-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PsSnLoUKq8BXTkJ5Ge7e+1/ngrWEsYpzI+VnDLRUU8c0kMHA1GblPDLuz//TImfU 0ARQW8JpITVUfk8/MqUFcw== 0000943440-98-000118.txt : 19981218 0000943440-98-000118.hdr.sgml : 19981218 ACCESSION NUMBER: 0000943440-98-000118 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SINGING MACHINE CO INC CENTRAL INDEX KEY: 0000923601 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 953795478 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-24968 FILM NUMBER: 98771329 BUSINESS ADDRESS: STREET 1: 3101 N W 25TH AVENUE CITY: POMPANO STATE: FL ZIP: 33069 BUSINESS PHONE: 9549688006 MAIL ADDRESS: STREET 1: 3101 N W 25TH AVENUE CITY: POMPANO BEACH STATE: FL ZIP: 33069 10QSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 0 - 24968 Commission File Number THE SINGING MACHINE COMPANY, INC. (Exact Name of Small Business Issuer as Specified in its Charter) Delaware 95-3795478 (State of Incorporation ) (IRS Employer I.D. No.) 3101 N.W. 25th Avenue, Pompano Beach, FL 33069 (Address of principal executive offices ) (954) 968-8006 (Issuer's telephone number, including area code) Check whether the Issuer: (1) filed all reports required to be filed by section 13 or 15(d) of the Exchange Act during the past 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 X No . APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes X No . APPLICABLE ONLY TO CORPORATE ISSUERS There were 2,356,935 shares of Common Stock, $.01 par value, issued and outstanding at September 30, 1998. THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1998 (Unaudited) and March 31, 1998. Consolidated Statement of Operations - Three months and six months ended September 30, 1998 and 1997 (Unaudited). Consolidated Statement of Cash Flows - Six months ended September 30, 1998 and 1997 (Unaudited). Notes to Consolidated Financial Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security-Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES 2 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY PART I - FINANCIAL INFORMATION Item I. Financial Statements 3 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET
ASSETS September 30, March 31, 1998 1998 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 92,763 $ 7,770 Trade accounts receivable - net of $80,000 allowance for doubtful accounts 1,574,995 532,765 Accounts receivable - related parties 26,658 25,489 Inventories - net 729,495 410,293 Prepaid expenses and other assets 34,460 38,047 TOTAL CURRENT ASSETS 2,458,371 1,014,364 PROPERTY & EQUIPMENT - net of accumulated depreciation of $169,768 as of September 30, 1998 and $163,064 as of March 31, 1998 12,731 19,435 INTANGIBLE ASSETS: Investments in song library net of accumulated amortization of $424,187 as of September 30, 1998 and $398,328 as of March 31, 1998 20,731 46,590 OTHER ASSETS 6,707 6,707 TOTAL ASSETS $2,498,540 $1,087,096
See accompanying notes to financial statements. 4 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY September 30, March 31, 1998 1998 (Unaudited) CURRENT LIABILITIES Trade accounts payable $ 2,296,043 $ 1,429,917 Loans payable 129,715 100,000 TOTAL CURRENT LIABILITIES 2,425,758 1,529,917 STOCKHOLDERS' EQUITY: Common stock, $.01 par value - 10,000,000 shares authorized, 2,356,935 issued and outstanding at September 30, 1998 and March 31, 1998 23,569 23,569 Additional paid in capital 9,986,867 9,986,867 Accumulated deficit (9,937,654) (10,453,257) Total stockholders' equity 72,782 (442,821) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,498,540 $ 1,087,096
See accompany notes to financial statements. 5 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS ( Unaudited )
Three Months Ended Six Months Ended September 30, September 30, September 30, September 30, 1998 1997 1998 1997 REVENUES: Equipment sales, net $3,692,515 $1,878,957 $5,316,554 $2,006,212 Music sales, net 97,822 251,990 123,485 352,832 Commission income - related party - 1,702 - 4,443 Other 9,919 9,928 11,449 39,883 Total revenues 3,800,256 2,142,577 5,451,488 2,403,370 COSTS AND EXPENSES: Cost of equipment sales 2,838,478 1,583,348 4,065,474 1,757,217 Cost of music sales 35,889 69,545 41,224 105,850 Other operating expenses 68,916 77,660 134,245 181,907 Selling general and administrative expense 297,821 245,678 589,378 540,585 Depreciation and amortization 14,481 46,673 30,459 93,348 Total costs and expenses 3,255,585 2,022,904 4,860,780 2,678,907 Operating income ( loss ) 544,671 119,673 590,708 (275,537) Other income ( expenses ): Interest income 590 569 1,168 1,125 Interest expense (6,221) (2,416) (10,977) (4,215) Factoring fees (49,482) (28,896) (65,296) (45,932) Total other expenses, net (55,113) (30,743) (75,105) (49,022) Income ( loss ) before taxes 489,558 88,930 515,603 (324,559)
6 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended September 30, September 30, September 30, September 30, 1998 1997 1998 1997 Net income (loss) $ 489,558 $ 88,930 $ 515,603 $ (324,559) Net income (loss) per share $ 0.21 $ 0.03 $ 0.22 $ (0.11) WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 2,356,934 2,883,582 2,356,934 2,883,582
See accompanying notes to financial statements. 7 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS ( Unaudited )
Three Months Ended Six Months Ended September 30, September 30, September 30, September 30, 1998 1997 1998 1997 NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 76,216 $ 25,846 $ 86,185 $ 40,778 CASH FLOWS FROM INVESTING ACTIVITIES: Property & equipment (3,023) - (3,023) - Receivable from related parties (591) (569) (1,169) 6,749 Other assets - (1,050) - (7,757) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,614) (1,619) (4,192) (1,008) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable - - 43,000 - Repayments of notes payable - - (40,000) - NET CASH PROVIDED BY (USED)IN FINANCING ACTIVITIES - - 3,000 - INCREASE (DECREASE) IN CASH 72,602 24,227 81,993 39,770 CASH - BEGINNING OF PERIOD 20,161 15,166 7,770 (377) CASH - END OF PERIOD $ 92,763 $ 39,393 $ 92,763 $ 39,393
