SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
COMMISSION FILE NO.: 0-24968
THE SINGING MACHINE COMPANY, INC.
(Name of Small Business Issuer in its Charter)
Delaware 95-3795478
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
3101 N.W. 25th Avenue, Pompano Beach, FL 33069
(Address of principal executive offices, including zip code)
(954) 968-8006
(Issuer's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $.01 per share OTC Bulletin Board
Common Stock Purchase Warrants OTC Bulletin Board
Securities registered pursuant to 12(g) of the Act: None
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Issuer was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes No x
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. (X)
State issuer's revenues for its most recent fiscal year: $6,230,022
The aggregate market value of the Registrant's voting stock held by
non-affiliates, based upon the closing sales price for the common stock of
$.43 per share as reported on the OTC Bulletin Board on November 1, 1998, was
approximately $621,941. The shares of Common Stock held by each officer and
director and by each person known to the Company to own 5% or more of the
outstanding Common Stock have been excluded and such persons may be deemed to
be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
Indicate whether the Issuer has filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 after
the distribution of securities under a plan confirmed by a court. Yes
No x
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
2,356,935 shares of Common Stock were outstanding as of November 30, 1998.
<PAGE> 1
THE SINGING MACHINE COMPANY, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Business.........................................3
Item 2. Properties.......................................12
Item 3. Legal Proceedings................................12
Item 4. Submission of Matters to a
Vote of Security Holders.......................12
PART II
Item 5. Market for Company's Common Equity
And Related Stockholder Matters................12
Item 6. Management's Discussion and
Analysis or Plan of Operations.................14
Item 7. Financial Statements and Supplementary Date......19
Item 8. Change in and Disagreements
with Accountants on Accounting
and Financial Disclosure.......................19
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act..............20
Item 10. Executive Compensation...........................22
Item 11. Security Ownership of Certain
Beneficial Owners and Management...............23
Item 12. Certain Relationships and Related Transactions...25
Item 13. Exhibits, Financial Statement
Schedules and Reports on Form 8-K..............27
SIGNATURES
<PAGE> 2
PART I - FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. The forward-looking statements
contained in this Form 10-KSB are subject to certain risks and uncertainties.
Actual results could differ materially from current expectations. Among the
factors that could affect the Company's actual results and could cause results
to differ from those contained in the forward-looking statements contained
herein is the Company's ability to implement its business strategy
successfully, which will depend on business, financial, and other factors
beyond the Company's control, including, among others, prevailing changes in
consumer preferences, access to sufficient quantities of raw materials,
availability of trained laborers and changes in industry regulation. There
can be no assurance that the Company will continue to be successful in
implementing its business strategy. Other factors could also cause actual
results to vary materially from the future results covered in such
forward-looking statements. Words used in this Form 10-KSB, such as
"expects", "believes", "estimates", and "anticipates" and variations of such
words and similar expressions are intended to identify such forward-looking
statements.
ITEM 1. BUSINESS
INTRODUCTION
The Singing Machine Company, Inc. (the "Company") is engaged in the
distribution and marketing of electronic karaoke audio equipment which plays
backing tracks (music without lyrics) of popular songs and records the vocal
accompaniment of professional and amateur singers to those backing tracks.
The Company contracts for the manufacture of all of its electronic equipment
products with manufacturers located in the Far East. The Company also
produces and markets karaoke audio software, including CDS, CD, and graphics,
video tapes and audio tapes containing music and lyrics of popular songs for
use with karaoke recording equipment. One track of those tapes offers
complete music and vocals for practice and the other track is instrumental
only for performance by the participant. Virtually all audio software sold by
the Company is accompanied by printed lyrics, and the Company's karaoke video
tapes contain lyrics which appear on the video screen. The Company contracts
for the reproduction of its audio software, which is produced by the Company
or by an exclusive independent producer.
The Company was incorporated in California in 1982. The Company originally
sold its products exclusively to professional and semi-professional singers.
In 1988, it began marketing karoake equipment for home use. The Company
believes it was the first to offer karaoke electronic recording equipment and
audio software for home use in the United States.
<PAGE> 3
In February 1990, all of the outstanding Common Stock was purchased by Magna
International, Inc. ("Magna"). In March 1990, the Company relocated its
offices from California to South Florida. In September 1991, Messrs. Paul Wu,
Eugene B. Settler and Edward Steele purchased an option from Magna for 100% of
the Company's then outstanding Common Stock, which option was exercised in May
1994, by Messrs. Settler and Steele and Mr. Wu's designees. In September
1992, Magna and an affiliate thereof agreed to exchange $816,574 of debt owed
by the Company to Magna and an affiliate thereof for additional shares of the
Company's Common Stock (the "Additional Shares"). That agreement, as amended,
gave Magna the right to require the Company to repurchase the additional
shares, on December 31, 1996, for $816,574 plus interest at 8% per annum from
September 30, 1994. On November 10, 1994, Magna exchanged the Additional
Shares for the Company's promissory note (the "Magna Note") in the amount of
$816,574. In addition, in May 1994, the Company was merged into a
wholly-owned subsidiary of the Company incorporated in Delaware with the same
name. As a result of that merger, the Delaware corporation became the
successor to the business and operations of the California corporation and
retained the name The Singing Machine Company, Inc.
BANKRUPTCY REORGANIZATION
On April 11, 1997, the Company filed a voluntary bankruptcy petition in the
United States Bankruptcy Court for the Southern District of Florida seeking
relief pursuant to 11 U.S.C. Chapter 11. The automatic stay provisions of the
Bankruptcy Code prohibit creditors from taking action against the Company
without first obtaining court approval. Further, the Company is permitted to
operate under Company management while the Company formulates a plan of
reorganization.
The Company's Amended Plan of Reorganization (the "Plan") was confirmed by the
Bankruptcy Court on March 17, 1998. The material terms of the Plan include
the payment of certain court approved and allowed claims as follows: (i)
administrative costs in the amount of $116,000; (ii) the secured claim of
Bankers Capital in accordance with the terms of the Bankers Capital agreement
in the amount of $106,000; (iii) ten percent (10%) of the amount of the
allowed claims of unsecured creditors whose claims are $300 or less; (iv)
creditors whose allowed unsecured claims exceeded $300 were given the option
of receiving a cash payment of ten percent (10%) of the amount of the allowed
claim or exchanging debt for equity in the reorganized debtor of one (1) share
of common stock for each two dollars ($2.00) of the allowed claim; (v)
existing pre-petition shareholders, warrantholders, and optionholders had
their interests reduced by ninety percent (90%).
As a result of bankruptcy reorganization, the Company was able to effectively
reduce the size of its corporate offices, warehousing operations, personnel,
and inventory resulting in a savings of $12,000 per month in lease expense and
a reduction in payroll of $6,000 per month. During the Chapter 11, the
<PAGE> 4
Company was able to retain its core customer base of major retail accounts
such as Target, J.C. Penney, Fingerhut, and FAO Schwarz. Also, the Company
began a new customer relationship with Best Buy to whom the Company has sold
in excess of $1,000,000 during 1998. The Company was also able to settle
certain pending legal matters through the Plan which, when viewed with the
fact that over ninety percent (90%) of the unsecured creditors converted debt
to equity in the reorganized company resulted in a significant reduction of
liabilities on the Company's post-reorganization balance sheet.
PRODUCT LINES
The Company currently has a product line of 12 different models of recording
and playback units incorporating such features as a dual cassette player,
graphic equalizer and high-output stereo amplifier and markets certain of its
units under the popular national brand Memorex™ as well as its
registered trademark, The Singing Machine®. The Company also licenses its
trademark, on a non-exclusive basis, to others for sales around the world.
The Company believes that it is the only major company in the karaoke industry
in the United States which sells both hardware and software.
The following table sets forth the approximate amounts and percentages of the
Company's net revenues by product type during the periods shown, excluding
certain ancillary revenues.
<TABLE>
<CAPTION>
Year Ended March 31,
1998 1997 1996 1995
Net Percent Net Percent Net Percent Net Percent
Revenues Of Total Revenues Of Total Revenues Of Total Revenues Of Total
<S> <C> <C> <C> <C> <C> <C>
Audio software $ 693,885 11.2% $1,610,594 15.2$ $1,255,932 24.95% $3,258,312 56.4%
Audio equipment $5,528,599 88.8% 9,953,462 84.85% 3,795,447 75.1% 2,520,914 43.6%
</TABLE>
The Company currently offers 12 different models of electronic recording and
playback equipment with retail prices ranging from $40 for basic units to $400
for semi-professional units with CD and graphics player sound enhancement,
graphic equalizers, tape record/playback features, and multiple inputs and
outputs for connection to compact disc players and video cassette records.
The Company currently offers its audio software in two formats - multiplex
cassettes and CD and graphics with retail prices ranging from $3.99 to
$14.98. The Company purchases recordings from an independent producer and
currently has a song library of over 2,700 songs. The Company's backing track
<PAGE> 5
product line covers the entire range of musical tastes including popular hits,
golden oldies, country, standards, rock and roll, and rap. The Company even
has backing tracks for opera and certain foreign language recordings. During
the fiscal year ended March 31, 1998, the Company introduced two new models of
recording equipment. The Company is producing 25 CDG and new cassette titles.
THE MARKET
The karoake industry exceeds sales of $10 billion in the Far East, based upon
Japanese industry estimates. The current North American market for karaoke
products is estimated at less than $400 million. Therefore, the Company
believes that there is tremendous growth potential not only in the North
American market, but also in South America and Europe as well.
Although there are other electronic component competitors for the Company's
hardware products, and other audio software competitors, the Company believes
it is the only major company specializing in karaoke category that offers
complete lines of hardware and CD+graphics machines as well as a software
library with over 2,700 titles offered by the Company.
SALES, MARKETING AND DISTRIBUTION
MARKETING
The Company relies on its management's ability to determine the existence and
extent of available markets for its products. Company management has
considerable marketing and sales background and devotes a significant portion
of its time to marketing-related activities. The Company achieves both
domestic and direct sales and markets its hardware and software products
primarily through its own sales force and approximately 14 independent sales
representatives. The Company's representatives are located in various states
and are paid a commission based upon sales in their respective territories.
The Company's sales representative agreements are generally one (1) year
agreements which automatically renew on an annual basis, unless terminated by
either party on 90 days notice. The Company works closely with its major
customers to determine marketing and advertising plans.
