SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______TO_________
COMMISSION FILE NUMBER: 0-24968
THE SINGING MACHINE COMPANY, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-3795478
-------- ----------
(State of Incorporation) (I.R.S. Employer I.D. No.)
1551 W. COPANS ROAD, SUITE 100, POMPANO BEACH, FL 33064
- ------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 968-8006
--------------
Check whether the registrant (1) has filed all reports required by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days.
YES X NO____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES ____ NO____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 2,811,582 shares of common
stock outstanding as of November 1, 1996.
This report contains a total of 25 pages.
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
FORM 10-QSB
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEET.................. 3
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS....... 5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS....... 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................24
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 375,723
Trade accounts receivable, net of
factor advances of $760,000
allowance for doubtful accounts of
$17,000 and sales returns and
allowance of $137,000 2,099,360
Receivables - related parties 31,296
Inventories - net 1,393,785
Prepaid expenses & other assets 66,863
----------
Total current assets 3,967,027
PROPERTY & EQUIPMENT - net of accumulated
depreciation of $239,000 292,324
INTANGIBLE ASSETS:
Investments in song library, net of
accumulated amortization of $291,000 974,075
Trademarks, net of accumulated
amortization of $112,000 653,499
Cost in excess of net asset acquired
net of accumulated amortization
of $85,000 494,443
----------
Total intangible assets 2,122,017
OTHER ASSETS 19,490
----------
Total assets $6,400,858
==========
The accompanying notes are an integral part of these statements.
3
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
LIABILITIES & STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Trade accounts payable $2,983,819
Trade payables - related parties 715,292
Accrued expenses 584,310
Royalties payable 980,631
Current portion of long term debt 1,348,914
----------
Total current liabilities 6,612,966
LONG TERM DEBT 20,878
----------
Total liabilities 6,633,844
----------
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value - 10,000,000
shares authorized, 2,811,582 shares
issued and outstanding 28,116
Additional paid in capital 5,827,169
Accumulated deficit (6,088,271)
----------
Total stockholders' deficit (232,986)
-----------
Total liabilities & stockholders' deficit $6,400,858
===========
The accompanying notes are an integral part of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
THE SINGING MACHINE COMPANY INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Equipment sales, net $4,345,078 $1,356,597 $ 5,434,360 $1,741,014
Music sales, net 454,323 424,528 720,707 759,306
Commission income - related party 55,145 79,742 69,164 112,065
Other 37,251 149 66,172 13,588
--------- ---------- ----------- ----------
Total revenues 4,891,797 1,861,016 6,290,403 2,625,973
Costs and expenses:
Cost of equipment sales 3,747,906 1,156,368 4,758,220 1,500,523
Cost of music sales 324,438 302,482 536,243 536,229
Other operating expenses 155,177 150,780 254,350 302,251
Selling general and administrative expenses 620,752 761,600 950,895 1,442,883
Depreciation and amortization 69,008 50,704 137,530 97,086
--------- ---------- ---------- ----------
Total costs and expenses 4,917,281 2,421,934 6,637,238 3,878,972
--------- ----------- ---------- ----------
Operating income (loss) (25,485) (560,918) (346,835) (1,252,999)
Other income (expenses):
Interest income 755 823 1,442 5,972
Interest expense (12,944) (49,252) (76,711) (94,036)
Loss on sales of accounts receivables (41,020) (44,824) (65,908) (73,817)
--------- ---------- ---------- ---------
Total other expenses, net (53,209) (93,253) (141,177) (161,881)
Income (loss) before taxes and --------- ---------- ---------- ---------
extraordinary item (78,694) (654,171) (488,012) (1,414,880)
Extraordinary item, net of income taxes:
Gain from debt extinguishment 71,285 - 71,285 -
--------- ---------- ---------- ---------
Income (loss) before taxes (7,409) (654,171) (416,727) (1,414,880)
Benefit (provision) for income taxes - (6,064) - (6,064)
--------- ---------- --------- -----------
Net income (loss) $ (7,409) $ (660,235) $ (416,727) $(1,420,944)
========= ========== ========= ===========
Net income (loss) per share $ (0.00) $ (0.23) $ (0.15) $ (0.51)
========= ========== ========= ===========
Weighted average common and common
equivalent shares outstanding 2,811,582 2,811,582 2,811,582 2,800,701
========= ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
<TABLE>
<CAPTION>
THE SINGING MACHINE COMPANY INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES $ 456,728 $153,622 $ 96,985 $(690,834)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property & equipment (3,141) (64,051) (3,038) (99,804)
Additions to song library - (10,715) (1) (50,735)
Receivable from related parties (938) (193) (1,093) 733
Other assets (13,505) 13,409 (1) 23,808
------- ------- ------ -------
Net cash provided (used) in investing activities (17,584) (61,550) (4,133) (125,998)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable - 15,354 - -
Proceeds from notes payable 85,040 - 492,732 15,354
Repayments of notes payable (185,142) (124,500) (199,161) (224,500)
Issuance of common stock & warrants - - - 320,578
Proceeds of long term debt - 37,903 - 37,903
Repayment of long term debt (3,441) (10,554) (10,814) (24,393)
------- ------- ------- -------
Net cash provided (used) in financing activities (103,543) (81,797) 282,757 124,942
Increase (decrease) in cash 335,601 10,275 375,610 (691,890)
Cash at beginning of period 40,122 38,158 113 740,349
Effect of currency exchange rate change - (407) - (433)
------- ------- ------- -------
Cash at end of period $ 375,723 $ 48,026 $ 375,723 $ 48,026
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The accompanying consolidated condensed 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 consolidated financial
statements and notes thereto included in the Company's audited
consolidated financial statements on Form 10-KSB for the fiscal year
ended March 31, 1996.
