-----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, NBh1OnAhtWY3EiSwvTJJMTk0FCbX975i3mGx0EbmGilhqlB0Zjpv26rYL4ZmEUJ0 UCjKgg0CA0OIBV5wmoVv8g== 0001116502-01-500685.txt : 20010702 0001116502-01-500685.hdr.sgml : 20010702 ACCESSION NUMBER: 0001116502-01-500685 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SINGING MACHINE CO INC CENTRAL INDEX KEY: 0000923601 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 953795478 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-24968 FILM NUMBER: 1671785 BUSINESS ADDRESS: STREET 1: 6601 LYONS ROAD STREET 2: BLDG A-7 CITY: COCONUT CREEK STATE: FL ZIP: 33073 BUSINESS PHONE: 9545961000 MAIL ADDRESS: STREET 1: 6601 LYONS ROAD BLDG CITY: COCONUT CREEK STATE: FL ZIP: 33073 10KSB 1 singingmachine10ksb.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2001 COMMISSION FILE NO.: 0-24968 THE SINGING MACHINE COMPANY, INC. --------------------------------- (Name of Small Business Issuer in its Charter) Delaware 95-3795478 -------------- --------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 6601 Lyons Road, Building A-7, Coconut Creek, FL 33073 ----------------------------------------------------------- (Address of principal executive offices, including zip code) (954) 596-1000 -------------------------- (Issuer's telephone number) ------------------------------------------------------ (Former Name, Former Address and Formal Fiscal Year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Common Stock Securities registered pursuant to 12(g) of the Act: None Common Stock Purchase Warrants Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Issuer was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. ( ) State issuer's revenues for its most recent fiscal year: $34,306,839 The aggregate market value of the Registrant's voting stock held by non-affiliates, based upon the closing sales price for the common stock of $5.06 per share as reported on the American Stock Exchange on June 19, 2001, was approximately $14,981,515.00. The shares of Common Stock held by each officer and director and by each person known to the Company to own 5% or more of the outstanding Common Stock have been excluded and such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS: Indicate whether the Issuer has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 after the distribution of securities under a plan confirmed by a court. Yes x No ----- ----- APPLICABLE ONLY TO CORPORATE REGISTRANTS: State the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. 4,359,120 shares of Common Stock were outstanding as of March 31, 2001. THE SINGING MACHINE COMPANY, INC. TABLE OF CONTENTS Page ----- PART I - ------ Item 1. Business ................................................ 3 Item 2. Properties.............................................. 10 Item 3. Legal Proceedings ...................................... 10 Item 4. Submission of Matters to a Vote of Security Holders ............................... 10 PART II - ------- Item 5. Market for Company's Common Equity And Related Stockholder Matters ........................ 10 Item 6. Management's Discussion and Analysis or Plan of Operations ......................... 13 Item 7. Financial Statements and Supplementary Date............. 18 Item 8. Change in and Disagreements with Accountants on Accounting and Financial Disclosure ............................... 18 PART III - -------- Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act ...................... 19 Item 10. Executive Compensation ................................. 21 Item 11. Security Ownership of Certain Beneficial Owners and Management ....................... 22 Item 12. Certain Relationships and Related Transactions ......... 24 Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K ...................... 26 SIGNATURES -2- PART I - FORWARD LOOKING STATEMENTS Certain statements contained in this Annual Report on Form 10-KSB, including without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," "intends," and words of similar import, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Position and Results of Operations - Factors That May Affect Future Results and Market Price of Stock." Readers are cautioned not to place undue reliance on these forward- looking statements, which reflect management's opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revisions to these forward- looking statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. ITEM 1. BUSINESS -------- The Singing Machine Company, Inc. (the "Company" or "we") is engaged in the distribution and marketing of electronic karaoke audio equipment which plays backing tracks (music without lyrics) of popular songs and records the vocal accompaniment of professional and amateur singers to those backing tracks. We contract for the manufacture of all electronic equipment products with manufacturers located in the Far East. We also produce and market karaoke music, including CD plus graphics, and audiocassette tapes containing music and lyrics of popular songs for use with karaoke recording equipment. One track of those tapes offers complete music and vocals for practice and the other track is instrumental only for performance by the participant. Virtually all audiocassette music sold by us is accompanied by printed lyrics, and our karaoke CD's with graphics contain lyrics, which appear on the video screen. We contract for the reproduction of audiocassette music, which is produced by us or by an independent producer. We were incorporated in California in 1982. We originally sold our products exclusively to professional and semi-professional singers. In 1988, we began marketing karaoke equipment for home use. We believe we were the first to offer karaoke electronic recording equipment and music for home use in the United States. -3- In May 1994, we merged into a wholly owned subsidiary incorporated in Delaware with the same name. As a result of that merger, the Delaware corporation became the successor to the business and operations of the California corporation and retained the name The Singing Machine Company, Inc. PRODUCT LINES We currently have a product line of 12 different models of recording and playback units incorporating such features as a CD graphics player, a graphics equalizer and high-output stereo amplifier and market these products under our trademark, The Singing Machine(TM). We also license our trademark, on a non- exclusive basis, to others for sale around the world. We believe that we are the only major company in the karaoke industry in the United States, which sells both hardware and music. The 12 different models of electronic recording and playback equipment sell at retail prices ranging from $30 for basic units to $400 for semi-professional units with CD plus graphics player sound enhancement, graphic equalizers, echo tape record/playback features, and multiple inputs and outputs for connection to compact disc players and video cassette recorders. We currently offer our audio software in two formats - multiplex cassettes and CD plus graphics with retail prices ranging from $6.95 to $19.95. We purchase recordings from independent producers and currently have a song library of over 2,700 songs. Our backing track product line covers the entire range of musical tastes including popular hits, golden oldies, country, standards, rock and roll, and rap. We even have backing tracks for opera and certain foreign language recordings. SUBSIDIARIES In July 1994, we formed a wholly owned subsidiary in Hong Kong, now known as International SMC (HK) Ltd., to coordinate our production and finance in the Far East. International assists with the coordination of product shipments from China and other foreign factories as well as the negotiation of foreign letters of credit. THE MARKET Based upon Japanese industry estimates, the karaoke industry exceeds sales of $10 billion in the Far East. The current North American market for karaoke products is estimated at less than $250 million. Therefore, we believe that there is tremendous growth potential not only in the North American market, but also in South America and Europe as well. Although there are other electronic component competitors for our hardware products, and other audio software competitors, we -4- believe we are the only major company specializing in karaoke category that offers complete lines of hardware including CD+graphics machines as well as an extensive software library. SALES, MARKETING AND DISTRIBUTION MARKETING We rely on management's ability to determine the existence and extent of available markets for our products. Our management has considerable marketing and sales background and devotes a significant portion of its time to marketing-related activities. We achieve both domestic and direct sales by marketing our hardware and software products primarily through our own sales force and approximately 11 independent sales representatives. Our representatives are located in various states and are paid a commission based upon sales in their respective territories. The sales representative agreements are generally one (1) year agreements, which automatically renew on an annual basis, unless terminated by either party on 30 days notice. We work closely with our major customers to determine marketing and advertising plans. We also market our products at various national and international trade shows each year. We regularly attend the following trade shows and conventions: the Consumer Electronics Show each January in Las Vegas; the Hong Kong Electronics Show each October in Hong Kong; and the American Toy Fair each February in New York. Our electronic recording products and music are marketed under The Singing Machine(TM) trademark throughout the United States, primarily through department stores, lifestyle merchants, mass merchandisers, direct mail catalogs and showrooms, music and record stores, national chains, specialty stores, and warehouse clubs. Our karaoke machines and karaoke music is currently sold in such stores as Target, J.C. Penney, Fingerhut, Best Buy, and Sears. SALES As a percentage of total revenues, our net sales in the aggregate to our six and five largest customers during the fiscal years ended March 31, 2001 and 2000, respectively, were approximately 82% and 70% respectively. Two major retailers, that individually purchased greater than 10% of the company's total revenues, accounted for 32% and 23% in fiscal 2001 and 30% and 18% in fiscal 2000. -5- Although we have long-established relationships with all of our customers, we do not have long-term contractual arrangements with any of them. A decrease in business from any of our major customers could have a material adverse effect on our results of operations and financial condition. Returns of electronic hardware and music products by our customers are generally not permitted except in approved situations involving quality defects, damaged goods, or goods shipped in error. Our policy is to give credit to our customers for the returns in conjunction with the receipt of new replacement purchase orders. Our credit policies are tailored to our customer base. We have not suffered significant credit losses to date. DISTRIBUTION We distribute hardware products to retailers and wholesale distributors through two methods: shipment of products from inventory (domestic sales), and shipments directly from our Hong Kong subsidiary or manufacturers in the Far East of products sold by our sales force (direct sales). Domestic sales, which account for substantially all of our music sales, are made to customers located throughout the United States from inventories maintained at our warehouse facility in Florida or directly from the music producers. Domestic Sales. Our strategy of selling products from a domestic warehouse enables us to provide timely delivery and serve as a "domestic supplier of imported goods." We purchase electronic recording products overseas for our own account and warehouse the products in leased facilities in Florida and California. We are responsible for costs of shipping, insurance, customs clearance, duties, storage and distribution related to such warehouse products and, therefore, warehouse sales command higher sales prices than direct sales. We generally sell from our own inventory in less than container-sized lots. Direct Sales. We formed International SMC (HK) Ltd. in 1994 to facilitate sales outside of the United States and to facilitate the purchase of equipment from vendors in China. We ship some hardware products sold by us directly to customers from the Far East through International SMC (HK). Sales made through International SMC (HK) are completed by either delivering products to the customers' common carriers at the shipping point or by shipping the products to the customers' distribution centers, warehouses, or stores. Direct sales are made in larger quantities (generally container sized lots) to customers in Italy, England, Canada, South America and the United States, who pay International SMC (HK) pursuant to their own international, irrevocable, transferable letters of credit or on open account. -6- MANUFACTURING AND PRODUCTION The electronic recording devices sold by us are manufactured and assembled by third parties pursuant to design specifications provided by us. Three factories in the People's Republic of China assemble our electronic recording devices. The finished products are packaged and labeled under our trademark, The Singing Machine(TM). Our products contain electronic components manufactured by other companies such as Panasonic, Sanyo, Toshiba, and Sony. The electronic components are installed in cabinets manufactured by three manufacturers. International SMC (HK) owns certain tools and dies used in the production of certain models of the electronic audio equipment sold by us. We presently purchase and import virtually all of our electronic recording products from three suppliers located in the People's Republic of China. In fiscal 2001 and 2000, suppliers in the People's Republic of China accounted for in excess of 94% and 88%, respectively, of the total product purchases, including virtually all of our hardware purchases. Our primary suppliers of electronic recording products are located in the Shenzen province of the People's Republic of China. While we purchase our products from a small number of large suppliers with whom we maintain a close alliance, all of the electronic components and raw materials used by us are available from several sources of supply, and we do not anticipate that the loss of any single supplier would have a material long-term adverse effect on our business, operations, or financial condition. To ensure our high standards of product quality and that suppliers meet shipping schedules, we utilize Hong Kong based employees of International SMC (HK) Ltd. as our representatives. These employees include product inspectors who are knowledgeable about product specifications and work closely with the suppliers to verify that such specifications are met. Additionally, key personnel frequently visit suppliers for quality assurance and to support good working relationships. All of the electronic equipment sold by us is warranted against manufacturing defects for a period of ninety (90) days for labor and parts. All music sold is similarly warranted for a period of 30 days. During the fiscal years ended March 31, 2001 and 2000, warranty claims have not been material to our results of operations. LICENSE AGREEMENT WITH MTV In November 2000, we entered into a multi-year domestic merchandise license agreement with MTV to create the first line of -7- MTV karaoke machine and compact disks with graphics (CD+G) featuring music for MTV's core audience. Under the licensing agreement, we will produce two MTV-branded products: (1) a large format karaoke machine with a built in, fully functional television that enables users to view song lyrics and (2) a small karaoke system that connects to a television. We will also produce exclusive CD+G's featuring music catering to MTV's core audience that will be distributed with the MTV branded karaoke machines. We plan on distributing the MTV-licensed product through our established distribution channels, including Best Buy, Costco, Toys R Us, JC Penny, Sears, Musicland and Sam's Club. The high- profile distribution network also may be expanded to include online-only retailers. We would like to have these products in the stores by the fall of 2001. However, there can be no assurances that we will be able to meet this deadline. COMPETITION Our business is highly competitive. In addition, we compete with all other existing forms of entertainment including, but not limited to, motion pictures, video arcade games, home video games, theme parks, nightclubs, television and prerecorded tapes, CD's, and videocassettes. Our financial position depends, among other things, on our ability to keep pace with such changes and developments and to respond to the requirements of our customers. Many of our competitors have significantly greater financial, marketing, and operating resources and broader product lines than we do. Our major electronic component competitors include Grand Prix, Casio, and Memorex. Our major music competitors are Pocket Songs and Sound Choice. We believe that competition in our markets is based primarily on price, product performance, reputation, delivery times, and customer support. We believe that, due to our proprietary know-how, we have the ability to develop and produce hardware and software on a cost-effective basis. TRADEMARKS We have registered various Singing Machine trademarks with the United States Patent & Trademark Office and also have common law rights in the Singing Machine trademarks. We have also registered the Singing Machine trademark in the United Kingdom, Germany, the Benelux countries, Switzerland and the United Kingdom. COPYRIGHTS AND LICENSES We hold federal and international copyrights to substantially all of the music productions comprising our song -8- library. However, since each of those productions is a re-recording of an original work by others, we are subject to both contractual and statutory licensing agreements with the publishers who own or control the copyrights of the underlying musical compositions and are obligated to pay royalties to the holders of such copyrights for the original music and lyrics of all of the songs in our library that have not passed into the public domain. We are currently a party to more than 2,700 different written copyright license agreements. The Federal Copyright Act creates a compulsory statutory license for all non-dramatic musical works, which have been distributed to the public in the United States. Under the Federal Copyright Act, with respect to each work included in a music product distributed by us under a compulsory license, we are required to