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 DECEMBER 31, 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 February 10, 1997.
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
DECEMBER 31, 1996
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $38,934
Trade accounts receivable, net of
factor advances of $1,599,000
allowance for doubtful accounts of
$17,000 and sales returns and
allowance of $97,000 1,427,366
Receivables - related parties 32,000
Inventories - net 1,081,393
Prepaid expenses & other assets 42,962
----------
Total current assets 2,622,655
PROPERTY & EQUIPMENT - net of accumulated
depreciation of $273,000 257,598
INTANGIBLE ASSETS:
Investments in song library, net of
accumulated amortization of $322,000 942,448
Trademarks, net of accumulated
amortization of $131,000 634,367
Cost in excess of net asset acquired,
net of accumulated amortization
of $99,000 479,968
----------
Total intangible assets 2,056,783
OTHER ASSETS 20,291
----------
Total assets $4,957,327
==========
The accompanying notes are an integral part of these statements.
3
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1996
(UNAUDITED)
LIABILITIES & STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Trade accounts payable $2,270,192
Trade payables - related parties 96,832
Accrued expenses 853,556
Royalties payable 792,849
Current portion of long-term debt 1,366,222
----------
Total current liabilities 5,379,651
LONG-TERM DEBT 12,271
----------
Total liabilities 5,391,922
----------
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 (6,289,880)
----------
Total stockholders' deficit (434,595)
----------
Total liabilities & stockholders' deficit $4,957,327
==========
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 NINE MONTHS ENDED
---------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Equipment sales, net $ 3,990,887 $ 1,968,788 $ 9,425,247 $ 3,709,802
Music sales, net 677,733 1,172,787 1,398,440 1,932,093
Commission income - related party 12,947 18,829 82,111 130,894
Other 5,802 190 71,974 13,778
----------- ----------- ----------- -----------
Total Revenue 4,687,369 3,160,594 10,977,772 5,786,567
Costs and expenses:
Cost of equipment sales 3,167,527 1,607,635 7,925,747 3,108,158
Cost of music sales 423,080 798,318 959,323 1,334,547
Other operating expenses 236,255 248,470 490,604 550,721
Selling general and administrative
expenses 659,670 661,807 1,610,566 2,104,690
Depreciation and amortization 67,319 59,326 204,849 156,412
----------- ----------- ----------- -----------
Total costs and expenses 4,553,851 3,375,556 11,191,089 7,254,528
----------- ----------- ----------- -----------
Operating income (loss) 133,518 (214,962) (213,318) (1,467,961)
Other Income (expense):
Interest income 704 1,476 2,146 7,448
Interest expense (23,532) (58,230) (100,242) (152,266)
Loss on sales of accounts receivable (65,517) (152,230) (131,425) (226,047)
Settlement costs (247,938) 0 (247,938) 0
Loss on sale of property and equipment - 2,780 - 2,780
----------- ----------- ----------- -----------
Total other expenses, net (336,283) (206,204) (477,459) (368,085)
Income (loss) before taxes and
extraordinary items (202,765) (421,166) (690,777) (1,836,046)
----------- ----------- ----------- -----------
Extraordinary item, net of income taxes
Gain from debt extinguishment 1,156 - 72,441 -
----------- ----------- ----------- -----------
Income (loss) before taxes (201,609) (421,166) (618,336) (1,836,046)
Benefit (provision) for income taxes - 861 - (5,203)
----------- ----------- ----------- -----------
Net Income (Loss) $ (201,609) $ (420,305) (618,336) $(1,841,249)
=========== =========== =========== ===========
Net income (loss) per share $ (0.07) $ (0.15) $ (0.22) $ (0.66)
=========== =========== =========== ===========
Weighted average common and common
equivalent shares outstanding 2,811,582 2,811,582 2,811,582 2,804,341
=========== =========== =========== ===========
</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 NINE MONTHS ENDED
--------------------------- --------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES $(179,120) $371,490 $ (82,134) $(319,345)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property & equipment 1,014 (36,942) (2,024) (136,746)
Additions to song library - (15,800) (1) (66,535)
Additions to trademarks - - - -
Receivable from related parties (704) 383 (1,797) 1,116
Other assets (801) 8,352 (803) 32,160
----------- ----------- ----------- -----------
Net cash provided (used) in investing activities (491) (44,007) (4,625) (170,005)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable - related party - - - -
Repayments of notes payable - 5,000 - 5,000
Proceeds from note payable - 15,406 492,732 30,760
Proceeds from issuance of bridge warrants - - - -
Repayments of notes payable (150,908) (375,694) (350,069) (600,194)
Deferred taxes - - - -
Issuance of common stock & warrants - - - 320,578
Proceeds of long term debt - - - 37,903
Repayment of long term debt (6,270) (17,720) (17,084) (42,113)
