SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
COMMISSION FILE NO.: 0-24968
THE SINGING MACHINE COMPANY, INC.
---------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 95-3795478
--------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6601 Lyons Road, Building A-7, Coconut Creek, FL 33073
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(Address of principal executive offices, including zip code)
(954) 596-1000
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(Issuer's telephone number)
----------------------------------------------------
(Former Name, Former Address and Formal Fiscal Year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $.01 per share OTC Bulletin Board
Common Stock Purchase Warrants OTC Bulletin Board
Securities registered pursuant to 12(g) of the Act: None
Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Issuer was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not
be contained, to the best of Issuer's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. (X)
State issuer's revenues for its most recent fiscal year: $19,032,320
The aggregate market value of the Registrant's voting stock held by
non-affiliates, based upon the closing sales price for the common
stock of $3.375 per share as reported on the OTC Bulletin Board on
June 20, 2000, was approximately $13,061,155.50. The shares of
Common Stock held by each officer and director and by each person
known to the Company to own 5% or more of the outstanding Common
Stock have been excluded and such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE
YEARS: Indicate whether the Issuer has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the
Securities Exchange Act of 1934 after the distribution of securities
under a plan confirmed by a court. Yes x No
APPLICABLE ONLY TO CORPORATE REGISTRANTS: State the number of
shares outstanding of each of the Issuer's classes of common stock,
as of the latest practicable date.
3,869,972 shares of Common Stock were outstanding as of June 20, 2000.
<PAGE>
THE SINGING MACHINE COMPANY, INC.
TABLE OF CONTENTS
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Page
PART I ----
------
Item 1. Business.........................................3
Item 2. Properties.......................................10
Item 3. Legal Proceedings................................10
Item 4. Submission of Matters to a
Vote of Security Holders.......................10
PART II
-------
Item 5. Market for Company's Common Equity
And Related Stockholder Matters................10
Item 6. Management's Discussion and
Analysis or Plan of Operations.................13
Item 7. Financial Statements and Supplementary Date......18
Item 8. Change in and Disagreements
with Accountants on Accounting
and Financial Disclosure.......................18
PART III
--------
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act..............19
Item 10. Executive Compensation...........................21
Item 11. Security Ownership of Certain
Beneficial Owners and Management...............22
Item 12. Certain Relationships and Related Transactions...24
Item 13. Exhibits, Financial Statement
Schedules and Reports on Form 8-K..............26
SIGNATURES
<PAGE> 2
PART I - FORWARD LOOKING STATEMENTS
-----------------------------------
The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for certain forward-looking statements. The
forward-looking statements contained in this Form 10-KSB are subject
to certain assumptions, risks and uncertainties. Actual results
could differ materially from current expectations. Among the
factors that could affect the Company's actual results and could
cause results to differ from those contained in the forward-looking
statements contained herein is the Company's ability to implement
its business strategy successfully, which will depend on business,
financial, and other factors beyond the Company's control,
including, among others, prevailing changes in consumer preferences,
access to sufficient quantities of raw materials, availability of
trained laborers and changes in industry regulation. There can be
no assurance that the Company will continue to be successful in
implementing its business strategy. Other factors could also cause
actual results to vary materially from the future results covered in
such forward-looking statements. Words used in this Form 10-KSB,
such as "expects", "believes", "estimates", and "anticipates" and
variations of such words and similar expressions are intended to
identify such forward-looking statements.
ITEM 1. BUSINESS
--------
INTRODUCTION
The Singing Machine Company, Inc. (the "Company") is engaged in the
distribution and marketing of electronic karaoke audio equipment
which plays backing tracks (music without lyrics) of popular songs
and records the vocal accompaniment of professional and amateur
singers to those backing tracks. The Company contracts for the
manufacture of all of its electronic equipment products with
manufacturers located in the Far East. The Company also produces
and markets karaoke audio software, including CD plus, graphics, and
audio cassette tapes containing music and lyrics of popular songs
for use with karaoke recording equipment. One track of those tapes
offers complete music and vocals for practice and the other track is
instrumental only for performance by the participant. Virtually all
audio cassette software sold by the Company is accompanied by
printed lyrics, and the Company's karaoke CD's with graphics
contain lyrics which appear on the video screen. The Company
contracts for the reproduction of its audio cassette software, which
is produced by the Company or by an independent producer.
The Company was incorporated in California in 1982. The Company
originally sold its products exclusively to professional and
semi-professional singers. In 1988, it began marketing karoake
equipment for home use. The Company believes it was the first to
offer karaoke electronic recording equipment and audio software for
home use in the United States.
In May 1994, the Company was merged into a wholly-owned subsidiary
<PAGE> 3
of the Company incorporated in Delaware with the same name. As a
result of that merger, the Delaware corporation became the successor
to the business and operations of the California corporation and
retained the name The Singing Machine Company, Inc.
The Company filed a voluntary petition under Chapter 11 of the U.S.
Bankruptcy Code on April 11, 1997. On March 17, 1998, the U.S.
Bankruptcy Court confirmed the Company's First Amended Plan of
Reorganization, which Plan has been fully implemented.
PRODUCT LINES
The Company currently has a product line of 11 different models of
recording and playback units incorporating such features as a CD
graphics player, graphic equalizer and high-output stereo amplifier
and markets its products under its registered trademark, The Singing
Machine(R). The Company also licenses its trademark, on a
non-exclusive basis, to others for sales around the world. The
Company believes that it is the only major company in the karaoke
industry in the United States which sells both hardware and software.
The Company currently offers 11 different models of electronic
recording and playback equipment with retail prices ranging from $30
for basic units to $400 for semi-professional units with CD plus
graphics player sound enhancement, graphic equalizers, echo tape
record/playback features, and multiple inputs and outputs for
connection to compact disc players and video cassette records. The
Company currently offers its audio software in two formats -
multiplex cassettes and CD plus graphics with retail prices ranging
from $6.95 to $29.95. The Company purchases recordings from
independent producers and currently has a song library of over 2,700
songs. The Company's backing track product line covers the entire
range of musical tastes including popular hits, golden oldies,
country, standards, rock and roll, and rap. The Company even has
backing tracks for opera and certain foreign language recordings.
During the fiscal year ended March 31, 2000, the Company introduced
three new models of recording equipment. The Company is producing
28 new CDG titles and 112 songs.
THE MARKET
The karoake industry exceeds sales of $10 billion in the Far East,
based upon Japanese industry estimates. The current North American
market for karaoke products is estimated at less than $300 million.
Therefore, the Company believes that there is tremendous growth
potential not only in the North American market, but also in South
America and Europe as well.
Although there are other electronic component competitors for the
Company's hardware products, and other audio software competitors,
the Company believes it is the only major company specializing in
karaoke category that offers complete lines of hardware including
CD+graphics machines as well as a software library with over 2,700
titles offered by the Company.
<PAGE> 4
SALES, MARKETING AND DISTRIBUTION
---------------------------------
MARKETING
The Company relies on its management's ability to determine the
existence and extent of available markets for its products. Company
management has considerable marketing and sales background and
devotes a significant portion of its time to marketing-related
activities. The Company achieves both domestic and direct sales and
markets its hardware and software products primarily through its own
sales force and approximately 17 independent sales representatives.
The Company's representatives are located in various states and are
paid a commission based upon sales in their respective territories.
The Company's sales representative agreements are generally one (1)
year agreements which automatically renew on an annual basis, unless
terminated by either party on 90 days notice. The Company works
closely with its major customers to determine marketing and
advertising plans.
The Company also markets its products at various national and
international trade shows each year. The Company regularly attends
the following trade shows and conventions: CES ("Consumer
Electronics Show") each January in Las Vegas; Hong Kong Electronics
Show each October in Hong Kong; and the American Toy Fair each
February in New York.
The Company's electronic recording products and audio software are
marketed under The Singing Machine(R) trademark throughout the
United States, primarily through department stores, lifestyle
merchants, mass merchandisers, direct mail catalogs and showrooms,
music and record stores, national chains, specialty stores and
warehouse clubs. The Company karaoke machines and karaoke music are
currently sold in such stores as Target, J.C. Penney, Fingerhut,
Best Buy, and Sears.
SALES
As a percentage of total revenues, the Company's net sales in the
aggregate to its five largest customers during the fiscal years
ended March 31, 1999 and 2000, were approximately 91% and 70%
respectively. For the fiscal 2000 period, two major retailers
accounted for 30% and 18% each of total revenues. During fiscal
year 2001, although the Company has made significant progress in
broadening its base of customers, the Company's largest customer
continues to produce approximately 30% of the Company's net sales.
Although the Company has long-established relationships with many of
its customers, it does not have long-term contractual arrangements
with any of them. A decrease in business from any of its major
customers could have a material adverse effect on the Company's
results of operations and financial condition.
