-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PfTX+JDSR14Vjth1I6FoBubIIenxdqVtiXhGSU0XQYaq63GEjtbmbJ8dVQKzceeK srf5c1djV9ZjZx+QFnWILw== 0000943440-98-000116.txt : 19981209 0000943440-98-000116.hdr.sgml : 19981209 ACCESSION NUMBER: 0000943440-98-000116 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19981208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SINGING MACHINE CO INC CENTRAL INDEX KEY: 0000923601 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 953795478 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-24968 FILM NUMBER: 98765308 BUSINESS ADDRESS: STREET 1: 3101 N W 25TH AVENUE CITY: POMPANO STATE: FL ZIP: 33069 BUSINESS PHONE: 9549688006 MAIL ADDRESS: STREET 1: 3101 N W 25TH AVENUE CITY: POMPANO BEACH STATE: FL ZIP: 33069 10KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998 COMMISSION FILE NO.: 0-24968 THE SINGING MACHINE COMPANY, INC. (Name of Small Business Issuer in its Charter) Delaware 95-3795478 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 3101 N.W. 25th Avenue, Pompano Beach, FL 33069 (Address of principal executive offices, including zip code) (954) 968-8006 (Issuer's telephone number) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, par value $.01 per share OTC Bulletin Board Common Stock Purchase Warrants OTC Bulletin Board Securities registered pursuant to 12(g) of the Act: None Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Issuer was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No x Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. (X) State issuer's revenues for its most recent fiscal year: $6,230,022 The aggregate market value of the Registrant's voting stock held by non-affiliates, based upon the closing sales price for the common stock of $.43 per share as reported on the OTC Bulletin Board on November 1, 1998, was approximately $621,941. The shares of Common Stock held by each officer and director and by each person known to the Company to own 5% or more of the outstanding Common Stock have been excluded and such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS Indicate whether the Issuer has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 after the distribution of securities under a plan confirmed by a court. Yes No x APPLICABLE ONLY TO CORPORATE REGISTRANTS State the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. 2,356,935 shares of Common Stock were outstanding as of November 30, 1998. 1 THE SINGING MACHINE COMPANY, INC. TABLE OF CONTENTS Page PART I Item 1. Business.........................................3 Item 2. Properties.......................................12 Item 3. Legal Proceedings................................12 Item 4. Submission of Matters to a Vote of Security Holders.......................12 PART II Item 5. Market for Company's Common Equity And Related Stockholder Matters................12 Item 6. Management's Discussion and Analysis or Plan of Operations.................14 Item 7. Financial Statements and Supplementary Date......19 Item 8. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.......................19 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act..............20 Item 10. Executive Compensation...........................22 Item 11. Security Ownership of Certain Beneficial Owners and Management...............23 Item 12. Certain Relationships and Related Transactions...25 Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............27 SIGNATURES 2 PART I - FORWARD LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. The forward-looking statements contained in this Form 10-KSB are subject to certain risks and uncertainties. Actual results could differ materially from current expectations. Among the factors that could affect the Company's actual results and could cause results to differ from those contained in the forward-looking statements contained herein is the Company's ability to implement its business strategy successfully, which will depend on business, financial, and other factors beyond the Company's control, including, among others, prevailing changes in consumer preferences, access to sufficient quantities of raw materials, availability of trained laborers and changes in industry regulation. There can be no assurance that the Company will continue to be successful in implementing its business strategy. Other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. Words used in this Form 10-KSB, such as "expects", "believes", "estimates", and "anticipates" and variations of such words and similar expressions are intended to identify such forward-looking statements. ITEM 1. BUSINESS INTRODUCTION The Singing Machine Company, Inc. (the "Company") is engaged in the distribution and marketing of electronic karaoke audio equipment which plays backing tracks (music without lyrics) of popular songs and records the vocal accompaniment of professional and amateur singers to those backing tracks. The Company contracts for the manufacture of all of its electronic equipment products with manufacturers located in the Far East. The Company also produces and markets karaoke audio software, including CDS, CD, and graphics, video tapes and audio tapes containing music and lyrics of popular songs for use with karaoke recording equipment. One track of those tapes offers complete music and vocals for practice and the other track is instrumental only for performance by the participant. Virtually all audio software sold by the Company is accompanied by printed lyrics, and the Company's karaoke video tapes contain lyrics which appear on the video screen. The Company contracts for the reproduction of its audio software, which is produced by the Company or by an exclusive independent producer. The Company was incorporated in California in 1982. The Company originally sold its products exclusively to professional and semi-professional singers. In 1988, it began marketing karoake equipment for home use. The Company believes it was the first to offer karaoke electronic recording equipment and audio software for home use in the United States. 3 In February 1990, all of the outstanding Common Stock was purchased by Magna International, Inc. ("Magna"). In March 1990, the Company relocated its offices from California to South Florida. In September 1991, Messrs. Paul Wu, Eugene B. Settler and Edward Steele purchased an option from Magna for 100% of the Company's then outstanding Common Stock, which option was exercised in May 1994, by Messrs. Settler and Steele and Mr. Wu's designees. In September 1992, Magna and an affiliate thereof agreed to exchange $816,574 of debt owed by the Company to Magna and an affiliate thereof for additional shares of the Company's Common Stock (the "Additional Shares"). That agreement, as amended, gave Magna the right to require the Company to repurchase the additional shares, on December 31, 1996, for $816,574 plus interest at 8% per annum from September 30, 1994. On November 10, 1994, Magna exchanged the Additional Shares for the Company's promissory note (the "Magna Note") in the amount of $816,574. In addition, in May 1994, the Company was merged into a wholly-owned subsidiary of the Company incorporated in Delaware with the same name. As a result of that merger, the Delaware corporation became the successor to the business and operations of the California corporation and retained the name The Singing Machine Company, Inc. BANKRUPTCY REORGANIZATION On April 11, 1997, the Company filed a voluntary bankruptcy petition in the United States Bankruptcy Court for the Southern District of Florida seeking relief pursuant to 11 U.S.C. Chapter 11. The automatic stay provisions of the Bankruptcy Code prohibit creditors from taking action against the Company without first obtaining court approval. Further, the Company is permitted to operate under Company management while the Company formulates a plan of reorganization. The Company's Amended Plan of Reorganization (the "Plan") was confirmed by the Bankruptcy Court on March 17, 1998. The material terms of the Plan include the payment of certain court approved and allowed claims as follows: (i) administrative costs in the amount of $116,000; (ii) the secured claim of Bankers Capital in accordance with the terms of the Bankers Capital agreement in the amount of $106,000; (iii) ten percent (10%) of the amount of the allowed claims of unsecured creditors whose claims are $300 or less; (iv) creditors whose allowed unsecured claims exceeded $300 were given the option of receiving a cash payment of ten percent (10%) of the amount of the allowed claim or exchanging debt for equity in the reorganized debtor of one (1) share of common stock for each two dollars ($2.00) of the allowed claim; (v) existing pre-petition shareholders, warrantholders, and optionholders had their interests reduced by ninety percent (90%). As a result of bankruptcy reorganization, the Company was able to effectively reduce the size of its corporate offices, warehousing operations, personnel, and inventory resulting in a savings of $12,000 per month in lease expense and a reduction in payroll of $6,000 per month. During the Chapter 11, the 4 Company was able to retain its core customer base of major retail accounts such as Target, J.C. Penney, Fingerhut, and FAO Schwarz. Also, the Company began a new customer relationship with Best Buy to whom the Company has sold in excess of $1,000,000 during 1998. The Company was also able to settle certain pending legal matters through the Plan which, when viewed with the fact that over ninety percent (90%) of the unsecured creditors converted debt to equity in the reorganized company resulted in a significant reduction of liabilities on the Company's post-reorganization balance sheet. PRODUCT LINES The Company currently has a product line of 12 different models of recording and playback units incorporating such features as a dual cassette player, graphic equalizer and high-output stereo amplifier and markets certain of its units under the popular national brand Memorex™ as well as its registered trademark, The Singing Machine®. The Company also licenses its trademark, on a non-exclusive basis, to others for sales around the world. The Company believes that it is the only major company in the karaoke industry in the United States which sells both hardware and software. The following table sets forth the approximate amounts and percentages of the Company's net revenues by product type during the periods shown, excluding certain ancillary revenues.
