-----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, EeQUNpbG+E4C9yhy3/XpMAaulhan1jhnR4z8+xZjKRS4A329mKXwX/cYhuo+5aqC 5P91GzUV3IZtiIDEqhIUlA== 0001116502-02-001004.txt : 20020723 0001116502-02-001004.hdr.sgml : 20020723 20020723142906 ACCESSION NUMBER: 0001116502-02-001004 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020723 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24968 FILM NUMBER: 02708452 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/A 1 singingmachine-10ka.txt AMENDED ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2002 0 - 24968 --------- Commission File Number THE SINGING MACHINE COMPANY, INC. --------------------------------- (Exact Name of Small Business Issuer as Specified in its Charter) Delaware 95-3795478 - --------------------------------------- ---------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) 6601 Lyons Road, Building A-7, Coconut Creek, FL 33073 ------------------------------------------------------ (Address of principal executive offices) (954) 596-1000 -------------- (Issuer's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: -------------------------------------------------------------------------- Title of each class Name of each Exchange on which Registered Common Stock American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: ----------------------------------------------------------- None Check whether the Issuer: (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |_| State issuer's revenues for its most recent fiscal year: $61,828,894. The aggregate market value of the Registrant's voting stock held by non-affiliates, based upon the closing price for the common stock of $10.00 per share as reported on the American Stock Exchange on July 17, 2002 was approximately $52,611,730 (based on 8,100,953 shares outstanding). ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS: Indicate whether the Issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. |X| Yes |_| No APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. There were 8,134,701 shares of common stock, issued and outstanding at July 22, 2002. DOCUMENTS INCORPORATED BY REFERENCE None Transitional Small Business Disclosure Format (check one): Yes |_| No |X| THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY INDEX TO ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH 31, 2002
PAGE PART I Item 1. Business 1 Item 2. Properties 5 Item 3. Legal Proceedings 5 Item 4. Submission of Matters to a Vote of Security Holders 5 PART II Item 5. Market for Company's Common Equity and Related Stockholder Matters 6 Item 6. Management's Discussion and Analysis of Financial Condition and Results of 7 Operations Item 7. Financial Statements 19 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial 19 Disclosure PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with 19 Section 16(a) of the Exchange Act Item 10. Executive Compensation 21 Item 11. Security Ownership of Certain Beneficial Owners and Management 26 Item 12. Certain Relationships and Related Transactions 27 Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28 SIGNATURES 31
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Annual Report on Form 10-KSB, including without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," "intends," and words of similar import, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Position and Results of Operations - Factors That May Affect Future Results and Market Price of Stock." Readers are cautioned not to place undue reliance on these forward- looking statements, which reflect management's opinions only as of the date hereof. The Company undertakes no obligation to revise or publicly release the results of any revisions to these forward- looking statements. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission. PART I FORWARD STOCK SPLIT On March 14, 2002, The Singing Machine Company, Inc. declared a 3-for-2 stock split to its stockholders of record as of March 4, 2002. All information in this Annual Report on Form 10-KSB has been restated to give effect to this 3-for-2 stock split. ITEM 1. BUSINESS -------- OVERVIEW The Singing Machine Company, Inc. (the "Company," "we" or "us") is engaged in the production, distribution, marketing and sale of consumer karaoke audio equipment, accessories and music. We contract for the manufacture of all electronic equipment products with factories located in the Far East. We also produce and market karaoke music, including CD plus graphics ("CD+G's"), and audiocassette tapes containing music and lyrics of popular songs for use with karaoke recording equipment. One track of those tapes offers music and vocals for practice and the other track is instrumental only for performance by the participant. Virtually all of the cassettes sold by us are accompanied by printed lyrics, and our karaoke CD+G's contain lyrics, which appear on the video screen. We contract for the reproduction of music recordings with independent studios. We were incorporated in California in 1982. We originally sold our products exclusively to professional and semi-professional singers. In 1988, we began marketing karaoke equipment for home use. We believe we were the first company to offer karaoke electronic recording equipment and music for home use in the United States. In May 1994, we merged into a wholly owned subsidiary incorporated in Delaware with the same name. As a result of that merger, the Delaware corporation became the successor to the business and operations of the California corporation and retained the name The Singing Machine Company, Inc. In July 1994, we formed a wholly owned subsidiary in Hong Kong, now known as International SMC (HK) Ltd. ("International SMC"), to coordinate our production and finance in the Far East. In November 1994, we closed an initial public offering of 2,070,000 shares of our common stock and 2,070,000 warrants. In April 1997, we filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. On March 17, 1998, our plan of reorganization was approved by the U.S. Bankruptcy Court. On June 10, 1998, our plan of reorganization had been fully implemented. Since emerging from bankruptcy, our revenues have steadily increased. Our revenues increased from $6.2 million in the fiscal year ended March 31, 1998 to $61.8 million in the fiscal year ended March 31, 2002. We had an operating loss of approximately $1.6 million in the fiscal year ended March 31, 1998 compared to net income of $8.065 million in the fiscal year ended March 31, 2002. PRODUCT LINES We currently have a product line of 18 different models of karaoke machines, incorporating such features as CD plus graphics player sound enhancement, graphic equalizers, echo tape record/playback features, and multiple inputs and outputs for connection to compact disc players and video cassette recorders. Our machines sell at retail prices ranging from $30 for basic units to $400 for semi-professional units. We currently offer our music in two formats - multiplex cassettes and CD+G's with retail prices ranging from $6.99 to $19.99. We currently have a song library of over 3,000 recordings, which we license from publishers. Our library of master recordings covers the entire range of musical tastes including popular hits, golden oldies, country, rock and roll, and rap. We even have backing tracks for opera and certain foreign language recordings. 1 MARKETING, SALES AND DISTRIBUTION MARKETING We rely on management's ability to determine the existence and extent of available markets for our products. Our management has considerable marketing and sales background and devotes a significant portion of its time to marketing-related activities. We achieve both domestic and direct sales by marketing our hardware and music products primarily through our own sales force and 14 independent sales representatives. Our representatives are located in various states and are paid a commission based upon sales in their respective territories. The sales representative agreements are generally one (1) year agreements, which automatically renew on an annual basis, unless terminated by either party on 30 days' notice. We work closely with our major customers to determine marketing and advertising plans. We also market our products at various national and international trade shows each year. We regularly attend the following trade shows and conventions: the Consumer Electronics Show each January in Las Vegas; the American Toy Fair each February in New York and the Hong Kong Electronics Show each October in Hong Kong, We spent approximately $181,800 on research and development in fiscal 2002, primarily to develop prototypes and working samples. Our karaoke machines and music are marketed under the Singing Machine(R) trademark throughout the United States, primarily through department stores, mass merchandisers, direct mail catalogs and showrooms, music and record stores, national chains, specialty stores, and warehouse clubs. Our karaoke machines and karaoke music are currently sold in such stores as Best Buy, J.C. Penney, Sears, Target and Toys R Us. Our licensing agreements with MTV Networks and Nickelodeon have further expanded our brand name and our customer base. Through our license with MTV, we have begun to focus on the 12 to 24 year old market and through our agreement with Nickelodeon, we have reached an even younger age group between the ages of 3-6. In November 2001, we signed an international distributorship agreement with Arbiter Group, PLC ("Arbiter"). Arbiter is the exclusive distributor of Singing Machine(R) karaoke machines and music products in the United Kingdom and a non-exclusive distributor in all other European countries. The agreement terminates on December 31, 2003, subject to an automatic renewal provision. SALES As a percentage of total revenues, our net sales in the aggregate to our five largest customers during the fiscal years ended March 31, 2002 and 2001, respectively, were approximately 87% and 78% respectively. In fiscal 2002 and 2001, Best Buy and Toys R Us accounted for more than 10% of our revenues. Furthermore, in fiscal 2002, Costco accounted for more than 10% of our revenues. Although we have long-established relationships with all of our customers, we do not have long-term contractual arrangements with any of them. A decrease in business from any of our major customers could have a material adverse effect on our results of operations and financial condition. Returns of electronic hardware and music products by our customers are generally not permitted except in approved situations involving quality defects, damaged goods, goods shipped in error or goods that are shipped on a consignment basis. Our policy is to give credit to our customers for the returns in conjunction with the receipt of new replacement purchase orders. Our credit policies are tailored to our customer base. We have not suffered significant credit losses to date. DISTRIBUTION We distribute hardware products to retailers and wholesale distributors through two methods: shipment of products from inventory (domestic sales), and shipments directly from our Hong Kong subsidiary or manufacturers in the Far East of products (direct sales). Domestic sales, which account for substantially all of our music sales, are made to customers located throughout the United States from inventories maintained at our warehouse facilities in Florida or California. 2 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 from certain factories in China for our own account, and warehouse the products in leased facilities in Florida and California. We are responsible for costs of shipping, insurance, customs clearance, duties, storage and distribution related to such products and, therefore, warehouse sales command higher sales prices than direct sales. We generally sell from our own inventory in less than container-sized lots. In the fiscal year ended March 31, 2002, approximately 55% of our sales were domestic sales. Direct Sales. We ship some hardware products sold by us directly to customers from the Far East through International SMC. Sales made through International SMC are completed by either delivering products to the customers' common carriers at the shipping point or by shipping the products to the customers' distribution centers, warehouses, or stores. Direct sales are made in larger quantities (generally container sized lots) to customers in Italy, England, Canada, South America and the United States, who pay International SMC pursuant to their own international, irrevocable, transferable letters of credit or on an open account. In the fiscal year ended March 31, 2002, approximately 45% of our sales were direct sales. MANUFACTURING AND PRODUCTION Our karaoke machines are manufactured and assembled by third parties pursuant to design specifications provided by us. Currently, we have ongoing relationships with six factories, located in the Shenzhen province of the People's Republic of China, who assemble our karaoke machines. In manufacturing our karaoke related products, these factories use molds and certain other tooling, some of which are owned by International SMC. Our products contain electronic components manufactured by other companies such as Panasonic, Sanyo, Toshiba, and Sony. Our manufacturers purchase and install these electronic components in our karaoke machines and related products. The finished products are packaged and labeled under our trademark, The Singing Machine(R). We have obtained copyright licenses from music publishers for all of the songs in our music library. We contract with outside studios on a work-for hire basis to produce recordings of these songs. After the songs have been recorded, we use outside companies to mass-produce the CD+G's and audiocassettes. While our equipment manufacturers purchase our supplies from a small number of large suppliers, all of the electronic components and raw materials used by us are available from several sources of supply, and we do not anticipate that the loss of any single supplier would have a material long-term adverse effect on our business, operations, or financial condition. Similarly, although we primarily use three factories to manufacture our karaoke machines and a small number of studios to record our music, we do not anticipate that the loss of any single manufacturer or single studio would have a material long-term adverse effect on our business, operations or financial condition. To ensure that our high standards of product quality and factories meet our shipping schedules, we utilize Hong Kong based employees of International SMC as our representatives. These employees include product inspectors who are knowledgeable about product specifications and work closely with the factories to verify that such specifications are met. Additionally, key personnel frequently visit our factories for quality assurance and to support good working relationships. All of the electronic equipment sold by us is warranted to the end user against manufacturing defects for a period of ninety (90) days for labor and parts. All music sold is similarly warranted for a period of 30 days. During the fiscal years ended March 31, 2002 and 2001, warranty claims have not been material to our results of operations. LICENSE AGREEMENTS WITH MTV AND NICKELODEON In November 2000, we entered into a multi-year merchandise license agreement with MTV Networks, a division of Viacom International, Inc., to create the first line of MTV karaoke machine and compact disks with graphics ("CD+G's") featuring music for MTV's core audience. Under the licensing agreement, we produced two MTV-branded machines for the fiscal 2002 year: (1) a large format karaoke machine with a built in, fully functional television that enables users to view song lyrics and (2) a small karaoke system that connects to a television. We also produced exclusive CD+G's featuring music catering to MTV's core audience that were distributed with the MTV branded karaoke machines. As of March 31, 2002, we exceeded the minimum guaranteed royalty payments established in the license agreement. For fiscal 2003, we are producing two additional MTV karaoke machines, a duet microphone and additional MTV branded CD+G's titles. In fiscal 2002, we sold 6 MTV branded CD+G's, in fiscal 2003, we expect to sell 20 different MTV CD+G titles. The MTV license expires on December 31, 2004. 3 We distribute the MTV licensed products through our established distribution channels, including Best Buy, Costco, JC Penny, Musicland, Sam's Club, Sears and Toys R Us. Our distribution network also includes the online versions of these retail customers. In December 2001, we entered into a multi-year license agreement with the Nickelodeon division of MTV Networks. Under this license, we will create a line of two Nickelodeon branded machines and music for the fiscal 2003 year. These products will be distributed through our established distribution channels. Our initial shipment date is scheduled for August 15, 2002. Over the term of this license agreement, we are obligated to make guaranteed minimum royalty payments of $450,000. We do not believe that the payment of these guaranteed fees will adversely affect our ongoing operations. The Nickelodeon license expires on December 31, 2004. COMPETITION Our business is highly competitive. Our major competitors for karaoke machines and related products are Casio Computer Corp., Grand Prix, Memorex, JVC and Pioneer Corp. We believe that competition for karaoke machines is based primarily on price, product features, reputation, delivery times, and customer support. Our primary competitors for producing karaoke music are Pocket Songs and Sound Choice. We believe that competition for karaoke music is based primarily on popularity of song titles, price, reputation and delivery times. We try to stay ahead of our competition by introducing new products each year and upgrading our existing products. We believe that we were one of the first companies to introduce CD+G technology to karaoke machines. In fiscal 2003, we introduced 6 new karaoke models, including 2 MTV branded machines. In fiscal 2003, we will be introducing a karaoke machine with a built-in-video monitor and camera. In addition, we compete with all other existing forms of entertainment including, but not limited to, motion pictures, video arcade games, home video games, theme parks, nightclubs, television and prerecorded tapes, CD's, and videocassettes. Our financial position depends, among other things, on our ability to keep pace with changes and developments in the entertainment industry and to respond to the requirements of our customers. Many of our competitors have significantly greater financial, marketing, and operating resources and broader product lines than we do. TRADEMARKS We have registered various trademarks with the United States Patent & Trademark Office for our Singing Machine(R) products and also have common law rights in these trademarks. We have also registered our trademark in Germany, the Benelux countries, Switzerland and the United Kingdom. COPYRIGHTS AND LICENSES We hold federal and international copyrights to substantially all of the music productions comprising our song library. However, since each of those productions is a re-recording of an original work by others, we are subject to contractual and/or statutory licensing agreements with the publishers who own or control the copyrights of the underlying musical compositions. We are obligated to pay royalties to the holders of such copyrights for the original music and lyrics of all of the songs in our library that have not passed into the public domain. We are currently a party to more than 3,000 different written copyright license agreements. The majority of the songs in our song library are subject to written copyright license agreements, oftentimes referred to as synchronization licenses. Our written licensing agreements for music provide for royalties to be paid on each song. The actual rate of royalty is negotiable, but typically ranges from $0.09 to $0.18 per song on each CD or audiocassette that is sold. Our written licenses typically provide for quarterly royalty payments, although some publishers require reporting on a semi-annual basis. We currently have compulsory statutory licenses for approximately 30 songs in our song library, which are sold as audiocassettes. The Federal Copyright Act creates a compulsory statutory license for all non-dramatic musical works, which have been distributed to the public in the United States. Royalties due under compulsory licenses are payable monthly and are based on the statutory rate. The statutory rate is the greater of $0.08 per song for five minutes of playing time or $0.0155 per minute of playing time or fraction thereof with respect to each item of music produced and distributed by us. We also have written license agreements for substantially all of the printed lyrics, which are distributed with our audiocassettes, which licenses also typically provide for quarterly payments of royalties at the statutory rate. 4 GOVERNMENT REGULATION Our karaoke machines must meet the safety standards imposed in various national, state, local and provincial jurisdictions. Our karaoke machines sold in the United States are designed, manufactured and tested to meet the safety standards of Underwriters Laboratories, Inc. or Electronic Testing Laboratories. Our production and sale of music products is subject to federal copyright laws. Our manufacturing operations in China are subject to foreign regulation. China has permanent "normal trade relations" ("NTR") status under US tariff laws, which provides a favorable category of US import duties. China's NTR status became permanent on January 1, 2002, following enactment of a bill authorizing such status upon China's admission to the World Trade Organization ("WTO") effective as of December 1, 2001. This substantially reduces the possibility of China losing its NTR status, which would result in increasing costs for the Company. EMPLOYEES As of April 15, 2002, we employed 47 persons, all of whom are full-time employees, including four executive officers. Thirteen of our employees are located at International SMC's corporate offices in Hong Kong. The remaining thirty-four employees are based in the United States, including the four executive positions; twelve are engaged in warehousing and technical support, and eighteen in accounting, marketing, sales and administrative functions. ITEM 2. PROPERTIES ---------- Our corporate headquarters are located in Coconut Creek, Florida in an 11,200 square foot office and warehouse facility. Our three leases for this office space expire on August 30, 2004. We sublease showroom space at the International Toy Center in New York City. We have leased 9,393 square feet of office and showroom space in Hong Kong from which we oversee our China based manufacturing operations. Our two leases for this space in the Ocean Center building expire on April 30, 2005 and May 31, 2005, respectively. We have one central warehouse facility in Compton, California for 79,000 square feet. Our lease expires on February 23, 2008. We have also subleased warehouse space in Carson, California, that we previously leased for warehouse space to an unrelated third party until the expiration of the lease. We believe that the facilities are well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance. We also believe that these leased facilities are not unique and could be replaced, if necessary, at the end of the term of the existing leases. ITEM 3. LEGAL PROCEEDINGS ----------------- We filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Florida, case number 97-22199-BKC-RBR, on April 11, 1997. On March 17, 1998, the U.S. Bankruptcy Court confirmed our First Amended Plan of Reorganization. As of June 10, 1998, our plan has been fully implemented. We are not a party to any material legal proceeding, nor to the knowledge of management, are any legal proceedings threatened against us. From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- No matters were submitted to a vote of security holders through a solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report. 5 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ------------------------------------------------------------------ Our common stock currently trades on the American Stock Exchange under the symbol "SMD." We began trading on the AMEX on March 8, 2001. From January 26, 1996 through March 7, 2001, we traded on the National Association of Securities Dealers, Inc.'s OTC Bulletin Board under the symbol "SING". Set forth below is the range of high and low information for our common stock as traded on the American Stock Exchange from March 8, 2001 through March 31, 2002, as reported by Commodity Systems, Inc. Also, set forth is the range of our high and low bid information for our common stock as traded on the OTC Bulletin Board from April 1, 2000 through March 8, 2001, as reported by the National Quotation Bureau, Inc. This information regarding trading on the OTC Bulletin Board represents prices between dealers and does not reflect retail mark-up or markdown or commissions, and may not necessarily represent actual market transactions. This information contained in this table has been restated to give effect to our 3-for-2 stock split to stockholders of record on March 4, 2002.
FISCAL PERIOD HIGH LOW 2002: ----- First Quarter (April 1 - June 30, 2001) $ 4.45 $ 2.90 Second Quarter (July 1 - September 30, 2001) 5.02 3.70 Third Quarter (October 1 - December 31, 2001) 16.19 4.30 Fourth Quarter (January 1 - March 31, 2002) 17.80 12.53 2001: ----- First Quarter (April 1 - June 30, 2000) $3.00 $1.65 Second Quarter (July 1 - September 30, 2000) 2.75 1.46 Third Quarter (October 1 - December 31, 2000) 4.42 2.33 Fourth Quarter (January 1 - March 8, 2001) 3.83 2.42 Fourth Quarter (March 8 - March 31, 2001) 4.00* 3.06*
- ------------- * The Company began trading on the American Stock Exchange on March 8, 2001 and the following prices represent the high and low sales prices on the AMEX during the period noted above. As of June 15, 2002, there were approximately 311 record holders of our outstanding common stock. COMMON STOCK - ------------ The Company has never declared or paid cash dividends on its common stock and the Company's Board of Directors intends to continue its policy for the foreseeable future. Furthermore, the Company's credit facility with LaSalle Business Credit, Inc. restricts the Company from paying any dividends to its shareholders, unless it obtains prior written consent from LaSalle. Future dividend policy will depend upon the Company's earnings, financial condition, contractual restrictions and other factors considered relevant by the Company's Board of Directors and will be subject to limitations imposed under Delaware law. On March 14, 2002, the Company effected a 3 for 2 stock split for all shareholders on record as of March 4, 2002. 6 SALE OF UNREGISTERED SECURITIES During the three-month period ended March 31, 2002, nine employees and one former director exercised stock options issued under our 1994 Amended and Restated Management Stock Option Plan. The employees exercised options to acquire an aggregate of 380,275 shares of our common stock. The names of the option holders, the dates of exercise of the number of shares purchased, the exercise price and the proceeds received by us are listed below. Date of Name Exercise No. of Shares Exercise Price Proceeds Eddie Steele 01-03-02 262,500 $ .287 $75,250 Eddie Steele 01-03-02 45,000 $ 1.107 $49,800 Eddie Steele 01-03-02 15,000 $ 2.04 $30,600 Alicia Haskamp 01-03-02 6,000 $ 2.04 $12,240 M. McElligott 02-06-02 3,750 $ 2.04 $ 7,650 Brian Cino 02-06-02 675 $ .287 $ 193.50 Brian Cino 02-06-02 1,350 $ 2.04 $ 2,754 Jorge Otaeugi 02-06-02 2,250 $ .287 $ 645 Jorge Otaeugi 02-06-02 2,250 $ 2.04 $ 4,590 John Steele 02-06-02 7,500 $ 2.04 $15,300 Terry Phillips 02-19-02 450 $ 2.04 $ 918 Alan Schor 02-19-02 7,500 $ 2.04 $15,300 Robert Torrelli 03-07-02 150 $ 2.04 $ 306 John DeNovi 03-07-02 2,550 $ 3.27 $ 8,330 John Steele 03-14-02 22,500 $ 2.04 $45,900 Terry Phillips 03-22-02 900 $ 2.04 $ 1,836 Each of these employees and former director paid for the shares with cash. The shares issued to our employees were registered under the Securities Act on a registration statement on Form S-8. As such, no restrictive legends were placed on the shares, except control legends were placed on the shares issued to Eddie Steele. During the three-month period ended March 31, 2002, four warrant holders exercised their warrants to acquire an aggregate of 78,000 shares of common stock. The names of the warrant holders, the dates of exercise of the number of shares purchased, the exercise price and the proceeds received by the Company are listed below. Date of Name Exercise No. of Shares Exercise Price Proceeds Eddie Steele 01-03-02 12,000 $ 1.33 $16,000 Fred Merz 02-19-02 6,000 $ 1.33 $ 8,000 FRS Investments 03-04-02 30,000 $ 0.917 $27,500 John Klecha 03-19-02 30,000 $ 1.33 $40,000 Each of these warrant holders exercised their warrants in reliance upon Section 4(2) of the Securities Act of 1933, because each of the holders was sophisticated and had access to comprehensive information about the Company. The Company placed legends on the certificates stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale. 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. 7 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of the Company's total revenues: YEAR ENDED MARCH 31, ---------------------------- 2002 2001 2000 ------ ------ ------ Total Revenues .............................. 100.0% 100.0% 100.0% Cost of Sales ............................... 67.0 65.5 72.1 Operating expenses .......................... 19.7 19.8 19.9 Operating income ............................ 13.3 14.7 8.0 Other expenses, net ......................... 0.09 2.5 5.0 Income before taxes ......................... 13.2 12.2 3.0 Provision (benefit) for income taxes ........ .2 .1 (0.8) Income (loss) ............................... 13.0 12.0 3.8 THE YEAR ENDED MARCH 31, 2002 AS COMPARED TO THE YEAR ENDED MARCH 31, 2001 NET SALES Net sales for the fiscal year ended March 31, 2002 increased 80.2% to $61,828,894 compared to $34,306,839 for the fiscal year ended March 31, 2001. The Company's growth was driven by strong sales of the Company's MTV licensed merchandise and the introduction of new karaoke machines and music titles. We generated $23,354,270 million or 37.8% of our net sales from products sold under the MTV license. In fiscal 2002, our sales of music increased to $6,306,547 or 10.2% of our net sales compared with $3,087,615 or 9% of our net sales in fiscal 2001. GROSS PROFIT Gross profit for the fiscal year ended March 31, 2002 was $20,380,003 or 33% of sales compared to $11,833,690 or 34.5% of sales for the fiscal year ended March 31, 2001. The decrease in gross margin compared to the prior year is due to the realization of volume discounts by our largest customers. This was offset to some degree by reduced prices that we paid our manufacturers for our karaoke machines because of our increased purchases. OPERATING EXPENSES Operating expenses increased to $12,144,623, or 19.7% of sales, for the year ended March 31, 2002 from $6,806,097, or 19.8% of sales, for the year ended March 31, 2001. This increase in operating expenses was primarily attributed to the increase in expenses associated with: (1) the opening of the Company's Hong Kong office, (2) the Company's first advertising campaign and (3) certain expenses which are considered variable as they relate directly to the level of sales. In December 2000, the Company's wholly-owned subsidiary, International SMC, opened a Hong Kong office. For the fiscal year ended March 31, 2002, this office incurred SG&A expenses of approximately $1,144,734 compared to $418,618 in the prior year. By opening this office, the Company saved the manufacturers agency fees, which were paid on each shipment in prior years. The Hong Kong office has fixed overhead expenses every month, as opposed to per shipment agency fees. We realized the greatest benefit from our Hong Kong office in the third quarter of fiscal 2002, when we purchased the largest amount of inventory. 8 Our advertising expense increased to $2,377,638 for the fiscal year ended March 31, 2002 compared to $921,359 for the fiscal year ended March 31, 2001. Advertising expense consists of two components: Co-operative advertising and direct advertising expense. Co-operative advertising is paid directly to the customer and is based directly on the amount of sales. The customer has complete discretion as to the use of these funds. Co-operative advertising expenses accounted for $972,000 of the increase in advertising expenses. In fiscal 2002, the Company embarked on its first formal advertising campaign, which used print advertising, radio spots, sponsorships, promotions and other media. The cost for this advertising campaign was approximately $484,000 and this is a direct advertising expense. Other expenses, termed variable expenses, contributed to the increase in operating expenses. These expenses included royalty expense, sales commissions, warehouse expenses, and travel. The largest increase can be seen in royalty expense, which increased approximately $1,713,000 over the prior year, primarily from the sale of items under the MTV licensing agreement. Our commissions payable to our independent sales representatives increased by $457,000 during fiscal 2002, because of increased sales. Our warehouse related expenses also increased by $478,000. These expenses are due to the increased importing of the Company's karaoke machines from Hong Kong. Our compensation expenses increased by $569,935 during our last fiscal year. We grew from 22 employees at March 31, 2001 to 47 employees at March 31, 2002. DEPRECIATION AND AMORTIZATION The Company's depreciation and amortization expenses were $394,456 for the fiscal year ended March 31, 2002, up from $301,064 in the prior year. The increase in depreciation and amortization expenses can be attributed to the Company's acquisition of new fixed assets during fiscal 2002, which included computers, furniture and other equipment in all of the Company's locations in Florida, California and Hong Kong. It also included the addition of new molds for our expanded product line. The amortization expense includes the amortization of a fee paid to LaSalle Bank for our line of credit facility and the amortization of remaining deferred guarantee fees related to the factoring agreement we terminated in April 2001. OTHER EXPENSES Other expenses were $50,821 for the fiscal year ended March 31, 2002 compared with net expenses of $839,572 for the fiscal year ended March 31, 2001. The Company had a large decrease in these miscellaneous items primarily because of the elimination of factoring fees and a decrease in interest expense resulting in a net decrease of $543,279. The Company terminated its factoring agreement in April 2001 and no longer incurs the fees and interest associated with it. The Company replaced the factoring agreement with a lower cost credit facility with LaSalle Business Credit in April 2001. The Company has also begun to generate income from royalty payments received in Hong Kong for the use of Company owned molds by other parties. INCOME BEFORE INCOME TAX EXPENSE The Company's income before income taxes increased 95.4% to $8,184,559 for the fiscal year ended March 31, 2002, compared to $4,188,021 for the fiscal year ended March 31, 2001. This increase in profit is due primarily to the increase in sales. INCOME TAX EXPENSE The Company files separate tax returns for the parent and for the Hong Kong Subsidiary. The income tax expense consists of taxes associated with federal, foreign and state income taxes in the consolidated statement of income. During fiscal 2002, the Company showed a profit in both the U.S. parent company and International SMC, its wholly-owned Hong Kong subsidiary. The U.S. parent company's federal tax liability in fiscal 2002 was eliminated due to the utilization of operating loss carryforwards from prior years. As a result of this, the income tax recognized in fiscal 2002 in the amount of $119,277 is primarily for state income taxes. As of March 31, 2002, the Company had usable net operating loss carryforward of $714,159 for federal income tax purposes. The Company expects to utilize the remaining NOL in fiscal 2003. 9 The Company's Hong Kong subsidiary has applied for a Hong Kong offshore claim income tax exemption based on the locality of the profits of the Hong Kong subsidiary. Management believes that the exemption will be approved because the source of all profits of the Hong Kong subsidiary is from exporting to customers outside of Hong Kong. Accordingly, no provision for foreign income taxes on the profits of the Hong Kong subsidiary have been provided in the accompanying consolidated financial statements. As of June 25, 2002, the Company has not received official approval of this Hong Kong tax exemption for fiscal 2002. In the event the exemption is not approved, the Hong Kong subsidiary profits will be taxed at a flat rate of 16% resulting in an estimated income tax expense of $725,000 and $460,000 for 2002 and 2001, respectively. NET INCOME As a result of the foregoing, the Company's net income increased 93.7% to $8,065,282 for the fiscal year ended March 31, 2002, compared to $4,164,701 for the fiscal year ended March 31, 2001. THE YEAR ENDED MARCH 31, 2001 AS COMPARED TO THE YEAR ENDED MARCH 31, 2000 NET SALES Net sales increased 80.3% in the fiscal year ended March 31, 2001. The increase in revenue from $19,032,320 in fiscal 2000 to $34,306,839 in fiscal 2001 can be attributed to the addition of a major customer and increased awareness of karaoke in the retail community. The addition of this customer alone added 20% to our revenues for fiscal 2001. Our sales of karaoke machines and karaoke music comprised 93% and 7%, respectively, of our sales in fiscal 2000. GROSS PROFIT Gross profit for fiscal 2001 was 34.5% of sales compared to 27.9% of sales in fiscal year 2000. The increased gross margin in fiscal 2001 is due to a favorable decrease in the cost of products, both hardware and music, resulting primarily from volume discounts. Another factor of increased gross margin is the increased percentage of music sales as compared to hardware sales. Overall, the gross profit on music sales is higher than that of hardware. OPERATING EXPENSES Operating expenses increased by 80.1% in fiscal 2001 compared to fiscal 2000. A good portion of this increase in operating expenses was due to the significant increase in sales and its impact on variable selling expenses such as freight expense, sales commissions, cooperative advertising, and travel expenses, among others. Another factor of this change is the addition of personnel, increasing compensation expense. The Company grew from 12 employees at March 31, 2000 to 22 employees at March 31, 2001. The accrual for management bonus also attributed to the increase in operating expenses. This expense is due largely to increased sales, but also to fairly stable expenses for the fiscal year. DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses increased from $116,369 in fiscal 2000 to $301,064 in fiscal 2001. The addition of new product molds in Hong Kong and the opening of a new Hong Kong office contributed to this increase. Also contributing to this increase was the expansion of our home office in Coconut Creek into another unit next to our existing office space. OTHER EXPENSES Other expenses decreased from $947,982 in fiscal year 2000 to $839,572 in fiscal year 2001. This is primarily due to the expense in fiscal 2000 of non-cash based guarantee fees. Loss on accounts receivable due to factoring was 0.25% of total revenues in fiscal 2001 compared to 2.3% of total revenues in fiscal 2000. This decrease is due to the favorable factoring rates negotiated for the year. 10 INCOME TAX EXPENSE The Company files separate tax returns for the parent and for the Hong Kong Subsidiary. The income tax expense (benefit) consists of taxes associated with federal, foreign and state income taxes in the consolidated statement of income. During fiscal 2001, the Company showed a profit in both the U.S. parent company and International SMC, its wholly-owned Hong Kong subsidiary. The U.S. parent company's tax liability was eliminated due to the utilization of operating loss carryforwards from prior years. As a result of this, the income tax recognized in fiscal 2001 in the amount of $23,320 is a result of the federal alternative minimum tax. Although the Company's NOL expires on various dates through 2019, the Company expects to utilize the remaining NOL in fiscal year 2003. The Company's Hong Kong subsidiary applied for a Hong Kong offshore claim income tax exemption for the calendar year ended March 31, 2001. Management believes that the exemption will be approved because the source of all profits of the Hong Kong subsidiary is from exporting to customers outside of Hong Kong. Accordingly, no provision for foreign income taxes on the profits of the Hong Kong subsidiary has been made. As of June 20, 2002, the Hong Kong offshore claim exemption for fiscal 2001 has not been approved. NET INCOME Net income after taxes (tax benefit) for the fiscal year ended March 31, 2001 and 2000 was $4,164,701 and $737,985, respectively. The increase in sales and stability of general expenses are attributed to the increased bottom line. The tax expense for fiscal 2001 is due to alternative minimum tax. The Company has remaining net operating loss carry forwards to cover US taxes that may have been due on the profitability of the Company. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2002, the Company had current assets of $20,451,705 and total assets of $21,664,451 compared to current assets of $9,016,324 and total assets of $10,509,682 at March 31, 2001. This increase in current assets and total assets is primarily due to the increase in (i) cash and cash equivalents due to increased sales and collections of accounts receivable, (ii) accounts receivable for sales in the fourth quarter and (iii) inventories. In the fourth quarter of 2002, Best Buy began taking our goods on a consignment basis instead of a purchase basis. We recorded approximately $2.875 million in sales returns and reversed related costs of sales in February 2002 and Best Buy retained the inventory on a consignment basis. From the date of the sales returns through March 31, 2002, we recorded approximately $2.442 million of sales from the consignment inventory. We increased our inventory levels as of March 31, 2002, in anticipation of the potential strike by longshoremen and other dockworkers on the California seaboard in July 2002. Current liabilities increased to $3,194,377 as of March 31, 2002, compared to $1,591,021 at March 31, 2001. This increase in current liabilities is primarily due to the accrual of expenses for royalties, management bonuses and allowances for advertising expenses among others. At March 31, 2002, the balance of the credit facility with LaSalle Business Credit was zero. Increased royalty expenses include royalty expenses payable to MTV for the sale of licensed merchandise, as well as other agencies and publishers with whom we hold licenses for our recorded music. The Company's stockholders' equity increased to $18,470,074 as of March 31, 2002 from $8,918,661 as of March 31, 2001, due to the exercise of options and warrants, the write off of deferred guarantee fees and the current fiscal year net income. Cash flows provided by operating activities were $2,954,687 during the fiscal year ended March 31, 2002. Cash flows were used in operating activities primarily due to increases in accounts receivable in the amount of $3,114,627 and inventory in the amount of $4,460,890. Cash flows were provided by operating activities primarily due to an increase in accounts payable and accrued expenses in the amount of $1,563,603 and net income of $8,065,282. These increases are a direct result of the increased volume of sales for the fiscal year. Cash provided by investing activities during this same period were $230,049. Cash provided by investing activities resulted primarily from receipt of $933,407 previously invested with the Company's factor. Other factors provided by investing activities consisted of $117,425 received from our officers as repayments on loans and $298,900 received from the sale of an unconsolidated subsidiary. Cash used in investing activities consisted of property and equipment in the amount of $613,691 and a $513,684 deposit placed for a letter of credit facility with Hong Kong Shanghai Banking Corporation. 11 Cash flows provided by financing activities were $1,319,190 during the fiscal year ended March 31, 2002. This consisted of proceeds from the exercise of warrants and options in the amount of $1,319,190. As the credit line at LaSalle National Bank was zero at this date, the amount of loan proceeds and repayments was the same, $21,856,653. The Company expects that its capital needs will increase during fiscal 2003. Our capital needs stem primarily from our need to purchase sufficient levels of inventory for the Christmas season. Our principal sources of capital in the next twelve months include our operating cash flows, borrowings under our credit facility with LaSalle and advances made under three letters of credit issued to our factories. At the present time, our credit facility with LaSalle provides us with up to $10 million in financing depending upon the time of the year. We are seeking increased financing from LaSalle or another third party by the end of July 2002. We would like to have credit facilities in excess of $20 million available for the upcoming holiday season. We entered into a credit facility with LaSalle in April 2001. Under this credit facility, LaSalle will advance up to 75% of the Company's eligible accounts receivable, plus up to 40% of eligible inventory, plus up to 40% of commercial letters of credit issued by LaSalle minus reserves as set forth in the loan documents. The credit facility is subject to loan limits from zero to $10,000,000 depending on the time of the year, as stipulated in the loan documents. Advances made under the credit facility bear interest at LaSalle's prime rate plus .5%. There is also an annual fee of 1% of the loan maximum, or $100,000. The credit facility expires on April 26, 2004 and is automatically renewable for one-year terms thereafter. Under the terms of the credit facility, the Company is required to maintain certain financial ratios and conditions. The loan contains a clean up period every 12 months where the loan amount must go to zero for a period of time. The loan is secured by a first lien on all present and future assets of the Company, except certain tooling located in China. Our Hong Kong subsidiary, International SMC, maintains a letter of credit facility with the Hong Kong Shanghai Banking Corporation ("HSBC"). The facility requires International SMC to maintain a separate deposit account in the amount of $513,684. This amount is included in deposits at March 31, 2002. During April and May 2002, HSBC agreed to issue International SMC two documentary letters of credit to finance its purchases of karaoke machines from our factories. One letter of credit provides for advances of up to $200,000 per draw, provided that the total drawings do not exceed $2 million. The other letter of credit is for $1 million. These letters of credit expire on December 21, 2002 and November 30, 2002, respectively and our factories are the beneficiaries. In June 2002, International SMC obtained a $1 million documentary letter of credit from Fortis Bank, formerly known as Belgian Bank, Hong Kong, a subsidiary of Generale Bank, Belgium. This letter of credit expires on December 6, 2002 and one of our factories is the beneficiary. International SMC also has use of a $500,000 credit facility from Fortis Bank. This facility is a revolving line based upon drawing down a maximum of 15% of the value of export letters of credit held by Fortis Bank. There is no maturity date except that Fortis Bank reserves the right to revise the terms and conditions at the Bank's discretion. The cost of this credit facility is the U.S. Dollar prime rate plus 1.25%. Repayment of principal plus interest shall be made upon negotiation of the export letters of credit, but not later than ninety (90) days after the advance. This credit facility is not currently in use and the terms are being renegotiated. As of March 31, 2002, we do not have any material commitments for capital expenditures, other than (i) our obligation to make certain guaranteed minimum royalty payments in the amount of $450,000 under our licensing agreement with Nickelodeon, (ii) our lease for our warehouse space in California and (iii) our purchases of inventory from certain factories in China. We also have contractual obligations under our real estates leases in Florida, Hong Kong and California. Except for the foregoing, we do not have any present commitment that is likely to result in our liquidity increasing or decreasing in any material way. In addition, except for the Company's need for additional capital to finance inventory purchases, the Company knows of no trend, additional demand, event or uncertainty that will result in, or that is reasonably likely to result in, the Company's liquidity increasing or decreasing in any material way. 12 EXCHANGE RATES We sell all of our products in U.S. dollars and pay for all of our manufacturing costs in either U.S. or Hong Kong dollars. Operating expenses of the Hong Kong office are paid in Hong Kong dollars. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since 1983 at HK$7.80 to U.S.$1.00 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. We cannot assure you that the exchange rate between the United States and Hong Kong currencies will continue to be fixed or that exchange rate fluctuations will not have a material adverse effect on our business, financial condition or results of operations. SEASONAL AND QUARTERLY RESULTS Historically, the Company's operations have been seasonal, with the highest net sales occurring in the second and third quarters (reflecting increased orders for equipment and music merchandise during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year. Sales in the Company's fiscal second and third quarter, combined, accounted for approximately 81% of net sales in fiscal 2002 and 75% of net sales in fiscal 2001. The Company's results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis. INFLATION Inflation has not had a significant impact on the Company's operations. The Company has historically passed any price increases on to its customers since prices charged by the Company are generally not fixed by long-term contracts. CRITICAL ACCOUNTING POLICIES The U.S. Securities and Exchange Commission defines critical accounting policies as "those that are both most important to the portrayal of a company's financial condition and results, and require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain". Preparation of our financial statements involves the application of several such policies. These policies include: estimates of accruals for product returns, the realizability of the deferred tax asset, calculation of our allowance for doubtful accounts and the Hong Kong income tax exemption. Accrual for product returns. We regularly receive requests from our customers for product returns. Our accrual amount is based on historical experience and is recorded as a reduction of sales and costs of sales and as a liability equal to the resulting gross profit on the estimated returns. At March 31, 2002, the accrual was approximately $164,000. Realizability of Deferred Tax Asset. We eliminated our valuation allowance on the deferred tax asset since we determined that it is more likely than not that the deferred tax asset will be realized. Estimate for Doubtful Accounts. We estimate an allowance for doubtful accounts using the specific identification method since a majority of accounts receivable are concentrated with several customers whose credit worthiness is evaluated periodically by us. The allowance was $12,022 at March 31, 2002. Hong Kong Income Tax Exemption. We estimated that the Hong Kong income tax to be zero based on our assessment of the probability that the application for the Hong Kong income tax exemption would be approved. In addition to the above policies, several other policies, including policies governing the timing of revenue recognition, are important to the preparation of our financial statements, but do not meet the definition of critical accounting policies because they do not involve subjective or complex judgments. 13 RISK FACTORS Set forth below and elsewhere in this Annual Report on Form 10-KSB and in the other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward looking statements contained in this Annual Report. FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK WE RELY ON SALES TO A LIMITED NUMBER OF KEY CUSTOMERS WHICH ACCOUNT FOR A LARGE PORTION OF OUR NET SALES As a percentage of total revenues, our net sales to our five largest customers during the fiscal year ended March 31, 2002 and 2001were approximately 87% and 78% respectively. In fiscal 2002, Best Buy, Toys R Us and Costco accounted for 35.7%, 27.8% and 10.5% of our net sales. In fiscal 2001, Best Buy and Toys R Us accounted for 34.9% and 20.4% of our net sales. Although we have long-established relationships with many of our customers, we do not have long-term contractual arrangements with any of them. A substantial reduction in or termination of orders from any of our largest customers could adversely affect our business, financial condition and results of operations. In addition, pressure by large customers seeking price reductions, financial incentives, changes in other terms of sale or requesting that we bear the risks and the cost of carrying inventory, such as consignment agreements, could adversely affect our business, financial condition and results of operations. If one or more of our major customers were to cease doing business with us, significantly reduced the amount of their purchases from us or returned substantial amounts of our products, it could have a material adverse effect on our business, financial condition and results of operations. OUR LICENSING AGREEMENT WITH MTV IS IMPORTANT TO OUR BUSINESS We generated $23,354,270, or 37.8% of our net sales, in fiscal 2002 from our sales of MTV licensed merchandise. Management values this license with MTV and desires to continue this licensing relationship. If the MTV license were to be terminated or failed to be renewed, our business, financial condition and results of operations could be adversely affected. However, management believes that our company has developed a strong brand name in the karaoke industry and that it will be able to continue to develop and grow its business, even if the MTV licensing relationship did not exist. INVENTORY MANAGEMENT AND CONSIGNMENT ARRANGEMENT WITH BEST BUY, OUR LARGEST CUSTOMER Because of our reliance on manufacturers in the Far East, our production lead times are relatively long. Therefore, we must commit to production in advance of customers orders. If we fail to forecast customers or consumer demand accurately we may encounter difficulties in filling customer orders or liquidating excess inventories, or may find that customers are canceling orders or returning products. Distribution difficulties may have an adverse effect on our business by increasing the amount of inventory and the cost of storing inventory. During our fourth quarter, Best Buy began taking our goods on a consignment basis. Additionally, changes in retailer inventory management strategies could make inventory management more difficult. Any of these results could have a material adverse effect on our business, financial condition and results of operations. OUR INABILITY TO COMPETE AND MAINTAIN OUR NICHE IN THE ENTERTAINMENT INDUSTRY COULD HURT OUR BUSINESS The business in which we are engaged is highly competitive. Our major competitors for karaoke machines and related products are Casio Computer Co, Grand Prix, JVC, Memorex and Pioneer Corp. We believe that competition for karaoke machines is based primarily on price, product features, reputation, delivery times, and customer support. Our primary competitors for producing karaoke music are Pocket Songs and Sound Choice. We believe that competition for karaoke music is based primarily on popularity of song titles, price, reputation and delivery times. We believe that our new product introductions and enhancements of existing products are material factors for our continued growth and profitability. In fiscal 2002, we produced 6 new karaoke machines. However, many of our competitors are substantially larger and have significantly greater financial, marketing and operating resources than we have. No assurance can be given that we will continue to be successful in introducing new products or further enhancing our existing products. 14 In addition, we must compete with all the other existing forms of entertainment including, but not limited to: motion pictures, video arcade games, home video games, theme parks, nightclubs, television and prerecorded tapes, CD's and video cassettes. WE ARE SUBJECT TO SEASONALITY, WHICH IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS AND CHANGES RESULTING IN FLUCTUATIONS IN QUARTERLY RESULTS We have experienced, and will experience in the future, significant fluctuations in sales and operating results from quarter to quarter. This is due largely to the fact that a significant portion of our business is derived from a limited number of relatively large customer orders, the timing of which cannot be predicted. Furthermore, as is typical in the karaoke industry, the quarters ended September 30 and December 31 will include increased revenues from sales made during the holiday season. Additional factors that can cause our sales and operating results to vary significantly from period to period include, among others, the mix of products, fluctuating market demand, price competition, new product introductions by competitors, fluctuations in foreign currency exchange rates, disruptions in delivery of components, political instability, general economic conditions, and the other considerations described in this section entitled Risk Factors. WE HAVE SIGNIFICANT FUTURE CAPITAL NEEDS WHICH ARE SUBJECT TO THE UNCERTAINTY OF ADDITIONAL FINANCING We currently have a $10 million credit facility from LaSalle Business Credit. In order to meet our projected needs for the holiday season, we would like to obtain financing in excess of $20 million. We are seeking this additional financing from LaSalle Business Credit or a different lender, if LaSalle does not want to increase our credit line. If adequate funds are not available on acceptable terms, or at all, we may be unable to sustain our rapid growth, which would have a material adverse effect on our business, results of operations, and financial condition. OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF THE CALIFORNIA LONGSHOREMEN GO ON STRIKE During fiscal 2002, approximately 55% of our sales were domestic sales, which were made from our warehouses in California and Florida. During June and July 2002, longshoremen and other dockworkers represented by the International Longshore and Warehouse Union, have threatened to go on strike. Since we import a significant amount of karaoke electronic recording equipment from the Far East to California, the strike would have a material adverse effect on our business, results of operations and financial condition. In the event that the strike occurs, we have developed contingency plans. However, all of these contingency plans will result in increased costs to our company and may reduce our profitability in fiscal 2003. WE MAY NOT BE ABLE TO SUSTAIN OR MANAGE OUR RAPID GROWTH We experienced rapid growth in net sales and net income in the last year. Our net sales for the fiscal year ended March 31, 2002 increased 80.2% to $61.8 million compared to $34.3 million for the fiscal year ended March 31, 2002. Similarly, our net income increased to $8.06 million for fiscal 2002 compared to $4.6 million for fiscal 2001. As a result, comparing our period-to-period operating results may not be meaningful, and results of operations from prior periods may not be indicative of future results. We cannot assure you that we will continue to experience growth in, or maintain our present level of, net sales or net income. Our growth strategy calls for us to continuously develop and diversify our karaoke products by (i) developing new karaoke machines and music products, (ii) entering into additional license agreements (iii) expanding into international markets, (iv) developing new retail customers in the United States and (v) obtaining additional financing. Our growth strategy will place additional demands on our management, operational capacity and financial resources and systems. To effectively manage future growth, we must continue to expand our operational, financial and management information systems and train, motive and manage our work force. In addition, implementation of our growth strategy is subject to risks beyond our control, including competition, market acceptance of new products, changes in economic conditions, our ability to maintain our licensing agreements with MTV and Nickelodeon and our ability to finance increased levels of accounts receivable and inventory necessary to support our sales growth, if any. Accordingly, we cannot assure you that our growth strategy will be implemented successfully. 15 THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE Market prices of the securities of companies in the toy and entertainment industry are often volatile. The market prices of our common stock may be affected by many factors, including: -quarterly variations in our operating results; -operating results that vary from the expectations of investors and securities analysts; -changes in expectations as to our future financial performance, including financial estimates by investors and securities analysts; - the actions of our customers and competitors (including new product line announcements and introduction); - regulations affecting our manufacturing operations in China; - other factors affecting the entertainment and consumer electronics industries in general; and - sales of our common stock into the public market. In addition, the stock market periodically has experienced significant price and volume fluctuations which may have been unrelated to the operating performance of particular companies. OUR MANUFACTURING OPERATIONS ARE LOCATED IN THE PEOPLE'S REPUBLIC OF CHINA, SUBJECTING US TO RISKS COMMON IN INTERNATIONAL OPERATIONS We are dependent upon six factories in the People's Republic of China to manufacture all of our electronic products. Our arrangements with these factories are subject to the risks of doing business abroad, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, limitations on the repatriation of earnings, political instability, and other factors which could have an adverse impact on our business. Furthermore, we have limited control over the manufacturing processes themselves. As a result, any difficulties encountered by the third-party manufacturers that result in product defects, production delays, cost overruns or the inability to fulfill orders on a timely basis could adversely affect our business, financial condition and results of operations. We believe that the loss of any one or more of our manufacturers would not have a long-term material adverse effect on us because other manufacturers with whom we do business would be able to increase production to fulfill our requirements. However, the loss of certain of our manufacturers, could, in the short-term, adversely affect our business until alternative supply arrangements were secured. WE MAY HAVE SIGNIFICANT RETURNS, MARKDOWNS AND PURCHASE ORDER CANCELLATIONS As is customary in the consumer electronics industry, the Company has, on occasion, (i) permitted certain customers to return slow-moving items for credit, (ii) provided price protection to certain customers by making price reductions effective as to certain products then held by customers in inventory and (ii) accepted customer cancellations of purchase orders issued to the Company. The Company expects that it will continue to be required to make such accommodations in the future. Any significant increase in the amount of returns, markdowns or purchaser order cancellations could have a material adverse effect on the Company's results of operations. WE DEPEND ON THIRD PARTY SUPPLIERS FOR PARTS FOR OUR KARAOKE MACHINES AND RELATED PRODUCTS, AND IF WE CANNOT OBTAIN SUPPLIES AS NEEDED, OUR OPERATIONS WILL BE SEVERELY DAMAGED Our growth and ability to meet customer demand depends in part on our capability to obtain timely deliveries of karaoke machines and our electronic products. We rely on third party suppliers to produce the parts and materials we use to manufacture and produce these products. If our suppliers are unable to provide our factories with the parts and supplies, we will be unable to produce our products. We cannot guarantee that we will be able to purchase the parts we need at reasonable prices or in a timely fashion. In the last several years, there have been shortages of certain chips that we use in our karaoke machines. However, we have anticipated this shortage and have made commitments to our factories to purchase chips in advance. If we are unable to purchase these parts and materials, we will experience severe production problems, which may possibly result in the termination of our operations. 16 CONSUMER DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS AND CHANGES Our business and financial performance may be damaged more than most companies by adverse financial conditions affecting our business or by a general weakening of the economy. Purchases of karaoke machines and music are considered discretionary for consumers. Our success will therefore be influenced by a number of economic factors affecting discretionary and consumer spending, such as employment levels, business, interest rates, and taxation rates, all of which are not under our control. Adverse economic changes affecting these factors may restrict consumer spending and thereby adversely affect our growth and profitability. WE MAY BE INFRINGING UPON THE COPYRIGHTS OF THIRD PARTIES Each song in our catalog is licensed to us for specific uses. Because of the numerous variations in each of our licenses for copyrighted music, there can be no assurance that we have complied with scope of each of our licenses. Additionally, third parties over whom we exercise no control may use our sound recordings in such a way that is contrary to our license agreement and by violating our license agreement we may be liable for contributory copyright infringement. Any infringement claims may have a negative effect on our ability to sell products. WE HAVE SIGNIFICANT RELIANCE ON LARGE RETAILERS WHICH ARE SUBJECT TO CHANGES IN THE ECONOMY We sell products to retailers, including department stores, lifestyle merchants, direct mail retailers which are catalogs and showrooms, national chains, specialty stores, and warehouse clubs. Certain of such retailers have engaged in leveraged buyouts or transactions in which they incurred a significant amount of debt, and some are currently operating under the protection of bankruptcy laws. Despite the difficulties experienced by retailers in recent years, we have not suffered significant credit losses to date. Deterioration in the financial condition of our customers could have a material adverse effect on our future profitability. OUR NET INCOME MAY BE REDUCED IF OUR HONG KONG SUBSIDIARY DOES NOT RECEIVE AN EXEMPTION FOR OFFSHORE INCOME TAX Our Hong Kong subsidiary has applied for a Hong Kong "offshore claim" income tax exemption based on the locality of the profits of the Hong Kong subsidiary. Management believes that since the source of all profits of the Hong Kong subsidiary are from exporting to customers outside of Hong Kong, it is likely that the exemption will be approved. Accordingly, no provision for foreign income taxes has been provided in the Company's financial statements. In the event the exemption is not approved, the Hong Kong subsidiary's profits will be taxed at a flat rate of 16% resulting in an income tax expense of approximately $725,000 and $460,000 for fiscal 2001. As a result, our net income for fiscal 2002 would be $7,340,282 and $3,704,701 for fiscal 2001. OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF OUR MANAGEMENT TEAM Our success depends to a significant degree upon the continued contributions of our executive officers, both individually and as a group. Although we have entered into employment contracts with Edward Steele, our Chief Executive Officer; John Klecha, our President, Chief Operating Officer; and Jack Dromgold, our Executive Vice President of Sales and Marketing, the loss of the services of any of these individuals could prevent us from executing our business strategy. We cannot assure you that we will be able to find appropriate replacements for Edward Steele, John Klecha or Jack Dromgold, if the need should arise, and any loss or interruption of Mr. Steele, Mr. Klecha or Mr. Dromgold's services could adversely affect our business, financial condition and results of operations. Mr. Steele will be retiring in February 2003; however, we expect to retain him as a consultant on product development for a period of at least one-year after his retirement. OUR OBLIGATION TO MAKE SEVERANCE PAYMENTS COULD PREVENT OR DELAY TAKEOVERS. Our employment agreements with Eddie Steele, John Klecha, April Green and Jack Dromgold require us, under certain conditions, to make substantial severance payments to them if they resign after a change of control. These provisions could delay or impede a merger, tender, offer or other transaction resulting in a change in control of the Company, even if such a transaction would have significant benefits to our shareholder. As a result, these provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. 17 WE MAY BE SUBJECT TO CLAIMS FROM THIRD PARTIES FOR UNAUTHORIZED USE OF THEIR PROPRIETARY TECHNOLOGY, COPYRIGHTS OR TRADE SECRETS We believe that we independently developed the technology used in our electronic and audio software products and that it does not infringe on the proprietary rights, copyrights or trade secrets of others. However, we cannot assure you that we have not infringed on the proprietary rights of third parties or those third parties will not make infringement violation claims against us. Any infringement claims may have a negative effect on our ability to manufacture our products. YOUR INVESTMENT MAY BE DILUTED If additional funds are raised through the issuance of equity securities, your percentage ownership in our equity will be reduced. Also, you may experience additional dilution in net book value per share, and these equity securities may have rights, preferences, or privileges senior to those of yours. RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE FUTURE SALES OF OUR COMMON STOCK HELD BY CURRENT STOCKHOLDERS MAY DEPRESS OUR STOCK PRICE As of March 31 2002, there were 8,020,027 shares of our common stock outstanding. We have filed two registration statements registering an aggregate 4,792,234 of shares of our common stock ( a registration statement on Form S-3 registering the resale of 2,947,984 shares or our common stock and a registration statement on Form S-8 to registering the sale of 1,844,250 shares underlying options granted under our 1994 Stock Option Plan). We also intend to file a registration statement on Form S-8 to register 1,950,000 shares of our common stock underlying options granted under our Year 2001 Stock Option Plan. The market price of our common stock could drop due to the sale of large number of shares of our common stock, such as the shares sold pursuant to the registration statements or under Rule 144, or the perception that these sales could occur. ADVERSE EFFECT ON STOCK PRICE FROM FUTURE ISSUANCES OF ADDITIONAL SHARES Our Certificate of Incorporation authorizes the issuance of 18,900,000 million shares of common stock. As of March 31, 2002, we had 8,020,027 shares of common stock issued and outstanding and an aggregate of 1,064,475 outstanding options and warrants. As such, our Board of Directors has the power, without stockholder approval, to issue up to 9,815,498 shares of common stock. Any issuance of additional shares of common stock, whether by us to new stockholders or the exercise of outstanding warrants or options, may result in a reduction of the book value or market price of our outstanding common stock. Issuance of additional shares will reduce the proportionate ownership and voting power of our then existing stockholders. PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY AND COULD DEPRESS THE PRICE OF OUR COMMON STOCK. Delaware law and our certificate of incorporation and bylaws contain provisions that could delay, defer or prevent a change in control of our company or a change in our management. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. These provisions of our restated certificate of incorporation include: authorizing our board of directors to issue additional preferred stock, limiting the persons who may call special meetings of stockholders, and establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings. We are also subject to certain provisions of Delaware law that could delay, deter or prevent us from entering into an acquisition, including the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in a business combination with an interested stockholder unless specific conditions are 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. 18 ITEM 7. FINANCIAL STATEMENTS -------------------- The financial statements required pursuant to this Item 7 are included in this Annual Report on Form 10-KSB, as amended, 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 AND FINANCIAL DISCLOSURE ----------------------------------- No change or disagreement with Salberg & Company, P.A., the Company's independent auditing firm, took place with respect to the preparation of the Company's financial statements for the two (2) most recent fiscal years contained in this Annual Report on Form 10-KSB, namely the fiscal years ended March 31, 2002 and March 31, 2001. However, during fiscal 2001, the Company changed accountants. Weinberg & Company, P.A. (the "Former Accountant"), was replaced as independent certified public accountant and independent auditor for the Company on November 28, 2000. The Company's decision to change accountants was approved by its Board of Directors because Scott Salberg, the auditor who has been responsible for the Company's account, left the Former Accountant to start his own accounting firm. The report of the Former Accountant on the financial statements of the Company for the year ended March 31, 2000, did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's fiscal year ended March 31, 2000, and through November 28, 2000, there were no disagreements with the Former Accountant on any matters of accounting principles or practices, financial statement disclosure or auditing scope procedure, which, if not resolved to the satisfaction of the Former Accountant would have caused it to make reference to the subject matter of the disagreement in connection with its report on these financial statements for those periods. On November 28, 2000, the Company engaged Salberg & Company, P.A., as its independent auditor and independent certified public accountant. The Company did not consult with Salberg and Company, P.A. regarding the application of accounting principles to a specific transaction of the type of audit opinion that might be rendered on the Company's financial statements, and no written or oral advice was provided by Salberg & Company, P.A. that was a factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issues. ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL ---------------------------------------------------- PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT ---------------------------------------------------------- The following table sets forth certain information with respect to our executive officers and directors as of March 31, 2002. Name Age Position ---- --- -------- Edward Steele 72 Chief Executive Officer and Director John F. Klecha 51 President, Chief Operating Officer, Secretary, Treasurer, and Director Jack S. Dromgold 58 Senior Vice-President, Sales and Marketing April J. Green 38 Chief Financial Officer Josef A. Bauer 64 Director Howard W. Moore 71 Director Robert J. Weinberg 53 Director 19 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 our sales director and was responsible for the development of our electronic hardware products in the Far East. 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 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 as 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 our Chief Operating Officer and since March 2001, Mr. Klecha has served as our President. Mr. Klecha is in charge of all 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 industries, including as a senior financial and administrative executive of a privately held toy design, manufacturing and distribution company from 1987 through 1997; as 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. Jack Dromgold has served as our Senior Vice President of Sales and Marketing since April 16, 2002 through the present date. Prior to joining us, Mr. Dromgold served as Vice President of Sales for Hasbro Games from 1993 through April 2002. Mr. Dromgold is a 35-year veteran of the toy and game industry and has been involved in the development of sales programs to support the launch of many new products over the years. April Green has served as our Chief Financial Officer since March 15, 2002. Ms. Green joined our company in June 1999 as our controller and was promoted to the position of Director of Finance & Administration in January 1, 2000. Prior to joining us, Ms. Green held various positions of increasing responsibility with Monogram International, a large, Florida-based novelty and toy company from February 1993 to June 1999. At Monogram, Ms. Green rose from Staff Accountant to Controller. Prior to June 1999, she served in a variety of financial positions in the automotive industry in the Tampa area. Ms. Green is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. 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.). Howard Moore has served as a director since 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 the Chairman of the Advisory Board of Leapfrog Enterprises, Inc. 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 1997. 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. 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 Director of Sales - International, is the son of Edward Steele, our Chief Executive Officer and Director. 20 BOARD COMMITTEES We have an audit committee, an executive compensation/stock option committee and a nominating committee. The audit committee consists of Messrs. Bauer, Moore 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. Bauer, 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 During fiscal 2002, our non-employee directors received a $1,000 cash stipend for serving on our Board and reimbursement for all reasonable expenses incurred in attending meetings. During fiscal 2003, we are increasing our annual cash stipend to non-employee directors to $10,000 per year. We also grant each of our outside directors 10,000 options for each year of service on the Board. Effective as of July 2, 2002, we granted each of our three outside directors options to purchase 30,000 shares of the Company's common stock, with 10,000 options vesting each year on the day before our annual shareholder's meetings. The exercise price of the options will be equal to the fair market value of the Company's common stock on the date of grant. The options will be immediately vested and are exercisable for a period of five years after the vesting date. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT To our knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that during the year ended March 31, 2002, its officers, directors and 10% shareholders complied with all Section 16(a) filing requirements, except that, as a result of administrative errors: Mr. Steele filed a Form 4 reporting his exercise of two tranches of options in September 2001 one month late, (2) Mr. Moore filed a Form 4 reporting his seven separate purchases of the Company's common stock in September 2001 five days late and (3) Mr. Bauer filed a Form 4 reporting his exercise of four tranches of options and warrants in September 2001 one day late. Both of the Form 4's filed by Mr. Bauer and Mr. Moore were signed before the filing date, but it appears that the SEC did not receive the forms until after the filing date. ITEM 10. EXECUTIVE COMPENSATION ---------------------- The following table sets forth certain compensation information for the fiscal years ended March 31, 2000, 2001 and 2002 with regard to Edward Steele, our Chief Executive Officer, and each of our other executive officers whose compensation exceeded $100,000 on an annual basis (the "Named Officers"): 21
SUMMARY COMPENSATION TABLE -------------------------- Annual Compensation Long Term Compensation ------------------------------------------------------------------------------------------ Awards Payments ---------------------------------------------------- Securities Name of Individual and Other Annual Restricted Underlying/ LTIP All Other - ----------------------- ------------- ----------- ------------ ----- --------- Principal Position Year Salary Bonus(1) Compensation Stock Award(s)Options/ SARsPayouts Compensation - ------------------ ---- ------ -------- ------------ ---------------------------------- ------------ Edward Steele 2002 $364,145 $192,133 -0- -0- 15,000 -0- -0- CEO 2001 $320,865 $256,289 -0- -0- 315,000 -0- -0- 2000 $189,363 $ 54,570 -0- $377,500 (2) 45,000 -0- -0- John Klecha 2002 $286,111 $157,200 -0- -0- 15,000 -0- -0- President, Chief 2001 $255,777 $205,031 -0- -0- 300,000 -0- -0- Operating Officer 2000 $114,394 $ 43,656 -0- $253,125 (3) 58,500 -0- -0- April Green Chief Financial Officer (4) 2002 $ 88,825 $ 25,000 -0- -0- 30,000 -0- -0- 2001 $ 83,658 $ 17,000 -0- -0- 7,500 -0- -0- 2000 $ 44,850 $ 3,500 -0- -0- -0- -0- -0-
(1) The amounts disclosed in this column for fiscal 2002 and 2001 include the Company's contributions under its 401(k) savings plan and automobile allowances. The amounts disclosed for fiscal 2000 represent automobile allowances only. (2) 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. (3) 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. (4) Ms. Greene has served as our Chief Financial Officer since March 15, 2002. She served as the Director of Finance and Administration from January 1, 2000 through March 14, 2002 and as our controller from June 1999 through December 2000. OPTION GRANTS IN FISCAL 2002 - ---------------------------- The following table sets forth information concerning all options granted to our officers and directors during the year ended March 31, 2002. No stock appreciation rights ("SAR's") were granted.
