting discretionary and consumer spending, such as employment levels, business, interest rates, and taxation rates, all of which are not under our control. Adverse economic changes affecting these factors may restrict consumer spending and thereby adversely affect our growth and profitability.
WE DEPEND ON THIRD PARTY SUPPLIERS, AND IF WE CANNOT OBTAIN SUPPLIES AS NEEDED, OUR OPERATIONS WILL BE SEVERELY DAMAGED
We rely on third party suppliers to produce the parts and materials we use to manufacture our products. If our suppliers are unable to provide us with the parts and supplies, we will be unable to produce our products. We cannot guarantee that we will be able to 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.
OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF OUR MANAGEMENT TEAM
Our success depends to a significant degree upon the continued contributions of our executive officers, both individually and as a group. Although we have entered into employment contracts with Messrs. Steele and Klecha, the loss of the services of either of these individuals could prevent us from executing our business strategy. See "Management -Directors and Executive Officers" for a listing of our executive officers.
CONTROL BY OUR OFFICERS AND DIRECTORS COULD ADVERSELY AFFECT OUR STOCKHOLDERS
Our officers and directors own in the aggregate approximately 36.7% of our outstanding common stock. As a result, these persons acting together, will have the ability to control substantially all matters submitted to our shareholders for approval and to control our management and affairs. Accordingly, this concentration of ownership may have the affect of delaying, deferring or preventing a change in control us, impeding a merger consolidation, takeover or other business combination involving us or discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could materially adversely affect the market price of the common stock.
YOUR INVESTMENT MAY BE DILUTED
If additional funds are raised through the issuance of equity securities, your percentage ownership in our equity will be reduced. Also, you may experience additional dilution in net book value per share, and these equity securities may have rights, preferences, or privileges senior to those of yours.
OUR ABILITY TO MANAGE GROWTH COULD HURT OUR BUSINESS
To manage our growth, we must implement systems, and train and manage our employees. We may not be able 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.
RISKS ASSOCIATED WITH THIS OFFERING AND OUR CAPITAL STRUCTURE
WE HAVE COMPLETE DISCRETION IN THE APPLICATION OF PROCEEDS FROM THIS OFFERING.
All of the proceeds from this offering have been designated for general corporate and working capital purposes and may be expended at the discretion of our management. As a result of the foregoing, any return on investment to investors will be substantially dependent upon the discretion and judgement of our management with respect to the application and allocation of the net proceeds from this offering.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE
As of March 15, 2001, there were 4,362,920 shares of our common stock outstanding, of which approximately 1,178,883 were restricted securities as that term is defined by Rule 144 under the Securities Act of 1933. The restricted securities will be eligible for public sale only if registered under the Securities Act or sold in accordance with Rule 144. The market price of our common stock could drop due to the sale of large number of shares of our common stock, such as the shares sold under this prospectus or under Rule 144, or the perception that these sales could occur. We also intend to file a registration statement on Form S-8 to register the 1.3 million shares of common stock underlying options issued under our 1994 stock option plan. These factors could also make it more difficult to raise funds through future offerings of common stock. See "Shares Eligible for Future Sale."
ADVERSE EFFECT ON STOCK PRICE FROM FUTURE ISSUANCES OF ADDITIONAL SHARES
Our certificate of incorporation authorizes the issuance of 18,900,000 million shares of common stock. As of March 15, 2001, we had 4,362,920 shares of common stock issued and outstanding and an aggregate of 1,652,400 outstanding options and warrants and 1,656,000 public warrants. As such, our Board of Directors has the power, without shareholder approval, to issued up to 11,228,680 shares of common stock.
Any issuance of additional shares of common stock, whether by us to new shareholders or the exercise of outstanding warrants or options, may result in a reduction of the book value or market price of our outstanding common stock and preferred shares. Issuance of additional shares will reduce the proportionate ownership and voting power of our then existing shareholders.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY AND COULD DEPRESS THE PRICE OF OUR COMMON STOCK.
Delaware law and our certificate of incorporation and bylaws contain provisions that could delay, defer or prevent a change in control of our company or a change in our management. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. These provisions of our restated certificate of incorporation include: limiting the persons who may call special meetings of stockholders and establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.
We are also subject to certain provisions of Delaware law that could delay, deter or prevent us from entering into an acquisition, including the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in a business combination with an interested stockholder unless specific conditions are met. The existence of these provisions could limit the price that investors are willing to pay in the future for shares of our common stock and may deprive you of an opportunity to sell your shares at a premium over prevailing prices.
FORWARD LOOKING STATEMENTS
Some of the statements contained in this prospectus contain certain "forward-looking information." All statements, other than statements of historical facts, are forward-looking statements" for purposes of these provisions. These statements include, but are not limited to statements regarding:
* any projections of earnings, revenues or other financial items;
* plans and objectives of management for future operations;
* our estimated growth and operating strategy,
* liquidity and capital expenditures,
* use of proceeds of the offering,
* our ability to cut overhead expenses,
* financing plans,
* industry tends, and
* payment of dividends.
You can identify these statements by forward-looking words, such as "expects," "believes,""plans," "intends," "may" and "will" or similar words. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those
described in the "Risk Factors" section and elsewhere in this Prospectus, that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Important factors that may cause actual results to differ from projections, include, for example:
* our ability to increase our sales of our karaoke products by
identifying new customers and increasing sales to pre-existing
customers;;
* our ability to cut overhead expenses;
* the effect of competition in the industry;
* changing economic conditions;
* our ability to attract and retain quality employees;
* other risks which are described in reports that we have filed with
the SEC and are described in our future filings with the SEC.
We will receive gross proceeds of approximately $687,925 if all the warrants are exercised. We will not receive any proceeds from the sale of shares by the selling stockholders. We currently intend to use the proceeds for working capital and other general corporate purposes. 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.
Holders of our 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 our business. Future dividend policy will be subject to the discretion of the Board of Directors and will be contingent upon future earnings, our financial condition, capital requirements, general business conditions and other factors. Therefore, there can be no assurance that we will ever pay any kind of dividend.
Our common stock currently trades on the American Stock Exchange under the symbol "SMD." We began trading on the AMEX on March 8, 2001. From January 26, 1996 through March 7, 2001, we traded 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 our common stock as traded on the OTC Bulletin Board for the two most recent fiscal years, as reported by the National Quotation Bureau, Inc. 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 ------------- -------- -------- 2001: ---- First Quarter (April 1 - June 30, 2000) $ 4.25 $2.47 Second Quarter (July 1 - September 30, 2000) 4.06 2.19 Third Quarter (October 1 -December 31, 2000) 6.56 3.44 2000: ----- First Quarter (April 1 - June 30, 1999) $2.59 $1.31 Second Quarter (July 1 - September 30, 1999) 2.09 1.59 Third Quarter (October 1 - December 31, 1999) 2.13 1.63 Fourth Quarter (January 1, 2000 - March 31, 2000) 5.38 1.59 1999: ----- First Quarter (April 1 - June 30, 1998) $2.00 $0.38 Second Quarter (July 1 - September 30, 1998) 0.57 0.41 Third Quarter (October 1 - December 31, 1998) 0.50 0.43 Fourth Quarter (January 1 - March 31, 1999) 2 .50 0.48 |
On March 21, 2001, the closing bid price of our common stock as reported on the American Stock Exchange was $5.05 per share.
As of March 15, 2001, there were approximately 311 record holders of our outstanding common stock and approximately 748 beneficial owners of our common stock.
Nine Months Ended
Year Ended March 31, December 31,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
(In thousands, except per share data)
Net Sales $19,032 $ 9,548 $38,863 $16,968
Cost of Sales 13,727 7,029 29,350 12,495
Total Operating
Expenses 3,779 1,545 4,806 1,922
Income from operations 1,526 974 4,708 2,551
Other Expenses, net 948 220 561 380
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Income before income tax benefit/expense 578 754 4,147 2,171 Net tax benefit/(expense) 160 170 (760) 0 Net income $ 738 $ 924 $ 3,386 $ 2,171 Net income per common share basic $ .23 $ .37 $ .81 $ .75 Net income (loss) per common share diluted $ .19 $ .36 $ .69 $ .53 Shares used in computing net income (loss) per common share - basic 2,726 2,475 4,190 2,899 Shares used in computing net income (loss) per common share - diluted 3,342 2,592 4,907 4,110 |
Nine Months As adjusted
Year Ended Ended For Exercise
March 31, December 31, of
1999 2000 2000 Warrants(1)
---- ---- -------------- ---------------
(Unaudited)
(In thousands)
Cash (including restricted cash) $ 49 379 411 1,099
Total current assets 1,813 3,789 11,595 12,283
Working capital (deficit) 399 3,348 7,364 8,052
Total Assets 2,379 4,347 12,276 12,964
Current liabilities 1,415 441 4,231 4,231
Long term obligations -- -- -- --
Total shareholders' equity $ 965 $ 3,906 $ 8,045 $ 8,733
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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,
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited)
Net Sales 100% 100% 100% 100%
Cost of goods sold 72.1 73.6 75.5 73.2
Total Operating Expenses 19.9 16.2 12.4 11.3
Income from operations 8.0 10.2 12.1 15.0
Other expenses, net 5.0 2.3 1.4 2.2
Income before taxes 3.0 7.9 10.7 12.8
Income tax benefit/
Expense .8 1.8 (2.0) 0
Net income (loss) 3.8 9.7 8.7 12.8
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NINE MONTHS ENDED DECEMBER 31, 2000
Revenues - Our revenues increased by 129% to $38,863,338 for the nine month period ended December 31, 2000, compared with revenues of $16,967,618 during the same period in 1999. The increase in total revenues can be attributed to the addition of a major customer. It can also be attributed to the growing popularity of karaoke as wholesome family entertainment.
Gross Profit - Our gross profit from equipment and music sales increased by 112% to $9,513,764, for the nine month period ended December 31, 2000, compared with gross profit of $4,472,876, for the same period in 1999.
Cost of Sales/Gross Profit - Our SG&A expenses were $4,806,055, or 12.4% of total revenues, and $1,921,996, or 11.3% of total revenues, for the nine month periods ended December 31, 2000 and 1999. The period-to-period increase in SG&A expenses is due to (1) an increase in salary related expenses due to an increase in corporate office staff, (2) a non-cash expense due to the continued amortization of stock based guarantee fee, and (3) increases in sales based expenses such as commissions and royalties.
Depreciation and Amortization Expenses - Depreciation and amortization expenses were $93,194, or .23% of total revenues and $82,820, or .48% of total revenues, for the nine month periods ended December 31, 2000 and 1999. This increase in depreciation and amortization expenses can be attributed to the addition of new tooling for the production of machines
Other Expenses - Net interest expense was $404,486, or 1.04% of total revenues, and $48,681, or .48% of total revenues, for the nine months ended December 31, 2000 and 1999. The increase in net interest expense can be attributed to our increased use of our credit line facilities to fund the inventory necessary to meet demand for our products.
Loss on sales of accounts receivable was $212,744, or .5% of total revenues, and $347,689, or 2.0% of total revenues, during the nine month periods ended December 31, 2000 and 1999. This decrease is due to decreased charges on factored invoices. These decreased charges are the result of a larger total amount of invoices being factored, which in turn decreased the interest percentage and gives us better terms of factor.
Income Before Income Tax Expense - As a result of the foregoing, our net income before income tax expense increased by 91.1% to $4,146,503, for the nine month period ended December 31, 2000 compared with $2,170,652, for the same period in 1999.
Income Tax Expense - As of the nine months ending December 31,2000, we had incurred an estimated income tax of $760,038. During previous periods, we did not have to pay income taxes, because we used our tax-loss carry-forwards. As of December 31, 2000, we had used up our tax-loss carry-forwards in our Hong Kong subsidiary and will have to pay income taxes based on Hong Kong rates. We expect our income tax rate to be approximately 22% in future quarters, reflecting the combined tax rates on our operations in the U.S. and Hong Kong.
Net Income - As a result of the foregoing, our net income increased by 56.0% to $3,386,465, for the nine month period ended December 31, 2000, compared with net income of $2,170,652 for the same period in 1999.
THE YEAR ENDED MARCH 31, 2000 AS COMPARED
TO THE YEAR ENDED MARCH 31, 1999
Revenues - Total revenues increased to approximately $19.0 million for the fiscal year ended March 31, 2000, compared to approximately $9.5 million reported for fiscal 1999. This increase was primarily due to increased sales and distribution to both traditional and internet based accounts, expansion into the UK market, and increased sales with existing accounts through marketing of additional machines and music.
Gross Profit - Gross profit increased 111% to approximately $5.3 million in fiscal 2000, or 27.9% of net sales from approximately $2.5 million or 26.4% of net sales in fiscal 1999. The increase in gross profit was primarily due to the increased sales of our popular CDG players and sales to new accounts.
Cost of Sales/Gross Profit - Income from operations for fiscal 2000 was approximately $1,525,668 versus $973,000 for fiscal year 1999 or approximately a 57% increase. During fiscal 2000, we incurred non-cash charges to operations of approximately $852,000 for stock based compensation. Of this amount, $381,580 was related to the issuance of stock options to consultants, $434,274 to the issuance of common stock for guarantee fees and $35,812 to the issuance of common stock for professional services.
Operating Expenses - Total operating expenses increased approximately $2.2 million or 145% to approximately $3.8 million or 19.9% of net sales during fiscal 2000, from approximately $1.5 million or 16.2% of net sales for fiscal 1999. The increase was primarily due to (1) the recognition of non-cash expenses relating to the common stock, stock options and warrants, (2) a significant increase in sales commissions, (3) warranty expenses, (4) advertising and travel expenses (due to the 100% increase in sale) and (5) new product development costs.
Depreciation and Amortization - Depreciation and amortization expense decreased approximately $28,000 or 19.3% to $116,000, during the fiscal 2000. This decrease was primarily due to the Singing Machine's music library being fully amortized during fiscal 1999.
Other Expenses - Net expenses were $947,982, or 5 % of total revenues and $219,495 or 2.3% of total revenues for fiscal 2000 and 1999. Net expenses consisted of other income, royalty income, and interest income offset by interest expense, stock based guarantee fees and factoring fees. Net interest and factoring expenses increased approximately $303,000 to $525,000 during fiscal 2000 compared to approximately $222,000 during fiscal 1999. During fiscal 2000, we incurred an expense in connection with acquiring a short-term letter of credit facility and increased factoring expenses due to the increase in sales from our domestic warehouse.
Loss on accounts receivable due to factoring was 2.3% of total revenues for both of the fiscal 2000 and 1999. Although more accounts receivable were factored during fiscal 2000, we were able to negotiate lower factoring rates due to an increase in volume.
Net Income - As a result of the foregoing, our net income for fiscal 2000 was approximately $738,000 versus approximately $924,000 for fiscal 1999. Approximately $852,000 charged to earnings during fiscal 2000 was a result of the recognition of non-cash expenses related to options and warrants granted which had exercise prices below their fair market value on the date of grant. These non-cash charges had no effect upon our operations or cash flow and are non-recurring item.
FINANCIAL CONDITION AND LIQUIDITY
At December 31, 2000, we had current assets of $11,594,951 and total assets of $12,275,603 compared to current assets of $3,788,929 and total assets of $4,346,901 at March 31, 2000. This increase in current assets and total assets is primarily due to the increase in accounts receivable and inventory.
Current liabilities increased to $4,230,736 as of December 31, 2000, compared to $440,615 at March 31, 2000. This increase in current liabilities is because of increased accounts payable, increased accrued expenses, an income tax payable and the increased use of our credit lines to fund future sales. We increased the use of credit lines primarily to purchase more inventory. Accounts payable increased to $1,517,104 as of December 31, 2000 from $354,193 as of March 31, 2000, primarily as a consequence of our increased expenditures to finance our sales efforts.
Our shareholder equity increased from $3,906,286 as of March 31, 2000, to $8,044,868 as of December 31, 2000. Our increase in shareholder equity has occurred because of the increase in equity capital of $580,645 due primarily to exercise of warrants and options and amortization and deferred guarantee fees of $171,472. In addition, our retained earnings increased in the amount of $3,386,465.
Cash flows generated from operating activities were $1,623,779 during the nine month period ended December 31, 2000. Cash used in investing activities during the nine month period ended December 31, 2000 was $(2,376,018). Cash flows from financing activities were $784,575 during the nine month period ended December 31, 2000. This consisted of proceeds in the amount of $580,645 from the exercise of warrants and options, and proceeds from certain loans.
CAPITAL RESOURCES
We have obtained significant financing for continuing operations and growth. One (1) line of credit has been opened through our Hong Kong subsidiary, and two (2) financing agreements through our U.S. operations. We have also obtained a commitment from LaSalle Business Credit to receive a $10 million credit facility.
BELGIAN BANK
Effective February 14, 2000, we, through our Hong Kong subsidiary, obtained a credit facility of $500,000 (US) 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 held by Belgian Bank. There is no maturity date 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.
MAIN FACTORS, INC.
We are a party to a factoring agreement, dated April 7, 2000, as amended, with Main Factors, Inc. pursuant to which Main Factors has agreed to purchase certain of our accounts receivable. Under the agreement, Main Factors will purchase certain selected accounts receivable from us and advance between 75% and 85% of the face value of those receivables to us. The accounts receivable are purchased by Main Factors without recourse and Main Factors performs an intensive credit review prior to the purchase of the receivables.
We are charged a variable percentage from 1.5% to 1% based upon the total amount of factored receivables within a calendar year. Main Factors has placed no maximum limit on the amount of our receivables it will purchase. The factoring agreement is personally guaranteed by John Klecha, our Chief Operating Officer and Chief Financial Officer.
EPK FINANCIAL CORPORATION
We have entered into an agreement with EPK Financial Corporation ("EPK") whereby EPK will open letters of credit with our 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, thus providing our customers with flexibility, and further, saving the customer the expense of opening a letter of credit in favor of us. The selling price to these customers is considerably higher because we pay financing costs to EPK and incur costs of ocean freight, duty, and handling charges. Upon shipment of product from these financed transactions, the receivables are factored by Main Factors, thereby buying the shipments and related interest from EPK.
We pay EPK a negotiated flat fee per transaction, and the maximum purchase price per transaction is $1,000,000. There have 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 pursuant to the EPK agreement. 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 a thirty (30) day written notice.
LA SALLE BUSINESS CREDIT, INC.
Effective March 14, 2001, we obtained a commitment letter from LaSalle Business Credit, Inc. to receive loans and financial accommodations of up to $10 million. The credit facility will be a period of three (3) years commencing on the date of funding and will bear interest at the rate of one-half of one percent (1/2 of 1%) per annum in excess of the publicly announced prime rate of LaSalle Bank National Association. The amounts advanced under the credit facility will be based upon a formula of eligible accounts, eligible inventory and certain other factors. The credit facility will be secured by a lien on all of our assets (other than tooling presently located in China). If the credit facility is not disbursed prior to April 30, 2001, the terms of the commitment letter will be deemed to be null and void, unless otherwise extended by LaSalle Business Credit.
We believe that our current cash and equivalents, lines of credit, and cash generated from operations will satisfy our expected working capital and capital expenditure requirements at least through the next 12 months.
Except for our credit arrangements described herein, we have no present commitment that is likely to result in its 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 is reasonably likely to result in, our 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.
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
We are 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 karaoke 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 was confirmed by the Bankruptcy Court on March 17, 1998. The material terms of our plan of reorganization 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 stockholders, warrant holders, and option holders.
As a result of our 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 our Chapter 11 reorganization, 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 of reorganization 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 our plan of reorganization.
PRODUCT LINES
We currently have a product line of 12 different models of recording and playback units incorporating such features as a CD graphics player, a graphics equalizer and high-output stereo amplifier and markets these products under our trademark, The Singing Machine(TM). 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 12 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.
SUBSIDIARIES
In July 1994, we formed a wholly-owned subsidiary in Hong Kong, now know as International SMC (HK) Ltd., 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.
THE MARKET
Based upon Japanese industry estimates, the karaoke industry exceeds sales of $10 billion in the Far East. The current North American market for karaoke products is estimated at less than $250 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 management's 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 11 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:
the Consumer Electronics Show each January in Las Vegas; the 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(TM) 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, 1999 and 2000, were approximately 91% and 70% respectively. For the fiscal 2000 period, two major retailers accounted for 30% and 10% of total revenues. During fiscal 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.
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.
Domestic Sales. Our strategy of selling products from a domestic warehouse enables us to 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.
Direct Sales. We formed International SMC (HK) Ltd. in 1994 because of our increased sales outside the United States. We ship some hardware products sold by us directly to customers from the Far East through International SMC (HK). Sales made through International SMC (HK) 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 SMC (HK) pursuant to their own international, irrevocable, transferable letters ofcreditor or on open credit with our suppliers in the Far East.
MANUFACTURING AND PRODUCTION
The electronic recording devices sold by us are manufactured and assembled by third parties pursuant to design specifications provided by us. Our electronic recording devices are assembled by three factories in the People's Republic of China. The finished products are packaged and labeled under our trademark, The Singing Machine(TM).
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 International SMC (HK).
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 2000 and 1999, 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, 2000 and 1999, warranty claims have not been material to our results of operations.
LICENSE AGREEMENT WITH MTV
In January 2001, we entered into a multi-year domestic merchandise license agreement with MTV to create the first line of MTV karaoke machine and compact disks with graphics (CD+G) featuring music for MTV's core audience. Under the licensing agreement, we will produce two MTV-branded products: (1) a large format karaoke machine with a built in, fully functional television that enables users to view song lyrics and (2) a small karaoke system that connects to a television. We will also produce exclusive CD+G's featuring music catering to MTV's core audience that will be distributed with the MTV branded karaoke machines.
We plan on distributing the MTV-licensed product through our established distribution channels, including Best Buy, Costco, Toys R Us, JC Penny, Sears, Mars, Musicland and Sam's Club. The high-profile distribution network also may be expanded to include online-only retailers. We would like to have these products in the stores in the spring of 2001. However, there can be no assurances that we will be able to meet this deadline.
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
We have registered various Singing Machine trademarks with the United States Patent & Trademark Office and also have common law rights in the Singing Machine trademarks. We have also registered the Singing Machine trademark in the United Kingdom, Germany, the Benelux countries, Switzerland and the United Kingdom.
COPYRIGHTS 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. We are currently a party to more than 3,000 different written copyright license agreements.
The Federal Copyright 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 Federal Copyright 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 $0.075 per song 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 30 songs in our song library.
The majority of the songs in our song library are subject to written copyright license agreements. Our written licensing agreements for audio software 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, which licenses also typically provide for quarterly payments of royalties at the Statutory Rate.
GOVERNMENT REGULATION
In 2000, the People's Republic of China gained "Most Favored Nation" 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 15 full-time employees, 4 of whom were engaged in warehousing and technical support, and 11 in marketing and administrative functions.
PROPERTIES
Our corporate headquarters are located in Coconut Creek, Florida in an 8,000 square foot office and warehouse facility. Our lease expires on April 30, 2004. In December 2000, we established a corporate office in Hong Kong,
consisting of 2,000 square feet. We share this office space with Toy Concepts International. Our lease expires on October 31, 2002. We also have three warehouse facilities, two in California and one warehouse in Florida.
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 these leased facilities are 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 for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, case number 97-22199-BKC-RBR, on April 11, 1997. On March 17, 1998, the U.S. Bankruptcy Court confirmed our First Amended Plan of Reorganization. As of June 10, 1998, our 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.
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 71 Chief Executive Officer and
Director
John F. Klecha 50 President, Chief Financial Officer,
Chief Operating Officer,
Secretary, Treasurer,
and Director
Josef A. Bauer 63 Director
Howard W. Moore 70 Director
Robert J. Weinberg 52 Director
|
Edward Steele has served as the Chief Executive Officer and as a director of the Singing Machine from September 1991 through the present date. He also served as our President from September 1991 through March 2001. 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 us, 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 served as our Chief Financial Officer, Secretary, Treasurer and Director from October 10, 1997 through the present date. Since June 28, 1999 through the present date, Mr. Klecha has also served as Chief Operating Officer and since March ,2001, Mr. Klecha has served as our President. Mr. Klecha is in charge of all financial, administrative, and operational functions of the Singing Machine. 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.
Josef A. Bauer has served as a director from October 15, 1999 through the present date. Mr. Bauer previously served as a director of the Singing Machine from February 1990 until September 1991 and from February 1995 until May 1998. Mr. Bauer presently serves as the Chief Executive Officer of the following three companies: Banisa Corporation, a privately owned investment company, since 1975; Trianon, a jewelry manufacturing and retail sales companies since1978 and Seamon Schepps, also a jewelry manufacuturing and retail sales company since 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 until 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 manufacturing of automobile audio equipment. Mr. Bauer also served as a director of AmeriData Technologies, Inc. a publicly traded computer products and service company from 1991 until 1994 (now part of General Electric Corporation).
Howard Moore has served as a director from August 2000 through the present date. From 1984, when Mr. Moore joined Toys 'R' Us as executive vice president and general merchandise manager, until 1990, when he retired, sales increased from $480 million to $4.8 billion. Mr. Moore served on the Toys 'R' Us board of directors from 1984 until June 2000. He is also founder and president of Howard Moore Associates, a company, which provides marketing, product licensing, packaging and merchandising consulting to the toy industry. Previously, he was president and CEO of Toy Town, USA, Inc. after founding and operating two other toy chain stores. Mr. Moore is currently serving as Vice Chairman of the Board of Cyber Merchants Exchange, Inc., a company traded on the OTC Bulletin Board.
Robert Weinberg has served as a director from March 9, 2001 through the present date. Mr. Weinberg has considerable experience in toy products, marketing, licensing, merchandising and packaging. He is currently the founder and president of RJW & Associates, a marketing consulting firm based in Saddle River, New Jersey. Previously, he served in various positions of increasing responsibility with Toys "R" Us, rising through the ranks from buyer trainee in 1971 to Senior Vice President - General Merchandise Manager in 1977. In these later positions, he was responsible for purchasing advertising/marketing, imports, product development, store planning and allocations. He retired from Toys "R" Us in March 2000.
Our directors serve for a term of one year, or until their successors shall have been elected and qualified. With the exception of Mr. Steele and Mr. Klecha who have employment agreements with us, 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 Edward Steele, our Chief Executive Officer, President and Director.
BOARD COMMITTEES
We have an audit committee, an executive compensation/stock option committee and a nominating committee. The audit committee consists of Messrs. Steele, Moore and Weinberg. 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 our independent auditors, reviews our internal accounting controls, and approves services to be performed by our independent auditors. The executive compensation/stock option committee consists of Messrs. Moore and Weinberg. The executive compensation/stock option committee considers and authorizes remuneration arrangements for senior management and grants options under, and administers our employee stock option plan. The entire Board of Directors operates as a nominating committee. The nominating committee is responsible for reviewing the qualifications of potential nominees for election to the Board of Directors and recommending the nominees to the Board of Directors for such election.
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 stockholder and board meeting attended and each Director is entitled to receive 10,000 stock options each year. We usually grant these options to our directors on the day before our annual stockholders meeting and the options are valued at our stock's closing price on such date. The options are exercisable upon receipt for a period of five years.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
We have adopted provisions in our certificate of incorporation and
bylaws that 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 Singing Machine or its stockholders for monetary
damages for breaches of certain fiduciary duties as a director of the Singing
Machine. The limitation of liability will not affect a director's liability for
(1) a breach of the director's duty of loyalty to the Singing Machine or its
stockholders, (2) an act or omission not in good faith or that involves
intentional misconduct or a knowing violation of the law, (3) any unlawful
distributions, or (4) 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 certificate of incorporation and bylaws require, us to indemnify our officers and directors to the fullest extent permitted by Delaware 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 Singing Machine, arising out of the person's services as a director or executive officer of the Singing Machine 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 certain compensation information for the fiscal years ended March 31, 1998, 1999 and 2000 with regard to the Singing Machine'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 Comp. Payouts
---------------------------------------------------- ----------------------- ---------------------------------------
Edward Steele 2000 $189,363 $52,369 $7,575 $312,000(1) 30,000
Chief Executive 1999 $180,692 $52,369 $7,228 -0- 100,000 -0- -0-
Officer 1998 $166,500 $ 3,180 $7,200 -0- -0- -0- -0-
John Klecha 2000 $114,394 $26,184 $4,292 $234,000(2)
Chief Financial 1999 $ 88,200 $26,184 $3,614 -0- -0- -0- -0-
Officer 1998 $ 43,654 $ 1,442 $2,100 -0- -0- -0- -0-
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(1) As consideration for guaranteeing a loan, Mr. Steele received 200,000 shares of our common stock on June 28, 1999. The fair market value of the stock on the date of grant was $1.56 per share.
(2) As consideration for guaranteeing a loan, Mr. Klecha received 150,000 shares of our common stock on June 28, 1999. The fair market value of the stock on the date of grant was $1.56 per share.
The following table sets forth information concerning all options granted to our officers and directors during the year ended March 31, 2000. No stock appreciation rights ("SAR's") were granted.
Total Options
Shares Granted to
Underlying Employees in Exercise Price
Name of Individual Options Granted Fiscal Year Per Share Expiration Date
----------------------------------------------------------------------------------------------------------
Edward Steele 30,000 28.8% $1.66 6/25/05
John Klecha 39,000 37.5% $1.66 6/25/05
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AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 2001 AND OPTION/WARRANT VALUES
The following table sets forth information as to the exercise of stock
options and warrants during the fiscal year ended March 31, 2000 by our officers
listed in our Summary Compensation Table and the fiscal year-end value of
unexercised options and warrants.
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year End Fiscal Year End
---------------------------------------------
Shares Acquired Value Exercisable/ Exercisable/
Name of Individual Upon Exercise Realized Unexercisable Unexercisable
-------------------------------------------------------------------------------------------------------
Edward Steele 0 0 205,000/175,000 $719,550/$559,850
John Klecha 50,000 $78,500(1) 39,000/ 50,000 $ 85,020/$39,000
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(1) Value is based on the difference between our common stock on January 18, 2000, the date on which the option was exercised ($2.00) and the option exercise price ($0.43) times the number of options exercised.
(2) Value is based on the difference between the market price of HBOA's common stock on March 31, 2000 and the option exercise prices times the number of outstanding options.
EMPLOYEE STOCK OPTION PLAN
Our amended and restated 1994 employee stock option plan provides for the granting of incentive stock options and non-qualified stock options to our employees, officers, directors and consultants. Our stock option plan is administered by our compensation committee. The total number of shares of our common stock that may be issued under our stock option plan is 1,300,000
shares. As of March 15, 2001, 1,235,000 options were issued and outstanding under our stock option plan.
EMPLOYMENT AGREEMENTS
On May 15, 2000, we extended an existing employment agreement with Mr. Steele for a period of three years to expire on February 28, 2004. This employment agreement will automatically be extended for an additional year, unless either party gives written notice at least sixty days prior to the end of the three-year term. Pursuant to Mr. Steele's employment agreement, he is entitled to receive base compensation of $350,000 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 our annual pre-tax net income (as defined in the agreement). 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 our company in the karaoke industry in the United States.
On July 1, 2000, we entered into a new employment agreement with Mr. Klecha, for period of three years to expire on May 31, 2003. This employment agreement will automatically be extended for an additional year, unless either party gives written notice at least sixty days prior to the end of the three-year term. Pursuant to Mr. Klecha's employment agreement, he is entitled to receive base compensation of $275,000 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 our annual pre-tax net income (as defined in the agreement). Mr. Klecha would receive 40% of the bonus pool. In the event of a termination of his employment following a change-in-control, Mr. Klecha would be entitled to a lump sum payment of 200% 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 our company in the karaoke industry in the United States.
We have an agreement with FLX (a manufacturer of consumer electronics products in China) to produce electronic recording equipment based on our specifications. Paul Wu, a former director of ours, is the Chairman of the Board and a principal stockholder of FLX. During the fiscal years ended March 31, 1999 and 2000, we purchased approximately $1.0 million and $10.3 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.
LOANS TO OFFICERS AND DIRECTORS
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, which note was extended until June 28, 2001. Interest has been paid on the note through June 28, 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, which note was extended until June 28, 2001. Interest has been paid on the note through June 28, 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, whereby Main Factors purchases certain of our accounts receivable. To secure the credit facility, John Klecha, our Chief Operating Officer and Chief Financial Officer, provided his personal payment guaranty. In July, 1999, we entered into an agreement with EPK Financial Corporation ("EPK") whereby EPK provides letters of credit with our factories to import inventory for distribution to our customers. 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. In consideration for providing their personal guarantees of these credit facilities, we issued to 200,000 shares of our common stock to Mr. Steele and 150,000 shares of our common stock to Mr. Klecha in June 1999.
On April 15, 1999, Mr. Bauer personally loaned the Singing Machine funds sufficient to pay one of our documents of acceptance in the amount of $33,948.66. As consideration for this loan, in March 2000, we issued Mr. Bauer warrants to purchase 10,000 shares of our common stock at an exercise price of $2.00 per share, exercisable until January 1, 2003.
In July 1999, Mr. Bauer arranged for a credit facility with Bank Julius Baer in the amount of $1 million. Further, in order to ensure approval of the extension of credit by Bank Julius Bear, Mr. Bauer personally guaranteed the line of credit. The Bank Julius Bear credit loan was fully repaid by the Singing Machine in February 2000. As consideration for guarantying this loan, in March 2000, we granted him warrants to purchase 50,000 shares of our common stock at an exercise price of $1.00 per share. The options expire in July 2005.
In May 2000, Mr. Bauer advanced $500,000 to the Singing Machine. The loan was for a period of eight months and bore interest at the rate of 15% per annum. We repaid this loan in December 2000. As consideration for extending the loan, we granted Mr. Bauer warrants to purchase 25,000 shares of our common stock at an exercise price of $3.25 per share. The options expire on May 25, 2003.
We believe that the above-described transactions are as fair to the Singing Machine as could have been obtained with unaffiliated parties.
