SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
Commission File Number 0-24968
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THE SINGING MACHINE COMPANY, INC.
---------------------------------
(Exact Name of Registrant 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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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate whether the registrant has filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes [X} No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
There were 8,125,178 shares of Common Stock, $.01 par value, issued and
outstanding at December 31, 2002.
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page No.
--------
Consolidated Balance Sheets - December 31, 2002 (Unaudited)
and March 31, 2002 .............................................. 3
Consolidated Statement of Operations - Three and nine months
ended December 31, 2002 and 2001 (Unaudited)..................... 4
Consolidated Statement of Cash Flows - Nine months ended
December 31, 2002 and 2001 (Unaudited) .......................... 5
Notes to Consolidated Financial Statements ...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 19
Item 4. Controls and Procedures.......................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 21
Item 2. Changes in Securities and Use of Proceeds........................ 21
Item 3. Defaults Upon Senior Securities ................................. 22
Item 4. Submission of Matters to a Vote of Security Holders ............. 22
Item 5. Other Information ............................................... 22
Item 6. Exhibits and Reports on Form 8-K ................................ 22
SIGNATURES ............................................................... 24
CERTIFICATIONS ............................................................25
EXHIBIT INDEX..............................................................27
2
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 MARCH 31, 2002
----------------- --------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 362,927 $ 5,520,147
Accounts receivable, net 19,535,201 3,536,903
Due from manufacturer 753,206 488,298
Inventories 30,016,924 9,274,352
Prepaid expenses and other current assets 2,155,879 982,697
Deposits 517,324 513,684
----------- -----------
TOTAL CURRENT ASSETS 53,341,461 20,316,081
----------- -----------
PROPERTY AND EQUIPMENT, NET 1,232,227 574,657
----------- -----------
OTHER ASSETS
Security deposits 180,532 135,624
Reorganization intangible, net 185,416 185,416
Deferred tax asset -- 452,673
----------- -----------
TOTAL OTHER ASSETS 365,948 773,713
----------- -----------
TOTAL ASSETS $54,939,636 $21,664,451
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $13,049,506 $ 1,846,238
Accrued expenses 4,173,368 1,289,597
Deferred Revenue 822,106
Loan payable 10,163,088 --
Income tax payable 630,796 58,542
----------- -----------
TOTAL CURRENT LIABILITIES 28,838,864 3,194,377
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value, 1,000,000 shares authorized,
no shares issues and outstanding -- --
Common stock, Class A, $0.01 par value, 100,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $0.01 par value, 18,900,000 shares authorized,
8,125,178 and 8,020,027 shares issued and outstanding 81,252 80,200
Additional paid-in capital 4,757,355 4,602,828
Retained earnings 21,262,165 13,787,046
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TOTAL STOCKHOLDERS' EQUITY 26,100,772 18,470,074
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,939,636 $21,664,451
=========== ===========
See accompanying notes to consolidated financial statements
3
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
December 31, December 31, December 31, December 31,
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SALES $ 48,869,776 $ 34,158,513 $ 85,998,383 $ 55,431,595
COST OF SALES 35,438,420 22,719,929 62,090,759 36,821,615
------------ ------------ ------------ ------------
GROSS PROFIT 13,431,356 11,438,584 23,907,624 18,609,980
------------ ------------ ------------ ------------
OPERATING EXPENSES
Compensation 1,257,519 1,090,838 2,827,823 2,361,797
Commissions 581,800 777,209 1,127,221 1,266,016
Advertising 3,210,330 1,038,056 4,082,940 1,942,442
Royalty expense 1,189,706 1,191,169 2,064,336 1,596,800
Selling, general,
and administrative expenses 2,110,769 1,413,371 5,153,503 3,248,749
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 8,350,124 5,510,643 15,255,823 10,415,804
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 5,081,232 5,927,941 8,651,801 8,194,176
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Other Income 38,628 53,600 196,648 195,741
Interest Expense (117,704) (104,877) (228,597) (143,034)
Interest Income -- 17,471 11,943 40,564
------------ ------------ ------------ ------------
NET OTHER EXPENSES (79,096) (33,806) (20,006) 93,271
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX PROVISION 5,002,156 5,894,135 8,631,795 8,287,447
INCOME TAX PROVISION (1,105,569) (6,000) (1,156,676) (18,000)
------------ ------------ ------------ ------------
NET INCOME $ 3,896,587 $ 5,888,135 $ 7,475,119 $ 8,269,447
============ ============ ============ ============
EARNINGS PER SHARE:
Basic $ .48 $ .80 $ .92 $ 1.20
============ ============ ============ ============
Diluted $ .44 $ .69 $ .84 $ 1.04
============ ============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 8,123,548 7,335,758 8,101,441 6,900,918
============ ============ ============ ============
Diluted 8,944,027 8,565,861 8,947,897 7,973,514
============ ============ ============ ============
See accompanying notes to financial statements
4
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
December 31,
2002 2001
------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 7,475,119 $ 8,269,447
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation and amortization 454,806 209,334
Stock based expenses -- 171,472
Bad debt 3,356 --
Deferred tax benefit 452,673 (73,574)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (16,001,654) (26,104,253)
Due from manufacturer (264,908) 1,379,901
Inventories (20,742,572) (1,900,092)
Prepaid expenses and other assets (1,218,091) 261,287
Increase (decrease) in:
Accounts payable 11,203,268 5,554,717
Accrued expenses 2,883,772 4,157,472
Deferred Revenue 822,106 --
Income taxes payable 572,254 (23,320)
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (14,359,871) (8,097,609)
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,112,376) (593,823)
Deposit for credit line (3,640) (256,807)
Proceeds from investment in factor -- 933,407
Proceeds from repayment of officer loans -- 117,425
Investment in and advances to unconsolidated subsidiary -- 274,702
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,116,016) 474,904
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Loan proceeds 37,612,713 19,211,494
Loan repayments (27,449,625) (11,644,383)
Proceeds from exercise of stock options and warrants 155,579 956,078
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 10,318,667 8,523,189
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,157,220) 900,484
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 5,520,147 1,016,221
------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 362,927 $ 1,916,705
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 228,597 $ 143,034
============ ============
Cash paid during the year for income taxes $ 73,207 $ 18,000
============ ============
See accompanying notes to consolidated financial statements
5
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements of the Company have been
prepared in accordance with the instructions to Form 10-Q 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 consolidated
financial statements and notes thereto included in the Company's audited
financial statements on the Company's Annual Report on Form 10-KSB for the
fiscal year ended March 31, 2002.
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 consolidated financial statements for the fiscal year ended
March 31, 2002, which are included in Form 10- KSB.
The Financial Accounting Standards Board has recently issued several new
accounting pronouncements which may apply to the Company.
The following statements have been adopted by the Company.
Statement No. 141 "Business Combinations" establishes revised standards for
accounting for business combinations. Specifically, the statement eliminates the
pooling method, provides new guidance for recognizing intangible assets arising
in a business combination, and calls for disclosure of considerably more
information about a business combination. This statement is effective for
business combinations initiated on or after July 1, 2001. The adoption of this
pronouncement on July 1, 2001 did not have a material effect on the Company's
financial position, results of operations or liquidity.
Statement No. 142 "Goodwill and Other Intangible Assets" provides new guidance
concerning the accounting for the acquisition of intangibles, except those
acquired in a business combination, which is subject to SFAS 141, and the manner
in which intangibles and goodwill should be accounted for subsequent to their
initial recognition. Generally, intangible assets with indefinite lives, and
goodwill, are no longer amortized; they are carried at lower of cost or market
and subject to annual impairment evaluation, or interim impairment evaluation if
an interim triggering event occurs, using a new fair market value method.
