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, 1999
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.)
6601 Lyons Road, Building A-7, Coconut Creek, FL 33073
(Address of principal executive offices )
(954) 596-1000
(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 2,898,500 shares of Common Stock, $.01 par value,
issued and outstanding at December 31, 1999.
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1999
(Unaudited) and March 31, 1999.
Consolidated Statement of Operations - Three months
and nine months ended December 31, 1999 and 1998
(Unaudited).
Consolidated Statement of Cash Flows - Nine months
ended December 31, 1999 and 1998 (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,
1999 1999
(Unaudited)
----------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 832,689 $ 49,288
Accounts receivable -
net of $19,900 allowance
for doubtful accounts 3,011,358 1,127,970
Due from officer(s) 110,676 13,880
Inventories - net 1,761,179 424,806
Prepaid expenses and
other current assets 189,189 27,154
Deferred tax asset 170,000 170,000
---------- ----------
TOTAL CURRENT ASSETS 6,075,091 1,813,098
PROPERTY & EQUIPMENT - net 54,828 16,447
OTHER ASSETS -
Reorganization intangible - net 481,066 549,790
---------- ----------
TOTAL ASSETS $6,610,985 $2,379,335
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 239,086 $ 830,088
Accrued expenses 22,570 392,926
Notes payable 0 63,000
Due to factor 1,865,259 128,581
---------- ----------
TOTAL CURRENT LIABILITIES 2,126,916 1,414,595
SHAREHOLDERS' EQUITY:
Preferred Stock, $1.00 par value;
1,000,000 shares authorized, issued
and outstanding 1,000,000 -
Common stock, $.01 par value;
75,000,000 shares authorized,
2,498,452 issued and outstanding at
December 31, 1999 and March 31, 1999 24,984 24,984
Additional paid in capital 364,277 15,600
Retained earnings 924,156 924,156
Earnings for period 2,170,652 -
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 4,484,069 964,740
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $6,610,984 $2,379,335
========== ==========
</TABLE>
See accompany notes to financial statements.
<PAGE> 4
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,
1999 1998 1999 <C> 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 8,640,813 $ 3,063,874 $ 16,967,618 $ 8,503,913
COST OF SALES 6,393,568 2,244,723 12,494,742 6,351,421
GROSS PROFIT 2,247,245 819,151 4,472,876 2,152,492
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 938,747 372,693 1,921,996 1,125,326
INCOME FROM OPERATIONS 1,308,498 446,458 2,550,880 1,027,166
OTHER INCOME (EXPENSES):
Other income 5,480 275 16,142 11,724
Interest expense (40,430) (5,574) (48,681) (16,651)
Interest income - 500 - 1,951
Factoring fees (150,416) (91,251) (347,689) (156,547)
------------ ------------ ------------ ------------
NET OTHER EXPENSES (185,366) (96,050) (380,228) (159,423)
INCOME BEFORE INCOME TAX BENEFIT 1,123,132 350,408 2,170,652 867,743
INCOME TAX BENEFIT (PROVISIONS) - - - -
NET INCOME $ 1,123,132 $ 350,408 $ 2,170,652 $ 867,743
============ ============ ============ ============
NET INCOME PER COMMON SHARE
Basic $ 0.39 $ 0.14 $ 0.75 $ 0.35
============ ============ ============ ============
Diluted $ 0.23 $ 0.14 $ 0.53 $ 0.35
============ ============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Basis 2,898,500 2,468,066 2,898,500 2,468,066
============ ============ ============ ============
Diluted 4,812,900 2,468,066 4,110,317 2,468,066
============ ============ ============ ============
See accompanying notes to financial statements.
<PAGE> 5
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
( Unaudited )
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (560,412) $ 48,819 $ (1,294,369) $ 77,358
------------ ------------ ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Receivable from related parties 34,759 (604) (96,796) (1,773)
Computer equipment (7,554) - (32,214) -
Leasehold improvements - - (14,672) -
Office equipment (3,143) - (5,559) -
------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 24,062 (604) (149,241) (1,773)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayments of notes payable - 29,715 (63,000) (86,486)
Proceeds from packing loan -
Belgium Bank - HK 831,873 - 915,011 -
Proceeds from notes payable - - - 43,000
Issuance of preferred stock - - 1,375,000 -
------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED)IN
FINANCING ACTIVITIES 831,873 29,715 2,227,011 (43,486)
INCREASE IN CASH 560,412 19,708 783,401 32,099
CASH - BEGINNING OF PERIOD 272,277 20,161 49,288 7,770
------------ ------------ ------------ ------------
CASH - END OF PERIOD $ 832,689 $ 39,869 $ 832,689 $ 39,869
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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, 1999.
