SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
COMMISSION FILE NO.: 0-24968
THE SINGING MACHINE COMPANY, INC.
(Name of Small Business Issuer in its Charter)
Delaware 95-3795478
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6601 Lyons Road, Building A-7, Coconut Creek, FL 33073
(Address of principal executive offices, including zip code)
(954) 596-1000
(Issuer's telephone number)
3101 N.W. 25th Avenue, Pompano Beach, FL 33069
(Former Name, Former Address and Formal Fiscal Year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, par value $.01 per share OTC Bulletin Board
Common Stock Purchase Warrants OTC Bulletin Board
Securities registered pursuant to 12(g) of the Act: None
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Issuer was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. (X)
State issuer's revenues for its most recent fiscal year: $9,547,816
The aggregate market value of the Registrant's voting stock held by non-
affiliates, based upon the closing sales price for the common stock of $1.78
per share as reported on the OTC Bulletin Board on July 30, 1999, was
approximately $4,447,243. The shares of Common Stock held by each officer and
director and by each person known to the Company to own 5% or more of the
outstanding Common Stock have been excluded and such persons may be deemed to
be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS: Indicate
whether the Issuer has filed all documents and reports required to be filed by
Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 after the
distribution of securities under a plan confirmed by a court. Yes x No
APPLICABLE ONLY TO CORPORATE REGISTRANTS: State the number of shares
outstanding of each of the Issuer's classes of common stock, as of the latest
practicable date.
2,498,451 shares of Common Stock were outstanding as of March 31, 1999.
<PAGE>
THE SINGING MACHINE COMPANY, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Business.........................................3
Item 2. Properties.......................................10
Item 3. Legal Proceedings................................11
Item 4. Submission of Matters to a
Vote of Security Holders.......................11
PART II
Item 5. Market for Company's Common Equity
And Related Stockholder Matters................12
Item 6. Management's Discussion and
Analysis or Plan of Operations.................14
Item 7. Financial Statements and Supplementary Date......18
Item 8. Change in and Disagreements
with Accountants on Accounting
and Financial Disclosure.......................18
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act..............18
Item 10. Executive Compensation...........................20
Item 11. Security Ownership of Certain
Beneficial Owners and Management...............22
Item 12. Certain Relationships and Related Transactions...23
Item 13. Exhibits, Financial Statement
Schedules and Reports on Form 8-K..............26
SIGNATURES
<PAGE> 2
PART I - FORWARD LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for certain forward-looking statements. The
forward-looking statements contained in this Form 10-KSB are
subject to certain assumptions, risks and uncertainties. Actual
results could differ materially from current expectations. Among
the factors that could affect the Company's actual results and
could cause results to differ from those contained in the forward-
looking statements contained herein is the Company's ability to
implement its business strategy successfully, which will depend on
business, financial, and other factors beyond the Company's
control, including, among others, prevailing changes in consumer
preferences, access to sufficient quantities of raw materials,
availability of trained laborers and changes in industry
regulation. There can be no assurance that the Company will
continue to be successful in implementing its business strategy.
Other factors could also cause actual results to vary materially
from the future results covered in such forward-looking statements.
Words used in this Form 10-KSB, such as "expects", "believes",
"estimates", and "anticipates" and variations of such words and
similar expressions are intended to identify such forward-looking
statements.
ITEM 1. BUSINESS
INTRODUCTION
The Singing Machine Company, Inc. (the "Company") is engaged in the
distribution and marketing of electronic karaoke audio equipment
which plays backing tracks (music without lyrics) of popular songs
and records the vocal accompaniment of professional and amateur
singers to those backing tracks. The Company contracts for the
manufacture of all of its electronic equipment products with
manufacturers located in the Far East. The Company also produces
and markets karaoke audio software, including CD plus, graphics,
and audio cassette 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 cassette software sold by the Company is
accompanied by printed lyrics, and the Company's karaoke CD's with
graphics contain lyrics which appear on the video screen. The
Company contracts for the reproduction of its audio cassette
software, which is produced by the Company or by an independent
producer.
The Company was incorporated in California in 1982. The Company
originally sold its products exclusively to professional and semi-
professional singers. In 1988, it began marketing karoake
equipment for home use. The Company believes it was the first to
offer karaoke electronic recording equipment and audio software for
home use in the United States.
In May 1994, the Company was merged into a wholly-owned subsidiary
<PAGE> 3
of the Company incorporated in Delaware with the same name. As a
result of that merger, the Delaware corporation became the
successor to the business and operations of the California
corporation and retained the name The Singing Machine Company, Inc.
BANKRUPTCY REORGANIZATION
On April 11, 1997, the Company filed a voluntary bankruptcy
petition in the United States Bankruptcy Court for the Southern
District of Florida seeking relief pursuant to 11 U.S.C. Chapter
11. The automatic stay provisions of the Bankruptcy Code prohibit
creditors from taking action against the Company without first
obtaining court approval. Further, the Company is permitted to
operate under Company management while the Company formulates a
plan of reorganization.
The Company's Amended Plan of Reorganization (the "Plan") was
confirmed by the Bankruptcy Court on March 17, 1998. The material
terms of the Plan include the payment of certain court approved and
allowed claims as follows: (i) administrative costs in the amount
of $116,000; (ii) the secured claim of Bankers Capital in
accordance with the terms of the Bankers Capital agreement in the
amount of $106,000; (iii) ten percent (10%) of the amount of the
allowed claims of unsecured creditors whose claims are $300 or
less; (iv) creditors whose allowed unsecured claims exceeded $300
were given the option of receiving a cash payment of ten percent
(10%) of the amount of the allowed claim or exchanging debt for
equity in the reorganized debtor of one (1) share of common stock
for each two dollars ($2.00) of the allowed claim; (v) existing
pre-petition shareholders, warrantholders, and optionholders had
their interests reduced by ninety percent (90%).
As a result of bankruptcy reorganization, the Company was able to
effectively reduce the size of its corporate offices, warehousing
operations, personnel, and inventory resulting in a savings of
$12,000 per month in lease expense and a reduction in payroll of
$6,000 per month. During the Chapter 11, the Company was able to
retain its core customer base of major retail accounts such as
Target, J.C. Penney, Fingerhut, and FAO Schwarz. Also, the Company
began a new customer relationship with Best Buy to whom the Company
has sold in excess of $1,000,000 during 1998. The Company was also
able to settle certain pending legal matters through the Plan
which, when viewed with the fact that over ninety percent (90%) of
the unsecured creditors converted debt to equity in the reorganized
company, resulted in a significant reduction of liabilities on the
Company's post-reorganization balance sheet. As of June 10, 1998,
the Company had fully implemented the Plan and distributed
securities pursuant to the Plan in the reorganized debtor.
PRODUCT LINES
The Company currently has a product line of 11 different models of
recording and playback units incorporating such features as a CD
graphics player, graphic equalizer and high-output stereo amplifier
and markets its products under its registered trademark, The
Singing Machine[R] . The Company also licenses its trademark, on a
<PAGE> 4
non-exclusive basis, to others for sales around the world. The
Company believes that it is the only major company in the karaoke
industry in the United States which sells both hardware and
software.
The Company currently offers 11 different models of electronic
recording and playback equipment with retail prices ranging from
$30 for basic units to $400 for semi-professional units with CD
plus graphics player sound enhancement, graphic equalizers, echo
tape record/playback features, and multiple inputs and outputs for
connection to compact disc players and video cassette records. The
Company currently offers its audio software in two formats -
multiplex cassettes and CD plus graphics with retail prices ranging
from $6.95 to $19.95. The Company purchases recordings from an
independent producer and currently has a song library of over 2,700
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.
During the fiscal year ended March 31, 1999, the Company introduced
three new models of recording equipment. The Company is producing
40 new CDG titles and 160 songs.
THE MARKET
The karoake industry exceeds sales of $10 billion in the Far East,
based upon Japanese industry estimates. The current North American
market for karaoke products is estimated at less than $400 million.
Therefore, the Company believes that there is tremendous growth
potential not only in the North American market, but also in South
America and Europe as well.
Although there are other electronic component competitors for the
Company's hardware products, and other audio software competitors,
the Company believes it is the only major company specializing in
karaoke category that offers complete lines of hardware including
CD+graphics machines as well as a software library with over 2,700
titles offered by the Company.
SALES, MARKETING AND DISTRIBUTION
MARKETING
The Company relies on its management's ability to determine the
existence and extent of available markets for its products.
Company management has considerable marketing and sales background
and devotes a significant portion of its time to marketing-related
activities. The Company achieves both domestic and direct sales
and markets its hardware and software products primarily through
its own sales force and approximately 21 independent sales
representatives. The Company's representatives are located in
various states and are paid a commission based upon sales in their
respective territories. The Company's sales representative
agreements are generally one (1) year agreements which
automatically renew on an annual basis, unless terminated by either
party on 90 days notice. The Company works closely with its major
<PAGE> 5
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 and audio software are
marketed under The Singing Machine[R] trademark 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 karaoke machines and karaoke music are
currently sold in such stores as Target, J.C. Penney, Fingerhut,
Best Buy, and Sears.
SALES
As a percentage of total revenues, the Company's net sales in the
aggregate to its five largest customers during the fiscal years
ended March 31, 1998 and 1999, were approximately 89% and 91%
respectively. For the fiscal 1999 period, three major retailers
accounted for 31%, 21%, and 21% each of total revenues. During
fiscal year 2000, the Company has made significant progress in
broadening its base of customers.
Although the Company has long-established relationships with many
of its customers, it does not have long-term contractual
arrangements with any of them. A decrease in business from any of
its major customers could have a material adverse effect on the
Company's results of operations and financial condition.
At March 31, 1999 and July 9, 1999, the Company has approximately
$1,786,000 and $11,445,000, respectively, net of cancellations, of
unfilled customer orders. The amount of unfilled orders at any
particular time is affected by a number of factors, including
scheduling of manufacturing and shipping of products, which in some
instances is dependent on the needs of the customer.
Returns of electronic hardware and software products by the
Company's customers are generally not permitted except in approved
situations involving quality defects, damaged goods, or goods
shipped in error. Returned hardware products are sold in closeout
markets by the Company. The policy of the Company is to give
credit to its distributors for audio software returned in
conjunction with the receipt of new replacement purchase orders.
Any such returns of software are available for resale by the
Company. The Company manages credit policies with respect to its
customer base. The Company has not suffered significant credit
losses to date, even 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
<PAGE> 6
a significant impact on the Company's revenues or other categories
of financial performance.
DISTRIBUTION
The Company distributes its hardware products to retailers and
wholesale distributors through two methods: domestic sales (i.e.,
shipment of products from the Company's inventory), and direct
sales, shipments directly from the Company's Hong Kong subsidiary
or manufacturers in the Far East, of products sold by the Company's
sales force. Domestic sales, which account for substantially all
of the Company's audio software sales, are made to customers
located throughout the United States from the Company's inventories
maintained at its warehouse facility in Florida or directly from
the software producers.
1. Domestic Sales: The Company's strategy of selling products from
a domestic warehouse enables it to provide timely delivery and
serve as a "domestic supplier of imported goods". The Company
purchases electronic recording products overseas for its own
account and warehouses the products in a leased facility in Florida
and a warehouse in California. The Company is responsible for
costs of shipping, insurance, customs clearance, duties, storage
and distribution related to such warehouse products and therefore,
warehouse sales command higher sales prices than direct sales. The
Company generally sells from its own inventory in less than
container sized lots.
2. Direct Sales - Hong Kong: The formation of the Company's
subsidiary, International SMC(HK) Ltd. ("International") is
attributable to the advent of foreign equipment sales. Some
hardware products sold by the Company are shipped directly to its
customers from the Far East through International, a Hong Kong
trading company. Sales made through International are completed by
either delivering products to the customers' common carriers at the
shipping point or by shipping the products to the customers'
distribution centers, warehouses or stores. Direct sales are made
in larger quantities (generally container sized lots) to customers
in Italy, England, Canada, and the United States, who pay
International pursuant to their own international, irrevocable,
transferable letters of creditor or on open credit with the
Company's suppliers in the Far East.
MANUFACTURING AND PRODUCTION
The electronic recording devices sold by the Company are
manufactured and assembled by third parties pursuant to design
specifications provided by the Company. The Company's electronic
recording devices are assembled by three factories in the People's
Republic of China. The finished products are packaged and labeled
under the Company's registered trademark, The Singing Machine
brand name.
