SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
0 - 24968
Commission File Number
THE SINGING MACHINE COMPANY, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 95-3795478
(State of Incorporation ) (IRS Employer I.D. No.)
3101 N.W. 25th Avenue, Pompano Beach, FL 33069
(Address of principal executive offices )
(954) 968-8006
(Issuer's telephone number, including area code)
Check whether the Issuer: (1) filed all reports required to be
filed by section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act
after the distribution of securities under a plan confirmed by a
court.
Yes X No .
APPLICABLE ONLY TO CORPORATE ISSUERS
There were 2,356,935 shares of Common Stock, $.01 par value, issued
and outstanding at September 30, 1998.
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998
(Unaudited) and March 31, 1998.
Consolidated Statement of Operations - Three months
and six months ended September 30, 1998 and 1997
(Unaudited).
Consolidated Statement of Cash Flows - Six months
ended September 30, 1998 and 1997 (Unaudited).
Notes to Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security-Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE> 2
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Item I. Financial Statements
<PAGE> 3
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
September 30, March 31,
1998 1998
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 92,763 $ 7,770
Trade accounts receivable -
net of $80,000 allowance
for doubtful accounts 1,574,995 532,765
Accounts receivable -
related parties 26,658 25,489
Inventories - net 729,495 410,293
Prepaid expenses and
other assets 34,460 38,047
TOTAL CURRENT ASSETS 2,458,371 1,014,364
PROPERTY & EQUIPMENT - net of
accumulated depreciation of
$169,768 as of September 30, 1998
and $163,064 as of March 31, 1998 12,731 19,435
INTANGIBLE ASSETS:
Investments in song library
net of accumulated amortization
of $424,187 as of September 30,
1998 and $398,328 as of
March 31, 1998 20,731 46,590
OTHER ASSETS 6,707 6,707
TOTAL ASSETS $2,498,540 $1,087,096
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, March 31,
1998 1998
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable $ 2,296,043 $ 1,429,917
Loans payable 129,715 100,000
TOTAL CURRENT LIABILITIES 2,425,758 1,529,917
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -
10,000,000 shares authorized,
2,356,935 issued and
outstanding at
September 30, 1998
and March 31, 1998 23,569 23,569
Additional paid in capital 9,986,867 9,986,867
Accumulated deficit (9,937,654) (10,453,257)
Total stockholders' equity 72,782 (442,821)
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,498,540 $ 1,087,096
</TABLE>
See accompany notes to financial statements.
<PAGE> 5
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
( Unaudited )
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Equipment sales, net $3,692,515 $1,878,957 $5,316,554 $2,006,212
Music sales, net 97,822 251,990 123,485 352,832
Commission income
- related party - 1,702 - 4,443
Other 9,919 9,928 11,449 39,883
Total revenues 3,800,256 2,142,577 5,451,488 2,403,370
COSTS AND EXPENSES:
Cost of equipment sales 2,838,478 1,583,348 4,065,474 1,757,217
Cost of music sales 35,889 69,545 41,224 105,850
Other operating expenses 68,916 77,660 134,245 181,907
Selling general and
administrative expense 297,821 245,678 589,378 540,585
Depreciation and amortization 14,481 46,673 30,459 93,348
Total costs and expenses 3,255,585 2,022,904 4,860,780 2,678,907
Operating income ( loss ) 544,671 119,673 590,708 (275,537)
Other income ( expenses ):
Interest income 590 569 1,168 1,125
Interest expense (6,221) (2,416) (10,977) (4,215)
Factoring fees (49,482) (28,896) (65,296) (45,932)
Total other expenses, net (55,113) (30,743) (75,105) (49,022)
Income ( loss ) before taxes 489,558 88,930 515,603 (324,559)
</TABLE>
<PAGE> 6
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income (loss) $ 489,558 $ 88,930 $ 515,603 $ (324,559)
Net income (loss) per share $ 0.21 $ 0.03 $ 0.22 $ (0.11)
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 2,356,934 2,883,582 2,356,934 2,883,582
</TABLE>
See accompanying notes to financial statements.
<PAGE> 7
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
( Unaudited )
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 76,216 $ 25,846 $ 86,185 $ 40,778
CASH FLOWS FROM
INVESTING ACTIVITIES:
Property & equipment (3,023) - (3,023) -
Receivable from
related parties (591) (569) (1,169) 6,749
Other assets - (1,050) - (7,757)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (3,614) (1,619) (4,192) (1,008)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from notes payable - - 43,000 -
Repayments of notes payable - - (40,000) -
NET CASH PROVIDED BY (USED)IN
FINANCING ACTIVITIES - - 3,000 -
INCREASE (DECREASE) IN CASH 72,602 24,227 81,993 39,770
CASH - BEGINNING OF PERIOD 20,161 15,166 7,770 (377)
CASH - END OF PERIOD $ 92,763 $ 39,393 $ 92,763 $ 39,393
</TABLE>
See accompanying notes to financial statements.
