-----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, A36pEYenKKRKMdO9CDyB+40JAc5D8rvh8Ri8dm4K7kZep90VU3tJ5A3VRyZ28yIF 9WSmu7JiKlb9Ks9ScS0dXQ== 0000950170-98-000355.txt : 19980225 0000950170-98-000355.hdr.sgml : 19980225 ACCESSION NUMBER: 0000950170-98-000355 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19980224 SROS: NONE 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: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-24968 FILM NUMBER: 98548352 BUSINESS ADDRESS: STREET 1: 1551 W COPANS ROAD STREET 2: SUITE 100 CITY: POMPANO STATE: FL ZIP: 33064 BUSINESS PHONE: 9549688006 MAIL ADDRESS: STREET 1: 1551 W COPANS ROAD STREET 2: SUITE 100 CITY: POMPANO BEACH STATE: FL ZIP: 33064 10KSB40 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-KSB (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended MARCH 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______________ to _______________ Commission File Number: 0-24968 THE SINGING MACHINE COMPANY, INC. (Name of Registrant as specified in its charter) DELAWARE 95-3795478 -------- ---------- (State or Other Jurisdiction (I.R.S. Employer Identification No.) Incorporation or Organization) 3101 N.W. 25TH AVENUE, POMPANO BEACH, FL 33069 ---------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number: 954-968-8006 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Common Stock Par Value $.01 per share OTC Bulletin Board Common Stock Purchase Warrant OTC Bulletin Board Securities registered pursuant to Section 12(g) of the Act: None Check whether the Registrant (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 registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of Registrant'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: $10,674,879 AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE REGISTRANT As of March 31, 1997, 2,883,582 shares of Common Stock, par value $.01 per share ("Common Stock"), of the Registrant were outstanding. Based on the average of the closing bid and asked prices of the Common Stock on the OTC Bulletin Board ("OTC") as of March 31, 1997 ($0.0625), the aggregate market value of the 1,859,083 shares of the Common Stock held by persons other than officers, directors and persons known to the Registrant to be the beneficial owner (as that term is defined under the rules of the Securities and Exchange Commission) of more than five percent of the Common Stock on that date was approximately $116,000. By the foregoing statements, the Registrant does not intend to imply that any of these officers, directors or beneficial owners are affiliates of the Registrant or that the aggregate market value, as computed pursuant to rules of the Securities and Exchange Commission, is in any way indicative of the amount which could be obtained for such shares of Common Stock. APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 14(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [X] (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 2,883,582 shares of Common Stock, par value $.01 per share, were outstanding as of March 31, 1997 DOCUMENTS INCORPORATED BY REFERENCE Exhibits contained in Registration Statement on Form SB-2 (Registration No. 33-81974-A) filed by the Registrant on July 27, 1994. Form 10-KSB filed on June 28, 1995. Form 10-QSB filed on November 13, 1995. Forms 8-K filed on December 4, 1995, February 23, 1996, and May 6, 1997. ii TABLE OF CONTENTS PAGE ---- Part I Item 1. Business......................................................... 1 Item 2. Properties.......................................................12 Item 3. Legal Proceedings................................................13 Item 4. Submission of Matters to a Vote of Security Holders..............14 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................14 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................15 Item 7. Financial Statements and Supplementary Data......................27 Item 8. Changes in and disagreements with Accountants on Accounting and Financial Disclosure.......................................28 Part III Item 9. Directors and Executive Officers of the Registrant...............28 Item 10. Executive Compensation...........................................31 Item 11. Security Ownership of Certain Beneficial Owners and Management...34 Item 12. Certain Relationships and Related Transactions...................35 Item 13. Exhibits and Reports on Form 8-K.................................37 Signatures.......................................................40 -------------------- iii PART I Item 1. BUSINESS GENERAL The Singing Machine Company, Inc. (the "Company") is engaged in the distribution and marketing of electronic KARAOKE audio equipment which plays backing tracks (music without lyrics) of popular songs and records the vocal accompaniment of professional and amateur singers to those backing tracks. The Company contracts for the manufacture of all of its electronic equipment products with manufacturers located in the Far East. The Company also produces and markets KARAOKE audio software, including CDS, CD and graphics, video tapes and audio tapes, containing music and lyrics of popular songs for use with KARAOKE recording equipment. One track of those tapes offers complete music and vocals for practice and the other track is instrumental only for performance by the participant. Virtually all audio software sold by the Company is accompanied by printed lyrics and the Company's KARAOKE video tapes contain lyrics which appear on the video screen. The Company contracts for the reproduction of its audio software, which is produced by the Company or by an exclusive independent producer. The Company currently has a product line of 11 different models of recording and playback units incorporating such features as a dual cassette player, graphic equalizer and high-output stereo amplifier and markets certain of its units under the popular national brand Memorex(TM) as well as its registered trademark THE SINGING MACHINE(R). In addition, the Company believes that it has one of the larger backing track libraries of music in the KARAOKE industry consisting of over 2,000 songs. The Company sells audio software under the trademarks KARAOKE KASSETTE(TM), KARAOKE KOMPACT DISC(TM) and KARAOKE VIDEO KASSETTE(TM) and KARAOKE recording and playback units under its registered trademark THE SINGING MACHINE(R). The Company also licenses its trademark, on a non-exclusive basis, to others for sales around the world. The Company believes that it is one of several companies in the KARAOKE industry in the United States which sells both hardware and software. BACKGROUND AND FORMATION OF THE COMPANY The KARAOKE industry began in Japan in the 1970s. In Japanese society, entertaining is not typically conducted in individual homes, but rather in restaurants and nightclubs. KARAOKE, which translated literally means "empty orchestra", is a concept that allows participants to sing words to soundtracks of popular songs, reading lyrics from video monitors or scripts. The concept is identical to that employed in the "follow the bouncing ball" segment of the "Sing Along with Mitch" television program from the 1960s. The instrumental music, or backing track, is provided by pre-recorded soundtracks on CDs or audio or video tapes. In Japan, KARAOKE clubs and public establishments became popular vehicles for social occasions and business entertainment. 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 KARAOKE 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 February 1990 all of the outstanding Common Stock was purchased by Magna International, Inc. ("Magna"). In March 1990, the Company relocated its offices from California to South, Florida. In September 1991, Messrs. Paul Wu, Eugene B. Settler and Edward Steele purchased an option from Magna for 100% of the Company's then outstanding Common Stock, which option was exercised in May 1994, by Messrs. Settler 1 and Steele and, Mr. Wu's designees. In September 1992, Magna and an affiliate thereof agreed to exchange $816,574 of debt owed by the Company to Magna and an affiliate thereof for additional shares of the Company's Common Stock (the "Additional Shares"). That agreement, as amended, gave Magna the right to require the Company to repurchase the Additional Shares, on December 31, 1996, for $816,574 plus interest at 8% per annum from September 30, 1994. On November 10, 1994 Magna exchanged the Additional Shares for the Company's promissory note (the "Magna Note") in the amount of $816,574. In addition, in May 1994, the Company was merged into a wholly-owned subsidiary of the Company incorporated in Delaware with the same name. As a result of that merger, the Delaware corporation became the successor to the business and operations of the California corporation and retained the name The Singing Machine Company, Inc. REORGANIZATION In November and December, 1996, the Company made two payments of $20,000 each to a former employee ("Judgement Creditor") who obtained a judgement in the amount of $248,000 against the Company for wrongful termination. These payments adversely affected the Company's cash flow. This decrease in cash flow was compounded by the fact that sales of hardware and software during the fourth quarter of fiscal 1997 were well below projections. The low sales of software were especially problematic because the Company carried, and continues to carry, a gross oversupply of software inventory which has severely impacted liquidity. To complicate matters further, the Company was advised by Montgomery Ward, a major customer, that the Company had to accept returns of approximately $270,000, representing almost fifty percent of what had been shipped and invoiced to this customer during the selling season of fiscal 1997. This severely impacted the Company's cash flow, which combined with low sales volume prompted the Company's factor to stop advancing funds in order to cover the factors' shortfall on the Montgomery Ward receivables. Additionally, due to this cash flow crisis, the Company defaulted on its monthly rent payment, which resulted in a default notice and the threat of eviction. The Company also defaulted on the quarterly royalty payments due, as well as payments due the Harry Fox Agency, the Company's primary copyright royalty creditor, per a prior agreement. This resulted in a demand letter and the threat to cancel the Company's music licensing agreements which would endanger the Company's ability to continue operations. The garnishment of the Company's factor and bank accounts by the Judgement Creditor, and the resultant institution of legal suits by other creditors prompted the Company to commence a reorganization case by filing a voluntary petition ("Petition") for relief under Chapter 11 of the Bankruptcy Code ("Bankruptcy Code") with the United States Bankruptcy Court for the Southern District of Florida ("Bankruptcy Court") on April 11, 1997 ("Petition Date"). As a result of filing the Petition, the Company is prohibited from paying any pre-petition liabilities and is currently in default under all of its funded debt agreements in effect prior to the Petition Date. As a result, all unpaid principal of, and accrued pre-petition interest on, such debt became immediately due and payable. In accordance with the Bankruptcy Code, the Company can seek Bankruptcy Court approval for the rejection of any executory contracts or unexpired leases, including real property leases. Any such rejection may give rise to a pre-petition unsecured claim for damage. The ability of the Company to effect a successful reorganization under Chapter 11 of the Bankruptcy Code will depend, in significant part, upon the Company's ability to formulate a Reorganization Plan ("Plan") that is approved by the Bankruptcy Court and meets the standards for plan confirmation under the Bankruptcy Code. In a Chapter 11 reorganization plan, the rights of the Company's creditors and stockholders may be substantially altered. Creditors may realize substantially less than the full amount of their claim. Equity 2 interests of the Company's stockholders may be diluted or even canceled. Investment in any security of the Company, therefore should be regarded as highly speculative. The Company has entered into discussions with its secured and significant unsecured creditors concerning the Company's Plan. In addition the Company has taken actions in the Bankruptcy Court to facilitate its reorganization, including (i) filing a Disclosure Statement ("Disclosure Statement") including schedules of assets and liabilities and a statement of financial affairs and amendments thereto as required, (ii) filing a motion requesting a bar date for filing proofs of claims against the Company, and (iii) filing a Plan and amendments as required. On December 17, 1997, the Bankruptcy Court approved the Company's amended Disclosure Statement. This Disclosure Statement and amended Plan has been filed and has been mailed together with ballots to the Company's pre-petition shareholders and creditors on January 5, 1998. The Company anticipates emerging from Chapter 11 after Bankruptcy Court approval, which is expected to occur at a hearing scheduled for February 26, 1998. SIGNIFICANT POST-PETITION EVENTS Since the Chapter 11 filing, the Company has made considerable positive advancements. The Company has moved into much smaller corporate offices and warehousing operations with an emphasis on reduction of inventory. Total combined operating space was reduced from 29,000 to 10,000 square feet, thereby reducing rental facility expenses by $12,000 per month, and the Company's staff has been reduced to the minimum needed to continue to operate efficiently. The Company has also arranged with Dero Research, Ltd. in Hong Kong, of which a former director of the Company is a principal stockholder, letter of credit financing up to $200,000 for purchases of new inventory as well as an arrangement with Asiatech 52 Manufacturing Ltd. ("A-Tech") in Hong Kong for 90 day document of acceptance ("DA") financing up to $200,000. With regard to the retention of the Company's customer base, the major accounts, Target, J.C. Penney, Fingerhut and FAO Schwarz have continued to purchase products from the Company. In addition, the Company began a new customer relationship with Best Buy, which had shipments exceeding $1,000,000 during the fiscal 1998 selling season. The Company did loose some catalog house business including Sears and Service Merchandise, but is confident this business will be regained upon emergence from Chapter 11. The Company filed a motion with the Bankruptcy Court, which is currently pending, to approve an agreement, entered into on December 16, 1997, regarding the treatment of the Harry Fox Agency in the Plan. The Harry Fox Agency, Inc., ("HFA"), is the Company's principal copyright royalty creditor to whom the Company owes approximately $820,000, which is governed by the terms of a prior settlement agreement and collateralized by the Company's master song recordings. In the agreement, HFA agreed to amend its proof of claim and to reflect this $820,000 as general unsecured debt and further, to elect to accept issuance of shares of the reorganized Company on the following basis: for each $2.00 of debt, HFA will receive one share of common stock or approximately 410,000 shares. On February 9, 1998, the Bankruptcy Court granted the Company's motion to approve a settlement agreement entered into on December 24, 1997, between the Company and Eugene Settler ("Settler"), a shareholder as well as former officer and director of the Company. Prior to this settlement agreement, there was pending in the Bankruptcy Court an adversary proceeding brought by the Company against Settler, for recovery of certain alleged preferential transfers arising from certain payments made to Settler as a result of legal proceedings brought by Settler against the Company for wrongful termination. The parties mediated the dispute and reached a settlement which resolves the adversary proceeding, certain alleged claims by Settler against the 3 Company and others, and provides for an exchange of releases amongst all parties. Under the terms of the agreement, Settler also resigned as a director of the Company and assigned all of his stock certificates and options to the Company. This settlement did not require the payment of any funds by the Company other than a portion of mediation costs incurred. CONFIRMATION The Bankruptcy Court has set a hearing to consider confirmation of the Plan for February 26, 1998. The significant elements of the Plan include (i) additional estimated administrative costs of $100,000 for the Company's bankruptcy counsel, (ii) the secured claim by Bankers Capital, the Company's factor, of $124,000 shall be paid according to the terms of its contract with the company, which is current, (iii) general unsecured creditors whose claims are equal to or less than $300 shall receive a cash payment of 15% of the amount of their allowed claim, and (iv) general unsecured creditors whose claims exceed $300 shall be given the option of receiving a cash payment of 10% of the amount of their allowed claim or receiving one share of new common stock in the reorganized company for each $2.00 of an allowed claim. Any cash payments to unsecured creditors would be paid in two equal installments, ten days after the Plan is confirmed and six months thereafter. Holders of existing common shares of the Company, equity interest holders, will have their interest diluted by ninety percent (90%) at confirmation under the Plan, so that for each ten shares of common stock owned they will receive one share of new common stock in the reorganized company. Although the Company anticipates that the Plan will be confirmed by the Bankruptcy Court, there can be no assurance that it will be. If the Company is unable to obtain confirmation of a plan of reorganization, its creditors or equity holders could seek other alternatives for the Company including bids for the Company or parts thereof through an auction process. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Legal Proceedings". STRATEGY Currently the Company is focusing on its audio equipment operations with the intention of increasing cash flow, improving operating efficiency, increasing internal growth and returning to profitability. The Company's intent is to obtain additional market share through an emphasis on the affordability, selection and quality of its products. The Company is also focusing greater sales efforts on mass market retailers, such as Target and Montgomery Ward, which the Company believes have greater potential for increased software sales. The Company has historically sold its software products predominately to chain music stores and music distributors and believes that the potential in this market has decreased. In order to reduce expenses, management has limited the development of new products for both audio equipment and audio software. There can be no assurance that the Company will be able to successfully implement its strategy. 4 PRODUCTS The following table sets forth the approximate amounts and percentages of the Company's net revenues by product type during the periods shown, excluding certain ancillary revenues.
YEAR ENDED MARCH 31, ---------------------------------------------------------------------------------------------- 1997 1996 1995 1994 -------------------- ---------------------- --------------------- ---------------------- NET PERCENT NET PERCENT NET PERCENT NET PERCENT REVENUES OF TOTAL REVENUES OF TOTAL REVENUES OF TOTAL REVENUES OF TOTAL ---------- -------- ---------- -------- ---------- -------- ---------- -------- Audio software $1,610,594 15.2% $1,255,932 24.9% $3,258,312 56.4% $5,414,215 63.3% Audio equipment 8,953,462 84.8% 3,795,447 75.1% 2,520,194 43.6% 3,133,508 36.7%
The Company currently offers 11 different models of electronic recording and playback equipment with retail prices ranging from $30 for basic units to $300 for semi-professional units with CD and graphics player sound enhancement, graphic equalizers, tape record/playback features and multiple inputs and outputs for connection to compact disc players and video cassette recorders. The Company currently offers its audio software in four formats - multiplex cassettes, CDS, CD and graphics, and video cassette tapes with retail prices ranging from $3.99 to $14.98. The Company purchases recordings from an independent producer, and currently has a song library of over 2,000 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. NEW PRODUCT DEVELOPMENT Management believes that the enhancement and extension of the Company's existing products and the selective development of new product lines are important to the Company's continued growth. The Company combines the style and content of its products to meet customer requirements for quality, product mix and pricing. Company employees work closely with both retailers and suppliers to identify trends in consumer preferences and to generate new product ideas. The Company's employees evaluate new ideas and seek to develop new products and improvements to existing products to satisfy industry requirements and changing consumer preferences. During the fiscal year ended March 31, 1997, the Company introduced four new models of recording equipment, and approximately 100 new song titles and 100 new compilations of existing titles. SALES, MARKETING AND DISTRIBUTION The Company distributes its products to retailers and wholesale distributors through two methods: domestic sales, i.e., shipment of products from the Company's inventory; and direct sales, i.e., 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, and a warehouse in California, or directly from U.S. software manufacturers. 5 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 and 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 to customers. For each of the fiscal years ended March 31, 1996 and 1997 domestic sales accounted for approximately 73% and 46%, respectively, of the Company's revenues. This decrease is attributable to the formation of a new international subsidiary early in fiscal 1996 and the full impact a change in the method by which the Company accounts for foreign sales. Previously, the Company, through related party transactions, recorded commissions earned on foreign shipments. See Item 6 "Management's Discussion and Analysis of Financial Condition and Results of Operations". DIRECT SALES. The formation of a new subsidiary early in 1996, International SMC (HK) Ltd. ("International") is attributable for the advent of foreign equipment sales in fiscal years 1996 and 1997, which accounted for 24% and 53% respectively, of total revenues. Some products sold by the Company are shipped directly to its customers from the Far East through either International or The SMC Singing Machine Company, Ltd., a Hong Kong trading company ("LTD"). Paul Wu, a director of the Company and a director of a principal stockholder of the Company, is the Chairman of the Board of LTD. Sales made through International or LTD are completed by either delivering products to the customers' common carriers at the shipping point or by shipping the products to customers' distribution centers, warehouses or stores. Direct sales are made in large quantities (generally container-sized lots) to customers located in Canada and the United States, who pay International or LTD pursuant to their own international, irrevocable, transferable letters of credit or on open credit with the Company's suppliers in the Far East. Pursuant to an agreement with LTD, the Company receives 50% of LTD's net profits as commissions, for all direct sales originated by the Company. For the fiscal years ended March 31, 1996 and 1997, approximately 2.5% and 0.8% respectively, of the Company's revenues were attributable to commissions from LTD. See Item 6 - "Management's Discussion and Analysis of Financial Condition and Results of operations". 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 backgrounds 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 25 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 year agreements which automatically renew on an annual basis, unless terminated by either party on 90 day's notice. The Company works closely with its major customers to determine marketing and advertising plans. The Company also markets its products at various national and international trade shows each year. The Company regularly attends the following trade shows and conventions: CES ("Consumer Electronics Show") each January in Las Vegas; Hong Kong Electronics Show each October in Hong Kong; and the American Toy Fair each February in New York. The Company's electronic recording products are marketed under THE SINGING MACHINE(R) or Memorex(TM) trademarks, and its audio software is marketed under the KARAOKE Kassette(TM), KARAOKE Kompact Disc(TM) and KARAOKE Video Kassette(TM) trademarks, 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's KARAOKE machines are currently sold in such 6 stores as Target, Toys R Us, J.C. Penney, Fingerhut, Best Buy, and Wal-Mart. In addition, the Company's KARAOKE software customers include J.C. Penney, Fingerhut, Target, Best Buy, and Musicland. 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, 1996 and 1997, were approximately 63% and 79%, respectively. For the fiscal 1996 period J.C. Penney accounted for 18%, Montgomery Ward 16%, Fingerhut 12%, and Target 10% of total revenues for such period. For the fiscal 1997 period Target accounted for 47% and J.C. Penney 13%. 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. The Company manages credit policies with respect to its customer base. The Company has not suffered significant credit losses to date, even during a period when many major retailers, including customers of the Company, experienced significant difficulties, including filing for protection under federal bankruptcy laws. In the cases where a customer of the Company has filed for protection under federal bankruptcy laws, it has not had a significant impact on the Company's revenues or other categories of financial performance. RETURNS Returns of electronic hardware products by the Company's customers are generally not permitted except in approved situations involving quality defects, damaged goods or goods shipped in error or in an untimely manner. Returned hardware products are placed in inventory by the Company for future sale and, if necessary, refurbished. The practice in the prerecorded music industry is to permit retailers to return or exchange audio software merchandise. In general, the policy of the Company is to give credit to its distributors for audio software returned in conjunction with the receipt of new replacement purchase orders. Any such returns of software are available for resale by the Company. Separate and apart from its copyright royalty reserves, the Company has historically established return reserves of from approximately 15% to 22% of total sales for financial statement reporting purposes. Such reserves also include reserves for returns resulting from direct sales by LTD. The Company believes such reserves are consistent with industry standards. IMPORTING The Company presently purchases and imports virtually all of its electronic recording products from four suppliers located in the People's Republic of China. In fiscal 1996 and 1997, suppliers in the People's Republic of China accounted for in excess of 70% 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, there are numerous other suppliers from which the same products could be purchased. The Company provides key suppliers with design and quality specifications. In return for ongoing business which the Company provides these suppliers, such suppliers maintain production capacity for the Company's production needs. To ensure its high standards of product quality and that shipping schedules are met by suppliers, the Company utilizes Hong Kong based agents as representatives. Those agents include product inspectors who are knowledgeable about the Company's product specifications and work closely with the suppliers to verify that such specifications are met. Additionally, key officers of the Company frequently visit suppliers for quality assurance and to support good working relationships. 7 On October 27, 1995, the Company entered into an agreement with Memcorp, Inc. ("Memcorp"), a Florida corporation holding rights to "Memorex", a registered trademark name. The agreement is a five year exclusive arrangement, whereby the Company became the exclusive sub-distributor of KARAOKE hardware products under the "Memorex" trademark ("Memcorp Sub-distributor Agreement"). The sub-distributor agreement requires the Company to pay a commission fee on all hardware sales utilizing the brand name during the term of the agreement. In addition to the sub-distributor agreement, the "Memcorp Administrative Agreement" provides the Company administrative assistance and the use of office and warehouse space in Asia as may be required for the purchase, distribution and sale of products. The Company pays Memcorp a commission fee on all shipped products for these services. As part of the consideration for the sub-distributor and administrative agreements, the Company granted Memcorp an option (the "Memcorp Option"), exercisable until October 26, 1996, to purchase one million (1,000,000) shares of the Company's common stock at a price of one dollar ($1) per share. Memcorp was granted certain registration rights for one year with respect to the shares underlying the option. This option has now expired unexercised. In the spring of 1997, the President of the United States renewed the People's Republic of China's "Most Favored Nation" ("MFN") treatment for the 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, it is unlikely that any such suppliers would offer the same preferred financing terms that are currently offered by FLX (HK) Ltd., a Hong Kong corporation ("FLX"). 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. 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 four factories in the People's Republic of China. See "Notes to Financial Statements - - No. 7, Related Party Transactions". The finished products are packaged and labeled under either the Company's registered trademark, THE SINGING MACHINE(R), the Memorex(TM) brand name, or under a customer's private label, such as Radio Shack. The Company's products contain electronic components manufactured by other companies such as Panasonic and Sony. Various subcontractors in the Far East produce printed circuit boards and audio components in accordance with specifications of the Company. The electronic components are installed in cabinets manufactured by FLX and other manufacturers. Tools and dies used in the production of certain models of the electronic audio equipment sold by the Company are owned by LTD and may be used by LTD to manufacture other companies' products. In March 1995, the Company purchased tools and dies for two new models from LTD for $318,000, which were subsequently sold to International, primarily in order to have the exclusive right to use such tools and dies. 8 All of the electronic components and raw materials used by the Company are available from several sources of supply and the Company does not anticipate that the loss of any single supplier would have a material long-term adverse effect on its business, operations or financial condition. The Company's audio software is produced by an independent producer. After the selection of songs for inclusion in a particular collection, Company personnel attempt to contact the publishers of the songs to obtain permission to re-record the music and print the lyrics. Based on the original musical arrangement, the independent producer retains singers and musicians to create a re-recording of the original work. Songs are recorded once with both music and lyrics, to allow the KARAOKE participant to hear an example of the songs performance, and once without lyrics to provide a "backing track" to accompany the original singing of the KARAOKE participant. Collections of such songs are then assembled on master digital audio tapes. The master tapes are then sent to various subcontractors in the United States and/or Hong Kong for duplication. The Company reproduces its original master tapes in two formats: audio cassette tapes; and CD&G. WARRANTIES All of the electronic equipment sold by the Company is warranted against manufacturing defects for a period of 90 days for labor and one year for parts. All audio software sold by the Company is similarly warranted for a period of 30 days. During the fiscal years ended March 31, 1996 and 1997, warranty claims have not been material to the Company's results of operations. BACKLOG At March 31, 1997, the Company had approximately $100,000, 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. 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, CDs and video cassettes. The Company's financial position depends, among other things, on its ability to keep pace with such changes and developments and to respond to the requirements of its customers. Many of the Company's competitors have significantly greater financial, marketing and operating resources and broader product lines than does the Company. The Company's major electronic component competitors include: Grand Prix; Casio; and NewTech. 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 has registered The Singing Machine(R) trademark in the United States, Canada, Austria, Benelux, Germany, France and the United Kingdom. The Company also utilizes the common law trademarks KARAOKE KASSETTE(TM), KARAOKE KOMPACT DISC(TM) and KARAOKE VIDEO KASSETTE(TM) in connection with the sale of its audio software. 9 The Company 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 nondramatic 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 $0.0697 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 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. The Act allows a deferral of royalty payments for products sold subject to a right of return. The practice in the recorded music industry is to permit retailers to return or exchange merchandise. Accordingly, each audio production sold by the Company is sold subject to a right of return for credit against future purchases or exchange. Royalties are due with respect to such sales on the earlier to occur of nine months after the date of distribution or the date on which the revenue from the sale is recognized in accordance with generally accepted accounting principles. The Company has reached agreement on a 25% reserve with a music publisher representing over 22% of its print licenses, which agreement requires the payment of deferred royalties no later than nine months after the date of distribution. With regard to the other principal copyright royalty holders, the Company has deferred, and intends to continue to defer, approximately 25% of royalty payments for approximately nine months, an amount and period which the Company believes is appropriate for the KARAOKE industry. In May 1994, the Company requested its principal copyright royalty creditor, the Harry Fox Agency, Inc. ("HFA"), which represents the majority of copyright holders for which the Company is obligated to pay royalties, to audit its records for the period October 1991 through March 1994. On May 22, 1995, the Company executed a settlement agreement (the "Settlement Agreement") with HFA, with respect to all non-current royalty obligations and claims for the period from October 1, 1991 through March 31, 1994 in the amount of $1,030,000. The Company had accrued approximately $1.0 million in its financial statements for royalty obligations to HFA, and on February 22, 1995, paid HFA $200,000 to be applied against the settlement amount. The total amount of settlement payments made during fiscal 1996 was $432,000, and the balance of approximately $400,000, as of March 31, 1996, was anticipated to be paid in monthly installments, through April 1997, of principal and interest at 8.0% per annum. After a period of default, the Company entered into an amended payment agreement with HFA, stipulating a lump sum payment to bring its account current and 10 monthly installments thereafter. As collateral security for the payment of its obligations under the Settlement Agreement, the Company has granted HFA a security interest in the Company's master sound recordings. With the completion of its negotiations with HFA, the Company had entered settlement agreements, totaling approximately $1.35 million, with creditors representing a majority of its non-current copyright royalty obligations. Pursuant to those settlement agreements, the Company intended to satisfy all non-current royalty obligations with the creditors in question by October 1997. As of March 31, 1997, the Company had paid approximately $925,000 pursuant to those settlement agreements. An audit was performed by HFA for the period April 1, 1994 through March 31, 1996, and all royalties due were accrued. The balance of pre-petition debt with HFA per the December 1997 agreement is approximately $820,000, of which approximately one half represents pre-paid royalties on inventory. As a result of the Company's historical copyright royalty reserve practices, the Company could be subject to various claims for damages under its written copyright licensing agreements, the Act and common law (the "Claims"). In cases of copyright infringement, the Act permits the copyright holder to elect to recover either actual damages, and any additional profits of the infringer, or statutory damages. Statutory damages under the Act range from $500 to $20,000 for each infringement, and the Act gives the federal courts complete authority over the size of damage awards. In cases where the copyright owner sustains the burden of proving, and the court finds, that infringement was committed wilfully, the court in its discretion may increase the award of statutory damages to a sum of not more than $100,000 per work infringed. In PEER INTERNATIONAL CORPORATION V. PAUSA RECORDS, INC., 909 F.2d 1332 (9th Cir. 1990), the Court of Appeals held that statutory damages are not available for a failure to pay royalties under a private license agreement since such a failure is not an act of infringement within the meaning of the Act. The Court in that case suggested that the only remedy for a failure to pay royalties under a written license agreement is a common law action to recover the unpaid amounts. However, there can be no assurance that courts in other jurisdictions will adopt the holding in Peer. The Company's executive officer, Mr. Edward Steele, and former president and member of the Board of Directors, Mr. Eugene Settler, had agreed to indemnify the Company against certain claims arising out of the Company's compulsory, statutory (i.e., non-written) licensing agreements (an "Indemnifiable Claim") asserted with respect to the period from September 3, 1991 through November 10, 1994 by pledging all of their shares of Common Stock to the Company. In the event of the assertion of such an Indemnifiable Claim, the Company may require the return of shares of Common Stock to the Company with a market value collectively equal to the Indemnifiable Claim. There can be no assurance, however, that the Company would be able to sell or otherwise dispose of such shares for cash or raise a sufficient amount from the sale of such shares in order to satisfy the Indemnifiable Claim. In addition, the Company would continue to bear all other costs and expenses incurred by, or assessed against, the Company (including legal) associated with such an Indemnifiable Claim, whether or not such Indemnifiable Claim is resolved in favor of the Company. The Company has agreed to release certain shares of Common Stock from the provisions of the pledge and indemnity agreement during the period beginning December 10, 1995, under certain circumstances based upon the performance of the Company. No such shares have been released as of March 31, 1997. The pledge and indemnity agreement would also terminate as to Messrs. Steele or Settler in the event of their deaths, provided the Company then maintains life insurance of at least $1,000,000 on each party. No such insurance is presently in place. Mr. Settler's pledge and indemnification have been nullified by the settlement agreement to which he and the Company are parties, which was approved by the Bankruptcy Court in January 1998, effective September 17, 1997. 