Intangible assets with finite lives are amortized over those lives, with no
stipulated maximum, and an impairment test is performed only when a triggering
event occurs. This statement is effective for all fiscal years beginning after
December 15, 2001. The Company adopted SFAS 142 on April 1, 2002 liquidity and
accordingly has stopped amortizing the reorganization intangible, which had a
net balance of $185,412 at March 31, 2002.
Statement No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" supercedes Statement No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121").
Though it retains the basic requirements of SFAS 121 regarding when and how to
measure an impairment loss, SFAS 144 provides additional implementation
guidance. SFAS 144 excludes goodwill and intangibles not being amortized among
other exclusions. SFAS 144 also supercedes the provisions of APB 30, "Reporting
the Results of Operations," pertaining to discontinued operations. Separate
reporting of a discontinued operation is still required, but SFAS 144 expands
the presentation to include a component of an entity, rather than strictly a
business segment as defined in SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 144 also eliminates the current
exemption to consolidation when control over a subsidiary is likely to be
temporary. This statement is effective for all fiscal years beginning after
December 15, 2001. The implementation of SFAS 144 on April 1, 2002 did not have
a material effect on the Company's financial position, results of operations or
liquidity.
Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections," updates, clarifies, and
simplifies existing accounting pronouncements. Statement No. 145 rescinds
Statement 4, which required all gains and losses from extinguishment of debt to
be aggregated and, if material, classified as an extraordinary item, net of
related income tax effect. As a result, the criteria in Opinion 30 will now be
used to classify those gains and losses. Statement 64 amended Statement 4, and
is no longer necessary because Statement 4 has been rescinded. Statement 44 was
issued to establish accounting requirements for the effects of transition to the
provisions of the motor Carrier Act of 1980. Because the transaction has been
completed,
6
Statement 44 is no longer necessary. Statement 145 amends Statement 13 to
require that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. This amendment is consistent with FASB's goal
requiring similar accounting treatment for transactions that have similar
economic effects. The adoption of SFAS No. 145 did not have a material impact on
the Company's consolidated financial statements.
Statement No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure", amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation". In response to a growing number of companies announcing plans to
record expenses for the fair value of stock options, Statement 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition,
Statement 148 amends the disclosure requirements of Statement 123 to require
more prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. The Statement also improves the timeliness
of those disclosures by requiring that this information be included in interim
as well as annual financial statements. In the past, companies were required to
make pro forma disclosures only in annual financial statements. The transition
guidance and annual disclosure provisions of Statement 148 are effective for
fiscal years ending after December 15, 2002, with earlier application permitted
in certain circumstances. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. The Company adopted the disclosure provisions of
Statement 148 for the quarter ended December 31, 2002, but will continue to use
the method under APB 25 in accounting for stock options. The adoption of the
disclosure provisions of Statement 148 did not have a material impact on the
Company's financial position, results of operations or liquidity.
The following statements will be adopted by the Company as they become
effective.
Statement No. 143, "Accounting for Asset Retirement Obligations," requires
entities to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The standard is effective for fiscal years beginning after June
15, 2002. The adoption of SFAS No. 143 is not expected to have a material impact
on the Company's financial statements.
Statement No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146")
addresses the recognition, measurement, and reporting of cost that are
associated with exit and disposal activities that are currently accounted for
pursuant to the guidelines set forth in EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to exit an Activity
(including Certain Cost Incurred in a Restructuring)," cost related to
terminating a contract that is not a capital lease and one-time benefit
arrangements received by employees who are involuntarily terminated - nullifying
the guidance under EITF 94-3. Under SFAS 146, the cost associated with an exit
or disposal activity is recognized in the periods in which it is incurred rather
than at the date the Company committed to the exit plan. This statement is
effective for exit or disposal activities initiated after December 31, 2002 with
earlier application encouraged. The adoption of SFAS 146 is not expected to have
a material impact on the Company's financial position or result of operations.
Certain amounts in the December 31, 2001 interim consolidated financial
statements have been reclassified to conform to the December 31, 2002
presentation.
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 December 31, 2002 are
not necessarily indicative of the results that may be expected for the entire
fiscal year ending March 31, 2003.
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 - DEPOSIT FOR LETTER OF CREDIT FACILITY
The Company, through its Hong Kong subsidiary, maintains letter of credit
facilities with three major international
7
banks. The Company's subsidiary is required to maintain separate deposit
accounts at these banks in the amount of $517,324. This amount is included in
deposits at December 31, 2002.
NOTE 3 - LOANS AND LETTERS OF CREDIT
In December 2002, the Company amended its Loan and Security Agreement (the
"Agreement") with a commercial lender (the "Lender").
The Lender will advance up to 70% of the Company's eligible accounts receivable,
plus up to 40% of the eligible inventory, plus up to 40% of the commercial
letters of credit opened for the purchase of eligible inventory, less reserves
of up to $1,000,000 as defined in the agreement.
The outstanding loan limit varies between zero and $25,000,000 depending on the
time of year, as stipulated in the Agreement. The Lender also provides the
Company the ability to issue commercial letters of credit up to $2,500,000,
which shall reduce the loan limits above. The loans bear interest at the
commercial lender's prime rate plus 0.5% and an annual fee equal to 1% of the
maximum loan amount or $250,000 is payable. The term of the loan facility
expires on April 26, 2004 and is automatically renewable for one-year terms. All
amounts under the loan facility are due within 90 days of demand. The loans are
secured by a first lien on all present and future assets of the Company except
for certain tooling located at a vendor in China.
The Agreement contains a financial covenant stipulating a minimum tangible net
worth of $20,000,000 from October 31, 2002 to December 31, 2002 with escalations
after this point as defined in the Agreement.
The outstanding balance at December 31, 2002, was $10,163,088.
NOTE 4 - EQUITY
Stock options and warrants were exercised during the third quarter of fiscal
year 2003. 1,875 shares of common stock were issued with proceeds to the Company
of $3,825. The total of stock options and warrants exercised for the nine month
period ended December 31, 2002 were 105,151 shares with a total proceeds to the
Company of $155,684.
On December 31, 2002, 187,000 stock options were granted to various employees of
the Company under the Stock Option Plan of 2001 at the then current stock price
of $9.00 per share. Pursuant to APB no. 25, no compensation expense will be
recognized.
NOTE 5 - COMMITMENTS
On April 15, 2002, the Company entered into a three-year employment agreement
with a new Executive Vice President of Sales and Marketing. The agreement
stipulates a salary and bonuses and a 50% of annual pay severance clause. The
agreement grants 50,000 options to the employee. The employee may elect to
return the first year options to the Company for $100,000.
In May and June 2002, the Company's subsidiary entered into new office leases in
Hong Kong, each for 36 months at an aggregate $13,364 per month.
Effective May 1, 2002, the Company signed a 5-year warehouse lease in California
for $33,970 per month. The Company also subleased out its space in the other
California warehouse for rent income of $12,393 per month through January 31,
2004.
Effective June 1, 2002, the Company signed an additional 27-month lease to
expand its corporate headquarters. The additional rent is $1,987 per month.
Effective September 1, 2002, the Company signed an additional 24 - month lease
to expand its corporate headquarters. The additional rent is $1,980 per month.
As of November 13, 2002, the Company amended its merchandise license agreement
to license a name, trade name, and logo of a music oriented television network.