At March 31, 2000 and June 20, 2000, the Company has approximately
$12,680,000 and $34,680,000, 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
<PAGE> 5
scheduling of manufacturing and shipping of products, which in some
instances is dependent on the needs of the customer.
Returns of electronic hardware and software products by the
Company's customers are generally not permitted except in approved
situations involving quality defects, damaged goods, or goods
shipped in error. Returned hardware products are sold in closeout
markets by the Company. The policy of the Company is to give credit
to its distributors for audio software returned in conjunction with
the receipt of new replacement purchase orders. Any such returns of
software are available for resale by the Company. The Company
manages credit policies with respect to its customer base. The
Company has not suffered significant credit losses to date, even
during a period when many major retailers, including customers of
the Company, experienced significant difficulties, including filing
for protection under federal bankruptcy laws. In the cases where a
customer of the Company has filed for protection under federal
bankruptcy laws, it has not had a significant impact on the
Company's revenues or other categories of financial performance.
DISTRIBUTION
The Company distributes its hardware products to retailers and
wholesale distributors through two methods: domestic sales (i.e.,
shipment of products from the Company's inventory), and direct
sales, shipments directly from the Company's Hong Kong subsidiary or
manufacturers in the Far East, of products sold by the Company's
sales force. Domestic sales, which account for substantially all of
the Company's audio software sales, are made to customers located
throughout the United States from the Company's inventories
maintained at its warehouse facility in Florida or directly from the
software producers.
1. DOMESTIC SALES: The Company's strategy of selling products from
a domestic warehouse enables it to provide timely delivery and serve
as a "domestic supplier of imported goods". The Company purchases
electronic recording products overseas for its own account and
warehouses the products in a leased facility in Florida and a
warehouse in California. The Company is responsible for costs of
shipping, insurance, customs clearance, duties, storage and
distribution related to such warehouse products and therefore,
warehouse sales command higher sales prices than direct sales. The
Company generally sells from its own inventory in less than
container sized lots.
2. DIRECT SALES - HONG KONG: The formation of the Company's
subsidiary, International SMC(HK) Ltd. ("International") is
attributable to the advent of foreign equipment sales. Some
hardware products sold by the Company are shipped directly to its
customers from the Far East through International, a Hong Kong
trading company. Sales made through International are completed by
either delivering products to the customers' common carriers at the
shipping point or by shipping the products to the customers'
distribution centers, warehouses or stores. Direct sales are made
in larger quantities (generally container sized lots) to customers
<PAGE> 6
in Italy, England, Canada, and the United States, who pay
International pursuant to their own international, irrevocable,
transferable letters of creditor or on open credit with the
Company's suppliers in the Far East.
MANUFACTURING AND PRODUCTION
The electronic recording devices sold by the Company are
manufactured and assembled by third parties pursuant to design
specifications provided by the Company. The Company's electronic
recording devices are assembled by three factories in the People's
Republic of China. The finished products are packaged and labeled
under the Company's registered trademark, The Singing Machine(R)
brand name.
The Company's products contain electronic components manufactured by
other companies such as Sanyo, 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 the Company
are owned by the Company's wholly-owned subsidiary, International
SMC(HK), Ltd.
The Company presently purchases and imports virtually all of its
electronic recording products from three suppliers located in the
People's Republic of China. In fiscal 2000 and 1999, suppliers in
the People's Republic of China accounted for 88% and 93%,
respectively, of the Company's total product purchases, including
virtually all of the Company's hardware purchases. The Company's
primary suppliers of electronic recording products are located in
the Shenzen province of the People's Republic of China.
While the Company purchases its products from a small number of
large suppliers with whom it maintains close alliances, all of the
electronic components and raw materials used by the Company are
available from several sources of supply, and the Company does not
anticipate that the loss of any single supplier would have a
material long-term adverse effect on its business, operations or
financial condition. To ensure its high standards of product
quality and that shipping schedules are met by suppliers, the
Company utilizes Hong Kong based agents as representatives. Those
agents include product inspectors who are knowledgeable about the
Company's product specifications and work closely with the suppliers
to verify that such specifications are met. Additionally, key
officers of the Company frequently visit suppliers for quality
assurance and to support good working relationships.
All of the electronic equipment sold by the Company is warranted
against manufacturing defects for a period of ninety (90) days for
labor and parts. All audio software sold by the Company is
similarly warranted for a period of 30 days. During the fiscal
years ended March 31, 2000 and 1999, warranty claims have not been
material to the Company's results of operations.
<PAGE> 7
SUBSIDIARIES
In June 1996, the Company organized a wholly-owned subsidiary in
Hong Kong under the name International SMC(HK) Ltd.
("International") to coordinate the Company's production and finance
in the Far East. International assists with the coordination of
product shipments from China and other foreign factories as well as
the negotiation of foreign letters of credit.
COMPETITION
The Company's business is highly competitive. In addition, the
Company competes with all other existing forms of entertainment
including, but not limited to, motion pictures, video arcade games,
home video games, theme parks, nightclubs, television and
prerecorded tapes, CD's, and video cassettes. The Company's
financial position depends, among other things, on its ability to
keep pace with such changes and developments and to respond to the
requirements of its customers. Many of the Company's competitors
have significantly greater financial, marketing, and operating
resources and broader product lines than does the Company. The
Company's major electronic component competitors include Grand Prix,
Casio, and Venturer. The Company's major audio software competitors
are Pocket Songs and Sound Choice.
The Company believes that competition in its markets is based
primarily on price, product performance, reputation, delivery times,
and customer support. The Company believes that, due to its
proprietary know-how, it has the ability to develop and produce
hardware and software on a cost-effective basis.
TRADEMARKS AND LICENSES
The Company's holds federal and international copyrights to
substantially all of the audio productions comprising its song
library. However, since each of those productions is a re-recording
of an original work by others, the Company is subject to both
contractual and statutory licensing agreements with the publishers
who own or control the copyrights of the underlying musical
compositions and is obligated to pay royalties to the holders of
such copyrights for the original music and lyrics of all of the
songs in its library that have not passed into the public domain.
Since most audio software distributed by the Company is accompanied
by printed lyrics, the Company is also subject to written print
royalty license agreements. The Company is currently a party to
more than 13,000 different written copyright license agreements
covering more than 30,000 separate copyright holders.
The Federal Copyright Act (the "Act") creates a compulsory statutory
license for all non-dramatic musical works which have been
distributed to the public in the United States. Under the Act, with
respect to each work included in an audio software product
distributed by the Company under a compulsory license, the Company
<PAGE> 8
is required to pay a royalty of the greater of $0.0710 per song or
$0.013 per minute of playing time or fraction thereof with respect
to each item of audio software produced and distributed by the
Company (the "Statutory Rate"). Royalties due under compulsory
licenses are payable monthly. The Company currently has compulsory
statutory licenses for approximately 200 songs in its song library.
The Act allows a deferral of royalty payments for products sold
subject to a right of return. The practice in the recorded music
industry is to permit retailers to return for exchange merchandise.
Accordingly, each audio production sold by the Company is sold
subject to a right of return for credit against future purchases or
exchange. Royalties are due with respect to such sales on the
earlier to occur of nine months after the date of distribution or
the date on which the revenue from the sale is recognized in
accordance with generally accepted accounting principles.
The majority of the songs in the Company's song library are subject
to written copyright license agreements. The Company's written
licensing agreements for audio software ("mechanical licenses")
typically provide for royalties at the Statutory Rate although some
provide for lower royalty rates. Written licenses typically provide
for quarterly royalty payments. The Company also has written
license agreements for substantially all of the printed lyrics which
are distributed with its audio software products ("print licenses"),
which licenses also typically provide for quarterly payments of
royalties at the Statutory Rate.
GOVERNMENT REGULATION
In the spring of 2000, the President of the United States renewed
the People's Republic of China's "Most Favored Nation" ("MFN")
treatment for entry of goods into the United States for an
additional year. In the context of United States tariff
legislation, MFN treatment means that products are subject to
favorable duty rates upon entry into the United States. IF MFN
status for China is restricted or revoked in the future, the
Company's cost of goods purchased from Chinese vendors is likely to
increase. A resultant change in suppliers would likely have an
adverse effect on the Company's operations and, possibly, earnings,
although management believes such adversity would be short-term as a
result of its ability to find alternative suppliers. Management
continues to closely monitor the situation and has determined that
the production capabilities in countries outside China which have
MFN status and, therefore, have favorable duty rates, would meet the
Company's production needs.
EMPLOYEES
At March 31, 2000, the Company had 12 full-time employees, 4 of whom
were engaged in warehousing and technical support, and 8 in
marketing and administrative functions. At June 30, 2000, the
Company had 12 full-time employees, 4 of whom were engaged in
warehousing and technical support, and 8 in marketing and
administrative functions.
