<PAGE>
As filed with the Securities and Exchange Commission on ___________, 2000
Registration No. 333-31882
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
The Singing Machine Company, Inc.
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 5065 95-3795478
-------------------------------- ----------------------------- ------------------
(State or other jurisdiction (Primary Standard (IRS Employer
of incorporation or organization) Industrial Classification) Identification No.)
</TABLE>
Edward Steele
Chief Executive Officer
The Singing Machine Company, Inc.
6601 Lyons Road 6601 Lyons Road,
Building A-7 Building A-7
Coconut Creek, FL 33073 Coconut Creek, FL 33073
Telephone: (943) 596-1000 Telephone: (954) 596-1000
Facsimile: (954) 596-2000 Facsimile: (954) 596-2000
----------------------------------- ---------------------------------
(Address and telephone number, (Name, address and telephone
including area code of Registrant's number of agent for service)
principal executive offices)
----------------------------
Copy to:
David A. Carter, Esq.
David A. Carter, P.A.
2300 Glades Road
Suite 210, West Tower
Boca Raton, Florida 33431
Telephone: (561) 750-6999
Facsimile: (561) 367-0960
Approximate Date of Commencement of Proposed Sale to the Public: As Soon as
practicable after the Registration Statement becomes effective.
================================================================================
<PAGE>
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Registration Statement is expected to be made pursuant
to Rule 434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to be Offering Price per Aggregate Offering Amount of Registration
Registered Registered (1) Security(2) Price(2) Fee
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 2,447,249 $3.50 $8,565,371.50 $2,261.25
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------
(1) Pursuant to Rule 416, there are also registered hereby such additional
indeterminate number of shares of common stock as may become issuable by
reason of stock splits, stock dividends and other adjustments to the
securities registered hereby.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
-ii-
<PAGE>
The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting on offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
Subject to Completion, Dated February ____, 2000
PROSPECTUS
2,447,249 shares of Common Stock
[GRAPHIC OMITTED]
This is an offering of 2,447,249 shares of common stock of The Singing
Machine Company, Inc., held by certain of our Securityholders. Of the 2,447,249
shares being offered by the Selling Securityholders, 284,500 shares are issuable
upon exercise of Options owned by certain of the Selling Securityholders,
1,000,000 shares are issuable upon the conversion of preferred stock owned by
certain of the Selling Securityholders, 723,200 shares are issuable upon
exercise of Warrants held by certain of the Selling Securityholders, and 439,549
Shares comprise common stock held by certain Selling Securityholders. We will
not receive any proceeds from the sale of the Shares, but we will receive
proceeds from the Selling Securityholders if they exercise their Warrants and
Options.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"SING". On __________, 2000, the closing bid price per share of our common stock
as reported by the OTC Bulletin Board was $_____.
This investment involves a high degree of risk. You should purchase
shares only if you can afford a complete loss of your investment. See "Risk
Factors" beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is ___________, 2000.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary...................................................
Risk Factors.........................................................
Use of Proceeds......................................................
Dividend Policy......................................................
Market Price of Common Stock.........................................
Selected Financial Data..............................................
Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................
Business.............................................................
Management...........................................................
Certain Transactions.................................................
Principal Securityholders............................................
Description of Securities............................................
Selling Securityholders..............................................
Plan of Distribution.................................................
Legal Matters........................................................
Experts..............................................................
Where You Can Find Additional Information............................
Index to Consolidated Financial Statements...........................
We have not authorized any dealer, sales person or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this Prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy these securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sale made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of The Singing
Machine Company, Inc. have not changed since the date hereof.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
-2-
<PAGE>
PROSPECTUS SUMMARY
The following summary may not contain all the information that may be
important to you. Before making an investment decision, you should read this
entire prospectus. Upon the completion of this offering, the only class of our
capital stock outstanding will be our common stock. Except where otherwise
indicated, all information in this prospectus assumes the conversion of all
Warrants, Options, and Preferred Stock into common stock. In this prospectus,
the "Company", "The Singing Machine", "we", "us" and "our" refer to The Singing
Machine Company, Inc., unless the context otherwise requires.
The Company
We incorporated in Delaware in 1994, and together with our wholly owned
subsidiary, International (SMC) HK, Ltd., engage in the production and
distribution of karaoke audio software and electronic recording equipment. Our
electronic karaoke machines and audio software products are marketed under The
Singing Machine(R) trademark. Our corporate offices are located at 6601 Lyons
Road, Building A-7, Coconut Creek, Florida 33073, and our telephone number is
(954) 596-1000.
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common stock offered.................................2,447,249 shares of Common Stock
Common stock issued and
outstanding prior to this offering..................2,931,975
Common stock issued and
outstanding after this offering.....................4,939,675 (1)
Use of proceeds......................................Expansion of music library, purchase of tooling for new
machine models, and other general corporate purposes
</TABLE>
- ----------------------
(1) assuming full exercise of all Options and Warrants and full conversion of
the Preferred Stock.
-3-
<PAGE>
Selected Financial Information
The selected financial information set forth below is derived from, and
should be read in conjunction with, the more detailed financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. See
"Consolidated Financial Statements")
Income Statement Items
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
1998 1999 1998 1999
---------- -------- -------- ---------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net Sales $ 6,056 $ 9,548 $ 8,504 $ 16,968
Cost of Sales 5,052 7,029 6,351 12,495
Selling, General and
Administrative Expenses 2,642 1,545 1,125 1,922
Income (loss) from operations (1,638) 974 1,027 2,551
Interest income, interest
expense and other income (147) (220) (159) (380)
Extraordinary item 4,490 - - -
Income before income tax benefit 2,705 754 868 2,171
Net tax benefit - 170 - -
Net income $ 2,705 $ 924 $ 868 $ 2,171
Net income per common share
basic $ 7.16 $ .37 $ .35 $ .75
Net income (loss) per common
share diluted $ 7.16 $ .36 $ .35 $ .53
Shares used in computing net
income (loss) per common
share - basic 378 2,475 2,468 2,899
Shares used in computing net
income (loss) per common
share - diluted 378 2,592 2,468 4,110
</TABLE>
Balance Sheet Items
<TABLE>
<CAPTION>
Nine Months As adjusted
Year Ended Ended for Exercise
March 31, December 31, of Options and
1999 1998 1999 Warrants(1)
--------- ---------- ------------- ------------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Cash (including restricted cash) $ 49 $ 8 $ 833 $ 2,183
Total current assets 1,813 847 6,075 7,425
Working capital (deficit) 399 (370) 3,948 5,298
Total Assets 2,379 1,555 6,611 7,961
Current liabilities 1,415 1,218 2,127 2,127
Long term obligations - - - -
Total shareholders' equity $ 965 $ 25 $ 4,484 $ 5,834
</TABLE>
- --------------------------------------------
(1) Adjusted to reflect the exercise of all Options and Warrants.
-4-
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below before making an investment
decision. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also impair our business operations.
These factors, among others, may cause actual results, events, or performance to
differ materially from those expressed in any forward-looking statements made in
this registration.
If any of the following events actually occurs, our business, financial
condition, or operating results could be materially and adversely affected. In
such case, the value of your investment may decline, and you may lose all or
part of your investment.
We have a limited post On April 11, 1997, we filed a voluntary Chapter 11
bankruptcy operating bankruptcy petition in the United States Bankruptcy
history upon which you Court for the Southern District of Florida seeking to
may evaluate us. reorganize our company. Our Amended Plan of
Reorganization (the "Plan") was confirmed by the
Bankruptcy Court on March 17, 1998. For the fiscal year
ended March 31, 1999, we had a net profit of $924,000.
For the six month period ended September 30, 1999, we
had a net profit of $1,056,000. There is no assurance
that we will continue to operate at a profit in the
future.
We do no generate At our current level of development, we do not
enough cash from generate net cash from operations sufficient to meet
operations to fund our our rapid growth. To fund our growth plan, we require
growth plan. either additional financing or a restructure of our
credit facilities to meet the ongoing liquidity needs
of our operations. There can be no assurance, however,
that our liquidity goals will be reached in the
immediate future, if ever.
We have significant We may need to raise significant additional funds
future capital needs beginning in 2000 to expand our concept. To fund our
which are subject to rapid sales growth, we will need to raise $2,000,000 in
the uncertainty of the form of additional capital or a credit facility. If
additional financing adequate funds are not available on acceptable terms,
or at all, we may be unable to sustain our rapid
growth, which would have a material adverse effect on
our business, results of operations, and financial
condition.
Your investment may If additional funds are raised through the
be diluted issuance of equity securities, your percentage
ownership in the Company's equity will be reduced.
Also, you may experience additional dilution in net
book value per share, and the equity securities may
have rights, preferences, or privileges senior to those
of yours.
-5-
<PAGE>
Our ability to manage To manage our growth, we must implement systems,
growth could hurt our and train and manage our employees. We may not be able
business to implement these action items in a timely manner, or
at all. Our inability to manage growth effectively
could have a material adverse effect on our business
operating results, and financial conditions. There can
be no assurance that we will achieve our planned
expansion goals, manage our growth effectively, or
operate profitably.
Our inability to The business in which we are engaged is highly
compete and maintain competitive. In addition, we must compete with all
our niche in the other existing forms of entertainment including, but
entertainment industry not limited to, motion pictures, video arcade games,
could hurt our business home video games, theme parks, nightclubs, television
and prerecorded tapes, CD's and video cassettes.
Competition in the Company's markets is based primarily
on price, product performance, reputation, delivery
times, and customer support. We believe that new
product introduction and enhancements of existing
products are material factors for our continuing growth
and profitability. Many of our competitors are
substantially larger and have significantly greater
financial, marketing and operating resources than we
have. No assurance can be given that we will continue
to be successful in introducing new products or further
enhancing existing products.
We rely on sales to key As a percentage of total revenues, the Company's
customers which net sales in the aggregate to its five largest
subjects us to risk 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 we have long- established
relationships with many of our customers, we do not
have long-term contractual arrangements with any of
them. A decrease in business from any of our major
customers could have a material adverse effect on our
results of operations and financial condition.
We have significant We sell products to retailers, including
reliance on large department stores, lifestyle merchants, direct mail
retailers which are catalogs and showrooms, national chains, specialty
subject to changes in stores, and warehouse clubs. Certain of such retailers
the economy have engaged in leveraged buyouts or transactions in
which they incurred a significant amount of debt, and
some are currently operating under the protection of
bankruptcy laws. Despite the difficulties experienced
by retailers in recent years, we have not suffered
significant credit losses to date. A deterioration in
the financial condition of our major customers could
have a material adverse effect on our future
profitability.
-6-
<PAGE>
We are subject to the We are dependent upon foreign companies for the
risks of doing business manufacture of all of our electronic products. Our
abroad arrangements with manufacturers are subject to the
risks of doing business abroad, such as import duties,
trade restrictions, work stoppages, foreign currency
fluctuations, political instability, and other factors
which could have an adverse impact on the business of
the Company. We believe that the loss of any one or
more of our suppliers would not have a long-term
material adverse effect on us, because other
manufacturers with whom we do business would be able to
increase production to fulfill our requirements.
However, the loss of certain of our suppliers, could,
in the short-term, adversely affect our business until
alternative supply arrangements were secured. During
fiscal 1998 and 1999, and the six months ended
September 30, 1999, three manufacturers located in the
People's Republic of China accounted for approximately
all of our hardware product purchases. If Most Favored
Nation ("MFN") status for China is restricted or
revoked in the future, the costs of goods purchased
from Chinese vendors is likely to increase. 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
production needs. Such a change in suppliers may have a
short-term adverse effect on operations and, possibly,
earnings.
We are subject to We have experienced, and will experience in the
seasonality which is future, significant fluctuations in sales and operating
affected by various results from quarter to quarter. This is due largely to
economic conditions and the fact that a significant portion of our business is
changes resulting in derived from a limited number of relatively large
fluctuations in customer orders, the timing of which cannot be
quarterly results predicted. Furthermore, as is typical in the karaoke
industry, the quarters ended September 30 and December
31 includes increased revenues from sales made during
the holiday season. Additional factors that can cause
our sales and operating results to vary significantly
from period to period include, among others, the mix of
products, fluctuating market demand, price competition,
new product introductions by competitors, fluctuations
in foreign currency exchange rates, disruptions in
delivery of components, political instability, general
economic conditions, and the other considerations
described in this section. Accordingly, period-to-
period comparisons may not necessarily be meaningful
and should not be relied on as indicative of future
performance. Historically, the third quarter of our
fiscal year, the three months ended December 31, have
been the most profitable quarter, and the fourth
quarter of our fiscal year, the three months ended
March 31, have been the least profitable quarter.