The term of the agreement remained unchanged, expiring on December 31, 2003. The
Company pays a royalty rate of a percentage of sales of the licensed or branded
merchandise, as defined in the amended agreement. The original agreement
required a minimum royalty of $686,250, which minimum was met with sales and was
paid by the Company as of March 31, 2002. The current amendment places a new
guaranteed minimum royalty of $1,500,000. This guaranteed minimum is recoupable
8
against royalties of sales for the period January 1, 2003 through December 31,
2003 only. The guarantee is payable as follows:
$500,000 on or before December 27, 2002;
$333,334 on or before June 1, 2003;
$333,333 on or before September 1, 2003; and
$333,333 on or before December 1, 2003
As of December 31, 2002, the initial $500,000 had been paid and is included in
prepaid expenses.
Effective December 23, 2002, the Company signed a 30-month lease for additional
warehouse space in California for $44,947 per month commencing January 1, 2003.
NOTE 6 - CONCENTRATIONS
The Company derives the majority of its revenues from retailers of products in
the United States. Financial instruments, which potentially subject the Company
to concentrations of credit risk, consist of accounts receivable. The Company's
allowance for doubtful accounts is based upon management's estimates and
historical experience and reflects the fact that accounts receivable are
concentrated with several large customers whose credit worthiness have been
evaluated by management. At December 31, 2002, approximately 50% of accounts
receivable were due from two U.S. customers. Accounts receivable from two
customers that individually owed over 10% of accounts receivable at December 31,
2002 was 25% and 25%. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral.
Revenues derived from five customers for the nine months ended September 30,
2002 and 2001 were 73.1% and 98%. Revenues derived from three customers for the
nine months ended December 31, 2002, which individually purchased greater than
10% of the Company's total revenues, were 23.1%, 17.9% and 17.6% for the nine
months ended December 31, 2002 and two customers 66% and 36% for the nine months
ended December 31, 2001.
In the fourth quarter of fiscal 2002, a major customer that provided 37% of the
Company's revenue in 2002 converted its purchase method to a consignee basis.
The Company recorded approximately $2,875,000 of sales returns and reversal of
related cost of sales of $2,112,000 in the fourth quarter of fiscal 2002 and the
customer retained the inventory on a consignment basis. As of December 31, 2002
this customer was still on a consignment basis with all but two products.
The Company is dependent upon foreign companies for manufacture of all of its
electronic products. The Company's arrangements with manufacturers are subject
to the risk 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 its business. The Company
believes that the loss of any one or more of their suppliers would not have a
long-term material adverse effect because other manufacturers with whom the
Company does business would be able to increase production to fulfill their
requirements. However, the loss of certain suppliers in the short-term could
adversely affect business until alternative supply arrangements are secured.
During fiscal 2002 and 2001, manufacturers in the People's Republic of China
(China) accounted for in excess of 95% and 94%, respectively of the Company's
total product purchases, including virtually all of the Company's hardware
purchases. The Company expects purchasing for 2003 to fall within the above
range as well.
Purchases of products derived from three factories based in China during fiscal
2002 were 51%, 39%, and 5% and from two manufacturers based in China during
fiscal 2001 were 80% and 14%, respectively. For the nine months ended December
31, 2002, purchases of product were derived from seven factories based in China.
The Company finances its sales primarily through a loan facility with one
lender. Although management believes there are other sources available, a loss
of the current credit facility could be in the short term, adversely affect
operations until an alternate lending arrangement is secured.
Net sales derived from the Company's Hong Kong based subsidiary aggregated
approximately $45,415,402 for the nine months ended December 31, 2002 and
$27,485,628 for the same period in 2001. The carrying value of net assets held
by the Company's Hong Kong based subsidiary, net of inter-company balances, was
approximately ($6,270,855) at December 31, 2002.
NOTE 7 - EARNINGS PER SHARE
Basic net income (loss) per common share (Basic EPS) excludes dilution and is
computed by dividing net income (loss) available to common stockholder by the
weighted-average number of common shares outstanding for the
9
period. Diluted net income per share (Diluted EPS) reflects the potential
dilution that could occur if stock options or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the Company. At December 31,
2002 there were 1,286,250 common stock equivalents outstanding which may dilute
future earnings per share.
NOTE 8 - SEGMENTS
The Company operates in one segment and maintains its records accordingly. Sales
by customer geographic region for the nine months ended December 31, 2002, were
as follows:
December 31,
2002 2001
----------- -----------
United States $70,809,392 $55,300,710
Asia 21,310 49,314
Australia 529,020 --
Canada 696,073 37,344
Central America 61,046 4,789
Europe 12,978,811 --
Mexico 902,731 122
South America -- 39,316
----------- -----------
$85,998,383 $55,431,595
=========== ===========
NOTE 9 - SUBSEQUENT EVENTS
The Company entered into an agreement with a retail customer whereby they
guaranteed the customer a minimum gross margin of $3,573,000 from the sale of
the Company's products during the period from September 1, 2002 through January
15, 2003. Under the agreement, the Company will reimburse the customer for the
difference between the customer's gross margin on sales and the minimum
guarantee. The Company would have a total exposure of $3,537,000, in the event
that there were no sales of the Company's products made by the retail customer
during this period. In accordance with the Securities and Exchange Commission
Staff Accounting Bulletin 101, "Revenue Recognition", the Company has not
recognized any revenues or related cost of sales at December 31, 2002. Any
revenues or related cost of sales will be recognized at January 15, 2003
("settlement date"), since the ultimate net sales are not determinable until
that date. In accordance with the Emerging Issues Task Force ("EITF") Issue
01-9, the guarantee is considered a reduction of sales. As of the settlement
date of the contract, the decrease in sales is $2,570,047, bringing net sales
under this agreement to ($167,737) and net loss on the agreement to
($1,594,113). As of this date, an initial amount of $1,500,000 has been paid
against the amount due under the settlement. The remaining amount is payable in
four equal payments of $267,511 on April 25, July 25 and October 25, 2003 and
January 25, 2004.
10
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- Q, 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,
distribution, marketing and sale of consumer karaoke audio equipment,
accessories and music. Our electronic karaoke machines and audio software
products are marketed under The Singing Machine(C) 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 Best Buy, Toys R Us, Target, J.C. Penney and Circuit City.
We had a net income before tax of $8,631,795 for the nine-month period ended
December 31, 2002.
RESULTS OF OPERATIONS
REVENUES
Revenues for the three months ended December 31, 2002 were $48,869,776, compared
to revenues of $34,158,513 for the three months ended December 31, 2001.
Revenues for the nine months ended December 31, 2002 and 2001 were $85,998,383
and $55,431,595, respectively. Our revenue increase for the nine months of 55.1%
is due to increased sales and the introduction of new products and services. We
also obtained several significant new national retail customers in our third
quarter ended December 31, 2002.
GROSS PROFIT
Gross profit for the three-month period ended December 31, 2002 was $13,431,356
or 27.5% of sales compared with $11,438,584 or 33.7% of sales for the second
quarter of the prior year. Gross profit for the nine months ended December 31,
2002 was $23,907,624 or 27.8% of sales compared with $18,609,980 or 33.6% of
sales for the nine months ended December 31, 2001. The decrease in gross profit
is primarily due to increased sales from our subsidiary and sales to
international customers. Our international sales were primarily in Europe,
Canada and Australia. Sales to international customers historically maintain a
lower gross profit because there are no other variable expenses from these
sales. Other variable expenses that are normally included with sales are
advertising allowances, returns and commissions.
OPERATING EXPENSES
Operating expenses were $8,350,124 or 17.1% of total revenues, in the third
quarter, up from $5,510,643 or 16.1% of total revenues, in the third quarter of
the prior year. For the nine months ended December 31, 2002 and 2001, operating
expenses were $15,255,823 or 17.7% of total revenues and $10,415,804 or 18.8%of
total revenues, respectively.
