-----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, EUoRwJ7LhIJm9kIt5tlbuiM11CsrvBR/X2pjxDiR9Nidmdygc7C5+ZTg28ZjAkGA 3KQWc8FUAgXPcTBnphk6lA== 0001116502-01-500884.txt : 20010814 0001116502-01-500884.hdr.sgml : 20010814 ACCESSION NUMBER: 0001116502-01-500884 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010813 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: 1934 Act SEC FILE NUMBER: 000-24968 FILM NUMBER: 1706992 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 singingmachine10qsb.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 June 30, 2001 ----------------- 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 4,450,520 shares of Common Stock, $.01 par value, issued and outstanding at June 30, 2001. THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY INDEX
Page No. PART I. FINANCIAL INFORMATION -------- Item 1. Financial Statements: Consolidated Balance Sheets - June 30, 2001 (Unaudited) and March 31, 2001........................................................................3 Consolidated Statement of Operations - Three months ended June 30, 2001 and 2000 (Unaudited)....................................................4 Consolidated Statement of Cash Flows - Three months ended June 30, 2001 and 2000 (Unaudited)....................................................5 Notes to Consolidated Financial Statements............................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................9 PART II. OTHER INFORMATION Item 1. Legal Proceedings.....................................................................17 Item 2. Changes in Securities.................................................................17 Item 3. Defaults Upon Senior Securities.......................................................18 Item 4. Submission of Matters to a Vote of Security Holders...................................18 Item 5. Other Information.....................................................................18 Item 6. Exhibits and Reports on Form 8-K......................................................18 SIGNATURES...........................................................................................18
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
June 30, March 31, 2001 2001 ------------ ------------ (unaudited) CURRENT ASSETS: Cash $ 43,381 $ 1,016,221 Accounts Receivable, net of allowance Of $9,812 4,910,520 955,652 Due from Factor 202 933,407 Due from Vendor -- 699,096 Inventories 5,021,893 4,813,461 Interest Receivable -- 7,425 Prepaid Expenses and Other Current Assets 768,576 598,487 ------------ ------------ TOTAL CURRENT ASSETS 10,744,572 9,016,324 PROPERTY AND EQUIPMENT, NET 261,638 263,791 OTHER ASSETS: Deposit for Credit Line 254,362 -- Due from related party 7,692 7,692 Due from officers -- 117,425 Investment in/advances to unconsolidated Subsidiary 383,947 374,730 Reorganization Intangible - net 254,139 277,047 Deferred tax asset 452,673 452,673 ------------ ------------ TOTAL ASSETS $ 12,359,024 $ 10,509,682 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable 1,303,853 821,684 Accrued Expenses 518,384 746,017 Income taxes payable -- 23,320 Loan Payable 335,107 -- Notes Payable -- -- Due to related party 1,073,488 -- ------------ ------------ TOTAL CURRENT LIABILITIES 3,230,832 1,591,021 ------------ ------------ STOCKHOLDERS' EQUITY: Common Stock, $.01 par value; 18,900,000 shares authorized; 4,450,520 shares issued and outstanding 44,505 43,590 Additional Paid In Capital 3,388,316 3,324,779 Deferred Guarantee Fees -- (171,472) Retained Earnings 5,695,371 5,721,764 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 9,128,193 8,918,661 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,359,024 $ 10,509,682 ============ ============
See accompanying notes to consolidated financial statements 3 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended June 30, June 30, 2001 2000 ----------- ----------- NET SALES $ 5,523,734 $ 6,068,591 COST OF SALES 3,662,646 4,549,844 ----------- ----------- GROSS PROFIT 1,861,088 1,518,747 ----------- ----------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,901,996 1,039,897 ----------- ----------- INCOME (LOSS) FROM OPERATIONS (40,908) 478,850 OTHER INCOME (EXPENSES): Other income 15,865 3,029 Interest expense (3,692) (63,098) Interest income 2,475 24,059 Factoring fees (133) (34,575) ----------- ----------- NET OTHER EXPENSES 14,515 (70,585) ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (26,393) 408,265 ----------- ----------- INCOME TAX EXPENSE (BENEFIT) -- -- ----------- ----------- NET INCOME (LOSS) $ (26,393) $ 408,265 =========== =========== EARNINGS (LOSS) PER SHARE Basic $ (0.01) $ 0.10 =========== =========== Diluted $ (0.01) $ 0.09 =========== =========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING Basic 4,391,968 4,063,296 Diluted 4,391,968 4,660,680
See accompanying notes to consolidated financial statements. 4 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended June 30, June 30, 2001 2000 ----------- ----------- NET CASH USED IN OPERATING ACTIVITIES $(1,793,927) $ (971,334) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and Equipment (30,416) (4,497) Due from factor 933,205 (261,236) Due from officer 117,425 -- Deposit for Credit line (254,362) -- Investment/Advances Unconsolidated Subsidiary (9,217) -- ----------- ----------- Net cash provided by investing activities 756,635 (265,733) ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock & exercise of warrants and options 64,452 400,518 Net proceeds from notes payable -- 599,247 ----------- ----------- Net cash provided by financing activities 64,452 999,765 ----------- ----------- Decrease in cash and cash equivalents (972,840) (237,302) Cash and cash equivalents - beginning of period 1,016,221 378,848 ----------- ----------- CASH AND CASH EQUIVALENTS - END OF PERIOD $ 43,381 $ 141,546 =========== ===========
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, 2001. 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, 2001, which are included in Form 10- KSB. Certain amounts in the June 30, 2000 interim consolidated financial statements have been reclassified to conform to the June 30, 2001 presentation. 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 three month period ended June 30, 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year ending March 31, 2002. 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 - INVESTMENT IN AND ADVANCES TO 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 is treating the control of the subsidiary as temporary and has recorded the investment of $170,000 and advances and interest of $213,947 at cost. The Company intends to enter into a contract to sell the 60% interest at the original cost. 6 NOTE 3 - DEPOSIT FOR CREDIT LINE The Company, through its Hong Kong subsidiary, is negotiating with a major international bank for credit facilities. Pursuant to these negotiations, the Company's subsidiary is required to maintain a separate depository account in the amount of $254,362. NOTE 4 - LOANS AND LETTERS OF CREDIT In July 1999, the Company entered into a financing agreement with a financing corporation. The agreement expires in July 2001. The financing corporation opens letters of credits on behalf of the Company to purchase inventory. Under the terms of the agreement, the Company pays a flat fee negotiated based on each letter of credit and the maximum amount of a single letter of credit cannot exceed $1,000,000. At March 31, 2001, the Company has no letters of credit open with the financing corporation. The factor has agreed under a third party agreement to factor receivables related to these letters of credit and pays the financing corporation directly. This agreement was terminated in April 2001. 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, 2001, there was no outstanding balance on this credit facility. 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 will also issue or co-sign for 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 $6,250,000 with escalations as defined in the Agreement. The outstanding balance at June 30, 2001, was $335,107. 7 NOTE 5 - EXERCISE OF STOCK OPTIONS AND WARRANTS AND MODIFICATION Stock options and warrants were exercised during the first quarter of fiscal year 2002. 91,400 shares of common stock were issued with proceeds to the Company of $64,452. 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 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. A former director of the Company, is Chairman of the Board and a principal stockholder of FLX. During the fiscal year ended March 31, 2001, the Company purchased approximately 80% of its equipment from FLX. The amount due to FLX at June 30, 2001 of $1,073,488 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 - 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 June 30, 2001 and 2000 were approximately 97% and 87%, respectively. For the three months ending June 30, 2001 and 2000, two (2) major retailers accounted for 90% and 48% each of total revenues. Because of the seasonality of the Company's sales, these results may be distorted due to the historically low percentage of overall sales during the Company's first fiscal quarter of each year. NOTE 8 - EARNINGS PER SHARE Basic net income (loss) per common share (Basic EPS) excludes dilution and is computed by dividing net income (loss) available to common stockholder by the weighted-average number of common shares outstanding for the period. Diluted net income per share (Diluted EPS) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. The assumed exercise of common stock equivalents was not utilized for the quarter ended June 30, 2001 since the effect was antidilutive. At June 30, 2001, there were 1,560,800 common stock options and warrants outstanding, which may dilute future earnings per share. NOTE 9 - SEGMENTS The Company operates in one business segment. Sales during the three months June 30, 2001, were all generated in the United States. 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 a net loss before estimated income tax of $26,393 for the three month period ended June 30, 2001. Our working capital as of June 30, 2001, was approximately $7,513,740. RESULTS OF OPERATIONS REVENUES For the three month period ended June 30, 2001, revenues were $5,523,734 as compared to $6,068,591 for the three months ended June 30, 2000. This is a decrease of 8% from last year. This decrease is due to a delay in production of four products. These products were due to ship in the middle of June and shipping was rescheduled for the first two weeks of July. These products were shipped on their rescheduled dates in July. GROSS PROFIT Gross profit for the three month period ended June 30, 2001 was $1,861,088 or 34% of sales. This shows an increase over the three months ended June 30, 2000, when the gross profit was 25% of sales. This favorable change in gross profit is due to increased purchasing efficiencies. It is also due to the elimination of manufacturers agency fees which were a part of product cost in prior years. 9 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses were $1,901,996 or 34% of total revenues, and $1,039,897 or 17% of total revenues for the three months ended June 30, 2001 and 2000, respectively. The increase in these expenses is partially due to a final expense for the amortization of guarantee fees. This accelerated amortization of $114,316 is due to the termination of the loan agreement for which the guarantee was made. Approximately, $166,000 of the increase is due to the opening of the Hong Kong office of International SMC (HK) Ltd., our wholly owned subsidiary. By opening this office, the Company saves the manufacturers agency fees which were paid in prior years. The office will have fixed overhead expenses every month, as opposed to per shipment agency fees. Therefore the full benefit of maintaining this office will be seen more clearly in our second and third quarters when, historically, the Company has the greatest amount of purchases from the Orient. Another factor in these increased expenses was payroll and its associated expenses which contributed approximately $250,000. Other increases were seen in royalty and commission expenses. DEPRECIATION AND AMORTIZATION EXPENSES The expense for depreciation and amortization was $41,737 for the three months ended June 30, 2001 as compared to $28,763 for the three months ended June 30, 2000. The increase is due primarily to the fixed asset additions of the last twelve months. These additions consisted of computers, furniture and other equipment in our California warehouse. OTHER EXPENSES Other income and expenses decreased by $85,102 from the three months ended June 30, 2000 to the three months ended June 30, 2001. The primary areas of decrease are interest and factoring fees. The Company terminated the factoring agreement in the first quarter and had no accounts receivable factored at that time. The Company's new loan agreement with LaSalle National Bank was in effect, but nominal borrowing was required in the first quarter which resulted in a limited interest expense. INCOME BEFORE INCOME TAX EXPENSE The Company showed a loss of $26,393 for the three months ended June 30, 2001. This loss can be attributed to the fixed costs associated with the opening the Hong Kong office. It can also be partially attributed to the accelerated amortization of guarantee fees, resulting in an additional expense of $114,316, in the selling, general and administrative expenses. INCOME TAX EXPENSE As a result of showing a net loss for the period, no accrual was made for income tax expense and the change in the deferred tax asset was not material. NET INCOME As there was no income tax expense accrual for the three months ended June 30, 2001, the net loss after taxes remained $26,393 as explained above. 10 SEASONALLY 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 June 30, 2001, we had current assets of $10,744,572 and total assets of $12,359,024 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 accounts receivable for sales in the month of June. Current liabilities increased to $3,230,832 as of June 30, 2001, compared to $1,591,021 at March 31, 2001. This increase in current liabilities is because of increased accounts payable and increased purchases of electronic recording equipment from a related party in the month of June. The use of the credit line was primarily to purchase inventory. Accounts payable increased to $1,303,853 as of June 30, 2001 from $821,684 as of March 31, 2001, primarily as a consequence of our increased expenditures to finance our sales efforts. Our stockholders' equity increased from $8,918,661 as of March 31, 2001, to $9,128,193 as of June 30, 2001 due to the exercise of warrants, write off of deferred guarantee fees and the current quarter loss. Cash flows used for operating activities were $1,793,927 during the three months ended June 30, 2001. Cash provided by investing activities during this same period was $756,635 resulting primarily from receipt of $933,205 invested at the factor, $117,425 repayments from officers and a deposit placed for a credit line of $254,362. Cash flows provided by financing activities were $64,452 during the three month period ended June 30, 2001. This consisted of proceeds in the amount of $64,452 from the exercise of warrants and options. CAPITAL RESOURCES The Company has obtained significant financing for continuing operations and growth. In April 2001, the Company entered into a credit facility with LaSalle Business Credit, Inc., which replaced the Company's pre-existing financing arrangements with Main Factors, Inc. and EPK Financial. The Company also has a credit facility with Belgian Bank, which is not currently in use and the terms of which are being renegotiated. LaSalle Bank The Company entered into a new credit facility with LaSalle Business Credit, Inc. (the "Lender" or "LaSalle") in April 2001. Under this credit facility, the Lender 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/guaranteed by the Lender minus reserves as set out in the loan documents. The agreement is subject to loan limits from zero to $10,000,000 depending on the time of the year, as stipulated in the loan documents. 11 The loan of funds under this agreement bears interest at the lender's prime rate plus .5%. There is also and annual fee of 1% of the loan maximum, or $100,000. The term of the agreement runs through April 26, 2004 and is automatically renewable for one-year terms thereafter. The facility contains a covenant on minimum tangible net worth that the Company must maintain. The loan contains a 90 days repayment on demand in the event of default, and allows for 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. 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 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. In next few months, the Company may obtain additional credit facilities for its Hong Kong subsidiary, but this will not have a significant impact on its liquidity. Belgian Bank Effective February 14, 2000, the Company, through its Hong Kong subsidiary, obtained a credit facility of $500,000 (US) from Belgian Bank, Hong Kong, a subsidiary of Generale Bank, Belgium. This facility is a revolving line based upon drawing down a maximum of 15% of the value of export letters of credit held by Belgian Bank. There is no maturity date except that Belgian Bank reserves the right to revise the terms and conditions at the Bank's discretion. The cost of this credit facility is the U.S. Dollar prime rate plus 1.25%. Repayment of principal plus interest shall be made upon negotiation of the export letters of credit, but not later than ninety (90) days after the advance. This credit facility is not currently in use and the terms are being renegotiated. Credit Facilities that were Terminated in April 2001 Main Factors The Company was a party to a factoring agreement, dated June 16, 1999, and amended December, 1999 and April, 2000, with Main Factors, Inc. (Main Factors). The Company terminated this arrangement with Main Factors in April 2001, when it entered into a credit facility with LaSalle. Under the factoring agreement, Main Factors purchased certain selected accounts receivable from the Company and advanced 75% - 85% of the face value of those receivables to the Company. The accounts receivable were purchased by Main Factors without recourse and Main Factors therefore performed an intensive credit review prior to the purchase of the receivables. The Company was charged a fixed percentage fee of the invoice, which could decrease on volume. The purchase of receivables of the Company by Main Factors was absolute and was a true sale of receivables. Main Factors has placed no maximum limit on the amount of the Company's receivables it would purchase. John Klecha, the Company's Chief Operating Officer and Chief Financial Officer, personally guaranteed this factoring agreement. 12 EPK Financial Corporation The Company entered into an agreement with EPK Financial Corporation (EPK) whereby EPK would open letters of credit with the Company's factories to import inventory for distribution to the Company's customers. The Company terminated this arrangement with EPK in April 2001, when it entered into a credit facility with LaSalle. During fiscal 2001 and the first quarter of fiscal 2002, the Company did not use its credit facility with EPK. 