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 quarter ended December 31, 2004
0 - 24968
Commission File Number
THE SINGING MACHINE COMPANY, INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 95-3795478
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(State of Incorporation ) (IRS Employer I.D. No.)
6601 Lyons Road, Building A-7, Coconut Creek, FL 33073
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(Address of principal executive offices)
(954) 596-1000
(Issuer'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
requirement 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 CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
CLASS NUMBER OF SHARES
OUTSTANDING ON February 10, 2005
Common Stock, $0.01 par value 9,765,592
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Page No.
--------
Item 1.
Consolidated Balance Sheets - December 31, 2004 (Unaudited)
and March 31, 2004 .............................................. 3
Consolidated Statements of Operations - Three months and nine
months ended December 31, 2004 and 2003 (Unaudited) ............. 4
Consolidated Statements of Cash Flows - Nine months ended
December 31, 2004 and 2003 (Unaudited) .......................... 5
Notes to Consolidated Financial Statements ...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................. 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk ....... 16
Item 4. Controls and Procedures ......................................... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 16
Item 2. Changes in Securities ........................................... 16
Item 3. Defaults Upon Senior Securities ................................. 17
Item 4. Submission of Matters to a Vote of Security Holders ............. 17
Item 5. Other Information ............................................... 17
Item 6. Exhibits and Reports on Form 8-K ................................ 17
SIGNATURES ............................................................... 18
Exhibits
The Singing Machine Company, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31 March 31
2004 2004
------------ ------------
(Unaudited)
Assets
------
Current Assets
Cash and cash equivalents $ 1,342,175 $ 356,342
Restricted Cash 869,955 874,283
Accounts Receivable, less allowances of $165,729 and $98,009,
respectively 4,272,798 3,806,166
Due from manufacturer 96,978 95,580
Inventories 2,803,193 5,923,267
Prepaid expenses and other current assets 606,777 783,492
Insurance receivable -- 800,000
Refundable tax -- 1,178,512
------------ ------------
Total Current Assets 9,991,876 13,817,642
Property and Equipment, at cost less accumulated depreciation
of $3,402,694 and $2,870,592, respectively 1,209,253 983,980
Other Non-Current Assets 417,093 615,773
------------ ------------
Total Assets $ 11,618,222 $ 15,417,395
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities
Bank overdraft $ -- $ 62,282
Accounts payable 1,519,159 4,651,675
Accrued expenses 1,510,049 3,481,905
Customer credits on account 759,912 2,111,484
Deferred Gross profit on estimated returns 956,880 --
Due to factor 577,994 --
Convertible debentures, net of unamortized discount of $2,554,511 1,445,489
Subordinated debt-related parties 1,000,000 1,000,000
Income tax payable 2,453,576 2,447,746
------------ ------------
Total Current Liabilities 8,777,570 15,200,581
Long Term liabilities
Convertible debentures, net of unamortized discount of $2,052,033 1,947,967 --
------------ ------------
Total Long Term Liabilities 1,947,967 --
------------ ------------
Total Liabilities 10,725,537 15,200,581
Shareholders' Equity
Preferred stock, $1.00 par value; 1,000,000
shares authorized, no shares issued and outstanding -- --
Common stock, Class A, $.01 par value; 100,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $0.01 par value; 18,900,000 shares authorized;
9,202,318 and 8,752,318 shares issued and outstanding 92,023 87,523
Additional paid-in capital 11,028,636 10,052,498
Accumulated deficit (10,227,974) (9,923,207)
------------ ------------
Total Shareholders' Equity 892,685 216,814
------------ ------------
Total Liabilities and Shareholders' Equity $ 11,618,222 $ 15,417,395
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
The Singing Machine Company, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
DEC 31, 2004 DEC 31, 2003 DEC 31, 2004 DEC 31, 2003
------------ ------------ ------------ ------------
Net Sales $ 14,368,388 $ 29,612,985 $ 36,978,549 $ 70,115,195
Cost of Goods Sold 9,445,203 30,457,329 27,024,880 63,790,739
------------ ------------ ------------ ------------
Gross Profit 4,923,185 (844,344) 9,953,669 6,324,456
Operating Expenses
Advertising 267,280 923,362 689,074 2,061,457
Commissions 607,042 489,327 965,705 1,036,483
Compensation 805,557 1,097,327 2,141,337 3,552,718
Freight & Handling 485,602 523,177 782,746 1,153,353
Royalty Expense 463,184 833,419 829,517 1,666,550
Selling, general and administrative expenses 1,283,875 2,920,789 3,462,102 7,872,416
------------ ------------ ------------ ------------