The primary factors that contributed to the increase of approximately $1,532,132
in operating expenses for the nine months ended December 31, 2002 are:
11
(i) the increase in depreciation in the amount of $188,713 due to
the addition of molds for new product additions for fiscal
year 2003,
(ii) compensation expense in the amount of $466,026 due to the
addition of key personnel in Florida, in our California
facility and at our Hong Kong subsidiary,
(iii) expansion of the California warehouse and its associated
expenses in the amount of $701,789,
(iv) expansion of the Hong Kong subsidiary and its related
expenses, in the amount of $340,710.
(v) increases in product development fees for development of
future product $300,454.
Other increases in operating expenses were to selling expenses, which are
considered variable. These expenses are based directly on the level of sales and
include commissions, direct and co-operative advertising, and royalty expenses.
These areas alone contributed $2,469,239 to the increase in operating expenses.
DEPRECIATION AND AMORTIZATION EXPENSES
The Company's depreciation and amortization expenses were $466,561 or .6 % of
total revenues for the nine months ended December 31, 2002, up from $236,032 or
..7% for the nine months ended December 31, 2001. The increase in depreciation
and amortization expenses can be attributed to the Company's acquisition of new
molds and tooling for our expanded product line, as well as minimal costs for
additional computer equipment and furniture for additional personnel.
OTHER INCOME AND EXPENSES
Other expense net of other income was $79,076, for the third quarter of fiscal
2003 compared to other expenses net of other income of $33,806 for the third
quarter of fiscal 2002. Other expenses net of other income for the nine months
ended December 31, 2003 were $20,006 compared to income of $93,271 for the nine
months ended December 31, 2001. Our interest expense increased during the nine
months ended December 31, 2002 compared to the same period of the prior year
primarily due to our increased use of our credit facility with LaSalle during
this period. Prior to August 2002, the Company had cash reserves to fund
operations and did not need to borrow on the line. Our interest income increased
from $2,475 during the nine months ended December 31, 2001, to $11,943 during
the first nine months of fiscal 2003 because we earned income on our cash
balances held by our lender by investing in 24 hour commercial paper
investments.
INCOME BEFORE INCOME TAX EXPENSE
The Company's net income before income taxes was $8,631,795 for the nine months
ended December 31, 2002 compared with $8,287,447 for the same period of the
prior year.
INCOME TAX EXPENSE
The Company files separate tax returns for the parent and for the Hong Kong
Subsidiary.
During the first three quarters of fiscal 2003, the Company showed a profit in
both the U.S. parent company and in International SMC (HK) Ltd., its
wholly-owned Hong Kong subsidiary.
As a result of the annualization of this profit, the U.S. parent company has
used up its net operating loss carryforwards. The Company had a deferred tax
benefit at March 31, 2002 of $452,673 that had been taken in prior years. Now
that the net operating losses have been depleted, the Company must expense this
benefit. The computed provision for income taxes at December 31, 2002 was
$704,003. This includes accruals for both federal and state income taxes. This
provision plus the expense of the tax benefit make up the income tax expense of
$1,156,676.
The Hong Kong subsidiary has applied for an income tax exclusion based on the
nature of its income. The claim for this exemption is still pending with Inland
Revenue of Hong Kong; therefore, no accrual is made for Hong Kong income taxes.
NET INCOME
As a result of the foregoing, the Company's net income was $7,475,119 for the
first nine months of fiscal 2003 compared with $8,269,447 for the first nine
months of the prior year.
12
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had cash on hand of $362,927 compared
to $5,520,147 at March 31, 2002. The decreased cash is a direct result of
increased inventory levels and accounts receivables. At December 31, 2002, the
Company had current assets of $53,341,462 and total assets of $54,939,636
compared to current assets of $20,316,081 and total assets of $21,664,451 at
March 31, 2002. The increase in current assets is the result of increased
accounts receivable from sales of the third quarter and increased inventory
levels. Increases in accounts receivable are common for this quarter of our
fiscal year, due to the high volume of sales. The receivables created in the
fiscal third quarter are subsequently collected in the fiscal fourth quarter.
Due to overall economic conditions, sales in the third quarter were not as high
as expected. Although sales of the Company's product on a retail level were
high, anticipated reorders from customers were not received during the third
quarter. The lack of reorders decreased the Company's liquidity, as the Company
now has a higher than expected level of inventory. This inventory is new,
saleable inventory that the Company expects will sell within the next six to
nine months. The increase in total assets is due to the increase in accounts
receivable, inventory and fixed assets.
Current liabilities increased to $28,838,865 as of December 31, 2002,
compared to $3,194,377 at March 31, 2002. This increase in current liabilities
is primarily due to increased accounts payable for inventory purchases and usage
of the credit facility with LaSalle Business Credit. At December 31, 2002, the
balance of the credit facility with LaSalle Business Credit was $10,163,088.
The Company's stockholders' equity increased to $26,100,772 as of
December 31, 2002 from $18,470,074 as of March 31, 2002, due primarily to the
net income for the first three fiscal quarters.
Cash flows used in operating activities were $14,359,871 during the
nine months ended December 31, 2002. Cash flows were used in operating
activities primarily due to the increase in inventory in the amount of
$20,742,572, accounts receivable in the amount of $16,001,654 and an income tax
payable accrual of $572,254 The increased inventory was partially offset by the
increase in accounts payable, which funded this inventory.
Cash used in investing activities during the nine months ended December
31, 2002 was $1,116,016. Cash used in investing activities resulted primarily
from the purchase of fixed assets in the amount of $1,112,376. The purchase of
fixed assets consists primarily of the tooling and molds required for production
of new machines for this fiscal year. Tooling and molds are depreciated over
three years.
Cash flows provided by financing activities were $10,318,667 during the
nine months ended December 31, 2002. This consisted of proceeds from the
exercise of warrants and options in the amount of $155,579. The remainder of
cash provided from financing activities was provided by net borrowings on the
credit line at LaSalle National Bank in the amount of $10,163,088.
Due to the increased level of inventory and accounts payable as of
December 31, 2002, the Company has an increased need for working capital. As of
December 31, 2002, the Company had current assets of $53.3, which consisted
primarily of accounts receivable and inventory; and current liabilities of
approximately $28.8 million. The most significant current liabilities include
(i) approximately $13 million in accounts payable, of which approximately $9
million is amounts payable to the Company's factories in China and (ii) $10
million outstanding under the Company's credit facility with LaSalle Bank. Over
the past few months, the Company has had discussions with its factories in China
and they have indicated that they are willing to extend the payment dates for
the Company's obligations. The Company also has been negotiating with LaSalle
Bank to increase the credit available to the Company. Under the Company's credit
facility with LaSalle Bank, the Company has a 45-day clean-up period between
March 15, 2003 and April 30, 2003 in which the Company is required to have a
zero balance (i.e., the Company can not borrow any money under its credit
facility during this time period). Given the Company's current liquidity
situation, the Company is requesting that LaSalle change this clean-up period to
a later time period, such as May 15, 2003 - June 30, 2003.
The Company's primary credit facility is with LaSalle Bank., which the
Company entered into in April 2001. Under this credit facility, LaSalle Bank
will advance up to 75% of the Company's eligible accounts receivable, plus up to
40% of eligible inventory, plus us up to 40% of commercial letters of credit
issue by LaSalle minus reserves as set forth in the loan documents. The credit
facility is subject to loan limits from zero to $25 million, depending on the
time of the year, as stipulated in the loan documents. The credit facility
expires on April 26, 2004 and is automatically renewable for one-year terms
thereafter. Under the terms of the credit facility, the Company is required to
maintain certain financial ratios and conditions. The loan contains a clean up
period every 12 months where the loan amount must go to zero for a period of
time. The loan is secured by a first lien on all present and future assets of
the Company ,except tooling located in China.
