-----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, HS9agvhwc7sf+sOIx4PAth2+nfZc7z2jO+C8iCQMp0HojW+MqR9z0EekCkUxbaDm t+DCEKk4yQKZ+zG3+feGyA== 0000943440-99-000132.txt : 19991117 0000943440-99-000132.hdr.sgml : 19991117 ACCESSION NUMBER: 0000943440-99-000132 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99754710 BUSINESS ADDRESS: STREET 1: 6601 LYONS ROAD BLDG A-7 CITY: COCONUT CREEK STATE: FL ZIP: 33073 BUSINESS PHONE: 9549688006 MAIL ADDRESS: STREET 1: 6601 LYONS ROAD BLDG CITY: COCONUT CREEK STATE: FL ZIP: 33073 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, 1999 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.) 6601 Lyons Road, Building A-7, Coconut Creek, FL 33073 (Address of principal executive offices ) (954) 596-1000 (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 2,898,500 shares of Common Stock, $.01 par value, issued and outstanding at September 30, 1999. THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1999 (Unaudited) and March 31, 1999. Consolidated Statement of Operations - Three months and six months ended September 30, 1999 and 1998 (Unaudited). Consolidated Statement of Cash Flows - Six months ended September 30, 1999 and 1998 (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, 1999 1999 ------------- --------- (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 272,277 $ 49,288 Accounts receivable - net of $19,900 allowance for doubtful accounts 4,339,525 1,127,970 Due from officer(s) 145,435 13,880 Inventories - net 1,046,649 424,806 Prepaid expenses and other current assets 130,589 27,154 Deferred tax asset 170,000 170,000 ---------- ----------- TOTAL CURRENT ASSETS 6,104,475 1,813,098 PROPERTY & EQUIPMENT - net 50,937 16,447 OTHER ASSETS - Reorganization intangible - net 503,974 549,790 ---------- ----------- TOTAL ASSETS $6,659,386 $ 2,379,335 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $1,525,188 $ 830,088 Accrued expenses 242,369 392,926 Notes payable 83,138 63,000 Due to factor 1,413,053 128,581 ---------- ----------- TOTAL CURRENT LIABILITIES 3,263,749 1,414,595 SHAREHOLDERS' EQUITY: Preferred Stock, $1.00 par value; 1,000,000 shares authorized, issued and outstanding 1,000,000 - Common stock, $.01 par value; 75,000,000 shares authorized, 2,498,452 issued and outstanding at September 30, 1999 and March 31, 1999 28,985 24,984 Additional paid in capital 386,594 15,600 Retained earnings 924,156 924,156 Earnings for period 1,055,897 - ---------- ----------- TOTAL SHAREHOLDERS' EQUITY 3,395,638 2,379,335 ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,659,386 $ 2,379,335 ========== ===========
See accompany notes to financial statements. -4- 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, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- NET SALES $ 6,736,706 $ 3,790,337 $ 8,326,419 $ 5,440,039 COST OF SALES 4,912,905 2,874,367 6,092,484 4,106,698 GROSS PROFIT 1,823,801 915,970 2,233,935 1,333,341 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 640,173 381,218 978,909 754,082 INCOME FROM OPERATIONS 1,183,628 534,752 1,255,026 579,259 OTHER INCOME (EXPENSES): Other income 7,752 9,919 32,288 11,449 Interest expense (24,224) (6,221) (37,779) (10,977) Interest income 3,420 590 5,635 1,688 Factoring fees (154,621) (49,482) (197,273) (65,296) ------------- ------------- ------------ ------------- NET OTHER EXPENSES (167,673) (45,194) (199,129) (63,656) INCOME BEFORE INCOME TAX BENEFIT 1,015,955 489,558 1,055,897 515,603 INCOME TAX BENEFIT (PROVISIONS) - - - - NET INCOME $ 1,015,955 $ 489,558 $ 1,055,897 $ 515,603 ============ ============= ============ ============= NET INCOME PER COMMON SHARE Basic $ 0.35 $ 0.19 $ 0.36 $ 0.21 ============ ============= ============ ============= Diluted $ 0.24 $ 0.19 $ 0.28 $ 0.21 ============ ============= ============ ============= WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING Basis 2,898,500 2,468,066 2,898,500 2,468,066 ============ ============= ============ ============= Diluted 4,190,400 2,468,066 3,760,080 2,468,066 ============ ============= ============ =============
See accompanying notes to financial statements. -5- 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, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 105,727 $ 76,216 $ (995,846) $ 83,185 ------------- ------------- ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Receivable from related parties (11,165) (3,023) (21,555) (3,023) Computer equipment (5,206) (591) (24,660) (1,169) Leasehold improvements (10,982) - (14,672) - Office equipment (2,416) - (2,416) - ------------- ------------- ------------ ------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (29,769) (3,614) (66,303) (4,192) CASH FLOWS FROM FINANCING ACTIVITIES: Notes payable - related party - - (110,000) - Repayments of notes payable - - (63,000) (40,000) Proceeds from packing loan - Belgium Bank - HK (84,128) - 83,138 - Proceeds from notes payable - - - 43,000 Issuance of preferred stock - - 1,375,000 - ------------- ------------- ------------ ------------- NET CASH PROVIDED BY (USED)IN FINANCING ACTIVITIES (84,128) - 1,285,138 3,000 INCREASE IN CASH (8,170) 72,602 222,989 81,993 CASH - BEGINNING OF PERIOD 280,447 20,161 49,288 7,770 ------------- ------------- ------------ ------------- CASH - END OF PERIOD $ 272,277 $ 92,763 $ 272,277 $ 92,763 ============ ============= ============ =============