The Company's products contain electronic components manufactured
by other companies such as Panasonic, Toshiba and Sony. The
electronic components are installed in cabinets manufactured by
<PAGE> 7
three manufacturers. Certain tools and dies used in the production
of certain models of the electronic audio equipment sold by the
Company are owned by LTD.
The Company presently purchases and imports virtually all of its
electronic recording products from three suppliers located in the
People's Republic of China. In fiscal 1999 and 1998, suppliers in
the People's Republic of China accounted for in excess of 88%,
respectively, of the Company's total product purchases, including
virtually all of the Company's hardware purchases. The Company's
primary suppliers of electronic recording products are located in
the Shenzen province of the People's Republic of China.
While the Company purchases its products from a small number of
large suppliers with whom it maintains close alliances, all of the
electronic components and raw materials used by the Company are
available from several sources of supply, and the Company does not
anticipate that the loss of any single supplier would have a
material long-term adverse effect on its business, operations or
financial condition. To ensure its high standards of product
quality and that shipping schedules are met by suppliers, the
Company utilizes Hong Kong based agents as representatives. Those
agents include product inspectors who are knowledgeable about the
Company's product specifications and work closely with the
suppliers to verify that such specifications are met.
Additionally, key officers of the Company frequently visit
suppliers for quality assurance and to support good working
relationships.
All of the electronic equipment sold by the Company is warranted
against manufacturing defects for a period of ninety (90) days for
labor and parts. All audio software sold by the Company is
similarly warranted for a period of 30 days. During the fiscal
years ended March 31, 1999 and 1998, warranty claims have not been
material to the Company's results of operations.
SUBSIDIARIES
In June 1996, the Company organized a wholly-owned subsidiary in
Hong Kong under the name International SMC(HK) Ltd.
("International") to coordinate the Company's production and
finance in the Far East. International assists with the
coordination of product shipments from China and other foreign
factories as well as the negotiation of foreign letters of credit.
COMPETITION
The Company's business is highly competitive. In addition, the
Company competes with all other existing forms of entertainment
including, but not limited to, motion pictures, video arcade games,
home video games, theme parks, nightclubs, television and
prerecorded tapes, CD's, and video cassettes. The Company's
financial position depends, among other things, on its ability to
keep pace with such changes and developments and to respond to the
requirements of its customers. Many of the Company's competitors
have significantly greater financial, marketing, and operating
<PAGE> 8
resources and broader product lines than does the Company. The
Company's major electronic component competitors include Grand
Prix, Casio, and New Tech. The Company's major audio software
competitors are Pocket Songs and Sound Choice.
The Company believes that competition in its markets is based
primarily on price, product performance, reputation, delivery
times, and customer support. The Company believes that, due to its
proprietary know-how, it has the ability to develop and produce
hardware and software on a cost-effective basis.
TRADEMARKS AND LICENSES
The Company's holds federal and international copyrights to
substantially all of the audio productions comprising its song
library. However, since each of those productions is a re-
recording of an original work by others, the Company is subject to
both contractual and statutory licensing agreements with the
publishers who own or control the copyrights of the underlying
musical compositions and is obligated to pay royalties to the
holders of such copyrights for the original music and lyrics of all
of the songs in its library that have not passed into the public
domain. Since most audio software distributed by the Company is
accompanied by printed lyrics, the Company is also subject to
written print royalty license agreements. The Company is currently
a party to more than 13,000 different written copyright license
agreements covering more than 30,000 separate copyright holders.
The Federal Copyright Act (the "Act") creates a compulsory
statutory license for all non-dramatic musical works which have
been distributed to the public in the United States. Under the
Act, with respect to each work included in an audio software
product distributed by the Company under a compulsory license, the
Company is required to pay a royalty of the greater of $0.0710 per
song or $0.013 per minute of playing time or fraction thereof with
respect to each item of audio software produced and distributed by
the Company (the "Statutory Rate"). Royalties due under compulsory
licenses are payable monthly. The Company currently has compulsory
statutory licenses for approximately 200 songs in its song library.
The Act allows a deferral of royalty payments for products sold
subject to a right of return. The practice in the recorded music
industry is to permit retailers to return for 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
<PAGE> 9
period which the Company believes is appropriate for the karaoke
industry.
The majority of the songs in the Company's song library are subject
to written copyright license agreements. The Company's written
licensing agreements for audio software ("mechanical licenses")
typically provide for royalties at the Statutory Rate although some
provide for lower royalty rates. Written licenses typically
provide for quarterly royalty payments. The Company also has
written license agreements for substantially all of the printed
lyrics which are distributed with its audio software products
("print licenses"), which licenses also typically provide for
quarterly payments of royalties at the Statutory Rate.
GOVERNMENT REGULATION
In the spring of 1999, the President of the United States renewed
the People's Republic of China's "Most Favored Nation" ("MFN")
treatment for entry of goods into the United States for an
additional year. In the context of United States tariff
legislation, MFN treatment means that products are subject to
favorable duty rates upon entry into the United States. IF MFN
status for China is restricted or revoked in the future, the
Company's cost of goods purchased from Chinese vendors is likely to
increase. A resultant change in suppliers would likely have an
adverse effect on the Company's operations and, possibly, earnings,
although management believes such adversity would be short-term as
a result of its ability to find alternative suppliers. Management
continues to closely monitor the situation and has determined that
the production capabilities in countries outside China which have
MFN status and, therefore, have favorable duty rates, would meet
the Company's production needs.
EMPLOYEES
At March 31, 1999, the Company had 11 full-time employees, 4 of
whom were engaged in warehousing and technical support, and 7 in
marketing and administrative functions. At June 30, 1999, the
Company had 12 full-time employees, 4 of whom were engaged in
warehousing and technical support, and 8 in marketing and
administrative functions.
ITEM 2. PROPERTIES
At present, the Company does not own any property. On May 1, 1997,
the Company entered into a lease for a 10,000 square foot office
and warehouse facility located in Pompano Beach, Florida, for a
term of 25 months at a cost of $5,161 per month. Pursuant to the
terms of the lease, the Company must pay maintenance, insurance,
and real estate taxes, which cost aggregates approximately $11,000
per year.
On March 31, 1999, the Company entered into a lease for an 8,000
square foot office and warehouse facility located in Coconut Creek,
Florida for a term of sixty-one (61) months at a cost of $4,487 per
month for the first twelve (12) month period and $4,820 for the
<PAGE> 10
second twelve (12) month period. Pursuant to the terms of the
lease, the Company must pay maintenance insurance and real estate
taxes, which in the aggregate, costs approximately $9,000 per year.
As this leased space is being constructed to the Company's
specifications, occupancy is expected approximately July 25, 1999.
The Company believes that the facilities are well maintained, in
substantial compliance with environmental laws and regulations and
adequately covered by insurance. The Company also believes that
the leased spaces which house its facilities are not unique and
could be replaced, if necessary, at the end of the term of the
existing lease.
ITEM 3. LEGAL PROCEEDINGS
The Company filed a voluntary petition ("Petition") for relief
under Chapter 11 of the Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the Southern District of
Florida (the "Bankruptcy Court"), case number 97-22199-BKC-RBR, on
April 11, 1997 (the "Petition Date"). On March 17, 1998, the U.S.
Bankruptcy Court confirmed the Company's Plan of Reorganization, as
Amended.
On or about November 24, 1998, the Company was named as a defendant
for allegedly infringing upon patents for tape decks owned by
Tanashin Denki Co., Ltd. ("Tanashin"), a Japanese manufacturing
concern. The Company was one of multiple defendants named in the
suit filed in the United States District Court for the Eastern
District of Virginia. The case has been transferred to the U.S.
District Court for the Southern District of Florida, Miami
Division. The Company is a co-defendant with Memcorp, from whom
the Company purchases the product which is the subject of the
alleged infringement. Tanashin alleges damages of approximately
$100,000, of which a maximum of $50,000 would be attributable to
the Company. However, the Company has viable defenses to the
Tanashin claims. Additionally, the Company may have rights of
indemnification from Memcorp pursuant to an agreement between the
companies. The Company believes that an adverse adjudication would
not have a material affect upon the Company's operations.
Other than the aforesaid proceedings, the Company is not a party to
any material legal proceeding, nor to the knowledge of management,
are any legal proceedings threatened against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 8, 1999, the shareholders approved the election of
directors according to the following vote:
<TABLE>
<CAPTION>
PROPOSAL #1 FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Edward Steele 1,523,849 744
John Klecha 1,523,969 624
Walter Haskamp 1,523,969 624
Paul Wu 1,523,969 624
</TABLE>
<PAGE> 11
On March 8, 1999, the shareholders of the Company approved an
increase in the number of authorized shares of common stock from
10,000,000 to 75,000,000, and approved the issuance of 600,000
stock options pursuant to the Company's Employee Stock Option Plan.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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 thereafter. This
information represents prices between dealers and does not reflect
retail mark-up or mark-down or commissions, and may not necessarily
represent actual market transactions.
<TABLE>
<CAPTION>
Fiscal Period *High Bid *Low Bid
<S> <C> <C>
1998:
First Quarter........................... $0.60 $0.60
Second Quarter.......................... 0.60 0.60
Third Quarter........................... 0.60 0.60
Fourth Quarter.......................... 2.50 0.60
1999:
First Quarter........................... $1.01 $0.17
Second Quarter.......................... 0.73 0.43
Third Quarter .......................... 0.50 0.43
Fourth Quarter.......................... 2.50 0.48
2000:
First Quarter
(through June 30, 1999).............. $2.81 $1.34
</TABLE>
* All data has been adjusted to reflect a one-for-ten reverse split
for the Company's Common Stock which was effected on April 1, 1998.
The closing bid price for the Company's Common Stock on the OTC
Bulletin Board on July 30, 1999 was $1.78 per share.
As of July 30, 1999, there were approximately 335 record holders of
the Company's outstanding Common Stock. Moreover, additional
shares of the Company's Common Stock are held for stockholders at
brokerage firms and/or clearing houses, and therefore the Company
was unable to determine the precise number of beneficial owners of
Common Stock as of July 30, 1999.
The Company has never declared or paid cash dividends on its
capital stock and the Company's Board of Directors intends to
continue its policy for the foreseeable future. Earnings, if any,
will be used to finance the development and expansion of the
Company's business. Future dividend policy will depend upon the
Company's earnings, capital requirements, financial condition and
other factors considered relevant by the Company's Board of
Directors and will be subject to limitations imposed under Delaware
law.
<PAGE> 12
PUBLIC WARRANTS
Pursuant to the Company's initial public offering, 1,380,000 public
warrants (the "Public Warrants") were issued. The Public Warrants
entitle the registered holders to purchase one (1) share of the
Company's Common Stock at an exercise price of $6.00 per share. On
January 26, 1995, pursuant to the twenty percent (20%) stock split,
the number of Public Warrants increased from 1,380,000 to 1,656,000
and the exercise price of the Public Warrants was reduced by forty
percent (40%) to $3.60 per share. After the Company's
reorganization, taking into consideration the post-bankruptcy
reverse split, the Public Warrants entitle the registered holders
to purchase one tenth (1/10) of one (1) share of the Company's
Common Stock at an exercise price of $36.00 per one (1) share of
Common Stock. These Public Warrants expire November 10, 1999.
PRIVATE PLACEMENT OFFERING
On April 1, 1999, the Company issued a Private Placement Memorandum
(the "Memorandum") offering a minimum of 40 Units ($1,100,000) and
a maximum of 50 Units ($1,375,000). The purchase price for each
Unit was $27,500. Each Unit consists of 20,000 shares of the
Company's Convertible Preferred Stock ("Preferred Stock") and 4,000
Common Stock Purchase Warrants ("Warrants"). Each share of
Preferred Stock is convertible, at the option of the Holder, into
one (1) share of the Company's Common Stock at any time after
issuance. Each share of Preferred Stock will automatically convert
into one (1) share of the Company's Common Stock at 5:00 p.m.
eastern time on April 1, 2000, which is one (1) year from the date
of the Memorandum. Each Warrant entitles the Holder to purchase,
at any time during the period commencing from the date of issuance
and ending three (3) years from the date of the Memorandum, one (1)
share of the Company's Common Stock at a purchase price of $2.00
per share. Fractional Units could be purchased at the discretion
of the Company.
