-----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, SmIoKWS7oXAcVvyv0HCoqaCP+vBqg7eH3vfrsaswI8OkDKL/lw8+D+n06PuVe1/O Pf7TwpzTu9yhWgL0IwEk1w== 0000943440-99-000098.txt : 19990810 0000943440-99-000098.hdr.sgml : 19990810 ACCESSION NUMBER: 0000943440-99-000098 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990809 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: 99681228 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, 1999 COMMISSION FILE NO.: 0-24968 THE SINGING MACHINE COMPANY, INC. (Name of Small Business Issuer in its Charter) Delaware 95-3795478 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 6601 Lyons Road, Building A-7, Coconut Creek, FL 33073 (Address of principal executive offices, including zip code) (954) 596-1000 (Issuer's telephone number) 3101 N.W. 25th Avenue, Pompano Beach, FL 33069 (Former Name, Former Address and Formal Fiscal Year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, par value $.01 per share OTC Bulletin Board Common Stock Purchase Warrants OTC Bulletin Board Securities registered pursuant to 12(g) of the Act: None Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Issuer was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. (X) State issuer's revenues for its most recent fiscal year: $9,547,816 The aggregate market value of the Registrant's voting stock held by non- affiliates, based upon the closing sales price for the common stock of $1.78 per share as reported on the OTC Bulletin Board on July 30, 1999, was approximately $4,447,243. The shares of Common Stock held by each officer and director and by each person known to the Company to own 5% or more of the outstanding Common Stock have been excluded and such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS: Indicate whether the Issuer has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 after the distribution of securities under a plan confirmed by a court. Yes x No APPLICABLE ONLY TO CORPORATE REGISTRANTS: State the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. 2,498,451 shares of Common Stock were outstanding as of March 31, 1999. THE SINGING MACHINE COMPANY, INC. TABLE OF CONTENTS Page PART I Item 1. Business.........................................3 Item 2. Properties.......................................10 Item 3. Legal Proceedings................................11 Item 4. Submission of Matters to a Vote of Security Holders.......................11 PART II Item 5. Market for Company's Common Equity And Related Stockholder Matters................12 Item 6. Management's Discussion and Analysis or Plan of Operations.................14 Item 7. Financial Statements and Supplementary Date......18 Item 8. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.......................18 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act..............18 Item 10. Executive Compensation...........................20 Item 11. Security Ownership of Certain Beneficial Owners and Management...............22 Item 12. Certain Relationships and Related Transactions...23 Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............26 SIGNATURES 2 PART I - FORWARD LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. The forward-looking statements contained in this Form 10-KSB are subject to certain assumptions, risks and uncertainties. Actual results could differ materially from current expectations. Among the factors that could affect the Company's actual results and could cause results to differ from those contained in the forward- looking statements contained herein is the Company's ability to implement its business strategy successfully, which will depend on business, financial, and other factors beyond the Company's control, including, among others, prevailing changes in consumer preferences, access to sufficient quantities of raw materials, availability of trained laborers and changes in industry regulation. There can be no assurance that the Company will continue to be successful in implementing its business strategy. Other factors could also cause actual results to vary materially from the future results covered in such forward-looking statements. Words used in this Form 10-KSB, such as "expects", "believes", "estimates", and "anticipates" and variations of such words and similar expressions are intended to identify such forward-looking statements. ITEM 1. BUSINESS INTRODUCTION The Singing Machine Company, Inc. (the "Company") is engaged in the distribution and marketing of electronic karaoke audio equipment which plays backing tracks (music without lyrics) of popular songs and records the vocal accompaniment of professional and amateur singers to those backing tracks. The Company contracts for the manufacture of all of its electronic equipment products with manufacturers located in the Far East. The Company also produces and markets karaoke audio software, including CD plus, graphics, and audio cassette tapes containing music and lyrics of popular songs for use with karaoke recording equipment. One track of those tapes offers complete music and vocals for practice and the other track is instrumental only for performance by the participant. Virtually all audio cassette software sold by the Company is accompanied by printed lyrics, and the Company's karaoke CD's with graphics contain lyrics which appear on the video screen. The Company contracts for the reproduction of its audio cassette software, which is produced by the Company or by an independent producer. The Company was incorporated in California in 1982. The Company originally sold its products exclusively to professional and semi- professional singers. In 1988, it began marketing karoake equipment for home use. The Company believes it was the first to offer karaoke electronic recording equipment and audio software for home use in the United States. In May 1994, the Company was merged into a wholly-owned subsidiary 3 of the Company incorporated in Delaware with the same name. As a result of that merger, the Delaware corporation became the successor to the business and operations of the California corporation and retained the name The Singing Machine Company, Inc. BANKRUPTCY REORGANIZATION On April 11, 1997, the Company filed a voluntary bankruptcy petition in the United States Bankruptcy Court for the Southern District of Florida seeking relief pursuant to 11 U.S.C. Chapter 11. The automatic stay provisions of the Bankruptcy Code prohibit creditors from taking action against the Company without first obtaining court approval. Further, the Company is permitted to operate under Company management while the Company formulates a plan of reorganization. The Company's Amended Plan of Reorganization (the "Plan") was confirmed by the Bankruptcy Court on March 17, 1998. The material terms of the Plan include the payment of certain court approved and allowed claims as follows: (i) administrative costs in the amount of $116,000; (ii) the secured claim of Bankers Capital in accordance with the terms of the Bankers Capital agreement in the amount of $106,000; (iii) ten percent (10%) of the amount of the allowed claims of unsecured creditors whose claims are $300 or less; (iv) creditors whose allowed unsecured claims exceeded $300 were given the option of receiving a cash payment of ten percent (10%) of the amount of the allowed claim or exchanging debt for equity in the reorganized debtor of one (1) share of common stock for each two dollars ($2.00) of the allowed claim; (v) existing pre-petition shareholders, warrantholders, and optionholders had their interests reduced by ninety percent (90%). As a result of bankruptcy reorganization, the Company was able to effectively reduce the size of its corporate offices, warehousing operations, personnel, and inventory resulting in a savings of $12,000 per month in lease expense and a reduction in payroll of $6,000 per month. During the Chapter 11, the Company was able to retain its core customer base of major retail accounts such as Target, J.C. Penney, Fingerhut, and FAO Schwarz. Also, the Company began a new customer relationship with Best Buy to whom the Company has sold in excess of $1,000,000 during 1998. The Company was also able to settle certain pending legal matters through the Plan which, when viewed with the fact that over ninety percent (90%) of the unsecured creditors converted debt to equity in the reorganized company, resulted in a significant reduction of liabilities on the Company's post-reorganization balance sheet. As of June 10, 1998, the Company had fully implemented the Plan and distributed securities pursuant to the Plan in the reorganized debtor. PRODUCT LINES The Company currently has a product line of 11 different models of recording and playback units incorporating such features as a CD graphics player, graphic equalizer and high-output stereo amplifier and markets its products under its registered trademark, The Singing Machine[R] . The Company also licenses its trademark, on a 4 non-exclusive basis, to others for sales around the world. The Company believes that it is the only major company in the karaoke industry in the United States which sells both hardware and software. The Company currently offers 11 different models of electronic recording and playback equipment with retail prices ranging from $30 for basic units to $400 for semi-professional units with CD plus graphics player sound enhancement, graphic equalizers, echo tape record/playback features, and multiple inputs and outputs for connection to compact disc players and video cassette records. The Company currently offers its audio software in two formats - multiplex cassettes and CD plus graphics with retail prices ranging from $6.95 to $19.95. The Company purchases recordings from an independent producer and currently has a song library of over 2,700 songs. The Company's backing track product line covers the entire range of musical tastes including popular hits, golden oldies, country, standards, rock and roll, and rap. The Company even has backing tracks for opera and certain foreign language recordings. During the fiscal year ended March 31, 1999, the Company introduced three new models of recording equipment. The Company is producing 40 new CDG titles and 160 songs. THE MARKET The karoake industry exceeds sales of $10 billion in the Far East, based upon Japanese industry estimates. The current North American market for karaoke products is estimated at less than $400 million. Therefore, the Company believes that there is tremendous growth potential not only in the North American market, but also in South America and Europe as well. Although there are other electronic component competitors for the Company's hardware products, and other audio software competitors, the Company believes it is the only major company specializing in karaoke category that offers complete lines of hardware including CD+graphics machines as well as a software library with over 2,700 titles offered by the Company. SALES, MARKETING AND DISTRIBUTION MARKETING The Company relies on its management's ability to determine the existence and extent of available markets for its products. Company management has considerable marketing and sales background and devotes a significant portion of its time to marketing-related activities. The Company achieves both domestic and direct sales and markets its hardware and software products primarily through its own sales force and approximately 21 independent sales representatives. The Company's representatives are located in various states and are paid a commission based upon sales in their respective territories. The Company's sales representative agreements are generally one (1) year agreements which automatically renew on an annual basis, unless terminated by either party on 90 days notice. The Company works closely with its major 5 customers to determine marketing and advertising plans. The Company also markets its products at various national and international trade shows each year. The Company regularly attends the following trade shows and conventions: CES ("Consumer Electronics Show") each January in Las Vegas; Hong Kong Electronics Show each October in Hong Kong; and the American Toy Fair each February in New York. The Company's electronic recording products and audio software are marketed under The Singing Machine[R] trademark throughout the United States, primarily through department stores, lifestyle merchants, mass merchandisers, direct mail catalogs and showrooms, music and record stores, national chains, specialty stores and warehouse clubs. The Company karaoke machines and karaoke music are currently sold in such stores as Target, J.C. Penney, Fingerhut, Best Buy, and Sears. SALES As a percentage of total revenues, the Company's net sales in the aggregate to its five largest customers during the fiscal years ended March 31, 1998 and 1999, were approximately 89% and 91% respectively. For the fiscal 1999 period, three major retailers accounted for 31%, 21%, and 21% each of total revenues. During fiscal year 2000, the Company has made significant progress in broadening its base of customers. Although the Company has long-established relationships with many of its customers, it does not have long-term contractual arrangements with any of them. A decrease in business from any of its major customers could have a material adverse effect on the Company's results of operations and financial condition. At March 31, 1999 and July 9, 1999, the Company has approximately $1,786,000 and $11,445,000, respectively, net of cancellations, of unfilled customer orders. The amount of unfilled orders at any particular time is affected by a number of factors, including scheduling of manufacturing and shipping of products, which in some instances is dependent on the needs of the customer. Returns of electronic hardware and software products by the Company's customers are generally not permitted except in approved situations involving quality defects, damaged goods, or goods shipped in error. Returned hardware products are sold in closeout markets by the Company. The policy of the Company is to give credit to its distributors for audio software returned in conjunction with the receipt of new replacement purchase orders. Any such returns of software are available for resale by the Company. The Company manages credit policies with respect to its customer base. The Company has not suffered significant credit losses to date, even during a period when many major retailers, including customers of the Company, experienced significant difficulties, including filing for protection under federal bankruptcy laws. In the cases where a customer of the Company has filed for protection under federal bankruptcy laws, it has not had 6 a significant impact on the Company's revenues or other categories of financial performance. DISTRIBUTION The Company distributes its hardware products to retailers and wholesale distributors through two methods: domestic sales (i.e., shipment of products from the Company's inventory), and direct sales, shipments directly from the Company's Hong Kong subsidiary or manufacturers in the Far East, of products sold by the Company's sales force. Domestic sales, which account for substantially all of the Company's audio software sales, are made to customers located throughout the United States from the Company's inventories maintained at its warehouse facility in Florida or directly from the software producers. 