The amounts disclosed in this column for fiscal 2003, 20022005, 2004 and 20012003 include
automobile expense allowances, which are providedallowances.
(2) Includes matching contributions under our 401(k) savings plan, medical
insurance pursuant to the executive’sexecutive's employment agreements.
(2)
agreement and other expenses
described herein.
(3) Mr. Steele served as our Chief Executive Officer from September 1991 through
July 23, 2003.
(4) Mr. Danny Zheng joined our company on April 19, 2004 as financial controller
and became our Chief Financial Officer on April 5, 2005.
(5) Mr. Jeffery Barocas joined our company on April 1, 2004 as Chief Financial
Officer and resigned on April 1, 2005.
(6) Ms. Green served as our Chief Financial Officer from March 15, 2002 through
April 9, 2004.
(7) Mr. Dahl served as our Senior Vice President of Finance from October 22,
2003 through April 13, 2004.
(8) Mr. Klecha served as our Chief Operating Officer from June 28, 1999 through
May 2, 2003.
(9) Amounts paid to Mr. Klecha pursuant to his separation and release agreement
were $183,703 and $36,204 for medical insurance and matching 401(K)
contributions.
(10) Mr. Dromgold joined us on April 15, 2002 and resigned on December 16, 2003.
(11) Amounts paid to Mr. Dromgold pursuant to his separation and release
agreement were $104,640 and our matching 401(k) contributions and medical
insurance were $4,582
(12) Includes the Company’srelocation expenses of $45,529, our matching contributionscontribution of
$8,543 under itsour 401(k) savings plan and medical insurance at a $100,000 value
contributed to option granted to Mr. Dromgold and $60,565 paid to Mr. Dromgold
pursuant to the executive’s employment agreements.
(3)
his separation and release agreement.
(13) Mr. Steele resignedWeinberg served as our Chief Executive Officer and as a director effectivefrom July 23, 2003 to
October 12, 2003.
(14) Represents 3 months of rent paid for Mr. Weinberg's apartment in Florida.
(15) Effective as of August 3, 2003.
(4)
1, 2003, Mr. Klecha resigned as our President and Chief Operating Officer effective as of May 2, 2003.
(5)
Ms. Green has served as our Chief Financial Officer since March 15, 2002. She served as the Director of Finance and Administration from January 1, 2000 through March 14, 2002 and as our controller from June 1999 through January 2000.
(6)
Chan, Mr. Dromgold joined our company on April 15, 2003 and resigned on January 16, 2003.
(7)
Mr. Dromgold received $50,000 asSteele
agreed to take 15% of their annual compensation in the form of stock for a signing bonusnine
month period until March 31, 2004 (except Mr. Steele's agreement was for an 8
month period until February 28, 2004 when he joined our company pursuant to his employment agreement.
(8)
Includes relocation expenses of $45,529, the Company matching contributions of $8,543 under its 401(k) savings plan and medical insurance and a $100,000 value attributed to options granted to Mr. Dromgold. After one year of employment, Mr. Dromgold had the right to sell 50,000 options that were granted to him under his employment agreement back to the Company at a price of $100,000.expired).
During their respective time periods, Mr. Chan, Mr. Dromgold did not electand Mr. Steele
received compensation in the amount of $20,125, $17,535 and $63,136 in shares of
the Singing Machine's common stock. The average trading that was used to
exercise this right during fiscal 2003 andcalculate the Company extended this right for another year.
number of shares that would be issued to each officer was $3.85
per share.
OPTION GRANTS IN FISCAL 2003
2005
The following table sets forth information concerning all options
granted to our officers and directors during the year ended March 31, 2003.2005. No
stock appreciation rights (“SAR’s”("SAR's") were granted.
Name |
| Shares Underlying Options Granted(1) |
| Percent of Total Options Granted to Employees in Fiscal Year |
| Exercise Price Per Share |
| Expiration Date |
| Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term(2) | ||||||||
5% |
| 10% | ||||||||||||||||
|
|
|
|
|
|
| ||||||||||||
Edward Steele | 30,000 | 5.25 | % | $ | 14.30 | 7/15/08 | $ | 118,525 | $ | 261,908 | ||||||||
John Klecha | 24,000 | 4.28 | % | $ | 14.30 | 7/15/08 | $ | 94,800 | $ | 209,520 | ||||||||
Jack Dromgold | 50,000 | (3) | 8.76 | % | $ | 8.61 | 8/14/07 | $ | 92,775 | $ | 199,795 | |||||||
50,000 | (4) | $ | 9.00 | 12/31/08 | $ | 124,327 | $ | 274,730 | ||||||||||
April Green | 20,000 | (4) | 3.50 | % | $ | 9.00 | 12/31/08 | $ | 49,731 | $ | 109,891 | |||||||
———————
All of these options were granted pursuant to theunder a Year 2001 Stock Option Plan. Option exercise prices wereThe
Options granted to Mr. Judkowitz, Mr. Bauer, Mr. Goldberg, Mr. Merkin and Mr.
Appel vest in one year, on November 29, 2005 (except Mr.Goldberg's and Mr.
Merkin will fully vest on December 1, 2005). Mr. Zheng's options vest in five
equal to the fair market value of the Company’s common stockinstallments beginning on the date of grant.
April 26, 2005.
10
The dollar amounts under these columns are the result of calculations based on the market price on the date of grant at an assumed annual rate of appreciation over the maximum term of the option at 5% and 10% as required by applicable regulations of the SEC and, therefore, are not intended to forecast possible future appreciation, if any, of the common stock price. Assumes all options are exercised at the end of their respective terms. Actual gains, if any, on stock option exercises depend on the future performance of the common stock.
(3)
Half Mr. Barocas received a grant of these50,000 options 25,000 vested on April 15, 2003 and the remaining 25,000 vest on April 15,5, 2004.
(4)
Twenty percent of the options are exercisable on January 1, 2004 and 20% exercisable each January 1st thereafter with the last 20% becoming exercisable on January 1, 2008. These
options would expire with varying expiration dateson June 30, 2005 ninety days after Mr. Barocas resigned
from Januaryour company.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 2009 through January 31, 2013.
Aggregated Option Exercises In Fiscal Year Ended March 31, 2003 And Option Values
2005 AND OPTION
VALUES
The following table sets forth information as to the exercise of stock
options during the fiscal year ended March 31, 20032005 by our officers listed in
our Summary Compensation Table and the fiscal year-end value of unexercised
options.
Name of Individual | Shares Acquired Upon Exercise | Value Realized | Number of Unexercised Options at Fiscal Year End | Value of Unexercisable In-the-Money Options at Fiscal Year End(2) | |||||||
Exercisable/ Unexercisable | Exercisable/ Unexercisable | ||||||||||
| |||||||||||
Edward Steele |
| 0 |
| 0 |
| 352,500/0 |
| $ | 2,251,050/0 | ||
John Klecha | 0 | 0 | 382,500/0 | $ | 2,502,330/0 | ||||||
Jack Dromgold | 0 | 0 | 25,000/75,000 | $ | 0/0 | ||||||
April Green | 1,000 | $ | 3,940 | 26,000/20,000 | $ | 128,440/0 | |||||
———————
(1)
Value realized is based on the difference between the closing price of our common stock on the date of exercise and the option exercise prices times the number of outstanding options.
(2)
Value of unexercised options equals $6.98, the average of the high and low trading prices on March 31, 2003, less the option exercise price multiplied by the number of shares exercisable or unexercisable.
Yi Ping Chan.Chan. Effective as of May 2, 2003, we entered into a three-yearthree year
employment agreement with Yi Ping Chan, our current interim CEO and Chief
Operating Officer. Mr. Chan is entitled to receive an annual salary equal to
$250,000 per year, plus bonuses and increases in his annual salary at the sole
discretion of the Company’sour Board of Directors. In July 2003, Mr. Chan agreed to accept 15% of his salary during nine-month period between July 1, 2003 through March 31, 2004 in the form of stock rather than cash. We also agreed to grant Mr. Chan options to
purchase 150,000 shares of the Company’sour common stock at an exercise price of $5.60 per share, of which 50,000 options will vest
each year and to reimburse him for moving expenses of up to $40,000. We granted
Mr. Chan options to purchase 150,000 shares of our common stock, in July 2003.
In the event of a termination of his employment following a change of control,
Mr. Chan would be entitled to a lump sum payment of 100% of the amount of his
total compensation in the twelve months preceding such termination. During the
term of his employment agreement and for a period of two yearyears after his
termination for cause and one year if he is terminated without cause, Mr. Chan
cannot directly or indirectly compete with our company in the karaoke industry
in the United States.
April Green. On March 15, 2002, we entered into a three-year employment agreement with April Green, our Chief Financial Officer. Pursuant to Ms. Green’s employment agreement, she is entitled to receive base compensation of $122,200 per year, which amount automatically increases during the second and third years by not less than the greater of 5% or the annual increase in the consumer price index. The agreement also provides for discretionary bonuses based on a percentage of the Company’s current bonus pool. In the event of a termination of her employment following a change of control, Ms. Green would be entitled to a lump sum payment of 50% of the amount of her total compensation in the twelve months preceding such termination. During the term of her employment agreement and for a period of two years after her termination for cause and one year if terminated without cause, Ms. Green cannot directly or indirectly compete with our company in the karaoke industry in the United States.
John Dahl. On October 22, 2003, we entered into a two-year employment agreement with John Dahl, our Senior Vice President of Finance, commencing on November 3, 2003 and expiring on November 2, 2005. Mr. Dahl is entitled to receive an annual salary equal to $150,000 per year, plus bonuses and increases in his annual salary, at the sole discretion of our Board of Directors.
EQUITY COMPENSATION PLANS AND 401(K) PLAN
We also agreed to grant Mr. Dahl options to purchase 50,000 shares of our common stock at an exercise price of $1.97 per share, which will be vested at. We also agreed to pay Mr. Dahl $50,000 as a signing bonus and for his moving expenses.
In the event of a termination of his employment following a change of control, Mr. Dahl would be entitled to a lump sum payment of 50% of the amount of his total compensation in the twelve months preceding such termination. During the term of his employment agreement and for a period of two year after his termination for cause and one year if terminated without cause, Mr. Dahl cannot directly or indirectly compete with our company in the karaoke industry in the United States.
Separation and Consulting Agreements
Jack Dromgold. Mr. Dromgold resigned as our Executive Vice President of Sales effective as of December 16, 2003. In connection with his resignation, we entered into a separation and release agreement with Mr. Dromgold. Under this agreement, we agreed to provide Mr. Dromgold with a payment equal to $161,939, which consisted of (i) $50,000 in cash paid on the resignation date, (ii) $109,281 to be paid over a six month period, pursuant to the normal payroll practices of the Company, beginning on January 9, 2004 and ending on June 25, 2004 and (iii) three months of COBRA reimbursement payments. In exchange, Mr. Dromgold agreed to release the Company from any liability in connection with termination of employment.
We also entered into a consulting agreement with Mr. Dromgold on December 16, 2003. Under this consulting agreement, Mr. Dromgold has an obligation to provide us with consulting services over a two month period, expiring on February 13, 2004. As compensation for these services, we have agreed to issue shares of our common stock having a market value equal to $50,000 to Mr. Dromgold and to reimburse him for all reasonable consulting expenses, subject to prior written approval from us. As of January 15, 2004, we have not issued these shares to him.