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. Factors That May Affect Future Results and Market Price of Stock 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 0in the karaoke industry is based primarily on price, product performance, reputation, delivery times, and customer support. We believe that our new product introductions and enhancements of existing products are material factors for our continuing growth and profitability. Many of our competitors are substantially larger and have significantly greater financial, marketing and operating resources than we have. No assurance can be given that we will continue to be successful in introducing new products or further enhancing existing products. We rely on sales to key customers which subjects us to risk As a percentage of total revenues, our net sales to our five largest customers during the fiscal quarter ended June 30, 2001 and 2000, were approximately 97% and 87% respectively. During fiscal year 2002, we further intend to broaden our base of customers. Although we have long-established relationships with many of our customers, we do not have long-term contractual arrangements with any of them. A decrease in business from any of our major customers could have a material adverse effect on our results of operations and financial condition. We have significant reliance on large retailers which are subject to changes in the economy We sell products to retailers, including department stores, lifestyle merchants, direct mail retailers which are catalogs and showrooms, national chains, specialty in stores, and warehouse clubs. Certain of such retailers have engaged in leveraged buyouts or transactions in which they incurred a significant amount of debt, and some are currently operating under the protection of bankruptcy laws. Despite the difficulties experienced by retailers in recent years, we have not suffered significant credit losses to date. A deterioration in the financial condition of our major customers could have a material adverse effect on our future profitability. 13 We are subject to the risks of doing business abroad We are dependent upon foreign companies for manufacture of all of our electronic products. Our arrangements with manufacturers are subject to the risks of doing business abroad, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, political instability, and other factors which could have an adverse impact on our business. We believe that the loss of any one or more of our suppliers would not have a long-term material adverse effect on us, because other manufacturers with whom we do business would be able to increase production to fulfill our requirements. However, the loss of certain of our suppliers, could, in the short-term, adversely affect our business until alternative supply arrangements were secured. During fiscal 2001 and 2000, suppliers in the People's Republic of China accounted for in excess of 94% and 88%, respectively of our total product purchases, including virtually all of our hardware purchases. The Company expects purchasing for fiscal 2002 to fall within the above range as well. In 2000, the People's Republic of China gained "Most Favored Nation" treatment for entry of goods into the United States for an additional year. In the context of United States tariff legislation, MFN treatment means that products are subject to favorable duty rates upon entry into the United States. IF MFN status for China is restricted or revoked in the future, our cost of goods purchased from Chinese vendors is likely to increase. A resultant change in suppliers would likely have an adverse effect on our operations and, possibly, earnings, although management believes such adversity would be short-term as a result of its ability to find alternative suppliers. We continue to closely monitor the situation and have determined that the production capabilities in countries outside China, which have MFN status and, therefore, have favorable duty rates, would meet our production needs. It must also be noted that at the present time, China is applying for membership into the World Trade Organization ("WTO"). This application is meeting with great favor from many of the WTO's other members. If this membership is approved, China will no longer require MFN status for US trade. The decision on membership will be submitted to the Ministerial Conference in Doha, Qatar in November of 2001. We have significant future capital needs which are subject to the uncertainty of additional financing We may need to raise significant additional funds to fund our rapid sales growth and/or implement other business strategies. If adequate funds are not available on acceptable terms, or at all, we may be unable to sustain our rapid growth, which would have a material adverse effect on our business, results of operations, and financial condition. We are subject to seasonality which is affected by various economic conditions and changes resulting in fluctuations in quarterly results We have experienced, and will experience in the future, significant fluctuations in sales and operating results from quarter to quarter. This is due largely to the fact that a significant portion of our business is derived from a limited number of relatively large customer orders, the timing of which cannot be predicted. Furthermore, as is typical in the karaoke industry, the quarters ended September 30 and December 31 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." 14 Accordingly, period-to-period comparisons may not necessarily be meaningful and should not be relied on as indicative of future performance. Historically, the first quarter of our fiscal year, the three months ended June 30, have been the least profitable quarter. Our proprietary technology may not be sufficiently protected Our success depends on our proprietary technology. We rely on a combination of contractual rights, patents, trade secrets, know-how, trademarks, non-disclosure agreements and technical measures to establish and protect our rights. We cannot assure you that we can protect our rights to prevent third parties from using or copying our technology. We may be subject to claims from third parties for unauthorized use of their proprietary technology We believe that we independently developed our technology and that it does not infringe on the proprietary rights or trade secrets of others. However, we cannot assure you that we have not infringed on the technologies of third parties or those third parties will not make infringement violation claims against us. Any infringement claims may have a negative effect on our ability to manufacture our products. Consumer discretionary spending may affect karaoke purchases and is affected by various economic conditions and changes Our business and financial performance may be damaged more than most companies by adverse financial conditions affecting our business or by a general weakening of the economy. Purchases of karaoke audio software and electronic recording equipment are considered discretionary for consumers. Our success will therefore be influenced by a number of economic factors affecting discretionary and consumer spending, such as employment levels, business, interest rates, and taxation rates, all of which are not under our control. Adverse economic changes affecting these factors may restrict consumer spending and thereby adversely affect our growth and profitability. We depend on third party suppliers, and if we cannot obtain supplies as needed, our operations will be severely damaged We rely on third party suppliers to produce the parts and materials we use to manufacture our products. If our suppliers are unable to provide us with the parts and supplies, we will be unable to produce our products. We cannot guarantee that we will be able to purchase the parts we need at reasonable prices or in a timely fashion. If we are unable to purchase the supplies and parts we need to manufacture our products, we will experience severe production problems, which may possibly result in the termination of our operations. Our business operations could be significantly disrupted if we lose members of our management team Our success depends to a significant degree upon the continued contributions of our executive officers, both individually and as a group. Although we have entered into employment contracts with Messrs. Steele and Klecha, the loss of the services of either of these individuals could prevent us from executing our business strategy. See "Management-Directors and Executive Officers" for a listing of our executive officers. 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. 15 Our ability to manage growth could hurt our business To manage our growth, we must implement systems, and train and manage our employees. We may not be able to implement these action items in a timely manner, or at all. Our inability to manage growth effectively could have a material adverse effect on our business operating results, and financial conditions. There can be no assurance that we will achieve our planned expansion goals, manage our growth effectively, or operate profitably. Risks Associated with our Capital Structure Future sales of our common stock held by current stockholders may depress our stock price As of June 30 2001, there were 4,450,520 shares of our common stock outstanding, of which approximately 1,198,883 were restricted securities as that term is defined by Rule 144 under the Securities Act of 1933. The restricted securities will be eligible for public sale only if registered under the Securities Act or sold in accordance with Rule 144. The market price of our common stock could drop due to the sale of large number of shares of our common stock, such as the shares sold under this prospectus or under Rule 144, or the perception that these sales could occur. We have filed a registration statement on Form S-8 to register the sale of up to 1,229,500 shares of our common stock underlying stock options granted and to be granted under our stock option plan. Additionally, we intend to file a registration statement to register for resale approximately 1.3 million shares of our common stock. These factors could also make it more difficult to raise funds through future offerings of common stock. 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 June 30, 2001, we had 4,450,520 shares of common stock issued and outstanding and an aggregate of 1,626,000 outstanding options and warrants and 1,656,000 public warrants. As such, our Board of Directors has the power, without stockholder approval, to issue up to 11,167,480 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. 16 We are also subject to certain provisions of Delaware law that could delay, deter or prevent us from entering into an acquisition, including the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in a business combination with an interested stockholder unless specific conditions are met. The existence of these provisions could limit the price that investors are willing to pay in the future for shares of our common stock and may deprive you of an opportunity to sell your shares at a premium over prevailing prices. 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) Not Applicable. (b) Not Applicable. (c) During the three month period ended June 30, 2001, six employees exercised stock options issued under our 1994 Amended and Restated Management Stock Option Plan. The employees exercised options to acquire an aggregate of 71,400 shares of our common stock. The names of the option holders, the dates of exercise 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 - ---- -------- ------ ----- -------- Adolph Nelson 4/30/01 1,500 $.43 $ 645 John Steele 4/30/01 5,000 $.43 $ 2,150 Teresa Marco 5/01/01 5,000 $.43 $ 2,150 Terry Philips 5/01/01 1,500 $.43 $ 645 Brian Cino 5/02/01 3,400 $.43 $ 1,462 John Klecha 5/30/01 50,000 $.43 $21,500 Melody Rawski 6/14/01 5,000 $.43 $ 2,150 Each of these employees paid for the shares with cash. Each of the employees exercised their options in reliance upon Section 4(2) of the Securities Act of 1933, because each of them was knowledgeable, sophisticated and had access to comprehensive information about the Company. 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 a control legend was placed on the shares that were issued to Mr. Klecha. During the three month period ended June 30, 2001, two warrant holders exercised their warrants to acquire an aggregate of 20,000 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 received by the Company are listed below. 18 Date of No. of Exercise Name Exercise Shares Price Proceeds - ---- -------- ------ ----- -------- Entropy Holdings 04/30/01 10,000 $ 2.00 $20,000 FRS Investments 04/30/01 10,000 $ 1.375 $13,750 Each of the warrant holders paid for their shares with cash. 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. Item 5. OTHER INFORMATION None. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Loan and Security Agreement made as of April 26, 2001 between The Singing Machine Company, Inc. and LaSalle Business Credit, Inc. 10.2 $10,000,000 Demand Note executed as of April 26, 2001 by the Singing Machine Company, Inc. 10.3 Trademark Security Agreement made as of April 26, 2001 by The Singing Machine Company, Inc. in favor of LaSalle Business Credit, Inc. for U.S. trademarks. 10.4 Trademark Security Agreement made as of April 26, 2001 by The Singing Machine Company, Inc. in favor of LaSalle Business Credit, Inc. for Canadian trademarks. (b) Reports on Form 8-K The Company did not file any reports on Form 8-K in the three months ended June 30, 2001. 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: August 13, 2001 By: /s/ John F. Klecha --------------------------- John F. Klecha President, Chief Financial Officer, Chief Operating Officer, Treasurer and Secretary 20 EX-10.1 3 ex10-1.txt LOAN AND SECURITY AGREEMENT EXHIBIT 10.1 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (as amended, modified or supplemented from time to time, this "Agreement") made this 26th day of April, 2001 by and between LASALLE BUSINESS CREDIT, INC., a Delaware corporation ("Lender"), 135 South LaSalle Street, Chicago, Illinois 60603-4105, and THE SINGING MACHINE COMPANY, INC., a Delaware corporation ("Borrower") 6601 Lyons Road, Suite A-7, Coconut Creek, Florida 33073. WITNESSETH: WHEREAS, Borrower may, from time to time, request Loans from Lender, and the parties wish to provide for the terms and conditions upon which such Loans, if made by Lender, shall be made; NOW, THEREFORE, in consideration of any Loan (including any Loan by renewal or extension) hereafter made to Borrower by Lender, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Borrower, the parties agree as follows: 1. DEFINITIONS. (a) "Account", "Account Debtor", "Chattel Paper", "Documents", "Equipment", "General Intangibles", "Goods", "Instruments", "Inventory", and "Investment Property" shall have the respective meanings assigned to such terms, as of the date of this Agreement, in the Illinois Uniform Commercial Code. (b) "Affiliate" shall mean any Person (i) which directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, Borrower, (ii) which beneficially owns or holds five percent (5%) or more of the voting control or equity interests of Borrower, or (iii) five percent (5%) or more of the voting control or equity interests of which is beneficially owned or held by Borrower. (c) "Collateral" shall mean all of the property of Borrower described in paragraph 4 hereof, together with all other real or personal property of any Obligor or any other Person now or hereafter pledged to Lender to secure, either directly or indirectly, repayment of any of the Liabilities. (d) "Eligible Account" shall mean an Account owing to Borrower which is acceptable to Lender in its sole discretion determined in good faith for lending purposes. Without limiting Lender's discretion, Lender shall, in general, consider an Account to be an Eligible Account if it meets, and so long as it continues to meet, the following requirements: (i) it is genuine and in all respects what it purports to be; 1 (ii) it is owned by Borrower, Borrower has the right to subject it to a security interest in favor of Lender or assign it to Lender and it is subject to a first priority perfected security interest in favor of Lender and to no other claim, lien, security interest or encumbrance whatsoever, other than Permitted Liens; (iii) it arises from (A) the performance of services by Borrower in the ordinary course of Borrower's business, and such services have been fully performed and acknowledged and accepted by the Account Debtor thereunder; or (B) the sale or lease of Goods by Borrower in the ordinary course of Borrower's business, and such Goods have been completed in accordance with the Account Debtor's specifications (if any) and delivered to the Account Debtor, such Account Debtor has not refused to accept, returned or offered to return, any of the Goods which are the subject of such Account, and Borrower has possession of, or Borrower has delivered to Lender (at Lender's request) shipping and delivery receipts evidencing delivery of such Goods; (iv) it is evidenced by an invoice rendered to the Account Debtor thereunder, is due and payable within the lesser of sixty (60) days after the due date or one hundred twenty (120) days past the invoice date thereof; provided, however, that if more than twenty-five percent (25%) of the aggregate dollar amount of invoices owing by a particular Account Debtor remain unpaid the lesser of sixty (60) days after the respective due dates thereof or one hundred twenty (120) days past the invoice date thereof, then all Accounts owing by that Account Debtor shall be deemed ineligible; (v) it is a valid, legally enforceable and unconditional obligation of the Account Debtor thereunder, and it shall not be an Eligible Account to the extent of any setoff, counterclaim, credit, allowance or adjustment by such Account Debtor, or if it is subject to any claim by such Account Debtor denying liability thereunder in whole or in part; (vi) it does not arise out of a contract or order which fails in any material respect to comply with the requirements of applicable law; (vii) the Account Debtor thereunder is not a director, officer, employee or agent of Borrower, or a Subsidiary, Parent or Affiliate; (viii) it is not an Account with respect to which the Account Debtor is the United States of America or any state or local government, or any department, agency or instrumentality thereof, unless Borrower assigns its right to payment of such Account to Lender pursuant to, and in full compliance with, the Assignment of Claims Act of 1940, as amended, or any comparable state or local law, as applicable; 2 (ix) it is not an Account with respect to which the Account Debtor is located in a state which requires Borrower, as a precondition to commencing or maintaining an action in the courts of that state, either to (A) receive a certificate of authority to do business and be in good standing in such state; or (B) file a notice of business activities report or similar report with such state's taxing authority, unless (x) Borrower has taken one of the actions described in clauses (A) or (B); (y) the failure to take one of the actions described in either clause (A) or (B) may be cured retroactively by Borrower at its election; or (z) Borrower has proven, to Lender's satisfaction, that it is exempt from any such requirements under any such state's laws; (x) the Account Debtor is located within the United States of America; (xi) it is not an Account with respect to which the Account Debtor's obligation to pay is subject to any repurchase obligation or return right, as with sales made on a bill-and-hold, guaranteed sale, sale on approval, sale or return or consignment basis; (xii) it is not an Account (A) with respect to which any representation or warranty contained in this Agreement is untrue; or (B) which violates any of the covenants of Borrower contained in this Agreement; (xiii) it is not an Account which, when added to a particular Account Debtor's other indebtedness to Borrower, exceeds a credit limit determined by Lender in its sole discretion determined in good faith for that Account Debtor (except that Accounts excluded from Eligible Accounts solely by reason of this subparagraph 1(d)(xiii) shall be Eligible Accounts to the extent of such credit limit), provided that Lender shall give Borrower written notice of any such credit limit, provided further that, without limitation of the foregoing, Lender acknowledges that no such credit limit exists for Best Buy or Toys R Us as of the date hereof; and (xiv) it is not an Account with respect to which the prospect of payment or performance by the Account Debtor is or will be impaired, as determined by Lender in its sole discretion determined in good faith. (e) "Eligible Inventory" shall mean Inventory of Borrower which is acceptable to Lender in its sole discretion determined in good faith for lending purposes. Without limiting Lender's discretion, Lender shall, in general, consider Inventory to be Eligible Inventory if it meets, and so long as it continues to meet, the following requirements: (i) it is owned by Borrower, Borrower has the right to subject it to a security interest in favor of Lender and it is subject to a first priority perfected security interest in favor of Lender and to no other claim, lien, security interest or encumbrance whatsoever, other than Permitted Liens; 3 (ii) it is located on one of the premises listed on Exhibit B (or other locations of which Lender has been advised in writing pursuant to subparagraph 10(c) hereof) and is not in transit; (iii) if held for sale or lease or furnishing under contracts of service, it is (except as Lender may otherwise consent in writing) new and unused and free from defects which would, in Lender's sole determination determined in good faith, affect its market value; (iv) it is not stored with a bailee, consignee, warehouseman, processor or similar party unless Lender has given its prior written approval and Borrower has caused any such bailee, consignee, warehouseman, processor or similar party to issue and deliver to Lender, in form and substance acceptable to Lender, such Uniform Commercial Code financing statements, warehouse receipts, waivers and other documents as Lender shall require; (v) Lender has determined in good faith, in accordance with Lender's customary business practices, that it is not unacceptable due to age, type, category or quantity; and (vi) it is not Inventory (A) with respect to which any of the representations and warranties contained in this Agreement are untrue; or (B) which violates any of the covenants of Borrower contained in this Agreement. (f) "Environmental Laws" shall mean all federal, state, district, local and foreign laws, rules, regulations, ordinances, and consent decrees relating to health, safety, hazardous substances, pollution and environmental matters, as now or at any time hereafter in effect, applicable to Borrower's business or facilities owned or operated by Borrower, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contamination, chemicals, or hazardous, toxic or dangerous substances, materials or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. (g) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, modified or restated from time to time. (h) "Event of Default" shall have the meaning specified in paragraph 12 hereof. 