-----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, UtG7BxLw7C+Y/JClZIUlcGd7mzR4RU//rbhstYm5/cA36UcJKWngNW44tnp2Thf8 K2EGH0M1ki2OpPAtJZgo8Q== 0001144204-06-007708.txt : 20060227 0001144204-06-007708.hdr.sgml : 20060227 20060227101425 ACCESSION NUMBER: 0001144204-06-007708 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20060221 ITEM INFORMATION: Entry into a Material Definitive Agreement ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20060227 DATE AS OF CHANGE: 20060227 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24968 FILM NUMBER: 06645161 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 8-K 1 v036479_8k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): FEBRUARY 21, 2006 THE SINGING MACHINE COMPANY, INC. (Exact name of registrant as specified in its charter) Delaware 0-24968 95-3795478 - -------------------------------------------------------------------------------- (State or other (Commission File Number) (IRS Employer jurisdiction of incorporation) Identification No.) 6601 Lyons Road, Bldg. A-7, Coconut Creek, Florida 33073 (Address of principal executive offices and Zip Code) Registrant's telephone number, including area code (954) 596-1000 Copies to: Darrin M. Ocasio, Esq. Sichenzia Ross Friedman Ference LLP 1065 Avenue of the Americas New York, New York 10018 Phone: (212) 930-9700 Fax: (212) 930-9725 Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): |_| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |_| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |_| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT. On February 21, 2006, we entered into a Securities Purchase Agreement (the "Purchase Agreement") with koncepts International Limited (the "Purchaser") pursuant to which we agreed to sell and issue 12,875,536 shares of common stock, $.01 par value per share (the "Common Shares"), and 3 common stock purchase warrants (the "Warrants") to purchase an aggregate of 5,000,000 shares of our common stock for an aggregate purchase price of $3,000,000, or a per share purchase price of $.233. Subject to additional closing conditions as specified in the Purchase Agreement, the closing of the offering is subject to our successful restructuring of our $4,000,000 principal amount subordinated debenture which came due on February 20, 2006, as well as the approval of the American Stock Exchange and the shareholders of Starlight International Holdings Ltd., parent company of the Purchaser, as per the requirements of Hong Kong Stock Exchange. The parties intend to complete this offering within the next 60 days, assuming all closing conditions are met. We issued Warrants to purchase (i) 2,500,000 shares of our common stock at an exercise price of $.233 per share for one year from the date of issuance, (ii) 1,250,000 shares of our common stock at an exercise price of $.28 per share for three years from the date of issuance, and (iii) 1,250,000 shares of our common stock at an exercise price of $.35 per share for four years from the date of issuance. The Warrants are subject to adjustment upon the occurrence of specific events, including stock dividends, stock splits, combinations or reclassifications of our common stock or distributions of cash or other assets. Under the terms of the Warrants, in no event shall the Purchaser become the beneficial owner of more than 19.99% of the number of shares of common stock outstanding immediately after giving effect to such issuance. In addition, we entered into a Registration Rights Agreement with the Purchaser on February 21, 2006 pursuant to which we are obligated to file a registration statement on Form S-3 (or if Form S-3 is not then available to us, on such form of registration statement that is available to effect the registration of the Common Shares and the shares of common stock underlying the Warrants) within 60 days after the closing date. We must register at least the number of shares of our common stock equal to the Common Shares plus the number of shares necessary to permit the exercise in full of the Warrants. In addition, we are obligated to use our best efforts to cause the SEC to declare the registration statement effective no later than 120 days after the filing date. If we do not file the registration statement, or if the SEC does not declare the registration statement effective, within the aforementioned time periods, we are required to make pro rata payments to the Purchaser, as liquidated damages and not as a penalty, in an amount equal to 1.0% of the aggregate amount invested by the Purchaser for each 30 day period or pro rata for any portion thereof, following the date by which such registration statement should have been filed or declared effective. On February 27, 2006, we issued a press release announcing the entry into the aforementioned material definitive agreements. A copy of this press release has been filed with this Current Report on Form 8-K as Exhibit 99.1 and is incorporated herein by reference. ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS. (A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. Not applicable. (B) PRO FORMA FINANCIAL INFORMATION. Not applicable. (C) EXHIBITS. EXHIBIT NUMBER DESCRIPTION - -------------- ---------------------------------------------------------------- 10.1 Securities Purchase Agreement dated February 21, 2006, by and between The Singing Machine Company, Inc. and koncepts International Limited. 10.2 Registration Rights Agreement dated February 21, 2006, by and between The Singing Machine Company, Inc. and koncepts International Limited. 10.3 One Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated February 21, 2006. 10.4 Three Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated February 21, 2006. 10.5 Four Year Stock Purchase Warrant of The Singing Machine Company, Inc. dated February 21, 2006. 99.1 Press release of The Singing Machine Company, Inc. dated as of February 27, 2006. 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 hereunto duly authorized. THE SINGING MACHINE, COMPANY, INC. Date: February 27, 2006 /s/ Yi Ping Chan -------------------------- Yi Ping Chan Interim CEO and Chief Operating Officer EX-10.1 2 v036479_ex10-1.txt THE SINGING MACHINE COMPANY, INC. SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement (this "Agreement") is dated as of February 21, 2006, among The Singing Machine Company, Inc., a Delaware corporation (the "Company"), and the purchasers identified on the signature pages hereto (each a "Purchaser" and collectively the "Purchasers"). RECITALS WHEREAS, the Company has authorized the sale and issuance to the Purchasers of an aggregate of up to 12,875,536 shares (the "Shares") of the Company's Common Stock, par value $0.01 (the "Common Stock"); WHEREAS, the Company wishes to issue warrants to the Purchasers to purchase up to an aggregate of 5,000,000 shares of the Company's Common Stock in connection with Purchasers' purchase of the Securities; and WHEREAS, Purchasers desire to purchase and the Company desires to sell the Shares and the Warrants (as defined below) on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: AGREEMENT 1. PURCHASE AND SALE. Pursuant to the terms and conditions set forth in this Agreement, the Company agrees to sell to the Purchasers, and the Purchasers hereby agree to purchase the Shares at a purchase price of $0.233 per share, for a total purchase price equal to the greater of: (a) $3 million US Dollars (the "Purchase Price") and three Warrants in the forms of Exhibit A, Exhibit B and Exhibit C attached hereto (collectively, the "Warrants") (the Shares and the Warrants are collectively referred to herein as the "Securities"). The Warrants will be distributed pro-rata among the Purchasers based on the percentage of the Shares purchased by each Purchaser. 2. FEES AND EXPENSES. On the Closing Date, the Company shall reimburse the Purchasers for their expenses (including legal fees and expenses) incurred in connection with the preparation and negotiation of this Agreement and the Related Agreements (as defined below), the Purchasers' due diligence review of the Company and all related matters in an amount equal to $30,000 US Dollars. 3. CLOSING, DELIVERY AND PAYMENT. 3.1. CLOSING. Subject to the terms and conditions herein, the closing of the transactions contemplated hereby ("Closing") shall take place on the first business day following such date as: (i) the Company has satisfied all of the closing conditions set forth herein, and (ii) Purchaser and its corporate parent have received regulatory approval from the Hong Kong Stock Exhange, (the "Closing Date") at the offices of Handal & Associates ("Handal"), located at 1200 Third Avenue, Suite 1321, San Diego, California. The Shares and Warrants sold and issued in each on the Closing Date will be, and will be distributed among the Purchasers, as set forth on Exhibit D. 1 3.2. CLOSING DELIVERABLES. (a) At the Closing, and as a condition to the Purchaser's obligations hereunder, the Company will deliver the following to the Purchasers: (i) an executed copy of this Agreement; (ii) an executed copy of the Registration Rights Agreement attached hereto as Exhibit E (the "Registration Rights Agreement"); (iii) an executed copy of corporate resolutions and Board authorizations which pursuant to Delaware law authorize the issuance of the Shares and Warrants to Purchasers as set forth herein; (iv) an executed copy of documents evidencing the restructuring of Company's currently outstanding debentures on the terms set forth herein, as well as the restructuring of Company's related party indebtedness on the terms set forth herein at paragraph 8.1; (v) Such documents from the American Stock Exchange, and any other applicable regulatory bodies (collectively "AMEX") which set forth that Purchasers' purchase of the Shares and Warrants on the terms set forth in this Agreement and the Related Agreements (as hereinafter defined) has been approved by the AMEX such that Purchasers' purchase of the Shares and Warrants is completely free and clear of any voting restrictions which may be imposed by the AMEX pursuant to Section 713, and any other applicable sections, of the American Stock Exchange Company Guide, and any additional applicable and related regulations (collectively "Regulatory Approval"); (vi) an opinion of Company counsel that the Shares and Warrants have been properly authorized, conform with all laws relating to their issuance, and are free and clear of all liens, charges, or assessments of any form and character as of the Closing Date; (vii) stock certificates representing the Shares purchased at the Closing; and (viii) the Warrants purchased at the Closing. The Warrants, Registration Rights Agreement and Amended Articles are referred to herein as the "Related Agreements." (b) At the Closing, each Purchaser will deliver the following to the Company: (i) an executed copy of this Agreement; 2 (ii) an executed copy of the Registration Rights Agreement; (iii) the purchase consideration for the Shares to be purchased by such Purchaser at the Closing, via wire transfer to an account designated by the Company; and (iv) Approval of the Hong Kong Stock Exchange.. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth in the Company's filings under the Securities Exchange Act of 1934 (collectively, the "Exchange Act Filings"), copies of which have been made available to the Purchasers, the Company hereby represents and warrants to the Purchaser as follows: 4.1. ORGANIZATION, GOOD, STANDING AND QUALIFICATION. Each of the Company and its active Subsidiaries (as defined below) is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Set forth on the attached Schedule 4.1 is a list identifying the name of the Company and each Subsidiary, its jurisdiction of incorporation and foreign status registration(s) as well as its directors and officers. Neither the Company nor any active Subsidiary is in violation of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the active Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate: (i) adversely affect the legality, validity or enforceability of this Agreement or the Related Agreements, (ii) have or result in or be reasonably likely to have or result in a material adverse effect on the results of operations, assets, business or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) adversely impair the Company's ability to perform fully on a timely basis its obligations under this Agreement or the Related Agreements (any of (i), (ii) or (iii), a "Material Adverse Effect"). 4.2. SUBSIDIARIES. Each direct and indirect Subsidiary of the Company, the direct owner of such Subsidiary and its percentage ownership thereof, is set forth on the attached Schedule 4.2. For the purpose of this Agreement, a "Subsidiary" of any person or entity means (i) a corporation or other entity whose shares of stock or other ownership interests having ordinary voting power (other than stock or other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the directors of such corporation, or other persons or entities performing similar functions for such person or entity, are owned, directly or indirectly, by such person or entity or (ii) a corporation or other entity in which such person or entity owns, directly or indirectly, more than 50% of the voting interests at such time. 4.3. CAPITALIZATION; VOTING RIGHTS. (a) The authorized capital stock of the Company, as of the date hereof consists of 100,000,000 shares of common stock par value $0.01of which 10,060,802 are issued and outstanding and 1,000,000 shares of preferred stock $0.10 par value, of which none are issued and outstanding. The authorized capital stock of each active Subsidiary of the Company is set forth on Schedule 4.3. 3 (b) Except as disclosed on Schedule 4.3 there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or arrangements or agreements of any kind for the purchase or acquisition from the Company of any of its securities other than this Agreement and the Related Agreements. (c) All issued and outstanding shares of the Company's Common Stock: (a) have been duly authorized and validly issued and are fully paid and nonassessable; and (b) were issued by the Company in full compliance with all applicable state and federal laws concerning the issuance of securities. (d) The rights, preferences, privileges and restrictions of the shares of the Common Stock are as stated in the Company's Articles of Incorporation, as amended (the "Charter") and pursuant to applicable law. 4.4. AUTHORIZATION AND BINDING OBLIGATIONS. All corporate, partnership or limited liability company, as the case may be, action on the part of the Company (including the respective officers and directors) necessary for the authorization of this Agreement and the Related Agreements, the performance of all obligations of the Company hereunder and under the other Related Agreements at the Closing and, the authorization, sale, issuance and delivery of the Securities has been taken or will be taken prior to the Closing. This Agreement and the Related Agreements, when executed and delivered will be valid and binding obligations of each of the Company enforceable against the Company in accordance with their terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights and general principles of equity that restrict the availability of equitable or legal remedies. 4.5. LIABILITIES. Neither the Company nor any of its Subsidiaries has any material contingent liabilities, except current liabilities incurred in the ordinary course of business and liabilities disclosed in the Company's Exchange Act Filings or on Schedule 4.5. 4.6. AGREEMENTS; ACTION. Except as set forth on Schedule 4.6: (a) there are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company or any of its Subsidiaries is a party or by which it is bound which may involve: (A) obligations (contingent or otherwise) of, or payments to, the Company in excess of $100,000; or (B) provisions restricting the development, manufacture or distribution of the Company's products or services. (b) Since March 31, 2005, neither the Company nor any of its Subsidiaries has: (A) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock; (B) incurred any indebtedness for money borrowed or any other liabilities in excess of $250,000 or, in the case of indebtedness and/or liabilities individually less than $250,000, in excess of $250,000 in the aggregate; (C) made any loans or advances to any person not in excess, individually or in the aggregate, of $50,000; or (D) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. 4 (c) For the purposes of this Section 4.6, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. 4.7. OBLIGATIONS TO RELATED PARTIES. Except as set forth on Schedule 4.7, there are no obligations of the Company or any of its Subsidiaries to officers, directors, stockholders or employees of the Company or any of its Subsidiaries other than: (a) for payment of salary for services rendered and for bonus payments; (b) reimbursement for reasonable expenses incurred on behalf of the Company and its Subsidiaries; and (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company). Further, except as described above or set forth on Schedule 4.7, none of the officers, directors or, to the best of the Company's knowledge, key employees or stockholders of the Company or any members of their immediate families, are indebted to the Company, individually or in the aggregate, in excess of $5,000 or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation which competes with the Company, other than passive investments in publicly traded companies (representing less than one percent (1%) of such company) which may compete with the Company. Except as described above, no officer, director or stockholder, or any member of their immediate families, is, directly or indirectly, interested in any material contract with the Company and no agreements, understandings or proposed transactions are contemplated between the Company and any such person. Except as set forth on Schedule 4.7, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 4.8. CHANGES. Since March 31, 2005, except as disclosed on Schedule 4.8 or any other Schedule to this Agreement or to any of the Related Agreements, there has not been: (a) any change in the business, assets, liabilities, condition (financial or otherwise), properties or operations of the Company or any of its Subsidiaries, which individually or in the aggregate has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (b) any resignation or termination of any officer, key employee or group of employees of the Company or any of its Subsidiaries; (c) any material change, except in the ordinary course of business, in the contingent obligations of the Company or any of its Subsidiaries by way of guaranty, endorsement, indemnity, warranty or otherwise; 5 (d) any damage, destruction or loss, whether or not covered by insurance, has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (e) any waiver by the Company or any of its Subsidiaries of a valuable right or of a material debt owed to it; (f) any direct or indirect loans made by the Company or any of its Subsidiaries to any stockholder, employee, officer or director of the Company or any of its Subsidiaries, other than advances made in the ordinary course of business; (g) any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder of the Company or any of its Subsidiaries; (h) any declaration or payment of any dividend or other distribution of the assets of the Company or any of its Subsidiaries; (i) any labor organization activity related to the Company or any of its Subsidiaries; (j) any debt, obligation or liability incurred, assumed or guaranteed by the Company or any of its Subsidiaries, except those for immaterial amounts and for current liabilities incurred in the ordinary course of business; (k) any sale, assignment, hypothecation or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets owned by the Company or any of its Subsidiaries; (l) any change in any material agreement to which the Company or any of its Subsidiaries is a party or by which either the Company or any of its Subsidiaries is bound which either individually or in the aggregate has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; (m) any other event or condition of any character that, either individually or in the aggregate, has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; or (n) any arrangement or commitment by the Company or any of its Subsidiaries to do any of the acts described in subsection (a) through (m) above. 4.9. TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. Except as set forth on Schedule 4.9, the Company and each of its Subsidiaries has good and marketable title to its properties and assets, and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than: (a) those resulting from taxes which have not yet become delinquent; 6 (b) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of the Company or any of its Subsidiaries; and (c) those that have otherwise arisen in the ordinary course of business. All facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or used by the Company and its Subsidiaries are in good operating condition and repair and are reasonably fit and usable for the purposes for which they are being used. Except as set forth on Schedule 4.9, the Company and its Subsidiaries are in compliance with all material terms of each lease to which it is a party or is otherwise bound except where such failure to be in compliance, either individually or in the aggregate has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. 4.10. INTELLECTUAL PROPERTY. (a) Each of the Company and each of its Subsidiaries owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes necessary for its business as now conducted, as presently proposed to be conducted (the "Intellectual Property"), without any infringement of the rights of others. There are no outstanding options, licenses or agreements of any kind relating to the foregoing proprietary rights, nor is the Company or any of its Subsidiaries bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of "off the shelf" or standard products. (b) Neither the Company nor any of its Subsidiaries are in breach of any intellectual property right of any third party nor have they received any communications alleging that the Company or any of its Subsidiaries has violated any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity, nor is the Company or any of its Subsidiaries aware of any basis therefor. (c) The Company does not and will not utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by the Company or any of its Subsidiaries, except for inventions, trade secrets or proprietary information that have been rightfully assigned to the Company or any of its Subsidiaries. 