-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LyAmP/K7h9785oVMx6MwZBb0qOoW4FZERXB4PNwS50pK8WNL3ojTZjzc1fK3t6Qn R56UJ1uqnQhOiK542yhE4A== 0001116502-02-000887.txt : 20020701 0001116502-02-000887.hdr.sgml : 20020701 20020701163847 ACCESSION NUMBER: 0001116502-02-000887 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SINGING MACHINE CO INC CENTRAL INDEX KEY: 0000923601 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 953795478 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24968 FILM NUMBER: 02693933 BUSINESS ADDRESS: STREET 1: 6601 LYONS ROAD STREET 2: BLDG A-7 CITY: COCONUT CREEK STATE: FL ZIP: 33073 BUSINESS PHONE: 9545961000 MAIL ADDRESS: STREET 1: 6601 LYONS ROAD BLDG CITY: COCONUT CREEK STATE: FL ZIP: 33073 10KSB 1 singingmachine-10k.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2002 0 - 24968 --------- Commission File Number THE SINGING MACHINE COMPANY, INC. --------------------------------- (Exact Name of Small Business Issuer as Specified in its Charter) Delaware 95-3795478 - ------------------------------------- ----------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) 6601 Lyons Road, Building A-7, Coconut Creek, FL 33073 ------------------------------------------------------ (Address of principal executive offices) (954) 596-1000 -------------- (Issuer's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each Exchange on which Registered Common Stock American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Common Stock Check whether the Issuer: (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year: $61,828,894. The aggregate market value of the Registrant's voting stock held by non-affiliates, based upon the closing price for the common stock of $14.40 per share as reported on the American Stock Exchange on June 18, 2002 was approximately $61,467,509 (based on 8,097,143 shares outstanding). ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS: Indicate whether the Issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. [x] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. There were 8,097,143 shares of common stock, issued and outstanding at June 17, 2002. DOCUMENTS INCORPORATED BY REFERENCE The information required by Part III of this Report is incorporated herein by reference from the registrant's definitive proxy statement relating to the annual meeting of stockholders to be held in 2002, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates. None Transitional Small Business Disclosure Format (check one): Yes[ ] No[X] THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY INDEX TO ANNUAL REPORT ON FORM 10-KSB For the Fiscal Year ended March 31, 2002
Page PART I Item 1. Business 2 Item 2. Properties 6 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 7 Item 6. Management's Discussion and Analysis of Financial Condition and Results of 9 Operations Item 7. Consolidated Financial Statements and Supplementary Data 20 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial 20 Disclosure PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with 20 Section 16(a) of the Exchange Act Item 10. Executive Compensation 20 Item 11. Security Ownership of Certain Beneficial Owners and Management 20 Item 12. Certain Relationships and Related Transactions 23 Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24 SIGNATURES 25
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Annual Report on Form 10-KSB, including without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," "intends," and words of similar import, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Position and Results of Operations - Factors That May Affect Future Results and Market Price of Stock." Readers are cautioned not to place undue reliance on these forward- looking statements, which reflect management's opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revisions to these forward- looking statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. 1 PART I FORWARD STOCK SPLIT On March 14, 2002, The Singing Machine Company, Inc. declared a 3-for-2 stock split to its stockholders of record as of March 4, 2002. All information in this Annual Report on Form 10-KSB has been restated to give effect to this 3-for-2 stock split. ITEM 1. BUSINESS OVERVIEW The Singing Machine Company, Inc. (the "Company," "we" or "us") is engaged in the production, distribution, marketing and sale of consumer karaoke audio equipment, accessories and music. We contract for the manufacture of all electronic equipment products with factories located in the Far East. We also produce and market karaoke music, including CD plus graphics ("CD+G's"), and audiocassette tapes containing music and lyrics of popular songs for use with karaoke recording equipment. One track of those tapes offers music and vocals for practice and the other track is instrumental only for performance by the participant. Virtually all of the cassettes sold by us are accompanied by printed lyrics, and our karaoke CD+G's contain lyrics, which appear on the video screen. We contract for the reproduction of music recordings with independent studios. 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 company to offer karaoke electronic recording equipment and music 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. In July 1994, we formed a wholly owned subsidiary in Hong Kong, now known as International SMC (HK) Ltd. ("International SMC"), to coordinate our production and finance in the Far East. In November 1994, we closed an initial public offering of 2,070,000 shares of our common stock and 2,070,000 warrants. In April 1997, we filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. On March 17, 1998, our plan of reorganization was approved by the U.S. Bankruptcy Court. On June 10, 1998, our plan of reorganization had been fully implemented. Since emerging from bankruptcy, our revenues have steadily increased. Our revenues increased from $6.2 million in the fiscal year ended March 31, 1998 to $61.8 million in the fiscal year ended March 31, 2002. We had an operating loss of approximately $1.6 million in the fiscal year ended March 31, 1998 compared to net income of $8.065 million in the fiscal year ended March 31, 2002. PRODUCT LINES We currently have a product line of 18 different models of karaoke machines, incorporating such features as 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 recorders. Our machines sell at retail prices ranging from $30 for basic units to $400 for semi-professional units. We currently offer our music in two formats - multiplex cassettes and CD+G's with retail prices ranging from $6.99 to $19.99. We currently have a song library of over 3,000 recordings, which we license from publishers. Our library of master recordings covers the entire range of musical tastes including popular hits, golden oldies, country, rock and roll, and rap. We even have backing tracks for opera and certain foreign language recordings. 2 MARKETING, SALES 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 music products primarily through our own sales force and 14 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 30 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 American Toy Fair each February in New York and the Hong Kong Electronics Show each October in Hong Kong, We spent approximately $181,800 on research and development in fiscal 2002, primarily to develop prototypes and working samples. Our karaoke machines and music are marketed under the Singing Machine(R) trademark throughout the United States, primarily through department stores, mass merchandisers, direct mail catalogs and showrooms, music and record stores, national chains, specialty stores, and warehouse clubs. Our karaoke machines and karaoke music are currently sold in such stores as Best Buy, J.C. Penney, Sears, Target and Toys R Us. Our licensing agreements with MTV Networks and Nickelodeon have further expanded our brand name and our customer base. Through our license with MTV, we have begun to focus on the 12 to 24 year old market and through our agreement with Nickelodeon, we have reached an even younger age group between the ages of 3-6. In November 2001, we signed an international distributorship agreement with Arbiter Group, PLC ("Arbiter"). Arbiter is the exclusive distributor of Singing Machine(R) karaoke machines and music products in the United Kingdom and a non-exclusive distributor in all other European countries. The agreement terminates on December 31, 2003, subject to an automatic renewal provision. 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, 2002 and 2001, respectively, were approximately 87% and 78% respectively. In fiscal 2002 and 2001, Best Buy and Toys R Us accounted for more than 10% of our revenues . Furthermore, in fiscal 2002, Costco accounted for more than 10% of our revenues. Although we have long-established relationships with all 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 music products by our customers are generally not permitted except in approved situations involving quality defects, damaged goods, goods shipped in error or goods that are shipped on a consignment basis. Our policy is to give credit to our customers for the returns in conjunction with the receipt of new replacement purchase orders. 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 (direct sales). Domestic sales, which account for substantially all of our music sales, are made to customers located throughout the United States from inventories maintained at our warehouse facilities in Florida or California. 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 3 from certain factories in China 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 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. In the fiscal year ended March 31, 2002, approximately 55% of our sales were domestic sales. Direct Sales. We ship some hardware products sold by us directly to customers from the Far East through International SMC. Sales made through International SMC 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, South America and the United States, who pay International SMC pursuant to their own international, irrevocable, transferable letters of credit or on an open account. In the fiscal year ended March 31, 2002, approximately 45% of our sales were direct sales. MANUFACTURING AND PRODUCTION Our karaoke machines are manufactured and assembled by third parties pursuant to design specifications provided by us. Currently, we have ongoing relationships with six factories, located in the Shenzhen province of the People's Republic of China, who assemble our karaoke machines. In manufacturing our karaoke related products, these factories use molds and certain other tooling, some of which are owned by International SMC. Our products contain electronic components manufactured by other companies such as Panasonic, Sanyo, Toshiba, and Sony. Our manufacturers purchase and install these electronic components in our karaoke machines and related products. The finished products are packaged and labeled under our trademark, The Singing Machine(R). We have obtained copyright licenses from music publishers for all of the songs in our music library. We contract with outside studios on a work-for hire basis to produce recordings of these songs. After the songs have been recorded, we use outside companies to mass-produce the CD+G's and audio cassettes. While our equipment manufacturers purchase our supplies from a small number of large suppliers, 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. Similarly, although we primarily use three factories to manufacture our karaoke machines and a small number of studios to record our music, we do not anticipate that the loss of any single manufacturer or single studio would have a material long term adverse effect on our business, operations or financial condition. To ensure that our high standards of product quality and factories meet our shipping schedules, we utilize Hong Kong based employees of International SMC as our representatives. These employees include product inspectors who are knowledgeable about product specifications and work closely with the factories to verify that such specifications are met. Additionally, key personnel frequently visit our factories for quality assurance and to support good working relationships. All of the electronic equipment sold by us is warranted to the end user against manufacturing defects for a period of ninety (90) days for labor and parts. All music sold is similarly warranted for a period of 30 days. During the fiscal years ended March 31, 2002 and 2001, warranty claims have not been material to our results of operations. LICENSE AGREEMENTS WITH MTV AND NICKELODEON In November 2000, we entered into a multi-year merchandise license agreement with MTV Networks, a division of Viacom International, Inc., to create the first line of MTV karaoke machine and compact disks with graphics ("CD+G's") featuring music for MTV's core audience. Under the licensing agreement, we produced two MTV-branded machines for the fiscal 2002 year: (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 also produced exclusive CD+G's featuring music catering to MTV's core audience that were distributed with the MTV branded karaoke machines. As of March 31, 2002, we exceeded the minimum guaranteed royalty payments established in the license agreement. For fiscal 2003, we are producing two additional MTV karaoke machines, a duet microphone and additional MTV branded CD+G's titles . In fiscal 2002, we sold 6 MTV branded CD+G's, in fiscal 2003, we expect to sell 20 different MTV CD+G titles. The MTV license expires on December 31, 2004. 4 We distribute the MTV licensed products through our established distribution channels, including Best Buy, Costco, JC Penny, Musicland, Sam's Club, Sears and Toys R Us. Our distribution network also includes the online versions of these retail customers. In December 2001, we entered into a multi-year license agreement with the Nickelodeon division of MTV Networks. Under this license, we will create a line of two Nickelodeon branded machines and music for the fiscal 2003 year. These products will be distributed through our established distribution channels. Our initial shipment date is scheduled for August 15, 2002. Over the term of this license agreement, we are obligated to make guaranteed minimum royalty payments of $450,000. We do not believe that the payment of these guaranteed fees will adversely affect our ongoing operations. The Nickelodeon license expires on December 31, 2004. COMPETITION Our business is highly competitive. Our major competitors for karaoke machines and related products are Casio Computer Corp., Grand Prix, Memorex, JVC and Pioneer Corp. We believe that competition for karaoke machines is based primarily on price, product features, reputation, delivery times, and customer support. Our primary competitors for producing karaoke music are Pocket Songs and Sound Choice. We believe that competition for karaoke music is based primarily on popularity of song titles, price, reputation and delivery times. We try to stay ahead of our competition by introducing new products each year and upgrading our existing products. We believe that we were one of the first companies to introduce CD+G technology to karaoke machines. In fiscal 2003, we introduced 6 new karaoke models, including 2 MTV branded machines. In fiscal 2003, we will be introducing a karaoke machine with a built-in-video monitor and camera. 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 videocassettes. Our financial position depends, among other things, on our ability to keep pace with changes and developments in the entertainment industry 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. TRADEMARKS We have registered various trademarks with the United States Patent & Trademark Office for our Singing Machine(R) products and also have common law rights in these trademarks. We have also registered our trademark in Germany, the Benelux countries, Switzerland and the United Kingdom. COPYRIGHTS AND LICENSES We hold federal and international copyrights to substantially all of the music 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 contractual and/or statutory licensing agreements with the publishers who own or control the copyrights of the underlying musical compositions. We 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 majority of the songs in our song library are subject to written copyright license agreements, oftentimes referred to as synchronization licenses. Our written licensing agreements for music provide for royalties to be paid on each song. The actual rate of royalty is negotiable, but typically ranges from $0.09 to $0.18 per song on each CD or audiocassette that is sold. Our written licenses typically provide for quarterly royalty payments, although some publishers require reporting on a semi-annual basis. We currently have compulsory statutory licenses for approximately 30 songs in our song library, which are sold as audio-cassettes. 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. Royalties due under compulsory licenses are payable monthly and are based on the statutory rate. The statutory rate is the greater of $0.08 per song for five minutes of playing time or $0.0155 per minute of playing time or fraction thereof with respect to each item of music produced and distributed by us. We also have written license agreements for substantially all of the printed 5 lyrics, which are distributed with our audio cassettes, which licenses also typically provide for quarterly payments of royalties at the statutory rate. GOVERNMENT REGULATION Our karaoke machines must meet the safety standards imposed in various national, state, local and provincial jurisdictions. Our karaoke machines sold in the United States are designed, manufactured and tested to meet the safety standards of Underwriters Laboratories, Inc. or Electronic Testing Laboratories. Our production and sale of music products is subject to federal copyright laws. Our manufacturing operations in China are subject to foreign regulation. China has permanent "normal trade relations" ("NTR") status under US tariff laws, which provides a favorable category of US import duties. China's NTR status became permanent on January 1, 2002, following enactment of a bill authorizing such status upon China's admission to the World Trade Organization ("WTO") effective as of December 1, 2001. This substantially reduces the possibility of China losing its NTR status, which would result in increasing costs for the Company. EMPLOYEES As of April 15, 2002, we employed 47 persons, all of whom are full-time employees, including four executive officers. Thirteen of our employees are located at International SMC's corporate offices in Hong Kong. The remaining thirty-four employees are based in the United States, including the four executive positions; twelve are engaged in warehousing and technical support, and eighteen in accounting, marketing, sales and administrative functions. ITEM 2. PROPERTIES Our corporate headquarters are located in Coconut Creek, Florida in an 11,200 square foot office and warehouse facility. Our three leases for this office space expire on August 30, 2004. We sublease showroom space at the International Toy Center in New York City. We have leased 9,393 square feet of office and showroom space in Hong Kong from which we oversee our China based manufacturing operations. Our two leases for this space in the Ocean Center building expire on April 30, 2005 and May 31, 2005, respectively. We have one central warehouse facility in Compton, California for 79,000 square feet. Our lease expires on February 23, 2008. We have also subleased warehouse space in Carson, California, that we previously leased for warehouse space to an unrelated third party until the expiration of the lease. 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 leases. ITEM 3. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders through a solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report. 6 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 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 information for our common stock as traded on the American Stock Exchange from March 8, 2001 through March 31, 2002, as reported by Commodity Systems, Inc. Also, set forth is the range of our high and low bid information for our common stock as traded on the OTC Bulletin Board from April 1, 2000 through March 8, 2001, as reported by the National Quotation Bureau, Inc. This information regarding trading on the OTC Bulletin Board represents prices between dealers and does not reflect retail mark-up or markdown or commissions, and may not necessarily represent actual market transactions. This information contained in this table has been restated to give effect to our 3-for-2 stock split to stockholders of record on March 4, 2002. Fiscal Period High Low 2002: ----- First Quarter (April 1 - June 30, 2001) $ 4.45 $ 2.90 Second Quarter (July 1 - September 30, 2001) 5.02 3.70 Third Quarter (October 1 - December 31, 2001) 16.19 4.30 Fourth Quarter (January 1 - March 31, 2002) 17.80 12.53 2001: ----- First Quarter (April 1 - June 30, 2000) $3.00 $1.65 Second Quarter (July 1 - September 30, 2000) 2.75 1.46 Third Quarter (October 1 - December 31, 2000) 4.42 2.33 Fourth Quarter (January 1 - March 8, 2001) 3.83 2.42 Fourth Quarter (March 8 - March 31, 2001) 4.00 * 3.06 * ---------------------------------------------------------- * The Company began trading on the American Stock Exchange on March 8, 2001 and the following prices represent the high and low sales prices on the AMEX during the period noted above. As of June 15, 2002, there were approximately 311 record holders of our outstanding common stock. COMMON STOCK - ------------ The Company has never declared or paid cash dividends on its common stock and the Company's Board of Directors intends to continue its policy for the foreseeable future. Furthermore, the Company's credit facility with LaSalle Business Credit, Inc. restricts the Company from paying any dividends to its shareholders, unless it obtains prior written consent from LaSalle. Future dividend policy will depend upon the Company's earnings, financial 7 condition, contractual restrictions and other factors considered relevant by the Company's Board of Directors and will be subject to limitations imposed under Delaware law. On March 14, 2002, the Company effected a 3 for 2 stock split for all shareholders on record as of March 4, 2002. Sale of Unregistered Securities During the three-month period ended March 31, 2002, nine employees and one former director exercised stock options issued under our 1994 Amended and Restated Management Stock Option Plan. The employees exercised options to acquire an aggregate of 380,275 shares of our common stock. The names of the option holders, the dates of exercise of the number of shares purchased, the exercise price and the proceeds received by us are listed below. Date of No. of Exercise Name Exercise Shares Price Proceeds Eddie Steele 01-03-02 262,500 $ .287 $75,250 Eddie Steele 01-03-02 45,000 $ 1.107 $49,800 Eddie Steele 01-03-02 15,000 $ 2.04 $30,600 Alicia Haskamp 01-03-02 6,000 $ 2.04 $12,240 M. McElligott 02-06-02 3,750 $ 2.04 $ 7,650 Brian Cino 02-06-02 675 $ .287 $ 193.50 Brian Cino 02-06-02 1,350 $ 2.04 $ 2,754 Jorge Otaeugi 02-06-02 2,250 $ .287 $ 645 Jorge Otaeugi 02-06-02 2,250 $ 2.04 $ 4,590 John Steele 02-06-02 7,500 $ 2.04 $15,300 Terry Phillips 02-19-02 450 $ 2.04 $ 918 Alan Schor 02-19-02 7,500 $ 2.04 $15,300 Robert Torrelli 03-07-02 150 $ 2.04 $ 306 John DeNovi 03-07-02 2,550 $ 3.27 $ 8,330 John Steele 03-14-02 22,500 $ 2.04 $45,900 Terry Phillips 03-22-02 900 $ 2.04 $ 1,836 Each of these employees and former director paid for the shares with cash. The shares issued to our employees were registered under the Securities Act on a registration statement on Form S-8. As such, no restrictive legends were placed on the shares, except control legends were placed on the shares issued to Eddie Steele. During the three-month period ended March 31, 2002, four warrant holders exercised their warrants to acquire an aggregate of 78,000 shares of common stock. The names of the warrant holders, the dates of exercise of the number of shares purchased, the exercise price and the proceeds received by the Company are listed below. Date of No. of Exercise Name Exercise Shares Price Proceeds Eddie Steele 01-03-02 12,000 $ 1.33 $16,000 Fred Merz 02-19-02 6,000 $ 1.33 $ 8,000 FRS Investments 03-04-02 30,000 $ 0.917 $27,500 John Klecha 03-19-02 30,000 $ 1.33 $40,000 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 sophisticated and had access to comprehensive information about the Company. The Company 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. 8 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussions and analysis should be read in conjunction with, and is qualified in its entirety by, the Financial Statements included elsewhere herein. Historical results are not necessarily indicative of trends in operating results for any future period. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of the Company's total revenues: YEAR ENDED MARCH 31, --------------------------------- 2002 2001 2000 ------ ------ ------- Total Revenues............................. 100.0% 100.0% 100.0% Cost of Sales.............................. 67.0 65.5 72.1 Operating expenses......................... 19.7 19.8 19.9 Operating income........................... 13.3 14.7 8.0 Other expenses, net........................ 0.09 2.5 5.0 Income before taxes........................ 13.2 12.2 3.0 Provision (benefit) for income taxes....... .2 .1 (0.8) Income (loss).............................. 13.0 12.0 3.8 THE YEAR ENDED MARCH 31, 2002 AS COMPARED TO THE YEAR ENDED MARCH 31, 2001 NET SALES Net sales for the fiscal year ended March 31, 2002 increased 80.2% to $61,828,894 compared to $34,306,839 for the fiscal year ended March 31, 2001. The Company's growth was driven by strong sales of the Company's MTV licensed merchandise and the introduction of new karaoke machines and music titles. We generated $23,354,270 million or 37.8% of our net sales from products sold under the MTV license. In fiscal 2002, our sales of music increased to $6,306,547 or 10.2% of our net sales compared with $3,087,615 or 9% of our net sales in fiscal 2001. GROSS PROFIT Gross profit for the fiscal year ended March 31, 2002 was $20,380,003 or 33% of sales compared to $11,833,690 or 34.5% of sales for the fiscal year ended March 31, 2001. The decrease in gross margin compared to the prior year is due to the realization of volume discounts by our largest customers. This was offset to some degree by reduced prices that we paid our manufacturers for our karaoke machines because of our increased purchases. OPERATING EXPENSES Operating expenses increased to $12,144,623, or 19.7% of sales, for the year ended March 31, 2002 from $6,806,097, or 19.8% of sales, for the year ended March 31, 2001. This increase in operating expenses was primarily attributed to the increase in expenses associated with: (1) the opening of the Company's Hong Kong 9 office, (2) the Company's first advertising campaign and (3) certain expenses which are considered variable as they relate directly to the level of sales. In December 2000, the Company's wholly-owned subsidiary, International SMC, opened a Hong Kong office. For the fiscal year ended March 31, 2002, this office incurred SG&A expenses of approximately $1,144,734 compared to $418,618 in the prior year. By opening this office, the Company saved the manufacturers agency fees, which were paid on each shipment in prior years. The Hong Kong office has fixed overhead expenses every month, as opposed to per shipment agency fees. We realized the greatest benefit from our Hong Kong office in the third quarter of fiscal 2002, when we purchased the largest amount of inventory. Our advertising expense increased to $2,377,638 for the fiscal year ended March 31, 2002 compared to $921,359 for the fiscal year ended March 31, 2001. Advertising expense consists of two components: Co-operative advertising and direct advertising expense. Co-operative advertising is paid directly to the customer and is based directly on the amount of sales. The customer has complete discretion as to the use of these funds. Co-operative advertising expenses accounted for $972,000 of the increase in advertising expenses. In fiscal 2002, the Company embarked on its first formal advertising campaign, which used print advertising, radio spots, sponsorships, promotions and other media. The cost for this advertising campaign was approximately $484,000 and this is a direct advertising expense. Other expenses, termed variable expenses, contributed to the increase in operating expenses. These expenses included royalty expense, sales commissions, warehouse expenses, and travel. The largest increase can be seen in royalty expense which increased approximately $1,713,000 over the prior year, primarily from the sale of items under the MTV licensing agreement. Our commissions payable to our independent sales representatives increased by $457,000 during fiscal 2002, because of increased sales. Our warehouse related expenses also increased by $478,000. These expenses are due to the increased importing of the Company's karaoke machines from Hong Kong. Our compensation expenses increased by $569,935 during our last fiscal year. We grew from 22 employees at March 31, 2001 to 47 employees at March 31, 2002. DEPRECIATION AND AMORTIZATION The Company's depreciation and amortization expenses were $394,456 for the fiscal year ended March 31, 2002, up from $301,064 in the prior year. The increase in depreciation and amortization expenses can be attributed to the Company's acquisition of new fixed assets during fiscal 2002, which included computers, furniture and other equipment in all of the Company's locations in Florida, California and Hong Kong. It also included the addition of new molds for our expanded product line. The amortization expense includes the amortization of a fee paid to LaSalle Bank for our line of credit facility and the amortization of remaining deferred guarantee fees related to the factoring agreement we terminated in April 2001. OTHER EXPENSES Other expenses were $50,821 for the fiscal year ended March 31, 2002 compared with net expenses of $839,572 for the fiscal year ended March 31, 2001. The Company had a large decrease in these miscellaneous items primarily because of the elimination of factoring fees and a decrease in interest expense resulting in a net decrease of $543,279. The Company terminated its factoring agreement in April 2001 and no longer incurs the fees and interest associated with it. The Company replaced the factoring agreement with a lower cost credit facility with LaSalle Business Credit in April 2001. The Company has also begun to generate income from royalty payments received in Hong Kong for the use of Company owned molds by other parties. INCOME BEFORE INCOME TAX EXPENSE The Company's income before income taxes increased 95.4% to $8,184,559 for the fiscal year ended March 31, 2002, compared to $4,188,021 for the fiscal year ended March 31, 2001. This increase in profit is due primarily to the increase in sales. INCOME TAX EXPENSE The Company files separate tax returns for the parent and for the Hong Kong Subsidiary. The income tax expense consists of taxes associated with federal, foreign and state income taxes in the consolidated statement of income. 10 During fiscal 2002, the Company showed a profit in both the U.S. parent company and International SMC, its wholly-owned Hong Kong subsidiary. The U.S. parent company's federal tax liability in fiscal 2002 was eliminated due to the utilization of operating loss carryforwards from prior years. As a result of this, the income tax recognized in fiscal 2002 in the amount of $119,277 is primarily for state income taxes. As of March 31, 2002, the Company had usable net operating loss carryforward of $714,159 for federal income tax purposes. The Company expects to utilize the remaining NOL in fiscal 2003. The Company's Hong Kong subsidiary has applied for a Hong Kong offshore claim income tax exemption based on the locality of the profits of the Hong Kong subsidiary. Management believes that the exemption will be approved because the source of all profits of the Hong Kong subsidiary are from exporting to customers outside of Hong Kong. Accordingly, no provision for foreign income taxes on the profits of the Hong Kong subsidiary have been provided in the accompanying consolidated financial statements. As of June 25, 2002, the Company has not received official approval of this Hong Kong tax exemption for fiscal 2002. In the event the exemption is not approved, the Hong Kong subsidiary profits will be taxed at a flat rate of 16% resulting in an estimated income tax expense of $725,000 and $460,000 for 2002 and 2001, respectively. NET INCOME As a result of the foregoing, the Company's net income increased 93.7% to $8,065,282 for the fiscal year ended March 31, 2002, compared to $4,164,701 for the fiscal year ended March 31, 2001. THE YEAR ENDED MARCH 31, 2001 AS COMPARED TO THE YEAR ENDED MARCH 31, 2000 NET SALES Net sales increased 80.3% in the fiscal year ended March 31, 2001. The increase in revenue from $19,032,320 in fiscal 2000 to $34,306,839 in fiscal 2001 can be attributed to the addition of a major customer and increased awareness of karaoke in the retail community. The addition of this customer alone added 20% to our revenues for fiscal 2001. Our sales of karaoke machines and karaoke music comprised 93% and 7%, respectively, of our sales in fiscal 2000. GROSS PROFIT Gross profit for fiscal 2001 was 34.5% of sales compared to 27.9% of sales in fiscal year 2000. The increased gross margin in fiscal 2001 is due to a favorable decrease in the cost of products, both hardware and music, resulting primarily from volume discounts. Another factor of increased gross margin is the increased percentage of music sales as compared to hardware sales. Overall, the gross profit on music sales is higher than that of hardware. OPERATING EXPENSES Operating expenses increased by 80.1% in fiscal 2001 compared to fiscal 2000. A good portion of this increase in operating expenses was due to the significant increase in sales and its impact on variable selling expenses such as freight expense, sales commissions, cooperative advertising, and travel expenses, among others. Another factor of this change is the addition of personnel, increasing compensation expense. The Company grew from 12 employees at March 31, 2000 to 22 employees at March 31, 2001. The accrual for management bonus also attributed to the increase in operating expenses. This expense is due largely to increased sales, but also to fairly stable expenses for the fiscal year. DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses increased from $116,369 in fiscal 2000 to $301,064 in fiscal 2001. The addition of new product molds in Hong Kong and the opening of a new Hong Kong office contributed to this increase. Also contributing to this increase was the expansion of our home office in Coconut Creek into another unit next to our existing office space. 11 OTHER EXPENSES Other expenses decreased from $947,982 in fiscal year 2000 to $839,572 in fiscal year 2001. This is primarily due to the expense in fiscal 2000 of non-cash based guarantee fees. Loss on accounts receivable due to factoring was 0.25% of total revenues in fiscal 2001 compared to 2.3% of total revenues in fiscal 2000. This decrease is due to the favorable factoring rates negotiated for the year. INCOME TAX EXPENSE The Company files separate tax returns for the parent and for the Hong Kong Subsidiary. The income tax expense (benefit) consists of taxes associated with federal, foreign and state income taxes in the consolidated statement of income. During fiscal 2001, the Company showed a profit in both the U.S. parent company and International SMC, its wholly-owned Hong Kong subsidiary. The U.S. parent company's tax liability was eliminated due to the utilization of operating loss carryforwards from prior years. As a result of this, the income tax recognized in fiscal 2001 in the amount of $23,320 is a result of the federal alternative minimum tax. Although the Company's NOL expires on various date through 2019, the Company expects to utilize the remaining NOL in fiscal year 2003. The Company's Hong Kong subsidiary applied for a Hong Kong offshore claim income tax exemption for the calendar year ended March 31, 2001. Management believes that the exemption will be approved because the source of all profits of the Hong Kong subsidiary are from exporting to customers outside of Hong Kong. Accordingly, no provision for foreign income taxes on the profits of the Hong Kong subsidiary has been made. As of June 20 , 2002, the Hong Kong offshore claim exemption for fiscal 2001 has not been approved. NET INCOME Net income after taxes (tax benefit) for the fiscal year ended March 31, 2001 and 2000 was $4,164,701 and $737,985, respectively. The increase in sales and stability of general expenses attributed to the increased bottom line. The tax expense for fiscal 2001 is due to alternative minimum tax. The Company has remaining net operating loss carry forwards to cover US taxes that may have been due on the profitability of the Company. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2002, the Company had current assets of $20,451,705 and total assets of $21,664,451 compared to current assets of $9,016,324 and total assets of $10,509,682 at March 31, 2001. This increase in current assets and total assets is primarily due to the increase in (i) cash and cash equivalents due to increased sales and collections of accounts receivable, (ii) accounts receivable for sales in the fourth quarter and (iii) inventories. In the fourth quarter of 2002, Best Buy began taking our goods on a consignment basis instead of a purchase basis. We recorded approximately $2.875 million in sales returns and reversed related costs of sales in February 2002 and Best Buy retained the inventory on a consignment basis. From the date of the sales returns through March 31, 2002, we recorded approximately $2.442 million of sales from the consignment inventory. We increased our inventory levels as of March 31, 2002, in anticipation of the potential strike by longshoremen and other dock workers on the California seaboard in July 2002. Current liabilities increased to $3,194,377 as of March 31, 2002, compared to $1,591,021 at March 31, 2001. This increase in current liabilities is primarily due to the accrual of expenses for royalties, management bonuses and allowances for advertising expenses among others. At March 31, 2002, the balance of the credit facility with LaSalle Business Credit was zero. Increased royalty expenses include royalty expenses payable to MTV for the sale of licensed merchandise, as well as other agencies and publishers with whom we hold licenses for our recorded music. The Company's stockholders' equity increased to $18,470,074 as of March 31, 2002 from $8,918,661 as of March 31, 2001, due to the exercise of options and warrants, the write off of deferred guarantee fees and the current fiscal year net income. Cash flows provided by operating activities were $2,954,687 during the fiscal year ended March 31, 2002. Cash flows were used in operating activities primarily due to increases in accounts receivable in the amount of 12 $3,114,627 and inventory in the amount of $4,460,890. Cash flows were provided by operating activities primarily due to an increase in accounts payable and accrued expenses in the amount of $1,563,603 and net income of $8,065,282. These increases are a direct result of the increased volume of sales for the fiscal year. Cash provided by investing activities during this same period were $230,049. Cash provided by investing activities resulted primarily from receipt of $933,407 previously invested with the Company's factor. Other factors provided by investing activities consisted of $117,425 received from our officers as repayments on loans and $298,900 received from the sale of an unconsolidated subsidiary. Cash used in investing activities consisted of property and equipment in the amount of $613,691 and a $513,684 deposit placed for a letter of credit facility with Hong Kong Shanghai Banking Corporation. Cash flows provided by financing activities were $1,319,190 during the fiscal year ended March 31, 2002. This consisted of proceeds from the exercise of warrants and options in the amount of $1,319,190. As the credit line at LaSalle National Bank was zero at this date, the amount of loan proceeds and repayments was the same, $21,856,653. The Company expects that its capital needs will increase during fiscal 2003. Our capital needs stem primarily from our need to purchase sufficient levels of inventory for the Christmas season. Our principal sources of capital in the next twelve months include our operating cash flows, borrowings under our credit facility with LaSalle and advances made under three letters of credit issued to our factories. At the present time, our credit facility with LaSalle provides us with up to $10 million in financing depending upon the time of the year. We are seeking increased financing from LaSalle or another third party by the end of July 2002. We would like to have credit facilities in excess of $20 million available for the upcoming holiday season. We entered into a credit facility with LaSalle in April 2001. Under this credit facility, LaSalle will advance up to 75% of the Company's eligible accounts receivable, plus up to 40% of eligible inventory, plus up to 40% of commercial letters of credit issued by LaSalle minus reserves as set forth in the loan documents. The credit facility is subject to loan limits from zero to $10,000,000 depending on the time of the year, as stipulated in the loan documents. Advances made under the credit facility bear interest at LaSalle's prime rate plus .5%. There is also an annual fee of 1% of the loan maximum, or $100,000. The credit facility expires on April 26, 2004 and is automatically renewable for one-year terms thereafter. Under the terms of the credit facility, the Company is required to maintain certain financial ratios and conditions. The loan contains a clean up period every 12 months where the loan amount must go to zero for a period of time. The loan is secured by a first lien on all present and future assets of the Company, except certain tooling located in China. Our Hong Kong subsidiary, International SMC, maintains a letter of credit facility with the Hong Kong Shanghai Banking Corporation ("HSBC"). The facility requires International SMC to maintain a separate deposit account in the amount of $513,684. This amount is included in deposits at March 31, 2002. During April and May 2002, HSBC agreed to issue International SMC two documentary letters of credit to finance its purchases of karaoke machines from our factories. One letter of credit provides for advances of up to $200,000 per draw, provided that the total drawings do not exceed $2 million. The other letter of credit is for $1 million. These letters of credit expire on December 21, 2002 and November 30, 2002, respectively and our factories are the beneficiaries. In June 2002, International SMC obtained a $1 million documentary letter of credit from Fortis Bank, formerly known as Belgian Bank, Hong Kong, a subsidiary of Generale Bank, Belgium. This letter of credit expires on December 6, 2002 and one of our factories is the beneficiary. International SMC also has use of a $500,000 credit facility from Fortis Bank. This facility is a revolving line based upon drawing down a maximum of 15% of the value of export letters of credit held by Fortis Bank. There is no maturity date except that Fortis 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. This credit facility is not currently in use and the terms are being renegotiated. As of March 31, 2002, we do not have any material commitments for capital expenditures, other than (i) our obligation to make certain guaranteed minimum royalty payments in the amount of $450,000 under our licensing agreement with Nickelodeon, (ii) our lease for our warehouse space in California and (iii) our purchases of inventory from certain factories in China. We also have contractual obligations under our real estates leases in Florida, Hong Kong and California. Except for the foregoing, we do not have any present commitment that is likely to result in our liquidity increasing or decreasing in any material way. In addition, except for the Company's need 13 for additional capital to finance inventory purchases, the Company knows of no trend, additional demand, event or uncertainty that will result in, or that is reasonably likely to result in, the Company's liquidity increasing or decreasing in any material way. Exchange Rates We sell all of our products in U.S. dollars and pay for all of our manufacturing costs in either U.S. or Hong Kong dollars. Operating expenses of the Hong Kong office are paid in Hong Kong dollars. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since 1983 at HK$7.80 to U.S.$1.00 and accordingly, has not represented a currency exchange risk to the U.S. dollar. We cannot assure you that the exchange rate between the United States and Hong Kong currencies will continue to be fixed or that exchange rate fluctuations will not have a material adverse effect on our business, financial condition or results of operations. SEASONAL AND QUARTERLY RESULTS Historically, the Company's operations have been seasonal, with the highest net sales occurring in the second and third quarters (reflecting increased orders for equipment and music merchandise during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year. Sales in the Company's fiscal second and third quarter, combined, accounted for approximately 81% of net sales in fiscal 2002 and 75% of net sales in fiscal 2001. The Company's results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis. INFLATION Inflation has not had a significant impact on the Company's operations. The Company has historically passed any price increases on to its customers since prices charged by the Company are generally not fixed by long-term contracts. CRITICAL ACCOUNTING POLICIES The U.S. Securities and Exchange Commission defines critical accounting policies as "those that are both most important to the portrayal of a company's financial condition and results, and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain." Preparation of our financial statements involve the application of several such policies. These policies include: estimates of accruals for product returns, the realizability of the deferred tax asset, calculation of our allowance for doubtful accounts and the Hong Kong income tax exemption. Accrual for product returns. We regularly receive requests from our customers for product returns. Our accrual amount is based on historical experience and is recorded as a reduction of sales and costs of sales and as a liability equal to the resulting gross profit on the estimated returns. At March 31, 2002, the accrual was approximately $164,000. Realizability of Deferred Tax Asset. We eliminated our valuation allowance on the deferred tax asset since we determined that it is more likely than not that the deferred tax asset will be realized. Estimate for Doubtful Accounts. We estimate an allowance for doubtful accounts using the specific identification method since a majority of accounts receivable are concentrated with several customers whose credit worthiness is evaluated periodically by us. The allowance was $12,022 at March 31, 2002. Hong Kong Income Tax Exemption. We estimated that the Hong Kong income tax to be zero based on our assessment of the probability that the application for the Hong Kong income tax exemption would be approved. In addition to the above policies, several other policies, including policies governing the timing of revenue recognition, are important to the preparation of our financial statements, but do not meet the definition of critical accounting policies because they do not involve subjective or complex judgments. 14 RISK FACTORS Set forth below and elsewhere in this Annual Report on Form 10-KSB and in the other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward looking statements contained in this Annual Report. Factors That May Affect Future Results and Market Price of Stock We rely on sales to a limited number of key customers which account for a large portion of our net sales As a percentage of total revenues, our net sales to our five largest customers during the fiscal year ended March 31, 2002 and 2001were approximately 87% and 78% respectively. In fiscal 2002, Best Buy, Toys R Us and Costco accounted for 35.7%, 27.8% and 10.5% of our net sales. In fiscal 2001, Best Buy and Toys R Us accounted for 34.9% and 20.4% of our net sales. Although we have long-established relationships with many of our customers, we do not have long-term contractual arrangements with any of them. A substantial reduction in or termination of orders from any of our largest customers could adversely affect our business, financial condition and results of operations. In addition, pressure by large customers seeking price reductions, financial incentives, changes in other terms of sale or requesting that we bear the risks and the cost of carrying inventory, such as consignment agreements, could adversely affect our business, financial condition and results of operations. If one or more of our major customers were to cease doing business with us, significantly reduced the amount of their purchases from us or returned substantial amounts of our products, it could have a material adverse effect on our business, financial condition and results of operations. Our licensing agreement with MTV is important to our business We generated $23,354,270, or 37.8% of our net sales, in fiscal 2002 from our sales of MTV licensed merchandise. Management values this license with MTV and desires to continue this licensing relationship. If the MTV license were to be terminated or failed to be renewed, our business, financial condition and results of operations could be adversely affected. However, management believes that our company has developed a strong brand name in the karaoke industry and that it will be able to continue to develop and grow its business, even if the MTV licensing relationship did not exist. Inventory Management and Consignment Arrangement with Best Buy, our largest customer Because of our reliance on manufacturers in the Far East, our production lead times are relatively long. Therefore, we must commit to production in advance of customers orders. If we fail to forecast customers or consumer demand accurately we may encounter difficulties in filling customer orders or liquidating excess inventories, or may find that customers are canceling orders or returning products. Distribution difficulties may have an adverse effect on our business by increasing the amount of inventory and the cost of storing inventory. During our fourth quarter, Best Buy began taking our goods on a consignment basis. Additionally, changes in retailer inventory management strategies could make inventory management more difficult. Any of these results could have a material adverse effect on our business, financial condition and results of 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. Our major competitors for karaoke machines and related products are Casio Computer Co, Grand Prix, JVC, Memorex and Pioneer Corp. We believe that competition for karaoke machines is based primarily on price, product features, reputation, delivery times, and customer support . Our primary competitors for producing karaoke music are Pocket Songs and Sound Choice. We believe that competition for karaoke music is based primarily on popularity of song titles, price, reputation and delivery times. We believe that our new product introductions and enhancements of existing products are material factors for our continued growth and profitability. In fiscal 2002, we produced 6 new karaoke machines. However, 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 our existing products. 15 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. 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 will include increased revenues from sales made during the holiday season. Additional factors that can cause our sales and operating results to vary significantly from period to period include, among others, the mix of products, fluctuating market demand, price competition, new product introductions by competitors, fluctuations in foreign currency exchange rates, disruptions in delivery of components, political instability, general economic conditions, and the other considerations described in this section entitled Risk Factors. We have significant future capital needs which are subject to the uncertainty of additional financing We currently have a $10 million credit facility from LaSalle Business Credit. In order to meet our projected needs for the holiday season, we would like to obtain financing in excess of $20 million. We are seeking this additional financing from LaSalle Business Credit or a different lender, if LaSalle does not want to increase our credit line. 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. Our business operations could be significantly disrupted if the California longshoremen go on strike During fiscal 2002, approximately 55% of our sales were domestic sales, which were made from our warehouses in California and Florida. During June and July 2002, California longshoremen and other dockworkers represented by the International Longshore and Warehouse Union, have threatened to go on strike. Since we import a significant amount of karaoke electronic recording equipment from the Far East to California, the strike would have a material adverse effect on our business, results of operations and financial condition. In the event that the strike occurs, we have developed contingency plans. However, all of these contingency plans will result in increased costs to our company and may reduce our profitability in fiscal 2003. We may not be able to sustain or manage our rapid growth We experienced rapid growth in net sales and net income in the last year. Our net sales for the fiscal year ended March 31, 2002 increased 80.2% to $61.8 million compared to $34.3 million for the fiscal year ended March 31, 2002. Similarly, our net income increased to $8.06 million for fiscal 2002 compared to $4.6 million for fiscal 2001. As a result, comparing our period-to-period operating results may not be meaningful, and results of operations from prior periods may not be indicative of future results. We cannot assure you that we will continue to experience growth in, or maintain our present level of, net sales or net income. Our growth strategy calls for us to continuously develop and diversify our karaoke products by (i) developing new karaoke machines and music products, (ii) entering into additional license agreements (iii) expanding into international markets, (iv) developing new retail customers in the United States and (v) obtaining additional financing. Our growth strategy will place additional demands on our management, operational capacity and financial resources and systems. To effectively manage future growth, we must continue to expand our operational, financial and management information systems and train, motive and manage our work force. In addition, implementation of our growth strategy is subject to risks beyond our control, including competition, market acceptance of new products, changes in economic conditions, our ability to maintain our licensing agreements with MTV and Nickelodeon and our ability to finance increased levels of accounts receivable and inventory necessary to support our sales growth, if any. Accordingly, we cannot assure you that our growth strategy will be implemented successfully. 16 The market price of our common stock may be volatile Market prices of the securities of companies in the toy and entertainment industry are often volatile. The market prices of our common stock may be affected by many factors, including: -quarterly variations in our operating results; -operating results that vary from the expectations of investors and securities analysts; -changes in expectations as to our future financial performance, including financial estimates by investors and securities analysts; - the actions of our customers and competitors (including new product line announcements and introduction); - regulations affecting our manufacturing operations in China; - other factors affecting the entertainment and consumer electronics industries in general; and - sales of our common stock into the public market. In addition, the stock market periodically has experienced significant price and volume fluctuations which may have been unrelated to the operating performance of particular companies. Our manufacturing operations are located in the People's Republic of China, subjecting us to risks common in international operations We are dependent upon six factories in the People's Republic of China to manufacture all of our electronic products. Our arrangements with these factories are subject to the risks of doing business abroad, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, limitations on the repatriation of earnings, political instability, and other factors which could have an adverse impact on our business. Furthermore, we have limited control over the manufacturing processes themselves. As a result, any difficulties encountered by the third-party manufacturers that result in product defects, production delays, cost overruns or the inability to fulfill orders on a timely basis could adversely affect our business, financial condition and results of operations.. We believe that the loss of any one or more of our manufacturers 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 manufacturers, could, in the short-term, adversely affect our business until alternative supply arrangements were secured. We may have significant returns, markdowns and purchase order cancellations As is customary in the consumer electronics industry, the Company has, on occasion, (i) permitted certain customers to return slow-moving items for credit, (ii) provided price protection to certain customers by making price reductions effective as to certain products then held by customers in inventory and (ii) accepted customer cancellations of purchase orders issued to the Company. The Company expects that it will continue to be required to make such accommodations in the future. Any significant increase in the amount of returns, markdowns or purchaser order cancellations could have a material adverse effect on the Company's results of operations. We depend on third party suppliers for parts for our karaoke machines and related products, and if we cannot obtain supplies as needed, our operations will be severely damaged Our growth and ability to meet customer demand depends in part on our capability to obtain timely deliveries of karaoke machines and our electronic products. We rely on third party suppliers to produce the parts and materials we use to manufacture and produce these products. If our suppliers are unable to provide our factories 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. In the last several years, there have been shortages of certain chips that we use in our karaoke machines. However, we have anticipated this shortage and have made commitments to our factories to purchase chips in advance. If we are unable to purchase these parts and materials, we will experience severe production problems, which may possibly result in the termination of our operations. 17 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 machines and music 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 may be infringing upon the copyrights of third parties Each song in our catalog is licensed to us for specific uses. Because of the numerous variations in each of our licenses for copyrighted music, there can be no assurance that we have complied with scope of each of our licenses. Additionally, third parties over whom we exercise no control may use our sound recordings in such a way that is contrary to our license agreement and by violating our license agreement we may be liable for contributory copyright infringement. Any infringement claims may have a negative effect on our ability to sell products. 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. Deterioration in the financial condition of our customers could have a material adverse effect on our future profitability. Our net income may be reduced if our Hong Kong Subsidiary does not receive an exemption for offshore income tax Our Hong Kong subsidiary has applied for a Hong Kong "offshore claim" income tax exemption based on the locality of the profits of the Hong Kong subsidiary. Management believes that since the source of all profits of the Hong Kong subsidiary are from exporting to customers outside of Hong Kong, it is likely that the exemption will be approved. Accordingly, no provision for foreign income taxes has been provided in the Company's financial statements. In the event the exemption is not approved, the Hong Kong subsidiary's profits will be taxed at a flat rate of 16% resulting in an income tax expense of approximately $725,000 and $460,000 for fiscal 2001. As a result, our net income for fiscal 2002 would be $7,340,282 and $3,704,701 for fiscal 2001. 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 Edward Steele, our Chief Executive Officer; John Klecha, our President, Chief Operating Officer; and Jack Dromgold, our Executive Vice President of Sales and Marketing, the loss of the services of any of these individuals could prevent us from executing our business strategy. We cannot assure you that we will be able to find appropriate replacements for Edward Steele, John Klecha or Jack Dromgold, if the need should arise, and any loss or interruption of Mr. Steele, Mr. Klecha or Mr. Dromgold's services could adversely affect our business, financial condition and results of operations. Mr. Steele will be retiring in February 2003; however, we expect to retain him as a consultant on product development for a period of at least one-year after his retirement. Our obligation to make severance payments could prevent or delay takeovers. Our employment agreements with Eddie Steele, John Klecha, April Green and Jack Dromgold require us, under certain conditions, to make substantial severance payments to them if they resign after a change of control. These provisions could delay or impede a merger, tender, offer or other transaction resulting in a change in control 18 of the Company, even if such a transaction would have significant benefits to our shareholder. As a result, these provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. We may be subject to claims from third parties for unauthorized use of their proprietary technology, copyrights or trade secrets We believe that we independently developed the technology used in our electronic and audio software products and that it does not infringe on the proprietary rights, copyrights or trade secrets of others. However, we cannot assure you that we have not infringed on the proprietary rights 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. 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. Risks Associated with our Capital Structure Future sales of our common stock held by current stockholders may depress our stock price As of March 31 2002, there were 8,020,027 shares of our common stock outstanding, We have filed two registration statements registering an aggregate 4,792,234 of shares of our common stock ( a registration statement on Form S-3 registering the resale of 2,947,984 shares or our common stock and a registration statement on Form S-8 to registering the sale of 1,844,250 shares underlying options granted under our 1994 Stock Option Plan). We also intend to file a registration statement on Form S-8 to register 1,950,000 shares of our common stock underlying options granted under our Year 2001 Stock Option Plan. 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 pursuant to the registration statements or under Rule 144, or the perception that these sales could occur. 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 31, 2002, we had 8,020,027 shares of common stock issued and outstanding and an aggregate of 1,064,475 outstanding options and warrants. As such, our Board of Directors has the power, without stockholder approval, to issue up to 9,815,498 shares of common stock. Any issuance of additional shares of common stock, whether by us to new stockholders 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. Issuance of additional shares will reduce the proportionate ownership and voting power of our then existing stockholders. 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: authorizing our board of directors to issue additional preferred stock, 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 19 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. ITEM 7. FINANCIAL STATEMENTS The financial statements required pursuant to this Item 7 are included in this Form 10-KSB as a separate section commencing on page F-1 and are incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AN FINANCIAL DISCLOSURE No change or disagreement with Salberg & Company, P.A., the Company's independent auditing firm, took place with respect to the preparation of the Company's financial statements for the two (2) most recent fiscal years contained in this Annual Report on Form 10-KSB, namely the fiscal years ended March 31, 2002 and March 31, 2001. However, during fiscal 2001, the Company changed accountants. Weinberg & Company, P.A. (the "Former Accountant"), was replaced as independent certified public accountant and independent auditor for the Company on November 28, 2000. The Company's decision to change accountants was approved by its Board of Directors because Scott Salberg, the auditor who has been responsible for the Company's account, left the Former Accountant to start his own accounting firm. The report of the Former Accountant on the financial statements of the Company for the year ended March 31, 2000, did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's fiscal year ended March 31, 2000, and through November 28, 2000, there were no disagreements with the Former Accountant on any matters of accounting principles or practices, financial statement disclosure or auditing scope procedure, which, if not resolved to the satisfaction of the Former Accountant would have caused it to make reference to the subject matter of the disagreement in connection with its report on these financial statements for those periods. On November 28, 2000, the Company engaged Salberg & Company, P.A., as its independent auditor and independent certified public accountant. The Company did not consult with Salberg and Company, P.A. regarding the application of accounting principles to a specific transaction of the type of audit opinion that might be rendered on the Company's financial statements, and no written or oral advice was provided by Salberg & Company, P.A. that was a factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issues. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information required by this Item 9 is incorporated herein by reference to the Company's definitive Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days after the Company's fiscal year end. ITEM 10. EXECUTIVE COMPENSATION The information required by this Item 10 is incorporated herein by reference to the Company's definitive Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days after the Company's fiscal year end. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 11 is incorporated herein by reference to the Company's definitive Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days after the Company's fiscal year end. 20 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 12 is incorporated herein by reference to the Company's definitive Proxy Statement which will be filed with the Securities and Exchange Commission within 120 days after the Company's fiscal year end. ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) Exhibits 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's 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 the Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1999 filed with the SEC on November 14, 2000). 3.12 Certificate of Correction filed with the Delaware Secretary of State on March 29, 2001 correcting the Amendment to our Certificate of Incorporation dated April 20, 1998 (incorporated by reference to Exhibit 3.11 in the Company's registration statement on Form SB-2 filed with the SEC on April 11, 2000).* 3.13 Certificate of Correction filed with the Delaware Secretary of State on March 30, 2001 correcting the Amendment to our Certificate of Incorporation dated May 7, 1998 (incorporated by reference to Exhibit 3.11 in the Company's registration statement on Form SB-2 filed with the SEC on April 11, 2001). 3.14 Amended By-Laws of the Singing Machine Company (incorporated by reference to Exhibit 3.14 in the Company's Annual Report on Form 10-KSB for the year ended March 31, 2001 filed with the SEC on June 29, 2001). 4.1 Form of Certificate Evidencing Shares of Common Stock (incorporated by reference to Exhibit 3.3. of the Company's 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 the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 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 (incorporated by reference to 21 Exhibit 10.1. of the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 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 trust of September 2, 1982 for warehouse space in Carson, California (incorporated by reference to Exhibit 10.2 of the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001. 10.3 Lease Agreement dated August 2000 between Koon Wah Mirror Holdings Limited and International SMC (HK) Limited for office space in Hong Kong (incorporated by reference to Exhibit 10.3 of the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 10.4 Lease Agreement dated March 12, 2002, by and between Lyons Corporate Park LLP and The Singing Machine Company, Inc. for office space in Coconut Creek, Florida.* 10.5 Sublease dated May 28, 2002 by and between The Singing Machine Company, Inc. and Busung America Corp. for warehouse space in Carson City, California.* 10.6 Lease documents for Ocean Centre dated April and June 2002 by and between Harbour City Management Limited and International SMC (HK) Ltd. for office space in Hong Kong.* 10.7 Industrial Lease dated March 1, 2002, by and between AMP Properties, L.P. and The Singing Machine Company, Inc. for warehouse space in Compton, California.* 10.8 Employment Agreement dated May 1, 1998 between the Singing Machine and Edward Steele (incorporated by reference to Exhibit 10.1 of the Company's registration statement on Form SB-2 filed with SEC on March 7, 2000). 10.9 Employment Agreement dated June 1, 2000 between the Singing Machine and John Klecha (incorporated by reference to Exhibit 10.5 of the Company's registration statement on Form SB-2 filed with the SEC March 28, 2001). 10.10 Loan and Security Agreement dated April 2000 between LaSalle Business Credit, Inc. and the Singing Machine Company (incorporated by reference to Exhibit 3.1 in the Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1999 filed with the SEC on November 14, 2000).* 10.11 First Amendment to Loan and Security Agreement dated October 1, 2001 between LaSalle Business Credit, Inc. and the Singing Machine Company.* 10.12 Second Amendment to Loan and Security Agreement dated November 20, 2001 between LaSalle Business Credit, Inc. and the Singing Machine Company.* 10.13 Third Amendment to Loan and Security Agreement dated November 28, 2001 between LaSalle Business Credit, Inc. and the Singing Machine Company.* 10.14 Fourth Amendment to Loan and Security Agreement dated February 28, 2002 between LaSalle Business Credit, Inc. and the Singing Machine Company, Inc.* 10.15 Amended and Restated 1994 Management Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 10.16 Factoring Agreement dated April 7, 2000 between the Singing Machine and Main Factors, Inc. (incorporated by reference to Exhibit 10.7 to the company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 10.17 Master Agreement dated July 31, 1999 between EPK Financial Corporation and the Singing Machine (incorporated by reference to Exhibit 10.4 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 10.18 Singing Machine's Amended Bankruptcy Plan of Reorganization dated December 17, 1997 (incorporated by reference to Exhibit 10.5 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 10.19 Bankruptcy Court's Order Confirming the Plan of Reorganization (incorporated by reference to Exhibit 10.5 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 21.1 List of Subsidiaries* 23.1 Consent of Salberg & Company, P.A.* *Filed herewith 22 SIGNATURES In accordance with the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SINGING MACHINE COMPANY, INC. Dated: June 28, 2002 By: /s/ John Klecha --------------- John Klecha, President, Chief Operating Officer, Secretary, Treasurer and Director (Principal Executive Officer) In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Capacity Date - --------- -------- ---- /s/ Edward Steele Chief Executive Officer June 28, 2002 - --------------------------- And Director Edward Steele (Principal Executive Officer) /s/ John F. Klecha President, Chief Operating June 28, 2002 - --------------------------- Officer, Secretary, Treasurer John F. Klecha and Director (Principal Executive Officer) /s/ April Green Chief Financial Officer June 28, 2002 - --------------- (Principal Financial and April Green Accounting Officer) /s/ Josef A. Bauer Director June 28, 2002 - --------------------------- Josef A. Bauer /s/ Howard W. Moore Director June 28, 2002 - --------------------------- Howard W. Moore /s/ Robert J. Weinberg Director June 28, 2002 - --------------------------- Robert J. Weinberg
23 The Singing Machine Company, Inc. and Subsidiary Consolidated Financial Statements March 31, 2002 The Singing Machine Company, Inc. and Subsidiary Contents -------- Page(s) ------------- Independent Auditors' Report F-1 Consolidated Balance Sheet F-2 Consolidated Statements of Income F-3 Consolidated Statements of Changes in Stockholders' Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 - F-22 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, 2002, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended March 31, 2002 and 2001. 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 auditing standards generally accepted in the United States of America. 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 consolidated 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, 2002, and the results of their operations and their cash flows for the years ended March 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America. SALBERG & COMPANY, P.A. Boca Raton, Florida May 23, 2002 F-1 The Singing Machine Company, Inc. and Subsidiary Consolidated Balance Sheet March 31, 2002 --------------
Assets ------ Current Assets Cash and cash equivalents $ 5,520,147 Accounts receivable, net 3,536,903 Due from manufacturer 488,298 Inventories 9,274,352 Prepaid expenses and other current assets 1,118,321 Deposits 513,684 ----------- Total Current Assets 20,451,705 ----------- Property and Equipment, Net 574,657 ----------- Other Assets Reorganization intangible, net 185,416 Deferred tax asset 452,673 ----------- Total Other Assets 638,089 ----------- Total Assets $21,664,451 =========== Liabilities and Stockholders' Equity ------------------------------------ Current Liabilities Accounts payable $ 1,846,238 Accrued payroll 519,714 Accrued royalties 301,873 Accrued advertising 136,551 Other accrued expenses 331,459 Income tax payable 58,542 ----------- Total Current Liabilities 3,194,377 ----------- Stockholders' Equity Preferred stock, $1.00 par value, 1,000,000 shares authorized, no shares issued and outstanding -- Common stock, Class A, $0.01 par value, 100,000 shares authorized, no shares issued and outstanding -- Common stock, $0.01 par value, 18,900,000 shares authorized, 8,020,027 shares issued and outstanding 80,200 Additional paid-in capital 4,602,828 Retained earnings 13,787,046 ----------- Total Stockholders' Equity 18,470,074 ----------- Total Liabilities and Stockholders' Equity $21,664,451 ===========
See accompanying notes to consolidated financial statements F-2 The Singing Machine Company, Inc. and Subsidiary Consolidated Statements of Income Years Ended March 31, 2002 and 2001 -----------------------------------
2002 2001 ------------ ------------ Net Sales $61,828,894 $34,306,839 Cost of Sales 41,448,891 22,473,149 ------------ ------------ Gross Profit 20,380,003 11,833,690 ------------ ------------ Operating Expenses Compensation 2,486,547 1,916,612 Agency fees -- 647,908 Commissions 1,294,543 837,222 Advertising 2,377,638 921,359 Bad debt 45,078 85,302 Royalties 1,862,116 148,643 Selling, general and administrative expenses 4,078,701 2,249,051 ------------ ------------ Total Operating Expenses 12,144,623 6,806,097 ------------ ------------ Income from Operations 8,235,380 5,027,593 ------------ ------------ Other Income (Expenses) Other income 215,840 32,617 Interest income 16,934 50,242 Interest expense (112,123) (424,104) Stock based guarantee fees (171,472) (267,029) Factoring fees -- (231,298) ------------ ------------ Net Other Expenses (50,821) (839,572) ------------ ------------ Income Before Income Taxes 8,184,559 4,188,021 Income Tax Expense 119,277 23,320 ------------ ------------ Net Income $ 8,065,282 $ 4,164,701 ============ ============ Earnings per Share: Basic $ 1.13 $ 0.66 ============ ============ Diluted $ 1.02 $ 0.56 ============ ============ Weighted Average Common and Common Equivalent Shares Outstanding: Basic 7,159,142 6,291,792 ============ ============ Diluted 7,943,473 7,457,173 ============ ============
See accompanying notes to consolidated financial statements F-3 The Singing Machine Company, Inc. and Subsidiary Consolidated Statements of Changes in Stockholders' Equity Years Ended March 31, 2002 and 2001 -----------------------------------
Common Stock and Common Stock to be Preferred Shares Issued --------------------------- ---------------------------- Shares Amount Shares Amount ----------- ------------ ---------- ------------ Balance March 31, 2000 1,000,000 $ 1,000,000 $4,541,430 $45,414 Conversion of preferred stock (1,000,000) (1,000,000) 1,500,000 15,000 Exercise of warrants -- -- 570,000 5,700 Exercise of employee stock options -- -- 2,250 23 Cancellation of shares -- -- (75,000) (750) Warrants issued for services and as loan fees -- -- -- -- Amortization of deferred guarantee fees -- -- -- -- Net Income, 2001 -- -- -- -- ---------- ----------- ------------ ------------ Balance March 31, 2001 -- -- 6,538,680 65,387 Amortization of deferred guaranteed fees -- -- -- -- Exercise of warrants -- -- 581,100 5,811 Exercise of employee stock options -- -- 900,525 9,005 Fractional share adjustment pursuant to 3:2 stock split -- -- (278) (3) Net Income, 2002 -- -- -- -- ---------- ----------- ---------- ---------- Balance, March 31, 2002 -- $ -- 8,020,027 $80,200 ---------- =========== ========== ========== [restub] Additional Deferred Paid-in Retained Guarantee Capital Earnings Fees Totals ---------- ----------- --------- ---------- Balance March 31, 2000 $1,703,910 $ 1,557,063 (400,101) $ 3,906,286 Conversion of preferred stock 985,000 -- -- -- Exercise of warrants 574,300 -- -- 580,000 Exercise of employee stock options 622 -- -- 645 Cancellation of shares 750 -- -- -- Warrants issued for services and as loan fees 38,400 -- -- 38,400 Amortization of deferred guarantee fees -- -- 228,629 228,629 Net Income, 2001 -- 4,164,701 -- 4,164,701 ---------- ----------- -------- ----------- Balance March 31, 2001 3,302,982 5,721,764 (171,472) 8,918,661 Amortization of deferred guaranteed fees -- -- 171,472 171,472 Exercise of warrants 584,239 -- -- 590,050 Exercise of employee stock options 720,135 -- -- 729,140 Fractional share adjustment pursuant to 3:2 stock split (4,528) -- -- (4,531) Net Income, 2002 -- 8,065,282 -- 8,065,282 ---------- ----------- -------- ----------- Balance, March 31, 2002 $4,602,828 $13,787,046 -- $18,470,074 ========== =========== ======== ===========
See accompanying notes to consolidated financial statements F-4 The Singing Machine Company, Inc. and Subsidiary Consolidated Statements of Cash Flows Years Ended March 31, 2002 and 2001 -----------------------------------
2002 2001 ------------ ------------ Cash Flow from Operating Activities: Net income $ 8,065,282 $ 4,164,701 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 394,456 301,064 Stock based expenses 171,472 267,029 Bad debt 45,078 85,302 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (2,626,329) (312,916) Due from manufacturer 210,798 (699,096) Inventories (4,460,891) (3,326,255) Prepaid expenses and other assets (444,004) (394,176) Increase (decrease) in: Accounts payable 1,364,158 467,491 Accrued expenses 199,445 672,342 Income taxes payable 35,222 11,326 ------------ ------------ Net Cash Provided by Operating Activities 2,954,687 1,236,812 ------------ ------------ Cash Flow from Investing Activities Purchase of property and equipment (613,691) (373,409) Deposits (513,684) -- Proceeds from repayment of related parties loans 7,692 -- Proceeds from repayment of officer loans 117,425 -- Proceeds from investment in factor 933,407 -- Investment in and advances to unconsolidated subsidiary -- (374,730) Proceeds from sale of unconsolidated subsidiary 298,900 -- Net proceeds from related parties -- 386,261 ------------ ------------ Net Cash Provided by (Used in) Investing Activities 230,049 (361,878) ------------ ------------ Cash Flow from Financing Activities Loan proceeds 21,856,653 600,000 Loan repayments (21,856,653) (600,000) Proceeds from exercise of stock options and warrants 1,319,190 580,645 Due from factor -- (818,206) ------------ ------------ Net Cash Provided by (Used in) Financing Activities 1,319,190 (237,561) ------------ ------------ Increase in Cash and Cash Equivalents 4,503,926 637,373 Cash and Cash Equivalents - Beginning of Year 1,016,221 378,848 ------------ ------------ Cash and Cash Equivalents - End of Year $ 5,520,147 $ 1,016,221 ============ ============ Supplemental Disclosures of Cash Flow Information: Cash paid during the year for interest $ 112,123 $ 424,104 ============ ============ Cash paid during the year for income taxes $ 102,415 $ 11,994 ============ ============