-7-
<PAGE>
Our proprietary Our success depends on our proprietary technology.
technology may not We rely on a combination of contractual rights,
be sufficiently patents, trade secrets, know-how, trademarks,
protected non-disclosure agreements and technical measures to
establish and protect our rights. We cannot assure you
that we can protect our rights to prevent third parties
from using or copying our technology.
We may be subject We believe that we independently developed our
to claims from third technology and that it does not infringe on the
parties for proprietary rights or trade secrets of others. However,
unauthorized use of we cannot assure you that we have not infringed on the
their proprietary technologies of third parties or those third parties
technology will not make infringement violation claims against us.
Any infringement claims may have a negative effect on
our ability to manufacture our products.
Consumer Purchases of karaoke audio software and electronic
discretionary recording equipment are considered discretionary for
spending may affect consumers. Our success will therefore be influenced by
karaoke purchases a number of economic factors affecting discretionary
and is affected by consumer spending, such as employment levels, business
various economic conditions, interest rates, and taxation rates, all of
conditions and which are not under our control. Adverse economic
changes changes affecting these factors may restrict consumer
spending and thereby adversely affect our growth and
profitability.
We depend on third We rely on third party suppliers to produce the
party suppliers, and parts and materials we use to manufacture our products.
if we cannot obtain If our suppliers are unable to provide us with the
supplies as needed, parts and supplies, we will be unable to produce our
our operations will products. We cannot guarantee that we will be able to
be severely damaged purchase the parts we need at reasonable prices or in a
timely fashion. If we are unable to purchase the
supplies and parts we need to manufacture our products,
we will experience severe production problems, which
may possibly result in the termination of our
operations.
We may not be The development of our business has been largely
able to attract dependent on the efforts of Edward Steele and John
and retain key Klecha. Although we have entered into employment
personnel contracts with Messrs. Steele and Klecha, the loss of
the services of either of these individuals could have
a material adverse affect on the Company. We believe
that our future success also will depend significantly
upon our ability to attract, motivate, and retain
additional highly skilled managerial personnel.
Competition for such personnel is intense, and there
can be no assurance that we will be successful in
attracting, assimilating, and retaining the personnel
we require to grow and operate profitability.
-8-
<PAGE>
There is only a limited Our securities are currently not listed in the
market for our stock Nasdaq Small Cap Market. Our Common Stock is traded on
and we cannot assure a the OTC Bulletin Board under the symbol "SING". As a
more significant market result, an investor may find it more difficult to
will ever develop dispose of, or to obtain accurate quotations as to the
market value of, our Common Stock.
Our securities may If no exclusions from the definition of a "penny
be subject to "penny stock" under applicable SEC regulations are available,
stock" trading our securities would be subject to the penny stock
requirements rules, which impose additional sales practice
requirements on broker-dealers who sell such securities
to persons other than established customers and
accredited investors. Consequently, the ability of
broker-dealers to sell our securities to prospective
purchasers and your ability to sell your securities in
the secondary market may be limited.
-9-
<PAGE>
USE OF PROCEEDS
The Company will receive no proceeds from the sale of the Shares by the
Selling Securityholders. The Company will receive net proceeds of approximately
$1,349,655 if all our Options and Warrants are exercised.
We currently intend to use the proceeds, assuming all Warrants and
Options are exercised, approximately as set forth below:
<TABLE>
<CAPTION>
Use Amount Percent
- --- ------ -------
<S> <C> <C>
Expansion of Music Library $ 100,000 7.4%
Tooling for New Products 200,000 14.8%
Working Capital and other General Corporate Purposes 1,049,655 77.8%
--------- -------
TOTAL $1,349,655 100.00%
</TABLE>
The foregoing represents our best estimate of the allocation of the
proceeds of the offering based upon the present state of our business,
operations, and plans, and current business conditions. We will have broad
discretion to determine the use of a substantial portion of the proceeds of the
offering. Conditions may develop which could cause us to reallocate proceeds
from the categories listed above.
Pending the above uses, we will invest the net proceeds in government
securities and other short-term, investment-grade, interest-bearing instruments.
The proceeds received from the exercise of the Warrants will be used entirely by
us and will not benefit parties affiliated with us.
-10-
<PAGE>
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to dividends when,
as and if declared by the Board of Directors out of funds legally available
therefor. We do not anticipate the declaration or payment of any dividends in
the foreseeable future. We intend to retain earnings, if any, to finance the
development and expansion of its business. Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent upon
future earnings, if any, the Company's financial condition, capital
requirements, general business conditions and other factors. Therefore, there
can be no assurance that any dividends of any kind will ever be paid by the
Company.
-11-
<PAGE>
MARKET PRICES OF COMMON STOCK
Our Common Stock trades on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board under the symbol "SING". Set forth below is
the range of high and low bid information for the Company's Common Stock for the
two most recent fiscal years. 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 (April 1 - June 30, 1997) $0.60 $0.60
Second Quarter (July 1 - September 30, 1997 0.60 0.60
Third Quarter (October 1 - December 31, 1997 0.60 0.60
Fourth Quarter (January 1 - March 31, 1998) 2.50 0.60
1999:
- -----
First Quarter (April 1 - June 30, 1998) $1.01 $0.17
Second Quarter (July 1 - September 30, 1998) 0.73 0.43
Third Quarter (October 1 - December 31, 1998) 0.50 0.43
Fourth Quarter (January 1 - March 31, 1999) 2.50 0.48
2000:
- -----
First Quarter (April 1 - June 30, 1999) $2.81 $1.34
Second Quarter (July 1 - September 30, 1999) 2.00 1.63
Third Quarter (October 1 - December 31, 1999) 2.13 1.63
Fourth Quarter (January 1, 2000 - _________, 2000)
</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.
On _________________, 2000, the closing sale price of our Common Stock
as reported on the OTC Bulletin Board was $___ per share.
As of December 31, 1999, there were approximately 311 record holders of
our outstanding Common Stock. Moreover, additional shares of our 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 our Common Stock as of December 31, 1999.
-12-
<PAGE>
SELECTED FINANCIAL DATA
Income Statement Items
- ----------------------
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
1998 1999 1998 1999
-------- -------- -------- ------
(Unaudited)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Net Sales $ 6,056 $ 9,548 $ 8,504 $ 16,968
Cost of Sales 5,052 7,029 6,351 12,495
Selling, General and
Administrative Expenses 2,642 1,545 1,125 1,922
Income (loss) from operations (1,638) 974 1,027 2,551
Interest income, interest
expense and other income (147) (220) (159) (380)
Extraordinary item 4,490 - - -
Income before income tax benefit 2,705 754 868 2,171
Net tax benefit - 170 - -
Net income $ 2,705 $ 924 $ 868 $ 2,171
Net income per common share
basic $ 7.16 $ .37 $ .35 $ .75
Net income (loss) per common
share diluted $ 7.16 $ .36 $ .35 $ .53
Shares used in computing net
income (loss) per common
share - basic 378 2,475 2,468 2,899
Shares used in computing net
income (loss) per common
share - diluted 378 2,592 2,468 4,110
</TABLE>
Balance Sheet Items
- -------------------
<TABLE>
<CAPTION>
Nine Months As adjusted
Year Ended Ended for Exercise
March 31, December 31, of Options and
1999 1998 1999 Warrants(1)
--------- ---------- ------------- ------------
(Unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Cash (including restricted cash) $ 49 $ 8 $ 833 $ 2,183
Total current assets 1,813 847 6,075 7,425
Working capital (deficit) 399 (370) 3,948 5,298
Total Assets 2,379 1,555 6,611 7,961
Current liabilities 1,415 1,218 2,127 2,127
Long term obligations - - - -
Total shareholders' equity $ 965 $ 25 $ 4,484 $ 5,834
</TABLE>
- --------------------------------------------
(1) Adjusted to reflect the exercise of all Options and Warrants
-13-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and the notes appearing elsewhere in
this prospectus.
Results of Operations
The following table sets forth, for the periods illustrated, certain
statements of operations data expressed as percentages of total revenues.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
1999 1998 1999 1998
---------- ---------- -------- ------
(Unaudited)
<S> <C> <C> <C> <C>
Net Sales 100% 100% 100% 100%
Cost of goods sold 73.6 83.4 73.6 74.7
Selling, General and
Administrative Expenses 16.2 43.6 11.3 13.2
Income (loss) from operations 10.2 (27.0) 15.0 12.1
Interest income, interest
expense and other income 2.3 2.4 2.2 1.9
Extraordinary item - 74.1 - -
Income before income tax benefit 7.9 44.7 12.8 10.2
Income tax benefit 1.8 - - -
Net income (loss) 9.7 44.7 12.8 10.2
</TABLE>
Nine Months Ended December 31, 1999 as Compared
to Nine Months Ended December 31, 1998
Revenues - Total revenues increased by approximately $8,462,705 or 99%
during the first nine months of fiscal 2000 compared to the first nine months of
fiscal 1999. The increase in revenues can be attributed to a growing popularity
of the Company's CD Plus Graphics machines, as well as a growing market for the
music used in these machines. The CD Plus Graphics machines can be easily
attached to the consumer's television set. When a special CD, which includes
graphics, is played on the machine, the lyrics can be seen on the television
screen for ease of following along with the music.
Gross Profit - Gross profit for the first nine months of fiscal 2000
increased approximately 208% from $2,152,492 for the first nine months of fiscal
1999 to $4,472,876. The increased gross profit is in direct proportion to the
increase in sales for this period and therefore, the reasoning for increased
revenues can be carried to gross profit also.
Selling, General Administrative Expenses - Selling, general &
administrative expenses increased approximately $797,000 or 71%, during the
first nine months of fiscal 2000 compared to the first nine months of fiscal
1999. The increase is primarily due to the increase in sales related expenses,
including commissions, royalties and advertising. There is also a slight
increase in salary related expenses due to an increase in office staff.
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Depreciation and Amortization Expenses - Depreciation and amortization
expense increased approximately $34,886 or 72% for the nine months ended
December 31, 1999, as compared to the same period of the prior year. The
increase can be attributed to the addition of year 2000 compliant computer
equipment and leasehold improvements for the new facility. Another factor
contributing to the increase is the amortization of reorganization intangibles.
These intangibles came about as a result of the Fresh Start Accounting beginning
in the fiscal year 1998. The remainder of these intangibles will continue to be
amortized over the next thirty- nine (39) months.
Other Expenses - Net interest expense increased approximately $32,000
during the first nine months of fiscal 2000 compared to the same period a year
ago. The increase can be attributed to the increased use of credit line
facilities to fund the inventory necessary to meet demand of the Company's
product.
Loss on sales of accounts receivable was 2.0% and 1.8% of total
revenues during the first nine months of fiscal 2000 and 1999 respectively. The
loss increased from $156,574 in fiscal 1999 to $347,689 in fiscal 2000. The
increase is due primarily to the increase in sales and invoices factored during
the first nine months of fiscal 2000.
The Year Ended March 31, 1999 As Compared
to the Year Ended March 31, 1998
Revenues - 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 introduction and subsequent sales of two (2) new CD with graphics
players and innovative music packages.
Gross Profit - Gross profit increased $1.51 million or 151% to $2.52
million in fiscal year ended 1999 or 26.4% of net sales from $1.1 million or
16.6% 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 9.8% of net sales was due primarily to the increased
sales of new models of CDG players and CDG music with higher margins than some
of our other products.
Selling, General Administrative Expenses - Selling, general and
administrative expenses decreased $1.10 million or 58.5% 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 result of
the emergence from bankruptcy legal and accounting fees were reduced
significantly. We 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.
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Depreciation and Amortization Expenses - Depreciation and amortization
expense decreased approximately $34,000 to $144,234 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.
