SINGING MACHINE CO INC - Annual Report: 2008 (Form 10-K)
Washington,
D.C. 20549
Form
10-K
(Mark one)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended March 31, 2008
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£
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from _________ to ___________
Commission
file number 000-24968
THE
SINGING MACHINE COMPANY, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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95-3795478
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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6601
LYONS ROAD, BUILDING A-7, COCONUT CREEK, FL 33073
(Address
of principal executive offices)
(954)
596-1000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: Common Stock, $.01 Par Value
Per Share
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark whether the registrant is a well-known seasoned issuer as defined
in Rule 405 of the Securities Act. Yes £ No R
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes £ No R
Indicate
by check mark 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 R No £
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K 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-K or any amendment to
this
Form 10-K. £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
.
Large
accelerated filer £ Accelerated
filer £ Non-accelerated
filer R
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act) Yes £ No R
As
of
June 23, 2008, the aggregate market value of the issued and outstanding common
stock held by non-affiliates of the registrant, based upon the closing price
of
the common stock as quoted on the American Stock Exchange of $0.22 was
approximately $7,005,000 (based on 31,841,728 shares outstanding). For purposes
of the above statement only, all directors, executive officers and 10%
shareholders are assumed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for any other purpose.
Number
of
shares of common stock outstanding as of June 23, 2008 was
31,841,728.
DOCUMENTS
INCORPORATED BY REFERENCE–
None
THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
INDEX
TO ANNUAL REPORT ON FORM 10-K
FOR
THE FISCAL YEAR ENDED MARCH 31, 2008
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PAGE
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PART I
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Item 1.
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Business
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2
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Item 1A.
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Risk
Factors
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8
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Item 1B.
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Unresolved
Staff Comments
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13
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Item 2.
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Properties
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13
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Item 3.
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Legal
Proceedings
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14
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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14
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PART II
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Item 5.
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Market
for Company's Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities
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15
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Item 6.
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Selected
Financial Data
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16
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Item 7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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Item 7A
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Quantitative
and Qualitative Disclosures About Market Risk
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23
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Item 8.
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Financial
Statements and Supplementary Data
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23
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Item 9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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23
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Item 9A.
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Controls
and Procedures
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24
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Item 9B.
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Other
Information
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24
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PART III
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Item 10.
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Directors
and Executive Officers of the Registrant
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25
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Item 11.
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Executive
Compensation
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27
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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33
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Item 13.
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Certain
Relationships and Related Transactions and Director
Independence
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35
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Item 14.
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Principal
Accounting Fees and Services
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35
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PART IV
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Item 15.
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Exhibits,
Financial Statement Schedules
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36
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DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K (the “Annual Report”) contains ‘‘forward-looking
statements’’ that represent our beliefs, projections and predictions about
future events. All statements other than statements of historical fact are
‘‘forward-looking statements’’, including any projections of earnings, revenue
or other financial items, any statements of the plans, strategies and objectives
of management for future operations, any statements concerning proposed new
projects or other developments, any statements regarding future economic
conditions or performance, any statements of management’s beliefs, goals,
strategies, intentions and objectives, and any statements of assumptions
underlying any of the foregoing. Words such as ‘‘may’’, ‘‘will’’, ‘‘should’’,
‘‘could’’, ‘‘would’’, ‘‘predicts’’, ‘‘potential’’, ‘‘continue’’, ‘‘expects’’,
‘‘anticipates’’, ‘‘future’’, ‘‘intends’’, ‘‘plans’’, ‘‘believes’’, ‘‘estimates’’
and similar expressions, as well as statements in the future tense, identify
forward-looking statements.
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our
ability to attract and retain management;
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our
growth strategies;
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anticipated
trends in our business;
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our
future results of operations;
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our
ability to make or integrate
acquisitions;
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our
liquidity and ability to finance our acquisition and development
activities;
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the
timing, cost and procedure for proposed acquisitions;
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the
impact of government regulation;
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planned
capital expenditures (including the amount and nature
thereof);
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our
financial position, business strategy and other plans and objectives
for
future operations;
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competition;
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the
ability of our management team to execute its plans to meet our
goals;
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general
economic conditions, whether internationally, nationally or in the
regional and local market areas in which we are doing business, that
may
be less favorable than expected; and
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other
economic, competitive, governmental, legislative, regulatory, geopolitical
and technological factors that may negatively impact our businesses,
operations and pricing.
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Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of whether, or the times by
which, our performance or results may be achieved. Forward-looking statements
are based on information available at the time those statements are made and
management’s belief as of that time with respect to future events, and are
subject to risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such differences
include, but are not limited to, those factors discussed under the headings
‘‘Risk factors’’, ‘‘Management’s discussion and analysis of financial condition
and results of operations’’, ‘‘Business’’ and elsewhere in this
prospectus.
ITEM
1. BUSINESS
OVERVIEW
The
Singing Machine Company, Inc. (“Company,” “Singing Machine,” “we,” “us,” or,
“our”) is engaged in the development, production, marketing and distribution of
consumer karaoke audio equipment, accessories, music, musical instruments,
and
licensed youth electronic products. We contract for the manufacturing of all
our
electronic equipment products with factories located in China. We also produce
and market karaoke music, including compact discs plus graphics ("CD+G's"),
which contain music and lyrics of popular songs for use with karaoke recording
equipment. We obtain the song licenses from major publishers such as EMI,
Universal, Sony and Warner and contract for the reproduction of music recordings
with independent studios. We have also begun collaborating with a music download
service provider for an expanded library of musical selections. This
collaboration provides the Company with not only an expanded library of music
for sale and distribution; it opens up the Company’s music sales to customers
who purchase our competitors’ karaoke machines as well. Further, the
capabilities of the Company’s new download music distribution system includes
the ability to stream selections from this expanded content library, creating
the opportunity to open new revenue sources through the sale of subscriptions.
The Company is also in the process of expanding its web presence by creating
a
hosted cyber-community where customers can upload their individual karaoke
performances to share.
We
were
incorporated in California in 1982. We originally sold our products exclusively
to professional and semi-professional singers. In 1988, we began marketing
karaoke equipment for home use. We believe we are the first company to introduce
the home karaoke products to the United States. In May 1994, we merged into
a
wholly-owned subsidiary incorporated in Delaware with the same name. As a result
of that merger, the Delaware Corporation became the successor to the business
and operations of the California Corporation and retained the name The Singing
Machine Company, Inc. In July 1994, we formed a wholly owned subsidiary in
Hong
Kong, known as International SMC (HK) Ltd. ("International SMC" or "Hong Kong
subsidiary"), to coordinate our engineering, production, logistics and financial
operations in China. In September 2006, International SMC was sold to See Bright
Investments Limited, a non-related third party. In December 2005, we formed
a
wholly-owned subsidiary SMC (Comercial Offshore De Macau) Limitada in Macau,
China (“SMC Macau” or “Macau subsidiary”), to provide sales, financing,
shipping, engineering and sourcing support for Singing Machine and Subsidiaries.
Our Macau subsidiary has been approved to operate its business in Macau as
Macau
Offshore Company (MOC) and is exempt for the Macau corporate income tax. In
February 2008, we formed a wholly-owned subsidiary SMC Logistics, Inc.
(“SMC-L”), a California corporation, to manage the U.S. domestic logistics and
fulfillment warehouse servicing for the Company and in April 2008 a wholly-owned
subsidiary, SMC Music, Inc. (“SMC-M”) to contract with third party music
providers.
In
November 1994, we closed an initial public offering of 2,070,000 shares of
our
common stock and 2,070,000 warrants. In April 1997, we filed a voluntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code. On March
17,
1998, our plan of reorganization was approved by the U.S. Bankruptcy Court.
On
June 10, 1998, our plan of reorganization had been fully implemented and we
emerged from the reorganization proceeding. Since then, we have developed the
Karaoke products featuring on-screen lyric, built-in camera and digital key
control functions. We have been listed on the AMEX since March 8, 2001. Our
common stock currently trades on under the stock symbol "SMD." Our principal
executive offices are located in Coconut Creek, Florida.
We
have
raised approximately $6 million in equity investments from investors in Hong
Kong from February 2006 to June 2007. The investors include two major suppliers:
koncept International Limited and Arts Electronics Co., Ltd. The investments
from these major suppliers underscore their support to the Company.
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GROWTH
STRATEGY
The
overall objective of the Singing Machine is to create an efficient platform
for
the development, manufacture, and marketing of home entertainment based consumer
electronics. The Company will also seek new revenue opportunities through
web-based content delivery and the creation of a community based entertainment
platforms. We also intend to leverage our position as a member of the Greater
Starlight International Holdings, Ltd, group to capitalize on synergies which
exist therein and to exercise our knowledge of the electronics business to
grow
revenue. The Company intends to leverage our valuable customer base and strong
relationships with our factories to achieve our organic and external growth
initiatives.
Organic
Growth Strategy
We
intend
to pursue various initiatives to execute our organic growth strategy which
is
designed to enhance our market presence, expand our customer base and be an
industry leader in new product development. Key elements of our organic growth
strategy include:
Business
Focus and Public Perceptions.
Historically karaoke has been our core business. The Singing Machine brand
is
widely recognized as a leader in karaoke and consequently we hold a dominant
market share in the business. While consistently a market leader, the Company
has determined that it needs to diversify and expand its core focus in order
to
grow its business. The Company has therefore refocused its self-perception
and
is determined to build on its success by defining ourself as a provider of
quality in home entertainment – not just home karaoke. Critical to this strategy
is a move to add value to our core business of karaoke machine sales. We believe
that by bundling our karaoke machine products with content such as Compact
Disc,
Electronic Download, Steaming Media, Community Performance Hosting, and by
creating quality, wholesome, home entertainment for the entire family we will
not only sell more products, we will find new sources of revenue. Using our
existing key relationships with our customers and factories, and by adding
new
relationships with key content providers, we believe we can achieve more
top-line growth by utilizing these relationships to design and distribute a
more
diversified line of consumer electronics. This should allow our Company to
reduce our dependency on a single karaoke product and minimize our exposure
to
the volatility of the karaoke market in general.
Develop
new features for karaoke equipment.
The
technology development in the karaoke market has been stagnant since 2004.
We
believe that in order to revitalize the karaoke market, we need to incorporate
new technologies. We are currently developing new karaoke products which will
host a number of unique features which we believe will diversity us from the
rest of the industry. We are currently developing a new feature set for our
karaoke machines which allow digital audio and video recording of our customer’s
in home karaoke performance. Once recorded the customer would then be able
to
email or upload the performance to community based websites such as YouTube®, or
our own community website. We anticipate later versions of this technology
will
support WiFi interaction to make the machine an internet appliance capable
of
accessing our music store to purchase a subscription of unlimited downloads
for
a day, week, or year based on the type of subscription purchased. We also plan
to introduce performance scoring or rating so that customers will be able to
have in-home competitions with full video playback to enhance the home
entertainment experience. We have been working with our major shareholder and
supplier, Starlight International, parent of koncept International Limited
as
well as other technology providers who each have strong research and development
skills to bring these new concepts and devices to life. We believe the
development of new products will not only reinforce our leadership position
in
the karaoke market, but will lead to increased sales and other opportunities
which will remake the Company into a purveyor of quality in-home entertainment
instead of simply being a supplier of single sale electronic devices.
Focus
on the key customers.
We
believe that we have the most karaoke product offerings than any of our
competitors in the karaoke market. We will continue to provide exclusive
products for our major retailers by meeting their needs or unique specification,
target price, and service support. We will focus on product development for
stores like Wal-Mart and Target. We believe this is one of the major areas
in
which we can substantially increase our revenues. We will involve our major
customers in key marketing strategies to expand our product offerings and repeat
customer business.
Establish
the music download business.
Downloading music is one of the fastest growing areas in the music industry.
We
believe that the future of karaoke music distribution is through legal mediums
of internet download sites (e.g. iTunes, iPhone, Amazon, etc). Since karaoke
music only accounts for a small percentage of total music business, retailers
usually only offer a limited selection of karaoke products. Thus, it is
difficult for the customers to find karaoke music in retail outlets, especially
for the songs they enjoy. While we maintain a physical CD distribution business,
we will concurrently launch a music download project in calendar 2009 to
capitalize on this new distribution model. The benefit to the Company are
multifaceted including the opportunity to: offer downloadable music which means
less physical inventory for the Company and our retail customers to carry;
reduce financial return risk since a downloaded pieced of karaoke music is
not
returnable; make available increased marketing opportunities by offering
downloads for those who sign up and provide their contact information enabling
the Company to create future marketing and advertising campaigns; create an
opportunity to sell our karaoke music to not only our customers but also to
owners of our competitors’ machines (new and old); create cross-promotions with
our retail-customers by giving away music downloads to purchasers of karaoke
machines as an incentive to sell more machines.
Exploit
Synergies from Within the Starlight Group.
We are
always looking to increase profitability or revenue through synergy recognition.
The Company has recognized an opportunity to offer our existing warehouse and
logistics services to the Starlight Group for a fee. The fee arrangement was
negotiated at arm’s length and represents a significant revenue opportunity for
the Company. Not only does the Starlight Group get a partner for its domestic
US
warehousing and logistics, we get service fees which defray the cost or our
own
historical warehouse expense. We are currently exploring other synergies
including customer representative relationships, customer service functions
and
accounting services. These opportunities lead to new top line revenue growth and
enhance profitability.
3
External
Growth Strategy
While
our
historical growth has been solely organic, we intend to pursue a growth strategy
which contemplates a balanced combination of organic growth and external growth.
Our external growth strategy will be characterized by potential strategic
acquisition of synergistic electronic or technology companies. Accordingly,
we
intend to leverage the skill sets of our management team and board of directors
to actively evaluate potential target companies and consummate merger and
acquisition transactions as an important component of our business
model.
Acquisition
Environment.
Most of
the major retailers in the United States prefer to buy the products from the
factories directly. This has changed the traditional distribution model by
eliminating the importers and brokers. In addition, the cost of products has
seen a dramatic increase due to spiraling prices of petroleum based products,
increasing labor costs in key manufacturing regions such as China, and the
currency arbitrage risks with the decline in the value of the US dollar. In
light of these developments, product costs have spiked while retail prices
have
been cut dramatically. We believe that the small to medium size companies who
primarily depended on a constant significant profit margin will not be able
to
compete in this business environment. At the same time, capital funding is
limited in the electronics market. Public and private equity are generally
difficult to access, especially for those companies with inadequate management
resources, unproven management and a lack of market leadership. As a member
of
the Starlight Group, we have access to product development and engineering
resources that our competitors do not have. We also have access to financing
for
operations and product purchases at rates which are not otherwise available
to
our competitors. This situation creates for us the opportunity to make a
strategic acquisition, should the right target present itself which will add
to
the value of the company and its business
Opportunity
for the Company.
Based
on preliminary discussions with potential targets, we believe that an
acquisition will be attractive to the potential targets because of the
following:
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The
existence of a diversified management team and the seasoned board
of
directors, who have significant experience operating businesses in
the
United States and working with factories in
China;
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An
efficient business model, which is characterized by a rapid product
development cycle, low operational costs and high inventory turn
over;
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The
existence of strong relationships with key factories in China. Two
of our
major shareholders are also major factories in China which provides
us
with lower production costs and vendor financing;
and
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A
visible exit strategy that offers cash or public traded
securities.
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Acquisition
Parameters.
We
intend to acquire companies which themselves have a potential for significant
growth or which can add technology to our Company so that we can grow. These
companies are limited by their resources and management’s abilities. We will
focus on companies that have exhibited historical profitability or those that
can combine with our Company to become profitable. We look for companies with
strong brand name recognition that may bring additional revenues to our
Company.
PRODUCT
LINES
We
currently have four different product lines which consist of over 50 different
models. The product lines consist of the following:
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Karaoke
Machines
that incorporate such features as CD plus graphics player, sound
enhancement, echo, tape record/playback features, and multiple inputs
and
outputs for connection to compact disc players, built-in camera,
video
cassette recorders, and home theater systems. Our machines sell at
retail
prices ranging from $30 for basic units to $200 for semi-professional
units
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Music
which includes a song library of over 2,500 recordings, which we
license
from their publishers. Our library of master recordings covers an
eclectic
range of musical tastes including popular hits, golden oldies, country,
rock and roll, Motown, Christian, Latin, and Rap. SMC offers an exclusive
line of Original Artist karaoke music under the monikers of “Real Karaoke”
and “Motown Original Artist Karaoke”. Our music sells at retail prices
ranging from $6.99 to $19.99. Additionally,
SMC has executed an agreement with a third party to provide both
physical
and digital music content. The library available through these third
parties extends to 15,000 selections and will be available in physical
CD
and downloadable formats. These physical titles will be directly
distributed into mass merchants, specialty stores, e-tailers and
music
stores.
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Bratz
Licensed Products which
include karaoke products, digital drum sets, clock radios, boom boxes,
TV/DVD combos and portable DVD players. Bratz products will sell
at retail
prices ranging from $9.99 to $199.
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Musical
Instruments which
include digital drum sets and keyboards. The retail price will range
from
$49 to $299.
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MARKETING,
SALES
Our
karaoke machines and music are sold nationally and internationally to a broad
spectrum of customers, primarily through mass merchandisers, department stores,
direct mail catalogs and showrooms, music and record stores, national chains,
specialty stores and warehouse clubs. Our product lines are currently sold
in
such stores as Best Buy, Wal-Mart, Costco, J.C. Penney, Kohl's, Radio Shack
and
Sam's Club. Our sales strategy include offering Domestic Sales as well as Direct
import sales made off-shore.
4
Domestic
Sales.
Our
strategy of selling products from a domestic warehouse enables us to provide
timely delivery and serve as a domestic supplier of imported goods. We purchase
karaoke machines overseas from certain factories in China for our own account,
and warehouse the products in leased facilities in Florida and California.
We
are responsible for costs of shipping, insurance, customs clearance, duties,
storage and distribution related to such products and, therefore, domestic
sales
command higher sales prices than direct sales. We generally sell from our own
inventory in less than container-sized lots.
Direct
Sales.
We ship
some hardware products sold by us directly to customers from China through
SMC
Macau. Sales made through our subsidiary 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' world wide, which pay SMC Macau pursuant to their own international,
irrevocable, transferable letters of credit or on open account.
In
fiscal
2008, approximately 51% of sales revenues were from direct sales and 49% of
revenues were domestic sales. Our sales within the US are primarily made by
our
in-house sales team and our independent sales representatives. Our independent
sales representatives are paid a commission based upon sales made in their
respective territories. We utilize some of our outside independent sales
representatives to help us provide service to our mass merchandisers and other
retailers. The sales representative agreements are generally one (1) year
agreements, which automatically renew on an annual basis, unless terminated
by
either party on 30 days' notice. Our international sales are primarily made
by
our in-house sales representatives and our independent distributors.
As
a
percentage of total revenues, our net sales in the aggregate to our five largest
customers during the fiscal years ended March 31, 2008, 2007, and 2006, were
approximately 62%, 57%, and 55%, respectively. In fiscal 2008, the top three
major customers accounted for 22%, 11% and 11% of our net revenues. Although
we
have long-established relationships with all of our customers, we do not have
quantity contractual arrangements with any of them. A decrease in business
from
any of our major customers could have a material adverse effect on our results
of operations and financial condition.
We
also
market our products at various national and international trade shows each
year.
We regularly attend the following trade shows and conventions: the Consumer
Electronics Show which takes place each January in Las Vegas; the American
Toy
Fair which occurs each February in New York and the Hong Kong Electronics Show
stages each October in Hong Kong.
The
Singing Machine brand is one of the most widely recognized karaoke brands in
the
United States and Europe. While we continue to heavily focus on our core karaoke
business, we are expanding our business into other product categories. Our
strong product procurement team in Hong Kong and China combined with our
experienced sales and service team in North America enables us to compete not
only in the karaoke market but also in other markets, such as musical
instruments, licensed toy products and other consumer electronics products.
RETURNS
Returns
of electronic hardware and music products by our customers generally occur
after
approval involving quality defects, damaged goods or goods shipped in error.
Our
policy is to give credit to our customers for the returns in conjunction with
the receipt of new replacement purchase orders. Recently the increasingly
competitive environment has forced the Company to extend more liberal return
authorizations as a marketing tool to extend, prolong or develop deeper business
relationships with key customers. Our total returns represented 8.6%, 13.4%,
and
7.4% of our net sales in fiscal 2008, 2007, and 2006, respectively.
LICENSE
AGREEMENTS
In
February 2003, we entered into a multi-year license agreement with Universal
Music Entertainment to market a line of Motown Karaoke machines and music.
This
agreement and its supplement agreement signed in March 2003, allowed us to
be
the first to use original artist recordings for our CD+G formatted karaoke
music. Over the term of the license agreement, we are obligated to make
guaranteed minimum royalty payments in the amount of $300,000, which was paid
in
full as of March 31, 2005. The agreement expired without renewal on December
31,
2006 without any additional minimum guarantee payments.
We
entered into a license agreement with Nickelodeon, Inc., a division of Viacom
International, Inc. in December 2002. Under this agreement, we licensed
Nickelodeon branded machines and a wide assortment of music. This license
originally expired on December 31, 2004. The Company extended the agreement
to
December 31, 2006. Over the term of the license agreement, we were obligated
to
make guaranteed minimum royalty payments in the amount of $450,000, which was
paid in full as of March 31, 2005. The agreement expired without renewal on
December 31, 2006 without any additional minimum guarantee payments. On May
10,
2006, we entered into a two-year license agreement with MGA Entertainment,
Inc.
to produce and distribute a variety of karaoke products based on MGA's BRATZ™
franchise, one of the world's leading toy lines and girls' lifestyle brands,
in
North America, Europe and Australia. These karaoke products include a TFT DVD
karaoke system, sing-a-long cassette players, deluxe microphones, electronic
keyboards, and an electronic drum.
On
November 21, 2006, we entered into a three-year license agreement with MGA
Entertainment, Inc. to produce and distribute a variety of consumer electronic
products based on MGA's BRATZ™ franchise. These consumer electronic products
include boom boxes, clock radios, and portable DVDs. The license agreement
contains a minimum guarantee payment term.
5
TOTAL
LICENSE SALES
FOR
THE FISCAL YEAR ENDED
March
31,
|
2008
|
2007
|
2006
|
||||||||
|
MTV
|
0.0
|
%
|
8.9
|
%
|
2.1
|
%
|
||||
|
Nickelodeon
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||
|
Bratz
|
15.0
|
%
|
0.0
|
%
|
0.0
|
%
|
||||
|
Other
Licenses
|
0.0
|
%
|
0.0
|
%
|
0.9
|
%
|
||||
|
Total
Licenses Sales
|
15.0
|
%
|
8.9
|
%
|
3.0
|
%
|
||||
DISTRIBUTION
We
distribute hardware products to retailers and wholesale distributors through
two
methods: shipment of products from inventory held at our warehouse facilities
in
Florida and California (domestic sales), shipments directly through our Macau
subsidiary, and manufacturers in China of products (direct sales). Domestic
sales, which account for substantially all of our music sales, are made to
customers located throughout North America from consignment inventories
maintained at our distributor warehouse facilities. In the fiscal year ended
March 31, 2008, approximately 49% of our sales were sales from our domestic
warehouses ("Domestic Sales") and 51% were sales shipped directly from China
("Direct Sales").
MANUFACTURING
AND PRODUCTION
Our
karaoke machines are manufactured and assembled by third parties pursuant to
design specifications provided by us. Currently, we have ongoing relationships
with six factories, located in Guangdong Province of the People's Republic
of
China, which assemble our karaoke machines. During fiscal 2009, we anticipate
that 90% of our karaoke products will be produced by one of these factories,
which has agreed to extend the financing to us. We believe that the
manufacturing capacity of our factories is adequate to meet the demands for
our
products in fiscal year 2009. However, if our primary factory in China was
prevented from manufacturing and delivering our karaoke products, our operation
would be severely disrupted until alternative sources of supply are located
(See
"Risk Factors - We are relying on one factory to manufacture and produce the
majority of our karaoke machines for fiscal 2009" on page 9).
In
manufacturing our karaoke related products, these factories use molds and
certain other tooling, most of which are owned by us. Our products contain
electronic components manufactured by other companies such as Panasonic, Sanyo,
Toshiba, and Sony. Our manufacturers purchase and install these electronic
components in our karaoke machines and related products. The finished products
are packaged and labeled under our trademark, The Singing Machine(R)
and
private labels. We use outside companies to mass-produce the CD+G's once the
masters have been completed.
While
our
equipment manufacturers purchase our supplies from a small number of large
suppliers, all of the electronic components and raw materials used by us are
available from several sources of supply. While we might depend on limited
suppliers for some key components the loss of any single supplier would not
have
a material long-term adverse effect on our business, operations, or financial
condition. Similarly, we use a small number of studios to record our music.
We
do not anticipate that the loss of any single studio would have a material
long-term adverse effect on our business, operations or financial condition.
To
ensure that our high standards of product quality are met and that factories
consistently meet our shipping schedules, we utilize Hong Kong and China based
employees as our representatives. These employees include product inspectors
who
are knowledgeable about product specifications and work closely with the
factories to verify that such specifications are met. Additionally, key
personnel frequently visit our factories for quality assurance and to support
good working relationships.
All
of
the electronic equipment sold by us is warranted to the end user against
manufacturing defects for a period of ninety (90) days for labor and parts.
All
music sold is similarly warranted for a period of 30 days. During the fiscal
years ended March 31, 2008, 2007, and 2006, warranty claims have not been
material to our results of operations.
COMPETITION
Our
business is highly competitive. Our major competitors for karaoke machines
and
related products are Memorex, GPX and other consumer electronics companies.
We
believe that competition for karaoke machines is based primarily on price,
product features, reputation, delivery times, and customer support. We believe
that our brand name is well recognized in the industry and helps us compete
in
the karaoke machine category. Our primary competitors for producing karaoke
music are Pocket Songs, UAV, Sybersound and Sound Choice. We believe that
competition for karaoke music is based primarily on popularity of song titles,
price, reputation, and delivery times. As far as the musical instrument market,
our key competitors include Yamaha, ION, and others. For Bratz products, our
competitors are Memorex and Emerson, which also make licensed products for
youth
electronics.
In
addition, we compete with all other existing forms of entertainment including,
but not limited to, motion pictures, video arcade games, home video games,
theme
parks, nightclubs, television and prerecorded tapes, CD's, and videocassettes.
Our financial position depends, among other things, on our ability to keep
pace
with changes and developments in the entertainment industry and to respond
to
the requirements of our customers. Many of our competitors have significantly
greater financial, marketing, and operating resources and broader product lines
than we do.
6
TRADEMARKS
AND PATENTS
We
have
obtained registered trademarks for The Singing Machine name and the logo in
the
United States and in the European Union. We have also filed trademark
applications in Australia and Hong Kong. We also filed various trademarks for
our products. In the past few years, we have also obtained two U.S. patents
for
karaoke machines.