4.11. COMPLIANCE WITH OTHER INSTRUMENTS. Neither the Company nor any of its Subsidiaries is in violation or default of (i) any material term of its Charter or Bylaws, or (ii) of any provision of any indebtedness, mortgage, indenture, contract, agreement or instrument to which it is party or by which it is bound or of any judgment, decree, order or writ, which violation or default, in the case of this clause (ii), has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. The execution, delivery and performance of and compliance with this Agreement and the Related Agreements to which it is a party, and the issuance and sale of the Securities by the Company pursuant hereto, will not, with or without the passage of time or giving of notice, result in any such material violation, or be in conflict with or constitute a default under any such term or provision, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or any of its Subsidiaries or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 7 4.12. FILINGS, CONSENTS AND APPROVALS. Neither the Company nor any Subsidiary is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other person in connection with the execution, delivery and performance by the Company of this Agreement or the Related Agreements, other than (i) a current report on Form 8-K announcing the transactions contemplated under this Agreement, (ii) the filing of a registration statement with the SEC as required under the Registration Rights Agreement, (iii) the notice and/or application(s) to the American Stock Exchange ("AMEX") for the issuance and sale of the Securities and the listing of the shares of Common Stock issuable upon exercise of the Warrants for trading thereon in the time and manner required thereby, and (iv) the filing of Form D with the SEC and applicable Blue Sky filings (collectively, the "Required Approvals"). 4.13. LITIGATION. Except as set forth on Schedule 4.13 hereto, there is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company or any of its Subsidiaries that prevents the Company or any of its Subsidiaries from entering into this Agreement or the other Related Agreements, or from consummating the transactions contemplated hereby or thereby, or which has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect or any change in the current equity ownership of the Company or any of its Subsidiaries, nor is the Company aware that there is any basis to assert any of the foregoing. Neither the Company nor any of its Subsidiaries is a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company or any of its Subsidiaries currently pending or which the Company or any of its Subsidiaries intends to initiate. 4.14. TAX RETURNS AND PAYMENTS. Except as set forth on Schedule 4.14, the Company and each of its Subsidiaries have timely filed all tax returns (federal, state, local, and foreign) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and all other taxes due and payable by the Company or any of its Subsidiaries on or before the Closing, have been paid or will be paid prior to the time they become delinquent. Except as set forth on Schedule 4.14, neither the Company nor any of its Subsidiaries has been advised: (a) that any of its returns, federal, state, local, foreign, or other, have been or are being audited as of the date hereof; or (b) of any deficiency in assessment or proposed judgment to its federal, state, local, foreign, or other taxes. The Company has no knowledge of any liability for any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for. 8 4.15. EMPLOYEES. Except as set forth on Schedule 4.15, neither the Company nor any of its Subsidiaries has any collective bargaining agreements with any of its employees. There is no labor union organizing activity pending or, to the Company's knowledge, threatened with respect to the Company or any of its Subsidiaries. Except as disclosed on Schedule 4.15, neither the Company nor any of its Subsidiaries is a party to or bound by any currently effective employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. To the Company's knowledge, no employee of the Company or any of its Subsidiaries, nor any consultant with whom the Company or any of its Subsidiaries has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, the Company or any of its Subsidiaries because of the nature of the business to be conducted by the Company or any of its Subsidiaries; and to the Company's knowledge the continued employment by the Company or any of its Subsidiaries of its present employees, and the performance of the Company's and its Subsidiaries' contracts with its independent contractors, will not result in any such violation. Neither the Company nor any of its Subsidiaries is aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to the Company or any of its Subsidiaries. Neither the Company nor any of its Subsidiaries has received any notice alleging that any such violation has occurred. Except for employees who have a current effective employment agreement with the Company or any of its Subsidiaries, no employee of the Company or any of its Subsidiaries has been granted the right to continued employment by the Company or any of its Subsidiaries or to any material compensation following termination of employment with the Company or any of its Subsidiaries. Except as set forth on Schedule 4.15, the Company is not aware that any officer, key employee or group of employees intends to terminate his, her or their employment with the Company or any of its Subsidiaries, nor does the Company or any of its Subsidiaries have a present intention to terminate the employment of any officer, key employee or group of employees. 4.16. COMPLIANCE WITH LAWS; PERMITS. Neither the Company nor any of its Subsidiaries is in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement or any other Related Agreement and the issuance of any of the Securities, except such as has been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing, as will be filed in a timely manner. Each of the Company and its Subsidiaries has all material franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 4.17. ENVIRONMENTAL AND SAFETY LAWS. Neither the Company nor any of its Subsidiaries is in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation except for such violations that individually, or in the aggregate, have had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. No Hazardous Materials (as defined below) are used or have been used, stored, or disposed of by the Company or any of its Subsidiaries or, to the Company's knowledge, by any other person or entity on any property owned, leased or used by the Company or any of its Subsidiaries. For the purposes of the preceding sentence, "Hazardous Materials" shall mean: 9 (a) materials which are listed or otherwise defined as "hazardous" or "toxic" under any applicable local, state, federal and/or foreign laws and regulations that govern the existence and/or remedy of contamination on property, the protection of the environment from contamination, the control of hazardous wastes, or other activities involving hazardous substances, including building materials; or (b) any petroleum products or nuclear materials. 4.18. INSURANCE. Set forth on Schedule 4.18 is a list of each policy of indemnity or insurance stating the inception date, termination date, policy number, named insured(s), policy limits (individual and aggregate claims), and deductible or Self Insured Retention amounts. A copy of every declaration page from each such policy shall be attached and incorporated herein. Each of the Company and each of its Subsidiaries have general commercial, fire and casualty insurance policies with coverages which the Company believes are customary for companies similarly situated to the Company and its Subsidiaries in the same or similar business. 4.19. SEC REPORTS. Except as set on Schedule 4.19, the Company has timely filed all proxy statements, reports and other documents required to be filed by it under the Securities Exchange Act 1934, as amended (the "Exchange Act"). The Company has made available to the Purchaser copies of: (i) its Annual Reports on Form 10-K for its fiscal year ended March 31, 2005; (ii) its quarterly reports on Form 10-Q for the fiscal quarters ended June 30, 2004, September 30, 2004, December 31, 2004, June 30, 2005, September 30, 2005, and December 31, 2005 and (iii) its reports on Form 8-K which have been filed from March 31, 2005 to date (collectively, the "SEC Reports"). Except as set forth on Schedule 4.19, each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER. Each Purchaser hereby represents, warrants and covenants to the Company as follows: 5.1. AUTHORIZATION; ENFORCEABILITY. Subject to receipt by Purchaser's corporate parent of approval of the Hong Kong Stock Exchange prior to the Closing, each Purchaser has the power and authority to purchase the Securities and to execute and deliver this Agreement and the Related Agreements to which such Purchaser is a party and to perform the provisions hereof and thereof. This Agreement constitutes, and upon execution and delivery thereof, each other Related Agreement to which such Purchaser is a party will constitute, such Purchaser's valid and legally binding obligation, enforceable in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors' rights generally and (ii) general principles of equity. 10 5.2. NO CONFLICT WITH OTHER INSTRUMENTS. The (i) execution, delivery and performance of this Agreement by each Purchaser and the other Related Agreements to which such Purchaser is a party, and (ii) consummation of the transactions contemplated hereby and thereby by such Purchaser has not and will not result in default (and to the knowledge of such Purchaser, no event has occurred which, with notice or lapse of time or both, would constitute a default) under any provision of any instrument or contract to which such Purchaser is a party or by which such Purchaser or any of its property is bound, or in violation of any provision of any governmental requirement applicable to such Purchaser. 5.3. CONSENT. FILINGS, CONSENTS AND APPROVALS. Except in connection with Purchaser's corporate parent's obligation to secure approval of the Hong Kong Stock Exchange prior to Closing, which Company acknowledges as a condition precedent to Purchaser's obligations to purchase the Shares, no Purchaser is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other person in connection with the execution, delivery and performance by the Purchaser of this Agreement or the Related Agreements, other than the Required Approvals or any other filing or notice required under federal or state securities laws to report the transactions contemplated in this Agreement and the Related Agreements. 5.4. INVESTMENT FOR OWN ACCOUNT. Such Purchaser will hold the Securities for their own account for investment purposes only, and not with a view to, or for resale in connection with, any distribution that would require registration under the Securities Act or the securities laws of any state. Such Purchaser does not presently have any reason to anticipate any change in circumstances or other particular occasion or event which would require selling the Securities or any part thereof or interest therein. Such Purchaser understands that there will be no established market for the Securities and that such Purchaser may be restricted from selling the Securities except in a sale exempt under federal and state securities laws. 5.5. NO REGISTRATION. Such Purchaser understands that: (a) the Securities (i) have not been registered under the Securities Act or any state securities laws, (ii) will be issued in reliance upon an exemption from the registration and prospectus delivery requirements of the Securities Act which relate to private offerings, (iii) may be required to be held by such Purchaser indefinitely, and (b) such Purchaser must therefore bear the economic risk of such investment indefinitely unless a subsequent disposition thereof is registered under the Securities Act and applicable state securities laws or is exempt therefrom. Such Purchaser further understands that such exemptions depend upon, among other things, the accuracy of such Purchaser's representations set forth in this Section 5. 5.6. ACCESS TO INFORMATION. Such Purchaser has had an opportunity to ask questions of, and receive satisfactory answers from, the Company and its representatives or agents concerning the terms of this investment and the undersigned's potential acquisition of the Securities, and all such questions have been answered to such Purchaser's full satisfaction. Such Purchaser has been furnished by the Company all information (or provided access to all information) regarding the business and financial condition of the Company, the attributes of the Securities and the merits and risks of an investment in the Securities which such Purchaser has requested or otherwise needs to evaluate the investment in the Securities, and such Purchaser does not desire any further information or data concerning the Company. Specifically, such Purchaser acknowledges receipt from the Company of, without limitation, the following information (collectively, the "Investment Information"): 11 (a) the Company's Exchange Act Filings; and (b) the Company's Charter and Bylaws. Such Purchaser has received, read and understands the Investment Information. Such Purchaser has examined all written materials furnished by the Company, or caused the same to be examined by such Purchaser's representatives, to the extent such Purchaser deemed necessary or appropriate. The undersigned acknowledges that the Company has made available to the undersigned the opportunity to obtain additional information to verify the accuracy of any material shown to the undersigned by the Company and to evaluate the merits and risks of this investment. 5.7. ACCREDITED INVESTOR. Such Purchaser is an "accredited investor" as defined in Rule 501 of Regulation D promulgated under the Securities Act, and such Purchaser, or those persons retained by such Purchaser, have knowledge, skill and experience in financial, business and investment matters relating to an investment of this type and are capable of evaluating the merits and risks of such investment and protecting such Purchaser in connection with an investment in the Securities. At such Purchaser's own expense, the undersigned has, to the extent deemed necessary by such Purchaser, retained and relied upon appropriate professional advice regarding the investment, tax and legal merits and consequences of an investment in the Securities. Such Purchaser has not received any legal, business, tax or other advice from the Company, its counsel or other representatives. 5.8. RISK OF INVESTMENT. Such Purchaser acknowledges that (i) it has been called to such Purchaser's attention that such Purchaser's investment in the Securities involves a high degree of risk, (ii) any investment in the Company is not insured by any governmental or other entity, and (iii) such Purchaser understands that the Securities will be an illiquid investment. Further, such Purchaser acknowledges that there are certain tax risks associated with the proposed investment and no assurances are being made that existing tax laws and regulations will not be modified in the future, thus altering tax consequences associated with this potential investment. The Company has never made any representation, guarantee or warranty (a) as to the approximate or exact length of time that such Purchaser will be required to remain an owner of the Securities (or any other securities of the Company); (b) the percentage of profit, amount of or type of consideration and/or profit or loss, if any, that will result from an investment in the Securities; or (c) that any future expectations relating to the Company's performance indicate in any way what the Company's financial condition or results of operations will be in the future. Such Purchaser understands the speculative nature of an investment in the Securities and the financial risks associated with the Securities. 5.9. RESTRICTIONS ON TRANSFER. The Offering is being made in reliance upon exemptions from registration under the Securities Act and applicable state securities laws for an offer and sale of securities not involving a public offering. The Securities may not be sold, transferred or otherwise disposed of without satisfaction of certain conditions, including registration under, or the availability of an exemption from registration under, the Securities Act and applicable state securities laws. Such Purchaser agrees that the Company may permit the transfer of the Securities out of such Purchaser's name only when any request for transfer is accompanied by an opinion of counsel acceptable in form and substance to Company counsel to the effect that the proposed transfer results in no violation of the Securities Act or any applicable state securities laws. A legend to this effect will be placed upon each certificate representing the Securities. 12 5.10. REPRESENTATIONS AND WARRANTIES. No person or entity, other than the Company, has been authorized to give any information or to make any representations on behalf of the Company in connection with the offering of the Securities and, if given or made, such information or representations have not been relied upon by the undersigned as having been made or authorized by the Company. The only representations, warranties and information made by the Company in connection with the Offering are those contained in this Agreement and the Investment Information. 5.11. GENERAL SOLICITATION. The solicitation of an offer to buy the Securities was communicated to such Purchaser in such a manner that at no time was such Purchaser presented with or solicited by or through any leaflet, public promotional meeting, television, radio, internet or other published advertisement or any other form of general or public advertising or solicitation. 5.12. PURCHASER'S EXPERIENCE. By reason of such Purchaser's business and financial experience, such Purchaser has the capacity to protect such Purchaser's own interests in investments of this nature. Such Purchaser has evaluated such Purchaser's financial resources and investment position, and the risks associated with the proposed investment and concluded that such Purchaser has the ability to bear the economic risks associated with this proposed investment. 5.13. NON-PUBLIC INFORMATION. After the date hereof, such Purchaser agrees to hold in strict confidence any non-public information of the Company (the "Information") acquired by such Purchaser, and not to use such Information for any competitive purpose. Such Purchaser may transmit Information to its partners, directors, officers, employees, agents or representatives, including attorneys, accountants and consultants (collectively, "Representatives"), but only to such Representatives who are informed of the confidential nature of the Information and are directed to treat such Information as confidential. Notwithstanding anything to the contrary herein, such Purchaser may disclose any Information to the extent such Information or portion thereof (i) is or becomes generally available to the public other than as a result of a disclosure by the undersigned or its Representatives in breach of the terms hereof, (ii) is or becomes available to such Purchaser on a non-confidential basis from a source, other than the Company or its representatives, without violation of a duty of confidentiality to the Company, or (iii) was known to such Purchaser on a non-confidential basis prior to the disclosure to such Purchaser by the Company or any of its representatives. 6. COVENANTS OF THE COMPANY AND PURCHASER. 13 6.1. LISTING. The Company shall as promptly as practicable after Closing secure the listing of the shares of Common Stock and Shares issuable upon the exercise of the Warrants on the AMEX (subject to official notice of issuance) and shall maintain such listing so long as any other shares of Common Stock shall be so listed. The Company will use commercially reasonable best efforts to maintain the listing of its Common Stock on AMEX, and will comply with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. 6.2. MARKET REGULATIONS. The Company shall notify the SEC, NASD and applicable state authorities, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to the Purchasers and promptly provide copies thereof to the Purchasers. 6.3. REPORTING REQUIREMENTS; REPORTS FOR PURCHASERS. The Company will timely file with the SEC all reports required to be filed pursuant to the Exchange Act and refrain from terminating its status as an issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations thereunder would permit such termination. The Company will prepare and timely file with the Commission, at the Company's expense, any filings pursuant to Section 13 or 16 of the Exchange Act that are required for Purchasers in connection with this transaction and for any exercise of the Warrants in the future; provided, however, that Purchasers agree to deliver any necessary information required to complete such filings to the Company no later than the next business day after the transaction requiring such filing occurs. 6.4. SHAREHOLDER APPROVAL. If required by law, the Company will call a special meeting of the Company's shareholders, which shall be held no later than July 31, 2006, for the Company's shareholders to vote to approve this Agreement, the Related Agreements and the transactions contemplated hereby and thereby. The Company's Board of the Directors (the "Board") will make a unanimous recommend that the shareholders vote in favor of such proposal. 6.5. BOARD SEATS. Within 5 days of the Closing Date, the Board will take such actions as are legally required to allow Purchasers to appoint such number of individuals designated by Purchasers to the Company's Board of Directors to fill such number of either vacant or newly created seats as is required to grant Purchasers representation on the Board which is pro rata with their shareholding in the Company as of the Closing. 6.6. RESTRICTIONS If required by law, until this Agreement and the Related Agreements are approved by the holders a majority of the outstanding shares of capital stock of the Company entitled to vote ("Shareholder Approval"), no holder of Shares or Warrants shall be entitled to vote such holder's Shares or exercise such holder's Warrants, if such holder will hold more than 19.99% of the outstanding Common Stock or voting power of the Company on the date of such vote or exercise. 7. INDEMNIFICATION. 14 7.1. COMPANY INDEMNIFICATION. The Company agrees to indemnify, hold harmless, reimburse and defend the Purchasers, each Purchaser's officers, directors, agents, affiliates, control persons, and principal shareholders, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Purchasers which results, arises out of or is based upon: (i) any misrepresentation by the Company or any of its Subsidiaries or breach of any warranty by the Company or any of its Subsidiaries in this Agreement, any other Related Agreement or in any exhibits or schedules attached hereto or thereto; or (ii) any breach or default in performance by Company or any of its Subsidiaries of any covenant or undertaking to be performed by Company or any of its Subsidiaries hereunder, under any other Related Agreement or any other agreement entered into by the Company and/or any of its Subsidiaries and Purchasers relating hereto or thereto. 