UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
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[_] Definitive Additional Materials
The Singing Machine Company, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
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THE SINGING MACHINE COMPANY, INC.
6601 Lyons Road, Building A-7
Coconut Creek, Florida 333073
July 9, 2001
To our Stockholders:
I am pleased to invite you to attend the annual meeting of stockholders
of The Singing Machine Company, Inc. to be held on Thursday, August 16, 2001 at
10:00 a.m. at the Marriot Hotel located at Boca Center, 5150 Town Center Circle,
Boca Raton, Florida.
Details regarding admission to the meeting and the business to be
conducted are more fully described in the accompanying Notice of Annual Meeting
and Proxy Statement.
YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the Annual
Meeting in person, you are requested to complete, date, sign and return the
enclosed proxy car in the enclosed envelope which requires no postage if mailed
in the United States. If you attend the Annual Meeting, you may vote in person
if you wish, even if you previously returned you proxy card.
We appreciate your support and continued interest in The Singing Machine
Company, Inc.
Sincerely,
/s/ Edward Steele
------------------------------
Edward Steele
Chairman and Chief Executive Officer
THE SINGING MACHINE COMPANY, INC.
6601 Lyons Road, Bldg. A-7
Coconut Creek, Florida 33073
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Our Stockholders:
The Annual Meeting of Stockholders of the Company will be held on
Thursday, August 16, 2001 at 10:00 a.m. at the Marriott Hotel which is located
at Boca Center, 5150 Town Center Circle, Boca Raton, Florida, for the following
purposes:
1. To elect directors to serve until the next Annual Meeting of
Shareholders and until their successors shall be elected and qualified;
2. To vote on a proposal to approve the Company's Year 2001 Stock Option
Plan;
3. To vote on a proposal to approve the Company's Cash Bonus Performance
Plan;
4. To ratify the appointment of Salberg & Company, P.A. as independent
public accountants for the Company for the current fiscal year.
5. To transact such other and further business as may properly come
before the meeting.
Only shareholders of record at the close of business on July 6, 2001 are
entitled to notice of and to vote at the Annual Meeting or any postponements or
adjournments thereof.
Whether or not you plan to attend the Annual Meeting in person, you are
requested to complete, date, sign and return the enclosed proxy car in the
enclosed envelope which requires no postage if mailed in the United States. If
you attend the Annual Meeting, you may vote in person if you wish, even if you
previously returned you proxy card.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH NOMINEE AND IN FAVOR OF
EACH PROPOSAL.
By Order of the Board of Directors
/s/ Edward Steele
-----------------------------
Edward Steele,
Chairman and Chief Executive
Officer
Coconut Creek, Florida
July 9, 2001
PROXY STATEMENT FOR ANNUAL MEETING
OF SHAREHOLDERS
To Be Held August 16, 2001
These proxy materials are being furnished in connection with the
solicitation of proxies by the Board of Directors of The Singing Machine
Company, Inc. (the "Company" ), for the Annual Meeting of Stockholders to be
held at 10:00 a.m. on August 16, 2001 at the Marriot Hotel located at 5150 Town
Center Circle, Boca Raton, Florida and at any adjournments or postponements of
the Annual Meeting. These proxy materials were first mailed on or about July 12,
2001 to all stockholders entitled to vote at the Annual Meeting.
PURPOSE OF THE MEETING
The specific proposals to be considered and acted upon at the Annual
Meeting are summarized in the accompanying notice of Annual Meeting of
Shareholders Each proposal is described in more detail in this Proxy Statement.
VOTING RIGHTS AND SOLICITATION
The Company's common stock is the only type of security entitled to vote
at the Annual Meeting. On July 6, 2001, the record date for determination of
stockholders entitled to vote at the Annual Meeting, there were 4,448,320 shares
of common stock outstanding. Each shareholder of record on July 6, 2001 is
entitled to one vote for each share of common stock held by such shareholder on
that date. Shares of common stock may not be voted cumulatively. A majority of
the outstanding shares of common stock must be present or represented at the
Annual Meeting in order to have a quorum. Abstentions and broker non-votes are
counted as present for the purpose of determine the presence of a quorum for the
transaction of business.
In the election of directors, the five candidates receiving the highest
number of affirmative votes will be elected. Proposals 2, 3 and 4 require the
approval of the affirmative vote of a majority of the outstanding voting shares
of the Company present in person or represented by proxy and entitled to vote at
the Annual Meeting. Abstentions and broker non-votes will not be counted either
in favor or against the election of the nominees or other proposals. All votes
will be tabulated by Inspector of Elections appointed for the Annual Meeting,
who will separately tabulate affirmative and negative votes, abstentions and
broker non-votes.
Whether or not you are able to attend the Annual Meeting, you are urged
to vote your proxy, which is solicited by the Company's Board of Directors and
which will be voted as you direct on your proxy when properly completed. In the
event no directions are specified, such proxies will be voted (1) FOR the
nominees of the Board of Directors, (2) FOR the approval of the Year 2001 Stock
Option Plan, (3) FOR the approval of the Cash Bonus Plan, (4) FOR the
ratification of Salberg & Company, P.A. as independent public accountants and
(5) in the discretion of the proxy holders, as to other matters that may
properly come before the Annual Meeting. You may revoke or change your proxy at
any time before the Annual Meeting. To do this, send a written notice of
revocation or another signed proxy with a later date to the Secretary at the
Company's principal executive
1
offices before the Annual Meeting. You may also revoke your proxy by attending
the Annual Meeting and voting in person.
The Company will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement, the proxy
and any additional solicitation material furnished to stockholders. Proxies may
by solicited by officers, directors and employees of the Company, none of whom
will receive any additional compensation for their services. The Company will
pay persons holding shares of common stock in their names or in the names of
nominees, but not owning such shares beneficially, such as brokerage houses,
bank and other fiduciaries, for the expense of forwarding solicitation materials
to their principals. All the costs of solicitation of proxies will be paid by
the Company.
MANAGEMENT
The following table sets forth certain information with respect to the
Company's executive officers and directors as of July 6, 2001.
Name Age Position
---- --- --------
Edward Steele 71 Chief Executive Officer
And Director
John F. Klecha 51 President, Chief Financial Officer, Chief
Operating Officer, Secretary, Treasurer, and
Director
Josef A. Bauer 63 Director
Howard W. Moore 70 Director
Robert J. Weinberg 52 Director
EDWARD STEELE has served as the Chief Executive Officer and as a
director of the Singing Machine from September 1991 through the present date. He
also served as our President from September 1991 through March 2001. From
October 1988 to September 1991, Mr. Steele was responsible for the development
of our electronic hardware products in the Far East and was our sales director.
Prior to joining us, Mr. Steele served in executive capacities at a number of
companies in the toy and electronics fields, including as managing director in
charge of worldwide sales of Concept 2000, a manufacturer of consumer
electronics, from 1971 to 1978; as President of Wicely Corp., a distributor of
electronic toys and consumer electronics from 1978 to 1983; and is President of
Justin Products Corp., an electronic toy manufacturer from 1983 to 1988.
JOHN KLECHA has served as our Chief Financial Officer, Secretary,
Treasurer and Director from October 10, 1997 through the present date. Since
June 28, 1999 through the present date, Mr. Klecha has also served as Chief
Operating Officer and since March 2001, Mr. Klecha has served as our President.
Mr. Klecha is in charge of all financial, administrative, and operational
functions of
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the Singing Machine. Prior to joining us, Mr. Klecha served in executive and
senior management capacities at a number of companies in the toy and other
consumer products fields, including as the senior financial and administrative
executive of a privately held toy design, manufacturing and distribution company
since 1987; Vice President, Director and Chief Financial Officer of Sussex
Nautilus from 1984 to 1987; and Vice President of Finance and Administration for
Lazzaroni Sarrono, Ltd. from 1982 to 1984.
JOSEF A. BAUER has served as a director from October 15, 1999 through
the present date. Mr. Bauer previously served as a director of the Singing
Machine from February 1990 until September 1991 and from February 1995 until May
1998. Mr. Bauer presently serves as the Chief Executive Officer of the following
three companies: Banisa Corporation, a privately owned investment company, since
1975; Trianon, a jewelry manufacturing and retail sales companies since 1978 and
Seamon Schepps, also a jewelry manufacturing and retail sales company since
1999. Since 1992, Mr. Bauer has been a managing director and principal
stockholder of Dero Research, Ltd. in Hong Kong, which serves as a
manufacturer's representative for the sale of telephone and electronic products.
From 1970 until 1993, Mr. Bauer served as a managing director and was a
principal stockholder of Dero Research Corporation in Tokyo, Japan, which was
engaged in the design, engineering and manufacturing of automobile audio
equipment. Mr. Bauer also served as a director of AmeriData Technologies, Inc. a
publicly traded computer products and service company from 1991 until 1994 (now
part of General Electric Corporation).
HOWARD MOORE has served as a director from August 2000 through the
present date. From 1984, when Mr. Moore joined Toys 'R' Us as executive vice
president and general merchandise manager, until 1990, when he retired, sales
increased from $480 million to $4.8 billion. Mr. Moore served on the Toys 'R' Us
board of directors from 1984 until June 2000. He is also founder and president
of Howard Moore Associates, a company, which provides marketing, product
licensing, packaging and merchandising consulting to the toy industry.