----------- ----------- ----------- -----------
Net cash provided (used) in financing activities (157,178) (373,008) 125,579 (248,066)
Increase (decrease) in cash (336,789) (45,525) 38,821 (737,416)
Cash at beginning of period 375,723 48,026 113 740,349
Effect of currency exchange rate change - (134) - (566)
----------- ----------- ----------- -----------
Cash at end of period $ 38,934 $ 2,367 $ 38,934 $ 2,367
=========== =========== =========== ===========
</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
DECEMBER 31, 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 nine month period ended December 31,
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
$20,800 of interest expense for the nine months ended December 30, 1996.
Amounts due under the note are collateralized by a security interest
7
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
in the Company's song library. The aggregate amount liable under the
note was approximately $131,000, as of December 31, 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 December 31, 1996, 87,750 Bridge
Warrants remain outstanding.
4. MAJOR CUSTOMERS
During the nine months ended December 31, 1996 and 1995, 66.8% and 63.1
%, 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:
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------------------
Target 41.0% 10.6%
J.C. Penney 11.6% -
Ames - 13.0%
Montgomery Ward - 19.2%
5. CONTINGENCIES
On October 16, 1996 an award was issued by the arbitrators in the matter
of the arbitration between the Company and its former president, as a
result of the Company's termination of his employment agreement. The
settlement agreement reached after the issuance of the award calls for
payment of approximately $248,000, representing compensation under the
employment agreement as well as legal fees and costs, over a nine month
commencing in December, 1996. The Company, having paid $40,000 as of the
date of this writing, is currently in default of the payment terms. As
a consequence thereof, in accordance with the terms of the settlement
agreement, a default judgement was entered against the Company in the
Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida
on February 12, 1997 in favor of the Company's former president in the
amount of $207,938 and will bear interest at the rate of 10% per annum.
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
8
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
was approximately $350,700 and $596,300 for the first nine 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 December 31,
1996.
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 February 10,
1997. 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
9
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
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 purchase, distribution and sale of
products. The Company pays Memcorp a commission fee on all shipped
products for these services.
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(R) or Memorex(TM) trademarkS. It's audio software is marketed
under the trademarks KARAOKE Kassette(TM), KARAOKE KOMPACT DISC(TM) AND KARAOKE
VIDEO KASSETTE(TM). 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, 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 corporation 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.
For the third quarter of fiscal 1997 the Company lost approximately ($202,000).
This figure includes a $248,000 charge for settlement via binding arbitration of
a complaint filed by the Company's former president as a result of the
termination of his employment agreement by the Company. See "Liquidity and
Capital Resources" for further information. The current period also includes an
extraordinary gain and the impact of certain adjustments; excluding these items
and the settlement costs the Company would have reported net income of
approximately $3,000. See "Results of Operations" for further information. The
Company's working capital deficit as of December 31, 1996 was approximately $2.8
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 December 31, 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 DECEMBER 31, 1996 AND 1995
REVENUES
Total revenues increased by approximately $1.5 million or 48% during the third
quarter of fiscal 1997 compared to the third quarter of fiscal 1996. The
increase in revenues is primarily the result of an increase in equipment sales
of $2.0 million partially offset by a decrease in music sales of $495,000.
Revenues from equipment sales increased 103% to approximately $4.0 million for
the third quarter of fiscal 1997 compared to $2.0 million for the third 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 sales by the U.S. entity of approximately $1.1 million and
foreign sales of approximately $900,000. 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 32% of equipment sales and 27%
of total revenues, for the third quarter of fiscal 1997. Previously, the
Company, through related party transactions, recorded commissions earned on
foreign shipments.