The Company also markets its products at various national and international
trade shows each year. The Company regularly attends the following trade
shows and conventions: CES ("Consumer Electronics Show") each January in Las
Vegas; Hong Kong Electronics Show each October in Hong Kong; and the American
Toy Fair each February in New York.
The Company's electronic recording products are marketed under The Singing
Machine® or Memorex™ trademarks, and its audio software is marketed
under the Karaoke Kassette™, Karaoke Kompact Disc™, and Karaoke
Video Kassette™ trademarks throughout the United States, primarily
<PAGE> 6
through department stores, lifestyle merchants, mass merchandisers, direct
mail catalogs and showrooms, music and record stores, national chains,
specialty stores and warehouse clubs. The Company karaoke machines are
currently sold in such stores as Target, J.C. Penney, Fingerhut, Best Buy, and
Sears. In addition, the Company's karaoke software customers include J.C.
Penney, Fingerhut, Target, Best Buy, and Musicland.
On October 27, 1995, the Company entered into an agreement with Memcorp, Inc.
("Memcorp"), a Florida corporation holding rights to "Memorex", a registered
trademark name. The agreement is a five year exclusive arrangement, whereby
the Company became the exclusive sub-distributor of karaoke hardware products
under the "Memorex" trademark ("Memcorp Sub-distributor Agreement"). The
sub-distributor agreement requires the Company to pay a commission fee on all
hardware sales utilizing the brand name during the term of the agreement.
During fiscal 1998, the Company uses the Memorex trademark name with only one
customer (Target).
SALES
As a percentage of total revenues, the Company's net sales in the aggregate to
its five largest customers during the fiscal years ended March 21, 1997 and
1998, were approximately 79% and 89% respectively. For the fiscal 1998
period, Target accounted for 36%, J.C. Penney 19%, Fingerhut, 11% and Best
Buy, 22%.
Although the Company has long-established relationships with many of its
customers, it does not have long-term contractual arrangements with any of
them. A decrease in business from any of its major customers could have a
material adverse effect on the Company's results of operations and financial
condition.
At March 31, 1998 and November 30, 1998, the Company has approximately
$876,000 and $792,000, respectively, net of cancellations, of unfilled
customer orders. The amount of unfilled orders at any particular time is
affected by a number of factors, including scheduling of manufacturing and
shipping of products, which in some instances is dependent on the needs of the
customer.
Returns of electronic hardware and software products by the Company's
customers are generally not permitted except in approved situations involving
quality defects, damaged goods, or goods shipped in error. Returned hardware
products are sold in closeout markets by the Company for future sale and, if
necessary, refurbished. The practice in the prerecorded music industry is to
permit retailers to return or exchange audio software merchandise. In
general, the policy of the Company is to give credit to its distributors for
audio software returned in conjunction with the receipt of new replacement
purchase orders. Any such returns of software are available for resale by the
Company. The Company manages credit policies with respect to its customer
base. The Company has not suffered significant credit losses to date, even
<PAGE> 7
during a period when many major retailers, including customers of the Company,
experienced significant difficulties, including filing for protection under
federal bankruptcy laws. In the cases where a customer of the Company has
filed for protection under federal bankruptcy laws, it has not had a
significant impact on the Company's revenues or other categories of financial
performance.
DISTRIBUTION
The Company distributes its hardware products to retailers and wholesale
distributors through two methods: domestic sales (i.e., shipment of products
from the Company's inventory), and direct sales, shipments directly from the
Company's Hong Kong subsidiary or manufacturers in the Far East, of products
sold by the Company's sales force. Domestic sales, which account for
substantially all of the Company's audio software sales, are made to customers
located throughout the United States from the Company's inventories maintained
at its warehouse facility in Florida or directly from the software producers.
1. Domestic Sales: The Company's strategy of selling products from a domestic
warehouse enables it to provide timely delivery and serve as a "domestic
supplier of imported goods". The Company purchases electronic recording
products overseas for its own account and warehouses the products in a leased
facility in Florida and a warehouse in California. The Company is responsible
for costs of shipping, insurance, customs clearance, duties, storage and
distribution related to such warehouse products and therefore, warehouse sales
command higher sales prices than direct sales. The Company generally sells
from its own inventory in less than container sized lots.
2. Direct Sales - Hong Kong: The formation of the Company's subsidiary,
International SMC(HK) Ltd. ("International") is attributable to the advent of
foreign equipment sales. Some hardware products sold by the Company are
shipped directly to its customers from the Far East through International, a
Hong Kong trading company. Sales made through International are completed by
either delivering products to the customers' common carriers at the shipping
point or by shipping the products to the customers' distribution centers,
warehouses or stores. Direct sales are made in larger quantities (generally
container sized lots) to customers in Italy, England, Canada, Australia and
the United States, who pay International pursuant to their own international,
irrevocable, transferable letters of creditor or on open credit with the
Company's suppliers in the Far East.
MANUFACTURING AND PRODUCTION
The electronic recording devices sold by the Company are manufactured and
assembled by third parties pursuant to design specifications provided by the
Company. The Company's electronic recording devices are assembled by three
factories in the People's Republic of China. The finished products are
<PAGE> 8
packaged and labeled under either the Company's registered trademark, The
Singing Machine®, the Memorex™ brand name.
The Company's products contain electronic components manufactured by other
companies such as Panasonic and Sony. Various subcontractors in the Far East
produce printed circuit boards and other audio components in accordance with
specifications of the Company. The electronic components are installed in
cabinets manufactured by FLX and other manufacturers. Tools and dies used in
the production of certain models of the electronic audio equipment sold by the
Company are owned by LTD and may be used by LTD to manufacture other
companies' products. In March 1995, the Company purchased tools and dies for
two new models from LTD for $318,000, which were subsequently sold to
International, primarily in order to have the exclusive right to use such
tools and dies.
The Company presently purchases and imports virtually all of its electronic
recording products from three suppliers located in the People's Republic of
China. In fiscal 1998 and 1997, suppliers in the People's Republic of China
accounted for in excess of 88% of the Company's total product purchases,
including virtually all of the Company's hardware purchases. The Company's
primary suppliers of electronic recording products are located in the Shenzen
province of the People's Republic of China.
While the Company purchases its products from a small number of large
suppliers with whom it maintains close alliances, all of the electronic
components and raw materials used by the Company are available from several
sources of supply, and the Company does not anticipate that the loss of any
single supplier would have a material long-term adverse effect on its
business, operations or financial condition. The Company provides key
suppliers with design and quality specifications. In return for ongoing
business which the Company provides these suppliers, such suppliers maintain
production capacity for the Company's production needs. To ensure its high
standards of product quality and that shipping schedules are met by suppliers,
the Company utilizes Hong Kong based agents as representatives. Those agents
include product inspectors who are knowledgeable about the Company's product
specifications and work closely with the suppliers to verify that such
specifications are met. Additionally, key officers of the Company frequently
visit suppliers for quality assurance and to support good working
relationships.
All of the electronic equipment sold by the Company is warranted against
manufacturing defects for a period of 90 days for labor and one (1) year for
parts. All audio software sold by the Company is similarly warranted for a
period of 30 days. During the fiscal years ended March 31, 1998 and 1997,
warranty claims have not been material to the Company's results of operations.
<PAGE> 9
SUBSIDIARIES
In June 1996, the Company organized a wholly-owned subsidiary in Hong Kong
under the name International SMC(HK) Ltd. ("International") to coordinate the
Company's production and finance in the Far East. International assists with
the coordination of product shipments from China and other foreign factories
as well as the negotiation of foreign letters of credit.
COMPETITION
The Company's business is highly competitive. In addition, the Company
competes with all other existing forms of entertainment including, but not
limited to, motion pictures, video arcade games, home video games, theme
parks, nightclubs, television and prerecorded tapes, CD's, and video
cassettes. The Company's financial position depends, among other things, on
its ability to keep pace with such changes and developments and to respond to
the requirements of its customers. Many of the Company's competitors have
significantly greater financial, marketing, and operating resources and
broader product lines than does the Company. The Company's major electronic
component competitors include Grand Prix, Casio, and New Tech. The Company's
major audio software competitors are Pocket Songs and Sound Choice.
The Company believes that competition in its markets is based primarily on
price, product performance, reputation, delivery times, and customer support.
The Company believes that, due to its proprietary know-how, it has the ability
to develop and produce hardware and software on a cost-effective basis.
TRADEMARKS AND LICENSES
The Company's holds federal and international copyrights to substantially all
of the audio productions comprising its song library. However, since each of
those productions is a re-recording of an original work by others, the Company
is subject to both contractual and statutory licensing agreements with the
publishers who own or control the copyrights of the underlying musical
compositions and is obligated to pay royalties to the holders of such
copyrights for the original music and lyrics of all of the songs in its
library that have not passed into the public domain. Since most audio
software distributed by the Company is accompanied by printed lyrics, the
Company is also subject to written print royalty license agreements. The
Company is currently a party to more than 13,000 different written copyright
license agreements covering more than 30,000 separate copyright holders.
The Federal Copyright Act (the "Act") creates a compulsory statutory license
for all non-dramatic musical works which have been distributed to the public
in the United States. Under the Act, with respect to each work included in an
audio software product distributed by the Company under a compulsory license,
the Company is required to pay a royalty of the greater of $0.0710 per song or
$0.013 per minute of playing time or fraction thereof with respect to each
<PAGE> 10
item of audio software produced and distributed by the Company (the "Statutory
Rate"). Royalties due under compulsory licenses are payable monthly. The
Company currently has compulsory statutory licenses for approximately 200
songs in its song library.
The Act allows a deferral of royalty payments for products sold subject to a
right of return. The practice in the recorded music industry is to permit
retailers to return or exchange merchandise. Accordingly, each audio
production sold by the Company is sold subject to a right of return for credit
against future purchases or exchange. Royalties are due with respect to such
sales on the earlier to occur of nine months after the date of distribution or
the date on which the revenue from the sale is recognized in accordance with
generally accepted accounting principles. The Company has reached agreement
on a 25% reserve with a music publisher representing over 22% of its print
licenses, which agreement requires the payment of deferred royalties no later
than nine months after the date of distribution. With regard to the other
principal copyright royalty holders, the Company has deferred, and intends to
continue to defer, approximately 25% of royalty payments for approximately
nine months, an amount and period which the Company believes is appropriate
for the karaoke industry.