Year Ended March 31, 1998 1997 1996 1995 Net Percent Net Percent Net Percent Net Percent Revenues Of Total Revenues Of Total Revenues Of Total Revenues Of Total Audio software $ 693,885 11.2% $1,610,594 15.2$ $1,255,932 24.95% $3,258,312 56.4% Audio equipment $5,528,599 88.8% 9,953,462 84.85% 3,795,447 75.1% 2,520,914 43.6%
The Company currently offers 12 different models of electronic recording and playback equipment with retail prices ranging from $40 for basic units to $400 for semi-professional units with CD and graphics player sound enhancement, graphic equalizers, tape record/playback features, and multiple inputs and outputs for connection to compact disc players and video cassette records. The Company currently offers its audio software in two formats - multiplex cassettes and CD and graphics with retail prices ranging from $3.99 to $14.98. The Company purchases recordings from an independent producer and currently has a song library of over 2,700 songs. The Company's backing track 5 product line covers the entire range of musical tastes including popular hits, golden oldies, country, standards, rock and roll, and rap. The Company even has backing tracks for opera and certain foreign language recordings. During the fiscal year ended March 31, 1998, the Company introduced two new models of recording equipment. The Company is producing 25 CDG and new cassette titles. THE MARKET The karoake industry exceeds sales of $10 billion in the Far East, based upon Japanese industry estimates. The current North American market for karaoke products is estimated at less than $400 million. Therefore, the Company believes that there is tremendous growth potential not only in the North American market, but also in South America and Europe as well. Although there are other electronic component competitors for the Company's hardware products, and other audio software competitors, the Company believes it is the only major company specializing in karaoke category that offers complete lines of hardware and CD+graphics machines as well as a software library with over 2,700 titles offered by the Company. SALES, MARKETING AND DISTRIBUTION MARKETING The Company relies on its management's ability to determine the existence and extent of available markets for its products. Company management has considerable marketing and sales background and devotes a significant portion of its time to marketing-related activities. The Company achieves both domestic and direct sales and markets its hardware and software products primarily through its own sales force and approximately 14 independent sales representatives. The Company's representatives are located in various states and are paid a commission based upon sales in their respective territories. The Company's sales representative agreements are generally one (1) year agreements which automatically renew on an annual basis, unless terminated by either party on 90 days notice. The Company works closely with its major customers to determine marketing and advertising plans. The Company also markets its products at various national and international trade shows each year. The Company regularly attends the following trade shows and conventions: CES ("Consumer Electronics Show") each January in Las Vegas; Hong Kong Electronics Show each October in Hong Kong; and the American Toy Fair each February in New York. The Company's electronic recording products are marketed under The Singing Machine® or Memorex™ trademarks, and its audio software is marketed under the Karaoke Kassette™, Karaoke Kompact Disc™, and Karaoke Video Kassette™ trademarks throughout the United States, primarily 6 through department stores, lifestyle merchants, mass merchandisers, direct mail catalogs and showrooms, music and record stores, national chains, specialty stores and warehouse clubs. The Company karaoke machines are currently sold in such stores as Target, J.C. Penney, Fingerhut, Best Buy, and Sears. In addition, the Company's karaoke software customers include J.C. Penney, Fingerhut, Target, Best Buy, and Musicland. On October 27, 1995, the Company entered into an agreement with Memcorp, Inc. ("Memcorp"), a Florida corporation holding rights to "Memorex", a registered trademark name. The agreement is a five year exclusive arrangement, whereby the Company became the exclusive sub-distributor of karaoke hardware products under the "Memorex" trademark ("Memcorp Sub-distributor Agreement"). The sub-distributor agreement requires the Company to pay a commission fee on all hardware sales utilizing the brand name during the term of the agreement. During fiscal 1998, the Company uses the Memorex trademark name with only one customer (Target). SALES As a percentage of total revenues, the Company's net sales in the aggregate to its five largest customers during the fiscal years ended March 21, 1997 and 1998, were approximately 79% and 89% respectively. For the fiscal 1998 period, Target accounted for 36%, J.C. Penney 19%, Fingerhut, 11% and Best Buy, 22%. Although the Company has long-established relationships with many of its customers, it does not have long-term contractual arrangements with any of them. A decrease in business from any of its major customers could have a material adverse effect on the Company's results of operations and financial condition. At March 31, 1998 and November 30, 1998, the Company has approximately $876,000 and $792,000, respectively, net of cancellations, of unfilled customer orders. The amount of unfilled orders at any particular time is affected by a number of factors, including scheduling of manufacturing and shipping of products, which in some instances is dependent on the needs of the customer. Returns of electronic hardware and software products by the Company's customers are generally not permitted except in approved situations involving quality defects, damaged goods, or goods shipped in error. Returned hardware products are sold in closeout markets by the Company for future sale and, if necessary, refurbished. The practice in the prerecorded music industry is to permit retailers to return or exchange audio software merchandise. In general, the policy of the Company is to give credit to its distributors for audio software returned in conjunction with the receipt of new replacement purchase orders. Any such returns of software are available for resale by the Company. The Company manages credit policies with respect to its customer base. The Company has not suffered significant credit losses to date, even 7 during a period when many major retailers, including customers of the Company, experienced significant difficulties, including filing for protection under federal bankruptcy laws. In the cases where a customer of the Company has filed for protection under federal bankruptcy laws, it has not had a significant impact on the Company's revenues or other categories of financial performance. DISTRIBUTION The Company distributes its hardware products to retailers and wholesale distributors through two methods: domestic sales (i.e., shipment of products from the Company's inventory), and direct sales, shipments directly from the Company's Hong Kong subsidiary or manufacturers in the Far East, of products sold by the Company's sales force. Domestic sales, which account for substantially all of the Company's audio software sales, are made to customers located throughout the United States from the Company's inventories maintained at its warehouse facility in Florida or directly from the software producers. 1. Domestic Sales: The Company's strategy of selling products from a domestic warehouse enables it to provide timely delivery and serve as a "domestic supplier of imported goods". The Company purchases electronic recording products overseas for its own account and warehouses the products in a leased facility in Florida and a warehouse in California. The Company is responsible for costs of shipping, insurance, customs clearance, duties, storage and distribution related to such warehouse products and therefore, warehouse sales command higher sales prices than direct sales. The Company generally sells from its own inventory in less than container sized lots. 2. Direct Sales - Hong Kong: The formation of the Company's subsidiary, International SMC(HK) Ltd. ("International") is attributable to the advent of foreign equipment sales. Some hardware products sold by the Company are shipped directly to its customers from the Far East through International, a Hong Kong trading company. Sales made through International are completed by either delivering products to the customers' common carriers at the shipping point or by shipping the products to the customers' distribution centers, warehouses or stores. Direct sales are made in larger quantities (generally container sized lots) to customers in Italy, England, Canada, Australia and the United States, who pay International pursuant to their own international, irrevocable, transferable letters of creditor or on open credit with the Company's suppliers in the Far East. MANUFACTURING AND PRODUCTION The electronic recording devices sold by the Company are manufactured and assembled by third parties pursuant to design specifications provided by the Company. The Company's electronic recording devices are assembled by three factories in the People's Republic of China. The finished products are 8 packaged and labeled under either the Company's registered trademark, The Singing Machine®, the Memorex™ brand name. The Company's products contain electronic components manufactured by other companies such as Panasonic and Sony. Various subcontractors in the Far East produce printed circuit boards and other audio components in accordance with specifications of the Company. The electronic components are installed in cabinets manufactured by FLX and other manufacturers. Tools and dies used in the production of certain models of the electronic audio equipment sold by the Company are owned by LTD and may be used by LTD to manufacture other companies' products. In March 1995, the Company purchased tools and dies for two new models from LTD for $318,000, which were subsequently sold to International, primarily in order to have the exclusive right to use such tools and dies. The Company presently purchases and imports virtually all of its electronic recording products from three suppliers located in the People's Republic of China. In fiscal 1998 and 1997, suppliers in the People's Republic of China accounted for in excess of 88% of the Company's total product purchases, including virtually all of the Company's hardware purchases. The Company's primary suppliers of electronic recording products are located in the Shenzen province of the People's Republic of China. While the Company purchases its products from a small number of large suppliers with whom it maintains close alliances, all of the electronic components and raw materials used by the Company are available from several sources of supply, and the Company does not anticipate that the loss of any single supplier would have a material long-term adverse effect on its business, operations or financial condition. The Company provides key suppliers with design and quality specifications. In return for ongoing business which the Company provides these suppliers, such suppliers maintain production capacity for the Company's production needs. To ensure its high standards of product quality and that shipping schedules are met by suppliers, the Company utilizes Hong Kong based agents as representatives. Those agents include product inspectors who are knowledgeable about the Company's product specifications and work closely with the suppliers to verify that such specifications are met. Additionally, key officers of the Company frequently visit suppliers for quality assurance and to support good working relationships. All of the electronic equipment sold by the Company is warranted against manufacturing defects for a period of 90 days for labor and one (1) year for parts. All audio software sold by the Company is similarly warranted for a period of 30 days. During the fiscal years ended March 31, 1998 and 1997, warranty claims have not been material to the Company's results of operations. 