Other Expenses - Net interest expense increased approximately $101,000
to $222,000 during fiscal year end 1999 compared to $121,000 during fiscal year
end 1998. During fiscal year end 1999, we were able to acquire various short
term loans to purchase inventory which contributed toward higher sales.
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, we were able to change factors during May of 1998 resulting in 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.
The Year Ended March 31, 1998 As Compared
to the Year Ended March 31, 1997
Revenues - Total revenues dropped to $6.2 million for the fiscal year
ended March 31, 1998, compared to the $10.7 million reported for fiscal 1997.
The decrease was primarily attributable to limited funding to purchase
additional inventory during operations under Chapter 11 federal bankruptcy.
Gross Profit - Cost of equipment sales for the year ended March 31,
1998 decreased from $3,326,000 for fiscal 1997. The cost of music sales
decreased $777,000 for the year ended March 31, 1998 from fiscal 1997. This
decrease in the cost of music sales reflects approximately $529,000 in
adjustment to inventory values during fiscal year 1997 and the reduced cost of
returns from distributors during fiscal year 1998.
Selling, General Administrative Expenses - Other operating expenses
decreased approximately $396,000 or 69% for fiscal 1998, compared to the prior
year. The decrease reflects management's efforts to control operating expenses
and primarily reflects lower warehouse rent, occupancy costs, and warehouse
personnel expense.
Selling, general and administrative expenses ("SG&A expenses")
decreased $87,000 or 4% for fiscal 1998 compared to fiscal 1997. This decrease
was primarily due to management's commitment to reduce total overhead.
Categories which decreased include salaries and benefits, promotional expenses
including catalog, advertising and show/convention costs, product development,
travel and entertainment, and insurance. These decreases were partially offset
by higher professional fees.
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Depreciation and Amortization Expenses - Depreciation and amortization
expense decreased approximately $223,000 or 56% to $177,000 during the fiscal
year ended March 31, 1998. The decrease was primarily due to the write-off of
certain fixed assets, trademark and costs in excess of net assets (goodwill) as
of March 31, 1998 and 1997.
Other Expenses - As a result of the significant decline in music sales
during fiscal 1997 and 1998, the Company reviewed the carrying value of costs in
excess of net assets acquired (goodwill) and trademarks carried on its balance
sheet. As a result of this review, the Company recorded a reduction in the
carrying value of such asset relating to music sales in the amount of $1,081,000
for fiscal 1997, which amount was charged to operations.
The operating loss for fiscal 1998 was approximately $1.6 million,
which was a reduction of $2.9 million from fiscal 1997. As a percentage of total
revenues, the operating loss decreased to 24% for fiscal 1998 from 32% in the
prior year. Excluding accounting adjustments, the fiscal 1997 operating loss
would have been $1.3 million. Gross profit as a percentage of sales continues to
increase, and during fiscal year 1999, the Company has secured sufficient
capital to fund inventory purchases and increase sales. The improvement in gross
profit from music sales was primarily because of management's change in policy
to reduce returned merchandise and the impact of inventory valuation adjustments
in the prior year.
Net interest expenses decreased $145,000 or 84% from the prior year due
to a stay of interest as a result of the bankruptcy filing and subsequent
reorganization.
Loss on sales of accounts receivable was 1.5% and 2.2% of total
revenues for the fiscal years 1998 and 1997, respectively. The decrease of
approximately $140,000 was primarily because of a decrease in sales.
Liquidity and Capital Resources
Liquidity - At December 31, 1999, the Company had current assets of
$6,075,091, compared to $1,813,098 at March 31, 1999; total assets of $6,610,985
as compared to $2,379,335 at March 31, 1999; current liabilities of $2,126,916
as compared to $1,414,595 at March 31, 1999, and a current net worth of
$4,484,069 as compared to $964,740 at March 31, 1999. The increase is primarily
due to additional capital raised through the sale of preferred shares of the
Company in a Private Placement Offering during the quarter ended June 30, 1999
(See Note 4 to Financial Statements), and the increase in net income for the
nine months ended December 31, 1999.
Capital Resources - The Company has obtained significant financing for
continuing operations and growth. Five specific lines of credit have been
opened, two financing agreements in Hong Kong and three financing agreements
through its U.S. operations.
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Effective May 19, 1999, the Company, through its Hong Kong subsidiary,
International SMC(HK) Ltd., 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.
Effective July 7, 1999, through our Hong Kong subsidiary, International
SMC(HK) Ltd., we obtained a credit facility of $300,000 (US) from Hong Kong
Bank. This facility is a revolving line based upon drawing down a maximum of 15%
of the value of export letters of credit lodged with Hong Kong Bank. There is no
expiration except that Hong Kong 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 1.50%. 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.
We entered into a factoring agreement, dated December 1, 1999, with
Main Factors, Inc. ("Main Factors") pursuant to which Main Factors purchases
certain accounts receivable. Under the agreement, Main Factors purchases certain
selected accounts receivable from us and advances to us 70% - 85% of the face
value of those receivables. The accounts receivable are purchased by Main
Factors without recourse and Main Factors therefore performs an intensive credit
review prior to purchase the receivable. The factoring agreement is personally
guaranteed by John Klecha, our Chief Operating Officer and Chief Financial
Officer.
We are charged a fixed percentage fee of the invoice. The purchase of
our receivables by Main Factors is absolute and is a true sale of receivables.
Main Factors has placed no maximum limit on the amount of accounts receivable
they will purchase.
We also entered into an agreement on July 19, 1999, with EPK Financial
Corporation ("EPK") whereby EPK will open letters of credit with the Company's
factories to import inventory for distribution to our customers. This allows us
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 our favor. The selling price to these customers is
considerably higher because we pay 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 Main Factor, thereby
buying the shipments and related interest from EPK.
We pay EPK a flat fee per transaction, which is negotiated for each
shipment, and the maximum purchase price per transaction is $1,000,000. There
has been no maximum total shipments established under this agreement. Main
Factors 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 Edward Steele, our Chairman and
Chief Executive Officer and John Klecha, our Chief Operating Officer, and Chief
Financial Officer. The agreement is in effect until July 1, 2001, unless
terminated by either party upon thirty (30) days written notice.
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On September 1, 1999, we received a $1,000,000 letter of credit
facility from Bank Julius Baer of New York. This facility is used to open
letters of credit to its factories. This allows us to purchase additional
karaoke hardware inventory to sell from its domestic warehouses during the
fiscal third quarter. This facility is supported by a $200,000 fixed deposit and
a corporate repayment guaranty.
We have no present commitment that is likely to result in liquidity
increasing or decreasing in any material way. In addition, we know of no trend,
additional demand, event or uncertainty that will result in, or that are
reasonably likely to result in, liquidity increasing or decreasing in any
material way.
We have no material commitments for capital expenditures. We know of no
material trends, favorable or unfavorable, in our capital resources. We have no
additional outstanding credit lines or credit commitments in place and has no
additional current need for financial credit.
Year 2000
All of our computer systems are Year 2000 compliant. The Year 2000
compliance issue has not and it is anticipated that it will not pose operational
problems.
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BUSINESS
Cautionary Statement Relating
to Forward Looking Information
We have included some forward-looking statements in this section and
other places in the prospectus regarding our expectations after completion of
this offering. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, levels of
activity, performance or achievements, or industry results, to be materially
different from any future results, levels of activity, performance or
achievements express or implied by these forward-looking statements. Some of
these forward-looking statements can be identified by the use of forward-looking
terminology including "believes", "expects", "may", "will", "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategies involve risks and uncertainties.
You should read statements that contain these words carefully because they:
o discuss our future expectations
o contain projections of our future operating results or of our future
financial condition; or
o state other "forward looking" information
We believe it is important to communicate our expectations to you, but
events may occur in the future over which we have no control and which we are
not accurately able to predict.
Introduction to Business
The Singing Machine Company, Inc. (the "Company", "we", or "us") 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. We contract for the manufacture of all electronic equipment products
with manufacturers located in the Far East. We also produce and market 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 us are accompanied by printed lyrics, and our
karaoke CD's with graphics contain lyrics which appear on the video screen. We
contract for the reproduction of audio cassette software, which is produced by
us or by an independent producer.
We were incorporated in California in 1982. We originally sold our
products exclusively to professional and semi-professional singers. In 1988, we
began marketing karoake equipment for home use. We believe we were the first to
offer karaoke electronic recording equipment and audio software for home use in
the United States.
In May 1994, we merged into a wholly-owned subsidiary 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.
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Bankruptcy Reorganization
On April 11, 1997, we 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. Our First Amended Plan of
Reorganization (the "Plan") was confirmed by the Bankruptcy Court on March 17,
1998. The material terms of the Plan permitted us to issue to unsecured
creditors securities in our newly reorganized company in payment of pre-petition
claims and, further, to reduce by 90% the equity interests of pre-petition
Securityholders, Warrantholders, and Optionholders.
As a result of the bankruptcy reorganization, we were able to
effectively reduce the size of our corporate offices, warehousing operations,
personnel, and inventory resulting in an aggregate savings of $18,000 per month.
During the Chapter 11, we were able to retain our core customer base of major
retail accounts as well as begin a new customer relationship with Best Buy. We
were 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 our company, resulted in a significant
reduction of liabilities on our post-reorganization balance sheet. As of June
10, 1998, we had fully implemented the Plan.
Product lines
We currently have 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). We also license our trademark, on
a non-exclusive basis, to others for sale around the world. We believe that we
are the only major company in the karaoke industry in the United States which
sells both hardware and software.
The 11 different models of electronic recording and playback equipment
sell at 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. We currently
offer our audio software in two formats - multiplex cassettes and CD plus
graphics with retail prices ranging from $6.95 to $19.95. We purchase recordings
from an independent producer and currently have a song library of over 2,700
songs. Our backing track product line covers the entire range of musical tastes
including popular hits, golden oldies, country, standards, rock and roll, and
rap. We even have backing tracks for opera and certain foreign language
recordings. During the fiscal year ended March 31, 1999, we introduced three new
models of recording equipment. We are producing 40 new CDG titles and 160 songs.
The Market
Based upon Japanese industry estimates, the karoake industry exceeds
sales of $10 billion in the Far East. The current North American market for
karaoke products is estimated at less than $400 million. Therefore, we believe
that there is tremendous growth potential not only in the North American market,
but also in South America and Europe as well.
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Although there are other electronic component competitors for our
hardware products, and other audio software competitors, we believe we are the
only major company specializing in karaoke category that offers complete lines
of hardware including CD+graphics machines as well as an extensive software
library.
Sales, Marketing and Distribution
Marketing
We rely on managements ability to determine the existence and extent of
available markets for our products. Our management has considerable marketing
and sales background and devotes a significant portion of its time to
marketing-related activities. We achieve both domestic and direct sales by
marketing our hardware and software products primarily through our own sales
force and approximately 21 independent sales representatives. Our
representatives are located in various states and are paid a commission based
upon sales in their respective territories. The 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. We work closely with
our major customers to determine marketing and advertising plans.
We also market our products at various national and international trade
shows each year. We regularly attend 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.
Our 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. Our karaoke machines and karaoke music is currently sold in
such stores as Target, J.C. Penney, Fingerhut, Best Buy, and Sears.
Sales
As a percentage of total revenues, our net sales in the aggregate to
our 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, we made significant progress in broadening our base of
customers.
Although we have long-established relationships with many of our
customers, we do not have long-term contractual arrangements with any of them. A
decrease in business from any of our major customers could have a material
adverse effect on our results of operations and financial condition.
At March 31, 1999 and December 31, 1999, we had approximately
$1,786,000 and $1,949,000, 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.
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Returns of electronic hardware and software products by our customers
are generally not permitted except in approved situations involving quality
defects, damaged goods, or goods shipped in error. We sell returned hardware
products in closeout markets. Our policy is to give credit to our distributors
for audio software returned in conjunction with the receipt of new replacement
purchase orders. The returned software is resold by us. Our credit policies are
tailored to our customer base. We have not suffered significant credit losses to
date.
Distribution
We distribute hardware products to retailers and wholesale distributors
through two methods: shipment of products from inventory (domestic sales), and
shipments directly from our Hong Kong subsidiary or manufacturers in the Far
East of products sold by our sales force (direct sales). Domestic sales, which
account for substantially all of our audio software sales, are made to customers
located throughout the United States from inventories maintained at our
warehouse facility in Florida or directly from the software producers.
