-----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, INWtzY2EpYN5x4rHC8VgojCRTXmxV5kuA18Lm38xxWeyX9ICet/comp7kxT0/nqm loGda6ZU55vDCB6umH9JQw== 0001116502-03-000172.txt : 20030214 0001116502-03-000172.hdr.sgml : 20030214 20030214091645 ACCESSION NUMBER: 0001116502-03-000172 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030214 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24968 FILM NUMBER: 03562766 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 10-Q 1 singingmachine10q.txt THE SINGING MACHINE COMPANY, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2002 Commission File Number 0-24968 ------- THE SINGING MACHINE COMPANY, INC. --------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 95-3795478 -------- ---------- (State of Incorporation) (IRS Employer I.D. No.) 6601 Lyons Road, Building A-7, Coconut Creek, FL 33073 ------------------------------------------------------ (Address of principal executive offices) (954) 596-1000 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X} No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS There were 8,125,178 shares of Common Stock, $.01 par value, issued and outstanding at December 31, 2002. THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Page No. -------- Consolidated Balance Sheets - December 31, 2002 (Unaudited) and March 31, 2002 .............................................. 3 Consolidated Statement of Operations - Three and nine months ended December 31, 2002 and 2001 (Unaudited)..................... 4 Consolidated Statement of Cash Flows - Nine months ended December 31, 2002 and 2001 (Unaudited) .......................... 5 Notes to Consolidated Financial Statements ...................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................. 11 Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 19 Item 4. Controls and Procedures.......................................... 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings ............................................... 21 Item 2. Changes in Securities and Use of Proceeds........................ 21 Item 3. Defaults Upon Senior Securities ................................. 22 Item 4. Submission of Matters to a Vote of Security Holders ............. 22 Item 5. Other Information ............................................... 22 Item 6. Exhibits and Reports on Form 8-K ................................ 22 SIGNATURES ............................................................... 24 CERTIFICATIONS ............................................................25 EXHIBIT INDEX..............................................................27 2 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY PART I - FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 MARCH 31, 2002 ----------------- -------------- (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 362,927 $ 5,520,147 Accounts receivable, net 19,535,201 3,536,903 Due from manufacturer 753,206 488,298 Inventories 30,016,924 9,274,352 Prepaid expenses and other current assets 2,155,879 982,697 Deposits 517,324 513,684 ----------- ----------- TOTAL CURRENT ASSETS 53,341,461 20,316,081 ----------- ----------- PROPERTY AND EQUIPMENT, NET 1,232,227 574,657 ----------- ----------- OTHER ASSETS Security deposits 180,532 135,624 Reorganization intangible, net 185,416 185,416 Deferred tax asset -- 452,673 ----------- ----------- TOTAL OTHER ASSETS 365,948 773,713 ----------- ----------- TOTAL ASSETS $54,939,636 $21,664,451 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $13,049,506 $ 1,846,238 Accrued expenses 4,173,368 1,289,597 Deferred Revenue 822,106 Loan payable 10,163,088 -- Income tax payable 630,796 58,542 ----------- ----------- TOTAL CURRENT LIABILITIES 28,838,864 3,194,377 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value, 1,000,000 shares authorized, no shares issues 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, 8,125,178 and 8,020,027 shares issued and outstanding 81,252 80,200 Additional paid-in capital 4,757,355 4,602,828 Retained earnings 21,262,165 13,787,046 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 26,100,772 18,470,074 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,939,636 $21,664,451 =========== ===========
See accompanying notes to consolidated financial statements 3 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended December 31, December 31, December 31, December 31, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ NET SALES $ 48,869,776 $ 34,158,513 $ 85,998,383 $ 55,431,595 COST OF SALES 35,438,420 22,719,929 62,090,759 36,821,615 ------------ ------------ ------------ ------------ GROSS PROFIT 13,431,356 11,438,584 23,907,624 18,609,980 ------------ ------------ ------------ ------------ OPERATING EXPENSES Compensation 1,257,519 1,090,838 2,827,823 2,361,797 Commissions 581,800 777,209 1,127,221 1,266,016 Advertising 3,210,330 1,038,056 4,082,940 1,942,442 Royalty expense 1,189,706 1,191,169 2,064,336 1,596,800 Selling, general, and administrative expenses 2,110,769 1,413,371 5,153,503 3,248,749 ------------ ------------ ------------ ------------ TOTAL OPERATING EXPENSES 8,350,124 5,510,643 15,255,823 10,415,804 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 5,081,232 5,927,941 8,651,801 8,194,176 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSES) Other Income 38,628 53,600 196,648 195,741 Interest Expense (117,704) (104,877) (228,597) (143,034) Interest Income -- 17,471 11,943 40,564 ------------ ------------ ------------ ------------ NET OTHER EXPENSES (79,096) (33,806) (20,006) 93,271 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAX PROVISION 5,002,156 5,894,135 8,631,795 8,287,447 INCOME TAX PROVISION (1,105,569) (6,000) (1,156,676) (18,000) ------------ ------------ ------------ ------------ NET INCOME $ 3,896,587 $ 5,888,135 $ 7,475,119 $ 8,269,447 ============ ============ ============ ============ EARNINGS PER SHARE: Basic $ .48 $ .80 $ .92 $ 1.20 ============ ============ ============ ============ Diluted $ .44 $ .69 $ .84 $ 1.04 ============ ============ ============ ============ WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: Basic 8,123,548 7,335,758 8,101,441 6,900,918 ============ ============ ============ ============ Diluted 8,944,027 8,565,861 8,947,897 7,973,514 ============ ============ ============ ============
See accompanying notes to financial statements 4 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Months Ended December 31, 2002 2001 ------------ ------------ CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 7,475,119 $ 8,269,447 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 454,806 209,334 Stock based expenses -- 171,472 Bad debt 3,356 -- Deferred tax benefit 452,673 (73,574) Changes in assets and liabilities: (Increase) decrease in: Accounts receivable (16,001,654) (26,104,253) Due from manufacturer (264,908) 1,379,901 Inventories (20,742,572) (1,900,092) Prepaid expenses and other assets (1,218,091) 261,287 Increase (decrease) in: Accounts payable 11,203,268 5,554,717 Accrued expenses 2,883,772 4,157,472 Deferred Revenue 822,106 -- Income taxes payable 572,254 (23,320) ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (14,359,871) (8,097,609) ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES Purchase of property and equipment (1,112,376) (593,823) Deposit for credit line (3,640) (256,807) Proceeds from investment in factor -- 933,407 Proceeds from repayment of officer loans -- 117,425 Investment in and advances to unconsolidated subsidiary -- 274,702 ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,116,016) 474,904 ------------ ------------ CASH FLOW FROM FINANCING ACTIVITIES Loan proceeds 37,612,713 19,211,494 Loan repayments (27,449,625) (11,644,383) Proceeds from exercise of stock options and warrants 155,579 956,078 ------------ ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 10,318,667 8,523,189 ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,157,220) 900,484 CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 5,520,147 1,016,221 ------------ ------------ CASH AND CASH EQUIVALENTS - END OF YEAR $ 362,927 $ 1,916,705 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 228,597 $ 143,034 ============ ============ Cash paid during the year for income taxes $ 73,207 $ 18,000 ============ ============
See accompanying notes to consolidated financial statements 5 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. It is suggested that these consolidated condensed financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's audited financial statements on the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 2002. The accounting policies followed for interim financial reporting are the same as those disclosed in Note 1 of the Notes to Financial Statements included in the Company's audited consolidated financial statements for the fiscal year ended March 31, 2002, which are included in Form 10- KSB. The Financial Accounting Standards Board has recently issued several new accounting pronouncements which may apply to the Company. The following statements have been adopted by the Company. 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 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 adopted SFAS 142 on April 1, 2002 liquidity and accordingly has stopped amortizing the reorganization intangible, which had a net balance of $185,412 at March 31, 2002. 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 implementation of SFAS 144 on April 1, 2002 did 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, 6 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 did not have a material impact on the Company's consolidated financial statements. Statement No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure", amends FASB Statement No. 123, "Accounting for Stock-Based Compensation". In response to a growing number of companies announcing plans to record expenses for the fair value of stock options, Statement 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements of Statement 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The Statement also improves the timeliness of those disclosures by requiring that this information be included in interim as well as annual financial statements. In the past, companies were required to make pro forma disclosures only in annual financial statements. The transition guidance and annual disclosure provisions of Statement 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company adopted the disclosure provisions of Statement 148 for the quarter ended December 31, 2002, but will continue to use the method under APB 25 in accounting for stock options. The adoption of the disclosure provisions of Statement 148 did not have a material impact on the Company's financial position, results of operations or liquidity. The following statements will be adopted by the Company as they become effective. 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. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146") addresses the recognition, measurement, and reporting of cost that are associated with exit and disposal activities that are currently accounted for pursuant to the guidelines set forth in EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to exit an Activity (including Certain Cost Incurred in a Restructuring)," cost related to terminating a contract that is not a capital lease and one-time benefit arrangements received by employees who are involuntarily terminated - nullifying the guidance under EITF 94-3. Under SFAS 146, the cost associated with an exit or disposal activity is recognized in the periods in which it is incurred rather than at the date the Company committed to the exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002 with earlier application encouraged. The adoption of SFAS 146 is not expected to have a material impact on the Company's financial position or result of operations. Certain amounts in the December 31, 2001 interim consolidated financial statements have been reclassified to conform to the December 31, 2002 presentation. In the opinion of management, all adjustments, which are of a normal recurring nature and considered necessary to present fairly the financial positions, results of operations, and cash flows for all periods presented have been made. The results of operations for the three-month period ended December 31, 2002 are not necessarily indicative of the results that may be expected for the entire fiscal year ending March 31, 2003. The accompanying consolidated condensed financial statements include the accounts of the Company and its wholly owned subsidiary. All significant inter-company balances and transactions have been eliminated. Assets and liabilities of the foreign subsidiary are translated at the rate of exchange in effect at the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustment is not material. NOTE 2 - DEPOSIT FOR LETTER OF CREDIT FACILITY The Company, through its Hong Kong subsidiary, maintains letter of credit facilities with three major international 7 banks. The Company's subsidiary is required to maintain separate deposit accounts at these banks in the amount of $517,324. This amount is included in deposits at December 31, 2002. NOTE 3 - LOANS AND LETTERS OF CREDIT In December 2002, the Company amended its Loan and Security Agreement (the "Agreement") with a commercial lender (the "Lender"). The Lender will advance up to 70% 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 $1,000,000 as defined in the agreement. The outstanding loan limit varies between zero and $25,000,000 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 $250,000 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 $20,000,000 from October 31, 2002 to December 31, 2002 with escalations after this point as defined in the Agreement. The outstanding balance at December 31, 2002, was $10,163,088. NOTE 4 - EQUITY Stock options and warrants were exercised during the third quarter of fiscal year 2003. 1,875 shares of common stock were issued with proceeds to the Company of $3,825. The total of stock options and warrants exercised for the nine month period ended December 31, 2002 were 105,151 shares with a total proceeds to the Company of $155,684. On December 31, 2002, 187,000 stock options were granted to various employees of the Company under the Stock Option Plan of 2001 at the then current stock price of $9.00 per share. Pursuant to APB no. 25, no compensation expense will be recognized. NOTE 5 - COMMITMENTS 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 to the employee. The employee may elect to return the first year options to the Company for $100,000. 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. Effective September 1, 2002, the Company signed an additional 24 - month lease to expand its corporate headquarters. The additional rent is $1,980 per month. As of November 13, 2002, the Company amended its merchandise license agreement to license a name, trade name, and logo of a music oriented television network. The term of the agreement remained unchanged, expiring on December 31, 2003. The Company pays a royalty rate of a percentage of sales of the licensed or branded merchandise, as defined in the amended agreement. The original agreement required a minimum royalty of $686,250, which minimum was met with sales and was paid by the Company as of March 31, 2002. The current amendment places a new guaranteed minimum royalty of $1,500,000. This guaranteed minimum is recoupable 8 against royalties of sales for the period January 1, 2003 through December 31, 2003 only. The guarantee is payable as follows: $500,000 on or before December 27, 2002; $333,334 on or before June 1, 2003; $333,333 on or before September 1, 2003; and $333,333 on or before December 1, 2003 As of December 31, 2002, the initial $500,000 had been paid and is included in prepaid expenses. Effective December 23, 2002, the Company signed a 30-month lease for additional warehouse space in California for $44,947 per month commencing January 1, 2003. NOTE 6 - CONCENTRATIONS The Company derives the majority 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 by management. At December 31, 2002, approximately 50% of accounts receivable were due from two U.S. customers. Accounts receivable from two customers that individually owed over 10% of accounts receivable at December 31, 2002 was 25% and 25%. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Revenues derived from five customers for the nine months ended September 30, 2002 and 2001 were 73.1% and 98%. Revenues derived from three customers for the nine months ended December 31, 2002, which individually purchased greater than 10% of the Company's total revenues, were 23.1%, 17.9% and 17.6% for the nine months ended December 31, 2002 and two customers 66% and 36% for the nine months ended December 31, 2001. In the fourth quarter of 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 the fourth quarter of fiscal 2002 and the customer retained the inventory on a consignment basis. As of December 31, 2002 this customer was still on a consignment basis with all but two products. 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 factories based in China during fiscal 2002 were 51%, 39%, and 5% and from two manufacturers based in China during fiscal 2001 were 80% and 14%, respectively. For the nine months ended December 31, 2002, purchases of product were derived from seven factories based in China. The Company finances its sales primarily through a loan facility with one lender. 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 $45,415,402 for the nine months ended December 31, 2002 and $27,485,628 for the same period in 2001. The carrying value of net assets held by the Company's Hong Kong based subsidiary, net of inter-company balances, was approximately ($6,270,855) at December 31, 2002. NOTE 7 - EARNINGS PER SHARE Basic net income (loss) per common share (Basic EPS) excludes dilution and is computed by dividing net income (loss) available to common stockholder by the weighted-average number of common shares outstanding for the 9 period. Diluted net income per share (Diluted EPS) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. At December 31, 2002 there were 1,286,250 common stock equivalents outstanding which may dilute future earnings per share. NOTE 8 - SEGMENTS The Company operates in one segment and maintains its records accordingly. Sales by customer geographic region for the nine months ended December 31, 2002, were as follows: December 31, 2002 2001 ----------- ----------- United States $70,809,392 $55,300,710 Asia 21,310 49,314 Australia 529,020 -- Canada 696,073 37,344 Central America 61,046 4,789 Europe 12,978,811 -- Mexico 902,731 122 South America -- 39,316 ----------- ----------- $85,998,383 $55,431,595 =========== =========== NOTE 9 - SUBSEQUENT EVENTS The Company entered into an agreement with a retail customer whereby they guaranteed the customer a minimum gross margin of $3,573,000 from the sale of the Company's products during the period from September 1, 2002 through January 15, 2003. Under the agreement, the Company will reimburse the customer for the difference between the customer's gross margin on sales and the minimum guarantee. The Company would have a total exposure of $3,537,000, in the event that there were no sales of the Company's products made by the retail customer during this period. In accordance with the Securities and Exchange Commission Staff Accounting Bulletin 101, "Revenue Recognition", the Company has not recognized any revenues or related cost of sales at December 31, 2002. Any revenues or related cost of sales will be recognized at January 15, 2003 ("settlement date"), since the ultimate net sales are not determinable until that date. In accordance with the Emerging Issues Task Force ("EITF") Issue 01-9, the guarantee is considered a reduction of sales. As of the settlement date of the contract, the decrease in sales is $2,570,047, bringing net sales under this agreement to ($167,737) and net loss on the agreement to ($1,594,113). As of this date, an initial amount of $1,500,000 has been paid against the amount due under the settlement. The remaining amount is payable in four equal payments of $267,511 on April 25, July 25 and October 25, 2003 and January 25, 2004. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10- Q, including without limitation, statements containing the words believes, anticipates, estimates, expects, and words of similar import, constitute forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described below and elsewhere in this Quarterly Report, and in other documents we file with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. GENERAL The Singing Machine Company, Inc. and its wholly owned subsidiary, International (SMC) HK, Ltd.(the "Company", "we" or "us") engages in the production, distribution, marketing and sale of consumer karaoke audio equipment, accessories and music. Our electronic karaoke machines and audio software products are marketed under The Singing Machine(C) trademark. Our products are sold throughout the United States, primarily through department stores, lifestyle merchants, mass merchandisers, direct mail catalogs and showrooms, music and record stores, national chains, specialty stores and warehouse clubs. Our karaoke machines and karaoke software are currently sold in such retail outlets as Best Buy, Toys R Us, Target, J.C. Penney and Circuit City. We had a net income before tax of $8,631,795 for the nine-month period ended December 31, 2002. RESULTS OF OPERATIONS REVENUES Revenues for the three months ended December 31, 2002 were $48,869,776, compared to revenues of $34,158,513 for the three months ended December 31, 2001. Revenues for the nine months ended December 31, 2002 and 2001 were $85,998,383 and $55,431,595, respectively. Our revenue increase for the nine months of 55.1% is due to increased sales and the introduction of new products and services. We also obtained several significant new national retail customers in our third quarter ended December 31, 2002. GROSS PROFIT Gross profit for the three-month period ended December 31, 2002 was $13,431,356 or 27.5% of sales compared with $11,438,584 or 33.7% of sales for the second quarter of the prior year. Gross profit for the nine months ended December 31, 2002 was $23,907,624 or 27.8% of sales compared with $18,609,980 or 33.6% of sales for the nine months ended December 31, 2001. The decrease in gross profit is primarily due to increased sales from our subsidiary and sales to international customers. Our international sales were primarily in Europe, Canada and Australia. Sales to international customers historically maintain a lower gross profit because there are no other variable expenses from these sales. Other variable expenses that are normally included with sales are advertising allowances, returns and commissions. OPERATING EXPENSES Operating expenses were $8,350,124 or 17.1% of total revenues, in the third quarter, up from $5,510,643 or 16.1% of total revenues, in the third quarter of the prior year. For the nine months ended December 31, 2002 and 2001, operating expenses were $15,255,823 or 17.7% of total revenues and $10,415,804 or 18.8%of total revenues, respectively. The primary factors that contributed to the increase of approximately $1,532,132 in operating expenses for the nine months ended December 31, 2002 are: 11 (i) the increase in depreciation in the amount of $188,713 due to the addition of molds for new product additions for fiscal year 2003, (ii) compensation expense in the amount of $466,026 due to the addition of key personnel in Florida, in our California facility and at our Hong Kong subsidiary, (iii) expansion of the California warehouse and its associated expenses in the amount of $701,789, (iv) expansion of the Hong Kong subsidiary and its related expenses, in the amount of $340,710. (v) increases in product development fees for development of future product $300,454. Other increases in operating expenses were to selling expenses, which are considered variable. These expenses are based directly on the level of sales and include commissions, direct and co-operative advertising, and royalty expenses. These areas alone contributed $2,469,239 to the increase in operating expenses. DEPRECIATION AND AMORTIZATION EXPENSES The Company's depreciation and amortization expenses were $466,561 or .6 % of total revenues for the nine months ended December 31, 2002, up from $236,032 or ..7% for the nine months ended December 31, 2001. The increase in depreciation and amortization expenses can be attributed to the Company's acquisition of new molds and tooling for our expanded product line, as well as minimal costs for additional computer equipment and furniture for additional personnel. OTHER INCOME AND EXPENSES Other expense net of other income was $79,076, for the third quarter of fiscal 2003 compared to other expenses net of other income of $33,806 for the third quarter of fiscal 2002. Other expenses net of other income for the nine months ended December 31, 2003 were $20,006 compared to income of $93,271 for the nine months ended December 31, 2001. Our interest expense increased during the nine months ended December 31, 2002 compared to the same period of the prior year primarily due to our increased use of our credit facility with LaSalle during this period. Prior to August 2002, the Company had cash reserves to fund operations and did not need to borrow on the line. Our interest income increased from $2,475 during the nine months ended December 31, 2001, to $11,943 during the first nine months of fiscal 2003 because we earned income on our cash balances held by our lender by investing in 24 hour commercial paper investments. INCOME BEFORE INCOME TAX EXPENSE The Company's net income before income taxes was $8,631,795 for the nine months ended December 31, 2002 compared with $8,287,447 for the same period of the prior year. INCOME TAX EXPENSE The Company files separate tax returns for the parent and for the Hong Kong Subsidiary. During the first three quarters of fiscal 2003, the Company showed a profit in both the U.S. parent company and in International SMC (HK) Ltd., its wholly-owned Hong Kong subsidiary. As a result of the annualization of this profit, the U.S. parent company has used up its net operating loss carryforwards. The Company had a deferred tax benefit at March 31, 2002 of $452,673 that had been taken in prior years. Now that the net operating losses have been depleted, the Company must expense this benefit. The computed provision for income taxes at December 31, 2002 was $704,003. This includes accruals for both federal and state income taxes. This provision plus the expense of the tax benefit make up the income tax expense of $1,156,676. The Hong Kong subsidiary has applied for an income tax exclusion based on the nature of its income. The claim for this exemption is still pending with Inland Revenue of Hong Kong; therefore, no accrual is made for Hong Kong income taxes. NET INCOME As a result of the foregoing, the Company's net income was $7,475,119 for the first nine months of fiscal 2003 compared with $8,269,447 for the first nine months of the prior year. 12 LIQUIDITY AND CAPITAL RESOURCES At December 31, 2002, the Company had cash on hand of $362,927 compared to $5,520,147 at March 31, 2002. The decreased cash is a direct result of increased inventory levels and accounts receivables. At December 31, 2002, the Company had current assets of $53,341,462 and total assets of $54,939,636 compared to current assets of $20,316,081 and total assets of $21,664,451 at March 31, 2002. The increase in current assets is the result of increased accounts receivable from sales of the third quarter and increased inventory levels. Increases in accounts receivable are common for this quarter of our fiscal year, due to the high volume of sales. The receivables created in the fiscal third quarter are subsequently collected in the fiscal fourth quarter. Due to overall economic conditions, sales in the third quarter were not as high as expected. Although sales of the Company's product on a retail level were high, anticipated reorders from customers were not received during the third quarter. The lack of reorders decreased the Company's liquidity, as the Company now has a higher than expected level of inventory. This inventory is new, saleable inventory that the Company expects will sell within the next six to nine months. The increase in total assets is due to the increase in accounts receivable, inventory and fixed assets. Current liabilities increased to $28,838,865 as of December 31, 2002, compared to $3,194,377 at March 31, 2002. This increase in current liabilities is primarily due to increased accounts payable for inventory purchases and usage of the credit facility with LaSalle Business Credit. At December 31, 2002, the balance of the credit facility with LaSalle Business Credit was $10,163,088. The Company's stockholders' equity increased to $26,100,772 as of December 31, 2002 from $18,470,074 as of March 31, 2002, due primarily to the net income for the first three fiscal quarters. Cash flows used in operating activities were $14,359,871 during the nine months ended December 31, 2002. Cash flows were used in operating activities primarily due to the increase in inventory in the amount of $20,742,572, accounts receivable in the amount of $16,001,654 and an income tax payable accrual of $572,254 The increased inventory was partially offset by the increase in accounts payable, which funded this inventory. Cash used in investing activities during the nine months ended December 31, 2002 was $1,116,016. Cash used in investing activities resulted primarily from the purchase of fixed assets in the amount of $1,112,376. The purchase of fixed assets consists primarily of the tooling and molds required for production of new machines for this fiscal year. Tooling and molds are depreciated over three years. Cash flows provided by financing activities were $10,318,667 during the nine months ended December 31, 2002. This consisted of proceeds from the exercise of warrants and options in the amount of $155,579. The remainder of cash provided from financing activities was provided by net borrowings on the credit line at LaSalle National Bank in the amount of $10,163,088. Due to the increased level of inventory and accounts payable as of December 31, 2002, the Company has an increased need for working capital. As of December 31, 2002, the Company had current assets of $53.3, which consisted primarily of accounts receivable and inventory; and current liabilities of approximately $28.8 million. The most significant current liabilities include (i) approximately $13 million in accounts payable, of which approximately $9 million is amounts payable to the Company's factories in China and (ii) $10 million outstanding under the Company's credit facility with LaSalle Bank. Over the past few months, the Company has had discussions with its factories in China and they have indicated that they are willing to extend the payment dates for the Company's obligations. The Company also has been negotiating with LaSalle Bank to increase the credit available to the Company. Under the Company's credit facility with LaSalle Bank, the Company has a 45-day clean-up period between March 15, 2003 and April 30, 2003 in which the Company is required to have a zero balance (i.e., the Company can not borrow any money under its credit facility during this time period). Given the Company's current liquidity situation, the Company is requesting that LaSalle change this clean-up period to a later time period, such as May 15, 2003 - June 30, 2003. The Company's primary credit facility is with LaSalle Bank., which the Company entered into in April 2001. Under this credit facility, LaSalle Bank will advance up to 75% of the Company's eligible accounts receivable, plus up to 40% of eligible inventory, plus us up to 40% of commercial letters of credit issue by LaSalle minus reserves as set forth in the loan documents. The credit facility is subject to loan limits from zero to $25 million, depending on the time of the year, as stipulated in the loan documents. 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 tooling located in China. 13 Our Hong Kong subsidiary, International SMC, has three letters of credit facilities available to finance its inventory purchases. These facilities are (1) a $2 million facility at Hang Sang Bank, (ii) a $2.5 million facility at Hong Kong Shanghai Banking Corporation and (ii) a $1 million facility at Fortis Bank The Company intends to satisfy its capital and liquidity requirements over the next ninety (90) days by (i) relying on credit extended to it from its factories in China, (ii) working with LaSalle Bank to increase the credit available to the Company under its credit facility, (iii) drawing on letters of credit with banks in Hong Kong to finance purchases of inventory, (iv) using cash collected from accounts receivable and (v) securing a $2 million credit facility with a financial institution in the Far East within the next two weeks. The Company's long-term plans for its capital and liquidity requirements are the same as its short-term plan. Additionally, the Company believes that it will have decreased levels of inventory purchases during the next six to nine months, utilizing inventory already on hand. The Company believes that its cash, cash equivalents, combined with financing obtained from LaSalle, its Hong Kong lenders and/or another financial institution, will be adequate to meet its capital need for at least the next 9 to 12 months. As of January 31, 2003, the Company's material commitments for capital expenditures are its obligations to (i) repay $4.3 under its credit facility with LaSalle Bank by March 15, 2003, (ii) pay $2,570,047 under a guaranteed sales contract with a retail customer (as described below), (iii) make certain guaranteed minimum royalty payments in the amount of (a) $1.5 million over the next year under its licensing agreement with MTV, which expires on December 31, 2003 and $450,000 under its licensing agreement with Nickelodeon, which expires on December 31, 2004, and (iv) make lease payments totaling approximately $85,000 per month for warehouse space in California until June 2005 and (v) capital expenditures in the amount of approximately $1.2 million for mold, furniture and fixtures during fiscal 2004. The Company has other contractual obligations under its real estates leases in Florida and Hong Kong. In April 2002, the Company entered into an agreement with a retail customer whereby it guaranteed the customer a minimum gross margin of $3,573,000 from the sale of the Company's products during the period from September 1, 2002 through January 15, 2003. Under the agreement, the Company will reimburse the customer for the difference between the customer's gross margin on sales and the minimum guarantee. The Company would have a total exposure of $3,537,000, in the event that there were no sales of the Company's products made by the retail customer during this period. In accordance with the Securities and Exchange Commission Staff Accounting Bulletin 101, "Revenue Recognition", the Company has not recognized any revenues or related cost of sales at December 31, 2002. Any revenues or related cost of sales will be recognized at January 15, 2003 ("settlement date"), since the ultimate net sales are not determinable until that date. In accordance with the Emerging Issues Task Force ("EITF") Issue 01-9, the guarantee is considered a reduction of sales. As of the settlement date of the contract, the decrease in sales is $2,570,047, bringing net sales under this agreement to ($167,737) and net loss on the agreement to ($1,594,113). As of this date, an initial amount of $1,500,000 has been paid against the amount due under the settlement. The remaining amount is payable in four equal payments of $267,511 on April 25, July 25 and October 25, 2003 and January 25, 2004. 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. 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 14 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 December 31, 2002, the accrual was approximately $1,253,104. 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 $3,356 at December 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. RISK FACTORS Set forth below and elsewhere in this Quarterly Report on Form 10-Q 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 Quarterlyl Report. FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK WE HAVE SIGNIFICANT FUTURE CAPITAL NEEDS WHICH ARE SUBJECT TO THE UNCERTAINTY OF ADDITIONAL FINANCING As of December 31, 2002, we had current assets of $53.3 million, consisting primarily of inventory and accounts receivable and current liabilities of $28,838,864. We have developed a plan to satisfy our short-term and long-term capital needs. See "Management Discussion and Analysis of Financial Condition - Liquidity" on page 14 of this Quarterly Report. We believe that we will be able to secure adequate financing pursuant to this plan. However, if we do not obtain sufficient financing, our business operations and financial condition will be adversely affected. If the Company does not have adequate financing, it may not be able to purchase sufficient inventory for fiscal 2004 and this may reduce sales and net income during fiscal 2004. Furthermore, the Company may have to scale back its business operations in Florida, California and the Far East if it does not have adequate financing. 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 period ended December 31, 2002 and 2001 were approximately 73.1% and 98% respectively. In the third quarter of fiscal 2003, two major customers accounted for 32.5% and 23.5% 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. The Company has significantly broadened its base of customers, decreasing the amount of reliance on their largest customers. 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. 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. 15 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 fail 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. Our licensing agreement with MTV expires on December 31, 2003. INVENTORY MANAGEMENT AND CONSIGNMENT ARRANGEMENTS Because of our reliance on manufacturers in the Far East for our machine production, 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. As of December 31, 2002, we had $30 million in inventory. We will attempt to liquidate this excess inventory during fiscal 2004. We believe that all of this inventory is highly marketable and saleable; however, there can be no assurances that we will be able to liquidate this inventory during our upcoming fiscal year. As of December 31, 2002, we had consignment agreements with three of our customers. It is more difficult to manage our inventory when our products are sold on consignment. Two of these consignment agreements expired on February 1, 2003. We expect that our remaining consignment agreement will expire on February 28, 2003 for most of the products sold by this retail customer (our music sales with this customer will still remain on consignment). 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 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. 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 Sales of consumer electronics and toy products in the retail channel are highly seasonal, causing the substantial majority of our sales to occur during the second quarter ended September 30 and the third quarter ended December 31. Sales in our second and third quarter, combined, accounted for approximately 81% of net sales in fiscal 2002 and 75% of net sales in fiscal 2001. The seasonal pattern of sales in the retail channel requires significant use of our working capital to manufacture and carry inventory in anticipation of the holiday season, as well as early and accurate forecasting of holiday sales. Failure to predict accurately and respond appropriately to consumer demand on a timely basis to meet seasonal fluctuations, or any disruption of consumer buying habits during their key period, would harm our business and operating results. As economic conditions fluctuate, retail environments adjust their buying patterns accordingly in order to 16 decrease their position in inventory on hand. Although the sales of the Company's product were high, on a retail level, for the nine months ended December 31, 2002, the sales of other product lines not affiliated with consumer electronics were not. This had a direct effect on the decreased amount of reorders received by the Company in the fiscal third quarter of 2003. 