See accompanying notes to consolidated financial statements F-5 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- Note 1 Nature of Operations and Summary of Significant Accounting Policies - --------------------------------------------------------------------------- (A) Nature of Operations The Singing Machine Company, Inc., a Delaware corporation, and Subsidiary (the "Company") is primarily engaged in the production, marketing, and sale of consumer karaoke audio equipment, accessories, and recordings. The products are sold directly to distributors and retail customers. (B) Principles of Consolidation The consolidated financial statements include the accounts of The Singing Machine Company, Inc. and its wholly-owned Hong Kong Subsidiary, International SMC (HK) Limited ("Hong Kong Subsidiary"). All significant intercompany accounts and transactions have been eliminated in consolidation. (C) Foreign Currency Translation The functional currency of the Company's 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 material during the periods presented. The cumulative translation adjustment and effect of exchange rate changes on cash at March 31, 2002 was not material. (D) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (E) Cash and Cash Equivalents For purposes of the cash flow statement, the Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. (F) Concentration of Credit Risk The Company maintains its cash in bank deposit accounts, which, at times, exceed federally insured limits. At March 31, 2002, the Company had $213,940 in United States bank deposits, which exceed federally insured limits and $5,219,326 in commercial paper, which is not insured. The Company has not experienced any losses in such accounts through March 31, 2002. F-6 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- (G) Inventories Inventories primarily consist of finished goods, which are comprised of electronic karaoke audio equipment, accessories, and compact discs. Inventories are stated at the lower of cost or market, as determined using the first in, first out method. Inventory consigned to one customer at March 31, 2002 was $2,020,172. (See Note 13) (H) Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided using an accelerated method over the estimated useful lives of the related assets over 3 to 7 years. (I) Long-Lived Assets The Company reviews long-lived assets and certain identifiable assets related to those assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the non-discounted future cash flows of the enterprise are less than their carrying amount, their carrying amounts are reduced to fair value and an impairment loss is recognized. (J) Stock-Based Compensation The Company accounts for stock options issued to employees in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation cost is measured on the date of grant as the excess of the current market price of the underlying stock over the exercise price. Such compensation amounts are amortized over the respective vesting periods of the option grant. The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to provide pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-valued based method defined in SFAS No. 123 had been applied. The Company accounts for stock options and stock issued to non-employees for goods or services in accordance with SFAS 123. (K) Revenue Recognition Revenue from the sale of equipment, accessories, and recordings are recognized upon shipment and are reported net of actual and estimated future returns and allowances. Revenues from sales of consigned inventory is recognized upon sale of product by the consignee. The Company offers a consumer product warranty for returns up to 90 days after purchase. F-7 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- (L) Advertising In accordance with Accounting Standards Executive Committee Statement of Position 93-7, ("SOP 93-7") costs incurred for producing and communicating advertising of the Company, are charged to operations as incurred. The Company has cooperative advertising arrangements with its vendors and accrues the cost of advertising against the related revenues. Advertising expense for the years ended March 31, 2002 and 2001 was $2,377,638 and $921,359, respectively. (M) Income Taxes Income taxes are accounted for under the asset and liability method of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109 deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (N) Earnings Per Share 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 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: 2002 2001 ---------- ---------- Net income $8,065,282 $4,164,701 ---------- ---------- Income available to common shares 8,065,282 4,164,701 Weighted average shares outstanding - basic 7,159,142 6,291,792 EPS - Basic $ 1.13 $ 0.66 ========== ========== Income available to common shares $8,065,282 $4,164,701 Weighted average shares outstanding - basic 7,159,142 6,291,792 Effect of dilutive securities: Stock options 784,331 1,127,555 Warrants issued with preferred stock -- 37,826 ---------- ---------- Weighted average shares outstanding - diluted 7,943,473 7,457,173 EPS - Diluted $ 1.02 $ 0.56 ========== ========== F-8 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- In 2001, the 2,484,000 public warrants and 45,000 common stock options (as restated for the 3 for 2 stock split) were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive. (O) Reorganization under United States Bankruptcy Code and Fresh Start Reporting On April 11, 1997, the Company filed for protection under the provisions of the United States Bankruptcy Code. In March 1998, the United States Bankruptcy Court approved the Company's Plan of Reorganization, as Amended, and the Company emerged from Chapter 11 Bankruptcy. At that time, the Company applied Fresh Start Reporting in accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7")." As a result of the application of SOP 90-7, the Company restated its assets and liabilities to their fair values as necessary, and reclassified its accumulated deficit of $6,841,684 against available additional paid-in capital of $6,200,262 resulting in a reorganization intangible asset of $641,422, which was being amortized on a straight-line basis over a period of seven years. (See Note 5) Pursuant to SAS 142, effective on April 1, 2002, the Company no longer amortizes the remaining balance of the Reorganization Intangible. (P) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts of the Company's short-term financial instruments, including accounts receivable, accounts payable, accrued expenses, and income taxes payable approximate fair value due to the relatively short period to maturity for these instruments. (Q) Recent Accounting Pronouncements Statement No. 141 "Business Combinations" establishes revised standards for accounting for business combinations. Specifically, the statement eliminates the pooling method, provides new guidance for recognizing intangible assets arising in a business combination, and calls for disclosure of considerably more information about a business combination. This statement is effective for business combinations initiated on or after July 1, 2001. The adoption of this pronouncement on July 1, 2001 did not have a material effect on the Company's financial position, results of operations or liquidity. Statement No. 142 "Goodwill and Other Intangible Assets" provides new guidance concerning the accounting for the acquisition of intangibles, except those acquired in a business combination, which is subject to SFAS 141, and the manner in which intangibles and goodwill should be accounted for subsequent to their initial recognition. Generally, intangible assets with indefinite lives, and goodwill, are no longer amortized; they are carried at lower of cost or market and subject to annual impairment evaluation, or interim impairment evaluation if an interim triggering F-9 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- event occurs, using a new fair market value method. Intangible assets with finite lives are amortized over those lives, with no stipulated maximum, and an impairment test is performed only when a triggering event occurs. This statement is effective for all fiscal years beginning after December 15, 2001. The Company believes that the implementation of SFAS 142 on April 1, 2002 will not have a material effect on the Company's financial position, results of operations or liquidity. Statement No. 143, "Accounting for Asset Retirement Obligations," requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial statements. Statement No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" supercedes Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). Though it retains the basic requirements of SFAS 121 regarding when and how to measure an impairment loss, SFAS 144 provides additional implementation guidance. SFAS 144 excludes goodwill and intangibles not being amortized among other exclusions. SFAS 144 also supercedes the provisions of APB 30, "Reporting the Results of Operations," pertaining to discontinued operations. Separate reporting of a discontinued operation is still required, but SFAS 144 expands the presentation to include a component of an entity, rather than strictly a business segment as defined in SFAS 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 144 also eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. This statement is effective for all fiscal years beginning after December 15, 2001. The Company believes that the future implementation of SFAS 144 on April 1, 2002 will not have a material effect on the Company's financial position, results of operations or liquidity. Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," updates, clarifies, and simplifies existing accounting pronouncements. Statement No. 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses. Statement 64 amended Statement 4, and is no longer necessary because Statement 4 has been rescinded. Statement 44 was issued to establish accounting requirements for the effects of transition to the provisions of the motor Carrier Act of 1980. Because the transaction has been completed, Statement 44 is no longer necessary. Statement 145 amends Statement 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment is consistent with FASB's goal requiring similar accounting treatment for transactions that have similar economic effects. The adoption of SFAS No. 145 is not expected to have a material impact on the Company's consolidated financial statements. F-10 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- (R) Reclassifications Certain amounts in the 2001 consolidated financial statements have been reclassified to conform to the 2002 presentation. Note 2 Accounts Receivable and Factor Agreement - ------------------------------------------------ Accounts receivable at March 31, 2002 was as follows: Accounts receivable $3,548,925 Allowance for doubtful accounts (12,022) ---------- $3,536,903 ========== During 2001, the Company sold certain trade accounts receivable, primarily without recourse, pursuant to a factoring agreement. The Company terminated the factoring agreement in April 2001 upon obtaining a new Loan and Security Agreement with a commercial lender. (See Note 7) During 2000, two officers of the Company entered into guarantee agreements related to the factor agreement resulting in deferred guarantee fees of $400,101, which was being amortized over the term of the factor agreement. Upon termination of the factor agreement, the remaining deferred guarantee fees of $171,472 were charged to operations as amortization. For the year ending March 31, 2001, the Company incurred $429,509 in factoring fees and interest. The portion representing factor interest expense was $198,208 of the $429,506. Note 3 Sale of Unconsolidated Subsidiary - ----------------------------------------- In November 2000, the Company closed on an acquisition of 60% of the ordinary voting shares of a Hong Kong toy company for a total purchase price of $170,000. The Company believed that the acquiree had agreed to extend the effective date to June 2001, but a dispute arose and the Company committed to dispose of the entire investment. Accordingly, pursuant to Statement of Financial Accounting Standards No. 94 "Consolidation of All Majority-Owned Subsidiaries," the Company treated the control of the subsidiary as temporary and recorded the investment of $170,000 and advances of $220,661 at cost. The Company completed a contract selling the 60% interest on September 11, 2001. The transaction resulted in a net loss on investment of $48,912 included in selling, general, and administrative expenses. The balance receivable at March 31, 2002 was $75,831 included in prepaids and other current assets. Note 4 Property and Equipment - ------------------------------ Property and equipment at March 31, 2002 is as follows: Computer and office equipment $ 230,025 Furniture and fixtures 106,164 Leasehold improvements 62,483 Molds and tooling 1,022,900 ---------- 1,421,572 Less accumulated depreciation (846,915) ---------- Total $ 574,657 ========== F-11 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- Depreciation expense for the years ended March 31, 2002 and 2001 was $302,824 and $209,432, respectively. Note 5 Reorganization Intangible - ---------------------------------- 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(O)) The reorganization intangible was being amortized over a period of seven years using a straight-line basis. In accordance with SFAS 109, in 2001, the reorganization intangible was reduced by $89,479 of an income tax benefit realized as a result of an increase in deferred tax assets resulting from a reduced valuation allowance. (See Note 12) The reorganization intangible at March 31, 2002 consisted of the following: Reorganization intangible $ 641,422 Less accumulated amortization (366,527) Less allocated income tax benefit (89,479) --------- $ 185,416 ========= Amortization expense on the reorganization intangible in each of the years ended March 31, 2002 and 2001 was $91,632. Note 6 Deposit for Letter of Credit Facility - --------------------------------------------- The Company, through its Hong Kong subsidiary, maintains a letter of credit facility with a major international bank. The Company's subsidiary is required to maintain a separate deposit account in the amount of $513,684. This amount is included in deposits at March 31, 2002. Note 7 Loans and Letters of Credit - ------------------------------------ (A) Credit Facility 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 90-days after the advance. As of March 31, 2002, there was no outstanding balance on this credit facility. F-12 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- (B) Loan and Security Agreement On April 26, 2001, the Company executed a Loan and Security Agreement (the "Agreement") with a commercial lender (the "Lender"). The Lender will advance up to 75% of the Company's eligible accounts receivable, plus up to 40% of the eligible inventory, plus up to 40% of the commercial letters of credit opened for the purchase of eligible inventory, less reserves of up to $1,200,000 as defined in the agreement. The outstanding loan limit varies between zero and $10,000,000 depending on the time of year, as stipulated in the Agreement. The Lender also provides the Company the ability to issue commercial letters of credit up to $2,500,000, which shall reduce the loan limits above. The loans bear interest at the commercial lender's prime rate plus 0.5% and an annual fee equal to 1% of the maximum loan amount or $100,000 is payable. The term of the loan facility expires on April 26, 2004 and is automatically renewable for one-year terms. All amounts under the loan facility are due within 90 days of demand. The loans are secured by a first lien on all present and future assets of the Company except for certain tooling located at a vendor in China. The Agreement contains a financial covenant stipulating a minimum tangible net worth of $7,200,000 as of March 31, 2002 with escalations as defined in the Agreement. There was no balance outstanding at March 31, 2002. Note 8 Commitments and Contingencies - -------------------------------------- (A) Leases On March 31, 1999 and April 10, 2000, the Company entered into lease agreements for office and warehouse facilities in Florida 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. On November 9, 2000, the Company leased a warehouse in California commencing January 1, 2001 for 37 months with base rent of $11,500 per month. This space has been subleased starting June 1, 2002 through January 31, 2002 for $12,393 per month. The Company leases a showroom in New York commencing September 1, 2001 through August 31, 2002 at a rate of $3,000 a month. The Company also leases office space in Hong Kong for $4,655 per month which lease expires October 31, 2002. In addition, the Company maintains various warehouse equipment and computer equipment leases. (See Note 16) Total rent expense was approximately $172,500 and $142,500 for 2002 and 2001, respectively. Future minimum lease payments under non-cancelable operating leases with terms exceeding one year as of March 31, 2002 are as follows: F-13 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- Year ending March 31: 2003 $ 578,449 2004 604,015 2005 412,460 2006 407,640 2007 407,640 Thereafter 339,700 ---------- $2,749,904 ========== (B) Employment Agreements The Company has employment contracts with three key officers as of March 31, 2002 (See Note 16). The agreements call for base salaries, with annual cost of living adjustments and travel allowances. The agreements also call for aggregate Board approved performance bonuses of up to 10% of net income before those performance bonuses, interest, and taxes. Such bonus is allocated to the three key officers and certain other key employees. During 2002 and 2001, the bonus percentage was 5% and 10%, respectively. (C) Merchandise License Agreements On November 1, 2000, as amended on November 29, 2001, the Company entered into a merchandise license agreement to license a name, tradename, and logo of a music oriented television network. The term of the agreement is from November 1, 2000 to December 31, 2003. However, shipment of related products did not begin until after March 31, 2001. Accordingly, none of the minimum royalty was charged to operations as of March 31, 2001. The Company pays a royalty rate of a percentage of stipulated sales, as defined in the agreement, with $686,250 guaranteed minimum royalties for the term, payable on a scheduled basis as stipulated in the agreement. Through 2002, the royalties expense exceeded the minimum royalty for the entire contract. (See Note 11) On December 1, 2001, the Company entered into an additional agreement with a division of above licensor for additional license properties and products. The license term is January 1, 2002 to December 31, 2004 with an initial stipulated ship date of August 15, 2002. The agreement stipulates a royalty rate as a percentage of net sales (defined as gross sales less discounts, allowances and damaged goods returns not to exceed 8% of gross sales), payable quarterly, with a guaranteed minimum royalty for the license term of $450,000 payable as follows: $25,000 on execution of agreement $85,000 on or before September 1, 2002 $85,000 on or before December 1, 2002 $85,000 on or before March 1, 2003 $85,000 on or before June 1, 2003; and $85,000 on or before September 1, 2003 The guaranteed royalty is non-refundable and not recoupable against any other license agreements with the licensor. F-14 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- (D) Significant Estimates The Company records an accrual for product returns in the normal course of business. The accrual is estimated based on historical experience and is recorded as a liability equal to the gross profit on estimated returns. At March 31, 2002, the accrual was approximately $164,000. The Company estimates an allowance for doubtful accounts using the specific identification method since a majority of accounts receivable are concentrated with several customers. The allowance was $12,022 at March 31, 2002. (E) Legal Matters The Company is subject to litigation relating to claims arising in the normal course of business. Note 9 Related Party Transactions - ---------------------------------- The Company's Hong Kong Subsidiary operates as an intermediary to purchase karaoke hardware from factories located in China on behalf of the Company. A primary manufacturer affiliated with a former director of the Company credited the Company for past purchases of approximately $799,000 as of March 31, 2001 for a portion of expenses incurred from product returns. The $799,000 amount was credited to cost of goods sold in 2001. The balance including some new credits as of March 31, 2002 was $488,298. The total goods purchased from this manufacturer during 2002 and 2001 aggregated approximately 51% and 80% of the total purchases, respectively. (See Note 13) Note 10 Stockholders' Equity - ---------------------------- (A) Amendment to Authorized Shares During September 2000, the Company filed an amendment to its Articles of Incorporation decreasing the authorized shares of the Company's common stock to 18,900,000 shares and 100,000 Class A common shares. (B) Stock Split On March 15, 2002, the Company affected a 3 for 2 stock split. All share and per share data have been retroactively restated in the accompanying consolidated financial statements to reflect the split. (C) Preferred Stock and Warrants 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 30,000 shares of the Company's 9% non-voting convertible preferred stock and 6,000 common stock purchase warrants. The purchase price for each unit was $ 27,500. Each share of preferred stock was convertible, at the option of the holder, into one share of the Company's common stock at any time after issuance, and was to automatically convert into one share of common stock on April 1, F-15 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- 2000. All preferred shares automatically converted on April 1, 2000. Each warrant entitles the holder to purchase one share of the Company's common stock at $2.00 per share. The warrants expire three years from the private placement memorandum date. 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. During 2000, 2001, and 2002, 24,000, 201,000, and 75,000 warrants were converted for $32,000, $268,000, and $100,000, respectively leaving no warrants outstanding at March 31, 2002. (D) Common Stock Warrants Expiration In November 2001, 2,484,000 public warrants expired unexercised. (E) Common Stock Issuances During 2002, the Company issued 1,418,625 common shares for cash proceeds of $1,319,190 upon exercise of options and warrants. (F) Guarantee Fees During the year ended March 31, 2000, the Company issued 525,000 shares of common stock to two officers of the Company in exchange for guarantees related to the Company's factor agreement (See Note 2), and letter of credit agreement. (See Note 7) These guarantee fees totaled $590,625 and are amortized over a period of 31 months. Accordingly, in 2000, the Company recognized $190,524 as guarantee fees and recorded $400,101 as deferred guarantee fees, presented as a deduction from equity. In 2001, $228,629 of deferred fees were charged to operations. During June 2001, the Company terminated its letter of credit and factor agreements and recognized the remaining amortization at that time. During the year ended March 31, 2001, the Company issued 37,500 common stock options for services and 45,000 common stock warrants to two investors as loan fees. The fair market value of the options totaling $38,400 was charged to operations. (G) Stock Options On June 1, 2001, the Board of Directors approved the 2001 Stock Option Plan, which replaced the 1994 Stock Option Plan, as amended, (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, 2002, the Plan authorizes options up to an aggregate of 1,950,000 shares of the Company's common stock and up to 300,000 shares for any one individual in any fiscal year. 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. On August 15, 2001, the Company issued options to purchase an aggregate 75,000 common shares to directors at an exercise price of $4.23, which equals the fair market value of the common stock at the grant date. Accordingly, no compensation cost has been recognized for options issued under the Plan in 2002 F-16 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- or 2001. Had compensation cost for the Company's stock-based compensation plan been determined on the fair value at the grant dates for awards under that plan, consistent with Statement of Accounting Standards No 123, "Accounting for Stock Based Compensation" (Statement No. 123), the Company's net income for the year ended March 31, 2001 would not have changed and the net income for the year ended March 31, 2002 would have been decreased to the pro-forma amounts indicated below. 2002 ---------- Net income As reported $8,065,282 Pro forma $7,949,793 Net income per share - basic As reported $ 1.13 Pro forma $ 1.11 Net income per share - diluted As reported $ 1.02 Pro forma $ 1.00 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 stock options and warrants issued to consultants, the Company applies SFAS 123. Accordingly, consulting expense of $38,400 was charged to operations in 2001. There was no consulting expense relating to grants in 2002. For financial statement disclosure purposes and for purposes of valuing stock options and warrants 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 in 2001: expected dividend yield 0%, risk-free interest rate of 6.08% to 6.81%, volatility 42% and expected term of two years. A summary of the options issued under the employment and consulting agreements as of March 31, 2002 and 2001 and changes during the years is presented below:
2002 2001 ---------------------------------------------------------------------------- Number of Weighted Number of Weighted Options and Average Options and Average Warrants Exercise Price Warrants Exercise Price ----------- -------------- ----------- -------------- Stock Options Balance at beginning of period 2,403,300 $1.31 1,593,300 $0.67 Granted 82,800 $3.92 1,215,750 $2.01 Exercised (1,406,625) $0.87 (371,250) $0.84 Forfeited (15,000) $2.04 (34,500) $0.92 ---------- ----- --------- ----- Balance at end of period 1,064,475 $2.11 2,403,300 $1.31 ========== ===== ========= ===== Options exercisable at end of period 1,064,475 $2.11 1,420,050 $0.70 Weighted average fair value of options granted during the period $1.54 $0.85 ===== =====
F-17 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- The following table summarizes information about employee stock options and consultant warrants outstanding at March 31, 2002:
Options and Warrants Outstanding Options and Warrants Exercisable ---------------------------------------------------------------- -------------------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding at Contractual Exercise Exercisable at Exercise Price March 31, 2002 Life Price March 31, 2002 Price --------- -------------- ----------- -------- ------------------ -------- $2.04 851,025 4.67 Years $2.04 425,513 $2.04 4.23 60,000 4.38 Years 4.23 60,000 4.23 3.27 42,450 3.95 Years 3.27 21,225 3.27 1.11 58,500 2.24 Years 1.11 58,500 1.11 0.92 52,500 0.19 Years 0.92 52,500 0.92 --------- ----- ------- ----- 1,064,475 $2.11 617,738 $2.11 ========= ===== ======= =====
Note 11 Royalty Expense - ----------------------- The Company enters into licensing and royalty agreements with music publishers (the "Licensors") in the normal course of business. In addition, the Company pays royalties under a merchandise license agreement. (See Note 8(C)) Royalty expense during 2002 and 2001 was $1,862,116 and $148,643, respectively. Note 12 Income Taxes - -------------------- The Company files separate tax returns for the parent and for the Hong Kong Subsidiary. The income tax expense (benefit) for federal, foreign, and state income taxes in the consolidated statement of income consisted of the following components for 2002 and 2001: 2002 2001 -------- -------- Current: U.S. Federal $ -- $21,320 Foreign -- -- State 119,277 2,000 -------- ------- 119,277 23,320 -------- ------- Deferred: U.S. Federal -- -- Foreign -- -- -------- ------- -- -- -------- ------- Total $119,277 $23,320 ======== ======= The Company's Hong Kong subsidiary has applied for a Hong Kong "offshore claim" income tax exemption based on the locality of the profits of the Hong Kong subsidiary. Management believes that since the source of all profits of the Hong Kong subsidiary are from exporting to customers outside of F-18 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- Hong Kong; it is likely the exemption will be approved. Accordingly, no provision for foreign income taxes on the profits of the Hong Kong subsidiary have been provided in the accompanying consolidated financial statements. In the event the exemption is not approved, the Hong Kong subsidiary profits will be taxed at a flat rate of 16% resulting in an income tax expense of approximately $725,000 and $460,000 for 2002 and 2001, respectively. The actual tax expense differs from the "expected" tax expense for the years ended March 31, 2002 and 2001 (computed by applying the U.S. Federal Corporate tax rate of 34 percent to income before taxes) as follows:
2002 2001 ----------- ----------- Computed "expected" tax expense $ 2,782,750 $1,423,927 State income taxes, net of Federal income tax benefit 78,723 -- Indefinite deferral of foreign earnings (1,541,493) (978,309) Stock based guarantee fees 20,405 27,207 Disqualifying ISO dispositions (26,926) -- Non-qualified stock options exercised -- (51,185) Meals and entertainment 6,999 2,982 Usage of United States net operating loss carryforwards (1,201,181) (424,622) United States alternative minimum tax -- 23,320 ----------- ---------- $ 119,277 $ 23,320 =========== ==========
The Company has not recognized a deferred tax liability for its foreign income in 2002 and 2001 since the reversal of this temporary difference is indefinite. Accordingly, the amounts of $1,541,493 and $978,309, respectively, which represent 34% of the foreign net income, have been reflected as a permanent difference at March 31, 2002 and 2001, respectively. The actual tax expense may be significantly larger in future years as the net operating loss is expected to be fully absorbed (except for the limited portion) during the 2003 fiscal year. In addition, the indefinite deferral of future and accumulated foreign earnings will depend on the Company's domestic versus foreign strategic plans. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at March 31, 2002 are as follows: F-19 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- Deferred tax assets: United States net operating loss carryforward $261,255 State net operating loss carryforward 89,315 Bad debt reserve 4,087 Reserve for sales return 55,886 Stock based expense 13,056 Amortization of reorganization intangible 36,400 -------- Total Gross Deferred Assets 459,999 Less valuation allowance -- -------- 459,999 Deferred tax liability: Depreciation (7,326) -------- Net Deferred Tax Asset $452,673 ======== On September 3, 1991, the Company underwent a change of ownership (as defined by Internal Revenue Code Section 382). This change limits the Company's ability to utilize it's approximately $4,057,000 of net operating loss carryforwards (NOL's) to $54,240 at a rate of $13,560 per year (these NOL's expire from 2004 to 2007). At March 31, 2002, the Company had useable net operating loss carryforwards of approximately $714,159 for federal income tax purposes, (which are not subject to the above limitations) which is immediately available to offset future taxable income of the United States entity expiring through 2019. The valuation allowance at April 1, 2001 was $1,059,089. The net change in the valuation allowance during the year ended March 31, 2002 was a decrease of $1,059,089. In accordance with SFAS 109, the year 2001 income tax benefit of $89,479 arising from the net increase in deferred tax assets has been allocated at March 31, 2001 to reduce the reorganization intangible. (See Note 5) Note 13 Concentrations of Credit Risk, Customers, Suppliers, and Financing - -------------------------------------------------------------------------- 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 and reflects the fact that accounts receivable are concentrated with several large customers whose credit worthiness have been evaluated be management. At March 31, 2002, 65% of accounts receivable were due from five U.S. customers and accounts receivable from two customers that individually owed over 10% of accounts receivable at March 31, 2002 was 36% and 35%. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Revenues derived from five customers in 2002 and 2001 were 87% and 78% of revenues, respectively. Revenues derived from three customers in 2002 and two customers in 2001, respectively, which individually purchased greater than 10% of the Company's total revenues, were 37%, 28%, and 10% in 2002 and 32% and 23% in 2001. F-20 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- In the fourth quarter of the fiscal 2002, a major customer that provided 37% of the Company's revenue in 2002 converted its purchase method to a consignee basis. The Company recorded approximately $2,875,000 of sales returns and reversal of related cost of sales of $2,112,000 in February and the customer retained the inventory on a consignment basis. (See Note 1(G)) From that date of sales returns, through March 31, 2002 the Company recorded $2,442,384 of sales from consignment inventory. The Company is dependent upon foreign companies for manufacture of all of its electronic products. The Company's arrangements with manufacturers are subject to the risk 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 its business. The Company believes that the loss of any one or more of their suppliers would not have a long-term material adverse effect because other manufacturers with whom the Company does business would be able to increase production to fulfill their requirements. However, the loss of certain suppliers in the short-term could adversely affect business until alternative supply arrangements are secured. During fiscal 2002 and 2001, manufacturers in the People's Republic of China (China) accounted for in excess of 95% and 94%, respectively of the Company's total product purchases, including virtually all of the Company's hardware purchases. The Company expects purchasing for 2003 to fall within the above range as well. Purchases of products derived from three vendors based in China during 2002 were 51%, 39%, and 5% and from two manufacturers based in China during 2001 were 80% and 14%, respectively. (See Note 9) The Company finances its sales primarily through a loan facility with one lender. (See Note 7) Although management believes there are other sources available, a loss of the current credit facility could be in the short term, adversely affect operations until an alternate lending arrangement is secured. Net sales derived from the Company's Hong Kong based subsidiary aggregated approximately $27,176,000 in 2002 and $12,595,800 in 2001. The carrying value of net assets held by the Company's Hong Kong based subsidiary was approximately $1,488,160 at March 31, 2002. Note 14 Segment Information - --------------------------- The Company operates in one segment and maintains its records accordingly. Sales by customer geographic region were as follows: 2002 2001 ----------- ----------- United States $61,686,942 $33,823,028 Asia 49,314 -- Canada 47,565 11,420 Central America 5,756 -- Europe -- 433,821 South America 39,317 38,570 ----------- ----------- $61,828,894 $34,306,839 =========== =========== F-21 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- Note 15 Defined Contribution Benefit Plan - ----------------------------------------- The Company maintains a 401-K plan for the benefit of its employees. Employer contributions to the plan and administrative costs during 2002 and 2001 were $41,733 and $8,682, respectively. Note 16 Subsequent Events - ------------------------- In April 2002, 10,000 common shares were issued upon exercise of warrants for gross proceeds of $0.92 per share or $9,200 and 16,500 common shares were issued upon exercise of employee options at a price of $2.04 per share or $33,660. On April 15, 2002, the Company entered into a three-year employment agreement with a new Executive Vice President of Sales and Marketing. The agreement stipulates a salary and bonuses and a 50% of annual pay severance clause. The agreement grants 50,000 options for each year of employment. The employee may elect to return the first year options to the Company for $100,000. As of the date of the accompanying audit report, the options have not been issued. In June 2002, the Board of Directors approved the terms of a consulting agreement effective on February 28, 2003 with the current CEO when he retires on that day. The CEO will receive $250,000 per year and will also receive an appreciation bonus of $200,000 on February 28, 2003. In May and June 2002, the Company's subsidiary entered into new office leases in Hong Kong, each for 36 months at an aggregate $13,364 per month. Effective May 1, 2002, the Company signed a 5-year warehouse lease in California for $33,970 per month. The Company also subleased out its space in the other California warehouse for rent income of $12,393 per month through January 31, 2004. Effective June 1, 2002, the Company signed an additional 27-month lease to expand its corporate headquarters. The additional rent is $1,987 per month. The company's Hong Kong subsidiary opened a letter of credit at April 16, 2002 with an international bank for up to $1,000,000. F-22 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.4 Lease Agreement dated March 12, 2002 by and between The Singing Machine Company, Inc., Lyons Corporate Park, LLLC, for office space in Coconut Creek, Florida 10.5 Sublease dated May 28, 2002, by and between The Singing Machine Company, Inc. and Busung America Corp. for warehouse space in Carson City California 10.6 Lease Documents for Ocean Centre dated April and June 2002 by and between Harbour City Management Limited and International SMC (HK) Ltd. for office space in Hong Kong 10.7 Industrial Lease dated March 1, 2002 by and between AMP Properties, L.P. and The Singing Machine Company 10.11 First Amendment to Loan and Security Agreement dated October 1, 2001 between LaSalle Business Credit, Inc. and The Singing Machine Company, Inc. 10.12 Second Amendment to Loan and Security Agreement dated November 20, 2001 between LaSalle Business Credit, Inc. and The Singing Machine Company, Inc. 10.13 Third Amendment to Loan and Security Agreement dated November 28, 2001 between LaSalle Business Credit, Inc. and The Singing Machine Company, Inc 10.14 Fourth Amendment to Loan and Security Agreement dated February 28, 2002 between LaSalle Business Credit, Inc. and The Singing Machine Company, Inc. 21.1 List of Subsidiaries 23.1 Consent of Salberg & Company, P.A. EX-10.4 3 lyons-lease.txt LYONS LEASE - MARCH 12, 2002 Exhibit 10.4 LEASE AGREEMENT LANDLORD: LYONS CORPORATE PARK, LLLP (A FLORIDA LIMITED LIABILITY LIMITED PARTNERSHIP). TENANT: The Singing Machine Co., Inc. BLDG. A ------------------------ SUITE 5 ------------------------ DATE March 12, 2002 -------------------
INDEX Page ARTICLE I GRANT AND TERM Section 1.01 Leased Premises 1 Section 1.02 Length of Term 1 Section 1.03 Construction of Lease Premises 1 Section 1.04 Possession After Completion of Construction 1 Section 1.05 Determination of Availability of Demised Premises 1 ARTICLE II RENT Section 2.01 Payment 1 Section 2.02 Minimum Rent 2 Section 2.03 Adjustment of Fixed Minimum Rent 2 Section 2.04 Real Estate Taxes 2 Section 2.05 Additional Rent 2 Section 2.06 Past Due Rent 3 ARTICLE III OPERATION AND MAINTENANCE OF COMMON AREAS Section 3.01 Designation of Common Areas 3 Section 3.02 Construction of Common Areas 3 Section 3.03 Tenant's Pro Rata Share of Expenses 3 ARTICLE IV USE OF PREMISES Section 4.01 Use of Premises 3 Section 4.02 Care of Premises 3 ARTICLE V UTILITY SERVICES Section 5.01 Landlord's Obligation to Make Utility Services Available and Option To Supply Such Services 4 Section 5.02 Tenant's Obligation for Payment 4 ARTICLE VI MAINTENANCE OF LEASE PREMISES Section 6.01 Landlord's and Tenant's Obligations for Maintenance 4 Section 6.02 Abuse of Plumbing, Walls, Etc. 4 ARTICLE VII SIGNS Section 7.01 4 ARTICLE VIII ALTERATIONS Section 8.01 5 ARTICLE IX INSURANCE AND INDEMNITY Section 9.01 Covenant to Hold Harmless 5 Section 9.02 Fire Insurance Premium 5 Section 9.03 Tenant's Obligation to Carry Public Liability Insurance 5 Section 9.04 Insurance Costs 5 ARTICLE X ASSIGNMENT AND SUBLETTING Section 10.01 6 ARTICLE XI ACCESS TO PREMISES Section 11.01 Right of Entry by Landlord 6 Section 11.02 Landlord's Right to Exhibit Premises 6 ARTICLE XII EMINENT DOMAIN Section 12.01 Total Condemnation 6 Section 12.02 Partial Condemnation 6 Section 12.03 Landlord's and Tenant's Damages 6 ARTICLE XIII DESTRUCTION OR DAMAGE TO DEMISED PREMISES Section 13.01 Reconstruction of Damaged Premises 6 Section 13.02 6 Section 13.03 7 Section 13.04 7 Section 13.05 7 Section 13.06 Subrogation 7 ARTICLE XIV BANKRUPTCY OR INSOLVENCY Section 14.01 Landlord's Option to Terminate Upon Insolvency of Tenant or Guarantor Under State Insolvency Law or Upon Insolvency of Tenant or Guarantor Under Federal Bankruptcy Act 7 ARTICLE XV DEFAULT OF TENANT Section 15.01 Right to Re-Enter 7 Section 15.02 Legal Expenses 8 Section 15.03 Waiver of Jury Trial and Counterclaims 8 Section 15.04 Curing of Tenant's Default 8 ARTICLE XVI TENANT'S PROPERTY Section 16.01 Taxes on Leasehold 8 Section 16.02 Notice by Tenant 8 ARTICLE XVII QUIET ENJOYMENT Section 17.01 Landlord's Covenant 8 ARTICLE XVIII HOLDING OVER, SUCCESSORS Section 18.01 Holding Over 8 Section 18.02 Successors 8 -i- ARTICLE XIX CERTAIN RIGHTS OF LESSOR WITH RESPECT TO LAND Section 19.01 Easements and Utilities 8 ARTICLE XX MISCELLANEOUS Section 20.01 Waiver 9 Section 20.02 Subordination 9 Section 20.03 Notices 9 Section 20.04 Construction 9 Section 20.05 Non-Liability 9 Section 20.06 Net Lease 9 Section 20.07 Financing and Tenant's Acknowledgment of Acceptance of Premises 9 Section 20.08 Accord and Satisfaction 10 Section 20.09 Captions and Section Numbers 10 Section 20.10 Partial Invalidity 10 Section 20.11 No Option 10 Section 20.12 Recording 10 Section 20.13 Sale or Transfer of the Demised Premises 10 Section 20.14 Liens 10 Section 20.15 Attornment 10 Section 20.16 Set-Off Statement 10 Section 20.17 Entire Agreement 10 Section 20.18 Brokerage 11 Section 20.19 No Oral Changes 11 Section 20.20 No Representations by Landlord 11 Section 20.21 Corporate or Partnership Tenant 11 Section 20.22 Damage From Roof Leaks 11 Section 20.23 Security Deposit 11 Section 20.24 Administrative Charge 11 Section 20.25 Laws of the State of Florida 11 Section 20.26 Counterparts 11 Section 20.27 Right to Plat 12 Section 20.28 Radon Gas 12 Section 20.29 Tenant's Time to Sue 12 Section 20.30 Rider 12 SIGNATURES 12 JURAT 13 RIDER 14 EXHIBIT "A" - LEGAL DESCRIPTION EXHIBIT "B" - SITE PLAN EXHIBIT "C" - TENANT'S CONFIRMATION LETTER EXHIBIT "D" - DESCRIPTION OF LANDLORD'S WORK EXHIBIT "E" - SIGN CRITERIA GUARANTY