See accompanying notes to financial statements. -6- THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) 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, 1999. 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, 1999 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, 1999 are not necessarily indicative of the results that may be expected for the entire fiscal year ending March 31, 2000. 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 -7- NOTE 2 - REORGANIZATION (Cont'd) 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 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 were issued an aggregate of 2,180,052 post-split shares of common stock. The financial statements reflect the issuance of 2,180,052 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 As a percentage of total revenues, the Company's net sales in the aggregate to its five (5) largest customers during the six months ended September 30, 1999 and 1998 were approximately 76% and 91%, respectively. For the six months ending September 30, 1999, three (3) major retailers accounted for 25% 20% and 15% each of total revenues. Because of the seasonality of the Company's sales, these results may be distorted due to the historically high percentage of overall sales during the Company's second and third fiscal quarters of each year. NOTE 4 - PRIVATE PLACEMENT OFFERING On June 28, 1999, the Company completed a Private Placement offering of 50 Units for gross proceeds of $1,375,000. -8- NOTE 4 - PRIVATE PLACEMENT OFFERING (Cont'd) Each Unit consisted of 20,000 shares of the Company's Convertible Preferred Stock ("Preferred Stock") and 4,000 Common Stock Purchase Warrants ("Warrants"). Each share of Preferred Stock is convertible, at the option of the Holder, into one (1) share of the Company's Common Stock at any time after issuance until April 1, 2000. Each share of Preferred Stock will automatically convert into one (1) share of the Company's Common Stock on April 1, 2000. Each Warrant entitles the Holder to purchase, at any time during the period commencing from April 1, 1999, and ending April 1, 2002, one (1) share of the Company's Common Stock at a purchase price of $2.00 per share. The Units were offered only to "accredited investors" as defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). Purchasers of the Units received securities that are not registered with the Securities and Exchange Commission (the "Commission") as a result of this Offering. The Company, however, agreed to use its best efforts to file a registration statement with the Commission to register the Company's Common Stock underlying the securities comprising the Units. There is no assurance as to when or if the registration statement will be declared effective by the Commission. There is no public market for the Units, Preferred Stock, or the Warrants, and none developed as a result of the private Offering. As a result of this Private Placement, fifty (50) Units were sold and $1,375,000 gross funds were raised. One million shares of the Company's Convertible Preferred Stock and 200,000 Common Stock Purchase Warrants were issued, effective as of the closing date of the offering, June 28, 1999. NOTE 5 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Edward Steele, a Director and the Company's Chief Executive Officer, has a promissory note outstanding to the Company in the principal amount of $13,880 as of September 30, 1999. The original note for $30,650 granted on March 31, 1998 has been extended until March 31, 2000 with an interest rate of 9% per annum on the unpaid balance. On July 1, 1999, the Company loaned Edward Steele, our Chief Executive Officer, President and Director, $55,000 for the purchase of two (2) units of the Company's Private Placement. The Note, including interest of 9%, matures on June 30, 2000. The Note is secured by the securities comprising the Private Placement Units. -9- NOTE 5 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Cont'd) On July 1, 1999, the Company loaned John Klecha, our Chief Operating Officer, Chief Financial Officer and Director, $55,000 for the purchase of two (2) units of the Company's Private Placement. The Note, including interest of 9%, matures on June 30, 2000. The Note is secured by the securities comprising the Private Placement Units. On June 28, 1999, the Board of Directors of the Company authorized the Company to issue to John Klecha 150,000 shares of the Company's Common stock in consideration for his personal guaranty of the Company's credit facilities provided by Main Factors, Inc. and EPK Financial Corporation. The shares are restricted under the Securities Act of 1933, as Amended. (See: "Capital Resources"). On June 28, 1999, the Board of Directors of the Company authorized the Company to issue to Edward Steele 200,000 shares of the Company's Common stock in consideration for his personal guaranty of the Company's credit facilities provided by EPK Financial