SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
Commission File Number 0 - 24968
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 4,254,920 shares of Common Stock, $.01 par value, issued and
outstanding at September 30, 2000.
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2000
(Unaudited) and March 31, 2000 (Audited).
Consolidated Statement of Operations - Three months
and six months ended September 30, 2000 and 1999
(Unaudited).
Consolidated Statement of Cash Flows - Six months
ended September 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
-2-
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
Item I. Financial Statements
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
2000 2000
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 496,276 $ 378,848
Accounts Receivable 4,129,180 728,038
Due from Factor 370,520 115,201
Due from Officer(s) 110,000 110,000
Due from related party -- 394,706
Inventory - net 6,747,298 1,487,206
Interest Receivable 2,475 7,425
Prepaid Expenses and
Other Current Assets 290,331 204,311
Deferred Tax Asset 266,242 363,194
------------ ------------
TOTAL CURRENT ASSETS 12,412,322 3,788,929
PROPERTY AND EQUIPMENT, NET 277,066 99,814
OTHER ASSETS:
Reorganization Intangible - net 412,342 458,158
------------ ------------
TOTAL ASSETS $ 13,101,730 $ 4,346,901
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable 1,716,842 354,193
Accrued Expenses 840,581 73,675
Income taxes payable 301,442 11,994
Notes Payable 600,000 0
Due to related party 3,556,768 753
------------ ------------
TOTAL CURRENT LIABILITIES 7,015,632 440,615
------------ ------------
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;
4,254,920 and 2,960,120, shares
issued and outstanding,
respectively 42,549 29,600
Common stock to be issued
(50,000 and 67,500 shares,
respectively) 500 675
Additional Paid In Capital 3,115,438 1,719,049
Deferred Guarantee Fees (285,786) (400,101)
Retained Earnings 3,213,397 1,557,063
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 6,086,098 3,906,286
------------ ------------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $ 13,101,730 $ 4,346,901
============ ============
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 11,786,707 $ 6,736,706 $ 17,855,298 $ 8,326,419
COST OF SALES 8,481,626 4,912,905 13,031,470 6,092,484
------------ ------------ ------------ ------------
GROSS PROFIT 3,305,081 1,823,801 4,823,828 2,233,935
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,506,220 640,173 2,546,117 978,909
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,798,861 1,183,628 2,277,711 1,255,026
OTHER INCOME (EXPENSES):
Other income 917 7,752 3,946 32,288
Interest expense (140,094) (24,224) (203,192) (37,779)
Interest income 11,156 437 35,215 5,635
Factoring fees (33,923) (154,621) (68,498) (197,273)
------------ ------------ ------------ ------------
NET OTHER EXPENSES (161,944) (170,656) (232,529) (197,129)
INCOME BEFORE INCOME TAX
EXPENSE 1,636,917 1,015,955 2,045,182 1,057,897
INCOME TAX EXPENSE 388,848 0 388,848 0
NET INCOME $ 1,248,069 $ 1,015,955 $ 1,656,334 $ 1,057,897
============ ============ ============ ============
NET INCOME PER COMMON SHARE
Basic $ 0.29 $ 0.35 $ 0.40 $ 0.36
============ ============ ============ ============
Diluted $ 0.25 $ 0.24 $ 0.33 $ 0.28
============ ============ ============ ============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING
Basic 4,251,033 2,898,500 4,157,677 2,898,500
Diluted 5,037,428 4,190,400 4,961,589 3,760,080
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 2,069,455 $ 105,727 $ (853,117) $ (995,846)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment (182,749) (18,604) (177,252) (44,748)
Due from factor 5,917 -- (255,319) --
Due from related parties (11,165) 394,706 (21,555)
----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities (176,832) (29,769) (37,865) (66,303)
----------- ----------- ----------- -----------
CASH FLOW FROM FINANCING
ACTIVITIES:
Proceeds from issuance of common
stock & exercise of warrants
and options 8,645 -- 409,163 --
Proceeds from issuance of preferred
stock -- -- -- 1,375,000
Net proceeds from notes payable (1,546,538) (84,128) 599,247 20,138
----------- ----------- ----------- -----------
Net cash provided by
financing activities (1,537,893) (84,128) 1,008,410 1,285,138
----------- ----------- ----------- -----------
Increase in cash and cash
equivalents 354,730 (8,170) 117,428 222,989
Cash and cash equivalents
- beginning of year 141,546 280,447 378,848 49,288
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS
- END OF YEAR $ 496,276 $ 272,277 $ 496,276 $ 272,277
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(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 six month period ended September 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
As a percentage of total revenues, the Company's net sales in the
aggregate to its five (5) largest customers during the quarters ended
September 30, 2000 and 1999 were approximately 76% and 76%,
respectively. For the six months ending September 30, 2000, two (2)
major retailers accounted for 32% and 22% each of total
-6-
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 2 - MAJOR CUSTOMERS (Cont'd)
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 3 - 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.