- ii - THIS LEASE made and entered into this 12th day of March, 2002 by and between LYONS CORPORATE PARK, LLLP (A FLORIDA LIMITED LIABILITY LIMITED PARTNERSHIP) whose address is 6601 N. Lyons Road, Coconut Creek, Florida 33073, Party of the First Part (hereinafter sometimes designated as "Landlord") and The Signing Machine Co., Inc. (A Florida Corporation) whose address is 6601 Lyons Road, Suite A-7, 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 have 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 part 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 Two years and three months, upon the terms and conditions as herein set forth. Section 1.03 Construction of Leased Premises PARAGRAPH DELETED 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. Tenant, prior to delivery of possession, shall be permitted to install fixtures and other equipment so long as such activities do not interfere with construction work, and it is agreed by Tenant that Landlord shall have no responsibility or liability whatsoever for any loss of, or damage to, any fixtures or other equipment so installed or left on the premises. Section 1.05 Determination of Availability of Demised Premises PARAGRAPH DELETED Landlord and Tenant agree that except for the items listed in Exhibit "D", #18, Tenant accepts the premises in an ARTICLE II RENT "AS IS, WHERE IS" condition and that the possession and commencement date of the Lease will be June 1, 2002. 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 the first period during the term hereof which is for less than one (1) month shall be a prorated portion of the monthly installment. 1 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 twelve months shall be One thousand nine hundred eighty six and 67/100 ($1,986.67) Dollars per month for a total of Twenty three thousand eight hundred forty and 04/100 ($23,840.04) Dollars for the twelve month period. 2. The minimum rent for the next twelve months shall be determined by Section 2.03 of the Lease Agreement using the prior period as the base period. 3. The minimum rent for the next three months shall be determined by Section 2.03 of the Lease Agreement using the period as the base period. 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 falls 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 Base 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 be less than the amount of rent being paid during the prior lease year. As used herein, the term "Lease Period" means the First Lease Period which is 12 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 #2 & #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, assessment (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 due 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 any thing 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 thereto 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 Tenant's 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. 2 Section 2.06 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 other Tenants, their officers, agents, employees and customers. Section 3.02 Construction of Common Areas Landlord agrees, at Landlord's sole cost and expense, to hardsurface, 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 Tenant's 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, roads, sidewalks, 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 Tenant's Pro Rata Share of Expenses Tenant agrees to pay, in addition to the rental set forth in Article II 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 toward 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 the 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 net 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 3 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 of public health, natural resources, or the environment, including, by way 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 Substances 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 any time, and 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 or at any time 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 (ii) 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 as provided for in Article I, Section 1.04 of this Lease, without regard to the formal commencement date of this Lease, Landlord shall not be liable 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 any 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 except replacement costs of the roof 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 shall 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, heating, 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 any in this Article contained, there shall 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 or whose 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 with the Landlord's written consent being first obtained. 4 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 or Landlord. Any signs erected by the Tenant shall be in conformance with any governmental laws. Tenant agrees not to use any advertising media that shall be deemed objectionable to Landlord or other tenants, such as loud speakers, 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 when 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 thereof shall be the property 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 of 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 property 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 property 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 lien 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 prorata share of all insurance costs 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 carried 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 effect a policy of public liability insurance with respect to the Demised 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. 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. D. For the purpose of this Section, insurance costs shall include any deductible required to be paid based on the terms of the insurance policy regarding any loss attributable to Tenant's Demised Premises. Should the loss occur only in the Tenant's Demised Premises, the Tenant agrees to pay the entire deductible. In the event that more than one Tenant is subject to an insurable loss, the deductible shall be prorated between the affected Tenants and computed based upon the square footage of the Tenant's Leased Premises as compared to the total square footage of all the Tenants affected. Such deductible or proportionate share of the deductible shall be paid within fifteen (15) days after a billing by the Landlord. 5 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 prorata portion of the rental as the case may be, for such space reserved in the 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 same 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 as a part shall be damaged to the extent of 50% or more of the cost of replacement thereof, whether or not the Demised Premises 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 6 (30) days nor more than 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 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 s Selected by the Landlord insuring Landlord against the casualty In question, or, if 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 through or under them byway of subrogation or otherwise, for any loss or damage to property caused by a casualty which is insurable under the 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 time 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 and 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 guarantor's insolvency or inability to pay its debts as they become due or otherwise, or if any assignment shall be made of Tenant's 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. I n 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 terms and conditions of Landlord in its sole discretion may doom advisable; upon each such reletting all rentals received by Landlord from such relening 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 reletting, 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 reletting during any month be less 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 reletting during any month be more than 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 be 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 7 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, it 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. (n determining the rent which would be payable by Tenant hereunder, subsequent to default, the annual rent for each year of 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 re leasing. 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 rant or any other amount due under the provisions of 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 foe, 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 of' tenant and the sums so expended by Landlord, together with an administrative fee equal to twenty-five percent (25(degree).6) of the sum expended by Landlord, shall be deemed 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 of 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 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 covenant:., terms and conditions on 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 new lease, it will be deemed to be occupying the leased premises as a tenant from month to month, and Tenant will be responsible for the rent and all other charges on a monthly basis with no prorations, 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 be increased to an amount established by Landlord. The new 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 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 right, 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, egress 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. 8 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 deemed 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 deeds) of trust that may 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 right 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 mortgages 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 mortgagee 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 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 mown 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 gender shall include the feminine and neuter genders. In the event any language is deleted from this Lease said language shall be deemed 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 may be occasioned by or through the acts or omissions of persons occupying adjoining premises, if any, or any part 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, sewer 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 fail 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, not, net 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 promises 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 addessed 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 mortgagee or financial institution at any time during the lease term as above described, shall give Landlord the right to cancel this Lease at that time upon five (5) days written notice to Tenant of such cancellation, and the Tenant shall remain liabile to the Landlord for any damages sustained by the Landlord because of such failure by the Tenant. 9 Section 20.08 Accord and Satisfaction No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rental herein stipulated shall be deemed t:) 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 from 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 (herein 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 ten (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 therefore. If Tenant shall fail to cause such lien to be discharged upon demand, then, in addition to any other right or remedy of Landlord, Landlord may, but 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 lien 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, subcontractors, materialmen, mechanics, and laborers shall have any right to file or place any mechanics and laborers, mechanics or material men's liens of any kind whatsoever upon the Demised Premise 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 ten (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 effect, (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 (e) 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 effect. 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. 10 Section 20.18 Brokerage Tenant warrants that it has had no dealings with any broker or agent in connection with this Lease, and Tenant covenant's 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 20.19 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 person(s) executing this Lease on behalf of Tenant was (were) duly authorized to do so. Furthermore, Tenant agrees to take any and ail 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's 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 six hundred twenty eight and 80/100 Dollars ($2,628.80). Said deposit shall be held 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 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 expend or may be required to expend, including attorney's fees, by reason of Tenant's default, in respect to any of the terms ,covenants, provisions and conditlons 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 event 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 sale of the land and building or leasing of the same of which the premises form a part, Landlord stall have the right to transfer the security to the vendee or the lessee, 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 new 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 !n 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 mortgagee holding any mortgage encumbering the leased premises or any part 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. 11 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 2028 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 guideline:, 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 arises 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 IN THE PRESENCE OF: LANDLORD: LYONS CORPORATE PARK, LLLP /s/ Ann (illegible) By: /s/ Michal J. Ferrera - ------------------------------- -------------------------------------- Michael J. Ferrera, Trustee, as a General Partner /s/ Vicki Buzzeli By: /s/ Michele Ferrera - ------------------------------- -------------------------------------- Michele Ferrera, Trustee, as a General Partner By: /s/ Augustine Ferrera -------------------------------------- Augustine Ferrera, Trustee, as a General Partner By: /s/ Lee S. Lasser -------------------------------------- Lee S. Lasser, Trustee, as a General Partner TENANT: The Singing Machine Co., Inc. (A Florida Corporaiton) /s/ Melody (illegible By: /s/ April J. Green - ------------------------------- -------------------------------------- Title: Director of Finance & Admin -------------------------------------- 12 INDIVIDUAL STATE OF ) COUNTY OF ) ss On this day of ____________________, 20___________________, 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. (SEAL) -------------------------------------------- Print, Type or Stamp Name of Notary PERSONALLY KNOWN ______________________________________ OR PRODUCED IDENTIFICATION______________________________________________ TYPE OF IDENTIFICATION PRODUCED_________________________________________________ PARTNERSHIP OR CORPORATION STATE OF FLORIDA ) )ss COUNTY OF BROWARD ) The foregoing instrument was acknowledged before me this 12th day of March, 2002 by April J. Green, as Director of Finance for The Singing Marchine Co., Inc. /s/ Vickie Buzzeli (SEAL) ------------------------------------------------- Print, Type or Stamp Name of Notary PERSONALLY KNOWN X -------------------------------------- OR PRODUCED IDENTIFICATION -------------------------------------- TYPE OF IDENTIFICATION PRODUCED -------------------------------------- STATE OF FLORIDA ) )ss COUNTY OF BROWARD ) The foregoing instrument was acknowledged before me this 12th day of March, 2002 by MICHAEL J. FERRERA, Trustee, MICHELE FERRERA, Trustee, AUGUSTINE FERRERA, Trustee, and LEE S. LASSER, Trustee all as General Partners of Lyons Corporate Park, LLLP, freely and voluntarily under authority duly vested in them by said Partnership. They are personally known to me. My Commission Expires: /s/ Vickie Buzzeli (SEAL) ------------------------------------------------- Print, Type or Stamp Name of Notary [GRAPHIC OMMITTED] 13 RIDER NO. 1 ATTACHED TO AND MADE A PART OF LEASE AGREEMENT DATED March 12, 2002 BETWEEN LYONS CORPORATE PARK, LLLP (A Florida Limited Liability Limited Partnership) LANDLORD AND THE SINGING MACHINE CO., INC. (A FLORIDA CORPORATION) AS TENANT, DATED THE 12th DAY OF MARCH, 2002. 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 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. LANDLORD: LYONS CORPORATE PARK, LLLP Witnesses: /s/ Ann (illegible) By: /s/ Michal J. Ferrera - ------------------------------- -------------------------------------- Michael J. Ferrera, Trustee, as a General Partner /s/ Vicki Buzzeli By: /s/ Michele Ferrera - ------------------------------- -------------------------------------- Michele Ferrera, Trustee, as a General Partner By: /s/ Augustine Ferrera -------------------------------------- Augustine Ferrera, Trustee, as a General Partner By: /s/ Lee S. Lasser -------------------------------------- Lee S. Lasser, Trustee, as a General Partner TENANT: The Singing Machine Co., Inc. (A Florida Corporaiton) By: /s/ April J. Green -------------------------------------- April J. Gree 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. EXHIBIT "B" ----------- SITE PLAN [GRAPHIC OMMITTED] Page 1 of 2 Exhibit "D" ----------- RIDER - LEASE SPECIFICATIONS ---------------------------- (Description of Landlord's Work) FOR LOT 1 & 2 OF LYONS CORPORATE PARK, LLLP -------------------------- 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 steel 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. corrigated metal deck 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 costs of spackling compound sanded smooth. 3-/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 painted dry wall and coiling 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. Page 2 of 2 Exhibit "D" ----------- RIDER - LEASE SPECIFICATIONS ---------------------------- (Description of Landlord's Work) FOR LOT 1 & 2 OF LYONS CORPORATE PARK, LLLP -------------------------- 10. Office Area Finishes: a) Walls, 2 coats of interior type flat latex paint. b) Doors and Frames: 2 coats semi-gloss paint 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 batt 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 butte 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 cyllnder 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, andthe 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 florescent fixtures and in warehouse area by 1' x 8' lamp florescent fixtures mounted to underside of roof structures. 15. Water Service - 3/4' supply with 5/8' meter - each bay in individually metered. 16. Accessories - Shop area 3' x 3' white translucent skylights. 17. The plans for thin premises are Job No. 9506 ,dated 5/3/94 drawn by Perez & Associates. 18. Landlord and Tenant agrees that Tenant accepts the premises in an "AS IS, WHERE IS" condition except for the following: 1. Landlord will paint the office area. 2. Landlord will clean the carpet in the office area. 3. Landlord will provide an opening in the warehouse wall between Suites A- 5 and A-6. SIGN CRITERIA ------------- LOCATION : Lyons Corporate Park I.LLP 6601 Lyons Road Coconut Creek, Florida 33073 EXTERIOR BUILDING SIGNS: 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 etude and perforated mental pads for cementing onto steel sign band. A silicone adhesive and sticky back tape roust be used to allow for removal of letters when necessary. Perforated pads must be adjusted to allow a minimum of 1/B" 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. NOTE: The Tenant shall confirm with the City of Coconut Creek that their sign conforms to City Ordinances prior to construction of their sign. EX-10.5 4 busung-sublease.txt BUSUNG SUBLEASE Exhibit 10.5 [LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD SUBLEASE MULTI-TENANT 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Sublease ("Sublease"), dated for reference purposes only May 28, 2002, is made by and between The Singing Machine Co., Inc., A Florida Corporation ("Sublessor") and Busung America Corp., a California Corporation ("Sublessee"), (collectively the "Parties", or individually a "Party"). 1.2(a) Premises: That certain portion of the Project (as defined below), known as 967 East Sandhill Avenue, Carson, California 90246, consisting of approximately 22,950 square feet ("Premises"). The Premises are located at: 967 East Sandhill Avenue, in the City of Carson, County of Los Angeles, State of California, with zip code 90746. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have nonexclusive rights to the Common Areas (as defined below) as hereinafter specified, but shall not have any rights to the roof, the exterior walls, or the utility raceways of the building containing the Premises ("Building") or to any other buildings in the Project. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Project." 1.2(b) Parking: 30 unreserved and -0- reserved vehicle parking spaces. 1.3 Term: 1 years and 8 months commencing June 1, 2002 ("Commencement Date") and ending January 31, 2004 ("Expiration Date"). 1.4 Early Possession: ("Early Possession Date"). 1.5 Base Rent: $12,393.00 per month ("Base Rent"), payable on the first (1st) day of each month commencing June 1, 2002. [ ] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Lessee's Share of Operating Expenses: fifty percent (50%) ("Lessee's Share"). 1.7 Base Rent and Other Monies Paid Upon Execution: (a) Base Rent: $12,393.00 for the period July 2002. (b) Security Deposit: $24,786.00 ("Security Deposit"). (c) Other: $ for . (d) Total Due Upon Execution of this Lease: $37,179.00. 1.8 Agreed Use: warehousing and distribution of restaurant equipment, primarily refrigerators. 1.9 Real Estate Brokers: (a) Representation: The following real estate brokers (the "Brokers") and brokerage relationships exist in this transaction (check applicable boxes): [X] Lee & Associates Los Angeles South Bay, Inc. represents Sublessor exclusively ("Lessor's Broker"); [X] Coldwell Banker Commercial, JM Properties represents Subleasee exclusively ("Lessee's Broker"); or [ ] ______________ represents both Sublessor and Sublessee ("Dual Agency"). (b) Payment to Brokers: Upon execution and delivery of this Sublease by both Parties, Sublessor shall pay to the Brokers the brokerage fee agreed to in a separate written agreement (or if there is no such agreement, the sum of % of the total Base Rent for the brokerage services rendered by the Brokers). 1.10 Guarantor. The obligations of the Subleassee under this Sublease shall be guaranteed by ("Guarantor"). 1.11 Attachments. Attached hereto are the following, all of which constitute a part of this Sublease: [ ] An Addendum consisting of Paragraphs through : [ ] a plot plan depicting the Premises and/or Project; [ ] a current set of the Rules and Regulations; [ ] a Work Letter; [ ] a copy of the Master Lease; [ ] other (specify): YHL Initials Page 1 of 6 REVISED 2. Premises. 2.1 Letting. Sublessor hereby subleasses to Sublessee, and Sublessee hereby subleases from Sublessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Sublease. Unless otherwise provided herein, any statement of size set forth in this Sublease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less. Note: Subleassee is advised to verify the actual size prior to executing this Sublease. 2.2 Condition. Sublessor shall deliver the Premises to Sublessee broom clean and free of debris on the Commencement Date or the 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"), and any items which the Lessor is obligated to construct pursuant to the Work Letter attached hereto, if any, other than those constructed by Lessee, shall be in good operating condition on said date. If a noncompliance with such warranty exists as of the Start Date, or if one of such systems or elements should malfunction or fail within the appropriate warranty period, Sublessor shall, as Sublessor's sole obligation with respect to such matter, except as otherwise provided in this Sublease, promptly after receipt of written notice from Subleassee setting forth with specificity the nature and extent of such noncompliance, malfunction or failure, rectify same at Sublessor's expense. The warranty periods shall be as follows: (i) 6 months as to the HVAC systems, and (ii) 30 days as to the remaining systems and other elements. If Sublessee does not give Sublessor the required notice within the appropriate warranty period, correction of any such noncompliance, malfunction or failure shall be the obligation of Sublessee at Sublessee's sole cost and expense. 2.3 Compliance. Sublessor warrants that any improvements, alterations or utility installations made or installed by or on behalf of Sublessor to or on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances ("Applicable Requirements") in effect on the date that they were made or installed. Sublessor makes no warranty as to the use to which Sublessee will put the Premises or to modifications which may be required by the Americans with Disabilities Act or any similar laws as a result of Sublessee's use. NOTE: Sublessee is responsible for determining whether or not the zoning and other applicable Requirements are appropriate for Sublessee'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, Sublessor shall, except as otherwise provided, promptly after receipt of written notice from Sublessee setting forth with specificity the nature and extent of such noncompliance, rectify the same. 2.4 Acknowledgements. Sublessee acknowledges that: (a) it has been advised by Sublessor 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 respects, and compliance with Applicable Requirements and the Americans with Disabilities Act, and their suitability for Sublessee's intended use, (b) Sublessee 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 Sublessor, Sublessor's agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Sublease. In addition, Sublessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Sublessee's ability to honor the Sublease or suitability to occupy the Premises, and (iii) it is Sublessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5 Americans with Disabilities Act. In the event that as a result of Sublessee's use, or intended use, of the Premises the Americans with Disabilities Act or any similar law requires modifications or the construction or installation of improvements in or to the Premises, Building, Project and/or Common Areas, the Parties agree that such modifications, construction or improvements shall be made at: [ ] Sublessor's expense [ ] Sublessee's expense. 2.6 Vehicle Parking. Sublessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time for parking. Sublessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full size passenger automobiles or pickup trucks, herein called "Permitted Size Vehicles." Sublessor may regulate the loading and unloading of vehicles by adopting Rules and Regulations as provided in Paragraph 2.9. No vehicles other than Permitted Size Vehicles may be parked in the Common Area without the prior written permission of Sublessor. (a) Sublessee shall not permit or allow any vehicles that belong to or are controlled by Sublessee or Sublessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Sublessor and such activities. (b) Sublessee shall not service or store any vehicles in the Common Areas. (c) If Sublessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Sublessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Sublessee, which cost shall be immediately payable upon demand by Sublessor. 2.7 Common Areas - Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project and interior utility raceways and installations within the Premises that are provided and designated by the Sublessor from time to time for the general nonexclusive use of Sublessor, Sublessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas. 2.8 Common Areas - Sublessee's Rights. Sublessor grants to Sublessee, for the benefit of Sublessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Sublease, the nonexclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Sublessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently. In the Common Areas. Any such storage shall be permitted only by the prior written consent of Sublessor or Sublessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Sublessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Sublessee, which cost shall be immediately payable upon demand by Sublessor. 2.9 Common Areas - rules and Regulations. Sublessor or such other person(s) as Sublessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right from time to time, to establish, modify, amend and enforce reasonable rules and regulations ("Rules and Regulations") for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Project and their invitees. Sublessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Sublessor shall not be responsible to Sublessee for the noncompliance with said Rules and Regulations by other tenants of the Project. 2.10 Common Areas - Changes. Sublessor shall have the right, in Sublessor's sole discretion, from timeto time: (a) To make changes to the Common Areas, including, without limitation changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available: (c) To add additional buildings and improvements to the Common Areas; (d) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project; and (e) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Project as Sublessor may, in the exercise of sound business judgment, deem to be appropriate. YHL Initials Page 2 of 6 REVISED 3. Possession. 3.1 Early Possession- If Sublessee 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 Sublease (Including but not limited to the obligations to pay Sublessee's Share of Common Area Operating Expenses, Real Property Taxes and insurance premiums and to maintain the Premises) shall, however. be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.2 Delay in Commencement. Sublessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises by the Commencement Date. If, despite said efforts, Sublessor is unable to deliver possession as agreed, the rights and obligations of Sublessor and Sublessee shall be as set forth in Paragraph 3.3 of the Master Lease (as modified by Paragraph 7.3 of this Sublease). 3.4 Sublessee Compliance. Sublessor shall not be required to tender possession of the Premises to Sublessee until Sublessee complies with its obligation to provide evidence of insurance. Pending delivery of such evidence, Sublessee shall be required to perform all of its obligations under this Sublease from and after the Start Date, including the payment of Rent, notwithstanding Sublessors election to withhold possession pending receipt of such evidence of insurance. Further, if Sublessee Is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Sublessor may elect to withhold possession until such conditions are satisfied. 4. Rent and Other Charges. 4.1 Rent Defined. All monetary obligations of Sublessee to Sublessor under the terms of this Sublease (except for the Security Deposit) are deemed to be rent ("Rent"). Rent shall be payable in lawful money of the United States to Sublessor at the address stated herein or to such other persons or at such other places as Sublessor may designate in writing. 4.2 Common Area Operating Expenses. Sublessee shall pay during the term hereof, in addition to the Base Rent, Sublessee's Share of all Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of this Sublease, in accordance with the following provisions: (a) "Common Area Operating Expenses" are defined, for purposes of this Sublease, as all costs incurred by Sublessor relating to the operation of the Project, including, but not limited to, the following: (i) The operation, repair and maintenance, in neat, clean. good order and condition, but not the replacement (see subparagraph (e)), of the following: (aa) The Common Areas and Common Area improvements, including parking areas, loading and unloading areas, trash areas, roadways, parkways, walkways, driveways, landscaped areas, bumpers, irrigation systems, Common area lighting facilities, fences and gates, elevators, roofs, and roof drainage systems. (bb) Exterior signs and any tenant directories. (cc) Any fire sprinkler systems. (ii) The cost of water, gas, electricity and telephone to service the Common Areas and any utilities not separately metered. (iii) Trash disposal, pest control services, property management, security services, and the costs of any environmental inspections. (iv) Reserves set aside for maintenance and repair of Common Areas. (v) Real Property Taxes. (vi) Insurance premiums. (vii) Any deductible portion of an insured loss concerning the Building or the Common Areas, (b) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Sublessor to either have said improvements or facilities or to provide those services unless Sublessor already provides the services, or Sublessor has agreed elsewhere in this Sublease to provide the same or some of them. (c) Sublessee's Share of Common Area Operating Expenses shall be payable by Sublessee within 10 days after a reasonably detailed statement of actual expenses is presented to Sublessee. At Sublessor's option, however, an amount may be estimated by Sublessor from time to time of Sublessee's Share of annual Common Area Operating Expenses and the same shall be payable monthly or quarterly, as Sublessor shall designate, during each 12 month period of the Sublease term, on the same day as the Base Rent is due hereunder. Sublessor shall deliver to Sublessee within 60 days after the expiration of each calendar year a reasonably detailed statement showing Sublessee's Share of the actual Common Area Operating Expenses incurred during the preceding year. If Sublessee's payments under this Paragraph 4.2(c) during the preceding year exceed Sublessee's Share as indicated on such statement, Sublessor shall credit the amount of such overpayment against Sublessee's Share of Common Area Operating Expenses next becoming due, If Sublessee's payments under this Paragraph 4.2(c) during the preceding year were less than Sublessee's Share as indicated on such statement, Sublessee shall pay to Sublessor the amount of the deficiency within 10 days after delivery by Sublessor to Sublessee of the statement. 4.3 Utilities. Sublessee 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. Notwithstanding the provisions of Paragraph 4.2, if at any time in Sublessor's sole judgment, Sublessor determines that Sublessee is using a disproportionate amount of water, electricity or other commonly metered utilities, or that Sublessee is generating such a large volume of trash as to require an increase in the size of the dumpster and/or an increase in the number of times per month that the dumpster is emptied, then Sublessor may increase Sublessee's Base Rent by an amount equal to such increased costs. 5. Security Deposit. The rights and obligations of Sublessor and Sublessee as to said Security Deposit shall be as set forth in Paragraph 5 of the Master Lease (as modified by Paragraph 7.3 of this Sublease). 6. Agreed Use. The Premises shall be used and occupied only for warehousing and distribution of restaurant equipment, primarily refrigerator,and related legal uses in office and for no other purpose. 7. Master Lease. 7.1 Sublessor is the lessee of the Premises by virtue of a lease, hereinafter the "Master Lease", wherein Marcel George and Joanne Marie George, Trustees of Marcel George Family Trusts of September 2, 1982 is the lessor,hereinafter the "Master Lessor". 7.2 This Sublease is and shall be at all times subject and subordinate to the Master Lease. 7.3 The terms, conditions and respective obligations of Sublessor and Subleasee to each other under this Sublease shall be the terms and conditions of the Master Lease except for those provisions of the Master Lease which are directly contradicted by this Sublease in which event the terms of this Sublease document shall control over the Master Lease. Therefore, for the purposes of this Sublease, wherever in the Master Lease the word "Lessor" is used it shall be deemed to mean the Sublessor herein and wherever in the Master Lease the word 'Lessee" is used it shall be deemed to mean the Subleasee herein. 7.4 During the term of this Sublease and for all periods subsequent for oblibations which have arisen prior to the termination of this Sublease, Subleasee does hereby expressly assume and agree to perform and comply with, for the benefit of Subleassor and Master Lessor, each and every obligation of Sublessor under the Master Lease except for the following paragraphs which are excluded therefrom: YHL Initials Page 3 of 6 REVISED 7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof are hereinafter referred to as the "Sublessee's Assumed Obligations". The obligations that sublessee has not assumed under paragraph 7.4 hereof are hereinafter referred to as the "Sublessor's Remaining Obligations". 7.6 Sublessee shall hold Sublessor free and harmless from all liability, judgments, costs, damages, claims or demands, including reasonable attorneys fees, arising out of Sublessee's failure to comply with or perform Sublessee's Assumed Obligations. 7.7 Sublessor agrees to maintain the Master Lease during the entire term of this Sublease, subject, however, to any earlier termination of the Master Lease without the fault of the Sublessor, and to comply with or perform Sublessor's Remaining Obligations and to hold Sublesses free and harmless from all liability, judgments, costs, damages, claims or demands arising out of Sublessor's failure to comply with or perform Sublessor's Remaining Obligations. 7.8 Sublessor represents to Sublessee that the Master Lease is in full force and effect and that no default exists on the part of any Party to the Master Lease. 8. Assignment of Sublease and Default. 8.1 Sublessor hereby assigns and transfers to Master Lessor the Sublessor's interest in this Sublease, subject however to the provisions of Paragraph 8.2 hereof, 8.2 Master Lessor, by executing this document, agrees that until a Default shall occur in the performance of Sublessor's Obligations under the Master Lease, that Sublessor may receive, collect and enjoy the Rent accruing under this Sublease. However, if Sublessor shall Default in the performance of its obligations to Master Lessor then Master Lessor may, at its option, receive and collect, directly from Sublessee, all Rent owing and to be owed under this Sublease. Master Lessor shall not, by reason of this assignment of the Sublease nor by reason of the collection of the Rent from the Sublessee, be deemed liable to Sublessee for any failure of the Sublessor to perform and comply with Sublessor's Remaining Obligations. 8.3 Sublessor hereby irrevocably authorizes and directs Sublessee upon receipt of any written notice from the Master Lessor stating that a Default exists in the performance of Sublessor's obligations under the Master Lease, to pay to Master Lessor the Rent due and to become due under the Sublease. Sublessor agrees that Sublessee shall have the right to rely upon any such statement and request from Master Lessor, and that Sublessee shall pay such Rent to Master Lessor without any obligation or right to inquire as to whether such Default exists and notwithstanding any notice from or claim from Sublessor to the contrary and Sublessor shall have no right or claim against Sublessee for any such Rent so paid by Sublessee. 8.4 No changes or modifications shall be made to this Sublease without the consent of Master Lessor. 9. Consent of Master Lessor. 9.1 In the event that the Master Lease requires that Sublessor obtain the consent of Master Lessor to any subletting by Sublessor then, this Sublease shall not be effective unless, within 10 days of the date hereof, Master Lessor signs this Sublease thereby giving its consent to this Subletting. 9.2 In the event that the obligations of the Sublessor under the Master Lease have been guaranteed by third parties then neither this Sublease, nor the Master Lessor's consent, shall be effective unless, within 10 days of the date hereof, said guarantors sign this Sublease thereby giving their consent to this Sublease. 9.3 In the event that Master Lessor does give such consent then: (a) Such consent shall not release Sublessor of its obligations or alter the primary liability of Sublessor to pay the Rent and perform and comply with all of the obligations of Sublessor to be performed under the Master Lease. (b) The acceptance of Rent by Master Lessor from Sublessee or any one else liable under the Master Lease shall not be deemed a waiver by Master Lessor of any provisions of the Master Lease. (c) The consent to this Sublease shall not constitute a consent to any subsequent subletting or assignment. (d) In the event of any Default of Sublessor under the Master Lease, Master Lessor may proceed directly against: Sublessor, any guarantors or any one else liable under the Master Lease or this Sublease without first exhausting Master Lessor's remedies against any other person or entity liable thereon to Master Lessor. (e) Master Lessor may consent to subsequent sublettings and assignments of the Master Lease or this Sublease or any amendments or modifications thereto without notifying Sublessor or any one else liable under the Master Lease and without obtaining their consent and such action shall not relieve such persons from liability, (f) In the event that Sublessor shall Default in its obligations under the Master Lease, then Master Lessor, at its option and without being obligated to do so, may require Sublessee to attorn to Master Lessor in which event Master Lessor shall undertake the obligations of Sublessor under this Sublease from the time of the exercise of said option to termination of this Sublease but Master Lessor shall not be liable for any prepaid Rent nor any Security Deposit paid by Sublessee, nor shall Master Lessor be liable for any other Defaults of the Sublessor under the Sublease. 9.4 The signatures of the Master Lessor and any Guarantors of Sublessor at the end of this document shall constitute their consent to the terms of this Sublease. 9.5 Master Lessor acknowledges that, to the best of Master Lessor's knowledge, no Default presently exists under the Maser Lease of obligations to be performed by Sublessor and that the Master Lease is in full force and effect. 9.6 In the event that Sublessor Defaults under its obligations to be performed under the Master Lease by Sublessor, Master Lessor agrees to deliver to Sublessee a copy of any such notice of default. Sublessee shall have the right to cure any Default of Sublessor described in any notice of default within ten days after service of such notice of default on Sublessee. If such Default is cured by Sublessee then Sublessee shall have the right of reimbursement and offset from and against Sublessor. 10. Additional Brokers Commissions. 10.1 Sublessor agrees that if Sublessee exercises any option or right of first refusal as granted by Sublessor herein, or any option or right substantially similar thereto, either to extend the term of this Sublease, to renew this Sublease, to purchase the Premises, or to lease or purchase adjacent property which Sublessor may own or in which Sublessor has an interest, then Sublessor shall pay to Broker a fee in accordance with the schedule of Broker in effect at the time of the execution of this Sublease. Notwithstanding the foregoing, Sublessor's obligation under this Paragraph is limited to a transaction in which Sublessor is acting as a Sublessor, lessor or seller. 10.2 Master Lessor agrees that if Sublessee shall exercise any option or right of first refusal granted to Sublessee by Master Lessor in connection with this Sublease, or any option or right substantially similar thereto, either to extend or renew the Master Lease, to purchase the Premises or any part thereof, or to lease or purchase adjacent property which Master Lessor may own or in which Master Lessor has an interest, or if Broker is the procuring cause of any other lease or sale entered into between Sublessee and Master Lessor pertaining to the Premises, any part thereof, or any adjacent property which Master Lessor owns or in which it has an interest, then as to any of said transactions, Master Lessor shall pay to Broker a fee, in cash, in accordance with the schedule of Broker in effect at the time of the execution of this Sublease. 