Corporation. The shares are restricted under the Securities Act of 1933, as Amended. (See: "Capital Resources"). The Company has an agreement with FLX (a China manufacturer of consumer electronics products) to produce electronic recording equipment based on the Company's specifications. Paul Wu, a former director of the Company, is Chairman of the Board and a principal stockholder of FLX. During the fiscal years ended March 31, 1998, and 1999, the Company purchased approximately $1.7 million and $1.0 million respectively, in equipment from FLX. The Company believes that all of the foregoing transactions with FLX have been on terms no less favorable to the Company than could have been obtained from unaffiliated third parties in arms- length transactions under similar circumstances. The Company entered into Financial Advisory Agreements on July 8, 1999, with Dunedin, Inc., FRS Investments, Inc., and Portfolio Research Associates, Inc. The Company contracted with these companies to provide the Company with a range of advisory services designed to provide the Company with new favorable sources of financing, assistance in raising new equity, possible business combination candidates, feedback concerning public image, review of management, and development of a strategic plan. Under the Agreements, Dunedin, Inc. and FRS Investments, Inc. were -11- each to receive 64,200 Common Stock Purchase Warrants upon execution of the Agreements and 5,200 Common Stock Purchase Warrants each month thereafter for the three (3) year term of the Agreements. Portfolio Research Associates, Inc. was to receive 61,600 Common Stock Purchase Warrants upon execution of the Agreement, and 3,600 Common Stock Purchase Warrants each month thereafter for the three (3) year term of the Agreement. All of the Warrants are exercisable at any time during the term of the Agreements at an exercise price of $1.375 per share. Additionally, each advisor executed a proxy in favor of the Company for each Common Share exercised. The Company has terminated the Financial Advisory Agreements of FRS Investments, Inc. and Portfolio Research Associates, Inc. as of October 1, 1999. The Company issued to Portfolio Research Associates, Inc. 76,000 Common Stock Purchase Warrants and to FRS Investments, Inc. 85,000 Common Stock Purchase Warrants in full satisfaction of their respective Agreements. The Company has issued 79,800 Common Stock Purchase Warrants to Dunedin, Inc. as of September 30, 1999. On October 1, 1999, the Company entered into a Financial Advisory Agreement with Richard Charbit. Mr. Charbit contracted to provide the Company with a broad range of advisory services concerning financing and securities. The Agreement is for a term of three (3) years. Mr. Charbit received 52,000 Common Stock Purchase Warrants upon execution of the Agreement, and will receive 24,000 Warrants on November 30, 1999, and 24,000 Warrants on December 31, 1999 for a total of 100,000 Common Stock Purchase Warrants. All Warrants have an exercise price of $1.375 per share and may be exercised at any time during the three (3) year period from and after October 1, 1999. Further, Mr. Charbit executed a proxy in favor of the Company for each underlying share. -12- 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 karaoke machines and audio software products are marketed under The Singing Machine[R] trademark. 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, Sears, J.C. Penney, Fingerhut and Sam's Clubs. For the first six months of fiscal 1999, the Company's net income was approximately $1,056,000. The Company's working capital as of September 30, 1999 was approximately $2,840,000. RESULTS OF OPERATIONS SIX MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 REVENUES Total revenues increased by approximately $2,887,000 or 53% during the first six months of fiscal 2000 compared to the first six months of fiscal 1999. The increase in revenue is a direct result of the expanding base of the Company's customers and popularity of the Company's CD Plus Graphics players which show song lyrics on TV screens as the CD is played. GROSS PROFIT Gross profit from equipment and music sales increased approximately $900,000 to $2,234,000 or 26.8% for the first six months of fiscal 2000, compared to $1,333,000 or 24.5% for the first six months of fiscal 1999. The increase in gross profit was a direct result of increased equipment sales of the Company's new CD+G karaoke machines and an -12- increase in music sales at a higher gross profit for the six months ending September 30, 1999. SELLING, GENERAL ADMINISTRATIVE EXPENSES Selling, general & administrative expenses increased approximately $225,000 or 30%, during the first six months of fiscal 2000 compared to the first six months of fiscal 1999. The increase is primarily due to increased commissions, advertising, and other sales related expenses due to higher sales volume during fiscal year 2000. DEPRECIATION AND AMORTIZATION EXPENSES Depreciation and amortization expense increased approximately $2,000 or 7% to $32,000 for the first six months of fiscal 2000 compared to the $30,000 recorded last year. The increase is primarily the result of the installation of a Year 2000 compliant computer network during fiscal year 2000. OTHER EXPENSES Net interest expense increased approximately $24,000 during the first six months of fiscal 2000 compared to the same period a year ago. The increase is primarily due to increased banking and interest charges for the financing of increased higher shipments of hardware during fiscal year 2000. Loss on sales of accounts receivable was 2.4% and 1.2% of total revenues during the first six months of fiscal 2000 and 1999 respectively. The loss increased $132,000 to $197,000, compared to the $65,000 recorded last year primarily due to increased sales and an increase of invoices factored during the first six months of fiscal 2000. 