1. Domestic Sales: The Company's strategy of selling products from a domestic warehouse enables it to provide timely delivery and serve as a "domestic supplier of imported goods". The Company purchases electronic recording products overseas for its own account and warehouses the products in a leased facility in Florida and a warehouse in California. The Company is responsible for costs of shipping, insurance, customs clearance, duties, storage and distribution related to such warehouse products and therefore, warehouse sales command higher sales prices than direct sales. The Company generally sells from its own inventory in less than container sized lots. 2. Direct Sales - Hong Kong: The formation of the Company's subsidiary, International SMC(HK) Ltd. ("International") is attributable to the advent of foreign equipment sales. Some hardware products sold by the Company are shipped directly to its customers from the Far East through International, a Hong Kong trading company. Sales made through International are completed by either delivering products to the customers' common carriers at the shipping point or by shipping the products to the customers' distribution centers, warehouses or stores. Direct sales are made in larger quantities (generally container sized lots) to customers in Italy, England, Canada, and the United States, who pay International pursuant to their own international, irrevocable, transferable letters of creditor or on open credit with the Company's suppliers in the Far East. MANUFACTURING AND PRODUCTION The electronic recording devices sold by the Company are manufactured and assembled by third parties pursuant to design specifications provided by the Company. The Company's electronic recording devices are assembled by three factories in the People's Republic of China. The finished products are packaged and labeled under the Company's registered trademark, The Singing Machine brand name. The Company's products contain electronic components manufactured by other companies such as Panasonic, Toshiba and Sony. The electronic components are installed in cabinets manufactured by 7 three manufacturers. Certain tools and dies used in the production of certain models of the electronic audio equipment sold by the Company are owned by LTD. The Company presently purchases and imports virtually all of its electronic recording products from three suppliers located in the People's Republic of China. In fiscal 1999 and 1998, suppliers in the People's Republic of China accounted for in excess of 88%, respectively, of the Company's total product purchases, including virtually all of the Company's hardware purchases. The Company's primary suppliers of electronic recording products are located in the Shenzen province of the People's Republic of China. While the Company purchases its products from a small number of large suppliers with whom it maintains close alliances, all of the electronic components and raw materials used by the Company are available from several sources of supply, and the Company does not anticipate that the loss of any single supplier would have a material long-term adverse effect on its business, operations or financial condition. To ensure its high standards of product quality and that shipping schedules are met by suppliers, the Company utilizes Hong Kong based agents as representatives. Those agents include product inspectors who are knowledgeable about the Company's product specifications and work closely with the suppliers to verify that such specifications are met. Additionally, key officers of the Company frequently visit suppliers for quality assurance and to support good working relationships. All of the electronic equipment sold by the Company is warranted against manufacturing defects for a period of ninety (90) days for labor and parts. All audio software sold by the Company is similarly warranted for a period of 30 days. During the fiscal years ended March 31, 1999 and 1998, warranty claims have not been material to the Company's results of operations. SUBSIDIARIES In June 1996, the Company organized a wholly-owned subsidiary in Hong Kong under the name International SMC(HK) Ltd. ("International") to coordinate the Company's production and finance in the Far East. International assists with the coordination of product shipments from China and other foreign factories as well as the negotiation of foreign letters of credit. COMPETITION The Company's business is highly competitive. In addition, the Company competes with all other existing forms of entertainment including, but not limited to, motion pictures, video arcade games, home video games, theme parks, nightclubs, television and prerecorded tapes, CD's, and video cassettes. The Company's financial position depends, among other things, on its ability to keep pace with such changes and developments and to respond to the requirements of its customers. Many of the Company's competitors have significantly greater financial, marketing, and operating 8 resources and broader product lines than does the Company. The Company's major electronic component competitors include Grand Prix, Casio, and New Tech. The Company's major audio software competitors are Pocket Songs and Sound Choice. The Company believes that competition in its markets is based primarily on price, product performance, reputation, delivery times, and customer support. The Company believes that, due to its proprietary know-how, it has the ability to develop and produce hardware and software on a cost-effective basis. TRADEMARKS AND LICENSES The Company's holds federal and international copyrights to substantially all of the audio productions comprising its song library. However, since each of those productions is a re- recording of an original work by others, the Company is subject to both contractual and statutory licensing agreements with the publishers who own or control the copyrights of the underlying musical compositions and is obligated to pay royalties to the holders of such copyrights for the original music and lyrics of all of the songs in its library that have not passed into the public domain. Since most audio software distributed by the Company is accompanied by printed lyrics, the Company is also subject to written print royalty license agreements. The Company is currently a party to more than 13,000 different written copyright license agreements covering more than 30,000 separate copyright holders. The Federal Copyright Act (the "Act") creates a compulsory statutory license for all non-dramatic musical works which have been distributed to the public in the United States. Under the Act, with respect to each work included in an audio software product distributed by the Company under a compulsory license, the Company is required to pay a royalty of the greater of $0.0710 per song or $0.013 per minute of playing time or fraction thereof with respect to each item of audio software produced and distributed by the Company (the "Statutory Rate"). Royalties due under compulsory licenses are payable monthly. The Company currently has compulsory statutory licenses for approximately 200 songs in its song library. The Act allows a deferral of royalty payments for products sold subject to a right of return. The practice in the recorded music industry is to permit retailers to return for exchange merchandise. Accordingly, each audio production sold by the Company is sold subject to a right of return for credit against future purchases or exchange. Royalties are due with respect to such sales on the earlier to occur of nine months after the date of distribution or the date on which the revenue from the sale is recognized in accordance with generally accepted accounting principles. The Company has reached agreement on a 25% reserve with a music publisher representing over 22% of its print licenses, which agreement requires the payment of deferred royalties no later than nine months after the date of distribution. With regard to the other principal copyright royalty holders, the Company has deferred, and intends to continue to defer, approximately 25% of royalty payments for approximately nine months, an amount and 9 period which the Company believes is appropriate for the karaoke industry. The majority of the songs in the Company's song library are subject to written copyright license agreements. The Company's written licensing agreements for audio software ("mechanical licenses") typically provide for royalties at the Statutory Rate although some provide for lower royalty rates. Written licenses typically provide for quarterly royalty payments. The Company also has written license agreements for substantially all of the printed lyrics which are distributed with its audio software products ("print licenses"), which licenses also typically provide for quarterly payments of royalties at the Statutory Rate. GOVERNMENT REGULATION In the spring of 1999, the President of the United States renewed the People's Republic of China's "Most Favored Nation" ("MFN") treatment for entry of goods into the United States for an additional year. In the context of United States tariff legislation, MFN treatment means that products are subject to favorable duty rates upon entry into the United States. IF MFN status for China is restricted or revoked in the future, the Company's cost of goods purchased from Chinese vendors is likely to increase. A resultant change in suppliers would likely have an adverse effect on the Company's operations and, possibly, earnings, although management believes such adversity would be short-term as a result of its ability to find alternative suppliers. Management continues to closely monitor the situation and has determined that the production capabilities in countries outside China which have MFN status and, therefore, have favorable duty rates, would meet the Company's production needs. EMPLOYEES At March 31, 1999, the Company had 11 full-time employees, 4 of whom were engaged in warehousing and technical support, and 7 in marketing and administrative functions. At June 30, 1999, the Company had 12 full-time employees, 4 of whom were engaged in warehousing and technical support, and 8 in marketing and administrative functions. ITEM 2. PROPERTIES At present, the Company does not own any property. On May 1, 1997, the Company entered into a lease for a 10,000 square foot office and warehouse facility located in Pompano Beach, Florida, for a term of 25 months at a cost of $5,161 per month. Pursuant to the terms of the lease, the Company must pay maintenance, insurance, and real estate taxes, which cost aggregates approximately $11,000 per year. On March 31, 1999, the Company entered into a lease for an 8,000 square foot office and warehouse facility located in Coconut Creek, Florida for a term of sixty-one (61) months at a cost of $4,487 per month for the first twelve (12) month period and $4,820 for the 10 second twelve (12) month period. Pursuant to the terms of the lease, the Company must pay maintenance insurance and real estate taxes, which in the aggregate, costs approximately $9,000 per year. As this leased space is being constructed to the Company's specifications, occupancy is expected approximately July 25, 1999. The Company believes that the facilities are well maintained, in substantial compliance with environmental laws and regulations and adequately covered by insurance. The Company also believes that the leased spaces which house its facilities are not unique and could be replaced, if necessary, at the end of the term of the existing lease. ITEM 3. LEGAL PROCEEDINGS The Company filed a voluntary petition ("Petition") for relief under Chapter 11 of the Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court"), case number 97-22199-BKC-RBR, on April 11, 1997 (the "Petition Date"). On March 17, 1998, the U.S. Bankruptcy Court confirmed the Company's Plan of Reorganization, as Amended. On or about November 24, 1998, the Company was named as a defendant for allegedly infringing upon patents for tape decks owned by Tanashin Denki Co., Ltd. ("Tanashin"), a Japanese manufacturing concern. The Company was one of multiple defendants named in the suit filed in the United States District Court for the Eastern District of Virginia. The case has been transferred to the U.S. District Court for the Southern District of Florida, Miami Division. The Company is a co-defendant with Memcorp, from whom the Company purchases the product which is the subject of the alleged infringement. Tanashin alleges damages of approximately $100,000, of which a maximum of $50,000 would be attributable to the Company. However, the Company has viable defenses to the Tanashin claims. Additionally, the Company may have rights of indemnification from Memcorp pursuant to an agreement between the companies. The Company believes that an adverse adjudication would not have a material affect upon the Company's operations. Other than the aforesaid proceedings, the Company is not a party to any material legal proceeding, nor to the knowledge of management, are any legal proceedings threatened against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On March 8, 1999, the shareholders approved the election of directors according to the following vote:
PROPOSAL #1 FOR AGAINST ABSTAIN Edward Steele 1,523,849 744 John Klecha 1,523,969 624 Walter Haskamp 1,523,969 624 Paul Wu 1,523,969 624
11 On March 8, 1999, the shareholders of the Company approved an increase in the number of authorized shares of common stock from 10,000,000 to 75,000,000, and approved the issuance of 600,000 stock options pursuant to the Company's Employee Stock Option Plan. PART II ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is currently traded on the OTC Bulletin Board under the symbol "SING". The following table sets forth, for the fiscal periods indicated, the high and low bid prices for the Common Stock on the OTC Bulletin Board thereafter. This information represents prices between dealers and does not reflect retail mark-up or mark-down or commissions, and may not necessarily represent actual market transactions.