9 SUBSIDIARIES In June 1996, the Company organized a wholly-owned subsidiary in Hong Kong under the name International SMC(HK) Ltd. ("International") to coordinate the Company's production and finance in the Far East. International assists with the coordination of product shipments from China and other foreign factories as well as the negotiation of foreign letters of credit. COMPETITION The Company's business is highly competitive. In addition, the Company competes with all other existing forms of entertainment including, but not limited to, motion pictures, video arcade games, home video games, theme parks, nightclubs, television and prerecorded tapes, CD's, and video cassettes. The Company's financial position depends, among other things, on its ability to keep pace with such changes and developments and to respond to the requirements of its customers. Many of the Company's competitors have significantly greater financial, marketing, and operating resources and broader product lines than does the Company. The Company's major electronic component competitors include Grand Prix, Casio, and New Tech. The Company's major audio software competitors are Pocket Songs and Sound Choice. The Company believes that competition in its markets is based primarily on price, product performance, reputation, delivery times, and customer support. The Company believes that, due to its proprietary know-how, it has the ability to develop and produce hardware and software on a cost-effective basis. TRADEMARKS AND LICENSES The Company's holds federal and international copyrights to substantially all of the audio productions comprising its song library. However, since each of those productions is a re-recording of an original work by others, the Company is subject to both contractual and statutory licensing agreements with the publishers who own or control the copyrights of the underlying musical compositions and is obligated to pay royalties to the holders of such copyrights for the original music and lyrics of all of the songs in its library that have not passed into the public domain. Since most audio software distributed by the Company is accompanied by printed lyrics, the Company is also subject to written print royalty license agreements. The Company is currently a party to more than 13,000 different written copyright license agreements covering more than 30,000 separate copyright holders. The Federal Copyright Act (the "Act") creates a compulsory statutory license for all non-dramatic musical works which have been distributed to the public in the United States. Under the Act, with respect to each work included in an audio software product distributed by the Company under a compulsory license, the Company is required to pay a royalty of the greater of $0.0710 per song or $0.013 per minute of playing time or fraction thereof with respect to each 10 item of audio software produced and distributed by the Company (the "Statutory Rate"). Royalties due under compulsory licenses are payable monthly. The Company currently has compulsory statutory licenses for approximately 200 songs in its song library. The Act allows a deferral of royalty payments for products sold subject to a right of return. The practice in the recorded music industry is to permit retailers to return or exchange merchandise. Accordingly, each audio production sold by the Company is sold subject to a right of return for credit against future purchases or exchange. Royalties are due with respect to such sales on the earlier to occur of nine months after the date of distribution or the date on which the revenue from the sale is recognized in accordance with generally accepted accounting principles. The Company has reached agreement on a 25% reserve with a music publisher representing over 22% of its print licenses, which agreement requires the payment of deferred royalties no later than nine months after the date of distribution. With regard to the other principal copyright royalty holders, the Company has deferred, and intends to continue to defer, approximately 25% of royalty payments for approximately nine months, an amount and period which the Company believes is appropriate for the karaoke industry. The majority of the songs in the Company's song library are subject to written copyright license agreements. The Company's written licensing agreements for audio software ("mechanical licenses") typically provide for royalties at the Statutory Rate although some provide for lower royalty rates. Written licenses typically provide for quarterly royalty payments. The Company also has written license agreements for substantially all of the printed lyrics which are distributed with its audio software products ("print licenses"), which licenses also typically provide for quarterly payments of royalties at the Statutory Rate. GOVERNMENT REGULATION In the spring of 1998, the President of the United States renewed the People's Republic of China's "Most Favored Nation" ("MFN") treatment for entry of goods into the United States for an additional year. In the context of United States tariff legislation, MFN treatment means that products are subject to favorable duty rates upon entry into the United States. IF MFN status for China is restricted or revoked in the future, the Company's cost of goods purchased from Chinese vendors is likely to increase. A resultant change in suppliers would likely have an adverse effect on the Company's operations and, possibly, earnings, although management believes such adversity would be short-term as a result of its ability to find alternative suppliers. Management continues to closely monitor the situation and has determined that the production capabilities in countries outside China which have MFN status and, therefore, have favorable duty rates, would meet the Company's production needs. 11 EMPLOYEES At March 31, 1998, the Company had 11 full-time employees, 4 of whom were engaged in warehousing and technical support, and 7 in marketing and administrative functions. At November 30, 1998, the Company had 10 full-time employees, 4 of whom were engaged in warehousing and technical support, and 6 in marketing and administrative functions. ITEM 2. PROPERTIES At present, the Company does not own any property. On May 1, 1997, the Company entered into a lease for a 10,000 square foot office and warehouse facility located in Pompano Beach, Florida, for a term of 25 months at a cost of $5,161 per month. Pursuant to the terms of the lease, the Company must pay maintenance, insurance, and real estate taxes, which cost aggregates approximately $11,000 per year. The Company believes that is existing facility and distribution center is adequate for the current level of the Company's operations. Furthermore, the Company believes that the facilities are well maintained, in substantial compliance with environmental laws and regulations and adequately covered by insurance. The Company also believes that the leased spaces which house its facilities are not unique and could be replaced, if necessary, at the end of the term of the existing lease. ITEM 3. LEGAL PROCEEDINGS The Company filed a voluntary petition ("Petition") for relief under Chapter 11 of the Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court"), case number 97-22199-BKC-RBR, on April 11, 1997 (the "Petition Date"). On March 17, 1998, the U.S. Bankruptcy Court confirmed the Company's Plan of Reorganization, as Amended. Other than the aforesaid Bankruptcy Court proceeding, the Company is not a party to any material legal proceeding, nor to the knowledge of management, are any legal proceedings threatened against the Company. However, as a result of the Company's historical copyright royalty reserve practices, the Company could be subject to various claims for damages under copyright licensing agreements, the Federal Copyright Act, or common law. No claims have been asserted against the Company with respect to copyright infringement. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Plan of Reorganization, as Amended, was submitted to a vote of security holders (Class 6 - Interest Holders) through a solicitation of votes in conjunction with the bankruptcy confirmation process. 12 PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On November 17, 1995, the Company was informed by The Nasdaq Stock Market, Inc. that the Company's securities no longer met certain criteria for continued listing on The Nasdaq SmallCap Market. Accordingly, effective January 26, 1996, after a January 19, 1996, hearing before a Nasdaq Listing Qualifications Panel, the Company's securities were delisted from The Nasdaq SmallCap Market. However, the Company's securities were immediately eligible for listing on the OTC Bulletin Board. The Common Stock is currently traded on the OTC Bulletin Board under the symbol "SINGD". The following table sets forth, for the fiscal periods indicated, the high and low bid prices for the Common Stock on the Nasdaq SmallCap Market for the periods prior to January 26, 1996, and the OTC Bulletin Board thereafter. This information represents prices between dealers and does not reflect retail mark-up or mark-down or commissions, and may not necessarily represent actual market transactions.
Fiscal Period *High Bid *Low Bid 1997: First Quarter........................... $2.50 $1.00 Second Quarter.......................... 1.00 1.00 Third Quarter........................... 1.00 0.78 Fourth Quarter.......................... 1.00 0.78 1998: First Quarter........................... $0.60 $0.60 Second Quarter.......................... 0.60 0.60 Third Quarter........................... 0.60 0.60 Fourth Quarter.......................... 2.50 0.60 1999: First Quarter........................... $1.20 $0.57 Second Quarter.......................... .73 0.50 Third Quarter (through November 30, 1998)......... .50 0.43
*All data has been adjusted to reflect a one-for-ten reverse split for the Company's Common Stock which was effected on April 1, 1998. The closing bid price for the Company's Common Stock on the OTC Bulletin Board on November 30, 1998 was $.43 per share. There has not been a public trading market for the Company's Public Warrants during the Company's last two fiscal years and any subsequent period thereto. As of November 30, 1998, there were approximately 283 record holders of the Company's outstanding Common Stock. Moreover, additional shares of the Company's Common Stock are held for stockholders at brokerage firms and/or clearing houses, and therefore the Company was unable to determine the precise number of beneficial owners of Common Stock as of November 30, 1998. 13 The Company has never declared or paid cash dividends on its capital stock and the Company's Board of Directors intends to continue its policy for the foreseeable future. Earnings, if any, will be used to finance the development and expansion of the Company's business. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Company's Board of Directors and will be subject to limitations imposed under Delaware law. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussions and analysis should be read in conjunction with, and is qualified in its entirety by, the Financial Statements and Selected Financial Information included elsewhere herein. Historical results are not necessarily indicative of trends in operating results for any future period. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items express as a percentage of the Company's total revenues, except as noted below:
YEAR ENDED MARCH 31, 1998 1997 1996 Revenues: Equipment sales, net................. 88.7 83.9% 73.0% Music sales, net .................... 11.1 15.1 24.2 Commission income - related party and other.................... .2 1.0 2.8 Total Revenues......................... 100.0% 100.0% 100.0% Cost of Sales(1): Cost of equipment sales.............. 61.5 90.0% 89.6% Cost of music sales.................. 4.1 67.3 110.8 Expenses: Other operating expenses............ 2.4 5.4 13.6 Selling, general and administrative expenses........... 29.7 22.2 48.2 Impairment of long-lived assets..... - 15.1 7.8 Operating income (loss)............... (23.5) (32.1) (66.2) Other expenses, net................... (2.4) (4.2) (7.9) Income (loss) before taxes............ (14.6) (36.3) (74.1) Provision (benefit) for income taxes.. - - - Income (loss)......................... (14.6) (36.3) (74.1)