4 (i) "Hazardous Materials" shall mean any hazardous, toxic or dangerous substance, materials and wastes, including, without limitation, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law (including, without limitation any that are or become classified as hazardous or toxic under any Environmental Law). (j) "Indemnified Party" shall have the meaning specified in paragraph 14 hereof. (k) "Letter of Credit" shall mean any letter of credit issued on behalf of Borrower in accordance with this Agreement. (l) "Liabilities" shall mean any and all obligations, liabilities and indebtedness of Borrower under this Agreement and the Other Agreements to Lender or to any parent, affiliate or subsidiary of Lender of any and every kind and nature, howsoever created, arising or evidenced and howsoever owned, held or acquired, whether now or hereafter existing, whether now due or to become due, whether primary, secondary, direct, indirect, absolute, contingent or otherwise (including, without limitation, obligations of performance), whether several, joint or joint and several, and whether arising or existing under written or oral agreement or by operation of law. (m) "Loans" shall mean all loans and advances made by Lender to or on behalf of Borrower hereunder. (n) "Loan Limit" shall have the meaning specified in paragraph (1) of Exhibit A. (o) "Lock Box" and "Lock Box Account" shall have the meanings specified in paragraph 7 hereof. (p) "Maximum Loan Limit" shall have the meaning specified in paragraph (1) of Exhibit A. (q) "Obligor" shall mean Borrower and each other Person who is or shall become primarily or secondarily liable for any of the Liabilities. (r) "Original Term" shall have the meaning specified in paragraph 9 hereof. (s) "Other Agreements" shall mean all agreements, instruments and documents, other than this Agreement, including, without limitation, guaranties, mortgages, trust deeds, pledges, powers of attorney, consents, assignments, contracts, notices, security 5 agreements, leases, financing statements and all other writings heretofore, now or from time to time hereafter executed by or on behalf of Borrower or any other Person and delivered to Lender or to any parent, affiliate or subsidiary of Lender in connection with the Liabilities or the transactions contemplated hereby, as each of the same may be amended, modified or supplemented from time to time. (t) "Parent" shall mean any Person now or at any time or times hereafter owning or controlling (alone or with any other Person) at least a majority of the issued and outstanding equity of Borrower and, if Borrower is a partnership, the general partner of Borrower. (u) "Permitted Liens" shall mean (i) statutory liens of landlords, carriers, warehousemen, processors, mechanics, materialmen or suppliers incurred in the ordinary course of business and securing amounts not yet due or declared to be due by the claimant thereunder or amounts which are being contested in good faith and by appropriate proceedings and for which Borrower has maintained adequate reserves; (ii) liens or security interests in favor of Lender; (iii) zoning restrictions and easements, licenses, covenants and other restrictions affecting the use of real property that do not individually or in the aggregate have a material adverse effect on Borrower's ability to use such real property for its intended purpose in connection with Borrower's business; (iv) liens in connection with purchase money indebtedness and capitalized leases otherwise permitted pursuant to the Agreement, provided, that such liens attach only to the assets the purchase of which was financed by such purchase money indebtedness or which is the subject of such capitalized leases; (v) involuntary liens securing amounts less than $100,000.00 and which are released or for which a bond acceptable to Lender in its sole discretion has been posted within ten (10) days of its creation, and (vi) liens specifically permitted by Lender in writing. (v) "Person" shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, entity, party or foreign or United States government (whether federal, state, county, city, municipal or otherwise), including, without limitation, any instrumentality, division, agency, body or department thereof. (w) "Renewal Term" shall have the meaning specified in paragraph 9 hereof. (x) "Subsidiary" shall mean any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time stock of any other class of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned by Borrower, or any partnership, joint venture or limited liability company of which more than fifty percent (50%) of the outstanding equity interests are at the time, directly or indirectly, owned by Borrower or any partnership of which Borrower is a general partner. 6 (y) "Tangible Net Worth" shall have the meaning specified in subparagraph 11(o) hereof. 2. LOANS. Subject to the terms and conditions of this Agreement (including Exhibit A) and the Other Agreements, during the Original Term and any Renewal Term, Lender shall, absent the occurrence of an Event of Default, make such Loans to Borrower as Borrower shall from time to time request. The aggregate unpaid principal balance of all Liabilities outstanding under this Agreement at any one time shall not exceed the lesser of the Loan Limit and the Maximum Loan Limit and shall bear interest at the rates set forth in Exhibit A. ALL LIABILITIES SHALL BE REPAID BY BORROWER UPON DEMAND BY LENDER. Prior to Lender making such demand, Liabilities shall be repaid as provided elsewhere in this Agreement. If at any time the outstanding Liabilities exceeds the Maximum Loan Limit or the Loan Limit, or any portion of the Liabilities exceed any applicable sublimit set forth in Exhibit A, Borrower shall immediately, and without the necessity of a demand by Lender, pay to Lender such amount as may be necessary to eliminate such excess and Lender shall apply such payment to the Liabilities to eliminate such excess. Borrower hereby authorizes Lender, in its sole discretion, to charge any of Borrower's accounts or advance Loans to make any payments of principal, interest, fees, costs or expenses required to be made under this Agreement. All Loans shall, in Lender's sole discretion, be evidenced by one or more promissory notes in form and substance satisfactory to Lender. However, if such Loans are not so evidenced, such Loans may be evidenced solely by entries upon the books and records maintained by Lender. 3. FEES AND CHARGES. Borrower shall pay to Lender, in addition to all other amounts payable hereunder, the fees and charges set forth in Exhibit A. It is the intent of the parties that the rate of interest and the other charges to Borrower under this Agreement shall be lawful; therefore, if for any reason the interest or other charges payable under this Agreement are found by a court of competent jurisdiction, in a final determination, to exceed the limit which Lender may lawfully charge Borrower, then the obligation to pay interest and other charges shall automatically be reduced to such limit and, if any amount in excess of such limit shall have been paid, then such amount shall be refunded to Borrower. 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, franchises, customer lists, tax refund claims, claims against carriers and shippers, guarantee claims, contract rights, security interests, security 7 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 bank accounts, deposits and cash; (g) any other property of Borrower now or hereafter in the possession, custody or control of Lender or any 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 (h) 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. 5. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS THEREIN. Borrower shall, at Lender's request, at any time and from time to time, 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 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 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 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. 6. POSSESSION OF COLLATERAL AND RELATED MATTERS. Until the commencement of a foreclosure or liquidation to realize upon the Collateral, Borrower shall have the right, except as otherwise provided in this Agreement, in the ordinary course of Borrower's business, to (a) sell, lease or furnish under contracts of service any of Borrower's Inventory normally held by Borrower for any such purpose; and (b) use and consume any raw materials, work in process or other materials normally held by Borrower for such purpose; provided, however, that a sale in the ordinary course of business shall not include any transfer or sale in satisfaction, partial or complete, of a debt owed by Borrower, provided that a sale of Inventory to a creditor of Borrower resulting in a valid Account owing to Borrower by such creditor shall not constitute a transfer or sale in satisfaction, partial, or complete, of a debt owed by Borrower. 8 7. COLLECTIONS. (a) Borrower shall direct all of its Account Debtors to make all payments on the Accounts directly to a post office box in Borrower's name (the "Lock Box") designated by, and under the exclusive control of, Lender, at a financial institution acceptable to Lender. Borrower shall establish an account (the "Lock Box Account") in Lender's name with a financial institution acceptable to Lender, into which all payments received in the Lock Box shall be deposited, and into which Borrower will immediately deposit all payments received by Borrower for Inventory or services in the identical form in which such payments were received, whether by cash or check. If Borrower, any Affiliate or Subsidiary, any shareholder, officer, director, employee or agent of Borrower or any Affiliate or Subsidiary, or any other Person acting for or in concert with Borrower shall receive any monies, checks, notes, drafts or other payments relating to or as proceeds of Accounts or other Collateral, Borrower and each such Person shall receive all such items in trust for, and as the sole and exclusive property of, Lender and, immediately upon receipt thereof, shall remit the same (or cause the same to be remitted) in kind to the Lock Box Account. The financial institution with which the Lock Box Account is established shall acknowledge and agree, in a manner satisfactory to Lender, that the amounts on deposit in such Lock Box Account are the sole and exclusive property of Lender, that such financial institution has no right to setoff against the Lock Box Account or against any other account maintained by such financial institution into which the contents of the Lock Box Account are transferred, and that such financial institution shall wire, or otherwise transfer in immediately available funds to Lender in a manner satisfactory to Lender, funds deposited in the Lock Box Account on a daily basis as such funds are collected. Borrower agrees that all payments made to such Lock Box Account or otherwise received by Lender, whether in respect of the Accounts or as proceeds of other Collateral or otherwise (except for proceeds of Collateral which are required to be delivered to the holder of a Permitted Lien which is prior in right of payment), will be applied on account of the Liabilities in accordance with the terms of this Agreement. Borrower agrees to pay all fees, costs and expenses in connection with opening and maintaining the Lock Box Account. All of such fees, costs and expenses if not paid by Borrower, may be paid by Lender and in such event all amounts paid by Lender shall constitute Liabilities hereunder, shall be payable to Lender by Borrower upon demand, and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder. All checks, drafts, instruments and other items of payment or proceeds of Collateral shall be endorsed by Borrower to Lender, and, if that endorsement of any such item shall not be made for any reason, Lender is hereby irrevocably authorized to endorse the same on Borrower's behalf. For the purpose of this paragraph, 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 (i) to endorse Borrower's name upon said items of payment and/or proceeds of Collateral and upon any Chattel Paper, Document, Instrument, invoice or similar document or agreement relating to any Account of Borrower or Goods pertaining thereto; (ii) to take control in any manner of any item of payment or proceeds thereof; and (iii) to have access to any lock box or postal box into which any of Borrower's mail is deposited, and open and process all mail addressed to Borrower and deposited therein. 9 (b) Lender may, at any time and from time to time after the occurrence of an Event of Default, whether before or after notification to any Account Debtor and whether before or after the maturity of any of the Liabilities, (i) enforce collection of any of Borrower's Accounts or other amounts owed to Borrower by suit or otherwise; (ii) exercise all of Borrower's rights and remedies with respect to proceedings brought to collect any Accounts or other amounts owed to Borrower; (iii) surrender, release or exchange all or any part of any Accounts or other amounts owed to Borrower, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder; (iv) sell or assign any Account of Borrower or other amount owed to Borrower upon such terms, for such amount and at such time or times as Lender deems advisable; (v) prepare, file and sign Borrower's name on any proof of claim in bankruptcy or other similar document against any Account Debtor or other Person obligated to Borrower; and (vi) do all other acts and things which are necessary, in Lender's sole discretion determined in good faith, to fulfill Borrower's obligations under this Agreement and to allow Lender to collect the Accounts or other amounts owed to Borrower. In addition to any other provision hereof, Lender may at any time, after the occurrence of an Event of Default, at Borrower's expense, notify any parties obligated on any of the Accounts to make payment directly to Lender of any amounts due or to become due thereunder. (c) For purposes of calculating interest, Lender shall, within two (2) business days after receipt by Lender at its office in Chicago, Illinois of (i) checks and (ii) cash or other immediately available funds from collections of items of payment and proceeds of any Collateral, apply the whole or any part of such collections or proceeds against the Liabilities in such order as Lender shall determine in its sole discretion. For purposes of determining the amount of Loans available for borrowing purposes, checks and cash or other immediately available funds from collections of items of payment and proceeds of any Collateral shall be applied in whole or in part against the Liabilities, in such order as Lender shall determine in its sole discretion, on the day of receipt, subject to actual collection. (d) Lender, in its sole discretion determined in good faith, without waiving or releasing any obligation, liability or duty of Borrower under this Agreement or the Other Agreements or any Event of Default, may at any time or times hereafter, but shall not be obligated to, pay, acquire or accept an assignment of any security interest, lien, encumbrance or claim asserted by any Person in, upon or against the Collateral. All sums paid by Lender in respect thereof and all costs, fees and expenses including, without limitation, reasonable attorney fees, all court costs and all other charges relating thereto incurred by Lender shall constitute Liabilities, payable by Borrower to Lender on demand and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder. (e) Promptly upon Borrower's receipt of any portion of the Collateral evidenced by an agreement, Instrument or Document, including, without limitation, any Chattel Paper, 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. 10 8. SCHEDULES AND REPORTS. (a) Within ten (10) days after the close of each calendar month, and at such other times as may be requested by Lender from time to time hereafter, Borrower shall deliver to Lender (i) a schedule identifying each Account and which Accounts constitute Eligible Accounts together with copies of the invoices when requested by Lender (with evidence of shipment attached) pertaining to each such Account, for the month (or other applicable period) immediately preceding; and (ii) such additional schedules, certificates, reports and information with respect to the Collateral as Lender may from time to time require. Lender, through its officers, employees or agents, shall have the right, at any time and from time to time in Lender's name, in the name of a nominee of Lender or in Borrower's name, to verify the validity, amount or any other matter relating to any of Borrower's Accounts, by mail, telephone, telegraph or otherwise, provided, that prior to the occurrence of an Event of Default, Lender shall conduct such verification in the name of a nominee of Lender or in Borrower's name. All costs, fees and expenses incurred by Lender in this regard shall constitute Liabilities, payable on demand and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder. (b) Without limiting the generality of the foregoing, Borrower shall deliver to Lender, at least once a month (or more frequently when requested by Lender), a report with respect to Borrower's Inventory. Borrower shall immediately notify Lender of any event causing loss or depreciation in value of Borrower's Inventory (other than normal depreciation occurring in the ordinary course of business) and which exceeds $50,000.00. (c) All schedules, certificates, reports and other items delivered by Borrower to Lender hereunder shall be executed by an authorized representative of Borrower and shall be in such form and contain such information as Lender shall specify. 