SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
Commission File Number: 0-24968
THE SINGING MACHINE COMPANY, INC.
(Name of Registrant as specified in its charter)
DELAWARE 95-3795478
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
Incorporation or Organization)
3101 N.W. 25TH AVENUE, POMPANO BEACH, FL 33069
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: 954-968-8006
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock
Par Value $.01 per share OTC Bulletin Board
Common Stock Purchase Warrant OTC Bulletin Board
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days.
Yes [ ] 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 Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $10,674,879
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AGGREGATE MARKET VALUE OF THE VOTING STOCK
HELD BY NONAFFILIATES OF THE REGISTRANT
As of March 31, 1997, 2,883,582 shares of Common Stock, par value $.01 per share
("Common Stock"), of the Registrant were outstanding. Based on the average of
the closing bid and asked prices of the Common Stock on the OTC Bulletin Board
("OTC") as of March 31, 1997 ($0.0625), the aggregate market value of the
1,859,083 shares of the Common Stock held by persons other than officers,
directors and persons known to the Registrant to be the beneficial owner (as
that term is defined under the rules of the Securities and Exchange Commission)
of more than five percent of the Common Stock on that date was approximately
$116,000. By the foregoing statements, the Registrant does not intend to imply
that any of these officers, directors or beneficial owners are affiliates of the
Registrant or that the aggregate market value, as computed pursuant to rules of
the Securities and Exchange Commission, is in any way indicative of the amount
which could be obtained for such shares of Common Stock.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 14(d) of the Securities
Exchange Act of 1934 subsequent to 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 Registrant's classes of
common stock, as of the latest practicable date:
2,883,582 shares of Common Stock, par value $.01
per share, were outstanding as of March 31, 1997
DOCUMENTS INCORPORATED BY REFERENCE
Exhibits contained in Registration Statement
on Form SB-2 (Registration No. 33-81974-A)
filed by the Registrant on July 27, 1994.
Form 10-KSB filed on June 28, 1995.
Form 10-QSB filed on November 13, 1995.
Forms 8-K filed on December 4, 1995,
February 23, 1996, and May 6, 1997.
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TABLE OF CONTENTS
PAGE
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Part I
Item 1. Business......................................................... 1
Item 2. Properties.......................................................12
Item 3. Legal Proceedings................................................13
Item 4. Submission of Matters to a Vote of Security Holders..............14
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................14
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................15
Item 7. Financial Statements and Supplementary Data......................27
Item 8. Changes in and disagreements with Accountants on Accounting
and Financial Disclosure.......................................28
Part III
Item 9. Directors and Executive Officers of the Registrant...............28
Item 10. Executive Compensation...........................................31
Item 11. Security Ownership of Certain Beneficial Owners and Management...34
Item 12. Certain Relationships and Related Transactions...................35
Item 13. Exhibits and Reports on Form 8-K.................................37
Signatures.......................................................40
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PART I
Item 1. BUSINESS
GENERAL
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 currently has a product line of 11 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(TM) as well as its registered trademark
THE SINGING MACHINE(R). In addition, the Company believes that it has one of the
larger backing track libraries of music in the KARAOKE industry consisting of
over 2,000 songs.
The Company sells audio software under the trademarks KARAOKE KASSETTE(TM),
KARAOKE KOMPACT DISC(TM) and KARAOKE VIDEO KASSETTE(TM) and KARAOKE recording
and playback units under its registered trademark THE SINGING MACHINE(R). The
Company also licenses its trademark, on a non-exclusive basis, to others for
sales around the world. The Company believes that it is one of several companies
in the KARAOKE industry in the United States which sells both hardware and
software.
BACKGROUND AND FORMATION OF THE COMPANY
The KARAOKE industry began in Japan in the 1970s. In Japanese society,
entertaining is not typically conducted in individual homes, but rather in
restaurants and nightclubs. KARAOKE, which translated literally means "empty
orchestra", is a concept that allows participants to sing words to soundtracks
of popular songs, reading lyrics from video monitors or scripts. The concept is
identical to that employed in the "follow the bouncing ball" segment of the
"Sing Along with Mitch" television program from the 1960s. The instrumental
music, or backing track, is provided by pre-recorded soundtracks on CDs or audio
or video tapes. In Japan, KARAOKE clubs and public establishments became popular
vehicles for social occasions and business entertainment.
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 KARAOKE 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.
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
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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.
REORGANIZATION
In November and December, 1996, the Company made two payments of $20,000 each to
a former employee ("Judgement Creditor") who obtained a judgement in the amount
of $248,000 against the Company for wrongful termination. These payments
adversely affected the Company's cash flow. This decrease in cash flow was
compounded by the fact that sales of hardware and software during the fourth
quarter of fiscal 1997 were well below projections. The low sales of software
were especially problematic because the Company carried, and continues to carry,
a gross oversupply of software inventory which has severely impacted liquidity.
To complicate matters further, the Company was advised by Montgomery Ward, a
major customer, that the Company had to accept returns of approximately
$270,000, representing almost fifty percent of what had been shipped and
invoiced to this customer during the selling season of fiscal 1997. This
severely impacted the Company's cash flow, which combined with low sales volume
prompted the Company's factor to stop advancing funds in order to cover the
factors' shortfall on the Montgomery Ward receivables.
Additionally, due to this cash flow crisis, the Company defaulted on its monthly
rent payment, which resulted in a default notice and the threat of eviction. The
Company also defaulted on the quarterly royalty payments due, as well as
payments due the Harry Fox Agency, the Company's primary copyright royalty
creditor, per a prior agreement. This resulted in a demand letter and the threat
to cancel the Company's music licensing agreements which would endanger the
Company's ability to continue operations.
The garnishment of the Company's factor and bank accounts by the Judgement
Creditor, and the resultant institution of legal suits by other creditors
prompted the Company to commence a reorganization case by filing a voluntary
petition ("Petition") for relief under Chapter 11 of the Bankruptcy Code
("Bankruptcy Code") with the United States Bankruptcy Court for the Southern
District of Florida ("Bankruptcy Court") on April 11, 1997 ("Petition Date").
As a result of filing the Petition, the Company is prohibited from paying any
pre-petition liabilities and is currently in default under all of its funded
debt agreements in effect prior to the Petition Date. As a result, all unpaid
principal of, and accrued pre-petition interest on, such debt became immediately
due and payable. In accordance with the Bankruptcy Code, the Company can seek
Bankruptcy Court approval for the rejection of any executory contracts or
unexpired leases, including real property leases. Any such rejection may give
rise to a pre-petition unsecured claim for damage.
The ability of the Company to effect a successful reorganization under Chapter
11 of the Bankruptcy Code will depend, in significant part, upon the Company's
ability to formulate a Reorganization Plan ("Plan") that is approved by the
Bankruptcy Court and meets the standards for plan confirmation under the
Bankruptcy Code. In a Chapter 11 reorganization plan, the rights of the
Company's creditors and stockholders may be substantially altered. Creditors may
realize substantially less than the full amount of their claim. Equity
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interests of the Company's stockholders may be diluted or even canceled.
Investment in any security of the Company, therefore should be regarded as
highly speculative.
The Company has entered into discussions with its secured and significant
unsecured creditors concerning the Company's Plan. In addition the Company has
taken actions in the Bankruptcy Court to facilitate its reorganization,
including (i) filing a Disclosure Statement ("Disclosure Statement") including
schedules of assets and liabilities and a statement of financial affairs and
amendments thereto as required, (ii) filing a motion requesting a bar date for
filing proofs of claims against the Company, and (iii) filing a Plan and
amendments as required.
On December 17, 1997, the Bankruptcy Court approved the Company's amended
Disclosure Statement. This Disclosure Statement and amended Plan has been filed
and has been mailed together with ballots to the Company's pre-petition
shareholders and creditors on January 5, 1998. The Company anticipates emerging
from Chapter 11 after Bankruptcy Court approval, which is expected to occur at a
hearing scheduled for February 26, 1998.
SIGNIFICANT POST-PETITION EVENTS
Since the Chapter 11 filing, the Company has made considerable positive
advancements. The Company has moved into much smaller corporate offices and
warehousing operations with an emphasis on reduction of inventory. Total
combined operating space was reduced from 29,000 to 10,000 square feet, thereby
reducing rental facility expenses by $12,000 per month, and the Company's staff
has been reduced to the minimum needed to continue to operate efficiently. The
Company has also arranged with Dero Research, Ltd. in Hong Kong, of which a
former director of the Company is a principal stockholder, letter of credit
financing up to $200,000 for purchases of new inventory as well as an
arrangement with Asiatech 52 Manufacturing Ltd. ("A-Tech") in Hong Kong for 90
day document of acceptance ("DA") financing up to $200,000.
With regard to the retention of the Company's customer base, the major accounts,
Target, J.C. Penney, Fingerhut and FAO Schwarz have continued to purchase
products from the Company. In addition, the Company began a new customer
relationship with Best Buy, which had shipments exceeding $1,000,000 during the
fiscal 1998 selling season. The Company did loose some catalog house business
including Sears and Service Merchandise, but is confident this business will be
regained upon emergence from Chapter 11.
The Company filed a motion with the Bankruptcy Court, which is currently
pending, to approve an agreement, entered into on December 16, 1997, regarding
the treatment of the Harry Fox Agency in the Plan. The Harry Fox Agency, Inc.,
("HFA"), is the Company's principal copyright royalty creditor to whom the
Company owes approximately $820,000, which is governed by the terms of a prior
settlement agreement and collateralized by the Company's master song recordings.
In the agreement, HFA agreed to amend its proof of claim and to reflect this
$820,000 as general unsecured debt and further, to elect to accept issuance of
shares of the reorganized Company on the following basis: for each $2.00 of
debt, HFA will receive one share of common stock or approximately 410,000
shares.
On February 9, 1998, the Bankruptcy Court granted the Company's motion to
approve a settlement agreement entered into on December 24, 1997, between the
Company and Eugene Settler ("Settler"), a shareholder as well as former officer
and director of the Company. Prior to this settlement agreement, there was
pending in the Bankruptcy Court an adversary proceeding brought by the Company
against Settler, for recovery of certain alleged preferential transfers arising
from certain payments made to Settler as a result of legal proceedings brought
by Settler against the Company for wrongful termination. The parties mediated
the dispute and reached a settlement which resolves the adversary proceeding,
certain alleged claims by Settler against the
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Company and others, and provides for an exchange of releases amongst all
parties. Under the terms of the agreement, Settler also resigned as a director
of the Company and assigned all of his stock certificates and options to the
Company. This settlement did not require the payment of any funds by the Company
other than a portion of mediation costs incurred.
CONFIRMATION
The Bankruptcy Court has set a hearing to consider confirmation of the Plan for
February 26, 1998. The significant elements of the Plan include (i) additional
estimated administrative costs of $100,000 for the Company's bankruptcy counsel,
(ii) the secured claim by Bankers Capital, the Company's factor, of $124,000
shall be paid according to the terms of its contract with the company, which is
current, (iii) general unsecured creditors whose claims are equal to or less
than $300 shall receive a cash payment of 15% of the amount of their allowed
claim, and (iv) general unsecured creditors whose claims exceed $300 shall be
given the option of receiving a cash payment of 10% of the amount of their
allowed claim or receiving one share of new common stock in the reorganized
company for each $2.00 of an allowed claim. Any cash payments to unsecured
creditors would be paid in two equal installments, ten days after the Plan is
confirmed and six months thereafter. Holders of existing common shares of the
Company, equity interest holders, will have their interest diluted by ninety
percent (90%) at confirmation under the Plan, so that for each ten shares of
common stock owned they will receive one share of new common stock in the
reorganized company.
Although the Company anticipates that the Plan will be confirmed by the
Bankruptcy Court, there can be no assurance that it will be. If the Company is
unable to obtain confirmation of a plan of reorganization, its creditors or
equity holders could seek other alternatives for the Company including bids for
the Company or parts thereof through an auction process. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Legal Proceedings".
STRATEGY
Currently the Company is focusing on its audio equipment operations with the
intention of increasing cash flow, improving operating efficiency, increasing
internal growth and returning to profitability. The Company's intent is to
obtain additional market share through an emphasis on the affordability,
selection and quality of its products.
The Company is also focusing greater sales efforts on mass market retailers,
such as Target and Montgomery Ward, which the Company believes have greater
potential for increased software sales. The Company has historically sold its
software products predominately to chain music stores and music distributors and
believes that the potential in this market has decreased. In order to reduce
expenses, management has limited the development of new products for both audio
equipment and audio software. There can be no assurance that the Company will be
able to successfully implement its strategy.
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PRODUCTS
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,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994
-------------------- ---------------------- --------------------- ----------------------
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> <C> <C>
Audio software $1,610,594 15.2% $1,255,932 24.9% $3,258,312 56.4% $5,414,215 63.3%
Audio equipment 8,953,462 84.8% 3,795,447 75.1% 2,520,194 43.6% 3,133,508 36.7%
</TABLE>
The Company currently offers 11 different models of electronic recording and
playback equipment with retail prices ranging from $30 for basic units to $300
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 recorders.
The Company currently offers its audio software in four formats - multiplex
cassettes, CDS, CD and graphics, and video cassette tapes 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 2,000 songs. The
Company's backing track 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.
NEW PRODUCT DEVELOPMENT
Management believes that the enhancement and extension of the Company's existing
products and the selective development of new product lines are important to the
Company's continued growth. The Company combines the style and content of its
products to meet customer requirements for quality, product mix and pricing.
Company employees work closely with both retailers and suppliers to identify
trends in consumer preferences and to generate new product ideas. The Company's
employees evaluate new ideas and seek to develop new products and improvements
to existing products to satisfy industry requirements and changing consumer
preferences.
During the fiscal year ended March 31, 1997, the Company introduced four new
models of recording equipment, and approximately 100 new song titles and 100 new
compilations of existing titles.
SALES, MARKETING AND DISTRIBUTION
The Company distributes its products to retailers and wholesale distributors
through two methods: domestic sales, i.e., shipment of products from the
Company's inventory; and direct sales, i.e., 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, and a warehouse in California, or directly
from U.S. software manufacturers.
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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 and 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 to customers. For each of the fiscal
years ended March 31, 1996 and 1997 domestic sales accounted for approximately
73% and 46%, respectively, of the Company's revenues. This decrease is
attributable to the formation of a new international subsidiary early in fiscal
1996 and the full impact a change in the method by which the Company accounts
for foreign sales. Previously, the Company, through related party transactions,
recorded commissions earned on foreign shipments. See Item 6 "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
DIRECT SALES. The formation of a new subsidiary early in 1996, International SMC
(HK) Ltd. ("International") is attributable for the advent of foreign equipment
sales in fiscal years 1996 and 1997, which accounted for 24% and 53%
respectively, of total revenues. Some products sold by the Company are shipped
directly to its customers from the Far East through either International or The
SMC Singing Machine Company, Ltd., a Hong Kong trading company ("LTD"). Paul Wu,
a director of the Company and a director of a principal stockholder of the
Company, is the Chairman of the Board of LTD. Sales made through International
or LTD are completed by either delivering products to the customers' common
carriers at the shipping point or by shipping the products to customers'
distribution centers, warehouses or stores. Direct sales are made in large
quantities (generally container-sized lots) to customers located in Canada and
the United States, who pay International or LTD pursuant to their own
international, irrevocable, transferable letters of credit or on open credit
with the Company's suppliers in the Far East. Pursuant to an agreement with LTD,
the Company receives 50% of LTD's net profits as commissions, for all direct
sales originated by the Company. For the fiscal years ended March 31, 1996 and
1997, approximately 2.5% and 0.8% respectively, of the Company's revenues were
attributable to commissions from LTD. See Item 6 - "Management's Discussion and
Analysis of Financial Condition and Results of operations".
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 backgrounds 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 25 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 year agreements
which automatically renew on an annual basis, unless terminated by either party
on 90 day's 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(R) or Memorex(TM) trademarks, and its audio software is marketed under
the KARAOKE Kassette(TM), KARAOKE Kompact Disc(TM) and KARAOKE Video
Kassette(TM) trademarks, throughout the United States primarily through
department stores, lifestyle merchants, mass merchandisers, direct mail catalogs
and showrooms, music and record stores, national chains, specialty stores and
warehouse clubs. The Company's KARAOKE machines are currently sold in such
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stores as Target, Toys R Us, J.C. Penney, Fingerhut, Best Buy, and Wal-Mart. In
addition, the Company's KARAOKE software customers include J.C. Penney,
Fingerhut, Target, Best Buy, and Musicland.
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 31, 1996 and
1997, were approximately 63% and 79%, respectively. For the fiscal 1996 period
J.C. Penney accounted for 18%, Montgomery Ward 16%, Fingerhut 12%, and Target
10% of total revenues for such period. For the fiscal 1997 period Target
accounted for 47% and J.C. Penney 13%.
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.
The Company manages credit policies with respect to its customer base. The
Company has not suffered significant credit losses to date, even 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.
RETURNS
Returns of electronic hardware products by the Company's customers are generally
not permitted except in approved situations involving quality defects, damaged
goods or goods shipped in error or in an untimely manner. Returned hardware
products are placed in inventory 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.
Separate and apart from its copyright royalty reserves, the Company has
historically established return reserves of from approximately 15% to 22% of
total sales for financial statement reporting purposes. Such reserves also
include reserves for returns resulting from direct sales by LTD. The Company
believes such reserves are consistent with industry standards.
IMPORTING
The Company presently purchases and imports virtually all of its electronic
recording products from four suppliers located in the People's Republic of
China. In fiscal 1996 and 1997, suppliers in the People's Republic of China
accounted for in excess of 70% 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, there are numerous other suppliers from
which the same products could be purchased. 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.
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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. In
addition to the sub-distributor agreement, the "Memcorp Administrative
Agreement" provides the Company administrative assistance and the use of office
and warehouse space in Asia as may be required for the purchase, distribution
and sale of products. The Company pays Memcorp a commission fee on all shipped
products for these services.
As part of the consideration for the sub-distributor and administrative
agreements, the Company granted Memcorp an option (the "Memcorp Option"),
exercisable until October 26, 1996, to purchase one million (1,000,000) shares
of the Company's common stock at a price of one dollar ($1) per share. Memcorp
was granted certain registration rights for one year with respect to the shares
underlying the option. This option has now expired unexercised.
In the spring of 1997, the President of the United States renewed the People's
Republic of China's "Most Favored Nation" ("MFN") treatment for the 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, it is unlikely that any
such suppliers would offer the same preferred financing terms that are currently
offered by FLX (HK) Ltd., a Hong Kong corporation ("FLX"). 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.
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 four
factories in the People's Republic of China. See "Notes to Financial Statements
- - No. 7, Related Party Transactions". The finished products are packaged and
labeled under either the Company's registered trademark, THE SINGING MACHINE(R),
the Memorex(TM) brand name, or under a customer's private label, such as Radio
Shack.
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 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.
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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's audio software is produced by an independent producer. After the
selection of songs for inclusion in a particular collection, Company personnel
attempt to contact the publishers of the songs to obtain permission to re-record
the music and print the lyrics. Based on the original musical arrangement, the
independent producer retains singers and musicians to create a re-recording of
the original work. Songs are recorded once with both music and lyrics, to allow
the KARAOKE participant to hear an example of the songs performance, and once
without lyrics to provide a "backing track" to accompany the original singing of
the KARAOKE participant. Collections of such songs are then assembled on master
digital audio tapes. The master tapes are then sent to various subcontractors in
the United States and/or Hong Kong for duplication. The Company reproduces its
original master tapes in two formats: audio cassette tapes; and CD&G.
WARRANTIES
All of the electronic equipment sold by the Company is warranted against
manufacturing defects for a period of 90 days for labor and one 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, 1996 and 1997, warranty claims
have not been material to the Company's results of operations.
BACKLOG
At March 31, 1997, the Company had approximately $100,000, 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.
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, CDs 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 NewTech. 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 has registered The Singing Machine(R) trademark in the United
States, Canada, Austria, Benelux, Germany, France and the United Kingdom. The
Company also utilizes the common law trademarks KARAOKE KASSETTE(TM), KARAOKE
KOMPACT DISC(TM) and KARAOKE VIDEO KASSETTE(TM) in connection with the sale of
its audio software.
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The Company 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 nondramatic 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 $0.0697 per song or
$0.013 per minute of playing time or fraction thereof with respect to each 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 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.
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.
In May 1994, the Company requested its principal copyright royalty creditor, the
Harry Fox Agency, Inc. ("HFA"), which represents the majority of copyright
holders for which the Company is obligated to pay royalties, to audit its
records for the period October 1991 through March 1994. On May 22, 1995, the
Company executed a settlement agreement (the "Settlement Agreement") with HFA,
with respect to all non-current royalty obligations and claims for the period
from October 1, 1991 through March 31, 1994 in the amount of $1,030,000. The
Company had accrued approximately $1.0 million in its financial statements for
royalty obligations to HFA, and on February 22, 1995, paid HFA $200,000 to be
applied against the settlement amount. The total amount of settlement payments
made during fiscal 1996 was $432,000, and the balance of approximately $400,000,
as of March 31, 1996, was anticipated to be paid in monthly installments,
through April 1997, of principal and interest at 8.0% per annum. After a period
of default, the Company entered into an amended payment agreement with HFA,
stipulating a lump sum payment to bring its account current and
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monthly installments thereafter. As collateral security for the payment of its
obligations under the Settlement Agreement, the Company has granted HFA a
security interest in the Company's master sound recordings.
With the completion of its negotiations with HFA, the Company had entered
settlement agreements, totaling approximately $1.35 million, with creditors
representing a majority of its non-current copyright royalty obligations.
Pursuant to those settlement agreements, the Company intended to satisfy all
non-current royalty obligations with the creditors in question by October 1997.
As of March 31, 1997, the Company had paid approximately $925,000 pursuant to
those settlement agreements. An audit was performed by HFA for the period April
1, 1994 through March 31, 1996, and all royalties due were accrued. The balance
of pre-petition debt with HFA per the December 1997 agreement is approximately
$820,000, of which approximately one half represents pre-paid royalties on
inventory.
As a result of the Company's historical copyright royalty reserve practices, the
Company could be subject to various claims for damages under its written
copyright licensing agreements, the Act and common law (the "Claims"). In cases
of copyright infringement, the Act permits the copyright holder to elect to
recover either actual damages, and any additional profits of the infringer, or
statutory damages. Statutory damages under the Act range from $500 to $20,000
for each infringement, and the Act gives the federal courts complete authority
over the size of damage awards. In cases where the copyright owner sustains the
burden of proving, and the court finds, that infringement was committed
wilfully, the court in its discretion may increase the award of statutory
damages to a sum of not more than $100,000 per work infringed. In PEER
INTERNATIONAL CORPORATION V. PAUSA RECORDS, INC., 909 F.2d 1332 (9th Cir. 1990),
the Court of Appeals held that statutory damages are not available for a failure
to pay royalties under a private license agreement since such a failure is not
an act of infringement within the meaning of the Act. The Court in that case
suggested that the only remedy for a failure to pay royalties under a written
license agreement is a common law action to recover the unpaid amounts. However,
there can be no assurance that courts in other jurisdictions will adopt the
holding in Peer.
The Company's executive officer, Mr. Edward Steele, and former president and
member of the Board of Directors, Mr. Eugene Settler, had agreed to indemnify
the Company against certain claims arising out of the Company's compulsory,
statutory (i.e., non-written) licensing agreements (an "Indemnifiable Claim")
asserted with respect to the period from September 3, 1991 through November 10,
1994 by pledging all of their shares of Common Stock to the Company. In the
event of the assertion of such an Indemnifiable Claim, the Company may require
the return of shares of Common Stock to the Company with a market value
collectively equal to the Indemnifiable Claim. There can be no assurance,
however, that the Company would be able to sell or otherwise dispose of such
shares for cash or raise a sufficient amount from the sale of such shares in
order to satisfy the Indemnifiable Claim. In addition, the Company would
continue to bear all other costs and expenses incurred by, or assessed against,
the Company (including legal) associated with such an Indemnifiable Claim,
whether or not such Indemnifiable Claim is resolved in favor of the Company. The
Company has agreed to release certain shares of Common Stock from the provisions
of the pledge and indemnity agreement during the period beginning December 10,
1995, under certain circumstances based upon the performance of the Company. No
such shares have been released as of March 31, 1997. The pledge and indemnity
agreement would also terminate as to Messrs. Steele or Settler in the event of
their deaths, provided the Company then maintains life insurance of at least
$1,000,000 on each party. No such insurance is presently in place. Mr. Settler's
pledge and indemnification have been nullified by the settlement agreement to
which he and the Company are parties, which was approved by the Bankruptcy Court
in January 1998, effective September 17, 1997.
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<PAGE>
No Claims have been asserted against the Company to date with respect to
copyright infringement. The Company believes that the assertion of any such
Claims is remote, primarily as a result of its actual and proposed satisfaction
of all material past due royalty obligations and the payment agreements which
the Company has negotiated with its principal copyright royalty creditors.
However, there can be no assurance that such Claims will not be asserted or, if
asserted, that such Claims will not have material adverse effect on the
Company's financial position.
INFORMATION SYSTEMS
During fiscal 1996, in an effort to reduce overhead expenses, the Company
entered into an open-ended agreement with Memcorp, Inc., whereby the Company
physically transferred its mainframe computer system and associated software
licenses to Memcorp, Inc., an electronics distributor located in Hialeah,
Florida, at no cost to Memcorp in exchange for the Company's indefinite
continued use of such system. Via telephonic communications, the Company
maintains twenty four hour, seven day a week access to the system. Under the
terms of the agreement, Memcorp is responsible for all of the system's
operating, maintenance and licensing fees. The system provides current on-line
information to assist the Company in analyzing purchasing patterns which enables
it to better identify product demand. Sales information is maintained and
tracked by major product category and customer. The information system generates
analyses of individual products to support Management in analyzing sales trends
and price sensitivity.
EMPLOYEES
At March 31, 1997, the Company had 12 full-time employees, 5 of whom were
engaged in warehousing and technical support and 7 in marketing and
administrative functions. The total number of employees has been reduced from
the prior year's total through both layoffs and attrition, as management pursues
cost cutting measurers. As of this filing the staff has been further reduced to
the minimum needed to operate efficiently. During peak shipping periods,
temporary labor is hired, lessening permanent overhead and fringe benefits on an
ongoing basis. None of the employees is represented by a labor union. The
Company believes that its employee relations are adequate.
Item 2. PROPERTIES
As of October 1995, the Company's United States distribution warehouse and
corporate offices were located in a 29,762 square foot facility in Pompano
Beach, Florida. The lease was for a 62-month term, with two three-year extension
options and provided for base rent, excluding common area maintenance, taxes and
insurance of approximately $138,000 during the first year with fixed increases
thereafter. As a result of the Chapter 11 filing this lease was rejected. The
Company acknowledges that as a result of the lease being rejected, this landlord
is entitled to a general unsecured claim of approximately $24,000.
On May 1, 1997 the Company entered into a lease for a 10,000 square foot office
and warehouse facility located in Pompano Beach for a term of 25 months.
Pursuant to the terms of the lease the Company must pay maintenance, insurance
and real estate taxes. This smaller facility reduces the Company's overhead
expenses by approximately $12,000 per month.
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Item 3. LEGAL PROCEEDINGS
The Company filed a voluntary petition ("Petition") for relief under Chapter 11
of the Bankruptcy Code ("Bankruptcy Code") with the United States Bankruptcy
Court for the Southern District of Florida ("Bankruptcy Court") on April 11,
1997 ("Petition Date"). The case was assigned #97-22199-BKC-RBR.
On December 17, 1997, the Bankruptcy Court approved the Company's amended
Disclosure Statement. This Disclosure Statement and amended Plan has been filed
and has been mailed together with ballots to the Company's pre-petition
shareholders and creditors on January 5, 1998. The Company anticipates emerging
from Chapter 11 after Bankruptcy Court approval, which is expected to occur at a
hearing scheduled for February 26, 1998.
Other than the Chapter 11 proceeding instituted on April 11, 1997, and the two
agreements described below, the Company is not a party to any material legal
proceeding, and does not anticipate instituting or being named a party to any
legal proceeding.
On February 9, 1998, the Bankruptcy Court granted the Company's motion to
approve a settlement agreement entered into on December 24, 1997, between the
Company and Eugene Settler ("Settler"), a shareholder as well as former officer
and director of the Company. Prior to this settlement agreement, there was
pending in the Bankruptcy Court an adversary proceeding brought by the Company
against Settler, for recovery of certain alleged preferential transfers arising
from certain payments made to Settler as a result of legal proceedings brought
by Settler against the Company for wrongful termination. The parties mediated
the dispute and reached a settlement which resolves the adversary proceeding,
certain alleged claims by Settler against the Company and others, and provides
for an exchange of releases amongst all parties. Under the terms of the
agreement, Settler also resigned as a director of the Company and assigned all
of his stock certificates and options to the Company. This settlement did not
require the payment of any funds by the Company other than a portion of
mediation costs incurred.
The Company filed a motion with the Bankruptcy Court, which is currently
pending, to approve an agreement, entered into on December 16, 1997, regarding
the treatment of the Harry Fox Agency in the Plan. The Harry Fox Agency, Inc.,
("HFA"), is the Company's principal copyright royalty creditor to whom the
Company owes approximately $820,000, which is governed by the terms of a prior
settlement agreement and collateralized by the Company's master song recordings.
In the agreement, HFA agreed to amend its proof of claim and to reflect this
$820,000 as general unsecured debt and further, to elect to accept issuance of
shares of the reorganized Company on the following basis: for each $2.00 of
debt, HFA will receive one share of common stock or approximately 410,000
shares.
The Bankruptcy Court has set a hearing to consider confirmation of the Plan for
February 26, 1998. The significant elements of the Plan include additional
estimated administrative costs of $100,000 for the Company's bankruptcy counsel,
the secured claim by Bankers Capital, the Company's factor, of $124,000 shall be
paid according to the terms of its contract with the company, which is current,
general unsecured creditors whose claims are equal to or less than $300 shall
receive a cash payment of 15% of the amount of their allowed claim, and general
unsecured creditors whose claims exceed $300 shall be given the option of
receiving a cash payment of 10% of the amount of their allowed claim or
receiving one share of new common stock in the reorganized company for each
$2.00 of an allowed claim. Any cash payments to unsecured creditors would be
paid in two equal installments ten days after the Plan is confirmed and six
months thereafter. Holders of existing common shares of the Company, equity
interest holders, will have their interest diluted by ninety percent (90%) at
confirmation under the Plan, so that for each ten shares of common stock owned
they will receive one share of new common stock in the reorganized company.
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Although the Company anticipates that the Plan will be confirmed by the
Bankruptcy Court, there can be no assurance that it will be. If the Company is
unable to obtain confirmation of a plan of reorganization, its creditors or
equity holders could seek other alternatives for the Company including bids for
the Company or parts thereof through an auction process.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As part of the Company's Amended Plan of Reorganization approved by the
Bankruptcy Court on December 17, 1997, the equity security holders of the
Company are entitled to enter a ballot voting for acceptance or rejection of the
Plan. Holders of existing common shares of the Company will have their interest
diluted by ninety percent (90%) at confirmation under the Plan, so that for each
ten shares of common stock owned they will receive one share of new common stock
in the reorganized company.
The deadline for filing ballots accepting or rejecting the Plan is February 16,
1998.