Potential Realizable Value at Assumed Annual Rates of Stock Total Options Price Appreciation Shares Granted to for Option Term(2) Underlying Employees in Exercise Price Expiration ---------------------- Name Options Granted(1) Fiscal Year Per Share Date 5% 10% - ------------------------------------------------------------------------------------------------------- Edward Steele 15,000 50% $4.23 8/15/06 $17,550 $38,700 John Klecha 15,000 50% $4.23 8/15/06 $17,500 $38,700 April Green -0- -0- -0- -0- -0- -0-
(1) All options were granted pursuant to the Year 2001 Stock Option Plan. Option exercise prices were at the market when granted. (2) The dollar amounts under these columns are the result of calculations based on the market price on the date of grant at an assumed annual rate of appreciation over the maximum term of the option at 5% and 10% as required by applicable regulations of the SEC and, therefore, are not intended to forecast possible future appreciation, if any of the common stock price. Assumes all options are exercised at the end of their respective terms. Actual gains, if any, on stock option exercises depend on the future performance of the common stock. 22 AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 2002 AND OPTION VALUES The following table sets forth information as to the exercise of stock options during the fiscal year ended March 31, 2002 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(2) --------------- ------------------ Shares Acquired Value Exercisable/ Exercisable/ Name of Individual Upon Exercise Realized(1) Unexercisable Unexercisable - ----------------------------------------------------------------------------------------------------------------- Edward Steele 604,500 $5,390,260 191,250/146,250 $2,259,637.50/$2,034,337.50 John Klecha 130,000 $ 731,100 232,500/135,000 $2,961,390.00/$1,877,850.00 April Green 6,000 $ 41,283 13,500/13,500 $ 187,785.00/$ 187,785.00
(1) Value realized is based on the difference between the closing price of our common stock on the date of exercise and the option exercise prices times the number of outstanding options. (2) Value of unexercised options equals the closing price of $15.95 on March 28, 2002, less the option exercise price multiplied by the number of shares exercisable or unexercisable. EMPLOYMENT AND CONSULTING AGREEMENTS Edward Steele. In February 2002, Edward Steele announced that he would be retiring as our Chief Executive Officer on March 1, 2003, and that he would remain affiliated with our Company after his retirement as a product development consultant. In June 2002, our Board of Directors approved the terms of consulting agreement with Mr. Steele, which would commence on March 1, 2003 (subject to finalization of the terms of Mr. Steele's services in a definitive consulting agreement). Under this agreement, Mr. Steele will provide the company with consulting services related to product design, packaging, administration and training his replacement for a period of one year after his retirement. Mr. Steele will receive a consulting fee equal to $250,000 per year and will be entitled to all benefits that he received while he was employed by the Company. The consulting agreement will provide that Mr. Steele cannot directly or indirectly compete with our company in the karaoke industry in the United States during the term of the consulting agreement and for a period of one year after its termination. Additionally, in recognition of Mr. Steele's fourteen years of service with the company, the Board approved a $200,000 appreciation bonus to be paid to Mr. Steele on his retirement date. Until February 28, 2003, Mr. Steele will continue to be employed as our Chief Executive Officer under his current employment agreement with the company, which consists of his employment agreement dated March 1, 1998 and an amendment effective as of May 5, 2000. Under Mr. Steele's employment agreement, his annual salary is $385,875 for the period from June 1, 2002 through May 31, 2003. The agreement also provides for an annual bonus, as determined by the Board of Directors in its sole discretion. In the event of a termination of Mr. Steele's employment in the event of a change in control (as defined in the employment agreement), 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. Additionally, if Mr. Steele is terminated without cause, he is entitled to a lump sum payment equal to 300% of his annual compensation. John Klecha. In June 2002, we decided that Mr. Klecha would become our Chief Executive Officer, when Mr. Steele retired on February 28, 2003 (subject to finalization of the terms of Mr. Klecha's employment in a definitive employment agreement). We agreed that Mr. Klecha's annual compensation as Chief Executive Officer would be $367,500 per year and that Mr. Klecha would be entitled to a bonus equal to 1/3 of the Company's bonus pool. The bonus pool available to Mr. Klecha and all of the Company's other employees will be equal to 10% of the growth in the Company's net income between two consecutive fiscal years. Until we enter into a new employment agreement, Mr. Klecha will continue to be employed under his current employment agreement, which expires on May 31, 2003. 23 Under Mr. Klecha's current employment agreement, his annual compensation is $303,187.50 for the period from June 1, 2002 through May 31, 2003. The employment agreement provides for an annual bonus, as determined by the Board of Directors in its sole discretion. In the event of a termination of his employment following a change-in-control (as defined in the employment agreement), Mr. Klecha is entitled to a lump sum payment of 200% of the amount of his total compensation in the twelve months preceding such termination. Additionally, if Mr. Klecha is terminated without cause, he is entitled to a lump sum payment equal to 300% of his annual compensation. Jack Dromgold. On April 15, 2002, we entered into a three-year employment agreement with Jack Dromgold, our Senior Vice President of Sales and Marketing, expiring on April 14, 2005. Mr. Dromgold's employment agreement will be 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.. It is our intent that Mr. Dromgold will eventually become our Executive Vice President and then our President. However, we did not guarantee Mr. Dromgold that he would be promoted to those positions during his term of employment with our company. Pursuant to Mr. Dromgold 's employment agreement, he is entitled to receive an annual salary of $220,000 per year, which amount automatically increases during the second and third fiscal years by not less than the greater of 5% or the annual increase in the consumer price index. As a signing bonus, we agreed to pay Mr. Dromgold $50,000, with $25,000 payable within 10 days of employment and the remaining $25,000 payable after six months of employment. If Mr. Dromgold completes one year of employment with the Company, he does not have an obligation to repay the signing bonus. We also agreed to grant Mr. Dromgold 50,000 options. After his first year of employment, Mr. Dromgold can elect to return the 50,000 options to the Company or one of our representatives for $100,000. As of July 14, 2002, we have not granted the options to Mr. Dromgold. During his first year of employment, Mr. Dromgold's bonus will be equal to 1% of new accounts shipped, but shall be a minimum of $50,000. During the second year of his employment, Mr. Dromgold's bonus will be switched to 10% of the Company's then current bonus plan, subject to Board approval. We also agreed to pay Mr. Dromgold's certain moving and relocation expenses in connection with his move from Massachusetts to Florida. As of July 8, 2002, we estimate that these moving expenses are approximately $39,000. In the event of a termination of Mr. Dromgold's employment in the event of a change in control (as defined in the employment agreement), Mr. Dromgold is entitled to a lump sum payment of 50% of the amount of his total compensation in the twelve months preceding such termination. April Green. On March 15, 2002, we entered into a three-year employment agreement with April Green, our Chief Financial Officer, expiring on March 14, 2005. Ms. Green's employment agreement will be 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 Ms. Green's employment agreement, she is entitled to receive base compensation of $122,200 per year, which amount automatically increases during the second and third fiscal years by not less than the greater of 5% or the annual increase in the consumer price index. The agreement also provides for an annual bonus, as determined by the Board of Directors, in its sole discretion. During her second year of employment, Ms. Green's bonus will be equal to 8% of the Company's then current bonus plan, subject to Board approval. In the event of a termination of her employment following a change of control (as defined in her employment agreement), Ms. Green is entitled to a lump sum payment of 50% of the amount of her total compensation in the twelve months preceding such termination. EQUITY COMPENSATION PLANS AND 401(K) PLAN The Company has two stock option plans: the 1994 Amended and Restated Stock Option Plan ("1994 Plan") and the Year 2001 Stock Option Plan ("Year 2001 Plan"). Both the 1994 Plan and the Year 2001 Plan provide for the granting of incentive stock options and non-qualified stock options to our employees, officers, directors and consultants As of March 31, 2001, we had 970,225 options issued and outstanding under our 1994 Plan and 81,750 options are issued and outstanding under our Year 2001 Plan. Furthermore, as of March 31, 2002, we had 52,500 warrants issued and outstanding to FRS Investments, Inc. a consulting company, which were subsequently exercised by FRS in April 2002. The following table gives information about equity awards under our 1994 Plan, the Year 2001 Plan and FRS Investment's warrants. 24
Number of securities to be Weighted-average Number of securities remaining issued upon exercise exercise price of available for future issuance under or outstanding options, outstanding options, equity compensation plans Plan Category warrants and rights warrants and rights (excluding securities in column (a)) - ------------- ------------------- ------------------- ------------------------------------ Equity Compensation Plans approved by Security holders 1,011,975 $ 2.17 1,218,250 Equity Compensation Plans not approved by Security holders 52,500* $ .92 52,500*
*FRS Investments exercised these warrants in April 2002. 1994 PLAN Our 1994 Plan was originally adopted by our Board of Directors in May 1994 and it was approved by our shareholders on June 29, 1994. Our shareholders approved amendments to our 1994 Plan in March 1999 and September 2000. The 1994 Plan reserved for issuance up to 1,950,000 million share of our common stock pursuant to the exercise of options granted under the Plan. As of March 31, 2002, we had granted all the options that are available for grant under our 1994 Plan. As of March 31, 2002, we have 970,225 options issued and outstanding under the 1994 Plan, of which 494,362.5 of these options are vested. On December 1, 2002, all options granted under the 1994 Plan will become fully vested . YEAR 2001 PLAN On June 1, 2001, our Board of Directors approved the Year 2001 Plan and it was approved by our shareholders at our special meeting held September 6, 2001. The Year 2001 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. The Year 2001 Plan authorizes an aggregate of 1,950,000 shares of the Company 's common stock and a maximum of 450,000 shares to any one individual in any one fiscal year. The shares of common stock available under the Year 2001 Plan are subject to adjustment for any stock split, declaration of a stock dividend or similar event. At March 31, 2002, we had granted 81,750 options under the Year 2001 Plan, all of which are fully vested. The Year 2001 Plan is administered by our Stock Option Committee ("Committee"), which consists of two or more directors chosen by our Board. The Committee has the full power in its discretion to (i) grant options under the Year 2001 Plan, (ii) determine the terms of the options (e.g. - vesting, exercise price), (iii) to interpret the provisions of the Year 2001 Plan and (iv) to take such action as it deems necessary or advisable for the administration of the Year 2001 Plan. Options granted to eligible individuals under the Year 2001 Plan may be either incentive stock options ("ISO's"), which satisfy the requirements of Code Section 422, or nonstatutory options ("NSO's"), which are not intended to satisfy such requirements. Options granted to outside directors, consultants and advisors may only be NSO's. The option exercise price will not be less than 100% of the fair market value of the Company's common stock on the date of grant. ISO's must have an exercise price greater to or equal to the fair market value of the shares underlying the option on the date of grant (or, if granted to a holder of 10% or more of our common stock, an exercise price of at least 110% of the under underlying shares fair market value on the date of grant). The maximum exercise period of ISO's is 10 years from the date of grant (or five years in the case of a holder with 10% or more of our common stock). The aggregate fair market value (determined at the date the option is granted) of shares with respect to which an ISO are exercisable for the first time by the holder of the option during any calendar year may not exceed $100,000. If that amounts exceeds $100,000, our Board of the Committee may designate those shares that will be treated as NSO's. Options granted under the Year 2001 Plan are not transferable except by will or applicable laws of descent and distribution. Except as expressly determined by the Committee, no option shall be exercisable after thirty (30) days following an individual's termination of employment with the Company or a 25 subsidiary, unless such termination of employment occurs by reason of such individual's disability, retirement or death. The Committee may in its sole discretion, provide in a grant instrument that upon a change of control (as defined in the Year 2001 Plan) that all outstanding option issued to the grantee shall automatically, accelerate and become full exercisable. Additionally, the obligations of the Company under the Year 2001 Plan are binding on (1) any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company or (2) any successor corporation or organization succeeding to all or substantially all of the assets and business of the Company. In the event of any of the foregoing, the Committee may, at its discretion, prior to the consummation of the transaction, offer to purchase, cancel, exchange, adjust or modify any outstanding options, as such time and in such manner as the Committee deems appropriate. FRS INVESTMENTS, INC. CONSULTING AGREEMENT In July 1999, we entered into a financial consulting agreement with FRS Investments, Inc. pursuant to which FRS agreed to provide certain consulting services to our company. In connection with this agreement, we issued an aggregate of 127,500 warrants to FRS at an exercise price of $0.92 per share and an expiration date of June 8, 2002. As of June 8, 2002, all of these warrants were exercised. 401(K) PLAN Effective January 1, 2001, we adopted a voluntary 401(k) plan. All employees with at least one year of service are eligible to participate in our 401(k) plan. In fiscal 2002, we made a matching contribution of 100% of salary deferral contributions up to 3% of pay, plus 50% of salary deferral contributions from 3% to 5% of pay for each payroll period. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ----------------------------------------------- AND MANAGEMENT -------------- The following table sets forth, as of July 17, 2002, 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 July 17, 2002, we had 8,134,701 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. 26 Shares Beneficially Percent of Name & Address Owned Class - ----------------------------------------------------------------------- John Klecha 934,611(1) 11.2% Edward Steele 1,158,546(2) 14.0% Josef Bauer 951,272(3) 11.7% Howard Moore 265,977(4) 3.3% Robert Weinberg 50,322(5) * April Green 14,450(6) * Jack Dromgold 600(7) * All Directors and Executive 3,375,778(8) 39.1% Officers as a Group (5 persons) (1) Includes 232,500 shares issuable upon the exercise of stock options that are exercisable within 60 days of July 17, 2002. (2) Includes 191,250 shares issuable upon the exercise of stock options that are exercisable within 60 days of July 17, 2002 and 152,910 shares held by Mr. Steele's wife. Mr. Steele disclaims beneficial ownership of any shares held by his wife. (3) Includes 360,000 shares held by Mr. Bauer's pension plan, 200,000 shares held by Mr. Bauer's wife and 51,475 shares held jointly by Mr. Bauer and his wife. Also includes 162,600 shares held by the Bauer Family Limited Partnership, of which Mr. Bauer and his wife own a 98% interest. Includes 10,000 shares that are issuable upon the exercise of stock options that are exercisable within sixty days of July 17, 2002. Mr. Bauer disclaims beneficial ownership of any shares held by his wife. (4) Includes 189,400 shares held by Mr. Moore, as trustee for the Howard & Helen Moore Living Trust, 30,750 shares held by Howard Moore Associates, Inc. Defined Benefit Pension Plan and 2,077 shares held by the Howard & Helen Moore Irrevocable Insurance Trust. Also include 10,000 shares issuable upon the exercise of stock options that are exercisable within 60 days of July 17, 2002. (5) Includes 4,500 shares held by a limited liability company, of which Mr. Weinberg is a 50% owner, 372 shares held by Mr. Weinberg's IRA and 450 shares held by Mr. Weinberg's spouse. Also includes 45,000 shares issuable upon the exercise of stock options that are exercisable within 60 days of July 17, 2002. Mr. Weinberg disclaims beneficial ownership of any shares held by his wife. (6) Includes 13,500 shares issuable upon the exercise of stock options that are exercisable within 60 days of July 17, 2002. (7) Shares are held jointly by Mr. Dromgold and his wife. (8) Includes 502,250 shares issuable upon the exercise of stock options that are exercisable within 60 days of July 17, 2002. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- On July 1, 1999, we loaned $55,000 to each of Eddie Steele and John Klecha to purchase 2 units in our private placement. These loans bore interest at the rate of 9% per annum and were due on June 28, 2001. Mr. Klecha and Mr. Steele repaid these loans and all accrued interest in June 2001. In June 1999, we arranged a credit facility with Main Factors, whereby Main Factors purchased 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 provided letters of credit with our factories to import inventory for distribution to our customers. To secure the EPK facility, Edward Steele and John Klecha provided their personal guarantees. In consideration for providing their personal guarantees of these credit facilities, we issued 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. We amortized the value of these deferred guarantee fees over a two year period, which was completed in the first quarter of fiscal 2002. 27 ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (A) Exhibits 3.1 Certificate of Incorporation of the Singing Machine filed with the Delaware Secretary of State on February 15, 1994 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.2 Certificate of Agreement of Merger between the Singing Machine Company, Inc., a California corporation, and the Singing Machine Company, Inc., a Florida corporation, filed with the Delaware Secretary of State on May 3, 1994 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.3 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on July 19, 1994 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.4 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on July 26, 1994 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.5 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on November 4, 1994 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.6 Certificate of Renewal of the Singing Machine filed with the Delaware Secretary of State on April 2, 1998 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.7 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on April 20, 1998 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.8 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on May 7, 1998 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.9 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on April 13, 1999 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.10 Certificate of Designations, Preferences and Rights of Preferred Stock of the Singing Machine filed with the Delaware Secretary of State on April 15, 1999 (incorporated by reference to Exhibit 3.1 in the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.11 Certificate of Amendment of the Singing Machine filed with the Delaware Secretary of State on September 29, 2000 (incorporated by reference to Exhibit 3.1 in the Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1999 filed with the SEC on November 14, 2000). 3.12 Certificate of Correction filed with the Delaware Secretary of State on March 29, 2001 correcting the Amendment to our Certificate of Incorporation dated April 20, 1998 (incorporated by reference to Exhibit 3.11 in the Company's registration statement on Form SB-2 filed with the SEC on April 11, 2000).* 3.13 Certificate of Correction filed with the Delaware Secretary of State on March 30, 2001 correcting the Amendment to our Certificate of Incorporation dated May 7, 1998 (incorporated by reference to Exhibit 3.11 in the Company's registration statement on Form SB-2 filed with the SEC on April 11, 2001). 3.14 Amended By-Laws of the Singing Machine Company (incorporated by reference to Exhibit 3.14 in the Company's Annual Report on Form 10-KSB for the year ended March 31, 2001 filed with the SEC on June 29, 2001). 4.1 Form of Certificate Evidencing Shares of Common Stock (incorporated by reference to Exhibit 3.3. of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000) 4.2 Form of Warrant Certificate (incorporated by reference to Exhibit 3.4 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 10.1 Lease Agreement dated April 10, 2000 between The Singing Machine Company, Inc. and Rocco Ferrera & Co., Inc. and Lee S. Lasser, trustee of the Lee Lasser Trust dated August 25, 1972, as amended d/b/a Lyons Corporate Park for Office and warehouse space in Coconut Creek, Florida (incorporated by reference to Exhibit 10.1. of the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 28 10.2 Lease Agreement dated November 9, 2000 between the Singing Machine Company, Inc. and Marcel George & Joanne Marie George, trustees of Marcel George family trust of September 2, 1982 for warehouse space in Carson, California (incorporated by reference to Exhibit 10.2 of the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001.) 10.3 Lease Agreement dated August 2000 between Koon Wah Mirror Holdings Limited and International SMC (HK) Limited for office space in Hong Kong (incorporated by reference to Exhibit 10.3 of the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 10.4 Lease Agreement dated March 12, 2002, by and between Lyons Corporate Park LLP and The Singing Machine Company, Inc. for office space in Coconut Creek, Florida.(incorporated by reference to Exhibit 10.4 of the Company's Form 10-KSB filed with the SEC on July 1, 2002) 10.5 Sublease dated May 28, 2002 by and between The Singing Machine Company, Inc. and Busung America Corp. for warehouse space in Carson City, California (incorporated by reference to Exhibit 10.5 of the Company's Form 10-KSB filed with the SEC on July 1, 2002). 10.6 Lease documents for Ocean Centre dated April and June 2002 by and between Harbour City Management Limited and International SMC (HK) Ltd. for office space in Hong Kong. (incorporated by reference to Exhibit 10.6 of the Company's Form 10-KSB filed with the SEC on July 1, 2002). 10.7 Industrial Lease dated March 1, 2002, by and between AMP Properties, L.P. and The Singing Machine Company, Inc. for warehouse space in Compton, California (incorporated by reference to Exhibit 10.7 of the Company's Form 10-KSB filed with the SEC on July 1, 2002). 10.8 Employment Agreement dated May 1, 1998 between the Singing Machine and Edward Steele (incorporated by reference to Exhibit 10.1 of the Company's registration statement on Form SB-2 filed with SEC on March 7, 2000). 10.9 Employment Agreement dated June 1, 2000 between the Singing Machine and John Klecha (incorporated by reference to Exhibit 10.5 of the Company's registration statement on Form SB-2 filed with the SEC March 28, 2001). 10.10 Loan and Security Agreement dated April 2000 between LaSalle Business Credit, Inc. and the Singing Machine Company (incorporated by reference to Exhibit 3.1 in the Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1999 filed with the SEC on November 14, 2000). 10.11 First Amendment to Loan and Security Agreement dated October 1, 2001 between LaSalle Business Credit, Inc. and the Singing Machine Company (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-KSB for the year ended March 31, 2002 filed with the SEC on July 1, 2002). 10.12 Second Amendment to Loan and Security Agreement dated November 20, 2001 between LaSalle Business Credit, Inc. and the Singing Machine Company (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-KSB for the year ended March 31, 2002 filed with the SEC on July 1, 2002). 10.13 Third Amendment to Loan and Security Agreement dated November 28, 2001 between LaSalle Business Credit, Inc. and the Singing Machine Company (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-KSB for the year ended March 31, 2002 filed with the SEC on July 1, 2002). 10.14 Fourth Amendment to Loan and Security Agreement dated February 28, 2002 between LaSalle Business Credit, Inc. and the Singing Machine Company, Inc. (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-KSB for the year ended March 31, 2002 filed with the SEC on July 1, 2002). 10.15 Amended and Restated 1994 Management Stock Option Plan (incorporated by reference to Exhibit 10.6 to the Company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 10.16 Factoring Agreement dated April 7, 2000 between the Singing Machine and Main Factors, Inc. (incorporated by reference to Exhibit 10.7 to the company's registration statement on Form SB-2 filed with the SEC on March 28, 2001). 10.17 Master Agreement dated July 31, 1999 between EPK Financial Corporation and the Singing Machine (incorporated by reference to Exhibit 10.4 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 10.18 Singing Machine's Amended Bankruptcy Plan of Reorganization dated December 17, 1997 (incorporated by reference to Exhibit 10.5 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 10.19 Bankruptcy Court's Order Confirming the Plan of Reorganization (incorporated by reference to Exhibit 10.5 of the Company's registration statement on Form SB-2 filed with the SEC on March 7, 2000). 29 10.20 Employment Agreement between the Company and Jack Dromgold dated April 14, 2002* 10.21 Employment Agreement between the Company and April Green dated March 15, 2002.* 10.22 Lease Agreement dated March 31, 1999 between The Singing Machine Company, Inc. and Rocco Ferrera & Co., Inc. and Lee S. Lasser, trustee of the Lee S. Lasser Trust dated August 25, 1972, as amended d/b/a Lyons Corporate Park for office space in Coconut Creek, Florida.* 21.1 List of Subsidiaries* 23.1 Consent of Salberg & Company, P.A.* *Filed herewith (B) Reports on Form 8-K We did not file any reports on Form 8-K during the fourth quarter ended March 31, 2002. 30 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: July 22, 2002 By: /s/ John F. Klecha --------------------------------------------------- John F. Klecha, President, Chief Operating Officer, Secretary, Treasurer and Director (Principal Executive Officer) In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
Signature Capacity Date - --------- -------- ---- /s/ Edward Steele Chief Executive Officer July 22, 2002 - --------------------------- And Director Edward Steele (Principal Executive Officer) /s/ John F. Klecha President, Chief Operating July 22, 2002 - --------------------------- Officer, Secretary, Treasurer John F. Klecha and Director (Principal Executive Officer) /s/ April Green Chief Financial Officer July 22, 2002 - -------------------- (Principal Financial and April Green Accounting Officer) /s/ Josef A. Bauer Director July 22, 2002 - --------------------------- Josef A. Bauer /s/ Howard W. Moore Director July 22, 2002 - --------------------------- Howard W. Moore /s/ Robert J. Weinberg Director July 22, 2002 - --------------------------- Robert J. Weinberg
31 The Singing Machine Company, Inc. and Subsidiary Consolidated Financial Statements March 31, 2002 The Singing Machine Company, Inc. and Subsidiary Contents -------- Page(s) ------------- Independent Auditors' Report F-1 Consolidated Balance Sheet F-2 Consolidated Statements of Income F-3 Consolidated Statements of Changes in Stockholders' Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 - F-22 Independent Auditors' Report ---------------------------- Board of Directors and Shareholders: The Singing Machine Company, Inc. and Subsidiary We have audited the accompanying consolidated balance sheet of The Singing Machine Company, Inc., and Subsidiary as of March 31, 2002, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended March 31, 2002 and 2001. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Singing Machine Company, Inc. and Subsidiary as of March 31, 2002, and the results of their operations and their cash flows for the years ended March 31, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America. SALBERG & COMPANY, P.A. Boca Raton, Florida May 23, 2002 F-1 The Singing Machine Company, Inc. and Subsidiary Consolidated Balance Sheet March 31, 2002 --------------
Assets ------ Current Assets Cash and cash equivalents $ 5,520,147 Accounts receivable, net 3,536,903 Due from manufacturer 488,298 Inventories 9,274,352 Prepaid expenses and other current assets 1,118,321 Deposits 513,684 ----------- Total Current Assets 20,451,705 ----------- Property and Equipment, Net 574,657 ----------- Other Assets Reorganization intangible, net 185,416 Deferred tax asset 452,673 ----------- Total Other Assets 638,089 ----------- Total Assets $21,664,451 =========== Liabilities and Stockholders' Equity ------------------------------------ Current Liabilities Accounts payable $ 1,846,238 Accrued payroll 519,714 Accrued royalties 301,873 Accrued advertising 136,551 Other accrued expenses 331,459 Income tax payable 58,542 ----------- Total Current Liabilities 3,194,377 ----------- Stockholders' Equity Preferred stock, $1.00 par value, 1,000,000 shares authorized, no shares issued and outstanding -- Common stock, Class A, $0.01 par value, 100,000 shares authorized, no shares issued and outstanding -- Common stock, $0.01 par value, 18,900,000 shares authorized, 8,020,027 shares issued and outstanding 80,200 Additional paid-in capital 4,602,828 Retained earnings 13,787,046 ----------- Total Stockholders' Equity 18,470,074 ----------- Total Liabilities and Stockholders' Equity $21,664,451 ===========
See accompanying notes to consolidated financial statements F-2 The Singing Machine Company, Inc. and Subsidiary Consolidated Statements of Income Years Ended March 31, 2002 and 2001 -----------------------------------
2002 2001 ------------ ------------ Net Sales $61,828,894 $34,306,839 Cost of Sales 41,448,891 22,473,149 ------------ ------------ Gross Profit 20,380,003 11,833,690 ------------ ------------ Operating Expenses Compensation 2,486,547 1,916,612 Agency fees -- 647,908 Commissions 1,294,543 837,222 Advertising 2,377,638 921,359 Bad debt 45,078 85,302 Royalties 1,862,116 148,643 Selling, general and administrative expenses 4,078,701 2,249,051 ------------ ------------ Total Operating Expenses 12,144,623 6,806,097 ------------ ------------ Income from Operations 8,235,380 5,027,593 ------------ ------------ Other Income (Expenses) Other income 215,840 32,617 Interest income 16,934 50,242 Interest expense (112,123) (424,104) Stock based guarantee fees (171,472) (267,029) Factoring fees -- (231,298) ------------ ------------ Net Other Expenses (50,821) (839,572) ------------ ------------ Income Before Income Taxes 8,184,559 4,188,021 Income Tax Expense 119,277 23,320 ------------ ------------ Net Income $ 8,065,282 $ 4,164,701 ============ ============ Earnings per Share: Basic $ 1.13 $ 0.66 ============ ============ Diluted $ 1.02 $ 0.56 ============ ============ Weighted Average Common and Common Equivalent Shares Outstanding: Basic 7,159,142 6,291,792 ============ ============ Diluted 7,943,473 7,457,173 ============ ============
See accompanying notes to consolidated financial statements F-3 The Singing Machine Company, Inc. and Subsidiary Consolidated Statements of Changes in Stockholders' Equity Years Ended March 31, 2002 and 2001 -----------------------------------
Common Stock and Common Stock to be Preferred Shares Issued --------------------------- ---------------------------- Shares Amount Shares Amount ----------- ------------ ---------- ------------ Balance March 31, 2000 1,000,000 $ 1,000,000 $4,541,430 $45,414 Conversion of preferred stock (1,000,000) (1,000,000) 1,500,000 15,000 Exercise of warrants -- -- 570,000 5,700 Exercise of employee stock options -- -- 2,250 23 Cancellation of shares -- -- (75,000) (750) Warrants issued for services and as loan fees -- -- -- -- Amortization of deferred guarantee fees -- -- -- -- Net Income, 2001 -- -- -- -- ---------- ----------- ------------ ------------ Balance March 31, 2001 -- -- 6,538,680 65,387 Amortization of deferred guaranteed fees -- -- -- -- Exercise of warrants -- -- 581,100 5,811 Exercise of employee stock options -- -- 900,525 9,005 Fractional share adjustment pursuant to 3:2 stock split -- -- (278) (3) Net Income, 2002 -- -- -- -- ---------- ----------- ---------- ---------- Balance, March 31, 2002 -- $ -- 8,020,027 $80,200 ---------- =========== ========== ========== [restub] Additional Deferred Paid-in Retained Guarantee Capital Earnings Fees Totals ---------- ----------- --------- ---------- Balance March 31, 2000 $1,703,910 $ 1,557,063 (400,101) $ 3,906,286 Conversion of preferred stock 985,000 -- -- -- Exercise of warrants 574,300 -- -- 580,000 Exercise of employee stock options 622 -- -- 645 Cancellation of shares 750 -- -- -- Warrants issued for services and as loan fees 38,400 -- -- 38,400 Amortization of deferred guarantee fees -- -- 228,629 228,629 Net Income, 2001 -- 4,164,701 -- 4,164,701 ---------- ----------- -------- ----------- Balance March 31, 2001 3,302,982 5,721,764 (171,472) 8,918,661 Amortization of deferred guaranteed fees -- -- 171,472 171,472 Exercise of warrants 584,239 -- -- 590,050 Exercise of employee stock options 720,135 -- -- 729,140 Fractional share adjustment pursuant to 3:2 stock split (4,528) -- -- (4,531) Net Income, 2002 -- 8,065,282 -- 8,065,282 ---------- ----------- -------- ----------- Balance, March 31, 2002 $4,602,828 $13,787,046 -- $18,470,074 ========== =========== ======== ===========
See accompanying notes to consolidated financial statements F-4 The Singing Machine Company, Inc. and Subsidiary Consolidated Statements of Cash Flows Years Ended March 31, 2002 and 2001 -----------------------------------
2002 2001 ------------ ------------ Cash Flow from Operating Activities: Net income $ 8,065,282 $ 4,164,701 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 394,456 301,064 Stock based expenses 171,472 267,029 Bad debt 45,078 85,302 Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (2,626,329) (312,916) Due from manufacturer 210,798 (699,096) Inventories (4,460,891) (3,326,255) Prepaid expenses and other assets (444,004) (394,176) Increase (decrease) in: Accounts payable 1,364,158 467,491 Accrued expenses 199,445 672,342 Income taxes payable 35,222 11,326 ------------ ------------ Net Cash Provided by Operating Activities 2,954,687 1,236,812 ------------ ------------ Cash Flow from Investing Activities Purchase of property and equipment (613,691) (373,409) Deposits (513,684) -- Proceeds from repayment of related parties loans 7,692 -- Proceeds from repayment of officer loans 117,425 -- Proceeds from investment in factor 933,407 -- Investment in and advances to unconsolidated subsidiary -- (374,730) Proceeds from sale of unconsolidated subsidiary 298,900 -- Net proceeds from related parties -- 386,261 ------------ ------------ Net Cash Provided by (Used in) Investing Activities 230,049 (361,878) ------------ ------------ Cash Flow from Financing Activities Loan proceeds 21,856,653 600,000 Loan repayments (21,856,653) (600,000) Proceeds from exercise of stock options and warrants 1,319,190 580,645 Due from factor -- (818,206) ------------ ------------ Net Cash Provided by (Used in) Financing Activities 1,319,190 (237,561) ------------ ------------ Increase in Cash and Cash Equivalents 4,503,926 637,373 Cash and Cash Equivalents - Beginning of Year 1,016,221 378,848 ------------ ------------ Cash and Cash Equivalents - End of Year $ 5,520,147 $ 1,016,221 ============ ============ Supplemental Disclosures of Cash Flow Information: Cash paid during the year for interest $ 112,123 $ 424,104 ============ ============ Cash paid during the year for income taxes $ 102,415 $ 11,994 ============ ============