13
Our Hong Kong subsidiary, International SMC, has three letters of
credit facilities available to finance its inventory purchases. These facilities
are (1) a $2 million facility at Hang Sang Bank, (ii) a $2.5 million facility at
Hong Kong Shanghai Banking Corporation and (ii) a $1 million facility at Fortis
Bank
The Company intends to satisfy its capital and liquidity requirements
over the next ninety (90) days by (i) relying on credit extended to it from its
factories in China, (ii) working with LaSalle Bank to increase the credit
available to the Company under its credit facility, (iii) drawing on letters of
credit with banks in Hong Kong to finance purchases of inventory, (iv) using
cash collected from accounts receivable and (v) securing a $2 million credit
facility with a financial institution in the Far East within the next two weeks.
The Company's long-term plans for its capital and liquidity requirements are the
same as its short-term plan. Additionally, the Company believes that it will
have decreased levels of inventory purchases during the next six to nine months,
utilizing inventory already on hand. The Company believes that its cash, cash
equivalents, combined with financing obtained from LaSalle, its Hong Kong
lenders and/or another financial institution, will be adequate to meet its
capital need for at least the next 9 to 12 months.
As of January 31, 2003, the Company's material commitments for capital
expenditures are its obligations to (i) repay $4.3 under its credit facility
with LaSalle Bank by March 15, 2003, (ii) pay $2,570,047 under a guaranteed
sales contract with a retail customer (as described below), (iii) make certain
guaranteed minimum royalty payments in the amount of (a) $1.5 million over the
next year under its licensing agreement with MTV, which expires on December 31,
2003 and $450,000 under its licensing agreement with Nickelodeon, which expires
on December 31, 2004, and (iv) make lease payments totaling approximately
$85,000 per month for warehouse space in California until June 2005 and (v)
capital expenditures in the amount of approximately $1.2 million for mold,
furniture and fixtures during fiscal 2004. The Company has other contractual
obligations under its real estates leases in Florida and Hong Kong.
In April 2002, the Company entered into an agreement with a retail
customer whereby it guaranteed the customer a minimum gross margin of $3,573,000
from the sale of the Company's products during the period from September 1, 2002
through January 15, 2003. Under the agreement, the Company will reimburse the
customer for the difference between the customer's gross margin on sales and the
minimum guarantee. The Company would have a total exposure of $3,537,000, in the
event that there were no sales of the Company's products made by the retail
customer during this period. In accordance with the Securities and Exchange
Commission Staff Accounting Bulletin 101, "Revenue Recognition", the Company has
not recognized any revenues or related cost of sales at December 31, 2002. Any
revenues or related cost of sales will be recognized at January 15, 2003
("settlement date"), since the ultimate net sales are not determinable until
that date. In accordance with the Emerging Issues Task Force ("EITF") Issue
01-9, the guarantee is considered a reduction of sales. As of the settlement
date of the contract, the decrease in sales is $2,570,047, bringing net sales
under this agreement to ($167,737) and net loss on the agreement to
($1,594,113). As of this date, an initial amount of $1,500,000 has been paid
against the amount due under the settlement. The remaining amount is payable in
four equal payments of $267,511 on April 25, July 25 and October 25, 2003 and
January 25, 2004.
SEASONAL 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.
INFLATION
Inflation has not had a significant impact on the Company's operations.
The Company has historically passed any price increases on to its customers
since prices charged by the Company are generally not fixed by long-term
contracts.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission defines critical accounting
policies as "those that are both most important to the portrayal of a company's
financial condition and results, and require management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain". Preparation of our
financial statements involves the application of several such
14
policies. These policies include: estimates of accruals for product returns, the
realizability of the deferred tax asset, calculation of our allowance for
doubtful accounts and the Hong Kong income tax exemption.
Accrual for product returns. We regularly receive requests from our
customers for product returns. Our accrual amount is based on historical
experience and is recorded as a reduction of sales and costs of sales and as a
liability equal to the resulting gross profit on the estimated returns. At
December 31, 2002, the accrual was approximately $1,253,104.
Estimate for Doubtful Accounts. We estimate an allowance for doubtful
accounts using the specific identification method since a majority of accounts
receivable are concentrated with several customers whose credit worthiness is
evaluated periodically by us. The allowance was $3,356 at December 31, 2002.
Hong Kong Income Tax Exemption. We estimated that the Hong Kong income
tax to be zero based on our assessment of the probability that the application
for the Hong Kong income tax exemption would be approved.
In addition to the above policies, several other policies, including
policies governing the timing of revenue recognition, are important to the
preparation of our financial statements, but do not meet the definition of
critical accounting policies because they do not involve subjective or complex
judgments.
RISK FACTORS
Set forth below and elsewhere in this Quarterly Report on Form 10-Q 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 Quarterlyl Report.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
WE HAVE SIGNIFICANT FUTURE CAPITAL NEEDS WHICH ARE SUBJECT TO THE UNCERTAINTY OF
ADDITIONAL FINANCING
As of December 31, 2002, we had current assets of $53.3 million,
consisting primarily of inventory and accounts receivable and current
liabilities of $28,838,864. We have developed a plan to satisfy our short-term
and long-term capital needs. See "Management Discussion and Analysis of
Financial Condition - Liquidity" on page 14 of this Quarterly Report. We believe
that we will be able to secure adequate financing pursuant to this plan.
However, if we do not obtain sufficient financing, our business operations and
financial condition will be adversely affected. If the Company does not have
adequate financing, it may not be able to purchase sufficient inventory for
fiscal 2004 and this may reduce sales and net income during fiscal 2004.
Furthermore, the Company may have to scale back its business operations in
Florida, California and the Far East if it does not have adequate financing.
WE RELY ON SALES TO A LIMITED NUMBER OF KEY CUSTOMERS, WHICH ACCOUNT FOR A LARGE
PORTION OF OUR NET SALES
As a percentage of total revenues, our net sales to our five largest
customers during the fiscal period ended December 31, 2002 and 2001 were
approximately 73.1% and 98% respectively. In the third quarter of fiscal 2003,
two major customers accounted for 32.5% and 23.5% of our net sales. Although we
have long-established relationships with many of our customers, we do not have
long-term contractual arrangements with any of them. A substantial reduction in
or termination of orders from any of our largest customers could adversely
affect our business, financial condition and results of operations. In addition,
pressure by large customers seeking price reductions, financial incentives,
changes in other terms of sale or requesting that we bear the risks and the cost
of carrying inventory, such as consignment agreements, could adversely affect
our business, financial condition and results of operations. The Company has
significantly broadened its base of customers, decreasing the amount of reliance
on their largest customers. If one or more of our major customers were to cease
doing business with us, significantly reduced the amount of their purchases from
us or returned substantial amounts of our products, it could have a material
adverse effect on our business, financial condition and results of operations.
WE MAY HAVE SIGNIFICANT RETURNS, MARKDOWNS AND PURCHASE ORDER CANCELLATIONS
As is customary in the consumer electronics industry, the Company has,
on occasion, (i) permitted certain customers to return slow-moving items for
credit, (ii) provided price protection to certain customers by making price
reductions effective as to certain products then held by customers in inventory
and (ii) accepted customer cancellations of purchase orders issued to the
Company. The Company expects that it will continue to be required to make such
accommodations in the future. Any significant increase in the amount of returns,
markdowns or purchaser order cancellations could have a material adverse effect
on the Company's results of operations.
15
OUR LICENSING AGREEMENT WITH MTV IS IMPORTANT TO OUR BUSINESS
We generated $23,354,270, or 37.8% of our net sales, in fiscal 2002
from our sales of MTV licensed merchandise. Management values this license with
MTV and desires to continue this licensing relationship. If the MTV license were
to be terminated or fail to be renewed, our business, financial condition and
results of operations could be adversely affected. However, management believes
that our company has developed a strong brand name in the karaoke industry and
that it will be able to continue to develop and grow its business, even if the
MTV licensing relationship did not exist. Our licensing agreement with MTV
expires on December 31, 2003.