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 Common Stock of the Company did not meet the minimum bid price of $1.00
per share, and that the Company's net tangible assets did not meet the minimum
requirement of $4,000,000. On January 25, 1996, pursuant to a January 19, 1996
hearing before a Nasdaq Hearing Panel, the Nasdaq Listings Qualifications
Committee ("Committee"), denied the Company's request for an exception to the
minimum bid price requirement. In addition the Committee indicated that the
Company did not meet the minimum quantitative criteria for inclusion on the
Nasdaq SmallCap Market. Accordingly, effective January 26, 1996, the Company's
securities were delisted from the Nasdaq Stock Market. However, the Company's
securities were immediately eligible to trade on the OTC Bulletin Board.
The Common Stock is currently traded on the OTC Bulletin Board under the symbol
"SING". The following table sets forth, for the fiscal periods indicated, the
high and low bid prices for the Common Stock on the Nasdaq National Market for
the periods prior to January 26, 1996, and the OTC Bulletin Board thereafter, as
adjusted for the fiscal fourth quarter 1995 20% Stock Dividend. The Company's
Common Stock commenced trading on November 10, 1994. Prior thereto, there was no
public market for the Company's Common Stock.
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Fiscal 1997 High Low
------------------------------------------------- ------ ------
First Quarter.................................... $0.250 $0.100
Second Quarter................................... 0.100 0.100
Third Quarter.................................... 0.100 0.078
Fourth Quarter .................................. 0.100 0.078
------------------------------------------------- ------ ------
Fiscal 1996 High Low
------------------------------------------------- ------ ------
First Quarter.................................... $1.63 $1.50
Second Quarter................................... 1.50 1.00
Third Quarter.................................... 1.03 0.75
Fourth Quarter (through January 25,1996)......... 0.78 0.50
Fourth Quarter (from January 26,1996; OTC)(1).... 0.25 0.25
Fiscal 1995 High Low
------------------------------------------------- ------ ------
Third Quarter (from November 10, 1994)........... $4.48 $2.92
Fourth Quarter .................................. 2.50 1.25
---------
(1) Stock quoted on OTC as of January 26, 1996.
As of February 10, 1998, the last reported bid price of the Common Stock on the
OTC Bulletin Board was $0.13 per share. The number of record holders of the
Common Stock at February 10, 1998 was 157, although the Company believes that
the number of beneficial owners of such Common Stock is much greater.
As a result of being delisted from the Nasdaq National Market, stockholders may
find it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, the Company's Common Stock.
The Company has never declared or paid cash dividends on its capital stock and
the Company's Board of Directors intends to continue this 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 and the agreement with the
representatives of the underwriters for the Company's initial public offering
(the "Representatives").
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION 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.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain income and
expense items expressed as a percentage of the Company's total revenues, except
as noted below:
YEAR ENDED MARCH 31
------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
Revenues:
Equipment sales, net.................. 83.9% 73.0% 41.9% 35.1%
Music sales, net...................... 15.1 24.2 54.2 60.5
Commission income - related party
and other........................... 1.0 2.8 3.9 4.4
Total revenues 100.0% 100.0% 100.0% 100.0%
Cost of Sales (1):
Cost of equipment sales............... 90.0% 89.6% 89.9% 77.6%
Cost of music sales................... 67.3 110.8 72.5 52.8
Expenses:
Other operating expenses.............. 5.4 13.6 7.8 4.8
Selling, general and administrative
expenses............................ 22.2 48.2 38.2 18.6
Depreciation and amortization......... 3.7 4.4 2.1 0.5
Impairment of long-lived assets....... 15.1 7.8 -- --
Operating income (loss)................. (32.1) (66.2) (25.1) 16.9
Other expenses, net .................... (4.2) (7.9) (12.1) 7.6
Income (loss) before taxes.............. (36.3) (74.1) (37.2) 9.2
Provision (benefit) for income taxes.... -- -- (5.7) 2.0
Income (loss)........................... (36.3) (74.1) (31.5) 7.2
- ----------
(1) Expressed as a percentage of related sales.
GENERAL
The Company is currently operating under Chapter 11 of the Bankruptcy Code as a
result of its filing for protection on April 11, 1997, and is awaiting a hearing
on confirmation of its Plan of reorganization set for February 26, 1998. For
fiscal 1997 and fiscal 1996, the Company's total revenues were approximately
$10.7 million and $5.2 million, respectively. Although total revenues more than
doubled in fiscal 1997, the Company had a net loss of approximately $3.9 million
which equaled its net loss in fiscal 1996. As a result of historical losses, a
net working capital deficiency and lack of financing, the Company's auditors
expressed substantial doubt about the Company's ability to continue as a going
concern based on their audit of the Company's financial statements for the
fiscal year ended March 31, 1997. See "Results of Operations", "Liquidity and
Capital Resources", and "Going Concern".
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THE YEAR ENDED MARCH 31, 1997
COMPARED TO YEAR ENDED MARCH 31, 1996.
Total revenues slightly more than doubled to $10.7 million for the fiscal year
ended March 31, 1997 compared to the $5.2 million reported for fiscal 1996. The
increase was primarily attributable to a sharp increase in equipment sales.
Revenues from equipment sales increased $5.2 million or 136% to approximately
$9.0 million during fiscal 1997 compared to approximately $3.8 million for
fiscal 1996. The increase reflects the impact of the Memorex trademark, a new
product mix featuring CD plus graphics players, a concerted sales effort by the
Company's management and a less competitive marketplace. The increase primarily
reflects higher foreign sales totaling approximately $5.6 million. The recording
of foreign equipment sales is attributable to sales made by the Company's
subsidiary, International SMC (HK) Ltd. ("International"), which began
operations in the first quarter of fiscal 1996, and represents 63% of equipment
sales and 53% of total revenues, for fiscal 1997. Previously, the Company,
through related party transactions, recorded commissions earned on foreign
shipments. Because of the additional costs related to importing goods and the
difficulty in obtaining inventory financing, management has decided to emphasize
direct sales from its Far East equipment suppliers via International as opposed
to domestic sales from inventory in the future.
Revenues from music sales increased by $355,000 or 28% to approximately $1.6
million in fiscal 1997 from the approximately $1.3 million recorded during
fiscal 1996. This apparent increase in music sales was due to significant
returns in the fourth quarter of fiscal 1996. Because of such returns and excess
inventory, management had 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 1996, when music sales decreased $2.0 million from the fiscal 1995
period. Fundamentally in fiscal 1997, sales of the Company's eight song and four
song music formats declined which was partially offset by increases in sales of
the CD&G format.
Commission income decreased to approximately $90,000 during fiscal 1997 compared
to $130,000 during the prior year. The decrease of $40,000 was primarily due to
a decrease in commission income from a related party. The Company anticipates
commission income from a related party to continue to decline due to the
formation of International and the decision to conduct substantially all foreign
sales through such subsidiary.
Cost of equipment sales for the year ended March 31, 1997, expressed as a
percentage of related sales, was 90%, unchanged from fiscal 1996. Cost of
equipment sales included inventory write-downs of $529,000 and $371,000, for
years 1997 and 1996, respectively. The cost of music sales, expressed as a
percentage of music sales, decreased to 67% for the current year, from nearly
111% in fiscal 1996. Among other items, this decrease in the cost of music sales
reflects approximately $190,000 in adjustments to inventory values based on
changing market conditions during fiscal 1996.
Other operating expenses decreased approximately $130,000, or 18%, for fiscal
1997, compared to the prior year. The decrease reflects managements' efforts to
control operating expenses in light of a significant increase in equipment sales
and primarily reflects lower warehouse rent, occupancy costs, and warehouse
personnel expense, partially offset by higher cost of supplies.
Selling, general & administrative expenses ("SG&A expenses") decreased $135,000
or 5% for fiscal 1997 compared to fiscal 1996. This decrease was primarily due
to management's commitment to reduce total overhead in light of a substantial
increase in sales. Categories which decreased include salaries and benefits,
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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.
The Company continues to take action to reduce its SG&A expenses, which can be
seen in the above comparison, taking into consideration the increase in sales.
The Company believes that an additional impact of staff and other reductions
will be seen in fiscal 1998. Product development costs are being curtailed,
computer support expenses have been reduced, rigid restrictions have been placed
on overtime and travel, and discretionary expenditures are being carefully
reviewed and eliminated by management. In addition, the Company has entered into
a new lease and moved its headquarters, which has reduced overhead expenses by
approximately $12,000 per month.
Depreciation and amortization expense increased approximately $170,000 or 76% to
$400,000 during the fiscal year ended March 31, 1997. The increase was primarily
the result of accelerating the depreciation of tools and dies on the books of
International which are carried on its books at $318,000, and reducing the
estimated useful lives of certain intangible assets, trademark and cost in
excess of net assets (goodwill), as of April 1, 1996.
As a result of the significant decline in music sales during fiscal 1996 and
1997, 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
assets relating to music sales in the amount of $405,000 for fiscal 1996 and
$1,081,000 for fiscal 1997, which amounts were charged to operations. See "Notes
to Consolidated Financial Statements No. 1 - Organization and Summary of
Significant Accounting Policies".
A similar review was conducted on the carrying value of the Company's investment
in song library, which consists of costs incurred in the production or purchase
of master song tapes. Based upon the outcome of such review, the Company
recorded a reduction in the carrying value of such assets of $820,000, which was
charged to operations. See "Notes to Consolidated Financial Statements No. 1 -
Organization and Summary of Significant Accounting Policies".
The operating loss for fiscal 1997 was approximately $3.4 million which is equal
to the operating loss reported for fiscal 1996. As a percentage of total
revenues, the operating loss decreased to 32% for fiscal 1997 from 66% in the
prior year. Both periods' operating income included significant accounting
adjustments to long-lived assets and inventory, among others. Excluding these
adjustments the fiscal 1997 operating loss would have been $1.3 million. This
improvement from the prior year was related to a combination of factors
including the increase in total revenues, a change in sales mix, and decreases
in other operating and SG&A expenses. The ratio of higher gross margin music
sales to total revenues continued to decrease to 15% in fiscal 1997 from 24% the
prior year. Gross profit, expressed as a percentage of equipment sales improved
to 16% for fiscal 1997, but is still below management targets. Gross profit from
equipment sales increased approximately $1.0 million for the same period. This
increase was attributable to increased volume of approximately $4.4 million from
the Company's subsidiary, International, as well as the impact on both sales and
margins due to less competitive pressures. Gross profit from music sales was
approximately $526,000 or 33%, for the current year compared to a loss of
$136,000 or 10% of related sales for the prior fiscal year. 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 expense was relatively unchanged from the prior year, the major
components being interest expense on the Magna Note and on the debt to HFA for
past due royalty obligations.
18
<PAGE>
Loss on sales of accounts receivable was 2.2% and 4.8% of total revenues for the
fiscal years 1997 and 1996, respectively. The decrease of approximately $16,000
was primarily because of a decrease in fees charged by the Company's factor
combined with the fact that the majority of the increase in total revenues took
place at the Company's foreign subsidiary, which does not utilize the services
of the factor.
Net loss for fiscal 1997 was approximately $3.9 million, unchanged from the loss
of $3.9 million reported for fiscal year 1996. Although the loss for fiscal
1997, excluding accounting adjustments of $2.1 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 will be 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
structures, will position the Company for profitability in fiscal 1998.
THE YEAR ENDED MARCH 31, 1996
COMPARED TO YEAR ENDED MARCH 31, 1995 (THE "FISCAL 1995 PERIOD").
The following discussion of fiscal year 1996 is in comparison to the Fiscal 1995
Period which is presented on a pro forma combined basis for the periods from
April 1, 1994 through May 4, 1994 (the "Predecessor Period") and from May 5,
1994 through March 31, 1995 (the "Successor Period"). As a result of the
application of "pushdown" accounting during the Fiscal 1995 Period, the
information with respect to such Fiscal 1995 Period may not necessarily be
comparable with the year ended March 31, 1996.
Total revenues declined by approximately $0.8 million or 14% for the fiscal year
ended March 31, 1996 compared to the $6.0 million reported for the Fiscal 1995
Period. The decline was attributable to decreases in music sales, master tape
sales, and commission income partially offset by sales from the Company's new
Hong Kong subsidiary.
Revenues from equipment sales increased $1.3 million or 52% to approximately
$3.8 million during fiscal 1996 compared to approximately $2.5 million for the
Fiscal 1995 Period. The increase is a result of foreign sales totaling
approximately $1.3 million. The recording of foreign equipment sales is
attributable to sales made by the Company's subsidiary, International SMC (HK)
Ltd. ("International"), formed in April, 1995, which represents 33% of equipment
sales and 24% of total revenues, for fiscal 1996. Previously, the Company,
through related party transactions, recorded commissions earned on foreign
shipments. But for such change in the method of recognizing income from foreign
hardware shipments, the Company's revenues from equipment sales for fiscal 1996
would have been relatively unchanged from the 1995 Period.
Revenues from music sales declined by $2.0 million or 61% to approximately $1.3
million in fiscal 1996 from the approximately $3.3 million recorded during the
Fiscal 1995 Period. The decline in music sales was due to less than expected
sales in certain music formats and master tape sales as well as management's
decision to redirect music sales away from distributors who historically have
high merchandise return rates in favor of mass market retailers. Sales of the
Company's four (4) song music format to a major customer declined by more than
$1.3 million for fiscal 1996. The Company did not report any master tape sales
revenue for fiscal 1996 compared to $279,000 during the Fiscal 1995 Period. The
Company's master tape agreement with an unrelated party expired September 1,
1995, which accounts for this decrease.
Commission income decreased to approximately $130,000 during fiscal 1996
compared to $230,000 during the Fiscal 1995 Period. The decrease of
approximately $100,000 or 43% was primarily because of a decrease
19
<PAGE>
in commission income from a related party. The Company anticipates commission
income from a related party to continue to decline due to the formation of
International and the decision to conduct substantially all foreign sales
through International.
Cost of equipment sales for the year ended March 31, 1996, expressed as a
percentage of related sales, was essentially unchanged from the approximate 90%
reported for the Fiscal 1995 Period. The cost of music sales, expressed as a
percentage of music sales, increased from almost 73% in fiscal 1995 to nearly
111% for the current year. Among other items this increase in cost of music
sales includes, approximately $190,000 in adjustments to inventory values based
on changing market conditions and the greater impact of amortization expense on
substantially lower sales volume.
Other operating expenses increased approximately $235,000, or 50%, for fiscal
1996, compared to the Fiscal 1995 Period. The increase was primarily because of
increased warehouse rent and occupancy costs of approximately ($81,000), costs
of outside storage expenses for merchandise ($20,000), cost of freight ($73,000)
and an increase in warehouse salaries ($53,000).
Selling, general & administrative expenses ("SG&A expenses") increased
approximately $200,000 or 9% for fiscal 1996 compared to the Fiscal 1995 Period.
The increase was primarily due to expenses associated with the administration of
the Company's new international subsidiary in Hong Kong of approximately
($170,000), costs associated with product development ($150,000), directors and
officers insurance ($57,000), catalog expense ($38,000), bad debt expense
($31,000), and financial consulting fees ($29,000). These increases were
partially offset by a decrease in expenses related to Bridge Warrant price
adjustments $169,000, and decreases in accounting fees of $100,000 and legal
fees of $61,000, which were incurred in the prior year and related to the
Company's IPO. A quarterly comparison of SG&A expenses indicates reductions in
the majority of categories totaling approximately $500,000 or 57%, including
salaries $78,000, catalog expense $48,000, public relations $20,000, accounting
$127,000 and legal $105,000.
During fiscal 1995, the Company received approximately $380,000 of reimbursed
expense credits from its related party supplier, FLX. The Company received
approximately $150,000 of such credits from FLX during fiscal 1996. Excluding
these credits, selling, general and administrative expenses year to year would
have been essentially unchanged.
The Company continues to take action to reduce its SG&A expenses, which can be
seen in the fourth quarter comparison. The Company believes that the full impact
of staff reductions will be seen in fiscal 1997; product development costs are
being curtailed, computer support expenses have been reduced, rigid restrictions
have been placed on overtime and travel, and discretionary expenditures are
being carefully reviewed and eliminated by management. In addition, although the
Company has not entered into any written agreements, it is actively seeking
parties to sublet a portion of its warehouse facility in order to further reduce
overhead.
Depreciation and amortization expense increased approximately $100,000 or 81% to
$227,000 during the fiscal year ended March 31, 1996. The increase was primarily
due to depreciation expense associated with International's purchase of tools
and dies which are carried on its books at $318,000.
As a result of the significant decline in music sales during fiscal 1996 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 assets
relating to music sales in the amount of $405,000 which was charged to
operations. See "Notes to Consolidated Financial Statements No. 1 - Organization
and Summary of Significant Accounting Policies".
20
<PAGE>
Operating loss for fiscal 1996 was approximately $3.4 million compared to a loss
of $1.5 million for the Fiscal 1995 Period. As a percentage of total revenues,
the operating loss increased to 66% for fiscal 1996 from 25% in the prior year.
The decrease in operating income was related to a combination of factors
including the decrease in total revenues, a significant change in sales mix, an
unfavorable accounting adjustment and an increase in selling, general and
administrative expenses. The ratio of higher gross margin music sales to total
revenues decreased to 24% in fiscal 1996 from 54% the prior year. Gross profit,
expressed as a percentage of equipment sales remained the same compared to the
prior year at 10%. Gross profit from equipment sales increased approximately
$140,000 for the same period. This increase was attributable to increased volume
of approximately $1.3 million from the Company's new subsidiary, International,
as well as the elimination of price concessions granted to certain customers
during the Fiscal 1995 Period. Gross profit (loss) from music sales decreased
approximately $1.0 million to (11%) of related sales for the fiscal year ended
March 31,1996, compared to 27%, for the Fiscal 1995 Period. The decline in gross
profit from music sales was primarily because of an increase in returned
merchandise ($355,000), the decline in master tape sales ($279,000), the
inventory valuation adjustments of approximately ($190,000), and the loss of
approximately $1,300,000 in music sales to a major customer of the Company's
four (4) song music format compared to the Fiscal 1995 Period.
Net interest expense decreased approximately $110,000 or 40% for fiscal 1996
compared to the Fiscal 1995 Period. The decrease was primarily due to
non-recurring interest expense associated with bridge financing of approximately
$137,000 in fiscal 1995 and a decrease in interest expense on related party
obligations $69,000, partially offset by interest expense on debt owed to Magna
International ($58,000), and past due royalty obligations to the Harry Fox
Agency, Inc.($33,000).
Loss on sales of accounts receivable was 5% and 7% of total revenues for the
fiscal years 1996 and 1995, respectively. The decrease of approximately $160,000
or 39% was primarily because of a decrease in fees charged by the Company's
factor, negotiated in the third quarter of fiscal 1995, combined with the
decrease in total revenues.
Net loss for fiscal 1996 was approximately $3.9 million, an increase of $2.0
million from the loss of $1.9 million reported for the Fiscal 1995 Period. The
loss for fiscal 1996 was primarily attributable to the 61% decline in high gross
margin music sales, the high level of merchandise returns and the related
reduction in carrying value of goodwill and trademarks. Although projections can
be overly optimistic and purchase orders can be canceled , and such items are no
guarantee of revenue, the Company has projections for fiscal 1997 sales based on
customer inquiries in excess of $10.5 million, of which $8.0 million are
substantiated by purchase orders.
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.
21
<PAGE>
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.
POSSIBLE CLAIMS
The Company may be subject to various Claims for damages and other remedies
under its written copyright licensing agreements or pursuant to Title 17 of the
United States Code. The Company is current with respect to compulsory licenses,
granted pursuant to the federal copyright statute. As of December, 1997, the
Company had entered into a definitive settlement agreement with its principal
copyright royalty creditor regarding past due obligations, contingent upon
confirmation of the Plan. Although the Company believes that the assertion of
any such Claims is remote, primarily as a result of the aforementioned
agreement, there can be no assurance that such Claims will not be asserted or,
if asserted, that such Claims will not have a material adverse effect on the
Company's financial position. See Item 1 - "Business - Trademarks and Licenses."
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to suffer from a lack of liquidity and capital resources
which have affected its ability to conduct business in a profitable manner. The
Company's working capital deficit at March 31, 1997, was approximately ($3.9)
million. While the Company is currently seeking additional financing for its
inventory and working capital needs there is no guarantee that it will be
successful in obtaining such financing on satisfactory terms.
The Company is a party to a factoring agreement, dated June 3, 1992, as amended
December 30, 1994, with Bankers Capital ("Bankers"), a division of Bankers
Leasing Association, Inc., pursuant to which Bankers purchases certain of the
Company's accounts receivable. Under the agreement, Bankers purchases certain
selected accounts receivable from the Company and advances 70% of the face
amount of those receivables to the Company. Bankers retains discretion to
determine which of the Company's accounts receivable it will purchase. Once
Bankers purchases the account receivable of any particular customer of the
Company, all accounts receivable of such customer (whether or not so purchased)
are collected by Bankers and applied first to payment of the particular accounts
receivable purchased by Bankers. As a result of the greater incidence of
returned merchandise by the Company's software customers, Bankers purchases a
lesser percentage of the Company's total accounts receivable relating to
software merchandise than hardware merchandise.
The Company is charged interest on all advances against the purchased accounts
receivable, at an annual rate of 1.5% in excess of the prime rate of interest
charged by Harris Trust and Savings Bank (8.50% on February 10, 1998), until the
receivables subject to the advances are collected. For accounts receivable
purchased by Bankers the Company will be charged a fee, from 2.0% to 3.0%,
depending on the period the receivable has been outstanding, and receives
payment from Bankers of the remaining 30% of the face amount of the receivable.
All receivables which are not collected within 150 days are charged back to the
Company and deducted from the total advances available to the Company. All of
the Company's accounts receivable, inventories and intangibles are pledged as
security under this agreement. The Company has agreed to pay minimum monthly
fees of $10,000 under the agreement. As of February 10, 1998, the outstanding
balance for which the Company is contingently liable to Bankers, was
approximately $50,000. The agreement with Bankers expired on June 28, 1997. By
Orders dated August 14 and September 5, 1997, the Bankruptcy Court authorized
post-petition financing with Bankers via the extension, under the same terms, of
its prior financing agreement for nine months expiring June 5, 1998.
22
<PAGE>
In September 1992, Magna agreed to exchange $816,574 of debt owed by the Company
to Magna, and an affiliated company of Magna, 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. Payment
of the note was guaranteed by a pledge from Gemco Pacific, Inc., an assignee of
Paul Wu, a director of the Company, of all of its shares of the Company's Common
Stock until the payment and satisfaction of fifty percent of the principal
amount of the note, and fifty percent of such shares until the remaining
principal balance of the note is paid.
The Magna Note was due in two equal installments on November 10, 1995 and May
10, 1996. The Company did not pay either installment. However, the Company did
make partial payments through June 30, 1996 of $275,000, which includes
principal and interest. As a result of the Company's failure to timely pay the
agreed upon installments the remaining balance of the note became due and
payable in full. The default provision of the Magna Note provides for a cure
period of 15 days after written notice has been given to the Company from Magna.
Written notice of default to the Company from Magna has not yet been received,
however, it is not required. The Company is subject to pay any reasonable
attorney's fees incurred by Magna in enforcing the rights of Magna while the
loan is in default. Notice of default has been given to Magna and no wavier of
default has been obtained by the Company. The entire note is classified as a
current obligation on the Company's balance sheet and continues to accrue
interest. As a result of the Chapter 11 filing, this debt is classified as a
general unsecured claim and will be paid according to the Plan if confirmed by
the Bankruptcy Court. See "Business - Confirmation".
On March 31, 1997 and 1996, the Company had accrued on its financial statements
total royalties payable, comprised of audio and written lyric components, of
approximately $720,000 and $1.1 million, respectively. As of March 31, 1997 the
Company remained delinquent in the payment of its copyright royalty obligations
imposed pursuant to written agreements with The Harry Fox Agency, Inc. ("HFA").
Due to its liquidity problems, the Company could only meet its other operating
obligations by not timely paying such royalty obligations.
In May 1994, the Company requested its principal copyright royalty creditor, the
Harry Fox Agency, Inc. ("HFA"), which represents the majority of copyright
holders for which the Company was obligated to pay royalties, to audit its
records for the period October 1991 through March 1994. On May 22, 1995, the
Company executed a settlement agreement (the "Settlement Agreement") with HFA,
with respect to all non-current royalty obligations and claims for the period
from October 1, 1991 through March 31, 1994 in the amount of $1,030,000. The
Company had accrued approximately $1.0 million in its financial statements for
royalty obligations to HFA and, on February 22, 1995, paid HFA $200,000 to be
applied against the settlement amount. The total amount of settlement payments
made during fiscal 1996 was $432,000, and the balance of approximately $400,000,
as of March 31, 1997, was anticipated to be paid in monthly installments,
through April 1997, of principal and interest at 8.0% per annum. After a period
of default, the Company entered into an amended payment agreement with HFA,
stipulating a lump sum payment to bring its account current and monthly
installments thereafter. As collateral security for the payment of its
obligations under the Settlement Agreement, the Company has granted HFA a
security interest in the Company's master sound recordings. An audit was
performed by HFA for the period April 1, 1994 through March 31, 1996 and all
royalties due were accrued.
The Bankruptcy Court is evaluating the Company's motion to approve an agreement,
entered into on December 16, 1997, regarding the treatment of the Harry Fox
Agency in the Plan. In the agreement approved by the Bankruptcy Court, HFA
agreed to amend its proof of claim and to reflect $820,000, which includes
23
<PAGE>
pre-payment of royalties on inventory, as general unsecured debt and further, to
elect to accept issuance of shares of the reorganized Company on the following
basis: for each $2.00 of debt, HFA will receive one share of common stock. This
agreement is subject to the Plan being confirmed by the Bankruptcy Court. See
"Business - Confirmation".
The Company may be subject to various Claims for damages and other remedies
under its written copyright licensing agreements or pursuant to Title 17 of the
United States Code. The Company satisfied its outstanding royalty obligations
with respect to compulsory licenses, granted pursuant to the federal copyright
statute, and has been current thereafter with respect to such compulsory royalty
obligations. Although the Company believes that the assertion of any such claims
is remote, primarily as a result of the completed negotiations for specific
payment agreements with its principal copyright royalty creditors, there can be
no assurance that such Claims will not be asserted or, if asserted, that such
Claims will not have a material adverse effect on the Company's financial
position.
On July 20, 1994, the Company closed a private financing pursuant to which it
issued secured subordinated promissory notes in an aggregate principal amount of
$400,000, and issued Bridge Warrants to purchase 360,000 shares of Common Stock.
Such notes, together with interest at a rate of 8% per annum, were repaid on
November 18, 1994. The Bridge Warrants were exercisable at a price of $1.20 per
share of Common Stock commencing February 8, 1995 and expire on August 15, 1999.
As of June 30, 1997, 272,250 of such Bridge Warrants had been exercised,
resulting in gross proceeds of $326,000 to the Company.
Since September 1991, FLX (HK) Ltd., a Hong Kong corporation ("FLX") and The
Singing Machine Company, Ltd., a Hong Kong trading company ("LTD") have sold
merchandise to the Company under deferred payment terms. Paul Wu, a director of
the Company, is the Chairman of the Board and a principal stockholder of FLX and
LTD. For the fiscal years ended March 31, 1997 and 1996, the total inventory
purchases from FLX and LTD were approximately $1.9 million and $1.2 million,
respectively. In the normal course of business, the Company enters into
negotiations with FLX and LTD, with respect to the terms and the nature of
transactions conducted with those companies. For the fiscal year 1997 and 1996,
such negotiations resulted in the Company receiving credits totaling
approximately $70,000 and $150,000, respectively, from such companies for such
items as refurbishing of defective merchandise by the Company and promotional
and advertising expenses, with a concomitant credit to results of operations.
See Item 12 - "Certain Relationships and Related Transactions".
At March 31, 1996, the Trade payables - related party, which totaled
approximately $425,000, were composed of amounts due by the Company for
merchandise received from overseas suppliers. FLX and LTD have also advanced
funds directly to, or on behalf of the Company, with respect to inventory
purchaseS.
Primarily due to the Company's continued negative cash flow from operations and
as a result of the net losses incurred by the Company for the fiscal years ended
1996 and 1997, the Company did not believe, prior to its Chapter 11 filing, that
its credit facility with Bankers and its financing arrangements with, Memcorp,
FLX and LTD would be sufficient to meet its future cash flow needs. Memcorp had
provided up to $2.2 million of inventory financing to the Company via letters of
credit but has no requirement to continue to do so. FLX and LTD had agreed to
provide up to $500,000 of inventory financing to the Company through April 1,
1996. Since April 1, 1995, FLX and LTD have provided inventory financing to the
Company in excess of their $500,000 commitment, but have no obligation to do so
in the future. Dero and A-Tech have agreed to provide up to $200,000 in
inventory financing each, as of the date of this filing.
24
<PAGE>
Because of the additional costs related to importing goods and the difficulty in
obtaining inventory financing, management has decided to emphasize direct sales
from its Far East equipment suppliers via International as opposed to domestic
sales from inventory in the future.
Although the Company is currently engaged in negotiations with regard to
securing third-party financing to replace or augment the financing arrangements
mentioned, there can be no assurance that such financing will be available on
terms satisfactory to the Company or at all, that FLX, LTD, Dero and A-Tech will
continue to provide financing to the Company, or that FLX and LTD will continue
to provide over-funding to the Company.
The Chapter 11 filing and related reorganization, provided such is confirmed by
the Bankruptcy Court, will have a significant positive impact on the Company's
cash flow and liquidity. It is projected that the reorganization will reduce the
Company's liabilities in excess of $4 million, thereby returning the Company to
solvency.
25
<PAGE>
GOING CONCERN
The report by the Company's independent auditors on its 1997 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, 1997 and an
accumulated deficit of approximately $9.5 million. In addition, the Company does
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 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.
26
<PAGE>
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HISTORICAL FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants,
Millward & Co..........................................................F-1
Balance Sheet at March 31, 1997..........................................F-2
Statements of Operations for the fiscal years ended
March 31, 1997 and March 31, 1996.....................................F-3
Statements of Shareholders Equity for the fiscal years
ended March 31, 1997 and March 31, 1996................................F-4
Statements of Cash Flows for the fiscal years ended
March 31, 1997 and March 31, 1996......................................F-5
Notes to Financial Statements............................................F-7
27
<PAGE>
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 balance sheet of The Singing
Machine Company, Inc. and Subsidiary (Debtor-in-possession) as of March 31, 1997
and the related consolidated statements of operations, shareholders' equity
(deficiency) and cash flows for each of the two years in the period 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 our 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 financial position of The Singing Machine
Company, Inc. and Subsidiary at March 31, 1997 and the results of their
operations and their cash flows for each of the two years in the period ended
March 31, 1997 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. As more fully described in Note 2, the Company has incurred recurring
operating losses and a shareholders' deficiency of $ 9,546,672, and on April 11,
1997, the Company filed for relief pursuant to Chapter 11 of the United States
Bankruptcy Act. In addition, the Company does 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.
Management's plans as to these matters are also described in Note 2. The
consolidated financial statements 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.