The accounting policies followed for interim financial reporting are the
same as those disclosed in Note 1 of the Notes to Consolidated Financial
Statements included in the Company's audited consolidated financial
statements for the fiscal year ended March 31, 1996 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 position, results of operations, and cash flows for all
periods presented have been made.
The results of operations for the six month period ended September
30,1996 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending March 31, 1997.
The accompanying consolidated condensed financial statements include the
accounts of the Company and its wholly-owned subsidiary. All significant
intercompany 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.
2. NOTES PAYABLE
On May 22, 1995, the Company signed a promissory note in the amount of
$830,000 with a royalty creditor for the payment of past due royalty
obligations and interest due through March 31, 1994. The note payable
requires various payments through April 15, 1997 and provides for
monthly interest payments at 8%. The Company incurred approximately
$12,800 of interest expense for the three months ended June 30, 1996 and
$20,800 for the six months ended September 30, 1996. Amounts due under
the note are collateralized by a security interest in
7
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
the Company's song library. The aggregate amount liable under
the note was approximately $191,000, as of September 30, 1996.
3. STOCKHOLDERS' EQUITY
In April 1995, the Company issued 272,250 common shares, $.01 par value,
to holders exercising 272,250 outstanding Bridge Warrants. The Bridge
Warrants were exercisable at a price of $1.20 per share of Common Stock
commencing February 8, 1995 and expire on August 15, 1999. The net
proceeds from the issuance was approximately $326,000 which was used for
the payment of trade payables. As of September 30, 1996, 87,750 Bridge
Warrants remain outstanding.
4. MAJOR CUSTOMERS
During the six months ended September 30, 1996 and 1995, 78.7% and
46.7%, respectively, of the Company's total revenues 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
SEPTEMBER 30, ENDED
1996 SEPTEMBER 30,
1995
------------------------- -----------------------
Target 48.1% 13.6%
J.C. Penney 17.1% 10.7%
Ames - 16.6%
Handleman Company - 11.7%
Montgomery Ward - 16.5%
5. CONTINGENCIES
The Company is required to pay certain royalties related to the sale of
a substantial portion of its music and lyrics based upon prescribed and
negotiated rates. Royalty expense was approximately $203,700 and
$253,700 for the first six months of fiscal 1997 and 1996, respectively,
and is included in cost of music sales in the accompanying consolidated
condensed statements of operations. The Company was not current in the
payment of certain of its royalty obligations to various royalty
creditors as of September 30, 1996. The Company did however, make
payments of $160,000 to its principal royalty creditor, The Harry Fox
Agency, Inc. ("HFA"), during July and August 1996. Although management
feels that it has sufficiently accrued for all such liability
8
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
in the accompanying consolidated condensed balance sheet, HFA contends
as a result of a recent audit, that the Company owes an additional
$195,000 in royalties. The Company disputes this assertion and is in
discussions with HFA to resolve the matter.
As a result of its actual and proposed satisfaction of a portion of all
past-due royalty obligations, management believes that it is remote that
any claims which could be asserted under its written copyright licensing
agreements or pursuant to United States federal copyright regulations
will be asserted. However, the ultimate outcome of this uncertainty and
its effect on the financial statements cannot be determined at this
time.
On July 20, 1994, certain of the Company's shareholders agreed to
indemnify the Company against certain claims asserted with respect to
the period September 3, 1991 through November 10, 1994, arising out of
the Company's compulsory statutory licensing agreements, by pledging
all of their shares of Common Stock to the Company. In the event of the
assertion of such claim, the Company may require the return of shares of
Common Stock to the Company with a market value equal to such claim.