11 No Claims have been asserted against the Company to date with respect to copyright infringement. The Company believes that the assertion of any such Claims is remote, primarily as a result of its actual and proposed satisfaction of all material past due royalty obligations and the payment agreements which the Company has negotiated with its principal copyright royalty creditors. However, there can be no assurance that such Claims will not be asserted or, if asserted, that such Claims will not have material adverse effect on the Company's financial position. INFORMATION SYSTEMS During fiscal 1996, in an effort to reduce overhead expenses, the Company entered into an open-ended agreement with Memcorp, Inc., whereby the Company physically transferred its mainframe computer system and associated software licenses to Memcorp, Inc., an electronics distributor located in Hialeah, Florida, at no cost to Memcorp in exchange for the Company's indefinite continued use of such system. Via telephonic communications, the Company maintains twenty four hour, seven day a week access to the system. Under the terms of the agreement, Memcorp is responsible for all of the system's operating, maintenance and licensing fees. The system provides current on-line information to assist the Company in analyzing purchasing patterns which enables it to better identify product demand. Sales information is maintained and tracked by major product category and customer. The information system generates analyses of individual products to support Management in analyzing sales trends and price sensitivity. EMPLOYEES At March 31, 1997, the Company had 12 full-time employees, 5 of whom were engaged in warehousing and technical support and 7 in marketing and administrative functions. The total number of employees has been reduced from the prior year's total through both layoffs and attrition, as management pursues cost cutting measurers. As of this filing the staff has been further reduced to the minimum needed to operate efficiently. During peak shipping periods, temporary labor is hired, lessening permanent overhead and fringe benefits on an ongoing basis. None of the employees is represented by a labor union. The Company believes that its employee relations are adequate. Item 2. PROPERTIES As of October 1995, the Company's United States distribution warehouse and corporate offices were located in a 29,762 square foot facility in Pompano Beach, Florida. The lease was for a 62-month term, with two three-year extension options and provided for base rent, excluding common area maintenance, taxes and insurance of approximately $138,000 during the first year with fixed increases thereafter. As a result of the Chapter 11 filing this lease was rejected. The Company acknowledges that as a result of the lease being rejected, this landlord is entitled to a general unsecured claim of approximately $24,000. On May 1, 1997 the Company entered into a lease for a 10,000 square foot office and warehouse facility located in Pompano Beach for a term of 25 months. Pursuant to the terms of the lease the Company must pay maintenance, insurance and real estate taxes. This smaller facility reduces the Company's overhead expenses by approximately $12,000 per month. 12 Item 3. LEGAL PROCEEDINGS The Company filed a voluntary petition ("Petition") for relief under Chapter 11 of the Bankruptcy Code ("Bankruptcy Code") with the United States Bankruptcy Court for the Southern District of Florida ("Bankruptcy Court") on April 11, 1997 ("Petition Date"). The case was assigned #97-22199-BKC-RBR. On December 17, 1997, the Bankruptcy Court approved the Company's amended Disclosure Statement. This Disclosure Statement and amended Plan has been filed and has been mailed together with ballots to the Company's pre-petition shareholders and creditors on January 5, 1998. The Company anticipates emerging from Chapter 11 after Bankruptcy Court approval, which is expected to occur at a hearing scheduled for February 26, 1998. Other than the Chapter 11 proceeding instituted on April 11, 1997, and the two agreements described below, the Company is not a party to any material legal proceeding, and does not anticipate instituting or being named a party to any legal proceeding. On February 9, 1998, the Bankruptcy Court granted the Company's motion to approve a settlement agreement entered into on December 24, 1997, between the Company and Eugene Settler ("Settler"), a shareholder as well as former officer and director of the Company. Prior to this settlement agreement, there was pending in the Bankruptcy Court an adversary proceeding brought by the Company against Settler, for recovery of certain alleged preferential transfers arising from certain payments made to Settler as a result of legal proceedings brought by Settler against the Company for wrongful termination. The parties mediated the dispute and reached a settlement which resolves the adversary proceeding, certain alleged claims by Settler against the Company and others, and provides for an exchange of releases amongst all parties. Under the terms of the agreement, Settler also resigned as a director of the Company and assigned all of his stock certificates and options to the Company. This settlement did not require the payment of any funds by the Company other than a portion of mediation costs incurred. The Company filed a motion with the Bankruptcy Court, which is currently pending, to approve an agreement, entered into on December 16, 1997, regarding the treatment of the Harry Fox Agency in the Plan. The Harry Fox Agency, Inc., ("HFA"), is the Company's principal copyright royalty creditor to whom the Company owes approximately $820,000, which is governed by the terms of a prior settlement agreement and collateralized by the Company's master song recordings. In the agreement, HFA agreed to amend its proof of claim and to reflect this $820,000 as general unsecured debt and further, to elect to accept issuance of shares of the reorganized Company on the following basis: for each $2.00 of debt, HFA will receive one share of common stock or approximately 410,000 shares. The Bankruptcy Court has set a hearing to consider confirmation of the Plan for February 26, 1998. The significant elements of the Plan include additional estimated administrative costs of $100,000 for the Company's bankruptcy counsel, the secured claim by Bankers Capital, the Company's factor, of $124,000 shall be paid according to the terms of its contract with the company, which is current, general unsecured creditors whose claims are equal to or less than $300 shall receive a cash payment of 15% of the amount of their allowed claim, and general unsecured creditors whose claims exceed $300 shall be given the option of receiving a cash payment of 10% of the amount of their allowed claim or receiving one share of new common stock in the reorganized company for each $2.00 of an allowed claim. Any cash payments to unsecured creditors would be paid in two equal installments ten days after the Plan is confirmed and six months thereafter. Holders of existing common shares of the Company, equity interest holders, will have their interest diluted by ninety percent (90%) at confirmation under the Plan, so that for each ten shares of common stock owned they will receive one share of new common stock in the reorganized company. 13 Although the Company anticipates that the Plan will be confirmed by the Bankruptcy Court, there can be no assurance that it will be. If the Company is unable to obtain confirmation of a plan of reorganization, its creditors or equity holders could seek other alternatives for the Company including bids for the Company or parts thereof through an auction process. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS As part of the Company's Amended Plan of Reorganization approved by the Bankruptcy Court on December 17, 1997, the equity security holders of the Company are entitled to enter a ballot voting for acceptance or rejection of the Plan. Holders of existing common shares of the Company will have their interest diluted by ninety percent (90%) at confirmation under the Plan, so that for each ten shares of common stock owned they will receive one share of new common stock in the reorganized company. The deadline for filing ballots accepting or rejecting the Plan is February 16, 1998. PART II Item 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On November 17, 1995 the Company was informed by The Nasdaq Stock Market, Inc., that the Common Stock of the Company did not meet the minimum bid price of $1.00 per share, and that the Company's net tangible assets did not meet the minimum requirement of $4,000,000. On January 25, 1996, pursuant to a January 19, 1996 hearing before a Nasdaq Hearing Panel, the Nasdaq Listings Qualifications Committee ("Committee"), denied the Company's request for an exception to the minimum bid price requirement. In addition the Committee indicated that the Company did not meet the minimum quantitative criteria for inclusion on the Nasdaq SmallCap Market. Accordingly, effective January 26, 1996, the Company's securities were delisted from the Nasdaq Stock Market. However, the Company's securities were immediately eligible to trade on the OTC Bulletin Board. 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 Nasdaq National Market for the periods prior to January 26, 1996, and the OTC Bulletin Board thereafter, as adjusted for the fiscal fourth quarter 1995 20% Stock Dividend. The Company's Common Stock commenced trading on November 10, 1994. Prior thereto, there was no public market for the Company's Common Stock. 14 Fiscal 1997 High Low ------------------------------------------------- ------ ------ First Quarter.................................... $0.250 $0.100 Second Quarter................................... 0.100 0.100 Third Quarter.................................... 0.100 0.078 Fourth Quarter .................................. 0.100 0.078 ------------------------------------------------- ------ ------ Fiscal 1996 High Low ------------------------------------------------- ------ ------ First Quarter.................................... $1.63 $1.50 Second Quarter................................... 1.50 1.00 Third Quarter.................................... 1.03 0.75 Fourth Quarter (through January 25,1996)......... 0.78 0.50 Fourth Quarter (from January 26,1996; OTC)(1).... 0.25 0.25 Fiscal 1995 High Low ------------------------------------------------- ------ ------ Third Quarter (from November 10, 1994)........... $4.48 $2.92 Fourth Quarter .................................. 2.50 1.25 --------- (1) Stock quoted on OTC as of January 26, 1996. As of February 10, 1998, the last reported bid price of the Common Stock on the OTC Bulletin Board was $0.13 per share. The number of record holders of the Common Stock at February 10, 1998 was 157, although the Company believes that the number of beneficial owners of such Common Stock is much greater. As a result of being delisted from the Nasdaq National Market, stockholders may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's Common Stock. The Company has never declared or paid cash dividends on its capital stock and the Company's Board of Directors intends to continue this 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 and the agreement with the representatives of the underwriters for the Company's initial public offering (the "Representatives"). Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION 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. 15 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of the Company's total revenues, except as noted below: YEAR ENDED MARCH 31 ------------------------------------ 1997 1996 1995 1994 ---- ---- ---- ---- Revenues: Equipment sales, net.................. 83.9% 73.0% 41.9% 35.1% Music sales, net...................... 15.1 24.2 54.2 60.5 Commission income - related party and other........................... 1.0 2.8 3.9 4.4 Total revenues 100.0% 100.0% 100.0% 100.0% Cost of Sales (1): Cost of equipment sales............... 90.0% 89.6% 89.9% 77.6% Cost of music sales................... 67.3 110.8 72.5 52.8 Expenses: Other operating expenses.............. 5.4 13.6 7.8 4.8 Selling, general and administrative expenses............................ 22.2 48.2 38.2 18.6 Depreciation and amortization......... 3.7 4.4 2.1 0.5 Impairment of long-lived assets....... 15.1 7.8 -- -- Operating income (loss)................. (32.1) (66.2) (25.1) 16.9 Other expenses, net .................... (4.2) (7.9) (12.1) 7.6 Income (loss) before taxes.............. (36.3) (74.1) (37.2) 9.2 Provision (benefit) for income taxes.... -- -- (5.7) 2.0 Income (loss)........................... (36.3) (74.1) (31.5) 7.2 - ---------- (1) Expressed as a percentage of related sales. GENERAL The Company is currently operating under Chapter 11 of the Bankruptcy Code as a result of its filing for protection on April 11, 1997, and is awaiting a hearing on confirmation of its Plan of reorganization set for February 26, 1998. For fiscal 1997 and fiscal 1996, the Company's total revenues were approximately $10.7 million and $5.2 million, respectively. Although total revenues more than doubled in fiscal 1997, the Company had a net loss of approximately $3.9 million which equaled its net loss in fiscal 1996. As a result of historical losses, a net working capital deficiency and lack of financing, the Company's auditors expressed substantial doubt about the Company's ability to continue as a going concern based on their audit of the Company's financial statements for the fiscal year ended March 31, 1997. See "Results of Operations", "Liquidity and Capital Resources", and "Going Concern". 16 THE YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996. Total revenues slightly more than doubled to $10.7 million for the fiscal year ended March 31, 1997 compared to the $5.2 million reported for fiscal 1996. The increase was primarily attributable to a sharp increase in equipment sales. Revenues from equipment sales increased $5.2 million or 136% to approximately $9.0 million during fiscal 1997 compared to approximately $3.8 million for fiscal 1996. The increase reflects the impact of the Memorex trademark, a new product mix featuring CD plus graphics players, a concerted sales effort by the Company's management and a less competitive marketplace. The increase primarily reflects higher foreign sales totaling approximately $5.6 million. The recording of foreign equipment sales is attributable to sales made by the Company's subsidiary, International SMC (HK) Ltd. ("International"), which began operations in the first quarter of fiscal 1996, and represents 63% of equipment sales and 53% of total revenues, for fiscal 1997. Previously, the Company, through related party transactions, recorded commissions earned on foreign shipments. Because of the additional costs related to importing goods and the difficulty in obtaining inventory financing, management has decided to emphasize direct sales from its Far East equipment suppliers via International as opposed to domestic sales from inventory in the future. Revenues from music sales increased by $355,000 or 28% to approximately $1.6 million in fiscal 1997 from the approximately $1.3 million recorded during fiscal 1996. This apparent increase in music sales was due to significant returns in the fourth quarter of fiscal 1996. Because of such returns and excess inventory, management had decided to redirect music sales away from distributors who historically have high merchandise return rates in favor of mass market retailers. The primary impact from this change in strategy was reflected in fiscal 1996, when music sales decreased $2.0 million from the fiscal 1995 period. Fundamentally in fiscal 1997, sales of the Company's eight song and four song music formats declined which was partially offset by increases in sales of the CD&G format. Commission income decreased to approximately $90,000 during fiscal 1997 compared to $130,000 during the prior year. The decrease of $40,000 was primarily due to a decrease in commission income from a related party. The Company anticipates commission income from a related party to continue to decline due to the formation of International and the decision to conduct substantially all foreign sales through such subsidiary. Cost of equipment sales for the year ended March 31, 1997, expressed as a percentage of related sales, was 90%, unchanged from fiscal 1996. Cost of equipment sales included inventory write-downs of $529,000 and $371,000, for years 1997 and 1996, respectively. The cost of music sales, expressed as a percentage of music sales, decreased to 67% for the current year, from nearly 111% in fiscal 1996. Among other items, this decrease in the cost of music sales reflects approximately $190,000 in adjustments to inventory values based on changing market conditions during fiscal 1996. Other operating expenses decreased approximately $130,000, or 18%, for fiscal 1997, compared to the prior year. The decrease reflects managements' efforts to control operating expenses in light of a significant increase in equipment sales and primarily reflects lower warehouse rent, occupancy costs, and warehouse personnel expense, partially offset by higher cost of supplies. Selling, general & administrative expenses ("SG&A expenses") decreased $135,000 or 5% for fiscal 1997 compared to fiscal 1996. This decrease was primarily due to management's commitment to reduce total overhead in light of a substantial increase in sales. Categories which decreased include salaries and benefits, 17 promotional expenses including catalog, advertising and show/convention costs, product development, travel and entertainment, and insurance. These decreases were partially offset by higher professional fees. The Company continues to take action to reduce its SG&A expenses, which can be seen in the above comparison, taking into consideration the increase in sales. The Company believes that an additional impact of staff and other reductions will be seen in fiscal 1998. Product development costs are being curtailed, computer support expenses have been reduced, rigid restrictions have been placed on overtime and travel, and discretionary expenditures are being carefully reviewed and eliminated by management. In addition, the Company has entered into a new lease and moved its headquarters, which has reduced overhead expenses by approximately $12,000 per month. Depreciation and amortization expense increased approximately $170,000 or 76% to $400,000 during the fiscal year ended March 31, 1997. The increase was primarily the result of accelerating the depreciation of tools and dies on the books of International which are carried on its books at $318,000, and reducing the estimated useful lives of certain intangible assets, trademark and cost in excess of net assets (goodwill), as of April 1, 1996. As a result of the significant decline in music sales during fiscal 1996 and 1997, the Company reviewed the carrying value of costs in excess of net assets acquired (goodwill) and trademarks carried on its balance sheet. As a result of this review the Company recorded a reduction in the carrying value of such assets relating to music sales in the amount of $405,000 for fiscal 1996 and $1,081,000 for fiscal 1997, which amounts were charged to operations. See "Notes to Consolidated Financial Statements No. 1 - Organization and Summary of Significant Accounting Policies". A similar review was conducted on the carrying value of the Company's investment in song library, which consists of costs incurred in the production or purchase of master song tapes. Based upon the outcome of such review, the Company recorded a reduction in the carrying value of such assets of $820,000, which was charged to operations. See "Notes to Consolidated Financial Statements No. 1 - Organization and Summary of Significant Accounting Policies". The operating loss for fiscal 1997 was approximately $3.4 million which is equal to the operating loss reported for fiscal 1996. As a percentage of total revenues, the operating loss decreased to 32% for fiscal 1997 from 66% in the prior year. Both periods' operating income included significant accounting adjustments to long-lived assets and inventory, among others. Excluding these adjustments the fiscal 1997 operating loss would have been $1.3 million. This improvement from the prior year was related to a combination of factors including the increase in total revenues, a change in sales mix, and decreases in other operating and SG&A expenses. The ratio of higher gross margin music sales to total revenues continued to decrease to 15% in fiscal 1997 from 24% the prior year. Gross profit, expressed as a percentage of equipment sales improved to 16% for fiscal 1997, but is still below management targets. Gross profit from equipment sales increased approximately $1.0 million for the same period. This increase was attributable to increased volume of approximately $4.4 million from the Company's subsidiary, International, as well as the impact on both sales and margins due to less competitive pressures. Gross profit from music sales was approximately $526,000 or 33%, for the current year compared to a loss of $136,000 or 10% of related sales for the prior fiscal year. The improvement in gross profit from music sales was primarily because of management's change in policy to reduce returned merchandise and the impact of inventory valuation adjustments in the prior year. Net interest expense was relatively unchanged from the prior year, the major components being interest expense on the Magna Note and on the debt to HFA for past due royalty obligations. 18 Loss on sales of accounts receivable was 2.2% and 4.8% of total revenues for the fiscal years 1997 and 1996, respectively. The decrease of approximately $16,000 was primarily because of a decrease in fees charged by the Company's factor combined with the fact that the majority of the increase in total revenues took place at the Company's foreign subsidiary, which does not utilize the services of the factor. Net loss for fiscal 1997 was approximately $3.9 million, unchanged from the loss of $3.9 million reported for fiscal year 1996. Although the loss for fiscal 1997, excluding accounting adjustments of $2.1 million, was significantly lower than the prior year, and management has made great strides in reducing overhead, the primary reason for both periods losses is the inability to obtain sufficient gross margins on hardware sales to cover overhead and debt payments combined with decreased levels of high margin music sales. Although projections can be overly optimistic and purchase orders can be canceled, management believes that the reduction of debt which will be accomplished upon confirmation of the Plan, in conjunction with the accounting adjustments to inventory and the carrying value of intangible assets, as well as the significant reductions in cost structures, will position the Company for profitability in fiscal 1998. THE YEAR ENDED MARCH 31, 1996 COMPARED TO YEAR ENDED MARCH 31, 1995 (THE "FISCAL 1995 PERIOD"). The following discussion of fiscal year 1996 is in comparison to the Fiscal 1995 Period which is presented on a pro forma combined basis for the periods from April 1, 1994 through May 4, 1994 (the "Predecessor Period") and from May 5, 1994 through March 31, 1995 (the "Successor Period"). As a result of the application of "pushdown" accounting during the Fiscal 1995 Period, the information with respect to such Fiscal 1995 Period may not necessarily be comparable with the year ended March 31, 1996. Total revenues declined by approximately $0.8 million or 14% for the fiscal year ended March 31, 1996 compared to the $6.0 million reported for the Fiscal 1995 Period. The decline was attributable to decreases in music sales, master tape sales, and commission income partially offset by sales from the Company's new Hong Kong subsidiary. Revenues from equipment sales increased $1.3 million or 52% to approximately $3.8 million during fiscal 1996 compared to approximately $2.5 million for the Fiscal 1995 Period. The increase is a result of foreign sales totaling approximately $1.3 million. The recording of foreign equipment sales is attributable to sales made by the Company's subsidiary, International SMC (HK) Ltd. ("International"), formed in April, 1995, which represents 33% of equipment sales and 24% of total revenues, for fiscal 1996. Previously, the Company, through related party transactions, recorded commissions earned on foreign shipments. But for such change in the method of recognizing income from foreign hardware shipments, the Company's revenues from equipment sales for fiscal 1996 would have been relatively unchanged from the 1995 Period. Revenues from music sales declined by $2.0 million or 61% to approximately $1.3 million in fiscal 1996 from the approximately $3.3 million recorded during the Fiscal 1995 Period. The decline in music sales was due to less than expected sales in certain music formats and master tape sales as well as management's decision to redirect music sales away from distributors who historically have high merchandise return rates in favor of mass market retailers. Sales of the Company's four (4) song music format to a major customer declined by more than $1.3 million for fiscal 1996. The Company did not report any master tape sales revenue for fiscal 1996 compared to $279,000 during the Fiscal 1995 Period. The Company's master tape agreement with an unrelated party expired September 1, 1995, which accounts for this decrease. Commission income decreased to approximately $130,000 during fiscal 1996 compared to $230,000 during the Fiscal 1995 Period. The decrease of approximately $100,000 or 43% was primarily because of a decrease 19 in commission income from a related party. The Company anticipates commission income from a related party to continue to decline due to the formation of International and the decision to conduct substantially all foreign sales through International. Cost of equipment sales for the year ended March 31, 1996, expressed as a percentage of related sales, was essentially unchanged from the approximate 90% reported for the Fiscal 1995 Period. The cost of music sales, expressed as a percentage of music sales, increased from almost 73% in fiscal 1995 to nearly 111% for the current year. Among other items this increase in cost of music sales includes, approximately $190,000 in adjustments to inventory values based on changing market conditions and the greater impact of amortization expense on substantially lower sales volume. Other operating expenses increased approximately $235,000, or 50%, for fiscal 1996, compared to the Fiscal 1995 Period. The increase was primarily because of increased warehouse rent and occupancy costs of approximately ($81,000), costs of outside storage expenses for merchandise ($20,000), cost of freight ($73,000) and an increase in warehouse salaries ($53,000). Selling, general & administrative expenses ("SG&A expenses") increased approximately $200,000 or 9% for fiscal 1996 compared to the Fiscal 1995 Period. The increase was primarily due to expenses associated with the administration of the Company's new international subsidiary in Hong Kong of approximately ($170,000), costs associated with product development ($150,000), directors and officers insurance ($57,000), catalog expense ($38,000), bad debt expense ($31,000), and financial consulting fees ($29,000). These increases were partially offset by a decrease in expenses related to Bridge Warrant price adjustments $169,000, and decreases in accounting fees of $100,000 and legal fees of $61,000, which were incurred in the prior year and related to the Company's IPO. A quarterly comparison of SG&A expenses indicates reductions in the majority of categories totaling approximately $500,000 or 57%, including salaries $78,000, catalog expense $48,000, public relations $20,000, accounting $127,000 and legal $105,000. During fiscal 1995, the Company received approximately $380,000 of reimbursed expense credits from its related party supplier, FLX. The Company received approximately $150,000 of such credits from FLX during fiscal 1996. Excluding these credits, selling, general and administrative expenses year to year would have been essentially unchanged. The Company continues to take action to reduce its SG&A expenses, which can be seen in the fourth quarter comparison. The Company believes that the full impact of staff reductions will be seen in fiscal 1997; product development costs are being curtailed, computer support expenses have been reduced, rigid restrictions have been placed on overtime and travel, and discretionary expenditures are being carefully reviewed and eliminated by management. In addition, although the Company has not entered into any written agreements, it is actively seeking parties to sublet a portion of its warehouse facility in order to further reduce overhead. Depreciation and amortization expense increased approximately $100,000 or 81% to $227,000 during the fiscal year ended March 31, 1996. The increase was primarily due to depreciation expense associated with International's purchase of tools and dies which are carried on its books at $318,000. As a result of the significant decline in music sales during fiscal 1996 the Company reviewed the carrying value of costs in excess of net assets acquired (goodwill) and trademarks carried on its balance sheet. As a result of this review the Company recorded a reduction in the carrying value of such assets relating to music sales in the amount of $405,000 which was charged to operations. See "Notes to Consolidated Financial Statements No. 1 - Organization and Summary of Significant Accounting Policies". 20 Operating loss for fiscal 1996 was approximately $3.4 million compared to a loss of $1.5 million for the Fiscal 1995 Period. As a percentage of total revenues, the operating loss increased to 66% for fiscal 1996 from 25% in the prior year. The decrease in operating income was related to a combination of factors including the decrease in total revenues, a significant change in sales mix, an unfavorable accounting adjustment and an increase in selling, general and administrative expenses. The ratio of higher gross margin music sales to total revenues decreased to 24% in fiscal 1996 from 54% the prior year. Gross profit, expressed as a percentage of equipment sales remained the same compared to the prior year at 10%. Gross profit from equipment sales increased approximately $140,000 for the same period. This increase was attributable to increased volume of approximately $1.3 million from the Company's new subsidiary, International, as well as the elimination of price concessions granted to certain customers during the Fiscal 1995 Period. Gross profit (loss) from music sales decreased approximately $1.0 million to (11%) of related sales for the fiscal year ended March 31,1996, compared to 27%, for the Fiscal 1995 Period. The decline in gross profit from music sales was primarily because of an increase in returned merchandise ($355,000), the decline in master tape sales ($279,000), the inventory valuation adjustments of approximately ($190,000), and the loss of approximately $1,300,000 in music sales to a major customer of the Company's four (4) song music format compared to the Fiscal 1995 Period. Net interest expense decreased approximately $110,000 or 40% for fiscal 1996 compared to the Fiscal 1995 Period. The decrease was primarily due to non-recurring interest expense associated with bridge financing of approximately $137,000 in fiscal 1995 and a decrease in interest expense on related party obligations $69,000, partially offset by interest expense on debt owed to Magna International ($58,000), and past due royalty obligations to the Harry Fox Agency, Inc.($33,000). Loss on sales of accounts receivable was 5% and 7% of total revenues for the fiscal years 1996 and 1995, respectively. The decrease of approximately $160,000 or 39% was primarily because of a decrease in fees charged by the Company's factor, negotiated in the third quarter of fiscal 1995, combined with the decrease in total revenues. Net loss for fiscal 1996 was approximately $3.9 million, an increase of $2.0 million from the loss of $1.9 million reported for the Fiscal 1995 Period. The loss for fiscal 1996 was primarily attributable to the 61% decline in high gross margin music sales, the high level of merchandise returns and the related reduction in carrying value of goodwill and trademarks. Although projections can be overly optimistic and purchase orders can be canceled , and such items are no guarantee of revenue, the Company has projections for fiscal 1997 sales based on customer inquiries in excess of $10.5 million, of which $8.0 million are substantiated by purchase orders. SEASONAL FACTORS As is typical in the KARAOKE industry, the Company's operations have been seasonal, with the highest net sales occurring in the second and third quarter (reflecting increased orders for equipment and music merchandise during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year. The Company's results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis. 21 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. POSSIBLE CLAIMS The Company may be subject to various Claims for damages and other remedies under its written copyright licensing agreements or pursuant to Title 17 of the United States Code. The Company is current with respect to compulsory licenses, granted pursuant to the federal copyright statute. As of December, 1997, the Company had entered into a definitive settlement agreement with its principal copyright royalty creditor regarding past due obligations, contingent upon confirmation of the Plan. Although the Company believes that the assertion of any such Claims is remote, primarily as a result of the aforementioned agreement, there can be no assurance that such Claims will not be asserted or, if asserted, that such Claims will not have a material adverse effect on the Company's financial position. See Item 1 - "Business - Trademarks and Licenses." LIQUIDITY AND CAPITAL RESOURCES The Company continues to suffer from a lack of liquidity and capital resources which have affected its ability to conduct business in a profitable manner. The Company's working capital deficit at March 31, 1997, was approximately ($3.9) million. While the Company is currently seeking additional financing for its inventory and working capital needs there is no guarantee that it will be successful in obtaining such financing on satisfactory terms. The Company is a party to a factoring agreement, dated June 3, 1992, as amended December 30, 1994, with Bankers Capital ("Bankers"), a division of Bankers Leasing Association, Inc., pursuant to which Bankers purchases certain of the Company's accounts receivable. Under the agreement, Bankers purchases certain selected accounts receivable from the Company and advances 70% of the face amount of those receivables to the Company. Bankers retains discretion to determine which of the Company's accounts receivable it will purchase. Once Bankers purchases the account receivable of any particular customer of the Company, all accounts receivable of such customer (whether or not so purchased) are collected by Bankers and applied first to payment of the particular accounts receivable purchased by Bankers. As a result of the greater incidence of returned merchandise by the Company's software customers, Bankers purchases a lesser percentage of the Company's total accounts receivable relating to software merchandise than hardware merchandise. The Company is charged interest on all advances against the purchased accounts receivable, at an annual rate of 1.5% in excess of the prime rate of interest charged by Harris Trust and Savings Bank (8.50% on February 10, 1998), until the receivables subject to the advances are collected. For accounts receivable purchased by Bankers the Company will be charged a fee, from 2.0% to 3.0%, depending on the period the receivable has been outstanding, and receives payment from Bankers of the remaining 30% of the face amount of the receivable. All receivables which are not collected within 150 days are charged back to the Company and deducted from the total advances available to the Company. All of the Company's accounts receivable, inventories and intangibles are pledged as security under this agreement. The Company has agreed to pay minimum monthly fees of $10,000 under the agreement. As of February 10, 1998, the outstanding balance for which the Company is contingently liable to Bankers, was approximately $50,000. The agreement with Bankers expired on June 28, 1997. By Orders dated August 14 and September 5, 1997, the Bankruptcy Court authorized post-petition financing with Bankers via the extension, under the same terms, of its prior financing agreement for nine months expiring June 5, 1998. 