We fill domestic 1. Domestic Sales: Our strategy of selling
orders from our U.S. products from a domestic warehouse enables us to
warehouses provide timely delivery and serve as a "domestic
supplier of imported goods". We purchase electronic
recording products overseas for our own account and
warehouse the products in leased facilities in Florida
and California. We are 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. We generally sell from our
own inventory in less than container sized lots.
We fill foreign 2. Direct Sales - Hong Kong: The formation of our
orders through our subsidiary, International SMC(HK) Ltd.
international ("International") is attributable to the advent of
subsidiary in Hong foreign equipment sales. Some hardware products sold by
Kong us are shipped directly to 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 our suppliers in the
Far East.
Manufacturing and Production
The electronic recording devices sold by us are manufactured and
assembled by third parties pursuant to design specifications provided by us. Our
electronic recording devices are assembled by three factories in the People's
Republic of China. The finished products are packaged and labeled under our
registered trademark, The Singing Machine(R) brand name.
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Our products contain electronic components manufactured by other
companies such as Panasonic, Toshiba, and Sony. The electronic components are
installed in cabinets manufactured by three manufacturers. Certain tools and
dies used in the production of certain models of the electronic audio equipment
sold by us are owned by LTD.
We presently purchase and import virtually all of our 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% and 91%, respectively, of the total product
purchases, including virtually all of our hardware purchases. Our primary
suppliers of electronic recording products are located in the Shenzen province
of the People's Republic of China.
While we purchase our products from a small number of large suppliers
with whom we maintain a close alliance, all of the electronic components and raw
materials used by us are available from several sources of supply, and we do not
anticipate that the loss of any single supplier would have a material long-term
adverse effect on our business, operations, or financial condition. To ensure
our high standards of product quality and that shipping schedules are met by
suppliers, we utilize Hong Kong based agents as representatives. Those agents
include product inspectors who are knowledgeable about product specifications
and work closely with the suppliers to verify that such specifications are met.
Additionally, our key officers frequently visit suppliers for quality assurance
and to support good working relationships.
All of the electronic equipment sold by us is warranted against
manufacturing defects for a period of ninety (90) days for labor and parts. All
audio software sold 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 our results of operations.
Subsidiaries
In June 1996, we organized a wholly-owned subsidiary in Hong Kong under
the name International SMC (HK) Ltd. ("International") to coordinate our
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
Our business is highly competitive. In addition, we compete 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. Our financial
position depends, among other things, on our ability to keep pace with such
changes and developments and to respond to the requirements of our customers.
Many of our competitors have significantly greater financial, marketing, and
operating resources and broader product lines than we do. Our major electronic
component competitors include Grand Prix, Casio, and New Tech. Our major audio
software competitors are Pocket Songs and Sound Choice.
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We believe that competition in our markets is based primarily on price,
product performance, reputation, delivery times, and customer support. We
believe that, due to our proprietary know-how, we have the ability to develop
and produce hardware and software on a cost-effective basis.
Trademarks and Licenses
We hold federal and international copyrights to substantially all of
the audio productions comprising our song library. However, since each of those
productions is a re-recording of an original work by others, we are subject to
both contractual and statutory licensing agreements with the publishers who own
or control the copyrights of the underlying musical compositions and are
obligated to pay royalties to the holders of such copyrights for the original
music and lyrics of all of the songs in our library that have not passed into
the public domain. Since most audio software distributed is accompanied by
printed lyrics, we are also subject to written print royalty license agreements.
We are 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 us under a compulsory license, we
are 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 us (the "Statutory Rate"). Royalties due
under compulsory licenses are payable monthly. We currently have compulsory
statutory licenses for approximately 200 songs in our 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 us 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. We have 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, we have deferred, and intend to continue to defer, approximately 25% of
royalty payments for approximately nine months, an amount and period which we
believe is appropriate for the karaoke industry.
The majority of the songs in our song library are subject to written
copyright license agreements. Our 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. We also have written license
agreements for substantially all of the printed lyrics which are distributed
with our audio software products ("print licenses"), which licenses also
typically provide for quarterly payments of royalties at the Statutory Rate.
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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, our cost of goods purchased from Chinese
vendors is likely to increase. A resultant change in suppliers would likely have
an adverse effect on our operations and, possibly, earnings, although management
believes such adversity would be short- term as a result of its ability to find
alternative suppliers. We continue to closely monitor the situation and have
determined that the production capabilities in countries outside China which
have MFN status and, therefore, have favorable duty rates, would meet our
production needs.
Employees
As of the date of this Prospectus, we had 12 full-time employees, 4 of
whom were engaged in warehousing and technical support, and 8 in marketing and
administrative functions.
Properties
On March 31, 1999, we 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 second twelve (12) month period. Under the
lease, we must pay costs for maintenance, insurance, and real estate taxes
approximating $9,000 per year. We believe that the facilities are well
maintained, in substantial compliance with environmental laws and regulations,
and adequately covered by insurance. We also believe that the leased facility is
not unique and could be replaced, if necessary, at the end of the term of the
existing lease.
Legal Proceedings
We 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 our First Amended Plan of Reorganization.
The Plan has been fully implemented.
We are not a party to any material legal proceeding, nor to the
knowledge of management, are any legal proceedings threatened against us. From
time to time, we may be involved in litigation relating to claims arising out of
our operations in the normal course of business.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to our
executive officers and directors as of the date of this prospectus.
Name Age Position
- ---- --- --------
Edward Steele 70 Chief Executive Officer,
President and Director
John F. Klecha 49 Chief Operating Officer,
Chief Financial Officer,
Secretary, Treasurer
and Director
Allen Schor 57 Director
Josef A. Bauer 62 Director
All directors hold office until the next annual meeting of
Securityholders or until their successors have been duly elected and qualified.
With the exception of Mr. Steele and Mr. Klecha who have employment agreements
with the company, our executive officers are appointed and serve at the
discretion of the Board of Directors. There are no family relationships among
any of our directors and executive officers. However, one of our key personnel,
John Steele, our National Sales Director, is the son of Director and Chief
Executive Officer Edward Steele.
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 our electronic hardware products in the Far East and was our
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. Since June 28, 1999,
Mr. Klecha has served as Chief Operating Officer. Mr. Klecha is in charge of
all financial, administrative, and operational functions of the Company. Prior
to joining us, Mr. Klecha served in executive and senior
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<PAGE>
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.
Josef A. Bauer was appointed to the Board of Directors effective
October 15, 1999. Since 1992, Mr. Bauer has been a managing director and
principal stockholder of Dero Research Ltd. in Hong Kong, which serves as a
manufacturer's representative for the sale of telephone and electronic products.
From 1970 to 1993, Mr. Bauer served as a managing director and was a principal
stockholder of Dero Research Corporation in Tokyo, Japan, which was engaged in
the design, engineering and manufacture of automobile audio equipment. He served
as a director from 1991 to 1994, of AmeriData Technologies, Inc., a publicly
traded computer products and service company. In December 1994, Mr. Bauer was
elected to the Board of Directors of Go- Video, Inc., a publicly trade video
electronics manufacturer and distributor. Mr. Bauer has also served as President
of Banisa Corporation, a privately owned investment company, since 1975. Mr.
Bauer is also President of Magna (a position he has held since 1989) and was
formerly a directors of the Company from February 1990 until September 1991, and
February 1995 until May, 1998.
Board Committees
On October 15, 1999, the Board of Directors appointed Audit and
Executive Compensation/Stock Option Committees. The Audit Committee consists of
Messrs. Steele, Bauer and Schor, and the Executive Compensation/Stock Option
Committee consists of Messrs. Klecha, Bauer and Schor. 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
Employee Stock Option Plan. The entire Board of Directors operates as a
nominating committee.
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<PAGE>
Director's Compensation
We currently reimburse each director for expenses incurred in
connection with attendance at each meeting of the Board of Directors or a
committee on which he serves. In addition, non- employee directors are entitled
to be paid a fee of $1,000 for each Securityholder and board meeting attended
and each Director is entitled to receive 5,000 common stock Options per year.
Limitations on Liability and Indemnification Matters
We have adopted provisions in our articles of incorporation and bylaws
that will limit the liability of our directors to the fullest extent permitted
by the by the Delaware General Corporation Law. Pursuant to such provisions, no
director will be liable to the Company or its Securityholders for monetary
damages for breaches of certain fiduciary duties as a director of the Company.
The limitation of liability will not affect a director's liability for a breach
of the director's duty of loyalty to the company or its Securityholders, an act
or omission not in good faith or that involves intentional misconduct or a
knowing violation of the law, any unlawful distributions, or a transaction from
which the director receives an improper personal benefit. The limitation of
liability also will not affect the availability of equitable remedies such as
injunctive relief or rescission.
Our articles of incorporation will permit, and our bylaws will require,
us to indemnify officers and directors to the fullest extent permitted by law.
We have also entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and executive officers
for certain expenses, judgments, fines and settlement amounts incurred by them
in any action or proceeding, including any action by or in the right of the
company, arising out of the person's services as a director or executive officer
of the company or any other company or enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified directors and executive officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling person based on
the foregoing provisions, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
and is, therefore, unenforceable.
Executive Compensation
The following table sets forth annual remuneration of $100,000 or more
paid for the fiscal years ended March 31, 1998 and 1999 and proposed to be paid
for the fiscal year ended March 31, 2000 to certain officers and directors of
the Company:
The following table sets forth certain compensation information for the
fiscal years ended March 31, 1997, 1998 and 1999 with regard to the Company's
Chief Executive Officer and one other executive officer whose combined salary
and bonus was in excess of $100,000 (the "Named Officers"):
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<PAGE>
<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 1998 $166,500 $ 3,180 $7,200 -0- -0- -0- -0-
1997 $170,167 $ -0- $7,200 -0- -0- -0- -0-
John Klecha 1999 $ 88,200 $26,184 $3,614 -0- -0- -0- -0-
Chief Financial Officer 1998 $ 43,654 $ 1,442 $2,100 -0- -0- -0- -0-
</TABLE>
The following table sets forth information concerning Options granted to our
officers and directors during the year ended March 31, 1999, pursuant to our
Stock Option Plan. 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> <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>
Stock Option Plans
Under the 1994 Employee Stock Option Plan (the "Option Plan"), the
Company reserved 400,000 shares of Common Stock for the grant of options. Under
the Option Plan, the Board of Directors in its discretion may grant stock
options to purchase common stock of the Company to
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<PAGE>
officers and employees, including Directors who are employees of the Company. Of
the 400,000 options, 275,000 were granted and 125,000 options remained reserved.
After the Company's bankruptcy reorganization, taking into consideration the
post-bankruptcy 1-for-10 reverse split, there remained 27,500 outstanding
options.
In December, 1998, the Company authorized the grant of 494,000 options
subject to the approval by the Company's shareholders of the reservation of an
aggregate of 600,000 options. The Company's shareholders approved the
reservation of the 600,000 options in March, 1999. On November 10, 1999, 27,500
options expired unexercised.
Therefore, of the aggregate 600,000 reserved, 494,000 were granted at
an exercise price of $.43 per share with fifty percent (50%) of the options
vesting during December, 1999, and fifty percent (50%) during December, 2000.
The remaining 106,000 options were granted with an exercise price of $1.66 per
share, all 106,000 options having vested in December, 1999.
As of December 31, 1999, no Options remain available for future grant.
Additional Options may become available for future grant. Additional options may
become available to the extent that outstanding options terminate or expire
unexercised.
Stock Option activity since March 31, 1998, is summarized as follows:
Number Weighted Average
of Shares Exercise Price
--------- --------------
Outstanding, March 31, 1998 ................ 27,500 (1) $4.87
Granted.................................... 600,000 .65
Exercised................................... - -
Cancelled................................... (27,500)(1) 4.87
Outstanding, December 31, 1999.............. 600,000 .65
Employment Agreements
We executed an employment agreement with Mr. Steele which commenced
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
- -------
(1) The Company's March 31, 1999 Consolidated Financial Statements reflect a
beginning outstanding option balance of 47,870 options. The difference
reflects options held by employees whose employment was terminated prior to
March 31, 1998, but whose options were cancelled subsequent to March 31,
1998.
