-----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, UNDlZajs51svwIsI6W5yoVFg6Hrg1UCuPKUpMDHsQIQ7wpljE7I59/20KwRw9bGb seev7ahHv0F2dyBpXfolAQ== 0001116502-01-000218.txt : 20010223 0001116502-01-000218.hdr.sgml : 20010223 ACCESSION NUMBER: 0001116502-01-000218 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-24968 FILM NUMBER: 1541724 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 10QSB 1 0001.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 ----------------- 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 ) (IRS Employer I.D. 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) 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. Yes x No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant 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. Yes x No APPLICABLE ONLY TO CORPORATE ISSUERS There were 4,359,120 shares of Common Stock, $.01 par value, issued and outstanding at December 31, 2000. THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - December 31, 2000 (Unaudited) and March 31, 2000. Consolidated Statement of Operations - Three months and nine months ended December 31, 2000 and 1999 (Unaudited). Consolidated Statement of Cash Flows - Three months and nine months ended December 31, 2000 and 1999 (Unaudited). Notes to Consolidated Financial Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES -2- THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY PART I - FINANCIAL INFORMATION Item I. Financial Statements THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS December 31, March 31, 2000 2000 ---- ---- (unaudited) CURRENT ASSETS: Cash $ 411,184 $ 378,848 Accounts Receivable 4,965,001 728,038 Due from Factor 2,630,918 115,201 Due from Officer(s) 110,000 110,000 Due from related party -- 394,706 Inventory - net 2,563,634 1,487,206 Interest Receivable 4,950 7,425 Prepaid Expenses and Other Current Assets 546,070 204,311 Deferred Tax Asset 363,194 363,194 ------------ ------------ TOTAL CURRENT ASSETS 11,594,951 3,788,929 PROPERTY AND EQUIPMENT, NET 291,218 99,814 OTHER ASSETS: Reorganization Intangible - net 389,434 458,158 ------------ ------------ TOTAL ASSETS $ 12,275,603 $ 4,346,901 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable 1,517,104 354,193 Accrued Expenses 1,739,366 73,675 Income taxes payable 769,583 11,994 Notes Payable 0 0 Due to related party 204,683 753 ------------ ------------ TOTAL CURRENT LIABILITIES 4,230,736 440,615 ------------ ------------ SHAREHOLDERS' EQUITY: Preferred Stock, $1.00 par value; 1,000,000 shares authorized, issued and outstanding -- 1,000,000 Common Stock, $.01 par value; 18,900,000 shares authorized; 4,362,920 and 2,960,120, shares issued and outstanding, respectively 43,629 29,600 Common stock to be issued (50,000 and 67,500 shares, respectively) 500 675 Additional Paid In Capital 3,285,840 1,719,049 Deferred Guarantee Fees (228,629) (400,101) Retained Earnings 4,943,528 1,557,063 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 8,044,868 3,906,286 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,275,603 $ 4,346,901 ============ ============ See accompanying notes to financial statements. -3- THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended December 31, December 31, December 31, December 31, 2000 1999 2000 1999 ---- ---- ---- ---- NET SALES $ 21,008,040 $ 8,640,813 $ 38,863,337 $ 16,967,618 COST OF SALES 16,318,104 6,393,568 29,349,574 12,494,742 ------------ ------------ ------------ ------------ GROSS PROFIT 4,689,936 2,247,245 9,513,763 4,472,876 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,259,606 938,747 4,806,054 1,921,996 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 2,430,330 1,308,498 4,707,709 2,550,880 OTHER INCOME (EXPENSES): Other income 10,268 5,480 14,214 16,142 Interest expense (201,294) (40,430) (404,486) (48,681) Interest income 6,594 0 41,809 0 Factoring fees (144,245) (150,416) (212,743) (347,689) ------------ ------------ ------------ ------------ NET OTHER EXPENSES (328,677) (185,366) (561,206) (380,228) INCOME BEFORE INCOME TAX EXPENSE 2,101,653 1,123,132 4,146,503 2,170,652 INCOME TAX EXPENSE 371,522 0 760,038 0 NET INCOME $ 1,730,131 $ 1,123,132 $ 3,386,465 $ 2,170,652 ============ ============ ============ ============ NET INCOME PER COMMON SHARE Basic $ 0.40 $ 0.39 $ 0.81 $ 0.75 ============ ============ ============ ============ Diluted $ 0.34 $ 0.23 $ 0.69 $ 0.53 ============ ============ ============ ============ WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING Basic 4,360,772 2,898,500 4,190,480 2,898,500 Diluted 5,124,436 4,812,900 4,906,869 4,110,317
See accompanying notes to financial statements -4- THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended Nine Months Ended ------------------ ----------------- December 31, December 31, December 31, December 31, 2000 1999 2000 1999 ---- ---- ---- ---- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 5,985,004 $ ( 295,523) $ 1,623,779 $(1,294,369) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (45,613) 34,759 (255,007) (96,796) Due from factor (2,260,398) (7,554) (2,515,717) (32,214) Due from related parties -- (3,143) 394,706 (5,559) ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities (2,306,011) 24,062 (2,376,018) (149,241) CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock & exercise of warrants and options 188,000 -- 1,580,645 -- Proceeds from issuance of preferred stock -- -- (1,000,000) 1,375,000 Net proceeds from related party (3,352,085) -- 203,930 -- Net proceeds from notes payable (600,000) 831,873 -- 852,011 ----------- ----------- ----------- ----------- Net cash provided by financing activities (3,764,085) 831,873 784,575 2,227,011 ----------- ----------- ----------- ----------- Increase in cash and cash equivalents (85,092) 560,412 32,336 783,401 Cash and cash equivalents - beginning of period 496,276 272,277 378,848 49,288 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 411,184 $ 832,689 $ 411,184 $ 832,689 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. -5- THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (Unaudited) NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-QSB and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. It is suggested that these consolidated condensed financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's audited financial statements on Form 10-KSB for the fiscal year ended March 31, 2000. The accounting policies followed for interim financial reporting are the same as those disclosed in Note 1 of the Notes to Financial Statements included in the Company's audited financial statements for the fiscal year ended March 31, 2000, which are included in Form 10- KSB. In the opinion of management, all adjustments which are of a normal recurring nature and considered necessary to present fairly the financial positions, results of operations, and cash flows for all periods presented have been made. The results of operations for the nine month period ended December 31, 2000 are not necessarily indicative of the results that may be expected for the entire fiscal year ending March 31, 2001. The accompanying consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter-company balances and transactions have been eliminated. Assets and liabilities of the foreign subsidiary are translated at the rate of exchange in effect at the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustment is not material. NOTE 2 - MAJOR CUSTOMERS As a percentage of total revenues, the Company's net sales in the aggregate to its five (5) largest customers during the quarters ended December 31, 2000 and 1999 were approximately 81% and 73%, respectively. For the nine months ending December 31, 2000, two (2) major retailers accounted for 36% and 19% each of total -6- THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 (Unaudited) NOTE 2 - MAJOR CUSTOMERS (Cont'd) revenues. Because of the seasonality of the Company's sales, these results may be distorted due to the historically high percentage of overall sales during the Company's second and third fiscal quarters of each year. NOTE 3 - LOANS PAYABLE During May 2000, the Company entered into two working capital loan agreements of $100,000 and $500,000, respectively. The loans extend over a maximum period of eight months, bear interest at 15% per annum, and are secured by corporate guarantees. In addition, the lenders were granted 5,000 and 25,000 stock options, respectively, to purchase shares of the Company's common stock at an exercise price of $3.25. The 30,000 stock options were accounted for as expense based on the estimated value of the options at the grant dates which aggregate aproximately $38,000. As of December 31, these loans have been paid in full. NOTE 4 - EXERCISE OF STOCK OPTIONS AND WARRANTS AND MODIFICATION Stock options and warrants were exercised during the third quarter of fiscal year 2001. 