See accompanying notes to financial statements. 8 NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-QSB and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. It is suggested that these consolidated condensed financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's audited financial statements on Form 10-KSB for the fiscal year ended March 31, 1998. The accounting policies followed for interim financial reporting are the same as those disclosed in Note 1 of the Notes to Financial Statements included in the Company's audited financial statements for the fiscal year ended March 31, 1998 which are included in Form 10-KSB. In the opinion of management, all adjustments which are of a normal recurring nature and considered necessary to present fairly the financial positions, results of operations, and cash flows for all periods presented have been made. The results of operations for the six month period ended September 30, 1998 are not necessarily indicative of the results that may be expected for the entire fiscal year ending March 31, 1999. The accompanying consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter company balances and transactions have been eliminated. Assets and liabilities of the foreign subsidiary are translated at the rate of exchange in effect at the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustment is not material. NOTE 2 - REORGANIZATION On April 1, 1998, the Company effectuated a one-for-ten (1:10) reverse stock split. The primary purpose of the reverse stock split was to comply with the Company's Plan of Reorganization, as Amended, which was confirmed on March 17, 1998. Trading in the post-split shares commenced at the opening of business on April 1, 1998. No additional 9 NOTE 2 - REORGANIZATION (Cont'd) shares were issued in connection with the reverse split and those stockholders entitled to receive fractional shares received shares based on rounding to the nearest whole number. During April 1998, the Company filed an amendment to its Articles of Incorporation increasing the authorized shares of the Company's common stock to ten million (10,000,000) shares. The Company's creditors, pursuant to the Company's Plan of Reorganization, as Amended, who elected to receive shares will be issued an aggregate of 2,068,576 post-split shares of common stock. The Company's legal counsel has written to each creditor requesting that the necessary information be completed and returned in order to issue the common stock. The financial statements reflect the issuance of 2,068,576 post-split shares of common stock to the Company's creditors. These financial statements also reflect the one-for-ten (1:10) reverse stock split in computing the weighted average common and common equivalent shares outstanding and the net loss per common share amounts and account for the subsequent increase of authorized common shares pursuant to the Company's amendment to its Articles of Incorporation during April 1998. NOTE 3 - MAJOR CUSTOMERS During the six months ended September 30, 1998 and 1997, 91.1% and 85.7%, respectively, of the Company's total revenue were derived from net sales to its five largest customers. Sales derived from customers who individually purchased greater than 10% of total revenues were as follows: SIX MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 Target 31.3% 11.0% Best Buy 24.0% - Fingerhut - 27.6% JC Penney 26.6% 37.7% Because of the seasonality of the Company's sales, these results may be distorted due to historically low percentage of overall sales during the Company's first quarter and historically high third quarter shipments. 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The analysis of the Company's financial condition, liquidity, capital resources, and results of operations should be reviewed in conjunction with the accompanying financial statements, including the notes thereto. General The Singing Machine Company Inc., incorporated in Delaware in 1994, together with its wholly owned subsidiary, International (SMC) HK, Ltd. (hereafter referred to as the "Company"), engages in the production and distribution of karaoke audio software and electronic recording equipment. The Company's electronic recording and playback products are marketed under The Singing Machine or Memorex trademarks. The Company's audio software is marketed under the trademark Karaoke Kassette , Karaoke Kompact Disc and Karaoke Video kassette . The Company's products are sold throughout the United States, primarily through department stores, lifestyle merchants, mass merchandisers, direct mail catalogs and showrooms, music and record stores, national chains, specialty stores and warehouse clubs. The Company's karaoke machines and karaoke software are currently sold in such retail outlets as Target, Best Buy, J.C. Penney and Fingerhut. On October 27, 1995 the Company signed an exclusive five (5) year sub-distribution agreement with Memcorp, Inc. a Florida company holding rights to MEMOREX, a registered trademark name. Under the agreement the Company became the exclusive sub-distributor of karaoke hardware products under "Memorex" trademark. For the first six months of fiscal 1999, the Company's net income was approximately $516,000. The