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, 1999 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, 1999 are not necessarily indicative of the
results that may be expected for the entire fiscal year
ending March 31, 2000.
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> 7
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
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 1999, the Company filed an amendment
to its Articles of Incorporation increasing the authorized
shares of the Company's common stock to seventy-five
million (75,000,000) shares.
The Company's creditors, pursuant to the Company's Plan of
Reorganization, as Amended, who elected to receive shares
were issued an aggregate of 2,180,052 post-split shares of
common stock. The financial statements reflect the
issuance of 2,180,052 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
As a percentage of total revenues, the Company's net sales
in the aggregate to its five (5) largest customers during
the nine months ended December 31, 1999 and 1998 were
approximately 73% and 84%, respectively. For the nine
months ending December 31, 1999, two (2) major retailers
accounted for 30% and 21% each of total revenues. Because
of the seasonality of the Company's sales, these results
may be distorted due to the historically high percentage
of overall sales during the Company's second and third
fiscal quarters of each year.
NOTE 4 - PRIVATE PLACEMENT OFFERING
On June 28, 1999, the Company completed a Private Placement
offering of 50 Units for gross proceeds of $1,375,000.
<PAGE> 8
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
NOTE 4 - PRIVATE PLACEMENT OFFERING (Cont'd)
Each Unit consisted 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 is convertible, at the option of the
Holder, into one (1) share of the Company's Common Stock
at any time after issuance until April 1, 2000. Each share
of Preferred Stock will automatically convert into one (1)
share of the Company's Common Stock on April 1, 2000. Each
Warrant entitles the Holder to purchase, at any time during
the period commencing from April 1, 1999, and ending April 1,
2002, one (1) share of the Company's Common Stock at a
purchase price of $2.00 per share. The Units were offered
only to "accredited investors" as defined in Rule 501 of
Regulation D under the Securities Act of 1933, as amended
(the "Securities Act"). Purchasers of the Units received
securities that are not registered with the Securities and
Exchange Commission (the "Commission") as a result of this
Offering. The Company, however, agreed to use its best
efforts to file a registration statement with the
Commission to register the Company's Common Stock
underlying the securities comprising the Units. There is
no assurance as to when or if the registration statement
will be declared effective by the Commission. There is no
public market for the Units, Preferred Stock, or the
Warrants, and none developed as a result of the private
Offering.
As a result of this Private Placement, fifty (50) Units
were sold and $1,375,000 gross funds were raised. One
million shares of the Company's Convertible Preferred Stock
and 200,000 Common Stock Purchase Warrants were issued,
effective as of the closing date of the offering, June 28,
1999.
NOTE 5 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Edward Steele, a Director and the Company's Chief Executive
Officer, has a promissory note outstanding to the Company
in the principal amount of $13,880 as of December 31,
1999. The original note for $30,650 granted on March 31,
1998 has been extended until March 31, 2000 with an
interest rate of 9% per annum on the unpaid balance.
On July 1, 1999, the Company loaned Edward Steele, our
Chief Executive Officer, President and Director, $55,000
for the purchase of two (2) units of the Company's Private
<PAGE> 9
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
Placement. The Note, including interest of 9%, matures on
June 30, 2000. The Note is secured by the securities
comprising the Private Placement Units.
NOTE 5 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Cont'd)
On July 1, 1999, the Company loaned John Klecha, our Chief
Operating Officer, Chief Financial Officer and Director,
$55,000 for the purchase of two (2) units of the Company's
Private Placement. The Note, including interest of 9%,
matures on June 30, 2000. The Note is secured by the
securities comprising the Private Placement Units.
On June 28, 1999, the Board of Directors of the Company
authorized the Company to issue to John Klecha 150,000
shares of the Company's Common stock in consideration for
his personal guaranty of the Company's credit facilities
provided by Main Factors, Inc. and EPK Financial
Corporation. The shares are restricted under the
Securities Act of 1933, as Amended. (See: "Capital
Resources").