104,000 shares of common stock were issued with proceeds to the Company of $188,000. On October 26,2000, the Company extended the expiration of the Company's Public Warrants to November 10, 2001. All other terms and conditions of the Public Warrants shall remain the same (exercise price, manner of exercise, etc.) NOTE 5 - ISSUANCE OF STOCK OPTIONS TO EMPLOYEES At the end of September 2000, the Company issued 648,000 options to employees of the Company. The exercise price of these options is $3.06 per option. This price is equal to the fair market value of the Company's common stock on the grant date. These options were accounted for in accordance with APB No. 25. NOTE 6 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has an agreement with FLX (a China manufacturer of consumer electronics products) to produce electronic recording equipment based on the Company's specifications. Paul Wu, a former director of the -7- Company, is Chairman of the Board and a principal stockholder of FLX. During the fiscal years ended March 31, 2000 and 1999, the Company purchased approximately $10.3 million and $1.7 million respectively, in equipment from FLX. The amount due to FLX at December 31, 2000 of $204,683 is included in the related party payable. The Company believes that all of the foregoing transactions with FLX have been on terms no less favorable to the Company than could have been obtained from unaffiliated third parties in arms-length transactions under similar circumstances. NOTE 7 - ADVANCES In November 2000, the Company advanced a refundable amount of $170,000 to a potential acquiree. The transaction is subject to a due diligence review, which must be completed by June 1, 2001. This amount is included in Prepaid and Other Current Assets at December 31, 2000. NOTE 8 - SEGMENTS The Company operates in one business segment. Sales during the three months and nine months ended December 31, 2000, were generated in the following geographic regions. Three Months Nine Months Ended Ended ----- ----- United States $20,835,330 $38,425,625 Europe/Asia 172,710 437,713 ----------- ----------- Total Sales $21,008,040 $38,863,338 =========== =========== -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------- FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10- QSB, including without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," and words of similar import, constitute "forward-looking statements." You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described below and elsewhere in this Quarterly Report, and in other documents we file with the Securities and Exchange Commission Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. GENERAL The Singing Machine Company, Inc. and its wholly owned subsidiary, International (SMC) HK, Ltd.("the "Company," "we" or "us") engages in the production and distribution of karaoke audio software and electronic recording equipment. Our electronic karaoke machines and audio software products are marketed under The Singing Machine(TM) trademark. Our products are sold throughout the United States, primarily through department stores, lifestyle merchants, mass merchandisers, direct mail catalogs and showrooms, music and record stores, national chains, specialty stores and warehouse clubs. Our karaoke machines and karaoke software are currently sold in such retail outlets as Best Buy, Toys R Us, Wal-mart, Target, J.C. Penney and Fingerhut. We had net income before estimated income tax of $4,146,503 for the nine month period ended December 31, 2000. Our working capital as of December 31, 2000, was approximately $7,402,616. RESULTS OF OPERATIONS REVENUES Our revenues increased 143% to $21,008,040 for the three month period ended December 31, 2000 compared with revenues of $8,640,813 for the three-month period ended December 31, 1999. Our revenues increased by 129% to $38,863,338 for the nine month period ended December 31, 2000, compared with revenues of $16,967,618 during the same period in 1999. The increase in total revenues can be attributed to the addition of a major customer. It can also be attributed to the growing popularity of karaoke as wholesome family entertainment. GROSS PROFIT Our gross profit from equipment and music sales increased by 108.6% to $4,689,936, for the three month period ended December 31, 2000 compared with gross profit of $2,247,245,for the three month period ended December 31, 1999. Our gross profit from equipment and music sales increased by 112% to $9,513,764, for the nine month period ended December 31, 2000, compared with gross profit of $4,472,876, for the same period in 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Our SG&A expenses were $2,259,606, or 10.7% of total revenues, and $938,747, or 10.9% of total revenues for the three month periods ended December 31, 2000 and 1999. Our SG&A expenses were $4,806,055, or 12.4% of total revenues, and $1,921,996, or 11.3% of total revenues, for the nine month periods ended December 31, 2000 and 1999. The period-to-period increase in SG&A expenses is due to (1) an increase in salary related expenses due to an increase in -9- corporate office staff, (2) a non-cash expense due to the continued amortization of stock based guarantee fee, and (3)increases in sales based expenses such as commissions and royalties. DEPRECIATION AND AMORTIZATION EXPENSES Our depreciation and amortization expenses were $33,983, or .16% of total revenues and $29,747, or .34% of total revenues, for the three month periods ended December 31, 2000 and 1999. This increase in depreciation and amortization expenses can be attributed to the addition of new tooling for the production of machines. Depreciation and amortization expenses were $93,194, or .23% of total revenues and $82,820, or .48% of total revenues, for the nine month periods ended December 31, 2000 and 1999. OTHER EXPENSES Net interest expense was $201,294, or .96% of total revenues, and $40,430, or .46% of total revenues, for the three months ended December 31, 2000 and 1999. Net interest expense was $404,486, or 1.04% of total revenues, and $48,681, or .48% of total revenues, for the nine months ended December 31, 2000 and 1999. The increase in net interest expense can be attributed to our increased use of our credit line facilities to fund the inventory necessary to meet demand for our products. Loss on sales of accounts receivable was $144,245, or .69% of total revenues, and $150,689, or 1.7% of total revenues, during the three month periods ended December 31, 2000 and 1999. Loss on sales of accounts receivable was $212,744, or .5% of total revenues, and $347,689, or 2.0% of total revenues, during the nine month periods ended December 31, 2000 and 1999. This decrease is due to decreased charges on factored invoices. These decreased charges are the result of a larger total amount of invoices being factored, which in turn decreased both the interest percentage and gives us better terms of factor. INCOME BEFORE INCOME TAX EXPENSE As a result of the foregoing, our net income before income tax expenses increased by 87.1% to $2,101,653, for the three month period ended December 31, 2000, compared with $1,123,132, for the three month period ended December 31, 1999. Our net income before income tax expense increased by 91.1% to $4,146,503, for the nine month period ended December 31, 2000 compared with $2,170,652, for the same period in 1999. INCOME TAX EXPENSE As of the nine months ending December 31,2000, the Company has incurred an estimated income tax of $760,038. For the three months ended December 31, 2000 the amount of estimated income tax was $371,522. During previous periods, we did not have to pay income taxes, because we used our tax-loss carry-forwards. As of September 30, 2000,we had used up our tax-loss carry-forwards and will have -10- to pay income taxes. We expect our income tax rate to be approximately 22% in future quarters, reflecting the combined tax rates on our operations in the U.S. and Hong Kong. NET INCOME As a result of the foregoing, our net income increased 54.0% to $1,730,131, for the three month period ended December 31, 2000, compared with net income of $1,123,132 for the three month period ended December 31, 1999. Our net income increased by 56.0% to $3,386,465, for the nine month period ended December 31, 2000, compared with net income of $2,170,652 for the same period in 1999. SEASONALITY AND QUARTERLY RESULTS Historically, our 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. Our 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. FINANCIAL CONDITION AND LIQUIDITY At December 31, 2000, we had current assets of $11,594,951 and total assets of $12,275,603 compared to current assets of $3,788,929 and total assets of $4,346,901 at March 31, 2000. This increase in current assets and total assets is primarily due to the increase in accounts receivable and inventory. Current liabilities increased to $4,192,335 as of December 31, 2000, compared to $440,615 at March 31, 2000. This increase in current liabilities is because of increased accounts payable, increased accrued expenses, an income tax payable and the increased use of our credit lines to fund future sales. We increased the use of credit lines primarily to purchase more inventory. Accounts payable increased to $1,517,104 as of December 31, 2000 from $354,193 as of March 31, 2000, primarily as a consequence of our increased expenditures to finance our sales efforts. Our shareholder equity increased from $3,906,286 as of March 31, 2000, to $8,083,268 as of December 31, 2000. Our increase in shareholder equity has occurred because of the increase in our current assets, and our retained earnings in the amount of $3,386,465. Cash