10.3 Any fee due from Sublessor or Master Lessor hereunder shall be due and payable upon the exercise of any option to extend or renew, upon the execution of any new lease, or, in the event of a purchase, at the close of escrow. 10.4 Any transferee of Sublessor's interest in this Sublease, or of Master Lessor's interest in the Master Lease, by accepting an assignment thereof, shall be deemed to have assumed the respective obligations of Sublessor or Master Lessor under this Paragraph 10. Broker shall be deemed to be a third-party beneficiary of this paragraph 10. YHL Initials Page 4 of 6 REVISED 11. Representations and Indemnities of Broker Relationships. The Parties each represent and warrant to the other that he has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Sublease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Sublessee and Sublessor do each hereby agree to indemnify, 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. 12. Attorney's fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in contract or equity, 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, Sublessor 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 ($200 is a reasonable minimum per occurrence for such services and consultation). 13. No Prior or Other Agreements; Broker Disclaimer. This Sublease 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. Sublessor and Sublessee each represents and warrants to the Brokers that it 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 Sublease and as to the use, 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 Sublessor or Sublessee under this Sublease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Sublease; 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. 13. (A) Condition of the Premises. Sublessor and Sublessee agree that the premises is leased in an "as is - where is" condition as of the commencement date, except however, the Sublessor agrees to repair areas of damaged drywall throughout the warehouse within the first (lst) twenty-one (21) days of the lease term and Subleasee is responsible for maintaining and/or reconditioning those areas at Lease termination. Sublessor is responsible for all other maintenance and repair pursuant to the terms of the Master Lease and the Sublease. ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE 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 SUBLEASE. 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 PROPERTY, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR SUBLESSEE'S INTENDED USE. WARNING IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED. Executed at: (time) 11:50 am on: (date) 6/7/02 By SUBLESSOR: The Singing Machine Co., Inc., A Florida Corporation By: /s/ April J. Green Name Printed: Aprill J Green Title: CFO By: Name Printed: Title: Address: 6601 Lyons Road, Blvd A-7 Coconut Creek, FL 33073 Telephone/Facsimile: (954) 596-1000/(954) 596-2000 Federal ID No. Executed at: (time) 1:30 pm on: (date) 5-30-02 By SUBLESSEE: Busung America Corp., A California Corporation By: /s/ Yong Ho Less Name Printed: Yong Ho Lee Title: President By: Name Printed: Title: Address: Telephone/Facsimile: Federal ID No. Page 5 of 6 REVISED YHL Initials Page 5 of 6 REVISED BROKER: Lee & Associates Los Angeles South Bay, Inc. Attn: D. Jerry Evans Title: President Address: 1411 West 190th Street, Suite 450 Gardenia, CA 90248 Telephone/Facsimile: (310) 768-8800/(310) 768-8978 Federal ID No. Consent to the above Sublease is hereby given. Executed at: 12:30 P.M. On: 6-04-02 By MASTER LESSOR: Marcel George and Joanne Marie George, Trustees of Marcel George Family Trusts of September 2, 1982 By: /s/ Arthur Beach Name Printed: Arthur Beach Title: [ILLEGIBLE] By: Name Printed: Title: Address: Telephone/Facsimile: (310) 472-3552 Federal ID No. BROKER: Coldwell Banker Commercial, JM Properties Attn: Andrew Kim Title: Address: 1125 West 190th Street, Suite 250 Gardena, CA 90248 Telephone/Facsimile: (310) 767-5600/(310) 767-5601 Federal ID No. Executed At: on: By GUARANTORS(S): By: Name Printed: Address: By: Name Printed: Address: YHL Initials Page 6 of 6 REVISED EX-10.6 5 premises-schedule.txt OCEAN CENTRE LEASE Exhibit 10.6 HARBOUR CITY Your Reference: Our Reference: 011 EST 11/6.1216 12th June 2002 International SMC (HK) Ltd. Suite 1210, Ocean Centre, Harbour City, 5 Canton Road, Kowloon Attn: Ms. M. Alicia Haskamp --------------------------- Dear Ms. Haskamp, Final Measurement of Area Suite 1216, Ocean Centre ------------------------ We are pleased to confirm that, pursuant to the "The Premises Schedule" of your Letter of Offer, the final measurement of the subject premises is 794 sq. ft. Accordingly the monthly rent, air- conditioning charge and service charge will be calculated on this measurement. Thank you for your attention. Yours sincerely, For and on behalf of HARBOUR CITY MANAGEMENT LIMITED Shirley Lai Tenant Services Manager SL/JC/cl HARBOUR CITY MANAGEMENT LIMITED - -------------------------------------------------------------------------------- OCEAN CENTRE - 12TH FLOOR FLOOR PLAN [GRAPHIC OMITTED] Suite 1216 Yours Truthfully, ------------------------ For and on behalf of Signature Name in block letter: For and on behalf of INTERNATIONAL SMC (HK) LIMITED Position /s/ M. A. Haskamp ----------------- Director/Authorized Signatory Ms. M.A. Haskamp Managing direction 11/6/2002 ACCEPTANCE ---------- We, HARRIMAN LEASING LIMITED, as Leasing Agent for the Landlord HEREBY accept the foregoing offer. Dated Signed by Doreen Y. F. Lee for and on behalf of For and on behalf of HARRIMAN LEASING LIMITED HARRIMAN LEASING LIMITED as Leasing Agent for the Landlord in the presence of: /s/ [Illegible] ----------------------------- Director & General Manager /s/ Illegible THE SUPPLEMENTARY INFORMATION SCHEDULE -------------------------------------- (Please PRINT the following information): 1. Full name of the person (or persons) (a partnership) or company to be shown as Tenant in the Lease/Tenancy Agreement: 2. Address, which in the case of a company should be the REGISTERED OFFICE ADDRESS: 3. Name and Address of Solicitors: 4. Bankers' Name and Address: 5. Business Registration No. 6. Approximate date of establishment in Hong Kong: 7. General nature of business/profession: 8. If Company, authorized capital: paid-up capital: 9. Where a subsidiary company, name and address of parent company: 10. Where a partnership, number and name of partners: 11. Name of previous/current landlord. 12. Other relevant background information in support of this Offer: 13. Contact Person and Telephone No.: THE PREMISES SCHEDULE --------------------- 1. The Landlord means the registered owner of the said Lot, Wharf {ILLEGIBLE} Limited, (including where the context so admits its successors and assigns) acting by its duly authorized agent, Marriman Leasing Limited. 2. Premises: Suites 1216, 12th Floor, Ocean Centre, Harbor City Kowloon (as shown on the floor plan attached hereto and thereon [ILLEGIBLE] pink). 3. Approximate Area: 750 sq. ft. gross (subject to final measurement to be conducted by the Landlord) 4. Use of Premises: Restricted to Commercial Offices Use Only. For this avoidance of doubt it is hereby declared and confirmed that no private sales, sample sales, clearance sales or any similar sales or any activities related thereto including but without limiting to distribution of circulars or erection or posting up or may revises or any [ILLEGIBLE] of any kind may be allowed in any circumstances. 5. Term of Lease/Tenancy: Three (3) Years from the Commencement Date 6. Commencement Date: 1st June, 2002 or such other date as specified by the Landlord by notice in writing which date shall be within 3 days of completion of the Building Finishes as referred to in Clause 2.1 of this Offer, whichever date is the later. 7. Rent and Other Charges: (a)(1) Rent: The rent shall be: (i) From The 1st month to The 36th month HK$ 15.00 per sq ft gross per month; and all payable monthly in advance. (a)(2) Market Rental: The Market Rental referred to in paragraph 7(a)(1) above shall be determined for the appropriate period or periods in question in accordance with the provisions of Section XI of the Lease/Tenancy Agreement. (b) Air-Conditioning Charges: HK$ 2.70 per sq ft gross per month payable monthly in advance, subject to increase either before or after the Commencement Date. The air-conditioning charge will commence to be payable on and from the date the Landlord's Managing Agent at our request commences the supply or air-conditioning service, but no in any case later than the expiry of the Rent-Free Period. (c) Service Charge: HK$ 1.90 per sq ft gross per month payable monthly in advance, subject to increase either before or after the Commencement Date. The service charge will commence to be payable on and from the Commencement Date. (d) Government Ratios: Estimated at HK$ 562.50 per month. (e) Utility Charges: We shall be responsible for all charges for the supply of gas, water, telephone and electricity including electricity consumed by the air-conditioning unit(s), apparatus and equipment serving the Premises and all deposits to the utility companies. 8. Rent-Free Period: Rent will commence to be payable 61 days after the Commencement date. The service charge, air-conditioning charge, utility charges and government rates shall be payable by us during such period. 9. Deposit: HK$ 45.787.50 representing 3 months' rent (at the highest rate specified in paragraph 7(a) above), government rates, air-conditioning charge and service charge. 10. Decoration Deposit: HK$ 5,000.00 payable prior to the commencement of the fitout work upon demand to ensure due compliance of instructions and directions by our contractors in accordance with Clause 5.2 of this Offer. This deposit is refundable by the Managing Agent to us upon completion of our [ILLEGIBLE] work after deducting any cost of loss or damage incurred including cost of remedy insofar as it is practically possible so to do. 11. Submission of Plans: Immediate after the Landlord's acceptance of this Offer. 12. Facilitation Fee: HK$ 2.00 per sq ft gross representing the costs incurred by the Landlord in providing services including consumption of temporary electricity to the Premises and removal of construction debris from a central collection point during the period of fitting out payable upon signing of this Offer. 5. TENANT'S WORK ------------- 5.1 All approved work (other than that to be carried out by the Landlord's nominated contractors as referred to in Clause 4.1 of this Offer) may be carried out by our own contractor (who shall in any event be required to be approved by the Landlord) and we shall be responsible for enduring that these contractors co-operate fully with the Landlord, its servants, agents, workman and contractors and is carrying out their work in such a manner as to avoid any delay to or interference with the Landlord or third parties. 5.2 We shall ensure that such contractors comply with all instructions and directions (including hours of work) given by the Landlord's representative and/or its Managing Agent and/or the building manager and that our contractors shall remove daily all trash, rubbish and surplus building materials resulting from the work. 5.3 We shall be responsible for effecting adequate public liability and consumers' all risks insurance and furnishing to the Landlord's representative before the commencement of any work in or to the Premises such evidence as the Landlord may require that the insurance is in place. 6. LEGAL TENANCY AGREEMENT PREPARATION ----------------------------------- 6.1 The Offer is accepted, we agree to execute a lease/tenancy agreement (the "Lease/Tenancy Agreement") in duplicate in the standard form which is sent with this offer and in the attached Schedule(s). 6.2 We also undertake to pay one half of the stamp duty and registration fee (if any) on this Offer and on the Lease/Tenancy Agreement and its counterpart and to return both copies of the agreement duly executed within 14 days of presentation [ILLEGIBLE] in any event before the Commencement Date specified in paragraph 6 of the Premises Schedule. 7. SIGNS ----- 7.1 We understand that the Landlord will provide at our cost one sign (according to the Landlord's standard design and specifications) to be fixed at some appropriate point(s) in the building for the display of our name and such other particulars as the Landlord may at its discretion approve. 7.2 We acknowledge and agree that the installation work in respect or such aforesaid sign shall be carried out by the Landlord's nominated contractor at our cost. 8. CHANGE OF NUMBERING OR NAME OF DEVELOPMENT ------------------------------------------ 8.1 We acknowledge that the Landlord reserves the right at any time and from time to time to change the numbering of the Premises (or any part thereof) or the name of the Building/Development (or any part thereof) that the Premises form part as it shall in its absolute discretion [ILLEGIBLE] upon giving to us no less than 3 months' prior notice in writing and the Landlord shall not be liable to us for any loss, damage, claims, costs or expenses resulting therefrom or in connection therewith. 9. DEPOSIT ------- 9.1 We enclose a cheque in your favour as agent of the Landlord in the sum specified in paragraph 9 of the Premises Schedule as a deposit. 9.2 We acknowledge that in case there shall have been any increase in the air-conditioning charge and/or service charge imposed by the Landlord prior to the Commencement Date, the deposit will be increased accordingly and we undertake to pay such increase forthwith upon demand. We further acknowledge that we shall not be entitled to possession of the Premises until we have paid the whole of the deposit including any increase pursuant to this Clause but that the [ILLEGIBLE].. 9.3 We acknowledge that if after this Offer has been accepted we fail to execute agreement in accordance with Clause 6 of this Offer or fail to comply with any of the terms and conditions herein the Landlord shall be entitled to its absolute discretion to forfeit the deposit and determine the agreement constituted by your acceptance of this Offer (the "Agreement") by giving notice to us. Nothing herein contained however shall prevent the Landlord from exercising its right to enforce specific performance of the Agreement or claiming against us for damages for breach of the Agreement. 9.4 We understand that you are at liberty to cash this cheque immediately pending the Landlord's consideration of this Offer and such action on your part shall not be deemed to be an acceptance thereof. Should this Offer not be accepted, the deposit will be returned to us (without interest or other compensation). 9.5 We understand upon execution of the [ILLEGIBLE] Agreement the deposit will be set against the deposit payable under Section IX of the Lease/Tenancy Agreement. 10. LANDLORD'S APPROVAL ------------------- 10.1 We acknowledge that whatever the consent or approval of the Landlord's required, the same may be given or withheld or given subject to conditions, at the Landlord in its sole discretion may determine. 11. LANDLORD'S AGENTS ----------------- 11.1 We acknowledge that Harriman Leasing Limited acts as Leasing Agent of the Landlord, and has authority to accept/reject this Offer on behalf of the Landlord and that Harbour City Management Limited acts as Managing Agent of the Landlord and has authority to represent and bind the Landlord in all [ILLEGIBLE] in connection with this Offer and if this Offer herein is accepted, in all matters missing from or in connection with the tenancy of the premises. 12. PRIVACY ORDINANCE NOTICE AND CONSENT ------------------------------------ 12.1 The Landlord shall be entitled to supply to any company within the Landlord's group of companies and also to any company which is the ultimate holding company or the Landlord as the Landlord may determine such information or personal data is respect of us for marketing purposes, including the exchange of non-financial information with selected business partners without our further consent being obtained. "Group of companies" and "holding company" shall have the meanings attributed thereto in the companies Ordinance Cap 22 of the Laws of Hong Kong Special Administrative Region. 13. BANK REFERENCE --------------- 13.1 We enclose a Bank's Reference in support of this Offer. 14. SUPPLEMENTARY INFORMATION ------------------------- 14.1 We have completed the Supplementary Information Schedule as requested by the Landlord. 15. ADDITIONAL CONDITIONS --------------------- 15.1 We acknowledge that the terms, conditions and provisions set out in the Additional Conditions Schedule attached to this Offer (if any) shall apply and be incorporated in this Offer. 16. IRREVOCABLE OFFER ----------------- 16.1 This Offer shall be irrevocable. 17. ACCEPTANCE ---------- 17.1 To indicate the Landlord's acceptance of this Offer, please sign the Acceptance endorsed at the foot of this Offer. To: HARRIMAN LEASING LIMITED Suite 1611, 16th Floor Ocean Centre Harbour City Kowloon From: International SMC (HK) Limited L1 Unit 6 Mirror Tower 61 Mody Road Kowloon Dear Sirs, LETTER OF OFFER FOR OFFICE PREMISES ----------------------------------- 1. OFFER ----- 1.1 We offer to lease the premises identified in the attached Premises Schedule (the "Premises") from your principal, the registered owner of the Premises (the "Landlord"), on the terms and conditions and subject to payment of the rent and other charges fees and amounts as set out in this letter or offer (this "Offer") and in the Schedule(s). 2. BUILDING FINISHES ----------------- 2.1 We understand that the Landlord's obligations are limited to making the premises available to us with the following: (1) Concrete floor with cement said screeding; (2) Standard and emulsion paint painted walls and columns; (3) Suspended ceiling with acoustic tiles and standard light fittings without wiring in a standard layout; (4) Standard entrance door; (5) Automatic smoke detectors and sprinkler system in a standard layout; (6) Air-conditioning system; and (7) Electricity supply terminated at a plug-in unit or barber chamber, as the ease may be, in the meter room. 2.2 We shall undertake and be responsible at our cost for: (1) all air-conditioning duct work, floor finish, clerical work (including [ILLEGIBLE] of light and power circuits) light-fittings, transfer of air duct to our suspended ceilings, and security, fire services (including sprinklers, infra-red detectors and/or smoke detectors) and air-conditioning unit (on/or control system serving the Premises: (2) Any other installation, adjustment, modification and alteration of the provisions and fixtures and fittings in the Premises, if approved by the Landlord. 2.3 Any other items including any additional fixtures or fittings and interior decoration which we may require will likewise be for our account. 3. APPROVAL OF INTERNAL LAYOUT --------------------------- 3.1 Within the period specified in paragraph 11 of the Premises Schedule, we shall submit to the Landlord for approval layout plans in respect to the Premises together with detailed design drawings and specifications for the design and construction of all proposed interior work installations and listings. 3.2 We acknowledge and agree that: (1) under no circumstances may work be commenced until the full approval of the Landlord in writing has been obtained: (2) no delays, whether in submitting or resubmitting our proposals and plans or in the Landlord approving the same or otherwise will entitle us to any [ILLEGIBLE] of the rent-free period granted hereunder or to any claim for compensation or otherwise: (3) the term of [ILLEGIBLE] may commence even though any of the plans, drawings and specifications have not been fully approved or any [ILLEGIBLE] work has not been commenced. 3.3 We agree to pay upon submission of our initial internal layout plans a Floor Handling Fee to the Landlord or its managing agent at the rate of HK$3.50 per sq. ft. based on the area of the Premises as specified in paragraph 3 of the Premises Schedule for: (1) voting our initial internal layout plans; and (2) where such plans include or necessitate work which is required hereunder to be carried out by the Landlord's nominated contractors, handling and co-ordinating the carrying on of such work. 4. ALTERATION WORK BY NOMINATED CONTRACTORS ---------------------------------------- 4.1 We acknowledge that to enable the electrical, air-conditioning, plumbing, drainage, sprinkler, security, building automation and the direction alarm systems in the building to be effectively co- ordinated and controlled all work required by us within the Premises affecting these services and facilities shall be designed and supervised by a professional electrical and Mechanical consultant employed by us, and carried out at our cost by the Landlord's nominated contractors for which purpose we undertake to engage the appropriate contractor nominated by the Landlord for the category of work in question and to pay the nominated contractors' charges for the work as follows: (1) 50% of the [ILLEGIBLE] sum for each category of work and the Landlord's charges at the same time as returning the signed statement of cost(s) (2) progress payment(s) (if any) as stipulated by the Landlord in the estimate upon presentation of invoices; and (3) the final account for each category of work and the balance of the Landlord's charges (if any) upon presentation of the relevant invoices. 4.2 We acknowledge that since the appropriate nominated contractors shall be engaged by us, the Landlord shall notwithstanding the nomination not have any liability to us for or in respect of any set deed matter or thing arising out of or in connection with the engagement of any such contractor or contractors or any work done or omitted to be done by them or any of them pursuant to such engagement. 4.3 We further agree that in respect of any subsequent [ILLEGIBLE] work in or to the Premises, a handling fee shall be payable to the Landlord in accordance with Section III Clause 7 of the [ILLEGIBLE] Agreement sent with this Offer. HARBOUR CITY Your Reference: Our Reference: 011 EST 11/6.1210 16th April 2002 International SMC (HK) Ltd. Suite 1210, Ocean Centre, Harbour City, 5 Canton Road, Kowloon Attn: Ms. M. Alicia Haskamp Dear Ms. Haskamp, Final Measurement of Area Suite 1210, Ocean Centre ------------------------ We are pleased to confirm that, pursuant to the "The Premises Schedule" of your Letter of Offer, the final measurement of the subject premises is 3,579 sq. ft. Accordingly the monthly rent, air-conditioning charge and service charge will be calculated on this measurement. Thank you for your attention. Yours sincerely, For and on behalf of HARBOUR CITY MANAGEMENT LIMITED Shirley Lai Tenant Services Manager SL/JC/cl OCEAN CENTRE - 12TH FLOOR FLOOR PLAN [GRAPHIC OMITTED] Suite #1210 Yours Truthfully, International SMC (HK) LTD /s/ M. S. Haskamp ------------------------ Director/Authorized Signatory For and on behalf of Signature /s/ M. A. Haskamp ----------------- Name in block letters: Ms. M. A. Haskamp Position: Managing Director Company Chop: For and on behalf of INTERNATIONAL SMC (HK) LIMITED Dated: -------------------------------- Director/Authorized Signatory ACCEPTANCE ---------- We, HARRIMAN LEASING LIMITED, as Leasing Agent for the Landlord HEREBY accept the foregoing offer. Dated Signed by Doreen Y. F. Lee for and on behalf of For and on behalf of HARRIMAN LEASING LIMITED Harriman LEASING LIMITED as Leasing Agent for the Landlord in the presence of: /s/ [illegible] ----------- Director & General Manager /s/ Yvonne Y. F. Lau Yvonne Y. F. Lau THE SUPPLEMENTARY INFORMATION SCHEDULE -------------------------------------- (Please PRINT the following information): 1. Full name of the person (or persons) (a partnership) or company to be shown as Tenant in the Lease/Tenancy Agreement: International SMC (HK) Ltd. 2. Address, which in the case of a company should be the REGISTERED OFFICE ADDRESS: Unit 6, L1, Mirror Tower, 61 Mody Road, TST East, Kowloon 3. Name and Address of Solicitors: T. S. Tong & Co., Wing Lung Building, 9th Floor, 45 Des Voeux Road, Central, Hong Kong (Mr. Iu Ting Kwok) 4. Bankers' Name and Address: HSBC, Rm 1006-1012, Cheung Sha Wan Plaza, Tower 2, 833 Cheung Sha Wan Road, Kowloon (Mr. Eric W. P. Lee) 5. Business Registration No. 18350489-000-07-01-8 6. Approximate date of establishment in Hong Kong: 26-Jul-1994 7. General nature of business/profession: Trading 8. If Company, authorized capital: $10,000 paid-up capital: $100 9. Where a subsidiary company, name and address of parent company: 100% owned subsidiary of The Singing Machine Co., Inc., 5501 Lyons Road, Bldg A-7, Coconut Creek, FL 33073, U.S.A. (A public listed company in the American Stock Exchange.) 10. Where a partnership, number and name of partners: NIL 11. Name of previous/current landlord. Koon Wah Mirror Holdings Ltd. 12. Other relevant background information in support of this Offer: 13. Contact Person and Telephone No.: Miss Dora Lee at 3107-7997 or Miss Michelle Ho at 3107-7992 (Operations Manager) (Finance Manager) THE PREMISES SCHEDULE --------------------- 1. The Landlord means the registered owner of the said Lot, Wharf {ILLEGIBLE} Limited, (including where the context so admits its successors and assigns) acting by its duly authorized agent, Harriman Leasing Limited. 2. Premises: Suites 1210, 12th Floor, Ocean Centre, Harbour City Kowloon (as shown on the floor plan attached hereto and thereon colored pink). 3. Approximate Area: 3,535 sq. ft. gross (subject to final measurement to be conducted by the Landlord) 4. Use of Premises: Restricted to Commercial Offices Use Only. For this avoidance of doubt it is hereby declared and confirmed that no private sales, sample sales, clearance sales or any similar sales or any activities related thereto including but without limiting to distribution of circulars or erection or posting up or may revises or any [ILLEGIBLE] of any kind may be allowed in any circumstances. 5. Term of Lease/Tenancy: Three (3) Years from the Commencement Date 6. Commencement Date: 1st May, 2002 or such other date as specified by the Landlord by notice in writing which date shall be within 3 days of completion of the Building Finishes as referred to in Clause 2.1 of this Offer, whichever date is the later. 7. Rent and Other Charges: (a)(1) Rent: The rent shall be: (i) From The 1st month to The 36th month HK$ 17.00 per sq ft gross per month; and all payable monthly in advance. (a)(2) Market Rental: The Market Rental referred to in paragraph 7(a)(1) above shall be determined for the appropriate period or periods in question in accordance with the provisions of Section XI of the Lease/Tenancy Agreement. (b) Air-Conditioning Charges: HK$ 2.70 per sq ft gross per month payable monthly in advance, subject to increase either before or after the Commencement Date. The air-conditioning charge will commence to be payable on and from the date the Landlord's Managing Agent at our request commences the supply or air-conditioning service, but no in any case later than the expiry of the Rent-Free Period. (c) Service Charge: HK$ 1.90 per sq ft gross per month payable monthly in advance, subject to increase either before or after the Commencement Date. The service charge will commence to be payable on and from the Commencement Date. (d) Government Ratios: Estimated at HK$ 3,005.00 per month. (e) Utility Charges: We shall be responsible for all charges for the supply of gas, water, telephone and electricity including electricity consumed by the air-conditioning unit(s), apparatus and equipment serving the Premises and all deposits to the utility companies. 8. Rent-Free Period: Rent will commence to be payable 87 days after the Commencement date. The service charge, air-conditioning charge, utility charges and government rates shall be payable by us during such period. 9. Deposit: HK$ 238.083.00 representing 3 months' rent (at the highest rate specified in paragraph 7(a) above), government rates, air-conditioning charge and service charge. 10. Decoration Deposit: HK$ 5,000.00 payable prior to the commencement of the fitout work upon demand to ensure due compliance of instructions and directions by our contractors in accordance with Clause 5.2 of this Offer. This deposit is refundable by the Managing Agent to us upon completion of our [ILLEGIBLE] work after deducting any cost of loss or damage incurred including cost of remedy insofar as it is practically possible so to do. 11. Submission of Plans: Immediate after the Landlord's acceptance of this Offer. 12. Facilitation Fee: HK$ 2.00 per sq ft gross representing the costs incurred by the Landlord in providing services including consumption of temporary electricity to the Premises and removal of construction debris from a central collection point during the period of fitting out payable upon signing of this Offer. 5. TENANT'S WORK -------------- 5.1 All approved work (other than that to be carried out by the Landlord's nominated contractors as referred to in Clause 4.1 of this Offer) may be carried out by our own contractor (who shall in any event be required to be approved by the Landlord) and we shall be responsible for enduring that these contractors co-operate fully with the Landlord, its servants, agents, workman and contractors and is carrying out their work in such a manner as to avoid any delay to or interference with the Landlord or third parties. 5.2 We shall ensure that such contractors comply with all instructions and directions (including hours of work) given by the Landlord's representative and/or its Managing Agent and/or the building manager and that our contractors shall remove daily all trash, rubbish and surplus building materials resulting from the work. 5.3 We shall be responsible for effecting adequate public liability and consumers' all risks insurance and furnishing to the Landlord's representative before the commencement of any work in or to the Premises such evidence as the Landlord may require that the insurance is in place. 6. LEGAL TENANCY AGREEMENT PREPARATION ----------------------------------- 6.1 The Offer is accepted, we agree to execute a lease/tenancy agreement (the "Lease/Tenancy Agreement") in duplicate in the standard [ILLEGIBLE] and in the attached Schedule(s). 6.2 We also undertake to pay one half of the stamp duty and registration fee (if any) on this Offer and on the Lease/Tenancy Agreement and its counterpart and to return both copies of the agreement duly executed within 14 days of presentation [ILLEGIBLE] in any event before the Commencement Date specified in paragraph 6 of the Premises Schedule. 7. SIGNS ----- 7.1 We understand that the Landlord will provide at our cost one sign (according to the Landlord's standard design and specifications) to be fixed at some appropriate point(s) in the building for the display of our name and such other particulars as the Landlord may at its discretion approve. 7.2 We acknowledge and agree that the installation work in respect or such aforesaid sign shall be carried out by the Landlord's nominated contractor at our cost. 8. CHANGE OF NUMBERING OR NAME OF DEVELOPMENT ------------------------------------------ 8.1 We acknowledge that the Landlord reserves the right at any time and from time to time to change the numbering of the Premises (or any part thereof) or the name of the Building/Development (or any part thereof) that the Premises form part as it shall in its absolute discretion [ILLEGIBLE] upon giving to us no less than 3 months' prior notice in writing and the Landlord shall not be liable to us for any loss, damage, claims, costs or expenses resulting therefrom or in connection therewith. 9. DEPOSIT ------- 9.1 We enclose a cheque in your favour as agent of the Landlord in the sum specified in paragraph 9 of the Premises Schedule as a deposit. 9.2 We acknowledge that in case there shall have been any increase in the air-conditioning charge and/or service charge imposed by the Landlord prior to the Commencement Date, the deposit will be increased accordingly and we undertake to pay such increase forthwith upon demand. We further acknowledge that we shall not be entitled to [ILLEGIBLE] of the Premises until we have paid the whole of the deposit including any increase pursuant to this Clause but that the [ILLEGIBLE].. 9.3 We acknowledge that if after this Offer has been accepted we [ILLEGIBLE] agreement in accordance with Clause 6 of this Offer or fail to comply with any of the terms and conditions herein [ILLEGIBLE] Landlord shall be entitled to its absolute discretion to forfeit the deposit and determine the agreement constituted by your acceptance of this Offer (the "Agreement") by giving notice to us. Nothing herein contained however shall prevent the Landlord from exercising its right to enforce specific performance of the Agreement or claiming against us for damages for breach of the Agreement. 9.4 We understand that you are at liberty to cash this cheque immediately pending the Landlord's consideration of this Offer and such action on your part shall not be deemed to be an acceptance thereof. Should this Offer not be accepted, the deposit will be returned to us (without interest or other compensation). 9.5 We understand upon execution of the [ILLEGIBLE] Agreement the deposit will be set against the deposit payable under Section IX of the Lease/Tenancy Agreement. 10. LANDLORD'S APPROVAL ------------------- 10.1 We acknowledge that whatever the consent or approval of the Landlord's required, the same may be given or withheld or given subject to conditions, at the Landlord in its sole discretion may determine. 11. LANDLORD'S AGENTS ----------------- 11.1 We acknowledge that Harriman Leasing Limited acts as Leasing Agent of the Landlord, and has authority to accept/reject this Offer on behalf of the Landlord and that Harbour City Management Limited acts as Managing Agent of the Landlord and has authority to represent and bind the Landlord in all [ILLEGIBLE] in connection with this Offer and if this Offer herein is accepted, in all matters missing from or in connection with the [ILLEGIBLE]. 12. PRIVACY ORDINANCE NOTICE AND CONSENT ------------------------------------ 12.1 The Landlord shall be entitled to supply to any company within the Landlord's group of companies and also to any company which is the ultimate holding company or the Landlord as the Landlord may determine such information or personal data is respect of us for marketing purposes, including the exchange of non-financial information with selected business partners without our further consent being obtained. "Group of companies" and "holding company" shall have the meanings attributed thereto in the companies Ordinance Cap 22 of the Laws of Hong Kong Special Administrative Region. 13. BANK REFERENCE -------------- 13.1 We enclose a Bank's Reference in support of this Offer. 14. SUPPLEMENTARY INFORMATION ------------------------- 14.1 We have completed the Supplementary Information Schedule as requested by the Landlord. 15. ADDITIONAL CONDITIONS --------------------- 15.1 We acknowledge that the terms, conditions and provisions set out in the Additional Conditions Schedule attached to this Offer (if any) shall apply and be incorporated in this Offer. 16. IRREVOCABLE OFFER ----------------- 16.1 This Offer shall be irrevocable. 17. ACCEPTANCE ---------- 17.1 To indicate the Landlord's acceptance of this Offer, please sign the Acceptance endorsed at the foot of this Offer. To: HARRIMAN LEASING LIMITED Suite 1611, 16th Floor Ocean Centre Harbour City Kowloon From: International SMC (HK) Limited L1 Unit 6 Mirror Tower 61 Mody Road Kowloon Dear Sirs, LETTER OF OFFER FOR OFFICE PREMISES ----------------------------------- 1. OFFER ----- 1.1 We offer to lease the premises identified in the attached Premises Schedule (the "Premises") from your principal, the registered owner of the Premises (the "Landlord"), on the terms and conditions and subject to payment of the rent and other charges fees and amounts as set out in this letter or offer (this "Offer") and in the Schedule(s). 2. BUILDING FINISHES ----------------- 2.1 We understand that the Landlord's obligations are limited to making the premises available to us with the following: (1) Concrete floor with cement said screeding; (2) Standard and emulsion paint painted walls and columns; (3) Suspended ceiling with acoustic tiles and standard light fittings without wiring in a standard layout; (4) Standard entrance door; (5) Automatic smoke detectors and sprinkler system in a standard layout; (6) Air-conditioning system; and (7) Electricity supply terminated at a plug-in unit or barber chamber, as the ease may be, in the meter room. 2.2 We shall undertake and be responsible at our cost for: (1) all air-conditioning duct work, floor finish, clerical work (including [ILLEGIBLE] of light and power circuits) light-fittings, transfer of air duct to our suspended ceilings, and security, fire services (including sprinklers, infra-red detectors and/or smoke detectors) and air-conditioning unit (on/or control system serving the Premises: (2) Any other installation, adjustment, modification and alteration of the provisions and fixtures and fittings in the Premises, if approved by the Landlord. 2.3 Any other items including any additional fixtures or fittings and interior decoration which we may require will likewise be for our account. 3. APPROVAL OF INTERNAL LAYOUT --------------------------- 3.1 Within the period specified in paragraph 11 of the Premises Schedule, we shall submit to the Landlord for approval layout plans in respect to the Premises together with detailed design drawings and specifications for the design and construction of all proposed interior work installations and listings. 3.2 We acknowledge and agree that: (1) under no circumstances may work be commenced until the full approval of the Landlord in writing has been obtained: (2) no delays, whether in submitting or resubmitting our proposals and plans or in the Landlord approving the same or otherwise will entitle us to any [ILLEGIBLE] of the rent-free period granted hereunder or to any claim for compensation or otherwise: (3) the term of [ILLEGIBLE] may commence even though any of the plans, drawings and specifications have not been fully approved or any [ILLEGIBLE] work has not been commenced. 3.3 We agree to pay upon submission of our initial internal layout plans a Floor Handling Fee to the Landlord or its managing agent at the rate of HK$3.50 per sq. ft. based on the area of the Premises as specified in paragraph 3 of the Premises Schedule for: (1) voting our initial internal layout plans; and (2) where such plans include or necessitate work which is required hereunder to be carried out by the Landlord's nominated contractors, handling and co-ordinating the carrying on of such work. 4. ALTERATION WORK BY NOMINATED CONTRACTORS ---------------------------------------- 4.1 We acknowledge that to enable the electrical, air-conditioning, plumbing, drainage, sprinkler, security, building automation and the direction alarm systems in the building to be effectively co- ordinated and controlled all work required by us within the Premises affecting these services and facilities shall be designed and supervised by a professional electrical and Mechanical consultant employed by us, and carried out at our cost by the Landlord's nominated contractors for which purpose we undertake to engage the appropriate contractor nominated by the Landlord for the category of work in question and to pay the nominated contractors' charges for the work as follows: (1) 50% of the [ILLEGIBLE] sum for each category of work and the Landlord's charges at the same time as returning the signed statement of cost(s) (2) progress payment(s) (if any) as stipulated by the Landlord in the estimate upon presentation of invoices; and (3) the final account for each category of work and the balance of the Landlord's charges (if any) upon presentation of the relevant invoices. 4.2 We acknowledge that since the appropriate nominated contractors shall be engaged by us, the Landlord shall notwithstanding the nomination not have any liability to us for or in respect of any set deed matter or thing arising out of or in connection with the engagement of any such contractor or contractors or any work done or omitted to be done by them or any of them pursuant to such engagement. 4.3 We further agree that in respect of any subsequent [ILLEGIBLE] work in or to the Premises, a handling fee shall be payable to the Landlord in accordance with Section III Clause 7 of the [ILLEGIBLE] Agreement sent with this Offer. EX-10.7 6 amb-lease.txt AMB INDUSTRIAL LEASE Exhibit 10.7 AMB PROPERTY, L.P. INDUSTRIAL LEASE by and between AMB PROPERTY, L.P. "LANDLORD" and THE SINGING MACHINE COMPANY, INC. "TENANT" Dated: March 1, 2002 TABLE OF CONTENTS Page 1. BASIC PROVISIONS 1 1.1 PARTIES I 1.2 PREMISES I 1.3 TERM 1 1.4 BASE RENT 1 1.5 TENANT's SHARE or OPERATING EXPENSES 1 1.6 TENANT'S ESTIMATED MONTHLY RENT PAYMENT 1 1.7 SECURITY DEPOSIT 1 1.8 PERMITTED USE 1 1.9 GUARANTOR I 1.10 ADDENDA 1.11 EXHIBITS 2 1.12 ADDRESS FOR RENT PAYMENTS 2 2. PREMISES AND COMMON AREAS 3 2.1 LETTING 3 2.2 COMMON AREAS - DEFINITION 2.3 COMMON AREAS - TENANT'S RIGHTS 3 2.4 COMMON AREAS - RULES AND REGUALTIONS 3 2.5 COMMON AREA CHANGES 3 3. TERM 3 3.1 TERM 3 3.2 DELAY IN POSSESSION 3.3 COMMENCEMENT DATE CERTIFICATE 4 4. RENT 4 4.1 BASE RENT 4 4.2 OPERATING EXPENSES 4 5. SECURITY DEPOSIT 5 6. USE 5 6.1 PERMITTED USE 6.2 HAZARDOUS SUBSTANCES 5 6.3 TENANT'S COMPLIANCE WITH REQUIREMENTS 6 6.4 INSPECTION; COMPLIANCE WITH LAW 6 7. MAINTENANCE, RE, PAW, TRADE FIXTURES AND ALTERATIONS 7 7.1 TENANT'S OBLIGATIONS 7 7.2 LANDLORD'S OBLIGATIONS 7.3 ALTERATIONS 7 7.4 SURRENDER/RESTORATION 8. INSURANCE; INDEMNITY 7 8.1 PAYMENT of PREMIUMS 7 8.2 TENANTS INSURANCE 7 8 33 LANDLORD'S INSURANCE 8.4 WAIVER of SUBROGATION 8 8.5 INDEMNITY 8 8.6 EXEMPTION OF LANDLORD FROM LIABILITY 9. DAMAGE OR DESTRUCTION . 