Previously, he was president and CEO of Toy Town, USA, Inc. after founding and
operating two other toy chain stores. Mr. Moore is currently serving as Vice
Chairman of the Board of Cyber Merchants Exchange, Inc., a company traded on the
OTC Bulletin Board.
ROBERT WEINBERG has served as a director from March 9, 2001 through the
present date. Mr. Weinberg has considerable experience in toy products,
marketing, licensing, merchandising and packaging. He is currently the founder
and president of RJW & Associates, a marketing consulting firm based in Saddle
River, New Jersey. Previously, he served in various positions of increasing
responsibility with Toys "R" Us, rising through the ranks from buyer trainee in
1971 to Senior Vice President - General Merchandise Manager in 1977. In these
later positions, he was responsible for purchasing advertising/marketing,
imports, product development, store planning and allocations. He retired from
Toys "R" Us in March 2000.
Our directors' serve for a term of one year, or until their successors
shall have been elected and qualified. With the exception of Mr. Steele and Mr.
Klecha who have employment agreements with us, our executive officers are
appointed and serve at the discretion of the Board of Directors. There are no
family relationships among any of our directors and executive officers. However,
one of our key personnel, John Steele, our National Sales Director, is the son
of Edward Steele, our Chief Executive Officer and Director.
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BOARD COMMITTEES AND MEETINGS
During the fiscal year ended March 31, 2001, the Board of Directors
held ten meetings. During this period, all of the directors attending or
participated in more than 75% of the aggregate of (1) the total number of
meetings of the Board of Directors and (2) the total number of meetings held by
all Committees of the Board on which each such director serves. The Company has
three standing committees: an Audit Committee, a Compensation/Stock Option
Committee and a Nominating Committee.
The Audit Committee recommends the engagement of independent auditors
to the board, initiates and oversees investigations into matters relating to
audit functions, reviews the plans and results of audits with our independent
auditors, reviews our internal accounting controls, and approves services to be
performed by our independent auditors. The Audit Committee held one meeting
during the last fiscal year. The Audit Committee currently consists of Messrs.
Moore, Bauer and Weinberg
The Executive Compensation/Stock Option Committee considers and
authorizes remuneration arrangements for senior management and grants options
under, and administers our 1994 Amended and Restated Management Stock Option
Plan. The Executive Compensation/Stock Option Committee held two meetings last
year The Executive Compensation/Stock Option Committee currently consists of
Messrs. Moore and Weinberg
The Nominating Committee is responsible for reviewing the
qualifications of potential nominees for election to the Board of Directors and
recommending the nominees to the Board of Directors for such election. The
entire Board of Directors operates as the Nominating Committee. The Nominating
Committee did not hold any meetings last year.
DIRECTOR'S COMPENSATION
The Company currently reimburse each director for expenses incurred in
connection with attendance at each meeting of the Board of Directors or a
committee on which he serves. In addition, non- employee directors are entitled
to be paid a fee of $1,000 for each stockholder and board meeting attended and
each Director is entitled to receive 10,000 stock options each year. The Company
usually grant these options to our directors on the day before our annual
stockholders meeting and the options are valued at our stock's closing price on
such date. The options are exercisable upon receipt for a period of five years.
In addition, the Company usually grants approximately 20,000 options to new
directors when they join the Board.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the Exchange Act)
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities (collectively
the Reporting Persons) to file reports and changes in ownership of such
securities with the Securities and Exchange Commission and the Company.
4
Based solely upon a review of (i) Forms 3 and 4 and amendments thereto furnished
to the Company pursuant to Rule 16a-3(e), promulgated under the Exchange Act,
during the Company's fiscal year ended March 31, 1998 and (ii) Forms 5 and any
amendments thereto and/or written representations furnished to the Company by
any Reporting Persons stating that such person was not required to file a Form 5
during the Company's fiscal year ended March 31, 2008, it has been determined
that except as set forth herein no Reporting Persons were delinquent with
respect to such person's reporting obligations set forth in Section 16(a) of the
Exchange Act. Mr. Moore inadvertently failed to file his initial statement of
beneficial ownership on Form 3 on a timely basis. Mr. Moore filed 2 Form 4's
three days late reporting 11 transaction and 1 Form 4 one day late reporting 5
transactions in our common stock. The Form 4's were signed by Mr. Moore prior to
the filing date, however, the SEC filing stamp indicates that these Form 4's
were received after the filing date. Mr. Bauer filed 2 Form 4's late reporting 2
transactions in our common stock. Mr. Klecha and Mr. Steele each filed 1 Form 4
late reporting 1 transaction in our common stock.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
fiscal years ended March 31, 1999, 2000 and 2001 with regard to the Singing
Machine's Chief Executive Officer and one other executive officer whose combined
salary and bonus was in excess of $100,000 (the "Named Officers"):
SUMMARY COMPENSATION TABLE
---------------------------
Annual Compensation Long Term Compensation
------------------------------------------------ ----------------------------------
Awards Payments
------------------------- ---------------------
Other Restricted Securities
Name of Individual Annual Stock Underlying LTIP All Other
and Principal Position Year Salary Bonus Compensation Award(s) Options Payouts Compensation
- ---------------------- ---- ------ ----- ------------ -------- ---------- ------- ------------
Edward Steele 2001 $320,865 $256,289 $7,938 -0- 210,000 -0- -0-
CEO 2000 189,363 54,570 7,575 $ 312,000 (1) 30,000 -0- -0-
1999 180,692 52,369 7,228 -0- 350,000 -0- -0-
John Klecha 2001 $255,777 $205,031 $6,000 -0- 190,000 -0- -0-
Chief Financial Officer 2000 114,394 43,656 4,292 $ 234,000 (2) 39,000 -0- -0-
Chief Operating Officer 1999 88,200 26,184 3,614 -0- 100,000 -0- -0-
(1) As consideration for guaranteeing a loan, Mr. Steele received 200,000 shares
of our common stock on June 28, 1999. The fair market value of the stock on the
date of grant was $1.6875 per share.
(2) As consideration for guaranteeing a loan, Mr. Klecha received 150,000 shares
of our common stock on June 28, 1999. The fair market value of the stock on the
date of grant was $1.6875 per share.
OPTION GRANTS IN FISCAL 2001
The following table sets forth information concerning all options
granted to our officers and directors during the year ended March 31, 2001. No
stock appreciation rights ("SAR's") were granted.
5
Total Options
Shares Granted to
Underlying Employees in Exercise Price
Name of Individual Options Granted Fiscal Year Per Share Expiration Date
- ------------------------------------------------------------------------------------------------
Edward Steele 210,000 31.1% $3.06 12/31/05*
John Klecha 190,000 28.1% $3.06 12/31/05*
*Except 10,000 options granted to Mr. Steele and Mr. Klecha expire on
September 5, 2006.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED MARCH 31, 2001 AND OPTION
VALUES
The following table sets forth information as to the exercise of stock
options during the fiscal year ended March 31, 2001 by our officers listed in
our Summary Compensation Table and the fiscal year-end value of unexercised
options.
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year End Fiscal Year End
-----------------------------------------
Shares Acquired Value Exercisable/ Exercisable/
Name of Individual Upon Exercise Realized Unexercisable Unexercisable
- ---------------------------------------------------------------------------------------------------
Edward Steele 0 0 390,000/200,000 $1,629,400/$342,000
John Klecha 0 0 99,000/180,000 $ 338,290/$307,800
(1) Value is based on the difference between the market price of our common
stock on March 31, 2001 and the option exercise prices times the number of
outstanding options.
EMPLOYMENT AGREEMENTS
On May 15, 2000, the Company extended an existing employment agreement
with Mr. Steele for a period of three years to expire on February 28, 2004. This
employment agreement will automatically be extended for an additional year,
unless either party gives written notice at least sixty days prior to the end of
the three-year term. Pursuant to Mr. Steele's employment agreement, he is
entitled to receive base compensation of $350,000 per year, which amount
automatically increases during the second and third fiscal years by the greater
of 5% or the annual increase in the consumer price index. The agreement also
provides for bonuses based on a percentage of a bonus pool tied to our annual
pre-tax net income (as defined in the agreement). Mr. Steele would receive 50%
of the bonus pool. In the event of a termination of his employment following a
change-in-control, Mr. Steele would be entitled to a lump sum payment of 300% of
the amount of his total compensation in the twelve months preceding such
termination. During the term of his employment agreement and for a period of one
year after his termination for cause, or his voluntary termination of his
employment agreement, Mr. Steele could not directly or indirectly compete with
our company in the karaoke industry in the United States.
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On July 1, 2000, the Company entered into a new employment agreement
with Mr. Klecha, for period of three years to expire on May 31, 2003. This
employment agreement will automatically be extended for an additional year,
unless either party gives written notice at least sixty days prior to the end of
the three-year term. Pursuant to Mr. Klecha's employment agreement, he is
entitled to receive base compensation of $275,000 per year, which amount
automatically increases during the second and third fiscal years by the greater
of 5% or the annual increase in the consumer price index. The agreement also
provides for bonuses based on a percentage of a bonus pool tied to our annual
pre-tax net income (as defined in the agreement). Mr. Klecha would receive 40%
of the bonus pool. In the event of a termination of his employment following a
change-in-control, Mr. Klecha would be entitled to a lump sum payment of 200% of
the amount of his total compensation in the twelve months preceding such
termination. During the term of his employment agreement and for a period of one
year after his termination for cause, or his voluntary termination of his
employment agreement, Mr. Klecha could not directly or indirectly compete with
our company in the karaoke industry in the United States.