<PAGE> 9
ITEM 2. PROPERTIES
----------
At present, the Company does not own any property. On March 31,
1999, the Company entered into a lease for an 8,000 square foot
office and warehouse facility located in Coconut Creek, Florida, for
a term of 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. Pursuant to the terms of the lease, the Company must pay
maintenance, insurance, and real estate taxes, which, in the
aggregate, costs approximately $12,300 per year. The lease
commenced after completion of construction on August 1, 1999.
On April 4, 2000, the Company entered into a lease for an additional
3,200 square foot office and warehouse facility situated next to the
above facility in Coconut Creek, Florida for a term of 52 months at
a cost of $1,600 per month for the first sixteen (16) month period
and $1,707 per month for the next twelve (12) month period.
Pursuant to the terms of the lease, the Company must pay
maintenance, insurance and real estate taxes, which in the
aggregate, costs approximately $4,900 per year. The Company took
occupancy of the space May 1, 2000. The facility has been attached
to the current facility by removing a section of the adjoining wall.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is not a party to any material legal proceeding, nor to
the knowledge of management, are any legal proceedings threatened
against the Company. From time to time, the Company may be involved
in litigation relating to claims arising out of operations in the
normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matters were submitted to a vote of securityholders through a
solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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COMMON STOCK
------------
The Company's Common Stock is currently traded on the 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.
<PAGE> 10
<TABLE>
<CAPTION>
FISCAL PERIOD HIGH BID LOW BID
------------- -------- -------
<S> <C> <C>
1999:
-----
First Quarter........................... $1.01 $0.17
Second Quarter.......................... 0.73 0.43
Third Quarter .......................... 0.50 0.43
Fourth Quarter.......................... 2.50 0.48
2000:
-----
First Quarter........................... $2.81 $1.31
Second Quarter.......................... 2.19 1.59
Third Quarter........................... 2.19 1.63
Fourth Quarter.......................... 5.38 1.88
2001:
-----
First Quarter
(through June 20, 2000).............. $4.50 $3.06
</TABLE>
The closing bid price for the Company's Common Stock on the OTC
Bulletin Board on June 20, 2000 was $3.375 per share.
As of June 20, 2000, there were approximately 320 record holders of
the Company's outstanding Common Stock. Moreover, additional shares
of the Company's Common Stock are held for stockholders at brokerage
firms and/or clearing houses, and therefore the Company was unable
to determine the precise number of beneficial owners of Common Stock
as of June 20, 2000.
The Company has never declared or paid cash dividends on its common
stock and the Company's Board of Directors intends to continue its
policy for the foreseeable future. Earnings, if any, will be used
to finance the development and expansion of the Company's business.
Future dividend policy will depend upon the Company's earnings,
capital requirements, financial condition and other factors
considered relevant by the Company's Board of Directors and will be
subject to limitations imposed under Delaware law. During the
fiscal year ending March 31, 2000, the Company paid a dividend of
$105,078 on preferred stock.
COMMON STOCK PUBLIC WARRANTS
----------------------------
The Company's Common Stock Public Warrants ("Public Warrants") are
currently traded on the OTC Bulletin Board under the symbol "SINGW".
Set forth below is the range of high and low bid information for
the Company's Public Warrants 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>
1999:
-----
First Quarter........................... $ - $ -
Second Quarter.......................... - -
Third Quarter .......................... - -
Fourth Quarter.......................... .1875 .1875
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
FISCAL PERIOD HIGH BID LOW BID
------------- -------- -------
<S> <C> <C>
2000:
-----
First Quarter........................... $ .125 $ .125
Second Quarter.......................... .0625 .0625
Third Quarter........................... .06 .06
Fourth Quarter.......................... .5625 .4375
2001:
-----
First Quarter
(through June 20, 2000).............. $ .0625 $ .0625
</TABLE>
The closing bid price for the Company's Public Warrant on the OTC
Bulletin Board on June 20, 2000 was $.0625 per share.
The Company currently has 1,656,000 Public Warrants issued and
outstanding. After the Company's reorganization, and after giving
effect to the post-bankruptcy common stock reverse split (April 1,
1998), ten (10) Public Warrants are required to purchase one (1)
share of the Company's 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 the
Company's common stock at a price of $36.00 per share. After the
expiration date, Warrantholders have no further rights.
PRIVATE PLACEMENT OFFERING
--------------------------
On April 1, 1999, the Company completed a Private Placement
Memorandum (the "Memorandum") offering of 50 Units and raised
$1,375,000 ($1,331,017 after related costs). Each Unit consists of
20,000 shares of the Company's Convertible Preferred Stock
("Preferred Stock") and 4,000 Common Stock Purchase Warrants
("Warrants"). Each share of Preferred Stock automatically converted
into one (1) share of the Company's Common Stock at 5:00 p.m.
eastern time on April 1, 2000. Each Warrant entitles the Holder to
purchase, at any time during the period commencing from the date of
issuance and ending three (3) years from the date of the Memorandum,
one (1) share of the Company's Common Stock at a purchase price of
$2.00 per share. The Company filed a registration statement with
the Commission to register the Company's Common Stock underlying the
securities comprising the Units, which was declared effective by the
Commission on March 17, 2000.
REGISTRATION OF CERTAIN SECURITIES
----------------------------------
The Company filed a Registration Statement on Form SB-2 with the
Securities and Exchange Commission which was declared effective on
March 17, 2000. The Company registered 2,447,249 shares of the
Company's Common Stock. The Company will not receive any proceeds
from the sale of Common Stock registered, but will receive proceeds
from the exercise of Warrants and Options upon conversion to Common
Stock subject to the registration.
<PAGE> 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
The following discussions and analysis should be read in conjunction
with, and is qualified in its entirety by, the Financial Statements
included elsewhere herein. Historical results are not necessarily
indicative of trends in operating results for any future period.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
income and expense items expressed as a percentage of the Company's
total revenues:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Total Revenues........................ 100.0% 100.0% 100.0%
Cost of Sales......................... 72.1 73.6 81.1
Selling, general and
administrative expenses............. 19.9 16.2 43.6
Operating income (loss)............... 8.0 10.2 (27.0)
Other expenses, net................... 5.0 2.3 2.4
Extraordinary item.................... - - 74.1
Income (loss) before taxes............ 3.0 7.9 44.7
Provision (benefit) for income taxes.. (.8) (1.8) -
Income (loss)......................... 3.8 9.7 44.7
</TABLE>
THE YEAR ENDED MARCH 31, 2000 AS COMPARED TO THE YEAR ENDED
MARCH 31, 1999
-----------------------------------------------------------
REVENUES - Total revenues increased to approximately $19.0 million
for the fiscal year ending March 31, 2000, compared to approximately
$9.5 million reported for fiscal 1999. The increase was primarily
due to increased sales and distribution to both traditional and
internet based accounts, expansion into the UK market, and increased
sales with existing accounts through marketing of additional
machines and music.
GROSS PROFIT - Gross profit increased approximately $2.8 million or
111% to approximately $5.3 million in fiscal year ending March 31,
2000, or 27.9% of net sales from approximately $2.5 million or 26.4%
<PAGE> 13
of net sales in fiscal year 1999. The increase in gross profit was
primarily due to the increased sales of the Company's popular CDG
players and sales to new accounts.
INCOME FROM OPERATIONS - Income from operations for fiscal year 2000
was approximately $1,525,668 versus $973,000 for fiscal year 1999 or
approximately a 57% increase. During fiscal year 2000, the Company
incurred non-cash charges to operations of approximately $852,000
for stock based compensation. These charges are the result of
computations of the fair market value of common stock options and
common stock warrants granted during fiscal year 2000. Had non-cash
stock based compensation not been recognized in fiscal year 2000,
the increase in income from operations would have been approximately
144%.
OPERATING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Operating,
selling, general and administrative expenses increased approximately
$2.2 million or 145% to approximately $3.8 million or 19.9% of net
sales during the fiscal year ending March 31, 2000, from
approximately $1.5 million or 16.2% of net sales for fiscal year
1999. The increase was primarily due to the recognition of non-cash
expenses relating to common stock, stock options and warrants issued
by the Company at the fair market value of those options and
warrants as of March 31, 2000; a significant increase in sales
commissions, warranty expenses, advertising, and travel expenses
(due to the 100% increase in sales); and new product development costs.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization
expense decreased approximately $28,000 or 19.3% to $116,000 during
the fiscal year ending March 31, 2000. The decrease was primarily
due to the Company's music library being fully amortized during the
fiscal year ending March 31, 1999.