(1) Expressed as a percentage of related sales. 14 THE YEAR ENDED MARCH 31, 1998 AND MARCH 31, 1997 Total revenues dropped to $6.2 million for the fiscal year ended March 31, 1998, compared to the $10.7 million reported for fiscal 1997. The decrease was primarily attributable to limited funding to purchase additional inventory during operations under Chapter 11 federal bankruptcy. Revenues from equipment sales decreased $3.4 million, or 38% to approximately $5.5 million during fiscal 1998 compared to approximately $9.0 million for fiscal 1997. Revenues from music sales decreased $917,000 or 57% to approximately $.7 million in fiscal 1998 from the approximately $1.6 million recorded during fiscal 1997. Due to excess inventory caused by returns in the fourth quarter of the fiscal year, management decided to redirect music sales away from distributors who historically have high merchandise return rates in favor of mass market retailers. The primary impact from this change in strategy was reflected in fiscal 1997. The decrease in music sales was primarily due to this change of strategy and the lack of operational capital to produce new music titles. Commission income decreased approximately $90,000 during fiscal 1998, to $7,500 as a result of directing foreign sales from its wholly owned subsidiary in Hong Kong as opposed to purchasing product from a related party. Cost of equipment sales for the year ended March 31, 1998 decreased from $3,326,000 for fiscal 1997. The cost of music sales decreased $777,000 for the year ended March 31, 1998 from fiscal 1997. This decrease in the cost of music sales reflects approximately $529,000 in adjustment to inventory values during fiscal year 1997 and the reduced cost of returns from distributors during fiscal year 1998. Other operating expenses decreased approximately $396,000 or 69% for fiscal 1998, compared to the prior year. The decrease reflects management's efforts to control operating expenses and primarily reflects lower warehouse rent, occupancy costs, and warehouse personnel expense. Selling, general and administrative expenses ("SG&A expenses") decreased $87,000 or 4% for fiscal 1998 compared to fiscal 1997. This decrease was primarily due to management's commitment to reduce total overhead. Categories which decreased include salaries and benefits, promotional expenses including catalog, advertising and show/convention costs, product development, travel and entertainment, and insurance. These decreases were partially offset by higher professional fees. 15 The Company continues to take action to reduce its SG&A expenses, which can be seen in the above comparison. The Company believes that an additional impact of staff and other reductions will be seen in fiscal 1999. The emergence from bankruptcy will directly reduce professional fees and an overall reduction of travel, salaries, and rent will impact the Company in fiscal 1999. Depreciation and amortization expense decreased approximately $223,000 or 56% to $177,000 during the fiscal year ended March 31, 1998. The decrease was primarily due to the write-off of certain fixed assets, trademark and costs in excess of net assets (goodwill) as of March 31, 1998 and 1997. As a result of the significant decline in music sales during fiscal 1997 and 1998, the Company reviewed the carrying value of costs in excess of net assets acquired (goodwill) and trademarks carried on its balance sheet. As a result of this review, the Company recorded a reduction in the carrying value of such asset relating to music sales in the amount of $1,081,000 for fiscal 1997, which amount was charged to operations. See "Notes to Consolidated Financial Statements No. 1 - Organization and Summary of Significant Accounting Policies". The operating loss for fiscal 1998 was approximately $1.6 million, which was a reduction of $2.9 million from fiscal 1997. As a percentage of total revenues, the operating loss decreased to 24% for fiscal 1998 from 32% in the prior year. Excluding accounting adjustments, the fiscal 1997 operating loss would have been $1.3 million. Gross profit as a percentage of sales continues to increase, and during fiscal year 1999, the Company has secured sufficient capital to fund inventory purchases and increase sales. The improvement in gross profit from music sales was primarily because of management's change in policy to reduce returned merchandise and the impact of inventory valuation adjustments in the prior year. Net interest expenses decreased $145,000 or 84% from the prior year due to a stay of interest as a result of the bankruptcy filing and subsequent reorganization. Loss on sales of accounts receivable was 1.5% and 2.2% of total revenues for the fiscal years 1998 and 1997, respectively. The decrease of approximately $140,000 was primarily because of a decrease in sales. Net loss for fiscal 1998 was approximately $.9 million, a $3.0 million reduction from the loss $3.9 million reported for fiscal year 1997. Although the loss for fiscal 1998, excluding accounting adjustments of $1.6 million, was significantly lower than the prior year, and management has made great strides in reducing overhead, the primary reason for both periods' losses is the inability to obtain sufficient gross margins on hardware sales to cover overhead and debt payments combined with decreased levels of high margin music sales. Although projections can be overly optimistic and purchase orders can be canceled, management believes that the reduction of debt which was 16 accomplished upon confirmation of the Plan, in conjunction with the accounting adjustments to inventory and the carrying value of intangible assets, as well as the significant reductions in cost structure, will position the Company for profitability in fiscal 1999. SEASONAL FACTORS As is typical in the karaoke industry, the Company's operations have been seasonal, with the highest net sales occurring in the second and third quarter (reflecting increased orders for equipment and music merchandise during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year. The Company's results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis. INFLATION Inflation has not had a significant impact on the Company's operations. The Company has historically passed any price increases on to its customers since prices charged by the Company are generally not fixed by long-term contracts. LIQUIDITY AND CAPITAL RESOURCES Going Concern The Company's working capital deficit at March 31, 1998, was approximately $500,000. The report by the Company's independent auditors on its 1998 financial statements express substantial doubt about the Company's ability to continue as a going concern. The independent auditors attributed this substantial doubt to substantial net operating losses in the fiscal year ended March 31, 1998, and an accumulated deficit of approximately $10,453,000. This condition raises substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include adjustments relating to the recoverability and classification of the recorded carrying value of assets or the amounts or classifications of other liabilities that might be necessary should the Company be unable to successfully negotiate additional inventory financing and continue as a going concern. Capital Resources The Company has obtained significant financing for continuing operations and growth. Three specific lines of credit have been opened, a financing agreement in Hong Kong and two financing agreements through its U.S. operations. Effective July 2, 1998, the Company, through its Hong Kong subsidiary, International SMC(HK) Ltd., has been provided a (US) $200,000 credit facility for opening letters of credit and/or trust receipt and/or purchasing at the 17 Company's factories by purchasing of documents against acceptance bills, from Delta Asia Financial Group, Hong Kong. This facility is a revolving line until May 31, 1999, at which time it will be reviewed. The cost of this credit facility is prime plus 2 1/2% and bank charges for opening letters of credit. This facility is personally guaranteed by Mr. J.A. Bauer, a former director of the Company. The Company is a party to a factoring agreement, dated April 24, 1998, with Berkshire Financial Group, Inc. ("Berkshire") pursuant to which Berkshire purchases certain of the Company's accounts receivable. Under the agreement, Berkshire purchases certain selected accounts receivable from the Company and advances 70% of the face value of those receivables to the Company. The accounts receivable are purchased by Berkshire without recourse and Berkshire therefore performs an intensive credit review prior to purchase the receivable. The Company is charged a variable percentage fee based upon the length of collection period of the receivable and the remaining collected balance fees are sent to the Company after collection. The purchase of receivables of the Company by Berkshire is absolute and is a true sale of receivables. Berkshire has placed no maximum limit on the amount of the Company's receivables they will purchase. The Company has also entered into an agreement with EPK Financial Corporation ("EPK") whereby EPK will open letters of credit with the Company's factories to import inventory for distribution to the Company's customers. This allows the Company to purchase domestic hardware inventory for distribution to customers in less than container load quantities and provides the flexibility to customers of not opening a letter of credit in favor of the Company. The selling price to these customers is considerably higher because the Company pays financing costs to EPK and incurs costs of ocean freight, duty, and handling charges. Upon shipment of product from these financed transactions, the receivables are factored by Berkshire Financial, thereby buying the shipments and related interest from EPK. The Company pays EPK a flat fee per transaction, which is negotiated for each shipment, and the maximum purchase price per transaction is $300,000. There has been no maximum total shipments established under this agreement. Berkshire has entered into this agreement as a third party agreeing to purchase all receivables invoiced under these transactions. The transactions financed by EPK are supported by personal guarantees of the chief executive officer and chief financial officer of the Company and the agreement is in effect until July 1, 1999, unless terminated by either party upon 30 days' written notice. The Company has no present commitment that is likely to result in its liquidity increasing or decreasing in any material way. In addition, the Company knows of no trend, additional demand, event or uncertainty that will result in, or that are reasonably likely to result in, the Company's liquidity increasing or decreasing in any material way. 18 The Company has no material commitments for capital expenditures. The Company knows of no material trends, favorable or unfavorable, in the Company's capital resources. The Company has no additional outstanding credit lines or credit commitments in place and has no additional current need for financial credit. Year 2000 Management has compiled a list of both internally and externally supplied information systems that utilize imbedded date codes which could experience operational difficulties in the year 2000. The Company uses third party applications or suppliers for all high level systems and reporting. These systems will either be upgraded and tested to be in compliance for the year 2000 or the Company will take necessary steps to replace the supplier. Management is testing new systems for which it is responsible. It is the Company's objective to be in year 2000 compliance for all systems by the end of fiscal 1999, however, no assurance can be given that such objective will be met. ITEM 7. FINANCIAL STATEMENTS The financial statements required pursuant to this Item 7 are included in this Form 10-KSB as a separate section commencing on page F-1 and are hereby incorporated by reference into this Item 7. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AN FINANCIAL DISCLOSURE In connection with the confirmation of its Plan of Reorganization, as Amended, by the U.S. Bankruptcy Court on March 17, 1998, the Company changed accountants beginning with the audit of the financial statements included herewith, from Millward & Co. to Samuel F. May, Jr. & Company, Certified Public Accountants. Millward & Co. resigned as the Company's accountant in or about March 1998. The report of Millward & Co. on the Company's financial statements for the fiscal year ended March 31, 1997 did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles, except for a going concern uncertainty. In connection with the audit of the Company's financial statements for the fiscal year ended March 31, 1997, and in the subsequent interim period, there were no disagreements, disputes, or differences of opinion with Millward & Co. on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures, which, if not resolved to the satisfaction of Millward & Co. would have caused Millward & Co. to make reference to the matter in its report. The accounting firm of Samuel F. May, Jr. & Company, Certified Public Accountants, has prepared the Company's financial statements for the Company's fiscal year ended March 31, 1998 (see item 7 above). 19 PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The directors and executive officers of the Company as of the date of this report are as follows: Name Age Position Edward Steele 69 Chief Executive Officer, President and Director John F. Klecha 48 Chief Financial Officer, Secretary, Treasurer and Director Walter Haskamp 63 Director Paul Wu 68 Director Edward Steele joined the Company in 1988 and has served as the Chief Executive Officer, President, and as a director of the Company since September 1991. From October 1988 to September 1991, Mr. Steele was responsible for the development of the Company's electronic hardware products in the Far East and was the Company's sales director. Prior to joining the Company, Mr. Steele served in executive capacities at a number of companies in the toy and electronics fields, including as Managing Director in charge of worldwide sales of Concept 2000, a manufacturer of consumer electronics, from 1971 to 1978; as President of Wicely Corp., a distributor of electronic toys and consumer electronics from 1978 to 1983; and as President of Justin Products Corp., an electronic toy manufacturer from 1983 to 1988. John Klecha has been the Chief Financial Officer, Secretary, Treasurer and a Director of the Company since October 10, 1997. Mr. Klecha is in charge of all financial and administrative operations of the Company, including the Company's daily operations, shipping and inventory. Mr. Klecha manages the Company's staff and is in control of the Company's billing and order entry and accounting. Prior to joining the Company, Mr. Klecha managed all financial and administrative functions for a toy design, manufacturing, and a distribution company encompassing 26 employees and revenues of $20 million. Mr. Klecha is a former Certified Public Accountant with more than 25 years of financial and management experience. 20 Walter H. Haskamp was appointed to the Board of Directors effective July 15, 1998. Since 1995, Mr. Haskamp has been a managing director of Knorr-Bremse AG based in Hong Kong, which is an international group producing brake systems for railway rolling stock and commercial vehicles. From 1986 to 1994, Mr. Haskamp served as managing director for DEG-German Investment and Development Company ("DEG"") based in Thailand. Additionally, Mr. Haskamp represented DEG on the Board of Directors of several joint venture companies as well as serving as a consultant to the Board of Investment and the Ministry of Industry of Thailand as assigned by DEG/BMZ, the German ministry for economic cooperation. Prior to 1986, Mr. Haskamp had served for more than 30 years as a managing director/general manager of various manufacturing companies in the Far East. Paul Wu has been a director of the Company since September 1991 and was the Chairman of the Board of Directors from September 1991 to February 1995. Mr. Wu is a private investor and has been engaged in the electronics business in the Far East and the United States. Since 1979, Mr. Wu has been the chairman of the Board and a principal stockholder of FLX(HK) Ltd., a Hong Kong corporation ("FLX"), which manufactures consumer electronics. Mr. Wu has also been the Chairman and a principal stockholder of The SMC Singing Machine Co., Ltd., a Hong Kong corporation ("LTD"), since 1991, which is a trading company for consumer electronics. Mr. Wu is also a director of Gemco Pacific, Inc., a principal stockholder of the Company. The Company agreed that the Managing Underwriter of the Company's initial public offering, which closed on November 18, 1994, may designate a nominee to the Board of Directors, reasonably acceptable to the Company, or have a representative attend all board meetings, until November 10, 1999. No such nominee has been designated. The officers, certain directors, and certain stockholders of the Company have agreed to vote their share, for the election of such nominee. The Company's directors serve for a term of one year, or until their successors shall have been elected and qualified. The Company has in place an employment agreement with its Chief Executive Officer, Mr. Steele, and its Chief Financial Officer, Mr. Klecha. See Item 10 - "Executive Compensation, Employment Agreements". DIRECTORS' FEES The Company currently reimburses each director for expenses incurred in connection with this attendance at each meeting of the Board of Directors or a committee on which he serves. In addition, non-employee directors are entitled to be paid a fee of $750 for each board or committee meeting attended and are entitled to receive 2,500 common stock options per year. No such fees were paid or options issued for fiscal 1998. 21 BOARD COMMITTEES On July 15, 1998, the Board of Directors appointed Audit and Executive Compensation/Stock Option Committees. The Audit Committee consists of Messrs. Steele, Wu, Haskamp, and the Executive Compensation/Stock Option Committee consists of Messrs. Steele, Wu, and Klecha. The Audit Committee recommends the engagement of independent auditors to the board, initiates and oversees investigations into matters relating to audit functions, reviews the plans and results of audits with the Company's independent auditors, reviews the Company's internal accounting controls, and approves services to be performed by the Company's independent auditors. The Executive Compensation/Stock Option Committee considers and authorizes remuneration arrangements for senior management and grants options under, and administers, the Company's 1994 Amended and Restated Management Stock Option Plan. The entire Board of Directors operates as a nominating committee. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities (collectively the "Reporting Persons") to file reports and changes in ownership of such securities with the Securities and Exchange Commission and the Company. Based solely upon a review of (i) Forms 3 and 4 and amendments thereto furnished to the Company pursuant to Rule 16a-3(e), promulgated under the Exchange Act, during the Company's fiscal year ended March 31, 1998 and (ii) Forms 5 and any amendments thereto and/or written representations furnished to the Company by any Reporting Persons stating that such person was not required to file a Form 5 during the Company's fiscal year ended March 31, 1998, it has been determined that no Reporting Persons were delinquent with respect to such person's reporting obligations set forth in Section 16(a) of the Exchange Act. Item 10. EXECUTIVE COMPENSATION The following table sets forth summary compensation information with respect to compensation paid by the Company to the Chief Executive Officer of the Company ("CEO") and the Company's four most highly compensated executive officers other than the CEO, who were serving as executive officers during the Company's fiscal year ended March 31, 1998. 22 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 Edward Steele 1998 $166,500 $3,180 $7,200 -0- -0- -0- -0- President John Klecha 1998 $ 43,654 $1,442 $2,100 -0- -0- -0- -0- Chief Financial Officer
EMPLOYMENT AGREEMENTS The Company executed an employment agreement with Mr. Steele which commenced as of March 1, 1998, for a period of three years. Pursuant to Mr. Steele's employment agreement, he is entitled to receive base compensation of $180,000 per year, which amount automatically increases during the second and third fiscal years by the greater of 5% or the annual increase in the Consumer Price Index. The agreement also provides for bonuses based on a percentage of a bonus pool tied to the annual pre-tax net income (as defined in the agreement) of the Company. No such bonuses were paid for the 1998 or 1997 fiscal years. Mr. Steele would receive 50% of the bonus pool. In the event of a termination of his employment following a change-in-control, Mr. Steele would be entitled to a lump sum payment of 300% of the amount of his total compensation in the twelve months preceding such termination. During the term of his employment agreement and for a period of one year after his termination for cause or his voluntary termination of his employment agreement, Mr. Steele could not directly or indirectly compete with the Company in the karaoke industry in the United States. The Company executed an employment agreement with Mr. Klecha which commenced as of March 1, 1998, for period of two years with an automatic term extension for one additional year unless terminated by the Company or the employee. Pursuant to Mr. Klecha's employment agreement, he is entitled to receive base compensation of $92,000 per year, which amount automatically increases during the second and third fiscal years by the greater of 5% or the annual increase in the Consumer Price Index. The agreement also provides for bonuses based on a percentage of a bonus pool tied to the annual pre-tax net income (as defined in the agreement) of the Company. No such bonuses were paid for the 1998 or 1997 fiscal years. Mr. Klecha would receive 25% of the bonus pool. In the event of a termination of his employment following a change-in-control in the twelve months preceding such termination, Mr. Klecha would be entitled to a limp sum payment of 100% of the amount of his total compensation in the twelve months preceding such termination. During the term of his employment 23 agreement and for a period of one year after his termination for cause or his voluntary termination of his employment agreement, Mr. Klecha could not directly or indirectly compete with the Company in the karaoke industry in the United States. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of November 30, 1998, certain information concerning beneficial ownership of the Company's Common Stock by (i) each person known to the Company to own 5% or more of the Company's outstanding Common Stock, (ii) all directors of the Company and (iii) all directors and officers of the Company as a group:
Shares Name and Address Beneficially Percent of of Beneficial Owner Owned (1)(8) Class The Harry Fox Agency 410,675 17.7% 711 Third Avenue, 8th Floor New York, NY 10017 Memcorp, Inc. 321,984 13.7% 7145 W. 20th Avenue Hialeah, FL 33014 Magna International Corp. 314,317 13.3% 484 Sunrise Highway Rockville Center, NY 11570 FLX(HK) Ltd. 212,432 9.1% Unit 19 5/F Vanta Ind. Centre 21-33 Tai Lin Pai Road Kwaichung N.T. Kowloon Hong Kong Colony Electronics 129,300(2) 5.6% 500 Hennessy Road Causeway, Hong Kong Gemco Pacific, Inc. 25,667(3) 1.1% 500 Hennessy Road Causeway, Hong Kong Edward Steele (7) 24,500(4) 1.0% 3101 NW. 25th Avenue Pompano Beach, FL 33069 Ford Harvest Ltd. 18,333(9) * 500 Hennessy Road Causeway, Hong Kong
24 contd...
