-----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, AGkXX6oj3YqyYMLhuB3Y2mS5PLyR2f4gI6bJd4QE0mT1mqES/SU0tdeMP+2mJvZq lAJQC8MHRXqmltY7bOx74w== /in/edgar/work/0001116502-00-500092/0001116502-00-500092.txt : 20001115 0001116502-00-500092.hdr.sgml : 20001115 ACCESSION NUMBER: 0001116502-00-500092 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SINGING MACHINE CO INC CENTRAL INDEX KEY: 0000923601 STANDARD INDUSTRIAL CLASSIFICATION: [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: 763355 BUSINESS ADDRESS: STREET 1: 6601 LYONS ROAD STREET 2: BLDG A-7 CITY: COCONUT CREEK STATE: FL ZIP: 33073 BUSINESS PHONE: 9545961000 MAIL ADDRESS: STREET 1: 6601 LYONS ROAD BLDG CITY: COCONUT CREEK STATE: FL ZIP: 33073 10QSB 1 0001.txt QUARTERLY REPORT 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, 2000 ------------------ Commission File Number 0 - 24968 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 4,254,920 shares of Common Stock, $.01 par value, issued and outstanding at September 30, 2000. THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2000 (Unaudited) and March 31, 2000 (Audited). Consolidated Statement of Operations - Three months and six months ended September 30, 2000 and 1999 (Unaudited). Consolidated Statement of Cash Flows - Six months ended September 30, 2000 and 1999 (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 THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET ASSETS
September 30, March 31, 2000 2000 ------------ ------------ (unaudited) CURRENT ASSETS: Cash $ 496,276 $ 378,848 Accounts Receivable 4,129,180 728,038 Due from Factor 370,520 115,201 Due from Officer(s) 110,000 110,000 Due from related party -- 394,706 Inventory - net 6,747,298 1,487,206 Interest Receivable 2,475 7,425 Prepaid Expenses and Other Current Assets 290,331 204,311 Deferred Tax Asset 266,242 363,194 ------------ ------------ TOTAL CURRENT ASSETS 12,412,322 3,788,929 PROPERTY AND EQUIPMENT, NET 277,066 99,814 OTHER ASSETS: Reorganization Intangible - net 412,342 458,158 ------------ ------------ TOTAL ASSETS $ 13,101,730 $ 4,346,901 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts Payable 1,716,842 354,193 Accrued Expenses 840,581 73,675 Income taxes payable 301,442 11,994 Notes Payable 600,000 0 Due to related party 3,556,768 753 ------------ ------------ TOTAL CURRENT LIABILITIES 7,015,632 440,615 ------------ ------------ SHAREHOLDERS' EQUITY: Preferred Stock, $1.00 par value; 1,000,000 shares authorized, issued and outstanding -- 1,000,000 Common Stock, $.01 par value; 73,900,000 shares authorized; 4,254,920 and 2,960,120, shares issued and outstanding, respectively 42,549 29,600 Common stock to be issued (50,000 and 67,500 shares, respectively) 500 675 Additional Paid In Capital 3,115,438 1,719,049 Deferred Guarantee Fees (285,786) (400,101) Retained Earnings 3,213,397 1,557,063 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 6,086,098 3,906,286 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,101,730 $ 4,346,901 ============ ============
See accompanying notes to financial statements. -3- 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, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- NET SALES $ 11,786,707 $ 6,736,706 $ 17,855,298 $ 8,326,419 COST OF SALES 8,481,626 4,912,905 13,031,470 6,092,484 ------------ ------------ ------------ ------------ GROSS PROFIT 3,305,081 1,823,801 4,823,828 2,233,935 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,506,220 640,173 2,546,117 978,909 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 1,798,861 1,183,628 2,277,711 1,255,026 OTHER INCOME (EXPENSES): Other income 917 7,752 3,946 32,288 Interest expense (140,094) (24,224) (203,192) (37,779) Interest income 11,156 437 35,215 5,635 Factoring fees (33,923) (154,621) (68,498) (197,273) ------------ ------------ ------------ ------------ NET OTHER EXPENSES (161,944) (170,656) (232,529) (197,129) INCOME BEFORE INCOME TAX EXPENSE 1,636,917 1,015,955 2,045,182 1,057,897 INCOME TAX EXPENSE 388,848 0 388,848 0 NET INCOME $ 1,248,069 $ 1,015,955 $ 1,656,334 $ 1,057,897 ============ ============ ============ ============ NET INCOME PER COMMON SHARE Basic $ 0.29 $ 0.35 $ 0.40 $ 0.36 ============ ============ ============ ============ Diluted $ 0.25 $ 0.24 $ 0.33 $ 0.28 ============ ============ ============ ============ WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING Basic 4,251,033 2,898,500 4,157,677 2,898,500 Diluted 5,037,428 4,190,400 4,961,589 3,760,080