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 second quarter of
fiscal year 2001. 5,500 shares of common stock were issued with
proceeds to the Company of $4,645.
NOTE 6 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has an agreement with FLX (a China manufacturer of consumer
electronics products) to produce
-7-
<PAGE>
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
NOTE 6 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Cont'd)
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,
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 September 30, 2000 of $3,556,768 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.
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10- QSB, including
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute "forward-looking
statements." You should not place undue reliance on these forward-looking
statements. Our actual results could differ materially from those anticipated in
these forward-looking statements for many reasons, including the risks faced by
us described below and elsewhere in this Quarterly Report, and in other
documents we file with the Securities and Exchange Commission
Readers are cautioned not to place undue reliance on these forward- looking
statements, which reflect management's opinions only as of the date hereof. We
undertake no obligation to revise or publicly release the results of any
revision to these forward-looking statements.
GENERAL
The Singing Machine Company, Inc. and its wholly owned subsidiary, International
(SMC) HK, Ltd.("the "Company," "we" or "us") engages in the production and
distribution of karaoke audio software and electronic recording equipment. Our
electronic karaoke machines and audio software products are marketed under The
Singing Machine(TM) trademark.
Our 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.
Our karaoke machines and karaoke software are currently sold in such retail
outlets as Target, Best Buy, J.C. Penney and Fingerhut.
We had net income of $1,656,334 for the six month period ended September 30,
2000. Our working capital as of September 30, 2000, was approximately
$5,396,690.
RESULTS OF OPERATIONS
REVENUES
Our revenues increased 75% to $11,786,707 during the second quarter ended
September 30, 2000, compared with revenues of $6,736,706 for the three-month
period ended September 30, 1999. Our revenues increased by 114% to $17,855,289
for the six month period ended September 30, 2000, compared with revenues of
$8,326,419 during the same period in 1999. This increase in total revenues can
be attributed to the growing popularity of the Company's CD plus graphics
machines and the addition of a major customer in the first quarter.
-9-
<PAGE>
GROSS PROFIT
Our gross profit from equipment and music sales increased by 81.2% to
$3,305,081, for the three month period ended September 30, 2000 compared with
gross profit of $1,823,801,for the three month period ended September 30, 1999.
Our gross profit from equipment and music sales increased by 116% to $4,823,828,
for the six month period ended September 30, 2000, compared with gross profit of
$2,233,935, for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our SG&A expenses were $1,506,220, or 12.8% of total revenues, and $640,173, or
9.5% of total revenues for the three month periods ended September 30, 2000 and
1999. Our SG&A expenses were $2,546,117, or 14.3% of total revenues, and
$978,909, or 11.8% of total revenues, for the six month periods ended September
30, 2000 and 1999. The period-to-period increase in SG&A expenses is due to (1)
an increase in salary related expenses due to an increase in corporate office
staff and (2) a non-cash expense due to the continued amortization of stock
based guarantee fee.