Edward Steele. Mr. Steele resigned as our Chief Executive Officer and as a Director effective as of August 3, 2003. Mr. Steele continues to be employed as an employee of the Company under his employment dated March 1, 1998 and as amended on May 5, 2000. Mr. Steele’s employment agreement expires on February 28, 2004. Under
this agreement, his annual compensation was $367,500 for fiscal 2003. In July 2003, Mr. Steele agreed to accept 15% of his salary during eight month period between July 1, 2003 through February 28, 2004 in the form of stock rather than cash. The agreement also provides for a discretionary bonuses determined by our Board of Directors. Mr. Steele did not receive a discretionary bonus in fiscal 2003. In the event of a termination of Mr. Steele’s employment in the event of a change in control, Mr. Steele would be entitled to a lump sum payment of 300% of the amount of his total compensation in the twelve months preceding such termination. During the term of his employment agreement and for a period of one year after his termination for cause or his voluntary termination of his employment, Mr. Steele can not directly or indirectly compete with our company in the karaoke industry in the United States.
John Klecha. Mr. Klecha was employed as our Chief Operating Officer pursuant to an employment agreement dated July 1, 2000. Mr. Klecha’s employment agreement was to expire on May 31, 2003 and would automatically extend for an additional year, until May 31, 2004, unless either party gave written notice at least sixty days prior to the end of the three-year term. We gave Mr. Klecha notice that we would not renew his employment agreement in February 2003. Mr. Klecha resigned as our Chief Operating Officer and President, effective as of May 2, 2003, but remained as an employee until May 31, 2003. In connection with his resignation, we entered into a separation and release agreement. Under this agreement, we agreed to provide Mr. Klecha with a payment equal to $183,707, which consisted of (i) salary and auto allowance through May 31, 2003, (ii) ;four weeks of accrued vacation time, (iii) four months of salary and automobile allowance payments and (iv) seven months COBRA reimbursement payments. In exchange, Mr. Klecha agreed to release the Company from any liability in connection with termination of employment.
Equity Compensation Plans And 401(K) Plan
The Company has two stock option plans: theour 1994 Amended and Restated Stock
Option Plan (“("1994 Plan”Plan") and theour Year 2001 Stock Option Plan (“("Year 2001
Plan”Plan"). Both the 1994 Plan and the Year 2001 Plan provide for the granting of
incentive stock options and non-qualified stock options to our employees,
officers, directors and consultantsconsultants. As of December 1, 2003,March 31, 2005, we had 389,900358,700
options issued and outstanding under our 1994 Plan and 629,500668,830 options are
issued and outstanding under our Year 2001 Plan.
The following table gives information about equity awards under our 1994 Plan and the Year 2001 Plan.
Plan Category | (a) Number of securities to be issued upon exercise or outstanding options, warrants and rights | (b) Weighted-average exercise price of outstanding options, warrants and rights | (c) Number of securities Remaining available for future issuance under equity compensation plans (excluding securities in column (a)) |
Equity Compensation Plans approved by Security holders | 1,090,120 | $ 4.55 | 568,580 |
Equity Compensation Plans Not approved by Security Holders | 0 | 0 | 0 |
PLAN
Our 1994 Plan was originally adopted by our Board of Directors in May
1994 and it was approved by our shareholders on June 29, 1994. Our shareholders
approved amendments to our 1994 Plan in March 1999 and September 2000. The 1994
Plan reserved for issuance up to 1,950,000 million shareshares of our common stock pursuant
to the exercise of options granted under the Plan. As of March 31, 2003, we had
granted all the options that are available for grant under our 1994 Plan. As of
January 15, 2004,March 31, 2005, we had 358,700have 343,050 options issued and outstanding under the 1994
Plan and all of these options are fully vested.
vested as of March 31, 2005.
11
Plan
PLAN
On June 1, 2001, our Board of Directors approved the Year 2001 Plan and
it was approved by our shareholders at our special meeting held September 6,
2001. The Year 2001 Plan was developed to provide a means whereby directors and
selected employees, officers, consultants, and advisors of the Company may be
granted incentive or non-qualified stock options to purchase common stock of the
Company. The Year 2001 Plan authorizes an aggregate of 1,950,000 shares of the
Company’sCompany`s common stock to be granted to eligible individuals as stock options and/or stock
awards. During any fiscal year,and a maximum of 450,000 options can be awardedshares to any one individual.individual in
any one fiscal year. The shares of common stock available under the Year 2001
Plan are subject to adjustment for any stock split, declaration of a stock
dividend or similar event. At January 15, 2004,March 31, 2005, we have granted 731,420698,560 options
under the Year 2001 Plan, 201,233432,781 of which are fully vested.
The Year 2001 Plan is administered by our Stock Option Committee
(“Committee”("Committee"), which consists of two or more directors chosen by our Board. The
Committee has the full power in its discretion to (i) grant options under the
Year 2001 Plan, (ii) determine the terms of the options (e.g. - vesting,
exercise price), (iii) to interpret the provisions of the Year 2001 Plan and
(iv) to take such action as it deems necessary or advisable for the
administration of the Year 2001 Plan.
Options granted to eligible individuals under the Year 2001 Plan may be
either incentive stock options (“ISO’s”("ISO's"), which satisfy the requirements of Code
Section 422, or non-statutorynonstatutory options (“NSO’s”("NSO's"), which are not intended to
satisfy such requirements. Options granted to outside directors, consultants and
advisors may only be NSO’s.NSO's. The option exercise price will not be less than 100%
of the fair market value of the Company’sCompany's common stock on the date of grant.
ISO’sISO's must have an exercise price greater to or equal to the fair market value
of the shares underlying the option on the date of grant (or, if granted to a
holder of 10% or more of our common stock, an exercise price of at least 110% of
the under underlying shares fair market value on the date of grant). The maximum
exercise period of ISO’sISO's is 10 years from the date of grant (or fiv efive years in
the case of a holder with 10% or more of our common stock). The aggregate fair
market value (determined at the date the option is granted) of shares with
respect to which an ISO are exercisable for the first time by the holder of the
option during any calendar year may not exceed $100,000. If that amountsamount exceeds
$100,000, our Board of the Committee may designate those shares that will be
treated as NSO’s.
NSO's.
Options granted under the Year 2001 Plan are not transferable except by
will or applicable laws of descent and distribution. Except as expressly
determined by the Committee, no option shall be exercisable after thirty (30)
days following an individual’sindividual's termination of employment with the Company or a
subsidiary, unless such termination of employment occurs by reason of such
individual’sindividual's disability, retirement or death. The Committee may in its sole
discretion, provide in a grant instrument that upon a change of control (as
defined in the Year 2001 Plan) that all outstanding option issued to the grantee
shall automatically accelerate and become fullfully exercisable. Additionally, the
obligations of the Company under the Year 2001 Plan are binding on (1) any
successor corporation or organization resulting from the merger, consolidation
or other reorganization of the Company or (2) any successor corporation or
organization succeeding to all or substantially all of the assets and business
of the Company. In the event of any of the foregoing, the Committee may, at its
discretion, prior to the consummation of the transaction, offer to purchase,
cancel, exchange, adjust or modify any outstanding options, as such time and in
such manner as the Committee deems appropriate.
401(K) Plan
PLAN
Effective January 1, 2001, we adopted a voluntary 401(k) plan. All
employees with at least one year of service are eligible to participate in our
401(k) plan. In fiscal 2002, we made a matching contribution of 100% of salary
deferral contributions up to 3% of pay, plus 50%50.369% of salary deferral
contributions from 3% to 5% of pay for each payroll period. The amounts charged
to earnings for contributions to this plan and administrative costs during the
years ended March 31, 2005, 2004 and 2003 2002totaled approximately $30,025, $55,402
and 2001 totaled $61,466, $41,733 and $8,682, respectively.
12
EXECUTIVE COMPENSATION
The Report of the Executive Compensation/Stock Option Committee on
Executive Compensation Philosophy
does not constitute soliciting material and should not be
deemed filed or incorporated by reference into any other Company filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent the Company specifically incorporates this Report by reference therein.
EXECUTIVE COMPENSATION PHILOSOPHY
The Executive Compensation Committee believes that our companywe must maintain
short and long-term executive compensation plans that enable us to attract and
retain well-qualified executives. Furthermore, we believe that our compensation
plans must also provide a direct incentive for our executives to create
shareholder value.
In furtherance of this philosophy, the compensation of our executives generally consists of three components: base salary, annual cash incentives and long-term performance-based incentives.
Base Salaries
BASE SALARIES
During fiscal 2003,2005, we had employment agreementsagreement with our four seniorone executive
officers: Eddie Steele, our Chief Executive Officer; John Klecha, our Chief Operating Officer; April Green, our Chief Financial Officer and Jack Dromgold, our Executive Vice President of Sales.officer. The base salariessalary of each of our executive officers werewas determined based
on comparison to executives with similar responsibilities at other public
companies.
Incentive Cash Bonuses
companies: The persons that served as executive officers during fiscal 2005 are
listed below.
Yi Ping Chan, who has served as our Chief Operating Officer since May
2, 2003 and Interim Chief Executive Officer since October 17, 2003 through the
present date.
Jeffrey Barocas, who has served as our Chief Financial officer from
April 1, 2004 and resigned on April 1, 2005.
Danny Zheng, who has served as our Financial Controller from April 19,
2004 to April 3, 2005 and served as our Chief Financial Officer from April 4,
2005 through the present date.
INCENTIVE CASH BONUSES
Generally, we award cash bonuses to our management employees and other
employees, based on their personal performance in the past year and overall
performance of our company. During fiscal 2003,2005, we only awarded cash bonuses to two of our executive officers. We awarded Jack Dromgold a bonus in the amount of $50,000 because of our contractual obligation to him pursuant to his employment agreement. Mr. Dromgold agreed to accept payment of this bonus in shares of our common stock, instead of cash. We also awarded April Green, our Chief Financial Officer, a cash bonus in the amount of $25,000. We did not award any cash
bonuses to Eddie Steele or John Klecha.
Long Term Compensationany of our executive officers because our financial performance was
weak.
LONG TERM COMPENSATION - Stock Option Grants
STOCK OPTION GRANTS We have utilized stock options to motivate and retain executive officers and other employees for the long-term. We believe that stock options closely align the interests of our executive officers and other employees with those of our stockholders and provide a major incentive to building stockholder value. Options are typically granted annually, and are subject to vesting provisions to encourage officers and employees to remain employed with the Company.
During fiscal 2003,2005, we granted an aggregate of 70,00062,000 options to two our
senior executive officers. All options grants in fiscal 20032005 were made under our
Year 2001 Stock Option Plan. WeSee "Executive Compensation -Option Grants in Last
Fiscal Year" for information about the number of options granted 20,000 options to Ms. Green and 50,000 optionseach
individual. Each of the option grants was at a price that was equal to Mr. Dromgold. The exercisethe
closing price of our common stock on the options is $9.00 per share and these options vest at a ratedate of 20% per year over a period of five years with expiration dates five years after each vesting date.
Relationship between our Compensation Policies and Corporate Performance
grant.
RELATIONSHIP BETWEEN OUR COMPENSATION POLICIES AND CORPORATE PERFORMANCE
We believe that our executive compensation policies correlate with our
corporate performance. Our stock options are usually granted at a price equal to
or above the fair market value of our common stock on the date of grant. As
such, our officers only benefit from the grant of stock options if our stock
price appreciates. Generally, we try to tie bonus payments to our Company’s financial
performance. However, if an individual has made significant contributions to our
company, we will provide them with a bonus payment for their efforts even if our
company’scompany's financial performance has not been strong.
Compensation
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Effective as of October 17, 2003, Yi Ping Chan became our Interim Chief
Executive Officer
Edward Steele servedOfficer. Mr. Chan's salary is $250,000 per year, as our Chief Executive Officer during fiscal 2003. Pursuant toset forth in his
employment agreement,agreement. In July 2003, Mr. Steele receivedChan agreed to accept 15% of his salary
during the nine-month period between July 1, 2003 through March 31, 2004 in the
form of stock rather than cash. We also agreed to grant Mr. Chan options to
purchase 150,000 shares of our common stock, at an annual salaryexercise price of $385,875$5.60 per
share, of which 50,000 options vest each year and to reimburse him for the period from June 1, 2002 through June 1, 2003.moving
expenses of up to $40,000.