flows generated from operating activities were $1,623,779 during the nine month period ended December 31, 2000. Cash used in investing activities during the nine month period ended December 31, 2000 was $(2,376,018). Cash flows from financing -11- activities were $784,575 during the nine month period ended December 31, 2000. This consisted of proceeds in the amount of $1,580,645 from the exercise of warrants and options, and proceeds from certain loans. CAPITAL RESOURCES The Company has obtained significant financing for continuing operations and growth. Two (2) specific lines of credit have been opened through the Company's Hong Kong subsidiary, and two (2) financing agreements through its U.S. operations. Belgian Bank Effective February 14, 2000, the Company, through its Hong Kong subsidiary, International SMC(HK) Ltd., obtained a credit facility of $500,000 (US) from Belgian Bank, Hong Kong, a subsidiary of Generale Bank, Belgium. This facility is a revolving line based upon drawing down a maximum of 15% of the value of export letters of credit held by Belgian Bank. There is no maturity date except that Belgian Bank reserves the right to revise the terms and conditions at the Bank's discretion. The cost of this credit facility is the U.S. Dollar prime rate plus 1.25%. Repayment of principal plus interest shall be made upon negotiation of the export letters of credit, but not later than ninety (90) days after the advance. Hong Kong Bank Effective July 7, 1999, the Company, through its Hong Kong subsidiary, International SMC(HK) Ltd., obtained a credit facility of $200,000 (US) from Hong Kong Bank. This facility is a revolving line based upon drawing down a maximum of 15% of the value of export letters of credit held by Hong Kong Bank. There is no maturity date except that Hong Kong Bank reserves the right to revise the terms and conditions at the Bank's discretion. The cost of this credit facility is the U.S. dollar prime rate plus 2.5%. Repayment of principal plus interest shall be made upon negotiation of the export letters of credit, but not later that ninety (90) days after the advance. Main Factors, Inc. The Company is a party to a factoring agreement, as amended April 7, 2000 with Main Factors, Inc. ("Main Factors") pursuant to which Main Factors has agreed to purchase certain of the Company's accounts receivable. Under the agreement, Main Factors will purchase certain selected accounts receivable from the Company and advance between 75% and 85% of the face value of those receivables to the Company. The accounts receivable are purchased by Main Factors without recourse and Main Factors performs an intensive credit review prior to the purchase of the receivables. -12- The Company is charged a variable percentage from 1.5% to 1% based upon the total amount of factored receivables within a calendar year. Main Factors has placed no maximum limit on the amount of the Company's receivables it will purchase. The factoring agreement is personally guaranteed by John Klecha, the Company's Chief Operating Officer and Chief Financial Officer. EPK Financial Corporation The Company has also entered into an agreement with EPK Financial Corporation ("EPK") whereby EPK will open letters of credit with the Company's factories to import inventory for distribution to the Company's customers. This allows the Company to purchase domestic hardware inventory for distribution to customers in less than container load quantities, thus providing the Company's customers with flexibility, and further, saving the customer the expense of opening a letter of credit in favor of the Company. The selling price to these customers is considerably higher because the Company pays financing costs to EPK and incurs costs of ocean freight, duty, and handling charges. Upon shipment of product from these financed transactions, the receivables are factored by Main Factors, thereby buying the shipments and related interest from EPK. The Company pays EPK a negotiated flat fee per transaction, and the maximum purchase price per transaction is $1,000,000. There have been no maximum total shipments established under this agreement. Main Factors has entered into this agreement as a third party agreeing to purchase all receivables invoiced pursuant to the EPK agreement. The transactions financed by EPK are supported by personal guarantees of Edward Steele, the Company's Chairman and Chief Executive Officer and John Klecha, the Company's Chief Operating Officer, and Chief Financial Officer. The agreement is in effect until July 1, 2001, unless terminated by either party upon a thirty (30) day written notice. Loans Payable During May 2000, the Company entered into two working capital loan agreements of $100,000 and $500,000, respectively. The loans extend over a maximum period of eight months, bear interest at 15% per annum, and are secured by corporate guarantees. In addition, the lenders were granted 5,000 and 25,000 stock options, respectively, to purchase shares of the Company's common stock at an exercise price of $3.25. As of December 31, 2000, these loans were paid in full. We believe that our current cash and equivalents, lines of credit, and cash generated from operations will satisfy our expected working capital and capital expenditure requirements at least through the next 12 months. The Company has no present commitment that is likely to result in its liquidity increasing or decreasing in any material way. In addition, the Company knows of no trend, additional demand, event or uncertainty that will result in, or that is reasonably likely -13- to result in, the Company's liquidity increasing or decreasing in any material way. The Company has no material commitments for capital expenditures. The Company knows of no material trends, favorable or unfavorable, in the Company's capital resources. The Company has no additional outstanding credit lines or credit commitments in place and has no additional current need for financial credit. RISK FACTORS Set forth below and elsewhere in this Quarterly Report 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 Quarterly Report. We have significant future capital needs which are subject to the uncertainty of additional financing We may need to raise significant additional funds to fund our rapid sales growth and/or implement other business strategies. If adequate funds are not available on acceptable terms, or at all, we may be unable to sustain our rapid growth, which would have a material adverse effect on our business, results of operations, and financial condition. Your investment may be diluted If additional funds are raised through the issuance of equity securities, your percentage ownership in the Company's equity will be reduced. Also, you may experience additional dilution in net book value per share, and the equity securities may have rights, preferences, or privileges senior to those of yours. Our ability to manage growth could hurt our business To manage our growth, we must implement systems, and train and manage our employees. We may not be able to implement these action items in a timely manner, or at all. Our inability to manage growth effectively could have a material adverse effect on our business operating results, and financial conditions. There can be no assurance that we will achieve our planned expansion goals, manage our growth effectively, or operate profitably. Our inability to compete and maintain our niche in the entertainment industry could hurt our business The business in which we are engaged is highly competitive. In addition, we must compete with all the other existing forms of entertainment including, but not limited to, motion pictures, video arcade games, home video games, theme parks, nightclubs, television and prerecorded tapes, CD's and video cassettes. Competition in the Company's markets is based primarily on price, product performance, reputation, delivery times, and customer -14- support. We believe that new product introductions and enhancements of existing products are material factors for our continuing growth and profitability. Many of our competitors are substantially larger and have significantly greater financial, marketing and operating resources than we have. No assurance can be given that we will continue to be successful in introducing new products or further enhancing existing products. We rely on sales to key customers which subjects us to risk As a percentage of total revenues, the Company's net sales in the aggregate to its five largest customers during the fiscal years ended March 31, 1999 and 2000, were approximately 91% and 70% respectively. For the nine months ended December 31, 2000, two major retailers accounted for 36% and 19% each of total revenues. During fiscal year 2001, the Company has made significant progress in broadening its base of customers. Although we have long- established relationships with many of our customers, we do not have long-term contractual arrangements with any of them. A decrease in business from any of our major customers could have a material adverse effect on our results of operations and financial condition. We have significant 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 in stores, and warehouse clubs. Certain of such retailers the economy have