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. -13- FINANCIAL CONDITION At September 30, 1999, the Company had current assets of $6,104,475, compared to $1,813,098 at March 31, 1999; total assets of $6,659,386 as compared to $2,379,335 at March 31, 1999; current liabilities of $3,263,749 as compared to $1,414,595 at March 31, 1999, and a current net worth of $3,395,638 as compared to $964,740 at March 31, 1999. The increase is primarily due to additional capital raised through the sale of preferred shares of the Company in a Private Placement Offering during the quarter ended June 30, 1999 (See Note 4 to Financial Statements), and the increase in net income for the six months ended September 30, 1999. CAPITAL RESOURCES The Company has obtained significant financing for continuing operations and growth. Five specific lines of credit have been opened, two financing agreements in Hong Kong and three financing agreements through its U.S. operations. Effective May 19, 1999, the Company, through its Hong Kong subsidiary, International SMC(HK) Ltd., obtained a credit facility of (US) $200,000 from Belgian Bank, Hong Kong, a subsidiary of Generale Bank, Belgium. This facility is a revolving line based upon drawing down a maximum of 15% of the value of export letters of credit lodged with Belgian Bank. There is no expiration except that Belgian Bank reserves the right to revise the terms and conditions at the Bank's discretion. The cost of this credit facility is the U.S. Dollar prime rate plus 1.25%. Repayment of principal plus interest shall be made upon negotiation of the export letters of credit, but not later than ninety (90) days after the advance. Effective July 7, 1999, the Company, through its Hong Kong subsidiary, International SMC(HK) Ltd., obtained a credit facility of $300,000 (US) from Hong Kong Bank. This facility is a revolving line based upon drawing down a maximum of 15% of the value of export letters of credit lodged with Hong Kong Bank. There is no expiration except that Hong Kong Bank reserves the right to revise the terms and conditions at the Bank's discretion. The cost of this credit facility is the U.S. dollar prime rate plus 1.50%. Repayment of principal plus interest shall be made upon negotiation of the export letters of credit, but not later than ninety (90) days after the advance. The Company is a party to a factoring agreement, dated June 16, 1999, with Main Factors, Inc. ("Main Factors") pursuant to which Main Factors purchases certain of the Company's -14- accounts receivable. Under the agreement, Main Factors purchases certain selected accounts receivable from the Company and advances 70% - 85% of the face value of those receivables to the Company. The accounts receivable are purchased by Main Factors without recourse and Main Factors therefore performs an intensive credit review prior to purchase the receivable. The factoring agreement is personally guaranteed by John Klecha, the Company's Chief Operating Officer and Chief Financial Officer. The Company is charged a fixed percentage fee of the invoice. The purchase of receivables of the Company by Main Factors is absolute and is a true sale of receivables. Main Factors has placed no maximum limit on the amount of the Company's receivables they will purchase. The Company has also entered into an agreement with EPK Financial Corporation ("EPK") whereby EPK will open letters of credit with the Company's factories to import inventory for distribution to the Company's customers. This allows the Company to purchase domestic hardware inventory for distribution to customers in less than container load quantities and provides the flexibility to customers of not opening a letter of credit in favor of the Company. The selling price to these customers is considerably higher because the Company pays financing costs to EPK and incurs costs of ocean freight, duty, and handling charges. Upon shipment of product from these financed transactions, the receivables are factored by Main Factor, 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 $1,000,000. There has been no maximum total shipments established under this agreement. Main Factors 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 Edward Steele, the Company's Chairman and Chief Executive Officer and John Klecha, the Company's Chief Operating Officer, and Chief Financial Officer. The agreement is in effect until July 1, 