Our
trademarks are a significant asset because they provide product recognition.
We
believe that our intellectual property is significantly protected, but there
are
no assurances that these rights can be successfully asserted in the future
or
will not be invalidated, circumvented or challenged.
COPYRIGHTS
AND LICENSES
We
hold
federal and international copyrights to substantially all of the music
productions comprising our song library. However, since each of those
productions is a re-recording of an original work by others, we are subject
to
contractual and/or statutory licensing agreements with the publishers who own
or
control the copyrights of the underlying musical compositions. We are obligated
to pay royalties to the holders of such copyrights for the original music and
lyrics of all of the songs in our library that have not passed into the public
domain. We are currently a party to many different written copyright license
agreements.
The
majority of the songs in our song library are subject to written copyright
license agreements, often times referred to as synchronization licenses. Our
written licensing agreements for music provide for royalties to be paid on
each
song. The actual rate of royalty is negotiable, but typically ranges from $0.09
to $0.15 per song on each CD that is sold. Similarly, the terms of the licenses
vary, but typically range from 2 to 5 years. Our written licenses typically
provide for quarterly royalty payments, although some publishers require
reporting on a semi-annual basis.
GOVERNMENT
REGULATION
Our
karaoke machines must meet the safety standards imposed in various national,
state, local, and provincial jurisdictions. Our karaoke machines sold in the
United States are designed, manufactured and tested to meet the safety standards
of Underwriters Laboratories, Inc. ("ULE") or Electronic Testing Laboratories
("ETL"). In Europe and other foreign countries, our products are manufactured
to
meet the Consumer Electronics (“CE”) marking requirements. CE marking is a
mandatory European product marking and certification system for certain
designated products. When affixed to a product and product packaging, CE marking
indicates that a particular product complies with all applicable European
product safety, health and environmental requirements within the CE marking
system. Products complying with CE marking are now accepted to be safe in 28
European countries. However, ULE or ETL certification does not mean that a
product complies with the product safety, health and environmental regulations
contained in all fifty states in the United States. Therefore, we maintain
a
quality control program designed to ensure compliance with all applicable US
and
federal laws pertaining to the sale of our products. Our production and sale
of
music products is subject to federal copyright laws.
The
manufacturing operations of our foreign suppliers in China are subject to
foreign regulation. China has permanent "normal trade relations" ("NTR") status
under US tariff laws, which provides a favorable category of US import duties.
China's NTR status became permanent on January 1, 2002. This substantially
reduces the possibility of China losing its NTR status, which would result
in
increasing costs for us.
SEASONALITY
AND SEASONAL FINANCING
Our
business is highly seasonal, with consumers making a large percentage of karaoke
purchases around the traditional holiday season in our second and third quarter.
These seasonal purchasing patterns and requisite production lead times cause
risk to our business associated with the underproduction or overproduction
of
products that do not match consumer demand. Retailers also attempt to manage
their inventories more tightly, requiring that we ship products closer to the
time that retailers expect to sell the products to consumers. These factors
increase the risk that we may not be able to meet demand for certain products
at
peak demand times, or that our own inventory levels may be adversely impacted
by
the need to pre-build products before orders are placed. As of March 31, 2008,
we had inventory of $3.5 million (net of reserves totaling $497,985) compared
to
inventory of $2.3 million as of March 31, 2007 (net of reserves totaling
$198,848 million).
Our
financing of seasonal working capital during fiscal 2007 was from vendor
financing and factoring the accounts receivables.
Our
major
shareholder, Starlight International, is willing and able to provide the
financing to the Company until March 31, 2008.
During
fiscal 2008, we plan on financing our inventory purchases by using credit lines
that have been extended to us by the factories in China and with letters of
credit that are issued by our customers to be used as collateral for payment
to
our vendors.
BACKLOG
We
ship
our products in accordance with delivery schedules specified by our customers,
which usually request delivery within three months of the date of the order.
In
the consumer electronics industry, orders are subject to cancellation or change
at any time prior to shipment. In recent years, a trend toward just-in-time
inventory practices in the consumer electronics industry has resulted in fewer
advance orders and therefore less backlog of orders for the Company. We believe
that backlog orders at any given time may not accurately indicate future sales.
We believe that we will be able to fill all of these orders in fiscal year
2009.
However, these orders can be cancelled or modified at any time prior to
delivery. This backlog does not take into account of any sales ordered by
customers directly from our domestic inventory with order turnaround time of
one
to two weeks. We normally have to keep the minimum inventory in our domestic
warehouses for this type of sales.
7
EMPLOYEES
As
of
July 1, 2008 we employed twenty people, all of whom are full-time employees,
with the exception of our chief executive officer who divides his time between
the Company and his legal practice. One of our employees is located at SMC
Macau’s offices. The remaining employees are based in the United States,
including one executive officer, five engaged in warehousing and technical
support and thirteen in accounting, marketing, sales and administrative
functions.
Set
forth
below and elsewhere in this Annual Report on Form 10-K and in the other
documents we file with the SEC are risks and uncertainties that could cause
actual results to differ materially from the results contemplated by the forward
looking statements contained in this Annual Report.
RISKS
ASSOCIATED WITH OUR BUSINESS
WE
HAVE ENTERED INTO AN AGREEMENT WITH STARLIGHT TO MANAGE THEIR LOGISTICS AND
FULFILLMENT SERVICES IN THE UNITED STATES. IF WE ARE UNABLE TO PERFORM UNDER
THIS AGREEMENT, IT COULD NEGATIVELY IMPACT OUR REVENUES AND CASH FLOW.
On
May
23, 2008 we entered into a services agreement to receive orders, warehouse,
and
ship all of the Starlight Group’s United States domestic goods. The value of
this contract is approximately $1.1 million dollars per year. If we are unable
to perform the duties under this contract, it could negatively impact our
revenue and cash flow.
WE
ARE RELYING ON A FACTORING FACILITY TO FINANCE OUR ACCOUNTS RECEIVABLE. THE
LOSS
OF THE FACTORING FACILITY MAY CAUSE A PROBLEM TO FULFILL THE CUSTOMER ORDERS
AND
THE LOSS OF THE REVENUES.
We
currently have a factoring facility with CIT Group/Commercial Services to
finance our accounts receivable. If we lose our banking facility, we may need
to
borrow a bridge loan or request the factories to extend the payment terms.
If we
fail to do so, we may suffer cash flow problems and not be able to fulfill
customer orders.
THE
MUSIC INDUSTRY HAS BEEN EXPERIENCING CONTINUING DECLINE OF COMPACT DISC (CD)
SALES. OUR KARAOKE CD SALES COULD DECLINE FURTHER IN THE FUTURE.
Due
to
the expansion of the music download business, the sales of Compact Discs (CD)
have been declining in recent years. Our karaoke CD sale has been declining
since year 2004 and may continue to decline in the future. Music revenue
accounts for approximately 1% of our total revenues.
A
SMALL NUMBER OF OUR CUSTOMERS ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES,
AND THE LOSS OF ONE OR MORE OF THESE KEY CUSTOMERS COULD SIGNIFICANTLY REDUCE
OUR REVENUES AND CASH FLOW.
We
rely
on a few large customers to provide a substantial portion of our revenues.
As a
percentage of total revenues, our net sales to our five largest customers during
the years ended March 31, 2008 and 2007 were approximately 62% and 57%,
respectively. We do not have long-term contractual arrangements with any of
our
customers and they can cancel their orders at any time prior to delivery. A
substantial reduction in or termination of orders from any of our largest
customers would decrease our revenues and cash flow.
WE
ARE RELYING ON ONE FACTORY TO MANUFACTURE AND PRODUCE THE MAJORITY OF OUR
KARAOKE MACHINES FOR FISCAL 2009, AND IF THE RELATIONSHIP WITH THIS FACTORY
IS
DAMAGED OR INJURED IN ANY WAY, IT WOULD REDUCE OUR REVENUES AND PROFITABILITY.
We
have
worked out a written agreement with a factory in China to produce most of our
karaoke machines for fiscal 2009. If the factory is unwilling or unable to
deliver our karaoke machines to us, our business will be adversely affected.
Because our cash on hand is minimal, we are relying on revenues received from
the sale of our ordered karaoke machines to provide cash flow for our
operations. If we do not receive cash from these sales, we may not be able
to
continue our business operations.
8
WE
ARE SUBJECT TO THE RISK THAT SOME OF OUR LARGE CUSTOMERS MAY RETURN KARAOKE
PRODUCTS THAT THEY HAVE PURCHASED FROM US AND IF THIS HAPPENS, IT WOULD REDUCE
OUR REVENUES AND PROFITABILITY.
In
fiscal
2008 and 2007, a number of our customers and distributors returned karaoke
products that they had purchased from us. Our customers returned goods valued
at
$2.9 million or 8.6% of our net sales in fiscal 2008. A majority of these
returns resulted from defective manufacturing from two of our main factories.
These factories have agreed to waive a majority of the repair and freight
charges due to the abnormally high percentage of returns. If this occurs again
in the future and our factories are unwilling to waive repair or freight costs
this will adversely reduce our revenues and profitability. If any of our
customers were to return karaoke products to us, it would reduce our revenues
and profitability.
WE
ARE SUBJECT TO PRESSURE FROM OUR CUSTOMERS RELATING TO PRICE REDUCTION AND
FINANCIAL INCENTIVES AND IF WE ARE PRESSURED TO MAKE THESE CONCESSIONS TO OUR
CUSTOMERS, IT WILL REDUCE OUR REVENUES AND PROFITABILITY.
Because
there is intense competition in the karaoke industry, we are subject to pricing
pressure from our customers. Many of our customers have demanded that we lower
our prices or they will buy our competitor's products. If we do not meet our
customer's demands for lower prices, we will not sell as many karaoke products.
In the fiscal year ended March 31, 2008, our sales to customers in the United
States decreased because of increased price competition. We are also subject
to
pressure from our customers regarding certain financial incentives, such as
return credits or large advertising or cooperative advertising allowances,
which
effectively reduce our profit. We gave advertising allowances of approximately
$458,099 during fiscal 2008 and $200,000 during fiscal 2007. We have
historically offered advertising allowances to our customers because it is
standard practice in the retail industry.
WE
EXPERIENCE DIFFICULTY FORECASTING THE DEMAND FOR OUR KARAOKE PRODUCTS AND IF
WE
DO NOT ACCURATELY FORECAST DEMAND, OUR REVENUES, NET INCOME AND CASH FLOW MAY
BE
AFFECTED.
Because
of our reliance on manufacturers in China for our machine production, our
production lead times range from one to four months. Therefore, we must commit
to production in advance of customers orders. It is difficult to forecast
customer demand because we do not have any scientific or quantitative method
to
predict this demand. Our forecasting is based on management's general
expectations about customer demand, the general strength of the retail market
and management's historical experiences. We overestimated demand for our
products in fiscal 2003 and 2004 and had $5.9 million in inventory as of March
31, 2004. Because of this excess inventory, we had liquidity problems in fiscal
2005 and our revenues, net income and cash flow were adversely affected.
WE
ARE SUBJECT TO THE COSTS AND RISKS OF CARRYING INVENTORY FOR OUR CUSTOMERS
AND
IF WE HAVE TOO MUCH INVENTORY, IT WILL AFFECT OUR REVENUES AND NET INCOME.
Many
of
our customers place orders with us several months prior to the holiday season,
but they schedule delivery two or three weeks before the holiday season begins.
As such, we are subject to the risks and costs of carrying inventory during
the
time period between the placement or the order and the delivery date, which
reduces our cash flow. As of March 31, 2008 we had $3.5 million in inventory
on
hand. It is important that we sell this inventory during fiscal 2009, so we
have
sufficient cash flow for operations.
OUR
GROSS PROFIT MARGINS HAVE DECREASED OVER THE PAST YEAR AND WE EXPECT A
COMPETITIVE MARKET.
Over
the
past year, our gross profit margins have generally decreased due to competition
and increasing costs except for fiscal 2005 when we developed several new
models, which were in demand and yielded higher profit margins. We expect that
our gross profit margin might decrease under downward pressure in fiscal 2009
because of currency fluctuations, increasing labor costs and the increasing
cost
of petroleum based raw materials and services which is affecting the entire
market segment.
OUR
BUSINESS IS SEASONAL AND THEREFORE OUR ANNUAL OPERATING RESULTS WILL DEPEND,
IN
LARGE PART, ON OUR SALES DURING THE RELATIVELY BRIEF HOLIDAY SEASON.
Sales
of
consumer electronics and toy products in the retail channel are highly seasonal,
with a majority of retail sales occurring during the period from September
through December in anticipation of the holiday season, which includes
Christmas. A substantial majority of our sales occur during the second quarter
ending September 30 and the third quarter ending December 31. Sales in our
second and third quarter, combined, accounted for approximately 87.0%, 94.0%,
and 87.5% of net sales in fiscal 2008, 2007, and 2006, respectively.
IF
WE ARE UNABLE TO COMPETE IN THE KARAOKE PRODUCTS CATEGORY, OUR REVENUES AND
NET
PROFITABILITY WILL BE REDUCED.
Our
major
competitors for karaoke machines and related products are Memorex and GPX.
We
believe that competition for karaoke machines is based primarily on price,
product features, reputation, delivery times, and customer support. Our primary
competitors for producing karaoke music are Compass, Pocket Songs, Sybersound,
UAV and Sound Choice. We believe that competition for karaoke music is based
primarily on popularity of song titles, price, reputation, and delivery times.
To the extent that we lower prices to attempt to enhance or retain market share,
we may adversely impact our operating margins. Conversely, if we opt not to
match competitor's price reductions we may lose market share, resulting in
decreased volume and revenue. To the extent our leading competitors reduce
prices on their karaoke machines and music; we must remain flexible to reduce
our prices. If we are forced to reduce our prices, it will result in lower
margins and reduced profitability. Because of intense competition in the karaoke
industry in the United States during fiscal 2008, we expect that the intense
pricing pressure in the low end of the market will continue in the karaoke
market in the United States in fiscal 2009. In addition, we must compete with
all the other existing forms of entertainment including, but not limited to:
motion pictures, video arcade games, home video games, theme parks, nightclubs,
television, prerecorded tapes, CD's, and video cassettes.
9
IF
WE ARE UNABLE TO DEVELOP NEW KARAOKE PRODUCTS, OUR REVENUES MAY NOT CONTINUE
TO
GROW.
The
karaoke industry is characterized by rapid technological change, frequent new
product introductions and enhancements and ongoing customer demands for greater
performance. In addition, the average selling price of any karaoke machine
has
historically decreased over its life, and we expect that trend to continue.
As a
result, our products may not be competitive if we fail to introduce new products
or product enhancements that meet evolving customer demands. The development
of
new products is complex, and we may not be able to complete development in
a
timely manner. To introduce products on a timely basis, we must:
|
·
|
accurately
define and design new products to meet market needs;
|
|
·
|
design
features that continue to differentiate our products from those of
our
competitors;
|
|
·
|
transition
our products to new manufacturing process technologies;
|
|
·
|
identify
emerging technological trends in our target markets;
|
|
·
|
anticipate
changes in end-user preferences with respect to our customers' products;
|
|
·
|
bring
products to market on a timely basis at competitive prices; and
|
|
·
|
respond
effectively to technological changes or product announcements by
others.
|
We
believe that we will need to continue to enhance our karaoke machines and
develop new machines to keep pace with competitive and technological
developments and to achieve market acceptance for our products. At the same
time, we need to identify and develop other products which may be different
from
karaoke machines.
OUR
PRODUCTS ARE SHIPPED FROM CHINA AND ANY DISRUPTION OF SHIPPING COULD PREVENT
OR
DELAY OUR CUSTOMERS' RECEIPT OF INVENTORY.
We
rely
principally on four contract ocean carriers to ship virtually all of the
products that we import to our warehouse facility in City of Industry,
California. Retailers that take delivery of our products in China rely on a
variety of carriers to import those products. Any disruptions in shipping,
whether in California or China, caused by labor strikes, other labor disputes,
terrorism, and international incidents may prevent or delay our customers'
receipt of inventory. If our customers do not receive their inventory on a
timely basis, they may cancel their orders or return products to us.
Consequently, our revenues and net income would be reduced.
OUR
MANUFACTURING OPERATIONS ARE LOCATED IN THE PEOPLE'S REPUBLIC OF CHINA,
SUBJECTING US TO RISKS COMMON IN INTERNATIONAL OPERATIONS. IF THERE IS ANY
PROBLEM WITH THE MANUFACTURING PROCESS, OUR REVENUES AND NET PROFITABILITY
MAY
BE REDUCED.
We
are
using eight factories in the People's Republic of China to manufacture the
majority of our karaoke machines. These factories will be producing nearly
all
of our karaoke products in fiscal 2009. Our arrangements with these factories
are subject to the risks of doing business abroad, such as import duties, trade
restrictions, work stoppages, and foreign currency fluctuations, limitations
on
the repatriation of earnings and political instability, which could have an
adverse impact on our business. Furthermore, we have limited control over the
manufacturing processes. As a result, any difficulties encountered by our
third-party manufacturers that result in product defects, production delays,
cost overruns or the inability to fulfill orders on a timely basis could
adversely affect our revenues, profitability and cash flow. Also, since we
do
not have written agreements with any of these factories, we are subject to
additional uncertainty if the factories do not deliver products to us on a
timely basis.
WE
DEPEND ON THIRD PARTY SUPPLIERS FOR PARTS FOR OUR KARAOKE MACHINES AND RELATED
PRODUCTS, AND IF WE CANNOT OBTAIN SUPPLIES AS NEEDED, OUR OPERATIONS WILL BE
SEVERELY DAMAGED.
Our
growth and ability to meet customer demand depends in part on our capability
to
obtain timely deliveries of karaoke machines and our electronic products. We
rely on third party suppliers to produce the parts and materials we use to
manufacture and produce these products. If our suppliers are unable to provide
our factories with the parts and supplies, we will be unable to produce our
products. We cannot guarantee that we will be able to purchase the parts we
need
at reasonable prices or in a timely fashion. In the last several years, there
have been shortages of certain chips that we use in our karaoke machines. If
we
are unable to anticipate any shortages of parts and materials in the future,
we
may experience severe production problems, which would impact our sales.
10
CONSUMER
DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND IS AFFECTED BY VARIOUS
ECONOMIC CONDITIONS AND CHANGES.
Our
business and financial performance may be damaged more than most companies
by
adverse financial conditions affecting our business or by a general weakening
of
the economy. Purchases of karaoke machines and music are considered
discretionary for consumers. Our success will therefore be influenced by a
number of economic factors affecting discretionary and consumer spending, such
as employment levels, business, interest rates, and taxation rates, all of
which
are not under our control. Additionally, other extraordinary events such as
terrorist attacks or military engagements, which adversely affect the retail
environment may restrict consumer spending and thereby adversely affect our
sales growth and profitability.
WE
MAY HAVE INFRINGED THE COPYRIGHTS OF CERTAIN MUSIC PUBLISHERS AND IF WE VIOLATE
FEDERAL COPYRIGHT LAWS, WE WILL BE SUBJECT TO MONETARY PENALTIES.
Over
the
past several years, the Singing Machine (like its competitors) has received
notices from certain music publishers alleging that the full range of necessary
rights in their copyrighted works has not been properly licensed in order to
sell those works as part of products known as “compact discs with graphics”
("CDG"s). CDG's are compact discs which contain the musical recordings of
karaoke songs and graphics which contain the lyrics of the songs. Singing
Machine has negotiated licenses with the complaining parties. As with any
alleged copyright violations, unlicensed users may be subject to damages under
the U.S. Copyright Act. Such damages and claims could have a negative effect
on
Singing Machine’s ability to sell its music products to its customers. This is
the reason the Singing Machine diligently pursues licenses.
WE
MAY BE SUBJECT TO CLAIMS FROM THIRD PARTIES FOR UNAUTHORIZED USE OF THEIR
PROPRIETARY TECHNOLOGY, COPYRIGHTS OR TRADE SECRETS AND ANY CLAIMS ASSERTED
AGAINST US COULD AFFECT OUR NET PROFITABILITY.
We
believe that we independently developed the technology used in our electronic
and audio software products and that it does not infringe on the proprietary
rights, copyrights or trade secrets of others. However, we cannot be sure that
we have not infringed on the proprietary rights of third parties or those third
parties will not make infringement violation claims against us. During fiscal
2000, Tanashin Denki, Ltd., a Japanese company that holds a patent on a cassette
tape drive mechanism alleged that some of our karaoke machines violated their
patents. We settled the matters with Tanashin in December 1999. Subsequently
in
December 2002, Tanashin again alleged that some of our karaoke machines violated
their patents. We entered into another settlement agreement with them in May
2003. In addition to Tanashin, we could receive infringement claims from other
third parties. Any infringement claims may have a negative effect on our
profitability and financial condition.
WE
ARE EXPOSED TO THE CREDIT RISK OF OUR CUSTOMERS, WHO ARE EXPERIENCING FINANCIAL
DIFFICULTIES, AND IF THESE CUSTOMERS ARE UNABLE TO PAY US, OUR REVENUES AND
PROFITABILITY WILL BE REDUCED.
We
sell
products to retailers, including department stores, lifestyle merchants, direct
mail catalogs and showrooms, national chains, specialty stores, and warehouse
clubs. Some of these retailers, such as K-Mart, FAO Schwarz and KB Toys, have
engaged in leveraged buyouts or transactions in which they incurred a
significant amount of debt, and operated under the protection of bankruptcy
laws. As of July 2, 2007 we are aware of only three customers, FAO Schwarz,
Musicland, and KB Toys, which are operating under the protection of bankruptcy
laws. Deterioration in the financial condition of our customers could result
in
bad debt expense to us and have a material adverse effect on our revenues and
future profitability.
A
DISRUPTION IN THE OPERATION OF OUR WAREHOUSE CENTERS IN CALIFORNIA OR FLORIDA
COULD IMPACT OUR ABILITY TO DELIVER MERCHANDISE TO OUR CUSTOMERS, WHICH COULD
ADVERSELY AFFECT OUR REVENUES AND PROFITABILITY.
A
significant amount of our merchandise is shipped to our customers from one
of
our two warehouses, which are located in City of Industry, California, and
Coconut Creek, Florida. Events such as fire or other catastrophic events, any
malfunction or disruption of our centralized information systems or shipping
problems may result in delays or disruptions in the timely distribution of
merchandise to our customers, which could substantially decrease our revenues
and profitability.
OUR
BUSINESS OPERATIONS COULD BE DISRUPTED IF THERE ARE LABOR PROBLEMS ON THE WEST
COAST.
During
fiscal 2008, approximately 49.0% of our sales were domestic warehouse sales,
which were made from our warehouses in California and Florida. During the third
quarter of fiscal 2003, the dock strike on the West Coast affected sales of
two
of our karaoke products and we estimate that we lost between $3 and $5 million
in orders because we could not get the containers of these products off the
pier. If another strike or work slow-down occurs and we do not have a sufficient
level of inventory, a strike or work slow-down would result in increased costs
to us and may reduce our profitability.
CURRENCY
EXCHANGE RATE RISK
During
fiscal year 2008, the Chinese local currency has had no material effect on
the
value of the US dollar as Chinese local currency is pegged to the US dollar.
11
INCREASED
RAW MATERIAL/PRODUCTION PRICING
The
fluctuations in the price of oil has and will continue to affect the Company
in
connection the sourcing and utilizing petroleum based raw materials and
services. The cost of trans-oceanic shipping, plastic and the like are driving
up the price our suppliers charge us for finished goods. Also, the there have
been a series of labor related regulations instituted in China which impact
wages and thus the cost of production which may result in our suppliers
demanding higher prices for our finished goods. This issue is common to all
companies in the same type of business and if the Company is not able to
negotiate lower costs, or reduce other expenses, or pass on some or all of
these
price increases to our customers, our profit margin may be
decreased.
RISKS
ASSOCIATED WITH OUR CAPITAL STRUCTURE
THE
MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE WHICH MAY CAUSE INVESTORS
TO
LOSE ALL OR A PORTION OF THEIR INVESTMENT.
From
December 1, 2004 through March 31, 2008, our common stock has traded between
a
high of $1.60 and a low of $0.21. During this period, we had liquidity problems
and incurred a net loss of $1.9 million in fiscal 2006 and loss of $3.6 million
in fiscal 2005. Our stock price may continue to be volatile based on similar
or
other adverse developments in our business. In addition, the stock market
periodically experiences significant adverse price and volume fluctuations
which
may be unrelated to the operating performance of particular companies.
IF
INVESTORS SHORT OUR SECURITIES, IT MAY CAUSE OUR STOCK PRICE TO DECLINE.
During
the past year, a number of investors have held a short position in our common
stock. As of March 31, 2008, investors held a short position of approximately
30,400 shares of our common stock which represented 0.09% of our public float.
The anticipated downward pressure on our stock price due to actual or
anticipated sales of our stock by some institutions or individuals who engage
in
short sales of our common stock could cause our stock price to decline.
Additionally, if our stock price declines, it may be more difficult for us
to
raise capital.
OUR
COMMON STOCK MAY BE DELISTED FROM THE AMERICAN STOCK EXCHANGE, WHICH MAY HAVE
A
MATERIAL ADVERSE IMPACT ON THE PRICING AND TRADING OF OUR COMMON
STOCK.
On
September 6, 2006, the Company received notice from The American Stock Exchange
(the "Amex") that the Company has fallen below the continued listing standards
of the Amex and that its listing is being continued pursuant to an extension.
Specifically, for the fiscal years ended March 31, 2007 and March 31, 2006,
the
Company was not in compliance with Section 1003(a)(ii) of the Amex Company
Guide
with shareholders' equity of less than $4,000,000 and net losses in three of
its
four most recent fiscal years. The Company was successful in exercising a
turnaround plan and on March 28, 2008, the Company received a notice from Amex
stating that the Singing Machine has resolved the aforementioned listing
deficiency and was restored to its full listing status. Amex has fully re-listed
the Company as a member in good-standing; however the Company still needs to
remain in compliance with Amex Company Guide Section 1009(h). If the company
fails to remain in good standing, there is still a possibility of delisting.
If
our common stock is removed from listing on Amex, it may become more difficult
for us to raise funds through the sales of our common stock or
securities.
IF
OUR OUTSTANDING DERIVATIVE SECURITIES ARE EXERCISED OR CONVERTED, OUR EXISTING
SHAREHOLDERS WILL SUFFER DILUTION.
As
of
March 31, 2008, there were outstanding stock options to purchase an aggregate
of
1,029,296 shares of common stock at exercise prices ranging from $0.32 to $11.09
per share, not all of which are immediately exercisable. The weighted average
exercise price of the outstanding stock options is approximately $1.44 per
share. As of March 31, 2007, there were outstanding and immediately exercisable
options to purchase an aggregate of 1,382,890. There were outstanding stock
warrants to purchase 1,250,000 shares of common stock at an exercise price
of
$.35 per share, all of which are exercisable.