We did not awardgrant any cash bonuses orto Mr. Chan in fiscal 2005 because
our financial performance did not justify cash bonuses to any of our employees.
Even though we have cut costs significantly, we had a net operating loss of $
3.6 million in fiscal 2005.
We awarded stock options to Mr. Steele for services rendered during fiscalChan in December 2003. AlthoughWe awarded Mr.
Chan options to purchase 52,800 shares of our revenues increased significantly in fiscal 2003common stock at an exercise price
of $1.97 per share. These options were granted under our Year 2001 Stock Option
Plan and were granted at a price that was equal to $95.6 million compared to $62.5 million in fiscal 2002,closing price of our net income in fiscal 2003 was $1.2 million or $0.14common
stock on the date of grant. Mr. Chan's options vest at a rate of one-third per
diluted share compared to net incomeyear over a period of $6.3 million or $0.79 per diluted share.
Mr. Steele resigned as our Chief Executive Officer effective as of August 3, 2003; however he will continue to be employed by our company under the terms of his employment agreement until February 28, 2004.
three years.
The Executive Compensation Committee
– submitted and approved in July 2003
Howard Moore, Chairman
Marc Goldberg (Chairman) Jay Bauer
Robert Weinberg
Harvey Judkowitz
13
The members of our Executive Compensation Committee in the fiscal year
ended March 31, 20032005 were Messrs. Bauer, MooreGoldberg, Judkowitz and Weinberg. The members of our Executive Compensation Committee in the fiscal year ended March 31, 2004 were Messrs. Bauer, Appel and Ekstract.Bauer. None of the
members of the Compensation Committee in fiscal 2003 or fiscal 20042005 were or are current
officers or employees of the CompanySinging Machine or any of its subsidiaries. None of
these persons have served on the board of directors or on the compensation
committee of any other entity that has an executive officer serving on our board
of directors or on our Compensation Committee.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
The graphchart below compares the performance of the Company’sSinging Machine's
common stock with the American Stock Market Index (“("AMEX Index”Index") and the Dow
Jones - Consumer Electronics Index (“("Dow Jones-CSE”Jones-CSE"), during the period
beginning March 31, 19982000 through March 31, 2003. Closing prices were not available for the Company’s common stock on March 31, 1998, so the bid prices were used for those dates.2005. The graph assumes the
investment of $100 on March 31, 19982000 in the Company’sSinging Machine's common stock, in
the AMEX Index and the Dow Jones-CSE Index. Total shareholder return was
calculated on the basis that in each case all dividends were reinvested.
![[singingmachineproxystmt001.jpg]](https://capedge.com/proxy/DEF 14A/0001116502-04-000080/singingmachineproxystmt001.jpg)
| 3/31/1998 |
| 3/31/1999 |
| 3/31/2000 |
| 3/31/2001 |
| 3/31/2002 |
| 3/31/2003 | |
THE SINGING MACHINE COMPANY, INC. | 100.00 | 1,102.94 | 2,481.59 | 2,823.53 | 9,405.88 | 4,141.18 | ||||||
DOW JONES CONSUMER ELECTRONICS INDEX | 100.00 | 114.36 | 249.71 | 150.37 | 124.37 | 79.34 | ||||||
AMEX MARKET INDEX | 100.00 | 94.63 | 133.82 | 112.89 | 111.97 | 106.93 |
Note:
Stock price performance shown in Stock Performance Graph for the common stock is historical, and not necessarily indicative of future price performance.
OWNERS AND MANAGEMENT
The following table setsets forth as of January 15, 2004,December 1, 2005, certain
information concerning beneficial ownership of our common stock by:
•
o all directors of the Company,
•
o all executive officers of the Company.
•
o persons known to own more than 5% of our common stock;
Unless otherwise indicated, the address for each person is The Singing Machine Company, Inc., 6601 Lyons Road, Building A-7, Coconut Creek, Florida 33073. As of January 15, 2004, we
We had 8,756,31810,060,282 shares of our common stock issued and outstanding.
As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights.
Name |
| Shares of Common Stock |
| Percentage of Common Stock |
|
| |||
Yi Ping Chan Interim Chief Executive Officer and Chief Operating Officer | 58,152(1) | * | ||
April Green Chief Financial Officer | 31,050(2) | * | ||
John Dahl Senior Vice President of Finance | 0 | * | ||
Joseph Bauer Director | 971,172(3) | 11.07% | ||
Bernard Appel Director | 0 | * | ||
Richard Ekstract Director | 0 | * | ||
Eddie Steele Former Chief Executive Officer And Director(4) | 1,169,596(4) | 12.84% | ||
John Klecha Former Officer and Director(5) | 810,811(5) | 9.26% | ||
Wellington Management Company, LLP(6) | 945,000(6) | 10.79% | ||
All Directors and Executive Officers as a Group | 1,060,374(7) | 11.93% |
———————
SHARES OF PERCENT OF COMMON STOCK(1) COMMON STOCK(1) --------------- --------------- Yi Ping Chan Interim CEO and Chief Operating Officer 160,957 *
Danny Zheng Chief Financial Officer 2,400 * Joseph Bauer Chairman 1,374,504 (2) 12.69% Edward Steele Former CEO 578,101 (3) 5.08% Bernard Appel Director 43,521 * Harvey Judkowitz Director 43,521 * Marc Goldberg Director 21,174 * Stewart Merkin Director 21,174 * Wellington Management Company, LLP 934,000 8.62% Target Capital 755,600 6.97% All Directors and Executive Officers as a Group 1,667,251 15.38% * Less than 1%.
14
Includes 50,000as to the person indicated the following outstanding stock options
to purchase shares of the Company's Common Stock issued under the 1994 and 2001
Stock Option Plans , which will be vested and exercisable within 60 days of
December 1, 2005: 117,600 options held by Yi Ping Chan; 2,400 options held by
Danny Zheng; 77,580 options held by Joseph Bauer; 40,000 options held by Bernard
Appel; 40,000 options held by Harvey Judkowitz; 20,000 options held by Marc
Goldberg; 20,000 options held by Stewart Merkin; 317,580 options held by the
executive officers and directors as a group.
(2) Includes 134,434 shares held individually by Mr. Bauer, 323,216 held by Mr.
Bauer's wife, 224,374 held jointly by Mr. Bauer and his wife, 369,400 shares
held by Mr. Bauer's pension account, 245,500 shares held in Mr. Bauer's Family
LTD Partnership and 77,580 issuable upon the exercise of stock options that arecan
be exercisable within 60 days of January 15, 2004.
(2)
December 1, 3005.
(3) Includes 30,000 shares issuable upon the exercise of stock options that are exercisable within 60 days of January 15, 2004.
(3)
Includes 17,596 shares which are163,200 held by Mr. Bauer directly, 360,000 sharesSteele individually, 414,810 held by Mr.
Bauer’s pension plan, 179,600 shares held by the Bauer Family Limited Partnership, 200,000 shares held by Mr. Bauer’s wife, 193,975 shares held by Mr. Bauer and his wife directly and 20,000 shares issuable upon the exercise of stock options that are exercisable within 60 days of January 15, 2004.
(4)
Effective as of August 3, 2003, Mr. Steele resigned as our Chief Executive Officer and as a director. Mr. Steele will continue to be an employee of the Company until February 28, 2004. Includes 152,910 shares held by Mr. Steele’s wife and 352,500 shares issuable upon the exercise of stock options that are exercisable within 60 days of January 15, 2004.
(5)
Mr. Klecha resigned as Chief Operating Officer effective as of May 2, 2003 and as a director effective as of July 28, 2003.
(6)
The address of Wellington Management Company, LLP is 78 State Street, Boston, Massachusetts 02109. All of the information presented in this item with respect to this beneficial owner was extracted solely from their Scheduled 13G filed on February 14, 2003.
(7)
Includes 100,000 shares issuable upon the exercise of stock options that are exercisable within 60 days of January 15, 2004.
Steele's wife. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 14, 2004, Josef A. Bauer, a director, advanced a short-term
loan of $200,000 to us which we are to use to meet our working capital
obligations. The interest rate on the loan is 8.5% per annum and the loan is
payable on demand. On August 26, 2004, we repaid Mr. Buaer a total of $202,109,
including $2,109 in interest.
On June 16, 2004, Edward Steele, former officer and director, advanced
$40,000 to us. The loan was interest free and paid in full on August 30, 2004.
On or about July 10, 2003, certain officers and directors of our
company advanced $1 million to our company pursuant to written loan agreements.
The officer was Yi Ping Chan and the directors were JayJosef A. Bauer and Howard
Moore. Mr. Moore resigned from our Board, effective as October 17, 2003.
Additionally, Maureen LaRoche, a business associate of Mr. Bauer, participated
in the financing. This loan bearsThe loans accrue interest at the rate of 9.5% per annum. It is presently expected that the loan will be repaid on or after March 31, 2004, when our credit agreement with LaSalle expires, as the debt is subordinated to the LaSalle facility.
When our outside Board members approved this transaction, they approved the interest rate on the loan and also approved granting additional compensation, such as warrants, to the investment group, if an investment bank provided a fairness opinion on the issuance of the additional consideration. Under Delaware law, the members of our Board of Directors have the authority to approve additional compensation to the investment group. Any grants would be discretionary, because our company does not have any contractual obligation to issue additional compensation to the outside investment group. If we retain an investment banking firm, we will accept recommendations from it on the type and amount of additional compensation that should be granted to the investment group. We expect that any additional compensation would probably be warrants, because unlike the issuance of stock, warrants with an exercise price equal to the fair market value on the date of grant, do not have a direct impact on our financial statements. However, we will remain open to any suggestions from our investment banking firm on the amount and type of compensation that would be acceptable for this transaction.
On about March 4, 2003, Jay Bauer, one of our directors advanced $400,000 to International SMC pursuant to a letter agreement,which used the funds to make an advance to a vendor for the purchase of raw materials for the production of our machines. We were to repay Mr. Bauer’s loan in two months on or about May 4, 2003 and the loan bore interest at the rate of 8% per annum. We repaid $200,000 on the loan on or about May 4, 2002 and the remaining balance was paid on or about October 10, 2003.
On July 1, 1999, we loaned $55,000 to each of Eddie Steele and John Klecha to purchase 2 units in our private placement. In May and June 1999, we raised $1,100,000 in a private offering. Our company needed the capital because we had just emerged from our Chapter 11 filing. We sold 40 units to 17 investors at an offering price of $27,500 per unit. Each unit consisted of 20,000 shares of the Company’s convertible preferred stock and warrants to purchase 4,000 shares of the Company’s common stock . These loans bore interest at the rate of 9% per annum and as of March
31, 2005, all interest was accrued, and the unpaid amount totaled approximately
$14,250. These loans were originally scheduled to be repaid by October 31, 2003
and are now due on June 28, 2001. Mr. Klechademand. These loans were subordinated to Milberg's factoring
agreement, which we terminated effective as of July 14, 2004 and Mr. Steele repaid these loanssubsequently
subordinated to Crestmark Bank. On January 20, 2005, Messrs. Bauer, Chan and allMs.
LaRoche had converted 50% of their loan and accrued interest in June 2001.