The following table sets forth, as of March 15, 2001, 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 Singing Machine and (iii) all directors and officers of the Singing Machine as a group. At March 15, 2001, we had 4,362,920 shares of our common stock issued and outstanding. Unless otherwise indicated, the address for each person is The Singing Machine Company, Inc., 6601 Lyons Road, Building A-7, coconut Creek, Florida 33073.
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.
Shares Beneficially Percent of
Name & Address Owned Class
-------------- ------------------- ----------
John Klecha 540,574(1) 12.1%
Edward Steele 625,924(2) 13.1%
Josef Bauer 575,266(3) 12.9%
Howard Moore 166,940(4) 3.8%
Robert Weinberg 2,050(5) *
Paul Wu 392,899(6) 9.0%
c/o Colony Electronics
500 Hennessy Road
Causeway, Hong Kong
All Directors and Executive 1,910,754(7) 38.4%
Officers as a Group (5 persons)
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(1) Includes options to purchase 99,000 shares and warrants to purchase 20,000 shares of our common stock.
(2) Includes options to purchase 390,000 shares and warrants to purchase 8,000 shares of our common stock.
(3) Includes options to purchase 10,000 shares and warrants to acquire 85,000 shares of our common stock. Also includes 108,400 shares held by the Bauer Family Limited Partnership.
(4) Includes 156,940 shares held by Mr. Moore, as Trustee for the Howard & Helen Moore Trust and options to purchase 10,000 shares of our common stock.
(5) Includes 1,800 shares held by a limited liability company, of which Mr. Weinberg is a 50% owner and 300 shares held by Mr. Weinberg's spouse. Mr Weinberg disclaims beneficial ownership of the shares held by his wife.
(6) Includes 237,932 shares held by FLX(HK) Ltd., 129,300 shares held by Colony Electronics and 25,667 shares held by Gemco Pacific, Inc. Mr. Paul Wu is a director of each of these companies and was a former director of the Singing Machine Company, Mr. Wu disclaims any beneficial ownership of the shares of FLX(HK) Ltd., Colony Electronics and Gemco.
(7) Includes options to purchase 469,000 shares and warrants to acquire 113,000 shares.
We are authorized to issue:
* 18,900,000 shares of common stock,
* 100,000 shares of Class A common stock, and
* 1,000,000 shares of convertible preferred stock.
As of March 15, 2001, we have 4,362,920 shares of our common stock issued and outstanding and no shares of Class A common stock or convertible preferred stock are issued and outstanding.
COMMON STOCK
The holders of our 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 our 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 Singing Machine, the holders of our 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 validly issued, fully paid and nonassessable.
CLASS A COMMON STOCK
Our Certificate of Incorporation authorize the issuance of 100,000 shares of Class A Common Stock. In connection with our public offering in 1994, all issued shares of our Class A common stock were converted into shares of our common stock. We do not plan on issuing any shares of our Class A common stock and will delete this provision from our Certificate of Incorporation after obtaining approval from our stockholders at our next stockholder's meeting.
CONVERTIBLE PREFERRED STOCK
Our Board of Directors has the authority, without further action by our stockholders, to issue up to 1,000,000 shares of our preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. In April 1999, we authorized the issuance of 1,000,000 shares of our convertible preferred stock in connection with a private offering of our units. All of these shares of convertible preferred stock were converted into shares of our common stock automatically on April 1, 2000.
We do not plan on issuing any shares of our convertible preferred stock in the near future and will delete this provision from our Certificate of Incorporation after obtaining approval from our stockholders at our next stockholder's meeting.
COMMON STOCK PUBLIC WARRANTS
In 1994, we sold 1,200,000 common stock 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, 2001.
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, warrant holders 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. Warrant holders do not have any voting or any other
rights as shareholders of the Singing Machine.
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 public warrants 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 was our 1997 bankruptcy reorganization. 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. Our 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. However, we 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, 2001, 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 Singing Machine.
STOCK OPTION PLAN
We have reserved an aggregate of 1,300,000 shares of our common stock under our stock option plan. As of March 15, 2001, we have granted 1,235,000 options to our officers, directors and employees under our stock option plan. The exercise price of these options ranges from $.43 per share to $4.90 per share.
OTHER OUTSTANDING OPTIONS AND WARRANTS
In addition to our public warrants and options granted under our stock option plan, we have granted 417,400 other warrants, all of which are being included in this registration statement. The exercise price of these warrants ranges from $1.375 per share to $3.25 per share.
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.
The table below sets forth information regarding ownership of our common stock by the selling stockholders on March 1, 2001 and the number of securities to be sold by them under this prospectus. Only three of our selling shareholders have a material relationship with the Singing machine. They are Eddie Steele, our Chief Executive Officer, John Klecha our President, Chief Financial Officer, Chief Operating Officer, Treasurer and Secretary and Josef Bauer, our of our directors.
SECURITIES OWNED PRIOR TO OFFERING SECURITIES AFTER OFFERING
--------------------------------------------- ----------------------------
SHARES OF
COMMON NUMBER OF
SHARES OF STOCK PERCENT OF SHARES OF PERCENT OF
NAME OF COMMON OFFERED COMMON COMMON COMMON
SELLING STOCKHOLDER STOCK(1) HEREBY(1) STOCK STOCK STOCK
------------------- ----------- ----------- ------------- -------------- -----------
Itamar Jones Zac 4,000(2) 4,000(2) * 0 *
Aton Trust Reg. 240,000 240,000 * 0 *
Bank Sal. Oppenheim Jr.
& CIE (Switzerland) Ltd. 140,000 140,000 * 0 *
Albert Wardi 12,000 12,000 * 0 *
Wolcot Capital Inc.
Money Purchase Plan 24,000 24,000 * 0 *
Sebastian Angelico 4,000 4,000 * 0 *
Anthony Broy 4,000(2) 4,000(2) * 0 *
Wendy Blauner 24,000 24,000 * 0 *
Entropy Holdings LLC 10,000 10,000 * 0 *
Sil Venturi 4,000 4,000 * 0 *
Frederick A. Merz 4,000 4,000 * 0 *
Clarion Finanz A.G. 67,000(2) 67,000(2) * 0 *
SISM Research and
Investment Services 10,000(2) 10,000(2) * 0 *
Dunedin, Inc. 95,400(2) 95,400(2) * 0 0%
FRS Investments, Inc. 85,000(2) 85,000(2) * 0 0%
Maureen LaRouche 5,000(2) 5,000(2) * 0 *
Neal Berkman 25,000(2) 25,000(2) * 0 *
John Klecha 540,574(3) 383,000(4) 12.1% 157,574 3.2%
Eddie Steele 625,924(5) 155,000(6) 13.1% 470,924 9.1%
Joseph Bauer 575,266(7) 85,000(8) 12.9% 490,266 10.2%
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(1) Assumes that all of our warrants are exercised to purchase shares of our common stock. No assurance can be given as to the timing of the exercise of the warrants or as to whether all or any of the warrants will be exercised.
(2) Represents shares to be acquired upon the exercise of warrants.
(3) Includes options to purchase 99,000 shares and warrants to purchase 20,000 shares of our common stock.
(4) Includes 20,000 shares to be acquired upon the exercise of warrants.
(5) Includes options to purchase 390,0000 shares and warrants to purchase 8,000 shares of our common stock.
(6) Includes 8,000 shares to be acquired upon the exercise of warrant.
(7) Includes warrants to acquire 85,000 shares of our common stock and options to acquire 10,000 shares of our common stock. Also includes 108,400 shares held by the Bauer Family Limited Partnership.
(8) Includes 85,000 shares to be acquired upon the exercise of warrants.
The information provided in these tables has been obtained from the records of our transfer agent. Because the selling stockholders may sell all or some portion of the shares of common stock beneficially owned by them, only an estimate (assuming the selling stockholders sell all of the shares offered hereby) can be given as to the number of shares of common stock that will be beneficially owned by the selling stockholders after this offfering. In addition, any selling stockholder may have sold, transferred or otherwise disposed or, or may sell, transfer or otherwise dispose of, at any time or from time to time since the dates on which they provided the information regarding the shares beneficially owned by them, all or a portion of the shares beneficially owned by them in transactions exempt from the registration requirements of the Securities Act of 1933.
We are registering 1,375,400 shares on behalf of certain selling stockholders. The selling stockholders named in the table below or pledgees, donees, transferees or other successors-in-interest selling shares received from a named selling stockholder as a gift, partnership distribution or other non-sale-related transfer after the date of this prospectus may sell the shares from time to time. The selling stockholders will act independently of the Singing Machine in making decisions with respect to the timing, manner and size of each sale. Sales of shares may be effected by selling stockholders from time to time in one or more types of transactions (which may include block transactions) on one or more exchanges, in the over-the-counter market or otherwise, in negotiated transactions, through put or call options transactions relating to the shares, through short sales of 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 or at negotiated prices.
The selling stockholders may effect such transactions by selling the shares directly to purchasers or through broker-dealers (which may act as agents or principals). The shares may be sold in one or more of, or a combination of the following:
- a block trade in which the broker-dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction,
- purchases by a broker-dealer as principal and resale by such broker-dealer for its account pursuant to the prospectus,
- an exchange distribution in accordance with the rules of such exchange;
- ordinary brokerage transactions and transactions in which the broker solicits purchasers, and
- in privately negotiated transactions.
To the extent required, we may amend or supplement this prospectus, from time to time to describe a specific plan of distribution. In effecting sales, broker-dealers engaged by the selling stockholders may arrange for other broker-dealers to participate in the resales.
The selling stockholders may enter into hedging transactions with broker-dealers in connection with the distributions of the shares or otherwise. In such transactions, broker-dealers may engage in short sales of the shares in the course of hedging the positions they assume with selling stockholders. The selling stockholders may also sell the shares short and redeliver the shares to close out such short positions. The selling stockholders may enter into options or other transactions with broker-dealers which require the delivery to the broker-dealer of the shares. The broker-dealer may then resell or otherwise transfer such shares pursuant to this prospectus. The selling stockholders also may loan or pledge the shares to a broker-dealer. The broker-dealer may sell the shares so loaned, or upon a default the broker-dealer may sell the pledged shares pursuant to this prospectus.
Broker-dealers or agents may receive compensation in the form of commissions, discounts or concessions from the selling stockholders. Broker-dealers or agents may also receive compensation from the purchasers of the shares for whom they act as agents or to whom they sell as principals, or both. Compensation as to a particular broker-dealer might be in excess of customary commissions and will be in amounts to be negotiated in connection with the sale. Broker- dealers or agents and any other participating broker-dealers or the selling stockholders may be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act in connection with the sale of the shares. Accordingly, any such commission, discount or concession received by them and any profit on the resale of the shares purchased by them may be deemed to be underwriting discounts or commissions under the Securities Act. Because the selling stockholders may be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act, the selling stockholders will be subject to the prospectus delivery requirements of the Securities Act. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 promulgated under the Securities Act may be sold under Rule 144 rather than pursuant to this prospectus. The selling stockholders have advised us that they have not entered into agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their securities. There is no underwriter or coordinated broker acting in connection with the proposed sale of shares by selling stockholders.
The shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. 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.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the shares may not simultaneously engage in market making activities with respect to our common stock for a period of two business days prior to the commencement of such distribution. In addition, each selling stockholder will be subject to applicable provisions of the Exchange Act and the associated rules and regulations under the Exchange Act, including Regulation M, which provisions may limit the timing of purchases and sales of shares of our common stock by the selling stockholders. We will make copies of this prospectus available to the selling stockholders and have informed them of the need for delivery of copies of this prospectus to purchasers at or prior to the time of any sale of the shares.
We will file a supplement to this prospectus, if required, pursuant to Rule 424(b) under the Securities Act upon being notified by a selling stockholder that any material arrangement has been entered into with a broker-dealer for the sale of shares through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer. Such supplement will disclose:
- the name of each such selling stockholder and of the participating broker-dealer(s),
- the number of shares involved,
- the price at which such shares were sold,
- the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable,
- that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and
- other facts material to the transaction.
In addition, we will file a supplement to this prospectus if a selling shareholder notifies us that a donee or pledgee intends to sell more than 500 shares.
We will bear all costs, expenses and fees in connection with the registration of the shares. The selling stockholders will bear all commissions and discounts, if any, attributable to the sale of the shares. The selling stockholders may agree to indemnify any broker-dealer or agent that participates in transactions involving sales of the shares against certain liabilities, including liabilities arising under the Securities Act.
As of March 15, 2001, we have 4,362,920 shares of our common stock issued and outstanding. Assuming exercise of all the warrants included in this prospectus, we will have 4,780,320 shares of common stock outstanding. Of these shares, all of the shares registered in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act. Shares that can not be traded without restriction are referred to as "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered of if they qualify for an exemption from registration under Rule 144 of the Securities Act.
RULE 144
In general, under Rule 144 as currently in effect, a person (or group of person whose shares are aggregated), including affiliates of the Singing Machine, who have beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period, an amount of restricted securities that does not exceed the greater of:
* 1% of the number of shares of common stock then outstanding (approximately 43,631 shares as of March 15, 2001); or
* the average weekly trading volume in the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.
No prediction can be made as to the effect, if any that market sales of the Singing Machine's common stock, or the availability of the common stock for sale, will have on the market price of the common stock prevailing from time to time. Nevertheless, sales of a significant number of shares of the Singing Machine's common stock in the public market, or the perception that such sales could occur, could adversely affect the market price of the common stock and impair our future ability to raise capital through an offering of equity securities. See "Risk Factors - Future sales of our common stock may depress our stock price."
STOCK OPTIONS
We intend to file a registration statement on Form S-8 to register 1.3 million shares of common stock underlying options granted or to be granted under our 1994 stock option plan. The registration statement will become effective automatically upon filing. As of March 15, 2001, we have 1,235,000 options issued under our 1994 stock option plan.
The validity of the securities being offered hereby will be passed upon by English, McCaughan & O'Bryan, P.A., 100 N.E. Third Ave., Suite 1100, Ft. Lauderdale, Florida 33301.
Our financial statements for the years ended March 31, 2000 and March 31, 1999 appearing in this prospectus and registration statement have been audited by Weinberg and Company, P.A., independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon the report given on the auditory of the firm as experts in accounting and auditing.
We have filed with the Securities and Exchange Commission a Registration Statement on Form SB-2 pursuant to the Securities Act of 1933, as amended, with respect to the offer, issuance and sale of 1,375,400 shares of our common stock. This prospectus does not contain all of the information set forth in the registration statement. For further information with respect to the us and the shares of our common stock to be sold in this offering, we make reference to the registration statement. Although this prospectus contains all material information regarding us, statements contained in this prospectus as the contents of any contract, agreement or other document referred to are not necessarily complete, and in each instance we make reference to the copy of the contract, agreement, or other document filed as an exhibit to the registration statement, each statement being qualified in all respects by the reference.
You may read and copy all or any portion of the registration statement or any other information, which we filed at the SEC's public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois. The address for the SEC's public reference room in Washington, D.C. is Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. You can request copies of these documents, upon payment of a duplicating filing fee, by writing to the SEC. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings are also available to you free or charge at the SEC's web site at http://www.sec.gov.
THE SINGING MACHINE COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
UNAUDITED FINANCIAL STATEMENTS FOR THE
NINE MONTHS ENDED DECEMBER 31, 2000 AND DECEMBER 30, 1999
Consolidated Balance Sheets - December 31, 2000 (Unaudited) and March 31, 2000 (Audited) F-2
Consolidated Statement of Operations - Three and Nine months Ended December 31, 2000 and 1999 (Unaudited) F-3
Consolidated Statement of Cash Flows . - Three and Nine Months Ended December 31, 2000 and 1999 (Unaudited) F-4
Notes to Consolidated Financial Statements F-5
AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEARS
ENDED MARCH 31, 2000 AND MARCH 31, 1999
Independent Auditor's Report F-8 Consolidated Balance Sheet as of March 31, 2000 F-9 Consolidated Statement of Income for the Years Ended F-10 March 31, 2000 and 1999 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended March 31, 2000 and 1999 F-11 Consolidated Statements of Cash Flows for the Years ended F-12 March 31, 2000 and 1999 Notes to Consolidated Financial Statements as of March 31, 2000 F-13 |
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, March 31,
2000 2000
----------- -------
(unaudited)
CURRENT ASSETS:
Cash $ 411,184 $ 378,848
Accounts Receivable 4,965,001 728,038
Due from Factor 2,630,918 115,201
Due from Officer(s) 110,000 110,000
Due from related party -- 394,706
Inventory - net 2,563,634 1,487,206
Interest Receivable 4,950 7,425
Prepaid Expenses and
Other Current Assets 546,070 204,311
Deferred Tax Asset 363,194 363,194
------------ ------------
TOTAL CURRENT ASSETS 11,594,951 3,788,929
PROPERTY AND EQUIPMENT, NET 291,218 99,814
OTHER ASSETS:
Reorganization Intangible - net 389,434 458,158
------------ ------------
TOTAL ASSETS $ 12,275,603 $ 4,346,901
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable 1,517,104 354,193
Accrued Expenses 1,739,366 73,675
Income taxes payable 769,583 11,994
Notes Payable 0 0
Due to related party 204,683 753
------------ ------------
TOTAL CURRENT LIABILITIES 4,230,736 440,615
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred Stock, $1.00 par value;
1,000,000 shares authorized,
issued and outstanding -- 1,000,000
Common Stock, $.01 par value;
18,900,000 shares authorized;
4,362,920 and 2,960,120, shares
issued and outstanding,
respectively 43,629 29,600
Common stock to be issued
(50,000 and 67,500 shares,
respectively) 500 675
Additional Paid In Capital 3,285,840 1,719,049
Deferred Guarantee Fees (228,629) (400,101)
Retained Earnings 4,943,528 1,557,063
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 8,044,868 3,906,286
------------ ------------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $ 12,275,603 $ 4,346,901
============ ============
|
See accompanying notes to consolidated financial statements.
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------- ------------- ------------- -------------
NET SALES $ 21,008,040 $ 8,640,813 $ 38,863,337 $ 16,967,618
COST OF SALES 16,318,104 6,393,568 29,349,574 12,494,742
------------ ------------ ------------ ------------
GROSS PROFIT 4,689,936 2,247,245 9,513,763 4,472,876
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,259,606 938,747 4,806,054 1,921,996
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 2,430,330 1,308,498 4,707,709 2,550,880
OTHER INCOME (EXPENSES):
Other income 10,268 5,480 14,214 16,142
Interest expense (201,294) (40,430) (404,486) (48,681)
Interest income 6,594 0 41,809 0
Factoring fees (144,245) (150,416) (212,743) (347,689)
------------ ------------ ------------ ------------
NET OTHER EXPENSES (328,677) (185,366) (561,206) (380,228)
INCOME BEFORE INCOME TAX
EXPENSE 2,101,653 1,123,132 4,146,503 2,170,652
INCOME TAX EXPENSE 371,522 0 760,038 0
NET INCOME $ 1,730,131 $ 1,123,132 $ 3,386,465 $ 2,170,652
============ ============ ============ ============
NET INCOME PER COMMON SHARE
Basic $ 0.40 $ 0.39 $ 0.81 $ 0.75
============ ============ ============ ============
Diluted $ 0.34 $ 0.23 $ 0.69 $ 0.53
============ ============ ============ ============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING
Basic 4,360,772 2,898,500 4,190,480 2,898,500
Diluted 5,124,436 4,812,900 4,906,869 4,110,317
|
See accompanying notes to consolidated financial statements.
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------ ------------ ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 5,985,004 $ ( 295,523) $ 1,623,779 $(1,294,369)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (45,613) 34,759 (255,007) (96,796)
Due from factor (2,260,398) (7,554) (2,515,717) (32,214)
Due from related parties (3,143) 394,706 (5,559)
----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities (2,306,011) 24,062 (2,376,018) (149,241)
----------- ----------- ----------- -----------
CASH FLOW FROM FINANCING
ACTIVITIES:
Proceeds from issuance of common
stock & exercise of warrants
and options 188,000 -- 580,645 --
Proceeds from issuance of preferred
stock -- -- -- 1,375,000
Net proceeds from related party (3,352,085) -- 203,930 --
Net proceeds from notes payable (600,000) 831,873 -- 852,011
----------- ----------- ----------- -----------
Net cash provided by
financing activities (3,764,085) 831,873 784,575 2,227,011
----------- ----------- ----------- -----------
Increase in cash and cash
equivalents (85,092) 560,412 32,336 783,401
Cash and cash equivalents
- beginning of period 496,276 272,277 378,848 49,288
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS
- END OF PERIOD $ 411,184 $ 832,689 $ 411,184 $ 832,689
=========== =========== =========== ===========
|
See accompanying notes to consolidated financial statements.
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(Unaudited)
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-QSB and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. It is suggested that these consolidated condensed financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's audited financial statements on Form 10-KSB for the fiscal year ended March 31, 2000.
The accounting policies followed for interim financial reporting are the same as those disclosed in Note 1 of the Notes to Financial Statements included in the Company's audited financial statements for the fiscal year ended March 31, 2000, which are included in Form 10- KSB.
In the opinion of management, all adjustments which are of a normal recurring nature and considered necessary to present fairly the financial positions, results of operations, and cash flows for all periods presented have been made.
The results of operations for the nine month period ended December 31, 2000 are not necessarily indicative of the results that may be expected for the entire fiscal year ending March 31, 2001.
The accompanying consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company balances and transactions have been eliminated. Assets and liabilities of the foreign subsidiary are translated at the rate of exchange in effect at the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustment is not material.
NOTE 2 - MAJOR CUSTOMERS
As a percentage of total revenues, the Company's net sales in the aggregate to its five (5) largest customers during the quarters ended December 31, 2000 and 1999 were approximately 81% and 73%, respectively. For the nine months ending December 31, 2000, two (2) major retailers accounted for 36% and 19% each of total
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(Unaudited)
NOTE 2 - MAJOR CUSTOMERS (Cont'd)
revenues. Because of the seasonality of the Company's sales, these results may be distorted due to the historically high percentage of overall sales during the Company's second and third fiscal quarters of each year.
NOTE 3 - LOANS PAYABLE
During May 2000, the Company entered into two working capital loan agreements of $100,000 and $500,000, respectively. The loans extend over a maximum period of eight months, bear interest at 15% per annum, and are secured by corporate guarantees. In addition, the lenders were granted 5,000 and 25,000 stock options, respectively, to purchase shares of the Company's common stock at an exercise price of $3.25. The 30,000 stock options were accounted for as expense based on the estimated value of the options at the grant dates which aggregate aproximately $38,000. As of December 31, these loans have been paid in full.
NOTE 4 - EXERCISE OF STOCK OPTIONS AND WARRANTS AND MODIFICATION
Stock options and warrants were exercised during the third quarter of fiscal year 2001. 104,000 shares of common stock were issued with proceeds to the Company of $188,000.
On October 26,2000, the Company extended the expiration of the Company's Public Warrants to November 10, 2001. All other terms and conditions of the Public Warrants shall remain the same (exercise price, manner of exercise, etc.)
NOTE 5 - ISSUANCE OF STOCK OPTIONS TO EMPLOYEES
At the end of September 2000, the Company issued 648,000 options to employees of the Company. The exercise price of these options is $3.00 per option. This price is equal to the fair market value of the Company's common stock on the grant date. These options were accounted for in accordance with APB No. 25.
NOTE 6 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has an agreement with FLX (a China manufacturer of consumer electronics products) to produce electronic recording equipment based on the Company's 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, 2000 and 1999, the Company purchased approximately $10.3 million and $1.7 million respectively, in equipment from FLX. The amount due to FLX at December 31, 2000 of $204,683 is included in the related party payable. The Company believes that all of the foregoing transactions with FLX have been on terms no less favorable to the Company than could have been obtained from unaffiliated third parties in arms-length transactions under similar circumstances.
NOTE 7 - ADVANCES
In November 2000, the Company advanced a refundable amount of $170,000 to a potential acquiree. The transaction is subject to a due diligence review, which must be completed by June 1, 2001. This amount is included in Prepaid and Other Current Assets at December 31, 2000.
NOTE 8 - INCOME TAXES
The Company computes income taxes at interim periods on a current year-to-date basis using the effective tax rate expected to be applicable for the full fiscal year.
The Company files separate tax returns for the parent and for its Hong Kong subsidiary. During the nine months ended December 31, 2000, the Company's parent generated nominal losses compared to the income generated by its subsidiary. Accordingly, the Company has maintained its estimated net deferred tax asset of $363,194 based on the its cumulative U.S. net operating losses.
NOTE 9 - SEGMENTS
The Company operates in one business segment. Sales during the three months and nine months ended December 31, 2000, were generated in the following geographic regions.
Three Months Nine Months
Ended Ended
United States $20,835,330 $38,425,625
Europe/Asia 172,710 437,713
----------- -----------
Total Sales $21,008,040 $38,863,338
=========== ===========
|
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, 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for the two years 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 audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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 audits provide 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 as of March 31, 2000, and the results of their operations and their cash flows for the two years then ended in conformity with generally accepted accounting principles.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
June 12, 2000
THE SINGING MACHINE COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2000
ASSETS
------
CURRENT ASSETS
Cash $ 378,848
Trade accounts receivable 728,038
Inventories 1,487,206
Interest receivable 7,425
Due from factor 115,201
Due from officers 110,000
Due from related party 394,706
Prepaid expenses and other current assets 204,311
Deferred tax asset 363,194
-----------
Total Current Assets 3,788,929
PROPERTY AND EQUIPMENT - NET 99,814
OTHER ASSETS
Reorganization intangible - net 458,158
-----------
TOTAL ASSETS $ 4,346,901
------------ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Trade accounts payable $ 354,193
Accrued expenses 73,675
Income taxes payable 11,994
Due to related party 753
-----------
Total Current Liabilities 440,615
-----------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, 1,000,000 shares authorized, 1,000,000 shares
issued and outstanding 1,000,000
Common stock, Class A, $0.01 par value, 100,000 shares authorized, none
issued and outstanding --
Common stock, $0.01 par value, 73,900,000 shares authorized, 2,960,120 shares
issued and outstanding 29,600
Common stock to be issued (67,500 shares) 675
Additional paid-in capital 1,719,049
Retained earnings 1,557,063
-----------
4,306,387
Less deferred stock based guarantee fees (400,101)
-----------
Total Stockholders' Equity 3,906,286
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,346,901
===========
|
See accompanying notes to consolidated financial statements.
THE SINGING MACHINE COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
2000 1999
------------ ------------
NET SALES $ 19,032,320 $ 9,547,816
COST OF SALES 13,727,377 7,029,359
------------ ------------
GROSS PROFIT 5,304,943 2,518,457
------------ ------------
Compensation 864,282 715,625
Consulting fees 409,080 22,407
Selling, general and administrative expenses 2,505,913 806,774
------------ ------------
TOTAL OPERATING EXPENSES 3,779,275 1,544,806
------------ ------------
INCOME FROM OPERATIONS 1,525,668 973,651
------------ ------------
OTHER INCOME (EXPENSES)
Other income 8,710 2,784
Royalty income 2,941 --
Interest income 21,255 3,254
Interest expense (117,349) (5,427)
Stock based guarantee fees (434,274) --
Factoring fees (429,265) (220,106)
------------ ------------
Net Other Expenses (947,982) (219,495)
------------ ------------
INCOME BEFORE INCOME TAXES 577,686 754,156
INCOME TAX BENEFIT - NET 160,299 170,000
------------ ------------
NET INCOME $ 737,985 $ 924,156
============ ============
EARNINGS PER SHARE
Basic $ 0.2322 $ 0.3733
------------ ------------
Diluted $ 0.1894 $ 0.3565
------------ ------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING
Basic 2,726,022 2,475,308
------------ ------------
Diluted 3,341,866 2,592,167
------------ ------------
|
See accompanying notes to consolidated financial statements.
THE SINGING MACHINE COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
Common Stock and Additional
Preferred Shares Common Stock to be Issued Paid-in
Shares Amount Shares Amount Capital
---------- ---------- ---------- ---------- ----------
Balance, March 31, 1998 -- $ -- 2,468,066 $ 24,680 $ --
Issuance of common stock for services -- -- 30,385 304 15,600
Net income 1999 -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, March 31, 1999 -- -- 2,498,451 24,984 15,600
Issuance of preferred stock for cash 1,000,000 1,000,000 -- -- 331,017
Common stock to be issued for exercise of
common stock warrants -- -- 16,000 160 31,840
Common stock issued for legal and other
services -- -- 50,049 500 99,598
Common stock retired - bankruptcy payables -- -- (5,880) (59) 59
Common stock issued as guarantee fee -- -- 350,000 3,500 587,125
Common stock to be issued as guarantee fee -- -- 50,000 500 243,250
Exercise of common stock options
(includes 1,500 shares to be issued) -- -- 69,000 690 28,980
Issuance of common stock options to
consultants -- -- -- -- 381,580
Dividends paid on preferred stock -- -- -- -- --
Net Income, 2000 -- -- -- -- --
---------- ---------- ---------- ---------- ----------
BALANCE, MARCH 31, 2000 1,000,000 $1,000,000 3,027,620 $ 30,275 $1,719,049
========== ========== ========== ========== ==========
|
[RESTUBBED}
Deferred
Retained Guarantee
Earnings Fees Totals
----------- ----------- -----------
Balance, March 31, 1998 $ -- $ -- $ 24,680
Issuance of common stock for services -- -- 15,904
Net income 1999 924,156 -- 924,156
----------- ----------- -----------
Balance, March 31, 1999 924,156 -- 964,740
Issuance of preferred stock for cash -- -- 1,331,017
Common stock to be issued for exercise of
common stock warrants -- -- 32,000
Common stock issued for legal and other
services -- -- 100,098
Common stock retired - bankruptcy payables -- -- --
Common stock issued as guarantee fee -- (400,101) 190,524
Common stock to be issued as guarantee fee -- -- 243,750
Exercise of common stock options
(includes 1,500 shares to be issued) -- -- 29,670
Issuance of common stock options to
consultants -- -- 381,580
Dividends paid on preferred stock (105,078) -- (105,078)
Net Income, 2000 737,985 -- 737,985
----------- ----------- -----------
BALANCE, MARCH 31, 2000 $ 1,557,063 $ (400,101) $ 3,906,286
=========== =========== ===========
|
See accompanying notes to consolidated financial statements.
THE SINGING MACHINE COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
2000 1999
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 737,985 $ 924,156
Adjustments to reconcile net income to net cash used in operating
activities
Depreciation and amortization 116,369 144,234
Stock based professional fees 35,812 15,904
Stock based guarantee fees 434,274 --
Stock based consulting fees 381,580 --
Deferred tax benefit (193,194) (170,000)
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable 399,933 (769,127)
Inventories (1,062,401) (14,513)
Interest receivable (7,425) --
Prepaid expenses and other assets (177,158) 17,600
Increase (decrease) in:
Trade accounts payable (440,797) (25,465)
Accrued expenses (319,251) (126,456)
Income tax payable 11,994 --
----------- -----------
Net cash used in operating activities (82,279) (3,667)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (108,103) (3,023)
Due from factor (115,201) --
Due from officer (96,120) 11,609
Due from related parties (394,706) --
----------- -----------
Net cash provided by (used in) investing activities (714,130) 8,586
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 29,670 --
Proceeds from exercise of warrants 32,000 --
Proceeds from issuance of preferred stock 1,360,205 --
Due from related parties 753 --
Payment of dividends on preferred stock (105,078) --
(Decrease) in notes payable (63,000) (37,000)
(Decrease) increase in due to factor (128,581) 73,599
----------- -----------
Net cash provided by financing activities 1,125,969 36,599
----------- -----------
Increase in cash and cash equivalents 329,560 41,518
Cash and cash equivalents - beginning of year 49,288 7,770
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 378,848 $ 49,288
-------------------------------------- =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 95,658 $ 10,327
=========== ===========
Cash paid during the year for income taxes $ 20,901 $ --
=========== ===========
|
See accompanying notes to consolidated financial statements.
10
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.
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 accounts and transactions have been eliminated in the consolidation.
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, 2000 was not material.
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.
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.
Inventories primarily consist of finished goods, which are comprised of electronic karaoke audio equipment, accessories, audiotapes, and compact discs. Inventories are stated at the lower of cost or market, as determined using the first in, first out method.
At March 31, 1999, the carrying value of an investment in song library was reduced to zero and the amortization expense charged to operations totaled $46,590 for the year ended March 31, 1999.
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 over 3 to 7 years.
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.
The Company maintains its cash in bank deposit accounts, which, at times, exceed federally insured limits. At March 31, 2000, the Company had $309,683 in US deposits, which exceed federally insured limits. The Company has not experienced any losses in such accounts through March 31, 2000.
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. The Company allows returns up to 90 days after sale.
In accordance with, Statement of Financial Accounting Standards No. 128 "Earnings per Share", basic earnings per share is computed by dividing the net income less preferred dividends for the period by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income less preferred dividends (due to their anti-dilutive effect - see below) by the weighted average number of common shares outstanding including the effect of common stock equivalents.
The following table presents a reconciliation of basic and diluted earnings per share:
2000 1999
------------ ------------
Net income $ 737,985 $ 924,156
Preferred stock dividends (105,077) --
------------ ------------
Income available to common shares 632,908 924,156
Weighted average shares outstanding - basic 2,726,022 2,475,308
EPS - BASIC $ 0.2322 $ 0.3733
----------- ============ ============
Income available to common shares 632,908 924,156
Weighted average shares outstanding - basic 2,726,022 2,475,308
Effect of dilutive securities:
Stock options 587,733 116,859
Preferred stock warrants 28,111 --
------------ ------------
Weighted average shares outstanding - diluted 3,341,866 2,592,167
EPS - DILUTED $ 0.1894 $ 0.3565
------------- ============ ============
|
Convertible preferred stock of 1,000,000 shares and related dividends on preferred stock were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive.
In accordance with Statement of Financial Accounting Standards No. 123, "Accounting For Based Compensation" (SFAS 123"), the Company has elected to account for Stock Options issued to employees under Accounting Principles Board Opinion No. 25 ("APB Opinion No, 25") and related interpretations, and accounts for stock options issued to consultants and for other services in accordance with SFAS 123.