22 In September 1992, Magna agreed to exchange $816,574 of debt owed by the Company to Magna, and an affiliated company of Magna, for additional shares of the Company's Common Stock (the "Additional Shares"). That agreement, as amended, gave Magna the right to require the Company to repurchase the Additional Shares, on December 31, 1996, for $816,574 plus interest at 8% per annum from September 30, 1994. On November 10, 1994, Magna exchanged the Additional Shares for the Company's promissory note (the "Magna Note") in the amount of $816,574. Payment of the note was guaranteed by a pledge from Gemco Pacific, Inc., an assignee of Paul Wu, a director of the Company, of all of its shares of the Company's Common Stock until the payment and satisfaction of fifty percent of the principal amount of the note, and fifty percent of such shares until the remaining principal balance of the note is paid. The Magna Note was due in two equal installments on November 10, 1995 and May 10, 1996. The Company did not pay either installment. However, the Company did make partial payments through June 30, 1996 of $275,000, which includes principal and interest. As a result of the Company's failure to timely pay the agreed upon installments the remaining balance of the note became due and payable in full. The default provision of the Magna Note provides for a cure period of 15 days after written notice has been given to the Company from Magna. Written notice of default to the Company from Magna has not yet been received, however, it is not required. The Company is subject to pay any reasonable attorney's fees incurred by Magna in enforcing the rights of Magna while the loan is in default. Notice of default has been given to Magna and no wavier of default has been obtained by the Company. The entire note is classified as a current obligation on the Company's balance sheet and continues to accrue interest. As a result of the Chapter 11 filing, this debt is classified as a general unsecured claim and will be paid according to the Plan if confirmed by the Bankruptcy Court. See "Business - Confirmation". On March 31, 1997 and 1996, the Company had accrued on its financial statements total royalties payable, comprised of audio and written lyric components, of approximately $720,000 and $1.1 million, respectively. As of March 31, 1997 the Company remained delinquent in the payment of its copyright royalty obligations imposed pursuant to written agreements with The Harry Fox Agency, Inc. ("HFA"). Due to its liquidity problems, the Company could only meet its other operating obligations by not timely paying such royalty obligations. In May 1994, the Company requested its principal copyright royalty creditor, the Harry Fox Agency, Inc. ("HFA"), which represents the majority of copyright holders for which the Company was obligated to pay royalties, to audit its records for the period October 1991 through March 1994. On May 22, 1995, the Company executed a settlement agreement (the "Settlement Agreement") with HFA, with respect to all non-current royalty obligations and claims for the period from October 1, 1991 through March 31, 1994 in the amount of $1,030,000. The Company had accrued approximately $1.0 million in its financial statements for royalty obligations to HFA and, on February 22, 1995, paid HFA $200,000 to be applied against the settlement amount. The total amount of settlement payments made during fiscal 1996 was $432,000, and the balance of approximately $400,000, as of March 31, 1997, was anticipated to be paid in monthly installments, through April 1997, of principal and interest at 8.0% per annum. After a period of default, the Company entered into an amended payment agreement with HFA, stipulating a lump sum payment to bring its account current and monthly installments thereafter. As collateral security for the payment of its obligations under the Settlement Agreement, the Company has granted HFA a security interest in the Company's master sound recordings. An audit was performed by HFA for the period April 1, 1994 through March 31, 1996 and all royalties due were accrued. The Bankruptcy Court is evaluating the Company's motion to approve an agreement, entered into on December 16, 1997, regarding the treatment of the Harry Fox Agency in the Plan. In the agreement approved by the Bankruptcy Court, HFA agreed to amend its proof of claim and to reflect $820,000, which includes 23 pre-payment of royalties on inventory, as general unsecured debt and further, to elect to accept issuance of shares of the reorganized Company on the following basis: for each $2.00 of debt, HFA will receive one share of common stock. This agreement is subject to the Plan being confirmed by the Bankruptcy Court. See "Business - Confirmation". The Company may be subject to various Claims for damages and other remedies under its written copyright licensing agreements or pursuant to Title 17 of the United States Code. The Company satisfied its outstanding royalty obligations with respect to compulsory licenses, granted pursuant to the federal copyright statute, and has been current thereafter with respect to such compulsory royalty obligations. Although the Company believes that the assertion of any such claims is remote, primarily as a result of the completed negotiations for specific payment agreements with its principal copyright royalty creditors, there can be no assurance that such Claims will not be asserted or, if asserted, that such Claims will not have a material adverse effect on the Company's financial position. On July 20, 1994, the Company closed a private financing pursuant to which it issued secured subordinated promissory notes in an aggregate principal amount of $400,000, and issued Bridge Warrants to purchase 360,000 shares of Common Stock. Such notes, together with interest at a rate of 8% per annum, were repaid on November 18, 1994. The Bridge Warrants were exercisable at a price of $1.20 per share of Common Stock commencing February 8, 1995 and expire on August 15, 1999. As of June 30, 1997, 272,250 of such Bridge Warrants had been exercised, resulting in gross proceeds of $326,000 to the Company. Since September 1991, FLX (HK) Ltd., a Hong Kong corporation ("FLX") and The Singing Machine Company, Ltd., a Hong Kong trading company ("LTD") have sold merchandise to the Company under deferred payment terms. Paul Wu, a director of the Company, is the Chairman of the Board and a principal stockholder of FLX and LTD. For the fiscal years ended March 31, 1997 and 1996, the total inventory purchases from FLX and LTD were approximately $1.9 million and $1.2 million, respectively. In the normal course of business, the Company enters into negotiations with FLX and LTD, with respect to the terms and the nature of transactions conducted with those companies. For the fiscal year 1997 and 1996, such negotiations resulted in the Company receiving credits totaling approximately $70,000 and $150,000, respectively, from such companies for such items as refurbishing of defective merchandise by the Company and promotional and advertising expenses, with a concomitant credit to results of operations. See Item 12 - "Certain Relationships and Related Transactions". At March 31, 1996, the Trade payables - related party, which totaled approximately $425,000, were composed of amounts due by the Company for merchandise received from overseas suppliers. FLX and LTD have also advanced funds directly to, or on behalf of the Company, with respect to inventory purchaseS. Primarily due to the Company's continued negative cash flow from operations and as a result of the net losses incurred by the Company for the fiscal years ended 1996 and 1997, the Company did not believe, prior to its Chapter 11 filing, that its credit facility with Bankers and its financing arrangements with, Memcorp, FLX and LTD would be sufficient to meet its future cash flow needs. Memcorp had provided up to $2.2 million of inventory financing to the Company via letters of credit but has no requirement to continue to do so. FLX and LTD had agreed to provide up to $500,000 of inventory financing to the Company through April 1, 1996. Since April 1, 1995, FLX and LTD have provided inventory financing to the Company in excess of their $500,000 commitment, but have no obligation to do so in the future. Dero and A-Tech have agreed to provide up to $200,000 in inventory financing each, as of the date of this filing. 24 Because of the additional costs related to importing goods and the difficulty in obtaining inventory financing, management has decided to emphasize direct sales from its Far East equipment suppliers via International as opposed to domestic sales from inventory in the future. Although the Company is currently engaged in negotiations with regard to securing third-party financing to replace or augment the financing arrangements mentioned, there can be no assurance that such financing will be available on terms satisfactory to the Company or at all, that FLX, LTD, Dero and A-Tech will continue to provide financing to the Company, or that FLX and LTD will continue to provide over-funding to the Company. The Chapter 11 filing and related reorganization, provided such is confirmed by the Bankruptcy Court, will have a significant positive impact on the Company's cash flow and liquidity. It is projected that the reorganization will reduce the Company's liabilities in excess of $4 million, thereby returning the Company to solvency. 25 GOING CONCERN The report by the Company's independent auditors on its 1997 financial statements express substantial doubt about the Company's ability to continue as a going concern. The independent auditors attributed this substantial doubt to substantial net operating losses in the fiscal year ended March 31, 1997 and an accumulated deficit of approximately $9.5 million. In addition, the Company does not have a line of credit in place to finance its seasonal needs for inventory purchases. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include adjustments relating to the recoverability and classification of the recorded carrying value of assets or the amounts or classifications of other liabilities that might be necessary should the Company be unable to successfully negotiate additional inventory financing and continue as a going concern. 26 Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HISTORICAL FINANCIAL STATEMENTS Report of Independent Certified Public Accountants, Millward & Co..........................................................F-1 Balance Sheet at March 31, 1997..........................................F-2 Statements of Operations for the fiscal years ended March 31, 1997 and March 31, 1996.....................................F-3 Statements of Shareholders Equity for the fiscal years ended March 31, 1997 and March 31, 1996................................F-4 Statements of Cash Flows for the fiscal years ended March 31, 1997 and March 31, 1996......................................F-5 Notes to Financial Statements............................................F-7 27 Report of Independent Certified Public Accountants Board of Directors and Shareholders The Singing Machine Company, Inc. (Debtor-in-Possession) Pompano Beach, Florida We have audited the accompanying consolidated balance sheet of The Singing Machine Company, Inc. and Subsidiary (Debtor-in-possession) as of March 31, 1997 and the related consolidated statements of operations, shareholders' equity (deficiency) and cash flows for each of the two years in the period ended March 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Singing Machine Company, Inc. and Subsidiary at March 31, 1997 and the results of their operations and their cash flows for each of the two years in the period ended March 31, 1997 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 more fully described in Note 2, the Company has incurred recurring operating losses and a shareholders' deficiency of $ 9,546,672, and on April 11, 1997, the Company filed for relief pursuant to Chapter 11 of the United States Bankruptcy Act. In addition, the Company does not have a line of credit in place to finance its seasonal needs for inventory purchases. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans as to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the inability of The Singing Machine Company, Inc. and Subsidiary to continue as a going concern. /s/ MILLWARD & CO. - ------------------------- Millward & Co. CPAs Fort Lauderdale, Florida December 3, 1997 F-1 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEET March 31, 1997 ASSETS CURRENT ASSETS: Cash $ 10,222 Trade Accounts Receivable, Net of Allowance for Doubtful Accounts of $80,000 309,480 Due from Officer 31,178 Inventories, Net 1,170,017 Prepaid Expenses and Other Current Assets 52,834 ----------- Total Current Assets 1,573,731 ----------- PROPERTY AND EQUIPMENT, Net of Accumulated Depreciation of $296,713 178,030 ----------- INTANGIBLE ASSET: Investment in Song Library, Net of Accumulated Amortization of $353,836 91,082 ----------- Total Assets $ 1,842,843 ----------- LIABILITIES AND SHAREHOLDERS' DEFICIENCY CURRENT LIABILITIES SUBJECT TO COMPROMISE: Bank Overdraft $ 10,599 Trade Accounts Payable 2,263,188 Trade Accounts Payable to Related Parties 424,863 Accrued Expenses 954,310 Royalties Payable 720,265 Loan Payable 643,305 Due to Factor 222,443 ----------- Total Current Liabilities Subject to Compromise 5,238,973 ----------- CURRENT LIABILITIES NOT SUBJECT TO COMPROMISE: Trade Accounts Payable of Subsidiary 277,258 ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' DEFICIENCY: Common Stock, $.01 Par Value; 10,000,000 Shares Authorized; 2,883,582 Shares Issued and Outstanding 28,836 Additional Paid-in Capital 5,844,448 Accumulated Deficit (9,546,672) ----------- Total Shareholders' Deficiency (3,673,388) ----------- Total Liabilities and Shareholders' Deficiency $ 1,842,843 =========== The accompanying notes are an integral part of these statements. F-2
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997 1996 ------------ ------------ REVENUES: Equipment Sales, Net $ 8,953,462 $ 3,795,447 Music Sales, Net 1,610,594 1,255,932 Commission Income - Related Party 90,583 130,893 Other Income 20,240 13,295 ------------ ------------ Total Revenues 10,674,879 5,195,567 ------------ ------------ COST AND EXPENSES: Cost of Equipment Sales 8,060,973 3,399,282 Cost of Music Sales 1,084,386 1,391,588 Other Operating Expenses 576,602 705,496 Selling, General and Administrative Expenses 2,370,746 2,380,976 Depreciation and Amortization 400,084 351,408 Impairment of Long-Lived Assets 1,609,973 405,085 ------------ ------------ Total Costs and Expenses 14,102,764 8,633,835 ------------ ------------ Loss from Operations (3,427,885) (3,438,268) ------------ ------------ OTHER (EXPENSES) INCOME: Interest Expense (173,639) (172,467) Interest Income 5,033 8,315 Factoring Fees (235,312) (250,818) Gain (Loss) on Sale or Abandonment Property and Equipment (43,325) 2,258 ------------ ------------ Total Other Expenses (447,243) (412,712) ------------ ------------ LOSS BEFORE PROVISION FOR INCOME TAXES (3,875,128) (3,850,980) PROVISION FOR INCOME TAXES -- -- ------------ ------------ NET LOSS $ (3,875,128) $ (3,850,980) ============ ============ NET LOSS PER COMMON SHARE $ (1.38) $ (1.38) ============ ============ WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 2,816,513 2,806,361 ============ ============
The accompanying notes are an integral part of these statements. F-3
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) For the Year Ended March 31, 1997 and 1996 COMMON STOCK TOTAL $.01 PAR VALUE ADDITIONAL SHAREHOLDERS' ------------------------- PAID-IN ACCUMULATED EQUITY SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY) ----------- ----------- ----------- ----------- ----------- Balance at March 31, 1995 2,539,332 $ 25,393 $ 5,509,314 $(1,820,564) $ 3,714,143 Exercise of Bridge Warrants 272,250 2,723 317,855 -- 320,578 Net Loss for the Year Ended March 31, 1996 -- -- -- (3,850,980) (3,850,980) ----------- ----------- ----------- ----------- ----------- Balance at March 31, 1996 2,811,582 28,116 5,827,169 (5,671,544) 183,741 Issuance of Common Shares for Debt settlement 72,000 720 17,279 -- 17,999 Net Loss for the Year Ended March 31, 1997 -- -- -- (3,875,128) (3,875,128) ----------- ----------- ----------- ----------- ----------- Balance at March 31, 1997 2,883,582 $ 28,836 $ 5,844,448 $(9,546,672) $(3,673,388) =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these statements. F-4
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIE Net Loss $(3,875,128) $(3,850,980) Adjustments to Reconcile Net Loss to Net Cash Provided by (Used in) Operations: Depreciation and Amortization 400,084 351,408 Impairment of Long-Lived Assets 1,609,973 405,085 (Gain) Loss on Sale or Abandonment of Property and Equipment 43,325 (2,780) Changes in Operating Assets and Liabilities: Trade Accounts Receivable (124,873) 915,996 Due from Factor 33,833 274,469 Inventories 1,136,415 348,878 Prepaid Expenses and Other 50,037 221,664 Income Tax Receivable -- 211,188 Bank Overdraft 10,599 -- Trade Accounts Payable 1,101,286 580,252 Trade Accounts Payable to Related Parties (80,771) (456,982) Accrued Expenses (53,127) 436,866 Royalties Payable (123,784) 373,621 ----------- ----------- Net Cash Provided by (Used in) Operating Activities 127,869 (191,315) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of Property and Equipment (732) (64,111) Proceeds from Sale of Property and Equipment -- 5,000 Additions to Song Library -- (71,972) Due from Officer (975) 447 Other Assets -- 32,158 ----------- ----------- Net Cash Used in Investing Activities (1,707) (98,478) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase in Due to Factor 222,443 Issuance of Bridge Warrants -- 320,578 Repayment of Long-Term Debt (338,496) (771,021) ----------- ----------- Net Cash Used in Financing Activities (116,053) (450,443) ----------- ----------- Net Increase (Decrease) in Cash 10,109 (740,236) Cash at Beginning of Year 113 740,349 ----------- ----------- Cash at End of Year $ 10,222 $ 113 =========== ===========
The accompanying notes are an integral part of these statements. F-5 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED MARCH 31, 1997 1996 ----------- ------------ SUPPLEMENTAL CASH FLOW INFORMATION: Cash Paid for Interest $ -- $ 103,000 ======== ========= Cash Paid (Received) for Income Taxes $ -- $(211,000) ======== ========= NON-CASH FINANCING ACTIVITY: Long-Term Note Receivable Given for Certain Past Due Royalty Payments $ -- $ 830,000 ======== ========= Long-Term Debt Incurred for the Acquisition of Property and Equipment $ -- $ 31,212 ======== ========= Long-Term Debt and Accounts Payable Incurred for Insurance $ -- $ 51,350 ======== ========= Issuance of Common Stock for Debt Settlement $ 17,999 $ -- ======== ========= The accompanying notes are an integral part of these statements. F-6 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 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 been classified as debts subject to compromise. See Note 12 to the consolidated financial statements related to the Company's Plan of Reorganization. 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 and accessories, audio and video tapes, 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 audio and video tapes was reviewed by the Company and based upon the outcome of such review, the Company has recorded a reduction in the carrying value of such assets in the amount of $529,414 which was charged to cost of sales. 6. CASH EQUIVALENTS - The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. 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. As of March 31, 1997, the Company reviewed the carrying value of investment in song library 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 $819,740. Accordingly, the write down of the investment in song library has been charged to operations. Amortization expense charged to operations for the fiscal years ended March 31, 1997 and 1996 amounted to $126,507 and $123,023, 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. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the term of the related lease. F-7 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 that 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 and 1996, 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 and $405,085, respectively. Accordingly, the write down of goodwill and trademarks has been charged to operations. Amortization expense charged to operations for the fiscal years ended March 31, 1997 and 1996 amounted to $134,425 and $89,617, respectively. 10. Income Taxes - Income taxes are accounted for under the asset and liability method of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities or a change in tax rate is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced to estimated amounts to be realized by use of a valuation allowance. The principal types of temporary differences between assets and liabilities for financial statement and tax return purposes are net operating loss carryforwards and allowances for doubtful accounts. 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 1997 and 1996 periods, the effect of the common stock equivalents would be antidilutive and has not been included in the calculation. 13. RECENT PRONOUNCEMENTS - In February 1997, the FASB issued Statement No. 128, "Earnings Per Share" ("FAS 128"). FAS 128 is effective for financial statements for periods ending after December 31, 1997 and early adoption is not permitted. The adoption of FAS 128 is not expected to 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 (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 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 $9,546,672 at March 31, 1997. In addition, the Company does not have a line of credit in place to finance its seasonal needs for purchases of inventory. 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 1998 although there can be no assurance that this can happen. In addition, as described in note 12, the Company has filed a voluntary petition for bankruptcy under Chapter 11 of the United States Bankruptcy Act and is awaiting approvals of its plan of reorganization. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. 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, 1997, the outstanding balance of such receivables for which the Company is contingently liable was approximately $300,757. The Company received proceeds of approximately $2,855,000 and $3,191,000 in the fiscal 1997 period and fiscal 1996, respectively, upon the sale of trade accounts receivable under this agreement, and incurred approximately $235,000 and $251,000 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 30% of the approved receivable face amount as security. Minimum factor fees were $10,000 per month. NOTE 4 - PROPERTY AND EQUIPMENT A summary of property and equipment as of March 31, 1997 is as follows: ESTIMATED USEFUL LIVES (YEARS) ------------ Computer Equipment 5 $ 60,139 Office and Warehouse Equipment 7 94,114 Tools and Dies 5 320,490 -------- 474,743 Less Accumulated Depreciation (296,713) -------- $178,030 ======== Depreciation and amortization expense on property and equipment for the fiscal 1997 and 1996 is approximately $139,152 and $137,231, respectively. F-9 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 NOTE 5 - LOAN PAYABLE As of March 31, 1997, loan payable consists of the follows: Note payable, bearing interest monthly at 8%, due upon demand and subject to compromise. Collateralized by a pledge of 256,666 shares of common stock held by the designee of a director. $ 643,305 ========= NOTE 6 - COMMITMENTS AND CONTINGENCIES In 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 $203,000 and $170,000 in the fiscal 1997 and fiscal 1996 periods, respectively. Future minimum lease commitments under noncancelable, the operating lease are as follows: YEAR ENDING MARCH 31: - --------------------- 1998 59,027 1999 78,703 2000 26,234 -------- $163,964 ======== NOTE 7 - RELATED PARTY TRANSACTIONS At March 31, 1997, the amount due from officer bears interest monthly at 9% per annum and is due on March 31, 1998. 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. Memcorp Asia Limited, a company related by a common director, acts as the exclusive agent for International SMC (HK) Ltd. and is paid a commission of 3% of sales for all F.O.B. Hong King shipments. Memcorp Asia coordinates the purchases to, and shipments from various factories in China, processes letters of credit from the customers of International SMC (HK) Ltd., and handles the payments and receipts of funds on behalf of the Company. During fiscal 1997, the Company paid $534,000 to Memcorp Asia Limited in commissions. During the fiscal 1997 and 1996 periods, the Company purchased certain karaoke audio equipment and accessories from Far East companies (related party suppliers) controlled by a director. During fiscal 1997, the Company purchased goods from FLX (HK) Limited, a company related through a common director, in the amount of approximately $1,900,000. During fiscal 1996, the Company purchased under deferred payment terms, certain karaoke audio equipment and accessories from FLX (HK) Limited. Upon delivery of such equipment in the United States, the Company executes documents of acceptance in favor of a bank in the Far East, which are guaranteed by the director. F-10 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED) The director has also advanced funds directly to, or on behalf of, the Company with respect to such equipment purchases. For the year ended March 31, 1997, the director did not advance any funds. Amounts outstanding under documents of acceptances or owed directly to these related party suppliers incur interest at 8.0% - 9.5% per annum from the date of shipment to the Company. In the fiscal 1997 and 1996 periods, equipment purchases from the related party suppliers were approximately $1,923,000 and $1,200,000, respectively; and approximately $40,000 of interest expense was incurred related to these purchases during fiscal 1996. During the fiscal 1995 period, the Company entered into an agreement with the above noted director which provided inventory financing through April 1, 1995 of up to $2,200,000 (inclusive of amounts owed directly, and amounts guaranteed under documents of acceptances). On May 4, 1995, the agreement was renegotiated whereby the director provided inventory financing through April 1, 1996 of up to $500,000. The Company has not negotiated any new agreement with this related supplier. At March 31, 1997, amounts owed directly to the director and amounts owed under documents of acceptances guaranteed by the director were $0. NOTE 8 - SHAREHOLDERS' DEFICIENCY 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 at an exercise price of $3.00 to $5.50. The incentive stock options expire in 1999 and 2004. At March 31, 1997, 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 186,300 shares of the Company's common stock. At March 31, 1997, 480,000 shares or 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 entitle the registered holders to purchase 1.2 shares of common stock at an exercisable price of $3.60 per share. The Public Warrants may be exercised at anytime beginning November 10, 1995 and continuing thereafter until November 10, 1999. Also, included in the offering were 144,000 warrants issued to the Company's underwriters (the Representatives 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 exercise price of the warrants for common stock, the underlying warrants, and the common stock subject to issuance pursuant to the underlying Public Warrants is $4.50, $.08 and $5.40, respectively. The warrants became exercisable November 10, 1995 and continuing thereafter until November 10, 1999. F-11 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 NOTE 8 - SHAREHOLDERS' DEFICIENCY (CONTINUED) 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 72,000 shares 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 (NOL's) as of March 31, 1997 to $14,000 per year (these NOL's expire from 2003 to 2007). At March 31, 1997, the Company has net operating loss carryforwards of approximately $6,900,000, (which are not subject to the above limitations) that expire through 2012. A valuation allowance of approximately $2,700,000 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 END MARCH 31, 1997 MARCH 31, 1996 -------------- -------------- Statutory rate (34.0)% (34.0)% State income tax effect, net of federal benefit (4.6)% (4.6)% Changes in valuation allowance 38.6 38.6 ---- ---- Effective rate -% -% ==== ==== At March 31, 1997, the components of the cumulative effect of temporary differences in the deferred income tax liability and income tax asset balances are as follow: TOTAL ----------- Assets: Net operating loss carryforwards $ 2,669,000 Reserves for bad debts, sales returns and warranties 31,000 ----------- 2,700,000 Valuation allowance (2,700,000) ----------- Net deferred tax assets $ -- =========== The net change in the valuation allowance during the fiscal 1997 period was an increase of $1,083,000. F-12 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 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 1997 and 1996 periods 79% and 63%, respectively, of the Company's total revenues were derived from sales to five customers. Sales derived from customers who individually purchased greater than 10% of total revenues were as follows: FISCAL FISCAL 1997 1996 ------ ------ J.C. Penney 13% 18% Montgomery Ward -- 16% Fingerhut -- 12% Target 47% 10% NOTE 11 - FOURTH QUARTER ADJUSTMENTS (UNAUDITED) The following is a summary of certain year end adjustments that are considered material in the aggregate to the results of the fourth quarter. FISCAL FISCAL 1997 1996 ----------- ----------- Inventory write-down $ 529,414 $ 371,000 Impairment of long-lived assets 1,900,568 405,085 Adjustment of royalties payable (290,595) -- ----------- ----------- $ 2,139,387 $ 776,085 =========== =========== F-13 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 NOTE 12 - DESCRIPTION OF PETITION 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. 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, 1997, 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. As of February 18, 1998, the Debtor had not received approval from the Bankruptcy Court to pay or otherwise honor certain of its pre-petition obligations including employee wages. The Debtor has determined that there is insufficient collateral to cover the interest portion of scheduled payments on its pre-petition debt obligations. The Debtor has discontinued accruing interest on these obligations. On December 17, 1997, the United States Bankruptcy court approved the Company's amended disclosure statement. This statement and amended plan of reorganization has been filed and is being mailed together with ballots to the Company's pre-petition shareholders and creditors. The Company expects to emerge from Chapter 11 after court approval. F-14 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following are the directors of the Company as of this filing, their respective ages, the year in which each was elected a director and, where applicable, the office of the Company held by the director. Each director elected will hold office for a one year term or until their respective successors have been duly elected and qualified: SERVED AS DIRECTOR NAME AGE SINCE OFFICE - --------------------- --- -------- ------------------------------------- Edward Steele 68 1991 Chief Executive Officer, President, Chief Financial Officer, and Director Eugene B. Settler (1) 61 1991 Director Paul Wu 67 1991 Director Josef A. Bauer (2) 60 1995 Director R. Edward Pearson (3) 35 1997 Vice President and Director - --------- (1) Mr. Settler resigned from the board as of March 26, 1997 (2) Mr. Bauer resigned from the board as of July 16, 1997 (3) Mr. R. Edward Pearson was promoted to Vice President and appointed to the board effective July 16, 1997. Edward Steele joined the Company in 1988 and has served as the Company's Chief Executive Officer, Chief Financial Officer and as a director since September 1991. As of February 29, 1996, Mr. Steele also assumed the office of President of the Company. 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 Managing Director in charge of worldwide sales of Concept 2000, a manufacturer of consumer electronics, from 1971 to 1978; President of Wicely Corp., a distributor of electronic toys and consumer electronics, from 1978 to 1983; and President of Justin Products Corp., an electronic toy manufacturer, from 1983 to 1988. Eugene B. Settler joined the Company as President in 1988 and served in that office until the termination of his employment agreement on February 22, 1996. Mr. Settler held the office of Director as of March 31, 1997, as he has since September 1991. Mr. Settler resigned his position as Director as of September 17, 1997. Prior to joining the Company, Mr. Settler served as Director of Sales and Marketing for CBS-Epic Records from 1968 to 1971, as Executive Vice President of Marketing for RCA Records from 1971 to 1973, and as Vice President of Marketing of TMC Music Corp. from 1973 to 1974. Mr. Settler was President of Request Records from 1976 to 1981 and Executive Vice President of IJE, Inc. (Kid Stuff Records) from 1981 to 1987. 28 Paul Wu has been a director of the Company since September 1991 and was the Chairman of the Board of Directors from September 1991 to February 1995. Mr. Wu is a private investor and has been engaged in the electronics business in the Far East and the United States. Since 1979, Mr. Wu has been the Chairman of the Board and a principal stockholder of FLX (HK) Ltd., a Hong Kong corporation ("FLX"), which manufactures consumer electronics. Mr. Wu has also been the Chairman and a principal stockholder of The SMC Singing Machine Co., Ltd., a Hong Kong corporation ("LTD"), since 1991, which is a trading company for consumer electronics. Mr. Wu is also a director of Gemco Pacific, Inc., a principal stockholder of the Company. Josef A. Bauer was appointed to the Board of Directors on February 3, 1995 and resigned from such position as of October 10, 1997. Since 1992, Mr. Bauer has been a managing director and principal stockholder of Dero Research Ltd. in Hong Kong, which serves as a manufacturer's representative for the sale of telephone and electronic products. From 1970 to 1993, Mr. Bauer served as managing director and was a principal stockholder of Dero Research Corporation in Tokyo, Japan, which was engaged in the design, engineering and manufacture of automobile audio equipment. He served as a director from 1991 to 1994, of AmeriData Technologies, Inc., a publicly traded computer products and service company. In December 1994, Mr. Bauer was elected to the Board of Directors of Go-Video, Inc., a publicly traded video electronics manufacturer and distributor. Mr. Bauer has also served as president of Banisa Corporation, a privately owned investment company, since 1975. Mr. Bauer is also President of Magna (a position he has held since 1989) and was formerly a director of the Company from February 1990 until September 1991. See Item 12 - "Certain Relationships and Related Transactions." R. Edward Pearson, age 35, joined the Company in 1995 and has served as the Company's Vice President and Director since July, 1997. Mr. Pearson's duties at the Company include, among others, all facets of sales and marketing of the Company's products to mass merchant and catalog retailers in North America, the development of and implementation of sales plans and presentations to major electronic buyers, management of over 25 independent sales representatives throughout the country, development of karaoke programs for individual retailers, development of all sales support materials and after-sale implementation of sales and shipment programs. Prior to joining the Company, Mr. Pearson was employed by one of Japan's largest karaoke companies with annual revenues of approximately $750 million. The Company has agreed, until November 10, 1999, that the representatives ("Representatives") of the underwriters for 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. No such nominee has yet been designated. The officers, certain directors and certain stockholders of the Company have agreed to vote their shares 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. See Item 10 - "Executive Compensation, Employment Agreements". DIRECTORS' FEES The Company currently reimburses each director for expenses incurred in connection with his attendance at each meeting of the Board of Directors or a committee on which he serves. In addition, non-employee directors are entitled to be paid a fee of $750 for each board or committee meeting attended and are entitled to receive 2,500 common stock options per year. No such fees were paid nor options issued for fiscal 1997. 29 BOARD COMMITTEES On February 3, 1995, the Board of Directors appointed Audit and Executive Compensation/Stock Option Committees. The Audit Committee consisted of Messrs. Steele, Wu and Bauer and the Executive Compensation/Stock Option Committee consisted of Messrs. Settler, Wu and Bauer. 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. Upon emergence from Chapter 11, the board is expected to re-appoint committee members as a result of the changes in board membership since the end of fiscal 1997. BOARD AND BOARD COMMITTEE MEETINGS During the fiscal year ended March 31, 1997, there were two meetings of the Board of Directors. The board members also communicate on a regular basis during the normal course of the business of the Company. The Audit and Executive Compensation/Stock Option Committees of the Board did not meet during the year. All directors attended at least 75% of the meetings of the Board. EXECUTIVE OFFICERS The following are the executive officers of the Company, their respective ages, the office of the Company held and the year in which first elected an officer. The executive officers will hold office until the next annual meeting of the Board of Directors or until their respective successors have been duly elected and qualified. OFFICER'S NAME AGE OFFICE OFFICER SINCE - ----------------- --- ---------------------------------- -------------- Edward Steele 68 Chief Executive Officer, President, September 1991 Chief Financial Officer R. Edward Pearson 35 Vice President July 1997 John Klecha 47 Secretary and Treasurer October 1997 For information regarding Mr. Steele and Mr. Pearson, see description above. Mr. John Klecha, General Manager of the Company since July 1997, was promoted to Secretary and Treasurer as of October 10, 1997. Mr. Klecha is in charge of all financial and administrative operations of the Company, including the Company's daily operations, shipping and inventory. Mr. Klecha manages the Company's staff and is in control of the Company's billing and order entry, accounts payable and accounts receivable. Prior to joining the Company, Mr. Klecha managed all financial and administrative functions for a toy design, manufacturing and distribution company encompassing 26 employees and revenues of $20 million. Mr. Klecha is a former Certified Public Accountant with more than 25 years of financial and management experience. 30 Item 10. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth the annual and long-term compensation paid to or accrued for the executive officers of the Company whose annual compensation exceeded $100,000 during the Company's last two fiscal years. SUMMARY COMPENSATION TABLE FOR THE FISCAL YEARS ENDED MARCH 31, 1997 AND 1996 LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------------------ NAME AND OTHER ANNUAL OPTIONS PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2) (NO. OF SHARES) ---- ---------- ----- --------------- -------------- Edward Steele Chief Executive Officer, President and Chief 1997 $170,167 $-0- $7,200 -0- Financial Officer 1996 145,731(1) -0- 8,617 -0- Eugene B. Settler President (3) 1996 140,841 -0- 11,803 -0- - --------- (1) Mr. Steele enacted a 15% voluntary pay reduction as of September 1995, in light of the Company's poor financial performance and retracted such beginning fiscal 1997. (2) Fiscal 1997 reflects automobile allowance in total for Mr. Steele; 1996 includes $3,600 in automobile allowance for Messrs. Steele and Settler, respectively. (3) Employment agreement terminated by Company February 22, 1996. EMPLOYMENT AGREEMENTS The Company executed an employment agreement with Mr. Steele which commenced as of October 1, 1994 and terminated on March 31, 1997. Pursuant to Mr. Steele's employment agreement, he is entitled to received base compensation of $150,000 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 1997 or 1996 fiscal years. Mr. Steele would receive 45% 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 agreement and for a period of two years 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. Mr. Steele is currently working under the terms of his prior employment agreement and is expected to enter into negotiations for a new agreement upon the Company's emergence from Chapter 11. 31 The Company had also entered into an employment agreement with Mr. Settler, which was terminated by the Company on February 22, 1996. As a result of the termination, the Company ceased payments thereunder. Mr. Settler filed a complaint which, under the terms of the employment agreement, was to be settled via binding arbitration. During January, 1998, the Bankruptcy Court granted the Company's motion to approve a settlement agreement effective September 17, 1997, between the Company and Mr. Settler. Prior to this settlement agreement, there was pending in the Bankruptcy Court an adversary proceeding brought by the Company against Settler, for recovery of certain alleged preferential transfers arising from certain payments made to Settler as a result of legal proceedings brought by Settler against the Company for wrongful termination. The parties mediated the dispute and reached a settlement which resolves the adversary proceeding, certain alleged claims by Settler against the Company and others, and provides for an exchange of releases amongst all parties. Under the terms of the agreement, Settler also resigned as a director of the Company and assigned all of his stock certificates and options to the Company. This settlement did not require the payment of any funds by the Company other than a portion of mediation costs incurred. 32 STOCK OPTION GRANTS IN LAST FISCAL YEAR There were no stock options granted to the Company's executive officers during the fiscal year ended March 31, 1997. The following table sets forth information regarding stock options granted to the Company's executive officers during the fiscal year ended March 31, 1995 and the potential value of such options at the end of their terms, assuming certain levels of stock price appreciation: GRANTS IN FISCAL YEAR 1995 INDIVIDUAL GRANTS(1) --------------------------------------------------------- PERCENT OF TOTAL SHARES UNDERLY- OPTIONS GRANTED TO ING OPTIONS EMPLOYEES IN EXERCISE EXPIRATION NAME GRANTED (#) FISCAL YEAR PRICE DATE ---- --------------- ------------------ -------- ---------- Edward Steele.......... 75,000 34.3% $5.50 6/29/99 Eugene B. Settler (2).. 75,000 34.3% $5.50 6/29/99 - --------- (1) All options are incentive stock options granted pursuant to the Company's Plan and have a term of five years. These options were granted on June 29, 1994. 20,000 of such options for each of Messrs. Steele and Settler were immediately exercisable with the balance becoming exercisable in increments of 20,000 shares per year. (2) Mr. Settler surrendered all of his stock and options, in conjunction with the terms of a settlement agreement effective September 17, 1997. STOCK OPTION EXERCISES AND HOLDINGS The following table provides certain information concerning the unexercised options to purchase shares of Common Stock held by the Company's executive officers as of March 31, 1997. No stock options were exercised by any executive officer of the Company during fiscal 1997.
LONG-TERM INCENTIVE PLANS AWARDS IN LAST FISCAL YEAR VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT 3/31/97 3/31/97 (#) ($)(1) -------------------------- -------------------------- SHARES ACQUIRED VALUE NAME ON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- -------------- -------- ----------- ------------- ----------- ------------- Edward Steele........ 0 0 60,000 15,000 (1) (1) Eugene B. Settler(2) 0 0 60,000 15,000 (1) (1) - --------- (1) No executive of the Company held any "in the money" options in which the fair market value of the Common Stock exceeded the option exercise price as of March 31, 1997. (2) Mr. Settler surrendered all of his stock and options, in conjunction with the terms of a settlement agreement effective September 17, 1997.