There can be no assurance, however, that the Company would be able to
sell or otherwise dispose of such shares for cash in order to satisfy
the claim. In addition, the Company would continue to bear all other
costs and expenses incurred by, or assessed against, the Company
(including legal) associated with such a claim, whether or not such
claim is resolved in favor of the Company. The Company has agreed to
release certain shares of Common Stock from the provisions of the pledge
and indemnity agreement during the period beginning 13 months after
November 10, 1994 under certain circumstances based upon the performance
of the Company. No such shares have been released as of November 10,
1996. The pledge and indemnity agreement will also terminate in the
event of a pledgor's death, provided the Company then maintains adequate
insurance on such pledgor. No such insurance is presently in place.
6. TRADEMARK
On October 27, 1995 the Company signed a five year agreement (the
"Sub-distributor Agreement") with Memcorp, Inc. ("Memcorp"), a Florida
corporation, whereby the Company became the exclusive sub-distributor of
KARAOKE hardware products under the "Memorex" trademark. The
Sub-distributor Agreement requires the Company to pay a commission fee
on all hardware sales during the term of the agreement. In addition to
the Sub-distributor Agreement, an administrative agreement (the "Memcorp
Administrative Agreement") was also signed which
9
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
provides the Company administrative assistance and the use of office and
warehouse space in Asia as may be required for the purchase,
distribution and sale of products. The Company pays Memcorp a commission
fee on all shipped products for these services.
As part of the consideration for the Sub-distributor and Administrative
Agreements, the Company granted Memcorp an option (the "Memcorp
Option"), exercisable until October 26, 1996, to purchase one million
shares of the Company's Common Stock at a price of one dollar ($1) per
share. Memcorp was granted certain registration rights for one year with
respect to the shares underlying the option. This option has now expired
unexercised.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Singing Machine Company, Inc., incorporated in Delaware in 1994, together
with its wholly-owned subsidiary International SMC (HK) Ltd.,
("International"), (hereinafter 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 /Registered trademark/ or Memorex /Trademark/ trademarks. It's
audio software is marketed under the trademarks KARAOKE Kassette /Trademark/,
KARAOKE KOMPACT DISC /Trademark/ AND KARAOKE VIDEO KASSETTE /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 are currently sold in such stores as Target, Toys
R US, J.C. Penney, Incredible Universe, Montgomery Ward, Spiegel's Catalog, and
Wal-Mart. The Company's KARAOKE software customers include Montgomery Ward,
Fingerhut, Target, The Wall, Specs Music, Ames, The Wherehouse Stores and
Musicland.
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 KAROKE hardware products under the "Memorex"
trademark.
The Company continues to post losses. For the second quarter of fiscal 1997 the
Company lost approximately $7,400. The loss includes an extraordinary gain and
the impact of certain adjustments; excluding these items the loss would have
been approximately $182,000. See "Results of Operations" for further
information. The Company's working capital deficit as of September 30, 1996 was
approximately $2.7 million.
As a result of historical losses, a net working capital deficiency and lack of
financing, the Company's auditors expressed substantial doubt about the
Company's ability to continue as a going concern based on their audit of the
Company's financial statements for the fiscal year ended March 31, 1996. See
"Results of Operations", "Liquidity and Capital Resources" and "Going Concern",
for the fiscal quarter ended September 30, 1996 for further information.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES
Total revenues increased by approximately $3.0 million or 163% during the second
quarter of fiscal 1997 compared to the second quarter of fiscal 1996. The
increase in revenues is primarily the result of an increase in equipment sales.
Revenues from equipment sales increased 220% to approximately $4,345,000 for the
second quarter of fiscal 1997 compared to $1,357,000 for the second quarter of
fiscal 1996. The increase reflects the impact of the Memorex trademark, a new
product mix featuring CD plus graphics players, a concerted sales effort by the
Company's management and a less competitive marketplace. The increase primarily
reflects higher foreign sales of approximately $3,075,000. The recording of
foreign equipment sales is attributable to sales made by International which
began operations in the first quarter of fiscal 1996 and represents 83% of
equipment sales and 73% of total revenues, for the second quarter of fiscal
1997. Previously, the Company, through related party transactions, recorded
commissions earned on foreign shipments. But for such change in the method of
recognizing income from foreign hardware shipments, the Company's revenues from
equipment sales for the second quarter of fiscal 1997 would have increased 132%
or approximately $2,475,000 from the same period a year ago.
Revenues from music sales increased 7% to approximately $454,000 for the second
quarter of fiscal 1997 compared to $425,000 for the second quarter of fiscal
1996. This increase includes the impact of a $114,000 adjustment related to the
reversal of a portion of return reserves which were considered excessive in the
opinion of management. Excluding this adjustment music sales would have
decreased $84,000 or 20% from a year ago primarily reflecting lower sales of 8
song cassettes of approximately $215,000, partially offset by an increase in
sales of the CD&G format of approximately $114,000.