9.1 TERMINATION RIGHT 9 9.2 DAMAGE CAUSED BY TENANT 9 10.REAL PROPERTY TAXES 9 10.1 PAYMENT OF REAL PROPERTY TAXES 9 10.2 REAL PROPERTY TAX DEFINITION 9 10.3 ADDITIONAL IMPROVEMENTS 10 10.4 JOINT ASSESSMENT 10 10.5 TENANT'S PROPERTY TAXES 10 11. UTILITIES 10 12. ASSIGNMENT AND SUBLETTING 10 12.1 LANDLORD'S CONSENT REQUIRED 10 12.2 RENT ADJUSTMENT 10 13. DEFAULT; REMEDIES 10 13.1 DEFAULT 10 13.2 REMEDIES 11 13.3 LATE CHARGES 12 14. CONDEMNATION 13 15. ESTOPPEL CERTIFICATE AND FINANCIAL STATEMENTS 13 15.1 ESTOPPEL CERTIFICATE 13 15.2 FINANCIAL STATEMENT 13 16. ADDITIONAL COVENANTS AND PROVISIONS 13 16.1 SEVERABILTY 13 16.2 INTEREST ON PAST-DUE OBLIGATION'S 13 16.3 TIME OF ESSENCE 13 16.4 LANDLORD LIABILITY 14 16.5 NO PRIOR OR OTHER AGREEMENTS 14 16.6 NOTICE REQUIREMENTS 14 16.7 DATE of NOTICE 14 16:8 WAIVERS 14 16.9 HOLDOVER 14 16.10 CUMULATIVE REMEDIES 14 16.11 BINDING EFFECT: CHOICE OF LAW 14 16.12 LANDLORD 14 16.13 ATTORNEYS' FEES AND OTHER COSTS 15 16.14 LANDLORD'S ACCESS; SHOWING PREMISES; REPAIRS 15 16.15 SIGNS 15 16.16 TERMINATION; MERGER 15 16.17 QUIET POSSESSION 15 16.18 SUBORDINATION; ATTORNMENT; NON-DISTURBANCE 15 16.19 RULES AND REGULATIONS 16 16.20 SECURITY MEASURES 16 16.21 RESERVATIONS 16 16.22 CONFLICT 16 16.23 OFFER 16 16.24 AMENDMENTS 16 16.25 MULTIPLE PARTIES 16 16.26 AUTHORITY 16 AMB PROPERTY CORPORATION INDUSTRIAL LEASE 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Lease ("Lease") dated Februag 6, 2002, is made by and between AM-13 Property, L.P., a Delaware limited partnership, ("Landlord") and The Singing Machine Company, Inc., a -Delaware corporation ("Tenant") (collectively, the "Parties" or individually, a "Party"). 1.2 Premises The premises ("Premises"), which are the subject of this Lease, are located at 303 West Artesia Blvd., Compton, CA 90220 in the industrial center commonly known as the Artesia Industrial Center (the "Industrial Center"). The Premises are: [XX] Approximately 79,000 square feet of space as depicted on Exhibit A. This space is a part of the building ("Building") which is also identified on Exhibit A. or [ ] A11 of the building ("Building") identified on Exhibit A, consisting of approximately square feet. If the Premises are all of the Building, there shall, for purposes of this Lease, be no distinction between the words "Premises" or "Building." Tenant shall have nonexclusive rights to the Common Areas (as defined in Paragraph 2.2 below) but shall not have any rights to the roof, exterior walls, or utility raceways of the .Building or to any other buildings in the Industrial Center. The Industrial Center-consists of the Premises, the Building, the Common Areas, the land upon which they are located, and all other buildings and improvements within the boundaries of the Industrial Center. 1.3 Term: Five 5 years and ten (IQ) months ("Term") commencing upon completion of tenant improvements as set forth in the Tenant Improvement Addendum ("Commencement Date") and ending at the end of the seventieth (70`x) month after the Commencement Date ("Expiration Date"). 1.4 Base Rent: $33,970.00 per month ("Base Rent"). $33,970.00 is payable on execution of this Lease for the period which is the fourth month of the Term. Tenant shall not be required to pay Base Rent for months 1 through 3 of the Term. 1.5 Tenant's Share of Operating Expenses ("Tenant's Share"): (a) Common Area Operating Expenses 33.1% (b), Building Operating Expenses 33.1% 1.6 Tenant's Estimated Monthly Rent Payment: Following is the estimated monthly Rent payment to Landlord pursuant to the provisions of this Lease. This estimate is made at the inception of the Lease and is subject to adjustment pursuant to the provisions of this Lease: (a) Base Rent (Paragraph 4.1) $33,970.00 (b) Operating Expenses (Paragraph 4.2, excluding Real Property Taxes, Landlord Insurance, and HVAC) $ 1,574.00 (c) Landlord Insurance (Paragraph 8.3) $ 687.50 (d) Real Property Taxes (Paragraph 10) $ 4,206.92 (e) HVAC $ 75.00 Estimated Monthly Payment $40.513.42 1.7 Security Deposit $33,970.00 ("Security Deposit"). 1.8 Permitted Use ("Permitted Use"): manufacture, repair and distribution karaoke equipment, audio software and electronic audio equipment and accessories related thereto and for no other purpose. 1.9 Guarantor: None 1.10 Addenda: Attached hereto are, the following Addenda, all of which constitute a part of this Lease (a) Addenda: Tenant Improvement Addendum (b) Addenda: Rent Adjustment Addendum (c) Addenda: Early Inducement and Recapture Addendum -1- (d) Addenda: Existing Tenant Contingency Addendum 1.11 Exhibits: Attached hereto are the following Exhibits, all of which constitute a part of this Lease: Exhibit A: Description of Premises. Exhibit B: Commencement Date Certificate. Exhibit C: Hazardous Substances Questionnaire Exhibit D: Move-Out Standards 1.12 Address for Rent Payments: All amounts payable by Tenant to Landlord shall, until further notice from Landlord, be paid to AMB Property Corporation at the following address: AMB Property, L.P. ----------------------------- P.O. Box 84254 ----------------------------- Dallas, TX 75284-2524 ----------------------------- -2- 2. Premises and Common Areas. 2.1 Letting. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises upon all of the terms, covenants, and conditions, set forth in this Lease. Any statement of square footage set forth in thus Lease or that may have been used in calculating Base Rent and/or Operating Expenses is an approximation which Landlord and Tenant agree is reasonable, and the Base Rent and Tenant's Share based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Common Areas - Definition. "Common Areas" are all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Landlord from time to time for the general nonexclusive use of Landlord, Tenant, and other tenants of the Industrial Center and their respective employees, suppliers, slippers, tenants, contractors, and invitees. 2.3 Common Areas - Tenant's Rights. Landlord hereby grants to Tenant, for the benefit of Tenant and its employees, suppliers, slippers, contractors, customers, and invitees, during the term of this Lease, the nonexclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Landlord under the terms hereof or under the terns of any rules and regulations or covenants, conditions, and restrictions governing the use of the Industrial Center. 2.4 Common Areas - Rules and Regulations. Landlord shall have the exclusive control arid management of the Common Areas and shall have the right, from time to time, to establish-, modify, amend, and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 16.19. 2.5 Common Area Changes. Landlord shall have the right, in Landlord's sole discretion; from time to time; (a) To make changes to the Common Areas, including, without limitation, changes in the locations, size, shape, and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways, and utility raceways, so long as Tenant's use and enjoyment of the Premises are not materially, adversely affected for a period of greater than 5 consecutive business days; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas, so long as such land can, in Landlord's sole reasonable judgment, be considered to serve and benefit the Building and the tenants thereof; (d) To add additional buildings and improvements to the Common Areas, provided that the capital costs of such construction (except as set forth in Section 4.2(a)(viii) of this Lease) are not charged back to Tenant, the availability of parking for the Premises is not materially, adversely affected for a period of greater than 5. consecutive business days and reasonable access to the Premises remains available; (e) To use the Common Areas while engaged in making additional improvements, repairs, or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to, or with respect to the Common Areas and Industrial Center as. Landlord may, in the exercise of sound business judgment, deem to be appropriate, so long as the capital costs of same shall not be charged back to Tenant, and Tenant's use and enjoyment of,the Premises are not materially, adversely affected for a period of greater than 5 consecutive business days. 3. Term. 3.1 Tenn. The Commencement~Date, Expiration Date, and Tern of this Lease are as specified in Paragraph 1.3. 3.2 Delay in Possession. If for any reason Landlord cannot deliver possession of the Premises to Tenant by the Commencement Date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the. validity of this Lease or the obligations of Tenant hereunder, In such case, Tenant shall not, except as otherwise provided herein, be obligated to pay Rent or perform any other obligation of Tenant under the terms of this Lease until Landlord delivers possession of the Premises to Tenant. The term of the Lease shall commence on the earlier of (a) the date Tenant takes possession of the Premises or (b) 10 days following notice to Tenant that Landlord is prepared totender possession of the Premeises to Tenant. If possession of the Premises is not delivered to Tenant within 60 days after the Commencement Date and such delay is not due to Tenant's acts, failure to act, or omissions, Tenant may by notice in writing to -3- Landlord within 20 days after the end of said 60-day period cancel this Lease and the parties shall be dischared from all obligations hereunder. If such written notice of Tenant is not received by Landlord within said 20-day period, Tenant's right to cancel this Lease shall terminate. 3.3 Commencement Date Certificate. At the request of of Landlord, Tenant shall execute and deliver to Landlord a completed certificate ("Commencement Date Certificate") in the form attached hereto as Exhibit B. 4. Rent. 4.1 Base Rent. Tenant shall pay to Landlord Base Rent and ~ other monetary obligations of Tenant to Landlord under the terms of this Lease (such other monetary obligations are herein referred to as "Additional Rent") in lawful money of the United States, without offset or deduction, in advance on or before the first day of each month. Base Rent and Additional Rent for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and Additional Rent shall be made to Landlord at its address stated herein or to such other persons or at such other addresses as Landlord may from time to time designate in writing to Tenant. Base Rent and Additional Rent are collectively referred to as "Rent." All monetary obligations of Tenant to Landlord under the terms of this Lease are deemed to be Rent. 4.2 Operating Expenses. Tenant shall pay to Landlord on the first day of each month during the term hereof, in addition to the Base Rent, Tenant's Share of all Operating Expenses in accordance with the following provisions: (a) "Operating Expenses" are all costs incurred by Landlord relating to the ownership and operation of the Industrial Center, Building, and Premises including, but not limited to, the following: (i) The operation, repair, maintenance, and replacement in neat, clean, good order, and condition of the Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, drainage systems, lighting facilities, fences and gates, exterior signs, and tenant directories. (ii) Water, gas, electricity, telephone, and other utilities servicing the Common Areas. (iii) Trash disposal, janitorial services, snow removal, property management (not to exceed 3% per year of gross revenues of the Industrial Center), and security services. (iv) Reasonable reserves set aside for maintenance, repair, and replacement of the Common Areas and Building, provided that Tenant shall not be required to make an initial "lump sum" contribution to any reserve fund. (v) Real Property Taxes. (vi) Premiums for the insurance policies maintained by Landlord under Paragraph 8 hereof, (vii) Environmental monitoring and insurance programs. (viii) Monthly amortization of capital improvements to the Common Areas and the Building. The monthly amortization of any given capital improvement shall be the sum of the (a) quotient obtained by dividing the cost of the capital improvement by Landlord's estimate of the number of months of useful life of such improvement as determined pursuant to the Internal Revenue Code plus (b) an amount equal. to the cost of the capital improvement times 1/12 of the lesser of 12% or the maximum annual interest rate permitted by law. (ix) Maintenance of the Building including, but not limited to, painting, caulking, and repair and replacement of Building components, including, but not limited to, roof, elevators, and fire detection and sprinkler systems. (x) Heating, ventilating, and air conditioning systems ("HVAC"). (xi) If Tenant fails to maintain the Premises, any expense incurred by Landlord for such maintenance, but not expenses incurred with respect to other tenants' premises, or, generally, expenses incurred by Landlord which do not reasonably benefit the Building or the tenants thereof. (b) Tenant's Share of Operating Expenses that are not specifically attributed to the Premises or Building ("Common Area Operating Expenses") shall be that percentage shown in Paragraph 1.5(a). Tenant's Share of Operating Expenses that are attributable to the Building ("Building Operating Expenses") shall be that percentage shown in Paragraph 1.5(b). Landlord -4- in its reasonable discretion shall determine which Operating Expenses are Common Area Operating Expenses, Building Operating Expenses, or expenses, or expenses to be entirely borne by Tenant. (c) The inclusion of the improvements, facilities, and services set forth in Subparagraph 4.2(a) shall not impose any obligation upon Landlord either to have said improvements or facilities or to provide those services, so long as Landlord has not levied a charge for same. (d) Tenant shall pay monthly in advance, on the same day that the Base Rent is due, Tenant's Share of estimated Operating Expenses and HVAC maintenance costs in the amount set forth in Paragraph 1.6. Landlord shall deliver to Tenant within 90 days after the expiration of each .calendar year a reasonably detailed statement showing Tenant's Share of the actual Operating Expenses incurred during the preceding year. If Tenant's estimated payments under thus Paragraph 4(d) during the preceding year exceed Tenant's Share as indicated on said statement, Tenant shall be credited the amount of such overpayment against Tenant's Share of Operating Expenses next becoming due. If Tenant's estimated payments under thus Paragraph 4.2(d) during said preceding year were less than Tenant's Share as indicated on said statement, Tenant shall pay to Landlord the amount of the deficiency within 10 days after delivery by Landlord to Tenant of said statement. No more than one time per year, Landlord may adjust the amount of the estimated 1 tenant's Share of Operating Expenses and HVAC maintenance costs to reflect Landlord's estimate of such expenses for the year. 5. Security Deposit. Tenant shall deposit with Landlord upon Tenant's execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Tenant's faithful performance of Tenant's obligations under this Lease. If Tenant fails to pay Base Rent or Additional Rent or otherwise defaults under this Lease (as defined in Paragraph 13.1), Landlord may use the Security Deposit for the payment of any amount due Landlord or to reimburse or compensate Landlord for any liability, cost, expense, loss, or damage (including attorneys' fees) which Landlord may suffer or incur by reason thereof. Tenant shall on demand pay Landlord the amount so used or applied so as to restore the Security Deposit to the amount set forth in Paragraph 1.7. Landlord shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Landlord shall, at the expiration or earlier termination of the term hereof and within 30 days after Tenant has vacated the Premises, return to Tenant that portion of the Security Deposit not used or applied by Landlord. No part of the Security Deposit shall be considered to be held in trust, to bear interest, or to be prepayment for any monies to be paid by Tenant under this Lease. 6. Use. 6.1 Permitted Use. Tenant shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8. Tenant shall not commit any nuisance, permit the emission of any objectionable noise or odor, suffer any waste, make any use of the Premises which is contrary to any law or ordinance, or which will invalidate or increase the premiums for any of Landlord's insurance. Tenant shall not service, maintain, or repair vehicles on the Premises, Building, or Common Areas. Tenant shall not store foods, pallets, drums; or any other materials outside the Premises. 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term, "Hazardous Substance," as used in this Lease, shall mean any product, substance, chemical, material, or waste whose presence, nature, quantity, and/or intensity of existence, use, manufacture, disposal, transportation, spill, release, or effect, 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 (iii) a basis for potential liability of Landlord to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil, or any products or by products thereof. Tenant shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Landlord and compliance in a timely manner (at Tenant's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3) "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 or 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 (iii) the presence in, on, or about the Premise of a Hazardous Substance with respect to which may any Applicable Requirements require -5- that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Tenant may, without Landlord's prior consent, but upon notice to Landlord and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Tenant in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage, or expose Landlord to any liability therefor. In addition, Landlord may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Tenant upon Tenant's ,giving Landlord such additional assurances as Landlord, in its reasonable discretion, deems necessary to protect itself, the public, the Premises, and the environment against damage, contamination, injury, and/or liability therefor, including but not limited to the installation (and, at Landlord's option, removal on or before Lease' expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit. Notwithstanding the foregoing, Landlord has no current and actual knowledge of any Reportable Use in or on the Premises. Further notwithstanding the foregoing, Tenant shall only be responsible under this Section for any Hazardous Substance or Reportable Use which has been caused by Tenant or its employees, contractors, affiliates or agents. (b) Duty to Inform Landlord. If Tenant knows, or has reasonable cause to believe, that a Hazardous Substance is located iii, under, or about the Premises or the Building, Tenant shall immediately give Landlord written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any governmental authority or private party concerning the presence, spill, release, discharge of, or exposure to such Hazardous Substance. Tenant shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). (c) Indemnification. Tenant shall indemnify, protect, defend, and hold Landlord, Landlord's affiliates, Lenders, and the officers, directors, shareholders, partners, employees, managers, independent contractors, attorneys, and agents of the foregoing ("Landlord Entities") and the Premises harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance on or brought onto the Premises by or for Tenant or by any of Tenant's employees, agents, contractors, servants, visitors, suppliers, or invitees (such employees, agents, contractors, servants, visitors, suppliers, and invitees as herein collectively referred to as "Tenant Entities"). Tenant's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to person, property, or the environment created or suffered by Tenant, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of 'any contamination therein involved. Tenant's obligations under this Paragraph 6.2(c) shall survive the Expiration Date or earlier tennination of this Lease. 6.3 Tenant's Compliance with Requirements. Tenant shall, at Tenant's sole cost and expense, fully, diligently, and in a timely manner comply with all "Applicable Requirements," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements,. and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Landlord's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (a) industrial hygiene, (b) environmental conditions on, in, under, or about the Premises, including soil and groundwater conditions, and (c) the use, generation, manufacture; . production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect- Tenant shall, within S days after receipt of Landlord's written request, provide Landlord with copies of all documents and information evidencing Tenant's compliance with any Applicable Requirements, and shall immediately upon receipt notify Landlord in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint, or report pertaining to or involving failure by Tenant or the Premises to comply with any Applicable Requirements. 6.4 Inspection Compliance with Law. In addition to Landlord's environmental monitoring and insurance program, the cost of which is included in Operating Expenses, Landlord and the holders of any mortgages, deeds of trust, or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, -6- and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Tenant with this Lease and all Applicable Requirements. Landlord shall be entitled to employ experts and/or consultants in connection therewith to advise Landlord with respect to Tenant's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The cost and expenses of any such inspections shall be paid by the party requesting same unless a violation of Applicable Requirements exists or is imminent, or the inspection is requested or ordered by a governmental authority and arises from Tenant's use or occupancy of the Premises, Tenant shall upon request reimburse Landlord or Landlord's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance, Repairs, Trade Fixtures and Alterations. 7.1 Tenant's Obligations. Subject to the provisions of Paragraph 7.2 (Landlord's Obligations), Paragraph 9 (Damage or Destruction), and Paragraph 1 4 (Condemnation), Tenant shall, at Tenant's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition, and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonable or readily accessible to Tena>>t and whether or not the need for such repairs occurs as a result of Tenant's use, the elements, or the age of such portion of the Premises including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, ventilating, electrical, lighting facilities, boilers, fired or .unfired pressure vessels, fire hose connectors if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights, but excluding any items which are the responsibility of Landlord pursuant to Paragraph 7.2 below. Tenant'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. 7.2 Landlord's Obligation s. Subject to the provisions of Paragraph 6 (Use), Paragraph 7.1 (Tenant's Obligations), Paragraph 9 (Damage or Destruction), and Paragraph 14 (Condemnation), Landlord, at its expense and not subject to the reimbursement requirements of Paragraph 4.2, shall keep in good order, condition, and repair the roof structure, foundations and exterior walls of the Building and utility systems within the Industrial Center, including, for greater certainly, all utility lines, pipes and conduits running under or within the Building and the Premises. Landlord, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition, and repair the air conditioning systems servicing the Premises, Building roof membrane, and Common Areas. 7.3 Alterations. Tenant shall not make nor cause to be made any alterations or installations in, on, under, or about the Premises, except for non-structural alterations which do not penetrate the roof membrane or structure that serve to better adapt the Premises for its ,purposes which 'do not exceed $50,000 per lease year in costs and of which Tenant gives Landlord at least 20 days' prior written notice. 7.4 Surrender/Restoration. Tenant shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating order, condition, and state of repair, ordinary wear and tear excepted. Without limiting the generality of the above, Tenant shall remove all personal property, trade fixtures, and floor bolts, patch all floors, axed cause all lights to be in good operating condition. Notwithstanding the foregoing, other than those improvements made pursuant to the Tenant Improvement Addendum to the Lease (which Tenant shall not be required to remove at the end of the Term or earlier termination), at the time that Tenant seeks consent From Landlord or gives notice to Landlord of any improvement to be made by Tenant, Landlord, as a condition to consent to such improvement (if consent is required) or within 10 days of receipt of written notice (if no consent is required), may require that Tenant remove such improvement(s) at Tenant's sole cost and expense at the end of the Term or earlier termination. 8. Insurance; Indemnity. 8.1 Payment of Premiums. The cost of the premiums for the insurance policies maintained by Landlord under this Paragraph 8 shall be a Corm-non Area Operating Expense reimbursable pursuant to Paragraph 4.2 hereof. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date and Expiration Date. -7- 8.2 Tenant's Insurance. (a) At its sole cost and expense, Tenant shall maintain in full force and effect during the Term of -the Lease the following insurance coverages insuring against claims which may arise from or in connection with the Tenant's operation,and use of the Premises. (i) Commercial General Liability insurance with minimum limits of $1,000,000 per occurrence and $3,000,000 general aggregate for bodily injury, personal injury, and property damage. If required by Landlord, liquor liability coverage will be included. Such insurance shall be endorsed to include Landlord and Landlord Entities as additional insureds, shall be primary and noncontributory with any Landlord insurance, and shall provide severability of interests between or among insureds. (ii) Workers' Compensation insurance with statutory limits and Employers Liability with a $1,000,000 per accident limit for bodily injury or disease. (iii) To the extent that Tenant owns or leases vehicles which are using or nonowned, and damage. (iv) Property insurance against "all risks" at least as broad as the current ISO Special Form policy, including earthquake and flood, for loss to any tenant improvements or betterments, floor and wall coverings, and business personal property on a full insurable replacement cost basis with no coinsurance clause, and Business Income insurance covering at least six months of loss of income and continuing expense. (b) Tenant shall deliver to Landlord certificates o-f all insurance reflecting evidence of required coverages prior to initial occupancy, and annually thereafter. (c) If, in the opinion of Landlord's insurance advisor, the amount or scope of such coverage is deemed inadequate at any time during the Term, Tenant shall increase such coverage to such reasonable amounts or scope as Landlord's advisor deems adequate and is comparable to coverages carried by a majority of similar size and use tenants in Compton, CA. (d) All insurance required under Paragraph 8.2 (i) shall be issued by insurers licensed to do business in the state in which the Premises are located and which are rated A:VI1 or better by Best's Key Rating Guide and (ii) shall be endorsed to provide at least 30-days prior notification of cancellation or material change in coverage to said additional insureds. 8.3 Landlord's Insurance. Landlord shall maintain "all risks" coverage as broad as the current ISO Special Form policy, including earthquake and flood, covering the buildings within the Industrial Center, Commercial General Liability insurance, and such other insurance in such amounts and covering such other liability or hazards as deemed appropriate by Landlord. The amount and scope of coverage of Landlord's insurance shall be determined by Landlord from time to time in its sole discretion and shall be subject to such deductible amounts as Landlord may elect. Landlord shall have the right to reduce or terminate any insurance or coverage to limits and amounts carried by a majority of owners of similar buildings in Compton, California. 8.4 Waiver of Subrogation. To the extent permitted by law and with permission of their insurance. carriers, Landlord and Tenant each waive any right to recover against the other on account of any and all claims Landlord or Tenant may have against the other with respect to property insurance actually carried, or required to be carried hereunder, to the extent of the proceeds realized from such insurance coverage. 8.5 Indemnity. Each party shall protect, defend, indemnify, and hold the other and their respective Entities harmless from and against any and all loss, claims, liability, or costs (including court costs and attorneys' fees) incurred by reason of: (a) any damage to any property (including but not limited to property of either party's Entities or death, bodily, or personal injury to any person occurring in or about the Premises, the Building, or the Industrial Center to the extent that such injury or damage shall be caused by or arise from any actual or alleged act, neglect, fault, or omission by or of that party or that party's agents, servants, employees, invitees; contractors, suppliers, subtenants, or visitors (collectively "Entities"); (b) the conduct or management of any work or anything whatsoever done by either party on or about the Premises or from transactions of either party concerning the Premises; (c) Either party's failure to comply with any and all governmental laws, ordinances, and regulations applicable to the condition or use of the Premises, Building or Industrial Center, or the operation or occupancy thereof; or (d) any breach or default on the part of either party in the performance of any covenant or agreement to be performed pursuant to this Lease. -8- The provisions of this Paragraph 8.5 shall, with respect to any claims or liability accruing prior to such termination, survive the Expiration Date or earlier termination of this Lease. 8.6 Exemption of Landlord from Liability. Except to the extent caused by the gross negligence or willful misconduct of Landlord, Landlord shall not be liable for and Tenant waives any claims against Landlord for injury or damage to the person or the property of Tenant, Tenant Entities, or any other person in or about the Premises, Building, or Industrial Center from any cause whatsoever, including, but not limited to, damage or injury which is caused by or results from (a) fire, steam, electricity, gas, water, or rain, or from the breakage, leakage, seepage, back up of sewers or drains, obstruction, or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning, or lighting fixtures or (b) from the condition of the Premises, other portions of the Building, or Industrial Center, Landlord shall not be liable for any damages arising From any act or neglect of any other tenant of Landlord nor from the failure by Landlord to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Landlord's negligence or breach of this Lease, Landlord shall under no circumstances be liable for injury to Tenant's business, for any loss of income or profit therefrom, or any indirect, consequential, or punitive damages. 9. Damage or Destruction. 9.1 Termination Right. Tenant shall give Landlord immediate written notice of any damage to the Premises. Subject to the provisions of Paragraph 9.2, if the Premises or the Building shall be damaged to such an extent that there is substantial interference for a period exceeding 90 consecutive days with the conduct by Tenant of its business at the Premises, or it is determined that such damage cannot be repaired within 180 days of its occurrence, Tenant, at any time prior to commencement of repair of the Premises and following 10 days written notice to Landlord, may terminate this Lease effective 30 days after delivery of such notice to Landlord. Such termination shall not excuse the performance by Tenant of those covenants which under the terms hereof survive termination. Rent shall be abated in proportion to the degree of interference during the period that there is such substantial interference with the conduct of Tenant's business at the Abatement of rent and Tenant's right of termination pursuant to this provision shall be Tenant's sole remedy for failure of Landlord to keep in good order, condition, and repair the foundations and exterior walls of the Building, Building roof, utility systems outside the Building, the Common Areas, and RVAC. 9.2 Damage Caused by Tenant. Tenant's termination rights under Paragraph 9.1 shall not apply if the damage to the Premises or Building is the'result of any actor omission of Tenant or of any of Tenant's agents, employees, customers, invitees, or contractors ("Tenant Acts"). Any damage resulting from a Tenant Act shall be promptly repaired by Tenant. Landlord at its option may at Tenant's expense repair any damage caused by Tenant Acts. Tenant shall continue to pay all rent and other sums due hereunder and shall be liable to Landlord for all damages that Landlord may sustain resulting from a Tenant Act. 10. Real Property Taxes: 10.1 Payment of Real Property Taxes. Landlord shall pay the Real Property Taxes due and payable during the term of thus Lease and, except as otherwise provided in Paragraph 10.3, such payments shall be a Common Area Operating Expense reimbursable pursuant to Paragraph 4.2. 10.2 Real Property Tax Definition. As used herein, the term "Real Property Taxes" is any form of tax or assessment, general, special, ordinary, or extraordinary, imposed or levied upon (a) the Industrial Center or Building, (b) any interest of Landlord in the Industrial Centcr or Building, (c) Landlord's right to rent or other income from the Industrial Center or Building, and/or (d) Landlord's business of leasing the Premises. Real Property Taxes include (a) any license fee, commercial rental tax, excise tax, improvement bond or bonds, levy, or tax; (b) any lax or charge'which replaces or is in addition to any of such above-described "Real Properly Taxes," and (c) any fees, expenses, or costs (including attorneys' fees, expert fees, and the like) incurred by Landlord in protesting or contesting any assessments levied or any tax rate. Real Properly Taxes for tax years commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date and Expiration Date. Real Property Taxes shall not include any tax levied against Landlord in respect of income earned by Landlord under this Lease, except to the extent that such tax is in lieu of Real Property Taxes. 10.3 Additional Improvements. Operating Expenses shall not include Real Property Taxes attributable to improvements placed upon the Industrial Center by other tenants or by -9- Landlord for the exclusive enjoyment of such other tenants. Tenant shall, however, pay to Landlord at the time Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed by reason of improvements placed upon the Premises by Tenant or at Tenant's request, provided that Tenant shall not be required to contribute to an increase in Real Property Taxes that results from the actions of any other tenant of the Industrial Center. 10.4 Joint Assessment. If the Building is not separately assessed, Real Property Taxes allocated to the Building shall be an equitable proportion of. the Real Property Taxes for all of the land and improvements included within the parcel assessed. 10.5 Tenant's Property Taxes. Tenant shall pay prior to delinquency all taxes assessed against and levied upon Tenant's improvements, fixtures, furnishings, equipment, and all personal property of Tenant contained in the Premises or stored within the Industrial Center. 11. Utilities. Tenant shall pay. directly for all utilities and services supplied to the premises, including but not limited to electricity, telephone, security, gas, and cleaning of the Premises, together with any taxes thereon. 12. Assignment and Subletting 12.1 Landlord's Consent Required. Tenant shall not assign, transfer, mortgage, or otherwise transfer or encumber (collectively, "assign") or sublet all or any part of. Tenant's interest in this Lease or in the Premises without Landlord's prior written consent, which consent shall not be unreasonably withheld. Relevant criteria in determining reasonability of consent include, but are not limited to, credit history of a proposed assignee or sublessee, references from prior landlords, any change or intensification of use-of the Premises or the Common Areas, and any limitations imposed by the. Internal Revenue Code and the Regulations promulgated thereunder relating to Real Estate Investment Trusts. Assignment or sublet shall not release Tenant from its obligations hereunder. Tenant shall not (i) sublet, assign, or enter into other arrangements in which the amounts to be paid by the sublessee or assignee thereunder would be based, in whole or in part, on the income or profits derived by the business activities of the sublessee or assignee; (ii) sublet the Premises or assign this Lease to any person or entity in which Landlord owns an interest, directly or indirectly (by applying constructive ownership rules set forth in Section 856(d)(5) , of the Internal Revenue Code (the "Code"); or (iii) sublet the Premises or assign this Lease hi any other manner which could cause any portion o f the amounts received by Landlord pursuant to this Lease or any sublease to fail to qualify as "rents from real property" within the meaning of Section 856(d) of the Code, or which could cause any other income received by Landlord to fail to qualify as income described in Section 856(c)(2) of the Code. The requirements of this Section 12.1 shall apply to any further subleasing by any subtenant. Notwithstanding the foregoing, in the event of any assignment or subletting to which Landlord consents, Landlord shall receive fifty percent (50%), in the event of a sublease, of any rent received by Tenant above the rent then being paid by Tenant to Landlord less any commissions or marketing expense paid by Tenant for such sublease. In addition, Landlord shall receive fifty percent (50%), in the event of an assignment, of any profit derived by Tenant from such assignment less any commissions or marketing expense paid by Tenant for such assignment. In the event of. any assignment or subletting, Tenant (or the proposed assignee or subtenant) shall pay to Landlord or its authorized managing agent (as directed by Landlord) a fee of $750.00 to cover Landlord's costs of review, negotiation, preparation or execution of any documentation regarding such assignment or subletting. 12.2 Rent Adjustment It; as of the effective date of any permitted assignment or subletting, the then remaining term of thus Lease is less than 1 year, Landlord may, as a condition to its consent: (a) require that the amount of the Rent payable under this Lease be adjusted to what is then the market value for property similar to the Premises as then constituted, as determined by Landlord; or (b) terminate the Lease as of the. date of assignment or subletting, subject to the performance by Tenant of those covenants whih under the terms hereof survive termination. 13. Default; Remedies. 13.1 Default. The occurrence of any one of the following events shall constitute an event of default of the part of Tenant ("Default"): (a) The abandonment of the Premises by Tenant; (b) Failure to pay any installment of Base Rent, Additional Rent, or any other monies due and payable hereunder, said failure continuing for a period of 7 days after the same is due; -10- (c) A general assignment by Tenant or any guarantor for the benefit of. creditors; (d) The filing of a voluntary petition of bankruptcy by Tenant or any guarantor; the filing of a voluntary petition for an arrangement; the filing of a petition, voluntary or involuntary, for reorganization; or the filing of an involuntary petition by Tenant's creditors or guarantors Premises that is not dismissed within 60 days after such event; (e) Receivership, attachment, of other judicial seizure of the Premises,or all or substantially all of Tenant's assets on the Premises that is not dismissed within 60 days after such event; (f) Failure of Tenant to maintain insurance as required by Paragraph 8.2; (g) Any breach by Tenant of its covenants under Paragraph 6.2; (h) Failure in the performance of any of Tenant's covenants, agreements, or obligations hereunder (except those failures specified as events-of Default in other Paragraphs of this Paragraph 13.1 which shall be governed by such other Paragraphs), which failure continues for 10 days after written notice thereof from Landlord to Tenant; provided that, if Tenant has exercised reasonable diligence to cure such failure and such failure cannot be cured within such 10-day period despite reasonable diligence, Tenant shall not be in default under this subparagraph unless Tenant fails thereafter diligently and continuously to prosecute the cure to completion; (i) Any transfer of a substantial portion of the assets of Tenant, or any incurrence of a material obligation by Tenant, unless such transfer or obligation is undertaken or incurred in the ordinary course of Tenant's business, or in good faith for equivalent consideration, or with Landlord's consent; and (j) The default of any guarantors of Tenant's obligations hereunder under any guaranty of this Lease, or the attempted repudiation or revocation of any such guaranty. 13.2 Remedies. In the event, of any Default by Tenant, Landlord shall have any or all of the following remedies: (a) Termination. In the event of any Default by Tenant, then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant: (1) the worth at the time of award of any unpaid Rent and any other suns due and payable which have been earned at the time of such termination; plus (2) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable which would have been earned alter termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus (3) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable for the balance of the term of this Lease after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (4) any other amount necessary to compensate Landlord for all die detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course would be likely to result therefrom, including, without limitation, any costs or expenses incurred by Landlord (i) in retaking possession of the Premises; (ii) in maintaining, repairing, preserving, restoring, replacing, cleaning, the Premises or any portion thereof, including such acts for reletting to a new lessee or lessees; (iii) for leasing commissions; or (iv) for any other costs necessary or appropriate to relet the Premises; plus (5) such reasonable, attorneys' fees incurred by Landlord as a result of a Default, and costs in the event suit is filed by Landlord to enforce such remedy (to the extent awarded by any court or arbitrator); and plus (6) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. As used in subparagraphs (1) and (2) above, the "worth at the time of award" is computed by allowing interest at an annual rate equal to twelve percent (12%) per annum or the maximum rate permitted by law, whichever is less. As used in subparagraph (3) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Fransisco at the time of award, plus one percent (1%). Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other present or future law, in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any Default of Tenant hereunder. -11- (b) Continuation of Lease. hi the event of any Default by Tenant, then in addition to any other remedies available-to Landlord at law or in equity and under this Lease, Landlprd shall have the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's Default and abandonment and recover Rent as it becomes due, provided tenant has the right to sublet or assign, subject only to reasonable limitations). (c) Re-entry. In the event of any Default by Tenant, Landlord shall also have the right, with or without terminating this Lease, in compliance with applicable law, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. (d) Reletting. In the event of the abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided in Paragraph a, Landlord may from time to time, without terminating this Lease, relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises. In the event that Landlord shall elect to so relet, then rentals received by Landlord from such reletting shall be applied in the following order: (1) to reasonable attorneys' fees incurred by Landlord as a result of a Default and costs in the event suit is filed by Landlord to enforce such remedies (to the extent awarded by any court or arbitrator); (2) to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; (3) to the payment of any costs of such reletting; -(4)~to the payment of the costs of any alterations and repairs to the Premises; (5) to the payment of Rent due and unpaid hereunder; and (6) the residue, if any, shall be held by Landlord and applied in payment of future Rent and other sums payable by Tenant hereunder as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied to the payment of Rent hereunder, be less than the Rent payable during the month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and- repairs not covered by the rentals received from such reletting. (e) Termination. No re-entry or taking of possession. of the Premises by Landlord pursuant to this Addendurn shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any Default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such Default. (f) Cumulative Remedies. The remedies herein provided are not exclusive and Landlord shall have any and all other remedies provided herein or by law or in equity. (g) No Surrender. No act or conduct of Landlord, whether consisting of the acceptance of the keys to the Premises, or otherwise, shall be deemed to be or constitute an acceptance of the surrender of the Premises by Tenant prior to the expiration of the Term, and such acceptance by Landlord of surrender by Tenant shall only flow from and must be evidenced by a written acknowledgment of acceptance of surrender signed by Landlord. The surrender of this Lease by Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects in writing that such merger take place, but shall operate as an assignment to Landlord of any and all existing subleases, or Landlord may, at its option, elect in writing to treat such surrender as a merger , terminating Tenant's estate under this Lease, and thereupon Landlord may terminate any or all such subleases by notifying the sublessee of its election so to do within five (5) days after such surrender. (h) Notice Provisions Tenant agrees that any notice given by Landlord pursuant to Paragraph 13.1 of the Lease shall satisfy the requirements for notice wider California Code of Civil Procedure Section 1161, and Landlord shall not be required to give any additional notice in order to he entitled to commence an unlawful detainer proceeding. 13.3 Late Charges. Tenant hereby acknowledges that late payment by Tenant to Landlord of Rent and other sums due hereunder will cause Landlord 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. Accordingly, if Landlord's designee within 4 days after such, amount shall be due, then, without any requirement for notice to Tenant, Tenant shall pay to Landlord a late charge equal to 5% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's Default with respect to such -12- overdue amount, nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. Notwithstanding the foregoing, on the first two occasions during the Term in which Tenant would otherwise be subject to payment of a late charge, no late charge shall accrue until after Landlord has given Tenant five (5) days' written notice thereof and Tenant has failed to pay the amount due within that period. In addition, should Landlord be tunable to negotiate any payment made by Tenant on the first attempt by Landlord and without any notice to Tenant, Tenant shall pay to Landlord a fee of $50.00 per item which the parties hereby agree represents a fair and reasonable estimate of the costs Landlord will incur by reason of Landlord's inability to negotiate such item(s). 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of exercise of said power (all of which are herein called "condemnation"), thus Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the floor area of the Premises, or more than 25% of the portion of the Common Areas designated for Tenant's parking, is taken by condemnation, Tenant may, at Tenant's option, to be exercised in writing within 10 days after Landlord shall have given Tenant written notice of such taking or in the absence of such notice, within 10 days after the condemning authority shall have taken possession), terminate this Lease as of the date the condemning authority takes such possession, If Tenant 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 the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises- Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Landlord; provided, however, that Tenant shall be entitled to any compensation, separately awarded to Tenant, for Tenant's relocation expenses and/or loss of Tenant's trade fixtures. In the event that this Lease is not terminated by reason of such condemnation, Landlord shall to the extent of its net severance damages in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. Tenant shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. Estoppel Certificate and Financial Statements. 15.1 Estoppel Certificate. Each party (herein referred to as "Responding Party") shall within 10 days after written notice from the other Party (the "Requesting Party") execute, acknowledge, and deliver, without charge therefor to the Requesting Patty, and to the extent it can truthfully do so, ari estoppcl certificate in a form reasonably acceptable to Requesting Party, or any of Requesting Party's lenders or any prospective purchasers of the Premises or the Industrial Center as the case may be, plus such additional information, confirmation and statements as be reasonably requested by the Requesting Party. Should Responding Party fail to deliver an executed and acknowledged estoppel certificate to Requesting Party as prescribed herein, Responding Party hereby authorizes Requesting Party to act as its attorney-in-fact in executing such estoppel certificate. 15.2 Financial Statement. If Landlord desires to finance, refinance, or sell the Building, Industrial Center, or any part thereof, Tenant and all Guarantors shall deliver to any potential lender or purchaser designated by Landlord such financial statements of Tenant and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Tenant's financial statements for the past 3 years. All such financial statements shall be received by Landlord and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. Notwithstanding the foregoing, Tenant shall not be required to provide financial statements pursuant to this Section as long as Tenant's stock is publicly traded on the American or New York Stock Exchange or NASDAQ. 16. Additional Covenants and Provisions. 16.1 Severability. The invalidity of any provision of thus Lease, as determined by a court of competent jurisdiction, shall not affect the validity of any other provision hereof. 16.2 Interest on Past-Due Obligations. Any monetary payment due Landlord hereunder not received by Landlord within 10 days following the date following the date on which it was due shall bear interest from the date at 12% per annum, but not exceeding the maximum rate allowed by law in addition to the late charge provided for in Paragraph 13.3. 16.3 Time of Essence. Time is of the essence with respect to the performance of all obligations to be preformed or observed by the Parties under this Lease. -13- 16.4 Landlord Liability. Tenant, its successors, and assigns shall not assert nor seek to enforce any claim for breach of this Lease against any of Landlord's assets other than Landlord's interest in the Industrial Center. Tenant agrees to look solely to such interest for the satisfaction of any liability or claim against Landlord under thus Lease. In no event whatsoever shall, Landlord (which term shall include, without limitation, any general or limited partner, trustees, beneficiaries, officers, directors, or stockholders of Landlord) ever be personally liable for any such liability. 16.5 No Prior or Other Agreements. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and supersedes all prior or contemporaneous oral or written agreements or understandings. 16.6 Notice Requirements. All notices'required or permitted by this Lease shall be in writing and may be delivered in person (by hand, messenger, or courier service) or may be sent by regular, certified, or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission during normal business hours, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 16.6. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Tenant's taking possessing of the premises, the Premises shall constitute Tenant's address for the purpose of mailing or delivering notices to Tenant. A copy of all notices required or permitted to be given to Landlord hereunder shall be concurrently transmitted to such party or parties at such addresses as Landlord may from time to time hereafter designate by written notice to Tenant. 16.7 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, of if no delivery date is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given 48 hours after the, same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or an overnight courier that guarantees next day , delivery shall be deemed given 24 hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone or facsimile confirmation of receipt of the transmission thereof, provided a copy is also delivered via hand or overnight delivery or certified mail. If notice is received on a Saturday, Sunday, or legal holiday, it shall be deemed received on the next business day. 16.8 Waivers. No waiver by Landlord of a Default by Tenant .shall be deemed a waiver of any other term, covenant, or condition hereof, or of any subsequent Default by Tenant of the same or any other tern, covenant, or condition hereof In addition the acceptance by Landlord of any rent or other payment after it is due, whether or not a notice of default has been served or any action has been filed by Landlord, thereon, shall not be deemed a waiver of Landlord's rights to proceed on any notice of default or action which has been filed against Tenant based upon Tenant's breach of the Lease. 16.9 Holdover. Tenant has no right to retain possession of the Premises or any partthereof beyond the expiration or earlier termination of this Lease. If Tenant holds over with the consent of Landlord: (a) the Base Rent payable shall be increased to 150% of the Base Rent applicable during the month immediately preceding such expiration or earlier termination; (b) Tenant's right to possession shall terminate on 30 days notice from Landlord; and (c) all other terms and conditions of this Lease shall 'continue to apply. Nothing contained herein shall be construed as a consent by Landlord to any holding over by Tenant. Tenant shall indemnify, defend, and hold Landlord harmless -f-rom and against any and all claims, demands, actions, losses, damages, obligations, costs, and expenses, including, without limitation, attorneys' fees incurred or suffered by Landlord by reason of Tenant's failure to surrender the Premises on the expiration or earlier termination of this Lease in accordance with the provisions of this Lease. 16.10 Cumulative Remedies, No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies in law or in equity. 16.11 Binding affect: Choice of Law. Thus Lease shall 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 country in which the Premises are located. 16.12 Landlord. The covenant and obligations contained in this Lease on the part of the Landlord are binding on Landlord, its successors, and assigns only during their respective period or ownership of an interest in the Building. In the event of any transfer or transfers of such title -14- to the Building, and to the extent such transferee expressly agrees to assume the obligations of Landlord hereunder, Landlord (and, iii the case of any subsequent transfers or conveyances, the then grantor) shall be concurrently freed and relieved from and after the date of such transfer or conveyance, without any further instrument or agreement, of all liability with respect to the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed. Landlord shall use commercially reasonable efforts to have any such Transferee provide Tenant with an acknowledgment that it has received and is holding Tenant's Security Deposit. 16.13 Attorneys' Fees and Other Costs. If any party brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding shall be entitled to reasonable attorneys' fees. The tenn "Prevailing Party" shall include, without, limitation, a Party who substantially obtains or defeats the relief sought. Landlord shall be entitled to reasonable attorneys' fees, costs, and expenses incurred in the preparation and service, of notices of Default and consultations in conriection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting breach. Tenant shall reimburse Landlord on demand for all reasonable legal, engineering, and other professional services expenses incurred by Landlord in connection with all requests by Tenant or any lender of Tenant for consent, waiver or approval of any kind. 16.14 Landlord's Access; Showing Premises; Repairs, Landlord and Landlord's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times upon reasonable notice for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements, or additions to the Premises or to the'Building, as Landlord may reasonably deem necessary. Landlord may at any time place on or about the Premises or Building any ordinary "For Sale" signs, and Landlord may at any time during the last 180 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Landlord shall be without abatement of rent or liability to Tenant. 16.15 Signs. Tenant shall not place any signs at or upon the exterior of the Premises or the Building, except that Tenant may, with Landlord's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Tenant's own business so long as such signs are in a location designated by Landlord and comply with sign ordinances and the signage criteria established for the Industrial Center by Landlord. 16.16 Termination; Merger. Unless specifically stated otherwise in writing by Landlord, the voluntary or other surrender of thus Lease by Tenant, the mutual termination or cancellation hereof, or a termination hereof by Landlord for Default by Tenant, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Landlord shall, in the event of any such surrender, termination, or cancellation; have the option to continue any one or all of any existing subtenancies. Landlord's failure within 10 days following any such event to make a written election to the contrary by written notice to the holder of any 'such lesser interest shall constitute Landlord's election to leave such event constitute the termination of such interest. 16.17 Quiet Possession. Upon payment by Tenant of the Base Rent and Additional Rent for the Premises and the performance of all of the covenants, conditions,* and provisions on Tenant's part to be observed and performed tinder this Lease, Tenant shall have quiet possession of the Premises for the entire term hereof, subject to all of the provisions of this Lease. 16.18 Subordination; Attornment; Non-Disturbance. (a) Subordination. This Lease shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or mortgage (collectively, "Mortgage") now or hereafter placed by Landlord upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements, and extensions thereof Tenant agrees that any person holding any Mortgage shall have, no duty, liability, or obligation to perform' any of the obligations of Landlord under this Lease. In the event of Landlord's default with respect to any such obligation, Tenant will give any Lender, whose name and address have previously been furnished in writing to Tenant, notice of a default by Landlord. Tenant may not exercise any remedies for default by Landlord unless and until Landlord and the Lender shall have received written notice of such default and a reasonable time (not less than 30 days) shall thereafter have elapsed without the default having been cured. If any Lender shall elect to have this Lease superior to the lien of its Mortgage and shall give written notice thereof to Tenant, this Lease shall be deemed prior to -15- such Mortgage. The provisions of a Mortgage relating to the disposition of condemnation and insurance proceeds shall prevail over any contrary provisions contained in this Lease. (b) Attornment. Subject to the nondisturbance provisions of subparagraph (c) of this Paragraph 16.18, Tenant agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Mortgage. In the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior landlord or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Tenant might have against any prior Landlord, or (iii) be liable for security deposits (except to the extent such security deposits have been actually received) or be bound by prepayment of more than one month's rent. (c) Non-Disturbance. With respect to a Mortgage entered into by Landlord before or after the execution of this Lease, Tenant's subordination of this Lease shall be subject to receiving assurance (a "nondisturbance agreement") from the Mortgage holder that Tenant's possession and this Lease will not be disturbed so long as Tenant is not in default and attorns to the record owner of the Premises in form acceptable to such Mortgage holder. (d) Self- Executing. The agreements contained in this Paragraph 16.18 shall be effective without the execution of any further documents; provided, however, that upon written request from Landlord or a Lender in connection With a sale, financing, or refinancing,of Premises, or at Tenant's request at the time of such sale, financing or refinancing, Tenant and Landlord shall execute such further writings as may be reasonably required to separately document any such subordination or nonsubordfitation, attornmeut, and/or nondisturbance agreement, as is provided for herein. Landlord is hereby irrevocably vested with full power to subordinate this Lease to a Mortgage, provided that the provisions of subparagraph (c) are observed. 16.19 Rules and Regulations. Tenant agrees that it will abide by, and to cause its employees, suppliers, shippers, customers, tenants, contractors, and invitees to abide by, all reasonable rules and regulations ("Rules and Regulations") which Landlord may make from time to time for the management, safety, care, and cleanliness of the Common Areas, the parking and unloading of vehicles, and the preservation of good order, as well as for the convenience of other occupants, or tenants of the Building and the Industrial Center and their invitees. Landlord shall not be responsible to Tenant for the noncompliance with said Rules and Regulations by other tenants of the Industrial Center, but nevertheless agrees to enforce the Rules and Regulations against all the tenants of the Industrial Center equally. 16.20 Security Measures. Tenant acknowledges that the rental payable to Landlord hereunder does not include the cost of guard service or other security measures. Landlord has no obligations to provide same. Tenant assumes all responsibility for the protection of the Premises:, Tenant, its agents, and invitees and their property from the acts of third parties. 16.21 Reservations. Landlord reserves the right to grant such easements that Landlord deems necessary and to cause the recordation of parcel maps, so long as such easements and maps do not unreasonably interfere with the use of the Premises by Tenant. Tenant agrees to sign any documents reasonably requested by Landlord to effectuate any such easements or maps. 16.22 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. 16.23 Offer. Preparation of this Lease by either Landlord Or Tenant or Landlord's agent or Tenant's agent and submission of same to Tenant or Landlord shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all parties hereto. 16.24 Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. 16.25 Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity is named herein as Tenant, the obligations of such persons shall be the joint and several responsibility of all persons or entities named herein as such Tenant. 16.26 Authority. Each person signing on behalf of Landlord or Tenant warrants and represents that she or the is authorized to execute and deliver this Lease and to make it a binding obligation of Landlord or Tenant. -16- [SIGNATURES ON FOLLOWING PAGE] -17- The parties hereto have executed this Lease at the place and on the dates specified below their respective signatures. Landlord: Tenant: AMB Properly, L.P. The Singing Machine Company, Inc., a Delaware limited partnership a Delaware corporation By: AMB Property Corporation, a Maryland corporation By: /s/ Martin J. Coyne, By: /s/ John Klecha ---------------------------- -------------------------------- Martin J. Coyne, John Klecha, President & C.O.O. Telephone: (415) 3949000 Tel zone: (954) 596-1000 Facsimile: (415) 394-9001 Facsimile: (954) 596-2000 Executed at: San Francisco, California Executed at: Coconut Creek, Florida on: 3/22/02 on: March 13, 2002 ---------------------------- -------------------------------- ADDRESS ADDRESS Pier 1, Bay 1 6601 Lyons Road, Bldg, A-7 San Francisco, CA 94111 Coconut Creek, Florida 33073 Tax 1D: 95-3795478 -18- GLOSSARY The following terms in the'Lease are defined in the paragraphs opposite the terms. TERM DEFINED IN PARAGRAPH ------------------------- Additional Rent 4.1 Applicable Requirements 6.3 Assign 12.1 Base Rent 1.4 Basic Provisions 1 Building 1.2 Building Operating Expenses 4.2(b) Code 12.1(a) Commencement Date 1.3 Commencement Date Certificate 3.3 Common Areas 2.2 Common Area Operating Expenses 4.2(b) Condemnation 14 Default 13.1 Expiration Date 1.3 PTVAC 4.2(a)(x) Hazardous Substance 6.2 Indemnity 8.5 Industrial Center 1.2 Landlord 1.1 Landlord Entities 6.2(e) Lease 1.1 Lenders 6.4 Mortgage 16.18 Operating Experises 4.2 Party/Parties 1.1 Permitted Use 1.8 Premises 1.2 Prevailing Party 16.13 Real Property Taxes 10.2 Rent 4.1 Reportable Use 6.2 Requesting Party 15 Responding Party 15 Rules and Regulations 2.4, 16.19 Security Deposit 1.7, 5 Taxes 10.2 Tenant 1.1 Tenant Acts 9.2 Tenant's Entity 6.2(c) Tenant's Share 1.5 Term 1.3 -19- AMB PROPERTY, L.P., A DELAWARE LIMITED PARTNERSHIP INDUSTRIAL LEASE Tenant Improvement Addendum This Tenant Improvement Addendum is a part of the Lease dated March 1, 2002, by and between AMB PROPERTY, L.P. ("Landlord") and Singing Machine Company, Inc. ("Tenant") for the premises commonly known as 303 West Artesia Boulevard, Compton, CA 90220. Subject to, the provisions hereinafter set forth, Tenant may construct at its sole cost and expense the improvements ("Alterations") described on Exhibit 1, if attached hereto, or which Tenant has otherwise obtained Landlord's prior written consent. Prior to commencement of construction, Tenant shall obtain and deliver to Landlord -any building permit required by applicable law and a copy of the executed construction contract(s). Tenant shall reimburse Landlord widen 10 days after the rendition of a bill for all of Landlord's actual out-of-pocket costs incurred in connection with the Alterations, including, without limitation, all management, engineering, outside consulting, and construction fees incurred by or ors behalf of Landlord for the review and, approval of Tenant's plans and specifications and for the monitoring of construction of the Alterations. Tenant shall require its contractor to 'Maintain insurance in the amounts and in the forms reasonably acceptable to Landlord. The Alterations shall be constructed by licensed contractors approved by Landlord and in accordance with rules, such as hours of construction, imposed by Landlord. The Alterations shall be completed lien free, in accordance with the plans and specifications approved by Landlord, in a good, workmanlike, and prompt manner, with new materials of first-class quality and comply with all applicable local, state, and federal regulations. The competed Alterations shall be the property of Landlord and shall, subject to the provisions of the next sentence, be surrendered with the Premises upon the expiration or sooner termination of this Lease. However, prior to the expiration or, sooner termination of this Lease, Tenant shall, at Tenant's sole cost and expense, remove the Alterations which are designated by Landlord to be removed and following such removal, repair and restore the Premises in a good and workmanlike manner to their original condition, reasonable wear and tear excepted. Prior to commencing construction of the Alterations, Tenant shall obtain from its contractors and deliver to Landlord a waiver and release of any and all claims against Landlord and liens against the Premises to which such contractor might at any time be entitled and to provide such payment and performance bonds as Landlord may require. The delivery of the waiver and release of claims and liens and such bonds shall be a condition precedent to Tenant's ability to begin its construction work at the Premises. Tenant shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for Tenant at or for use on the Premises. Tenant shall give Landlord not less than 10 days' notice prior to the commencement of any work in, on, or about the Premises, and Landlord shall have the right to post notices of non-responsibility in or on the ' Premises as provided by law. Tenant agrees to indemnify, protect, and defend Landlord and hold Landlord harmless against any loss, liability, or damage resulting from construction of the Alterations. Notwithstanding the foregoing provisions, Landlord at its sole cost and expense, not to exceed $79,000.00 ("TI Allowance") shall complete the following improvements to all applicable building codes ("Initial Improvements"): 1. Demolition of portions of the Premises as depicted on Schedule 1 attached hereto. 2. Painting and carpeting of remaining ground floor office area as depicted on Schedule 1. 3. Demolition of warehouse office area as depicted on Schedule 1. 4. Repair of parking lot and yard areas. The scope of work with respect to the Initial Improvements is more particularly set forth in that certain letter dated February 4, 2002 prepared by Norm Wilson & Sons, Inc., the general contractor responsible for the installation of the Initial Improvements, which letter is attached hereto as Schedule 2 (the "Work Letter"). It is understood and agreed that the TI Allowance shall be sufficient to pay in full the Initial Improvements set forth in the Work Letter. To the extent the cost of the Initial Improvements exceeds the TI Allowance, Landlord shall be responsible to pay such excess without contribution from Tenant. To the extent the eost,of the Initial Improvements is less than $79,000, such savings shall accrue to Landlord. AMB PROPERTY, L.P., A DELAWARE LIMITED PARTNERSHIP INDUSTRIAL LEASE RENT ADJUSTMENT ADDENDUM This Rent Adjustment Addendum is a part of the Lease dated March 1, 2002, by and between AMB PROPERTY, L.P. ("Landlord") and The Singing Machine Company, Inc. ("Tenant") for the premises commonly known as 303 West Artesia Boulevard, Compton, CA 90220. Monthly Base Rent for the each of the periods designated in thus. Addendum ("Adjustment Periods") shall be the amount calculated in accordance with the alternative selected below ("Rent Adjustment Alternative"), but in no event shall the monthly Base Rent for an Adjustment Period be less than the highest monthly rent payable during the term preceding the Adjustment Period. 1. Adjustment Periods: Month 3.1 of the Term to Month 60 of the Term ("Period One") Month 61 of the Term to End of the Term ("Period Two") 2. Rent Adjustment Alternatives [ ] Fixed rent adjustment ("Fixed Rent Adjustment") [XX] Cost of living adjustment ("CPI Adjustment") Monthly Base Rent shall be calculated using the following CPl index ("Index"): [ ] Urban Wage Earners and Clerical Workers [X] All Urban Consumers [ ] ----------------------------- The Comparison Month is: [X] the first month of the term of thus Lease; or [ ] ----------------------------- [ ] Market rent ("Market Rent Adjustment") 3. Calculation of Rent Adjustment a. Cost of Living Adjustment. The CPI Adjustment shall be based upon the Consumer Price Index of the Bureau of Labor Statistics of the United States Department of Labor (1982 - 1984 =100) for Los Angeles-Riverside-Orange County using the Index selected in Paragraph 2. If the selected Rent Adjustment Alternative is the CPI Adjustment, the monthly Base Rent payable during each Adjustment Period shall be the product obtained by multiplying the highest monthly Base Rent payable by Tenant during the term immediately preceding by a fraction the numerator of which shall be the Index for the month that is three (3) months prior to the first month of the Adjustment Period and the denominator of which shall be the Index for the month that is three (3) months prior to the Comparison Month selected above. Notwithstanding the foregoing, the CPI Adjustment shall not be less than 3% nor more than 6% more, on a cumulative and compounded per annum basis, then the Comparison Month or the prior Adjustment Period, as the case may be. b. Market Rent Adjustment. Four months prior to the commencement of each Adjustment Period, if the selected Rent Adjustment Alternative is the Market Rent Adjustment, the Parties shall negotiate in good faith to determine the Base Rent for the Adjustment Period. If agreement cannot be reached within thirty days, Landlord and Tenant shall each, no later than 90 days prior to the commencement of the Adjustment Period, make a reasonable determination of the fair market rental for the Premises for the Adjustment Period and submit such determination, in writing, to arbitration in accordance with the following provisions: (1) No later than 90 days prior to the commencement of the. Adjustment Period, Landlord and Tenant shall each select an industrial leasing broker to act as an arbitrator. The two arbitrators so appointed shall, no later than 75 days prior to the commencement of the Adjustment Period, select a third mutually acceptable industrial leasing broker to act as a third arbitrator. (2) The three arbitrators, acting by a majority, shall no later than 75 days prior to the commencement of the Adjustment Period, determine the actual fair market rental for the Premises for the Adjustment Period. The decision of a majority of the arbitrators shall be binding on the Parties. The fair market rental determination of Landlord or Tenant which is closest to the fair market rental as determined by the arbitrators shall be the Base Rent for the Adjustment Period. (3) If either of the Patties fails. to appoint an arbitrator within the period required by this Addendum, the arbitrator timely appointed shall determine the Base Rent for the Adjustment Period. (4) The entire cost of such arbitration shall be paid by the party whose fair market rental submission is not selected. 4. NOTICE: Notice of Rent Adjustments shall be made as specified in paragraph 16.6 of the Lease. AMB PROPERTY, L.P., A DELAWARE LIMITED PARTNERSHIP INDUSTRIAL LEASE Early Possession and Inducement Recapture Addendum This Early Possession and Inducement Recapture Addendum is a part of the Lease dated March 1, 2002, by and between AMl3 PROPERTY, L.P. ("Landlord") and The Singing Machine Company, Ins. ("Tenant") for the premises commonly known as 303 West Artesia Boulevard, Compton, CA 90220. 1. Early Possession. Tenant may occupy the Premises upon delivery of the Premises to Tenant by Landlord ("Early Possession Date"), even though the Early Possession Date is prior to the Commencement Date of the Lease ("Early Possession"). The obligation to pay Base Rent shall be abated for the Early Possession Period. All ether terms of this Lease, however, including, but not limited to, the obligations to pay Tenant's Share of Operating Expenses and to carry the insurance required by Paragraph 8, sha11 be in effect during the Early Possession period. Such Early Possession shall not change the Expiration Date of the Original Term. If possession is not tendered to Tenant on the Early Possession Date, the Early Possession period shall run from the date of delivery of possession and continue for a period equal to the period during which the Tenant would have otherwise enjoyed, under the terms hereof, possession of the Premises with abated Base Rent, but minus any days of delay caused by the acts, failure to act, or omissions of Tenant. 2. Inducement Recapture in Event of Breach. Any agreement by Landlord for possession of the Premises without the payment or reduced payment of rent or other charges or for the giving or paying by Landlord to or for Tenant of any cash or other bonus, inducement, or consideration for Tenant's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," are conditioned upon Tenant's full and faithful performance of all of the terms, covenants; and conditions of this Lease to be performed or observed by Tenant during the term of this Lease. Upon the occurrence of n Default by Tenant, any rent, other charge, bonus, inducement, or consideration abased, given, or paid by Landlord under such an inducement Provision shall be immediately due and payable by Tenant to Landlord and recoverable by Landlord as additional rent due under this Lease, notwithstanding any subsequent cure by Tenant. Notwithstanding the foregoing, the Inducement Recapture shall be limited to the one month of rent abatement which Tenant is receiving. AMB PROPERTY, L.P., A DELAWARE LIMITED PARTNERSHIP INDUSTRIAL LEASE Existing Tenant Contingency Addendum This Existing Tenant Contingency Addendum is a part of the Lease dated March 1, 2002, by and between AMB PROPERTY, L.P. ("Landlord") and The Singing Machine Company, Inc. ("Tenant") for the premises commonly known as 303 West Artesia Boulevard, Compton, CA 90220. Landlord and Tenant acknowledge and 'agree that this Lease is contingent upon Landlord's recovery of possession of the Premises from the existing tenant ("Existing Tenant") and the Existing Tenant's reimbursement to Landlord of $67,940.00, an amount equal to two (2) month's Base Rent under the Lease ("Abated Rent Reimbursement"). Should Landlord not be able to recover possession of the Premises from Existing Tenant or should Existing Tenant not pay Landlord the Abated Rent Reimbursement, this Lease shall be null and void, and any Security Deposit paid by Tenant to Landlord shall immediately be returned to Tenant without set-off or deduction. Landlord shall confirm Existing Tenant's compliance with this Addendum no later than 10 days after execution of the Lease by both parties thereto. [GRAPHIC OMITTED] [EXHIBIT "A"] [MAP OF BUILDING] COMMENCEMENT DATE MEMORANDUM ---------------------------- LANDLORD: AME PROPERTY, L.P. TENANT: Singing Machine Company, Inc. LEASE DATE: March 1, 2002 PREMISES: 303 West Art esia Boulevard Compton, CA 90220 Tenant hereby accepts the Premises as being in the condition required under the Lease. The Commencement Date of the Lease is ---------------------- The Expiration Date of the Lease is ---------------------- Landlord: Tenant: AND Property, L.P. The Singing Machine Company, Inc. a Delaware limited partnership a Delaware corporation By: AMB Property Corporation, a Maryland corporation By: By: ---------------------------- ---------------------------- Its: Its: --------------------------- --------------------------- Executed at: Executed at: ------------------------ ------------------------ on: on: ---------------------------- ---------------------------- EXHIBIT B TENANT MOVE-IN AND LEASE RENEWAL ENVIRONMENTAL QUE STIONNAIRE FOR COMMERCIAL AND INDUSTRIAL PROPERTIES Property Name: Artesia Industrial Center. Property Address: 303 West Artesia Boulevard, Compton, CA 90220 Addendunm to the Lease Dated March 1, 2002 Between The Singing; Machine Company, Inc, ("Tenant") and AMB Property, L.P. ("Landlord") Instructions: The following questionnaire, is to be completed by the Tenant Representative with knowledge of the planned/existing operations for the specified building/location. A copy of the completed form-must be attached to all mew leases and renewals, and forwarded to the Owner's Risk Management Department. 1.0 PLANNED USEZOPERATIONS - -------------------------- 1-1. Describe planned use (new Lease) nor existing operations (lease renewal), and include brief description of manufacturing~prvcesses employed. 2.0 HAZARDOUS MATERIALS - ----------------------- 2-1. Are hazardous materials used or stored? If so, continue with the next question. If not, go to Section 3.0. 2-2 Are any of the following materials handled on the property? (A material is handled if it is used, generated, processed, produced, packaged, treated, stored, emitted, discharged, or disposed.) If so, complete this section. If this question is not applicable, skip this section and go on to Section 5.0. o Explosives o Fuels o Oils o Solvents o Oxidizer o Organics/Inorganics o Acids o Bases o Pesticides o Gases o PCBs o Radioactive Materials o Other (please specify) 2-3. For the following groups of chemicals, please check the type(s), use(s), and quantity of each chemical used or stored on the site. Attach either a chemical inventory or list the chemicals in each category. Solvents Gases Type:______________________ Type:_____________________ Use:_______________________ Use: _____________________ Quantity:__________________ Quantity;_________________ Inorganic Acids Type:______________________ Type:_____________________ Use:_______________________ Use: _____________________ Quantity:__________________ Quantity;_________________ Fuels Explosives Type:______________________ Type:_____________________ Use:_______________________ Use: _____________________ Quantity:__________________ Quantity;_________________ Oils Bases Type:______________________ Type:_____________________ Use:_______________________ Use: _____________________ Quantity:__________________ Quantity;_________________ Oxidizers Pesticides Type:______________________ Type:_____________________ Use:_______________________ Use: _____________________ Quantity:__________________ Quantity;_________________ Organic Radioactive Materials Type:______________________ Type:_____________________ Use:_______________________ Use: _____________________ Quantity:__________________ Quantity;_________________ Other Type:______________________ Use:_______________________ Quantity:__________________ 2-4. List and quantify the marerials idea ltified above. ----------------------------------------------------------------------- MATERIAL PHYSICAL STATE CONTAINER SIZE NUMBER OF CONTAINERS ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- 2-5. Describe the storage area locations) for these materials. 3.0 HAZARDOUS WASTES ---------------- 3-1. Are hazardous wastes generated? I~so; continue with the next question. If not, skip this section and go to,section 4.0. ! 3-2. Are any of the following wastes generated, handled, or disposed of (where applicable) on the property? o Hazardous wastes o Industrial Wastewater o Waste oils o PCBs o Air emissions o Sludges o Other (please specify) 3-3. Identify *and describe those wastes generated, handled or disposed of (disposition). Specify any wastes known to be regulated under the Resource Conselvarion and Recovery Act (RCRA) as "listed characteristic or statutory" wastes- Include rotal amounts generated monthly. Please include !name, location, and permit number (e.g. EPA ID No.) for transporter and disposal facility,!if applicable). Attach separate pages as necessary. 3-4. List and quantify, the materials identified in Question 3-2 of this section. ----------------------------------------------------------------------- WASTE SOURCE APPROXIMATE WASTE DISPOSITION GENERATED MONTHLY CHARACTERIZATION QUANTITY ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- ----------------------------------------------------------------------- 3-5. Are pollution controls or monitoring employed in the process to prevent or minimize the release of wastes into the environment? If so, please describe. 4.0 USTS/ASTS 4-1. Are underground storage tanks (USTs), aboveground storage tanks (ASTs), or associated pipelines present on site (lease renewals) or required for planned operations (new tenants)? If not, continue with section 5.0: If yes, please describe capacity, contents, age, design and construction of USTs o; ASTs 4-2. Is the UST/AST registered and permitted with the appropriate regulatory agencies? Please provide a copy of the required pen-nits. 4-3. Indicate if any of the following leak prevention measures have been provided for the USTs/ASTs and their associated piping. Additionally, please indicate the number of tanks that are provided with the indicated measure. Please provide copies of written test results and monitoring documentation. Integrity testing Inventory reconciliation Leak detection system Overfill spill protection Secondary containment Other (please describe) Cathodic protection 4-4. If this Questionnaire is being completed for a lease renewal, and if any of the USTs/ASTs have leaked, please state the substance released, the media(s) impacted (e.g., soil, water, asphalt, etc.), the actions taken, and all remedial responses to the incident. 4-5. If this Questionnaire is being completed for a lease renewal, have USTs/ASTs been removed from the property? If so, please provide any official closure letters or reports and supporting documentation (e.g., analytical test results, remediation report results, etc.). 