In June 1999, we arranged a credit facility with Main Factors Inc., whereby Main Factors purchased certainthe amount of
our accounts receivable. To secure the credit facility, John Klecha, our Chief Operating Officer and Chief Financial Officer at that time, provided his personal payment guaranty. In July 1999, we entered$409,500 into an agreement with EPK Financial Corporation (“EPK”) whereby EPK provided letters of credit to our factories to import inventory for distribution to our customers. To secure the EPK facility, Edward Steele and John Klecha each provided their personal guarantees. In consideration for providing their personal guarantees of these credit facilities, we issued 200,000 shares of our common stock toat $0.72/share for total of 563,274 shares. On May
18, 2005, Mr. Steele and 150,000 sharesMoore had converted 100% of ourhis loan in the amount of $200,000
into common stock at $0.72/share for total of 277,778 shares. On November 30,
2005, we have repaid $100,000 loan to Mr. Klecha in June 1999. Both agreements with Main Factors and EPK were terminated in April 2001.
Ms. LaRoche.
15
The following Report of the Audit Committee does not constitute
soliciting material and should not be deemed filed or incorporated by reference
into any other Company filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, except to the extent the Company specifically incorporates
this Report by reference therein.
The Audit Committee is responsible for assisting the Board in
monitoring (1) the quality and integrity of our financial statements, (2) our
compliance with regulatory requirements and (3) the independence and performance
of our independent auditors. Among other responsibilities, the Audit Committee
reviews, in its oversight capacity, our annual financial statement with both
management and the independent auditors and meets periodically with our
independent auditors to consider their evaluation of our financial and internal
controls. The Audit Committee also recommends to the Board of Directors the
selection of the company’scompany's independent certified public accountants. The Audit
Committee is composed of three directors and operates under a written charter
adopted and approved by the Board of Directors. During fiscal 2003,2005, all of the
Audit Committee members were non-empl oyeenon-employee directors and were independent as
defined by the AMEX listing standards in effect during fiscal 2003.2005. The members
of the Audit Committee during fiscal 20032005 were Howard Moore, Jay BauerHarvey Judkowitz, Bernard Appel
and Robert Weinberg.Stewart Merkin. Mr. MooreJudkowitz served as the Chairman of the Audit Committee.
In discharging its duties during fiscal 2003,2005, the Audit Committee met
with and held discussions with management and our independent auditors,
Grant ThorntonBerkovits, Lago & Company, LLP. Management represented to the independent
auditors that our audited financial statements were prepared in accordance with
generally accepted accounting principles. The Audit Committee also discussed
with Grant ThorntonBerkovits, Lago & Company, LLP the matters required to be discussed by
Statement on Auditing Standards No. 61, “Communications"Communications with Audit Committees.”"
In addition, Grant ThorntonBerkovits, Lago & Company, LLP, provided the Audit Committee with
the written disclosures and the letter required by Independence Standards Board
Standard No. 1, “Independence"Independence Discussion with Audit Committees,”" and the Audit
Committee discussed with Grant ThorntonBerkovits, Lago & Company, LLP, its independence.
Based on the above-mentioned review and discussions with management and
the independent auditors, the representations of management and the report of
the independent auditors to our committee, the Audit Committee recommended that
the Board of Directors include the audited consolidated financial statements in
the Company’sCompany's Annual Report on Form 10-K for the fiscal year ended March 31,
2003.
2005.
Audit Committee
– submitted in July 2003
Howard Moore,Harvey Judkowitz, Chairman
Josef Bauer
Robert Weinberg
Bernard Appel
Stewart Merkin
16
PROPOSAL 1. ELECTION OF DIRECTORS
The foursix persons set below, each of whom is currently a director, are
proposed to be re-elected as directors at the Annual Meeting. If elected, each
of these directors will hold office until the next Annual Meeting of
Stockholders in the year 20042006 or until his or her successor is duly elected and
qualified.
Bernard Appel
Josef Bauer
Yi Ping Chan
Richard Ekstract
Marc Goldberg
Harvey Judkowitz
Stewart Merkin
All of the nominees are currently serving as directors. Each nominee
has agreed to be named in this Proxy Statement and to serve as a director if
elected. For biographical information regarding the nominees, see “Management” on pages 3-4"Management"
of this Proxy Statement. Management expects that each nominee will be available
for election, but if any of them is not a candidate at the time ofwhen the
election occurs, it is intended that such proxy will be voted for the election
of another nominee to be designated by the Board of Directors to fill such
vacancy.
Vote Required and Recommendation
The four
Assuming a quorum is present, the six nominees for election to the
Board of Directors who receive the greatest number of votes cast for the
election of directors by the shares present, in person or by proxy, shall be
elected directors. Shareholders do not have the right to cumulate their votes
for directors. In the election of directors, an abstention or broker non-vote
will have no effect on the outcome.
The Board recommends stockholders to vote “FOR”"for" each of the nominees
for director set forth above.
17
AMEND OUR YEAR100,000,000 SHARES
As of December 20, 2005, we had 18,900,000 shares of authorized common
stock, of which 10,060,282 shares are outstanding. We have reserved 5,372,898
shares of the common stock for following uses:
1) 1,950,000 shares of common stock is reserved for the 2001 STOCK OPTION PLAN TO ALLOW FOR THE GRANTING OF STOCK AWARDS TO ELIGIBLE PARTICIPANTS
Atstock
option plan;
2) 2,831,858 shares of common stock is reserved for $4 million
convertible debentures; and
3) 591,040 shares of common stock is reserved for the meeting, you will be askedoutstanding
warrant.
There were 3,466,820 shares of authorized common stock available to
issue as of December 20, 2005. We are asking our shareholders to approve an
amendment to our Year 2001 Stock Option Plan (the “2001 Plan” or the “Plan”)Certificate of Incorporation to allow for the granting of stock awards to eligible participants under the Plan. Stock Awards are grants of shares ofincrease our authorized common
stock which may or may not be subjectfrom 18,900,000 shares to vesting conditions, or rights to purchase shares of our common stock at a price, not less than the fair market value on the date of grant, that is determined by a Committee. Our 2001 Plan currently only provides for the grant of stock options to eligible individuals under this plan.100,000,000.
The proposed amendment would not make any other substantive changes in the 2001 Plan. The amendment would not change the 1,950,000 shares authorized for grant under the 2001 Plan.
Background and Reason for the Proposed Amendment
Our Board of Directors adopted our 2001 Plan effective as of June 1, 2001 and our shareholders approved our 2001 Plan at our annual meeting held on August 16, 2001. Currently, the 2001 Plan provides for the grant of stock options to eligible participants, but does not include the grant of stock awards. In lightterms of the possibility that the Financial Accounting Standards Board may in the future change the accounting treatment of employee stock options in a way that makes options less attractive from a corporate financial statement perspective, our Board believes it is appropriate for the Company to have increased flexibility as to the type of equity compensation awards it may grant to employees and other eligible Plan participants.
Specifically, our Board has determined that we would be better positioned to attract and retain qualified officers, employees, consultants and directors if we had the ability, in addition to being able to grant stock options, to grant stock awards to these individuals (which awards may or may not be subject to vesting). For this reason, the Board has approved an amendment to the 2001 Plan to permit the granting of such stock awards, subject to shareholder approval. Shareholder approval is also being sought to comply with the rules of the American Stock Exchange.
Description of the Year 2001 Plan, as Amended, Subject to Shareholder Approval
The following is a summary of the principal features of the 2001 Plan, as amended. This summary, however, does not purport to be a complete description and is qualified in its entirety by the complete text of the 2001 Plan attached to this Proxy Statement as Exhibit A.
Purpose
The purposes of the 2001 Plan are to attract and retain the best available personnel for the Company and to provide additional incentive to the employees, officers, consultants, advisors and directors of the Company.
Administration
The 2001 Plan will be administered by our Board of Directors or an underlying committee thereof (“Committee”). The determination of which members of the board serve on the Committee will be made in accordance with the requirements of Section 162(m) of the Internal Revenue Code (and any regulations promulgated thereunder) and Rule 16b-3 of the Exchange Act. The Committee has the full power in its discretion to grants awards under the 2001 Plan, to determine the terms thereof, to interpret the provisions of the 2001 Plan and to take such action as it deems necessary or advisable for the administration of the 2001 Plan.
Eligibility and Limitations on Grants
The 2001 Plan provides that Plan awards may be granted to employees (including officers and directors who are also employees) and consultants and advisors to the Company (including non-employee directors). Incentive stock options may only be granted to employees. The Committee selects the recipients of Plan awards and determines the number of shares, the exercise price, the vesting or forfeiture provisions and other applicable terms not inconsistent with the Plan provisions that apply to each award. In making such determinations, the Committee takes into account the duties and responsibilities of each individual, the value of his or her services to our company and other relevant factors such as the market rate of compensation for such person. As of January 15, 2004, there are approximately 59 employees who are eligible to participate in the 2001 Plan.
The 2001 Plan authorizes an aggregate of 1,950,000 shares of the Company’s common stock to be granted to eligible individuals as stock options and will authorize the granting of stock awards if this proposal is approved. As of January 15, 2004, we have granted 731,420 options under the Plan and 1,218,580 shares are available for grant. The maximum number of shares of common stock whichwill be identical to
those of the currently outstanding shares of common stock. However, because
holders of common stock have no preemptive rights to purchase or subscribe for
any unissued stock of the Company, the issuance of additional shares of common
stock will reduce the current stockholders' percentage ownership interest in the
total outstanding shares of common stock. This amendment will not alter the
current number of issued shares. The relative rights and limitations of the
shares of common stock would remain unchanged under this proposal.
The increase in the number of authorized but unissued shares of common
stock would enable the Company, without further stockholder approval, to issue
shares from time to time as may be grantedrequired for proper business purposes, such
as raising additional capital for ongoing operations, business and asset
acquisitions or mergers, stock splits and dividends, present and future employee
benefit programs and other corporate purposes. If approved, the Company has no
present intentions to issue any of the newly authorized shares of common stock.
In addition, one of the effects of this proposed amendment might be to
enable the Board to render it more difficult to, or discourage an individual under options underattempt to,
obtain control of the 2001 Plan during any fiscal year is 450,000 options. There is alsoCompany by means of a $100,000 limit onmerger, tender offer, proxy contest
or otherwise, and thereby protect the aggregate market valuecontinuity of shares subject to all incentive stock options that may be granted to an employee during any calendar year.present management. The
Board would, unless prohibited by applicable law, have additional shares of
common stock available underto effect transactions (such as private placements) in
which the 2001 Plan are subject to adjustment for any stock split, declaration of a stock dividend or other similar event.
Terms of Options
The termsnumber of the options granted underCompany's outstanding shares would be increased and
would thereby dilute the 2001 Plan are determinedinterest of any party attempting to gain control of the
Company. Such action could discourage an acquisition of the Company, which
stockholders might view as desirable.
While the amendment may have anti-takeover ramifications, the Board
believes that the financial flexibility offered by the Committee. Each option is evidenced by a stock option agreement betweenamendment outweighs any
disadvantages. To the Company and the optionee and is subject to the following additional terms and conditions:
Exercise Price. The exercise price of an option is determined by the Committee at the time of the grant. The option exercise price will not be less than the 100% of the Fair Market Value (as defined in the 2001 Plan) of the common stock on the date of such grant. On January 2, 2004, the average of the Company’s high and low sales price was $2.34 per share. The Committee will determine at the time of grant the terms under which options shall vest and become exercisable.
Special Limitations on ISO’s. No ISO may be granted to an employee who owns, at the time of the grant, stock representing more than 10% of the total voting power of all classes of stock of our company or its subsidiaries (a “10% stockholder”) unless the exercise price for the shares subject to such ISO is at least 110% of the Market Price on the date of grant and such ISO award is not exercisable more than five years after its date of grant. In addition, the total fair market value of shares subject to ISO’s which are exercisable for the first time by an employee in a given calendar year shall not exceed $100,000, valued as of the date of the ISO’s grant. ISOs may not be granted more than 10 years after the date of adoption of the 2001 Plan by the Board of Directors.