engaged in leveraged buyouts or transactions in which they incurred a significant amount of debt, and some are currently operating under the protection of bankruptcy laws. Despite the difficulties experienced by retailers in recent years, we have not suffered significant credit losses to date. A deterioration in the financial condition of our major customers could have a material adverse effect on our future profitability. We are subject to the risks of doing business abroad We are dependent upon foreign companies for manufacture of all of our electronic products. Our arrangements with manufacturers are subject to the risks of doing business abroad, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, political instability, and other factors which could have an adverse impact on the business of the Company. We believe that the loss of any one or more of our suppliers would not have a long-term material adverse effect on us, because other manufacturers with whom we do business would be able to increase production to fulfill our requirements. However, the loss of certain of our suppliers, could, in the short-term, adversely affect our business until alternative supply arrangements were -15- secured. During fiscal 2000 and 1999, suppliers in the People's Republic of China accounted for 88% and 93%, respectively of the Company's total product purchases, including virtually all of the Company's hardware purchases. If Most Favored Nation ("MFN") status for China is restricted or revoked in the future, the costs of goods purchased from Chinese vendors is likely to increase. Management continues to closely monitor the situation and has determined that the production capabilities in countries outside China which have MFN status and, therefore, have favorable duty rates, would meet production needs. Such a change in suppliers may have a short-term adverse effect on operations and, possibly, earnings. We are subject to seasonality which is affected by various economic conditions and changes resulting in fluctuations in quarterly results We have experienced, and will experience in the future, significant fluctuations in sales and operating results from quarter to quarter. This is due largely to the fact that a significant portion of our business is derived from a limited number of relatively large customer orders, the timing of which cannot be predicted. Furthermore, as is typical in the karaoke industry, the quarters ended September 30 and December 31 includes increased revenues from sales made during the holiday season. Additional factors that can cause our sales and operating results to vary significantly from period to period include, among others, the mix of products, fluctuating market demand, price competition, new product introductions by competitors, fluctuations in foreign currency exchange rates, disruptions in delivery of components, political instability, general economic conditions, and the other considerations described in this section. Accordingly, period-to- period comparisons may not necessarily be meaningful and should not be relied on as indicative of future performance. Historically, the third quarter of our fiscal year, the three months ended December 31, have been the most profitable quarter, and the fourth quarter of our fiscal year, the three months ended March 31, have been the least profitable quarter. Our proprietary technology may not be sufficiently protected Our success depends on our proprietary technology. We rely on a combination of contractual rights, patents, trade secrets, know- how, trademarks, non-disclosure agreements and technical measures to establish and protect our rights. We cannot assure you that we can protect our rights to prevent third parties from using or copying our technology. We may be subject to claims from third parties for unauthorized use of their proprietary technology We believe that we independently developed our technology and that it does not infringe on the proprietary rights or trade secrets of others. However, we cannot assure you that we have not infringed on the technologies of third parties or those third parties will -16- not make infringement violation claims against us. Any infringement claims may have a negative effect on our ability to manufacture our products. Consumer discretionary spending may affect karaoke purchases and is affected by various economic conditions and changes Purchases of karaoke audio software and electronic discretionary recording equipment are considered discretionary for consumers. Our success will therefore be influenced by a number of economic factors affecting discretionary and consumer spending, such as employment levels, business, interest rates, and taxation rates, all of which are not under our control. Adverse economic changes affecting these factors may restrict consumer spending and thereby adversely affect our growth and profitability. We depend on third party suppliers, and if we cannot obtain supplies as needed, our operations will be severely damaged We rely on third party suppliers to produce the parts and materials we use to manufacture our products. If our suppliers are unable to provide us with the parts and supplies, we will be unable to produce our products. We cannot guarantee that we will be able to purchase the parts we need at reasonable prices or in a timely fashion. If we are unable to purchase the supplies and parts we need to manufacture our products, we will experience severe production problems, which may possibly result in the termination of our operations. We may not be able to attract and retain key personnel The development of our business has been largely able to attract dependent on the efforts of Edward Steele and John Klecha. Although we have entered into employment contracts with Messrs. Steele and Klecha, the loss of the services of either of these individuals could have a material adverse affect on the Company. We believe that our future success also will depend significantly upon our ability to attract, motivate, and retain additional highly skilled managerial personnel. Competition for such personnel is intense, and there can be no assurance that we will be successful in attracting, assimilating, and retaining the personnel we require to grow and operate profitability. There is only a limited market for our stock and we cannot assure a more significant market will ever develop Our common stock is traded on the OTC Bulletin Board under the symbol "SING". As result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our Common Stock. On January 24, 2001, we applied to have our securities listed on the American Stock Exchange. While we believe that we meet all the requirements to be listed on the American Stock Exchange, there are no assurances that our common stock will be listed on the American Stock Exchange. -17- PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is not a party to any material legal proceeding, nor to the knowledge of management, are any legal proceedings threatened against the Company. From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. Item 2. CHANGES IN SECURITIES (a) On October 26, 2000, the Board of Directors of the Company unanimously consented to extend the expiration date of the Company's Public Warrants to November 10, 2001. All other terms and conditions of the Public Warrants shall remain the same (exercise price, manner of exercise, etc.). (b) Not Applicable. (c) During the three month period ended December 31, 2000, four warrant holders exercised their warrants to acquire an aggregate of 104,000 shares of our common stock. The names of the warrant holders, the dates of exercise the number of shares purchased, the exercise price and the proceeds recieved by the Company are listed below. Date of No. of Exercise Name Exercise Shares Price Proceeds - ---- -------- ------ ----- -------- Bank Sal Oppenheim 10/27/00 40,000 $ 2.00 $80,000 Union Atlantic 11/01/00 20,000 $ 1.00 $20,000 Sil Venturi 12/01/00 4,000 $ 2.00 $ 8,000 Aton Trust 12/01/00 40,000 $ 2.00 $80,000 Each of these warrant holders exercised their warrants in reliance upon Section 4(2) of the Securities Act of 1933, because each of these holders was knowledgeable, 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. (d) Not applicable. Item 3. DEFAULTS UPON SENIOR SECURITIES Not applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS Not applicable. -18- Item 5. OTHER INFORMATION The Company is reporting information regarding its proposed acquisition of a controlling interest in Toy Concepts International Limited, a Hong Kong company, in this Form 10-QSB instead of in a Current Report on Form 8-K. This contains information required under "Item 5. Other Events." On February 12, 2001, the Company through its wholly owned subsidiary, International SMC (HK) Limited, entered into an agreement to purchase 600,000 shares or 60% of the issued and outstanding shares of Toy Concepts International Limited, a Hong Kong company from Lui Ka Shing David and Lui Yu Pik Kitty. The Company has a 3 1/2 month due diligence period to investigate Toy Concepts, which expires on June 1, 2001. There can be no assurances that this acquisition will close or that it will be profitable to the Company if it closes. Toy Concepts is engaged in the business of manufacturing and distributing toys, including toy lines of figures, molded horses and other animals, dolls and doll products. If the acquisition is closed, Toy Concepts intends to continue in its current line of business and will also begin distributing more toy karaoke products. The proposed stock purchase is being made pursuant to a Stock Purchase Agreement dated February 12, 2001. The foregoing discussion of the Stock Purchase Agreement is qualified by reference to the complete text of the Stock Purchase Agreement, as amended, which is filed as Exhibit 2.1 hereto and is incorporated herein by this reference. (c) Exhibits. 