1994 AMENDED AND RESTATED MANAGEMENT STOCK OPTION PLAN
The Company's Amended and Restated 1994 Management Stock Option Plan
provides for the granting of incentive stock options and non-qualified stock
options to its employees, officers, directors and consultants. The 1994 Plan is
administered by the entire Board of Directors of the Company or by the Stock
Option/Compensation Committee. The number of shares of common stock that may be
issued under the 1994 Plan is 1,300,000 shares. As of March 31, 2001, 1,229,500
options were issued and outstanding under the 1994 Plan. Since options to
purchase 70,500 shares have been exercised under the 1994 Plan, no more shares
are available for grant under the 1994 Plan.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2001, certain
information concerning beneficial ownership of our common stock by:
- each person known to us to own 5% or more of our outstanding common
stock,
- each director;
- each current executive officer named in the Summary Compensation
Table on page 5;
- all of our current executive officers and directors as a group.
Unless otherwise indicated, the address for each person is The Singing
Machine Company, Inc., 6601 Lyons Road, Building A-7, Coconut Creek, Florida
33073. At March 31, 2001, we had 4,359,120 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.
Shares Beneficially Percent of
Name & Address Owned Class
-------------- ------------------- ----------
John Klecha 545,574(1) 12.2%
Edward Steele 664,924(2) 14.8%
Josef Bauer 630,657(3) 14.1%
Howard Moore 137,092(4) 3.1%
Robert Weinberg 2,100(5) *
Paul Wu 392,899(6) 9.0%
c/o Colony Electronics
500 Hennessy Road
Causeway, Hong Kong
All Directors and Executive 1,980,347(7) 40.0%
Officers as a Group (5 persons)
(1) Includes options to purchase 99,000 shares and warrants to purchase 20,000
shares of our common stock.
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(2) Includes options to purchase 390,000 shares and warrants to purchase 8,000
shares of our common stock.
(3) Includes 200,000 shares held by Mr. Bauer's pension plan and options to
purchase 10,000 shares and warrants to acquire 85,000 shares of our common
stock. Also includes 106,232 shares held by the Bauer Family Limited
Partnership, of which Mr. Bauer and his wife own a 98% interest. Mr. Bauer
disclaims beneficial ownership of the shares held by his spouse.
(4) Includes 127,092 shares held by Mr. Moore, as Trustee for the Howard & Helen
Moore Trust and options to purchase 10,000 shares of our common stock.
(5) Includes 1,800 shares held by a limited liability company, of which Mr.
Weinberg is a 50% owner and 300 shares held by Mr. Weinberg's spouse. Mr.
Weinberg disclaims beneficial ownership of the shares held by his wife.
(6) Includes 237,932 shares held by FLX (HK) Ltd., 129,300 shares held by Colony
Electronics and 25,667 shares held by Gemco Pacific, Inc. Mr. Paul Wu is a
director of each of these companies and was a former director of the Singing
Machine Company, Mr. Wu disclaims any beneficial ownership of the shares of FLX
(HK) Ltd., Colony Electronics and Gemco.
(7) Includes options to purchase 469,000 shares and warrants to acquire 113,000
shares.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have an agreement with FLX (a manufacturer of consumer electronics
products in China) to produce electronic recording equipment based on our
specifications. Paul Wu, a former director of ours, is the Chairman of the Board
and a principal stockholder of FLX. During the fiscal years ended March 31, 2000
and 2001, we purchased approximately $10.3 million and $23.8 million
respectively, in equipment from FLX. We believe that all of the foregoing
transactions with FLX have been on terms no less favorable to us than could have
been obtained from unaffiliated third parties in arms-length transactions under
similar circumstances.
LOANS TO OFFICERS AND DIRECTORS
On July 1, 1999, we loaned Edward Steele, our Chief Executive Officer,
President and Director $55,000 for the purchase of two (2) units of our private
placement. The note including interest of 9% matured on June 28,2001. Mr. Steele
paid the note and all accrued interest on the note in full in June, 2001.
On July 1, 1999, we loaned John Klecha, our Chief Operating Officer,
Chief Financial Officer and Director $55,000 for the purchase of two (2) units
of our private placement. The note including interest of 9% matured on June 28,
2001. Mr. Klecha paid the note and all accrued interest on the note in full in
June, 2001.
9
STOCK GRANTS FOR CREDIT FACILITY AND LETTER OF CREDIT GUARANTEES
In June 1999, we arranged a credit facility with Main Factors, whereby
Main Factors purchases certain of our accounts receivable. To secure the credit
facility, John Klecha, our Chief Operating Officer and Chief Financial Officer,
provided his personal payment guaranty. In July 1999, we entered into an
agreement with EPK Financial Corporation ("EPK") whereby EPK provides letters of
credit with our factories to import inventory for distribution to our customers.
To secure the EPK facility, Edward Steele, our Chief Executive Officer and
President, and John Klecha, our Chief Operating Officer and Chief Financial
Officer, provide their personal guarantees. In consideration for providing their
personal guarantees of these credit facilities, we issued to 200,000 shares of
our common stock to Mr. Steele and 150,000 shares of our common stock to Mr.
Klecha in June 1999. Both agreements with Main Factors and EPK were terminated
in April 2001.
On April 15, 1999, Mr. Bauer personally loaned the Singing Machine
funds sufficient to pay one of our documents of acceptance in the amount of
$33,948.66. As consideration for this loan, in March 2000, we issued Mr. Bauer
warrants to purchase 10,000 shares of our common stock at an exercise price of
$2.00 per share, exercisable until January 1, 2003.
In July 1999, Mr. Bauer arranged for a credit facility with Bank Julius
Baer in the amount of $1 million. Further, in order to ensure approval of the
extension of credit by Bank Julius Bear, Mr. Bauer personally guaranteed the
line of credit. The Bank Julius Bear credit loan was fully repaid by the Singing
Machine in February 2000. As consideration for guarantying this loan, in March
2000, we granted him warrants to purchase 50,000 shares of our common stock at
an exercise price of $1.00 per share. The options expire in July 2005.
In May 2000, Mr. Bauer advanced $500,000 to the Singing Machine. The
loan was for a period of eight months and bore interest at the rate of 15% per
annum. We repaid this loan in December 2000. As consideration for extending the
loan, we granted Mr. Bauer warrants to purchase 25,000 shares of our common
stock at an exercise price of $3.25 per share. The options expire on May 25,
2003.
We believe that the above-described transactions are as fair to the
Singing Machine as could have been obtained with unaffiliated parties.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors is responsible for
assisting the Board in monitoring (1) the quality and integrity of the Company's
financial statements, (2) the Company's compliance with regulatory requirements
and (3) the independence and performance of the Company's independent and
internal auditors. Among other responsibilities, the Audit Committee reviews, in
its oversight capacity, reviews the Company's annual financial statement with
both management and the independent auditors and meets periodically with the
independent and internal auditors to consider their evaluation of the Company's
financial and internal controls. The Audit Committee also recommend to the Board
of Directors the selection of the Company's independent auditors. The Audit
Committee is composed of three directors and operates under a written charter
adopted and approved by the Board of Directors. Two of the Audit Committee
members are non- employee directors and are independent as defined by the AMEX
listing standards. As such, the Audit Committee is comprised of a majority of
independent directors. A copy of the Audit Committee Charter is attached to the
proxy statement as Appendix A.
10
In discharging its duties, the Audit Committee has met with and held
discussions with management and the Company's independent auditors, Salberg &
Company, P.A. and the Company's internal auditors. Management has represented to
the independent auditors that the Company's audited financial statements were
prepared in accordance with generally accepted accounting principles. The Audit
Committee has also discussed with the independent auditors the matters required
to be discussed by Statement on Auditing Standards No. 61 (Communications with
Audit Committees). The Company's independent auditors provided to the Audit
Committee the written disclosure required by Independence Standards Board
Standard No. 1 (Independence Discussion with Audit Committees), and the Audit
Committee discussed with representatives of the independent auditor their firm's
independence. As provided in the Audit Committee Charter, it is not the
Committee's responsibility to determine, and the considerations and discussions
referenced above, do not ensure, that the Company's financial statements are
complete and accurate and presented in accordance with generally accepted
accounting principles.
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 has recommended
that the Board of Directors include the audited consolidated financial
statements in the Company's Annual Report on Form 10-KSB for the fiscal year
ended March 31, 2001.
Howard Moore, Chairman
Robert Weinberg
Edward Steele
INDEPENDENT PUBLIC ACCOUNTANTS FEE SUMMARY
During fiscal 2001, Salberg & Company, P.A. provided services in the
following categories and amounts:
Description Amount
- ----------- ------
Audit Fees(1) $34,500
Review of Quarterly Reports $ 6,100
Financial Information Systems Design and Implementation Fees $ 0
All Other Fees $ 4,500(1)
- --------------
(1) Fees to prepare the Company's tax return for the fiscal year
ended March 31, 2000.