The Units were being offered only to "accredited investors" as
defined in Rule 501 of Regulation D under the Securities Act of
1933, as amended (the "Securities Act"). The Units were offered on
a "$1,100,000 minimum - $1,375,000 maximum" basis pursuant to Rule
506 of Regulation D under the Securities Act of 1933, as amended
(the "Securities Act"). Purchasers of the Units will receive
securities that are not registered with the Securities and Exchange
Commission (the "Commission") as a result of this Offering. The
Company, however, will use its best efforts to file a registration
statement with the Commission to register the Company's Common
Stock underlying the securities comprising the Units within ninety
(90) days after the completion of the Offering. There is no
assurance as to when or if the registration statement will be
declared effective by the Commission. There is no public market
for the Units, Preferred Stock, or the Warrants, and none will
develop as a result of the Offering.
<PAGE> 13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussions and analysis should be read in
conjunction with, and is qualified in its entirety by, the
Financial Statements and Selected Financial Information included
elsewhere herein. Historical results are not necessarily
indicative of trends in operating results for any future period.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
income and expense items express as a percentage of the Company's
total revenues, except as noted below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1999 1998 1997
<S> <C> <C> <C>
Total Revenues........................ 100.0% 100.0% 100.0%
Cost of Sales......................... 73.6 81.1 85.7
Expenses:
Other operating expenses............ 2.9 2.4 5.4
Selling, general and
administrative expenses........... 13.3 29.7 22.2
Impairment of long-lived assets..... 0 0 15.1
Operating income (loss)............... 10.2 (23.5) (32.1)
Other expenses, net................... (2.3) (2.4) (4.2)
Income (loss) before taxes............ 7.9 (14.6) (36.3)
Provision (benefit) for income taxes.. 1.8 - -
Income (loss)......................... 9.7 (36.3) (74.1)
_______________________________
</TABLE>
THE YEAR ENDED MARCH 31, 1999 AND MARCH 31, 1998
Total revenues increased to $9.5 million for the fiscal year ended
March 31, 1999, compared to the $6.1 million reported for fiscal
1998. The increase was primarily due to increased funding and
lines of credit established during the fiscal year ended March 31,
1999, to purchase additional inventory and the Company's
introduction and subsequent sales of two (2) new CD with graphics
players and innovative music packages.
Gross profit increased $1.5 million or 165% to $2.52 million in
fiscal year ended 1999 or 26.4% of net sales from $996 million or
16.4% of net sales in fiscal year end 1998. The overall increase
in gross profit was attributable to the significant increase in net
sales. The increase in the gross profit margin of 10.0% of net
sales was due primarily to the increased sales of new models of CDG
<PAGE> 14
players and CDG music with higher margins than some of our other
products.
Selling, general and administrative expenses decreased $1.10
million or 41.5% to $1.54 million, or 16.2% of net sales in fiscal
year end 1999, from $2.64 million or 43.6% of net sales, in fiscal
year end 1998. This decrease was primarily due to management's
commitment to reduce total overhead and write off various
intangible assets during the reorganization under Chapter 11 of
fiscal year 1998. As a a result of the emergence from bankruptcy
legal and accounting fees were reduced significantly. The Company
also had significant reductions in temporary help, rent,
advertising, insurance and maintenance expense as a result of the
downsized facility. Warehousing operations were moved to a west
coast warehouse, reducing the Florida warehousing requirements and
reducing ocean freight costs of hardware sold during fiscal year
end 1999.
Net interest expense increased approximately $104,000 to $225,000
during fiscal year end 1999 compared to $121,000 during fiscal year
end 1998. During fiscal year end 1999, the Company was able to
acquire various short term loans to purchase inventory which
contributed toward higher sales.
Depreciation and amortization expense decreased approximately
$34,000 or 19% to $144,000 during the fiscal year ended March 31,
1999. The decrease was primarily due to full depreciation of
certain tools during fiscal year 1998 and the continued use of
those tools during fiscal year 1999 after their value was fully
depreciated. The $144,000 includes amortization of the
reorganization intangibles established in March 1998 as a result of
the application of Fresh Start Reporting.
Loss on sales of accounts receivable was 2.3% and 1.5% of total
revenues for the fiscal years 1999 and 1998, respectively.
Although more accounts receivable were factored during fiscal year
1999 versus fiscal year 1998, the Company was able to change
factors during May of 1998 with a lower factoring rate.
Net income for fiscal 1999 was approximately $924,000 versus a loss
of $1,785,000 for fiscal year 1998. Management has significantly
reduced overhead and been able to increase gross margins through
new product introductions and innovative marketing and packaging
programs.
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
<PAGE> 15
fulfillment of orders can therefore significantly affect results of
operations on a quarter-to-quarter basis.
INFLATION
Inflation has not had a significant impact on the Company's
operations. The Company has historically passed any price
increases on to its customers since prices charged by the Company
are generally not fixed by long-term contracts.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
The Company has obtained significant financing for continuing
operations and growth. Three specific lines of credit have been
opened, a financing agreement in Hong Kong and two financing
agreements through its U.S. operations.
Effective May 19, 1999, the Company, through its Hong Kong
subsidiary, International SMC(HK) Ltd., obtained a credit facility
of (US) $200,000 from Belgian Bank, Hong Kong, a subsidiary of
Generale Bank, Belgium. This facility is a revolving line based
upon drawing down a maximum of 15% of the value of export letters
of credit lodged with Belgian Bank. There is no expiration except
that Belgian Bank reserves the right to revise the terms and
conditions at the Bank's discretion. The cost of this credit
facility is the U.S. Dollar prime rate plus 1.25%. Repayment of
principal plus interest shall be made upon negotiation of the
export letters of credit, but not later than ninety (90) days after
the advance.
Effective July 2, 1998, the Company, through its Hong Kong
subsidiary, International SMC(HK) Ltd., has been provided a (US)
$200,000 credit facility for opening letters of credit and/or trust
receipt and/or purchasing at the Company's factories by purchasing
of documents against acceptance bills, from Delta Asia Financial
Group, Hong Kong. This facility is a revolving line until May 31,
1999, at which time it will be reviewed. The cost of this credit
facility is prime plus 2 1/2% and bank charges for opening letters
of credit. This facility is personally guaranteed by Mr. J.A.
Bauer, a former director of the Company.
The Company is a party to a factoring agreement, dated April 24,
1998, with Berkshire Financial Group, Inc. ("Berkshire") pursuant
to which Berkshire purchases certain of the Company's accounts
receivable. Under the agreement, Berkshire purchases certain
selected accounts receivable from the Company and advances 70% of
the face value of those receivables to the Company. The accounts
receivable are purchased by Berkshire without recourse and
Berkshire therefore performs an intensive credit review prior to
purchase the receivable.
The Company is charged a variable percentage fee based upon the
length of collection period of the receivable and the remaining
<PAGE> 16
collected balance fees are sent to the Company after collection.
The purchase of receivables of the Company by Berkshire is absolute
and is a true sale of receivables. Berkshire has placed no maximum
limit on the amount of the Company's receivables they will
purchase.
The Company has also entered into an agreement with EPK Financial
Corporation ("EPK") whereby EPK will open letters of credit with
the Company's factories to import inventory for distribution to the
Company's customers. This allows the Company to purchase domestic
hardware inventory for distribution to customers in less than
container load quantities and provides the flexibility to customers
of not opening a letter of credit in favor of the Company. The
selling price to these customers is considerably higher because the
Company pays financing costs to EPK and incurs costs of ocean
freight, duty, and handling charges. Upon shipment of product from
these financed transactions, the receivables are factored by
Berkshire Financial, thereby buying the shipments and related
interest from EPK.
The Company pays EPK a flat fee per transaction, which is
negotiated for each shipment, and the maximum purchase price per
transaction is $300,000. There has been no maximum total shipments
established under this agreement. Berkshire has entered into this
agreement as a third party agreeing to purchase all receivables
invoiced under these transactions. The transactions financed by
EPK are supported by personal guarantees of the chief executive
officer and chief financial officer of the Company and the
agreement is in effect until July 1, 1999, unless terminated by
either party upon 30 days' written notice.
The Company has no present commitment that is likely to result in
its liquidity increasing or decreasing in any material way. In
addition, the Company knows of no trend, additional demand, event
or uncertainty that will result in, or that are reasonably likely
to result in, the Company's liquidity increasing or decreasing in
any material way.
The Company has no material commitments for capital expenditures.
The Company knows of no material trends, favorable or unfavorable,
in the Company's capital resources. The Company has no additional
outstanding credit lines or credit commitments in place.
Year 2000
Management has compiled a list of both internally and externally
supplied information systems that utilize imbedded date codes which
could experience operational difficulties in the year 2000. The
Company uses third party applications or suppliers for all high
level systems and reporting. These systems will be tested and if
necessary replaced. Management is testing new systems for which it
is responsible. The Company is planning complete internal computer
system replacement which is totally year 2000 compliant. It is the
Company's objective to be in year 2000 compliance by the end of
September 1999, however, no assurance can be given that such
objective will be met.
<PAGE> 17
ITEM 7. FINANCIAL STATEMENTS
The financial statements required pursuant to this Item 7 are
included in this Form 10-KSB as a separate section commencing on
page F-1 and are hereby incorporated by reference into this Item 7.
On April 11, 1997 the Company filed for protection under the
provisions of the United States Bankruptcy Code. In March 1998,
the United States Bankruptcy Court approved the Company's Plan of
Reorganization, as Amended, and the Company emerged from Chapter 11
Bankruptcy. At that time, the Company applied Fresh Start
Reporting in accordance with the American Institute of Certified
Public Accountants' Statement of Position 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code
("SOP 90-7"). As a result of the application of SOP 90-7, the
Company restated its assets and liabilities to their fair values as
necessary, and reclassified its accumulated deficit of $6,841,684
against available additional paid-in capital of $6,200,262
resulting in a reorganization intangible asset of $641,422, which
is being amortized on a straight line basis over a period of seven
years.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AN FINANCIAL DISCLOSURE
The Company changed accountants beginning with the audit of the
financial statements included herewith, from Samuel F. May, Jr. &
Company, Certified Public Accountants to Weinberg & Company,
Certified Public Accountants. Samuel F. May, Jr. & Company resigned
as the Company's accountant in or about May 1999.
The report of Samuel F. May, Jr. & Company on the Company's
financial statements for the fiscal year ended March 31, 1998 did
not contain an adverse opinion or disclaimer of opinion, and was
not qualified or modified as to uncertainty, audit scope, or
accounting principles, except for a going concern uncertainty.
In connection with the audit of the Company's financial statements
for the fiscal year ended March 31, 1998, and in the subsequent
interim period, there were no disagreements, disputes, or
differences of opinion with Samuel F. May, Jr. & Company on any
matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures, which, if not
resolved to the satisfaction of Samuel F. May, Jr. & Company would
have caused Samuel F. May, Jr. & Company to make reference to the
matter in its report.
The accounting firm of Weinberg & Company, Certified Public
Accountants, has prepared the Company's financial statements for
the Company's fiscal year ended March 31, 1999 (see item 7 above).
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors and executive officers of the Company as of the date
of this report are as follows:
<PAGE> 18
Name Age Position
Edward Steele 69 Chief Executive Officer,
President and Director
John F. Klecha 48 Chief Financial Officer,
Secretary, Treasurer
and Director
Allen Schor 57 Director
Edward Steele joined the Company in 1988 and has served as the
Chief Executive Officer, President, and as a director of the
Company since September 1991. From October 1988 to September 1991,
Mr. Steele was responsible for the development of the Company's
electronic hardware products in the Far East and was the Company's
sales director. Prior to joining the Company, Mr. Steele served in
executive capacities at a number of companies in the toy and
electronics fields, including as Managing Director in charge of
worldwide sales of Concept 2000, a manufacturer of consumer
electronics, from 1971 to 1978; as President of Wicely Corp., a
distributor of electronic toys and consumer electronics from 1978
to 1983; and as President of Justin Products Corp., an electronic
toy manufacturer from 1983 to 1988.
John Klecha has been the Chief Financial Officer, Secretary,
Treasurer and a Director of the Company since October 10, 1997.
Mr. Klecha is in charge of all financial and administrative
operational functions of the Company. Prior to joining the
Company, Mr. Klecha served in executive and senior management
capacities at a number of companies in the toy and other consumer
products fields, including as the senior financial and
administrative executive of a privately held toy design,
manufacturing and distribution company since 1987, Vice President,
Director and Chief Financial Officer of Sussex Nautilus from 1984
to 1987, and Vice President of Finance and Administration for
Lazzaroni Sarrono, Ltd. from 1982 to 1984.
Allen Schor was appointed to the Board of Directors effective June
28, 1999. Since 1969, Mr. Schor has served as the President and
Chief Executive Officer of El Mar Plastics, Inc., an international
marketing and production company of plastics products for the tape-
recording industry headquartered in Carson, California,.