On June 28, 1999, the Board of Directors of the Company
authorized the Company to issue to Edward Steele 200,000
shares of the Company's Common stock in consideration for
his personal guaranty of the Company's credit facilities
provided by EPK Financial Corporation. The shares are
restricted under the Securities Act of 1933, as Amended.
(See: "Capital Resources").
The Company has an agreement with FLX (a China manufacturer
of consumer electronics products) to produce electronic
recording equipment based on the Company's 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, 1998, and 1999, the Company
purchased approximately $1.7 million and $1.0 million
respectively, in equipment from FLX. 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.
The Company entered into Financial Advisory Agreements on
July 8, 1999, with Dunedin, Inc., FRS Investments, Inc.,
and Portfolio Research Associates, Inc. The Company
contracted with these companies to provide the Company with
a range of advisory services designed to provide the
Company with new favorable sources of financing, assistance
in raising new equity, possible business combination
<PAGE> 10
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
candidates, feedback concerning public image, review of
management, and development of a strategic plan. Under the
Agreements, Dunedin, Inc. and FRS Investments, Inc. were
each to receive 64,200 Common Stock Purchase Warrants upon
execution of the Agreements and 5,200 Common Stock Purchase
Warrants each month thereafter for the three (3) year term
of the Agreements. Portfolio Research Associates, Inc. was
to receive 61,600 Common Stock Purchase Warrants upon
execution of the Agreement, and 3,600 Common Stock Purchase
Warrants each month thereafter for the three (3) year term
of the Agreement. All of the Warrants are exercisable at
any time during the term of the Agreements at an exercise
price of $1.375 per share. Additionally, each advisor
executed a proxy in favor of the Company for each Common
Share exercised. The Company has terminated the Financial
Advisory Agreements of FRS Investments, Inc. and Portfolio
Research Associates, Inc. as of October 1, 1999, and
terminated the financial agreements with Dunedin, Inc. as
of November 22, 1999. The Company will issue to Portfolio
Research Associates, Inc. 76,000 Common Stock Purchase
Warrants and to FRS Investments, Inc. 85,000 Common Stock
Purchase Warrants in full satisfaction of their respective
Agreements. The Company will issue 123,400 Common Stock
Purchase Warrants to Dunedin, Inc.
On October 1, 1999, the Company entered into a Financial
Advisory Agreement with Richard Charbit. Mr. Charbit
contracted to provide the Company with a broad range of
advisory services concerning financing and securities. The
Agreement was for a term of three (3) years. Mr. Charbit
was to receive 52,000 Common Stock Purchase Warrants upon
execution of the Agreement, and was to receive 24,000
Warrants on November 30, 1999, and 24,000 Warrants on
December 31, 1999 for a total of 100,000 Common Stock
Purchase Warrants. All Warrants had an exercise price of
$1.375 per share and may be exercised at any time during
the three (3) year period from and after October 1, 1999.
Further, Mr. Charbit executed a proxy in favor of the
Company for each underlying share. The Company has
terminated the agreement with Richard Charbit as of
November 22, 1999 and he will not receive any of the Common
Stock Purchase Warrants due to lack of performance.
<PAGE> 11
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,
Sears, J.C. Penney, Fingerhut, Sam's Clubs and Toys R Us.
For the first nine months of fiscal 2000, the Company's net
income was approximately $2,171,000. The Company's working
capital as of December 31, 1999 was approximately
$3,948,000.
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
Total revenues increased by approximately $8,462,705 or 99%
during the first nine months of fiscal 2000 compared to the
first nine months of fiscal 1999. The increase in revenues
can be attributed to a growing popularity of the Company's
CD Plus Graphics machines, as well as a growing market for
the music used in these machines. The CD Plus Graphics
machines can be easily attached to the consumer's
television set. When a special CD, which includes
graphics, is played on the machine, the lyrics can be seen
on the television screen for ease of following along with
the music.
GROSS PROFIT
Gross profit for the first nine months of fiscal 2000 also
increased approximately 99% from $6,351,421 for the first
<PAGE> 12
nine months of fiscal 1999 to $12,494,742. The increased
gross profit is in direct proportion to the increase in
sales for this period and therefore, the reasoning for
increased revenues can be carried to gross profit also.