Fiscal Period *High Bid *Low Bid 1998: First Quarter........................... $0.60 $0.60 Second Quarter.......................... 0.60 0.60 Third Quarter........................... 0.60 0.60 Fourth Quarter.......................... 2.50 0.60 1999: First Quarter........................... $1.01 $0.17 Second Quarter.......................... 0.73 0.43 Third Quarter .......................... 0.50 0.43 Fourth Quarter.......................... 2.50 0.48 2000: First Quarter (through June 30, 1999).............. $2.81 $1.34
* All data has been adjusted to reflect a one-for-ten reverse split for the Company's Common Stock which was effected on April 1, 1998. The closing bid price for the Company's Common Stock on the OTC Bulletin Board on July 30, 1999 was $1.78 per share. As of July 30, 1999, there were approximately 335 record holders of the Company's outstanding Common Stock. Moreover, additional shares of the Company's Common Stock are held for stockholders at brokerage firms and/or clearing houses, and therefore the Company was unable to determine the precise number of beneficial owners of Common Stock as of July 30, 1999. The Company has never declared or paid cash dividends on its capital stock and the Company's Board of Directors intends to continue its policy for the foreseeable future. Earnings, if any, will be used to finance the development and expansion of the Company's business. Future dividend policy will depend upon the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Company's Board of Directors and will be subject to limitations imposed under Delaware law. 12 PUBLIC WARRANTS Pursuant to the Company's initial public offering, 1,380,000 public warrants (the "Public Warrants") were issued. The Public Warrants entitle the registered holders to purchase one (1) share of the Company's Common Stock at an exercise price of $6.00 per share. On January 26, 1995, pursuant to the twenty percent (20%) stock split, the number of Public Warrants increased from 1,380,000 to 1,656,000 and the exercise price of the Public Warrants was reduced by forty percent (40%) to $3.60 per share. After the Company's reorganization, taking into consideration the post-bankruptcy reverse split, the Public Warrants entitle the registered holders to purchase one tenth (1/10) of one (1) share of the Company's Common Stock at an exercise price of $36.00 per one (1) share of Common Stock. These Public Warrants expire November 10, 1999. PRIVATE PLACEMENT OFFERING On April 1, 1999, the Company issued a Private Placement Memorandum (the "Memorandum") offering a minimum of 40 Units ($1,100,000) and a maximum of 50 Units ($1,375,000). The purchase price for each Unit was $27,500. Each Unit consists of 20,000 shares of the Company's Convertible Preferred Stock ("Preferred Stock") and 4,000 Common Stock Purchase Warrants ("Warrants"). Each share of Preferred Stock is convertible, at the option of the Holder, into one (1) share of the Company's Common Stock at any time after issuance. Each share of Preferred Stock will automatically convert into one (1) share of the Company's Common Stock at 5:00 p.m. eastern time on April 1, 2000, which is one (1) year from the date of the Memorandum. Each Warrant entitles the Holder to purchase, at any time during the period commencing from the date of issuance and ending three (3) years from the date of the Memorandum, one (1) share of the Company's Common Stock at a purchase price of $2.00 per share. Fractional Units could be purchased at the discretion of the Company. The Units were being offered only to "accredited investors" as defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). The Units were offered on a "$1,100,000 minimum - $1,375,000 maximum" basis pursuant to Rule 506 of Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). Purchasers of the Units will receive securities that are not registered with the Securities and Exchange Commission (the "Commission") as a result of this Offering. The Company, however, will use its best efforts to file a registration statement with the Commission to register the Company's Common Stock underlying the securities comprising the Units within ninety (90) days after the completion of the Offering. There is no assurance as to when or if the registration statement will be declared effective by the Commission. There is no public market for the Units, Preferred Stock, or the Warrants, and none will develop as a result of the Offering. 13 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussions and analysis should be read in conjunction with, and is qualified in its entirety by, the Financial Statements and Selected Financial Information included elsewhere herein. Historical results are not necessarily indicative of trends in operating results for any future period. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items express as a percentage of the Company's total revenues, except as noted below:
YEAR ENDED MARCH 31, 1999 1998 1997 Total Revenues........................ 100.0% 100.0% 100.0% Cost of Sales......................... 73.6 81.1 85.7 Expenses: Other operating expenses............ 2.9 2.4 5.4 Selling, general and administrative expenses........... 13.3 29.7 22.2 Impairment of long-lived assets..... 0 0 15.1 Operating income (loss)............... 10.2 (23.5) (32.1) Other expenses, net................... (2.3) (2.4) (4.2) Income (loss) before taxes............ 7.9 (14.6) (36.3) Provision (benefit) for income taxes.. 1.8 - - Income (loss)......................... 9.7 (36.3) (74.1) _______________________________
THE YEAR ENDED MARCH 31, 1999 AND MARCH 31, 1998 Total revenues increased to $9.5 million for the fiscal year ended March 31, 1999, compared to the $6.1 million reported for fiscal 1998. The increase was primarily due to increased funding and lines of credit established during the fiscal year ended March 31, 1999, to purchase additional inventory and the Company's introduction and subsequent sales of two (2) new CD with graphics players and innovative music packages. Gross profit increased $1.5 million or 165% to $2.52 million in fiscal year ended 1999 or 26.4% of net sales from $996 million or 16.4% of net sales in fiscal year end 1998. The overall increase in gross profit was attributable to the significant increase in net sales. The increase in the gross profit margin of 10.0% of net sales was due primarily to the increased sales of new models of CDG 14 players and CDG music with higher margins than some of our other products. Selling, general and administrative expenses decreased $1.10 million or 41.5% to $1.54 million, or 16.2% of net sales in fiscal year end 1999, from $2.64 million or 43.6% of net sales, in fiscal year end 1998. This decrease was primarily due to management's commitment to reduce total overhead and write off various intangible assets during the reorganization under Chapter 11 of fiscal year 1998. As a a result of the emergence from bankruptcy legal and accounting fees were reduced significantly. The Company also had significant reductions in temporary help, rent, advertising, insurance and maintenance expense as a result of the downsized facility. Warehousing operations were moved to a west coast warehouse, reducing the Florida warehousing requirements and reducing ocean freight costs of hardware sold during fiscal year end 1999. Net interest expense increased approximately $104,000 to $225,000 during fiscal year end 1999 compared to $121,000 during fiscal year end 1998. During fiscal year end 1999, the Company was able to acquire various short term loans to purchase inventory which contributed toward higher sales. Depreciation and amortization expense decreased approximately $34,000 or 19% to $144,000 during the fiscal year ended March 31, 1999. The decrease was primarily due to full depreciation of certain tools during fiscal year 1998 and the continued use of those tools during fiscal year 1999 after their value was fully depreciated. The $144,000 includes amortization of the reorganization intangibles established in March 1998 as a result of the application of Fresh Start Reporting. Loss on sales of accounts receivable was 2.3% and 1.5% of total revenues for the fiscal years 1999 and 1998, respectively. Although more accounts receivable were factored during fiscal year 1999 versus fiscal year 1998, the Company was able to change factors during May of 1998 with a lower factoring rate. Net income for fiscal 1999 was approximately $924,000 versus a loss of $1,785,000 for fiscal year 1998. Management has significantly reduced overhead and been able to increase gross margins through new product introductions and innovative marketing and packaging programs. SEASONAL FACTORS As is typical in the karaoke industry, the Company's operations have been seasonal, with the highest net sales occurring in the second and third quarter (reflecting increased orders for equipment and music merchandise during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year. The Company's results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The 15 fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis. INFLATION Inflation has not had a significant impact on the Company's operations. The Company has historically passed any price increases on to its customers since prices charged by the Company are generally not fixed by long-term contracts. LIQUIDITY AND CAPITAL RESOURCES Capital Resources The Company has obtained significant financing for continuing operations and growth. Three specific lines of credit have been opened, a financing agreement in Hong Kong and two financing agreements through its U.S. operations. Effective May 19, 1999, the Company, through its Hong Kong subsidiary, International SMC(HK) Ltd., obtained a credit facility of (US) $200,000 from Belgian Bank, Hong Kong, a subsidiary of Generale Bank, Belgium. This facility is a revolving line based upon drawing down a maximum of 15% of the value of export letters of credit lodged with Belgian Bank. There is no expiration except that Belgian Bank reserves the right to revise the terms and conditions at the Bank's discretion. The cost of this credit facility is the U.S. Dollar prime rate plus 1.25%. Repayment of principal plus interest shall be made upon negotiation of the export letters of credit, but not later than ninety (90) days after the advance. Effective July 2, 1998, the Company, through its Hong Kong subsidiary, International SMC(HK) Ltd., has been provided a (US) $200,000 credit facility for opening letters of credit and/or trust receipt and/or purchasing at the Company's factories by purchasing of documents against acceptance bills, from Delta Asia Financial Group, Hong Kong. This facility is a revolving line until May 31, 1999, at which time it will be reviewed. The cost of this credit facility is prime plus 2 1/2% and bank charges for opening letters of credit. This facility is personally guaranteed by Mr. J.A. Bauer, a former director of the Company. The Company is a party to a factoring agreement, dated April 24, 1998, with Berkshire Financial Group, Inc. ("Berkshire") pursuant to which Berkshire purchases certain of the Company's accounts receivable. Under the agreement, Berkshire purchases certain selected accounts receivable from the Company and advances 70% of the face value of those receivables to the Company. The accounts receivable are purchased by Berkshire without recourse and Berkshire therefore performs an intensive credit review prior to purchase the receivable. The Company is charged a variable percentage fee based upon the length of collection period of the receivable and the remaining 16 collected balance fees are sent to the Company after collection. The purchase of receivables of the Company by Berkshire is absolute and is a true sale of receivables. Berkshire has placed no maximum limit on the amount of the Company's receivables they will purchase. The Company has also entered into an agreement with EPK Financial Corporation ("EPK") whereby EPK will open letters of credit with the Company's factories to import inventory for distribution to the Company's customers. This allows the Company to purchase domestic hardware inventory for distribution to customers in less than container load quantities and provides the flexibility to customers of not opening a letter of credit in favor of the Company. The selling price to these customers is considerably higher because the Company pays financing costs to EPK and incurs costs of ocean freight, duty, and handling charges. Upon shipment of product from these financed transactions, the receivables are factored by Berkshire Financial, thereby buying the shipments and related interest from EPK. The Company pays EPK a flat fee per transaction, which is negotiated for each shipment, and the maximum purchase price per transaction is $300,000. There has been no maximum total shipments established under this agreement. Berkshire has entered into this agreement as a third party agreeing to purchase all receivables invoiced under these transactions. The transactions financed by EPK are supported by personal guarantees of the chief executive officer and chief financial officer of the Company and the agreement is in effect until July 1, 1999, unless terminated by either party upon 30 days' written notice. The Company has no present commitment that is likely to result in its liquidity increasing or decreasing in any material way. In addition, the Company knows of no trend, additional demand, event or uncertainty that will result in, or that are reasonably likely to result in, the Company's liquidity increasing or decreasing in any material way. The Company has no material commitments for capital expenditures. The Company knows of no material trends, favorable or unfavorable, in the Company's capital resources. The Company has no additional outstanding credit lines or credit commitments in place. Year 2000 Management has compiled a list of both internally and externally supplied information systems that utilize imbedded date codes which could experience operational difficulties in the year 2000. The Company uses third party applications or suppliers for all high level systems and reporting. These systems will be tested and if necessary replaced. Management is testing new systems for which it is responsible. The Company is planning complete internal computer system replacement which is totally year 2000 compliant. It is the Company's objective to be in year 2000 compliance by the end of September 1999, however, no assurance can be given that such objective will be met. 17 ITEM 7. FINANCIAL STATEMENTS The financial statements required pursuant to this Item 7 are included in this Form 10-KSB as a separate section commencing on page F-1 and are hereby incorporated by reference into this Item 7. On April 11, 1997 the Company filed for protection under the provisions of the United States Bankruptcy Code. In March 1998, the United States Bankruptcy Court approved the Company's Plan of Reorganization, as Amended, and the Company emerged from Chapter 11 Bankruptcy. At that time, the Company applied Fresh Start Reporting in accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7"). As a result of the application of SOP 90-7, the Company restated its assets and liabilities to their fair values as necessary, and reclassified its accumulated deficit of $6,841,684 against available additional paid-in capital of $6,200,262 resulting in a reorganization intangible asset of $641,422, which is being amortized on a straight line basis over a period of seven years. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AN FINANCIAL DISCLOSURE The Company changed accountants beginning with the audit of the financial statements included herewith, from Samuel F. May, Jr. & Company, Certified Public Accountants to Weinberg & Company, Certified Public Accountants. Samuel F. May, Jr. & Company resigned as the Company's accountant in or about May 1999. The report of Samuel F. May, Jr. & Company on the Company's financial statements for the fiscal year ended March 31, 1998 did not contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles, except for a going concern uncertainty. In connection with the audit of the Company's financial statements for the fiscal year ended March 31, 1998, and in the subsequent interim period, there were no disagreements, disputes, or differences of opinion with Samuel F. May, Jr. & Company on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures, which, if not resolved to the satisfaction of Samuel F. May, Jr. & Company would have caused Samuel F. May, Jr. & Company to make reference to the matter in its report. The accounting firm of Weinberg & Company, Certified Public Accountants, has prepared the Company's financial statements for the Company's fiscal year ended March 31, 1999 (see item 7 above). PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The directors and executive officers of the Company as of the date of this report are as follows: 18 Name Age Position Edward Steele 69 Chief Executive Officer, President and Director John F. Klecha 48 Chief Financial Officer, Secretary, Treasurer and Director Allen Schor 57 Director Edward Steele joined the Company in 1988 and has served as the Chief Executive Officer, President, and as a director of the Company since September 1991. From October 1988 to September 1991, Mr. Steele was responsible for the development of the Company's electronic hardware products in the Far East and was the Company's sales director. Prior to joining the Company, Mr. Steele served in executive capacities at a number of companies in the toy and electronics fields, including as Managing Director in charge of worldwide sales of Concept 2000, a manufacturer of consumer electronics, from 1971 to 1978; as President of Wicely Corp., a distributor of electronic toys and consumer electronics from 1978 to 1983; and as President of Justin Products Corp., an electronic toy manufacturer from 1983 to 1988. John Klecha has been the Chief Financial Officer, Secretary, Treasurer and a Director of the Company since October 10, 1997. Mr. Klecha is in charge of all financial and administrative operational functions of the Company. Prior to joining the Company, Mr. Klecha served in executive and senior management capacities at a number of companies in the toy and other consumer products fields, including as the senior financial and administrative executive of a privately held toy design, manufacturing and distribution company since 1987, Vice President, Director and Chief Financial Officer of Sussex Nautilus from 1984 to 1987, and Vice President of Finance and Administration for Lazzaroni Sarrono, Ltd. from 1982 to 1984. Allen Schor was appointed to the Board of Directors effective June 28, 1999. Since 1969, Mr. Schor has served as the President and Chief Executive Officer of El Mar Plastics, Inc., an international marketing and production company of plastics products for the tape- recording industry headquartered in Carson, California,. Additionally, Mr. Schor is the General Manager of CD Media Masters, Inc. In 1995, CD Media Masters was formed by five (5) international investors to create a CD master making facility. This facility is located at the El Mar Plastics, Inc. facility. Effective May 5, 1999, Paul Wu resigned as a director of the Company. Mr. Wu's resignation was voluntary and not as the result of any disagreement with the Company. On July 12, 1999, Walter Haskamp, a director of the Company, passed away. 19 The Company agreed that the Managing Underwriter of the Company's initial public offering, which closed on November 18, 1994, may designate a nominee to the Board of Directors, reasonably acceptable to the Company, or have a representative attend all board meetings, until November 10, 1999. No such nominee has been designated. The officers, certain directors, and certain stockholders of the Company have agreed to vote their share, for the election of such nominee. The Company's directors serve for a term of one year, or until their successors shall have been elected and qualified. The Company has in place an employment agreement with its Chief Executive Officer, Mr. Steele, and its Chief Financial Officer, Mr. Klecha. See Item 10 - "Executive Compensation, Employment Agreements". DIRECTORS' FEES The Company currently reimburses each director for expenses incurred in connection with this attendance at each meeting of the Board of Directors or a committee on which he serves. In addition, non-employee directors are entitled to be paid a fee of $750 for each board or committee meeting attended and are entitled to receive 2,500 common stock options per year. Mr. Haskamp received such payments for his board meeting attendance during fiscal 1999. BOARD COMMITTEES On July 15, 1998, the Board of Directors appointed Audit and Executive Compensation/Stock Option Committees. The Audit Committee consists of Messrs. Steele, and Haskamp, and the Executive Compensation/Stock Option Committee consists of Messrs. Steele and Klecha. The Audit Committee recommends the engagement of independent auditors to the board, initiates and oversees investigations into matters relating to audit functions, reviews the plans and results of audits with the Company's independent auditors, reviews the Company's internal accounting controls, and approves services to be performed by the Company's independent auditors. The Executive Compensation/Stock Option Committee considers and authorizes remuneration arrangements for senior management and grants options under, and administers, the Company's 1994 Amended and Restated Management Stock Option Plan. The entire Board of Directors operates as a nominating committee. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities (collectively the "Reporting Persons") to file reports and changes in ownership of such securities with the Securities and Exchange Commission and the Company. Based solely upon a review of (i) Forms 3 and 4 and amendments thereto 20 furnished to the Company pursuant to Rule 16a-3(e), promulgated under the Exchange Act, during the Company's fiscal year ended March 31, 1998 and (ii) Forms 5 and any amendments thereto and/or written representations furnished to the Company by any Reporting Persons stating that such person was not required to file a Form 5 during the Company's fiscal year ended March 31, 1998, it has been determined that no Reporting Persons were delinquent with respect to such person's reporting obligations set forth in Section 16(a) of the Exchange Act. Item 10. EXECUTIVE COMPENSATION The following table sets forth summary compensation information with respect to compensation paid by the Company to the Chief Executive Officer of the Company ("CEO") and the Company's four most highly compensated executive officers other than the CEO, who were serving as executive officers during the Company's fiscal year ended March 31, 1999.
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 1999 $180,692 $52,369 $7,228 -0- -0- -0- -0- President John Klecha 1999 $ 88,200 $26,184 $3,614 -0- -0- -0- -0- Chief Financial Officer
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. 21 The Company executed an employment agreement with Mr. Klecha which commenced as of March 1, 1998, for period of two years with an automatic term extension for one additional year unless terminated by the Company or the employee. Pursuant to Mr. Klecha's employment agreement, he is entitled to receive base compensation of $92,000 per year, which amount automatically increases during the second and third fiscal years by the greater of 5% or the annual increase in the Consumer Price Index. The agreement also provides for bonuses based on a percentage of a bonus pool tied to the annual pre-tax net income (as defined in the agreement) of the Company. No such bonuses were paid for the 1998 or 1997 fiscal years. Mr. Klecha would receive 25% of the bonus pool. In the event of a termination of his employment following a change-in- control in the twelve months preceding such termination, Mr. Klecha would be entitled to a lump sum payment of 100% of the amount of his total compensation in the twelve months preceding such termination. During the term of his employment agreement and for a period of one year after his termination for cause or his voluntary termination of his employment agreement, Mr. Klecha could not directly or indirectly compete with the Company in the karaoke industry in the United States. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of June 30, 1999, certain information concerning beneficial ownership of the Company's Common Stock by (i) each person known to the Company to own 5% or more of the Company's outstanding Common Stock, (ii) all directors of the Company and (iii) all directors and officers of the Company as a group:
Shares Name and Address Beneficially Percent of of Beneficial Owner Owned (1)(8) Class The Harry Fox Agency 410,675 16.1% 711 Third Avenue, 8th Floor New York, NY 10017 Alan & Deanna Schor 324,643 12.8% 840 East Walnut Carson, CA 90746 FLX(HK) Ltd. 212,432 8.3% Unit 19 5/F Vanta Ind. Centre 21-33 Tai Lin Pai Road Kwaichung N.T. Kowloon Hong Kong Colony Electronics 129,300(2) 5.1% 500 Hennessy Road Causeway, Hong Kong
22
Contd... Shares Name and Address Beneficially Percent of of Beneficial Owner Owned (1)(8) Class John Klecha 98,374 3.9% 3101 N.W. 25th Avenue Pompano Beach, FL 33069 Edward Steele (7) 46,968(4) 1.8% 3101 NW. 25th Avenue Pompano Beach, FL 33069 Gemco Pacific, Inc. 25,667(3) 1.0% 500 Hennessy Road Causeway, Hong Kong Paul Wu 25,500(5) 1.0% 985 Rexdale Boulevard Rexdale, Ontario CA M9W 1R9 All Directors and Executive Officers as a Group (4 persons) 495,485(6) 19.4% ________________________
(1) As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days. Unless otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights. (2) Mr. Wu is a director of Colony Electronics. Mr. Wu disclaims any beneficial ownership of the shares of Colony Electronics. (3) Mr. Wu is a director of Gemco Pacific, Inc. ("Gemco"). Mr. Wu disclaims beneficial ownership of the shares owned by Gemco. (4) Includes immediately exercisable options to purchase 7,500 shares of Common Stock. (5) Includes immediately exercisable options to purchase 7,500 shares of Common Stock. (6) Includes immediately exercisable options to purchase 15,000 shares of Common Stock and immediately exercisable warrants to acquire 2,250 shares of Common Stock. (7) Mr. Steele disclaims beneficial ownership of 100 shares owned by his wife. (8) Presumes issuance of 2,180,011 shares of the Company's Common Stock to creditors of the Company pursuant to the Company's Plan of Reorganization, As Amended, and approved by the Bankruptcy Court on March 17, 1998. ______________________ ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has an agreement with FLX (a china manufacturer of consumer electronics products) to produce electronic recording 23 equipment based on the Company's specifications. Paul Wu, a former director of the Company, is Chairman of the Board and a principal stockholder of FLX. During the fiscal years ended March 31, 1998, and 1999, the Company purchased approximately $1.7 million and $1.0 million respectively, in equipment from FLX. The Company believes that all of the foregoing transactions with FLX and LTD have been on terms no less favorable to the Company that could have been obtained from unaffiliated third parties in arms-length transactions under similar circumstances. The Company entered into an agreement with EPK Financial Corporation ("EPK") whereby EPK will open letters of credit with the Company's factories to import inventory for distribution to the Company's customers. This allows the Company to purchase domestic hardware inventory for distribution to customers in less than container load quantities and provides the flexibility to customers of not opening an L/C in favor of the Company. The selling price to these customers is higher to cover the Company's costs of financing costs to EPK, ocean freight, duty, inland freight, and handling. The Company pays EPK a flat fee per transaction, which is negotiated for each shipment. There has been no maximum of total shipments established under this agreement. Berkshire Financial, the Company's factor, has entered into this agreement as a third party agreeing to purchase all accounts receivable invoiced under these transactions. The transactions financed by EPK are supported by personal guarantees of Edward Steele, the Company's Chief Financial Officer, and John Klecha, the Company's Chief Financial Officer. The agreement is in effect until July 1, 1999, unless terminated by either party upon 30 days' written notice. Edward Steele, the Company's Chief Executive Officer, has a promissory note outstanding to the Company of $13,880 as of March 31, 1998. The original note for $30,650 granted on March 31, 1999 has been extended until March 31, 2000 with a rate of 9% per annum on the unpaid balance. Under its Amended and Restated 1994 Stock Option Plan, the Company reserved 600,000 additional shares of its common stock for issuance upon exercise of options granted under the Plan. During 1999, shareholders approved the increase of 600,000 shares available for grant. 499,000 of these options were granted at an exercise price of $.43 per share, with fifty percent (50%) of these options vesting during December 1999, and fifty percent (50%) during December, 2000. After the Company's reorganization, taking into consideration the post-bankruptcy reverse split, there remained 27,500 outstanding options bringing the total to 627,500 shares of common stock authorized for issuance upon exercise of options granted under the Plan. As of March 31, 1999, 101,000 shares were available for future grant. Additional shares may become available to the extent that 24 options presently outstanding under the Plan terminate or expire unexercised. As of March 31, 1999, options to purchase 526,500 shares of common stock have been issued. Stock option activity pursuant to the Plan is summarized as follows:
Number Weighted Average of Shares Exercise Price Outstanding, March 31, 1998... 47,870 $4.87 Granted....................... 499,000 .43 Exercised..................... - - Cancelled..................... (20,370) 4.33 Outstanding, March 31, 1999... 526,500 .68
The following table sets forth information concerning options granted to officer and directors of the Company during the year ended March 31, 1999, pursuant to the Company's stock option plans. No stock appreciation rights ("SAR's") were granted.