Additionally, Mr. Schor is the General Manager of CD Media Masters,
Inc. In 1995, CD Media Masters was formed by five (5)
international investors to create a CD master making facility.
This facility is located at the El Mar Plastics, Inc. facility.
Effective May 5, 1999, Paul Wu resigned as a director of the
Company. Mr. Wu's resignation was voluntary and not as the result
of any disagreement with the Company. On July 12, 1999, Walter
Haskamp, a director of the Company, passed away.
<PAGE> 19
The Company agreed that the Managing Underwriter of the Company's
initial public offering, which closed on November 18, 1994, may
designate a nominee to the Board of Directors, reasonably
acceptable to the Company, or have a representative attend all
board meetings, until November 10, 1999. No such nominee has been
designated. The officers, certain directors, and certain
stockholders of the Company have agreed to vote their share, for
the election of such nominee.
The Company's directors serve for a term of one year, or until
their successors shall have been elected and qualified. The
Company has in place an employment agreement with its Chief
Executive Officer, Mr. Steele, and its Chief Financial Officer, Mr.
Klecha. See Item 10 - "Executive Compensation, Employment
Agreements".
DIRECTORS' FEES
The Company currently reimburses each director for expenses
incurred in connection with this attendance at each meeting of the
Board of Directors or a committee on which he serves. In addition,
non-employee directors are entitled to be paid a fee of $750 for
each board or committee meeting attended and are entitled to
receive 2,500 common stock options per year. Mr. Haskamp received
such payments for his board meeting attendance during fiscal 1999.
BOARD COMMITTEES
On July 15, 1998, the Board of Directors appointed Audit and
Executive Compensation/Stock Option Committees. The Audit
Committee consists of Messrs. Steele, and Haskamp, and the
Executive Compensation/Stock Option Committee consists of Messrs.
Steele and Klecha. The Audit Committee recommends the engagement
of independent auditors to the board, initiates and oversees
investigations into matters relating to audit functions, reviews
the plans and results of audits with the Company's independent
auditors, reviews the Company's internal accounting controls, and
approves services to be performed by the Company's independent
auditors. The Executive Compensation/Stock Option Committee
considers and authorizes remuneration arrangements for senior
management and grants options under, and administers, the Company's
1994 Amended and Restated Management Stock Option Plan. The entire
Board of Directors operates as a nominating committee.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's officers and directors, and persons
who own more than ten percent of a registered class of the
Company's equity securities (collectively the "Reporting Persons")
to file reports and changes in ownership of such securities with
the Securities and Exchange Commission and the Company. Based
solely upon a review of (i) Forms 3 and 4 and amendments thereto
<PAGE> 20
furnished to the Company pursuant to Rule 16a-3(e), promulgated
under the Exchange Act, during the Company's fiscal year ended
March 31, 1998 and (ii) Forms 5 and any amendments thereto and/or
written representations furnished to the Company by any Reporting
Persons stating that such person was not required to file a Form 5
during the Company's fiscal year ended March 31, 1998, it has been
determined that no Reporting Persons were delinquent with respect
to such person's reporting obligations set forth in Section 16(a)
of the Exchange Act.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth summary compensation information
with respect to compensation paid by the Company to the Chief
Executive Officer of the Company ("CEO") and the Company's four
most highly compensated executive officers other than the CEO, who
were serving as executive officers during the Company's fiscal year
ended March 31, 1999.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
___________________________________ ____________________________________________________
Awards Payments
------------------------- ------------------------
Restricted Securities
Name of Individual Other Annual Stock Underlying/ LTIP All Other
and Principal Position Year Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Edward Steele 1999 $180,692 $52,369 $7,228 -0- -0- -0- -0-
President
John Klecha 1999 $ 88,200 $26,184 $3,614 -0- -0- -0- -0-
Chief Financial Officer
</TABLE>
EMPLOYMENT AGREEMENTS
The Company executed an employment agreement with Mr. Steele which
commenced as of March 1, 1998, for a period of three years.
Pursuant to Mr. Steele's employment agreement, he is entitled to
receive base compensation of $180,000 per year, which amount
automatically increases during the second and third fiscal years by
the greater of 5% or the annual increase in the Consumer Price
Index. The agreement also provides for bonuses based on a
percentage of a bonus pool tied to the annual pre-tax net income
(as defined in the agreement) of the Company. No such bonuses were
paid for the 1998 or 1997 fiscal years. Mr. Steele would receive
50% of the bonus pool. In the event of a termination of his
employment following a change-in-control, Mr. Steele would be
entitled to a lump sum payment of 300% of the amount of his total
compensation in the twelve months preceding such termination.
During the term of his employment agreement and for a period of one
year after his termination for cause or his voluntary termination
of his employment agreement, Mr. Steele could not directly or
indirectly compete with the Company in the karaoke industry in the
United States.
<PAGE> 21
The Company executed an employment agreement with Mr. Klecha which
commenced as of March 1, 1998, for period of two years with an
automatic term extension for one additional year unless terminated
by the Company or the employee. Pursuant to Mr. Klecha's
employment agreement, he is entitled to receive base compensation
of $92,000 per year, which amount automatically increases during
the second and third fiscal years by the greater of 5% or the
annual increase in the Consumer Price Index. The agreement also
provides for bonuses based on a percentage of a bonus pool tied to
the annual pre-tax net income (as defined in the agreement) of the
Company. No such bonuses were paid for the 1998 or 1997 fiscal
years. Mr. Klecha would receive 25% of the bonus pool. In the
event of a termination of his employment following a change-in-
control in the twelve months preceding such termination, Mr. Klecha
would be entitled to a lump sum payment of 100% of the amount of
his total compensation in the twelve months preceding such
termination. During the term of his employment agreement and for
a period of one year after his termination for cause or his
voluntary termination of his employment agreement, Mr. Klecha could
not directly or indirectly compete with the Company in the karaoke
industry in the United States.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of June 30, 1999, certain
information concerning beneficial ownership of the Company's Common
Stock by (i) each person known to the Company to own 5% or more of
the Company's outstanding Common Stock, (ii) all directors of the
Company and (iii) all directors and officers of the Company as a
group:
<TABLE>
<CAPTION>
Shares
Name and Address Beneficially Percent of
of Beneficial Owner Owned (1)(8) Class
<S> <C> <C>
The Harry Fox Agency 410,675 16.1%
711 Third Avenue, 8th Floor
New York, NY 10017
Alan & Deanna Schor 324,643 12.8%
840 East Walnut
Carson, CA 90746
FLX(HK) Ltd. 212,432 8.3%
Unit 19 5/F Vanta Ind. Centre
21-33 Tai Lin Pai Road
Kwaichung N.T. Kowloon
Hong Kong
Colony Electronics 129,300(2) 5.1%
500 Hennessy Road
Causeway, Hong Kong
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
Contd...
Shares
Name and Address Beneficially Percent of
of Beneficial Owner Owned (1)(8) Class
<S> <C> <C>
John Klecha 98,374 3.9%
3101 N.W. 25th Avenue
Pompano Beach, FL 33069
Edward Steele (7) 46,968(4) 1.8%
3101 NW. 25th Avenue
Pompano Beach, FL 33069
Gemco Pacific, Inc. 25,667(3) 1.0%
500 Hennessy Road
Causeway, Hong Kong
Paul Wu 25,500(5) 1.0%
985 Rexdale Boulevard
Rexdale, Ontario CA M9W 1R9
All Directors and Executive
Officers as a Group (4 persons) 495,485(6) 19.4%
________________________
</TABLE>
(1) As used herein, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Securities Exchange Act
of 1934 as consisting of sole or shared voting power (including the
power to vote or direct the vote) and/or sole or shared investment
power (including the power to dispose or direct the disposition of)
with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, including a right to
acquire such power(s) during the next 60 days. Unless otherwise
noted, beneficial ownership consists of sole ownership, voting and
investment rights.
(2) Mr. Wu is a director of Colony Electronics. Mr. Wu disclaims any
beneficial ownership of the shares of Colony Electronics.
(3) Mr. Wu is a director of Gemco Pacific, Inc. ("Gemco"). Mr. Wu
disclaims beneficial ownership of the shares owned by Gemco.
(4) Includes immediately exercisable options to purchase 7,500 shares of
Common Stock.
(5) Includes immediately exercisable options to purchase 7,500 shares of
Common Stock.
(6) Includes immediately exercisable options to purchase 15,000 shares of
Common Stock and immediately exercisable warrants to acquire 2,250
shares of Common Stock.
(7) Mr. Steele disclaims beneficial ownership of 100 shares owned by his
wife.
(8) Presumes issuance of 2,180,011 shares of the Company's Common Stock to
creditors of the Company pursuant to the Company's Plan of
Reorganization, As Amended, and approved by the Bankruptcy Court on
March 17, 1998.
______________________
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has an agreement with FLX (a china manufacturer of
consumer electronics products) to produce electronic recording
<PAGE> 23
equipment based on the Company's specifications. Paul Wu, a former
director of the Company, is Chairman of the Board and a principal
stockholder of FLX. During the fiscal years ended March 31, 1998,
and 1999, the Company purchased approximately $1.7 million and $1.0
million respectively, in equipment from FLX.
The Company believes that all of the foregoing transactions with
FLX and LTD have been on terms no less favorable to the Company
that could have been obtained from unaffiliated third parties in
arms-length transactions under similar circumstances.
The Company entered into an agreement with EPK Financial
Corporation ("EPK") whereby EPK will open letters of credit with
the Company's factories to import inventory for distribution to the
Company's customers. This allows the Company to purchase domestic
hardware inventory for distribution to customers in less than
container load quantities and provides the flexibility to customers
of not opening an L/C in favor of the Company. The selling price
to these customers is higher to cover the Company's costs of
financing costs to EPK, ocean freight, duty, inland freight, and
handling.
The Company pays EPK a flat fee per transaction, which is
negotiated for each shipment. There has been no maximum of total
shipments established under this agreement. Berkshire Financial,
the Company's factor, has entered into this agreement as a third
party agreeing to purchase all accounts receivable invoiced under
these transactions. The transactions financed by EPK are supported
by personal guarantees of Edward Steele, the Company's Chief
Financial Officer, and John Klecha, the Company's Chief Financial
Officer. The agreement is in effect until July 1, 1999, unless
terminated by either party upon 30 days' written notice.
Edward Steele, the Company's Chief Executive Officer, has a
promissory note outstanding to the Company of $13,880 as of March
31, 1998. The original note for $30,650 granted on March 31, 1999
has been extended until March 31, 2000 with a rate of 9% per annum
on the unpaid balance.
Under its Amended and Restated 1994 Stock Option Plan, the Company
reserved 600,000 additional shares of its common stock for issuance
upon exercise of options granted under the Plan. During 1999,
shareholders approved the increase of 600,000 shares available for
grant. 499,000 of these options were granted at an exercise price
of $.43 per share, with fifty percent (50%) of these options
vesting during December 1999, and fifty percent (50%) during
December, 2000. After the Company's reorganization, taking into
consideration the post-bankruptcy reverse split, there remained
27,500 outstanding options bringing the total to 627,500 shares of
common stock authorized for issuance upon exercise of options
granted under the Plan.
As of March 31, 1999, 101,000 shares were available for future
grant. Additional shares may become available to the extent that
<PAGE> 24
options presently outstanding under the Plan terminate or expire
unexercised.
As of March 31, 1999, options to purchase 526,500 shares of common
stock have been issued.
Stock option activity pursuant to the Plan is summarized as
follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
<S> <C> <C>
Outstanding, March 31, 1998... 47,870 $4.87
Granted....................... 499,000 .43
Exercised..................... - -
Cancelled..................... (20,370) 4.33
Outstanding, March 31, 1999... 526,500 .68
</TABLE>
The following table sets forth information concerning options
granted to officer and directors of the Company during the year
ended March 31, 1999, pursuant to the Company's stock option plans.
No stock appreciation rights ("SAR's") were granted.