9. TERMINATION. This Agreement shall be in effect from the date hereof until April 26, 2004 (the "Original Term") and shall automatically renew itself from year to year thereafter (each such one-year renewal being referred to herein as a "Renewal Term") unless (a) Lender makes demand for repayment prior to the end of the Original Term or the then current Renewal Term; (b) the due date of the Liabilities is accelerated pursuant to paragraph 13 hereof; or (c) Borrower elects to terminate this Agreement at the end of the Original Term or at the end of any Renewal Term by giving Lender written notice of such election at least ninety (90) days prior to the end of the Original Term or the then current Renewal Term and by paying all of the Liabilities in full on the last day of such term. Absent the occurrence of an Event of Default, Lender will give at least ninety (90) days notice of its intention to demand the Loans prior to the end of the Original Term or any Renewal Term. If one or more of the events 11 specified in clauses (a), (b) and (c) occurs, then (i) Lender shall not make any additional Loans on or after the date identified as the date on which the Liabilities are to be repaid; and (ii) this Agreement shall terminate on the date thereafter that the Liabilities are paid in full. At such time as Borrower has repaid all of the Liabilities and this Agreement has terminated, Borrower shall deliver to Lender a release, in form and substance satisfactory to Lender, of all obligations and liabilities of Lender and its officers, directors, employees, agents, parents, subsidiaries and affiliates to Borrower, and if Borrower is obtaining new financing from another lender, Borrower shall deliver such lender's indemnification of Lender, in form and substance satisfactory to Lender, for checks which Lender has credited to Borrower's account, but which subsequently are dishonored for any reason or for automatic clearinghouse or wire transfers not yet posted to Borrower's account. If, during the term of this Agreement, Borrower prepays all of the Liabilities from any source other than income from the ordinary course operations of Borrower's business and this Agreement is terminated, Borrower agrees to pay to Lender as a prepayment fee, in addition to the payment of all other Liabilities, an amount equal to (i) three percent (3%) of the Maximum Loan Limit if such prepayment occurs two (2) years or more prior to the end of the Original Term, (ii) two percent (2%) of the Maximum Loan Limit if such prepayment occurs less than two (2) years, but at least one (1) year prior to the end of the Original Term, or (iii) one percent (1%) of the Maximum Loan Limit if such prepayment occurs less than one (1) year prior to the end of the Original Term or any then current Renewal Term, provided, that Borrower shall not be required to pay such prepayment fee if the Liabilities are prepaid by Borrower in response to the Lender's demand for repayment of the Loans, before the occurrence of an Event of Default or if the Liabilities are refinanced with an affiliate of Lender after the first anniversary of the date of this Agreement. 10. REPRESENTATIONS, WARRANTIES AND COVENANTS. Borrower hereby represents, warrants and covenants that: (a) the financial statements delivered or to be delivered by Borrower to Lender at or prior to the date of this Agreement and at all times subsequent thereto accurately reflect the financial condition of Borrower, and there has been no material adverse change in the financial condition, the operations or any other status of Borrower since the date of the financial statements delivered to Lender most recently prior to the date of this Agreement; (b) (i) the office where Borrower keeps its books, records and accounts (or copies thereof) concerning the Collateral, Borrower's principal place of business and all of Borrower's other places of business, locations of Collateral and post office boxes and locations of bank accounts are as set forth in Exhibit B; and (ii) Borrower shall promptly (but in no event less than ten (10) days prior thereto) advise Lender in writing of the proposed opening of any new place of business or new location of Collateral, the closing of any existing place of business or location of Collateral, any change in the location of Borrower's books, records and accounts (or copies thereof), the opening or closing of any post office box of Borrower or the opening or closing of any bank account; 12 (c) the Collateral, including, without limitation, the Equipment (except any part thereof which Borrower shall have advised Lender in writing consists of Collateral normally used in more than one state) is and shall be kept, or, in the case of vehicles, based, only at the addresses set forth on Exhibit B, and at other locations within the continental United States of which Lender has been advised by Borrower in writing; (d) if any of the Collateral consists of Goods of a type normally used in more than one state, whether or not actually so used, (i) Borrower shall immediately give written notice to Lender of any use of any such Goods in any state other than a state in which Borrower has previously advised Lender such Goods shall be used and (ii) such Goods shall not, unless Lender shall otherwise consent in writing, be used outside of the continental United States; (e) except as disclosed on Schedule 10(e) attached hereto and made a part hereof, Borrower has not made, and shall not make, any loans or advances to any Affiliate or other Person except for advances to employees, officers and directors of Borrower for travel and other expenses arising in the ordinary course of Borrower's business and except for loans to employees not to exceed $50,000.00 in the aggregate outstanding at any time; (f) each Account or item of Inventory which Borrower shall, expressly or by implication, request Lender to classify as an Eligible Account or as Eligible Inventory, respectively, shall, as of the time when such request is made, conform in all respects to the requirements of such classification as set forth in the respective definitions of "Eligible Account" and "Eligible Inventory" as set forth herein and as otherwise established by Lender from time to time, and Borrower shall promptly notify Lender in writing if any such Eligible Account or Eligible Inventory shall subsequently become ineligible; (g) Borrower is, and shall at all times during the Original Term and any Renewal Term be, the lawful owner of all Collateral now purportedly owned or hereafter purportedly acquired by Borrower, free from all liens, claims, security interests and encumbrances whatsoever, whether voluntarily or involuntarily created and whether or not perfected, other than the Permitted Liens; (h) Borrower has the right and power and is duly authorized and empowered to enter into, execute and deliver this Agreement and the Other Agreements and perform its obligations hereunder and thereunder. Borrower's execution, delivery and performance of this Agreement and the Other Agreements does not and shall not conflict with the provisions of the organizational documents of Borrower, any statute, regulation, ordinance or rule of law, or any agreement, contract or other document which may now or hereafter be binding on Borrower, except for conflicts with agreements, contracts or other documents which would not have a material adverse effect on its business, property, assets, operations or condition, financial or otherwise, and Borrower's execution, delivery and performance of this Agreement and the Other Agreements shall not result in the imposition of any lien or other encumbrance upon any of Borrower's property (other than Permitted Liens) under any existing indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument by which Borrower or any of its property may be bound or affected; 13 (i) there are no actions or proceedings which are pending or to the best of Borrower's knowledge, threatened against Borrower which are, 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; (j) (i) Borrower has obtained and shall maintain all governmental consents, franchises, certificates, licenses, authorizations, approvals and permits, the lack of which would have a material adverse effect on its business property, assets, operations or condition financial or otherwise; and (ii) Borrower is and shall remain in compliance in all material respects with all applicable federal, state, local and foreign statutes, orders, regulations, rules and ordinances (including, without limitation, Environmental Laws and statutes, orders, regulations, rules and ordinances relating to taxes, employer and employee contributions and similar items, securities, ERISA or employee health and safety) the failure to comply with which would have a material adverse effect on its business, property, assets, operations or condition, financial or otherwise; (k) all written information now, heretofore or hereafter furnished by Borrower to Lender is and shall be true and correct in all material respects as of the date with respect to which such information was or is furnished; (l) Borrower is not conducting, permitting or suffering to be conducted, nor shall it conduct, permit or suffer to be conducted, any activities pursuant to or in connection with which any of the Collateral is now, or will (while any Liabilities remain outstanding) be owned by any Affiliate; provided, however, that Borrower may enter into transactions with Affiliates for the purchase or sale of Inventory or services in the ordinary course of business pursuant to terms that are no less favorable to Borrower than the terms upon which such transfers or transactions would have been made had they been made to or with a Person that is not an Affiliate and, in connection therewith, may transfer cash or property to Affiliates for fair value; (m) Borrower's name has always been as set forth on the first page of this Agreement and Borrower uses no tradenames, assumed names, fictitious names or division names in the operation of its business, except as otherwise disclosed in writing to Lender; Borrower shall notify Lender in writing within ten (10) days of the change of its name or the use of any tradenames, assumed names, fictitious names or division names not previously disclosed to Lender in writing; (n) with respect to Borrower's Equipment: (i) except with respect to leased Equipment, Borrower has good and indefeasible and merchantable title to and ownership of all Equipment; (ii) Borrower shall, to the extent required by good business judgment, keep and 14 maintain the Equipment in good operating condition and repair and shall make all necessary replacements thereof and repairs thereto so that the value and operating efficiency thereof shall at all times be preserved and maintained; (iii) Borrower shall not permit any such items to become a fixture to real estate unless such real estate is owned by Borrower and is subject to a mortgage in favor of Lender or to become an accession to other personal property not subject to a lien in favor of Lender; and (iv) Borrower, immediately on demand by Lender, shall deliver to Lender any and all evidence of ownership of, including, without limitation, certificates of title and applications of title to, any of the Equipment; (o) this Agreement and the Other Agreements to which Borrower is a party are the legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms; (p) Borrower is and shall remain solvent, is and shall be able to pay its debts as they become due, has and shall continue to have capital sufficient to carry on its business, now owns and shall continue to own property having a value both at fair valuation and at present fair saleable value greater than the amount required to pay its debts, and will not be rendered insolvent by the execution and delivery of this Agreement or any of the Other Agreements or by completion of the transactions contemplated hereunder or thereunder; (q) Borrower is not now obligated, nor shall it create, incur, assume or become obligated (directly or indirectly), for any loans or other indebtedness for borrowed money other than the Loans, except that Borrower may (i) borrow money from a Person other than Lender on an unsecured and subordinated basis if a subordination agreement in favor of Lender and in form and substance satisfactory to Lender is executed and delivered to Lender relative thereto; (ii) maintain any present indebtedness to any Person which has been disclosed to Lender in writing and consented to in writing by Lender; (iii) incur unsecured indebtedness to trade creditors in the ordinary course of Borrower's business; (iv) incur purchase money indebtedness or capitalized lease obligations in connection with capital expenditures permitted pursuant to subparagraph 11(q) of this Agreement; and (v) incur operating lease obligations requiring payments not to exceed $250,000.00 in the aggregate during any fiscal year of Borrower; (r) Borrower does not own any margin securities, and none of the proceeds of the Loans hereunder shall be used for the purpose of purchasing or carrying any margin securities or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase any margin securities or for any other purpose not permitted by Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time; 15 (s) except as otherwise disclosed in writing to Lender, Borrower has no Parents, Subsidiaries or other Affiliates or divisions, nor is Borrower engaged in any joint venture or partnership with any other Person; (t) if Borrower is a corporation, limited liability company or partnership, Borrower is duly organized, validly existing and in good standing in its state of organization 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; (u) Borrower is not in default under any material contract, lease or commitment to which it is a party or by which it is bound, nor does Borrower know of any dispute regarding any contract, lease or commitment which would have a material adverse effect on its business, property, assets, operations or condition, financial or otherwise; (v) there are no controversies pending or, to the best of Borrower's knowledge, threatened between Borrower and any of its employees, other than employee grievances arising in the ordinary course of business which would not, in the aggregate, have a material adverse effect on its business, property, assets, operations or condition, financial or otherwise, and Borrower is in compliance with all federal and state laws respecting employment and employment terms, conditions and practices except for such non-compliance which would not have a material adverse effect on its business, property, assets, operations or condition, financial or otherwise; (w) Borrower possesses, and shall continue to possess, adequate licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications, tradestyles and tradenames to continue to conduct its business as heretofore conducted by it, except to the extent that the failure to possess such items would not have a material adverse effect on its business, property, assets, operations or condition, financial or otherwise; (x) (i) Borrower has not generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in any manner which at any time violates in any material respect any Environmental Law or any license, permit, certificate, approval or similar authorization thereunder and the operations of the Borrower comply in all material respects with all Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder; (ii) there has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other Person, nor is any pending or to 16 the best of the Borrower's knowledge threatened, and Borrower shall immediately notify Lender upon becoming aware of any such investigation, proceeding, complaint, order, directive, claim, citation or notice and take prompt and appropriate actions to respond thereto, with respect to any non-compliance with or violation of the requirements of any Environmental Law by the Borrower or the release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which affects the Borrower or its business, operations or assets or any properties at which the Borrower has transported, stored or disposed of any Hazardous Materials unless, the foregoing could not reasonably be expected to have a material adverse effect on Borrower's business, property, assets, operations or condition, financial or otherwise; (iii) Borrower has no material liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials; and (iv) without limiting the generality of the foregoing, Borrower shall, following the determination by Lender that there is non-compliance, or any condition which requires any action by or on behalf of Borrower in order to avoid any non-compliance, with any Environmental Law, at Borrower's expense, cause an independent environmental engineer acceptable to Lender to conduct such tests of the relevant site(s) as are appropriate and prepare and deliver a report setting forth the result of such tests, a proposed plan for remediation and an estimate of the costs thereof; and (y) Borrower has paid and discharged, and shall at all times hereafter promptly pay and discharge all obligations and liabilities arising under ERISA of a character which, if unpaid or unperformed, might result in the imposition of a lien against any of its properties or assets and will promptly notify the Lender of (i) the occurrence of any "reportable event" (as defined in ERISA) which might result in the termination by the Pension Benefit Guaranty Corporation (the "PBGC") of any employee benefit plan ("Plan") covering any officers or employees of the Borrower, any benefits of which are, or are required to be, guaranteed by the PBGC; (ii) receipt of any notice from the PBGC of its intention to seek termination of any Plan or appointment of a trustee therefor; and (iii) its intention to terminate or withdraw from any Plan; provided, that Borrower shall not terminate any Plan or withdraw therefrom if such withdrawal or termination shall result in any liability to Borrower. Borrower represents, warrants and covenants to Lender that all representations and warranties of Borrower contained in this Agreement (whether appearing in paragraphs 10 or 11 hereof or elsewhere) shall be true at the time of Borrower's execution of this Agreement, shall survive the execution, delivery and acceptance hereof by the parties hereto and the closing of the transactions described herein or related hereto, shall remain true until the repayment in full and satisfaction of all of the Liabilities and termination of this Agreement, and shall be remade by Borrower at the time each Loan is made pursuant to this Agreement, provided, that representations and warranties made as of a particular date shall be true and correct as of such date. 17 11. ADDITIONAL COVENANTS OF BORROWER. Until payment and satisfaction in full of all Liabilities and termination of this Agreement, unless Borrower obtains Lender's prior written consent waiving or modifying any of Borrower's covenants hereunder in any specific instance, Borrower agrees as follows: (a) Borrower shall at all times keep accurate and complete books, records and accounts with respect to all of Borrower's business activities, in accordance with sound accounting practices and generally accepted accounting principles consistently applied, and shall keep such books, records and accounts, and any copies thereof, only at the addresses indicated for such purpose on Exhibit B; (b) Borrower agrees to deliver to Lender the following financial information, all of which shall be prepared in accordance with generally accepted accounting principles consistently applied, and shall be accompanied by a compliance certificate in the form of Exhibit C hereto, which compliance certificate shall include a calculation of all financial covenants contained in this Agreement: (i) no later than thirty (30) days after each calendar month, copies of internally prepared financial statements, including, without limitation, balance sheets and statements of income, retained earnings and cash flow of Borrower, certified by the Chief Financial Officer of Borrower; (ii) no later than forty-five (45) days after the end of each of the first three quarters of Borrower's fiscal year a balance sheet, operating statement and reconciliation of surplus of Borrower, which quarterly financial statements may be unaudited but shall be certified by the Chief Financial Officer of Borrower; (iii) no later than ninety (90) days after the end of each of Borrower's fiscal years, audited annual financial statements with an unqualified opinion by independent certified public accountants