2.1 Stock Purchase Agreement dated February 12, 2001 by and between International SMC (HK) Limited, as purchaser, and Lui Ka Shing David and Lui Yu Pik Kitty, as the vendors, and Liu Yiu Wah, as vendor guarantor relating to the sale of 600,000 shares of Toy Concepts International Limited. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Title - ------ ----- 2.1 Stock Purchase Agreement dated February 12, 2001 by and between International SMC (HK) Limited, as purchaser, and Lui Ka Shing David and Lui Yu Pik Kitty, as the vendors, and Liu Yiu Wah, as vendor guarantor relating to the sale of 600,000 shares of Toy Concepts International Limited. (b) Reports on Form 8-K On November 30, 2000, the Company filed a Form 8-K reporting information under Item 4 - Change in Registrant's Certifying Accountant. -19- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE SINGING MACHINE COMPANY, INC. Dated: February 13, 2000 By: /s/ John F. Klecha --------------------------- John F. Klecha Chief Financial Officer EX-2.1 2 0002.txt STOCK PURCHASE AGREEMENT DATED FEBRUARY 12, 2001 THIS AGREEMENT made the 12th day of February Two Thousand and One BETWEEN all those persons whose respective names and addresses are set out in the First Schedule hereto (the "Vendors") of the one part and the person whose name and address are set out in the Second Schedule hereto (the "Purchaser") of the second part and LUI YIU WAH, holder of Hong Kong Identity Card No. Al85781(1), gentleman of 1/F., Liven House, 61-63 King Yip Street, Kwun Tong, Kowloon, Hong Kong (the "Vendor Guarantor") of the third part. WHEREAS (A) TOY CONCEPTS INTERNATIONAL LIMITED (the "Company") was incorporated in Hong Kong under the Companies Ordinance on 5 August 1993 as a private company limited by shares with an authorized share capital of HK$1,000,000.00 divided into 1,000,000 ordinary shares of HK$1.00 each, all of which have been issued and fully paid up as at the date hereof. (B) The Vendors are respectively the registered holders of the number of shares in the Company as am set out opposite to their respective names in the third column of the First Schedule hereto at the date hereof (hereinafter referred to as "the Sole Shares") and each of the Vendors has the right, power and authority to sell and transfer the Sale Shares, free from any claims, debts, liens, options, preemption rights, charges, encumbrances, equities or adverse rights of any description together with all rights attached thereto and all dividends and distributions declared paid or made in respect thereof after the, date hereof. (C) The Vendors have agreed to sell and the Purchaser has agreed to purchase the Sale Shares on the terms and conditions and on the basis of the warranties, representations, undertakings, agreements and indemnities hereinafter mentioned. NOW IT IS HEREBY AGREED as follows 1. DEFINITIONS AND INTERPRETATION ------------------------------ 1.1 In this Agreement, unless otherwise expressed or required by context, the following expressions shall have the respective meanings set opposite thereto, as follows:
Expression Meaning ---------- ------- "Accounts" the unaudited profit and loss account for the year ended on and the unaudited balance sheet as at the Accounts Date of the Company together with the pro forma consolidated balance sheet of the Company for the financial period ended on the Accounts Date, a copy of which has been initialed by the Vendors for the purpose of identification and , annexed hereto as Annex A; 1 "Accounts Date" 31 March 2000; "Business Day" any day on which banks in Hong Kong are officially open for business, except a Saturday; "Completion" completion of the sale and purchase of the Sale Shares pursuant to Clause 4; "Completion Date" the first Business Day after the fulfillment of the Conditions Precedent or June 1, 2001, whichever shall occur later, on which completion of the transactions set out in Clause 4.1 are to take place; "Conditions Precedent" the condition precedent provided in Clause 2.1; "Consideration" the purchaser price for the purchase of the Sale Shares as set out in Clause 3.1; "Deposits" the payment of the Consideration made by the Purchaser pursuant to Clause 3; "Disclosed" fully and fairly disclosed to the Purchaser in this Agreement and the Disclosure Letter and the Accounts; "Disclosure Letter" the disclosure letter dated the date of this Agreement, from the Vendors to the Purchaser annexed hereto as Annex B; "HK$" Hong Kong Dollars, the lawful currency of Hong Kong; "Hong Kong" The Hong Kong Special Administrative Region of the People's Republic of China; "Purchaser's Solicitors" Messrs. T.S. Tong & Co., at 8th Floor, Wing Lung Bank Building, 45 Des Voeux Road Central, Hong Kong; "Tax" and "Taxation" means any form of taxation, levy, duty, surcharge, contribution or imposition of whatever nature (including any fine, penalty, surcharge or interest in relation thereto) imposed by a local, municipal, governmental, state, federal or other body or authority iii Hong Kong; "Vendors' Solicitors" Messrs. Chan, Lau & Wai at Room 601, Aon China Building, No.29 Queen's Road Central, Hong Kong; 2 "Warranties" the representations, warranties, undertakings or indemnities made or given! by the Vendors in this Agreement; "US$" the United States of America Dollars, the lawful currency of the United States of America;
1.2 The headings to the Clauses of this Agreement are for ease of reference only and shall be ignored in interpreting this Agreement. 1.3 Reference herein to "Clauses" and "Schedules" are reference to clauses of and schedules to this Agreement. 1.4 Words and expressions in the singular include the plural and vice versa, 1.5 Reference to person include any public body and any body of persons, corporate or unincorporate. 1.6 Reference to Ordinances, statutes, legislations or enactments shall be construed as a reference to such Ordinances, statutes, legislations or enactments as may be amended or re-enacted from time to time and for the time being in force. 1.7 Recitals (A), (B) and (C) form part of this Agreement. 2. CONDITIONS PRECEDENT FOR THE SALE AND PURCHASE OF SALE SHARES ------------------------------------------------------------- 2.1. The respective obligations to affect Completion in accordance with Clause 4 of this Agreement shall be conditional upon the fulfillment of the condition that the due diligence investigation to be carried out pursuant to Clause 2.6 having been completed to the reasonable satisfaction of the Purchaser ("Conditions Precedent"). The Vendors and the Purchaser shall use all reasonable endeavors to procure the fulfillment of the Conditions Precedent as soon as possible but in any event before 1 June 2001 and the Vendors shall provide all reasonable assistance required by the Purchaser so as to fulfill the Conditions Precedent. 2.2 If the Conditions Precedent shall not have been fulfilled or waived on or before 1 June 2001 and the non-fulfillment is not attributable to the default of any of the parties hereto, this Agreement shall become null and void and of no legal effect and neither of the parties hereto shall have any claim and/or recourse against the other of them save and except any antecedent breach of the terms hereof and the Vendors shall forthwith thereafter refund and return the Deposits in full to the Purchaser without interest, costs or compensations whatsoever. 2.3 In the event that (other than due to the default of the Purchaser) the Vendors shall despite fulfillment or waiver of the Conditions Precedent fail to complete the sale of the Sale Shares 3 to the Purchaser pursuant to the terms hereof and/or to carry out any of the Vendors' obligations herein, it shall be open to the Purchaser either to enforce the sale of the Sale Shares and the performance of the outstanding obligations by decree of specific performance against the Vendors or by written notice to the Vendors to forthwith rescind this Agreement whereupon the Deposits shall be refunded to the Purchaser forthwith but without prejudice to the Purchaser's right to claim for damages (if any) against the Vendors and all documents and things in respect of the Company previously delivered by the Vendors or the Vendors' Solicitors to the Purchaser or the Purchaser's Solicitors shall forthwith be returned to the Vendors or the Vendors' Solicitors. 