Company's working capital as of September 30, 1998 was approximately $33,000. RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 REVENUES Total revenues increased by approximately $3,048,000 or 227% during the first six months of fiscal 1999 compared to the first six months of fiscal 1998. The increase in revenue is primarily a result of increases in equipment and software sales and a reduced rate of returns from customers. Revenues from equipment sales increased 265% to approximately $5,316,000 for the first six months of fiscal 1999 compared to $2,006,000 for the first six months 11 of fiscal 1998. The increase in equipment sales was primarily a result of the ability of the Company to obtain new financing to purchase new inventory during the first six months of fiscal 1999. Revenues from music sales declined by 65% to approximately $123,000 for the first six months of fiscal 1999 compared to $353,000 for the first six months of fiscal 1998. Commissions and other income decreased approximately $33,000 to $11,000 for the first six months of fiscal 1999 compared to the first six months of fiscal 1998. The decrease reflects lower commission income from a related party, primarily due to International's increased business operations in Hong Kong, reflecting lower licensing fees. GROSS PROFIT Gross profit from equipment and music sales increased approximately $837,364 to $1,333,000 or 24.5% for the first six months of fiscal 1999, compared to $495,977 or 21.1% for the first six months of fiscal 1998. The increase in gross profit was primarily a result of the reduction of the Company's existing inventory and the ability of the Company to obtain new financing to purchase new inventory after the Chapter 11 reorganization and selling at higher gross margins. OTHER OPERATING EXPENSES Other operating expenses decreased approximately $48,000, or 26% during the first six months of fiscal 1999 compared to the same period a year ago. The decrease is primarily due to lower facility and personnel expenses. SELLING, GENERAL ADMINISTRATIVE EXPENSES Selling, general & administrative expenses increased approximately $52,143 or 21.2%, during the first six months of fiscal 1999 compared to the first six months of fiscal 1998. The increase is primarily due to an increase in salaries and payroll taxes as a direct result of an additional employee (marketing) product development expenses as a direct result of production of new music titles and development costs of new music multi-packs and significant increases in freight and delivery costs as a result of increased sales. DEPRECIATION AND AMORTIZATION EXPENSES Depreciation and amortization expense decreased approximately $63,000 or 67% to $30,000 for the first six months of fiscal 1999 compared to the $93,000 recorded last year. The decrease is primarily the result of the write off of the costs of trademarks no longer used, cost in excess of net assets (goodwill), write-down of the song 12 library due to the bankruptcy reorganization, and leasehold improvements abandoned while moving to a smaller facility. OTHER EXPENSES Net interest expense increased approximately $26,000 or 57% during the first six months of fiscal 1999 compared to the same period year ago. The increase is primarily due to increased banking and interest charges of the Company's Hong Kong subsidiary to finance increased shipments of hardware. Loss on sales of accounts receivable was 1.2% and 1.8% of total revenues during the first six months of fiscal 1999 and 1998 respectively. The loss increased $19,000 to $65,000, compared to the $46,000 recorded last year primarily due to higher shipments and factoring of those receivables during the first six months of fiscal 1999. SEASONALITY AND QUARTERLY RESULTS Historically, the Company's 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. The company's results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to- quarter basis. FINANCIAL CONDITION At September 30, 1998, the Company had current assets of $2,458,371, compared to $1,014,364 at March 31, 1998; total assets of $2,495,640 as compared to $1,087,096 at March 31, 1998; current liabilities of $2,425,758 as compared to $1,529,917 at March 31, 1998, and a current net worth of $72,782 as compared to $(442,821) at March 31, 1998. (See "Financial Statements"). The increase in total assets and net worth are principally due to the increases of inventories and receivables as a result of higher sales and orders during the six months ended September 30, 1998. LIQUIDITY AND CAPITAL RESOURCES Going Concern: The Company's working capital at September 30, 1998, was approximately $33,000. The report by the Company's independent auditors on its March 31, 1998 financial statements express substantial doubt about the Company's ability to continue as a going concern. The 13 independent auditors attributed this substantial doubt to substantial net operating losses in the fiscal year ended March 31, 1998, and an accumulated deficit of approximately $10,400,000. This condition raised substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include adjustments relating to the recoverability and classification of the recorded carrying value of assets or the amounts or classifications of other liabilities that might be necessary should the Company be unable to successfully negotiate additional inventory financing and continue as a going concern. Capital Resources: Since the date of the March 31, 1998 financial statements, the Company has obtained significant financing for continuing operations and growth. Three specific lines of credit have been opened, a financing