<TABLE>
<CAPTION>
Percent of
Number of Total Options
Shares Granted to
Underlying Employees in Exercise Price
Name of Individual Options Granted Fiscal Year Per Share Expiration Date
<S> <C> <C> <C> <C>
Edward Steele 350,000 70.1% $ .43 12/9/05
John Klecha 100,000 20.0% $ .43 12/9/05
</TABLE>
The following table sets forth information as to options held by
the executive officers named in the Summary Compensation Table
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at at Fiscal
Fiscal Year End Year End
Shares - -
Acquired Value Exercisable/ Exercisable/
Name of Individual Upon Exercise Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Edward Steele N/A N/A 7,500 / 350,000 0 / 483,870
John Klecha N/A N/A 0 / 100,000 0 / 138,250
</TABLE>
<PAGE> 25
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(A) Exhibits
2(a) Debtor's Amended Disclosure Statement, dated December 17,
1997[1]
2(b) Debtor's Amended Plan of Reorganization, dated December
17, 1998[1]
2(c) Agreement regarding treatment of The Harry Fox Agency in
Debtor's Plan of Reorganization, as Amended, dated
December 24, 1997[1]
2(d) Order Amending Amended Plan of Reorganization and Order
Confirming Debtor's Amended Plan[5]
3(a) Certificate of Incorporation of the Company, including
amendment filed with the Secretary of the State of
Delaware
3(b) By-Laws of the Company[2]
3(c) Amendment to Company's Certificate of Incorporation filed
with the Secretary of the State of Delaware, dated April
30, 1998[5]
4(a) Form of Warrant issued in connection with July, 1994,
private offering[2]
4(b) Warrant Agreement and related Warrant Certificate to be
issued in connection with the public offering of the
Company on November 18, 1994
4(c) Underwriter's Warrant issued to the Underwriters on
November 18, 1994[3]
*10(e) 1994 Amended and Restated Management Stock Option Plan2
10(q) Form of Subscription Agreement evidencing registration
rights
16(a) Letter on Change in certifying accountant
(B) Reports on Form 8-K
The Company filed a report on Form 8-K, dated May 19, 1999,
announcing the Initial Closing of a Private Placement of the
Company's securities. The Initial Closing of the Private Placement
Offering was held Monday, May 17, 1999. The Company obtained the
net proceeds from the sale of the minimum of 40 Units of the Company
securities for gross proceeds of $1,100,000. The Company will
continue to offer the remaining Units of the Private Placement until
it is sold or until the end of the Offering period, June 30, 1999.
27 Summary Financial Data Schedule
- ----------------------------
[1] Incorporated by reference as filed by the Company with the Securities
and Exchange Commission pursuant to the Federal Rules of Bankruptcy
Procedure in conjunction with the Company's Chapter 11 Reorganization.
[2] Incorprated 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.
[3] Incorporated by reference to the Post-Effective Amendment No. 1 to the
Registration Statement as filed on December 13, 1994.
[4] Incorporated by Reference to the Amendment No. 3 to the Registration
Statement as filed on October 21, 1994.
[5] Incorporated by reference in the Company's Annual Report on Form 10KSB
as filed on December 8, 1998.
<PAGE> 26
SIGNATURES
In accordance with the requirements of Section 13 and 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE SINGING MACHINE COMPANY, INC.
Dated: August 5, 1999 By:/s/ Edward Steele
Edward Steele, Chief Executive
Officer, President and Director
In accordance with the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons
on behalf of the Company and in the capacities and on the dates
indicated.
Signature Capacity Date
/s/ Edward Steele Chief Executive Officer August 5, 1999
Edward Steele President and Director
/s/ John Klecha Chief Financial Officer, August 5, 1999
John Klecha Secretary, Treasurer
and Director
<PAGE> 27
SEC FILE NO. 0-24968
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
EXHIBITS
TO
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
_______________________________
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
OF
THE SINGING MACHINE COMPANY, INC.
<PAGE>
RESTATED FINANCIALS FOR
MARCH 31, 1998
<PAGE>
Samuel F. May Jr. and Company
Certified Public Accounts
Member: AICPA
FICPA
Barnett Bank Building
23123 State Road 7, Suite 210
Boca Raton, Florida 33428
Office: (561) 487-0670 Fax: (561) 852-1646
Report of Independent Certified Public Accountant
Board of Directors and Shareholders
The Singing Machine Company, Inc.
and Subsidiary
Pompano Beach, Florida
I have audited the accompanying consolidated balance sheet of The Singing
Machine Company, Inc. and Subsidiary as of March 31, 1998, and the related
consolidated statements of operation, shareholders' equity and cash flows for
the year ended March 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. My responsibility is to
express an opinion on these consolidated financial statements based on my
audit The financial statements of The Singing Machine Company, Inc. as of
March 31, 1997, were audited by other auditors whose report, dated December
3, 1997, expressed a qualified opinion on those statements.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. I believe that our
audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Singing Machine Company, Inc. and Subsidiary at March 31, 1998, and the
results of their operations and their cash flows for the year ended March 31,
1998, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that The Singing Machine Company, Inc. and Subsidiary will continue
as a going concern.
As discussed in Note 13 to the consolidated financial statements, the
Company's March 31, 1998 accounts receivable, retained earnings (accumulated
deficit) and additional paid in capital accounts previously reported as
$532,765, ($10,453,257) and $9,986,867, respectively, should have been
$358,844, -0- and -0-. This discovery was made subsequent to the issuance of
the consolidated financial statements. The consolidated financial statements
have been restated to reflect these corrections.
/s/ Samuel F. May Jr. & Company
Samuel F. May Jr. & Company
Certified Public Accountants
Boca Raton, Florida
July 20, 1999, except for
Note 13, as to which date
is October 12, 1998
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 1998
ASSETS
(Restated)
CURRENT ASSETS:
Cash $ 7,770
Trade accounts receivable,
net of allowance
for doubtful accounts of $80,000 358,844
Due from officer 25,489
Inventories, net 410,293
Prepaid expenses
and other current assets 44,754
Total current assets 847,150
EQUIPMENT, net of accumulated
depreciation of $163,064 19,435
INTANGIBLE ASSET:
Investment in song library, net of accumulated
amortization of $398,328 46,590
Reorganization Costs 641,422
Total intangible assets 688,012
Total assets $ 1,544,597
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 271,656
Trade accounts payable to related parties 229,754
Accrued expenses 519,382
Royalties payable 41,809
Loans payable 100,000
Due to factor 54,982
Total current liabilities 1,217,583
COMMITMENTS AND CONTINGENCIES
Trade accounts payable of subsidiary 312,334
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
10,000,000 shares authorized;
2,468,066 shares issued and outstanding 24,680
Additional paid-in capital -
Retained earnings (accumulated deficit) -
Total shareholders' equity 24,680
Total liabilities and
shareholders' equity $ 1,554,597
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended March 31,
1998 1997
(Restated)
<S> <C> <C>
REVENUES:
Equipment sales, net $ 5,354,678 $ 8,953,462
Music sales, net 693,885 1,610,594
Commission income
- related party - 90,583
Other income 7,538 20,240
Total revenues 6,056,101 10,674,879
COST AND EXPENSES:
Cost of equipment sales 4,734,633 8,060,973
Cost of music sales 317,644 1,084,386
Other operating expenses 181,005 576,602
Selling, general and
administrative expenses 2,283,590 2,370,746
Depreciation and amortization 177,268 400,084
Impairment of long-lived assets - 1,609,973
Total costs and expenses 7,694,140 14,102,764
Loss from operations (1,638,039) (3,427,885)
OTHER (EXPENSES) INCOME:
Interest expense (28,514) (173,639)
Interest income 2,870 5,033
Factoring fees (95,257) (235,312)
Gain (loss) on sale or
abandonment of
property and equipment (25,822) (43,325)
Total other expenses (146,723) (447,243)
LOSS BEFORE EXTRAORDINARY ITEM (1,784,762) (3,875,128)
Extraordinary item:
Early extinguishment of debt,
net of income taxes 4,489,750 -
Income before provision
for income taxes 2,704,988 -
PROVISION FOR INCOME TAXES - -
NET INCOME (LOSS) $ 2,704,988 $ (3,875,128)
NET INCOME (LOSS)
PER COMMON SHARE
(Basic and Diluted) $ 7,157 $ (13,759)
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING
(Basic and Diluted) 377,936 281,651
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended March 31, 1998 (Restated) and 1997
<TABLE>
<CAPTION>
Retained Total
Common Stock Additional Earnings Shareholders'
$.01 Par Value Paid-In (Accumulated) Equity
Shares Amount Capital (Deficit) (Deficit)
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996 281,159 $ 2,812 $ 5,852,473 $ (5,671,544) $ 183,741
Issuance of common shares for
debt settlement 7,200 72 17,927 - 17,999
Net loss for the year ended
March 31, 1997 - - - (3,875,128) (3,875,128)
Balance at March 31, 1997 288,359 $ 2,884 $ 5,870,400 $ (9,546,672) $(3,673,388)
Issuance of common shares for
debt settlement 2,068,576 20,685 330,973 - 351,658
Issuance of common shares for
settlement with former officer 111,131 1,111 (1,111) - -
Reorganization due to fresh
start accounting - - (6,200,262) 6,041,684 641,422
Net income for the year ended
March 31, 1998 - - - 2,704,988 2,704,988
Balance at March 31, 1998 2,468,066 24,680 $ - $ - $ 24,680
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended March 31,
1998 1997
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 2,704,985 $ (3,875,128)
Adjustments to reconcile net loss
to net cash provided by
(used in) operations:
Depreciation and amortization 177,268 400,084
Impairment of long-lived assets - 1,609,973
(Gain) Loss on sale or abandonment of
property and equipment 25,822 43,325
Changes in operating assets
and liabilities:
Trade accounts receivable (49,364) (124,873)
Due from factor (3) 33,833
Inventories 759,724 1,136,415
Prepaid expenses and other 8,080 50,037
Income tax receivable - -
Bank overdraft (10,599) 10,599
Trade accounts payable (1,956,456) 1,101,286
Trade accounts payable
to related parties (195,109) (80,771)
Accrued expenses (434,928) (53,127)
Royalties payable (678,456) (123,784)
Net cash provided by operating activities 350,967 127,869
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment - (732)
Proceeds from sale of property
and equipment - -
Additions to song library - -
Due from officer 5,689 (975)
Net cash used in investing activities 5,689 (1,707)
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to factor (167,461) 222,443
Issuance of common stock for
debt settlement 351,658 -
Issuance of bridge warrants - -
Loans payable (543,305) (338,496)
Net cash used in financing activities (359,108) (116,053)
Net increase (decrease) in cash (2,452) 10,109
Cash at beginning of year 10,222 113
Cash at end of year $ 7,770 $ 10,222
SUPPLEMENTAL CASH FLOW INFORMATION
Issuance of common stock
for debt settlement $ 4,137,152 $ 17,999
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization and Basis of Presentation - The Singing Machine
Company, Inc. and Subsidiary (the Company) is primarily engaged in
the production, distribution, and marketing of karaoke music
recordings, as well as the distribution and marketing of electronic
karaoke audio equipment and accessories. The Company also acts as
the exclusive commissioned sales agent for a related party which
sells karaoke audio equipment to both unrelated parties located in
the United States and internationally, and to the Company for
distribution within the United States.
On November 18, 1994, the Company completed an initial public
offering of its common stock on Form SB-2.
On April 11, 1997, The Singing Machine Company, Inc. filed a
voluntary petition for relief pursuant to Chapter 11 of the United
States Bankruptcy Act. Accordingly, all debts have bene classified
as debts subject to compromise. See Note 12 to the consolidated
financial statements related to the Company's Plan of
Reorganization, as Amended.
2. Principles of Consolidation - The consolidated financial statements
include the accounts of The Singing Machine Company, Inc. and its
wholly-owned foreign subsidiary. All significant intercompany
transactions have been eliminated.
3. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
4. Foreign Currency Translation - Local currency is generally
considered the functional currency outside the United States.
Assets and liabilities are translated at the year-end exchange rate.
Income and expense items are translated at average rates of exchange
prevailing during the year. The related translation adjustment is
not material.
5. Inventories - Inventories are substantially all finished goods,
which consist primarily of electronic karaoke audio equipment
accessories, audio and compact discs. Inventories are stated at the
lower of cost (first-in, first-out method) or market. As of March
31, 1997, the carrying value of all audio and video tapes was
reviewed by the Company and based upon the outcome of such review,
the Company has recorded a reduction in the carrying value of such
assets in the amount of $529,414 , which was charged to cost of
sales.
F-6
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
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.
Amortization expense charged to operations for the fiscal years
ended March 31, 1998 and 1997 amounted to $44,492 and $126,507,
respectively.
8. Property and Equipment - Property and equipment is recorded at cost
less accumulated depreciation and amortization. Depreciation is
provided using an accelerated method over the estimated useful
lives of the related assets. During July, 1997, the Company moved
to more cost effective facilities. All leasehold improvements and
equipment associated with the prior facility were written down to
$-0- value.
