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, 2000
0 - 24968
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Commission File Number
THE SINGING MACHINE COMPANY, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 95-3795478
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(State of Incorporation ) (IRS Employer I.D. No.)
6601 Lyons Road, Building A-7 , Coconut Creek, FL 33073
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(Address of principal executive offices )
(954) 596-1000
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(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 4,249,620 shares of Common Stock, $.01 par value, issued and
outstanding at June 30, 2000.
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2000
(Unaudited) and March 31, 2000.
Consolidated Statement of Operations - Three months
ended June 30, 2000 and 1999 (Unaudited).
Consolidated Statement of Cash Flows - Three months
ended June 30, 2000 and 1999 (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
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Item I. Financial Statements
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
June 30, March 31,
2000 2000
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(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 141,546 $ 378,848
Accounts Receivable 1,162,879 728,038
Due from Factor 376,437 115,201
Due from Officer(s) 110,000 110,000
Due from related party - 394,706
Inventory - net 5,054,629 1,487,206
Interest Receivable 9,900 7,425
Prepaid Expenses and
Other Current Assets 351,465 204,311
Deferred Tax Asset 363,194 363,194
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TOTAL CURRENT ASSETS 7,570,050 3,788,929
PROPERTY AND EQUIPMENT, NET 94,317 99,814
OTHER ASSETS:
Reorganization Intangible - net 435,250 458,158
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TOTAL ASSETS $8,099,617 $4,346,901
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable 975,219 354,193
Accrued Expenses 203,058 73,675
Income taxes payable 2,576 11,994
Due to related party 2,146,538 753
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TOTAL CURRENT LIABILITIES 3,327,391 440,615
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SHAREHOLDERS' EQUITY:
Preferred Stock, $1.00 par value;
1,000,000 shares authorized,
issued and outstanding - 1,000,000
Common Stock, $.01 par value;
73,900,000 shares authorized;
4,249,620 and 2,960,120, shares
issued and outstanding,
respectively 42,496 29,600
Common stock to be issued
(50,000 and 67,500 shares,
respectively) 500 675
Additional Paid In Capital 3,106,846 1,719,049
Deferred Guarantee Fees (342,944) (400,101)
Retained Earnings 1,965,328 1,557,063
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TOTAL SHAREHOLDERS' EQUITY 4,772,226 3,906,286
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TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $8,099,617 $4,346,901
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</TABLE>
See accompanying notes to financial statements.
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
2000 1999
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<S> <C> <C>
NET SALES $ 6,068,591 $ 1,589,713
COST OF SALES 4,549,844 1,179,579
GROSS PROFIT 1,518,747 410,134
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,039,897 346,549
INCOME FROM OPERATIONS 478,850 63,585
OTHER INCOME (EXPENSES):
Other income 3,029 26,168
Interest expense (63,098) (7,596)
Interest income 24,059 437
Factoring fees (34,575) (42,652)
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NET OTHER EXPENSES (70,585) (23,643)
INCOME BEFORE INCOME
TAX BENEFIT 408,265 39,942
NET INCOME $ 408,265 $ 39,942
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NET INCOME PER COMMON SHARE
Basic $ 0.10 $ 0.02
========== ==========
Diluted $ 0.09 $ 0.01
========== ==========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING
Basic 4,063,296 2,548,500
Diluted 4,660,680 3,312,500
</TABLE>
See accompanying notes to financial statements.
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
2000 1999
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<S> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $(2,912,578) $ (1,105,400)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (4,497) (23,144)
Due from factor (261,236) -
Due from related parties 394,706 (119,563)
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Net cash provided by (used in)
investing activities 128,973 (142,707)
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CASH FLOW FROM FINANCING
ACTIVITIES:
Proceeds from issuance of common
stock & exercise of warrants
and options 400,518 -
Net proceeds from notes payable 599,247 104,266
Net proceeds from related party 1,546,538 -
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Net cash provided by
financing activities 2,546,303 104,266
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Increase in cash and cash
equivalents (237,302) (1,143,841)
Cash and cash equivalents
- beginning of year 378,848 49,288
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CASH AND CASH EQUIVALENTS
- END OF YEAR $ 141,546 $ (1,094,553)
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
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, 2000.
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, 2000, 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,
2000 are not necessarily indicative of the results that may be
expected for the entire fiscal year ending March 31, 2001.
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 - MAJOR CUSTOMERS
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As a percentage of total revenues, the Company's net sales in the
aggregate to its five (5) largest customers during the quarters ended
June 30, 2000 and 1999 were approximately 87% and 94%, respectively.
For the quarter ending June 30, 2000, two (2) major retailers accounted
for 48% and 28% each of total revenues. Because of the
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
NOTE 2 - MAJOR CUSTOMERS (Cont'd)
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seasonality of the Company's sales, these results may be distorted due
to the historically low percentage of overall sales during the
Company's first fiscal quarter of each year.