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<PAGE>
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.
We executed an employment agreement with Mr. Klecha which commenced
March 1, 1998, for period of two years with an automatic term extension for one
additional year unless terminated by us 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.
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<PAGE>
CERTAIN TRANSACTIONS
Company Loans to Officers and Directors
Edward Steele, a Director and Chief Executive Officer, has a promissory
note outstanding to us in the principal amount of $13,880 as of September 30,
1999. The original note for $30,650 granted on March 31, 1998 has been extended
until March 31, 2000 with an interest rate of 9% per annum on the unpaid
balance.
On July 1, 1999, we loaned Edward Steele, our Chief Executive Officer,
President and Director $55,000 for the purchase of two (2) units of our Private
Placement. The Note including interest of 9% matures on June 30, 2000. The Note
is secured by the securities comprising the Private Placement Units.
On July 1, 1999, we loaned John Klecha, our Chief Operating Officer,
Chief Financial Officer and Director $55,000 for the purchase of two (2) units
of our Private Placement. The Note including interest of 9% matures on June 30,
2000. The Note is secured by the securities comprising the Private Placement
Units.
Stock Grants for Credit Facility and Letter of Credit Guarantees
In June, 1999, we arranged a credit facility with Main Factors, Inc.,
whereby Main Factors, Inc. purchases certain of our accounts receivable. Under
the agreement, we receive 75% - 85% of the face value of those receivables
without recourse. To secure the credit facility, John Klecha, our Chief
Operating Officer and Chief Financial Officer, provided his personal payment
guaranty. The average outstanding balance of this credit facility is $300,000.
In July, 1999, we entered into an agreement with EPK Financial
Corporation ("EPK") whereby EPK provided letters of credit with our factories to
import inventory for distribution to our customers. The EPK agreement allows us
to purchase domestic hardware inventory in less than container load quantities
and provide our customers with the flexibility of not having to own letters of
credit. To secure the letter of credit, Edward Steele, our Chief Executive
Officer and President, and John Klecha, our Chief Operating Officer and Chief
Financial Officer, provide their personal guarantees. The average outstanding
balance of this letter of credit is $300,000.
In consideration for providing their personal guarantees, we issued to
Mr. Steele 200,000 shares of our Common Stock and issued to Mr. Klecha 150,000
shares of our Common Stock.
Other Relationships
We have an agreement with FLX (a china manufacturer of consumer
electronics products) to produce electronic recording equipment based on our
specifications. Paul Wu, a former director of the Company, is Chairman of the
Board and a principal stockholder of FLX.
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<PAGE>
During the fiscal years ended March 31, 1998, and 1999, we purchased
approximately $1.7 million and $1.0 million respectively, in equipment from FLX.
We believe that all of the foregoing transactions with FLX have been on
terms no less favorable to us than could have been obtained from unaffiliated
third parties in arms-length transactions under similar circumstances.
Financial Advisory Agreements
We entered into Financial Advisory Agreements on July 8, 1999, with
Dunedin, Inc., FRS Investments, Inc., and Portfolio Research Associates, Inc. We
contracted with these companies to provide us with a range of advisory services
designed to provide us with new favorable sources of financing, assistance in
raising new equity, possible business combination candidates, feedback
concerning our public image, review of management, and development of a
strategic plan. Under the Agreements, Dunedin, Inc. and FRS Investments, Inc.
were each to receive 64,200 Common Stock Purchase Warrants upon execution of the
Agreements and 5,200 Common Stock Purchase Warrants each month thereafter for
the three (3) year term of the Agreements. Portfolio Research Associates, Inc.
was to receive 61,600 Common Stock Purchase Warrants upon execution of the
Agreement, and 3,600 Common Stock Purchase Warrants each month thereafter for
the three (3) year term of the Agreement. All of the Warrants are exercisable at
any time during the term of the Agreements at an exercise price of $1.375 per
share. Additionally, each advisor executed a proxy in favor of our Company for
each Common Share exercised.
We have terminated the Financial Advisory Agreements of FRS
Investments, Inc. and Portfolio Research Associates, Inc. as of October 1, 1999,
and Dunedin, Inc. as of November 26, 1999. We issued to Portfolio Research
Associates, Inc. 76,000 Common Stock Purchase Warrants, to FRS Investments, Inc.
85,000 Common Stock Purchase Warrants, and to Dunedin, Inc. 92,200 Common Stock
Purchase Warrants, in full satisfaction of their respective Agreements.
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<PAGE>
PRINCIPAL SECURITYHOLDERS
The following table sets forth, as of the date of this Prospectus,
certain information concerning beneficial ownership of our Common Stock by (i)
each person known to us to own 5% or more of our outstanding Common Stock, (ii)
all directors of the Company and (iii) all directors and officers of the Company
as a group:
<TABLE>
<CAPTION>
Percentage of Shares (1)
Name & Address Position with Company Number of Shares Before Offering After Offering
-------------- --------------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
John Klecha Director, Chief Operating
6601 Lyons Road, Building A-7 Officer, and Chief Financial 483,274 (4) 16.5% 9.8%
Coconut Creek, Florida 33073 Officer
Edward Steele (7) Director, Chief Executive
6601 Lyons Road, Building A-7 Officer, and President 457,924 (3) 15.6% 9.3%
Coconut Creek, Florida 33073
Alan and Deana Schor Director
840 East Walnut 324,643 11.1% 6.6%
Carson, California 90746
Josef A. Bauer Director
130 Sunrise Avenue, #312 116,886(5) 4.0% 2.4%
Palm Beach, FL 33480
The Harry Fox Agency
711 Third Avenue, 8th Floor 410,675 14.0% 8.3%
New York, NY 10017
FLX(HK) Ltd.
Unit 19 5/F Vanta Ind. Centre
21-33 Tai Lin Pai Road 237,932(2) 8.1% 4.8%
Kwaichung N.T. Kowloon
Hong Kong
Colony Electronics
500 Hennessy Road 129,300(2) 4.4% 2.6%
Causeway, Hong Kong
Gemco Pacific, Inc
500 Hennessy Road 25,667(2) .9% 0.5%
Causeway, Hong Kong
All Directors and Executive 1,382,727(6) 47.2% 28.0%
Officers as a Group (4 per
</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. Paul Wu is a former director of the Company. Mr. Wu is a director of
Colony Electronics. Mr. Wu disclaims any beneficial ownership of the shares
of Colony Electronics. Mr. Wu is a director of FLX(HK) Ltd. and disclaims
any beneficial ownership of the shares of FLX (HK) Ltd. Mr. Wu is a
director of Gemco Pacific, Inc. ("Gemco"). Mr. Wu disclaims beneficial
ownership of the shares owned by Gemco.
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<PAGE>
(3) Includes immediately exercisable Options to purchase 205,000 shares of
Common Stock and immediately exercisable Warrants to purchase 8,000 shares
of Common Stock.
(4) Includes immediately exercisable Options to purchase 39,000 shares of
Common Stock and immediately exercisable Warrants to purchase 24,000 shares
of Common Stock.
(5) Includes immediately exercisable Warrants to purchase 8,000 shares of
Common Stock.
(6) Includes immediately exercisable Options to purchase 244,000 shares of
Common Stock and immediately exercisable Warrants to purchase 40,000 shares
of Common Stock.
(7) Mr. Steele disclaims beneficial ownership of 100 shares owned by his wife.
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<PAGE>
DESCRIPTION OF SECURITIES
The Company is authorized to issue 74,000,000 shares of Common Stock,
$.01 par value per share, and 1,000,000 shares of Preferred Stock, $1.00 par
value per share. As of the date of this Prospectus, there are 2,931,975 shares
of Common Stock issued and outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted for the election of
directors can elect all of the directors. The holders of Common Stock are
entitled to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining available for distribution to
them after payment of liabilities and after provision has been made for each
class of stock, if any, having preference over the Common Stock. Holders of
shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and, except as noted herein, there are no redemption
provisions applicable to the Common Stock. All of the outstanding shares of
Common Stock are, and the Shares, when issued and paid for as set forth in this
Prospectus, will be, fully paid and nonassessable.
The holders of Common Stock do not have any subscription, redemption or
conversion rights, nor do they have any preemptive or other rights to acquire or
subscribe for additional, unissued or treasury shares. Accordingly, if the
Company were to elect to sell additional shares of Common Stock following this
Offering, persons acquiring Common Stock in this Offering would have no right to
purchase additional shares, and, as a result, their percentage equity interest
in the Company would be reduced. Pursuant to the Company's Bylaws, except for
any matters which, pursuant to corporate law, require a greater percentage vote
for approval (including, for example certain mergers and consolidations and the
amendment of certain provisions of the Company's Bylaws) , the holders of
majority of the issued and outstanding Common Stock entitled to vote, if present
in person or by proxy, are necessary and sufficient to constitute a quorum for
the transaction of business at meetings of the Company's stockholders. Further,
except as to any matter which, pursuant to corporate law, requires a greater
percentage vote for approval (including, for example, certain mergers,
consolidations, sales of substantially all of the assets, and amendments to
certain provisions of the charter and Bylaws, of the Company), the affirmative
vote of the holders of a majority of the Common Stock voted on the matter
(provided a quorum as aforesaid is present) is necessary and sufficient to
authorize, affirm or ratify any act or action except the election of directors,
which is by a plurality of the votes cast.
The holders of Common Stock do not have cumulative voting rights.
Accordingly, the holders of more than half of the outstanding shares of Common
Stock can elect all of the directors to be elected in any election. In such
event, the holders of the remaining shares of Common Stock would not be able to
elect any directors. The Board of Directors is empowered to fill any vacancies
on the Board of Directors created by the resignation, death or removal of
directors.
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<PAGE>
In addition to voting at duly called meetings at which a quorum is
present in person or by proxy, corporate law, the Charter and the Company's
Bylaws provide that stockholders may take action without the holding of a
meeting by written consent or consents signed by the holders of that number of
the outstanding shares of the capital stock of the Company entitled to vote
thereon which would be required to take the subject action. Prompt notice of the
taking of any action without a meeting by less than unanimous consent of the
stockholders will be given to those stockholders who do not consent in writing
to the action. The purposes of this provision are to facilitate action by
stockholders and to reduce the corporate expense associated with annual and
special meetings of stockholders. Pursuant to the rules and regulations of the
Commission, if stockholder action is taken by written consent, the Company will
be required to send to each stockholder entitled to vote on the matter acted on,
but whose consent was not solicited, an information statement containing
information substantially similar to that which would have been contained in a
proxy statement.
After the offering and after giving effect to the conversion of all
preferred stock, exercise of all Warrants and outstanding Options, the Company's
executive officers and directors will beneficially own approximately 28% of the
outstanding shares of Common Stock, and may accordingly be in a position to
significantly influence the voting results of certain actions required or
permitted to be taken by stockholders of the Company, including the election of
directors. As a result, the officers and directors of the Company may be in a
position to control the outcome of substantially all matters on which
stockholders are entitled to vote, including the election of directors.
Convertible Preferred Stock
The Company's Board of Directors has the authority, without further
action by the stockholders, to issue up to 1,000,000 shares of preferred stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and the
number of shares constituting any series or the designation of such series,
without any further vote or action by shareholders as of the date of this
Prospectus, all of the preferred shares have been issued. The issuance of
preferred stock could also adversely affect the voting power of holders of
common stock and the likelihood that such holders will receive dividend payments
and payments upon liquidation and could have the effect of delaying, deferring
or preventing a change in control of the Company. Accordingly, the issuance of
shares of preferred stock may discourage bids for the common stock or may
otherwise adversely affect the market price of the common stock. The Company has
no present plan to issue any additional shares of preferred stock.
A brief description of the Company's "Convertible Preferred Stock"
including the preferences, dividends, conversion and other rights, all as set by
the Board of Directors of the Company, is as follows. A more detailed
explanation regarding the Preferred Stock may be found in the Amendment to the
Company's Articles of Incorporation.
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<PAGE>
Designation and Initial Number. The class of shares of Preferred Stock
hereby classified shall be designated the "Convertible Preferred Stock"
(hereinafter referred to as the "Preferred Stock"). The initial number of
authorized shares of the Preferred Stock is 1,000,000.