The majority of the songs in the Company's song library are subject to written
copyright license agreements. The Company's written licensing agreements for
audio software ("mechanical licenses") typically provide for royalties at the
Statutory Rate although some provide for lower royalty rates. Written
licenses typically provide for quarterly royalty payments. The Company also
has written license agreements for substantially all of the printed lyrics
which are distributed with its audio software products ("print licenses"),
which licenses also typically provide for quarterly payments of royalties at
the Statutory Rate.
GOVERNMENT REGULATION
In the spring of 1998, the President of the United States renewed the People's
Republic of China's "Most Favored Nation" ("MFN") treatment for entry of goods
into the United States for an additional year. In the context of United
States tariff legislation, MFN treatment means that products are subject to
favorable duty rates upon entry into the United States. IF MFN status for
China is restricted or revoked in the future, the Company's cost of goods
purchased from Chinese vendors is likely to increase. A resultant change in
suppliers would likely have an adverse effect on the Company's operations and,
possibly, earnings, although management believes such adversity would be
short-term as a result of its ability to find alternative suppliers.
Management continues to closely monitor the situation and has determined that
the production capabilities in countries outside China which have MFN status
and, therefore, have favorable duty rates, would meet the Company's production
needs.
<PAGE> 11
EMPLOYEES
At March 31, 1998, the Company had 11 full-time employees, 4 of whom were
engaged in warehousing and technical support, and 7 in marketing and
administrative functions. At November 30, 1998, the Company had 10 full-time
employees, 4 of whom were engaged in warehousing and technical support, and 6
in marketing and administrative functions.
ITEM 2. PROPERTIES
At present, the Company does not own any property. On May 1, 1997, the
Company entered into a lease for a 10,000 square foot office and warehouse
facility located in Pompano Beach, Florida, for a term of 25 months at a cost
of $5,161 per month. Pursuant to the terms of the lease, the Company must pay
maintenance, insurance, and real estate taxes, which cost aggregates
approximately $11,000 per year.
The Company believes that is existing facility and distribution center is
adequate for the current level of the Company's operations. Furthermore, the
Company believes that the facilities are well maintained, in substantial
compliance with environmental laws and regulations and adequately covered by
insurance. The Company also believes that the leased spaces which house its
facilities are not unique and could be replaced, if necessary, at the end of
the term of the existing lease.
ITEM 3. LEGAL PROCEEDINGS
The Company filed a voluntary petition ("Petition") for relief under Chapter
11 of the Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the Southern District of Florida (the "Bankruptcy
Court"), case number 97-22199-BKC-RBR, on April 11, 1997 (the "Petition
Date"). On March 17, 1998, the U.S. Bankruptcy Court confirmed the Company's
Plan of Reorganization, as Amended.
Other than the aforesaid Bankruptcy Court proceeding, the Company is not a
party to any material legal proceeding, nor to the knowledge of management,
are any legal proceedings threatened against the Company. However, as a
result of the Company's historical copyright royalty reserve practices, the
Company could be subject to various claims for damages under copyright
licensing agreements, the Federal Copyright Act, or common law. No claims
have been asserted against the Company with respect to copyright infringement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Plan of Reorganization, as Amended, was submitted to a vote of
security holders (Class 6 - Interest Holders) through a solicitation of votes
in conjunction with the bankruptcy confirmation process.
<PAGE> 12
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On November 17, 1995, the Company was informed by The Nasdaq Stock Market,
Inc. that the Company's securities no longer met certain criteria for
continued listing on The Nasdaq SmallCap Market. Accordingly, effective
January 26, 1996, after a January 19, 1996, hearing before a Nasdaq Listing
Qualifications Panel, the Company's securities were delisted from The Nasdaq
SmallCap Market. However, the Company's securities were immediately eligible
for listing on the OTC Bulletin Board.
The Common Stock is currently traded on the OTC Bulletin Board under the
symbol "SINGD". The following table sets forth, for the fiscal periods
indicated, the high and low bid prices for the Common Stock on the Nasdaq
SmallCap Market for the periods prior to January 26, 1996, and the OTC
Bulletin Board thereafter. This information represents prices between dealers
and does not reflect retail mark-up or mark-down or commissions, and may not
necessarily represent actual market transactions.
<TABLE>
<CAPTION>
Fiscal Period *High Bid *Low Bid
<S> <C> <C>
1997:
First Quarter........................... $2.50 $1.00
Second Quarter.......................... 1.00 1.00
Third Quarter........................... 1.00 0.78
Fourth Quarter.......................... 1.00 0.78
1998:
First Quarter........................... $0.60 $0.60
Second Quarter.......................... 0.60 0.60
Third Quarter........................... 0.60 0.60
Fourth Quarter.......................... 2.50 0.60
1999:
First Quarter........................... $1.20 $0.57
Second Quarter.......................... .73 0.50
Third Quarter
(through November 30, 1998)......... .50 0.43
</TABLE>
*All data has been adjusted to reflect a one-for-ten reverse split for the
Company's Common Stock which was effected on April 1, 1998.
The closing bid price for the Company's Common Stock on the OTC Bulletin Board
on November 30, 1998 was $.43 per share. There has not been a public trading
market for the Company's Public Warrants during the Company's last two fiscal
years and any subsequent period thereto.
As of November 30, 1998, there were approximately 283 record holders of the
Company's outstanding Common Stock. Moreover, additional shares of the
Company's Common Stock are held for stockholders at brokerage firms and/or
clearing houses, and therefore the Company was unable to determine the precise
number of beneficial owners of Common Stock as of November 30, 1998.
<PAGE> 13
The Company has never declared or paid cash dividends on its capital stock and
the Company's Board of Directors intends to continue its policy for the
foreseeable future. Earnings, if any, will be used to finance the development
and expansion of the Company's business. Future dividend policy will depend
upon the Company's earnings, capital requirements, financial condition and
other factors considered relevant by the Company's Board of Directors and will
be subject to limitations imposed under Delaware law.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussions and analysis should be read in conjunction with, and
is qualified in its entirety by, the Financial Statements and Selected
Financial Information included elsewhere herein. Historical results are not
necessarily indicative of trends in operating results for any future period.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income and
expense items express as a percentage of the Company's total revenues, except
as noted below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1997 1996
<S> <C> <C> <C>
Revenues:
Equipment sales, net................. 88.7 83.9% 73.0%
Music sales, net .................... 11.1 15.1 24.2
Commission income - related
party and other.................... .2 1.0 2.8
Total Revenues......................... 100.0% 100.0% 100.0%
Cost of Sales(1):
Cost of equipment sales.............. 61.5 90.0% 89.6%
Cost of music sales.................. 4.1 67.3 110.8
Expenses:
Other operating expenses............ 2.4 5.4 13.6
Selling, general and
administrative expenses........... 29.7 22.2 48.2
Impairment of long-lived assets..... - 15.1 7.8
Operating income (loss)............... (23.5) (32.1) (66.2)
Other expenses, net................... (2.4) (4.2) (7.9)
Income (loss) before taxes............ (14.6) (36.3) (74.1)
Provision (benefit) for income taxes.. - - -
Income (loss)......................... (14.6) (36.3) (74.1)
</TABLE>
(1) Expressed as a percentage of related sales.
<PAGE> 14
THE YEAR ENDED MARCH 31, 1998 AND MARCH 31, 1997
Total revenues dropped to $6.2 million for the fiscal year ended March 31,
1998, compared to the $10.7 million reported for fiscal 1997. The decrease
was primarily attributable to limited funding to purchase additional inventory
during operations under Chapter 11 federal bankruptcy.
Revenues from equipment sales decreased $3.4 million, or 38% to approximately
$5.5 million during fiscal 1998 compared to approximately $9.0 million for
fiscal 1997.
Revenues from music sales decreased $917,000 or 57% to approximately $.7
million in fiscal 1998 from the approximately $1.6 million recorded during
fiscal 1997. Due to excess inventory caused by returns in the fourth quarter
of the fiscal year, management decided to redirect music sales away from
distributors who historically have high merchandise return rates in favor of
mass market retailers. The primary impact from this change in strategy was
reflected in fiscal 1997. The decrease in music sales was primarily due to
this change of strategy and the lack of operational capital to produce new
music titles.
Commission income decreased approximately $90,000 during fiscal 1998, to
$7,500 as a result of directing foreign sales from its wholly owned subsidiary
in Hong Kong as opposed to purchasing product from a related party.
Cost of equipment sales for the year ended March 31, 1998 decreased from
$3,326,000 for fiscal 1997. The cost of music sales decreased $777,000 for
the year ended March 31, 1998 from fiscal 1997. This decrease in the cost of
music sales reflects approximately $529,000 in adjustment to inventory values
during fiscal year 1997 and the reduced cost of returns from distributors
during fiscal year 1998.
Other operating expenses decreased approximately $396,000 or 69% for fiscal
1998, compared to the prior year. The decrease reflects management's efforts
to control operating expenses and primarily reflects lower warehouse rent,
occupancy costs, and warehouse personnel expense.
Selling, general and administrative expenses ("SG&A expenses") decreased
$87,000 or 4% for fiscal 1998 compared to fiscal 1997. This decrease was
primarily due to management's commitment to reduce total overhead. Categories
which decreased include salaries and benefits, promotional expenses including
catalog, advertising and show/convention costs, product development, travel
and entertainment, and insurance. These decreases were partially offset by
higher professional fees.
<PAGE> 15
The Company continues to take action to reduce its SG&A expenses, which can be
seen in the above comparison. The Company believes that an additional impact
of staff and other reductions will be seen in fiscal 1999. The emergence from
bankruptcy will directly reduce professional fees and an overall reduction of
travel, salaries, and rent will impact the Company in fiscal 1999.
Depreciation and amortization expense decreased approximately $223,000 or 56%
to $177,000 during the fiscal year ended March 31, 1998. The decrease was
primarily due to the write-off of certain fixed assets, trademark and costs in
excess of net assets (goodwill) as of March 31, 1998 and 1997.
As a result of the significant decline in music sales during fiscal 1997 and
1998, the Company reviewed the carrying value of costs in excess of net assets
acquired (goodwill) and trademarks carried on its balance sheet. As a result
of this review, the Company recorded a reduction in the carrying value of such
asset relating to music sales in the amount of $1,081,000 for fiscal 1997,
which amount was charged to operations. See "Notes to Consolidated Financial
Statements No. 1 - Organization and Summary of Significant Accounting
Policies".