Commission and other income increased approximately $12,500 to $92,400 for the
second quarter of fiscal 1997 compared to the second quarter of fiscal 1996. The
increase reflects higher other income of $37,100 partially offset by lower
commission income from related party of $24,600, primarily due to
International's increased business operations in Hong Kong.
GROSS PROFIT
Gross profit from equipment and music sales increased approximately $404,800 to
$727,100 or 15.1% for the second quarter of fiscal 1997, compared to $322,300 or
18.1% for the second quarter of fiscal 1996.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Gross profit, expressed as a percentage of equipment sales, decreased to 13.7%
for the second quarter of fiscal 1997, compared to 14.8% for the second quarter
of fiscal 1996. The current quarter gross profit percentage reflects a Memcorp
licensing fee for use of the Memorex trademark. Reflecting higher sales, gross
profit from equipment sales increased $396,900 to $597,200, for the same period.
This increase includes the impact of an adjustment which reduced the cost of
equipment sales by $61,000. Excluding this adjustment, gross profit and the
gross profit percentage would have been $536,200, and 12.3%, respectively.
Gross profit from music sales increased approximately $7,800 to $129,900 or
28.6% for the second quarter of fiscal 1997, compared to $122,000 or 28.7%, for
the second quarter of fiscal 1996. The second quarter of fiscal 1997 included a
$42,500 increase in gross profit related to the aforementioned adjustment for
return reserves. Excluding this adjustment, gross profit from music sales would
have decreased $34,700 yielding a gross profit percentage of 25.7%. The decrease
in gross profit percentage reflects the decrease in sales of high margin 8 song
cassettes combined with downward pressure on pricing in an increasingly
competitive market.
OTHER OPERATING EXPENSES
Other operating expenses increased approximately $4,400, or 3%, during the
second quarter of fiscal 1997 compared to the same period a year ago. The
increase reflects managements continued efforts to control operating expenses in
light of an increase in excess of 200% in equipment sales and primarily includes
higher freight and handling charges of $10,000, and warehouse supplies and
packing materials of $13,800, partially offset by lower warehouse payroll
expenses of $17,500.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased approximately $140,800 or
18%, during the second quarter of fiscal 1997 compared to the second quarter of
fiscal 1996. The current year figure includes $118,100 for administration of the
Company's subsidiary in Hong Kong which is computed and paid based on 3% of
International's sales. Excluding this sales based administration fee SG&A
expenses would have decreased $259,000 or 34% from the prior year. The decrease
is primarily due to management's commitment to reduce overhead in its effort to
return the Company to profitability and can be seen in the following reductions;
salaries and benefits $136,100, promotional expenses including catalog,
advertising and show/convention of $60,800, product development $26,300, travel
and entertainment $16,600, and automobile expenses $9,000.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased approximately $18,300 or 36%, to
$69,000 for the second quarter of fiscal 1997 compared to the $50,700 recorded
last year. The increase is primarily the result of accelerating the depreciation
of tools and dies totaling $318,000 on the books of International, and reducing
the estimated useful lives of certain intangible assets, trademark and cost in
excess of net assets (goodwill), to 10 years as of April 1, 1996.
OTHER EXPENSES
Net interest expense decreased approximately $36,300 or 74%, during the second
quarter of fiscal 1997 compared to the same period a year ago. The decrease
partially reflects the reclassification in the current period of interest
expense related to inventory financing. Were it not for this reclassification,
net interest expense would have decreased $10,700 or 22%.
Loss on sales of accounts receivable was 0.8% and 2.4% of total revenues during
the second quarter of fiscal 1997 and 1996, respectively. The loss decreased
$3,800 to $41,000, compared to the $44,800 recorded last year primarily due to
shorter collection periods.
EXTRAORDINARY ITEM
During the second quarter of fiscal 1997 the Company realized an extraordinary
gain of $71,300 related to the restructuring of debt with one creditor. The
Company is currently involved in negotiations with trade creditors and
anticipates additional gains from restructuring or extinguishment of debt in the
upcoming quarter.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
REVENUES
Total revenues increased by approximately $3.7 million or 140% during the first
six months of fiscal 1997 compared to the first six months of fiscal 1996. The
increase in revenues is primarily the result of an increase in equipment sales.
