SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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
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(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 [ X ] 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 September 30, 1996.
This report contains a total of 22 pages.
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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......................21
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 40,122
Trade accounts receivable, net of
factor advances of $478,000
allowance for doubtful accounts of
$17,000 and sales returns and
allowance of $216,000 641,143
Receivables - related parties 30,358
Inventories - net 1,798,686
Prepaid expenses & other assets 52,679
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Total current assets 2,562,988
PROPERTY & EQUIPMENT - net of accumulated
depreciation of $203,000 324,792
INTANGIBLE ASSETS:
Investments in song library, net of
accumulated amortization of $259,000 1,005,702
Trademarks, net of accumulated
amortization of $93,000 672,630
Cost in excess of net asset acquired
net of accumulated amortization
of $70,000 508,917
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Total intangible assets 2,187,249
OTHER ASSETS 5,983
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Total assets $5,081,012
==========
The accompanying notes are an integral part of these statements.
3
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $1,724,397
Trade payables - related parties 206,765
Accrued expenses 788,100
Royalties payable 1,117,783
Current portion of long term debt 1,448,666
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Total current liabilities 5,285,711
LONG TERM DEBT 20,878
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Total liabilities 5,306,589
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COMMITMENTS & CONTINGENCIES
STOCKHOLDERS' EQUITY:
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 (6,080,862)
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Total stockholders' equity (225,577)
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Total liabilities & stockholders' equity $5,081,012
==========
The accompanying notes are an integral part of these statements.
4
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<TABLE>
<CAPTION>
THE SINGING MACHINE COMPANY INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
----------------------------------------
JUNE 30, JUNE 30,
1996 1995
---------------- -----------------
<S> <C> <C>
Revenues:
Equipment sales, net $ 1,089,282 $ 384,417
Music sales, net 266,384 334,778
Commission income - related party 14,019 32,323
Other 28,921 13,439
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Total revenues 1,398,606 764,957
Costs and expenses:
Cost of equipment sales 1,010,314 344,155
Cost of music sales 211,805 233,747
Other operating expenses 99,173 151,471
Selling general and administrative
expenses 330,144 681,283
Depreciation and amortization 68,522 46,382
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Total costs and expenses 1,719,957 1,457,038
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Operating income (loss) (321,351) (692,081)
Other Income (expenses):
Interest income 687 5,149
Interest expense (63,767) (44,784)
Loss on sales of accounts receivable (24,888) (28,993)
Loss on sale of property and equipment - -
Loss from subsidiary - -
---------------- -----------------
Total other expenses, net (87,967) (68,628)
---------------- -----------------
Income (loss) before taxes (409,318) (760,709)
Benefit (provision) for income taxes - -
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Net income (loss) $ (409,318) $ (760,709)
================ =================
Net income (loss) per share $ (0.15) $ (0.27)
================ =================
Weighted average common and common
equivalent shares outstanding 2,811,582 2,789,700
================ =================
The accompanying notes are an integral part of these statements.
5
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
------------------------------
JUNE 30, JUNE 30,
1996 1995
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES ($359,743) ($844,482)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property & equipment 103 (35,753)
Additions to song library (1) (40,020)
Additions to trademarks - -
Receivable from related parties (155) 926
Other assets 13,506 10,399
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Net cash provided (used) in investing activities 13,453 (64,448)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable - related party - -
Repayments of notes payable - -
Proceeds from notes payable 407,692 -
Proceeds from issuance of bridge warrants - -
Repayments of notes payable (14,019) (100,000)
Deferred taxes - -
Issuance of common stock & warrants - 320,578
proceeds of long term debt - -
Repayment of long term debt (7,373) (13,839)
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Net cash provided (used) in financing activities 386,300 206,739
Increase (decrease) in cash 40,009 (702,191)
Cash at beginning of quarter 113 740,349
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Cash at end of quarter 40,122 38,158
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 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 financial statements and
notes thereto included in the Company's audited 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 Financial
Statements included in the Company's audited 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 three month period ended June 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 $8,013 of
interest expense for the three months ended June 30, 1996. Amounts due
under the note are collateralized by a security interest in the
Company's song library. The aggregate amount liable under the note was
approximately $409,000, as of June 30, 1996.