Dividends. There shall be a nine percent (9%) dividend paid on the
Preferred Stock prior to the date of conversion.
Conversion. Each share of Preferred Stock will automatically convert at
5:00 p.m. eastern time on April 1, 2000. Upon conversion, each holder of one (1)
share of Preferred Stock shall receive from the Company one (1) share of the
Company's Common Stock.
Liquidation or Dissolution. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of Preferred Stock then outstanding shall be entitled to be paid out of the
assets of the Company available for distribution to its stockholders, before any
payment shall be made to the holders of any stock of the Company ranking junior
to Preferred Stock.
A merger or consolidation of the Company with or into any other
corporation, share exchange or a sale or conveyance of all or any part of the
assets of the Company (which shall not in fact result in the liquidation of the
Company and the distribution of assets to stockholders) shall not be deemed to
be a voluntary or involuntary liquidation, dissolution or winding up of the
Company.
Common Stock Public Warrants
In 1994, we sold 1,200,000 Common Stock Public Warrants (individually
"Public Warrant" or collectively "Public Warrants) pursuant to our initial
public offering. In 1995, we declared a dividend to our shareholders payable in
the form of Public Warrants. As a result of the dividend, we issued an
additional 456,000 Public Warrants. As of the date of this Prospectus, there are
1,656,000 Public Warrants issued and outstanding.
The following is a brief summary of the provisions of the Public
Warrants:
Term. The original term of the Public Warrants was five (5) years from
the date of our Initial Public Offering dated November 10, 1994. The Public
Warrants issued as a dividend in 1995 expire at the same time the original
Public Warrants expire. On October 29, 1999, our Board of Directors extended the
expiration date of the Public Warrants by one (1) year to November 10, 2000.
Exercise Price. Ten (10) Public Warrants are required to purchase one
(1) share of our common stock. Ten (10) Public Warrants entitle the holder
thereof to purchase at any time on or before November 10, 2000 (the "Expiration
Date") one (1) share of our common stock at a price of $36.00 per share. After
the expiration date, Warrantholders have no further rights. The Public Warrants
are subject to adjustments in their exercise price and in the number of shares
of common stock or other securities deliverable upon the exercise thereof in the
event of a stock dividend, stock split, reclassification, reorganization,
consolidation, or merger. Warrantholders do not have any voting or any other
rights as shareholders of the Company.
-39-
<PAGE>
The Public Warrants may be exercised by surrendering the certificate
evidencing such Public Warrant, with the Form of Election to purchase on the
reverse side of such certificate properly completed and executed, together with
payment of the exercise price and any transfer tax, to the Warrant Agent. If
less than all of the Public Warrants evidenced by a Warrant Certificate are
exercised, a new certificate will be issued for the remaining number of Public
Warrants. Payment of the exercise price may be made by cash, bank draft, or
official bank or certified check equal to the exercise price.
The exercise price of the PublicWarrants bears no relation to any
objective criteria of value and should in no event be regarded as an indication
of any future market price of the securities.
We have authorized and reserved for issuance a sufficient number of
common stock to permit the exercise of all Public Warrants to be issued. All
common stock issued upon exercise of the Public Warrants, if exercised in
accordance with their terms, will be fully paid and non- assessable.
Adjustments. The exercise price and the number of common shares
purchasable upon exercise of the Public Warrants are subject to adjustment upon
the occurrence of certain events. The original Public Warrants issued in
connection with our Initial Public Offering were subject to adjustment on two
occasions. The first occurrence was the 1995 dividend paid to shareholders and
the second occurrence the 1997 bankruptcy reorganization of the Company. In
1995, we issued 456,000 Public Warrants as a dividend to shareholders increasing
the aggregate number of outstanding Public Warrants to 1,656,000. On April 11,
1997, we filed a voluntary bankruptcy petition to reorganize pursuant to Chapter
11. The Company's Amended Plan of Reorganization (the "Plan") was confirmed by
the Bankruptcy Court on March 17, 1998. In accordance with the Plan, on April 1,
1998, we effectuated a one-for-ten (1:10) reverse stock split. As a result of
the reorganization, ten (10) Public Warrants are now required to purchase one
(1) share of common stock, at $36.00 per share. The Company, however, may extend
the expiration date of the Public Warrants and/or adjust the exercise price.
Transfer, Exchange and Exercise. The Public Warrants are in registered
form and may be presented for transfer, exchange or exercise at any time before
the expiration date of November 10, 2000, at which time the Public Warrants
become wholly void and of no value.
Warrantholder not Shareholder. The Public Warrants do not confer upon
holders any dividend, voting, preemptive or any other rights as a shareholder of
the Company.
Transfer Agent and Warrant Agent
The transfer agent and the warrant agent for our Common Stock and
Public Warrants is Continental Stock Transfer & Trust Co., 2 Broadway, New York,
New York 10004.
-40-
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth, for each Selling Securityholder, the
amount of Common Stock of the Company owned, the number of shares of Common
Stock offered hereby, and the number of shares of Common Stock owned after the
offering (assuming the sale of all shares offered under this Prospectus).
<TABLE>
<CAPTION>
Shares of Common
Stock Beneficially Shares that May be Shares of Common
Selling Owned Prior to Offered Pursuant to Stock Owned
Securityholder this Offering (1)(2) this Prospectus (1)(2) After Offering
---------------- --------------------- ------------------------ ---------------
<S> <C> <C> <C>
Itamar Jones Zac 24,000 24,000 0
Jack Robbins 310,500 270,000 40,500
Aton Trust Reg. 240,000 240,000 0
Bank Sal. OppenheimJr.
& CIE (Switzerland) Ltd. 240,000 240,000 0
Albert Wardi 12,000 12,000 0
Wolcot Capital Inc.
Money Purchase Plan 24,000 24,000 0
Sebastian Angelico 24,000 24,000 0
Anthony Broy 24,000 24,000 0
Wendy Blauner 24,000 24,000 0
Jon Blauner 54,000 24,000 30,000
Entropy Holdings LLC 60,000 60,000 0
Benchmark Capital 96,000 96,000 0
Josef A. Bauer 116,866 65,549 51,317
Sil Venturi 24,000 24,000 0
Frederick A. Merz 27,000 24,000 3,000
Union Atlantic LC 20,000 20,000 0
Clarion Finanz A.G. 90,000 90,000 0
SISM Research and
Investment Services 10,000 10,000 0
Dunedin, Inc. 143,400 92,200 51,200
Portfolio Research
Associates, Inc. 76,000 76,000 0
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
Shares of Common
Stock Beneficially Shares that May be Shares of Common
Selling Owned Prior to Offered Pursuant to Stock Owned
Securityholder this Offering (1)(2) this Prospectus (1)(2) After Offering
---------------- --------------------- ------------------------ ---------------
<S> <C> <C> <C>
FRS Investments, Inc. 215,000 85,000 130,000
Melody L. Rawski 5,000 5,000 0
Teresa Marco 25,010 15,000 10,010
John Steele 25,000 25,000 0
Terri Phillips 2,500 2,500 0
Brian Cino 2,500 2,500 0
Jorge R. Otacqui 1,500 1,500 0
Adolf H. Nelson 1,500 1,500 0
April Green 5,000 5,000 0
John Klecha 483,274 383,000 100,274
Edward Steele 457,924 395,000 62,924
David A. Carter 28,000 28,000 0
Bert L. Gusrae 28,000 28,000 0
Walter Haskamp 2,500 2,500 0
Susan Massinger 4,000 4,000 0
</TABLE>
- ------------------
(1) Assumes that all of our preferred stock is converted into shares and all of
our Warrants are exercised into Shares. No assurance can be given as to the
timing of the conversion of the preferred stock or the exercise of the
Warrants or as to whether all or any of the preferred stock will be
converted or all or any of the Warrants will be exercised.
(2) Assumes that all Options are exercised into Shares. No assurance can be
given as to the timing of the exercise of the Options or as to whether all
or any of the Options will be exercised.
-42-
<PAGE>
PLAN OF DISTRIBUTION
The securities registered pursuant to this Prospectus (the "Offered
Stock") may be sold from time to time by the Selling Securityholders or by
pledgees, donees, transferees or other successors-in interest. The Offered Stock
may be sold in transactions on the OTC Bulletin Board, in privately negotiated
transactions, through the writing of Options on the shares, or a combination of
such methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of the sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Securityholders may effect such
transactions by the sale of the Offered Stock to or through broker- dealers, and
such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers of the Offered Stock for whom such broker-dealers may act as agent or
to whom they may sell as principal, or both.
The Selling Securityholders may also pledge the Offered Stock to a
broker-dealer and upon default under such pledge the broker-dealer may effect
sales of the Offered Stock pledged pursuant to this Prospectus. In addition, the
Offered Stock covered by this Prospectus may be sold in private transactions or
under Rule 144, rather than pursuant to this Prospectus.
The Company will not receive any of the proceeds from the sale of the
Offered Stock by the Selling Securityholders. We will receive the exercise price
of the Warrants and Options, if such Warrants and Options are exercised, but
will receive no proceeds from the resale of the underlying shares which may be
offered hereby.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states the shares may not
be sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
The Selling Securityholders and any broker-dealers or agents that
participate with the Selling Securityholders in the distribution of the shares
may be deemed to be "underwriters" within the meaning of the Securities Act, and
any commissions received by them and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act of 1933 as amended (the "Securities Act").
-43-
<PAGE>
We will pay all costs and expenses incurred in connection with the
registration under the Securities Act. This includes:
o all registration and filing fees;
o printing expenses; and
o fees and disbursements of our counsel and accountants.
The Selling Securityholders will bear all commissions and discounts, if
any, attributable to the sales of the shares.
The Selling Securityholders are under no obligation to sell all or any of
the shares. The Selling Securityholders are not restricted as to the prices at
which they may sell their shares and sales of such shares at less than the
market price may depress the market price of our common stock.
-44-
<PAGE>
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon by
David A. Carter, P.A., 2300 Glades Road, Suite 210, West Tower, Boca Raton,
Florida 33433. The sole stockholder of and counsel to David A. Carter, P.A. are
the beneficial owners of an aggregate of 56,000 shares of common stock of the
Company.
EXPERTS
The consolidated balance sheets as of March 31, 1998 and the
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended March 31, 1998, included in this prospectus, have been included
herein in reliance on the report of Samuel F. May, Jr. & Company, CPA's as
independent accountants for the consolidated balance sheets, given on the
authority as experts in accounting and auditing.
The consolidated balance sheets as of March 31, 1999 and the consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended March 31, 1999, included in this prospectus, have been included herein in
reliance on the report of Weinberg & Company, P.A., as independent accountants
for the consolidated balance sheets, given on the authority as experts in
accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement"), pursuant to the Securities Act of 1933, as amended (the "Act"),
with respect to the offer, issuance and sale of 2,447,249 shares of The Singing
Machine Company, Inc. Common Stock (the "Shares"). This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. The statements contained in this Prospectus as to the contents
of any contract or other document identified as exhibits in this Prospectus are
not necessarily complete, and in each instance, reference is made to a copy of
such contract or document filed as an exhibit to the Registration Statement,
each statement being qualified in any and all respects by such reference. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and exhibits thereof
which may be inspected without charge at the principal office of the Commission
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549.
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, and in accordance therewith, files reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; at its New York Regional Office, Room 1400, 7 World Trade Center,
New York, New York 10048; and at its Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and copies of such material can be
obtained from the Public Reference Section at prescribed rates. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission at http://www.sec.gov. The Company intends to furnish its
Securityholders with annual reports containing audited financial statements and
such other reports as the Company deems appropriate or as may be required by
law.
-45-
<PAGE>
THE SINGING MACHINE COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1999
Financial Statements:
Report of Independent Accountants..........................................
Consolidated Balance Sheets................................................
Consolidated Statement of Income...........................................
Consolidated Statements of Shareholders' Equity............................
Consolidated Statement of Cash Flows.......................................
Notes to Consolidated Financial Statements.................................
YEAR ENDED MARCH 31, 1998
Financial Statements:
Report of Independent Accountants..........................................
Consolidated Balance Sheets................................................