The operating loss for fiscal 1998 was approximately $1.6 million, which was a
reduction of $2.9 million from fiscal 1997. As a percentage of total
revenues, the operating loss decreased to 24% for fiscal 1998 from 32% in the
prior year. Excluding accounting adjustments, the fiscal 1997 operating loss
would have been $1.3 million. Gross profit as a percentage of sales continues
to increase, and during fiscal year 1999, the Company has secured sufficient
capital to fund inventory purchases and increase sales. The improvement in
gross profit from music sales was primarily because of management's change in
policy to reduce returned merchandise and the impact of inventory valuation
adjustments in the prior year.
Net interest expenses decreased $145,000 or 84% from the prior year due to a
stay of interest as a result of the bankruptcy filing and subsequent
reorganization.
Loss on sales of accounts receivable was 1.5% and 2.2% of total revenues for
the fiscal years 1998 and 1997, respectively. The decrease of approximately
$140,000 was primarily because of a decrease in sales.
Net loss for fiscal 1998 was approximately $.9 million, a $3.0 million
reduction from the loss $3.9 million reported for fiscal year 1997. Although
the loss for fiscal 1998, excluding accounting adjustments of $1.6 million,
was significantly lower than the prior year, and management has made great
strides in reducing overhead, the primary reason for both periods' losses is
the inability to obtain sufficient gross margins on hardware sales to cover
overhead and debt payments combined with decreased levels of high margin music
sales. Although projections can be overly optimistic and purchase orders can
be canceled, management believes that the reduction of debt which was
<PAGE> 16
accomplished upon confirmation of the Plan, in conjunction with the accounting
adjustments to inventory and the carrying value of intangible assets, as well
as the significant reductions in cost structure, will position the Company for
profitability in fiscal 1999.
SEASONAL FACTORS
As is typical in the karaoke industry, the Company's operations have been
seasonal, with the highest net sales occurring in the second and third quarter
(reflecting increased orders for equipment and music merchandise during the
Christmas selling months) and to a lesser extent the first and fourth quarters
of the fiscal year.
The Company's results of operations may also fluctuate from quarter to quarter
as a result of the amount and timing of orders placed and shipped to
customers, as well as other factors. The fulfillment of orders can therefore
significantly affect results of operations on a quarter-to-quarter basis.
INFLATION
Inflation has not had a significant impact on the Company's operations. The
Company has historically passed any price increases on to its customers since
prices charged by the Company are generally not fixed by long-term contracts.
LIQUIDITY AND CAPITAL RESOURCES
Going Concern
The Company's working capital deficit at March 31, 1998, was approximately
$500,000. The report by the Company's independent auditors on its 1998
financial statements express substantial doubt about the Company's ability to
continue as a going concern. The independent auditors attributed this
substantial doubt to substantial net operating losses in the fiscal year ended
March 31, 1998, and an accumulated deficit of approximately $10,453,000. This
condition raises substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include adjustments relating
to the recoverability and classification of the recorded carrying value of
assets or the amounts or classifications of other liabilities that might be
necessary should the Company be unable to successfully negotiate additional
inventory financing and continue as a going concern.
Capital Resources
The Company has obtained significant financing for continuing operations and
growth. Three specific lines of credit have been opened, a financing
agreement in Hong Kong and two financing agreements through its U.S.
operations.
Effective July 2, 1998, the Company, through its Hong Kong subsidiary,
International SMC(HK) Ltd., has been provided a (US) $200,000 credit facility
for opening letters of credit and/or trust receipt and/or purchasing at the
<PAGE> 17
Company's factories by purchasing of documents against acceptance bills, from
Delta Asia Financial Group, Hong Kong. This facility is a revolving line
until May 31, 1999, at which time it will be reviewed. The cost of this
credit facility is prime plus 2 1/2% and bank charges for opening letters of
credit. This facility is personally guaranteed by Mr. J.A. Bauer, a former
director of the Company.
The Company is a party to a factoring agreement, dated April 24, 1998, with
Berkshire Financial Group, Inc. ("Berkshire") pursuant to which Berkshire
purchases certain of the Company's accounts receivable. Under the agreement,
Berkshire purchases certain selected accounts receivable from the Company and
advances 70% of the face value of those receivables to the Company. The
accounts receivable are purchased by Berkshire without recourse and Berkshire
therefore performs an intensive credit review prior to purchase the
receivable.
The Company is charged a variable percentage fee based upon the length of
collection period of the receivable and the remaining collected balance fees
are sent to the Company after collection. The purchase of receivables of the
Company by Berkshire is absolute and is a true sale of receivables. Berkshire
has placed no maximum limit on the amount of the Company's receivables they
will purchase.
The Company has also entered into an agreement with EPK Financial Corporation
("EPK") whereby EPK will open letters of credit with the Company's factories
to import inventory for distribution to the Company's customers. This allows
the Company to purchase domestic hardware inventory for distribution to
customers in less than container load quantities and provides the flexibility
to customers of not opening a letter of credit in favor of the Company. The
selling price to these customers is considerably higher because the Company
pays financing costs to EPK and incurs costs of ocean freight, duty, and
handling charges. Upon shipment of product from these financed transactions,
the receivables are factored by Berkshire Financial, thereby buying the
shipments and related interest from EPK.
The Company pays EPK a flat fee per transaction, which is negotiated for each
shipment, and the maximum purchase price per transaction is $300,000. There
has been no maximum total shipments established under this agreement.
Berkshire has entered into this agreement as a third party agreeing to
purchase all receivables invoiced under these transactions. The transactions
financed by EPK are supported by personal guarantees of the chief executive
officer and chief financial officer of the Company and the agreement is in
effect until July 1, 1999, unless terminated by either party upon 30 days'
written notice.
The Company has no present commitment that is likely to result in its
liquidity increasing or decreasing in any material way. In addition, the
Company knows of no trend, additional demand, event or uncertainty that will
result in, or that are reasonably likely to result in, the Company's liquidity
increasing or decreasing in any material way.
<PAGE> 18
The Company has no material commitments for capital expenditures. The Company
knows of no material trends, favorable or unfavorable, in the Company's
capital resources. The Company has no additional outstanding credit lines or
credit commitments in place and has no additional current need for financial
credit.
Year 2000
Management has compiled a list of both internally and externally supplied
information systems that utilize imbedded date codes which could experience
operational difficulties in the year 2000. The Company uses third party
applications or suppliers for all high level systems and reporting. These
systems will either be upgraded and tested to be in compliance for the year
2000 or the Company will take necessary steps to replace the supplier.
Management is testing new systems for which it is responsible. It is the
Company's objective to be in year 2000 compliance for all systems by the end
of fiscal 1999, however, no assurance can be given that such objective will be
met.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required pursuant to this Item 7 are included in this
Form 10-KSB as a separate section commencing on page F-1 and are hereby
incorporated by reference into this Item 7.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AN FINANCIAL DISCLOSURE
In connection with the confirmation of its Plan of Reorganization, as Amended,
by the U.S. Bankruptcy Court on March 17, 1998, the Company changed
accountants beginning with the audit of the financial statements included
herewith, from Millward & Co. to Samuel F. May, Jr. & Company, Certified
Public Accountants. Millward & Co. resigned as the Company's accountant in or
about March 1998.
The report of Millward & Co. on the Company's financial statements for the
fiscal year ended March 31, 1997 did not contain an adverse opinion or
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope, or accounting principles, except for a going concern uncertainty.
In connection with the audit of the Company's financial statements for the
fiscal year ended March 31, 1997, and in the subsequent interim period, there
were no disagreements, disputes, or differences of opinion with Millward & Co.
on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures, which, if not resolved to the
satisfaction of Millward & Co. would have caused Millward & Co. to make
reference to the matter in its report.
The accounting firm of Samuel F. May, Jr. & Company, Certified Public
Accountants, has prepared the Company's financial statements for the Company's
fiscal year ended March 31, 1998 (see item 7 above).
<PAGE> 19
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors and executive officers of the Company as of the date of this
report are as follows:
Name Age Position
Edward Steele 69 Chief Executive Officer,
President and Director
John F. Klecha 48 Chief Financial Officer,
Secretary, Treasurer
and Director
Walter Haskamp 63 Director
Paul Wu 68 Director
Edward Steele joined the Company in 1988 and has served as the Chief Executive
Officer, President, and as a director of the Company since September 1991.
From October 1988 to September 1991, Mr. Steele was responsible for the
development of the Company's electronic hardware products in the Far East and
was the Company's sales director. Prior to joining the Company, Mr. Steele
served in executive capacities at a number of companies in the toy and
electronics fields, including as Managing Director in charge of worldwide
sales of Concept 2000, a manufacturer of consumer electronics, from 1971 to
1978; as President of Wicely Corp., a distributor of electronic toys and
consumer electronics from 1978 to 1983; and as President of Justin Products
Corp., an electronic toy manufacturer from 1983 to 1988.
John Klecha has been the Chief Financial Officer, Secretary, Treasurer and a
Director of the Company since October 10, 1997. Mr. Klecha is in charge of
all financial and administrative operations of the Company, including the
Company's daily operations, shipping and inventory. Mr. Klecha manages the
Company's staff and is in control of the Company's billing and order entry and
accounting. Prior to joining the Company, Mr. Klecha managed all financial
and administrative functions for a toy design, manufacturing, and a
distribution company encompassing 26 employees and revenues of $20 million.
Mr. Klecha is a former Certified Public Accountant with more than 25 years of
financial and management experience.
<PAGE> 20
Walter H. Haskamp was appointed to the Board of Directors effective July 15,
1998. Since 1995, Mr. Haskamp has been a managing director of Knorr-Bremse AG
based in Hong Kong, which is an international group producing brake systems
for railway rolling stock and commercial vehicles. From 1986 to 1994, Mr.
Haskamp served as managing director for DEG-German Investment and Development
Company ("DEG"") based in Thailand. Additionally, Mr. Haskamp represented DEG
on the Board of Directors of several joint venture companies as well as
serving as a consultant to the Board of Investment and the Ministry of
Industry of Thailand as assigned by DEG/BMZ, the German ministry for economic
cooperation. Prior to 1986, Mr. Haskamp had served for more than 30 years as
a managing director/general manager of various manufacturing companies in the
Far East.