selected by Borrower and reasonably satisfactory to Lender, which financial statements shall be accompanied by (A) a letter from such accountants acknowledging that they are aware that a primary intent of Borrower in obtaining such financial statements is to influence Lender and that Lender is relying upon such financial statements in connection with the exercise of its rights hereunder, provided, that Borrower shall only be required to use its reasonable efforts in good faith to obtain such letter; and (B) copies of any management letters sent to the Borrower by such accountants; and (iv) copies of any and all proxy statements, financial statements and reports which Borrower makes available to its stockholders, including without limitation, any filings with the Securities Exchange Commission; (c) Borrower shall promptly advise Lender in writing of any material adverse change in the business, property, assets, operations or condition, financial or otherwise, of Borrower, the occurrence of any Event of Default hereunder or the occurrence of any event which, if uncured, will become an Event of Default hereunder after notice or lapse of time (or both); (d) Lender, or any Persons designated by it, shall have the right to call at Borrower's places of business at any reasonable times, and, without hindrance or delay, to inspect the Collateral and to inspect, audit, check and make extracts from Borrower's books, records, journals, orders, receipts and any correspondence and other data relating to Borrower's business, the Collateral or any transactions 18 between the parties hereto, and shall have the right to make such verification concerning Borrower's business as Lender may consider reasonable under the circumstances. Borrower shall furnish to Lender such information relevant to Lender's rights under this Agreement as Lender shall at any time and from time to time request. Borrower authorizes Lender to discuss the affairs, finances and business of Borrower with any officers, employees or directors of Borrower or with Parent or any Affiliate or the officers, employees or directors of Parent or any Affiliate, and to discuss the financial condition of Borrower with Borrower's independent public accountants. Any such discussions shall be without liability to Lender or to Borrower's independent public accountants. Borrower shall pay to Lender all customary fees and out-of-pocket expenses incurred by Lender in the exercise of its rights hereunder, and all of such fees and expenses shall constitute Liabilities hereunder, shall be payable on demand and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder; provided however, that, except with respect to Lender's initial audit, prior to the occurrence of an Event of Default, the maximum amount Borrower shall be required to pay Lender pursuant to this subparagraph 11(d) shall be Twelve Thousand Five Hundred and No/100 Dollars ($12,500.00) per fiscal year of Borrower. (e) Borrower shall: (i) keep the Collateral properly housed and insured for the full insurable value thereof against loss or damage by fire, theft, explosion, sprinklers, collision (in the case of motor vehicles) and such other risks as are customarily insured against by Persons engaged in businesses similar to that of Borrower, with such companies, in such amounts, with such deductibles, and under policies in such form, as shall be satisfactory to Lender. Original (or certified) copies of such policies of insurance have been or shall be, within ninety (90) days of the date hereof, delivered to Lender, together with evidence of payment of all premiums therefor, and shall contain an endorsement, in form and substance acceptable to Lender, showing loss under such insurance policies payable to Lender. Such endorsement, or an independent instrument furnished to Lender, shall provide that the insurance company shall give Lender at least thirty (30) days written notice before any such policy of insurance is altered or canceled and that no act, whether willful or negligent, or default of Borrower or any other Person shall affect the right of Lender to recover under such policy of insurance in case of loss or damage. In addition, Borrower shall cause to be executed and delivered to Lender an assignment of proceeds of its business interruption insurance policies. Borrower hereby directs all insurers under all policies of insurance to pay all proceeds payable thereunder directly to Lender. Borrower irrevocably makes, constitutes and appoints Lender (and all officers, employees or agents designated by Lender) as Borrower's true and lawful attorney (and agent-in-fact) for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing the name of Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and making all determinations and decisions with 19 respect to such policies of insurance, provided, however, that if no Event of Default shall have occurred, Borrower may make, settle and adjust claims involving less than $100,000.00 in the aggregate without Lender's consent; and (ii) maintain, at its expense, such public liability and third party property damage insurance as is customary for Persons engaged in businesses similar to that of Borrower with such companies and in such amounts, with such deductibles and under policies in such form as shall be satisfactory to Lender and original (or certified) copies of such policies have been or shall be, within ninety (90) days after the date hereof, delivered to Lender, together with evidence of payment of all premiums therefor; each such policy shall contain an endorsement showing Lender as additional insured thereunder and providing that the insurance company shall give Lender at least thirty (30) days written notice before any such policy shall be altered or cancelled. If Borrower at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium relating thereto, then Lender, without waiving or releasing any obligation or default by Borrower hereunder, may (but shall be under no obligation to) obtain and maintain such policies of insurance and pay such premiums and take such other actions with respect thereto as Lender deems advisable upon notice to Borrower. Such insurance, if obtained by Lender, may, but need not, protect Borrower's interests or pay any claim made by or against Borrower with respect to the Collateral. Such insurance may be more expensive than the cost of insurance Borrower may be able to obtain on its own and may be cancelled only upon Borrower providing evidence that it has obtained the insurance as required above. All sums disbursed by Lender in connection with any such actions, including, without limitation, court costs, expenses, other charges relating thereto and reasonable attorneys' fees, shall constitute Loans hereunder, shall be payable on demand by Borrower to Lender and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder; (f) Borrower shall not use the Collateral, or any part thereof, in any unlawful business or for any unlawful purpose or use or maintain any of the Collateral in any manner that does or could result in material damage to the environment or a violation of any applicable Environmental Laws; shall keep the Collateral in good condition, repair and order, ordinary wear and tear excepted,; shall permit Lender to examine any of the Collateral at any time and wherever the Collateral may be located; except as otherwise set forth herein, shall not permit the Collateral, or any part thereof, to be levied upon under execution, attachment, distraint or other legal process; shall not sell, lease, grant a security interest in or otherwise dispose of any of the Collateral except as expressly permitted by this Agreement; shall not settle or adjust any Account identified by Borrower as an Eligible Account (except for ordinary course discounts, credits or allowances which reduce the availability set forth in Paragraph (1)(a) of Exhibit 20 A) or with respect to which the Account Debtor is an Affiliate without the consent of Lender, provided, that following the occurrence of an Event of Default, Borrower shall not settle or adjust any Account without the consent of Lender; and shall not secrete or abandon any of the Collateral, or remove or permit removal of any of the Collateral from any of the locations listed on Exhibit B (or such other locations as Borrower shall have notified Lender in writing pursuant to subparagraph 10(c) hereof), except for the removal of Inventory sold in the ordinary course of Borrower's business as permitted herein; (g) all monies and other property obtained by Borrower from Lender pursuant to this Agreement shall be used solely for business purposes of Borrower; (h) Borrower shall, at the request of Lender, indicate on its records concerning the Collateral a notation, in form satisfactory to Lender, of the security interest of Lender hereunder; (i) Borrower shall file all required tax returns and pay all of its taxes when due, subject to any extensions granted by the applicable taxing authority, and provided, that if any taxes are subsequently determined to be owing by Borrower which are not the result of fraud or criminal negligence, such additional taxes are paid when due, including, without limitation, taxes imposed by federal, state or municipal agencies, and shall cause any liens for taxes to be promptly released; provided, that Borrower shall have the right to contest the payment of such taxes in good faith by appropriate proceedings so long as (i) the amount so contested is shown on Borrower's financial statements; (ii) the contesting of any such payment does not give rise to a lien for taxes; (iii) Borrower keeps on deposit with Lender (such deposit to be held with interest) or a reserve is maintained against Borrower's availability to borrow money under paragraph (1) of Exhibit A, in either case, in an amount of money which, in the sole judgment of Lender exercised in good faith, is sufficient to pay such taxes and any interest or penalties that may accrue thereon; and (iv) if Borrower fails to prosecute such contest with reasonable diligence, Lender may apply the money so deposited or reserved in payment of such taxes. If Borrower fails to pay any such taxes and in the absence of any such contest by Borrower, Lender may (but shall be under no obligation to) advance and pay any sums required to pay any such taxes and/or to secure the release of any lien therefor, and any sums so advanced by Lender shall constitute Loans hereunder, shall be payable by Borrower to Lender on demand, and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder; (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; (k) Borrower shall not (i) enter into any merger or consolidation; (ii) sell, lease or otherwise dispose of any of its assets other than in the ordinary course of business; (iii) purchase the stock or all or substantially all of the assets of any Person or division of such Person; or (iv) enter into any other transaction outside the ordinary course of Borrower's business, including, without 21 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; (l) Borrower shall not declare or pay any dividend or other distribution (whether in cash or in kind) on any class of its stock (if Borrower is a corporation) or on account of any equity interest in Borrower (if Borrower is a partnership, limited liability company or other type of entity); (m) Borrower shall not purchase or otherwise acquire, or contract to purchase or otherwise acquire, the obligations or stock of any Person, other than direct obligations of the United States, obligations insured by the Federal Deposit Insurance Corporation and obligations unconditionally guaranteed by the United States; (n) Borrower shall not amend its organizational documents or change its fiscal year or enter into a new line of business materially different from Borrower's current business, unless (i) such actions would not have an adverse effect on the Borrower's business, property, assets, operations or condition, financial or otherwise, as determined by Lender in its sole discretion, (ii) such actions would not affect the obligations of Borrower to Lender, (iii) such actions would not affect the interpretation of any of the terms of this Agreement or the Other Agreements and (iv) Lender has received ten (10) days prior written notice of such amendment or change; (o) Borrower's Tangible Net Worth shall not at any time be less than the "Minimum Tangible Net Worth"; Minimum Tangible Net Worth being defined for purposes of this subparagraph as $6,250,000.00 at all times from March 31, 2001 through June 29, 2001. Commencing June 30, 2001 through September 29, 2001, Minimum Tangible Net Worth shall be equal to $6,700,000.00. Thereafter, Minimum Tangible Net Worth shall be equal to, with respect to Measuring Period A, as hereinafter defined, Minimum Tangible Net Worth during the immediately preceding Measuring Period B plus Five Hundred Thousand and No/100 Dollars ($500,000.00) and with respect to Measuring Period B, as hereinafter defined, Minimum Tangible Net Worth shall be equal to the greater of (1) Borrower's Tangible Net Worth as shown on Borrower's fiscal year end statement for the most recently completed fiscal year less Five Hundred Thousand and No/100 Dollars ($500,000.00) or (2) the Minimum Tangible Net Worth as of the immediately preceding Measuring Period A plus Five Hundred 22 Thousand and No/100 Dollars ($500,000.00). Measuring Period A shall mean each six (6) month period of September 30th of each year through March 30th of the following year and Measuring Period B shall mean each six (6) month period of March 31st of each year through September 29th of the same year; and "Tangible Net Worth" being defined for purposes of this subparagraph as Borrower's shareholders' equity (including retained earnings) less the book value of all intangible assets as determined solely by Lender on a consistent basis plus the amount of any LIFO reserve plus the amount of any debt subordinated to Lender, all as determined under generally accepted accounting principles applied on a basis consistent with the financial statement dated February 28, 2001 except as set forth herein; (p) Borrower shall reimburse Lender for all costs and expenses, including, without limitation, legal expenses and reasonable attorneys' fees, incurred by Lender in connection with the (i) documentation and consummation of this transaction, subject to Exhibit A, and any other transactions between Borrower and Lender, including, without limitation, Uniform Commercial Code and other public record searches and filings, overnight courier or other express or messenger delivery, appraisal costs, surveys, title insurance and environmental audit or review costs; (ii) collection, protection or enforcement of any rights in or to the Collateral; (iii) collection of any Liabilities; and (iv) administration and enforcement of any of Lender's rights under this Agreement. Borrower shall also pay all normal service charges with respect to all accounts maintained by Borrower with Lender and any additional services requested by Borrower from Lender. All such costs, expenses and charges shall constitute Liabilities hereunder, shall be payable by Borrower to Lender on demand, and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder; (q) Borrower shall not purchase or otherwise acquire (including, without limitation, acquisition by way of capitalized lease), or commit to purchase or acquire, any fixed asset if, after giving effect to such purchase or other acquisition, the aggregate cost of all such fixed assets purchased or otherwise acquired would exceed $700,000.00 during any fiscal year of Borrower; and (r) Neither Borrower nor any Affiliate shall use any portion of the proceeds of the Loans, either directly or indirectly, for the purpose of (i) purchasing any securities underwritten or privately placed by ABN AMRO Securities (USA) Inc. ("AASI"), an affiliate of Lender, (ii) purchasing from AASI any securities in which AASI makes a market, or (iii) refinancing or making payments of principal, interest or dividends on any securities issued by Borrower or any Affiliate, and underwritten, privately placed or dealt in by AASI. 12. DEFAULT. The occurrence of any one or more of the following events shall constitute an "Event of Default" by Borrower hereunder: 23 (a) the failure of any Obligor to pay when due, declared due, or demanded by Lender, any of the Liabilities; (b) the failure of any Obligor to perform, keep or observe any of the covenants, conditions, promises, agreements or obligations of such Obligor under this Agreement or any of the Other Agreements; provided that any such failure by Borrower under subparagraphs 10(b)(ii), 10(g) (but only with respect to involuntarily created liens, claims, security interests and encumbrances), 10(j)(i), 10 (v), 10 (w), 10 (x), and 10 (y) of this Agreement shall not constitute an Event of Default hereunder until the fifteenth (15th) day following the occurrence thereof; (c) the failure of any Obligor to perform, keep or observe (after any applicable notice and cure period) any of the covenants, conditions, promises, agreements or obligations of such Obligor under any other agreement with any Person if such failure might have a material adverse effect on such Obligor's business, property, assets, operations or condition, financial or otherwise; (d) the making or furnishing by any Obligor to Lender of any representation, warranty, certificate, schedule, report or other communication within or in connection with this Agreement or the Other Agreements or in connection with any other agreement between such Obligor and Lender, which is untrue or misleading in any respect; (e) the loss, theft, damage or destruction of any of the Collateral in an amount in excess of $150,000.00 in the aggregate for all such events during any year of the Original Term or any Renewal Term as determined by Lender in its sole discretion, or (except as permitted hereby) sale, lease or furnishing under a contract of service of, any of the Collateral; (f) the creation (whether voluntary or involuntary) of, or any attempt to create, any lien or other encumbrance upon any of the Collateral, other than the Permitted Liens, or the making or any attempt to make any levy, seizure or attachment thereof; (g) the commencement of any proceedings in bankruptcy by or against any Obligor or for the liquidation or reorganization of any Obligor, or alleging that such Obligor is insolvent or unable to pay its debts as they mature, or for the readjustment or arrangement of any Obligor's debts, whether under the United States Bankruptcy Code or under any other law, whether state or federal, now or hereafter existing for the relief of debtors, or the commencement of any analogous statutory or non-statutory proceedings involving any Obligor; provided, however, that if such commencement of proceedings against such Obligor is involuntary, such action shall not constitute an Event of Default unless such proceedings are not dismissed within sixty (60) days after the commencement of such proceedings; 24 (h) the appointment of a receiver or trustee for any Obligor, for any of the Collateral or for any substantial part of any Obligor's assets or the institution of any proceedings for the dissolution, or the full or partial liquidation, or the merger or consolidation, of any Obligor which is a corporation, limited liability company or a partnership; provided, however, that if such appointment or commencement of proceedings against such Obligor is involuntary, such action shall not constitute an Event of Default unless such appointment is not revoked or such proceedings are not dismissed within sixty (60) days after the commencement of such proceedings; (i) the entry of any judgment or order aggregating in excess of $100,000.00 against any Obligor which remains unsatisfied or undischarged and in effect for thirty (30) days after such entry without a stay of enforcement or execution; (j) the death of any Obligor who is a natural Person, or of any general partner who is a natural Person of any Obligor which is a partnership, or any member who is a natural Person of any Obligor which is a limited liability company or the dissolution of any Obligor which is a partnership, limited liability company or corporation; (k) the occurrence of an event of default under (after any applicable notice and cure period), or the revocation or termination of, any agreement, instrument or document executed and delivered by any Person to Lender pursuant to which such Person has guaranteed to Lender the payment of all or any of the Liabilities or has granted Lender a security interest in or lien upon some or all of such Person's real and/or personal property to secure the payment of all or any of the Liabilities; (l) the institution in any court of a criminal proceeding against any Obligor, or the indictment of any Obligor for any crime; and (m) any material adverse change in the business, property, assets, operations or condition, financial or otherwise of any Obligor, as determined by Lender in its sole judgment exercised in good faith. 