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).
The Financial Accounting Standards Board has recently issued several new accounting pronouncements. Statement No. 133 as amended by Statements No. 137 and 138, "Accounting for Derivative Instruments and Hedging Activities" establishes accounting and reporting standards for derivative instruments and related contracts and hedging activities. This statement is effective for all fiscal quarters and fiscal years beginning after June 15, 2000.
The Company believes that its future adoption of these pronouncements will not have a material effect on the Company's financial position or results of operations.
Certain amounts in the 1999 consolidated financial statements have been reclassified to conform with the 2000 presentation.
The Company sells certain trade accounts receivable, primarily without recourse, pursuant to factoring agreements. During April and May 1999, the Company sold its receivables under an agreement whereby the factor advanced 70% of the face value of these receivables to the Company. The Company was charged a variable percentage fee based upon the length of the collection period. In June 1999, as amended in December 1999, the Company entered into a new factor agreement (the "Agreement") with a different factor. Under the terms of the Agreement, the factor advances up to 75% of the face value of the receivables to the Company. The Company is charged a variable percentage fee from 1.5% to 1% based upon the total amount of factored receivables within a calendar year. All of the Company's accounts receivable are pledged as collateral under this agreement. In addition, two officers of the Company entered into guarantee agreements related to the factor agreement (See Note 8 (E)). For the years ending March 31, 2000 and 1999, the Company incurred $429,265 and $220,106, respectively in factoring fees. At March 31, 2000, factored trade accounts receivable not reflected on the accompanying balance sheet totaled $481,706 of which, $366,505 was advanced by the factor and the remaining $115,201 was due from the factor (See Note 6(C) and Note 13 (A)).
Property and equipment at March 31, 2000 is as follows:
Computer equipment $ 93,874
Office equipment 48,473
Leasehold improvements 18,112
Mold and tooling 49,794
----------
210,253
Less accumulated depreciation (110,439)
----------
Totals $ 99,814
==========
|
Depreciation expense for the year ended March 31, 2000 and 1999 was $21,970 and $6,012, respectively.
The reorganization intangible resulted from the application of Fresh Start Accounting in March 1998 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(N)). The reorganization intangible is being amortized over a period of seven years using a straight-line basis.
The reorganization intangible at March 31, 2000 consisted of the following:
Reorganization intangible $ 641,422
Less accumulated amortization (183,264)
-----------
$ 458,158
===========
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Amortization expense on the reorganization intangible in each of the years ended March 31, 2000 and 1999 was $91,632.
During 1999, the Company loaned a total of $110,000 to two key officers of the Company. The loans bear simple interest at 9% per annum. Principal and interest are due in full on June 28, 2000 and secured by the securities purchased with the loans.
As of March 31, 2000, the Company accrued $7,425 interest on the loans.
On March 31, 1999 and April 4, 2000, the Company entered into lease agreements for office and warehouse facilities for a term of 61 months and 52 months, respectively. The terms began on August 1, 1999 and April 14, 2000. Pursuant to the terms of the leases, the Company must pay maintenance and real estate taxes of approximately $13,000 per year. In addition, the Company entered into a warehouse equipment lease and a computer equipment lease during 2000. Total rent expense was approximately $81,300 and $60,953 for 2000 and 1999. Future minimum lease payments under these non-cancelable operating leases are as follows:
Year ending March 31:
2001 $ 84,725
2002 90,088
2003 93,466
2004 96,767
Thereafter 41,162
-------------
$ 406,208
=============
|
As of March 31, 2000, The Company has not experienced any negative effects related to the Year 2000 issue.
In July 1998, the Company entered into a financing agreement with a financing corporation, which expired in July 1999. In July 1999, the Company entered into a new financing agreement with the same financing corporation, which expires in July 2001. The financing corporation opens letters of credits on behalf of the Company to purchase inventory. 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 can not exceed $1,000,000. At March 31, 2000, the Company has no letters of credit open with the financing corporation. 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, had entered into an agreement with a financing group in Hong Kong to provide it with a United States letter of credit facility of $200,000. The cost of the credit facility was 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 was guaranteed by a former director of the Company.
On May 19, 1999, as amended on February 14, 2000, the Company, through its Hong Kong Subsidiary, obtained a credit facility of $500,000 from a Hong Kong subsidiary of a Belgian bank. This facility is a revolving line of credit based upon drawing down a maximum of 15% of the value of export letters of credit lodged with Belgian Bank. There is no expiration date to this agreement, 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. As of March 31, 2000 there was no outstanding balance on this credit facility.
At March 31, 2000, the amounts due from officers bear interest at 9% per annum and are due June 28, 2000 (See Note 5).
At March 31, 2000, the balance due from related party, in the amount of $394,706, is due from an affiliate of a director of the Company's subsidiary. The amount bears interest at 9.6% per annum and is unsecured and due on demand.
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 $5,546,000 during 2000.
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.
During April 1999, the Company filed an amendment to its
Articles of Incorporation increasing the authorized shares of
the Company's common stock to 74,000,000 shares (100,000 Class
A common and 73,900,000 common) from 10,000,000 shares, and
authorizing 1,000,000 shares of preferred stock (See Note
8(C)). Each share of preferred stock is entitled to a 9%
dividend, preferred liquidation distribution, conversion to
common stock and has no voting rights.
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 consisted of 20,000 shares of the Company's convertible preferred stock and 4,000 common stock purchase warrants. The purchase price for each unit was $ 27,500. Each share of preferred stock is convertible, at the option of the holder, into one share of the Company's common stock at any time after issuance, and will automatically convert into one share of
common stock on April 1, 2000 (See Note 13(B)). 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. Through June 1999 the maximum number of 50 units had been sold and $1,375,000 gross funds were raised ($1,331,017 after related costs), at which time the offer was closed. As of March 31, 2000, 16,000 warrants were exercised for a total consideration of $32,000.
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 entitled 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.
As a result of the March 1998 reorganization (See Note 1 (N)), 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 originally expired on November 10, 1999. In October 1999, the expiration date of these warrants was extended for one year to November 10, 2000. Through the date of this report, none of the warrants have been exercised.
During the year ended March 31, 2000, the Company issued
common stock to two officers of the Company in exchange for
guarantees related to the Company's factor agreement (See Note
2). These guarantee fees totaled $590,625 and are amortized
over a period of 31 months. Accordingly, the Company
recognized $190,524 as guarantee fees and recorded $400,101 as
deferred guarantee fees, presented as a deduction from equity.
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, 2000, 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. During the year ended March 31, 2000, the Company issued 104,000 stock options in addition to the stock options issued during 1999.
In accordance with SFAS 123, for options issued to employees, 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, 2000 and 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 years ended March 31, 2000 and 1999 would have been decreased to the pro-forma amounts indicated below.
2000 1999
---------- ------------
Net income As reported $ 737,985 $ 924,156
Pro forma $ 676,995 $ 824,356
Net income per share - basic As reported $ 0.2322 $ 0.3733
Pro forma $ 0.2098 $ 0.3330
Net income per share - diluted As reported $ 0.1894 $ 0.3565
Pro forma $ 0.1711 $ 0.3180
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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 to employees during 2000
and 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 for 2000: expected
dividend yield 0%, risk-free interest rate of 5.53%,
volatility 66% and expected term of two years and for 1999:
expected dividend yield 0%, risk-free interest rate of 5.59%,
volatility 65% and expected term of three years.
For options issued to consultants, the Company applies SFAS
123. Accordingly, consulting expense of $381,580 was charged
to operations in 2000.
For financial statement disclosure purposes and for purposes of valuing stock options issued to consultants, the fair market value of each stock option granted was estimated on the date of grant using the Black-Scholes Option-Pricing Model in accordance with SFAS 123 using the following weighted-average assumptions: expected dividend yield 0%, risk-free interest rate of 5.53%, volatility 66% and expected term of one year.
A summary of the options issued under the employment and consulting agreements as of March 31, 2000 and changes during the year is presented below:
Number Weighted Average
of Options Exercise Price
------------- ---------------
Stock Options
-------------
Balance at beginning of period 526,500 $ 0.68
Granted 635,200 $ 1.40
Exercised (69,000) $ 0.43
Forfeited (30,500) $ 4.79
---------- --------
Balance at end of period 1,062,200 $ 1.01
========== ========
Options exercisable at end of period $ 1.01
Weighted average fair value of options
granted during the period $ 0.70
========
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The following table summarizes information about stock options outstanding at March 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------------------------- ----------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price March 31, 2000 Life Price March 31, 2000 Price
------------ ------------------ ------------- ------------ ------------------ ------------
$ 1.66 104,000 4.25 Years $ 1.66 101,500 $ 1.66
$ 0.43 427,000 3.75 Years 0.43 427,000 0.43
$ 1.00-2.00 531,200 2.09 Years 1.35 531,200 1.35
--------- ------- --------- --------
1,062,200 2.97 Years $ 1.01 1,059,700 $ 1.01
========= ======= ========= ========
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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 2000 and 1999:
2000 1999
--------- ---------
Current:
U.S. Federal $ -- $ --
Foreign 32,895 --
State -- --
--------- ---------
32,895 --
--------- ---------
Deferred
U. S. Federal (193,194) (170,000)
Foreign -- --
--------- ---------
Total $(160,299) $(170,000)
========= =========
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The actual tax expense differs from the "expected" tax expense for the year ended March 31, 2000 (computed by applying the U.S. Federal Corporate tax rate of 34 percent to income before taxes) as follows:
Computed "expected" tax expense $ 196,413
Foreign income taxes (47,398)
Benefit of U.S. net operating loss
carryforwards (116,120)
Change in the beginning of the year
valuation allowance for deferred tax
assets allocated to income tax benefit (193,194)
------------
$ (160,299)
============
F-24
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The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at March 31, 2000 are as follows:
Deferred tax assets:
U.S. net operating loss carryforward $ 1,742,574
Stock based compensation 289,566
--------------
Total gross deferred tax assets 2,032,140
Less valuation allowance 1,668,946
--------------
Net deferred tax assets $ 363,194
==============
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At March 31, 2000, the Company had net operating loss carryforwards of approximately $5,125,000 for income tax purposes, available to offset future taxable income of the U.S. entity expiring from 2003 through 2013. The usage of $4,057,000 of these net operating losses 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.
The valuation allowance at April 1, 1999 was $2,013,701. The net change in the valuation allowance during the year ended March 31, 2000 was a decrease of $344,755.
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 2000 and 1999, 70% and 91%, respectively, of the Company's total revenues were derived from sales to five customers. Revenues derived from two customers in 2000 and three customers in 1999 who individually purchased greater than 10% of total revenues during 2000 and 1999 were 30% and 18% and 31%, 21% and 21%, respectively.
The Company has entered into employment contracts with two key officers. The agreements call for base salaries of $180,000 and $175,000, 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. Effective June 1, 2000, the salaries were increased to $350,000 and $275,000, respectively with related performance bonuses equal to five percent and four percent, of net income before interest and taxes, respectively.
As reflected in the consolidated statements of operations and cash flows, the Company has incurred significant non-cash charges to operations during the year ended March 31, 2000. These charges to operations totaled $851,666 for stock based compensation. Of this total amount, $381,580 was related to the issuance of stock options to consultants, $434,274 to the issuance of common stock for guarantee fees and $35,812 to the issuance of common stock for professional services.
During April 2000, the Company agreed to an amendment of their factor agreement. Under the terms of the amended agreement, the factor advances 85% of the factored invoices to the Company. Should the total stockholders' equity fall below $3,500,000 in any calendar quarter, the advance will be reduced to 75%. The Company agreed to factor an annual minimum of $13,000,000 of receivables at a factor fee of .95% resulting in a stipulated fee of $123,500. All of the Company's accounts receivable are pledged as collateral under the agreement. There is no limit on the amount of accounts receivable that can be factored under the agreement (See Note 2).
On April 1, 2000, the 1,000,000 shares of preferred stock issued and outstanding as of March 31, 2000 automatically converted into common stock, increasing the number of outstanding shares of common stock to 3,960,120 (See Note 8(C)).
During May 2000, the Company entered into two working capital loan agreements of $100,000 and $500,000, respectively. The loans extend over a maximum period of eight months, bear interest at 15% per annum, and are secured by corporate guarantees. In addition, the lenders will be granted 5,000 and 25,000 stock options, respectively, to purchase shares of the Company's common stock at an exercise price of $3.25.
PART II
Item 24. Indemnification of Directors and Officers
As a Delaware corporation, we are subject to the Delaware General Corporation Law. Section 102(b)(7) of Delaware law enables a corporation in its certificate of incorporation to eliminate or limit personal liability of members of its Board of Directors for monetary damages for breach of a director's fiduciary duty of care. Article 10 of our Certificate of Incorporation provides that a director shall not be personally liable to us or our 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 us or our 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. and contains a comparable provision.
Section 145 of Delaware law permits a corporation organized under Delaware law to indemnify directors and officers with respect to any matter in which the director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the company, and with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. Article VI of our Bylaws provides that our officers, directors, employees or agent shall be indemnified to the full extent permitted by Delaware law. Article VI also provides that we may advance expenses to a director prior to the final disposition of the action. However, if required under Delaware law, we may require an officer or director to give us an undertaking in advance of the final disposition that he will repay all amounts so advanced, if it shall ultimately be determined that such officer or director is not entitled to be indemnified under our by- laws or otherwise.
The above discussion of Delaware law and our certificate of incorporation and bylaws is not intended to be exhaustive and is qualified in its entirety by our certificate of incorporation, bylaws and Delaware law.
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 our securities. Other than the SEC Registration Fee, the amounts set forth below are estimates:
SEC Registration Fee ...................................... $ 140.88
Printing & Engraving Expenses ............................. 10,000.00
Legal Fees and Expenses ................................... 20,000.00
Accounting Fees and Expenses .............................. 10,000.00
Blue Sky Fees and Expenses ................................ .00
TOTAL: ......................... $ 40,140.88
===========
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II-1
Item 26. Recent Sales of Unregistered Securities
The following table sets forth our sale of securities during the last three years, which securities were not registered under the Securities Act of 1933, as amended. No underwriters were employed with respect to the sale of any of the securities listed below. All shares were issued in reliance on Section 4(2) and/or Section 3(b) of the Securities Act.
1. Between March 17, 1998 - June 10, 1998, we issued 2,174,212 shares of our common stock to 130 pre-petition bankruptcy creditors pursuant to our First Amended Plan of Reorganization confirmed by the Bankruptcy Court on March 17, 1998. We issued the shares to these creditors in reliance upon Section 4(2) of the Securities Act, because the shareholders were knowledgeable, sophisticated and had access to comprehensive information about us. We placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
2. On December 9, 1998, we issued an aggregate of 496,000 options to our employees, as consideration for services they had rendered to us. We issued these options to our employees in reliance upon Section 4(2) of the Securities Act, because our employees were knowledgeable, sophisticated and had access to comprehensive information about us. We issued options to the following employees on December 9, 1998:
No. of Exercise
Name Options Price
---- ------- -----
Adolph Nelson 3,000 $.43
Jorge Otaegui 3,000 .43
Brian Cino 5,000 .43
Terri Phillips 5,000 .43
Terry Marco 10,000 .43
Melody Schwab 10,000 .43
John Steele 10,000 .43
Edward Steele 350,000 .43
John Klecha 100,000 .43
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For each employee, fifty percent of their options are exercisable on December 9, 1999 and 50% on December 9, 2000. The options all expires on December 9, 2003.
3. In January, 1999, we issued an aggregate of 30,000 shares of common stock to three (3) persons in consideration for legal services rendered to us. We issued 14,000 shares to David Carter, 14,000 shares to Bert Gusrae and 2,000 shares to Susan Massinger. We issued these shares to these persons in reliance upon Section 4(2) of the Securities Act, because the shareholders were knowledgeable, sophisticated and had access to comprehensive information about us. We placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
II-2
4. During the period between February 1999 and May 1999,we issued
warrants to three entities and one person as consideration for consulting
services rendered to us. Each warrant entitled to warrant holder to purchase one
(1) share our common stock. The names of the consultants, the issue date, the
vesting date, the number of warrants, the exercise prices of the warrants and
the expiration dates of the warrants are listed below.
Issue Vesting Number Exercise Expiration
Name Date Date of Warrants Price Date
---- ---- ---- ----------- ----- -----
Union Atlantic, LC 02/08/99 03/08/99 20,000 $1.00 02/08/02
Jack Robbins 04/15/99 12/01/99 75,000 $1.00 04/15/02
Jack Robbins 04/15/99 03/01/00 75,000 $1.50 04/15/02
SISM Research
& Investment 05/21/99 05/30/99 10,000 $1.00 05/21/02
Clarion Finaz 04/14/99 05/17/99 67,000 $1.375 05/14/02
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We issued these warrants to these persons in reliance upon Section 4(2) of the Securities Act, because the shareholders were knowledgeable, sophisticated and had access to comprehensive information about us. We placed legends on the warrants stating that the warrants were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
5. In April, 1999, we issued an aggregate of 30,000 shares of common stock to three (3) persons in consideration for legal services rendered to us. We issued 14,000 shares to David Carter, 14,000 shares to Bert Gusrae and 2,000 shares to Susan Massinger We issued these shares to these persons in reliance upon Section 4(2) of the Securities Act, because the shareholders were knowledgeable, sophisticated and had access to comprehensive information about us. We placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
6. In April, 1999, we issued 2,500 shares of our common stock to outside director, Walter Haskamp as consideration for serving as a Director on our Board. We issued these shares to Mr. Haskamp in reliance upon Section 4(2) of the Securities Act, because he was knowledgeable, sophisticated and had access to comprehensive information about the Company. We placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
7. In May and June 1999, we completed a private placement of 40 units to 17 investors at an offering price of $27,500 per unit. The offering and sale of the units was made in reliance upon Rule 506 of the Regulation D promulgated under the Securities Act of 1933, as amended. The common stock was only offered and sold to accredited investors or persons who represented that they had no need for liquidity in their investment and had adequate financial resources to withstand a total loss of their investment. We issued these shares to these persons in reliance upon Section 4(2) of the Securities Act, because the shareholders were knowledgeable, sophisticated and had access to comprehensive information about us. We placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
II-3
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
Entropy Holdings LLC 5/12/99 $27,500 21/2 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
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8. In May, 1999, the Singing Machine issued 17,549 shares of common stock to Memcorp, Inc. in consideration of $35,098 of product, or $2.00 per share. We issued the shares to Memcorp, Inc. in reliance upon Section 4(2) of the Securities Act of 1933, because it was knowledgeable, sophisticated and had access to comprehensive information about us. We placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale. We issued the shares to Memcorp in reliance upon Section 4(2) of the Securities Act of 1933, because he was knowledgeable, sophisticated and had access to comprehensive information about us. We placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
9. In June, 1999, we issued 200,000 shares of common stock to Edward Steele, our Director and Chief Executive Officer of the Singing Machine, in consideration for his personal guaranty of the Singing Machine's credit facility with EPK Financial. We issued the shares to Mr. Steele. in reliance upon Section 4(2) of the Securities Act of 1933, because he was knowledgeable, sophisticated and had access to comprehensive information about us. We placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
10. In June, 1999, we issued 150,000 shares of common stock to John Klecha, our Chief Operating Officer and Chief Financial Officer and Director, in consideration for his personal guaranty of the Singing Machine's credit facilities with Main Factors and EPK Financial. We issued the shares to Mr. Klecha. in reliance upon Section 4(2) of the Securities Act of 1933, because he was knowledgeable, sophisticated and had access to comprehensive information about us. We placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
II-4
11. On June 25, 1999, we issued an aggregate of 104,000 options to our employees, as consideration for services they had rendered to us. We issued these options to our employees in reliance upon Section 4(2) of the Securities Act, because our employees were knowledgeable, sophisticated and had access to comprehensive information about us. We issued options to the following employees on June 25, 1999:
No. of Exercise
Name Options Price
---- ------- -----
April Gates 5,000 $1.66
Terry Marco 10,000 $1.66
John Steele 20,000 $1.66
Edward Steele 30,000 $1.66
John Klecha 39,000 $1.66
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For each employee (except April Gates Green), fifty percent of their options are exercisable on August 1, 1999 and 50% on December 1, 1999. The options all expire on June 25, 2004. Fifty percent of Ms. Green's options are exercisable on January 2, 2000 and 50% on July 2, 2000. All of her options expire on June 25, 2004.
12. We entered into certain financial consulting agreements with Dunedin, Inc., FSR Investments, Inc. and Portfolio Research Associates, Inc. on July 8, 1999. We terminated these agreements with FSR Investments, Inc. and Portfolio Research Associates, Inc. on October 1, 1999 and with Dunedin, Inc. on November 26, 1999. In connection with these agreements, we issued an aggregate of 95,400 warrants to Dunedin, 76,000 warrants to Portfolio Research and 85,000 warrants to FSR Investments. The exercise price of these warrants is $1.375 per share and the warrants expire on June 8, 2002.
13. On April 15, 1999, Mr. Bauer personally loaned the Singing Machine funds sufficient to pay one of its documents of acceptance in the amount of $33,948.66. As consideration for this loan, in March 2000 we issued Mr. Bauer warrants to purchase 10,000 shares of our common stock at an exercise price of $2.00 per share, exercisable until January 1, 2003. In July 1999, Mr. Bauer arranged for a credit facility with Bank Julius Bear in the amount of $1 million. Further, in order to ensure approval of the extension of credit by Bank Julius Bear, Mr. Bauer personally guaranteed the line of credit. The Bank Julius Bear credit loan was fully repaid by the Singing Machine in February 2000. As consideration for guarantying this loan, in March 2000, we granted him warrants to purchase 50,000 shares of our common stock at an exercise price of $1.00 per share. The warrants expire in July 2005.
14. During fiscal 2000, six employees exercised options to acquire 70, 500 stock options. The names of the employees, the number of shares purchased and the proceeds to us are listed below:
Number of Purchase Proceeds to Date of
Name Shares Acquired Price the Company Exercise
---- --------------- ----- ----------- --------
Melody Rawski 5,000 $.43 $ 2,150 12/30/99
John Steele 5,000 $.43 $ 2,150 01/04/00
John Klecha 50,000 $.43 $21,500 01/18/00
Terry Marco 5,000 $.43 $ 2,150 01/25/00
Terri Phillips 2,500 $.43 $ 1,075 02/16/00
Adolph Nelson 1,500 $.43 $ 645 03/15/00
Jorge Otaegui 1,500 $.43 $ 645 08/02/00
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II-5
Each of the employees paid for the options with cash. Each employee's exercise of the option was made in reliance on Section 4(2) of the Securities Act. Each employee represented that he/she had no need for liquidity in his/her investment and had adequate financial resources to withstand a total loss of their investment. A legend was placed on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
15. During fiscal 2000, fifteen warrant holders exercised their warrants to acquire 396,000 shares of our common stock. The names of the warrant holders, the date of exercise, the number of shares purchased, the exercise price and the proceeds received by us are listed below.
Date of No. of Exercise Proceeds to the
Name Exercise Shares Price Singing Machine
---- -------- ------ ----- ---------------
Benchmark Capital 4/26/00 16,000 $2.00 $ 32,000
Sebastian Angelico 5/03/00 4,000 $2.00 $ 8,000
Josef Bauer 5/15/00 8,000 $2.00 $ 16,000
Portfolio Research
Associates 5/17/00 76,000 $1.375 $104,500
Albert Wardi 5/22/00 2,000 $2.00 $ 4,000
Jack Robbins 5/24/00 75,000 $1.00 $ 75,000
Jack Robbins 5/24/00 75,000 $1.50 $112,500
Jack Robbins 5/24/00 20,000 $2.00 $ 40,000
Wolcot Capital Inc. 5/24/00 4,000 $2.00 $128,000
Wendy Blauner 5/24/00 4,000 $2.00 $ 8,000
Jon Blauner 5/24/00 4,000 $2.00 $ 8,000
John Klecha 9/25/00 4,000 $2.00 $ 8,000
Bank Sal. Oppenheim 10/27/00 40,000 $2.00 $ 80,000
Union Atlantic 11/01/00 20,000 $1.00 $ 20,000
Sil Venturi 12/01/00 4,000 $2.00 $ 8,000
Aton Trust 12/01/00 40,000 $2.00 $ 80,000
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Each of these warrant holders exercised their warrants in reliance upon Section 4(2) of the Securities Act of 1933, because each of the holders was knowledgeable, sophisticated and had access to comprehensive information about us. We placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.
16. In May 2000, we obtained two working capital loans in the amount of $100,000 and $500,000 from Maureen La Rouche and Josef Bauer. The loans were for a period of eight months and bore interest at the rate of 15% per annum. As consideration for extending the loans, we issued 5,000 warrants to Ms. La Rouche and 25,000 warrants to Mr. Bauer. Each warrant allowed the holder to purchase one share of our common stock at an exercise price of $3.25 per share. The warrants expire on May 25, 2003.
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17. During September 2000, we issued 25,000 warrants to Neal Berkman for services rendered to our Company. Mr. Berkman a principal at Berkman and Associates, a firm that provides investor relation services to us. The warrants have an exercise price of $3.06 per share and 25,000 warrants vest on December 1, 2001 and 50% on December 1, 2002. All warrants expire on December 1, 2006.
18. On September 5, 2000, we issued an aggregate of 665,000 options to our employees, as consideration for services they had rendered to us. We issued these options to our employees in reliance upon Section 4(2) of the Securities Act, because our employees were knowledgeable, sophisticated and had access to comprehensive information about us.
No. of Exercise
Name Options Price
---- ------- -----
Josef Bauer 10,000 $3.06
Brian Cino 10,000 $3.06
April Green 20,000 $3.06
Alicia Haskamp 30,000 $3.06
John Klecha 190,000 $3.06
Terry Marco 30,000 $3.06
Marion McElligott 5,000 $3.06
Jamilla Miller 3,000 $3.06
Howard Moore 35,000 $3.06
Adolph Nelson 2,500 $3.06
Jorge Otaeugi 3,000 $3.06
Terry Phillips 5,000 $3.06
Melody Rawski 10,000 $3.06
Alan Schor 10,000 $3.06
Eddie Steele 210,000 $3.06
John Steele 50,000 $3.06
Richard Torrelli 2,000 $3.06
Edwin Young 50,000 $3.06
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For each employee, officer or director, fifty percent of their options are exercisable on December 1, 2001 and 50% on December 1, 2002. The options all expire on December 1, 2006.
19. On March 13, 2001, we issued 20,000 options to Robert Weinberg and 10,000 options to John DeNovi. The exercise price of these options is $4.90 per share and the expiration date is March 13, 2006. Half of these options vest on March 13,2002 and the remainder vest on March 13, 2002. We issued these options to Mr. Weinberg and Mr. DeNovi in reliance upon Section 4(2) of the Securities Act, because our employees were knowledgeable, sophisticated and had access to comprehensive information about us.
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Item 27. Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
3.1 Certificate of Incorporation of the Singing Machine filed with
the Delaware Secretary of State on February 15, 1994
(incorporated by reference to Exhibit 3.1 in our registration
statement on Form SB- 2 filed with the SEC on March 7, 2000).
3.2 Certificate of Agreement of Merger between the Singing Machine
Company, Inc., a California corporation, and the Singing
Machine Company, Inc., a Florida corporation, filed with the
Delaware Secretary of State on May 3, 1994 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.3 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on July 19, 1994 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.4 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on July 26, 1994 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.5 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on November 4, 1994 (incorporated
by reference to Exhibit 3.1 in our registration statement on
Form SB-2 filed with the SEC on March 7, 2000).
3.6 Certificate of Renewal of the Singing Machine filed with the
Delaware Secretary of State on April 2, 1998 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.7 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on April 20, 1998 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.8 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on May 7, 1998 incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.9 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on April 13, 1999 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.10 Certificate of Designations, Preferences and Rights of
Preferred Stock of the Singing Machine filed with the Delaware
Secretary of State on April 15, 1999 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.11 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on September 29, 2000.
(incorporated by reference to Exhibit 3.1 in our Quarterly
Report on Form 10-QSB for the period ended September 30, 1999
filed with the SEC on November 14, 2000).
3.12 By-Laws of the Singing Machine Company (incorporated by
reference to Exhibit 3.2 of our registration statement on Form
SB-2 filed with the SEC on March 7, 2000)
4.1 Form of Certificate Evidencing Shares of Common Stock
(incorporated by reference to Exhibit 3.3 of our registration
statement on Form SB-2 filed with the SEC on March 7, 2000)
4.2 Form of Warrant Certificate (incorporated by reference to
Exhibit 3.4 of our registration statement on Form SB-2 filed
with the SEC on March 7, 2000).
5.1 Opinion re: Legality of the Securities Being Registered*
II-8
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10.1 Lease Agreement dated April 10, 2000 between The Singing
Machine Company, Inc. and Rocco Ferrera & Co., Inc. and Lee S.
Lasser, trustee of the Lee Lasser Trust dated August 25, 1972,
as amended d/b/a Lyons Corporate Park for office and warehouse
space in Coconut Creek, Florida.*
10.2 Lease Agreement dated November 9, 2000 between the Singing
Machine Company, Inc. and Marcel George & Joanne Marie George,
trustees of Marcel George family trusts of September 2, 1982
for warehouse space in Carson, California.*
10.3 Lease Agreement dated August 2000 between Koon Wah Mirror
Holdings Limited and International SMC (HK) Limited for office
space in Hong Kong.*
10.4 Employment Agreement dated May 1, 1998 between the Singing
Machine and Edward Steele (incorporated by reference to
Exhibit 10.1 of our registration statement on Form SB-2 filed
with the SEC on March 7, 2000).
10.5 Employment Agreements dated June 1, 2000 between the Singing
Machine and John Klecha*
10.6 Amended and Restated 1994 Management Stock Option Plan*
10.7 Factoring Agreement dated April 7, 2000 between the Singing
Machine and Main Factors, Inc.*
10.8 Master Agreement dated July 31, 1999 between EPK Financial
Corporation Agreement and the Singing Machine (incorporated by
reference to Exhibit 10.4 of our registration statement on
Form SB-2 filed with the SEC on March 7, 2000).
10.9 Singing Machine's Amended Bankruptcy Plan of Reorganization
dated December 17, 1997 (incorporated by reference to Exhibit
10.5 of our registration statement on Form SB-2 filed with the
SEC on March 7, 2000).
10.10 Bankruptcy's Court's Order Confirming the Plan of
Reorganization (incorporated by reference to Exhibit 10.5 of
our registration statement on Form SB-2 filed with the SEC on
March 7, 2000).
21.1 List of Subsidiaries*
23.1 Consent of Counsel - English, McCaughan & O'Bryan, P.A.
(included in Exhibit 5.1)*
23.2 Consent of Accountant - Weinberg & Company, P.A.*
------------------
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*Filed herewith.
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:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act;
II-9
(ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and
(iii) Include any additional or changed material information on the plan of distribution.
(2) That, for the purpose of determining any liability under the Securities Act of 1933, as amended, treat each such post-effective amendment as a new registration statement relating to the securities offered therein, and the offering of the securities at that time 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.
(4) For purposes of determining any liability under the Securities Act of 1933, as amended, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A, and contained in a form of prospectus filed by the small business issuer under Rule 424(b)(1) or (4) or 497(h) under the Secutities Act as part of this registration statement as of the time the Commission declares it effective.
(5) For determining any liability under the Secutities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at the time as the initial bona fide offering of those securities.
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-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement on Form SB-2, to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Coconut Creek, Florida, on March 16, 2001.
THE SINGING MACHINE COMPANY, INC.
Dated: March 26, 2001 By: /s/ John F. Klecha
-------------------------------------
John F. Klecha, President, Chief Operating
Officer, Chief Financial Officer, Treasurer,
Secretary and Director
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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 Date --------- ----- ---- /s/ Edward Steele Chairman of the Board of Directors and -------------------------- Chief Executive Officer March 26, 2001 Edward Steele /s/ John F. Klecha President, Chief Operating Officer, --------------------------- Chief Financial Officer, Treasurer, March 26, 2001 John F. Klecha Secretary and Director /s/ Josef A. Bauer Director March 26, 2001 ---------------------------- Josef A. Bauer /s/ Howard Moore Director March 26, 2001 ------------------------- Howard Moore /s/ Robert J. Weinberg Director March 26, 2001 ------------------------- Robert J. Weinberg |
II-11
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
3.1 Certificate of Incorporation of the Singing Machine filed with
the Delaware Secretary of State on February 15, 1994
(incorporated by reference to Exhibit 3.1 in our registration
statement on Form SB- 2 filed with the SEC on March 7, 2000)
3.2 Certificate of Agreement of Merger between the Singing Machine
Company, Inc., a California corporation, and the Singing
Machine Company, Inc., a Florida corporation, filed with the
Delaware Secretary of State on May 3, 1994 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000)
3.3 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on July 19, 1994 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.4 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on July 26, 1994 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.5 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on November 4, 1994 (incorporated
by reference to Exhibit 3.1 in our registration statement on
Form SB-2 filed with the SEC on March 7, 2000).
3.6 Certificate of Renewal of the Singing Machine filed with the
Delaware Secretary of State on April 2, 1998 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.7 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on April 20, 1998 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.8 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on May 7, 1998 incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.9 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on April 13, 1999 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.10 Certificate of Designations, Preferences and Rights of
Preferred Stock of the Singing Machine filed with the Delaware
Secretary of State on April 15, 1999 (incorporated by
reference to Exhibit 3.1 in our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
3.11 Certificate of Amendment of the Singing Machine filed with the
Delaware Secretary of State on September 29, 2000.
(incorporated by reference to Exhibit 3.1 in our Quarterly
Report on Form 10-QSB for the period ended September 30, 1999
filed with the SEC on November 14, 2000).
3.12 By-Laws of the Singing Machine Company (incorporated by
reference to Exhibit 3.2 of our registration statement on Form
SB-2 filed with the SEC on March 7, 2000).