33 Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 31, 1997, the shares of Common Stock beneficially owned by each director of the Company, each executive officer of the Company named in the Summary Compensation Table under the caption "Item 10 - Executive Compensation", each person known to the Company to own more than 5% of the outstanding shares of Common Stock and all directors and executive officers as a group. SHARES BENEFICIALLY PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER OWNED CLASS - ------------------------------------ ------------ ----------- Gemco Pacific, Inc.(1) 256,666 9.1% 500 Hennessy Road Causeway, Hong Kong Edward Steele (6) 245,000(2) 8.7 1551 W. Copans Road, #100 Pompano Beach, Florida 33064 Eugene B. Settler (7) 242,000(2) 8.6 1551 W. Copans Road, #100 Pompano Beach, Florida 33064 Ford Harvest Ltd. 183,333 6.5 500 Hennessy Road Causeway, Hong Kong Paul Wu 75,000(3) 2.7 985 Rexdale Blvd. Rexdale, Ontario M9W 1R9 Josef A. Bauer 22,500(4) * 820 Park Avenue New York, NY 10021 All directors and executive officers 584,500(5) 20.8% as a group (4 persons) - --------- * Less than 1% (1) Mr. Wu is a director of Gemco Pacific, Inc. ("Gemco"). Mr. Wu disclaims beneficial ownership of the shares owned by Gemco. All 256,666 of such shares have been pledged by Gemco to Magna International, Inc. ("Magna") to secure payment of an $816,574 promissory note of the Company to Magna. (2) Includes immediately exercisable options to purchase 60,000 shares of Common Stock. (3) Includes immediately exercisable options to purchase 75,000 shares of Common Stock. (4) Consists of immediately exercisable warrants to acquire such shares. Does not include 256,666 shares pledged to Magna by Gemco to secure an outstanding obligation of the Company to Magna. Mr. Bauer is President of Magna. (5) Includes immediately exercisable options to purchase 195,000 shares of Common Stock and immediately exercisable warrants to acquire 22,500 shares of Common Stock. (6) Mr. Steele disclaims beneficial ownership of 6,500 shares owned by his wife. (7) Mr. Settler surrendered all of his stock and options, in conjunction with the terms of a settlement agreement effective September 17, 1997. 34 Section 16(a) of the Securities Exchange Act of 1934 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, to file reports of ownership and changes in ownership of such securities with the Securities and Exchange Commission. Officers, directors and greater than ten-percent beneficial owners are required by applicable regulations to furnish the Company with copies of all Section 16(a) forms they file. The Company is not aware of any beneficial owner of more than ten percent of its Common Stock. Based solely upon a review of the copies of the forms furnished to the Company, if any, the Company believes that all filing requirements applicable to its officers and directors were complied with during the 1997 fiscal year. POSSIBLE CHANGE IN CONTROL The Company's principal executive officer, Mr. Steele, and its former president and director, Mr. Settler, had agreed to indemnify the Company against certain claims related to compulsory copyright obligations (an "Indemnifiable Claim") asserted with respect to the period from September 3, 1991 through November 10, 1994 by pledging all of their shares of Common Stock to the Company. In the event of the assertion of an Indemnifiable Claim, the Company may require the return of shares of Common Stock to the Company with a market value collectively equal to the Indemnifiable Claim. Mr. Settler has since been released from such indemnification as a result of a settlement agreement effective September 17, 1997. As a result of that indemnification, the Company could reacquire up to approximately 3.25% of its outstanding shares of Common Stock (assuming 2,811,582 shares of Common Stock outstanding as of June 30, 1997) from Mr. Steele. Gemco had pledged all 256,666 of its shares of the Company's common stock to Magna to secure payment of an $816,574 promissory note (the Magna Note) of the Company to Magna. Josef A. Bauer, a former director of the Company, is President of Magna. The remaining balance of approximately $630,000 is currently classified as a general unsecured claim in the Chapter 11 proceedings. As a result of such default, Magna could acquire approximately 9.1% of the Company's outstanding Common Stock if it pursues legal remedy. Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On September 3, 1991, in consideration for $200,000, Magna, the then owner of all of the issued and outstanding shares of the Company's Common Stock, entered into an option agreement (the "Option Agreement") with Wedge Corp., a Florida corporation ("Wedge"), to sell Wedge's designee 100% of the Company's Common Stock. The stockholders of Wedge were Paul Wu, Edward Steele and Eugene B. Settler (the "Optionees"). In connection with the grant of the option, Wedge agreed to pledge all of the shares subject to the option to Magna as security for the Company's satisfaction of various loans from Magna and an affiliate of Magna. On May 5, 1994, the option was exercised for no additional consideration, and Magna transferred 883,332 shares of the Company's Common Stock to Messrs. Settler and Steele and Mr. Wu's designees, Gemco Pacific, Inc. ("Gemco") and Ford Harvest Ltd. The 256,666 shares held by Gemco are held by Magna as security for the loans from Magna and an affiliate of Magna. Mr. Wu is a director of Gemco. Magna has not provided any material services to the Company since September 3, 1991. Josef A. Bauer, President of Magna, was elected to the Company's Board of Directors on February 3, 1995 and resigned on July 16, 1997. In September 1992, Magna and an affiliate thereof agreed to exchange $816,574 of debt owed by the Company to Magna and an affiliate thereof for additional shares of the Company's Common Stock (the "Additional Shares"). That agreement, as amended, gave Magna the right to require the Company to repurchase the Additional Shares, on December 31, 1996, for $816,574 plus interest at 8% per annum from September 30, 35 1994. On November 10, 1994 Magna exchanged the Additional Shares for the Company's promissory note in the amount of $816,574. Payment of the note was guaranteed by a pledge from Gemco Pacific, Inc., an assignee of Paul Wu, a director of the Company, of all of its shares of the Company's Common Stock until the payment and satisfaction of fifty percent of the principal amount of the note, and fifty percent of such shares until the remaining principal balance of the note is paid. The Company has an agreement with FLX to produce electronic recording equipment, based on the Company's specifications. The Company acts as exclusive agent for LTD and receives commission income from such company based upon 50% of the net profits, as defined, related to sales arranged by the Company for LTD. Paul Wu, a director of the Company, is the Chairman of the Board and a principal stockholder of FLX and LTD. During the fiscal years ended March 31, 1997 and 1996, the Company purchased approximately $1.9 million and $1.2 million, respectively, in equipment from FLX and LTD and received approximately $90,000 and $130,000, respectively, in commission income from LTD. See Item 6 - "Managements Discussion and Analysis of Financial Condition and Results of Operations". On May 4, 1992, the Company sold all of its tools and dies used in the production of electronic recording equipment to LTD for approximately $344,000, resulting in a gain to the Company of approximately $202,000. In March 1995, the Company purchased tools and dies for two new models from LTD for $318,000. The Company believes that all of the foregoing transactions with FLX and LTD have been on terms no less favorable to the Company than could have been obtained from unaffiliated third parties in arms-length transactions under similar circumstances. Approximately $1.6 million of the net proceeds of the Company's initial public offering in November 1994 were used to satisfy certain accounts and note payable to FLX and LTD. Paul Wu, a director of the Company, is an officer, director and principal stockholder of FLX and LTD. The accounts payable are composed of amounts due with respect to payments made, or guaranteed, by FLX and LTD in connection with the issuance of documents of acceptance ("D/As") by the Company for merchandise received from overseas suppliers. The Company purchases electronic recording products for its own account from manufacturers in the Far East. Upon delivery of such merchandise in the United States, the Company executes D/As in favor of a bank in the Far East with respect to payment for that merchandise. FLX and LTD have guaranteed the Company's obligations to those banks. In addition, FLX and LTD have also advanced funds directly to, or on behalf of the Company, with respect to inventory purchases. Mr. Wu, as Chairman of FLX and LTD, had agreed that FLX and LTD would continue to provide up to $500,000 of inventory financing in the form of loans to, or on behalf of, the Company, or the provision of D/As on the Company's behalf through April 1, 1996. Since April 1, 1995, FLX and LTD have provided inventory financing to the Company in excess of their $500,000 commitment, but have no obligation to do so in the future. The Company has not negotiated any new agreement with these related suppliers. At March 31, 1997, amounts owed directly to Mr. Wu and amounts owed under documents of acceptance were $0. 36 The Company has arranged with Dero Research, Ltd. in Hong Kong, of which Mr. Bauer is a principal stockholder, letter of credit financing up to $200,000 for purchases of new inventory. Previously, on a case-by-case basis with respect to certain purchase orders, and subject to his discretion, Mr. Bauer has agreed, directly or through a company controlled by Mr. Bauer, to provide inventory financing in the form of letters of credit on the Company's behalf. In exchange, the Company has agreed to reimburse Mr. Bauer for all expenses incurred with respect to such letters of credit and to pay a commission of four percent on the face amount of the letter of credit. In July 1995, Mr. Bauer funded letters of credit aggregating $130,000 for the Company's benefit and has provided no further funding to date. Memcorp Asia Ltd., act as the exclusive agent for the Company's Hong Kong subsidiary, International, and is paid a commission of 5% of sales for all F.O.B. Hong Kong shipments. Memcorp Asia coordinates the purchases to, and shipments from various factories in China, processes letters of credit from customers of International, and handles the payments and receipts of funds on behalf of the Company. During fiscal 1997 the Company paid $534,000 to Memcorp Asia, a company in which Mr. Joseph Maurice Taub is a common director. The Company's principal executive officer, Mr. Steele, and its former president and director, Mr. Settler, had agreed to indemnify the Company against certain Indemnifiable Claims asserted with respect to the period from September 3, 1991 through November 10, 1994 by pledging all of their shares of Common Stock to the Company. In the event of the assertion of any Indemnifiable Claim, the Company may require the return of shares of Common Stock to the Company with a market value collectively equal to the Indemnifiable Claim. There can be no assurance, however, that the Company would be able to sell or otherwise dispose of such shares for cash in order to satisfy the Indemnifiable Claim. In addition, the Company would continue to bear all other costs and expenses incurred by, or assessed against, the Company (including legal) associated with such an Indemnifiable Claim, whether or not such Indemnifiable Claim is resolved in favor of the Company. The Company has agreed to release certain shares of Common Stock from the provisions of the pledge and indemnity agreement during the period beginning 13 months after November 10, 1994 under certain circumstances based upon the performance of the Company. No such shares have been released as of June 30, 1997. Mr. Settler has since been released from such indemnification as a result of a settlement agreement effective September 17, 1997. The pledge and indemnity agreement will also terminate as to Messrs. Steele or Settler in the event of their death, provided the Company then maintains life insurance of at least $1,000,000 on each party. No such insurance is presently in place. Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Exhibits. EXHIBIT NO. DESCRIPTION - ----------- ----------- 1(a) Form of Underwriting Agreement between the Company and the Representatives(5) 1(b) Form of Selected Dealers Agreement(3) 3(a) Certificate of Incorporation of the Company, including amendment to be filed with the Secretary of State of Delaware1 3(b) By-Laws of the Company(1) 4(a) Form of Warrant issued in connection with July, 1994 private offering(1) 4(b) Warrant Agreement and related Warrant Certificate to be issued in connection with the public offering by the Company on November 18, 1994(6) 37 4(c) Underwriter's Warrant issued to the Underwriters on November 18, 1994(6) *10(a) Employment Agreement between the Company and Edward Steele, dated November 18, 1994(6) *10(b) Employment Agreement between the Company and Eugene B. Settler, dated November 18, 1994(6) *10(c) Employment Agreement between the Company and Howard Miller, dated November 18, 1994(6) 10(d) Agreement dated February 28, 1994 between the Company and Magna International Corp(1) *10(e) 1994 Amended and Restated Management Stock Option Plan(1) 10(f) Financial Consulting Agreement between the Company and the Representatives, dated November 18, 1994(3) 10(g) Consulting Agreement between the Company and Genesis Partners, Inc., dated December 9, 1993, as amended September 2, 1994 and October 20, 1994(4) 10(h) Agreement of Merger dated February 28, 1994, among with Company, The Singing Machine Company, Inc., a California corporation, and Magna International Corp.(1) 10(I) Supply, Support and Distributorship Agreement dated as of January 1, 1994, between the Company and FLX (HK) Ltd(1) 10(j) Supply, Support and Distributorship Agreement dated as of January 1, 1994, between the Company and The SMC Singing Machine Co., Ltd.(1) 10(k) Accounts Receivable Agreement, dated June 15, 1992, between the Company and Bankers Capital, as amended September 22, 1994 and December 30, 1994(2) 10(l) Letter Agreement, dated May 4, 1994, among the Company, Paul Wu, Edward Steele and Eugene B. Settler(1) 10(m) Letter Agreement, dated May 4, 1994, among the Company, Edward Steele and Eugene B. Settler(1) 10(n) Indemnity and Stock Pledge Agreement, dated July 20, 1994, among Eugene B. Settler, Edward Steele and the Company(1) 10(o) Agreement dated June 29, 1994 among the Company, Magna International Corp., Edward Steele, Eugene B. Settler and Gemco Pacific, Inc.(1) 10(p) Trademark certificates(2) 10(q) Form of Subscription Agreement evidencing registration rights(3) 10(r) Letter Agreement, dated March 27, 1995, among the Company and Paul Wu(7) 10(s) Letter Agreement, dated May 15, 1995, between the Company and The Harry Fox Agency, Inc.(8) 10(t) Security Agreement, dated May 22, 1995, between the Company and The Harry Fox Agency, Inc.(8) 10(u) Draft form of Indemnity and Contribution Agreement by and among Eugene B. Settler, Edward Steele and Gemco(9) 10(v) Sub-distribution agreement between the Company and Memcorp, Inc., dated October 27, 1995(10) 10(w) Administrative agreement between the Company and Memcorp, Inc., dated October 27, 1995(10) 10(x) Option agreement to purchase one million shares between the Company and Memcorp, Inc., dated October 27, 1995(10) 10(y) Debtor's Amended Disclosure Statement, dated December 17, 1997. 10(z) Debtor's Amended Plan of Reorganization, dated December 17, 1997. 10(aa) Agreement regarding treatment of Harry Fox Agency in Debtor's Plan of Reorganization, dated December 16, 1997. 27 Financial Data Schedule. - ---------- * Compensatory Plan or Management Contract (1) Incorporated by reference to the Company's Registration Statement on Form SB-2 (Registration No. 33- 81974-A) (the "Registration Statement") as filed on July 27, 1994. (2) Incorporated by reference to the Amendment No. 1 to the Registration Statement as filed on September 28, 1994. 38 (3) Incorporated by reference to the Amendment No. 3 to the Registration Statement as filed on October 21, 1994. (4) Incorporated by reference to the Amendment No. 4 to the Registration Statement as filed on November 4, 1994. (5) Incorporated by reference to the Amendment No. 5 to the Registration Statement as filed on November 8, 1994. (6) Incorporated by reference to the Post-Effective Amendment No. 1 to the Registration Statement as filed on December 13, 1994. (7) Incorporated by reference to the Post-Effective Amendment No. 4 to the Registration Statement as filed on March 29, 1995. (8) Incorporated by reference to the Company's Report on Form 8-K dated June 5, 1995. (9) Incorporated by reference to the Company's Annual Report on Form10-KSB for the fiscal year ended March 31, 1995 as filed on June 28, 1995. (10) Incorporated by reference to the Company's Quarterly Report on Form10-QSB for the quarter ended September 30, 1995 as filed on November 13, 1995. (b) Reports on Form 8-K. The Company filed two reports on Form 8-K during the year ended March 31, 1996. The Company filed one Item 4 Form 8-K on December 4, 1995, and one Item 6 Form 8-K on February 23, 1996. The Company did not file any reports on Form 8-K during the year ended March 31, 1997. The Company filed one Form 8-K on May 6, 1997. 39 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 authorized1. THE SINGING MACHINE COMPANY, INC. By: /s/ EDWARD STEELE ----------------- Edward Steele, Chief Executive Officer, President, and Director (Principal Executive, Financial and Accounting Officer) Dated: February 24, 1998 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 ------------- Edward Steele Chief Executive Officer, President, February 24, 1998 and Director (Principal Executive, Financial and Accounting Officer) /s/ R. EDWARD PEARSON ----------------- Edward Pearson Vice President and Director February 24, 1998 /s/ PAUL WU ------- Paul Wu Director February 24, 1998 40 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 10(y) Debtor's Amended Disclosure Statement, dated December 17, 1997. 10(z) Debtor's Amended Plan of Reorganization, dated December 17, 1997. 10(aa) Agreement regarding treatment of Harry Fox Agency in Debtor's Plan of Reorganization, dated December 16, 1997. 27 Financial Data Schedule. EX-10.Y 2 EXHIBIT 10(y) UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF FLORIDA IN RE: CASE NO.: 97-22199-BKC-RBR THE SINGING MACHINE COMPANY, INC., CHAPTER 11 Tax ID# 95-3795478 Debtor. - -----------------------------------/ DEBTOR'S AMENDED DISCLOSURE STATEMENT THIS DISCLOSURE STATEMENT HAS NEITHER BEEN APPROVED NOR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE STATEMENTS CONTAINED HEREWITH. FURR AND COHEN, P.A. Attorneys for Debtor By: Robert C. Furr, Esq. and Lisa J. Chaiklin Aflalo, Esq. 1499 West Palmetto Park Road Suite 412 Boca Raton, FL 33486 (561) 395-0500 TABLE OF CONTENTS PAGE ---- Brief Summary of Chapter 11 1 ARTICLE I Definitions 4 ARTICLE II Preliminary Statements and History Financial Condition of Debtor 5 (A) History of Debtor 5 (B) Summary of Reasons for Filing Petition 10 (C) Source of Financial Information 11 ARTICLE III Debtor's Operation and Structure 12 (A) Synopsis of Operation in Chapter 11 12 (B) Executory Contracts 13 (C) Objections to Claims and Preference Analysis 15 (D) Officers and Directors 19 ARTICLE IV Claimants and Impaired Interest Holders 20 ARTICLE V Analysis of the Plan v. Liquidation Analysis 22 ARTICLE VI Risk Factors 24 ARTICLE VII Certain Factors to be Considered 26 ARTICLE VIII Tax Consequences of the Plan 33 ARTICLE IX Post Confirmation Reorganized Debtor's Structure 39 ARTICLE X Confirmation by Cramdown 40 ARTICLE XI Miscellaneous Provisions 41 ARTICLE XII Conclusion 42 EXHIBITS (A) Current Balance Sheet (B-1) Income & Expense Statement (B-2) DIP Report Excerpts (C) Schedule of Creditors (D) Liquidation Analysis (E) Projection and Detailed List of Expenses for First Year DEBTOR'S AMENDED DISCLOSURE STATEMENT The Singing Machine Company, Inc. ("SMC" or "Debtor") provides this Disclosure Statement ("Disclosure Statement") to all known creditors and Interest Holders of the Debtor in order to disclose the information deemed to be material, important, and necessary for the creditors to arrive at a reasonably informed decision in exercising their right to abstain from voting or to vote for acceptance or rejection of the Plan of Reorganization (the "Plan"). A copy of the Plan accompanies this Disclosure Statement. The Plan is a legally binding arrangement and should be read in its entirety, as opposed to relying on the summary in this Disclosure Statement. Accordingly, creditors and interest Holders may wish to consult with their own lawyer to understand the Plan more fully. BRIEF SUMMARY OF CHAPTER 11 Chapter 11 is the principal reorganization Chapter of the United States Bankruptcy Code (the "Code"). It allows a debtor to remain in operation and work out its financial difficulties. In a Chapter 11, the debtor continues to manage its affairs as a debtor-in-possession and as a fiduciary to the creditors of the estate. Formulation and confirmation of a plan of reorganization are the principal purposes of a Chapter 11 reorganization case. The plan is the vehicle for satisfying the holders of claims against a debtor. After a plan has been filed, the holders of claims whose claims are proposed to be impaired are permitted to vote to accept or reject the plan. Section 1125 of the Code requires the debtor, before soliciting acceptances of the proposed plan, to prepare a disclosure statement containing adequate information of such kind, and in such detail, as to enable a hypothetical reasonable investor to make an informed judgment about the plan. This Disclosure 1 Statement is presented to holders of Claims in impaired classes against the debtor to satisfy the requirements of Section 1125 of the Code. Chapter 11 does not require that each holder of a claim against the debtor vote in favor of the plan in order for the bankruptcy court to confirm the plan. At a minimum, however, a plan must be accepted by a majority in number and at least two-thirds in amount of those claims actually voting in at least one class of claims impaired under such plan. The Code also defines acceptance of a plan of reorganization by a class of interests as acceptance by holders of at least two-thirds in amount of those claims actually voting. Even though a Creditor or Interest Holder may choose not to vote or may choose to vote against the Plan, the Creditor or Interest Holder will be bound by the terms and treatment set forth in the Plan if such Plan is accepted by the required majorities in each Class of Creditors or is confirmed by the United States Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court"). The proponent of the Plan may seek confirmation of the Plan under the "cramdown" provisions of the Code. Pursuant to Section 1129(b) of the Code, a proponent may "cramdown" the Plan against a non-accepting class of creditors or interests if the Plan complies with all of the requirements of Section 1129(a), except Section 1129(a)(8), which requires acceptance by all impaired classes), and the proponent establishes, among other things, that the Plan is accepted by at least one impaired class of creditors, that the Plan is fair and equitable, and that the Plan does not discriminate unfairly. Creditors or Interest Holders who fail to vote will not be counted in determining acceptance or rejection of the Plan. The Bankruptcy Court has set a hearing on confirmation of the Plan for________________ at______________ , at Federal Building, 299 East Broward Boulevard, Fort Lauderdale, Florida. 2 Creditors or Interest Holders may vote on the Plan by filling out and mailing the accompanying ballot form to the Bankruptcy Court. Your Ballot must be filed on or before ____________________ . As a creditor or Interest Holder, your vote is important. In order for the Plan to be deemed accepted, of the ballots cast, creditors that hold as least 2/3 in amount and more than 1/2 in number of the allowed claims of impaired Classes must accept the Plan. However, you are advised that the Debtor may be afforded the right under the Code to have the Plan confirmed over the objections of dissenting creditors consistent with the limitations set forth in the Code. NO REPRESENTATIONS CONCERNING THE DEBTOR PARTICULARLY AS TO ITS FUTURE BUSINESS OPERATIONS OR THE VALUE OF PROPERTY, ARE AUTHORIZED OTHER THAN AS SET FORTH IN THIS STATEMENT. ANY REPRESENTATIONS OR INDUCEMENTS MADE TO SECURE YOUR ACCEPTANCE WHICH ARE OTHER THAN AS CONTAINED IN THIS STATEMENT SHOULD NOT BE RELIED UPON BY YOU IN ARRIVING AT YOUR DECISION, AND SUCH ADDITIONAL REPRESENTATIONS AND INDUCEMENTS SHOULD BE REPORTED TO COUNSEL FOR DEBTOR, WHO IN TURN SHALL DELIVER SUCH INFORMATION TO THE UNITED STATES TRUSTEE FOR SUCH ACTION AS MAY BE DEEMED APPROPRIATE. Debtor filed a Voluntary Petition for reorganization under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. 101 ET SEQ., (the "Code") in the United States Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court") on April 11, 1997 (the "Filing Date"). The Debtor has continued to operate its business as a Debtor-In-Possession pursuant to ss. 1108 of the Code. You are urged to read the contents of this Disclosure Statement before making your 3 decision to accept or reject the Plan. Particular attention should be directed to the provisions of the Plan affecting or impairing your rights as they presently exist. The terms used herein have the same meaning as in the Plan unless the context hereof requires otherwise. THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT HAS BEEN SUBMITTED BY THE DEBTOR'S MANAGEMENT, UNLESS SPECIFICALLY STATED TO BE FROM OTHER SOURCES. NO REPRESENTATIONS, OTHER THAN THOSE SET FORTH HEREIN, CONCERNING THE DEBTOR (PARTICULARLY AS TO FUTURE BUSINESS OPERATIONS OR VALUE OF ITS PROPERTY) ARE AUTHORIZED BY THE DEBTOR. Projections of results of future operations are based on management's best estimates in light of current market conditions, past experience, analysis of general economic conditions, and other estimates which will bear on the results. These projections are subject to significant risks and uncertainties. I. DEFINITIONS The following phrases, as used hereinafter, shall have the following meanings: All Definitions in the Plan of Reorganization are incorporated herein. ALLOWED CLAIM(S) means the amount of any Claim against the Debtor to the extent that: a. a proof of the Claim was filed or deemed to be filed with the Bankruptcy Court in accordance with the Bankruptcy Rules within such time as the Court allowed, provided that a timely Proof of Claim filed in accordance with the Bankruptcy Rules shall supersede any scheduling of such Claim pursuant to Code Section 521(1);and b. (i) no objection to such Claim is timely filed; or 4 (ii) the Claim is allowed by a Final Order. COMPANY shall mean the Debtor. CONFIRMATION DATE shall mean the date on which the Clerk of the Court enters the Confirmation Order on the Court's docket. DEBTOR'S PROPERTY shall mean all of the Debtor's property, as defined in Section 541 of the Code. EFFECTIVE DATE shall mean the tenth day after the Confirmation Order becomes final, or such other date as this Court shall order. PLAN shall mean the enclosed Chapter 11 Plan and any subsequent amendments, modifications, or supplements made from time to time. II. PRELIMINARY STATEMENT AND HISTORY AND FINANCIAL CONDITION OF DEBTOR (A) HISTORY OF DEBTOR The karaoke industry began in Japan in the 1970s. In Japanese society, entertaining is not typically conducted in individual homes, but rather in restaurants and nightclubs. Karaoke, which translated literally means "empty orchestra," is a concept that allows participants to sing words to soundtracks of popular songs, reading lyrics from video monitors or scripts. The concept is identical to that employed in the "follow the bouncing ball" segment of the "Sing Along with Mitch" television program from the 1960s. The instrumental music, or backing track, is provided by pre-recorded soundtracks on CDS or audio or video tapes. In Japan, karaoke clubs and public establishments became popular vehicles for social occasions and business entertainment. The Company was incorporated in California in 1982. The Company originally sold its 5 products exclusively to professional and semi-professional singers. In 1988, the Company began marketing karaoke 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. Management believes that the enhancement and extension of the Company's existing products and the selective development of new product lines are important to the Company's continued growth. The Company combines the style and content of its products to meet customer requirements for quality, product mix and pricing. Company employees work closely with both retailers and suppliers to identify trends in consumer preferences and to generate new product ideas. The Company's employees evaluate new concepts and seek to develop new products and improvements to existing products satisfying industry requirements and changing consumer preferences. 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 6 Company is responsible for costs of shipping, insurance, customs clearance, duties, storage and distribution related to such warehouse products and therefore, warehouse sales command higher sales prices than direct sales. The Company generally sells from its own inventory in less than container sized lots. 2. DIRECT SALES-HONG KONG: The formation of the Company's subsidiary, International SMC(HK) Ltd. ("International") is attributable to the advent of foreign equipment sales. Some hardware products sold by the Company are shipped directly to its customers from the Far East through International, a Hong Kong trading company. Sales made through International are completed by either delivering products to the customers' common carriers at the shipping point or by shipping the products to the customers' distribution centers, warehouses or stores. Direct sales are made in larger quantities (generally container sized lots) to customers in Italy, England, Canada, Australia and the United States, who pay International pursuant to their own international, irrevocable, transferable letters of credit or on open credit with the Company's suppliers in the Far East. The Company achieves both domestic and direct sales, and markets its hardware and software products, primarily through its own sales force and approximately 15 independent sales representatives. The Company's representatives are located in various states related to the customers' location, and are paid a commission based upon sales in their respective territories. The Company's sales representative agreements are generally one year agreements which automatically renew on an annual basis, unless terminated by either party on 90 days notice. The Company works closely with its major customers to determine marketing and advertising plans. The Company also markets its products at various national and international trade shows 7 each year. The Company regularly attends CES("Consumer Electronics Show") each January in Las Vegas; Hong Kong Electronics Show each October in Hong Kong; the Hong Kong Toy Fair in January; and the International Toy Fair each February in New York. 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 cases where a customer of the Company has filed for protection under federal bankruptcy laws, it has not had a significant impact on the Company's revenues or other categories of financial performance. On July 20, 1994, the Company closed a private financing pursuant to which it issued secured subordinated promissory notes to ten (10) investors in an aggregate principal amount of $400,000.00, and issued Bridge Warrants to purchase 360,000 shares of common stock (the "Bridge Financing"). Such notes, together with interest at the rate of 8% per annum, were repaid on November 18, 1994 (see below). The Bridge Warrants are exercisable at a price of $1.20 per share of common stock, commencing February 8, 1995 and expire on August 15, 1999. As of June 30, 1996, 272,250 of such Bridge Warrants had been exercised. On November 18, 1994, the Company closed the initial public offering (the "IPO") of 1,380,000 (1,656,000 as adjusted for the Stock Dividend) Warrants for an aggregate purchase price of approximately $7,800,000. After giving effect to the payment of offering expenses and underwriting expenses collectively estimated at $1,959,000, the Company received approximately $5,121,000 of the net proceeds from such initial public offering. Approximately $1,600,000 of the net proceeds of the IPO were used to satisfy a portion of certain accounts and notes payable 8 for inventory to FLX (HK) Ltd., a Hong Kong Corporation ("FLX"), and the Singing Machine Company, Ltd., a Hong Kong trading company ("LTD"). Paul Wu is an officer, director and principal stockholder of FLX and LTD.1 Approximately $350,000 of the proceeds from the IPO were used for inventory purchases, $850,000 were used to satisfy past due copyright royalty obligations, $225,000 were used for working capital and $400,000 was applied to satisfy indebtedness represented by certain outstanding promissory notes issued in connection with Bride Financing. The Company used approximately $1,695,000 of the net proceeds of the IPO to satisfy certain trade payables to suppliers of materials and services used in the Company's operations. The Debtor is a publicly traded company on the OTC Bulletin Board under the symbol "SING." See discussion below in Section VII. The Debtor does not have any affiliates. The Debtor does not provide any retirement benefits. 