SELLING, GENERAL ADMINISTRATIVE EXPENSES
Selling, general & administrative expenses increased
approximately $797,000 or 71%, during the first nine months
of fiscal 2000 compared to the first nine months of fiscal
1999. The increase is primarily 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.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expense increased
approximately $34,886 or 72% for the nine months ended
December 31, 1999, as compared to the same period of the
prior year. The increase can be attributed to the addition
of year 2000 compliant computer equipment and leasehold
improvements for the new facility. Another factor
contributing to the increase is the amortization of
reorganization intangibles. These intangibles came about
as a result of the Fresh Start Accounting beginning in the
fiscal year 1998. The remainder of these intangibles will
continue to be amortized over the next thirty-nine (39)
months.
OTHER EXPENSES
Net interest expense increased approximately $32,000 during
the first nine months of fiscal 2000 compared to the same
period a year ago. 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 2.0% and 1.8% of
total revenues during the first nine months of fiscal 2000
and 1999 respectively. The loss increased from $156,574
in fiscal 1999 to $347,689 in fiscal 2000. The increase
is due primarily to the increase in sales and invoices
factored during the first nine months of fiscal 2000.
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
<PAGE> 13
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, 1999, the Company had current assets of
$6,075,091, compared to $1,813,098 at March 31, 1999; total
assets of $6,610,985 as compared to $2,379,335 at March 31,
1999; current liabilities of $2,126,916 as compared to
$1,414,595 at March 31, 1999, and a current net worth of
$4,484,069 as compared to $964,740 at March 31, 1999. The
increase is primarily due to additional capital raised
through the sale of preferred shares of the Company in a
Private Placement Offering during the quarter ended June
30, 1999 (See Note 4 to Financial Statements), and the
increase in net income for the nine months ended December
31, 1999.
CAPITAL RESOURCES
The Company has obtained significant financing for
continuing operations and growth. Five specific lines of
credit have been opened, two financing agreements in Hong
Kong and three financing agreements through its U.S.
operations.
Effective May 19, 1999, the Company, through its Hong Kong
subsidiary, International SMC(HK) Ltd., obtained a credit
facility of (US) $200,000 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 lodged with Belgian
Bank. There is no expiration 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.
Effective July 7, 1999, the Company, through its Hong Kong
subsidiary, International SMC(HK) Ltd., obtained a credit
facility of $300,000 (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
lodged with Hong Kong Bank. There is no expiration 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 1.50%.
Repayment of principal plus interest shall be made upon
negotiation of the export letters of credit, but not later
<PAGE> 14
than ninety (90) days after the advance.
The Company is a party to a factoring agreement, dated June
16, 1999, and amended December, 1999, with Main Factors,
Inc. ("Main Factors") pursuant to which Main Factors
purchases certain of the Company's accounts receivable.
Under the agreement, Main Factors purchases certain
selected accounts receivable from the Company and advances
70% - 85% of the face value of those receivables to the
Company. The accounts receivable are purchased by Main
Factors without recourse and Main Factors therefore
performs an intensive credit review prior to purchase the
receivable. The factoring agreement is personally
guaranteed by John Klecha, the Company's Chief Operating
Officer and Chief Financial Officer.
The Company is charged a fixed percentage fee of the
invoice. The purchase of receivables of the Company by
Main Factors is absolute and is a true sale of receivables.
Main Factors 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 Main Factor, 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 $2,000,000. There has 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 under
these transactions. 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 thirty (30)
days written notice.
The Company has received a $1,000,000 letter of credit
facility from Bank Julius Baer of New York. The Company
uses this facility to open letters of credit to its
factories. This allows the Company to purchase additional
karaoke hardware inventory to sell from its domestic
warehouses during the fiscal third quarter. This facility
is supported by a $200,000 fixed deposit and a corporate
repayment guaranty.
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 installed, tested and implemented a computer
network which is Year 2000 compliant. During the Company's
fiscal second quarter, new computer hardware and software
were installed, successfully replacing the prior computer
hardware and software which was not Year 2000 compliant.
The Company has converted all third party applications and
suppliers to its new network. To date, the Company has not
experienced any inconvenience or interruption of its
business due to year 2000 related problems.