13. REMEDIES UPON AN EVENT OF DEFAULT. (a) Upon the occurrence of an Event of Default described in subparagraph 12(g) hereof, all of the Liabilities shall immediately and automatically become due and payable, without notice of any kind. Upon the occurrence of any other Event of Default, all Liabilities may, at the option of Lender, and without demand, notice or legal process of any kind, be declared, and immediately would become, due and payable. (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, 25 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 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 reasonably and properly given if given at least five (5) calendar days before such disposition. 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. 14. INDEMNIFICATION. Borrower agrees to defend (with counsel reasonably satisfactory to Lender), protect, indemnify and hold harmless Lender, each affiliate or subsidiary of Lender, and each of their respective officers, directors, employees, attorneys and agents (each an "Indemnified Party") from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature (including, without limitation, the disbursements and the reasonable fees of counsel for each Indemnified Party in connection with any investigative, administrative or judicial proceeding, whether or not the Indemnified Party shall be designated a party thereto), which may be imposed on, incurred by, or asserted against, any Indemnified Party (whether direct, indirect or consequential and whether based on any federal, state or local laws or regulations, including, without limitation, securities laws and regulations, Environmental Laws and commercial laws and regulations, under common law or in equity, or based on contract or otherwise) in any manner relating to or arising out of this Agreement or any Other Agreement, or any act, event or transaction related or attendant thereto, the making or issuance and the management of the Loans or any Letters of Credit or the use or intended use of the proceeds of the Loans or any Letters of Credit; provided, however, that Borrower shall not have any obligation hereunder to any Indemnified Party with respect to matters caused by or resulting from the willful misconduct or gross negligence of such Indemnified Party. To the extent that the undertaking to indemnify set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, Borrower shall satisfy such undertaking to the maximum extent permitted by applicable law. Any liability, obligation, loss, damage, penalty, cost or expense covered by this indemnity shall be paid to each Indemnified Party on demand, and, failing prompt payment, shall, together with interest thereon at 26 the highest rate then applicable to Loans hereunder from the date incurred by each Indemnified Party until paid by Borrower, be added to the Liabilities of Borrower and be secured by the Collateral. The provisions of this paragraph 14 shall survive the satisfaction and payment of the other Liabilities and the termination of this Agreement. 15. NOTICE. All written notices and other written communications with respect to this Agreement shall be sent by ordinary, certified or overnight mail, by telecopy or delivered in person, and in the case of Lender shall be sent to it at 135 South LaSalle Street, Chicago, Illinois 60603-4105, and in the case of Borrower shall be sent to it at its principal place of business set forth on the first page of this Agreement or as otherwise directed by Borrower in writing. All notices shall be deemed received upon actual receipt thereof or refusal of delivery. 16. CHOICE OF GOVERNING LAW; CONSTRUCTION; FORUM SELECTION. This Agreement and the Other Agreements are submitted by Borrower to Lender for Lender's acceptance or rejection at Lender's principal place of business as an offer by Borrower to borrow monies from Lender now and from time to time hereafter, and shall not be binding upon Lender or become effective until accepted by Lender, in writing, at said place of business. If so accepted by Lender, this Agreement and the Other Agreements shall be deemed to have been made at said place of business. THIS AGREEMENT AND THE OTHER AGREEMENTS SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING, WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, BUT EXCLUDING PERFECTION OF THE SECURITY INTERESTS IN COLLATERAL LOCATED OUTSIDE OF THE STATE OF ILLINOIS, WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE RELEVANT JURISDICTION IN WHICH SUCH COLLATERAL IS LOCATED. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or remaining provisions of this Agreement. To induce Lender to accept this Agreement, Borrower irrevocably agrees that, subject to Lender's sole and absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER AGREEMENTS OR THE COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS. BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN SAID CITY AND STATE. Borrower hereby irrevocably appoints and designates the Secretary of State of Illinois, whose address is Springfield, Illinois (or any other person having and maintaining a place of business in such state whom Borrower may from time to time hereafter designate upon ten (10) days written notice to Lender and whom Lender has agreed in its sole discretion in writing is satisfactory and who has executed an agreement in form and substance 27 satisfactory to Lender agreeing to act as such attorney and agent), as Borrower's true and lawful attorney and duly authorized agent for acceptance of service of legal process. Borrower agrees that service of such process upon such person shall constitute personal service of such process upon Borrower. Lender agrees to endeavor to provide a copy of such process to the law firm of English, McCaughan & O'Bryan, P.A. by mail at the address of 100 Northeast Third Avenue, Suite 1100, Fort Lauderdale, Florida 33301 or by facsimile transmission at facsimile number (954) 763-2439. Failure of Lender to provide a copy of such process shall not impair Lender's rights hereunder. BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST BORROWER BY LENDER IN ACCORDANCE WITH THIS PARAGRAPH. 17. MODIFICATION AND BENEFIT OF AGREEMENT. This Agreement and the Other Agreements may not be modified, altered or amended except by an agreement in writing signed by Borrower or such other person who is a party to such Other Agreement and Lender. Borrower may not sell, assign or transfer this Agreement, or the Other Agreements or any portion thereof, including, without limitation, Borrower's rights, titles, interest, remedies, powers or duties hereunder and thereunder. Borrower hereby consents to Lender's sale, assignment, transfer or other disposition, at any time and from time to time hereafter, of this Agreement, or the Other Agreements, or of any portion thereof, or participations therein, including, without limitation, Lender's rights, titles, interest, remedies, powers and/or duties and agrees that it shall execute and deliver such documents as Lender may request in connection with any such sale, assignment, transfer or other disposition, provided that, until such time as the Loans exceed $40,000,000.00, Lender shall retain at least fifty-one percent (51%) of the Loans unless Lender is purchased, in whole or in part, or the Loans are transferred to an affiliate of Lender. 18. HEADINGS OF SUBDIVISIONS. The headings of subdivisions in this Agreement are for convenience of reference only, and shall not govern the interpretation of any of the provisions of this Agreement. 19. POWER OF ATTORNEY. Borrower acknowledges and agrees that its appointment of Lender as its attorney and agent-in-fact for the purposes specified in this Agreement is an appointment coupled with an interest and shall be irrevocable until all of the Liabilities are satisfied and paid in full and this Agreement is terminated. 20. CONFIDENTIALITY. Borrower and Lender hereby agree and acknowledge that any and all information relating to Borrower which is (i) furnished by Borrower to Lender (or to any affiliate of Lender); and (ii) non-public, confidential or proprietary in nature, shall be kept confidential by Lender or such affiliate in accordance with applicable law; provided, however, that such information and other credit information relating to Borrower may be distributed by Lender or such affiliate to Lender's or such affiliate's directors, officers, employees, attorneys, affiliates, assignees, participants, auditors and regulators, and upon the order of a court or other governmental agency having jurisdiction over Lender or such affiliate, to any other party. Borrower and Lender further agree that this provision shall survive the termination of this Agreement. 28 21. COUNTERPARTS. This Agreement and any amendments, waivers, consents or supplements may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which, when so executed and delivered, shall be deemed an original, but all of which counterparts together shall constitute but one agreement. 22. WAIVER OF JURY TRIAL; OTHER WAIVERS. (a) BORROWER AND LENDER EACH HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, ANY OF THE OTHER AGREEMENTS, THE LIABILITIES, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY BORROWER OR LENDER OR WHICH, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN BORROWER AND LENDER. IN NO EVENT SHALL LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. (b) Borrower hereby waives demand, presentment, protest and notice of nonpayment, and further waives the benefit of all valuation, appraisal and exemption laws. (c) BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY LENDER OF ITS RIGHTS TO REPOSSESS THE COLLATERAL OF BORROWER WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH COLLATERAL, provided that in the event that Lender seeks to enforce its rights hereunder by judicial process or self help, Lender shall provide Borrower with such notices as are required by law. (d) Lender's failure, at any time or times hereafter, to require strict performance by Borrower of any provision of this Agreement or any of the Other Agreements shall not waive, affect or diminish any right of Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Lender of an Event of Default under this Agreement or any default under any of the Other Agreements shall not suspend, waive or affect any other Event of Default under this Agreement or any other default under any of the Other Agreements, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. No delay on the part of Lender in the exercise of any right or remedy under this Agreement or any Other Agreement shall preclude other or further exercise thereof or the exercise of any right or remedy. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement or any of the Other Agreements and no Event of Default under this Agreement or default under any of the Other Agreements shall be deemed to have been suspended or waived by Lender unless such suspension or waiver is in writing, signed by a duly authorized officer of Lender and directed to Borrower specifying such suspension or waiver. 29 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above. The Singing Machine Company, Inc. LaSalle Business Credit, Inc. By John Klecha By Casey Orlowski ---------------------------------- ------------------------ Its President, Chief Operating Officer Its Vice President Chief Financial Officer, Treasurer ---------------------- and Secretary. ---------------------------------- 30 EXHIBIT A SPECIAL PROVISIONS ---------------------------- Attached to and made a part of that certain Loan and Security Agreement, as it may be amended in accordance with its terms from time to time, including all exhibits attached thereto (the "Agreement") of even date herewith by and between The Singing Machine Company, Inc. ("Borrower") and LaSalle Business Credit, Inc. ("Lender"). CREDIT TERMS - ------------ (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 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 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 -1- EXHIBIT A SPECIAL PROVISIONS ---------------------------- Attached to and made a part of that certain Loan and Security Agreement, as it may be amended in accordance with its terms from time to time, including all exhibits attached thereto (the "Agreement") of even date herewith by and between The Singing Machine Company, Inc. ("Borrower") and LaSalle Business Credit, Inc. ("Lender"). 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 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 1st through October 31st of each calendar year; (ii) Seven Million Five Hundred Thousand and No/100 Dollars ($7,500,000.00) during the month of November of each calendar year; (iii) Five Million and No/100 Dollars ($5,000,000.00) during the month of December of each calendar year; and (iv) 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. (2) LETTERS OF CREDIT: Subject to the terms and conditions of the Agreement, including Exhibit A, and the Other Agreements, during the Original Term or any Renewal Term, Lender shall, absent the existence of an Event of Default, from time to time cause to be issued and co-sign for or otherwise guarantee, upon Borrower's request, commercial Letters of Credit; provided, that the aggregate undrawn face amount of all such Letters of Credit shall at no time exceed Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00). Lender's contingent liability under the Letters of Credit shall automatically reduce, dollar for dollar, the amount which Borrower may borrow pursuant to Paragraph (1) hereof. Payments made by Lender to any Person on account of any Letter of Credit shall constitute Loans hereunder. At no time shall the aggregate of direct Loans by Lender to Borrower plus the contingent liability of Lender under the outstanding Letters of Credit be in excess of the lesser of the Loan Limit and the Maximum Loan Limit. Borrower shall remit to Lender a Letter of Credit fee equal -2- EXHIBIT A SPECIAL PROVISIONS ---------------------------- Attached to and made a part of that certain Loan and Security Agreement, as it may be amended in accordance with its terms from time to time, including all exhibits attached thereto (the "Agreement") of even date herewith by and between The Singing Machine Company, Inc. ("Borrower") and LaSalle Business Credit, Inc. ("Lender"). to one-fourth of one percent (1/4th of 1%) per month on the aggregate undrawn face amount of all Letters of Credit outstanding, which fee shall be payable monthly in arrears on each day that interest is payable hereunder. Borrower shall also pay on demand the normal and customary administrative charges of the issuer of the Letter of Credit for issuance of any Letter of Credit. (3) ADDITIONS TO ELIGIBLE INVENTORY CRITERIA: Limits on Eligible Inventory: Without limiting Lender's discretion to determine the acceptability of Inventory for lending purposes in accordance with subparagraph 1(e)(v) of the Agreement: (a) Specific Category Inventory: With respect to the advance described in subparagraphs (1)(b) and (1)(c) of this Exhibit A, such Inventory shall consist solely of finished goods in the form of karaoke machines. (4) INTEREST RATE: Each Loan shall bear interest at the rate of one-half of one percent (1/2 of 1%) per annum in excess of LaSalle Bank National Association's publicly announced prime rate (which is not intended to be LaSalle Bank National Association's lowest or most favorable rate in effect at any time) (the "Prime Rate") in effect from time to time, payable on the last business day of each month in arrears. Said rate of interest shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the effective date of each such change in the Prime Rate. Upon the occurrence of an Event of Default, each Loan shall bear interest at the rate of two percent (2%) per annum in excess of the interest rate otherwise payable thereon, which interest shall be payable on demand. All interest shall be calculated on the basis of a 360-day year. -3- EXHIBIT A SPECIAL PROVISIONS ---------------------------- Attached to and made a part of that certain Loan and Security Agreement, as it may be amended in accordance with its terms from time to time, including all exhibits attached thereto (the "Agreement") of even date herewith by and between The Singing Machine Company, Inc. ("Borrower") and LaSalle Business Credit, Inc. ("Lender"). (5) FEES AND CHARGES: (a) Facilities Fees: Borrower shall pay to Lender an annual facilities fee equal to one percent (1%) of the Maximum Loan Limit, which fee shall be fully earned by Lender and payable on the date that Lender makes its initial disbursement under the Agreement and on each anniversary of the date of the Agreement during the Original Term and any Renewal Term. (b) Documentation Fee: Borrower shall pay to Lender a documentation fee of Ten Thousand and No/100 Dollars ($10,000.00), which fee shall be fully earned by Lender and payable on the date that Lender makes its initial disbursement under the Agreement. ADDITIONS AND CHANGES TO COVENANTS - ---------------------------------- (6) CHECKING ACCOUNT PROVISIONS: Borrower shall maintain its controlled disbursement account with LaSalle Bank National Association and Borrower shall utilize the cash management services of LaSalle Bank National Association. Normal charges shall be assessed thereon. ADDITIONS AND CHANGES TO DEFAULT PROVISIONS - ------------------------------------------- (7) CHANGE OF MANAGEMENT DEFAULT: In addition to the Events of Default specified in paragraph 12 of the Agreement, it shall be an Event of Default hereunder if Edward Steele and John Klecha shall cease to be the Chief Executive Officer and President, respectively, of Borrower; provided, however, that Borrower shall have seven (7) days from the date such Persons cease to be the Chief Executive Officer and President, respectively, of Borrower to retain an interim replacement Chief Executive Officer or President satisfactory to Lender in its sole discretion before such event shall constitute an Event of Default; further provided, however, that Borrower shall have ninety (90) days from the date such Persons cease to be the Chief Executive Officer and President, respectively, of Borrower to retain a permanent replacement Chief Executive Officer or President satisfactory to Lender in its sole discretion before such event shall constitute an Event of Default. -4- EXHIBIT A SPECIAL PROVISIONS ---------------------------- Attached to and made a part of that certain Loan and Security Agreement, as it may be amended in accordance with its terms from time to time, including all exhibits attached thereto (the "Agreement") of even date herewith by and between The Singing Machine Company, Inc. ("Borrower") and LaSalle Business Credit, Inc. ("Lender"). CONDITIONS TO CLOSING - --------------------- (8) ADDITIONAL CONDITIONS TO CLOSING: Lender shall be under no obligation to consummate the transactions contemplated by the Agreement until each of the conditions listed in this Paragraph (8) has been satisfied. Whenever a condition contained herein requires delivery of an agreement or other document to Lender, each such agreement or other document shall be in form and substance satisfactory to Lender in its sole discretion. (a) Landlord's Agreement: Borrower shall cause to be executed in favor of Lender and delivered to Lender a Landlord's Agreement from each lessor of property(ies) set forth on Exhibit B, which Landlord's Agreement shall include a copy of the relevant lease. (b) Securities Pledge Agreement Borrower shall execute in