- -------------------------
Millward & Co. CPAs
Fort Lauderdale, Florida
December 3, 1997
F-1
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEET
March 31, 1997
ASSETS
CURRENT ASSETS:
Cash $ 10,222
Trade Accounts Receivable, Net of Allowance
for Doubtful Accounts of $80,000 309,480
Due from Officer 31,178
Inventories, Net 1,170,017
Prepaid Expenses and Other Current Assets 52,834
-----------
Total Current Assets 1,573,731
-----------
PROPERTY AND EQUIPMENT, Net of Accumulated
Depreciation of $296,713 178,030
-----------
INTANGIBLE ASSET:
Investment in Song Library, Net of Accumulated
Amortization of $353,836 91,082
-----------
Total Assets $ 1,842,843
-----------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES SUBJECT TO COMPROMISE:
Bank Overdraft $ 10,599
Trade Accounts Payable 2,263,188
Trade Accounts Payable to Related Parties 424,863
Accrued Expenses 954,310
Royalties Payable 720,265
Loan Payable 643,305
Due to Factor 222,443
-----------
Total Current Liabilities Subject to Compromise 5,238,973
-----------
CURRENT LIABILITIES NOT SUBJECT TO COMPROMISE:
Trade Accounts Payable of Subsidiary 277,258
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIENCY:
Common Stock, $.01 Par Value; 10,000,000 Shares
Authorized; 2,883,582 Shares Issued and Outstanding 28,836
Additional Paid-in Capital 5,844,448
Accumulated Deficit (9,546,672)
-----------
Total Shareholders' Deficiency (3,673,388)
-----------
Total Liabilities and Shareholders' Deficiency $ 1,842,843
===========
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31,
1997 1996
------------ ------------
<S> <C> <C>
REVENUES:
Equipment Sales, Net $ 8,953,462 $ 3,795,447
Music Sales, Net 1,610,594 1,255,932
Commission Income - Related Party 90,583 130,893
Other Income 20,240 13,295
------------ ------------
Total Revenues 10,674,879 5,195,567
------------ ------------
COST AND EXPENSES:
Cost of Equipment Sales 8,060,973 3,399,282
Cost of Music Sales 1,084,386 1,391,588
Other Operating Expenses 576,602 705,496
Selling, General and Administrative Expenses 2,370,746 2,380,976
Depreciation and Amortization 400,084 351,408
Impairment of Long-Lived Assets 1,609,973 405,085
------------ ------------
Total Costs and Expenses 14,102,764 8,633,835
------------ ------------
Loss from Operations (3,427,885) (3,438,268)
------------ ------------
OTHER (EXPENSES) INCOME:
Interest Expense (173,639) (172,467)
Interest Income 5,033 8,315
Factoring Fees (235,312) (250,818)
Gain (Loss) on Sale or Abandonment Property
and Equipment (43,325) 2,258
------------ ------------
Total Other Expenses (447,243) (412,712)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (3,875,128) (3,850,980)
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET LOSS $ (3,875,128) $ (3,850,980)
============ ============
NET LOSS PER COMMON SHARE $ (1.38) $ (1.38)
============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 2,816,513 2,806,361
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
For the Year Ended March 31, 1997 and 1996
COMMON STOCK TOTAL
$.01 PAR VALUE ADDITIONAL SHAREHOLDERS'
------------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1995 2,539,332 $ 25,393 $ 5,509,314 $(1,820,564) $ 3,714,143
Exercise of Bridge Warrants 272,250 2,723 317,855 -- 320,578
Net Loss for the Year Ended
March 31, 1996 -- -- -- (3,850,980) (3,850,980)
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1996 2,811,582 28,116 5,827,169 (5,671,544) 183,741
Issuance of Common Shares for
Debt settlement 72,000 720 17,279 -- 17,999
Net Loss for the Year Ended
March 31, 1997 -- -- -- (3,875,128) (3,875,128)
----------- ----------- ----------- ----------- -----------
Balance at March 31, 1997 2,883,582 $ 28,836 $ 5,844,448 $(9,546,672) $(3,673,388)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIE
Net Loss $(3,875,128) $(3,850,980)
Adjustments to Reconcile Net Loss to Net
Cash Provided by (Used in) Operations:
Depreciation and Amortization 400,084 351,408
Impairment of Long-Lived Assets 1,609,973 405,085
(Gain) Loss on Sale or Abandonment of Property and Equipment 43,325 (2,780)
Changes in Operating Assets and Liabilities:
Trade Accounts Receivable (124,873) 915,996
Due from Factor 33,833 274,469
Inventories 1,136,415 348,878
Prepaid Expenses and Other 50,037 221,664
Income Tax Receivable -- 211,188
Bank Overdraft 10,599 --
Trade Accounts Payable 1,101,286 580,252
Trade Accounts Payable to Related Parties (80,771) (456,982)
Accrued Expenses (53,127) 436,866
Royalties Payable (123,784) 373,621
----------- -----------
Net Cash Provided by (Used in) Operating Activities 127,869 (191,315)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (732) (64,111)
Proceeds from Sale of Property and Equipment -- 5,000
Additions to Song Library -- (71,972)
Due from Officer (975) 447
Other Assets -- 32,158
----------- -----------
Net Cash Used in Investing Activities (1,707) (98,478)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Due to Factor 222,443
Issuance of Bridge Warrants -- 320,578
Repayment of Long-Term Debt (338,496) (771,021)
----------- -----------
Net Cash Used in Financing Activities (116,053) (450,443)
----------- -----------
Net Increase (Decrease) in Cash 10,109 (740,236)
Cash at Beginning of Year 113 740,349
----------- -----------
Cash at End of Year $ 10,222 $ 113
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31,
1997 1996
----------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash Paid for Interest $ -- $ 103,000
======== =========
Cash Paid (Received) for Income Taxes $ -- $(211,000)
======== =========
NON-CASH FINANCING ACTIVITY:
Long-Term Note Receivable Given for Certain
Past Due Royalty Payments $ -- $ 830,000
======== =========
Long-Term Debt Incurred for the
Acquisition of Property and Equipment $ -- $ 31,212
======== =========
Long-Term Debt and Accounts Payable
Incurred for Insurance $ -- $ 51,350
======== =========
Issuance of Common Stock for Debt Settlement $ 17,999 $ --
======== =========
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
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 been classified as debts subject to compromise. See
Note 12 to the consolidated financial statements related to the Company's Plan
of Reorganization.
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 and accessories, audio and video
tapes, 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 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.
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. As of March 31, 1997, the Company
reviewed the carrying value of investment in song library 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 $819,740. Accordingly, the write down of
the investment in song library has been charged to operations. Amortization
expense charged to operations for the fiscal years ended March 31, 1997 and 1996
amounted to $126,507 and $123,023, 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.
Leasehold improvements are amortized over the shorter of the estimated useful
lives of the improvements or the term of the related lease.
F-7
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 that
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 and 1996, 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 and
$405,085, respectively. Accordingly, the write down of goodwill and trademarks
has been charged to operations. Amortization expense charged to operations for
the fiscal years ended March 31, 1997 and 1996 amounted to $134,425 and $89,617,
respectively.
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.
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 1997 and 1996 periods, the effect
of the common stock equivalents would be antidilutive and has not been included
in the calculation.
13. RECENT PRONOUNCEMENTS - In February 1997, the FASB issued Statement No. 128,
"Earnings Per Share" ("FAS 128"). FAS 128 is effective for financial statements
for periods ending after December 31, 1997 and early adoption is not permitted.
The adoption of FAS 128 is not expected to 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.
F-8
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
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 $9,546,672 at March 31, 1997. In addition, the Company
does not have a line of credit in place to finance its seasonal needs for
purchases of inventory. 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 1998 although there can be no assurance that this can happen. In
addition, as described in note 12, the Company has filed a voluntary petition
for bankruptcy under Chapter 11 of the United States Bankruptcy Act and is
awaiting approvals of its plan of reorganization. The consolidated financial
statements 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 possible inability of the
Company to continue as a going concern.
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, 1997,
the outstanding balance of such receivables for which the Company is
contingently liable was approximately $300,757.
The Company received proceeds of approximately $2,855,000 and $3,191,000 in the
fiscal 1997 period and fiscal 1996, respectively, upon the sale of trade
accounts receivable under this agreement, and incurred approximately $235,000
and $251,000 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 30% of the approved receivable face amount
as security. Minimum factor fees were $10,000 per month.
NOTE 4 - PROPERTY AND EQUIPMENT
A summary of property and equipment as of March 31, 1997 is as follows:
ESTIMATED
USEFUL LIVES
(YEARS)
------------
Computer Equipment 5 $ 60,139
Office and Warehouse Equipment 7 94,114
Tools and Dies 5 320,490
--------
474,743
Less Accumulated Depreciation (296,713)
--------
$178,030
========
Depreciation and amortization expense on property and equipment for the fiscal
1997 and 1996 is approximately $139,152 and $137,231, respectively.
F-9
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
NOTE 5 - LOAN PAYABLE
As of March 31, 1997, loan payable consists of the follows:
Note payable, bearing interest monthly at 8%, due upon demand and
subject to compromise. Collateralized by a pledge of 256,666 shares
of common stock held by the designee of a director. $ 643,305
=========
NOTE 6 - COMMITMENTS AND CONTINGENCIES
In 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 $203,000 and $170,000 in the fiscal 1997 and fiscal
1996 periods, respectively. Future minimum lease commitments under
noncancelable, the operating lease are as follows:
YEAR ENDING MARCH 31:
- ---------------------
1998 59,027
1999 78,703
2000 26,234
--------
$163,964
========
NOTE 7 - RELATED PARTY TRANSACTIONS
At March 31, 1997, the amount due from officer bears interest monthly at 9% per
annum and is due on March 31, 1998.
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.
Memcorp Asia Limited, a company related by a common director, acts as the
exclusive agent for International SMC (HK) Ltd. and is paid a commission of 3%
of sales for all F.O.B. Hong King shipments. Memcorp Asia coordinates the
purchases to, and shipments from various factories in China, processes letters
of credit from the customers of International SMC (HK) Ltd., and handles the
payments and receipts of funds on behalf of the Company. During fiscal 1997, the
Company paid $534,000 to Memcorp Asia Limited in commissions.
During the fiscal 1997 and 1996 periods, the Company purchased certain karaoke
audio equipment and accessories from Far East companies (related party
suppliers) controlled by a director. During fiscal 1997, the Company purchased
goods from FLX (HK) Limited, a company related through a common director, in the
amount of approximately $1,900,000. During fiscal 1996, the Company purchased
under deferred payment terms, certain karaoke audio equipment and accessories
from FLX (HK) Limited. Upon delivery of such equipment in the United States, the
Company executes documents of acceptance in favor of a bank in the Far East,
which are guaranteed by the director.
F-10
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED)
The director has also advanced funds directly to, or on behalf of, the Company
with respect to such equipment purchases. For the year ended March 31, 1997, the
director did not advance any funds. Amounts outstanding under documents of
acceptances or owed directly to these related party suppliers incur interest at
8.0% - 9.5% per annum from the date of shipment to the Company.
In the fiscal 1997 and 1996 periods, equipment purchases from the related party
suppliers were approximately $1,923,000 and $1,200,000, respectively; and
approximately $40,000 of interest expense was incurred related to these
purchases during fiscal 1996. During the fiscal 1995 period, the Company entered
into an agreement with the above noted director which provided inventory
financing through April 1, 1995 of up to $2,200,000 (inclusive of amounts owed
directly, and amounts guaranteed under documents of acceptances). On May 4,
1995, the agreement was renegotiated whereby the director provided inventory
financing through April 1, 1996 of up to $500,000. The Company has not
negotiated any new agreement with this related supplier. At March 31, 1997,
amounts owed directly to the director and amounts owed under documents of
acceptances guaranteed by the director were $0.
NOTE 8 - SHAREHOLDERS' DEFICIENCY
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 at an exercise
price of $3.00 to $5.50. The incentive stock options expire in 1999 and 2004.
At March 31, 1997, 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 186,300 shares of
the Company's common stock. At March 31, 1997, 480,000 shares or 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 entitle the registered holders to purchase 1.2 shares of common
stock at an exercisable price of $3.60 per share. 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 Representatives 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
exercise price of the warrants for common stock, the underlying warrants, and
the common stock subject to issuance pursuant to the underlying Public Warrants
is $4.50, $.08 and $5.40, respectively. The warrants became exercisable November
10, 1995 and continuing thereafter until November 10, 1999.
F-11
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
NOTE 8 - SHAREHOLDERS' DEFICIENCY (CONTINUED)
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 72,000 shares 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 (NOL's)
as of March 31, 1997 to $14,000 per year (these NOL's expire from 2003 to 2007).
At March 31, 1997, the Company has net operating loss carryforwards of
approximately $6,900,000, (which are not subject to the above limitations) that
expire through 2012. A valuation allowance of approximately $2,700,000 has been
recognized to offset primarily all of the deferred tax assets related to these
carryforwards.
The differences between the statutory United States federal income tax rate and
the effective tax rate are as follows:
YEAR ENDED YEAR END
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
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 -% -%
==== ====
At March 31, 1997, the components of the cumulative effect of temporary
differences in the deferred income tax liability and income tax asset balances
are as follow:
TOTAL
-----------
Assets:
Net operating loss carryforwards $ 2,669,000
Reserves for bad debts, sales
returns and warranties 31,000
-----------
2,700,000
Valuation allowance (2,700,000)
-----------
Net deferred tax assets $ --
===========
The net change in the valuation allowance during the fiscal 1997 period was an
increase of $1,083,000.
F-12
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
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.
During the fiscal 1997 and 1996 periods 79% and 63%, 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:
FISCAL FISCAL
1997 1996
------ ------
J.C. Penney 13% 18%
Montgomery Ward -- 16%
Fingerhut -- 12%
Target 47% 10%
NOTE 11 - FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
The following is a summary of certain year end adjustments that are considered
material in the aggregate to the results of the fourth quarter.
FISCAL FISCAL
1997 1996
----------- -----------
Inventory write-down $ 529,414 $ 371,000
Impairment of long-lived assets 1,900,568 405,085
Adjustment of royalties payable (290,595) --
----------- -----------
$ 2,139,387 $ 776,085
=========== ===========
F-13
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
NOTE 12 - DESCRIPTION OF PETITION
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. 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, 1997, 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.
As of February 18, 1998, the Debtor had not received approval from the
Bankruptcy Court to pay or otherwise honor certain of its pre-petition
obligations including employee wages. The Debtor has determined that there is
insufficient collateral to cover the interest portion of scheduled payments on
its pre-petition debt obligations. The Debtor has discontinued accruing interest
on these obligations.
On December 17, 1997, the United States Bankruptcy court approved the Company's
amended disclosure statement. This statement and amended plan of reorganization
has been filed and is being mailed together with ballots to the Company's
pre-petition shareholders and creditors. The Company expects to emerge from
Chapter 11 after court approval.
F-14
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following are the directors of the Company as of this filing, their
respective ages, the year in which each was elected a director and, where
applicable, the office of the Company held by the director. Each director
elected will hold office for a one year term or until their respective
successors have been duly elected and qualified:
SERVED AS
DIRECTOR
NAME AGE SINCE OFFICE
- --------------------- --- -------- -------------------------------------
Edward Steele 68 1991 Chief Executive Officer, President,
Chief Financial Officer, and Director
Eugene B. Settler (1) 61 1991 Director
Paul Wu 67 1991 Director
Josef A. Bauer (2) 60 1995 Director
R. Edward Pearson (3) 35 1997 Vice President and Director
- ---------
(1) Mr. Settler resigned from the board as of March 26, 1997
(2) Mr. Bauer resigned from the board as of July 16, 1997
(3) Mr. R. Edward Pearson was promoted to Vice President and appointed to the
board effective July 16, 1997.
Edward Steele joined the Company in 1988 and has served as the Company's Chief
Executive Officer, Chief Financial Officer and as a director since September
1991. As of February 29, 1996, Mr. Steele also assumed the office of President
of the Company. 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 Managing Director in charge of worldwide sales of
Concept 2000, a manufacturer of consumer electronics, from 1971 to 1978;
President of Wicely Corp., a distributor of electronic toys and consumer
electronics, from 1978 to 1983; and President of Justin Products Corp., an
electronic toy manufacturer, from 1983 to 1988.
Eugene B. Settler joined the Company as President in 1988 and served in that
office until the termination of his employment agreement on February 22, 1996.
Mr. Settler held the office of Director as of March 31, 1997, as he has since
September 1991. Mr. Settler resigned his position as Director as of September
17, 1997. Prior to joining the Company, Mr. Settler served as Director of Sales
and Marketing for CBS-Epic Records from 1968 to 1971, as Executive Vice
President of Marketing for RCA Records from 1971 to 1973, and as Vice President
of Marketing of TMC Music Corp. from 1973 to 1974. Mr. Settler was President of
Request Records from 1976 to 1981 and Executive Vice President of IJE, Inc. (Kid
Stuff Records) from 1981 to 1987.
28
<PAGE>
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.
Josef A. Bauer was appointed to the Board of Directors on February 3, 1995 and
resigned from such position as of October 10, 1997. Since 1992, Mr. Bauer has
been a managing director and principal stockholder of Dero Research Ltd. in Hong
Kong, which serves as a manufacturer's representative for the sale of telephone
and electronic products. From 1970 to 1993, Mr. Bauer served as managing
director and was a principal stockholder of Dero Research Corporation in Tokyo,
Japan, which was engaged in the design, engineering and manufacture of
automobile audio equipment. He served as a director from 1991 to 1994, of
AmeriData Technologies, Inc., a publicly traded computer products and service
company. In December 1994, Mr. Bauer was elected to the Board of Directors of
Go-Video, Inc., a publicly traded video electronics manufacturer and
distributor. Mr. Bauer has also served as president of Banisa Corporation, a
privately owned investment company, since 1975. Mr. Bauer is also President of
Magna (a position he has held since 1989) and was formerly a director of the
Company from February 1990 until September 1991. See Item 12 - "Certain
Relationships and Related Transactions."
R. Edward Pearson, age 35, joined the Company in 1995 and has served as the
Company's Vice President and Director since July, 1997. Mr. Pearson's duties at
the Company include, among others, all facets of sales and marketing of the
Company's products to mass merchant and catalog retailers in North America, the
development of and implementation of sales plans and presentations to major
electronic buyers, management of over 25 independent sales representatives
throughout the country, development of karaoke programs for individual
retailers, development of all sales support materials and after-sale
implementation of sales and shipment programs. Prior to joining the Company, Mr.
Pearson was employed by one of Japan's largest karaoke companies with annual
revenues of approximately $750 million.
The Company has agreed, until November 10, 1999, that the representatives
("Representatives") of the underwriters for 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. No such nominee has yet been designated. The
officers, certain directors and certain stockholders of the Company have agreed
to vote their shares 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.
See Item 10 - "Executive Compensation, Employment Agreements".
DIRECTORS' FEES
The Company currently reimburses each director for expenses incurred in
connection with his 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
nor options issued for fiscal 1997.
29
<PAGE>
BOARD COMMITTEES
On February 3, 1995, the Board of Directors appointed Audit and Executive
Compensation/Stock Option Committees. The Audit Committee consisted of Messrs.
Steele, Wu and Bauer and the Executive Compensation/Stock Option Committee
consisted of Messrs. Settler, Wu and Bauer. 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. Upon emergence from Chapter 11, the board is
expected to re-appoint committee members as a result of the changes in board
membership since the end of fiscal 1997.
BOARD AND BOARD COMMITTEE MEETINGS
During the fiscal year ended March 31, 1997, there were two meetings of the
Board of Directors. The board members also communicate on a regular basis during
the normal course of the business of the Company. The Audit and Executive
Compensation/Stock Option Committees of the Board did not meet during the year.
All directors attended at least 75% of the meetings of the Board.
EXECUTIVE OFFICERS
The following are the executive officers of the Company, their respective ages,
the office of the Company held and the year in which first elected an officer.
The executive officers will hold office until the next annual meeting of the
Board of Directors or until their respective successors have been duly elected
and qualified.
OFFICER'S NAME AGE OFFICE OFFICER SINCE
- ----------------- --- ---------------------------------- --------------
Edward Steele 68 Chief Executive Officer, President, September 1991
Chief Financial Officer
R. Edward Pearson 35 Vice President July 1997
John Klecha 47 Secretary and Treasurer October 1997
For information regarding Mr. Steele and Mr. Pearson, see description above.
Mr. John Klecha, General Manager of the Company since July 1997, was promoted to
Secretary and Treasurer as of 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, accounts payable and
accounts receivable. Prior to joining the Company, Mr. Klecha managed all
financial and administrative functions for a toy design, manufacturing and
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.
30
<PAGE>
Item 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation paid to or
accrued for the executive officers of the Company whose annual compensation
exceeded $100,000 during the Company's last two fiscal years.
SUMMARY COMPENSATION TABLE
FOR THE FISCAL YEARS ENDED MARCH 31, 1997 AND 1996
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------
NAME AND OTHER ANNUAL OPTIONS
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2) (NO. OF SHARES)
---- ---------- ----- --------------- --------------
Edward Steele
Chief Executive Officer,
President and Chief 1997 $170,167 $-0- $7,200 -0-
Financial Officer 1996 145,731(1) -0- 8,617 -0-
Eugene B. Settler
President (3) 1996 140,841 -0- 11,803 -0-
- ---------
(1) Mr. Steele enacted a 15% voluntary pay reduction as of September 1995, in
light of the Company's poor financial performance and retracted such
beginning fiscal 1997.
(2) Fiscal 1997 reflects automobile allowance in total for Mr. Steele; 1996
includes $3,600 in automobile allowance for Messrs. Steele and Settler,
respectively.
(3) Employment agreement terminated by Company February 22,
1996.
EMPLOYMENT AGREEMENTS
The Company executed an employment agreement with Mr. Steele which commenced as
of October 1, 1994 and terminated on March 31, 1997. Pursuant to Mr. Steele's
employment agreement, he is entitled to received base compensation of $150,000
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 1997 or 1996 fiscal years. Mr. Steele
would receive 45% 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 agreement and for a
period of two years 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.
Mr. Steele is currently working under the terms of his prior employment
agreement and is expected to enter into negotiations for a new agreement upon
the Company's emergence from Chapter 11.
31
<PAGE>
The Company had also entered into an employment agreement with Mr. Settler,
which was terminated by the Company on February 22, 1996. As a result of the
termination, the Company ceased payments thereunder. Mr. Settler filed a
complaint which, under the terms of the employment agreement, was to be settled
via binding arbitration. During January, 1998, the Bankruptcy Court granted the
Company's motion to approve a settlement agreement effective September 17, 1997,
between the Company and Mr. Settler. Prior to this settlement agreement, there
was pending in the Bankruptcy Court an adversary proceeding brought by the
Company against Settler, for recovery of certain alleged preferential transfers
arising from certain payments made to Settler as a result of legal proceedings
brought by Settler against the Company for wrongful termination. The parties
mediated the dispute and reached a settlement which resolves the adversary
proceeding, certain alleged claims by Settler against the Company and others,
and provides for an exchange of releases amongst all parties. Under the terms of
the agreement, Settler also resigned as a director of the Company and assigned
all of his stock certificates and options to the Company. This settlement did
not require the payment of any funds by the Company other than a portion of
mediation costs incurred.
32
<PAGE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
There were no stock options granted to the Company's executive officers during
the fiscal year ended March 31, 1997.
The following table sets forth information regarding stock options granted to
the Company's executive officers during the fiscal year ended March 31, 1995 and
the potential value of such options at the end of their terms, assuming certain
levels of stock price appreciation:
GRANTS IN FISCAL YEAR 1995
INDIVIDUAL GRANTS(1)
---------------------------------------------------------
PERCENT OF TOTAL
SHARES UNDERLY- OPTIONS GRANTED TO
ING OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED (#) FISCAL YEAR PRICE DATE
---- --------------- ------------------ -------- ----------
Edward Steele.......... 75,000 34.3% $5.50 6/29/99
Eugene B. Settler (2).. 75,000 34.3% $5.50 6/29/99
- ---------
(1) All options are incentive stock options granted pursuant to the Company's
Plan and have a term of five years. These options were granted on June 29,
1994. 20,000 of such options for each of Messrs. Steele and Settler were
immediately exercisable with the balance becoming exercisable in increments
of 20,000 shares per year.
(2) Mr. Settler surrendered all of his stock and options, in conjunction with
the terms of a settlement agreement effective September 17, 1997.
STOCK OPTION EXERCISES AND HOLDINGS
The following table provides certain information concerning the unexercised
options to purchase shares of Common Stock held by the Company's executive
officers as of March 31, 1997. No stock options were exercised by any executive
officer of the Company during fiscal 1997.
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS
AWARDS IN LAST FISCAL YEAR
VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT 3/31/97 3/31/97
(#) ($)(1)
-------------------------- --------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward Steele........ 0 0 60,000 15,000 (1) (1)
Eugene B. Settler(2) 0 0 60,000 15,000 (1) (1)
- ---------
(1) No executive of the Company held any "in the money" options in which the
fair market value of the Common Stock exceeded the option exercise price as
of March 31, 1997.
(2) Mr. Settler surrendered all of his stock and options, in conjunction with
the terms of a settlement agreement effective September 17, 1997.
</TABLE>
33
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1997, the shares of Common Stock
beneficially owned by each director of the Company, each executive officer of
the Company named in the Summary Compensation Table under the caption "Item 10 -
Executive Compensation", each person known to the Company to own more than 5% of
the outstanding shares of Common Stock and all directors and executive officers
as a group.
SHARES
BENEFICIALLY PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED CLASS
- ------------------------------------ ------------ -----------
Gemco Pacific, Inc.(1) 256,666 9.1%
500 Hennessy Road
Causeway, Hong Kong
Edward Steele (6) 245,000(2) 8.7
1551 W. Copans Road, #100
Pompano Beach, Florida 33064
Eugene B. Settler (7) 242,000(2) 8.6
1551 W. Copans Road, #100
Pompano Beach, Florida 33064
Ford Harvest Ltd. 183,333 6.5
500 Hennessy Road
Causeway, Hong Kong
Paul Wu 75,000(3) 2.7
985 Rexdale Blvd.
Rexdale, Ontario M9W 1R9
Josef A. Bauer 22,500(4) *
820 Park Avenue
New York, NY 10021
All directors and executive officers 584,500(5) 20.8%
as a group (4 persons)
- ---------
* Less than 1%
(1) Mr. Wu is a director of Gemco Pacific, Inc. ("Gemco"). Mr. Wu disclaims
beneficial ownership of the shares owned by Gemco. All 256,666 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.
(2) Includes immediately exercisable options to purchase 60,000 shares of
Common Stock.
(3) Includes immediately exercisable options to purchase 75,000 shares of
Common Stock.
(4) Consists of immediately exercisable warrants to acquire such shares. Does
not include 256,666 shares pledged to Magna by Gemco to secure an
outstanding obligation of the Company to Magna. Mr. Bauer is President of
Magna.
(5) Includes immediately exercisable options to purchase 195,000 shares of
Common Stock and immediately exercisable warrants to acquire 22,500 shares
of Common Stock.
(6) Mr. Steele disclaims beneficial ownership of 6,500 shares owned by his
wife.
(7) Mr. Settler surrendered all of his stock and options, in conjunction with
the terms of a settlement agreement effective September 17, 1997.
34
<PAGE>
Section 16(a) of the Securities Exchange Act of 1934 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, to file reports of
ownership and changes in ownership of such securities with the Securities and
Exchange Commission. Officers, directors and greater than ten-percent beneficial
owners are required by applicable regulations to furnish the Company with copies
of all Section 16(a) forms they file. The Company is not aware of any beneficial
owner of more than ten percent of its Common Stock.
Based solely upon a review of the copies of the forms furnished to the Company,
if any, the Company believes that all filing requirements applicable to its
officers and directors were complied with during the 1997 fiscal year.
POSSIBLE CHANGE IN CONTROL
The Company's principal executive officer, Mr. Steele, and its former president
and director, Mr. Settler, had agreed to indemnify the Company against certain
claims related to compulsory copyright obligations (an "Indemnifiable Claim")
asserted with respect to the period from September 3, 1991 through November 10,
1994 by pledging all of their shares of Common Stock to the Company. In the
event of the assertion of an Indemnifiable Claim, the Company may require the
return of shares of Common Stock to the Company with a market value collectively
equal to the Indemnifiable Claim. Mr. Settler has since been released from such
indemnification as a result of a settlement agreement effective September 17,
1997. As a result of that indemnification, the Company could reacquire up to
approximately 3.25% of its outstanding shares of Common Stock (assuming
2,811,582 shares of Common Stock outstanding as of June 30, 1997) from Mr.
Steele.
Gemco had pledged all 256,666 of its shares of the Company's common stock to
Magna to secure payment of an $816,574 promissory note (the Magna Note) of the
Company to Magna. Josef A. Bauer, a former director of the Company, is President
of Magna. The remaining balance of approximately $630,000 is currently
classified as a general unsecured claim in the Chapter 11 proceedings. As a
result of such default, Magna could acquire approximately 9.1% of the Company's
outstanding Common Stock if it pursues legal remedy.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 3, 1991, in consideration for $200,000, Magna, the then owner of
all of the issued and outstanding shares of the Company's Common Stock, entered
into an option agreement (the "Option Agreement") with Wedge Corp., a Florida
corporation ("Wedge"), to sell Wedge's designee 100% of the Company's Common
Stock. The stockholders of Wedge were Paul Wu, Edward Steele and Eugene B.
Settler (the "Optionees"). In connection with the grant of the option, Wedge
agreed to pledge all of the shares subject to the option to Magna as security
for the Company's satisfaction of various loans from Magna and an affiliate of
Magna. On May 5, 1994, the option was exercised for no additional consideration,
and Magna transferred 883,332 shares of the Company's Common Stock to Messrs.
Settler and Steele and Mr. Wu's designees, Gemco Pacific, Inc. ("Gemco") and
Ford Harvest Ltd. The 256,666 shares held by Gemco are held by Magna as security
for the loans from Magna and an affiliate of Magna. Mr. Wu is a director of
Gemco. Magna has not provided any material services to the Company since
September 3, 1991. Josef A. Bauer, President of Magna, was elected to the
Company's Board of Directors on February 3, 1995 and resigned on July 16, 1997.
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,
35
<PAGE>
1994. On November 10, 1994 Magna exchanged the Additional Shares for the
Company's promissory note in the amount of $816,574. Payment of the note was
guaranteed by a pledge from Gemco Pacific, Inc., an assignee of Paul Wu, a
director of the Company, of all of its shares of the Company's Common Stock
until the payment and satisfaction of fifty percent of the principal amount of
the note, and fifty percent of such shares until the remaining principal balance
of the note is paid.
The Company has an agreement with FLX to produce electronic recording equipment,
based on the Company's specifications. The Company acts as exclusive agent for
LTD and receives commission income from such company based upon 50% of the net
profits, as defined, related to sales arranged by the Company for LTD. Paul Wu,
a director of the Company, is the Chairman of the Board and a principal
stockholder of FLX and LTD. During the fiscal years ended March 31, 1997 and
1996, the Company purchased approximately $1.9 million and $1.2 million,
respectively, in equipment from FLX and LTD and received approximately $90,000
and $130,000, respectively, in commission income from LTD. See Item 6 -
"Managements Discussion and Analysis of Financial Condition and Results of
Operations".
On May 4, 1992, the Company sold all of its tools and dies used in the
production of electronic recording equipment to LTD for approximately $344,000,
resulting in a gain to the Company of approximately $202,000. In March 1995, the
Company purchased tools and dies for two new models from LTD for $318,000.
The Company believes that all of the foregoing transactions with FLX and LTD
have been on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties in arms-length transactions under
similar circumstances.
Approximately $1.6 million of the net proceeds of the Company's initial public
offering in November 1994 were used to satisfy certain accounts and note payable
to FLX and LTD. Paul Wu, a director of the Company, is an officer, director and
principal stockholder of FLX and LTD. The accounts payable are composed of
amounts due with respect to payments made, or guaranteed, by FLX and LTD in
connection with the issuance of documents of acceptance ("D/As") by the Company
for merchandise received from overseas suppliers. The Company purchases
electronic recording products for its own account from manufacturers in the Far
East. Upon delivery of such merchandise in the United States, the Company
executes D/As in favor of a bank in the Far East with respect to payment for
that merchandise. FLX and LTD have guaranteed the Company's obligations to those
banks. In addition, FLX and LTD have also advanced funds directly to, or on
behalf of the Company, with respect to inventory purchases.