2001, unless terminated by either party upon thirty (30) days written notice. The Company has received a $1,000,000 letter of credit facility from Bank Julius Baer of New York. The Company uses this facility to open letters of credit to its factories. This allows the Company to purchase additional karaoke hardware inventory to sell from its domestic warehouses during the fiscal third quarter. This facility is supported by a $200,000 fixed deposit and a corporate repayment guaranty. -15- 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 installed, tested and implemented a computer network which is Year 2000 compliant. During the Company's fiscal second quarter, new computer hardware and software was installed, successfully replacing the prior computer hardware and software which was not Year 2000 compliant. The Company is currently in the process of converting all third party applications and suppliers to its new network. It is the Company's objective to be in Year 2000 compliance for all systems by the end of calendar 1999, however, no assurance can be given that such objective will be met. -16- PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS On or about November 24, 1998, the Company was named as a defendant for allegedly infringing upon patents for tape decks owned by Tanashin Denki Co., Ltd. ("Tanashin"), a Japanese manufacturing concern. The Company was one of multiple defendants named in the suit filed in the United States District Court for the Eastern District of Virginia. The case has been transferred to the U.S. District Court for the Southern District of Florida, Miami Division. The Company is a co-defendant with Memcorp, from whom the Company purchases the product which is the subject of the alleged infringement. Tanashin alleges damages of approximately $100,000, of which a maximum of $50,000 would be attributable to the Company. However, the Company has viable defenses to the Tanashin claims. Additionally, the Company may have rights of indemnification from Memcorp pursuant to an agreement between the companies. The Company believes that an adverse adjudication would not have a material affect upon the Company's operations. Item 2. CHANGES IN SECURITIES On July 1, 1999, the Company completed a Private Placement offering of 50 Units for gross proceeds of $1,375,000. The purchase price for each Unit was $27,500. Each Unit consisted of 20,000 shares of the Company's Convertible Preferred Stock ("Preferred Stock") and 4,000 Common Stock Purchase Warrants ("Warrants"). Each share of Preferred Stock is convertible, at the option of the Holder, into one (1) share of the Company's Common Stock at any time after issuance until April 1, 2000. Each share of Preferred Stock will automatically convert into one (1) share of the Company's Common Stock at 5:00 p.m. eastern time on April 1, 2000. Each Warrant entitles the Holder to purchase, at any time during the period commencing from April 1, 1999 and ending April 1, 2002, one (1) share of the Company's Common Stock at a purchase price of $2.00 per share. Fractional Units could be purchased at the discretion of the Company. The Units were offered only to "accredited investors" as defined in Rule 501 of Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). The Units were offered on a "$1,100,000 minimum - $1,375,000 maximum" basis pursuant to Rule 506 of Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). Purchasers of the Units received securities that are not registered with the Securities and Exchange Commission (the "Commission") as a result of this Offering. The Company, -17- however, agreed to use its best efforts to file a registration statement with the Commission to register the Company's Common Stock underlying the securities comprising the Units. There is no assurance as to when or if the registration statement will be declared effective by the Commission. There is no public market for the Units, Preferred Stock, or the Warrants, and none developed a result of the private offering. As a result of this Private Placement, fifty (50) Units were sold and $1,375,000 gross funds were raised. One million shares of the Company's Convertible Preferred Stock and 200,000 Common Stock Purchase Warrants were issued, effective as of the closing date of the offering, June 28, 1999. 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 Edward Steele, a Director and the Company's Chief Executive Officer, has a promissory note outstanding to the Company in the principal amount of $13,880 as of September 30, 1999. The original note for $30,650 granted on March 31, 1998 has been extended until March 31, 2000 with an interest rate of 9% per annum on the unpaid balance. On July 1, 1999, the Company loaned Edward Steele, our Chief Executive Officer, President and Director, $55,000 for the purchase of two (2) units of the Company's Private Placement. The Note, including interest of 9%, matures on June 30, 2000. The Note is secured by the securities comprising the Private Placement Units. On July 1, 1999, the Company loaned John Klecha, our Chief Operating Officer, Chief Financial Officer and Director, $55,000 for the purchase of two (2) units