favor of Lender and deliver to Lender a Securities Pledge Agreement with respect to the stock of International SMC (HK) Limited and such other documents as Lender shall require. (c) Validity Agreements: Borrower shall cause to be executed in favor of Lender and delivered to Lender the Validity Agreements for each of John Klecha and Edward Steele. (d) Trademark Security Agreement: Borrower shall execute and deliver to Lender a Trademark Security Agreement. (e) Licensor's Consent: Borrower shall cause MTV Networks, a division of Viacom International Inc. to execute and deliver to Lender a Licensor's Consent (f) Bailed Equipment Letter: Borrower shall cause International SMC (HK) Limited to execute and deliver to Lender a Bailed Equipment Letter relative to Borrower's Equipment in its possession. (g) Warehouseman's Letters: Lender hereby acknowledges that Eligible Inventory is and from time to time may be stored with a bailee, warehouseman, or similar party at the locations set forth in Exhibit B. Relative thereto, Borrower shall cause each such party to execute and deliver to Lender a Warehouseman's Letter. -5- EXHIBIT A SPECIAL PROVISIONS ---------------------------- Attached to and made a part of that certain Loan and Security Agreement, as it may be amended in accordance with its terms from time to time, including all exhibits attached thereto (the "Agreement") of even date herewith by and between The Singing Machine Company, Inc. ("Borrower") and LaSalle Business Credit, Inc. ("Lender"). (h) Attorney's Opinion Letter: Borrower shall cause to be executed and delivered to Lender an Attorney's Opinion Letter. OTHER PROVISIONS - ---------------- (11) PERMITTED LIENS: Lender acknowledges that the liens evidenced by the following filed financing statements and any amendments thereto, as said financing statements exist as of ____________, 2001, shall constitute Permitted Liens: --------------------------------------------------------------- --------------------------------------------------------------- IN WITNESS WHEREOF, this Exhibit A has been executed as of the 26th day of April, 2001. LASALLE BUSINESS CREDIT, INC. THE SINGING MACHINE COMPANY, INC. By Casey Orlowski By John Klecha ------------------------------ --------------------------- Title: Vice President Title: President, Chief Operating Officer, Chief Financial Officer, Secretary and Treasurer ---------------------------- ------------------------------- -6- EXHIBIT B - BUSINESS AND COLLATERAL LOCATIONS --------------------------------------------- Attached to and made a part of that certain Loan and Security Agreement, as it may be amended in accordance with its terms from time to time, including all exhibits attached thereto (the "Agreement") of even date herewith between THE SINGING MACHINE COMPANY, INC. ("Borrower") and LASALLE BUSINESS CREDIT, INC. ("Lender"). A. Borrower's Business Locations (please indicate which location is the principal place of business and at which locations originals and all copies of Borrower's books, records and accounts are kept). 1. 6601 Lyons Road Suite A-7 [including Suite A-6 and Suite A-8] Coconut Creek, Florida 33073 [leased location/principal place of business] B. Other locations of Collateral (including, without limitation, warehouse locations, processing locations, consignment locations) and all post office boxes of Borrower. Please indicate the relationship of such location to Borrower (i.e. public warehouse, processor, etc.). 1. 967 East Sandhill Avenue Carson City, California 90746 [leased location] 2. Mirror Tower 61 Mody Road Tsimshatsui East Units 2 and 3 of the Lower One Floor Kowloon, Hong Kong [bailed equipment location of subsidiary] 3. c/o El Mar Plastics 840 Walnut Street Carson City, California 90746] [public warehouse location] -7- C. Bank Accounts of Borrower: Bank (with address) Account Number Type of Account ------------------ ------------- --------------- 1. Republic Securities Bank 0323002325 Operating l Account 7400 West Camino Real Drive Boca Raton, Fl 33433 2. Republic Securities Bank 0323002323 Payroll Account 7400 West Camino Real Drive Boca Raton, FL 33433 -8- EXHIBIT C - Compliance Certificate ---------------------------------- Attached to and made a part of that certain Loan and Security Agreement, as it may be amended in accordance with its terms from time to time, including all exhibits attached thereto (the "Agreement") of even date herewith between The Singing Machine Company, Inc. ("Borrower") and LaSalle Business Credit, Inc. ("Lender"). This Certificate is submitted pursuant to paragraph 11(b) of the Agreement. The undersigned hereby certifies to Lender that as of the date of this Certificate: 1. The undersigned is the __________________________ of the Borrower. 2. There exists no event or circumstance which is or which with the passage of time, the giving of notice, or both would constitute an Event of Default, as that term is defined in the Agreement, or, if such an event or circumstance exists, a writing attached hereto specifies the nature thereof, the period of existence thereof and the action that Borrower has taken or proposes to take with respect thereto. 3. No material adverse change in the condition, financial or otherwise, business, property, or results of operations of Borrower has occurred since [date of last Compliance Certificate/last financial statements delivered prior to closing], or, if such a change has occurred, a writing attached hereto specifies the nature thereof and the action that Borrower has taken or proposes to take with respect thereto. 4. Borrower is in compliance with the representations, warranties and covenants in the Agreement, or, if Borrower is not in compliance with any representations, warranties or covenants in the Agreement, a writing attached hereto specifies the nature thereof, the period of existence thereof and the action that Borrower has taken or proposes to take with respect thereto. 5. The financial statements of the Borrower being concurrently delivered herewith have been prepared in accordance with generally accepted accounting principles consistently applied and there have been no material changes in accounting policies or financial reporting practices of the Borrower since [date of the last compliance certificate/date of last financial statements delivered prior to closing] or, if any such change has occurred, such changes are set forth in a writing attached hereto. 6. Attached hereto is a true and correct calculation of the financial covenants contained in the Agreement. The Singing Machine Company, Inc. By John Klecha ---------------------------- Its: President, Chief Operating Officer, Chief Financial Officer Secretary and Treasurer ---------------------------- -2- SCHEDULE 10(E) Promissory note date July 1, 1999, maturing June 28, 2001, in the amount of $55,000 executed by John Klecha in favor of the Borrower. Promissory note dated July 1, 1999, maturing June 28, 2001, in the amount of $55,000 executed by Edward Steele in favor of the Borrower. EX-10.2 4 ex10-2.txt DEMAND NOTE EXHIBIT 10.2 DEMAND NOTE Executed as of the 26th day of April, 2001, at Chicago, Illinois, ID. Singing Amount $10,000,000.00 FOR VALUE RECEIVED, the Undersigned (jointly and severally, if more than one) promises to pay to the order of LASALLE BUSINESS CREDIT INC. (hereinafter, together with any holder hereof, called "Lender"), at the main office of the Lender, the principal sum of Ten Million and No/100 ------ Dollars ($10,000,000.00) plus the aggregate unpaid principal amount of all advances made by Lender to the Undersigned (or any one of them, if more than one) pursuant and in accordance with Paragraph 2 of the Loan Agreement (as hereinafter defined) in excess of such amount, or, if less, the aggregate unpaid principal amount of all advances made by Lender to the Undersigned (or any one of them, if more than one) pursuant to and in accordance with Paragraph 2 of the Loan Agreement. The Undersigned (jointly and severally, if more than one) further promises to pay interest on the outstanding principal amount hereof on the dates and at the rates provided in the Loan Agreement from the date hereof until payment in full hereof. This Demand Note is referred to in and was delivered pursuant to that certain Loan and Security Agreement, as amended, amended and restated or otherwise modified from time to time, together with all exhibits thereto, dated April 26, 2001, between Lender and the Undersigned (the "Loan Agreement"). All terms which are capitalized and used herein (which are not otherwise defined herein) shall have the meaning ascribed to such term in the Loan Agreement. THE OUTSTANDING PRINCIPAL BALANCE OF THE UNDERSIGNED'S LIABILITIES TO LENDER UNDER THIS DEMAND NOTE SHALL BE PAYABLE UPON DEMAND. Prior to demand, principal hereunder shall be payable pursuant to the terms of the Loan Agreement. The Undersigned (and each one of them, if more than one) hereby authorizes the Lender to charge any account of the Undersigned (and each one of them, if more than one) for all sums due hereunder. If payment hereunder becomes due and payable on a Saturday, Sunday or legal holiday under the laws of the United States or the State of Illinois, the due date thereof shall be extended to the next succeeding business day, and interest shall be payable thereon at the rate specified during such extension. Credit shall be given for payments made in the manner and at the times provided in the Loan Agreement. It is the intent of the parties that the rate of interest and other charges to the Undersigned under this Demand Note shall be lawful; therefore, if for any reason the interest or other charges payable hereunder are found by a court of competent jurisdiction, in a final determination, to exceed the limit which Lender may lawfully charge the Undersigned, then the obligation to pay interest or other charges shall automatically be reduce dot such limit and, if any amount in excess of such limit shall have been paid, then such amount shall be refunded to the Undersigned. The principal and all accrued interest hereunder may be prepaid by the Undersigned, in part or in full, at any time; provided, however, that the Undersigned shall pay a prepayment fee as provided in the Loan Agreement. The Undersigned (and each one of them, if more than one) waives the benefit of any law that would otherwise restrict or limit Lender or any affiliate of Lender, in the exercise of its right, which is hereby acknowledged, to set-off against the Liabilities, without notice and at any time hereafter after the occurrence of an Event of Default, any indebtedness matured or unmatured owing from Lender, or any affiliate of Lender, to the Undersigned (or any one of them). The Undersigned (and each one of them, if more than one) waives every defense, counterclaim (other than any claim which, if not made as a counterclaim, would be waived by Undersigned) or setoff which the Undersigned (or any one of them, 1 if more than one) may now have or hereafter may have to any action by Lender in enforcing this Note and/or any of the other Liabilities, or in enforcing Lender's rights in the Collateral and ratifies and confirms whatever Lender may do pursuant to the terms hereof and of the Loan Agreement and with respect to the Collateral and agrees that Lender shall not be liable for any error in judgment or mistakes of fact or law except with respect to acts of gross negligence or willful misconduct. The Undersigned, any other party liable with respect to the Liabilities and any and all endorsers and accommodation parties, and each one of them, if more than one, waive any and all presentment, demand, notice of dishonor, protest and all other notices and demands in connection with the enforcement of Lender's rights hereunder. The loan evidenced hereby has been made and this Note has been delivered at Chicago, Illinois., THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, and shall be binding upon the Undersigned (and each one of them, if more than one) and the Undersigned's heirs, legal representatives, successors and assigns (and each of them, if more than one). If this Note contains any blanks when executed by the Undersigned (or any one of them, if more than one), the Lender is hereby authorized, without notice to the Undersigned (or any one of them, if more than one) to complete any such blanks according to the terms upon which the loan or loans were granted. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or be invalid under such law, such provision shall be severable, and be ineffective to the extent of prohibition or invalidity, without invalidating the remaining provisions of this Note. If more than one party shall execute this Note the term "Undersigned" as used herein shall mean all parties signing this Note, and each one of them, and all such parties, their respective heirs, executors, administrators successors and assigns, shall be jointly and severally obligated hereunder. To induce the Lender to make the loan evidenced by this Note, the Undersigned (and each one of them, if more than one) (i) irrevocably agrees that, subject to Lender's sole and absolute election, all actions arising directly or indirectly as a result or in consequence of this Note or any other agreement with the Lender, or the Collateral, shall be instituted and litigated only in courts having situs in the City of Chicago, Illinois; (ii) hereby consents to the exclusive jurisdiction and venue of any State or Federal Court located and having its situs in said city; and (iii) waives any objection based on forum non-conveniens. IN ADDITION, LENDER AND THE UNDERSIGNED (OR ANY ONE OF THEM, IF MORE THAN ONE) HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS NOTE, THE LIABILITIES, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY THE UNDERSIGNED OR LENDER OR WHICH IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN THE UNDERSIGNED AND LENDER. In addition, the Undersigned agrees that all service of process shall be made as provided in the Loan Agreement. As used herein, all provisions shall include the masculine, feminine, neuter, singular and plural thereof, wherever the context and facts require such construction and in particular the word "Undersigned" shall be so construed. 2 IN WITNESS WHEREOF, each of the Undersigned, if more than one, has executed this Note on the date above set forth.
(CORPORATION, PARTNERSHIP OR LIMITED (INDIVIDUAL(S) SIGN BELOW) LIABILITY COMPANY SIGN BELOW) __________________________________ The Singing Machine Company, Inc. -------------------------------------------------- Name Name of Corporation, Partnership or Limited Liability Company _________________________________ By:___________________________________ Address Name and Title 6601 Lyons Road, Suite A-7 _________________________________ Coconut Creek, Florida 33073 ------------------------------------------------------ Address _________________________________ By:___________________________________ Address Name and Title - --------------------------------- -------------------------------------- Address Address - --------------------------------- --------------------------------------
EX-10.3 5 ex10-3.txt TRADEMARK SECURITY AGREEMENT EXHIBIT 10.3 TRADEMARK SECURITY AGREEMENT THIS TRADEMARK SECURITY AGREEMENT (the "Security Agreement") made as of this 26th day of April, 2001, by The Singing Machine Company, Inc., a Delaware corporation ("Borrower") in favor of LaSalle Business Credit, Inc., with an office at 135 South LaSalle Street, Suite 425, Chicago, Illinois 60603 ("Lender"): W I T N E S S E T H - - - - - - - - - - WHEREAS, Borrower and Lender are parties to a certain Loan and Security Agreement of even date herewith (as amended, amended and restated or otherwise modified from time to time, the "Loan Agreement") and other related loan documents of even date herewith (collectively, with the Loan Agreement, and as each may be amended or otherwise modified from time to time, the "Financing Agreements"), which Financing Agreements provide (i) for Lender to, from time to time, extend credit to or for the account of Borrower and (ii) for the grant by Borrower to Lender of a security interest in certain of Borrower's assets, including, without limitation, its trademarks and trademark applications; NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, Borrower agrees as follows: 1. Incorporation of Financing Agreements. The Financing Agreements and the terms and provisions thereof are hereby incorporated herein in their entirety by this reference thereto. All terms capitalized but not otherwise defined herein shall have the same meanings herein as in the Loan Agreement. 2. Grant and Reaffirmation of Grant of Security Interests. To secure the complete and timely payment and satisfaction of the Liabilities, Borrower hereby grants to Lender, and hereby reaffirms its prior grant pursuant to the Financing Agreements of, a continuing security interest in Borrower's entire right, title and interest in and to all of its now owned or existing and hereafter acquired or arising trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos, other business identifiers, prints and labels on which any of the foregoing have appeared or appear, all registrations and recordings thereof, and all applications (other than "intent to use" applications until a verified statement of use is filed with respect to such applications) in connection therewith, including, without limitation, the trademarks and applications listed on Schedule A attached hereto and made a part hereof and the trademarks, and renewals thereof, and all income, royalties, damages and payments now or hereafter due and/or payable under or with respect to any of the foregoing, including, without limitation, damages and payments for past, present and future infringements of any of the foregoing and the right to sue for past, present and future infringements of any of the foregoing (all of the foregoing are sometimes hereinafter individually and/or collectively referred to as the "Trademarks"); all rights corresponding to any of the foregoing throughout the world and the goodwill of the Borrower's business connected with the use of and symbolized by the Trademarks. 3. Warranties and Representations. Borrower warrants and represents to Lender that: (i) no Trademark has been adjudged invalid or unenforceable by a court of competent jurisdiction nor has any such Trademark been cancelled, in whole or in part and each such Trademark is presently subsisting; (ii) Borrower is the sole and exclusive owner of the entire and unencumbered right, title and interest in and to each Trademark, free and clear of any liens, charges and encumbrances, including without limitation, shop rights and covenants by Borrower not to sue third persons; (iii) Borrower has no notice of any suits or actions commenced or threatened with reference to any Trademark; and (iv) Borrower has the unqualified right to execute and deliver this Security Agreement and perform its terms. 4. Restrictions on Future Agreements. Borrower agrees that until Borrower's Liabilities shall have been satisfied in full and the Financing Agreements shall have been terminated, Borrower shall not, without the prior written consent of Lender, sell or assign its interest in any Trademark or enter into any other agreement with respect to any Trademark which would affect the validity or enforcement of the rights transferred to Lender under this Security Agreement. 5. New Trademarks. Borrower represents and warrants that, based on a diligent investigation by Borrower, the Trademarks listed on Schedule A constitute all of the federally registered Trademarks, and federal applications for registration of Trademarks (other than "intent to use" applications until a verified statement of use is filed with respect to such applications) now owned by Borrower. If, before Borrower's Liabilities shall have been satisfied in full or before the Financing Agreements have been terminated, Borrower shall (i) become aware of any existing Trademarks of which Borrower has not previously informed Lender, or (ii) become entitled to the benefit of any Trademarks, which benefit is not in existence on the date hereof, the provisions of this Security Agreement above shall automatically apply thereto and Borrower shall give to Lender prompt written notice thereof. Borrower hereby authorizes Lender to modify this Security Agreement by amending Schedule A to include any such Trademarks. 