7.2. PURCHASERS' INDEMNIFICATION. Each Purchaser agrees to indemnify, hold harmless, reimburse and defend the Company and each of the Company's officers, directors, agents, affiliates, control persons and principal shareholders, at all times against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Company which results, arises out of or is based upon: (i) any misrepresentation by the Purchasers or breach of any warranty by the Purchasers in this Agreement, any other Related Agreement or in any exhibits or schedules attached hereto or thereto; or (ii) any breach or default in performance by the Purchasers of any covenant or undertaking to be performed by the Purchasers hereunder, under any other Related Agreement or any other agreement entered into by the Company and/or any of its Subsidiaries and Purchasers relating hereto or thereto. 8. MISCELLANEOUS. 8.1. DEBT RESTRUCTURING. As of the Closing Date, Company shall have entered into such legally binding agreements as are required to restructure its related party debt in the current outstanding principal amount of $300,000 ("Related Party Debt") and outstanding debentures as set forth herein. With regard to its Related Party Debt, Company may use $50,000 of the proceeds to be received by Company from Purchasers at Closing to retire a like portion of its Related Party Debt, and shall cause the remainder of the Related Party Debt to take the form of three year unsecured promissory notes payable on an interest only basis with quarterly payments of interest at the annual rate of five and one-half percent (5.5%) ("Related Party Debt Restructure"). Concurrent with the Related Party Debt Restructure and as of the Closing Date, Company shall enter into such legally binding agreements as are required to restructure its currently outstanding debentures in the current outstanding principal amount of $4,000,000 ("Debentures") such that the Company may: (i) use up to $2,000,000 of the proceeds to be received by Company from Purchasers at Closing to retire the Debentures in full as to both principal and accrued interest owing as of the Closing Date, and (ii) cause the exercise price of the warrants currently held by the holders of the Debentures to be lowered to $0.85 per share ("Debenture Restructure"). 8.2. FINANCING RIGHT OF FIRST REFUSAL. Company shall grant to Purchasers the right of first refusal to provide Company with a working capital line of credit on the same terms and conditions as those offered to Company by a third-party institutional lender, excepting Crestmark Bank. 8.3. EQUITY FINANCING RIGHT OF FIRST REFUSAL. Company shall grant the Purchasers the right of first refusal to purchase from Company any equity or quasi-equity securities which Company may choose to issue after the Closing Date ("Equity First Refusal Right"). Such Equity First Refusal Right shall expire on the third anniversary of the Closing Date. 15 8.4. ENTIRE AGREEMENT. This Agreement, the Related Agreements, the exhibits and schedules hereto and thereto and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 8.5. CHOICE OF LAW. This Agreement shall be governed under the laws of the State of New York, without regard to conflicts of law. The parties agree that the venue for the resolution of any conflicts arising under this Agreement or for the interpretation of this Agreement shall be in San Diego, California and that the Courts of the State of California shall have jurisdiction over any such disputes and over the parties hereto. 8.6. ATTORNEY'S FEES. In the event any litigation, arbitration, mediation, or other proceeding ("Proceeding") is initiated by any party(ies) against any other party(ies) to enforce, interpret or otherwise obtain judicial or quasi-judicial relief in connection with this Agreement, the prevailing party(ies) in such Proceeding shall be entitled to recover from the unsuccessful party(ies) all costs, expenses, actual attorney's and expert witness fees, relating to or arising out of: (i) such Proceeding (whether or not such Proceeding proceeds to judgment), and (ii) any post-judgment or post-award proceeding including, without limitation, one to enforce any judgment or award resulting from any such Proceeding. Any such judgment or award shall contain a specific provision for the recovery of all such subsequently incurred costs, expenses, actual attorney and expert witness fees. 8.7. COUNTERPARTS. This Agreement may be signed in one (1) or more counterparts, each of which shall constitute an original but all of which together shall be one (1) and the same document. Signatures received by facsimile shall be deemed to be original signatures. 8.8. PARTIAL INVALIDITY. Each provision of this Agreement will be valid and enforceable to the fullest extent permitted by law. If any provision of this Agreement or the application of the provision to any person or circumstance will, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of the provision to persons or circumstances other than those as to which it is held invalid or unenforceable, will not be affected by such invalidity or unenforceability, unless the provision or its application is essential to this Agreement. 8.9. TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 8.10. DRAFTING AMBIGUITIES. Each party to this Agreement and their legal counsel have reviewed and revised this Agreement. The rule of construction that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or exhibits to this Agreement. 8.11. NOTICES. Any notice from one party to another shall be delivered either personally, via facsimile or by United States mail, postage fully prepaid, addressed as follows: 16 Purchasers: To the respective addresses set forth below the Purchaser's signature at the foot of this Agreement. With a copy (not constituting notice): Handal & Associates Attention: Anton Handal, Esq. 1200 Third Avenue, Suite 1321 San Diego, CA 92101-4111 Company: The Singing Machine Company, Inc. Attention: Yi Ping Chan 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073 With a copy to (not constituting notice): Sichenzia Ross Friedman Ference LLP Attention: Darrin M. Ocasio, Esq. 1065 Avenue of the Americas New York, NY 10018 Any notice being delivered within the continental United States shall be deemed delivered upon (a) personal service, or (b) transmission via facsimile (with the original thereof to be immediately sent via mail, postage prepaid), or (c) forty eight (48) hours after the time of deposit in the mail, as the case may be. In the event any Party changes its address, such change of address shall be communicated to the other Party in the manner set forth in this Section. 8.12. DEFINITION OF KNOWLEDGE. For the purposes of this Agreement, the Company shall only be deemed to have "knowledge" of a particular fact or other matter, if an executive officer of the Company is actually aware of such fact or matter, or a reasonably prudent individual operating in the capacity of an executive officer of the Company could be expected to discover or otherwise become aware of such fact or matter in the ordinary course of fulfilling the responsibilities of an executive officer. 8.13. INTERPRETATION/REPRESENTATION. Wherever the context of this Agreement requires, all words used in the singular shall be construed to have been used in the plural, and vice versa, and the use of any gender specific pronoun shall include any other appropriate gender. The term "person" shall refer to any individual, corporation or legal entity having standing to bring an action in its own name under applicable state law. The conjunctive "or" shall mean "and/or" unless otherwise required by the context in which the conjunctive "or" is used. 8.14. SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Purchaser and the closing of the transactions contemplated hereby to the extent provided therein. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 17 8.15. SUCCESSORS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Securities from time to time, other than the holders of Common Stock which has been sold by the Purchasers pursuant to Rule 144 or an effective registration statement. 8.16. AMENDMENT AND WAIVER. (a) This Agreement may be amended or modified only upon the written consent of the Company and a majority in interest of the Purchasers. (b) The obligations of the Company and the rights of the Purchasers under this Agreement may be waived only with the written consent of a majority in interest of the Purchasers. (c) The obligations of the Purchasers and the rights of the Company under this Agreement may be waived only with the written consent of the Company. 8.17. DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement or the Related Agreements, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. All remedies, either under this Agreement or the Related Agreements, by law or otherwise afforded to any party, shall be cumulative and not alternative. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.] 18 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof. COMPANY: THE SINGING MACHINE COMPANY, INC. a Delaware corporation /s/Yi Ping Chan - ------------------------------ Yi Ping Chan, Interim Chief Executive Officer PURCHASERS: KONCEPTS INTERNATIONAL LIMITED By: /s/ Lau Sak Hong - ------------------------------ Name: Lau Sak Hong Its: Chairman Address: 5/F., Shing Dao Industrial Building 232 Aberdeen Main Road Hong Kong 19 EXHIBIT A FORM OF WARRANT EXHIBIT B FORM OF WARRANT EXHIBIT C FORM OF WARRANT EXHIBIT D CLOSING SHARE DISTRIBUTION SCHEDULE EXHIBIT E REGISTRATION RIGHTS AGREEMENT EXHIBIT F AMENDED ARTICLES (IF REQUIRED) Schedule 4.1: Company and Subsidiary Identification INTERNATIONAL SMC (HK) LTD (A HONG KONG CORPORATION) 100% owned by The Singing Machine Company, Inc. (A Delaware corporation) Office address: Suite 1210, Ocean Center, 5 Canton Road, Kowloon, Hong Kong THE SINGING MACHINE HOLDINGS LTD. (A BVI CORPORATION) 100% owned by The Singing Machine Company, Inc. Registered Office: C/O Trident Trust Company (B.V.I.) Limited, Trident Chambers, P.O. Box 146, Road Town, Tortola, British Virgin Islands SMC (COMERCIAL OFFSHORE DE MACAU) LIMITADA (A MACAU CORPORATION) 100% owned by The Singing Machine Holdings Ltd. Office address: Alameda Dr. Carlos d'Assumpcao, No. 263, Efificio China Civil Plaza, 20 andar, Macau Schedule 4.2: Ownership of Subsidiaries (See Above at Schedule 4.1) Schedule 4.3: Capitalization and Voting Rights Issuing Date Vesting Period Fully Vested Date Options #Cancelled (YR) 9/11/2002 3 09/10/05 90,000 60,000 12/31/2002 5 12/30/07 237,000 163,500 1/24/2003 1 01/24/04 10,000 -- 3/8/2003 3 03/07/06 180,000 -- 4/18/2003 5 04/16/08 10,000 12/19/2003 5 12/17/08 229,920 97,360 1/23/2004 5 01/21/09 32,000 -- 2/6/2004 1 02/05/05 42,060 35,560 2/26/2004 1 02/25/05 60,000 20,000 3/29/2004 1 03/29/05 20,000 -- 4/5/2004 5 04/04/09 50,000 50,000.00 4/26/2004 5 04/25/09 12,000 -- 9/30/2004 5 09/29/09 50,000 50,000.00 11/29/2004 1 11/29/05 60,000 -- 12/1/2004 1 12/01/05 40,000 -- 2/1/2005 5 01/31/10 12,000 -- 5/9/2005 3 05/08/08 621,000 50,000.00 1/20/2006 3 01/19/09 60,000 -- Total 1,815,980 526,420 Total Option as of Feb 21, 2006 1,289,560 Warrants as of Feb 21, 2006 Private Warrants Issued Vested Expiration ------ ------ ---------- Roth Capital Partners LLP 4.025 103,896 9/8/2003 9/8/2003 9/7/2006 Omicron Master Trust 4.025 285,714 9/8/2003 9/8/2003 9/7/2006 SF Capital Partners, Ltd. 4.025 57,143 9/8/2003 9/8/2003 9/7/2006 Bristol Investment Fund, Ltd. 4.025 34,286 9/8/2003 9/8/2003 9/7/2006 Ascend Offshore Fund, Ltd. 4.025 54,629 9/8/2003 9/8/2003 9/7/2006 Ascend Partners LP 4.025 6,651 9/8/2003 9/8/2003 9/7/2006 Ascend Partners Sapient LP 4.025 18,720 9/8/2003 9/8/2003 9/7/2006 - Omicron Master Trust 1.52 18,750 2/9/2004 2/9/2004 9/7/2006 SF Capital Partners, Ltd. 1.52 3,750 2/9/2004 2/9/2004 9/7/2006 Bristol Investment Fund, Ltd. 1.52 2,250 2/9/2004 2/9/2004 9/7/2006 Ascend Offshore Fund, Ltd. 1.52 3,585 2/9/2004 2/9/2004 9/7/2006 Ascend Partners LP 1.52 437 2/9/2004 2/9/2004 9/7/2006 Ascend Partners Sapient LP 1.52 1,229 2/9/2004 2/9/2004 9/7/2006 ======= Unexercised Warrants 591,040 Schedule 4.5: Liabilities None Schedule 4.6: Agreements None Schedule 4.7: Obligations to Related Parties None Schedule 4.8: Changes in Condition None Schedule 4.9 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC Properties pledged as collateral to Crestmark Bank, a lender All personal properties of The Singing Machine Company, Inc., which including: 1) Accounts receivable 2) Inventory 3) Chattel paper (N/A) 4) Equipment 5) Investment property (N/A) 6) Deposit account 7) General Intangible As of February 21, 2006. Our loan balance with the Crestmark Bank is zero. Schedule 4.13: Litigation None Schedule 4.14: Tax Returns and Payments As of February 21, 2006, International SMC (HK), Ltd. Owes Internal Revenue Service (US) $137,475 for the income tax due for tax year ended March 31, 2003 before penalty and interest. The amount is included in our latest consolidated financial statements filed with SEC dated February 14, 2006. Schedule 4.15: Employees Employment Agreement with Alicia Haskamp Schedule 4.18 Insurance Account 1602 12/31/2005 Prepaid Insurance
Agent Policy # Expiration Total Premium AIG - Gulf Coast Insurance - Workers Comp - FL WC WC00681263400 10/17/2005-10/17/2006 $ 28,606.00 Premium Assn Corp-Summit Global - Directors &Office D&O 212645 11/10/05-11/10/06 $ 176,750.00 The Hartford P&L 21UUNYY6200/ 7/1/2005-7/1/06 $ 44,329.31 21XHUTT5984 Int'l Marine Underwriter Cargo 1/03/05 - 1/2/06 Monthly bill
Schedule 4.19: SEC Reporting EX-10.2 3 v036479_ex10-2.txt REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement ("Agreement") is made and entered into as of February 21, 2006, by and between The Singing Machine Company, Inc., a Delaware corporation (the "Company"), and the purchasers of the Company's Common Stock that are signatories hereto (each a "Purchaser" and collectively, the "Purchasers"). This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof, by and between the Purchasers and the Company (the "Purchase Agreement"), and pursuant to the Warrants referred to therein. Capitalized terms used but not defined herein shall have the meaning set forth in the Purchase Agreement. The Company and the Purchasers hereby agree as follows: 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: "COMMISSION" means the Securities and Exchange Commission. "COMMON STOCK" means shares of the Company's common stock, par value $0.01 per share. "EFFECTIVENESS DATE" means the 120th day following the Filing Date. "EFFECTIVENESS PERIOD" shall have the meaning set forth in Section 2(a). "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and any successor statute. "FILING DATE" means, with respect to the Registration Statement required to be filed hereunder, a date no later than sixty (60) days following the date hereof and, with respect to shares of Common Stock issuable to the Holder as a result of adjustments to the conversion price of the exercise price of the Warrants, pursuant to their respective terms, sixty (60) days after the occurrence of such event or the date of such adjustment. "HOLDER" OR "HOLDERS" means the Purchasers or any of its affiliates or transferees to the extent any of them hold Registrable Securities. "INDEMNIFIED PARTY" shall have the meaning set forth in Section 6(c). "INDEMNIFYING PARTY" shall have the meaning set forth in Section 6(c). "PERSON" means any individual, corporation, partnership, limited liability company, or other legal entity. "PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. 1 "PROSPECTUS" means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "REGISTRABLE SECURITIES" means the shares of Common Stock issued and/or issuable upon the exercise of the Warrants. "REGISTRATION STATEMENT" means each registration statement required to be filed hereunder, including the Prospectus. "RULE 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 424" means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "SECURITIES ACT" means the Securities Act of 1933, as amended, and any successor statute. "TRADING MARKET" means any of the NASD OTC Bulletin Board, NASDAQ Capital Market, the NASDAQ National Market, the American Stock Exchange or the New York Stock Exchange. "WARRANTS" means the Common Stock purchase warrants issued pursuant to the Purchase Agreement. 2. REGISTRATION. (a) On or prior to the Filing Date the Company shall prepare and file with the Commission a Registration Statement covering the Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith). The Company shall cause the Registration Statement to become effective and remain effective as provided herein. The Company shall use its reasonable commercial efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event no later than the Effectiveness Date. The Company shall use its reasonable commercial efforts to keep the Registration Statement continuously effective under the Securities Act until the date which is the earlier date of when (i) all Registrable Securities have been sold or (ii) all Registrable Securities may be sold immediately without registration under the Securities Act and without volume restrictions pursuant to Rule 144(k), as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent and the affected Holders (the "Effectiveness Period"). 2 (b) If: (i) the Registration Statement is not filed on or prior to the Filing Date; (ii) the Registration Statement is not declared effective by the Commission by the Effectiveness Date; (iii) after the Registration Statement is filed with and declared effective by the Commission, the Registration Statement ceases to be effective (by suspension or otherwise) as to all Registrable Securities to which it is required to relate at any time prior to the expiration of the Effectiveness Period (without being succeeded immediately by an additional registration statement filed and declared effective) for a period of time which shall exceed 30 days in the aggregate per year or more than 20 consecutive calendar days (defined as a period of 365 days commencing on the date the Registration Statement is declared effective); or (iv) the Common Stock is not listed or quoted, or is suspended from trading on any Trading Market for a period of three (3) consecutive Trading Days (provided the Company shall not have been able to cure such trading suspension within 30 days of the notice thereof or list the Common Stock on another Trading Market); (any such failure or breach being referred to as an "Event," and for purposes of clause (i) or (ii) the date on which such Event occurs, or for purposes of clause (iii) the date which such 30 day or 20 consecutive day period (as the case may be) is exceeded, or for purposes of clause (iv) the date on which such three (3) Trading Day period is exceeded, being referred to as "Event Date"), then during the period beginning on the Event Date and ending on (but not including) the date that the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as liquidated damages and not as a penalty, equal to 1.0% for each thirty (30) day period (prorated for partial periods on a daily basis) of the Purchase Price of the Registrable Securities then held by such Holder and the amount by which the Warrants are in the money. While such Event continues, such liquidated damages shall be paid not less often than each thirty (30) days. Any unpaid liquidated damages as of the date when an Event has been cured by the Company shall be paid within five (5) days following the date on which such Event has been cured by the Company. (c) Within three (3) business days following the date on which the Registration Statement is declared effective by the Commission, and assuming no stop-order has been issued with respect to the Registration Statement, the Company shall furnish to each Holder: (x) a letter, dated such date, of outside counsel representing the Company addressed to such Holder, confirming such effectiveness and, to the knowledge of such counsel, the absence of any stop order, and (y) in the case of an underwriting (or if the Commission deems such Holder as an underwriter for disclosure purposes), (i) a copy of an opinion, dated such date, of such outside counsel, in such form and substance as is required to be given to the underwriters, and (ii) a letter addressed to such Holder, dated such date, from the Company's independent certified public accountants, in such form and substance as is required to be given by the Company's independent certified public accountants to such underwriters. 3. REGISTRATION PROCEDURES. If and whenever the Company is required by the provisions hereof to effect the registration of any Registrable Securities under the Securities Act, the Company will, as expeditiously as possible: (a) prepare and file with the Commission such amendments and supplements to the Registration Statement and the Prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by the Registration Statement and to keep such Registration Statement effective until the expiration of the Effectiveness Period; 3 (b) upon the effectiveness of the Registration Statement, furnish to the Purchaser such number of copies of the Registration Statement and the Prospectus included therein (including each preliminary Prospectus) as the Purchaser reasonably may request to facilitate the public sale or disposition of the Registrable Securities covered by the Registration Statement; (c) use its commercially reasonable efforts to register or qualify the Purchaser's Registrable Securities covered by the Registration Statement under the securities or "blue sky" laws of such jurisdictions within the United States as the Purchaser may reasonably request, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (d) list the Registrable Securities covered by the Registration Statement with any securities exchange on which the Common Stock of the Company is then listed; (e) immediately notify the Purchaser at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which the Prospectus contained in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and (f) make available for inspection by the Purchasers and any attorney, accountant or other agent retained by the Purchasers, upon reasonable prior notice, all publicly available, non-confidential financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all publicly available, non-confidential information reasonably requested by the attorney, accountant or agent of the Purchasers. 4. OBLIGATIONS OF EACH HOLDER. In connection with the registration of Registrable Securities pursuant to a Registration Statement, each Holder shall: (a) timely furnish to the Company in writing such information regarding itself and the intended method of disposition of such Registrable Securities as the Company shall reasonably request in order to effect the registration thereof; (b) upon receipt of any notice from the Company of the happening of any Discontinuation Event described in Section 7(d), immediately discontinue any sale or other disposition of such Registrable Securities pursuant to such Registration Statement until the filing of an amendment or supplement is delivered to the Holder as described in Section 7(d), and use commercially reasonable efforts to maintain the confidentiality of such notice and its contents; (c) in the event of an underwritten offering of such Registrable Securities in which such Holder participates, enter into a customary and reasonable underwriting agreement and execute such other documents as the Company and the managing underwriter for such offering may reasonably request; 4 (d) notify the Company when it has sold all of the Registrable Securities held by it; and (e) notify the Company in the event that any information supplied by such Holder for inclusion in such Registration Statement or related prospectus is untrue or omits to state a material fact required to be stated therein or necessary to make such information not misleading in light of the circumstances then existing; immediately discontinue any sale or other disposition of such Registrable Securities pursuant to such Registration Statement until the filing of an amendment or supplement to such prospectus as may be necessary so that such prospectus does not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and use commercially reasonable efforts to assist the Company as may be appropriate to make such amendment or supplement effective for such purpose. 