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 December 31, 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 February 1, 1999.
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1998
(Unaudited) and March 31, 1998.
Consolidated Statement of Operations - Three months
and nine months ended December 31, 1998 and 1997
(Unaudited).
Consolidated Statement of Cash Flows - nine months
ended December 31, 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
December 31, March 31,
1998 1998
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 39,869 $ 7,770
Trade accounts receivable -
net of $80,000 allowance
for doubtful accounts 986,244 532,765
Accounts receivable -
related parties 27,262 25,489
Inventories - net 388,635 410,293
Prepaid expenses and
other assets 37,534 38,047
TOTAL CURRENT ASSETS 1,479,544 1,014,364
PROPERTY & EQUIPMENT - net of
accumulated depreciation of
$174,823 as of December 31, 1998
and $163,064 as of March 31, 1998 7,676 19,435
INTANGIBLE ASSETS:
Investments in song library
net of accumulated amortization
of $434,553 as of December 31,
1998 and $398,328 as of
March 31, 1998 10,365 46,590
OTHER ASSETS 1,165 6,707
TOTAL ASSETS $1,498,750 $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
December 31, March 31,
1998 1998
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable $ 1,017,314 $ 1,429,917
Loans payable 56,514 100,000
TOTAL CURRENT LIABILITIES 1,073,828 1,529,917
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -
10,000,000 shares authorized,
2,356,935 issued and
outstanding at
December 31, 1998
and March 31, 1998 23,569 23,569
Additional paid in capital 9,986,867 9,986,867
Accumulated deficit (9,585,514) (10,453,257)
Total stockholders' equity 424,922 (442,821)
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,498,750 $ 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 Nine Months Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Equipment sales, net $2,683,242 $3,257,985 $7,999,796 $5,264,197
Music sales, net 380,632 301,983 504,117 654,815
Commission income
- related party - 1,389 - 5,832
Other 275 35,010 11,724 74,894
Total revenues 3,064,149 3,596,367 8,515,637 5,999,738
COSTS AND EXPENSES:
Cost of equipment sales 2,110,611 2,722,679 6,176,085 4,479,896
Cost of music sales 134,112 84,338 175,336 190,188
Other operating expenses 68,673 99,470 202,918 281,377
Selling general and
administrative expense 286,545 366,139 874,474 911,166
Depreciation and amortization 17,475 46,675 47,934 140,025
Total costs and expenses 2,617,416 3,319,301 7,476,747 6,002,652
Operating income ( loss ) 446,733 277,066 1,038,890 (2,914)
Other income ( expenses ):
Interest income 500 496 1,951 1,621
Interest expense (5,574) (700) (16,551) (4,915)
Factoring fees (91,251) (37,109) (156,547) (83,041)
Total other expenses, net (96,325) (37,313) (171,147) (86,335)
Income ( loss ) before taxes 350,408 239,753 867,743 (89,249)
</TABLE>
<PAGE> 6
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income (loss) $ 350,408 $ 239,753 $ 867,743 $ (89,249)
Net income (loss) per share $ 0.15 $ 0.08 $ 0.37 $ (0.03)
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 Nine Months Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 48,819 $ 46,751 $ 77,358 $ 30,399
CASH FLOWS FROM
INVESTING ACTIVITIES:
Property & equipment - - - -
Receivable from
related parties (604) (495) (1,773) 6,254
Other assets - 53,040 - (2,677)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (604) 52,545 (1,773) 3,577
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from notes payable 29,715 - 43,000 -
Repayments of notes payable - - (86,486) -
NET CASH PROVIDED BY (USED)IN
FINANCING ACTIVITIES 29,715 - (43,486) -
INCREASE (DECREASE) IN CASH 19,708 (5,794) 32,099 33,976
CASH - BEGINNING OF PERIOD 20,161 39,393 7,770 (377)
CASH - END OF PERIOD $ 39,869 $ 33,599 $ 39,869 $ 33,599
</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 nine month period ended
December 31, 1998 are 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 nine months ended December 31, 1998 and 1997,
84.4% and 84.7%, 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:
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
Target 33.0% 34.1%
Best Buy 18.6% 19.2%
JC Penney 20.1% 18.8%
<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.