pay a royalty of the greater of $0.075 per song with respect to each item of music produced and distributed by us (the "Statutory Rate"). Royalties due under compulsory licenses are payable monthly. We currently have compulsory statutory licenses for approximately 30 songs in our song library. The majority of the songs in our song library are subject to written copyright license agreements. Our written licensing agreements for music typically provide for royalties at the Statutory Rate although some provide for lower royalty rates. Written licenses typically provide for quarterly royalty payments. We also have written license agreements for substantially all of the printed lyrics, which are distributed, with our music products, which licenses also typically provide for quarterly payments of royalties at the Statutory Rate. GOVERNMENT REGULATION In 2000, the People's Republic of China gained "Most Favored Nation" treatment for entry of goods into the United States for an additional year. In the context of United States tariff legislation, MFN treatment means that products are subject to favorable duty rates upon entry into the United States. IF MFN status for China is restricted or revoked in the future, our cost of goods purchased from Chinese vendors is likely to increase. A resultant change in suppliers would likely have an adverse effect on our operations and, possibly, earnings, although management believes such adversity would be short-term as a result of its ability to find alternative suppliers. We continue to closely monitor the situation and have determined that the production capabilities in countries outside China, which have MFN status and, therefore, have favorable duty rates, would meet our production needs. It must also be noted that at the present time, China is applying for membership into the World Trade Organization ("WTO"). -9- This application is meeting with great favor from many of the WTO's other members. If this membership is approved, China will no longer require MFN status for US trade. The decision on membership will be submitted to the Ministerial Conference in Doha, Qatar in November of 2001. EMPLOYEES As of March 31, 2001, the Company employed 22 persons, all of whom are full-time employees, including two executive officers. Five of our employees are located at our subsidiary International (SMC) HK Ltd. The remaining seventeen employees are based in the United States, including the two executive positions, six are engaged in warehousing and technical support, and nine in accounting, marketing and administrative functions. ITEM 2. PROPERTIES ---------- Our corporate headquarters are located in Coconut Creek, Florida in an 11,200 square foot office and warehouse facility. Our lease expires on April 30, 2004. In December 2000, we established a corporate office in Hong Kong, consisting of 2,000 square feet. We share this office space with Toy Concepts International. Our lease expires on October 31, 2002. We also have three warehouse facilities, two in California and one warehouse in Florida. We believe that the facilities are well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance. We also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the term of the existing lease. ITEM 3. LEGAL PROCEEDINGS ----------------- We filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, case number 97-22199-BKC-RBR, on April 11, 1997. On March 17, 1998, the U.S. Bankruptcy Court confirmed our First Amended Plan of Reorganization. As of June 10, 1998, our plan has been fully implemented. We are not a party to any material legal proceeding, nor to the knowledge of management, are any legal proceedings threatened against us. From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- -10- No matters were submitted to a vote of security holders through a solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED ---------------------------------------------- STOCKHOLDER MATTERS ------------------- Our common stock currently trades on the American Stock Exchange under the symbol "SMD." We began trading on the AMEX on March 8, 2001. From January 26, 1996 through March 7, 2001, we traded on the National Association of Securities Dealers, Inc.'s OTC Bulletin Board under the symbol "SING". Set forth below is the range of high and low bid information for our common stock as traded on the OTC Bulletin Board for the two most recent fiscal years, as reported by the National Quotation Bureau, Inc. This information represents prices between dealers and does not reflect retail mark-up or markdown or commissions, and may not necessarily represent actual market transactions. Fiscal Period High Bid Low Bid 2001: - ----- First Quarter (April 1-June 30, 2000) $4.25 $2.47 Second Quarter (July 1-September 30, 2000) 4.06 2.19 Third Quarter (October 1-December 31, 2000) 6.56 3.44 Fourth Quarter (January 1-March 8, 2001) 5.63 3.81 Fourth Quarter (March 8-March 31, 2001) 5.45* 4.50* 2000: - ----- First Quarter (April 1-June 30, 1999) $2.59 $1.31 Second Quarter (July 1-September 30, 1999) 2.09 1.59 Third Quarter (October 1-December 31, 1999) 2.13 1.63 Fourth Quarter (January 1-March 31, 2000) 5.38 1.59 - --------------------- * The Company began trading on the American Stock Exchange on March 8, 2001 and the following prices represent the high and low sales prices on the AMEX during the period noted above. On June 19, 2001, the closing bid price of our common stock as reported on the American Stock Exchange was $5.06 per share. As of June 19, 2001, there were approximately 311 record holders of our outstanding common stock and approximately 748 beneficial owners of our common stock. COMMON STOCK - ------------ -11- The Company has never declared or paid cash dividends on its common stock and the Company's Board of Directors intends to continue its policy for the foreseeable future. Furthermore, the Company's credit facility with LaSalle Business Credit, Inc. restricts the Company from paying any dividends to its shareholders, unless it obtains prior written consent from LaSalle. Future dividend policy will depend upon the Company's earnings, financial condition, contractual restrictions and other factors considered relevant by the Company's Board of Directors and will be subject to limitations imposed under Delaware law. During the fiscal year ending March 31, 2000, the Company paid a dividend of $105,078 on its preferred stock. COMMON STOCK PUBLIC WARRANTS - ---------------------------- The Company's Common Stock Public Warrants ("Public Warrants") are currently traded on the OTC Bulletin Board under the symbol "SINGW". Set forth below is the range of high and low bid information for the Company's Public Warrants for the two most recent fiscal years. This information represents prices between dealers and does not reflect retail mark-up or markdown or commissions, and may not necessarily represent actual market transactions. 2000: - ----- First Quarter........................... $ .125 $ .125 Second Quarter.......................... .0625 .0625 Third Quarter........................... .06 .06 Fourth Quarter.......................... .5625 .4375 2001: - ----- First Quarter........................... $ .468 $ .062 Second Quarter.......................... .14 .04 Third Quarter........................... .10 .031 Fourth Quarter.......................... .156 .011 The closing bid price for the Company's Public Warrant on the OTC Bulletin Board on June 19, 2001 was $.015 per share. The Company currently has 1,656,000 Public Warrants issued and outstanding. After the Company's reorganization, and after giving effect to the post-bankruptcy common stock reverse split (April 1, 1998), ten (10) Public Warrants are required to purchase one (1) share of the Company's Common Stock. Ten (10) Public Warrants entitle the holder thereof to purchase at any time on or before November 10, 2001 (the "Expiration Date") one (1) share of the Company's common stock at a price of $36.00 per share. After the expiration date, warrant holders have no further rights. Sale of Unregistered Securities -12- On March 13, 2001, we issued 20,000 options to Robert Weinberg and 10,000 options to John DeNovi. The exercise price of these options is $4.90 per share and the expiration date is March 13, 2006. Half of Mr. Weinberg's options vest on December 1, 2001 and the remainder vest on December 1, 2002. Half of Mr. DeNovi's options vest on March 13, 2002 and the remainder vest on March 13, 2003. We issued these options to Mr. Weinberg and Mr. DeNovi in reliance upon Section 4(2) of the Securities Act, because our employees were knowledgeable, sophisticated and had access to comprehensive information about us. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- The following discussions and analysis should be read in conjunction with, and is qualified in its entirety by, the Financial Statements included elsewhere herein. Historical results are not necessarily indicative of trends in operating results for any future period. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of the Company's total revenues: YEAR ENDED MARCH 31, ------------------------------------ 2001 2000 1999 ---------- ---------- ---------- Total Revenues........................ 100.0% 100.0% 100.0% Cost of Sales......................... 65.5 72.1 73.6 Selling, general and Administrative expenses............. 19.8 19.9 16.2 Operating income (loss)............... 14.7 8.0 10.2 Other expenses, net................... 2.5 5.0 2.3 Extraordinary item.................... -- -- -- Income (loss) before taxes............ 12.2 3.0 7.9 Provision (benefit) for income taxes.. .1 (0.8) (1.8) Income (loss)......................... 12.0 3.8 9.7 -13- THE YEAR ENDED MARCH 31, 2001 AS COMPARED TO THE YEAR ENDED MARCH 31, 2000 REVENUES Total revenues increased 80.3% in the fiscal year ended March 31, 2001. The increase in revenue from $19,032,320 to $34,306,839 in 2001 can be attributed to the addition of a major customer and increased awareness of karaoke in the retail community. Another factor resulting in increased revenue is the addition of a major retail customer to our customer base. The addition of this customer alone added 20% to our revenues for this fiscal year. GROSS PROFIT The gross profit for 2001 was 34.5% as compared to 27.9% in fiscal year 2000. The increased gross margin is due to a favorable decrease in the cost of products, both hardware and music. These decreases can be attributed to an increased volume of purchasing. Another factor of increased gross margin is the increased percentage of music sales as compared to hardware sales. Overall, the gross profit on music sales is higher than that of hardware. INCOME FROM OPERATIONS The increase in income from operations from $1,525,668 to $5,027,593 is due primarily to increased sales. OPERATING EXPENSES Operating expenses increased by 80.1% in fiscal 2001 as compared to fiscal 2000. A good portion of this increase in operating expenses was due to the significant increase in sales and its impact on variable selling expenses such as freight expense, sales commissions, cooperative advertising, and travel expenses, among others. Another factor of this change is the addition of personnel, increasing compensation expense. The Company grew from 12 employees at March 31, 2000 to 22 employees at March 31, 2001. Five of these employees are based in our new International SMC (HK) Ltd. office. We have also added a warehouse and repair facility, which at March 2001 employed 2 people. The remaining employees were added to the infrastructure of the home office. The accrual for management bonus also attributed to the increase in operating expenses. This expense is due largely to increased sales, but also to fairly stable expenses for the fiscal year. -14- DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses increased from $116,369 in fiscal 2000 to $301,064 in fiscal 2001. The addition of new product molds in Hong Kong and the opening of a new Hong Kong office contributed to this increase. Also contributing to this increase was the expansion of our home office in Coconut Creek into another unit next to our existing facility. OTHER EXPENSES Other expenses decreased from $947,982 in fiscal year 2000 to $839,572 in fiscal year 2001. This is primarily due to the expense in fiscal 2000 of non-cash based guarantee fees. Loss on accounts receivable due to factoring was 0.25% of total revenues in fiscal 2001 as compared to 2.3% of total revenues in fiscal 2000. This decrease is due to the favorable factoring rates negotiated for the year. NET INCOME Net income after taxes (tax benefit) for the fiscal year ended March 31, 2001 and 2000 was $4,164,701 and $737,985, respectively. The increase in sales and stability of general expenses attributed to the increased bottom line. The tax expense for fiscal 2001 is due to alternative minimum tax. The Company has remaining net operating loss carry forwards to cover US taxes that may have been due on the profitability of the Company. THE YEAR ENDED MARCH 31, 2000 AS COMPARED TO THE YEAR ENDED MARCH 31, 1999 REVENUES Total revenues increased to approximately $19.0 million for the fiscal year ending March 31, 2000, compared to approximately $9.5 million reported for fiscal 1999. The increase was primarily due to increased sales and distribution to both traditional and Internet based accounts, expansion into the UK market, and increased sales with existing accounts through marketing of additional machines and music. GROSS PROFIT Gross profit increased approximately $2.8 million or 111% to approximately $5.3 million in fiscal year ending March 31, 2000, or 27.9% of net sales from approximately $2.5 million or 26.4% of net -15- sales in fiscal year 1999. The increase in gross profit was primarily due to the increased sales of the Company's popular CDG players and sales to new accounts. INCOME FROM OPERATIONS Income from operations for fiscal year 2000 was approximately $1,525,668 versus $973,000 for fiscal year 1999 or approximately a 57% increase. During fiscal year 2000, the Company incurred non- cash charges to operations of approximately $852,000 for stock based compensation. These charges are the result of computations of the fair market value of common stock options and common stock warrants granted during fiscal year 2000. Had non-cash stock based compensation not been recognized in fiscal year 2000, the increase in income from operations would have been approximately 144%. OPERATING EXPENSES Operating, selling, general and administrative expenses increased approximately $2.2 million or 145% to approximately $3.8 million or 19.9% of net sales during the fiscal year ending March 31, 2000, from approximately $1.5 million or 16.2% of net sales for fiscal year 1999. The increase was primarily due to the recognition of non-cash expenses relating to common stock, stock options and warrants issued by the Company at the fair market value of those options and warrants as of March 31, 2000; a significant increase in sales commissions, warranty expenses, advertising, and travel expenses (due to the 100% increase in sales); and new product development costs. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense decreased approximately $28,000 or 19.3% to $116,000 during the fiscal year ending March 31, 2000. The decrease was primarily due to the Company's music library being fully amortized during the fiscal year ending March 31, 1999. OTHER EXPENSES Net interest and factoring expenses increased approximately $303,000 to $525,000 during fiscal year 2000 compared to approximately $222,000 during fiscal year 1999. During the fiscal year ending March 31, 2000, the Company incurred an expense in connection with acquiring a short-term letter of credit facility, and increased factoring expenses due to the increase in sales from our domestic warehouse. Loss on accounts receivable due to factoring was 2.3% of total revenues for both of the fiscal years ending March 31, 2000 and March 31, 1999. Although more accounts receivable were factored -16- during fiscal year 2000, the Company was able to negotiate lower factoring rates due to an increase in volume. NET INCOME Although net income for fiscal 2000 was approximately $738,000 versus approximately $924,000 for fiscal year 1999. Approximately $852,000 charged to earnings during fiscal year 2000 was a result of the estimate of the fair market value of common stock options and common stock warrants granted, which has no effect upon Company operations or cash flow and with the exception of deferred stock based guarantee fees to be recognized in future periods, is a non- recurring item. LIQUIDITY AND CAPITAL RESOURCES Liquidity - --------- At March 31, 2001, the Company had current assets of $9,016,324, compared to $3,788,929 at March 31, 2000; total assets of $10,509,682 as compared to $4,346,901 at March 31, 2000; current liabilities of $1,591,021 as compared to $440,615 at March 31, 2000; and a current net worth of $8,918,661 as compared to $3,906,286 at March 31, 2000. The increase in current assets, total assets, and net worth can be attributed to the large increase in sales for the fiscal year. The increase in current liabilities is due to a significant accrual for management bonuses and the increased use of vendor credit facilities for the operations of THE Company's business. You will note that the large majority of the increase in total assets is in current assets. Current assets consist primarily of cash, accounts receivable, and inventory. Capital Resources - ----------------- The Company has obtained significant financing for continuing operations and growth. In April 2001, the Company entered into a credit facility with LaSalle Business Credit, Inc., which replaced the Company's pre-existing financing arrangements with Main Factors, Inc. and EPK Financial. The Company also has a credit facility with Belgian Bank, which is not currently in use and the terms of which are being renegotiated. LaSalle Bank The Company entered into a new credit facility with LaSalle Business Credit, Inc. (the "Lender"or "LaSalle") in April 2001. Under this credit facility, the Lender will advance up to 75% of the Company's eligible accounts receivable, plus up to 40% of eligible inventory, plus up to 40% of commercial letters of credit -17- issued/guaranteed by the Lender minus reserves as set out in the loan documents. The agreement is subject to loan limits from zero to $10,000,000 depending on the time of the year, as stipulated in the loan documents. The loan of funds under this agreement bears interest at the lender's prime rate plus .5%. There is also and annual fee of 1% of the loan maximum, or $100,000. The term of the agreement runs through April 26, 2004 and is automatically renewable for one-year terms thereafter. The facility contains a covenant on minimum tangible net worth that the Company must maintain. The