Revenues from music sales decreased 42% to approximately $678,000 for the third
quarter of fiscal 1997 compared to $1.2 million for the third quarter of fiscal
1996. Third quarter 1997 revenues include 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 $609,000 or 52% from a year ago primarily reflecting lower
sales of 4 song and 8 song cassettes, partially offset by an increase in sales
of the CD&G format.
Commission and other income was relatively unchanged at approximately $19,000
for the third quarter of fiscal 1997 compared to the third quarter of fiscal
1996.
GROSS PROFIT
Gross profit from equipment and music sales increased approximately $342,000 to
$1.1 million or 23.1% for the third quarter of fiscal 1997, compared to $736,000
or 23.4% for the third quarter of fiscal 1996.
Gross profit, expressed as a percentage of equipment sales, increased to 20.6%
for the third quarter of fiscal 1997, compared to 18.3% for the third quarter of
fiscal 1996. Reflecting higher
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
sales, gross profit from equipment sales increased $462,000 to $823,000, for the
same period.
Gross profit from music sales decreased approximately $120,000 to $255,000 or
37.6% for the third quarter of fiscal 1997, compared to $375,000 or 31.9%, for
the third quarter of fiscal 1996. The third 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 $162,000.
OTHER OPERATING EXPENSES
Other operating expenses decreased approximately $12,200, or 5%, during the
third quarter of fiscal 1997 compared to the same period a year ago. The
decrease reflects managements continued efforts to control operating expenses in
light of a significant increase in equipment sales and primarily reflects lower
freight and handling charges of $23,000, partially offset by higher warehouse
supplies of $15,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased approximately $2,100,
during the third quarter of fiscal 1997 compared to the third quarter of fiscal
1996. The current quarter figure includes $89,000 for administration of the
Company's subsidiary in Hong Kong which is computed and paid based on 3% of
certain sales. Excluding this sales based administration fee, SG&A expenses
would have decreased $91,000 or 14% from the prior year. Noteworthy variances in
this category include reductions in salaries and benefits of $67,000 and
insurance of $35,000, partially offset by an increase in professional fees of
$48,000.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased approximately $8,000 or 13%, to
$67,000 for the third quarter of fiscal 1997 compared to the $59,000 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 $34,000 or 60%, during the third
quarter of fiscal 1997 compared to the same period a year ago. 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 decreased $17,300 or 31%, primarily reflecting the reduction
of the HFA balance.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Loss on sales of accounts receivable was 1.4% and 4.8% of total revenues during
the third quarter of fiscal 1997 and 1996, respectively. The loss decreased
$87,000 to $65,000, compared to the $152,000 recorded last year primarily due to
shorter collection periods and reduced fees.
The Company recorded settlement costs of approximately $248,000 in the third
quarter of fiscal 1997 as the result of a settlement reached via binding
arbitration. The complaint was filed by the Company's former president as a
result of the termination of his employment agreement by the Company.
EXTRAORDINARY ITEM
During the third quarter of fiscal 1997 the Company realized an extraordinary
gain of approximately $1,200 related to the restructuring of debt with trade
creditors. The Company is currently involved in discussions with other trade
creditors and anticipates additional gains from restructuring or extinguishment
of debt.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
REVENUES
Total revenues increased by approximately $5.2 million or 90% during the first
nine months of fiscal 1997 compared to the first nine months of fiscal 1996. The
increase in revenues is primarily the result of an increase in equipment sales.
Revenues from equipment sales increased 154% to approximately $9.4 million for
the nine months of fiscal 1997 compared to approximately $3.7 million for the
nine 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 $4.0 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 54% of equipment sales and 46% of total revenues, for the nine months
of fiscal 1997. Previously, the Company, through related party transactions,
recorded commissions earned on foreign shipments.
Revenues from music sales decreased 28% to approximately $1.4 million for the
nine months of fiscal 1997 compared to $1.9 million for the same period of
fiscal 1996. The current year sales figure includes the impact of a $228,000
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 $762,000 or 39% from a year ago primarily
reflecting lower sales of 8 song and 4 song cassettes, partially offset by an
increase in sales of the CD&G format.