INVENTORY MANAGEMENT AND CONSIGNMENT ARRANGEMENTS
Because of our reliance on manufacturers in the Far East for our
machine production, our production lead times are relatively long. Therefore, we
must commit to production in advance of customers orders. If we fail to forecast
customers or consumer demand accurately we may encounter difficulties in filling
customer orders or liquidating excess inventories, or may find that customers
are canceling orders or returning products. Distribution difficulties may have
an adverse effect on our business by increasing the amount of inventory and the
cost of storing inventory. As of December 31, 2002, we had $30 million in
inventory. We will attempt to liquidate this excess inventory during fiscal
2004. We believe that all of this inventory is highly marketable and saleable;
however, there can be no assurances that we will be able to liquidate this
inventory during our upcoming fiscal year.
As of December 31, 2002, we had consignment agreements with three of
our customers. It is more difficult to manage our inventory when our products
are sold on consignment. Two of these consignment agreements expired on February
1, 2003. We expect that our remaining consignment agreement will expire on
February 28, 2003 for most of the products sold by this retail customer (our
music sales with this customer will still remain on consignment). Additionally,
changes in retailer inventory management strategies could make inventory
management more difficult. Any of these results could have a material adverse
effect on our business, financial condition and results of operations.
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. Our major
competitors for karaoke machines and related products are Grand Prix, JVC,
Memorex and Pioneer Corp. We believe that competition for karaoke machines is
based primarily on price, product features, reputation, delivery times, and
customer support. Our primary competitors for producing karaoke music are Pocket
Songs and Sound Choice. We believe that competition for karaoke music is based
primarily on popularity of song titles, price, reputation, and delivery times.
We believe that our new product introductions and enhancements of
existing products are material factors for our continued growth and
profitability. In fiscal 2002, we produced 6 new karaoke machines. However, 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 our existing products.
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.
WE ARE SUBJECT TO SEASONALITY, WHICH IS AFFECTED BY VARIOUS ECONOMIC CONDITIONS
AND CHANGES RESULTING IN FLUCTUATIONS IN QUARTERLY RESULTS
Sales of consumer electronics and toy products in the retail channel
are highly seasonal, causing the substantial majority of our sales to occur
during the second quarter ended September 30 and the third quarter ended
December 31. Sales in our second and third quarter, combined, accounted for
approximately 81% of net sales in fiscal 2002 and 75% of net sales in fiscal
2001.
The seasonal pattern of sales in the retail channel requires
significant use of our working capital to manufacture and carry inventory in
anticipation of the holiday season, as well as early and accurate forecasting of
holiday sales. Failure to predict accurately and respond appropriately to
consumer demand on a timely basis to meet seasonal fluctuations, or any
disruption of consumer buying habits during their key period, would harm our
business and operating results.
As economic conditions fluctuate, retail environments adjust their
buying patterns accordingly in order to
16
decrease their position in inventory on hand. Although the sales of the
Company's product were high, on a retail level, for the nine months ended
December 31, 2002, the sales of other product lines not affiliated with consumer
electronics were not. This had a direct effect on the decreased amount of
reorders received by the Company in the fiscal third quarter of 2003.
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 considerations described in this section entitled Risk
Factors.
A DISRUPTION IN THE OPERATION OF OUR WAREHOUSE CENTERS IN CALIFORNIA AND FLORIDA
WOULD IMPACT OUR ABILITY TO DELIVERY MERCHANDISE TO OUR STORES, WHICH COULD
ADVERSELY IMPACT OUR REVENUES AND HARM OUR BUSINESS AND FINANCIAL RESULTS
A significant amount of our merchandise is shipped to our customers
from one of our two warehouses, which are located in Compton, California and
Coconut Creek, Florida. Events such as fire or other catastrophic events, any
malfunction or disruption of our centralized information systems or shipping
problems may result in delays or disruptions in the timely distribution of
merchandise to our customers, which could adversely impact our revenues and our
business and financial results.
OUR BUSINESS OPERATIONS COULD BE DISRUPTED IF THERE ARE LABOR PROBLEMS ON THE
WEST COAST
During fiscal 2002, approximately 55% of our sales were domestic sales,
which were made from our warehouses in California and Florida. During the third
quarter of fiscal 2003, the dock strike on the West Coast affected sales of two
of our karaoke products and we lost approximately $3 million in orders because
we couldn't get these product off the pier. If another strike or work slow-down
were to occur and we do not have a sufficient level of inventory, a strike or
work slow-down would result in increased costs to our company and may reduce our
profitability.
OUR PRODUCTS ARE SHIPPED FROM CHINA AND ANY DISRUPTION OF SHIPPING COULD HARM
OUR BUSINESS
We rely principally on four contract ocean carriers to ship virtually
all of the products that we import to our warehouse facility in Compton,
California. Retailers that take delivery of our products in China rely on a
variety of carriers to import those products. Any disruptions in shipping,
whether in California or China, caused by labor strikes, other labor disputes,
terrorism, and international incidents or otherwise could significantly harm our
business and reputation.
WE MAY NOT BE ABLE TO SUSTAIN OR MANAGE OUR RAPID GROWTH
We experienced rapid growth in net sales and net income in the last
year. Our net sales for the fiscal year ended March 31, 2002 increased 80.2% to
$61.8 million compared to $34.3 million for the fiscal year ended March 31,
2002. Similarly, our net income increased to $8.06 million for fiscal 2002
compared to $4.6 million for fiscal 2001. As a result, comparing our
period-to-period operating results may not be meaningful, and results of
operations from prior periods may not be indicative of future results. We cannot
assure you that we will continue to experience growth in, or maintain our
present level of, net sales or net income.
Our growth strategy calls for us to continuously develop and diversify
our karaoke products by (i) developing new karaoke machines and music products,
(ii) entering into additional license agreements (iii) expanding into
international markets, (iv) developing new retail customers in the United States
and (v) obtaining additional financing. Our growth strategy will place
additional demands on our management, operational capacity and financial
resources and systems. To effectively manage future growth, we must continue to
expand our operational, financial and management information systems and train,
motive and manage our work force.
In addition, implementation of our growth strategy is subject to risks
beyond our control, including competition, market acceptance of new products,
changes in economic conditions, our ability to maintain our licensing agreements
with MTV and Nickelodeon and our ability to finance increased levels of accounts
receivable and inventory necessary to support our sales growth, if any.
Accordingly, we cannot assure you that our growth strategy will be implemented
successfully.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE
17
Market prices of the securities of companies in the toy and
entertainment industry are often volatile. The market prices of our common stock
may be affected by many factors, including:
-unpredictable consumer preferences and spending trends;
-operating results that vary from the expectations of investors and
securities analysts;
- the actions of our customers and competitors (including new product
line announcements and introduction;
- changes in our pricing policies, the pricing policies of our
competitors and general pricing trends in the consumer and
electronics and toy markets;
-regulations affecting our manufacturing operations in China;
-other factors affecting the entertainment and consumer electronics
industries in general; and
-sales of our common stock into the public market.
In addition, the stock market periodically has experienced significant
price and volume fluctuations which may have been unrelated to the operating
performance of particular companies.