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. A DISRUPTION IN THE OPERATION OF OUR WAREHOUSE CENTERS IN CALIFORNIA AND FLORIDA WOULD IMPACT OUR ABILITY TO DELIVERY MERCHANDISE TO OUR STORES, WHICH COULD ADVERSELY IMPACT OUR REVENUES AND HARM OUR BUSINESS AND FINANCIAL RESULTS A significant amount of our merchandise is shipped to our customers from one of our two warehouses, which are located in Compton, California and Coconut Creek, Florida. Events such as fire or other catastrophic events, any malfunction or disruption of our centralized information systems or shipping problems may result in delays or disruptions in the timely distribution of merchandise to our customers, which could adversely impact our revenues and our business and financial results. OUR BUSINESS OPERATIONS COULD BE DISRUPTED IF THERE ARE LABOR PROBLEMS ON THE WEST COAST During fiscal 2002, approximately 55% of our sales were domestic sales, which were made from our warehouses in California and Florida. During the third quarter of fiscal 2003, the dock strike on the West Coast affected sales of two of our karaoke products and we lost approximately $3 million in orders because we couldn't get these product off the pier. If another strike or work slow-down were to occur and we do not have a sufficient level of inventory, a strike or work slow-down would result in increased costs to our company and may reduce our profitability. OUR PRODUCTS ARE SHIPPED FROM CHINA AND ANY DISRUPTION OF SHIPPING COULD HARM OUR BUSINESS We rely principally on four contract ocean carriers to ship virtually all of the products that we import to our warehouse facility in Compton, California. Retailers that take delivery of our products in China rely on a variety of carriers to import those products. Any disruptions in shipping, whether in California or China, caused by labor strikes, other labor disputes, terrorism, and international incidents or otherwise could significantly harm our business and reputation. 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. THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE 17 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: -unpredictable consumer preferences and spending trends; -operating results that vary from the expectations of investors and securities analysts; - the actions of our customers and competitors (including new product line announcements and introduction; - changes in our pricing policies, the pricing policies of our competitors and general pricing trends in the consumer and electronics and toy markets; -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, and 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 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. We, however, have anticipated this shortage and have made commitments to our factories to purchase chips in advance. If we are unable to anticipate any shortages of parts and materials in the future, we may experience severe production problems, which would impact our sales. 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. 18 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 and that our suppliers have complied with these 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 2002 and 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. Mr. Klecha's employment agreement expires on May 31, 2003. We are currently in negotiations with Mr. Klecha regarding his employment with our company after May 31, 2003. 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. 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. 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 19 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 December 31, 2002, there were 8,125,178 shares of our common stock outstanding. We have filed three registration statements registering an aggregate 6,742,234 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, 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 and 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 December 31, 2002, we had 8,125,178 shares of common stock issued and outstanding and an aggregate of 1,336,250 outstanding options and warrants. As such, our Board of Directors has the power, without stockholder approval, to issue up to 9,438,572 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company does not hold any investments in market risk sensitive instruments. Accordingly, the Company believes that it is not subject to any material risks arising from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk instruments ITEM 4. CONTROLS AND PROCEDURES Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. 20 In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any material legal proceeding, nor to the knowledge of management are any legal proceedings threatened against the Company. From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. ITEM 2. CHANGES IN SECURITIES (a) Not Applicable. (b) Not Applicable. (c) On December 31, 2002, we issued an aggregate of 187,000 options to our employees, as consideration for services they had rendered to us. We issued these options to our employees in reliance upon Section 4(2) of the Securities Act, because our employees were knowledgeable, sophisticated and had access to comprehensive information about us. Name Number of Options Exercise Price - ---- ----------------- -------------- Frank Abell 6,000 $9.00 Jennifer Barnes 5,000 $9.00 Dan Becherer 10,000 $9.00 Almina Brady-Dykes 6,000 $9.00 Elizabeth Canela 3,000 $9.00 Tammy Chestnut 1,000 $9.00 Belinda Cheung 500 $9.00 Danny Cheung 1,000 $9.00 Jeffrey Chiu 1,000 $9.00 Brian Cino 3,000 $9.00 John DeNovi 10,000 $9.00 Teresa Garcia 15,000 $9.00 April Green 20,000 $9.00 Alicia Haskamp 18,000 $9.00 Michelle Ho 3,000 $9.00 Wilson Ho 1,000 $9.00 Dale Hopkins 10,000 $9.00 Irene Ko 3,000 $9.00 Bill Lau 4,500 $9.00 Dora Lee 3,000 $9.00 Nataly Lessard 6,000 $9.00 Gigi Leung 500 $9.00 Marian McElligott 15,000 $9.00 Adolph Nelson 2,000 $9.00 Rick Ng 500 $9.00 Cathy Novello 4,000 $9.00 Jennifer O'Kuhn 2,000 $9.00 Jorge Otaegui 2,000 $9.00 Terri Phillips 3,000 $9.00 Melody Rawski 5,000 $9.00 Asante Sellers 1,000 $9.00 Stacy Sethman 5,000 $9.00 John Steele 10,000 $9.00 Richard Torrelli 1,000 $9.00 Nicolas Venegas 2,000 $9.00 Vicky Xavier 2,500 $9.00 Ho Man Yeung 500 $9.00 Yen Yu 1,000 $9.00 21 For each employee, twenty percent (20%) of their options are exercisable on January 1, 2004 and 20% exercisable each January 1st thereafter with the last 20% becoming exercisable on January 1, 2008. The options expire 5 years after they become exercisable with varying expiration dates from December 31, 2009 through December 31, 2013. During the three month period ended December 31, 2002, one employee exercised stock options issued under our 1994 Amended and Restated Management Stock Option Plan. The employee exercised options to acquire an aggregate of 1,875 shares of our common stock. The name of the option holder, the date of exercise, the number of shares purchased, the exercise price and the proceeds received by the Company are listed below. Date of No. of Exercise Name Exercise Shares Price Proceeds - ------------- -------- ------- -------- -------- Adolph Nelson 12/19/02 1,875 $2.04 $ 3,825 Mr. Nelson paid for his shares with cash. Mr. Nelson exercised his options in reliance upon Section 4(2) of the Securities Act of 1933, because he is are knowledgeable, sophisticated and had access to comprehensive information about the Company. The shares issued to our employees were registered under the Securities Act on a registration statement on Form S-8. As such, no restrictive legends were placed on the shares of Mr. Nelson. (d) Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS Not applicable. ITEM 5. OTHER INFORMATION In February 2003, the Board requested that Mr. Steele remain as Chief Executive Officer and Chairman of the Board for another year, until February 28, 2004. Mr. Steele will be employed under the terms of his employment agreement dated March 1, 1998 and an amendment effective as of May 5, 2000. In a press release dated February 1, 2002 and in subsequent SEC filings, the Company had announced that Mr. Steele would be retiring as the Chief Executive Officer on February 28, 2003. John Klecha will remain employed as the Chief Operating Officer and President of the Company until May 31, 2003, which is the expiration date of his employment agreement with the Company. The Board is currently in negotiations with Mr. Klecha regarding his employment with the Company after May 31, 2003. Further, in January 2003, the Board commenced a search process to identify talented senior level executives to join the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Sixth Amendment dated December 27, 2002 to Loan and Security Agreement dated April 26, 2001 by and between LaSalle Business Credit, Inc. and the Company. 10.2 Sublease dated December 2002 between Nakamichi America Corporation and the Company for warehouse space in Rancho Dominguez, California. 10.3 Domestic Merchandise License Agreement dated November 1, 2000 between MTV Networks, a division of Viacom International, Inc. and the Company (portions of this Exhibit 10.3 have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission). 10.4 Amendment dated January 1, 2002 to Domestic Merchandise License Agreement between MTV Networks, a division of Viacom International, Inc. and the Company (portions of this Exhibit 10.4 22 have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission). 10.5 Second Amendment as of November 13, 2002 to Domestic Merchandise License Agreement between MTV Networks, a division of Viacom International, Inc. and the Company (portions of this Exhibit 10.5 have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission). 99.1 Certifying Statement of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certifying Statement of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K The Company did not file any Report on Form 8-K during the three months ended December 31, 2002. 23 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE SINGING MACHINE COMPANY, INC. Dated February 14, 2003 By: /s/ April J. Green -------------------------------------------- April J. Green Chief Financial Officer (On behalf of Registrant and Chief Accounting Officer) 24 CERTIFICATIONS I, Edward Steele, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Singing Machine Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 14, 2003 / S / Edward Steele Edward Steele Chief Executive Officer 25 CERTIFICATIONS I, April J Green, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Singing Machine Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 14, 2003 / S / April J Green April J Green Chief Financial Officer (Principal Financial Officer) 26 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.1 Sixth Amendment dated December 27, 2002 to Loan and Security Agreement dated April 26, 2001 by and between LaSalle Business Credit, Inc. and the Company. 10.2 Sublease dated December 27, 2002 between Nakamichi American Corporation and the Company for warehouse space in Rancho Dominguez, California. 10.3 Domestic Merchandise License Agreement dated November 1, 2000 between MTV Networks, a division of Viacom International, Inc. and the Company (portions of this Exhibit 10.3 have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission). 10.4 Amendment dated January 1, 2002 to Domestic Merchandise License Agreement between MTV Networks, a division of Viacom International, Inc. and the Company (portions of this Exhibit 10.4 have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission). 10.5 Amendment dated November 13, 2002 to Domestic Merchandise License Agreement between MTV Networks, a division of Viacom International, Inc. and the Company (portions of this Exhibit 10.5 have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission). 99.1 Certifying Statement of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 99.2 Certifying Statement of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 27 EX-10.1 3 loanamendment-101.txt AMENDMENT 6 TO LOAN AGREEMENT EXHIBIT 10.1 LASALLE BUSINESS CREDIT, INC. MEMBER ABN AMRO GROUP 135 South LaSalle Street Suite 425 December 27, 2002 Chicago, Illinois 60603 (312) 904-8490 The Singing Machine Company, Inc. 6601 Lyons Road Suite A-7 Coconut Creek, Florida 33073 RE: SIXTH AMENDMENT Gentlemen: THE SINGING MACHINE COMPANY, INC., a Delaware corporation ("BORROWER") and LASALLE BUSINESS CREDIT, INC., a Delaware corporation ("LENDER") have entered into that certain Loan and Security Agreement dated April 26, 2001 (the "SECURITY AGREEMENT"). From time to time thereafter, Borrower and Bank may have executed various amendments (each an "AMENDMENT" and collectively the "AMENDMENTS") to the Security Agreement (the Security Agreement and the Amendments hereinafter are referred to, collectively, as the "AGREEMENT"). Borrower and Lender now desire to further amend the Agreement as provided herein, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing recitals, the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. The Agreement hereby is amended as follows: (a) Paragraph (1) of Exhibit A of the Agreement is deleted in its entirety and the following is substituted in its place: (i) LOANS: Subject to the terms and conditions of the Agreement and the Other Agreements, Lender shall, absent the occurrence of an Event of Default, advance an amount up to the sum of the following sublimits (the "LOAN LIMIT"): (a) Up to seventy percent (70%), or such lesser percentage as determined by Lender in its sole discretion exercised in good faith, of the face amount (less maximum discounts, EXHIBIT 10.1 LASALLE BUSINESS CREDIT, INC. MEMBER ABN AMRO GROUP The Singing Machine Company, Inc. December 27, 2002 Page 2 credits and allowances which may be taken by or granted to Account Debtors in connection therewith in the ordinary course of Borrower's business) of Borrower's Eligible Accounts; plus (b) Subject to subparagraph (3)(a) of this Exhibit A, the lesser of: up to forty percent (40%), or such lesser percentage as determined by Lender in its sole discretion exercised in good faith, of the lower of the cost or market value of Borrower's Eligible Inventory or (I) Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00) during the period of May 1st through July 31st of each calendar year; (II) Five Million and No/100 Dollars ($5,000,000.00) during the period of August 1st through November 30th of each calendar year; provided, that commencing on December 1st of each calendar year, said sublimit shall reduce by One Million Five Hundred Thousand and No/100 Dollars ($1,500,000.00) per week and shall continue to reduce on the same day of each week until December 15th of each calendar year, on which date said advance rate shall reduce to zero percent (0%) during the period of December 15th of each calendar year through April 30th of each following calendar year; provided, however the following advance rates and amounts shall apply during the following periods: subject to subparagraph (3)(a) of this Exhibit A, the lesser of: A) up to twenty percent (20%), or such lesser percentage as determined by Lender in its sole discretion exercised in good faith, of the lower of the cost or market value of Borrower's Eligible Inventory or Two Million Five Hundred Thousand and No/100 Dollars ($2,500,00000) during the period of December 16, 2002 through January 15, 2003; and B) up to ten percent (10%), or such lesser percentage as determined by Lender in its sole discretion exercised in good faith, of the lower of the cost or market value of Borrower's Eligible Inventory or Two Million and No/100 Dollars ($2,000,000.00) during the period of January 16, 2003 through February 10, 2003; and EXHIBIT 10.1 LASALLE BUSINESS CREDIT, INC. MEMBER ABN AMRO GROUP The Singing Machine Company, Inc. December 27, 2002 Page 3 commencing on February 11, 2003 through April 30, 2003, said sublimit shall reduce to Zero and No/100 Dollars ($0.00), and during which time said advance rate shall reduce to zero percent (0%); plus (c) Subject to subparagraph (3)(a) of this Exhibit A, the lesser of: up to forty percent (40%), or such lesser percentage as determined by Lender in its sole discretion exercised in good faith, against the face amount of commercial Letters of Credit issued or guaranteed by Lender for the purpose of purchasing Eligible Inventory; provided, that such commercial Letters of Credit are in form and substance satisfactory to Lender or Two Million Five Hundred Thousand and No/100 Dollars ($2,500,000.00); provided, that said advance rate shall reduce to zero percent (0%) during the period of December 1st of each calendar year through April 30th of each following calendar year; minus (d) Such reserves, as Lender elects, in its sole discretion exercised in good faith, to establish from time to time, including without limitation, (I) a seasonal dilution reserve in the amount of One Million and No/100 Dollars ($1,000,000.00) against Borrower's "Eligible Accounts" during the periods of October 1, 2002 until March 15, 2003 and October 1st of each subsequent calendar year until the "Clean Up Period" (as defined below), and (II) to the extent that the ratio of Free on Board sales to domestic sales increases, Lender in its sole discretion may create a reserve to account for the additional dilution; provided, that the Loan Limit shall in no event exceed (I) Twenty-Five Million and No/100 Dollars ($25,000,000.00) during the period of August 1st through December 15th of each calendar year; (II) Twenty Million and No/100 Dollars ($20,000,000.00) during the period of December 16th through December 31st of each calendar year; and (III) Ten Million and No/100 Dollars ($10,000,000.00) during the period of January 1st through July 31st of each calendar year; and (IV) zero ($0) during any consecutive ninety (90) day EXHIBIT 10.1 LASALLE BUSINESS CREDIT, INC. MEMBER ABN AMRO GROUP The Singing Machine Company, Inc. December 27, 2002 Page 4 period between December 15th of each year through April 30th of each following year (the "Clean Up Period") as determined by Borrower (the "Maximum Loan Limit"), except as such amount may be increased or, following the occurrence of an Event of Default, decreased by Lender, in its sole discretion, exercised in good faith, from time to time; provided further, however, that the following Maximum Loan Limits shall apply during the following time periods: the Loan Limit shall in no event exceed (I) Fifteen Million and No/100 Dollars ($15,000,000.00) during the period of December 16, 2002 through December 31, 2002; (III) Twelve Million Five Hundred Thousand and No/100 Dollars ($12,500,000.00) during the period of January 1, 2003 through January 14, 2003; (IV) Ten Million and No/100 Dollars ($10,000,000.00) during the period of January 15, 2003 through July 31, 2003; and (V) zero ($0) during the consecutive forty-five (45) day period between March 15, 2003 through April 30, 2003, except as such amount may be increased or, following the occurrence of an Event of Default, decreased by Lender, in its sole discretion, exercised in good faith, from time to time. (a) Paragraph (5)(c) of Exhibit A of the Agreement is deleted in its entirety and the following is substituted in its place: (c) ONE-TIME AMENDMENT FEES: Borrower shall pay to Bank a one-time amendment fee of Twenty-five Thousand and No/100 Dollars ($25,000.00), which fee shall be deemed fully earned on the date of this Amendment and payable on January 31, 2003. 2. This Amendment shall not become effective until fully executed by all parties hereto. 3. Except as expressly amended hereby and by any other supplemental documents or instruments executed by either party hereto in order to effectuate the transactions contemplated hereby, the Agreement and Exhibit A thereto hereby are ratified and confirmed by the parties hereto and remain in full force and effect in accordance with the terms thereof. EXHIBIT 10.1 LASALLE BUSINESS CREDIT, INC. MEMBER ABN AMRO GROUP The Singing Machine Company, Inc. December 27, 2002 Page 5 LASALLE BUSINESS CREDIT, INC. By /s/ Casey Orlowski --------------------------- Title Vice President --------------------------- ACKNOWLEDGED AND AGREED TO this 27th day of December, 2002. THE SINGING MACHINE COMPANY, INC. By /s/ John F. Klecha ------------------------------- JOHN F. KLECHA Title PRESIDENT/SECRETARY EX-10.2 4 nakamichisublease.txt NAKAMICHI SUBLEASE EXHIBIT 10.2 STANDARD SUBLEASE DRAFT (Short-form to be used with post 1995 AIREA leases) (NOTE: DO NOT USE IF LESS THAN ENTIRE PREMISES ARE BEING SUBLET. FOR SITUATIONS WHERE THE PREMISES ARE TO BE OCCUPIED BY MORE THAN ONE TENANT OR SUBTENANT USE THE "STANDARD SUBLEASE--MULTI-TENANT" FORM) 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Sublease ("Sublease"), dated for reference purposes only December 17 , 2002, is made by and between Nakamichi America Corporation ("Sublessor") and The Singing Machine Company, Inc. ("Sublessee"), (collectively the "Parties", or individually a "Party"). 