loan contains a 90 days repayment on demand in the event of default, and allows for a clean up period every 12 months where the loan amount must go to zero for a period of time. The loan is secured by a first lien on all present and future assets of the Company, except certain tooling located in China. The Company has no present commitment that is likely to result in its liquidity increasing or decreasing in any material way. In addition, the Company knows of no trend, additional demand, event or uncertainty that will result in, or that is reasonably likely to result in, the Company's liquidity increasing or decreasing in any material way. The Company has no material commitments for capital expenditures. The Company knows of no material trends, favorable or unfavorable, in the Company's capital resources. The Company has no additional outstanding credit lines or credit commitments in place and has no additional current need for financial credit. In next few months, the Company may obtain additional credit facilities for its Hong Kong subsidiary, but this will not have a significant impact on its liquidity. Belgian Bank Effective February 14, 2000, the Company, through its Hong Kong subsidiary, obtained a credit facility of $500,000 (US) from Belgian Bank, Hong Kong, a subsidiary of Generale Bank, Belgium. This facility is a revolving line based upon drawing down a maximum of 15% of the value of export letters of credit held by Belgian Bank. There is no maturity date except that Belgian Bank reserves the right to revise the terms and conditions at the Bank's discretion. The cost of this credit facility is the U.S. Dollar prime rate plus 1.25%. Repayment of principal plus interest shall be made upon negotiation of the export letters of credit, but not later than ninety (90) days after the advance. This credit facility is not currently in use and the terms are being renegotiated. -18- Credit Facilities that were Terminated in April 2001 Main Factors The Company was a party to a factoring agreement, dated June 16, 1999, and amended December, 1999 and April, 2000, with Main Factors, Inc. (Main Factors). The Company terminated this arrangement with Main Factors in April 2001, when it entered into a credit facility with LaSalle. Under the factoring agreement, Main Factors purchased certain selected accounts receivable from the Company and advanced 75% - 85% of the face value of those receivables to the Company. The accounts receivable were purchased by Main Factors without recourse and Main Factors therefore performed an intensive credit review prior to the purchase of the receivables. The Company was charged a fixed percentage fee of the invoice, which could decrease on volume. The purchase of receivables of the Company by Main Factors was absolute and was a true sale of receivables. Main Factors has placed no maximum limit on the amount of the Company's receivables it would purchase. John Klecha, the Company's Chief Operating Officer and Chief Financial Officer, personally guaranteed this factoring agreement. EPK Financial Corporation The Company entered into an agreement with EPK Financial Corporation (EPK) whereby EPK would open letters of credit with the Company's factories to import inventory for distribution to the Company's customers. The Company terminated this arrangement with EPK in April 2001, when it entered into a credit facility with LaSalle. During fiscal 2001, the Company did not use its credit facility with EPK. SEASONAL FACTORS As is typical in the karaoke industry, the Company's operations have been seasonal, with the highest net sales occurring in the second and third fiscal quarters (reflecting increased orders for equipment and music merchandise during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year. The Company's results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis. INFLATION -19- Inflation has not had a significant impact on the Company's operations. The Company has historically passed any price increases on to its customers since prices charged by the Company are generally not fixed by long-term contracts. Factors That May Affect Future Results and Market Price of Stock Our inability to compete and maintain our niche in the entertainment industry could hurt our business The business in which we are engaged is highly competitive. In addition, we must compete with all the other existing forms of entertainment including, but not limited to, motion pictures, video arcade games, home video games, theme parks, nightclubs, television and prerecorded tapes, CD's and video cassettes. Competition in the karaoke industry is based primarily on price, product performance, reputation, delivery times, and customer support. We believe that our new product introductions and enhancements of existing products are material factors for our continuing growth and profitability. Many of our competitors are substantially larger and have significantly greater financial, marketing and operating resources than we have. No assurance can be given that we will continue to be successful in introducing new products or further enhancing existing products. We rely on sales to key customers which subjects us to risk As a percentage of total revenues, our net sales to our five largest customers during the fiscal years ended March 31, 2001 and 2000, were approximately 77% and 70% respectively. Two major retailers, that individually purchased greater than 10% of the Company's total revenues accounted for 32% and 23% in fiscal 2001 and 30% and 18% in fiscal 2000. During fiscal year 2002, we further intend to broaden our base of customers. Although we have long-established relationships with many of our customers, we do not have long-term contractual arrangements with any of them. A decrease in business from any of our major customers could have a material adverse effect on our results of operations and financial condition. We have significant reliance on large retailers which are subject to changes in the economy We sell products to retailers, including department stores, lifestyle merchants, direct mail retailers which are catalogs and showrooms, national chains, specialty in stores, and warehouse clubs. Certain of such retailers have engaged in leveraged buyouts or transactions in which they incurred a significant amount of debt, and some are currently operating under the protection of bankruptcy laws. Despite the difficulties -20- experienced by retailers in recent years, we have not suffered significant credit losses to date. A deterioration in the financial condition of our major customers could have a material adverse effect on our future profitability. We are subject to the risks of doing business abroad We are dependent upon foreign companies for manufacture of all of our electronic products. Our arrangements with manufacturers are subject to the risks of doing business abroad, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, political instability, and other factors which could have an adverse impact on our business. We believe that the loss of any one or more of our suppliers would not have a long-term material adverse effect on us, because other manufacturers with whom we do business would be able to increase production to fulfill our requirements. However, the loss of certain of our suppliers, could, in the short-term, adversely affect our business until alternative supply arrangements were secured. During fiscal 2001 and 2001, suppliers in the People"s Republic of China accounted for in excess of 94% and 88%, respectively of our total product purchases, including virtually all of our hardware purchases. If Most Favored Nation status for China is restricted or revoked in the future, the costs of goods purchased from Chinese vendors is likely to increase. Management continues to closely monitor the situation and has determined that the production capabilities in countries outside China which have MFN status and, therefore, have favorable duty rates, would meet production needs. Such a change in suppliers may have a short-term adverse effect on operations and, possibly, earnings. We have significant future capital needs which are subject to the uncertainty of additional financing We may need to raise significant additional funds to fund our rapid sales growth and/or implement other business strategies. If adequate funds are not available on acceptable terms, or at all, we may be unable to sustain our rapid growth, which would have a material adverse effect on our business, results of operations, and financial condition. We are subject to seasonality which is affected by various economic conditions and changes resulting in fluctuations in quarterly results We have experienced, and will experience in the future, significant fluctuations in sales and operating results from quarter to quarter. This is due largely to the fact that a -21- significant portion of our business is derived from a limited number of relatively large customer orders, the timing of which cannot be predicted. Furthermore, as is typical in the karaoke industry, the quarters ended September 30 and December 31 includes increased revenues from sales made during the holiday season. Additional factors that can cause our sales and operating results to vary significantly from period to period include, among others, the mix of products, fluctuating market demand, price competition, new product introductions by competitors, fluctuations in foreign currency exchange rates, disruptions in delivery of components, political instability, general economic conditions, and the other considerations described in this section entitled "Risk Factors." Accordingly, period-to-period comparisons may not necessarily be meaningful and should not be relied on as indicative of future performance. Historically, the third quarter of our fiscal year, the three months ended December 31, have been the most profitable quarter, and the fourth quarter of our fiscal year, the three months ended March 31, have been the least profitable quarter. Our proprietary technology may not be sufficiently protected Our success depends on our proprietary technology. We rely on a combination of contractual rights, patents, trade secrets, know-how, trademarks, non-disclosure agreements and technical measures to establish and protect our rights. We cannot assure you that we can protect our rights to prevent third parties from using or copying our technology. We may be subject to claims from third parties for unauthorized use of their proprietary technology We believe that we independently developed our technology and that it does not infringe on the proprietary rights or trade secrets of others. However, we cannot assure you that we have not infringed on the technologies of third parties or those third parties will not make infringement violation claims against us. Any infringement claims may have a negative effect on our ability to manufacture our products. -22- Consumer discretionary spending may affect karaoke purchases and is affected by various economic conditions and changes Our business and financial performance may be damaged more than most companies by adverse financial conditions affecting our business or by a general weakening of the economy. Purchases of karaoke audio software and electronic recording equipment are considered discretionary for consumers. Our success will therefore be influenced by a number of economic factors affecting discretionary and consumer spending, such as employment levels, business, interest rates, and taxation rates, all of which are not under our control. Adverse economic changes affecting these factors may restrict consumer spending and thereby adversely affect our growth and profitability. We depend on third party suppliers, and if we cannot obtain supplies as needed, our operations will be severely damaged We rely on third party suppliers to produce the parts and materials we use to manufacture our products. If our suppliers are unable to provide us with the parts and supplies, we will be unable to produce our products. We cannot guarantee that we will be able to purchase the parts we need at reasonable prices or in a timely fashion. If we are unable to purchase the supplies and parts we need to manufacture our products, we will experience severe production problems, which may possibly result in the termination of our operations. Our business operations could be significantly disrupted if we lose members of our management team Our success depends to a significant degree upon the continued contributions of our executive officers, both individually and as a group. Although we have entered into employment contracts with Messrs. Steele and Klecha, the loss of the services of either of these individuals could prevent us from executing our business strategy. See "Management -Directors and Executive Officers" for a listing of our executive officers. Your investment may be diluted If additional funds are raised through the issuance of equity securities, your percentage ownership in our equity will be reduced. Also, you may experience additional dilution in net book value per share, and these equity securities may have rights, preferences, or privileges senior to those of yours. Our ability to manage growth could hurt our business -23- To manage our growth, we must implement systems, and train and manage our employees. We may not be able to implement these action items in a timely manner, or at all. Our inability to manage growth effectively could have a material adverse effect on our business operating results, and financial conditions. There can be no assurance that we will achieve our planned expansion goals, manage our growth effectively, or operate profitably. Risks Associated with our Capital Structure Future sales of our common stock held by current stockholders may depress our stock price As of June 1 2001, there were 4,445,320 shares of our common stock outstanding, of which approximately 1,198,883 were restricted securities as that term is defined by Rule 144 under the Securities Act of 1933. The restricted securities will be eligible for public sale only if registered under the Securities Act or sold in accordance with Rule 144. The market price of our common stock could drop due to the sale of large number of shares of our common stock, such as the shares sold under this prospectus or under Rule 144, or the perception that these sales could occur. We have filed a registration statement on Form S-8 to register the sale of up to 1,229,500 shares of our common stock underlying stock options granted and to be granted under our stock option plan. Additionally, we intend to file a registration statement to register for resale approximately 1.3 million shares of our common stock. These factors could also make it more difficult to raise funds through future offerings of common stock. Adverse Effect on Stock Price from Future Issuances of Additional Shares Our Certificate of Incorporation authorizes the issuance of 18,900,000 million shares of common stock. As of June 1 2001, we had 4,445,520 shares of common stock issued and outstanding and an aggregate of 1,717,400 outstanding options and warrants and 1,656,000 public warrants. As such, our Board of Directors has the power, without stockholder approval, to issue up to 11,081,080 shares of common stock. Any issuance of additional shares of common stock, whether by us to new stockholders or the exercise of outstanding warrants or options, may result in a reduction of the book value or market price of our outstanding common stock. Issuance of additional shares will reduce the proportionate ownership and voting power of our then existing stockholders. -24- Provisions in our charter documents and Delaware law may make it difficult for a third party to acquire our company and could depress the price of our common stock. Delaware law and our certificate of incorporation and bylaws contain provisions that could delay, defer or prevent a change in control of our company or a change in our management. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. These provisions of our restated certificate of incorporation include: authorizing our board of directors to issue additional preferred stock, limiting the persons who may call special meetings of stockholders, and establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. We are also subject to certain provisions of Delaware law that could delay, deter or prevent us from entering into an acquisition, including the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in a business combination with an interested stockholder unless specific conditions are met. The existence of these provisions could limit the price that investors are willing to pay in the future for shares of our common stock and may deprive you of an opportunity to sell your shares at a premium over prevailing prices. ITEM 7. FINANCIAL STATEMENTS -------------------- The financial statements required pursuant to this Item 7 are included in this Form 10-KSB as a separate section commencing on page F-1 and are incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ------------------------------------------------ ACCOUNTING AN FINANCIAL DISCLOSURE ---------------------------------- Weinberg & Company, P.A. (the "Former Accountant"), was replaced as independent certified public accountant and independent auditor for the Company on November 28, 2000. The Company's decision to change accountants was approved by its Board of Directors because Scott Salberg, the auditor who has been responsible for the Company's account, left the Former Accountant to start his own accounting firm. The report of the Former Accountant on the financial statements of the Company for the year ended March 31, 2000, did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's fiscal year ended March 31, 2000, and through the date of this report, there were no -25- disagreements with the Former Accountant on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of the Former Accountant would have caused it to make reference to the subject matter of the disagreement in connection with its report on these financial statements for those periods. On November 28, 2000, the Company engaged Salberg & Company, P.A., as its independent auditor and independent certified public accountant. The Company did not consult with Salberg and Company, P.A. regarding the application of accounting principles to a specific transaction or the type of audit opinion that might be rendered on the Company's financial statements, and no written or oral advice was provided by Salberg & Company, P.A. that was a factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issues. PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL ---------------------------------------------------- PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ------------------------------------------------------ ACT --- The following table sets forth certain information with respect to our executive officers and directors as of March 31, 2001. Name Age Position Edward Steele 71 Chief Executive Officer And Director John F. Klecha 50 President, Chief Financial Officer, Chief Operating Officer, Secretary, Treasurer, and Director Josef A. Bauer 63 Director Howard W. Moore 70 Director Robert J. Weinberg 52 Director Edward Steele has served as the Chief Executive Officer and as a director of the Singing Machine from September 1991 through the present date. He also served as our President from September 1991 through March 2001. From October 1988 to September 1991, Mr. Steele was responsible for the development of our electronic hardware products in the Far East and was our sales director. Prior to joining us, Mr. Steele served in executive capacities at a number of companies in the toy and electronics fields, including as managing director in charge of worldwide sales -26- of Concept 2000, a manufacturer of consumer electronics, from 1971 to 1978; as President of Wicely Corp., a distributor of electronic toys and consumer electronics from 1978 to 1983; and is President of Justin Products Corp., an electronic toy manufacturer from 1983 to 1988. John Klecha has served as our Chief Financial Officer, Secretary, Treasurer and Director from October 10, 1997 through the present date. Since June 28, 1999 through the present date, Mr. Klecha has also served as Chief Operating Officer and since March 2001, Mr. Klecha has served as our President. Mr. Klecha is in charge of all financial, administrative, and operational functions of the Singing Machine. Prior to joining us, Mr. Klecha served in executive and senior management capacities at a number of companies in the toy and other consumer products fields, including as the senior financial and administrative executive of a privately held toy design, manufacturing and distribution company since 1987; Vice President, Director and Chief Financial Officer of Sussex Nautilus from 1984 to 1987; and Vice President of Finance and Administration for Lazzaroni Sarrono, Ltd. from 1982 to 1984. Josef A. Bauer has served as a director from October 15, 1999 through the present date. Mr. Bauer previously served as a director of the Singing Machine from February 1990 until September 1991 and from February 1995 until May 1998. Mr. Bauer presently serves as the Chief Executive Officer of the following three companies: Banisa Corporation, a privately owned investment company, since 1975; Trianon, a jewelry manufacturing and retail sales companies since 1978 and Seamon Schepps, also a jewelry manufacturing and retail sales company since 1999. Since 1992, Mr. Bauer has been a managing director and principal stockholder of Dero Research, Ltd. in Hong Kong, which serves as a manufacturer's representative for the sale of telephone and electronic products. From 1970 until 1993, Mr. Bauer served as a managing director and was a principal stockholder of Dero Research Corporation in Tokyo, Japan, which was engaged in the design, engineering and manufacturing of automobile audio equipment. Mr. Bauer also served as a director of AmeriData Technologies, Inc. a publicly traded computer products and service company from 1991 until 1994 (now part of General Electric Corporation). Howard Moore has served as a director from August 2000 through the present date. From 1984, when Mr. Moore joined Toys 'R' Us as executive vice president and general merchandise manager, until 1990, when he retired, sales increased from $480 million to $4.8 billion. Mr. Moore served on the Toys 'R' Us board of directors from 1984 until June 2000. He is also founder and president of Howard Moore Associates, a company, which provides marketing, product licensing, packaging and merchandising consulting to the toy industry. Previously, he was president and CEO of Toy Town, USA, Inc. after founding and operating two other toy chain stores. Mr. Moore is currently serving as Vice Chairman of the Board of Cyber Merchants Exchange, Inc., a company traded on the OTC Bulletin Board. -27- Robert Weinberg has served as a director from March 9, 2001 through the present date. Mr. Weinberg has considerable experience in toy products, marketing, licensing, merchandising and packaging. He is currently the founder and president of RJW & Associates, a marketing consulting firm based in Saddle River, New Jersey. Previously, he served in various positions of increasing responsibility with Toys "R" Us, rising through the ranks from buyer trainee in 1971 to Senior Vice President - General Merchandise Manager in 1977. In these later positions, he was responsible for purchasing advertising/marketing, imports, product development, store planning and allocations. He retired from Toys "R" Us in March 2000. Our directors' serve for a term of one year, or until their successors shall have been elected and qualified. With the exception of Mr. Steele and Mr. Klecha who have employment agreements with us, our executive officers are appointed and serve at the discretion of the Board of Directors. There are no family relationships among any of our directors and executive officers. However, one of our key personnel, John Steele, our National Sales Director, is the son of Edward Steele, our Chief Executive Officer and Director. BOARD COMMITTEES We have an audit committee, an executive compensation/ stock option committee and a nominating committee. The audit committee consists of Messrs. Moore, Bauer and Weinberg. The audit committee recommends the engagement of independent auditors to the board, initiates and oversees investigations into matters relating to audit functions, reviews the plans and results of audits with our independent auditors, reviews our internal accounting controls, and approves services to be performed by our independent auditors. The executive compensation/stock option committee consists of Messrs. Moore and Weinberg. The executive compensation/stock option committee considers and authorizes remuneration arrangements for senior management and grants options under, and administers our employee stock option plan. The entire Board of Directors operates as a nominating committee. The nominating committee is responsible for reviewing the qualifications of potential nominees for election to the Board of Directors and recommending the nominees to the Board of Directors for such election. DIRECTOR'S COMPENSATION We currently reimburse each director for expenses incurred in connection with attendance at each meeting of the Board of Directors or a committee on which he serves. In addition, non- employee directors are entitled to be paid a fee of $1,000 for each stockholder and board meeting attended and each Director is entitled to receive 10,000 stock options each year. We usually grant these options to our directors on the day before our annual stockholders meeting and the options are valued at our stock's -28- closing price on such date. The options are exercisable upon receipt for a period of five years. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 (the Exchange Act) requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities (collectively the Reporting Persons) to file reports and changes in ownership of such securities with the Securities and Exchange Commission and the Company. Based solely upon a review of (i) Forms 3 and 4 and amendments thereto furnished to the Company pursuant to Rule 16a-3(e), promulgated under the Exchange Act, during the Company's fiscal year ended March 31, 1998 and (ii) Forms 5 and any amendments thereto and/or written representations furnished to the Company by any Reporting Persons stating that such person was not required to file a Form 5 during the Company's fiscal year ended March 31, 2008, it has been determined that except as set forth herein no Reporting Persons were delinquent with respect to such person's reporting obligations set forth in Section 16(a) of the Exchange Act. Mr. Moore inadvertently failed to file his initial statement of beneficial ownership on Form 3 on a timely basis. Mr. Moore filed 2 Form 4's three days late reporting 11 transactions and 1 Form 4 one day late reporting 5 transactions in our common stock. The Form 4's were signed by Mr. Moore prior to the filing date, however, the SEC filing stamp indicates that these Form 4's were received after the filing date. Mr. Bauer filed 2 Form 4's late reporting 2 transactions in our common stock. Mr. Klecha and Mr. Steele each filed 1 Form 4 late reporting 1 transaction in our common stock. Item 10. EXECUTIVE COMPENSATION ---------------------- The following table sets forth certain compensation information for the fiscal years ended March 31, 1999, 2000 and 2001 with regard to the Singing Machine's Chief Executive Officer and one other executive officer whose combined salary and bonus was in excess of $100,000 (the "Named Officers"):
SUMMARY COMPENSATION TABLE -------------------------- Annual Compensation Long Term Compensation ------------------------------- --------------------------------------- Awards Payments -------------------------- ----------- Other Restricted Securities Name of Individual Annual Stock Underlying/ LTIP All Other and Principal Position Year Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation - ---------------------- ---- ------ ----- ------------ --------- ------------ ------- ------------ Edward Steele 2001 $320,865 $256,289 $7,938 $ -0- 210,000 -0- -0- CEO 2000 189,363 54,570 7,575 337,500 (1) 30,000 -0- -0- 1999 180,692 52,369 7,228 -0- 350,000 -0- -0- John Klecha 2001 $255,777 $205,031 $6,000 -0- 190,000 -0- -0- Chief Financial Officer 2000 114,394 43,656 4,292 253,125 (2) 39,000 -0- -0- Chief Operating Officer 1999 88,200 26,184 3,614 -0- 100,000 -0- -0-
(1) As consideration for guaranteeing a loan, Mr. Steele received 200,000 shares of our common stock on June 28, 1999. The fair market value of the stock on the date of grant was $1.6875. -29- (2) As consideration for guaranteeing a loan, Mr. Klecha received 150,000 shares of our common stock on June 28, 1999. The fair market value of the stock on the date of grant was $1.6875 per share. OPTION GRANTS IN FISCAL 2001 The following table sets forth information concerning all options granted to our officers and directors during the year ended March 31, 2001. No stock appreciation rights ("SAR's") were granted.
Total Options Shares Granted to Underlying Employees in Exercise Price Name of Individual Options Granted Fiscal Year Per Share Expiration Date - ---------------------------------------------------------------------------------------------------------- Edward Steele 210,000 31.1% $3.06 12/31/05* John Klecha 190,000 28.1% $3.06 12/31/05*
*Except 10,000 options granted to Mr. Steele and Mr. Klecha expire on September 5, 2006. Aggregated Option Exercises in Fiscal Year Ended March 31, 2001 and Option Values The following table sets forth information as to the exercise of stock options during the fiscal year ended March 31, 2001 by our officers listed in our Summary Compensation Table and the fiscal year-end value of unexercised options.
Value of Number of Unexercised Unexercised In-the-Money Options at Options at Fiscal Year End Fiscal Year End ------------------------------------ Shares Acquired Value Exercisable/ Exercisable/ Name of Individual Upon Exercise Realized Unexercisable Unexercisable - ------------------------------------------------------------------------------------------------------------- Edward Steele 0 0 390,000/200,000 $1,629,400/$342,000 John Klecha 0 0 99,000/180,000 $ 338,290/$307.800
(1) Value is based on the difference between the market price of our common stock on March 31, 2001 and the option exercise prices times the number of outstanding options. EMPLOYMENT AGREEMENTS -30- On May 15, 2000, we extended an existing employment agreement with Mr. Steele for a period of three years to expire on February 28, 2004. This employment agreement will automatically be extended for an additional year, unless either party gives written notice at least sixty days prior to the end of the three-year term. Pursuant to Mr. Steele's employment agreement, he is entitled to receive base compensation of $350,000 per year, which amount automatically increases during the second and third fiscal years by the greater of 5% or the annual increase in the consumer price index. The agreement also provides for bonuses based on a percentage of a bonus pool tied to our annual pre-tax net income (as defined in the agreement). Mr. Steele would receive 50% of the bonus pool. In the event of a termination of his employment following a change-in-control, Mr. Steele would be entitled to a lump sum payment of 300% of the amount of his total compensation in the twelve months preceding such termination. During the term of his employment agreement and for a period of one year after his termination for cause, or his voluntary termination of his employment agreement, Mr. Steele could not directly or indirectly compete with our company in the karaoke industry in the United States. On July 1, 2000, we entered into a new employment agreement with Mr. Klecha, for period of three years to expire on May 31, 2003. This employment agreement will automatically be extended for an additional year, unless either party gives written notice at least sixty days prior to the end of the three-year term. Pursuant to Mr. Klecha's employment agreement, he is entitled to receive base compensation of $275,000 per year, which amount automatically increases during the second and third fiscal years by the greater of 5% or the annual increase in the consumer price index. The agreement also provides for bonuses based on a percentage of a bonus pool tied to our annual pre-tax net income (as defined in the agreement). Mr. Klecha would receive 40% of the bonus pool. In the event of a termination of his employment following a change-in-control, Mr. Klecha would be entitled to a lump sum payment of 200% of the amount of his total compensation in the twelve months preceding such termination. During the term of his employment agreement and for a period of one year after his termination for cause, or his voluntary termination of his employment agreement, Mr. Klecha could not directly or indirectly compete with our company in the karaoke industry in the United States. Stock Option Plan Our amended and restated 1994 management stock option plan provides for the granting of incentive stock options and non- qualified stock options to our employees, officers, directors and consultants. Our stock option plan is administered by our compensation committee. The number of shares of our common stock -31- that may be issued under our stock options is 1,300,000 shares. As of March 31, 2001, 1,235,000 options were issued and outstanding under our stock option plan. -32- ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ----------------------------------------------- AND MANAGEMENT -------------- The following table sets forth, as of March 31, 2001, certain information concerning beneficial ownership of our common stock by (i) each person known to us to own 5% or more of our outstanding common stock, (ii) all directors of the Singing Machine and (iii) all directors and officers of the Singing Machine as a group. At March 31, 2001, we had 4,359,120 shares of our common stock issued and outstanding. Unless otherwise indicated, the address for each person is The Singing Machine Company, Inc., 6601 Lyons Road, Building A-7, Coconut Creek, Florida 33073. As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights. Shares Beneficially Percent of Name & Address Owned Class - -------------- ------------------- ---------- John Klecha 545,574(1) 12.2% Edward Steele 664,924(2) 14.8% Josef Bauer 630,657(3) 14.1% Howard Moore 137,092(4) 3.1% Robert Weinberg 2,100(5) * Paul Wu 392,899(6) 9.0% c/o Colony Electronics 500 Hennessy Road Causeway, Hong Kong All Directors and Executive 1,980,347(7) 40.0% Officers as a Group (5 persons) (1) Includes options to purchase 99,000 shares and warrants to purchase 20,000 shares of our common stock. (2) Includes options to purchase 390,000 shares and warrants to purchase 8,000 shares of our common stock. (3) Includes 200,000 shares held by Mr. Bauer's pension plan and options to purchase 10,000 shares and warrants to acquire 85,000 shares of our common stock. Also includes 106,232 shares held by the Bauer Family Limited Partnership, of which Mr. Bauer and his -33- wife own a 98% interest. Mr. Bauer disclaims beneficial ownership of the shares held by his spouse. (4) Includes 127,092 shares held by Mr. Moore, as Trustee for the Howard & Helen Moore Trust and options to purchase 10,000 shares of our common stock. (5) Includes 1,800 shares held by a limited liability company, of which Mr. Weinberg is a 50% owner and 300 shares held by Mr. Weinberg's spouse. Mr. Weinberg disclaims beneficial ownership of the shares held by his wife. (6) Includes 237,932 shares held by FLX (HK) Ltd., 129,300 shares held by Colony Electronics and 25,667 shares held by Gemco Pacific, Inc. Mr. Paul Wu is a director of each of these companies and was a former director of the Singing Machine Company, Mr. Wu disclaims any beneficial ownership of the shares of FLX (HK) Ltd., Colony Electronics and Gemco. (7) Includes options to purchase 469,000 shares and warrants to acquire 113,000 shares. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We have an agreement with FLX (a manufacturer of consumer electronics products in China) to produce electronic recording equipment based on our specifications. Paul Wu, a former director of ours, is the Chairman of the Board and a principal stockholder of FLX. During the fiscal years ended March 31, 2000 and 2001, we purchased approximately $10.3 million and $23.8 million respectively, in equipment from FLX. We believe that all of the foregoing transactions with FLX have been on terms no less favorable to us than could have been obtained from unaffiliated third parties in arms-length transactions under similar circumstances. LOANS TO OFFICERS AND DIRECTORS On July 1, 1999, we loaned Edward Steele, our Chief Executive Officer, President and Director $55,000 for the purchase of two (2) units of our private placement. The note including interest of 9% matured on June 28,2001. Mr. Steele paid the note and all accrued interest on the note in full in June, 2001. On July 1, 1999, we loaned John Klecha, our Chief Operating Officer, Chief Financial Officer and Director $55,000 for the purchase of two (2) units of our private placement. The note including interest of 9% matured on June 28, 2001. Mr. Klecha paid the note and all accrued interest on the note in full in June, 2001. -34- STOCK GRANTS FOR CREDIT FACILITY AND LETTER OF CREDIT GUARANTEES In June 1999, we arranged a credit facility with Main Factors, whereby Main Factors purchases certain of our accounts receivable. To secure the credit facility, John Klecha, our Chief Operating Officer and Chief Financial Officer, provided his personal payment guaranty. In July 1999, we entered into an agreement with EPK Financial Corporation ("EPK") whereby EPK provides letters of credit with our factories to import inventory for distribution to our customers. To secure the EPK facility, Edward Steele, our Chief Executive Officer and President, and John Klecha, our Chief Operating Officer and Chief Financial Officer, provide their personal guarantees. In consideration for providing their personal guarantees of these credit facilities, we issued to 200,000 shares of our common stock to Mr. Steele and 150,000 shares of our common stock to Mr. Klecha in June 1999. Both agreements with Main Factors and EPK were terminated in April 2001. On April 15, 1999, Mr. Bauer personally loaned the Singing Machine funds sufficient to pay one of our documents of acceptance in the amount of $33,948.66. As consideration for this loan, in March 2000, we issued Mr. Bauer warrants to purchase 10,000 shares of our common stock at an exercise price of $2.00 per share, exercisable until January 1, 2003. In July 1999, Mr. Bauer arranged for a credit facility with Bank Julius Baer in the amount of $1 million. Further, in order to ensure approval of the extension of credit by Bank Julius Bear, Mr. Bauer personally guaranteed the line of credit. The Bank Julius Bear credit loan was fully repaid by the Singing Machine in February 2000. As consideration for guarantying this loan, in March 2000, we granted him warrants to purchase 50,000 shares of our common stock at an exercise price of $1.00 per share. The options expire in July 2005. In May 2000, Mr. Bauer advanced $500,000 to the Singing Machine. The loan was for a period of eight months and bore interest at the rate of 15% per annum. We repaid this loan in December 2000. As consideration for extending the loan, we granted Mr. Bauer warrants to purchase 25,000 shares of our common stock at an exercise price of $3.25 per share. The options expire on May 25, 2003. We believe that the above-described transactions are as fair to the Singing Machine as could have been obtained with unaffiliated parties. -35- ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES --------------------------------------- AND REPORTS ON FORM 8-K ----------------------- (A) Exhibits 3.1 Certificate of Incorporation of the Singing Machine filed with the Delaware Secretary of State on February 15, 1994 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB- 2 filed with the SEC on March 7, 2000). 3.2 Certificate of Agreement of Merger between the Singing Machine Company, Inc., a California corporation, and the Singing Machine Company, Inc., a Florida corporation, filed with the Delaware Secretary of State on May 3, 1994 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.3 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on July 19, 1994 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.4 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on July 26, 1994 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.5 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on November 4, 1994 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.6 Certificate of Renewal of the Singing Machine filed with the Delaware Secretary of State on April 2, 1998 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.7 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on April 20, 1998 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.8 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on May 7, 1998 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.9 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on April 13, 1999 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). -36- 3.10 Certificate of Designations, Preferences and Rights of Preferred Stock of the Singing Machine filed with the Delaware Secretary of State on April 15, 1999 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.11 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on September 29, 2000. (incorporated by reference to Exhibit 3.1 in the Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1999 filed with the SEC on November 14, 2000). 3.12 Certificate of Correction filed with the Delaware Secretary of State on March 29, 2001 correcting the Amendment to our Certificate of Incorporation dated April 20, 1998. (incorporated by reference to Exhibit 3.11 in the Company's registration statement on Form SB-2 filed with the SEC on April 11, 2001)* 3.13 Certificate of Correction filed with the Delaware Secretary of State on March 30, 2001 correcting the Amendment to our Certificate of Incorporated date May 7, 1998 (incorporated by reference to Exhibit 3.11 in the Company's registration statement on Form SB-2 filed with the SEC on April 11, 2001) 3.14 Amended By-Laws of the Singing Machine Company.* 4.1 Form of Certificate Evidencing Shares of Common Stock (incorporated by reference to Exhibit 3.3 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000) 4.2 Form of Warrant Certificate (incorporated by reference to Exhibit 3.4 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 10.1 Lease Agreement dated April 10, 2000 between The Singing Machine Company, Inc. and Rocco Ferrera & Co., Inc. and Lee S. Lasser, trustee of the Lee Lasser Trust dated August 25, 1972, as amended d/b/a Lyons Corporate Park for office and warehouse space in Coconut Creek, Florida. (incorporated by reference to Exhibit 10.1 of the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 10.2 Lease Agreement dated November 9, 2000 between the Singing Machine Company, Inc. and Marcel George & Joanne Marie George, trustees of Marcel George family trusts of September 2, 1982 for warehouse space in Carson, California (incorporated by reference to Exhibit 10.2 of the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). -37- 10.3 Lease Agreement dated August 2000 between Koon Wah Mirror Holdings Limited and International SMC (HK) Limited for office space in Hong Kong (incorporated by reference to Exhibit 10.3 of the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 10.4 Employment Agreement dated May 1, 1998 between the Singing Machine and Edward Steele (incorporated by reference to Exhibit 10.1 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 10.5 Employment Agreements dated June 1, 2000 between the Singing Machine and John Klecha (incorporated by reference to Exhibit 10.5 of the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 10.6 Amended and Restated 1994 Management Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 10.7 Factoring Agreement dated April 7, 2000 between the Singing Machine and Main Factors, Inc. (incorporated by reference to Exhibit 10.7 to the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 10.8 Master Agreement dated July 31, 1999 between EPK Financial Corporation Agreement and the Singing Machine (incorporated by reference to Exhibit 10.4 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 10.9 Singing Machine's Amended Bankruptcy Plan of Reorganization dated December 17, 1997 (incorporated by reference to Exhibit 10.5 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 10.10 Bankruptcy's Court's Order Confirming the Plan of Reorganization (incorporated by reference to Exhibit 10.5 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 21.1 List of Subsidiaries* 23.1 Consent of Salberg & Company, P.A.* 23.2 Consent of Weinberg & Company, P.A.* - ------------- * Filed herewith (B) Reports on Form 8-K The Company filed a Current Report on Form 8-K dated January 5, 2001 reporting information contained in Item 5 - Other Events. In this Report on Form 8-K, the Company announced that we had entered into multi-year, domestic merchandise license agreement with MTV. -38- SIGNATURES In accordance with the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SINGING MACHINE COMPANY, INC. Dated: June 28, 2000 By: /s/ Edward Steele -------------------------------- Edward Steele, Chief Executive Officer and Director In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Capacity Date - --------- -------- ---- /s/ Edward Steele Chief Executive Officer June 28, 2001 - -------------------------- Edward Steele and Director /s/ John F. Klecha President, Chief Financial June 28, 2001 - -------------------------- Officer, Chief Operating John F. Klecha Officer, Secretary, Treasurer and Director /s/ Josef A. Bauer Director June 28, 2001 - -------------------------- Josef A. Bauer /s/ Howard W. Moore Director June 28, 2001 - -------------------------- Howard W. Moore /s/ Robert J. Weinberg Director June 28, 2001 - -------------------------- Robert J. Weinberg -39- THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 The Singing Machine Company, Inc. Contents -------- Page (s) -------- Independent Auditors' Report (SALBERG & COMPANY, P.A.) F-1 Independent Auditors' Report (WEINBERG & COMPANY, P.A.) F-2 Consolidated Balance Sheet F-3 Consolidated Statements of Income F-4 Consolidated Statements of Changes in Stockholders' Equity F-5 - F-6 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 - F-22 Independent Auditors' Report ---------------------------- Board of Directors and Shareholders: The Singing Machine Company, Inc. and Subsidiary We have audited the accompanying consolidated balance sheet of The Singing Machine Company, Inc., and Subsidiary as of March 31, 2001, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements as of March 31, 2000 were audited by other auditors whose report dated June 12, 2000 expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Singing Machine Company, Inc. and Subsidiary as of March 31, 2001, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. SALBERG & COMPANY, P.A. Boca Raton, Florida May 18, 2001 F-1 Independent Auditors' Report Board of Directors and Shareholders: The Singing Machine Company, Inc. and Subsidiary We have audited the accompanying consolidated statements of income, changes in stockholders' equity, and cash flows of The Singing Machine Company, Inc. and Subsidiary for the year ended March 31, 2000. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of The Singing Machine Company, Inc. and Subsidiary for the year ended March 31, 2000, in conformity with generally accepted accounting principles. WEINBERG & COMPANY, P.A. Boca Raton, Florida June 12, 2000 F-2 The Singing Machine Company, Inc. and Subsidiary Consolidated Balance Sheet March 31, 2001 --------------
Assets ------ Current Assets Cash and cash equivalents $ 1,016,221 Accounts receivable, net of allowance of $9,812 955,652 Due from factor 933,407 Due from vendor 699,096 Inventories 4,813,461 Prepaid expenses and other current assets 598,487 ------------ Total Current Assets 9,016,324 ------------ Property and equipment, net 263,791 ------------ Other Assets Due from related party 7,692 Due from officers 117,425 Investment in and advances to unconsolidated subsidiary 374,730 Reorganization intangible, net 277,047 Deferred tax asset 452,673 ------------ Total Other Assets 1,229,567 ------------ Total Assets $ 10,509,682 ============ Liabilities and Stockholders' Equity ------------------------------------ Current Liabilities Accounts payable and accrued expenses $ 1,567,701 Income taxes payable 23,320 ------------ Total Current Liabilities 1,591,021 ------------ Stockholders' Equity Preferred stock, $1.00 par value, 1,000,000 shares authorized, no shares issued and outstanding -- Common stock, Class A, $0.01 par value, 100,000 shares authorized, no shares issued and outstanding -- Common stock, $0.01 par value, 18,900,000 shares authorized, 4,359,120 shares issued and outstanding 43,590 Additional paid-in capital 3,324,779 Retained earnings 5,721,764 ------------ 9,090,133 Less deferred stock based guarantee fees (171,472) ------------ Total Stockholders' Equity 8,918,661 ------------ Total Liabilities and Stockholders' Equity $ 10,509,682 ============
See accompanying notes to consolidated financial statements F-3 The Singing Machine Company, Inc. and Subsidiary Consolidated Statements of Income Years Ended March 31, 2001 and 2000 -----------------------------------
2001 2000 ------------ ------------ Net Sales $ 34,306,839 $ 19,032,320 Cost of Sales 22,473,149 13,727,377 ------------ ------------ Gross Profit 11,833,690 5,304,943 ------------ ------------ Operating Expenses Compensation 1,916,612 864,282 Consulting fees 66,000 409,080 Commissions and agency fee 1,485,130 263,225 Advertising 921,359 280,780 Bad debt 85,302 49,956 Selling, general and administrative expenses 2,331,694 1,911,952 ------------ ------------ Total Operating Expenses 6,806,097 3,779,275 ------------ ------------ Income From Operations 5,027,593 1,525,668 ------------ ------------ Other Income (Expenses) Other income 31,821 8,710 Royalty income 796 2,941 Interest income 50,242 21,255 Interest expense (424,104) (117,349) Stock based guarantee fees (267,029) (434,274) Factoring fees (231,298) (429,265) ------------ ------------ Net Other Expenses (839,572) (947,982) ------------ ------------ Income Before Income Taxes 4,188,021 577,686 Income Tax Expense (Benefit) 23,320 (160,299) ------------ ------------ Net Income $ 4,164,701 $ 737,985 ============ ============ Earnings per Share Basic $ 0.99 $ 0.2322 ------------ ------------ Diluted $ 0.84 $ 0.1894 ------------ ------------ Weighted Average Common and Common Equivalent Shares Outstanding Basic 4,194,528 2,726,022 ------------ ------------ Diluted 4,981,241 3,341,866 ------------ ------------
See accompanying notes to consolidated financial statements F-4 The Singing Machine Company, Inc. and Subsidiary Consolidated Statements of Changes in Stockholders' Equity Years Ended March 31, 2001 and 2000 -----------------------------------
Common Stock and Common Stock to be Preferred Shares Issued ----------------------- ------------------------- Shares Amount Shares Amount ---------- ---------- ---------- ---------- Balance, March 31, 1999 -- -- 2,498,451 24,984 Issuance of preferred stock for cash 1,000,000 1,000,000 -- -- Common stock to be issued for exercise of common stock warrants -- -- 16,000 160 Common stock issued for legal and other services -- -- 50,049 500 Common stock retired - bankruptcy payables -- -- (5,880) (59) Common stock issued as guarantee fee -- -- 350,000 3,500 Common stock to be issued as guarantee fee -- -- 50,000 500 Exercise of common stock options (includes 1,500 shares to be issued) -- -- 69,000 690 Issuance of common stock options to consultants -- -- -- -- Dividends paid on preferred stock -- -- -- -- Net Income, 2000 -- -- -- -- ---------- ---------- ---------- ---------- Balance March 31, 2000 1,000,000 1,000,000 3,027,620 30,275 [RESTUBBED] Additional Deferred Paid-in Retained Guarantee Capital Earnings Fees Totals ---------- --------- --------- ---------- Balance, March 31, 1999 15,600 924,156 -- 964,740 Issuance of preferred stock for cash 331,017 -- -- 1,331,017 Common stock to be issued for exercise of common stock warrants 31,840 -- -- 32,000 Common stock issued for legal and other services 99,598 -- -- 100,098 Common stock retired - bankruptcy payables 59 -- -- -- Common stock issued as guarantee fee 587,125 -- (400,101) 190,524 Common stock to be issued as guarantee fee 243,250 -- -- 243,750 Exercise of common stock options (includes 1,500 shares to be issued) 28,980 -- -- 29,670 Issuance of common stock options to consultants 381,580 -- -- 381,580 Dividends paid on preferred stock -- (105,078) -- (105,078) Net Income, 2000 -- 737,985 -- 737,985 ---------- ---------- ---------- ---------- Balance March 31, 2000 1,719,049 1,557,063 (400,101) 3,906,286
See accompanying notes to consolidated financial statements F-5 The Singing Machine Company, Inc. and Subsidiary Consolidated Statements of Changes in Stockholders' Equity Years Ended March 31, 2001 and 2000 -----------------------------------
Common Stock and Common Stock to be Preferred Shares Issued -------------------------- ------------------------- Shares Amount Shares Amount ----------- ----------- ----------- ----------- Conversion of preferred stock (1,000,000) (1,000,000) 1,000,000 10,000 Exercise of warrants -- -- 380,000 3,800 Exercise of employee stock options -- -- 1,500 15 Cancellation of shares -- -- (50,000) (500) Warrants issued for services and as loan fees -- -- -- -- Amortization of deferred guarantee fees -- -- -- -- Net Income, 2001 -- -- -- -- ----------- ----------- ----------- ----------- Balance March 31, 2001 -- $ -- 4,359,120 $ 43,590 =========== =========== =========== =========== [RESTUBBED] Additional Deferred Paid-in Retained Guarantee Capital Earnings Fees Totals ---------- ----------- ---------- ----------- Conversion of preferred stock 990,000 -- -- -- Exercise of warrants 576,200 -- -- 580,000 Exercise of employee stock options 630 -- -- 645 Cancellation of shares 500 -- -- -- Warrants issued for services and as loan fees 38,400 -- -- 38,400 Amortization of deferred guarantee fees -- -- 228,629 228,629 Net Income, 2001 -- 4,164,701 -- 4,164,701 ----------- ----------- ----------- ----------- Balance March 31, 2001 $ 3,324,779 $ 5,721,764 $ (171,472) $ 8,918,661 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements F-6 The Singing Machine Company, Inc. and Subsidiary Consolidated Statements of Cash Flows Years Ended March 31, 2001 and 2000 -----------------------------------
2001 2000 ----------- ----------- Cash Flows from Operating Activities Net income $ 4,164,701 $ 737,985 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 301,064 116,369 Stock based expenses 267,029 851,666 Bad debt 85,302 -- Deferred tax benefit -- (193,194) Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (312,916) 399,933 Due from vendor (699,096) -- Interest receivable -- (7,425) Inventories (3,326,255) (1,062,401) Prepaid expenses and other assets (394,176) (177,158) Increase (decrease) in: Accounts payable and accrued expenses 1,139,833 (760,048) Income taxes payable 11,326 11,994 ----------- ----------- Net Cash Provided by (Used in) Operating Activities 1,236,812 (82,279) ----------- ----------- Cash Flows From Investing Activities Purchase of property and equipment (373,409) (108,103) Investment in and advances to unconsolidated subsidiary (374,730) -- Due from officer -- (96,120) Net proceeds from (payment to) related parties 386,261 (393,953) ----------- ----------- Net Cash Used in Investing Activities (361,878) (598,176) ----------- ----------- Cash Flows From Financing Activities Loan proceeds 600,000 -- Loan repayments (600,000) -- Proceeds from exercise of stock options and warrants 580,645 61,670 Proceeds from issuance of preferred stock -- 1,360,205 Due from factor (818,206) (243,782) Payment of dividends on preferred stock -- (105,078) Decrease in notes payable -- (63,000) ----------- ----------- Net Cash Provided by (Used in) Financing Activities (237,561) 1,010,015 ----------- ----------- Increase in Cash and Cash Equivalents 637,373 329,560 Cash and Cash Equivalents - Beginning of Year 378,848 49,288 ----------- ----------- Cash and Cash Equivalents - End of Year $ 1,016,221 $ 378,848 =========== =========== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for interest $ 424,104 $ 95,658 =========== =========== Cash paid during the year for income taxes $ 11,994 $ 20,901 =========== ===========