II-12
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4.1 Form of Certificate Evidencing Shares of Common Stock
(incorporated by reference to Exhibit 3.3 of our registration
statement on Form SB-2 filed with the SEC on March 7, 2000).
4.2 Form of Warrant Certificate (incorporated by reference to
Exhibit 3.4 of our registration statement on Form SB-2 filed
with the SEC on March 7, 2000).
5.1 Opinion re: Legality of the Securities Being Registered*
10.1 Lease Agreement dated April 10, 2000 between The Singing
Machine Company, Inc. and Rocco Ferrera & Co., Inc. and Lee S.
Lasser, trustee of the Lee Lasser Trust dated August 25, 1972,
as amended d/b/a Lyons Corporate Park for office and warehouse
space in Coconut Creek, Florida.*
10.2 Lease Agreement dated November 9, 2000 between the Singing
Machine Company, Inc. and Marcel George & Joanne Marie George,
trustees of Marcel George family trusts of September 2, 1982
for warehouse space in Carson, California.*
10.3 Lease Agreement dated August 2000 between Koon Wah Mirror
Holdings Limited and International SMC (HK) Limited for office
space in Hong Kong.*
10.4 Employment Agreement dated May 1, 1998 between the Singing
Machine and Edward Steele (incorporated by reference to
Exhibit 10.1 of our registration statement on Form SB-2 filed
with the SEC on March 7, 2000).
10.5 Employment Agreement dated June 1, 2000 between the Singing
Machine and John Klecha*
10.6 Amended and Restated 1994 Management Stock Option Plan*
10.7 Factoring Agreement dated April 7, 2000 between the Singing
Machine and Main Factors, Inc.*
10.8 Master Agreement dated July 31, 1999 between EPK Financial
Corporation Agreement and the Singing Machine (incorporated by
reference to Exhibit 10.4 of our registration statement on
Form SB-2 filed with the SEC on March 7, 2000).
10.9 Singing Machine's Amended Bankruptcy Plan of Reorganization
dated December 17, 1997 (incorporated by reference to Exhibit
10.5 of our registration statement on Form SB-2 filed with the
SEC on March 7, 2000).
10.10 Bankruptcy's Court's Order Confirming the Plan of
Reorganization (incorporated by reference to Exhibit 10.5 of
our registration statement on Form SB-2 filed with the SEC on
March 7, 2000) .
21.1 List of Subsidiaries*
23.1 Consent of Counsel - English, McCaughan & O'Bryan, P.A.
(included in Exhibit 5.1)*
23.2 Consent of Accountant - Weinberg & Company, P.A.*
------------------
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*Filed herewith.
II-13
LAW OFFICES ENGLISH,
MCCAUGHAN & O'BRYAN, P.A.
March 27, 2001
Board of Directors
The Singing Machine Company, Inc.
6601 Lyons Road, Building A-7
Coconut Creek, FL 33073
Re: The Singing Machine Company, Inc. (the "Company") Gentlemen:
You have requested our opinion in connection with the Registration Statement on Form SB-2 (the "Registration Statement") of The Singing Machine Company, Inc. relating to the following shares (the "Shares") of common stock:
(A) 958,000 Shares of common stock held by certain existing stockholders identified in the Registration Statement;
(B) 417,400 Shares of common stock issuable upon exercise of certain outstanding warrants.
We have made such examination of the corporate records and proceedings of the Company and have taken such further action as we deemed necessary or appropriate to the rendering of our opinion herein.
Based on the foregoing, we are of the opinion that the 958,000 Shares referenced above were legally issued, fully paid and non-assessable. Further, the Shares underlying the warrants , when paid for and issued as contemplated by the warrant agreements, will be legally issued, fully paid and non- assessable. Therefore, the purchasers acquiring Shares upon subsequent resale as contemplated in the Registration Statement will receive Shares that, as applicable, have been or will be legally issued, fully paid and non-assessable by the Company.
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 this Registration Statement.
Sincerely,
/s/ ENGLISH, MCCAUGHAN & O'BRYAN, P.A. |
EXHIBIT 10.1
THIS LEASE made and entered into this 10th day of __________________, by and between ROCCO FERRERA & CO., INC. (A MICHIGAN CORPORATION) AND LEE S. LASSER, TRUSTEE OF THE LEE S. LASSER TRUST DATED AUGUST 25,1972 AS AMENDED d/b/a LYONS CORPORATE PARK, whose address is 6601 N. Lyons Road, Coconut Creek, Florida 33073, Party of the First Part (hereinafter sometimes designated as "Landlord") and The Singing Machine Co., Inc. (A Florida Corporation) whose address is 6601 Lyons load, Suite A-8, Coconut Creek, FL 33073, Party of the Second Part (sometimes hereinafter designated as "Tenant").
WITNESSETH:
ARTICLE I GRANT AND TERM
Section 1.01 Leased Premises
In consideration of the mutual premises, covenants and agreements herein contained, the adequacy of which consideration is by both parties confessed and acknowledged, and in further consideration of the rents, covenants and agreements hereinafter reserved and contained on the part of the Tenant to be observed and performed, the Landlord leases to the Tenant, and the Tenant rents from the Landlord, those certain premises now or hereafter to be erected on the property hereafter described, located in Broward County, Florida, described as containing 32 feet of frontage (measured from outside of exterior wall or center of common partition, as the case may be) and having an overall depth of 100 feet (measured from outside of exterior wall to outside of exterior wall) for a total of 3,200 square feet of ground floor area, which would include a portion of the truck well area, designated "Leased or Demised Premises," and the same being located within the Industrial Park property known and described as:
EXHIBIT "A" attached hereto and made a pan hereof, and as more particularly shown on Exhibit "B", together with the right to use the areas outlined around said Leased or Demised Premises.
Landlord and Tenant agree that Exhibit "B" shows only the approximate shape and dimensions of the proposed buildings in the Industrial Park, and further agree that Tenant's consent shall not be required for any additions, reductions or modifications thereto.
Section 1.02 Length of Term
To have and to hold, together with appurtenances, for a term of four years and four month, upon the terms and conditions as herein set forth.
Section 1.03 Construction of Leased Premises
Section 1.04 Possession After Completion of Construction
Solely for the purpose of computing the term of this Lease, the commencement date shall be deemed to be the first day of the month next following the date when the premises are ready for occupancy. It is agreed that by occupying said premises as a Tenant, Tenant formally accepts the same and acknowledges that the Demised Premises are in the condition called for hereunder. The rentals herein reserved shall commence on the date when the premises are ready for occupancy.
Section 1.05 Determination of Availability of Demised Premises
Landlord and Tenant agree that Tenant agree that Tenant accepts the premises in an "AS IS, WHERE IS" condition and that the possession and commencement dates will be May 1, 2000.
ARTICLE II RENT
Section 2.01 Payment
All rent and other charges payable to the Landlord under any provision of this Lease shall be paid to the Landlord, or as the Landlord may otherwise designate, in lawful money of the United States at the address of the Landlord or at such other place as The Landlord in writing may designate, without any set-off or deduction whatsoever, and without any prior demand therefor. In addition to the payment of the Rent and other charges, the Tenant shall also pay to the Landlord at the time of payment of such Rent and other charges, all sales, use or occupancy taxes payable by virtue of any of such payments. Rent for any period during the term hereof which is for less than one (1) month shall be a prorated portion of the monthly installment.
Section 2.02 Minimum Rent
The fixed minimum annual rent during the term of this Lease shall be payable by the Tenant in equal monthly installments on or before the first day of each month in advance without any prior demand therefor and without any deduction and set-off whatsoever, and shall be as follows:
1. The minimum rent for the first sixteen months shall be One thousand six hundred and 00/100 ($1,600.00) Dollars per month for a total of Twenty-five thousand six hundred and 00/100 ($25,600.00) Dollars.
2. The minimum rent for the next twelve months shall be One thousand seven hundred six and 67/10 ($1,706.67) Dollars per month for a total of Twenty thousand four hundred eighty and 04/100 ($20,480.04) Dollars.
3. The minimum rent for the next twenty-four months shall be determined by Section 2.03 of the Lease Agreement using the prior period as the base period and adjusted annually.
Section 2.03 Adjustment of Fixed Minimum Rent
The annual Fixed Minimum Rent shall be subject to periodical adjustment (but never below the amount specified in the previous lease year) on the first day of each Lease Period and on each anniversary thereafter. Landlord shall notify Tenant of the adjustment upon Landlord's calculation of same but the failure to do so within any specific time shall not be a waiver or release of Landlord's right to collect/charge the increased minimum rent. The term "Index" means the South Consumer Price Index, All Items, For All Urban Consumers (1982-84-100) published by the Bureau-of Labor Statistics or other governmental agency then publishing the Index (or if such index is no longer published. the Index of Consumer Prices in Miami most closely comparable to the Index). The term"Base Number" means the index number immediately preceding the month in which falls the first day of the prior lease period, for which the rent is being calculated. The term "Current Number" means the Index number immediately preceding the month in which the date of commencement of the particular Lease Period. If the latest Current Number exceeds the Base Number, then the Fixed Minimum Rent for the next Lease Period shall be increased to an amount which is the product obtained by multiplying the Fixed Minimum Rent set forth in Section 2.02 of this lease by a fraction. the numerator of which fraction is such latest Current Number and the denominator of which fraction is the Bass Number. Such increased Fixed Minimum Rent shall be effective throughout the Lease Period next following such latest Current Number. The basic or minimum rental for each year of the extended time shall not W lose than the amount of rent being paid during the prior lease year. As used herein, the term "Lease Period" means tile First Lease Period which is 16 months and each consecutive period, except that if the commencement date of the Lease Term is a day other than the first day of a calendar month, then the first Lease Period shall include the number of days beginning with such commencement date and ending on the last day of such month. This Section 2.03 shall apply to the item #3 of section 2.02 The minimum annual increase shall not be less than 4 percent.
Section 2.04 Real Estate Taxes
For the purposes of this Section, the term "taxes" shall include all real estate taxes, assessments (general and special) and other governmental impositions and charges of every kind and nature whatsoever, extraordinary as well as ordinary, foreseen and unforeseen, and each and every installment thereof, which shall or may during the lease term be levied, assessed, imposed, become due and payable, or liens upon, or arise in connection with the use, occupancy or possession of, or grow duo or payable out of, or for, the building or any part thereof, or the land (the "Parcel") upon which the building is situated or any other improvements thereon. Tenant agrees to pay to Landlord Tenant's share of taxes, as herein provided, Tenant's proportionate share of taxes assessed with respect to all buildings in the Industrial Park shall be determined by multiplying the amount of such taxes by a fraction, the denominator of which shall be the rentable square foot area of all buildings constructed in the Industrial Park upon which any such taxes are assessed and the numerator of which shall be the total number of square feet of ground floor area contained in the demised premises as set forth in Section 1.01 hereof. Taxes shall be prorated as of the commencement date of the Lease upon the due date basis of the appropriate taxing authorities.
In addition to the foregoing, should the State of Florida or any political subdivision thereof or any governmental authority having jurisdiction thereover, impose a tax and/or assessment (other than a franchise tax) upon or against the rentals payable hereunder by Tenant or Landlord, either by way of substitution for the taxes and assessments levied or assessed against such land and such buildings, or in addition hereto, such tax and/or assessments shall be paid by Tenant, Landlord will estimate the obligations anticipated to be required to be paid by Tenant to Landlord as provided in this Section 2.04 and Tenant shall pay 1/12 thereof in equal monthly installments together with the payment of minimum annual rent. in the event that the aggregate of Tenant's installments during the year shall be less than the amount of the obligations due from Tenant, such deficiency shall be paid to Landlord within fifteen (15) days after demand therefor. If there shall have been an overpayment by Tenant, Tenant shall be given a credit towards the next due payment of its share of taxes.
Notwithstanding anything in this Section 2.04 to the contrary, all costs and expenses incurred by Landlord during negotiations for or contests of the amount of the taxes shall be included with the term "taxes." In the event a refund is obtained, Landlord shall credit a portion thereof to the next installment of rent due from Tenant in proportion to the share of such taxes originally paid by Tenant from which the refund was derived.
In addition to the foregoing, Tenant at all times shall be responsible for and shall pay, before delinquency, all taxes levied, assessed or unpaid on any leasehold interest, any right of occupancy, any investment of Tenant in the Demised Premises, or any personal property of any kind owned, installed or used by Tenant, including Tenant's leasehold improvements or on Tenants right to occupy the Demised Premises
Section 2.05 Additional Rent
The Tenant shall pay as additional rent any money and charges required to be paid pursuant to the terms of this Lease Agreement, whether or not the same may be designated "additional rent." If such amounts or charges are not paid at the time provided in the Lease, they shall nevertheless, if not paid when due, be collectible as rent thereafter falling due hereunder, but nothing herein contained shall be deemed to suspend or delay the payment of any amount of money or charge at the time the same becomes due and payable hereunder, or limit any other remedy of the Landlord.
Section 2.08 Past Due Rent
If Tenant shall fail to pay any rent or additional rent when the same shall be due and payable. such unpaid amounts shall bear interest from the date thereof to the date of payment at the rate of eighteen percent (18%) per annum.
ARTICLE III OPERATION AND MAINTENANCE OF COMMON AREAS
Section 3.01 Designation of Common Areas
For the purpose of this Article and wherever else used in this Lease, the common area shall be defined as to include, by way of illustration and not limitation, all parking areas, access roads and facilities which may be furnished by Landlord in or near the Industrial Park, including the truckway, or ways, driveways, pedestrian sidewalks, landscaped and planting areas, retaining walls, fences, storm sewer systems, lighting facilities, and all other areas and improvements which may be provided by the Landlord For the general use in common of the Tenants, their officers, agents, employees and customers.
Section 3.02 Construction of Common Areas
Landlord agrees, at Landlord's sole cost and expense, to hard surface, properly drain, adequately light and landscape a parking area, or parking areas, together with the necessary access roads within the limits of the Industrial Park. Landlord hereby grants to Tenant and Tenants employees, agents, customers, and invitees the right, during the term hereof, to use, in common with others entitled to the use thereof, the parking area or areas and access roads within the limits of the Industrial Park. Landlord further agrees to operate, manage and maintain, during the term of this Lease, all parking areas, roadside walks, landscaping, drainage and lighting facilities within the Industrial Park property. The manner in which such areas and facilities shall be maintained and the expenditures thereof shall be at the sole discretion of the Landlord, and the use of such areas and facilities shall be subject to such reasonable regulations as Landlord shall make from time to time.
Section 3.03 Tenants Pro Rata Share of Expenses
Tenant agrees to pay, in addition to the rental set forth in Article 11 of this Lease, a proportionate share of the costs. expenses, and other charges incurred in connection with the operation, maintenance and repair of the Common Areas of the Industrial Park and shall include, but not be limited to, the costs and expenses of the following: maintenance of the common areas including policing and security protection; repair and replacement of paving, line painting, sidewalks, planter boxes and entrance canopies, curbs, walkways, landscaping, sprinkler systems, sanitary and storm drainage systems, including retention ponds, water systems, dumpster enclosures and lighting systems (including bulbs and poles); painting of the building; maintenance and repair of the roof, to the sum of which shall be added an amount equal to ten (10%) percent thereof in payment of all of Landlord's administrative costs. The proportionate share to be paid by Tenant shall be computed on the basis that the total floor area of the herein Demised Premises bears to the total floor area of the Industrial Park as determined at the beginning of each calendar quarter.
Landlord will estimate the obligations anticipated to be required to be paid by Tenant to Landlord as provided in this Section 3.03, and Tenant shall pay 1/12 thereof in equal monthly installments, together with the payment of minimum annual rent. If requested by Tenant, Landlord shall submit a statement showing in reasonable detail for the period in question, all disbursements
made in connection with the operation and maintenance herein described. In the event that the aggregate of Tenant's installments during the calendar year shall be less than the amount of the obligations due from Tenant, such deficiency shall be paid to Landlord within fifteen (15) days after demand therefor. If there shall have been an overpayment by Tenant, Tenant shall be given credit towards the next due payment of its share of expenses.
ARTICLE IV USE OF PREMISES
Section 4.01 Use of Premises
It is understood and agreed between the parties hereto that said premises during the continuance of the Lease may be used and occupied only for office and warehouse for manufacturing and distribution of singing machines, and for no other purpose or purposes without the written consent of Landlord. The Tenant will be allowed parking pursuant to the Site Plan.
Tenant shall promptly comply with all laws, ordinances and lawful orders and regulations affecting the premises hereby leased. and the cleanliness, safety, occupation and use of same.
Section 4.02 Care of Premises
A. Tenant shall not perform any acts or carry on any practices which may injure the building or be a nuisance or menace to other tenants in the Industrial Park and shall keep the premises under its control, including sidewalks, and landscaped areas adjacent to the premises clean and free from rubbish and dirt at all times, and shall store all trash and garbage within the leased premises and arrange for the regular pickup of such trash and garbage at Tenant's expense. Tenant shall not burn any trash or garbage of any kind in or about the building. Tenant shall install beige or gray levelors in the Demised Premises.
B. Tenant shall not keep or display any merchandise or signs on or otherwise obstruct the sidewalks or areaways adjacent to the premises without the written consent of the Landlord. Tenant shall not use or permit the use of any portion of said premises as sleeping apartments, lodging rooms, or for any unlawful purpose or purposes. Tenant shall maintain the windows in a neat and clean condition. Tenant shall not make any structural changes in the Demised Premises without the written consent of Landlord. No animals shall be kept in the leased premises. Tenant shall conduct business within the leased premises and the Tenant cannot store any items outside the leased premises. Tenant can only use the Truckwells for Tractor-Trailers, as the Truckwells may retain some water during a storm.
C. Environmental Responsibilities
(1) Tenant and Landlord shall each comply with all applicable environmental laws concerning the proper storage, handling and disposal of any hazardous substances in on or about the Premises. Tenant shall not use, store, generate, treat, or dispose of any hazardous substance on the Premises, or cause, suffer or permit the same to be done by any person without the prior
written consent of the Landlord, which consent may be granted or withheld in
Landlord's sole discretion. For purposes of this Lease, the term"hazardous
substance' means any substance, the manufacture, use, treatment, storage,
transportation, or disposal of which is regulated by any law having as its
object the protection to public health, natural resources, or the environment,
including, byway of illustration only and not as a limitation, the following:
the Resources Conservation and Recovery Act; the Comprehensive Environmental
Response, Compensation, and Liability Act; the Toxic Substance Control Act; the
Federal Water Pollution Control Act; the Clean Air Act; as each such acts shall
be amended from time to time,
(2) Tenant shall promptly supply to Landlord a copy of the reports of any environmental audit or investigation at any time undertaken on the Premises or adjacent property, all notices, demands, inquiries, or claims received from any person or entity as a result of hazardous substances alleged to be on or emanating from the Premises or adjacent property, and any notices, reports, or applications for licenses, permits, or approvals submitted by or on behalf of Tenant to any environmental regulatory agency affecting the Premises or adjacent property.
(3) Landlord reserves the right (but shall not have the obligation) to enter upon and inspect the Premises at anytime, arid from time to time, during Tenant's business hours and, on reasonable notice, at other times. Such inspection may include, without limitations, the taking and analysis of soil borings, samples of ground water or Surface Water, installation of observation wells, and investigation of the surface or subsurface of the Premises by geophysical Means ("Tests"). Tenant shall promptly furnish to Landlord any information requested by or on behalf of Landlord concerning Tenant's operations on the Premises and/or adjacent property, whether or not such information of the proprietary nature. Landlord's inspection and testing rights are for Landlord's own protection only and Landlord has not, and shall not be deemed to have assumed any responsibility to Tenant or any other party for compliance with environmental laws, as a result of the exercise or non-exercise of such rights.
(4) In the event that any hazardous substance is
discovered to have been released upon or from the Premises during the term of
this Lease, whether such discovery is made during the term of this Lease oral
anytime thereafter, Tenant shall, at its sole cost and expense, take all steps
necessary to remove and properly dispose of such hazardous substance and cleanup
or repair Any contamination or damage resulting therefrom, in full compliance
with all applicable laws and regulations and to the reasonable satisfaction of
Landlord. Tenant agrees to defend, indemnify and hold Landlord harmless from and
against (i) any liabilities, including judgment, court costs, and actual
attorney fees claimed or asserted against or sustained by Landlord resulting
from Tenant's failure to fully comply with the provisions of this Section 4.02
and, (5) any costs for inspections, tests or studies referenced in Section 4.02
(c) (3) which are incurred by Landlord.
ARTICLE V UTILITY SERVICES
Section 5.01 Landlord's Obligation to Make Utility Services Available and Option to Supply Such Services
Landlord agrees to provide and maintain the necessary mains and conduits in order that water and sewer facilities, gas (if available) and electricity may be available to the Demised Premises, and Tenant agrees to promptly pay for its use of the same.
Section 5.02 Tenant's Obligation for Payment
The obligation of Tenant to pay for water, gas, if available, and
electricity, as herein provided, shall commence as of the date on which
possession of the Premises is delivered to Tenant or, provided for in Article 1,
Section 1.04 of this Lease, without regard to the formal commencement date of
this Lease, Landlord shall not be Noble for damages or otherwise should the
furnishing of any services supplied by others to the Demised Premises be
interrupted by fire, accident, riot, strike, act of God, or the making of
necessary repairs or improvements or other cause beyond the control of Landlord.
To the extent said utilities in whole or in part are not furnished by Landlord.
Tenant covenants that it will maintain and pay for when due all utility
services.
ARTICLE VI MAINTENANCE OF LEASED PREMISES
Section 6.01 Landlord's and Tenant's Obligations for Maintenance
Landlord shall keep the four outer walls and roof of the Demised Premises in good repair, except that Landlord shall not be called to make any such repairs occasioned by the act of negligence of Tenant, its agents, or employees, except to the extent that Landlord is reimbursed therefor under any policy of insurance permitting waiver of subrogation in advance of loss. Landlord shall be reimbursed for all roof repairs pursuant to Section 3.03. Tenant shall notify Landlord of any repairs which are the responsibility of the Landlord to perform. Landlord shall not be called upon to make any other improvements or repairs of any kind upon said premises and appurtenances, and said premises and appurtenances shall at all times be kept in good order, condition and repair by Tenant, and shall also be kept in a clean, sanitary, and safe condition in accordance with the laws of the State of Florida, and in accordance with all directions, rules and regulations of the health officer, fire marshal, building inspector or other proper officers of the governmental agencies having jurisdiction, at the sole cost and expense of Tenant, and Tenant shall comply with all requirements of law, ordinances and otherwise touching said premises. Tenant shag permit no waste, damage or injury to said premises, and Tenant shall at its own cost and expense will maintain and replace any glass windows, skylight, roof exhaust fans, interior electrical systems, healing, ventilating, and air conditioning systems, interior above ground plumbing, ventilating fans, overhead doors, and front doors, door hardware and frames; dock levelers, if provided, in the premises, which may be broken. At the expiration of the tenancy created hereunder, Tenant Shall surrender the premises in good condition and free from vermin, reasonable wear and tear, loss by fire or other unavoidable casualty excepted. Notwithstanding anything in this Article contained, there shag be no obligation on the part
of Tenant to comply with any of the laws, directions, rules and regulations referred to which may require structural alterations, structural changes, structural repairs, or structural additions, unless made necessary by act of work performed by Tenant, in which event Tenant shall comply at its sole expense. Tenants shall perform normal maintenance on a timely schedule which would include changing the HVAC filters.
Section 6.02 Abuse of Plumbing, Walls, Etc.
The plumbing facilities and adjoining or connecting sewer lines or mains shall not be used for any other purpose than that for which they are constructed, and no foreign substance of any kind shall be thrown therein, and the expense of any breakage, stoppage or damage resulting from a violation of this provision shall be borne by Tenant, who shall, orwhose employees, agents, invitees, or licensees shall have caused it. The Tenant, its employees or agents, shall not paint, alter or deface any walls, ceilings, partitions, floors, wood, stone or iron work without the Landlord's written consent being first obtained.
ARTICLE VII SIGNS
Section 7.01
Tenant shall not erect or install any exterior or interior Window or door signs or advertising media or window or door lettering, or placards without the previous written consent of Landlord. Tenant agrees not to use any advertising madia that shall be deemed objectionable to Landlord or other tenants, such as loudspeakers, phonographs, or radio broadcast in a manner to be heard outside the leased premises. Tenant shall not install any exterior lighting or plumbing fixtures, shades or awnings, or any exterior decorations or painting, or build any fences or make any changes to the building exterior without the previous written consent of Landlord. Notwithstanding anything herein or elsewhere to the contrary contained, any sign(s) which Tenant may install in or about the demised premises with the approval of Landlord either simultaneously with the execution of this Lease Agreement or subsequently Shall be removed at the termination of this Lease and the Tenant shall restore the area where the sign was mounted to its original condition.
ARTICLE VIII ALTERATIONS
Section 8.01
All alterations. additions, improvements and fixtures (other than trade fixtures) which may be made or installed by either of the parties hereto upon the premises and which in any manner are attached to the floors, walls or ceilings or any extension hereof shall be the properly of Landlord, and at the termination of this Lease shall remain upon and be surrendered with the premises as a part thereof, without disturbance, molestation or injury. Any floor covering, irrespective as to manner affixed, shall be and become the property to the Landlord absolutely; provided, however, that Landlord may designate by written notice to Tenant those alterations, additions, improvements and fixtures, which shall be removed by Tenant at the expiration or termination of the Lease, and Tenant
shall promptly remove the same and repair any damage to the leased premises caused by such removal of any of the foregoing, to the condition as when originally received by Tenant, reasonable wear and tear excepted. Further, Tenant shall likewise remove its machinery and equipment at the expiration or termination of this Lease and repair any damage to the leased premises caused by such removal, restoring the premises to the condition as when originally received by Tenant, reasonable wear and tear excepted.
ARTICLE IX INSURANCE AND INDEMNITY
Section 9.01 Covenant to Hold Harmless
Landlord shall be defended and held harmless by Tenant from any liability for damages to any person or any property in or upon said premises and the sidewalks, driveways and landscaped areas adjoining same, including the person and properly of the Tenant, and its employees and all persons in the building at its or their invitation or with their consent. It is understood and agreed that all properly kept, stored or maintained in the Demised Premises shall be so kept, stored or maintained at the risk of Tenant only. Tenant shall not suffer or give cause for the filing of any lion against the Demised Premises.
Section 9.02 Fire Insurance Premium
Tenant shall not carry any stock of goods or do anything in or about said premises which will in any way tend to increase the insurance rates of said premises and in the buildings of which they are a part. Tenant agrees to pay, in addition to its pro rata share of all insurance coals as described in this Lease Agreement, the total of any increase in premiums for insurance against loss by fire that may be charged during the terms of this Lease on the amount of insurance to be carded by Landlord on said premises and the buildings of which they are a part, resulting from the business carried on in the leased premises by Tenant, whether or not Landlord has consented to the same. If Tenant installs any electrical equipment that overloads the lines in the herein leased premises, Tenant shall at its own expense make whatever changes are necessary to comply with the requirements of the insurance Underwriters and governmental authorities having jurisdiction.
Section 9.03 Tenant's Obligation to Carry Public Liability Insurance
Tenant shall, during the entire term hereof, keep in full force and affect a policy of public liability insurance with respect to the Demigod Premises and the business operated by Tenant and/or any sub-tenants of Tenant in the Demised Premises, in which both Landlord and Tenant shall be named as parties covered thereby, or which provides equivalent protection to and is approved by Landlord, and in which the limits of liability shall be not less than Five Hundred Thousand Dollars ($500,000) per person and One Million Dollars ($1,000,000) for each accident or occurrence for bodily injury and Two Hundred Fifty Thousand Dollars ($250,000) for property damages.
Tenant shall furnish Landlord with a certificate or certificates of insurance, or other acceptable evidence that such insurance is in force at all times during the term hereof.
Section 9.04 Insurance Costs
A. Tenant shall pay to Landlord as additional rent during each lease year, the cost of all insurance policies including, by way of illustration and not limitation, the cost of covering all risks of loss to all of the buildings and improvements on or about the Industrial Park on the full replacement value of the buildings and all improvements thereon, and rental income protection coverage, and public liability insurance including umbrella coverage as Landlord shall deem necessary and desirable during the term of the Lease, payable by Landlord, in any lease year or portion thereof following the Commencement Date of the Lease. Insurance costs shall be prorated as of the Commencement Date and the Termination Date of the Lease. For the purposes of this Section, insurance coals shall include any deductible required to be paid as a result of any insurance claim by any insurance policy in force for the leased premises, Tenant hereby acknowledges and agrees to pay such deductibles upon request by Landlord after any loss or damage to the leased premises.
B. Tenant's proportionate share shall be computed on the basis that the first floor area of the Demised Premises bears to the total first floor area of the Industrial Park as determined at the beginning of each calendar quarter.
C. Landlord will estimate the obligations anticipated to be required to be paid by Tenant to Landlord as provided in Section 9.04 and Tenant shall pay 1/12 thereof in equal monthly installments, together with the payment of minimum annual rent. In the event that the aggregate of Tenant's installments during the year shall be less than the amount of the obligations due from Tenant, such deficiency shall be paid to Landlord within fifteen (15) days after billing is presented therefor by Landlord. If there shall have been an overpayment by Tenant, Tenant shall be given a credit towards the next due payment of its share of the insurance costs.
ARTICLE X ASSIGNMENT AND SUBLETTING
Section 10.01
Tenant agrees not to assign or in any manner transfer this Lease or any estate or interest therein without the previous written consent of Landlord, and not to sublet said premises or any part or parts thereof, and consent by Landlord to one or more assignments of this Lease or to one or more sublettings of said premises shall not operate to exhaust Landlord's rights under this Article. In the event of any assignment or sublease of all or any portion of the Premises where the rental or other consideration reserved in the sublease or by the assignment exceeds the rental or prorate portion of the rental as the case maybe, for such space reserved in this Lease, Tenant agrees to pay Landlord monthly, as additional rent, on the first day of each month, the excess of the rental or other consideration reserved in the sublease or assignment over the rental reserved in this Lease applicable to the subleased assigned space. Tenant acknowledges that Landlord selected Tenant in part on the
basis of Tenant's proposed use and occupation of the Premises, and agrees that Landlord may withhold consent to any proposed sublease or assignment if the sub-tenant's or assignee's business or proposed use of the Premises would be physically injurious to the Building or would detract from the reputation of the Industrial Park, if any, within which the Premises are located.
ARTICLE XI ACCESS TO PREMISES
Section 11.01 Right of Entry by Landlord
Landlord shall have the right to enter upon the leased premises at all reasonable hours for the purpose of inspecting the same, or of making repairs, additions or alterations to the Demised Premises or any property owned or controlled by Landlord. If Landlord deems any repairs required to be made by Tenant necessary, it may demand that Tenant make the dame forthwith, and if Tenant refuses or neglects to commence such repairs and complete the same with reasonable dispatch, Landlord may make or cause such repairs to be made and shall not be responsible to Tenant for any loss or damage that may accrue to its stock or business by reason thereof, and if Landlord makes or causes such repairs to be made, Tenant agrees that it will forthwith, on demand, pay to Landlord the cost thereof with interest at eighteen percent (18%), and if it shall default in such payment, Landlord shall have the remedies provided in Article XV.
Section 11.02 Landlord's Right to Exhibit Premises
For a period commencing ninety (90) days prior to the termination of this Lease, Landlord may have reasonable access to the premises herein demised for the purpose of exhibiting the same to prospective tenants.
ARTICLE XII EMINENT DOMAIN
Section 12.01 Total Condemnation
If the whole of the premises hereby leased shall be taken by any public authority under the power of eminent domain, then the term of this Lease shall cease as of the day possession shall be taken by such public authority and the rent shall be paid up to that day with a proportionate refund by Landlord of such rent as may have been paid in advance.
Section 12.02 Partial Condemnation
If less than the whole, but more than 25% of the leased premises shall be taken under eminent domain, Tenant shall have the right either to terminate this Lease and declare the same null and void, or, continue in the possession of the remainder of the leased premises, and shall notify Landlord in writing prior to any such taking or Tenant's intention. in the event Tenant elects to remain in possession, all of the terms herein provided shall continue in effect, except that the minimum rent shall be reduced in proportion to the amount of the premises taken and Landlord shall, at its own cost and expense, make all necessary repairs or alterations to the basic building, front and interior work
as covered by Description of Landlord's Work attached hereto so as to constitute the remaining premises a complete architectural unit.
Section 12.03 Landlord's and Tenant's Damages
All damages awarded for such taking under the power of eminent domain, whether for the whole or a part of the leased premises, shall belong to and be the property of Landlord whether such damages shall be awarded as compensation for diminution in value to the leasehold or to the fee of the premises; provided. however, that Landlord shall not be entitled to the award made to Tenant for loss of business, depreciation to, and cost of removal of stock and fixtures.
ARTICLE XIII DESTRUCTION OR DAMAGE TO DEMISED PREMISES
Section 13.01 Reconstruction of Damaged Premises
In the event the Demised Premises shall be partially or totally destroyed by fire or other casualty insurable under full standard extended coverage insurance, as to become partially or totally untenable, the same shall be repaired as speedily as possible at the expense of Landlord, unless Landlord shall elect not to rebuild as hereinafter provided, and a just and proportionate part of the rent shall be abated until so repaired. The obligation of Landlord hereunder shall be limited to the basic building and interior work as covered by Description of Landlord's Work attached hereto. In no event shall Landlord be required to repair or replace Tenant's merchandise, trade fixtures, furnishings or equipment or any alterations or additions to the leased premises accomplished by or on behalf of the Tenant. The obligations of Landlord hereunder shall be conditioned upon Tenant's payment of any deductible required by the insurance policy in force for the leased premises.