Total Operating Expenses 3,912,540 6,787,401 8,870,481 17,342,977
------------ ------------ ------------ ------------
Income (Loss) from Operations 1,010,645 (7,631,745) 1,083,188 (11,018,521)
Other Income (Expenses)
Other income(expense) 124,535 32,098 241,806 (50,882)
Interest expense (195,942) (336,191) (439,646) (786,753)
Interest expense - Amortization of discount
on convertible debentures (446,194) (350,987) (1,190,115) (407,788)
------------ ------------ ------------ ------------
Net Other Expenses (517,601) (655,080) (1,387,955) (1,245,423)
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 493,044 (8,286,825) (304,767) (12,263,944)
Income Taxes Expense -- 2,163,776 -- 1,160,678
------------ ------------ ------------ ------------
Net Income (Loss) $ 493,044 $(10,450,601) $ (304,767) $(13,424,622)
============ ============ ============ ============
Income (Loss) per common share:
Basic $ 0.05 $ (1.20) $ (0.03) $ (1.58)
Diluted $ 0.05 $ (1.20) $ (0.03) $ (1.58)
Weighted Average Common and Common Equivalent Shares:
Basic 9,202,318 8,729,818 8,934,136 8,503,065
Diluted 9,255,651 8,729,818 8,934,136 8,503,065
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
The Singing Machine Company, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For Nine Months Ended December 31
------------ ------------
2004 2003
------------ ------------
Cash flows from operating activities
Net Loss $ (304,767) $(13,424,622)
Adjustments to reconcile net loss to net cash provided by
(used in)operating activities
Depreciation and amortization 532,102 1,165,687
Impairment of tooling -- 508,480
Amortization of discount/deferred fees on convertible debentures 1,190,116 444,584
Stock compensation 293,000 511,299
Deferred tax benefit -- 1,925,612
Changes in assets and liabilities:
Accounts Receivable (466,633) (8,816,852)
Insurance receivable 800,000 --
Due from manufacturer (1,398) (20,329)
Inventories 3,120,074 17,164,975
Prepaid expenses and other assets 176,716 (858,011)
Other non-current assets 198,680 --
Accounts payable (3,132,516) (3,154,539)
Accrued expenses (58,096) 653,540
Deferred gross profit on estimated sales returns (956,880) --
Customer credits on account (1,351,572) (149,380)
Current income taxes 1,184,342 (948,536)
------------ ------------
Net cash provided by (used in) operating activities 1,223,168 (4,998,092)
------------ ------------
Cash flows from investing activities
Purchase of property and equipment (757,375) (434,065)
Restricted cash 4,328 (28,002)
------------ ------------
Net cash used in investing activities (753,047) (462,067)
------------ ------------
Cash flows from financing activities
Borrowing from revolving credit facilities -- 27,777,630
Repayment to revolving credit facilities -- (27,445,340)
Borrowing from factoring, net 577,994 --
Bank Overdraft (62,282) (231,410)
Proceeds from issuance of convertible debt -- 4,000,000
Payment of financing fees related to convertible debt -- (255,000)
Proceeds from related party loan 240,000 700,000
Payments of related party loan (240,000) (100,000)
Proceeds from exercise of stock options and warrants -- 981,972
------------ ------------
Net cash provided by financing activities 515,712 5,427,852
------------ ------------
Change in cash and cash equivalents 985,833 (32,307)
Cash and cash equivalents at beginning of period 356,342 268,265
------------ ------------
Cash and cash equivalents at end of period $ 1,342,175 $ 235,958
============ ============
Supplemental Disclosures of Cash Flow Information:
Cash paid for nine months ending December 31
Interest $ 379,375 $ 591,817
============ ============
Taxes $ 50,000 $ 1,388,102
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of The Singing Machine Company, Inc. and its subsidiary International
SMC (the "Company", "The Singing Machine"). All significant intercompany
transactions and balances have been eliminated. The unaudited consolidated
financial statements have been prepared in conformity with Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission and therefore do not
include information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America.
However, all adjustments (consisting of normal recurring accruals), which, in
the opinion of management, are necessary for a fair presentation of the
financial statements, have been included. Operating results for the period ended
December 31, 2004 are not necessarily indicative of the results that may be
expected for the remaining quarters or the year ending March 31, 2005 due to
seasonal fluctuations in The Singing Machine's business, changes in economic
conditions and other factors. For further information, please refer to the
Consolidated Financial Statements and Notes thereto contained in The Singing
Machine's Annual Report on Form 10-K for the year ended March 31, 2004.
INVENTORIES
Inventories are comprised of electronic karaoke audio equipment, accessories,
and compact discs and are stated at the lower of cost or market, as determined
using the first in, first out method.