FUTURE
SALES OF OUR COMMON STOCK HELD BY CURRENT STOCKHOLDERS AND INVESTORS MAY DEPRESS
OUR STOCK PRICE.
As
of
June 23, 2008 there were 31,841,728 shares of our common stock outstanding.
We
have filed two registration statements registering an aggregate 3,794,250 of
shares of our common stock (a registration statement on Form S-8 to register
the
sale of 1,844,250 shares underlying options granted under our 1994 Stock Option
Plan and a registration statement on Form S-8 to register 1,950,000 shares
of
our common stock underlying options granted under our Year 2001 Stock Option
Plan). An additional registration statement on Form S-1 was filed in October
2003, registering an aggregate of 2,795,465 shares of our common stock. The
market price of our common stock could drop due to the sale of large number
of
shares of our common stock, such as the shares sold pursuant to the registration
statements or under Rule 144, or the perception that these sales could occur.
OUR
STOCK PRICE MAY DECREASE IF WE ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK.
Our
Certificate of Incorporation authorizes the issuance of 100,000,000 shares
of
common stock as amended in January 2006. As of June 23, 2008 we had 31,841,728
shares of common stock issued and outstanding and an aggregate of 3,484,593
shares issuable under our outstanding options and warrants. As such, our Board
of Directors has the power, without stockholder approval, to issue up to
64,673,679 shares of common stock. Any issuance of additional shares of common
stock, whether by us to new stockholders or the exercise of outstanding warrants
or options, may result in a reduction of the book value or market price of
our
outstanding common stock. Issuance of additional shares will reduce the
proportionate ownership and voting power of our then existing stockholders.
12
PROVISIONS
IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAKE IT DIFFICULT FOR A THIRD PARTY
TO
ACQUIRE OUR COMPANY AND COULD DEPRESS THE PRICE OF OUR COMMON STOCK.
Delaware
law and our certificate of incorporation and bylaws contain provisions that
could delay, defer or prevent a change in control of our Company or a change
in
our management. These provisions could also discourage proxy contests and make
it more difficult for you and other stockholders to elect directors and take
other corporate actions. These provisions of our restated certificate of
incorporation include: authorizing our board of directors to issue additional
preferred stock, limiting the persons who may call special meetings of
stockholders, and establishing advance notice requirements for nominations
for
election to our board of directors or for proposing matters that can be acted
on
by stockholders at stockholder meetings.
IF
WE FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING, THE
PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED.
Our
internal controls over financial reporting may have weaknesses and conditions
that need to be addressed, the disclosure of which may have an adverse impact
on
the price of our common stock. We are required to establish and maintain
appropriate internal controls over financial reporting. Failure to establish
those controls, or any failure of those controls once established, could
adversely impact our public disclosures regarding our business, financial
condition or results of operations. In addition, our management’s assessment of
internal controls over financial reporting may identify weaknesses and
conditions that need to be addressed in our internal controls over financial
reporting or other matters that may raise concerns for investors. Any actual
or
perceived weaknesses and conditions that need to be addressed in our internal
controls over financial reporting, disclosure of our management’s assessment of
our internal controls over financial reporting or disclosure of our public
accounting firm’s attestation to or report on management’s assessment of the
Company’s internal controls over financial reporting may have an adverse impact
on the price of our common stock. .
THE
MARKET PRICE OF OUR COMMON STOCK MAY BE ADVERSELY AFFECTED BY SEVERAL
FACTORS.
The
market price of our common stock could fluctuate significantly in response
to
various factors and events, including:
| ◦ |
our
ability to execute our business
plan;
|
◦
operating results below
expectations;
◦
loss of any strategic
relationship;
◦
industry
developments;
◦
economic and other
external factors; and
◦
period-to-period
fluctuations in its financial results.
In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance
of
particular companies. These market fluctuations may also materially and
adversely affect the market price of our common stock.
WE
HAVE NOT PAID CASH DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY CASH DIVIDENDS
IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR
STOCK.
We
have
never paid cash dividends on our stock and do not anticipate paying cash
dividends on our stock in the foreseeable future. The payment of cash dividends
on our stock will depend on our earnings, financial condition and other business
and economic factors affecting us at such time as the board of directors may
consider relevant. If we do not pay cash dividends, our stock may be less
valuable because a return on your investment will only occur if our stock price
appreciates.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Our
corporate headquarters is located in Coconut Creek, Florida in approximately
8,000 square feet office and warehouse facility. The lease expires on May 31,
2010. The annual rental expense is $72,000.
We
have
one warehouse facility in City of Industry, California. The City of Industry
warehouse facility has 90,000 square feet (with an option to acquire an
additional 90,000 square feet) and the lease expires on April 30, 2013. The
annual rental expense is approximately $600,000.
We
have a
1,500 square foot office space in Macau. The lease expires on October 31, 2008.
The annual rent expense is $32,991.
13
We
believe that the facilities are well maintained, in substantial compliance
with
environmental laws and regulations, and adequately covered by insurance. We
also
believe that these leased facilities are not unique and could be replaced,
if
necessary, at the end of the term of the existing leases.
LEGAL
MATTERS
None
pending.
HISTORICALLY:
SYBERSOUND
RECORDS, INC., D/B/A PARTY TYME KARAOKE V. UAV CORPORATION, D/B/A KARAOKE BAY
AND D/B/A STERLING ENTERTAINMENT; MADACY ENTERTAINMENT GROUP, LTD.; AUDIO
STREAM, INC. D/B/A KEYNOTE KARAOKE; TOP TUNES, INC.; SINGING MACHINE COMPANY;
COMPASS PRODUCTIONS, INC.; BCI ECLIPSE LLC; AND DOES 1 THROUGH 50 INCLUSIVE.
(SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF LOS ANGELES, WEST
DISTRICT, CASE NO. SC 085498)
On
May
12, 2005, Sybersound Records, Inc., a U.S. karaoke product distributor, filed
a
suit in Los Angeles Superior Court against virtually every one of its
competitors (including Singing Machine), seeking actual and punitive damages
arising from alleged unfair business practices, unfair competition, and wrongful
interference with business relationships. The defendants in the case (including
Singing Machine), all of whom cooperated in vigorously defending themselves
from
what they considered to be baseless charges, filed various motions in the case
seeking dismissal on Constitutional and other grounds. Sybersound thereafter
moved to dismiss the state court action, a motion which the court granted,
and
filed a new action against many of the same defendants, including The Singing
Machine Company, Inc., in federal court on August 11, 2005 (described
below).
SYBERSOUND
RECORDS, INC. V. UAV CORPORATION; MADACY ENTERTAINMENT L.P., AUDIO STREAM,
INC.,
TOP TUNES, INC., SINGING MACHINE, INC., BCI ECLIPSE COMPANY, LLC, AMOS ALTER,
DAVID ALTER, EDWARD GOETZ, DENNIS NORDEN, FRANK ROBERTSON, DOUGLAS VOGT AND
RICHARD VOGT (UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF
CALIFORNIA, CV05-5861 JFW); (UNITED STATES COURT OF APPEALS FOR THE NINTH
CIRCUIT (USCA DOCKET NO. 06-55221)
The
new
federal court action filed on August 11, 2005 alleged violation the Copyright
Act and the Lanham Act by the defendants, and claims for unfair competition
under California law. Sybersound was joined in the complaint by several
publisher owners of musical compositions who alleged copyright infringement
against all the defendants except
The
Singing Machine Company, Inc. On November 7, 2005, the district court ordered
the publisher plaintiffs’ copyright claims severed from the case. The Singing
Machine Company, Inc. is not a party to the severed cases.
In
September, 2005, the defendants, including The Singing Machine Company, Inc.,
filed multiple motions to dismiss the original complaint. In October 2005,
Sybersound filed a motion for summary judgment, as well. On January 6, 2006,
the
court granted the motions of the defendants and denied the plaintiff’s motion,
dismissing the case against the defendants, including The Singing Machine
Company, Inc., with prejudice. Plaintiff Sybersound thereafter appealed the
decision to the Ninth Circuit Court of Appeals.
On
February 27, 2008 the Ninth Circuit Court of Appeals affirmed the dismissal
against The Singing Machine Company, Inc. and dismissed all claims against
the
Company with prejudice.
OTHER
MATTERS
None.
We
held
our Annual Meeting of Stockholders on Friday, January 12, 2007 at 2:00 p.m
EST
at the Company’s executive offices. There were present in person or by proxy
21,909,111 shares of Common Stock, of a total of 25,274,883 shares of Common
Stock entitled to vote. At the Annual Meeting, our stockholders voted in favor
of the following proposals:
14
1.
The
number of shares voted in favor of the election of the following nominees for
director is set forth opposite each nominee's name:
|
Nominee
|
Number
of Shares
|
|||
|
Bernard
Appel
|
21,904,899
|
|||
|
Josef
Bauer
|
21,898,899
|
|||
|
Harvey
Judkowitz
|
21,837,830
|
|||
|
Stewart
Merkin
|
21,837,830
|
|||
|
Peter
Hon
|
21,881,899
|
|||
|
Carol
Lau
|
21,881,899
|
|||
|
Yat
Tung Lau
|
21,881,899
|
|||
2.
21,578,030 shares were voted in favor of the appointment of Berkovits, Lago,
& Company LLP as the Company’s independent auditors for the fiscal year
ended March 31, 2007.
PART
II
ITEM
5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our
common stock currently trades on the American Stock Exchange under the symbol
"SMD." Set forth below is the range of high and low information for our common
stock as traded on the American Stock Exchange during fiscal 2007 and fiscal
2006. This information regarding trading on AMEX represents prices between
dealers and does not reflect retail mark-up or markdown or commissions, and
may
not necessarily represent actual market transactions.
|
FISCAL
PERIOD
|
HIGH
|
LOW
|
|||||
|
2008:
|
|||||||
|
First
quarter (April 1 - June 30, 2007)
|
$
|
0.87
|
$
|
0.60
|
|||
|
Second
quarter (July 1 - September 30, 2007)
|
0.90
|
0.34
|
|||||
|
Third
quarter (October 1 - December 31, 2007)
|
0.78
|
0.29
|
|||||
|
Fourth
quarter (January 1 - March 31, 2008)
|
0.35
|
0.20
|
|||||
|
2007:
|
|||||||
|
First
quarter (April 1 - June 30, 2006)
|
$
|
0.40
|
$
|
0.23
|
|||
|
Second
quarter (July 1 - September 30, 2006)
|
0.55
|
0.25
|
|||||
|
Third
quarter (October 1 - December 31, 2006)
|
0.79
|
0.24
|
|||||
|
Fourth
quarter (January 1 - March 31, 2007)
|
1.60
|
0.70
|
|||||
DIVIDENDS
We
have
never declared or paid cash dividends on our common stock and our Board of
Directors intends to continue its policy for the foreseeable future. Future
dividend policy will depend upon our earnings, financial condition, contractual
restrictions and other factors considered relevant by our Board of Directors
and
will be subject to limitations imposed under Delaware law.
EQUITY
COMPENSATION PLAN INFORMATION
The
following table summarizes our equity compensation plan information as of March
31, 2007:
|
WEIGHTED-AVERAGE
|
NUMBER OF SECURITIES
|
|||||||||
|
NUMBER OF SECURITIES
|
EXERCISE PRICE OF
|
REMAINING AVAILABLE FOR EQUITY
|
||||||||
|
TO BE ISSUED UPON
|
OUTSTANDING
|
COMPENSATION PLANS
|
||||||||
|
EXERCISE OF OUTSTANDINGS
|
OPTIONS, WARRANTS
|
(EXCLUDING SECURITIES IN
|
||||||||
|
PLAN CATEGORY
|
OPTION, WARRANTS AND RIGHTS
|
AND RIGHTS
|
COLUMN (A))
|
|||||||
|
Equity
Compensation Plans approved by Security Holders
|
1,382,890
|
$
|
1.86
|
625,160
|
||||||
|
Equity
Compensation Plans Not approved by Security Holders
|
0
|
$
|
0
|
0
|
||||||
15
RECENT
SALES OF UNREGISTERED SECURITIES
During
the fiscal year ended March 31, 2008 the Company issued 1,892,857 shares of
its
common stock.
On
March
12, 2008, the Company issued 952,381 shares of common stock to Arts Electronics,
LTD for $200,000 ($0.21 per share).
March
31,
2007 and 2006, the Company issued 17,225,917 and 290,689 shares of its common
stock.
During
the twelve months ended March 31, 2007, the Company issued 285,000 shares of
common stock to various employees, as well as directors, at prices ranging
from
$.32 per share to $.60 per share according to employee stock option
agreements.
On
March
26, 2007, the Company issued 526,316 shares of common stock to Arts Electronics,
LTD for $500,000 ($.95 per share).
On
March
26, 2007, the Company issued 720,000 shares of common stock to Gentle Boss
Investments LTD to for $600,000 ($.833 per share).
On
March
26, 2007, the Company issued 480,000 shares of common stock to Timemate
Industries Limited for $400,000 ($.833 per share).
On
October 3, 2006, the Company issued 1,380,000 shares of common stock to Gentle
Boss Investments LTD. for $600,300 ($.435 per share).
On
October 3, 2006, the Company issued 920,000 shares of common stock to Timemate
Industries Limited for $400,200 ($.435 per share).
On
September 27, 2006, the Company issued 39,065 shares of common stock to members
of the Board of Directors for services provided to the Company for fiscal year
2006, valued at $12,501, which is included in the selling, general, and
administrative expenses for the nine months ended December 31,
2006.
On
June
25, 2006, the Company issued 12,875,536 shares of common stock to koncepts
International Limited for a $3 million investment ($.233 per
share).
On
November 1, 2005, the Company issued 12,911 shares of common stock to members
of
the Board of Directors for services provided to the Company for fiscal year
2005, valued at $9,167.
On
May 1,
2005, the Company has authorized the issuance of 277,778 shares of common stock
for the conversion of a $200,000 related party loan.
We
issued
Warrants to purchase (i) 2,500,000 shares of our common stock at an exercise
price of $.233 per share for one year from the date of issuance, (ii) 1,250,000
shares of our common stock at an exercise price of $.28 per share for three
years from the date of issuance, and (iii) 1,250,000 shares of our common stock
at an exercise price of $.35 per share for four years from the date of issuance.
The Warrants are subject to adjustment upon the occurrence of specific events,
including stock dividends, stock splits, combinations or reclassifications
of
our common stock or distributions of cash or other assets. Under the terms
of
the Warrants, in no event shall the Purchaser become the beneficial owner of
more than 19.99% of the number of shares of common stock outstanding immediately
after giving effect to such issuance. On April 10, 2007, 2,500,000 options
were
exercised at $.233 per share.
*All
of
the above issuances and sales were deemed to be exempt under Rule 506 of
Regulation D and/or Section 4 (2) of the Securities Act of 1933, as amended
(the
“Securities Act”). No advertising or general solicitation was employed in
offering the securities. The offerings and sales were made to a limited number
of persons, all of whom were accredited investors, business associates of the
Singing Machine or executive officers of the Singing Machine, and transfer
was
restricted by the Singing Machine in accordance with the requirement of the
Securities Act. In addition to representations by the above-reference persons,
we have made independent determinations that all of the above-referenced persons
were accredited or sophisticated investors, and that they were capable of
analyzing the merits and risks of their investment, and that they understood
the
speculative nature of their investment. Furthermore, all of the above-referenced
persons were provided with access to our Securities and Exchange Commission
filings.
PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS
None.
ITEM
6. SELECTED FINANCIAL DATA
The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this Annual Report on Form 10-K. The statements of
operations data for the years ended March 31, 2008, 2007, and 2006 and the
balance sheet data at March 31, 2008 and 2007 are derived from our audited
financial statements which are included elsewhere in this Form 10-K. The
statement of operations data for the year ended March 31, 2005 and 2004 and
the
balance sheet data at March 31, 2006, 2005 and 2004 are derived from our audited
financial statements which are not included in this Form 10-K. The historical
results are not necessarily indicative of results to be expected for future
periods.
16
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||
|
Statement
of Operations:
|
||||||||||||||||
|
Net
Sales
|
$
|
34,048,858
|
$
|
26,732,144
|
$
|
32,305,560
|
$
|
38,209,825
|
$
|
70,541,128
|
||||||
|
Income
(loss) before income taxes
|
$
|
1,712
|
$ |
(1,714,988
|
)
|
$ |
(1,905,250
|
)
|
$ |
(3,591,975
|
)
|
$ |
(21,924,919
|
)
|
||
|
Income
tax benefit (expense)
|
$
|
0
|
$
|
2,453,576
|
$
|
0
|
$
|
0
|
$ |
(758,505
|
)
|
|||||
|
Net
income (loss)
|
$
|
1,712
|
$
|
738,588
|
$ |
(1,905,250
|
)
|
$ |
(3,591,975
|
)
|
$ |
(22,683,424
|
)
|
|||
|
Balance
Sheet:
|
||||||||||||||||
|
Working
capital
|
$
|
3,300,422
|
$
|
2,394,796
|
$ |
(4,274,100
|
)
|
$ |
(3,378,528
|
)
|
$ |
(1,382,939
|
)
|
|||
|
Current
ratio
|
204
|
%
|
187
|
%
|
48
|
%
|
65
|
%
|
90
|
%
|
||||||
|
Property,
plant and equipment, net
|
$
|
598,280
|
$
|
446,510
|
$
|
513,615
|
$
|
1,038,843
|
$
|
983,980
|
||||||
|
Total
assets
|
$
|
7,236,167
|
$
|
5,657,800
|
$
|
4,524,267
|
$
|
7,668,808
|
$
|
15,417,395
|
||||||
|
Shareholders'
equity
|
$
|
4,068,064
|
$
|
2,897,359
|
$ |
(3,661,798
|
)
|
$ |
(1,985,023
|
)
|
$
|
216,814
|
||||
|
Per
Share Data:
|
||||||||||||||||
|
Income
(loss) per common share – basic
|
$
|
0.000
|
$
|
0.03
|
$ |
(0.19
|
)
|
$ |
(0.39
|
)
|
$ |
(2.65
|
)
|
|||
|
Income
(loss) per common share – diluted
|
$
|
0.000
|
$
|
0.03
|
$ |
(0.19
|
)
|
$ |
(0.39
|
)
|
$ |
(2.65
|
)
|
|||
|
Cash
dividends paid
|
0
|
0
|
0
|
0
|
0
|
|||||||||||
The
following discussion should be read in conjunction with the Financial Statements
and Notes filed herewith. Our fiscal year ends March 31. This document contains
certain forward-looking statements including, among others, regarding
anticipated trends in our financial condition and results of operations and
our
business strategy. (See Part I, Item 1A, "Risk Factors "). These forward-looking
statements are based largely on our current expectations and are subject to
a
number of risks and uncertainties. Actual results could differ materially from
these forward-looking statements. Important factors to consider in evaluating
such forward-looking statements include (i) changes in external factors or
in
our internal budgeting process which might impact trends in our results of
operations; (ii) unanticipated working capital or other cash requirements;
(iii)
changes in our business strategy or an inability to execute our strategy due
to
unanticipated changes in the industries in which we operate; and (iv) various
competitive market factors that may prevent us from competing successfully
in
the marketplace.
OVERVIEW
Our
primary objectives for fiscal 2008 were to:
|
·
|
increase
the revenues by expanding our product lines and customer
base;
|
|
·
|
continue
to drive down the operating costs;
|
|
·
|
turn
the operations to profit;
|
|
·
|
obtain
better financing facilities;
|
|
·
|
raise
additional equity.
|
We
believe that the plans were well executed and we have achieved our primary
goals. During fiscal 2008, our revenue has increased by 27.4% while the total
operation expenses decrease by 3.7%. Most importantly, we have generated profit
from operations after a four year restructuring effort. We also have raised
approximately $1.1 million equity from major suppliers. As a result, we
successfully remedied our non-compliance status with the American Stock Exchange
in fiscal 2008.
17
The
following table sets forth, for the periods indicated, certain income and
expense items expressed as a percentage of the Company's total revenues:
|
2008
|
2007
|
2006
|
||||||||
|
Total
Revenues
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
Cost
of Sales
|
77.5
|
%
|
77.1
|
%
|
78.1
|
%
|
||||
|
Operating
expenses
|
22.1
|
%
|
29.2
|
%
|
28.6
|
%
|
||||
|
Operating
(loss) income
|
0.5
|
%
|
-6.4
|
%
|
-6.7
|
%
|
||||
|
Other
(expenses), income, net
|
-0.5
|
%
|
-0.1
|
%
|
0.8
|
%
|
||||
|
Income
(Loss) before taxes
|
0.1
|
%
|
-6.5
|
%
|
-5.9
|
%
|
||||
|
Provision
(benefit) for income taxes
|
0.0
|
%
|
9.2
|
%
|
0.0
|
%
|
||||
|
Net
Income (loss)
|
0.1
|
%
|
2.8
|
%
|
-5.9
|
%
|
||||
FISCAL
YEAR ENDED MARCH 31, 2008 COMPARED WITH FISCAL YEAR ENDED MARCH 31,
2007
NET
SALES
Net
sales
for the fiscal year ended March 31, 2008 were approximately $34.0 million,
an
increase of approximately $7.3 million from approximately $26.7 million for
fiscal 2007. The increase in net sales was primarily due to the sales increase
for the Bratz licensed products of $4 million and the Musical instrument of
$2.5
million, as well as the small increase in karaoke products sales. The music
CD
sales continued to decrease from approximately $700,000 in fiscal 2007 to less
than $100,000 in fiscal 2008 due to the overall CD sales decline in the entire
music industry.
In
fiscal
2008, 59% of our sales were direct sales, which represent sales made by
International SMC and SMC Macau, and 41% were domestic sales, which represents
sales made from our warehouses in the United States. The ratio is very similar
to that of fiscal 2007.
GROSS
PROFIT
Gross
profit for fiscal 2008 was approximately $7.7 million or 22.5% of total revenues
compared to approximately $6.1 million or 22.9% of sales for fiscal 2007. The
increase in gross margin, compared to the prior year, was primarily due to
a
better pricing model. However, the higher profit margin was partially off set
by
the cost increase in China and the lower music sales. The music sales usually
yielded a higher margin than that of the hardware sales.
Our
gross
profit may not be comparable to those of other entities, since some entities
include the costs of warehousing, inspection, freight charges and other
distribution costs in their cost of sales. We account for the above expenses
as
operating expenses and classify them under the selling expenses.
OPERATING
EXPENSES
Operating
expenses, including depreciation and amortization, for the fiscal year ended
March 31, 2008 decreased from approximately $7.8 million to approximately $7.5
million, a decrease of approximately $0.3 million or 3.7% compared to the same
period last year. The decrease in operating expenses consists of approximately
$0.6 million increase in selling expenses, which include advertising,
commission, freight and royalty expenses, and an approximately $0.9 million
decrease in general and administration expenses. The increase of selling
expenses was proportional to the increase of the revenues. The decrease of
the
general and administrative expenses was primarily due to reductions in warehouse
expenses and compensation expenses.
DEPRECIATION
AND AMORTIZATION
Our
depreciation and amortization expenses were $311,273 for fiscal 2008 compared
to
$556,051 for fiscal 2007. The fixed assets mainly consist of the tools and
molds, which are depreciated with three years straight-line method. In the
past
three years, we have utilized some existing tools and molds for the new product
designs. It helps drive down the tooling cost. We have also improved the product
design process, which allow us to make fewer models of new products with higher
sales volume for each models.
NET
OTHER INCOME (EXPENSES)
Net
other
expense was $154,672 in fiscal 2008 compared to net other income of $13,327
in
fiscal 2007. The increase was primarily due to the increase of the borrowing
cost. The higher borrowing cost was a result of the higher domestic sales,
which
required a longer term to finance inventory and accounts receivable.
INCOME
BEFORE TAXES
We
had an
income before taxes of $1,712 in fiscal 2008 compared to a loss before taxes
of
$1,714,988 in fiscal 2007. The improved profit was a result of higher revenues
and successfully lowering operating expenses.
18
INCOME
TAX EXPENSE
Significant
management judgment is required in developing our provisions for income taxes,
including the determination of foreign tax liabilities, deferred tax assets
and
liabilities and any valuation allowances that might be required against deferred
tax assets. Management evaluates its ability to realize its deferred tax assets
on a quarterly basis and adjusts its valuation allowance when it believes that
it is not likely to be realized. On March 31, 2008 and 2007, we had gross
deferred tax assets of approximately $
2.7
million
and
approximately $6.4 million, against which we recorded valuation allowances
totaling approximately $
2.7
million
and
approximately $6.4, respectively.
For
the
fiscal years ended March 31, 2008 and March 31, 2007, we did not record any
income tax expense. This occurred because the Company had taxable losses for
the
US operations and the Macau subsidiary is exempt from income tax according
to
the Macau Offshore Company (MOC) regulations.
The
Company's former wholly-owned subsidiary, International SMC (HK) Limited had
applied for an exemption of income tax in Hong Kong. Therefore, no taxes had
been expensed or provided for at International SMC (HK) Limited. Although no
decision has been reached by the governing body, the parent company had reached
the decision to provide for the possibility that the exemption could be denied
and accordingly had recorded a provision of $2,453,576 in the consolidated
financial statements for Hong Kong taxes in fiscal 2003, 2002 and 2001.
As
a
result of restructuring its operations in China, the Company established a
wholly owned Macau subsidiary to conduct its operations in China. In August
2006, the Company engaged the parent of its major shareholder in Hong Kong,
Starlight International, to provide engineering and shipping services. In
September 2006, the Company sold its wholly owned Hong Kong subsidiary,
International SMC (HK) Limited (“ISMC”) to See Bright Investments Limited.
As
a
consequence of the ISMC divestiture, and based on the opinion of the Hong Kong
tax counsel, as well as “hold harmless” representations from the present
shareholders of ISMC, the Company reversed the previously recorded provision
of
Hong Kong tax of approximately $2,453,000 in the quarter ended December 31,
2006. Such reversal has been presented in the income tax section of the
accompanying Consolidated Statements of Operations.
We
operate within multiple taxing jurisdictions and are subject to audit in those
jurisdictions. Because of the complex issues involved, any claims can require
an
extended period to resolve. In management's opinion, adequate provisions for
income taxes have been made.
NET
LOSS/NET INCOME
As
a
result of the foregoing, we had net income of approximately $1,712 in fiscal
2008 from operations as compared to a net income of 738,588 in fiscal 2007
as a
result of a one-time tax reversal of approximately $2.5 million in fiscal 2007.
FISCAL
YEAR ENDED MARCH 31, 2007 COMPARED WITH FISCAL YEAR ENDED MARCH 31,
2006
NET
SALES
Net
sales
for the fiscal year ended March 31, 2007 were approximately $26.7 million,
a
decrease of approximately $5.6 million from approximately $32.3 million for
fiscal 2006. The decrease in net sales was a result of both decreases in unit
volume as well as pricing. The decrease in sales is primarily attributed to
the
following:
|
·
|
We
lost a $2.7 million order from a major specialty store in the United
States because the customer decided not to carry karaoke products.