5. REGISTRATION EXPENSES. All expenses relating to the Company's compliance with Sections 2 and 3 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including reasonable counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the NASD, transfer taxes, fees of transfer agents and registrars, fees of, and disbursements incurred by, one counsel for the Holders (to the extent such counsel is required due to Company's failure to meet any of its obligations hereunder), are called "Registration Expenses." All selling commissions applicable to the sale of Registrable Securities, including any fees and disbursements of any special counsel to the Holders beyond those included in Registration Expenses, are called "Selling Expenses." The Company shall only be responsible for all Registration Expenses and shall not be responsible for the Selling Expenses. 6. INDEMNIFICATION. (a) In the event of a registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless the Purchasers, and their officers, directors and each other person, if any, who controls the Purchasers within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Purchasers, or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and, subject to the provisions of Section 6(c) below, will reimburse the Purchasers, and each such person for any reasonable legal (of no more than one separate counsel) or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon: (i) an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by or on behalf of any Purchaser or any such person specifically for use in any such document, or (ii) a failure of such person to deliver or cause to be delivered the final Prospectus contained in the Registration Statement and made available by the Company, if such delivery is required by applicable law. 5 (b) In the event of a registration of any Registrable Securities under the Securities Act pursuant to this Agreement, each Purchaser will indemnify and hold harmless the Company, and its officers, directors and each other person, if any, who controls the Company within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact which was furnished by such Purchaser to the Company expressly for use in (and such information is contained in) the Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and, subject to the provisions of Section 6(c) below, will reimburse the Company and each such person for any reasonable legal (of no more than one separate counsel) or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that such Purchaser will be liable in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon (i) an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished to the Company by or on behalf of such Purchaser specifically for use in any such document, or (ii) a failure of such person to deliver or cause to be delivered the final Prospectus contained in the Registration Statement and made available by the Company, if such delivery is required by applicable law. Notwithstanding the provisions of this paragraph, no Purchaser shall be required to indemnify any person or entity in excess of the amount of the aggregate net proceeds received by such Purchaser in respect of Registrable Securities in connection with any such registration under the Securities Act. (c) Promptly after receipt by a party entitled to claim indemnification hereunder (an "Indemnified Party") of notice of the commencement of any action, such Indemnified Party shall, if a claim for indemnification in respect thereof is to be made against a party hereto obligated to indemnify such Indemnified Party (an "Indemnifying Party"), notify the Indemnifying Party in writing thereof, but the omission so to notify the Indemnifying Party shall not relieve it from any liability which it may have to such Indemnified Party other than under this Section 6(c) and shall only relieve it from any liability which it may have to such Indemnified Party under this Section 6(c) if and to the extent the Indemnifying Party is prejudiced by such omission. In case any such action shall be brought against any Indemnified Party and it shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such Indemnified Party, and, after notice from the Indemnifying Party to such Indemnified Party of its election so to assume and undertake the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party under this Section 6(c) for any legal expenses subsequently incurred by such Indemnified Party in connection with the defense thereof; if the Indemnified Party retains its own counsel, then the Indemnified Party shall pay all fees, costs and expenses of such counsel, provided, however, that, if the defendants in any such action include both the indemnified party and the Indemnifying Party and the Indemnified Party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the Indemnifying Party or if the interests of the Indemnified Party reasonably may be deemed to conflict with the interests of the Indemnifying Party, the Indemnified Party shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the Indemnifying Party as incurred. 6 (d) In order to provide for just and equitable contribution in the event of joint liability under the Securities Act in any case in which either: (i) a Purchaser, or any officer, director or controlling person of a Purchaser, makes a claim for indemnification pursuant to this Section 6 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 6 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of such Purchaser or such officer, director or controlling person of such Purchaser in circumstances for which indemnification is provided under this Section 6; then, and in each such case, the Company and such Purchaser will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Purchaser is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the Registration Statement bears to the public offering price of all securities offered by such Registration Statement, provided, however, that, in any such case, (A) such Purchaser will not be required to contribute any amount in excess of the public offering price of all such securities offered by it pursuant to such Registration Statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 7. MISCELLANEOUS. (a) Remedies. In the event of a breach by the Company or by a Holder, of any of their respective obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. (b) No Piggyback on Registrations. Except as and to the extent specified in Schedule 7(b) hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in any Registration Statement other than the Registrable Securities, and the Company shall not after the date hereof enter into any agreement providing any such right for inclusion of shares in the Registration Statement to any of its security holders. Except as and to the extent specified in Schedule 7(b) hereto, the Company has not previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been fully satisfied. (c) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. 7 (d) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of a Discontinuation Event (as defined below), such Holder will forthwith discontinue disposition of such Registrable Securities under the applicable Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph. For purposes of this Section 7(d), a "Discontinuation Event" shall mean (i) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); (ii) any request by the Commission or any other Federal or state governmental authority for amendments or supplements to such Registration Statement or Prospectus or for additional information; (iii) the issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and/or (v) the occurrence of any event or passage of time that makes the financial statements included in such Registration Statement ineligible for inclusion therein or any statement made in such Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to such Registration Statement, Prospectus or other documents so that, in the case of such Registration Statement or Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (e) Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen (15) days after receipt of such notice, any such Holder shall so request in writing, the Company shall use its best efforts to include in such registration statement all or any part of such Registrable Securities such holder requests to be registered to the extent the Company may do so without violating registration rights of others which exist as of the date of this Agreement, subject to customary underwriter cutbacks applicable to all holders of registration rights and subject to obtaining any required the consent of any selling stockholder(s) to such inclusion under such registration statement. The Company shall have a right to postpone, delay or withdraw any registration pursuant to this Section 7(e) without obligation to the Holder. (f) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of at least two-thirds (2/3) of the then outstanding Registrable Securities (without regard to any limitation on conversion or exercise of the Registrable Securities). Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of certain Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. 8 (g) Notices. Any notice or request hereunder may be given to the Company or the Purchasers at the respective addresses set forth in the Purchase Agreement or as may hereafter be specified in a notice designated as a change of address under this Section 7(g). Any notice or request hereunder shall be given by registered or certified mail, return receipt requested, hand delivery, overnight mail, Federal Express or other national overnight next day carrier (collectively, "Courier") or telecopy (confirmed by mail). Notices and requests shall be, in the case of those by hand delivery, deemed to have been given when delivered to any party to whom it is addressed, in the case of those by mail or overnight mail, deemed to have been given three (3) business days after the date when deposited in the mail or with the overnight mail carrier, in the case of a Courier, the next business day following timely delivery of the package with the Courier, and, in the case of a telecopy, when confirmed. (h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign their respective rights hereunder in connection with the transfer of the Shares or Warrants as long as: (i) the Company is, within a reasonable period of time following such transfer, furnished with written notice of the name and address of such transferee, (ii) the transferee agrees in writing with the Company to be bound by all of the provisions hereof, and (iii) such transfer is made in accordance with the applicable requirements of the Purchase Agreement and with the prior consent of the Company, which consent shall not be unreasonably withheld; provided, however, that the registration rights granted in this Agreement shall not be transferred to any person or entity that receives any Shares, Warrants or Registrable Securities in a public transaction pursuant to an effective registration statement under the Securities Act or pursuant to Rule 144. (i) Execution and Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions of a Transaction Document, then the prevailing party in such Proceeding shall be reimbursed by the other party for its reasonable attorney's fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding. 9 (k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (l) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 10 IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. COMPANY: THE SINGING MACHINE COMPANY, INC. /s/Yi Ping Chan - ------------------------------ Yi Ping Chan, Interim Chief Executive Officer HOLDERS: KONCEPTS INTERNATIONAL LIMITED By: /s/ Lau Sak Hong - ------------------------------ Name: Lau Sak Hong Its: Chairman 11 EX-10.3 4 v036479_ex10-3.txt THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED UNLESS A REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. WARRANT TO PURCHASE COMMON STOCK OF THE SINGING MACHINE COMPANY, INC. Issue Date: February 21, 2006 Warrant No. 1 THIS CERTIFIES that koncepts International Limited or any subsequent holder hereof (the "Holder"), has the right to purchase from THE SINGING MACHINE COMPANY, INC., a Delaware corporation (the "Company"), up to 2,500,000 fully paid and nonassessable shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), subject to adjustment as provided herein, at a price per share equal to the Exercise Price (as defined below), at any time beginning on the date hereof (the "the "Issue Date") and ending at 6:00 p.m., eastern time, on the date that is the First anniversary of the Issue Date (the "Expiration Date"). 1. Exercise. (a) Right to Exercise. The Holder shall have the right to exercise this Warrant at any time and from time to time during the period beginning on the Issue Date and ending on the Expiration Date as to all or any part of the shares of Common Stock covered hereby (the "Warrant Shares"). (b) Exercise Price. The "Exercise Price" for each Warrant Share purchased by the Holder upon the exercise of this Warrant shall be equal to $0.233, subject to adjustment for the events specified in Section 4 below; provided, however that if required by law, until this Warrant, the Securities Purchase Agreement between the Company and Holder dated as of the date hereof (the "Securities Purchase Agreement") and the transactions contemplated herein and therein are approved by the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote ("Shareholder Approval"), , other than as a result of adjustments for the events specified in Section 4(a) below. Payment of the Exercise Price is made in cash or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price for the number of Common Shares specified in such Exercise Notice (as defined below) (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant). (c) Exercise Notice. In order to exercise this Warrant, the Holder shall send by facsimile transmission, at any time prior to 6:00 p.m., eastern time, on the business day (which means any day other than a Saturday, a Sunday or a day which commercial banks located in New York City are permitted by law to close) on which the Holder wishes to effect such exercise (the "Exercise Date"), to the Company an executed copy of the notice of exercise in the form attached hereto as Exhibit A (the "Exercise Notice"), the original Warrant and the Exercise Price, which shall not be required if the Exercise Notice indicates the Holder's election to effect a cashless exercise. The Exercise Notice shall also state the name or names (with address) in which the shares of Common Stock that are issuable on such exercise shall be issued. In the case of a dispute as to the calculation of the Exercise Price or the number of Warrant Shares issuable hereunder (including, without limitation, the calculation of any adjustment pursuant to Section 6 below), the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed and shall submit the disputed calculations to a certified public accounting firm of national recognition (other than the Company's independent accountants), reasonably acceptable to Holder, within two (2) business days following the date on which the Exercise Notice is delivered to the Company. The Company shall cause such accountant to calculate the Exercise Price and/or the number of Warrant Shares issuable hereunder and to notify the Company and the Holder of the results in writing no later than three (3) business days following the day on which such accountant received the disputed calculations (the "Dispute Procedure"). Such accountant's calculation shall be deemed conclusive absent manifest error. The fees of any such accountant shall be borne by the party whose calculations were most at variance with those of such accountant. (d) Limitations on Exercise. Notwithstanding anything to the contrary contained herein, and only if required by law, until Shareholder Approval is obtained, no holder of this Warrant shall be entitled to exercise this Warrant, if after exercise such holder will, with the shares of Common Stock issued on exercise and any other shares of the Company's Common Stock then held by such holder, hold more than 19.99% of the outstanding Common Stock or voting power of the Company on the date of such exercise. (e) Holder of Record. The Holder shall, for all purposes, be deemed to have become the holder of record of the Warrant Shares specified in an Exercise Notice on the Exercise Date specified therein, irrespective of the date of delivery of such Warrant Shares. Except as specifically provided herein, nothing in this Warrant shall be construed as conferring upon the Holder hereof any rights as a stockholder of the Company prior to the Exercise Date. (f) Cancellation of Warrant. This Warrant shall be canceled upon its exercise and, if this Warrant is exercised in part, the Company shall, at the time that it delivers Warrant Shares to the Holder pursuant to such exercise as provided herein, issue a new warrant, and deliver to the Holder a certificate representing such new warrant, with terms identical in all respects to this Warrant (except that such new warrant shall be exercisable into the number of shares of Common Stock with respect to which this Warrant shall remain unexercised); provided, however, that the Holder shall be entitled to exercise all or any portion of such new warrant at any time following the time at which this Warrant is exercised, regardless of whether the Company has actually issued such new warrant or delivered to the Holder a certificate therefor. 2 2. Delivery of Warrant Shares Upon Exercise. Upon receipt of an Exercise Notice pursuant to Section 1 above, the Company shall: (a) no later than the close of business on the later to occur of (i) the third (3rd) business day following the Exercise Date set forth in such Exercise Notice and (ii) such later date on which the Company shall have received payment of the Exercise Price, and (b) with respect to Warrant Shares that are the subject of a Dispute Procedure, the close of business on the third (3rd) business day following the determination made pursuant to Section 1(b) (each of the dates specified in (A) or (B) being referred to as a "Delivery Date"), issue and deliver or caused to be delivered to the Holder the number of Warrant Shares as shall be determined as provided herein. The Company shall effect delivery of Warrant Shares to the Holder by, as long as the Transfer Agent participates in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program ("FAST"), crediting the account of the Holder or its nominee at DTC (as specified in the applicable Exercise Notice) with the number of Warrant Shares required to be delivered, no later than the close of business on such Delivery Date. In the event that the Transfer Agent is not a participant in FAST, or if the Warrant Shares are not otherwise eligible for delivery through FAST, or if the Holder so specifies in an Exercise Notice or otherwise in writing on or before the Exercise Date, the Company shall effect delivery of Warrant Shares by delivering to the Holder or its nominee physical certificates representing such Warrant Shares, no later than the close of business on such Delivery Date. 3. Failure to Deliver Warrant Shares. (a) In the event that the Company fails for any reason to deliver to the Holder the number of Warrant Shares specified in the applicable Exercise Notice on or before the Delivery Date therefor (an "Exercise Default"), and such default continues for seven (7) business days following delivery of a written notice of such default by the Holder to the Company, the Company shall pay to the Holder payments ("Exercise Default Payments") in the amount of: (i) (N/365) multiplied by (ii) the aggregate Exercise Price of the Warrant Shares which are the subject of such Exercise Default multiplied by (iii) the lower of ten percent (10%) and the maximum rate permitted by applicable law (the "Default Interest Rate"), where "N" equals the number of days elapsed between the original Delivery Date of such Warrant Shares and the date on which all of such Warrant Shares are issued and delivered to the Holder. Cash amounts payable hereunder shall be paid on or before the fifth (5th) business day of the calendar month following the calendar month in which such amount has accrued. (b) In the event that the Holder has not received certificates representing the Warrant Shares by the seventh (7th) business day following an Exercise Default, the Holder may notify the Company in writing of its election to revoke the Exercise Notice that is the subject of such default, in which case, effective as of the date of such revocation notice, such Exercise Notice shall be deemed rescinded and of no further force or effect. 3 (c) Nothing herein shall limit the Holder's right to pursue actual damages for the Company's failure to issue and deliver Warrant Shares on the applicable Delivery Date (including, without limitation, damages relating to any purchase of Common Stock by the Holder to make delivery on a sale effected in anticipation of receiving Warrant Shares upon exercise, such damages to be in an amount equal to: (a) the aggregate amount paid by the Holder for the Common Stock so purchased minus (b) the aggregate amount of net proceeds, if any, received by the Holder from the sale of the Warrant Shares issued by the Company pursuant to such exercise), and the Holder shall have the right to pursue all remedies available to it at law or in equity (including, without limitation, a decree of specific performance and/or injunctive relief); provided, however, that, in the event, following an Exercise Default, the Company delivers to the Holder the Warrant Shares that are required to be issued by the Company pursuant to such exercise, the Holder shall use commercially reasonable efforts to sell such shares promptly following such delivery. 