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On or about November 24, 1998, the Company was named as a
defendant for allegedly infringing upon patents for tape
decks owned by Tanashin Denki Co., Ltd. ("Tanashin"), a
Japanese manufacturing concern. The Company was one of
multiple defendants named in the suit filed in the United
States District Court for the Eastern District of Virginia.
The case has been transferred to the U.S. District Court
for the Southern District of Florida, Miami Division. The
Company reached a settlement and license agreement with
Tanashin effective January 4, 2000, whereby the Company
agreed to pay a royalty to Tanashin for all future sales
of non-Tanashin cassette tape player decks that infringe
upon Tanashin patents used in the Company's products.
Without admission to or proof of patent infringement, the
Company paid to Tanashin $15,051.80 to compensate Tanashin
for all past alleged infringements and dismissal of all
claims by Tanashin against the Company.
Item 2. CHANGES IN SECURITIES
On July 1, 1999, the Company completed a Private Placement
offering of 50 Units for gross proceeds of $1,375,000. The
purchase price for each Unit was $27,500. Each Unit
consisted 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 is convertible, at the option of the Holder, into one
(1) share of the Company's Common Stock at any time after
issuance until April 1, 2000. Each share of Preferred
Stock will automatically convert 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 April 1, 1999
and ending April 1, 2002, one (1) share of the Company's
Common Stock at a purchase price of $2.00 per share.
Fractional Units could be purchased at the discretion of
the Company.
The Units were offered only to "accredited investors" as
defined in Rule 501 of Regulation D under the Securities
Act of 1933, as amended (the "Securities Act"). The Units
were offered on a "$1,100,000 minimum - $1,375,000 maximum"
basis pursuant to Rule 506 of Regulation D under the
Securities Act of 1933, as amended (the "Securities Act").
Purchasers of the Units received securities that are not
registered with the Securities and Exchange Commission (the
"Commission") as a result of this Offering. The Company,
however, agreed to use its best efforts to file a
registration statement with the Commission to register the
Company's Common Stock underlying the securities comprising
the Units. There is no assurance as to when or if the
registration statement will be declared effective by the
Commission. There is no public market for the Units,
<PAGE> 17
Preferred Stock, or the Warrants, and none developed a
result of the private offering.
As a result of this Private Placement, fifty (50) Units
were sold and $1,375,000 gross funds were raised. One
million shares of the Company's Convertible Preferred Stock
and 200,000 Common Stock Purchase Warrants were issued,
effective as of the closing date of the offering, June 28,
1999.
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
Edward Steele, a Director and the Company's Chief Executive
Officer, has a promissory note outstanding to the Company
in the principal amount of $13,880 as of December 31,
1999. The original note for $30,650 granted on March 31,
1998 has been extended until March 31, 2000 with an
interest rate of 9% per annum on the unpaid balance.
On July 1, 1999, the Company loaned Edward Steele, our
Chief Executive Officer, President and Director, $55,000
for the purchase of two (2) units of the Company's Private
Placement. The Note, including interest of 9%, matures on
June 30, 2000. The Note is secured by the securities
comprising the Private Placement Units.
On July 1, 1999, the Company loaned John Klecha, our Chief
Operating Officer, Chief Financial Officer and Director,
$55,000 for the purchase of two (2) units of the Company's
Private Placement. The Note, including interest of 9%,
matures on June 30, 2000. The Note is secured by the
securities comprising the Private Placement Units.
On June 28, 1999, the Board of Directors of the Company
authorized the Company to issue to John Klecha 150,000
shares of the Company's Common stock in consideration for
his personal guaranty of the Company's credit facilities
provided by Main Factors, Inc. and EPK Financial
Corporation. The shares are restricted under the
Securities Act of 1933, as Amended. (See: "Capital
Resources").
On June 28, 1999, the Board of Directors of the Company
authorized the Company to issue to Edward Steele 200,000
shares of the Company's Common stock in consideration for
<PAGE> 18
his personal guaranty of the Company's credit facilities
provided by EPK Financial Corporation. The shares are
restricted under the Securities Act of 1933, as Amended.
(See: "Capital Resources").
The Company has an agreement with FLX (a China manufacturer
of consumer electronics products) to produce electronic
recording equipment based on the Company's 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, 1998, and 1999, the Company
purchased approximately $1.7 million and $1.0 million
respectively, in equipment from FLX. 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.