3. HARRY FOX AGENCY: In May 1994, the Company requested its principal copyright royalty creditor, the Harry Fox Agency, Inc. ("HFA"), which represents the majority of copyright holders for which the Company is obligated to pay royalties, to audit its records for the period October 1991 through March 1994. On May 22, 1995, the Company executed a settlement (the "Settlement Agreement") with HFA, with respect to all non-current royalty obligations and claims for the period October 1, 1991 through March 31, 1994 in the amount of $1,030,000. The Company had accrued approximately $1.0 million in its financial statements for royalty - -------- 1 Paul Wu also has been director of the Company since 1991 and was the Chairman of the Board of Directors from September 1991 to February 1995. 9 obligations to HFA and on February 22, 1995, paid HFA $200,000 to be paid against the settlement amount. The total amount of settlement payments made during fiscal 1996 was $432,000, and the balance of approximately $400,000 was anticipated to be paid in monthly installments through May 1997, of principal and interest at 8.0% per annum. After a period of default, the Company entered into an amended payment agreement with HFA, stipulating a lump sum payment to bring its account current and monthly installments thereafter. As collateral security for the payment of its obligations under the Settlement Agreement, the Company granted HFA a security interest in the Company's master sound recordings. The most recent audit by HFA covered the period April 1, 1994 through March 31, 1996 and all royalties due were accrued. The pre-petition royalties owed to HFA exceed $400,000.00. (B) SUMMARY OF REASONS FOR FILING PETITION In November and December, 1996, the Debtor made two payments of $20,000.00 each to a former employee, Eugene Settler ("Judgment Creditor"), who obtained a judgment against the Debtor for wrongful termination. These payments affected the Debtor's cash flow. This decrease in cash flow was compounded by the fact that sales of hardware and software during the months of January, February and March, 1997, were well below projections. The low sales of software was especially problematic because a former employee who was terminated miscalculated the marketplace and the Company carries a gross oversupply of software inventory. To complicate matters further, in January, 1997, the Debtor was advised by Montgomery Ward that the Company had to accept returns of approximately fifty percent (50%) of what was shipped and invoiced during the latter part of 1996. The account receivable with Montgomery 10 Ward was about $560,000 less $270,000 that was returned. This had a devastating impact on the Company's cash flow during a period of low shipping. This event deeply upset the Company's factor, and the factor stopped advancing funds, for a period of time, to the Debtor to cover the shortfall on the Montgomery Ward receivable. Additionally, because of the cash flow crisis, the Debtor defaulted on their monthly rent to their landlord, which resulted in a default notice. The landlord threatened eviction. The Debtor also defaulted on the quarterly royalty payments as well as the payments due under a prior agreement to the Harry Fox Agency. This resulted in a demand letter for payment and threatening to cancel the Debtor's music licensing agreements, which would have had severe consequences on the Debtor's operations. The filing of the Bankruptcy Petition on April 11, 1997 was prompted by the garnishment by the Judgment Creditor of the Company's factor and bank accounts, rendering the Company without funds for payroll, daily operations, etc. Due to the garnishment, a fair number of Company payments by check were dishonored at the bank due to the lack of availability of Company funds. This precipitated other creditors to institute legal suits against the Company. Due to momentum of the creditors' actions and to preserve the operations of the Company, the only recourse was to file for protection under Chapter 11 of the Code. (C) SOURCE OF FINANCIAL INFORMATION The source of financial information for this Disclosure Statement and Plan is from reports from Debtor's officers, Debtor-In-Possession Reports, and Debtor's accountants which have been prepared in accordance with generally accepted accounting principles. It has not been audited. 11 III. DEBTOR'S OPERATION AND STRUCTURE (A) SYNOPSIS OF OPERATION IN CHAPTER 11 Since the Chapter 11 filing, the Company has made considerable positive advancements. The Company has moved into much smaller corporate offices and warehousing operations with the emphasis on reduction of inventory. Total combined operating space was reduced from 29,000 to 10,000 square feet, thereby reducing rental facility expenses by $12,000.00 per month. The Company's staff has been reduced to the minimum needed to continue to operate efficiently. During peak shipping periods, temporary labor is hired, lessening permanent overhead and fringe benefits ongoing. The Company has arranged with Dero(HK) letter of credit financing up to $200,000 for purchases of new inventory. The major concern relating to the Chapter 11 filing was the retention of the Company's customer base. For the most part, the major accounts, Target, JC Penney, Fingerhut, and FAO Schwartz have supported the Company. The Company opened a new major account, Best Buy, which will have shipments of over $1,000,000 during 1997. The Company did lose some catalog house business (i.e. Sears and Service Merchandise) but the Company feels confident that this business will be retained upon reorganization under Chapter 11. One of the Company's major concerns is its software division. This once was a major contributor to the Company's profit. The Company's volume has gone down from $5.4 million during 1994 to $1.3 million during the last year. Part of the reasons for this year's decline is that 12 the Company elected to discontinue doing business to the record trade where returns are a standard practice, thus creating a consignment environment. The Company's software returns were running as high as 50% from major wholesalers and retailers. Current software business is only with accounts that do not return high percentages of sales. This provides a higher degree of profitability for the sales that are made. The Company has large inventories of obsolete music that the Company intends to liquidate over the next twelve months. The Company is currently negotiating to produce a number of new songs for 1998 in addition to selling additional music to a select group of customers which do not cause return problems and loss of profit. The Company's hardware business continues to grow with an emphasis on enhancing current products and adding three new models during 1998. Attached hereto marked Exhibit "A" & "B-1" respectively are the Debtor's current balance sheet and an Income and Expense Statement reflecting the Debtor's Chapter 11 operations using the accrual method. Attached hereto marked Exhibit B-2 is the summary page, together with Attachments 1, 2 and 3, of the Debtor's latest Debtor-In-Possession Report. The source of this financial information is the internal documents and records of the Company, which are unaudited. The financial information has been prepared in accordance with generally accepted accounting principles, using the accrual method and inventory based on FIFO. (B) EXECUTORY CONTRACTS Article VI of the Plan entitled "Executory Contracts" indicates that all Executory Contracts and unexpired leases of the Debtor not expressly assumed prior to the Confirmation Date, or not 13 at the Confirmation Date the subject of a pending application to assume, shall be deemed to be rejected. As to any Executory Contract to be assumed, the Debtor shall, pursuant to the provisions of Section 1123(a)(5)(G) of the Code, cure or demonstrate the ability to make cure payments with regard to such executory contract. The Debtor shall, in accordance with Section 365(f) of the Code demonstrate the ability to provide adequate assurance of future performance under each such executory contract. Payment of any claim arising in respect of an executory contract shall be in full satisfaction, release, discharge and cure of all defaults, including any other claim filed by such party as a result of existing defaults. Each person who is a party to an executory contract rejected shall be entitled to file a proof of claim for damages alleged to have arisen from the rejection of such executory contract, in accordance with the provisions of Rule 302(D) of the Local Rules of Bankruptcy Procedure for the Southern District of Florida. Objections to any such proof of claim shall be filed at later than seven days after such proof of claim is filed, and the Court shall determine such objection. Unsecured claims arising out of the rejection of executory contracts shall be Class 4 entitled to treatment afforded such class. At present, the only lease to be rejected is the lease of a photocopier from American Business Credit Corporation. The estimated rejection damages will not have a material impact on the Debtor's Plan. Pursuant to the Local Rules of the Bankruptcy Court, Proofs of Claim arising pursuant to 11 U.S.C. ss. 502(g) from the rejection of an executory contract or unexpired lease must be filed not later than thirty (30) days after the later of (1) the entry of the Order compelling or approving the rejection of the contract or lease, or (2) the effective date of the rejection of the contract or lease, if the order contains the notice mandated by Local Rule 606. 14 (C) OBJECTIONS TO CLAIMS AND VOIDABLE TRANSFERS Pursuant to the Plan, Debtor may object to any scheduled claim or Proof of Claim filed against the Debtor. Such an objection shall preclude the consideration of any claims as "allowed" for the purposes of timely distribution in accordance with the Plan. The Claims Bar date expired on August 27, 1997. The Debtor will file Objections to certain Claims following approval of its Disclosure Statement. 1. OBJECTIONS TO CLAIMS The material Claims that the Debtor proposes to dispute, in whole or in part, are discussed below. These proposed objections are made without prejudice to the Debtor's right to raise additional objections to any claim. a. Marlin Sevy d/b/a Sales Network Associates filed Claim Number 51 for $9,750.62 for commissions earned. The Debtor will challenge such claim as being a priority wage claim because such commissions were earned outside the ninety (90) day period and, therefore, should be treated as a general, unsecured claim. b. ASR Recording Service of California filed two Claims, Claim Number 74 in the amount of $649,285.45 and Claim Number 99 in the amount of $494,700.91. The Debtor intends to challenge one of the claims as being duplicative and determine the correct amount of the Claim. c. The Debtor listed Big State Distribution Corporation in its Schedules as having a disputed, unsecured claim for $212,442.55. Since such claimant was listed as disputed and did not file a Proof of Claim, the Debtor will seek the disallowance of the claim of Big State Distribution Corporation. 15 d. Copans (Phase I) Associates filed Claim Number 86 as a secured claim in the amount of $15,401.84 and as an unsecured claim in the amount of $29,992.50. The Debtor intends to challenge this claim as being calculated erroneously because such Claimant retained a $15,000.00 security deposit belonging to the Debtor, in order to compensate for certain rent owed. The Debtor was current in its post-petition rental obligations prior to vacating such premises and the Debtor disputes the landlord's claim for rejection damages. e. Emily Music Corporation filed Claim Number 54 claiming a priority unsecured claim in the amount of $12 - $15,000.00. The Debtor challenges such claim in full. The Debtor owes Emily Music Corporation $.11 for a royalty. f. HAL Leonard Publishing filed Claim Number 56 claiming an unsecured amount of $81,425.60. The Debtor intends to challenge such claim as being computed erroneously; the Debtor's records reflect the debt owed to HAL Leonard Publishing is $49,303.60. g. The Debtor listed Handleman Company in its Schedules as having a disputed, unsecured claim for $8,850.05. Since such claimant was listed as disputed and did not file a Proof of Claim, the Debtor will seek the disallowance of the claim of Handleman Company. h. The Debtor listed J.C. Penney Company, Inc. in its Schedules as having a disputed, unsecured claim for $2,264.98. Since such claimant was listed as disputed and did not file a Proof of Claim, the Debtor will seek the disallowance of the claim of J.C. Penney Company, Inc. i. The Debtor listed J.W. Charles Securities, Inc. in its Schedules as having a disputed, unsecured claim for $6,000.00. Since such claimant was listed as disputed and did not file a Proof of Claim, the Debtor will seek the disallowance of the claim of J.W. Charles Securities, Inc. 16 j. Know Music filed Claim Number 97 in the amount of $100,000.00. The Debtor intends to challenge such claim as being completely erroneous; the Debtor only owes Know Music $5.50 for royalties. k. Kokomo Music filed Claim Number 95 in the amount of $100,000.00. The Debtor intends to challenge such claim as being complete erroneous; the Debtor owes Kokomo Music $363.85 for royalties. l. The Debtor listed Lash Tamaron Distributors in its Schedules as having a disputed, unsecured claim for $21,847.81. Since such claimant was listed as disputed and did not file a Proof of Claim, the Debtor will seek the disallowance of the claim of Lash Tamaron Distributors. m. Magna International Corp. filed Claim Number 89 claiming a secured claim in the amount of $628,634.00. The Debtor does not dispute the amount of the claim, only that it should be an unsecured claim, not a secured claim. n. Montgomery & Larmoyeux filed Claim Number 79 in the amount of $75,011.50, which the Debtor intends to challenge as being improperly claimed against the Debtor's estate for which the Debtor has no liability. o. Orion filed Claim Number 108 as a priority claim in the amount of $14,974.21. The Debtor has no objection as to the amount, however, such claim should only be allowed as an unsecured amount. p. The Debtor listed Sony Music Publishing in its Schedules as having a disputed, unsecured claim for $32,028.70 and $1,814.01. Since such claimant was listed as disputed and did not file a Proof of Claim, the Debtor will seek the disallowance of the claims of Sony Music Publishing. 17 There will be no material effect on the Plan if the disputed claims are allowed or disallowed. (2) PREFERENTIAL, FRAUDULENT OR OTHERWISE VOIDABLE TRANSFERS The Debtor has investigated, and continues to investigate, the existence of preferential, fraudulent or otherwise voidable transfers. Other than the pending preference action against Eugene Settler (discussed below), the Debtor believes that no other possible preferential, fraudulent or otherwise voidable transfer exists. There is currently pending in the Bankruptcy Court an adversary proceeding brought by the Debtor against Eugene B. Settler ("Settler") bearing Adversary Case No. 97-0439-BKC-RBR- A for the recovery of certain alleged preferential transfers. The action arises from certain payments that were made to Settler as a result of a judgment obtained against the Debtor for wrongful termination of Settler's employment. The Adversary Complaint filed on April 25, 1997 sought recovery of $60,377.66 in alleged preferential payments. During discovery, it was learned that $20,135.99 which was garnished by Settler was still being held by NationsBank, and the bank was ordered to turn such funds over to the Debtor. The Debtor then filed an amended adversary complaint for the recovery of $40,241.67. The parties mediated the dispute and, after several lengthy sessions in mediation, the parties reached a settlement, which was recently reduced to writing and is being circulated for execution by the parties thereto. The settlement resolves the adversary proceeding, certain alleged claims by Settler against the Debtor and others and provides for an exchange of releases amongst all parties. The settlement agreement also provides that (i) Settler's claim against the Debtor and stock and options in the Debtor will be assigned to a Colony Electronics Ltd., a Hong Kong corporation; (ii) the Debtor indemnifies 18 Settler against certain claims of creditors of the Debtor; and (iii) binds Settler to a covenant not to compete against the Debtor. The settlement agreement is subject to Court approval. For further details, a copy of the settlement agreement is available upon written request to Debtor's counsel. (D) OFFICERS AND DIRECTORS The following individuals shall hold the position indicated as an officer and/or director of the Reorganized Debtor, at the compensation stated, subject to change by action of the Board of Directors. They are insiders. President, CEO and Director: Edward Steele $167,500.00 Vice President and Director: R. Edward Pearson $ 75,000.00 Secretary & Treasurer: John Klecha $ 75,000.00 Director: Paul Wu $ NONE Business Background of Executive Officers and Directors EDWARD STEELE. Mr. Steele joined the Company in 1988 and has served as the Company's Chief Executive Officer, Chief Financial Officer and as a director since September 1991. As of February 29, 1996, Mr. Steele also assumed the offices of President and Secretary of the Company. 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 electronic 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. R. EDWARD PEARSON. Mr. Pearson joined the Company in 1995 and has served as the Company's Vice President since August, 1997. Mr. Pearson's duties at the Company include, among others, all facets of sales and marketing of the Company's products to mass merchant and catalog retailers in North America, Which include the development and implementation of sales plans, sales presentations to major electronic buyers, management of over thirty independent sales representatives throughout the country, development of karaoke programs for individual retailers, 19 development of all sales support materials and after-sale implementation of sales and shipment programs. Prior to joining the Company, Mr. Pearson was employed by one of Japan's largest karaoke companies with annual revenues of approximately $750,000,000.00. JOHN KLECHA. Mr. Klecha joined the Company in 1997 and is currently the Company's General Manager. He has served as the Company's Secretary and Treasurer since October, 1997. Mr. Klecha is in charge of all financial and administrative operations of the Company, including the Company's daily operations, shipping and inventory. Mr. Klecha manages the Company's staff and is in control of the Company's billing and order entry, accounts payable and accounts receivable. Prior to joining the Company, Mr. Klecha managed all financial and administrative functions for a toy design, manufacturing and distribution company encompassing 26 employees and sales revenues of $20 million. Mr. Klecha has been a Certified Public Accountant with more than twenty-five years of financial and management experience. PAUL WU. Mr Wu has been a director of the Company since September 1991 and was the Chairman of the Board of Directors from September 1991 to February 1995. Mr. Wu is a private investor and has been engaged in the electronics business in the Far East and the United States. Since 1979, Mr. Wu has been the Chairman of the Board and a principal stockholder of FLX(HK) Ltd., a Hong Kong Corporation ("FLX"), which manufactures consumer electronics. Mr. Wu has also been the Chairman and a principal stockholder of The Singing Machine Co., Ltd., a Hong Kong corporation ("LTD"), since 1991, which is a trading company for consumer electronics. Mr. Wu is also a director of Gemco Pacific, Inc., a principal stockholder of the Company. IV. CLAIMANTS AND IMPAIRED INTEREST HOLDERS Claimants and Interest Holders entitled to vote under the Plan must affirmatively act in order for the Plan to be confirmed by the Bankruptcy Court. According to the Debtor's Plan, Classes 4, 5 and 6 are "impaired" classes within the meaning of ss. 1124 of the Code. Class 4 consists of Administrative Convenience Claims (general unsecured claims equal to or less than $300.00) and will receive a cash payment of ten percent (10%) of the amount of their Allowed Claim on the Effective Date. Class 5 consists of the claims of general unsecured creditors and will be given the option 20 of receiving a cash payment of ten percent (10%)2 of the amount of their Allowed Claim ("Option A") or one share of New Common Stock of the Reorganized Debtor for each Two Dollars ($2.00) of an Allowed Claim ("Option B"). Class 6 consists of the equity interests of the holders of the Old Common Stock of the Debtor and will receive one share of New Common Stock in the Reorganized Debtor for each ten (10) shares of existing pre-petition stock (1 x 10 reverse split). Classes 4, 5 and 6, accordingly, must vote to accept the Plan in order for the Plan to be confirmed without a cram down. A Claimant who fails to vote to either accept or reject the Plan will not be included in the calculation regarding acceptance or rejection of the Plan. A claimant in Class 5 who fails to elect "Option A or B" on the ballot provided to the Claimant or fails to vote will be deemed to have elected "Option B". A ballot to be completed by the holders of Claims and/or Interests is included herewith. Instructions for completing and returning the ballots are set forth thereon and should be reviewed at length. The Plan will be confirmed by the Bankruptcy Court and made binding upon all Claimants and Interest holders if (a) with respect to impaired Classes of Claimants, the Plan is accepted by holders of two-thirds (2/3) in amount and more than one-half (1/2) in number of Claims in each such class voting upon the Plan and (b) with respect to classes of Interest Holders, if the Plan is accepted by the holders of at least two-thirds (2/3) in amount of the allowed interests of such class held by holders of such interests. In the event the requisite acceptances are not obtained, the Bankruptcy Court may, nevertheless, confirm the Plan if it finds that the Plan accords fair and equitable treatment to any class rejecting it. Your attention is directed to - -------- (2)Payable five percent (5%) on the Effective Date and five percent (5%) six (6) months thereafter. 21 Section 1129 of the Code for details regarding the circumstances of such "cram down" provisions. V. ANALYSIS OF THE PLAN VS. LIQUIDATION ANALYSIS All payments as provided for in the Debtor's Plan shall be financed by Debtor's cash on hand and its continued business operations. The Plan provides that all priority claims will be paid in full at confirmation. The Plan further provides that (i) general unsecured claims equal to or less than $300.00 will be given a ten percent (10%) dividend payable on the Effective Date and (ii) all other unsecured claimants will be given a choice of receiving either (a) a ten percent (10%) dividend, payable five percent (5%) on the Effective Date and five percent (5%) six (6) months thereafter, or (b) one share of corporate common stock for each $2.00 of debt. The current shareholders of the corporation will receive a new stock certificate for ten percent (10%) of their current outstanding shares, that is, their shares will be diluted by ninety percent (90%). The Debtor has filed its monthly operating statements since the filing of its bankruptcy petition. Attached hereto marked Exhibit "C" is a table showing all of the claims of Debtor in each classification. On the right side of the amount of claim are certain parenthetical codes, which signify the following: "v" - The amount listed is representative of vacation time accrued as of the date of the filing of the Petition. "s" - The amount listed is representative of severance pay due Claimant. "PU" - The Claimant has filed the proof of claim as both a priority and unsecured claim. "S" - The Claimant has filed the proof of claim as a secured claim, which differs from how the Debtor listed the claim on its Schedules. 22 "P" - The Claimant has filed the proof of claim as a priority claim, which differs from how the Debtor listed the claim on its Schedules. "U" - The Claimant has filed the proof of claim as an unsecured claim, which differs from how the Debtor listed the claim on its Schedules. "d" - The Claim was listed as disputed on the Debtor's Schedules. "S/U"- The Claimant has filed the proof of claim as a secured and as an unsecured claim. "X" - The Claimant filed the proof of claim but failed to select any category (i.e. secured, unsecured nonpriority or unsecured priority) for the claim. Attached hereto marked Exhibit "D" is a Liquidation Analysis of the Debtor. Attached hereto marked Composite Exhibit "E" is a projection of income and expenses for the Plan, which is prepared on a cash method, together with a detailed list of expenses of the Debtor for the first year of the Plan. Management believes that its Plan of Reorganization provides full value for all claims of creditors and is in the best interest of creditors. As with any Plan, an alternative would be a conversion of the Chapter 11 case to a Chapter 7 case and subsequent liquidation of the Debtor by a duly appointed or elected trustee. In the Event of a liquidation under Chapter 7, the following is likely to occur: (a) An additional tier of administrative expenses entitled to priority over general unsecured claims under ss. 507(a)(1) of the Code would be incurred. Such administrative expenses would include Trustee's commissions and fees to the Trustee's accountants, attorneys and other professionals likely to be retained by him for the purposes of liquidating the assets of the Debtor; (b) Substantially less than market value will be realized for the Debtor's accounts receivable, inventory, equipment, materials and supplies; 23 (c) Further claims would be asserted against the Debtor with respect to such matters as income and other taxes associated with the sale of the assets, and the inability of the Debtor to fulfill outstanding, contractual commitments and other related claims. (d) A liquidation analysis containing a balance sheet is attached as Exhibit "C". Predicated upon the foregoing, it is management's opinion that the liquidation value of the Debtor would be insufficient to make meaningful payments to any class of creditors other than the secured creditors, leaving only a very small distribution for the claims of any other classes of creditors such as general unsecured creditors. The Court has previously set August 27, 1997 as a claims Bar date. All indebtedness scheduled by the Debtor as not disputed, contingent or unliquidated or any indebtedness set forth in a properly executed and filed Proof of Claim shall be deemed an Allowed Claim unless the same is objected to and the objection thereto is sustained by the Court. VI. RISK FACTORS The Debtor believes that while the equity securities to be issued under the Plan have a high degree of risk, that risk compares favorably to liquidation of the Debtor's assets. The on-going operation of the business will generate the most funds for payment to creditors. The Debtor has not undertaken a valuation of the equity securities to be issued under the Plan. A. MARKET FOR NEW COMMON STOCK The Company will apply for inclusion of the New Common Stock on the Nasdaq SmallCap Market System, or if the application is not accepted, will continue to trade on the OTC 24 Bulletin Board. However, there can be no assurance that the Company will be able to effect the listing of these securities or, if included, that an active trading market for the New Common Stock will develop or, if developed, that such market will continue. Accordingly, no assurance can be given that a holder of New Common Stock will be able to sell such securities in the future or as to the price at which such securities might trade. The liquidity of the market for such securities and the prices at which such securities trade will depend upon the number of holders thereof, the interest of securities dealers in maintaining a market in such securities, and other factors beyond the Company's control. B. GENERAL BUSINESS RISKS The principal business risk of the Company after the Plan is confirmed is that the Company may not be able to achieve the financial results the Plan requires. Such a shortfall could result in the Company being unable to repay the amounts called for under the Plan. C. DILUTION The issuance of a significant number of shares of New Common Stock in connection with the restructuring will result in significant dilution of the equity interests of the holders of Old Common Stock. Immediately following the consummation of the restructuring, the equity interest of the holders of Old Common Stock will be diluted to approximately 10% of the outstanding New Common Stock. D. CONTINUING LEVERAGE; FUTURE REFINANCINGS The Company is now highly leveraged and, although completion of the restructuring will significantly reduce the Company's debt obligations, the Company will remain leveraged after consummation of the Plan. The Company had approximately $4,400,000.00 in indebtedness at 25 April 11, 1997. After giving effect to the Plan, the Company's estimated aggregate indebtedness would total approximately $1,100,000.00. The Company's leverage poses risks to holders of the Company's debt and equity securities. The Company's management believes that, following the consummation of the Plan, the Company will have sufficient cash flow from operations to pay interest on all of its outstanding debt as those payments become due. However, even if the restructuring is completed, the Company's ability to meet its debt service obligations will depend on a number of factors, including its ability to implement the reorganization plan. E. NO DIVIDENDS The Company does not anticipate that it will be able to pay any dividends on the New Common Stock in the foreseeable future. F. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS See Section VIII, "Certain Federal Income Tax Consequences of the Plan" for a summary of certain federal income tax aspects of the Plan. VII. CERTAIN FACTORS TO BE CONSIDERED In determining whether or not to vote in favor of the Plan, each holder of a Claim should carefully consider the following factors, together with all of the other information contained in this Disclosure Statement. A. ISSUANCE OF REORGANIZATION SECURITIES Section 1145 of the Bankruptcy Code exempts the original issuance of securities under a plan of reorganization from registration under the Securities Act of 1933, as amended (the "Securities Act") and state law. Under Section 1145, the issuance of the reorganization Securities 26 is exempt from registration if three principal requirements are satisfied: (1) the securities must be issued by a Debtor, its successor, or an affiliate participating in a joint plan with the Debtor, under a plan of reorganization; (2) the recipients of the securities must hold a claim against the Debtor or such affiliate, an Interest in the Debtor of such affiliate, or a claim for an administrative expense against the Debtor or such affiliate; and (3) the securities must be issued entirely in exchange for the recipient's claim against or Interest in the Debtor or such affiliate, or "principally" in such exchange and "partly" for cash or property. The Debtor believes that the issuance of the Reorganization Securities under the Plan will satisfy all three conditions because: (a) the issuance are expressly contemplated under the Plan; (b) the recipients are holders of "Claims" against or "Interests" in the Debtor; and (c) the recipients would obtain the Reorganization Securities in exchange for their pre-petition Claims and Interests. B. SUBSEQUENT TRANSFERS OF REORGANIZATION SECURITIES The Reorganization Securities to be issued pursuant to the Plan may be freely transferred by most recipients following initial issuance under the Plan, and all resales and subsequent transactions in the Reorganized Securities are exempt from registration under federal and state securities laws, unless the holder is an "underwriter" with respect to such securities. Section 1145(b) of the Bankruptcy Code defines four types of "underwriters": (i) persons who purchase a claim against, an Interest in, or a claim for an administrative expense against the Debtor with a view to distributing any security received in exchange for such a claim or interest; (ii) persons who offer to sell securities offered under a plan for the holders of such securities; (iii) persons who offer to buy such securities for the holders of such securities, if the offer to buy is: (a) with a view to distributing such securities; or (b) made under 27 a distribution agreement; and (iv) a person who is an "issuer" with respect to the securities, as the term "issuer" is defined in Section 2(11) of the Securities Act. Under Section 2(11) of the Securities Act, an "issuer" includes any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control of the issuer. To the extent that persons who receive Reorganization Securities or other securities pursuant to the Plan are deemed to be "underwriters", resales by such persons would not be exempted by Section 1145 of the Bankruptcy Code from registration under the Securities Act or other applicable law. Persons deemed to be underwriters would, however, be permitted to sell such Reorganization Securities or other securities without registration pursuant to the provisions of Rule 144 under the Securities Act. These rules permit the public sale of securities received by "underwriters" if current information regarding the issuer is publicly available and if volume limitations and certain other conditions are met. Whether or not any particular person would be deemed to be an "underwriter" with respect to any Reorganization Security or other security to be issued pursuant to the Plan would depend upon various facts and circumstances applicable to that person. Accordingly, the Debtors express no view as to whether any particular person receiving Reorganization Securities under the Plan would be "underwriter" with respect to any Reorganization Security to be issued pursuant to the Plan. Given the complex and subjective nature of the question of whether a particular holder may be an underwriter, the Debtors make no representation concerning the right of any person to trade in the Reorganization Securities. THE DEBTOR RECOMMENDS THAT POTENTIAL RECIPIENTS 28 OF REORGANIZATION SECURITIES CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE SUCH REORGANIZATION SECURITIES WITHOUT COMPLIANCE WITH THE SECURITIES ACT OR THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). C. VALUATION OF EQUITY SECURITIES The Debtor has not undertaken a valuation of the equity securities to be issued under the Plan. D. MARKET FOR EXISTING SECURITIES On November 17, 1995 the Company was informed by The Nasdaq Stock Market, Inc., that the common stock of the Company did not meet the minimum bid price of $1.00 per share, and that the Company's net tangible assets did not meet the minimum requirement of $4,000,000. On January 25, 1996, pursuant to a January 19, 1996 hearing before a Nasdaq Hearing Panel, the Nasdaq Listings Qualifications Committee ("Committee"), denied the Company's request for an exception to the minimum bid price requirement. In addition, the Committee indicated that the Company did not meet the minimum quantitative criteria for inclusion on the Nasdaq SmallCap Market. Accordingly, effective January 26, 1996, the Company's securities were delisted from the Nasdaq Stock Market. However, the Company's securities were immediately eligible to trade on the OTC Bulletin Board. 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. The Company's fiscal year runs from April 1 to March 31 (e.g., Fiscal 1997 runs from April 1, 1996 to March 31, 1997). The Company's Common Stock commenced trading on November 10, 1994. Prior thereto, there was no public market for the Company's Common Stock. 29 FISCAL 1998 HIGH LOW ------ ------ First Quarter............................................ $0.078 $0.078 Second Quarter........................................... $0.078 0.031 Third Quarter (to 11/5/97)............................... $0.031 0.031 FISCAL 1997 HIGH LOW ------ ------ First Quarter............................................ $0.25 $0.10 Second Quarter........................................... $0.10 0.10 Third Quarter............................................ $0.10 0.078 Fourth Quarter .......................................... $0.10 0.078 FISCAL 1996 HIGH LOW ------ ------ Fourth Quarter .......................................... $0.78 0.25 (1) Stock quoted on OTC as of January 26, 1996. As of December 15, 1997, the last reported bid price of the Common Stock on the OTC Bulletin Board was $0.05 per share. The number of record holders of the Common Stock at December 15, 1997 was 157, although the Company believes that the number of beneficial owners of such Common Stock is much greater. As a result of being delisted from the Nasdaq National Market, stockholders may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's Common Stock. The Company has never declared or paid cash dividends on its capital stock and the Company's Board of Directors intends to continue this policy for the foreseeable future. Earnings, 30 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 and the agreement with the representatives of the underwriters for the Company's initial public offering (the "Representatives"). E. DELINQUENCY IN FILING PERIODIC PUBLIC REPORT The Debtor is delinquent in filing the Company's periodic quarterly reports for 1997. However, the Debtor filed with the SEC Form 12b-25 on July 24, 1997, requesting an extension of time to file to enable the Debtor to motion the Bankruptcy Court for an order approving the appointment of accountants to audit the Company's books and prepare the necessary financial information to file the delinquent quarterly reports (10-Q's) and the year end 1997 annual report (10-K). The Debtor anticipates that all delinquent periodic reports will be filed prior to the confirmation hearing. F. CLARIFICATION OF THE STOCK DISTRIBUTION TO UNSECURED CREDITORS The new, Reorganized Debtor will exchange all of the existing common stock into New Common Stock. The Plan provides that all existing pre-petition shareholders will receive one (1) share of New Common Stock in the Reorganized Debtor for each ten (10) shares of existing prepetition stock (1 x 10 reverse split). The New Common Stock will be issued as needed to those unsecured claimants which elect to convert their unsecured claim to equity in the newly Reorganized Debtor, each two dollars ($2.00) of unsecured debt being converted to one (1) share of New Common Stock in the newly reorganized debtor. Stock exchanged from pre-petition Interest Holders and not reissued 31 to unsecured creditors will remain as treasury stock. The percentage ownership of the Reorganized Company by existing Interest Holders will depend upon the number of unsecured creditors that elect to convert their debt to equity in the newly reorganized Debtor. It should be noted that the Harry Fox Agency whose unsecured claim is approximately $820,000 has agreed to convert its debt to equity ($820,000 / 2 = 410,000 shares of New Common Stock in the newly Reorganized Debtor). G. INSIDER TRANSACTIONS The Debtor has an outstanding unsecured loan to Edward Steele, President, CEO and Director, in the amount of $32,021.30. The loan is to be repaid on a structured interest only basis, payable quarterly at the rate of 8% for a term of 12 months at which time all outstanding principal and interest is due and payable. The loan is current and becomes due on March 31, 1998. H. INSIDER AND AFFILIATE CLAIMS Edward Steele, the President and Chairman of the Board of the Directors is an insider of the Debtor as that terms is defined in the Code, and holds a priority wage claim in the amount of $3,546.85 against the Company for vacation time accrued as of the Filing Date. Mikiyo Steele, the daughter-in-law of Edward Steele, is an insider of the Debtor and holds a priority wage claim in the amount of $238.18 for vacation time accrued as of the Filing Date. The claims of Edward Steele and Mikiyo Steele are included in Class 1 - Wage Claims, and will be paid in accordance with the provisions of Section 507 of the Code on the Effective Date. 32 I. ESTIMATED ADMINISTRATIVE EXPENSES The Administrative Expenses of the Debtor for the entire reorganization process are estimated to be approximately $150,000.00. Such expenses are subject to Court approval. The breakdown of such administrative expenses, include professional fees for the following: A. David A. Carter, Esq., Special counsel to Debtor B. Furr and Cohen, P.A., Debtor's counsel C. Arthur Kushner, C.P.A. D. Samuel Heller, Mediator E. Samuel F. May, Jr., C.P.A. G. Proskauer, Rose, LLP, Special Counsel to Debtor F. Barry S. Shapiro, C.P.A. of Millward & Company J. LEGAL PROCEEDINGS Other than the Adversary proceeding described above, the Debtor is not a party to any material legal proceeding, and does not contemplate instituting any legal proceeding. The Debtor is unaware of any legal proceeding threatened against the Debtor. VIII. TAX CONSEQUENCES OF THE PLAN A. INTRODUCTION The consummation of the Plan will have significant federal income tax consequences for the Reorganized Debtor, and for other persons, including Creditors and equity holders. The discussion below summarizes certain of those consequences. This discussion is for general information only and is based on the Internal Revenue Code of 1986, as amended (the "Tax Code"), the Treasury regulations thereunder, judicial authority and current administrative rulings and practice, all of which are subject to change at any time by legislative, judicial, or 33 administrative action. Any such change may be retroactively applied in a manner that could adversely affect the Reorganized Debtor, and such other persons. The tax consequences of certain aspects of the Plan are uncertain due to the lack of applicable legal authority and may be subject to administrative or judicial interpretations that differ from the discussion below. This discussion does not address the potential impact of various federal income tax consequences that may be relevant to certain types of taxpayers subject to special treatment under the federal income tax laws (such as tax-exempt organizations, life insurance companies, and taxpayers who are not United States domestic corporations or citizens or residents of the United States), nor does it discuss any aspect of state, local, foreign or other tax laws that may be applicable to particular taxpayers. Furthermore, due to the complexity of the Plan, the lack of applicable legal precedent, the possibility of changes in the law, and the application of certain legal interpretations to underlying factual patterns and other matters not discussed below, the federal income tax consequences described herein are subject to significant uncertainties. No ruling has been sought or obtained from the Internal Revenue Service (the "IRS") with respect to any of the tax aspects of the Plan, and no opinion of counsel has been requested or obtained by the Debtors with respect to any such aspects. CREDITORS, SHAREHOLDERS, PARTNERS, AND ANY OTHER EQUITY HOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS AND COUNSEL AS TO THE TAX CONSEQUENCES TO EACH OF THEM INDIVIDUALLY OF THE CONSIDERATION OF THE PLAN UNDER APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS. 34 B. TAX CONSEQUENCES TO CREDITORS 1. GENERAL The tax consequences of the implementation of the Plan to a Creditor will depend in part on whether that Creditor's present Claim constitutes a "security" for federal income tax purposes. Generally, claims arising out of the extension of trade credit have not been held to be securities, while corporate debt obligations evidenced by written instruments with maturities, when issued, of ten years or more, have generally been held to be securities. While it is not clear whether mortgage notes are securities for tax purposes, the Debtor believes that mortgage notes may so qualify. As discussed in greater detail below, a creditor which exchanges claims that are not securities, or that exchanges securities for property other than Reorganization Securities, may recognize income or loss on the exchange. For example, the modification of a mortgage may constitute a realization event, which depending on various facts and circumstances, may require recognition. In addition, to the extent consideration received by a creditor is attributable to accrued interest and depending on the amount a particular creditor may be required to recognize, some or all of such amount may be treated as ordinary income or loss regardless of whether its existing claims are capital assets. The Treasury Department has not issued regulations to determine the amount of stock, securities, or other property received by the creditor that will be attributable to accrued interest. In this regard, the Reorganized Debtor may be required to issue information returns reporting the value of properties distributed to creditors and the portion thereof deemed attributable to accrued and unpaid interest. ACCORDINGLY, CREDITORS ARE URGED TO CONSULT THEIR 35 OWN TAX ADVISORS WITH RESPECT TO THE TAX TREATMENT OF THEM OF ANY CONSIDERATION RECEIVED BY THEM THAT IS ATTRIBUTABLE TO ACCRUED INTEREST OR THAT MAY BE SO ATTRIBUTABLE. In the case of any gain or loss that a creditor may recognize, other than in respect of accrued interest, the character of such gain or loss as a capital gain or loss, or ordinary income or loss, will be determined by a number of factors, including but not limited to the tax status of the creditor, the nature of the transaction from which the debt was derived, the nature of the debt in the hands of the creditors, and whether and to what extent the creditor has previously claimed a bad debt deduction. 2. CONSEQUENCES TO CREDITORS RECEIVING ONLY CASH. A creditor which receives only cash in satisfaction of its claims will recognize ordinary interest income to the extent that the amount received is allocable to claims for interest that were not previously includible in its income, or will recognize a loss (generally deductible in full against ordinary income) to the extent any such accrued interest was previously included in its income and is not paid in full. In addition, such creditors will recognize income or loss on the exchange equal to the difference between (1) the creditor's basis in its claim (other than any claim in respect of accrued interest) and (2) the balance of the amount of cash received after any allocation to accrued interest. 3. CONSEQUENCES TO CREDITORS RECEIVING REORGANIZATION SECURITIES WHOSE CLAIMS CONSTITUTE SECURITIES The issuance of Reorganization Securities solely in exchange for existing claims against the Debtor, that are "securities" should be treated as having been issued in a tax-free "reorganization" of the Reorganized Debtor and, accordingly, should not result in income or loss 36 recognition except with respect to claims for accrued interest. Such creditors will, in general, recognize ordinary income on the receipt of Reorganization Securities or cash or other property to the extent allocable to claims for accrued interest not previously included in income, or will recognize a loss (generally deductible in full against ordinary income) to the extent that the Reorganization Securities or cash or other property is allocable to accrued interest previously included in income and does not satisfy in full such claims for accrued interest. Further, such creditors may recognize income (but not loss) as a result of the receipt of cash and property; (other than any cash and property allocable to accrued interest) in addition to Reorganization Securities pursuant to the Plan. The amount of such gain, if any, will equal the lesser of (1) the excess, if any, of the sum of the fair market value of such property and of the Reorganization Securities received (other than such property or stock allocable to accrued interest) over the basis of the creditor in its existing claims (other than any claims in respect of accrued interest) or (2) the amount of such property received. The aggregate tax basis of a creditor in any Reorganization Securities received pursuant to the Plan will be equal to its tax basis in existing claims (other than any claims in respect of accrued interest), decreased by the fair market value of property (other than Reorganization Securities and any value allocable to accrued interest) received in satisfaction of its existing claims and increased by the amount of gain, if any, recognized on the exchange (but not decreased by the amount of any loss realized the exchange). 37 4. CONSEQUENCES TO CREDITORS RECEIVING STOCK WHOSE CLAIMS DO NOT CONSTITUTE SECURITIES. A creditor whose existing claims do not constitute some on the receipt of property to the extent allocable to claims for accrued interest not previously included in income and which does not satisfy such claims for accrued interest in full. If the creditor has previously claimed a bad debt deduction for the indebtedness, the creditor may realize ordinary income from the recovery of a previously deducted bad debt to the extent the cash and the value of the property (including Reorganization Securities) received exceeds the basis of the debt remaining after the bad debt deduction. Further, any such creditors will also recognize income or loss on the exchange of its existing claims (other than claims for accrued interest) for cash and property equal to the difference between (1) the amount realized in respect of such claims and (2) the creditor's tax basis in such claims (computed by taking into account any bad debt deduction or recovery). 5. DISPOSITION OF REORGANIZATION SECURITIES. The aggregate basis in the Reorganization Securities received by a creditor whose existing claims are not securities will equal the fair market value of such Reorganization Securities on the effective date. Should the creditor subsequently recognize any gain on the sale or exchange of securities received pursuant to the Plan, the gain recognized by such creditor on such sale or exchange will be treated as ordinary income to the extent of the aggregate amount allowed to such creditor as bad debt deductions with respect to such claims. In the case of a cash basis creditor, the amount so treated as ordinary income may include any amount which was not included in such creditor's income on the exchange but which would have been so included in the claim had been satisfied in full. Any additional gain may be treated as capital gain. 38 C. TAX CONSEQUENCES TO THE DEBTORS. 1. DEBTOR'S EXISTING TAX ATTRIBUTES Based upon tax returns as filed, the consolidated group including the Debtor has net operating loss ("NOL") carryovers that, subject to the limitations discussed below, may be available to offset future taxable income or future tax liabilities of the Reorganized Debtor in its federal income tax return. The amount of the consolidated NOL carryover of the consolidated group including the Debtor is estimated to be in excess of $9,700,000.00 dollars as of April 11, 1997. However, this amount is not binding on the IRS and may be subject to adjustments (which may be substantial in magnitude) as a result of potential IRS audits of prior tax returns, which audits may not take place for several years. Moreover, as discussed below, the NOL carryovers of the Debtors will likely be substantially reduced, or their use limited, as a result of the Debtors' operations and transactions during 1998 and 1999, including but not limited to the discharge of indebtedness of the Debtor and the issuance of Reorganization Securities under the Plan. Further, the existence of consolidated net operating loss carryforwards is dependent upon the continued ability of the group to file consolidated income tax returns through the current year and beyond. An adverse determination regarding the issue would likely substantially increase the past and/or future income tax liabilities of the Debtors. IX. POST-CONFIRMATION REORGANIZED DEBTOR'S STRUCTURE A. EQUITY STRUCTURE Upon the Effective Date, the Debtor shall continue to operate. The total number of outstanding shares of stock currently in existence is 2,811,582. The Debtor is unable to 39 determine the total number of outstanding shares of common stock which will exist if and when the Debtor's Plan is confirmed because Class 5 (the general unsecured claims of creditors) are given a choice of a cash payment or common stock. The Debtor cannot predict how many Class 5 claimants will elect a cash payment and how many will elect stock. B. BOARD OF DIRECTORS Upon the Effective Date, the Debtor's Board of Directors shall remain unchanged. C. OFFICERS Upon the Effective Date, the Debtor's officers shall remain unchanged. D. RETENTION OF ASSETS AND OPERATIONS Upon the Effective Date, the Debtor shall retain all of its assets and continue to operate its business. Upon the Effective Date, the Debtor shall be free to operate and to perform any and all acts authorized by its Articles of Incorporation without further Order from the Court, except for the stock dividend to Unsecured Creditors and the dilution of existing Interest Holders. E. ISSUANCE OF NONVOTING EQUITY SECURITIES In accordance with Section 1123(a)(6) of the Code, the Reorganized Debtor's corporate charter will be amended to include a provision prohibiting the issuance of nonvoting equity securities. X. CONFIRMATION BY CRAM DOWN Debtor reserves the right, in the event that impaired classes reject the Plan, to seek confirmation of the Plan if the Bankruptcy Court finds that the Plan does not discriminate unfairly and is fair and equitable with respect to each dissenting class. 40 The Plan is deemed fair and equitable if it provides (i) that each holder of a Secured Claim retains its lien and receives deferred cash payments totalling at least the allowed amount of its claim, of a value, as of the effective date of the Plan, of at least the value of its secured interest in the property subject to his lien, and (ii) that each holder of an unsecured claim receives property of a value equal to the allowed amount of its claim, or no holder of a junior claim receives or retains any property. XI. MISCELLANEOUS PROVISIONS A. Notwithstanding any other provisions of the Plan, any claim which is scheduled as disputed, contingent, or unliquidated or which is objected to in whole or in part on or before the date for distribution on account of such claim shall not be paid in accordance with the provisions of the Plan until such claim has become an Allowed Claim by a final Order. If allowed, the claim shall be paid on the same terms as if there had been no dispute. B. At any time before the Confirmation Date, the Debtor may modify the Plan, but may not modify the Plan so that the Plan, as modified, fails to meet the requirements of ss. 1122 and ss.1123 of the Code. After the Debtor files a modification with the Bankruptcy Court, the Plan, as modified, shall become the Amended Plan. C. At any time after the Confirmation Date, and before Substantial Consummation of the Plan, the Debtor may modify the Plan with permission of the Court so that the Plan, as modified, meets the requirements of ss.ss. 1122 and 1123 of the Code. The Plan, as modified under this paragraph, shall become the Amended Plan. D. After the Confirmation Date, the Debtor may, with approval of the Bankruptcy Court, 41 and so long as it does not materially and adversely affect the interest of Creditors, remedy any defect or omission, or reconcile any inconsistencies in the Plan or in the Order of Confirmation, in such manner as may be necessary to carry out the purposes and effect of the Plan. XII. CONCLUSION Under the Debtor's Plan, all creditors and Interest Holders of Debtor will participate in some manner in the distribution to be made thereunder. Debtor believes that the distributions contemplated in its Plan are fair and afford all Claimants and Interest Holders equitable treatment. ACCORDINGLY, DEBTOR RECOMMENDS THAT ALL CLAIMANTS AND INTEREST HOLDERS VOTE TO ACCEPT THE PLAN. DATED: December 17, 1997. The Singing Machine Company, Inc. By: /s/ JOHN KLECHA ------------------------- John Klecha, Sec./Treas. I HEREBY CERTIFY that I am admitted to the Bar of the United States District Court for the Southern District of Florida and I am in compliance with the additional qualifications to practice in this Court set forth in Local Rule 910(A). FURR AND COHEN, P.A. Attorney for Debtor 1499 W. Palmetto Park Road Suite 412 Boca Raton, FL 33486 561-395-0500 By /s/ LISA J. CHAIKLIN AFLALO --------------------------- LISA J. CHAIKLIN AFLALO, ESQ. Florida Bar No. 0873179 42
The Singing Machine Company, Inc. Operating Statement October 31, 1997 MONTH OF OCTOBER YEAR TO DATE --------------------------------------------- ----------------------------------------------- ACTUAL PLAN VARIANCE ACTUAL PLAN VARIANCE --------- --------- -------- --------- --------- -------- Sales - Hardware 364,105 279,645 84,460 940,094 862,012 70,082 Sales - Software 215,952 337,270 (121,318) 472,551 680,102 (207,551) Sales - FOB HK 1,649,535 1,406,400 243,135 3,079,757 3,462,896 (383,139) Total 2,229,592 2,023,315 206,277 4,492,402 5,005,010 (512,608) Cost of Sales - Hardware 292,377 227,072 65,305 831,016 682,714 148,302 Cost of Sales - Software 43,000 205,060 (162,060) 123,886 413,020 (289,134) Cost of Sales - FOB HK 1,408,929 1,180,629 228,300 2,640,454 2,939,606 (299,152) Total 1,744,306 1,612,761 131,545 3,595,356 4,035,340 (439,984) Gross Profit - Hardware 71,728 19.7% 52,573 18.8% 19,155 109,078 11.6% 179,298 20.8% (70,220) Gross Profit - Software 172,952 80.1% 132,210 39.2% 40,742 348,665 73.8% 267,082 39.3% 81,503 Gross Profit - FOB HK 240,606 14.6% 225,771 16.1% 14,835 439,303 14.3% 523,290 15.1% (83,987) Total 405,286 21.8% 410,554 20.3% 74,732 897,046 20.0% 969,670 19.4% (72,624) Operating Expenses US Office Expenses 103,488 112,516 (9,028) 737,733 791,813 (54,080) Commissions 16,831 21,076 (4,245) 42,240 64,421 (22,181) Royalties 34,455 42,158 (7,703) 66,901 138,948 (72,047) HK Office Expenses 22,342 4,000 18,342 37,207 16,000 21,207 HK Depreciation 8,803 8,803 0 61,621 61,621 0 US Depreciation & Amort 4,175 7,500 (3,325) 29,225 52,500 (23,275) Total 177,116 179,750 (2,634) 884,081 1,011,162 (127,101) Net Profit B/F Taxes 308,170 230,804 77,366 12,965 (41,512) 54,477
EXHIBIT "A"
The Singing Machine Company US Operating Expense Comparison October 1997 MONTH OF OCTOBER YEAR TO DATE ------------------------ --------------------------- ACTUAL PLAN VARIANCE ACTUAL PLAN VARIANCE ------ ----- -------- ------- ------ -------- Salaries 42802 40748 2054 278509 277946 563 Salaries Chg Back-Repair -1712 -1712 0 -11990 -11990 0 P/R Taxes 2483 2100 383 16573 17938 -1365 Insurance-Health 921 1983 -1062 9858 13913 -4055 Temp Help-Warehouse 9231 2400 6831 43412 36413 6999 Rent 6559 6568 -9 77976 80173 -2197 Utilities 723 450 273 3034 3596 -562 Rent-Showroom 350 350 0 2450 2450 0 Freight & Delivery 894 5000 -4106 7139 16141 -9002 Advertising Allowances 0 0 0 43544 0 43544 Travel 2149 8350 -6201 14083 27388 -13305 Entertainment 172 0 172 641 0 641 Product Development 495 1000 -505 11369 7000 4369 Warehouse Sup/Packaging Mat'l 4798 2500 2298 19447 19399 48 Repairs & Maintenance 1138 1000 138 13142 7000 6142 Warranty Expense 6258 2000 4258 39472 30832 8640 Outside Computer Services 783 500 283 13709 9815 3894 Moving Expenses 0 0 0 13024 7720 5304 Equipment Rental 1343 640 703 5256 5093 163 Office Supplies 1197 2000 -803 7441 7312 129 Printing Supplies 1261 0 1261 2383 0 2383 Computer Supplies 103 100 3 344 700 -356 Telephone & Fax 1594 2200 -606 11803 14134 -2331 Postage 0 500 -500 3318 3906 -588 Courier Expenses 1660 100 1560 2423 700 1723 Bad Debts Expense 0 0 0 43377 0 43377 Interest & Bank charges 68 100 -32 6240 700 5540 Legal Fees 0 4000 -4000 0 71998 -71998 Accounting Fees 0 8000 -8000 17813 33813 -16000 Stock Transfer Fees 579 600 -21 3468 4082 -614 Insurance-General 4612 8039 -3427 32284 24938 7346 Factor Costs 10513 10000 0 56445 60000 -3555 State & Local Taxes 2611 0 2611 3095 0 3095 Misc 55 3000 -2945 4239 18703 -14464 Royalty Income-Domestic -26 0 -26 -4469 0 -4469 Interest Income -126 0 -126 -1251 0 -1251 Other Income 0 0 0 -9928 0 -9928 Debt Extinguishment 0 0 0 -41940 0 -41940 --- ------ ----- ------ ------ ------ Total 103488 112516 -9028 737733 791813 -54080
EXHIBIT "B-1" The Singing Machine Company, Inc. Consolidated Balance Sheet October 31, 1997 ASSETS Cash 53,626 Accounts Receivable-Net 645,633 Receivables-Related Parties 32,021 Other Receivables 6,707 Inventories-Net 957,422 Prepaid Expenses 28,880 Fixed Assets 98,313 Intangible Assets 14O,762 ---------- TOTAL ASSETS 1,963,364 ========== LIABILITIES Accounts Payable 5,229,588 Loans Payable 607,080 ---------- TOTAL LIABILITIES 5,836,668 ========== SHAREHOLDER'S EQUITY Common Stock 28,838 Additional Paid in Capital 5,844,449 Retained Earnings(Net Deficit) (9,759,554) Earnings for the Period 12,965 ---------- TOTAL S/H EQUITY (3,873,304) ========== TOTAL LIAB. & S/H EQUITY 1,963,364 ========== "Pre-Petition Debt - 4,418,744 EXHIBIT "B-1" The Singing Machine Company, Inc. Projected Balance Sheet after Reorganization As of December 4, 1997 ASSETS Cash 17,000 Accounts Receivable-Net 1,040,000 Receivables-Related Parties 32,021 Other Receivables 6,707 Inventories-Net 412,000 Prepaid Expenses 54,200 Fixed Assets 96,512 Intangible Assets 128,422 ---------- TOTAL ASSETS 1,786,862 ========== LIABILITIES Accounts Payable 1,063,795 ---------- 1,063,795 ========== TOTAL LIABILITIES SHAREHOLDER'S EQUITY Common Stock 28,836 Additional Paid in Capital 5,844,449 Retained Earnings(Net Deficit) (5,440,818) Earnings for the Period 29O,600 ---------- TOTAL S/H EQUITY 723,067 ========== TOTAL LIAB. & S/H EQUITY 1,786,862 ========== *Assumtion is that 50% of creditors who filed claims will elect to take the cash option of the reorganization plan and the balance the stock option EXHIBIT "B-1" MONTHLY FINANCIAL REPORT FOR BUSINESS For the Period Beginning October 1, 1997 and Ending October 31, 1997 Name of Debtor: The Singing Machine Company, Inc. Case Number:97-22199-BKC-RBR Date of Petition: April 11, 1997 CURRENT CUMULATIVE MONTH PETITION TO DATE --------- ---------------- 1. CASH AT BEGINNING OF PERIOD 13,791.41 2. RECEIPTS: A. Cash sales NA NA Less: Cash Refunds NA NA Net Cash Sales NA NA B. Collection on Postpetition 161,348.85 855,096.75 C. Collection on Prepetition 0.00 0.00 D. Other Receipts (Attach List) 15,329.45 25,072.72 3. TOTAL RECEIPTS 176,578.30 880,124.58 4. TOTAL CASH AVAILABLE FOR OPERATIONS (Line 1 + Line 3) 190,469.71 5. DISBURSEMENTS A. U.S. Trustee Quarterly Fees 3,750.00 5,250.00 B. Net Payroll 35,164.00 232,455.57 C. Payroll Taxes Paid 10,020.57 63,296.23 D. Sales and Use Taxes 0.00 0.00 E. Other Taxes 3,898.46 4,343.46 F. Rent 6,558.56 67,539.92 G. Other Leases 370.44 1,111.32 H. Telephone 1,554.29 11,802.57 I. Utilities 1,288.55 4,433.75 J. Travel & Entertainment 2,084.48 13,290.52 K. Vehicle Expenses 0.00 323,22 L. Office Supplies 1,133.50 5,524.52 M. Advertising 0.00 0.00 N. Insurance 4,505.26 53,151.82 O. Purchases of Fixed Assets 0.00 0.00 P. Purchases of Inventory 50,419.98 151,415.52 Q. Manufacturing Supplies 4,598.91 30,917.33 R. Repairs & Maintenance 1,310.32 10,129.34 S. Payments to Secured Creditors 0.00 0.00 T. Other Operating Expenses 47,519.13 203,650.53 (Attach List) 0.00 6. TOTAL CASH DISBURSEMENTS 174,471.45 858,751.31 7. ENDING CASH BALANCE 15,998.25 (LINE 4 LINE 5) I declare under penalty of perjury that this statement and the accompanying documents and reports are true and correct to the best of my knowledge and belief. This 20th of October, 1997 /s/ Edward Steele ----------------------- EXHIBIT "B-2" Other Operating Expenses For the Period beginning October 1, 1997 and Ending October 31, 1997 Name of Debtor: The Singing Machine, Co., Inc. Case Number: 97-22199-BKC-RBR Royalties 15,418.48 Contract Labor 6,364.69 Outside Computer Services 6,040.84 Security Deposits 5,000.00 Freight 3,843.14 Sales Commissions 2,592.74 Machine Repair 2,306.00 Courier Expenses 1,554.25 Legal Fees 1,075.00 Printing Supplies 943.40 Showroom Rental 700.00 Stock Transfer Fees 578.91 Customs & Duties 400.00 S.U.I 361.57 Equipment Rental 261.83 Computer Supplies 102.75 Bank Charges 75.53 Miscellaneous Expenses 55.00 Total 47,619.13 EXHIBIT "B-2" ATTACHMENT 1 MONTHLY ACCOUNTS RECEIVABLE AGING AND RECONCILIATION
Name of Debtor: The Singing Machine Company, Inc. Case Number: 97-22199-BKC-RBR
Reporting Period Beginning October 1,1997 and Ending October 31, 1997.
ACCOUNTS RECEIVABLE AT PETITION DATE 370,797.67 Less Factor's Interest (226,275.88)
ACCOUNTS RECEIVABLE RECONCILIATION (Include all accounts receivable, pre-petition and post-petition, including charge card sales which have not been received): Beginning of Month Balance 263,468.72 PLUS: Current Month New Billings 543,513.44 LESS: Collection During the Month (161,348.85) End of Month Balance 645,633,31 =========== AGING: (Show the total amount for each age group of accounts incurred since filing the petition) O-30 DAYS 31-60 DAYS 61-9O DAYS OVER 90 TOTAL DAYS ---------- ---------- ---------- ------------ ----------- 528,505.91 280,580.98 59,957.19 (223,410.77) 645,633.31 ========== ========== ========= =========== ========== EXHIBIT "B-2" ATTACHMENT 2 MONTHLY ACCOUNTS PAYABLE AND SECURED PAYMENTS REPORT Name of Debtor: The Singing Machine Company, Inc. Case Number: 97-22199-BKC-RBR Reporting Period Beginning October 1, 1997 and Ending October 31, 1997 In the space below list all invoices or bills incurred and not paid since the filing of the petition. Do not include amounts owed prior to filing the petition.