Paul Wu has been a director of the Company since September 1991 and was the
Chairman of the Board of Directors from September 1991 to February 1995. Mr.
Wu is a private investor and has been engaged in the electronics business in
the Far East and the United States. Since 1979, Mr. Wu has been the chairman
of the Board and a principal stockholder of FLX(HK) Ltd., a Hong Kong
corporation ("FLX"), which manufactures consumer electronics. Mr. Wu has also
been the Chairman and a principal stockholder of The SMC Singing Machine Co.,
Ltd., a Hong Kong corporation ("LTD"), since 1991, which is a trading company
for consumer electronics. Mr. Wu is also a director of Gemco Pacific, Inc., a
principal stockholder of the Company.
The Company agreed that the Managing Underwriter of the Company's initial
public offering, which closed on November 18, 1994, may designate a nominee to
the Board of Directors, reasonably acceptable to the Company, or have a
representative attend all board meetings, until November 10, 1999. No such
nominee has been designated. The officers, certain directors, and certain
stockholders of the Company have agreed to vote their share, for the election
of such nominee.
The Company's directors serve for a term of one year, or until their
successors shall have been elected and qualified. The Company has in place an
employment agreement with its Chief Executive Officer, Mr. Steele, and its
Chief Financial Officer, Mr. Klecha. See Item 10 - "Executive Compensation,
Employment Agreements".
DIRECTORS' FEES
The Company currently reimburses each director for expenses incurred in
connection with this 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 $750 for each board or committee meeting attended
and are entitled to receive 2,500 common stock options per year. No such fees
were paid or options issued for fiscal 1998.
<PAGE> 21
BOARD COMMITTEES
On July 15, 1998, the Board of Directors appointed Audit and Executive
Compensation/Stock Option Committees. The Audit Committee consists of Messrs.
Steele, Wu, Haskamp, and the Executive Compensation/Stock Option Committee
consists of Messrs. Steele, Wu, and Klecha. 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 the Company's independent auditors, reviews the
Company's internal accounting controls, and approves services to be performed
by the Company's independent auditors. The Executive Compensation/Stock
Option Committee considers and authorizes remuneration arrangements for senior
management and grants options under, and administers, the Company's 1994
Amended and Restated Management Stock Option Plan. The entire Board of
Directors operates as a nominating committee.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors, and persons who own more than
ten percent of a registered class of the Company's equity securities
(collectively the "Reporting Persons") to file reports and changes in
ownership of such securities with the Securities and Exchange Commission and
the Company. Based solely upon a review of (i) Forms 3 and 4 and amendments
thereto furnished to the Company pursuant to Rule 16a-3(e), promulgated under
the Exchange Act, during the Company's fiscal year ended March 31, 1998 and
(ii) Forms 5 and any amendments thereto and/or written representations
furnished to the Company by any Reporting Persons stating that such person was
not required to file a Form 5 during the Company's fiscal year ended March 31,
1998, it has been determined that no Reporting Persons were delinquent with
respect to such person's reporting obligations set forth in Section 16(a) of
the Exchange Act.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth summary compensation information with respect
to compensation paid by the Company to the Chief Executive Officer of the
Company ("CEO") and the Company's four most highly compensated executive
officers other than the CEO, who were serving as executive officers during the
Company's fiscal year ended March 31, 1998.
<PAGE> 22
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Awards Payments
Restricted Securities
Name of Individual Other Annual Stock Underlying/ LTIP All Other
and Principal Position Year Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Edward Steele 1998 $166,500 $3,180 $7,200 -0- -0- -0- -0-
President
John Klecha 1998 $ 43,654 $1,442 $2,100 -0- -0- -0- -0-
Chief Financial Officer
</TABLE>
EMPLOYMENT AGREEMENTS
The Company executed an employment agreement with Mr. Steele which commenced
as of March 1, 1998, for a period of three years. Pursuant to Mr. Steele's
employment agreement, he is entitled to receive base compensation of $180,000
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 the annual pre-tax net income (as defined in the agreement)
of the Company. No such bonuses were paid for the 1998 or 1997 fiscal years.
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 the Company in the karaoke industry in the
United States.
The Company executed an employment agreement with Mr. Klecha which commenced
as of March 1, 1998, for period of two years with an automatic term extension
for one additional year unless terminated by the Company or the employee.
Pursuant to Mr. Klecha's employment agreement, he is entitled to receive base
compensation of $92,000 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 the annual pre-tax net income (as defined
in the agreement) of the Company. No such bonuses were paid for the 1998 or
1997 fiscal years. Mr. Klecha would receive 25% of the bonus pool. In the
event of a termination of his employment following a change-in-control in the
twelve months preceding such termination, Mr. Klecha would be entitled to a
limp sum payment of 100% of the amount of his total compensation in the twelve
months preceding such termination. During the term of his employment
<PAGE> 23
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 the Company in the karaoke industry in the
United States.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of November 30, 1998, certain information
concerning beneficial ownership of the Company's Common Stock by (i) each
person known to the Company to own 5% or more of the Company's outstanding
Common Stock, (ii) all directors of the Company and (iii) all directors and
officers of the Company as a group:
<TABLE>
<CAPTION>
Shares
Name and Address Beneficially Percent of
of Beneficial Owner Owned (1)(8) Class
<S> <C> <C>
The Harry Fox Agency 410,675 17.7%
711 Third Avenue, 8th Floor
New York, NY 10017
Memcorp, Inc. 321,984 13.7%
7145 W. 20th Avenue
Hialeah, FL 33014
Magna International Corp. 314,317 13.3%
484 Sunrise Highway
Rockville Center, NY 11570
FLX(HK) Ltd. 212,432 9.1%
Unit 19 5/F Vanta Ind. Centre
21-33 Tai Lin Pai Road
Kwaichung N.T. Kowloon
Hong Kong
Colony Electronics 129,300(2) 5.6%
500 Hennessy Road
Causeway, Hong Kong
Gemco Pacific, Inc. 25,667(3) 1.1%
500 Hennessy Road
Causeway, Hong Kong
Edward Steele (7) 24,500(4) 1.0%
3101 NW. 25th Avenue
Pompano Beach, FL 33069
Ford Harvest Ltd. 18,333(9) *
500 Hennessy Road
Causeway, Hong Kong
</TABLE>
<PAGE> 24
contd...
<TABLE>
<CAPTION>
Shares
Name and Address Beneficially Percent of
of Beneficial Owner Owned (1)(8) Class
<S> <C> <C>
Paul Wu 7,500(5) *
985 Rexdale Boulevard
Rexdale, Ontario CA M9W 1R9
All Directors and Executive
Officers as a Group (2 persons) 32,000(6) 1.4%
</TABLE>
(1) 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.
(2) Mr. Wu is a director of Colony Electronics. Mr. Wu disclaims any
beneficial ownership of the shares of Colony Electronics.
(3) Mr. Wu is a director of Gemco Pacific, Inc. ("Gemco"). Mr. Wu disclaims
beneficial ownership of the shares owned by Gemco. All 25,667 of such
shares have been pledged by Gemco to Magna International, Inc. ("Magna")
to secure payment of an $816,574 promissory note of the Company to Magna.
(4) Includes immediately exercisable options to purchase 6,000 shares of
Common Stock.
(5) Includes immediately exercisable options to purchase 7,500 shares of
Common Stock.
(6) Includes immediately exercisable options to purchase 19,500 shares of
Common Stock and immediately exercisable warrants to acquire 2,250
shares of Common Stock.
(7) Mr. Steele disclaims beneficial ownership of 6,500 shares owned by his
wife.
(8) Presumes issuance of 2,068,576 shares of the Company's Common Stock to
creditors of the Company pursuant to the Company's Plan of
Reorganization, As Amended, and approved by the Bankruptcy Court on
March 17, 1998.
(9) Mr. Wu is a director of Ford Harvest, Ltd. Mr. Wu disclaims beneficial
ownership of the shares owned by Ford Harvest Ltd.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has an agreement with FLX (A china manufacturer of consumer
electronics products) to produce electronic recording equipment based on the
Company's specifications. Paul Wu, a director of the Company, is Chairman of
<PAGE> 25
the Board and a principal stockholder of FLX. During the fiscal years ended
March 31, 1997, and 1998, the Company purchased approximately $1.9 million and
$1.2 million respectively, in equipment from FLX.
The Company believes that all of the foregoing transactions with FLX and LTD
have been on terms no less favorable to the Company that could have been
obtained from unaffiliated third parties in arms-length transactions under
similar circumstances.
The Company entered into an agreement with EPK Financial Corporation ("EPK")
whereby EPK will open letters of credit with the Company's factories to import
inventory for distribution to the Company's customers. This allows the
Company to purchase domestic hardware inventory for distribution to customers
in less than container load quantities and provides the flexibility to
customers of not opening an L/C in favor of the Company. The selling price to
these customers is higher to cover the Company's costs of financing costs to
EPK, ocean freight, duty, inland freight, and handling.
The Company pays EPK a flat fee per transaction, which is negotiated for each
shipment. There has been no maximum of total shipments established under this
agreement. Berkshire Financial, the Company's factor, has entered into this
agreement as a third party agreeing to purchase all accounts receivable
invoiced under these transactions. The transactions financed by EPK are
supported by personal guarantees of Edward Steele, the Company's Chief
Financial Officer, and John Klecha, the Company's Chief Financial Officer.
The agreement is in effect until July 1, 1999, unless terminated by either
party upon 30 days' written notice.
Edward Steele, the Company's Chief Executive Officer, has a promissory note
outstanding to the Company of $25,489 as of March 31, 1998. The original note
for $30,650 granted on March 31, 1995 has been extended until March 31, 1999
with a rate of 9% per annum on the unpaid balance.