NOTE 3 - LOANS PAYABLE
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During May 2000, the Company entered into two working capital loan
agreements of $100,000 and $500,000, respectively. The loans extend
over a maximum period of eight months, bear interest at 15% per annum,
and are secured by corporate guarantees. In addition, the lenders will
be granted 5,000 and 25,000 stock options, respectively, to purchase
shares of the Company=s common stock at an exercise price of $3.25.
NOTE 4 - PRIVATE PLACEMENT OFFERING
--------------------------
On April 1, 1999, the Company completed a Private Placement Memorandum
(the "Memorandum") offering of 50 Units and raised $1,375,000
($1,331,017 after related costs). Each Unit consists of 20,000 shares
of the Company's Convertible Preferred Stock ("Preferred Stock") and
4,000 Common Stock Purchase Warrants ("Warrants"). Each share of
Preferred Stock automatically converted into one (1) share of the
Company's Common Stock at 5:00 p.m. eastern time on April 1, 2000.
Each Warrant entitles the Holder to purchase, at any time during the
period commencing from the date of issuance and ending three (3) years
from the date of the Memorandum, one (1) share of the Company's Common
Stock at a purchase price of $2.00 per share. The Company filed a
registration statement with the Commission to register the Company's
Common Stock underlying the securities comprising the Units, which was
declared effective by the Commission on March 17, 2000.
NOTE 5 - EXERCISE OF STOCK OPTIONS AND WARRANTS
--------------------------------------
Stock options and warrants were exercised during the first quarter of
fiscal year 2001 for a net value of $400,518.
NOTE 6 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Company has an agreement with FLX (a China manufacturer of consumer
electronics products) to produce electronic recording equipment based
on the Company's
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THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Unaudited)
NOTE 6 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Cont'd)
----------------------------------------------
specifications. Paul Wu, a former director of the Company, is Chairman
of the Board and a principal stockholder of FLX. During the fiscal
years ended March 31, 2000 and 1999, the Company purchased
approximately $10.3 million and $1.7 million respectively, in equipment
from FLX. The amount due to FLX at June 30, 2000 of $1,546,538 is
included in the related party payable. The Company believes that all
of the foregoing transactions with FLX have been on terms no less
favorable to the Company than could have been obtained from
unaffiliated third parties in arms-length transactions under similar
circumstances.
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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 karaoke machines and audio software products are marketed under The
Singing Machine trademark.
The Company's products are sold throughout the United States, primarily through
department stores, lifestyle merchants, mass merchandisers, direct mail
catalogs and showrooms, music and record stores, national chains, specialty
stores and warehouse clubs.
The Company's karaoke machines and karaoke software are currently sold in such
retail outlets as Target, Best Buy, J.C. Penney and Fingerhut.
For the first quarter of fiscal 2001, the Company's net income was
approximately $408,265. The Company's working capital as of June 30, 2000 was
approximately $4,242,659.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
During the first three months of fiscal 2001, total revenues increased
approximately 281% as compared to the first three months of fiscal 2000. In
dollars, this amounts to an approximate increase of $4,478,878. This large
increase in total revenues can be attributed not only to a growing popularity
of the Company's CD plus graphics machines, but also to the addition of a major
customer in the first quarter.
GROSS PROFIT
Gross profit from equipment and music sales for the first three months of
fiscal 2001 increased to $1,518,747, or a 270% increase from $410,134 for the
first three months of fiscal 2000. The increased gross profit is a direct
result of the increase in sales for this period.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by approximately
$762,498, or 220% for the first three months of fiscal 2001. These increased
expenses are due to the increase in sales related expenses, including
commissions, royalties and advertising. There is also a slight increase in
salary related expenses due to an increase in office staff. There is also a
non-cash expense due to the continued amortization of stock based guarantee
fees.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expenses increased approximately $15,247, or
112% for the three months ended June 30, 2000, as compared to the same period
of the prior year. This increase can be attributed to the addition of computer
equipment and leasehold improvements for the new facility.
OTHER EXPENSES
Net interest expense increased approximately $46,198 for the first three months
of fiscal 2001 as compared to the first three months of fiscal 2000. The
increase can be attributed to the increased use of credit line facilities to
fund the inventory necessary to meet demand of the company's product.
Loss on sales of accounts receivable was 0.6% and 2.6% of total revenues during
the first three months of fiscal 2001 and 2000 respectively. The loss
decreased from $42,652 in fiscal 2000 to $34,575 in fiscal 2000. This decrease
is due to decreased charges on factored invoices. These decreased charges are
the result of a larger total amount of invoices being factored, which in turn
decreased both the interest percentage and gave the Company better terms of
factor.
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, 2000 the Company had current assets of $7,570,050, compared to
$3,788.929 at March 31, 2000; total assets of $8,099,617 as compared to
$4,436,901 at March 31, 2000; current liabilities of $3,327,391 as compared to
$440,615 at March 31, 2000, and current net worth of $4,772,226. The increase
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is due to increased use of credit lines to fund future sales. The increased
use of credit lines was primarily for increased inventory. Changes in net
worth are due to increased net income as a result of increased sales.