See accompanying notes to financial statements. -4- THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended Six Months Ended ------------------------------- ------------------------------- September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ------------ ------------ ------------- ------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 2,069,455 $ 105,727 $ (853,117) $ (995,846) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (182,749) (18,604) (177,252) (44,748) Due from factor 5,917 -- (255,319) -- Due from related parties (11,165) 394,706 (21,555) ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities (176,832) (29,769) (37,865) (66,303) ----------- ----------- ----------- ----------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock & exercise of warrants and options 8,645 -- 409,163 -- Proceeds from issuance of preferred stock -- -- -- 1,375,000 Net proceeds from notes payable (1,546,538) (84,128) 599,247 20,138 ----------- ----------- ----------- ----------- Net cash provided by financing activities (1,537,893) (84,128) 1,008,410 1,285,138 ----------- ----------- ----------- ----------- Increase in cash and cash equivalents 354,730 (8,170) 117,428 222,989 Cash and cash equivalents - beginning of year 141,546 280,447 378,848 49,288 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 496,276 $ 272,277 $ 496,276 $ 272,277 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. -5- THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (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, 2000. 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, 2000, 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, 2000 are not necessarily indicative of the results that may be expected for the entire fiscal year ending March 31, 2001. 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 - MAJOR CUSTOMERS As a percentage of total revenues, the Company's net sales in the aggregate to its five (5) largest customers during the quarters ended September 30, 2000 and 1999 were approximately 76% and 76%, respectively. For the six months ending September 30, 2000, two (2) major retailers accounted for 32% and 22% each of total -6- THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (UNAUDITED) NOTE 2 - MAJOR CUSTOMERS (Cont'd) 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 3 - LOANS PAYABLE During May 2000, the Company entered into two working capital loan agreements of $100,000 and $500,000, respectively. The loans extend over a maximum period of eight months, bear interest at 15% per annum, and are secured by corporate guarantees. In addition, the lenders will be granted 5,000 and 25,000 stock options, respectively, to purchase shares of the Company's common stock at an exercise price of $3.25. NOTE 4 - PRIVATE PLACEMENT OFFERING On April 1, 1999, the Company completed a Private Placement Memorandum (the "Memorandum") offering of 50 Units and raised $1,375,000 ($1,331,017 after related costs). Each Unit consists of 20,000 shares of the Company's Convertible Preferred Stock ("Preferred Stock") and 4,000 Common Stock Purchase Warrants ("Warrants"). Each share of Preferred Stock automatically converted 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 the date of issuance and ending three (3) years from the date of the Memorandum, one (1) share of the Company's Common Stock at a purchase price of $2.00 per share. The Company filed a registration statement with the Commission to register the Company's Common Stock underlying the securities comprising the Units, which was declared effective by the Commission on March 17, 2000. NOTE 5 - EXERCISE OF STOCK OPTIONS AND WARRANTS Stock options and warrants were exercised during the second quarter of fiscal year 2001. 5,500 shares of common stock were issued with proceeds to the Company of $4,645. NOTE 6 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has an agreement with FLX (a China manufacturer of consumer electronics products) to produce -7- THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2000 (UNAUDITED) NOTE 6 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Cont'd) 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, 2000 and 1999, the Company purchased approximately $10.3 million and $1.7 million respectively, in equipment from FLX. The amount due to FLX at September 30, 2000 of $3,556,768 is included in the related party payable. 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. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10- QSB, including without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," and words of similar import, constitute "forward-looking statements." You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described below and elsewhere in this Quarterly Report, and in other documents we file with the Securities and Exchange Commission Readers are cautioned not to place undue reliance on these forward- looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. GENERAL The Singing Machine Company, Inc. and its wholly owned subsidiary, International (SMC) HK, Ltd.