<PAGE> 8
NOTE 1 - CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements of the
Company have been prepared in accordance with the
instructions to Form 10-QSB and, therefore, omit or
condense certain footnotes and other information normally
included in financial statements prepared in accordance
with generally accepted accounting principles. It is
suggested that these consolidated condensed financial
statements should be read in conjunction with the Company's
financial statements and notes thereto included in the
Company's audited financial statements on Form 10-KSB for
the fiscal year ended March 31, 1998.
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, 1998 which are included in Form 10-KSB.
In the opinion of management, all adjustments which are of
a normal recurring nature and considered necessary to
present fairly the financial positions, results of
operations, and cash flows for all periods presented have
been made.
The results of operations for the six month period ended
September 30, 1998 are not necessarily indicative of the
results that may be expected for the entire fiscal year
ending March 31, 1999.
The accompanying consolidated condensed financial
statements include the accounts of the Company and its
wholly-owned subsidiary. All significant inter company
balances and transactions have been eliminated. Assets
and liabilities of the foreign subsidiary are translated
at the rate of exchange in effect at the balance sheet
date; income and expenses are translated at the average
rates of exchange prevailing during the year. The related
translation adjustment is not material.
NOTE 2 - REORGANIZATION
On April 1, 1998, the Company effectuated a one-for-ten
(1:10) reverse stock split. The primary purpose of the
reverse stock split was to comply with the Company's Plan
of Reorganization, as Amended, which was confirmed on March
17, 1998. Trading in the post-split shares commenced at
the opening of business on April 1, 1998. No additional
<PAGE> 9
NOTE 2 - REORGANIZATION (Cont'd)
shares were issued in connection with the reverse split and
those stockholders entitled to receive fractional shares
received shares based on rounding to the nearest whole
number. During April 1998, the Company filed an amendment
to its Articles of Incorporation increasing the authorized
shares of the Company's common stock to ten million
(10,000,000) shares.
The Company's creditors, pursuant to the Company's Plan of
Reorganization, as Amended, who elected to receive shares
will be issued an aggregate of 2,068,576 post-split shares
of common stock. The Company's legal counsel has written
to each creditor requesting that the necessary information
be completed and returned in order to issue the common
stock. The financial statements reflect the issuance of
2,068,576 post-split shares of common stock to the
Company's creditors.
These financial statements also reflect the one-for-ten
(1:10) reverse stock split in computing the weighted
average common and common equivalent shares outstanding and
the net loss per common share amounts and account for the
subsequent increase of authorized common shares pursuant
to the Company's amendment to its Articles of Incorporation
during April 1998.
NOTE 3 - MAJOR CUSTOMERS
During the six months ended September 30, 1998 and 1997,
91.1% and 85.7%, respectively, of the Company's total
revenue were derived from net sales to its five largest
customers. Sales derived from customers who individually
purchased greater than 10% of total revenues were as
follows:
SIX MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
Target 31.3% 11.0%
Best Buy 24.0% -
Fingerhut - 27.6%
JC Penney 26.6% 37.7%
Because of the seasonality of the Company's sales, these
results may be distorted due to historically low percentage
of overall sales during the Company's first quarter and
historically high third quarter shipments.
<PAGE> 10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The analysis of the Company's financial condition,
liquidity, capital resources, and results of operations
should be reviewed in conjunction with the accompanying
financial statements, including the notes thereto.
General
The Singing Machine Company Inc., incorporated in Delaware
in 1994, together with its wholly owned subsidiary,
International (SMC) HK, Ltd. (hereafter referred to as the
"Company"), engages in the production and distribution of
karaoke audio software and electronic recording equipment.
The Company's electronic recording and playback products
are marketed under The Singing Machine or Memorex
trademarks. The Company's audio software is marketed under
the trademark Karaoke Kassette , Karaoke Kompact Disc and
Karaoke Video kassette . The Company's products are sold
throughout the United States, primarily through department
stores, lifestyle merchants, mass merchandisers, direct
mail catalogs and showrooms, music and record stores,
national chains, specialty stores and warehouse clubs.
The Company's karaoke machines and karaoke software are
currently sold in such retail outlets as Target, Best Buy,
J.C. Penney and Fingerhut.
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 karaoke hardware products
under "Memorex" trademark.
For the first six months of fiscal 1999, the Company's net
income was approximately $516,000. The Company's working
capital as of September 30, 1998 was approximately $33,000.