4. Anti-Dilution Adjustments; Distributions; Other Events. The Exercise Price and the number of Warrant Shares issuable hereunder shall be subject to adjustment from time to time as provided in this Section 6. In the event that any adjustment of the Exercise Price or the number of Warrant Shares as required herein results in a fraction of a cent or fraction of a share, as applicable, such Exercise Price or number of Warrant Shares shall be rounded up or down to the nearest cent or share, as applicable. (a) Subdivision or Combination of Common Stock. If the Company, at any time after the Issue Date, subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) its shares of Common Stock into a greater number of shares, then after the date of record for effecting such subdivision, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced. Any adjustment made pursuant to the foregoing sentence that results in a decrease in the Exercise Price shall also effect a proportional increase in the number of Warrant Shares into which this Warrant is exercisable. If the Company, at any time after the initial issuance of this Warrant, combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) its shares of Common Stock into a smaller number of shares, then, after the date of record for effecting such combination, the Exercise Price in effect immediately prior to such combination will be proportionally increased. Any adjustment made pursuant to the foregoing sentence that results in an increase in the Exercise Price shall also effect a proportional decrease in the number of Warrant Shares into which this Warrant is exercisable. (b) Distributions. If the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a partial liquidating dividend or otherwise (including any dividend or distribution to the Company's stockholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary) (a "Distribution"), the Company shall deliver written notice of such Distribution (a "Distribution Notice") to the Holder at least five (5) business days prior to the earlier to occur of (i) the record date for determining stockholders entitled to such Distribution (the "Record Date") and (ii) the date on which such Distribution is made (the "Distribution Date"). The Holder shall be entitled to receive the same amount and type of assets being distributed in such Distribution as though the Holder were a holder on the Record Date therefor of a number of shares of Common Stock into which this Warrant is exercisable as of such Record Date (such number of shares to be determined at the Exercise Price then in effect and without giving effect to any limitations on such exercise contained in this Warrant or the Subscription Agreement). 4 (c) Dilutive Issuances. (i) Adjustment Upon Dilutive Issuance. If, at any time after the Issue Date, the Company issues or sells, or in accordance with subparagraph (ii) of this Section 4(c), is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share less than the Exercise Price on the date of such issuance or sale (or deemed issuance or sale) (a "Dilutive Issuance"), then effective immediately upon the Dilutive Issuance, the Exercise Price shall be adjusted so as to equal an amount determined by multiplying such Exercise Price by the following fraction: N0 + N1 ------- N0 + N2 where: N0 = the number of shares of Common Stock outstanding immediately prior to the issuance, sale or deemed issuance or sale of such additional shares of Common Stock in such Dilutive Issuance without taking into account any shares of Common Stock issuable upon conversion, exchange or exercise of any securities or other instruments which are convertible into or exercisable or exchangeable for Common Stock ("Convertible Securities") or options, warrants or other rights to purchase or subscribe for Common Stock or Convertible Securities ("Purchase Rights"); N1 = the number of shares of Common Stock which the aggregate consideration, if any, received or receivable by the Company for the total number of such additional shares of Common Stock so issued, sold or deemed issued or sold in such Dilutive Issuance (which, in the case of a deemed issuance or sale, shall be calculated in accordance with subparagraph (ii) below) would purchase at the Exercise Price in effect immediately prior to such Dilutive Issuance; and N2 = the number of such additional shares of Common Stock so issued, sold or deemed issued or sold in such Dilutive Issuance. Notwithstanding the foregoing, no adjustment shall be made pursuant hereto if such adjustment would result in an increase in the Exercise Price. (ii) Effect On Exercise Price Of Certain Events. For purposes of determining the adjusted Exercise Price under subparagraph (i) of this Section 4(c), the following will be applicable: 5 (A) Issuance Of Purchase Rights. If the Company issues or sells any Purchase Rights, whether or not immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Purchase Rights (and the price of any conversion of Convertible Securities, if applicable) is less than the Exercise Price in effect on the date of issuance or sale of such Purchase Rights, then the maximum total number of shares of Common Stock issuable upon the exercise of all such Purchase Rights (assuming full conversion, exercise or exchange of Convertible Securities, if applicable) shall, as of the date of the issuance or sale of such Purchase Rights, be deemed to have been issued and sold by the Company for such price per share. For purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon the exercise of such Purchase Rights" shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Purchase Rights, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Purchase Rights, plus, in the case of Convertible Securities issuable upon the exercise of such Purchase Rights, the minimum aggregate amount of additional consideration payable upon the conversion, exercise or exchange of all such Convertible Securities (determined in accordance with the calculation method set forth in subparagraph (ii)(D) below), by (y) the maximum total number of shares of Common Stock issuable upon the exercise of all such Purchase Rights (assuming full conversion, exercise or exchange of Convertible Securities, if applicable). Except as provided in Section 6(c)(ii)(C) hereof, no further adjustment to the Exercise Price shall be made upon the actual issuance of such Common Stock upon the exercise of such Purchase Rights or upon the conversion, exercise or exchange of Convertible Securities issuable upon exercise of such Purchase Rights. (B) Issuance Of Convertible Securities. If the Company issues or sells any Convertible Securities, whether or not immediately convertible, exercisable or exchangeable, and the price per share for which Common Stock is issuable upon such conversion, exercise or exchange is less than the Exercise Price in effect on the date of issuance or sale of such Convertible Securities, then the maximum total number of shares of Common Stock issuable upon the conversion, exercise or exchange of all such Convertible Securities shall, as of the date of the issuance or sale of such Convertible Securities, be deemed to have been issued and sold by the Company for such price per share. For the purposes of the immediately preceding sentence, the "price per share for which Common Stock is issuable upon such conversion, exercise or exchange" shall be determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion, exercise or exchange of all such Convertible Securities (determined in accordance with the calculation method set forth in subparagraph (ii)(D)), by (B) the maximum total number of shares of Common Stock issuable upon the exercise, conversion or exchange of all such Convertible Securities. Except as provided in Section 6(c)(ii)(C) hereof, no further adjustment to the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion, exercise or exchange of such Convertible Securities. 6 (C) Change In Option Price Or Conversion Rate. If there is a change at any time in (x) the purchase price or amount of additional consideration payable to the Company upon the exercise of any Purchase Rights; (y) the amount of additional consideration, if any, payable to the Company upon the conversion, exercise or exchange of any Convertible Securities the adjustment for which is not otherwise covered under Section 6(c)(ii)(B) above; or (z) the rate at which any Convertible Securities are convertible into or exercisable or exchangeable for Common Stock, then in any such case, the Exercise Price in effect at the time of such change shall be readjusted to the Exercise Price which would have been in effect at such time had such Purchase Rights or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion, exercise or exchange rate, as the case may be, at the time initially issued or sold. (D) Calculation Of Consideration Received. If any Common Stock, Purchase Rights or Convertible Securities are issued or sold for cash, the consideration received therefor will be the amount received by the Company therefor, after deduction of all underwriting discounts or allowances in connection with such issuance, grant or sale. In case any Common Stock, Purchase Rights or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, including in the case of a strategic or similar arrangement in which the other entity will provide services to the Company, purchase services from the Company or otherwise provide intangible consideration to the Company, the amount of the consideration other than cash received by the Company (including the net present value of the consideration expected by the Company for the provided or purchased services) shall be the fair market value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the average of the last sale prices thereof on the principal market for such securities during the period of ten Trading Days immediately preceding the date of receipt. In case any Common Stock, Purchase Rights or Convertible Securities are issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor will be deemed to be the fair market value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Purchase Rights or Convertible Securities, as the case may be. The independent members of the Company's Board of Directors shall calculate reasonably and in good faith, using standard commercial valuation methods appropriate for valuing such assets, the fair market value of any consideration other than cash or securities; provided, however, that if the Holder does not agree to such fair market value calculation within three business days after receipt thereof from the Company, then such fair market value shall be determined in good faith by an investment banker or other appropriate expert of national reputation selected by the Holder and reasonably acceptable to the Company, with the costs of such appraisal to be borne by the Company. (iii) Exceptions To Adjustment Of Exercise Price. Notwithstanding the foregoing, no adjustment to the Exercise Price shall be made pursuant to this Section 6(c) upon the issuance of any Excluded Securities. For purposes hereof, "Excluded Securities" means (1) securities purchased under the Securities Purchaser Agreement; (2) securities issued upon conversion or exercise of the Warrants (as defined in the Securities Purchase Agreement); (3) shares of Common Stock issuable or issued to employees, consultants or directors from time to time upon the exercise of options, in such case granted or to be granted in the discretion of the Board of Directors pursuant to one or more stock option plans or restricted stock plans in effect as of the Issue Date; (4) shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization of the Company; (5) securities issued upon conversion of outstanding shares of the Company's Convertible Preferred Stock outstanding as of the date of this Warrant, if any, provided that the terms of such preferred stock have not been amended since the date hereof; (6) securities issued upon conversion or exercise of Debentures or Warrants issued under the Securities Purchase Agreement, dated as of August 20., 2003 and (7) 1,820,600 shares issuable upon exercise of currently outstanding warrants and options listed on Schedule 1 hereto. 7 (iv) Notice Of Adjustments. Upon the occurrence of each adjustment or readjustment of the Exercise Price pursuant to this Section 4 resulting in a change in the Exercise Price by more than one percent (1%), or any change in the number or type of stock, securities and/or other property issuable upon exercise of this Warrant, the Company, at its expense, shall promptly compute such adjustment or readjustment or change and prepare and furnish to the Holder a certificate setting forth such adjustment or readjustment or change and showing in detail the facts upon which such adjustment or readjustment or change is based. The Company shall, upon the written request at any time of the Holder, furnish to the Holder a like certificate setting forth: (i) such adjustment or readjustment or change, (ii) the Exercise Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon exercise of this Warrant. (a) Major Transactions. In the event of a merger, consolidation, business combination, tender offer, exchange of shares, recapitalization, reorganization, redemption or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities or other assets of the Company or another entity or the Company shall sell all or substantially all of its assets (each of the foregoing being a "Major Transaction"), the Company will give the Holder at least twenty (20) days written notice prior to the closing of such Major Transaction in a manner that does not constitute disclosure of material non-public information (unless otherwise previously consented to in writing by the Holder), and: (i) the Holder shall be permitted to exercise this Warrant in whole or in part at any time prior to the record date for the receipt of such consideration and shall be entitled to receive, for each share of Common Stock issuable to Holder for such exercise, the same per share consideration payable to the other holders of Common Stock in connection with such Major Transaction, and (ii) if and to the extent that the Holder retains any portion of this Warrant following such record date, the Company will cause the surviving or, in the event of a sale of assets, purchasing entity, as a condition precedent to such Major Transaction, to assume the obligations of the Company under this Warrant, with such adjustments to the Exercise Price and the securities covered hereby as may be necessary in order to preserve the economic benefits of this Warrant to the Holder. (b) Adjustments; Additional Shares, Securities or Assets. In the event that at any time, as a result of an adjustment made pursuant to this Section 4, the Holder of this Warrant shall, upon exercise of this Warrant, become entitled to receive securities or assets (other than Common Stock) then, wherever appropriate, all references herein to shares of Common Stock shall be deemed to refer to and include such shares and/or other securities or assets; and thereafter the number of such shares and/or other securities or assets shall be subject to adjustment from time to time in a manner and upon terms as nearly equivalent as practicable to the provisions of this Section 6. 8 5. Fractional Interests. No fractional shares or scrip representing fractional shares shall be issuable upon the exercise of this Warrant, but on exercise of this Warrant, the Holder hereof may purchase only a whole number of shares of Common Stock. If, on exercise of this Warrant, the Holder hereof would be entitled to a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, the Company shall, in lieu of issuing any such fractional share, pay to the Holder an amount in cash equal to the product resulting from multiplying such fraction by the market price as of the Exercise Date. 6. Transfer of this Warrant. The Holder may sell, transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in part, as long as such sale or other disposition is made pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act. Upon such transfer or other disposition, the Holder shall deliver this Warrant to the Company together with a written notice to the Company, substantially in the form of the Transfer Notice attached hereto as Exhibit B (the "Transfer Notice"), indicating the person or persons to whom this Warrant shall be transferred and, if less than all of this Warrant is transferred, the number of Warrant Shares to be covered by the part of this Warrant to be transferred to each such person. Within three (3) business days of receiving a Transfer Notice and the original of this Warrant, the Company shall deliver to the each transferee designated by the Holder a Warrant or Warrants of like tenor and terms for the appropriate number of Warrant Shares and, if less than all this Warrant is transferred, shall deliver to the Holder a Warrant for the remaining number of Warrant Shares. 7. Benefits of this Warrant. This Warrant shall be for the sole and exclusive benefit of the Holder of this Warrant and nothing in this Warrant shall be construed to confer upon any person other than the Holder of this Warrant any legal or equitable right, remedy or claim hereunder. 8. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnity reasonably satisfactory to the Company, and upon surrender of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. 9. Notice or Demands. Any notice, demand or request required or permitted to be given by the Company or the Holder pursuant to the terms of this Warrant shall be in writing and shall be deemed delivered (i) when delivered personally or by verifiable facsimile transmission, unless such delivery is made on a day that is not a business day, in which case such delivery will be deemed to be made on the next succeeding business day, (ii) on the next business day after timely delivery to an overnight courier and (iii) on the business day actually received if deposited in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid), addressed as follows: 9 If to the Company: The Singing Machine Company, Inc. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073 Attn: Yi Ping Chan Tel: (954) 596-1000 Fax: (954) 596-2000 with a copy (not constituting notice) to: Sichenzia Ross Friedman Ference LLP 1065 Avenue of the Americas New York, NY 10018 Attention: Darrin M. Ocasio, Esq. Tel: (212) 930-9700 Fax: (212) 930-9725 If to Holder: At the address set forth below Holder's signature on the Securities Purchase Agreement. with a copy (not constituting notice) to: Handal & Associates 1200 Third Avenue, Suite 1321 San Diego, CA 92101-4111 Attn: Anton Handal, Esq. Tel: (619) 544-6400 Fax: (619) 696-0323 10. Attorney's Fees. In the event any litigation, arbitration, mediation, or other proceeding ("Proceeding") is initiated by any party(ies) against any other party(ies) to enforce, interpret or otherwise obtain judicial or quasi-judicial relief in connection with this Agreement, the prevailing party(ies) in such Proceeding shall be entitled to recover from the unsuccessful party(ies) all costs, expenses, actual attorney's and expert witness fees, relating to or arising out of: (i) such Proceeding (whether or not such Proceeding proceeds to judgment), and (ii) any post-judgment or post-award proceeding including, without limitation, one to enforce any judgment or award resulting from any such Proceeding. Any such judgment or award shall contain a specific provision for the recovery of all such subsequently incurred costs, expenses, actual attorney and expert witness fees. 10 11. Applicable Law. This Warrant is issued under and shall for all purposes be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within the State of New York. 12. Amendments. No amendment, modification or other change to, or waiver of any provision of, this Warrant may be made unless such amendment, modification or change is set forth in writing and is signed by the Company and the Holder. 13. Entire Agreement. This Warrant, the Securities Purchase Agreement and the Registration Rights Agreement, and the schedules and exhibits hereto and thereto, constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Warrant, the Securities Purchase Agreement and the Registration Rights Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. 14. Headings. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. [Signature Page to Follow] 11 IN WITNESS WHEREOF, the Company has duly executed and delivered this Warrant as of the Issue Date. THE SINGING MACHINE COMPANY, INC. By: /s/ Yi Ping Chan ------------------------------- Yi Ping Chan Interim Chief Executive Officer EXHIBIT A to WARRANT EXERCISE NOTICE The undersigned Holder hereby irrevocably exercises the right to purchase of the shares of Common Stock ("Warrant Shares") of The Singing Machine Company, Inc. evidenced by the attached Warrant (the "Warrant"). The Holder elects to make payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): ________ $__________ in lawful money of the United States; and/or ________ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Market Price of $_______ per share for purposes of this calculation); and/or ________ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 1(c), to exercise this Warrant with respect to the maximum number of shares of Common Stock purchasable pursuant to the cashless exercise procedure set forth in Section 1(c). Date: ______________________ - ----------------------------------- Name of Registered Holder By: _______________________________ Name: Title: EXHIBIT B to WARRANT TRANSFER NOTICE FOR VALUE RECEIVED, the undersigned Holder of the attached Warrant hereby sells, assigns and transfers unto the person or persons named below the right to purchase shares of the Common Stock of The Singing Machine Company, Inc. evidenced by the attached Warrant. Date: ______________________ - ----------------------------------- Name of Registered Holder By: _______________________________ Name: Title: Transferee Name and Address: - --------------------------------- - --------------------------------- - --------------------------------- Schedule 1 Outstanding Options and Warrants
Private Warrants Issued Vested Expiration -------- -------- ---------- Roth Capital Partners LLP 4.025 103,896 9/8/2003 9/8/2003 9/7/2006 Omicron Master Trust 4.025 285,714 9/8/2003 9/8/2003 9/7/2006 SF Capital Partners, Ltd. 4.025 57,143 9/8/2003 9/8/2003 9/7/2006 Bristol Investment Fund, Ltd. 4.025 34,286 9/8/2003 9/8/2003 9/7/2006 Ascend Offshore Fund, Ltd. 4.025 54,629 9/8/2003 9/8/2003 9/7/2006 Ascend Partners LP 4.025 6,651 9/8/2003 9/8/2003 9/7/2006 Ascend Partners Sapient LP 4.025 18,720 9/8/2003 9/8/2003 9/7/2006 - Omicron Master Trust 1.52 18,750 2/9/2004 2/9/2004 9/7/2006 SF Capital Partners, Ltd. 1.52 3,750 2/9/2004 2/9/2004 9/7/2006 Bristol Investment Fund, Ltd. 1.52 2,250 2/9/2004 2/9/2004 9/7/2006 Ascend Offshore Fund, Ltd. 1.52 3,585 2/9/2004 2/9/2004 9/7/2006 Ascend Partners LP 1.52 437 2/9/2004 2/9/2004 9/7/2006 Ascend Partners Sapient LP 1.52 1,229 2/9/2004 2/9/2004 9/7/2006 ------- Unexercised Warrants 591,040 =======