("the "Company," "we" or "us") engages in the production and distribution of karaoke audio software and electronic recording equipment. Our electronic karaoke machines and audio software products are marketed under The Singing Machine(TM) trademark. Our 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. Our karaoke machines and karaoke software are currently sold in such retail outlets as Target, Best Buy, J.C. Penney and Fingerhut. We had net income of $1,656,334 for the six month period ended September 30, 2000. Our working capital as of September 30, 2000, was approximately $5,396,690. RESULTS OF OPERATIONS REVENUES Our revenues increased 75% to $11,786,707 during the second quarter ended September 30, 2000, compared with revenues of $6,736,706 for the three-month period ended September 30, 1999. Our revenues increased by 114% to $17,855,289 for the six month period ended September 30, 2000, compared with revenues of $8,326,419 during the same period in 1999. This increase in total revenues can be attributed to the growing popularity of the Company's CD plus graphics machines and the addition of a major customer in the first quarter. -9- GROSS PROFIT Our gross profit from equipment and music sales increased by 81.2% to $3,305,081, for the three month period ended September 30, 2000 compared with gross profit of $1,823,801,for the three month period ended September 30, 1999. Our gross profit from equipment and music sales increased by 116% to $4,823,828, for the six month period ended September 30, 2000, compared with gross profit of $2,233,935, for the same period in 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Our SG&A expenses were $1,506,220, or 12.8% of total revenues, and $640,173, or 9.5% of total revenues for the three month periods ended September 30, 2000 and 1999. Our SG&A expenses were $2,546,117, or 14.3% of total revenues, and $978,909, or 11.8% of total revenues, for the six month periods ended September 30, 2000 and 1999. The period-to-period increase in SG&A expenses is due to (1) an increase in salary related expenses due to an increase in corporate office staff and (2) a non-cash expense due to the continued amortization of stock based guarantee fee. DEPRECIATION AND AMORTIZATION EXPENSES Our depreciation and amortization expenses were $30,449, or .25% of total revenues and $39,557, or .59% of total revenues, for the three month periods ended September 30, 2000 and 1999. This increase in depreciation and amortization expenses can be attributed to the addition of new tooling for the production of machines. Depreciation and amortization expenses were $59,213, or .33% of total revenues and $53,073, or .64% of total revenues, for the six month periods ended September 30, 2000 and 1999. OTHER EXPENSES Net interest expense was $140,094, or 1.2% of total revenues, and $24,224, or .4% of total revenues, for the three months ended September 30, 2000 and 1999. Net interest expense was $203,192, or 1.1% of total revenues, and $37,779, or .5% of total revenues, for the six months ended September 30, 2000 and 1999. The increase in net interest expense can be attributed to our increased use of our credit line facilities to fund the inventory necessary to meet demand for our products. Loss on sales of accounts receivable was $33,923, or .29% of total revenues, and $154,621, or 2.3% of total revenues, during the three month periods ended September 30, 2000 and 1999. Loss on sales of accounts receivable was $68,498, or .38% of total revenues, and $197,129, or 2.6% of total revenues, during the six month periods ended September 30, 2000 and 1999. This decrease is due to decreased charges on factored invoices. These decreased charges are the result of a larger total amount of invoices being factored, which in turn decreased both the interest percentage and gives us -10- better terms of factor. INCOME BEFORE INCOME TAX EXPENSE As a result of the foregoing, our net income before income tax expenses increased by 61.1% to $1,636,917, for the three month period ended September 30, 2000, compared with $1,015,955, for the three month period ended September 30, 1999. Our net income before income tax expense increased by 93.3% to $2,045,182, for the six month period ended September 30, 2000 compared with $1,057,897, for the same period in 1999. INCOME TAX EXPENSE During the second quarter of 2000, we incurred an income tax expense of $388,848. During previous periods, we did not have to pay income taxes, because we used our tax-loss carry-forwards. As of September 30, 2000,we have used up our tax-loss carry-forwards and will have to pay income taxes. We expect our income tax rate to be approximately 20% in future quarters, reflecting the combined tax rates on our operations in the U.S. and Hong Kong. NET INCOME As a result of the foregoing, our net income increased 22.8% to $1,248,069, for the three month period ended September 30, 2000, compared with net income of $1,015,995 for the three month period ended September 30, 1999. Our net income increased by 56.6% to $1,656,334, for the six month period ended September 30, 2000, compared with net income of $1,057,897 for the same period in 1999. SEASONALITY 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. 