OUR MANUFACTURING OPERATIONS ARE LOCATED IN THE PEOPLE'S REPUBLIC OF CHINA,
SUBJECTING US TO RISKS COMMON IN INTERNATIONAL OPERATIONS
We are dependent upon six factories in the People's Republic of China
to manufacture all of our electronic products. Our arrangements with these
factories are subject to the risks of doing business abroad, such as import
duties, trade restrictions, work stoppages, and foreign currency fluctuations,
limitations on the repatriation of earnings, political instability, and other
factors, which could have an adverse impact on our business. Furthermore, we
have limited control over the manufacturing processes themselves. As a result,
any difficulties encountered by the third-party manufacturers that result in
product defects, production delays, cost overruns or the inability to fulfill
orders on a timely basis could adversely affect our business, financial
condition and results of operations. We believe that the loss of any one or more
of our manufacturers 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
manufacturers, could, in the short-term, adversely affect our business until
alternative supply arrangements were secured.
WE DEPEND ON THIRD PARTY SUPPLIERS FOR PARTS FOR OUR KARAOKE MACHINES AND
RELATED PRODUCTS, AND IF WE CANNOT OBTAIN SUPPLIES AS NEEDED, OUR OPERATIONS
WILL BE SEVERELY DAMAGED
Our growth and ability to meet customer demand depends in part on our
capability to obtain timely deliveries of karaoke machines and our electronic
products. We rely on third party suppliers to produce the parts and materials we
use to manufacture and produce these products. If our suppliers are unable to
provide our factories 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. In the last several years,
there have been shortages of certain chips that we use in our karaoke machines.
We, however, have anticipated this shortage and have made commitments to our
factories to purchase chips in advance. If we are unable to anticipate any
shortages of parts and materials in the future, we may experience severe
production problems, which would impact our sales.
CONSUMER DISCRETIONARY SPENDING MAY AFFECT KARAOKE PURCHASES AND IS AFFECTED BY
VARIOUS ECONOMIC CONDITIONS AND CHANGES
Our business and financial performance may be damaged more than most
companies by adverse financial conditions affecting our business or by a general
weakening of the economy. Purchases of karaoke machines and music 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.
18
WE MAY BE INFRINGING UPON THE COPYRIGHTS OF THIRD PARTIES
Each song in our catalog is licensed to us for specific uses. Because
of the numerous variations in each of our licenses for copyrighted music, there
can be no assurance that we have complied with scope of each of our licenses and
that our suppliers have complied with these licenses. Additionally, third
parties over whom we exercise no control may use our sound recordings in such a
way that is contrary to our license agreement and by violating our license
agreement we may be liable for contributory copyright infringement. Any
infringement claims may have a negative effect on our ability to sell products.
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 showrooms, national
chains, specialty stores, and warehouse clubs. Certain of such retailers 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.
Deterioration in the financial condition of our customers could have a material
adverse effect on our future profitability.
OUR NET INCOME MAY BE REDUCED IF OUR HONG KONG SUBSIDIARY DOES NOT RECEIVE AN
EXEMPTION FOR OFFSHORE INCOME TAX
Our Hong Kong subsidiary has applied for a Hong Kong "offshore claim"
income tax exemption based on the locality of the profits of the Hong Kong
subsidiary. Management believes that since the source of all profits of the Hong
Kong subsidiary are from exporting to customers outside of Hong Kong, it is
likely that the exemption will be approved. Accordingly, no provision for
foreign income taxes has been provided in the Company's financial statements. In
the event the exemption is not approved, the Hong Kong subsidiary's profits will
be taxed at a flat rate of 16% resulting in an income tax expense of
approximately $725,000 and $460,000 for fiscal 2002 and 2001.
OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF
OUR MANAGEMENT TEAM
Our success depends to a significant degree upon the continued
contributions of our executive officers, both individually and as a group.
Although we have entered into employment contracts with Edward Steele, our Chief
Executive Officer; John Klecha, our President, Chief Operating Officer; and Jack
Dromgold, our Executive Vice President of Sales and Marketing, the loss of the
services of any of these individuals could prevent us from executing our
business strategy. Mr. Klecha's employment agreement expires on May 31, 2003. We
are currently in negotiations with Mr. Klecha regarding his employment with our
company after May 31, 2003. We cannot assure you that we will be able to find
appropriate replacements for Edward Steele, John Klecha or Jack Dromgold, if the
need should arise, and any loss or interruption of Mr. Steele, Mr. Klecha or Mr.
Dromgold's services could adversely affect our business, financial condition and
results of operations.
OUR OBLIGATION TO MAKE SEVERANCE PAYMENTS COULD PREVENT OR DELAY TAKEOVERS.
Our employment agreements with Eddie Steele, John Klecha, April Green
and Jack Dromgold require us, under certain conditions, to make substantial
severance payments to them if they resign after a change of control. These
provisions could delay or impede a merger, tender, offer or other transaction
resulting in a change in control of the Company, even if such a transaction
would have significant benefits to our shareholder. As a result, these
provisions could limit the price that certain investors might be willing to pay
in the future for shares of our common stock.
WE MAY BE SUBJECT TO CLAIMS FROM THIRD PARTIES FOR UNAUTHORIZED USE OF THEIR
PROPRIETARY TECHNOLOGY, COPYRIGHTS OR TRADE SECRETS
We believe that we independently developed the technology used in our
electronic and audio software products and that it does not infringe on the
proprietary rights, copyrights or trade secrets of others. However, we cannot
assure you that we have not infringed on the proprietary rights 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.
YOUR INVESTMENT MAY BE DILUTED
If additional funds are raised through the issuance of equity
securities, your percentage ownership in our equity will be reduced. Also, you
may experience additional dilution in net book value per share, and these equity
19
securities may have rights, preferences, or privileges senior to those of yours.
RISKS ASSOCIATED WITH OUR CAPITAL STRUCTURE
FUTURE SALES OF OUR COMMON STOCK HELD BY CURRENT STOCKHOLDERS MAY DEPRESS OUR
STOCK PRICE
As of December 31, 2002, there were 8,125,178 shares of our common
stock outstanding. We have filed three registration statements registering an
aggregate 6,742,234 of shares of our common stock (a registration statement on
Form S-3 registering the resale of 2,947,984 shares or our common stock, a
registration statement on Form S-8 to registering the sale of 1,844,250 shares
underlying options granted under our 1994 Stock Option Plan and a registration
statement on Form S-8 to register 1,950,000 shares of our common stock
underlying options granted under our Year 2001 Stock Option Plan). The market
price of our common stock could drop due to the sale of large number of shares
of our common stock, such as the shares sold pursuant to the registration
statements or under Rule 144, or the perception that these sales could occur.
ADVERSE EFFECT ON STOCK PRICE FROM FUTURE ISSUANCES OF ADDITIONAL SHARES
Our Certificate of Incorporation authorizes the issuance of 18,900,000
million shares of common stock. As of December 31, 2002, we had 8,125,178 shares
of common stock issued and outstanding and an aggregate of 1,336,250 outstanding
options and warrants. As such, our Board of Directors has the power, without
stockholder approval, to issue up to 9,438,572 shares of common stock.
Any issuance of additional shares of common stock, whether by us to new
stockholders or the exercise of outstanding warrants or options, may result in a
reduction of the book value or market price of our outstanding common stock.
Issuance of additional shares will reduce the proportionate ownership and voting
power of our then existing stockholders.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT DIFFICULT FOR A
THIRD PARTY TO ACQUIRE OUR COMPANY AND COULD DEPRESS THE PRICE OF OUR COMMON
STOCK.
Delaware law and our certificate of incorporation and bylaws contain
provisions that could delay, defer or prevent a change in control of our company
or a change in our management. These provisions could also discourage proxy
contests and make it more difficult for you and other stockholders to elect
directors and take other corporate actions. These provisions of our restated
certificate of incorporation include: authorizing our board of directors to
issue additional preferred stock, limiting the persons who may call special
meetings of stockholders, and establishing advance notice requirements for
nominations for election to our board of directors or for proposing matters that
can be acted on by stockholders at stockholder meetings.