Mr. Wu, as Chairman of FLX and LTD, had agreed that FLX and LTD would continue
to provide up to $500,000 of inventory financing in the form of loans to, or on
behalf of, the Company, or the provision of D/As on the Company's behalf through
April 1, 1996. Since April 1, 1995, FLX and LTD have provided inventory
financing to the Company in excess of their $500,000 commitment, but have no
obligation to do so in the future. The Company has not negotiated any new
agreement with these related suppliers. At March 31, 1997, amounts owed directly
to Mr. Wu and amounts owed under documents of acceptance were $0.
36
<PAGE>
The Company has arranged with Dero Research, Ltd. in Hong Kong, of which Mr.
Bauer is a principal stockholder, letter of credit financing up to $200,000 for
purchases of new inventory. Previously, on a case-by-case basis with respect to
certain purchase orders, and subject to his discretion, Mr. Bauer has agreed,
directly or through a company controlled by Mr. Bauer, to provide inventory
financing in the form of letters of credit on the Company's behalf. In exchange,
the Company has agreed to reimburse Mr. Bauer for all expenses incurred with
respect to such letters of credit and to pay a commission of four percent on the
face amount of the letter of credit. In July 1995, Mr. Bauer funded letters of
credit aggregating $130,000 for the Company's benefit and has provided no
further funding to date.
Memcorp Asia Ltd., act as the exclusive agent for the Company's Hong Kong
subsidiary, International, and is paid a commission of 5% of sales for all
F.O.B. Hong Kong shipments. Memcorp Asia coordinates the purchases to, and
shipments from various factories in China, processes letters of credit from
customers of International, and handles the payments and receipts of funds on
behalf of the Company. During fiscal 1997 the Company paid $534,000 to Memcorp
Asia, a company in which Mr. Joseph Maurice Taub is a common director.
The Company's principal executive officer, Mr. Steele, and its former president
and director, Mr. Settler, had agreed to indemnify the Company against certain
Indemnifiable Claims asserted with respect to the period from September 3, 1991
through November 10, 1994 by pledging all of their shares of Common Stock to the
Company. In the event of the assertion of any Indemnifiable Claim, the Company
may require the return of shares of Common Stock to the Company with a market
value collectively equal to the Indemnifiable Claim. There can be no assurance,
however, that the Company would be able to sell or otherwise dispose of such
shares for cash in order to satisfy the Indemnifiable Claim. In addition, the
Company would continue to bear all other costs and expenses incurred by, or
assessed against, the Company (including legal) associated with such an
Indemnifiable Claim, whether or not such Indemnifiable Claim is resolved in
favor of the Company. The Company has agreed to release certain shares of Common
Stock from the provisions of the pledge and indemnity agreement during the
period beginning 13 months after November 10, 1994 under certain circumstances
based upon the performance of the Company. No such shares have been released as
of June 30, 1997. Mr. Settler has since been released from such indemnification
as a result of a settlement agreement effective September 17, 1997. The pledge
and indemnity agreement will also terminate as to Messrs. Steele or Settler in
the event of their death, provided the Company then maintains life insurance of
at least $1,000,000 on each party. No such insurance is presently in place.
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1(a) Form of Underwriting Agreement between the Company and the
Representatives(5)
1(b) Form of Selected Dealers Agreement(3)
3(a) Certificate of Incorporation of the Company, including amendment to be
filed with the Secretary of State of Delaware1
3(b) By-Laws of the Company(1)
4(a) Form of Warrant issued in connection with July, 1994 private
offering(1)
4(b) Warrant Agreement and related Warrant Certificate to be issued in
connection with the public offering by the Company on November 18,
1994(6)
37
<PAGE>
4(c) Underwriter's Warrant issued to the Underwriters on November 18,
1994(6)
*10(a) Employment Agreement between the Company and Edward Steele, dated
November 18, 1994(6)
*10(b) Employment Agreement between the Company and Eugene B. Settler, dated
November 18, 1994(6)
*10(c) Employment Agreement between the Company and Howard Miller, dated
November 18, 1994(6)
10(d) Agreement dated February 28, 1994 between the Company and Magna
International Corp(1)
*10(e) 1994 Amended and Restated Management Stock Option Plan(1)
10(f) Financial Consulting Agreement between the Company and the
Representatives, dated November 18, 1994(3)
10(g) Consulting Agreement between the Company and Genesis Partners, Inc.,
dated December 9, 1993, as amended September 2, 1994 and October 20,
1994(4)
10(h) Agreement of Merger dated February 28, 1994, among with Company, The
Singing Machine Company, Inc., a California corporation, and Magna
International Corp.(1)
10(I) Supply, Support and Distributorship Agreement dated as of January 1,
1994, between the Company and FLX (HK) Ltd(1)
10(j) Supply, Support and Distributorship Agreement dated as of January 1,
1994, between the Company and The SMC Singing Machine Co., Ltd.(1)
10(k) Accounts Receivable Agreement, dated June 15, 1992, between the
Company and Bankers Capital, as amended September 22, 1994 and
December 30, 1994(2)
10(l) Letter Agreement, dated May 4, 1994, among the Company, Paul Wu,
Edward Steele and Eugene B. Settler(1)
10(m) Letter Agreement, dated May 4, 1994, among the Company, Edward Steele
and Eugene B. Settler(1)
10(n) Indemnity and Stock Pledge Agreement, dated July 20, 1994, among
Eugene B. Settler, Edward Steele and the Company(1)
10(o) Agreement dated June 29, 1994 among the Company, Magna International
Corp., Edward Steele, Eugene B. Settler and Gemco Pacific, Inc.(1)
10(p) Trademark certificates(2)
10(q) Form of Subscription Agreement evidencing registration rights(3)
10(r) Letter Agreement, dated March 27, 1995, among the Company and Paul
Wu(7)
10(s) Letter Agreement, dated May 15, 1995, between the Company and The
Harry Fox Agency, Inc.(8)
10(t) Security Agreement, dated May 22, 1995, between the Company and The
Harry Fox Agency, Inc.(8)
10(u) Draft form of Indemnity and Contribution Agreement by and among Eugene
B. Settler, Edward Steele and Gemco(9)
10(v) Sub-distribution agreement between the Company and Memcorp, Inc.,
dated October 27, 1995(10)
10(w) Administrative agreement between the Company and Memcorp, Inc., dated
October 27, 1995(10)
10(x) Option agreement to purchase one million shares between the Company
and Memcorp, Inc., dated October 27, 1995(10)
10(y) Debtor's Amended Disclosure Statement, dated December 17, 1997.
10(z) Debtor's Amended Plan of Reorganization, dated December 17, 1997.
10(aa) Agreement regarding treatment of Harry Fox Agency in Debtor's Plan of
Reorganization, dated December 16, 1997.
27 Financial Data Schedule.
- ----------
* Compensatory Plan or Management Contract
(1) 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.
(2) Incorporated by reference to the Amendment No. 1 to the Registration
Statement as filed on September 28, 1994.
38
<PAGE>
(3) Incorporated by reference to the Amendment No. 3 to the Registration
Statement as filed on October 21, 1994.
(4) Incorporated by reference to the Amendment No. 4 to the Registration
Statement as filed on November 4, 1994.
(5) Incorporated by reference to the Amendment No. 5 to the Registration
Statement as filed on November 8, 1994.
(6) Incorporated by reference to the Post-Effective Amendment No. 1 to the
Registration Statement as filed on December 13, 1994.
(7) Incorporated by reference to the Post-Effective Amendment No. 4 to the
Registration Statement as filed on March 29, 1995.
(8) Incorporated by reference to the Company's Report on Form 8-K dated June 5,
1995.
(9) Incorporated by reference to the Company's Annual Report on Form10-KSB for
the fiscal year ended March 31, 1995 as filed on June 28, 1995.
(10) Incorporated by reference to the Company's Quarterly Report on Form10-QSB
for the quarter ended September 30, 1995 as filed on November 13, 1995.
(b) Reports on Form 8-K.
The Company filed two reports on Form 8-K during the year ended March
31, 1996. The Company filed one Item 4 Form 8-K on December 4, 1995,
and one Item 6 Form 8-K on February 23, 1996.
The Company did not file any reports on Form 8-K during the year ended
March 31, 1997.
The Company filed one Form 8-K on May 6, 1997.
39
<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 authorized1.
THE SINGING MACHINE COMPANY, INC.
By: /s/ EDWARD STEELE
-----------------
Edward Steele, Chief Executive Officer, President,
and Director (Principal Executive, Financial and
Accounting Officer)
Dated: February 24, 1998
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
-------------
Edward Steele Chief Executive Officer, President, February 24, 1998
and Director (Principal Executive,
Financial and Accounting Officer)
/s/ R. EDWARD PEARSON
-----------------
Edward Pearson Vice President and Director February 24, 1998
/s/ PAUL WU
-------
Paul Wu Director February 24, 1998
40
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10(y) Debtor's Amended Disclosure Statement, dated December 17, 1997.
10(z) Debtor's Amended Plan of Reorganization, dated December 17, 1997.
10(aa) Agreement regarding treatment of Harry Fox Agency in Debtor's Plan of
Reorganization, dated December 16, 1997.
27 Financial Data Schedule.
EXHIBIT 10(y)
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.
- -----------------------------------/
DEBTOR'S AMENDED DISCLOSURE STATEMENT
THIS DISCLOSURE STATEMENT HAS NEITHER BEEN APPROVED NOR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS
THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE
STATEMENTS CONTAINED HEREWITH.
FURR AND COHEN, P.A.
Attorneys for Debtor
By: Robert C. Furr, Esq. and
Lisa J. Chaiklin Aflalo, Esq.
1499 West Palmetto Park Road
Suite 412
Boca Raton, FL 33486
(561) 395-0500
<PAGE>
TABLE OF CONTENTS
PAGE
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Brief Summary of Chapter 11 1
ARTICLE I Definitions 4
ARTICLE II Preliminary Statements and History
Financial Condition of Debtor 5
(A) History of Debtor 5
(B) Summary of Reasons for Filing Petition 10
(C) Source of Financial Information 11
ARTICLE III Debtor's Operation and Structure 12
(A) Synopsis of Operation in Chapter 11 12
(B) Executory Contracts 13
(C) Objections to Claims and Preference Analysis 15
(D) Officers and Directors 19
ARTICLE IV Claimants and Impaired Interest Holders 20
ARTICLE V Analysis of the Plan v. Liquidation Analysis 22
ARTICLE VI Risk Factors 24
ARTICLE VII Certain Factors to be Considered 26
ARTICLE VIII Tax Consequences of the Plan 33
ARTICLE IX Post Confirmation Reorganized Debtor's Structure 39
ARTICLE X Confirmation by Cramdown 40
ARTICLE XI Miscellaneous Provisions 41
ARTICLE XII Conclusion 42
EXHIBITS
(A) Current Balance Sheet
(B-1) Income & Expense Statement
(B-2) DIP Report Excerpts
(C) Schedule of Creditors
(D) Liquidation Analysis
(E) Projection and Detailed List of Expenses for First Year
<PAGE>
DEBTOR'S AMENDED DISCLOSURE STATEMENT
The Singing Machine Company, Inc. ("SMC" or "Debtor") provides this
Disclosure Statement ("Disclosure Statement") to all known creditors and
Interest Holders of the Debtor in order to disclose the information deemed to be
material, important, and necessary for the creditors to arrive at a reasonably
informed decision in exercising their right to abstain from voting or to vote
for acceptance or rejection of the Plan of Reorganization (the "Plan"). A copy
of the Plan accompanies this Disclosure Statement. The Plan is a legally binding
arrangement and should be read in its entirety, as opposed to relying on the
summary in this Disclosure Statement. Accordingly, creditors and interest
Holders may wish to consult with their own lawyer to understand the Plan more
fully.
BRIEF SUMMARY OF CHAPTER 11
Chapter 11 is the principal reorganization Chapter of the United States
Bankruptcy Code (the "Code"). It allows a debtor to remain in operation and work
out its financial difficulties. In a Chapter 11, the debtor continues to manage
its affairs as a debtor-in-possession and as a fiduciary to the creditors of the
estate.
Formulation and confirmation of a plan of reorganization are the
principal purposes of a Chapter 11 reorganization case. The plan is the vehicle
for satisfying the holders of claims against a debtor. After a plan has been
filed, the holders of claims whose claims are proposed to be impaired are
permitted to vote to accept or reject the plan. Section 1125 of the Code
requires the debtor, before soliciting acceptances of the proposed plan, to
prepare a disclosure statement containing adequate information of such kind, and
in such detail, as to enable a hypothetical reasonable investor to make an
informed judgment about the plan. This Disclosure
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Statement is presented to holders of Claims in impaired classes against the
debtor to satisfy the requirements of Section 1125 of the Code.
Chapter 11 does not require that each holder of a claim against the
debtor vote in favor of the plan in order for the bankruptcy court to confirm
the plan. At a minimum, however, a plan must be accepted by a majority in number
and at least two-thirds in amount of those claims actually voting in at least
one class of claims impaired under such plan. The Code also defines acceptance
of a plan of reorganization by a class of interests as acceptance by holders of
at least two-thirds in amount of those claims actually voting.
Even though a Creditor or Interest Holder may choose not to vote or may
choose to vote against the Plan, the Creditor or Interest Holder will be bound
by the terms and treatment set forth in the Plan if such Plan is accepted by the
required majorities in each Class of Creditors or is confirmed by the United
States Bankruptcy Court for the Southern District of Florida (the "Bankruptcy
Court"). The proponent of the Plan may seek confirmation of the Plan under the
"cramdown" provisions of the Code. Pursuant to Section 1129(b) of the Code, a
proponent may "cramdown" the Plan against a non-accepting class of creditors or
interests if the Plan complies with all of the requirements of Section 1129(a),
except Section 1129(a)(8), which requires acceptance by all impaired classes),
and the proponent establishes, among other things, that the Plan is accepted by
at least one impaired class of creditors, that the Plan is fair and equitable,
and that the Plan does not discriminate unfairly. Creditors or Interest Holders
who fail to vote will not be counted in determining acceptance or rejection of
the Plan.
The Bankruptcy Court has set a hearing on confirmation of the Plan
for________________ at______________ , at Federal Building, 299 East Broward
Boulevard, Fort Lauderdale, Florida.
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Creditors or Interest Holders may vote on the Plan by filling out and mailing
the accompanying ballot form to the Bankruptcy Court. Your Ballot must be filed
on or before ____________________ . As a creditor or Interest Holder, your vote
is important. In order for the Plan to be deemed accepted, of the ballots cast,
creditors that hold as least 2/3 in amount and more than 1/2 in number of the
allowed claims of impaired Classes must accept the Plan. However, you are
advised that the Debtor may be afforded the right under the Code to have the
Plan confirmed over the objections of dissenting creditors consistent with the
limitations set forth in the Code.
NO REPRESENTATIONS CONCERNING THE DEBTOR PARTICULARLY AS TO ITS FUTURE
BUSINESS OPERATIONS OR THE VALUE OF PROPERTY, ARE AUTHORIZED OTHER THAN AS SET
FORTH IN THIS STATEMENT. ANY REPRESENTATIONS OR INDUCEMENTS MADE TO SECURE YOUR
ACCEPTANCE WHICH ARE OTHER THAN AS CONTAINED IN THIS STATEMENT SHOULD NOT BE
RELIED UPON BY YOU IN ARRIVING AT YOUR DECISION, AND SUCH ADDITIONAL
REPRESENTATIONS AND INDUCEMENTS SHOULD BE REPORTED TO COUNSEL FOR DEBTOR, WHO IN
TURN SHALL DELIVER SUCH INFORMATION TO THE UNITED STATES TRUSTEE FOR SUCH ACTION
AS MAY BE DEEMED APPROPRIATE.
Debtor filed a Voluntary Petition for reorganization under Chapter 11
of the United States Bankruptcy Code, 11 U.S.C. 101 ET SEQ., (the "Code") in the
United States Bankruptcy Court for the Southern District of Florida (the
"Bankruptcy Court") on April 11, 1997 (the "Filing Date"). The Debtor has
continued to operate its business as a Debtor-In-Possession pursuant to ss. 1108
of the Code.
You are urged to read the contents of this Disclosure Statement before
making your
3
<PAGE>
decision to accept or reject the Plan. Particular attention should be directed
to the provisions of the Plan affecting or impairing your rights as they
presently exist. The terms used herein have the same meaning as in the Plan
unless the context hereof requires otherwise.
THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT HAS BEEN
SUBMITTED BY THE DEBTOR'S MANAGEMENT, UNLESS SPECIFICALLY STATED TO BE FROM
OTHER SOURCES. NO REPRESENTATIONS, OTHER THAN THOSE SET FORTH HEREIN, CONCERNING
THE DEBTOR (PARTICULARLY AS TO FUTURE BUSINESS OPERATIONS OR VALUE OF ITS
PROPERTY) ARE AUTHORIZED BY THE DEBTOR.
Projections of results of future operations are based on management's
best estimates in light of current market conditions, past experience, analysis
of general economic conditions, and other estimates which will bear on the
results. These projections are subject to significant risks and uncertainties.
I. DEFINITIONS
The following phrases, as used hereinafter, shall have the following
meanings: All Definitions in the Plan of Reorganization are incorporated herein.
ALLOWED CLAIM(S) means the amount of any Claim against the Debtor to the extent
that:
a. a proof of the Claim was filed or deemed to be filed with the
Bankruptcy Court in accordance with the Bankruptcy Rules within such time as the
Court allowed, provided that a timely Proof of Claim filed in accordance with
the Bankruptcy Rules shall supersede any scheduling of such Claim pursuant to
Code Section 521(1);and
b. (i) no objection to such Claim is timely filed; or
4
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(ii) the Claim is allowed by a Final Order.
COMPANY shall mean the Debtor.
CONFIRMATION DATE shall mean the date on which the Clerk of the Court
enters the Confirmation Order on the Court's docket.
DEBTOR'S PROPERTY shall mean all of the Debtor's property, as defined
in Section 541 of the Code.
EFFECTIVE DATE shall mean the tenth day after the Confirmation Order
becomes final, or such other date as this Court shall order.
PLAN shall mean the enclosed Chapter 11 Plan and any subsequent
amendments, modifications, or supplements made from time to time.
II. PRELIMINARY STATEMENT AND
HISTORY AND FINANCIAL CONDITION OF DEBTOR
(A) HISTORY OF DEBTOR
The karaoke industry began in Japan in the 1970s. In Japanese society,
entertaining is not typically conducted in individual homes, but rather in
restaurants and nightclubs. Karaoke, which translated literally means "empty
orchestra," is a concept that allows participants to sing words to soundtracks
of popular songs, reading lyrics from video monitors or scripts. The concept is
identical to that employed in the "follow the bouncing ball" segment of the
"Sing Along with Mitch" television program from the 1960s. The instrumental
music, or backing track, is provided by pre-recorded soundtracks on CDS or audio
or video tapes. In Japan, karaoke clubs and public establishments became popular
vehicles for social occasions and business entertainment.
The Company was incorporated in California in 1982. The Company
originally sold its
5
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products exclusively to professional and semi-professional singers. In 1988, the
Company began marketing karaoke 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. Management believes that the enhancement and
extension of the Company's existing products and the selective development of
new product lines are important to the Company's continued growth. The Company
combines the style and content of its products to meet customer requirements for
quality, product mix and pricing. Company employees work closely with both
retailers and suppliers to identify trends in consumer preferences and to
generate new product ideas. The Company's employees evaluate new concepts and
seek to develop new products and improvements to existing products satisfying
industry requirements and changing consumer preferences.
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
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<PAGE>
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 credit or on open credit with the Company's suppliers in
the Far East.
The Company achieves both domestic and direct sales, and markets its
hardware and software products, primarily through its own sales force and
approximately 15 independent sales representatives. The Company's
representatives are located in various states related to the customers'
location, and are paid a commission based upon sales in their respective
territories. The Company's sales representative agreements are generally one
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
7
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each year. The Company regularly attends CES("Consumer Electronics Show") each
January in Las Vegas; Hong Kong Electronics Show each October in Hong Kong; the
Hong Kong Toy Fair in January; and the International Toy Fair each February in
New York.
The Company manages credit policies with respect to its customer base.
The Company has not suffered significant credit losses to date, even during a
period when many major retailers, including customers of the Company,
experienced significant difficulties, including filing for protection under
federal bankruptcy laws. In 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.
On July 20, 1994, the Company closed a private financing pursuant to
which it issued secured subordinated promissory notes to ten (10) investors in
an aggregate principal amount of $400,000.00, and issued Bridge Warrants to
purchase 360,000 shares of common stock (the "Bridge Financing"). Such notes,
together with interest at the rate of 8% per annum, were repaid on November 18,
1994 (see below). The Bridge Warrants are exercisable at a price of $1.20 per
share of common stock, commencing February 8, 1995 and expire on August 15,
1999. As of June 30, 1996, 272,250 of such Bridge Warrants had been exercised.
On November 18, 1994, the Company closed the initial public offering
(the "IPO") of 1,380,000 (1,656,000 as adjusted for the Stock Dividend) Warrants
for an aggregate purchase price of approximately $7,800,000. After giving effect
to the payment of offering expenses and underwriting expenses collectively
estimated at $1,959,000, the Company received approximately $5,121,000 of the
net proceeds from such initial public offering. Approximately $1,600,000 of the
net proceeds of the IPO were used to satisfy a portion of certain accounts and
notes payable
8
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for inventory to FLX (HK) Ltd., a Hong Kong Corporation ("FLX"), and the Singing
Machine Company, Ltd., a Hong Kong trading company ("LTD"). Paul Wu is an
officer, director and principal stockholder of FLX and LTD.1 Approximately
$350,000 of the proceeds from the IPO were used for inventory purchases,
$850,000 were used to satisfy past due copyright royalty obligations, $225,000
were used for working capital and $400,000 was applied to satisfy indebtedness
represented by certain outstanding promissory notes issued in connection with
Bride Financing. The Company used approximately $1,695,000 of the net proceeds
of the IPO to satisfy certain trade payables to suppliers of materials and
services used in the Company's operations.
The Debtor is a publicly traded company on the OTC Bulletin Board under
the symbol "SING." See discussion below in Section VII.
The Debtor does not have any affiliates. The Debtor does not provide
any retirement benefits.
3. HARRY FOX AGENCY: In May 1994, the Company requested its principal
copyright royalty creditor, the Harry Fox Agency, Inc. ("HFA"), which represents
the majority of copyright holders for which the Company is obligated to pay
royalties, to audit its records for the period October 1991 through March 1994.
On May 22, 1995, the Company executed a settlement (the "Settlement Agreement")
with HFA, with respect to all non-current royalty obligations and claims for the
period October 1, 1991 through March 31, 1994 in the amount of $1,030,000. The
Company had accrued approximately $1.0 million in its financial statements for
royalty
- --------
1 Paul Wu also has been director of the Company since 1991 and was the Chairman
of the Board of Directors from September 1991 to February 1995.
9
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obligations to HFA and on February 22, 1995, paid HFA $200,000 to be paid
against the settlement amount. The total amount of settlement payments made
during fiscal 1996 was $432,000, and the balance of approximately $400,000 was
anticipated to be paid in monthly installments through May 1997, of principal
and interest at 8.0% per annum. After a period of default, the Company entered
into an amended payment agreement with HFA, stipulating a lump sum payment to
bring its account current and monthly installments thereafter. As collateral
security for the payment of its obligations under the Settlement Agreement, the
Company granted HFA a security interest in the Company's master sound
recordings. The most recent audit by HFA covered the period April 1, 1994
through March 31, 1996 and all royalties due were accrued. The pre-petition
royalties owed to HFA exceed $400,000.00.
(B) SUMMARY OF REASONS FOR FILING PETITION
In November and December, 1996, the Debtor made two payments of
$20,000.00 each to a former employee, Eugene Settler ("Judgment Creditor"), who
obtained a judgment against the Debtor for wrongful termination. These payments
affected the Debtor's cash flow.
This decrease in cash flow was compounded by the fact that sales of
hardware and software during the months of January, February and March, 1997,
were well below projections. The low sales of software was especially
problematic because a former employee who was terminated miscalculated the
marketplace and the Company carries a gross oversupply of software inventory.
To complicate matters further, in January, 1997, the Debtor was advised
by Montgomery Ward that the Company had to accept returns of approximately fifty
percent (50%) of what was shipped and invoiced during the latter part of 1996.
The account receivable with Montgomery
10
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Ward was about $560,000 less $270,000 that was returned. This had a devastating
impact on the Company's cash flow during a period of low shipping. This event
deeply upset the Company's factor, and the factor stopped advancing funds, for a
period of time, to the Debtor to cover the shortfall on the Montgomery Ward
receivable.
Additionally, because of the cash flow crisis, the Debtor defaulted on
their monthly rent to their landlord, which resulted in a default notice. The
landlord threatened eviction.
The Debtor also defaulted on the quarterly royalty payments as well as
the payments due under a prior agreement to the Harry Fox Agency. This resulted
in a demand letter for payment and threatening to cancel the Debtor's music
licensing agreements, which would have had severe consequences on the Debtor's
operations.
The filing of the Bankruptcy Petition on April 11, 1997 was prompted by
the garnishment by the Judgment Creditor of the Company's factor and bank
accounts, rendering the Company without funds for payroll, daily operations,
etc. Due to the garnishment, a fair number of Company payments by check were
dishonored at the bank due to the lack of availability of Company funds. This
precipitated other creditors to institute legal suits against the Company. Due
to momentum of the creditors' actions and to preserve the operations of the
Company, the only recourse was to file for protection under Chapter 11 of the
Code.
(C) SOURCE OF FINANCIAL INFORMATION
The source of financial information for this Disclosure Statement and
Plan is from reports from Debtor's officers, Debtor-In-Possession Reports, and
Debtor's accountants which have been prepared in accordance with generally
accepted accounting principles. It has not been audited.
11
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III. DEBTOR'S OPERATION AND STRUCTURE
(A) SYNOPSIS OF OPERATION IN CHAPTER 11
Since the Chapter 11 filing, the Company has made considerable positive
advancements. The Company has moved into much smaller corporate offices and
warehousing operations with the emphasis on reduction of inventory. Total
combined operating space was reduced from 29,000 to 10,000 square feet, thereby
reducing rental facility expenses by $12,000.00 per month.
The Company's staff has been reduced to the minimum needed to continue
to operate efficiently. During peak shipping periods, temporary labor is hired,
lessening permanent overhead and fringe benefits ongoing.
The Company has arranged with Dero(HK) letter of credit financing up to
$200,000 for purchases of new inventory.
The major concern relating to the Chapter 11 filing was the retention
of the Company's customer base. For the most part, the major accounts, Target,
JC Penney, Fingerhut, and FAO Schwartz have supported the Company. The Company
opened a new major account, Best Buy, which will have shipments of over
$1,000,000 during 1997. The Company did lose some catalog house business (i.e.
Sears and Service Merchandise) but the Company feels confident that this
business will be retained upon reorganization under Chapter 11.
One of the Company's major concerns is its software division. This once
was a major contributor to the Company's profit. The Company's volume has gone
down from $5.4 million during 1994 to $1.3 million during the last year. Part of
the reasons for this year's decline is that
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the Company elected to discontinue doing business to the record trade where
returns are a standard practice, thus creating a consignment environment. The
Company's software returns were running as high as 50% from major wholesalers
and retailers.
Current software business is only with accounts that do not return high
percentages of sales. This provides a higher degree of profitability for the
sales that are made.
The Company has large inventories of obsolete music that the Company
intends to liquidate over the next twelve months.
The Company is currently negotiating to produce a number of new songs
for 1998 in addition to selling additional music to a select group of customers
which do not cause return problems and loss of profit.
The Company's hardware business continues to grow with an emphasis on
enhancing current products and adding three new models during 1998.
Attached hereto marked Exhibit "A" & "B-1" respectively are the
Debtor's current balance sheet and an Income and Expense Statement reflecting
the Debtor's Chapter 11 operations using the accrual method. Attached hereto
marked Exhibit B-2 is the summary page, together with Attachments 1, 2 and 3, of
the Debtor's latest Debtor-In-Possession Report. The source of this financial
information is the internal documents and records of the Company, which are
unaudited. The financial information has been prepared in accordance with
generally accepted accounting principles, using the accrual method and inventory
based on FIFO.
(B) EXECUTORY CONTRACTS
Article VI of the Plan entitled "Executory Contracts" indicates that
all Executory Contracts and unexpired leases of the Debtor not expressly assumed
prior to the Confirmation Date, or not
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at the Confirmation Date the subject of a pending application to assume, shall
be deemed to be rejected. As to any Executory Contract to be assumed, the Debtor
shall, pursuant to the provisions of Section 1123(a)(5)(G) of the Code, cure or
demonstrate the ability to make cure payments with regard to such executory
contract. The Debtor shall, in accordance with Section 365(f) of the Code
demonstrate the ability to provide adequate assurance of future performance
under each such executory contract. Payment of any claim arising in respect of
an executory contract shall be in full satisfaction, release, discharge and cure
of all defaults, including any other claim filed by such party as a result of
existing defaults.
Each person who is a party to an executory contract rejected shall be
entitled to file a proof of claim for damages alleged to have arisen from the
rejection of such executory contract, in accordance with the provisions of Rule
302(D) of the Local Rules of Bankruptcy Procedure for the Southern District of
Florida. Objections to any such proof of claim shall be filed at later than
seven days after such proof of claim is filed, and the Court shall determine
such objection. Unsecured claims arising out of the rejection of executory
contracts shall be Class 4 entitled to treatment afforded such class.
At present, the only lease to be rejected is the lease of a photocopier
from American Business Credit Corporation. The estimated rejection damages will
not have a material impact on the Debtor's Plan. Pursuant to the Local Rules of
the Bankruptcy Court, Proofs of Claim arising pursuant to 11 U.S.C. ss. 502(g)
from the rejection of an executory contract or unexpired lease must be filed not
later than thirty (30) days after the later of (1) the entry of the Order
compelling or approving the rejection of the contract or lease, or (2) the
effective date of the rejection of the contract or lease, if the order contains
the notice mandated by Local Rule 606.
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(C) OBJECTIONS TO CLAIMS AND VOIDABLE TRANSFERS
Pursuant to the Plan, Debtor may object to any scheduled claim or Proof
of Claim filed against the Debtor. Such an objection shall preclude the
consideration of any claims as "allowed" for the purposes of timely distribution
in accordance with the Plan. The Claims Bar date expired on August 27, 1997. The
Debtor will file Objections to certain Claims following approval of its
Disclosure Statement.
1. OBJECTIONS TO CLAIMS
The material Claims that the Debtor proposes to dispute, in whole or in
part, are discussed below. These proposed objections are made without prejudice
to the Debtor's right to raise additional objections to any claim.
a. Marlin Sevy d/b/a Sales Network Associates filed Claim Number 51 for
$9,750.62 for commissions earned. The Debtor will challenge such claim as being
a priority wage claim because such commissions were earned outside the ninety
(90) day period and, therefore, should be treated as a general, unsecured claim.
b. ASR Recording Service of California filed two Claims, Claim Number
74 in the amount of $649,285.45 and Claim Number 99 in the amount of
$494,700.91. The Debtor intends to challenge one of the claims as being
duplicative and determine the correct amount of the Claim.
c. The Debtor listed Big State Distribution Corporation in its
Schedules as having a disputed, unsecured claim for $212,442.55. Since such
claimant was listed as disputed and did not file a Proof of Claim, the Debtor
will seek the disallowance of the claim of Big State Distribution Corporation.