1.2 Premises: That certain real property, including all improvements therein, and commonly known by the street address of 1975 Charles Willard Street, Rancho Dominguez located in the County of Los Angeles , State of California and generally described as (describe briefly the nature of the property) that approximate 93,850 square foot industrial building including approximately 13,000 square feet of office space ("Premises"). 1.3 Term: Thirty (30) months ___________years and _______________months commencing January 1, 2003 ("Commencement Date") and ending June 30, 2005 ("Expiration Date"). 1.4 Early Possession: December 2002, upon execution of Sublease Agreement ("Early Possession Date"). 1.5 Base Rent: $ 37,540.00 per month ("Base Rent"), payable on the first (1st) day of each month commencing. [ ] If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Base Rent and Other Monies Paid Upon Execution: (a) Base Rent: $___________________ for the period. (b) Security Deposit: $37,540.00 ("Security Deposit"). (c) Association Fees: $-0- for the period. (d) Other: $-0- _____________________ for _________________________ (e) Total Due Upon Execution of this Lease: $75,080.00. 1.7 Agreed Use: administrative offices and warehousing of singing machines and any legally related uses thereto. 1.8 Real Estate Brokers: (a) Representation: The following real estate brokers (the "Brokers") and brokerage relationships exist in this transaction (check applicable boxes): [ ] represents Sublessor exclusively ("Sublessor's Broker"); [ ] represents Sublessee exclusively ("Sublessee's Broker"); or [x] Colliers Seeley International, Inc. represents both Sublessor and Sublessee ("Dual Agency"). (b) Payment to Brokers: Upon execution and delivery of this Sublease by both Parties, Sublessor shall pay to the Brokers the brokerage fee agreed to in a separate written agreement (or if there is no such agreement, the sum of or % of the total Base Rent) for the brokerage services rendered by the Brokers. 1.9 Guarantor. The obligations of the Sublessee under this Sublease shall be guaranteed by ("Guarantor"). 1.10 Attachments. Attached hereto are the following, all of which constitute a part of this Sublease: [ ] an Addendum consisting of Paragraphs through ; [ ] a plot plan depicting the Premises; [ ] a Work Letter; [x] a copy of the Master Lease; [x] other (specify): Sublessor to leave fence in warehouse. Sublessor and Sublessee will walk through the Premises to confirm area that has to be repaired. After any repairs, Sublessee shall be responsible for repairs and maintenance of the Premises. Sublessee shall provide Sublessor with Certificate of Insurance showing Sublessor and Carson Dominguez as "additional insured." Sublessee shall pay the common area maintenance expense, property taxes, property insurance additionally every month. ORL AJG - ---------- ---------- - ----------- ---------- Initials Page 1 of 5 Initials 2. Premises. 2.1 Letting. Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Sublease. Unless otherwise provided herein, any statement of size set forth in this Sublease, or that may have been used in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not the actual size is more or less. Note: Sublessee is advised to verify the actual size prior to executing this Sublease. 2.2 Condition. Sublessor shall deliver the Premises to Sublessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("Start Date"), and warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), and any items which the Sublessor is obligated to construct pursuant to the Work Letter attached hereto, if any, other than those constructed by Sublessee, shall be in good operating condition on said date. If a non-compliance with such warranty exists as of the Start Date, or if one of such systems or elements should malfunction or fail within the appropriate warranty period, Sublessor shall, as Sublessor's sole obligation with respect to such matter, except as otherwise provided in this Sublease, promptly after receipt of written notice from Sublessee setting forth with specificity the nature and extent of such non-compliance, malfunction or failure, rectify same at Sublessor's expense. The warranty periods shall be as follows: (i) 6 months as to the HVAC systems, and (ii) 30 days as to the remaining systems and other elements. If Sublessee does not give Sublessor the required notice within the appropriate warranty period, correction of any such non-compliance, malfunction or failure shall be the obligation of Sublessee at Sublessee's sole cost and expense. 2.3 Compliance. Sublessor warrants that any improvements, alterations or utility installations made or installed by or on behalf of Sublessor to or on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances ("Applicable Requirements") in effect on the date that they were made or installed. Sublessor makes no warranty as to the use to which Sublessee will put the Premises or to modifications which may be required by the Americans with Disabilities Act or any similar laws as a result of Sublessee's use. NOTE: Sublessee is responsible for determining whether or not the zoning and other Applicable Requirements are appropriate for Sublessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Sublessor shall, except as otherwise provided, promptly after receipt of written notice from Sublessee setting forth with specificity the nature and extent of such non-compliance, rectify the same. 2.4 Acknowledgements. Sublessee acknowledges that: (a) it has been advised by Sublessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and the Americans with Disabilities Act), and their suitability for Sublessee's intended use, (b) Sublessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Sublessor, Sublessor's agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Sublease. In addition, Sublessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Sublessee's ability to honor the Sublease or suitability to occupy the Premises, and (ii) it is Sublessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5 Americans with Disabilities Act. In the event that as a result of Sublessee's use, or intended use, of the Premises the Americans with Disabilities Act or any similar law requires modifications or the construction or installation of improvements in or to the Premises, Building, Project and/or Common Areas, the Parties agree that such modifications, construction or improvements shall be made at: o Sublessor's expense o Sublessee's expense. 3. Possession. 3.1 Early Possession. If Sublessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Sublease (including but not limited to the obligations to pay Sublessee's Share of Common Area Operating Expenses, Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date. 3.2 Delay in Commencement. Sublessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises by the Commencement Date. If, despite said efforts, Sublessor is unable to deliver possession as agreed, the rights and obligations of Sublessor and Sublessee shall be as set forth in Paragraph 3.3 of the Master Lease (as modified by Paragraph 7.3 of this Sublease). 3.3 Sublessee Compliance. Sublessor shall not be required to tender possession of the Premises to Sublessee until Sublessee complies with its obligation to provide evidence of insurance. Pending delivery of such evidence, Sublessee shall be required to perform all of its obligations under this Sublease from and after the Start Date, including the payment of Rent, notwithstanding Sublessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Sublessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Sublessor may elect to withhold possession until such conditions are satisfied. 4. Rent and Other Charges. 4.1 Rent Defined. All monetary obligations of Sublessee to Sublessor under the terms of this Sublease (except for the Security Deposit) are deemed to be rent ("Rent"). Rent shall be payable in lawful money of the United States to Sublessor at the address stated herein or to such other persons or at such other places as Sublessor may designate in writing. 4.2 Utilities. Sublessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. 5. Security Deposit. The rights and obligations of Sublessor and Sublessee as to said Security Deposit shall be as set forth in Paragraph 5 of the Master Lease (as modified by Paragraph 7.3 of this Sublease). 6. Agreed Use. The Premises shall be used and occupied only for Specified in Paragraph 1.7 above and for no other purpose. 7. Master Lease. 7.1 Sublessor is the lessee of the Premises by virtue of a lease, hereinafter the "Master Lease", wherein Carson Dominguez Properties, LP is the lessor, hereinafter the "Master Lessor". 7.2 This Sublease is and shall be at all times subject and subordinate to the Master Lease. 7.3 The terms, conditions and respective obligations of Sublessor and Sublessee to each other under this Sublease shall be the terms and conditions of the Master Lease except for those provisions of the Master Lease which are directly contradicted by this Sublease in which event the terms of this Sublease document shall control over the Master Lease. Therefore, for the purposes of this Sublease, wherever in the Master Lease the word "Lessor" is used it shall be deemed to mean the Sublessor herein and wherever in the Master Lease the word "Lessee" is used it shall be deemed to mean the Sublessee herein. 7.4 During the term of this Sublease and for all periods subsequent for obligations which have arisen prior to the termination of this Sublease, Sublessee does hereby expressly assume and agree to perform and comply with, for the benefit of Sublessor and Master Lessor, each and every obligation of Sublessor under the Master Lease except for the following paragraphs which are excluded therefrom: 1.3, 1.4, 1.5, 1.6, 1.7, 1.8, 1.10, 1.11, 1.12 ORL AJG - ---------- ---------- - ----------- ---------- Initials Page 2 of 5 Initials 7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof are hereinafter referred to as the "Sublessee's Assumed Obligations". The obligations that sublessee has not assumed under paragraph 7.4 hereof are hereinafter referred to as the "Sublessor's Remaining Obligations". 7.6 Sublessee shall hold Sublessor free and harmless from all liability, judgments, costs, damages, claims or demands, including reasonable attorneys fees, arising out of Sublessee's failure to comply with or perform Sublessee's Assumed Obligations. 7.7 Sublessor agrees to maintain the Master Lease during the entire term of this Sublease, subject, however, to any earlier termination of the Master Lease without the fault of the Sublessor, and to comply with or perform Sublessor's Remaining Obligations and to hold Sublessee free and harmless from all liability, judgments, costs, damages, claims or demands arising out of Sublessor's failure to comply with or perform Sublessor's Remaining Obligations. 7.8 Sublessor represents to Sublessee that the Master Lease is in full force and effect and that no default exists on the part of any Party to the Master Lease. 8. Assignment of Sublease and Default. 8.1 Sublessor hereby assigns and transfers to Master Lessor Sublessor's interest in this Sublease, subject however to the provisions of Paragraph 8.2 hereof. 8.2 Master Lessor, by executing this document, agrees that until a Default shall occur in the performance of Sublessor's Obligations under the Master Lease, that Sublessor may receive, collect and enjoy the Rent accruing under this Sublease. However, if Sublessor shall Default in the performance of its obligations to Master Lessor then Master Lessor may, at its option, receive and collect, directly from Sublessee, all Rent owing and to be owed under this Sublease. In the event, however, that the amount collected by Master Lessor exceeds Sublessor's obligations any such excess shall be refunded to Sublessor. Master Lessor shall not, by reason of this assignment of the Sublease nor by reason of the collection of the Rent from the Sublessee, be deemed liable to Sublessee for any failure of the Sublessor to perform and comply with Sublessor's Remaining Obligations. 8.3 Sublessor hereby irrevocably authorizes and directs Sublessee upon receipt of any written notice from the Master Lessor stating that a Default exists in the performance of Sublessor's obligations under the Master Lease, to pay to Master Lessor the Rent due and to become due under the Sublease. Sublessor agrees that Sublessee shall have the right to rely upon any such statement and request from Master Lessor, and that Sublessee shall pay such Rent to Master Lessor without any obligation or right to inquire as to whether such Default exists and notwithstanding any notice from or claim from Sublessor to the contrary and Sublessor shall have no right or claim against Sublessee for any such Rent so paid by Sublessee. 8.4 No changes or modifications shall be made to this Sublease without the consent of Master Lessor. 9. Consent of Master Lessor. 9.1 In the event that the Master Lease requires that Sublessor obtain the consent of Master Lessor to any subletting by Sublessor then, this Sublease shall not be effective unless, within 10 days of the date hereof, Master Lessor signs this Sublease thereby giving its consent to this Subletting. 9.2 In the event that the obligations of the Sublessor under the Master Lease have been guaranteed by third parties then neither this Sublease, nor the Master Lessor's consent, shall be effective unless, within 10 days of the date hereof, said guarantors sign this Sublease thereby giving their consent to this Sublease. 9.3 In the event that Master Lessor does give such consent then: (a) Such consent shall not release Sublessor of its obligations or alter the primary liability of Sublessor to pay the Rent and perform and comply with all of the obligations of Sublessor to be performed under the Master Lease. (b) The acceptance of Rent by Master Lessor from Sublessee or any one else liable under the Master Lease shall not be deemed a waiver by Master Lessor of any provisions of the Master Lease. (c) The consent to this Sublease shall not constitute a consent to any subsequent subletting or assignment. (d) In the event of any Default of Sublessor under the Master Lease, Master Lessor may proceed directly against Sublessor, any guarantors or any one else liable under the Master Lease or this Sublease without first exhausting Master Lessor's remedies against any other person or entity liable thereon to Master Lessor. (e) Master Lessor may consent to subsequent sublettings and assignments of the Master Lease or this Sublease or any amendments or modifications thereto without notifying Sublessor or any one else liable under the Master Lease and without obtaining their consent and such action shall not relieve such persons from liability. (f) In the event that Sublessor shall Default in its obligations under the Master Lease, then Master Lessor, at its option and without being obligated to do so, may require Sublessee to attorn to Master Lessor in which event Master Lessor shall undertake the obligations of Sublessor under this Sublease from the time of the exercise of said option to termination of this Sublease but Master Lessor shall not be liable for any prepaid Rent nor any Security Deposit paid by Sublessee, nor shall Master Lessor be liable for any other Defaults of the Sublessor under the Sublease. (g) Unless directly contradicted by other provisions of this Sublease, the consent of Master Lessor to this Sublease shall not constitute an agreement to allow Sublessee to exercise any options which may have been granted to Sublessor in the Master Lease (see Paragraph 39.2 of the Master Lease). 9.4 The signatures of the Master Lessor and any Guarantors of Sublessor at the end of this document shall constitute their consent to the terms of this Sublease. 9.5 Master Lessor acknowledges that, to the best of Master Lessor's knowledge, no Default presently exists under the Master Lease of obligations to be performed by Sublessor and that the Master Lease is in full force and effect. 9.6 In the event that Sublessor Defaults under its obligations to be performed under the Master Lease by Sublessor, Master Lessor agrees to deliver to Sublessee a copy of any such notice of default. Sublessee shall have the right to cure any Default of Sublessor described in any notice of default within ten days after service of such notice of default on Sublessee. If such Default is cured by Sublessee then Sublessee shall have the right of reimbursement and offset from and against Sublessor. 10. Additional Brokers Commissions. 10.1 Sublessor agrees that if Sublessee exercises any option or right of first refusal as granted by Sublessor herein, or any option or right substantially similar thereto, either to extend the term of this Sublease, to renew this Sublease, to purchase the Premises, or to lease or purchase adjacent property which Sublessor may own or in which Sublessor has an interest, then Sublessor shall pay to Broker a fee in accordance with the schedule of Broker in effect at the time of the execution of this Sublease. Notwithstanding the foregoing, Sublessor's obligation under this Paragraph is limited to a transaction in which Sublessor is acting as a Sublessor, lessor or seller. 10.2 Master Lessor agrees that if Sublessee shall exercise any option or right of first refusal granted to Sublessee by Master Lessor in connection with this Sublease, or any option or right substantially similar thereto, either to extend or renew the Master Lease, to purchase the Premises or any part thereof, or to lease or purchase adjacent property which Master Lessor may own or in which Master Lessor has an interest, or if Broker is the procuring cause of any other lease or sale entered into between Sublessee and Master Lessor pertaining to the Premises, any part thereof, or any adjacent property which Master Lessor owns or in which it has an interest, then as to any of said transactions, Master Lessor shall pay to Broker a fee, in cash, in accordance with the schedule of Broker in effect at the time of the execution of this Sublease. 10.3 Any fee due from Sublessor or Master Lessor hereunder shall be due and payable upon the exercise of any option to extend or renew, upon the execution of any new lease, or, in the event of a purchase, at the close of escrow. 10.4 Any transferee of Sublessor's interest in this Sublease, or of Master Lessor's interest in the Master Lease, by accepting an assignment thereof, shall be deemed to have assumed the respective obligations of Sublessor or Master Lessor under this Paragraph 10. Broker shall be deemed to be a third-party beneficiary of this paragraph 10. ORL AJG - ---------- ---------- - ----------- ---------- Initials Page 3 of 5 Initials 11. Representations and Indemnities of Broker Relationships. The Parties each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Sublease, and that no one other than said named Brokers is entitled to any commission or finder's fee in connection herewith. Sublessee and Sublessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 12. Attorney's fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Sublessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation). 13. No Prior or Other Agreements; Broker Disclaimer. This Sublease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Sublessor and Sublessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Sublease and as to the use, nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Sublessor or Sublessee under this Sublease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Sublease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker. ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS SUBLEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR SUBLESSEE'S INTENDED USE. WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED Executed at: Irvine, CA Executed at: Coconut Creek, FL -------------------------- --------------------------- on: December 30, 2002 on: 23 December 2002 ---------------------------------- ------------------------------------- By Sublessor: By Sublessee: Nakamichi America Corporation The Singing Machine Company, Inc. - -------------------------------------- ---------------------------------------- By: /s/ Orlando R. Lopez By: /s/ April J. Green ---------------------------------- ------------------------------------- Name Printed: Orlando R. Lopez Name Printed: April J. Green ------------------------- --------------------------- Title: Chief Financial Office Title: Chief Financial Officer -------------------------------- ---------------------------------- By: By: ---------------------------------- ------------------------------------- Name Printed: Name Printed: ------------------------- --------------------------- Title: Title: -------------------------------- ---------------------------------- Address: Address: -------------------------------- ---------------------------------- -------------------------------- ---------------------------------- Telephone/Facsimile: Telephone/Facsimile: ------------------ -------------------- Federal ID No. Federal ID No. 95-3795478 ------------------------ -------------------------- BROKER: BROKER: Colliers Seeley International, Inc. Colliers Seeley International, Inc. - --------------------------------------- ---------------------------------------- Attn: Ken Yoshimoto Attn: Ken Yoshimoto --------------------------------- ---------------------------------- Title: Senior Vice President Title: Senior Vice President -------------------------------- --------------------------------- Address: 2050 W. 190th Street, Address: 2050 W. 190th Street, Suite 101, Torrance, California 90504 Suite 101, Torrance, California 90504 - --------------------------------------- ---------------------------------------- Telephone/Facsimile: (310) 787-1000 Telephone/Facsimile: (310) 787-1000 ------------------ -------------------- Federal ID No. Federal ID No. ------------------------ -------------------------- Consent to the above Sublease is hereby given. ORL AJG - ---------- ---------- - ----------- ---------- Initials Page 4 of 5 Initials Executed at: Executed at: -------------------------- --------------------------- on: on: ---------------------------------- ------------------------------------- By Master Lessor By Guarantor(s) Carson Dominguez - -------------------------------------- ---------------------------------------- By: By: ---------------------------------- ------------------------------------- Name Printed: Name Printed: ------------------------- --------------------------- Title: Address: -------------------------------- -------------------------------- By: ---------------------------------- Name Printed: Name Printed: ------------------------- --------------------------- Title: Address: -------------------------------- -------------------------------- Address: -------------------------------- -------------------------------- Telephone/Facsimile: ------------------ Federal ID No. ------------------------ NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower St., Suite 600, Los Angeles, CA 90017. (213) 687-8777. (C)Copyright 1997 By American Industrial Real Estate Association. All rights reserved. No part of these works may be reproduced in any form without permission in writing. Lessor's Consent Form to Sublease attached. ORL ORL AJG - ---------- ---------- - ----------- ---------- Initials Page 5 of 5 Initials LESSOR'S CONSENT TO SUBLEASE Carson Dominguez Properties ("Lessor") hereby consents to the Sublease by and between Nakamichi America Corporation (Sublessor) and The Singing Machine Company, Inc. (Sublessee) without release Sublessor of any liability under the Lease and without waiver of Lessor's rights set forth in the Lease to approve any future subleases. The Assignment shall be construed in accordance with the laws of the State of California. This Lessor's Consent to the Sublease in no event modifies or changes the Lease or the obligations of the Lessee hereunder. EXECUTED as of 12/23/2002. ---------------- CARSON DOMINGUEZ PROPERTIES By: [ILLEGIBLE] ------------------------------------ Title: Sr. V.P. --------------------------------- By: [ILLEGIBLE] ------------------------------------ Title: V.P. --------------------------------- EX-10.3 5 mtvn-domesticlicense103.txt DOMESTIC LICENSE AGREEMENT - MTVN EXHIBIT 10.3 MTVN DOMESTIC MERCHANDISE LICENSE AGREEMENT Agreement made as of November 1, 2000, by and between MTV NETWORKS, a division of Viacom International Inc., a Delaware corporation, with offices at 1515 Broadway, New York, New York 10036 ("MTVN"), and TIE SINGING MACHINE COMPANY, INC., a Delaware corporation, with offices at 6601 Lyons Road, Bldg. A-7, Coconut Creek, FL 33073 ("Licensee") (this "Agreement"). BASIC PROVISIONS The "LICENSED The "MTV: MUSIC TELEVISION" name, trademark and logo. PROPERTY" "KARAOKE" A leisure activity whereby individuals sing the words to a song as such words appear on a television screen or viewing monitor and are displayed in sync with the audio track of such song. The "LICENSED (1) At least two but no more than twelve compilation of song titles of compact discs or cassettes which are branded with the Licensed Property and comprised of a compilation of music tracks and the technology necessary for the end-user to participate in Karaoke activities (the "Music Product(s)"). In addition to the provisions set forth in Article 4, MTVN shall have final approval rights regarding the identity of the music tracks and any performances contained on the Music Products. The content contained in the Music Products may only be provided to the end-user via the Music Products as packaged goods and may not be provided on any other technical platform now known or hereafter devised. The Music Products shall be sold separately from the Advanced Karaoke Machine (as hereafter defined) and the Karaoke Machine (as hereafter defined). * The confidential portion has been so omitted pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission (2) No more than one title per year of the Term (as hereafter defined) for a total maximum of three titles of a compact disc which are branded with the Licensed Property and comprised of a compilation of no more than three music tracks and the ` technology necessary for the end-user to participate in Karaoke activities which shall be packaged with the Advanced Karaoke Machine (as hereafter defined) and the Karaoke Machine as hereafter defined) (the" Sampler Music Products"). In addition to the provisions set forth in Article 4, MTVN shall have final approval rights regarding the identity of the music tracks and any performances contained on the Sampler Music Products. For the avoidance of doubt, the content contained in the Sampler Music Products may only be provided to the end-user via the Sampler Music Products as packaged goods and may not be provided on any other technical platform now known or hereafter devised. No royalties shall be paid for Sampler Music Products. (3) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) does not include a viewing monitor and (c) must be used with a separate television set in order to be functional (the "Karaoke Machine"). (4) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities and (b) includes (i) a television set, (ii) a single cassette deck for recording Karaoke performances and (iii) an AM/FM terrestrial radio receiver (the "Advanced Karaoke Machine"). ((1) through (4) each a "Licensed Pro of collectively the "Licensed Products".) The "LICENSED The United States of America, its territories and possessions. TERRITORY" 2 The "LICENSED (1) Mid tier stores (e.g., JC Penny and Sears), department CHANNELS OF stores (e.g., May Company and Macy's), book stores whether DISTRIBUTION" independent or chain (e.g., Barnes & Noble), college bookstores whether independent or chain, specialty/trend stores (e.g., Spencer's and Gadzooks), music stores whether independent or chain (e.g., Musicland), video stores whether independent or chain, computer/ electronics stores (e.g., Software Etc. and Electronic Boutique), discount retailers and warehouse store chains (e.g., Best Buy, Costco, Sam's Club), and upon MTVN's approval in each instance, catalog retailers and direct mail. MTVN acknowledges and agrees that retailers in the Licensed Channels of Distribution may advertise and sell the Licensed Products via their catalogs and direct mail which are branded with their retail store names (e.g., JC Penny catalog). (2) Upon MTVN's prior approval, Licensee shall have the non-exclusive right to distribute the Licensed Products through Licensee's wholly owned and operated website; and through (a) online only retailers (e.g,, amazon.com and etoys.com) and (b) the wholly owned and operated websites of retailers in the Licensed Channels of Distribution (the (a) and (b) collectively, the "LCD Retailers") provide _d, however, that the websites owned by Licensee and the LCD Retailers shall be in compliance with MTVN's website operating guidelines and the an-line Privacy Alliance Guidelines. In addition, Licensee acknowledges and agrees on behalf of itself, and the LCD Retailers, that (i) MTVN shall have approval over all content used on the websites used by Licensee and the LCD Retailers incorporating the Licensed Products and the Licensed Property, (ii) in no event shall Licensee or the LCD Retailer develop a MTVN branded online boutique or website, (iii) in no event shall Licensee or the LCD Retailer use any MTVN content (i.e., video clips, sound bytes and copies of book pages, etc.) on their respective websites, (iv) there shall be a one-way link from the websites used by Licensee and the LCD Retailer incorporating the Licensed Products and the Licensed Property to the appropriate MTVN website, (v) on-line orders for the Licensed Products shall only be fulfilled for orders placed within the Licensed Territory and 3 3 (vi) MTVN may at any time during the Term of this Agreement revoke Licensee's right to distribute the Licensed Products on-line upon 15 days prior notice. Licensee covenants and agrees that it will use best efforts to ensure that the LCD Retailers are in compliance with the terms and conditions set forth above. The "TERM" The term of this Agreement shall commence on November 1, 2000 and continue through December 31, 2003. The "ROYALTY *% of Net Sales (as defined in the annexed Additional Terms RATE" and Conditions) for the Music Products. *% of Net Sales (as defined in the annexed Additional Terms and Conditions) for the Karaoke Machine and the Advanced Karaoke Machine. The "GUARANTEED The Guaranteed Minimum Royalty for the Term is $686,250.00 and MINIMUM ROYALTY" shall be payable as follows: $50,000.00 on January 5, 2001; $40,000.00 on or before September 30, 2001; $40,000.00 on or before November 30, 2001; $64,375.00 on or before January 31, 2002; $64,375.00 on or before April 30, 2002; $64,375.00 on or before July 31, 2002; $64,375.00 on or before October 31, 2002; $75,000.00 on or before January 31, 2003; $75,000.00 on or before April 30, 2003; $75,000.00 on or before July 31, 2003; and $73,750.00 on or before October 31, 2003. "PRESENTATION (1) The Presentation Date to Licensee's Retailer's shall be DATE TO January 6, 2001 for (a) the Karaoke Machine, (b) the Advanced LICENSEE'S Karaohe Machine and (c) at least two Music Products, the RETAILERS" titles of such Music Products to be mutually agreed upon by MTVN and Licensee. (2) The Presentation Date to Licensee's Retailer's for the remaining Compact Disks shall be determined in accordance with a mutually acceptable presentation schedule to be agreed upon by MTVN and Licensee. * The confidential portion has been so omitted pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission 4 "INITIAL SHIP (1) The Initial Ship to Licensee's Retailers shall be June 30, DATE TO 2001 for (a) the Karaoke Machine, (b) the Advanced Karaoke LICENSEE'S Machine and (c) at least two Music Products, the titles of RETAILERS" such Music Products to be mutually agreed upon b MTVN and Licensee. (2) The Initial Ship to Licensee's Retailers for the remaining Compact Disks shall be determined in accordance with a mutually acceptable initial schedule to be agreed upon by MTVN and Licensee. "COPYRIGHT NOTICE""(C)____ Licensee to fill in year of publication] MTV Networks, a division of Viacom International Inc. All Rights Reserved." "TRADEMARK "MTV: MUSIC TELEVISION(TM)". Licensee shall also include the NOTICE" following notice on all materials set forth in Section 5(b) of The Additional Terms And Conditions in proximity to the Licensed Property. "MTV: MUSIC TELEVISION" and all related titles and logos are trademarks of MTV Networks, a division of Viacom International Inc. "ADDITIONAL Licensee shall be solely responsible for all costs and INFORMATION" expenses related to the Licensed Products including, but not limited to, third party clearances, in connection with the development, manufacture, packaging, duplication, advertising, marketing, promotion, distribution and sale of the Licensed Products. Licensee shall be solely responsible for obtaining all licenses, clearances and permissions (including, without limitation, all master use mechanical license agreements) for all content to be included on or in connection with the Licensed Products that may be necessary for the manufacture, advertising, marketing, promotion, distribution and exploitation of the Licensed Products. All applicable fees, payments and royalties for talent and music relating to the Licensed Products and the advertising, marketing and promotion thereof (including, any guild, union and residual obligations, music synchronization fees and other audio and art costs including materials requested by Licensee that MTVN must create) shall be paid by Licensee. 5 This Agreement includes the Additional Terms and Conditions and the Exhibits annexed hereto and made a part hereof. All capitalized terms in the Additional Terms and Conditions shall have the respective definitions as set forth in the Basic Provisions herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. THE SINGING MACHINE COMPANY, INC. MTV NETWORKS, a division of Viacom International Inc. By: /s/ John Klecha By: /s/ Heidi Eskenazi - -------------------------------- ---------------------------------- Name: John Klecha Name: Heidi Eskenazi Title: Chief Operating Officer Title: Vice president, Licensing 6 ADDITIONAL TERMS AND CONDITIONS ------------------------------- ARTICLE 1. LICENSE. MTVN hereby grants to Licensee, and Licensee hereby accepts, the nonexclusive right to incorporate the Licensed Property on the Licensed Products solely for the purpose of the manufacture, distribution, sale and advertisement of the Licensed Products through the Licensed Channels of Distribution in the Licensed Territory during the Term (the "License") as specified in the Basic Provisions. Licensee shall not have the right to sublicense the rights granted hereunder. ARTICLE 2. RESERVATION OF RIGHTS. MTVN retains all rights not expressly granted hereunder including, but not limited to, the right to distribute and sell the Licensed Products through premium offers, combination and give-away Sales, direct response, direct mail, home shopping type of networks, the on-line medium or any other non-traditional medium now known or hereafter invented, sales clubs, incentive programs, theme parks/ recreational attractions and activities, any MTVN or its affiliated companies' retail outlets and the rights to the Licensed Property, and all names, trademarks and likenesses of characters which are used in connection with a motion picture or other theatrical or live stage presentation for all products, including the Licensed Products. ARTICLE 3. ROYALTIES, ACCOUNTING AND AUDIT. - --------- ------------------------------- (a) COMPUTATION: ------------ (i) Royalties shall be payable by Licensee at the Royalty Rate set forth in the Basic Provisions on Net Sales of all Licensed Products. "Net Sales" shall mean gross sales less customary trade quantity discounts and allowances, actual returns and returns for damaged goods only, the aggregate of which shall not exceed eight percent of gross sales. Except for those expressly provided for in this Section 3(a)(i), there shall be no deductions of any sort or kind including, but not limited to, deductions for returns, cash discounts, costs or expenses incurred in the manufacture, distribution, sale or advertisement of the Licensed Products, or for uncollected bills. (ii) Licensee shall not have the right to sell one or more of the Licensed Products packaged together with a non-"MTV: Music Television" branded product (the "Bundle" or "Bundling"). (iii) Royalty obligations shall accrue upon the sale of the Licensed Products. A Licensed Product is considered "sold" when it is invoiced, shipped, or paid for, whichever event occurs first. Subject to the provisions o f Section (3)(a)(i), Licensee shall be entitled to credit MTVN's royalty account for any payment of royalties made to MTVN for Licensed Products sold and subsequently returned for credit. (iv) In the event that Licensed Products are sold to any party affiliated, controlled, or in any way related to Licensee at a special price lower than the average price charged to other parties, the royalty payable to MTVN shall be based upon said average price. (b) PAYMENTS: --------- (i) Royalties shall be payable on a quarterly basis throughout the Term, within 45 days after the close of each respective quarter. Quarters shall be based on a standard calendar year. (ii) Licensee shall pay to MTVN a non-refundable Guaranteed Minimum Royalty as set forth in the Basic Provisions. (iii) All payments and Quarterly Reports to MTVN hereunder shall be sent to the following address: MTV Networks, Ancillary Sales, P.O. Box 13801, Newark, NJ 07188.0801 with a copy of such Quarterly Report to the Vice President, Licensing, MTV: Music Television at the address specified in Article 16. (iv) All payments past due shall be subject to a late charge of one percent per month (or the highest rate allowed by law if lower), from the date such payments were due. (v) The Guaranteed Minimum Royalty shall be non-refundable but recoupable against the royalties due hereunder. Royalty payments made for any period of the Term shall be credited against the Guaranteed Minimum Royalty for such period of the Term. (c) ACCOUNTING: ----------- Within 45 days after the close of each quarter, Licensee shall furnish to MTVN complete and accurate statements of its sales of Licensed Products and royalties due MT VN, in the form annexed hereto as Exhibit A and Exhibit B (the "Quarterly Reports"). Quarterly Reports shall be furnished whether or not Licensee has actual royalties to report for any quarter. All Quarterly Reports shall be signed and certified as correct by an officer of Licensee. Acceptance by MTVN of royalty payments and Quarterly Reports shall not preclude MTVN from questioning the accuracy thereof. (d) AUDIT: ------ (i) Licensee shall keep accurate books of account and records at its principal place of business of all transactions relating to, or affecting, this Agreement, during the Term and fox a period of three years thereafter. MTVN, or its representative, shall have the right during reasonable business hours to examine and verify Licensee's physical inventory of the Licensed Products as well as Licensee's books of accounts and records, and to make copies and extracts thereof; provided, however, that all such audits shall be kept confidential between the parties and relates solely to the performance of the parties under this Agreement. No accounts or records not rationally relating to Licensee's performance under this Agreement shall be available to MTVN. 8 (ii) In the event that an audit by MTVN discloses an underpayment in royalties due MTVN, Licensee shall promptly pay MTV'N such discrepancy plus a late charge of one percent per month (or the highest rate allowed by law if lower), from the day such payments were due. If such audit discloses a discrepancy of seven percent or more in favor of Licensee for any quarter, Licensee shall also reimburse MTVN for all costs, fees and expenses, incurred by MTVN in connection with the audit. If such audit discloses a discrepancy in favor of MTVN, such overpayments