<PAGE> 26
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(A) Exhibits
2(a) Debtor's Amended Disclosure Statement, dated December 17, 1997 <F1>
2(b) Debtor's Amended Plan of Reorganization, dated December 17, 19981
2(c) Agreement regarding treatment of The Harry Fox Agency in Debtor's Plan
of Reorganization, as Amended, dated December 24, 1997 <F1>
2(d) Order Amending Amended Plan of Reorganization and Order Confirming
Debtor's Amended Plan
3(a) Certificate of Incorporation of the Company, including amendment filed
with the Secretary of the State of Delaware<F2>
3(b) By-Laws of the Company <F2>
3(c) Amendment to Company's Certificate of Incorporation filed with the
Secretary of the State of Delaware, dated April 30, 1998
4(a) Form of Warrant issued in connection with July, 1994, private offering
<F2>
4(b) Warrant Agreement and related Warrant Certificate to be issued in
connection with the public offering of the Company on November 18, 1994
<F3>
4(c) Underwriter's Warrant issued to the Underwriters on November 18, 1994
<F3>
*10(e)1994 Amended and Restated Management Stock Option Plan<F2>
10(q) Form of Subscription Agreement evidencing registration rights<F4>
16(a) Letter on Change in certifying accountant
(B) Reports on Form 8-K
The Company filed a report on Form 8-K, dated March 25, 1998. Pursuant
to the Company's Plan of Reorganization, as Amended, on March 17, 1998,
the Company announced that on March 31, 1998 (the "Record Date"), the
Company will effect a one-for-ten (1-for-10) reverse stock split of the
Company's Common Stock, which will be effected on April 1, 1998.
<F1> Incorporated by reference as filed by the Company with the Securities
and Exchange Commission pursuant to the Federal Rules of Bankruptcy
Procedure in conjunction with the Company's Chapter 11 Reorganization.
<F2> Incorporated by reference to the Company's Registration Statement on
Form SB-2 (Registration No. 33-81974-A) (the "Registration Statement")
as filed on July 27, 1994.
<F3> Incorporated by reference to the Post-Effective Amendment No. 1 to the
Registration Statement as filed on December 13, 1994.
<F4> Incorporated by reference to the Amendment No. 3 to the Registration
Statement as filed on October 21, 1994.
<PAGE> 27
Samuel F. May Jr. and Company
Certified Public Accounts
Member: AICPA
FICPA
Barnett Bank Building
23123 State Road 7, Suite 210
Boca Raton, Florida 33428
Office: (561) 487-0670 Fax: (561) 852-1646
Report of Independent Certified Public Accountant
Board of Directors and Shareholders
The Singing Machine Company, Inc.
and Subsidiary
Pompano Beach, Florida
I have audited the accompanying consolidated balance sheet of The Singing
Machine Company, Inc. and Subsidiary as of March 31, 1998, and the related
consolidated statements of operation, shareholders' equity (deficit), and cash
flows for the year ended March 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these consolidated financial
statements based on my audit The financial statements of The Singing Machine
Company, Inc. as of March 31, 1997, were audited by other auditors whose
report, dated December 3, 1997, expressed a qualified opinion on those
statements.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. I believe
that our audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Singing
Machine Company, Inc. and Subsidiary at March 31, 1998, and the results of
their operations and their cash flows for the year ended March 31, 1998, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that The Singing Machine Company, Inc. and Subsidiary will continue as a going
concern.
/s/ Samuel F. May Jr. & Company
Samuel F. May Jr. & Company
Certified Public Accountants
Boca Raton, Florida
October 12, 1998
F-1
<PAGE>
MILLWARD & CO. CPA
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
The Singing Machine Company, Inc.
(Debtor-in-Possession)
Pompano Beach, Florida
We have audited the accompanying consolidated statements of operations,
shareholders' equity (deficiency), and cash flow of The Singing Machine
Company, Inc. as Subsidiary (Debtor-in-Possession) for the year ended March
31, 1997. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted my audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of consolidated
operations and consolidated cash flows for the year ended March 31, 1997 in
conformity with generally accepted accounting principles.
The accompanying consolidated referred to above for the year ended March 31,
1997, have been prepared assuming that The Singing Machine Company, Inc. will
continue as a going concern. As indicated in the financial statements, the
Company has incurred recurring operating losses and has an accumulated deficit
of $9,546,672, at March 31, 1997, and on April 11, 1997, the Company filed for
relief pursuant to Chapter 11 of the United States Bankruptcy Act. In
addition, as of December 3, 1997, the Company did not have a line of credit in
place to finance its seasonal needs for inventory purchases. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements for the year ended March 31,
1997, do not include any adjustments to reflect the possible future effects on
the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the inability of The
Singing Machine Company, Inc. and Subsidiary to continue as a going concern.
/s/ Millward & Co. CPAs
Millward & Co. CPAs
Fort Lauderdale, Florida
December 3, 1997
F-2
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 1998
ASSETS
CURRENT ASSETS:
Cash $ 7,770
Trade accounts receivable, net of allowance
for doubtful accounts of $80,000 532,765
Due from officer 25,489
Inventories, net 410,293
Prepaid expenses and other current assets 44,754
Total current assets 1,021,071
EQUIPMENT, net of accumulated
depreciation of $163,064 19,435
INTANGIBLE ASSET:
Investment in song library, net of accumulated
amortization of $398,328 46,590
Total assets $ 1,087,096
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Trade accounts payable $ 583,990
Trade accounts payable to related parties 229,754
Accrued expenses 519,382
Royalties payable 41,809
Loans payable 100,000
Due to factor 54,982
Total current liabilities 1,529,917
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock, $.01 par value;
10,000,000 shares authorized;
2,356,935 shares issued and outstanding 23,569
Additional paid-in capital 9,986,867
Accumulated deficit (10,453,257)
Total shareholders' deficit (442,821)
Total liabilities and shareholders' deficit $ 1,087,096
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended March 31,
1998 1997
<S> <C> <C>
REVENUES:
Equipment sales, net $ 5,528,599 $ 8,953,462
Music sales, net 693,885 1,610,594
Commission income
- related party - 90,583
Other income 7,538 20,240
Total revenues 6,230,022 10,674,879
COST AND EXPENSES:
Cost of equipment sales 4,734,633 8,060,973
Cost of music sales 317,644 1,084,386
Other operating expenses 181,005 576,602
Selling, general and
administrative expenses 2,283,590 2,370,746
Depreciation and amortization 177,268 400,084
Impairment of long-lived assets - 1,609,973
Total costs and expenses 7,694,140 14,102,764
Loss from operations (1,464,118) (3,427,885)
OTHER (EXPENSES) INCOME:
Interest expense (28,514) (173,639)
Interest income 2,870 5,033
Factoring fees (95,257) (235,312)
Gain (loss) on sale or abandonment
of property and equipment (25,822) (43,325)
Total other expenses (146,723) (447,243)
LOSS BEFORE EXTRAORDINARY ITEM (1,610,841) (3,875,128)
Extraordinary item:
Early extinguishment of debt,
net of income taxes 704,256 -
Loss before provision for
income taxes (906,585) -
PROVISION FOR INCOME TAXES - -
NET LOSS $ (906,585) $ (3,875,128)
NET LOSS PER COMMON SHARE
(Basic and Diluted) $ (2.428) $ (13.759)
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
(Basic and Diluted) 373,369 281,651
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
Total
Common Stock Additional Shareholders'
$.01 Par Value Paid-In Accumulated Equity
Shares Amount Capital Deficit (Deficit)
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1996 281,159 $ 2,812 $5,852,473 $(5,671,544) $ 183,741
Issuance of common
shares for debt
settlement 7,200 72 17,927 - 17,999
Net loss for the
year ended
March 31, 1997 - - - (3,875,128) (3,875,128)
Balance at
March 31, 1997 288,359 2,884 5,870,400 (9,546,672) (3,673,388)
Issuance of common
shares for debt
settlement 2,068,576 20,685 4,116,467 - 4,137,152
Net loss for the
year ended
March 31, 1998 - - - (906,585) (906,585)
Balance at
March 31, 1998 2,356,935 $ 23,569 $ 9,986,867 $(10,453,257) $ (442,821)
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended March 31,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (906,585) $(3,875,128)
Adjustments to reconcile net
loss to net cash provided by
used in) operations:
Depreciation and amortization 177,268 400,084
Impairment of long-lived assets - 1,609,973
(Gain) Loss on sale or
abandonment of property
and equipment 25,822 43,325
Changes in operating assets
and liabilities:
Trade accounts receivable (223,285) (124,873)
Due from factor (3) 33,833
Inventories 759,724 1,136,415
Prepaid expenses and other 8,080 50,037
Income tax receivable - -
Bank overdraft (10,599) 10,599
Trade accounts payable (1,956,456) 1,101,286
Trade accounts payable
to related parties (195,109) (80,771)
Accrued expenses (434,928) (53,127)
Royalties payable (678,456) (123,784)
Net cash provided by (used in)
operating activities (3,434,527) 127,869
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment - (732)
Proceeds from sale of property
and equipment - -
Additions to song library - -
Due from officer 5,689 (975)
Net cash used in investing activities 5,689 (1,707)
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to factor (167,461) 222,443
Issuance of common stock for
debt settlement 4,137,152 -
Issuance of bridge warrants - -
Loans payable (543,305) (338,496)
Net cash used in financing activities 3,426,386 (116,053)
Net increase (decrease) in cash (2,452) 10,109
Cash at beginning of year 10,222 113
Cash at end of year $ 7,770 $ 10,222
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization and Basis of Presentation - The Singing Machine Company,
Inc. and Subsidiary (the Company) is primarily engaged in the
production, distribution, and marketing of karaoke music recordings, as
well as the distribution and marketing of electronic karaoke audio
equipment and accessories. The Company also acts as the exclusive
commissioned sales agent for a related party which sells karaoke audio
equipment to both unrelated parties located in the United States and
internationally, and to the Company for distribution within the United
States.
On November 18, 1994, the Company completed an initial public offering of
its common stock on Form SB-2.
On April 11, 1997, The Singing Machine Company, Inc. filed a voluntary
petition for relief pursuant to Chapter 11 of the United States
Bankruptcy Act. Accordingly, all debts have bene classified as debts
subject to compromise. See Note 12 to the consolidated financial
statements related to the Company's Plan of Reorganization, as Amended.
2. Principles of Consolidation - The consolidated financial statements
include the accounts of The Singing Machine Company, Inc. and its
wholly-owned foreign subsidiary. All significant intercompany
transactions have been eliminated.
3. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
4. Foreign Currency Translation - Local currency is generally considered the
functional currency outside the United States. Assets and liabilities
are translated at the year-end exchange rate. Income and expense items
are translated at average rates of exchange prevailing during the year.
The related translation adjustment is not material.