We are also subject to certain provisions of Delaware law that could
delay, deter or prevent us from entering into an acquisition, including the
Delaware General Corporation Law, which prohibits a Delaware corporation from
engaging in a business combination with an interested stockholder unless
specific conditions are met. The existence of these provisions could limit the
price that investors are willing to pay in the future for shares of our common
stock and may deprive you of an opportunity to sell your shares at a premium
over prevailing prices.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not hold any investments in market risk sensitive
instruments. Accordingly, the Company believes that it is not subject to any
material risks arising from changes in interest rates, foreign currency exchange
rates, commodity prices, equity prices or other market changes that affect
market risk instruments
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
SEC reports. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
20
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
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
(a) Not Applicable.
(b) Not Applicable.
(c) On December 31, 2002, we issued an aggregate of 187,000 options to our
employees, as consideration for services they had rendered to us. We issued
these options to our employees in reliance upon Section 4(2) of the Securities
Act, because our employees were knowledgeable, sophisticated and had access to
comprehensive information about us.
Name Number of Options Exercise Price
- ---- ----------------- --------------
Frank Abell 6,000 $9.00
Jennifer Barnes 5,000 $9.00
Dan Becherer 10,000 $9.00
Almina Brady-Dykes 6,000 $9.00
Elizabeth Canela 3,000 $9.00
Tammy Chestnut 1,000 $9.00
Belinda Cheung 500 $9.00
Danny Cheung 1,000 $9.00
Jeffrey Chiu 1,000 $9.00
Brian Cino 3,000 $9.00
John DeNovi 10,000 $9.00
Teresa Garcia 15,000 $9.00
April Green 20,000 $9.00
Alicia Haskamp 18,000 $9.00
Michelle Ho 3,000 $9.00
Wilson Ho 1,000 $9.00
Dale Hopkins 10,000 $9.00
Irene Ko 3,000 $9.00
Bill Lau 4,500 $9.00
Dora Lee 3,000 $9.00
Nataly Lessard 6,000 $9.00
Gigi Leung 500 $9.00
Marian McElligott 15,000 $9.00
Adolph Nelson 2,000 $9.00
Rick Ng 500 $9.00
Cathy Novello 4,000 $9.00
Jennifer O'Kuhn 2,000 $9.00
Jorge Otaegui 2,000 $9.00
Terri Phillips 3,000 $9.00
Melody Rawski 5,000 $9.00
Asante Sellers 1,000 $9.00
Stacy Sethman 5,000 $9.00
John Steele 10,000 $9.00
Richard Torrelli 1,000 $9.00
Nicolas Venegas 2,000 $9.00
Vicky Xavier 2,500 $9.00
Ho Man Yeung 500 $9.00
Yen Yu 1,000 $9.00
21
For each employee, twenty percent (20%) of their options are
exercisable on January 1, 2004 and 20% exercisable each January 1st thereafter
with the last 20% becoming exercisable on January 1, 2008. The options expire 5
years after they become exercisable with varying expiration dates from December
31, 2009 through December 31, 2013.
During the three month period ended December 31, 2002, one employee
exercised stock options issued under our 1994 Amended and Restated Management
Stock Option Plan. The employee exercised options to acquire an aggregate of
1,875 shares of our common stock. The name of the option holder, the date of
exercise, the number of shares purchased, the exercise price and the proceeds
received by the Company are listed below.
Date of No. of Exercise
Name Exercise Shares Price Proceeds
- ------------- -------- ------- -------- --------
Adolph Nelson 12/19/02 1,875 $2.04 $ 3,825
Mr. Nelson paid for his shares with cash. Mr. Nelson exercised his options in
reliance upon Section 4(2) of the Securities Act of 1933, because he is are
knowledgeable, sophisticated and had access to comprehensive information about
the Company. The shares issued to our employees were registered under the
Securities Act on a registration statement on Form S-8. As such, no restrictive
legends were placed on the shares of Mr. Nelson.
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
In February 2003, the Board requested that Mr. Steele remain as Chief
Executive Officer and Chairman of the Board for another year, until February 28,
2004. Mr. Steele will be employed under the terms of his employment agreement
dated March 1, 1998 and an amendment effective as of May 5, 2000. In a press
release dated February 1, 2002 and in subsequent SEC filings, the Company had
announced that Mr. Steele would be retiring as the Chief Executive Officer on
February 28, 2003. John Klecha will remain employed as the Chief Operating
Officer and President of the Company until May 31, 2003, which is the expiration
date of his employment agreement with the Company. The Board is currently in
negotiations with Mr. Klecha regarding his employment with the Company after May
31, 2003. Further, in January 2003, the Board commenced a search process to
identify talented senior level executives to join the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Sixth Amendment dated December 27, 2002 to Loan and Security
Agreement dated April 26, 2001 by and between LaSalle Business
Credit, Inc. and the Company.
10.2 Sublease dated December 2002 between Nakamichi America
Corporation and the Company for warehouse space in Rancho
Dominguez, California.
10.3 Domestic Merchandise License Agreement dated November 1, 2000
between MTV Networks, a division of Viacom International, Inc.
and the Company (portions of this Exhibit 10.3 have been
omitted pursuant to a request for confidential treatment filed
with the Securities and Exchange Commission).
10.4 Amendment dated January 1, 2002 to Domestic Merchandise
License Agreement between MTV Networks, a division of Viacom
International, Inc. and the Company (portions of this Exhibit
10.4
22
have been omitted pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission).
10.5 Second Amendment as of November 13, 2002 to Domestic
Merchandise License Agreement between MTV Networks, a division
of Viacom International, Inc. and the Company (portions of
this Exhibit 10.5 have been omitted pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission).
99.1 Certifying Statement of the Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Certifying Statement of the Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company did not file any Report on Form 8-K during the three months ended
December 31, 2002.
23
SIGNATURES
Pursuant to the requirements of the Securities and 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 14, 2003
By: /s/ April J. Green
--------------------------------------------
April J. Green
Chief Financial Officer
(On behalf of Registrant and
Chief Accounting Officer)
24
CERTIFICATIONS
I, Edward Steele, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Singing Machine
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003 / S / Edward Steele
Edward Steele
Chief Executive Officer
25
CERTIFICATIONS
I, April J Green, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Singing Machine
Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 14, 2003 / S / April J Green
April J Green
Chief Financial Officer
(Principal Financial Officer)
26
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.1 Sixth Amendment dated December 27, 2002 to Loan and Security
Agreement dated April 26, 2001 by and between
LaSalle Business Credit, Inc. and the Company.
10.2 Sublease dated December 27, 2002 between Nakamichi American
Corporation and the Company for warehouse space in Rancho Dominguez,
California.
10.3 Domestic Merchandise License Agreement dated November 1, 2000 between
MTV Networks, a division of Viacom International, Inc. and the
Company (portions of this Exhibit 10.3 have been omitted pursuant to
a request for confidential treatment filed with the Securities and
Exchange Commission).
10.4 Amendment dated January 1, 2002 to Domestic Merchandise License
Agreement between MTV Networks, a division of Viacom International,
Inc. and the Company (portions of this Exhibit 10.4 have been omitted
pursuant to a request for confidential treatment filed with the
Securities and Exchange Commission).
10.5 Amendment dated November 13, 2002 to Domestic Merchandise License
Agreement between MTV Networks, a division of Viacom International,
Inc. and the Company (portions of this Exhibit 10.5 have been omitted
pursuant to a request for confidential treatment filed with the
Securities and Exchange Commission).
99.1 Certifying Statement of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
99.2 Certifying Statement of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes Oxley Act of 2002
27