RESULTS OF OPERATIONS - SIX MONTHS ENDED SEPTEMBER 30, 1998
AND 1997
REVENUES
Total revenues increased by approximately $3,048,000 or
227% during the first six months of fiscal 1999 compared
to the first six months of fiscal 1998. The increase in
revenue is primarily a result of increases in equipment and
software sales and a reduced rate of returns from
customers.
Revenues from equipment sales increased 265% to
approximately $5,316,000 for the first six months of
fiscal 1999 compared to $2,006,000 for the first six months
<PAGE> 11
of fiscal 1998. The increase in equipment sales was
primarily a result of the ability of the Company to obtain
new financing to purchase new inventory during the first
six months of fiscal 1999.
Revenues from music sales declined by 65% to approximately
$123,000 for the first six months of fiscal 1999 compared
to $353,000 for the first six months of fiscal 1998.
Commissions and other income decreased approximately
$33,000 to $11,000 for the first six months of fiscal 1999
compared to the first six months of fiscal 1998. The
decrease reflects lower commission income from a related
party, primarily due to International's increased business
operations in Hong Kong, reflecting lower licensing fees.
GROSS PROFIT
Gross profit from equipment and music sales increased
approximately $837,364 to $1,333,000 or 24.5% for the first
six months of fiscal 1999, compared to $495,977 or 21.1%
for the first six months of fiscal 1998. The increase in
gross profit was primarily a result of the reduction of the
Company's existing inventory and the ability of the Company
to obtain new financing to purchase new inventory after the
Chapter 11 reorganization and selling at higher gross
margins.
OTHER OPERATING EXPENSES
Other operating expenses decreased approximately $48,000,
or 26% during the first six months of fiscal 1999 compared
to the same period a year ago. The decrease is primarily
due to lower facility and personnel expenses.
SELLING, GENERAL ADMINISTRATIVE EXPENSES
Selling, general & administrative expenses increased
approximately $52,143 or 21.2%, during the first six months
of fiscal 1999 compared to the first six months of fiscal
1998. The increase is primarily due to an increase in
salaries and payroll taxes as a direct result of an
additional employee (marketing) product development
expenses as a direct result of production of new music
titles and development costs of new music multi-packs and
significant increases in freight and delivery costs as a
result of increased sales.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expense decreased
approximately $63,000 or 67% to $30,000 for the first six
months of fiscal 1999 compared to the $93,000 recorded last
year. The decrease is primarily the result of the write
off of the costs of trademarks no longer used, cost in
excess of net assets (goodwill), write-down of the song
<PAGE> 12
library due to the bankruptcy reorganization, and leasehold
improvements abandoned while moving to a smaller facility.
OTHER EXPENSES
Net interest expense increased approximately $26,000 or 57%
during the first six months of fiscal 1999 compared to the
same period year ago. The increase is primarily due to
increased banking and interest charges of the Company's
Hong Kong subsidiary to finance increased shipments of
hardware.
Loss on sales of accounts receivable was 1.2% and 1.8% of
total revenues during the first six months of fiscal 1999
and 1998 respectively. The loss increased $19,000 to
$65,000, compared to the $46,000 recorded last year
primarily due to higher shipments and factoring of those
receivables during the first six months of fiscal 1999.
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.
FINANCIAL CONDITION
At September 30, 1998, the Company had current assets of
$2,458,371, compared to $1,014,364 at March 31, 1998; total
assets of $2,495,640 as compared to $1,087,096 at March 31,
1998; current liabilities of $2,425,758 as compared to
$1,529,917 at March 31, 1998, and a current net worth of
$72,782 as compared to $(442,821) at March 31, 1998. (See
"Financial Statements"). The increase in total assets and
net worth are principally due to the increases of
inventories and receivables as a result of higher sales and
orders during the six months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Going Concern: The Company's working capital at September
30, 1998, was approximately $33,000. The report by the
Company's independent auditors on its March 31, 1998
financial statements express substantial doubt about the
Company's ability to continue as a going concern. The
<PAGE> 13
independent auditors attributed this substantial doubt to
substantial net operating losses in the fiscal year ended
March 31, 1998, and an accumulated deficit of approximately
$10,400,000. This condition raised substantial doubt about
the Company's ability to continue as a going concern. 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.
Capital Resources: Since the date of the March 31, 1998
financial statements, the Company has obtained significant
financing for continuing operations and growth. Three
specific lines of credit have been opened, a financing
agreement in Hong Kong and two financing agreements through
its U.S. operations.