Revenues from equipment sales increased 212% to approximately $5,435,000 for the
six months of fiscal 1997 compared to approximately $1,740,000 for the six
months of fiscal 1996. The increase reflects the impact of the Memorex
trademark, a new product mix featuring CD plus graphics players, a concerted
sales effort by the Company's management and a less competitive marketplace. The
increase primarily reflects higher foreign sales of approximately $3,150,000
million. The recording of foreign equipment sales is attributable to sales made
by International which began operations in the first quarter of fiscal 1996 and
represents 70% of equipment sales and 61% of total revenues, for the six months
of fiscal 1997. Previously, the Company, through related party transactions,
recorded commissions earned on foreign shipments. But for such change in the
method of recognizing income from foreign hardware shipments, the Company's
revenues from equipment sales for the six months of fiscal 1997 would have
increased 114% or approximately $2,895,000 from the same period a year ago.
Revenues from music sales decreased 5% to approximately $720,000 for the six
months of fiscal 1997 compared to $759,000 for the same period of fiscal 1996.
The current year sales figure includes the impact of a $114,000 adjustment
related to the reversal of a portion of return reserves which were considered
excessive in the opinion of management. Excluding this adjustment music sales
would have decreased $153,000 or 20% from a year ago primarily reflecting lower
sales of 8 song cassettes of approximately $316,000, partially offset by an
increase in sales of the CD&G format of approximately $154,000.
Commission and other income increased approximately $9,700 to $135,300 for the
first six months of fiscal 1997 compared to the first six months of fiscal 1996.
The increase reflects higher other income of $52,600, partially offset by lower
commission income from related party of $42,900, primarily due to
International's increased business operations in Hong Kong.
GROSS PROFIT
Gross profit from equipment and music sales increased approximately $397,000 to
$860,600 or 14.0% for the first six months of fiscal 1997, compared to $463,600
or 18.5% for the first six months of fiscal 1996.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Gross profit, expressed as a percentage of equipment sales, decreased to 12.4%
for the six months of fiscal 1997, compared to 13.8% for the six months of
fiscal 1996. The current year gross profit percentage reflects a Memcorp
licensing fee for use of the Memorex trademark. Reflecting higher sales, gross
profit from equipment sales increased $435,600 to $676,100, for the same period.
This increase includes the impact of an adjustment which reduced the cost of
equipment sales by $61,000. Excluding this adjustment, gross profit and the
gross profit percentage would have been $615,100, and 11.3%, respectively.
Gross profit from music sales decreased approximately $38,600 to $184,500 or
25.6% for the six months of fiscal 1997, compared to $223,100 or 29.4%, for the
six months of fiscal 1996. The six months of fiscal 1997 includes $42,500
related to the aforementioned adjustment for return reserves. Excluding this
adjustment gross profit from music sales would have decreased $81,100 yielding a
gross profit percentage of 23.4%. The decrease in gross profit percentage
reflects the decrease in sales of high margin 8 song cassettes combined with
downward pressure on pricing in an increasingly competitive market.
OTHER OPERATING EXPENSES
Other operating expenses decreased approximately $47,900, or 16%, during the
first six months of fiscal 1997 compared to the same period a year ago. The
decrease reflects managements continued efforts to control operating expenses in
light of an increase in excess of 200% in equipment sales and primarily reflects
lower warehouse payroll expenses of $34,900, and warehouse rent of $19,800,
partially offset by higher warehouse supplies and packing materials of $11,200.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased approximately $492,000 or
34%, during the first six months of fiscal 1997 compared to the same period of
fiscal 1996. The current year figure includes $125,800 for administration of the
Company's subsidiary in Hong Kong which is computed and paid based on 3% of
International's sales. Excluding this sales based administration fee SG&A
expenses would have decreased $617,800 or 43% from the prior year. The decrease
is primarily due to management's commitment to reduce overhead in its effort to
return the Company to profitability and can be seen in the following reductions;
salaries and benefits $255,800, promotional expenses including catalog,
advertising and show/convention of $136,700, product development $63,200, travel
and entertainment $58,400, and automobile expenses $20,900.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased approximately $40,400 or 42%, to
$137,500 for the six months of fiscal 1997 compared to the $97,100 recorded last
year. The increase is primarily the result of accelerating the depreciation of
tools and dies totaling $318,000 on the books of International, and reducing the
estimated useful lives of certain intangible assets, trademark and cost in
excess of net assets (goodwill), to 10 years as of April 1, 1996.
OTHER EXPENSES
Net interest expense decreased approximately $12,800 or 15%, during the six
months of fiscal 1997 compared to the same period the prior year. The decrease
reflects the reclassification in the current period of interest expense related
to inventory financing. Were it not for this reclassification, net interest
expense would have increased $12,800 or 15%.
Loss on sales of accounts receivable was 1.0% and 2.8% of total revenues during
the first six months of fiscal 1997 and 1996, respectively. The loss decreased
$7,900 to $65,900, compared to the $73,800 recorded last year primarily due to
shorter collection periods.