See accompanying notes to consolidated financial statements F-7 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2001 -------------- Note 1 Nature of Operations and Summary of Significant Accounting Policies - ---------------------------------------------------------------------------- (A) Nature of Operations The Singing Machine Company, Inc., a Delaware corporation, and Subsidiary (the "Company") is primarily engaged in the production, marketing, and sale of consumer karaoke audio equipment, accessories, and recordings. The products are sold directly to distributors and retail customers. (B) Principles of Consolidation The consolidated financial statements include the accounts of The Singing Machine Company, Inc. and its wholly-owned Hong Kong Subsidiary, International SMC (HK) Limited ("Hong Kong Subsidiary"). All significant intercompany accounts and transactions have been eliminated in consolidation. (C) Foreign Currency Translation The functional currency of the Company's Hong Kong Subsidiary is the local currency. The financial statements of the subsidiary are translated to United States dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the year for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material during the periods presented. The cumulative translation adjustment and effect of exchange rate changes on cash at March 31, 2001 was not material. (D) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (E) Cash and Cash Equivalents For purposes of the cash flow statement, the Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. (F) Concentration of Credit Risk The Company maintains its cash in bank deposit accounts, which, at times, exceed federally insured limits. At March 31, 2001, the Company had $534,577 in US deposits, which exceed federally insured limits. The Company has not experienced any losses in such accounts through March 31, 2001. F-8 (G) Inventories Inventories primarily consist of finished goods, which are comprised of electronic karaoke audio equipment, accessories, and compact discs. Inventories are stated at the lower of cost or market, as determined using the first in, first out method. (H) Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided using an accelerated method over the estimated useful lives of the related assets over 3 to 7 years. (I) Long-Lived Assets The Company uses Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 requires the Company to review long-lived assets and certain identifiable assets related to those assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the non-discounted future cash flows of the enterprise are less than their carrying amount, their carrying amounts are reduced to fair value and an impairment loss is recognized. (J) Stock-Based Compensation The Company accounts for stock options issued to employees in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation cost is measured on the date of grant as the excess of the current market price of the underlying stock over the exercise price. Such compensation amounts are amortized over the respective vesting periods of the option grant. The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to provide pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-valued based method defined in SFAS No. 123 had been applied. The Company accounts for stock options and stock issued to non-employees for goods or services in accordance with SFAS 123. F-9 (K) Revenue Recognition Revenue from the sale of equipment, accessories, and recordings are recognized upon shipment and are reported net of actual and estimated future returns and allowances. The Company offers a consumer product warranty for returns up to 90 days after purchase. (L) Advertising In accordance with Accounting Standards Executive Committee Statement of Position 93-7, ("SOP 93-7") costs incurred for producing and communicating advertising of the Company, are charged to operations as incurred. The Company advertises with its vendors and credits those vendors the cost of advertising against the accounts receivable due from those vendors. Advertising expense for the years ended March 31, 2001 and 2000 was $921,359 and $280,780, respectively. (M) Income Taxes Income taxes are accounted for under the asset and liability method of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes ("SFAS 109"). Under SFAS 109 deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (N) Earnings Per Share In accordance with, Statement of Financial Accounting Standards No. 128 "Earnings per Share", basic earnings per share is computed by dividing the net income less preferred dividends for the period by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income less preferred dividends by the weighted average number of common shares outstanding including the effect of common stock equivalents. The following table presents a reconciliation of basic and diluted earnings per share: 2001 2000 ----------- ----------- Net income $ 4,164,701 $ 737,985 Preferred stock dividends -- (105,077) ----------- ----------- Income available to common shares 4,164,701 632,908 Weighted average shares outstanding - basic 4,194,528 2,726,022 EPS - Basic $ 0.99 $ 0.2322 =========== =========== Income available to common shares $ 4,164,701 $ 632,908 Weighted average shares outstanding - basic 4,194,528 2,726,022 Effect of dilutive securities: Stock options 761,044 587,733 Warrants issued with preferred stock 25,669 28,111 ----------- ----------- Weighted average shares outstanding - diluted 4,981,241 3,341,866 EPS - Diluted $ 0.84 $ 0.1894 =========== =========== F-10 In 2000, convertible preferred stock of 1,000,000 shares, related dividends on preferred stock, and the 1,656,000 public warrants were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive. In 2001, the 1,656,000 public warrants and 30,000 common stock options were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive. (O) Reorganization under United States Bankruptcy Code and Fresh Start Reporting On April 11, 1997, the Company filed for protection under the provisions of the United States Bankruptcy Code. In March 1998, the United States Bankruptcy Court approved the Company's Plan of Reorganization, as Amended, and the Company emerged from Chapter 11 Bankruptcy. At that time, the Company applied Fresh Start Reporting in accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7"). As a result of the application of SOP 90-7, the Company restated its assets and liabilities to their fair values as necessary, and reclassified its accumulated deficit of $6,841,684 against available additional paid-in capital of $6,200,262 resulting in a reorganization intangible asset of $641,422, which is being amortized on a straight line basis over a period of seven years (See Note 5). (P) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts of the Company's short-term financial instruments, including accounts receivable, due from factor, due from vendor, accounts payable and accrued expenses, and income taxes payable approximate fair value due to the relatively short period to maturity for these instruments. The carrying value of the Company's amounts due from officers approximates fair value because the interest rate on this instrument approximates the Company's borrowing rate at March 31, 2001. F-11 (Q) New Accounting Pronouncements The Financial Accounting Standards Board has recently issued several new accounting pronouncements. Statement No. 133 as amended by Statements No. 137 and 138, "Accounting for Derivative Instruments and Hedging Activities" establishes accounting and reporting standards for derivative instruments and related contracts and hedging activities. This statement is effective for all fiscal quarters and fiscal years beginning after June 15, 2000. The Company believes that its future adoption of these pronouncements will not have a material effect on the Company's financial position or results of operations. (R) Reclassifications Certain amounts in the 2000 consolidated financial statements have been reclassified to conform with the 2001 presentation. Note 2 Accounts Receivable and Factor Agreement - ------------------------------------------------- The Company sells certain trade accounts receivable, primarily without recourse, pursuant to a factoring agreement. Under the terms of the Agreement, the factor advances up to 75% of the face value of the receivables to the Company. The Company was charged a variable percentage fee from 1% to 1.5% based upon the volume of factored receivables within a calendar year plus interest. During April 2000, the Company agreed to an amendment of their factor agreement. Under the terms of the amended agreement, the factor advances 85% of the factored invoices to the Company. Should the total stockholders' equity fall below $3,500,000 in any calendar quarter, the advance will be reduced to 75%. The Company agreed to factor an annual minimum of $13,000,000 of receivables at a factor fee of .95% resulting in a stipulated minimum fee of $123,500. All of the Company's accounts receivable are pledged as collateral under the agreement. There is no limit on the amount of accounts receivable that can be factored under the agreement. During 2000, two officers of the Company entered into guarantee agreements related to the factor agreement (See Note 10 (D)). For the years ending March 31, 2001 and 2000, the Company incurred $429,509 and $429,625, respectively in factoring fees and interest. For Year 2001, the portion representing factor interest expense was $198,208 of the $429,506. At March 31, 2001, factored trade accounts receivable not reflected on the accompanying balance sheet totaled $468,911 and the factor held, at the Company's option, reserve funds in excess of the contractual amount totaling $933,407 in an interest bearing account (see Note 7). Note 3 Investment in and Advances to Unconsolidated Subsidiary - ---------------------------------------------------------------- In November 2000, the Company closed on an acquisition of 60% of the ordinary voting shares of a Hong Kong toy company for a total purchase price of $170,000. The Company believed that the acquiree had agreed to extend the effective date to June 2001, but a dispute arose and the Company committed to dispose of the entire investment. Accordingly, pursuant to Statement of Financial Accounting Standards No. 94 "Consolidation of All Majority-Owned Subsidiaries," the Company is treating the control of the subsidiary as temporary and has recorded the investment of $170,000 and advances of $204,730 at cost. The Company intends to enter into a contract to sell the 60% interest at the original cost. F-12 Note 4 Property and Equipment - ------------------------------- Property and equipment at March 31, 2001 is as follows: Computer equipment $ 117,350 Furniture and office equipment 110,467 Leasehold improvements 28,903 Molds and tooling 551,095 --------- 807,815 Less accumulated depreciation (544,024) --------- Total $ 263,791 ========= Depreciation expense for the years ended March 31, 2001 and 2000 was $209,432 and $21,970, respectively. Note 5 Reorganization Intangible - ---------------------------------- The reorganization intangible resulted from the application of Fresh Start Accounting in March 1998 pursuant to the American Institute of Certified Public Accountants Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" (See Note 1(M)). The reorganization intangible is being amortized over a period of seven years using a straight-line basis. In accordance with SFAS 109, at March 31, 2001, the reorganization intangible was reduced by an $89,479 income tax benefit realized as a result of an increase in deferred tax assets resulting from a reduced valuation allowance. (See Note 12) The reorganization intangible at March 31, 2001 consisted of the following: Reorganization intangible $ 641,422 Less accumulated amortization (274,896) Less allocated income tax benefit (89,479) --------- $ 277,047 ========= Amortization expense on the reorganization intangible in each of the years ended March 31, 2001 and 2000 was $91,632. Note 6 Due from Officers - -------------------------- During 1999, the Company loaned a total of $110,000 to two key officers of the Company. The loans bear simple interest at 9% per annum. Principal and interest were due in full on June 28, 2000, which was extended to June 28, 2001 and secured by the securities purchased with the loans. Interest was paid through June 28, 2000. As of March 31, 2001, the Company accrued $7,425 interest on the loans. F-13 Note 7 Loans and Letters of Credit - ------------------------------------ In July 1999, the Company entered into a financing agreement with a financing corporation. The agreement expires in July 2001. The financing corporation opens letters of credits on behalf of the Company to purchase inventory. Under the terms of the agreement, the Company pays a flat fee negotiated based on each letter of credit and the maximum amount of a single letter of credit cannot exceed $1,000,000. At March 31, 2001, the Company has no letters of credit open with the financing corporation. The factor (see Note 2) has agreed under a third party agreement to factor receivables related to these letters of credit and pays the financing corporation directly. This agreement was terminated in April 2001. On May 19, 1999, as amended on February 14, 2000, the Company, through its Hong Kong Subsidiary, obtained a credit facility of $500,000 from a Hong Kong subsidiary of a Belgian bank. This facility is a revolving line of credit based upon drawing down a maximum of 15% of the value of export letters of credit lodged with Belgian Bank. There is no expiration date to this agreement, except that Belgian Bank reserves the right to revise the terms and conditions at the Bank's discretion. The cost of this credit facility is the U.S. Dollar prime rate plus 1.25%. Repayment of principal plus interest shall be made upon negotiation of the export letters of credit, but not later than 90-days after the advance. As of March 31, 2001, there was no outstanding balance on this credit facility. During May 2000, the Company entered into two working capital loan agreements of $100,000 and $500,000, respectively. The loans extended over a maximum period of eight months, bear interest at 15% per annum, and were secured by corporate guarantees. In addition, the lenders were granted 5,000 and 25,000 stock options, respectively, to purchase shares of the Company's common stock at an exercise price of $3.25. These loans were repaid prior to March 31, 2001. In May 2001, the Company obtained a new loan facility (see Note 16). Note 8 Commitments and Contingencies - -------------------------------------- (A) Leases On March 31, 1999 and April 10, 2000, the Company entered into lease agreements for office and warehouse facilities for a term of 61 months and 52 months, respectively. The terms began on August 1, 1999 and April 14, 2000. Pursuant to the terms of the leases, the Company must pay maintenance and real estate taxes of approximately $13,000 per year. In addition, the Company entered into a warehouse equipment lease and a computer equipment lease during 2000. On November 9, 2000, the Company leased a warehouse in California commencing January F-14 1, 2001 for 37 months with base rent of $11,500 per month. The Company leases a showroom in New York commencing September 1, 2001. The Company also leases office space in Hong Kong for $3,825 per month which lease expires October 2002. Total rent expense was approximately $142,472 and $81,300 for 2001 and 2000. Future minimum lease payments under these non-cancelable operating leases are as follows: Year ending March 31: 2002 $290,554 2003 306,689 2004 196,375 2005 4,820 Thereafter -- -------- $798,438 ======== (B) Employment Agreements The Company has renewed employment contracts with two key officers. The agreements call for base salaries, with annual cost of living adjustments and travel allowances. The agreements also call for aggregate performance bonuses 10% of net income before those performance bonuses, interest, and taxes. Such bonus is allocated to the two key officers and certain other key employees. (C) Merchandise License Agreement On November 1, 2000, the Company entered into a merchandise license agreement to license a name, tradename, and logo of a music oriented television network. The term of the agreement is from November 1, 2000 to December 31, 2003. However, shipment of related products has not begun as of the date of the accompanying audit report. Accordingly, none of the minimum royalty has been charged to operations as of March 31, 2001. An advance of $50,000 has been included in prepaid expenses. The Company will pay a royalty rate of a percentage of stipulated sales, as defined in the agreement, with $686,250 guaranteed minimum royalties for the term, payable on a scheduled basis as stipulated in the agreement. (D) Significant Estimates The Company records an accrual for product returns in the normal course of business. The accrual is estimated based on historical experience and is recorded as a liability equal to the gross profit on estimated returns. At March 31, 2001, the accrual was approximately $159,000. F-15 Note 9 Related Party Transactions - ----------------------------------- At March 31, 2001, the amounts due from officers bear interest at 9% per annum and are due June 28, 2001 (See Note 6). The Company's Hong Kong Subsidiary operates as an intermediary to purchase karaoke hardware from factories located in China on behalf of the Company. A primary vendor affiliated with a former director of the Company credited the Company for past purchases approximately $799,000 as of March 31, 2001 for a portion of expenses incurred from product returns. The amount was credited to cost of goods sold and the remaining balance at March 31, 2001 is reflected as due from vendor. The total goods purchased from this vendor during 2001 aggregated approximately 80% of the total purchases. (See Note 13) Note 10 Stockholders' Equity - ----------------------------- (A) Amendment to Authorized Common Shares During September 2000, the Company filed an amendment to its Articles of Incorporation decreasing the authorized shares of the Company's common stock to 20,000,000 shares from 75,000,000 shares. (B) Preferred Stock and Warrants