Option: Employee stock options as of February 21, 2006: 1,289,560 shares EX-10.4 5 v036479_ex10-4.txt THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED UNLESS A REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. WARRANT TO PURCHASE COMMON STOCK OF THE SINGING MACHINE COMPANY, INC. Issue Date: February 21, 2006 Warrant No. 2 THIS CERTIFIES that koncepts International Limited or any subsequent holder hereof (the "Holder"), has the right to purchase from THE SINGING MACHINE COMPANY, INC., a Delaware corporation (the "Company"), up to 1,250,000 fully paid and nonassessable shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), subject to adjustment as provided herein, at a price per share equal to the Exercise Price (as defined below), at any time beginning on the date hereof (the "the "Issue Date") and ending at 6:00 p.m., eastern time, on the date that is the Third anniversary of the Issue Date (the "Expiration Date"). 1. Exercise. (a) Right to Exercise. The Holder shall have the right to exercise this Warrant at any time and from time to time during the period beginning on the Issue Date and ending on the Expiration Date as to all or any part of the shares of Common Stock covered hereby (the "Warrant Shares"). (b) Exercise Price. The "Exercise Price" for each Warrant Share purchased by the Holder upon the exercise of this Warrant shall be equal to $0.280, subject to adjustment for the events specified in Section 4 below; provided, however that if required by law, until this Warrant, the Securities Purchase Agreement between the Company and Holder dated as of the date hereof (the "Securities Purchase Agreement") and the transactions contemplated herein and therein are approved by the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote ("Shareholder Approval"), , other than as a result of adjustments for the events specified in Section 4(a) below. Payment of the Exercise Price is made in cash or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price for the number of Common Shares specified in such Exercise Notice (as defined below) (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant). (c) Exercise Notice. In order to exercise this Warrant, the Holder shall send by facsimile transmission, at any time prior to 6:00 p.m., eastern time, on the business day (which means any day other than a Saturday, a Sunday or a day which commercial banks located in New York City are permitted by law to close) on which the Holder wishes to effect such exercise (the "Exercise Date"), to the Company an executed copy of the notice of exercise in the form attached hereto as Exhibit A (the "Exercise Notice"), the original Warrant and the Exercise Price, which shall not be required if the Exercise Notice indicates the Holder's election to effect a cashless exercise. The Exercise Notice shall also state the name or names (with address) in which the shares of Common Stock that are issuable on such exercise shall be issued. In the case of a dispute as to the calculation of the Exercise Price or the number of Warrant Shares issuable hereunder (including, without limitation, the calculation of any adjustment pursuant to Section 6 below), the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed and shall submit the disputed calculations to a certified public accounting firm of national recognition (other than the Company's independent accountants), reasonably acceptable to Holder, within two (2) business days following the date on which the Exercise Notice is delivered to the Company. The Company shall cause such accountant to calculate the Exercise Price and/or the number of Warrant Shares issuable hereunder and to notify the Company and the Holder of the results in writing no later than three (3) business days following the day on which such accountant received the disputed calculations (the "Dispute Procedure"). Such accountant's calculation shall be deemed conclusive absent manifest error. The fees of any such accountant shall be borne by the party whose calculations were most at variance with those of such accountant. (d) Limitations on Exercise. Notwithstanding anything to the contrary contained herein, and only if required by law, until Shareholder Approval is obtained, no holder of this Warrant shall be entitled to exercise this Warrant, if after exercise such holder will, with the shares of Common Stock issued on exercise and any other shares of the Company's Common Stock then held by such holder, hold more than 19.99% of the outstanding Common Stock or voting power of the Company on the date of such exercise. (e) Holder of Record. The Holder shall, for all purposes, be deemed to have become the holder of record of the Warrant Shares specified in an Exercise Notice on the Exercise Date specified therein, irrespective of the date of delivery of such Warrant Shares. Except as specifically provided herein, nothing in this Warrant shall be construed as conferring upon the Holder hereof any rights as a stockholder of the Company prior to the Exercise Date. (f) Cancellation of Warrant. This Warrant shall be canceled upon its exercise and, if this Warrant is exercised in part, the Company shall, at the time that it delivers Warrant Shares to the Holder pursuant to such exercise as provided herein, issue a new warrant, and deliver to the Holder a certificate representing such new warrant, with terms identical in all respects to this Warrant (except that such new warrant shall be exercisable into the number of shares of Common Stock with respect to which this Warrant shall remain unexercised); provided, however, that the Holder shall be entitled to exercise all or any portion of such new warrant at any time following the time at which this Warrant is exercised, regardless of whether the Company has actually issued such new warrant or delivered to the Holder a certificate therefor. 2 2. Delivery of Warrant Shares Upon Exercise. Upon receipt of an Exercise Notice pursuant to Section 1 above, the Company shall: (a) no later than the close of business on the later to occur of (i) the third (3rd) business day following the Exercise Date set forth in such Exercise Notice and (ii) such later date on which the Company shall have received payment of the Exercise Price, and (b) with respect to Warrant Shares that are the subject of a Dispute Procedure, the close of business on the third (3rd) business day following the determination made pursuant to Section 1(b) (each of the dates specified in (A) or (B) being referred to as a "Delivery Date"), issue and deliver or caused to be delivered to the Holder the number of Warrant Shares as shall be determined as provided herein. The Company shall effect delivery of Warrant Shares to the Holder by, as long as the Transfer Agent participates in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program ("FAST"), crediting the account of the Holder or its nominee at DTC (as specified in the applicable Exercise Notice) with the number of Warrant Shares required to be delivered, no later than the close of business on such Delivery Date. In the event that the Transfer Agent is not a participant in FAST, or if the Warrant Shares are not otherwise eligible for delivery through FAST, or if the Holder so specifies in an Exercise Notice or otherwise in writing on or before the Exercise Date, the Company shall effect delivery of Warrant Shares by delivering to the Holder or its nominee physical certificates representing such Warrant Shares, no later than the close of business on such Delivery Date. 3. Failure to Deliver Warrant Shares. (a) In the event that the Company fails for any reason to deliver to the Holder the number of Warrant Shares specified in the applicable Exercise Notice on or before the Delivery Date therefor (an "Exercise Default"), and such default continues for seven (7) business days following delivery of a written notice of such default by the Holder to the Company, the Company shall pay to the Holder payments ("Exercise Default Payments") in the amount of: (i) (N/365) multiplied by (ii) the aggregate Exercise Price of the Warrant Shares which are the subject of such Exercise Default multiplied by (iii) the lower of ten percent (10%) and the maximum rate permitted by applicable law (the "Default Interest Rate"), where "N" equals the number of days elapsed between the original Delivery Date of such Warrant Shares and the date on which all of such Warrant Shares are issued and delivered to the Holder. Cash amounts payable hereunder shall be paid on or before the fifth (5th) business day of the calendar month following the calendar month in which such amount has accrued. (b) In the event that the Holder has not received certificates representing the Warrant Shares by the seventh (7th) business day following an Exercise Default, the Holder may notify the Company in writing of its election to revoke the Exercise Notice that is the subject of such default, in which case, effective as of the date of such revocation notice, such Exercise Notice shall be deemed rescinded and of no further force or effect. (c) Nothing herein shall limit the Holder's right to pursue actual damages for the Company's failure to issue and deliver Warrant Shares on the applicable Delivery Date (including, without limitation, damages relating to any purchase of Common Stock by the Holder to make delivery on a sale effected in anticipation of receiving Warrant Shares upon exercise, such damages to be in an amount equal to: (a) the aggregate amount paid by the Holder for the Common Stock so purchased minus (b) the aggregate amount of net proceeds, if any, received by the Holder from the sale of the Warrant Shares issued by the Company pursuant to such exercise), and the Holder shall have the right to pursue all remedies available to it at law or in equity (including, without limitation, a decree of specific performance and/or injunctive relief); provided, however, that, in the event, following an Exercise Default, the Company delivers to the Holder the Warrant Shares that are required to be issued by the Company pursuant to such exercise, the Holder shall use commercially reasonable efforts to sell such shares promptly following such delivery. 3 4. Anti-Dilution Adjustments; Distributions; Other Events. The Exercise Price and the number of Warrant Shares issuable hereunder shall be subject to adjustment from time to time as provided in this Section 6. In the event that any adjustment of the Exercise Price or the number of Warrant Shares as required herein results in a fraction of a cent or fraction of a share, as applicable, such Exercise Price or number of Warrant Shares shall be rounded up or down to the nearest cent or share, as applicable. (a) Subdivision or Combination of Common Stock. If the Company, at any time after the Issue Date, subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) its shares of Common Stock into a greater number of shares, then after the date of record for effecting such subdivision, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced. Any adjustment made pursuant to the foregoing sentence that results in a decrease in the Exercise Price shall also effect a proportional increase in the number of Warrant Shares into which this Warrant is exercisable. If the Company, at any time after the initial issuance of this Warrant, combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) its shares of Common Stock into a smaller number of shares, then, after the date of record for effecting such combination, the Exercise Price in effect immediately prior to such combination will be proportionally increased. Any adjustment made pursuant to the foregoing sentence that results in an increase in the Exercise Price shall also effect a proportional decrease in the number of Warrant Shares into which this Warrant is exercisable. (b) Distributions. If the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a partial liquidating dividend or otherwise (including any dividend or distribution to the Company's stockholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary) (a "Distribution"), the Company shall deliver written notice of such Distribution (a "Distribution Notice") to the Holder at least five (5) business days prior to the earlier to occur of (i) the record date for determining stockholders entitled to such Distribution (the "Record Date") and (ii) the date on which such Distribution is made (the "Distribution Date"). The Holder shall be entitled to receive the same amount and type of assets being distributed in such Distribution as though the Holder were a holder on the Record Date therefor of a number of shares of Common Stock into which this Warrant is exercisable as of such Record Date (such number of shares to be determined at the Exercise Price then in effect and without giving effect to any limitations on such exercise contained in this Warrant or the Subscription Agreement). 4 (c) Dilutive Issuances. (i) Adjustment Upon Dilutive Issuance. If, at any time after the Issue Date, the Company issues or sells, or in accordance with subparagraph (ii) of this Section 4(c), is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share less than the Exercise Price on the date of such issuance or sale (or deemed issuance or sale) (a "Dilutive Issuance"), then effective immediately upon the Dilutive Issuance, the Exercise Price shall be adjusted so as to equal an amount determined by multiplying such Exercise Price by the following fraction: N0 + N1 ------- N0 + N2 where: N0 = the number of shares of Common Stock outstanding immediately prior to the issuance, sale or deemed issuance or sale of such additional shares of Common Stock in such Dilutive Issuance without taking into account any shares of Common Stock issuable upon conversion, exchange or exercise of any securities or other instruments which are convertible into or exercisable or exchangeable for Common Stock ("Convertible Securities") or options, warrants or other rights to purchase or subscribe for Common Stock or Convertible Securities ("Purchase Rights"); N1 = the number of shares of Common Stock which the aggregate consideration, if any, received or receivable by the Company for the total number of such additional shares of Common Stock so issued, sold or deemed issued or sold in such Dilutive Issuance (which, in the case of a deemed issuance or sale, shall be calculated in accordance with subparagraph (ii) below) would purchase at the Exercise Price in effect immediately prior to such Dilutive Issuance; and N2 = the number of such additional shares of Common Stock so issued, sold or deemed issued or sold in such Dilutive Issuance. Notwithstanding the foregoing, no adjustment shall be made pursuant hereto if such adjustment would result in an increase in the Exercise Price. (ii) Effect On Exercise Price Of Certain Events. For purposes of determining the adjusted Exercise Price under subparagraph (i) of this Section 4(c), the following will be applicable: 5 (A) Issuance Of Purchase Rights. If the Company issues or sells any Purchase Rights, whether or not immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Purchase Rights (and the price of any conversion of Convertible Securities, if applicable) is less than the Exercise Price in effect on the date of issuance or sale of such Purchase Rights, then the maximum total number of shares of Common Stock issuable upon the exercise of all such Purchase Rights (assuming full conversion, exercise or exchange of Convertible Securities, if applicable) shall, as of the date of the issuance or sale of such Purchase Rights, be deemed to have been issued and sold by the Company for such price per share. For purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon the exercise of such Purchase Rights" shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Purchase Rights, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Purchase Rights, plus, in the case of Convertible Securities issuable upon the exercise of such Purchase Rights, the minimum aggregate amount of additional consideration payable upon the conversion, exercise or exchange of all such Convertible Securities (determined in accordance with the calculation method set forth in subparagraph (ii)(D) below), by (y) the maximum total number of shares of Common Stock issuable upon the exercise of all such Purchase Rights (assuming full conversion, exercise or exchange of Convertible Securities, if applicable). Except as provided in Section 6(c)(ii)(C) hereof, no further adjustment to the Exercise Price shall be made upon the actual issuance of such Common Stock upon the exercise of such Purchase Rights or upon the conversion, exercise or exchange of Convertible Securities issuable upon exercise of such Purchase Rights. (B) Issuance Of Convertible Securities. If the Company issues or sells any Convertible Securities, whether or not immediately convertible, exercisable or exchangeable, and the price per share for which Common Stock is issuable upon such conversion, exercise or exchange is less than the Exercise Price in effect on the date of issuance or sale of such Convertible Securities, then the maximum total number of shares of Common Stock issuable upon the conversion, exercise or exchange of all such Convertible Securities shall, as of the date of the issuance or sale of such Convertible Securities, be deemed to have been issued and sold by the Company for such price per share. For the purposes of the immediately preceding sentence, the "price per share for which Common Stock is issuable upon such conversion, exercise or exchange" shall be determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion, exercise or exchange of all such Convertible Securities (determined in accordance with the calculation method set forth in subparagraph (ii)(D)), by (B) the maximum total number of shares of Common Stock issuable upon the exercise, conversion or exchange of all such Convertible Securities. Except as provided in Section 6(c)(ii)(C) hereof, no further adjustment to the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion, exercise or exchange of such Convertible Securities. (C) Change In Option Price Or Conversion Rate. If there is a change at any time in (x) the purchase price or amount of additional consideration payable to the Company upon the exercise of any Purchase Rights; (y) the amount of additional consideration, if any, payable to the Company upon the conversion, exercise or exchange of any Convertible Securities the adjustment for which is not otherwise covered under Section 6(c)(ii)(B) above; or (z) the rate at which any Convertible Securities are convertible into or exercisable or exchangeable for Common Stock, then in any such case, the Exercise Price in effect at the time of such change shall be readjusted to the Exercise Price which would have been in effect at such time had such Purchase Rights or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion, exercise or exchange rate, as the case may be, at the time initially issued or sold. 6 (D) Calculation Of Consideration Received. If any Common Stock, Purchase Rights or Convertible Securities are issued or sold for cash, the consideration received therefor will be the amount received by the Company therefor, after deduction of all underwriting discounts or allowances in connection with such issuance, grant or sale. In case any Common Stock, Purchase Rights or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, including in the case of a strategic or similar arrangement in which the other entity will provide services to the Company, purchase services from the Company or otherwise provide intangible consideration to the Company, the amount of the consideration other than cash received by the Company (including the net present value of the consideration expected by the Company for the provided or purchased services) shall be the fair market value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the average of the last sale prices thereof on the principal market for such securities during the period of ten Trading Days immediately preceding the date of receipt. In case any Common Stock, Purchase Rights or Convertible Securities are issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor will be deemed to be the fair market value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Purchase Rights or Convertible Securities, as the case may be. The independent members of the Company's Board of Directors shall calculate reasonably and in good faith, using standard commercial valuation methods appropriate for valuing such assets, the fair market value of any consideration other than cash or securities; provided, however, that if the Holder does not agree to such fair market value calculation within three business days after receipt thereof from the Company, then such fair market value shall be determined in good faith by an investment banker or other appropriate expert of national reputation selected by the Holder and reasonably acceptable to the Company, with the costs of such appraisal to be borne by the Company. (iii) Exceptions To Adjustment Of Exercise Price. Notwithstanding the foregoing, no adjustment to the Exercise Price shall be made pursuant to this Section 6(c) upon the issuance of any Excluded Securities. For purposes hereof, "Excluded Securities" means (1) securities purchased under the Securities Purchaser Agreement; (2) securities issued upon conversion or exercise of the Warrants (as defined in the Securities Purchase Agreement); (3) shares of Common Stock issuable or issued to employees, consultants or directors from time to time upon the exercise of options, in such case granted or to be granted in the discretion of the Board of Directors pursuant to one or more stock option plans or restricted stock plans in effect as of the Issue Date; (4) shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization of the Company; (5) securities issued upon conversion of outstanding shares of the Company's Convertible Preferred Stock outstanding as of the date of this Warrant, if any, provided that the terms of such preferred stock have not been amended since the date hereof; (6) securities issued upon conversion or exercise of Debentures or Warrants issued under the Securities Purchase Agreement, dated as of August 20., 2003 and (7) 1,820,600 shares issuable upon exercise of currently outstanding warrants and options listed on Schedule 1 hereto. 7 (iv) Notice Of Adjustments. Upon the occurrence of each adjustment or readjustment of the Exercise Price pursuant to this Section 4 resulting in a change in the Exercise Price by more than one percent (1%), or any change in the number or type of stock, securities and/or other property issuable upon exercise of this Warrant, the Company, at its expense, shall promptly compute such adjustment or readjustment or change and prepare and furnish to the Holder a certificate setting forth such adjustment or readjustment or change and showing in detail the facts upon which such adjustment or readjustment or change is based. The Company shall, upon the written request at any time of the Holder, furnish to the Holder a like certificate setting forth: (i) such adjustment or readjustment or change, (ii) the Exercise Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon exercise of this Warrant. (a) Major Transactions. In the event of a merger, consolidation, business combination, tender offer, exchange of shares, recapitalization, reorganization, redemption or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities or other assets of the Company or another entity or the Company shall sell all or substantially all of its assets (each of the foregoing being a "Major Transaction"), the Company will give the Holder at least twenty (20) days written notice prior to the closing of such Major Transaction in a manner that does not constitute disclosure of material non-public information (unless otherwise previously consented to in writing by the Holder), and: (i) the Holder shall be permitted to exercise this Warrant in whole or in part at any time prior to the record date for the receipt of such consideration and shall be entitled to receive, for each share of Common Stock issuable to Holder for such exercise, the same per share consideration payable to the other holders of Common Stock in connection with such Major Transaction, and (ii) if and to the extent that the Holder retains any portion of this Warrant following such record date, the Company will cause the surviving or, in the event of a sale of assets, purchasing entity, as a condition precedent to such Major Transaction, to assume the obligations of the Company under this Warrant, with such adjustments to the Exercise Price and the securities covered hereby as may be necessary in order to preserve the economic benefits of this Warrant to the Holder. (b) Adjustments; Additional Shares, Securities or Assets. In the event that at any time, as a result of an adjustment made pursuant to this Section 4, the Holder of this Warrant shall, upon exercise of this Warrant, become entitled to receive securities or assets (other than Common Stock) then, wherever appropriate, all references herein to shares of Common Stock shall be deemed to refer to and include such shares and/or other securities or assets; and thereafter the number of such shares and/or other securities or assets shall be subject to adjustment from time to time in a manner and upon terms as nearly equivalent as practicable to the provisions of this Section 6. 