Also,
one of our European customers had carried over inventory from fiscal
2006
and therefore they lowered their fiscal 2007 purchases by $3
million.
|
|
·
|
We
did not complete the investment transaction with koncept International
until June 2006. Most of major retailers had decided their buying
plan
before June. Our financial constraints affect our ability to compete
for
the major accounts.
|
|
·
|
The
decrease of karaoke Compact Disc (CD) sales. We had higher than usual
returns of karaoke CD’s in our quarter ended March 31, 2007. As a result,
our music sales decreased by approximately $700,000 to approximately
$1
million for fiscal 2007. The music industry has been experiencing
a
continuing decline in CD sales; while the music download business
has
increased dramatically. We have explored the possibilities with various
download companies to sell our music and lyrics on line in fiscal
2008.
|
In
fiscal
year 2007, 60% of our sales were direct sales, which represent sales made by
International SMC and SMC Macau, and 40% were domestic sales, which represents
sales made from our warehouses in the United States.
The
sales
decrease occurred in all segments of our business. Our total hardware sales
decreased to approximately $25.7 million in fiscal 2007 compared to total
hardware sales of approximately $30.9 million in fiscal 2006.
Music
sales decreased to approximately $1 million, or 3.7% of net sales, in fiscal
2007, compared to approximately $1.4 million, or 5% of net sales, in fiscal
2006. The decrease in music sales was a result of a sharp decline in overall
CD
sales as experienced by other major companies in the music
industry.
19
GROSS
PROFIT
Gross
profit for fiscal 2007 was approximately $6.1 million or 22.9% of total revenues
compared to approximately $7.1 million or 21.9% of sales for fiscal 2006. The
increase in gross margin, compared to the prior year, was primarily due to
a
better pricing model for hardware and the loss of the low margin customers.
The
increase of the hardware profit margin was partly offset by the decrease of
the
music profit margin. Music sales yield higher profit margin than our other
products.
Our
gross
profit may not be comparable to those of other entities, since some entities
include the costs of warehousing, inspection, freight charges and other
distribution costs in their cost of sales. We account for the above expenses
as
operating expenses and classify them under selling, general and administrative
expenses.
OPERATING
EXPENSES
Operating
expenses, including depreciation and amortization, for the fiscal year ended
March 31, 2007 decreased from approximately $9.2 million to approximately $7.8
million, a decrease of approximately $1.4 million or 15.4% compared to the
same
period last year. The decrease in operating expenses consists of approximately
$100,000 increase in selling expenses, which include advertising, commission,
freight and royalty expenses, and an approximately $1.2 million decrease in
general and administration expenses. The increase of selling expenses was
primarily due to the increase of freight expenses of approximately $200,000.
The
decrease of the general and administrative expenses was primarily due to
reductions in warehouse expenses, compensation expenses and the bad debt
expense.
DEPRECIATION
AND AMORTIZATION
Our
depreciation and amortization expenses were $556,051 for fiscal 2007 compared
to
$688,951 for fiscal 2006. This decrease in depreciation and amortization
expenses can be attributed to the fact that we produced fewer models with higher
volume per model, which increased the economies of scale for our product lines.
In addition, the Company did not amortize any loan costs for the fiscal year
ended March 31, 2007.
NET
OTHER INCOME (EXPENSES)
Net
other
expense was $13,327 in fiscal 2007 compared to net other income of $254,172
in
fiscal 2006. In fiscal 2006, we recognized a one time gain of approximately
$2.2
million from the restructuring of approximately $4 million convertible debts
and
we also incurred approximately $1.6 million amortization of discount on
convertible debentures. In addition, we incurred approximately $487,000 in
interest expense in fiscal 2006. Our interest expense was approximately $42,000
for fiscal 2007.
INCOME
BEFORE TAXES
We
had a
net loss before taxes of $1,714,988 in fiscal 2007 compared to a net loss before
taxes of $1,905,250 in fiscal 2006. The decrease of the loss was primarily
due
to the decrease of the operating expenses.
INCOME
TAX EXPENSE
Significant
management judgment is required in developing our provisions for income taxes,
including the determination of foreign tax liabilities, deferred tax assets
and
liabilities and any valuation allowances that might be required against deferred
tax assets. Management evaluates its ability to realize its deferred tax assets
on a quarterly basis and adjusts its valuation allowance when it believes that
it is not likely to be realized. On March 31, 2007 and 2006, we had gross
deferred tax assets of approximately $
2.7
million
and
approximately $6.4 million, against which we recorded valuation allowances
totaling approximately $
2.7
million
and
approximately $6.4, respectively.
For
the
fiscal years ended March 31, 2007 and March 31, 2006, we did not record any
income tax expense. This occurred because the Company had taxable losses for
the
US operations and the Macau subsidiary is exempt from income tax according
to
the Macau Offshore Company (MOC) regulations.
The
Company's former wholly-owned subsidiary, International SMC (HK) Limited had
applied for an exemption of income tax in Hong Kong. Therefore, no taxes had
been expensed or provided for at International SMC (HK) Limited. Although no
decision has been reached by the governing body, the parent company had reached
the decision to provide for the possibility that the exemption could be denied
and accordingly had recorded a provision of $2,453,576 in the consolidated
financial statements for Hong Kong taxes in fiscal 2003, 2002 and 2001.
As
a
result of restructuring its operations in China, the Company established a
wholly owned Macau subsidiary to conduct its operations in China. In August
2006, the Company engaged the parent of its major shareholder in Hong Kong,
Starlight International, to provide engineering and shipping services. In
September 2006, the Company sold its wholly owned Hong Kong subsidiary,
International SMC (HK) Limited (“ISMC”) to See Bright Investments Limited.
As
a
consequence of the ISMC divestiture, and based on the opinion of the Hong Kong
tax counsel, as well as “hold harmless” representations from the present
shareholders of ISMC, the Company reversed the previously recorded provision
of
Hong Kong tax of approximately $2,453,000 in the quarter ended December 31,
2006. Such reversal has been presented in the income tax section of the
accompanying Consolidated Statements of Operations.
We
operate within multiple taxing jurisdictions and are subject to audit in those
jurisdictions. Because of the complex issues involved, any claims can require
an
extended period to resolve. In management's opinion, adequate provisions for
income taxes have been made.
20
NET
LOSS/NET INCOME
As
a
result of the foregoing, we had net income of approximately $738,588 in fiscal
2007 compared to a net loss of approximately $1.9 million in fiscal 2006. Our
decrease in net loss is primarily attributable to a one time tax reversal of
approximately $2.5 million.
On
March
31, 2008, we had cash on hand of approximately $0.4 million compared to cash
on
hand of approximately $1.2 million on March 31, 2007. The decrease of cash
on
hand was primarily due to the increase of the inventory of approximately $1.4
million and the increase of the accounts receivable of approximately $0.9
million. The increase of the inventory and the accounts receivable was a result
of the increased domestic sales.
Cash
used
in the operating activities for the year ended March 31, 2008 was $1,352,223.
The cash was spent to finance a higher level of the inventory and accounts
receivable. We used the company common stock and vendor financing to off set
portion of the cash requirement.
Cash
used
in investing activities for the year ended March 31, 2008 was $490,697. Cash
used in investing activities was for the purchase of tooling and
molds.
Cash
provided by financing activities was $1,101,836 for the fiscal year ended March
31, 2008, which was due to additional equity investments of approximately
$630,881 and the working capital loan from the related party – Starlight Holding
Company.
As
of
March 31, 2008, our working capital was approximately $3.3 million. Our current
liabilities of approximately $3.2 million include:
|
·
|
Customer
credit on account of approximately $778,993 – the amount will be offset by
future purchases or refund.
|
|
·
|
Accounts
payable of $1,145,150 of which $755,000 was due to a major supplier
in
China.
|
|
·
|
Related
party loan of $616,732 due to Starlight Holding
Company.
|
As
of
June 16, 2008, our cash on hand is approximately $450,000. Our average monthly
operating expenses are approximately $300,000 and we need approximately $0.9
million to cover our operating expenses during the next three month period.
Our
primary expenses are normal operating costs including salaries, lease payments
for our warehouse space in California and other operating costs.
As
of
March 31, 2008, our commitments for debt and other contractual arrangements
are
summarized as follows:
|
Total
|
Less
than 1 year
|
1
-
3 years
|
3
-
5 years
|
Over
5 years
|
||||||||||||
|
Property
Leases
|
$
|
3,398,205
|
$
|
556,673
|
$
|
2,115,596
|
$
|
725,936.35
|
$
|
-
|
||||||
|
Equipment
Leases
|
24,763
|
9,888
|
14,875
|
-
|
-
|
|||||||||||
|
Licensing
Agreement
|
242,000
|
242,000
|
-
|
-
|
||||||||||||
|
Loan
Payable-Related Party
|
616,732
|
616,732
|
-
|
-
|
-
|
|||||||||||
|
Total
|
$
|
4,281,700
|
$
|
1,425,293
|
$
|
2,130,471
|
$
|
725,936
|
$
|
-
|
||||||
WORKING
CAPITAL REQUIREMENTS DURING THE SHORT AND LONG TERM
During
the next twelve month period, we plan on financing our working capital needs
from:
1)
Equity
investments – The Company is actively seeking equity investments to expand its
business. We expect to raise additional capital as required for fiscal year
2009.
2)
Vendor
financing – Our key vendors in China have agreed to manufacture on behalf of the
Company without advanced payments and have extended payment terms to the
Company. The terms with the factories are sufficient to cover the factory direct
sales, which accounted for more than 60% of the total revenues.
3)
Factoring of accounts receivable - The Company factors its accounts receivable
for sales originated in the United States. We are continually exploring better
rates and terms with various banks. The Company has currently received numerous
proposals with higher credit facility at better rates to meet the cash
requirements of the shipping season. We continue to evaluate all offers.
4)
Cost
reduction - The Company has reduced significant operating expenses in recent
years. The cost reduction initiatives are part of our intensive effort to
achieve a successful turn-around restructuring. The Company plans to continue
its cost cutting efforts in fiscal 2009.
5)
Bridge
Loan - We may be able to raise additional short term bridge loan from the parent
of our majority shareholder, Starlight International, who is also one of our
suppliers.
21
6)
Reduce
cost of operation – The Company has incorporated SMC Logistics, Inc. as a
wholly-owned subsidiary to operate our California warehouse. For fiscal 2009,
SMC Logistics has signed an agreement with the Starlight Group to handle the
logistics and fulfillment of Starlight Groups’ domestic products for a service
fee. This arrangement effectively turns our warehouse from a cost-center to
a
profit-center.
Our
sources of cash for working capital in the long term are the same as our sources
during the short term. If we need additional financing, we intend to approach
different financing companies or insiders. However, we cannot guarantee that
our
financing plan will succeed. If we need to obtain additional financing and
fail
to do so, it may have a material adverse effect on our ability to meet our
financial obligations and continue our operations.
During
fiscal 2009, we will strive to reduce additional operating costs. In order
to
reduce the need to maintain inventory in our warehouses in California and
Florida, we intend to continue to ship a significant portion of our total sales
directly from SMC Macau. The goods shipped directly to our customers from ports
in China are primarily backed by customer letters of credit. The customers
take
title to the merchandise at their consolidators in China and are responsible
for
the shipment, duty, clearance and freight charges to their locations. In order
to keep our inventory low, we have been helping our customers forecast and
manage their Singing Machine inventories. This will prevent the overstocking
situation with customers.
Except
for the foregoing, we do not have any present commitment that is likely to
cause
our liquidity to increase or decrease in any material way. In addition, except
for the Company’s need for additional capital to finance inventory purchases,
the Company is not aware of any trend, additional demand, event or uncertainty
that will result in, or that is reasonably likely to result in, the Company’s
liquidity increasing or decreasing in any material way.
EXCHANGE
RATES
We
sell
all of our products in U.S. dollars and pay for all of our manufacturing costs
in either U.S. or Hong Kong dollars. Operating expenses of our former Hong
Kong
office were paid in Hong Kong dollars. Operating expenses of the Macau office
are paid in either Hong Kong dollars or Macau currency (MOP) The exchange rate
of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong
government since 1983 at HK$7.80 to U.S. $1.00 and, accordingly, has not
represented a currency exchange risk to the U.S. dollar. The exchange rate
of
the MOP to the U.S. dollar is MOP $8.05 to U.S. $1.00. We cannot assure you
that
the exchange rate between the United States, Macau and Hong Kong currencies
will
continue to be fixed or that exchange rate fluctuations will not have a material
adverse effect on our business, financial condition or results of operations.
SEASONAL
AND QUARTERLY RESULTS
Historically,
our operations have been seasonal, with the highest net sales occurring in
the
second and third quarters (reflecting increased orders for equipment and music
merchandise during the Christmas selling months) and to a lesser extent the
first and fourth quarters of the fiscal year. Sales in our fiscal second and
third quarter, combined, accounted for approximately 87.8%, 94.0% and 87.5
% of
net sales in fiscal 2008, 2007, and 2006.
Our
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.
We
are
currently developing and considering selling products other than karaoke
category during the slow season to fulfill the revenue shortfall.
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.
OFF
BALANCE SHEET ARRANGEMENTS
None.
CRITICAL
ACCOUNTING POLICIES
We
prepared our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. As such,
management is required to make certain estimates, judgments and assumptions
that
it believes are reasonable based on the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses for the periods presented. The significant accounting policies which
management believes are the most critical to aid in fully understanding and
evaluating our reported financial results included accounts receivable allowance
for doubtful accounts, reserves on inventory and income tax.
22
COLLECTIBILITY
OF ACCOUNTS RECEIVABLE.
The
Singing Machine's allowance for doubtful accounts is based on management's
estimates of the creditworthiness of its customers, current economic conditions
and historical information, and, in the opinion of management, is believed
to be
an amount sufficient to respond to normal business conditions. Management sets
100% reserves for customers in bankruptcy and other reserves based upon
historical collection experience. Should business conditions deteriorate or
any
major customer default on its obligations to the Company, this allowance may
need to be significantly increased, which would have a negative impact on
operations.
RESERVES
ON INVENTORIES.
The
Singing Machine establishes a reserve on inventory based on the expected net
realizable value of inventory on an item by item basis when it is apparent
that
the expected realizable value of an inventory item falls below its original
cost. A charge to cost of sales results when the estimated net realizable value
of specific inventory items declines below cost. Management regularly reviews
the Company's investment in inventories for such declines in value.
INCOME
TAXES.
Significant management judgment is required in developing our provision for
income taxes, including the determination of foreign tax liabilities, deferred
tax assets and liabilities and any valuation allowances that might be required
against the deferred tax assets. Management evaluates its ability to realize
its
deferred tax assets on a quarterly basis and adjusts its valuation allowance
when it believes that it is more likely than not that the asset will not be
realized.
We
operate within multiple taxing jurisdictions and are subject to audit in those
jurisdictions. Because of the complex issues involved, any claims can require
an
extended period to resolve. In management's opinion, adequate provisions for
potential income taxes in the jurisdictions have been made.
OTHER
ESTIMATES.
We make
other estimates in the ordinary course of business relating to sales returns
and
allowances, warranty reserves, and reserves for promotional incentives.
Historically, past changes to these estimates have not had a material impact
on
our financial condition. However, circumstances could change which may alter
future expectations.
RECENT
ACCOUNTING PRONOUNCEMENTS:
See
"Note
1" to the attached financial statements.
Market
risk represents the risk of loss that may impact our financial position, results
of operations or cash flows due to adverse changes in financial and commodity
market prices and interest rates. We are exposed to market risk in the areas
of
changes in United States and international borrowing rates and changes in
foreign currency exchange rates. In addition, we are exposed to market risk
in
certain geographic areas that have experienced or remain vulnerable to an
economic downturn, such as China. We purchase substantially all our inventory
from companies in China, and, therefore, we are subject to the risk that such
suppliers will be unable to provide inventory at competitive prices. While
we
believe that, if such an event were to occur we would be able to find
alternative sources of inventory at competitive prices, we cannot assure you
that we would be able to do so. These exposures are directly related to our
normal operating and funding activities. Historically and as of March 31, 2008,
we have not used derivative instruments or engaged in hedging activities to
minimize market risk.
INTEREST
RATE RISK
As
of
March 31, 2008, our exposure to market risk resulting from changes in interest
rates is immaterial.
FOREIGN
CURRENCY RISK
We
have a
wholly-owned subsidiary in Macau. Sales by this operation made on a FOB China
or
Hong Kong basis are dominated in U.S. dollars. However, purchases of inventory
and Macau operating expenses are typically denominated in either Hong Kong
dollars or the Macau currency (“MOP”), thereby creating exposure to changes in
exchange rates. Changes in the Hong Kong dollar, U.S. dollar or MOP exchange
rates may positively or negatively affect our gross margins, operating income
and retained earnings. We do not believe that near-term changes in the exchange
rates, if any, will result in a material effect on our future earnings, fair
values or cash flows, and therefore, we have chosen not to enter into foreign
currency hedging transactions. We cannot assure you that this approach will
be
successful, especially in the event of a significant and sudden change in the
value of the Hong Kong dollar.
The
financial statements and supplemental data required pursuant to this Item 8
are
included in this Annual Report, as a separate section commencing on page F-1
and
are incorporated herein by reference.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
N/A
23
(a) Management’s
Annual Report on Internal Control over Financial
Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. This rule defines internal control over financial reporting as
a
process designed by, or under the supervision of Company management to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. GAAP.
A
system
of internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A material weakness is any deficiency,
or combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of
our
company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
Based
upon this evaluation, our Chief Executive Officer and interim Chief Financial
Officer concluded that our internal control over financial reporting was not
effective as of the period covered by this Annual Report, as a result of
material weaknesses.
The
material weaknesses were primarily due to the following:
(i)
Lack of accounting management personnel. At
the
time of this Annual Report the Company does not currently have a financial
controller or on-site Chief Financial Officer. As a result, there
is
no material division of duties that would insure that information is checked
or
verified before it is entered into the accounting system or that entries into
the accounting system accurately reflect transactions. Reconciliations of
accounts, when performed, are conducted by the individual that is responsible
for entering information into the account. Additionally there is currently
no
management oversight to ensure transactions or postings are accurately recorded.
(ii)
Lack of effective financial control policies and procedures. The
Company does not currently have sufficient written policies and procedures
dealing with account reconciliations or charge-backs by customers. As a result,
many unauthorized charge-backs may be taken without proper review or dispute.
There also lacks proper documentation or internal testing to assure all postings
and transactions are accurately and timely reported.
(iii)
Transition of accounting system.
For
fiscal year 2008, management has identified inadequate features and preventive
measures with our Traverse accounting system. For business and financial control
reasons management has decided to upgrade and convert to a new accounting system
in March 2008. As of the date of this Annual Report, the Company has switched
all functions over to this new system. However, due to employee unfamiliarity
with the new software and reliance upon sensitive reports generated by the
new
system, such data input and output may not be timely or accurate.
In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily is required to apply its judgment in
evaluating the relationship between the benefit of desired controls and
procedures and the cost of implementing new controls and
procedures.
(b)
Management’s
Plan for Remediation of Material Weaknesses
In
light
of the conclusion that our internal control over financial reporting was not
effective, our management is in the process of implementing a plan intended
to
remediate such ineffectiveness and to strengthen our internal controls over
financial reporting through the implementation of certain measures. At the
filing of this Annual Report, Management has addressed the need for a financial
controller and has hired a full-time controller. For fiscal 2009, Management
is
committed to improve control and oversight relating to financial controls and
will work with our Audit Committee to formulate written policies and procedures
to address deficiencies described above. Additionally, Management has engaged
the services of a technical consulting company that is familiar with our new
accounting system to address the deficiencies reported above.
This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this Annual Report.
(c)
Changes
in Internal Controls
There
were no changes in the Company’s internal controls over financial reporting
during the year ended March 31, 2008, that materially affected, or were
reasonably likely to materially affect, the Company’s internal control over
financial reporting, other than the remediation measures described
above.
ITEM
9B. OTHER INFORMATION
None.
24
PART
III
The
following table sets forth certain information with respect to our executive
officers, directors and significant employees as of June 15, 2008.
|
Name
|
Age
|
Position
|
|
Anton
H. Handal
|
53
|
Chief
Executive Officer
|
|
Alicia
Haskamp (1)
|
60
|
Former
Senior VP of Sales and Product Development
|
|
Danny
Zheng (2)
|
38
|
Former
Chief Financial Officer
|
|
Carol
Lau
|
59
|
Chief
Financial Officer and Chairwoman
|
|
Harvey
Judkowitz
|
53
|
Director
|
|
Bernard
Appel
|
76
|
Director
|
|
Stewart
A. Merkin
|
65
|
Director
|
|
Peter
Hon
|
67
|
Director
|
|
Yat
Tung Lau
|
29
|
Director
|
|
Josef
A. Bauer (3)
|
69
|
Former
Director
|
(2)
Mr.
Zheng resigned as our Chief Financial Officer on May 22, 2008.
(3)
Mr.
Bauer resigned from our Board of Directors of February 4, 2008.
Directors
are elected or appointed to serve until the next annual meeting and until their
successors are elected and qualified. Officers are appointed to serve for one
year until the meeting of the Board of Directors following the annual meeting
of
stockholders and until their successors have been elected and qualified. Any
officer elected or appointed by the Board or appointed by an executive officer
or by a committee may be removed by the Board either with or without cause,
and
in the case of an officer appointed by an executive officer or by a committee,
by the officer or committee that appointed him or by the president.
The
following information sets forth the backgrounds and business experience of
our
directors and executive officers and has been provided to us by each respective
individual:
Anton
“Tony” H. Handal
became
the CEO of the Singing Machine on June 21, 2007. Mr. Handal is also the founder
and principal of Handal & Associates. Mr. Handal has extensive
practical business experience. He has negotiated, documented and closed a myriad
of business transactions and has successfully managed several mergers,
acquisitions and reverse mergers. Mr. Handal, together with a close group of
financial and accounting affiliates, has structured corporate finance
transactions, managed due diligence assignments and negotiated purchase and
sale
agreements. He has also overseen corporate due diligence, licensed Intellectual
Property and negotiated vendor/supply agreements.
Not
only
is Mr. Handal a quality attorney, he is also known for his creative approach
to
“Problem-solving”. He has brought these qualities to bear in
advising his clients on asset purchases, mergers and acquisitions, contract
negotiations and risk management. Mr. Handal has negotiated and acted as lead
counsel in business transactions exceeding $130,000,000 in value.
Mr.
Handal has also extended his own personal time, and directed members of his
firm
to contribute to the community by actively pursuing pro bono work for and on
behalf of several non profit and community based organizations.
Mr.
Handal, between 1995 and 1999, had served as CEO of a start-up technology
company, secured patents, raised capital and handled communications with
shareholders/investors. Since 1998, he has acted as US legal counsel for
Starlight International Holdings, Ltd. a major shareholder of the Company.
He
has also served as a member of the Villa View Hospital board of directors,
former member of the Board of Trustees of the San Diego Railroad Museum and
was
counsel to the San Diego Fire Youth Soccer Team. In addition to his strong
dedication to the firm and his community, Mr. Handal has acted as counsel to
the
San Diego Convention Center Corporation. He has actively engaged in fundraising
and supporting local, statewide and national political candidates.
Mr.
Handal is a member of the California and Florida State Bars; Federal District
Court Bar of the Northern, Southern and Central Districts of California and
Florida and also a member of the Ninth Circuit Court of Appeals. He is a
graduate of the University of California at Los Angeles (UCLA) school of
Economics and received a Juris Doctorate degree from Southwestern University
School of Law.
Danny
Zheng
had been
part of the Singing Machine management team since April 2004 and had served
as
financial controller and principal accounting officer until April 5, 2005 when
he became the Chief Financial Officer of the Singing Machine. On January 1,
2007, Danny became the interim Chief Executive Officer of the Company until
Mr.
Handal was appointed Chief Executive Officer on June 21, 2007. Mr. Zheng has
since resigned from the Company effective March 22, 2008. Mr. Zheng is a
certified public accountant licensed by the state of Delaware. He held
controller and VP finance positions with various private and public companies.
Previously, he was also employed by a New York regional CPA firm as tax
consultant for 4 years. Mr. Zheng also served as general manager from 1999
to
2002 for PC Ware International Miami branch, a Taiwan based computer
manufacturer. He was responsible for its distribution, marketing and finance
operation in six countries throughout Latin America. He also served as director
of operations for PC Micro, a joint venture computer manufacturer in Manaus,
Brazil from 1999 to 2002. Mr. Zheng earned a B.S. degree in accounting from
Nankai University in China. Mr. Zheng is currently pursuing an Executive MBA
degree at the Wharton School, University of Pennsylvania.
25
Carol
Lau
joined
the Starlight Group in 1987 and was appointed to the position of President
of
Starlight Randix Corporation, a wholly owned subsidiary of the Starlight group
in 1993. In 2001, she became the Chief Financial Officer of Cosmo Communications
Corporation. Currently Ms. Lau serves as the Company’s interim Chief Financial
Officer. Prior to joining the Starlight group, from 1978 to 1987 Ms. Lau held
positions in auditing and financial management with the Australian Government.
Ms. Lau was a Certified Public Accountant (CPA) in Australia and is a licensed
CPA in Massachusetts. She holds a Bachelor of Business degree from the Curtin
University in Australia and a Graduate Diploma in Computer Science from the
Canberra University in Australia. Ms. Lau joined the Company’s board on January
12, 2007.
Harvey
Judkowitz
has
served as a director since March 29, 2004 and is the chairman of the Audit
Committee. He is licensed as a Certified Public Accountant in New York and
Florida. From 1988 to the present date, Mr. Judkowitz has conducted his own
CPA
practices. He has served as the Chairman and CEO of UniPro Financial Services,
a
diversified financial services company up until the company was sold in
September of 2005. He presently is the Chairman of AHM Financial Services Inc.,
a start-up management company.
Bernard
S. Appel
has
served as a director since October 31, 2003. He spent 34 years at Radio Shack,
beginning in 1959. At Radio Shack, he held several key merchandising and
marketing positions and was promoted to the positions of President in 1984
and
to Chairman of Radio Shack and Senior Vice President of Tandy Corporation in
1992. Since 1993 through the present date, Mr. Appel has operated the private
consulting firm of Appel Associates, providing companies with merchandising,
marketing and distribution strategies, creative line development and domestic
and international procurement.
Stewart
Merkin
has
served as a director since December 1, 2004. Mr. Merkin, founding partner of
the
Law Office of Stewart A. Merkin, has been practicing law in Miami, Florida
since
1974. His core legal practice areas include corporate and securities law, as
well as mergers and acquisitions and international transactions. He was awarded
both J.D. and M.B.A. degrees from Cornell University, as well as a B.S. from
The
Wharton School, University of Pennsylvania. He has been admitted to the Florida
and New York State Bar since 1972 and 1973, respectively
Peter
Hon
has been
a non-executive of the Starlight group since 1998. Mr. Hon passed the College
of
Law qualifying examination in 1969 in the United Kingdom and began practicing
law in Hong Kong in that year after being admitted to the High Court of Hong
Kong. He has been the principal of Hon and Co, a law firm in Hong Kong for
the
past 37 years. Mr. Hon joined the Company’s board on January 12,
2007.