Percent of Number of Total Options Shares Granted to Underlying Employees in Exercise Price Name of Individual Options Granted Fiscal Year Per Share Expiration Date Edward Steele 350,000 70.1% $ .43 12/9/05 John Klecha 100,000 20.0% $ .43 12/9/05
The following table sets forth information as to options held by the executive officers named in the Summary Compensation Table
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at at Fiscal Fiscal Year End Year End Shares - - Acquired Value Exercisable/ Exercisable/ Name of Individual Upon Exercise Realized Unexercisable Unexercisable Edward Steele N/A N/A 7,500 / 350,000 0 / 483,870 John Klecha N/A N/A 0 / 100,000 0 / 138,250
25 ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) Exhibits 2(a) Debtor's Amended Disclosure Statement, dated December 17, 1997[1] 2(b) Debtor's Amended Plan of Reorganization, dated December 17, 1998[1] 2(c) Agreement regarding treatment of The Harry Fox Agency in Debtor's Plan of Reorganization, as Amended, dated December 24, 1997[1] 2(d) Order Amending Amended Plan of Reorganization and Order Confirming Debtor's Amended Plan[5] 3(a) Certificate of Incorporation of the Company, including amendment filed with the Secretary of the State of Delaware 3(b) By-Laws of the Company[2] 3(c) Amendment to Company's Certificate of Incorporation filed with the Secretary of the State of Delaware, dated April 30, 1998[5] 4(a) Form of Warrant issued in connection with July, 1994, private offering[2] 4(b) Warrant Agreement and related Warrant Certificate to be issued in connection with the public offering of the Company on November 18, 1994 4(c) Underwriter's Warrant issued to the Underwriters on November 18, 1994[3] *10(e) 1994 Amended and Restated Management Stock Option Plan2 10(q) Form of Subscription Agreement evidencing registration rights 16(a) Letter on Change in certifying accountant (B) Reports on Form 8-K The Company filed a report on Form 8-K, dated May 19, 1999, announcing the Initial Closing of a Private Placement of the Company's securities. The Initial Closing of the Private Placement Offering was held Monday, May 17, 1999. The Company obtained the net proceeds from the sale of the minimum of 40 Units of the Company securities for gross proceeds of $1,100,000. The Company will continue to offer the remaining Units of the Private Placement until it is sold or until the end of the Offering period, June 30, 1999. 27 Summary Financial Data Schedule - ---------------------------- [1] Incorporated by reference as filed by the Company with the Securities and Exchange Commission pursuant to the Federal Rules of Bankruptcy Procedure in conjunction with the Company's Chapter 11 Reorganization. [2] Incorprated by reference to the Company's Registration Statement on Form SB-2 (Registration No. 33-81974-A) (the "Registration Statement") as filed on July 27, 1994. [3] Incorporated by reference to the Post-Effective Amendment No. 1 to the Registration Statement as filed on December 13, 1994. [4] Incorporated by Reference to the Amendment No. 3 to the Registration Statement as filed on October 21, 1994. [5] Incorporated by reference in the Company's Annual Report on Form 10KSB as filed on December 8, 1998. 26 SIGNATURES In accordance with the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE SINGING MACHINE COMPANY, INC. Dated: August 5, 1999 By:/s/ Edward Steele Edward Steele, Chief Executive Officer, President and Director In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Capacity Date /s/ Edward Steele Chief Executive Officer August 5, 1999 Edward Steele President and Director /s/ John Klecha Chief Financial Officer, August 5, 1999 John Klecha Secretary, Treasurer and Director 27 SEC FILE NO. 0-24968 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________________________ EXHIBITS TO FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 _______________________________ FOR THE FISCAL YEAR ENDED MARCH 31, 1999 OF THE SINGING MACHINE COMPANY, INC. RESTATED FINANCIALS FOR MARCH 31, 1998 Samuel F. May Jr. and Company Certified Public Accounts Member: AICPA FICPA Barnett Bank Building 23123 State Road 7, Suite 210 Boca Raton, Florida 33428 Office: (561) 487-0670 Fax: (561) 852-1646 Report of Independent Certified Public Accountant Board of Directors and Shareholders The Singing Machine Company, Inc. and Subsidiary Pompano Beach, Florida I have audited the accompanying consolidated balance sheet of The Singing Machine Company, Inc. and Subsidiary as of March 31, 1998, and the related consolidated statements of operation, shareholders' equity and cash flows for the year ended March 31, 1998. These consolidated financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these consolidated financial statements based on my audit The financial statements of The Singing Machine Company, Inc. as of March 31, 1997, were audited by other auditors whose report, dated December 3, 1997, expressed a qualified opinion on those statements. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that our audit provides a reasonable basis for my opinion. In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Singing Machine Company, Inc. and Subsidiary at March 31, 1998, and the results of their operations and their cash flows for the year ended March 31, 1998, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that The Singing Machine Company, Inc. and Subsidiary will continue as a going concern. As discussed in Note 13 to the consolidated financial statements, the Company's March 31, 1998 accounts receivable, retained earnings (accumulated deficit) and additional paid in capital accounts previously reported as $532,765, ($10,453,257) and $9,986,867, respectively, should have been $358,844, -0- and -0-. This discovery was made subsequent to the issuance of the consolidated financial statements. The consolidated financial statements have been restated to reflect these corrections. /s/ Samuel F. May Jr. & Company Samuel F. May Jr. & Company Certified Public Accountants Boca Raton, Florida July 20, 1999, except for Note 13, as to which date is October 12, 1998 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET March 31, 1998 ASSETS (Restated) CURRENT ASSETS: Cash $ 7,770 Trade accounts receivable, net of allowance for doubtful accounts of $80,000 358,844 Due from officer 25,489 Inventories, net 410,293 Prepaid expenses and other current assets 44,754 Total current assets 847,150 EQUIPMENT, net of accumulated depreciation of $163,064 19,435 INTANGIBLE ASSET: Investment in song library, net of accumulated amortization of $398,328 46,590 Reorganization Costs 641,422 Total intangible assets 688,012 Total assets $ 1,544,597 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 271,656 Trade accounts payable to related parties 229,754 Accrued expenses 519,382 Royalties payable 41,809 Loans payable 100,000 Due to factor 54,982 Total current liabilities 1,217,583 COMMITMENTS AND CONTINGENCIES Trade accounts payable of subsidiary 312,334 SHAREHOLDERS' EQUITY: Common stock, $.01 par value; 10,000,000 shares authorized; 2,468,066 shares issued and outstanding 24,680 Additional paid-in capital - Retained earnings (accumulated deficit) - Total shareholders' equity 24,680 Total liabilities and shareholders' equity $ 1,554,597 The accompanying notes are an integral part of these statements. F-2 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31, 1998 1997 (Restated) REVENUES: Equipment sales, net $ 5,354,678 $ 8,953,462 Music sales, net 693,885 1,610,594 Commission income - related party - 90,583 Other income 7,538 20,240 Total revenues 6,056,101 10,674,879 COST AND EXPENSES: Cost of equipment sales 4,734,633 8,060,973 Cost of music sales 317,644 1,084,386 Other operating expenses 181,005 576,602 Selling, general and administrative expenses 2,283,590 2,370,746 Depreciation and amortization 177,268 400,084 Impairment of long-lived assets - 1,609,973 Total costs and expenses 7,694,140 14,102,764 Loss from operations (1,638,039) (3,427,885) OTHER (EXPENSES) INCOME: Interest expense (28,514) (173,639) Interest income 2,870 5,033 Factoring fees (95,257) (235,312) Gain (loss) on sale or abandonment of property and equipment (25,822) (43,325) Total other expenses (146,723) (447,243) LOSS BEFORE EXTRAORDINARY ITEM (1,784,762) (3,875,128) Extraordinary item: Early extinguishment of debt, net of income taxes 4,489,750 - Income before provision for income taxes 2,704,988 - PROVISION FOR INCOME TAXES - - NET INCOME (LOSS) $ 2,704,988 $ (3,875,128) NET INCOME (LOSS) PER COMMON SHARE (Basic and Diluted) $ 7,157 $ (13,759) WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Basic and Diluted) 377,936 281,651
The accompanying notes are an integral part of these statements. F-3 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the Years Ended March 31, 1998 (Restated) and 1997
Retained Total Common Stock Additional Earnings 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 20,685 330,973 - 351,658 Issuance of common shares for settlement with former officer 111,131 1,111 (1,111) - - Reorganization due to fresh start accounting - - (6,200,262) 6,041,684 641,422 Net income for the year ended March 31, 1998 - - - 2,704,988 2,704,988 Balance at March 31, 1998 2,468,066 24,680 $ - $ - $ 24,680
The accompanying notes are an integral part of these statements. F-4 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended March 31, 1998 1997 (Restated) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 2,704,985 $ (3,875,128) Adjustments to reconcile net loss to net cash provided by (used in) operations: Depreciation and amortization 177,268 400,084 Impairment of long-lived assets - 1,609,973 (Gain) Loss on sale or abandonment of property and equipment 25,822 43,325 Changes in operating assets and liabilities: Trade accounts receivable (49,364) (124,873) Due from factor (3) 33,833 Inventories 759,724 1,136,415 Prepaid expenses and other 8,080 50,037 Income tax receivable - - Bank overdraft (10,599) 10,599 Trade accounts payable (1,956,456) 1,101,286 Trade accounts payable to related parties (195,109) (80,771) Accrued expenses (434,928) (53,127) Royalties payable (678,456) (123,784) Net cash provided by operating activities 350,967 127,869 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment - (732) Proceeds from sale of property and equipment - - Additions to song library - - Due from officer 5,689 (975) Net cash used in investing activities 5,689 (1,707) CASH FLOWS FROM FINANCING ACTIVITIES: Due to factor (167,461) 222,443 Issuance of common stock for debt settlement 351,658 - Issuance of bridge warrants - - Loans payable (543,305) (338,496) Net cash used in financing activities (359,108) (116,053) Net increase (decrease) in cash (2,452) 10,109 Cash at beginning of year 10,222 113 Cash at end of year $ 7,770 $ 10,222 SUPPLEMENTAL CASH FLOW INFORMATION Issuance of common stock for debt settlement $ 4,137,152 $ 17,999
The accompanying notes are an integral part of these statements. F-5 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Organization and Basis of Presentation - The Singing Machine Company, Inc. and Subsidiary (the Company) is primarily engaged in the production, distribution, and marketing of karaoke music recordings, as well as the distribution and marketing of electronic karaoke audio equipment and accessories. The Company also acts as the exclusive commissioned sales agent for a related party which sells karaoke audio equipment to both unrelated parties located in the United States and internationally, and to the Company for distribution within the United States. On November 18, 1994, the Company completed an initial public offering of its common stock on Form SB-2. On April 11, 1997, The Singing Machine Company, Inc. filed a voluntary petition for relief pursuant to Chapter 11 of the United States Bankruptcy Act. Accordingly, all debts have bene classified as debts subject to compromise. See Note 12 to the consolidated financial statements related to the Company's Plan of Reorganization, as Amended. 2. Principles of Consolidation - The consolidated financial statements include the accounts of The Singing Machine Company, Inc. and its wholly-owned foreign subsidiary. All significant intercompany transactions have been eliminated. 3. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 4. Foreign Currency Translation - Local currency is generally considered the functional currency outside the United States. Assets and liabilities are translated at the year-end exchange rate. Income and expense items are translated at average rates of exchange prevailing during the year. The related translation adjustment is not material. 5. Inventories - Inventories are substantially all finished goods, which consist primarily of electronic karaoke audio equipment accessories, audio and compact discs. Inventories are stated at the lower of cost (first-in, first-out method) or market. As of March 31, 1997, the carrying value of all audio and video tapes was reviewed by the Company and based upon the outcome of such review, the Company has recorded a reduction in the carrying value of such assets in the amount of $529,414 , which was charged to cost of sales. F-6 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 6. Cash Equivalents - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. 7. Investment in Song Library - Investment in song library consists of costs incurred in the production or purchase of master song tapes. The carrying value of investment in song library is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that the investment in song library will not be recoverable, as determined based on the estimated undiscounted cash of the entity acquired over the remaining amortization period, the Company's carrying value of the investment in song library is reduced by the estimated shortfall of discounted cash flows. Amortization expense charged to operations for the fiscal years ended March 31, 1998 and 1997 amounted to $44,492 and $126,507, respectively. 8. Property and Equipment - Property and equipment is recorded at cost less accumulated depreciation and amortization. Depreciation is provided using an accelerated method over the estimated useful lives of the related assets. During July, 1997, the Company moved to more cost effective facilities. All leasehold improvements and equipment associated with the prior facility were written down to $-0- value. 