OTHER EXPENSES - Net interest and factoring expenses increased
approximately $303,000 to $525,000 during fiscal year 2000 compared
to approximately $222,000 during fiscal year 1999. During the
fiscal year ending March 31, 2000, the Company incurred an expense
in connection with acquiring a short-term letter of credit facility,
and increased factoring expenses due to the increase in sales from
our domestic warehouse.
Loss on accounts receivable due to factoring was 2.3% of total
revenues for both of the fiscal years ending March 31, 2000 and
March 31, 1999. Although more accounts receivable were factored
during fiscal year 2000, the Company was able to negotiate lower
factoring rates due to an increase in volume.
NET INCOME - Although net income for fiscal 2000 was approximately
$738,000 versus approximately $924,000 for fiscal year 1999.
Approximately $852,000 charged to earnings during fiscal year 2000
was a result of the estimate of the fair market value of common
stock options and common stock warrants granted, which has no effect
upon Company operations or cash flow and with the exception of
deferred stock based guarantee fees to be recognized in future
periods, is a non-recurring item.
<PAGE> 14
THE YEAR ENDED MARCH 31, 1999 AS COMPARED TO THE YEAR ENDED
MARCH 31, 1998
-----------------------------------------------------------
REVENUES - Total revenues increased to approximately $9.5 million
for the fiscal year ending March 31, 1999, compared to approximately
$6.1 million reported for fiscal year ending 1998. The increase was
primarily due to increased funding and lines of credit established
during the fiscal year ending 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 approximately $1.51 million or
151% to approximately $2.52 million in fiscal year 1999 or 26.4% of
net sales from approximately $1.1 million or 16.6% of net sales in
fiscal year 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 approximately $1.10 million or
58.5% to $1.54 million, or 16.2% of net sales in fiscal year end
1999, from approximately $2.64 million or 43.6% of net sales, in
fiscal year 1998. This decrease was primarily due to management's
commitment to reduce total overhead and write off various intangible
assets while the Company reorganized under Chapter 11 during 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 1999.
DEPRECIATION AND AMORTIZATION EXPENSES - Depreciation and
amortization expense decreased approximately $34,000 to $144,234
during the fiscal year ending 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 1999 compared to
approximately $121,000 during fiscal year 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.
<PAGE> 15
NET INCOME - 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.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
---------
At March 31, 2000, the Company had current assets of $3,595,735,
compared to $1,813,098 at March 31, 1999; total assets of $4,153,707
as compared to $2,379,335 at March 31, 1999; current liabilities of
$440,615 as compared to $1,414,595 at March 31, 1999; and a current
net worth of $3,713,092 as compared to $964,740 at March 31, 1999.
The increase in current assets, total assets, and current net worth
and the decrease in current liabilities 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 Financial Statements), and the increase in net
income before charges for recurring items for the fiscal year ending
March 31, 2000.
Capital Resources
-----------------
The Company has obtained significant financing for continuing
operations and growth. Two (2) specific lines of credit have been
opened through the Company's Hong Kong subsidiary, and two (2)
financing agreements through its U.S. operations.
Belgian Bank
Effective February 14, 2000, the Company, through its Hong Kong
subsidiary, International SMC(HK) Ltd., obtained a credit facility
of $500,000 (US) 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 held by Belgian Bank. There is no maturity date 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.
Hong Kong Bank
Effective July 7, 1999, the Company, through its Hong Kong
subsidiary, International SMC(HK) Ltd., obtained a credit facility
of $200,000 (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 held by Hong Kong Bank. There is no maturity date
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 2.50%. Repayment of
principal plus interest shall be made upon negotiation of the export
<PAGE> 16
letters of credit, but not later than ninety (90) days after the
advance.
Main Factors, Inc.
The Company is a party to a factoring agreement, dated June 16,
1999, and amended December, 1999 and April, 2000, with Main Factors,
Inc. ("Main Factors") pursuant to which Main Factors has agreed to
purchase certain of the Company's accounts receivable. Under the
agreement, Main Factors will purchase certain selected accounts
receivable from the Company and advance 75% - 85% of the face value
of those receivables to the Company. The accounts receivable are
purchased by Main Factors without recourse and Main Factors
therefore performs an intensive credit review prior to the purchase
of the receivables.
The Company is charged a fixed percentage fee of the invoice. Such
fixed percentage may decrease on volume. The purchase of
receivables of the Company by Main Factors is absolute and is a true
sale of receivables. Main Factors has placed no maximum limit on
the amount of the Company's receivables it will purchase. The
factoring agreement is personally guaranteed by John Klecha, the
Company's Chief Operating Officer and Chief Financial Officer.
EPK Financial Corporation
The Company has also entered into an agreement with EPK Financial
Corporation ("EPK") whereby EPK will open letters of credit with the
Company's factories to import inventory for distribution to the
Company's customers. This allows the Company to purchase domestic
hardware inventory for distribution to customers in less than
container load quantities, thus providing the Company's customers
with flexibility, and further, saving the customer the expense of
opening a letter of credit in favor of the Company. The selling
price to these customers is considerably higher because the Company
pays financing costs to EPK and incurs costs of ocean freight, duty,
and handling charges. Upon shipment of product from these financed
transactions, the receivables are factored by Main Factors, thereby
buying the shipments and related interest from EPK.
The Company pays EPK a negotiated flat fee per transaction, 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 pursuant to the EPK
agreement. The transactions financed by EPK are supported by
personal guarantees of Edward Steele, the Company's Chairman and
Chief Executive Officer and John Klecha, the Company's 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.
<PAGE> 17
The Company has no present commitment that is likely to result in
its liquidity increasing or decreasing in any material way. In
addition, the Company knows of no trend, additional demand, event or
uncertainty that will result in, or that is reasonably likely to
result in, the Company's liquidity increasing or decreasing in any
material way.
The Company has no material commitments for capital expenditures.
The Company knows of no material trends, favorable or unfavorable,
in the Company's capital resources. The Company has no additional
outstanding credit lines or credit commitments in place and has no
additional current need for financial credit.
SEASONAL FACTORS
As is typical in the karaoke industry, the Company's operations have
been seasonal, with the highest net sales occurring in the second
and third fiscal quarters (reflecting increased orders for equipment
and music merchandise during the Christmas selling months) and to a
lesser extent the first and fourth quarters of the fiscal year.
The Company's results of operations may also fluctuate from quarter
to quarter as a result of the amount and timing of orders placed and
shipped to customers, as well as other factors. The fulfillment of
orders can therefore significantly affect results of operations on a
quarter-to-quarter basis.
INFLATION
Inflation has not had a significant impact on the Company's
operations. The Company has historically passed any price increases
on to its customers since prices charged by the Company are
generally not fixed by long-term contracts.
ITEM 7. FINANCIAL STATEMENTS
--------------------
The financial statements required pursuant to this Item 7 are
included in this Form 10-KSB as a separate section commencing on
page F-1 and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AN FINANCIAL DISCLOSURE
------------------------------------------------
No change or disagreement with accountants took place with respect
to the preparation of the Company's financial statements for the two
(2) most recent fiscal years contained in this report, namely the
fiscal years ended March 31, 2000 and March 31, 1999.
<PAGE> 18
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
----------------------------------------------------------
The directors and executive officers of the Company as of the date
of this report are as follows:
Name Age Position
---- --- --------
Edward Steele 70 Chief Executive Officer,
President and Director
John F. Klecha 49 Chief Operating Officer,
Chief Financial Officer,
Secretary, Treasurer
and Director
Allen Schor 58 Director
Josef A. Bauer 62 Director
Edward Steele joined the Company in 1988 and has served as the Chief
Executive Officer, President, and as a director of the Company since
September 1991. From October 1988 to September 1991, Mr. Steele was
responsible for the development of the Company's electronic hardware
products in the Far East and was the Company's sales director.
Prior to joining the Company, Mr. Steele served in executive
capacities at a number of companies in the toy and electronics
fields, including as Managing Director in charge of worldwide sales
of Concept 2000, a manufacturer of consumer electronics, from 1971
to 1978; as President of Wicely Corp., a distributor of electronic
toys and consumer electronics from 1978 to 1983; and as President of
Justin Products Corp., an electronic toy manufacturer from 1983 to
1988.
John Klecha has been the Chief Financial Officer, Secretary,
Treasurer and a Director of the Company since October 10, 1997.
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 the
Company, Mr. Klecha served in executive and senior management
capacities at a number of companies in the toy and other consumer
products fields, including as the senior financial and
administrative executive of a privately held toy design,
manufacturing and distribution company since 1987; Vice President,
Director and Chief Financial Officer of Sussex Nautilus from 1984 to
1987; and Vice President of Finance and Administration for Lazzaroni
Sarrono, Ltd. from 1982 to 1984.