Consolidated Statement of Operations.......................................
Consolidated Statements of Shareholders' Equity (Deficit)..................
Consolidated Statement of Cash Flows.......................................
Notes to Consolidated Financial Statements.................................
F-1
<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
F-2
<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.
F-3
<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.
F-4
<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>
See accompanying notes to consolidated financial statements.
F-5
<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.
F-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
(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.
F-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)
(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".
F-8
<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).
F-9
<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.
F-10
<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.
F-11
<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.
F-12
<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.
F-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)
(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
F-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 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
======
F-15
<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:
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
- ------- -------------- ----------- -------- ----------- --------
$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
======= =======
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)
=========
F-16
<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 perccent to income before taxes) as follows:
<TABLE>
<CAPTION>
<S> <C>
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
==========
</TABLE>
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.
F-17
<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
F-18
<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.
F-19
<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
F-20
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 1998
<TABLE>
<CAPTION>
ASSETS
(Restated)
----------
<S> <C>
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
============
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<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-22
<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>
Common Stock Retained Total
$.01 Par Value Additional Earnings Shareholders'
------------------------- 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-23
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended March 31,
-----------------------------------
1998 1997
------------ -------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
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-24
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization and Basis of Presentation - The Singing Machine Company,
Inc. and Subsidiary (the Company) is primarily engaged in the production,
distribution, and marketing of karaoke music recordings, as well as the
distribution and marketing of electronic karaoke audio equipment and
accessories. The Company also acts as the exclusive commissioned sales
agent for a related party which sells karaoke audio equipment to both
unrelated parties located in the United States and internationally, and
to the Company for distribution within the United States.
On November 18, 1994, the Company completed an initial public offering of
its common stock on Form SB-2.
On April 11, 1997, The Singing Machine Company, Inc. filed a voluntary
petition for relief pursuant to Chapter 11 of the United States
Bankruptcy Act. Accordingly, all debts have bene classified as debts
subject to compromise. See Note 12 to the consolidated financial
statements related to the Company's Plan of Reorganization, as Amended.
2. Principles of Consolidation - The consolidated financial statements
include the accounts of The Singing Machine Company, Inc. and its
wholly-owned foreign subsidiary. All significant intercompany
transactions have been eliminated.
3. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
4. Foreign Currency Translation - Local currency is generally considered the
functional currency outside the United States. Assets and liabilities are
translated at the year-end exchange rate. Income and expense items are
translated at average rates of exchange prevailing during the year. The
related translation adjustment is not material.
5. Inventories - Inventories are substantially all finished goods, which
consist primarily of electronic karaoke audio equipment accessories,
audio and compact discs. Inventories are stated at the lower of cost
(first-in, first-out method) or market. As of March 31, 1997, the
carrying value of all audio and video tapes was reviewed by the Company
and based upon the outcome of such review, the Company has recorded a
reduction in the carrying value of such assets in the amount of $529,414,
which was charged to cost of sales.
6. Cash Equivalents - The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash
equivalents.
F-25
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Investment in Song Library - Investment in song library consists of costs
incurred in the production or purchase of master song tapes. The carrying
value of investment in song library is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates
that the investment in song library will not be recoverable, as
determined based on the estimated undiscounted cash of the entity
acquired over the remaining amortization period, the Company's carrying
value of the investment in song library is reduced by the estimated
shortfall of discounted cash flows. Amortization expense charged to
operations for the fiscal years ended March 31, 1998 and 1997 amounted to
$44,492 and $126,507, respectively.
8. Property and Equipment - Property and equipment is recorded at cost less
accumulated depreciation and amortization. Depreciation is provided using
an accelerated method over the estimated useful lives of the related
assets. During July, 1997, the Company moved to more cost effective
facilities. All leasehold improvements and equipment associated with the
prior facility were written down to $-0- value.
9. Costs in Excess of Net Assets Acquired and Trademarks - The carrying
value of goodwill and trademarks are reviewed if the facts and
circumstances suggest it may be impaired. If this review indicates that
the goodwill and trademarks will not be recoverable, as determined based
on the estimated undiscounted cash of the entity acquired over the
remaining amortization period, the Company's carrying value of the
goodwill and trademarks is reduced by the estimated shortfall of
discounted cash flows. As of March 31, 1997, the carrying value of
goodwill and trademarks was reviewed by the Company and based upon the
outcome of such review, the Company has recorded a reduction in the
carrying value of such assets relating to music sales in the amount of
$1,080,828. Accordingly, the write down of goodwill and trademarks has
been charged to operations.
10. Income Taxes - Income taxes are accounted for under the asset and
liability method of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"). Deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on
deferred tax assets and liabilities or a change in tax rate is recognized
in income in the period that includes the enactment date. Deferred tax
assets are reduced to estimated amounts to be realized by use of a
valuation allowance.
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.
F-26
<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)
11. Revenue Recognition - Revenue from the sale of equipment and music are
recognized upon shipment and are reported net of returns and allowances.
Commission income is recognized as earned.
12. Loss Per Common Share - Loss per common share is calculated based on the
weighted average number of common shares and dilutive common stock
equivalents outstanding during the period. For the fiscal 1998 and 1997
periods, the effect of the common stock equivalents would be antidilutive
and has not been included in the calculation.
13. Pronouncements - In fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share," which supercedes Accounting Principles Board Opinion No. 15.
Pursuant to SFAS No. 128, earnings (loss) per common share is computed by
dividing net income (loss) available to common stockholders by the
weighted average number of shares outstanding during the period. Diluted
earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock.
For the fiscal years ended March 31, 1998 and 1997, there is no
difference between basic and diluted net loss per share or between the
basic and diluted net loss per share as previously reported. Potential
common shares from stock options, warrants, and convertible preferred
stock are excluded in computing basic and diluted net loss per share as
their effects would be antidilutive. The adoption of SFAS No. 128 did not
have a material impact on the Company's consolidated financial
statements.
14. Fair Market Value of Financial Instruments - The carrying amount reported
in the consolidated balance sheet for cash and cash equivalents, note
payable, accounts payable, and accrued liabilities approximates fair
market value due to the immediate or short-term maturity of these
financial instruments. The Company's liabilities are subject to
compromise as discussed in note 12 to the consolidated financial
statements.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the accompanying
consolidated financial statements, the Company incurred losses and there is an
accumulated deficit of $10,453,257 at March 31, 1998. Management of the Company
believes that it has instituted certain initiatives, including an enhanced sales
focus and cost reductions that will result in returning the Company to
profitable operations in fiscal 1999, and the Company's backlog of orders placed
by customers indicate this strategy is working.
F-27
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 3 - SALE OF RECEIVABLES WITH RECOURSE
The Company sells certain trade accounts receivable, subject to full recourse
provisions, pursuant to a factoring agreement, as amended. At March 31, 1998,
the outstanding balance of such receivables for which the Company is
contingently liable was approximately $532,765.
The Company received proceeds of approximately $1,987,000 and $2,855,000 in the
fiscal 1998 period and fiscal 1997, respectively, upon the sale of trade
accounts receivable under this agreement, and incurred approximately $95,257 and
$235,000 in factor fees, respectively. All of the Company's accounts
receivables, inventories, and intangibles are pledged as collateral under this
agreement, and the factor holds back 50% of the approved receivable face amount
as security. Minimum factor fees were $6,667 per month.
NOTE 4 - EQUIPMENT
A summary of equipment as of March 31, 1998 is as follows:
Estimated
Useful Lives
(Years)
------------
Computer equipment 5 $ 56,212
Office equipment 7 42,915
----------
99,127
Less accumulated depreciation 79,692
----------
Totals $ 19,435
==========
Depreciation and amortization expense on property and equipment for the fiscal
1998 and fiscal 1997 periods is approximately $177,268 and $139,152,
respectively.
NOTE 5 - LOANS PAYABLE
As of March 31, 1998, loan payable consists of the following:
<TABLE>
<CAPTION>
<S> <C>
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
===========
</TABLE>
F-28
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 6 - COMMITMENTS AND CONTINGENCIES
On May 1, 1997, the Company entered into a lease for an office and warehouse
facility for a term of 25 months. Pursuant to the terms of the lease, the
Company must pay maintenance, insurance, and real estate taxes. Total rent
expense was approximately $77,724 and $203,000 in the 1998 and fiscal 1997
periods, respectively. Future minimum lease commitments under noncancellable,
the operating lease are as follows:
Year Ending March 31:
--------------------
1999 $ 78,703
2000 26,234
2001 -
----------
$ 104,937
==========
NOTE 7 - RELATED PARTY TRANSACTIONS
At March 31, 1998, the amount due from officer bears interest monthly at 9% per
annum and is due on March 31, 1999.
The Company's Hong Kong wholly-owned subsidiary, International SMC (HK) Ltd.,
operates as an intermediary to purchase Karaoke hardware from factories located
in China.
During the fiscal 1998 and 1997 periods, the Company purchased certain karaoke
audio equipment and accessories from Far East companies (related party
suppliers) controlled by a director. During fiscal 1998, the Company purchased
goods from FLX (HK) Limited, a company related through a common director, in the
amount of approximately $1,200,000. During fiscal 1997, the Company purchased
approximately $1,900,000.
NOTE 8 - SHAREHOLDERS' DEFICIT
Effective May 3, 1994, the Company adopted a stock option plan (the Plan), which
provides for the granting of both incentive and nonqualified stock options to
key personnel, including officers, directors, consultants, and advisors of the
Company, based upon the determination of the Board of Directors. The Plan was
amended on June 29,1994, and incentive stock options were granted under the Plan
to purchase 293,700 shares of the Company's common stock. The incentive stock
options expire in 1999 and 2004.
On April 1, 1998, the Company effectuated a one for ten (1:10) reverse stock
split. The primary purpose of the split is pursuant to the Company's Plan of
Reorganization as Amended on March 17, 1998. Trading in the post-split shares
commenced at the opening of business on April 1, 1998. No additional shares were
issued in connection with the reverse split and those stockholders entitled to
receive fractional shares received shares based on rounding to the nearest whole
number. During April, 1998, the Company filed an amendment to its Articles of
Incorporation increasing the authorized shares of the Company's common stock to
ten million (10,000,000) shares.
F-29
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 8 - SHAREHOLDERS' DEFICIT (continued)
The company's creditors, pursuant to the Company's Plan of Reorganization, as
Amended, who elected to receive shares will be issued an aggregate of 2,068,576
post-split shares of common stock. The Company's legal counsel has written to
each creditor requesting that the necessary information be completed and
returned in order to issue the common stock. The financial statements reflect
the issuance of 2,068,576 post-split shares of common stock to the Company's
creditors.
These financial statements reflect the one for ten (1:10) reverse stock split in
computing the weighted average common and common equivalent shares outstanding
and the net loss per common share amounts and accounts for the subsequent
increase of authorized common shares pursuant to the Company's amendment to its
Articles of Incorporation during April, 1998.
At March 31, 1998, 215,000 of these options are currently exercisable, and the
remaining 78,700, held by three individuals, become exercisable in maximum
increments of 20,000 each year through June 29,1999. Additional incentive or
nonqualified stock options may be granted to purchase up to 191,300 shares of
the Company's common stock. At March 31, 1998, 485,000 shares of common stock
have been reserved for issuance under the Plan.
On November 18, 1994, the Company closed the initial public offering of
1,380,000 shares of its common stock and 1,380,000 warrants (the Public
Warrants) for an aggregate purchase price of approximately $7,080,000. The
Public Warrants may be exercised at anytime beginning November 10, 1995, and
continuing thereafter until November 10, 1999.
Also, included in the offering were 144,000 warrants issued to the Company's
underwriters (the Representative's Warrants). The Representative's Warrants
entitle the registered holders to purchase one share of the Company's common
stock and a warrant to purchase an additional share of common stock. The
warrants became exercisable November 10, 1995, and will continue thereafter
until November 10, 1999.
During April, 1995, 272,250 Bridge Warrants were exercised resulting in net
proceeds to the Company of $320,578.
During March, 1997, the Company issued 7,200 shares post-split of common stock
to settle outstanding debt of approximately $18,000.