5. Fractional Interests. No fractional shares or scrip representing fractional shares shall be issuable upon the exercise of this Warrant, but on exercise of this Warrant, the Holder hereof may purchase only a whole number of shares of Common Stock. If, on exercise of this Warrant, the Holder hereof would be entitled to a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, the Company shall, in lieu of issuing any such fractional share, pay to the Holder an amount in cash equal to the product resulting from multiplying such fraction by the market price as of the Exercise Date. 8 6. Transfer of this Warrant. The Holder may sell, transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in part, as long as such sale or other disposition is made pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act. Upon such transfer or other disposition, the Holder shall deliver this Warrant to the Company together with a written notice to the Company, substantially in the form of the Transfer Notice attached hereto as Exhibit B (the "Transfer Notice"), indicating the person or persons to whom this Warrant shall be transferred and, if less than all of this Warrant is transferred, the number of Warrant Shares to be covered by the part of this Warrant to be transferred to each such person. Within three (3) business days of receiving a Transfer Notice and the original of this Warrant, the Company shall deliver to the each transferee designated by the Holder a Warrant or Warrants of like tenor and terms for the appropriate number of Warrant Shares and, if less than all this Warrant is transferred, shall deliver to the Holder a Warrant for the remaining number of Warrant Shares. 7. Benefits of this Warrant. This Warrant shall be for the sole and exclusive benefit of the Holder of this Warrant and nothing in this Warrant shall be construed to confer upon any person other than the Holder of this Warrant any legal or equitable right, remedy or claim hereunder. 8. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnity reasonably satisfactory to the Company, and upon surrender of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. 9. Notice or Demands. Any notice, demand or request required or permitted to be given by the Company or the Holder pursuant to the terms of this Warrant shall be in writing and shall be deemed delivered (i) when delivered personally or by verifiable facsimile transmission, unless such delivery is made on a day that is not a business day, in which case such delivery will be deemed to be made on the next succeeding business day, (ii) on the next business day after timely delivery to an overnight courier and (iii) on the business day actually received if deposited in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid), addressed as follows: 9 If to the Company: The Singing Machine Company, Inc. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073 Attn: Yi Ping Chan Tel: (954) 596-1000 Fax: (954) 596-2000 with a copy (not constituting notice) to: Sichenzia Ross Friedman Ference LLP 1065 Avenue of the Americas New York, NY 10018 Attention: Darrin M. Ocasio, Esq. Tel: (212) 930-9700 Fax: (212) 930-9725 If to Holder: At the address set forth below Holder's signature on the Securities Purchase Agreement. with a copy (not constituting notice) to: Handal & Associates 1200 Third Avenue, Suite 1321 San Diego, CA 92101-4111 Attn: Anton Handal, Esq. Tel: (619) 544-6400 Fax: (619) 696-0323 10. Attorney's Fees. In the event any litigation, arbitration, mediation, or other proceeding ("Proceeding") is initiated by any party(ies) against any other party(ies) to enforce, interpret or otherwise obtain judicial or quasi-judicial relief in connection with this Agreement, the prevailing party(ies) in such Proceeding shall be entitled to recover from the unsuccessful party(ies) all costs, expenses, actual attorney's and expert witness fees, relating to or arising out of: (i) such Proceeding (whether or not such Proceeding proceeds to judgment), and (ii) any post-judgment or post-award proceeding including, without limitation, one to enforce any judgment or award resulting from any such Proceeding. Any such judgment or award shall contain a specific provision for the recovery of all such subsequently incurred costs, expenses, actual attorney and expert witness fees. 10 11. Applicable Law. This Warrant is issued under and shall for all purposes be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within the State of New York. 12. Amendments. No amendment, modification or other change to, or waiver of any provision of, this Warrant may be made unless such amendment, modification or change is set forth in writing and is signed by the Company and the Holder. 13. Entire Agreement. This Warrant, the Securities Purchase Agreement and the Registration Rights Agreement, and the schedules and exhibits hereto and thereto, constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Warrant, the Securities Purchase Agreement and the Registration Rights Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. 14. Headings. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. [Signature Page to Follow] 11 IN WITNESS WHEREOF, the Company has duly executed and delivered this Warrant as of the Issue Date. THE SINGING MACHINE COMPANY, INC. By: /s/ Yi Ping Chan ------------------------------- Yi Ping Chan Interim Chief Executive Officer EXHIBIT A to WARRANT EXERCISE NOTICE The undersigned Holder hereby irrevocably exercises the right to purchase of the shares of Common Stock ("Warrant Shares") of The Singing Machine Company, Inc. evidenced by the attached Warrant (the "Warrant"). The Holder elects to make payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): ________ $__________ in lawful money of the United States; and/or ________ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Market Price of $_______ per share for purposes of this calculation); and/or ________ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 1(c), to exercise this Warrant with respect to the maximum number of shares of Common Stock purchasable pursuant to the cashless exercise procedure set forth in Section 1(c). Date: ______________________ - ----------------------------------- Name of Registered Holder By: ______________________________ Name: Title: EXHIBIT B to WARRANT TRANSFER NOTICE FOR VALUE RECEIVED, the undersigned Holder of the attached Warrant hereby sells, assigns and transfers unto the person or persons named below the right to purchase shares of the Common Stock of The Singing Machine Company, Inc. evidenced by the attached Warrant. Date: ______________________ - ----------------------------------- Name of Registered Holder By: ______________________________ Name: Title: Transferee Name and Address: - ----------------------------- - ----------------------------- - ----------------------------- Schedule 1 Outstanding Options and Warrants
Private Warrants Issued Vested Expiration -------- -------- ---------- Roth Capital Partners LLP 4.025 103,896 9/8/2003 9/8/2003 9/7/2006 Omicron Master Trust 4.025 285,714 9/8/2003 9/8/2003 9/7/2006 SF Capital Partners, Ltd. 4.025 57,143 9/8/2003 9/8/2003 9/7/2006 Bristol Investment Fund, Ltd. 4.025 34,286 9/8/2003 9/8/2003 9/7/2006 Ascend Offshore Fund, Ltd. 4.025 54,629 9/8/2003 9/8/2003 9/7/2006 Ascend Partners LP 4.025 6,651 9/8/2003 9/8/2003 9/7/2006 Ascend Partners Sapient LP 4.025 18,720 9/8/2003 9/8/2003 9/7/2006 - Omicron Master Trust 1.52 18,750 2/9/2004 2/9/2004 9/7/2006 SF Capital Partners, Ltd. 1.52 3,750 2/9/2004 2/9/2004 9/7/2006 Bristol Investment Fund, Ltd. 1.52 2,250 2/9/2004 2/9/2004 9/7/2006 Ascend Offshore Fund, Ltd. 1.52 3,585 2/9/2004 2/9/2004 9/7/2006 Ascend Partners LP 1.52 437 2/9/2004 2/9/2004 9/7/2006 Ascend Partners Sapient LP 1.52 1,229 2/9/2004 2/9/2004 9/7/2006 ------- Unexercised Warrants 591,040 =======
Option: Employee stock options as of February 21, 2006: 1,289,560 shares EX-10.5 6 v036479_ex10-5.txt THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW, AND MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED UNLESS A REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER, SALE OR TRANSFER. WARRANT TO PURCHASE COMMON STOCK OF THE SINGING MACHINE COMPANY, INC. Issue Date: February _21, 2006 Warrant No. 3 THIS CERTIFIES that koncepts International Limited or any subsequent holder hereof (the "Holder"), has the right to purchase from THE SINGING MACHINE COMPANY, INC., a Delaware corporation (the "Company"), up to 1,250,000 fully paid and nonassessable shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), subject to adjustment as provided herein, at a price per share equal to the Exercise Price (as defined below), at any time beginning on the date hereof (the "the "Issue Date") and ending at 6:00 p.m., eastern time, on the date that is the Fourth anniversary of the Issue Date (the "Expiration Date"). 1. Exercise. (a) Right to Exercise. The Holder shall have the right to exercise this Warrant at any time and from time to time during the period beginning on the Issue Date and ending on the Expiration Date as to all or any part of the shares of Common Stock covered hereby (the "Warrant Shares"). (b) Exercise Price. The "Exercise Price" for each Warrant Share purchased by the Holder upon the exercise of this Warrant shall be equal to $0.350, subject to adjustment for the events specified in Section 4 below; provided, however that if required by law, until this Warrant, the Securities Purchase Agreement between the Company and Holder dated as of the date hereof (the "Securities Purchase Agreement") and the transactions contemplated herein and therein are approved by the holders of a majority of the outstanding shares of capital stock of the Company entitled to vote ("Shareholder Approval"), , other than as a result of adjustments for the events specified in Section 4(a) below. Payment of the Exercise Price is made in cash or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Exercise Price for the number of Common Shares specified in such Exercise Notice (as defined below) (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant). (c) Exercise Notice. In order to exercise this Warrant, the Holder shall send by facsimile transmission, at any time prior to 6:00 p.m., eastern time, on the business day (which means any day other than a Saturday, a Sunday or a day which commercial banks located in New York City are permitted by law to close) on which the Holder wishes to effect such exercise (the "Exercise Date"), to the Company an executed copy of the notice of exercise in the form attached hereto as Exhibit A (the "Exercise Notice"), the original Warrant and the Exercise Price, which shall not be required if the Exercise Notice indicates the Holder's election to effect a cashless exercise. The Exercise Notice shall also state the name or names (with address) in which the shares of Common Stock that are issuable on such exercise shall be issued. In the case of a dispute as to the calculation of the Exercise Price or the number of Warrant Shares issuable hereunder (including, without limitation, the calculation of any adjustment pursuant to Section 6 below), the Company shall promptly issue to the Holder the number of Warrant Shares that are not disputed and shall submit the disputed calculations to a certified public accounting firm of national recognition (other than the Company's independent accountants), reasonably acceptable to Holder, within two (2) business days following the date on which the Exercise Notice is delivered to the Company. The Company shall cause such accountant to calculate the Exercise Price and/or the number of Warrant Shares issuable hereunder and to notify the Company and the Holder of the results in writing no later than three (3) business days following the day on which such accountant received the disputed calculations (the "Dispute Procedure"). Such accountant's calculation shall be deemed conclusive absent manifest error. The fees of any such accountant shall be borne by the party whose calculations were most at variance with those of such accountant. (d) Limitations on Exercise. Notwithstanding anything to the contrary contained herein, and only if required by law, until Shareholder Approval is obtained, no holder of this Warrant shall be entitled to exercise this Warrant, if after exercise such holder will, with the shares of Common Stock issued on exercise and any other shares of the Company's Common Stock then held by such holder, hold more than 19.99% of the outstanding Common Stock or voting power of the Company on the date of such exercise. (e) Holder of Record. The Holder shall, for all purposes, be deemed to have become the holder of record of the Warrant Shares specified in an Exercise Notice on the Exercise Date specified therein, irrespective of the date of delivery of such Warrant Shares. Except as specifically provided herein, nothing in this Warrant shall be construed as conferring upon the Holder hereof any rights as a stockholder of the Company prior to the Exercise Date. (f) Cancellation of Warrant. This Warrant shall be canceled upon its exercise and, if this Warrant is exercised in part, the Company shall, at the time that it delivers Warrant Shares to the Holder pursuant to such exercise as provided herein, issue a new warrant, and deliver to the Holder a certificate representing such new warrant, with terms identical in all respects to this Warrant (except that such new warrant shall be exercisable into the number of shares of Common Stock with respect to which this Warrant shall remain unexercised); provided, however, that the Holder shall be entitled to exercise all or any portion of such new warrant at any time following the time at which this Warrant is exercised, regardless of whether the Company has actually issued such new warrant or delivered to the Holder a certificate therefor. 2 2. Delivery of Warrant Shares Upon Exercise. Upon receipt of an Exercise Notice pursuant to Section 1 above, the Company shall: (a) no later than the close of business on the later to occur of (i) the third (3rd) business day following the Exercise Date set forth in such Exercise Notice and (ii) such later date on which the Company shall have received payment of the Exercise Price, and (b) with respect to Warrant Shares that are the subject of a Dispute Procedure, the close of business on the third (3rd) business day following the determination made pursuant to Section 1(b) (each of the dates specified in (A) or (B) being referred to as a "Delivery Date"), issue and deliver or caused to be delivered to the Holder the number of Warrant Shares as shall be determined as provided herein. The Company shall effect delivery of Warrant Shares to the Holder by, as long as the Transfer Agent participates in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program ("FAST"), crediting the account of the Holder or its nominee at DTC (as specified in the applicable Exercise Notice) with the number of Warrant Shares required to be delivered, no later than the close of business on such Delivery Date. In the event that the Transfer Agent is not a participant in FAST, or if the Warrant Shares are not otherwise eligible for delivery through FAST, or if the Holder so specifies in an Exercise Notice or otherwise in writing on or before the Exercise Date, the Company shall effect delivery of Warrant Shares by delivering to the Holder or its nominee physical certificates representing such Warrant Shares, no later than the close of business on such Delivery Date. 3. Failure to Deliver Warrant Shares. (a) In the event that the Company fails for any reason to deliver to the Holder the number of Warrant Shares specified in the applicable Exercise Notice on or before the Delivery Date therefor (an "Exercise Default"), and such default continues for seven (7) business days following delivery of a written notice of such default by the Holder to the Company, the Company shall pay to the Holder payments ("Exercise Default Payments") in the amount of: (i) (N/365) multiplied by (ii) the aggregate Exercise Price of the Warrant Shares which are the subject of such Exercise Default multiplied by (iii) the lower of ten percent (10%) and the maximum rate permitted by applicable law (the "Default Interest Rate"), where "N" equals the number of days elapsed between the original Delivery Date of such Warrant Shares and the date on which all of such Warrant Shares are issued and delivered to the Holder. Cash amounts payable hereunder shall be paid on or before the fifth (5th) business day of the calendar month following the calendar month in which such amount has accrued. (b) In the event that the Holder has not received certificates representing the Warrant Shares by the seventh (7th) business day following an Exercise Default, the Holder may notify the Company in writing of its election to revoke the Exercise Notice that is the subject of such default, in which case, effective as of the date of such revocation notice, such Exercise Notice shall be deemed rescinded and of no further force or effect. 3 (c) Nothing herein shall limit the Holder's right to pursue actual damages for the Company's failure to issue and deliver Warrant Shares on the applicable Delivery Date (including, without limitation, damages relating to any purchase of Common Stock by the Holder to make delivery on a sale effected in anticipation of receiving Warrant Shares upon exercise, such damages to be in an amount equal to: (a) the aggregate amount paid by the Holder for the Common Stock so purchased minus (b) the aggregate amount of net proceeds, if any, received by the Holder from the sale of the Warrant Shares issued by the Company pursuant to such exercise), and the Holder shall have the right to pursue all remedies available to it at law or in equity (including, without limitation, a decree of specific performance and/or injunctive relief); provided, however, that, in the event, following an Exercise Default, the Company delivers to the Holder the Warrant Shares that are required to be issued by the Company pursuant to such exercise, the Holder shall use commercially reasonable efforts to sell such shares promptly following such delivery. 4. Anti-Dilution Adjustments; Distributions; Other Events. The Exercise Price and the number of Warrant Shares issuable hereunder shall be subject to adjustment from time to time as provided in this Section 6. In the event that any adjustment of the Exercise Price or the number of Warrant Shares as required herein results in a fraction of a cent or fraction of a share, as applicable, such Exercise Price or number of Warrant Shares shall be rounded up or down to the nearest cent or share, as applicable. (a) Subdivision or Combination of Common Stock. If the Company, at any time after the Issue Date, subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) its shares of Common Stock into a greater number of shares, then after the date of record for effecting such subdivision, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced. Any adjustment made pursuant to the foregoing sentence that results in a decrease in the Exercise Price shall also effect a proportional increase in the number of Warrant Shares into which this Warrant is exercisable. If the Company, at any time after the initial issuance of this Warrant, combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) its shares of Common Stock into a smaller number of shares, then, after the date of record for effecting such combination, the Exercise Price in effect immediately prior to such combination will be proportionally increased. Any adjustment made pursuant to the foregoing sentence that results in an increase in the Exercise Price shall also effect a proportional decrease in the number of Warrant Shares into which this Warrant is exercisable. (b) Distributions. If the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a partial liquidating dividend or otherwise (including any dividend or distribution to the Company's stockholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary) (a "Distribution"), the Company shall deliver written notice of such Distribution (a "Distribution Notice") to the Holder at least five (5) business days prior to the earlier to occur of (i) the record date for determining stockholders entitled to such Distribution (the "Record Date") and (ii) the date on which such Distribution is made (the "Distribution Date"). The Holder shall be entitled to receive the same amount and type of assets being distributed in such Distribution as though the Holder were a holder on the Record Date therefor of a number of shares of Common Stock into which this Warrant is exercisable as of such Record Date (such number of shares to be determined at the Exercise Price then in effect and without giving effect to any limitations on such exercise contained in this Warrant or the Subscription Agreement). 