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 June 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 No x .
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 No x .
APPLICABLE ONLY TO CORPORATE ISSUERS
There were 2,356,935 shares of Common Stock, $.01 par value, issued
and outstanding at June 30, 1998.
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998
(Unaudited) and March 31, 1998.
Consolidated Statement of Operations - Three months
ended June 30, 1998 and 1997 (Unaudited).
Consolidated Statement of Cash Flows - Three months
ended June 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
June 30, March 31,
1998 1998
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 20,161 $ 7,770
Trade accounts receivable -
net of $80,000 allowance
for doubtful accounts 437,193 532,765
Accounts receivable -
related parties 26,067 25,489
Inventories - net 225 675 410,293
Prepaid expenses and
other assets 39,767 38,047
TOTAL CURRENT ASSETS 748,863 1,014,364
PROPERTY & EQUIPMENT - net of
accumulated depreciation of
$167,928 as of June 30, 1998
and $163,064 as of
March 31, 1998 14,571 19,435
INTANGIBLE ASSETS:
Investments in song library
net of accumulated amortization
of $414,559 as of June 30, 1998
and $398,328 as of
March 31, 1998 30,339 46,590
OTHER ASSETS 6,707 6,707
TOTAL ASSETS $ 800,480 $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
June 30, March 31,
1998 1998
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable $ 1,115,584 $ 1,429,917
Loans payable 102,795 100,000
TOTAL CURRENT LIABILITIES 1,218,379 1,529,917
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -
10,000,000 shares authorized,
2,356,935 issued and
outstanding at June 30, 1998
and March 31, 1998 23,569 23,569
Additional paid in capital 9,986,867 9,986,867
Accumulated deficit (10,428,335) (10,453,257)
TOTAL STOCKHOLDERS' EQUITY (417,899) (442,821)
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 800,480 $ 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
June 30,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES:
Equipment sales, net $1,624,039 $ 127,255
Music sales, net 25,663 100,842
Commission income - related party 1,080 2,741
Other - 29,955
1,650,782 260,793
COSTS AND EXPENSES:
Cost of equipment sales 1,216,996 173,869
Cost of music sales 5,335 36,305
Other operating expenses 68,916 104,247
Selling general and administrative
expenses 281,720 298,237
Depreciation and amortization 15,978 46,675
1,588,945 659,333
OPERATING INCOME (LOSS) 61,837 (398,540)
OTHER INCOME (EXPENSES):
Interest income 578 557
Interest expense (21,679) (1,799)
Factoring expenses (15,814) (17,036)
(36,915) (18,278)
INCOME (LOSS) BEFORE TAXES 24,922 (416,818)
PROVISION FOR INCOME TAXES - -
NET INCOME (LOSS) $ 24,922 $ (416,818)
NET INCOME (LOSS) PER SHARE $ 0.01 $ (0.14)
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 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
June 30,
1998 1997
<S> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 37,704 $ 14,986)
CASH FLOWS FROM INVESTING ACTIVITIES:
Receivable from related parties 578 557
Net cash provided by (used in)
investing activities 578 557
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 41,282 15,543
CASH - BEGINNING OF PERIOD 13,916 (377)
CASH - END OF PERIOD $ 55,198 $ 15,166
</TABLE>
See accompanying notes to financial statements.
<PAGE> 7
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 three month period
ended June 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
<PAGE> 8
NOTE 2 - REORGANIZATION (Cont'd)
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 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 three months ended June 30, 1998 and 1997,
89.3% and 86.3%, 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:
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
Target 34.5% 11.0%
<PAGE> 9
NOTE 3 - MAJOR CUSTOMERS (Cont'd)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
<S> <C> <C>
Best Buy 25.6% -
Fingerhut 12.6% 27.6%
JC Penney 11.1% 37.7%
</TABLE>
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.
<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 quarter of fiscal 1999, the Company's net
income was approximately $25,000. The Company's working
capital deficit as of June 30, 1998 was approximately
$515,000. 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, 1998. See "Liquidity and
Capital Resources" - "Going Concern" below.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES
Total revenues increased by approximately $1,390,000 or
533% during the first quarter of fiscal 1999 compared to
the first quarter of fiscal 1998. The increase in revenue
is primarily a result of increases in equipment sales,
and a reduced return rate from customers.
Revenues from equipment sales increased 1,176% to
approximately $1,624,000 for the first quarter of fiscal
1999 compared to $127,000 for the first quarter of
fiscal 1998. The increase in equipment sales was due to
the ability of the Company to obtain new financing to
purchase new inventory since the Chapter 11
reorganization.
Revenues from music sales declined by 75% to
approximately $26,000 for the first quarter of fiscal
1999 compared to $101,000 for the first quarter of fiscal
1998. Commissions and other income decreased by
approximately $36,000 to $1,900 for the first quarter of
fiscal 1999 compared to the first quarter 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 $409,000 to $427,000 or 25.9% for the first
quarter of fiscal 1999, compared to $18,000 or 7.8% for
the first quarter 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.
OTHER OPERATING EXPENSES
Other operating expenses decreased approximately $35,000,
or 34% during the first quarter 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 decreased
approximately $16,000 or 6%, during the first quarter of
fiscal 1999 compared to the first quarter of fiscal 1998.
The decrease is primarily due to lower facility costs.
<PAGE> 12
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expense decreased
approximately $31,000 or 66% to $16,000 for the first
quarter of fiscal 1999 compared to the $46,700 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), the write-down of the
song library due to the bankruptcy reorganization, and
leasehold improvements abandoned while moving to a
smaller facility.
OTHER EXPENSES
Net interest expense increased approximately $18,000 or
100% during the first quarter 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 1.0% and 6.5% of
total revenues during the first quarter of fiscal 1999
and 1998 respectively. The loss decreased $1,200 to
15,800, compared to the $17,000 recorded last year
primarily due to a lower factoring rate during the first
quarter 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 June 30, 1998, the Company had current assets of
$748,863, compared to $1,014,364 at March 31, 1998; total
assets of $800,450 as compared to $1,087,096 at March 31,
1998; current liabilities of $1,218,379 as compared to
<PAGE> 13
$1,529,917 at March 31, 1998, and a current net worth of
$(417,899) as compared to $(442,821) at March 31, 1998.
(See "Financial Statements"). The decrease in total
assets and increase in net worth are principally due to
the sell off of inventory during the period.
LIQUIDITY AND CAPITAL RESOURCES
Going Concern: The Company's working capital deficit at
June 30, 1998, was approximately $515,000. 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
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 $10,453,000. This condition raises
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: 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
<PAGE> 14
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 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
<PAGE> 15
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> 16
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> 17
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 11, 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> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> JUN-30-1998
<CASH> 20,161
<SECURITIES> 0
<RECEIVABLES> 437,193
<ALLOWANCES> 80,000
<INVENTORY> 225,675
<CURRENT-ASSETS> 748,863
<PP&E> 14,571
<DEPRECIATION> 167,928
<TOTAL-ASSETS> 30,339
<CURRENT-LIABILITIES> 1,218,379
<BONDS> 0
0
0
<COMMON> 23,569
<OTHER-SE> (417,899)
<TOTAL-LIABILITY-AND-EQUITY> 800,480
<SALES> 1,649,702
<TOTAL-REVENUES> 1,650,782
<CGS> 1,222,331
<TOTAL-COSTS> 1,588,945
<OTHER-EXPENSES> 15,236
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,679
<INCOME-PRETAX> 24,922
<INCOME-TAX> 0
<INCOME-CONTINUING> 24,922
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,922
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