9. Costs in Excess of Net Assets Acquired and Trademarks - The carrying value of goodwill and trademarks are reviewed if the facts and circumstances suggest it may be impaired. If this review indicates that the goodwill and trademarks will not be recoverable, as determined based on the estimated undiscounted cash of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill and trademarks is reduced by the estimated shortfall of discounted cash flows. As of March 31, 1997, the carrying value of goodwill and trademarks was reviewed by the Company and based upon the outcome of such review, the Company has recorded a reduction in the carrying value of such assets relating to music sales in the amount of $1,080,828. Accordingly, the write down of goodwill and trademarks has been charged to operations. 10. Income Taxes - Income taxes are accounted for under the asset and liability method of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit F-7 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 10. carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated amounts to be realized by use of a valuation allowance. The principal types of temporary differences between assets and liabilities for financial statement and tax return purposes are net operating loss carryforwards and allowances for doubtful accounts. 11. Revenue Recognition - Revenue from the sale of equipment and music are recognized upon shipment and are reported net of returns and allowances. Commission income is recognized as earned. 12. Loss Per Common Share - Loss per common share is calculated based on the weighted average number of common shares and dilutive common stock equivalents outstanding during the period. For the fiscal 1998 and 1997 periods, the effect of the common stock equivalents would be antidilutive and has not been included in the calculation. 13. Pronouncements - In fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share," which supercedes Accounting Principles Board Opinion No. 15. Pursuant to SFAS No. 128, earnings (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock. For the fiscal years ended March 31, 1998 and 1997, there is no difference between basic and diluted net loss per share or between the basic and diluted net loss per share as previously reported. Potential common shares from stock options, warrants, and convertible preferred stock are excluded in computing basic and diluted net loss per share as their effects would be antidilutive. The adoption of SFAS No. 128 did not have a material impact on the Company's consolidated financial statements. 14. Fair Market Value of Financial Instruments - The carrying amount reported in the consolidated balance sheet for cash and cash equivalents, note payable, accounts payable, and accrued liabilities approximates fair market value due to the immediate or short-term maturity of these financial instruments. The Company's liabilities are subject to compromise as discussed in note 12 to the consolidated financial statements. F-8 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 2 - GOING CONCERN The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company incurred losses and there is an accumulated deficit of $10,453,257 at March 31, 1998. Management of the Company believes that it has instituted certain initiatives, including an enhanced sales focus and cost reductions that will result in returning the Company to profitable operations in fiscal 1999, and the Company's backlog of orders placed by customers indicate this strategy is working. NOTE 3 - SALE OF RECEIVABLES WITH RECOURSE The Company sells certain trade accounts receivable, subject to full recourse provisions, pursuant to a factoring agreement, as amended. At March 31, 1998, the outstanding balance of such receivables for which the Company is contingently liable was approximately $532,765. The Company received proceeds of approximately $1,987,000 and $2,855,000 in the fiscal 1998 period and fiscal 1997, respectively, upon the sale of trade accounts receivable under this agreement, and incurred approximately $95,257 and $235,000 in factor fees, respectively. All of the Company's accounts receivables, inventories, and intangibles are pledged as collateral under this agreement, and the factor holds back 50% of the approved receivable face amount as security. Minimum factor fees were $6,667 per month. NOTE 4 - EQUIPMENT A summary of equipment as of March 31, 1998 is as follows: Estimated Useful Lives (Years) Computer equipment 5 $ 56,212 Office equipment 7 42,915 99,127 Less accumulated depreciation 79,692 Totals $ 19,435 Depreciation and amortization expense on property and equipment for the fiscal 1998 and fiscal 1997 periods is approximately $177,268 and $139,152, respectively. F-9 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 5 - LOANS PAYABLE As of March 31, 1998, loan payable consists of the following: Note payable, bearing annual interest at 10%, due upon demand and subject to compromise $ 20,000 Note payable, bearing annual interest at 12% due September 30, 1998, and subject to compromise to an officer and director 80,000 Totals $ 100,000 NOTE 6 - COMMITMENTS AND CONTINGENCIES On May 1, 1997, the Company entered into a lease for an office and warehouse facility for a term of 25 months. Pursuant to the terms of the lease, the Company must pay maintenance, insurance, and real estate taxes. Total rent expense was approximately $77,724 and $203,000 in the 1998 and fiscal 1997 periods, respectively. Future minimum lease commitments under noncancellable, the operating lease are as follows: Year Ending March 31: 1999 $ 78,703 2000 26,234 2001 - $ 104,937 NOTE 7 - RELATED PARTY TRANSACTIONS At March 31, 1998, the amount due from officer bears interest monthly at 9% per annum and is due on March 31, 1999. The Company's Hong Kong wholly-owned subsidiary, International SMC (HK) Ltd., operates as an intermediary to purchase Karaoke hardware from factories located in China. During the fiscal 1998 and 1997 periods, the Company purchased certain karaoke audio equipment and accessories from Far East companies (related party suppliers) controlled by a director. During fiscal 1998, the Company purchased goods from FLX (HK) Limited, a company related through a common director, in the amount of approximately $1,200,000. During fiscal 1997, the Company purchased approximately $1,900,000. F-10 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 8 - SHAREHOLDERS' DEFICIT Effective May 3, 1994, the Company adopted a stock option plan (the Plan), which provides for the granting of both incentive and nonqualified stock options to key personnel, including officers, directors, consultants, and advisors of the Company, based upon the determination of the Board of Directors. The Plan was amended on June 29,1994, and incentive stock options were granted under the Plan to purchase 293,700 shares of the Company's common stock. The incentive stock options expire in 1999 and 2004. On April 1, 1998, the Company effectuated a one for ten (1:10) reverse stock split. The primary purpose of the split is pursuant to the Company's Plan of Reorganization as Amended on March 17, 1998. Trading in the post-split shares commenced at the opening of business on April 1, 1998. No additional shares were issued in connection with the reverse split and those stockholders entitled to receive fractional shares received shares based on rounding to the nearest whole number. During April, 1998, the Company filed an amendment to its Articles of Incorporation increasing the authorized shares of the Company's common stock to ten million (10,000,000) shares. The company's creditors, pursuant to the Company's Plan of Reorganization, as Amended, who elected to receive shares will be issued an aggregate of 2,068,576 post-split shares of common stock. The Company's legal counsel has written to each creditor requesting that the necessary information be completed and returned in order to issue the common stock. The financial statements reflect the issuance of 2,068,576 post-split shares of common stock to the Company's creditors. These financial statements reflect the one for ten (1:10) reverse stock split in computing the weighted average common and common equivalent shares outstanding and the net loss per common share amounts and accounts for the subsequent increase of authorized common shares pursuant to the Company's amendment to its Articles of Incorporation during April, 1998. At March 31, 1998, 215,000 of these options are currently exercisable, and the remaining 78,700, held by three individuals, become exercisable in maximum increments of 20,000 each year through June 29,1999. Additional incentive or nonqualified stock options may be granted to purchase up to 191,300 shares of the Company's common stock. At March 31, 1998, 485,000 shares of common stock have been reserved for issuance under the Plan. On November 18, 1994, the Company closed the initial public offering of 1,380,000 shares of its common stock and 1,380,000 warrants (the Public Warrants) for an aggregate purchase price of approximately $7,080,000. The Public Warrants may be exercised at anytime beginning November 10, 1995, and continuing thereafter until November 10, 1999. F-11 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 8 - SHAREHOLDERS' DEFICIT (Continued) Also, included in the offering were 144,000 warrants issued to the Company's underwriters (the Representative's Warrants). The Representative's Warrants entitle the registered holders to purchase one share of the Company's common stock and a warrant to purchase an additional share of common stock. The warrants became exercisable November 10, 1995, and will continue thereafter until November 10, 1999. During April, 1995, 272,250 Bridge Warrants were exercised resulting in net proceeds to the Company of $320,578. During March, 1997, the Company issued 7,200 shares post-split of common stock to settle outstanding debt of approximately $18,000. NOTE 9 - INCOME TAXES On September 3, 1991, the Company underwent a change of ownership (as defined by Internal Revenue Code Section 382). This change limits the Company's ability to utilize its approximately $4,057,000 of net operating loss carryforwards (NOLs) as of March 31, 1997, to $14,000 per year (these NOLs expire from 2003 to 2007). At March 31, 1998, the Company has net operating loss carryforwards of approximately $10,635,490 (which are not subject to the above limitations) that expire through 2012. A valuation allowance of approximately $4,136,300 has been recognized to offset primarily all of the deferred tax assets related to these carryforwards. The differences between the statutory United States federal income tax rate and the effective tax rate are as follows:
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 - % - %
F-12 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 9 - INCOME TAXES (Continued) At March 31, 1998, the components of the cumulative effect of temporary differences in the deferred income tax liability and income tax asset balances are as follows: Total Assets: Net operating loss carryforwards $ 4,105,300 Reserves for bad debts, sales returns and warranties 31,000 Sub-totals 4,136,300 Valuation allowance (4,136,300) Net deferred tax assets $ - The net change in the valuation allowance during the fiscal 1998 period was an increase of $1,436,300. NOTE 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS The Company derives primarily all of its equipment and music sales revenues from distributors and retailers of such products in the United States. Financial instruments, which potentially subject the company to concentrations of credit risk, consist principally of cash and accounts receivable (including receivables sold to factor with recourse). The credit risk associated with cash is considered low due to the credit quality of the depository institution. The Company's allowance for doubtful accounts is based upon management's estimates and historical experience. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. During the fiscal 1998 and 1997 periods, 91% and 79%, respectively, of the Company's total revenues were derived from sales to five customers. Sales derived from customers who individually purchased greater than 10% of total revenues were as follows: Fiscal 1998 Fiscal 1997 Target 36% 47% JC Penney 19% 13% Best Buy 22% -- Fingerhut 11% -- F-13 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 NOTE 11 - FOURTH QUARTER ADJUSTMENTS (UNAUDITED) The following is a summary of certain year-end adjustment that are considered material in the aggregate to the results of the fourth quarter. Fiscal 1998 Fiscal 1997 Inventory write-down $ - $ 529,414 Impairment of long-lived assets - 1,900,568 Adjustment of royalties payable - (290,595) NOTE 12 - DESCRIPTION OF PETITION On April 11, 1997, The Singing Machine Company, Inc. filed a voluntary petition of relief pursuant to Chapter 11 of the United States Bankruptcy Act. Under Chapter 11, certain claims against the Debtor in existence prior to the filing of the petitions for relief under the federal bankruptcy laws are stayed while the Debtor continues business operations as Debtor-in-possession. These claims are reflected in the March 31, 1998, balance sheet as "liabilities subject to compromise." Additional claims (liabilities subject to compromise) may arise subsequent to the filing date resulting from rejection of executory contracts, including leases, and from the determination by the court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Claims secured against the Debtor's assets ("secured claims") also are stayed, although the holders of such claims have the right to move the court for relief from the stay. Secured claims are secured primarily by liens on the Debtor's property, plant, and equipment. On March 17, 1998, the United States Bankruptcy Court approved the Company's Plan of Reorganization, as Amended, and the Company emerged from Chapter 11 Bankruptcy. NOTE 13 - FRESH START ACCOUNTING The Company's consolidated financial statements have been restated on July 20, 1999 to reflect the changes in the trade accounts receivable