DAYS OUTSTANDING VENDOR DESCRIPTIONS AMOUNT ----------- ------------------------ -------------------- --------- 10/15/97 16 Age to Age Music Music Royalty 5.17 09/30/97 31 ASR Recording Services Purchases of Software 1,280.00 10/21/97 10 ASR Recording Services Purchases of Software 14,921.51 10/14/97 17 The End of August Music Music Royalty 0.86 10/15/97 16 EMI Christain music obo Bases Music Royalty 0.96 10/15/97 16 Bash Music Music Royalty 113.44 10/01/97 30 Been Jammin Music Music Royalty 100.14 10/15/97 16 Been Jammin Music Music Royalty 13.08 08/01/97 91 Begonia Melodies Music Royalty 5.26 10/14/97 17 Begonia Melodies Music Royalty 11.26 10/15/97 16 Benefit Music Music Royalty 0.14 10/15/97 16 Bocephus Music Music Royalty 1.05 10/15/97 16 Brockman Music Music Royalty 88.91 10/15/97 16 Bug & Bear Music Music Royalty 4.48 10/15/97 16 Buzzard Rock Music Music Royalty 27.45 10/15/97 16 C'est music Music Royalty 12.29 10/15/97 16 C'est Music obo Maya Music Music Royalty 2.45 08/01/97 91 Carol Bayer Sager Music Music Royalty 44.79 10/15/97 16 Carol Bayer Sager Music Music Royalty 7.67 10/15/97 16 Cass County Music Music Royalty 15.73 08/01/97 91 Chiplin Music Music Royalty 5.35 08/01/97 91 Chrysalis Music Music Royalty 73.18 10/15/97 16 Chrysalis Music Music Royalty 8.83 10/15/97 16 Coral Reefer Music Music Royalty 20.92 10/15/97 16 Corey Rock Music Music Royalty 98.14 10/15/97 16 Country Road Music Music Royalty 10.42 10/14/97 16 DA Music c/o Kent & Beatty Music Royalty 1.74 10/15/97 16 Dabbyloo Music Music Royalty 0.63 10/27/97 4 Dadan Packaging Music Royalty 133.00 10/15/97 16 Diamond Struck Music Music Royalty 0.34 10/15/97 16 Diana Music Music Royalty 1.62 10/15/97 16 Donald Jay Music Music Royalty 3.49 10/15/97 16 Donna Summer dba Sweet Summer Music Royalty 2.74 10/15/97 16 Dream Catcher Music Music Royalty 1.11 10/15/97 16 Duck Housa Music Music Royalty 0.38 EXHIBIT "B-2" 10/15/97 16 Edge O'Woods music Music Royalty 1.63 10/15/97 16 Edge of Fluke Music Music Royalty 3.15 10/14/97 17 Malt Shoppe Music Music Royalty 0.47 10/15/97 16 Elliott-Jacobsen Music Music Royalty 4.59 10/15/97 16 New Exective Music Music Royalty 3.66 10/01/97 30 Eyeteecee Music Music Royalty 13.59 10/15/97 16 Eyeteecee Music Music Royalty 0.88 10/31/97 0 Factory Electronics Machine Repair 20.00 10/14/97 17 Fifth of March Publishing Music Royalty 4.87 10/15/97 16 Five Bar-B-Songs Music Royalty 74.48 10/15/97 16 Feadbach Music Music Royalty 7.67 10/20/97 11 Florida Freight Freight 37.50 10/15/97 16 Forever Endeavor Music Music Royalty 231.09 09/25/97 37 Robert Furr & Charles Cohen PA Legal Fees 33,978.02 10/15/97 16 Gary Burr Music Music Royalty 0.57 10/15/97 16 Gear Publishing Music Royalty 22.87 09/05/97 46 Genesis Computer Solutions Music Royalty 1,235.00 10/15/97 16 Golden Reed Music Music Royalty 0.22 08/01/97 91 Gratitude Sky Music Music Royalty 66.14 10/14/97 17 Gratitude Sky Music Music Royalty 6.40 10/15/97 16 Great Cumberland Music Music Royalty 1.37 10/15/97 16 Hamstein Stroudavarrious Music Music Royalty 39.09 08/01/97 91 Hidden Pun Music Music Royalty 11.21 10/14/97 17 Hidden Pun Music Music Royalty 1.46 10/01/97 30 Hit List Music Music Royalty 11.21 10/15/97 16 Hit List Music Music Royalty 1.46 10/10/97 21 Honcik Management Services Music Royalty 15.00 08/01/97 99 House of Fun Music Music Royalty 69.24 10/15/97 16 House of Fun Music Music Royalty 26.18 10/15/97 16 Howlin' Hits Music Royalty 2.28 10/01/97 30 Hudmar Publishing Company Music Royalty 0.14 10/03/97 28 International Business-GA Computer SVC 483.36 10/15/97 16 Ignorant Music Music Royalty 2.61 10/10/97 21 Ikon Office Solutions Equipment Rental 795.02 10/27/97 4 Ikon office Solutions Equipment Rental 286.2 10/15/97 16 Innocent Bystander Music Royalty 6.63 07/16/97 107 International Smc (HK) ltd. Customer Chargeback (370.00) 07/08/97 115 J.D. Financial Corp Application Fees 630.00 10/15/97 16 Jeddrah Music Music Royalty 1.99 10/15/97 16 John Klecha Reimburse for Office Supp 1,187.20 10/15/97 16 Johnny Yuma Music Music Royalty 13.76 10/01/97 30 Kamakazi Music Music Royalty 0.53 10/15/97 16 Katie Walker Music Music Royalty 0.63 10/15/97 16 Kinetic Diamond Music Music Royalty 35.14 10/15/97 16 Knockout Music Music Royalty 5.23 EXHIBIT "B-2" 10/15/97 16 Kokomo Music Music Royalty 9.18 10/15/97 16 Larric Music Music Royalty 3.18 10/15/97 16 Let Therebe Music Music Royalty 4.63 10/01/97 30 Lido Music Music Royalty 0.53 10/15/97 16 Life of the Record Music Royalty 1.73 10/15/97 16 Lion's Mate Music Music Royalty 0.29 10/14/97 17 Little Shops of Morgansongs Music Royalty 8.83 10/21/97 10 Logus Information Systems Computer Repair 80.00 10/15/97 16 Long Iguanna Music Music Royalty 0.63 08/01/97 91 Lost in Music Music Royalty 0.91 10/15/97 16 Lost in Music Music Royalty 31.50 10/25/97 6 Lynn Jacobs Publishing Music Royalty 1.74 10/15/97 16 Major Bob Music Music Royalty 308.99 10/15/97 16 Man-Ken Music Music Royalty 0.42 10/15/97 16 Management Agency & Music Music Royalty 4.17 10/15/97 16 Mariposa Music Music Royalty 0.71 10/15/97 16 Martin Panzer Music Music Royalty 0.53 10/15/97 16 Meadowgreen Music Music Royalty 5.82 08/21/97 10 Memcorp Purchases of Products (4,630.48) 09/15/97 16 Memcorp Purchases of Products (1,322.40) 09/17/97 14 Memcorp Purchases of Products 21,174.20 10/09/97 22 Memcorp Purchases of Products 40,115.28 10/15/97 16 Memcorp Purchases of Products 37,836.00 10/20/97 11 Memcorp Purchases of Products 1,185.87 10/21/97 10 Memcorp Purchases of Products 42,310.00 09/30/97 32 Midrange Support & Service Computer Support 106.00 10/15/97 16 Mighty Nice Music Music Royalty 111.71 10/15/97 16 Milk Money Music Music Royalty 7.49 10/15/97 16 Miracle Creek Music Music Royalty 0.10 10/14/97 17 Mitchell B. Degroot Jr Trust Music Royalty 4.09 10/15/97 16 Moebetoblame Music Music Royalty 0.53 10/15/97 16 Moline Valley Music Music Royalty 1.63 10/15/97 16 Monster Music Music Royalty 9.04 10/15/97 16 Moon Child Music Music Royalty 0.21 10/14/97 17 Morganactive Music Music Royalty 247.15 10/15/97 16 Mudbluff Music Music Royalty 1.85 10/15/97 16 Muscle Shoals Sound Pub. Music Royalty 15.90 10/15/97 16 Nebraska Music Music Royalty 1.99 10/15/97 16 New Hayes Obo New Don Songs Music Royalty 4.54 10/15/97 16 Nouvelles Editions Rideau Roug Music Royalty 1.41 10/15/97 16 Now Sound Music Music Royalty 0.53 10/05/97 26 Nutech Entertainment Purchases of Software 5,579.00 10/13/97 16 Nutech Entertainment Purchases of Software 5,224.00 10/22/97 9 Nutech Entertainment Purchases of Software 27,434.45 10/23/97 8 Nutech Entertainment Purchases of Software 2,149.74 EXHIBIT "B-2" 10/15/97 16 Paragon Music Music Royalty 3.86 10/15/97 16 Peace Rock Music Music Royalty 0.55 08/01/97 91 Pebbitone Music Music Royalty 0.05 10/21/97 10 Personally Yours Services Temp Help 1,297.31 10/28/97 3 Personally Yours Services Temp Help 853.32 10/11/97 20 Pet Mac Publishing Music Royalty 0.74 10/25/97 6 Pet Mac Publishing Music Royalty 0.53 10/15/97 16 Pkm Music Music Royalty 111.71 10/14/97 17 Songs of Polygram Int'l Pub. Music Royalty 0.45 10/15/97 16 Songs of Polygram ob Barbara Music Royalty 6.76 10/28/97 3 Printing Depot Printing Suplies 317.79 10/15/97 16 Quakenbush Music Music Royalty 9.82 10/15/97 16 R.U. Cyrius Music Music Royalty 3.49 10/15/97 16 Rachel's Own Music Music Royalty 11.54 10/15/97 16 Rafelson Music Music Royalty 1.34 10/15/97 16 Rare Blue Music Music Royalty 5.15 10/14/97 17 Reaisongs Music Royalty 0.54 10/15/97 16 Red Brazos Music Music Royalty 9.37 10/15/97 16 Red Cloud Music Music Royalty 15.73 10/15/97 16 Rex Nelon Music Music Royalty 1.43 10/15/97 16 Rio Bravo Music Music Royalty 247.15 10/15/97 16 Rocky Core Music Music Royalty 82.39 10/01/97 30 Saba Seven Music Music Royalty 24.85 10/15/97 16 Saba Seven Music Music Royalty 2.48 10/01/97 30 Sailor Musicc Music Royalty 0.28 10/14/97 17 Scarlet Moon Music Music Royalty 17.57 10/20/97 11 Seacloud Properties Rent & Utilities 6,652.66 10/15/97 16 Seagrape Music Music Royalty 3.57 05/09/97 143 Securitylink Security Services 771.63 08/01/97 91 Seven Summits Music Music Royalty 0.45 10/15/97 16 Seven Summits Music Music Royalty 0.38 10/14/97 17 Sister Elisabeth Music Music Royalty 2.06 10/15/97 16 Six Strings Music Music Royalty 2.09 08/01/97 91 Skinny Zach Music Music Royalty 0.53 10/15/97 16 Sky Harbor Music Music Royalty 0.14 10/15/97 16 Sloopy II Music Royalty 6.74 10/15/97 16 Sluggosongs Music Royalty 1.91 10/15/97 16 Snow Music-Karen Schauban Pub. Music Royalty 3.41 10/15/97 16 Snug Music Music Royalty 2.49 10/15/97 16 Somerset Songs Pub. Music Royalty 1.83 10/15/97 16 Songwriter's Ink. Music Royalty 0.10 10/15/97 16 Sony Music Pub. Music Royalty 49.21 10/14/97 17 Southern Days Music Music Royalty 0.43 10/15/97 16 Sparrow Communications Group Music Royalty 0.10 10/15/97 16 Stamps-Baxter Music & Printing Music Royalty 6.26 EXHIBIT "B-2" 10/15/97 16 The Harry Fox Agency Music Royalty 7,040.99 10/15/97 16 Threesome Music Music Royalty 9.05 10/15/97 16 Trevcor Music Music Royalty 41.19 10/15/97 16 Triumvirate Music Music Royalty 111.92 10/15/97 16 Two Knight Pub. Music Royalty 2.09 09/27/97 35 UPS Freight 10.00 10/04/97 27 UPS Freight 528.16 10/15/97 16 Wally Holmes Music Royalty 2.09 08/01/97 91 Walt Disney Music Royalty 70.79 10/15/97 16 Walt Disney Music Royalty 9.84 10/15/97 16 Wild Gator Music Music Royalty 0.14 10/15/97 16 William Joel Music Music Royalty 329.30 10/15/97 16 Wonderland Music Music Royalty 7.14 10/14/97 17 W & R Songs Music Royalty 0.83 10/15/97 16 Yellow Elephant Music Music Royalty 1.36 10/14/97 17 Zesty Zacks Music Music Royalty 2.43 10/15/97 16 48-11 Music Music Royalty 1.26 Total 253,743.79
- -------------------------------------------------------------------------------- ACCOUNTS PAYABLE RECONCILIATION (Post Petition Only): Opening Balance (total from prior report) 157,975.99 PLUS: New Indebtednes Incurred This Month 202,001.40 LESS: Amount Paid on Accounts Payable 28,403.60 LESS: Direct Payments from Factors 77,830.00 Ending Month Balance 253,743.79 - -------------------------------------------------------------------------------- SECURED: List the status to Secured Creditors and Lessors (Post Petition Only): NUMBER TOTAL OF POST AMOUNT OF SECURED DATE PETITION POST PETITION CREDITOR/ PAYMENT PAYMENT PAYMENTS PAYMENTS LESSOR DUE AMOUNT DELINQUENT DELINQUENT - -------- ------- ------- ---------- ------------- 0.00 0.00 0.00 0.00 0.00 EXHIBIT "B-2" ATTACHMENT 3 ATTACHMENT 3 INVENTORY AND FIXED ASSETS REPORT Name of Debtor: The Singing Machine Company, Inc. Case Number: 97-22199-BKC-RBR Reporting Period Beginning October 1, 1997 and Ending October 31, 1997 INVENTORY REPORT INVENTORY BALANCE AT PETITION DATE: 1,100,000.00 INVENTORY RECONCILIATION: Inventory Balance at Beginning of Month 999,900.52 Inventory Purchased During Month 234,372.45 Inventory Returns to Distributor 0.00 Inventory Used or Sold 335,377.18 Inventory Returns 58,526.31 Inventory on Hand at End of Month 957,422.10 METHOD OF COSTING INVENTORY: Standard Cost FIXED ASSET REPORT FIXED ASSETS FAIR MARKET VALUE AT PETITION DATE: 89,253.80 (Included Property, Plant and Equipment) BRIEF DESCRIPTION (First Report Only): Office Furniture, Computer Equipment, Leasehold Improvements, Warehouse Equipment FIXED ASSETS RECONCILIATION; Fixed Asset Book Value at Beginning of Month 78,607.04 LESS: Depreciation Expense (1,774.48) PLUS: New Purchases 0.00 Ending Monthly Balance 76,832.53 BRIEF DESCRIPTION OF FIXED ASSETS PURCHASED OR DISPOSED OF DURING THE REPORTING PERIOD: No fixed assets purchased or disposed of within reporting period. EXHIBIT #B-2" EXHIBIT "C" CLASS CREDITOR CLAIM AMOUNT NO OF CLAIM ----- -------- WAGE CLAIMS: - ------------ 1 Anthony Aglione 43 87.99(v) 1 Rosemarie D. Ausilio 29 536.94(s)(PU) 1 Augustin Baez 44 90.78(v) 1 Brian Cino 42 83.08(v) 1 Marlin Sevy d/b/a Sales Network Assoc. 51 9,750.62 (P) 1 Adolph Nelson 63.87(v) 1 Ed Pearson 1,164.82(v) 1 Terri Phillips 222.28(v) 1 Melody Schwab 30 170.70(v) 1 Shelley Simmons 564.31(v) 1 Edward Steele 17 3,546.85(v) 1 Mikiyo Steele 238.18(v) PRIORITY CLAIMS: - ---------------- Broward County Revenue Collector 73 5,420.58 (S) State of Florida, Dept. of Revenue 10 4.22(P) 10 1,283.60(U) SECURED CLAIMS: - --------------- 2 Bankers Capital 124,000.00 3 Toyota Motor Credit Corp. 7,657.00 CLASS 4 CLAIMS: - --------------- 48-11 Music 18.46 64 East Music Co. 8.23 ABF Freight Systems, Inc. 78 4,364.79 AMR Publications 4.45 AMR Publications .29 AMR Publications OBO Sierra 2.25 ASR Recording Service of CA 74 649,285.45 ASR Recording Service of CA 99 494,700.91 * See Key in Article V of the Disclosure Statement ARC Music Corporation 1,397.36 AT&T - FBS 22.57 Aafes Headquarters 12,735.56 Abbey Road Dist. 1,257.31 Acoustic Music Company 434.61 Active International 2,062.50 Active Media Services, Inc. 24 4,337.00 Aerodynamic Music 208.09 Age to Age Music 729.40 Agnes Goodacre 50.00 Al Hoffman Songs, Inc. 4.42 Alain Boublil Music, Ltd. 569.64 Albert E, Brumley & Sons 120.08 Alcor Music 5.22 Alley Music Corp. 765.07 Alpha Records, Inc. 516.00 Amachrist Music 6.62 American Arbitration 91 719.80 American Business Credit Corp. 85 6,563.52(P/U) American Made Music 20.33 Amerigas - Pompano Beach 7 274.75 Anago International, Inc. 28 934.55 Atlantic Music Corp. 673.33 Atlantic Paper & Packaging 41 1,159.64(P) Atlas Packaging, Inc. 9 1,303.38 Aurelius Music 1.56 Avon Corrugated Corp. 11 516.00 B Flat Publishing 6.29 B & G Akst Publishing Co. .84 BCL Music, Inc. 170.80 BMG Music Publishing .68 BMG Music Publishing 6,480.47 BPI Communications 10,236.00 Augustin Baez, Jr. 44 207.63 Ball-Zell Sales & Supply Co. 64.49 Barnegat Music Corp. 6.09 Bash Music (Ascap) 379.76 Bay Tact Corporation 8 442.88 Beckie Publishing Co., Inc. 798.14 Been Jammin Music 5,289.30 Begonia Melodies, Inc. 944.13 BellSouth Communications 61 872.28 BellSouth Financial Service 1,156.82 Bema Music Co. - Sweel City Records 1.05 Benefit Music 6,991.80 Benny Davis Music 6.34 Big Sam's Lock and Safe 71.55 Big State Distribution Corp. 212,442.55(d) Billboard Circulation Dept. 265.00 Black Ice Publishing 96 6,000.00 Blackstone Legal Supplies, Inc. 20.14 Blue Cross & Blue Shield 47 30.07(P/U) Blue Cross & Blue Shield 48 1,046.93 Blue Gum Music, Inc. 19.27 Blue Network Music, Inc. 2.11 Bobby Fischer Music 58.12 Bobby Freeman Music 734.87 Bobby Freeman Music 26.55 Debbie Bodenhorn 32.54 Boobette Music .48 Boosey & Hawkes, Inc. 1.99 Bourne Company 53 286.66 Brockman Music 31.50 Broken Bird 330.82 Bug & Beer Music 577.94 Bug Music Group 808.70 Bust It Publishing 0.51 Buzzard Rock Music 393.86 Buzzherb Music 0.82 C S C 72 190.00 CPP Belwin Mills 19,984.41 Calandrelli Music 97.01 California Phase Music 8.11 Camelot Music, Inc. 7,643.82 Campbell Connelly & Co., Ltd. 2.23 Carbert Music, Inc. 7.45 Carole Bayer Sager Music 414.85 Carton Sales & Manufacturing 15 3,103.60 Carub Music 5.22 David Casa 7.82 Cass Country Music 3,935.82 Channel Music 419.38 Checkpoint 22 4,227.02 Cherry Lane Music Publishing 1,682.53 Chevis Publishing Corp. 7.88 Chi-Boy Music 32 100.00 Chinquapin Music 0.21 Chotirmall's, Inc. 65.25 Chriswood Music 190.03 Chrysalis Music, Ltd. 391.97 Brian Cino 42 207.63 The City of Pompano Beach 375.00 Clockus Music 277.42 Coburn Music 9.27 Coffee Stop, Inc. 134.80 Computer Solutions, Inc. 4 954.00 Con-Way Southern Express 3,722.57 Conrad Music Division of Arc Music 0.42 Consolidated Freightways 58 6,466.23 Continental Stock Transfer Trust Co. 75 2,640.00 Copans (Phase 1) Associates 86 15,401.84(S) 86 29,992.50(S) Copans Printing & Graphics 12.82 Copyright Management 5,541.59 Coral Reefer Music 2,592.25 Corey Rock Music, Ltd. 1,378.79 Corsan Marketing 5,159.62 Country Road Music 58.50 County Line Music 0.69 Creative Bloc Music, Inc. 28.74 Criteron Music Corp. 6.06 Cromwell Music, Inc. 7.70 Curb Songs 1.16 D. Jentgens, Nat. Guardian 1.94 DA Music 184.08 Dabilu Music 7.73 Dadan Packaging 3 669.97 Daly & Wolcott 1,345.00 Danka Industries, Inc. 589.53 Daylight Transport 77 6,763.33(S/U) Delta Business Systems 224.58 Department of the Navy 446.00 Dept. of the Navy 446.00 Dero Research Limited 25 21,141.13 Diamond Struck Music 28.90 Dillard Music Co. 0.29 Direct Freight Corporation 27 2,429.00(S/U) Dixie Stars Music 9.88 Donald Jay Music, Ltd. 370.34 Dootsie Williams Pub 10.40 Dream Catcher Music, Inc. 81 29.89 Dwarf Music 185.81 EMI Christian Music 9.80 EMI Christian Music Obo Bases 105.80 Edge O'Woods Music 595.70 Edge of Fluke Music 0.19 Edward Marks obo Lost Boys 2,036.70 Eighties Music 2.35 Electronic Choices, Inc. 62 9,160.01 Elliot-Jacobsen Music 853.26 Elvis Music, Inc. 12.68 Emily Music Corp. 54 12-15,000.00(P/U) Englishtown Music 165.91 Ernst & Young 9,454.00 Essix Music 629.49 Evaco Financial Printers 2,277.63 Expotec, Inc. 27.13 Eyeteecee Music 23.26 FLX (HK) Ltd. 424,852.62 Fay's Inc. 2,420.00 Feadbach Music 622.31 Federal Express Corporation 2,140.40 Fever Pitch Music 174.33 Fisher Music Corp. 131.70 Foam Factory 611.00 Folkways Music Publishers 25.66 Forever Endeavor Music 1,618.37 Forman Marketing & Sales 87 5,715.82 Fort Knox Music, Inc. 24.15 Fred Ahlert Music Corp. 8.10 Frontier Communications 71.54(d) Fun City / Top of Town & Purple 6.93 G. Schirmer, Inc. 87.49 Gary Burr Music, Inc. 3.75 Genesis Computer Solutions, Inc. 459.75 Genesis Partners, Inc. 6,000.00 George M. Cohan Music Publishing Co 0.14 George Whiting Publishing Co. 3.57 Gilbert Express 3,170.40 Gnossos Music 395.94 Gnossos Music 45.32 Golden Egg Music 244.27 Golden Reed Music 68 4.81 Goldrian Music 4.19 Gone [illegible] Music 33 100.00 Grabbitt Music 34 unknown Grandpa's 1,708.80 Great Eastern Music 40 undeterminable(P) HAL Leonard Publishing 46 81,425.60 Hampshire House Publishing Corp. 46 2.41 Hamstein Cumberland Music 31.43 Hamstein Publishing Co., Inc. 346.34 Hamstein Stroudavarious Music 116.52 Handicapped Employees Living 80 384.00(P/U) Handleman Comp. 8,850.05(d) Harvey Software 206.70 Hasings Books & Music 143.03 Heavy Petal Music, Inc. 0.42 Heilig Meyer Company 2,787.26 Catherine Hinen 3.97 Hip Chic Music 8.57 Hip Trip Music Co. 8.57 Hit List Music 61.64 Hodgson Impey Cheng 37 1,800.00 Hollis Music, Inc. - Cromwell 1.78 Hollywood Imports 1,132.63(d) Holy Moley Music 9.90 Homewood House Music 358.39 Hopper Radio of Florida, Inc. 66 275.00 House of Bryant Publishing 216.57 House of Fun Music 3,815.20 Housenotes Music 84.72 Howlin' Hits 1,805.56 Hudmar Publishing Company 3.06 Hudson Bay Music Company 96.52 Ignorant Music 101 22.10 Innocent Bystander 54.65 Integrated Copyright Group 241.69 Interbond Corp. of America 646.55(d) International Business GA 483.36 Iza Music 2.37 J & R Music World, Inc. 404.11 J.C. Penny Company, Inc. 2,254.98(d) JW Charles Securities, Inc. 6,000.00(d) Jenny Music, Inc. 6.20 Jerry Bock Enterprises 2.29 Jerry Leiber Music 1.79 Jimi Lane Music 215.12 Johnny Yuma Music 1,702.36 Jones Music America 4.19 Just Cuts Music 2.40 Kamakazi Music 4.94 Katie Walker Music 21.99 Kaybee Toy & Hobby 9,167.79 Keyes Coverage, Inc. 107.69 Kieran Kane Music 256.74 Kinetic Diamond Music 695.60 King Regal Music Publishing 219.70 Knockout Music, Inc. 564.70 Know Music 97 100,000.00 Kokomo Music 95 100,000.00 Arthur M. Kushner 11,374.26 Larry Spier, Inc. 24.64 Lash Tamaron Distributors 21,847.81(d) Leadsheet Land Music 419.41 Let There Be Music, Inc. 414.04 Lewis Music Publishing Co., Inc. 6.84 Lido Music, Inc. 6.81 Likasa Music 428.14 Little Big Town Music 20.32 Loaves and Fishes Music Co. 9.37 Lomanto Exhibit Services 57 957.60(d) Lone Iguanna Music 139.89 Lost in Music, Inc. 1,285.73 Low-Sal, Inc. 3.32 Lucio Mandler Croland Bronstein 2,491.50 Ludlow Music, Inc. 131.65 M & J Technologies 88 605.24 X Magna International Corp 89 628,634.00(S) Major Bob Music 83 187.63 Major Songs 2.93 Management Agency & Music 87.59 Manna Music 42.56 Maplewood Music Publishing Co. 1.12 Mariposa Music, Inc. 48.26 Martiz Performance Improvement 65.00 Mark Cain Music 9.52 Marke Music Publishing Co., Inc. 0.11 Marlin TV Corp. 22.90 Marlong Music Corp. 3.71 Martha Lake Electronics 99.00 Martin Panzer Music 4.94 Matheson Fast Freight 96.65 Matragun Music, Inc. 18.23 Meadowgreen Music Co. 693.51 Memcorp, Inc. 65 643,967.71 Mid Summer Music, Inc. 319.13 Midstar Music 8.57 Mighty Nice Music 332.93 Mike Stoller Music 14.74 Milk Money Music 179.25 Howard Miller 69 18,667.50 Milliken and Michaels 1,100.00(d) Millward & Company 25,000.00 Miracle Creek Music 0.10 Mitsui-soko (USA), Inc. 281.31 Moline Valley Music 595.70 Monster Music 195.85 Montgomery & Larmoyeaux 79 75,011.50 Moon Child Music 69.95 Moonlight & Manolias Music Pub. 5.35 Morale Welfare & Recreat 71.50(d) Morale Welfare & Recreation 67 77.60(d) Morale Welfare & Recreation 25 325.00(d) Morris Music 23.52 Mudbluff Music 109.04 Muscle Shoals Sound Pub. 1,080.52 Museum Steps Music 9.80 Music Ridge Music 391.68 Music Sales Corp. 950.49 Music Sales Limited 6,031.50 Music Sales Limited 106 8,934.05 Musical Comedy Productions, Inc. 13.46 Nash Notes 296.48 National Record Mart 1,152.21 Nebraska Music 311.03 New Executive Music 122.37 Newcon Limited 230.00 Nikkodo USA, Ltd. 315.18(d) Now Sounds Music 56.61 Nutech Entertainment 10,360.00 O'Ryan Music 6.87 O'Tex Music 262.02 Of Music 25.36 Olde Clover Leaf Music 9.35 Orion 108 14,974.21 Out Time Music 1.28 Over the Rainbow Music 1.07 Overnite Transportation Co. 13 1,322.85 P.A.L. 6,716.38 PKM Music 332.93 PRS, Ltd. 8.41 Palm Beach Habilitation Center 3.64 Paragon Music Co. 462.24 Patti Washington Music 3.97 Paul Simon Music 828.21 Sparrow Music 77.85 Special Rider Music 591.78 Spiegel, Inc. 50 7,295.55 Spring Creek Music 5.19 St. Louis Music, Inc. 70 1,798.06 St. Nicholas Music, Inc. 557.30 Stamps-Baxter Music & Printing 360.81 Starstruck Writers Group, Inc. 223.82 Edward Steele 17 9,911.70 John Steele 45 252.60 Sterling Music Company 13.83 Sterling Software, Inc. 98 4,520.41(P) Steve O'Brien Music (BMI) 103.90 Stirling Jack Service 160.00 Stone City Music 33.18 Stormking Music 43.23 Strange Euphoria Music 3.69 Sugar Song Publishing, Inc. 3.18 Donna Sumer d/b/a/ Sweet Summer 150.33 Sun Container, Inc. 275.00 Sunshine State Messenger Svc 2 65.50 Sure Fire Music Co. 85.16 Swag Song Music 1,658.63 Talmont Music 111.85 Tandy Customer Service 81.43 Target Northern Operations Ctr. 55 313,612.05 Tech Specialist 20.00 Telly Larc, Inc. 29,03 Temp One of South Florida 5,408.15 Temporary Labor Sources, Inc. 978.75 The Association 14,944.84 The Harry Fox Agency 104 410,000.00(S) The Really Useful Group 260.50 Third Story Music, Inc. 11.83 Threesome Music 596.12 Tobago Music 1.94 Towncar 153.75 Toy Town Tunes 0.27 Toys R Us, Inc. 1 28,238.85 Transportation Credit Service 5,167.74 Trevcor Music Corp. 590.55 Triad 63 42,392.54(P) Trio Music Company, Inc. 775.97 Trio Music Company, Inc. 7.45 Triumvirate Music 64 506.88 Trixie Lou Music 0.24 Two Knight Publishing 215.12 Underwriters Lab's, Inc. 65.00 Uni-Box Incorporated 52 456.75 Unimusica, Inc. 20.60 Unison Music Publishing, Inc. 419.38 United Parcel Service 84 9,299.50 United Parcel Services 174.14 United Waste 700.00 Vector Music Corp. 97.11 Volta Music Corp. 0.30 W & R Songs 1.31 W & R Songs 8.22 WB Music Corp obo Damila USIC 2.11 WB Music Corp. 12.32 WEB IV Music, Inc. 12.77 WRS Motion Picture & Video Lab 3,556.91 Walmart Stores, Inc. 90 44,118.23 Walmart Stores, Inc. 22,932.58 Walt Disney Music 1,248.84 Walter Kent Music Co. 18 2,000.00 Walter Orange Music 2.44 Warner Chappell Music 71 85,855.93 Warren Gorham & Lamont 299.19 Webster Music Corp. 21 2,000.00 Wednesday Music 12 unknown Welbeck Music Corp. 0.78 Whole Lotta Shakin' Music 25.84 William Joel Music 9,565.19 Winston Organ Service, Inc. 60 50.00 Wonderland Music 856.52 Word Music 61.28 Work Songs Ltd. 99.57 Yee Haw Music 106.56 Yellow Elephant Music 212.58 Yellow Freight System, Inc. 56 2,123.75 Yum Howdy Music 16.95 Zachary Creek 5.79 Zavion Enterprises 358.58 Zena Music 2.63 Zephyrhills 35 280.42 Zevon Music 279.59 EXHIBIT "D" LIQUIDATION ANALYSIS ASSETS: LIQUIDATION VALUE: Cash $ 13,858.00 Security Deposits $ 4,968.00 Acct. Receivable $ 125,000.00 Patents, Copywrights, Song Library $ 45,000.00 Office Equipment $ 11,140.00 Inventory $ 155,000.00 Warehouse Equipment $ 9,240.00 TOTAL $ 364,206.00 LIABILITIES: Wage Claims $ 10,769.80 Priority Claims $ 6,708.40 Secured Claims $ 131,657.00 TOTAL PRIORITY AND SECURED $ 149,135.20 -------------- Chaper 7 Administrative Fees $ 50,000.00 $ 199,135.20 -------------- AVAILABLE FOR UNSECURED CLAIMS $ 165,070.60 ============== This would yield an approximate dividend of 3% to unsecured creditors. ASSUMPTIONS The liquidation valuation is based on management's business estimate of current fair market value in a Chapter 7 liquidation.