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. FINANCIAL CONDITION AND LIQUIDITY At September 30, 2000, we had current assets of $12,412,322 and total assets of $13,101,730 compared to current assets of $3,788,929 and total assets of $4,346,901 at March 31, 2000. This increase in current assets and total assets is primarily due to the increase in accounts receivable and inventory. Current liabilities increased to $7,015,632 as of September 30, 2000, compared to $440,615 at March 31, 2000. This increase in -11- current liabilities is because of increased accounts payable, increased accrued expenses, an income tax payable and the increased use of our credit lines to fund future sales. We increased the use of credit lines primarily to purchase more inventory. Accounts payable increased to $1,716,842 as of September 30, 2000 from $354,193 as of March 31, 2000, primarily as a consequence of our increased expenditures to finance our sales efforts. Our shareholder equity increased from $4,346,901 as of March 31, 2000, to $13,101,730 as of September 30, 2000. Our increase in shareholder equity has occurred because of the increase in our current assets and our retained earnings in the amount of $3,213,397. Cash flows used in operating activities were $853,117 during the six month period ended September 30, 2000. Cash used in investing activities during the six month period ended September 30, 2000 was $37,865. Cash flows from financing activities were $1,008,410 during the six month period ended September 30, 2000. This consisted of proceeds in the amount of $409,163 from the exercise of warrants and options, and proceeds from certain loans. CAPITAL RESOURCES The Company has obtained significant financing for continuing operations and growth. Two (2) specific lines of credit have been opened through the Company's Hong Kong subsidiary, and two (2) financing agreements through its U.S. operations. BELGIAN BANK Effective February 14, 2000, the Company, through its Hong Kong subsidiary, International SMC(HK) Ltd., obtained a credit facility of $500,000 (US) 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 held by Belgian Bank. There is no maturity date 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. HONG KONG BANK Effective July 7, 1999, the Company, through its Hong Kong subsidiary, International SMC(HK) Ltd., obtained a credit facility of $200,000 (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 held by Hong Kong Bank. There is no maturity date 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 2.5%. Repayment of principal plus interest shall be made upon -12- negotiation of the export letters of credit, but not later that ninety (90) days after the advance. MAIN FACTORS, INC. The Company is a party to a factoring agreement, as amended April 7, 2000 with Main Factors, Inc. ("Main Factors") pursuant to which Main Factors has agreed to purchase certain of the Company's accounts receivable. Under the agreement, Main Factors will purchase certain selected accounts receivable from the Company and advance between 75% and 85% of the face value of those receivables to the Company. The accounts receivable are purchased by Main Factors without recourse and Main Factors performs an intensive credit review prior to the purchase of the receivables. The Company is charged a variable percentage from 1.5% to 1% based upon the total amount of factored receivables within a calendar year. Main Factors has placed no maximum limit on the amount of the Company's receivables it will purchase. The factoring agreement is personally guaranteed by John Klecha, the Company's Chief Operating Officer and Chief Financial Officer. EPK FINANCIAL CORPORATION 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, thus providing the Company's customers with flexibility, and further, saving the customer the expense of 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 Factors, thereby buying the shipments and related interest from EPK. The Company pays EPK a negotiated flat fee per transaction, and the maximum purchase price per transaction is $1,000,000. There have 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 pursuant to the EPK agreement. 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 a thirty (30) day written notice. LOANS PAYABLE During May 2000, the Company entered into two working capital loan agreements of $100,000 and $500,000, respectively. The loans -13- extend over a maximum period of eight months, bear interest at 15% per annum, and are secured by corporate guarantees. In addition, the lenders will be granted 5,000 and 25,000 stock options, respectively, to purchase shares of the Company's common stock at an exercise price of $3.25. We believe that our current cash and equivalents, lines of credit, and cash generated from operations will satisfy our expected working capital and capital expenditure requirements at least through the next 12 months. 