Shares Name and Address Beneficially Percent of of Beneficial Owner Owned (1)(8) Class Paul Wu 7,500(5) * 985 Rexdale Boulevard Rexdale, Ontario CA M9W 1R9 All Directors and Executive Officers as a Group (2 persons) 32,000(6) 1.4%
(1) As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights. (2) Mr. Wu is a director of Colony Electronics. Mr. Wu disclaims any beneficial ownership of the shares of Colony Electronics. (3) Mr. Wu is a director of Gemco Pacific, Inc. ("Gemco"). Mr. Wu disclaims beneficial ownership of the shares owned by Gemco. All 25,667 of such shares have been pledged by Gemco to Magna International, Inc. ("Magna") to secure payment of an $816,574 promissory note of the Company to Magna. (4) Includes immediately exercisable options to purchase 6,000 shares of Common Stock. (5) Includes immediately exercisable options to purchase 7,500 shares of Common Stock. (6) Includes immediately exercisable options to purchase 19,500 shares of Common Stock and immediately exercisable warrants to acquire 2,250 shares of Common Stock. (7) Mr. Steele disclaims beneficial ownership of 6,500 shares owned by his wife. (8) Presumes issuance of 2,068,576 shares of the Company's Common Stock to creditors of the Company pursuant to the Company's Plan of Reorganization, As Amended, and approved by the Bankruptcy Court on March 17, 1998. (9) Mr. Wu is a director of Ford Harvest, Ltd. Mr. Wu disclaims beneficial ownership of the shares owned by Ford Harvest Ltd. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has an agreement with FLX (A china manufacturer of consumer electronics products) to produce electronic recording equipment based on the Company's specifications. Paul Wu, a director of the Company, is Chairman of 25 the Board and a principal stockholder of FLX. During the fiscal years ended March 31, 1997, and 1998, the Company purchased approximately $1.9 million and $1.2 million respectively, in equipment from FLX. The Company believes that all of the foregoing transactions with FLX and LTD have been on terms no less favorable to the Company that could have been obtained from unaffiliated third parties in arms-length transactions under similar circumstances. The Company entered into an agreement with EPK Financial Corporation ("EPK") whereby EPK will open letters of credit with the Company's factories to import inventory for distribution to the Company's customers. This allows the Company to purchase domestic hardware inventory for distribution to customers in less than container load quantities and provides the flexibility to customers of not opening an L/C in favor of the Company. The selling price to these customers is higher to cover the Company's costs of financing costs to EPK, ocean freight, duty, inland freight, and handling. The Company pays EPK a flat fee per transaction, which is negotiated for each shipment. There has been no maximum of total shipments established under this agreement. Berkshire Financial, the Company's factor, has entered into this agreement as a third party agreeing to purchase all accounts receivable invoiced under these transactions. The transactions financed by EPK are supported by personal guarantees of Edward Steele, the Company's Chief Financial Officer, and John Klecha, the Company's Chief Financial Officer. The agreement is in effect until July 1, 1999, unless terminated by either party upon 30 days' written notice. Edward Steele, the Company's Chief Executive Officer, has a promissory note outstanding to the Company of $25,489 as of March 31, 1998. The original note for $30,650 granted on March 31, 1995 has been extended until March 31, 1999 with a rate of 9% per annum on the unpaid balance. 26 ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) Exhibits 2(a) Debtor's Amended Disclosure Statement, dated December 17, 1997 2(b) Debtor's Amended Plan of Reorganization, dated December 17, 19981 2(c) Agreement regarding treatment of The Harry Fox Agency in Debtor's Plan of Reorganization, as Amended, dated December 24, 1997 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 3(b) By-Laws of the Company 3(c) Amendment to Company's Certificate of Incorporation filed with the Secretary of the State of Delaware, dated April 30, 1998 4(a) Form of Warrant issued in connection with July, 1994, private offering 4(b) Warrant Agreement and related Warrant Certificate to be issued in connection with the public offering of the Company on November 18, 1994 4(c) Underwriter's Warrant issued to the Underwriters on November 18, 1994 *10(e)1994 Amended and Restated Management Stock Option Plan 10(q) Form of Subscription Agreement evidencing registration rights 16(a) Letter on Change in certifying accountant (B) Reports on Form 8-K The Company filed a report on Form 8-K, dated March 25, 1998. Pursuant to the Company's Plan of Reorganization, as Amended, on March 17, 1998, the Company announced that on March 31, 1998 (the "Record Date"), the Company will effect a one-for-ten (1-for-10) reverse stock split of the Company's Common Stock, which will be effected on April 1, 1998. 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. 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. Incorporated by reference to the Post-Effective Amendment No. 1 to the Registration Statement as filed on December 13, 1994. Incorporated by reference to the Amendment No. 3 to the Registration Statement as filed on October 21, 1994. 27 Samuel F. May Jr. and Company Certified Public Accounts Member: AICPA FICPA Barnett Bank Building 23123 State Road 7, Suite 210 Boca Raton, Florida 33428 Office: (561) 487-0670 Fax: (561) 852-1646 Report of Independent Certified Public Accountant Board of Directors and Shareholders The Singing Machine Company, Inc. and Subsidiary Pompano Beach, Florida I have audited the accompanying consolidated balance sheet of The Singing Machine Company, Inc. and Subsidiary as of March 31, 1998, and the related consolidated statements of operation, shareholders' equity (deficit), and cash flows for the year ended March 31, 1998. These consolidated financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these consolidated financial statements based on my audit The financial statements of The Singing Machine Company, Inc. as of March 31, 1997, were audited by other auditors whose report, dated December 3, 1997, expressed a qualified opinion on those statements. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that our audit provides a reasonable basis for my opinion. In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Singing Machine Company, Inc. and Subsidiary at March 31, 1998, and the results of their operations and their cash flows for the year ended March 31, 1998, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that The Singing Machine Company, Inc. and Subsidiary will continue as a going concern. /s/ Samuel F. May Jr. & Company Samuel F. May Jr. & Company Certified Public Accountants Boca Raton, Florida October 12, 1998 F-1 MILLWARD & CO. CPA Report of Independent Certified Public Accountants Board of Directors and Shareholders The Singing Machine Company, Inc. (Debtor-in-Possession) Pompano Beach, Florida We have audited the accompanying consolidated statements of operations, shareholders' equity (deficiency), and cash flow of The Singing Machine Company, Inc. as Subsidiary (Debtor-in-Possession) for the year ended March 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted my audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of consolidated operations and consolidated cash flows for the year ended March 31, 1997 in conformity with generally accepted accounting principles. The accompanying consolidated referred to above for the year ended March 31, 1997, have been prepared assuming that The Singing Machine Company, Inc. will continue as a going concern. As indicated in the financial statements, the Company has incurred recurring operating losses and has an accumulated deficit of $9,546,672, at March 31, 1997, and on April 11, 1997, the Company filed for relief pursuant to Chapter 11 of the United States Bankruptcy Act. In addition, as of December 3, 1997, the Company did not have a line of credit in place to finance its seasonal needs for inventory purchases. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements for the year ended March 31, 1997, do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of The Singing Machine Company, Inc. and Subsidiary to continue as a going concern. /s/ Millward & Co. CPAs Millward & Co. CPAs Fort Lauderdale, Florida December 3, 1997 F-2 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET March 31, 1998 ASSETS CURRENT ASSETS: Cash $ 7,770 Trade accounts receivable, net of allowance for doubtful accounts of $80,000 532,765 Due from officer 25,489 Inventories, net 410,293 Prepaid expenses and other current assets 44,754 Total current assets 1,021,071 EQUIPMENT, net of accumulated depreciation of $163,064 19,435 INTANGIBLE ASSET: Investment in song library, net of accumulated amortization of $398,328 46,590 Total assets $ 1,087,096 LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Trade accounts payable $ 583,990 Trade accounts payable to related parties 229,754 Accrued expenses 519,382 Royalties payable 41,809 Loans payable 100,000 Due to factor 54,982 Total current liabilities 1,529,917 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' DEFICIT: Common stock, $.01 par value; 10,000,000 shares authorized; 2,356,935 shares issued and outstanding 23,569 Additional paid-in capital 9,986,867 Accumulated deficit (10,453,257) Total shareholders' deficit (442,821) Total liabilities and shareholders' deficit $ 1,087,096 The accompanying notes are an integral part of these statements. F-3 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31, 1998 1997 REVENUES: Equipment sales, net $ 5,528,599 $ 8,953,462 Music sales, net 693,885 1,610,594 Commission income - related party - 90,583 Other income 7,538 20,240 Total revenues 6,230,022 10,674,879 COST AND EXPENSES: Cost of equipment sales 4,734,633 8,060,973 Cost of music sales 317,644 1,084,386 Other operating expenses 181,005 576,602 Selling, general and administrative expenses 2,283,590 2,370,746 Depreciation and amortization 177,268 400,084 Impairment of long-lived assets - 1,609,973 Total costs and expenses 7,694,140 14,102,764 Loss from operations (1,464,118) (3,427,885) OTHER (EXPENSES) INCOME: Interest expense (28,514) (173,639) Interest income 2,870 5,033 Factoring fees (95,257) (235,312) Gain (loss) on sale or abandonment of property and equipment (25,822) (43,325) Total other expenses (146,723) (447,243) LOSS BEFORE EXTRAORDINARY ITEM (1,610,841) (3,875,128) Extraordinary item: Early extinguishment of debt, net of income taxes 704,256 - Loss before provision for income taxes (906,585) - PROVISION FOR INCOME TAXES - - NET LOSS $ (906,585) $ (3,875,128) NET LOSS PER COMMON SHARE (Basic and Diluted) $ (2.428) $ (13.759) WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Basic and Diluted) 373,369 281,651
The accompanying notes are an integral part of these statements. F-4 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the Years Ended March 31, 1998 and 1997
Total Common Stock Additional Shareholders' $.01 Par Value Paid-In Accumulated Equity Shares Amount Capital Deficit (Deficit) Balance at March 31, 1996 281,159 $ 2,812 $5,852,473 $(5,671,544) $ 183,741 Issuance of common shares for debt settlement 7,200 72 17,927 - 17,999 Net loss for the year ended March 31, 1997 - - - (3,875,128) (3,875,128) Balance at March 31, 1997 288,359 2,884 5,870,400 (9,546,672) (3,673,388) Issuance of common shares for debt settlement 2,068,576 20,685 4,116,467 - 4,137,152 Net loss for the year ended March 31, 1998 - - - (906,585) (906,585) Balance at March 31, 1998 2,356,935 $ 23,569 $ 9,986,867 $(10,453,257) $ (442,821)
The accompanying notes are an integral part of these statements. F-5 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended March 31, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (906,585) $(3,875,128) Adjustments to reconcile net loss to net cash provided by used in) operations: Depreciation and amortization 177,268 400,084 Impairment of long-lived assets - 1,609,973 (Gain) Loss on sale or abandonment of property and equipment 25,822 43,325 Changes in operating assets and liabilities: Trade accounts receivable (223,285) (124,873) Due from factor (3) 33,833 Inventories 759,724 1,136,415 Prepaid expenses and other 8,080 50,037 Income tax receivable - - Bank overdraft (10,599) 10,599 Trade accounts payable (1,956,456) 1,101,286 Trade accounts payable to related parties (195,109) (80,771) Accrued expenses (434,928) (53,127) Royalties payable (678,456) (123,784) Net cash provided by (used in) operating activities (3,434,527) 127,869 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment - (732) Proceeds from sale of property and equipment - - Additions to song library - - Due from officer 5,689 (975) Net cash used in investing activities 5,689 (1,707) CASH FLOWS FROM FINANCING ACTIVITIES: Due to factor (167,461) 222,443 Issuance of common stock for debt settlement 4,137,152 - Issuance of bridge warrants - - Loans payable (543,305) (338,496) Net cash used in financing activities 3,426,386 (116,053) Net increase (decrease) in cash (2,452) 10,109 Cash at beginning of year 10,222 113 Cash at end of year $ 7,770 $ 10,222