9. Costs in Excess of Net Assets Acquired and Trademarks - The
carrying value of goodwill and trademarks are reviewed if the facts
and circumstances suggest it may be impaired. If this review
indicates that the goodwill and trademarks will not be recoverable,
as determined based on the estimated undiscounted cash of the
entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill and trademarks is reduced
by the estimated shortfall of discounted cash flows. As of March
31, 1997, the carrying value of goodwill and trademarks was
reviewed by the Company and based upon the outcome of such review,
the Company has recorded a reduction in the carrying value of such
assets relating to music sales in the amount of $1,080,828.
Accordingly, the write down of goodwill and trademarks has been
charged to operations.
10. Income Taxes - Income taxes are accounted for under the asset and
liability method of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). Deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
F-7
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
10. 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
1998 and 1997 periods, the effect of the common stock equivalents
would be antidilutive and has not been included in the calculation.
13. Pronouncements - In fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
Per Share," which supercedes Accounting Principles Board Opinion
No. 15. Pursuant to SFAS No. 128, earnings (loss) per common share
is computed by dividing net income (loss) available to common
stockholders by the weighted average number of shares outstanding
during the period. Diluted earnings per share reflect the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock. For the
fiscal years ended March 31, 1998 and 1997, there is no difference
between basic and diluted net loss per share or between the basic
and diluted net loss per share as previously reported. Potential
common shares from stock options, warrants, and convertible
preferred stock are excluded in computing basic and diluted net
loss per share as their effects would be antidilutive. The
adoption of SFAS No. 128 did not have a material impact on the
Company's consolidated financial statements.
14. Fair Market Value of Financial Instruments - The carrying amount
reported in the consolidated balance sheet for cash and cash
equivalents, note payable, accounts payable, and accrued
liabilities approximates fair market value due to the immediate or
short-term maturity of these financial instruments. The Company's
liabilities are subject to compromise as discussed in note 12 to
the consolidated financial statements.
F-8
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As shown in
the accompanying consolidated financial statements, the Company incurred
losses and there is an accumulated deficit of $10,453,257 at March 31,
1998. Management of the Company believes that it has instituted certain
initiatives, including an enhanced sales focus and cost reductions that
will result in returning the Company to profitable operations in fiscal
1999, and the Company's backlog of orders placed by customers indicate
this strategy is working.
NOTE 3 - SALE OF RECEIVABLES WITH RECOURSE
The Company sells certain trade accounts receivable, subject to full
recourse provisions, pursuant to a factoring agreement, as amended. At
March 31, 1998, the outstanding balance of such receivables for which
the Company is contingently liable was approximately $532,765.
The Company received proceeds of approximately $1,987,000 and $2,855,000
in the fiscal 1998 period and fiscal 1997, respectively, upon the sale
of trade accounts receivable under this agreement, and incurred
approximately $95,257 and $235,000 in factor fees, respectively. All of
the Company's accounts receivables, inventories, and intangibles are
pledged as collateral under this agreement, and the factor holds back
50% of the approved receivable face amount as security. Minimum factor
fees were $6,667 per month.
NOTE 4 - EQUIPMENT
A summary of equipment as of March 31, 1998 is as follows:
Estimated
Useful Lives
(Years)
Computer equipment 5 $ 56,212
Office equipment 7 42,915
99,127
Less accumulated depreciation 79,692
Totals $ 19,435
Depreciation and amortization expense on property and equipment for the
fiscal 1998 and fiscal 1997 periods is approximately $177,268 and
$139,152, respectively.
F-9
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 5 - LOANS PAYABLE
As of March 31, 1998, loan payable consists of the following:
Note payable, bearing annual interest
at 10%, due upon demand and
subject to compromise $ 20,000
Note payable, bearing annual interest
at 12% due September 30, 1998,
and subject to compromise
to an officer and director 80,000
Totals $ 100,000
NOTE 6 - COMMITMENTS AND CONTINGENCIES
On May 1, 1997, the Company entered into a lease for an office and
warehouse facility for a term of 25 months. Pursuant to the terms of
the lease, the Company must pay maintenance, insurance, and real estate
taxes. Total rent expense was approximately $77,724 and $203,000 in the
1998 and fiscal 1997 periods, respectively. Future minimum lease
commitments under noncancellable, the operating lease are as follows:
Year Ending March 31:
1999 $ 78,703
2000 26,234
2001 -
$ 104,937
NOTE 7 - RELATED PARTY TRANSACTIONS
At March 31, 1998, the amount due from officer bears interest monthly at
9% per annum and is due on March 31, 1999.
The Company's Hong Kong wholly-owned subsidiary, International SMC (HK)
Ltd., operates as an intermediary to purchase Karaoke hardware from
factories located in China.
During the fiscal 1998 and 1997 periods, the Company purchased certain
karaoke audio equipment and accessories from Far East companies (related
party suppliers) controlled by a director. During fiscal 1998, the
Company purchased goods from FLX (HK) Limited, a company related through
a common director, in the amount of approximately $1,200,000. During
fiscal 1997, the Company purchased approximately $1,900,000.
F-10
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 8 - SHAREHOLDERS' DEFICIT
Effective May 3, 1994, the Company adopted a stock option plan (the
Plan), which provides for the granting of both incentive and
nonqualified stock options to key personnel, including officers,
directors, consultants, and advisors of the Company, based upon the
determination of the Board of Directors. The Plan was amended on June
29,1994, and incentive stock options were granted under the Plan to
purchase 293,700 shares of the Company's common stock. The incentive
stock options expire in 1999 and 2004.
On April 1, 1998, the Company effectuated a one for ten (1:10) reverse
stock split. The primary purpose of the split is pursuant to the
Company's Plan of Reorganization as Amended on March 17, 1998. Trading
in the post-split shares commenced at the opening of business on April
1, 1998. No additional shares were issued in connection with the
reverse split and those stockholders entitled to receive fractional
shares received shares based on rounding to the nearest whole number.
During April, 1998, the Company filed an amendment to its Articles of
Incorporation increasing the authorized shares of the Company's common
stock to ten million (10,000,000) shares.
The company's creditors, pursuant to the Company's Plan of
Reorganization, as Amended, who elected to receive shares will be issued
an aggregate of 2,068,576 post-split shares of common stock. The
Company's legal counsel has written to each creditor requesting that the
necessary information be completed and returned in order to issue the
common stock. The financial statements reflect the issuance of
2,068,576 post-split shares of common stock to the Company's creditors.
These financial statements reflect the one for ten (1:10) reverse stock
split in computing the weighted average common and common equivalent
shares outstanding and the net loss per common share amounts and
accounts for the subsequent increase of authorized common shares
pursuant to the Company's amendment to its Articles of Incorporation
during April, 1998.
At March 31, 1998, 215,000 of these options are currently exercisable,
and the remaining 78,700, held by three individuals, become exercisable
in maximum increments of 20,000 each year through June 29,1999.
Additional incentive or nonqualified stock options may be granted to
purchase up to 191,300 shares of the Company's common stock. At March
31, 1998, 485,000 shares of common stock have been reserved for issuance
under the Plan.
On November 18, 1994, the Company closed the initial public offering of
1,380,000 shares of its common stock and 1,380,000 warrants (the Public
Warrants) for an aggregate purchase price of approximately $7,080,000.
The Public Warrants may be exercised at anytime beginning November 10,
1995, and continuing thereafter until November 10, 1999.
F-11
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 8 - SHAREHOLDERS' DEFICIT
(Continued)
Also, included in the offering were 144,000 warrants issued to the
Company's underwriters (the Representative's Warrants). The
Representative's Warrants entitle the registered holders to purchase one
share of the Company's common stock and a warrant to purchase an
additional share of common stock. The warrants became exercisable
November 10, 1995, and will continue thereafter until November 10, 1999.
During April, 1995, 272,250 Bridge Warrants were exercised resulting in
net proceeds to the Company of $320,578.
During March, 1997, the Company issued 7,200 shares post-split of common
stock to settle outstanding debt of approximately $18,000.
NOTE 9 - INCOME TAXES
On September 3, 1991, the Company underwent a change of ownership (as
defined by Internal Revenue Code Section 382). This change limits the
Company's ability to utilize its approximately $4,057,000 of net
operating loss carryforwards (NOLs) as of March 31, 1997, to $14,000 per
year (these NOLs expire from 2003 to 2007). At March 31, 1998, the
Company has net operating loss carryforwards of approximately
$10,635,490 (which are not subject to the above limitations) that expire
through 2012. A valuation allowance of approximately $4,136,300 has
been recognized to offset primarily all of the deferred tax assets
related to these carryforwards.
The differences between the statutory United States federal income tax
rate and the effective tax rate are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1998 March 31, 1997
<S> <C> <C>
Statutory rate (34.0)% (34.0)%
State income tax effect, net of
federal benefit (4.6)% (4.6)%
Changes in valuation allowance 38.6 % 38.6 %
Effective rate - % - %
</TABLE>
F-12
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 9 - INCOME TAXES
(Continued)
At March 31, 1998, the components of the cumulative effect of temporary
differences in the deferred income tax liability and income tax asset
balances are as follows:
Total
Assets:
Net operating loss carryforwards $ 4,105,300
Reserves for bad debts,
sales returns and warranties 31,000
Sub-totals 4,136,300
Valuation allowance (4,136,300)
Net deferred tax assets $ -
The net change in the valuation allowance during the fiscal 1998 period
was an increase of $1,436,300.
NOTE 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company derives primarily all of its equipment and music sales
revenues from distributors and retailers of such products in the United
States. Financial instruments, which potentially subject the company to
concentrations of credit risk, consist principally of cash and accounts
receivable (including receivables sold to factor with recourse). The
credit risk associated with cash is considered low due to the credit
quality of the depository institution. The Company's allowance for
doubtful accounts is based upon management's estimates and historical
experience. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral.
During the fiscal 1998 and 1997 periods, 91% and 79%, respectively, of
the Company's total revenues were derived from sales to five customers.
Sales derived from customers who individually purchased greater than 10%
of total revenues were as follows:
Fiscal 1998 Fiscal 1997
Target 36% 47%
JC Penney 19% 13%
Best Buy 22% --
Fingerhut 11% --
F-13
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 11 - FOURTH QUARTER ADJUSTMENTS (UNAUDITED)
The following is a summary of certain year-end adjustment that are
considered material in the aggregate to the results of the fourth
quarter.
Fiscal 1998 Fiscal 1997
Inventory write-down $ - $ 529,414
Impairment of long-lived assets - 1,900,568
Adjustment of royalties payable - (290,595)
NOTE 12 - DESCRIPTION OF PETITION
On April 11, 1997, The Singing Machine Company, Inc. filed a voluntary
petition of relief pursuant to Chapter 11 of the United States
Bankruptcy Act. Under Chapter 11, certain claims against the Debtor in
existence prior to the filing of the petitions for relief under the
federal bankruptcy laws are stayed while the Debtor continues business
operations as Debtor-in-possession. These claims are reflected in the
March 31, 1998, balance sheet as "liabilities subject to compromise."
Additional claims (liabilities subject to compromise) may arise
subsequent to the filing date resulting from rejection of executory
contracts, including leases, and from the determination by the court (or
agreed to by parties in interest) of allowed claims for contingencies
and other disputed amounts. Claims secured against the Debtor's assets
("secured claims") also are stayed, although the holders of such claims
have the right to move the court for relief from the stay. Secured
claims are secured primarily by liens on the Debtor's property, plant,
and equipment.
On March 17, 1998, the United States Bankruptcy Court approved the
Company's Plan of Reorganization, as Amended, and the Company emerged
from Chapter 11 Bankruptcy.
NOTE 13 - FRESH START ACCOUNTING
The Company's consolidated financial statements have been restated on
July 20, 1999 to reflect the changes in the trade accounts receivable
common stock, additional paid in capital, retained earnings (accumulated
deficit) account as of March 31, 1998.
F-14
<PAGE>
THE SINGING MACHINE COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONTENTS
PAGE FF-1 - INDEPENDENT AUDITORS' REPORT
PAGE FF-2 - CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999
PAGE FF-3 - CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
YEAR ENDED MARCH 31, 1999
PAGE FF-4 - CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE YEAR ENDED
MARCH 31, 1999
PAGE FF-5 - CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE
YEAR ENDED MARCH 31, 1999
PAGE FF6 - FF18 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS
OF MARCH 31, 1999
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholders
The Singing Machine Company, Inc.
and Subsidiary
We have audited the accompanying consolidated balance sheet of The
Singing Machine Company, Inc. and Subsidiary as of March 31, 1999, and
the related consolidated statement of operation, stockholders' equity,
and cash flows for the year then ended. 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 audits 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, 1999, and the
results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles.