Section 13.02
If (i) either the Demised Premises or the building in which it is
located containing floor space (taken in the aggregate) shall be damaged to the
extent of more than 25% of the cost of replacement thereof, respectively, or
(ii) the proceeds of Landlord's insurance recovered or recoverable as a result
of the damage shall be insufficient to pay fully for the cost of replacement of
so much of the Demised Premises and/ or the building in which they are located
as was included in the Landlord's Work provided in Section 1.03 hereof or (iii)
the Demised Premises or the building shall be damaged as a result of a risk
which is not covered by Landlord's in insurance or (iv) the Demised Premises
shall be damaged in whole or in part during the last two years of the Lease Term
or (v) the building in which the Demised Premises are a part shall be damaged to
the extent of 50% or more of the cost of replacement thereof, whether or not the
Demised Promises shall be damaged; then, and in any of such events, Landlord may
terminate this Lease by notice given within ninety (90) days after such event
and upon the date specified in such notice, which shall not be less than thirty
(30) days nor more then sixty (60) days after the giving of said notice, this
Lease shall terminate and come to an end and Tenant shall vacate and surrender
the Demised Premises. If the casualty, repairing or rebuilding shall render the
Demised Premises untenable in whole or in part, an equitable abatement of the
Fixed Minimum Rent and Additional Rent shall be allowed from the date when the
damage
occurred until completion of the Landlord's repairs or rebuilding or, in the event Landlord elects to terminate this lease, until said date of termination taking into account, among other things, the amount and location of the floor space of the Demised Premises are rendered untenable.
Section 13.03
If this Lease shall not be terminated as provided above, Landlord
shall, at its expense, Proceed with the repair or restoration of the Demised
Premises and the building. All repairs and restoration of the Demised Premises
not involved in Landlord's work shall be performed by Tenant at its expense. All
salvage from repair or restoration work done at any time pursuant to this
Section shall belong to Landlord, who shall not be accountable therefor to
Tenant.
Section 13.04
The "cost of replacement" as such term is used in Section 13.02 above
shall be determined by the company or companies selected by the Landlord
insuring Landlord against the casualty in question, or, there shall be no
insurance, then as the parties hereto shall agree, or, in the absence of an
insurance company determination or an agreement, as shall be determined by
arbitration in Broward County, Florida, in accordance with the provisions of
Section 682, Florida Statutes.
Section 13.05
If the Demised Premises and/or the building shall be damaged or destroyed due to the fault and/or negligence of tenant, its agents, employees or invitees, Tenant shall at its expense, repair or restore the Demised Premises or building and the Fixed Minimum Rent, Tax Rent and all other additional rents and charges herein shall not abate.
Section 13.06 Subrogation
"Landlord and Tenant" each hereby release the other from any and all liability or responsibility to the other, or to any other party claiming by, through or under them by way of subrogation or otherwise, for any loss or damage to property caused by a casualty which is insurable under standard fire and extended coverage insurance; provided, however, that this mutual waiver shall be applicable only with respect to a loss or damage occurring during the lime when property insurance policies, which are readily available in the marketplace, contain a clause or permit an endorsement to the effect that any such release shall not adversely affect or impair the policy or the right of the insured party to receive proceeds under the policy.
ARTICLE XIV BANKRUPTCY OR INSOLVENCY
Section 14.01 Landlord's Option to Terminate Upon Insolvency of Tenant or Guarantor Under State Insolvency Law of Upon Insolvency of Tenant or Guarantor Under Federal Bankruptcy Act.
In the event the estate of Tenant created hereby shall be taken in execution or by other process of law, or if Tenant or any guarantor of Tenant's obligations hereunder ("guarantor") shall be adjudicated insolvent pursuant to the provisions of any present or future insolvency law under the laws of any state having jurisdiction ("state law"), or if any proceedings are filed by or against such guarantor or tenant under the Bankruptcy Code, or any similar provisions of any future federal bankruptcy law, or if a receiver or trustee of the property of Tenant or guarantor shall be appointed under state law by reason of Tenant's or guarantors insolvency or inability to pay its debts as they become due or otherwise, or if any assignment shall be made of Tenants or guarantor's property for the benefit of creditors under state law, then and in such event Landlord may at its option terminate this Lease and all rights of Tenant hereunder by giving Tenant written notice of the election to so terminate within thirty (30) days after occurrence of such event. In a reorganization under Chapter 11 of the Federal Bankruptcy Code, the debtor or trustee must assume this Lease or assign it within sixty (60) days from the filing of the proceeding, or he shall be deemed to have rejected and terminated this Lease.
ARTICLE XV DEFAULT OF THE TENANT
Section 15.01 Right to Re-enter
In the event of any failure of Tenant to pay any rental due hereunder within five (5) days after the same shall be due, or any failure to perform any other of the terms, conditions or covenants of this Lease to be observed or performed by Tenant or Guarantor for more than thirty (30) days after written notice of such default shall have been mailed to Tenant, or if Tenant or Guarantor shall become bankrupt or insolvent, or file any debtor proceedings, or take or have taken against Tenant or Guarantor in any Court pursuant to any statute either of the United States of any State, a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Tenant's or Guarantor's property, or if Tenant or Guarantor makes an assignment for the benefit of creditors, or petitions for or enters into an arrangement, or if Tenant or Guarantor shall abandon said premises, or suffer this Lease to be taken under any writ of execution, then Landlord, besides other rights and remedies it may have. shall have the right of reentry provided by Florida law which provides for notice to Tenant and a judicial hearing. After notice and a final judgment, Landlord may remove all persons and property from the leased premises and such property may be removed and stored in a public warehouse or elsewhere at the cost of, and for the account of Tenant, and all without liability to Landlord for any loss or damage which may be occasioned thereby.
Should Landlord elect to re-enter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Lease or it may from time to time without terminating this Lease make such alterations and repairs as may be necessary in order to relet the premises, and relet said premises or any part thereof for such term or terms (which may be for a term extending beyond the term of this Lease) and at such rental or rentals and upon such other term and condition as Landlord in its sole discretion may deem advisable; upon each such reletting all rentals received by Landlord from such reletting shall be applied, first, to the payment of any indebtedness other than rent due hereunder from Tenant to
Landlord; second, to the payment of any costs and expenses of such retelling, including brokerage fees and attorney's fees and of cost of such alterations and repairs; third, to the payment of rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. If such rentals received from such retailing during any month be lose than that to be paid during that month by Tenant hereunder Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. If such rentals received from such retelling during any month be more then that to be paid during that month by Tenant hereunder, then such excess shall not benefit Tenant by reducing the amount of any of Tenant's obligations due Landlord. Any amounts obtained by reletting shall ho for the sole benefit of Landlord. No such re-entry or taking possession of said premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. Should Landlord at any time terminate this Lease for any breach, in addition to any other remedies it may have, it may recover from Tenant all damages it may incur by reason of such breach, including the cost of recovering the leased premises, reasonable attorney's fees, and including the worth at the time of such termination of the excess, if any, of the amount of rent and charges equivalent to rent reserved in this Lease for the remainder of the stated term over the amount, if any, actually received by Landlord from the reletting of the leased premises, all of which amount shall be immediately due and payable from Tenant to Landlord. In determining the rent which would be payable by Tenant hereunder, subsequent to default, the annual rent for each year at the unexpired term shall be equal to the average annual minimum rent paid by Tenant from the commencement of the term to the time of default, or during the proceeding three full calendar years, whichever period is shorter. Whether or not forfeiture has been declared, Landlord will not be obligated or responsible, in any way, for failure to release the Premises or, in the event that the Premises are released, for failure to collect the rent under such releasing. The failure of Landlord to re-lease all or any part of the Premises will not release or affect Tenant's liability for rent or damages.
Section 15.02 Legal Expenses
In case suit shall be brought for recovery of possession of the leased premises, for the recovery of rent or any other amount due under the provisions at this Lease, or because of the breach of any other covenant herein contained on the part of Tenant to be kept or performed, and a breach shall be established, Tenant shall pay to Landlord all expenses incurred therefor, including reasonable attorney's fee.
Section 15.03 Waiver of Jury Trial and Counterclaims
The parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties any way connected with this Lease relating to any monetary defaults.
Section 15.04 Curing of Tenant's Default
Notwithstanding anything herein contained to the contrary, if Tenant shall be in default in the performance of any of the terms or provisions of this Lease and if Landlord shall give to Tenant notice in writing of such default specifying the nature thereof, and if Tenant shall fail to cure such default within the time provided in Section 15.01 hereof, or immediately if such default requires emergency action, Landlord may, in addition to its other legal and equitable remedies, cure such default for the account of and at the cost and expense at Tenant and the sums so expanded by Landlord, together with an administrative fee equal to twenty-five percent (25%) of The sum expanded by Landlord. shall be doomed to be additional rent and shall be paid by Tenant on the day when rent shall next become due and payable.
ARTICLE XVI TENANT'S PROPERTY
Section 16.01 Taxes on Leasehold
Tenant shall be responsible for and shall pay before delinquency all municipal, county or state taxes assessed during the term of this Lease against any leasehold interest or personal property at any kind, owned by or placed in, upon or about the leased premises by the Tenant.
Section 16.02 Notice by Tenant
Tenant shall give immediate notice to Landlord in case of fire or accidents in the leased premises or in the building of which the premises are a part. or of defects therein or in any fixtures or equipment.
ARTICLE XVII QUIET ENJOYMENT
Section 17.01 Landlord's Covenant
Upon payment by the Tenant of the rents herein provided, and upon the observance and performance of all the covenants, terms and conditions an Tenant's part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the leased premises for the term hereby Demised without hindrance or interruption by Landlord or any other person or persons lawfully or equitably claiming by, through or under the landlord, subject, nevertheless, to the terms and conditions of this Lease.
ARTICLE XVIII HOLDING OVER, SUCCESSORS
Section 18.01 Holding Over
If Tenant remains in possession of the leased premises after the expiration of this Lease without executing a now lease, it will be deemed to be occupying the leased premises as a tenant from month to month, subject to all the provisions of this Lease to the extent that they can be applicable to a month to month tenancy, except that the minimum rental for each month will he increased to an amount established by Landlord. The now monthly amount will be established by written notice from Landlord to Tenant.
Section 18.02 Successors
All rights and liabilities herein given to, or imposed upon, the respective parties hereto shall extend to and bind the several respective heirs, executors, administrators, successors, and assigns of the said parties: and if there shall be more than one tenant, they shall all be bound jointly and severally by the terms, covenants, and agreements herein. No rights, however, shall inure to the benefit of any assignee of Tenant unless the assignment to such assignee has been approved by Landlord in writing as provided in Section 10,01 hereof.
ARTICLE XIX CERTAIN RIGHTS OF LESSOR WITH RESPECT TO THE LAND
Section 19.01 Easements and Utilities
The Landlord shall have the fight, without the consent of Lessee, to grant to adjacent land owners, purchasers, Tenants or occupants or any governmental agency or public or private utility company, including Tenant, at any time and from time to time during the term of the Lease, as extended easements and rights of ingress, agrees, and common use and enjoyment with respect to the roads. walks, unimproved portions of the land, water, sewage, telephone, gas and electricity lines, and Landlord may at anytime and from time to time grant easements, public and private, for such purposes to itself and to others, and relocate any easements now or hereafter affecting the land.
ARTICLE XX MISCELLANEOUS
Section 20.01 Waiver
One or more waivers of any covenant or condition by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant or condition, and the consent or approval by Landlord to or of any act by Tenant requiring Landlord's consent or approval shall not be doomed to waive or render unnecessary Landlord's consent or approval to or of any subsequent similar act by Tenant.
Section 20.02 Subordination
Tenant hereby grants the right to Landlord to, and Landlord hereby reserves the right to, subject and subordinate this Lease (at all times) to any mortgage(s) or deed(s) of trust that my hereafter be placed upon the Demised Premises and to any and all advances to be made thereunder and to the interest thereon and all renewals, replacements and extensions thereof. Landlord may execute and deliver any instrument or instruments subordinating this Lease to any such mortgage or deed of trust without any further action or consent by Tenant, and Tenant hereby irrevocably appoints the Landlord the attorney-in-fact of the Tenant to execute and deliver any such instrument or instruments for and in the name of the Tenant. Tenant additionally hereby grants to any first mortgagee of the leased premises the light to subject and subordinate this Lease (at all times) to any such first mortgage and to any and all advances to be made thereunder and to the interest thereon and all renewals, replacements and extensions thereof. Any such first mortgagee may execute and deliver
any instrument or instruments subordinating this Lease to any such first mortgage without any further action or consent by Tenant, and Tenant hereby irrevocably appoints such first mortgages the attorney-in-fact of the Tenant to execute and deliver any such instrument or instruments for and in the name of the Tenant. In confirmation of any such subordination, the Tenant shall promptly execute any certificate that the Landlord or such first mortgagee may request.
Section 20.03 Notices
Whenever under this Lease a provision is made for notice of any kind, it shall be deemed sufficient notice and service thereof if such notice to Tenant is in writing, addressed to Tenant at the last known post office address or office address of Tenant or at the leased premises, and sent by registered or certified mail with postage prepaid, and if such notice to Landlord is in writing, addressed to the last known post office address of Landlord and sent by registered or certified mail with postage prepaid. Notice must be sent to but one Tenant or Landlord where Tenant or Landlord is more than one person.
Section 20.04 Construction
Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party. as creating the relationship of principal and agent or of partnership or of joint venture between the parties hereto, it being understood and agreed that neither the method of computation of rent, nor any other provision contained herein, nor any acts of the parties herein, shall be deemed to create any relationship between the parties hereto other than the relationship of Landlord and Tenant, Wherever herein the singular number is used, the same shall include the plural. and the masculine gander shall include the feminine and neuter genders. In the event any language is deleted from this Lease, said language shall be doomed to have never appeared and no other implication shall be drawn therefrom.
Section 20.05 Non-Liability
Landlord shall not be responsible or liable to Tenant for any loss or damage, that maybe occasioned by or through the acts or omissions of persons occupying adjoining premises, if any, or any pan of the premises adjacent to or connected with the premises hereby leased or any loss or damage resulting to Tenant or his property from burst, stopped or leaking water, gas, sower or steam pipes, or for any damage or loss or property within the Demised Premises from any cause whatsoever.
Notwithstanding any provisions of this Lease to the contrary, Tenant acknowledges and agrees that no personal liability of any kind under any of the terms, conditions or provisions of this Lease shall attach to the Landlord (including any joint venturer of the joint venture which is the Landlord hereunder or any leasing agent, broker or other agent or representative of Landlord) for the payment of any amounts payable under this Lease or for the performance of any terms, conditions or provisions required to be performed by Landlord under this Lease. If Landlord shall fall to perform any term, condition or provision of this Lease required to be performed by Landlord and if as a consequence of such default, Tenant shall recover a money judgment against Landlord, such
judgment shall be satisfied only out of the proceeds of sale received upon execution and levy of such judgment against the right, title and interest of the Landlord in the building of which the Tenant's Demised Premises are a part, and neither Landlord nor any of the joint venturers of the joint venture which is the Landlord hereunder shall be personally liable for any Such judgment or monetary deficiency.
Section 20.06 Net Lease
It is the intent of the parties that the within Lease be a net, net, not Lease.
Section 20.07 Financing and Tenant's Acknowledgment of Acceptance of Premises
Notwithstanding anything herein or elsewhere to the contrary contained.
A. The Landlord shall not be obligated to proceed with the construction of the leased premises unless and until financing acceptable to Landlord is obtained. Should such financing not be obtainable within six (6) months after completion of final plans and specifications, Landlord may so notify Tenant in writing, and this Lease shall thereupon cease and terminate, and each of the parties hereto shall be released and discharged from any and all liability and responsibility hereunder. if Landlord can obtain financing only upon the basis of modification of the terms and provisions of this Lease, the Landlord shall have the right to cancel this Lease if the Tenant refuses to approve in writing any such modifications within thirty (30) days after Landlord's request therefor. If such right to cancel is exercised, this Lease shall thereafter be null and void, any money or security deposited hereunder shall be returned to the Tenant, and neither party shall have any liability to the other by reason of such cancellation.
B. Tenant agrees to furnish Landlord, upon request and after Tenant has taken possession of the Demised Premises, a letter addressed to Landlord's mortgagee or financial institution, giving the information, as described in the attached Exhibit "C".
Failure of Tenant to provide Landlord such a letter at the request of Landlord, Landlord's mortgages or financial institution at any time during the lease term as above described, shall give Landlord the light to cancel this Lease at that time upon five (5) days written notice to Tenant of such cancellation, and the Tenant shall remain liable to the Landlord for any damages sustained by the Landlord because of such failure by the Tenant.
Section 20.08 Accord and Satisfaction
No payment by Tenant or receipt by Landlord of a lessor amount than the monthly rental herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided.
Section 20.09 Captions and Section Numbers
The captions, section numbers, article numbers and index appearing in this Lease are inserted only as a Matter of convenience and in no way define, limit, construe or describe the scope or intent of such sections or articles of this Lease nor in any way affect this Lease.
Section 20.10 Partial Invalidity
If any term, covenant or condition of this Lease or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law.
Section 20.11 No Option
The submission of this Lease for examination does not constitute a reservation of or option for the leased premises, and this Lease becomes effective as a Lease only upon execution and delivery thereof by Landlord and Tenant.
Section 20.12 Recording
This Lease shall not be recorded by the Tenant. However, it may be recorded by Landlord at Landlord's option, if this Lease is recorded by Tenant without the written consent of the Landlord, then this Lease may, at any time, without notice and whenever the Landlord so elects, be declared by Landlord null and void.
Section 20.13 Sale or Transfer of the Demised Premises
Upon any sale or transfer, including any transfer by operation of law, of the Demised Premises, or the Industrial Park, Landlord shall be relieved f rom all subsequent obligations and liabilities under this Lease as long as successor Landlord assumes all of the obligations of the Lease.
Section 20.14 Liens
In the event a mechanic's lien shall be filed against the Demised
Premises or Tenant's interest therein as a result of the work undertaken by
Tenant to ready the Demised Premises for the opening of Tenant's business or as
a result of any repairs or alterations made by Tenant, Tenant shall, within ton
(10) days after receiving notice of such lien, discharge such lien, either by
payment of the indebtedness due the mechanic's lien claimant or by filing a bond
(as provided by statute) as security there(or if Tenant shall fall to cause such
lien to be discharged upon demand, then, in addition to any other right or
remedy of Landlord, Landlord may, hut shall not be obligated to, discharge the
same by paying the amount claimed to be due or by bonding or other proceeding
deemed appropriate by Landlord and the amount so paid by Landlord and/or all
costs and expenses, including reasonable
attorney's fees, incurred by Landlord in procuring the discharge of such Non shall be deemed to be additional rent Nothing in this Lease contained shall be construed as a consent on the part of the Landlord to subject Landlord's estate in the Demised Premises to any lien or liability under the Lien Law of the State of Florida.
Tenant shall never, under any circumstances, have the power to subject the interest of Landlord in the Demised Premises to any mechanics or materialmen's liens or liens of any kind. In accordance with the applicable provisions of the Florida Lien Law. It is specifically provided that neither Tenant or anyone claiming by, through or under Tenant, including, but not limited to, contractors, sub-contractors, materialmen, mechanics, and laborers shall have any right to file or place any mechanics and laborers, mechanics or materialmen's liens of any kind whatsoever upon the Demised Promise nor upon any building or improvements thereof, and any such liens are hereby prohibited. All parties with whom Tenant may deal are put on notice that Tenant has no power to subject Landlord's interest to any claim or lien of any kind or character, and all persons so dealing with Tenant must look solely to the credit of Tenant and not to Landlord's interest or assets. Further, Tenant acknowledges that Tenant, with respect to improvements or alterations made by Tenant or caused to be made by Tenant hereunder, shall promptly notify the contractor making such improvements to the Demised Premises of this provision exculpating Landlord's liability for such liens.
Section 20.15 Attornment
In the event any proceedings are brought for foreclosure or in the event of exercise of the power of sale under any mortgage made by Landlord covering the leased premises, or areas surrounding same, Tenant shall, at the option and request of purchaser, attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease.
Section 20.16 Set-Off Statement
Tenant agrees within ton (10) days after any request therefor by the Landlord to execute in recordable form and deliver to Landlord a statement, in writing, certifying (a) that this Lease is in full force and affect, (b) the date of commencement of the term of this Lease, (c) that rent is paid currently without set-off or defense thereto, (d) the amount of rent, if any, paid in advance, and (a) that there are no uncured defaults by Landlord or stating those claimed by Tenant.
Section 20.17 Entire Agreement
This Lease shall constitute the entire agreement of the parties hereto. All prior agreements, statements or representations between the parties and their agents and/or employees, whether written or oral, are expressly merged herein and if not contained in this Lease agreement shall be of no force or affect- This Lease agreement shall not be modified, changed, altered, or discharged whatsoever, excepting only by an agreement in writing and executed by both Landlord and Tenant.
Section 20.18 Brokerage
Tenant warrants that it has had no dealings with any broker or agent in connection with this Lease, and Tenant covenants to pay, hold harmless and indemnify Landlord from and against any and all costs, expense or liability for any compensation, commissions and charges claimed by any broker or agent with respect to this Lease or the negotiation thereof based upon or arising out of any acts or dealings which Tenant or any representative of Tenant has had or is claimed to have had with such broker or agent.
Section 20.10 No Oral Changes
This Lease may not be changed or terminated orally but only upon an agreement in writing signed by the parties hereto.
Section 20.20 No Representations by Landlord
Landlord or Landlord's agents have made no representations, warranties or promises with respect to the Demised Premises or the building except as herein expressly set forth.
Section 20.21 Corporate or Partnership Tenant
If Tenant is or will be a corporation, partnership, or other entity, the persons executing this Lease on behalf of Tenant hereby covenant and warrant that Tenant has been duly organized and is qualified or authorized to do business in the State of Florida; and that the person(s) executing this Lease on behalf of Tenant is (are) duly authorized to sign and execute this Lease. Furthermore, prior to the Commencement Date, Tenant shall provide Landlord with evidence of the foregoing which, where applicable, will include a certificate from the State of Florida that Tenant is qualified to do business in that state, and a certified resolution of the Board of Directors or partners of Tenant that the parson(s) executing this Lease on behalf of Tenant was (were) duly authorized to do so. Furthermore, Tenant agrees to take any and all necessary action to keep its existence as an entity in good standing throughout the term of this Lease in the state in which Tenant has been organized and, if such state is other that the State of Florida, to continue to be qualified to do business in the State of Florida.
Section 20.22 Damage From Roof Leaks
As to Tenant' a machinery, equipment and inventory;
Tenant understands and agrees that the Landlord shall have no liability for any resultant damage from any leaks as a result of excessive rain, roofing defects or hurricane damage, and that it shall be the responsibility of the Tenant to protect itself as it sees fit concerning any leakage of water whatsoever, either from the roof, leaking or burst pipes or from any other source,
Section 20.23 Security Deposit
The Tenant has, simultaneously herewith, deposited with Landlord, the sum of Two thousand one hundred five and 87/100 Dollars ($2,105.87). Said deposit shall beheld by Landlord as security for the faithful performance by Tenant of the terms, covenants, provisions and conditions of this Lease. It is agreed that in the event Tenant defaults in respect to any of the terms, covenants, provisions and conditions of this Lease, including but not limited to the payment of rental, Landlord may, but in no event shall Landlord be re required to, use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rental or any other sum as to which Tenant is in default or any sum which Landlord may expand or may be required to expand, including attorney's fees, by reason of Tenant's default, in respect to any of the terms, covenants, provisions and conditions of this Lease, including but not limited to any damages or deficiencies in the reletting of the premises, whether such damages or deficiencies accrued before or after summary proceedings or other reentry by Landlord. Should the entire deposit, or any portion thereof, be appropriated and applied by Landlord for the payment of overdue rental or other sums due and payable to Landlord by Tenant hereunder, then Tenant shall, upon the written demand of Landlord, forthwith remit to Landlord a sufficient amount in cash to restore said security to the original sum deposited, and Tenant's failure to do so within five (5) days after receipt of such demand shall constitute a breach of this Lease. Said security deposit if not applied toward the payment of rent in arrears or toward the payment of damages suffered by the Landlord by reason of the Tenant's breach of the covenants, conditions and agreements of this Lease. is to be returned to the Tenant when this Lease is terminated, according to these terms and in no avant is said security deposit to be returned until the Tenant has vacated the premises and delivered possession to the Landlord upon the terms and conditions as provided and required under this Lease. In the event of a Sala of the land and building or leasing of the some of which the premises form a part, Landlord shall have the right to transfer the security to the vendee or the losses, and Landlord shall thereupon be released by Tenant from all liability for the return of such security, and it is agreed that the provisions hereof shall apply to every transfer or Assignment Made of the Security to a now Landlord. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the security deposited hereunder and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. Landlord shall not be required to segregate Tenant's security deposit, nor shall Tenant be entitled to any interest on the aforesaid deposit or security, it is expressly understood and agreed that the issuance of a writ or restitution and the reentering of the premises; by Landlord for any default on the part of Tenant prior to the expiration of the term, shall not be deemed such a termination of this Lease as to entitle Tenant to the recovery of the said security and that the said deposit shall be retained and remain in the possession of Landlord until the end of the term as hereinbefore stated.
Section 20.24 Administrative Charge
All rent is due on the first of the month. Any rent paid after the tenth of any month will be subject to a service charge of 10% of the minimum rent due, which will be for administrative expenses.
Section 20.25 Laws of the State of Florida
This Lease shall be governed by and construed in accordance with the laws of the State of Florida.
Section 20.26 Counterparts
This Lease shall be executed by Landlord and Tenant in two counterparts, each of which shall be deemed to be an original but both of which shall constitute one and the same agreement. If requested by Landlord or any mortgages holding any mortgage encumbering the leased premises or any pan thereof, Tenant agrees to execute and deliver to Landlord or any such mortgagee within five (5) days of such request, a duplicate original of this Lease together with all exhibits, drawings, riders or amendments thereto.
Section 20.27 Right to Plat
Landlord reserves the right to plat or otherwise subdivide the property during the term of the Lease and Tenant agrees to cooperate with Landlord.
Section 20.28 Radon Gas
Florida State Law requires that every lease contain the following statement:
"RADON GAS: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit."
Section 20.29 Tenant's Time to Sue
A. Commencement of Action. Any claim, demand, right or, defense by Tenant that ads" out of this Lease or the negotiations that preceded this Lease shall be barred unless Tenant commences an action thereon, or interposes a defense by reason thereof, within six (6) months after the date of the inaction, omission, event, or action that gave rise to such claim, demand, right or defense.
B. Tenant Acknowledgment. Tenant acknowledges and understands, after having consulted with its legal counsel, that the purpose of Paragraph A is to shorten the period within which Tenant would otherwise have to raise such claims, demands, rights, or defenses under applicable laws.
Section 20.30 Rider
A Rider is attached hereto and made part hereof.
IN WITNESS WHEREOF, Landlord and Tenant have signed their names and affixed their seals the day and year first above written.
SIGNED, SEALED AND DELIVERED LANDLORD:
IN THE PRESENCE OF:
LYONS CORPORATE PARK
/s/ Vickie Buzzell By: /s/ Augustine Ferrera
----------------------------------- -------------------------------
Augustine Ferrera
Secretary/Treasurer for
/s/ Ann Mittilman Rocco Ferrara & Co., Inc.
-----------------------------------
By: /s/ Lee S. Lasser
-------------------------------
Lee S. Lasser/Trustee
TENANT:
The Singing Machine Co., Inc.
(A Florida Corporation)
/s/ Vickie Buzzell By: /s/ John Klecha
------------------------------------ -------------------------------
/s/ Ann Mittilman Title: Chief Operating Officer
------------------------------------ ----------------------------
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INDIVIDUAL
On this _______ day of ___________________, 2001, before me personally appeared __________________________________________________________, who did acknowledge before me that he/she executed the within and foregoing instrument by his free act and deed for the purpose therein expressed.
PERSONALLY KNOWN ________________________________
OR PRODUCED IDENTIFICATION ________________________________
TYPE OF IDENTIFICATION PRODUCED ________________________________
PARTNERSHIP OR CORPORATION
The foregoing instrument was acknowledged before me this _____ day of
________ 2001, by JOHN KLECHA, as Chief Operating Officer for THE SINGING
MACHINE CO., INC.
(SEAL) /s/ Vickie Buzzell
-----------------------------------
Print, Type or Stamp Name of Notary
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PERSONALLY KNOWN ________________________________
OR PRODUCED IDENTIFICATION ________________________________
TYPE OF IDENTIFICATION PRODUCED ________________________________
The foregoing instrument was acknowledged before me this _____ day of _______________, 2001, by AUGUSTINE FERRERA, as Secretary/Treasurer for ROCCO FERRERA & CO., INC. He is personally known to me.
(SEAL) /s/ Vickie Buzzell
-----------------------------------
Print, Type or Stamp Name of Notary
|
The foregoing instrument was acknowledged before me this _____ day of _______________, 2001, by LEE S. LASSER, TRUSTEE. He is personally known to me.
(SEAL) /s/ Vickie Buzzell
-----------------------------------
Print, Type or Stamp Name of Notary
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RIDER NO. I ATTACHED TO AND MADE A PART OF LEASE AGREEMENT DATED
_____________ BETWEEN ROCCO FERRERA & CO., INC. (A MICHIGAN CORPORATION)
AND LEE S. LASSER, TRUSTEE OF THE LEE S. LASSER TRUST DATED AUGUST 25,1972
AS AMENDED, d/b/a LYONS CORPORATE PARK, LANDLORD AND THE SINGING
MACHINE CO., INC. (A Florida Corporation)
AS TENANT, DATED THE ______ DAY OF _____________________
RE: 6601 Lyons Road, Suite A-6, Coconut Creek, FL 33473
1. _______ Landlord and Tenant agree that Landlord has supplied and placed in the demised premises, storm shutters and bolts to cover all of the glass in the front of the bay and the front door. Tenant agrees that it is the sole responsibility of Tenant to install the storm shutters should the need arise. At the termination of the occupancy, the Tenant agrees to return the shutters and bolts to the Landlord in good condition.
Witnesses: LANDLORD: Lyons Corporate Park
/s/ Vickie Buzzell By: /s/ Augustine Ferrera
-------------------------- -------------------------------------------
Augustine Ferrer Secretary/Treasurer
/s/ Ann Mittilman for Rocco Ferrara & Co., Inc.
-------------------------- (A Michigan Corporation)
By: /s/ Lee S. Lasser
-------------------------------------------
Lee S. Lasser/Trustee
TENANT: The Singing Machine Co., Inc.
(A Florida Corporation)
/s/ Vickie Buzzell By: /s/ John Klecha
--------------------------- -------------------------------------------
/s/ Ann Mittilman
---------------------------
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EXHIBIT "A"
LEGAL DESCRIPTION
Lot 1 & 2 of Lyons Business Park according to the Plat thereof as recorded in Plat Book 137, Page 47 of the Public Records of Broward County.
LEASE DATE:
LANDLORD:
TENANT:
PREMISES:
The undersigned Landlord and Tenant of the above lease hereby certify to _____________________________ as mortgagee, the following:
1. That the term of the lease commenced on _____________, 200__, and the Tenant is in full and complete possession of the premises demised under the lease and has commenced full occupancy and use of the premises, such possession having been delivered by the Landlord and having been accepted by the Tenant. (May be omitted where term has not commenced and Tenant is not yet in occupancy.)
2. That the lease calls for and Tenant is paying monthly rental installments of which commenced to accrue on the _____ day of ______________, 200__.
3. That no advance rental or other payment has been made in connection with the Lease, except rental for the current month and the last month of the lease term (if applicable) and the rent has been paid to and including _________________, 200__.
4. That a security deposit in the amount of $___________ is being held by Landlord, which amount is not subject to any set off or reduction or to any increase for interest or other credit due to Tenant.
5. That all obligations and conditions under said Lease to be performed to date by Landlord or Tenant have been satisfied, free of defenses and set-offs including all construction work in the demised premises.
6. That the Lease is a valid lease and in full force and effect and represents the entire agreement between the parties; that there is no existing default on the part of the Landlord or the Tenant in any of the terms and conditions thereof and no event has occurred which, with the passing of time or giving of notice or both, would constitute an event of default; and that said Lease has: (initial one)
( ) not been amended, modified, supplemented, extended, renewed or assigned.
( ) been amended, modified, supplemented, extended, renewed or ssigned as follows by the following described agreements:
7. That the Lease provides for a primary term of _________________, 200__; and that: (initial one)
( ) neither the Lease nor any of the documents listed in Paragraph 6, (if any), contain an option for any additional term or terms.
( ) the Lease and/or the documents listed under Paragraph 6, above, contain an option for _____________ additional term(s) of ___________ year(s) and ____________ month(s) (each) at a rent to be determined as follows:
8. That there are no actions, voluntary or involuntary, pending against the Tenant under the bankruptcy laws of the United States or any state thereof.
9. That this certification is made knowing that is relying upon the representations herein made.
TENANT:
DATED BY:
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TITLE:
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LANDLORD:
DATED BY:
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TITLE:
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(Description of Landlord's Work)
FOR LOT 1 & 2 OF
A. Building Construction
1. Building Fill - compacted to a density of 98 percent at optimum moisture contact.
2. Foundations: Reinforced concrete (3.000 p.s.i) spread footings. Soil bearing capacity assumed to be 2,500 psf.
3. Exterior Walls: 8" concrete masonry units with tie columns and tie beams with painted stucco exterior finish, interior finish not painted.
4. Structural Frame: A-36 steel roof framing made up of open web steel bar joists bearing on steel girder joists supported by areal pipe columns. Minimum clear height to be 18'-0" from finish floor slab to underside of roof structure.
5. Floor slab: 4" concrete slab reinforced with 6" x 6" - 1.4/1.4 welded wire mesh on 6 mil. visqueen vapor barrier.
6. Roof Construction:
a) 22 ga. corrugated metal dock with 1" rigid insulation board fastened to metal deck.
b) 4 ply built-up tar and gravel roof.