4-6. Far Lease renewals, are there any above or below ground pipelines on site used to transfer chemicals or wastes? For new tenants, are installations of this type required for the planned operations? If so, please describe. 4-7. If present or planned, have the chemical transfer pipelines been inspected or tested for leaks? If not please indicate the results and provide a copy of the inspection or test results. 5.0 ASBESTOS CONTAINING BUILDING MATERIALS -------------------------------------- 5-1. Please be advised that this property participates in an Asbestos Operations and Maintenance Program, and that an asbestos survey may have been performed at the Property. If provided, please review ,the information that identifies the locations of known asbestos containing material or presumed asbestos containing material. All personnel and appropriate subcontractors should be notified of the presence of these materials, and informed not to disturb these materials. Any activity that involves the disturbance or removal of these materials must be done by an appropriately trained individual/contractor. 6.0 REGULATORY ---------- 6-1. For Lease Renewals, are there any past, current, or pending regulatory actions by federal, state, or local environmental agencies alleging noncompliance with regulations? If so, please describe. 6-2. For lease renewals, are there any past, current, or pending lawsuits or administrative proceedings for alleged environmental damages involving the property, you, or any owner or tenant of the property? If so, please describe. 6-3. Does the operation have or require a National Pollutant Discharge Elimination System (NPDFS) or equivalent permit? If so, please provide a copy of this permit. 6-4. For Lease renewals, have there been any complaints from the surrounding community regarding facility operations? If so, please describe. Have there been any worker complaints or regulatory investigations regarding hazardous material exposure at the facility? If so, please describe status, and any corrective actions taken. 6-5. Has a Hazardous Materials Business Plan been developed for the site? If so, please provide a copy. CERTIFICATION - ------------- I am familiar with the real property described in this questionnaire. By signing below, I represent and warrant that the answers to the above questions are complete and accurate to the best of my knowledge. I also understand the Owner will rely on the completeness and accuracy of my answers in assessing any environmental liability risks associated with the property. Signature: Name: Title: Date: Telephone: Exhibit "D" MOVE OUT STANDARDS This Move Out Standards Exhibit is dated for the reference purposes as of the same date as the Lease, and is made between AMB Property, L.P., a Delaware limited partnership, ("Landlord's and The Singing Machine Company, Inc., a Delaware corporation ("Tenant") to be a part of that certain Standard Industrial Lease ("Lease"' concerning the premises located at 303 West Artesia Boulevard, Compton, CA 90220 ("Premises"). Landlord and Tenant agree that the Lease is hereby modified and supplemented as follows: At the expiration or earlier termination of the Lease and in addition to any other provisions of the Lease regarding surrender of the Premises, Tenant shall surrender the Premises in the same condition as they were upon delivery of possession'thereto under the Lease, reasonable wear and tear excepted, and shall deliver all keys to-Landlord. Before surrendering the Premises, Tenant shall remove all of its personal property and trade fixtures and such alterations or addition's to the Premises made by Tenant as may be specified for removal by Landlord. If Tenant fails to remove its personal property, fixtures or Alterations or additions upon the expiration or earlier termination of the Lease, the same shall be deemed abandoned and shall become the property of the Landlord. Notwithstanding the foregoing, Tenant shall be liable to Landlord for all costs and damages incurred by Landlord in removing, storing or selling such property, fixtures, alterations or additions and in restoring the Premises to the condition required pursuant to the Lease. Notwithstanding anything to the contrary in the Lease, Tenant shall surrender the Premises, at the time of the expiration or earlier termination of the Lease, in a condition that shall includes, but is not limited to, the following: 1. Lights: Office and warehouse lights will be fully operational with all bulbs functioning. 2. Dock Levelers & Roll Up Doors: Should be in good working condition. 3. Intentionally Deleted 4. Warehouse Floor Free of stains created by Tenant or its Entities and broom swept with no racking bolts and other protrusions left in floor. Cracks created by Tenant or its Entities should be repaired with an epoxy or polymer. 5. Tenant-Installed Equipment Removed and space turned to original Wiring: condition when originally leased. (Remove air lines, junction boxes, conduit, etc.) . 6. Walls: Sheetrock (drywall) damage should be patched and fire taped so that there are no holes in either office or warehouse. 7. Roof: Any tenant-installed equipment must be removed and roof penetrations properly repaired by licensed roofing contractor. Active leaks caused by Tenant installed equipment or by any other negligent act or omission of Tenant with regard to the roof structure or membrane must be fixed and latest landlord maintenance and repairs recommendation must have been followed. 8. Signs: All exterior signs must be removed and holes patched and paint touched-up as necessary. All window signs should likewise be removed. 9. Heating & Air Conditioning A written report from a licensed HVAC System: contractor within the last three months stating that all evaporative coolers and/or heaters within the warehouse are operational and safe and that office HVAC system is also in good and safe operating condition. 10. Overall Cleanliness: Vacuum carpet, and remove any and all debris from office and, warehouse. Remove all pallets and debris from exterior of premises. 11. Upon Completion: Contact Landlord's property manager to coordinate date of turning off power, turning in keys, and obtaining final Landlord inspection of premises which, in turn, 'wiill,facilitate refund of security deposit. NORM WILSON & SONS, INC. GENERAL CONTRACTORS LICENSE #435700 8125 SOMERSET BLVD. 562-634-7933 PARAMOUNT, CA 90723 562-634-6545 FAX OVERTON-MOORE PROPERTIES FEB. 4, 2002 1125 190TH ST. (SUITE 200) GARDENA, CA. ATTN: FLOYD YOUNKIN RE: 303 E. ARTESIA (PRELIMINARY BUDGET) as per space plan delivered to OMA office of 1/31/02 SCOPE OF WORK TOTAL 1 DRYWALL $3,800.00 A. CONSTRUCT 5 L/FT. OF WALL AT 1ST FLOOR AREA NEAR LOBBY B. REQUIRED PATCHING AFTER DEMOLITION C. PATCH EXISTING WALLS PRIOR TO PAINTING D. FILL IN (2) DOORS LEADING TO OFFICE NEAR DEMO E. CREATE HALLWAY AT REAR NORTHWEST CORNER OF BUILDING WHERE RESTROOMS ARE LOCATED 2 INSULATION $23.00 A. R-11 INSULATION @ NEW WALL 3 DOOR AND FRAMES A. RELOCATE (1) EXISTING DOOR AND FRAME TO NEW WALL B. RE-SWING (1) DOOR IN OFFICE RESTROOM 4 ACOUSTICAL CEILINGS $2,100.00 A. REPLACE DAMAGED OR STAINED TILES IN REMAINING OFFICE AREA B. CREATE T-BAR SOFFIT AT AREA IN OPEN OFFICE WHERE CEILING IS TO BE DEMOLISHED 5 FIRE PROTECTION $3,500.00 A. ALLOWANCE FOR REQUIRED DEMOLITION AND RELOCATION OF SPRINKLER HEADS TO NEW OFFICE LAYOUT 6 PAINTING $4,494.00 A. PAINTING OF ALL REMAINING OFFICE WALLS AT 1ST FLOOR AREA B. PAINTING OF OFFICE RESTROOMS AND WAREHOUSE RESTROOMS AT NORTHWEST CORNER OF SPACE 7 CARPET BASE AND RESILIENT FLOORING $306.00 A. INSTALL NEW 6" TOPSET BASE IN OFFICE RESTROOMS SEE EXCLUSIONS 8 ELECTRICAL $5,050.00 A. REQUIRED DEMOLITION B. REWORK ELECTRICAL TO REMAINING OFFICE AREAS C. DEMO ELECTRIC TO SHIPPING OFFICE D. RELAMP EXISTING OFFICE AREA E. REPLACE AND REPAIR EXTERI0R LIGHTING F. REHAB WAREHOUSE LIGHTING AS REQUIRED 9 HVAC $3,260.00 A. CAP PLENUMS FROM THREE OFFICE AREA UNITS AND ONE WAREHOUSE UNIT B. RE-WORK EXISTING DUCT TO SERVE ONLY DESIGNATED OCCUPIED AREAS C. RELOCATE T-STATS FROM WALLS WHICH ARE TO BE REMOVED D. REPLACE (2) EXHAUST FANS IN WAREHOUSE RESTROOMS 10 PLUMBING $2,485.00 A. REHAB EXISTING FIXTURES AS NEEDED IN BOTH OFFICE AND WAREHOUSE RESTROOMS 11 DEMOLITION $12,848.00 A. DEMO WAREHOUSE OFFICE APPROX. 800 SQ. FT. B. DEMO TWO STORY MEZZANINE ADDITION (APPROX. 3,248 SQ. FT.) C. DEMO 210 L/FT. OF PARTITION WALL D. DEMO 1,300 SQ. FT. OF T-BAR CEILING E. DEMO 2,800 SQ. FT. OF VCT F. REMOVAL OF ALL DEMOLISHED MATERIAL 12 ALLOWANCE TO RE-WORK BOTTOM RUN OF STAIRS AFTER $538.00 COMPLETION OF DEMO 13 ALLOWANCE FOR MISC. ROUGH CARPENTRY AFTER DEMOLITION $3,000.00 IS COMPLETE 14 JANITORIAL $3,024.00 A. STRIP AND WAX VCT FLOORING B. SHAMPOO CARPET C. COMPLETE JANITORIAL 15 REMOVE GLUE FROM AREA OF DEMOLITION AND SEAL FLOOR $4,482.00 16 ALLOWANCE TO CREATE OPENINGS IN EXISTING WALL AT MAIN OFFICE 17 ALLOWANCE TO REPAIR FOIL INSULATION @ WAREHOUSE $1,110.00 AREA WHERE DEMOLITION OCCURS AND EXISTING WAREHOUSE AREA note: cost does not include foil over remaining office area ---------- SUBTOTAL $55,315.00 GENERAL CONDITIONS $2,765.75 PROFIT/OVERHEAD $4,546.46 ---------- TOTAL $62,727.21 EXCLUSIONS: 1 PLAN CHECK PERMIT AND ARCHITECTURAL FEES 2 REMOVAL OF HAZARDOUS WASTE 3 FIRE SAFETY SYSTEMS 4 FIRE EXTINGUISHERS 5 NEW CARPET AND VCT FLOORING 6 ALL REHAB WORK AT REMAINING 2ND FLOOR OFFICE EXCEPT FOR SHAMPOOING OF CARPET 7 PAINTING OF WAREHOUSE WALLS 8 NEW T-BAR, ELECTRICAL AND HVAC AT NORTHWEST WAREHOUSE OFFICE 9 SEALING OF WAREHOUSE FLOOR RESPECTFULLY SUBMITTED, NORM WILSON & SONS, INC. /s/ RON WILSON -------------- RON WILSON VICE PRESIDENT EX-10.11 7 lasalle-first.txt LASALLE FIRST AMENDMENT Exhibit 10.11 LaSalle Business Credit, Inc. LASALLE BANKS 135 South LaSalle Street Chicago, Illinois 60603 (312) 904-8490 October 1, 2001 The Singing Machine Company, Inc. 6601 Lyons Road Suite A-7 Coconut Creek, Florida 33073 Re: First Amendment (Revised) Gentlemen: The Singing Machine Company, Inc., a Delaware corporation ("Borrower") and LaSalle Business Credit, Inc., a Delaware corporation ("Lender") have entered into that certain Loan and Security Agreement dated April 26, 2001 (the "Security Agreement"). From time to time thereafter, Borrower and Bank may have executed various amendments (each an "Amendment" and collectively the "Amendments") to the Security Agreement (the Security Agreement and the Amendments hereinafter are referred to, collectively, as the "Agreement"). Borrower and Lender now desire to further amend the Agreement as provided herein, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. The Agreement hereby is amended as follows: (a) Paragraph 1(a) of the Agreement is hereby amended and restated in its entirety, as follows: (a) "Account", "Account Debtor", "Chattel Paper", "Commercial Tort Claims", "Deposit Accounts", "Documents", "Electronic Chattel Paper", "Equipment", "Fixtures'.", "General Intangibles", "Goods", "Instruments", "Inventory", "Investment LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. October 1, 2001 Page 2 Property", "Letter-of-Credit Right", "Proceeds" and "Tangible Chattel Paper" shall have the respective meanings assigned to such terms in the Illinois Uniform Commercial Code, as the same may be in effect from time to time. (b) Paragraph 4 of the Agreement is hereby amended and restated in its entirety, as follows: 4. GRANT OF SECURITY INTEREST TO LENDER. As security for the payment of all Loans now or in the future made by Lender to Borrower hereunder and for the payment or other satisfaction of all other Liabilities, Borrower hereby assigns to Lender and grants to Lender a continuing security interest in the following property of Borrower, whether now or hereafter owned, existing, acquired or arising and wherever now or hereafter located: (a) all Accounts (whether or not Eligible Accounts) and all Goods whose sale; lease or other disposition by Borrower has given rise to Accounts and have been returned to, or repossessed or stopped in transit by, Borrower; (b) all Chattel Paper, Instruments, Documents and General Intangibles (including, without limitation, all patents, patent applications, trademarks, trademark applications, tradenames, trade secrets, goodwill, copyrights, copyright applications, registrations, licenses, software, franchises, customer lists, tax refund claims, claims against carriers and shippers, guarantee claims, contract rights, payment intangibles, security interests, security deposits and rights to indemnification); (c) all Inventory (whether or not Eligible Inventory); (d) all Goods (other than Inventory), including, without limitation, Equipment (other than tooling located in Hong Kong), vehicles and Fixtures; (e) all Investment Property; (f) all Deposit Accounts, bank accounts, deposits and cash; (g) all Letter-of-Credit Rights; (h) Commercial Tort Claims listed on Exhibit D hereto; (i) any other property of Borrower now or hereafter in the possession-, custody or control of Lender or any LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. October 1, 2001 Page 3 agent or any parent, affiliate or subsidiary of Lender or any participant with Lender in the Loans, for any purpose (whether for safekeeping, deposit, collection, custody, pledge, transmission or otherwise); and (j) all additions and accessions to, substitutions for, and replacements, products and Proceeds of the foregoing property, including, without limitation, proceeds of all insurance policies insuring the foregoing property, and all of Borrower's books and records relating to any of the foregoing and to Borrower's business. (c) Paragraph 5 of the Agreement is hereby amended and restated in its entirety, as follows: 5. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTEREST THEREIN. Borrower shall, at Lender's request, at any time and from time to time, authenticate, execute and deliver to Lender such financing statements, documents and other agreements and instruments (and pay the cost of filing or recording the same in all public offices deemed necessary or desirable by Lender) and do such other acts and things or use its best efforts to cause third parties to do such other acts and things as Lender may deem necessary or desirable in its sole discretion in order to establish and maintain a valid, attached and perfected security interest in the Collateral in favor of Lender (free and clear of all other liens, claims, encumbrances and rights of third parties whatsoever, whether voluntarily or involuntarily created, except Permitted Liens) to secure payment of the Liabilities, and in order to facilitate the collection of the Collateral. Borrower irrevocably hereby makes, constitutes and appoints Lender (and all Persons designated by Lender for that purpose) as Borrower's true and lawful attorney and agent-in-fact to execute and file such financing statements, documents and other agreements and instruments and do such other acts and things as may be necessary to preserve and perfect Lender's security interest in the LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. October 1, 2001 Page 4 Collateral. Borrower further agrees, upon the occurrence of an Event of Default, that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement shall be sufficient as a financing statement. Borrower further notifies and confirms the prior filing by Lender of any and all financing statements which identify the Borrower as debtor, Lender as secured party and any or all Collateral as collateral. (d) Paragraph 7(e) of the Agreement is hereby amended and restated in its entirety, as follows: (e) Promptly upon Borrower's receipt of any portion of the Collateral evidenced by an agreement, instrument or Document, including without limitation, any Tangible Chattel Paper and any Investment Property consisting of certificated securities, Borrower shall deliver the original thereof to Lender together with an appropriate endorsement or other specific evidence of assignment thereof to Lender (in form and substance acceptable to Lender). If an endorsement or assignment of any such items shall not be made for any reason, Lender is hereby irrevocably authorized, as Borrower's attorney and agent-in-fact to endorse or assign the same on Borrower's behalf. (e) Paragraph 10(i) of the Agreement is hereby amended and restated in its entirety, as follows: (i) (x) there are no actions or proceedings which are pending or to the best of Borrower's knowledge, threatened against Borrower which is, in the determination of Lender made in good faith, reasonably likely to result in any material adverse change in Borrower's business, property, assets, operations or condition, financial or otherwise and Borrower shall, promptly upon becoming aware of any such pending or threatened action or proceeding, give written notice thereof to Lender and (y) Borrower has no Commercial Tort Claims pending other than Tort Claims of Borrower which may arise, which notice shall constitute Borrower's LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. October 1, 2001 Page 5 authorization to amend Exhibit D to add such Commercial Tort Claim; (f) Paragraph 10(t) of the Agreement is hereby amended and restated in its entirety, as follows: (t) if Borrower is a corporation, limited liability company or partnership, Borrower is duly organized, validly existing and in good standing in the State of Delaware, its organizational identification number is 2376345 and Borrower is duly qualified and in good standing in all states where the nature and extent of the business transacted by it or the ownership of its assets makes such qualification necessary or, if Borrower is not so qualified, Borrower may cure any such failure without losing any of its rights, incurring any liens or material penalties, or otherwise affecting Lender's rights; (g) Paragraph 11(j) of the Agreement is hereby amended and restated in its entirety, as follows: (j) Borrower shall not assume, guarantee or endorse, or otherwise become liable in connection with, the obligations of any Person, except by endorsement of instruments for deposit or collection or similar transactions in the ordinary course of business; and, except that Borrower may guarantee, on a limited basis, obligations of any Subsidiary of Borrower up to $500,000.00 in the aggregate outstanding at any time, and any obligations over that amount shall require prior written consent by Lender. Such consent of Lender shall not be unreasonably withheld and, in any event, Lender shall use its best efforts to grant or deny such consent of Lender in writing within ten (10) business days of 'receipt of a written request from Borrower for such consent. LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. October 1, 2001 Page 6 (h) Paragraph 11(k) of the Agreement is hereby amended and restated in its entirety, as follows: (k) Borrower shall not (i) enter into any merger or consolidation; (ii) change the state of Borrower's, organization or enter into any transaction which has the effect of changing Borrower's state of organization; (iii) sell, lease or otherwise dispose of any of its assets other than in the ordinary course of business; (iv) purchase the stock or all or substantially all of the assets of any Person or division of such Person; or (v) enter into any other transaction outside the ordinary course of Borrower's business, including, without limitation, any purchase, redemption or retirement of any shares of any class of its stock or any other equity interest, and any issuance of any shares of, or warrants or other rights to receive or purchase any shares of, any class of its stock or any other equity interest; provided, that Borrower may (a) issue securities to any Person so long as such issuance of securities does not exceed ten percent (10%) of the Borrower's issued and outstanding capital stock, (b) grant options to employees, (c) adopt a stock option plan, (d) issue securities upon the exercise of outstanding stock options and warrants, and (e) file a registration statement on Form S-8 or Form S-3; provided further, that with respect to each of the foregoing, (x) no Event of Default shall be caused by the issuance of any securities, stock or warrants and (y) no put rights or mandatory dividends are granted in connection with such issuance; (i) Paragraph 11 of the Agreement is hereby amended to add a new subparagraph (s) as follows: (s) To the extent that Borrower obtains or maintains any Electronic Chattel Paper, Borrower shall create, store and assign the record or records comprising the Electronic Chattel Paper in such a manner that (i) a single authoritative copy of the record or records exists which is unique, identifiable and except as otherwise provided in clauses (iv), (v) and (vi) below, unalterable, (ii) the authoritative copy identifies Lender as the assignee of the record or records, (iii) the LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. October 1, 2001 Page 7 authoritative copy is communicated to and maintained by the Lender or its designated custodian, (iv) copies or revisions that add or change an identified assignee of the authoritative copy can only be made with the participation of Lender, (v) each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy that is not the authoritative copy and (vi) any revision of the authoritative copy is readily identifiable as an authorized or unauthorized revision. (j) Paragraph 13(b) of the Agreement is hereby amended and restated in its entirety, as follows: (b) Upon the occurrence and during the continuance of an Event of Default, Lender may exercise from time to time any rights and remedies available to it under the Uniform Commercial Code and any other applicable law in addition to, and not in lieu of, any rights and remedies expressly granted in this Agreement or in any of the Other Agreements and all of Lender's rights and remedies shall be cumulative and non-exclusive to the extent permitted by law. In particular, but not by way of limitation of the foregoing, Lender may, without notice, demand or legal process of any kind, take possession of any or all of the Collateral (in addition to Collateral of which it already has possession), wherever it may be found, and for that purpose may-pursue the same wherever it may be found, and may enter onto any of Borrower's premises where any of the Collateral may be, and search for, take possession of, remove, keep and store any of the Collateral until the same shall be sold or otherwise disposed of, and Lender shall have the right to store the same at any of Borrower's premises without cost to Lender. At Lender's request, Borrower shall, at Borrower's expense, assemble the Collateral and make it available to Lender at one or more places to be designated by Lender and reasonably convenient to Lender and Borrower. Borrower recognizes that if Borrower fails to perform, observe or discharge The Singing Machine Company, Inc. October 1, 2001 Page 8 any of its Liabilities under this Agreement or the Other Agreements, no remedy at law will provide adequate relief to Lender, and agrees that Lender shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. Any notification of intended disposition of any of the Collateral required by law will- be deemed to be a reasonable authenticated notification of disposition if given at least ten (10) calendar days prior to such disposition and such notice shall (i) describe Lender and Borrower, (ii) describe the Collateral that is the subject of the intended disposition, (iii) state the method of the intended disposition, (iv) state that Borrower is entitled to an accounting of the Liabilities and state the charge, if any, for an accounting and (v) state the time and place of any public disposition or the time after which any private sale is to be made. Lender may disclaim any warranties that might arise in connection with the sale, lease or other disposition of the Collateral and has no obligation to provide any warranties at such time. Any Proceeds. of any disposition by Lender of any of the Collateral may be applied by Lender to the payment of expenses in connection with the Collateral, including, without limitation, legal expenses and reasonable attorneys' fees, and any balance of such Proceeds' may be applied by Lender toward the payment of such of the Liabilities, and in such order of application, as Lender may from time to time elect. (k) All references to "fixtures" in the Agreement shall be amended to read "Fixtures". (l) The Agreement is hereby amended to add a new Exhibit D-Commercial Tort Claims, as set forth on Exhibit D hereto. (m) Exhibit B to the Agreement is amended and restated as attached hereto and made a part hereof. 2. This Amendment shall not become effective until fully executed by all parties hereto. LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. October 1, 2001 Page 9 3. Except as expressly amended hereby and by any other supplemental documents or instruments executed by either party hereto in order to effectuate the transactions contemplated hereby, the Agreement and Exhibit A thereto hereby are ratified and confirmed by the parties hereto and remain in full force and effect in accordance with the terms thereof. LASALLE BUSINESS CREDIT, INC. By /s/ Casey Orlowski -------------------------- Title Vice President ------------------------- ACKNOWLEDGED AND AGREED TO this 1st day of October, 2001. The Singing Machine Company, Inc. By /s/ John F. Klecha ----------------------------- John F. Klecha Title President/Secretary EX-10.12 8 lasalle-second.txt LASALLE SECOND AMENDMENT Exhibit 10.12 LaSalle Business Credit, Inc. LASALLE BANKS 135 South LaSalle Street Chicago, Illinois 60603 (312) 904-8490 November 20, 2001 The Singing Machine Company, Inc. 6601 Lyons Road Suite A-7 Coconut Creek, Florida 33073 Re: Second Amendment The Singing Machine Company, Ind., a 'Delaware corporation ("Borrower") and LaSalle Business Credit, Inc., a Delaward corporation ("Lender") have entered into that certain Loan and Security Agreement dated April 26, 2001 (the "Security Agreement'). From time to time thereafter, Borrower and Bank may have executed various amendments (each an "Amendment" and collectively the "Amendments") to the Security Agreement (the Security Agreement and the Amendments hereinafter are referred to, collectively, as the "Agreement"). Borrower and Lender now desire to further amend the Agreement as provided herein, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. The Agreement hereby is amended as follows: (a) Paragraph (1) of Exhibit A of the Agreement is deleted in its entirety and the following is substituted in its place: (1) LOANS: Subject to the terms and conditions of the Agreement and the Other Agreements, Lender shall, absent the occurrence of an Event of Default, advance an amount up to the sum of the following sublimits (the "Loan Limit"): (a) Up to seventy-five percent (75%), or such lesser percentage as determined by Lender in its sole discretion exercised in good faith, of the face amount (less maximum discounts, credits and allowances which may be taken by or granted to Account Debtors LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. November 9, 2001 Page 2 in connection therewith in the ordinary course of Borrower's business) of Borrower's Eligible Accounts; plus (b) Subject to subparagraph (3)(a) of this Exhibit A, up to forty percent (40%), or such lesser percentage as determined by Lender in its sole discretion exercised in good faith, of the lower of the cost or market value of Borrowers Eligible Inventory; plus (c) Subject to subparagraph (3)(a) of this Exhibit A, up to forty percent (40%), or such lesser percentage as determined by Lender in its sole discretion exercised in good faith, against the face amount of commercial Letters of Credit issued or guaranteed by Lender for the purpose of purchasing Eligible Inventory; provided, that such commercial Letters of Credit are in form and substance satisfactory to Lender; minus (d) Such reserves as Lender elects, in its sole discretion exercised in good faith, to establish from time to time, including without limitation, (i) a seasonal dilution reserve in the initial amount of One Hundred Fifty Thousand and No/100 Dollars ($150,000.00) against Borrower's "Eligible Accounts" during the period of September 1st of each calendar year through January 31st of each following calendar year, which shall increase by One Hundred Fifty Thousand and No/100 Dollars ($150,000.00) a week commencing September 8th and continuing on the same day of each week thereafter until said reserve equals One Million Two Hundred Thousand and No/100 Dollars ($1,200,000.00); and (ii) to the extent that the ratio of Free on Board sales to domestic sales increases, Lender in its sole discretion may create a reserve to account for the additional dilution; provided, that the aggregate amount of advances made pursuant to subparagraphs (b) and (c) above shall in no event exceed Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00); provided, that the availability pursuant to subparagraphs (b) and (c) above shall reduce to zero during the period of December 1st of each calendar year through April 30th of each following calendar year, and LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. November 9, 2001 Page 3 further provided, that the Loan Limit shall in no event exceed (i) Ten Million and No/100 Dollars ($10,000,000.00) during the period of January 1, 2001 through December 20, 2001; (ii) Seven Million Five Hundred Thousand and No/100 Dollars ($7,500,000,00) during the period of December 21, 2001 through January 10, 2002; (iii) Five Million and No/100 Dollars ($5,000,000.00) during the period of January 11, 2002 through January 20, 2002; (iv) Ten Million and No/100 Dollars ($10,000,000.00) during the period of January 21, 2002 through October 31, 2002 and during the period of January 1st through October 31st of each calendar year thereafter; (v) Seven Million Five Hundred Thousand and No/100 Dollars ($7,500,000.00) during the month of November of each calendar year; (vi) Five Million and No/100 Dollars ($5,000,000.00) during the month of December of each calendar year; and (vii) zero ($0) during any consecutive ninety (90) day period between December 1e of each year through April 30th of each following year (the "Clean Up Period") as determined by Borrower (the "Maximum Loan Limit"), except as such amount may be increased or, following the occurrence of an Event of Default, decreased by Lender, in its sole discretion, exercised in good faith, from time to time. (b) Paragraph (5) of Exhibit A of the Agreement is amended to add the following provision: (c) One-Time Fee: Borrower shall pay to Bank a one-time fee of Two Thousand Five Hundred and No/100 Dollars ($2,500.00), which fee shall be fully earned by Bank on the date of this Amendment and payable on November 30, 2001. 2. This Amendment shall not become effective until fully executed by all parties hereto. 3. Except as expressly amended hereby and by any other supplemental documents or instruments executed by either party hereto in order to effectuate the transactions contemplated hereby, the Agreement and Exhibit A thereto LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. November 9, 2001 Page 4 hereby are ratified and confirmed by the parties hereto and remain in full force and effect in accordance with the terms thereof. LASALLE BUSINESS CREDIT, INC. By /s/ Casey Orlowski -------------------------- Title Vice President ------------------------- ACKNOWLEDGED AND AGREED TO this 20th day of November, 2001. The Singing Machine Company, Inc. By /s/ John F. Klecha ----------------------------- John F. Klecha Title President/Secretary EX-10.13 9 lasalle-third.txt LASALLE THIRD AMENDMENT Exhibit 10.13 LaSalle Business Credit, Inc. LASALLE BANKS 135 South LaSalle Street Chicago, Illinois 60603 (312) 904-8490 November 28, 2001 The Singing Machine Company, Inc. 6601 Lyons Road Suite A-7 Coconut Creek, Florida 33073 Re: Third Amendment Gentlemen: The Singing Machine Company, Inc., a Delaware corporation ("Borrower") and LaSalle Business Credit, Inc., a Delaware corporation ("Lender") have entered into that certain Loan and Security Agreement dated April 26, 2001 (the "Security Agreement"). From time to time thereafter, Borrower and Bank may have executed various amendments (each an "Amendment" and collectively the "Amendments") to the Security Agreement (the Security Agreement and the Amendments hereinafter are referred to, collectively, as the "Agreement"). Borrower and Lender now desire to further amend the Agreement as provided herein, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. The Agreement hereby is amended as follows: (a) Paragraph (1) of Exhibit A of the Agreement is deleted in its entirety and the following is substituted in its place: (1) LOANS: Subject to the terms and conditions of the Agreement and the Other Agreements, Lender shall, absent the occurrence of an Event of Default, advance an amount up to the sum of the following sublimits (the "Loan Limit"): (a) Up to seventy-five percent (75%), or such lesser percentage as determined by Lender in its sole discretion exercised in good faith, LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. November 28, 2001 Page 2 of the face amount (less maximum discounts, credits and allowances which may be taken by or granted to Account Debtors in connection therewith in the ordinary course of Borrower's business) of Borrower's Eligible Accounts; plus (b) Subject to subparagraph (3)(a) of this Exhibit A, up to forty percent (40%), or such lesser percentage as determined by Lender in its sole discretion, exercised in good faith, of the lower of the cost or market value of Borrower's Eligible Inventory; plus (c) Subject to subparagraph (3)(a) of this Exhibit A, up to forty percent (40%), or such lesser percentage as determined by Lender in its sole discretion exercised in good faith, against the face amount of commercial Letters of Credit issued or guaranteed by Lender for the purpose of purchasing Eligible Inventory; provided, that such commercial Letters of Credit are in form and substance satisfactory to Lender; minus (d) Such reserves as Lender elects, in its sole discretion exercised in good faith, to establish from time to time, including without limitation, (i) a seasonal dilution reserve in the initial amount of One Hundred Fifty Thousand and No/100 Dollars ($150,000.00) against Borrower's "Eligible Accounts" during the period of September 1st of each calendar year through January 31" of each following calendar year, which shall increase by One Hundred Fifty Thousand and No/100 Dollars ($150,000.00 a week commencing September 8th and continuing on the same day of each week thereafter until said reserve equals One Million Two Hundred Thousand and No/100 Dollars ($1,200,000.00); and (ii) to the extent that the ratio of Free on Board sales to domestic sales increases, Lender in its sole discretion LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. November 28, 2001 Page 3 may create a reserve to account for the additional dilution; provided, that the aggregate amount of advances made pursuant to subparagraphs (b) and (c) above shall in no event exceed Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00); provided, that the availability pursuant to subparagraphs (b) and (c) above shall reduce to zero during the period of December 1st of each calendar year through April 30th of each following calendar year; and further provided, that the Loan Limit shall in no event exceed (i) Eleven Million and No/100 Dollars ($11,000,000.00) during the period of January 1, 2001 through December 20, 2001; (ii) Seven Million Five Hundred Thousand and No/100 Dollars ($7,500,000.00) during the period of December 21, 2001 through January 10, 2002; (iii) Five Million and No/100 Dollars ($5,000,000,00) during the period of January 11, 2002 through January 20, 2002; (iv) Ten Million and No/100 Dollars ($10,000,000.00) during the period of January 21, 2002 through October 31, 2002 and during the period of January 1st through October 31st of each calendar year thereafter; (v) Seven Million Five Hundred Thousand and No/100 Dollars ($7,500,000.00) during the month of November of each calendar year; (vi) Five Million and No/100 Dollars ($5,000,000.00) during the month of December of each calendar year; and (vii) zero ($0) during any consecutive ninety (90) day period between December 15th of each year through April 30th of each following year (the "Clean Up Period") as determined by Borrower (the "Maximum Loan Limit"), except as such amount may be increased or, following the occurrence of an Event of Default, decreased by Lender, in its sole discretion, exercised in good faith, from time to time. LaSalle Business Credit Inc. - -------------------------------------------------------------------------------- LASALLE BANKS The Singing Machine Company, Inc. November 28, 2001 Page 4 (b) Paragraph (5) of Exhibit A of the Agreement is deleted in its entirety and the following is substituted in its place: (c) One-Time Amendment Fees: Borrower shall pay to Bank one-time amendment fees of (i) Two Thousand Five Hundred and No/100 Dollars ($2,500.00) for the Second Amendment and (ii) One Thousand Five Hundred and No/100 Dollars ($1,500.00) for the Third Amendment, for a total aggregate of Four Thousand and No/100 Dollars ($4,000.00), which fees shall be fully earned by Bank on the date of each such Amendment, respectively, and payable on November 30, 2001. 2. This Amendment shall not become effective until fully executed by all parties hereto. 3. Except as expressly amended hereby and by any other supplemental documents or instruments executed by either party hereto in order to effectuate the transactions contemplated hereby, the Agreement and Exhibit A thereto hereby are ratified and confirmed by the parties hereto and remain in full force and effect in accordance with the terms thereof. LASALLE BUSINESS CREDIT, INC. By /s/ Casey Orlowski -------------------------- Title Vice President ------------------------- ACKNOWLEDGED AND AGREED TO this 28th day of November, 2001. The Singing Machine Company, Inc. By /s/ John F. Klecha ----------------------------- John F. Klecha Title President/Secretary EX-10.14 10 lasalle-fourth.txt LASALLE FOURTH AMENDMENT Exhibit 10.14 LaSalle Business Credit, Inc. LASALLE BANKS 135 South LaSalle Street Chicago, Illinois 60603 (312) 904-8490 February 28, 2002 The Singing Machine Company, Inc. 6601 Lyons Road Suite A-7 Coconut Creek, Florida 33073 Re: Fourth Amendment Gentlemen: The Singing Machine Company, Inc., a Delaware corporation ("Borrower") and LaSalle Business Credit, Inc., a Delaware corporation ("Lender") have entered into that certain Loan and Security Agreement dated April 26, 2001 (the "Security Agreement"). From time to time thereafter, Borrower and Bank may have executed various amendments (each an "Amendment" and collectively the "Amendments") to the Security Agreement (the Security Agreement and the Amendments hereinafter are referred to, collectively, as the "Agreement"). Borrower and Lender now desire to further amend the Agreement as provided herein, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. The Agreement hereby is amended as follows: (a) Exhibit B to the Agreement is amended and restated as the Second Amended and Restated Exhibit B as Attached hereto and made a part hereof. 2. This Amendment shall not become effective until fully executed by all parties hereto. 3. Except as expressly amended hereby and by any other supplemental documents or instruments executed by either party hereto in order to effectuate the transactions contemplated hereby, the Agreement and exhibit A thereto hereby are ratified and confirmed by the parties hereto and remain in full force and effect in accordance with the terms thereof. LaSalle Business Credit, Inc. The Singing Machine Company, Inc. LASALLE BANKS February 28, 2002 Page 2 LASALLE BUSINESS CREDIT, INC. By /s/ Casey Orlowski -------------------------- Title Vice President ------------------------- ACKNOWLEDGED AND AGREED TO this 28th day of February, 2002. The Singing Machine Company, Inc. By /s/ John F. Klecha ----------------------------- John F. Klecha Title President/Secretary Lyons Corporate Park, LLP 6601 Lyons Road Suite C-1 Coconut Creek, Florida 33073 - -------------------------------------------------------------------------------- Telephone (954) 428-6600 Fax (954) 428-6713 DATE: March 12, 2002 Mr. John Klecha The Singing Machine Co., Inc. 6601 Lyons Road, Suite A-7 Coconut Creek, FL 33073 RE: 6601 Lyons Road, Suite A-5 Dear Mr. Klecha: Please be advised that notwithstanding anything in the lease to the contrary, Landlord and Tenant agree that there shall be no minimum rent pursuant to the lease for the first month but the Tenant will be responsible for all other items in the lease during this period. If during the Option Period of the Lease, Tenant defaults under the terms of the Lease, and the default is not cured within the time limits specified in the lease, then it is agreed that Tenant will be liable to Landlord for all of the minimum rent, and maintenance, insurance and property taxes not paid by Tenant during the free rental period specified in this letter. Yours truly, LYONS CORPORATE PARK, LLLP /s/ Lee S. Lasser ------------------------------------ LEE S. LASSER, Trustee, as a General Partner /s/ Augustine Ferrera, ------------------------------------ AUGUSTINE FERRERA, Trustee, as a General Partner /s/ Michelle Ferrera ------------------------------------ MICHELLE FERRERA, Trustee, as a General Partner /s/ Michael J. Ferrera ------------------------------------ Michael J. Ferrera, Trustee, as a General Partner THE SINGING MACHINE CO., INC. By /s/ April J. Green - ------------------------------------ APRIL J. GREEN EX-21.1 11 listofsubsidiaries.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES Country of Percentage Name Incorporation Owned - ---- ------------- ---------- International SMC (HK) Limited Hong Kong 100% EX-23.1 12 consentsalberg.txt CONSENT SALBERG EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors The Singing Machine Company, Inc.: We hereby consent to the incorporation by reference in the registration statement of The Singing Machine Company, Inc. on Form S-8 (File No. 333-59684) filed with the Securities and Exchange Commission ("SEC") on April 27, 2001 and the registration statement on Form S-3 (File No. 333-70142) filed with the SEC on October 9, 2001 of our report dated May 23, 2002, with respect to the consolidated financial statements of The Singing Machine Company, Inc. and subsidiary, for the years ended March 31, 2002 and 2001, included in this Annual Report on the Form 10-KSB for the year ended March 31, 2002. /s/ SALBERG & COMPANY, P.A. Boca Raton, Florida June 30,2002 -----END PRIVACY-ENHANCED MESSAGE-----