The Singing Machine Company, Inc. Operating Statement Projections For the Years Ended 3/31/98-3/31/02 Year End Year End Year End Year End Year End 3/31/98 3/31/99 3/31/00 3/31/01 3/31/02 Gross Sales - Domestic 3,741,896 4,100,000 4,920,000 5,904,000 7,084,000 Gross Sales - FOB Hong Kong 3,731,900 6,000,000 7,200,000 8,640,000 10,368,000 --------- ---------- ---------- ---------- ---------- Total 7,473,796 10,100,000 12,120,000 14,544,000 17,452,000 Returns 1,369,000 1,000,000 1,200,000 1,454,000 1,745,000 --------- ---------- ---------- ---------- ---------- Net Sales 6,104,796 9,100,000 10,920,000 13,090,000 15,707,000 Gross Profit - Domestic 1,095,920 1,318,400 1,574,000 1,889,280 2,266,880 Gross Profit - FOB Hong Kong 545,361 1,026,000 1,512,000 1,814,400 2,177,280 GP on Returns (269,693) (194,000) (304,800) (370,188) (444,277) --------- ---------- ---------- ---------- ---------- Total 1,371,588 2,150,400 2,781,200 3,333,492 3,999,883 OPERATING EXPENSES US Expenses 1,246,850 1,100,000 1,200,000 1,300,000 1,400,000 HK Expenses 51,000 67,000 80,000 104,000 144,000 Commissions 80,218 122,000 163,000 196,000 235,000 Depreciation - US 219,347 189,000 143,000 84,000 62,000 Depreciation - HK 106,124 1,697 1,697 1,697 1,697 --------- ---------- ---------- ---------- ---------- Total Expenses 1,703,539 1,479,697 1,587,697 1,685,697 1,842,697 Net Income (331,951) 670,703 1,193,503 1,647,795 2,157,186
COMPOSITE EXHIBIT "E"
THE SINGING MACHINE COMPANY, INC. EXPENSES - US OFFICE 1997 ACCOUNT APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER - ------------- Salaries 45521 37613 37452 36428 56850 38036 38036 38036 38036 P/R Taxes 3927 2390 7258 2021 3147 2100 2100 1000 1900 Rent Copans/Pompano 10924 17052 17052 4968 4968 4968 4968 4060 4968 Utilities 553 595 569 620 359 450 450 450 450 Rent - Ft. Laud. Whse. 1657 1616 1600 1600 1600 0 Rent - showroom 350 350 350 350 350 350 350 350 350 Rent - ASR 630 630 630 630 640 630 630 630 630 Telephone 2001 2137 1466 1997 2023 2200 2200 2200 2200 Copier Rental 365 391 365 365 541 370 370 370 370 Fork Lift Rental 274 262 262 726 262 270 270 270 270 Temp Payroll 2598 7545 7114 5309 6567 4800 2400 1200 400 Prof. Fees - Accounting 17843 0 6000 6000 6000 8000 Prof. Fees - Legal 17500 25414 2765 1405 914 20000 4000 4000 5000 Insurance - Medical 1983 2015 1983 1983 1983 1983 1983 1983 2220 Insurance- General 4370 1488 5026 6015 8039 12645 5469 Stock Fees 540 684 562 548 548 600 600 600 600 EDI Expense 550 550 550 550 550 Packing Supplies 315 515 237 208 1514 2500 2500 2500 500 Office Supplies 550 1280 1546 744 1192 2000 2000 2000 2000 Repair/Warranty Expense 6382 6514 6125 5560 3251 2000 2000 2000 2000 Packaging Material 3111 3841 3135 Travel 710 5205 4306 5125 2512 1100 8350 900 500 Postage 640 400 857 49 952 500 500 500 500 US Trustee 1500 0 0 3750 0 Freight & Delivery 4673 1273 1760 1594 3841 5000 5000 5000 2000 Misc. 1872 2828 3942 3511 550 3000 3000 3000 3000 Internet 131 255 178 214 1100 1100 1100 1100 Moving Expense 7720 Computer Maint. 573 482 585 3104 3821 750 500 500 500 TOTAL 109110 140724 98394 91337 104186 110872 105246 97252 83513
1998 ACCOUNT JANUARY FEBRUARY MARCH TOTAL - ------------- Salaries 57054 38036 57054 518152 P/R Taxes 4578 3632 4500 3454 Rent Copans/Pompano 4960 4960 4968 96940 Utilities 450 450 450 5846 Rent - Ft. Laud. Whse. 8073 Rent - showroom 350 350 350 4200 Rent - ASR 630 630 630 7570 Telephone 2200 2200 2200 25134 Copier Rental 370 370 370 4617 Fork Lift Rental 270 270 270 3616 Temp Payroll 0 38013 Prof. Fees - Accounting 8000 57013 Prof. Fees - Legal 10000 5000 5000 100998 Insurance - Medical 2220 2220 2220 24776 Insurance- General 8430 6015 5404 62990 Stock Fees 600 600 600 7082 EDI Expense 550 550 550 4400 Packing Supplies 1500 1500 1500 15290 Office Supplies 2000 2000 2000 10312 Repair/Warranty Expense 34032 Packaging Material Travel 12400 6650 3400 51238 Postage 500 500 500 6406 US Trustee 3750 9000 Freight & Delivery 1000 2000 2000 35141 Misc. 3000 3000 3000 33703 Internet 600 600 600 6978 Moving Expense 7720 Computer Maint. 500 500 500 12315 TOTAL 126029 82041 98146 1246850 EXHIBIT "E" EX-10.Z 3 EXHIBIT 10(Z) UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF FLORIDA IN RE: CASE NO.: 97-22199-BKC-RBR THE SINGING MACHINE COMPANY, INC., CHAPTER 11 Tax ID# 95-3795478 DEBTOR. / - --------------------------------- DEBTOR'S AMENDED PLAN OF REORGANIZATION FURR AND COHEN, P.A. Attorneys for Debtor By: Robert C. Furr, Esq. and Lisa J. Chaiklin Aflalo, Esq. 1499 West Palmetto Park Road Suite 412 Boca Raton, FL 33486 (561) 395-0500 TABLE OF CONTENTS PAGE ---- (a) Definitions - Article I 1 (b) Classification of Claims and Interests - Article II 11 (c) Treatment of Claims and Interests under the Plan - Article III 11 (d) Impairment - Article IV 15 (e) Means of Execution and Security for Installment Payments - Article V 15 (f) Executory Contracts - Article VI 16 (g) Effect of Confirmation - Article VII 17 (h) Cram Down, Modification, Substantive Consolidation - Article VIII 17 (i) Retention of Jurisdiction - Article IX 18 (j) Officers and Directors - Article X 19 (k) Miscellaneous - Article XI 20 DEBTOR'S AMENDED PLAN OF REORGANIZATION ARTICLE I DEFINITIONS As used in this Plan, the following terms shall have the respective meanings set forth below, and such meanings shall be equally applicable to the singular and plural forms of the terms defined unless the context requires otherwise. Those terms no specifically defined in this Plan shall have the meanings ascribed to them by the code. ACTIONS All actions that a trustee or debtor-in-possession is empowered to bring pursuant to 11 U.S.C. Sections 542-553 of the Code, and any other cause of action, lawsuit, adversary proceeding, contested matter, claim objection, or right of the Debtor or the Estate against any Person. ADMINISTRATIVE CLAIM A Claim for payment of an administrative expense under Section 503 of the Code that is entitled to priority under Section 507(a)(1) of the Code. Administrative Claims include claims for the provision of goods or services that are incurred by the Debtor in the ordinary course of business. ADMINISTRATIVE CLAIMANT The holder of an Administrative Claim. ALLOWED AMOUNT With Respect to a Claim, (a) the amount of a Claim that was listed in the Debtor's Schedules (as originally filed in the Case) as not disputed, contingent or unliquidated, if the holder of such Claim has not filed a proof of claim with the Court within the applicable period of limitation fixed by the Court pursuant to Rule 3003(c)(3) of the Rules, or (b) if a holder of a Claim has filed a proof of claim with the Court within the applicable period of limitation fixed by the Court pursuant to Rule 3003(c)(3) of the Rules: (I) the amount stated in such proof of claim or in the Schedules if no objection to such proof of claim or amount listed in the Schedules has been interposed within the applicable period of limitation fixed by the Code or Rules, or as otherwise fixed by the Court, or (ii) such amount as shall be fixed by an order of the Court which has become a Final Order, if an objection has been interposed within the applicable period of limitation fixed by the Code, the Rules, or the Court, or (c) with respect to a Fee Request, such amount as shall be fixed by an order of the Court which has become a Final Order. In no event shall the Allowed Amount of any Priority Claim or Unsecured Claim include interest accrued on such Claim after the Filing Date. ALLOWED CLAIM Any Claim which is not a Disputed Claim for which an Allowed Amount has been finally determined in such Allowed Amount. The Allowed Amount of each Secured Claim shall include, pursuant to Section 506(b) of the Code, interest on such Claim, and any reasonable fees, costs, or charges provided for under the agreement(s) under which such Claim arose incurred as a result of any breach or default, act or omission occurring through the Effective Date or by reason of the Plan, Confirmation or Substantial Consummation. ALLOWED INTEREST Any Interest which has not been timely disputed, or if timely disputed, which has been allowed by order of the Court which has become a Final Order. ARTICLE One of the numbered Articles of the Plan. ASSETS All of the right, title and interest of the Debtors in and to property of any type or nature including the patents, licenses, technologies and the Actions and all other Property of the Estate. 2 ASSUMED CONTRACT An Executory Contract (as modified or amended pursuant to the Plan, prior order of the Court or by agreement of the parties) that is assigned to the Reorganized Debtor pursuant to the Plan. BUSINESS DAY A day other than a Saturday, a Sunday or a day on which commercial banks in South Florida are authorized or required to close. CASE This Chapter 11 Case No. 97-22199-BKC-RBR United States Bankruptcy Court for the Southern District of Florida. CLAIM (a) A right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed or contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; (b) a right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured; and (c) without limiting the generality of the foregoing, all Administrative Claims, Priority Claims, Secured Claims and unsecured Claims. CLASS A group of Claims or Interests classified together pursuant to the Plan. CLASS 1 The unsecured priority claims of employees of the Debtor as described, classified and treated in Article 3.5 of the Plan. 3 CLASS 2 The Secured Claim of Bankers Capital as described, classified and treated in Article 3.6 of the Plan. CLASS 3 The Secured Claim of Toyota Motor Credit Corporation as described, classified and treated in Article 3.7 of the Plan. CLASS 4 The Claims of Convenience Claims as described, classified and treated in Article 3.8 of the Plan. CLASS 5 The Claims of general unsecured creditors as described, classified and treated in Article 3.9 of the Plan. CLASS 6 The equity interests of the holders of common shares of the Debtor as described, classified and treated in Article 3.10 of the Plan. CODE The Bankruptcy Code, 11 U.S.C. Section 101 ET SEQ. COMMON STOCK The Common Stock, par value $0.01 per share, of the Debtor to be issued to certain Claim holders and Interest Holders pursuant to the Plan. CONFIRMATION The entry by the Court of the Confirmation Order. 4 CONFIRMATION DATE The date on which the Clerk of the Court enters the Confirmation Order on the docket. CONFIRMATION HEARING A hearing held by the Court on confirmation of the Plan pursuant to Section 1128 of the Code. CONFIRMATION ORDER The order entered by the Court confirming the Plan, which shall contain such provisions as the Proponent desires and shall otherwise be in form and substance satisfactory to the Proponent. CONVENIENCE CLAIMS The Claims by those general unsecured creditors which are equal to or less than $300.00 in amount. COURT The United States Bankruptcy Court, Southern District of Florida including any Bankruptcy Judge thereof and any court having competent jurisdiction to hear appeals from the Bankruptcy Judges thereof. CREDITOR Any Person holding a Claim or Interest, including Administrative Claimants and Claims of the kind specified in Sections 502(b), 502(h) and 502(i) of the Code, and such Person's heirs, successors, assigns, executors and personal representatives. DEBTOR or DEBTOR IN POSSESSION The Singing Machine Company, Inc. Any reference in the Plan to the "Debtor" shall also include the Debtor in its capacity as debtor in possession in the Case, and vice versa. 5 DISCLOSURE STATEMENT The Disclosure Statement filed by the Debtor in connection with the Plan and approved by the Court for submission to Creditors as the same may be amended from time to time. DISPUTED AMOUNT With respect to a particular Disputed Claim, that amount which is equal to the difference, if any, between the Face Amount of such Claim and the amount, if any, of such Claim which the party objecting thereto concedes. DISPUTED CLAIM Any Claim for which an Allowed Amount has not yet been determined and with respect to which an objection has been interposed on or prior to the Confirmation Date or such other date as may be fixed by the Court. DISPUTED INTEREST Any Interest which has not yet been allowed and with respect to which an objection has been interposed on or prior to the Confirmation Date or such other date fixed by the Court. EFFECTIVE DATE The tenth day after the Confirmation Order becomes final, or such other date as this Court shall order. ESTATE The estate created in the Case pursuant to Section 541 of the Code. EXECUTORY CONTRACT A contract or unexpired lease to which Debtor is a party and that is executory within the meaning of Section 365 of the Code. 6 FACE AMOUNT With respect to a particular Claim, (a) if the holder of such Claim has not filed a proof of claim with the Court within the applicable period of limitation fixed by the Court pursuant to Rule 3003(c)(3) of the Rules, the amount of such Claim that was listed in the Schedules (as originally filed in the Case) as not disputed, contingent or unliquidated; or (b) if the holder of such Claim has filed a proof of claim with the Court within the applicable period of limitation fixed by the Court pursuant to Rule 3003(c)(3) of the Rules, the amount stated in such proof of claim, or (c) with respect to a Fee Request, the net amount to which the applicant would be entitled if its application were to be granted in full. FEE REQUEST An application or request for payment by the Estate of fees, compensation for services rendered or reimbursement of expenses, pursuant to Rule 2016 of the Rules or other applicable provision of the Code or the Rules. FILING DATE April 11, 1997, the date the Debtor filed its Chapter 11 petition with the Court. FINAL ORDER An order or judgment of the Court as entered on the docket that has not been reversed, stayed, modified or amended, and respecting which the time to appeal, petition for certiorari or seek reargument, review or rehearing has expired and as to which no appeal, reargument, petition for certiorari, review or rehearing is pending or as to which any right to appeal, reargue, petition for certiorari or seek review or rehearing has been waived in writing in a manner satisfactory to the Proponents, or, if any appeal, reargument, petition for certiorari, review or rehearing thereof as been denied, the time to take any further appeal or to seek certiorari or further rehearing, review of 7 reargument has expired. If any provision of the Plan requires the entry of a Final Order as a condition to the occurrence or performance of an act, the Debtor may waive such requirement. INTEREST HOLDERS Equity interest of the holders of common stock of the Debtor. LIEN A charge against or interest in any item of Property of the Estate to secure payment of a debt or performance of an obligation. PERSON Any individual, sole proprietorship, partnership (general or limited), joint venture, trust, unincorporated organization, association, corporation, institution, entity or government (whether federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body, political subdivision or department thereof). PLAN This Plan of Reorganization in the present form or as it may be modified, amended or supplemented from time to time. PRIORITY CLAIM A Claim (other than an Administrative Claim) that is entitled to priority under Section 507 of the Code. PRIORITY TAX CLAIM A Claim (other than an Administrative Claim) that is entitled to priority under Section 507(a)(8) of the Code. PRO RATA 8 Proportionately, so that the ratio of the amount of consideration distributed on account of a particular Allowed Claim to the Allowed Amount of such Claim is the same as the ratio of the amount of consideration distributed on account of all Allowed Claims of the Class in which the particular Claim is included to the amount of all Allowed Claims of that Class. Whenever a Disputed Claim has not been finally resolved, an appropriate reserve for payment of such Disputed Claim shall be established so that there will be sufficient monies available to make a Pro Rata distribution to the holder of such Disputed Claim upon final resolution of the dispute. PROPERTY OF THE ESTATE The property defined in Section 541 of the Code and any other property right or interest of the Debtor. PROPONENT The Debtor REJECTED CONTRACT An Executory Contract that is rejected at any time during the Case or pursuant to Article VI of the Plan. REJECTION CLAIM A Claim arising under Section 502(g) of the Code in its Allowed Amount. RULES The Federal Rules of Bankruptcy Procedure, the Federal Rules of Civil Procedure and/or the Local Rules of the Bankruptcy Court. SCHEDULES The schedules of assets and liabilities originally filed by the Debtor with the Court and as the same may be amended from time to time. 9 SECURED CLAIM A Claim secured by a lien on property in which the Estate has an interest or that is subject to set-off under Section 553 of the Code to the extent of the value of the interest attributable to such Claim in the Estate's interest in such property or to the extent of the amount subject to set-off. SECURED CREDITOR The holder of a Secured Claim. SECURED TAX CLAIMS Ad valorem taxes assessed against the personal property owned by the Debtor. SUBSTANTIAL CONSUMMATION Following the occurrence of Confirmation, the date that the first dividend is distributed to creditors. UNSECURED CLAIM A Claim other than a Secured Claim, a Priority Claim or an Administrative Claim. UNSECURED CREDITOR The holder of a unsecured Claim WAGE CLAIMS The claims of employees for wages, salaries or commissions earned within ninety (90) days before the date of the filing of the Petition to the extent of $4,000.00 as provided in Section 507(a)(3) of the Code. RULES OF CONSTRUCTION AND INTERPRETATION The following rules of construction shall be applicable for all purposes of the Plan unless the context clearly requires otherwise: The terms "include," "including" and similar terms shall be construed as if followed 10 by the phrase "without being limited to." 1. Words of masculine, feminine or neuter gender shall mean and include the correlative words of the other genders, and words importing the singular number shall mean and include the plural number, and vice versa. 2. All article, section and exhibit or appendix captions are used for convenience and reference only and in no way define, limit or describe the scope or intent of, on in any way affect, any such article, section, exhibit or appendix. ARTICLE II CLASSIFICATION OF CLAIMS AND INTERESTS 2.1 An allowed Claim is part of a particular class only to the extent that the Allowed Claim qualifies within the definition of that Class and, is in a different Class to the extent that the remainder of the Claim qualifies within the description of a different Class. ARTICLE III TREATMENT OF CLAIMS AND INTERESTS UNDER THE PLAN 3.1 GENERAL. All payments under this Plan shall commence ten days after confirmation. 3.2 ADMINISTRATIVE CLAIMS. All Allowed Administrative Claims shall be paid: (a) in full on the Effective Date or, if such Claim is objected to, the Date of a Final Order allowing any such Administrative Claim; OR (b) upon such other terms as may be agreed to between the Debtor and each such Administrative Claimant. Administrative costs are estimated to be approximately $100,000.00 above what has 11 been paid to Furr and Cohen as a retainer. All case related payments for services, costs, and expenses will be subject to Court approval. All payments shall be from cash on hand. 3.3 All fees due under 11 U.S.C. ss. 1129(a)(12) shall be paid as required by 28 U.S.C. ss. 1930. 3.4 TAX CLAIMS. - Allowed Tax Claims, estimated by management to total $7,500.00, specified in 11 U.S.C. Section 507(a)(8) shall be paid in full at confirmation. 3.5 CLASS 1 -- WAGE CLAIMS DESCRIPTION: Class 1 consists of the unsecured priority claims of employees of the Debtor. The Debtor estimates the aggregate amount of Class 1 Claims to be $10,000.00. TREATMENT: Class 1 Claimants will be paid up to a maximum of $4,000.00 per claimant in accordance with the provisions of Sections 507 of the Code on the Effective Date. IMPAIRMENT. Class 1 Claims are unimpaired. 3.6 CLASS 2 -- BANKERS CAPITAL. DESCRIPTION: Class 2 consists of the secured claim of Bankers Capital in the amount of $124,000.00, secured by a lien on certain of the Debtor's Assets, as described in the factoring agreement and as approved by prior Court Orders. TREATMENT: The Class 2 claim of Bankers Capital shall be paid according to the terms of its contract with the Debtor, which contract is current. IMPAIRMENT. Class 2 claim is unimpaired. 3.7 CLASS 3 -- TOYOTA MOTOR CREDIT CORPORATION DESCRIPTION: Class 3 consists of the Secured Claim of Toyota Motor Credit Corporation, which is secured by a Lien on a forklift. 12 TREATMENT: The Class 3 claim shall be paid according to its contract, which is current. IMPAIRMENT. Class 3 Claim is unimpaired. 3.8 CLASS 4 -- ADMINISTRATIVE CONVENIENCE CLAIMS DESCRIPTION: Class 4 consists of Convenience Claims. TREATMENT: Class 4 claims will receive a cash payment of ten percent (10%) of the amount of their Allowed Claim on the Effective Date. IMPAIRMENT: Class 4 is impaired. 3.9 CLASS 5 -- GENERAL UNSECURED CLAIMS DESCRIPTION: Class 5 consists of the claims of general unsecured creditors. TREATMENT: Unsecured creditors will be given a choice at confirmation to elect the following: OPTION A: a cash payment of ten percent (10%) of the amount of their Allowed Claim, payable five percent (5%) on the Effective Date and five percent (5%) six (6) months thereafter; or OPTION B: issuance on the Effective Date of shares of New Common Stock of the reorganized Company on the following basis: for each Two Dollars ($2.00) of an Allowed Claim, each Claimant shall receive one share of New Common Stock. Creditors will elect Option A or Option B on the ballot. In the event a creditor fails to elect a treatment on the ballot or fails to vote, such creditor will be deemed to have elected Option B. IMPAIRMENT. Class 5 is impaired. 3.10 CLASS 6 -- INTEREST HOLDERS DESCRIPTION: Class 6 consists of the equity interests of the holders of the Old Common Stock 13 of the Debtor. TREATMENT: Interest Holders will have their interest diluted by ninety percent (90%) at confirmation, so that for each share of existing pre-petition common stock owned, they will receive one-tenth (1/10) of a share of New Common Stock in the reorganized Company (1 x 10 reverse split). IMPAIRMENT. Class 6 is impaired. AGREEMENT TO LESS FAVORABLE TREATMENT Any Creditor of Interest Holder may agree to less favorable treatment than is provided for such Creditor in the Plan. The obligations of the Debtor under this Plan may be prepaid in full or in part without penalty. 3.11 PAYMENT OF U.S. TRUSTEE'S FEES: Notwithstanding any other provisions of the Plan to the contrary, the Debtor shall pay the United States Trustee the appropriate sum required pursuant to 28 U.S.C ss. 1930(a)(6), within ten (10) days of the entry of the order confirming this Plan, for pre-confirmation periods and simultaneously provide to the United States Trustee an appropriate affidavit indicating the cash disbursements for the relevant period. The Debtor, as a reorganized Debtor, shall further pay the United States Trustee the appropriate sum required pursuant to 28 U.S.C. ss. 1930(a)(6), until the earlier of the closing of this case by the issuance of a Final Decree by the Bankruptcy Court, or upon the entry of an Order by the Bankruptcy court dismissing this case or converting this case to another Chapter under the United States Bankruptcy Code, and the reorganized Debtor shall provide to the United States Trustee upon the payment of each post-confirmation payment an appropriate affidavit indicating all the cash disbursements from the relevant period. 3.12 BLANK BALLOTS Any Ballot not filed in accordance with the filing instructions on the Ballot pertaining to this Plan shall not be counted for voting purposes. 14 ARTICLE IV IMPAIRMENT 4.1 Claims in Classes 4, 5 and 6 are impaired under this Plan. Impaired classes will be treated as fully set forth in Article III above. ARTICLE V MEANS OF EXECUTION AND SECURITY FOR PAYMENTS 5.1 The distribution of cash required under the Plan, shall be made from available funds of the Debtor or as may be available for distribution on or before the Effective Date or, as otherwise agreed to by Debtor and the holders of Allowed Priority Claims and Allowed Unsecured Claims. 5.2 The Distribution of cash required under Article III of the Plan shall, as set forth in such Article, be made from the continuing operations of Debtor prior to the Effective Date or by the reorganized Debtor following the Effective Date. 5.3 [Omitted] 5.4 Upon the entry of the Confirmation Order, the reorganized Debtor shall be vested with all of its property free and clear of all claims and interests of creditors, except as otherwise provided for herein. 5.5 After the entry of an Order of Confirmation, the reorganized Debtor shall continue its business and manage its affairs without further supervision of the Court. 5.6 Furr and Cohen shall be the initial disbursing agent and shall be responsible for making the payments under the Plan due on the Effective Date. All payments thereafter will be made by the Debtor. The payments shall be as provided in Article III. 15 5.7 UNCLAIMED DISTRIBUTIONS. Any checks mailed by the disbursing agent for the initial payment to a particular creditor which remains unclaimed ninety (90) days after mailing, shall constitute "unclaimed funds" which shall become the Debtor's property. A distribution of funds is unclaimed, if, without limitation, the holder of a Claim entitled thereto does not cash a check or returns a check or if the check mailed to the holder at the address set forth in the Debtor's Schedule of Liabilities or set forth in a proof of claim filed by such holder is returned by the United States Postal Service as undeliverable. Any funds unclaimed shall be forfeited by the holder otherwise entitled thereto, and all rights, title and interest therein shall thereupon vest in the Reorganized Debtor. ARTICLE VI EXECUTORY CONTRACTS 6.1 Any and all Executory Contracts and unexpired leases of the Debtor not expressly assumed herein, assumed prior to the Confirmation Date, or not at the Confirmation Date the subject of pending application to assume, shall be deemed to be rejected. 6.2 Debtor has present intentions to assume certain leases of office equipment and its music licensing contracts. The debtor intends to file motions to assume same prior to the Confirmation date. 6.3 Any claims for rejected contracts shall be paid in Class 5 upon determination by agreement or by the Court. Any proof of claim for damages arising from the rejection must be filed with ;the Court within thirty (30) days after the entry of an Order allowing the rejection of the contract. 16 ARTICLE VII EFFECT OF CONFIRMATION 7.1 DISCHARGE - Except as otherwise provided in this Plan, Confirmation of the Plan and full compliance and performance with the Plan, shall be deemed to have discharged the Debtor from any Claim that arose on or prior to the confirmation Date, and any Claim of a kind specified in Section 502(g), (h) or (i) of the Code, whether or not: (a) a Proof of the Claim is filed or deemed to be filed under Sections 501 and 1111(a) of the Code; (b) such Claim is allowed under Section 502 of the Code; or (c) the holder of such Claim has accepted the Plan. The payments to be made by Debtor pursuant to this Plan shall be in full settlement and satisfaction of all Claims against Debtor. ARTICLE VIII CRAM DOWN, MODIFICATION, SUBSTANTIVE CONSOLIDATION UTILIZATION OF CRAM DOWN If all of the applicable provisions of 11 U.S.C. ss. 1129(a) other than paragraph (8), are found to have been met with respect to the Plan, Debtor may seek confirmation pursuant to 11 U.S.C. ss. 1129(b) of the Code. For the purposes of seeking confirmation under the Cram-down provisions of the Code, should that alternative means of confirmation prove to be necessary, Debtor reserves the right to modify or vary the treatment of the claims of the rejecting Classes so as to comply with ss. 1129(6) of the Code. 17 MODIFICATION OF PLAN PRIOR TO CONFIRMATION At any time prior to the Confirmation Date, the Proponent may modify the Plan, but may not modify the Plan so that the Plan as modified fails to meet the requirements of Sections 1122 and 1123 of the Code. If the Proponent files a modification with the Court, the Plan as modified shall become the Plan. AFTER CONFIRMATION. At any time after the Confirmation Date, and before Substantial Consummation, the Proponent may modify the Plan but may not modify the Plan so that the Plan as modified fails to meet the requirements of Sections 1122 and 1123 of the Code. The Plan as modified under this Section becomes the Plan only if the Court, after notice and a hearing, confirms such Plan, as modified, under Section 1129 of the Code. ARTICLE IX RETENTION OF JURISDICTION 9.1 From and after entry of the Confirmation order, the Bankruptcy Court shall retain such jurisdiction as is legally permissible over the reorganization Case for the following purposes: (a) to hear and determine any and all objections to the allowance on any Claim or any controversy as to the classification of Claims; (b) to hear and determine any and all applications for compensation and reimbursement of expenses to professionals as well as to hear and determine claims entitled to priority under Section 507(a)(1) of Title 11; (c) to enable the Debtor to prosecute any and all proceedings which may be brought to set aside liens or encumbrances and to recover any transfers, assets, properties or damages to which the Debtor may be entitled under applicable provision of the Code or any other Federal, State or local 18 laws; including causes of action, controversies, disputes, and conflicts between the Debtor and any other party, including but not limited to any causes of action for objections to claims, preferences or fraudulent transfers and obligations or equitable subordination; and to enter any Order assuring that good, sufficient and marketable legal title is conveyed to the purchaser of the Debtor's property. (d) to consider any necessary valuation issues under Section 506 of the Code, and any proceeding to determine the amount, validity and priority of liens, in connection with the Debtor's property. (e) to determine the rights of any party in respect of the assumption or rejection of any executory contracts or unexpired leases. (f) to correct any defect, cure any omission, or reconcile any inconsistency in the Plan or Order of Confirmation, as may be necessary to carry out the purposes and intent of this Plan. (g) to modify this Plan after Confirmation, pursuant to the Code. (h) to enforce and interpret the terms and conditions of the Plan. (i) to enter Orders to enforce the title, rights and power of the Estate as the Court may deem necessary. (j) to enter Orders concluding and closing this case. ARTICLE X OFFICERS AND DIRECTORS The following individuals shall hold the position indicated as an officer and/or director of the Reorganized Debtor, at the compensation stated, subject to change by action of the Board of Directors. They are insiders. President, CEO and Director Edward Steele $167,500.00 Vice President And Director Edward Pearson $75,000.00 19 Secretary & Treasurer John Klecha $ 75,000.00 Director Paul Wu $ NONE ARTICLE XI MISCELLANEOUS 11.1 HEADINGS. Headings are utilized in this Plan for the convenience of reference only, and shall not constitute a part of this Plan for any other purpose. 11.2 DEFECTS, OMISSIONS AND AMENDMENTS. This Plan may be altered, amended or modified by Debtor before or after the Confirmation Date as provided in Section 1127 of the Code. 11.3 GOVERNING LAW. Except to the extent that the Code is applicable, all rights and obligations arising under this Plan shall be governed by, and construed and enforced in accordance with, the laws of the State of Florida. 11.4 SEVERABILITY. Should any provision in this Plan be determined to be unenforceable, such determination shall in no way limit or affect the enforceability and operative effect of any or all other provisions of this plan. 11.5 REGULATORY APPROVAL. No regulatory approval is necessary for the confirmation of this Plan. 11.6 SAVINGS CLAUSE. Any minor defect or inconsistency in the Plan may be corrected or amended by the Confirmation Order. 11.7 NO ADMISSIONS. The preparation and filing of this Plan and the Disclosure Statement were undertaken, in part, as a means of settling disputes among various parties in interest in the Case and is offered by the Proponent, in part, as an offer in compromise by the Proponent in the Plan to other parties in interest in the Case. No statement or omission by Proponent in the Plan or the 20 Disclosure Statement, including any statement concerning the estimated Allowed Amount of any Claim, shall preclude or estop the Proponent from objecting to any Claim, and no such statement or omission shall constitute, or be deemed to constitute, any type of admission, waiver or estoppel on the part of the Proponent, and nothing stated or unstated by the Proponent shall be admissible against the Proponent except in the hearings on the adequacy of the Disclosure Statement and the confirmation of the Plan. DATED: December 17, 1997 The Singing Machine Company, Inc. By: /s/ JOHN KLECHA --------------- John Klecha, Secy./Treas. I HEREBY CERTIFY that I am admitted to the Bar of the United States District Court for the Southern District of Florida and I am in compliance with the additional qualifications to practice in this Court set forth in Local Rule 910(A). FURR AND COHEN, P.A. Attorney for Debtor 1499 W. Palmetto Park Road Suite 412 Boca Raton, FL 33486 561-395-0500 By: /s/ LISA J. CHAIKLIN AFLALO --------------------------- ROBERT C. FURR, ESQ. Florida Bar No. 210854 LISA J. CHAIKLIN AFLALO, ESQ. Florida Bar No. 873179 21 EX-10.AA 4 EXHIBIT 10(aa) UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF FLORIDA IN RE: CASE NO. 97-22199-BKC-RBR CHAPTER 11 THE SINGING MACHINE COMPANY, INC., Tax ID# 95-3795478 DEBTOR. - -------------------------------/ AGREEMENT REGARDING TREATMENT OF HARRY FOX AGENCY IN DEBTOR'S PLAN OF REORGANIZATION THIS AGREEMENT regarding Plan treatment ("Agreement") is made as of the 16th day of December, 1997, by and between The Singing Machine Company, Inc., a Debtor-in-Possession ("SMC") and the Harry Fox Agency ("Harry Fox"), a DELAWARE corporation. WITNESSETH: WHEREAS, SMC filed a Chapter 11 bankruptcy proceeding on April 11, 1997 ("Petition Date"), and was assigned Case No. 97-22199-BKC-RBR (the "Bankruptcy Case"); WHEREAS, SMC and Harry Fox have agreed that SMC is liable to Harry Fox for royalties due on the Cut-out Inventory (as hereinafter defined) in the amount of $414,598.16; WHEREAS, SMC and Harry Fox have agreed that the royalties due on the Cut-out Inventory shall be treated as a pre-petition debt owed by SMC to Harry Fox; and WHEREAS, Harry Fox elects to accept one (1) share of stock in SMC for each $2.00 of Pre-Petition Debt (as hereinafter defined), and NOW, THEREFORE, in consideration of the premises and the mutual covenants of the parties hereinafter expressed, it is hereby agreed as follows: ARTICLE I - RECITALS, EXHIBITS, SCHEDULES 1.1 The foregoing recitals are true and correct and, together with the schedules and exhibits referred to hereafter, are hereby incorporated into this Agreement by this reference. Capitalized words used herein and not otherwise defined in the text hereof shall have the meaning set forth in the Debtor's Plan of Reorganization and Disclosure Statement, as amended. ARTICLE II - ROYALTIES DUE ON PRE-PETITION DEBT 2.1 The Cut-out Inventory are those music selections that are listed on Schedule "A" hereto. 2.2 SMC and Harry Fox agree that the royalties owed for the Cut-out Inventory (the "Cut-Out Royalties") shall be treated as pre-petition debt owed by SMC to Harry Fox and shall be included as part of Harry Fox's general unsecured claim in SMC's Bankruptcy Case. As of the Petition Date, the Cut-Out Royalties due were $414,598.16. 2.3 In addition to the Cut-Out Royalties, SMC and Harry Fox agree that SMC owed, as of the Petition Date, Harry Fox $406,750.00 for royalties other than those owed for the Cut-Out Royalties (the "Pre-Petition Regular Royalties"). 2.4 Harry Fox shall amend its proof of claim filed in SMC's Bankruptcy Case to reflect $821,348.16 in general unsecured debt, which is the sum of the Cut-Out Royalties and the Pre-Petition Regular Royalties (collectively referred to as the "Pre-Petition Debt"). 2.5 Harry Fox agrees that the Pre-Petition Debt shall be treated as a general unsecured claim in the Debtor's Plan of Reorganization and further agrees to elect to accept the issuance of shares of common stock of the reorganized Debtor on the following basis: for each $2.00 of the 2 Pre-Petition debt, Harry Fox will receive one (1) share of common stock. ARTICLE III - POST-PETITION ROYALTIES DUE 3.1 SMC recognizes that it has a continuing obligation to pay royalties since the filing of its Bankruptcy Case. SMC has paid to Harry Fox all its royalty obligations for the period commencing on the Petition Date through and including June 30, 1997. All royalty payments due for the period commencing July 1, 1997 and thereafter, shall be paid into the Trust Account of Edwards and Angell("Edwards & Angell") and shall be held in escrow until such time as Court enters a final order on the Debtor's Plan of Reorganization; 3.2 Upon the Order confirming the Debtor's Plan of Reorganization becoming final and non-appealable, the Debtor shall calculate post-petition royalties due, excluding those royalties due on the Cut-Out Inventory (the "Post-Petition Royalties") and direct Edward & Angell to release from escrow and pay to Harry Fox an amount equal to the Post-Petition Royalties and turnover the remainder of the funds in the Trust Account to SMC. 3.3 In the event that SMC's Chapter 11 Plan of Reorganization does not get confirmed, the Bankruptcy Case is converted to Chapter 7 or this Agreement is not approved by the Court, Edwards & Angell shall turnover to Harry Fox the entire sum deposited into the Trust Account pursuant to Paragraph 3.1 hereof for credit towards SMC's post-petition royalties due, including those royalties due on the Cut-Out Inventory. ARTICLE IV - MISCELLANEOUS 4.1 MODIFICATION. No changes of or modifications or additions to this Agreement shall be valid unless the same shall be in writing and signed by the parties hereto. 3 4.2 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon the parties hereto, their beneficiaries, heirs and administrators. No party may assign or transfer its interests herein, or delegate its duties hereunder, without the written consent of the other party. 4.3 NO WAIVER. No waiver of any provision of this Agreement shall be effective, unless it is in writing and signed by the party against whom it is asserted, and any such written waiver shall only be applicable to the specific instance to which it relates and shall not be deemed to be a continuing or future waiver. 4.4 GENDER AND USE OF SINGULAR AND PLURAL. All pronouns shall be deemed to refer to the masculine, feminine, neuter, singular or plural, as the identity of the party or parties or their personal representatives, successors and assigns may require. 4.5 COUNTERPARTS. This Agreement and any amendments may be executed in one or more counterparts, each of which shall be deemed an original and all of which together will constitute one and the same instrument. The parties may execute the Agreement by facsimilie transmitted signatures. 4.6 HEADINGS. The article and section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of the Agreement. 4.7 GOVERNING LAW. This Agreement shall be interpreted and construed in accordance with the laws of the State of Florida, without giving effect to its choice of law or conflict of laws rule, and any proceeding arising between the parties in any manner pertaining or related to this Agreement shall, to the extent permitted by law, be held in Broward County, Florida. 4 4.8 FURTHER ASSURANCES. The parties hereto will execute and deliver such further instruments and do such further acts and things as may be reasonably required to carry out the intent and purposes of this Agreement. 4.9 CONSTRUCTION. This Agreement shall not be construed more strictly against one party than against the other, it being recognized that both SMC and Harry Fox have contributed substantially to the preparation of this Agreement. 4.10 BANKRUPTCY COURT APPROVAL. This Agreement will be binding upon the parties and conditioned upon the entry of an Order by the Bankruptcy Court approving its terms. 4.11 EXECUTION AUTHORITY. SMC and Harry Fox expressly authorize their respective attorneys to execute this Agreement on their behalf and have consented to the terms and conditions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date and year set forth above. FURR AND COHEN, P.A. EDWARDS AND ANGELL Attorney for Debtor Attorneys for Harry Fox Agency 1499 W. Palmetto Park Road 250 Royal Palm Way Suite 412 Suite 300 Boca Raton, FL 33486 Palm Beach, FL 33480 561-395-0500 (561) 833-7700 By /s/ LISA J. CHAIKLIN AFLALO By: /s/ KENNI F. JUDD - ------------------------------ -------------------------- LISA J. CHAIKLIN AFLALO, ESQ. KENNI F. JUDD, ESQ. Florida Bar No. 0873179 Florida Bar No. 602728 5 EX-27 5
5 YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 10,222 0 420,658 (80,000) 1,170,017 1,573,731 474,743 296,713 1,842,843 5,516,231 0 0 0 28,836 (3,702,224) 1,842,843 10,564,056 10,674,879 9,145,359 14,102,764 278,637 0 168,606 (3,875,178) 0 (3,875,178) 0 0 0 (3,875,178) (1.38) (1.38)
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