2.4 In the event that (other than due to the default of the Vendors) the Purchaser shall despite fulfillment or waiver of the Conditions Precedent fail to complete the purchase of the Sale Shares and/or to pay the Consideration or any part thereof pursuant to the terms hereof, the Vendors may sue the Purchaser for specific performance of this Agreement or may by notice in writing to the Purchaser forthwith rescind this Agreement whereupon the Deposits shall be absolutely forfeited to the Vendors as liquidated damages but without prejudice to the right of the Vendors to claim for damages (if any) and specific performance of this Agreement against the Purchaser and all documents and things in respect of the Company previously delivered by the Vendors or the Vendors' Solicitors to the Purchaser or the Purchaser's Solicitors shall be returned to the Vendors or the Vendors' Solicitors. 2.5 The Purchaser may in its absolute discretion waive all of the Conditions. If the Vendors shall not receive from the Purchaser any objection or query in writing in relation to the business or any other matters concerning the Company on or before 1 June 2001, the due diligence review and investigation referred to in Clause 2.6 shall be deemed to have been carried out to the satisfaction of the Purchaser and the Conditions Precedent shall be deemed to have been fulfilled by the parties hereto or waived by the Purchaser. 2.6 The Purchaser shall be entitled to carry out a due diligence review and investigation of the business of the Company to such extent as is necessary for the transaction contemplated under this Agreement, such due diligence review to be completed on or before 1 June 2001. In order to facilitate such due diligence review, as soon as practicable after the date of this Agreement, the Vendors shall. procure the Company to make available for inspection to authorized representatives of the Purchaser all such information relating to the Company and such access to the premises and all books, title deeds, records, accounts, contracts relating to the Company as soon as practicable and other documentation of the Company as the Purchaser may reasonably request as soon as practicable. 2.7 The Purchaser shall not be obliged to complete the purchase of any of the Sale Shares unless the sale and purchase of all the Sale Shares shall be, completed simultaneously. 4 3. PAYMENT ------- 3.1 In November 2000, the Company advanced a refundable deposit in the amount of One Hundred Seventy Thousand ($170,000) to the Vendors as Consideration for the proposed purchase of the Shares. 3.2 If the Purchaser is not satisfied with the results of its due diligence investigation which expires on June 1, 2001, the Purchaser shall be entitled to a full refund of the $170,000 that was advanced to the Vendors. 3.3 The Purchaser's obligations set out in this Section 3 are conditional upon the compliance of all the applicable terms and conditions of this Agreement on the part of the Vendors, 4. COMPLETION ---------- 4.1 Completion of the sale and purchase of the Sale Shares shall take place on the tenth Business Day after the fulfillment of the Conditions Precedent or 1 June 2001, whichever shall occur later ("Completion Date") at the offices of Vendors' Solicitors, or at such date or place as may be mutually agreed by the parties hereto when the following business will be simultaneously transacted: 4.1.1 The Vendors shall deliver and/or procure the delivery to the Purchaser or its nominee(s) the following 4.1.1.1 instrument(s) of transfer in favor of the Purchaser and/or its nominee(s) in respect of the Sale Shares all duly executed by the Vendors or the registered holder of the Sale Shares; 4.1.1.2 original share certificates and the relevant declarations of trust (if executed) in respect of the Sale Shares; 4.1.1.3 such other documents as may be required to give a good and effective transfer of title to the Sale Shares to the Purchaser and/or its nominee(s) and to enable it/them to become the registered holder(s) thereof; 4.1.1.4 written resignation of the Vendors directors of the Company with immediate effect after the appointment of the Purchaser's nominees as referred to in Clause 4.1.2(ii) of this Agreement and with acknowledgment that they have no claim or right of action against the Company for compensation for loss of office, termination of employment or otherwise; 5 4.1.1.5 written resignation of the company secretary of the Company with immediate effect and with acknowledgment that they have no claim or right of action against the Company for compensation for loss of office, termination of employment or otherwise; 4.1.1.6 written resignation, if required, of the Auditors (if any) of the Company; 4.1.1.7 all other documents and papers whatsoever relating to the affairs of the Company as are in the possession or custody of the Vendors. 4.1.2 The Vendors together with the other director(s) of the Company shall procure that a board meeting of the Company be held on Completion and shall procure the passing thereat of board resolutions to the following effect; (i) approving the transfer of the Sale Shares to the Purchaser and/or its nominees and the registration of the appropriate share transfers subject to the same being duly stamped; (ii) appointing three persons as may be nominated by the Purchaser as directors and appointing such person as may be nominated by the Purchaser as secretary of the Company and approving the resignation of the Vendors directors of the Company and the resignation of the existing company secretary of the Company. 4.1.3 The Vendors shall do all that is necessary to ensure that the Sale Shares are duly transferred and registered in the name of the Purchaser (or its nominee(s)) and that the three persons as the Purchasers shall nominate are appointed as new directors of the Company. 4.2 The transactions described in Clause 4.1 shall take place at the same time so that in default of the performance of any such transactions the other party or parties shall not be obliged to complete the sale and purchase aforesaid (without prejudice to any further legal remedies). 5. FURTHER OBLIGATIONS OF THE VENDORS PENDING COMPLETION ----------------------------------------------------- 5.1 The Vendors shall procure that the business of the Company is and shall be operated in a manner consistent with past practices and shall use all reasonable endeavors to carry on the business of the Company in the best interest of the Company in the circumstances or then prevailing circumstances during the period from the date hereof until Completion. The Vendors shall procure that the Company shall not during the aforesaid period except with the prior consent in writing of the Purchaser: 6 5.1.1 in any material way depart from the ordinary course of its day to day business either as regards the nature, scope or manner of conducting the same, or otherwise do anything whereby its financial position will be materially and adversely affected; 5.1.2 sell or transfer or otherwise dispose of (other than in the ordinary course of business) any part of its assets, or waive any rights of material value or cancel or release any debt or claim, or create or permit to arise any encumbrance on or in respect of any part of its undertaking, property or assets save for any encumbrance arising by operation of law and without any default by the Vendors or the Company; 5.1.3 discharge or satisfy (otherwise than in the ordinary course of business) any encumbrance, its undertaking, property or assets or any obligation or liability whether actual or contingent, or make any payment or enter into any commitment or obligation or any kind (other than in respect of normal trading accounts entered into on an arm's length basis and in the ordinary course of business where full payment is made directly between the original debtor and creditor so that the direct liability is discharged in fall); 5.1.4 knowingly contravene or fail to comply with any obligation, statutory or otherwise, fail to perform and continue to perform in accordance with the terms of any material contracts, or knowingly terminate any material agreement, arrangement or understanding, or enter into any contract or arrangement outside the ordinary course of business of the Company; 5.1.5 fail to duly reserve and preserve its material rights in respect of any actual or potential litigation, arbitration or other proceedings material to it, or fail to continue to maintain full force and effect all insurance policies now in effect or renewals thereof, and not knowingly default under any provision thereof and duly to give any notice and presentand maintain any claims under any such insurance policies; 5.1.6 fail to duly file all reports or other documents required to be filed with governmental authorities or to duly observe and conform in all material respects to all applicable laws, or any consent, approvals, licences and permits in relation to its business or any or its, assets, or dispose of the ownership, possession, custody or control of any of its corporate or other books or records; 5.1.7 issue any shares or other securities or loan capital or merge or consolidate with any other equity or take any steps with a view to dissolution, liquidation or winding up or do or permit to be done any act, deed or thing which might result in the same; 5.1.8 appoint any director, secretary or (pursuant to any power of attorney or similar authority) attorney save for the purpose of Completion under this Agreement; 5.1.9 declare, make or pay any dividend or under distribution; 7 5.1.10 amend, vary or agree to amend or vary any material contract to which the Company is a party; 5.1.11 lend any money to any of the directors or their respective associates or give any security over any of its assets to any of the directors or their respective associates in respect of any loan made to them; 5.1.12 commit any act or omission which would constitute a breach of the Warranties set out in the Third Schedule hereto. 6. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS -------------------------------------------- 6.1 Save as Disclosed on or before the date hereof, the Vendors hereby represent and warrant to and undertake with the Purchaser that each of the matters set out in the Third Schedule are as at the date hereof and shall as at the Completion Date be true and correct and not misleading in all material respects. 6.2 Each of Warranties contained in this Agreement (including all Schedules) will survive the completion of the sale and purchase of the Sale Shares. 6.3 Nothing herein contained shall prejudice either or the parties' right to specific performance of this Agreement, 6.4 Each party hereby undertakes to execute and do and cause or procure to be executed and done all such other documents, instruments, acts and things as the other party may reasonably require in order to give effect to this Agreement. 6.5 The Vendors hereby agree and undertake to do execute and perform such further acts deeds, documents and things as the Purchaser may require effectively to vest the beneficial ownership of the Sale Shares in the Purchaser or its nominee(s) and to exercise and compel the exercise of all voting rights as directors and shareholders of or in the Company to procure that the Company to do all necessary acts and things to fulfill the obligations of the Vendors herein contained. 6.6 Each of the parties hereto hereby unconditionally and irrevocably represents to and warrants to the other that its entry into and performance of this Agreement will not be contrary to any applicable law. 6.7 The Vendors shall promptly notify the Purchaser in writing of any matter or thing which the Vendors become aware which is in breach of or inconsistent with any of the Warranties. Where the breach of the Warranty is not of a material nature, upon receipt of such notice by the Purchaser or at such time when the Purchaser becomes aware of the matter or thing which is in breach of or inconsistent with any of the Warranties, the Purchaser shall have the right to demand the Vendors to remedy or rectify the same by service of a written notice to 8 the Vendors setting forth the particulars of such breach. Upon receipt of the written notice by the Vendors, the Vendors shall have 14 days from the date of such notice or until the Completion Date, whichever is the earlier, to rectify or remedy the breach. 6.8 Where the breach of Warranty is of a material nature or if the Vendors shall fail to remedy or rectify the breach within the prescribed period pursuant to Clause 6.7, the Purchaser may elect to rescind this Agreement. Upon such rescission, the Vendors shall forthwith refund the Deposits to the Purchaser. 6.9 (a) The liability of the Vendors and the Vendor Guarantor in respect of any breach of the Warranties and any terms and conditions of this Agreement shall be limited as provided in the following subclauses of this Clauses. (b) The Vendors and the Vendor Guarantor shall be under no liability in respect of a breach of any of the Warranties or any terms and conditions of this Agreements unless both of them shall have received written notice from the Purchaser prior to the 1st anniversary of the date of this Agreement giving details of the relevant claim and any such claim shall (if not previously satisfied, settled or withdrawn) be deemed to have been waived or withdrawn at the expiration of 3 months after the 1st anniversary of the date of this Agreement unless proceedings in respect, thereof shall then already have been commenced against the Vendors and Vendor Guarantor. (c) The Vendors and the Vendor Guarantor shall be under no liability in respect of any breach of the Warranties or any terms and conditions of this Agreement (i) if such liability would not have arisen but; for something voluntarily done or omitted to be done (other than pursuant to a legally bindingcommitment created on or before Completion) by the Purchaser after Completion and otherwise than in the ordinary course of business; (ii) if such liability arises by reason of an increase in the rates of taxation since the Accounts Date; (iii) to the extent that provision or reserve in respect of such liability was made in the Accounts; or (iv) to the extent that such liability arises or is increased as a result only of any increase in rates of tax made after Completion with retrospective effect; (v) if such liability arises in respect of tax for which the Company is primarily liable and which arose in the ordinary course of business of the Company between Accounts Date and Completion; 9 (d) The aggregate liability of the Vendors and the Vendor Guarantor in respect of any claim for breach of any of the Warranties or any terms and conditions of this Agreement shall be limited to the extent that the amount of such liability shall be computed after deducting therefrom (i) the amount by which any taxation for which the Company is or may be assessed or accountable is reduced or extinguished as a result of such liability; (ii) the amount by which any provision for tax (including deferred or provisional tax), bad or doubtful debts or contingent or other liabilities contained in the Accounts has proved at the date of the relevant claim to be in excess of the matter for which such provision was made; and (iii) the amount of any taxation credits, relief or set-off due to or already received by the Purchaser or the Company (except to the extent that the same shall have been taken into account in the Accounts) and shall be further limited to the aggregate Consideration received by the Vendors hereunder. The Purchaser shall and shall procure the Company to reimburse to the Vendors and the Vendor Guarantor an amount equal to any sum paid by the Vendors or the Vendor Guarantor or any of them in respect of a claim under the Warranties which is subsequently recovered, or paid to the Purchaser or the Company by any third party provided that the Purchaser and/or the Company shall be entitled to deduct from the amount to be reimbursed to the Vendors and the Vendor Guarantor as aforesaid, any costs and expenses as may be incurred in the recovery of the sum so paid by the Vendors or the Vendor Guarantor or any part thereof from the third party. (f) Without prejudice to the liability of the Vendors and the Vendor Guarantor in respect of any breach of the Warranties or any term and conditions of this Agreement (i) the Purchaser shall notify the Vendors and the Vendor Guarantor of any assessment or claim against the Purchaser and shall procure the Vendor Guarantor of any Company to notify the Vendors and the assessment or claim against the Company in respect of which (if valid) a claim would lie against the Vendors and the Vendor Guarantor under any of the Warranties forthwith upon the Purchaser or (as the case may be) the Company becoming aware of the same; and (ii) The Vendors and the Vendor Guarantor shall be offered a reasonable opportunity at their expense of resisting in the name of the Purchaser or (as the case may be) the Company my such assessment or claim and shall at the Vendors' and/or the Vendor Guarantor's expenses be provided with or have made available to, them all information and documents of the Company and 10 (to the extent applicable) of the Purchaser reasonably required by them for the purpose Of such resistance as aforesaid, but subject to the Company and the Purchaser being indemnified to their reasonable satisfaction against all costs and expenses thereby incurred and to the Purchaser being kept fully informed of all steps proposed to be taken by the Vendors and/or the Vendor Guarantor and the Purchaser shall not and shall procure that the Company shall not without written consent (such consent shall not be unreasonably withheld) of the Vendors and the Vendor Guarantor admit, settle or discharge any such assessment or claim. 6A. GUARANTEE BY THE VENDOR GUARANTOR --------------------------------- 6A.1 The Vendor Guarantor hereby guarantees, unconditionally and irrevocably as primary obligor, to the Purchaser the due observance and performance by the Vendors of all the agreements, obligations, commitments and undertakings contained in this Agreement ("Vendors' Guaranteed Obligations") on the part of the Vendors to be observed and performed and that the Warranties given or provided by the Vendors to the Purchaser under this Agreement are true accurate and correct and the Vendor Guarantor undertakes and agrees that he will indemnify the Purchaser and keep the Purchaser fully indemnified on a full indemnity basis in respect of all losses, costs, expenses and damage whatsoever which may be sustained by the Purchaser by reason of or in consequence of any failure of the Vendors to carry out any such Vendors' Guaranteed Obligations or any breach of the Warranties' given or provided by the Vendors to the Purchaser under this Agreement. 