4 (c) Dilutive Issuances. (i) Adjustment Upon Dilutive Issuance. If, at any time after the Issue Date, the Company issues or sells, or in accordance with subparagraph (ii) of this Section 4(c), is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share less than the Exercise Price on the date of such issuance or sale (or deemed issuance or sale) (a "Dilutive Issuance"), then effective immediately upon the Dilutive Issuance, the Exercise Price shall be adjusted so as to equal an amount determined by multiplying such Exercise Price by the following fraction: N0 + N1 ------- N0 + N2 where: N0 = the number of shares of Common Stock outstanding immediately prior to the issuance, sale or deemed issuance or sale of such additional shares of Common Stock in such Dilutive Issuance without taking into account any shares of Common Stock issuable upon conversion, exchange or exercise of any securities or other instruments which are convertible into or exercisable or exchangeable for Common Stock ("Convertible Securities") or options, warrants or other rights to purchase or subscribe for Common Stock or Convertible Securities ("Purchase Rights"); N1 = the number of shares of Common Stock which the aggregate consideration, if any, received or receivable by the Company for the total number of such additional shares of Common Stock so issued, sold or deemed issued or sold in such Dilutive Issuance (which, in the case of a deemed issuance or sale, shall be calculated in accordance with subparagraph (ii) below) would purchase at the Exercise Price in effect immediately prior to such Dilutive Issuance; and N2 = the number of such additional shares of Common Stock so issued, sold or deemed issued or sold in such Dilutive Issuance. Notwithstanding the foregoing, no adjustment shall be made pursuant hereto if such adjustment would result in an increase in the Exercise Price. (ii) Effect On Exercise Price Of Certain Events. For purposes of determining the adjusted Exercise Price under subparagraph (i) of this Section 4(c), the following will be applicable: 5 (A) Issuance Of Purchase Rights. If the Company issues or sells any Purchase Rights, whether or not immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Purchase Rights (and the price of any conversion of Convertible Securities, if applicable) is less than the Exercise Price in effect on the date of issuance or sale of such Purchase Rights, then the maximum total number of shares of Common Stock issuable upon the exercise of all such Purchase Rights (assuming full conversion, exercise or exchange of Convertible Securities, if applicable) shall, as of the date of the issuance or sale of such Purchase Rights, be deemed to have been issued and sold by the Company for such price per share. For purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon the exercise of such Purchase Rights" shall be determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Purchase Rights, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Purchase Rights, plus, in the case of Convertible Securities issuable upon the exercise of such Purchase Rights, the minimum aggregate amount of additional consideration payable upon the conversion, exercise or exchange of all such Convertible Securities (determined in accordance with the calculation method set forth in subparagraph (ii)(D) below), by (y) the maximum total number of shares of Common Stock issuable upon the exercise of all such Purchase Rights (assuming full conversion, exercise or exchange of Convertible Securities, if applicable). Except as provided in Section 6(c)(ii)(C) hereof, no further adjustment to the Exercise Price shall be made upon the actual issuance of such Common Stock upon the exercise of such Purchase Rights or upon the conversion, exercise or exchange of Convertible Securities issuable upon exercise of such Purchase Rights. (B) Issuance Of Convertible Securities. If the Company issues or sells any Convertible Securities, whether or not immediately convertible, exercisable or exchangeable, and the price per share for which Common Stock is issuable upon such conversion, exercise or exchange is less than the Exercise Price in effect on the date of issuance or sale of such Convertible Securities, then the maximum total number of shares of Common Stock issuable upon the conversion, exercise or exchange of all such Convertible Securities shall, as of the date of the issuance or sale of such Convertible Securities, be deemed to have been issued and sold by the Company for such price per share. For the purposes of the immediately preceding sentence, the "price per share for which Common Stock is issuable upon such conversion, exercise or exchange" shall be determined by dividing (A) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion, exercise or exchange of all such Convertible Securities (determined in accordance with the calculation method set forth in subparagraph (ii)(D)), by (B) the maximum total number of shares of Common Stock issuable upon the exercise, conversion or exchange of all such Convertible Securities. Except as provided in Section 6(c)(ii)(C) hereof, no further adjustment to the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion, exercise or exchange of such Convertible Securities. (C) Change In Option Price Or Conversion Rate. If there is a change at any time in (x) the purchase price or amount of additional consideration payable to the Company upon the exercise of any Purchase Rights; (y) the amount of additional consideration, if any, payable to the Company upon the conversion, exercise or exchange of any Convertible Securities the adjustment for which is not otherwise covered under Section 6(c)(ii)(B) above; or (z) the rate at which any Convertible Securities are convertible into or exercisable or exchangeable for Common Stock, then in any such case, the Exercise Price in effect at the time of such change shall be readjusted to the Exercise Price which would have been in effect at such time had such Purchase Rights or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or changed conversion, exercise or exchange rate, as the case may be, at the time initially issued or sold. 6 (D) Calculation Of Consideration Received. If any Common Stock, Purchase Rights or Convertible Securities are issued or sold for cash, the consideration received therefor will be the amount received by the Company therefor, after deduction of all underwriting discounts or allowances in connection with such issuance, grant or sale. In case any Common Stock, Purchase Rights or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, including in the case of a strategic or similar arrangement in which the other entity will provide services to the Company, purchase services from the Company or otherwise provide intangible consideration to the Company, the amount of the consideration other than cash received by the Company (including the net present value of the consideration expected by the Company for the provided or purchased services) shall be the fair market value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the average of the last sale prices thereof on the principal market for such securities during the period of ten Trading Days immediately preceding the date of receipt. In case any Common Stock, Purchase Rights or Convertible Securities are issued in connection with any merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor will be deemed to be the fair market value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Purchase Rights or Convertible Securities, as the case may be. The independent members of the Company's Board of Directors shall calculate reasonably and in good faith, using standard commercial valuation methods appropriate for valuing such assets, the fair market value of any consideration other than cash or securities; provided, however, that if the Holder does not agree to such fair market value calculation within three business days after receipt thereof from the Company, then such fair market value shall be determined in good faith by an investment banker or other appropriate expert of national reputation selected by the Holder and reasonably acceptable to the Company, with the costs of such appraisal to be borne by the Company. (iii) Exceptions To Adjustment Of Exercise Price. Notwithstanding the foregoing, no adjustment to the Exercise Price shall be made pursuant to this Section 6(c) upon the issuance of any Excluded Securities. For purposes hereof, "Excluded Securities" means (1) securities purchased under the Securities Purchaser Agreement; (2) securities issued upon conversion or exercise of the Warrants (as defined in the Securities Purchase Agreement); (3) shares of Common Stock issuable or issued to employees, consultants or directors from time to time upon the exercise of options, in such case granted or to be granted in the discretion of the Board of Directors pursuant to one or more stock option plans or restricted stock plans in effect as of the Issue Date; (4) shares of Common Stock issued in connection with any stock split, stock dividend or recapitalization of the Company; (5) securities issued upon conversion of outstanding shares of the Company's Convertible Preferred Stock outstanding as of the date of this Warrant, if any, provided that the terms of such preferred stock have not been amended since the date hereof; (6) securities issued upon conversion or exercise of Debentures or Warrants issued under the Securities Purchase Agreement, dated as of August 20., 2003 and (7) 1,820,600 shares issuable upon exercise of currently outstanding warrants and options listed on Schedule 1 hereto. 7 (iv) Notice Of Adjustments. Upon the occurrence of each adjustment or readjustment of the Exercise Price pursuant to this Section 4 resulting in a change in the Exercise Price by more than one percent (1%), or any change in the number or type of stock, securities and/or other property issuable upon exercise of this Warrant, the Company, at its expense, shall promptly compute such adjustment or readjustment or change and prepare and furnish to the Holder a certificate setting forth such adjustment or readjustment or change and showing in detail the facts upon which such adjustment or readjustment or change is based. The Company shall, upon the written request at any time of the Holder, furnish to the Holder a like certificate setting forth: (i) such adjustment or readjustment or change, (ii) the Exercise Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon exercise of this Warrant. (a) Major Transactions. In the event of a merger, consolidation, business combination, tender offer, exchange of shares, recapitalization, reorganization, redemption or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of the same or another class or classes of stock or securities or other assets of the Company or another entity or the Company shall sell all or substantially all of its assets (each of the foregoing being a "Major Transaction"), the Company will give the Holder at least twenty (20) days written notice prior to the closing of such Major Transaction in a manner that does not constitute disclosure of material non-public information (unless otherwise previously consented to in writing by the Holder), and: (i) the Holder shall be permitted to exercise this Warrant in whole or in part at any time prior to the record date for the receipt of such consideration and shall be entitled to receive, for each share of Common Stock issuable to Holder for such exercise, the same per share consideration payable to the other holders of Common Stock in connection with such Major Transaction, and (ii) if and to the extent that the Holder retains any portion of this Warrant following such record date, the Company will cause the surviving or, in the event of a sale of assets, purchasing entity, as a condition precedent to such Major Transaction, to assume the obligations of the Company under this Warrant, with such adjustments to the Exercise Price and the securities covered hereby as may be necessary in order to preserve the economic benefits of this Warrant to the Holder. (b) Adjustments; Additional Shares, Securities or Assets. In the event that at any time, as a result of an adjustment made pursuant to this Section 4, the Holder of this Warrant shall, upon exercise of this Warrant, become entitled to receive securities or assets (other than Common Stock) then, wherever appropriate, all references herein to shares of Common Stock shall be deemed to refer to and include such shares and/or other securities or assets; and thereafter the number of such shares and/or other securities or assets shall be subject to adjustment from time to time in a manner and upon terms as nearly equivalent as practicable to the provisions of this Section 6. 8 5. Fractional Interests. No fractional shares or scrip representing fractional shares shall be issuable upon the exercise of this Warrant, but on exercise of this Warrant, the Holder hereof may purchase only a whole number of shares of Common Stock. If, on exercise of this Warrant, the Holder hereof would be entitled to a fractional share of Common Stock or a right to acquire a fractional share of Common Stock, the Company shall, in lieu of issuing any such fractional share, pay to the Holder an amount in cash equal to the product resulting from multiplying such fraction by the market price as of the Exercise Date. 6. Transfer of this Warrant. The Holder may sell, transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in part, as long as such sale or other disposition is made pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act. Upon such transfer or other disposition, the Holder shall deliver this Warrant to the Company together with a written notice to the Company, substantially in the form of the Transfer Notice attached hereto as Exhibit B (the "Transfer Notice"), indicating the person or persons to whom this Warrant shall be transferred and, if less than all of this Warrant is transferred, the number of Warrant Shares to be covered by the part of this Warrant to be transferred to each such person. Within three (3) business days of receiving a Transfer Notice and the original of this Warrant, the Company shall deliver to the each transferee designated by the Holder a Warrant or Warrants of like tenor and terms for the appropriate number of Warrant Shares and, if less than all this Warrant is transferred, shall deliver to the Holder a Warrant for the remaining number of Warrant Shares. 7. Benefits of this Warrant. This Warrant shall be for the sole and exclusive benefit of the Holder of this Warrant and nothing in this Warrant shall be construed to confer upon any person other than the Holder of this Warrant any legal or equitable right, remedy or claim hereunder. 8. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of indemnity reasonably satisfactory to the Company, and upon surrender of this Warrant, if mutilated, the Company shall execute and deliver a new Warrant of like tenor and date. 9. Notice or Demands. Any notice, demand or request required or permitted to be given by the Company or the Holder pursuant to the terms of this Warrant shall be in writing and shall be deemed delivered (i) when delivered personally or by verifiable facsimile transmission, unless such delivery is made on a day that is not a business day, in which case such delivery will be deemed to be made on the next succeeding business day, (ii) on the next business day after timely delivery to an overnight courier and (iii) on the business day actually received if deposited in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid), addressed as follows: 9 If to the Company: The Singing Machine Company, Inc. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073 Attn: Yi Ping Chan Tel: (954) 596-1000 Fax: (954) 596-2000 with a copy (not constituting notice) to: Sichenzia Ross Friedman Ference LLP 1065 Avenue of the Americas New York, NY 10018 Attention: Darrin M. Ocasio, Esq. Tel: (212) 930-9700 Fax: (212) 930-9725 If to Holder: At the address set forth below Holder's signature on the Securities Purchase Agreement. with a copy (not constituting notice) to: Handal & Associates 1200 Third Avenue, Suite 1321 San Diego, CA 92101-4111 Attn: Anton Handal, Esq. Tel: (619) 544-6400 Fax: (619) 696-0323 10. Attorney's Fees. In the event any litigation, arbitration, mediation, or other proceeding ("Proceeding") is initiated by any party(ies) against any other party(ies) to enforce, interpret or otherwise obtain judicial or quasi-judicial relief in connection with this Agreement, the prevailing party(ies) in such Proceeding shall be entitled to recover from the unsuccessful party(ies) all costs, expenses, actual attorney's and expert witness fees, relating to or arising out of: (i) such Proceeding (whether or not such Proceeding proceeds to judgment), and (ii) any post-judgment or post-award proceeding including, without limitation, one to enforce any judgment or award resulting from any such Proceeding. Any such judgment or award shall contain a specific provision for the recovery of all such subsequently incurred costs, expenses, actual attorney and expert witness fees. 11. Applicable Law. This Warrant is issued under and shall for all purposes be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within the State of New York. 10 12. Amendments. No amendment, modification or other change to, or waiver of any provision of, this Warrant may be made unless such amendment, modification or change is set forth in writing and is signed by the Company and the Holder. 13. Entire Agreement. This Warrant, the Securities Purchase Agreement and the Registration Rights Agreement, and the schedules and exhibits hereto and thereto, constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Warrant, the Securities Purchase Agreement and the Registration Rights Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. 14. Headings. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. [Signature Page to Follow] IN WITNESS WHEREOF, the Company has duly executed and delivered this Warrant as of the Issue Date. THE SINGING MACHINE COMPANY, INC. By: /s/ Yi Ping Chan ------------------------------- Yi Ping Chan Interim Chief Executive Officer EXHIBIT A to WARRANT EXERCISE NOTICE The undersigned Holder hereby irrevocably exercises the right to purchase of the shares of Common Stock ("Warrant Shares") of The Singing Machine Company, Inc. evidenced by the attached Warrant (the "Warrant"). The Holder elects to make payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): ________ $__________ in lawful money of the United States; and/or ________ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Market Price of $_______ per share for purposes of this calculation); and/or ________ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 1(c), to exercise this Warrant with respect to the maximum number of shares of Common Stock purchasable pursuant to the cashless exercise procedure set forth in Section 1(c). Date: ______________________ - ----------------------------------- Name of Registered Holder By: _______________________________ Name: Title: EXHIBIT B to WARRANT TRANSFER NOTICE FOR VALUE RECEIVED, the undersigned Holder of the attached Warrant hereby sells, assigns and transfers unto the person or persons named below the right to purchase shares of the Common Stock of The Singing Machine Company, Inc. evidenced by the attached Warrant. Date: ______________________ - ----------------------------------- Name of Registered Holder By: _______________________________ Name: Title: Transferee Name and Address: - ---------------------------- - ---------------------------- - ---------------------------- Schedule 1 Outstanding Options and Warrants
Private Warrants Issued Vested Expiration -------- -------- ---------- Roth Capital Partners LLP 4.025 103,896 9/8/2003 9/8/2003 9/7/2006 Omicron Master Trust 4.025 285,714 9/8/2003 9/8/2003 9/7/2006 SF Capital Partners, Ltd. 4.025 57,143 9/8/2003 9/8/2003 9/7/2006 Bristol Investment Fund, Ltd. 4.025 34,286 9/8/2003 9/8/2003 9/7/2006 Ascend Offshore Fund, Ltd. 4.025 54,629 9/8/2003 9/8/2003 9/7/2006 Ascend Partners LP 4.025 6,651 9/8/2003 9/8/2003 9/7/2006 Ascend Partners Sapient LP 4.025 18,720 9/8/2003 9/8/2003 9/7/2006 - Omicron Master Trust 1.52 18,750 2/9/2004 2/9/2004 9/7/2006 SF Capital Partners, Ltd. 1.52 3,750 2/9/2004 2/9/2004 9/7/2006 Bristol Investment Fund, Ltd. 1.52 2,250 2/9/2004 2/9/2004 9/7/2006 Ascend Offshore Fund, Ltd. 1.52 3,585 2/9/2004 2/9/2004 9/7/2006 Ascend Partners LP 1.52 437 2/9/2004 2/9/2004 9/7/2006 Ascend Partners Sapient LP 1.52 1,229 2/9/2004 2/9/2004 9/7/2006 ------- Unexercised Warrants 591,040 =======
Option: Employee stock options as of February 21, 2006: 1,289,560 shares EX-99.1 7 v036479_ex99-1.txt [The Singing Machine Company Logo] Investor Contact: Company Contact: Neil Berkman Y.P. Chan Berkman Associates Interim CEO (310) 826 - 5051 (954) 596 - 1000 info@BerkmanAssociates.com www.SingingMachine.com FOR IMMEDIATE RELEASE The Singing Machine Company Announces $3 Million Equity Investment By A Key Supplier Coconut Creek, FL, February 27, 2006 -- The Singing Machine Company (AMEX: SMD) announced today that koncepts International Ltd. a Hong Kong subsidiary of Starlight International Holdings Ltd. (Hong Kong Stock Exchange:485), has agreed to acquire approximately 12.9 million newly issued, unregistered shares of the Company's common stock (representing approximately 56% of the total number of shares issued and outstanding following the closing of the proposed transaction) for a total of $3 million, or $0.233 per share. In addition, the investor would receive warrants to acquire up to an additional 5.0 million shares over a four-year period at prices ranging from $0.233 to $0.350 per share. This privately negotiated transaction is subject to the successful restructuring by The Singing Machine of the $4 million subordinated debenture which came due on February 20, 2006, as well as to the approval of the American Stock Exchange and the shareholders of Starlight International Holdings Ltd as per the requirement of Hong Kong Stock Exchange. The Company hopes to close this transaction within the next 60 days. As previously announced, The Singing Machine is in discussions with the holders of the subordinated debentures, and will make a public announcement as soon as new information is available. About Starlight International Holdings Ltd. Starlight International Holdings Ltd. is an investment holding company listed on the Hong Kong Stock Exchange whose subsidiaries are principally engaged in the design, manufacture and sale of a wide range of electronic products, securities trading and property development. It is currently one of the key suppliers of The Singing Machine Company. About The Singing Machine Incorporated in 1982, The Singing Machine Company develops and distributes a full line of consumer-oriented karaoke machines and music as well as other products under The Singing Machine(TM), Motown(TM), MTV(TM), Nickelodeon(TM), Hi-5(TM) and other brand names. The first to provide karaoke systems for home entertainment in the United States, The Singing Machine sells its products in North America, Europe and Asia. Forward-Looking Statements This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about the Company's business based, in part, on assumptions made by management and include, but are not limited to statements about our financial statements for the fiscal year ended March 31, 2006. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including the risks that our vendors in China may not ship our products on the scheduled basis and that we will have sufficient cash flow to finance our working capital needs in the second and third quarter of this fiscal year. In addition, you should review our risk factors in our SEC filings which are incorporated herein by reference. Such forward-looking statements speak only as of the date on which they are made and the company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this release. * * * * * THE SINGING MACHINE COMPANY, INC. 6601 Lyons Road o Building A-7 o Coconut Creek, Florida 33073 (954) 596-1000 o Fax (954) 596-2000 -----END PRIVACY-ENHANCED MESSAGE-----