common stock, additional paid in capital, retained earnings (accumulated deficit) account as of March 31, 1998. F-14 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONTENTS PAGE FF-1 - INDEPENDENT AUDITORS' REPORT PAGE FF-2 - CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 PAGE FF-3 - CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1999 PAGE FF-4 - CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED MARCH 31, 1999 PAGE FF-5 - CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 1999 PAGE FF6 - FF18 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 Independent Auditors' Report Board of Directors and Shareholders The Singing Machine Company, Inc. and Subsidiary We have audited the accompanying consolidated balance sheet of The Singing Machine Company, Inc. and Subsidiary as of March 31, 1999, and the related consolidated statement of operation, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Singing Machine Company, Inc. and Subsidiary at March 31, 1999, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Weinberg & Company, P.A. WEINBERG & COMPANY, P.A. Boca Raton, Florida July 23, 1999 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 ASSETS CURRENT ASSETS Cash $ 49,288 Trade accounts receivable, net of allowance for doubtful accounts of $19,900 1,127,970 Due from officer 13,880 Inventories, net 424,806 Prepaid expenses and other current assets 27,154 Deferred tax asset 170,000 Total Current Assets 1,813,098 PROPERTY AND EQUIPMENT, NET 16,447 OTHER ASSETS Reorganization intangible - net 549,790 TOTAL ASSETS $ 2,379,335 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable $ 830,088 Accrued expenses 392,926 Notes payable 63,000 Due to factor 128,581 Total Current Liabilities 1,414,595 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued and outstanding - Common stock, $.01 par value; 75,000,000 shares authorized; 2,498,451 shares issued and outstanding 24,984 Additional paid-in capital 15,600 Retained Earnings 924,156 Total Shareholders' Equity 964,740 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,379,335 See accompanying notes to consolidated financial statements. FF-2 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED MARCH 31, 1999 NET SALES $ 9,547,816 COST OF SALES 7,029,359 GROSS PROFIT 2,518,457 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,544,806 INCOME FROM OPERATIONS 973,651 OTHER INCOME (EXPENSES): Other Income 2,784 Interest expense (5,427) Interest income 3,254 Factoring fees (220,106) Net other expenses (219,495) INCOME BEFORE INCOME TAX BENEFIT 754,156 INCOME TAX BENEFIT 170,000 NET INCOME $ 924,156 NET INCOME PER COMMON SHARE: Basic $ 0.3733 Diluted $ 0.3565 WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING Basic 2,475,308 Diluted 2,592,167 See accompanying notes to consolidated financial statements. FF-3 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED MARCH 31, 1999
Additional Total Common Stock Paid-In Retained Stockholders' Shares Amount Capital Earnings Equity Balance at March 31, 1998 2,468,066 $ 24,680 $ - $ - $ 24,680 Issuance of common stock for services 30,385 304 15,600 - 15,904 Net Income 1999 - - - 924,156 924,156 BALANCE AT MARCH 31, 1999 2,498,451 $ 24,984 $ 15,600 $ 924,156 $ 964,740
The accompanying notes to consolidated financial statements. FF-4 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 924,156 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 144,234 Issuance of common stock for services 15,904 Deferred tax benefit (170,000) Changes in assets and liabilities: (Increase) decrease in: Trade accounts receivable (769,127) Inventories (14,513) Prepaid expenses and other assets 17,600 Increase (decrease) in: Trade accounts payable (25,465) Accrued expenses (126,456) Net cash used in operating activities (3,667) CASH FLOWS FROM INVESTING ACTIVITIES Payments for purchase of computer equipment (3,023) Decrease due from officer 11,609 Net cash provided by investing activities 8,586 CASH FLOW FROM FINANCING ACTIVITIES Notes payable (37,000) Due from factor 73,599 Net cash provided by financing activities 36,599 Increase in cash and cash equivalents 41,518 Cash and cash equivalents beginning of year 7,770 CASH AND CASH EQUIVALENTS END OF YEAR $ 49,288 Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 10,327 See accompanying notes to consolidated financial statements. FF-5 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 Note 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) Organization The Singing Machine Company, Inc. and Subsidiary (the "Company") is primarily engaged in the production, marketing and sale of consumer karaoke audio equipment, accessories, and recordings. The products are sold directly to distributors and retail customers. (B) Principles of Consolidation The consolidated financial statements include the accounts of The Singing Machine Company, Inc. and its wholly-owned Hong Kong Subsidiary, International SMC (HK) Limited ("Hong Kong Subsidiary"). All significant intercompany balances and transactions have been eliminated in the consolidation. (C) Foreign Currency Translation The functional currency of the Company's international Hong Kong Subsidiary is the local currency. The financial statements of the subsidiary are translated to United States dollars using year-end rates of exchange for assets and liabilities, and average rates of exchange for the year for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations and were not significant during the periods presented. The cumulative translation adjustment, and effect of exchange rate changes on cash at March 31, 1999 was not material. (D) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (E) Cash and Cash Equivalents For purposes of the cash flow statement the Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. (F) Inventories Inventories primarily consist of finished goods, which are comprised of electronic karaoke audio equipment, accessories, audio tapes and compact discs. Inventories are stated at the lower of cost or market, as determined using the first in, first out method. FF-6 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 Note 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) (G) Investment in Song Library Investment in song library consists of costs incurred in the production or purchase of master song tapes. The carrying value of the investment in song library is periodically reviewed to determine if the facts and circumstances suggest that it may be impaired. If this review indicates that the investment will not be recoverable, as determined based on the estimated undiscounted cash flow over the remaining amortization period, the Company's carrying value of the investment is reduced by the estimated shortfall. As of March 31, 1999, the carrying value of the investment in song library has been reduced to zero. Amortization expense charged to operations during 1999 totaled $46,590. (H) Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided using an accelerated method over the estimated useful lives of the related assets. (I) Income Taxes Income taxes are accounted for under the asset and liability method of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes ("SFAS 109"). Under SFAS 109 deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (J) Revenue Recognition Revenue from the sale of equipment, accessories and recordings are recognized upon shipment and are reported net of actual and estimated future returns and allowances. Commission income is recognized as earned. (K) Net Income Per Common Share Net income per common share for the year ended March 31, 1999 is computed based on the weighted average common shares and dilutive common stock equivalents outstanding during the year as defined by Financial Accounting Standards, No 128, "Earnings Per Share". FF-7 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 Note 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) (L) Reorganization Under United States Bankruptcy Code and Fresh Start Reporting On April 11, 1997 the Company filed for protection under the provisions of the United States Bankruptcy Code. In March 1998, the United States Bankruptcy Court approved the Company's Plan of Reorganization, as Amended, and the Company emerged from Chapter 11 Bankruptcy. At that time, the Company applied Fresh Start Reporting in accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7"). As a result of the application of SOP 90-7, the Company restated its assets and liabilities to their fair values as necessary, and reclassified its accumulated deficit of $6,841,684 against available additional paid-in capital of $6,200,262 resulting in a reorganization intangible asset of $641,422, which is being amortized on a straight line basis over a period of seven years. (See Note 4). NOTE 2 - ACCOUNTS RECEIVABLE AND FACTOR AGREEMENT The Company sells certain trade accounts receivable, without recourse, pursuant to a factoring agreement (the "Agreement"). Under the agreement, the factor advances 70% of the face value of these receivables to the Company. The Company is charged a variable percentage fee based upon the length of the collection period. Factoring fees, sales returns and uncollectible accounts are charged against the 30% factor reserve held by the factor and the balance is remitted to the Company periodically as accounts are collected by the factor. For the year ending March 31, 1999 the Company incurred $220,106 in factoring fees. All of the Company's accounts receivable, inventories, and intangibles are pledged as collateral under this agreement. At March 31, 1999, the outstanding balance of such receivables was approximately $416,000 of which $128,581 is advanced and due to the factor. The Company terminated this agreement during June 1999. (See Note 12). FF-8 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment at March 31, 1999 is as follows: Estimated Useful Lives (Years) Computer equipment 5 $ 59,235 Office equipment 7 42,915 102,150 Less accumulated depreciation (85,703) Totals $ 16,447 Depreciation expense on equipment for the year ended March 31, 1999 was $6,012. NOTE 4 - REORGANIZATION INTANGIBLE The reorganization intangible resulted in March 1998 from the application of Fresh Start Accounting pursuant to the American Institute of Certified Public Accountants Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" (See Note 1(L)). The reorganization intangible is being amortized over a period of seven years using a straight line basis. The reorganization intangible at March 31, 1999 consisted of the following: Reorganization intangible $ 641,422 Less accumulated amortization 91,632 Balance at March 31, 1999 $ 549,790 Amortization expense on the reorganization intangible for the year ended March 31, 1999 was $91,632. FF-9 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 NOTE 5 - NOTES PAYABLE As of March 31, 1999 notes payable consist of the following: Note payable, bearing annual interest at 10%, due upon demand $ 43,000 Note payable, bearing annual interest at 12%, due September 30, 1999 $ 20,000 Totals $ 63,000 NOTE 6 - COMMITMENTS AND CONTINGENCIES (A) Leases On March 31, 1999, the Company entered into a lease for an office and warehouse facility for a term of 61 months. The term is expected to begin in late July 1999. Pursuant to the terms of the lease, the Company must pay maintenance and real estate taxes of approximately $9,000 per year. The Company entered into a lease for office equipment payable monthly at $289, through August 1999. Total rent expense was approximately $60,953 for the year ended March 31, 1999. Future minimum lease payments under noncancellable, operating leases are as follows: Year Ending March 31: 2000 $ 57,200 2001 56,800 2002 59,500 2003 61,900 Thereafter 80,700 $316,100 (B) Year 2000 Issues The Company is aware of the issues associated with the programming code in existing computer systems. As the millennium (Year 2000) approaches. The "Year 2000" problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two-digit year to 00. The issue is whether the computer system will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. FF-10 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 NOTE 6 - COMMITMENTS AND CONTINGENCIES - (CONT'D) (B) Year 2000 Issues - (CONT'D) Management has compiled a list of both internally and externally supplied information systems that utilize imbedded data codes which could experience operational difficulties in the year 2000. The Company uses third party applications or suppliers for all high level systems and reporting. Management has determined that their primary accounting and reporting software is not Year 2000 compliant. Management is currently testing new systems for which it is responsible. The Company is planning a complete internal computer system replacement which is totally year 2000 compliant. The Company has not incurred any material costs to date relating to investigating the Year 2000 issue. Initial costs for new Year 2000 compliant hardware and software are estimated to be approximately $36,000 for this conversion. It is the Company's objective to be in Year 2000 compliance by the end of September 1999, however, no assurance can be given that such objective will be met. (C) Lines and Letters of Credit The Company has entered into a financing agreement with a financing corporation. The financing corporation opens letters of credits on behalf of the Company to purchase inventory. Under terms of the agreement, the Company pays a flat fee negotiated based on each letter of credit and the maximum amount of a single letter of credit can not exceed $300,000. The financing agreement expires on July 1, 1999 (Note 12). At March 31, 1999, the Company has letters of credit open with the financing corporation of $226,588. The factor (see Note 2) has agreed under a third party agreement to factor receivables related to these letters of credit and pays the financing corporation directly. The Company through its Hong Kong Subsidiary has entered into an agreement with Delta Asia Financial Group, Hong Kong ("Delta") to provide it with a United States letter of credit facility of $200,000. The cost of the credit facility is prime plus 2 1/2% and bank charges for opening letters of credit. The facility terminated under the