EXTRAORDINARY ITEM
During the first six months of fiscal 1997 the Company realized an extraordinary
gain of $71,300 related to the restructuring of debt with one creditor. The
Company is currently involved in negotiations with trade creditors and
anticipates additional gains from restructuring or extinguishment of debt in the
upcoming quarter.
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.
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
There was a working capital deficiency of approximately $2.7 million, as of
September 30, 1996 compared to a deficiency of $338,000 a year ago.
Net cash provided by operating activities was approximately $97,000 for the
first six months of fiscal 1997 compared to net cash (used) in operating
activities of ($691,000) during the first six months of fiscal 1996. The
difference between the Company's net loss of approximately $417,000 and
operating cash flows for the first six months of fiscal 1997 was primarily due
to cash provided by an increase in liabilities of $1,265,000, a reduction in
inventory of $913,000, and non-cash charges for depreciation and amortization of
$201,000, partially offset by an increase in total receivables of $1,881,000.
Net cash provided (used) in investing activities was ($4,000) and ($126,000)
during the first six months of fiscal 1997 and 1996, respectively.
Net cash provided by financing activities was $283,000 and $125,000 during the
first six months of fiscal 1997 and 1996, respectively. The impact of the
establishment of a related party note of $400,000, partially offset by
reductions for debt restructuring and payments of $199,000, primarily account
for the fiscal 1997 activity.
The Company continues to suffer from a lack of liquidity and capital resources
which have affected its ability to conduct business in a profitable manner.
While the Company has made progress in arranging financing for its inventory
needs through its relationship with Memcorp, utilizing letters of credit opened
on the Company's behalf totaling approximately $2 million as of this writing,
there is no formal agreement in place with regard to such financing, the lack of
which could force the Company to cease operations.
The Company is a party to a factoring agreement, dated June 3, 1992, as amended
December 30, 1994, with Bankers Capital ("Bankers"), a division of Bankers
Leasing Association, Inc., pursuant to which Bankers purchases certain of the
Company's accounts receivable. Under the agreement, Bankers purchases certain
selected accounts receivable from the Company and advances 70% of the face
amount of those receivables to the Company. Bankers retains discretion to
determine which of the Company's accounts receivable it will purchase. Once
Bankers purchases the account receivable of any particular customer of the
Company, all accounts receivable of such customer (whether or not so purchased)
are collected by Bankers and applied first to payment of the particular accounts
receivable purchased by Bankers. As a result
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
of the greater incidence of returned merchandise by the Company's software
customers, Bankers purchases a lesser percentage of the Company's total accounts
receivable relating to software merchandise than hardware merchandise.
The Company is charged interest on all advances against the purchased accounts
receivable, at an annual rate of 1.5% in excess of the prime rate of interest
charged by Harris Trust and Savings Bank (8.25% on November 1, 1996), until the
receivables subject to the advances are collected. For accounts receivable
purchased by Bankers the Company will be charged a fee, from 2.0% to 3.0%,
depending on the period the receivable has been outstanding, and receives
payment from Bankers of the remaining 30% of the face amount of the receivable.
All receivables which are not collected within 150 days are charged back to the
Company and deducted from the total advances available to the Company. All of
the Company's accounts receivable, inventories and intangibles are pledged as
security under this agreement. The Company has agreed to pay minimum monthly
fees of $10,000 under the agreement. As of November 1, 1996, the outstanding
balance for which the Company is contingently liable to Bankers, was
approximately $1,630,000. The agreement with Bankers expires on June 28, 1997.
In September 1992, Magna International ("Magna")agreed to exchange $816,574 of
debt owed by the Company to Magna, and an affiliated company of Magna, for
additional shares of the Company's Common Stock (the "Additional Shares"). That
agreement, as amended, gave Magna the right to require the Company to repurchase
the Additional Shares, on December 31, 1996, for $816,574 plus interest at 8%
per annum from September 30, 1994. On November 10, 1994, Magna exchanged the
Additional Shares for the Company's promissory note (the "Magna Note") in the
amount of $816,574. Payment of the note was guaranteed by a pledge from Gemco
Pacific, Inc., an assignee of Paul Wu, a director of the Company, of all of its
shares of the Company's Common Stock until the payment and satisfaction of fifty
percent of the principal amount of the note, and fifty percent of such shares
until the remaining principal balance of the note is paid.