5. Inventories - Inventories are substantially all finished goods, which
consist primarily of electronic karaoke audio equipment accessories, audio
and compact discs. Inventories are stated at the lower of cost (first-in,
first-out method) or market. As of March 31, 1997, the carrying value of
all audio and video tapes was reviewed by the Company and based upon the
outcome of such review, the Company has recorded a reduction in the
carrying value of such assets in the amount of $529,414 , which was
charged to cost of sales.
6. Cash Equivalents - The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash
equivalents.
F-7
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
7. Investment in Song Library - Investment in song library consists of costs
incurred in the production or purchase of master song tapes. The carrying
value of investment in song library is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates
that the investment in song library will not be recoverable, as determined
based on the estimated undiscounted cash of the entity acquired over the
remaining amortization period, the Company's carrying value of the
investment in song library is reduced by the estimated shortfall of
discounted cash flows. Amortization expense charged to operations for the
fiscal years ended March 31, 1998 and 1997 amounted to $44,492 and
$126,507, respectively.
8. Property and Equipment - Property and equipment is recorded at cost less
accumulated depreciation and amortization. Depreciation is provided using
an accelerated method over the estimated useful lives of the related
assets. During July, 1997, the Company moved to more cost effective
facilities. All leasehold improvements and equipment associated with the
prior facility were written down to $-0- value.
9. Costs in Excess of Net Assets Acquired and Trademarks - The carrying
value of goodwill and trademarks are reviewed if the facts and
circumstances suggest it may be impaired. If this review indicates that
the goodwill and trademarks will not be recoverable, as determined based
on the estimated undiscounted cash of the entity acquired over the
remaining amortization period, the Company's carrying value of the
goodwill and trademarks is reduced by the estimated shortfall of
discounted cash flows. As of March 31, 1997, the carrying value of
goodwill and trademarks was reviewed by the Company and based upon the
outcome of such review, the Company has recorded a reduction in the
carrying value of such assets relating to music sales in the amount of
$1,080,828. Accordingly, the write down of goodwill and trademarks has
been charged to operations.
10. Income Taxes - Income taxes are accounted for under the asset and
liability method of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities or a change in tax rate is
recognized in income in the period that includes the enactment date.
Deferred tax assets are reduced to estimated amounts to be realized by
use of a valuation allowance.
F-8
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
The principal types of temporary differences between assets and
liabilities for financial statement and tax return purposes are net
operating loss carryforwards and allowances for doubtful accounts.
11. Revenue Recognition - Revenue from the sale of equipment and music are
recognized upon shipment and are reported net of returns and allowances.
Commission income is recognized as earned.
12. Loss Per Common Share - Loss per common share is calculated based on the
weighted average number of common shares and dilutive common stock
equivalents outstanding during the period. For the fiscal 1998 and 1997
periods, the effect of the common stock equivalents would be antidilutive
and has not been included in the calculation.
13. Pronouncements - In fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share," which supercedes Accounting Principles Board Opinion No. 15.
Pursuant to SFAS No. 128, earnings (loss) per common share is computed by
dividing net income (loss) available to common stockholders by the
weighted average number of shares outstanding during the period. Diluted
earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock.
For the fiscal years ended March 31, 1998 and 1997, there is no
difference between basic and diluted net loss per share or between
the basic and diluted net loss per share as previously reported.
Potential common shares from stock options, warrants, and convertible
preferred stock are excluded in computing basic and diluted net loss per
share as their effects would be antidilutive. The adoption of SFAS No.
128 did not have a material impact on the Company's consolidated
financial statements.
14. Fair Market Value of Financial Instruments - The carrying amount reported
in the consolidated balance sheet for cash and cash equivalents, note
payable, accounts payable, and accrued liabilities approximates fair
market value due to the immediate or short-term maturity of these
financial instruments. The Company's liabilities are subject to
compromise as discussed in note 12 to the consolidated financial
statements.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the
accompanying consolidated financial statements, the Company incurred losses
and there is an accumulated deficit of $10,453,257 at March 31, 1998.
Management of the Company believes that it has instituted certain initiatives,
including an enhanced sales focus and cost reductions that will result in
returning the Company to profitable operations in fiscal 1999, and the
Company's backlog of orders placed by customers indicate this strategy is
working.
F-9
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 3 - SALE OF RECEIVABLES WITH RECOURSE
The Company sells certain trade accounts receivable, subject to full recourse
provisions, pursuant to a factoring agreement, as amended. At March 31, 1998,
the outstanding balance of such receivables for which the Company is
contingently liable was approximately $532,765.
The Company received proceeds of approximately $1,987,000 and $2,855,000 in
the fiscal 1998 period and fiscal 1997, respectively, upon the sale of trade
accounts receivable under this agreement, and incurred approximately $95,257
and $235,000 in factor fees, respectively. All of the Company's accounts
receivables, inventories, and intangibles are pledged as collateral under this
agreement, and the factor holds back 50% of the approved receivable face
amount as security. Minimum factor fees were $6,667 per month.
NOTE 4 - EQUIPMENT
A summary of equipment as of March 31, 1998 is as follows:
Estimated
Useful Lives
(Years)
Computer equipment 5 $ 56,212
Office equipment 7 42,915
99,127
Less accumulated depreciation 79,692
Totals $ 19,435
Depreciation and amortization expense on property and equipment for the fiscal
1998 and fiscal 1997 periods is approximately $177,268 and $139,152,
respectively.
NOTE 5 - LOANS PAYABLE
As of March 31, 1998, loan payable consists of the following:
Note payable, bearing annual interest at 10%,
due upon demand and subject to compromise $ 20,000
Note payable, bearing annual interest at 12% due
September 30, 1998, and subject to
compromise to an officer and director 80,000
Totals $ 100,000
F-10
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 6 - COMMITMENTS AND CONTINGENCIES
On May 1, 1997, the Company entered into a lease for an office and warehouse
facility for a term of 25 months. Pursuant to the terms of the lease, the
Company must pay maintenance, insurance, and real estate taxes. Total rent
expense was approximately $77,724 and $203,000 in the 1998 and fiscal 1997
periods, respectively. Future minimum lease commitments under noncancellable,
the operating lease are as follows:
Year Ending March 31:
1999 $ 78,703
2000 26,234
2001 -
$ 104,937
NOTE 7 - RELATED PARTY TRANSACTIONS
At March 31, 1998, the amount due from officer bears interest monthly at 9%
per annum and is due on March 31, 1999.
The Company's Hong Kong wholly-owned subsidiary, International SMC (HK) Ltd.,
operates as an intermediary to purchase Karaoke hardware from factories
located in China.
During the fiscal 1998 and 1997 periods, the Company purchased certain karaoke
audio equipment and accessories from Far East companies (related party
suppliers) controlled by a director. During fiscal 1998, the Company
purchased goods from FLX (HK) Limited, a company related through a common
director, in the amount of approximately $1,200,000. During fiscal 1997, the
Company purchased approximately $1,900,000.
NOTE 8 - SHAREHOLDERS' DEFICIT
Effective May 3, 1994, the Company adopted a stock option plan (the Plan),
which provides for the granting of both incentive and nonqualified stock
options to key personnel, including officers, directors, consultants, and
advisors of the Company, based upon the determination of the Board of
Directors. The Plan was amended on June 29,1994, and incentive stock options
were granted under the Plan to purchase 293,700 shares of the Company's common
stock. The incentive stock options expire in 1999 and 2004.
On April 1, 1998, the Company effectuated a one for ten (1:10) reverse stock
split. The primary purpose of the split is pursuant to the Company's Plan of
Reorganization as Amended on March 17, 1998. Trading in the post-split shares
commenced at the opening of business on April 1, 1998. No additional shares
were issued in connection with the reverse split and those stockholders
entitled to receive fractional shares received shares based on rounding to the
nearest whole number. During April, 1998, the Company filed an amendment to
its Articles of Incorporation increasing the authorized shares of the
Company's common stock to ten million (10,000,000) shares.
F-11
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 8 - SHAREHOLDERS' DEFICIT (continued)
The company's creditors, pursuant to the Company's Plan of Reorganization, as
Amended, who elected to receive shares will be issued an aggregate of
2,068,576 post-split shares of common stock. The Company's legal counsel has
written to each creditor requesting that the necessary information be
completed and returned in order to issue the common stock. The financial
statements reflect the issuance of 2,068,576 post-split shares of common stock
to the Company's creditors.
These financial statements reflect the one for ten (1:10) reverse stock split
in computing the weighted average common and common equivalent shares
outstanding and the net loss per common share amounts and accounts for the
subsequent increase of authorized common shares pursuant to the Company's
amendment to its Articles of Incorporation during April, 1998.
At March 31, 1998, 215,000 of these options are currently exercisable, and the
remaining 78,700, held by three individuals, become exercisable in maximum
increments of 20,000 each year through June 29,1999. Additional incentive or
nonqualified stock options may be granted to purchase up to 191,300 shares of
the Company's common stock. At March 31, 1998, 485,000 shares of common stock
have been reserved for issuance under the Plan.
On November 18, 1994, the Company closed the initial public offering of
1,380,000 shares of its common stock and 1,380,000 warrants (the Public
Warrants) for an aggregate purchase price of approximately $7,080,000. The
Public Warrants may be exercised at anytime beginning November 10, 1995, and
continuing thereafter until November 10, 1999.
Also, included in the offering were 144,000 warrants issued to the Company's
underwriters (the Representative's Warrants). The Representative's Warrants
entitle the registered holders to purchase one share of the Company's common
stock and a warrant to purchase an additional share of common stock. The
warrants became exercisable November 10, 1995, and will continue thereafter
until November 10, 1999.
During April, 1995, 272,250 Bridge Warrants were exercised resulting in net
proceeds to the Company of $320,578.
During March, 1997, the Company issued 7,200 shares post-split of common stock
to settle outstanding debt of approximately $18,000.
NOTE 9 - INCOME TAXES
On September 3, 1991, the Company underwent a change of ownership (as defined
by Internal Revenue Code Section 382). This change limits the Company's
ability to utilize its approximately $4,057,000 of net operating loss
carryforwards (NOLs) as of March 31, 1997, to $14,000 per year (these NOLs
expire from 2003 to 2007). At March 31, 1998, the Company has net operating
loss carryforwards of approximately $10,635,490 (which are not subject to the
above limitations) that expire through 2012. A valuation allowance of
approximately $4,136,300 has been recognized to offset primarily all of the
deferred tax assets related to these carryforwards.