agreement on May 31, 1999 and was not renewed. This facility is guaranteed by a former director of the Company. FF-11 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 NOTE 7 - RELATED PARTY TRANSACTIONS At March 31, 1999, the amount due from officer bears interest monthly at 9% per annum and is due on March 31, 2000. The Company's Hong Kong Subsidiary, operates as an intermediary to purchase karaoke hardware from factories located in China on behalf of the Company. The Company purchased certain karaoke audio equipment and accessories from a Far East company controlled by a shareholder of the Company. The total goods purchased from this Company aggregated approximately $1,700,000 during 1999. NOTE 8 - STOCKHOLDERS' EQUITY (A) Reverse Stock Split On April 1, 1998 the Company effected a one-for-ten (1:10) reverse stock split. The primary purpose of the split is pursuant to the Company's Plan of Reorganization, as Amended, on March 17, 1998. Trading in the post-split shares commenced at the opening of business on April 1, 1998. No additional shares were issued in connection with the reverse split and those stockholders entitled to receive fractional shares received shares based on rounding to the nearest whole number. (B) Amendment to Authorized Common Shares During April 1998, subsequent to the reorganization, the Company filed an amendment to its Articles of Incorporation increasing the authorized shares of the Company's common stock to ten million (10,000,000) shares from one million (1,000,000) shares. (See Note 12) (C) Common Stock Warrants Pursuant to the Company's initial public offering in November 1994, the company issued 1,656,000, 87,750, and 144,000 public warrants, bridge warrants and underwriter warrants, respectively, as adjusted for a January 1995 20% common stock split. Each warrant provided for the purchase of one share of the Company's common stock at an exercise price of $3.60, $1.20 and $4.50 for the public, bridge and underwriter warrants, respectively, as adjusted for the January 1995 common stock split. In addition, the underwriter warrants entitle the holder to acquire an additional 144,000 warrants to acquire 144,000 shares of common stock at a price of $5.40 per share. FF-12 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 NOTE 8 - STOCKHOLDERS' EQUITY - (CONT'D) (C) Common Stock Warrants - (CONT'D) As a result of the March 1998 reorganization (see Note 1(L)), all of the warrants have been amended whereby ten warrants must now be exchanged for each share of common stock with the exercise price per warrant remaining the same. The warrants became exercisable on November 10, 1995 and expire on November 10, 1999. Through the date of this report, none of the warrants have been exercised. (D) Stock Options Effective May 3, 1994, as amended on June 29, 1994 and March 18,1999, the Board of Directors adopted a Stock Option Plan (the "Plan"). The plan was developed to provide a means whereby directors and selected employees, officers, consultants, and advisors of the Company may be granted incentive or non-qualified stock options to purchase common stock of the Company. As of March 31, 1999, the Plan authorizes options up to an aggregate of 600,000 shares of the Company's common stock. The authorized 600,000 options are a result of the application of a one- for-ten reverse common stock split (see Note 8(A)) on the original 480,000 authorized options and a March 18, 1999 amendment to the plan increasing the authorized stock options to 600,000. The Company applies APB Opinion No. 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for options issued under the plan as of March 31, 1999. Had compensation cost for the Company's stock-based compensation plan been determined on the fair value at the grant dates for awards under that plan, consistent with Statement of Accounting Standards No 123, "Accounting for Stock Based Compensation" (Statement No. 123), the Company's net income for the year ended March 31, 1999 would have been decreased to the pro-forma amounts indicated below. Net income As reported $ 924,156 Pro forma $ 824,356 Net income per share-basic As reported $ 0.3733 Pro forma $ 0.3330 Net income per share-diluted As reported $ 0.3565 Pro forma $ 0.3180 FF-13 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 NOTE 8 - STOCKHOLDERS' EQUITY - (CONT'D) (D) Stock Options - (CONT'D) The effect of applying Statement No. 123 is not likely to be representative of the effects on reported net income for future years due to, among other things, the effects of vesting. For financial statement disclosure purposes the fair market value of each stock option granted during 1999 was estimated on the date of grant using the Black-Scholes Model in accordance with Statement No. 123 using the following weighted-average assumptions: expected dividend yield 0%, risk-free interest rate of 5.59%, volatility 65% and expected term of three years. A summary of the Company's Stock Option Plan as of March 31, 1999 and changes during the year is presented below: Weighted Number of Average Options Exercise Price Stock Options Balance at beginning of period 47,870 $ 4.87 Granted 499,000 $ 0.43 Exercised - - Forfeited (20,370) $ 4.33 Balance at end of period 526,500 $ 0.68 Options exercisable at end of period 27,500 $ 5.27 Weighted average fair value of options granted during the period $ 0.20 FF-14 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 NOTE 8 - STOCKHOLDERS' EQUITY - (CONT'D) (D) Stock Options - (CONT'D) The following table summarizes information about stock options outstanding at March 31, 1999:
Options Outstanding Options Exercisable Weighted Number Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise at Contractual Exercise At March 31 Exercise Price March 31, 1999 Life Price 1998 Price $5.00-$5.50 22,500 0.25 Years $ 5.33 22,500 $ 5.33 $5.00 5,000 4.17 Years $ 5.00 5,000 $ 5.00 $0.43 499,000 4.75 Years $ 0.43 - $ - 526,500 4.55 Years $ 4.45 27,500 $ 5.27
Subsequent to March 31, 1999, 75,000 options exercisable at $5.50, and 3,000 options exercisable at $5.00 have been terminated due to attrition of the holders. NOTE 9 - INCOME TAXES The Company files separate tax returns for the parent and for the Hong Kong Subsidiary. The income tax expense (benefit) for federal, foreign and state income taxes in the consolidated statement of income consisted of the following components for 1999: Current: U.S. Federal $ - Foreign - State - - Deferred: U.S. Federal (170,000) Foreign - Total $(170,000) FF-15 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 NOTE 9 - INCOME TAXES - (CONT'D) The actual tax expense differs from the "expected" tax expense for the year ended March 31, 1999 (computed by applying the U.S. Federal Corporate tax rate of 34 percent to income before taxes) as follows: Computed "expected" tax expense $ 256,413 Benefit of U.S. and foreign net operating loss carryforwards (256,413) Change in the beginning of the year valuation allowance for deferred tax assets allocated to income tax benefit (170,000) $ (170,000) The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at March 31, 1999 are as follows: Deferred tax assets: U.S. net operating loss carryforward $2,169,421 Foreign net operating loss carryforward 14,280 Total gross deferred tax assets 2,183,701 Less valuation allowance 2,013,701 Net deferred tax assets $ 170,000 At March 31, 1999, the Company had net operating loss carryforwards of approximately $6,381,000 for income tax purposes, available to offset future taxable income of the U.S. entity expiring on various dates beginning in 2003 through 2013. Usage of approximately $4,057,000 of the net operating loss is limited to $14,000 per year due to a change in ownership under Internal Revenue Code Section 382, which occurred in 1991. These net operating losses expire from 2003 to 2007. At March 31, 1999 the Company's Honk Kong Subsidiary had approximately $42,000 in net operating loss carryforwards available to offset future taxable income of the Subsidiary. The resulting deferred tax asset has been fully offset by a valuation allowance. The valuation allowance at April 1, 1998 was approximately $2,440,000. The net change in the valuation allowance during the year ended March 31, 1999 was a decrease of approximately $426,000. FF-16 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 Note 10 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS The Company derives primarily all of its revenues from retailers of products in the United States. Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of accounts receivable. The Company's allowance for doubtful accounts is based upon management's estimates and historical experience. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. During the fiscal 1999, 91% of the Company's total revenues were derived from sales to five customers. Sales derived from three customers who individually purchased greater than 10% of total revenues in 1999 were 31%, 21%, and 21%, respectively. NOTE 11 EMPLOYMENT AGREEMENTS The Company has entered into employment contracts with two key officers. The agreements call for base salaries of $180,000 and $92,000, respectively with annual cost of living adjustments and travel allowances. The agreements also call for performance bonuses equal to five percent and two and one-half percent, respectively of net income before interest and taxes. NOTE 12 - SUBSEQUENT EVENTS During April 1999, the Company filed an amendment to its Articles of Incorporation increasing the authorized shares of the Company's common stock to seventy-five million shares (75,000,000) from ten million (10,000,000) shares. (See Note 8(B)). The change in authorized shares has been shown retroactively in the consolidated financial statements as of March 31, 1999. During April 1999, the Company filed an amendment to its Articles of Incorporation to authorize one million (1,000,000) shares of preferred stock. Each share of preferred stock is entitled to 9% dividends, preferred liquidation distribution, conversion to common stock and no voting powers. The new authorized shares of preferred stock has been shown retroactively in the consolidated financial statements as of March 31, 1999. During April 1999 the Company issued a private placement memorandum, pursuant to Rule 506 of Regulation D of the 1933 Securities Act, as amended, to offer a minimum of 40 units and a maximum of 50 units of stock and warrants. Each unit consists of 20,000 shares of the Company's convertible preferred stock and 4,000 common stock purchase warrants. The purchase price for each unit is $ 27,500. Each share of preferred stock is convertible, at the option of the holder, into one FF-17 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 NOTE 12 - SUBSEQUENT EVENTS - (CONT'D) share of the Company's common stock at any time after issuance. Each share of preferred stock will automatically convert into one share of common stock on April 1, 2000. Each warrant entitles the holder to purchase one share of the Company's common stock at $2.00 per share. The warrants expire three years from the private placement memorandum date. The Company's net proceeds after placement discount and commissions but before offering expenses are estimated to be 90% of the amount raised. As of the date of this report 50 units have been sold and $1,375,000 gross funds have been raised. Effective May 19, 1999, the Company, through its Hong Kong Subsidiary, obtained a credit facility of (US) $2,000,000 from Belgian Bank, Hong Kong, a subsidiary of Generale Bank, Belgium. This facility is a revolving line based upon drawing down a maximum of 15% of the value of export letters of credit lodged with Belgian Bank. There is no expiration except that Belgian Bank reserves the right to revise the terms and conditions at the Bank's discretion. The cost of this credit facility is the U.S. Dollar prime rate plus 1.25%. Repayment of principal plus interest shall be made upon negotiation of the export letters of credit, but not later than ninety (90) days after the advance. During June 1999, the Company entered into a new factor agreement with Maine Factors, Inc.. Under the terms of the agreement, the factor advances 73.5% of the factored invoices to the Company. The Company will pay a base fee of 3.5 % of the total accounts receivable factored. All of the Company's accounts receivable, inventories and intangibles are pledged as collateral under the agreement. There is no limit on the amount of accounts receivable that can be factored under the agreement. During July 1999, the Company entered into a new financing agreement with a financing company. Under the terms of the new agreement, the Company pays a flat fee negotiated based on each letter of credit and the maximum amount of a single letter of credit cannot exceed $1,000,000. The financing agreement expires on July 1, 2001. FF-18 EXHIBIT 16(A) Samuel F. May Jr. and Company Certified Public Accounts Member: AICPA FICPA Barnett Bank Building 23123 State Road 7, Suite 210 Boca Raton, Florida 33428 Office: (561) 487-0670 Fax: (561) 852-1646 August 5, 1999 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: The Singing Machine Company, Inc. File No. 0-24968 Gentlemen: I was previously the principal accountant for The Singing Machine Company, Inc. and, under the date of October 12, 1999, I reported on the consolidated financial statements of The Singing Machine Company, Inc. and statement of The Singing Machine Company, Inc. and subsidiaries as of and for the year ended March 31, 1998. On February 23, 1999, our appointment as principal accountant was terminated. I have read The Singing Machine Company, Inc.'s statements included under Item 8 of its Form 10-KSB dated August 5, 1999, and I agree with such statements. Very truly yours, /s/ Samuel F. May, Jr. Samuel F. May, Jr. Certified Public Accountant 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-K and is qualifed in its entirety by reference to such financial statements. YEAR MAR-31-1999 MAR-31-1999 49,288 0 1,127,970 19,900 424,806 1,813,098 16,447 144,234 2,379,335 1,414,595 0 0 0 24,984 964,740 2,379,335 9,547,816 9,547,816 7,029,359 1,544,806 219,495 0 225,533 764,156 (170,000) 924,156 0 0 0 924,156 0.373 0.356
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