The Company entered into Financial Advisory Agreements on
July 8, 1999, with Dunedin, Inc., FRS Investments, Inc.,
and Portfolio Research Associates, Inc. The Company
contracted with these companies to provide the Company with
a range of advisory services designed to provide the
Company with new favorable sources of financing, assistance
in raising new equity, possible business combination
candidates, feedback concerning public image, review of
management, and development of a strategic plan. Under the
Agreements, Dunedin, Inc. and FRS Investments, Inc. were
each to receive 64,200 Common Stock Purchase Warrants upon
execution of the Agreements and 5,200 Common Stock Purchase
Warrants each month thereafter for the three (3) year term
of the Agreements. Portfolio Research Associates, Inc. was
to receive 61,600 Common Stock Purchase Warrants upon
execution of the Agreement, and 3,600 Common Stock Purchase
Warrants each month thereafter for the three (3) year term
of the Agreement. All of the Warrants are exercisable at
any time during the term of the Agreements at an exercise
price of $1.375 per share. Additionally, each advisor
executed a proxy in favor of the Company for each Common
Share exercised. The Company has terminated the Financial
Advisory Agreements of FRS Investments, Inc. and Portfolio
Research Associates, Inc. as of October 1, 1999. The
Company issued to Portfolio Research Associates, Inc.
76,000 Common Stock Purchase Warrants and to FRS
Investments, Inc. 85,000 Common Stock Purchase Warrants in
full satisfaction of their respective Agreements. The
Company has terminated its agreement with Dunedin, Inc.
effective November 22, 1999. The Company will issue the
appropriate amount of Common Stock Purchase Warrants to
Dunedin, Inc. as of November 30, 1999.
On October 1, 1999, the Company entered into a Financial
Advisory Agreement with Richard Charbit. Mr. Charbit
<PAGE> 19
contracted to provide the Company with a broad range of
advisory services concerning financing and securities. The
Agreement was for a term of three (3) years. Mr. Charbit
was to receive 52,000 Common Stock Purchase Warrants upon
execution of the Agreement, and was to receive 24,000
Warrants on November 30, 1999, and 24,000 Warrants on
December 31, 1999 for a total of 100,000 Common Stock
Purchase Warrants. All Warrants have an exercise price of
$1.375 per share and may be exercised at any time during
the three (3) year period from and after October 1, 1999.
Further, Mr. Charbit executed a proxy in favor of the
Company for each underlying share. The Company has
terminated the agreement with Richard Charbit as of
November 22, 1999, and Mr. Charbit will not receive any of
the Common Stock Purchase Warrants due to lack of
performance.
On November 1, 1999, the Board of Directors of the Company
authorized the extension of the expiration date of the
Company's publicly traded warrants (OTCBB - "SINGW") for
one (1) year. These warrants are now scheduled to expire
November 10, 2000.
On October 15, 1999, the Board of Directors appointed
Joseph A. Bauer to the Company's Board of Directors until
the next shareholder's meeting. The vacancy on the Board
of Directors was due to the death of Walter Haskamp.
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.
(b) The Company filed a Current Report on Form 8-K dated
September 9, 1999, regarding an increase in the
Company's sales for the year ended March 31, 1999.
<PAGE> 20
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 8, 2000 By:/s/ John F. Klecha
John F. Klecha
Chief Financial Officer
<PAGE> 21
<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-Q and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-2000
<CASH> 832,689
<SECURITIES> 0
<RECEIVABLES> 3,011,358
<ALLOWANCES> 19,900
<INVENTORY> 1,761,179
<CURRENT-ASSETS> 6,075,091
<PP&E> 54,828
<DEPRECIATION> 14,096
<TOTAL-ASSETS> 6,610,985
<CURRENT-LIABILITIES> 2,126,916
<BONDS> 0
0
1,000,000
<COMMON> 24,984
<OTHER-SE> 4,484,069
<TOTAL-LIABILITY-AND-EQUITY> 6,610,984
<SALES> 16,967,618
<TOTAL-REVENUES> 16,967,618
<CGS> 12,494,742
<TOTAL-COSTS> 1,921,996
<OTHER-EXPENSES> (16,142)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 396,370
<INCOME-PRETAX> 2,170,652
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,170,652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,170,652
<EPS-BASIC> 0.748
<EPS-DILUTED> 0.528
</TABLE>