See accompanying notes to consolidated financial statements F-5 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- Note 1 Nature of Operations and Summary of Significant Accounting Policies - --------------------------------------------------------------------------- (A) Nature of Operations The Singing Machine Company, Inc., a Delaware corporation, and Subsidiary (the "Company") is primarily engaged in the production, marketing, and sale of consumer karaoke audio equipment, accessories, and recordings. The products are sold directly to distributors and retail customers. (B) Principles of Consolidation The consolidated financial statements include the accounts of The Singing Machine Company, Inc. and its wholly-owned Hong Kong Subsidiary, International SMC (HK) Limited ("Hong Kong Subsidiary"). All significant intercompany accounts and transactions have been eliminated in consolidation. (C) Foreign Currency Translation The functional currency of the Company's Hong Kong Subsidiary is the local currency. The financial statements of the subsidiary are translated to United States dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the year for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not material during the periods presented. The cumulative translation adjustment and effect of exchange rate changes on cash at March 31, 2002 was not material. (D) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (E) Cash and Cash Equivalents For purposes of the cash flow statement, the Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. (F) Concentration of Credit Risk The Company maintains its cash in bank deposit accounts, which, at times, exceed federally insured limits. At March 31, 2002, the Company had $213,940 in United States bank deposits, which exceed federally insured limits and $5,219,326 in commercial paper, which is not insured. The Company has not experienced any losses in such accounts through March 31, 2002. F-6 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- (G) Inventories Inventories primarily consist of finished goods, which are comprised of electronic karaoke audio equipment, accessories, and compact discs. Inventories are stated at the lower of cost or market, as determined using the first in, first out method. Inventory consigned to one customer at March 31, 2002 was $2,020,172. (See Note 13) (H) Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided using an accelerated method over the estimated useful lives of the related assets over 3 to 7 years. (I) Long-Lived Assets The Company reviews long-lived assets and certain identifiable assets related to those assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. If the non-discounted future cash flows of the enterprise are less than their carrying amount, their carrying amounts are reduced to fair value and an impairment loss is recognized. (J) Stock-Based Compensation The Company accounts for stock options issued to employees in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation cost is measured on the date of grant as the excess of the current market price of the underlying stock over the exercise price. Such compensation amounts are amortized over the respective vesting periods of the option grant. The Company adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities to provide pro forma net income (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-valued based method defined in SFAS No. 123 had been applied. The Company accounts for stock options and stock issued to non-employees for goods or services in accordance with SFAS 123. (K) Revenue Recognition Revenue from the sale of equipment, accessories, and recordings are recognized upon shipment and are reported net of actual and estimated future returns and allowances. Revenues from sales of consigned inventory is recognized upon sale of product by the consignee. The Company offers a consumer product warranty for returns up to 90 days after purchase. F-7 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- (L) Advertising In accordance with Accounting Standards Executive Committee Statement of Position 93-7, ("SOP 93-7") costs incurred for producing and communicating advertising of the Company, are charged to operations as incurred. The Company has cooperative advertising arrangements with its vendors and accrues the cost of advertising against the related revenues. Advertising expense for the years ended March 31, 2002 and 2001 was $2,377,638 and $921,359, respectively. (M) Income Taxes Income taxes are accounted for under the asset and liability method of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109 deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (N) Earnings Per Share In accordance with, Statement of Financial Accounting Standards No. 128 "Earnings per Share", basic earnings per share is computed by dividing the net income less preferred dividends for the period by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income less preferred dividends by the weighted average number of common shares outstanding including the effect of common stock equivalents. The following table presents a reconciliation of basic and diluted earnings per share: 2002 2001 ---------- ---------- Net income $8,065,282 $4,164,701 ---------- ---------- Income available to common shares 8,065,282 4,164,701 Weighted average shares outstanding - basic 7,159,142 6,291,792 EPS - Basic $ 1.13 $ 0.66 ========== ========== Income available to common shares $8,065,282 $4,164,701 Weighted average shares outstanding - basic 7,159,142 6,291,792 Effect of dilutive securities: Stock options 784,331 1,127,555 Warrants issued with preferred stock -- 37,826 ---------- ---------- Weighted average shares outstanding - diluted 7,943,473 7,457,173 EPS - Diluted $ 1.02 $ 0.56 ========== ========== F-8 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- In 2001, the 2,484,000 public warrants and 45,000 common stock options (as restated for the 3 for 2 stock split) were not included in the computation of diluted earnings per share as their effect would have been anti-dilutive. (O) Reorganization under United States Bankruptcy Code and Fresh Start Reporting On April 11, 1997, the Company filed for protection under the provisions of the United States Bankruptcy Code. In March 1998, the United States Bankruptcy Court approved the Company's Plan of Reorganization, as Amended, and the Company emerged from Chapter 11 Bankruptcy. At that time, the Company applied Fresh Start Reporting in accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7")." As a result of the application of SOP 90-7, the Company restated its assets and liabilities to their fair values as necessary, and reclassified its accumulated deficit of $6,841,684 against available additional paid-in capital of $6,200,262 resulting in a reorganization intangible asset of $641,422, which was being amortized on a straight-line basis over a period of seven years. (See Note 5) Pursuant to SAS 142, effective on April 1, 2002, the Company no longer amortizes the remaining balance of the Reorganization Intangible. (P) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosures of information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amounts of the Company's short-term financial instruments, including accounts receivable, accounts payable, accrued expenses, and income taxes payable approximate fair value due to the relatively short period to maturity for these instruments. (Q) Recent Accounting Pronouncements Statement No. 141 "Business Combinations" establishes revised standards for accounting for business combinations. Specifically, the statement eliminates the pooling method, provides new guidance for recognizing intangible assets arising in a business combination, and calls for disclosure of considerably more information about a business combination. This statement is effective for business combinations initiated on or after July 1, 2001. The adoption of this pronouncement on July 1, 2001 did not have a material effect on the Company's financial position, results of operations or liquidity. Statement No. 142 "Goodwill and Other Intangible Assets" provides new guidance concerning the accounting for the acquisition of intangibles, except those acquired in a business combination, which is subject to SFAS 141, and the manner in which intangibles and goodwill should be accounted for subsequent to their initial recognition. Generally, intangible assets with indefinite lives, and goodwill, are no longer amortized; they are carried at lower of cost or market and subject to annual impairment evaluation, or interim impairment evaluation if an interim triggering F-9 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- event occurs, using a new fair market value method. Intangible assets with finite lives are amortized over those lives, with no stipulated maximum, and an impairment test is performed only when a triggering event occurs. This statement is effective for all fiscal years beginning after December 15, 2001. The Company believes that the implementation of SFAS 142 on April 1, 2002 will not have a material effect on the Company's financial position, results of operations or liquidity. Statement No. 143, "Accounting for Asset Retirement Obligations," requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial statements. Statement No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" supercedes Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). Though it retains the basic requirements of SFAS 121 regarding when and how to measure an impairment loss, SFAS 144 provides additional implementation guidance. SFAS 144 excludes goodwill and intangibles not being amortized among other exclusions. SFAS 144 also supercedes the provisions of APB 30, "Reporting the Results of Operations," pertaining to discontinued operations. Separate reporting of a discontinued operation is still required, but SFAS 144 expands the presentation to include a component of an entity, rather than strictly a business segment as defined in SFAS 131, Disclosures about Segments of an Enterprise and Related Information. SFAS 144 also eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. This statement is effective for all fiscal years beginning after December 15, 2001. The Company believes that the future implementation of SFAS 144 on April 1, 2002 will not have a material effect on the Company's financial position, results of operations or liquidity. Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections," updates, clarifies, and simplifies existing accounting pronouncements. Statement No. 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses. Statement 64 amended Statement 4, and is no longer necessary because Statement 4 has been rescinded. Statement 44 was issued to establish accounting requirements for the effects of transition to the provisions of the motor Carrier Act of 1980. Because the transaction has been completed, Statement 44 is no longer necessary. Statement 145 amends Statement 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment is consistent with FASB's goal requiring similar accounting treatment for transactions that have similar economic effects. The adoption of SFAS No. 145 is not expected to have a material impact on the Company's consolidated financial statements. F-10 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- (R) Reclassifications Certain amounts in the 2001 consolidated financial statements have been reclassified to conform to the 2002 presentation. Note 2 Accounts Receivable and Factor Agreement - ------------------------------------------------ Accounts receivable at March 31, 2002 was as follows: Accounts receivable $3,548,925 Allowance for doubtful accounts (12,022) ---------- $3,536,903 ========== During 2001, the Company sold certain trade accounts receivable, primarily without recourse, pursuant to a factoring agreement. The Company terminated the factoring agreement in April 2001 upon obtaining a new Loan and Security Agreement with a commercial lender. (See Note 7) During 2000, two officers of the Company entered into guarantee agreements related to the factor agreement resulting in deferred guarantee fees of $400,101, which was being amortized over the term of the factor agreement. Upon termination of the factor agreement, the remaining deferred guarantee fees of $171,472 were charged to operations as amortization. For the year ending March 31, 2001, the Company incurred $429,509 in factoring fees and interest. The portion representing factor interest expense was $198,208 of the $429,506. Note 3 Sale of Unconsolidated Subsidiary - ----------------------------------------- In November 2000, the Company closed on an acquisition of 60% of the ordinary voting shares of a Hong Kong toy company for a total purchase price of $170,000. The Company believed that the acquiree had agreed to extend the effective date to June 2001, but a dispute arose and the Company committed to dispose of the entire investment. Accordingly, pursuant to Statement of Financial Accounting Standards No. 94 "Consolidation of All Majority-Owned Subsidiaries," the Company treated the control of the subsidiary as temporary and recorded the investment of $170,000 and advances of $220,661 at cost. The Company completed a contract selling the 60% interest on September 11, 2001. The transaction resulted in a net loss on investment of $48,912 included in selling, general, and administrative expenses. The balance receivable at March 31, 2002 was $75,831 included in prepaids and other current assets. Note 4 Property and Equipment - ------------------------------ Property and equipment at March 31, 2002 is as follows: Computer and office equipment $ 230,025 Furniture and fixtures 106,164 Leasehold improvements 62,483 Molds and tooling 1,022,900 ---------- 1,421,572 Less accumulated depreciation (846,915) ---------- Total $ 574,657 ========== F-11 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- Depreciation expense for the years ended March 31, 2002 and 2001 was $302,824 and $209,432, respectively. Note 5 Reorganization Intangible - ---------------------------------- The reorganization intangible resulted from the application of Fresh Start Accounting in March 1998 pursuant to the American Institute of Certified Public Accountants Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code." (See Note 1(O)) The reorganization intangible was being amortized over a period of seven years using a straight-line basis. In accordance with SFAS 109, in 2001, the reorganization intangible was reduced by $89,479 of an income tax benefit realized as a result of an increase in deferred tax assets resulting from a reduced valuation allowance. (See Note 12) The reorganization intangible at March 31, 2002 consisted of the following: Reorganization intangible $ 641,422 Less accumulated amortization (366,527) Less allocated income tax benefit (89,479) --------- $ 185,416 ========= Amortization expense on the reorganization intangible in each of the years ended March 31, 2002 and 2001 was $91,632. Note 6 Deposit for Letter of Credit Facility - --------------------------------------------- The Company, through its Hong Kong subsidiary, maintains a letter of credit facility with a major international bank. The Company's subsidiary is required to maintain a separate deposit account in the amount of $513,684. This amount is included in deposits at March 31, 2002. Note 7 Loans and Letters of Credit - ------------------------------------ (A) Credit Facility On May 19, 1999, as amended on February 14, 2000, the Company, through its Hong Kong Subsidiary, obtained a credit facility of $500,000 from a Hong Kong subsidiary of a Belgian bank. This facility is a revolving line of credit based upon drawing down a maximum of 15% of the value of export letters of credit lodged with Belgian Bank. There is no expiration date to this agreement, except that Belgian Bank reserves the right to revise the terms and conditions at the Bank's discretion. The cost of this credit facility is the U.S. Dollar prime rate plus 1.25%. Repayment of principal plus interest shall be made upon negotiation of the export letters of credit, but not later than 90-days after the advance. As of March 31, 2002, there was no outstanding balance on this credit facility. F-12 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- (B) Loan and Security Agreement On April 26, 2001, the Company executed a Loan and Security Agreement (the "Agreement") with a commercial lender (the "Lender"). The Lender will advance up to 75% of the Company's eligible accounts receivable, plus up to 40% of the eligible inventory, plus up to 40% of the commercial letters of credit opened for the purchase of eligible inventory, less reserves of up to $1,200,000 as defined in the agreement. The outstanding loan limit varies between zero and $10,000,000 depending on the time of year, as stipulated in the Agreement. The Lender also provides the Company the ability to issue commercial letters of credit up to $2,500,000, which shall reduce the loan limits above. The loans bear interest at the commercial lender's prime rate plus 0.5% and an annual fee equal to 1% of the maximum loan amount or $100,000 is payable. The term of the loan facility expires on April 26, 2004 and is automatically renewable for one-year terms. All amounts under the loan facility are due within 90 days of demand. The loans are secured by a first lien on all present and future assets of the Company except for certain tooling located at a vendor in China. The Agreement contains a financial covenant stipulating a minimum tangible net worth of $7,200,000 as of March 31, 2002 with escalations as defined in the Agreement. There was no balance outstanding at March 31, 2002. Note 8 Commitments and Contingencies - -------------------------------------- (A) Leases On March 31, 1999 and April 10, 2000, the Company entered into lease agreements for office and warehouse facilities in Florida for a term of 61 months and 52 months, respectively. The terms began on August 1, 1999 and April 14, 2000. Pursuant to the terms of the leases, the Company must pay maintenance and real estate taxes of approximately $13,000 per year. On November 9, 2000, the Company leased a warehouse in California commencing January 1, 2001 for 37 months with base rent of $11,500 per month. This space has been subleased starting June 1, 2002 through January 31, 2002 for $12,393 per month. The Company leases a showroom in New York commencing September 1, 2001 through August 31, 2002 at a rate of $3,000 a month. The Company also leases office space in Hong Kong for $4,655 per month which lease expires October 31, 2002. In addition, the Company maintains various warehouse equipment and computer equipment leases. (See Note 16) Total rent expense was approximately $172,500 and $142,500 for 2002 and 2001, respectively. Future minimum lease payments under non-cancelable operating leases with terms exceeding one year as of March 31, 2002 are as follows: F-13 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- Year ending March 31: 2003 $ 578,449 2004 604,015 2005 412,460 2006 407,640 2007 407,640 Thereafter 339,700 ---------- $2,749,904 ========== (B) Employment Agreements The Company has employment contracts with three key officers as of March 31, 2002 (See Note 16). The agreements call for base salaries, with annual cost of living adjustments and travel allowances. The agreements also call for aggregate Board approved performance bonuses of up to 10% of net income before those performance bonuses, interest, and taxes. Such bonus is allocated to the three key officers and certain other key employees. During 2002 and 2001, the bonus percentage was 5% and 10%, respectively. (C) Merchandise License Agreements On November 1, 2000, as amended on November 29, 2001, the Company entered into a merchandise license agreement to license a name, tradename, and logo of a music oriented television network. The term of the agreement is from November 1, 2000 to December 31, 2003. However, shipment of related products did not begin until after March 31, 2001. Accordingly, none of the minimum royalty was charged to operations as of March 31, 2001. The Company pays a royalty rate of a percentage of stipulated sales, as defined in the agreement, with $686,250 guaranteed minimum royalties for the term, payable on a scheduled basis as stipulated in the agreement. Through 2002, the royalties expense exceeded the minimum royalty for the entire contract. (See Note 11) On December 1, 2001, the Company entered into an additional agreement with a division of above licensor for additional license properties and products. The license term is January 1, 2002 to December 31, 2004 with an initial stipulated ship date of August 15, 2002. The agreement stipulates a royalty rate as a percentage of net sales (defined as gross sales less discounts, allowances and damaged goods returns not to exceed 8% of gross sales), payable quarterly, with a guaranteed minimum royalty for the license term of $450,000 payable as follows: $25,000 on execution of agreement $85,000 on or before September 1, 2002 $85,000 on or before December 1, 2002 $85,000 on or before March 1, 2003 $85,000 on or before June 1, 2003; and $85,000 on or before September 1, 2003 The guaranteed royalty is non-refundable and not recoupable against any other license agreements with the licensor. F-14 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- (D) Significant Estimates The Company records an accrual for product returns in the normal course of business. The accrual is estimated based on historical experience and is recorded as a liability equal to the gross profit on estimated returns. At March 31, 2002, the accrual was approximately $164,000. The Company estimates an allowance for doubtful accounts using the specific identification method since a majority of accounts receivable are concentrated with several customers. The allowance was $12,022 at March 31, 2002. (E) Legal Matters The Company is subject to litigation relating to claims arising in the normal course of business. Note 9 Related Party Transactions - ---------------------------------- The Company's Hong Kong Subsidiary operates as an intermediary to purchase karaoke hardware from factories located in China on behalf of the Company. A primary manufacturer affiliated with a former director of the Company credited the Company for past purchases of approximately $799,000 as of March 31, 2001 for a portion of expenses incurred from product returns. The $799,000 amount was credited to cost of goods sold in 2001. The balance including some new credits as of March 31, 2002 was $488,298. The total goods purchased from this manufacturer during 2002 and 2001 aggregated approximately 51% and 80% of the total purchases, respectively. (See Note 13) Note 10 Stockholders' Equity - ---------------------------- (A) Amendment to Authorized Shares During September 2000, the Company filed an amendment to its Articles of Incorporation decreasing the authorized shares of the Company's common stock to 18,900,000 shares and 100,000 Class A common shares. (B) Stock Split On March 15, 2002, the Company affected a 3 for 2 stock split. All share and per share data have been retroactively restated in the accompanying consolidated financial statements to reflect the split. (C) Preferred Stock and Warrants During April 1999, the Company issued a private placement memorandum, pursuant to Rule 506 of Regulation D of the 1933 Securities Act, as amended, to offer a minimum of 40 units and a maximum of 50 units of stock and warrants. Each unit consisted of 30,000 shares of the Company's 9% non-voting convertible preferred stock and 6,000 common stock purchase warrants. The purchase price for each unit was $ 27,500. Each share of preferred stock was convertible, at the option of the holder, into one share of the Company's common stock at any time after issuance, and was to automatically convert into one share of common stock on April 1, F-15 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- 2000. All preferred shares automatically converted on April 1, 2000. Each warrant entitles the holder to purchase one share of the Company's common stock at $2.00 per share. The warrants expire three years from the private placement memorandum date. Through June 1999, the maximum number of 50 units had been sold and $1,375,000 gross funds were raised ($1,331,017 after related costs), at which time the offer was closed. During 2000, 2001, and 2002, 24,000, 201,000, and 75,000 warrants were converted for $32,000, $268,000, and $100,000, respectively leaving no warrants outstanding at March 31, 2002. (D) Common Stock Warrants Expiration In November 2001, 2,484,000 public warrants expired unexercised. (E) Common Stock Issuances During 2002, the Company issued 1,418,625 common shares for cash proceeds of $1,319,190 upon exercise of options and warrants. (F) Guarantee Fees During the year ended March 31, 2000, the Company issued 525,000 shares of common stock to two officers of the Company in exchange for guarantees related to the Company's factor agreement (See Note 2), and letter of credit agreement. (See Note 7) These guarantee fees totaled $590,625 and are amortized over a period of 31 months. Accordingly, in 2000, the Company recognized $190,524 as guarantee fees and recorded $400,101 as deferred guarantee fees, presented as a deduction from equity. In 2001, $228,629 of deferred fees were charged to operations. During June 2001, the Company terminated its letter of credit and factor agreements and recognized the remaining amortization at that time. During the year ended March 31, 2001, the Company issued 37,500 common stock options for services and 45,000 common stock warrants to two investors as loan fees. The fair market value of the options totaling $38,400 was charged to operations. (G) Stock Options On June 1, 2001, the Board of Directors approved the 2001 Stock Option Plan, which replaced the 1994 Stock Option Plan, as amended, (the "Plan"). The Plan was developed to provide a means whereby directors and selected employees, officers, consultants, and advisors of the Company may be granted incentive or non-qualified stock options to purchase common stock of the Company. As of March 31, 2002, the Plan authorizes options up to an aggregate of 1,950,000 shares of the Company's common stock and up to 300,000 shares for any one individual in any fiscal year. In accordance with SFAS 123, for options issued to employees, the Company applies APB Opinion No. 25 and related interpretations in accounting for its plan. On August 15, 2001, the Company issued options to purchase an aggregate 75,000 common shares to directors at an exercise price of $4.23, which equals the fair market value of the common stock at the grant date. Accordingly, no compensation cost has been recognized for options issued under the Plan in 2002 F-16 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- or 2001. Had compensation cost for the Company's stock-based compensation plan been determined on the fair value at the grant dates for awards under that plan, consistent with Statement of Accounting Standards No 123, "Accounting for Stock Based Compensation" (Statement No. 123), the Company's net income for the year ended March 31, 2001 would not have changed and the net income for the year ended March 31, 2002 would have been decreased to the pro-forma amounts indicated below. 2002 ---------- Net income As reported $8,065,282 Pro forma $7,949,793 Net income per share - basic As reported $ 1.13 Pro forma $ 1.11 Net income per share - diluted As reported $ 1.02 Pro forma $ 1.00 The effect of applying Statement No. 123 is not likely to be representative of the effects on reported net income for future years due to, among other things, the effects of vesting. For stock options and warrants issued to consultants, the Company applies SFAS 123. Accordingly, consulting expense of $38,400 was charged to operations in 2001. There was no consulting expense relating to grants in 2002. For financial statement disclosure purposes and for purposes of valuing stock options and warrants issued to consultants, the fair market value of each stock option granted was estimated on the date of grant using the Black-Scholes Option-Pricing Model in accordance with SFAS 123 using the following weighted-average assumptions in 2001: expected dividend yield 0%, risk-free interest rate of 6.08% to 6.81%, volatility 42% and expected term of two years. A summary of the options issued under the employment and consulting agreements as of March 31, 2002 and 2001 and changes during the years is presented below:
2002 2001 ---------------------------------------------------------------------------- Number of Weighted Number of Weighted Options and Average Options and Average Warrants Exercise Price Warrants Exercise Price ----------- -------------- ----------- -------------- Stock Options Balance at beginning of period 2,403,300 $1.31 1,593,300 $0.67 Granted 82,800 $3.92 1,215,750 $2.01 Exercised (1,406,625) $0.87 (371,250) $0.84 Forfeited (15,000) $2.04 (34,500) $0.92 ---------- ----- --------- ----- Balance at end of period 1,064,475 $2.11 2,403,300 $1.31 ========== ===== ========= ===== Options exercisable at end of period 1,064,475 $2.11 1,420,050 $0.70 Weighted average fair value of options granted during the period $1.54 $0.85 ===== =====
F-17 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- The following table summarizes information about employee stock options and consultant warrants outstanding at March 31, 2002:
Options and Warrants Outstanding Options and Warrants Exercisable ---------------------------------------------------------------- -------------------------------- Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Outstanding at Contractual Exercise Exercisable at Exercise Price March 31, 2002 Life Price March 31, 2002 Price --------- -------------- ----------- -------- ------------------ -------- $2.04 851,025 4.67 Years $2.04 425,513 $2.04 4.23 60,000 4.38 Years 4.23 60,000 4.23 3.27 42,450 3.95 Years 3.27 21,225 3.27 1.11 58,500 2.24 Years 1.11 58,500 1.11 0.92 52,500 0.19 Years 0.92 52,500 0.92 --------- ----- ------- ----- 1,064,475 $2.11 617,738 $2.11 ========= ===== ======= =====
Note 11 Royalty Expense - ----------------------- The Company enters into licensing and royalty agreements with music publishers (the "Licensors") in the normal course of business. In addition, the Company pays royalties under a merchandise license agreement. (See Note 8(C)) Royalty expense during 2002 and 2001 was $1,862,116 and $148,643, respectively. Note 12 Income Taxes - -------------------- The Company files separate tax returns for the parent and for the Hong Kong Subsidiary. The income tax expense (benefit) for federal, foreign, and state income taxes in the consolidated statement of income consisted of the following components for 2002 and 2001: 2002 2001 -------- -------- Current: U.S. Federal $ -- $21,320 Foreign -- -- State 119,277 2,000 -------- ------- 119,277 23,320 -------- ------- Deferred: U.S. Federal -- -- Foreign -- -- -------- ------- -- -- -------- ------- Total $119,277 $23,320 ======== ======= The Company's Hong Kong subsidiary has applied for a Hong Kong "offshore claim" income tax exemption based on the locality of the profits of the Hong Kong subsidiary. Management believes that since the source of all profits of the Hong Kong subsidiary are from exporting to customers outside of F-18 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- Hong Kong; it is likely the exemption will be approved. Accordingly, no provision for foreign income taxes on the profits of the Hong Kong subsidiary have been provided in the accompanying consolidated financial statements. In the event the exemption is not approved, the Hong Kong subsidiary profits will be taxed at a flat rate of 16% resulting in an income tax expense of approximately $725,000 and $460,000 for 2002 and 2001, respectively. The actual tax expense differs from the "expected" tax expense for the years ended March 31, 2002 and 2001 (computed by applying the U.S. Federal Corporate tax rate of 34 percent to income before taxes) as follows:
2002 2001 ----------- ----------- Computed "expected" tax expense $ 2,782,750 $1,423,927 State income taxes, net of Federal income tax benefit 78,723 -- Indefinite deferral of foreign earnings (1,541,493) (978,309) Stock based guarantee fees 20,405 27,207 Disqualifying ISO dispositions (26,926) -- Non-qualified stock options exercised -- (51,185) Meals and entertainment 6,999 2,982 Usage of United States net operating loss carryforwards (1,201,181) (424,622) United States alternative minimum tax -- 23,320 ----------- ---------- $ 119,277 $ 23,320 =========== ==========