Yat
Tung Lau
joined
the Starlight group in 2003 as assistant to the Chairman of the Board of the
Starlight group and is now head of corporate relations. He is also responsible
for local sales in China and heads the computer information system department
for the Starlight group. From 2002 to 2003, he held a marketing executive
position in Storage Technology Corporation. Mr. Lau holds a Bachelor of Arts
degree in business marketing from Indiana University. Mr. Lau joined the
Company’s board on January 12, 2007.
BOARD
COMMITTEES
We
have
an audit committee, an executive compensation/stock option committee and a
nominating committee.
As
of
July 2, 2007, the audit committee consists of Messrs. Judkowitz (Chairman),
Appel and Merkin. The Board has designated Mr. Judkowitz as the "audit committee
financial expert," as defined by Item 401(h) of Regulation S-K of the Securities
Exchange Act of 1934. The Board has determined that Messrs. Judkowitz, Merkin
and Appel are "independent directors" within the meaning of the listing
standards of the American Stock Exchange. 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 our independent auditors, reviews our internal accounting
controls, and approves services to be performed by our independent auditors.
As
of
July 2, 2007, the executive compensation/stock option committee consisted of
Ms.
Carol Lau (Chairwoman) and Messrs. Judkowitz. In May 2008, Ms. Lau assumed
the
position of Interim CFO, replacing Danny Zhang and was thus ineligible to sit
on
the compensation committee. Ms. Lau was replaced by Stewart Merkin on the
compensation committee on July 8, 2008. The executive compensation/stock option
committee considers and authorizes remuneration arrangements for senior
management and grants options under, and administers our employee stock option
plan.
As
of
July 2, 2007, the nominating committee consists of Messrs. Appel (Chairman),
Merkin and Yat Tung Lau. The nominating committee is responsible for reviewing
the qualifications of potential nominees for election to the Board of Directors
and recommending the nominees to the Board of Directors for such election.
Nomination
of Directors
As
provided in its charter and our Company’s corporate governance principles, the
Nominating Committee is responsible for identifying individuals qualified to
become directors. The Nominating Committee seeks to identify director candidates
based on input provided by a number of sources, including (1) the Nominating
Committee members, (2) our other directors, (3) our stockholders, (4) our Chief
Executive Officer or Chairman, and (5) third parties such as professional search
firms. In evaluating potential candidates for director, the Nominating Committee
considers the entirety of each candidate’s credentials.
26
Qualifications
for consideration as a director nominee may vary according to the particular
areas of expertise being sought as a complement to the existing composition
of
the Board of Directors. However, at a minimum, candidates for director must
possess:
|
•
|
high
personal and professional ethics and integrity;
|
|
•
|
the
ability to exercise sound judgment;
|
|
•
|
the
ability to make independent analytical inquiries;
|
|
•
|
a
willingness and ability to devote adequate time and resources to
diligently perform Board and committee duties; and
|
|
•
|
the
appropriate and relevant business experience and acumen.
|
In
addition to these minimum qualifications, the Nominating Committee also takes
into account when considering whether to nominate a potential director candidate
the following factors:
|
•
|
whether
the person possesses specific industry expertise and familiarity
with
general issues affecting our business;
|
|
•
|
whether
the person’s nomination and election would enable the Board to have a
member that qualifies as an “audit committee financial expert” as such
term is defined by the Securities and Exchange Commission (the “SEC”) in
Item 401 of Regulation S-K;
|
|
•
|
whether
the person would qualify as an “independent” director under the listing
standards of the American Stock Exchange;
|
|
•
|
the
importance of continuity of the existing composition of the Board
of
Directors to provide long term stability and experienced oversight;
and
|
|
•
|
the
importance of diversified Board membership, in terms of both the
individuals involved and their various experiences and areas of expertise.
|
FAMILY
RELATIONSHIPS
There
are
no other family relationships among any of our officers or other directors,
except for Chairwoman Carol Lau who is the aunt of Director Yat Tung Lau and
the
mother of Gary Atkinson, the Company’s General Counsel.
CODE
OF ETHICS
We
have
adopted a Code of Business Conduct and Ethics, which is applicable to all
directors, officers and employees of the Singing Machine, including our
principal executive officer, our principal financial officer, and our principal
accounting officer or controller or other persons performing similar functions.
A copy of the Code of Ethics will be filed as Exhibit 14.1 via an amendment
to
this Annual Report or filed as an exhibit to a Current Report on Form 8-K.
We
intend to post amendments to or waives from our Code of Ethics (to the extent
applicable to our chief executive officer, principal financial officer,
principal accounting officer or controller or other persons performing similar
functions) on our website.
COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
To
our
knowledge, based solely on a review of the copies of such reports furnished
to
the Company and written representations that no other reports were required,
the
Company believes that during the year ended March 31, 2007, its officers,
directors and 10% shareholders complied with all Section 16(a)
filing.
COMPENSATION
DISCUSSION AND ANALYSIS
PHILOSOPHY
The
Executive Compensation Committee believes that the Singing Machine must maintain
short and long-term executive compensation plans that enable us to attract
and
retain well-qualified executives. Furthermore, we believe that our compensation
plans must also provide a direct incentive for our executives to create
shareholder value. A well designed executive compensation plan will align the
interests between the executives and the shareholders as well as creating a
positive environment of goals, performances and rewards.
We
believe that the executive compensation should reflect the success of the
management team, rather than the individual, in attaining the key operating
objectives such as revenues growth, operation cost reduction, fund raising
and
the appreciation of the stock price. A clear measurement should be established
to reward the performance. We will also evaluate our executive compensation
package by comparison to similar companies to ensure the competitiveness of
our
compensation.
27
In
furtherance of this philosophy, the compensation of our executives generally
consists of three components: base salary, annual cash incentives and long-term
performance-based incentives.
BASE
SALARIES
Annual
base salaries for executive officers are initially determined by evaluating
the
responsibility of the position and the experience and the skill sets of the
individual. Also taken into consideration is the competitiveness of the market
place for executive talent, including a comparison of base annual salaries
with
comparable positions within similar companies.
INCENTIVE
CASH BONUSES
Generally,
we award cash bonuses to our management employees and other employees, based
on
their personal performance in the past year and overall performance of our
Company. The overall performance of our Company includes the revenue growth,
reduction of the operation expenses, fund raising and the stock price
appreciation.
LONG
TERM COMPENSATION - STOCK OPTION GRANTS
We
have
utilized stock options to motivate and retain executive officers and other
employees for the long-term. We believe that stock options closely align the
interests of our executive officers and other employees with those of our
stockholders and provide a major incentive to building stockholder value.
Options are typically granted annually, and are subject to vesting provisions
to
encourage officers and employees to remain employed with the Company. Our stock
options are usually granted at a price equal to or above the fair market value
of our common stock on the date of grant. As such, our officers only benefit
from the grant of stock options if our stock price appreciates. Generally,
we
try to tie bonus payments to our financial performance. However, if an
individual has made significant contributions to our Company, we will provide
them with a bonus payment for their efforts even if our Company's financial
performance has not been strong.
COMPENSATION
OF OFFICERS
Anton
Handal became the Chief Executive Officer of the Company on June 21, 2007.
Mr.
Handal does not have an employment contract with the Company and does not
receive a salary. In exchange for his services, Mr. Handal has an option from
koncepts International Limited to purchase 750,000 stock warrants of The Singing
Machine Company, Inc. held by koncepts International Limited, at any time,
upon
payment of $5,000.
Danny
Zheng served as the Company’s Interim Chief Executive Officer from January 1,
2007 through June 21, 2007 and as the Chief Financial Officer from June 21
through May 22, 2008. During this time, Mr. Zheng had an employment contract,
for the Chief Financial Officer position, which was entered into on July 20,
2006. Based on the agreement, Mr. Zheng’s base salary is $160,000 per year. The
agreement also includes a monthly car allowance of $500 per month and a bonus,
which is at the sole discretion of the Company’s Board of Directors. Mr. Zheng
was not granted any cash bonuses in fiscal 2008.
COMPENSATION
COMMITTEE REPORT
The
compensation committee is responsible for discharging the responsibilities
of
the board with respect to compensation of executive officers. The compensation
committee sets performance goals and objectives for the chief executive officer
and the other executive officers, evaluates their performance with respect
to
those goals and sets their compensation based upon the evaluation of their
performance. The compensation committee assesses the information it receives
in
accordance with its business judgment. The compensation committee also
periodically reviews director compensation. All decision with respect to
executive and director compensation are approved by the compensation committee
and recommended to the full board of directors for ratification.
The
compensation committee has reviewed and discussed the Compensation Discussion
and Analysis (the “CD&A”) for the year ended March 31, 2007 with management.
In reliance on the reviews and discussions referred to above, the compensation
committee recommended to the board, and the board has approved, that the
CD&A be included in the Company’s Annual Report on Form 10-K for the year
ended March 31, 2007 for filing with SEC.
Submitted
by the Compensation Committee of the Board of Directors:
Stewart
Merkin & Harvey Judkowitz
The
following table provides certain summary information concerning compensation
awarded to, earned by or paid to our Chief Executive Officer and other named
executive officers of our Company whose total compensation exceeded $100,000
(collectively, the “named officers”) for fiscal year 2007.
28
SUMMARY
COMPENSATION TABLE
|
Name
and Principal
Position
|
Year
|
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
(1)
|
Non-Equity
incentive plan compensation
|
Change in
Pension Value
and
Non-Qualified
Deferred
Compensation
Earnings
|
All other
compensation (2)
|
Total
Compensation
|
||||||||||||||||||
|
Anton
Handal (3)
|
2008
|
$
|
0.00
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Chief
Executive Officer
|
||||||||||||||||||||||||||||
|
Danny
Zheng (4)
|
2008
|
$
|
166,154.00
|
$
|
5,000.00
|
-
|
-
|
-
|
-
|
$
|
12,876.84
|
$
|
184,030.84
|
|||||||||||||||
|
Former
Chief Financial Officer
|
||||||||||||||||||||||||||||
|
Alicia
Haskamp (5)
|
2008
|
$
|
127,884.60
|
-
|
-
|
-
|
-
|
-
|
$
|
48,498.71
|
$
|
176,383.31
|
||||||||||||||||
|
Former
Senior Vice President of Sales and Product
Development
|
||||||||||||||||||||||||||||
(1)
Represents stock-based compensation expense for the fiscal year ended March
31,
2007, for stock options granted in 2007 under SFAS 123(R), Share based
payments as discussed in Note 1, “Stock Based Compensation” of the Notes to
Consolidated Financial Statements included elsewhere in this Annual Report
on
Form 10-K.
(2)
Includes matching contributions under our 401(k) savings plan, medical and
life
insurance pursuant to the executive's employment agreement and other expenses
described herein. For Yi Ping Chan for fiscal year 2007, this amount includes
$40,000 in moving expenses per the separation agreement dated December 6, 2006.
For Alicia Haskamp, a housing allowance of approximately $27,000 is
included.
(3)
Mr.
Handal does not receive a salary however pursuant to a warrants option agreement
with koncepts International Limited, he has an option to purchase 750,000 stock
warrants in the Company for $5,000, exercisable at any time.
(4)
Mr.
Danny Zheng joined our Company on April 19, 2004 as financial controller and
became our Chief Financial Officer on April 5, 2005 and our Interim Chief
Executive Officer on January 1, 2007. On June 21, 2007, Mr. Zheng resigned
as
our Interim Chief Executive Officer and Mr. Anton “Tony” H. Handal was appointed
as our Chief Executive Officer. Mr. Zheng subsequently resigned as Chief
Financial Officer effective March 22, 2008.
(5)
Ms.
Haskamp resigned effective February 5, 2008.
The
following table sets forth information regarding stock option awards to our
named executive officers under our Year 2001 Stock Option Plan during the fiscal
year ended March 31, 2008:
GRANTS
OF PLAN BASED AWARDS
|
Name
and Principal Position
|
|
Grant Date
|
|
All Other Option
Awards: Number of
Securities
Underlying Options(#)
|
|
Exercise or
Base Price of
Option Awards
($/Sh) (1)
|
|
Grant Date
Fair Value
of
Stock and
Option Awards (2)
|
|||||
|
N/A
(1)
|
N/A
|
N/A
|
N/A
|
N/A
|
|||||||||
(1)
No
grants of plan based awards were issued during FY 2008
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The
following table sets forth information with respect to grants of options to
purchase our common stock under our Year 2001 Stock Option Plan to the named
executive officers during the fiscal year ended March 31, 2008:
29
|
Name
and Principal Position
|
Number of
Securities Underlying Unexercised Options (#)
Exercisable
|
Number of
Securities Underlying Unexercised Options (#)
Unexercisable
|
Equity Incentive
Plan
Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
Option
Exercise Price ($)
|
Option
Expiration Date
|
Number of
Shares or Units of
Stock
That
Have
Not
Vested
(#)
|
Market
Value of
Shares or Units of
Stock
That
Have
Not
Vested
($)
|
Equity Incentive
Plan
Awards: Number of Unearned Shares, Units
or
Other
Rights That
Have Not
Vested (#)
|
Equity Incentive
Plan Awards: Market or Payout Value of Unearned
Shares, Units or Other Rights That Have Not
Vested ($)
|
|||||||||||||||||||
|
Danny
Zheng
|
9,600
|
2,400
|
N/A
|
1.05
|
4/26/2014
|
N/A
|
N/A
|
N/A
|
N/A
|
|||||||||||||||||||
|
Former
Chief Financial Officer
|
46,667
|
23,333
|
0.60
|
5/8/2015
|
||||||||||||||||||||||||
|
30,000
|
-
|
0.34
|
1/19/2011
|
|||||||||||||||||||||||||
|
100,000
|
0.33
|
4/9/2011
|
||||||||||||||||||||||||||
|
186,267
|
25,733
|
|||||||||||||||||||||||||||
|
Alicia
Haskamp
|
||||||||||||||||||||||||||||
|
Former
Senior VP of Sales & Product Development
|
18,000
|
-
|
N/A
|
9.00
|
10/31/2012
|
N/A
|
N/A
|
N/A
|
N/A
|
|||||||||||||||||||
|
30,000
|
-
|
5.60
|
3/7/2013
|
|||||||||||||||||||||||||
|
11,200
|
2,800
|
1.97
|
12/19/2013
|
|||||||||||||||||||||||||
|
10,600
|
-
|
1.97
|
12/19/2013
|
|||||||||||||||||||||||||
|
53,333
|
26,667
|
0.60
|
5/8/2015
|
|||||||||||||||||||||||||
|
50,000
|
50,000
|
0.33
|
4/9/2011
|
|||||||||||||||||||||||||
|
173,133
|
79,467
|
|||||||||||||||||||||||||||
*The
Company does not grant any stock-based awards
The
following table sets forth with respect to the named director, compensation
information inclusive of equity awards and payments made in the fiscal year
ended March 31, 2008. All option awards were granted from our Year 2001 Stock
Option Plan.
DIRECTOR
COMPENSATION
|
Name
|
Fees Earned or
Paid in Cash
|
Stock Awards
|
Option
|
Non-Equity
Incentive Plan Compensation ($)
|
Change in
Pension Value and Nonqualified Deferred Compensation
Earnings
|
All Other
Compensation
|
Total
|
|||||||||||||||
|
Bernie
Appel
|
$
|
8,900
|
$
|
2,500
|
$
|
2,400
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
13,800
|
||||||||
|
Jay
Bauer (1)
|
$
|
8,000
|
$
|
1,959
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
9,959
|
||||||||
|
Peter
Hon
|
$
|
-
|
$
|
2,500
|
$
|
2,400
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
4,900
|
||||||||
|
Harvey
Judkowitz
|
$
|
9,100
|
$
|
2,500
|
$
|
2,400
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
14,000
|
||||||||
|
Carol
Lau
|
$
|
1,400
|
$
|
2,500
|
$
|
2,400
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
6,300
|
||||||||
|
Yat
Tung Lau
|
$
|
500
|
$
|
2,500
|
$
|
2,400
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
5,400
|
||||||||
|
Stewart
Merkin
|
$
|
9,100
|
$
|
2,500
|
$
|
2,400
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
14,000
|
||||||||
|
(1)
|
Jay
Bauer resigned from our Board effective February 4,
2008.
|
Refer
to
Note 1 “Stock Based Compensation” in the Notes to the Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10K for the relevant
assumptions used to determine the valuation of our option awards.
During
fiscal 2008, we have utilized the following compensation policy for our
directors:
|
·
|
An
initial grant of 20,000 Singing Machine stock options with an exercise
price determined as the closing price on the day of joining the board.
The
options will vest in one year and expire in ten years while they
are board
members or 90 days once they are no longer board
members.
|
|
·
|
An
annual cash payment of $7,500 will be made for each completed full
year of
service or prorated for a partial year. The payment will be made
as of
March 31.
|
30
|
·
|
An
annual stock grant of stock equivalent in value to $2,500 for each
completed full year of service or prorated for a partial year. The
stock
price at grant will be determined at the closing price on the day
of the
Annual Shareholder Meeting. The actual grant will be made on or before
March 31.
|
|
·
|
An
annual grant of 20,000 Singing Machine stock options with an exercise
price determined as the closing price on the day of the Annual Shareholder
Meeting. If the Annual Meeting is held less than 6 months after the
board
member first joined the board he or she will not receive another
option
grant.
|
|
·
|
Independent
board members will receive a $500 fee for each board meeting and
annual
meeting they attend. Committee meetings and telephone board meetings
will
be compensated with a $200 fee.
|
|
·
|
All
expenses will be reimbursed for attending board, committee and annual
meetings or when their presence at a location away from home is
requested.
|
EMPLOYMENT
AGREEMENTS
As
of
June 30, 2008 the Company has no employment contracts with any of its employees.
The Company had an employment contract with Danny Zheng, former Chief Financial
Officer, which terminated as of May 22, 2008. The employment agreement was
entered into on July 20, 2006. Based on the agreement, Mr. Zheng’s base salary
was $160,000 per year. Mr. Zheng will serve as a consultant to the Company
for
three months from the date of his resignation ending August 31, 2008 during
which time he will be paid his normal base salary and benefits.
Mr.
Zheng
received a cash bonus of $5,000 in fiscal 2008 and $12,000 in fiscal year
2006.
We
awarded Mr. Zheng options to purchase 12,000 shares of our common stock, which
vest in 5 years, at an exercise price of $1.05 per share in April 2004. We
awarded 70,000 stock options, which vest in 3 years, to Mr. Zheng at exercise
price of $0.60 on May 9, 2005. On January 20, 2006, the Company granted 30,000
stock options, which vest in 1 year, at an exercise price of $.34 per share.
On
April 10, 2006, Mr. Zheng was given stock options, which vest in 1 year, to
purchase 100,000 shares of our common stock at an exercise price of $.33 per
share. All of these options were granted under our Year 2001 Stock Option Plan
and were granted at a price that was equal to closing price of our common stock
on the date of grant.
In
addition, the Company previously had an employee agreement with Alicia Haskamp,
former Senior Vice President of Sales and Product Development prior to her
resignation on February 5, 2008. Based upon that agreement, her base salary
was
$160,000 per year and included a $500 monthly car allowance and a bonus which
is
based on hardware net sales revenue. Ms. Haskamp served as consultant to the
company until March 31, 2008 through which she was paid her full base salary,
benefits, and commissions.
Anton
H.
Handal who became our Chief Executive Officer effective June 21, 2007 and has
no
employment agreements with the Company as of the date of this
report.
SEPARATION
AND CONSULTING AGREEMENTS
As
of
June 30, 2008 the Company currently only has one consulting agreement. Pursuant
to his resignation, Danny Zheng has agreed to consult for the Company until
August 31, 2008, during which time he will be paid his normal compensation
package and benefits. The Company also had a consulting agreement with Alicia
Haskamp, which terminated on March 31, 2008. Ms. Haskamp was paid her full
salary, benefits, and commission.
EQUITY
COMPENSATION PLANS AND 401(K) PLAN
We
have
two stock option plans: our 1994 Amended and Restated Stock Option Plan ("1994
Plan") and our Year 2001 Stock Option Plan ("Year 2001 Plan"). Both the 1994
Plan and the Year 2001 Plan provide for the granting of incentive stock options
and non-qualified stock options to our employees, officers, directors and
consultants As of March 31, 2007, we had 13,050 options issued and outstanding
under our 1994 Plan and 1,369,840 options are issued and outstanding under
our
Year 2001 Plan.
31
The
following table gives information about equity awards under our 1994 Plan and
the Year 2001 Plan.
|
|
WEIGHTED-AVERAGE
|
NUMBER OF SECURITIES
|
||||||||
|
NUMBER OF SECURITIES
|
EXERCISE PRICE OF
|
REMAINING AVAILABLE FOR EQUITY
|
||||||||
|
TO
BE ISSUED UPON
|
OUTSTANDING
|
COMPENSATION PLANS
|
||||||||
|
EXERCISE OF OUTSTANDINGS
|
OPTIONS, WARRANTS
|
(EXCLUDING SECURITIES IN
|
||||||||
|
PLAN CATEGORY
|
OPTION, WARRANTS AND RIGHTS
|
AND RIGHTS
|
COLUMN (A))
|
|||||||
|
Equity
Compensation Plans approved by Security Holders
|
1,382,890
|
$
|
1.86
|
625,160
|
||||||
|
Equity
Compensation Plans Not approved by Security Holders
|
0
|
$
|
0
|
0
|
||||||
YEAR
1994 PLAN
Our
1994
Plan was originally adopted by our Board of Directors in May 1994 and was
approved by our shareholders on June 29, 1994. Our shareholders approved
amendments to our 1994 Plan in March 1999 and September 2000. The 1994 Plan
reserved for issuance up to 1,950,000 million share of our common stock pursuant
to the exercise of options granted under the Plan. As of March 31, 2003, we
had
granted all the options that are available for grant under our 1994 Plan. As
of
March 31, 2007, we have 13,050 options issued and outstanding under the 1994
Plan and all of these options are fully vested as of March 31, 2007.
YEAR
2001 PLAN
On
June
1, 2001, our Board of Directors approved the Year 2001 Plan and it was approved
by our shareholders at our special meeting held September 6, 2001. The Year
2001
Plan was developed to provide a means whereby directors and selected employees,
officers, consultants, and advisors of the Company may be granted incentive
or
non-qualified stock options to purchase common stock of the Company. The Year
2001 Plan authorizes an aggregate of 1,950,000 shares of the Company `s common
stock with a maximum of 450,000 shares to any one individual in any one fiscal
year. The shares of common stock available under the Year 2001 Plan are subject
to adjustment for any stock split, declaration of a stock dividend or similar
event. At March 31, 2007, we have granted 1,369,840 options under the Year
2001
Plan, 569,257 of which are fully vested.
The
Year
2001 Plan is administered by our Stock Option Committee ("Committee"), which
consists of two or more directors chosen by our Board. The Committee has the
full power in its discretion to (i) grant options under the Year 2001 Plan,
(ii)
determine the terms of the options (e.g. - vesting, exercise price), (iii)
to
interpret the provisions of the Year 2001 Plan and (iv) to take such action
as
it deems necessary or advisable for the administration of the Year 2001 Plan.
Options
granted to eligible individuals under the Year 2001 Plan may be either incentive
stock options ("ISO's"), which satisfy the requirements of Code Section 422,
or
nonstatutory options ("NSO's"), which are not intended to satisfy such
requirements. Options granted to outside directors, consultants and advisors
may
only be NSO's. The option exercise price will not be less than 100% of the
fair
market value of the Company's common stock on the date of grant. ISO's must
have
an exercise price greater to or equal to the fair market value of the shares
underlying the option on the date of grant (or, if granted to a holder of 10%
or
more of our common stock, an exercise price of at least 110% of the under
underlying shares fair market value on the date of grant). The maximum exercise
period of ISO's is 10 years from the date of grant (or five years in the case
of
a holder with 10% or more of our common stock). The aggregate fair market value
(determined at the date the option is granted) of shares with respect to which
an ISO are exercisable for the first time by the holder of the option during
any
calendar year may not exceed $100,000. If that amount exceeds $100,000, our
Board of the Committee may designate those shares that will be treated as NSO's.
Options
granted under the Year 2001 Plan are not transferable except by will or
applicable laws of descent and distribution. Except as expressly determined
by
the Committee, no option shall be exercisable after thirty (30) days following
an individual's termination of employment with the Company or a subsidiary,
unless such termination of employment occurs by reason of such individual's
disability, retirement or death. The Committee may in its sole discretion,
provide in a grant instrument that upon a change of control (as defined in
the
Year 2001 Plan) that all outstanding option issued to the grantee shall
automatically, accelerate and become full exercisable. Additionally, the
obligations of the Company under the Year 2001 Plan are binding on (1) any
successor corporation or organization resulting from the merger, consolidation
or other reorganization of the Company or (2) any successor corporation or
organization succeeding to all or substantially all of the assets and business
of the Company. In the event of any of the foregoing, the Committee may, at
its
discretion, prior to the consummation of the transaction, offer to purchase,
cancel, exchange, adjust or modify any outstanding options, as such time and
in
such manner as the Committee deems appropriate.
401(K)
PLAN
Effective
January 1, 2001, we adopted a voluntary 401(k) plan. All employees with at
least
one year of service are eligible to participate in our 401(k) plan. We make
a
matching contribution of 100% of salary deferral contributions up to 3% of
pay,
plus 50% of salary deferral contributions from 3% to 5% of pay for each payroll
period. The amounts charged to earnings for contributions to this plan and
administrative costs during the years ended March 31, 2008, 2007, 2006 and
2005
totaled approximately $21,674, $39,460, $39,572 and $30,025, respectively.
32
The
following table sets forth as of June 15, 2008, certain information concerning
beneficial ownership of our common stock by:
|
·
|
all
directors of the Singing Machine,
|
|
·
|
all
named executive officers of the Singing Machine;
and
|
|
·
|
persons
known to own more than 5% of our common stock.
|
We
had
31,841,728 shares of our common stock issued and outstanding. In addition,
the
following amounts are included as they will be exercisable within 60 days of
June 15, 2008: 33,333 shares of common stock, and 1,029,296 stock options issued
under the 1994 and 2001 Stock Option Plans.
As
used
herein, the term beneficial ownership with respect to a security is defined
by
Rule 13d-3 under the Securities Exchange Act of 1934 as consisting of sole
or
shared voting power (including the power to vote or direct the vote) and/or
sole
or shared investment power (including the power to dispose or direct the
disposition of) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, including a right to acquire such
power(s) during the next 60 days. Unless otherwise noted, beneficial ownership
consists of sole ownership, voting and investment rights.