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 is 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. RISK FACTORS Set forth below and elsewhere in this Quarterly Report 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 Quarterly Report. WE DO NOT GENERATE ENOUGH CASH FROM OPERATIONS TO FUND OUR GROWTH PLAN At our current level of development, we do not generate enough cash from operations sufficient to meet operations to fund our rapid growth. To fund our growth plan, we require either additional financing or a restructuring of our credit facilities to meet the ongoing liquidity needs of our operations. There can be no assurance, however, that our liquidity goals will be reached in the immediate future, if ever. WE HAVE SIGNIFICANT FUTURE CAPITAL NEEDS WHICH ARE SUBJECT TO THE UNCERTAINTY OF ADDITIONAL FINANCING We may need to raise significant additional funds to fund our rapid sales growth and/or implement other business strategies. If adequate funds are not available on acceptable terms, or at all, we may be unable to sustain our rapid growth, which would have a material adverse effect on our business, results of operations, and financial condition. -14- YOUR INVESTMENT MAY BE DILUTED If additional funds are raised through the issuance of equity securities, your percentage ownership in the Company's equity will be reduced. Also, you may experience additional dilution in net book value per share, and the equity securities may have rights, preferences, or privileges senior to those of yours. OUR ABILITY TO MANAGE GROWTH COULD HURT OUR BUSINESS To manage our growth, we must implement systems, and train and manage our employees. We may not be able to implement these action items in a timely manner, or at all. Our inability to manage growth effectively could have a material adverse effect on our business operating results, and financial conditions. There can be no assurance that we will achieve our planned expansion goals, manage our growth effectively, or operate profitably. OUR INABILITY TO COMPETE AND MAINTAIN OUR NICHE IN THE ENTERTAINMENT INDUSTRY COULD HURT OUR BUSINESS The business in which we are engaged is highly competitive. 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 and prerecorded tapes, CD's and video cassettes. Competition in the Company's markets is based primarily on price, product performance, reputation, delivery times, and customer support. We believe that new product introductions and enhancements of existing products are material factors for our continuing growth and profitability. Many of our competitors are substantially larger and have significantly greater financial, marketing and operating resources than we have. No assurance can be given that we will continue to be successful in introducing new products or further enhancing existing products. WE RELY ON SALES TO KEY CUSTOMERS WHICH SUBJECTS US TO RISK As a percentage of total revenues, the Company's net sales in the aggregate to its five largest customers during the fiscal years ended March 31, 1999 and 2000, were approximately 91% and 70% respectively. For the fiscal 2000 period, two major retailers accounted for 30% and 18% each of total revenues. During fiscal year 2001, the Company has made significant progress in broadening its base of customers. Although we have long-established relationships with many of our customers, we do not have long-term 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 HAVE SIGNIFICANT RELIANCE ON LARGE RETAILERS WHICH ARE SUBJECT TO CHANGES IN THE ECONOMY We sell products to retailers, including department stores, lifestyle merchants, direct mail retailers which are catalogs and -15- showrooms, national chains, specialty in stores, and warehouse clubs. Certain of such retailers the economy have engaged in leveraged buyouts or transactions in which they incurred a significant amount of debt, and some are currently operating under the protection of bankruptcy laws. Despite the difficulties experienced by retailers in recent years, we have not suffered significant credit losses to date. A deterioration in the financial condition of our major customers could have a material adverse effect on our future profitability. WE ARE SUBJECT TO THE RISKS OF DOING BUSINESS ABROAD We are dependent upon foreign companies for manufacture of all of our electronic products. Our arrangements with manufacturers are subject to the risks 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 the business of the Company. We believe that the loss of any one or more of our suppliers would not have a long-term material adverse effect on us, because other manufacturers with whom we do business would be able to increase production to fulfill our requirements. However, the loss of certain of our suppliers, could, in the short-term, adversely affect our business until alternative supply arrangements were secured. During fiscal 2000 and 1999, suppliers in the People's Republic of China accounted for 88% and 93%, respectively of the Company's total product purchases, including virtually all of the Company's hardware purchases. If Most Favored Nation ("MFN") status for China is restricted or revoked in the future, the costs of goods purchased from Chinese vendors is likely to increase. Management continues to closely monitor the situation and has determined that the production capabilities in countries outside China which have MFN status and, therefore, have favorable