NOTE 9 - INCOME TAXES
On September 3, 1991, the Company underwent a change of ownership (as defined by
Internal Revenue Code Section 382). This change limits the Company's ability to
utilize its approximately $4,057,000 of net operating loss carryforwards (NOLs)
as of March 31, 1997, to $14,000 per year (these NOLs expire from 2003 to 2007).
At March 31, 1998, the Company has net operating loss carryforwards of
approximately $10,635,490 (which are not subject to the above limitations) that
expire through 2012. A valuation allowance of approximately $4,136,300 has been
recognized to offset primarily all of the deferred tax assets related to these
carryforwards.
F-30
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 9 - INCOME TAXES (continued)
The differences between the statutory United States federal income tax rate and
the effective tax rate are as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1998 March 31, 1997
------------------ ----------------
<S> <C> <C>
Statutory rate (34.0)% (34.0)%
State income tax effect, net of
federal benefit (4.6)% (4.6)%
Changes in valuation allowance 38.6% 38.6%
--------- -------------
Effective rate -% -%
========= =============
</TABLE>
At March 31, 1998, the components of the cumulative effect of temporary
differences in the deferred income tax liability and income tax asset balances
are as follows:
Total
-------------
Assets:
Net operating loss carryforwards $ 4,105,300
Reserves for bad debts, sales returns and warranties 31,000
-------------
Sub-totals 4,136,300
Valuation allowance (4,136,300)
-------------
Net deferred tax assets $ -
=============
The net change in the valuation allowance during the fiscal 1998 period was an
increase of $1,436,300.
NOTE 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company derives primarily all of its equipment and music sales revenues from
distributors and retailers of such products in the United States. Financial
instruments, which potentially subject the company to concentrations of credit
risk, consist principally of cash and accounts receivable (including receivables
sold to factor with recourse). The credit risk associated with cash is
considered low due to the credit quality of the depository institution. The
Company's allowance for doubtful accounts is based upon management's estimates
and historical experience. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral.
F-31
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS (continued)
During the fiscal 1998 and 1997 periods, 91% and 79%, respectively, of the
Company's total revenues were derived from sales to five customers. Sales
derived from customers who individually purchased greater than 10% of total
revenues were as follows:
Fiscal Fiscal
1998 1997
----------- --------
Target 36% 47%
JC Penney 19% 13%
Best Buy 22% --
Fingerhut 11% --
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 Fiscal
1998 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.
F-32
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
NOTE 12 - DESCRIPTION OF PETITION (continued)
On March 17, 1998, the United States Bankruptcy Court approved the Company's
Plan of Reorganization, as Amended, and the Company emerged from Chapter 11
Bankruptcy.
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-33
<PAGE>
PART II
Information Not Required in Prospectus
--------------------------------------
Item 24. Indemnification of Directors and Officers
Article 10 of the Company's Certificate of Incorporation, as amended,
and Section 6 of the By- Laws of the Company, contain the following provisions
with respect to indemnifying officers and directors of the Company:
Certificate of Incorporation
Article 10. To the fullest extent permitted by Delaware statutory or decisional
law, as amended or interpreted, no director of the Company shall be personally
liable to the Company or the Company's Shareholders for monetary damages for
breach of a fiduciary duty as a director. Article 10 does not affect the
availability of equitable remedies for breach of fiduciary duties.
By-Laws
Indemnification of employees and other agents of the Company (including persons
who serve the Company's request as employees or other agents of another
organization in which it owns shares or of which it is a creditor) may be
provided by the Company to whatever extent shall be authorized by the directors
before or after the occurrence of any event as to or in consequence of which
indemnification may be sought. Any indemnification to which a person is entitled
under these provisions may be provided although the person to be indemnified is
no longer a director, officer, employee, or agent of the Company or of such
other organization. It is the intent of these provisions to indemnify directors
and offices to the fullest extent not specifically prohibited by law, including
indemnification against claims brought derivatively, in the name of the Company,
and that such directors and officers need not exhaust any other remedies.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth various expenses which will be incurred
in connection with the registration of the Company's securities. Other than the
SEC Registration Fee, the amounts set forth below are estimates:
SEC Registration Fee.........................................$ 2,261.25
Printing & Engraving Expenses................................ 15,000.00
Legal Fees and Expenses...................................... 30,000.00
Accounting Fees and Expenses................................. 1,400.00
Blue Sky Fees and Expenses................................... 15,000.00
TOTAL:............................$63,661.25
=========
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
The Company was incorporated in the State of Delaware in May, 1994,
with 1,000,000 authorized common shares. Currently, the Company has authorized
capital of 74,000,000 shares of common stock, $.01 par value. The Company has
2,931,975 shares of common stock issued and outstanding prior to this
registration. See "Principal Securityholders" and "Description of Securities".
In April, 1998, the Company amended its Certificate of Incorporation to
increase the number of authorized common shares from 1,000,000 shares to
10,000,000.
The Registrant issued 2,174,212 shares of the Company's common stock to
pre-petition bankruptcy creditors pursuant to the Company's First Amended Plan
of Reorganization (the "Plan") confirmed by the Bankruptcy Court on March 17,
1998. As of June 10, 1998, the Plan had been fully implemented.
In January, 1999, the Company issued 30,000 shares of common stock to
three (3) persons in consideration for professional services.
In April, 1999, the Company amended its Certificate of Incorporation
increase the number of authorized shares of common stock from 10,000,000 shares
to 74,000,000 shares.
In April, 1999, the Company issued 30,000 shares of common stock to
three (3) persons in consideration for professional services.
In April, 1999, the Company issued 2,500 shares of common stock to
outside director, Walter Haskamp as consideration for serving as a Director of
the Company.
Registrant has sold and issued the securities described below pursuant
to and in accordance with Regulation D under the Securities Act of 1933, as
amended (the "Act") within the past three years where were not registered under
the Act:
<TABLE>
<CAPTION>
Number Number of Number of
Date Purchase Of Convertible Common
of Price Units Preferred Stock Net
Name Purchase Per Unit Purchase Shares Warrants Proceeds
- ---- -------- -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Itamar Jones Zac 5/12/99 $27,500 1 20,000 4,000 $ 27,500
Jack Robbins 5/12/99 $27,500 5 100,000 20,000 $137,500
Aton Trust Reg. 5/12/99 $27,500 10 200,000 40,000 $275,000
Bank Sal. Oppenheim 5/12/99 $27,500 10 200,000 40,000 $275,000
Albert Wardi 5/12/99 $27,500 1/2 10,000 2,000 $ 13,750
Wolcot Capital Inc. 5/12/99 $27,500 1 20,000 4,000 $ 27,500
John Klecha 5/12/99 $27,500 6 120,000 24,000 $165,000
Sebastian Angelico 5/12/99 $27,500 1 20,000 4,000 $ 27,500
Anthony Broy 5/12/99 $27,500 1 20,000 4,000 $ 27,500
Wendy Blauner 5/12/99 $27,500 1 20,000 4,000 $ 27,500
John Blauner 5/12/99 $27,500 1 20,000 4,000 $ 27,500
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Number Number of Number of
Date Purchase Of Convertible Common
of Price Units Preferred Stock Net
Name Purchase Per Unit Purchase Shares Warrants Proceeds
- ---- -------- -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Entropy Holdings LLC 5/12/99 $27,500 2 1/2 50,000 10,000 $ 68,750
Benchmark Capital LLC 5/12/99 $27,500 4 80,000 16,000 $110,000
Josef A. Bauer 6/28/99 $27,500 2 40,000 8,000 $ 55,000
Sil Venturi 6/28/99 $27,500 1 20,000 4,000 $ 27,500
Frederick A. Merz 6/28/99 $27,500 1 20,000 4,000 $ 27,500
Edward Steele 6/28/99 $27,500 2 40,000 8,000 $ 55,000
</TABLE>
In May, 1999, the Company issued 17,549 shares of common stock to
Memcorp, Inc. in consideration of $35,098 of product, or $2.00 per share.
In June, 1999, the Company issued 200,000 shares of common stock to
Edward Steele, a Director and Chief Executive Officer of the Company, in
consideration for his personal guaranty of the Company's credit facility with
EPK Financial.
In June, 1999, the Company issued 150,000 shares of common stock to
John Klecha, a Director, Chief Operating Officer and Chief Financial Officer of
the Company, in consideration for his personal guaranty of the Company's credit
facilities with Main Factors and EPK Financial.
Item 27. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
3.1 Certificate of Incorporation and Certificate of Amendments Thereto of Registrant*
3.2 By-Laws of Registrant*
4.1 Form of Certificate Evidencing Shares of Common Stock*
5.1 Opinion re: Legality of the Securities Being Registered*
10.1 Edward Steele Employment Agreement 3/1/98 - 3/1/01*
10.2 John Klecha Employment Agreement 3/1/98 - 3/1/00*
10.3 Main Factors, Inc. Agreement 6/99*
10.4 EPK Financial Corporation Agreement 7/99*
10.5 Bankruptcy Plan of Reorganization*
10.6 Order Confirming Plan of Reorganization*
23.1 Consent of Counsel - David A. Carter, P.A.
23.2 Consent of Accountant - Weinberg & Company, P.A.
23.3 Consent of Accountant - Samuel F. May, Jr. & Company, CPA's
24.1 Power of Attorney*
</TABLE>
- --------------------
*Previously Filed
II-3
<PAGE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934, as amended) that is incorporated
by reference in the Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL
OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND HAS DULY CAUSED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF COCONUT CREEK, COUNTY OF BROWARD, STATE OF
FLORIDA, ON MARCH 14, 2000.
The Singing Machine Company, Inc.
Dated: March 14, 2000 By:______________________________________
John F. Klecha, Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
Signature Title
___________________________ Chairman of the Board of Directors and
Edward Steele Chief Executive Officer
__________________________ Chief Operating Officer,
John F. Klecha Chief Financial Officer and Director
__________________________ Director
Josef A. Bauer
__________________________ Director
Alan Schor
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------- ----------------------
<S> <C>
3.1 Certificate of Incorporation and Certificate of Amendments Thereto of Registrant*
3.2 By-Laws of Registrant*
4.1 Form of Certificate Evidencing Shares of Common Stock*
5.1 Opinion re: Legality of the Securities Being Registered*
10.1 Edward Steele Employment Agreement 3/1/98 - 3/1/01*
10.2 John Klecha Employment Agreement 3/1/98 - 3/1/00*
10.3 Main Factors, Inc. Agreement 6/99*
10.4 EPK Financial Corporation Agreement 7/99*
10.5 Bankruptcy Plan of Reorganization*
10.6 Order Confirming Plan of Reorganization*
23.1 Consent of Counsel - David A. Carter, P.A.
23.2 Consent of Accountant - Weinberg & Company, P.A.
23.3 Consent of Accountant - Samuel F. May, Jr. & Company, CPA's
24.1 Power of Attorney*
</TABLE>
- --------------------
*Previously Filed
<PAGE>
CONSENT OF COUNSEL - DAVID A. CARTER, P.A.
The consent of David A. Carter, P.A. to the use of its name in this
Form SB-2 Registration Statement, and related Prospectus, as amended, of The
Singing Machine Company, Inc. is contained in its opinion filed as Exhibit 5.1.
DAVID A. CARTER, P.A.
Boca Raton, Florida
February 24, 2000
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in the Form SB-2 Registration Statement of The
Singing Machine Company, Inc. our report as of March 31, 1999, dated July 23,
1999 relating to the consolidated financial statements of The Singing Machine
Company, Inc. which appear in such Form SB-2, and to the reference to our Firm
under the heading "Experts" in the prospectus.
/s/ WEINBERG & COMPANY, P.A.
--------------------------------
WEINBERG & COMPANY, P.A.
Certified Public Accountants
Boca Raton, Florida
March 1, 2000
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the use in the Form SB-2 Registration Statement of The
Singing Machine Company, Inc. our report as of March 31, 1998, dated October 12,
1998, relating to the consolidated financial statements of The Singing Machine
Company, Inc. which appear in such Form SB-2, and to the reference to our Firm
under the heading "Experts" in the prospectus.
/s/ SAMUEL F. MAY JR. & COMPANY
-------------------------------
SAMUEL F. MAY JR. & COMPANY
Certified Public Accountants
Boca Raton, Florida
March 1, 2000