The accompanying notes are an integral part of these statements. F-6 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Organization and Basis of Presentation - The Singing Machine Company, Inc. and Subsidiary (the Company) is primarily engaged in the production, distribution, and marketing of karaoke music recordings, as well as the distribution and marketing of electronic karaoke audio equipment and accessories. The Company also acts as the exclusive commissioned sales agent for a related party which sells karaoke audio equipment to both unrelated parties located in the United States and internationally, and to the Company for distribution within the United States. On November 18, 1994, the Company completed an initial public offering of its common stock on Form SB-2. On April 11, 1997, The Singing Machine Company, Inc. filed a voluntary petition for relief pursuant to Chapter 11 of the United States Bankruptcy Act. Accordingly, all debts have bene classified as debts subject to compromise. See Note 12 to the consolidated financial statements related to the Company's Plan of Reorganization, as Amended. 2. Principles of Consolidation - The consolidated financial statements include the accounts of The Singing Machine Company, Inc. and its wholly-owned foreign subsidiary. All significant intercompany transactions have been eliminated. 3. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 4. Foreign Currency Translation - Local currency is generally considered the functional currency outside the United States. Assets and liabilities are translated at the year-end exchange rate. Income and expense items are translated at average rates of exchange prevailing during the year. The related translation adjustment is not material. 5. Inventories - Inventories are substantially all finished goods, which consist primarily of electronic karaoke audio equipment accessories, audio and compact discs. Inventories are stated at the lower of cost (first-in, first-out method) or market. As of March 31, 1997, the carrying value of all audio and video tapes was reviewed by the Company and based upon the outcome of such review, the Company has recorded a reduction in the carrying value of such assets in the amount of $529,414 , which was charged to cost of sales. 6. Cash Equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. F-7 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 7. Investment in Song Library - Investment in song library consists of costs incurred in the production or purchase of master song tapes. The carrying value of investment in song library is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that the investment in song library will not be recoverable, as determined based on the estimated undiscounted cash of the entity acquired over the remaining amortization period, the Company's carrying value of the investment in song library is reduced by the estimated shortfall of discounted cash flows. Amortization expense charged to operations for the fiscal years ended March 31, 1998 and 1997 amounted to $44,492 and $126,507, respectively. 8. Property and Equipment - Property and equipment is recorded at cost less accumulated depreciation and amortization. Depreciation is provided using an accelerated method over the estimated useful lives of the related assets. During July, 1997, the Company moved to more cost effective facilities. All leasehold improvements and equipment associated with the prior facility were written down to $-0- value. 9. Costs in Excess of Net Assets Acquired and Trademarks - The carrying value of goodwill and trademarks are reviewed if the facts and circumstances suggest it may be impaired. If this review indicates that the goodwill and trademarks will not be recoverable, as determined based on the estimated undiscounted cash of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill and trademarks is reduced by the estimated shortfall of discounted cash flows. As of March 31, 1997, the carrying value of goodwill and trademarks was reviewed by the Company and based upon the outcome of such review, the Company has recorded a reduction in the carrying value of such assets relating to music sales in the amount of $1,080,828. Accordingly, the write down of goodwill and trademarks has been charged to operations. 10. Income Taxes - Income taxes are accounted for under the asset and liability method of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated amounts to be realized by use of a valuation allowance. F-8 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The principal types of temporary differences between assets and liabilities for financial statement and tax return purposes are net operating loss carryforwards and allowances for doubtful accounts. 11. Revenue Recognition - Revenue from the sale of equipment and music are recognized upon shipment and are reported net of returns and allowances. Commission income is recognized as earned. 12. Loss Per Common Share - Loss per common share is calculated based on the weighted average number of common shares and dilutive common stock equivalents outstanding during the period. For the fiscal 1998 and 1997 periods, the effect of the common stock equivalents would be antidilutive and has not been included in the calculation. 13. Pronouncements - In fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share," which supercedes Accounting Principles Board Opinion No. 15. Pursuant to SFAS No. 128, earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock. For the fiscal years ended March 31, 1998 and 1997, there is no difference between basic and diluted net loss per share or between the basic and diluted net loss per share as previously reported. Potential common shares from stock options, warrants, and convertible preferred stock are excluded in computing basic and diluted net loss per share as their effects would be antidilutive. The adoption of SFAS No. 128 did not have a material impact on the Company's consolidated financial statements. 14. Fair Market Value of Financial Instruments - The carrying amount reported in the consolidated balance sheet for cash and cash equivalents, note payable, accounts payable, and accrued liabilities approximates fair market value due to the immediate or short-term maturity of these financial instruments. The Company's liabilities are subject to compromise as discussed in note 12 to the consolidated financial statements. NOTE 2 - GOING CONCERN The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company incurred losses and there is an accumulated deficit of $10,453,257 at March 31, 1998. Management of the Company believes that it has instituted certain initiatives, including an enhanced sales focus and cost reductions that will result in returning the Company to profitable operations in fiscal 1999, and the Company's backlog of orders placed by customers indicate this strategy is working. F-9 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 3 - SALE OF RECEIVABLES WITH RECOURSE The Company sells certain trade accounts receivable, subject to full recourse provisions, pursuant to a factoring agreement, as amended. At March 31, 1998, the outstanding balance of such receivables for which the Company is contingently liable was approximately $532,765. The Company received proceeds of approximately $1,987,000 and $2,855,000 in the fiscal 1998 period and fiscal 1997, respectively, upon the sale of trade accounts receivable under this agreement, and incurred approximately $95,257 and $235,000 in factor fees, respectively. All of the Company's accounts receivables, inventories, and intangibles are pledged as collateral under this agreement, and the factor holds back 50% of the approved receivable face amount as security. Minimum factor fees were $6,667 per month. NOTE 4 - EQUIPMENT A summary of equipment as of March 31, 1998 is as follows: Estimated Useful Lives (Years) Computer equipment 5 $ 56,212 Office equipment 7 42,915 99,127 Less accumulated depreciation 79,692 Totals $ 19,435 Depreciation and amortization expense on property and equipment for the fiscal 1998 and fiscal 1997 periods is approximately $177,268 and $139,152, respectively. NOTE 5 - LOANS PAYABLE As of March 31, 1998, loan payable consists of the following: Note payable, bearing annual interest at 10%, due upon demand and subject to compromise $ 20,000 Note payable, bearing annual interest at 12% due September 30, 1998, and subject to compromise to an officer and director 80,000 Totals $ 100,000 F-10 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 6 - COMMITMENTS AND CONTINGENCIES On May 1, 1997, the Company entered into a lease for an office and warehouse facility for a term of 25 months. Pursuant to the terms of the lease, the Company must pay maintenance, insurance, and real estate taxes. Total rent expense was approximately $77,724 and $203,000 in the 1998 and fiscal 1997 periods, respectively. Future minimum lease commitments under noncancellable, the operating lease are as follows: Year Ending March 31: 1999 $ 78,703 2000 26,234 2001 - $ 104,937 NOTE 7 - RELATED PARTY TRANSACTIONS At March 31, 1998, the amount due from officer bears interest monthly at 9% per annum and is due on March 31, 1999. The Company's Hong Kong wholly-owned subsidiary, International SMC (HK) Ltd., operates as an intermediary to purchase Karaoke hardware from factories located in China. During the fiscal 1998 and 1997 periods, the Company purchased certain karaoke audio equipment and accessories from Far East companies (related party suppliers) controlled by a director. During fiscal 1998, the Company purchased goods from FLX (HK) Limited, a company related through a common director, in the amount of approximately $1,200,000. During fiscal 1997, the Company purchased approximately $1,900,000. NOTE 8 - SHAREHOLDERS' DEFICIT Effective May 3, 1994, the Company adopted a stock option plan (the Plan), which provides for the granting of both incentive and nonqualified stock options to key personnel, including officers, directors, consultants, and advisors of the Company, based upon the determination of the Board of Directors. The Plan was amended on June 29,1994, and incentive stock options were granted under the Plan to purchase 293,700 shares of the Company's common stock. The incentive stock options expire in 1999 and 2004. On April 1, 1998, the Company effectuated a one for ten (1:10) reverse stock split. The primary purpose of the split is pursuant to the Company's Plan of Reorganization as Amended on March 17, 1998. Trading in the post-split shares commenced at the opening of business on April 1, 1998. No additional shares were issued in connection with the reverse split and those stockholders entitled to receive fractional shares received shares based on rounding to the nearest whole number. During April, 1998, the Company filed an amendment to its Articles of Incorporation increasing the authorized shares of the Company's common stock to ten million (10,000,000) shares. F-11 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 8 - SHAREHOLDERS' DEFICIT (continued) The company's creditors, pursuant to the Company's Plan of Reorganization, as Amended, who elected to receive shares will be issued an aggregate of 2,068,576 post-split shares of common stock. The Company's legal counsel has written to each creditor requesting that the necessary information be completed and returned in order to issue the common stock. The financial statements reflect the issuance of 2,068,576 post-split shares of common stock to the Company's creditors. These financial statements reflect the one for ten (1:10) reverse stock split in computing the weighted average common and common equivalent shares outstanding and the net loss per common share amounts and accounts for the subsequent increase of authorized common shares pursuant to the Company's amendment to its Articles of Incorporation during April, 1998. At March 31, 1998, 215,000 of these options are currently exercisable, and the remaining 78,700, held by three individuals, become exercisable in maximum increments of 20,000 each year through June 29,1999. Additional incentive or nonqualified stock options may be granted to purchase up to 191,300 shares of the Company's common stock. At March 31, 1998, 485,000 shares of common stock have been reserved for issuance under the Plan. On November 18, 1994, the Company closed the initial public offering of 1,380,000 shares of its common stock and 1,380,000 warrants (the Public Warrants) for an aggregate purchase price of approximately $7,080,000. The Public Warrants may be exercised at anytime beginning November 10, 1995, and continuing thereafter until November 10, 1999. Also, included in the offering were 144,000 warrants issued to the Company's underwriters (the Representative's Warrants). The Representative's Warrants entitle the registered holders to purchase one share of the Company's common stock and a warrant to purchase an additional share of common stock. The warrants became exercisable November 10, 1995, and will continue thereafter until November 10, 1999. During April, 1995, 272,250 Bridge Warrants were exercised resulting in net proceeds to the Company of $320,578. During March, 1997, the Company issued 7,200 shares post-split of common stock to settle outstanding debt of approximately $18,000. NOTE 9 - INCOME TAXES On September 3, 1991, the Company underwent a change of ownership (as defined by Internal Revenue Code Section 382). This change limits the Company's ability to utilize its approximately $4,057,000 of net operating loss carryforwards (NOLs) as of March 31, 1997, to $14,000 per year (these NOLs expire from 2003 to 2007). At March 31, 1998, the Company has net operating loss carryforwards of approximately $10,635,490 (which are not subject to the above limitations) that expire through 2012. A valuation allowance of approximately $4,136,300 has been recognized to offset primarily all of the deferred tax assets related to these carryforwards. F-12 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 9 - INCOME TAXES (continued) The differences between the statutory United States federal income tax rate and the effective tax rate are as follows:
Year Ended Year Ended March 31, 1998 March 31, 1997 Statutory rate (34.0)% (34.0)% State income tax effect, net of federal benefit (4.6)% (4.6)% Changes in valuation allowance 38.6% 38.6% Effective rate - -
At March 31, 1998, the components of the cumulative effect of temporary differences in the deferred income tax liability and income tax asset balances are as follows: Total Assets: Net operating loss carryforwards $ 4,105,300 Reserves for bad debts, sales returns and warranties 31,000 Sub-totals 4,136,300 Valuation allowance (4,136,300) Net deferred tax assets $ - The net change in the valuation allowance during the fiscal 1998 period was an increase of $1,436,300. NOTE 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS The Company derives primarily all of its equipment and music sales revenues from distributors and retailers of such products in the United States. Financial instruments, which potentially subject the company to concentrations of credit risk, consist principally of cash and accounts receivable (including receivables sold to factor with recourse). The credit risk associated with cash is considered low due to the credit quality of the depository institution. The Company's allowance for doubtful accounts is based upon management's estimates and historical experience. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. F-13 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS (continued) During the fiscal 1998 and 1997 periods, 91% and 79%, respectively, of the Company's total revenues were derived from sales to five customers. Sales derived from customers who individually purchased greater than 10% of total revenues were as follows:
Fiscal Fiscal 1998 1997 Target 36% 47% JC Penney 19% 13% Best Buy 22% - Fingerhut 11% -
NOTE 11 - FOURTH QUARTER ADJUSTMENTS (UNAUDITED) The following is a summary of certain year-end adjustment that are considered material in the aggregate to the results of the fourth quarter.