33
As
of June 15, 2008
| Name and position of owner |
Title
of Class
|
Shares of
Common
Stock (1)
|
Percent of
Common
Stock
|
|||||||
|
Anton
Handal
|
N/A
|
0
|
*
|
|||||||
|
Chief
Executive Officer
|
||||||||||
|
Danny
Zheng
|
Common Stock
|
186,267
|
*
|
|||||||
|
Former
Chief Financial Officer
|
||||||||||
|
Alicia
Haskamp
|
Common Stock
|
|||||||||
|
Former
Sr. Vice President of Sales and Product Development
|
52,000
|
*
|
||||||||
|
Joseph
Bauer (2)
|
Common Stock
|
1,284,591
|
3.91
|
%
|
||||||
|
Director
|
||||||||||
|
Bernard
Appel
|
Common Stock
|
74,022
|
*
|
|||||||
|
Director
|
||||||||||
|
Harvey
Judkowitz
|
Common Stock
|
74,022
|
*
|
|||||||
|
Director
|
||||||||||
|
Carol
Lau
|
Common Stock
|
574
|
*
|
|||||||
|
Chairwoman
|
||||||||||
|
Yat
Tung Lau
|
Common Stock
|
574
|
*
|
|||||||
|
Director
|
||||||||||
|
Peter
Hon
|
Common Stock
|
574
|
*
|
|||||||
|
Director
|
||||||||||
|
Stewart
Merkin
|
Common Stock
|
51,675
|
*
|
|||||||
|
Director
|
||||||||||
|
Koncept
International Ltd (3)
|
Common Stock
|
17,875,536
|
54.38
|
%
|
||||||
|
Majority
Shareholder
|
||||||||||
|
Gentle
Boss Investments Ltd
|
Common Stock
|
2,100,000
|
6.39
|
%
|
||||||
|
Shareholder
|
||||||||||
|
All
Directors and Executive Officers as a Group
|
Common Stock
|
1,724,299
|
5.25
|
%
|
||||||
|
Total
Shares of Common Stock @ 6/15/08
|
31,841,728
|
|||||||||
|
Stock
Options Exercisable within 60 days of 6/15/08
|
1,029,296
|
|||||||||
|
Total
|
32,871,024
|
|||||||||
*Less
than 1%.
(1)
Includes as to the person indicated the following outstanding stock options
to
purchase shares of the Company’s Common Stock issued under the 1994 and 2001
Stock Option Plans, which will be vested and exercisable within 60 days of
July
15, 2008: 186,267 options held by Danny Zheng; 60,000 options held by Bernie
Appel; 60,000 options held by Harvey Judkowitz and 40,000 held by Stewart
Merkin.
34
(2)
Includes 138,423 shares held individually by Mr. Bauer, 299,016 held by Mr.
Bauer’s wife, 178,374 held jointly by Mr. Bauer and his wife, 369,400 shares
held by Mr. Bauer’s pension account, 245,500 shares held in Mr. Bauer’s Family
LTD Partnership, 2,688 shares of common stock for fiscal year 2007 service
and
102,740 issuable upon the exercise of stock options that can be exercisable
within 60 days of July 2, 2007.
(3)
Includes 2,500,000 stock warrants exercised on April 10, 2007.
Review,
Approval or Ratification of Transactions with Related
Persons
We
believe that the terms of all of the above transactions are commercially
reasonable and no less favorable to us than we could have obtained from an
unaffiliated third party on an arm’s length basis. Our policy requires that all
related parties recuse themselves from negotiating and voting on behalf of
our
company in connection with related party transactions.
Parents
Not
applicable
Promoter
and Certain Control Persons
CORPORATE
GOVERNANCE
Board
Determination of Independence
The
Board
has determined that Messrs. Judkowitz, Merkin and Appel are "independent
directors" within the meaning of the listing standards of the American Stock
Exchange. 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 our independent
auditors, reviews our internal accounting controls, and approves services to
be
performed by our independent auditors.
The
following is a summary of the fees billed to the Singing Machine by Berkovits
& Co, LLP and HLB Hodgson Impey Chengfor professional services rendered for
the fiscal years ended March 31, 2008 and 2007:
|
Fee
Category
|
Fiscal 2008
|
Fiscal 2007
|
|||||
|
Audit
Fees
|
$
|
164,194
|
$
|
227,675
|
|||
|
Tax
Fees
|
15,000
|
15,000
|
|||||
|
All
Other Fees
|
1,600
|
1,150
|
|||||
|
Total
Fees
|
$
|
180,794
|
$
|
243,825
|
|||
Audit
Fees - Consists of fees billed for professional services rendered for the audit
of the Singing Machine's consolidated financial statements and review of the
interim consolidated financial statements included in quarterly reports and
services that were provided by Berkovits & Co, LLP in connection with
statutory and regulatory filings or engagements
Tax
Fees
- Consists of fees billed for professional services for tax compliance, tax
advice and tax planning. These services include assistance regarding federal,
state and international tax compliance, tax audit defense, customs and duties,
mergers and acquisitions, and international tax planning.
All
Other
Fees - Consists of fees for products and services other than the services
reported above.
Out
of
the total fiscal 2008 and fiscal 2007 audit and other fees, $164,194 and
$164,774 were billed by Berkovits and Co., LLP, respectively.
POLICY
ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES
OF
INDEPENDENT AUDITORS
The
Audit
Committee's policy is to pre-approve all audit and permissible non-audit
services provided by the independent auditors. These services may include audit
services, audit-related services, tax services and other services. Pre-approval
is generally provided for up to one year and any pre-approval is detailed as
to
the particular service or category of services and is generally subject to
a
specific budget. The independent auditors and management are required to
periodically report to the Audit Committee regarding the extent of services
provided by the independent auditors in accordance with this pre-approval,
and
the fees for the services performed to date. The Audit Committee may also
pre-approve particular services on a case-by-case basis.
35
PART
IV
(a)
1.
The following financial statements for The Singing Machine Company, Inc. and
Subsidiaries are filed as a part of this report:
Consolidated
Balance Sheets— March 31, 2008 and 2007
Consolidated
Statements of Operations—Years ended March 31, 2008, 2007 and 2005.
Consolidated
Statements of Shareholders' (deficit) Equity—Years ended March 31, 2008, 2007
and 2005.
Consolidated
Statements of Cash Flows—Years ended March 31, 2008, 2007 and 2005.
2.
Notes
to Consolidated Financial Statements
Schedules
are omitted because of the absence of conditions under which they are required
or because the information is included in the financial statements or notes
thereto.
(b)
Exhibits.
|
Exhibit No.
|
Description
|
3.1
Certificate of Incorporation of the Singing Machine filed with the Delaware
Secretary of State on February 15, 1994 and amendments through April 15, 1999
(incorporated by reference to Exhibit 3.1 in the Singing Machine's registration
statement on Form SB-2 filed with the SEC on March 7, 2000).
3.2
Certificate of Amendment of the Singing Machine filed with the Delaware
Secretary of State on September 29, 2000 (incorporated by reference to Exhibit
3.1 in the Singing Machine's Quarterly Report on Form 10-QSB for the period
ended September 30, 1999 filed with the SEC on November 14, 2000).
3.3
Certificates of Correction filed with the Delaware Secretary of State on March
29 and 30, 2001 correcting the Amendment to our Certificate of Incorporation
dated April 20, 1998 (incorporated by reference to Exhibit 3.11 in the Singing
Machine's registration statement on Form SB-2 filed with the SEC on April 11,
2000).
3.4
Amended By-Laws of the Singing Machine Singing Machine (incorporated by
reference to Exhibit 3.14 in the Singing Machine's Annual Report on Form 10-KSB
for the year ended March 31, 2001 filed with the SEC on June 29, 2001).
4.1
Form
of Certificate Evidencing Shares of Common Stock (incorporated by reference
to
Exhibit 3.3. of the Singing Machine's registration statement on Form SB-2 filed
with the SEC on March 7, 2000). File No. 333-57722)
10.1
Factoring Agreement dated February 9, 2004 between Milberg Factors, Inc. and
the
Singing Machine. (incorporated by reference to Exhibit 10.1 in the Singing
Machine's Quarterly Report on Form 10-Q filed with the SEC on February 17,
2004,
File No. 000-24968).
10.2
Security Agreement for Goods and Chattels dated February 9, 2004 between Milberg
Factors, Inc. and the Singing Machine. incorporated by reference to Exhibit
10.2
in the Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on
February 17, 2004, File No. 000-24968).
10.3
Security Agreement for Inventory dated February 9, 2004 between Milberg Factors,
Inc. and the Singing Machine (incorporated by reference to Exhibit 10.3 in
the
Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on February
17, 2004, File No. 000-24968).
10.4
Second Amendment to the Transaction Documents dated February 9, 2004 between
Omicron Master Trust, SF Capital Partners, Ltd, Bristol Investment Fund, Ltd.,
Ascend Offshore Fund, ltd., Ascend Partners, LP, Ascend Partners Sapient L.P.
and the Singing Machine (incorporated by reference to Exhibit 10.4 in the
Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on February
17, 2004, File No. 000-24968).
10.5
Form
of Subordination Agreement executed by institutional Investors. (Incorporated
by
reference to Exhibit 10.18 of the Singing Machine's Amendment No. 1 to its
registration statement on Form S-1 filed with SEC on April, 2004)
10.6
Employment Agreement dated February 27, 2004 between the Singing Machine and
Eddie Steele. (incorporated by reference to the Singing Machine's Annual Report
on Form 10-K for the fiscal year ended March 31, 2005)
36
10.7
Employment Agreement dated May 2, 2003 between the Singing Machine and Yi Ping
Chan. (incorporated by reference to Exhibit 10.20 of the Singing Machine's
Annual Report on Form 10-KSB/A filed with the SEC on July 23, 2003, File No.
000-24968). +
10.8
Separation and Release Agreement effective as of May 2, 2003 between the Singing
Machine and John Klecha (incorporated by reference to Exhibit 10.1 of the
Singing Machine's Annual Report on Form 8-K filed with the SEC on July 17,
2003,
File No. 000-24968).
10.9
Separation and Release Agreement effective as of April 9, 2004 between the
Singing Machine and April Green. (incorporated by reference to the Singing
Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2005)
10.10
Separation and Release Agreement dated December 16,2003 between the Singing
Machine and Jack Dromgold. (incorporated by reference to the Singing Machine's
Annual Report on Form 10-K for the fiscal year ended March 31, 2005)
10.11
Separation and Release Agreement effective as of April 12, 2004 between the
Singing Machine and John Dahl. (incorporated by reference to the Singing
Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2005)
10.12
Industrial Lease dated March 1, 2002, by and between AMP Properties, L.P. and
the Singing Machine for warehouse space in Compton, California (incorporated
by
reference to Exhibit 10.20 of the Singing Machine's Annual Report on Form
10-KSB/A filed with the SEC on July 23, 2002, File No. 000-24968).
10.13
Amended and Restated 1994 Management Stock Option Plan (incorporated by
reference to Exhibit 10.6 to the Singing Machine's registration statement on
Form SB-2 filed with the SEC on March 28, 2001, File No. 333-59684).
10.14
Year 2001 Stock Option Plan (incorporated by reference to Exhibit 10.1 of the
Singing Machine's registration statement on Form S-8 filed with the SEC on
September 13, 2002, File No. 333-99543).
10.15
Securities Purchase Agreement dated as of August 20, 2003 by and among the
Singing Machine and Omicron Master Trust, SF Capital Partners, Ltd., Bristol
Investment Fund, Ltd., Ascend Offshore Fund, Ltd., Ascend Partners, LP and
Ascend Partners Sapient, LP (collectively, the "Investors") (filed as Exhibit
10.1 to the Singing Machine's Registration Statement filed with the SEC on
October 9, 2003, File No. 333-109574).
10.16
Amendment dated September 5, 2003 to Securities Purchase Agreement between
the
Singing Machine and the Investors (filed as Exhibit 10.2 to the Singing
Machine's Registration Statement filed with the SEC on October 9, 2003, File
No.
333-109574).
10.17
Form of Debenture Agreement issued by the Singing Machine to each of the
Investors (filed as Exhibit 10.3 to the Singing Machine's Registration Statement
filed with the SEC on October 9, 2003, File No. 333-109574).
10.18
Form of Warrant Agreement issued by the Singing Machine to the Investors (filed
as Exhibit 10.4 to the Singing Machine's Registration Statement filed with
the
SEC on October 9, 2003, File No. 333-109574).
10.19
Warrant Agreement between the Singing Machine and Roth Capital Partners, LLC
(filed as Exhibit 10.5 to the Singing Machine's Registration Statement filed
with the SEC on October 9, 2003, File No. 333-109574).
10.20
Registration Rights Agreement between the Singing Machine and each of the
Investors and Roth Capital Partners, LLC (filed as Exhibit 10.5 to the Singing
Machine's Registration Statement filed with the SEC on October 9, 2003, File
No.
333-109574).
10.21
Domestic Merchandise License Agreement dated November 1, 2000 between MTV
Networks, a division of Viacom International, Inc. and the Singing Machine
(incorporated by reference to Exhibit 10.3 of the Singing Machine's Quarterly
Report on Form 10-Q for the quarter ended December 31, 2002, filed with the
SEC
on February 14, 2003, File No. 000-24968).
10.22
Amendment dated January 1, 2002 to Domestic Merchandise License Agreement
between MTV Networks, a division of Viacom International, Inc. and the Singing
Machine (incorporated by reference to Exhibit 10.4 of the Singing Machine's
Quarterly Report on Form 10-Q for the quarter ended December 31, 2002, filed
with the SEC on February 14, 2003, File No. 0000-24968).
10.23
Second Amendment as of November 13, 2002 to Domestic Merchandise License
Agreement between MTV Networks, a division of Viacom International, Inc. and
the
Singing Machine (incorporated by reference to Exhibit 10.5 of the Singing
Machine's Quarterly Report on Form 10-Q for the quarter ended December 31,
2002,
filed with the SEC on February 2003, File No. 000-24968).
10.24
Third Amendment as of February 26, 2003 to Domestic Merchandise License
Agreement between MTV Networks, a division of Viacom International, Inc. and
the
Singing Machine (incorporated by reference to Exhibit 10.10 of the Singing
Machine's Annual Report on Form 10-K for the fiscal year ended March 31, 2003,
filed with the SEC on July 17, 2003, File No. 000-24968).
10.25
Amendment to Domestic Licensing Agreement dated November 15, 2002 between the
Singing Machine and MTV Networks, a division of Viacom International, Inc.
(incorporated by reference to Exhibit 10.5 in the Singing Machine's Quarterly
Report on Form 10-Q filed with the SEC on February 17, 2004, File No.
000-24968).
37
10.26
Fifth Amendment to Domestic Licensing Agreement dated December 23, 2003 between
the Singing Machine and MTV Networks, a division of Viacom International, Inc.
(incorporated by reference to Exhibit 10.6 in the Singing Machine's Quarterly
Report on Form 10-Q filed with the SEC on February 17, 2004, File No.
000-24968).
10.27
Sales Agreement effective as of December 9, 2003 between the Singing Machine
and
CPP Belwin, Inc. and its affiliates (incorporated by reference to Exhibit 10.7
in the Singing Machine's Quarterly Report on Form 10-Q filed with the SEC on
February 17, 2004, File No. 000-24968).
10.28
Distribution Agreement dated April 1, 2003 between the Singing Machine and
Arbiter Group, PLC. (incorporated by reference to the Singing Machine's Annual
Report on Form 10-K for the fiscal year ended March 31, 2005)
10.29
Loan Agreements dated August 13, 2003 in the aggregate amount of $1 million
between the Company and each of Josef Bauer, Howard Moore & Helen Moore
Living Trust, Maureen G. LaRoche and Yi Ping Chan.(incorporated by reference
to
the Singing Machine's Annual Report on Form 10-K for the fiscal year ended
March
31, 2005)
10.30
Letter dated March 4, 2003 from Jay Bauer to the Singing Machine regarding
a
$400,000 loan. (incorporated by reference to the Singing Machine's Annual Report
on Form 10-K for the fiscal year ended March 31, 2005)
10.31
Securities
Purchase Agreement dated February 21, 2007, by and between The
Singing Machine Company, Inc.
and
koncepts International Limited. (incorporated by reference to the Singing
Machine’s Current Report on Form 8-K filed with the SEC on February 27,
2007)
10.32
Registration
Rights Agreement dated February 21, 2007, by and between The
Singing Machine Company, Inc.
and
koncepts International Limited. (incorporated
by reference to the Singing Machine’s Current Report on Form 8-K filed with the
SEC on February 27, 2007)
10.33
One
Year
Stock Purchase Warrant of The
Singing Machine Company, Inc.
dated
February 21, 2007. (incorporated by reference to the Singing Machine’s Current
Report on Form 8-K filed with the SEC on February 27, 2007)
10.34
Three
Year Stock Purchase Warrant of The
Singing Machine Company, Inc.
dated
February 21, 2007. (incorporated by reference to the Singing Machine’s Current
Report on Form 8-K filed with the SEC on February 27, 2007)
10.35
Four
Year
Stock Purchase Warrant of The
Singing Machine Company, Inc.
dated
February 21, 2007. (incorporated by reference to the Singing Machine’s Current
Report on Form 8-K filed with the SEC on February 27, 2007)
10.36
Bridge
Loan Agreement dated March 8, 2007, by and between The
Singing Machine Company, Inc.
and
Ever Solid Limited. (incorporated by reference to the Singing Machine’s Current
Report on Form 8-K filed with the SEC on March 14, 2007)
10.37
Collateral
Security Agreement dated March 8, 2007, by and between The
Singing Machine Company, Inc.
and
Ever Solid Limited. (incorporated by reference to the Singing Machine’s Current
Report on Form 8-K filed with the SEC on March 14, 2007)
10.38
Bridge
Note of The
Singing Machine Company, Inc.
dated
March 8, 2007. (incorporated by reference to the Singing Machine’s Current
Report on Form 8-K filed with the SEC on March 14, 2007)
10.39
Settlement Agreement and Release dated as of March 5, 2007 by and among
The
Singing Machine Company, Inc.
and the
holders of the Company’s $4,000,000 principal amount 8% Convertible Debentures.
(incorporated by reference to the Singing Machine’s Current Report on Form 8-K
filed with the SEC on March 14, 2007)
10.40
Settlement Agreement dated April 27, 2007, by and between The Singing Machine
Company, Inc. and Abacus Advisors Group LLC. (incorporated by reference to
the
Singing Machine’s Current Report on Form 8-K filed with the SEC on May 3, 2007)
31.1
Certification of Anton Handal, Chief Executive Officer, pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.*
31.2
Certification of Danny Zheng, Chief Financial Officer, pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.*
32.1
Certifying Statement of the Chief Executive Officer pursuant to Section 906
of
the Sarbanes-Oxley Act.*
32.2
Certifying Statement of the Chief Financial Officer pursuant to Section 906
of
the Sarbanes-Oxley Act.*
*
Filed
herewith
+
Compensatory plan or arrangement.
38
SIGNATURES
In
accordance with the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, The Singing Machine Company, Inc. has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE
SINGING MACHINE COMPANY, INC.
|
|
||
|
Date:
July 9, 2008
|
By:
|
/s/ Anton
H. Handal
|
|
|
Anton
H. Handal
|
|
|
|
Chief
Executive Officer
|
|
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 Singing
Machine Company, Inc. and in the capacities and on the dates indicated.
39
THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
FINANCIAL
STATEMENTS
INDEX
TO FINANCIAL STATEMENTS
|
Reports
of Independent Registered Public Accounting Firm
|
F-2
|
|
Consolidated
Balance Sheets
|
F-3
|
|
Consolidated
Statements of Operations
|
F-4
|
|
Consolidated
Statements of Cash Flows
|
F-5
|
|
Consolidated
Statements of Stockholders' Equity (Deficit)
|
F-6
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders of
The
Singing Machine Company, Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of The Singing Machine
Company, Inc. and Subsidiaries (the “Company”) as of March 31, 2008 and 2007,
and the related consolidated statements of operations, shareholders’ equity, and
cash flows for each of the years in the three year period ended March 31, 2008.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of March
31,
2008 and 2007, and the results of its operations and its cash flows for each
of
the years in the three year period ended March 31, 2008, in conformity with
accounting principles generally accepted in the United States of
America.
We
have
also audited Schedule II of the Company for the years ended March 31, 2008,
2007, 2006. In our opinion, this schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly,
in
all material respects, the information therein.
/s/
Berkovits & Company, LLP.