In preparing the Company's audited financial statements, certain audit
procedures for the Company's subsidiary, International SMC (HK) Limited, are
performed by another audit firm in Hong Kong. The Company paid its Hong Kong
auditors $4,487 for their audit of International SMC (HK) Limited. In addition,
the Company paid Weinberg & Company, P.A., its former auditors, $9,57 for
Weinberg & Company's services in reviewing the Company's quarterly financial
statements for two quarters in fiscal 2001 and $2,706 for tax preparation fees.
11
The Audit Committee has determined that the services provided by
Salberg & Company, P.A. to the Company that were not related to the audit of the
Company's financial statements were at all relevant times compatible with the
firm's independence.
12
PROPOSALS TO THE STOCKHOLDERS
PROPOSAL 1. ELECTION OF DIRECTORS
The five 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
shareholders in the year 2002 or until his successor is duly elected and
qualified.
Edward Steele
John Klecha
Josef Bauer
Howard Moore
Robert Weinberg
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 2-3 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 of
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 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. The Board recommends
shareholder to vote "for" each of the nominees for director set forth above.
PROPOSAL 2. TO APPROVE THE YEAR 2001 STOCK OPTION PLAN
At the Annual Meeting, stockholders are being asked approve the
Company's Year 2001 Stock Option Plan (the "2001 Plan"). The 2001 Plan was
approved by our Board of Directors effective as of June 1, 2001, but will become
effective only upon stockholder approval. The 2001 Plan will replace our 1994
Plan, which does not have any shares available for grant.
The 2001 Plan will allow the Company to offer equity incentives to
attract, retain and motivate highly qualified individuals essential to the
Company's long-term growth and success. The Company is presenting this 2001 Plan
for stockholder approval to obtain various regulatory advantages under the
Internal Revenue Code and the American Stock Exchange rules. If the stockholders
do not approve the 2001 Plan, it will not be adopted.
DESCRIPTION OF THE 2001 PLAN
The following is a summary of the terms of the 2001 Plan, which is
qualified in its entirety by the complete text of the 2001 Plan attached to this
Proxy Statement as Exhibit B.
13
ADMINISTRATION OF THE PLAN
The 2001 Plan will be administered by the Company's Board of Directors
or an underlying committee ("Committee"). The determination of which members of
the Board serve on this 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 grant 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.
TYPE OF AWARDS UNDER THE PLAN
The 2001 Plan provides that the Committee may grant awards to
participants in any of the following forms, subject to such terms, conditions
and provisions as the Committee may determine to be necessary or desirable: (1)
incentive stock options ("ISOs") and (2) nonstatutory qualified stock options
("NSOs"). No payment is required on the grant of any option under the Year 2001
Plan. Each option granted under the 2001 Plan is shall be evidenced by an option
agreement, incorporating such terms as the Committee shall deem necessary or
desirable.
ELIGIBILITY AND PARTICIPATION
The Company's officers, directors, employees, advisors and consultants
are eligible to receive NSO's under the 2001 Plan (collectively, the "Eligible
Individuals"). Only the Company's employees are eligible to receive ISO's. As of
March 31, 2001, the Company has 22 employees. Participation in the 2001 Plan is
at the discretion of the Committee and is based upon the employee's present and
potential contributions to the success of the Company and its subsidiaries and
such other factors as the Compensation Committee deems relevant.
MAXIMUM SHARES AVAILABLE
The maximum aggregate number of shares of common stock available for
award under the 2001 Plan to Eligible Individuals of the Company and its
subsidiaries is 1,300,000 shares. The maximum number of options that may be
granted to an individual in any fiscal year is 300,000 options. The shares of
common stock available under the 2001 Plan are subject to adjustment for any
stock split, declaration of a stock dividend or other similar event.
GRANTS OF OPTIONS, EXERCISE PRICE AND VESTING
The Committee may award ISOs and/or NSOs (collectively, "options") to
Eligible Individuals under the Plan. 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 Market Price (as defined in the 2001 Plan)
of the common stock on the date of such grant. On July 6, 2001, the average of
the Company's high and low sales price was $5.90 per share. The Committee will
determine at the time of grant the terms under which options shall vest and
become exercisable.
14
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 the 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 OPTIONS
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
method that the Committee has approved in writing, including but not limited to
(i) delivery of shares of common stock having a Fair Market Value equal to the
exercise price of the Option, (ii) tender of a full recourse promissory note,
(iii) a broker-assisted "cashless exercise" arrangement, (iv) waiver of
compensation due or accrued to the participant for services rendered, or (v) any
other methods that the Committee may approve in writing.
NONTRANSFERABILITY 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 employee'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 employee was terminated
for cause or left without good reason (as defined in the 2001 Plan).
15
CHANGE OF CONTROL
The Committee may in its sole discretion, provide in a Grant Instrument
that upon a Change of Control (as defined in the Plan or otherwise), that all
outstanding Options issued to the Grantee shall automatically accelerate and
become fully exercisable. Additionally, the obligations of the Company under the
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.
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 award shall be adjusted in certain
circumstances to prevent dilution or enlargement of rights.
AMENDMENT AND TERMINATION
The Plan will terminate on June 1, 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 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 previously granted without such employee'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 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,
16
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 disposition 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.
NONQUALIFIED STOCK OPTIONS
NSO's granted under the 2001 Plan do not qualify as "incentive stock
options" and 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
17
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.
BENEFITS UNDER THE 2001 PLAN AND OPTIONS TO BE TRANSFERRED TO THE 2001 PLAN
Because benefits under the 2001 Plan will depend on the Committee's
actions and the fair market value of common stock at various future dates, it is
not possible to determine the benefits that will be received by officers and
other employees if the 2001 Plan is approved by the stockholders.
However, the Company intends to transfer 14,500 options to the 2001
Plan. On March 13, 2001, the Company granted 20,000 options to Robert Weinberg,
as consideration for joining the Board of Directors. At the time that the
Company made these grants, it did not have enough authorized shares under its
1994 Management Stock Option Plan. So, the Company granted 14,500 options
outside of the Plan. If the stockholders approve the Year 2001 Plan, the Company
will transfer these 14,500 options to the 2001 Plan. The exercise price of these
options is $4.90 per share and the expiration date is March 13, 2006. Four
thousand five hundred of Mr. Weinberg's options vest on December 1, 2001 and the
remainder vest on December 1, 2002.
Furthermore, the following table sets forth additional information with
respect to options granted under the 1994 Plan and includes the 14,500 options
granted to Robert Weinberg during fiscal 2001.
Weighted Average Options
Identity of Group Exercise Price Granted
----------------- -------------- -------
Eddie Steele $3.06 210,000
Chief Executive Officer
John Klecha $3.06 190,000
President, Chief Operating Officer, Chief
Financial Officer, Treasurer and Secretary
All current executive officers as a group $3.06 400,000
All current directors who are not executive
officers as a group $3.65 65,000
All employees, other than executive officers $3.14 230,050
-------------------------------------------- ----- -------
18
LIMITATIONS ON THE COMPANY'S COMPENSATION DEDUCTION
Compensation of persons who are Named Executive Officers of the Company
(as such term is defined in the SEC regulations) are subject to the tax
deduction limits of Section 162(m) of the Internal Revenue Code. Stock options
that qualify as "performance-based compensation" are exempt from Section 162(m),
thus allowing the Company the full tax deduction otherwise permitted for such
compensation. If approved by the Company's stockholders, the 2001 Plan will
enable the Committee to grant stock options under the 2001 Plan that will be
exempt from the deduction limits of Section 162(m).
The determination of whether compensation related to the 2001 Plan is
performance-based for purposes of Internal Revenue Code Section 162(m) will be
dependent upon a number of factors, including (1) stockholder approval of the
2001 Plan and (2) the exercise price at which options are granted, (3) whether
independent directors approve the grants of the options to the Named Executive
Officers and (4) whether the plan specifies a limit on the maximum number of
shares that an individual can receive in a year. Internal Revenue Code Section
162(m) also prescribes certain limitations and procedural requirements in order
for compensation to qualify as performance-based. Although the Company has
structured the 2001 Plan to satisfy the requirements of Internal Revenue Code
Section 162(m) with regard to its "performance-based" criteria, there is no
assurance the options thereunder will so satisfy such requirements. Accordingly,
the Company may be limited in the deductions it may take with respect to options
granted under the 2001 Plan.
VOTE REQUIRED AND RECOMMENDATION
To approve the 2001 Plan, a majority of the shares of common stock
present, in person or by proxy, must be voted in favor of this proposal. The
Board recommends shareholder to vote "for" the proposal to approve the 2001
Plan.
PROPOSAL 3. APPROVAL OF CASH BONUS PERFORMANCE PLAN
At the Annual Meeting, shareholders are being asked to approve a Cash
Bonus Performance Plan ("Cash Bonus Plan"). Our Board adopted the Cash Bonus
Plan, effective as of June 1, 2001, subject to stockholder approval. The Cash
Bonus Plan will allow the Company to offer equity incentives to attract, retain
and motivate its employees. Additionally, the Cash Bonus will allow compensation
to certain executive officers who are treated as Named Executive Officers (as
such term is defined in the SEC rules and regulations) to satisfy the
requirements of performance-based compensation within the meaning of Section
162(m) of the Internal Revenue Code.
DESCRIPTION OF THE CASH BONUS PLAN
The following is a summary of the terms of the Cash Bonus Plan, which
is qualified in its entirety by the complete text of the Cash Bonus Plan
attached to this Proxy Statement as Exhibit C.