shall be deducted from future payments due MTVN under-this Agreement. ARTICLE 4. QUALITY, SAMPLES, APPROVALS AND MANUFACTURES. - --------- -------------------------------------------- (a) The quality and style of all Licensed Products, and the manner in which the License Property may appear on the Licensed Products and on or in any packaging, promotional materials, labels, advertising, publicity and display materials of any kind and in any medium which are used in connection with the Licensed Products are subject to MTVN's prior approval and shall be in full conformity with all applicable laws and regulations. (b) At each stage of development or production and prior to manufacture, Licensee shall promptly provide MTVN with two samples in the form of proofs and/or prototypes for each Licensed Product and all related materials for MTVN's approval, which may be withheld in MTVN's sole discretion. MTVN shall advise Licensee in writing of its approval. or disapproval of such samples within 10 business days. No samples shall be deemed approved unless and until MTVN has given its approval. Licensee shall not proceed beyond any development or production stage where approval is required without first securing such approval. - In connection with the submission of samples by Licensee for MTVN's approval, Licensee shall submit to MTVN a completed copy of the Licensed Product Approval Form provided by MTVN as Exhibit _C. Once a sample has been approved, Licensee shall not depart therefrom. Approval by MTVN shall not relieve Licensee of any of its agreements, indemnities and warranties hereunder. (c) Licensee shall promptly reimburse MTVN for any and all costs of artwork and other creative materials prepared by MTVN exclusively for the Licensed Products at Licensee's request. (d) Concurrently with the initial shipment of each Licensed Product, Licensee shall furnish to MTVN, at no cost to MTVN, (i) 50 samples of each Music Product and each subsequent-year of the Term, 25 samples of each Music Product and (ii) 8 samples of each Karaoke Machine and each Advanced Karaoke Machine and each subsequent year of the Term, 5 samples of each of the Karaoke Machine and each Advanced Karaoke Machine. Any Licensed Products requested by MTVN in excess of the foregoing amounts shall be made available to MTVN at Licensee's cost. No samples provided to MTVN shall be reproduced by MTVN nor shall MTVN authorize any entity affiliated with or having a contractual relationship with MTVN to reproduce such samples. In addition, samples provided to MTVN shall not be made available I for retail distribution by MTVN nor shall MTVN authorize any entity affiliated with or having a contractual relationship with MTVN to sell any samples for retail distribution. No royalties shall be due under this Agreement to MTVN for any sample provided to MTVN. Licensed Products 9 request by MTVN for resale shall be made available to MTVN at Licensee's best wholesale price. (e) During the Term, Licensee shall permit representatives selected by MTVN access to Licensee's floor stock for sampling purposes at any tune during normal business hours upon reasonable notice. (f) At any time during the Term, and for a period of one year thereafter, upon MTVN's request therefor, Licensee shall provide MTVN with a listing of the names and addresses of Licensee's third party manufacturers on the Approval of Manufacturer Form attached hereto as Exhibit D, and, if additionally requested by MTVN, a copy of Licensee's agreement with any such manufacturer. If such manufacturer utilizes the Licensed Property for any unauthorized purpose, Licensee shall use best efforts to ensure that such utilization is immediately halted. MTVN acknowledges and agrees that it shall not engage Licensee's third party manufacturers, as identified by Licensee, to manufacture the Licensed Products itself. (g) From time to time, upon MTVN's request, Licensee shall include certain materials provided by MTVN relating to MTVN's programs, programming services, or ancillary businesses, which materials are not in direct competition with the Licensed Products of Licensee, in the packaging of the Licensed Products. ARTICLE 5. MARKINGS. - --------- --------- (a) Licensee shall affix the Copyright and Trademark Notices set forth in the Basic Provisions to all Licensed Products and to all packaging, labels, promotional, advertising, publicity, and display materials used in connection therewith, in accordance with instructions from MTVN. No Licensed Products, or related materials, shall contain any other copyright, trademark or trade name unless Licensee has obtained MTVN's prior consent. MTVN consents to the use of "The Singing Machine" on the Licensed Products. The inclusion of any other trademark or trade name shall be subject to MTVN's approval, such approval to be at MTVN's sole discretion. MTVN may at any time require an addition to or change of the Copyright and Trademark Notices, effective not less than 30 days after receipt by Licensee of notice thereof; provided however, that Licensee shall have the right to continue to distribute any inventory already manufactured at the time of such notice, Licensee shall fully cooperate with MTVN in connection with MTVN's obtaining or maintaining copyright and/or trademark protection for the Licensed Property in MTVN's name. (b) Licensee shall affix to the Licensed Products and all packaging, labels, promotional materials, advertising, publicity, and display materials used in connection therewith, any other legends, markings and notices required by any law or regulation in the Licensed Territory or which MTVN reasonably may request. . (c) Licensee acknowledges and agrees that it shall provide a credit to any third party creators of any Licensed Properties, as directed by MTVN, on the Licensed Products or packaging or other materials related thereto. 10 ARTICLE 6. OWNERSHIP. - --------- ---------- (a) As between MTVN and Licensee, all right, title and interest in and to the Licensed Property shall be and remain the sole and complete property of MTVN. Licensee recognizes the value of the goodwill associated with the Licensed Property, that the Licensed Property may have secondary meaning in the mind of the public, and that the trademarks and copyrights in the Licensed Property, and any registrations therefor, are good and valid. All use by Licensee of the Licensed Property shall inure to the benefit of MTVN. Licensee shall not, during the Term or thereafter, contest or assist others to contest, MTVN's rights or interests in the Licensed Property or the validity of this License. Licensee shall not seek any copyright or trademark registration for the Licensed Property. (b) With respect to the intellectual property owned or controlled by Licensee not by virtue of this Agreement ("Licensee's Intellectual Property"), any copyright, trademark, or other proprietary rights owned by Licensee and heretofore used by it which are used in connection with the Licensed Products as approved by MTVN pursuant to Section S(a) above, shall continue to be owned by Licensee and shall not become the property of MTVN. (c) Except for Licensee's Intellectual Property, all right, title, or interest in or to any copyright, trademark, or other proprietary rights that come into existence during the Term as a result of the exercise by Licensee of any right granted to it hereunder, shall immediately and automatically vest in MTVN. (d) Except as otherwise provided, all materials that come into existence during the Term, including, but not limited to, art work and designs, packaging, labels, and promotional, advertising, publicity, and display materials used in connection with the Licensed Products shall be deemed "works made for hire" fox MTVN within the meaning of the U.S. Copyright Law. To the extent that any such work does not so qualify, for the consideration set forth herein, Licensee hereby irrevocably and absolutely assigns to MTVN all rights throughout the universe in perpetuity in all media now known or hereafter developed including, but not limited to, the copyright and any extensions and renewals thereof and the trademarks and the goodwill associated therewith. (e) Licensee agrees to execute and deliver to MTVN any documents which MTVN may reasonably request to confirm MTVN's ownership of its rights hereunder, Licensee hereby irrevocably appoints MTVN as its attorney-in-fact coupled with an interest to sign any such documents in Licensee's name. (f) Licensee shall be obligated to obtain written assignments of copyright in favor of MTVN in respect of any artwork or other copyrightable subject matter developed in connection with the Licensed Property on the Licensed Products, in the form attached hereto as Exhibit E. ARTICLE 7. INFRINGEMENTS. Licensee shall promptly notify MTVN of any apparently unauthorized use or infringement by third parties of any rights granted to Licensee herein, and shall cooperate fully in any action at law or in equity undertaken by MTW with respect to such 11 unauthorized use or infringement. Licensee shall not institute any suit in connection with any apparently unauthorized use or infringement without first obtaining the consent of MTVN to do so, and MTVN shall have the sole right to determine whether or not any action shall be taken on account of any such unauthorized uses or infringements. ARTICLE 8. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS. - --------- --------------------------------------------- (a) Licensee represents, warrants, and undertakes as follows: (i) It is free to enter into and fully perform this Agreement; (ii) All ideas, creations, designs, materials and intellectual property furnished by Licensee in connection with the Licensed Products shall be Licensee's own and original creation and shall not infringe upon the rights of any person or entity or shall be fully licensed by Licensee; (iii) The Licensed Products and all materials used in, connection therewith shall be of the highest standard reasonably suitable for goods of the type of the Licensed Products. The Licensed Products will be safe for use by consumers and will comply with all applicable governmental rules, guidelines, codes, regulations, and warranties (express or implied) including, without limitation, those contained in the Child Safety Protection Act and/or adopted by the Consumer Product Safety Commission; (iv) The Licensed Products shall be manufactured, distributed, sold and advertised in accordance with all applicable federal, state and local laws including but not limite to all applicable labor laws and regulations and in a manner that will not reflect adversely upon MTVN, and shall not infringe upon or violate any rights of any third parties; (v) Licensee shall use its best efforts to obtain maximum sales of the Licensed Products in the Licensed Territory during the Term; (vi) Licensee has obtained or shall obtain all required authorizations, approvals, licenses, or permits from all government authorities in order for it to enter into and perform its obligations pursuant to this Agreement; (vii) Licensee shall not pledge this Agreement, or the rights provided hereunder, as security or collateral to any third party; and (viii) Licensee shall not initially sell, distribute, market or permit any third party to sell, distribute or market any Licensed Products which are damaged, defective, "seconds" or otherwise fail to meet the specifications quality or notice approval requirements contained hereunder. Notwithstanding anything to the contrary contained above, Licensee may resell any "B goods" Licensed Products which are returned for credit due to minor cosmetic damage only (e.g., small dents or minor scratches); pro vided, however, that (y) MTVN shall have approval in 12 its sole discretion over any such sales, including without limitation, the proposed retailers and (z) such Licensed Products are clearly identified to the consumer as "B" goods". (b) MTVN represents, warrants, and undertakes as follows: (i) It is free to enter into and fully perform this Agreement; and (ii) The Licensed Property is original to and the sole property of MTVN, and does not infringe upon or violate any copyright, trademark or proprietary right of any third party. ARTICLE 9. INDEMNITIES - --------- ------------ (a) Licensee shall at all times indemnify and hold MTVN, its officers, directors and employees harmless from and against any and all claims, damages, liabilities, costs and expenses, including reasonable counsel fees, arising out of or relating to any breach or alleged breach by Licensee of any representation, warranty or undertaking made herein, or out of any defect (latent or patent) in the Licensed Products; provided, however, that MTVN shall give prompt notice, cooperation and assistance to Licensee relative to any such claim or suit, and provided further that no settlement of any such claim or suit shall be made without the prior consent of MTVN. (b) * ARTICLE 10. INSURANCE. Licensee shall obtain and maintain at its own costs and expense from a qualified insurance company licensed to do business in New York, separate polices for (a) standard Product Liability Insurance and (b) standard Errors and Omissions Insurance, both naming MTVN as an additional named insured, with respect to all Licensed Products manufactured hereunder, whether sold during the License Term or thereafter. The Product Liability Insurance shall provide protection against any and all claims, demands and causes of action arising out of any defects or failure to perform, alleged or otherwise, of the Licensed Products or any material used in connection therewith or any use thereof during the License Term and thereafter. The amount of coverage for each policy shall be $5,000,000 per occurrence. The policies shall provide for 10 days notice to MTVN from the insurer pursuant to Article 16, in the event of any modification, cancellation or termination thereof. Licensee agrees to furnish MTVN a Certificate of Insurance evidencing same prior to the final execution of the Agreement which shall be attached hereto as Exhibit F. In no event shall Licensee manufacture, distribute or sell the Licensed Products prior to receipt by MTVN of such evidence of insurance. * The confidential portion has been so omitted pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission 13 ARTICLE 11. DEFAULT. - ---------- ------- (a) Upon the occurrence of any of the following events (each of which is a "Default"), then in addition and without prejudice to any rights which it may have at law, in equity or otherwise, MTVN shall have the right to terminate this Agreement, to delete from this Agreement any elements of the Licensed Property or any Licensed Products and/or to require the immediate payment of any Guaranteed Minimum Royalty and royalties due or to become due hereunder: (i) Licensee fails to meet the Presentation Date To Licensee's Retailers or the initial Ship Date To Licensee's Retailers of the Licensed Products; (ii) Licensee fails to actively manufacture, advertise, distribute or sell the Licensed Products; (iii) Licensee fails to make a payment or famish a Quarterly Report in accordance herewith and does not cure such failure within 45 days after notice thereof; (iv) Licensee fails to comply with. the approval, quality, and safety requirements hereunder and/or the Licensed Products do not comply with such requirement and/or the Licensed Products are the subject matter of adverse or negative publicity due to such failure and does not cure such failure within 45 days after notice thereof; (v) Licensee fails to comply with any other of Licensee's material obligations hereunder or breaches any warranty or representation made by it hereunder and does not cure such failure or breach within 45 days after notice thereof; (vi) Licensee sells or otherwise disposes of all or substantially all of its business or assets to a third party, or control or ownership of Licensee is changed or transferred; (vii) Licensee sells or causes others to sell the Licensed Products outside the Licensed Channels of Distribution or outside the Licensed Territory and does not cure such failure or breach within 45 days after notice thereof; (viii) Licensee fails to obtain or maintain insurance in the amount of the type provided for herein and does not cure such failure or breach within 45 days after notice thereof; (ix) Licensee contests or assists others to contest MTVN's rights or interests in the Licensed Property or the validity of this License; or (x) Licensee fails to comply with any provision of any other agreement between Licensee and MTVN and does not cure such failure or breach within 45 days after notice thereof. 14 (b) In the event that the Licensed Products pose a safety threat to the consumer, or are the subject of a claim or inquiry by the Consumer Product Safety Commission or the Child Safety Protection Act or any other person, agency or commission because of quality and/or safety concerns, and/or labeling or are the subject of negative publicity due to poor quality and/or safety of the Licensed Products, Licensee shall, upon MTVWs reasonable request, immediately recall such Licensed Products from the market place, and take any other measures MTVN may reasonably demand. (c) If a petition in bankruptcy is filed by or against Licensee, or Licensee is adjudicated bankrupt, which is not dismissed within 30 days, or Licensee makes any assignment for the benefit of creditors or becomes insolvent, is placed in the hands of a trustee or receiver, fails to satisfy any judgment against it or is unable to pay its debts as they become due, whichever is sooner, this License shall automatically terminate forthwith without any notice whatsoever. Upon such termination for any reason under this Section 11 (c) Licensee, its receiver, representatives, trustees, agents, administrators, successors and assigns shall have no further rights hereunder, and neither this License nor any right or interest herein shall be deemed an asset in any insolvency, receivership or bankruptcy. (d) Licensee may terminate this Agreement if MTVN fails to comply with any of its material obligations hereunder or breaches any warranty or representation made by it hereunder and does not cure such failure or breach 45 days after notice thereof. ARTICLE 12. FORCE MAJEURE. In the event that Licensee is prevented from manufacturing, distributing or selling the Licensed Products because of any act of God; unavoidable accident; fire; epidemic; strike, lockout, or other labor dispute; war, riot or civil commotion; act of public enemy; enactment of any rule, law, order or act of government or governmental instrumentality (whether federal, state, local or foreign); or other cause of a similar or different nature beyond Licensee's control, and such condition continues for a period of 45 days or more, either party hereto shall have the right to terminate this Agreement effective at any time during the continuation of such condition by giving the other party at least 10 days notice to such effect. In such event, the Guaranteed Minimum Royalty and royalties on sales theretofore made shall become immediately due and payable and this Agreement shall be automatically terminated. ARTICLE 13. EFFECT OF EXPIRATION OR TERMINATION. - ---------- ------------------------------------ Upon the expiration or termination of this Agreement for any reason, all rights granted to Licensee herein shall forthwith revert to MTVN, with the following consequences: (a) No portion of any prior payments shall be refundable to Licensee, and any and all payments due or to become due, including any royalties and the Guaranteed Minimum Royalty shall be immediately due and payable. If, at such time, the total amount of royalties paid by Licensee during the Term is less than the Guaranteed Minimum Royalty, Licensee shall immediately pay such difference to MTVN. 15 i (b) After the expiration or termination of this Agreement, Licensee shall not manufacture, advertise, distribute or sell the Licensed products containing or including the Licensed Property or any product which may infringe upon MTVN's proprietary rights, or use any name, logo or design which is substantially or confusingly similar to the Licensed Property on any product in any place whatsoever. Except for those Licensed Products distributed to the Licensed Channels of Distribution prior to the expiration or termination