The Magna Note was due in two equal installments on November 10, 1995 and May
10, 1996. The Company did not pay either installment. However, the Company did
make partial payments through June 30, 1996 of $275,000. As a result of the
Company's failure to timely pay the agreed upon installments, the remaining
balance of the note became due and payable in full. The default provision of the
Magna Note provides for a cure period of 15 days after written notice has been
given to the Company from Magna. Written notice of default to the Company from
Magna has not yet been received, however, it is not required. The Company is
subject to pay any reasonable attorney's fees incurred by Magna in enforcing the
rights of Magna while the loan is in default. Notice of default has been given
to
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Magna and no wavier of default has been obtained by the Company. The entire note
is classified as a current obligation on the Company's balance sheet and
continues to accrue interest. Magna has thus far been cooperating with the
Company as it attempts to restructure and has made no demands for payment. At
the appropriate time the Company will attempt to renegotiate the terms on the
debt agreement with Magna. However, there can be no assurance that the Company
will be able to successfully negotiate new terms which will be favorable to the
Company, if at all.
On September 30, 1996 and 1995, the Company had accrued on its financial
statements total royalties payable, comprised of audio and written lyric
components, of approximately $981,000 and $766,000, respectively. As of
September 30, 1996, the Company substantially reduced the delinquency of it's
copyright royalty obligations by paying five quarters' payments totaling
$160,000, to its principal royalty creditor, The Harry Fox Agency, Inc.("HFA"),
which represents approximately 80% of the publishers to whom the Company owes
royalties. The Company remains one quarter delinquent in the payment of its
copyright royalty obligations imposed pursuant to written copyright royalty
agreements with HFA. Due to its current liquidity problems, the Company could
only meet its other operating obligations by not timely paying such royalty
obligations.
In May 1994, the Company requested its principal copyright royalty creditor,
HFA, which represents the majority of copyright holders for which the Company
was obligated to pay royalties, to audit its records for the period October 1991
through March 1994. On May 22, 1995, the Company executed a settlement agreement
(the "Settlement Agreement") with HFA, with respect to all non-current royalty
obligations and claims for the period from October 1, 1991 through March 31,
1994 in the amount of $1,030,000. The Company had accrued approximately $1.0
million in its financial statements for royalty obligations to HFA and, on
February 22, 1995, paid HFA $200,000 to be applied against the settlement
amount. The total amount of settlement payments made during fiscal 1996 was
$432,000, and the balance of approximately $400,000, as of March 31, 1996, was
anticipated to be paid in monthly installments, through April 1997, of principal
and interest at 8.0% per annum. After a period of default, the Company entered
into an amended payment agreement with HFA, stipulating a lump sum payment to
bring its account current and monthly installments thereafter, and is current
with respect to such agreement as of the date of this filing, having paid HFA
approximately $214,000 between June 30 and September 30, 1996. As collateral
security for the payment of its obligations under the Settlement Agreement, the
Company has granted HFA a security interest in the Company's master sound
recordings.
With the completion of its negotiations with HFA, the Company has now entered
settlement agreements, totaling approximately $1.2
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
million, with creditors representing a majority of its non-current copyright
royalty obligations. Pursuant to those settlement agreements, the Company
intends to satisfy all non-current royalty obligations with the creditors in
question by April 1997, although there is no guarantee that the Company will be
able to do so within the specified time period. As of November 10, 1996, the
Company had paid approximately $900,000 pursuant to those settlement agreements.
An audit was performed by HFA for the period April 1, 1994 through March 31,
1996. The final impact of this audit has yet to be determined as HFA and the
Company are in discussions regarding HFA's assertion that the Company owes an
additional $195,000 for this period.
The Company may be subject to various Claims for damages and other remedies
under its written copyright licensing agreements or pursuant to Title 17 of the
United States Code. The Company satisfied its outstanding royalty obligations
with respect to compulsory licenses, granted pursuant to the federal copyright
statute, and has been current thereafter with respect to such compulsory royalty
obligations. Although the Company believes that the assertion of any such claims
is remote, primarily as a result of the completed negotiations for specific
payment agreements with its principal copyright royalty creditors, there can be
no assurance that such Claims will not be asserted or, if asserted, that such
Claims will not have a material adverse effect on the Company's financial
position.
On July 20, 1994, the Company closed a private financing pursuant to which it
issued secured subordinated promissory notes in an aggregate principal amount of
$400,000, and issued Bridge Warrants to purchase 360,000 shares of Common Stock.
Such notes, together with interest at a rate of 8% per annum, were repaid on
November 18, 1994. The Bridge Warrants were exercisable at a price of $1.20 per
share of Common Stock commencing February 8, 1995 and expire on August 15, 1999.
As of September 30, 1996, 272,250 of such Bridge Warrants had been exercised,
resulting in gross proceeds of $326,000 to the Company.