of the Company's Private Placement. The Note, including interest of 9%, matures on June 30, 2000. The Note is secured by the securities comprising the Private Placement Units. On June 28, 1999, the Board of Directors of the Company authorized the Company to issue to John Klecha 150,000 shares of the Company's Common stock in consideration for his personal guaranty of the Company's credit facilities provided by Main Factors, Inc. and EPK Financial Corporation. The shares are restricted under the -18- Securities Act of 1933, as Amended. (See: "Capital Resources"). On June 28, 1999, the Board of Directors of the Company authorized the Company to issue to Edward Steele 200,000 shares of the Company's Common stock in consideration for his personal guaranty of the Company's credit facilities provided by EPK Financial Corporation. The shares are restricted under the Securities Act of 1933, as Amended. (See: "Capital Resources"). The Company has an agreement with FLX (a China manufacturer of consumer electronics products) to produce electronic recording equipment based on the Company's specifications. Paul Wu, a former director of the Company, is Chairman of the Board and a principal stockholder of FLX. During the fiscal years ended March 31, 1998, and 1999, the Company purchased approximately $1.7 million and $1.0 million respectively, in equipment from FLX. The Company believes that all of the foregoing transactions with FLX have been on terms no less favorable to the Company than could have been obtained from unaffiliated third parties in arms- length transactions under similar circumstances. The Company entered into Financial Advisory Agreements on July 8, 1999, with Dunedin, Inc., FRS Investments, Inc., and Portfolio Research Associates, Inc. The Company contracted with these companies to provide the Company with a range of advisory services designed to provide the Company with new favorable sources of financing, assistance in raising new equity, possible business combination candidates, feedback concerning public image, review of management, and development of a strategic plan. Under the Agreements, Dunedin, Inc. and FRS Investments, Inc. were each to receive 64,200 Common Stock Purchase Warrants upon execution of the Agreements and 5,200 Common Stock Purchase Warrants each month thereafter for the three (3) year term of the Agreements. Portfolio Research Associates, Inc. was to receive 61,600 Common Stock Purchase Warrants upon execution of the Agreement, and 3,600 Common Stock Purchase Warrants each month thereafter for the three (3) year term of the Agreement. All of the Warrants are exercisable at any time during the term of the Agreements at an exercise price of $1.375 per share. Additionally, each advisor executed a proxy in favor of the Company for each Common Share exercised. The Company has terminated the Financial Advisory Agreements of FRS Investments, Inc. and Portfolio Research Associates, Inc. as of October 1, 1999. The Company issued to Portfolio Research Associates, Inc. 76,000 Common Stock Purchase Warrants and to FRS Investments, Inc. 85,000 Common Stock Purchase Warrants in full satisfaction of their respective Agreements. The Company has issued 79,800 Common Stock Purchase Warrants -19- to Dunedin, Inc. as of September 30, 1999. On October 1, 1999, the Company entered into a Financial Advisory Agreement with Richard Charbit. Mr. Charbit contracted to provide the Company with a broad range of advisory services concerning financing and securities. The Agreement is for a term of three (3) years. Mr. Charbit received 52,000 Common Stock Purchase Warrants upon execution of the Agreement, and will receive 24,000 Warrants on November 30, 1999, and 24,000 Warrants on December 31, 1999 for a total of 100,000 Common Stock Purchase Warrants. All Warrants have an exercise price of $1.375 per share and may be exercised at any time during the three (3) year period from and after October 1, 1999. Further, Mr. Charbit executed a proxy in favor of the Company for each underlying share. On November 1, 1999, the Board of Directors of the Company authorized the extension of the expiration date of the Company's publicly traded warrants (OTCBB - "SINGW") for one (1) year. These warrants are now scheduled to expire November 10, 2000. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) There are no exhibits required to be filed for the period covered by this Report. (b) The Company filed a Current Report on Form 8-K dated September 9, 1999, regarding an increase in the Company's sales for the year ended March 31, 1999. -20- 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: November 12, 1999 By:/s/ John F. Klecha John F. Klecha Chief Financial Officer -21- 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-Q and is qualified in its entirety by reference to such financial statements. 6-MOS MAR-31-1999 SEP-30-1999 272,277 0 4,339,525 19,900 1,046,649 6,104,475 50,937 39,557 6,659,386 3,263,749 0 0 1,000,000 28,985 3,395,638 6,659,386 8,326,419 8,326,419 6,092,484 978,909 0 0 37,779 1,055,897 0 1,055,897 0 0 0 1,055,897 0.36 0.28
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