The Company has not recognized a deferred tax liability for its foreign income in 2002 and 2001 since the reversal of this temporary difference is indefinite. Accordingly, the amounts of $1,541,493 and $978,309, respectively, which represent 34% of the foreign net income, have been reflected as a permanent difference at March 31, 2002 and 2001, respectively. The actual tax expense may be significantly larger in future years as the net operating loss is expected to be fully absorbed (except for the limited portion) during the 2003 fiscal year. In addition, the indefinite deferral of future and accumulated foreign earnings will depend on the Company's domestic versus foreign strategic plans. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at March 31, 2002 are as follows: F-19 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- Deferred tax assets: United States net operating loss carryforward $261,255 State net operating loss carryforward 89,315 Bad debt reserve 4,087 Reserve for sales return 55,886 Stock based expense 13,056 Amortization of reorganization intangible 36,400 -------- Total Gross Deferred Assets 459,999 Less valuation allowance -- -------- 459,999 Deferred tax liability: Depreciation (7,326) -------- Net Deferred Tax Asset $452,673 ======== On September 3, 1991, the Company underwent a change of ownership (as defined by Internal Revenue Code Section 382). This change limits the Company's ability to utilize it's approximately $4,057,000 of net operating loss carryforwards (NOL's) to $54,240 at a rate of $13,560 per year (these NOL's expire from 2004 to 2007). At March 31, 2002, the Company had useable net operating loss carryforwards of approximately $714,159 for federal income tax purposes, (which are not subject to the above limitations) which is immediately available to offset future taxable income of the United States entity expiring through 2019. The valuation allowance at April 1, 2001 was $1,059,089. The net change in the valuation allowance during the year ended March 31, 2002 was a decrease of $1,059,089. In accordance with SFAS 109, the year 2001 income tax benefit of $89,479 arising from the net increase in deferred tax assets has been allocated at March 31, 2001 to reduce the reorganization intangible. (See Note 5) Note 13 Concentrations of Credit Risk, Customers, Suppliers, and Financing - -------------------------------------------------------------------------- The Company derives primarily all of its revenues from retailers of products in the United States. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable. The Company's allowance for doubtful accounts is based upon management's estimates and historical experience and reflects the fact that accounts receivable are concentrated with several large customers whose credit worthiness have been evaluated be management. At March 31, 2002, 65% of accounts receivable were due from five U.S. customers and accounts receivable from two customers that individually owed over 10% of accounts receivable at March 31, 2002 was 36% and 35%. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Revenues derived from five customers in 2002 and 2001 were 87% and 78% of revenues, respectively. Revenues derived from three customers in 2002 and two customers in 2001, respectively, which individually purchased greater than 10% of the Company's total revenues, were 37%, 28%, and 10% in 2002 and 32% and 23% in 2001. F-20 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- In the fourth quarter of the fiscal 2002, a major customer that provided 37% of the Company's revenue in 2002 converted its purchase method to a consignee basis. The Company recorded approximately $2,875,000 of sales returns and reversal of related cost of sales of $2,112,000 in February and the customer retained the inventory on a consignment basis. (See Note 1(G)) From that date of sales returns, through March 31, 2002 the Company recorded $2,442,384 of sales from consignment inventory. The Company is dependent upon foreign companies for manufacture of all of its electronic products. The Company's arrangements with manufacturers are subject to the risk of doing business abroad, such as import duties, trade restrictions, work stoppages, foreign currency fluctuations, political instability, and other factors, which could have an adverse impact on its business. The Company believes that the loss of any one or more of their suppliers would not have a long-term material adverse effect because other manufacturers with whom the Company does business would be able to increase production to fulfill their requirements. However, the loss of certain suppliers in the short-term could adversely affect business until alternative supply arrangements are secured. During fiscal 2002 and 2001, manufacturers in the People's Republic of China (China) accounted for in excess of 95% and 94%, respectively of the Company's total product purchases, including virtually all of the Company's hardware purchases. The Company expects purchasing for 2003 to fall within the above range as well. Purchases of products derived from three vendors based in China during 2002 were 51%, 39%, and 5% and from two manufacturers based in China during 2001 were 80% and 14%, respectively. (See Note 9) The Company finances its sales primarily through a loan facility with one lender. (See Note 7) Although management believes there are other sources available, a loss of the current credit facility could be in the short term, adversely affect operations until an alternate lending arrangement is secured. Net sales derived from the Company's Hong Kong based subsidiary aggregated approximately $27,176,000 in 2002 and $12,595,800 in 2001. The carrying value of net assets held by the Company's Hong Kong based subsidiary was approximately $1,488,160 at March 31, 2002. Note 14 Segment Information - --------------------------- The Company operates in one segment and maintains its records accordingly. Sales by customer geographic region were as follows: 2002 2001 ----------- ----------- United States $61,686,942 $33,823,028 Asia 49,314 -- Canada 47,565 11,420 Central America 5,756 -- Europe -- 433,821 South America 39,317 38,570 ----------- ----------- $61,828,894 $34,306,839 =========== =========== F-21 The Singing Machine Company, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2002 -------------- Note 15 Defined Contribution Benefit Plan - ----------------------------------------- The Company maintains a 401-K plan for the benefit of its employees. Employer contributions to the plan and administrative costs during 2002 and 2001 were $41,733 and $8,682, respectively. Note 16 Subsequent Events - ------------------------- In April 2002, 10,000 common shares were issued upon exercise of warrants for gross proceeds of $0.92 per share or $9,200 and 16,500 common shares were issued upon exercise of employee options at a price of $2.04 per share or $33,660. On April 15, 2002, the Company entered into a three-year employment agreement with a new Executive Vice President of Sales and Marketing. The agreement stipulates a salary and bonuses and a 50% of annual pay severance clause. The agreement grants 50,000 options for each year of employment. The employee may elect to return the first year options to the Company for $100,000. As of the date of the accompanying audit report, the options have not been issued. In June 2002, the Board of Directors approved the terms of a consulting agreement effective on February 28, 2003 with the current CEO when he retires on that day. The CEO will receive $250,000 per year and will also receive an appreciation bonus of $200,000 on February 28, 2003. In May and June 2002, the Company's subsidiary entered into new office leases in Hong Kong, each for 36 months at an aggregate $13,364 per month. Effective May 1, 2002, the Company signed a 5-year warehouse lease in California for $33,970 per month. The Company also subleased out its space in the other California warehouse for rent income of $12,393 per month through January 31, 2004. Effective June 1, 2002, the Company signed an additional 27-month lease to expand its corporate headquarters. The additional rent is $1,987 per month. The company's Hong Kong subsidiary opened a letter of credit at April 16, 2002 with an international bank for up to $1,000,000. F-22 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.20 Employment Agreement between the Company and Jack Dromgold dated April 14, 2002 10.21 Employment Agreement between the Company and April Green dated March 15, 2002 10.22 Lease Agreement dated March 31, 1999 between The Singing Machine Company, Inc. and Rocco Ferrera & Co., Inc. and Lee S. Lasser, trustee of the Lee S. Lasser Trust dated August 25, 1972, as amended d/b/a Lyons Corporate Park for office space in Coconut Creek, Florida. 21.1 List of Subsidiaries 23.1 Consent of Salberg & Company, P.A. EX-10.20 3 dromgold-employment.txt DROMGOLD EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") made as of the 15th day of April 2002 by and between THE SINGING MACHINE COMPANY, INC., a Delaware corporation with its principal office at 6601 Lyons Road, Coconut Creek, FL 33073 (The "Company") and Jack Dromgold whose residence address is 44 Brookside Drive, Longmeadow, MA 01106 (the "Employee"). The Company and the Employee hereby agree as follows with respect to the Employee's relationship with the Company: 1. Relationship; Term. The Company shall retain the Employee and the employee shall be retained by the Company, on the terms and conditions hereinafter set forth, as an Employee for a period (the "Employment Period") commencing on April 15, 2002 (the "Commencement Date"), and ending on April 14, 2005 (the "Termination Date"), unless terminated sooner pursuant to the provisions hereof. Such period of employment shall be automatically extended for a one (1) one-year term unless either the Company or the Employee notifies the other in writing at least sixty (60) days prior to the end of the then current term that it or he does not intend to renew such employment, in which case such employment will expire at the end of the then current term. During the entire term of this Agreement, the Employee shall be the Company's Sr. Vice President - Sales and Marketing. 2. Efforts on Company's Behalf. The Employee shall devote all of his time and his best efforts, skills and attention to the business and affairs of the Company, shall serve the Company faithfully and competently and shall at all times act in the Company's best interest. The services to be rendered by Executive during the term hereof shall be as Sr. Vice President Sales and Marketing subject at all times to the direction and control of the President. Nothing herein shall be construed to prevent Employee from investing in or participating in the management of companies or other entities, which do not compete with the Company or from serving on the board of directors of any other company. a) Succession Plan. It is the desire but not the obligation of the Singing Machine Company that over the period of this contract, the Executive, based upon performance, will rise within the company to Executive Vice President and eventually President. 3. Base Compensation. ------------------ a) The Company shall pay to the Executive, and the Executive agrees to accept, minimum base compensation of two hundred twenty thousand ($220,000) per year (the "Base Compensation"), payable in accordance with normal payroll policies of the Company and shall be subject to all usual and customary payroll deductions including all applicable withholding taxes. b) Employee's Base Compensation shall automatically increase over the period year's Base Compensation each year during the term hereof by not less than the greater of: i. Five percent (5%); or ii. An amount calculated by multiplying the prior year's Base Compensation by a fraction, the numerator of which shall be the consumer price index ("Consumer Price Index"), as hereafter defined, for the month of January in the year of adjustment and the denominator of which shall be the Consumer Price Index for All Urban Consumers, U.S. City Average (1982-84=100) All Items, Bureau of Labor Statistics of the United States Department of Labor. 4. Bonus Compensation. ------------------- A. The Executive shall be entitled to receive a bonus (the "Profit Bonus") for each fiscal year of the Company ("Fiscal Year") during the employment period. B. Employee's Bonus, for the first year of this contract, shall be based upon 1% of the Employee's new account sales shipped, but shall be a minimum of $50,000. During the second year of this contract, the Employee's bonus plan shall switch to 10% share of the total company wide bonus pool for each successive year of the contract. All bonuses shall be paid in accordance with the Company's cash bonus incentive plan. C. In consideration of Employee's services hereunder, the Executive shall be granted the option to purchase a minimum of 50,000 shares of common stock of the Company in accordance with the terms of a stock option agreement to be executed between the Company and Employee after the effective date of this agreement. In addition, a minimum amount of at least 50,000 shares of common stock options will be granted the Executive for each subsequent year a distribution is granted by the company's Board of Directors. Additionally, after one year if the Executive would so decide, the company or Company's representative will buy back the original 50,000 shares from the Executive for $100,000. D. The Company will reimburse the employee monthly for an Allowance of Auto expenses not to exceed $500 monthly or $6.000 annually plus the cost of auto insurance. E. The Company will pay for all moving related expenses to move and relocate the executive to the Company's Florida location. The Company and the executive will have a separate agreement to aid the executive with sale of his existing home in Massachusetts. The company and the Employee will execute a separate agreement to cover the Employee's relocation. F. In consideration and as an incentive for the Executive to join the Singing Machine Company, a signing bonus of $50,000 will be provided to the Executive. This bonus will be payable as follows: 1/2 ($25,000) within 10 (ten) days of employment commencement and 1/2 ($25,000) payable after six months of service. There will be no obligation to pay back this signing bonus if the Employee completes one year of continuous service with the Company. 5. Benefit Plans. -------------- a) The executive shall be entitled to participation in all Company-sponsored benefit plans in accordance with terms, conditions and costs with usual or customary Company policy and will cover his entire family. b) In the event that the Company purchases insurance on the life of the Executive, Executive shall be entitled to purchase said policy from the Company in the event of his termination, pursuant to the terms hereof, for an amount equal to the cash surrender value thereof. 6. Business Expenses. The Employee shall be reimbursed for all usual and customary expenses incurred on behalf of the company, in accordance with Company practices and procedures; provided that each such expense is of a nature qualifying it as a proper deduction on the Federal income tax returns of the Company, exclusive of any limitation rules as a business expense of the Company and not as compensation to Employee, and Employee furnishes the Company with adequate documentary evidence to substantiate such expenses. 7. Vacation. Employee shall be entitled to a paid vacation of three (3) weeks per each year of this agreement. Such vacation time allowance shall cumulatively accrue, and any unused vacation time for each year can be used in the following year or paid to the Employee at the Employee's sole discretion. The Company shall make all reasonable efforts to enable Employee to use his vacation leave each year. Employee shall also be entitled to all paid holidays made generally available by the company to its employees. 8. Death or Disability. -------------------- a) Notwithstanding anything to the contrary contained in Paragraph 1 above if, during the term hereof, the Employee suffers a disability (as defined below) the Company shall, subject to the provisions of Paragraph 8 hereof, continue to pay Employee the compensation provided in Paragraph 3 hereof during the period of his disability; provided, however, that in the event Employee is disabled for a continuous period of ninety (90) consecutive days or for shorter periods aggregating ninety (90) days in any twelve-month period that the employee is incapable of substantially fulfilling the duties set forth in Section 2 or hereafter assigned to him by the President or Board of Directors because of physical, mental or emotional incapacity resulting from injury, sickness or disease as determined by an independent physician agreed upon by both the Company and the Employee, the Company may, at its election, terminate this Agreement. In the event of such termination, the Company shall continue to be obligated to pay Employee his compensation earned up to the date of termination. b) As used in this Agreement, the term "disability" shall mean the substantial inability of Employee to perform his duties under this Agreement as determined by an independent physician agreed upon by both the Company and the Employee. c) In the event that employment ceases prior to the end of a calendar month as a result of his death or disability or in the event of a termination described in Paragraph 10 below, the Company shall pay Employee or his legal representatives, as the case may be, in addition to any other amounts payable by the Company hereunder, a lump cash sum which shall in no event be less than the salary plus any bonus to which Employee would have been entitled had he continued to be affiliated with the Company until the end of the calendar month during which his affiliation terminates. 9. Change of Control. ------------------ a) For the purposes of this Agreement a "Change of Control" shall be deemed to have taken place if: (i) any person, including a "group" as defined in Section 13 (d)(3) of the Securities Exchange Act of 1934, as amended, becomes the owner or beneficial owner of Company securities, after the date of this Agreement, having 50% or more of the combined voting power of the then outstanding securities of the Company that may be case for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company, or open market purchases approved by the Board, as long as the majority of the Board approving the purchases is the majority at the time the purchases are made), or (ii) the persons who were directors of the Company before such transactions shall cease to constitute a majority of the Board of the Company, or any successor to the Company, as the direct or indirect result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions. b) The Company and Employee hereby agree that, if Employee is affiliated with the Company on the date on which a Change of Control occurs (the "Change of Control Date") the Company (or, if Executive is affiliated with a subsidiary, the subsidiary) will continue to retain Executive, and Executive will remain affiliated with the Company (or subsidiary), for the period commencing on the Change of Control date and ending on the first anniversary of such a date, to exercise such authority and perform such Employee duties as are commensurate with the authority being exercised and duties being performed by the Employee immediately prior to the Change of Control Date. c) During the remaining term hereof after the Change of Control Date, the Company (or subsidiary) will (i) continue to pay Employee a salary at not less than the level applicable to Employee on the Change of Control Date, (ii) pay Employee Bonuses in amounts not less in amount than those paid during the twelve month period preceding the Change of Control Date, and (iii) continue employee benefit programs as to Employee at levels in effect on the Change of Control Date (but subject to such reductions as may be required to maintain such plans in compliance with applicable federal law regulating employee benefit programs). d) If during the remaining term hereof after the Change of Control Date (i) Employee's employment is terminated by the Company (or subsidiary), or (ii) there shall have occurred a material reduction in Employee's compensation or employment related benefits, or a material change in Employee's status, working conditions, management responsibilities or titles, and Employee voluntarily terminates his relationship with the company within sixty (60) days of any such occurrence, or the last in a series of occurrences, then Employee shall be entitled to receive, subject to the provisions of subparagraphs (e) and (f) below, a lump sum payment equal to 50% of Employee's "base period income" as determined under (e) below. Such amount will be paid to Employee within thirty (30) business days after his termination of affiliation with the Company. e) The Employee's "base period income" shall be his base salary and annual incentive bonuses paid or payable to him during or with respect to the twelve month period preceding the date of his termination of affiliation. f) The amounts payable to Employee under any other compensation arrangement maintained by the Company (or a subsidiary) which became payable after payment of the lump sum provided for in (a), upon or as a result of the exercise by Employee of rights which are contingent on a Change of Control (and would be considered a "parachute payment" under Internal Revenue Code & 280G and regulations thereunder), shall be increased by an additional amount representing a gross-up of any federal income tax liability arising from an excess parachute payment or otherwise. 10. Termination. ------------ a) Termination for Cause. This agreement may be immediately terminated by the Company at any time during the Employment Period for "cause". In such an event of termination, the Company shall be obligated only to continue to pay to Employee his Base Salary earned up to the effective date of termination. "Cause" for purposes hereof shall mean a breach of any of the provisions of this Agreement by Employee, unsatisfactory performance of Employee's duties hereunder as reasonably determined by the Company's Board of Directors, willful misconduct or neglect of duties, conviction of any criminal offense involving a felony, gross negligence, malfeasance or a crime of moral turpitude. b) Continuing Effect. Notwithstanding any termination of the Employee as provided in this Section 10 or otherwise, the provisions of Section 12 and 13 shall remain in full force and effect and shall be binding on the Employee and his legal representatives, a successors and assigns. 11. Consolidation, Merger or Sale of Assets. Nothing in this Agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation, which assumes this Agreement and all obligations of the Company hereunder, in writing. Upon such consolidation, merger, or transfer of assets and assumption, the term "the Company" as used herein, shall mean such other corporation and this Agreement shall continue in full force and effect. 12. Restrictive Covenants. ---------------------- a) The Employee acknowledges that his services and responsibilities are unique in character and are of particular significance to the Company, that the Company is a competitive business and that the Employee's continued and exclusive service to the Company under this Agreement is of a high degree of importance to the Company. Therefore, during the Employment Period and for the applicable periods specified below (each, the "Noncompete Period"), the Employee shall not, directly or indirectly, as owner, partner, joint venture, Employee, broker, agent, corporate, officer, principal, licensor, shareholder (unless as owner of no more than five percent (5%) of the issued and outstanding capital stock of such entity if such stock is traded on a major securities exchange, or in any other capacity whatsoever, engage in or have any connection with any business which is competitive with the Company, and which operates anywhere in the {World] on the effective date of termination of this Agreement. Reason for Termination Noncompete Period Termination without cause 1 year Termination for cause 2 years For purposes of this Agreement a business will be deemed to be competitive with The Company if it is an importer/re-seller of Karaoke hardware and/or software specializing in the United States mass merchant marketplace. b) In addition to the restrictions set forth in Section 12(a), during the Noncompete period, the Employee shall not: i. directly or indirectly, by initiating contact or otherwise, induce influence, combine or conspire with, or attempt to induce, influence, combine or conspire with any of the officers, Employees or agents of the Company to terminate his, her or its employment or relationship with or to compete against the company; or ii. directly or indirectly, by initiating contact or otherwise, divert or attempt to divert any or all of any customers' or suppliers business with the Company. c) If, in any judicial proceedings, a court shall refuse to enforce any of the covenants included in this Section 12 due to extent, geographic scope or duration thereof, or otherwise, then such unenforceable covenant shall be amended to relate to such lesser extent, geographic scope or duration and this Section 12 shall be enforceable, as amended. In the event the Company should bring any legal action or other proceeding against Employee for enforcement of this Agreement, the calculation of the Noncompete Period shall not include the period of time commencing with the filing or legal action or other proceeding to enforce this Agreement through the date of final judgment or final resolution, including all appeals, if any of such legal action or other proceeding unless the Company is receiving the practical benefits of this Section 12 during such time. The existence of any claim or cause of action by the Employee against the Company predicted on this Agreement or otherwise shall not constitute a defense to the enforcement by the Company of these covenants. d) The Employee has carefully considered the nature and extent of the restrictions upon the Employee and the rights and remedies conferred upon the Company under this Section 12, and the Employee hereby acknowledges that the restrictions on his activity as contained herein are reasonably required for the Company's protection, would not operate as a bar to the Employee's sole means of support, are fully required to protect the legitimate interests of the Company, do not confer a benefit on the Company disproportionate to the detriment of the Employee and are material inducements to the Company to enter into this Agreement. The Employee hereby agrees that in the event of a violation by him of any of the provisions of this Agreement, the Company will be entitled to institute and prosecute proceedings at law or in equity to obtain damages with respect to such violation or to enforce the specific performance of this Agreement by the Employee or to enjoin the Employee from engaging in any activity in violation hereof. 13. Treatment and Ownership of Confidential Information. The Employee acknowledges that during his employment he will learn and will have access to Confidential Information regarding the Company. For purposes of this Agreement, the term "Confidential" acquires or develops or has made use of, in whole or in part in connection with Employee's employment with the Company (whether before or after the date of this Agreement), including any financial data, client names and addresses, employee data, discoveries, processes, formulas, inventions, know-how, techniques and any other materials or information related to the business or activities of the Company which are not generally known to others engaged in similar businesses or activities. The Employee acknowledges that such Confidential Information as is acquired and used by the Company or its affiliates is a special, valuable and unique asset. The Employee will not, except in connection with and as required by his performance of his duties under this Agreement, for any reason use for his own benefit, or the benefit of any person or entity with which he may be associated, or disclose any such Confidential Information to any person, firm, corporation, association or other entity for any reason or purpose whatsoever without the prior written consent of the Company's Board of Directors, unless such Confidential Information previously shall be and shall remain the exclusive property of the Company. The Employee agrees to promptly disclose to the Company all Confidential Information developed in whole or in part by the Employee within the scope of this Agreement and to assign to the Company and right title, or interest the Employee may have in such Confidential Information. The Employee agrees to turn over to the Company all physical manifestations of the Confidential Information in his possession or under his control at the request of the Company. 14. Employee Representations and Warranties. The Employee represents and warrants that he is not a party to, or bound by, any other employment agreements. The Employee further represents and warrants to the Company that he is free of known physical and mental disabilities that would, with or without reasonable accommodations that would create an undue hardship for the Company, impair his performance hereunder and he is fully empowered to enter and perform his obligations under this Agreement. Without limiting the generality of the foregoing, the Employee represents and warrants that he is under no restrictive covenants to any person or entity that will be violated by his entering into and performing this Agreement. 15. Arbitration. Except as provided in sections 12 and 25 hereof, any dispute, controversy or claim arising under, out of, in connection with, or in relation to this Agreement, or the breach, termination, validity or enforceability of any provision of this Agreement, will be settled by an arbitrator (the "Arbitrator") chosen according to the rules of the American Arbitration Association's National Rules for Resolution of Employment Disputes, with the additional proviso that all steps necessary to insure the confidentiality of the proceedings will be added to the basic rules. Unless otherwise mutually agreed upon by the parties, the arbitration hearings shall be held in the Broward County, Florida. The parties hereby agree that the Arbitrator has full power and authority to hear and determine the controversy and make an award in writing in the form of a reasoned judicial opinion. The parties hereby stipulate in advance that the award is binding and final. The parties hereto also agree that judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof. Each party is responsible for their own legal fees and out-of-pocket expenses. 16. Binding Effect. Except as herein otherwise provided, this Agreement shall inure to the benefit of and shall be binding upon the parties hereto, their personal representatives, successors, heirs and assigns. 17. Severability. Invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforce4ability of any other provision. 18. Terminology. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders, the singular shall include the plural and vice versa. Titles of Paragraphs are for convenience only, and neither limit nor amplify the provisions of the Agreement itself. 19. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Florida. 20. Entire Agreement. This Agreement contains the entire understanding between the parties and may not be changed or modified except by an Agreement in writing signed by all the parties. 21. Notice. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered when deposited in the United States mail, postage prepaid, registered or certified mail, return receipt required, addressed to the parties at the addresses first stated herein, or to such other address as either party hereto shall from time to time designate to the other party by notice in writing as provided herein. 22. No Publicity. The Employee agrees that he will not engage in any conduct that is injurious to the Company's reputation and interests, including but not limited to, publicly disparaging (or inducing or encouraging others to publicly disparage) the Company or any of the Company's directors, officers, employees or agents. 23. Cooperation. Employee agrees to cooperate fully with the Company by providing information to the Company and its representatives, agents or advisors regarding any business matters with which the Employee may become involved during the term of this Agreement and to cooperate fully in the event of any litigation or legal, administrative or regulatory proceeding by providing information, including but not limited to, providing truthful testimony at any legal administrative or regulatory proceeding, regarding any facts or information of which Employee has knowledge and/or any business matters of which Employee has or had knowledge. 24. Assignability. The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company, provided that such successor or assign shall acquire all or substantially all of the assets and business of the Company and, further provided that any such assignment shall not release the Company from its obligations to the Employee thereunder. The Employee's rights and obligations hereunder may not be assigned or alienated without the prior written consent of the Company and any attempt to do so by the Employee will be void. 25. Attorney's Fees. If any legal action or other proceeding is brought by the Company for the enforcement of Section 12 of this Agreement, or because of an alleged dispute, breach, default or misrepresentation by the Employee in connection with any provision of this Agreement, the Company or the Employee in such legal action or other proceeding, shall be responsible for its own attorneys' fees, sales and use taxes, court costs and other expenses incurred in that action or proceeding. 26. Injunctive Relief. The Employee acknowledges and agrees that in the event Employee violates any term, covenant or provision of Section 12 of this Agreement, the Company will suffer irreparable harm for which the Company will have no adequate remedy at law. The Employee agrees that the Company shall be entitled to injunctive relief for any breach or violation of Section 12 of this Agreement, including but not limited to the issuance of an ex parte preliminary injunction, in addition to and not in limitation of any and all other remedies available to the Company at law or in equity. 27. No Offsets. The existence of any claim or cause of action of the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of this Agreement. 28. Employee Acknowledgement. The Employee acknowledges and agrees that Employee has read and understands the terms set forth in this Agreement and has been given a reasonable opportunity to consult with an attorney prior to execution of this Agreement. 29. Other Instruments. The parties hereby covenant and agree that they will execute such other and further instruments and documents as are or may become necessary or convenient to effectuate and carry out the terms of this Agreement. 30. Counterparts. This Agreement may be executed in any number of counterparts and each such counterpart shall for all purposes be deemed an original. 31. Assignability. This Agreement shall not be assigned by either party, except with the written consent of the other. [SIGNATURE PAGE ON NEXT PAGE] IN WITNESS WHEREOF, this Agreement has been duly signed by the Employee and on behalf of the Company on the day and year first above written. THE SINGING MACHINE COMPANY, INC. By: /s/ John Klecha /s/ Jack Dromgold - ---------------------- ---------------------- John Klecha Jack Dromgold President C.O.O. Employee EX-10.21 4 greem-employment.txt GREEN EMPLOYMENT AGREEMENT THE SINGING MACHINE EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT ("Agreement") made as of the 5th day of March 2002 by and between THE SINGING MACHINE COMPANY, INC., a Delaware corporation with its principal office at 6601 Lyons Road, Coconut Creek, FL 33073 (The "Company" and April Green whose residence address is 259 NW 95 Terrace Coral Springs, Florida 33071 (the "Employer"). The Company and the Employee hereby agree as follows with respect to the Employee's relationship with the Company: 1. Relationship; Term. The Company shall retain the Employee and the Employee shall be retained by the Company, on the terms and conditions hereinafter set forth, as an Employee for a period (the "Employment Period") commencing on March 15, 2002 (the "Commencement Date"), and ending on March 14, 2005 (the "Termination Date"), unless terminated sooner pursuant to the provisions hereof. Such period of employment shall be automatically extended for one (1) one-year term unless either the Company or the Employee notifies the other in writing at least sixty (60) days prior to the end of the then current term that it or he does not intend to renew such employment, in which case such employment will expire at the end of the then current term. During the entire term of this Agreement, the Employee shall be the Company's Chief Financial Officer. 2. Efforts on Company's Behalf. The Employee shall devote all of his time and his best efforts, skills and attention to the business and affairs of the Company, shall serve the Company faithfully and competently and shall at all times act in the Company's best interest. The services to be rendered by Executive during the term hereof shall be as Chief Financial Officer, subject at all times to the direction and control of the President. Nothing herein shall be construed to prevent other entities, which do not compete with the Company, from serving on the board of directors of any other company. 3. Base Compensation a) The Company shall pay to the Executive, and the Executive agrees to accept, minimum base compensation of one hundred twenty-two thousand two hundred dollars ($122,200) per year (the "Base Compensation"), payable in accordance - ------------------------------------------------------------------------------ THE SINGING MACHINE COMPANY, INC. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073g A-7 Tel: (954) 596-1000 Fax: (954) 596-2000 with normal payroll policies of the Company and shall be subject to all usual and customary payroll deductions including all applicable withholding taxes. b) Employee's Base Compensation shall automatically increase over the prior year's Base Compensation each year during the term hereof by not less than the greater of: i. Five percent (5%); or ii. An amount calculated by multiplying the prior year's Base Compensation by a fraction, the numerator of which shall be the consumer price index ("Consumer Price Index"), as hereafter defined, for the month of January in the year of adjustment and the denominator of which shall be the Consumer Price Index for All Urban Consumers, U.S. City Average (1982- 84=100) All Items, Bureau of Labor Statistics of the United States Department of Labor. 4. Bonus Compensation. ------------------- A. The Executive shall be entitled to receive a bonus (the " Profit Bonus") for each fiscal year of the Company ("Fiscal Year") during the employment period. B. Employee's Bonus, for the first year of this contract, shall be based upon a discretionary amount based solely upon company performance. During the second year of this contract, the Employee's bonus plan shall switch to: 8% share of the total company wide bonus pool for each successive year of the contract. All bonuses shall be paid in accordance with the Company's cash bonus incentive plan. C. In consideration of Employee's services hereunder, the Executive shall be granted the option to purchase shares of common stock of the Company in accordance with the terms of a stock option agreement to be executed between the Company and Employee after the effective date of this agreement. D. The Company will reimburse the employee monthly for an Allowance of Auto expenses not to exceed $300. 5. Benefit Plans. a. The Executive shall be entitled to participation in all Company-sponsored benefit plans in accordance with terms, conditions and costs with usual or customary Company policy and will cover his entire family. b. In the event that the Company purchases insurance on the life of the Executive. Executive shall be entitled to purchase said policy from the Company in the event of his termination, pursuant to the terms hereof, for an amount equal to the cash surrender value thereof. - ------------------------------------------------------------------------------ THE SINGING MACHINE COMPANY, INC. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073g A-7 Tel: (954) 596-1000 Fax: (954) 596-2000 6. Business Expenses. The Employee shall be reimbursed for all usual and customary expenses incurred on behalf of the company, in accordance with Company practices and procedures; provided that each such expense is of a nature qualifying it as a proper deduction on the Federal income tax returns of the Company, exclusive of any limitation rules as a business expense of the Company and not as compensation to Employee, and Employee furnishes the Company with adequate documentary evidence to substantiate such expenses. 7. Vacation. Employee shall be entitled to a paid vacation of three (3) weeks per each year of this agreement. Such vacation time allowance shall cumulatively accrue, and any unused vacation time for each year can be used in the following year or paid to the Employee at the Employee's sole discretion. The Company shall make all reasonable efforts to enable Employee to use his vacation leave each year. Employee shall also be entitled to all paid holidays made generally available by the company to its employees. 8. Death or Disability a) Notwithstanding anything to the contrary contained in Paragraph 1 above if, during the term hereof, the Employee suffers a disability (as defined below) the Company shall, subject to the provisions of Paragraph 8 () hereof, continue to pay Employee the compensation provided in Paragraph 3 hereof during the period of his disability; provided, however, that in the event Employee is disabled for a continuous period of ninety (90) days in any twelve- month period that the employee is incapable of substantially fulfilling the duties set forth in Section 2 or hereafter assigned to him by the President or Board of Directors because of physical, mental or emotional incapacity resulting from injury, sickness or disease as determined by an independent physician agreed upon by both the Company and the Employee, the Company may, at its election, terminate this Agreement. In the event of such termination, the Company shall continue to be obligated to pay Employee his compensation earned up to the date of termination. b) As used in this Agreement, the term "disability" shall mea the substantial inability of Employee to perform his duties under this Agreement as determined by an independent physician agreed upon by both the Company and the Employee. c) In the event that employment ceases prior to the end of a calendar month as a result of his death or disability or in the event of a termination described in Paragraph 10 below, the Company shall pay Employee or his legal representatives, as the case may be, in addition to any other amounts payable by the Company hereunder, a lump cash sum which shall in no event be less than the salary plus any bonus to which Employee would have been entitled had he continued to be affiliated with the Company until the end of the calendar month during which his affiliation terminates. - ------------------------------------------------------------------------------ THE SINGING MACHINE COMPANY, INC. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073g A-7 Tel: (954) 596-1000 Fax: (954) 596-2000 9. Change of Control. a) For the purposes of this Agreement, a "Change of Control" shall be deemed to have taken place if: (i) any person, including a "group" as defined in Section 13 (d)(3) of the Securities Exchange Act of 1934, as amended, becomes the owner or beneficial owner of Company securities, after the date of this Agreement, having 50% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company, or open market purchases approved by the Board, as long as the majority of the Board approving the purchases is the majority at the time the purchases are made), or (ii) the persons who were directors of the Company before such transactions shall cease to constitute a majority of the Board of the Company, or any successor to the Company, as the direct or indirect result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions. b) The Company and Employee hereby agree that, if Employee is affiliated with the Company on the date on which a Change of Control occurs (the "Change of Control Date") the Company (or, if Executive is affiliated with a subsidiary, the subsidiary) will continue to retain Executive, and Executive will remain affiliated with the Company (or subsidiary), for the period commencing on the Change of Control Date and ending on the first anniversary of such a date, to exercise such authority and perform such Employee duties as are commensurate with the authority being exercised and duties being performed by the Employee immediately prior to the Change of Control Date. c) During the remaining term hereof after the Change of Control Date, the Company (or subsidiary) will (i) continue to pay Employee a salary at not less than the level applicable to Employee on the Change of Control Date, (ii) pay Employee Bonuses in amounts not less in amount than those paid during the twelve month period preceding the Change of Control Date, and (iii) continue employee benefit programs as to Employee at levels in effect on the Change of Control Date (but subject to such reductions as may be required to maintain such plans in compliance with applicable federal law regulating employee benefit programs). d) If during the remaining term hereof after the Change of Control Date (i) Employee's employment is terminated by the Company (or subsidiary), or (ii) there shall have occurred a material reduction in Employee's compensation or employment related benefits, or a material change in Employee's status, working conditions, management responsibilities or titles, and - ------------------------------------------------------------------------------ THE SINGING MACHINE COMPANY, INC. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073g A-7 Tel: (954) 596-1000 Fax: (954) 596-2000 Employee voluntarily terminates his relationship with the company within sixty (60) days of any such occurrence, or the last in a series of occurrences, then Employee shall be entitled to receive, subject to the provisions of subparagraphs (e) and (f) below, a lump sum payment equal to 50% of Employee's "base period income" as determined under (e) below. Such amount will be paid to Employee within thirty (30) business days after his termination of affiliation with the Company. e) The Employee's "base period income" shall be his base salary and annual incentive bonuses paid or payable to him during or with respect to the twelve month period preceding the date of his termination of affiliation. f) The amounts payable to Employee under any other compensation arrangement maintained by the Company (or a subsidiary) which became payable after payment of the lump sum provided for in (a), upon or as a result of the exercise by Employee of rights which are contingent on a Change of Control (and would be considered a "parachute payment" under Internal Revenue Code & 280G and regulations thereunder), shall be increased by an additional amount representing a gross-up of any federal income tax liability arising from an excess parachute payment or otherwise. 10. Termination. ------------ a) Termination for Cause. This agreement may be immediately terminated by the Company at any time during the Employment Period for "cause". In such an event of termination, the Company shall be obligated only to continue to pay to Employee his Base Salary earned up to the effective date of termination. "Cause" for purposes hereof shall mean a breach of any of the provisions of this Agreement by Employee, unsatisfactory performance of Employee's duties hereunder as reasonably determined by the Company's Board of Directors, willful misconduct or neglect of duties, conviction of any criminal offense involving a felony, gross negligence, malfeasance or a crime of moral turpitude. b) Continuing Effect. Notwithstanding any termination of the Employee as provided in this Section 10 or otherwise, the provisions of Section 12 and 13 shall remain in full force and effect and shall be binding on the Employee and his legal representatives, successors and assigns. 11. Consolidation, Merger or Sale of Assets. Nothing in this Agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation, which assumes this Agreement, and all obligations of the Company hereunder, in writing. Upon such consolidation, merger, or transfer of assets and assumption, the term "the Company" as used herein, shall mean such other corporation and this Agreement shall continue in full force and effect. - ------------------------------------------------------------------------------ THE SINGING MACHINE COMPANY, INC. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073g A-7 Tel: (954) 596-1000 Fax: (954) 596-2000 12. Restrictive Covenants a) The Employee acknowledges that his services and responsibilities are unique in character and are of particular significance to the Company, that the Company is a competitive business and that the Employee's continued and exclusive service to the Company under this Agreement is of a high degree of importance to the Company. Therefore, during the Employment Period and for the applicable periods specified below (each, the "Noncompete Period"), the Employee shall, not, directly or indirectly, as owner, partner, joint venture, Employee, broker, agent, corporate officer, principal, licensor, shareholder (unless as owner of no more than five percent (5%) of the issued and outstanding capital stock of such entity if such stock is traded on a major securities exchange, or in any other capacity whatsoever, engage in or have any connection with any business which is competitive with the Company, and which operates anywhere in the (World) on the effective date of termination of this Agreement: Reason for Termination Noncompete Period Termination without cause 1 year Termination with cause 2 years For purposes of this Agreement, a business will be deemed to be competitive with the Company if it is an importer/re-seller of Karaoke hardware and/or software specializing in the United States mass merchant marketplace. b) In addition to the restrictions set fort in Section 12(a), during the Noncompete period, the Employee shall not: i. directly or indirectly, by initiating contact or otherwise induce, influence, combine or conspire with, any of the officers, Employees or agents of the Company to terminate his, her or its employment or relationship with or to compete against the company; or ii. directly or indirectly, by initiating contact or otherwise, divert or attempt to divert any or all of any customers' or suppliers' business with the Company. a) If, in any judicial proceedings, a court shall refuse to enforce any of the covenants included in this Section 12 due to extent, geographic scope or duration thereof, or otherwise, then such unenforceable covenant shall be amended to relate to such lesser extent, geographic scope or duration and this Section 12 shall be enforceable, as amended. In the event the Company should bring any legal action or other proceeding against Employee for enforcement of this Agreement, - ------------------------------------------------------------------------------ THE SINGING MACHINE COMPANY, INC. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073g A-7 Tel: (954) 596-1000 Fax: (954) 596-2000 the calculation of the Noncompete Period shall not include the period of time commencing with the filing of legal action or other proceeding to enforce this Agreement through the date of final judgment or final resolution, including all appeals, of any of such legal action or other proceeding unless the Company is receiving the practical benefits of this Section 12 during such time. The existence of any claim or cause of action by the Employee against the Company predicated on this Agreement or otherwise shall not constitute a defense to the enforcement by the Company of these covenants. b) The Employee has carefully considered the nature and extent of the restrictions upon the Employee and the rights and remedies conferred upon the Company under this Section 12, and the Employee hereby acknowledges that the restrictions on his activity as contained herein are reasonably required for the Company's protection, would not operate as a bar to the Employee's sole means of support, are fully required to protect the legitimate interests of the Company, do not confer a benefit on the Company disproportionate to the detriment of the Employee and are material inducements to the Company to enter into this Agreement. The Employee hereby agrees that in the event of a violation by him of any of the provisions of this Agreement, the Company will be entitled to institute and prosecute proceedings at law or in equity to obtain damages with respect to such violation or to enforce the specific performance of this Agreement by the Employee or to enjoin the Employee from engaging in any activity in violation hereof. 13. Treatment and Ownership of Confidential Information. The Employee acknowledges that during his employment he will learn and will have access to Confidential Information regarding the Company. For purposes of this Agreement, the term "Confidential" acquires or develops or has made use of, in whole or in part in connection with Employee's employment with the Company (whether before of after the date of this Agreement), including any financial data, client names and addresses, employee data, discoveries, processes, formulas, inventions, know- how, techniques and any other materials or information related to the business or activities of the Company which are not generally known to others engaged in similar businesses or activities. The Employee acknowledges that such Confidential Information as is required and used by the Company or its affiliates is a special, valuable and unique asset. The Employee will not, except in connection with and as required by his performance of his duties under this Agreement, for any reason use for his own benefit, or the benefit of any person or other entity for any reason or purpose whatsoever without the prior written consent of the Company's Board of Directors, unless such Confidential Information previously shall be and shall remain the exclusive property of the Company. The Employee agrees to promptly disclose to the Company all Confidential Information. The Employee agrees to turn over to the Company all physical manifestations of the Confidential Information in his possession or under his control at the request of the Company. - ------------------------------------------------------------------------------ THE SINGING MACHINE COMPANY, INC. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073g A-7 Tel: (954) 596-1000 Fax: (954) 596-2000 14. Employee Representations and Warranties. The Employee represents and warrants that he is not a party to, or bound by, any other employment agreements. The Employee further represents and warrants to the Company that his is free of known physical and mental disabilities that would, with or without reasonable accommodations that would create an undue hardship for the Company, impair his performance hereunder and he is fully empowered to enter and perform his obligations under this Agreement. Without limiting the generality of the foregoing, the Employee represents and warrants that he is under no restrictive covenants to any person or entity that will be violated by his entering into and performing this Agreement. 15. Arbitration. Except as provided in sections 12 and 25 hereof, any dispute, controversy or claim arising under, out of, in connection with, or in relation to this Agreement, or the breach, termination, validity or enforceability of any provision of this Agreement, will be settled by an arbitrator (the "Arbitrator") chosen according to the rules of the American Arbitration Association's National Rules for Resolution of Employment Disputes, with the additional proviso that all steps necessary to insure the confidentiality of the proceedings will be added to the basic rules. Unless otherwise mutually agreed upon by the parties, the arbitration hearings shall be held in the Broward County, Florida. The parties hereby agree that the Arbitrator has full power and authority to hear and determine the controversy and make an award in writing in the form of a reasoned judicial opinion. The parties hereby stipulate in advance that the award is binding and final. The parties hereto also agree that judgment upon the arbitration award may be entered in any federal or state court having jurisdiction thereof. Each party is responsible for their own legal fees and out-of-pocket expenses. 16. Binding Effect. Except as herein otherwise provided, this Agreement shall inure to the benefit of and shall be binding upon the parties hereto, their personal representatives, successors, heirs and assigns. 17. Severability. Invalidity or unenforceability of any provisions hereof shall in no way affect the validity or enforceability of any other provisions. 18. Terminology. All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural and vice versa. Titles of Paragraphs are for convenience only, and neither limit nor amplify the provisions of the Agreement itself. 19. Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Florida. 20. Entire Agreement. This Agreement contains the entire understanding between the parties - ------------------------------------------------------------------------------ THE SINGING MACHINE COMPANY, INC. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073g A-7 Tel: (954) 596-1000 Fax: (954) 596-2000 and may not be changed or modified except by an Agreement in writing signed by all the parties. 21. Notice. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered when deposited in the United States mail, postage prepaid, registered or certified mail, return receipt required, addressed to the parties at the addresses first stated herein, or to such other addresses as either party hereto shall from time to time designate to the other party by notice in writing as provided herein. 22. No Publicity. The Employee agrees that he will not engage in any conduct that is injurious to the Company's reputation and interests, including but not limited to, publicly disparaging (or inducing or encouraging other to publicly disparage) the Company or any of the Company's directors, officers, employees or agents. 23. Cooperation. Employee agrees to cooperate fully with the Company by providing information to the Company and its representatives, agents or advisors regarding any business matters with which the Employee may become involved during the term of this Agreement and to cooperate fully in the event of any litigation or legal, administrative or regulatory proceedings by providing information, including but not limited to, providing truthful testimony at any legal, administrative or regulatory proceeding, regarding any facts or information of which Employee has knowledge and/or any business matters of which Employee has or had knowledge. 24. Assignability. The rights and obligations of the Company under this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Company, provided that such successor or assign shall acquire all or substantially all of the assets and business of the Company and, further provided that any such assignment shall not release the Company from its obligations to the Employee hereunder. The Employee's rights and obligations hereunder may not be assigned or alienated without the prior written consent of the Company and any attempt to do so by the Employee will be void. 25. Attorney's Fees. If any legal action or other proceeding is brought by the Company for the enforcement of Section 12 of this Agreement, or because of an alleged dispute, breach, default or misrepresentation by the Employee in connection with any provision of this Agreement, the Company or the Employee in such legal action or other proceeding, shall be responsible for its own attorneys' fees, sales and use taxes, court costs and other expenses incurred in that action or proceeding. 26. Injunctive Relief. The Employee acknowledges and agrees that in the event Employee violates any term, covenant or provision of Section 12 of this Agreement, the Company will - ------------------------------------------------------------------------------ THE SINGING MACHINE COMPANY, INC. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073g A-7 Tel: (954) 596-1000 Fax: (954) 596-2000 suffer irreparable harm for which the Company will have no adequate remedy at law. The Employee agrees that the Company shall be entitled to injunctive relief for any breach or violation of Section 12 of this Agreement, including but not limited to the issuance of an ex parte preliminary injunction, in addition to and not in limitation of any and all other remedies available to the Company at law or in equity. 27. No Offsets. The existence of any claim or cause of action of the Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of this Agreement. 28. Employee Acknowledgement. The Employee acknowledges and agrees that Employee has read and understands the terms set forth in this Agreement and has been given a reasonable opportunity to consult with an attorney prior to execution of this Agreement. 29. Other Instruments. The parties hereby covenant and agree that they will execute such other and further instruments and documents as are or may become necessary or convenient to effectuate and carry out the terms of this Agreement. 30. Counterparts. This Agreement may be executed in any number of counterparts and each such counterpart shall for all purposes be deemed an original. 31. Assignability. This Agreement shall not be assigned by either party, except with the written consent of the other. (SIGNATURE PAGE ON NEXT PAGE) - ------------------------------------------------------------------------------ THE SINGING MACHINE COMPANY, INC. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073g A-7 Tel: (954) 596-1000 Fax: (954) 596-2000 IN WITNESS WHEREOF, this Agreement has been duly signed by the Employee and on behalf of the Company on the day and year first above written. THE SINGING MACHINE COMPANY, INC. /s/ John Klecha /s/ April Green - ----------------------------- ------------------------------ John Klecha April Green President, C.O.O. Employee - ------------------------------------------------------------------------------ THE SINGING MACHINE COMPANY, INC. 6601 Lyons Road, Building A-7 Coconut Creek, FL 33073g A-7 Tel: (954) 596-1000 Fax: (954) 596-2000 EX-10.22 5 lyons-suite7lease.txt LEASE AGREEMENT - ROCCO - LASSER Exhibit 10.22 LYONS CORPORATE PARK 6601 Lyons Road Suite C-1 Coconut Creek, Florida 88073 Telephone (954) 486-6600 FAX (954) 488-5718 DATE: March 31, 1999 The Singing Machine Co., Inc. (A Florida Corporation) 3101 N.W. 25th Avenue Pompano Beach, FL 33069 RE: 6601 Lyons Road Suite A, 7 & 8 Dear Mr. Klecha: Please be advised that notwithstanding anything in the lease to the contrary, Landland and Tenant agree that there shall be no minimum rent pursuant to the lease pursuant to section 2.02 for the first one month of the lease, but the Tenant will be responsible for the payment of maintenance, insurance and property taxes and sales tax and for all other items in the lease during this period. If Tenant defaults under the terms of the Lease, and the defaults is not cured within the time limits specified in the lease, then it is agreed that Tenant will be liable to Landlord for all of the minimum rent, and maintenance, insurance and property taxes not paid by Tenant during the free rental period specified in this letter. Yours truly, LYONS CORPORATE PARK /s/ Lee S. Lasser ----------------- LEE S. LASSER /s/ Augustine Ferrera --------------------- AUGUSTINE FERRERA The Singing Machine Co., Inc. BY /s/ John Klecha --------------- LEASE AGREEMENT LANDLORD: ROCCO FERRERA & CO. INC. (A MICHIGAN CORPORATION) AND LEE S. LASSER, TRUSTEE OF THE LEE S. LASSER TRUST DATED AUGUST 25, 1972 AS AMENDED d/b/a LYONS CORPORATE PARK.. TENANT: The Singing Machine Co., Inc. (A Florida Corporationi) BLDG. A ------------------------ SUITE 7 & 8 ------------------------ DATE March 31, 1999 -------------------
INDEX Page ARTICLE I GRANT AND TERM Section 1.01 Leased Premises 1 Section 1.02 Length of Term 1 Section 1.03 Construction of Lease Premises 1 Section 1.04 Possession After Completion of Construction 1 Section 1.05 Determination of Availability of Demised Premises 1 ARTICLE II RENT Section 2.01 Payment 1 Section 2.02 Minimum Rent 2 Section 2.03 Adjustment of Fixed Minimum Rent 2 Section 2.04 Real Estate Taxes 2 Section 2.05 Additional Rent 2 Section 2.06 Past Due Rent 3 ARTICLE III OPERATION AND MAINTENANCE OF COMMON AREAS Section 3.01 Designation of Common Areas 3 Section 3.02 Construction of Common Areas 3 Section 3.03 Tenant's Pro Rata Share of Expenses 3 ARTICLE IV USE OF PREMISES Section 4.01 Use of Premises 3 Section 4.02 Care of Premises 3 ARTICLE V UTILITY SERVICES Section 5.01 Landlord's Obligation to Make Utility Services Available and Option To Supply Such Services 4 Section 5.02 Tenant's Obligation for Payment 4 ARTICLE VI MAINTENANCE OF LEASE PREMISES Section 6.01 Landlord's and Tenant's Obligations for Maintenance 4 Section 6.02 Abuse of Plumbing, Walls, Etc. 4 ARTICLE VII SIGNS Section 7.01 4 ARTICLE VIII ALTERATIONS Section 8.01 5 ARTICLE IX INSURANCE AND INDEMNITY Section 9.01 Covenant to Hold Harmless 5 Section 9.02 Fire Insurance Premium 5 Section 9.03 Tenant's Obligation to Carry Public Liability Insurance 5 Section 9.04 Insurance Costs 5 ARTICLE X ASSIGNMENT AND SUBLETTING Section 10.01 6 ARTICLE XI ACCESS TO PREMISES Section 11.01 Right of Entry by Landlord 6 Section 11.02 Landlord's Right to Exhibit Premises 6 ARTICLE XII EMINENT DOMAIN Section 12.01 Total Condemnation 6 Section 12.02 Partial Condemnation 6 Section 12.03 Landlord's and Tenant's Damages 6 ARTICLE XIII DESTRUCTION OR DAMAGE TO DEMISED PREMISES Section 13.01 Reconstruction of Damaged Premises 6 Section 13.02 6 Section 13.03 7 Section 13.04 7 Section 13.05 7 Section 13.06 Subrogation 7 ARTICLE XIV BANKRUPTCY OR INSOLVENCY Section 14.01 Landlord's Option to Terminate Upon Insolvency of Tenant or Guarantor Under State Insolvency Law or Upon Insolvency of Tenant or Guarantor Under Federal Bankruptcy Act 7 ARTICLE XV DEFAULT OF TENANT Section 15.01 Right to Re-Enter 7 Section 15.02 Legal Expenses 8 Section 15.03 Waiver of Jury Trial and Counterclaims 8 Section 15.04 Curing of Tenant's Default 8 ARTICLE XVI TENANT'S PROPERTY Section 16.01 Taxes on Leasehold 8 Section 16.02 Notice by Tenant 8 ARTICLE XVII QUIET ENJOYMENT Section 17.01 Landlord's Covenant 8 ARTICLE XVIII HOLDING OVER, SUCCESSORS Section 18.01 Holding Over 8 Section 18.02 Successors 8 -i- ARTICLE XIX CERTAIN RIGHTS OF LESSOR WITH RESPECT TO LAND Section 19.01 Easements and Utilities 8 ARTICLE XX MISCELLANEOUS Section 20.01 Waiver 9 Section 20.02 Subordination 9 Section 20.03 Notices 9 Section 20.04 Construction 9 Section 20.05 Non-Liability 9 Section 20.06 Net Lease 9 Section 20.07 Financing and Tenant's Acknowledgment of Acceptance of Premises 9 Section 20.08 Accord and Satisfaction 10 Section 20.09 Captions and Section Numbers 10 Section 20.10 Partial Invalidity 10 Section 20.11 No Option 10 Section 20.12 Recording 10 Section 20.13 Sale or Transfer of the Demised Premises 10 Section 20.14 Liens 10 Section 20.15 Attornment 10 Section 20.16 Set-Off Statement 10 Section 20.17 Entire Agreement 10 Section 20.18 Brokerage 11 Section 20.19 No Oral Changes 11 Section 20.20 No Representations by Landlord 11 Section 20.21 Corporate or Partnership Tenant 11 Section 20.22 Damage From Roof Leaks 11 Section 20.23 Security Deposit 11 Section 20.24 Administrative Charge 11 Section 20.25 Laws of the State of Florida 11 Section 20.26 Counterparts 11 Section 20.27 Right to Plat 11 Section 20.28 Radon Gas 12 Section 20.29 Tenant's Time to Sue 12 Section 20.30 Rider 12 SIGNATURES 12 JURAT 13 RIDER 14 EXHIBIT "A" - LEGAL DESCRIPTION EXHIBIT "B" - SITE PLAN EXHIBIT "C" - TENANT'S CONFIRMATION LETTER EXHIBIT "D" - DESCRIPTION OF LANDLORD'S WORK EXHIBIT "E" - SIGN CRITERIA GUARANTY
- ii - THIS LEASE made and entered into this 31st day of March, 1999 by and between ROCCO FERRERA & CO., INC. (A MICHIGAN CORPORATION) AND LEE S. LASSER, TRUSTEE OF THE LEE S. LASSER TRUST DATED AUGUST 25, 1972, AS AMENDED d/b/a LYONS CORPORATE PARK, whose address is 6601 N. Lyons Road, Coconut Creek, Florida 33073, Party of the First Part (hereinafter sometimes designated as "Landlord") and The Singing Machine Co., Inc. whose address is 3101 N.W. 25th Avenue, Pompano Beach, FL 33069 Party of the Second Part, (sometimes hereinafter designated as "Tenant"). WITNESSETH: ARTICLE I GRANT AND TERM Section 1.01 Leased Premises In consideration of the mutual premises, covenants and agreements herein contained, the adequacy of which consideration is by both parties confessed and acknowledged, and in further consideration of the rents, covenants and agreements hereinafter reserved and contained on the part of the Tenant to be observed and performed, the Landlord leases to the Tenant, and the Tenant rents from the Landlord, those certain premises now or hereafter to be erected on the property hereafter described, located in Broward County, Florida, described as containing 80 feet of frontage (measured from outside of exterior wall or center of common partition, as the case may be) and have an overall depth of 100 feet (measured from outside of exterior wall to outside of exterior wall) for a total of 8,000 square feet of ground floor area, which would include a portion of the truck well area, designated "Leased or Demised Premises", and the same being located within the Industrial Park property known and described as: EXHIBIT "A" attached hereto and made a part hereof, and as more particularly shown on Exhibit "B", together with the right to use the areas outlined around said Leased or Demised Premises. Landlord and Tenant agree that Exhibit "B" shows only the approximate shape and dimensions of the proposed buildings in the Industrial Park, and further agree that Tenant's consent shall not be required for any additions, reductions or modifications thereto. Section 1.02 Length of Term To have and to hold, together with appurtenances, for a term of five years and one month, upon the terms and conditions as herein set forth. Section 1.03 Construction of Leased Premises Landlord agrees prior to the commencement of the term of this Lease, at Landlord's sole cost and expense, to construct on the site a building in which the Demised Premises are to be located. In accordance with the outline specificatin, where applicable, entitled "Description of Landlord's Work" (Exhibit D) annexed hereto and made a part hereof, and it is understood and signed by Tenant that no minor changes from the plans that have been agreed upon by and between the parties hereto, which may be necessary during the preparation of the Demised Premises for Tenant or during construction, will affect or change the Lease or Invalidate same. Section 1.04 Possession After Completion of Construction Solely for the purpose of computing the term of this Lease, the commencement date shall be deemed to be the first day of the month next following the date when the premises are ready for occupancy. It is agreed that by occupying said premises as a Tenant, Tenant formally accepts the same and acknowledges that the Demised Premises are in the condition called for hereunder. The rentals herein reserved shall commence on the date when the premises are ready for occupancy. Tenant, prior to delivery of possession, shall be permitted to install fixtures and other equipment so long as such activities do not interfere with construction work, and it is agreed by Tenant that Landlord shall have no responsibility or liability whatsoever for any loss of, or damage to, any fixtures or other equipment so installed or left on the premises. Section 1.05 Determination of Availability of Demised Premises The Demised Premises shall be deemed as ready for occupancy when Landlord shall have substantially completed construction of the said premises in accordance with the Description of Landlord's Work as referred to in Section 1.03 of this Article, in accordance with all lawful statutes or ordinances and regulations affecting said premises. However, it shall not be required for Landlord and/or Tenant to have obtained a Certificate of Occupancy for the leased premises for the premises to be cleaned, substantially completed and ready for Tenant's occupancy. If any disputes shall arise as to the premises being ready for Tenant's occupancy, a certificate furnished by the architect in charge so certifying shall be conclusive and binding of the fact and date upon the parties. ARTICLE II RENT Section 2.01 Payment All rent and other charges payable to the Landlord under any provision of this Lease shall be paid to the Landlord, or as the Landlord may otherwise designate, in lawful money of the United States at the address of the Landlord or at such other place as the Landlord in writing may designate, without any set-off or deduction whatsoever, and without any prior demand therefor. In addition to the payment of the Rent and other charges, the Tenant shall also pay to the Landlord at the time of payment of such Rent and other charges, all sales, use or occupancy taxes payable by virtue of any of such payments. Rent for the first period during the term hereof which is for less than one (1) month shall be a prorated portion of the monthly installment. 1 Section 2.02 Minimum Rent The fixed minimum annual rent during the term of this Lease shall be payable by the Tenant in equal monthly installments on or before the first day of each month in advance without any prior demand therefor and without any deduction and set-off whatsoever, and shall be as follows: 1. The minimum rent for the first thirteen months shall be Four thousand eight hundred eighty six and 67/100 ($4,886.67) Dollars per month for a total of Fifty three thousand eight hundred forty and 04/100 ($53,840.04) Dollars for the twelve month period. 2. The minimum rent for the next twelve months shall be Four thousand eight hundred twenty and 00/100 ($4,820.00) Dollars per month for a total of Fifty seven thousand eight hundred forty and 00/100 ($57,840.00) Dollars. 3. The minimum rent for the next thirty six months shall be determined by section 2.03 of the Lease Agreement adjusted annually and using the prior period as the base period. Section 2.03 Adjustment of Fixed Minimum Rent The annual Fixed Minimum Rent shall be subject to periodical adjustment (but never below the amount specified in the previous lease year) on the first day of each Lease Period and on each anniversary thereafter. Landlord shall notify Tenant of the adjustment upon Landlord's calculation of same but the failure to do so within any specific time shall not be a waiver or release of Landlord's right to collect/charge the increased minimum rent. The term "index" means the South Consumer Price Index, All Items, For All Urban Consumers (1982-84-100) published by the Bureau of Labor Statistics or other governmental agency then publishing the Index (or if such index is no longer published, the Index of Consumer Prices in Miami most closely comparable to the Index). The term "Base Number" means the index number immediately preceding the month in which falls the first day of the prior lease period, for which the rent is being calculated. The term "Current Number" means the index number immediately preceding the month in which falls the date of commencement of the particular Lease Period. If the latest Current Number exceeds the Base Number, then the Fixed Minimum Rent for the next Lease Period shall be increased to an amount which is the product obtained by multiplying the Fixed Minimum Rent set forth in Section 2.02 of this lease by a fraction, the numerator of which fraction is such latest Current Number and the denominator of which fraction is the Base Number. Such increased Fixed Minimum Rent shall be effective throughout the Lease Period next following such latest Current Number. The basic or minimum rental for each year of the extended time shall not be less than the amount of rent being paid during the prior lease year. As used herein, the term "Lease Period" means the First Lease Period which is 13 months and each consecutive period, except that if the commencement date of the Lease Term is a day other than the first day of a calendar month, then the first lease Period shall include the number of days beginning with such commencement date and ending on the last day of such month. This Section 2.03 shall apply to the Item #3 of section 2.02 The minimum annual increase shall not be less than 4 percent. Section 2.04 Real Estate Taxes For the purposes of this Section, the term "taxes" shall include all real estate taxes, assessment (general and special) and other governmental impositions and charges of every kind and nature whatsoever, extraordinary as well as ordinary, foreseen and unforeseen, and each and every installment thereof which shall or may during the lease term be levied, assessed, imposed, become due and payable, or liens upon, or arise in connection with the use, occupancy or possession of, or grow due or payable out of, or for, the building or any part thereof, or the land (the "Parcel") upon which the building is situated or any other improvements thereon. Tenant agrees to pay to Landlord Tenant's share of taxes, as herein provided. Tenant's proportionate share of taxes assessed with respect to all buildings in the industrial Park shall be determined by multiplying the amount of such taxes by a fraction, the denominator of which shall be the rentable square foot area of all buildings constructed in the Industrial Park upon which any such taxes are assessed and the numerator of which shall be the total number of square feet of ground floor area contained in the demised premises as set forth in Section 1.01 hereof. Taxes shall be prorated as of the commencement date of the Lease upon the due date basis of the appropriate taxing authorities. In addition to the foregoing, should the State of Florida or any political subdivision thereof or any governmental authority having jurisdiction thereover, impose a tax and/or assessment (other than a franchise tax) upon or against the rentals payable hereunder by Tenant or Landlord, either by way of substitution for the taxes and assessments levied or assessed against such land and such buildings, or in addition hereto, such tax and/or assessments shall be paid by Tenant. Landlord will estimate the obligations anticipated to be required to be paid by Tenant to Landlord as provided in this Section 2.04 and Tenant shall pay 1/12 thereof in equal monthly installments together with the payment of minimum annual rent. In the event that the aggregate of Tenant's installments during the year shall be less than the amount of the obligations due from Tenant, such deficiency shall be paid to Landlord within fifteen (15) days after demand therefor. If there shall have been an overpayment by Tenant, Tenant shall be given a credit towards the next due payment of its share of taxes. Notwithstanding any thing in this Section 2.04 to the contrary, all costs and expenses incurred by Landlord during negotiations for or contests of the amount of the taxes shall be included with the term "Taxes". In the event a refund is obtained, Landlord shall credit a portion thereto the next installment of rent due from Tenant in proportion to the share of such taxes originally paid by Tenant from which the refund was derived. In addition to the foregoing, Tenant at all times shall be responsible for and shall pay, before delinquency, all taxes levied, assessed or unpaid on any leasehold interest, any right of occupancy, any investment of Tenant in the Demised Premises, or any personal property of any kind owned, installed or used by Tenant, including Tenant's leasehold improvements or on Tenant's right to occupy the Demised Premises. Section 2.05 Additional Rent The Tenant shall pay as additional rent any money and charges required to be paid pursuant to the terms of this Lease Agreement, whether or not the same may be designated "additional rent". If such amounts or charges are not paid at the time provided in the Lease, they shall nevertheless, if not paid when due, be collectible as rent thereafter falling due hereunder, but nothing herein contained shall be deemed to suspend or delay the payment of any amount of money or charge at the time the same becomes due and payable hereunder, or limit any other remedy of the Landlord. 