DEPRECIATION AND AMORTIZATION EXPENSES
Our depreciation and amortization expenses were $30,449, or .25% of total
revenues and $39,557, or .59% of total revenues, for the three month periods
ended September 30, 2000 and 1999. This increase in depreciation and
amortization expenses can be attributed to the addition of new tooling for the
production of machines. Depreciation and amortization expenses were $59,213, or
.33% of total revenues and $53,073, or .64% of total revenues, for the six month
periods ended September 30, 2000 and 1999.
OTHER EXPENSES
Net interest expense was $140,094, or 1.2% of total revenues, and $24,224, or
.4% of total revenues, for the three months ended September 30, 2000 and 1999.
Net interest expense was $203,192, or 1.1% of total revenues, and $37,779, or
.5% of total revenues, for the six months ended September 30, 2000 and 1999. The
increase in net interest expense can be attributed to our increased use of our
credit line facilities to fund the inventory necessary to meet demand for our
products.
Loss on sales of accounts receivable was $33,923, or .29% of total revenues, and
$154,621, or 2.3% of total revenues, during the three month periods ended
September 30, 2000 and 1999. Loss on sales of accounts receivable was $68,498,
or .38% of total revenues, and $197,129, or 2.6% of total revenues, during the
six month periods ended September 30, 2000 and 1999. 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 gives us
-10-
<PAGE>
better terms of factor.
INCOME BEFORE INCOME TAX EXPENSE
As a result of the foregoing, our net income before income tax expenses
increased by 61.1% to $1,636,917, for the three month period ended September 30,
2000, compared with $1,015,955, for the three month period ended September 30,
1999. Our net income before income tax expense increased by 93.3% to $2,045,182,
for the six month period ended September 30, 2000 compared with $1,057,897, for
the same period in 1999.
INCOME TAX EXPENSE
During the second quarter of 2000, we incurred an income tax expense of
$388,848. During previous periods, we did not have to pay income taxes, because
we used our tax-loss carry-forwards. As of September 30, 2000,we have used up
our tax-loss carry-forwards and will have to pay income taxes. We expect our
income tax rate to be approximately 20% in future quarters, reflecting the
combined tax rates on our operations in the U.S. and Hong Kong.
NET INCOME
As a result of the foregoing, our net income increased 22.8% to $1,248,069, for
the three month period ended September 30, 2000, compared with net income of
$1,015,995 for the three month period ended September 30, 1999. Our net income
increased by 56.6% to $1,656,334, for the six month period ended September 30,
2000, compared with net income of $1,057,897 for the same period in 1999.
SEASONALITY AND QUARTERLY RESULTS
Historically, our 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.
Our 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 AND LIQUIDITY
At September 30, 2000, we had current assets of $12,412,322 and total assets of
$13,101,730 compared to current assets of $3,788,929 and total assets of
$4,346,901 at March 31, 2000. This increase in current assets and total assets
is primarily due to the increase in accounts receivable and inventory.
Current liabilities increased to $7,015,632 as of September 30,
2000, compared to $440,615 at March 31, 2000. This increase in
-11-
<PAGE>
current liabilities is because of increased accounts payable, increased accrued
expenses, an income tax payable and the increased use of our credit lines to
fund future sales. We increased the use of credit lines primarily to purchase
more inventory. Accounts payable increased to $1,716,842 as of September 30,
2000 from $354,193 as of March 31, 2000, primarily as a consequence of our
increased expenditures to finance our sales efforts.
Our shareholder equity increased from $4,346,901 as of March 31, 2000, to
$13,101,730 as of September 30, 2000. Our increase in shareholder equity has
occurred because of the increase in our current assets and our retained earnings
in the amount of $3,213,397.
Cash flows used in operating activities were $853,117 during the six month
period ended September 30, 2000. Cash used in investing activities during the
six month period ended September 30, 2000 was $37,865. Cash flows from financing
activities were $1,008,410 during the six month period ended September 30, 2000.
This consisted of proceeds in the amount of $409,163 from the exercise of
warrants and options, and proceeds from certain loans.
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
-12-
<PAGE>
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.
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 to 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
-13-
<PAGE>
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.
We believe that our current cash and equivalents, lines of credit, and cash
generated from operations will satisfy our expected working capital and capital
expenditure requirements at least through the next 12 months.