For the first nine months of fiscal 1999, the Company's net
income was approximately $868,000. The Company's working
capital as of December 31, 1998 was approximately $406,000.
RESULTS OF OPERATIONS - NINE MONTHS ENDED DECEMBER 31, 1998
AND 1997
REVENUES
Total revenues increased by approximately $2,515,899 or 42%
during the first nine months of fiscal 1999 compared to the
first nine 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 52% to
approximately $8,000,000 for the first nine months of
fiscal 1999 compared to $5,264,000 for the first nine
months of fiscal 1998. The increase in equipment sales was
primarily a result of the ability of the Company to obtain
new financing to purchase inventory during the first nine
months of fiscal 1999.
Revenues from music sales declined by 23% to approximately
$504,000 for the first nine months of fiscal 1999 compared
<PAGE> 11
to $353,000 for the first nine months of fiscal 1998.
Commissions and other income decreased approximately
$69,000 to $655,000 for the first nine months of fiscal
1999 compared to the first nine 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 $903,000 to $2,152,000 or 25.3% for the first
nine months of fiscal 1999, compared to $1,249,000 or 21.1%
for the first nine 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 inventory after the
Chapter 11 reorganization and selling at higher gross
margins.
OTHER OPERATING EXPENSES
Other operating expenses decreased approximately $78,000,
or 28% during the first nine 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 decreased
approximately $36,692 or 4%, during the first nine months
of fiscal 1999 compared to the first nine months of fiscal
1998. The decrease is primarily due to lower legal and
accounting fees after reorganization.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expense decreased
approximately $92,000 or 66% to $48,000 for the first nine
months of fiscal 1999 compared to the $140,000 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
library due to the bankruptcy reorganization, and leasehold
improvements abandoned while moving to a smaller facility.
OTHER EXPENSES
Net interest expense increased approximately $11,000 or
333% during the first nine 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, and interest on short term notes.
<PAGE> 12
Loss on sales of accounts receivable was 1.8% and 1.4% of
total revenues during the first nine months of fiscal
1999 and 1998 respectively. The loss increased $74,000
to $157,000, compared to the $83,000 recorded last year
primarily due to higher shipments and factoring of those
receivables during the first nine months of fiscal 1999 and
purchase order financing during 1999 of approximately
$1,200,000 of hardware orders.
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 December 31, 1998, the Company had current assets of
$1,479,544, compared to $1,014,364 at March 31, 1998; total
assets of $1,498,750 as compared to $1,087,096 at March 31,
1998; current liabilities of $1,073,828 as compared to
$1,529,917 at March 31, 1998, and a current net worth of
$424,922 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
receivables as a result of higher sales and orders during
the nine months ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Going Concern: The Company's working capital at December
31, 1998, was approximately $406,000. 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
$10,400,000. 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
<PAGE> 13
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
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.
<PAGE> 14
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: February 1, 1999 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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 39,869
<SECURITIES> 0
<RECEIVABLES> 986,244
<ALLOWANCES> 80,000
<INVENTORY> 388,635
<CURRENT-ASSETS> 1,479,544
<PP&E> 7,676
<DEPRECIATION> 174,823
<TOTAL-ASSETS> 1,498,750
<CURRENT-LIABILITIES> 1,073,828
<BONDS> 0
0
0
<COMMON> 23,569
<OTHER-SE> 424,922
<TOTAL-LIABILITY-AND-EQUITY> 1,498,750
<SALES> 8,503,913
<TOTAL-REVENUES> 8,515,637
<CGS> 6,351,421
<TOTAL-COSTS> 7,476,747
<OTHER-EXPENSES> 154,596
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,551
<INCOME-PRETAX> 867,743
<INCOME-TAX> 867,743
<INCOME-CONTINUING> 867,743
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 867,743
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