Exercise of the Option. An option may be exercised in whole or in part in accordance with procedures established by the Committee. Common stock purchased upon the exercise of the option shall be paid for in full at the time of purchase. Such payment shall be made in cash. Additionally, payment may be made in any other methodextent that the Committee has approved in writing, including but not limitedamendment may have anti-takeover effects,
the amendment may encourage persons seeking to (i) delivery of shares of common stock having a Fair Market Value equal to the exercise price of the Option, (ii) a broker-assisted “cashless exercise” arrangement, (iii) waiver of compensation due or accrued to the participant for services rendered, or (iv) any other methods that the Committee may approve in writing.
Non Transferability of Options. Options are not transferable except by will or applicable laws of descent and distribution. The Committee may, however, authorize certain transfers to the extent allowable under applicable law.
Expiration of Options. Options will expire at such time as the Committee determines. ISOs may not be exercised more than 10 years from the date of the grant, unless held by a 10% stockholder, in which case such ISOs may not be exercised more than five years from the date of grant.
Termination of Options. Except as expressly determined by the Committee in its sole discretion, no option shall be exercisable after 30 days following an eligible individual’s termination of employment with the Company or a subsidiary, unless such termination of employment occurs by reason of such individual’s disability, retirement or death (each as defined in the 2001 Plan). In addition, the Committee may, in its sole discretion, cause any option to be forfeited upon an eligible individual’s termination of employment if the individual was terminated for cause or left without good reason (as defined in the 2001 Plan).
Stock Awards
Shareholder approval is being sought to amend to 2001 Plan to permitacquire the Company to grant stock awardsnegotiate
directly with the Board enabling the Board to eligible participants. Stock awards are grants of shares of our common stock, which may or may not be subject to vesting conditions, and rights to purchase shares of our common stock at a price, not less thanconsider the fair market value on the date of grant, that is determined by a Committee. If shareholder approval is obtained, the Company will be able to grant stock awards to eligible participants on such terms, conditions and restrictions as determined appropriate by the Committee at the time the stock award is granted. The maximum number of shares of stock that may be granted to an individual as stock awards during a fiscal year is 350,000 shares. The terms and conditions of these awards may (but need not) include, without limitation, restrictions on transfer, vesting provisions, for feiture provisions and provisions permitting the Company to repurchase shares subject to the stock award. The Committee may chose to grant stock awards to eligible participants for no consideration or may require that the participant pay for the stock underlying the stock award at a price equal to a minimum of the fair market value of the Company’s common stock on the date of grant.
Change of Control
The Committee may in its sole discretion, provideproposed transaction
in a Grant Instrumentmanner that upon a Change of Control (as defined inbest serves the Plan or otherwise), that all outstanding options or stock awards issued to the grantee shall automatically accelerate and become fully exercisable. Additionally, the obligations of the Company under the 2001 Plan are binding on (1) any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company or (2) any successor corporation or organization succeeding to all or substantially all of the assets and business of the Company. In the event of any of the foregoing, the Committee may, at its discretion, prior to the consummation of the transaction, offer to purchase, cancel, exchange, adjust or modify any outstanding options or stock awards, as such time and in such manner as the Committee deems appropriat e.
Adjustment upon Changes in Capitalization
The number and class of shares available under the 2001 Plan may be adjusted by the Committee to prevent dilution or enlargement of rights in the event of various changes in the capitalization of the Company. At the time of grant of any award, the Committee may provide that the number and class of shares issuable in connection with such option shall be adjusted in certain circumstances to prevent dilution or enlargement of rights.
Amendment and Termination
The Plan will terminate on May 31, 2011. The Board of Directors may at any time amend, suspend or discontinue the 2001 Plan, except that no amendment may be made with the approval of stockholders if such approval is required by Section 162(m) of the Internal Revenue Code.
Options and stock awards granted prior to a termination of the 2001 Plan shall continue in accordance with their terms following such termination. No amendment, suspension or termination of the 2001 Plan shall adversely affect the rights of an eligible individual in options and stock awards previously granted without such individual’s consent.
Certain United States Federal Income Tax Information
The United States federal income tax consequences to the Company and eligible individuals under the 2001 Plan are complex and subject to change. The following discussion is only a summary and recipients of options and stock awards under the 2001 Plan should consult their own tax advisors since a taxpayer’s particular situation may be such that some variation of the rules described below will apply. This information may not be applicable to employees of foreign subsidiaries or participants who are not residents of the United States.
Incentive Stock Options
If an option granted under the 2001 Plan is treated as an ISO, the optionee will not recognize any income upon either the grant or the exercise of the option, and the Company will not be allowed a deduction for federal tax purposes. Upon a sale of the shares, the tax treatment to the optionee and the Company will depend primarily upon whether the optionee has met certain holding period requirements at the time he or she sells the shares. In addition, as discussed below, the exercise of an ISO may subject the optionee to alternative minimum tax liability.
If an optionee exercises an ISO and does not dispose of the shares received within two years after the date such option was granted or within one year after the transfer of the shares to him or her, any gain realized upon the disposition will be characterized as long-term capital gain and, in such case, the Company will not be entitled to a federal tax deduction. If the optionee disposes of the shares either within two years after the date the option is granted or within one year after the transfer of the shares to him or her, such disposition will be treated as a disqualifying disposition and an amount equal to the lesser of (1) the fair market value of the shares on the date of exercise minus the exercise price, or (2) the amount realized on the disposition minus the exercise price, will be taxed as ordinary income to the optionee in the taxable year in which the disp osition occurs. (However, in the case of gifts, sales to related parties, and certain other transactions, the full difference between the fair market value of the stock and the purchase price will be treated as compensation income). The excess, if any, of the amount realized upon disposition over the fair market value at the time of the exercise of the option will be treated as long-term capital gain if the shares have been held for more than one year following the exercise of the option. In the event of a disqualifying disposition, the Company may withhold income taxes from the optionee’s compensation with respect to the ordinary income realized by the optionee as a result of the disqualifying disposition.
The exercise of an ISO may subject an optionee to alternative minimum tax liability. The excess of the fair market value of the shares at the time an ISO is exercised over the purchase price of the shares is included in income for purposes of the alternative minimum tax even though it is not included in taxable income for purposes of determining the regular tax liability of an employee. Consequently, an optionee may be obligated to pay alternative minimum tax in the year he or she exercises an ISO.
In general, there will be no federal income tax deductions allowed to the Company upon the grant, exercise, or termination of an ISO. However, in the event an optionee sells or otherwise disposes of stock received on the exercise of an ISO in a disqualifying disposition, the Company will be entitled to a deduction for federal income tax purposes in an amount equal to the ordinary income, if any, recognized by the optionee upon disposition of the shares, provided that the deduction is not otherwise disallowed under the Internal Revenue Code.
Non-Qualified Stock Options
All other options which do not qualify as incentive stock options are referred to as nonstatutory stock options. NOS’s will not qualify for any special tax benefits to the optionee. An optionee generally will not recognize
any taxable income at the time he or she is granted an NSO option. However, upon its exercise, the optionee will recognize ordinary income for federal tax purposes measured by the excess of the then fair market value of the shares over the exercise price. The income realized by the optionee will be subject to income and other employee
withholding taxes.
The optionee’s basis for determination of gain or loss upon the subsequent disposition of shares acquired upon the exercise of a NSO will be the amount paid for such shares plus any ordinary income recognized as a result of the exercise of such option. Upon disposition of any shares acquired pursuant to the exercise of a NSO, the difference between the sale price and the optionee’s basis in the shares will be treated as a capital gain or loss and generally will be characterized as long-term capital gain or loss if the shares have been held for more than one year at their disposition.
In general, there will be no federal income tax deduction allowed to the Company upon the grant or termination of a NSO or a sale or disposition of the shares acquired upon the exercise of a NSO. However, upon the exercise of a NSO, the Company will be entitled to a deduction for federal income tax purposes equal to the amount of ordinary income that an optionee is required to recognize as a result of the exercise, provided that the deduction is not otherwise disallowed under the Internal Revenue Code.
Stock Awards
Generally, the recipient of a stock award will recognize ordinary compensation income at the time the Company’s common stock associated with such stock award is received in an amount equal to the excess, if any, of the fair market value of the stock received over any amount paid by the recipient in exchange for the stock. If, however, the stock is non-vested (i.e., if the recipient is required to work for a period of time in order to have the right to sell the stock) when it is received under the Year 2001 Stock Option Plan and the recipient had not elected otherwise, the recipient generally will not recognize income until the stock becomes vested, at which time the recipient will recognize ordinary compensation income equal to the excess, if any, of the fair market value of the stock on the date it becomes vested over any amount paid by the recipient in exchange for the stock. Th e income realized by the recipient will generally be subject to U.S. income and employment taxes.
The recipient’s basis for determination of gain or loss upon the subsequent disposition of shares acquired as stock awards will be the amount paid for such shares plus any ordinary income recognized either when the stock is received or when the stock becomes vested, as applicable. Upon the disposition of any stock received as a stock award under the Plan, the difference between the sale price and the recipient’s basis in the shares will be treated as a capital gain or loss and generally will be characterized as long-term capital gain or loss if, at the time of disposition, the shares have been held for more than one year since the recipient recognized compensation income with respect to such shares.
In the year that the recipient of a stock award recognizes ordinary taxable income in respect of such award, the Company will be entitled to a deduction for federal income tax purposes equal to the amount of ordinary income that the recipient is required to recognize, provided that the deduction is not otherwise disallowed under the Code.
Benefits under the 2001 Plan
Because benefits under the 2001 Plan will depend on the Committee’s actions and the fair market value of our common stock, it is not possible to determine the benefits that will be received by officers and other employees if the 2001 Plan is approved by our shareholders.
Furthermore, the following table sets forth additional information with respect to options granted under our Year 2001 Stock Option Plan as of January 2, 2004.
Name | Number of Shares Subject to the Options Granted under 2001 Plan | Weighted Average Exercise Price Per Share | ||
Yi Ping Chan |
| 202,800 |
| $4.65 |
April Green | 24,380 | $7.74 | ||
John Dahl | 50,000 | $1.97 | ||
Executive Group (3 persons) | 276,760 | $4.79 | ||
Non-Executive Director Group(3 persons) | 42,740 | $9.60 | ||
Non-Executive Officer Employee Group (41 persons) | 426,500 | $7.00 |
The 2001 Plan is not a qualified deferred compensation plan under Section 401(a) of the Code, and is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended.
Vote Required and Recommendation
The approval of the amendment to our 2001 Plan to allow for the granting of stock awards to eligible individuals requires the affirmative vote of the holders of a majority of shares of the Company’s common stock, present in person or by proxy at the Annual Meeting.stockholders' interests.
The Board recommends shareholders to vote “FOR”"for" the amendmentapproval to amend our
Certificate of our 2001 Plan.
Incorporation to increase the number of authorized
common stock from 18,900,000 to 100,000,000 shares.
18
We are asking our shareholders to ratify the Audit Committee’sCommittee's
appointment of Grant ThorntonBerkovits, Lago & Company, LLP as our independent certified
public accountants for the fiscal year endedending March 31, 2004.2006. In the event the
shareholders fail to ratify the appointment, the Audit Committee will reconsider
this appointment. Even if the appointment is ratified, the Audit Committee, in
its discretion, may direct the appointment of a different independent auditing
firm at any time during the year if the Audit Committee determines that such a
change would be in our company and our shareholder’sshareholder's best interests.