/s/ Weinberg & Company, P.A.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
July 23, 1999
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1999
ASSETS
CURRENT ASSETS
Cash $ 49,288
Trade accounts receivable, net of allowance
for doubtful accounts of $19,900 1,127,970
Due from officer 13,880
Inventories, net 424,806
Prepaid expenses and other current assets 27,154
Deferred tax asset 170,000
Total Current Assets 1,813,098
PROPERTY AND EQUIPMENT, NET 16,447
OTHER ASSETS
Reorganization intangible - net 549,790
TOTAL ASSETS $ 2,379,335
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 830,088
Accrued expenses 392,926
Notes payable 63,000
Due to factor 128,581
Total Current Liabilities 1,414,595
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value, 1,000,000
shares authorized, none issued and outstanding -
Common stock, $.01 par value;
75,000,000 shares authorized;
2,498,451 shares issued and outstanding 24,984
Additional paid-in capital 15,600
Retained Earnings 924,156
Total Shareholders' Equity 964,740
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,379,335
See accompanying notes to consolidated financial statements.
FF-2
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1999
NET SALES $ 9,547,816
COST OF SALES 7,029,359
GROSS PROFIT 2,518,457
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,544,806
INCOME FROM OPERATIONS 973,651
OTHER INCOME (EXPENSES):
Other Income 2,784
Interest expense (5,427)
Interest income 3,254
Factoring fees (220,106)
Net other expenses (219,495)
INCOME BEFORE INCOME TAX BENEFIT 754,156
INCOME TAX BENEFIT 170,000
NET INCOME $ 924,156
NET INCOME PER COMMON SHARE:
Basic $ 0.3733
Diluted $ 0.3565
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Basic 2,475,308
Diluted 2,592,167
See accompanying notes to consolidated financial statements.
FF-3
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1998 2,468,066 $ 24,680 $ - $ - $ 24,680
Issuance of
common stock for
services 30,385 304 15,600 - 15,904
Net Income 1999 - - - 924,156 924,156
BALANCE AT
MARCH 31, 1999 2,498,451 $ 24,984 $ 15,600 $ 924,156 $ 964,740
</TABLE>
The accompanying notes to consolidated financial statements.
FF-4
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 924,156
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Depreciation and amortization 144,234
Issuance of common stock for services 15,904
Deferred tax benefit (170,000)
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable (769,127)
Inventories (14,513)
Prepaid expenses and other assets 17,600
Increase (decrease) in:
Trade accounts payable (25,465)
Accrued expenses (126,456)
Net cash used in
operating activities (3,667)
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchase of
computer equipment (3,023)
Decrease due from officer 11,609
Net cash provided by
investing activities 8,586
CASH FLOW FROM FINANCING ACTIVITIES
Notes payable (37,000)
Due from factor 73,599
Net cash provided by
financing activities 36,599
Increase in cash and cash equivalents 41,518
Cash and cash equivalents beginning of year 7,770
CASH AND CASH EQUIVALENTS END OF YEAR $ 49,288
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 10,327
See accompanying notes to consolidated financial statements.
FF-5
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
Note 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
The Singing Machine Company, Inc. and Subsidiary (the "Company") is
primarily engaged in the production, marketing and sale of consumer
karaoke audio equipment, accessories, and recordings. The products are
sold directly to distributors and retail customers.
(B) Principles of Consolidation
The consolidated financial statements include the accounts of The
Singing Machine Company, Inc. and its wholly-owned Hong Kong Subsidiary,
International SMC (HK) Limited ("Hong Kong Subsidiary"). All
significant intercompany balances and transactions have been eliminated
in the consolidation.
(C) Foreign Currency Translation
The functional currency of the Company's international Hong Kong
Subsidiary is the local currency. The financial statements of the
subsidiary are translated to United States dollars using year-end rates
of exchange for assets and liabilities, and average rates of exchange
for the year for revenues, costs, and expenses. Net gains and losses
resulting from foreign exchange transactions are included in the
consolidated statements of operations and were not significant during
the periods presented. The cumulative translation adjustment, and
effect of exchange rate changes on cash at March 31, 1999 was not
material.
(D) 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.
(E) Cash and Cash Equivalents
For purposes of the cash flow statement the Company considers all highly
liquid investments with maturities of three months or less at the time
of purchase to be cash equivalents.
(F) Inventories
Inventories primarily consist of finished goods, which are comprised of
electronic karaoke audio equipment, accessories, audio tapes and compact
discs. Inventories are stated at the lower of cost or market, as
determined using the first in, first out method.
FF-6
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
Note 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)
(G) 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 the investment
in song library is periodically reviewed to determine if the facts and
circumstances suggest that it may be impaired. If this review indicates
that the investment will not be recoverable, as determined based on the
estimated undiscounted cash flow over the remaining amortization period,
the Company's carrying value of the investment is reduced by the
estimated shortfall. As of March 31, 1999, the carrying value of the
investment in song library has been reduced to zero. Amortization
expense charged to operations during 1999 totaled $46,590.
(H) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Expenditures for repairs and maintenance are charged
to expense as incurred. Depreciation is provided using an accelerated
method over the estimated useful lives of the related assets.
(I) 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"). Under 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.
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 of a change
in tax rates is recognized in income in the period that includes the
enactment date.
(J) Revenue Recognition
Revenue from the sale of equipment, accessories and recordings are
recognized upon shipment and are reported net of actual and estimated
future returns and allowances. Commission income is recognized as
earned.
(K) Net Income Per Common Share
Net income per common share for the year ended March 31, 1999 is
computed based on the weighted average common shares and dilutive common
stock equivalents outstanding during the year as defined by Financial
Accounting Standards, No 128, "Earnings Per Share".
FF-7
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
Note 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)
(L) Reorganization Under United States Bankruptcy Code and Fresh Start
Reporting
On April 11, 1997 the Company filed for protection under the provisions
of the United States Bankruptcy Code. In March 1998, the United States
Bankruptcy Court approved the Company's Plan of Reorganization, as
Amended, and the Company emerged from Chapter 11 Bankruptcy. At that
time, the Company applied Fresh Start Reporting in accordance with the
American Institute of Certified Public Accountants' Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code ("SOP 90-7"). As a result of the application of SOP
90-7, the Company restated its assets and liabilities to their fair
values as necessary, and reclassified its accumulated deficit of
$6,841,684 against available additional paid-in capital of $6,200,262
resulting in a reorganization intangible asset of $641,422, which is
being amortized on a straight line basis over a period of seven years.
(See Note 4).
NOTE 2 - ACCOUNTS RECEIVABLE AND FACTOR AGREEMENT
The Company sells certain trade accounts receivable, without recourse,
pursuant to a factoring agreement (the "Agreement"). Under the
agreement, the factor advances 70% of the face value of these
receivables to the Company. The Company is charged a variable
percentage fee based upon the length of the collection period.
Factoring fees, sales returns and uncollectible accounts are charged
against the 30% factor reserve held by the factor and the balance is
remitted to the Company periodically as accounts are collected by the
factor. For the year ending March 31, 1999 the Company incurred
$220,106 in factoring fees. All of the Company's accounts receivable,
inventories, and intangibles are pledged as collateral under this
agreement. At March 31, 1999, the outstanding balance of such
receivables was approximately $416,000 of which $128,581 is advanced and
due to the factor. The Company terminated this agreement during June
1999. (See Note 12).
FF-8
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999 is as follows:
Estimated
Useful Lives
(Years)
Computer equipment 5 $ 59,235
Office equipment 7 42,915
102,150
Less accumulated depreciation (85,703)
Totals $ 16,447
Depreciation expense on equipment for the year ended March 31, 1999 was
$6,012.
NOTE 4 - REORGANIZATION INTANGIBLE
The reorganization intangible resulted in March 1998 from the
application of Fresh Start Accounting pursuant to the American Institute
of Certified Public Accountants Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" (See
Note 1(L)). The reorganization intangible is being amortized over a
period of seven years using a straight line basis.
The reorganization intangible at March 31, 1999 consisted of the
following:
Reorganization intangible $ 641,422
Less accumulated amortization 91,632
Balance at March 31, 1999 $ 549,790
Amortization expense on the reorganization intangible for the year
ended March 31, 1999 was $91,632.
FF-9
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 5 - NOTES PAYABLE
As of March 31, 1999 notes payable consist of the following:
Note payable, bearing annual interest at 10%,
due upon demand $ 43,000
Note payable, bearing annual interest at 12%, due
September 30, 1999 $ 20,000
Totals $ 63,000
NOTE 6 - COMMITMENTS AND CONTINGENCIES
(A) Leases
On March 31, 1999, the Company entered into a lease for an office and
warehouse facility for a term of 61 months. The term is expected to
begin in late July 1999. Pursuant to the terms of the lease, the
Company must pay maintenance and real estate taxes of approximately
$9,000 per year. The Company entered into a lease for office equipment
payable monthly at $289, through August 1999. Total rent expense was
approximately $60,953 for the year ended March 31, 1999. Future minimum
lease payments under noncancellable, operating leases are as follows:
Year Ending March 31:
2000 $ 57,200
2001 56,800
2002 59,500
2003 61,900
Thereafter 80,700
$316,100
(B) Year 2000 Issues
The Company is aware of the issues associated with the programming code
in existing computer systems. As the millennium (Year 2000) approaches.
The "Year 2000" problem is pervasive and complex as virtually every
computer operation will be affected in some way by the rollover of the
two-digit year to 00. The issue is whether the computer system will
properly recognize date-sensitive information when the year changes to
2000. Systems that do not properly recognize such information could
generate erroneous data or cause a system to fail.
FF-10
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 6 - COMMITMENTS AND CONTINGENCIES - (CONT'D)
(B) Year 2000 Issues - (CONT'D)
Management has compiled a list of both internally and externally
supplied information systems that utilize imbedded data codes which
could experience operational difficulties in the year 2000. The
Company uses third party applications or suppliers for all high level
systems and reporting. Management has determined that their primary
accounting and reporting software is not Year 2000 compliant.
Management is currently testing new systems for which it is responsible.
The Company is planning a complete internal computer system replacement
which is totally year 2000 compliant. The Company has not incurred any
material costs to date relating to investigating the Year 2000 issue.
Initial costs for new Year 2000 compliant hardware and software are
estimated to be approximately $36,000 for this conversion. It is the
Company's objective to be in Year 2000 compliance by the end of
September 1999, however, no assurance can be given that such objective
will be met.
(C) Lines and Letters of Credit
The Company has entered into a financing agreement with a financing
corporation. The financing corporation opens letters of credits on
behalf of the Company to purchase inventory. Under terms of the
agreement, the Company pays a flat fee negotiated based on each letter
of credit and the maximum amount of a single letter of credit can not
exceed $300,000. The financing agreement expires on July 1, 1999 (Note
12). At March 31, 1999, the Company has letters of credit open with
the financing corporation of $226,588. The factor (see Note 2) has
agreed under a third party agreement to factor receivables related to
these letters of credit and pays the financing corporation directly.
The Company through its Hong Kong Subsidiary has entered into an
agreement with Delta Asia Financial Group, Hong Kong ("Delta") to
provide it with a United States letter of credit facility of $200,000.
The cost of the credit facility is prime plus 2 1/2% and bank charges
for opening letters of credit. The facility terminated under the
agreement on May 31, 1999 and was not renewed. This facility is
guaranteed by a former director of the Company.
FF-11
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 7 - RELATED PARTY TRANSACTIONS
At March 31, 1999, the amount due from officer bears interest monthly at
9% per annum and is due on March 31, 2000.
The Company's Hong Kong Subsidiary, operates as an intermediary to
purchase karaoke hardware from factories located in China on behalf of
the Company.
The Company purchased certain karaoke audio equipment and accessories
from a Far East company controlled by a shareholder of the Company. The
total goods purchased from this Company aggregated approximately
$1,700,000 during 1999.
NOTE 8 - STOCKHOLDERS' EQUITY
(A) Reverse Stock Split
On April 1, 1998 the Company effected a one-for-ten (1:10) reverse stock
split. The primary purpose of the split is pursuant to the Company's
Plan of Reorganization, as Amended, on March 17, 1998. Trading in the
post-split shares commenced at the opening of business on April 1, 1998.