Commission and other income increased approximately $9,400 to $154,100 for the
first nine months of fiscal 1997 compared to the first nine months of fiscal
1996. The increase reflects higher other income of $58,200, partially offset by
lower commission income from related party of $48,800, primarily due to
International's increased business operations in Hong Kong.
GROSS PROFIT
Gross profit from equipment and music sales increased approximately $739,000 to
$1.9 million or 17.9% for the first nine months of fiscal 1997, compared to $1.2
million or 21.3% for the first nine months of fiscal 1996.
Gross profit, expressed as a percentage of equipment sales, decreased to 15.9%
for the nine months of fiscal 1997, compared to 16.2 for the nine months of
fiscal 1996. The current year gross
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
profit percentage reflects a Memcorp licensing fee for use of the Memorex
trademark. Reflecting higher sales, gross profit from equipment sales increased
$898,000 to $1.5 million, 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 the gross profit percentage would have been 15.3%.
Gross profit from music sales decreased approximately $158,000 to $439,000 or
31.4% for the nine months of fiscal 1997, compared to $598,000 or 30.1%, for the
nine months of fiscal 1996. The nine months of fiscal 1997 includes $85,000
related to the aforementioned adjustment for return reserves. Excluding this
adjustment gross profit from music sales would have decreased $243,000 yielding
a gross profit percentage of 30.3%.
OTHER OPERATING EXPENSES
Other operating expenses decreased approximately $60,000, or 11%, during the
first nine 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 a significant increase in equipment sales and primarily reflects lower
warehouse payroll expenses of $45,800, warehouse rent of $18,600, and freight of
$15,500 partially offset by higher warehouse temporary help of $36,600 and
warehouse supplies of $23,100.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased approximately $494,100 or
23%, during the first nine months of fiscal 1997 compared to the same period of
fiscal 1996. The current year figure includes $238,600 for administration of the
Company's subsidiary in Hong Kong which is computed and paid based on 3% of
certain sales. Excluding this sales based administration fee, SG&A expenses
would have decreased $732,700 or 35% 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 $322,700, promotional expenses including catalog,
advertising and show/convention of $143,200, product development $69,700, travel
and entertainment $63,800, and insurance $55,700. These decreases were partially
offset by higher professional fees of $73,100.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased approximately $48,400 or 31%, to
$204,800 for the nine months of fiscal 1997 compared to the $156,400 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
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 $46,700 or 32%, during the nine
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 decreased $3,700 or 3%.
Loss on sales of accounts receivable was 1.2% and 3.9% of total revenues during
the first nine months of fiscal 1997 and 1996, respectively. The loss decreased
$94,600 to $131,400, compared to the $226,000 recorded last year primarily due
to shorter collection periods and lower fees.
The Company recorded settlement costs of approximately $248,000 during the nine
months of fiscal 1997 as the result of a settlement reached via binding
arbitration. The complaint was filed by the Company's former president as a
result of the termination of his employment agreement by the Company.
EXTRAORDINARY ITEM
During the first nine months of fiscal 1997 the Company realized an
extraordinary gain of $72,400 related to the restructuring of debt with certain
trade creditors. The Company is currently involved in discussions with other
trade creditors and anticipates additional gains from restructuring or
extinguishment of debt.
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 $2.8 million, as of
December 31, 1996 compared to a deficiency of approximately $700,000 a year ago.
Net cash (used)in operating activities was approximately ($82,000) for the first
nine months of fiscal 1997 compared to net cash (used) in operating activities
of ($319,000) during the first nine months of fiscal 1996. The difference
between the Company's net loss of approximately $618,000 and operating cash
flows for the first nine months of fiscal 1997 was primarily due to cash
provided by an increase in liabilities of $180,000, a reduction in inventory of
$1,225,000, and non-cash charges for depreciation and amortization of $300,000,
partially offset by an increase in net receivables of $1,209,000.
Net cash provided (used) in investing activities was ($4,600) and ($170,000)
during the first nine months of fiscal 1997 and 1996, respectively.