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d. Copans (Phase I) Associates filed Claim Number 86 as a secured claim
in the amount of $15,401.84 and as an unsecured claim in the amount of
$29,992.50. The Debtor intends to challenge this claim as being calculated
erroneously because such Claimant retained a $15,000.00 security deposit
belonging to the Debtor, in order to compensate for certain rent owed. The
Debtor was current in its post-petition rental obligations prior to vacating
such premises and the Debtor disputes the landlord's claim for rejection
damages.
e. Emily Music Corporation filed Claim Number 54 claiming a priority
unsecured claim in the amount of $12 - $15,000.00. The Debtor challenges such
claim in full. The Debtor owes Emily Music Corporation $.11 for a royalty.
f. HAL Leonard Publishing filed Claim Number 56 claiming an unsecured
amount of $81,425.60. The Debtor intends to challenge such claim as being
computed erroneously; the Debtor's records reflect the debt owed to HAL Leonard
Publishing is $49,303.60.
g. The Debtor listed Handleman Company in its Schedules as having a
disputed, unsecured claim for $8,850.05. Since such claimant was listed as
disputed and did not file a Proof of Claim, the Debtor will seek the
disallowance of the claim of Handleman Company.
h. The Debtor listed J.C. Penney Company, Inc. in its Schedules as
having a disputed, unsecured claim for $2,264.98. Since such claimant was listed
as disputed and did not file a Proof of Claim, the Debtor will seek the
disallowance of the claim of J.C. Penney Company, Inc.
i. The Debtor listed J.W. Charles Securities, Inc. in its Schedules as
having a disputed, unsecured claim for $6,000.00. Since such claimant was listed
as disputed and did not file a Proof of Claim, the Debtor will seek the
disallowance of the claim of J.W. Charles Securities, Inc.
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j. Know Music filed Claim Number 97 in the amount of $100,000.00. The
Debtor intends to challenge such claim as being completely erroneous; the Debtor
only owes Know Music $5.50 for royalties.
k. Kokomo Music filed Claim Number 95 in the amount of $100,000.00. The
Debtor intends to challenge such claim as being complete erroneous; the Debtor
owes Kokomo Music $363.85 for royalties.
l. The Debtor listed Lash Tamaron Distributors in its Schedules as
having a disputed, unsecured claim for $21,847.81. Since such claimant was
listed as disputed and did not file a Proof of Claim, the Debtor will seek the
disallowance of the claim of Lash Tamaron Distributors.
m. Magna International Corp. filed Claim Number 89 claiming a secured
claim in the amount of $628,634.00. The Debtor does not dispute the amount of
the claim, only that it should be an unsecured claim, not a secured claim.
n. Montgomery & Larmoyeux filed Claim Number 79 in the amount of
$75,011.50, which the Debtor intends to challenge as being improperly claimed
against the Debtor's estate for which the Debtor has no liability.
o. Orion filed Claim Number 108 as a priority claim in the amount of
$14,974.21. The Debtor has no objection as to the amount, however, such claim
should only be allowed as an unsecured amount.
p. The Debtor listed Sony Music Publishing in its Schedules as having a
disputed, unsecured claim for $32,028.70 and $1,814.01. Since such claimant was
listed as disputed and did not file a Proof of Claim, the Debtor will seek the
disallowance of the claims of Sony Music Publishing.
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There will be no material effect on the Plan if the disputed claims are
allowed or disallowed.
(2) PREFERENTIAL, FRAUDULENT OR OTHERWISE VOIDABLE TRANSFERS
The Debtor has investigated, and continues to investigate, the
existence of preferential, fraudulent or otherwise voidable transfers. Other
than the pending preference action against Eugene Settler (discussed below), the
Debtor believes that no other possible preferential, fraudulent or otherwise
voidable transfer exists.
There is currently pending in the Bankruptcy Court an adversary
proceeding brought by the Debtor against Eugene B. Settler ("Settler") bearing
Adversary Case No. 97-0439-BKC-RBR- A for the recovery of certain alleged
preferential transfers. The action arises from certain payments that were made
to Settler as a result of a judgment obtained against the Debtor for wrongful
termination of Settler's employment. The Adversary Complaint filed on April 25,
1997 sought recovery of $60,377.66 in alleged preferential payments. During
discovery, it was learned that $20,135.99 which was garnished by Settler was
still being held by NationsBank, and the bank was ordered to turn such funds
over to the Debtor. The Debtor then filed an amended adversary complaint for the
recovery of $40,241.67. The parties mediated the dispute and, after several
lengthy sessions in mediation, the parties reached a settlement, which was
recently reduced to writing and is being circulated for execution by the parties
thereto. The settlement resolves the adversary proceeding, certain alleged
claims by Settler against the Debtor and others and provides for an exchange of
releases amongst all parties. The settlement agreement also provides that (i)
Settler's claim against the Debtor and stock and options in the Debtor will be
assigned to a Colony Electronics Ltd., a Hong Kong corporation; (ii) the Debtor
indemnifies
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Settler against certain claims of creditors of the Debtor; and (iii) binds
Settler to a covenant not to compete against the Debtor. The settlement
agreement is subject to Court approval. For further details, a copy of the
settlement agreement is available upon written request to Debtor's counsel.
(D) OFFICERS AND DIRECTORS
The following individuals shall hold the position indicated as an
officer and/or director of the Reorganized Debtor, at the compensation stated,
subject to change by action of the Board of Directors. They are insiders.
President, CEO and Director: Edward Steele $167,500.00
Vice President and Director: R. Edward Pearson $ 75,000.00
Secretary & Treasurer: John Klecha $ 75,000.00
Director: Paul Wu $ NONE
Business Background of Executive Officers and Directors
EDWARD STEELE. Mr. Steele joined the Company in 1988 and has served as the
Company's Chief Executive Officer, Chief Financial Officer and as a director
since September 1991. As of February 29, 1996, Mr. Steele also assumed the
offices of President and Secretary of the Company. 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 electronic 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.
R. EDWARD PEARSON. Mr. Pearson joined the Company in 1995 and has served as the
Company's Vice President since August, 1997. Mr. Pearson's duties at the Company
include, among others, all facets of sales and marketing of the Company's
products to mass merchant and catalog retailers in North America, Which include
the development and implementation of sales plans, sales presentations to major
electronic buyers, management of over thirty independent sales representatives
throughout the country, development of karaoke programs for individual
retailers,
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development of all sales support materials and after-sale implementation of
sales and shipment programs. Prior to joining the Company, Mr. Pearson was
employed by one of Japan's largest karaoke companies with annual revenues of
approximately $750,000,000.00.
JOHN KLECHA. Mr. Klecha joined the Company in 1997 and is currently the
Company's General Manager. He has served as the Company's Secretary and
Treasurer since October, 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, accounts payable and
accounts receivable. Prior to joining the Company, Mr. Klecha managed all
financial and administrative functions for a toy design, manufacturing and
distribution company encompassing 26 employees and sales revenues of $20
million. Mr. Klecha has been a Certified Public Accountant with more than
twenty-five years of financial and management experience.
PAUL WU. Mr 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 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.
IV. CLAIMANTS AND IMPAIRED INTEREST HOLDERS
Claimants and Interest Holders entitled to vote under the Plan must
affirmatively act in order for the Plan to be confirmed by the Bankruptcy Court.
According to the Debtor's Plan, Classes 4, 5 and 6 are "impaired" classes within
the meaning of ss. 1124 of the Code.
Class 4 consists of Administrative Convenience Claims (general
unsecured claims equal to or less than $300.00) and will receive a cash payment
of ten percent (10%) of the amount of their Allowed Claim on the Effective Date.
Class 5 consists of the claims of general unsecured creditors and will
be given the option
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of receiving a cash payment of ten percent (10%)2 of the amount of their Allowed
Claim ("Option A") or one share of New Common Stock of the Reorganized Debtor
for each Two Dollars ($2.00) of an Allowed Claim ("Option B").
Class 6 consists of the equity interests of the holders of the Old
Common Stock of the Debtor and will receive one share of New Common Stock in the
Reorganized Debtor for each ten (10) shares of existing pre-petition stock (1 x
10 reverse split).
Classes 4, 5 and 6, accordingly, must vote to accept the Plan in order
for the Plan to be confirmed without a cram down. A Claimant who fails to vote
to either accept or reject the Plan will not be included in the calculation
regarding acceptance or rejection of the Plan. A claimant in Class 5 who fails
to elect "Option A or B" on the ballot provided to the Claimant or fails to vote
will be deemed to have elected "Option B".
A ballot to be completed by the holders of Claims and/or Interests is
included herewith. Instructions for completing and returning the ballots are set
forth thereon and should be reviewed at length. The Plan will be confirmed by
the Bankruptcy Court and made binding upon all Claimants and Interest holders if
(a) with respect to impaired Classes of Claimants, the Plan is accepted by
holders of two-thirds (2/3) in amount and more than one-half (1/2) in number of
Claims in each such class voting upon the Plan and (b) with respect to classes
of Interest Holders, if the Plan is accepted by the holders of at least
two-thirds (2/3) in amount of the allowed interests of such class held by
holders of such interests. In the event the requisite acceptances are not
obtained, the Bankruptcy Court may, nevertheless, confirm the Plan if it finds
that the Plan accords fair and equitable treatment to any class rejecting it.
Your attention is directed to
- --------
(2)Payable five percent (5%) on the Effective Date and five percent (5%) six (6)
months thereafter.
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Section 1129 of the Code for details regarding the circumstances of such "cram
down" provisions.
V. ANALYSIS OF THE PLAN VS. LIQUIDATION ANALYSIS
All payments as provided for in the Debtor's Plan shall be financed by
Debtor's cash on hand and its continued business operations. The Plan provides
that all priority claims will be paid in full at confirmation. The Plan further
provides that (i) general unsecured claims equal to or less than $300.00 will be
given a ten percent (10%) dividend payable on the Effective Date and (ii) all
other unsecured claimants will be given a choice of receiving either (a) a ten
percent (10%) dividend, payable five percent (5%) on the Effective Date and five
percent (5%) six (6) months thereafter, or (b) one share of corporate common
stock for each $2.00 of debt. The current shareholders of the corporation will
receive a new stock certificate for ten percent (10%) of their current
outstanding shares, that is, their shares will be diluted by ninety percent
(90%).
The Debtor has filed its monthly operating statements since the filing
of its bankruptcy petition.
Attached hereto marked Exhibit "C" is a table showing all of the claims
of Debtor in each classification. On the right side of the amount of claim are
certain parenthetical codes, which signify the following:
"v" - The amount listed is representative of vacation time accrued as
of the date of the filing of the Petition.
"s" - The amount listed is representative of severance pay due Claimant.
"PU" - The Claimant has filed the proof of claim as both a priority and
unsecured claim.
"S" - The Claimant has filed the proof of claim as a secured claim,
which differs from how the Debtor listed the claim on its
Schedules.
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"P" - The Claimant has filed the proof of claim as a priority claim,
which differs from how the Debtor listed the claim on its
Schedules.
"U" - The Claimant has filed the proof of claim as an unsecured claim,
which differs from how the Debtor listed the claim on its
Schedules.
"d" - The Claim was listed as disputed on the Debtor's Schedules.
"S/U"- The Claimant has filed the proof of claim as a secured and as an
unsecured claim.
"X" - The Claimant filed the proof of claim but failed to select any
category (i.e. secured, unsecured nonpriority or unsecured
priority) for the claim.
Attached hereto marked Exhibit "D" is a Liquidation Analysis of the
Debtor.
Attached hereto marked Composite Exhibit "E" is a projection of income
and expenses for the Plan, which is prepared on a cash method, together with a
detailed list of expenses of the Debtor for the first year of the Plan.
Management believes that its Plan of Reorganization provides full value
for all claims of creditors and is in the best interest of creditors.
As with any Plan, an alternative would be a conversion of the Chapter
11 case to a Chapter 7 case and subsequent liquidation of the Debtor by a duly
appointed or elected trustee.
In the Event of a liquidation under Chapter 7, the following is likely
to occur:
(a) An additional tier of administrative expenses entitled to priority
over general unsecured claims under ss. 507(a)(1) of the Code would be incurred.
Such administrative expenses would include Trustee's commissions and fees to the
Trustee's accountants, attorneys and other professionals likely to be retained
by him for the purposes of liquidating the assets of the Debtor;
(b) Substantially less than market value will be realized for the
Debtor's accounts receivable, inventory, equipment, materials and supplies;
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(c) Further claims would be asserted against the Debtor with respect to
such matters as income and other taxes associated with the sale of the assets,
and the inability of the Debtor to fulfill outstanding, contractual commitments
and other related claims.
(d) A liquidation analysis containing a balance sheet is attached as
Exhibit "C".
Predicated upon the foregoing, it is management's opinion that the
liquidation value of the Debtor would be insufficient to make meaningful
payments to any class of creditors other than the secured creditors, leaving
only a very small distribution for the claims of any other classes of creditors
such as general unsecured creditors.
The Court has previously set August 27, 1997 as a claims Bar date. All
indebtedness scheduled by the Debtor as not disputed, contingent or unliquidated
or any indebtedness set forth in a properly executed and filed Proof of Claim
shall be deemed an Allowed Claim unless the same is objected to and the
objection thereto is sustained by the Court.
VI. RISK FACTORS
The Debtor believes that while the equity securities to be issued under
the Plan have a high degree of risk, that risk compares favorably to liquidation
of the Debtor's assets. The on-going operation of the business will generate the
most funds for payment to creditors. The Debtor has not undertaken a valuation
of the equity securities to be issued under the Plan.
A. MARKET FOR NEW COMMON STOCK
The Company will apply for inclusion of the New Common Stock on the
Nasdaq SmallCap Market System, or if the application is not accepted, will
continue to trade on the OTC
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Bulletin Board. However, there can be no assurance that the Company will be able
to effect the listing of these securities or, if included, that an active
trading market for the New Common Stock will develop or, if developed, that such
market will continue. Accordingly, no assurance can be given that a holder of
New Common Stock will be able to sell such securities in the future or as to the
price at which such securities might trade. The liquidity of the market for such
securities and the prices at which such securities trade will depend upon the
number of holders thereof, the interest of securities dealers in maintaining a
market in such securities, and other factors beyond the Company's control.
B. GENERAL BUSINESS RISKS
The principal business risk of the Company after the Plan is confirmed
is that the Company may not be able to achieve the financial results the Plan
requires. Such a shortfall could result in the Company being unable to repay the
amounts called for under the Plan.
C. DILUTION
The issuance of a significant number of shares of New Common Stock in
connection with the restructuring will result in significant dilution of the
equity interests of the holders of Old Common Stock. Immediately following the
consummation of the restructuring, the equity interest of the holders of Old
Common Stock will be diluted to approximately 10% of the outstanding New Common
Stock.
D. CONTINUING LEVERAGE; FUTURE REFINANCINGS
The Company is now highly leveraged and, although completion of the
restructuring will significantly reduce the Company's debt obligations, the
Company will remain leveraged after consummation of the Plan. The Company had
approximately $4,400,000.00 in indebtedness at
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April 11, 1997. After giving effect to the Plan, the Company's estimated
aggregate indebtedness would total approximately $1,100,000.00. The Company's
leverage poses risks to holders of the Company's debt and equity securities. The
Company's management believes that, following the consummation of the Plan, the
Company will have sufficient cash flow from operations to pay interest on all of
its outstanding debt as those payments become due. However, even if the
restructuring is completed, the Company's ability to meet its debt service
obligations will depend on a number of factors, including its ability to
implement the reorganization plan.
E. NO DIVIDENDS
The Company does not anticipate that it will be able to pay any
dividends on the New Common Stock in the foreseeable future.
F. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
See Section VIII, "Certain Federal Income Tax Consequences of the Plan"
for a summary of certain federal income tax aspects of the Plan.
VII. CERTAIN FACTORS TO BE CONSIDERED
In determining whether or not to vote in favor of the Plan, each holder
of a Claim should carefully consider the following factors, together with all of
the other information contained in this Disclosure Statement.
A. ISSUANCE OF REORGANIZATION SECURITIES
Section 1145 of the Bankruptcy Code exempts the original issuance of
securities under a plan of reorganization from registration under the Securities
Act of 1933, as amended (the "Securities Act") and state law. Under Section
1145, the issuance of the reorganization Securities
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is exempt from registration if three principal requirements are satisfied: (1)
the securities must be issued by a Debtor, its successor, or an affiliate
participating in a joint plan with the Debtor, under a plan of reorganization;
(2) the recipients of the securities must hold a claim against the Debtor or
such affiliate, an Interest in the Debtor of such affiliate, or a claim for an
administrative expense against the Debtor or such affiliate; and (3) the
securities must be issued entirely in exchange for the recipient's claim against
or Interest in the Debtor or such affiliate, or "principally" in such exchange
and "partly" for cash or property. The Debtor believes that the issuance of the
Reorganization Securities under the Plan will satisfy all three conditions
because: (a) the issuance are expressly contemplated under the Plan; (b) the
recipients are holders of "Claims" against or "Interests" in the Debtor; and (c)
the recipients would obtain the Reorganization Securities in exchange for their
pre-petition Claims and Interests.
B. SUBSEQUENT TRANSFERS OF REORGANIZATION SECURITIES
The Reorganization Securities to be issued pursuant to the Plan may be
freely transferred by most recipients following initial issuance under the Plan,
and all resales and subsequent transactions in the Reorganized Securities are
exempt from registration under federal and state securities laws, unless the
holder is an "underwriter" with respect to such securities. Section 1145(b) of
the Bankruptcy Code defines four types of "underwriters":
(i) persons who purchase a claim against, an Interest in, or a
claim for an administrative expense against the Debtor with a
view to distributing any security received in exchange for
such a claim or interest;
(ii) persons who offer to sell securities offered under a plan for
the holders of such securities;
(iii) persons who offer to buy such securities for the holders of
such securities, if the offer to buy is: (a) with a view to
distributing such securities; or (b) made under
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a distribution agreement; and
(iv) a person who is an "issuer" with respect to the securities, as
the term "issuer" is defined in Section 2(11) of the
Securities Act.
Under Section 2(11) of the Securities Act, an "issuer" includes any
person directly or indirectly controlling or controlled by the issuer, or any
person under direct or indirect common control of the issuer.
To the extent that persons who receive Reorganization Securities or
other securities pursuant to the Plan are deemed to be "underwriters", resales
by such persons would not be exempted by Section 1145 of the Bankruptcy Code
from registration under the Securities Act or other applicable law. Persons
deemed to be underwriters would, however, be permitted to sell such
Reorganization Securities or other securities without registration pursuant to
the provisions of Rule 144 under the Securities Act. These rules permit the
public sale of securities received by "underwriters" if current information
regarding the issuer is publicly available and if volume limitations and certain
other conditions are met.
Whether or not any particular person would be deemed to be an
"underwriter" with respect to any Reorganization Security or other security to
be issued pursuant to the Plan would depend upon various facts and circumstances
applicable to that person. Accordingly, the Debtors express no view as to
whether any particular person receiving Reorganization Securities under the Plan
would be "underwriter" with respect to any Reorganization Security to be issued
pursuant to the Plan.
Given the complex and subjective nature of the question of whether a
particular holder may be an underwriter, the Debtors make no representation
concerning the right of any person to trade in the Reorganization Securities.
THE DEBTOR RECOMMENDS THAT POTENTIAL RECIPIENTS
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OF REORGANIZATION SECURITIES CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY
MAY FREELY TRADE SUCH REORGANIZATION SECURITIES WITHOUT COMPLIANCE WITH THE
SECURITIES ACT OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE
ACT").
C. VALUATION OF EQUITY SECURITIES The Debtor has not undertaken a
valuation of the equity securities to be issued under the Plan.
D. MARKET FOR EXISTING SECURITIES
On November 17, 1995 the Company was informed by The Nasdaq Stock
Market, Inc., that the common stock of the Company did not meet the minimum bid
price of $1.00 per share, and that the Company's net tangible assets did not
meet the minimum requirement of $4,000,000. On January 25, 1996, pursuant to a
January 19, 1996 hearing before a Nasdaq Hearing Panel, the Nasdaq Listings
Qualifications Committee ("Committee"), denied the Company's request for an
exception to the minimum bid price requirement. In addition, the Committee
indicated that the Company did not meet the minimum quantitative criteria for
inclusion on the Nasdaq SmallCap Market. Accordingly, effective January 26,
1996, the Company's securities were delisted from the Nasdaq Stock Market.
However, the Company's securities were immediately eligible to trade on the OTC
Bulletin Board.
The Common Stock is currently traded on the OTC Bulletin Board under
the symbol "SING". The following table sets forth, for the fiscal periods
indicated, the high and low bid prices for the Common Stock on the OTC Bulletin
Board. The Company's fiscal year runs from April 1 to March 31 (e.g., Fiscal
1997 runs from April 1, 1996 to March 31, 1997). The Company's Common Stock
commenced trading on November 10, 1994. Prior thereto, there was no public
market for the Company's Common Stock.
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FISCAL 1998
HIGH LOW
------ ------
First Quarter............................................ $0.078 $0.078
Second Quarter........................................... $0.078 0.031
Third Quarter (to 11/5/97)............................... $0.031 0.031
FISCAL 1997
HIGH LOW
------ ------
First Quarter............................................ $0.25 $0.10
Second Quarter........................................... $0.10 0.10
Third Quarter............................................ $0.10 0.078
Fourth Quarter .......................................... $0.10 0.078
FISCAL 1996
HIGH LOW
------ ------
Fourth Quarter .......................................... $0.78 0.25
(1) Stock quoted on OTC as of January 26, 1996.
As of December 15, 1997, the last reported bid price of the Common
Stock on the OTC Bulletin Board was $0.05 per share. The number of record
holders of the Common Stock at December 15, 1997 was 157, although the Company
believes that the number of beneficial owners of such Common Stock is much
greater.
As a result of being delisted from the Nasdaq National Market,
stockholders may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Company's Common Stock.
The Company has never declared or paid cash dividends on its capital
stock and the Company's Board of Directors intends to continue this policy for
the foreseeable future. Earnings,
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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 and the agreement with the representatives of the
underwriters for the Company's initial public offering (the "Representatives").
E. DELINQUENCY IN FILING PERIODIC PUBLIC REPORT
The Debtor is delinquent in filing the Company's periodic quarterly
reports for 1997. However, the Debtor filed with the SEC Form 12b-25 on July 24,
1997, requesting an extension of time to file to enable the Debtor to motion the
Bankruptcy Court for an order approving the appointment of accountants to audit
the Company's books and prepare the necessary financial information to file the
delinquent quarterly reports (10-Q's) and the year end 1997 annual report
(10-K). The Debtor anticipates that all delinquent periodic reports will be
filed prior to the confirmation hearing.
F. CLARIFICATION OF THE STOCK DISTRIBUTION TO UNSECURED CREDITORS
The new, Reorganized Debtor will exchange all of the existing common
stock into New Common Stock. The Plan provides that all existing pre-petition
shareholders will receive one (1) share of New Common Stock in the Reorganized
Debtor for each ten (10) shares of existing prepetition stock (1 x 10 reverse
split).
The New Common Stock will be issued as needed to those unsecured
claimants which elect to convert their unsecured claim to equity in the newly
Reorganized Debtor, each two dollars ($2.00) of unsecured debt being converted
to one (1) share of New Common Stock in the newly reorganized debtor. Stock
exchanged from pre-petition Interest Holders and not reissued
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to unsecured creditors will remain as treasury stock. The percentage ownership
of the Reorganized Company by existing Interest Holders will depend upon the
number of unsecured creditors that elect to convert their debt to equity in the
newly reorganized Debtor. It should be noted that the Harry Fox Agency whose
unsecured claim is approximately $820,000 has agreed to convert its debt to
equity ($820,000 / 2 = 410,000 shares of New Common Stock in the newly
Reorganized Debtor).
G. INSIDER TRANSACTIONS
The Debtor has an outstanding unsecured loan to Edward Steele,
President, CEO and Director, in the amount of $32,021.30. The loan is to be
repaid on a structured interest only basis, payable quarterly at the rate of 8%
for a term of 12 months at which time all outstanding principal and interest is
due and payable. The loan is current and becomes due on March 31, 1998.
H. INSIDER AND AFFILIATE CLAIMS
Edward Steele, the President and Chairman of the Board of the Directors
is an insider of the Debtor as that terms is defined in the Code, and holds a
priority wage claim in the amount of $3,546.85 against the Company for vacation
time accrued as of the Filing Date. Mikiyo Steele, the daughter-in-law of Edward
Steele, is an insider of the Debtor and holds a priority wage claim in the
amount of $238.18 for vacation time accrued as of the Filing Date. The claims of
Edward Steele and Mikiyo Steele are included in Class 1 - Wage Claims, and will
be paid in accordance with the provisions of Section 507 of the Code on the
Effective Date.
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I. ESTIMATED ADMINISTRATIVE EXPENSES
The Administrative Expenses of the Debtor for the entire reorganization
process are estimated to be approximately $150,000.00. Such expenses are subject
to Court approval. The breakdown of such administrative expenses, include
professional fees for the following:
A. David A. Carter, Esq., Special counsel to Debtor
B. Furr and Cohen, P.A., Debtor's counsel
C. Arthur Kushner, C.P.A.
D. Samuel Heller, Mediator
E. Samuel F. May, Jr., C.P.A.
G. Proskauer, Rose, LLP, Special Counsel to Debtor
F. Barry S. Shapiro, C.P.A. of Millward & Company
J. LEGAL PROCEEDINGS
Other than the Adversary proceeding described above, the Debtor is not
a party to any material legal proceeding, and does not contemplate instituting
any legal proceeding. The Debtor is unaware of any legal proceeding threatened
against the Debtor.
VIII. TAX CONSEQUENCES OF THE PLAN
A. INTRODUCTION
The consummation of the Plan will have significant federal income tax
consequences for the Reorganized Debtor, and for other persons, including
Creditors and equity holders. The discussion below summarizes certain of those
consequences. This discussion is for general information only and is based on
the Internal Revenue Code of 1986, as amended (the "Tax Code"), the Treasury
regulations thereunder, judicial authority and current administrative rulings
and practice, all of which are subject to change at any time by legislative,
judicial, or
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administrative action. Any such change may be retroactively applied in a manner
that could adversely affect the Reorganized Debtor, and such other persons. The
tax consequences of certain aspects of the Plan are uncertain due to the lack of
applicable legal authority and may be subject to administrative or judicial
interpretations that differ from the discussion below. This discussion does not
address the potential impact of various federal income tax consequences that may
be relevant to certain types of taxpayers subject to special treatment under the
federal income tax laws (such as tax-exempt organizations, life insurance
companies, and taxpayers who are not United States domestic corporations or
citizens or residents of the United States), nor does it discuss any aspect of
state, local, foreign or other tax laws that may be applicable to particular
taxpayers. Furthermore, due to the complexity of the Plan, the lack of
applicable legal precedent, the possibility of changes in the law, and the
application of certain legal interpretations to underlying factual patterns and
other matters not discussed below, the federal income tax consequences described
herein are subject to significant uncertainties. No ruling has been sought or
obtained from the Internal Revenue Service (the "IRS") with respect to any of
the tax aspects of the Plan, and no opinion of counsel has been requested or
obtained by the Debtors with respect to any such aspects.
CREDITORS, SHAREHOLDERS, PARTNERS, AND ANY OTHER EQUITY HOLDERS ARE
ADVISED TO CONSULT THEIR OWN TAX ADVISORS AND COUNSEL AS TO THE TAX CONSEQUENCES
TO EACH OF THEM INDIVIDUALLY OF THE CONSIDERATION OF THE PLAN UNDER APPLICABLE
FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
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B. TAX CONSEQUENCES TO CREDITORS
1. GENERAL
The tax consequences of the implementation of the Plan to a Creditor
will depend in part on whether that Creditor's present Claim constitutes a
"security" for federal income tax purposes. Generally, claims arising out of the
extension of trade credit have not been held to be securities, while corporate
debt obligations evidenced by written instruments with maturities, when issued,
of ten years or more, have generally been held to be securities. While it is not
clear whether mortgage notes are securities for tax purposes, the Debtor
believes that mortgage notes may so qualify.
As discussed in greater detail below, a creditor which exchanges claims
that are not securities, or that exchanges securities for property other than
Reorganization Securities, may recognize income or loss on the exchange. For
example, the modification of a mortgage may constitute a realization event,
which depending on various facts and circumstances, may require recognition.
In addition, to the extent consideration received by a creditor is
attributable to accrued interest and depending on the amount a particular
creditor may be required to recognize, some or all of such amount may be treated
as ordinary income or loss regardless of whether its existing claims are capital
assets. The Treasury Department has not issued regulations to determine the
amount of stock, securities, or other property received by the creditor that
will be attributable to accrued interest. In this regard, the Reorganized Debtor
may be required to issue information returns reporting the value of properties
distributed to creditors and the portion thereof deemed attributable to accrued
and unpaid interest. ACCORDINGLY, CREDITORS ARE URGED TO CONSULT THEIR
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OWN TAX ADVISORS WITH RESPECT TO THE TAX TREATMENT OF THEM OF ANY CONSIDERATION
RECEIVED BY THEM THAT IS ATTRIBUTABLE TO ACCRUED INTEREST OR THAT MAY BE SO
ATTRIBUTABLE.
In the case of any gain or loss that a creditor may recognize, other
than in respect of accrued interest, the character of such gain or loss as a
capital gain or loss, or ordinary income or loss, will be determined by a number
of factors, including but not limited to the tax status of the creditor, the
nature of the transaction from which the debt was derived, the nature of the
debt in the hands of the creditors, and whether and to what extent the creditor
has previously claimed a bad debt deduction.
2. CONSEQUENCES TO CREDITORS RECEIVING ONLY CASH.
A creditor which receives only cash in satisfaction of its claims will
recognize ordinary interest income to the extent that the amount received is
allocable to claims for interest that were not previously includible in its
income, or will recognize a loss (generally deductible in full against ordinary
income) to the extent any such accrued interest was previously included in its
income and is not paid in full.
In addition, such creditors will recognize income or loss on the
exchange equal to the difference between (1) the creditor's basis in its claim
(other than any claim in respect of accrued interest) and (2) the balance of the
amount of cash received after any allocation to accrued interest.
3. CONSEQUENCES TO CREDITORS RECEIVING REORGANIZATION SECURITIES WHOSE
CLAIMS CONSTITUTE SECURITIES
The issuance of Reorganization Securities solely in exchange for
existing claims against the Debtor, that are "securities" should be treated as
having been issued in a tax-free "reorganization" of the Reorganized Debtor and,
accordingly, should not result in income or loss
36
<PAGE>
recognition except with respect to claims for accrued interest. Such creditors
will, in general, recognize ordinary income on the receipt of Reorganization
Securities or cash or other property to the extent allocable to claims for
accrued interest not previously included in income, or will recognize a loss
(generally deductible in full against ordinary income) to the extent that the
Reorganization Securities or cash or other property is allocable to accrued
interest previously included in income and does not satisfy in full such claims
for accrued interest.
Further, such creditors may recognize income (but not loss) as a result
of the receipt of cash and property; (other than any cash and property allocable
to accrued interest) in addition to Reorganization Securities pursuant to the
Plan. The amount of such gain, if any, will equal the lesser of (1) the excess,
if any, of the sum of the fair market value of such property and of the
Reorganization Securities received (other than such property or stock allocable
to accrued interest) over the basis of the creditor in its existing claims
(other than any claims in respect of accrued interest) or (2) the amount of such
property received.