agreement in Hong Kong and two financing agreements through its U.S. operations. Effective July 2, 1998, the Company, through its Hong Kong subsidiary, International SMC(HK) Ltd., has been provided a (US) $200,000 credit facility for opening letters of credit and/or trust receipt and/or purchasing at the Company's factories by purchasing of documents against acceptance bills, from Delta Asia Financial Group, Hong Kong. This facility is a revolving line until May 31, 1999, at which time it will be reviewed. The cost of this credit facility is prime plus 2 1/2% and bank charges for opening letters of credit. This facility is personally guaranteed by Mr. J.A. Bauer, a former director of the Company. The Company is a party to a factoring agreement, dated April 24, 1998, with Berkshire Financial Group, Inc. ("Berkshire") pursuant to which Berkshire purchases certain of the Company's accounts receivable. Under the agreement, Berkshire purchases certain selected accounts receivable from the Company and advances 70% of the face value of those receivables to the Company. The accounts receivable are purchased by Berkshire without recourse and Berkshire therefore performs an intensive credit review prior to purchase the receivable. The Company is charged a variable percentage fee based upon the length of collection period of the receivable and the remaining collected balance fees are sent to the Company after collection. The purchase of receivables of the Company by Berkshire is absolute and is a true sale of receivables. Berkshire has placed no maximum limit on the amount of the Company's receivables they will purchase. The Company has also entered into an agreement with EPK Financial Corporation ("EPK") whereby EPK will open letters of credit with the Company's factories to import inventory for distribution to the Company's customers. This allows 14 the Company to purchase domestic hardware inventory for distribution to customers in less than container load quantities and provides the flexibility to customers of not opening a letter of credit in favor of the Company. The selling price to these customers is considerably higher because the Company pays financing costs to EPK and incurs costs of ocean freight, duty, and handling charges. Upon shipment of product from these financed transactions, the receivables are factored by Berkshire Financial, thereby buying the shipments and related interest from EPK. The Company pays EPK a flat fee per transaction, which is negotiated for each shipment, and the maximum purchase price per transaction is $300,000. There has been no maximum total shipments established under this agreement. Berkshire has entered into this agreement as a third party agreeing to purchase all receivables invoiced under these transactions. The transactions financed by EPK are supported by personal guarantees of the chief executive officer and chief financial officer of the Company and the agreement is in effect until July 1, 1999, unless terminated by either party upon 30 days' written notice. The Company has no present commitment that is likely to result in its liquidity increasing or decreasing in any material way. In addition, the Company knows of no trend, additional demand, event or uncertainty that will result in, or that are reasonably likely to result in, the Company's liquidity increasing or decreasing in any material way. The Company has no material commitments for capital expenditures. The Company knows of no material trends, favorable or unfavorable, in the Company's capital resources. The Company has no additional outstanding credit lines or credit commitments in place and has no additional current need for financial credit. YEAR 2000 Management has compiled a list of both internally and externally supplied information systems that utilize imbedded date codes which could experience operational difficulties in the year 2000. The Company uses third party applications or suppliers for all high level systems and reporting. These systems will either be upgraded and tested to be in compliance for the year 2000 or the Company will take necessary steps to replace the supplier. Management is testing new systems for which it is responsible. It is the Company's objective to be in year 2000 compliance for all systems by the end of fiscal 1999, however, no assurance can be given that such objective will be met. 15 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Not applicable Item 2. CHANGES IN SECURITIES Not applicable Item 3. DEFAULTS UPON SENIOR SECURITIES Not applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS Not applicable Item 5. OTHER INFORMATION Not applicable Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) There are not exhibits required to be filed for the period covered by this Report. (b) The Company did not file a Current Report on Form 8-K during the period covered by this Report. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE SINGING MACHINE COMPANY, INC. Dated: December 17, 1998 By:/s/ John F. Klecha John F. Klecha Chief Financial Officer EX-27 2
5 This schedule contains summary financial information extracted from Balance Sheet, Statement of Operations, Statements of Cash Flows and Notes thereto incorporated in Part I, Item 1. of this Form 10-QSB and is qualified in its entirety by reference to such financial statements. 6-MOS MAR-31-1999 SEP-30-1998 92,763 0 1,574,995 80,000 729,495 2,458,371 12,731 769,768 2,498,540 2,425,758 0 0 0 23,569 72,782 2,498,540 5,440,039 5,451,488 4,106,698 4,860,780 75,105 0 76,273 515,603 0 515,603 0 0 0 515,603 .22 .22
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