Allen Schor was appointed to the Board of Directors effective June
28, 1999. Since 1969, Mr. Schor has served as the President and
<PAGE> 19
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, 19994, Mr. Bauer was elected to the Board of
Directors of GoVideo, Inc., a publicly traded video electronics
manufacturer and distributor. Mr. Bauer has also served as
President of Banisa Corporation, a privately owned investment
company, since 1975. Mr. Bauer is also President of Magna (a
position he has held since 1989) and was formerly a director of the
Company from February 1990 until September 1991, and February 1995
until May, 1998.
The Company's directors serve for a term of one year, or until their
successors shall have been elected and qualified. The Company has
in place an employment agreement with its Chief Executive Officer,
Mr. Steele, and its Chief Financial Officer, Mr. Klecha. See Item
10 - "Executive Compensation, Employment Agreements".
DIRECTORS' COMPENSATION
The Company currently reimburses each director for expenses incurred
in connection with attendance at each meeting of the Board of
Directors or a committee on which the director serves. In addition,
non-employee directors are entitled to be paid a fee of $1,000 for
each board or committee meeting attended and are entitled to receive
10,000 common stock options per year.
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, (and outside directors) Bauer and Schor,
and the Executive Compensation/Stock Option Committee consists of
Messrs. Klecha, (and outside directors) 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
<PAGE> 20
Option Committee considers and authorizes remuneration arrangements
for senior management and grants options under, and administers, the
Company's 1994 Amended and Restated Management Stock Option Plan.
The entire Board of Directors operates as a nominating committee.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's
equity securities (collectively the "Reporting Persons") to file
reports and changes in ownership of such securities with the
Securities and Exchange Commission and the Company. Based solely
upon a review of (i) Forms 3 and 4 and amendments thereto furnished
to the Company pursuant to Rule 16a-3(e), promulgated under the
Exchange Act, during the Company's fiscal year ended March 31, 1998
and (ii) Forms 5 and any amendments thereto and/or written
representations furnished to the Company by any Reporting Persons
stating that such person was not required to file a Form 5 during
the Company's fiscal year ended March 31, 2008, it has been
determined that no Reporting Persons were delinquent with respect to
such person's reporting obligations set forth in Section 16(a) of
the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
The following table sets forth summary compensation information with
respect to compensation paid by the Company to the Chief Executive
Officer of the Company ("CEO") and the Company's four most highly
compensated executive officers other than the CEO, who were serving
as executive officers during the Company's fiscal year ending March
31, 2000.
<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 2000 $189,363 $52,369 $7,575 $200,000 -0- -0- -0-
President
John Klecha 2000 $114,394 $26,184 $4,292 $150,000 -0- -0- -0-
Chief Financial Officer
Chief Operating Officer
</TABLE>
EMPLOYMENT AGREEMENTS
The Company extended the existing employment agreement with Mr.
Steele which commenced as of March 1, 2000, for a period of three
years. Pursuant to Mr. Steele's employment agreement, he is
entitled to receive base compensation of $350,000 per year, which
<PAGE> 21
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. Mr. Steele would
receive 50% of the bonus pool. In the event of a termination
of his employment following a change-in-control, Mr. Steele
would be entitled to a lump sum payment of 300% of the amount of
his total compensation in the twelve months preceding such
termination. During the term of his employment agreement and
for a period of one year after his termination for cause or his
voluntary termination of his employment agreement, Mr. Steele
could not directly or indirectly compete with the Company in
the karaoke industry in the United States.
The Company executed an employment agreement with Mr. Klecha
which commenced as of June 1, 2000, for period of three years
with an automatic term extension for one additional year
unless terminated by the Company or the employee. Pursuant to
Mr. Klecha's employment agreement, he is entitled to receive base
compensation of $275,000 per year, which amount automatically
increases during the second and third fiscal years by the greater
of 5% or the annual increase in the Consumer Price Index. The
agreement also provides for bonuses based on a percentage of a
bonus pool tied to the annual pre-tax net income (as defined in the
agreement) of the Company. Mr. Klecha would receive 40% 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
200% of the amount of his total compensation in the twelve months
preceding such termination. During the term of his employment
agreement and for a period of one year after his termination for
cause or his voluntary termination of his employment agreement, Mr.
Klecha could not directly or indirectly compete with the Company in
the karaoke industry in the United States.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
---------------------------------------------------
The following table sets forth, as of the date of this Report,
certain information concerning beneficial ownership of the
Company's Common Stock by (i) each person known to the Company to
own 5% or more of the Company's outstanding Common Stock, (ii)
each of the directors of the Company and (iii) all directors and
officers of the Company as a group:
<TABLE>
<CAPTION>
Shares
Name and Address Beneficially Percent of
of Beneficial Owner Owned (1)(8) Class
------------------- ------------ ----------
<S> <C> <C>
John Klecha
6601 Lyons Road, Building A-7
Coconut Creek, Florida 33073 483,274(4) 9.8%
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
Contd..
Shares
Name and Address Beneficially Percent of
of Beneficial Owner Owned [1][8] Class
------------------- ------------ ----------
<S> <C> <C>
Edward Steele [7]
6601 Lyons Road, Building A-7
Coconut Creek, Florida 33073 440,424 [3] 8.9%
Allen and Deana Schor
840 East Walnut
Carson, California 90746 336,343 6.8%
Josef A. Bauer
130 Sunrise Avenue, #312
Palm Beach, FL 33480 116,886 [5] 2.4%
The Harry Fox Agency
711 Third Avenue, 8th Floor
New York, NY 10017 410,675 8.3%
FLX(HK) Ltd.
Unit 19 5/F Vanta Ind. Centre
21-33 Tai Lin Pai Road
Kwaichung N.T. Kowloon
Hong Kong 237,932 [2] 4.8%
Colony Electronics
500 Hennessy Road
Causeway, Hong Kong 129,300 [2] 2.6%
Gemco Pacific, Inc.
500 Hennessy Road
Causeway, Hong Kong 25,667 [2] 0.5%
All Directors and Executive
Officers as a Group (4 persons) 1,376,927 [6] 27.9%
</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.
[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.
<PAGE> 23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Company has an agreement with FLX (a china manufacturer of
consumer electronics products) to produce electronic recording
equipment based on the Company's specifications. Paul Wu, a
significant shareholder of the Company (see: Security Ownership
of Certain Beneficial Owners and Management), and a former
director of the Company, is Chairman of the Board and a principal
stockholder of FLX. During the fiscal years ended March 31, 1999,
and 2000, the Company purchased approximately $1.0 million and
$10.3 million respectively, in equipment from FLX. The Company
believes that all of the foregoing transactions with FLX have been
on terms no less favorable to the Company that could have been
obtained from unaffiliated third parties in arms-length transactions
under similar circumstances.
COMPANY LOANS TO OFFICERS AND DIRECTORS
On March 31, 1998, the Company loaned Edward Steele, a Director and
Chief Executive Officer, the principal amount of $13,880, which Note
was extended until March 31, 2001, with an interest rate of 9% per
annum on the unpaid balance. In June, 1999, Mr. Steele paid the
Note in full.
On July 1, 1999, the Company loaned Edward Steele, Chief Executive
Officer, President and Director $55,000 for the purchase of two (2)
units of the Company's Private Placement. The Note including
interest of 9% matures on June 28, 2000. The Note is secured by the
securities comprising the Private Placement Units.
On July 1, 1999, the Company 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 28, 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, the Company arranged a credit facility with Main
Factors, Inc., whereby Main Factors, Inc. purchases certain of the
Company's accounts receivable. Under the agreement, the Company
receives 75% - 85% of the face value of those receivables without
recourse. To secure the credit facility, John Klecha, the Company's
Chief Operating Officer and Chief Financial Officer, provided his
personal payment guaranty. The average outstanding balance of this
credit facility is $1,300,000.
In July, 1999, the Company entered into an agreement with EPK
Financial Corporation ("EPK") whereby EPK provided letters of credit
with the Company's factories to import inventory for distribution to
our customers. The EPK agreement allows the Company to purchase
domestic hardware inventory in less than container load quantities
and provide 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
<PAGE> 24
of credit is $300,000.
In consideration for providing their personal guarantees, the Company
issued to Mr. Steele 200,000 shares of our Common Stock and issued to
Mr. Klecha 150,000 shares of our Common Stock.