During April 1999, the Company issued a private placement memorandum, pursuant to Rule 506 of Regulation D of the 1933 Securities Act, as amended, to offer a minimum of 40 units and a maximum of 50 units of stock and warrants. Each unit consisted of 20,000 shares of the Company's 9% non-voting convertible preferred stock and 4,000 common stock purchase warrants. The purchase price for each unit was $ 27,500. Each share of preferred stock was convertible, at the option of the holder, into one share of the Company's common stock at any time after issuance, and was to automatically convert into one share of common stock on April 1, 2000. All preferred shares automatically converted on April 1, 2000. Each warrant entitles the holder to purchase one share of the Company's common stock at $2.00 per share. The warrants expire three years from the private placement memorandum date. Through June 1999, the maximum number of 50 units had been sold and $1,375,000 gross funds were raised ($1,331,017 after related costs), at which time the offer was closed. During 2000 and 2001, 16,000 and 134,000 warrants were converted for $32,000 and $268,000, respectively, leaving 50,000 warrants outstanding at March 31, 2001. (C) Common Stock Warrants Pursuant to the Company's initial public offering in November 1994, the Company issued 1,656,000, 87,750, and 144,000 public warrants, bridge warrants and underwriter warrants, respectively, as adjusted for a January 1995 20% common stock split. The bridge warrants and underwriter's warrants expired on August 15, 1999 and November 10, 1999, respectively. As a result of the March 1998 reorganization (See Note 1 (O)), all of the public warrants have been amended whereby ten warrants must now be exchanged for each share of common stock with the exercise price per warrant remaining the same at $3.60. The public warrants became exercisable on November 10, 1995 and originally expired on November 10, 1999. In October 1999 and again in October 2000, the expiration date of the 1,656,000 public warrants was extended expiring on November 10, 2001. Through the date of the accompanying audit report, none of the warrants have been exercised. F-16 (D) Guarantee Fees During the year ended March 31, 2000, the Company issued common stock to two officers of the Company in exchange for guarantees related to the Company's factor agreement (see Note 2), and letter of credit agreement (see Note 7). These guarantee fees totaled $590,625 and are amortized over a period of 31 months. Accordingly, in 2000, the Company recognized $190,524 as guarantee fees and recorded $400,101 as deferred guarantee fees, presented as a deduction from equity. In 2001, $228,629 of deferred fees were charged to operations. During June 2001, the Company terminated its letter of credit and factor agreements and recognized the remaining amortization at that time. During the year ended March 31, 2001, the Company issued 25,000 common stock options for services and 30,000 common stock warrants to two investors as loan fees. The fair market value of the options totaling $38,400 was charged to operations. (E) Stock Options Effective May 3, 1994, as amended on June 29, 1994, March 18,1999, and September 6, 2000, the Board of Directors adopted a Stock Option Plan (the "Plan"). The plan was developed to provide a means whereby directors and selected employees, officers, consultants, and advisors of the Company may be granted incentive or non-qualified stock options to purchase common stock of the Company. As of March 31, 2001, the Plan authorizes options up to an aggregate of 1,300,000 shares of the Company's common stock. In accordance with SFAS 123, for options issued to employees, the Company applies APB Opinion No. 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for options issued under the plan as of March 31, 2001 and 2000. Had compensation cost for the Company's stock-based compensation plan been determined on the fair value at the grant dates for awards under that plan, consistent with Statement of Accounting Standards No 123, "Accounting for Stock Based Compensation" (Statement No. 123), the Company's net income for the year ended March 31, 2001 would not have changed and the net income for the year ended March 31, 2000 would have been decreased to the pro-forma amounts indicated below. 2000 ------------- Net income As reported $ 737,985 Pro forma $ 676,995 Net income per share - basic As reported $ 0.2322 Pro forma $ 0.2098 Net income per share - diluted As reported $ 0.1894 Pro forma $ 0.1711 F-17 The effect of applying Statement No. 123 is not likely to be representative of the effects on reported net income for future years due to, among other things, the effects of vesting. For financial statement disclosure purposes, the fair market value of each stock option granted to employees during 2000 was estimated on the date of grant using the Black-Scholes Model in accordance with Statement No. 123 using the following weighted-average assumptions for 2000: expected dividend yield 0%, risk-free interest rate of 5.53%, volatility 66% and expected term of two years. For stock options and warrants issued to consultants, the Company applies SFAS 123. Accordingly, consulting expense of $38,400 and $381,580 was charged to operations in 2001 and 2000, respectively. For financial statement disclosure purposes and for purposes of valuing stock options and warrants issued to consultants, the fair market value of each stock option granted was estimated on the date of grant using the Black-Scholes Option-Pricing Model in accordance with SFAS 123 using the following weighted-average assumptions in 2000: expected dividend yield 0%, risk-free interest rate of 5.53%, volatility 66% and expected term of one year and in 2001: expected dividend yield 0%, risk-free interest rate of 6.08% to 6.81%, volatility 42% and expected term of two years. A summary of the options issued under the employment and consulting agreements as of March 31, 2001 and changes during the year is presented below:
Number of Options and Weighted Average Warrants Exercise Price ------------ ---------------- Stock Options ------------- Balance at beginning of period 1,062,200 $ 1.01 Granted 810,500 $ 3.01 Exercised (247,500) $ 1.26 Forfeited (23,000) $ 1.38 ---------- -------- Balance at end of period 1,602,200 $ 1.97 ========== ======== Options exercisable at end of period 946,700 $ 1.05 Weighted average fair value of options granted during the period $ 1.28 ========
F-18 The following table summarizes information about employee stock options and consultant warrants outstanding at March 31, 2001:
Options and Warrants Outstanding Options and Warrants Exercisable -------------------------------------------------------------------------- ---------------------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding at Contractual Exercise Exercisable at Exercise Price March 31, 2001 Life Price March 31, 2001 Price ------------ ------------------ ------------- ------------ ------------------ ------------ $ 3.06 700,500 5.67 Years $ 3.06 25,000 $ 3.06 4.90 30,000 4.95 Years 4.90 - - 1.00 60,000 3.80 Years 1.00 60,000 1.00 1.66 104,000 3.24 Years 1.66 104,000 1.66 0.43 425,500 2.69 Years 0.43 425,500 0.43 3.25 30,000 2.15 Years 3.28 30,000 3.25 2.00 10,000 1.76 Years 2.00 10,000 2.00 1.38 242,200 1.17 Years 1.38 242,200 1.38 ----------------- ----------- ----------------- ----------- 1,602,200 $ 1.97 896,700 $ 1.05 ================= =========== ================= ===========
Note 11 Royalty Expense - ------------------------ The Company enters into licensing and royalty agreements with music publishers (the "Licensors") in the normal course of business. The Licensors are generally paid a one time fee and royalties based on fixed dollar amounts for each song sold by the Company. Royalty expense during 2001 was $148,643. Note 12 Income Taxes - --------------------- The Company files separate tax returns for the parent and for the Hong Kong Subsidiary. The income tax expense (benefit) for federal, foreign, and state income taxes in the consolidated statement of income consisted of the following components for 2001 and 2000: 2001 2000 --------- --------- Current: U.S. Federal $ 21,320 $ -- Foreign -- 32,895 State 2,000 -- --------- --------- 23,320 32,895 --------- --------- Deferred: U.S. Federal -- (193,194) Foreign -- -- --------- --------- Total $ -- $(160,299) ========= ========= The Company's Hong Kong subsidiary intends on applying for a Hong Kong "offshore claim" income tax exemption based on the locality of the profits of the Hong Kong subsidiary. Management believes that since the source of all profits of the Hong Kong subsidiary are from customers outside of Hong Kong it is likely the exemption will be approved. Accordingly, no provision for income taxes on the profits of the Hong Kong subsidiary have been provided in the accompanying consolidated financial statements. F-19 In the event the exemption is not approved, the Hong Kong subsidiary profits will be taxed at a flat rate of 16% resulting in an income tax expense of approximately $460,000. The actual tax expense differs from the "expected" tax expense for the years ended March 31, 2001 and 2000 (computed by applying the U.S. Federal Corporate tax rate of 34 percent to income before taxes) as follows:
2001 2000 ----------- ----------- Computed "expected" tax expense $ 1,423,927 $ 196,413 Foreign income taxes -- (47,398) Indefinite deferral of foreign earnings (978,309) -- Stock based guarantee fees 27,207 -- Non-qualified stock options exercised (51,185) -- Meals and entertainment 2,983 -- Usage of United States net operating loss carryforwards (424,622) (116,120) Change in deferred tax asset valuation allowance -- (193,194) United States alternative minimum tax 23,320 -- ----------- ----------- $ 23,320 $ (160,299) =========== ===========
The Company has not recognized a deferred tax liability for its foreign income in 2001 since the reversal of this temporary difference is indefinite. Accordingly, the amount of $978,309, which represents 34% of the foreign net income, has been reflected as a permanent difference. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at March 31, 2001 are as follows: Deferred tax assets: United States net operating loss carryforward $ 1,470,965 Bad debt reserve 3,336 Stock based compensation 13,056 Amortization of reorganization intangible 27,300 ------------- Total Gross Deferred Assets 1,514,657 Less valuation allowance (1,059,089) ------------- 455,568 Deferred tax liability: Depreciation (2,895) ------------- Net Deferred Tax Asset $ 452,673 ============= F-20 On September 3, 1991, the Company underwent a change of ownership (as defined by Internal Revenue Code Section 382). This change limits the Company's ability to utilize its approximately $4,057,000 of net operating loss carryforwards (NOL's) to $14,000 per year (these NOL's expire from 2003 to 2007). At March 31, 2001, the Company had useable net operating loss carryforwards of approximately $4,326,370 for income tax purposes, (which are not subject to the above limitations) available to offset future taxable income of the U.S. entity expiring through 2021. The valuation allowance at April 1, 2000 was $1,668,946. The net change in the valuation allowance during the year ended March 31, 2001 was a decrease of $609,857. In accordance with SFAS 109, the income tax benefit of $89,479 arising from the net increase in deferred tax assets has been allocated at March 31, 2001 to reduce the reorganization intangible. (See Note 5) Note 13 Concentrations of Credit Risk, Customers, Suppliers, and Financing - --------------------------------------------------------------------------- The Company derives primarily all of its revenues from retailers of products in the United States. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable. The Company's allowance for doubtful accounts is based upon management's estimates and historical experience and reflects the fact that accounts receivable are concentrated with several large customers. At March 31, 2001, 85% of accounts receivable were due from five U.S. customers. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Revenues derived from six customers in 2001 and five customers 2000 aggregated 82% and 70% of revenues, respectively. Revenues derived from two customers in each year 2001 and 2000 that individually purchased greater than 10% of the Company's total revenues were 32% and 23% in 2001 and 30% and 18% in 2000. Purchases of products derived from two vendors based in China during 2001 were 80% and 14%, respectively. (See Note 9) The Company financed its sales through one factor. Subsequent to March 31, 2001, the Company obtained a new loan facility, which it intends to use in lieu of the factor financing. (See Note 16) Note 14 Non-Cash Charges to Operations - --------------------------------------- As reflected in the consolidated statements of operations and cash flows, the Company has incurred significant non-cash charges to operations during the year ended March 31, 2000. These charges to operations totaled $851,666 for stock based compensation. Of this total amount, $381,580 was related to the issuance of stock options to consultants, $434,274 to the issuance of common stock for guarantee fees and $35,812 to the issuance of common stock for professional services. F-21 Note 15 Segment Information - ---------------------------- The Company operates in one segment and maintains its records accordingly. Sales by customer geographic region during 2001 were as follows: United States $33,823,028 Canada 11,420 Europe 433,821 South America 38,570 ----------- $34,306,839 =========== Note 16 Subsequent Events - -------------------------- (A) Loan and Security Agreement On April 26, 2001, the Company executed a Loan and Security Agreement (the "Agreement") with a commercial lender (the "Lender"). The Lender will advance up to 75% of the Company's eligible accounts receivable, plus up to 40% of the eligible inventory, plus up to 40% of the commercial letters of credit opened for the purchase of eligible inventory, less reserves of up to $1,200,000 as defined in the agreement. The outstanding loan limit varies between zero and $10,000,000 depending on the time of year, as stipulated in the Agreement. The Lender will also issue or co-sign for commercial letters of credit up to $2,500,000, which shall reduce the loan limits above. The loans bear interest at the commercial lender's prime rate plus 0.5% and an annual fee equal to 1% of the maximum loan amount or $100,000 is payable. The term of the loan facility expires on April 26, 2004 and is automatically renewable for one-year terms. All amounts under the loan facility are due within 90 days of demand. The loans are secured by a first lien on all present and future assets of the Company except for certain tooling located at a vendor in China. The Agreement contains a financial covenant stipulating a minimum tangible net worth of $6,250,000 with escalations as defined in the Agreement. F-22 SEC FILE NO. 0-24968 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------- EXHIBITS TO FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------------- FOR THE FISCAL YEAR ENDED MARCH 31, 2001 OF THE SINGING MACHINE COMPANY, INC. EXHIBIT INDEX ------------- Exhibit No. Description - ------- ------------ 3.14 Amended By-Laws of the Singing Machine Company 21.1 List of Subsidiaries 23.1 Consent of Salberg & Company, P.A. 23.2 Consent of Weinberg & Company, P.A. EX-3.14 2 ex3-14.txt AMENDED BYLAWS AMENDED BY-LAWS OF THE SINGING MACHINE COMPANY, INC. 1. MEETINGS OF STOCKHOLDERS. 1.1 Annual Meeting. The annual meeting of stockholders shall be held on the first day of May in each year, or as soon thereafter as practicable, and shall be held at a place and time determined by the board of directors (the "Board"). 1.2 Special Meetings. Special meetings of the stockholders may be called by resolution of the Board or the president and shall be called by the president or secretary upon the written request (stating the purpose or purposes of the meeting) of a majority of the directors then in office or of the holders of a majority of the outstanding shares entitled to vote. Only business related to the purposes set forth in the notice of the meeting may be transacted at a special meeting. 1.3 Place and Time of Meetings. Meetings of the stockholders may be held in or outside Delaware at the place and time specified by the Board or the officers or stockholders requesting the meeting. 1.4 Notice of Meetings; Waiver of Notice. Written notice of each meeting of stockholders shall be given to each stockholder entitled to vote at the meeting, except that (a) it shall not be necessary to give notice to any stockholder who submits a signed waiver of notice before or after the meeting, and (b) no notice of an adjourned meeting need be given, except when required under section 1.5 below or by law. Each notice of a meeting shall be given, personally or by mail, not fewer than 10 nor more than 60 days before the meeting and shall state the time and place of the meeting, and, unless it is the annual meeting, shall state at whose direction or request the meeting is called and the purposes for which it is called. If mailed, notice shall be considered given when mailed to a stockholder at his address on the corporation's records. The attendance of any stockholder at a meeting, without protesting at the beginning of the meeting that the meeting is not lawfully called or convened, shall constitute a waiver of notice by him. 1.5 Quorum. At any meeting of stockholders, the presence in person or by proxy of the holders of a majority of the shares entitled to vote shall constitute a quorum for the transaction of any business. In the absence of a quorum, a majority in voting interest of those present or, if no stockholders are present, any officer entitled to preside at or to act as secretary of the meeting, may adjourn the meeting until a quorum is present. At any adjourned meeting at which a quorum is present, any action may be taken that might have been taken at the meeting as originally called. No notice of an adjourned meeting need be given, if the time and place are announced at the meeting at which the adjournment is taken, except that, if adjournment is for more than 30 days or if, after the adjournment, a new record date is fixed for the meeting, notice of the adjourned meeting shall be given pursuant to section 1.4. 