Since September 1991, FLX (HK) Ltd., a Hong Kong corporation ("FLX") and The SMC
Singing Machine Company, Ltd., a Hong Kong trading company ("LTD") have sold
merchandise to the Company under deferred payment terms. Paul Wu, a director of
the Company, is the Chairman of the Board and a principal stockholder of FLX and
LTD. For the fiscal year ended March 31, 1996 and for the first six months of
fiscal 1997, the total inventory purchases from FLX and LTD were approximately
$3.0 million and $1.6 million, respectively. In the normal course of business,
the Company enters into negotiations with FLX and LTD, with respect to the terms
and the nature of transactions conducted with those companies. For the fiscal
year ended March 31, 1996, such negotiations resulted in the Company receiving
credits totaling approximately $150,000 from such
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
companies for such items as refurbishing of defective merchandise by the Company
and promotional and advertising expenses, with a concomitant credit to results
of operations. For the first six months of fiscal 1997, the Company received
approximately $42,000 in credits.
At September 30, 1996, Trade payables - related party FLX, and Note payable -
FLX, which totaled approximately $708,000 and $419,000, respectively, were
composed of amounts due with respect to purchases made by the Company for
merchandise received from overseas suppliers. FLX and LTD have also
advanced funds directly to, or on behalf of the Company, with respect to
inventory purchases.
Primarily due to the Company's continued negative cash flow from operations and
as a result of the net losses incurred by the Company for the fiscal years ended
1995 and 1996, as well as the first six months of fiscal 1997, the Company does
not believe that its current credit facility with Bankers and its current
financing arrangements with Memcorp, FLX and LTD will be sufficient to meet its
cash flow needs for the fiscal year ending March 31, 1997. Memcorp has agreed to
provide up to $2.0 million of inventory financing to the Company via letters of
credit but has no requirement to do so. FLX and LTD had agreed to provide up to
$500,000 of inventory financing to the Company through April 1, 1996. FLX and
LTD have provided inventory financing to the Company in excess of their $500,000
commitment, but have no obligation to do so in the future and could demand
payment of the Company's outstanding credit at any time as the financing
agreement has now expired. As of September 30, 1996, FLX and/or LTD have not
requested payment nor has the Company made such payment. As of April 1, 1996,
the Company converted $400,000 of related party trade payables due to FLX to a
short-term note payable.
Although the Company is currently engaged in negotiations with regard to
securing third-party financing to replace or augment the financing arrangements
provided by Memcorp, FLX and LTD, there can be no assurance that such financing
will be available on terms satisfactory to the Company or at all, that Memcorp,
FLX and LTD will continue to provide financing to the Company, or that FLX and
LTD will continue to provide overfunding to the Company and not demand repayment
of amounts financed in excess of their $500,000 commitment. In any such event,
the Company may seek to refinance its obligations with creditors (including the
Company's past due obligations to Magna) or be forced to curtail or cease
operations.
22
<PAGE>
GOING CONCERN
The report of the Company's independent auditors on its 1996 financial
statements express substantial doubt about the Company's ability to continue as
a going concern. The independent auditors attributed this substantial doubt to
substantial net operating losses in the fiscal year ended March 31, 1996 and an
accumulated deficit of approximately $5.7 million. The auditors have further
noted that the Company experienced a substantial decline in sales of music
recordings and other revenues. The Company is currently dependent on the
financing provided by Memcorp and the continued over funding of inventory
financing from FLX and LTD to continue operations and to allow it to make
inventory purchases in advance of the peak holiday selling season. The Company
does not have a dedicated line of credit in place to finance its seasonal needs
for inventory purchases. The discontinuance financing by Memcorp or of over
funding by FLX and LTD, and the unavailability of financing to replace such,
could result in the Company being forced to curtail or cease its operations. 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.
23
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There are no exhibits to this report.
(b) There were no reports on Form 8-K filed during the
quarter.
24
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
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.
---------------------------------
(Registrant)
November 13, 1996
By: /S/EDWARD STEELE
------------------------------
Edward Steele
Chief Executive Officer
(Principal Financial and
Principal Accounting
officer)
25
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 375,723
<SECURITIES> 0
<RECEIVABLES> 3,044,656
<ALLOWANCES> (914,000)
<INVENTORY> 1,393,785
<CURRENT-ASSETS> 3,967,027
<PP&E> 531,324
<DEPRECIATION> (239,000)
<TOTAL-ASSETS> 6,400,858
<CURRENT-LIABILITIES> 6,612,966
<BONDS> 0
0
0
<COMMON> 28,116
<OTHER-SE> (232,986)
<TOTAL-LIABILITY-AND-EQUITY> 6,400,858
<SALES> 4,799,401
<TOTAL-REVENUES> 4,891,797
<CGS> 4,072,344
<TOTAL-COSTS> 4,917,281
<OTHER-EXPENSES> 41,020
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12,189)
<INCOME-PRETAX> (78,694)
<INCOME-TAX> 0
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