duty rates, would meet production needs. Such a change in suppliers may have a short-term adverse effect on operations and, possibly, earnings. WE ARE SUBJECT TO SEASONALITY WHICH IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS AND CHANGES RESULTING IN FLUCTUATIONS IN QUARTERLY RESULTS We have experienced, and will experience in the future, significant fluctuations in sales and operating results from quarter to quarter. This is due largely to the fact that a significant portion of our business is derived from a limited number of relatively large customer orders, the timing of which cannot be predicted. Furthermore, as is typical in the karaoke industry, the quarters ended September 30 and December 31 includes increased revenues from sales made during the holiday season. Additional factors that can cause our sales and operating results to vary significantly from period to period include, among others, the mix of products, fluctuating market demand, price competition, new product introductions by competitors, fluctuations in foreign currency exchange rates, disruptions in delivery of components, political instability, general economic conditions, and the other -16- considerations described in this section. Accordingly, period-to- period comparisons may not necessarily be meaningful and should not be relied on as indicative of future performance. Historically, the third quarter of our fiscal year, the three months ended December 31, have been the most profitable quarter, and the fourth quarter of our fiscal year, the three months ended March 31, have been the least profitable quarter. OUR PROPRIETARY TECHNOLOGY MAY NOT BE SUFFICIENTLY PROTECTED Our success depends on our proprietary technology. We rely on a combination of contractual rights, patents, trade secrets, know- how, trademarks, non-disclosure agreements and technical measures to establish and protect our rights. We cannot assure you that we can protect our rights to prevent third parties from using or copying our technology. WE MAY BE SUBJECT TO CLAIMS FROM THIRD PARTIES FOR UNAUTHORIZED USE OF THEIR PROPRIETARY TECHNOLOGY We believe that we independently developed our technology and that it does not infringe on the proprietary rights or trade secrets of others. However, we cannot assure you that we have not infringed on the technologies of third parties or those third parties will not make infringement violation claims against us. Any infringement claims may have a negative effect on our ability to manufacture our products. CONSUMER DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS AND CHANGES Purchases of karaoke audio software and electronic discretionary recording equipment 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. Adverse economic changes affecting these factors may restrict consumer spending and thereby adversely affect our growth and profitability. WE DEPEND ON THIRD PARTY SUPPLIERS, AND IF WE CANNOT OBTAIN SUPPLIES AS NEEDED, OUR OPERATIONS WILL BE SEVERELY DAMAGED We rely on third party suppliers to produce the parts and materials we use to manufacture our products. If our suppliers are unable to provide us 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. If we are unable to purchase the supplies and parts we need to manufacture our products, we will experience severe production problems, which may possibly result in the termination of our operations. -17- WE MAY NOT BE ABLE TO ATTRACT AND RETAIN KEY PERSONNEL The development of our business has been largely able to attract dependent on the efforts of Edward Steele and John Klecha. Although we have entered into employment contracts with Messrs. Steele and Klecha, the loss of the services of either of these individuals could have a material adverse affect on the Company. We believe that our future success also will depend significantly upon our ability to attract, motivate, and retain additional highly skilled managerial personnel. Competition for such personnel is intense, and there can be no assurance that we will be successful in attracting, assimilating, and retaining the personnel we require to grow and operate profitability. THERE IS ONLY A LIMITED MARKET FOR OUR STOCK AND WE CANNOT ASSURE A MORE SIGNIFICANT MARKET WILL EVER DEVELOP Our common stock is traded on the OTC Bulletin Board under the symbol "SING". As result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our Common Stock. On November 10, 2000,we applied to have our securities listed on the NASDAQ Small Cap Market. While we believe that we meet all the requirements to be listed on the NASDAQ Small Cap Market, there are no assurances that our common stock will be listed on the NASDAQ Small Cap Market. OUR SECURITIES MAY BE SUBJECT TO "PENNY STOCK" TRADING REQUIREMENTS If no exclusions from the definition of a "penny stock" under applicable SEC regulations are available, our securities would be subject to the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors. Consequently, the ability of broker-dealers to sell our securities to prospective purchasers and your ability to sell your securities in the secondary market may be limited. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any material legal proceeding, nor to the knowledge of management, are any legal proceedings threatened against the Company. From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. ITEM 2. CHANGES IN SECURITIES On October 26, 2000, the Board of Directors of the Company unanimously consented to extend the expiration date of the Company's Public Warrants to November 10, 2001. All other terms and conditions of the Public Warrants shall remain the same (exercise price, manner of exercise, etc.). -18- ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS On September 6, 2000, the Company held its Annual Meeting of Stockholders. The stockholders of record at August 4, 2000 were provided with a Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934 as filed July 28, 2000. This Proxy statement detailed four proposals which were brought to vote at the September 6 meeting. The outcome of these proposals as well as details of each vote follows. Proposal 1 - Election of Directors. The following four directors were elected to serve until the next Annual Meeting of Shareholders and until their successors shall be elected and qualified:
Broker For Against Withheld Abstentions Non-Votes --- ------- -------- ----------- --------- Edward Steele 3,960,402 0 2,380 0 0 John Klecha 3,961,394 0 1,388 0 0 Josef Bauer 3,961,394 0 1,388 0 0 Howard Moore 3,961,394 0 1,388 0 0
Proposal 2 - To ratify the issuance of stock options pursuant to the Company's Employee Stock Option Plan: Broker For Against Withheld Abstentions Non-Votes --- ------- -------- ----------- --------- 3,964,846 55,534 0 2,372 0 Proposal 3 - To consider and act upon a proposal to amend the Company's Articles of Incorporation to decrease the number of authorized shares of Common Stock from 75,000,000 to 20,000,000: Broker For Against Withheld Abstentions Non-Votes --- ------- -------- ----------- --------- 3,959,987 2,546 0 252 0 Proposal 4 - To consider and act upon a proposal to approve Weinberg and Company, P.A. as the Company's independent certified public accountants for the fiscal year end March 31, 2001: Broker For Against Withheld Abstentions Non-Votes --- ------- -------- ----------- --------- 3,952,176 10,384 0 222 0 ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits -19- Exhibit Number Title - ------- ----- 3.1 Amendment to the Company's Certificate of Incorporation dated September 6, 2000. 27.1 Financial Data Schedule (b) Reports on Form 8-K On August 11, 2000, the Company filed a Form 8-K reporting information under Item 5 - Other Events. -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 14, 2000 By: /s/ John F. Klecha -------------------- John F. Klecha Chief Financial Officer -21- EX-3.1 2 0002.txt CERTIFICATE OF AMENDMENT EXHIBIT 3.1 CERTIFICATE OF AMENDMENT TO CERTIFICATE OF INCORPORATION OF THE SINGING MACHINE COMPANY, INC. THE SINGING MACHINE COMPANY, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does certify: FIRST: that pursuant to the Company's Annual Meeting on September 6, 2000, and approval by a majority vote of the majority of the shareholders of said corporation, the Board is authorized to amend Article Four to the Articles of Incorporation of the Company to fix the aggregate number of shares of Capital Stock that the Company shall have authority to issue at Twenty Million (20,000,000) shares, as follows: RESOLVED, that the Certificate of Incorporation of The Singing Machine Company, Inc. be amended by deleting the first paragraph of Article Four to the Articles of Incorporation of the Company and to insert the following in its place and stead: "The aggregate number of shares of all classes of capital stock that this Company shall have authority to issue is Twenty Million (20,000,000) shares, consisting of Eighteen Million Nine hundred Thousand (18,900,000) shares of Common Stock, par value $.01 per share (the "Common Stock"); and (ii) One Hundred Thousand (100,000) shares of Class A Common Stock, par value $.01 per share (the "Class A Stock"); and One Million (1,000,000) shares of Preferred Stock, par value $1.00 per (the "Preferred Stock"). 1 SECOND: that the aforesaid amendments were duly adopted in accordance with the applicable provisions of Sections 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, The Singing Machine Company, Inc. has caused this Certificate to be signed by John Klecha, its Secretary, this 6th day of September, 2000. THE SINGING MACHINE COMPANY, INC. By /s/ John Klecha ----------------------- John Klecha, Secretary 2 EX-27 3 0003.txt FDS
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-31-2001 APR-01-2000 SEP-30-2000 496,276 0 4,129,180 0 6,747,298 12,412,322 277,066 59,213 13,101,730 7,015,632 0 0 0 42,549 6,043,549 13,101,730 17,855,298 17,855,298 13,031,470 2,546,117 29,337 0 203,192 2,045,182 388,848 1,656,334 0 0 0 1,656,334 0.40 0.33
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