6A.2 The guarantee and indemnity provided by the Vendor Guarantor in this Clause 6A shall be a continuing guarantee and indemnity and shall cover all Vendors' Guaranteed Obligations and/or breach of the Warranties given or provided by the Vendors to the Purchaser under this Agreement notwithstanding the liquidation, incapacity or any change in the constitution of the Vendors or any settlement of account or variation or modification of this Agreement or any indulgence or waiver given by any party hereto or other matter whatsoever until the last claim whatsoever by the Purchaser against the Vendors has been satisfied in full, 6A.3 Should any Vendors' Guaranteed Obligations or the Warranties given or provided by the Vendors to the Purchaser under this Agreement, which if valid or enforceable would be the subject of the guarantee and indemnity in this Clause 6A, be or become wholly or in part invalid or unenforceable against the Vendors by reason of any defect in or insufficiency or want of powers of the Vendors or irregular or improper purported exercise thereof or breach or want of authority by any person purporting to act on behalf of the Vendors or because any of the rights have become barred by reason of any legal limitation, disability, incapacity or any other fact or circumstance whether or not always known to the Purchaser, the Vendor Guarantor shall nevertheless be liable to the Purchaser notwithstanding the avoidance or invalidity 11 of any term or condition of this Agreement whatsoever including (without limitation) avoidance under any enactment relating to liquidation in respect of that Vendors' Guaranteed Obligations or any of the Warranties given or provided by the Vendors to the Purchaser under this Agreement as if the same were wholly valid and enforceable. 6A.4 The guarantee and indemnity provided by the Vendor Guarantor in this Clause 6A may be enforced against him by the Purchaser at any time without first instituting legal proceedings against the Vendors in the first instance or joining in the Vendors as a party or parties in the same proceedings against him. 6A.5 For the avoidance of doubt, this Clause 6A shall be subject always to the relevant provisions of Clause 6. 7. SEVERABILITY ------------ If at any time any one or more provisions hereof is or becomes invalid, illegal, unenforceable or incapable of performance in any respect, the validity, legality, enforceability or performance of the remaining provisions hereof shall not thereby in any way be affected or impaired. 8. ENTIRE AGREEMENT ---------------- This Agreement constitutes the entire agreement and understanding between the parties in connection with the subject-matter of this Agreement and supersedes all previous proposals, representations, warranties, agreements or undertakings relating thereto whether oral, written or otherwise and neither party has relied on any such proposals, representations, warranties, agreements or undertakings. 9. TIME ---- 9.1 Time shall be of the essence in this Agreement. 9.2 No time or indulgence given by any party to the other shall be deemed or in any way be construed as a waiver of any of its rights and remedies hereunder. 12 10. ASSIGNMENT ---------- This Agreement shall be binding on and shall enure for the benefits of the successors and assigns of the parties hereto but shall not be assigned by any party without the prior written consent of the other party. 11. NOTICES AND OTHER COMMUNICATION ------------------------------- 11.1 Any notice required or permitted to be given hereunder shall be given in writing in the English language delivered personally or sent by post (airmail if overseas) or by facsimile message to the party due to receive such notice at its address as set out below (or such other address as it may have notified to the other parties in accordance with this Clause). 11.2 A notice delivered personally shall be deemed to be received when delivered and any notice sent by pre-paid recorded delivery post shall be deemed (in the absence of evidence of earlier receipt) to be received seven Business Days after posting and in proving the time of despatch it shall be sufficient to show that the envelope containing such notice was properly addressed, stamped and posted o that the facsimile message was properly addressed and despatched as the case may be. A notice sent by facsimile message shall be deemed to have been received at the expiration of 24 hours after the time of despatch. 11.3 (a) For the purpose of delivery of notices under this Agreement, the address and facsimile number of the Purchaser are: Address : Unit 519, Vanta Industrial Centre, 21-33 Tai Lin Pai Road, Kwai Chung, New Territories, Hong Kong Facsimile : (852) 2480 5922 Attention : Ms. Alicia Haskamp (b) For the purpose of delivery of notices under this Agreement, the address and facsimile number of the Vendors and the Vendor Guarantor are: Address : 1/F., Liven House, 61-63 King Yip Street, Kwun Tong, Kowloon, Hong Kong Facsimile : (852) 2372 9139 Attention : Mr. Lui Yiu Wah 12. COSTS AND EXPENSES ------------------ 12.1 Each party shall bear their respective legal and professional fees, costs and expenses incurred in the negotiation, preparation and execution of this Agreement. 13 12.2 All ad valorem stamp duty payable on the instruments of transfer and contract notes of the Sale Shares shall be borne by the Vendors on one, part and the Purchaser on the other part in equal shares. In the event that the Stamp Office requires any document(s), account(s) and/or balance sheet(s) of the Company for the purpose of assessing the amount of stamp duty payable, the Vendors shall at their own expenses arrange for the. production of such document(s), accounts) and/or balance sheet(s). 13. CONFIDENTIAL ------------ 13.1 Each party shall treat as confidential all information obtained as a result of entering into or performing this Agreement which relates to (a) the provisions of this Agreement; (b) the negotiations relating to this Agreement; (c) the subject matter of this Agreement; or (d) the other party. 13.2 Notwithstanding the other provisions of this clause, either party may disclose confidential information: (a) if and to the extent required by law; (b) if and to the extent required by existing contractual obligations; (c) if and to the extent required to vest the full benefit of this Agreement in that party; (d) to its professional advisors, auditors and bankers:, (e) if and to the extent the information has come into the public domain through no fault of that party; (f) if and to the extent the other party has given prior written consent to the disclosure, such consent not to be unreasonably withheld or delayed; or 13.3 The restrictions contained in this clause shall apply without limit in time. 13.4 No public announcement or communication of any kind shall be made in respect of the subject matter of this Agreement unless specifically agreed between the parties or unless an announcement is required pursuant to the relevant law and/or the rules and regulations of any regulatory bodies. Any announcement by any party required to be made pursuant to any relevant law and/or the rules and regulations of any regulatory bodies shall be issued only 14 after such prior consultation With the other party as is reasonably practicable in the circumstances, 14. GOVERNING LAW ------------- 14.1 This Agreement shall be governed by and construed in accordance with the laws of Hong Kong and the parties hereto agree to submit to the non-exclusive jurisdiction of the courts of Hong Kong. 15. JOINT AND SEVERAL ----------------- The obligations and liability of the Vendors under this Agreement shall be joint and several. IN WITNESS whereof the parties hereto have signed this Agreement on the day and year first above written. SIGNED, SEALED AND DELIVERED by LUI KA SHING in the presence of: /s/ Wong Chun Hung /s/ Lui Ka Shing ------------------ ---------------- Trainee Solicitor Hong Kong SAR SIGNED, SEALED AND DELIVERED by LUI YU PIK KITTY in the presence of /s/ Wong Chun Hung /s/ Lui Yu Pik Kitty ------------------ -------------------- Trainee Solicitor Hong Kong SAR SIGNED, SEALED AND DELIVERED by LUI YIU WAH in the presence of /s/ Wong Chun Hung /s/ Wong Chun Hung ------------------ ------------------ Trainee Solicitor Hong Kong SAR 15 SEALED with the COMMON SEAL of INTERNATIONAL SMC (HK) LIMITED and signed by MR. JOHN KLECHA, a director in the presence of: /s/ IU TING KWOK /s/ John Klecha --------------------- --------------- Solicitor T.S. Tong & Co. Hong Kong SAR. 16 First Schedule Name of Vendors Second Schedule Name of Purchaser Third Schedule Representations, Warranties and Undertakings Annex A Accounts Annex B Disclosure Letter Schedule 1. Staff List dated July 19, 2000 2. List of Trade Debtors at March 31, 2000 3. List of Trade Creditors at March 31, 2000 4. List of Furniture and Fixtures 5. Annual Return dated August 5, 2000 6. Memorandum and Articles of Association with Special Resolution attached. 7. Salary List dated October 14, 2000. 8. Deed of Guarantee (undated singed Mr. Lui Yiu Wah 9. Copy Trading & Profit & Loss Account from April 1st, 2000 to September 30, 2000 and Balance Sheet as at September 30, 2000 of the Company
-----END PRIVACY-ENHANCED MESSAGE-----