7. Doors:
a) Overhead doors: 12'w x 14'h at bays and 8'w x 8'h at truck dock. Metal overhead rolling door with manual drive surface mounted inside space.
b) Entrance Doors: 3'0" x 7'0" Gray tinted tempered glass set in Satin aluminum frames.
c) Rear Doors" 3'0" x 7'0" metal doors in hollow metal frames.
d) Interior Doors: Wood hollow core stain grade door set
in wood Jamb. 3'0" x 6'8" x 1-3/8" at office and 2'8"
x 6'8" x 1-3/8" at toilets.
8. Interior Partitions: Building D, Building H and Building I =
8'0" high constructed from 3-5/8" galvanized metal studs with
top and bottom cap .25 gauge thickness. Studs to be placed 24"
o.c. Finish on walls to be 1/2" gypsum wallboard, joints to be
finished with 2" joint tape covered with 3 coats of spackling
compound sanded smooth. 3-1/2" batt insulation at perimeter
interior partitions.
9. Toilet Facilities: Each toilet facility shall have 1 water closet, 1 lavatory. 1-18" x 24" plate glass mirror, 1 paper holder. Floor finish shall be vinyl tile, walls to be pointed dry wall and calling to be acoustical tile.
1 toilet facility per bay shall conform to the American National Standards "Specifications for Making Buildings and Facilities Accessible to and Usable by, the Physically Handicapped" ANSI A 117.1.
10. Office Area Finishes:
a) Walls, 2 coats of Interior type flat latex paint.
b) Doors and Frames: 2 coats semi-gloss pain or stain.
c) Flooring: carpet allowance of $9.00 s.y.
d) Base:; 4" vinyl or rubber.
e) Ceiling: 2' x 4' x 5/8" mineral fiber board White flush type, with fissured face. Runners and edge moldings to be 5/8" x 6" fiberglass butt insulation above ceiling. Ceiling height at Building C is 9' and at Building F and G is 8'.
11. Hardware.
a) Entrance Doors to have double cylinder dead bolt lockset with interior thumb turn, push/pull bar, automatic closer and offset pivot hinges. All finishes to match finish of door frame.
b) Interior Door - 1 pr. at 3 1/2" x 3 1/2" antique brass finish mortise type butts with one Schlage or equal F Series tulip antique brass finish passage hardware per door and one door stop.
c) Rear Door - 1 1/2" pr. at 4 1/2" x 4'1/2" paint grade mortise type butts with double cylinder dead bolt with 1" throw.
d) Washroom Doors with privacy HDW.
12. Plumbing - Exterior lines all to be polyvinyl chloride
type (PVC). Interior waste and vent lines to
be PVC. Interior water distribution to be
copper pipe.
13. HVAC - Air conditioning to be provided by split
package with the compressor mounted on steel
curbs set on the roof, and the air handler
suspended from the roof, above the office
area. A/C supplied at 1 ton/400 s.f. of
office space. Heating will be accomplished
by heat strips in air handling unit.
Ductwork to be standard fiberglass
foil-clad. One 1/3 h.p. ventilator exhaust
fan in shop area.
14. Electrical
Service - Individual meters, 200 amp 3 phase service
for each bay. Lighting is to be provided in
the office space by 2' x 4' lay in 4 lamp
flourescent fixtures and in warehouse area
by 1' x 8' lamp flourescent fixtures mounted
to underside of roof structures.
15. Water
Service - 3/4' supply with 5/8' meter - each bay its
individually metered.
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16. Accessories - Shop area 3' x 3' white translucent skylights.
17. The plans for this premises are Job No. 9739, dated 3/31/99, drawn by Perez & Associates.
LOCATION: Lyons Corporate Park
6601 Lyons Road
Coconut Creek, Florida 33073
EXTERIOR BUILDING SIGN: All signs shall be fabricated identically using the
following construction specifications:
1) All sign layouts must be approved by
landlord before installation. Sketch and
specifications must be submitted.
2) All live sign areas are restricted in size
to allow perimeter air space where no sign
element can be placed.
3) All signs to consist of individual molded 3
dimensional (not flat) plastic letters
outfitted with studs and perforated metal
pads for cementing onto steel sign bank. A
silicone adhesive and sticky back tape must
be used to allow for removal of letters when
necessary. Perforated pads must be adjusted
to allow a minimum of 1/8" projection from
back of letters to wall (see Diagram B).
4) Tenant may choose from a variety of letter
styles available and the color must be
white.
5) Logos and company emblems may be used as
long as they conform to these general
construction specifications and do not
exceed sign "size" regulations.
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NOTE: The Tenant shall confirm with the City of Coconut Creek that their sign conforms to City Ordinances prior to construction of their sign.
EXHIBIT 10.2
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - GROSS
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes only November 9, 2000, is made by and between Marcel George & Joanne Marie George, trustees of Marcel George family trusts of September 2, 1982 ("Lessor") and The Singing Machine Company, Inc., a Florida Corporation ("Lessee"), (collectively the "Parties" or individually a "Party").
1.2 Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 967 East Sandhill Avenue, Carson, CA 90746 located in the County of Los Angeles, state of California, and generally described as (describe briefly the nature of the property and, if applicable, the "Project". If the property is located within a Project) the westerly portion of that certain property known as 967-69 East Sandhill Avenue, Carson, CA as shown an exhibit "A" attached hereto. The lease premises being approximately 22,950 square feet of building area plus yard/parking ("Premises"). (See also Paragraph 2).
1.3 Term: 3 years and 1 months ("Original Term") commencing January 1, 2001 ("Commencement Date") and ending January 31, 2004 ("Expiration Date"). (See also Paragraph 3)
1.4 Early Possession: X X X ("Early Possession Date"). (See also Paragraphs 3.2 and 3.3)
1.5 Base Rent: $ 11,500.00 per month ("Base Rent"), payable on the First day of each month commencing on January 1, 2001. (See also Paragraph 4)[] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted and/or for common area maintenance charges.
1.6 Base Rent Paid Upon Execution: $11,500.00 as Base Rent for the period of January, 2001.
1.7 Security Deposit: $11,500.00 ("Security Deposit"). (See also Paragraph 5)
1.8 Agreed Use: warehouse distribution and service of electronic equipment. (See also Paragraph 6)
1.9 Insuring Party. Lessor is the "Insuring Party". The annual "Base Premium" is __________. (See also Paragraph 8)
1.10 Real Estate Brokers: (See also Paragraph 15)
(a) Representation: The following real estate brokers (collectively, the "Brokers") and brokerage relationships exist in this transaction (check applicable boxes): [X] Hal Thompson Co. represents Lessor exclusively ("Lessor's Broker"): [X] Collins Commercial Corporation represents Lessee exclusively ("Lessee's Broker"); or [ ] ___________________________ represents both Lessor and Lessee ("Dual Agency").
(b) Payment to Brokers: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of _______% of the total Base Rent for the brokerage services rendered by said Broker).
1.11 Guarantor. The obligations of the Lessee under this
Lease are to be guaranteed by ______________________________________
("Guarantor"). (See also Paragraph 37)
1.12 Addenda and Exhibits. Attached hereto is an Addendum or Addenda consisting of Paragraphs 50 through 51 and Exhibits A all of which constitute a part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon is not subject to revision whether or not the actual size is more or less.
2.2 Condition. Lessor shall deliver the Premises broom clean and free of debris on the Commencement Date or ft Early Possession Date, whichever first occurs ("Start Date"), and warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, if any, and all other such elements of the building, in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the surface and structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "Building") shall be free of material defects. If a non-compliance with said warranty exists as of the Start Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If, after the Start Date, Lessee does not give Lessor written notice of any non-compliance with this warranty within (i) six (6) months as to the HVAC systems or (ii) thirty (30) days as to the remaining systems and other elements of the Building, correction of such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense, except for the roof, foundations, and bearing walls which are handled as provided in paragraph 7.
2.3 Compliance. Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations and ordinances ("Applicable Requirements") in effect on the Start Date. Said warranty does not apply to this use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning is appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed, if the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of Such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6,2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of such work as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however, that if such
Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and the amount equal to six (6) months' Base Rent if Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure.
(b) If such Capital Expenditure is not the result of the
specific and unique use of the Premises by Lessee (such as, governmentally
mandated seismic modifications), then Lessor and Lessee shall allocate the
obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(c):
provided, however, that if such Capital Expenditure is required during the last
two years of this Lease or if Lessor reasonably determines that it is not
economically feasible to pay its share thereof, Lessor shall have the option to
terminate this Lease upon ninety (90) days prior written notice to Lessee unless
Lessee notifies Lessor, in writing, within ten (10) days after receipt of
Lessor's termination notice that Lessee will pay for such Capital Expenditure.
If Lessor does not elect to terminate, and tails to tender its share of any such
Capital Expenditure, Lessee may advance such funds and deduct same, with
interest, from Pent until Lessor's share of such costs have been fully paid, if
Lessee is unable to finance Lessor's share, or if the balance of the Rent due
and payable for the remainder of this Lease is not sufficient to fully reimburse
Lessee or an offset basis, Lessee shall have the right to terminate this Lease
upon thirty (30) days written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall be fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease.
2.4 Acknowledgments. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use; (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises; and (c) neither Lessor, Lessors agents, nor any Broker has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that; (a) Broker has made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises: and (b) it is Lessors sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.
2.5 Lessee as Prior Owner/Occupant, The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.
3.2 Early Possession. The Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date.
3.3 Delay In Possession, Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until it receives possession of the Premises. If possession is not delivered within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder, if such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall terminate. Except as otherwise provided, if possession is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession of the Premises is not delivered within four (4) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing.
3.4 Lessee Compliance. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of b obligations under this Lease from and after the Start Date, including the payment of Plant, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.
4. Rent.
4.1. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("Rent").
4.2 Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Sent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating.
5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Plant, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of sold Security Deposit for the payment of any amount due Lessor or to reimburse or compensate, Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all of or any portion of said Security Deposit, Lessee shall
within ten (10) days after written request therefor deposit monies with Lessor
sufficient to restore said Security Deposit to the full amount required by this
Lease. If the Base Rent increases during the term of this Lease, Lessee shall,
upon written request from Lessor, deposit additional moneys with Lessor so that
the total amount of the Security Deposit shall at all times boor the same
proportion to the increased Base Rent as ft initial Security Deposit bore to the
initial Base Rent. Should the Agreed Use be amended to accommodate a material
change in the business of Less" or to accommodate a sublessee or assignee,
Lessor shall have the right to increase the Security Deposit to the extent
necessary, in Lessor's reasonable judgment, to account for any increased wear
and tear that the Premises may suffer as a result thereof, if a change in
control of Lessee occurs during this Lease and following such change the
financial condition of Lessee is, in Lessor's reasonable judgment, significantly
reduced, Lessee shall deposit such additional monies with Lessor as shall be
sufficient to cause the Security Deposit to be at a commercially reasonable
level based on said change in financial condition. Lessor shall not be required
to keep the Security Deposit separate from its general accounts. Within fourteen
(14) days after the expiration or termination of this Lease, Lessor elects to
apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30)
days after the Premises have been vacated pursuant to Paragraph 7,4(c) below,
Lessor shall return that portion of the Security Deposit not used or applied by
Lessor. No part of the Security Deposit shall be considered to be hold in trust,
to bear interest or to be prepayment for any monies to be paid by Lessee Under
this Lease.
6. Use.
6.11 Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose, Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay b consent to any written request for a modification of the Agreed Use, so long as the same will not Impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, or is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (111) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory, Hazardous Substances shall include, but not be limited to, hydrocarbons, Petroleum, gasoline, and/or crude oil or Any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "Reportable Use"shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with
respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of Contamination or damage or expose Lessor to any liability therefor, in addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances at Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, Including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.
(c) Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party.
(d) Lessee Indemnification. Lessee shall indemnity, defend and hold Lessor, its agents, employees, lenders and ground lessor, il any, harmless from and against any and all loss of rents and/or damages, liabilities, Judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.
(e) Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances on the Premises prior to the Start Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required
by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease.
(f) Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee's use (including alterations) of the Premises. In which event Lessee shall be responsible for such payment, Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessors agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities.
(g) Lessor Termination Option. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13). Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessors desire to terminate this Lease as of the date sixty (k) days following the date of such notice, in the event Lessor elects to give a termination notice. Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessors notice of termination.
6.3 Lessee's Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessors engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lowe or the Premise* to comply with any Applicable Requirements.
6.4 Inspection; Compliance. Lessor and Lessor's "Lender' (as defined in Paragraph 30 Wow) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination. 7. Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations
7.1 Lessee's Obligations.
(a) In General. Subject to the provisions of Paragraph
2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building
code), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessors
Obligations), 9 (Damage and Destruction), and 14 (Condemnation), Lessee shall,
at Lessee's role expense, keep the Premises, Utility Installations, and
Alterations in good order, condition and repair (whether or not the portion of
the Premises requiring repairs, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessees use, any prior use, the elements or the
age of such portion of the Premises), including, but not limited to, all
equipment or facilities, such as plumbing, heating, ventilating,
air-conditioning, electrical, lighting facilities, boilers, pressure vessels,
fire protection system, fixtures, walls (interior and exterior), ceilings,
floors, windows, doors, skylights, landscaping, driveways, parking lots, fences,
signs, sidewalks and parkways located in, on, or adjacent to the Premises.
Lessee is also responsible for keeping the roof and roof drainage clean and free
of debris. Lessor shall keep the surface and structural elements of the roof,
foundations, and bearing walls in good repair (see paragraph 7.2). Lessee, in
keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices. Lessee's obligations shall include
restorations, replacements or renewals when necessary to keep the Premises and
all Improvements thereon or a part thereof in good order, condition and state of
repair. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition (including, e.g., graffiti
removal) consistent with the exterior appearance of other similar facilities of
comparable age and size in the vicinity; including, when necessary, the exterior
repainting of the Building.
(b) Service Contracts. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and Improvements ('Basic Elemental, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) driveways and parking lots, (vi) clarifiers, (vii) basic utility feed to the perimeter of the Building, and (viii) any other equipment, if reasonably required by Lessor.
(c) Replacement Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8,7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if the Basic Elements described in Paragraph 7.1 (b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by Lessor, and the mat thereof shall be
prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a traction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the Judgment of Lessor's accountants), with Lessee reserving the right to prepay its obligation at any time.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building
Code), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the
Parties hereto that Lessor have no obligation, in any manner whatsoever, to
repair and maintain the Premises, or the equipment therein, all of which
obligations are intended to be that of the Lessee, except for the surface and
structural elements of the rod, foundations and bearing walls, the repair of
which shall be the responsibility of Lessor upon receipt at written notice that
such a repair is necessary. It is the intention of the Parties that the terms of
this Lease govern the respective obligations of the Parties as to maintenance
and repair of the Premises, and they expressly waive the benefit of any statute
now or hereafter in affect to the extent it is inconsistent with the terms of
this Lease.
7.3 Utility Installations; Trade Fixtures; Alterations
(a) Definitions; Consent Required. The term "Utility Installations" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems and signs, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term 'Trade Fixtures" shall mean Lessees machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lowe Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessors prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the mot or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any one year.
(b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work and (W) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner, Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee providing a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor.
(c) Indemnification. Lease shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than tan (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lomas shall, at its sole expense defend and project itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and Cost.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Leme shall be the property of Loose, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property at Lessor and be surrendered by Lessee with the Premises.
(b) Removal. By delivery to Lessee of written notice from Lessor not earlier than ninety (90) and not later than thirty (30) days prior to the and of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent.
(c) Surrender/Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary Wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lome "if repair any damage occasioned by 0* installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the prop" of Less" and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below.
8. Insurance Indemnity.
8.1 Payment of Premium Increases.
(a) Lowe shall pay to Lessor any insurance cost increase (Insurance Cost Increase) occurring during the term of this Lease, 'Insurance Cost Increase' is defined as any increase in the actual cost of the insurance required under Paragraph 8.2(b), 8.3(a) and 8.3(b) ("Required
Insurance), over and above the Base Premium as hereinafter defined calculated on an annual basis. "Insurance Cost Increase shall include but not be limited to increases resulting from the nature of Lessee's occupancy, any act or omission of Lessee, requirements of the holder of mortgage or deed of trust covering the Premises, increased valuation of the Premises and/or a premium rate Increase. The parties are encouraged to fill in the Base Premium in Paragraph 1.9 with a reasonable premium for the Required Insurance based on the Agreed Use of the Premises. If the parties fail to insert a dollar amount in Paragraph 1.9, then the Base Premium shall be the lowest annual premium reasonably obtainable for the Required Insurance as of the commencement of the Original Term tot the Agreed Use of the Premises. In no event, however, shall Lessee be responsible for any portion of the increase in the premium cost attributable to liability insurance carried by Lessor under Paragraph 8.1 (b) in excess of $2,000,000 per occurrence.
(b) Lessee shall pay any such Insurance Cost Increase to Lessor within thirty (30) days after receipt by Lessee of a copy of the premium statement or other reasonable evidence of the amount due. If the insurance policies maintained hereunder cover other prop" besides the Premises, Lessor shall also deliver to Lessee a statement of the amount of such Insurance Cost Increase attributable only to the Premises showing in reasonable detail the manner in which such amount was computed, Premiums for policy periods commencing prior to, or extending beyond the term of this Lease, shall be prorated to correspond to the term of this Lease.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only,(b) Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.21(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall hot be named as an additional insured therein.
8.3 Property Insurance - Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Patty shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor, any groundlessor, and to Lender(s) insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more then the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such
policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender or included in the Base Premium), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city neatest to where the Premises are located.
(b) Rental Value. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next twelve (12) month period.
(c) Adjacent Premises, if the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessees acts, omissions, use or occupancy of the Premises.
8.4 Lessee's Property/Business Interruption Insurance.
(a) Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations, Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force.
(b) Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.
(c) No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cower Lessee's property, business operations or obligations under this Lease.
8.5 Insurance Policies. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the wit thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fall to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies, may have against Lessor or Lessee, as the case may be so long as the insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, Hens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters. Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, tire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a Part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations, Utility Installations and Trade Fixtures, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total.
(b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction,
Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total.
(c) "Insured Loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.
(d) "Replacement Cost"shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises.
9.2 Partial Damage - Insured Loss. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Leme's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect: provided, however, that Lessee shall, at
Lessors election, make the repair of any damage or destruction the total cost to
repair of which is $10,000 or less, and, in such event, Lessor shall make any
applicable insurance proceeds available to Lessee on a reasonable basis for that
purpose. Notwithstanding the foregoing, if the required insurance was not in
force or the insurance proceeds are not sufficient to effect such repair, the
Insuring Party shall promptly contribute the shortage in proceeds as and when
required to complete said repairs, in the event, however, such shortage was due
to the fact that, by reason of the unique nature of the improvements, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provider, Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor if Lessor receives said funds or adequate assurance thereat
within said ten (10) day period, the party responsible for making the repairs
shall complete them as soon as reasonably possible and this Lease shall remain
in full force and effect. If such funds or assurance are not received. Lessor
may nevertheless elect by written notice to Lessee within ten (10) days
thereafter to: (i) make such restoration and repair as is commercially
reasonable with Lessor paying any shortage in proceeds, in which case this Lease
shall remain in full force and effect: or (ii) have this Lease terminate thirty
(30) days thereafter. Lessee shall not be entitled to reimbursement of any funds
contributed by Lessee to repair any such damage or destruction, Premises Partial
Damage duo to Road or earthquake shall be subject to Paragraph 9.3,
notwithstanding that there may be some insurance coverage, but the not proceeds
of any such insurance shall be made available for the repairs if made by either
Party.
9.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (1) repair such damage as soon as reasonably possible at Lessors expense, in which event this Lease shall continue in full force and effect, or (11) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days
following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give Written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Loam shall continue hi full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee. Lessor shall have the right to recover Lessors damages from Lessee, except as provided in Paragraph 8.6.
9.5 Damage Near End of Term. N at any time during the last six (6)
months of this Lease there is damage for which the cost to repair exceeds one
(1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this
Lease effective sixty (60) days following the date of occurrence of such damage
by giving a written termination notice to Lessee within thirty (30) days after
the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee
at that time has an exercisable option to extend this Lease or to purchase the
Premises, then Lessee may preserve this Lease by, (a) exercising such option and
(b) providing Lessor with any shortage in insurance proceeds (or adequate
assurance thereof) needed to make the repairs on or before the earlier of (i)
the date which is ten days after Lessee's receipt of Lessor's written notice
purporting to terminate this Lease, or (11) the day prior to the date upon which
such option expires, if Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any shortage
in insurance proceeds, Lessor shall, at Lessor's commercially reasonable
expense, repair such damage as own as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during such period, then this Lease shall
terminate on the date specified in the termination notice and Lessee's option
shall be extinguished.
9.6 Abatement of Rent; Lessee's Remedies.
(a) Abatement. In the event at Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shell be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.
(b) Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to ally Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall
continue in full force and effect. "Commence" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.
9.7 termination-Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor.
9.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the Went inconsistent herewith.
10. Real Property Taxes.
10.1 Definition of "Real Property Tam," As used herein, the term "Real Property Taxes' shall include any form at assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); Improvement bond: and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises.
10.2
(a) Payment of Taxes. Lessor shall pay the Real Property Taxes applicable to the Premises provided, however, that Lessee shall pay to Lessor the amount, if any, by which Real Property Taxes applicable to the Premises increase over the fiscal tax year during which the Commencement Date occurs ("Tax Increase"). Subject to Paragraph 10.2(b), payment of any such Tax Increase shall be made by Lessee to Lessor within thirty (30) days after receipt of Lessor's written statement setting forth the amount due and the computation thereof. If any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease. Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect.
(b) Advance Payment, in the event Lessee incurs a late charge on any Rent payment, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that the Tax Increase be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the amount due, at least twenty (20) days prior to the applicable delinquency date; or (ii) monthly in advance with the payment of the Base Rent, if Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of the Tax Increase divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable Tax Increase is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable Tax Increase. If the amount collected by Lessor is insufficient to pay the Tax Increase when due, Lessee shall pay Lessor, upon demand, such additional sums as
are necessary to pay ouch obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may at the option of Lessor, be treated as an additional Security Deposit.
(c) Additional Improvements. Notwithstanding anything to the contrary in this Paragraph 10.2, Lessee shall pay to Lessor upon demand therefor the entirety of any increase in Real Property Taxes assessed by reason of Alterations or Utility Installations placed upon the Premises by Lessee or at Lessee's request.
10.3 Joint Amusement. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Tax Increase for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available.
10.4 Personal Property Taxes. Lessee shall pay, prior to
delinquency, all taxes assessed against and levied upon Lessee Owned
Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and
all personal property of Lessee. When possible, Lessee shall cause such property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement. 11. Utilities. Lessee shall pay
for all water, gas, heat, light, power, telephone, trash disposal and other
utilities and services supplied to the Premises, together with any taxes
thereon, if any such services are not separately metered to Lessee, Lessee shall
pay a reasonable proportion, to be determined by Lessor, of all charges jointly
metered.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose.
(c) Thu involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than twenty-five percent (25%) of such Not Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or is it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. "Not Worth of Lessee" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.
(d) An assignment or subletting without consent shall, at Lessor`5 option, be a Default curable after notice per Paragraph 13.1 (c), or a noncurable Breach without the necessity of
any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either; (i) terminate this Lease, or (R) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ter percent (110%) of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (1) the purchase price of any option to purchase the Premises hold by Lessee shall be subject to similar adjustment to one hundred ten percent (11 MI.) of the price previously in affect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessors consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease; (4) release Lessee of any obligations hereunder: or (N) after the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.
(b) Lessor may accept Rent or Performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise Re remedies for Lessees Default or Breach.
(c) Lessors consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor.
(e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessors determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and for required modification of the Premises, it any together with a fee of $1,000 or ten percent (10%) of the current monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as consideration for Lessors considering and processing said request, Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. M Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to haw assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.
12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether Or hot expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease: provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from ft time of the exercise of said option to the expiration of such sublease: provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.
(c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to he sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.
13. Default, Breach; Remedies.
13.1 Default; Breach. A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "Breach" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:
(a) The abandonment of the Premises: or the vacating of the Premises without providing a commercially reasonable level of security, and/or Security Deposit or where the coverage of the property insurance described in Paragraph 6.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service "tracts, (iii) the rescission of an unauthorized
assignment or subletting, (iv) a Estoppel Certificate, (v) a requested
subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any
document requested under Paragraph 42 (easements), or (viii) any other
documentation or information which Lessor may reasonably require of Lessee under
the terms of this Lease, where any such failure continues for a period of ten
(10) days following written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13A (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then d shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed, within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days: or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days: provided, however, in the event that any provision of this subparagraph (a) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this Low is guaranteed (i) the death of a Guarantor: (m) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty; (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing; (lv) a Guarantor's refusal to honor the guaranty; or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee',% failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee falls to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at ft option, may require all future payments to Us made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer. Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute "I also constitute the notice required by Paragraph 13,11. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lane entitling Lessor to the remedies provided for in this Lease and/or by said statute.
(b) Continue this Lease and Lessees right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the stale wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's fight to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 Inducement Recapture. Any agreement for free or abated rent or other charges, or for the giving at paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions" shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions; of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph Unless specifically so stated in writing by Lessor at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within _______ days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to one percent (10%) of each such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lessee to the contrary, Base Rent shall, at Lessors option, become due and payable quarterly in advance.
13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date am which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments. The Interest ("Interest") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus 4%, but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.
13.6 Breach by Lessor.
(a) Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performance provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion.
(b) Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said written notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Point an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor, Lessee shall document the cost of said cure and supply said documentation to Lessor.
14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building portion of the premises, or more than twenty-five percent (25%) of the land area portion of the premises not occupied by any building, is taken by Condemnation. Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.
15. Brokers' Fee.
15.1 Additional Commission. In addition to the payments owed
pursuant to Paragraph 1,10 above, and unless Lessor and the Brokers otherwise
agree in writing. Lessor agrees that: (a) if Lessee exercises any Option: (b) if
Lessee acquires any rights to the Premises or other Premises owned by Lessor and
located within the some Project, if any, within which the Premises is located;
(c) if Lessee remains in possession of the Premises, with the consent of Lessor,
after the expiration of this Lease; or (d) if Base Rent is increased, whether by
agreement or operation of an escalation clause herein, then, Lessor shall pay
Brokers a fee in accordance with the schedule of said Brokers in effect at the
time of the execution of this Lease.
15.2 Assumption of Obligations. Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Each Broker shall be a third party beneficiary of the provisions of Paragraphs 1.10, 15. 22 and 31. If Lessor falls to Pay to a Broker any amounts due as and for commissions pertaining to this Lease when due, then such amounts shall accrue interest, in addition, if Lessor fails to pay any amounts to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within ten (10) days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker.
15.3 Representations and indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, R any) in connection with this Loose, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do
each hereby agree to indemnity, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 16. Estoppel Certificates.
(a) Each Party (as "Responding Party") shall within ten
(10) days after written notice from the other Party (the "Requesting Party")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in form similar to the then most current "Estoppel Certificate" form published
by the American industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Patty.
(b) If the Responding Party shall fall to execute or deliver the Estoppel Certificate within such ten day period, the Requesting Party may execute an Estoppel Certificate stating that: (1) the Lease is in full force and effect without modification except as may be represented by the Requesting Party; (ii) there are no uncured defaults in the Requesting Party's performance: and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lome's financial statements for the past three (3) years, All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes heroin set forth.
17. Definition of Lessor. The term "Lessor" as used herein "I mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessors title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor, Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible, with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above.
18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.
19. Days. Unless otherwise specifically indicated to the contrary, the word "days"as used in this Lease shall mean and refer to calendar days.
20. Limitation on Liability. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or
their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction.
21. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.
22. No Prior or Other Agreements: Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that 4 has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and Attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.
23.2 Date of Notice. Any notice sent by registered or certified
mail, return receipt requested, shall be deemed given on the date of delivery
shown on the receipt card, or if no delivery date is shown, the postmark
thereon. If sent by regular mail the notice shall be deemed given forty-eight
(48) hours after the same is addressed as required herein and mailed with
postage prepaid. Notices delivered by United States Express Mail or overnight
courier that guarantee next day delivery shall be deemed given twenty-four (24)
hours after delivery of the same to the Postal Service or courier. Notices
transmitted by facsimile transmission or similar means shall be deemed delivered
upon telephone confirmation of receipt, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday, Sunday or legal holiday,
it shall be deemed received on the next business day.
24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any W shall not be deemed to render unnecessary the obtaining of Lessors consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by
Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees applicable thereto.
26. No Right to Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Same Rent shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.
28. Covenants; and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and tides are for the convenience of the parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as if both parties had prepared it.
29. Binding Effect; Choice of Low. This Lease "I be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.
30. Subordination, Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "Lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3. Lessee agrees to attorn to it Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such now owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership: (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor; or (ill) be bound by prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "Non-Disturbance Agreement") from the
Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's option, directly contact Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents: provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. Attorneys' Fees. If any Party or broker brings an action or proceeding involving the Premises to enforce the terms hereof or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense, The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repair, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For SeV signs and Lessor rray during the last six (6) months of the term hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any time place on or about the Premises any ordinary "For Sublease" sign.
33. Auction. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.
34. Signs. Except for ordinary "For Sublease" signs, Lessee shall not place any sign upon the Premises without Lessors prior written consent. All signs must comply with all Applicable Requirements.
35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessors failure within ten (10) days following any such event to elect to the
contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest.
36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessors consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given, in the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request.
37. Guarantor.
37.1 Execution. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease.
37.2 Default. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect.
38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.
39. Options.
39.1 Definition. "Option" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor.
39.2 Options Personal To Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting.
39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly, exercised.
39.4 Effect of Default an Options.
(a) Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured: (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee); (iii) during the time Lessee is in Breach of this Lease; or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, whether or not the Defaults are cured, during the twelve (12) month period Immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force
or effect, notwithstanding Lessees due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee falls to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (0) Lessor
gives to Lessee three (3) or more notices of separate Default during any twelve
(12) month period, whether or not the Defaults are cured, or (iii) if Lessee
commits a Breach of this Lease.
40. Multiple Buildings. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee will pay its fair share of common expenses incurred in connection therewith.
41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same, Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.
42. Reservation. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions.
43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation or: the part of said Party to pay such sum or any part thereof, said Party she)! be entitled to recover such sum or so much thereof as it was not legally required to pay
44. Authority. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf, Each party
shall, within thirty (30) days after request, deliver to the other party satisfactory evidence of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.
46. Offer. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lose a agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.
48. Multiple Parties. If more than one person or entity is nomad herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease.
49. Mediation and Arbitration of Disputes. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease [ ] is [ ] is not attached to this Lease.
50. The Month of February, 2001 shall be rent free.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. TIME PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED. THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED.
The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures.
Executed at: Executed at:
---------------------------- --------------------------
on: on:
----------------------------------- ---------------------------------
By LESSOR: By LESSEE:
Marcel George & Joanne Marie George, The Singing Machine Company, Inc.,
trusts of Marcel George Family Trusts a Florida corporation
By: By: /s/ John F. Klecha
----------------------------------- -----------------------------------
Name Printed: Name Printed: John F. Klecha
--------------------------
Title: Title: Chief Operating Officer
---------------------------------
By: By:
----------------------------------- ------------------------------------
Name Printed: Name Printed:
--------------------------- ----------------------------
Title: Title:
--------------------------------- ---------------------------------
Address: 630 Tigertail Road Address: 6601 Lyons Road, Building A-7
Los Angeles, CA 90049 Coconut Creek, FL 33073
Telephone: (310) 472-3552 Telephone:
-----------------------------
Facsimile: (310) 398-0784 Facsimile:
------------------------------
Federal ID No: Federal ID No:
------------------------- -------------------------
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NOTE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So.
Flower Street, Suite 600, Los Angeles, California 90017. (213)
687-8777. Fax No. (213) 687-8618
ADDENDUM TO
STANDARD LEASE
Dated November 9, 2000
By and between: George-Singing Machine
51 RENT ESCALATIONS
(a) On January 1, 2002 and each consecutive 12 months thereafter, the monthly rent payable under paragraph 4 of the attached Lease shall be adjusted by the increase, if any, f rom the date this Lease commenced, in the Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of Labor for Urban Wage Earners and Clerical Workers, Los Angeles-Long Beach Anaheim, California (1967=100), "All Items", herein referred to as "C.P.I."
(b) The monthly rent payable in accordance with paragraph (a) of this Addendum shall be calculated as follows: the rent payable for the first month of the term of this Lease, as set forth in paragraph 4 of the attached Lease, shall be multiplied by a fraction the numerator of which shall be the C.P.I. of the calendar month during which the adjustment is to take effect, and the denominator of which shall be the C.P.I. for the calendar month in which the original Lease term commences. The sum so calculated shall constitute the new monthly rent hereunder, but in no event, shall such new monthly rent be less than the rent payable for the month immediately preceding the date for rent adjustment.
(c) Pending receipt of the required C.P.I. and determination of the actual adjustment, Lessee Shall pay an estimated adjusted rental, as reasonably determined by Lessor by reference to the then available C.P.I. so information. Upon notification of the actual adjustment after publication of the required C.P.I., any overpayment shall be credited against the next installment of rent due, and any underpayment shall be immediately due and payable by Lessee. Lessor's failure to request payment of an estimated or actual rent adjustment shall not constitute a waiver of the right to any adjustment provided for in the Lease or this addendum.
(d) In the event the compilation and/or publication of the C.P.I. shall be transferred to any other governmental department or bureau or agency or shall be discontinued, then the index most nearly the same as the C.P.I. shall be used to make such calculation. In the event that Lessor and Lessee cannot agree on such alternative index. then the matter shall be submitted for decision to the American Arbitration Z Association in accordance with the then rules of said association and the decision of the arbitrators shall be binding upon the parties. The cost of said Arbitrators shall be paid equally by Lessor and Lessee.