The aggregate tax basis of a creditor in any Reorganization Securities
received pursuant to the Plan will be equal to its tax basis in existing claims
(other than any claims in respect of accrued interest), decreased by the fair
market value of property (other than Reorganization Securities and any value
allocable to accrued interest) received in satisfaction of its existing claims
and increased by the amount of gain, if any, recognized on the exchange (but not
decreased by the amount of any loss realized the exchange).
37
<PAGE>
4. CONSEQUENCES TO CREDITORS RECEIVING STOCK WHOSE CLAIMS DO NOT
CONSTITUTE SECURITIES.
A creditor whose existing claims do not constitute some on the receipt
of property to the extent allocable to claims for accrued interest not
previously included in income and which does not satisfy such claims for accrued
interest in full. If the creditor has previously claimed a bad debt deduction
for the indebtedness, the creditor may realize ordinary income from the recovery
of a previously deducted bad debt to the extent the cash and the value of the
property (including Reorganization Securities) received exceeds the basis of the
debt remaining after the bad debt deduction. Further, any such creditors will
also recognize income or loss on the exchange of its existing claims (other than
claims for accrued interest) for cash and property equal to the difference
between (1) the amount realized in respect of such claims and (2) the creditor's
tax basis in such claims (computed by taking into account any bad debt deduction
or recovery).
5. DISPOSITION OF REORGANIZATION SECURITIES.
The aggregate basis in the Reorganization Securities received by a
creditor whose existing claims are not securities will equal the fair market
value of such Reorganization Securities on the effective date. Should the
creditor subsequently recognize any gain on the sale or exchange of securities
received pursuant to the Plan, the gain recognized by such creditor on such sale
or exchange will be treated as ordinary income to the extent of the aggregate
amount allowed to such creditor as bad debt deductions with respect to such
claims. In the case of a cash basis creditor, the amount so treated as ordinary
income may include any amount which was not included in such creditor's income
on the exchange but which would have been so included in the claim had been
satisfied in full. Any additional gain may be treated as capital gain.
38
<PAGE>
C. TAX CONSEQUENCES TO THE DEBTORS.
1. DEBTOR'S EXISTING TAX ATTRIBUTES
Based upon tax returns as filed, the consolidated group including the
Debtor has net operating loss ("NOL") carryovers that, subject to the
limitations discussed below, may be available to offset future taxable income or
future tax liabilities of the Reorganized Debtor in its federal income tax
return. The amount of the consolidated NOL carryover of the consolidated group
including the Debtor is estimated to be in excess of $9,700,000.00 dollars as of
April 11, 1997. However, this amount is not binding on the IRS and may be
subject to adjustments (which may be substantial in magnitude) as a result of
potential IRS audits of prior tax returns, which audits may not take place for
several years. Moreover, as discussed below, the NOL carryovers of the Debtors
will likely be substantially reduced, or their use limited, as a result of the
Debtors' operations and transactions during 1998 and 1999, including but not
limited to the discharge of indebtedness of the Debtor and the issuance of
Reorganization Securities under the Plan. Further, the existence of consolidated
net operating loss carryforwards is dependent upon the continued ability of the
group to file consolidated income tax returns through the current year and
beyond. An adverse determination regarding the issue would likely substantially
increase the past and/or future income tax liabilities of the Debtors.
IX. POST-CONFIRMATION REORGANIZED DEBTOR'S STRUCTURE
A. EQUITY STRUCTURE
Upon the Effective Date, the Debtor shall continue to operate. The
total number of outstanding shares of stock currently in existence is 2,811,582.
The Debtor is unable to
39
<PAGE>
determine the total number of outstanding shares of common stock which will
exist if and when the Debtor's Plan is confirmed because Class 5 (the general
unsecured claims of creditors) are given a choice of a cash payment or common
stock. The Debtor cannot predict how many Class 5 claimants will elect a cash
payment and how many will elect stock.
B. BOARD OF DIRECTORS
Upon the Effective Date, the Debtor's Board of Directors shall remain
unchanged.
C. OFFICERS
Upon the Effective Date, the Debtor's officers shall remain unchanged.
D. RETENTION OF ASSETS AND OPERATIONS
Upon the Effective Date, the Debtor shall retain all of its assets and
continue to operate its business. Upon the Effective Date, the Debtor shall be
free to operate and to perform any and all acts authorized by its Articles of
Incorporation without further Order from the Court, except for the stock
dividend to Unsecured Creditors and the dilution of existing Interest Holders.
E. ISSUANCE OF NONVOTING EQUITY SECURITIES
In accordance with Section 1123(a)(6) of the Code, the Reorganized
Debtor's corporate charter will be amended to include a provision prohibiting
the issuance of nonvoting equity securities.
X. CONFIRMATION BY CRAM DOWN
Debtor reserves the right, in the event that impaired classes reject
the Plan, to seek confirmation of the Plan if the Bankruptcy Court finds that
the Plan does not discriminate unfairly and is fair and equitable with respect
to each dissenting class.
40
<PAGE>
The Plan is deemed fair and equitable if it provides (i) that each
holder of a Secured Claim retains its lien and receives deferred cash payments
totalling at least the allowed amount of its claim, of a value, as of the
effective date of the Plan, of at least the value of its secured interest in the
property subject to his lien, and (ii) that each holder of an unsecured claim
receives property of a value equal to the allowed amount of its claim, or no
holder of a junior claim receives or retains any property.
XI. MISCELLANEOUS PROVISIONS
A. Notwithstanding any other provisions of the Plan, any claim which is
scheduled as disputed, contingent, or unliquidated or which is objected to in
whole or in part on or before the date for distribution on account of such claim
shall not be paid in accordance with the provisions of the Plan until such claim
has become an Allowed Claim by a final Order. If allowed, the claim shall be
paid on the same terms as if there had been no dispute.
B. At any time before the Confirmation Date, the Debtor may modify the
Plan, but may not modify the Plan so that the Plan, as modified, fails to meet
the requirements of ss. 1122 and ss.1123 of the Code. After the Debtor files a
modification with the Bankruptcy Court, the Plan, as modified, shall become the
Amended Plan.
C. At any time after the Confirmation Date, and before Substantial
Consummation of the Plan, the Debtor may modify the Plan with permission of the
Court so that the Plan, as modified, meets the requirements of ss.ss. 1122 and
1123 of the Code. The Plan, as modified under this paragraph, shall become the
Amended Plan.
D. After the Confirmation Date, the Debtor may, with approval of the
Bankruptcy Court,
41
<PAGE>
and so long as it does not materially and adversely affect the interest of
Creditors, remedy any defect or omission, or reconcile any inconsistencies in
the Plan or in the Order of Confirmation, in such manner as may be necessary to
carry out the purposes and effect of the Plan.
XII. CONCLUSION
Under the Debtor's Plan, all creditors and Interest Holders of Debtor
will participate in some manner in the distribution to be made thereunder.
Debtor believes that the distributions contemplated in its Plan are fair and
afford all Claimants and Interest Holders equitable treatment.
ACCORDINGLY, DEBTOR RECOMMENDS THAT ALL CLAIMANTS AND INTEREST HOLDERS VOTE TO
ACCEPT THE PLAN.
DATED: December 17, 1997.
The Singing Machine Company, Inc.
By: /s/ JOHN KLECHA
-------------------------
John Klecha, Sec./Treas.
I HEREBY CERTIFY that I am admitted to the Bar of the United States
District Court for the Southern District of Florida and I am in compliance with
the additional qualifications to practice in this Court set forth in Local Rule
910(A).
FURR AND COHEN, P.A.
Attorney for Debtor
1499 W. Palmetto Park Road
Suite 412
Boca Raton, FL 33486
561-395-0500
By /s/ LISA J. CHAIKLIN AFLALO
---------------------------
LISA J. CHAIKLIN AFLALO, ESQ.
Florida Bar No. 0873179
42
<PAGE>
<TABLE>
<CAPTION>
The Singing Machine Company, Inc.
Operating Statement
October 31, 1997
MONTH OF OCTOBER YEAR TO DATE
--------------------------------------------- -----------------------------------------------
ACTUAL PLAN VARIANCE ACTUAL PLAN VARIANCE
--------- --------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales - Hardware 364,105 279,645 84,460 940,094 862,012 70,082
Sales - Software 215,952 337,270 (121,318) 472,551 680,102 (207,551)
Sales - FOB HK 1,649,535 1,406,400 243,135 3,079,757 3,462,896 (383,139)
Total 2,229,592 2,023,315 206,277 4,492,402 5,005,010 (512,608)
Cost of Sales - Hardware 292,377 227,072 65,305 831,016 682,714 148,302
Cost of Sales - Software 43,000 205,060 (162,060) 123,886 413,020 (289,134)
Cost of Sales - FOB HK 1,408,929 1,180,629 228,300 2,640,454 2,939,606 (299,152)
Total 1,744,306 1,612,761 131,545 3,595,356 4,035,340 (439,984)
Gross Profit - Hardware 71,728 19.7% 52,573 18.8% 19,155 109,078 11.6% 179,298 20.8% (70,220)
Gross Profit - Software 172,952 80.1% 132,210 39.2% 40,742 348,665 73.8% 267,082 39.3% 81,503
Gross Profit - FOB HK 240,606 14.6% 225,771 16.1% 14,835 439,303 14.3% 523,290 15.1% (83,987)
Total 405,286 21.8% 410,554 20.3% 74,732 897,046 20.0% 969,670 19.4% (72,624)
Operating Expenses
US Office Expenses 103,488 112,516 (9,028) 737,733 791,813 (54,080)
Commissions 16,831 21,076 (4,245) 42,240 64,421 (22,181)
Royalties 34,455 42,158 (7,703) 66,901 138,948 (72,047)
HK Office Expenses 22,342 4,000 18,342 37,207 16,000 21,207
HK Depreciation 8,803 8,803 0 61,621 61,621 0
US Depreciation & Amort 4,175 7,500 (3,325) 29,225 52,500 (23,275)
Total 177,116 179,750 (2,634) 884,081 1,011,162 (127,101)
Net Profit B/F Taxes 308,170 230,804 77,366 12,965 (41,512) 54,477
</TABLE>
EXHIBIT "A"
<PAGE>
<TABLE>
<CAPTION>
The Singing Machine Company
US Operating Expense Comparison
October 1997
MONTH OF OCTOBER YEAR TO DATE
------------------------ ---------------------------
ACTUAL PLAN VARIANCE ACTUAL PLAN VARIANCE
------ ----- -------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Salaries 42802 40748 2054 278509 277946 563
Salaries Chg Back-Repair -1712 -1712 0 -11990 -11990 0
P/R Taxes 2483 2100 383 16573 17938 -1365
Insurance-Health 921 1983 -1062 9858 13913 -4055
Temp Help-Warehouse 9231 2400 6831 43412 36413 6999
Rent 6559 6568 -9 77976 80173 -2197
Utilities 723 450 273 3034 3596 -562
Rent-Showroom 350 350 0 2450 2450 0
Freight & Delivery 894 5000 -4106 7139 16141 -9002
Advertising Allowances 0 0 0 43544 0 43544
Travel 2149 8350 -6201 14083 27388 -13305
Entertainment 172 0 172 641 0 641
Product Development 495 1000 -505 11369 7000 4369
Warehouse Sup/Packaging Mat'l 4798 2500 2298 19447 19399 48
Repairs & Maintenance 1138 1000 138 13142 7000 6142
Warranty Expense 6258 2000 4258 39472 30832 8640
Outside Computer Services 783 500 283 13709 9815 3894
Moving Expenses 0 0 0 13024 7720 5304
Equipment Rental 1343 640 703 5256 5093 163
Office Supplies 1197 2000 -803 7441 7312 129
Printing Supplies 1261 0 1261 2383 0 2383
Computer Supplies 103 100 3 344 700 -356
Telephone & Fax 1594 2200 -606 11803 14134 -2331
Postage 0 500 -500 3318 3906 -588
Courier Expenses 1660 100 1560 2423 700 1723
Bad Debts Expense 0 0 0 43377 0 43377
Interest & Bank charges 68 100 -32 6240 700 5540
Legal Fees 0 4000 -4000 0 71998 -71998
Accounting Fees 0 8000 -8000 17813 33813 -16000
Stock Transfer Fees 579 600 -21 3468 4082 -614
Insurance-General 4612 8039 -3427 32284 24938 7346
Factor Costs 10513 10000 0 56445 60000 -3555
State & Local Taxes 2611 0 2611 3095 0 3095
Misc 55 3000 -2945 4239 18703 -14464
Royalty Income-Domestic -26 0 -26 -4469 0 -4469
Interest Income -126 0 -126 -1251 0 -1251
Other Income 0 0 0 -9928 0 -9928
Debt Extinguishment 0 0 0 -41940 0 -41940
--- ------ ----- ------ ------ ------
Total 103488 112516 -9028 737733 791813 -54080
</TABLE>
EXHIBIT "B-1"
<PAGE>
The Singing Machine Company, Inc.
Consolidated Balance Sheet
October 31, 1997
ASSETS
Cash 53,626
Accounts Receivable-Net 645,633
Receivables-Related Parties 32,021
Other Receivables 6,707
Inventories-Net 957,422
Prepaid Expenses 28,880
Fixed Assets 98,313
Intangible Assets 14O,762
----------
TOTAL ASSETS 1,963,364
==========
LIABILITIES
Accounts Payable 5,229,588
Loans Payable 607,080
----------
TOTAL LIABILITIES 5,836,668
==========
SHAREHOLDER'S EQUITY
Common Stock 28,838
Additional Paid in Capital 5,844,449
Retained Earnings(Net Deficit) (9,759,554)
Earnings for the Period 12,965
----------
TOTAL S/H EQUITY (3,873,304)
==========
TOTAL LIAB. & S/H EQUITY 1,963,364
==========
"Pre-Petition Debt - 4,418,744
EXHIBIT "B-1"
<PAGE>
The Singing Machine Company, Inc.
Projected Balance Sheet after Reorganization
As of December 4, 1997
ASSETS
Cash 17,000
Accounts Receivable-Net 1,040,000
Receivables-Related Parties 32,021
Other Receivables 6,707
Inventories-Net 412,000
Prepaid Expenses 54,200
Fixed Assets 96,512
Intangible Assets 128,422
----------
TOTAL ASSETS 1,786,862
==========
LIABILITIES
Accounts Payable 1,063,795
----------
1,063,795
==========
TOTAL LIABILITIES
SHAREHOLDER'S EQUITY
Common Stock 28,836
Additional Paid in Capital 5,844,449
Retained Earnings(Net Deficit) (5,440,818)
Earnings for the Period 29O,600
----------
TOTAL S/H EQUITY 723,067
==========
TOTAL LIAB. & S/H EQUITY 1,786,862
==========
*Assumtion is that 50% of creditors who filed claims will elect to take the cash
option of the reorganization plan and the balance the stock option
EXHIBIT "B-1"
<PAGE>
MONTHLY FINANCIAL REPORT FOR BUSINESS
For the Period Beginning October 1, 1997 and Ending October 31, 1997
Name of Debtor: The Singing Machine Company, Inc. Case Number:97-22199-BKC-RBR
Date of Petition: April 11, 1997
CURRENT CUMULATIVE
MONTH PETITION TO DATE
--------- ----------------
1. CASH AT BEGINNING OF PERIOD 13,791.41
2. RECEIPTS:
A. Cash sales NA NA
Less: Cash Refunds NA NA
Net Cash Sales NA NA
B. Collection on Postpetition 161,348.85 855,096.75
C. Collection on Prepetition 0.00 0.00
D. Other Receipts (Attach List) 15,329.45 25,072.72
3. TOTAL RECEIPTS 176,578.30 880,124.58
4. TOTAL CASH AVAILABLE FOR
OPERATIONS (Line 1 + Line 3) 190,469.71
5. DISBURSEMENTS
A. U.S. Trustee Quarterly Fees 3,750.00 5,250.00
B. Net Payroll 35,164.00 232,455.57
C. Payroll Taxes Paid 10,020.57 63,296.23
D. Sales and Use Taxes 0.00 0.00
E. Other Taxes 3,898.46 4,343.46
F. Rent 6,558.56 67,539.92
G. Other Leases 370.44 1,111.32
H. Telephone 1,554.29 11,802.57
I. Utilities 1,288.55 4,433.75
J. Travel & Entertainment 2,084.48 13,290.52
K. Vehicle Expenses 0.00 323,22
L. Office Supplies 1,133.50 5,524.52
M. Advertising 0.00 0.00
N. Insurance 4,505.26 53,151.82
O. Purchases of Fixed Assets 0.00 0.00
P. Purchases of Inventory 50,419.98 151,415.52
Q. Manufacturing Supplies 4,598.91 30,917.33
R. Repairs & Maintenance 1,310.32 10,129.34
S. Payments to Secured Creditors 0.00 0.00
T. Other Operating Expenses 47,519.13 203,650.53
(Attach List) 0.00
6. TOTAL CASH DISBURSEMENTS 174,471.45 858,751.31
7. ENDING CASH BALANCE 15,998.25
(LINE 4 LINE 5)
I declare under penalty of perjury that this statement and the accompanying
documents and reports are true and correct to the best of my knowledge and
belief. This 20th of October, 1997 /s/ Edward Steele
-----------------------
EXHIBIT "B-2"
<PAGE>
Other Operating Expenses
For the Period beginning October 1, 1997 and Ending October 31, 1997
Name of Debtor: The Singing Machine, Co., Inc. Case Number: 97-22199-BKC-RBR
Royalties 15,418.48
Contract Labor 6,364.69
Outside Computer Services 6,040.84
Security Deposits 5,000.00
Freight 3,843.14
Sales Commissions 2,592.74
Machine Repair 2,306.00
Courier Expenses 1,554.25
Legal Fees 1,075.00
Printing Supplies 943.40
Showroom Rental 700.00
Stock Transfer Fees 578.91
Customs & Duties 400.00
S.U.I 361.57
Equipment Rental 261.83
Computer Supplies 102.75
Bank Charges 75.53
Miscellaneous Expenses 55.00
Total 47,619.13
EXHIBIT "B-2"
<PAGE>
ATTACHMENT 1
MONTHLY ACCOUNTS RECEIVABLE AGING AND RECONCILIATION
<TABLE>
<CAPTION>
<S> <C>
Name of Debtor: The Singing Machine Company, Inc. Case Number: 97-22199-BKC-RBR
</TABLE>
Reporting Period Beginning October 1,1997 and Ending October 31, 1997.
<TABLE>
<CAPTION>
<S> <C>
ACCOUNTS RECEIVABLE AT PETITION DATE 370,797.67 Less Factor's Interest (226,275.88)
</TABLE>
ACCOUNTS RECEIVABLE RECONCILIATION (Include all accounts receivable,
pre-petition and post-petition, including charge card sales which have not
been received):
Beginning of Month Balance 263,468.72
PLUS: Current Month New Billings 543,513.44
LESS: Collection During the Month (161,348.85)
End of Month Balance 645,633,31
===========
AGING: (Show the total amount for each age group of accounts incurred since
filing the petition)
O-30 DAYS 31-60 DAYS 61-9O DAYS OVER 90 TOTAL
DAYS
---------- ---------- ---------- ------------ -----------
528,505.91 280,580.98 59,957.19 (223,410.77) 645,633.31
========== ========== ========= =========== ==========
EXHIBIT "B-2"
<PAGE>
ATTACHMENT 2
MONTHLY ACCOUNTS PAYABLE AND SECURED PAYMENTS REPORT
Name of Debtor: The Singing Machine Company, Inc. Case Number: 97-22199-BKC-RBR
Reporting Period Beginning October 1, 1997 and Ending October 31, 1997
In the space below list all invoices or bills incurred and not paid since the
filing of the petition. Do not include amounts owed prior to filing the
petition.
<TABLE>
<CAPTION>
DAYS
OUTSTANDING VENDOR DESCRIPTIONS AMOUNT
----------- ------------------------ -------------------- ---------
<S> <C> <C> <C> <C>
10/15/97 16 Age to Age Music Music Royalty 5.17
09/30/97 31 ASR Recording Services Purchases of Software 1,280.00
10/21/97 10 ASR Recording Services Purchases of Software 14,921.51
10/14/97 17 The End of August Music Music Royalty 0.86
10/15/97 16 EMI Christain music obo Bases Music Royalty 0.96
10/15/97 16 Bash Music Music Royalty 113.44
10/01/97 30 Been Jammin Music Music Royalty 100.14
10/15/97 16 Been Jammin Music Music Royalty 13.08
08/01/97 91 Begonia Melodies Music Royalty 5.26
10/14/97 17 Begonia Melodies Music Royalty 11.26
10/15/97 16 Benefit Music Music Royalty 0.14
10/15/97 16 Bocephus Music Music Royalty 1.05
10/15/97 16 Brockman Music Music Royalty 88.91
10/15/97 16 Bug & Bear Music Music Royalty 4.48
10/15/97 16 Buzzard Rock Music Music Royalty 27.45
10/15/97 16 C'est music Music Royalty 12.29
10/15/97 16 C'est Music obo Maya Music Music Royalty 2.45
08/01/97 91 Carol Bayer Sager Music Music Royalty 44.79
10/15/97 16 Carol Bayer Sager Music Music Royalty 7.67
10/15/97 16 Cass County Music Music Royalty 15.73
08/01/97 91 Chiplin Music Music Royalty 5.35
08/01/97 91 Chrysalis Music Music Royalty 73.18
10/15/97 16 Chrysalis Music Music Royalty 8.83
10/15/97 16 Coral Reefer Music Music Royalty 20.92
10/15/97 16 Corey Rock Music Music Royalty 98.14
10/15/97 16 Country Road Music Music Royalty 10.42
10/14/97 16 DA Music c/o Kent & Beatty Music Royalty 1.74
10/15/97 16 Dabbyloo Music Music Royalty 0.63
10/27/97 4 Dadan Packaging Music Royalty 133.00
10/15/97 16 Diamond Struck Music Music Royalty 0.34
10/15/97 16 Diana Music Music Royalty 1.62
10/15/97 16 Donald Jay Music Music Royalty 3.49
10/15/97 16 Donna Summer dba Sweet Summer Music Royalty 2.74
10/15/97 16 Dream Catcher Music Music Royalty 1.11
10/15/97 16 Duck Housa Music Music Royalty 0.38
EXHIBIT "B-2"
<PAGE>
10/15/97 16 Edge O'Woods music Music Royalty 1.63
10/15/97 16 Edge of Fluke Music Music Royalty 3.15
10/14/97 17 Malt Shoppe Music Music Royalty 0.47
10/15/97 16 Elliott-Jacobsen Music Music Royalty 4.59
10/15/97 16 New Exective Music Music Royalty 3.66
10/01/97 30 Eyeteecee Music Music Royalty 13.59
10/15/97 16 Eyeteecee Music Music Royalty 0.88
10/31/97 0 Factory Electronics Machine Repair 20.00
10/14/97 17 Fifth of March Publishing Music Royalty 4.87
10/15/97 16 Five Bar-B-Songs Music Royalty 74.48
10/15/97 16 Feadbach Music Music Royalty 7.67
10/20/97 11 Florida Freight Freight 37.50
10/15/97 16 Forever Endeavor Music Music Royalty 231.09
09/25/97 37 Robert Furr & Charles Cohen PA Legal Fees 33,978.02
10/15/97 16 Gary Burr Music Music Royalty 0.57
10/15/97 16 Gear Publishing Music Royalty 22.87
09/05/97 46 Genesis Computer Solutions Music Royalty 1,235.00
10/15/97 16 Golden Reed Music Music Royalty 0.22
08/01/97 91 Gratitude Sky Music Music Royalty 66.14
10/14/97 17 Gratitude Sky Music Music Royalty 6.40
10/15/97 16 Great Cumberland Music Music Royalty 1.37
10/15/97 16 Hamstein Stroudavarrious Music Music Royalty 39.09
08/01/97 91 Hidden Pun Music Music Royalty 11.21
10/14/97 17 Hidden Pun Music Music Royalty 1.46
10/01/97 30 Hit List Music Music Royalty 11.21
10/15/97 16 Hit List Music Music Royalty 1.46
10/10/97 21 Honcik Management Services Music Royalty 15.00
08/01/97 99 House of Fun Music Music Royalty 69.24
10/15/97 16 House of Fun Music Music Royalty 26.18
10/15/97 16 Howlin' Hits Music Royalty 2.28
10/01/97 30 Hudmar Publishing Company Music Royalty 0.14
10/03/97 28 International Business-GA Computer SVC 483.36
10/15/97 16 Ignorant Music Music Royalty 2.61
10/10/97 21 Ikon Office Solutions Equipment Rental 795.02
10/27/97 4 Ikon office Solutions Equipment Rental 286.2
10/15/97 16 Innocent Bystander Music Royalty 6.63
07/16/97 107 International Smc (HK) ltd. Customer Chargeback (370.00)
07/08/97 115 J.D. Financial Corp Application Fees 630.00
10/15/97 16 Jeddrah Music Music Royalty 1.99
10/15/97 16 John Klecha Reimburse for Office Supp 1,187.20
10/15/97 16 Johnny Yuma Music Music Royalty 13.76
10/01/97 30 Kamakazi Music Music Royalty 0.53
10/15/97 16 Katie Walker Music Music Royalty 0.63
10/15/97 16 Kinetic Diamond Music Music Royalty 35.14
10/15/97 16 Knockout Music Music Royalty 5.23
EXHIBIT "B-2"
<PAGE>
10/15/97 16 Kokomo Music Music Royalty 9.18
10/15/97 16 Larric Music Music Royalty 3.18
10/15/97 16 Let Therebe Music Music Royalty 4.63
10/01/97 30 Lido Music Music Royalty 0.53
10/15/97 16 Life of the Record Music Royalty 1.73
10/15/97 16 Lion's Mate Music Music Royalty 0.29
10/14/97 17 Little Shops of Morgansongs Music Royalty 8.83
10/21/97 10 Logus Information Systems Computer Repair 80.00
10/15/97 16 Long Iguanna Music Music Royalty 0.63
08/01/97 91 Lost in Music Music Royalty 0.91
10/15/97 16 Lost in Music Music Royalty 31.50
10/25/97 6 Lynn Jacobs Publishing Music Royalty 1.74
10/15/97 16 Major Bob Music Music Royalty 308.99
10/15/97 16 Man-Ken Music Music Royalty 0.42
10/15/97 16 Management Agency & Music Music Royalty 4.17
10/15/97 16 Mariposa Music Music Royalty 0.71
10/15/97 16 Martin Panzer Music Music Royalty 0.53
10/15/97 16 Meadowgreen Music Music Royalty 5.82
08/21/97 10 Memcorp Purchases of Products (4,630.48)
09/15/97 16 Memcorp Purchases of Products (1,322.40)
09/17/97 14 Memcorp Purchases of Products 21,174.20
10/09/97 22 Memcorp Purchases of Products 40,115.28
10/15/97 16 Memcorp Purchases of Products 37,836.00
10/20/97 11 Memcorp Purchases of Products 1,185.87
10/21/97 10 Memcorp Purchases of Products 42,310.00
09/30/97 32 Midrange Support & Service Computer Support 106.00
10/15/97 16 Mighty Nice Music Music Royalty 111.71
10/15/97 16 Milk Money Music Music Royalty 7.49
10/15/97 16 Miracle Creek Music Music Royalty 0.10
10/14/97 17 Mitchell B. Degroot Jr Trust Music Royalty 4.09
10/15/97 16 Moebetoblame Music Music Royalty 0.53
10/15/97 16 Moline Valley Music Music Royalty 1.63
10/15/97 16 Monster Music Music Royalty 9.04
10/15/97 16 Moon Child Music Music Royalty 0.21
10/14/97 17 Morganactive Music Music Royalty 247.15
10/15/97 16 Mudbluff Music Music Royalty 1.85
10/15/97 16 Muscle Shoals Sound Pub. Music Royalty 15.90
10/15/97 16 Nebraska Music Music Royalty 1.99
10/15/97 16 New Hayes Obo New Don Songs Music Royalty 4.54
10/15/97 16 Nouvelles Editions Rideau Roug Music Royalty 1.41
10/15/97 16 Now Sound Music Music Royalty 0.53
10/05/97 26 Nutech Entertainment Purchases of Software 5,579.00
10/13/97 16 Nutech Entertainment Purchases of Software 5,224.00
10/22/97 9 Nutech Entertainment Purchases of Software 27,434.45
10/23/97 8 Nutech Entertainment Purchases of Software 2,149.74
EXHIBIT "B-2"
<PAGE>
10/15/97 16 Paragon Music Music Royalty 3.86
10/15/97 16 Peace Rock Music Music Royalty 0.55
08/01/97 91 Pebbitone Music Music Royalty 0.05
10/21/97 10 Personally Yours Services Temp Help 1,297.31
10/28/97 3 Personally Yours Services Temp Help 853.32
10/11/97 20 Pet Mac Publishing Music Royalty 0.74
10/25/97 6 Pet Mac Publishing Music Royalty 0.53
10/15/97 16 Pkm Music Music Royalty 111.71
10/14/97 17 Songs of Polygram Int'l Pub. Music Royalty 0.45
10/15/97 16 Songs of Polygram ob Barbara Music Royalty 6.76
10/28/97 3 Printing Depot Printing Suplies 317.79
10/15/97 16 Quakenbush Music Music Royalty 9.82
10/15/97 16 R.U. Cyrius Music Music Royalty 3.49
10/15/97 16 Rachel's Own Music Music Royalty 11.54
10/15/97 16 Rafelson Music Music Royalty 1.34
10/15/97 16 Rare Blue Music Music Royalty 5.15
10/14/97 17 Reaisongs Music Royalty 0.54
10/15/97 16 Red Brazos Music Music Royalty 9.37
10/15/97 16 Red Cloud Music Music Royalty 15.73
10/15/97 16 Rex Nelon Music Music Royalty 1.43
10/15/97 16 Rio Bravo Music Music Royalty 247.15
10/15/97 16 Rocky Core Music Music Royalty 82.39
10/01/97 30 Saba Seven Music Music Royalty 24.85
10/15/97 16 Saba Seven Music Music Royalty 2.48
10/01/97 30 Sailor Musicc Music Royalty 0.28
10/14/97 17 Scarlet Moon Music Music Royalty 17.57
10/20/97 11 Seacloud Properties Rent & Utilities 6,652.66
10/15/97 16 Seagrape Music Music Royalty 3.57
05/09/97 143 Securitylink Security Services 771.63
08/01/97 91 Seven Summits Music Music Royalty 0.45
10/15/97 16 Seven Summits Music Music Royalty 0.38
10/14/97 17 Sister Elisabeth Music Music Royalty 2.06
10/15/97 16 Six Strings Music Music Royalty 2.09
08/01/97 91 Skinny Zach Music Music Royalty 0.53
10/15/97 16 Sky Harbor Music Music Royalty 0.14
10/15/97 16 Sloopy II Music Royalty 6.74
10/15/97 16 Sluggosongs Music Royalty 1.91
10/15/97 16 Snow Music-Karen Schauban Pub. Music Royalty 3.41
10/15/97 16 Snug Music Music Royalty 2.49
10/15/97 16 Somerset Songs Pub. Music Royalty 1.83
10/15/97 16 Songwriter's Ink. Music Royalty 0.10
10/15/97 16 Sony Music Pub. Music Royalty 49.21
10/14/97 17 Southern Days Music Music Royalty 0.43
10/15/97 16 Sparrow Communications Group Music Royalty 0.10
10/15/97 16 Stamps-Baxter Music & Printing Music Royalty 6.26
EXHIBIT "B-2"
<PAGE>
10/15/97 16 The Harry Fox Agency Music Royalty 7,040.99
10/15/97 16 Threesome Music Music Royalty 9.05
10/15/97 16 Trevcor Music Music Royalty 41.19
10/15/97 16 Triumvirate Music Music Royalty 111.92
10/15/97 16 Two Knight Pub. Music Royalty 2.09
09/27/97 35 UPS Freight 10.00
10/04/97 27 UPS Freight 528.16
10/15/97 16 Wally Holmes Music Royalty 2.09
08/01/97 91 Walt Disney Music Royalty 70.79
10/15/97 16 Walt Disney Music Royalty 9.84
10/15/97 16 Wild Gator Music Music Royalty 0.14
10/15/97 16 William Joel Music Music Royalty 329.30
10/15/97 16 Wonderland Music Music Royalty 7.14
10/14/97 17 W & R Songs Music Royalty 0.83
10/15/97 16 Yellow Elephant Music Music Royalty 1.36
10/14/97 17 Zesty Zacks Music Music Royalty 2.43
10/15/97 16 48-11 Music Music Royalty 1.26
Total 253,743.79
</TABLE>
- --------------------------------------------------------------------------------
ACCOUNTS PAYABLE RECONCILIATION (Post Petition Only):
Opening Balance (total from prior report) 157,975.99
PLUS: New Indebtednes Incurred This Month 202,001.40
LESS: Amount Paid on Accounts Payable 28,403.60
LESS: Direct Payments from Factors 77,830.00
Ending Month Balance 253,743.79
- --------------------------------------------------------------------------------
SECURED: List the status to Secured Creditors and Lessors (Post Petition Only):
NUMBER TOTAL
OF POST AMOUNT OF
SECURED DATE PETITION POST PETITION
CREDITOR/ PAYMENT PAYMENT PAYMENTS PAYMENTS
LESSOR DUE AMOUNT DELINQUENT DELINQUENT
- -------- ------- ------- ---------- -------------
0.00 0.00 0.00 0.00 0.00
EXHIBIT "B-2"
<PAGE>
ATTACHMENT 3
ATTACHMENT 3
INVENTORY AND FIXED ASSETS REPORT
Name of Debtor: The Singing Machine Company, Inc. Case Number: 97-22199-BKC-RBR
Reporting Period Beginning October 1, 1997 and Ending October 31, 1997
INVENTORY REPORT
INVENTORY BALANCE AT PETITION DATE: 1,100,000.00
INVENTORY RECONCILIATION:
Inventory Balance at Beginning of Month 999,900.52
Inventory Purchased During Month 234,372.45
Inventory Returns to Distributor 0.00
Inventory Used or Sold 335,377.18
Inventory Returns 58,526.31
Inventory on Hand at End of Month 957,422.10
METHOD OF COSTING INVENTORY: Standard Cost
FIXED ASSET REPORT
FIXED ASSETS FAIR MARKET VALUE AT PETITION DATE: 89,253.80
(Included Property, Plant and Equipment)
BRIEF DESCRIPTION (First Report Only): Office Furniture, Computer Equipment,
Leasehold Improvements, Warehouse Equipment
FIXED ASSETS RECONCILIATION;
Fixed Asset Book Value at Beginning of Month 78,607.04
LESS: Depreciation Expense (1,774.48)
PLUS: New Purchases 0.00
Ending Monthly Balance 76,832.53
BRIEF DESCRIPTION OF FIXED ASSETS PURCHASED OR DISPOSED OF DURING THE REPORTING
PERIOD: No fixed assets purchased or disposed of within reporting period.