19
The Cash Bonus Plan will be administered by a committee of not less
than two directors appointed by the Board of Directors, each of whom is an
"outside director" within the meaning of the regulation implementing Section
162(m) of the Internal Revenue Code (the "Committee"). The Committee will have
the full authority to make, interpret and approve all rules for the
administration of the Cash Bonus Plan.
ELIGIBILITY AND PARTICIPATION
All employees of the Company and its subsidiaries are generally
eligible to receive cash bonuses under the Cash Bonus Plan. As of March 31,
2001, the Company had 22 employees. Participation in the Cash Bonus Plan is at
the discretion of the Committee and is based upon the employee's present and
potential contributions to the success of the Company and its subsidiaries and
such other factors as the Committee deems relevant.
ESTABLISHED PERFORMANCE TARGET - PTNI
The Committee has established a performance target under the Plan based
upon the Company's Net Income before Taxes, adjusted to exclude Interest
Expense, Extraordinary Items, Accruals for Cash Bonuses and Key Man Life
Insurance Expense (as such terms are defined in the Cash Bonus Plan).
Furthermore, PTNI excludes any changes that occur in the applicable accounting
principles or practices during the applicable performance period. The total
maximum bonus pool that will be paid under the Cash Bonus Plan each fiscal year
is 12% of the Company's PTNI (which sum shall be referred to as the "bonus
pool.")
Under the Cash Bonus Plan, the maximum bonus per fiscal year payable to
the following individuals shall not exceed the following percentages: the Chief
Executive Officer's bonus may not exceed 49.6% of the bonus pool; the Chief
Operating Officer's bonus shall not exceed 39.6% of the bonus pool; the Director
of Sales bonus shall not exceed 9.6% of the bonus pool and the bonus payable to
the other employees shall not exceed 1.2% of the bonus pool.
20
The Committee has sole discretion to determine whether any or all of
the maximum permissible bonuses will actually be paid, or whether payment or
vesting of any bonus will be deferred, subject in each case to the Cash Bonus
Plan's terms and any other written commitment. The Committee is also authorized
to exercise its "negative discretion" by establishing additional conditions and
terms of payment of bonuses, including the achievement of other financial,
strategic or individual goals, which will be objective or subjective, as it
deems appropriate. However, the Company will not alter the performance target of
PTNI or 12% of PTNI as the bonus pool payable to its participants, unless it
obtains approval from its stockholders.
Pursuant to employment agreements, Mr. Steele, our Chief Executive
Officer and Mr. Klecha, our President, Chief Operating Officer, Chief Financial
Officer, Treasurer and Secretary, are entitled to receive up to 50% and 40% of
our PTNI. If the shareholders approve the Cash Bonus Plan, Mr. Steele and Mr.
Klecha have agreed to amend their employment agreements to provide that any cash
bonus payments will be made pursuant to the Cash Bonus Plan and that each of
them will be subject to the maximum bonus payments described in the Cash Bonus
Plan.
The Plan may from time to time be amended, suspended or terminated, in
whole or in part, by the Board of Directors or the committee, but no amendment
will be effective without Board and/or stockholder approval if such approval is
required to comply with the applicable rules under Section 162(m). All payments
under the Cash Bonus Plan are made in cash as soon as practicable after the
close of the fiscal year.
In the event that the Cash Bonus Plan is not approved by the Company's
stockholders, the Cash Bonus Plan will not be implemented. The Company's Board
of Directors and the Compensation Committee, however, may continue to authorize
and pay bonuses to executive officers and other employees on another basis,
consistent with applicable corporate authority and the Company's compensation
policies, as from time to time in effect. In particular, Mr. Steele and Mr.
Klecha would be entitled to receive bonuses set forth in their employment
agreements, which bonuses are subject to the sole discretion of the Board of
Directors. Such other compensation could increase compensation cost to the
Company, if such compensation to Mr. Steele, Mr. Klecha or any other Named
Executive Officers could not be deducted under Section 162(m) to the extent that
(when combined with other non-exempt compensation) it exceed the limit set forth
in that statute.
At the present time, the Company does not know what its net income will
be for the next year, so the Company is not able to estimate the benefits that
would be payable under the Cash Bonus Plan. However, if the Cash Bonus
Performance Plan had been paid in effect during the previous fiscal year, the
sums received by each of our named executives officers and directors and the
groups indicated below would have been approximately as follows:
Name Cash Bonus
---- ----------
Eddie Steele, CEO $305,086
John Klecha $243,576
President, Chief Operating Officer, Chief
Financial Officer, Treasurer and Secretary
21
Name Cash Bonus
---- ----------
All current executive officers as a group $548,662
All current directors who are not executive
officers as a group $ 0
All employees, other than executive officers
(John Steele and other employee) $ 66,43
--------
$615,092
The Board believes that the cash bonuses will be awarded primarily to those
persons who possess a capacity to contribute significantly to the successful
performance of the Company.
VOTE REQUIRED AND RECOMMENDATION
To approve the Cash Bonus Plan, a majority of the shares of common
stock, present in person or by proxy, must be voted in favor of this proposal.
The Board recommends shareholder to vote "for" the proposal to approve the Cash
Bonus Plan.
PROPOSAL 5. RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors of the Company has selected Salberg & Company,
P.A. independent certified public accountants, as independent auditors for the
Company for the fiscal year ended March 31, 2002 and determined that it would be
desirable to request that the Company's shareholders ratify such selection. One
or more representatives of Salberg & Company, P.A. are expected to be present at
the Annual Meeting and are expected to be available to respond to appropriate
questions from shareholders.
Although the Board of Directors of the Company is submitting the
appointment of Salberg & Company, P.A. for shareholder ratification it reserves
the right to change the selection of Salberg & Company, P.A. as auditors, at any
time during the fiscal year, if it deems such change to be in the best interest
of the Company, even after shareholder ratification.
If the appointment is not ratified, our Board will consider whether it
should select other independent auditors.
VOTE REQUIRED AND RECOMMENDATION
The ratification of the selection of Salberg & Company, P.A. requires
the affirmative vote of the holders of a majority of shares of common stock,
present in person or by proxy. The Board recommends shareholder to vote "for"
the ratification of the selection of Salberg & Company, P.A.
PREVIOUS INDEPENDENT AUDITORS
Weinberg & Company, P.A. (the "Former Accountant"), was replaced as
independent certified public accountant and independent auditor for the Company
on November 28, 2000. The Company's
22
decision to change accountants was approved by its Board of Directors because
Scott Salberg, the auditor who has been responsible for the Company's account,
left the Former Accountant to start his own accounting firm.
The report of the Former Accountant on the financial statements of the
Company for the year ended March 31, 2000, did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles. During the Company's fiscal year ended
March 31, 2000, and through the date of this report, there were no disagreements
with the Former Accountant on any matters of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which, if not
resolved to the satisfaction of the Former Accountant would have caused it to
make reference to the subject matter of the disagreement in connection with its
report on these financial statements for those periods.
ENGAGEMENT OF NEW INDEPENDENT ACCOUNTANTS
On November 28, 2000, the Company engaged Salberg & Company, P.A., as
its independent auditor and independent certified public accountant. The Company
did not consult with Salberg & Company, P.A. regarding the application of
accounting principles to a specific transaction or the type of audit opinion
that might be rendered on the Company's financial statements, and no written or
oral advice was provided by Salberg & Company, P.A. that was a factor considered
by the Company in reaching a decision as to the accounting, auditing or
financial reporting issues.
ANNUAL REPORT ON FORM 10-KSB
We are mailing copies of our annual report on Form 10-KSB for the
twelve months ended March 31, 2001, with this proxy statement to our
shareholders of record as of July 6, 2001.
INFORMATION CONCERNING SHAREHOLDER PROPOSALS
To be considered for inclusion in next year's Proxy Statement,
shareholder proposals must be received at the Company's principal executive
officers not later than the close of business on March 14, 2002. Additionally,
the Company must have notice of any stockholder proposal to be submitted at the
next Annual Meeting (but not required to be included in the Company's Proxy
Statement) by May 28, 2002, or such proposal will be considered untimely
pursuant to Rule 14a-4 and Rule 14-5(e) under the Securities Exchange Act of
1934, and persons so named in the proxies solicited by management may exercise
discretionary voting authority with respect to such proposal.
Notices of intention to present proposals at the 2002 Annual Meeting
should be addressed to the Company's Corporate Secretary, 6601 Lyons Road, Bldg.
A-7, Coconut Creek, FL 33073. The Company reserves the right to reject, rule out
of order, ot take other appropriate action with respect to any proposal that
does not comply with these and other applicable requirements.
23
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 judgement of the proxy holders.
24
EXHIBIT A
THE SINGING MACHINE COMPANY, INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
I. PURPOSE
The Audit Committee's function is to assist the Board of Directors in
fulfilling its oversight responsibilities by reviewing: the financial reports
and other financial information provided by The Singing Machine Corporation,
Inc. (the "Corporation") to any governmental body, shareholders or the public;
the Corporation's systems of internal controls regarding finance, accounting,
legal compliance and ethics that management and the Board have established; and
the Corporation's auditing, accounting and financial reporting processes
generally. Consistent with this function, the Audit Committee should encourage
continuous improvement of, and should foster adherence to, the Corporation's
policies, procedures and practices at all levels. The Audit Committee's duties
and responsibilities are to:
o Serve as an independent neutral and objective party to monitor
the Corporation's financial reporting process and internal
control system.
o Review and appraise the audit efforts of the Corporation's
independent accountants and internal auditing department.
o Provide an open avenue of communication among the independent
accountants, financial and senior management, the internal
auditing department, and the Board of Directors.