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. 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.
RISK FACTORS
Set forth below and elsewhere in this Quarterly Report and in the other
documents we file with the SEC are risks and uncertainties that could cause
actual results to differ materially from the results contemplated by the forward
looking statements contained in this Quarterly Report.
WE DO NOT GENERATE ENOUGH CASH FROM OPERATIONS TO FUND OUR GROWTH
PLAN
At our current level of development, we do not generate enough cash from
operations sufficient to meet operations to fund our rapid growth. To fund our
growth plan, we require either additional financing or a restructuring of our
credit facilities to meet the ongoing liquidity needs of our operations. There
can be no assurance, however, that our liquidity goals will be reached in the
immediate future, if ever.
WE HAVE SIGNIFICANT FUTURE CAPITAL NEEDS WHICH ARE SUBJECT TO THE
UNCERTAINTY OF ADDITIONAL FINANCING
We may need to raise significant additional funds to fund our rapid sales growth
and/or implement other business strategies. If adequate funds are not available
on acceptable terms, or at all, we may be unable to sustain our rapid growth,
which would have a material adverse effect on our business, results of
operations, and financial condition.
-14-
<PAGE>
YOUR INVESTMENT MAY BE DILUTED
If additional funds are raised through the issuance of equity securities, your
percentage ownership in the Company's equity will be reduced. Also, you may
experience additional dilution in net book value per share, and the equity
securities may have rights, preferences, or privileges senior to those of yours.
OUR ABILITY TO MANAGE GROWTH COULD HURT OUR BUSINESS
To manage our growth, we must implement systems, and train and manage our
employees. We may not be able to implement these action items in a timely
manner, or at all. Our inability to manage growth effectively could have a
material adverse effect on our business operating results, and financial
conditions. There can be no assurance that we will achieve our planned expansion
goals, manage our growth effectively, or operate profitably.
OUR INABILITY TO COMPETE AND MAINTAIN OUR NICHE IN THE
ENTERTAINMENT INDUSTRY COULD HURT OUR BUSINESS
The business in which we are engaged is highly competitive. In addition, we must
compete with all the other existing forms of entertainment including, but not
limited to, motion pictures, video arcade games, home video games, theme parks,
nightclubs, television and prerecorded tapes, CD's and video cassettes.
Competition in the Company's markets is based primarily on price, product
performance, reputation, delivery times, and customer support. We believe that
new product introductions and enhancements of existing products are material
factors for our continuing growth and profitability. Many of our competitors are
substantially larger and have significantly greater financial, marketing and
operating resources than we have. No assurance can be given that we will
continue to be successful in introducing new products or further enhancing
existing products.
WE RELY ON SALES TO KEY CUSTOMERS WHICH SUBJECTS US TO RISK
As a percentage of total revenues, the Company's net sales in the aggregate to
its five largest customers during the fiscal years ended March 31, 1999 and
2000, were approximately 91% and 70% respectively. For the fiscal 2000 period,
two major retailers accounted for 30% and 18% each of total revenues. During
fiscal year 2001, the Company has made significant progress in broadening its
base of customers. Although we have long-established relationships with many of
our customers, we do not have long-term contractual arrangements with any of
them. A decrease in business from any of our major customers could have a
material adverse effect on our results of operations and financial condition.
WE HAVE SIGNIFICANT RELIANCE ON LARGE RETAILERS WHICH ARE SUBJECT
TO CHANGES IN THE ECONOMY
We sell products to retailers, including department stores, lifestyle merchants,
direct mail retailers which are catalogs and
-15-
<PAGE>
showrooms, national chains, specialty in stores, and warehouse clubs. Certain of
such retailers the economy have engaged in leveraged buyouts or transactions in
which they incurred a significant amount of debt, and some are currently
operating under the protection of bankruptcy laws. Despite the difficulties
experienced by retailers in recent years, we have not suffered significant
credit losses to date. A deterioration in the financial condition of our major
customers could have a material adverse effect on our future profitability.