of this Agreement, Licensee shall promptly deliver to MTVN a statement indicating the number of Licensed Products then currently on hand or in the process of being manufactured. MTVN shall have the right to conduct a physical inventory in order to ascertain or verify such inventory and statement. Except as provided in Section 13(c), such inventory shall at MTVN's option, be destroyed by Licensee or purchased by MTVN at Licensee's cost of manufacture. Disposition of any plates, molds, forms, lithographs and other material relating to the Licensed Products then remaining on hand shall be subject to notice from MTVN to Licensee either to destroy the Licensed Products or to deliver the same to MTVN or its designee. In the event that MTVN requests Licensee to destroy its inventory, the Licensed Property or materials relating thereto, MTVN may require Licensee to deliver to MTVN an affidavit by an officer of Licensee, attesting to such destruction in such form as MTVN may in its sole discretion require. (c) Upon the expiration of this Agreement, so long as Licensee is not in default at the time of expiration, Licensee may continue to sell the Licensed Products, previously manufactured and on hand, on a non-exclusive basis during a period of 90 days thereafter, subject to all of the terms and conditions contained in this Agreement; provided, however, that: (i) the Licensed Products shall be sold in the ordinary course of business at prices not lower than the prevailing wholesale price or prices charged by Licensee during the 90 day period immediately preceding the expiration of this Agreement, (ii) no new Licensed products are manufactured during such sell-off period and (iii) MTVN is paid its then existing Royalty Rate on all Licensed Products sold during the sell-off period. ARTICLE 14. CONFIDENTIALITY. Each of Licensee and MTVN may, from time to time, be exposed to and will be furnished with certain information, relating to the other's plans for certain productions and businesses, which are confidential. Each of Licensee and MTVN shall keep confidential and not reveal or disclose any of said information, material or data to any third party or the terms of this Agreement, or any agreement Licensee enters into pursuant to this Agreement during the Term or thereafter. Neither Licensee nor MTVN shall disclose or make known to anyone outside of Licensee or MTVN, as applicable, directly or indirectly, the interest of the other in this Agreement or the terms of this Agreement. The provisions of this Article 1414 shall not apply to information which is (a) or becomes publicly available, (b) required to be disclosed pursuant to a court order or applicable law, rules or regulations or (c) independently developed by the disclosing party. ARTICLE 15. PRESS RELEASES/PUBLYC STATEMENTS. Licensee shall make no public statements or issue any press releases regarding this Agreement, or the Licensed Products, without the prior consent of MTVN. Notwithstanding anything to the contrary, MTVN acknowledges that Licensee shall make all legally required United States Securities and Exchange Commission filings. 16 ARTICLE 16. NOTICES. A11 notices, requests, approvals, consents and other communications required or permitted under this Agreement, except for payments, shall be in writing and shall be sent by facsimile to the facsimile number specified below. A copy of any such notice shall also be personally delivered, sent by mail or overnight courier delivery service with the capacity to verify receipt of delivery on the date such notice is transmitted by telecopy to the addresses specified below. If to MTVN: - ----------- MTV Networks, a division of Viacom International Inc. Attention: Ms. Heidi Eskenazi, Vice President, Licensing 1515 Broadway New York, Never York 10036-5797 Telephone: (212) 846-7145 Telecopy: (212) 846-7908 With a copies: - ------------ MTV Networks, a division of Viacom International Inc. Attention: Ms. Elizabeth Matthews, Vice President, Law & Business Affairs 1515 Broadway New York, New York 10036-5797 Telephone: (212) 258-7122 Telecopy: (212) 258-1992 If to Licensee: - --------------- The Singing Machine Company, Inc. Attention; Ms. Terry Marco, Director of Marketing 6601 Lyons Road, Bldg. A-7 Coconut Creek, FL 33073 Telephone: 954-596-1000 Telecopy: 954-596-2000 Receipt of such notice, request, approval, consent or other communication shall be deemed conclusively made (a) if personally delivered, at the time of delivery or (b) if mailed or sent by overnight courier service, upon receipt thereof. In any event, action or proceeding, service of process upon Licensee may be accomplished by sending such process in the manner specified herein for the giving of notice to Licensee. Either party may change its address or facsimile number for notification purposes by giving the other party notice of the new address or facsimile number and the date upon which it will become effective. ARTICLE 17. GOVERNING LAW. This Agreement and all questions arising hereunder shall be governed by, and construed in accordance with, the laws and decisions of the State of New 17 York without giving effect to the principles thereof relating to conflicts of law. Each of the parties hereto (a) irrevocably agrees that the federal courts of the Southern District of New York and the New York State courts shall have sole and exclusive jurisdiction over any suit or other proceeding arising out of or based upon this Agreement, (b) submits to the venue and jurisdiction of such courts and (c) irrevocably consents to personal jurisdiction by such courts. ARTICLE 18. COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one single agreement between the parties. ARTICLE 19. RELATIONSHIP. Nothing herein contained shall be construed to constitute a partnership or joint venture between the parties hereto, and neither Licensee nor MTVN shall be bound by any representation, act or omission of the other. ARTICLE 20. SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to be contrary to law, then the remaining provisions of this Agreement shall remain in full force and effect. ARTICLE 21. WAIVER. No delay or omission by either party to exercise any right or power it has under this Agreement shall impair or be construed as a waiver of such right or power. A waiver by either party of any breach or covenant shall not be construed to be a waiver of any succeeding breach or any other covenant. All waivers must be in writing and signed by the party waiving its rights. ARTICLE 22. ENTIRE AGREEMENT. This Agreement, and any Exhibits attached hereto, is the entire agreement between the parties with respect to its subject matter, and there are no other representations, understandings, or agreements between the parties relative to such subject matter. ARTICLE 23. AMENDMENTS. No amendment to, or change, waiver or discharge of, any provision of this Agreement shall be valid unless made in writing and signed by an authorized representative of the party against which such amendment, change, waiver or discharge is sought to be enforced. ARTICLE 24. SURVIVAL. The terms of Article 3, Section 4(f), Article 6, Article 8, Article 9, Article 10, Article 13, Article 14, Article 15, Article 17, this Article 24, Article 25, and Article 27 shall survive the expiration or termination of this Agreement for any reason. ASSIGNMENT. Any attempted or purported assignment or other transfer, sublicense, mortgage or other encumbrance of this Agreement and the rights granted herein by Licensee without the prior approval of MTVN, which approval may be granted by MTVN in its sole and absolute discretion, shall be void and of no effect. ARTICLE 26. CONSENTS, APPROVALS AND REQUESTS. Except as specifically set forth in this Agreement, all consents, requests and approvals to be given by either party under this 18 Agreement shall be (a) in writing and (b) not be unreasonably withheld. Each party shall make only reasonable requests under this Agreement. ARTICLE 27. THIRD PARTY BENEFICIARIES. Each party intends that this Agreement shall not benefit or create any right or cause of action in or on behalf of any person or entity other than MTVN and Licensee. END OF ADDITIONAL TERMS AND CONDITIONS 19 SCHEDULES Schedule A Actual Quarterly Sales and Royalty Report Schedule B Projected Quarterly Sales and Royalty Report Schedule C Music Television Product Approval Form Schedule D Approval of Manufacturer EX-10.4 6 amend-domesticlicense104.txt AMENDED-MTVN EXHIBIT 10.4 As of January 1, 2002 Ms. Terry Marco, Director of Marketing The Singing Machine Company, Inc. 6601 Lyons Road, Bldg. A-7. Coconut Creek, FL 33073 Re: Amendment to MTVN Domestic Merchandise License Agreement. -------------------------------------------------------- Dear Terry: Reference is made to the agreement dated the 1st day of November, 2000, by and between MTV Networks, a division of Viacom International Inc., ("MTVN") and The Singing Machine Company, Inc. ("Licensee") with respect to the "MTV: Music Television" name, trademark and logo (the "Licensed Property") (the "Agreement"). Capitalized terms used without definition herein shall have the respective definitions set forth in the Agreement. Effective as of the date hereof, MTVN and Licensee hereby agree that the Agreement shall be amended as follows: 1. Section 1 of the definition of Licensed Products contained in the Basic Provisions shall be amended by (a) deleting in its entirety the phrase "but no more than twelve" in the first sentence and (b) adding the following after the first sentence: "The number of Music Products to be released by Licensee is and shall remain subject to MTVN's prior approval in its sole discretion." 2. The phrase "Advance Karaoke Machine (as hereafter defined) and the Karaoke Machine (as hereafter defined)" contained in Section l and Section 2 of the definition of Licensed Products contained in the Basic Provisions shall be deleted in its entirety and replaced with the "MTV Karaoke Machines (as hereafter defined)". 3. The phrase "((1)-(4) each a "Licensed Product," collectively the "Licensed Products".)" at the end of the definition of Licensed Products contained in the Basic Provisions of the Agreement shall be deleted in its entirety and replaced with the following: "(5) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) does not include a viewing monitor, (c) must be used with a separate television set or viewing monitor in order to be functional and (d) includes (i) dual cassette decks for recording and playing back Karaoke performances, (ii) 2 microphone inputs, (iii) AC power operation, (iv) a Microphone (as hereafter defined), (v) a patch cord and (vi) 12 watt RMS Power Output (Model No. SMG-328). (6) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) does not include a viewing monitor, (c) must be used with a separate television set or viewing monitor in order to be functional and (d) includes (i) a handle (ii) 2 microphone inputs, * The confidential portion has been so omitted pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission (iii) AC/DC power operation, (iv) a Microphone, (v) a patch cord and (vi) built-in speaker system (Model No. SMG-128). (7) One version of a Karaoke hardware machine branded with the Licensed Property which (a) will be sold exclusively at Toys R Us retail stores, (b) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (c) does not include a viewing monitor, (d) must be used with a separate television set or viewing monitor in order to be functional and (e) includes (i) a single cassette deck, (ii) 2 microphone inputs, (iii) AC power operation, (iv) a Microphone and (v) a patch cord (Model No. SMG-138). (8) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) allows the end user to plug the Karaoke machine into a separate television set and video cassette recorder which allows the end user to view and record their Karaoke performance, (c) includes a viewing monitor, (d) includes a video camera feature that (i) is permanently attached to the top of the Karaoke machine and manufactured as part of the Karaoke machine hardware as a whole, (ii) needs to be manually adjusted by the end user to record their Karaoke performance, (iii) is not an individual piece of hardware separate and apart from the Karaoke machine and is not able to be detached from the Karaoke Machine for use independent of the Karaoke machine, (iv) does not contain the technical functionality to allow it to operate as a stand alone video camera and (e) includes (i) 2 microphone inputs, (ii) AC power operation, (iii) a Microphone and (iv) a patch cord (Model No. SMVG-600). For the avoidance of doubt, in no event shall the video camera be Internet compatible or contain any technology that would allow it to broadcast or otherwise distribute any content. MTVN shall have approval rights regarding all technical components of the video camera feature. ((3)-(8) each a "MTV Karaoke Machine" and collectively, the "MTV Karaoke Machines") (9) One version of a uni-directional, handheld microphone which (a) weighs approximately 10 ounces, with a frequency response of 100-12,000 Hz, Sensitivity of-76B+/-3dB at 1 KHz and Impedance of 600 ohm+/-15%, (b) is approximately 2-1/6" X 10-1/2" in size, (c) is branded with the Licensed Property, (d) must use a wire that plugs into the MTV Karaoke Machines to be operational and (e) may be sold individually (the "Duet Microphones") or packaged together with the MTV Karaoke Machines (the "Microphone Sold With MTV Karaoke Machines") (the Duet Microphone and the Microphone Sold With MTV Karaoke Machines, collectively, the "Microphone(s)") (Model No. 222). For the avoidance of doubt, a Microphone shall be used by plugging it into an MTV Karaoke Machine and singing into it for an amplified voice effect. ((1)-(9) each a "Licensed Product" and collectively, the "Licensed Products"). The parties acknowledge and agree that, any device or item that does not meet all of the specifications and include all of the capabilities set forth in the definitions above shall not constitute a "Licensed Product" hereunder. In no event shall any of the Licensed Products include any other components or technical functionality nor' known or hereafter devised or developed which is not specified herein including, but not limited to, wireless, cellular, satellite or any mobile telephone functionality. If Licensee intends to create, develop, sell, distribute or manufacture a product that varies from the Licensed Products to the extent that it modifies, enhances or otherwise alters one or more of the stated features or adds an unstated feature, then Licensee shall give MTVN prior notice describing such requested alteration, and MTVN then may elect in its sole discretion to include such altered product as 2 Part of the definition of "Licensed Products" by giving notice to Licensee and amending this Agreement to such effect." 4. Subject to Paragraph 8 below, the phrase "Specialty toy stores (e.g., FAO Schwarz) and Toys R Us and KayBee Toys and upon MTVN's approval other Mass market toy stores ("Toy Store Retailers")" shall be added to the definition of Licensed Channels of Distribution contained in the Basic Provisions of the Agreement. 5. The definition of Royalty Rate contained in the Basic Provisions of the Agreement shall be deleted in its entirety and replaced with the following: "(1) *% of Net Sales (as defined in the annexed Additional Terms and Conditions) for the Music Products and the Duet Microphones. (2) Except for the Licensed Products defined in Section 8 of the definition of Licensed Products (SMVG-600), *% of Net Sales (as defined in the annexed Additional Terms and Conditions) for the MTV Karaoke Machines." (3) *% of Net Sales (as defined in the annexed Additional Terms and Conditions) for the Licensed Products defined in Section 8 of the definition of Licensed Products (SMVG-600). 6. The definition of Presentation Date To Licensee's Retailers contained in the Basic Provisions of the Agreement shall be deleted in its entirety and replaced with the following: "(1) The Presentation Date to Licensee's Retailer's shall be: (a) January 6, 2001 for (i) the Karaoke Machine, (ii) the Advanced Karaoke Machine and (iii) at least two Music Products, the titles of such Music Products to be mutually agreed upon by MTVN and Licensee; (b) January 6, 2002 for the four remaining MTV Karaoke Machines; and (c) Mutually agreed upon for the Duet Microphones. (2) The Presentation Date to Licensee's Retailer's for any other Music Products approved by MTVN shall be determined in accordance with a mutually acceptable presentation schedule to be agreed upon by MTVN and Licensee." 7. The definition of Initial Ship Date To Licensee's Retailers contained in the Basic Provisions of the Agreement shall be deleted in its entirety and replaced with the following: "(1) The Initial Ship to Licensee's Retailers shall be: (a) June, 2001 for (i) the Karaoke Machine, (ii) the Advanced Karaoke Machine and (iii) at least two Music Products, the titles of such Music Products to be mutually agreed upon by MTVN and Licensee; (b) No later than June 30, 2002 for the MTV Karaoke Machines in parts (5) through (7) of the definition of Licensed Products; (c) No later than September 30, 2002 for the MTV Karaoke in part (8) of the definition of Licensed Products; and 3 * The confidential portion has been so omitted pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission (c) No later than September 30, 2002 for the MTV Karaoke in part (8) of the definition of Licensed Products; and (d) Mutually agreed upon by MTVN and Licensee for the Duet Microphones. (2) The Initial Ship to Licensee's Retailers for any other Music Products approved by MTVN shall be determined in accordance with a mutually acceptable initial schedule to be agreed upon by MTVN and Licensee." 8. (a) Licensee acknowledges that the placement of the Licensed Products in retail toy stores, is of the utmost importance to MTVN and, therefore, Licensee shall use best efforts to ensure that (i) all Toy Store Retailers display, place, market and makes available for sale the Licensed Products solely in the music/karaoke/electronics section of each store during the Term and (ii) the Duet Microphones are only sold with the other Licensed Products and not with any microphones or music related products marketed to or intended for children and/or pre-teens (e.g., Barbie branded microphones). (b) If at any time during the Term (i) any Licensed Products are sold in any sections, aisles or areas other than the music/karaoke/electronics section of a Toy Store Retailer or (ii) the Duet Microphones are sold in an area or section apart from the Licensed Products ((i) and (ii), the "Prohibited Areas"), then (y) the party hereto with knowledge of such marketing, placement, display or sales activities in the Prohibited Areas shall promptly notify the other and (z) Licensee shall have fourteen days from the time it is made aware of such activities to have the Toy Store Retailers terminate such activities. If the Toy Store Retailers do not remove the Licensed Products and any marketing and sales materials related thereto from the Prohibited Areas and display, market, place and sell the Licensed Products solely as described in Section 8(a) above, then MTVN shall have the right, in its sole discretion, upon notice to Licensee, to automatically revoke Toy Stores Retailers from the Licensed Channels of Distribution. Except as otherwise herein amended, the Agreement is hereby ratified and confirmed in all respects. Please indicate your acceptance of the foregoing by signing in the space provided below. Very truly yours, MTV Networks, a division of Viacom International Inc. By: /s/ Heidi Eskenazi ------------------------ Name: Heidi Esken Title: V.P. Licensing, Merchandising & Interactive; MTV ACCEPTED AND AGREED TO: THE SINGING MACHINE COMPANY, INC. By: /s/ John Klecha ------------------------- Name: John Klecha Title: Chief Operating Officer EX-10.5 7 secondamend-mtvn.txt SECOND AMENDMENT TO MTVN EXHIBIT 10.5 As of November 13, 2002 Mr. Eddie Steele, CEO The Singing Machine Company, Inc. 6601 Lyons Road, Bldg. A-7 Coconut Creek, FL 33073 Re: Second Amendment to MTVN Domestic Merchandise License Agreement Dear Eddie: Reference is made to the agreement dated the 1st day of November, 2000, as amended January 1, 2002, by and between MTV Networks, a division of Viacom International Inc. ("MTVN"), and The Singing Machine Company, Inc. ("Licensee") with respect to the "MTV: Music Television" name, trademark and logo (the "Licensed Property") (the "Agreement"). Capitalized terms used without definition herein shall have the respective definitions set forth in the Agreement. Effective as of the date hereof, MTVN and Licensee hereby agree that the Agreement shall be amended as follows: 1. The definition of "Term" contained in the Basic Provisions of the Agreement shall be deleted in its entirety and replaced with the following: "The Term of this Agreement shall commence on November 1. 