<PAGE> 25
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(A) EXHIBITS
2(a) Debtor's Amended Disclosure Statement, dated December 17,
1997 [1]
2(b) Debtor's Amended Plan of Reorganization, dated December
17, 1998 [1]
2(d) Order Amending Amended Plan of Reorganization and Order
Confirming Debtor's Amended Plan
3(a) Certificate of Incorporation of the Company, including
amendment filed with the Secretary of the State of
Delaware [2]
3(b) By-Laws of the Company [2]
3(c) Amendment to Company's Certificate of Incorporation
filed with the Secretary of the State of Delaware, dated
April 30, 1998
10(e) 1994 Amended and Restated Management Stock Option Plan [2]
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
-------------------------------
[1] Incorporated by reference as filed by the Company with the
Securities and Exchange Commission pursuant to the Federal
Rules of Bankruptcy Procedure in conjunction with the
Company's Chapter 11 Reorganization.
[2] Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration No. 33-81974-A) (the
"Registration Statement") as filed on July 27, 1994.
<PAGE> 26
SIGNATURES
In accordance with the requirements of Section 13 and 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE SINGING MACHINE COMPANY, INC.
Dated: June 28, 2000 By:/s/ Edward Steele
Edward Steele, Chief Executive
Officer, President and Director
In accordance with the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons
on behalf of the Company and in the capacities and on the dates
indicated.
Signature Capacity Date
--------- -------- ----
/s/ Edward Steele Chief Executive Officer June 28, 2000
Edward Steele President and Director
/s/ John Klecha Chief Financial Officer, June 28, 2000
John Klecha Chief Operating Officer,
Secretary, Treasurer
and Director
/s/ Allen Schor Director and Chairman of June 28, 2000
Allen Schor the Audit Committee
<PAGE> 27
SEC FILE NO. 0-24968
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________
EXHIBITS
TO
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
_______________________________
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
OF
THE SINGING MACHINE COMPANY, INC.
<PAGE> 28
THE SINGING MACHINE COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
<PAGE> 29
THE SINGING MACHINE COMPANY, INC.
AND SUBSIDIARY
CONTENTS
--------
PAGE F-1 INDEPENDENT AUDITORS' REPORT
PAGE F-2 CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000
PAGE F-3 CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS
ENDED MARCH 31, 2000 AND 1999
PAGES F-4 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
PAGE F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED MARCH 31, 2000 AND 1999
PAGES F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF
MARCH 31, 2000
<PAGE> 30
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, 2000,
and the related consolidated statements of income, stockholders'
equity, and cash flows for the two years 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 audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits 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
audits provide 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
as of March 31, 2000, and the results of their operations and their
cash flows for the two years then ended in conformity with generally
accepted accounting principles.
/s/ Weinberg & Company, P.A.
WEINBERG & COMPANY, P.A.
Boca Raton, Florida
June 12, 2000
<PAGE> 31
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2000
--------------------
ASSETS
------
CURRENT ASSETS
Cash $ 378,848
Trade accounts receivable 728,038
Inventories 1,487,206
Interest receivable 7,425
Due from factor 115,201
Due from officers 110,000
Due from related party 394,706
Prepaid expenses and other
current assets 204,311
Deferred tax asset 363,194
--------------
Total Current Assets 3,788,929
PROPERTY AND EQUIPMENT - NET 99,814
OTHER ASSETS
Reorganization intangible - net 458,158
--------------
TOTAL ASSETS $ 4,346,901
------------ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Trade accounts payable $ 354,193
Accrued expenses 73,675
Income taxes payable 11,994
Due to related party 753
--------------
Total Current Liabilities 440,615
--------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value,
1,000,000 shares authorized,
1,000,000 shares issued and outstanding 1,000,000
Common stock, Class A, $0.01 par value,
100,000 shares authorized, none
issued and outstanding -
Common stock, $0.01 par value, 73,900,000
shares authorized, 2,960,120 shares
issued and outstanding 29,600
Common stock to be issued (67,500 shares) 675
Additional paid-in capital 1,719,049
Retained earnings 1,557,063
--------------
4,306,387
Less deferred stock based guarantee fees (400,101)
--------------
Total Stockholders' Equity 3,906,286
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,346,901
------------------------------------------ ==============
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 32
THE SINGING MACHINE COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
NET SALES $ 19,032,320 $ 9,547,816
COST OF SALES 13,727,377 7,029,359
---------------- ---------------
GROSS PROFIT 5,304,943 2,518,457
---------------- ---------------
Compensation 864,282 715,625
Consulting fees 409,080 22,407
Selling, general and administrative
expenses 2,505,913 806,774
---------------- ---------------
TOTAL OPERATING EXPENSES 3,779,275 1,544,806
---------------- ---------------
INCOME FROM OPERATIONS 1,525,668 973,651
---------------- ---------------
OTHER INCOME (EXPENSES)
Other income 8,710 2,784
Royalty income 2,941 -
Interest income 21,255 3,254
Interest expense (117,349) (5,427)
Stock based guarantee fees (434,274) -
Factoring fees (429,265) (220,106)
---------------- ---------------
Net Other Expenses (947,982) (219,495)
---------------- ---------------
INCOME BEFORE INCOME TAXES 577,686 754,156
INCOME TAX BENEFIT - NET 160,299 170,000
---------------- ---------------
NET INCOME $ 737,985 $ 924,156
---------- ================ ===============
EARNINGS PER SHARE
Basic $ 0.2322 $ 0.3733
---------------- ---------------
Diluted $ 0.1894 $ 0.3565
---------------- ---------------
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Basic 2,726,022 2,475,308
---------------- ---------------
Diluted 3,341,866 2,592,167
---------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 33
THE SINGING MACHINE COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------
<TABLE>
<CAPTION> Common Stock and
Common Stock Additional Deferred
Preferred Shares to be Issued Paid-In Retained Guarantee
Shares Amount Shares Amount Capital Earnings Fees Totals
------ ------ ------ ------ ---------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, 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, March 31, 1999 - - 2,498,451 24,984 15,600 924,156 - 964,740
Issuance of preferred
stock for cash 1,000,000 1,000,000 - - 331,017 - - 1,331,017
Common stock to be issued
for exercise of common
stock warrants - - 16,000 160 31,840 - - 32,000
Common stock issued for
legal and other services - - 50,049 500 99,598 - - 100,098
Common stock retired -
bankruptcy payables - - (5,880) (59) 59 - - -
Common stock issued as
guarantee fee - - 350,000 3,500 587,125 - (400,101) 190,524
Common stock to be issued
as guarantee fee - - 50,000 500 243,250 - - 243,750
Exercise of common stock
options (includes 1,500
shares to be issued) - - 69,000 690 28,980 - - 29,670
Issuance of common stock
options to consultants - - - - 381,580 - - 381,580
Dividends paid on
preferred stock - - - - - (105,078) - (105,078)
Net Income, 2000 - - - - - 737,985 - 737,985
--------- ---------- --------- --------- ----------- ---------- --------- -----------
BALANCE, MARCH 31, 2000 1,000,000 $1,000,000 3,027,620 $ 30,275 $ 1,719,049 $1,557,063 $(400,101) $ 3,906,286
========= ========== ========= ========= =========== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 34
THE SINGING MACHINE COMPANY, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 737,985 $ 924,156
Adjustments to reconcile net income
to net cash used in operating
activities
Depreciation and amortization 116,369 144,234
Stock based professional fees 35,812 15,904
Stock based guarantee fees 434,274 -
Stock based consulting fees 381,580 -
Deferred tax benefit (193,194) (170,000)
Changes in assets and liabilities:
(Increase) decrease in:
Trade accounts receivable 399,933 (769,127)
Inventories (1,062,401) (14,513)
Interest receivable (7,425) -
Prepaid expenses and other assets (177,158) 17,600
Increase (decrease) in:
Trade accounts payable (440,797) (25,465)
Accrued expenses (319,251) (126,456)
Income tax payable 11,994 -
----------- ------------
Net cash used in operating activities (82,279) (3,667)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (108,103) (3,023)
Due from factor (115,201) -
Due from officer (96,120) 11,609
Due from related parties (394,706) -
----------- ------------
Net cash provided by (used in)
investing activities (714,130) 8,586
----------- ------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 29,670 -
Proceeds from exercise of warrants 32,000 -
Proceeds from issuance of preferred stock 1,360,205 -
Due from related parties 753 -
Payment of dividends on preferred stock (105,078) -
(Decrease) in notes payable (63,000) (37,000)
(Decrease) increase in due to factor (128,581) 73,599
----------- ------------
Net cash provided by financing activities 1,125,969 36,599
----------- ------------
Increase in cash and cash equivalents 329,560 41,518
Cash and cash equivalents - beginning of year 49,288 7,770
----------- ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 378,848 $ 49,288
--------------------------------------- =========== ============
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest $ 95,658 $ 10,327
=========== ============
Cash paid during the year for income taxes $ 20,901 $ -
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 35
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
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 accounts 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, 2000 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, audiotapes, and compact
discs. Inventories are stated at the lower of cost or market, as
determined using the first in, first out method.