2 Section 2.06 Past Due Rent If Tenant shall fail to pay any rent or additional rent when the same shall be due and payable, such unpaid amounts shall bear interest from the date thereof to the date of payment at the rate of eighteen percent (18%) per annum. ARTICLE III OPERATION AND MAINTENANCE OF COMMON AREAS Section 3.01 Designation of Common Areas For the purpose of this Article and wherever else used in this Lease, the common area shall be defined as to include, by way of illustration and not limitation, all parking areas, access roads and facilities which may be furnished by Landlord in or near the Industrial Park, including the truckway, or ways, driveways, pedestrian sidewalks, landscaped and planting areas, retaining walls, fences, storm sewer systems, lighting facilities, and all other areas and improvements which may be provided by the Landlord for the general use in common of the other Tenants, their officers, agents, employees and customers. Section 3.02 Construction of Common Areas Landlord agrees, at Landlord's sole cost and expense, to hardsurface, properly drain, adequately light and landscape a parking area, or parking areas, together with the necessary access roads within the limits of the Industrial Park. Landlord hereby grants to Tenant and Tenant's employees, agents, customers, and invitees the right, during the term hereof, to use, in common with others entitled to the use thereof, the parking area or areas and access roads within the limits of the Industrial Park. Landlord further agrees to operate, manage and maintain, during the term of this Lease, all parking areas, roads, sidewalks, landscaping, drainage and lighting facilities within the Industrial Park property. The manner in which such areas and facilities shall be maintained and the expenditures thereof shall be at the sole discretion of the Landlord, and the use of such areas and facilities shall be subject to such reasonable regulations as Landlord shall make from time to time. Section 3.03 Tenant's Pro Rata Share of Expenses Tenant agrees to pay, in addition to the rental set forth in Article II of this Lease, a proportionate share of the costs, expenses, and other charges incurred in connection with the operation, maintenance and repair of the Common Areas of the Industrial Park and shall include, but not be limited to, the costs and expenses of the following: maintenance of the common areas including policing and security protection: repair and replacement of paving, line painting, sidewalks, planter boxes and entrance canopies, curbs, walkways, landscaping, sprinkler systems, sanitary and storm drainage systems, including retention ponds, water systems, dumpster enclosures and lighting systems (including bulbs and poles); painting of the building; maintenance and repair of the roof, to the sum of which shall be added an amount equal to ten (10%) percent thereof in payment of all of Landlord's administrative costs. The proportionate share to be paid by Tenant shall be computed on the basis that the total floor area of the herein Demised Premises bears to the total floor area of the Industrial Park as determined at the beginning of each calendar quarter. Landlord will estimate the obligations anticipated to be required to be paid by Tenant to Landlord as provided in this Section 3.03, and Tenant shall pay 1/12 thereof in equal monthly installments, together with the payment of minimum annual rent. If requested by Tenant, Landlord shall submit a statement showing in reasonable detail for the period in question, all disbursements made in connection with the operation and maintenance herein described. In the event that the aggregate of Tenant's installments during the calendar year shall be less than the amount of the obligations due from Tenant, such deficiency shall be paid to Landlord within fifteen (15) days after demand therefor. If there shall have been an overpayment by Tenant, Tenant shall be given credit toward the next due payment of its share of expenses. ARTICLE IV USE OF PREMISES Section 4.01 Use of Premises It is understood and agreed between the parties hereto that said premises during the continuance of the Lease may be used and occupied only for office and warehouse for the manufacturing and distribution of singing machines, and for no other purpose or purposes without the written consent of Landlord. Tenant shall promptly comply with all laws, ordinances and lawful orders and regulations affecting the premises hereby leased, and the cleanliness, safety, occupation and use of same. Section 4.02 Care of Premises. A. Tenant shall not perform any acts or carry on any practices which may injure the building or be a nuisance or menace to other tenants in the Industrial Park and shall keep the premises under its control, including sidewalks, and landscaped areas adjacent to the premises clean and free from rubbish and dirt at all times, and shall store all trash and garbage within the leased premises and arrange for the regular pickup of such trash and garbage at Tenant's expense. Tenant shall not burn any trash or garbage of any kind in or about the building. Tenant shall install beige or gray levelors in the Demised Premises. B. Tenant shall not keep or display any merchandise or signs on or otherwise obstruct the sidewalks or areaways adjacent to the premises without the written consent of the Landlord. Tenant shall not use or permit the use of any portion of said premises as sleeping apartments, lodging rooms, or for any unlawful purpose or purposes. Tenant shall maintain the windows in a net and clean condition. Tenant shall not make any structural changes in the Demised Premises without the written consent of Landlord. No animals shall be kept in the leased premises. Tenant shall conduct business within the leased premises and the Tenant cannot store any items outside the leased premises. Tenant can only use the Truckwells for Tractor-Trailers, as the Truckwells may retain some water during a storm. C. Environmental Responsibilities (1) Tenant and Landlord shall each comply with all applicable environmental laws concerning the proper storage, handling and disposal of any hazardous substances in on or about the Premises. Tenant shall not use, store, generate, treat, or dispose of any hazardous substance on the Premises, or cause, suffer or permit the same to be done by any person without the prior written consent of the Landlord, which consent may be granted or withheld in 3 Landlord's sole discretion. For purposes of this Lease, the term "hazardous substance" means any substance, the manufacture, use, treatment, storage, transportation, or disposal of which is regulated by any law having as its object the protection of public health, natural resources, or the environment, including, by way of illustration only and not as a limitation, the following: the Resources Conservation and Recovery Act; the Comprehensive Environmental Response, Compensation, and Liability Act; the Toxic Substances Control Act; the Federal Water Pollution Control Act; the Clean Air Act; as each such acts shall be amended from time to time. (2) Tenant shall promptly supply to Landlord a copy of the reports of any environmental audit or investigation at any time undertaken on the Premises or adjacent property, all notices, demands, inquiries, or claims received from any person or entity as a result of hazardous substances alleged to be on or emanating from the Premises or adjacent property, and any notices, reports, or applications for licenses, permits, or approvals submitted by or on behalf of Tenant to any environmental regulatory agency affecting the Premises or adjacent property. (3) Landlord reserves the right (but shall not have the obligation) to enter upon and inspect the Premises at any time, and from time to time, during Tenant's business hours and, on reasonable notice, at other times. Such inspection may include, without limitations, the taking and analysis of soil borings, samples of ground water or surface water, installation of observation wells, and investigation of the surface or subsurface of the Premises by geophysical means ("Tests"). Tenant shall promptly furnish to Landlord any information requested by or on behalf of Landlord concerning Tenant's operations on the Premises and or adjacent property, whether or not such information of the proprietary nature. Landlord's inspection and testing rights are for Landlord's own protection only and Landlord has not, and shall not be deemed to have assumed any responsibility to Tenant or any other party for compliance with environmental laws, as a result of the exercise, or non-exercise of such rights. (4) In the event that any hazardous substance is discovered to have been released upon or from the Premises during the term of this Lease, whether such discovery is made during the term of this Lease or at any time thereafter, Tenant shall, at its sole cost and expense, take all steps necessary to remove and properly dispose of such hazardous substance and cleanup or repair any contamination or damage resulting therefrom, in full compliance with all applicable laws and regulations and to the reasonable satisfaction of Landlord. Tenant agrees to defend, indemnify and hold Landlord harmless from and against (i) any liabilities, including judgment, court costs, and actual attorney fees claimed or asserted against or sustained by Landlord resulting from Tenant's failure to fully comply with the provisions of this Section 4.02 and (ii) any costs for inspections, tests or studies referenced in Section 4.02 (c) (3) which are incurred by Landlord. ARTICLE V UTILITY SERVICES Section 5.01 Landlord's Obligation to Make Utility Services Available and Option to Supply Such Services Landlord agrees to provide and maintain the necessary mains and conduits in order that water and sewer facilities, gas (if available) and electricity may be available to the Demised Premises, and Tenant agrees to promptly pay for its use of the same. Section 5.02 Tenant's Obligation for Payment The obligation of Tenant to pay for water, gas, if available, and electricity, as herein provided, shall commence as of the date on which possession of the Premises is delivered to Tenant as provided for in Article I, Section 1.04 of this Lease, without regard to the formal commencement date of this Lease, Landlord shall not be liable for damages or otherwise should the furnishing of any services supplied by others to the Demised Premises be interrupted by fire, accident, riot, strike, act of God, or the making of necessary repairs or improvements or other cause beyond the control of Landlord. To the extent said utilities in whole or in part are not furnished by Landlord. Tenant covenants that it will maintain and pay for when due all utility services. ARTICLE VI MAINTENANCE OF LEASED PREMISES Section 6.01 Landlord's and Tenant's Obligations for Maintenance Landlord shall keep the four outer walls and roof of the Demised Premises in good repair, except that Landlord shall not be called to make any such repairs occasioned by the act of negligence of Tenant, its agents, or employees, except to the extent that Landlord is reimbursed therefor under any policy of insurance permitting waiver of subrogation in advance of loss. Landlord shall be reimbursed for all roof repairs except replacement costs of the roof pursuant to Section 3.03. Tenant shall notify Landlord of any repairs which are the responsibility of the Landlord to perform. Landlord shall not be called upon to make any other improvements or repairs of any kind upon said premises and appurtenances, and said premises and appurtenances shall at all times be kept in good order, condition and repair by Tenant, and shall also be kept in a clean, sanitary, and safe condition in accordance with the laws of the State of Florida, and in accordance with all directions, rules and regulations of the health officer, fire marshal, building inspector or other proper officers of the governmental agencies having jurisdiction, at the sole cost and expense of Tenant, and Tenant shall comply with all requirements of law, ordinances and otherwise touching said premises. Tenant shall permit no waste, damage or injury to said premises, and Tenant shall at its own cost and expense will maintain and replace any glass windows, skylight, roof exhaust fans, interior electrical systems, heating, ventilating, and air conditioning systems, interior above ground plumbing, ventilating fans, overhead doors, and front doors, door hardware and frames; dock, levelers, if provided, in the premises, which may be broken. At the expiration of the tenancy created hereunder, Tenant shall surrender the premises in good condition and free from vermin, reasonable wear and tear, loss by fire or other unavoidable casualty excepted. Notwithstanding any in this Article contained, there shall be no obligation on the part of Tenant to comply with any of the laws, directions, rules and regulations referred to which may require structural alterations, structural changes, structural repairs, or structural additions, unless made necessary by act of work performed by Tenant, in which event Tenant shall comply at its sole expense. Tenants shall perform normal maintenance on a timely schedule which would include changing the HVAC filters. Section 6.02 Abuse of Plumbing, Walls, Etc. The plumbing facilities and adjoining or connecting sewer lines or mains shall not be used for any other purpose than that for which they are constructed, and no foreign substance of any kind shall be thrown therein, and the expense of any breakage, stoppage or damage resulting from a violation of this provision shall be borne by Tenant, who shall or whose employees, agents, invitees, or licensees shall have caused it. The Tenant, its employees or agents, shall not paint, alter or deface any walls, ceilings, partitions, floors, wood, stone or iron work with the Landlord's written consent being first obtained. 4 ARTICLE VII SIGNS Section 7.01 Tenant shall not erect or install any exterior or interior window or door signs or advertising media or window or door lettering, or placards without the previous written consent or Landlord. Any signs erected by the Tenant shall be in conformance with any governmental laws. Tenant agrees not to use any advertising media that shall be deemed objectionable to Landlord or other tenants, such as loud speakers, phonographs, or radio broadcast in a manner to be heard outside the leased premises. Tenant shall not install any exterior lighting or plumbing fixtures, shades or awnings, or any exterior decorations or painting, or build any fences or make any changes to the building exterior without the previous written consent of Landlord. Notwithstanding anything herein or elsewhere to the contrary contained, any sign)s) which Tenant may install in or about the demised premises with the approval of Landlord either simultaneously with the execution of this Lease Agreement or subsequently shall be removed at the termination of this Lease and the Tenant shall restore the area when the sign was mounted to its original condition. ARTICLE VIII ALTERATIONS Section 8.01 All alterations, additions, improvements and fixtures (other than trade fixtures) which may be made or installed by either of the parties hereto upon the premises and which in any manner are attached to the floors, walls or ceilings or any extension thereof shall be the property of Landlord, and at the termination of this Lease shall remain upon and be surrendered with the premises as a part thereof, without disturbance, molestation or injury. Any floor covering, irrespective as to manner affixed, shall be and become the property of the Landlord absolutely; provided, however, that Landlord may designate by written notice to Tenant those alterations, additions, improvements and fixtures, which shall be removed by Tenant at the expiration or termination of the Lease, and Tenant shall promptly remove the same and repair any damage to the leased premises caused by such removal of any of the foregoing, to the condition as when originally received by Tenant, reasonable wear and tear excepted. Further, Tenant shall likewise remove its machinery and equipment at the expiration or termination of this Lease and repair any damage to the leased premises caused by such removal, restoring the premises to the condition as when originally received by Tenant, reasonable wear and tear excepted. ARTICLE IX INSURANCE AND INDEMNITY Section 9.01 Covenant to Hold Harmless Landlord shall be defended and held harmless by Tenant from any liability for damages to any person or any property in or upon said premises and the sidewalks, driveways and landscaped areas adjoining same, including the person and property of the Tenant, and its employees and all persons in the building at its or their invitation or with their consent. It is understood and agreed that all property kept, stored or maintained in the Demised Premises shall be so kept, stored or maintained at the risk of Tenant only. Tenant shall not suffer or give cause for the filing of any lien against the Demised Premises. Section 9.02 Fire Insurance Premium Tenant shall not carry any stock of goods or do anything in or about said premises which will in any way tend to increase the insurance rates of said premises and in the buildings of which they are a part. Tenant agrees to pay, in addition to its prorata share of all insurance costs as described in this Lease Agreement, the total of any increase in premiums for insurance against loss by fire that may be charged during the terms of this Lease on the amount of insurance to be carried by Landlord on said premises and the buildings of which they are a part, resulting from the business carried on in the leased premises by Tenant, whether or not Landlord has consented to the same. If Tenant installs any electrical equipment that overloads the lines in the herein leased premises. Tenant shall at its own expense make whatever changes are necessary to comply with the requirements of the Insurance Underwriters and governmental authorities having jurisdiction. Section 9.03 Tenant's Obligation to Carry Public Liability Insurance Tenant shall, during the entire term hereof, keep in full force and effect a policy of public liability insurance with respect to the Demised Premises and the business operated by Tenant and/or any sub-tenants of Tenant in the Demised Premises, in which both Landlord and Tenant shall be named as parties covered thereby, or which provides equivalent protection to and is approved by Landlord, and in which the limits of liability shall be not less than Five Hundred Thousand Dollars ($500,000) per person and One Million Dollars ($1,000,000) for each accident or occurrence for bodily injury and Two Hundred Fifty Thousand Dollars ($250,000) for property damages. Tenant shall furnish Landlord with a certificate or certificates of insurance, or other acceptable evidence that such insurance is in force at all times during the term hereof. Section 9.04 Insurance Costs A. Tenant shall pay to Landlord as additional rent during each lease year, the cost of all insurance policies including, by way of illustration and not limitation, the cost of covering all risks of loss to all of the buildings and improvements on or about the Industrial Park on the full replacement value of the buildings and all improvements thereon, and rental income protection coverage, and public liability insurance including umbrella coverage as Landlord shall deem necessary and desirable during the term of the Lease, payable by Landlord, in any lease year or portion thereof following the Commencement Date of the Lease. Insurance costs shall be prorated as of the Commencement Date and the Termination Date of the Lease. For the purposes of this Section, Insurance costs shall include any deductible required to be paid as a result of any insurance claim by any insurance policy in force for the leased premises. Tenant hereby acknowledges and agrees to pay such deductibles upon request by Landlord after any loss or damage to the leased premises. B. Tenant's proportionate share shall be computed on the basis that the first floor area of the Demised Premises bears to the total first floor area of the Industrial Park as determined at the beginning of each calendar quarter. C. Landlord will estimate the obligations anticipated to be required to be paid by Tenant to Landlord as provided in Section 9.04 and Tenant shall pay 1/12 thereof in equal monthly installments, together with the payment of minimum annual rent. In the event that the aggregate of Tenant's installments during the year shall be less than the amount of the obligations due from Tenant, such deficiency shall be paid to Landlord within fifteen (15) days after billing is presented therefor by Landlord. If there shall have been an overpayment by Tenant, Tenant shall be given a credit towards the next due payment of its share of the insurance costs. 5 ARTICLE X ASSIGNMENT AND SUBLETTING Section 10.01 Tenant agrees not to assign or in any manner transfer this Lease or any estate or interest therein without the previous written consent of Landlord, and not to sublet said premises or any part or parts thereof, and Consent by Landlord to one or more assignments of this Lease or to one or more sublettings of said premises shall not operate to exhaust Landlord's rights under this Article. In the event of any assignment or sublease of all or any portion of the Premises where the rental or other consideration reserved in the sublease or by the assignment exceeds the rental or prorata portion of the rental as the case may be, for such space reserved in the Lease, Tenant agrees to pay Landlord monthly, as additional rent, on the first day of each month, the excess of the rental or other consideration reserved in the sublease or assignment over the rental reserved in this Lease applicable to the subleased/assigned space. Tenant acknowledges that Landlord selected Tenant in part on the basis of Tenant's proposed use and occupation of the Premises, and agrees that Landlord may withhold consent to any proposed sublease or assignment if the sub-tenant's or assignee's business or proposed use of the premises would be physically injurious to the Building or would detract from the reputation of the Industrial Park, if any, within which the Premises are located. ARTICLE XI ACCESS TO PREMISES Section 11.01 Right of Entry by Landlord Landlord shall have the right to enter upon the leased premises at all reasonable hours for the purpose of inspecting the same, or of making repairs, additions or alterations to the Demised Premises or any property owned or controlled by Landlord. If Landlord deems any repairs required to be made by Tenant necessary, it may demand that Tenant make the same forthwith, and if Tenant refuses or neglects to commence such repairs and complete the same with reasonable dispatch, Landlord may make or cause such repairs to be made and shall not be responsible to Tenant for any loss or damage that may accrue to its stock or business by reason thereof, and if Landlord makes or causes such repairs to be made, Tenant agrees that it will forthwith, on demand, pay to Landlord the cost thereof with interest at eighteen percent (18%), and if it shall default in such payment, Landlord shall have the remedies provided in Article XV. Section 11.02 Landlord's Right to Exhibit Premises For a period commencing ninety (90) days prior to the termination of this Lease, Landlord may have reasonable access to the premises herein demised for the purpose of exhibiting the same to prospective tenants. ARTICLE XII EMINENT DOMAIN Section 12.01 Total Condemnation If the whole of the premises hereby leased shall be taken by any public authority under the power of eminent domain, then the term of this Lease shall cease as of the day possession shall be taken by such public authority and the rent shall be paid up to that day with a proportionate refund by Landlord of such rent as may have been paid in advance. Section 12.02 Partial Condemnation If less than the whole, but more than 25% of the leased premises shall be taken under eminent domain, Tenant shall have the right either to terminate this Lease and declare the same null and void, or, continue in the possession of the remainder of the leased premises, and shall notify Landlord in writing prior to any such taking or Tenant's intention. In the event Tenant elects to remain in possession, all of the terms herein provided shall continue in effect, except that the minimum rent shall be reduced in proportion to the amount of the premises taken and Landlord shall, at its own cost and expense, make all necessary repairs or alterations to the basic building, front and interior work as covered by Description of Landlord's Work attached hereto so as to constitute the remaining premises a complete architectural unit. Section 12.03 Landlord's and Tenant's Damages All damages awarded for such taking under the power of eminent domain, whether for the whole or a part of the leased premises, shall belong to and be the property of Landlord whether such damages shall be awarded as compensation for diminution in value to the leasehold or to the fee of the premises; provided, however, that Landlord shall not be entitled to the award made to Tenant for loss of business, depreciation to, and cost of removal of stock and fixtures. ARTICLE XIII DESTRUCTION OR DAMAGE TO DEMISED PREMISES Section 13.01 Reconstruction of Damaged Premises In the event the Demised Premises shall be partially or totally destroyed by fire or other casualty insurable under full standard extended coverage insurance, as to become partially or totally untenable, the same shall be repaired as speedily as possible at the expense of Landlord, unless Landlord shall elect not to rebuild as hereinafter provided, and a just and proportionate part of the rent shall be abated until so repaired. The obligation of Landlord hereunder shall be limited to the basic building and interior work as covered by Description of Landlord's Work attached hereto. In no event shall Landlord be required to repair or replace Tenant's merchandise, trade fixtures, furnishings or equipment or any alterations or additions to the leased premises accomplished by or on behalf of the Tenant. The obligations of Landlord hereunder shall be conditioned upon Tenant's payment of any deductible required by the insurance policy in force for the leased premises. Section 13.02 If (i) either the Demised Premises or the building in which it is located containing floor space (taken in the aggregate) shall be damaged to the extent of more than 25% of the cost of replacement thereof, respectively, or (ii) the proceeds of Landlord's insurance recovered or recoverable as a result of the damage shall be insufficient to pay fully for the cost of replacement of so much of the Demised Premises and/or the building in which they are located as was included in the Landlord's Work provided in Section 1.03 hereof or (iii) the Demised Premises or the building shall be damaged as a result of a risk which is not covered by Landlord's in insurance or (iv) the Demised Premises shall be damaged in whole or in part during the last two years of the Lease Term or (v) the building in which the Demised Premises as a part shall be damaged to the extent of 50% or more of the cost of replacement thereof, whether or not the Demised Premises shall be damaged; then, and in any of such events, Landlord may terminate this Lease by notice given within ninety (90) days after such event, and upon the date specified in such notice, which shall not be less than thirty 6 (30) days nor more than sixty (60) days after the giving of said notice, this Lease shall terminate and come to an end and Tenant shall vacate and surrender the Demised Premises. If the casualty, repairing or rebuilding shall render the Demised Premises untenable in whole or in part, an equitable abatement of the Fixed Minimum Rent and Additional Rent shall be allowed from the date when the damage occurred until completion of the Landlord's repairs or rebuilding or, in the event Landlord elects to terminate this lease, until said date of termination taking into account, among other things, the amount and location of the floor space of the Demised Premises rendered untenable. Section 13.03 If this Lease shall not be terminated as provided above, Landlord shall, at its expense, proceed with the repair or restoration of the Demised Premises and the building. All repairs and restoration of the Demised Premises not involved in Landlord's Work shall be performed by Tenant at its expense. All salvage from repair or restoration work done at any time pursuant to this Section shall belong to Landlord, who shall not be accountable therefor to Tenant. Section 13.04 The "cost of replacement" as such term is used in Section 13.02 above shall be determined by the company or companies s Selected by the Landlord insuring Landlord against the casualty In question, or, if there shall be no Insurance, then as the parties hereto shall agree, or, in the absence of an insurance company determination or an agreement, as shall be determined by arbitration in Broward County, Florida, in accordance with the provisions of Section 682, Florida Statutes. Section 13.05 If the Demised Premises and/or the building shall be damaged or destroyed due to the fault and/or negligence of Tenant, its agents, employees or Invitees. Tenant shall at its expense, repair or restore the Demised Premises or building and the Fixed Minimum Rent, Tax Rent and all other additional rents and charges herein shall not abate. Section 13.06 Subrogation The Tenant shall be release from any liability resulting from damage by fire or casualty (irrespective of the cause of such fire or casualty) upon the express proviso that if at any time Landlord's insurance shall refuse waivers of subrogation, Landland may in each instance revoke said waiver of subrogation effective thirty (30) days from date of notices, unless within such thirty (30) days prior. Tenant is able to ensure and furnish to the Landlord insurance in other companies with such waivered subrogation. If Tenant can secure such other insurance, then the Landlord shall pay so much of the cost thereof as Landlord was paying for its own insurance, and the Tenant shall pay the remainder. ARTICLE XIV BANKRUPTCY OR INSOLVENCY Section 14.01 Landlord's Option to Terminate Upon Insolvency of Tenant or Guarantor Under State Insolvency Law of Upon Insolvency of Tenant or Guarantor Under Federal Bankruptcy Act. In the event the estate of Tenant created hereby shall be taken in execution or by other process of law, or if Tenant or and guarantor of Tenant's obligations hereunder ("guarantor") shall be adjudicated insolvent pursuant to the provisions of any present or future Insolvency law under the laws of any state having jurisdiction ("state law"), or if any proceedings are filed by or against such guarantor or tenant under the Bankruptcy Code, or any similar provisions of any future federal bankruptcy law, or if a receiver or trustee of the property of Tenant or guarantor shall be appointed under state law by reason of Tenant's or guarantor's insolvency or inability to pay its debts as they become due or otherwise, or if any assignment shall be made of Tenant's or guarantor's property for the benefit of creditors under state law, then and in such event Landlord may at its option terminate this Lease and all rights of Tenant hereunder by giving Tenant written notice of the election to so terminate within thirty (30) days after occurrence of such event. I n a reorganization under Chapter 11 of the Federal Bankruptcy Code, the debtor or trustee must assume this Lease or assign it within sixty (60) days from the filing of the proceeding, or he shall be deemed to have rejected and terminated this Lease. ARTICLE XV DEFAULT OF THE TENANT Section 15.01 Right to Re-enter In the event of any failure of Tenant to pay any rental due hereunder within five (5) days after the same shall be due, or any failure to perform any other of the terms, conditions or covenants of this Lease to be observed or performed by Tenant or Guarantor for more than thirty (30) days after written notice of such default shall have been mailed to Tenant, or if Tenant or Guarantor shall become bankrupt or insolvent, or file any debtor proceedings, or take or have taken against Tenant or Guarantor in any Court pursuant to any statute either of the United States of any State, a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Tenant's or Guarantor's property, or if Tenant or Guarantor makes an assignment for the benefit of creditors, or petitions for or enters into an arrangement, or if Tenant or Guarantor shall abandon said premises, or suffer this Lease to be taken under any writ of execution, then Landlord, besides other rights and remedies it may have, shall have the right of reentry provided by Florida law which provides for notice to Tenant and a judicial hearing. After notice and a final judgment, Landlord may remove all persons and property from the leased premises and such property may be removed and stored in a public warehouse or elsewhere at the cost of, and for the account: of Tenant, and all without liability to Landlord for any loss or damage which may be occasioned thereby. Should Landlord elect to re-enter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, it may either terminate this Lease or it may from time to time without terminating this Lease make such alterations and repairs as may be necessary in order to relet the premises, and relet said premises or any part thereof for such term or terms which may be for a term extending beyond the term of this Lease) and at such rental or rentals and upon such other terms and conditions of Landlord in its sole discretion may doom advisable; upon each such reletting all rentals received by Landlord from such relening shall be applied, first to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs and expenses of such reletting, including brokerage fees and attorney's fees and of cost of such alterations and repairs; third, to the payment of rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder. If such rentals received from such reletting during any month be less than that to be paid during that month by Tenant hereunder Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. If such rentals received from such reletting during any month be more than that to be paid during that month by Tenant hereunder, then such excess shall not benefit Tenant by reducing the amount of any of Tenant's obligations due Landlord. Any amounts obtained by reletting shall be for the sole benefit of Landlord. No such re-entry or taking possession of said premises by Landlord shall be construed as an election on its part 7 to terminate this Lease unless a written notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach. Should Landlord at any time terminate this Lease for any breach, in addition to any other remedies it may have, it may recover from Tenant all damages it may incur by reason of such breach, including the cost of recovering the leased premises, reasonable attorney's fees, and including the worth at the time of such termination of the excess, it any, of the amount of rent and charges equivalent to rent reserved in this Lease for the remainder of the stated term over the amount, if any, actually received by Landlord from the reletting of the leased premises, all of which amount shall be immediately due and payable from Tenant to Landlord. (n determining the rent which would be payable by Tenant hereunder, subsequent to default, the annual rent for each year of the unexpired term shall be equal to the average annual minimum rent paid by Tenant from the commencement of the term to the time of default, or during the proceeding three full calendar years, whichever period is shorter. Whether or not forfeiture has been declared, Landlord will not be obligated or responsible, in any way, for failure to release the Premises or, in the event that the Premises are released, for failure to collect the rent under such re leasing. The failure of Landlord to re-lease all or any part of the Premises will not release or affect Tenant's liability for rent or damages, Section 15.02 Legal Expenses In case suit shall be brought for recovery of possession of the leased premises, for the recovery of rant or any other amount due under the provisions of this Lease, or because of the breach of any other covenant herein contained on the part of Tenant to be kept or performed, and a breach shall be established, Tenant shall pay to Landlord all expenses incurred therefor, including reasonable attorney's fee. Section 15.03 Waiver of Jury Trial and Counterclaims The parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties any way connected with this Lease relating to any monetary defaults. Section 15.04 Curing of Tenant's Default Notwithstanding anything herein contained to the contrary, if Tenant shall be in default in the performance of any of the terms or provisions of this Lease and if Landlord shall give to Tenant notice in writing of such default specifying the nature thereof, and if Tenant shall fail to cure such default within the time provided in Section 15.01 hereof, or immediately if such default requires emergency action, Landlord may, in addition to its other legal and equitable remedies, cure such default for the account of and at the cost and expense of' tenant and the sums so expended by