CAPITAL RESOURCES
The Company has obtained significant financing for continuing operations and
growth. Two (2) specific lines of credit have been opened through the Company's
Hong Kong subsidiary, and two (2) financing agreements through its U.S.
operations.
Belgian Bank
Effective February 14, 2000, the Company, through its Hong Kong subsidiary,
International SMC(HK) Ltd., obtained a credit facility of $500,000 (US) from
Belgian Bank, Hong Kong, a subsidiary of Generale Bank, Belgium. This
facility is a revolving line based upon drawing down a maximum of 15% of the
value of export letters of credit held by Belgian Bank. There is no maturity
date except that Belgian Bank reserves the right to revise the terms and
conditions at the Bank's discretion. The cost of this credit facility is the
U.S. Dollar prime rate plus 1.25%. Repayment of principal plus interest shall
be made upon negotiation of the export letters of credit, but not later than
ninety (90) days after the advance.
Hong Kong Bank
Effective July 7, 1999, the Company, through its Hong Kong subsidiary,
International SMC(HK) Ltd., obtained a credit facility of $200,000 (US) from
Hong Kong Bank. This facility is a revolving line based upon drawing down a
maximum of 15% of the value of export letters of credit held by Hong Kong Bank.
There is no maturity date except that Hong Kong Bank reserves the right to
revise the terms and conditions at the Bank's discretion. The cost of this
credit facility is the U.S. dollar prime rate plus 2.5%. Repayment of
principal plus interest shall be made upon negotiation of the export letters
of credit, but not later that ninety (90) days after the advance.
Main Factors, Inc.
The Company is a party to a factoring agreement, as amended April 7, 2000 with
Main Factors, Inc. ("Main Factors") pursuant to which Main Factors has agreed
to purchase certain of the Company=s accounts receivable. Under the agreement,
Main Factors will purchase certain selected accounts receivable from the
Company and advance between 75% and 85% of the face value of those receivables
to the Company. The accounts receivable are purchased by Main Factors without
recourse and Main Factors performs an intensive credit review prior to the
purchase of the receivables.
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The Company is charged a variable percentage from 1.5% to 1% based upon the
total amount of factored receivables within a calendar year. Main Factors has
placed no maximum limit on the amount of the Company's receivables it will
purchase. The factoring agreement is personally guaranteed by John Klecha,
the Company's Chief Operating Officer and Chief Financial Officer.
EPK Financial Corporation
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 ot purchase domestic hardware inventory for distribution to customers
in less than container load quantities, thus providing the Company=s customers
with flexibility, and further, saving the customer the expense of 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 Main
Factors, thereby buying the shipments and related interest from EPK.
The Company pays EPK a negotiated flat fee per transaction, and the maximum
purchase price per transaction is $1,000,000. There have been no maximum total
shipments established under this agreement. Main Factors has entered into this
agreement as a third party agreeing to purchase all receivables invoiced
pursuant to the EPK agreement. The transactions financed by EPK are supported
by personal guarantees of Edward Steele, the Company=s Chairman and Chief
Executive Officer and John Klecha, the Company's Chief Operating Officer,
and Chief Financial Officer. The agreement is in effect until July 1, 2001,
unless terminated by either party upon a thirty (30) day written notice.
Loans Payable
During May 2000, the Company entered into two working capital loan agreements
of $100,000 and $500,000, respectively. The loans extend over a maximum period
of eight months, bear interest at 15% per annum, and are secured by corporate
guarantees. In addition, the lenders will be granted 5,000 and 25,000 stock
options, respectively, to purchase shares of the Company's common stock at an
exercise price of $3.25.
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 is 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.
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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.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceeding, nor to the
knowledge of management, are any legal proceedings threatened against
the Company. From time to time, the Company may be involved in
litigation relating to claims arising out of operations in the normal
course of business.
Item 2. CHANGES IN SECURITIES
On April 1, 1999, the Company completed a Private Placement Memorandum
(the "Memorandum") offering of 50 Units and raised $1,375,000
($1,331,017 after related costs). Each Unit consists of 20,000 shares
of the Company's Convertible Preferred Stock ("Preferred Stock") and
4,000 Common Stock Purchase Warrants ("Warrants"). Each share of
Preferred Stock automatically converted into one (1) share of the
Company's Common Stock at 5:00 p.m. eastern time on April 1, 2000.
Each Warrant entitles the Holder to purchase, at any time during the
period commencing from the date of issuance and ending three (3) years
from the date of the Memorandum, one (1) share of the Company's Common
Stock at a purchase price of $2.00 per share. The Company filed a
registration statement with the Commission to register the Company's
Common Stock underlying the securities comprising the Units, which was
declared effective by the Commission on March 17, 2000.
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 no exhibits required to be filed for the
period covered by this Report.
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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: August 1, 2000 By: /S/ John F. Klecha
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John F. Klecha
Chief Financial Officer
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