(G) INVESTMENT IN SONG LIBRARY
--------------------------
At March 31, 1999, the carrying value of an investment in song library was
reduced to zero and the amortization expense charged to operations totaled
$46,590 for the year ended March 31, 1999.
F-6
<PAGE> 36
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT'D)
------ --------------------------------------------------
(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 over 3 to 7 years.
(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) CONCENTRATION OF CREDIT RISK
----------------------------
The Company maintains its cash in bank deposit accounts, which, at
times, exceed federally insured limits. At March 31, 2000, the
Company had $309,683 in US deposits, which exceed federally
insured limits. The Company has not experienced any losses in
such accounts through March 31, 2000.
(K) 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. The Company allows
returns up to 90 days after sale.
(L) EARNINGS PER SHARE
------------------
In accordance with, Statement of Financial Accounting Standards No. 128
"Earnings per Share", basic earnings per share is computed by dividing the
net income less preferred dividends for the period by the weighted average
number of common shares outstanding. Diluted earnings per share is
computed by dividing net income less preferred dividends (due to their
anti-dilutive effect see below) by the weighted average number of common
shares outstanding including the effect of common stock equivalents.
F-7
<PAGE> 37
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT'D)
------ --------------------------------------------------
The following table presents a reconciliation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Net income $ 737,985 $ 924,156
Preferred stock dividends (105,077) -
------------ ------------
Income available to common shares 632,908 924,156
Weighted average shares outstanding
- basic 2,726,022 2,475,308
EPS - BASIC $ 0.2322 $ 0.3733
============ ============
Income available to common shares 632,908 924,156
Weighted average shares outstanding
- basic 2,726,022 2,475,308
Effect of dilutive securities:
Stock options 587,733 116,859
Preferred stock warrants 28,111 -
------------ ------------
Weighted average shares outstanding
- diluted 3,341,866 2,592,167
EPS - DILUTED $ 0.1894 $ 0.3565
============ ============
</TABLE>
Convertible preferred stock of 1,000,000 shares and related dividends on
preferred stock were not included in the computation of diluted earnings
per share as their effect would have been anti-dilutive.
(M) STOCK OPTIONS
-------------
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting For Based Compensation" (SFAS 123"), the Company has elected
to account for Stock Options issued to employees under Accounting
Principles Board Opinion No. 25 ("APB Opinion No, 25") and related
interpretations, and accounts for stock options issued to consultants and
for other services in accordance with SFAS 123.
F-8
<PAGE> 38
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONT'D)
------ --------------------------------------------------
(N) 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).
(O) NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
The Financial Accounting Standards Board has recently issued several new
accounting pronouncements. Statement No. 133 as amended by Statements No.
137 and 138, "Accounting for Derivative Instruments and Hedging
Activities" establishes accounting and reporting standards for derivative
instruments and related contracts and hedging activities. This statement
is effective for all fiscal quarters and fiscal years beginning after June
15, 2000.
The Company believes that its future adoption of these pronouncements will
not have a material effect on the Company's financial position or results
of operations.
(P) RECLASSIFICATIONS
-----------------
Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform with the 2000 presentation.
F-9
<PAGE> 39
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 2 ACCOUNTS RECEIVABLE AND FACTOR AGREEMENTS
------ -----------------------------------------
The Company sells certain trade accounts receivable, primarily without
recourse, pursuant to factoring agreements. During April and May 1999,
the Company sold its receivables under an agreement whereby the factor
advanced 70% of the face value of these receivables to the Company. The
Company was charged a variable percentage fee based upon the length of the
collection period. In June 1999, as amended in December 1999, the Company
entered into a new factor agreement (the "Agreement") with a different
factor. Under the terms of the Agreement, the factor advances up to 75%
of the face value of the receivables to the Company. The Company is
charged a variable percentage fee from 1.5% to 1% based upon the total
amount of factored receivables within a calendar year. All of the
Company's accounts receivable are pledged as collateral under this
agreement. In addition, two officers of the Company entered into
guarantee agreements related to the factor agreement (See Note 8 (E)).
For the years ending March 31, 2000 and 1999, the Company incurred
$429,265 and $220,106, respectively in factoring fees. At March 31, 2000,
factored trade accounts receivable not reflected on the accompanying
balance sheet totaled $481,706 of which, $366,505 was advanced by the
factor and the remaining $115,201 was due from the factor (See Note 6(C)
and Note 13 (A)).
NOTE 3 PROPERTY AND EQUIPMENT
------ ----------------------
Property and equipment at March 31, 2000 is as follows:
Computer equipment $ 93,874
Office equipment 48,473
Leasehold improvements 18,112
Mold and tooling 49,794
-----------
210,253
Less accumulated depreciation (110,439)
-----------
Totals $ 99,814
===========
Depreciation expense for the year ended March 31, 2000 and 1999 was
$21,970 and $6,012, respectively.
F-10
<PAGE> 40
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 4 REORGANIZATION INTANGIBLE
------ -------------------------
The reorganization intangible resulted from the application of Fresh Start
Accounting in March 1998 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(N)).
The reorganization intangible is being amortized over a period of seven
years using a straight-line basis.
The reorganization intangible at March 31, 2000 consisted of the following:
Reorganization intangible $ 641,422
Less accumulated amortization (183,264)
----------
$ 458,158
==========
Amortization expense on the reorganization intangible in each of the years
ended March 31, 2000 and 1999 was $91,632.
NOTE 5 DUE FROM OFFICERS
------ -----------------
During 1999, the Company loaned a total of $110,000 to two key officers of
the Company. The loans bear simple interest at 9% per annum. Principal
and interest are due in full on June 28, 2000 and secured by the
securities purchased with the loans.
As of March 31, 2000, the Company accrued $7,425 interest on the loans.
NOTE 6 COMMITMENTS AND CONTINGENCIES
------ -----------------------------
(A) LEASES
------
On March 31, 1999 and April 4, 2000, the Company entered into lease
agreements for office and warehouse facilities for a term of 61 months and
52 months, respectively. The terms began on August 1, 1999 and April 14,
2000. Pursuant to the terms of the leases, the Company must pay
maintenance and real estate taxes of approximately $13,000 per year. In
addition, the Company entered into a warehouse equipment lease and a
computer equipment lease during 2000. Total rent expense was
approximately $81,300 and $60,953 for 2000 and 1999. Future minimum lease
payments under these non-cancelable operating leases are as follows:
F-11
<PAGE> 41
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 6 COMMITMENTS AND CONTINGENCIES (CONT'D)
-----------------------------
Year ending March 31:
2001 $ 84,725
2002 90,088
2003 93,466
2004 96,767
Thereafter 41,162
-----------
$ 406,208
===========
(B) YEAR 2000 ISSUE
---------------
As of March 31, 2000, The Company has not experienced any negative effects
related to the Year 2000 issue.
(C) LINES AND LETTERS OF CREDIT
---------------------------
In July 1998, the Company entered into a financing agreement with a
financing corporation, which expired in July 1999. In July 1999, the
Company entered into a new financing agreement with the same financing
corporation, which expires in July 2001. The financing corporation opens
letters of credits on behalf of the Company to purchase inventory. 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 can not exceed $1,000,000. At March 31, 2000, the Company has
no letters of credit open with the financing corporation. 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, had entered into an
agreement with a financing group in Hong Kong to provide it with a United
States letter of credit facility of $200,000. The cost of the credit
facility was 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 was guaranteed by a former director of the
Company.
On May 19, 1999, as amended on February 14, 2000, the Company, through its
Hong Kong Subsidiary, obtained a credit facility of $500,000 from a Hong
Kong subsidiary of a Belgian bank. This facility is a revolving line of
credit based upon drawing down a maximum of 15% of the value of export
letters of credit lodged with Belgian
F-12
<PAGE> 42
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 6 COMMITMENTS AND CONTINGENCIES (Cont'd)
------ -----------------------------
Bank. There is no expiration date to this agreement, 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. As of March 31, 2000 there was no
outstanding balance on this credit facility.
NOTE 7 RELATED PARTY TRANSACTIONS
--------------------------
At March 31, 2000, the amounts due from officers bear interest at 9% per
annum and are due June 28, 2000 (See Note 5).
At March 31, 2000, the balance due from related party, in the amount of
$394,706, is due from an affiliate of a director of the Company's
subsidiary. The amount bears interest at 9.6% per annum and is unsecured
and due on demand.
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 $5,546,000
during 2000.
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.
F-13
<PAGE> 43
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 8 STOCKHOLDERS' EQUITY
------ --------------------
(B) AMENDMENT TO AUTHORIZED COMMON AND PREFERRED SHARES
---------------------------------------------------
During April 1999, the Company filed an amendment to its Articles of
Incorporation increasing the authorized shares of the Company's common
stock to 74,000,000 shares (100,000 Class A common and 73,900,000 common)
from 10,000,000 shares, and authorizing 1,000,000 shares of preferred
stock (See Note 8(C)). Each share of preferred stock is entitled to a 9%
dividend, preferred liquidation distribution, conversion to common stock
and has no voting rights.