Fiscal Fiscal 1998 1997 Inventory write-down $ - $ 529,414 Impairment of long-lived assets - 1,900,568 Adjustment of royalties payable - (290,595)
NOTE 12 - DESCRIPTION OF PETITION On April 11, 1997, The Singing Machine Company, Inc. filed a voluntary petition of relief pursuant to Chapter 11 of the United States Bankruptcy Act. Under Chapter 11, certain claims against the Debtor in existence prior to the filing of the petitions for relief under the federal bankruptcy laws are stayed while the Debtor continues business operations as Debtor-in-possession. These claims are reflected in the March 31, 1998, balance sheet as "liabilities subject to compromise." Additional claims (liabilities subject to compromise) may arise subsequent to the filing date resulting from rejection of executory contracts, including leases, and from the determination by the court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtor's assets ("secured claims") also are stayed, although the holders of such claims have the right to move the court for relief from the stay. Secured claims are secured primarily by liens on the Debtor's property, plant, and equipment. F-14 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 12 - DESCRIPTION OF PETITION (continued) On March 17, 1998, the United States Bankruptcy Court approved the Company's Plan of Reorganization, as Amended, and the Company emerged from Chapter 11 Bankruptcy. F-15 SIGNATURES In accordance with the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SINGING MACHINE COMPANY, INC. Dated: December 7, 1998 By:/s/ Edward Steele Edward Steele, Chief Executive Officer, President and Director In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Capacity Date /s/ Edward Steele Chief Executive Officer December 7, 1998 Edward Steele President and Director /s/ John Klecha Chief Financial Officer, December 7, 1998 John Klecha Secretary, Treasurer and Director /s/ Walter Haskamp Director December 7, 1998 Walter Haskamp /s/ Paul Wu Director December 7, 1998 Paul Wu SEC FILE NO. 0-24968 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS TO FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998 OF THE SINGING MACHINE COMPANY, INC. EXHIBIT 2(d) Order Amending Amended Plan of Reorganization and Order Confirming Debtor's Amended Plan UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF FLORIDA IN RE: CASE NO. 97-22199-BKC-RBR THE SINGING MACHINE COMPANY, INC. CHAPTER 11 Tax ID#95-3795478 Debtor. __________________________________/ ORDER AMENDING AMENDED PLAN OF REORGANIZATION AND ORDER CONFIRMING DEBTOR'S AMENDED PLAN This cause came before the Court upon the Debtor's Ex-Parte Motion to Amend the Plan of Reorganization and Confirmation Order wherein the Debtor requested that the Amended Plan of Reorganization and Confirmation Order entered by this Court on February 26, 1998 be amended to provide that the record date and payable date for purposes of effectuating the reverse stock split of the Debtor's securities and the issuance of shares to those creditors that are exchanging debt for equity, be extended for fourteen (14) days from and after approval of the amendment to provide the Debtor with the opportunity to comply with the National Association of Securities Dealers, Inc. ("NASD") regulations. After review of the Motion and finding that good cause to Amend the Confirmation Order, it is ORDERED AND ADJUDGED as follows: 1. The Debtor's Amended Plan of Reorganization and the Order Confirming Debtor's Amended Plan of Reorganization entered by the Court on February 26, 1998 are amended to add and include the following paragraph: ORDERED THAT the record date and payable date for purposes of effectuating the reverse stock split of the Debtor's securities and the issuance of shares to the creditors whose debt is being converted to stock is extended fourteen (14) days from the date of this Order to provide the Debtor with the opportunity to comply with the National Association of Securities Dealers, Inc. ("NASD") regulations. DONE AND ORDERED in the Southern District of Florida this 17th day of March, 1998. /s/ Raymond B. Ray RAYMOND B. RAY, Judge UNITED STATES BANKRUPTCY JUDGE COPIES FURNISHED TO: Robert C. Furr, Esq. Furr and Cohen, P.A. 1499 W. Palmetto Pk.Rd.#412 Boca Raton, Florida 33486 Office of Asst. U.S. Trustee 51 S.W. 1 Avenue Room 1204 Miami, Florida 33130 The Singing Machine Company, Inc. 3101 Northwest 25th Avenue Pompano Beach, FL 33069 Susan Sherrill, Esq. Securities & Exchange Commission Branch of Reorganization Suite 1000 3475 Lenox Road, NE Atlanta, GA 30326-1323 David Carter, Esq. Special Counsel to DIP 2300 Glades Road Boca Raton, FL 33431 EXHIBIT 3(c) Amendment to Company's Certificate of Incorporation filed with the Secretary of the State of Delaware, dated April 30, 1998 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF THE SINGING MACHINE COMPANY, INC. THE SINGING MACHINE COMPANY, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does certify: FIRST: that pursuant to the Company's Plan of Reorganization, as amended on March 17, 1998, and pursuant to the unanimous written consent of the Board of Directors of said corporation, the Board adopted a resolution dated March 23, 1998, amending Article Three to the Articles of Incorporation of the Company to fix the aggregate number of shares of Capital Stock that the Company shall have authority to issue at One Million One Hundred Thousand (1,100,000) shares. SECOND: that in lieu of a meeting and vote of stockholders, and in accordance with the provisions of Section 303 of the General Corporation Law of the State of Delaware, the Board of Directors of said corporation, by the unanimous written consent of its members, as necessary to effectuate the Company's Plan of Reorganization, as Amended on March 17, 1998, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of said Corporation: RESOLVED, that the Certificate of Incorporation of The Singing Machine Company, Inc. be amended by deleting the first paragraph of Article Three to the Articles of Incorporation of the Company and to insert the following in its place and stead: "The aggregate number of shares of all classes of capital stock that this Company shall have authority to issue is Eleven Million (11,000,000) shares, consisting of Nine Million (9,900,000) shares of Common Stock, par value $.01 per share (the "Common Stock"); and (ii) One Hundred Thousand (100,000) shares of Class A Common Stock, par value $.01 per share (the "Class A Stock"); and One Million (1,000,000) shares of Preferred Stock, par value $1.00 per (the "Preferred Stock"). THIRD: that the aforesaid amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, The Singing Machine Company, Inc. has caused this Certificate to be signed by John Klecha, its Secretary, this 30th day of April, 1998. THE SINGING MACHINE COMPANY, INC. By: /s/ John Klecha John Klecha, Secretary singing\amendment2.del EXHIBIT 16(a) Letter on Change in certifying Accountants This is to confirm that Millward & Co. had no disagreements with the Singing Machine Company, Inc., regarding accounting issues. /s/ Millward & Co. Millward & Co. Fort Lauderdale, Florida November 16, 1998 EX-27 2
5 This schedule contains summary financial information extracted from Balance Sheet, Statement of Operations, Statements of Cash Flows and Notes thereto incorporated in Part I, Item 1. of this Form 10-KSB and is qualified in its entirety by reference to such financial statements. 12-MOS MAR-31-1998 MAR-31-1998 7,770 0 532,765 80,000 410,293 1,021,071 19,435 163,064 1,087,096 1,529,917 0 0 0 23,569 (445,821) 1,087,096 6,222,484 6,230,022 7,694,140 7,136,585 118,209 0 28,514 (906,585) 0 (906,585) 0 (704,256) 0 (906,585) (2.43) (2.43)
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