EXHIBIT 10.3
DATED _____________, 2000
KOON WAH MIRROR HOLDINGS LIMITED
and
INTERNATIONAL SMC (HK) LIMITED
TENANCY AGREEMENT
of
Units 2 and 3 on the Lower One Floor of Mirror Tower, 61 Mody Road, Isimshatsui East, Kowloon
which is situated on Kowloon Inland Lot No.10587.
BAKER & McKENZIE
14th Floor, Hutchison House
Hong Kong
AN AGREEMENT made this _______ day of August 2000
Parties BETWEEN KOON WAH MIRROR HOLDINGS LIMITED whose registered office is situate at 4th Floor, Koon Wah Mirror Group Building, 2 Yuen Shun Circuit, Yuen Chau Kok, Shatin, New Territories, Hong Kong ("the Landlord") of the one part and the person, firm or company detailed in Part I of the First Schedule hereto (the "Tenant") of the other part.
AGREED AS FOLLOWS:
1. PREMISES, TERM AND RENT
Premises 1.1 The Landlord hereby lets unto the Tenant ALL THOSE the
premises particularized in Part II of the First Schedule
hereto ("the Premises") TOGETHER with a right for the Tenant
its servants and licensees (in common with the Landlord and
all other tenants and occupiers of Mirror Tower, 61 Mody
Road, Tsimshatsui East, Kowloon, a building situated on
Kowloon Inland Lot No. 10587 ("the Building") and their
respective servants and licensees and all others having the
like right) to pass and repass upon down over and along the
ramps staircases landings passages entrances and means of
access in the Building at all times by day and by night with
or without vehicles for the purpose of access to and from the
Premises from and to the entrance to the Building AND
TOGETHER with the right in common with other tenants and
occupiers of the Building for the Tenant its servants and
licensees to use the passenger lifts for the purpose of
carrying passengers to and from the Premises (during such
hours as the same shall be working) AND TOGETHER with the
exclusive right for the Tenant its servants and licensees to
use the water closets, lavatories and conveniences located
within the Premises or allocated for use by the Tenant (if
any).
Term 1.2 This Agreement shall be for the term ("the Term") set
forth in Part III of the First Schedule hereto.
Rent and Service
Charges 1.3 Throughout the Term the rent and Service Charges as are
set out in Part I & Part II of the Second Schedule be payable
to the Landlord monthly in advance without deduction. The
first payment of rent shall be made on the signing of this
Agreement and subsequent payments shall be made in advance on
the first day of each calendar month.
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2. TENANT'S OBLIGATIONS AND RESTRICTIONS
The Tenant agrees with the Landlord as follows:
2.1 Rent and Other Charges
Rent 2.1.1 To pay the rent as set out in Part I of the Second
Schedule at the times and in manner aforesaid without
deduction;
Service Charges 2.1.2 To pay to the Landlord by way of further or
additional payments for the provision by the Landlord of the
maintenance and management of the Premises and the Building
and for the supply of air-conditioning services to the
Premises the sum specified in Part II of the Second Schedule
hereto ("the Service Charges") such sum to be paid monthly in
advance throughout the Term and on the days and in the manner
as the payment of rent hereinbefore mentioned which shall be
subject to increase at any time during the continuance of the
Term upon the Landlord giving to the Tenant not less than one
calendar month's notice in writing of such increase and upon
the expiration of the said period of one month the Service
Charges shall be increased by the amount specified in the
Landlord's notice. There shall be no restriction on the
number of occasions upon which the Landlord may call for an
increase in the Service Charges and the Landlord's assessment
of the increase shall be conclusive and binding on the
Tenant. Additional air-conditioning services may be provided
upon request by the Tenant at such adjusted rates as may from
time to time be charged by the Landlord at its absolute
discretion;
Water 2.1.3 To pay all charges for water as may be shown by the
separate meter installed upon or in relation to the Premises
or by accounts rendered to the Tenant in respect of such
amount of water consumed in the Premises;
Electricity 2.1.4 To pay all charges for electricity and gas as
and gas may be shown by the separate meter installed upon or in
relation to the Premises or by accounts rendered to the
Tenant in respect of such amount of electricity and gas
consumed in the Premises;
Government Rent,
Rates, taxes etc, 2.1.5 To pay and discharge all Government Rent rates taxes
assessments duties charges impositions and outgoings
whatsoever now or hereafter to be imposed or charged by the
Government of Hong Kong or other lawful authority on the
Premises or upon the owner or occupier in respect thereof
(Property Tax alone excluded). Without
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prejudice to the generality of the sub-clause the Tenant
shall pay all Government Rent rates imposed on the Premises
in the first place to the Landlord who shall serve the same
with the Hong Kong Government. In the event that an
assessment to Government Rent rates in respect of the
Premises shall be raised directly upon the Landlord. The
Landlord shall during the month immediately preceding any
quarter in respect of which such Government Rent rates may
fall due be at liberty to debit the Tenant with the amount
thereof and the same shall forthwith be paid by the Tenant to
the Landlord whereupon the Landlord shall account for the
same to the Government of Hong Kong. The Landlord shall be
entitled to treat non-payment of any amount debited to the
Tenant in accordance with the foregoing provisions of this
Clause or any part thereof in all respects as non-payment of
rent under this Agreement;
Utility Deposits 2.1.6 To pay and discharge all deposits in respect
of electricity, gas, water and telephone in relation to the
Premises and to reimburse the Landlord for any sum paid by
the Landlord in respect of the same on behalf of the Tenant;
Directory Board 2.1.7 To pay to the Landlord on demand the costs of
affixing replacing or repairing the Tenant's name in
lettering to the directory boards within the Building;
2.2 Restrictions on Assignment, Subletting
Compliance with
Ordinances and
Regulations 2.2.1 To obey and comply with all Ordinances, regulations,
bylaws, rules and requirements of any Governmental or other
competent authority relating to the Premises the conduct and
carrying on of the Tenant's business on or in the Premises or
to any other act, deed, matter or thing done, permitted,
suffered or omitted therein or thereon by the Tenant or any
employee, agent of licensee of the Tenant and to notify the
Landlord forthwith in writing of any notice received from any
utility statutory or public authority concerning or in
respect of the Premises or any services supplied thereto and
in particular to observe at all times all statutory
regulations governing fire prevention within the Premises and
to observe perform and comply with all directions given by
the Fire Services Department Urban Council or other competent
authority in connection with the Premises or any part thereof
and the storage of goods therein and to indemnify the
Landlord against all actions costs claims and demands in
respect of any breach or non-observance of any of the
foregoing terms;
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Restrictions on
assignment,
subletting 2.2.2 Not to assign or transfer or sublet or share or part
with possession no the Premises or any part(s) thereof to or
with any person or persons or firm or body corporate whereby
any organization company firm or person not a party to this
Agreement obtains the use or possession of the Premises or
any part or parts thereof irrespective of whether any rental
or other consideration is given for such use or possession
and in the event of any such transfer subletting sharing
assignment or parting with the possession of the Premises or
any parts thereof (whether for monetary or other
consideration or not) this Agreement shall at the option of
the Landlord forthwith determine and the Tenant shall
forthwith surrender vacant possession of the Premises to the
Landlord. The tenancy shall be personal to the Tenant named
in this Agreement and without in any way limiting the
generality of the foregoing, the following acts and events
shall, unless approved in writing by the Landlord, be deemed
to be breaches of this clause:
(a) In the case of a Tenant which is a
partnership, taking in of one or
more new partners whether on the
death or retirement of an existing
partner or otherwise.
(b) In the cast of a Tenant who is an
individual (including a sole
surviving partner of a partnership
Tenant) the death, insanity or other
disability of that individual, to
the intent that no right to use,
possess, occupy or enjoy the
Premises or any part thereof shall
vest in the executors,
administrators, personal
representatives, next of kin,
trustee or committee of any such
individual.
(c) In the case of a Tenant which is a
corporation, any takeover,
reconstruction, amalgamation,
merger, voluntary liquidation or
change in the person or persons who
owns or own a majority of its voting
shares or who otherwise has or have
effective control thereof.
(d) The giving by the Tenant of a power
of attorney or similar authority
whereby the donee of the power
obtains the right to use, possess,
occupy or enjoy the Premises or any
part thereof or does in fact use,
possess, occupy or enjoy the same.
(e) The change of the Tenant's business
name without the previous written
consent of the Landlord.
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2.3 User and Other Restrictions
User 2.3.1 To use the Premises only for the purpose as set forth
in Part IV of the First Schedule hereto and for no other
purpose whatsoever;
Breach of
Government Lease 2.3.2 Not to cause suffer or permit any contravention
of the provisions of the Government Lease under which the
Landlord holds the Premises and to indemnify the Landlord
against any such breach.
Domestic use 2.3.3 Not to use the Premises or any part thereof as
sleeping quarters or as domestic premises within the meaning
of any ordinance for the time being in force or to allow any
person to remain on the Premises overnight unless with the
Landlord's prior permission in writing, Such permission shall
only be given to enable the Tenant to post watchmen to look
after the Premises provided that the names of the watchmen
are first registered with the Landlord prior to its giving
such permission;
Illegal or immoral
use 2.3.4 Not to cause permit or suffer any part of the Premises
to use be used for Sampling or for any illegal immoral or
improper purposes;
Offensive trade 2.3.5 Not to cause permit or suffer any part of the
Premises to be used for any trade or business which is now or
may hereafter be declared to be an offensive trade under the
Public Health and Urban Services Ordinance or any enactment
amending the same or substituting therefor:
Storage of
hazardous goods 2.3.6 Not to keep or store or cause to be kept or
stored upon the Premises any hazardous or extra hazardous or
dangerous goods falling within the meaning of the Dangerous
Goods Ordinance and the Regulations thereunder or any
statutory modification or re-enactment thereof (except such
limited quantities as may from time to time be permitted by
the Landlord in writing) AND to indemnify the Landlord
against all actions costs demands and claims in respect of
any breach or non observance of this sub-clause;
Obstruction of
Common area 2.3.7 Not to put or place any refuse bin, box, carton,
container, furniture, chattels or refuse or store any goods
or any other things on the common loading and unloading space
(if any) on the ground floor or in any of the common entrance
halls, staircases, landings, passages,
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corridors, Ere escape ways, lifts and other common parts of
and in the Building and not to fix any fixed gates or fences
Which may in any Way block or obstruct any of the said fire
escape ways AND the Landlord, its servants or agents may
without any prior notice to the Tenant and without incurring
any liability therefor remove any such obstruction and
dispose of or remove the same as they may think fit and the
Tenant shall on demand pay to the Landlord all costs and
expenses incurred by the Landlord in connection with such
disposal or removal AND the Tenant shall indemnify the
Landlord for any loss or damage arising from the breach of
this Clause;
Nuisance 2.3.8 Not to cause or permit or suffer any part of the
Premises to be used in any way so as to cause nuisance
annoyance inconvenience damage or danger to the Landlord of
the tenants or occupiers of adjacent or neighboring Premises;
Noise 2.3.9 Not to cause or produce or suffer of permit to be
produced on or in the Premises any sound or noise (including
sound produced by broadcasting from Television, radio and any
apparatus of instrument capable of producing or reproducing
music and sound) or other acts or things in or on the
Premises which is or are or may be a nuisance or Annoyance to
the tenants or occupiers of adjacent or neighboring premises:
Animals, pets &
infestation 2.3.10 Not to keep or permit or suffer to be kept any animals
or infestation pets in the Premises and to take all steps and
precautions to the satisfaction of the Landlord to prevent
the Premises or any part thereof from becoming infested by
termites rats mice roaches or any other pests or vermin and
for the better observance hereof the Landlord may require the
Tenant to employ at the Tenant's cost such pest extermination
contractors as the Landlord may nominate and at such
intervals as the Landlord may direct,
Cooking and
prevention of
odors 2.3.11 Not to prepare or permit or suffer to be prepared any
prevention of food in the Premises or to cause or permit any
offensive odors or unusual odors to be produced upon or
emanate from the Premises;
Loading of lifts
and use of
passenger lifts 2.3.12 Not to load or permit or suffer to be loaded
into any lift in the Building any goods, persons or things
whatsoever lifts whereby the permitted capacity of the said
lift or lifts may be exceeded and not to
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use the passenger lift for the carriage of goods and to be wholly responsible for any damage caused by any breach of this sub-clause;
Floor loading 2.3.13 Not to store or place any goods machinery or
other things on or in any part of the Premises which exceed
the maximum floor loading of the Premises;
Removal of refuse 2.3.14 To be responsible for the removal of refuse
and garbage from the Premises to such location as shall be
specified by the Landlord from time to time and to use only
that type of refuse containers as is specified by the
Landlord from time to time aud to ensure that they are
properly scaled at all times. In the event of the Landlord
providing a collection service for refuse and garbage the
same shall be used by the Tenant to the exclusion of any
other similar service and the use of such service provided by
the Landlord shall bo at the sole cost of the Tenant. To
employ only cleaning contractor for the Premises as may be
nominated by the Landlord from time to time to the exclusion
of any other cleaning contractors;
Signs 2.3.15 Not to affix, erect, attach, exhibit, display or
permit or suffer so to do to be done upon any part within or
on the exterior of the Premises or to or through any windows
thereof any writing sign, decoration, signboard notice
advertisement placard neon light or other device whether
illuminated or not which may be visible from outside the
Premises except the display of nameplate or signboard of the
Tenant and their lawful subtenant or licensee at the entrance
to the Premises the size and position of such nameplate or
signboard shall be subject to the approval of the Landlord.
The Landlord or its authorized agents shall have absolute
discretion in granting or refusing such approval and any
approval to be granted shall be subject to such conditions as
the Landlord or its authorized agents may think fit. The
Landlord or its authorized agents &W have the right to remove
at the cost and expense of the Tenant any unauthorized
writing, sign, decoration signboard notice advertisement
placard neon light or device affixed or put up or displayed
without the proper approval of the Landlord or its agents,
2.4. Additions and Alterations to Premises
Installation &
alterations 2.4.1 Without prejudice to any of the following sub-clauses,
before carrying out any internal decorations partitioning
alterations and fittings (including but not limited to
electrical mechanical wiring,
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installations) to submit within 3 days from the commencement of the Term details and plans thereof to the Landlord for its prior approval and to re-submit for the Landlord's further prior approval such amendments to the said details and plans as may be desired by the Tenant or required by the relevant government authorities and any costs incurred by the Landlord in connection with such approval including architect's fees shall be for account of the Tenant. The Tenant shall only carry out such internal decorations partitioning alterations and fittings and any amendments thereto by contractor(s) approved by the Landlord in its absolute discretion and in accordance with such approved details and plans and such other directions and conditions as may be given and imposed by the Landlord relating thereto in accordance with such ordinances and other government rules and regulations as shall from time to time be in force during the Term. Such approval from the Landlord shall not relieve the Tenant from the responsibility of obtaining all necessary permits licences and approval pertaining to the proposed decoration partitioning alteration or fitting works and the Tenant shall submit all applications required and shall comply with all government ordinances rules and regulations and bylaws of any public utility company or authority having jurisdiction over the said works. The Tenant shall not commence any such internal decorations partitioning alterations and fitting works unless and until all necessary approvals licences or permits relating thereto have been obtained from the relevant government department or authorities and if the Tenant shall for any reason put in hand any such works as aforesaid prior to obtaining the necessary approvals licenses or permits from the relevant government authorities the Tenant shall be solely responsible for the consequences of such unauthorized works including but not limited to the costs of demolition, addition and alteration required to comply with government requirements and shall indemnify and keep the Landlord fully indemnified against all losses claims costs actions and proceedings arising from the Tenant's breach of the provisions of this sub-clause. The Tenant shall at its own costs and expenses make, good any default in complying with this sub-clause notwithstanding that its fitting out partitioning and decoration proposals may have been submitted by the Landlord or the Landlord's agent to the relevant government authorities on behalf of the Tenant and the Tenant shall solely bear the consequences of any rejections or any amendments required by the relevant government authorities of the Tenant's proposals and of any delay or losses resulting from such rejections or amendments. To secure the performance of the Tenant's obligations hereunder, the Tenant shall on the signing hereof deposit with the Landlord a fitting out deposit in such sum as may be
determined by the Landlord from time to time. The Landlord shall be entitled to deduct from such fitting out deposit all losses claims, costs actions and proceedings suffered or incurred by the Landlord as a result of the Tenant's breach of this clause. Such fitting out deposit (or the balance thereof, after deduction as aforesaid) shall be refunded to the Tenant within 14 days of completion of the fitting out:
Building services
and builders'
work 2.4.2 To employ at the Tenant's expense only such contractors
as may be nominated by the Landlord from time to time for the
purpose of designing and carrying out and installing all the
necessary building services and builders' work as hereinafter
defined in the Premises in manner as prescribed by the
Landlord or its nominated contractors and in particular to
pay the Landlord vetting and relating charges in accordance
with the Landlord's predetermined scales subject to
amendments/alterations from time to time and to such extent
as the Landlord shall in its absolute discretion deem
appropriate or necessary.
(i) The expression "building services"
shall mean all mechanical and
electrical engineering work and
arrangement related to the Premises
including but not limited to
electrical security, sprinkler
system, air-conditioning, plumbing,
drainage, building automation and
fire fighting installation.
(ii) The expression "builders' works"
shall mean all renovation work not
specified under "building services"
including but not limited to light
track, light trough and graphic
panel.
Work by
the Tenant 2.4.3 To construct at the Tenant's own expense within
the Premises or furnish items to the Premises as follows:
(i) a ceiling of non-combustible
material approved by the Landlord.
No combustible materials will be
permitted above the ceiling. Any
work relating to the extension or
relocation of the sprinkler heads
and/or the smoke detectors and other
fire fighting equipment installed by
the Landlord shall be carried out by
the Landlord's nominated contractors
but the costs thereof shall be borne
by the Tenant;
(ii) paint and decorate the interior of
the Premises;
(iii) furnish aud install floor fill and
floor finishes. PVC tiles shall
not be used unless approved by the
Landlord;
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(iv) subject to the relevant plan showing
all the details including but not
limiting to the gauge of wire, etc.
duly approved in writing in advance
by the Landlord, complete all
electrical and mechanical
installations (heating, ventilation
and air- conditioning, plumbing and
drainage, fire fighting) for the
purposes of providing electrical and
mechanical services to the premises
provided that the reinstatement of
the ceiling or any part of the
common area damaged by or removed in
relation to the connection of
electricity to the Premises shall be
carried out by the Landlord's
nominated contractor. The
workmanship and materials shall be
of a standard to be approved by the
Landlord;
(v) furnish and install or arrange for
the installation of all utilities
such as gas and telephones as well
as other Tenant's requirements
within the Premises together with
such meters as are necessary to
measure the Tenant's consumption
thereof and to employ only the
contractors nominated or approved by
the Landlord for such purposes;
(vi) furnish, install, support and
connect all lighting fixtures,
including lamps, switches and
wiring, save that in the case of
support involving cutting into
structure prior written approval of
the Landlord will be required and in
all instances only the contractor
designated by the Landlord will be
used;
(vii) furnish design of signs for the
approval of the Landlord but
acceptance of such design is at the
sole discretion of the Landlord; and
(viii) install such fire extinguishers or
other means of fire-fighting
equipment inside tho Premises as may
be required from time to time by all
relevant Ordinances and regulations
of the Honk Kong Government.
Submission of
information 2.4.4 (i) To furnish at the time of the
submission of the fitting out
details and plans, the Landlord with
the following information and items:
(a) the name and address of the
appointed designer/agent
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for the Premises:
(b) the name(s) and address(es)
of the contractor(s) the
Tenant intends to engage in
the construction of
Tenant's work Provided that
the Landlord shall have the
absolute discretion to
reject any such
contractor(s);
(c) the name and address of the
Tenant's authorized
agent/representative, if
any; and
(d) the actual commencement
date of interior decoration
and the estimated date of
completion of decoration
work, fixturing work, and
date of projected opening.
(ii) To provide the Landlord the
following plans to enable the
nominated mechanical and electrical
contractors to prepare the
corresponding designs and drawings:
(a) three copies of the
reflected ceiling plan with
schedule on voltage, type,
wattage, quantity and
location of outlets for all
light fittings and
air-conditioning;
(b) three copies of the floor
plan with partitions;
(c) three shop layout prints of
all case work including the
location of all sockets,
switches, fuse boxes,
telephone points, size,
weight and location of
outlets for all light
fittings and
air-conditioning; and
(d) three sets of elevations to
describe the space with all
electric outlets and detail
of show case at shopfront.
(iii) To forward to the Landlord any
elevation of the leased space that
way affect the appearance of the
shopping center together with the
shop layout drawing submission for
approval prior to any construction
work. The Landlord shall have the
absolute right to demolish any
construction work by the Tenant
which in its opinion affects the
appearance of the shopping center
and the Tenant shall pay for all
costs therefor.
Inspection by
Landlord 2.4.5 All Tenant's work shall be subject to the inspection of
Landlord, the Landlord architect and Landlord's general
contractor from time to time during the period in which
Tenant's work aforesaid is being performed.
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Reimbursement to
Landlord 2.4.6 The Landlord shall have the right to perform on behalf
of and for the account of the Tenant, subject to the
reimbursement by the Tenant, any of the Tenant's work which
the Landlord deems necessary to be done on an emergency
basis, work caused by the Tenant's fault, and work which
pertains to structural components, the general utility
systems for the Building and the erection of temporary safety
barricades and temporary signs during construction.
Lighting Panel
Boards 2.4.7 To provide a lighting panel within the Premises which
panel will:
(i) include circuits to all receptacles
serving accent, case, valence
and other lightings; and
(ii) with boards of 28-220 volt and 220
volt of the circuit breaker type all
utilizing bolted on type breaker.
Emergency Lighting
and Exit Signs 2.4.8 To provide battery operated type emergency
lighting and exit signs in location within the Premises as
required by any law and regulations, and as deemed necessary
by the Landlord.
Earthing 2.4.9 To provide earthing within the Premises.
Telephone System 2.4.10 To install at the Tenant's own expense empty
conduits for telephone service to the Premises. Telephone
service to the Premises shall only be installed by the
licensed fixed Telecommunication Network Service Operators
and the Tenant shall leave pull wire in all conduits. The
Landlord will for facilitating construction purposes install
telephone jacks and conduits to the Premises at the Tenant's
expense.
Electrical
Testing 2.4.31 To test all circuits for shorts and ground and to
balance loads on all panels.
Exterior
fittings 2.4.12 Not to install any supports or erect any iron brackets
or install any wires, aerials, fittings, plant, equipment,
signs, advertisements or blinds on or protruding from the
windows or any part of the exterior walls or windows of the
Building or any exterior part of the Premises for any purpose
including the installation of air-conditioners;
Injury to main
walls 2.4.11 Not without the prior written consent of the Landlord
to cut main or injure or permit or suffer to be cut maimed or
injured any doors
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window walls beams structural members or other part of the
fabric of the Premises;
Fixtures
interior 2.4.14 Not to affix anything to the columns, floors, ceilings
or interior walls or windows of the Building that could maim
or interfere with the same or that might in any way affect
the structural stability of the Building or any part thereof
without the prior written consent of the Landlord;
Shelters 2.4.15 Not to erect any shelters or coverings on any part of
the flat roofs or roof of the Building;
Smoke-lobbies and
fire escape 2.4.16 Not to alter the position of any smoke lobby or
fire escape doors or to make any additions to or in any way
amend such doors without the prior written consent of the
Landlord;
Locks 2.4.17 Not without the written consent of the Landlord (such
consent not to be unreasonably withheld) to install
additional locks bolts security fitments or systems or other
fittings to the entrance doors of the Premises or to the
Premises or in any way to change or alter those already
installed;
2.5 Repair Obligation
Repair of interior
fixtures and
fittings 2.5.1 To keep all the interior of the Premises including the
flooring partitions and interior plaster or other finishing
materials or rendering to walls floors and ceilings and the
Tenant's and the Landlord's fixtures and fittings therein
including all doors, windows and fire fighting apparatus,
locks, security fittings and any additions made by the Tenant
to the Premises in a good clean tenantable substantial and
proper repair and condition and as may be appropriate from
time to time painted and decorated (damage or destruction due
to any of the causes mentioned in Clause 5 hereof excepted)
and so to maintain the same at the expense of the Tenant and
to pay or reimburse to the Landlord the cost of replacing all
broken and damaged windows whether the same be broken or
damaged by the negligence of the Tenant or owing to
circumstances beyond the control of the Tenant;
Repair of sprinkler
system electrical
installations 2.5.2 To repair or replace if so required by the appropriate
system Company or authority under the terms of the
Electricity Supply
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Regulations or any Statutory modification or re-enactment
thereof or any Orders in Council or Regulations made
thereunder by contractor(s) nominated by the Landlord all the
sprinkler system electrical wiring installations and fittings
including the wall ventilation fans within the Premises and
the wiring from the Tenant's meter or meters to and within
the same and to carry out any periodic testing of electrical
installations at the Premises required by regulations made
under the Electricity Ordinance (Cap.406);
Repair of toilets
andwater apparatus
and cleansing
drains 2.5.3 To maintain all such toilets and water apparatus
(located within the Premises or elsewhere if used exclusively
by the Tenant its employees invitees and licensees) in good
clean and tenantable state and in proper repair and condition
at all times during the Term to the satisfaction of the
Landlord and in accordance with the Regulations of the Public
Health or other Governmental Authority concerned and to pay
on demand to the Landlord the cost incurred by the Landlord
in cleansing and cleaning any of the drains choked or stopped
up owing to negligence or careless use by the Tenant or its
employees invitees or licensees;
Protection from
typhoon 2.5.4 To take all reasonable precautions to protect the
interior of the Premises from storm or typhoon damage;
Landlord's right
to enter and view 2.5.5 To permit the duly authorized agents or servants
of the Landlord and any other persons duly authorized by the
Landlord at any time to enter the Premises (and by force if
necessary) for the purposes of security, and/or fire fighting
and inspecting or carrying out routine and essential or
emergency repairs or alterations or additions to or
maintenance or renewal of the Building and the Landlord's
services and fixtures and fittings within the Building and
any other services or fixtures and fittings which may be
supplied or provided to or installed in the Building by third
parties including, without limitation to the generality of
the foregoing, telephone and other communication services and
fixtures and fittings installed in connection, therewith, and
of making good on behalf of the Tenant any defects or
effecting any repairs which the Tenant has failed to do under
the terms of this Agreement;
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Obligation to
execute repairs
on receipt of
notice 2.5.6 To proceed to make good all defects and wants of repair
therein found for which the Tenant may be liable within
receipt of notice the space of one calendar month from the
receipt of written notice from the Landlord to amend and make
good the same and if the Tenant shall fail to proceed to
execute such works or repairs as aforementioned to permit the
Landlord to enter upon the Premises and execute the same and
the cost thereof shall be a debt due from the Tenant to the
Landlord and recoverable forthwith by action;
To inform
Landlord of
damage 2.5.7 To give notice to the Landlord or its agent of any
damage that may be suffered to the Premises and of any
accident to or defects in the water and gas pipes; electrical
wiring or fittings, fittings fixtures or other facilities
provided by the Landlord as shall be known or reasonably
ought to be known to the Tenant;
2.6 Insurance Liabilities and Indemnities
Indemnity against
Loss/Damage from
Interior 2.6.3 To be wholly responsible for any damage or injury
caused to any other person whomsoever directly or indirectly
through the defective or damaged condition of any part of
interior of the Premises or of any of the fixtures and
fittings therein or in any way owing to the spread of fire or
smoke or the overflow of water from the Premises or any part
thereof or through the act default or neglect of the Tenant
its servants agents licensees or contractors and to make good
the same by payment or otherwise and to indemnify the
Landlord against all costs claims demands actions and legal
proceedings whatsoever made upon the Landlord by any person
in respect of any such loss damage or injury and all costs
and expenses incidental thereto and to keep the Premises
insured against third party liabilities and in particular the
matters aforesaid with a reputable insurance, office PROVIDED
ALWAYS that if the Tenant shall at any time fail to keep the
Premises insured as aforesaid the Landlord may do all things
necessary to effect aud maintain such insurance and any
monies expended by it for that purpose shall be repayable by
the Tenant on demand and be recoverable forthwith by action;
Breach of
insurance
policy 2.6.2 Not to cause or suffer or permit to be done any act or
thing whereby the policy or policies of insurance on the
Building or anything within the Building against damage by
fire or liability to third parties for the time being
subsisting may become void or voidable or whereby the
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rate of premium or premia thereon may be increased, and to
repay to the Landlord on demand all sums paid by the Landlord
by way of increased premium or premia thereon and all
expenses incurred by the Landlord in and about any renewal of
such policy or policies arising from or tendered necessary by
a breach of this Sub-clause;
Indemnity against
overflow of water 2.6. To be wholly responsible for any loss or damage
caused to any, person or property caused by or through or in
any way owing to the escape or overflow of water front the
Premises and to make good the same by payment or otherwise
and to indemnify the Landlord against all costs claims
demands actions and legal proceedings whatsoever made upon
the Landlord by any person in respect of such loss damage or
injury and costs and expenses incidental thereto;
Liable for
employee's
negligence 2.6.4 To be liable for any act default or negligence of the
Tenant's contractors, employees, invitees, visitors or
licensees in respect of the use of the Premises and the
common areas and facilities of the Building and to indemnify
the Landlord against all costs claims demands expenses or
liability to any third party in connection therewith;
2.7 Yielding Up
Yield up
premises To yield up the Premises with all fixtures and fittings and
additions therein and thereto (save and except trade fixtures
and fittings) at the expiration or sooner determination of
this Agreement in good clean and tenantable repair and
condition (fair wear and tear and damage or destruction due
to any of the causes mentioned in Clause 5 hereof excepted)
Provided That where the Tenant has altered erected or
installed any fixtures fittings partitioning or additions in
or to the Premises with or without the Landlord's written
consent the Landlord may at its absolute discretion require
the Tenant to reinstate remove or do away with such
alterations fixtures fittings partitioning or additions or
any part or portion thereof and make good and repair in a
proper and workmanlike manner any damage to the Premises and
the Landlord's fixtures and fittings therein as a result
thereof before delivering up the Premises to the Landlord
Provided further that in the event that the Tenant has prior
to the date of this Agreement whether pursuant to the terms
of any earlier Agreement or Lease or otherwise, made
alterations or additions to the Premises or if the Premises
shall not for any reason be handed over to the Tenant as a
"shell" at the commencement of the term hereby created the
Landlord
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reserves the right to require the Tenant at the sole expense
of the Tenant to remove any or all of such alterations or
additions so made prior to the date of this Agreement or to
reinstate the premises as a "shell" as the case may be and to
make good any damage to the Premises caused thereby;
3. Landlord's Obligations
The Landlord agrees with the Tenant as follows:
Property Tax 3.1 To pay the Property Tax attributable to or in respect
of the Premises;
Exterior and
structure 3.2 To maintain the exterior and structure of the Premises in
structure good and substantial repair and condition
throughout the Term at the expense of the Landlord Provided
That the Landlord shall not be liable for breach of this
Clause (so far as it relates to the Premises) unless and
until written notice of any defect or want of repair has been
given to the Landlord by the Tenant and the Landlord has
failed to take reasonable steps to repair or remedy the same
within a reasonable time;
Quiet enjoyment 3.3 To permit the Tenant (duly paying the rent and Government
Rent and rates and Service Charges hereby agreed to be paid
on the days and in manner herein provided for payment of the
same and observing and performing the agreements stipulations
terms conditions and obligations herein contained) to have
quiet possession and enjoyment (subject to the provisions
hereof) of the Premises, during the Term without any
interruption by the Landlord of any person lawfully claiming
under or through or in trust for the Landlord.
Air-conditioning
Services 3.4 To provide and maintain lifts, escalators
air-conditioning service from 8.00 aan. to 6:00 p.m. on
weekdays and 8:00 a.m. to 2:00 p.m. on Saturdays (excluding
Sundays and public holidays). The supply of air-conditioning
shall be controlled and regulated by the Landlord at its sole
discretion, and also such electricity as is attributable to
lights of the entrances, passages, corridors, staircases,
landings and lavatories PROVIDED however the Landlord shall
neither be liable to pay compensation to the Tenant in
respect of any period during which due to circumstances
beyond the control of the Landlord the proper operation of
the said lifts or central air-conditioning plant shall be
interrupted as the result of defects, mechanical failure or
breakdown or need for repair or overhaul, nor shall the
Landlord be
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liable thereby to grant any abatement of rent and/or Service
Charges in respect of such interruption;
4. Exclusions Exceptions and Reservations
IT IS HEREBY FURTHER EXPRESSLY AGREED that the Landlord shall
not in any circumstances be liable to the Tenant or any other
person whatsoever;
Insurance 4.1 In respect of any loss or damage sustained by the Tenant
as a result of the letting or leasing of any part of the
Building to any person or company for any purpose whatsoever
permitted by the Government Lease and in particular, but
without limiting the generality of the foregoing, in respect
of any increase in premium under all or any insurance
policies taken out by the Tenant relating to the Premises or
any part thereof or the content therein and/or all premium
required to be paid by virtue of any insurance policies taken
out by the Tenant relating to the Premises or any part
thereof or the contents therein being avoided as a result of
the matters aforesaid or in respect of any loss damage or
injury sustained by the Tenant, its servants agents licensees
and contractors as a result of any accident in the Building;
Lifts
utilities, etc. 4.2 In respect of any loss or damage to person or
property sustained by the Tenant or any such person caused by
or through or in any way owing to any defect in or breakdown
of the lifts, electric power and water supplies, or any other
building service provided in the Building;
Fire and overflow 4.3 In respect of any loss or damage to person or property of
water sustained by the Tenant or any other person caused by
or through or in any way owing to the escape of fumes smoke
fire or any other substance or thing or the overflow of water
from anywhere within the Building.