The Audit Committee will fulfill these duties by carrying out the activities
enumerated in Section IV of this Charter.
II. COMPOSITION
The Audit Committee shall be comprised of three or more directors as
determined by the Board, a majority of whom shall be independent directors, and
free from any relationship that, in the opinion of the Board, would interfere
with the exercise of his or her independent judgment as a member of the
Committee. A director will not be considered "independent" if, among other
things, he or she has:
o been employed by the corporation or its affiliates in the current or
past three years;
o accepted any compensation from the corporation or its affiliates in
excess of $60,000 during the previous fiscal year (except for board
service, retirement plan benefits, or non- discretionary compensation);
A-1
o an immediate family member who is, or has been in the past three years,
employed by the corporation or its affiliates as an executive officer;
o been a partner, controlling shareholder or an executive officer of any
for-profit business to which the corporation made, or from which it
received, payments (other than those which arise solely from
investments in the Corporation's securities) that exceed five percent
of the organization's consolidated gross revenues for that year, or
$200,000, whichever is more, in any of the past three years; or
o been employed as an executive of another entity where any of the
Corporation's executives serve on that entity's compensation committee.
All members of the Committee shall have a working familiarity with basic finance
and accounting practices, and at least one member of the Committee shall have
accounting or related financial management expertise. Committee members may
enhance their familiarity with finance and accounting by participating in
educational programs conducted by the Corporation or an outside consultant.
The members of the Committee shall be elected by the Board at the director's
meeting, following the annual shareholders meeting, or at any other time that it
is necessary to elect a success to the Committee. Unless a Chair is elected by
the full Board, the members of the Committee may designate a Chair by majority
vote of the full Committee membership.
III. MEETINGS
The Committee shall meet at least four times annually, and at least
once per fiscal quarter, or more frequently as circumstances dictate. As part of
its job to foster open communication, the Committee should meet at least be
annually with management, the director of the internal auditing department and
the independent accountants in separate executive sessions to discuss any
matters that the Committee or each of these groups believe should be discussed
privately. In addition, the Committee or at least its Chair should meet with the
independent accountants and management quarterly to review the Corporations
financials.
IV. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Audit Committee shall:
Documents/Reports Review
1. Review and update this Charter periodically, and not less than
annually, as conditions dictate.
2. Review the Corporation's annual financial statements and any reports or
other financial information submitted to any governmental body, or the
public, including any certification, report, opinion, or review
rendered by the independent accountants.
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3. Review regular internal reports to management prepared by the internal
auditing department and management's response.
4. Review with financial management and the independent accountants the
Quarterly Reports on Form10-QSB prior to their filing or prior to the
release of earnings. If the entire committee is unavailable, the Chair
of the Committee may represent the entire Committee for purposes of
this review.
Independent Accountants
- -----------------------
5. Recommend to the Board of Directors the selection of the independent
accountants, considering their independence and their effectiveness,
and approve the fees and other compensation to be paid to the
independent accountants.
6. On an annual basis, the Committee should review and discuss with the
accountants all significant relationships the accountants have with the
Corporation to determine the accountants' independence. The accountants
shall provide the Corporation with a formal written statement
delineating all relationships between the accountants and the
Corporation, consistent with Independence Standards Board Standard 1.
7. The Committee has a responsibility for actively engaging in a dialogue
with the independent accountants with respect to any disclosed
relationships or services that may impact the objectivity and
independence of the accountant and for taking, or recommending that the
full board take, appropriate action to oversee the independence of the
independent accountant.
8. The independent accountant's ultimate accountability is to the Board of
Directors and the Committee, as representatives of the shareholder, and
the Committee, as the shareholder's representative, has ultimate
authority and responsibility to select, evaluate and where,
appropriate, replace the independent accountant (or to nominate the
outside auditor to be proposed for shareholder approval in the proxy
statement).
9. Review the performance of the independent accountants and approve any
proposed discharge of the independent accountants when circumstances
warrant.
10. Periodically consult with the independent accountants out of the
presence of management about internal controls and the fullness and
accuracy of the organization's financial statements and disclosure.
Financial Reporting Processes
- -----------------------------
11. In consultation with the independent accountants and the internal
auditors, review the internal and external integrity of the
organization's financial reporting processes.
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12. Consider the independent accountants' judgments about the quality and
appropriateness of the Corporation's accounting principles as applied
in its financial reporting.
13. Consider and approve, if appropriate, major changes to the
Corporation's auditing and accounting principles and practices as
suggested by the independent accountants, management, or the internal
auditing department.
Process Improvement
- -------------------
14. Establish regular and separate systems of reporting to the Audit
Committee by each of management, the independent accountants and the
internal auditors regarding any significant judgments made in
management's preparation of the financial statements and the view of
each as to appropriateness of such judgments.
15. Following completion of the annual audit, review separately with each
of management, the independent accountants and the internal auditing
department any significant difficulties encountered during the course
of the audit, including any restrictions on the scope of work or access
to required information.
16. Review any disagreement among management and the independent
accountants or the internal auditing department in connection with the
preparation of the financial statements.
17. Review with the independent accountants, the internal auditing
department and management the extent to which changes or improvements
in financial or accounting practices, as approved by the Audit
Committee, have been implemented. (This review should be conducted at
an appropriate of time subsequent to implementation of changes or
improve ments, as decided by the Committee.)
Ethical and Legal Compliance
- ----------------------------
18. Establish, review and update periodically a Code of Ethical Conduct and
ensure that management has established a system to enforce this Code.
19. Review management's monitoring of the Corporation's compliance with the
organization's Code of Ethical Conduct, and ensure that management has
the proper review system in place to ensure that Corporation's
financial statements, reports and other financial information
disseminated to governmental organizations, and the public satisfy
legal requirements.
20. Review activities, organizational structure, and qualifications of the
internal audit department.
21. Review, with the organization's counsel, legal compliance matters
including corporate securities trading policies.
A-4
22. Review, with the Corporation's counsel, any legal matter that could
have a significant impact on the organization's financial statements.
23. Perform any other activities consistent with this Charter, the
Corporation's Bylaws and governing law, as the Committee or, the Board
deems necessary or appropriate.
A-5
EXHIBIT B
THE SINGING MACHINE COMPANY, INC.
YEAR 2001 STOCK OPTION PLAN
B-1
Table of Contents
Page
1. Administration ........................................................................................B-3
2. Grants ................................................................................................B-4
3. Shares Subject to the Plan ............................................................................B-4
4. Eligibility for Participation .........................................................................B-5
5. Granting of Options ...................................................................................B-5
6. Effect of Termination of Employment, Disability, Retirement or Death ..................................B-5
7. Withholding of Taxes ..................................................................................B-8
8. Transferability of Grants .............................................................................B-8
9. Change of Control......................................................................................B-9
10. Limitations on Issuance or Transfer of Shares .........................................................B-9
11. Amendment and Termination of the Plan ................................................................B-10
12. Funding of the Plan ..................................................................................B-10
13. Rights of Participants ...............................................................................B-10
14. No Fractional Shares .................................................................................B-10
15. Headings .............................................................................................B-10
16. Effective Date of the Plan ...........................................................................B-10
17. Miscellaneous ........................................................................................B-11
B-2
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 employees of The Singing Machine
Company, Inc. (the "Company") and its subsidiaries, (ii) certain Key Advisors
(as defined in Section 4(a)) who perform services for 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 and nonqualified stock options. 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 Code 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.
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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 as "Grants" or "Options"). 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 event 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.
3. Shares Subject to the Plan.
--------------------------
(a) Shares Authorized. Subject to the adjustment specified
below, the aggregate number of shares of common stock of the Company ("Company
Stock") that may be awarded under the Plan is 1,300,000 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
300,000 options ("Award 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 Options granted under the Plan terminate, expire, or are canceled,
forfeited, exchanged or surrendered without having been exercised, 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 Options, provide for such adjustments to such Options
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 intended 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
162(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.
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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 ("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 intended 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.
B-5
(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 a sale was 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 subject 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.
(e) 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 or an amendment to
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) by a tender of a full
recourse promissory note, (iii) pursuant to a broker-assisted "cashless
exercise" arrangement, (iv) by waiver of compensation due or accrued to the
participant for services rendered or (v) 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 7) at the time of exercise.
(f) 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 to 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. Effect of Termination of Employment, Disability, Retirement or
Death.
B-6
(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 or intended to result, directly or
indirectly, in 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 any time 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 case 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 Corporation or a subsidiary because of a long-term or total disability,
as determined by the Committee in its sole discretion. "Retirement" shall mean a
termination of employment with the Corporation 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 Corporation or a subsidiary or (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 Corporation 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; provided, however, that any Incentive Stock Option
of such recipient shall no longer be treated as an Incentive Stock Option unless
B-7
exrcised within three (3) months of the date of the recipient's death. In the
event of the death of a recipient of Options following a termination of
employment due to Retirement or 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. Withholding of Taxes.
--------------------
(a) Required Withholding. All Grants under the Plan shall be
subject to 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 by having shares withheld up to an amount that does
not exceed the Grantee's maximum marginal tax 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.