We engaged Grant ThorntonBerkovits, Lago & Company, LLP as our independent auditor on
March 27, 2003October 15, 2004 and Grant ThorntonBerkovits, Lago & Company, LLP audited our consolidated
financial statements foror the fiscal year ended March 31, 2003.2005. Representatives of
Grant ThorntonBerkovits, Lago & Company, LLP are expected to be present at the meeting and
will have the opportunity to make a statement if they desiresdesire to do so. It is
also expected that they will be available to respond to appropriate questions.
Principal Accountant Fees and Services
The following is a summary of the fees billed to the CompanySinging Machine by
Berkovits, Lago & Co, LLP and Grant Thornton, LLP for professional services
rendered for the fiscal yearyears ended March 31, 2003:
Fee Category | Fiscal 2003 Fees | ||||
| Audit Fees |
| $ | 130,767 | (1) |
Audit Related Fees | 0 | ||||
Tax Fees | 56,261 | ||||
All Other Fees | 0 | ||||
Total Fees | $ | 187,028 | |||
———————
(1)
2005 and 2004:
Fee Category Fiscal 2005 Fiscal 2004
----------- -----------
Audit Fees $289,790 $ 217,632
Tax Fees 33,543 103,958
All Other Fees 12,938 5,041
Total Fees $336,271 $ 326,631
Audit Fees - Consists of fees billed for professional services rendered
for the audit of the Company’sSinging Machine's consolidated financial statements and
review of the interim consolidated financial statements included in quarterly
reports and services that were provided by Berkovits, Lago & Co, LLP and Grant
Thornton LLP in connection with statutory and regulatory filings or engagements.
Tax Fees - Consists of fees billed for professional services for tax
compliance, tax advice and tax planning. These services include assistance
regarding federal, state and international tax compliance, tax audit defense,
customs and duties, mergers and acquisitions, and international tax planning.
All Other Fees - Consists of fees for products and services other than
the services reported above. In fiscal year ended March 31, 2003.
2004, these services included general business meetings between Grant Thornton, and executives and directors of The Singing Machine. Out of the total 2005 audit and other fees, $86,219 was billed by Berkovits, Lago and Company, LLP. Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
The Audit Committee’sCommittee's policy is to pre-approve all audit and
permissible non-audit services provided by the independent auditors. These
services may include audit services, audit-related services, tax services and
other services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. The independent auditors and
management are required to periodically report to the Audit Committee regarding
the extent of services provided by the independent auditors in accordance with
this pre-approval, and the fees for the services performed to date. The Audit
Committee may also pre-approve particular services on a case-by-case basis.
Vote Required and Recommendation
The ratification of the selection of, Grant Thornton LLP, as our independent certified
public accountants forBerkovits, Lago and Company, LLP.for the fiscal year endedending
March 31, 2004,2006, requires the affirmative vote of the holders of a majority of
shares of the Company’sCompany's common stock, present in person or by proxy at the
annual meeting..meeting.
The Board recommends shareholders to vote “FOR”"for" the ratification of the
selection of Grant ThorntonBerkovits, Lago and Company, LLP, as our independent auditors
for the fiscal year ended March 31, 2004.
Previous Independent Auditors
On March 27, 2003, we engaged Grant Thornton as our independent auditor with respect to the preparation of our financial statements for fiscal 2003 and dismissed Salberg & Company, P.A. (“Salberg & Company”), our prior independent auditor on March 24, 2003. Our decision to change accountants was approved by our Audit Committee on March 24, 2003. As of March 24, 2003, we did not have any change or disagreement with Salberg & Company with respect to the preparation of our financial statements for the two (2) most recent fiscal years contained in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003.
The report of Salberg & Company on our financial statements for fiscal 2002, fiscal 2001 and all subsequent interim periods, did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles for fiscal 2002, fiscal 2001 and all subsequent interim periods. Furthermore, Salberg & Company did not advise us that:
1)
internal controls necessary to develop reliable financial statements did not exist, or
2)
information had come to the attention of Salberg & Company which made in unwilling to rely upon management’s representations or made it unwilling to be associated with the financial statement prepared by management, or
3)
the scope of the audit should be expanded significantly, or information had come to the attention of Salberg & Company that they concluded will, or if further investigated might, materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the fiscal periods subsequent to March 31, 2002 (including information that may prevent it from rendering an unqualified audit report on those financial statements) or made in unwilling to rely on management’s representations or to be associated with the financial statements prepared by management or,
4)
information has come to the attention of Salberg & Company that they have concluded will, or if further investigated might, materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements or the financial statements issued or to be issued covering the fiscal periods subsequent to March 31, 2002 through March 28, 2003, the date of the Form 8-K filing reporting our change in accountants, that had not been resolved to the satisfaction of Salberg & Company or which would have prevented Salberg & Company from rendering an unqualified audit report on such financial statements.
During fiscal 2002, fiscal 2001 and all subsequent interim periods, there were no disagreements with Salberg & Company on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to the satisfaction of Salberg & Company would have caused it to make reference to the subject matter of the disagreements in connection with its reports on these financial statements for those periods. We did not consult with Grant Thornton regarding the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, and no written or oral advice was provided by Grant Thornton that was a factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issues. There were no disag reements with Grant Thornton during fiscal 2003.
2006.
19
We are mailing copies of our Annual Report on Form 10-K for the twelve
months ended March 31, 2003,2005 with this proxy statement to our shareholders of
record as of January 9, 2004.
December 19, 2005. STOCKHOLDERS SHARING THE SAME LAST NAME AND ADDRESS
We have adopted a procedure approved by the SEC called “householding.”"householding."
Under this procedure, certain stockholders of record who have the same address
and last name and don’t participate in electronic delivery of proxy materials will receive only one copy of our Annual Report, Proxy Statement
and any additional proxy soliciting materials sent to stockholders until such
time as one or more of these stockholders notifies us that they wish to continue
receiving individual copies. This procedure will reduce duplicate mailings and
save printing costs and postage fees, as well as natural resources. Stockholders
who participate in householding will continue to receive separate proxy cards.
If you received a householdedhousehold mailing this year, and you would like to
have additional copies of our Annual Report and Proxy Statement mailed to you,
please submit your request to Corporate Secretary, The Singing Machine Company,
Inc., 6601 Lyons Road, Bldg. A-7, Coconut Creek, FL 33073, or call (954)
596-1000. Upon your request, we will promptly deliver a separate copy of our
Annual Report and Proxy Statement. You may also contact us at the address or
phone number above if you received multiple copies of the annual meeting
materials and would prefer to receive a single copy in the future. If you would
like to opt out of householding for future mailings, call 1 (954) 596-1000 or send
a written request to the Corporate Secretary at the above address, and your
request will be effective within 30 days.
INFORMATION CONCERNING SHAREHOLDER PROPOSALS
Under SEC rules, any stockholder who intends to present a proposal at
our next Annual Meeting of Stockholders must submit the proposal, in writing, so
that we receive it at our principal executive office by September 24, 200415, 2006 in
order for the proposal to be included in our Proxy Statement and proxy for such
meeting. The submission of a stockholder proposal does not guarantee that it
will be included in our Proxy Statement. We reserve the right to reject, rule
out of order or take other appropriate action with respect to any proposal that
does not comply with these and other applicable requirements.
PROXY SOLICITATION COSTS. The proxies being solicited hereby are being solicited by the Company. The Company will bear the entire cost of solicitation of proxies, including preparation, assembly, printing and mailing of this Proxy Statement, the Proxy card and any additional information furnished to stockholders. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holding in their names shares of common stock beneficially owned by others to forward to such beneficial owners. Officers and regular employees of the Company may, but without compensation other than their regular compensation, solicit proxies by further mailing or personal conversations, or by telephone, telex, facsimile or electronic means. We will, upon request, reimburse brokerage firms and others for their reasonable expenses in forwarding solicitation material to the beneficial owners of stock. OTHER MATTERS
As of the date of this Proxy Statement, we are not aware of any matter to be presented for action at the meeting other than the matters set forth above. If any other matter is properly brought before the meeting for action by shareholders, proxies in the enclosed form returned to us will be voted in accordance with the recommendation of the Board of Directors, or in the absence of such a recommendation, in accordance with the judgment of the proxy holders.
Coconut Creek, Florida
January
December 20, 2004
Exhibit A
2005
20
YEAR 2001 STOCK OPTION PLAN, AS AMENDED
(
PROXY FOR ANNUAL MEETING TO BE HELD ON JANUARY 17, 2006
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Yi Ping Chan, as amended January 9, 2004, further subjectproxy, with the power
to shareholder approval)
Tableappoint his substitute, to represent and to vote all the shares of Contents
Page
1.
Administration.
A-3
2.
Grants.
A-3
3.
Shares Subject to the Plan.
A-3
4.
Eligibility for Participation.
A-4
5.
Granting of Options.
A-4
6.
Options – Termination of Employment for any Reason.
A-5
7.
Stock Awards.
A-6
8.
Withholding of Taxes.
A-6
9.
Transferability of Grants.
A-7
10.
Change of Control.
A-7
11.
Limitations on Issuance or Transfer of Shares.
A-7
12.
Amendment and Termination of the Plan.
A-8
13.
Funding of the Plan.
A-8
14.
Rights of Participants.
A-8
15.
No Fractional Shares.
A-8
16.
Headings.
A-8
17.
Effective Date of the Plan.
A-8
18.
Miscellaneous.
A-8
THE SINGING MACHINE COMPANY, INC.
YEAR 2001 STOCK OPTION PLAN
The purpose of The Singing Machine Company, Inc. Year 2001 Stock Option Plan (the “Plan”) is to provide (i) designated employeescommon
stock of The Singing Machine Company, Inc. (the “Company”"Company") and its subsidiaries, (ii) certain Key Advisors (as defined in Section 4(a)) who perform services for, which the
Company or its subsidiaries and (iii) non-employee members of the Board of Directors of the Company (the “Board”) with the opportunity to receive grants of incentive stock options, nonqualified stock options and stock awards. The Company believes that the Plan will encourage the participants to contribute materially to the growth of the Company, thereby benefiting the Company’s shareholders, and will align the economic interests of the participants with those of the shareholders.
1.
Administration.
(a)
Committee. The Plan shall be administered and interpreted by the Board of Directors or a committee appointed by the Board (the Board of Directors in such capacity or any committee appointed by the Board of Directors is referred to hereafter as the “Committee”). The Committee as appointed by the Board shall consist of two or more persons appointed by the Board, all of whom may be “outside directors” as defined under Section 162(m) of the Internal Revenue Codes of 1986, as amended (the “Code”) and related Treasury regulations and may be “non-employee directors” as defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
(b)
Committee Authority. The Committee shall have the sole authority to, (i) determine the individuals to whom grants shall be made under the Plan, (ii) determine the type, size and terms of the grants to be made to each such individual, (iii) determine the time when the grants will be made and the duration of any applicable exercise or restriction period, including the criteria for exercisability and the acceleration of exercisability and (iv) deal with any other matters arising under the Plan.
(c)
Committee Determinations. The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee’s interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interest in the Plan or in, any awards granted hereunder. All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals.
2.
Grants. Awards under the Plan may consist of grants of incentive stock options as described in Section 5 (“Incentive Stock Options”), nonqualified stock options as described in Section 5 (“Nonqualified Stock Options”) (Incentive Stock Options and Nonqualified Stock Options may sometimes be collectively referred to asAoptions”) and stock awards (“Stock Awards”) described in Section 7(hereinafter, collectively referred to as the “grants”). All Grants shall be subject to the terms and conditions set forth herein and to such other terms and conditions consistent with this Plan as the Committee deems appropriate and as are specified in writing by the Committee to the individual in a grant instrument (the “Grant Instrument”) or an amendment to the Grant Instrument. In the e vent there is an inconsistency between the terms of the Grant Instrument and the terms of the Plan, the terms of the Plan shall govern. The Committee shall approve the form and provisions of each Grant Instrument. Grants under a particular Section of the Plan need not be uniform as among the grantees and individuals may receive more than one Grant under the Plan.