7
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
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 June 30, 1996, 87,750
Bridge Warrants remain outstanding.
4. MAJOR CUSTOMERS
During the three months ended June 30, 1996 and 1995, 66.6% and 54.3%,
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:
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
-----------------------------------------------
J.C. Penney 21.5% -
Target 12.4% 19.5%
Fingerhut 11.6% -
Memcorp 11.4% -
Montgomery Ward - 11.8%
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 $77,700 and
$124,500 for the first three 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 June 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 in the accompanying 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.
8
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
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
September 15, 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 provides the
Company administrative assistance and the use of office and warehouse
space in Asia as may be required for the
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
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.
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 (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 first quarter of fiscal 1997 the
Company lost approximately ($410,000). The Company's working capital deficit as
of June 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 June 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 JUNE 30, 1996 AND 1995
REVENUES
Total revenues increased by approximately $634,000 or 83% during the first
quarter of fiscal 1997 compared to the first quarter of fiscal 1996. The
increase in revenues is primarily a result of an increase in equipment sales
partially offset by declines in software sales and commission income.
Revenues from equipment sales increased 183% to approximately $1,090,000 for the
first quarter of fiscal 1997 compared to $384,000 for the first quarter of
fiscal 1996. The increase is primarily a result of higher domestic sales
totaling $638,000 or 340%, reflecting the impact of the Memorex trademark and
the closeout of Singing Machine brand name inventory in favor of new Memorex
labeled goods, among other factors. Foreign sales increased $67,000 from a year
ago. The recording of foreign equipment sales is attributable to sales made by
the Company's subsidiary, International SMC (HK) Ltd., ("International"), which
began operations in the first quarter of fiscal 1996 and represents 24% of
equipment sales and 19% of total revenues, for the first quarter of fiscal 1997.
Previously, the Company, through related party transactions, recorded
commissions earned on foreign shipments.
Revenues from music sales declined by 20% to approximately $266,000 for the
first quarter of fiscal 1997 compared to $335,000 for the first quarter of
fiscal 1996. The decrease is due to less than expected sales in certain music
formats, namely 8 song cassettes of approximately $100,000, partially offset by
increases in sales of CD and VHS formats of approximately $17,000 and $16,000,
respectively.
Commission and other income decreased approximately $2,800 to $43,000 for the
first quarter of fiscal 1997 compared to the first quarter of fiscal 1996. The
decrease reflects lower commission income from related party of $18,300,
primarily due to International's increased business operations in Hong Kong,
partially offset by higher other income of $15,500, primarily reflecting
licensing fees.
GROSS PROFIT
Gross profit from equipment and music sales decreased approximately $7,700 to
$133,600 or 9.6% for the first quarter of fiscal 1997, compared to $141,,300 or
19.6% for the first quarter of fiscal 1996.
Gross profit, expressed as a percentage of equipment sales, decreased to 7.3%
for the first quarter of fiscal 1997, compared to
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
10.5% for the first quarter of fiscal 1996. The current quarter gross profit
percentage reflects a Memcorp licensing fee for use of the Memorex trademark as
well as a number of transactions at reduced pricing to settle outstanding
credits or due to competitive pressures. Were it not for these transactions, the
period's gross profit percentage would have been approximately 13%. Reflecting
higher sales, gross profit from equipment sales increased $38,700 to $79,000,
for the same period.
Gross profit from music sales decreased approximately $46,400 to $54,600 or
20.5% for the first quarter of fiscal 1997, compared to $101,000 or 30.2%, for
the first quarter of fiscal 1996. The first quarter of fiscal 1997 included
higher sales in CD and VHS formats which have inherently lower margins than
other formats.