WE ARE SUBJECT TO THE RISKS OF DOING BUSINESS ABROAD
We are dependent upon foreign companies for manufacture of all of our electronic
products. Our arrangements with manufacturers are subject to the risks of doing
business abroad, such as import duties, trade restrictions, work stoppages,
foreign currency fluctuations, political instability, and other factors which
could have an adverse impact on the business of the Company. We believe that the
loss of any one or more of our suppliers would not have a long-term material
adverse effect on us, because other manufacturers with whom we do business would
be able to increase production to fulfill our requirements. However, the loss of
certain of our suppliers, could, in the short-term, adversely affect our
business until alternative supply arrangements were secured. During fiscal 2000
and 1999, suppliers in the People's Republic of China accounted for 88% and 93%,
respectively of the Company's total product purchases, including virtually all
of the Company's hardware purchases. If Most Favored Nation ("MFN") status for
China is restricted or revoked in the future, the costs of goods purchased from
Chinese vendors is likely to increase. Management continues to closely monitor
the situation and has determined that the production capabilities in countries
outside China which have MFN status and, therefore, have favorable duty rates,
would meet production needs. Such a change in suppliers may have a short-term
adverse effect on operations and, possibly, earnings.
WE ARE SUBJECT TO SEASONALITY WHICH IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS
AND CHANGES RESULTING IN FLUCTUATIONS IN QUARTERLY RESULTS
We have experienced, and will experience in the future, significant fluctuations
in sales and operating results from quarter to quarter. This is due largely to
the fact that a significant portion of our business is derived from a limited
number of relatively large customer orders, the timing of which cannot be
predicted. Furthermore, as is typical in the karaoke industry, the quarters
ended September 30 and December 31 includes increased revenues from sales made
during the holiday season. Additional factors that can cause our sales and
operating results to vary significantly from period to period include, among
others, the mix of products, fluctuating market demand, price competition, new
product introductions by competitors, fluctuations in foreign currency exchange
rates, disruptions in delivery of components, political instability, general
economic conditions, and the other
-16-
<PAGE>
considerations described in this section. Accordingly, period-to- period
comparisons may not necessarily be meaningful and should not be relied on as
indicative of future performance. Historically, the third quarter of our fiscal
year, the three months ended December 31, have been the most profitable quarter,
and the fourth quarter of our fiscal year, the three months ended March 31, have
been the least profitable quarter.
OUR PROPRIETARY TECHNOLOGY MAY NOT BE SUFFICIENTLY PROTECTED
Our success depends on our proprietary technology. We rely on a combination of
contractual rights, patents, trade secrets, know- how, trademarks,
non-disclosure agreements and technical measures to establish and protect our
rights. We cannot assure you that we can protect our rights to prevent third
parties from using or copying our technology.
WE MAY BE SUBJECT TO CLAIMS FROM THIRD PARTIES FOR UNAUTHORIZED
USE OF THEIR PROPRIETARY TECHNOLOGY
We believe that we independently developed our technology and that it does not
infringe on the proprietary rights or trade secrets of others. However, we
cannot assure you that we have not infringed on the technologies of third
parties or those third parties will not make infringement violation claims
against us. Any infringement claims may have a negative effect on our ability to
manufacture our products.
CONSUMER DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND
IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS AND CHANGES
Purchases of karaoke audio software and electronic discretionary recording
equipment are considered discretionary for consumers. Our success will therefore
be influenced by a number of economic factors affecting discretionary and
consumer spending, such as employment levels, business, interest rates, and
taxation rates, all of which are not under our control. Adverse economic changes
affecting these factors may restrict consumer spending and thereby adversely
affect our growth and profitability.
WE DEPEND ON THIRD PARTY SUPPLIERS, AND IF WE CANNOT OBTAIN SUPPLIES AS NEEDED,
OUR OPERATIONS WILL BE SEVERELY DAMAGED
We rely on third party suppliers to produce the parts and materials we use to
manufacture our products. If our suppliers are unable to provide us with the
parts and supplies, we will be unable to produce our products. We cannot
guarantee that we will be able to purchase the parts we need at reasonable
prices or in a timely fashion. If we are unable to purchase the supplies and
parts we need to manufacture our products, we will experience severe production
problems, which may possibly result in the termination of our operations.