3.
Shares Subject to the Plan.
(a)
Shares Authorized. Subject to the adjustment specified Shares below, the aggregate number of shares of common stock of the Company (“Shares” or “Common Stock”) that may be awarded under the Plan is 1,950,000 shares. The maximum aggregate number of shares of Company Stock that shall be subject to Grants made under the Plan to any individual during any calendar year shall not exceed 450,000 Options and 350,000 Stock Awards (AAward Limit@). The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including shares purchased by the Company on the open market for purposes of the Plan. If and to the extent any Options made under the Plan terminate, expire, or are canceled, forfeited, exchanged or surrendered without having been exercis ed, or if any shares of Common Stock underlying Stock Awards are forfeited for any reason, the shares subject to such Grants shall again be available for purposes of the
Plan. However, to the extent Section 162(m) of the Code requires, such shares continue to be counted against the Award Limit.
(b)
Adjustments. Notwithstanding any other provision of the Plan, the Committee may: (1) at any time, make or provide such adjustments to the Plan or to the number and class of shares available thereunder, or (2) at the time of grant of any Awards, provide for such adjustments to such Awards as the Committee shall deem appropriate to prevent dilution or enlargement of rights, including without limitation, adjustments in the event of stock dividends, stock splits, recapitalizations, mergers, consolidations, combinations or exchanges of shares, separations, spin-offs, reorganizations, liquidations and the like. Any adjustments determined by the Committee shall be final, binding and conclusive.
With respect to Options which are granted to participants, the compensation of whom could be subject to limitation under Section 162(m) of the Code and which are limited to qualify as performance-based compensation under Section 162(m)(4)(c), no adjustment or action described in this Section 3(b) or in any other provision of the Plan shall be authorized to the extent that such adjustment or action would cause the Option to fail to qualify under Section l62(m)(4)(c), or any successor provisions thereto. Furthermore, no adjustment or action shall be authorized to the extent the adjustment or action would result in short-swing profits liability under Section 16 or violate the exemptive conditions of Rule 16b-3, unless the Committee determines that the Option or other award is not to comply with such exemptive conditions. The number of shares of Company Stock subject to any Option shall always be rounded to the next whole number.
4.
Eligibility for Participation.
(a)
Eligible Persons. All employees of the Company and its subsidiaries (“Employees”), including Employees who are officers or members of the Board, and members of the Board who are not Employees (“Non-Employee Directors”) shall be eligible to participate in the Plan. Key advisors and consultants who perform services to the Company or any of its subsidiaries (collectively, the “Key Advisors”) shall be eligible to participate in the Plan if the Key Advisors render bona fide services and such services are not in connection with the offer or sale of securities in a capital raising transaction.
(b)
Selection of Grantees. The Committee shall select the Employees, Non-Employee Directors and Key Advisors to receive Grants and shall determine the number of shares of Company Stock subject to a particular Grant in such manner as the Committee determines. Employees, Key Advisors and Non-Employee Directors who receive Grants under this Plan shall hereinafter be referred to as “Grantees.”
5.
Granting of Options.
(a)
Number of Shares. The Committee shall determine the number of shares of Company Stock that will be subject to each Grant of Options to Employees, Non-Employee Directors and Key Advisors.
(b)
Type of Option and Price.
(i)
The Committee may grant Incentive Stock Options that are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code or Nonqualified Stock Options that are not intended to so qualify or any combination of Incentive Stock Options and Nonqualified Stock Options, all in accordance with the terms and conditions set forth herein. Incentive Stock Options may be granted only to Employees, Nonqualified Stock Options may be granted to Employees, Non-Employee Directors and Key Advisors.
(ii)
The purchase price (the “Exercise Price”) of Company Stock subject to an Option shall be determined by the Committee and shall be equal to or greater than the Fair Market Value (as defined below) of a share of Company Stock on the date the Option is granted, provided, however, that (A) the Exercise Price of an Incentive Stock Option shall be equal to or greater than the Fair Market Value of a share of Company Stock on the date the Incentive Stock Option is granted; (B) an Incentive Stock Option may not be granted to an Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, unless the Exercise Price per share is not less than 110% of the Fair Market Value of Company Stock on the date of grant; (C) in the case of an Option inte nded to qualify as performance based compensation (as described in Section 162(m)(4)(c) of the Code), the Exercise Price shall not be less than 100% of the Fair Market Value of Company Stock on the date of grant; and
(D) in the case of Nonqualified Stock Options granted to Non-Employee Directors, the Exercise Price shall equal 100% of the Fair Market Value of Company Stock on the date of grant.
(iii)
If the Company Stock is publicly traded, then the Fair Market Value per share shall be determined as follows: (x) if the principal trading market for the Company Stock is a national securities exchange or the Nasdaq National Market, the average of the high and low sales prices on the relevant date or (if there were no trades on that date) the latest preceding date upon which sales were reported, or (y) if the Company Stock is not principally traded on such exchange or market; the mean between the last reported “bid” and “asked” prices of Company Stock on the relevant date, as reported on Nasdaq or, if not so reported, as reported by the National Daily) Quotation Bureau, Inc. or as reported in a customary financial reporting service, as applicable and as the Committee determines. If the Company Stock is not publicly traded or, if publicly traded, is not su bject to reported transactions or “bid” or “asked” quotations as set forth above, the Fair Market Value per share shall be as determined by the Committee.
(c)
Option Term. The Committee shall determine the term of each Option. The term of any Option shall not exceed ten years from the date of grant. However, an Incentive Stock Option that is granted to an Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company, or any parent or subsidiary of the Company, may not have a term that exceeds five years from the date of grant.
(d)
Vesting and Exercisability of Options. Options shall vest and become exercisable in accordance with such terms and conditions, consistent with the Plan, as may be determined by the Committee and, specified in the Grant Instrument or an amendment to the Grant Instrument. The Committee may accelerate the vesting and/or exercisability of any or all outstanding Options at any time for any reason.
Exercise of Options. A Grantee may exercise an Option that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company with payment of the Exercise Price. The Grantee shall pay the Exercise Price for an Option as specified by the Committee in cash. However, if permitted in writing by the Committee in the Grant Instrument the Grantee may pay the exercise price by (i) delivering, shares of Company Stock owned by the Grantee having a Fair Market Value on the date of exercise equal to the Exercise Price, (ii) pursuant to a broker assisted “cashless exercise” arrangement, (iii) by waiver of compensation due or accrued to the participant for services rendered or (iv) any other methods that the Committee may permit. The Grantee shall pay the Exercise Price and the amount of any withholding tax due (pursuant to Section&nbs p;7) at the time of exercise.
(e)
Limits on Incentive Stock Options. Each Incentive Stock Option shall provide that, if the aggregate Fair Market Value of the stock on the date of the grant with respect which Incentive Stock Options are exercisable for the first time by a Grantee during any calendar year, under the Plan or any other stock option plan of the Company or a parent or subsidiary, exceeds $100,000, then the Option, as to the excess, shall be treated as a Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any person who is not an Employee of the Company or a parent or subsidiary (within the meaning of Section 424(f) of the Code).
6.
Options - Effect of Termination of Employment for any Reason
(a)
General Rule. The Committee shall establish and set forth in each Grant Instrument that evidences an Option whether the Option will continue to be exercisable, and terms and conditions of such exercise, if a Grantee ceases to be employed by, or to provide services to, the Company or its subsidiaries, which provisions may be waived or modified by the Committee at any time. If not so established in the Grant Instrument, the Option will be exercisable according to the following terms and conditions, which may be waived or modified by the Committee at any time.
(b)
Termination for Cause or Leaving Without Good Reason. No Option shall be exercisable after 30 days following the recipient’s termination of employment with the Company or a subsidiary, unless such termination of employment occurs by reason of Disability or Retirement (as defined in this Section 6) or death. The Committee may, in its sole discretion, cause any Option to be forfeited upon an employee’s termination of employment if the employee was terminated for one (or more) of the following reasons: (i) the employee’s conviction, or plea of guilty or nolo contendere to the Commission, of a felony, (ii) the employee’s commission of any fraud, misappropriation or misconduct which causes demonstrable injury to the Company or a subsidiary, (iii) an act of dishonesty by the employee resulting in or intended to result, directly or indirectly, i n gain or personal enrichment at the expense of the Company or a subsidiary, (iv) any breach of the employee’s fiduciary duties to the Company as an employee or officer or (v) the employee’s leaving the Company without giving adequate notice of
such departure. It shall be within the sole discretion of the Committee to determine whether the employee’s termination was for one of the foregoing reasons, and the decision of the Committee shall be final and conclusive.
(c)
Disability or Retirement. Except as expressly provided otherwise in the written agreement relating to any Option granted under the Plan, in the event of the Disability or Retirement of a recipient of Options, the Options which are held by such recipient on the date of such Disability or Retirement, shall be exercisable at anytime until the expiration date of the Options, provided, however, that any Incentive Stock Option of such recipient shall no longer be treated as an Incentive Stock Option unless exercised within three (3) months of the date of such Disability or Retirement (or within one (1) year in the ease of an employee who is “disabled” within the meaning of Section 22(e)(3) of the Code). “Disability” shall mean any termination of employment with the Company or a subsidiary because of a long-term or total disability, as determined by the Commit tee in its sole discretion. “Retirement” shall mean a termination of employment with the Company or a subsidiary either (i) on a voluntary basis by a recipient who is at least 55 years of age and has at least 10 years of service with the Company or a subsidiary; (ii) on an involuntary basis (other than for cause) by a recipient who is at least 60 years of age; or (iii) otherwise with the written consent of the Committee in its sole discretion. The decision of the Committee shall be final and conclusive.
(d)
Death. In the event of the death of a recipient of Options while an employee of the Company or any subsidiary, Options which are held by such employee at the date of death, shall be exercisable by the beneficiary designated by the employee for such purpose (the “Designated Beneficiary”) or if no Designated Beneficiary shall be appointed or if the Designated Beneficiary shall predecease the employee, by the employee’s personal representatives, heirs or legatees at any time prior to the Expiration Date of the Option at which time such Options shall terminate. In the event of the death of a recipient of Options following a termination of employment due to Retirement Disability, if such death occurs before the Options are exercised, the Options which are held by such recipient on the date of termination of employment, whether or not otherwise exercisable on such date , shall be exercisable by such recipient’s Designated Beneficiary, or if no Designated Beneficiary shall be appointed or if the Designated Beneficiary shall predecease such recipient, by such recipient’s personal representatives, heirs, or legatees to the same extent such Options were exercisable by the recipient.
7.
Stock Awards.
(a)
General Terms. The Committee shall determine the number of shares of Company Stock that will be subject to each Grant of Stock Awards to Employees, Non-Employee Directors and Key Advisors. Stock Awards are (i) grants of shares of the Company=s common stock that may or may not be subject to vesting conditions and/or (ii) rights to purchase shares of the Company=s common stock at a price that is determined by the Committee but which will not be less than the Fair Market Value of the Company Stock on the date of grant. Stock Awards shall be subject to the terms, conditions and restrictions determined by the Committee at the time the Stock Award is granted. Such terms, conditions and restrictions may (but need not) include, without limitation, restrictions on transfer, vesting provisions, forfeiture provisions and repurchase rights by the Company.
(b)
Stock Award Agreements. Each Stock Award granted under the Plan shall be evidenced by a Stock Award Agreement between the recipient and the Company. Such Agreement, and the Shares issued or to be issued pursuant to the Award, shall be subject to all applicable terms of the Plan and of the Stock Award Agreement. The provisions of the various Stock Award Agreements entered into under the Plan need not be identical.