OTHER OPERATING EXPENSES
Other operating expenses decreased approximately $52,300, or 35%, during the
first quarter of fiscal 1997 compared to the same period a year ago. The
decrease reflects managements continued efforts to reduce operating expenses and
primarily includes lower warehouse payroll expenses, a reduction in outside
warehouse expense, and decreased warehouse rent as during the prior year the
Company incurred additional costs related to the relocation of its headquarters.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general & administrative expenses decreased approximately $351,000 or
52%, during the first quarter of fiscal 1997 compared to the first quarter of
fiscal 1996. 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 $119,700, promotional expenses
including catalog, advertising and show/convention of $76,000, travel and
entertainment $41,700, product development $37,000, automobile expenses $11,900,
and professional fees $11,600.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased approximately $22,100 or 48%, to
$68,500 for the first quarter of fiscal 1997 compared to the $46,400 recorded
last year. The increase is primarily the result of accelerating the depreciation
of tools and dies totaling $318,000 sold to 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.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OTHER EXPENSES
Net interest expense increased approximately $23,400 or 59%, during the first
quarter of fiscal 1997 compared to the same period a year ago. The increase
includes higher interest expense related to inventory financing of $12,200,
related party obligations of $10,800, and past due royalty obligations to the
Harry Fox Agency, Inc., of $2,800, partially offset by lower interest expense on
debt owed to Magna International ($5,500).
Loss on sales of accounts receivable was 1.8% and 3.8% of total revenues during
the first quarter of fiscal 1997 and 1996, respectively. The loss decreased
$4,100 to $24,900, compared to the $29,000 recorded last year primarily due to
shorter collection periods.
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.
LIQUIDITY AND CAPITAL RESOURCES
There was a working capital deficiency of approximately $2.7 million, as of June
30, 1996 compared to working capital of $700,000 a year ago.
Net cash used in operating activities was approximately $360,000 and $845,000
during the first three months of fiscal 1997 and 1996, respectively. The
difference between the Company's net loss of approximately $410,000 and
operating cash flows for the first quarter of fiscal 1997 was primarily due to
cash provided by a reduction in inventory of $508,000, and non-cash charges for
depreciation and amortization of $100,000, partially offset by a decreases in
liabilities of $166,000, and an increase in total receivables of $423,000.
Net cash provided (used) in investing activities was $13,500 and ($64,500)
during the first quarter of fiscal 1997 and 1996, respectively. The cash flow
for the first quarter of fiscal 1997 reflects cash provided by a decrease in
other assets of $13,500.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net cash provided by financing activities was $386,000 and $207,000 during the
first three months of fiscal 1997 and 1996, respectively. The impact of the
establishment of a related party note of $400,000, net of reductions of
($14,000) primarily accounts 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 over $1.0 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 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 September 30, 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 September 30, 1996, the outstanding
balance for which the Company is contingently liable to Bankers, was
approximately $630,000. The agreement with Bankers expires on June 28, 1997.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, which includes
principal and interest. 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 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 June 30, 1995 and 1996, the Company had accrued on its financial statements
total royalties payable, comprised of audio and written lyric components, of
approximately $700,000 and $1.1 million, respectively. As of June 30, 1996, the
Company was six quarters delinquent in the payment of its copyright royalty
obligations imposed pursuant to written copyright royalty agreements with
various publishers. Due to its current liquidity problems, the Company could
only meet its other operating obligations by not timely paying such royalty
obligations. However, the Company has had discussions with these publishers to
seek alternative payment terms and has in fact paid a substantial portion,
$160,000, of its
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
current obligations to its principal royalty creditor, The Harry
Fox Agency, Inc. ("HFA"), as of September 30, 1996.
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 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 September 30, 1996, the Company had paid
approximately $1,016,000 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
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 June 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 quarter of
fiscal 1997, the total inventory purchases from FLX and LTD were approximately
$1.2 million and $131,000, 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 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 quarter of fiscal 1997, the Company received approximately $21,000 in
credits.
At June 30, 1996, Trade payables - related party, and Note payable - FLX, which
totaled approximately $206,850 and $386,000, 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 quarter 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
18
<PAGE>
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 June 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.
19
<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.
20
<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.
21
<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)
October 9, 1996
By: /S/ EDWARD STEELE
------------------------------
Edward Steele
Chief Executive Officer
(Principal Financial and
Principal Accounting
officer)
22
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