Fort
Lauderdale, Florida
July
2,
2008
F-2
THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
March 31, 2008
|
March 31, 2007
|
||||||
|
Assets
|
|||||||
|
Current
Assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
447,816
|
$
|
1,188,900
|
|||
|
Accounts
receivable, net of allowances of $120,899 and
|
|||||||
|
$61,825,
respectively
|
1,961,721
|
1,054,371
|
|||||
|
Due
from factor
|
131,451
|
109,991
|
|||||
|
Inventories,net
|
3,514,984
|
2,280,083
|
|||||
|
Prepaid
expenses and other current assets
|
412,552
|
521,891
|
|||||
|
Total
Current Assets
|
6,468,524
|
5,155,236
|
|||||
|
Property
and Equipment, net
|
598,280
|
446,510
|
|||||
|
Other
Non-Current Assets
|
169,362
|
56,054
|
|||||
|
Total
Assets
|
$
|
7,236,166
|
$
|
5,657,800
|
|||
|
Liabilities
and Shareholders' Equity
|
|||||||
|
Current
Liabilities
|
|||||||
|
Accounts
payable
|
$
|
1,145,150
|
$
|
903,243
|
|||
|
Due
to related parties, net
|
616,732
|
199,316
|
|||||
|
Accrued
expenses
|
409,415
|
624,994
|
|||||
|
Customer
credits on account
|
778,993
|
594,169
|
|||||
|
Deferred
gross profit on estimated returns
|
217,812
|
213,718
|
|||||
|
Subordinated
debt - related parties
|
-
|
225,000
|
|||||
|
Total
Current Liabilities
|
3,168,102
|
2,760,440
|
|||||
|
Shareholders'
Equity
|
|||||||
|
Preferred
stock, $1.00 par value; 1,000,000 shares authorized, no
|
|||||||
|
shares
issued and outstanding
|
-
|
-
|
|||||
|
Common
stock, Class A, $.01 par value; 100,000 shares
|
|||||||
|
authorized;
no shares issued and outstanding
|
-
|
-
|
|||||
|
Common
stock, $0.01 par value; 100,000,000 shares authorized;
|
|||||||
|
31,758,400
and 27,286,199 shares issued and outstanding
|
317,584
|
272,862
|
|||||
|
Additional
paid-in capital
|
18,430,612
|
17,306,342
|
|||||
|
Accumulated
deficit
|
(14,680,132
|
)
|
(14,681,844
|
)
|
|||
|
Total
Shareholders' Equity
|
4,068,064
|
2,897,360
|
|||||
|
Total
Liabilities and Shareholders' Equity
|
$
|
7,236,166
|
$
|
5,657,800
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For the Years Ended
|
||||||||||
|
03/31/08
|
03/31/07
|
03/31/06
|
||||||||
|
|
|
|
||||||||
|
Net
Sales
|
$
|
34,067,871
|
$
|
26,732,144
|
$
|
32,305,560
|
||||
|
Cost
of Goods Sold
|
26,389,070
|
20,616,541
|
25,223,056
|
|||||||
|
Gross
Profit
|
7,678,801
|
6,115,603
|
7,082,504
|
|||||||
|
Operating
Expenses
|
||||||||||
|
Selling
expenses
|
2,931,416
|
2,308,959
|
2,169,168
|
|||||||
|
General
and administrative expenses
|
4,279,728
|
4,952,254
|
6,140,542
|
|||||||
|
Depreciation
and amortization
|
311,273
|
556,051
|
932,216
|
|||||||
|
Total
Operating Expenses
|
7,522,417
|
7,817,264
|
9,241,926
|
|||||||
|
Income
(Loss) from Operations
|
156,384
|
(1,701,661
|
)
|
(2,159,422
|
)
|
|||||
|
Other
Income (Expenses)
|
||||||||||
|
Other
income
|
-
|
-
|
103,396
|
|||||||
|
(Loss)
Gain on sale of subsidiary and other assets
|
(27,654
|
)
|
29,028
|
-
|
||||||
|
Net
gain on retirement of convertible debentures
|
|
|
||||||||
|
including
unpaid accrued interest of $259,726
|
-
|
-
|
2,253,725
|
|||||||
|
Interest
expense, net of interest income
|
(127,018
|
)
|
(42,355
|
)
|
(487,307
|
)
|
||||
|
Interest
expense - Amortization of discount
|
||||||||||
|
on
convertible debentures
|
-
|
-
|
(1,615,642
|
)
|
||||||
|
Net
Other Income (Expenses)
|
(154,672
|
)
|
(13,327
|
)
|
254,172
|
|||||
|
Income
(loss) before reversal of provision for income
taxes
|
1,712
|
(1,714,988
|
)
|
(1,905,250
|
)
|
|||||
|
Reversal
of provision for income taxes
|
-
|
2,453,576
|
-
|
|||||||
|
Net
Income (Loss)
|
$
|
1,712
|
$
|
738,588
|
$
|
(1,905,250
|
)
|
|||
|
Income
(Loss) per Common Share
|
||||||||||
|
Basic
|
$
|
0.000
|
$
|
0.035
|
$
|
(0.190
|
)
|
|||
|
Diluted
|
$
|
0.000
|
$
|
0.030
|
$
|
(0.190
|
)
|
|||
|
Weighted
Average Common and Common
|
||||||||||
|
Equivalent
Shares:
|
||||||||||
|
Basic
|
29,925,952
|
21,145,003
|
10,029,085
|
|||||||
|
Diluted
|
30,910,424
|
24,753,864
|
10,029,085
|
|||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
For the Years Ended
|
||||||||||
|
|
March 31, 2008
|
March 31, 2007
|
March 31, 2006
|
|||||||
|
|
||||||||||
|
Cash
flows from operating activities
|
||||||||||
|
Net
Income (Loss)
|
$
|
1,712
|
$
|
738,588
|
$
|
(1,905,250
|
)
|
|||
|
Adjustments
to reconcile net income (loss) to net cash and cash equivalents used
in
operating activities:
|
||||||||||
|
Reversal
of provision for income taxes
|
-
|
(2,453,576
|
)
|
-
|
||||||
|
Gain
from debt restructure
|
-
|
-
|
(2,253,725
|
)
|
||||||
|
Gain
on sale of subsidiary and other assets
|
-
|
(29,028
|
)
|
-
|
||||||
|
Loss
on disposal of property and equipment
|
27,654
|
-
|
-
|
|||||||
|
Depreciation
and amortization
|
311,273
|
556,051
|
688,951
|
|||||||
|
Change
in inventory reserve
|
131,154
|
(902,071
|
)
|
(681,767
|
)
|
|||||
|
Change
in allowance for bad debts
|
17,284
|
(41,790
|
)
|
95,016
|
||||||
|
Amortization
of discount/deferred fees on convertible debentures
|
-
|
-
|
1,858,911
|
|||||||
|
Stock
compensation
|
38,112
|
194,870
|
22,473
|
|||||||
|
Deferred
gross profit on estimated sales returns
|
4,094
|
27,436
|
(209,949
|
)
|
||||||
|
Changes
in assets and liabilities:
|
||||||||||
|
(Increase)
Decrease in:
|
||||||||||
|
Accounts
receivable
|
(924,634
|
)
|
156,690
|
(113,445
|
)
|
|||||
|
Inventories
|
(1,366,055
|
)
|
310,046
|
2,088,646
|
||||||
|
Prepaid
expenses and other current assets
|
109,339
|
(293,489
|
)
|
278,902
|
||||||
|
Other
non-current assets
|
(113,308
|
)
|
42,633
|
12,711
|
||||||
|
Increase
(Decrease) in:
|
||||||||||
|
Accounts
payable
|
441,906
|
(160,565
|
)
|
97,239
|
||||||
|
Accrued
expenses
|
(215,579
|
)
|
(23,190
|
)
|
214,133
|
|||||
|
Customer
credits on account
|
184,824
|
(440,046
|
)
|
(625,110
|
)
|
|||||
|
Net
cash used in operating activities
|
(1,352,224
|
)
|
(2,317,441
|
)
|
(432,264
|
)
|
||||
|
Cash
flows from investing activities
|
||||||||||
|
Purchase
of property and equipment
|
(490,697
|
)
|
(488,946
|
)
|
(163,723
|
)
|
||||
|
Receipt
of restricted cash
|
-
|
268,405
|
602,390
|
|||||||
|
Proceeds
from sales of assets
|
-
|
29,028
|
-
|
|||||||
|
Net
cash (used in)/provided by investing activities
|
(490,697
|
)
|
(191,513
|
)
|
438,667
|
|||||
|
Cash
flows from financing activities
|
||||||||||
|
Proceeds
from (payments to) factoring, net
|
(21,460
|
)
|
24,290
|
(99,909
|
)
|
|||||
|
Payment
on related party loans
|
(225,000
|
)
|
-
|
-
|
||||||
|
Payment
on convertible debentures
|
-
|
-
|
(2,000,000
|
)
|
||||||
|
Proceeds
from issuance of stock
|
630,881
|
3,125,700
|
-
|
|||||||
|
Net
advanced from related parties
|
717,416
|
124,316
|
1,900,000
|
|||||||
|
Net
cash provided by/(used in) financing activities
|
1,101,837
|
3,274,306
|
(199,909
|
)
|
||||||
|
Change
in cash and cash equivalents
|
(741,084
|
)
|
765,352
|
(193,506
|
)
|
|||||
|
Cash
and cash equivalents at beginning of period
|
1,188,900
|
423,548
|
617,054
|
|||||||
|
Cash
and cash equivalents at end of period
|
$
|
447,816
|
$
|
1,188,900
|
$
|
423,548
|
||||
|
Supplemental
Disclosures of Cash Flow Information:
|
||||||||||
|
Cash
paid for Interest
|
$
|
78,898
|
$
|
57,769
|
$
|
272,852
|
||||
|
Supplemental
Disclosures of Non-Cash Financing Activities:
|
||||||||||
|
Payment
of trade payable with stock
|
$
|
500,000
|
$
|
500,000
|
-
|
|||||
|
Conversion
of loan payable to equity
|
$
|
-
|
$
|
2,000,000
|
$
|
200,000
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
THE
SINGING MACHINE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
|
Preferred Stock
|
Common Stock
|
Additional Paid
|
Accumulated
|
|||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
in Capital
|
Deficit
|
Total
|
||||||||||||||||
|
Balance
at March 31, 2005
|
-
|
$
|
-
|
9,769,593
|
$
|
97,696
|
$
|
11,432,463
|
$
|
(13,515,182
|
)
|
$
|
(1,985,023
|
)
|
||||||||
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
(1,905,250
|
)
|
(1,905,250
|
)
|
|||||||||||||
|
Conversion
of Insider Loan
|
-
|
-
|
290,689
|
2,907
|
206,260
|
209,167
|
||||||||||||||||
|
Warrants
related to debenture payment settlement
|
-
|
-
|
-
|
-
|
6,000
|
-
|
6,000
|
|||||||||||||||
|
Employee
compensation - stock option
|
-
|
-
|
-
|
-
|
13,308
|
-
|
13,308
|
|||||||||||||||
|
Balance
at March 31, 2006
|
-
|
-
|
10,060,282
|
100,603
|
11,658,031
|
(15,420,432
|
)
|
(3,661,798
|
)
|
|||||||||||||
|
Net
Income
|
-
|
-
|
-
|
-
|
-
|
738,588
|
738,588
|
|||||||||||||||
|
Employee
compensation-stock option
|
-
|
-
|
-
|
-
|
182,369
|
-
|
182,369
|
|||||||||||||||
|
Exercise
of employee stock options
|
-
|
-
|
285,000
|
2,850
|
122,350
|
-
|
125,200
|
|||||||||||||||
|
Director
Fees
|
-
|
-
|
39,065
|
391
|
12,110
|
-
|
12,501
|
|||||||||||||||
|
Issuances
of common stock
|
-
|
-
|
16,901,852
|
169,018
|
5,331,482
|
-
|
5,500,500
|
|||||||||||||||
|
Balance
at March 31, 2007
|
-
|
-
|
27,286,199
|
272,862
|
17,306,342
|
(14,681,844
|
)
|
2,897,360
|
||||||||||||||
|
Net
Income
|
-
|
-
|
-
|
-
|
-
|
1,712
|
1,712
|
|||||||||||||||
|
Employee
compensation-stock option
|
-
|
-
|
24,010
|
-
|
24,010
|
|||||||||||||||||
|
Exercise
of employee stock options
|
-
|
-
|
147,515
|
1,475
|
46,905
|
-
|
48,380
|
|||||||||||||||
|
Director
Fees
|
-
|
-
|
15,162
|
152
|
13,950
|
-
|
14,102
|
|||||||||||||||
|
Issuances
of common stock
|
-
|
-
|
4,309,524
|
43,095
|
1,039,405
|
-
|
1,082,500
|
|||||||||||||||
|
Balance
at March 31, 2008
|
-
|
$
|
-
|
31,758,400
|
$
|
317,584
|
$
|
18,430,612
|
$
|
(14,680,132
|
)
|
$
|
4,068,064
|
|||||||||
The
accompanying notes are an integral part of these financial
statements
F-6
THE
SINGING MACHINE COMPANY, INC AND SUBSIDIARIES
NOTE
1 - BASIS OF PRESENTATION
OVERVIEW
The
Singing Machine Company, Inc., a Delaware corporation (the "Company," “SMC”, or
"The Singing Machine"), and wholly-owned subsidiaries SMC (Comercial Offshore
De
Macau) Limitada (“Macau Subsidiary”), SMC Logistics, Inc. (“SMC-L”), and the
Singing Machine Holdings Ltd. (a B.V.I. company) are primarily engaged in the
development, marketing, and sale of consumer karaoke audio equipment,
accessories, musical instruments and musical recordings. The products are sold
directly to distributors and retail customers.
The
preparation of The Singing Machine's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
revenues and expenses during the period. Future events and their effects cannot
be determined with absolute certainty; therefore, the determination of estimates
requires the exercise of judgment. Actual results inevitably will differ from
those estimates, and such differences may be material to the Company's financial
statements. Management evaluates its estimates and assumptions continually.
These estimates and assumptions are based on historical experience and other
factors that are believed to be reasonable under the circumstances.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES
OF CONSOLIDATION The
accompanying consolidated financial statements include the accounts of The
Singing Machine Company, Inc. and its wholly-owned subsidiaries: SMC (Comercial
Offshore De Macau) Limitada (“Macau Subsidiary”), The Singing Machine Holdings
Ltd. (a B.V.I. company) and SMC Logistics, Inc., a California company. All
inter-company accounts and transactions have been eliminated in consolidation
for all periods presented.
USE
OF ESTIMATES
The
Singing Machine makes estimates and assumptions in the ordinary course of
business relating to sales returns and allowances, warranty reserves, and
reserves for promotional incentives that affect the reported amounts of assets
and liabilities and of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Historically, past changes to these
estimates have not had a material impact on the Company's financial condition.
However, circumstances could change which may alter future expectations.
COLLECTIBILITY
OF ACCOUNTS RECEIVABLE
The
Singing Machine's allowance for doubtful accounts is based on management's
estimates of the creditworthiness of its customers, current economic conditions
and historical information, and, in the opinion of management, is believed
to be
an amount sufficient to respond to normal business conditions. Management sets
100% reserves for customers in bankruptcy and other reserves based upon
historical collection experience. Should business conditions deteriorate or
any
major customer default on its obligations to the Company, this allowance may
need to be significantly increased, which would have a negative impact on
operations.
FOREIGN
CURRENCY TRANSLATION
The
functional currency of the Macau Subsidiary is the Hong Kong dollar. The
financial statements of the subsidiaries are translated to U.S. dollars using
year-end rates of exchange for assets and liabilities, and average rates of
exchange for the year for revenues, costs, and expenses. Net gains and losses
resulting from foreign exchange transactions and translations were not material
during the periods presented.
CONCENTRATION
OF CREDIT RISK
The
Company maintains cash balances in foreign financial institutions. Such balances
are not insured. The uninsured amounts at March 31, 2008 and March 31, 2007
are
$407,376 and $240,682, respectively.
INVENTORY
Inventories
are comprised of electronic karaoke equipment, accessories, and compact discs
and are stated at the lower of cost or market, as determined using the first
in,
first out method. The Singing Machine reduces inventory on hand to its net
realizable value on an item-by-item basis when it is apparent that the expected
realizable value of an inventory item falls below its original cost. A charge
to
cost of sales results when the estimated net realizable value of specific
inventory items declines below cost. Management regularly reviews the Company's
investment in inventories for such declines in value.
F-7
REVENUE
RECOGNITION
Revenue
from the sale of equipment, accessories, and musical recordings are recognized
upon the later of: (a) the time of shipment or (b) when title passes to the
customers and all significant contractual obligations have been satisfied and
collection of the resulting receivable is reasonably assured. Revenues from
sales of consigned inventory are recognized upon sale of the product by the
consignee. Net sales are comprised of gross sales net of actual and estimated
future returns, discounts and volume rebates. The total returns represent 8.6%,
13.4%, and 7.4% of the gross sales for the twelve months ended March 31, 2008,
2007, and 2006, respectively.
STOCK
BASED COMPENSATION
The
Company began to apply the provisions of SFAS No. 123 (revised 2004),
Share-Based Payments ("SFAS 123 (R)"), starting on January 1, 2006. SFAS 123
(R)
which became effective after June 15, 2005, replaces SFAS No. 123, Accounting
for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees. SFAS 123 (R) requires
all share-based payments to employees including grants of employee stock
options, be measured at fair value and expensed in the consolidated statement
of
operations over the service period (generally the vesting period). Upon
adoption, the Company transitioned to SFAS 123 (R) using the modified
prospective application, whereby compensation cost is only recognized in the
consolidated statements of operations beginning with the first period that
SFAS
123 (R) is effective and thereafter, with prior periods' stock-based
compensation still presented on a pro forma basis. Under the modified
prospective approach, the provisions of SFAS 123 (R) are to be applied to new
employee awards and to employee awards modified, repurchased, or cancelled
after
the required effective date. Additionally, compensation cost for the portion
of
employee awards for which the requisite service has not been rendered that
are
outstanding as of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective date. The
compensation cost for that portion of employee awards shall be based on the
grant-date fair value of those awards as calculated for either recognition
or
pro-forma disclosures under SFAS 123. The Company continues to use the
Black-Scholes option valuation model to value stock options. As a result of
the
adoption of SFAS 123 (R), for the years ended March 31, 2008, 2007 and 2006,
,
the stock option expense was $24,010, $182,3969 and $13,307, respectively.
Employee stock option compensation expense in fiscal years 2008, 2007 and 2006
includes the estimated fair value of options granted, amortized on a
straight-line basis over the requisite service period for the entire portion
of
the award.
Prior
to
June 15, 2005, the Company followed Accounting Principles Board Opinion ("APB")
No. 25, Accounting for Stock Issued to Employees. Reported and pro forma net
loss and loss per share based on APB No. 25 for the last fiscal year of
transition would have been as follows:
|
For year ended
|
||||
|
March 31, 2006
|
||||
|
Net
loss, as reported
|
$
|
(1,905,250
|
)
|
|
|
Less:
Total stock-based employee compensation expense determined under
fair
value based method
|
(484,103
|
)
|
||
|
Net
loss, pro forma
|
$
|
(2,389,353
|
)
|
|
|
Net
loss, per share -
basic As
reported
|
$
|
(0.19
|
)
|
|
|
Pro
forma
|
$
|
(0.24
|
)
|
|
|
Net
loss, per share -
diluted As
reported
|
$
|
(0.19
|
)
|
|
|
Pro
forma
|
$
|
(0.24
|
)
|
|
The
fair
value of each option grant was estimated on the date of the grant using the
Black-Scholes option-pricing model with the assumptions outlined below. The
expected volatility is based upon historical volatility of our stock and other
contributing factors. The expected term is based upon observation of actual
time
elapsed between date of grant and exercise of options for all employees.
Previously such assumptions were determined based on historical
data.
|
·
|
For
the year ended March 31, 2008: expected dividend yield 0%, risk-free
interest rate of 3.3%, volatility of 67.41% and expected term of
three
years.
|
|
·
|
For
the year ended March 31, 2007: expected dividend yield 0%, risk-free
interest rate of 4.65% to 5.1%, volatility 90.77% and 91.6% and expected
term of three years.
|
|
·
|
For
the year ended March 31, 2006: expected dividend yield 0%, risk-
free
interest rate from 4% to 4.86%, volatility from 91% to 104% and expected
term of three to five years.
|
F-8
ADVERTISING
Costs
incurred for producing and publishing advertising of the Company, are charged
to
operations as incurred. The Company has entered into cooperative advertising
agreements with its major customers that specifically indicated that the
customer has to spend the cooperative advertising fund upon the occurrence
of
mutually agreed events. The percentage of the cooperative advertising allowance
ranges from 2% to 5% of the purchase. The customers have to advertise the
Company's products in the customer's catalog, local newspaper and other
advertising media. The customer must submit the proof of the performance (such
as a copy of the advertising showing the Company’s products) to the Company to
request for the allowance. The customer does not have the ability to spend
the
allowance at their discretion. The Company believes that the identifiable
benefit from the cooperative advertising program and the fair value of the
advertising benefit is equal or greater than the cooperative advertising
expense. Advertising expense for the years ended March 31, 2008, 2007 and 2006
was $470,671, $212,362 and $168,739, respectively.
RESEARCH
AND DEVELOPMENT COSTS
All
research and development costs are charged to results of operations as incurred.
These expenses are shown as a component of selling, general and administrative
expenses in the consolidated statements of operations. For the years ended
March
31, 2008, 2007 and 2006, these amounts totaled $22,491, $104,218 and $132,282,
respectively.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
SFAS
No.
107, "Disclosures about Fair Value of Financial Instruments," requires
disclosures of information about the fair value of certain financial instruments
for which it is practicable to estimate that value. For purposes of this
disclosure, the fair value of a financial instrument is the amount at which
the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation.
The
carrying amounts of the Company's short-term financial instruments, including
accounts receivable, due from factors, accounts payable, loan-related party,
customer credits on account, subordinated debt-related parties and accrued
expenses approximates fair value due to the relatively short period to maturity
for these instruments.
RECLASSIFICATIONS
Certain
prior period amounts have been reclassified to conform to the current period
presentation.
INCOME
TAXES
The
Company follows Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" ("SFAS No. 109"). Under the asset and liability method of
SFAS
No. 109, deferred tax assets and liabilities are recognized for the future
tax
consequences attributed to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax base.
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 No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. If it
is
more likely than not that some portion of a deferred tax asset will not be
realized, a valuation allowance is recognized.
Significant
management judgment is required in developing The Singing Machine's provision
for income taxes, including the determination of foreign tax liabilities,
deferred tax assets and liabilities and any valuation allowances that might
be
required against the deferred tax assets. Management evaluates its ability
to
realize its deferred tax assets on a quarterly basis and adjusts its valuation
allowance when it believes that it is more likely that the asset will not be
realized.
Effective April
1, 2007, we adopted the provisions of the Financial Accounting Standards Board
(“FASB”) Interpretation (FIN) No. 48, Accounting
for Uncertainty in Income Taxes –
an
interpretation of FASB Statement No. 109.
FIN 48
contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109, Accounting
for Income Taxes.
The
first step is to evaluate the tax position for recognition by determining if
the
weight of available evidence indicates it is more likely than not that the
position will be sustained on audit, including resolution of related appeals
or
litigation processes, if any. The second step is to measure the tax benefit
as
the largest amount which is more than 50% likely of being realized upon ultimate
settlement. We consider many factors when evaluating and estimating its tax
positions and tax benefits, which may require periodic adjustments and which
may
not accurately anticipate actual outcomes. The impact of FIN 48 on our financial
position is discussed in Note 13 – Income Taxes.
LONG-LIVED
ASSETS
The
Company reviews long-lived assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts
may
not be recoverable. If the undiscounted future cash flows attributable to the
related assets are less than the carrying amount, the carrying amounts are
reduced to fair value and an impairment loss is recognized in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Expenditures for repairs and maintenance are charged to expense
as
incurred. Depreciation is provided for in amounts sufficient to relate the
cost
of depreciable assets to their estimated useful lives using accelerated and
straight-line methods.
F-9
CASH
AND CASH EQUIVALENTS
The
Company considers all highly liquid investments with maturities of three months
or less at the time of purchase to be cash equivalents. Cash and cash equivalent
balances at March 31, 2008 and March 31, 2007 were $447,816 and $1,188,900,
respectively.
SHIPPING
AND HANDLING COSTS
Shipping
and handling costs are classified as a component of selling expenses and those
billed to customers are recorded as a reduction of expense in the statement
of
operations.
NOTE
3- RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2007, FASB issued SFAS No. 141 (revised 2007), Business
Combinations,
which
replaces SFAS No 141. The statement retains the purchase method of accounting
for acquisitions, but requires a number of changes, including changes in the
way
assets and liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and liabilities assumed arising
from
contingencies, requires the capitalization of in-process research and
development at fair value and requires the expensing of acquisition-related
costs as incurred. We are currently assessing the potential impact that adoption
of SFAS No. 141 would have on our financial statements.
In
December 2007, the FASB issued SFAS No. 160. Noncontrolling
Interests in Consolidated Financial Statements, and amendment of ARB 51 (“SFAS
No. 160”),
which
changes the accounting and reporting for minority interests. Minority interests
will be recharacterized as noncontrolling interests and will be reported as
a
component of equity separate from the parent’s equity, and purchases or sales of
equity interests that do not result in a change of control will be accounted
for
as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the
face
of the income statement and upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings.. We are currently assessing the potential impact that
adoption of SFAS No. 160 would have on our financial statements.
NOTE
4 - INVENTORIES
Inventories
are comprised of the following components:
|
March 31,
|
March 31,
|
||||||
|
2008
|
2007
|
||||||
|
Finished
Goods
|
$
|
4,012,969
|
$
|
2,334,381
|
|||
|
Inventory
in Transit
|
-
|
144,550
|
|||||
|
Less:
Inventory Reserve
|
(497,985
|
)
|
(198,848
|
)
|
|||
|
Total
Inventories
|
$
|
3,514,984
|
$
|
2,280,083
|
|||
Inventory
consigned to customers at March 31, 2008 and March 31, 2007 were $372,012 and
$418,598, respectively.
NOTE
5 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT
The
Company executed an agreement with CIT on August 13, 2007 to factor its
receivables. CIT assumes the credit risk on approved accounts (factor risk
accounts). For non-approved accounts, the Company will assume the credit risk
(client risk accounts). The factoring fees, for the client risk accounts, are
.3% of the gross invoice. For the factor risk accounts, the fees are .55% of
the
gross invoice. The annual minimum charge is $24,000. The agreement will expire
August 2008. After that date, each party will have to give 60 days written
notice to terminate the agreement. CIT does not advance funds to the Company
directly. On October 26, 2007, the Company entered into a four- party agreement
with CIT(“Factor”), Standard Chartered Bank (Hong Kong), Limited (“Lender”) and
Starlight Marketing Limited (“Borrower”), a related party. According to the
agreement, the Company assigns the proceeds from customers to the Lender, the
Lender advances the loans to the Borrower. The Borrower sends the advance to
the
Company. Both the Borrower and the Company guarantee the repayment of the
advance. The maximum amount for the advance is approximately $4.5 million or
85%
of the qualified accounts receivable, which ever is higher. As of March 31,
2008
and 2007, the outstanding amount due from the factor was $131,451 and $109,991,
respectively. The amounts represent excess of customer payments received by
the
factor over advances made to the Company.
F-10
A
summary
of property and equipment is as follows:
|
USEFUL
|
MARCH 31,
|
MARCH 31,
|
||||||||
|
LIFE
|
2008
|
2007
|
||||||||
|
Computer
and office equipment
|
5
years
|
$
|
520,182
|
$
|
440,946
|
|||||
|
Furniture
and fixtures
|
5-7
years
|
216,120
|
220,171
|
|||||||
|
Leasehold
improvement
|
*
|
156,614
|
209,004
|
|||||||
|
Molds
and tooling
|
3
years
|
1,032,970
|
621,508
|
|||||||
|
1,925,886
|
1,491,629
|
|||||||||
|
Less:
Accumulated depreciation
|
(1,327,606
|
)
|
(1,045,119
|
)
|
||||||
|
$
|
598,280
|
$
|
446,510
|
|||||||
| · |
Shorter
of remaining term of lease or useful life
|
Depreciation
for fiscal years ended 2008, 2007, and 2006 was $311,273, $556,051, and
$688,951, respectively.
NOTE
7 – DUE TO RELATED PARTIES, NET
As
of
March 31, 2008 we had $616,732 due to related parties. This consists of an
interest bearing loan payable of $642,587 to Starlight Marketing Limited, an
$18,000 payable to Starlight Marketing Development Limited, and net accounts
payable of $38,751 to related parties. These amounts were reduced by a
non-interest bearing receivable from Cosmo Communications Corp. for
$82,607.
As
of
March 31, 2007, due to related parties represented accounts payable for
inventory purchased from Starlight Marketing Limited.
NOTE
8 - SUBORDINATED DEBT - RELATED PARTIES
These
related party loans as of March 31, 2007 were in the amount of $225,000 and
were
due to a former director and his associate. The loans carried an interest rate
of 5.5%. The loans were paid during fiscal year 2008.
NOTE
9 - CUSTOMER CREDITS ON ACCOUNT
Customer
credits on account represent customers that have received credits in excess
of
their accounts receivable balance. These balances were reclassified for
financial statement purposes as current liabilities until paid or applied to
future purchases.
NOTE
10 - NET GAIN ON RETIREMENT OF CONVERTIBLE DEBENTURES
On
March
10, 2006, the holders of the Company’s 8% convertible debentures agreed to
accept $2,000,000 in full payment of principal and unpaid interest due them
on
the convertible debentures.
This
agreed upon final payment resulted in a net gain of $2,253,725 which has been
reflected under other income in the accompanying consolidated statement of
operations for the fiscal year ended March 31, 2006.
NOTE
11
- COMMITMENTS AND CONTINGENCIES
LEGAL
MATTERS
SYBERSOUND
RECORDS, INC. V. UAV CORPORATION; MADACY ENTERTAINMENT L.P., AUDIO STREAM,
INC.,
TOP TUNES, INC., SINGING MACHINE, INC., BCI ECLIPSE COMPANY, LLC, AMOS ALTER,
DAVID ALTER, EDWARD GOETZ, DENNIS NORDEN, FRANK ROBERTSON, DOUGLAS VOGT AND
RICHARD VOGT (UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF
CALIFORNIA, CV05-5861 JFW); (UNITED STATES COURT OF APPEALS FOR THE NINTH
CIRCUIT (USCA DOCKET NO. 06-55221)
The
federal court action filed on August 11, 2005 alleged violation of the Copyright
Act and the Lanham Act by the defendants, and claims for unfair competition
under California law. Sybersound was joined in the complaint by several
publisher owners of musical compositions who alleged copyright infringement
against all the defendants except
The
Singing Machine Company, Inc. On November 7, 2005, the district court ordered
the publisher plaintiffs’ copyright claims severed from the case. The Singing
Machine Company, Inc. is not a party to the severed cases.
In
September 2005, the defendants, including The Singing Machine Company, Inc.,
filed multiple motions to dismiss the original complaint. In October 2005,
Sybersound filed a motion for summary judgment. On January 6, 2006, the court
granted the motions of the defendants and denied the plaintiff’s motion, thereby
dismissing the case against the defendants, including The Singing Machine
Company, Inc., with prejudice. The plaintiff Sybersound thereafter appealed
the
decision to the Ninth Circuit Court of Appeals.
F-11
On
February 27, 2008 the Ninth Circuit Court of Appeals affirmed the dismissal
against The Singing Machine Company, Inc. and dismissed all claims against
the
Company with prejudice. Sybersound has until July 10, 2008 to file a Petition
with the United States Supreme Court to appeal that decision. If Sybersound
does
not elect to file a Petition, the above captioned lawsuit will be concluded.
The
Company is also subject to various other legal proceedings and other claims
that
arise in the ordinary course of business. In the opinion of management, the
amount of ultimate liability, if any, in excess of applicable insurance
coverage, is not likely to have a material effect on the financial condition,
results of operations or liquidity of the Company. However, as the outcome
of
litigation or other legal claims is difficult to predict, significant changes
in
the range of possible loss could occur, which could have a material impact
on
the Company's operations.
LEASES
The
Company has entered into various operating lease agreements for office and
warehouse facilities in Coconut Creek, Florida, City of Industry, California
and
Macau. The leases expire at varying dates. Rent expense for the years ended
March 31, 2008, 2007 and 2006 was $201,270, $409,608 and $632,586,
respectively.
In
addition, the Company maintains various warehouse equipment and computer
equipment operating leases.
Future
minimum lease payments under property and equipment leases with terms exceeding
one year as of March 31, 2008 are as follows:
|
Property Leases
|
|
Equipment Leases
|
|||||
|
For
period ending
|
|||||||
|
2009
|
$
|
556,673
|
$
|
9,888
|
|||
|
2010
|
714,004
|
14,875
|
|||||
|
2011
|
732,359
|
-
|
|||||
|
2012
|
669,233
|
-
|
|||||
|
2013
and beyond
|
725,936
|
-
|
|||||
|
$
|
3,398,204
|
$
|
24,763
|
||||
The
above
property lease payments are gross payments which are not net of supplemental
sublease fees we receive. During fiscal years 2008 and 2007 the Company received
fees of approximately $543,000 and $414,000 respectively, for warehousing
services provided to affiliated entities out of its California
warehouse.