(C) PREFERRED STOCK
---------------
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 consisted of 20,000 shares of the Company's
convertible preferred stock and 4,000 common stock purchase warrants. The
purchase price for each unit was $ 27,500. Each share of preferred stock
is convertible, at the option of the holder, into one share of the
Company's common stock at any time after issuance, and will automatically
convert into one share of common stock on April 1, 2000 (See Note 13(B)).
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. Through June 1999 the maximum number of
50 units had been sold and $1,375,000 gross funds were raised ($1,331,017
after related costs), at which time the offer was closed. As of March 31,
2000, 16,000 warrants were exercised for a total consideration of $32,000.
(D) 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 entitled 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-14
<PAGE> 44
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 8 STOCKHOLDERS' EQUITY (Cont'd)
As a result of the March 1998 reorganization (See Note 1 (N)), 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 originally expired on November 10, 1999.
In October 1999, the expiration date of these warrants was
extended for one year to November 10, 2000. Through the date of
this report, none of the warrants have been exercised.
(E) GUARANTEE FEES
During the year ended March 31, 2000, the Company issued common stock to
two officers of the Company in exchange for guarantees related to the
Company's factor agreement (See Note 2). These guarantee fees totaled
$590,625 and are amortized over a period of 31 months. Accordingly, the
Company recognized $190,524 as guarantee fees and recorded $400,101 as
deferred guarantee fees, presented as a deduction from equity.
(F) 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, 2000, 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. During the year ended
March 31, 2000, the Company issued 104,000 stock options in addition to
the stock options issued during 1999.
In accordance with SFAS 123, for options issued to employees, 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, 2000 and 1999. Had
compensation cost for the Company's stock-based compensation plan been
determined on the fair value at the grant dates
F-15
<PAGE> 45
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 8 STOCKHOLDERS' EQUITY (Cont'd)
------ --------------------
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 years ended March 31, 2000 and 1999
would have been decreased to the pro-forma amounts indicated below.
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Net income As reported $ 737,985 $ 924,156
Pro forma $ 676,995 $ 824,356
Net income per share - basic As reported $ 0.2322 $ 0.3733
Pro forma $ 0.2098 $ 0.3330
Net income per share - diluted
As reported $ 0.1894 $ 0.3565
Pro forma $ 0.1711 $ 0.3180
</TABLE>
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 to employees during 2000 and 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 for
2000: expected dividend yield 0%, risk-free interest rate of 5.53%,
volatility 66% and expected term of two years and for 1999: expected
dividend yield 0%, risk-free interest rate of 5.59%, volatility 65% and
expected term of three years.
For options issued to consultants, the Company applies SFAS 123.
Accordingly, consulting expense of $381,580 was charged to operations in
2000.
For financial statement disclosure purposes and for purposes of valuing
stock options issued to consultants, the fair market value of each stock
option granted was estimated on the date of grant using the Black-Scholes
Option-Pricing Model in accordance with SFAS 123 using the following
weighted-average assumptions: expected dividend yield 0%, risk-free
interest rate of 5.53%, volatility 66% and expected term of one year.
A summary of the options issued under the employment and consulting
agreements as of March 31, 2000 and changes during the year is presented
below:
F-16
<PAGE> 46
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 8 STOCKHOLDERS' EQUITY (Cont'd)
------ --------------------
<TABLE>
<CAPTION>
Number of Weighted Average
Options Exercise Price
--------- ----------------
<S> <C> <C>
Stock Options
-------------
Balance at beginning of period 526,500 $ 0.68
Granted 635,200 $ 1.40
Exercised (69,000) $ 0.43
Forfeited (30,500) $ 4.79
--------- ---------
Balance at end of period 1,062,200 $ 1.01
========= =========
Options exercisable at end
of period $ 1.01
Weighted average fair value of
options granted during the period $ 0.70
=========
</TABLE>
The following table summarizes information about stock options outstanding
at March 31, 2000:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractural Exercise Exercisable at Exercise
Price March 31, 2000 Life Price March 31, 2000 Price
-------- -------------- ------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 1.66 104,000 4.25 Years $ 1.66 101,500 $ 1.66
$ 0.43 427,000 3.75 Years 0.43 427,000 0.43
$ 1.00-2.00 531,200 2.09 Years 1.35 531,200 1.35
--------- -------- --------- -------
1,062,200 2.97 Years $ 1.01 1,059,700 $ 1.01
========= ======== ========= =======
</TABLE>
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 2000 and 1999:
F-17
<PAGE> 47
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 9 INCOME TAXES (CONT'D)
------ ------------
2000 1999
---------- ----------
Current:
U.S. Federal $ - $ -
Foreign 32,895 -
State - -
---------- ----------
32,895 -
---------- ----------
Deferred:
U.S. Federal (193,194) (170,000)
Foreign - -
---------- ----------
Total $ (160,299) $ (170,000)
========== ==========
The actual tax expense differs from the "expected" tax expense for the
year ended March 31, 2000 (computed by applying the U.S. Federal Corporate
tax rate of 34 percent to income before taxes) as follows:
Computed "expected" tax expense $ 196,413
Foreign income taxes (47,398)
Benefit of U.S. net operating loss
carryforwards (116,120)
Change in the beginning of the year
valuation allowance for deferred tax
assets allocated to income tax benefit (193,194)
------------
$ (160,299)
============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at March 31, 2000 are as
follows:
Deferred tax assets:
U.S. net operating loss carryforward $ 1,742,574
Stock based compensation 289,566
------------
Total gross deferred tax assets 2,032,140
Less valuation allowance 1,668,946
------------
Net deferred tax assets $ 363,194
============
F-18
<PAGE> 48
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 9 INCOME TAXES (CONT'D)
------ ------------
At March 31, 2000, the Company had net operating loss carryforwards of
approximately $5,125,000 for income tax purposes, available to offset
future taxable income of the U.S. entity expiring from 2003 through 2013.
The usage of $4,057,000 of these net operating losses 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.
The valuation allowance at April 1, 1999 was $2,013,701. The net change
in the valuation allowance during the year ended March 31, 2000 was a
decrease of $344,755.
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 2000 and 1999, 70% and 91%, respectively, of the Company's total
revenues were derived from sales to five customers. Revenues derived from
two customers in 2000 and three customers in 1999 who individually
purchased greater than 10% of total revenues during 2000 and 1999 were 30%
and 18% and 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 $175,000,
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. Effective June 1, 2000, the salaries were
increased to $350,000 and $275,000, respectively with related performance
bonuses equal to five percent and four percent, of net income before
interest and taxes, respectively.
F-19
<PAGE> 49
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
--------------------
NOTE 12 NON-CASH CHARGES TO OPERATIONS
------- ------------------------------
As reflected in the consolidated statements of operations and cash flows,
the Company has incurred significant non-cash charges to operations during
the year ended March 31, 2000. These charges to operations totaled
$851,666 for stock based compensation. Of this total amount, $381,580 was
related to the issuance of stock options to consultants, $434,274 to the
issuance of common stock for guarantee fees and $35,812 to the issuance of
common stock for professional services.
NOTE 13 SUBSEQUENT EVENTS
------- -----------------
(A) AMENDMENT OF FACTOR AGREEMENT
-----------------------------
During April 2000, the Company agreed to an amendment of their factor
agreement. Under the terms of the amended agreement, the factor advances
85% of the factored invoices to the Company. Should the total
stockholders' equity fall below $3,500,000 in any calendar quarter, the
advance will be reduced to 75%. The Company agreed to factor an annual
minimum of $13,000,000 of receivables at a factor fee of .95% resulting in
a stipulated fee of $123,500. All of the Company's accounts receivable
are pledged as collateral under the agreement. There is no limit on the
amount of accounts receivable that can be factored under the agreement
(See Note 2).
(B) CONVERSION OF PREFERRED STOCK
-----------------------------
On April 1, 2000, the 1,000,000 shares of preferred stock issued and
outstanding as of March 31, 2000 automatically converted into common
stock, increasing the number of outstanding shares of common stock to
3,960,120 (See Note 8(C)).
(C) LOANS PAYABLE
-------------
During May 2000, the Company entered into two working capital loan
agreements of $100,000 and $500,000, respectively. The loans extend over
a maximum period of eight months, bear interest at 15% per annum, and are
secured by corporate guarantees. In addition, the lenders will be granted
5,000 and 25,000 stock options, respectively, to purchase shares of the
Company's common stock at an exercise price of $3.25.
F-20
<PAGE> 50