-17-
<PAGE>
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN KEY PERSONNEL
The development of our business has been largely able to attract dependent on
the efforts of Edward Steele and John Klecha. Although we have entered into
employment contracts with Messrs. Steele and Klecha, the loss of the services of
either of these individuals could have a material adverse affect on the Company.
We believe that our future success also will depend significantly upon our
ability to attract, motivate, and retain additional highly skilled managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that we will be successful in attracting, assimilating, and retaining
the personnel we require to grow and operate profitability.
THERE IS ONLY A LIMITED MARKET FOR OUR STOCK AND WE CANNOT ASSURE A MORE
SIGNIFICANT MARKET WILL EVER DEVELOP
Our common stock is traded on the OTC Bulletin Board under the symbol "SING". As
result, an investor may find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, our Common Stock. On November 10,
2000,we applied to have our securities listed on the NASDAQ Small Cap Market.
While we believe that we meet all the requirements to be listed on the NASDAQ
Small Cap Market, there are no assurances that our common stock will be listed
on the NASDAQ Small Cap Market.
OUR SECURITIES MAY BE SUBJECT TO "PENNY STOCK" TRADING
REQUIREMENTS
If no exclusions from the definition of a "penny stock" under applicable SEC
regulations are available, our securities would be subject to the penny stock
rules, which impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited
investors. Consequently, the ability of broker-dealers to sell our securities to
prospective purchasers and your ability to sell your securities in the secondary
market may be limited.
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 October 26, 2000, the Board of Directors of the Company unanimously consented
to extend the expiration date of the Company's Public Warrants to November 10,
2001. All other terms and conditions of the Public Warrants shall remain the
same (exercise price, manner of exercise, etc.).
-18-
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On September 6, 2000, the Company held its Annual Meeting of
Stockholders. The stockholders of record at August 4, 2000 were
provided with a Proxy Statement pursuant to Section 14(a) of the
Securities Exchange Act of 1934 as filed July 28, 2000. This Proxy
statement detailed four proposals which were brought to vote at the
September 6 meeting. The outcome of these proposals as well as details
of each vote follows.
Proposal 1 - Election of Directors. The following four directors were elected to
serve until the next Annual Meeting of Shareholders and until their successors
shall be elected and qualified:
<TABLE>
<CAPTION>
Broker
For Against Withheld Abstentions Non-Votes
--- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Edward Steele 3,960,402 0 2,380 0 0
John Klecha 3,961,394 0 1,388 0 0
Josef Bauer 3,961,394 0 1,388 0 0
Howard Moore 3,961,394 0 1,388 0 0
</TABLE>
Proposal 2 - To ratify the issuance of stock options pursuant to the Company's
Employee Stock Option Plan:
Broker
For Against Withheld Abstentions Non-Votes
--- ------- -------- ----------- ---------
3,964,846 55,534 0 2,372 0
Proposal 3 - To consider and act upon a proposal to amend the Company's Articles
of Incorporation to decrease the number of authorized shares of Common Stock
from 75,000,000 to 20,000,000:
Broker
For Against Withheld Abstentions Non-Votes
--- ------- -------- ----------- ---------
3,959,987 2,546 0 252 0
Proposal 4 - To consider and act upon a proposal to approve Weinberg and
Company, P.A. as the Company's independent certified public accountants for the
fiscal year end March 31, 2001:
Broker
For Against Withheld Abstentions Non-Votes
--- ------- -------- ----------- ---------
3,952,176 10,384 0 222 0
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
-19-
<PAGE>
Exhibit
Number Title
------- -----
3.1 Amendment to the Company's Certificate of
Incorporation dated September 6, 2000.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On August 11, 2000, the Company filed a Form 8-K reporting information
under Item 5 - Other Events.
-20-
<PAGE>
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: November 14, 2000 By: /s/ John F. Klecha
--------------------
John F. Klecha
Chief Financial Officer
-21-