Net cash provided (used) by financing activities was $126,000 and ($248,000)
during the first nine 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 $350,000, 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 did make progress in arranging financing for its inventory
needs for the most recent Christmas season through its relationship with
Memcorp, utilizing letters of credit opened on the Company's behalf totaling
approximately $2.2 million, there is no formal agreement in place with regard to
such inventory financing for the future, 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 February 1, 1997), 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 December 31, 1996, the outstanding
balance for which the Company is contingently liable to Bankers, was
approximately $1.4 million. The agreement with Bankers expires on June 28, 1997.
On October 16, 1996 an award was issued by the arbitrators in the matter of the
arbitration between the Company and its former president, as a result of the
Company's termination of his employment agreement. The settlement agreement
reached after the issuance of the award calls for payment of approximately
$248,000, representing compensation under the employment agreement as well as
legal fees and costs, over a nine month period commencing in December, 1996. The
Company, having paid $40,000 as of the date of this writing, is currently in
default of the payment terms. As a consequence thereof, in accordance with the
terms of the settlement agreement, a default judgement was entered against the
Company on February 12, 1997 in favor of the Company's former president in the
amount of $207,938 and will bear interest at the rate of 10% per annum.
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 December 31, 1996 of $295,000. 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
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 December 31, 1996 and 1995, the Company had accrued on its financial
statements total royalties payable, comprised of audio and written lyric
components, of approximately $793,000 and $1.2 million, respectively. As was the
case as of September 30th, the Company remains one quarter delinquent in the
payment of its copyright royalty obligations imposed pursuant to written
copyright royalty agreements with The Harry Fox Agency, Inc. ("HFA"). HFA
represents approximately 80% of the publishers to whom the Company owes
royalties. 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. The Company is
one month delinquent with respect to such agreement as of the date of this
filing. 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. Based on management's assertion that it has
more than sufficiently accrued for all such royalty liability and as a result of
an agreement reached with HFA based on their most recent audit (for the period
April 1, 1994 - March 31, 1996), the Company has reclassified $150,000 in
royalty liability to the installment balance due HFA.
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
With the completion of its negotiations with HFA, the Company has now entered
settlement agreements, totaling approximately $1.35 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 October 1997,
although there is no guarantee that the Company will be able to do so within the
specified time period. As of February 10, 1997, the Company had paid
approximately $925,000 pursuant to those settlement agreements.
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 December 31, 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 nine months of
fiscal 1997, the total inventory purchases from FLX and LTD were approximately
$2.9 million and $2.5 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 companies for such items as refurbishing of defective merchandise
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
by the Company and promotional and advertising expenses, with a concomitant
credit to results of operations. For the first nine months of fiscal 1997, the
Company received approximately $63,000 in credits.
At December 31, 1996, Note payable - FLX, which totaled approximately $372,000,
was 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 nine 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 provided
up to $2.2 million of inventory financing to the Company via letters of credit
but has no requirement to continue 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 December 31, 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>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 discontinuance of 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
27 Financial Data Schedule
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)
February 14, 1997
By: /S/EDWARD STEELE
-----------------------------------
Edward Steele
Chief Executive Officer
(Principal Financial and
Principal Accounting officer)
25
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 38,934
<SECURITIES> 0
<RECEIVABLES> 3,172,366
<ALLOWANCES> (1,713,000)
<INVENTORY> 1,081,393
<CURRENT-ASSETS> 2,622,655
<PP&E> 530,598
<DEPRECIATION> (273,000)
<TOTAL-ASSETS> 4,957,327
<CURRENT-LIABILITIES> 5,379,651
<BONDS> 0
0
0
<COMMON> 28,116
<OTHER-SE> (462,711)
<TOTAL-LIABILITY-AND-EQUITY> 4,957,327
<SALES> 4,668,620
<TOTAL-REVENUES> 4,687,369
<CGS> 3,590,607
<TOTAL-COSTS> 4,553,851
<OTHER-EXPENSES> 313,455
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,828
<INCOME-PRETAX> (202,765)
<INCOME-TAX> 0
<INCOME-CONTINUING> (202,765)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,156
<CHANGES> 0
<NET-INCOME> (201,609)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