EXHIBIT #B-2"
<PAGE>
EXHIBIT "C"
CLASS CREDITOR CLAIM AMOUNT
NO OF CLAIM
----- --------
WAGE CLAIMS:
- ------------
1 Anthony Aglione 43 87.99(v)
1 Rosemarie D. Ausilio 29 536.94(s)(PU)
1 Augustin Baez 44 90.78(v)
1 Brian Cino 42 83.08(v)
1 Marlin Sevy d/b/a
Sales Network Assoc. 51 9,750.62 (P)
1 Adolph Nelson 63.87(v)
1 Ed Pearson 1,164.82(v)
1 Terri Phillips 222.28(v)
1 Melody Schwab 30 170.70(v)
1 Shelley Simmons 564.31(v)
1 Edward Steele 17 3,546.85(v)
1 Mikiyo Steele 238.18(v)
PRIORITY CLAIMS:
- ----------------
Broward County Revenue
Collector 73 5,420.58 (S)
State of Florida, Dept.
of Revenue 10 4.22(P)
10 1,283.60(U)
SECURED CLAIMS:
- ---------------
2 Bankers Capital 124,000.00
3 Toyota Motor Credit Corp. 7,657.00
CLASS 4 CLAIMS:
- ---------------
48-11 Music 18.46
64 East Music Co. 8.23
ABF Freight Systems, Inc. 78 4,364.79
AMR Publications 4.45
AMR Publications .29
AMR Publications OBO Sierra 2.25
ASR Recording Service of CA 74 649,285.45
ASR Recording Service of CA 99 494,700.91
* See Key in Article V of the Disclosure Statement
<PAGE>
ARC Music Corporation 1,397.36
AT&T - FBS 22.57
Aafes Headquarters 12,735.56
Abbey Road Dist. 1,257.31
Acoustic Music Company 434.61
Active International 2,062.50
Active Media Services, Inc. 24 4,337.00
Aerodynamic Music 208.09
Age to Age Music 729.40
Agnes Goodacre 50.00
Al Hoffman Songs, Inc. 4.42
Alain Boublil Music, Ltd. 569.64
Albert E, Brumley & Sons 120.08
Alcor Music 5.22
Alley Music Corp. 765.07
Alpha Records, Inc. 516.00
Amachrist Music 6.62
American Arbitration 91 719.80
American Business Credit Corp. 85 6,563.52(P/U)
American Made Music 20.33
Amerigas - Pompano Beach 7 274.75
Anago International, Inc. 28 934.55
Atlantic Music Corp. 673.33
Atlantic Paper & Packaging 41 1,159.64(P)
Atlas Packaging, Inc. 9 1,303.38
Aurelius Music 1.56
Avon Corrugated Corp. 11 516.00
B Flat Publishing 6.29
B & G Akst Publishing Co. .84
BCL Music, Inc. 170.80
BMG Music Publishing .68
BMG Music Publishing 6,480.47
BPI Communications 10,236.00
Augustin Baez, Jr. 44 207.63
Ball-Zell Sales & Supply Co. 64.49
Barnegat Music Corp. 6.09
Bash Music (Ascap) 379.76
Bay Tact Corporation 8 442.88
Beckie Publishing Co., Inc. 798.14
Been Jammin Music 5,289.30
Begonia Melodies, Inc. 944.13
BellSouth Communications 61 872.28
BellSouth Financial Service 1,156.82
Bema Music Co. - Sweel City Records 1.05
Benefit Music 6,991.80
Benny Davis Music 6.34
Big Sam's Lock and Safe 71.55
Big State Distribution Corp. 212,442.55(d)
Billboard Circulation Dept. 265.00
Black Ice Publishing 96 6,000.00
Blackstone Legal Supplies, Inc. 20.14
Blue Cross & Blue Shield 47 30.07(P/U)
Blue Cross & Blue Shield 48 1,046.93
<PAGE>
Blue Gum Music, Inc. 19.27
Blue Network Music, Inc. 2.11
Bobby Fischer Music 58.12
Bobby Freeman Music 734.87
Bobby Freeman Music 26.55
Debbie Bodenhorn 32.54
Boobette Music .48
Boosey & Hawkes, Inc. 1.99
Bourne Company 53 286.66
Brockman Music 31.50
Broken Bird 330.82
Bug & Beer Music 577.94
Bug Music Group 808.70
Bust It Publishing 0.51
Buzzard Rock Music 393.86
Buzzherb Music 0.82
C S C 72 190.00
CPP Belwin Mills 19,984.41
Calandrelli Music 97.01
California Phase Music 8.11
Camelot Music, Inc. 7,643.82
Campbell Connelly & Co., Ltd. 2.23
Carbert Music, Inc. 7.45
Carole Bayer Sager Music 414.85
Carton Sales & Manufacturing 15 3,103.60
Carub Music 5.22
David Casa 7.82
Cass Country Music 3,935.82
Channel Music 419.38
Checkpoint 22 4,227.02
Cherry Lane Music Publishing 1,682.53
Chevis Publishing Corp. 7.88
Chi-Boy Music 32 100.00
Chinquapin Music 0.21
Chotirmall's, Inc. 65.25
Chriswood Music 190.03
Chrysalis Music, Ltd. 391.97
Brian Cino 42 207.63
The City of Pompano Beach 375.00
Clockus Music 277.42
Coburn Music 9.27
Coffee Stop, Inc. 134.80
Computer Solutions, Inc. 4 954.00
Con-Way Southern Express 3,722.57
Conrad Music Division
of Arc Music 0.42
Consolidated Freightways 58 6,466.23
Continental Stock Transfer
Trust Co. 75 2,640.00
Copans (Phase 1) Associates 86 15,401.84(S)
86 29,992.50(S)
Copans Printing & Graphics 12.82
Copyright Management 5,541.59
<PAGE>
Coral Reefer Music 2,592.25
Corey Rock Music, Ltd. 1,378.79
Corsan Marketing 5,159.62
Country Road Music 58.50
County Line Music 0.69
Creative Bloc Music, Inc. 28.74
Criteron Music Corp. 6.06
Cromwell Music, Inc. 7.70
Curb Songs 1.16
D. Jentgens, Nat. Guardian 1.94
DA Music 184.08
Dabilu Music 7.73
Dadan Packaging 3 669.97
Daly & Wolcott 1,345.00
Danka Industries, Inc. 589.53
Daylight Transport 77 6,763.33(S/U)
Delta Business Systems 224.58
Department of the Navy 446.00
Dept. of the Navy 446.00
Dero Research Limited 25 21,141.13
Diamond Struck Music 28.90
Dillard Music Co. 0.29
Direct Freight Corporation 27 2,429.00(S/U)
Dixie Stars Music 9.88
Donald Jay Music, Ltd. 370.34
Dootsie Williams Pub 10.40
Dream Catcher Music, Inc. 81 29.89
Dwarf Music 185.81
EMI Christian Music 9.80
EMI Christian Music Obo Bases 105.80
Edge O'Woods Music 595.70
Edge of Fluke Music 0.19
Edward Marks obo Lost Boys 2,036.70
Eighties Music 2.35
Electronic Choices, Inc. 62 9,160.01
Elliot-Jacobsen Music 853.26
Elvis Music, Inc. 12.68
Emily Music Corp. 54 12-15,000.00(P/U)
Englishtown Music 165.91
Ernst & Young 9,454.00
Essix Music 629.49
Evaco Financial Printers 2,277.63
Expotec, Inc. 27.13
Eyeteecee Music 23.26
FLX (HK) Ltd. 424,852.62
Fay's Inc. 2,420.00
Feadbach Music 622.31
Federal Express Corporation 2,140.40
Fever Pitch Music 174.33
Fisher Music Corp. 131.70
Foam Factory 611.00
Folkways Music Publishers 25.66
Forever Endeavor Music 1,618.37
<PAGE>
Forman Marketing & Sales 87 5,715.82
Fort Knox Music, Inc. 24.15
Fred Ahlert Music Corp. 8.10
Frontier Communications 71.54(d)
Fun City / Top of Town & Purple 6.93
G. Schirmer, Inc. 87.49
Gary Burr Music, Inc. 3.75
Genesis Computer Solutions, Inc. 459.75
Genesis Partners, Inc. 6,000.00
George M. Cohan Music Publishing Co 0.14
George Whiting Publishing Co. 3.57
Gilbert Express 3,170.40
Gnossos Music 395.94
Gnossos Music 45.32
Golden Egg Music 244.27
Golden Reed Music 68 4.81
Goldrian Music 4.19
Gone [illegible] Music 33 100.00
Grabbitt Music 34 unknown
Grandpa's 1,708.80
Great Eastern Music 40 undeterminable(P)
HAL Leonard Publishing 46 81,425.60
Hampshire House Publishing Corp. 46 2.41
Hamstein Cumberland Music 31.43
Hamstein Publishing Co., Inc. 346.34
Hamstein Stroudavarious Music 116.52
Handicapped Employees Living 80 384.00(P/U)
Handleman Comp. 8,850.05(d)
Harvey Software 206.70
Hasings Books & Music 143.03
Heavy Petal Music, Inc. 0.42
Heilig Meyer Company 2,787.26
Catherine Hinen 3.97
Hip Chic Music 8.57
Hip Trip Music Co. 8.57
Hit List Music 61.64
Hodgson Impey Cheng 37 1,800.00
Hollis Music, Inc. - Cromwell 1.78
Hollywood Imports 1,132.63(d)
Holy Moley Music 9.90
Homewood House Music 358.39
Hopper Radio of Florida, Inc. 66 275.00
House of Bryant Publishing 216.57
House of Fun Music 3,815.20
Housenotes Music 84.72
Howlin' Hits 1,805.56
Hudmar Publishing Company 3.06
Hudson Bay Music Company 96.52
Ignorant Music 101 22.10
Innocent Bystander 54.65
Integrated Copyright Group 241.69
Interbond Corp. of America 646.55(d)
International Business GA 483.36
<PAGE>
Iza Music 2.37
J & R Music World, Inc. 404.11
J.C. Penny Company, Inc. 2,254.98(d)
JW Charles Securities, Inc. 6,000.00(d)
Jenny Music, Inc. 6.20
Jerry Bock Enterprises 2.29
Jerry Leiber Music 1.79
Jimi Lane Music 215.12
Johnny Yuma Music 1,702.36
Jones Music America 4.19
Just Cuts Music 2.40
Kamakazi Music 4.94
Katie Walker Music 21.99
Kaybee Toy & Hobby 9,167.79
Keyes Coverage, Inc. 107.69
Kieran Kane Music 256.74
Kinetic Diamond Music 695.60
King Regal Music Publishing 219.70
Knockout Music, Inc. 564.70
Know Music 97 100,000.00
Kokomo Music 95 100,000.00
Arthur M. Kushner 11,374.26
Larry Spier, Inc. 24.64
Lash Tamaron Distributors 21,847.81(d)
Leadsheet Land Music 419.41
Let There Be Music, Inc. 414.04
Lewis Music Publishing Co., Inc. 6.84
Lido Music, Inc. 6.81
Likasa Music 428.14
Little Big Town Music 20.32
Loaves and Fishes Music Co. 9.37
Lomanto Exhibit Services 57 957.60(d)
Lone Iguanna Music 139.89
Lost in Music, Inc. 1,285.73
Low-Sal, Inc. 3.32
Lucio Mandler Croland Bronstein 2,491.50
Ludlow Music, Inc. 131.65
M & J Technologies 88 605.24 X
Magna International Corp 89 628,634.00(S)
Major Bob Music 83 187.63
Major Songs 2.93
Management Agency & Music 87.59
Manna Music 42.56
Maplewood Music Publishing Co. 1.12
Mariposa Music, Inc. 48.26
Martiz Performance Improvement 65.00
Mark Cain Music 9.52
Marke Music Publishing Co., Inc. 0.11
Marlin TV Corp. 22.90
Marlong Music Corp. 3.71
Martha Lake Electronics 99.00
Martin Panzer Music 4.94
Matheson Fast Freight 96.65
<PAGE>
Matragun Music, Inc. 18.23
Meadowgreen Music Co. 693.51
Memcorp, Inc. 65 643,967.71
Mid Summer Music, Inc. 319.13
Midstar Music 8.57
Mighty Nice Music 332.93
Mike Stoller Music 14.74
Milk Money Music 179.25
Howard Miller 69 18,667.50
Milliken and Michaels 1,100.00(d)
Millward & Company 25,000.00
Miracle Creek Music 0.10
Mitsui-soko (USA), Inc. 281.31
Moline Valley Music 595.70
Monster Music 195.85
Montgomery & Larmoyeaux 79 75,011.50
Moon Child Music 69.95
Moonlight & Manolias Music Pub. 5.35
Morale Welfare & Recreat 71.50(d)
Morale Welfare & Recreation 67 77.60(d)
Morale Welfare & Recreation 25 325.00(d)
Morris Music 23.52
Mudbluff Music 109.04
Muscle Shoals Sound Pub. 1,080.52
Museum Steps Music 9.80
Music Ridge Music 391.68
Music Sales Corp. 950.49
Music Sales Limited 6,031.50
Music Sales Limited 106 8,934.05
Musical Comedy Productions, Inc. 13.46
Nash Notes 296.48
National Record Mart 1,152.21
Nebraska Music 311.03
New Executive Music 122.37
Newcon Limited 230.00
Nikkodo USA, Ltd. 315.18(d)
Now Sounds Music 56.61
Nutech Entertainment 10,360.00
O'Ryan Music 6.87
O'Tex Music 262.02
Of Music 25.36
Olde Clover Leaf Music 9.35
Orion 108 14,974.21
Out Time Music 1.28
Over the Rainbow Music 1.07
Overnite Transportation Co. 13 1,322.85
P.A.L. 6,716.38
PKM Music 332.93
PRS, Ltd. 8.41
Palm Beach Habilitation Center 3.64
Paragon Music Co. 462.24
Patti Washington Music 3.97
Paul Simon Music 828.21
<PAGE>
Sparrow Music 77.85
Special Rider Music 591.78
Spiegel, Inc. 50 7,295.55
Spring Creek Music 5.19
St. Louis Music, Inc. 70 1,798.06
St. Nicholas Music, Inc. 557.30
Stamps-Baxter Music & Printing 360.81
Starstruck Writers Group, Inc. 223.82
Edward Steele 17 9,911.70
John Steele 45 252.60
Sterling Music Company 13.83
Sterling Software, Inc. 98 4,520.41(P)
Steve O'Brien Music (BMI) 103.90
Stirling Jack Service 160.00
Stone City Music 33.18
Stormking Music 43.23
Strange Euphoria Music 3.69
Sugar Song Publishing, Inc. 3.18
Donna Sumer d/b/a/ Sweet Summer 150.33
Sun Container, Inc. 275.00
Sunshine State Messenger Svc 2 65.50
Sure Fire Music Co. 85.16
Swag Song Music 1,658.63
Talmont Music 111.85
Tandy Customer Service 81.43
Target Northern Operations Ctr. 55 313,612.05
Tech Specialist 20.00
Telly Larc, Inc. 29,03
Temp One of South Florida 5,408.15
Temporary Labor Sources, Inc. 978.75
The Association 14,944.84
The Harry Fox Agency 104 410,000.00(S)
The Really Useful Group 260.50
Third Story Music, Inc. 11.83
Threesome Music 596.12
Tobago Music 1.94
Towncar 153.75
Toy Town Tunes 0.27
Toys R Us, Inc. 1 28,238.85
Transportation Credit Service 5,167.74
Trevcor Music Corp. 590.55
Triad 63 42,392.54(P)
Trio Music Company, Inc. 775.97
Trio Music Company, Inc. 7.45
Triumvirate Music 64 506.88
Trixie Lou Music 0.24
Two Knight Publishing 215.12
Underwriters Lab's, Inc. 65.00
Uni-Box Incorporated 52 456.75
Unimusica, Inc. 20.60
Unison Music Publishing, Inc. 419.38
United Parcel Service 84 9,299.50
United Parcel Services 174.14
<PAGE>
United Waste 700.00
Vector Music Corp. 97.11
Volta Music Corp. 0.30
W & R Songs 1.31
W & R Songs 8.22
WB Music Corp obo Damila USIC 2.11
WB Music Corp. 12.32
WEB IV Music, Inc. 12.77
WRS Motion Picture & Video Lab 3,556.91
Walmart Stores, Inc. 90 44,118.23
Walmart Stores, Inc. 22,932.58
Walt Disney Music 1,248.84
Walter Kent Music Co. 18 2,000.00
Walter Orange Music 2.44
Warner Chappell Music 71 85,855.93
Warren Gorham & Lamont 299.19
Webster Music Corp. 21 2,000.00
Wednesday Music 12 unknown
Welbeck Music Corp. 0.78
Whole Lotta Shakin' Music 25.84
William Joel Music 9,565.19
Winston Organ Service, Inc. 60 50.00
Wonderland Music 856.52
Word Music 61.28
Work Songs Ltd. 99.57
Yee Haw Music 106.56
Yellow Elephant Music 212.58
Yellow Freight System, Inc. 56 2,123.75
Yum Howdy Music 16.95
Zachary Creek 5.79
Zavion Enterprises 358.58
Zena Music 2.63
Zephyrhills 35 280.42
Zevon Music 279.59
<PAGE>
EXHIBIT "D"
LIQUIDATION ANALYSIS
ASSETS: LIQUIDATION VALUE:
Cash $ 13,858.00
Security Deposits $ 4,968.00
Acct. Receivable $ 125,000.00
Patents, Copywrights, Song Library $ 45,000.00
Office Equipment $ 11,140.00
Inventory $ 155,000.00
Warehouse Equipment $ 9,240.00
TOTAL $ 364,206.00
LIABILITIES:
Wage Claims $ 10,769.80
Priority Claims $ 6,708.40
Secured Claims $ 131,657.00
TOTAL PRIORITY AND SECURED $ 149,135.20
--------------
Chaper 7 Administrative Fees $ 50,000.00
$ 199,135.20
--------------
AVAILABLE FOR UNSECURED CLAIMS $ 165,070.60
==============
This would yield an approximate dividend of 3% to unsecured creditors.
ASSUMPTIONS
The liquidation valuation is based on management's business estimate of
current fair market value in a Chapter 7 liquidation.
<PAGE>
<TABLE>
<CAPTION>
The Singing Machine Company, Inc.
Operating Statement Projections
For the Years Ended 3/31/98-3/31/02
Year End Year End Year End Year End Year End
3/31/98 3/31/99 3/31/00 3/31/01 3/31/02
<S> <C> <C> <C> <C> <C>
Gross Sales - Domestic 3,741,896 4,100,000 4,920,000 5,904,000 7,084,000
Gross Sales - FOB Hong Kong 3,731,900 6,000,000 7,200,000 8,640,000 10,368,000
--------- ---------- ---------- ---------- ----------
Total 7,473,796 10,100,000 12,120,000 14,544,000 17,452,000
Returns 1,369,000 1,000,000 1,200,000 1,454,000 1,745,000
--------- ---------- ---------- ---------- ----------
Net Sales 6,104,796 9,100,000 10,920,000 13,090,000 15,707,000
Gross Profit - Domestic 1,095,920 1,318,400 1,574,000 1,889,280 2,266,880
Gross Profit - FOB Hong Kong 545,361 1,026,000 1,512,000 1,814,400 2,177,280
GP on Returns (269,693) (194,000) (304,800) (370,188) (444,277)
--------- ---------- ---------- ---------- ----------
Total 1,371,588 2,150,400 2,781,200 3,333,492 3,999,883
OPERATING EXPENSES
US Expenses 1,246,850 1,100,000 1,200,000 1,300,000 1,400,000
HK Expenses 51,000 67,000 80,000 104,000 144,000
Commissions 80,218 122,000 163,000 196,000 235,000
Depreciation - US 219,347 189,000 143,000 84,000 62,000
Depreciation - HK 106,124 1,697 1,697 1,697 1,697
--------- ---------- ---------- ---------- ----------
Total Expenses 1,703,539 1,479,697 1,587,697 1,685,697 1,842,697
Net Income (331,951) 670,703 1,193,503 1,647,795 2,157,186
</TABLE>
COMPOSITE
EXHIBIT "E"
<PAGE>
<TABLE>
<CAPTION>
THE SINGING MACHINE COMPANY, INC.
EXPENSES - US OFFICE
1997
ACCOUNT APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER
- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries 45521 37613 37452 36428 56850 38036 38036 38036 38036
P/R Taxes 3927 2390 7258 2021 3147 2100 2100 1000 1900
Rent Copans/Pompano 10924 17052 17052 4968 4968 4968 4968 4060 4968
Utilities 553 595 569 620 359 450 450 450 450
Rent - Ft. Laud.
Whse. 1657 1616 1600 1600 1600 0
Rent - showroom 350 350 350 350 350 350 350 350 350
Rent - ASR 630 630 630 630 640 630 630 630 630
Telephone 2001 2137 1466 1997 2023 2200 2200 2200 2200
Copier Rental 365 391 365 365 541 370 370 370 370
Fork Lift Rental 274 262 262 726 262 270 270 270 270
Temp Payroll 2598 7545 7114 5309 6567 4800 2400 1200 400
Prof. Fees -
Accounting 17843 0 6000 6000 6000 8000
Prof. Fees - Legal 17500 25414 2765 1405 914 20000 4000 4000 5000
Insurance - Medical 1983 2015 1983 1983 1983 1983 1983 1983 2220
Insurance- General 4370 1488 5026 6015 8039 12645 5469
Stock Fees 540 684 562 548 548 600 600 600 600
EDI Expense 550 550 550 550 550
Packing Supplies 315 515 237 208 1514 2500 2500 2500 500
Office Supplies 550 1280 1546 744 1192 2000 2000 2000 2000
Repair/Warranty
Expense 6382 6514 6125 5560 3251 2000 2000 2000 2000
Packaging Material 3111 3841 3135
Travel 710 5205 4306 5125 2512 1100 8350 900 500
Postage 640 400 857 49 952 500 500 500 500
US Trustee 1500 0 0 3750 0
Freight & Delivery 4673 1273 1760 1594 3841 5000 5000 5000 2000
Misc. 1872 2828 3942 3511 550 3000 3000 3000 3000
Internet 131 255 178 214 1100 1100 1100 1100
Moving Expense 7720
Computer Maint. 573 482 585 3104 3821 750 500 500 500
TOTAL 109110 140724 98394 91337 104186 110872 105246 97252 83513
</TABLE>
1998
ACCOUNT JANUARY FEBRUARY MARCH TOTAL
- -------------
Salaries 57054 38036 57054 518152
P/R Taxes 4578 3632 4500 3454
Rent Copans/Pompano 4960 4960 4968 96940
Utilities 450 450 450 5846
Rent - Ft. Laud.
Whse. 8073
Rent - showroom 350 350 350 4200
Rent - ASR 630 630 630 7570
Telephone 2200 2200 2200 25134
Copier Rental 370 370 370 4617
Fork Lift Rental 270 270 270 3616
Temp Payroll 0 38013
Prof. Fees -
Accounting 8000 57013
Prof. Fees - Legal 10000 5000 5000 100998
Insurance - Medical 2220 2220 2220 24776
Insurance- General 8430 6015 5404 62990
Stock Fees 600 600 600 7082
EDI Expense 550 550 550 4400
Packing Supplies 1500 1500 1500 15290
Office Supplies 2000 2000 2000 10312
Repair/Warranty
Expense 34032
Packaging Material
Travel 12400 6650 3400 51238
Postage 500 500 500 6406
US Trustee 3750 9000
Freight & Delivery 1000 2000 2000 35141
Misc. 3000 3000 3000 33703
Internet 600 600 600 6978
Moving Expense 7720
Computer Maint. 500 500 500 12315
TOTAL 126029 82041 98146 1246850
EXHIBIT "E"
EXHIBIT 10(Z)
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.
/
- ---------------------------------
DEBTOR'S AMENDED PLAN OF REORGANIZATION
FURR AND COHEN, P.A.
Attorneys for Debtor
By: Robert C. Furr, Esq. and
Lisa J. Chaiklin Aflalo, Esq.
1499 West Palmetto Park Road
Suite 412
Boca Raton, FL 33486
(561) 395-0500
<PAGE>
TABLE OF CONTENTS
PAGE
----
(a) Definitions - Article I 1
(b) Classification of Claims and Interests -
Article II 11
(c) Treatment of Claims and Interests under the
Plan - Article III 11
(d) Impairment - Article IV 15
(e) Means of Execution and Security for
Installment Payments - Article V 15
(f) Executory Contracts - Article VI 16
(g) Effect of Confirmation - Article VII 17
(h) Cram Down, Modification, Substantive
Consolidation - Article VIII 17
(i) Retention of Jurisdiction - Article IX 18
(j) Officers and Directors - Article X 19
(k) Miscellaneous - Article XI 20
<PAGE>
DEBTOR'S AMENDED PLAN OF REORGANIZATION
ARTICLE I
DEFINITIONS
As used in this Plan, the following terms shall have the respective
meanings set forth below, and such meanings shall be equally applicable to the
singular and plural forms of the terms defined unless the context requires
otherwise. Those terms no specifically defined in this Plan shall have the
meanings ascribed to them by the code.
ACTIONS
All actions that a trustee or debtor-in-possession is empowered to
bring pursuant to 11 U.S.C. Sections 542-553 of the Code, and any other cause of
action, lawsuit, adversary proceeding, contested matter, claim objection, or
right of the Debtor or the Estate against any Person.
ADMINISTRATIVE CLAIM
A Claim for payment of an administrative expense under Section 503 of
the Code that is entitled to priority under Section 507(a)(1) of the Code.
Administrative Claims include claims for the provision of goods or services that
are incurred by the Debtor in the ordinary course of business.
ADMINISTRATIVE CLAIMANT
The holder of an Administrative Claim.
ALLOWED AMOUNT
With Respect to a Claim, (a) the amount of a Claim that was listed in
the Debtor's Schedules (as originally filed in the Case) as not disputed,
contingent or unliquidated, if the holder of such Claim has not filed a proof of
claim with the Court within the applicable period of limitation fixed by the
Court pursuant to Rule 3003(c)(3) of the Rules, or (b) if a holder of a Claim
has filed a proof of claim with the Court within the applicable period of
limitation fixed by the Court pursuant to Rule 3003(c)(3)
<PAGE>
of the Rules: (I) the amount stated in such proof of claim or in the Schedules
if no objection to such proof of claim or amount listed in the Schedules has
been interposed within the applicable period of limitation fixed by the Code or
Rules, or as otherwise fixed by the Court, or (ii) such amount as shall be fixed
by an order of the Court which has become a Final Order, if an objection has
been interposed within the applicable period of limitation fixed by the Code,
the Rules, or the Court, or (c) with respect to a Fee Request, such amount as
shall be fixed by an order of the Court which has become a Final Order. In no
event shall the Allowed Amount of any Priority Claim or Unsecured Claim include
interest accrued on such Claim after the Filing Date.
ALLOWED CLAIM
Any Claim which is not a Disputed Claim for which an Allowed Amount has
been finally determined in such Allowed Amount. The Allowed Amount of each
Secured Claim shall include, pursuant to Section 506(b) of the Code, interest on
such Claim, and any reasonable fees, costs, or charges provided for under the
agreement(s) under which such Claim arose incurred as a result of any breach or
default, act or omission occurring through the Effective Date or by reason of
the Plan, Confirmation or Substantial Consummation.
ALLOWED INTEREST
Any Interest which has not been timely disputed, or if timely disputed,
which has been allowed by order of the Court which has become a Final Order.
ARTICLE
One of the numbered Articles of the Plan.
ASSETS
All of the right, title and interest of the Debtors in and to property
of any type or nature including the patents, licenses, technologies and the
Actions and all other Property of the Estate.
2
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ASSUMED CONTRACT
An Executory Contract (as modified or amended pursuant to the Plan,
prior order of the Court or by agreement of the parties) that is assigned to the
Reorganized Debtor pursuant to the Plan.
BUSINESS DAY
A day other than a Saturday, a Sunday or a day on which commercial
banks in South Florida are authorized or required to close.