1.6 Voting; Proxies. Each stockholder of record shall be entitled to one vote for each share registered in his name. Corporate action to be taken by stockholder vote, other than the election of directors, shall be authorized by a majority of the votes cast at a meeting of stockholders, except as otherwise provided by law or by section 1.8. Directors shall be elected in the manner provided in section 2.1. Voting need not be by ballot, unless requested by a majority of the stockholders entitled to vote at the meeting or ordered by the chairman of the meeting. Each stockholder entitled to vote at any meeting of stockholders or to express consent to or dissent from corporate action in writing without a meeting may authorize another person to act for him by proxy. No proxy shall be valid after three years from its date, unless it provides otherwise. 1.7 List of Stockholders. Not fewer than 10 days prior to the date of any meeting of stockholders, the secretary of the corporation shall prepare a complete list of stockholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in his name. For a period of not fewer than 10 days prior to the meeting, the list shall be available during ordinary business hours for inspection by any stockholder for any purpose germane to the meeting. During this period, the list shall be kept either (a) at a place within the city where the meeting is to be held, if that place shall have been specified in the notice of the meeting, or (b) if not so specified, at the place where the meeting is to be held. The list shall also be available for inspection by stockholders at the time and place of the meeting. 1.8 Action by Consent Without a Meeting. Any action required or permitted to be taken at any meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not fewer than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voting. Prompt notice of the taking of any such action shall be given to those stockholders who did not consent in writing. 2. BOARD OF DIRECTORS. 2.1 Number, Qualification, Election and Term of Directors. The business of the corporation shall be managed by the entire Board, which initially shall consist of three (3) directors. The number of directors may be changed by resolution of a majority of the Board or by the stockholders, but no decrease may shorten the term of any incumbent director. Directors shall be elected at each annual meeting of stockholders by a plurality of the votes cast and shall hold office until the next annual meeting of stockholders and until the election and qualification of their respective successors, subject to the provisions of section 2.9. As used in these by-laws, the term "entire Board" means the total number of directors the corporation would have, if there were no vacancies on the Board. 2.2 Quorum and Manner of Acting. A majority of the entire Board shall constitute a quorum for the transaction of business at any meeting, except as provided in section 2.10. Action of the Board shall be authorized by the vote of the majority of the directors present at the time of the vote, if there is a quorum, unless otherwise provided by law or these by-laws. In the absence of a 2 quorum, a majority of the directors present may adjourn any meeting from time to time until a quorum is present. 2.3 Place of Meetings. Meetings of the Board may be held in or outside Delaware. 2.4 Annual and Regular Meetings. Annual meetings of the Board, for the election of officers and consideration of other matters, shall be held either (a) without notice immediately after the annual meeting of stockholders and at the same place, or (b) as soon as practicable after the annual meeting of stockholders, on notice as provided in section 2.6. Regular meetings of the Board may be held without notice at such times and places as the Board determines. If the day fixed for a regular meeting is a legal holiday, the meeting shall be held on the next business day. 2.5 Special Meetings. Special meetings of the Board may be called by the president or by a majority of the directors. 2.6 Notice of Meetings; Waiver of Notice. Notice of the time and place of each special meeting of the Board, and of each annual meeting not held immediately after the annual meeting of stockholders and at the same place, shall be given to each director by mailing it to him at his residence or usual place of business at least three days before the meeting, or by delivering or telephoning or telegraphing it to him at least two days before the meeting. Notice of a special meeting also shall state the purpose or purposes for which the meeting is called. Notice need not be given to any director who submits a signed waiver of notice before or after the meeting or who attends the meeting without protesting at the beginning of the meeting the transaction of any business because the meeting was not lawfully called or convened. Notice of any adjourned meeting need not be given, other than by announcement at the meeting at which the adjournment is taken. 2.7 Board or Committee Action Without a Meeting. Any action required or permitted to be taken by the Board or by any committee of the Board may be taken without a meeting, if all the members of the Board or the committee consent in writing to the adoption of a resolution authorizing the action. The resolution and the written consents by the members of the Board or the committee shall be filed with the minutes of the proceedings of the Board or the committee. 2.8 Participation in Board or Committee Meetings by Conference Telephone. Any or all members of the Board or any committee of the Board may participate in a meeting of the Board or the committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. 2.9 Resignation and Removal of Directors. Any director may resign at any time by delivering his resignation in writing to the president or secretary of the corporation, to take effect at the time specified in the resignation; the acceptance of a resignation, unless required by its terms, shall not be necessary to make it effective. Any or all of the directors may be removed at any time, either with or without cause, by vote of the stockholders. 3 2.10 Vacancies. Any vacancy in the Board, including one created by an increase in the number of directors, may be filled for the unexpired term by a majority vote of the remaining directors, though less than a quorum. 2.11 Compensation. Directors shall receive such compensation as the Board determines, together with reimbursement of their reasonable expenses in connection with the performance of their duties. A director also may be paid for serving the corporation or its affiliates or subsidiaries in other capacities. 3. COMMITTEES. 3.1 Executive Committee. The Board at its direction, by resolution adopted by a majority of the entire Board, may designate an executive committee of one or more directors, which shall have all the powers and authority of the Board, except as otherwise provided in the resolution, section 141(c) of the General Corporation Law of Delaware or any other applicable law. The members of the executive committee shall serve at the pleasure of the Board. All action of the executive committee shall be reported to the Board at its next meeting. 3.2 Other Committees. The Board, by resolution adopted by a majority of the entire Board, may designate other committees of one or more directors, which shall serve at the Board's pleasure and have such powers and duties as the Board determines. 3.3 Rules Applicable to Committees. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In case of the absence or disqualification of any member of a committee, the member or members present at a meeting of the committee and not disqualified, whether or not a quorum, may unanimously appoint another director to act at the meeting in place of the absent or disqualified member. All action of a committee shall be reported to the Board at its next meeting. Each committee shall adopt rules of procedure and A shall meet as provided by those rules or by resolutions of the Board. 4. OFFICERS. 4.1 Number; Security. The executive officers of the corporation shall be the chief executive officer, president, one or more vice presidents (including an executive vice president, if the Board so determines), a secretary and a treasurer and any other offices that the Board determines to create. Any two or more offices may be held by the same person. The board may require any officer, agent or employee to give security for the faithful performance of his duties. 4.2 Election; Term of Office. The executive officers of the corporation shall be elected annually by the Board, and each such officer shall hold office until the next annual meeting of the Board and until the election of his successor, subject to the provisions of section 4.4. 4 4.3 Subordinate officers. The Board may appoint subordinate officers (including assistant secretaries and assistant treasurers) , agents or employees, each of whom shall hold office for such period and have such powers and duties as the Board determines. The Board may delegate to any executive officer or committee the power to appoint and define the powers and duties of any subordinate officers, agents or employees. 4.4 Resignation and Removal of officers. Any officer may resign at any time by delivering his resignation in writing to the president or secretary of the corporation, to take effect at the time specified in the resignation; the acceptance of a resignation, unless required by its terms, shall not be necessary to make it effective. Any officer elected or appointed by the Board or appointed by an executive officer or by a committee may be removed by the Board either with or without cause, and in the case of an officer appointed by an executive officer or by a committee, by the officer or committee that appointed him or by the president. 4.5 Vacancies. A vacancy in any office may be filled for the unexpired term in the manner prescribed in sections 4.2 and 4.3 for election or appointment to the office. 4.6 President and Other Officers. Subject to the control of the Board, the president shall have general supervision over the business of the corporation and shall have such other powers and duties as the president of corporations usually has or as the Board assigns to such person. Other officers shall have such duties as are assigned to them. 4.7 Vice President. Each vice president shall have such powers and duties as the Board or the president assigns to him. 4.8 The Treasurer. The treasurer shall be the chief financial officer of the corporation and shall be in charge of the corporation's books and accounts. Subject to the control of the Board, he shall have-such other powers and duties as the Board or the president assigns to him. 4.9 The Secretary. The secretary shall be the secretary of, and keep the minutes of, all meetings of the Board and the stockholders, shall be responsible for giving notice of all meetings of stockholders and the Board, and shall keep the seal and, when authorized by the Board, apply it to any instrument requiring it. Subject to the control of the Board, he shall have such powers and duties as the Board or the president assigns to him. In the absence of the secretary from any meeting, the minutes shall be kept by the person appointed for that purpose by the presiding officer. 4.10 Salaries. The Board may fix the officers' salaries, if any, or it may authorize the president to fix the salary of any other officer. 5. SHARES. 5.1 Certificates. The corporation's shares shall be represented by certificates in the form approved by the Board. Each certificate shall be signed by the president or a vice president, and by the secretary or an assistant secretary or the treasurer or an assistant treasurer, and shall be sealed 5 with the corporation's seal or a facsimile of the seal. Any or all of the signatures on the certificate may be a facsimile. 5.2 Transfers. Shares shall be transferable only on the corporation's books, upon surrender of the certificate for the shares, properly endorsed. The Board may require satisfactory surety before issuing a new certificate to replace a certificate claimed to have been lost or destroyed. 5.3 Determination of Stockholders of Record. The Board may fix, in advance, a date as the record date for the determination of stockholders entitled to notice of or to vote at any meeting of the stockholders, or to express consent to or dissent from any proposal without a meeting, or to receive payment of any dividend or the allotment of any rights, or for the purpose of any other action. The record date may not be more than 60 or fewer than 10 days before the date of the meeting or more than 60 days before any other action. 6. INDEMNIFICATION AND INSURANCE. 6.1 Right to Indemnification. Each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director or officer of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action or inaction in an official capacity or in any other capacity while serving as director, officer, employee or agent, shall be indemnified and held harmless by the corporation to the fullest extent permitted by the General Corporation Law of Delaware, as amended from time to time, against all costs, charges, expenses, liabilities and losses (including attorneys, fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and that indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his heirs, executors and administrators; provided, however, that, except as provided in section 6.2, the corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by that person, only if that proceeding (or part thereof) was authorized by the Board. The right to indemnification conferred in these by-laws shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the General Corporation Law of Delaware, as amended from time to time, requires, the payment of such expenses incurred by a director or officer in his capacity as a director or officer (and not in any other capacity in which service was or is rendered by that person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced, if it shall ultimately be determined that such director or officer is not entitled to be indemnified under these by-laws or otherwise. The corporation may, by action of 6 its Board, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. 6.2 Right of Claimant to Bring Suit. If a claim under section 6.1 is not paid in full by the corporation within 30 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant also shall be entitled to be paid the expense of prosecuting that claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition, where the required undertaking, if any, is required and has been tendered to the corporation) that the claimant has failed to meet a standard of conduct that makes it permissible under Delaware law for the corporation to indemnify the claimant for the amount claimed. Neither the failure of the corporation (including its Board, its independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he has met that standard of conduct, nor an actual determination by the corporation (including its Board, its independent counsel or its stockholders) that the claimant has not met that standard of conduct, shall be a defense to the action or create a presumption that the claimant has failed to meet that standard of conduct. 6.3 Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this section 6 shall not be exclusive of any other right any person may have or hereafter acquire under any statute, provision of the certificate of incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. 6.4 Insurance. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the corporation would have the power to indemnify such person against that expense, liability or loss under Delaware law. 6.5 Expenses as a Witness. To the extent any director, officer, employee or agent of the corporation is by reason of such position, or a position with another entity at the request of the corporation, a witness in any action, suit or proceeding, he shall be indemnified against all costs and expenses actually and reasonably incurred by him or on his behalf in connection therewith. 6.6 Indemnity Agreements. The corporation may enter into agreement with any director, officer, employee or agent of the corporation providing for indemnification to the fullest extent permitted by Delaware law. 7. OFFICES. 7.1 Registered Office. The registered office shall be established and maintained at the office of The Prentice-Hall Corporation, 32 Loockerman Square, Suite L-100, in the City of Dover, 7 in the County of Kent, in the State of Delaware, and said corporation shall be the registered agent of this corporation in charge thereof. 7.2 Other Offices. The corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the corporation may require. 8. MISCELLANEOUS. 8.1 Seal. The Board shall adopt a corporate seal, which shall be in the form of a circle and shall bear the corporation's name and the year and state in which it was incorporated. 8.2 Fiscal Year. The Board may determine the corporation's fiscal year. until changed by the Board, the last day of the corporation's fiscal year shall be December 31. 8.3 Voting of Shares in other Corporations. Shares in other corporations held by the corporation may be represented and voted by an officer of this corporation or by a proxy or proxies appointed by one of them. The Board may, however, appoint some other person to vote the shares. 8.4 Amendments. These By-Laws may be altered or repealed, and By-Laws may be made at any annual meeting of the stockholders or at any special meeting thereof if notice of the proposed alteration or repeal or By-Law or By-Laws to be made be contained in the notice of such special meeting, by the affirmative vote of a majority of the stock issued and outstanding and entitled to vote thereat, or by the affirmative vote of a majority of the Board of Directors, at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors, if notice of the proposed alteration or repeal, or By-Law or By-Laws to be made, be contained in the notice of such special meeting. 8 EX-21.1 3 ex21-1.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES Country of Percentage Name Incorporation Owned ---- ------------- ----- International SMC (HK) Limited. Hong Kong 100% EX-23.1 4 ex23-1.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statement of The Singing Machine Company, Inc. on Form S-8 (File No. 333-59684) of our report dated May 18, 2001, with respect to the consolidated financial statements of The Singing Machine Company, Inc. and subsidiary, for the year ended March 31, 2001, included in this Annual Report on the Form 10-KSB for the year ended March 31, 2001. /s/ SALBERG & COMPANY, P.A. Boca Raton, Florida June 28, 2001 EX-23.2 5 ex23-2.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statement of The Singing Machine Company, Inc. on Form S-8 (File No. 333-59684) of our audit report dated June 12, 2000, on the financial statements of The Singing Machine Company, Inc. and subsidiary for the fiscal year ended March 31, 2000, included in this Annual Report on the Form 10-KSB for the year ended March 31, 2001. /s/ WEINBERG & COMPANY, P.A. Boca Raton, Florida June 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----