2 6. Term. The term of this Security Agreement shall extend until the payment in full of Borrower's Liabilities and the termination of the Financing Agreements. Borrower agrees that upon the occurrence of an Event of Default, the use by Lender of all Trademarks shall be without any liability for royalties or other related charges from Lender to Borrower. 7. Product Quality. Borrower agrees to maintain the quality of any and all products in connection with which the Trademarks are used, consistent with commercially reasonable business practices. Upon the occurrence of an Event of Default, Borrower agrees that Lender, or a conservator appointed by Lender, shall have the right to establish such additional product quality controls as Lender, or said conservator, in its reasonable judgment, may deem necessary to assure maintenance of the quality of products sold by Borrower under the Trademarks. 8. Release of Security Agreement. This Security Agreement is made for collateral purposes only. Upon payment in full of Borrower's Liabilities and termination of the Financing Agreements, Lender shall take such actions as may be necessary or proper to terminate the security interests created hereby and pursuant to the Financing Agreements 9. Expenses. All expenses incurred in connection with the performance of any of the agreements set forth herein shall be borne by Borrower. All fees, costs and expenses, of whatever kind or nature, including reasonable attorneys' fees and legal expenses, incurred by Lender in connection with the filing or recording of any documents (including all taxes in connection therewith) in public offices, the payment or discharge of any taxes, reasonable counsel fees, maintenance fees, encumbrances or otherwise in protecting, maintaining or preserving the Trademarks or in defending or prosecuting any actions or proceedings arising out of or related to the Trademarks shall be borne by and paid by Borrower and until paid shall constittute Liabilities. 10. Duties of Borrower. Borrower shall have the duty (i) to file and prosecute diligently any trademark applications pending as of the date hereof or hereafter until Borrower's Liabilities shall have been paid in full and the Financing Agreements have been terminated, (ii) to preserve and maintain all rights in the Trademarks, as commercially reasonable and (iii) to ensure that the Trademarks are and remain enforceable, as commercially reasonable. Any expenses incurred in connection with Borrower's Liabilities under this Section 10 shall be borne by Borrower. 11. Lender's Right to Sue. After an Event of Default, Lender shall have the right, but shall in no way be obligated, to bring suit in its own name to enforce the Trademarks and, if Lender shall commence any such suit, Borrower shall, at the request of Lender, do any and all lawful acts and execute any and all proper documents required by Lender in aid of such enforcement and Borrower shall promptly, upon demand, reimburse and indemnify Lender for all costs and expenses incurred by Lender in the exercise of its rights under this Section 11. 12. Waivers. No course of dealing between Borrower and Lender, nor any failure to exercise, nor any delay in exercising, on the part of Lender, any right, power or privilege hereunder or under the Financing Agreements shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 3 13. Severability. The provisions of this Security Agreement are severable, and if any clause or provision shall be held invalid and unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Security Agreement in any jurisdiction. 14. Modification. This Security Agreement cannot be altered, amended or modified in any way, except as specifically provided in Section 5 hereof or by a writing signed by the parties hereto. 15. Cumulative Remedies; Power of Attorney; Effect on Financing Agreements. All of Lender's rights and remedies with respect to the Trademarks, whether established hereby or by the Financing Agreements, or by any other agreements or by law shall be cumulative and may be exercised singularly or concurrently. Borrower hereby authorizes Lender upon the occurrence of an Event of Default, to make, constitute and appoint any officer or agent of Lender as Lender may select, in its sole discretion, as Borrower's true and lawful attorney-in-fact, with power to (i) endorse Borrower's name on all applications, documents, papers and instruments necessary or desirable for Lender in the use of the Trademarks or (ii) take any other actions with respect to the Trademarks as Lender deems to be in the best interest of Lender, or (iii) grant or issue any exclusive or non-exclusive license under the Trademarks to anyone, or (iv) assign, pledge, convey or otherwise transfer title in or dispose of the Trademarks to anyone. Borrower hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney shall be irrevocable until Borrower's Liabilities shall have been paid in full and the Financing Agreements have been terminated. Borrower acknowledges and agrees that this Security Agreement is not intended to limit or restrict in any way the rights and remedies of Lender under the Financing Agreements but rather is intended to facilitate the exercise of such rights and remedies. Lender shall have, in addition to all other rights and remedies given it by the terms of this Security Agreement and the Financing Agreements, all rights and remedies allowed by law and the rights and remedies of a secured party under the Uniform Commercial Code as enacted in Illinois. 16. Binding Effect; Benefits. This Security Agreement shall be binding upon Borrower and its respective successors and assigns, and shall inure to the benefit of Lender, its successors, nominees and assigns. 17. Governing Law. This Security Agreement shall be governed by and construed in accordance with the laws of the State of Illinois and applicable federal law. 18. Headings. Paragraph headings used herein are for convenience only and shall not modify the provisions which they precede. 4 19. Further Assurances. Borrower agrees to execute and deliver such further agreements, instruments and documents, and to perform such further acts, as Lender shall reasonably request from time to time in order to carry out the purpose of this Security Agreement and agreements set forth herein. 20. Survival of Representations. All representations and warranties of Borrower contained in this Security Agreement shall survive the execution and delivery of this Security Agreement and shall be remade on the date of each borrowing under the Financing Agreements. IN WITNESS WHEREOF, Borrower has duly executed this Security Agreement as of the date first written above. THE SINGING MACHINE COMPANY, INC. By John Klecha ------------------------------------------ Its President, Chief Operating Officer, Chief Financial Officer, Secretary and Treasurer Agreed and Accepted As of the Date First Written Above LASALLE BUSINESS CREDIT, INC. By Casey Orlowsky Its Vice President 5 SCHEDULE A ---------- TRADEMARK REGISTRATIONS -----------------------
Trademark Description U.S. Serial/Registration No. Date Registered - --------------------- ---------------------------- --------------- THE SINGING MACHINE AND DESIGN 1274948 April 24, 1984 SINGING MACHINE AND DESIGN 1274947 April 24, 1984 THE SINGING MACHINE AND DESIGN 540673 June 03, 1993 Benelux THE SINGING MACHINE AND DESIGN 2065315 May 19, 1994 Germany THE SINGING MACHINE AND DESIGN 414758 April 30, 1993 Switzerland THE SINGING MACHINE AND DESIGN B1517912 June 03, 1994 United Kingdom
6 EX-10.4 6 ex10-4.txt TRADEMARK SECURITY AGREEMENT EXHIBIT 10.4 TRADEMARK SECURITY AGREEMENT THIS TRADEMARK SECURITY AGREEMENT (the "Security Agreement") made as of this 26 day of April, 2001, by The Singing Machine Company, Inc., a Delaware corporation ("Borrower") in favor of LaSalle Business Credit, Inc., with an office at 135 South LaSalle Street, Suite 425, Chicago, Illinois 60603 ("Lender"): W I T N E S S E T H - - - - - - - - - - WHEREAS, Borrower and Lender are parties to a certain Loan and Security Agreement of even date herewith (as the same may be amended or otherwise modified from time to time, the "Loan Agreement") and other related loan documents of even date herewith (collectively, with the Loan Agreement, and as each may be amended or otherwise modified from time to time, the "Financing Agreements"), which Financing Agreements provide (i) for Lender to, from time to time, extend credit to or for the account of Borrower and (ii) for the grant by Borrower to Lender of a security interest in certain of Borrower's assets, including, without limitation, its trademarks and trademark applications; NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, Borrower agrees as follows: 1. Incorporation of Financing Agreements. The Financing Agreements and the terms and provisions thereof are hereby incorporated herein in their entirety by this reference thereto. All terms capitalized but not otherwise defined herein shall have the same meanings herein as in the Loan Agreement. 2. Grant and Reaffirmation of Grant of Security Interests. To secure the complete and timely payment and satisfaction of the Liabilities, Borrower hereby grants to Lender, and hereby reaffirms its prior grant pursuant to the Financing Agreements of, a continuing security interest in Borrower's entire right, title and interest in and to all of its now owned or existing and hereafter acquired or arising trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos, other business identifiers, prints and labels on which any of the foregoing have appeared or appear, all registrations and recordings thereof, and all applications (other than United States "intent to use" applications until a verified statement of use or amendment to allege use is filed in the United States Patent and Trademark Office with respect to such applications) in connection therewith, including, without limitation, the trademarks, trademark registrations and applications listed on Schedule A attached hereto and made a part hereof and the trademarks, and renewals thereof, and all income, royalties, damages and payments now or hereafter due and/or payable under or with respect to any of the foregoing, including, without limitation, damages and payments for past, present and future infringements of any of the foregoing and the right to sue for past, present and future infringements of any of the foregoing (all of the foregoing are sometimes hereinafter individually and/or collectively referred to as the "Trademarks"); all rights corresponding to any of the foregoing throughout the world and the goodwill of the Debtor's business connected with the use of and symbolized by the Trademarks. 3. Warranties and Representations. Borrower warrants and represents to Lender that: (i) no Trademark has been adjudged invalid or unenforceable by a court of competent jurisdiction nor has any such Trademark been cancelled, in whole or in part and each such Trademark is presently subsisting; (ii) Borrower is the sole and exclusive owner of the entire and unencumbered right, title and interest in and to each Trademark, free and clear of any liens, charges and encumbrances; (iii) Borrower has no notice of any suits or actions commenced or threatened with reference to any Trademark; and (iv) Borrower has the unqualified right to execute and deliver this Security Agreement and perform its terms. 4. Restrictions on Future Agreements. Borrower agrees that until Borrower's Liabilities shall have been satisfied in full and the Financing Agreements shall have been terminated, Borrower shall not, without the prior written consent of Lender, sell or assign its interest in any Trademark or enter into any other agreement with respect to any Trademark which would affect the validity or enforcement of the rights transferred to Lender under this Security Agreement. 5. New Trademarks. Borrower represents and warrants that, based on a diligent investigation by Borrower, the Trademarks listed on Schedule A constitute all of the federally registered Trademarks, and federal applications for registration of Trademarks in the United States and Canada (other than United States "intent to use" applications until a verified statement of use or amendment to allege use is filed with the United States Patent and Trademark Office with respect to such applications) now owned by Borrower. If, before Borrower's Liabilities shall have been satisfied in full or before the Financing Agreements have been terminated, Borrower shall (i) become aware of any existing Trademarks of which Borrower has not previously informed Lender, or (ii) become entitled to the benefit of any Trademarks, which benefit is not in existence on the date hereof, the provisions of this Security Agreement above shall automatically apply thereto and Borrower shall give to Lender prompt written notice thereof. Borrower hereby authorizes Lender to modify this Security Agreement by amending Schedule A to include any such Trademarks. 6. Term. The term of the Security Agreements granted herein shall extend until the payment in full of Borrower's Liabilities and the termination of the Financing Agreements. Borrower agrees that upon the occurrence of an Event of Default, the use by Lender of all Trademarks shall be without any liability for royalties or other related charges from Lender to Borrower. 2 7. Product Quality. Borrower agrees to maintain the quality of any and all products in connection with which the Trademarks are used, consistent with commercially reasonable business practices. Upon the occurrence of an Event of Default, Borrower agrees that Lender, or a conservator appointed by Lender, shall have the right to establish such additional product quality controls as Lender, or said conservator, in its reasonable judgment, may deem necessary to assure maintenance of the quality of products sold by Borrower under the Trademarks. 8. Release of Security Agreement. This Security Agreement is made for collateral purposes only. Upon payment in full of Borrower's Liabilities and termination of the Financing Agreements, Lender shall take such actions as may be necessary or proper to terminate the security interests created hereby and pursuant to the Financing Agreements 9. Expenses. All expenses incurred in connection with the performance of any of the agreements set forth herein shall be borne by Borrower. All fees, costs and expenses, of whatever kind or nature, including reasonable attorneys' fees and legal expenses, incurred by Lender in connection with the filing or recording of any documents (including all taxes in connection therewith) in public offices, the payment or discharge of any taxes, reasonable counsel fees, maintenance fees, encumbrances or otherwise in protecting, maintaining or preserving the Trademarks or in defending or prosecuting any actions or proceedings arising out of or related to the Trademarks shall be borne by and paid by Borrower and until paid shall constitute Liabilities. 10. Duties of Borrower. Borrower shall have the duty (i) to file and prosecute diligently any trademark applications pending as of the date hereof or hereafter until Borrower's Liabilities shall have been paid in full and the Financing Agreements have been terminated, (ii) to preserve and maintain all rights in the Trademarks, as commercially reasonable and (iii) to ensure that the Trademarks are and remain enforceable, as commercially reasonable. Any expenses incurred in connection with Borrower's Liabilities under this Section 10 shall be borne by Borrower. 11. Lender's Right to Sue. After an Event of Default, Lender shall have the right, but shall in no way be obligated, to bring suit in its own name to enforce the Trademarks and, if Lender shall commence any such suit, Borrower shall, at the request of Lender, do any and all lawful acts and execute any and all proper documents required by Lender in aid of such enforcement and Borrower shall promptly, upon demand, reimburse and indemnify Lender for all costs and expenses incurred by Lender in the exercise of its rights under this Section 11. 12. Waivers. No course of dealing between Borrower and Lender, nor any failure to exercise, nor any delay in exercising, on the part of Lender, any right, power or privilege hereunder or under the Financing Agreements shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 3 13. Severability. The provisions of this Security Agreement are severable, and if any clause or provision shall be held invalid and unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Security Agreement in any jurisdiction. 14. Modification. This Security Agreement cannot be altered, amended or modified in any way, except as specifically provided in Section 5 hereof or by a writing signed by the parties hereto. 15. Cumulative Remedies; Power of Attorney; Effect on Financing Agreements. All of Lender's rights and remedies with respect to the Trademarks, whether established hereby or by the Financing Agreements, or by any other agreements or by law shall be cumulative and may be exercised singularly or concurrently. Borrower hereby authorizes Lender upon the occurrence of an Event of Default, to make, constitute and appoint any officer or agent of Lender as Lender may select, in its sole discretion, as Borrower's true and lawful attorney-in-fact, with power to (i) endorse Borrower's name on all applications, documents, papers and instruments necessary or desirable for Lender in the use of the Trademarks or (ii) take any other actions with respect to the Trademarks as Lender deems to be in the best interest of Lender, or (iii) grant or issue any exclusive or non-exclusive license under the Trademarks to anyone, or (iv) assign, pledge, convey or otherwise transfer title in or dispose of the Trademarks to anyone. Borrower hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney shall be irrevocable until Borrower's Liabilities shall have been paid in full and the Financing Agreements have been terminated. Borrower acknowledges and agrees that this Security Agreement is not intended to limit or restrict in any way the rights and remedies of Lender under the Financing Agreements but rather is intended to facilitate the exercise of such rights and remedies. Lender shall have, in addition to all other rights and remedies given it by the terms of this Security Agreement and the Financing Agreements, all rights and remedies allowed by law and the rights and remedies of a secured party under the Uniform Commercial Code as enacted in Illinois. 16. Binding Effect; Benefits. This Security Agreement shall be binding upon Borrower and its respective successors and assigns, and shall inure to the benefit of Lender, its successors, nominees and assigns. 17. Governing Law. This Security Agreement shall be governed by and construed in accordance with the laws of the State of Illinois and applicable federal law. 18. Headings. Paragraph headings used herein are for convenience only and shall not modify the provisions which they precede. 19. Further Assurances. Borrower agrees to execute and deliver such further agreements, instruments and documents, and to perform such further acts, as Lender shall reasonably request from time to time in order to carry out the purpose of this Security Agreement and agreements set forth herein. 4 20. Survival of Representations. All representations and warranties of Borrower contained in this Security Agreement shall survive the execution and delivery of this Security Agreement and shall be remade on the date of each borrowing under the Financing Agreements. IN WITNESS WHEREOF, Borrower has duly executed this Security Agreement as of the date first written above. THE SINGING MACHINE COMPANY, INC. By John Klecha ------------------------------------- Its President, Chief Operating Officer, Chief Financial Officer, Treasurer and Secretary Agreed and Accepted As of the Date First Written Above LASALLE BUSINESS CREDIT, INC. By Casey Orlowski Its Vice President 5 SCHEDULE A ---------- TRADEMARK REGISTRATIONS Trademark Registration No. Date Registered - --------- ---------------- --------------- THE SINGING TMA430631 April 24, 1984 MACHINE AND DESIGN Canada -----END PRIVACY-ENHANCED MESSAGE-----