Effective July 2, 1998, the Company, through its Hong Kong
subsidiary, International SMC(HK) Ltd., has been provided
a (US) $200,000 credit facility for opening letters of
credit and/or trust receipt and/or purchasing at the
Company's factories by purchasing of documents against
acceptance bills, from Delta Asia Financial Group, Hong
Kong. This facility is a revolving line until May 31,
1999, at which time it will be reviewed. The cost of this
credit facility is prime plus 2 1/2% and bank charges for
opening letters of credit. This facility is personally
guaranteed by Mr. J.A. Bauer, a former director of the
Company.
The Company is a party to a factoring agreement, dated
April 24, 1998, with Berkshire Financial Group, Inc.
("Berkshire") pursuant to which Berkshire purchases certain
of the Company's accounts receivable. Under the agreement,
Berkshire purchases certain selected accounts receivable
from the Company and advances 70% of the face value of
those receivables to the Company. The accounts receivable
are purchased by Berkshire without recourse and Berkshire
therefore performs an intensive credit review prior to
purchase the receivable.
The Company is charged a variable percentage fee based upon
the length of collection period of the receivable and the
remaining collected balance fees are sent to the Company
after collection. The purchase of receivables of the
Company by Berkshire is absolute and is a true sale of
receivables. Berkshire has placed no maximum limit on the
amount of the Company's receivables they will purchase.
The Company has also entered into an agreement with EPK
Financial Corporation ("EPK") whereby EPK will open letters
of credit with the Company's factories to import inventory
for distribution to the Company's customers. This allows
<PAGE> 14
the Company to purchase domestic hardware inventory for
distribution to customers in less than container load
quantities and provides the flexibility to customers of not
opening a letter of credit in favor of the Company. The
selling price to these customers is considerably higher
because the Company pays financing costs to EPK and incurs
costs of ocean freight, duty, and handling charges. Upon
shipment of product from these financed transactions, the
receivables are factored by Berkshire Financial, thereby
buying the shipments and related interest from EPK.
The Company pays EPK a flat fee per transaction, which is
negotiated for each shipment, and the maximum purchase
price per transaction is $300,000. There has been no
maximum total shipments established under this agreement.
Berkshire has entered into this agreement as a third party
agreeing to purchase all receivables invoiced under these
transactions. The transactions financed by EPK are
supported by personal guarantees of the chief executive
officer and chief financial officer of the Company and the
agreement is in effect until July 1, 1999, unless
terminated by either party upon 30 days' written notice.
The Company has no present commitment that is likely to
result in its liquidity increasing or decreasing in any
material way. In addition, the Company knows of no trend,
additional demand, event or uncertainty that will result
in, or that are reasonably likely to result in, the
Company's liquidity increasing or decreasing in any
material way.
The Company has no material commitments for capital
expenditures. The Company knows of no material trends,
favorable or unfavorable, in the Company's capital
resources. The Company has no additional outstanding
credit lines or credit commitments in place and has no
additional current need for financial credit.
YEAR 2000
Management has compiled a list of both internally and
externally supplied information systems that utilize
imbedded date codes which could experience operational
difficulties in the year 2000. The Company uses third
party applications or suppliers for all high level systems
and reporting. These systems will either be upgraded and
tested to be in compliance for the year 2000 or the Company
will take necessary steps to replace the supplier.
Management is testing new systems for which it is
responsible. It is the Company's objective to be in year
2000 compliance for all systems by the end of fiscal 1999,
however, no assurance can be given that such objective will
be met.
<PAGE> 15
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable
Item 5. OTHER INFORMATION
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There are not exhibits required to be filed for the
period covered by this Report.
(b) The Company did not file a Current Report on Form
8-K during the period covered by this Report.
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
THE SINGING MACHINE COMPANY, INC.
Dated: December 17, 1998 By:/s/ John F. Klecha
John F. Klecha
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Balance
Sheet, Statement of Operations, Statements of Cash Flows and Notes thereto
incorporated in Part I, Item 1. of this Form 10-QSB and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 92,763
<SECURITIES> 0
<RECEIVABLES> 1,574,995
<ALLOWANCES> 80,000
<INVENTORY> 729,495
<CURRENT-ASSETS> 2,458,371
<PP&E> 12,731
<DEPRECIATION> 769,768
<TOTAL-ASSETS> 2,498,540
<CURRENT-LIABILITIES> 2,425,758
<BONDS> 0
0
0
<COMMON> 23,569
<OTHER-SE> 72,782
<TOTAL-LIABILITY-AND-EQUITY> 2,498,540
<SALES> 5,440,039
<TOTAL-REVENUES> 5,451,488
<CGS> 4,106,698
<TOTAL-COSTS> 4,860,780
<OTHER-EXPENSES> 75,105
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,273
<INCOME-PRETAX> 515,603
<INCOME-TAX> 0
<INCOME-CONTINUING> 515,603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 515,603
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>