8. Transferability of Grants.
-------------------------
(a) Nontransferability 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 or any other applicable laws.
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 satisfactory to the Company of
his or her right to receive the Grant under the Grantee's will or under the
applicable laws of descent and distribution.
(b) Transfer of Nonqualified Stock Options. Notwithstanding
the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee
may transfer Nonqualified Stock Options to family members or other persons or
entities according to such terms as the Committee may determine; provided that
the Grantee receives no consideration for the transfer of an Option and the
transferred Option shall continue to be subject to the same terms and conditions
as were applicable to the Option immediately before the transfer.
9. Change of Control.
-----------------
(a) Change of Control. As used herein, a "Change of Control" shall be
B-8
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 corporation 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" as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended, becomes the owner or beneficial
owner of Company securities, after the date of this Agreement, having 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 majority at the time the purchases are made), or
(iv) the persons who were directors of the Company before certain transactions
(as described herein) 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 Eligible Individuals.
.
(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 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.
10. Limitations on Issuance or Transfer of Shares. No Company Stock
shall be issued or transferred in connection with any Grant hereunder unless and
until all 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.
B-9
11. 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 l62(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 the Board or is extended by the Board with the
approval of the shareholders.
(c) Termination and Amendment of Outstanding Grants. A
termination or amendment of the Plan that occurs after a Grant is made shall not
materially impair the rights of a 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.
12. 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.
13. Rights of Participants. Nothing in this Plan shall entitle any
Employee, Key Advisor or other person to any claim or right to be granted a
Grant under this Plan. Neither this Plan nor any action taken hereunder shall be
construed as giving any individual any rights to be retained by or in the employ
of the Company or any other employment rights.
14. 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.
15. 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.
16. Effective Date of the Plan.
--------------------------
(a) Effective Date. Subject to the approval of the Company's
shareholders, the Plan shall be effective as of June 1, 2000.
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(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.
17. 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) Loans. The Committee may, in its discretion, extend a loan
in connection with the exercise or receipt of a grant under this Plan. The terms
and conditions of any such loan shall be set by the Committee.
(c) 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.
(d) 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 awards, at such time and in
such manner as the Committee deems appropriate.
(e) 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 been
included.
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(f) 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 June 1, 2001
THE SINGING MACHINE COMPANY, INC.
By: /s/ John Klecha
John Klecha
President and Chief Executive Officer
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EXHIBIT C
THE SINGING MACHINE COMPANY, INC.
CASH BONUS PERFORMANCE PLAN
SECTION 1. PURPOSE OF PLAN
The purpose of the Plan is to promote the success of The Singing Machine
Company, Inc. (the "Company") by providing to participating employees bonus
incentives that qualify as performance- based compensation within the meaning of
Section 162(m) of the Internal Revenue Code.
SECTION 2. DEFINITIONS AND TERMS
2.1 Accounting Terms. Except as otherwise expressly provided or the context
otherwise requires, financial and accounting terms are used as defined for
purposes of, and shall be determined in accordance with, generally accepted
accounting principles, as from time to time in effect, as applied and reflected
in the consolidated financial statements of the Company, prepared in the
ordinary course of business.
2.2 Specific Terms. The following words and phrases as used herein shall have
the following meaning unless a different meaning is plainly required by the
context.
"Accrual Amounts for Cash Bonuses" means any amounts accrued by the
Company or its subsidiaries in accordance with accounting principles generally
accepted in the United States of America for Bonus payments to be made to
Employees under its Cash Bonus Plan for the Year to which the Bonus payments
relate and other annual bonuses that are accrued in accordance with accounting
principles generally accepted in the United States of America for Employees in
other bonus plans of the Company for the Year to which the bonus payments
relate.
"Bonus" means a cash payment or payment opportunity, as the context
requires, that is made to each Participant under this Plan.
"Bonus Pool" shall mean 12% of the Company's PTNI for each Year.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means the committee which has been established to
administer the Plan in accordance with Section 3.1 and Section 162(m) of the
Code.
"Company" means The Singing Machine Company, Inc. and any successor,
whether by merger, ownership of all or substantially all of its assets or
otherwise.
"Employee" means any employee of the Company.
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"Extraordinary Items" means all items of gain, loss or expense for the
Year determined to be extraordinary or unusual in nature or infrequent in
occurrence or related to the disposal of a segment of a business all as
determined in accordance with generally accepted accounting principles in the
United States of America established by opinion No. 30 of the Accounting
Principles Board (APA Opinion No. 30) and any amendments or interpretations
thereof.
.
"Interest Expense" for any Year means any line item(s) representing
interest expense of the Company, as reported in the income statement, contained
in the audited consolidated financial statements of the Company, for the Year.
"Key Man Life Insurance Expense" for any Year means any premium
expenses that the Company has incurred under insurance policies that it has
obtained for its executive officers who are deemed to be Named Executive
Officers (as such term is defined in the SEC rules and regulations).
"Net Income" for any Year means the consolidated net income of the
Company, as reported in the income statement, contained in the audited
consolidated financial statements of the Company for the Year.
"Participant" means any Employee selected to participate in the Plan by
the Committee.
"Performance Period" means the Year with respect to which the
Performance Target is set by the Committee.
"Performance Target" means the specific objective goal that is timely
set in writing by the Committee for each Participant for the Performance Period.
The Performance Target for this Plan shall be PTNI.
"Plan" means this Cash Bonus Performance Plan for Employees of the
Company, as amended from time to time.
"PTNI" for any Year means the Net Income of the Company before Taxes
and adjusted to exclude (i) Interest Expense, (ii) Extraordinary Items, (iii)
Accrual Amounts for Cash Bonuses, and (iv) Key Man Life Insurance Expense. PTNI
also excludes any change that occurs in the applicable accounting principles or
practices during the Performance Period, as further described in Section 4.6 of
the Plan.
"Section 162(m)" means Section 162(m) of the Code, and the regulations
promulgated thereunder, all as amended from time to time.
"Taxes" means any line items representing income taxes of the Company,
as reported in the income statement, contained in the audited consolidated
inancial statements of the Company, for the Year.
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"Year" means any one or more fiscal years of the Company, commencing on
or after April 1, 2001 that represent(s) the applicable Performance Period.
SECTION 3. ADMINISTRATION OF THE PLAN
3.1 The Committee. The Plan shall be administered by a Committee consisting of
at least two members of the Board of Directors of the Company, duly authorized
by the Board of Directors of the Company to administer the Plan, who (i) are not
eligible to participate in the Plan and (ii) are "outside directors" within the
meaning of Section 162(m).
3.2 Powers of the Committee. The Committee has established the Performance
Target as PTNI for the term of the Plan. The Committee shall have the sole
responsibility of determining from among the Employees those persons who will
participate in and receive Bonuses under the Plan and, subject to Sections 4 and
5 of the Plan, the amount of such Bonuses and shall otherwise be responsible for
the administration of the Plan, in accordance with its terms. The Committee
shall have the authority to construe and interpret the Plan (except as otherwise
provided herein) and any agreement or other document relating to any Bonus under
the Plan, may adopt rules and regulations governing the administration of the
Plan, and shall exercise all other duties and powers conferred on it by the
Plan, or which are incidental or ancillary thereto. For each Performance Period,
the Committee shall determine those Employees who are selected as Participants
in the Plan.
3.3 Requisite Action. A majority (but not fewer than two) of the members of the
Committee shall constitute a quorum. The vote of a majority of those present at
a meeting at which a quorum is present or the unanimous written consent of the
Committee shall constitute action by the Committee.
3.4 Express Authority (and Limitations on Authority) to Change Terms and
Conditions of Bonus. Without limiting the Committee's authority under other
provisions of the Plan, but subject to any express limitations of the Plan and
Section 5.8, the Committee shall have the authority to accelerate a Bonus (after
the attainment of the applicable Performance Target(s)) and to waive restrictive
conditions for a Bonus (including any forfeiture conditions, but not Performance
Target(s)), in such circumstances as the Committee deems appropriate. In the
case of any acceleration of a Bonus after the attainment of the applicable
Performance Target(s), the amount payable shall be discounted to its present
value using an interest rate equal to Moody's Average Corporate Bond Yield for
the month preceding the month in which such acceleration occurs.
SECTION 4. BONUS PROVISIONS.
4.1 Provision for Bonus. Each Participant may receive a Bonus if and only if the
Performance Target established by the Committee, is attained. The applicable
Performance Period shall be determined by the Committee consistent with the
terms of the Plan and Section 162(m). Notwithstanding the fact that the
Performance Target has been attained, the Company may pay a Bonus of less than
the amount determined by the formula or standard established pursuant to Section
4.2 or may pay no Bonus at all, unless the Committee otherwise expressly
provides by written contract or other written commitment.
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4.2 Performance Target. The Committee has determined that the Performance Target
for each Year shall be PTNI. In the aggregate, the Participants shall be
entitled to receive a bonus equal to twelve percent (12%) of the Company's PTNI
each year. The Committee has determined that persons serving in the following
positions shall be entitled to receive the following percentages of the Bonus
Pool during each Performance Period:
Percent of
Position Bonus Pool
-------- ----------
Chief Executive Officer 49.6%
Chief Operating Officer 39.6%
Director of Sales 9.6%
All Other Employees* 1.2%
-------------------- -----
*All other employees excludes the Chief Executive Officer, the Chief
Operating Officer and the Director of Sales.