Such
fees
have been offset against rent expense in the consolidated statements of
operations. The affiliated entities are committed to pay fees to the Company
of
approximately $429,000 during fiscal year 2009.
LICENSE
AGREEMENTS
On
May
10, 2006, we entered into a two-year license agreement with MGA Entertainment,
Inc. to produce and distribute a variety of karaoke products based on MGA's
BRATZ™ franchise, one of the world's leading toy lines and girls' lifestyle
brands, in North America, Europe and Australia. These karaoke products include
a
TFT DVD karaoke system, sing-a-long cassette players, deluxe microphones,
electronic keyboards and an electronic drum. The license agreement contains
a
minimum guarantee payment term.
On
November 21, 2006 we also entered into a three-year license agreement with
MGA
Entertainment, Inc. to produce and distribute a variety of consumer electronic
products based on MGA's BRATZ™ franchise, one of the world's leading toy lines
and girls' lifestyle brands, in North America, New Zealand, Chile and Australia.
These consumer electronic products include boom boxes, clock radios and portable
DVDs. The license agreement contains a minimum guarantee payment
term.
Future
royalty payments due under license agreements at March 31, 2008 are as follows:
|
Royalty Payments
|
||||
|
For
period ending
|
||||
|
2009
|
$
|
242,000
|
||
|
Thereafter
|
||||
|
$
|
242,000
|
|||
F-12
AMERICAN
STOCK EXCHANGE STATUS
On
September 6, 2006, the Company received notice from The American Stock Exchange
(the "Amex") that the Company had fallen below the continued listing standards
of the Amex and that its listing was being continued pursuant to an
extension.
For
the
fiscal years ended March 31, 2007 and March 31, 2006, the Company was not in
compliance with Section 1003(a)(ii) of the Amex Company Guide with shareholders'
equity of less than $4,000,000 and net losses in three of its four most recent
fiscal years.
In
a
letter dated March 28, 2008, the American Stock Exchange reviewed the Company’s
fiscal year 2008 financial statements and in light of its performance,
determined that Singing Machine has resolved its listing deficiency from
September 6, 2006. The Company is fully reinstated as an Amex member in good
standing, but will still have to comply with continued listing standards
pursuant to Amex Company Guide Section 1009(h).
NOTE
12 - STOCKHOLDERS' EQUITY
COMMON
STOCK ISSUANCES
During
the years ended March 31, 2008, 2007 and 2006, the Company issued the following
common stock shares:
2008:
During
the year ended March 31, 2008, the Company issued 162,677 shares of common
stock
to various employees, as well as directors, at prices ranging from $.32 per
share to $.93 per share pursuant to employee stock option
agreements.
On
March
12, 2008, the Company issued 952,381 shares of common stock to Arts Electronics
for $200,000 ($0.21 per share) as payment for a trade payable.
On
September 28, 2007, the Company issued 857,143 shares of common stock to koncept
International Limited, a subsidiary of Starlight for $300,000 ($.35 per share)
as payment for certain payables owed by the Company to Starlight Marketing
Macao.
On
April
16, 2007, 2,500,000 warrants at $0.233 were exercised by koncept International
Limited, a subsidiary of Starlight, and the Company received a total of
$582,500.
2007:
On
October 3, 2006, the Company sold 1,380,000 shares of common stock to Gentle
Boss Investments LTD. for $600,300 ($.435 per share).
On
October 3, 2006, the Company sold 920,000 shares of common stock to Timemate
Industries Limited for $400,200 ($.435 per share).
On
September 27, 2006, the Company issued 39,065 shares of common stock to members
of the Board of Directors for services provided to the Company for fiscal year
2006, valued at $12,501, which is included in the selling, general, and
administrative expenses for the years ended December 31, 2006.
On
June
25, 2006, the Company issued 12,875,536 shares of common stock to koncept
International Limited, a subsidiary of Starlight for a $3 million investment
($.233 per share).
2006:
On
November 1, 2005, the Company issued 12,911 shares of common stock to members
of
the Board of Directors for services provided to the Company for fiscal year
2005, valued at $9,167.
On
May 1,
2005, the Company has authorized the issuance of 277,778 shares of common stock
for the conversion of a $200,000 related party loan.
EARNINGS
PER SHARE
In
accordance with SFAS No. 128, "Earnings per Share", basic (loss) earnings per
share are computed by dividing the net (loss) earnings for the year by the
weighted average number of common shares outstanding. Diluted earnings per
share
is computed by dividing net earnings for the year by the weighted average number
of common shares outstanding including the effect of common stock equivalents.
F-13
STOCK
OPTIONS
On
June
1, 2001, the Board of Directors approved the 2001 Stock Option Plan (`Plan"),
which replaced the 1994 Stock Option Plan, as amended, (the "1994 Plan"). The
Plan was developed to provide a means whereby directors and selected employees,
officers, consultants, and advisors of the Company may be granted incentive
or
non-qualified stock options to purchase common stock of the Company. As of
March
31, 2008, the Plan is authorized to grant options up to an aggregate of
1,950,000 shares of the Company's common stock and up to 300,000 shares for
any
one individual grant in any fiscal year. As of March 31, 2008, the Company
had
275,220 options available to be granted under the 2001 Plan. As of March 31,
2008, the Company had 337,500 options available to be granted under the 1994
Plan.
The
Company adopted SFAS 123(R) for the reporting periods ending after June 15,
2005
and thereafter has recognized the fair value of the stock option as part of
the
selling, general and administration expense. Accordingly, no compensation cost
has been recognized for options issued under the Plan in periods prior to June
15, 2005. A summary of stock option activity for each of the years presented
is
summarized below.
|
Fiscal
2008
|
Fiscal
2007
|
Fiscal
2006
|
|||||||||||||||||
|
Number of Options
|
Weighted
Average
Exercise Price
|
Number of
Options
|
Weighted
Average
Exercise
Price
|
Number of
Options
|
Weighted
Average
Exercise Price
|
||||||||||||||
|
Stock
Options:
|
|||||||||||||||||||
|
Balance
at beginning of period
|
1,382,890
|
$
|
1.26
|
1,300,110
|
$
|
1.74
|
1,041,610
|
$
|
3.67
|
||||||||||
|
Granted
|
120,000
|
$
|
0.45
|
943,000
|
$
|
0.39
|
841,000
|
$
|
0.50
|
||||||||||
|
Exercised
|
(147,515
|
)
|
$
|
0.33
|
(285,000
|
)
|
$
|
0.44
|
-
|
$
|
0.00
|
||||||||
|
Forfeited
|
(107,560
|
)
|
$
|
1.27
|
(575,220
|
)
|
$
|
1.34
|
(582,500
|
)
|
$
|
3.48
|
|||||||
|
Balance
at end of period
|
1,247,815
|
$
|
1.25
|
1,382,890
|
$
|
1.26
|
1,300,110
|
$
|
1.74
|
||||||||||
|
Options
exercisable at end of period
|
1,029,296
|
$
|
1.44
|
582,307
|
$
|
2.14
|
392,161
|
$
|
3.52
|
||||||||||
The
following table summarizes information about employee stock options outstanding
at March 31, 2008:
|
Number Outstanding at
March 31, 2008
|
Weighted Average
Remaining Contractural
Life
|
Weighted Average
Exercise Price
|
Number Exercisable at
March 31, 2008
|
Weighted Average
Exercise Price
|
||||||||||||
|
$0.32-$0.77
|
1,018,485
|
5.37
|
$
|
0.51
|
811,152
|
0.50
|
||||||||||
|
$1.05-$1.97
|
116,780
|
6.02
|
$
|
1.51
|
105,594
|
1.50
|
||||||||||
|
$2.04-$5.60
|
35,550
|
4.55
|
$
|
5.04
|
35,550
|
5.04
|
||||||||||
|
$7.20-$11.09
|
77,000
|
4.66
|
$
|
9.58
|
77,000
|
9.58
|
||||||||||
|
1,247,815
|
1,029,296
|
|||||||||||||||
Prior
to
April 1, 2005, in accordance with SFAS No. 123, for options issued to employees,
the Company applies the intrinsic value method of APB Opinion No. 25 and related
interpretations in accounting for options issued.
STOCK
WARRANTS
As
of
March 31, 2008, the Company had a total of 2,500,000 stock purchase warrants
outstanding. The exercise price of these warrants range from $0.28 to $0.35.
The
expiration date of these warrants range from July 25, 2009 to July 26,
2010.
The
Company files separate tax returns in the United States and in Macau. The Macau
Subsidiary has received approval from the Macau government to operate its
business as a Macau Offshore Company (MOC), and is exempt from the Macau income
tax. For the fiscal years ended March 31, 2008, 2007 and 2006, the Company
recorded no tax provision. The Company has now exhausted its ability to carry
back any further losses and therefore will only be able to recognize tax
benefits to the extent that it has future taxable income.
Due
to
the change of control of the Company, the net operating loss carry over is
subject to the IRS Section 382 limitation. As of March 31, 2008, 2007 and 2006,
The Singing Machine had net deferred tax assets of approximately $2.5 million,
$2.7 million, and $6.4 million, respectively, against which the Company recorded
valuation allowances totaling approximately $2.5
million,
$2.7 million, and $6.4 million, respectively.
FASB
Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
(“FIN
48”) was issued to clarify the requirements of SFAS No. 109, Accounting
for Income Taxes,
relating to the recognition of income tax benefits. FIN 48 provides a two-step
approach to recognizing and measuring tax benefits when the benefits’
realization is uncertain. The first step is to determine whether the benefit
is
to be recognized; the second step is to determine the amount to be
recognized:
| · |
Income
tax benefits should be recognized when, based on the technical merits
of a
tax position, the company believes that if a dispute arose with the
taxing
authority and were taken to a court of last resort, it is more likely
than
not (i.e., a probability of greater than 50 percent) that the tax
position
would be sustained as filed; and
|
F-14
| · |
If
a position is determined to be more likely than not of being sustained,
the reporting company should recognize the largest amount of tax
benefit
that is greater than 50 percent likely of being realized upon ultimate
settlement with the taxing
authority.
|
We
adopted FIN on April 1, 2007 and it has had no impact on the financial
statements.
In
2007,
as a consequence of the ISMC divestiture, and based on the opinion of the Hong
Kong tax counsel, as well as “hold harmless” representations from the present
shareholders of ISMC, the Company reversed the previously recorded provision
of
Hong Kong tax of approximately $2,453,000. Such reversal has been presented
in
the income tax section of the accompanying statements of operations.
The
income tax expense (benefit) for federal, foreign, and state income taxes in
the
consolidated statement of operations consisted of the following components
for
2008, 2007, and 2006:
|
2008
|
2007
|
2006
|
||||||||
|
Current:
|
||||||||||
|
U.S.
Federal
|
$
|
9,181
|
$
|
(781,917
|
)
|
$
|
550,839
|
|||
|
Foreign
|
-
|
(2,453,576
|
)
|
(129,090
|
)
|
|||||
|
State
|
944
|
(69,080
|
)
|
74,870
|
||||||
|
Deferred
|
(10,125
|
)
|
850,997
|
(496,619
|
)
|
|||||
|
|
$
|
-
|
$
|
(2,453,576
|
)
|
$
|
-
|
|||
The
United States and foreign components of income (loss) before income taxes are
as
follows:
|
2008
|
2007
|
2006
|
||||||||
|
United
States
|
$
|
27,002
|
$
|
(2,316,348
|
)
|
$
|
(1,167,591
|
)
|
||
|
Foreign
|
(25,290
|
)
|
601,360
|
(737,659
|
)
|
|||||
|
$
|
1,712
|
$
|
(1,714,988
|
)
|
$
|
(1,905,250
|
)
|
|||
The
actual tax expense differs from the "expected" tax expense for the years ended
March 31, 2008, 2007, and 2006 (computed by applying the U.S. Federal Corporate
tax rate of 34 percent to income before taxes) as follows:
|
2008
|
2007
|
2006
|
||||||||
|
Expected
tax (benefit) expense
|
$
|
582
|
$
|
(583,096
|
)
|
$
|
(647,785
|
)
|
||
|
State
income taxes, net of Federal income tax benefit
|
943
|
(69,080
|
)
|
(110,506
|
)
|
|||||
|
Permanent
differences
|
5,829
|
5,640
|
5,550
|
|||||||
|
Deemed
Dividend
|
-
|
-
|
1,224,000
|
|||||||
|
Change
in valuation allowance
|
(194,062
|
)
|
(3,702,790
|
)
|
(4,019,030
|
)
|
||||
|
Tax
rate differential on foreign earnings
|
8,600
|
(204,462
|
)
|
121,714
|
||||||
|
Reversal
of provision for foreign income taxes
|
-
|
(2,453,576
|
)
|
-
|
||||||
|
Other
|
178,108
|
4,553,788
|
3,426,057
|
|||||||
|
Actual
(benefit) tax expense
|
$
|
-
|
$
|
(2,453,576
|
)
|
$
|
-
|
|||
F-15
The
tax
effects of temporary differences that give rise to significant portions of
deferred tax assets and liabilities are as follows:
|
2008
|
2007
|
2006
|
||||||||
|
Deferred
tax assets:
|
||||||||||
|
Federal
net operating loss carryforward
|
$
|
1,490,139
|
$
|
2,034,910
|
$
|
2,325,138
|
||||
|
State
net operating loss carryforward
|
518,078
|
291,285
|
466,092
|
|||||||
|
Hong
Kong net operating loss carryforward
|
-
|
-
|
340,916
|
|||||||
|
AMT
credit carryforward
|
70,090
|
70,090
|
70,090
|
|||||||
|
Inventory
differences
|
169,382
|
66,942
|
505,452
|
|||||||
|
Hong
Kong foreign tax credit
|
-
|
-
|
2,453,576
|
|||||||
|
Allowance
for doubtful accounts
|
41,105
|
21,021
|
35,229
|
|||||||
|
Reserve
for sales returns
|
74,056
|
72,664
|
63,336
|
|||||||
|
Charitable
contributions
|
60,700
|
60,700
|
60,573
|
|||||||
|
Amortization
of reorganization intangible
|
53,652
|
53,652
|
53,652
|
|||||||
|
Total
deferred tax assets
|
2,477,202
|
2,671,264
|
6,374,054
|
|||||||
|
Deferred
tax liability:
|
||||||||||
|
Depreciation
|
-
|
-
|
-
|
|||||||
|
Total
deferred tax liability
|
-
|
-
|
-
|
|||||||
|
Net
deferred tax assets before valuation allowance
|
2,477,202
|
2,671,264
|
6,374,054
|
|||||||
|
Valuation
allowance
|
(2,477,202
|
)
|
(2,671,264
|
)
|
(6,374,054
|
)
|
||||
|
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
$
|
-
|
||||
At
March
31, 2008, the Company has federal tax net operating loss carry forwards in
the
amount of approximately $4.4 million, which expires beginning in the year 2023.
In addition, state tax net operating loss carry forwards in the amount of
approximately $6.6 million expires beginning in 2013. The Company is no longer
subject to income tax examinations for fiscal years before 2005.
NOTE
14 - SEGMENT INFORMATION
The
Company operates in one segment and maintains its records accordingly. The
majority of sales to customers outside of the United States are made by the
Macau Subsidiary and Hong Kong Subsidiary, until its date of sale. Sales by
geographic region for the period presented are as follows:
|
FOR
THE FISCAL YEARS ENDED
|
||||||||||
|
March
31,
|
||||||||||
|
2008
|
2007
|
2006
|
||||||||
|
North
America
|
$
|
27,085,842
|
$
|
20,552,962
|
$
|
22,458,950
|
||||
|
Europe
|
6,314,126
|
5,793,062
|
9,655,939
|
|||||||
|
Others
|
667,904
|
386,120
|
190,671
|
|||||||
|
$
|
34,067,871
|
$
|
26,732,144
|
$
|
32,305,560
|
|||||
The
geographic area of sales is based primarily on the location where the product
is
delivered.
NOTE
15 - EMPLOYEE BENEFIT PLANS
The
Company has a 401(k) plan for its employees to which the Company makes
contributions at rates dependent on the level of each employee's contributions.
Contributions made by the Company are limited to the maximum allowable for
federal income tax purposes. The amounts charged to operations for contributions
to this plan and administrative costs during the years ended March 31, 2008,
2007, and 2006 totaled $21,674, $39,460 and $39,571, respectively. The amounts
are included as a component of general and administrative expense in the
accompanying Consolidated Statements of Operations. The Company does not provide
any post employment benefits to retirees.
NOTE
16 - CONCENTRATIONS OF CREDIT RISK, CUSTOMERS, SUPPLIERS, AND FINANCING
The
Company derives a majority of its revenues from retailers of products in the
United States. Financial instruments, which potentially subject the Company
to
concentrations of credit risk, consist of accounts receivable. The Company's
allowance for doubtful accounts is based upon management's estimates and
historical experience and reflects the fact that accounts receivable are
concentrated with several large customers whose credit worthiness have been
evaluated by management. At March 31, 2008, 65% of accounts receivable were
due
from three customers in North America. Accounts receivable from customers that
individually owed over 10% of total accounts receivable was 31% and 29% at
March
31, 2008. Accounts receivable from customers that individually owed over 10%
of
total accounts receivable was 29% at March 31, 2007. The Company performs
ongoing credit evaluations of its customers.
F-16
Revenues
derived from five customers in 2008, 2007, and 2006 were 62%, 58% and 56% of
total revenues, respectively. Revenues derived from top three customers in
2008,
2007 and 2006 as percentage of the total revenue were 22%, 11% and 11%, 24%,
16%
and 10%, and 13%, 12% and 11%, respectively. The loss of any of these customers
can have an adverse impact on the financial position of the
Company.
Net
sales
derived from the Hong Kong and Macau Subsidiaries aggregated $17.3 million
in
2008, $16.2 million in 2007 and $21.9 million in 2006.
The
Company is dependent upon foreign companies for the manufacture of all of its
electronic products. The Company's arrangements with manufacturers are subject
to the risk of doing business abroad, such as import duties, trade restrictions,
work stoppages, foreign currency fluctuations, political instability, and other
factors, which could have an adverse impact on its business. The Company
believes that the loss of any one or more of their suppliers would not have
a
long-term material adverse effect because other manufacturers with whom the
Company does business would be able to increase production to fulfill their
requirements. However, the loss of certain suppliers in the short-term could
adversely affect business until alternative supply arrangements are secured.
During
fiscal years 2008, 2007, and 2006, manufacturers in the People's Republic of
China ("China") accounted for approximately 99%, 98% and 98%; respectively
of
the Company's total product purchases, including all of the Company's hardware
purchases.
The
Company is primary relying on one factoring company in the United State to
finance its accounts receivable. The loss of the factoring facility might have
an adverse effect on its business.
The
following financial information reflects all normal recurring adjustments that
are, in the opinion of management, necessary for a fair statement of the results
of the interim periods. The quarterly unaudited results for the years 2008,
2007, and 2006 are set forth in the following table:
|
Basic
|
Diluted
|
|||||||||||||||
|
Earnings
|
Earnings
|
|||||||||||||||
|
Net Earnings
|
(Loss)
|
(Loss)
|
||||||||||||||
|
Sales
|
Gross
Profit
|
(Loss)
|
Per Share
|
Per Share
|
||||||||||||
|
(In thousands)
|
(In thousands)
|
(In thousands)
|
||||||||||||||
|
2008
|
||||||||||||||||
|
First
quarter
|
$
|
2,446
|
$
|
339
|
$
|
(852
|
)
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
|||
|
Second
quarter
|
16,108
|
3,193
|
1,054
|
0.04
|
0.03
|
|||||||||||
|
Third
quarter
|
13,784
|
3,747
|
767
|
0.03
|
0.03
|
|||||||||||
|
Fourth
quarter
|
1,730
|
400
|
(967
|
)
|
(0.03
|
)
|
(0.03
|
)
|
||||||||
|
Fiscal
Year 2008
|
$
|
34,068
|
$
|
7,679
|
$
|
2
|
$
|
-
|
$
|
-
|
||||||
|
2007
|
||||||||||||||||
|
First
quarter
|
$
|
1,036
|
$
|
126
|
$
|
(1,151
|
)
|
$
|
(0.11
|
)
|
$
|
(0.11
|
)
|
|||
|
Second
quarter
|
14,299
|
3,046
|
806
|
0.04
|
0.03
|
|||||||||||
|
Third
quarter
|
11,018
|
3,289
|
2,824
|
0.11
|
0.10
|
|||||||||||
|
Fourth
quarter
|
379
|
(345
|
)
|
(1,740
|
)
|
(0.08
|
)
|
(0.08
|
)
|
|||||||
|
Fiscal
Year 2007
|
$
|
26,732
|
$
|
6,116
|
$
|
739
|
$
|
0.03
|
$
|
0.03
|
||||||
|
2006
|
||||||||||||||||
|
First
quarter
|
$
|
2,792
|
$
|
437
|
$
|
(1,902
|
)
|
$
|
(0.19
|
)
|
$
|
(0.19
|
)
|
|||
|
Second
quarter
|
18,532
|
3,823
|
926
|
0.09
|
0.09
|
|||||||||||
|
Third
quarter
|
9,877
|
2,580
|
(565
|
)
|
(0.06
|
)
|
(0.06
|
)
|
||||||||
|
Fourth
quarter
|
1,104
|
243
|
(364
|
)
|
(0.03
|
)
|
(0.03
|
)
|
||||||||
|
Fiscal
Year 2006
|
$
|
32,305
|
$
|
7,083
|
$
|
(1,905
|
)
|
$
|
(0.19
|
)
|
$
|
(0.19
|
)
|
|||
NOTE
18 – GAIN FROM DISPOSAL OF ASSETS
During
fiscal 2007, the Company sold its Hong Kong subsidiary to a non-related third
party and recognized a gain of $20,078. The Company also recognized a gain
of
$8,950 from the sale of old tools during 2007.
F-17
The
buyer
of the Hong Kong Subsidiary, See Bright Investments Ltd, also assumed the
approximate potential tax liability of $2.4 million. See Income Tax Note
13.
NOTE
19 – RELATED PARTY TRANSACTIONS
INVESTMENT
koncept
International Limited, a subsidiary of Starlight International Holding Ltd,
invested $3 million in the Company. The investment was approved by the American
Stock Exchange on July 25, 2006. Currently, koncept owns 51% of the Company’s
outstanding common stock.
TRADE
On
May
23, 2008, SMC Logistics entered into a service and logistics agreement with
affiliates Starlight Consumer Electronics (USA), Inc. and Cosmo Communications
Corp. to provide logistics, fulfillment, and warehousing services for Starlight
and Cosmo’s domestic sales. The Agreement is expected to generate approximately
$1.1 million dollars for fiscal year 2009.
The
Company purchased products from Starlight Marketing Macao, a subsidiary of
Starlight International Holding Ltd. The purchases from Starlight for the fiscal
year ended March 31, 2008 and 2007 were $5,775,074 and $3,232,694, respectively.
In addition, the Company also purchased molds and tooling from Starlight in
the
amount of $126,282 and $269,700 in fiscals 2008 and 2007, respectively, which
are included in Property and Equipment in the accompanying Consolidated Balance
Sheets.
On
August
1, 2006, the Company entered into a service agreement with Starlight Electronics
Co., Ltd, a subsidiary of Starlight International Holding Ltd, to provide
shipping and engineering service to the Company at a charge of $25,000 per
month. For the fiscal year ended March 31, 2008 and 2007, this service charge
was $200,000 per annum and is included in the general and administrative
expenses in the accompanying Consolidated Statements of Operations.
In
addition, on October 1, 2006 the Company entered into a warehouse services
agreement with Starlight Industrial Holding LTD, to provide them with
warehousing services at the Company’s California warehouse at a monthly service
charge of $26,000. In May 2008, that amount was increased to $39,000 per month.
This amount was used to offset the Company’s rent expense for the warehouse and
is shown in the accompanying Consolidated Statements of Operations as a
component of general and administrative expenses.
FINANCING
On
August
3, 2007, the Company entered into a three party Assignment Agreement in which
Starlight Marketing Limited, a subsidiary of Starlight International Holding
Ltd, provides financing to the Company. In return, the Company has agreed to
assign to Starlight its rights to receive all monies from time to time due
to it
under the Factoring Agreement with CIT Group. On October 26, 2007, the three
party Assignment Agreement was replaced by the four party Assignment Agreement,
in which, the Standard Charter Bank (Hong Kong) was added as the Lender. (see
Note 5). The amount due to Starlight as of March 31, 2008 resulting from the
Assignment Agreement is $642,587 of which approximately $138,448 is
interest.
F-18
SUPPLEMENTAL
DATA
SCHEDULE
II
|
Balance at
|
Charged to
|
Reduction to
|
Credited to
|
Balance at
|
||||||||||||
|
Beginning of
|
Costs and
|
Allowance
|
Costs and
|
End
of
|
||||||||||||
|
Description
|
Period
|
Expenses
|
for Write off |
Expenses
|
Period
|
|||||||||||
|
Year
ended March 31, 2008
|
||||||||||||||||
|
Reserves
deducted from assets to which they apply:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
61,824
|
$
|
112,390
|
$
|
(53,315
|
)
|
$
|
-
|
$
|
120,899
|
|||||
|
Deferred
tax valuation allowance
|
$
|
2,671,264
|
$
|
123,910
|
$
|
-
|
$
|
(317,972
|
)
|
$
|
2,477,202
|
|||||
|
Inventory
reserve
|
$
|
198,848
|
$
|
382,048
|
$
|
-
|
$
|
(82,911
|
)
|
$
|
497,985
|
|||||
|
Year
ended March 31, 2007
|
||||||||||||||||
|
Reserves
deducted from assets to which they apply:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
103,615
|
$
|
40,082
|
$
|
(26,973
|
)
|
$
|
(54,900
|
)
|
$
|
61,824
|
||||
|
Deferred
tax valuation allowance
|
$
|
6,374,053
|
$
|
-
|
$
|
-
|
$
|
(3,702,789
|
)
|
$
|
2,671,264
|
|||||
|
Inventory
reserve
|
$
|
1,096,123
|
$
|
121,969
|
$
|
(747,505
|
)
|
$
|
(271,739
|
)
|
$
|
198,848
|
||||
|
Year
ended March 31, 2006
|
||||||||||||||||
|
Reserves
deducted from assets to which they apply:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
$
|
117,805
|
$
|
561,271
|
$
|
(575,460
|
)
|
$
|
-
|
$
|
103,615
|
|||||
|
Deferred
tax valuation allowance
|
$
|
10,393,084
|
$
|
-
|
$
|
-
|
$
|
(4,019,031
|
)
|
$
|
6,374,053
|
|||||
|
Inventory
reserve
|
$
|
1,668,430
|
$
|
83,099
|
$
|
(516,742
|
)
|
$
|
(138,664
|
)
|
$
|
1,096,123
|
||||
F-19