5. Suspension of Rent and Other Charges
Suspension of
rent and other
charges If the Premises or any part thereof shall at any time during
the Term be destroyed or damaged or become inaccessible owing
to fire water storm wind typhoon defective construction white
ants earthquake subsidence of the ground or any calamity
beyond the control of the Landlord and not due to the default
of the Tenant so as to render the Premises or any part
thereof unfit for use or inaccessible and the policy or
policies of insurance effected by the Landlord shall not have
been vitiated or Payment of the policy monies
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refused in whole or in part in consequence of any act or
default of the Tenant or if at any time during the
continuance of the Term the Premises or any part thereof
shall be condemned as a dangerous structure or a demolition
order or closure order shall become operative in respect of
the Premises or any part thereof then the rent and other
charges hereby reserved or a fair proportion thereof (such
proportion to be determined by the Landlord whose decision
shall be final and binding) according to the nature and
extent of the damage sustained or order made shall from that
occurrence of such event be suspended until the Premises or
the part thereof affected shall again be rendered accessible
and fit for habitation and use Provided Always that the
Landlord shall be under no obligation to reinstate and repair
the Premises if in its opinion it is not economical or
practicable to do so and Provided that if the Premises or the
part thereof affected shall not have been reinstated or
rendered accessible or such closure order be uplifted in the
meantime either the Landlord or the Tenant may at any time
after three months from the occurrence of such damage or
destruction or order or inaccessibility give to the other of
them notice in writing to determine this Agreement and
thereupon the same and everything herein contained shall
cease and be void as from the date of the occurrence of such
destruction or drainage or order or inaccessibility of the
Premises or any part thereof but without prejudice to the
rights and remedies of either party against the other in
respect of any antecedent claim or breach of the covenants,
stipulations terms and condition herein contained or of the
Landlord in respect of the rent and other charges payable
hereunder prior to the coming into effect of the
determination of the Agreement;
6. Default in Payments
It is hereby expressly agreed and declared as follows:
Default 6.1 If the rent and/or the monthly Service Charges and any
other charges, payable hereunder or any part thereof shall be
in arrears for fifteen (15) days after the same shall have
become payable (whether formally demanded or not) or if there
shall be any breach or non-performance of any of the
stipulations conditions or agreements herein contained and on
the part of the Tenant to be observed or performed or if the
Tenant shall become, bankrupt or being a corporation go into
liquidation (save for the purposes of amalgamation or
reconstruction) or if the Tenant shall suffer execution to be
levied upon the Premises an the Tenant's goods then and in
any such case it shall be lawful for the Landlord at any time
thereafter to re-enter on and upon the Premises or any part
thereof in the name of the whole and thereupon this Agreement
shall absolutely determine but without prejudice to any right
of action by the Landlord in respect of any outstanding
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breach non-observance or non-performance by the Tenant of any
of the terms of this Agreement all costs and expenses
incurred by the Landlord in demanding payment of the rent and
other charges aforesaid (if the Landlord elects to demand)
arising out of this Clause shall be paid by the Tenant and sw
be recoverable from the Tenant as a debt or be deductible by
the Landlord from any deposit held by the Landlord hereunder.
Notwithstanding anything herein contained in the event of
default in payment of the Service Charges on the date an
which the same falls due for payment or any interest thereon
the Landlord shall in addition to its other rights under the
terms of this Agreement be entitled to disconnect the supply
of air-conditioning to the Premises until the amount in
arrears shall have been fully paid by the Tenant without
incurring any liability to the Tenant for any loss or damages
suffered by the Tenant as a result thereof;
Overdue interest 6.2 Without prejudice to any other right or action by the
Landlord provided in this Agreement, if the rent and/or
Government Rent and/or rates and/or the Service Charges (if
any) and/or any other charges payable hereunder or any part
thereof shall be in arrears, it is hereby expressly agreed
and declared that the Landlord hereby reserves the right to
charge the Tenant overdue interest on the amount in arrears
at the rate of 2% per month for each month or part thereof
that the amount remains in arrears.
Acceptance of
rent 6.3 The acceptance of any rent and other charges by the
Landlord hereunder shall not be deemed to operate as a waiver
by the Landlord of any rights to proceed against the Tenant
in respect of any breach non-observance or non-performance by
the Tenant of any of the covenants stipulations terms and
conditions herein contained and on the part of the Tenant to
be observed and performed.
Acts of
employees 6.4 For the purpose of these presents any act default neglect
or invitees and omission of any guest visitor servant
contractor employee licensees agent invitee or license of the
Tenant shall be deemed to be the act default neglect or
omission of the Tenant.
Distraint 6.5 For the purposes of Part III of the Landlord and Tenant
(Consolidation) Ordinance (Chapter 7) and of these presents,
the rent payable in respect of the Premises shall be and be
deemed to be in arrears if not paid in advance at the time
and in the manner hereinbefore provided for Payment thereof.
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7. Deposit
Deposit 7.1 The Tenant shall on the signing hereof deposit and at all
times during the said term maintain with the Landlord a total
sum of HK$104,792.00 consisting of a sum equivalent to 3
months' rental and Service Charges and 3 months' rates
payable in respect of the Premises, to secure the due
observance and performance by the Tenant of the agreements
stipulations terms and conditions herein contained and on the
part of the Tenant to be observed and performed which said
deposit shall be held by the Landlord throughout this
Agreement free of any interest to the Tenant with the right
for the Landlord (without prejudice to any other right or
remedy hereunder) to deduct therefrom the amount of any rent
Service Charges Government Rent rates and other charges
payable hereunder and any costs expenses loss or damage
sustained by the Landlord as the result of any non-observance
or non-performance by the Tenant of any of the said
agreements, Stipulations terms or conditions. In the event of
the monthly rent and Service Charges being increased during
the Term and the renewal period (if any) the deposit shall
forthwith be increased in like proportion to the increase in
the monthly rent and Service Charges and the provisions of
this Clause shall apply to the deposit as so increased. In
the event of any deduction being made by the Landlord from
the said deposit in accordance herewith the Tenant shall
forthwith on demand by the Landlord make a further deposit
equal to the amount so dedicated and failure by the Tenant so
to do shall entitle the Landlord forthwith to re-enter upon
the Premises and to determine this Agreement.
Repayment of
deposit 7.2 Subject as aforesaid the said deposit shall be refunded
to the Tenant by the Landlord without interest within 14 days
after the expiration or sooner determination of this
Agreement and delivery of vacant possession of the Premises
to the Landlord in accordance with Clause 2.7 hereof and
after settlement of the list outstanding claim by the
Landlord against the Tenant for any arrears of rent. Service
Charges Government Rent rates and other charges and for any
breach non-observance, or nonperformance of any of the
agreements stipulations; obligations or conditions herein
contained and on the part of the Tenant to be observed or
performed whichever shall be the later.
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8. Landlord's Regulations
Introduction of
Regulations 8.1 The Landlord reserves the right from time to time and by
regulations notice in writing to the Tenant to make introduce
and subsequently amend adopt or abolish if necessary such
Regulations as it may consider necessary for the proper
operation and maintenance of the Building.
Conflict 8.2 Such Regulations shall be supplementary to the terms and
conditions contained in this Agreement and shall not in any
way derogate from such text and conditions, In the event of
conflict between such regulations and the terms and
conditions of this Agreement the terms and conditions of this
Agreement shall prevail.
9. Interpretation and Miscellaneous
Marginal notes 9.1 The Marginal Notes are intended for guidance only and do
not form a part of this Agreement nor shall any of the
provisions of this Agreement be construed or interpreted by
reference thereto or in any way affected or limited thereby.
Landlord and
Tenant
legislation 9.2 The Tenant hereby expressly agrees to deprive itself of
any and all rights to protection against eviction provided by
any existing legislation or by any future enactment in
substitution or amendment thereof or addition thereto to the
intent that the Tenant shall deliver up vacant possession of
the Premises to the Landlord at the expiration or sooner
determination of the tenancy hereby created.
Condonation not
a waiver 9.3 No condoning, excusing of overlooking by the Landlord a
waiver of any default, breach or non-observance or non
performance by the Tenant at any time or times of any of the
agreements stipulations terms and conditions herein contained
shall operate as a waiver of the Landlord's rights hereunder
in respect of any continuing or subsequent default, breach or
non-observance or non performance or so as to defeat or
affect in any way the rights and remedies of the Landlord
hereunder in respect of any such continuing or subsequent
default or breach and no waiver by the Landlord shall be
inferred from or implied by anything done or omitted by the
Landlord, unless expressed in writing and signed by the
Landlord. Any consent only for the particular matter to which
it relates and in no way shall be considered as a waiver or
release of any of the provisions hereof nor
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shall it be construed as dispensing with the necessity of
obtaining the specific written consent of the Landlord in the
future, unless expressly so provided.
Letting notices
and entry 9.4 During the Term the Landlord shall be at liberty to affix
and maintain without interference upon any external part of
the Premises a notice stating that the Premises are to be let
or sold and such other information in connection therewith as
the Landlord shall reasonably require and the Tenant shall
permit persons authorized by the Landlord to enter and view
the Premises at reasonable times by prior appointment with
the Tenant.
Service of
notice 9.5 Any notice required to be served on the Tenant shall be
sufficiently served if delivered to or dispatched by
registered post or left at the Premises or at the last known
address of the Tenant. A notice sent by registered post shall
be deemed to be given at the time and date of posting.
Name of
Building 9.6 The Landlord reserves the right to rename the Building
with any such name or style as in its sole discretion may
determine and at any time and from time to time to change,
alter, substitute or abandon any such name and the Landlord
shall not be liable in damages to the Tenant or be made a
party to any other proceedings or for costs or expenses of
whatsoever nature incurred by the Tenant as a result of such
change.
Gender 9.7 In this Agreement if the context permits or requires
words importing the singular number shall include the plural
number and vice versa and words importing the masculine
feminine or neuter gender shall include the other of them.
Stamp duty and
legal costs 9.8 Each party shall pay its own solicitors' costs and legal
costs disbursements of and incidental to this Agreement. The
Stamp Duty payable on this Agreement and its counterpart
shall be borne by the Landlord and the Tenant in equal
shares. The Land Registry registration fees of this Agreement
shall be borne by the Tenant solely.
Definition of 9.9 Where more than one person is included under the Tenant
designation of the Tenant all such persons shall be jointly
and severally liable for the performance and observance of
the terms, agreements and obligations herein contained and on
the Tenant's part to be performed
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and observed whether such persons hold as Tenants in Common,
Joint Tenants or otherwise.
Sale and
Redevelopment 9.10 If the Landlord resolves to sell, redevelop, rebuild or
refurbish the Premises of a substantial part thereof (which
intention shall be sufficiently evidenced by a copy of the
resolution of its Board of Directors certified by its
Secretary to be a true and correct copy) then in such event
the Landlord shall be entitled to give not less than 6 clear
calendar months' notice in writing to expire at any time to
terminate this Agreement, and immediately upon the expiration
of such notice this Agreement shall terminate but without
prejudice to the rights and remedies of either party against
the other in respect of any antecedent claim or breach of any
of the covenants restrictions stipulations or conditions
herein contained. Redevelopment and/or refurbishing for the
purpose of this Clause shall mean the demolition of the whole
Premises or a substantial part or parts (but not necessarily
a major part) thereof whether or not including any main walls
exterior walls or roof of the Premises and whether or not any
part thereof is to be rebuilt or reconstructed in the same or
any other manner.
Landlord's right
to carry out
renovation 9.11 The Tenant acknowledges that the Landlord will carry out
renovation works to the Building and for this purpose the
Landlord reserves the right for its servants agents
contractors and their respective employees to enter upon the
Premises and any part of the Building with all necessary
equipment plant and materials for the purpose of carrying out
such renovation works and under no circumstances whatsoever
shall the Tenant be entitled to claim any damages or
compensation from the Landlord for any inconvenience noise or
disturbance caused by such renovation works.
Exclusion of
warranties 9.12 The Landlord does not represent or warrant that the
Premises are suitable for the use or purposes specified in
Part IV of the First Schedule hereto and the Tenant shall
satisfy itself or shall be deemed to have satisfied itself
that the Premises are suitable for the purposes for which
they are to be used and the Tenant hereby agrees that it will
at its own expense apply for any requisite license or permit
from the Government or Public Authorities in respect of the
carrying on of the Tenant's business therein and shall comply
with all Ordinances, Regulations, Orders, Notices or Rules
made by the Government or Public Authorities in connection
with the conduct of such business by
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the Tenant in the Premises and the Tenant shall indemnify the
Landlord in respect of any breach by the Tenant of this
Clause.
Landlord not
bound 9.13 The Landlord shall not be bound by any oral by oral
representation representations or oral promises with respect
to the Building and its appurtenances or in respect of the
Premises except as herein expressly set forth with the object
and intention that the whole of the agreement between the
Landlord and the Tenant shall be set forth herein and in no
way modified by any oral discussions which may have preceded
the signing of this Agreement.
Approval of
Landlord 9.14 No approval by the Landlord is valid unless it is in
writing and signed by the Landlord or its authorized agents.
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THE FIRST SCHEDULE ABOVE REFERRED TO
PART I
Tenant: INTERNATIONAL SMC (HK) LIMITED whose registered office is
situate at Unit 519, Vanta Industrial Centre, 21-33 Tai Lin
Pai Road, Kwai Chung, New Territories.
PART II
Premises: All Those Units 2 and 3 on the Lower One Floor or the
building known as MIRROR TOWER, 61 MODY ROAD, TSIMSHATUI
EAST, KOWLOON erected on All That piece or parcel of ground
registered in the Land Registry as KOWLOON INLAND LOT NO.
10587 (which Units are more particularly delineated and
coloured Pink on the plan annexed hereto).
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PART III
Term: Two years commencing on 1st September 2000 and expiring on 31st August 2002 (both days inclusive).
PART IV
User: The Premises shall be used as an office only.
THE SECOND SCHEDULE ABOVE REFERRED TO
PART I
RENT
Period Amount
From 1st September 2000 to 30th September 2000 Rent-free. The Tenant shall be
(both days inclusive) and responsible for payment of Government
From 1st September 2001 to 30th September 2001 Rent, rates and Service Charges and
(both days inclusive) other outgoings during the rent-free
periods.
From 1st October 2000 to 31st August 2001 HK$25,000.00 per month (exclusive
(both days inclusive) and of Government Rent, rates and Service
From 1st October 2001 to 31st August 2002 Charges).
(both days inclusive)
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PART II
SERVICE CHARGES
HK$8,718.00 per calendar month subject to increase as provided in Clause 2.1.2.
AS WITNESS whereof the said parties have executed this Agreement the day and year first above written.
SIGNED by )
)
for and on behalf of the Landlord )
whose signature is verified by: )
SIGNED by )
)
for and on behalf of the Tenant in )
the presence of: )
RECEIVED on or before the day )
and year first abovewritten of and from )
the Tenant the sum of HONGKONG DOLLARS )
ONE HUNDRED AND FOUR THOUSAND SEVEN ) HK$104,792.00
HUNDRED NINETY-TWO ONLY ) -------------
being the deposit. )
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EXHIBIT 10.5
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("Agreement") made as of the lst day of June 2000 by and between THE SINGING MACHINE COMPANY, INC., a Delaware corporation with its principal office at 6601 Lyons Road, Coconut creek, FL 33073 (the "Company") and John Klecha whose residence address is 6004 North Golden Beauty Lane, Tamarac, FL 33321 (the "Employee").
The Company and the Executive hereby agree as follows with respect to the Employee'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 Employee for a period (the "Employment Period") commencing on June 1, 2000 (the "Commencement Date"), and ending on May 31, 2003 (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 Agreement, the Executive shall be the Company's Chief Operating Officer, Treasurer and Financial Officer, subject to the direction of the Company's 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 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 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 two hundred seventy-five thousand dollars ($275,000.00) 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) 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 forty percent (40%) of the Bonus Pool, unless modified by the Company's Board of Directors 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: 1) income from extra ordinary gains as set forth in the Financial Statements, 2) 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 the audited financial statements for all Fiscal Years within ninety (90) days of the end of such Fiscal Year. 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. 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 by check within thirty (30) days after receipt by the Company of the Financial Statements for said Fiscal Year by the Company's independent certified public accountants, however the Executive shall have the right to draw up to fifty percent (50%) of such Profit Bonus 60 days after the close of the Company's Fiscal Year based upon the Company's internal Financial Statements and completion of the field work portion of the Fiscal Year Audit by the Company's independent certified public accountants. 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 the 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 Executive after the effective date of this agreement.
5. Benefit Plans.
(a) The Executive 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 $500 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 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 for the first year of this Agreement. Such vacation time allowance shall cumulatively accrue, and any unused vacation time for each year can be used in the following year or paid to the Executive at the Executive's sole discretion. The Company shall make all reasonable efforts to enable Executive 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 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 Paragraph 3 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 Executive 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 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 10 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 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 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 Chanqe 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 200% of Executive's "base period income" as determined under (e) below. Such amount will be paid to Executive within thirty (30) 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. 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 Employee a severance amount equal to six months, of Executive'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 three (3) years of Executive'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 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, 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 Executive 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 Executive 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 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, 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/or 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 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, 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 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 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 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 12, 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.
13. 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 acquires or develops or has made use of, acquires or develops or has made 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 not 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.
14. 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.
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 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 agree that the Arbitrator has full power and authority to hear and determine the controversy and make and 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 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 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.
23. 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 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 Executive has knowledge and/or any business matters of which Executive 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 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.
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 Executive in connection with any provision of this Agreement, the Company or the Executive 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 Executive acknowledges and agrees that in the event Executive 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 Executive 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 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.
28. 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.
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 Executive and on behalf of the Company on the day and year first above written.
THE SINGING MACHINE COMPANY. INC.
By: /s/ Eddie Steele - C.E.O.
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Edward Steele, President
/s/ John Klecha
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John F. Klecha
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THE SINGING MACHINE COMPANY, INC.
AMENDED AND RESTATED
1994 MANAGEMENT STOCK OPTION PLAN
This Amended and Restated 1994 Stock Option Plan is intended to provide incentives: (a) to the officers and other employees of the Singing Machine Company, Inc. or any of its present or future subsidiaries by providing such employees with opportunities to purchase stock in The Singing Machine Company, Inc., pursuant to options granted hereunder that qualify as "Incentive Stock Options" under Section 422(b) of the Internal Revenue Code of 1986, as amended; and (b), to directors, officers, employees, advisors and consultants of The Singing Machine Company, Inc. or any of its present or future subsidiaries by providing such persons with opportunities to purchase stock in The Singing Machine Company, Inc., pursuant to options granted hereunder which do not qualify as "incentive stock options."
(a) "Agreement" shall have the meaning ascribed to the term as set forth in Section 6 hereof.
(b) "Board of Directors" means the Board of Directors of the Company or any Subsidiary.
(c) "Common Stock" means the common stock, $.01 par value per share, of the Company.
(d) "Company" means, The Singing Machine Company, Inc.. a Delaware corporation.
(e) "Employee" means every individual performing services for the Company or any Subsidiary if the relationship between him and the person for whom he performs such services is the legal relationship of employer and employee as determined in accordance with Section 3401(c) of Internal Revenue Code and Treasury Regulations promulgated thereunder. A member of the Board of Directors in his sole capacity as such is not an Employee.
(f) "Incentive Stock option" means a right grand pursuant to this Plan to purchase Common Stock that satisfies the requirements of Section 422 of the Internal Revenue Code.
(g) "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended.
(h) "Non-Employee Director" means every member of the Board of Directors who is not also an Employee of the company or any Subsidiary.
(i) "Nonqualified Stock Option" means a right granted pursuant to this Plan to purchase Common Stock that does not satisfy the requirements of Section 422 of the internal Revenue Code.
(j) "Option" means a right granted pursuant to this Plan to purchase Common stock which may be either an incentive stock option or a Nonqualified Stock option as determined by the Board of Directors.
(k) "Optionee" means an individual who has received an option under the Plan.
(1) "Plan" means this stock option plan authorizing the granting of stock Options.
(m) "Plan Administrators" shall have the meaning ascribed to the term as set forth in Section 5 hereof.
(n) "Reserved Shares" shall have the meaning ascribed to the term as set forth in Section 3 hereof.
(o) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the company if, at the time the Option is granted, each of the corporations other Chan the last corporation in the unbroken chain owns SO% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
Subject to adjustments pursuant to section 8 of the Plan, no more than One Million Three Hundred Thousand shares (1,300,000) in the aggregate of the Company's Common Stock (the "Reserved Shares") may be issued pursuant of the Plan to eligible participants. The number of the Reserved Shares shall be reduced by the number of options granted under the Plan. The Reserved Shares may be made available from authorized but unissued Common Stock of the Company, from Common Stock of the Company held as treasury stock, from any shares which may become available due to the expiration, cancellation or other termination of any Option previously granted by the Company, or from any combination of the foregoing.
The individuals eligible to receive Options under this Plan shall be such valued Employees, Non-Employee Directors, advisors or consultants of the Company or any, Subsidiary, as the Board of Directors may from time to time determine and select. Non-Employee Directors, advisors and consultants shall only be eligible to receive Nonqualified Stock Options. Employees shall be eligible to receive both incentive Stock Options and Nonqualified Stock options. An Optionee may hold more than one Option. No Employee of the Company or any Subsidiary is eligible to receive any Incentive Stock Options if such employee, at the time the option is granted, owns, beneficially or of record, in excess of lot of the outstanding voting stock of the Company or a Subsidiary; provided, however, that such employee will be eligible to receive an Incentive Stock Option if at the time such
Option is granted the Option price is at least 110% or the fair market value (determined with regard to Section 422 (c) (7) of the Internal Revenue Code) of the, stock subject to the option and such option by its terms is not exercisable after the expiration of five (5) years from the date such Option is granted. Pursuant to Section 422(d) of the Internal Revenue Code, no Option granted pursuant to this Plan shall be ,treated as an Incentive stock option to the extent that the aggregate fair market value (determined at the time the Option was granted) or common stock with, respect to which Options (that otherwise qualify as Incentive Stock Options) are exercisable for the first time by an Employee during any calendar year (under all plans of the Company and its Subsidiaries) exceeds $100,000.
(a) The Plan shall be administered by the Board of Directors, or by a committee appointed by the Board of Directors.
(b) The Plan Administrators shall have the power, subject to, and within the limits of the express provisions of the Plan:
(i) To determine from time to time which eligible persons shall be granted options under the Plan, and the time when any Option shall be granted to them;
(ii) To determine the number of Options to be granted to any person;
(iii) To grant Incentive Stock options, Nonqualified Stock options, or both, under the Plan to such persons;
(iv) To determine the duration and purposes of leaves of absence which may be granted to Optionees without constituting a termination of their employment for purposes of the Plan;
(v) To prescribe terms and provisions of each Option granted under the Plain (which need not be identical)
(vi) To determine the maximum period during which options may be exercised;
(vii) To construe and interpret the Plan and options granted under it, and to establish, amend, and revoke rules and regulations for its administration; and
(viii) Generally, to exercise such, powers and to perform such acts as are deemed necessary or expedient to promote the best interests of the Company with respect to the Plan.
(c) The Plan Administrators, in the exercise of these powers, may correct any defect or supply any omission, or reconcile any inconsistency in the Plan, or in any option, in the manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. All determinations
of the Plan Administrators shall be made by majority vote. Subject to any applicable provisions of the Company or Bylaws, all decisions made by the Plan Administrators pursuant, to the provisions of the Plan and related orders or resolutions of the Plan Administrators shall be final, conclusive and binding on all persons, including the company, stockholders of the Company, Employees and Optionees.
(d) The Plan Administrators may designate the Secretary of the company, or other, Employees of the Company or competent professional advisors, to assist, in the administration of this Plan and may grant authority to such, persons to execute agreements or other documents on behalf of the Plan Administrators.
(e) The Plan Administrators may employ such legal counsel, consultants and agents as they may deem desirable for the administration of this Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. No present or former Plan Administrator shall be liable for any action or determination made in good faith with respect to this Plan, or any Option granted hereunder. To the maximum extent permitted by applicable law and the Company's Certificate of Incorporation and Bylaws, each present or former Plan Administrator shall be indemnified and held harmless by the Company against any cost or expenses (including counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with this Plan unless arising out of such persons own fraud or bad faith. Such indemnification shall be in addition to any rights at indemnification the person may have as a director, officer or employee or, under the Certificate of Incorporation of the Company, the Bylaws of the Company or otherwise. Expenses incurred by the Plan administrators in the engagement of such counsel, consultant or agent shall be paid by the Company.
The Options granted under the Plan shall be evidenced by written Option Agreements (the "Agreements") consistent with the terms of the Plan which shall be executed by the Company and the Optionee. The Agreements, in such form as the Plan Administrators shall from time to time approve shall, incorporate the following terms and conditions:
(a) Time of Exercise. Options shall be exercisable in accordance with the terms of the Agreements as approved by the Plan Administrators, from time to time. Incentive Stock Options may be exercised only if, at all times during the period that begins on the date of the granting of the Incentive Stock Option and that ends on the day three(3) months before the date of such exercise, the Optionee was an Employee of the Company or any Subsidiary; provided, however, that if the Optionee is "disabled" within the meaning of Section 22 (c) of the Internal Revenue code, then the end of the preceding post-employment exercise period shall be extended to one (1) year.
(b) Purchase Price. Except as otherwise provided in section 4 hereof, the purchase price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall not be less than the fair market value of the Common Stock on the date the option is granted. The purchase
price per share of common Stock deliverable upon the exercise of a Nonqualified Stock Option shall be determined by the Plan Administrators in their sole discretion.
(c) Method of Exercise. In order to exercise an option in whole or in part, the Optionee shall give written notice to the Company at its principal place of business of such exercise, stating the number of shares with respect to which the Option is being exercised. Such notice shall be accompanied by full payment of the purchase price thereof either (i) in cash, or (ii) at the discretion of the Plan Administrators, in whole shares of common Stock having a fair market value equal as of the date of the exercise to the cash exercise price of the Option, or (iii) at the discretion of the Plan Administrators, by delivery of the Optionee's personal recourse note bearing interest payable not less than annually at no less than 100% of the lowest applicable Federal rate, as defined in Section 1274(d) of the Internal Revenue Code, or (iv) any combination of (i), (ii) and (iii) above. If the Plan Administrators exercise their discretion to permit payment of the exercise price of any Option by means of the methods set forth in clauses (ii), (iii) or (iv) , of the preceding sentence, such discretion shall be exercised in writing at the time of the grant of the option in question. The exercise date of the Option shall be the date the Company receives such notice with any necessary accompaniments in satisfactory order.
(d) Transferability. An Option shall not be transferable by the Optionee other than at death and an Option granted to such Optionee is exercisable, during his lifetime, only by such Optionee.
The Agreements may also contain such other terms, provisions, and conditions consistent with the Plan and applicable provisions of the Internal Revenue Code as the Plan Administrators may determine are necessary or proper.
An Optionee shall not deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such option, unless and until: (a) the Option shall have been exercised pursuant a the terms thereof; (b) the Company shall have issued and delivered the shares to the Optionee; and (c) the Optionee's name shall have been entered as a stockholder of record on the books of the Company. Thereupon, the Optionee shall have full voting and other ownership rights with respect to such shares.
(a) Changes in Capital Structure. In the event of a change in the corporate structure or shares of the Company, the Plan Administrators (subject to any required action by the stockholders) shall make such equitable adjustments designed to protect against dilution as they may deem appropriate in the number and share authorized by the Plan and, with respect to outstanding Options in the number and kind of shares covered thereby and in the exercise price of such Options on the
dates granted. For the purpose of this Section, a change in the corporate structure or shares of the Company shall include, but is not limited to, changes resulting from a recapitalization, stock split, consolidation, rights offering, stock dividend, reorganization, or liquidation.
(b) Reorganization-Continuation of the Plan. Upon the effective date of the dissolution or liquidation of the Company, or a reorganization, merger or consolidation of the Company with one or more corporations in which the company is not the surviving corporation, or of a transfer of substantially all of the Company's stockholders, the Plan and any Option previously granted under the Plan shall terminate unless provision be made in writing in connection with such transaction for the continuation of the Plan and for the assumption of the Options previously granted, or for the substitution of new options covering the shares of a successor employer corporation, or a parent or subsidiary thereof, with appropriate adjustments (in accordance with the applicable provisions of the Internal Revenue code) as to the number and kind of shares and price per share, in which event the Plan and the previously granted or new options substituted therefor shall continue in the manner and under the terms as provided.
(c) Reorganization-Termination of the Plan. In the event of a dissolution, liquidation, reorganization, merger, consolidation, transfer of assets or transfer of shares, as provided in Section 9 (b) above, and if provision is not made in such transaction for the continuance of the Plan and for the assumption of Options previously granted or the substitution of new Options covering the shares of a successor employer corporation or a parent or subsidiary thereof, then an Optionee under the Plan shall be entitled to written notice prior to the effective date of any such transactions stating that rights under this option must be exercised within thirty (30) days of the date of such notice or they will be terminated.
Each Option shall be subject to a requirement that, if at any time the Plan Administrator shall determine, in their discretion, that the listing or qualification of the shares or other securities subject to such Option upon any securities exchange, or under any state or federal law or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with the granting thereof or the issue or purchase of shares or payments of any amount thereunder, such Option may not be exercised in whole or in part and no amounts may be received thereunder unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions unacceptable to the Plan Administrators.
Nothing in this Plan shall be deemed to grant any right of continued employment to a participating employee or to limit or waive any rights of the Company or its Subsidiary to terminate such employment at any time, with or without cause.
The Board of Directors of the Company shall have the power to amend or revise the terms of this Plan or any part thereof without further action of the stockholders; provided, however, that no such amendment shall impair any Option or deprive any Optionee of shares that may have been granted to him under the Plan without his consent; and provided, further, that no such amendment shall, without stockholder approval:
(a) increase the aggregate number of the Reserved Shares for the purpose of the Plan;
(b) change the class of individuals eligible to receive options under the Plan;
(c) extend the maximum period during which any option may be granted or exercised;
(d) reduce the Option price per share under any Option below fair market value; or
(e) extend the term of the Plan.
(a) The effective date of the Plan shall be the Effective Date of the Merger of the Singing Machine Company, Inc., a California corporation, with and into The Singing Machine Company, Inc., a Delaware corporation; provided, however, in the event that the Plan is not approved by the voting stockholders of the Company on or before July 31, 1994, the Plan and all Options granted and to be granted hereunder shall be null and void and the Company shall have no obligation of any nature whatsoever to any employee or other person arising out of the Plan or any options granted or to be granted hereunder.
(b) The Board of Directors of the Company may terminate the Plan at any
time with respect to any shares that are not subject to Options. Unless
terminated earlier by the Board of Directors, the Plan shall terminate on ten
(10) years from adoption of this Plan and no options shall be granted under this
Plan after it has been terminated. Termination of this Plan shall not affect the
right and obligation of any Optionee with respect to Options granted prior to
termination.
Whenever under the Plan shares are to be issued in satisfaction of Options granted hereunder, the Company shall have the right to require the recipient to make arrangements to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements, if any, prior to or following the delivery of any certificate or certificates for such shares.
This Plan is adopted pursuant to, and is intended to comply with, the applicable provisions of the Internal Revenue Code and the regulations thereunder. Incentive Stock Options granted pursuant to this Plan are intended to be "incentive stock options" as that term is defined in Section 422 of the Internal Revenue Code and the regulations thereunder. In the event this Plan or any Incentive Stock Option granted pursuant to this Plan is in any way inconsistent with the applicable legal requirements of the Internal Revenue Code or any regulation thereunder, this Plan and any Incentive Stock Option granted pursuant to this Plan shall be deemed automatically amended as of the date hereof to conform to such legal requirements, if such conformity can be achieved by amendment.
Each Employee who receives an Incentive Stock Option must agree to notify the Company in writing immediately after the Employee makes a disqualifying disposition of any Common Stock acquired pursuant to the exercise of an Incentive Stock Option. For purposes of this Plan, a "disqualifying disposition" is any disposition (including any sale) of such Common Stock before the later of (i) two years after the date the Employee was granted the Incentive Stock Option, or (ii) one year after the date the Employee Acquired Common Stock by exercising the Incentive Stock Option.
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. This agreement supercedes that agreement dated December 1, 1999 between The Singing Machine Company, Inc. and Main Factors, Inc.
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 purchase 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 nine and one-half-tenths of one percent (.95 %) 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 60. We agree to factor $13,000,000 in the year 2000 or to pay the factoring charge of nine and one-half-tenths of one percent (.95%) for any amount between the actual amount factored and the agreed minimum of $13,000,000. It is anticipated that this agreement will continue beyond December 31, 2000. Prior to December 31, 2000, both parties agree to discuss the appropriate minimum amount of factored sales for future periods. Any change in the minimum amount. of sales will be documented as . an amendment to this factoring agreement. Should we fail to document any change in the agreed minimum, the $13,000,000 will be the minimum for the year ending December 31, 2001 and any subsequent year. Should we elect to terminate this agreement as provided for in this agreement prior to December 31, 2000 or any future one year period, the minimum will be pro-rated to the period prior to the actual termination date as to any minimum factoring charge. 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 eighty-five percent (85%) of the purchase price thereof and charge our account therewith, less your charge. We understand that you have the desecration to change the advance percentage. You have further advised us and we agree that should the total shareholders' equity fall below $3,500,000 in any calendar quarter, the advance will be changed to up to seventy-five percent (75%). 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) wt., 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 or the proceeds thereof 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 an I y other statute of the United States of America now or at an), 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 one and three quarters percent (1.75%) 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. 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
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Edward Steele, President John Klecha, Secretary
Main Factors, Inc.
Accepted in Dallas, Texas this 7th day of April, 2000
By: /s/ Fain Michie
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Fain Michie, President
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EXHIBIT 21.1
List of Subsidiaries
International SMC (HK) Limited
EXHIBIT 23.2
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 for the years ended March 31, 2000 and 1999, dated June 12, 2000, relating to the consolidated financial statements of The Singing Machine Company, Inc. and subsidiaries which appear in such Form SB-2, and to the reference to our Firm under the heading "Expert" in the prospectus.
/s/ WEINBERG & COMPANY, P.A.
Certified Public Accountants
Boca Raton, Florida
March 27, 2001
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