No additional shares were issued in connection with the reverse split
and those stockholders entitled to receive fractional shares received
shares based on rounding to the nearest whole number.
(B) Amendment to Authorized Common Shares
During April 1998, subsequent to the reorganization, the Company filed
an amendment to its Articles of Incorporation increasing the authorized
shares of the Company's common stock to ten million (10,000,000) shares
from one million (1,000,000) shares. (See Note 12)
(C) Common Stock Warrants
Pursuant to the Company's initial public offering in November 1994, the
company issued 1,656,000, 87,750, and 144,000 public warrants, bridge
warrants and underwriter warrants, respectively, as adjusted for a
January 1995 20% common stock split. Each warrant provided for the
purchase of one share of the Company's common stock at an exercise price
of $3.60, $1.20 and $4.50 for the public, bridge and underwriter
warrants, respectively, as adjusted for the January 1995 common stock
split. In addition, the underwriter warrants entitle the holder to
acquire an additional 144,000 warrants to acquire 144,000 shares of
common stock at a price of $5.40 per share.
FF-12
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 8 - STOCKHOLDERS' EQUITY - (CONT'D)
(C) Common Stock Warrants - (CONT'D)
As a result of the March 1998 reorganization (see Note 1(L)), all of the
warrants have been amended whereby ten warrants must now be exchanged
for each share of common stock with the exercise price per warrant
remaining the same. The warrants became exercisable on November 10,
1995 and expire on November 10, 1999. Through the date of this report,
none of the warrants have been exercised.
(D) Stock Options
Effective May 3, 1994, as amended on June 29, 1994 and March 18,1999,
the Board of Directors adopted a Stock Option Plan (the "Plan"). The
plan was developed to provide a means whereby directors and selected
employees, officers, consultants, and advisors of the Company may be
granted incentive or non-qualified stock options to purchase common
stock of the Company. As of March 31, 1999, the Plan authorizes options
up to an aggregate of 600,000 shares of the Company's common stock.
The authorized 600,000 options are a result of the application of a one-
for-ten reverse common stock split (see Note 8(A)) on the original
480,000 authorized options and a March 18, 1999 amendment to the plan
increasing the authorized stock options to 600,000.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been
recognized for options issued under the plan as of March 31, 1999. Had
compensation cost for the Company's stock-based compensation plan been
determined on the fair value at the grant dates for awards under that
plan, consistent with Statement of Accounting Standards No 123,
"Accounting for Stock Based Compensation" (Statement No. 123), the
Company's net income for the year ended March 31, 1999 would have been
decreased to the pro-forma amounts indicated below.
Net income As reported $ 924,156
Pro forma $ 824,356
Net income per share-basic As reported $ 0.3733
Pro forma $ 0.3330
Net income per share-diluted As reported $ 0.3565
Pro forma $ 0.3180
FF-13
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 8 - STOCKHOLDERS' EQUITY - (CONT'D)
(D) Stock Options - (CONT'D)
The effect of applying Statement No. 123 is not likely to be
representative of the effects on reported net income for future years
due to, among other things, the effects of vesting.
For financial statement disclosure purposes the fair market value of
each stock option granted during 1999 was estimated on the date of grant
using the Black-Scholes Model in accordance with Statement No. 123 using
the following weighted-average assumptions: expected dividend yield 0%,
risk-free interest rate of 5.59%, volatility 65% and expected term of
three years.
A summary of the Company's Stock Option Plan as of March 31, 1999 and
changes during the year is presented below:
Weighted
Number of Average
Options Exercise Price
Stock Options
Balance at beginning of period 47,870 $ 4.87
Granted 499,000 $ 0.43
Exercised - -
Forfeited (20,370) $ 4.33
Balance at end of period 526,500 $ 0.68
Options exercisable at end
of period 27,500 $ 5.27
Weighted average fair value
of options granted during
the period $ 0.20
FF-14
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 8 - STOCKHOLDERS' EQUITY - (CONT'D)
(D) Stock Options - (CONT'D)
The following table summarizes information about stock options
outstanding at March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at Contractual Exercise At March 31 Exercise
Price March 31, 1999 Life Price 1998 Price
<S> <C> <C> <C> <C> <C>
$5.00-$5.50 22,500 0.25 Years $ 5.33 22,500 $ 5.33
$5.00 5,000 4.17 Years $ 5.00 5,000 $ 5.00
$0.43 499,000 4.75 Years $ 0.43 - $ -
526,500 4.55 Years $ 4.45 27,500 $ 5.27
</TABLE>
Subsequent to March 31, 1999, 75,000 options exercisable at $5.50, and
3,000 options exercisable at $5.00 have been terminated due to attrition
of the holders.
NOTE 9 - INCOME TAXES
The Company files separate tax returns for the parent and for the Hong
Kong Subsidiary. The income tax expense (benefit) for federal, foreign
and state income taxes in the consolidated statement of income consisted
of the following components for 1999:
Current:
U.S. Federal $ -
Foreign -
State -
-
Deferred:
U.S. Federal (170,000)
Foreign -
Total $(170,000)
FF-15
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 9 - INCOME TAXES - (CONT'D)
The actual tax expense differs from the "expected" tax expense for the
year ended March 31, 1999 (computed by applying the U.S. Federal
Corporate tax rate of 34 percent to income before taxes) as follows:
Computed "expected" tax expense $ 256,413
Benefit of U.S. and foreign net operating
loss carryforwards (256,413)
Change in the beginning of the year
valuation allowance for deferred tax
assets allocated to income tax benefit (170,000)
$ (170,000)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at March 31, 1999 are as
follows:
Deferred tax assets:
U.S. net operating loss carryforward $2,169,421
Foreign net operating loss carryforward 14,280
Total gross deferred tax assets 2,183,701
Less valuation allowance 2,013,701
Net deferred tax assets $ 170,000
At March 31, 1999, the Company had net operating loss carryforwards of
approximately $6,381,000 for income tax purposes, available to offset
future taxable income of the U.S. entity expiring on various dates
beginning in 2003 through 2013. Usage of approximately $4,057,000 of
the net operating loss is limited to $14,000 per year due to a change in
ownership under Internal Revenue Code Section 382, which occurred in
1991. These net operating losses expire from 2003 to 2007.
At March 31, 1999 the Company's Honk Kong Subsidiary had approximately
$42,000 in net operating loss carryforwards available to offset future
taxable income of the Subsidiary. The resulting deferred tax asset has
been fully offset by a valuation allowance.
The valuation allowance at April 1, 1998 was approximately $2,440,000.
The net change in the valuation allowance during the year ended March
31, 1999 was a decrease of approximately $426,000.
FF-16
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
Note 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company derives primarily all of its revenues from retailers of
products in the United States. Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist of
accounts receivable. The Company's allowance for doubtful accounts is
based upon management's estimates and historical experience. The
Company performs ongoing credit evaluations of its customers and
generally does not require collateral.
During the fiscal 1999, 91% of the Company's total revenues were derived
from sales to five customers. Sales derived from three customers who
individually purchased greater than 10% of total revenues in 1999 were
31%, 21%, and 21%, respectively.
NOTE 11 EMPLOYMENT AGREEMENTS
The Company has entered into employment contracts with two key officers.
The agreements call for base salaries of $180,000 and $92,000,
respectively with annual cost of living adjustments and travel
allowances. The agreements also call for performance bonuses equal to
five percent and two and one-half percent, respectively of net income
before interest and taxes.
NOTE 12 - SUBSEQUENT EVENTS
During April 1999, the Company filed an amendment to its Articles of
Incorporation increasing the authorized shares of the Company's common
stock to seventy-five million shares (75,000,000) from ten million
(10,000,000) shares. (See Note 8(B)). The change in authorized shares
has been shown retroactively in the consolidated financial statements as
of March 31, 1999.
During April 1999, the Company filed an amendment to its Articles of
Incorporation to authorize one million (1,000,000) shares of preferred
stock. Each share of preferred stock is entitled to 9% dividends,
preferred liquidation distribution, conversion to common stock and no
voting powers. The new authorized shares of preferred stock has been
shown retroactively in the consolidated financial statements as of March
31, 1999.
During April 1999 the Company issued a private placement memorandum,
pursuant to Rule 506 of Regulation D of the 1933 Securities Act, as
amended, to offer a minimum of 40 units and a maximum of 50 units of
stock and warrants. Each unit consists of 20,000 shares of the
Company's convertible preferred stock and 4,000 common stock purchase
warrants. The purchase price for each unit is $ 27,500. Each share of
preferred stock is convertible, at the option of the holder, into one
FF-17
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1999
NOTE 12 - SUBSEQUENT EVENTS - (CONT'D)
share of the Company's common stock at any time after issuance. Each
share of preferred stock will automatically convert into one share of
common stock on April 1, 2000. Each warrant entitles the holder to
purchase one share of the Company's common stock at $2.00 per share.
The warrants expire three years from the private placement memorandum
date. The Company's net proceeds after placement discount and
commissions but before offering expenses are estimated to be 90% of the
amount raised. As of the date of this report 50 units have been sold
and $1,375,000 gross funds have been raised.
Effective May 19, 1999, the Company, through its Hong Kong Subsidiary,
obtained a credit facility of (US) $2,000,000 from Belgian Bank, Hong
Kong, a subsidiary of Generale Bank, Belgium. This facility is a
revolving line based upon drawing down a maximum of 15% of the value of
export letters of credit lodged with Belgian Bank. There is no
expiration except that Belgian Bank reserves the right to revise the
terms and conditions at the Bank's discretion. The cost of this credit
facility is the U.S. Dollar prime rate plus 1.25%. Repayment of
principal plus interest shall be made upon negotiation of the export
letters of credit, but not later than ninety (90) days after the
advance.
During June 1999, the Company entered into a new factor agreement with
Maine Factors, Inc.. Under the terms of the agreement, the factor
advances 73.5% of the factored invoices to the Company. The Company
will pay a base fee of 3.5 % of the total accounts receivable factored.
All of the Company's accounts receivable, inventories and intangibles
are pledged as collateral under the agreement. There is no limit on the
amount of accounts receivable that can be factored under the agreement.
During July 1999, the Company entered into a new financing agreement
with a financing company. Under the terms of the new agreement, the
Company pays a flat fee negotiated based on each letter of credit and
the maximum amount of a single letter of credit cannot exceed
$1,000,000. The financing agreement expires on July 1, 2001.
FF-18
<PAGE>
EXHIBIT 16(A)
<PAGE>
Samuel F. May Jr. and Company
Certified Public Accounts
Member: AICPA
FICPA
Barnett Bank Building
23123 State Road 7, Suite 210
Boca Raton, Florida 33428
Office: (561) 487-0670 Fax: (561) 852-1646
August 5, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The Singing Machine Company, Inc.
File No. 0-24968
Gentlemen:
I was previously the principal accountant for The Singing Machine
Company, Inc. and, under the date of October 12, 1999, I reported on the
consolidated financial statements of The Singing Machine Company, Inc. and
statement of The Singing Machine Company, Inc. and subsidiaries as of and for
the year ended March 31, 1998. On February 23, 1999, our appointment as
principal accountant was terminated. I have read The Singing Machine
Company, Inc.'s statements included under Item 8 of its Form 10-KSB dated
August 5, 1999, and I agree with such statements.
Very truly yours,
/s/ Samuel F. May, Jr.
Samuel F. May, Jr.
Certified Public Accountant
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Balance
Sheet, Statement of Operations, Statements of Cash Flows and Notes thereto
incorporated in Part I, Item 1 of this Form 10-K and is qualifed in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 49,288
<SECURITIES> 0
<RECEIVABLES> 1,127,970
<ALLOWANCES> 19,900
<INVENTORY> 424,806
<CURRENT-ASSETS> 1,813,098
<PP&E> 16,447
<DEPRECIATION> 144,234
<TOTAL-ASSETS> 2,379,335
<CURRENT-LIABILITIES> 1,414,595
<BONDS> 0
0
0
<COMMON> 24,984
<OTHER-SE> 964,740
<TOTAL-LIABILITY-AND-EQUITY> 2,379,335
<SALES> 9,547,816
<TOTAL-REVENUES> 9,547,816
<CGS> 7,029,359
<TOTAL-COSTS> 1,544,806
<OTHER-EXPENSES> 219,495
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225,533
<INCOME-PRETAX> 764,156
<INCOME-TAX> (170,000)
<INCOME-CONTINUING> 924,156
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 924,156
<EPS-BASIC> 0.373
<EPS-DILUTED> 0.356
</TABLE>