Landlord, together with an administrative fee equal to twenty-five percent (25 percent) of the sum expended by Landlord, shall be deemed to be additional rent and shall be paid by Tenant on the day when rent shall next become due and payable. ARTICLE XVI TENANT'S PROPERTY Section 16.01 Taxes on Leasehold Tenant shall be responsible for and shall pay before delinquency all municipal, county or state taxes assessed during the term of this Lease against any leasehold interest or personal property of any kind, owned by or placed in, upon or about the leased premises by the Tenant. Section 16.02 Notice by Tenant Tenant shall give immediate notice to Landlord in case of fire or accidents in the leased premises or in the building of which the premises are a part, or of defects therein any fixtures or equipment. ARTICLE XVII QUIET ENJOYMENT Section 17.01 Landlord's Covenant Upon payment by the Tenant of the rents herein provided, and upon the observance and performance of all the covenant:., terms and conditions on Tenant's part to be observed and performed, Tenant shall peaceably and quietly hold and enjoy the leased premises for the term hereby demised without hindrance or interruption by Landlord or any other person or persons lawfully or equitably claiming by, through or under the Landlord, subject, nevertheless, to the terms and conditions of this Lease. ARTICLE XVIII HOLDING OVER, SUCCESSORS Section 18.01 Holding Over If Tenant remains in possession of the leased premises after the expiration of this Lease without executing a new lease, it will be deemed to be occupying the leased premises as a tenant from month to month, and Tenant will be responsible for the rent and all other charges on a monthly basis with no prorations, subject to all the provisions of this Lease to the extent that they can be applicable to a month to month tenancy, except that the minimum rental for each month will be increased to an amount established by Landlord. The new monthly amount will be established by written notice from Landlord to Tenant. Section 18.02 Successors All rights and liabilities herein given to, or imposed upon, the respective parties hereto shall extend to and bind the respective heirs, executors, administrators, successors, and assigns of the said parties; and if there shall be more than one tenant, they shall all be bound jointly and severally by the terms, covenants, and agreements herein. No rights, however, shall inure to the benefit of any assignee of Tenant unless the assignment to such assignee has been approved by Landlord In writing as provided in Section 10.01 hereof. ARTICLE XIX CERTAIN RIGHTS OF LESSOR WITH RESPECT TO THE LAND Section 19.01 Easements and Utilities The Landlord shall have the right, without the consent of Lessee, to grant to adjacent land owners, purchasers, Tenants or occupants or any governmental agency or public or private utility company, including Tenant, at any time and from time to time during the term of the Lease, as extended easements and rights of ingress, egress and common use and enjoyment with respect to the roads, walks, unimproved portions of the land, water, sewage, telephone, gas and electricity lines, and Landlord may at anytime and from time to time grant easements, public and private, for such purposes to itself and to others, and relocate any easements now or hereafter affecting the land. 8 ARTICLE XX MISCELLANEOUS Section 20.01 Waiver One or more waivers of any covenant or condition by Landlord shall not be construed as a waiver of a subsequent breach of the same covenant or condition. and the consent or approval by Landlord to or of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent or approval to or of any subsequent similar act by Tenant. Section 20.02 Subordination Tenant hereby grants the right to Landlord to. and Landlord hereby reserves the right to, subject and subordinate this Lease (at all times) to any mortgage(s) or deeds) of trust that may hereafter be placed upon the Demised Premises and to any and all advances to be made thereunder and to the interest thereon and all renewals, replacements and extensions thereof. Landlord may execute and deliver any instrument or instruments subordinating this Lease to any such mortgage or deed of trust without any further action or consent by Tenant. and Tenant hereby irrevocably appoints the Landlord the attorney-in-fact of the Tenant to execute and deliver any such instrument or instruments for and in the name of the Tenant. Tenant additionally hereby grants to any first mortgagee of the leased premises the right to subject and subordinate this Lease (at all times) to any such first mortgage and to any and all advances to be made thereunder, and to the interest thereon and all renewals, replacements and extensions thereof. Any such first mortgages may execute and deliver any instrument or instruments subordinating this Lease to any such first mortgage without any further action or consent by Tenant, and Tenant hereby irrevocably appoints such first mortgagee the attorney-in-fact of the Tenant to execute and deliver any such instrument or instruments for and in the name of the Tenant. In confirmation of any such subordination, the Tenant shall promptly execute any certificate that the the Landlord or such first mortgagee may request. Section 20.03 Notices Whenever under this Lease a provision is made for notice of any kind, it shall be deemed sufficient notice and service thereof if such notice to Tenant is in writing, addressed to Tenant at the last known post office address or office address of Tenant or at the leased premises, and sent by registered or certified mail with postage prepaid, and if such notice to Landlord is in writing, addressed to the last mown post office address of Landlord and sent by registered or certified mail with postage prepaid. Notice must be sent to but one Tenant or Landlord where Tenant or Landlord is more than one person. Section 20.04 Construction Nothing contained herein shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent or of partnership or of joint venture between the parties hereto, it being understood and agreed that neither the method of computation of rent, nor any other provision contained herein, nor any acts of the parties herein, shall be deemed to create any relationship between the parties hereto other than the relationship of Landlord and Tenant, Wherever herein the singular number is used, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders. In the event any language is deleted from this Lease said language shall be deemed to have never appeared and no other implication shall be drawn therefrom. Section 20.05 Non-Liability Landlord shall not be responsible or liable to Tenant for any loss or damage that may be occasioned by or through the acts or omissions of persons occupying adjoining premises, if any, or any part of the premises adjacent to or connected with the premises hereby leased or any loss or damage resulting to Tenant or his property from burst, stopped or leaking water, gas, sewer or steam pipes, or for any damage or loss or property within the Demised Premises from any cause whatsoever Notwithstanding any provisions of this Lease to the contrary, Tenant acknowledges and agrees that no personal liability of any kind under any of the terms, conditions or provisions of this Lease shall attach to the Landlord (including any joint venturer of the joint venture which is the Landlord hereunder or any leasing agent, broker or other agent or representative of Landlord) for the payment of any amounts payable under this Lease or for the performance of any terms, conditions or provisions required to be performed by Landlord under this Lease. If Landlord shall fail to perform any term, condition or provision of this Lease required to be performed by Landlord and if as a consequence of such default, Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution and levy of such judgment against the right, title and interest of the Landlord in the building of which the Tenant's Demised Premises are a part, and neither Landlord nor any of the joint venturers of the joint venture which is the Landlord hereunder shall be personally liable for any Such judgment or monetary deficiency. Section 20.06 Net Lease It is the intent of the parties that the within Lease be a net, not, net Lease. Section 20.07 Financing and Tenant's Acknowledgment of Acceptance of Premises Notwithstanding anything herein or elsewhere to the contrary contained. A. The Landlord shall not be obligated to proceed with the construction of the leased promises unless and until financing; acceptable to Landlord is obtained. Should such financing not be obtainable within six (6) months after completion of final plans and specifications, Landlord may so notify Tenant in writing, and this Lease shall thereupon cease and terminate, and each of the parties hereto shall be released and discharged from any and all liability and responsibility hereunder. If Landlord can obtain financing only upon the basis of modification of the terms and provisions of this Lease, the Landlord shall have the right to cancel this Lease if the Tenant refuses to approve in writing any such modifications within thirty (30) days after Landlord's request therefor. If such right to cancel is exercised, this Lease shall thereafter be null and void, any money or security deposited hereunder shall be returned to the Tenant, and neither party shall have any liability to the other by reason of such cancellation. B. Tenant agrees to furnish Landlord, upon request and after Tenant has taken possession of the Demised Premises, a letter addessed to Landlord's mortgagee or financial institution, giving the information, as described in the attached Exhibit "C". Failure of Tenant to provide Landlord such a letter at the request of Landlord, Landlord's mortgagee or financial institution at any time during the lease term as above described, shall give Landlord the right to cancel this Lease at that time upon five (5) days written notice to Tenant of such cancellation, and the Tenant shall remain liabile to the Landlord for any damages sustained by the Landlord because of such failure by the Tenant. 9 Section 20.08 Accord and Satisfaction No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rental herein stipulated shall be deemed t:) be other than on account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. Section 20.09 Captions and Section Numbers The captions, section numbers, article numbers and index appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such sections or articles of this Lease nor in any way affect this Lease. Section 20.10 Partial Invalidity If any term, covenant or condition of this Lease or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to persons or circumstances other than those to which it is held invalid or unenforceable, shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law. Section 20.11 No Option The submission of this Lease for examination does not constitute a reservation of or option for the leased premises, and this Lease becomes effective as a Lease only upon execution and delivery thereof by Landlord and Tenant. Section 20.12 Recording This Lease shall not be recorded by the Tenant. However, it may be recorded by Landlord at Landlord's option. If this Lease is recorded by Tenant without the written consent of the Landlord, then this Lease may, at any time, without notice and whenever the Landlord so elects, be declared by Landlord null and void, Section 20.13 Sale or Transfer of the Demised Premises Upon any sale or transfer, including any transfer by operation of law, of the Demised Premises, or the Industrial Park, Landlord shall be relieved from all subsequent obligations and liabilities under this Lease as long as successor Landlord assumes all of the obligations of the lease Section 20.14 Liens In the event a mechanic's lien shall be filed against the Demised Premises or Tenant's interest (herein as a result of the work undertaken by Tenant to ready the Demised Premises for the opening of Tenant's business or as a result of any repairs or alterations made by Tenant, Tenant shall, within ten (10) days after receiving notice of such lien, discharge such lien, either by payment of the indebtedness due the mechanic's lien claimant or by filing a bond (as provided by statute) as security therefore. If Tenant shall fail to cause such lien to be discharged upon demand, then, in addition to any other right or remedy of Landlord, Landlord may, but shall not be obligated to, discharge the same by paying the amount claimed to be due or by bonding or other proceeding deemed appropriate by Landlord and the amount so paid by Landlord and/or all costs and expenses, including reasonable attorney's fees, incurred by Landlord in procuring the discharge of such lien shall be deemed to be additional rent. Nothing in this Lease contained shall be construed as a consent on the part of the Landlord to subject Landlord's estate in the Demised Premises to any lien or liability under the Lien Law of the State of Florida. Tenant shall never, under any circumstances, have the power to subject the interest of Landlord in the Demised Premises to any mechanics or materialmen's liens or liens of any kind. In accordance with the applicable provisions of the Florida Lien Law, it is specifically provided that neither Tenant or anyone claiming by, through or under Tenant, including, but not limited to, contractors, subcontractors, materialmen, mechanics, and laborers shall have any right to file or place any mechanics and laborers, mechanics or material men's liens of any kind whatsoever upon the Demised Premise nor upon any building or improvements thereof, and any such liens are hereby prohibited. All parties with whom Tenant may deal are put on notice that Tenant has no power to subject Landlord's interest to any claim or lien of any kind or character, and all persons so dealing with Tenant must look solely to the credit of Tenant and not to Landlord's interest or assets. Further, Tenant acknowledges that Tenant, with respect to improvements or alterations made by Tenant or caused to be made by Tenant hereunder shall promptly notify the contractor making such improvements to the Demised Premises of this provision exculpating Landlord's liability for such liens, Section 20.15 Attornment In the event any proceedings are brought for foreclosure or in the event of exercise of the power of sale under any mortgage made by Landlord covering the leased premises, or areas surrounding same, Tenant shall, at the option and request of purchaser, attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as the Landlord under this Lease, Section 20.16 Set-Off Statement Tenant agrees within ten (10) days after any request therefor by the Landlord to execute in recordable form and deliver to Landlord a statement, in writing, certifying (a) that this Lease is in full force and effect, (b) the date of commencement of the term of this Lease, (c) that rent is paid currently without set-off or defense thereto, (d) the amount of rent, if any, paid in advance, and (e) that there are no uncured defaults by Landlord or stating those claimed by Tenant. Section 20.17 Entire Agreement This Lease shall constitute the entire agreement of the parties hereto. All prior agreements, statements or representations between the parties and their agents and/or employees, whether written or oral, are expressly merged herein and if not contained in this Lease agreement shall be of no force or effect. This Lease agreement shall not be modified, changed, altered, or discharged whatsoever, excepting only by an agreement in writing and executed by both Landlord and Tenant. 10 Section 20.18 Brokerage Tenant warrants that it has had no dealings with any broker or agent in connection with this Lease, and Tenant covenant's pay, hold harmless and indemnify Landlord from and against any and all costs, expense or liability for any compensation, commissions and charges claimed by any broker or agent with respect to this Lease or the negotiation thereof based upon or arising out of any acts or dealings which Tenant or any representative of Tenant has had or is claimed to have had with such broker or agent. Section 20.19 No Oral Changes This Lease may not be changed or terminated orally but only upon an agreement In writing signed by the parties hereto. Section 20.20 No Representations by Landlord Landlord or landlord's agents have made no representations, warranties or promises with respect to the Demised Premises or the building except as herein expressly set forth. Section 20.21 Corporate or Partnership Tenant If Tenant is or will be a corporation, partnership, or other entity, the persons executing this Lease on behalf of Tenant hereby covenant and warrant that Tenant has been duly organized and is qualified or authorized to do business in the State of Florida; and that the person(s) executing this Lease on behalf of Tenant is (are) duly authorized to sign and execute this Lease. Furthermore, prior to the Commencement Date, Tenant shall provide Landlord with evidence of the foregoing which, where applicable, will include a certificate from the State of Florida that Tenant is qualified to do business in that state, and a certified resolution of the Board of Directors or partners of Tenant that the person(s) executing this Lease on behalf of Tenant was (were) duly authorized to do so. Furthermore, Tenant agrees to take any and ail necessary action to keep its existence as an entity in good standing throughout the term of this Lease in the state in which Tenant has been organized and, If such state is other that the State of Florida, to continue to be qualified to do business in the State of Florida. Section 20.22 Damage From Roof Leaks As to Tenant's machinery, equipment and Inventory: Tenant understands and agrees that the Landlord shall have no liability for any resultant damage from any leaks as a result of excessive rain, roofing defects or hurricane damage, and that it shall be the responsibility of the Tenant to protect itself as it sees fit concerning any leakage of water whatsoever, either from the roof, leaking or burst pipes or from any other source. Section 20.23 Security Deposit The Tenant has, simultaneously herewith, deposited with Landlord, the Sum of Five thousand four hundred twelve and 00/100 Dollars ($5,512.00). Said deposit shall be held by Landlord as security for the faithful performance by Tenant of the terms, covenants, provisions and conditions of this Lease. It is agreed that in the event Tenant defaults in respect to any of the terms, covenants, provisions and conditions of this Lease, including but not limited to the payment of rental, Landlord may, but in no event shall Landlord be required to, use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rental or any other sum as to which Tenant is in default or any sum which Landlord may expend or may be required to expend, including attorney's fees, by reason of Tenant's default, in respect to any of the terms ,covenants, provisions and conditlons of this Lease, including but not limited to any damages or deficiencies in the reletting of the premises, whether such damages or deficiencies accrued before or after summary proceedings or other reentry by Landlord. Should the entire deposit, or any portion thereof, be appropriated and applied by Landlord for the payment of overdue rental or other sums due and payable to Landlord by Tenant hereunder, then Tenant shall, upon the written demand of Landlord, forthwith remit to Landlord a sufficient amount in cash to restore said security to the original sum deposited, and Tenant's failure to do so within five (5) days after receipt of such demand shall constitute a breach of this Lease. Said security deposit if not applied toward the payment of rent in arrears or toward the payment of damages suffered by the Landlord by reason of the Tenant's breach of the covenants, conditions and agreements of this Lease, is to be returned to the Tenant when this Lease is terminated, according to these terms and in no event is said security deposit to be returned until the Tenant has vacated the premises and delivered possession to the Landlord upon the terms and conditions as provided and required under this Lease. In the event of a sale of the land and building or leasing of the same of which the premises form a part, Landlord stall have the right to transfer the security to the vendee or the lessee, and Landlord shall thereupon be released by Tenant from all liability for the return of such security, and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new Landlord. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the security deposited hereunder and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. Landlord shall not be required to segregate Tenant's security deposit, nor shall Tenant be entitled to any interest on the aforesaid deposit or security. It is expressly understood and agreed that the issuance of a writ or restitution and the reentering of the premises by Landlord for any default on the part of Tenant prior to the expiration of the term, shall not be deemed such a termination of this Lease as to entitle Tenant to the recovery of the said security and that the said deposit shall be retained and remain in the possession of Landlord until the end of the term as hereinbefore stated. Section 20.24 Administrative Charge All rent is due on the first of the month. Any rent paid after the tenth of any month will be subject to a service charge of 10% of the minimum rent due, which will be for administrative expenses. Section 20.25 Laws of the State of Florida This Lease shall be governed by and construed !n accordance with the laws of the State of Florida. Section 20.26 Counterparts This Lease shall be executed by Landlord and Tenant in two counterparts, each of which shall be deemed to be an original but both of which shall constitute one and the same agreement. If requested by Landlord or any mortgagee holding any mortgage encumbering the leased premises or any part thereof, Tenant agrees to execute and deliver to Landlord or any such mortgagee within five (5) days of such request a duplicate original of this Lease together with all exhibits, drawings, riders or amendments thereto. 11 Section 20.27 Right to Plat Landlord reserves the right to plat or otherwise subdivide the property during the term of the Lease and Tenant agrees to cooperate with Landlord. Section 2028 Radon Gas Florida State Law requires that every lease contain the following statement: "RADON GAS: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guideline:, have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit." Section 20.29 Tenant's Time to Sue A. Commencement of Action. Any claim, demand, right or, defense by Tenant that arises out of this Lease or the negotiations that preceded this Lease shall be barred unless Tenant commences an action thereon, or interposes a defense by reason thereof, within six (6) months after the date of the inaction, omission, event, or action that gave rise to such claim, demand, right or defense. B. Tenant Acknowledgment. Tenant acknowledges and understands, after having consulted with its legal counsel, that the purpose of Paragraph A is to shorten the period within which Tenant would otherwise have to raise such claims, demands, rights, or defenses under applicable laws. Section 20.30 Rider A Rider is attached hereto and made part hereof. IN WITNESS WHEREOF, Landlord and Tenant have signed their names and affixed their seals the day and year first above written. SIGNED, SEALED AND DELIVERED IN THE PRESENCE OF: LANDLORD: LYONS CORPORATE PARK /s/ Vicki Buzzell By: /s/ Augustine Ferrera - ------------------------------- -------------------------------------- Augustine Ferrera /s/ [ILLEGIBLE] Secretary/Treasurer for - ------------------------------- Rocco Ferrera & Co., Inc. By: /s/ Lee S. Lasser -------------------------------------- Lee S. Lasser, Trustee TENANT: The Singing Machine Co., Inc. (A Florida Corporaton) /s/ Melody Schwab By: /s/ John Klecha - ------------------------------- -------------------------------------- /s/ Teresa Marco Title: CFO - ------------------------------- ------------------------------- 12 INDIVIDUAL STATE OF ) COUNTY OF ) ss On this day of ____________________, 20___________________, before me personally appeared ______________________________________________________________________ who did acknowledge before me that he/she executed the within and foregoing instrument by his free act and deed for the purpose therein expressed. (SEAL) -------------------------------------------- Print, Type or Stamp Name of Notary PERSONALLY KNOWN ______________________________________ OR PRODUCED IDENTIFICATION______________________________________________ TYPE OF IDENTIFICATION PRODUCED_________________________________________________ PARTNERSHIP OR CORPORATION STATE OF FLORIDA ) )ss COUNTY OF BROWARD ) The foregoing instrument was acknowledged before me this 8th day of April, 1999 by John Klecha, as CFO for The Singing Marchine /s/ Vickie Buzzell (SEAL) ------------------------------------------------- Print, Type or Stamp Name of Notary PERSONALLY KNOWN -------------------------------------- OR PRODUCED IDENTIFICATION -------------------------------------- TYPE OF IDENTIFICATION PRODUCED -------------------------------------- STATE OF FLORIDA ) )ss COUNTY OF BROWARD ) The foregoing instrument was acknowledged before me this 12th day of April, 1999 by AUGUSTINE FERRERA,SECRETARY/TREASURER FOR ROCCO FERRERA & CO., INC. He is personally known to me. My Commission Expires: /s/ Vickie Buzzell (SEAL) ------------------------------------------------- Print, Type or Stamp Name of Notary PERSONALLY KNOWN -------------------------------------- OR PRODUCED IDENTIFICATION -------------------------------------- TYPE OF IDENTIFICATION PRODUCED -------------------------------------- STATE OF FLORIDA ) )ss COUNTY OF BROWARD ) The foregoing instrument was acknowledged before me this 12th day of April, 1999 by LEE S. LASSER, TRUSTEE. He is personally known to me. /s/ Vickie Buzzell (SEAL) ------------------------------------------------- Print, Type or Stamp Name of Notary 13 RIDER NO. 1 ATTACHED TO AND MADE A PART OF LEASE AGREEMENT DATED March 31, 1999 BETWEEN ROCCO FERRERA & CO. INC. (A MICHIGAN CORPORATION) AND LEE S. LASSER, TRUSTEE OF THE LEE S. LASSER TRUST DATED AUGUST 25, 1972, AS AMENDED, d/b/a LYONS CORPORATE PARK, LANDLORD AND THE SINGING MACHINE CO., INC. (A FLORIDA CORPORATION) AS TENANT, DATED THE 31ST DAY OF MARCH, 1999. 1. Landlord and Tenant agree that Landlord has supplied and placed in the demised premises, storm shutters and bolts to cover all of the glass in front of the bay and the front door. Tenant agrees that it is the sole responsibility of Tenant to install the storm shutters should the need arise. At the termination of the occupancy, the Tenant agrees to return the shutters and bolts to the Landlord in good condition. LANDLORD: LYONS CORPORATE PARK Witnesses: /s/ Vicki Buzzell By: /s/ Augustine Ferrera - ------------------------------- -------------------------------------- Augustine Ferrera, Secretary for /s/ Frank [ILLEGIBLE] Rocco Ferrera & Co., Inc. - ------------------------------- (A Michigan Corporation) TENANT: The Singing Machine Co., Inc. (A Florida Corporaton) /s/ Melody Schwab By: /s/ John Klecha - ----------------- -------------------------------------- Chief Financial Officer /s/ Teresa A. Marco - ------------------- EXHIBIT "A" ----------- LEGAL DESCRIPTION ----------------- Lot 1 & 2 of Lyons Business Park according to the Plat thereof as recorded in Plat Book 137, Page 47, of the Public Records of Broward County. EXHIBIT "B" ----------- SITE PLAN [GRAPHIC OMMITTED] EXHIBIT "C" ----------- LEASE DATE: - ----------- LANDLORD: - --------- TENANT: - ------- PREMISES: - --------- AREA: _____________________________ Sq. Ft. - ----- The undersigned Landlord and Tenant of the above lease hereby certify to _____________________ as mortgages, the following: 1. That the term of the lease commenced on ______________, 19__ and the Tenant is in full and complete possession of the premises demised under the lease and has commenced full occupancy and use of the premises, such possession having been delivered by the Landlord and having been accepted by the Tenant. (May be omitted where term has not commenced and Tenant is not yet in occupancy.) 2. That the lease calls for and Tenant is paying monthly rental installments of $___________ which commenced to accrue on the ____ day of ____________, 19__. 3. That no advance rental or other payment has been made in connection with the Lease, except rental for the current month and the last month of the lease term (if applicable) and the rent has been paid to and including _____________, 19__. 4. That a security deposit in the amount of $___________ is being held by Landlord, which amount if not subject to any set off or reduction or to any increase for Interest or other credit due to Tenant. 5. That all obligations and conditions under said Lease to be performed to date by Landlord or Tenant have been satisfied, free of defenses and set-offs including all construction work in the demised premises. 6. That the Lease is a valid lease and in full force and effect and represents the entire agreement between the parties; that there is no existing default on the part of the Landlord or the Tenant in any of the terms and conditions thereof and no event has occured which, with the passing of time or giving of notice or both, would constitute an event of default; and that said Lease has: (initial one) ( ) not been amended, modified, supplemented, extended, renewal or assigned. ( ) been amended, modified, supplemented, extended, renewed or assigned as follows by the following described agreements: _______________________________________________________________________________ 7. That the Lease provides for a primary term of ___________________, 19__; and that: (initial one) ( ) neither the Lease nor any of the documents listed in Paragraph 6, (if any), contain an option for any additional term or terms. ( ) the Lease and/or documents listed under Paragraph 6, above, contain an option for _________________ additional term(s) of __________________ year(s) and _________ month(s) (each) at a rent to be determined as follows: _______________________________________________________________________________ 8. That there are no actions, voluntary or involuntary, pending against the Tenant under the bankruptcy laws of the United States or any state thereof. 9. That this certification is made knowing that ___________ is relying upon the repreentations herein made. TENANT: DATED___________________________ BY:________________________ TITLE:_____________________ Page 1 of 2 Exhibit "D" ----------- RIDER - LEASE SPECIFICATIONS ---------------------------- (Description of Landlord's Work) FOR LOT 1 & 2 OF LYONS CORPORATE PARK Building Construction 1. Building Fill - compacted to a density of 98 percent at optimum moisture contact. 2. Foundations: Reinforced concrete (3,000 p.s.i.) spread footings. Soil bearing capacity assumed to be 2,500 psf. 3. Exterior Walls: 8" concrete masonry units with tie columns and tie beams with painted stucco exterior finish, interior finish not painted. 4. Structural Frame: A-36 steel roof framing made up of open web steel bar joists bearing on steel girder joists supported by steel pipe columns. minimum clear height to be 18'-0" from finish floor slab to underside of roof structure. 5. Floor slab: 4" concrete slab reinforced with 6" x 6" - 1.4/1.4 welded wire mesh on 6 mil. visqueen vapor barrier. 6. Roof Construction: a) 22 ga. corrigated metal deck with 1" rigid insulation board fastened to metal deck. b) 4 ply built-up tar and gravel roof. 7. Doors: a) Overhead doors: 12'w x 14'h at bays and 8'w x 8'h at truck dock. Metal overhead rolling door with manual drive surface mounted inside space. b) Entrance Doors: 3'0" x 7'0" Gray tinted tempered glass set in Satin aluminum frames. c) Rear Doors" 3'0" x 7'0" metal doors in hollow metal frames. d) Interior Doors: Wood hollow core stain grade door set in wood jamb. 3'0" x 6'8" x 1-3/8" at office and 2'8" x 6'8" x 1-3/8" at toilets.' 8. Interior Partitions: Building A-B-E-L 10% finish = 8'0" high constructed from 3-5/8" galvanized metal studs with top and bottom cap gauge thickness. Building A-B-E-L 20% or over finish = 9" high constructed from 3-5/8" galvanized meetal studs with top and bottom cap gauge thickness. Studs to be placed 24" o.c. Finish on walls will be 1/2" gypsum wallboard, joints to be finished with 2" joint tape covered with 3 coats of spackling compound sanded smooth. 3-/2" batt insulation at perimeter interior partitions and in offices # 1 and # 7 pursuant to Exhibit D-1 attached. 9. Toilet Facilities Each toilet facility shall have 1 water closet, 1 lavatory. 1-18" x 24" plate glass mirror, 1 paper holder. Floor finish shall be vinyl tile, walls to be painted dry wall and coiling to be acoustical tile. 1 toilet facility per bay shall conform to the American National Standards "Specifications for Making Buildings and Facilities Accessible to, and Usable by, the Physically Handicapped" ANSI A 117.1. Each bathroom will have an exhaust fan. Page 2 of 2 Exhibit "D" ----------- RIDER - LEASE SPECIFICATIONS ---------------------------- (Description of Landlord's Work) FOR LOT 1 & 2 OF LYONS CORPORATE PARK, LLLP -------------------------- 10. Office Area Finishes: a) Walls, 2 coats of interior type flat latex paint. b) Doors and Frames: 2 coats semi-gloss paint or stain. c) Flooring: carpet allowance of $9.00 s.y. d) Base: 4" vinyl or rubber. e) Ceiling: 2' x 4' x 5/8" mineral fiber board White flush type, with fissured face. Runners and edge moldings to be 5/8" x 6" fiberglass batt insulation above ceiling. Ceiling height at Building C is 9' and at Building F and G is 8'. 11. Hardware: a) Entrance Doors to have double cylinder dead bolt lockset with interior thumb turn, push/pull bar. automatic closer and offset pivot hinges. All finishes to match finish of door frame. b) Interior Door - 1 pr. at 3-1/2" x 3-1/2" antique brass finish mortise type butte with one Schlage or equal f series tulip antique brass finish passage hardware per door and one door stop. c) Rear Door - 1-1/2" pr. at 4-1/2" x 4-1/2" paint grade mortise type butts. with double cyllnder dead bolt with 1" throw. d) Washroom Doors with privacy HDW. 12. Plumbing - Exterior lines all to be polyvinyl chloride type (PVC). Interior waste and vent lines to be PVC. Interior water distribution to be copper pipe. 13. HVAC - Air conditioning to be provided by split package with the compressor mounted on steel curbs set on the roof, andthe air handler suspended from the roof, above the office area. A/C supplied at 1 ton/400 s.f. of office space. Heating will be accomplished by heat strips in air handling unit. Ductwork to be standard fiberglass foil-clad. One 1/3 h.p. ventilator exhaust fan in shop area. 14. Electrical Service - Individual meters, 200 amp 3 phase service for each bay. Lighting is to be provided in the office space by 2' x 4' lay in 4 lamp florescent fixtures and in warehouse area by 1' x 8' lamp florescent fixtures mounted to underside of roof structures. 15. Water Service - 3/4' supply with 5/8' meter - each bay in individually metered. 16. Accessories - Shop area 3' x 3' white translucent skylights. 17. Kitchen - to include 6' of base and upper cabinets, 1 double sink and appropriate fixtures. (Tenant to pay for this on a Work Order No. 001). 18. Permits: All permits to obtain and complete construction are the responsibility of the Landlord. 19. The plans for this premises are Job No. 9912, dated 3/31/99, drawn by perez and Associates. SITE PLAN Suite A-7 and A-8 [GRAPHIC OMMITTED] SIGN CRITERIA ------------- LOCATION : Lyons Corporate Park I.LLP 6601 Lyons Road Coconut Creek, Florida 33073 EXTERIOR BUILDING SIGNS: All signs shall be fabricated identically using the following construction specifications: 1) All sign layouts must be approved by landlord before installation. Sketch and specifications must be submitted. 2) All live sign areas are restricted in size to allow perimeter air space where no sign element can be placed. 3) All signs to consist of individual molded 3 dimensional (not flat) plastic letters outfitted with etude and perforated mental pads for cementing onto steel sign band. A silicone adhesive and sticky back tape roust be used to allow for removal of letters when necessary. Perforated pads must be adjusted to allow a minimum of 1/B" projection from back of letters to wall (See Diagram B). 4) Tenant may choose from a variety of letter styles available and the color must be white. 5) Logos and company emblems may be used as long as they conform to these general construction specifications and do not exceed sign "size" regulations. EXHIBIT "E-1" SIGN ELEVATIONS --------------- [GRAPHIC OMMITTED] EX-21.1 6 subsidiaries.txt SUBSIDIARIES LIST EXHIBIT 21.1 LIST OF SUBSIDIARIES Country of Percentage Name Incorporation Owned ---- ------------- ----- International SMC (HK) Limited. Hong Kong 100% EX-23.1 7 salberg-consent.txt SALBERG CONSENT 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) filed with the Securities and Exchange Commission ("SEC") on April 27, 2001 and the registration statement on Form S-3 (File No. 333-70142) filed with the SEC on September 27, 2001 of our report dated May 23, 2002, with respect to the consolidated financial statements of The Singing Machine Company, Inc. and subsidiary, for the years ended March 31, 2002 and 2001, included in this Annual Report, as amended, on the Form 10-KSB for the year ended March 31, 2002. /s/ SALBERG & COMPANY, P.A. Boca Raton, Florida July 22, 2002 -----END PRIVACY-ENHANCED MESSAGE-----