F-12
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 9 - INCOME TAXES (continued)
The differences between the statutory United States federal income tax rate
and the effective tax rate are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1998 March 31, 1997
<S> <C> <C>
Statutory rate (34.0)% (34.0)%
State income tax effect, net of
federal benefit (4.6)% (4.6)%
Changes in valuation allowance 38.6% 38.6%
Effective rate - -
</TABLE>
At March 31, 1998, the components of the cumulative effect of temporary
differences in the deferred income tax liability and income tax asset balances
are as follows:
Total
Assets:
Net operating loss carryforwards $ 4,105,300
Reserves for bad debts, sales returns
and warranties 31,000
Sub-totals 4,136,300
Valuation allowance (4,136,300)
Net deferred tax assets $ -
The net change in the valuation allowance during the fiscal 1998 period was an
increase of $1,436,300.
NOTE 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company derives primarily all of its equipment and music sales revenues
from distributors and retailers of such products in the United States.
Financial instruments, which potentially subject the company to concentrations
of credit risk, consist principally of cash and accounts receivable (including
receivables sold to factor with recourse). The credit risk associated with
cash is considered low due to the credit quality of the depository
institution. The Company's allowance for doubtful accounts is based upon
management's estimates and historical experience. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral.
F-13
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS (continued)
During the fiscal 1998 and 1997 periods, 91% and 79%, respectively, of the
Company's total revenues were derived from sales to five customers. Sales
derived from customers who individually purchased greater than 10% of total
revenues were as follows:
<TABLE>
<CAPTION>
Fiscal Fiscal
1998 1997
<S> <C> <C>
Target 36% 47%
JC Penney 19% 13%
Best Buy 22% -
Fingerhut 11% -
</TABLE>
NOTE 11 - FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
The following is a summary of certain year-end adjustment that are considered
material in the aggregate to the results of the fourth quarter.
<TABLE>
<CAPTION>
Fiscal Fiscal
1998 1997
<S> <C> <C>
Inventory write-down $ - $ 529,414
Impairment of long-lived assets - 1,900,568
Adjustment of royalties payable - (290,595)
</TABLE>
NOTE 12 - DESCRIPTION OF PETITION
On April 11, 1997, The Singing Machine Company, Inc. filed a voluntary
petition of relief pursuant to Chapter 11 of the United States Bankruptcy
Act. Under Chapter 11, certain claims against the Debtor in existence prior
to the filing of the petitions for relief under the federal bankruptcy laws
are stayed while the Debtor continues business operations as
Debtor-in-possession. These claims are reflected in the March 31, 1998,
balance sheet as "liabilities subject to compromise." Additional claims
(liabilities subject to compromise) may arise subsequent to the filing date
resulting from rejection of executory contracts, including leases, and from
the determination by the court (or agreed to by parties in interest) of
allowed claims for contingencies and other disputed amounts. Claims secured
against the Debtor's assets ("secured claims") also are stayed, although the
holders of such claims have the right to move the court for relief from the
stay. Secured claims are secured primarily by liens on the Debtor's property,
plant, and equipment.
F-14
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 12 - DESCRIPTION OF PETITION (continued)
On March 17, 1998, the United States Bankruptcy Court approved the Company's
Plan of Reorganization, as Amended, and the Company emerged from Chapter 11
Bankruptcy.
F-15
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE SINGING MACHINE COMPANY, INC.
Dated: December 7, 1998 By:/s/ Edward Steele
Edward Steele, Chief Executive
Officer, President and Director
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Edward Steele Chief Executive Officer December 7, 1998
Edward Steele President and Director
/s/ John Klecha Chief Financial Officer, December 7, 1998
John Klecha Secretary, Treasurer
and Director
/s/ Walter Haskamp Director December 7, 1998
Walter Haskamp
/s/ Paul Wu Director December 7, 1998
Paul Wu
<PAGE>
SEC FILE NO. 0-24968
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
OF
THE SINGING MACHINE COMPANY, INC.
<PAGE>
EXHIBIT 2(d)
Order Amending Amended Plan of Reorganization and Order Confirming Debtor's
Amended Plan
<PAGE>
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF FLORIDA
IN RE: CASE NO. 97-22199-BKC-RBR
THE SINGING MACHINE COMPANY, INC. CHAPTER 11
Tax ID#95-3795478
Debtor.
__________________________________/
ORDER AMENDING AMENDED PLAN OF REORGANIZATION
AND ORDER CONFIRMING DEBTOR'S AMENDED PLAN
This cause came before the Court upon the Debtor's Ex-Parte Motion to
Amend the Plan of Reorganization and Confirmation Order wherein the Debtor
requested that the Amended Plan of Reorganization and Confirmation Order
entered by this Court on February 26, 1998 be amended to provide that the
record date and payable date for purposes of effectuating the reverse stock
split of the Debtor's securities and the issuance of shares to those creditors
that are exchanging debt for equity, be extended for fourteen (14) days from
and after approval of the amendment to provide the Debtor with the opportunity
to comply with the National Association of Securities Dealers, Inc. ("NASD")
regulations. After review of the Motion and finding that good cause to Amend
the Confirmation Order, it is
ORDERED AND ADJUDGED as follows:
1. The Debtor's Amended Plan of Reorganization and the Order
Confirming Debtor's Amended Plan of Reorganization entered by the Court on
February 26, 1998 are amended to add and include the following paragraph:
ORDERED THAT the record date and payable date for purposes of effectuating the
reverse stock split of the Debtor's securities and the issuance of shares to
the creditors whose debt is being converted to stock is extended fourteen (14)
days from the date of this Order to provide the Debtor with the opportunity to
comply with the National Association of Securities Dealers, Inc. ("NASD")
regulations.
<PAGE>
DONE AND ORDERED in the Southern District of Florida this 17th day of
March, 1998.
/s/ Raymond B. Ray
RAYMOND B. RAY, Judge
UNITED STATES BANKRUPTCY JUDGE
COPIES FURNISHED TO:
Robert C. Furr, Esq.
Furr and Cohen, P.A.
1499 W. Palmetto Pk.Rd.#412
Boca Raton, Florida 33486
Office of Asst. U.S. Trustee
51 S.W. 1 Avenue
Room 1204
Miami, Florida 33130
The Singing Machine Company, Inc.
3101 Northwest 25th Avenue
Pompano Beach, FL 33069
Susan Sherrill, Esq.
Securities & Exchange Commission
Branch of Reorganization
Suite 1000
3475 Lenox Road, NE
Atlanta, GA 30326-1323
David Carter, Esq.
Special Counsel to DIP
2300 Glades Road
Boca Raton, FL 33431
<PAGE>
EXHIBIT 3(c)
Amendment to Company's Certificate of Incorporation filed with the Secretary
of the State of Delaware, dated April 30, 1998
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
THE SINGING MACHINE COMPANY, INC.
THE SINGING MACHINE COMPANY, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
does certify:
FIRST: that pursuant to the Company's Plan of Reorganization, as amended
on March 17, 1998, and pursuant to the unanimous written consent of the Board
of Directors of said corporation, the Board adopted a resolution dated March
23, 1998, amending Article Three to the Articles of Incorporation of the
Company to fix the aggregate number of shares of Capital Stock that the
Company shall have authority to issue at One Million One Hundred Thousand
(1,100,000) shares.
SECOND: that in lieu of a meeting and vote of stockholders, and in
accordance with the provisions of Section 303 of the General Corporation Law
of the State of Delaware, the Board of Directors of said corporation, by the
unanimous written consent of its members, as necessary to effectuate the
Company's Plan of Reorganization, as Amended on March 17, 1998, adopted a
resolution proposing and declaring advisable the following amendment to the
Certificate of Incorporation of said Corporation:
RESOLVED, that the Certificate of Incorporation of The Singing Machine
Company, Inc. be amended by deleting the first paragraph of Article Three to
the Articles of Incorporation of the Company and to insert the following in
its place and stead:
"The aggregate number of shares of all classes of capital stock
that this Company shall have authority to issue is Eleven Million
(11,000,000) shares, consisting of Nine Million (9,900,000) shares
<PAGE>
of Common Stock, par value $.01 per share (the "Common Stock");
and (ii) One Hundred Thousand (100,000) shares of Class A Common
Stock, par value $.01 per share (the "Class A Stock"); and
One Million (1,000,000) shares of Preferred Stock, par value
$1.00 per (the "Preferred Stock").
THIRD: that the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Section 242 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, The Singing Machine Company, Inc. has caused this
Certificate to be signed by John Klecha, its Secretary, this 30th day of
April, 1998.
THE SINGING MACHINE COMPANY, INC.
By: /s/ John Klecha
John Klecha, Secretary
singing\amendment2.del
<PAGE>
EXHIBIT 16(a)
Letter on Change in certifying Accountants
<PAGE>
This is to confirm that Millward & Co. had no disagreements with the Singing
Machine Company, Inc., regarding accounting issues.
/s/ Millward & Co.
Millward & Co.
Fort Lauderdale, Florida
November 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Balance
Sheet, Statement of Operations, Statements of Cash Flows and Notes thereto
incorporated in Part I, Item 1. of this Form 10-KSB and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,770
<SECURITIES> 0
<RECEIVABLES> 532,765
<ALLOWANCES> 80,000
<INVENTORY> 410,293
<CURRENT-ASSETS> 1,021,071
<PP&E> 19,435
<DEPRECIATION> 163,064
<TOTAL-ASSETS> 1,087,096
<CURRENT-LIABILITIES> 1,529,917
<BONDS> 0
0
0
<COMMON> 23,569
<OTHER-SE> (445,821)
<TOTAL-LIABILITY-AND-EQUITY> 1,087,096
<SALES> 6,222,484
<TOTAL-REVENUES> 6,230,022
<CGS> 7,694,140
<TOTAL-COSTS> 7,136,585
<OTHER-EXPENSES> 118,209
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,514
<INCOME-PRETAX> (906,585)
<INCOME-TAX> 0
<INCOME-CONTINUING> (906,585)
<DISCONTINUED> 0
<EXTRAORDINARY> (704,256)
<CHANGES> 0
<NET-INCOME> (906,585)
<EPS-PRIMARY> (2.43)
<EPS-DILUTED> (2.43)
</TABLE>