2000 and continue through December 31, 2003." 2. In addition to (and not in lieu of) the Guaranteed Minimum Royalty of $686,250 payable pursuant to the Agreement, Licensee shall pay MTVN an additional Guaranteed Minimum Royalty of $1,500,000, payable as follows: $500,000 on or before December 27, 2002; $333,334 on or before June 1, 2003; $333,333 on or before September 1, 2003; and $333,333 on or before December 1, 2003. 3. Notwithstanding anything to the contrary contained in the Agreement, the additional Guaranteed Minimum Royalty due pursuant to Paragraph 2 hereinabove shall (a) not be recoupable against any royalties due for sales of Licensed Products sold through December 31, 2002 and (b) be recoupable solely against royalties due for sales of Licensed Products sold on or after January 1, 2003. 4. The following shall be added to the definition of Royalty Rate contained in the Basic Provisions of the Agreement: - ------- * The confidential portion has been so omitted pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. 1 "The Royalty Rate on sales of all Licensed Products sold on or after January 1, 2003 shall be * of Net Sales (as defined in the Additional Terms and Conditions of the Agreement)." 5. The definition of Licensed Products contained in the Basic Provisions of the Agreement shall be deleted in its entirety and replaced with the following: The "LICENSED (1) Each year of the Term, Licensee shall release at least PRODUCTS" eight compact discs or cassettes in at least four different musical genres consisting of a compilation of music tracks, which shall be branded with the Licensed Property and contain the technology necessary for the end-user to participate in Karaoke activities (the "Music Product(s)"). The number of Music Products to be released by Licensee shall be subject to MTVN's prior approval in its sole discretion. In addition to the provisions set forth in Article 4, MTVN shall have prior and final approval rights regarding the identity of the music tracks and any performances contained on the Music Products. The content contained in the Music Products may only be provided to the end-user via the Music Products as packaged goods and may not be provided on any other technical platform now known or hereafter devised. The Music Products shall be sold separately from the MTV Karaoke Machines (as hereafter defined). (2) Each year of the Term, Licensee shall release no more than three compact discs of a compilation of no more than eight music tracks which shall be branded with the Licensed Property and contain the technology necessary for the end- user to participate in Karaoke activities which shall be packaged with the MTV Karaoke Machines (the "Sampler Music Products"). In addition to the provisions set forth in Article 4, MTVN shall have prior and final approval rights regarding the identity of the music tracks and any performances contained on the Sampler Music Products. For the avoidance of doubt, the content contained in the Sampler Music Products may only be provided to the end-user via the Sampler Music Products as packaged goods and may not be provided on any other technical platform now known or hereafter devised. No royalties shall be paid by Licensee to MTVN for Sampler Music Products. (3) (a) One version of a uni-directional, handheld microphone which (i) weighs approximately 10 ounces, with - ------- * The confidential portion has been so omitted pursuant to a request for confidential treatment and has been filed separately with the Securities and Exchange Commission. 2 a frequency response of 100-12,000 Hz, Sensitivity of-76B+/- 3dB at 1 1000Hz and Impedance of 600 ohm+/-15%, (ii) is approximately 2-1/6" X 10-1/2" in size, (iii) is branded with the Licensed Property, (iv) must use a wire that plugs into the MTV Karaoke Machines to be operational and (v) may be sold individually (a "Duet Microphone") or packaged together with the MTV Karaoke Machines (a "Microphone Sold With MTV Karaoke Machines") (Model No. SMM 300). (b) One version of a uni-directional, handheld microphone which (i) weighs approximately 10 ounces, with a frequency response of 100-10,000 Hz, Sensitivity of-72dB +1- 3dB at 1000Hz and Impedance of 600 ohm +1-30% (ii) is approximately 1.8" by 11.1" in size, (iii) is branded with the Licensed Property, (iv) may be sold as a Duet Microphone or a Microphone Sold With MTV Karaoke Machines, (v) includes a cord to plug the microphone into an MTV Karaoke Machine and two AA batteries for use without the cord as a wireless microphone (Model No. SMM 106). (Section 3(a) and Section 3(b), individually and collectively, the "Microphone(s)"). For the avoidance of doubt, a Microphone shall be used by either plugging it into an MTV Karaoke Machine or using "AA" batteries and singing into it for an amplified voice effect accomplished by the end-user singing into such Microphone. (4) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities and (b) includes (i) a television set, (ii) a single cassette deck for recording Karaoke performances and (iii) an AM/FM terrestrial radio receiver (Model No. STVG-700). (5) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) does not include a viewing monitor, (c) must be used with a separate television set or viewing monitor in order to view the lyrics of the songs 3 and (d) includes (i) a handle (ii) two microphone inputs, (iii) AC/DC power operation, (iv) a Microphone, (v) a patch cord and (vi) built-in speaker system (Model No. SMG-128). (6) One version of a Karaoke hardware machine branded with the Licensed Property which (a) will be sold exclusively at Toys R Us retail stores from the beginning of the Term through December 31, 2002, and in any of the Licensed Channels of Distribution thereafter, (b) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (c) does not include a viewing monitor, (d) must be used with a separate television set or viewing monitor in order to view the lyrics of the songs and (e) includes (i) a single cassette deck, (ii) two microphone inputs, (iii) AC power operation, (iv) a Microphone and (v) a patch cord (Model No. SMG-138). (7) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) allows the end-users to plug the Karaoke machine into a separate television set and video cassette recorder which allows the end-user to view and record their Karaoke performance, (c) includes a viewing monitor, (d) includes a video camera feature that (i) is permanently attached to the top of the Karaoke machine and manufactured as part of the Karaoke machine hardware as a whole, (ii) needs to be manually adjusted by the end-user to record the end-user's Karaoke performance, (iii) is not an individual piece of hardware separate and apart from the Karaoke machine and is not able to be detached from the Karaoke Machine for use independent of the Karaoke machine, (iv) does not contain the technical functionality to allow it to operate as a stand alone video camera and (e) includes (i) two Microphone inputs, (ii) AC power operation, (iii) a Microphone and (iv) a patch cord (Model No. SMVG 600). (8) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) does not include a viewing monitor, (c) must be used with a separate television set or viewing monitor in order to view the lyrics of the songs, (d) has a tray load, 4 three CD&G changer, (e) has a top load, single cassette deck for recording and playing back Karaoke performances and (f) includes a (i) remote control which is solely operational with the SMG-282, (ii) Microphone and (iii) built-in speaker system (Model No. SMG-282). (9) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) does not include a viewing monitor, (c) must be used with a separate television set or viewing monitor in order to view the lyrics of the songs, (d) has a tray load, three CD&G changer, (e) has a front load, single cassette deck for recording and playing back Karaoke performances and (f) includes a (i) remote control which is solely operational with the SMG-270, (ii) Microphone and (iii) built-in speaker system (Model No. SMG-270). (10) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) does not include a viewing monitor, (c) must be used with a separate television set or viewing monitor in order to view the lyrics of the songs, (d) has a tray load, three CD&G changer, (e) has a top (load, single cassette deck for recording and playing back Karaoke performances and (f) includes a (i) remote control solely operational with the SMG-280, (ii) Microphone and (iii) built-in speaker system (Model No. SMG-280). (11) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) includes a built-in 5.5 inch black and white viewing monitor, (c) has a top load, single CD&G player and (d) includes a (i) Microphone and (ii) built-in speaker system (Model No. STVG-50l). (12) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) includes a 5 built-in 5.5 inch black and white viewing monitor, (c) has a front load, single cassette deck for recording and playing back Karaoke performances, (d) has a top load, single CD&G player and (e) includes a (i) Microphone and (ii) built-in speaker system (Model No. STVG-505). (13) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) does not include a viewing monitor, (c) must be used with a separate television set or viewing monitor in order to view the lyrics of the songs, (d) has a top load, single CD&G player, (e) includes a video camera feature that (i) is permanently attached to the top of the Karaoke machine and manufactured as part of the machine hardware as a whole, (ii) needs to be manually adjusted by the end-user to record the end-user's performance, (iii) is not an individual piece of hardware separate and apart from the Karaoke machine and is not able to be detached from the Karaoke machine for use independent of the Karaoke machine, (iv) does not contain the technical functionality to allow it to operate as a stand alone video camera and (f) includes (i) headphone plug in capability, (ii) a device that allows the Karaoke machine to be mounted to the top of a television set and (iii) a Microphone (Model No. SMVG-608). (14) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) includes a built-in 13- inch color television set (i) manufactured as part of the Karaoke machine hardware as a whole, (ii) which receives television reception and is used as a viewing monitor for Karaoke activities and (iii) contains a "cable-tuner module" responsible for signal decoding (i.e., does not need an external/separate device to receive the television signal from the available cable), (c) has a tray load, single CD&G player that is (1) capable of playing regular CD-ROM discs as well as discs in DVD format containing audio visual performances stored on DVD disks in a digital form using a MPEG-2 compression standard, (ii) not designed or capable of modifying any content of DVD or compact disks in any form and (iii) is not designed or capable of recording or copying 6 any content ("DVD Player"), (d) includes a video camera feature that (i) is permanently attached to the top of the Karaoke machine and manufactured as part of the Karaoke machine hardware as a whole, (ii) needs to be manually adjusted by the end-user to record the end-user's performance, (iii) is not an individual piece of hardware separate and apart from the Karaoke machine and is not able to be detached from the Karaoke machine for use independent of the Karaoke machine and (iv) does not contain the technical functionality to allow it to operate as a stand alone video camera, (e) includes a video cassette recorder device capable of playing and recording audio visual Karaoke performances solely in an analog form from and onto film based tapes/cartridges ("VCR"), which VCR is (i) manufactured as part of the Karaoke machine as a whole and (ii) is not an individual piece of hardware separate and apart from the Karaoke machine and (f) includes a (i) remote control which is solely operational with the STVG-630 and (ii) Microphone (Model No. STVG-630). (15) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) includes a built-in 7 inch black and white television set (i) manufactured as part of the Karaoke machine hardware as a whole, (ii) that receives television reception and is used as a viewing monitor for Karaoke activities and (iii) does not contain a "cable-tuner module" (i.e., needs an external/separate device to receive the television signal from the available cable), (c) has a front load, single cassette deck for recording and playing back Karaoke performances, (d) has a tray load, single CD&G player, (e) has an AM/FM terrestrial radio receiver (i.e., a device that enables an end-user to listen to audio content solely via such receiver) and (f) includes a (i) Microphone and (ii) built-in speaker system (Model No. STVG-707). (16) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) does not include a viewing monitor, (c) must be used with a separate television set or viewing monitor in order to view the lyrics of the songs, (d) has a top load, single CD&G player which also 7 operates as a DVD Player, (e) has a front load, single cassette deck for recording and playing back Karaoke performances and (f) includes a (i) remote control solely operational with the SMG-800, (ii) Microphone and (iii) built-in speaker system (Model No. SMG-800). (17) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) does not include a viewing monitor, (c) must be used with a separate television set or viewing monitor in order to view the lyrics of the songs, (d) has a tray load, single CD&G player which also operates as DVD Player, (e) has a front load, dual cassette deck for recording and playing back Karaoke performances, (f) stereo functionality includes (i) a subwoofer and (ii) two speakers that may be (y) detached from the main body of the Karaoke machine and (z) connected to the Karaoke machine using wires or short range wireless communications solely using the radio spectrum necessary for one-way wireless microphones and in no way facilitates any other means of communication including, but not limited to, a commercial mobile radio service pursuant to **47 C.F.R. Part 20 and (g) includes a (i) remote control solely operational with the SMG-8 10, (ii) Microphone and (iii) built-in speaker system (Model No. SMD-810). (18) One version of a Karaoke hardware machine branded with the Licensed Property which (a) enables the end-user to play the Music Products and the Sampler Music Products and participate in Karaoke activities, (b) does not include a viewing monitor, (c) must be used with a separate television set or viewing monitor in order to view the lyrics of the songs, (d) has a tray load, three CD&G changer, (e) has a front load, dual cassette deck for recording and playing back Karaoke performances, (f) stereo functionality includes (i) 40 watts stereo power, which also operates as an amplifier (i.e., for a guitar or keyboard with volume control), (ii) adjustable reverb and (iii) key control functionality which allows the end-user to adjust the music to the musical key of their choice and (g) includes a (i) Microphone and (ii) built-in speaker system (Model No. SMG-900). 8 ((9)-(18) only, each, a "2003 MTV Karaoke Machine" and collectively, the "2003 MTV Karaoke Machines"). ((4)-(18) each, a "MTV Karaoke Machine" and collectively, the "MTV Karaoke Machines"). ((l)-(18) each, a "Licensed Product" and collectively, the "Licensed Products"). The parties acknowledge and agree that, (1) in no event shall the Licensed Products, or any features contained therein, be Internet compatible or contain any other components or technical functionality now known or hereafter devised or developed that would allow the Licensed Products to broadcast, stream, deliver or distribute any content. MTVN shall have prior approval rights regarding all technical components of the Licensed Products and (2) any device or item that does not (a) meet all of the specifications and include all of the capabilities set forth in the definitions of the Licensed Products and (b) without limiting the specifications, restrictions and descriptions of functionality and capability set forth on the definitions of the Licensed Products, contain all the features included on the technical spec sheets for the Licensed Products (excluding the Sampler Music Products and the Music Products), attached hereto at Attachment A, shall not constitute a "Licensed Product" hereunder. In no event shall any of the Licensed Products include any other components or technical functionality now known or hereafter devised or developed which is not specified herein including, but not limited to, wireless, cellular, satellite or any mobile telephone functionality. If Licensee intends to create, develop, sell, distribute or manufacture a product that varies from the Licensed Products to the extent that it modifies, enhances or otherwise alters one or more of the stated features or adds an unstated feature, then Licensee shall give MTVN prior notice describing such requested alteration, and MTVN then may elect in its sole discretion to include such altered product as part of the definition of "Licensed Products" by giving notice to Licensee and amending this Agreement to such effect. 6. The Presentation Date To Licensee's Retailers for the 2003 MTV Karaoke Machines shall be January 9, 2003 at the Consumer Electronics Show. 9 7. The Initial Ship Date To Licensee's Retailers for the 2003 MTV Karaoke Machines shall be June 1, 2003. 8. Licensee shall release a minimum of six of the eleven 2003 MTV Karaoke Machines in accordance with Section 6 and Section 7 above and the terms and conditions of the Agreement. Notwithstanding anything to the contrary, Licensee shall have the right, but not the obligation, to release any of the no more than five remaining unreleased 2003 MTV Karaoke Machines; provided, however, that such release is in accordance with the terms and conditions of the Agreement. The identity of all 2003 MTV Karaoke Machines to be released shall be mutually agreed upon by MTVN and Licensee. 9. Licensee acknowledges and agrees that it shall not, or authorize others, to design, manufacture, market, distribute or sell Karaoke machines that have the same color schemes and designs as any MTV Karaoke machines that are being released for the Term of the Agreement. 10. Licensee acknowledges and agrees that the MTV Karaoke Machines shall always be primarily marketed and sold as Karaoke machines as opposed to other functions or features which may be contained in the Licensed Products. Except as otherwise herein amended, the Agreement is hereby ratified and confirmed in all respects. Please indicate your acceptance of the foregoing by signing in the space provided below. Very truly yours, MTV Networks, a division of Viacom International Inc. By: /s/ Donald Silvey ------------------------------------- Name: Donald Silvey Title: SVP Program Enterprises ACCEPTED AND AGREED TO: THE SINGING MACHINE COMPANY, INC. By: /s/ Edward Steele ------------------------------ Name: Edward Steele Title: CEO 10 EX-99.1 8 certification991.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The Singing Machine Company, Inc. (the "Company") on Form 10-Q for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward Steele, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: February 14, 2003 / S / Edward Steele Edward Steele Chairman and Chief Executive Officer (Principal Executive Officer) EX-99.2 9 certification992.txt CERTIFICATION EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of The Singing Machine Company, Inc. (the "Company") on Form 10-Q for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, April J Green, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: February 14, 2003 / S / April J Green April J Green Chief Financial Officer (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----