CASE
This Chapter 11 Case No. 97-22199-BKC-RBR United States Bankruptcy
Court for the Southern District of Florida.
CLAIM
(a) A right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed or contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured, or unsecured; (b) a right to an
equitable remedy for breach of performance if such breach gives rise to a right
to payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured,
or unsecured; and (c) without limiting the generality of the foregoing, all
Administrative Claims, Priority Claims, Secured Claims and unsecured Claims.
CLASS
A group of Claims or Interests classified together pursuant to the
Plan.
CLASS 1
The unsecured priority claims of employees of the Debtor as described,
classified and treated in Article 3.5 of the Plan.
3
<PAGE>
CLASS 2
The Secured Claim of Bankers Capital as described, classified and
treated in Article 3.6 of the Plan.
CLASS 3
The Secured Claim of Toyota Motor Credit Corporation as described,
classified and treated in Article 3.7 of the Plan.
CLASS 4
The Claims of Convenience Claims as described, classified and treated
in Article 3.8 of the Plan.
CLASS 5
The Claims of general unsecured creditors as described, classified and
treated in Article 3.9 of the Plan.
CLASS 6
The equity interests of the holders of common shares of the Debtor as
described, classified and treated in Article 3.10 of the Plan.
CODE
The Bankruptcy Code, 11 U.S.C. Section 101 ET SEQ.
COMMON STOCK
The Common Stock, par value $0.01 per share, of the Debtor to be issued
to certain Claim holders and Interest Holders pursuant to the Plan.
CONFIRMATION
The entry by the Court of the Confirmation Order.
4
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CONFIRMATION DATE
The date on which the Clerk of the Court enters the Confirmation Order
on the docket.
CONFIRMATION HEARING
A hearing held by the Court on confirmation of the Plan pursuant to
Section 1128 of the Code.
CONFIRMATION ORDER
The order entered by the Court confirming the Plan, which shall contain
such provisions as the Proponent desires and shall otherwise be in form and
substance satisfactory to the Proponent.
CONVENIENCE CLAIMS
The Claims by those general unsecured creditors which are equal to or
less than $300.00 in amount.
COURT
The United States Bankruptcy Court, Southern District of Florida
including any Bankruptcy Judge thereof and any court having competent
jurisdiction to hear appeals from the Bankruptcy Judges thereof.
CREDITOR
Any Person holding a Claim or Interest, including Administrative
Claimants and Claims of the kind specified in Sections 502(b), 502(h) and 502(i)
of the Code, and such Person's heirs, successors, assigns, executors and
personal representatives.
DEBTOR or DEBTOR IN POSSESSION
The Singing Machine Company, Inc. Any reference in the Plan to the
"Debtor" shall also include the Debtor in its capacity as debtor in possession
in the Case, and vice versa.
5
<PAGE>
DISCLOSURE STATEMENT
The Disclosure Statement filed by the Debtor in connection with the
Plan and approved by the Court for submission to Creditors as the same may be
amended from time to time.
DISPUTED AMOUNT
With respect to a particular Disputed Claim, that amount which is equal
to the difference, if any, between the Face Amount of such Claim and the amount,
if any, of such Claim which the party objecting thereto concedes.
DISPUTED CLAIM
Any Claim for which an Allowed Amount has not yet been determined and
with respect to which an objection has been interposed on or prior to the
Confirmation Date or such other date as may be fixed by the Court.
DISPUTED INTEREST
Any Interest which has not yet been allowed and with respect to which
an objection has been interposed on or prior to the Confirmation Date or such
other date fixed by the Court.
EFFECTIVE DATE
The tenth day after the Confirmation Order becomes final, or such other
date as this Court shall order.
ESTATE
The estate created in the Case pursuant to Section 541 of the Code.
EXECUTORY CONTRACT
A contract or unexpired lease to which Debtor is a party and that is
executory within the meaning of Section 365 of the Code.
6
<PAGE>
FACE AMOUNT
With respect to a particular Claim, (a) if the holder of such Claim has
not filed a proof of claim with the Court within the applicable period of
limitation fixed by the Court pursuant to Rule 3003(c)(3) of the Rules, the
amount of such Claim that was listed in the Schedules (as originally filed in
the Case) as not disputed, contingent or unliquidated; or (b) if the holder of
such Claim has filed a proof of claim with the Court within the applicable
period of limitation fixed by the Court pursuant to Rule 3003(c)(3) of the
Rules, the amount stated in such proof of claim, or (c) with respect to a Fee
Request, the net amount to which the applicant would be entitled if its
application were to be granted in full.
FEE REQUEST
An application or request for payment by the Estate of fees,
compensation for services rendered or reimbursement of expenses, pursuant to
Rule 2016 of the Rules or other applicable provision of the Code or the Rules.
FILING DATE
April 11, 1997, the date the Debtor filed its Chapter 11 petition with
the Court.
FINAL ORDER
An order or judgment of the Court as entered on the docket that has not
been reversed, stayed, modified or amended, and respecting which the time to
appeal, petition for certiorari or seek reargument, review or rehearing has
expired and as to which no appeal, reargument, petition for certiorari, review
or rehearing is pending or as to which any right to appeal, reargue, petition
for certiorari or seek review or rehearing has been waived in writing in a
manner satisfactory to the Proponents, or, if any appeal, reargument, petition
for certiorari, review or rehearing thereof as been denied, the time to take any
further appeal or to seek certiorari or further rehearing, review of
7
<PAGE>
reargument has expired.
If any provision of the Plan requires the entry of a Final Order as a
condition to the occurrence or performance of an act, the Debtor may waive such
requirement.
INTEREST HOLDERS
Equity interest of the holders of common stock of the Debtor.
LIEN
A charge against or interest in any item of Property of the Estate to
secure payment of a debt or performance of an obligation.
PERSON
Any individual, sole proprietorship, partnership (general or limited),
joint venture, trust, unincorporated organization, association, corporation,
institution, entity or government (whether federal, state, county, city,
municipal or otherwise, including, without limitation, any instrumentality,
division, agency, body, political subdivision or department thereof).
PLAN
This Plan of Reorganization in the present form or as it may be
modified, amended or supplemented from time to time.
PRIORITY CLAIM
A Claim (other than an Administrative Claim) that is entitled to
priority under Section 507 of the Code.
PRIORITY TAX CLAIM
A Claim (other than an Administrative Claim) that is entitled to
priority under Section 507(a)(8) of the Code.
PRO RATA
8
<PAGE>
Proportionately, so that the ratio of the amount of consideration
distributed on account of a particular Allowed Claim to the Allowed Amount of
such Claim is the same as the ratio of the amount of consideration distributed
on account of all Allowed Claims of the Class in which the particular Claim is
included to the amount of all Allowed Claims of that Class. Whenever a Disputed
Claim has not been finally resolved, an appropriate reserve for payment of such
Disputed Claim shall be established so that there will be sufficient monies
available to make a Pro Rata distribution to the holder of such Disputed Claim
upon final resolution of the dispute.
PROPERTY OF THE ESTATE
The property defined in Section 541 of the Code and any other property
right or interest of the Debtor.
PROPONENT
The Debtor
REJECTED CONTRACT
An Executory Contract that is rejected at any time during the Case or
pursuant to Article VI of the Plan.
REJECTION CLAIM
A Claim arising under Section 502(g) of the Code in its Allowed Amount.
RULES
The Federal Rules of Bankruptcy Procedure, the Federal Rules of Civil
Procedure and/or the Local Rules of the Bankruptcy Court.
SCHEDULES
The schedules of assets and liabilities originally filed by the Debtor
with the Court and as the same may be amended from time to time.
9
<PAGE>
SECURED CLAIM
A Claim secured by a lien on property in which the Estate has an
interest or that is subject to set-off under Section 553 of the Code to the
extent of the value of the interest attributable to such Claim in the Estate's
interest in such property or to the extent of the amount subject to set-off.
SECURED CREDITOR
The holder of a Secured Claim.
SECURED TAX CLAIMS
Ad valorem taxes assessed against the personal property owned by the
Debtor.
SUBSTANTIAL CONSUMMATION
Following the occurrence of Confirmation, the date that the first
dividend is distributed to creditors.
UNSECURED CLAIM
A Claim other than a Secured Claim, a Priority Claim or an
Administrative Claim.
UNSECURED CREDITOR
The holder of a unsecured Claim
WAGE CLAIMS
The claims of employees for wages, salaries or commissions earned
within ninety (90) days before the date of the filing of the Petition to the
extent of $4,000.00 as provided in Section 507(a)(3) of the Code.
RULES OF CONSTRUCTION AND INTERPRETATION
The following rules of construction shall be applicable for all
purposes of the Plan unless the context clearly requires otherwise:
The terms "include," "including" and similar terms shall be construed
as if followed
10
<PAGE>
by the phrase "without being limited to."
1. Words of masculine, feminine or neuter gender shall mean and include
the correlative words of the other genders, and words importing the singular
number shall mean and include the plural number, and vice versa.
2. All article, section and exhibit or appendix captions are used for
convenience and reference only and in no way define, limit or describe the scope
or intent of, on in any way affect, any such article, section, exhibit or
appendix.
ARTICLE II
CLASSIFICATION OF CLAIMS AND INTERESTS
2.1 An allowed Claim is part of a particular class only to the
extent that the Allowed Claim qualifies within the definition of that Class and,
is in a different Class to the extent that the remainder of the Claim qualifies
within the description of a different Class.
ARTICLE III
TREATMENT OF CLAIMS AND INTERESTS UNDER THE PLAN
3.1 GENERAL. All payments under this Plan shall commence ten days
after confirmation.
3.2 ADMINISTRATIVE CLAIMS. All Allowed Administrative Claims shall
be paid:
(a) in full on the Effective Date or, if such Claim is objected to,
the Date of a Final Order allowing any such Administrative Claim;
OR
(b) upon such other terms as may be agreed to between the Debtor and
each such Administrative Claimant.
Administrative costs are estimated to be approximately $100,000.00
above what has
11
<PAGE>
been paid to Furr and Cohen as a retainer.
All case related payments for services, costs, and expenses will be
subject to Court approval. All payments shall be from cash on hand.
3.3 All fees due under 11 U.S.C. ss. 1129(a)(12) shall be paid as
required by 28 U.S.C. ss. 1930.
3.4 TAX CLAIMS. - Allowed Tax Claims, estimated by management to
total $7,500.00, specified in 11 U.S.C. Section 507(a)(8) shall be paid in full
at confirmation.
3.5 CLASS 1 -- WAGE CLAIMS
DESCRIPTION: Class 1 consists of the unsecured priority claims of
employees of the Debtor. The Debtor estimates the aggregate amount of Class 1
Claims to be $10,000.00.
TREATMENT: Class 1 Claimants will be paid up to a maximum of $4,000.00
per claimant in accordance with the provisions of Sections 507 of the Code on
the Effective Date.
IMPAIRMENT. Class 1 Claims are unimpaired.
3.6 CLASS 2 -- BANKERS CAPITAL.
DESCRIPTION: Class 2 consists of the secured claim of Bankers Capital
in the amount of $124,000.00, secured by a lien on certain of the Debtor's
Assets, as described in the factoring agreement and as approved by prior Court
Orders.
TREATMENT: The Class 2 claim of Bankers Capital shall be paid according
to the terms of its contract with the Debtor, which contract is current.
IMPAIRMENT. Class 2 claim is unimpaired.
3.7 CLASS 3 -- TOYOTA MOTOR CREDIT CORPORATION
DESCRIPTION: Class 3 consists of the Secured Claim of Toyota Motor
Credit Corporation, which is secured by a Lien on a forklift.
12
<PAGE>
TREATMENT: The Class 3 claim shall be paid according to its contract,
which is current.
IMPAIRMENT. Class 3 Claim is unimpaired.
3.8 CLASS 4 -- ADMINISTRATIVE CONVENIENCE CLAIMS
DESCRIPTION: Class 4 consists of Convenience Claims.
TREATMENT: Class 4 claims will receive a cash payment of ten percent
(10%) of the amount of their Allowed Claim on the Effective Date.
IMPAIRMENT: Class 4 is impaired.
3.9 CLASS 5 -- GENERAL UNSECURED CLAIMS
DESCRIPTION: Class 5 consists of the claims of general unsecured
creditors.
TREATMENT: Unsecured creditors will be given a choice at confirmation
to elect the following:
OPTION A: a cash payment of ten percent (10%) of the amount of their
Allowed Claim, payable five percent (5%) on the Effective Date and five percent
(5%) six (6) months thereafter;
or
OPTION B: issuance on the Effective Date of shares of New Common
Stock of the reorganized Company on the following basis: for each Two Dollars
($2.00) of an Allowed Claim, each Claimant shall receive one share of New Common
Stock.
Creditors will elect Option A or Option B on the ballot. In the
event a creditor fails to elect a treatment on the ballot or fails to vote, such
creditor will be deemed to have elected Option B.
IMPAIRMENT. Class 5 is impaired.
3.10 CLASS 6 -- INTEREST HOLDERS
DESCRIPTION: Class 6 consists of the equity interests of the holders of
the Old Common Stock
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<PAGE>
of the Debtor.
TREATMENT: Interest Holders will have their interest diluted by ninety
percent (90%) at confirmation, so that for each share of existing pre-petition
common stock owned, they will receive one-tenth (1/10) of a share of New Common
Stock in the reorganized Company (1 x 10 reverse split).
IMPAIRMENT. Class 6 is impaired.
AGREEMENT TO LESS FAVORABLE TREATMENT
Any Creditor of Interest Holder may agree to less favorable treatment
than is provided for such Creditor in the Plan. The obligations of the Debtor
under this Plan may be prepaid in full or in part without penalty.
3.11 PAYMENT OF U.S. TRUSTEE'S FEES: Notwithstanding any other
provisions of the Plan to the contrary, the Debtor shall pay the United States
Trustee the appropriate sum required pursuant to 28 U.S.C ss. 1930(a)(6), within
ten (10) days of the entry of the order confirming this Plan, for
pre-confirmation periods and simultaneously provide to the United States Trustee
an appropriate affidavit indicating the cash disbursements for the relevant
period. The Debtor, as a reorganized Debtor, shall further pay the United States
Trustee the appropriate sum required pursuant to 28 U.S.C. ss. 1930(a)(6), until
the earlier of the closing of this case by the issuance of a Final Decree by the
Bankruptcy Court, or upon the entry of an Order by the Bankruptcy court
dismissing this case or converting this case to another Chapter under the United
States Bankruptcy Code, and the reorganized Debtor shall provide to the United
States Trustee upon the payment of each post-confirmation payment an appropriate
affidavit indicating all the cash disbursements from the relevant period.
3.12 BLANK BALLOTS Any Ballot not filed in accordance with the
filing instructions on the Ballot pertaining to this Plan shall not be counted
for voting purposes.
14
<PAGE>
ARTICLE IV
IMPAIRMENT
4.1 Claims in Classes 4, 5 and 6 are impaired under this Plan.
Impaired classes will be treated as fully set forth in Article III above.
ARTICLE V
MEANS OF EXECUTION AND SECURITY FOR PAYMENTS
5.1 The distribution of cash required under the Plan, shall be made
from available funds of the Debtor or as may be available for distribution on or
before the Effective Date or, as otherwise agreed to by Debtor and the holders
of Allowed Priority Claims and Allowed Unsecured Claims.
5.2 The Distribution of cash required under Article III of the Plan
shall, as set forth in such Article, be made from the continuing operations of
Debtor prior to the Effective Date or by the reorganized Debtor following the
Effective Date.
5.3 [Omitted]
5.4 Upon the entry of the Confirmation Order, the reorganized Debtor
shall be vested with all of its property free and clear of all claims and
interests of creditors, except as otherwise provided for herein.
5.5 After the entry of an Order of Confirmation, the reorganized
Debtor shall continue its business and manage its affairs without further
supervision of the Court.
5.6 Furr and Cohen shall be the initial disbursing agent and shall
be responsible for making the payments under the Plan due on the Effective Date.
All payments thereafter will be made by the Debtor. The payments shall be as
provided in Article III.
15
<PAGE>
5.7 UNCLAIMED DISTRIBUTIONS. Any checks mailed by the disbursing
agent for the initial payment to a particular creditor which remains unclaimed
ninety (90) days after mailing, shall constitute "unclaimed funds" which shall
become the Debtor's property. A distribution of funds is unclaimed, if, without
limitation, the holder of a Claim entitled thereto does not cash a check or
returns a check or if the check mailed to the holder at the address set forth in
the Debtor's Schedule of Liabilities or set forth in a proof of claim filed by
such holder is returned by the United States Postal Service as undeliverable.
Any funds unclaimed shall be forfeited by the holder otherwise entitled thereto,
and all rights, title and interest therein shall thereupon vest in the
Reorganized Debtor.
ARTICLE VI
EXECUTORY CONTRACTS
6.1 Any and all Executory Contracts and unexpired leases of the
Debtor not expressly assumed herein, assumed prior to the Confirmation Date, or
not at the Confirmation Date the subject of pending application to assume, shall
be deemed to be rejected.
6.2 Debtor has present intentions to assume certain leases of office
equipment and its music licensing contracts. The debtor intends to file motions
to assume same prior to the Confirmation date.
6.3 Any claims for rejected contracts shall be paid in Class 5 upon
determination by agreement or by the Court. Any proof of claim for damages
arising from the rejection must be filed with ;the Court within thirty (30) days
after the entry of an Order allowing the rejection of the contract.
16
<PAGE>
ARTICLE VII
EFFECT OF CONFIRMATION
7.1 DISCHARGE - Except as otherwise provided in this Plan,
Confirmation of the Plan and full compliance and performance with the Plan,
shall be deemed to have discharged the Debtor from any Claim that arose on or
prior to the confirmation Date, and any Claim of a kind specified in Section
502(g), (h) or (i) of the Code, whether or not:
(a) a Proof of the Claim is filed or deemed to be filed under
Sections 501 and 1111(a) of the Code;
(b) such Claim is allowed under Section 502 of the Code; or
(c) the holder of such Claim has accepted the Plan.
The payments to be made by Debtor pursuant to this Plan shall be in
full settlement and satisfaction of all Claims against Debtor.
ARTICLE VIII
CRAM DOWN, MODIFICATION, SUBSTANTIVE CONSOLIDATION
UTILIZATION OF CRAM DOWN
If all of the applicable provisions of 11 U.S.C. ss. 1129(a) other
than paragraph (8), are found to have been met with respect to the Plan, Debtor
may seek confirmation pursuant to 11 U.S.C. ss. 1129(b) of the Code. For the
purposes of seeking confirmation under the Cram-down provisions of the Code,
should that alternative means of confirmation prove to be necessary, Debtor
reserves the right to modify or vary the treatment of the claims of the
rejecting Classes so as to comply with ss. 1129(6) of the Code.
17
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MODIFICATION OF PLAN
PRIOR TO CONFIRMATION At any time prior to the Confirmation Date,
the Proponent may modify the Plan, but may not modify the Plan so that the Plan
as modified fails to meet the requirements of Sections 1122 and 1123 of the
Code. If the Proponent files a modification with the Court, the Plan as modified
shall become the Plan.
AFTER CONFIRMATION. At any time after the Confirmation Date, and
before Substantial Consummation, the Proponent may modify the Plan but may not
modify the Plan so that the Plan as modified fails to meet the requirements of
Sections 1122 and 1123 of the Code. The Plan as modified under this Section
becomes the Plan only if the Court, after notice and a hearing, confirms such
Plan, as modified, under Section 1129 of the Code.
ARTICLE IX
RETENTION OF JURISDICTION
9.1 From and after entry of the Confirmation order, the Bankruptcy
Court shall retain such jurisdiction as is legally permissible over the
reorganization Case for the following purposes:
(a) to hear and determine any and all objections to the allowance on
any Claim or any controversy as to the classification of Claims;
(b) to hear and determine any and all applications for compensation
and reimbursement of expenses to professionals as well as to hear and determine
claims entitled to priority under Section 507(a)(1) of Title 11;
(c) to enable the Debtor to prosecute any and all proceedings which
may be brought to set aside liens or encumbrances and to recover any transfers,
assets, properties or damages to which the Debtor may be entitled under
applicable provision of the Code or any other Federal, State or local
18
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laws; including causes of action, controversies, disputes, and conflicts between
the Debtor and any other party, including but not limited to any causes of
action for objections to claims, preferences or fraudulent transfers and
obligations or equitable subordination; and to enter any Order assuring that
good, sufficient and marketable legal title is conveyed to the purchaser of the
Debtor's property.
(d) to consider any necessary valuation issues under Section 506 of
the Code, and any proceeding to determine the amount, validity and priority of
liens, in connection with the Debtor's property.
(e) to determine the rights of any party in respect of the
assumption or rejection of any executory contracts or unexpired leases.
(f) to correct any defect, cure any omission, or reconcile any
inconsistency in the Plan or Order of Confirmation, as may be necessary to carry
out the purposes and intent of this Plan.
(g) to modify this Plan after Confirmation, pursuant to the Code.
(h) to enforce and interpret the terms and conditions of the Plan.
(i) to enter Orders to enforce the title, rights and power of the
Estate as the Court may deem necessary.
(j) to enter Orders concluding and closing this case.
ARTICLE X
OFFICERS AND DIRECTORS
The following individuals shall hold the position indicated as an
officer and/or director of the Reorganized Debtor, at the compensation stated,
subject to change by action of the Board of Directors. They are insiders.
President, CEO and Director Edward Steele $167,500.00
Vice President And Director Edward Pearson $75,000.00
19
<PAGE>
Secretary & Treasurer John Klecha $ 75,000.00
Director Paul Wu $ NONE
ARTICLE XI
MISCELLANEOUS
11.1 HEADINGS. Headings are utilized in this Plan for the
convenience of reference only, and shall not constitute a part of this Plan for
any other purpose.
11.2 DEFECTS, OMISSIONS AND AMENDMENTS. This Plan may be altered,
amended or modified by Debtor before or after the Confirmation Date as provided
in Section 1127 of the Code.
11.3 GOVERNING LAW. Except to the extent that the Code is
applicable, all rights and obligations arising under this Plan shall be governed
by, and construed and enforced in accordance with, the laws of the State of
Florida.
11.4 SEVERABILITY. Should any provision in this Plan be determined
to be unenforceable, such determination shall in no way limit or affect the
enforceability and operative effect of any or all other provisions of this plan.
11.5 REGULATORY APPROVAL. No regulatory approval is necessary for
the confirmation of this Plan.
11.6 SAVINGS CLAUSE. Any minor defect or inconsistency in the Plan
may be corrected or amended by the Confirmation Order.
11.7 NO ADMISSIONS. The preparation and filing of this Plan and the
Disclosure Statement were undertaken, in part, as a means of settling disputes
among various parties in interest in the Case and is offered by the Proponent,
in part, as an offer in compromise by the Proponent in the Plan to other parties
in interest in the Case. No statement or omission by Proponent in the Plan or
the
20
<PAGE>
Disclosure Statement, including any statement concerning the estimated Allowed
Amount of any Claim, shall preclude or estop the Proponent from objecting to any
Claim, and no such statement or omission shall constitute, or be deemed to
constitute, any type of admission, waiver or estoppel on the part of the
Proponent, and nothing stated or unstated by the Proponent shall be admissible
against the Proponent except in the hearings on the adequacy of the Disclosure
Statement and the confirmation of the Plan.
DATED: December 17, 1997
The Singing Machine Company, Inc.
By: /s/ JOHN KLECHA
---------------
John Klecha, Secy./Treas.
I HEREBY CERTIFY that I am admitted to the Bar of the United States
District Court for the Southern District of Florida and I am in compliance with
the additional qualifications to practice in this Court set forth in Local Rule
910(A).
FURR AND COHEN, P.A.
Attorney for Debtor
1499 W. Palmetto Park Road
Suite 412
Boca Raton, FL 33486
561-395-0500
By: /s/ LISA J. CHAIKLIN AFLALO
---------------------------
ROBERT C. FURR, ESQ.
Florida Bar No. 210854
LISA J. CHAIKLIN AFLALO, ESQ.
Florida Bar No. 873179
21
EXHIBIT 10(aa)
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF FLORIDA
IN RE: CASE NO. 97-22199-BKC-RBR
CHAPTER 11
THE SINGING MACHINE COMPANY, INC.,
Tax ID# 95-3795478
DEBTOR.
- -------------------------------/
AGREEMENT REGARDING TREATMENT OF HARRY FOX AGENCY
IN DEBTOR'S PLAN OF REORGANIZATION
THIS AGREEMENT regarding Plan treatment ("Agreement") is made as of the
16th day of December, 1997, by and between The Singing Machine Company, Inc., a
Debtor-in-Possession ("SMC") and the Harry Fox Agency ("Harry Fox"), a DELAWARE
corporation.
WITNESSETH:
WHEREAS, SMC filed a Chapter 11 bankruptcy proceeding on April 11, 1997
("Petition Date"), and was assigned Case No. 97-22199-BKC-RBR (the "Bankruptcy
Case");
WHEREAS, SMC and Harry Fox have agreed that SMC is liable to Harry Fox
for royalties due on the Cut-out Inventory (as hereinafter defined) in the
amount of $414,598.16;
WHEREAS, SMC and Harry Fox have agreed that the royalties due on the
Cut-out Inventory shall be treated as a pre-petition debt owed by SMC to Harry
Fox; and
WHEREAS, Harry Fox elects to accept one (1) share of stock in SMC for
each $2.00 of Pre-Petition Debt (as hereinafter defined), and
NOW, THEREFORE, in consideration of the premises and the mutual
covenants of the parties hereinafter expressed, it is hereby agreed as follows:
<PAGE>
ARTICLE I - RECITALS, EXHIBITS, SCHEDULES
1.1 The foregoing recitals are true and correct and, together with the
schedules and exhibits referred to hereafter, are hereby incorporated into this
Agreement by this reference. Capitalized words used herein and not otherwise
defined in the text hereof shall have the meaning set forth in the Debtor's Plan
of Reorganization and Disclosure Statement, as amended.
ARTICLE II - ROYALTIES DUE ON PRE-PETITION DEBT
2.1 The Cut-out Inventory are those music selections that are listed on
Schedule "A" hereto.
2.2 SMC and Harry Fox agree that the royalties owed for the Cut-out
Inventory (the "Cut-Out Royalties") shall be treated as pre-petition debt owed
by SMC to Harry Fox and shall be included as part of Harry Fox's general
unsecured claim in SMC's Bankruptcy Case. As of the Petition Date, the Cut-Out
Royalties due were $414,598.16.
2.3 In addition to the Cut-Out Royalties, SMC and Harry Fox agree that
SMC owed, as of the Petition Date, Harry Fox $406,750.00 for royalties other
than those owed for the Cut-Out Royalties (the "Pre-Petition Regular
Royalties").
2.4 Harry Fox shall amend its proof of claim filed in SMC's Bankruptcy
Case to reflect $821,348.16 in general unsecured debt, which is the sum of the
Cut-Out Royalties and the Pre-Petition Regular Royalties (collectively referred
to as the "Pre-Petition Debt").
2.5 Harry Fox agrees that the Pre-Petition Debt shall be treated as a
general unsecured claim in the Debtor's Plan of Reorganization and further
agrees to elect to accept the issuance of shares of common stock of the
reorganized Debtor on the following basis: for each $2.00 of the
2
<PAGE>
Pre-Petition debt, Harry Fox will receive one (1) share of common stock.
ARTICLE III - POST-PETITION ROYALTIES DUE
3.1 SMC recognizes that it has a continuing obligation to pay royalties
since the filing of its Bankruptcy Case. SMC has paid to Harry Fox all its
royalty obligations for the period commencing on the Petition Date through and
including June 30, 1997. All royalty payments due for the period commencing July
1, 1997 and thereafter, shall be paid into the Trust Account of Edwards and
Angell("Edwards & Angell") and shall be held in escrow until such time as
Court enters a final order on the Debtor's Plan of Reorganization;
3.2 Upon the Order confirming the Debtor's Plan of Reorganization
becoming final and non-appealable, the Debtor shall calculate post-petition
royalties due, excluding those royalties due on the Cut-Out Inventory (the
"Post-Petition Royalties") and direct Edward & Angell to release from escrow and
pay to Harry Fox an amount equal to the Post-Petition Royalties and turnover the
remainder of the funds in the Trust Account to SMC.
3.3 In the event that SMC's Chapter 11 Plan of Reorganization does not
get confirmed, the Bankruptcy Case is converted to Chapter 7 or this Agreement
is not approved by the Court, Edwards & Angell shall turnover to Harry Fox the
entire sum deposited into the Trust Account pursuant to Paragraph 3.1 hereof for
credit towards SMC's post-petition royalties due, including those royalties due
on the Cut-Out Inventory.
ARTICLE IV - MISCELLANEOUS
4.1 MODIFICATION. No changes of or modifications or additions to this
Agreement shall be valid unless the same shall be in writing and signed by the
parties hereto.
3
<PAGE>
4.2 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon
the parties hereto, their beneficiaries, heirs and administrators. No party may
assign or transfer its interests herein, or delegate its duties hereunder,
without the written consent of the other party.
4.3 NO WAIVER. No waiver of any provision of this Agreement shall be
effective, unless it is in writing and signed by the party against whom it is
asserted, and any such written waiver shall only be applicable to the specific
instance to which it relates and shall not be deemed to be a continuing or
future waiver.
4.4 GENDER AND USE OF SINGULAR AND PLURAL. All pronouns shall be deemed
to refer to the masculine, feminine, neuter, singular or plural, as the identity
of the party or parties or their personal representatives, successors and
assigns may require.
4.5 COUNTERPARTS. This Agreement and any amendments may be executed in
one or more counterparts, each of which shall be deemed an original and all of
which together will constitute one and the same instrument. The parties may
execute the Agreement by facsimilie transmitted signatures.
4.6 HEADINGS. The article and section headings contained in this
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of the Agreement.
4.7 GOVERNING LAW. This Agreement shall be interpreted and construed in
accordance with the laws of the State of Florida, without giving effect to its
choice of law or conflict of laws rule, and any proceeding arising between the
parties in any manner pertaining or related to this Agreement shall, to the
extent permitted by law, be held in Broward County, Florida.
4
<PAGE>
4.8 FURTHER ASSURANCES. The parties hereto will execute and deliver
such further instruments and do such further acts and things as may be
reasonably required to carry out the intent and purposes of this Agreement.
4.9 CONSTRUCTION. This Agreement shall not be construed more strictly
against one party than against the other, it being recognized that both SMC and
Harry Fox have contributed substantially to the preparation of this Agreement.
4.10 BANKRUPTCY COURT APPROVAL. This Agreement will be binding upon the
parties and conditioned upon the entry of an Order by the Bankruptcy Court
approving its terms.
4.11 EXECUTION AUTHORITY. SMC and Harry Fox expressly authorize
their respective attorneys to execute this Agreement on their behalf and have
consented to the terms and conditions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year set forth above.
FURR AND COHEN, P.A. EDWARDS AND ANGELL
Attorney for Debtor Attorneys for Harry Fox Agency
1499 W. Palmetto Park Road 250 Royal Palm Way
Suite 412 Suite 300
Boca Raton, FL 33486 Palm Beach, FL 33480
561-395-0500 (561) 833-7700
By /s/ LISA J. CHAIKLIN AFLALO By: /s/ KENNI F. JUDD
- ------------------------------ --------------------------
LISA J. CHAIKLIN AFLALO, ESQ. KENNI F. JUDD, ESQ.
Florida Bar No. 0873179 Florida Bar No. 602728
5
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<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 10,222
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<ALLOWANCES> (80,000)
<INVENTORY> 1,170,017
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