4.3 Maximum Individual Bonuses. Notwithstanding any other provisions hereof,
during each Performance Period, the Chief Executive Officer shall not receive a
Bonus in excess of 49.6% of the Bonus Pool, the Chief Operating Officer shall
not receive a Bonus in excess of 39.6% of the Bonus Pool, the Director of Sales
shall not receive a Bonus in excess of 9.6% of the Bonus Pool and all other
employees shall not receive a Bonus in excess of 1.2% of the Bonus Pool.
The Committee reserves the right in its absolute discretion not to pay any
Bonuses to any of the Employees listed herein or to award any of them a Bonus
less than the maximum amount determined in accordance with the formula described
above.
4.4 Selection of Participants. For each Performance Period, the Committee shall
determine the Employees who will participate in the Plan.
4.5 Effect of Mid-Year Commencement of Service. To the extent compatible with
Sections 4.2 and 5.8, if services as an Employee commence after the adoption of
the Plan, the Committee may grant a Bonus that is proportionately adjusted based
on the period of actual service during the Year; the amount of any Bonus paid to
such person shall not exceed that proportionate amount.
4.6 Changes in Accounting Principles or Practices. Subject to Section 5.8, if a
change occurs in the applicable accounting principles or practices, the amount
of the Bonuses paid under this Plan for such Performance Period shall be
determined without regard to such change.
4.7 Committee Discretion to Determine Bonuses. The Committee has the sole
discretion to determine the standard or formula pursuant to which each
Participant's Bonus shall be calculated (in accordance with Section 4.2),
whether all or any portion of the amount so calculated will be paid, and the
specific amount (if any) to be paid to each Participant, subject in all cases to
the terms, conditions and limits of the Plan and of any other written commitment
authorized by the Committee.
C-4
To this same extent, the Committee may at any time establish additional
conditions and terms of payment of Bonuses (including but not limited to the
achievement of other financial, strategic or individual goals, which may be
objective or subjective) as it may deem desirable in carrying out the purposes
of the Plan and may take into account such other factors as it deems appropriate
in administering any aspect of the Plan. The Committee may not, however,
increase the maximum amount permitted to be paid to any individual under Section
4.2 or 4.3 of the Plan or award a Bonus under this Plan if the Performance
Target has not been satisfied.
4.8 Committee Certification. No Employee shall receive any payment under the
Plan unless the Committee has certified, by resolution or other appropriate
action in writing, that the amount thereof has been accurately determined in
accordance with the terms, conditions and limits of the Plan and that the
Performance Target and any other material terms previously established by the
Committee or set forth in the Plan were in fact satisfied.
4.9 Time of Payment. Any Bonuses granted by the Committee under the Plan shall
be paid as soon as practicable following the Committee's determinations under
this Section 4 and the certification of the Committee's findings under Section
4.8. Any such payment shall be in cash or cash equivalent, subject to applicable
withholding requirements. Notwithstanding the foregoing, the Committee, in its
sole discretion (but subject to any prior written commitments and to any
conditions consistent with Section 5.8 that it deems appropriate), may defer the
payout or vesting of any Bonus. In the case of the delay of a Bonus otherwise
payable at or after the attainment and certification of the applicable
Performance Target(s), any additional amount payable shall be based on Moody's
Average Corporate Bond Yield over the deferral period.
SECTION 5. GENERAL PROVISIONS
5.1 No Right to Bonus or Continued Employment. Neither the establishment of the
Plan nor the provision for or payment of any amounts hereunder nor any action of
the Company (including, for purposes of this Section 5.1, any predecessor or
subsidiary), the Board of Directors of the Company or the Committee in respect
of the Plan, shall be held or construed to confer upon any person any legal
right to receive, or any interest in, a Bonus or any other benefit under the
Plan, or any legal right to be continued in the employ of the Company. The
Company expressly reserves any and all rights to discharge an Employee in its
sole discretion, without liability of any person, entity or governing body under
the Plan or otherwise. Notwithstanding any other provision hereof and
notwithstanding the fact that the Performance Target has been attained and/or
the individual maximum amounts pursuant to Section 4.2 have been calculated, the
Company shall have no obligation to pay any Bonus hereunder nor to pay the
maximum amount so calculated, unless the Committee otherwise expressly provides
by written contract or other written commitment.
5.2 Discretion of Company, Board of Directors and Committee. Any decision made
or action taken by the Company or by the Board of Directors of the Company or by
the Committee arising out of or in connection with the creation, amendment,
construction, administration, interpretation and effect of the Plan shall be
within the absolute discretion of such entity and shall be conclusive and
binding
C-5
upon all persons. No member of the Committee shall have any liability for
actions taken or omitted under the Plan by the member or any other person.
5.3 Absence of Liability. A member of the Board of Directors of the Company or a
member of the Committee of the Company or any officer of the Company shall not
be liable for any act or inaction hereunder, whether of commission or omission.
5.4 No Funding of Plan. The Company shall not be required to fund or otherwise
segregate any cash or any other assets which may at any time be paid to
Participants under the Plan. The Plan shall constitute an "unfunded" plan of the
Company. The Company shall not, by any provisions of the Plan, be deemed to be a
trustee of any property, and any obligations of the Company to any Participant
under the Plan shall be those of a debtor and any rights of any Participant or
former Participant shall be limited to those of a general unsecured creditor.
5.5 Non-Transferability of Benefits and Interests. Except as expressly provided
by the Committee, no benefit payable under the Plan shall be subject in any
manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge, and any such attempted action be void and no such benefit
shall be in any manner liable for or subject to debts, contracts, liabilities,
engagements or torts of any Participant or former Participant. This Section 5.5
shall not apply to an assignment of a contingency or payment due after the death
of the Employee to the deceased Employee's legal representative or beneficiary.
5.6 Law to Govern. All questions pertaining to the construction, regulation,
validity and effect of the provisions of the Plan shall be determined in
accordance with the laws of the State of Florida, without regard to conflicts of
laws principles.
5.7 Non-Exclusivity. Subject to Section 5.8, the Plan does not limit the
authority of the Company, the Board or the Committee, or any subsidiary of the
Company, to grant awards or authorize any other compensation under any other
plan or authority, including, without limitation, awards or other compensation
based on the same Performance Target(s) used under the Plan. In addition,
Employees not selected to participate in the Plan may participate in other plans
of the Company.
5.8 Section 162(m) Conditions; Bifurcation of Plan. It is the intent of the
Company that the Plan and Bonuses paid hereunder satisfy and be interpreted in a
manner, that, in the case of Participants who are or may be persons whose
compensation is subject to Section 162(m), satisfies any applicable requirements
as performance-based compensation. Any provision, application or interpretation
of the Plan inconsistent with this intent to satisfy the standards in Section
162(m) of the Code shall be disregarded. Notwithstanding anything to the
contrary in the Plan, the provisions of the Plan may at any time be bifurcated
by the Board or the Committee in any manner so that certain provisions of the
Plan or any Bonus intended (or required in order) to satisfy the applicable
requirements of Section 162(m) are only applicable to persons whose compensation
is subject to Section 162(m).
C-6
SECTION 6. AMENDMENTS, SUSPENSION OR TERMINATION OF PLAN
The Board of Directors or the Committee may from time to time amend, suspend or
terminate in whole or in part, and if suspended or terminated, may reinstate,
any or all of the provisions of the Plan. Notwithstanding the foregoing, no
amendment may be effective without Board of Directors and/or stockholder
approval if such approval is necessary to comply with the applicable rules under
Section 162(m) of the Code.
C-7
THE SINGING MACHINE COMPANY, INC.
6601 LYONS ROAD, BLDG. A-7
COCONUT CREEK, FL 33073
PROXY
The undersigned hereby constitutes and appoints Edward Steele and John Klecha 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 July 6, 2001, at the
Annual Meeting of Stockholders to be held on August 16, 2001, at the Marriott
Hotel, 5150 Town Center Circle, Boca Raton, Florida 33486, 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 and FOR Proposals 2, 3 and 4.
The undersigned stockholder hereby acknowledges receipt of the Notice of Annual
Meeting and Proxy Statement and hereby revokes any proxy or proxies heretofore
given. This proxy may be revoked at any time prior to the Annual Meeting. If you
received more than one proxy card, please date, sign and return all cards in the
accompanying envelope.
(continued on reverse side)
1. Election of Directors
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(Except as marked to the for all such nominees listed
contrary) [ ] below [ ]
Edward Steele John Klecha Josef Bauer Howard Moore Robert Weinberg
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE PLEASE
DRAW A LINE THROUGH THAT NOMINEE'S NAME)
2. To approve the Year 2001 Stock Option Plan
For [ ] Against [ ] Abstain [ ]
3. To approve the Cash Bonus Performance Plan
For [ ] Against [ ] Abstain [ ]
4. To approve the appointment of Salberg & Company, P.A., as independent
auditors
For [ ] Against [ ] Abstain [ ]
5. In their discretion, the Proxy Agents are authorized to vote upon such other
business as may properly come before the meeting or any adjournment thereof.
Dated: , 2001
--------------------------
-----------------------------------------
Signature of Shareholder
-----------------------------------------
Signature of Shareholder
Please sign exactly as the name appears
below. If the shares are held jointly, both
owners must sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give 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.