(c)
Vesting. If a Stock Award is granted subject to forfeiture, vesting and/or repurchase provisions or restrictions, the Committee may, in its discretion, accelerate in whole or in part the schedule governing such vesting provisions or the lapsing of such restrictions or otherwise provide for the waiver of any such provisions or restrictions under such circumstances and subject to such conditions as it deems appropriate, consistent with the terms of the Plan. The certificates evidencing Shares subject to such provisions and restrictions, although issued in the name of the participant, shall be held by the Company or a third party designated by the Committee in escrow to enforce such provisions and restrictions.
8.
Withholding of Taxes.
(a)
Required Withholding. All Grants under the Plan shall be subject applicable federal (including FICA), state and local tax withholding requirements. The Company shall have the right to deduct from any wages paid to the Grantee, any federal, state or local taxes required by law to be withheld with respect to such
Grants. In the case of Options, the Company may require the Grantee or other person receiving such shares to pay to the Company the amount of any such taxes that the Company is required to withhold with respect to such Grants, or the Company may deduct from other wages paid by the Company the amount of any withholding taxes due with respect to such Grants.
(b)
Election to Withhold Shares. If the Committee so permits, a Grantee may elect to satisfy the Company’s income tax withholding obligation with respect to an Option and having shares withheld up to an amount that does not exceed the Grantee’s maximum marginal rate for federal (including FICA), state and local tax liabilities. The election must be in a form and manner prescribed by the Committee and shall be subject to the prior approval of the Committee.
9.
Transferability of Grants.
(a)
No transferability of Grants. Except as provided below, only the Grantee may exercise rights under a Grant during the Grantee’s lifetime. A Grantee may not assign, pledge or transfer those rights except by will or by the laws of descent and distribution. When a Grantee dies, the personal representative or other person entitled to succeed to the rights of the Grantee (“Successor Grantee”) may exercise such rights. A Successor Grantee must furnish proof satisfactorily to the Company of his or her right to receive the Grant under the Grantee’s will or under applicable laws of descent and distribution.
(b)
Non-Transferability of Grants. Notwithstanding the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may transfer Nonqualified Stock Options or Stock Awards to family members or other persons or entities according to such terms as the Committee may approve.
10.
Change of Control.
(a)
Change of Control. As used herein, a “Change of Control” shall be deemed to have occurred upon the consummation of any of the following transactions: (i) any merger or consolidation of the Company or other transaction (other than sales of equity by the Company for the purpose of raising cash for its own account) where the shareholders of the Company immediately prior to such transaction will not beneficially own immediately after such transaction shares entitling such shareholders to more than 50% of all votes to which all shareholders of the surviving corporationundersigned would be entitled in the election of directors (without consideration of the rights of any class of stock to elect directors by a separate class vote); (ii) the sale or other disposition of all or substantially all of the assets of the Company; (iii) any person, including a “group” a s defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, becomes the owner or beneficial owner of Company securities, after the date of this. Agreement, having 30% or more of the combined voting power of the then outstanding securities of, the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company, or open market purchases approved by the Board, as long as the majority of the Board approving the purchases is the majorityvote, at the time the purchases are made), or (iv) the persons who were directors of the Company before certain transactions (as described here in) shall cease to constitute a majority of the Board of the Company, or any successor to the Company, as the direct or indirect result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, any combination of the foregoing transactions or any other transaction(s) or series of transactions that result in the composition of the Board changing. The definition of “Change of Control” as used in this Plan may be expanded by the Committee in individual Grant Instruments that it awards to Grantees.
(b)
Notice of Change of Control. Upon a Change of Control as defined in the Plan or any other definition of change of control that is approved by the Committee (collectively, “Change of Control”), the Company shall provide each Grantee who has outstanding Options or Stock Award with written notice of such Change of Control. The Committee may, in its sole discretion, provide in a Grant Instrument that upon a Change of Control all outstanding Options issued to the Grantee under the Grant Instrument shall automatically accelerate and become fully exercisable and all outstanding Stock Awards shall automatically be vested.
11.
Limitations on Issuance or Transfer of Shares. No Company Stock shall be issued or transferred in connection with any Grant hereunder unless and untilall legal requirements applicable to the issuance or transfer of such Company Stock have been complied with to the satisfaction of the Committee. The Committee shall have the right to condition any Grant made to any Grantee hereunder on such Grantee’s undertaking in writing to comply with such restrictions on his or her subsequent disposition of such shares of Company Stock as the Committee shall deem necessary or advisable as a result of any applicable law, regulation or official interpretation thereof, and
certificates representing such shares may be legended to reflect any such restrictions. Certificates representing shares of Company Stock issued or transferred under the Plan will be subject to such stop-transfer orders and other restrictions as may be required by applicable laws, regulations and interpretations, including any requirement that a legend be placed thereon.
12.
Amendment and Termination of the Plan.
(a)
Amendment. The Board may amend or terminate the Plan at any time provided, however, that the Board shall not amend the Plan without shareholder approval if such approval is required by Section 162(m) of the Code.
(b)
Termination of Plan. The Plan shall terminate on the day immediately preceding the tenth anniversary of its effective date, unless the Plan is terminated earlier by Board or is extended by the Board with the approval of the shareholders.
(c)
Termination and Amendment to Outstanding Grants. A termination or amendment of the Plan that occurs after a Grant is made shall not materially impair the rights of the Grantee unless the Grantee consents. The termination of the Plan shall not impair the power and authority of the Committee with respect to an outstanding Grant. Whether or not the Plan has terminated, an outstanding Grant may be terminated or amended in accordance with the Plan or may be amended by agreement of the Company and the Grantee consistent with the Plan.
(d)
Governing Document. The Plan shall be the controlling document. No other statements, representations, explanatory materials or examples, oral or written, may amend the Plan in any manner. The Plan shall be binding upon and enforceable against the Company and its successors and assigns.
13.
Funding of the Plan. This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Grants under this Plan. In no event shall interest be paid or accrued on any Grant including unpaid installments of Grants.
14.
Rights of Participants. Nothing in this Plan shall entitle any Employee, Key Advisor or other Grantee to any claim or right to be granted a Grant under this Plan. Neither this Plan nor an action taken hereunder shall be construed as giving any individual any rights to be retained by or the employ of the Company or any other employment rights.
15.
No Fractional Shares. No fractional shares of Company Stock shall be issued or delivered pursuant to the Plan or any Grant. The Committee shall determine whether cash, other awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.
16.
Headings. Section headings are for reference only. In the event of a conflict between a title and the content of a Section, the content of the Section shall control.
17.
Effective Date of the Plan.
(a)
Effective Date. The Plan shall be effective as of June 1, 2001.
(b)
Public Offering. The provisions of the Plan that refer to a Public Offering, or that refer to, or are applicable to persons subject to, Section 16 of the Exchange Act or Section 162(m) of the Code, shall be effective for so long as such stock is so registered.
18.
Miscellaneous.
(a)
Grants in Connection with Corporate Transactions and Otherwise. Nothing contained in this Plan shall be construed to (i) limit the right of the Committee to make Grants under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including Grants to employees thereof who become Employees of the Company, or for other proper corporate purposes, or (ii) limit the right of the Company to grant stock options or make other awards outside of this Plan. Without limiting the foregoing, the Committee may make a Grant to an employee of another corporation who becomes an Employee by reason of a corporate merger, consolidation, acquisition of stock or
property, reorganization or liquidation involving the Company or any of its subsidiaries in substitution for a stock option or restricted stock grant made by such corporation. The terms and conditions of the substitute grants may vary from the terms and conditions required by the Plan and from those of the substituted stock incentives. The Committee shall prescribe the provisions of the substitute grants.
(b)
Compliance with Law. The Plan, the exercise of Options and the obligations of the Company to issue or transfer shares of Company Stock under Grants shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. With respect to persons subject to Section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3 or its successors under the Exchange Act. The Committee may revoke any Grant if it is contrary to law or modify a Grant to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payments to Grantees. The Committee may, in its sole discretion, agree to limit its authority under this Section.
(c)
Successors. The obligations of the Company under this Plan shall be binding upon any successor corporation or organization resulting from the merger, consolidation or other reorganization of the Company, or any successor corporation or organization succeeding to all or substantially all of the assets and business of the Company. In the event of any of the foregoing, notwithstanding any other provision contained in this Plan, the Committee may at its discretion prior to the consummation of the transaction, offer to purchase, exchange, adjust, modify or cancel any Outstanding Options or Stock Awards, at such time and in such manner as the Committee deems appropriate.
(d)
Severability. In the event that any provision of the Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not be included.
(e)
Governing Law. The validity, construction, interpretation and effect of the Plan and Grant Instruments issued under the Plan shall exclusively be governed by and determined in accordance with the law of the State of Florida, without regard to conflicts of laws principles.
Dated as of January 9, 2004
THE SINGING MACHINE COMPANY, INC.
By:
/s/ APRIL GREEN
April Green
Chief Financial Officer
THE SINGING MACHINE COMPANY, INC.
6601 Lyons Road, Bldg. A-7
Coconut Creek, FL 33073
The undersigned hereby constitutes and appoints Yi Ping Chan and April Green as Proxy Agents, with full power of substitution in each, and hereby authorizes the Proxy Agents to represent and to vote as designated below, all shares of common stock of the Company held of record by the undersigned on January 9, 2004 at theCompany's Annual Meeting of
ShareholdersStockholders to be held on February 26, 2004, at the Marriott Hotel located at Boca Center, 5150 Town Center Circle, Boca Raton, Florida or any adjournment thereof.
This Proxy is solicited on behalf of the Board of The Singing Machine Company, Inc. This Proxy when properly executed will be voted in the manner directed herein by the undersigned shareholder. If no direction is made, this Proxy will be voted FOR the nominees listed in Proposal 1, FOR Proposal 2January 17, 2006 and FOR Proposal 3. The undersigned shareholder hereby acknowledges receipt of the Notice of the Annual Meeting and Proxy Statement and hereby revokes any proxy or proxies heretofore given. This proxy may be revoked at any time prioradjournments thereof,
subject to the Annual Meeting. If you received more than one proxy card, please date, sign and return all cards indirections indicated on the accompanying envelope (continued on reverse side).
1.
Election of Directors
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(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, PLEASE DRAW A LINE THROUGH THAT NOMINEE’S NAME)
2.
To approve an amendment to our Year 2001 Stock Option Plan to allow for the grant of stock awards to eligible participants under the Year 2001 Stock Option Plan.
For [ ]
Against [ ]
Abstain [ ]
3.
To approve the appointment of Grant Thornton LLP as our independent certified public accountants.
For [ ]
Against [ ]
Abstain [ ]
4.
side hereof.
In their discretion, the Proxy Agents areproxy is authorized to vote upon suchany other
business asmatter that may properly come before the meeting or any adjournmentadjournments thereof.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATIONS MADE, BUT IF NO
CHOICES ARE INDICATED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF ALL NOMINEES
AND FOR THE PROPOSALS LISTED ON THE REVERSE SIDE.
IMPORTANT--This Proxy must be signed and dated on the reverse side.
21
_____________________________, 2004
________________, 200_
Signature of Shareholder
Signature of Shareholder
______________________________________________________________________
Name (printed) _________________________________________________________________
Title __________________________________________________________________________
Important: Please sign exactly as the name appears below. If
the shares are held jointly, both owners must sign.
on this proxy. When signing as
attorney, executor, administrator,
trustee, or guardian, corporate officer, etc., please giveindicate
full title as such. If a
corporation, please sign in the corporate name by
President or other authorized officer. If a
partnership, please sign in partnership name by
authorized person.
title. 22