REVENUE RECOGNITION
Revenue from the sale of equipment, accessories, and musical recordings are
recognized upon the later of (a) the time of shipment or (b) when title passes
to the customers, all significant contractual obligations have been satisfied
and collection of the resulting receivable is reasonably assured. Revenues from
sales of consigned inventory are recognized upon sale of the product by the
consignee. The customers are only allowed to return the defective products. We
also approved customers to return their overstock merchandise from time to time.
Generally, the customer have one year to return the defective product. Net sales
are comprised of gross sales net of actual returns and a provision for estimated
future returns, discounts, sales allowances. The actual returns and provision
for estimated returns for three months ended December 31, 2004 and 2003 were
$1.5 million and $2.1 million, respectively, which represented 10.5% and 7.1% of
the net sales. The actual returns and provision for estimated returns for nine
months ended December 31, 2004 and 2003 were $3.6 million and $6.1 million,
respectively, which represented 10.0% and 8.7% of the net sales.
INCOME TAXES.
Significant management judgment is required in developing The Singing Machine's
provision for income taxes, including the determination of foreign tax
liabilities, deferred tax assets and liabilities and any valuation allowances
that might be required against the deferred tax assets. Management evaluates its
ability to realize its deferred tax assets on a quarterly basis and adjusts its
valuation allowance when it believes that it is more likely than not that the
assets will not be realized. At March 31, 2004 and December 31, 2004, the
Company concluded that a valuation allowance was needed against all of the
Company's deferred tax assets, as it was not more likely than not that the
deferred taxes would be realized. At December 31, 2004 and March 31, 2004, The
Singing Machine had gross deferred tax assets of $8.7 million and $8.2 million,
against which the Company recorded full valuation allowances.
For the three months ended December 31, 2004, the Company recorded no tax
provision. This occurred because the Company has net operating losses for the
year to date period. The Company has not recorded a benefit for the current
period losses because realizability is unlikely.
The Company operates within multiple taxing jurisdictions and is subject to
audit in those jurisdictions. Because of the complex issues involved, any claims
can require an extended period to resolve. In management's opinion, adequate
provisions for income taxes have been made.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
STOCK BASED COMPENSATION
The Company accounts for stock options issued to employees using the intrinsic
value method in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation cost is measured on the date of grant as
the excess of the current market price of the underlying stock over the exercise
price. Such compensation amounts are amortized over the respective vesting
periods of the option grant. The Company applied the disclosure provisions of
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure an amendment of FASB Statement No. 148",
which permits entities to provide pro forma net earnings (loss) and pro forma
earnings (loss) per share disclosures for employee stock option grants as if the
fair-valued based method defined in SFAS No. 123 had been applied to options
granted.
6
Had compensation cost for the Company's stock-based compensation plan been
determined using the fair value method for awards under that plan, consistent
with Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock Based Compensation", the Company's net loss would have been changed to the
pro-forma amounts indicated below.
For Three Months Ended For Nine Months Ended
----------------------------- ------------------------------
December 31, December 31, December 31, December 31,
2004 2003 2004 2003
--------- ------------- ---------- -------------
Net income (Loss), as reported $ 493,044 $ (10,450,601) $ (304,767) $ (13,424,622)
Less: Total stock-based employee
compensation expense determined under
fair value based method
$ 164,269 $ 202,682 $ 480,838 $ 608,046
Net income (loss), pro forma $ 328,775 $ (10,653,283) $ (785,605) $ (14,032,668)
Net income (loss) per share - basic As reported $ 0.05 $ (1.20) $ (0.03) $ (1.58)
Pro forma $ 0.04 $ (1.22) $ (0.09) $ (1.65)
Net income (loss) per share - diluted As reported $ 0.05 $ (1.20) $ (0.03) $ (1.58)
Pro forma $ 0.04 $ (1.22) $ (0.09) $ (1.65)
The effect of applying SFAS No. 123 is not likely to be representative of the
effects on reported net earnings for future years due to, among other things,
the effects of vesting.
For stock options and warrants issued to consultants, the Company applies the
fair value method of accounting as prescribed by SFAS No.123. There were no
consulting expenses relating to grants for the quarters ended December 31, 2004
and 2003.
For financial statement disclosure purposes and for purposes of valuing stock
options and warrants issued to consultants, the fair market value of each stock
option granted was estimated on the date of grant using the Black-Scholes
Option-Pricing Model in accordance with SFAS No. 123 using the following
weighted-average assumptions:
For the period ended December 31, 2004:
Expected dividend yield 0%, risk-free interest rate of 4%, volatility 199.15%
and expected term of five years.
For the period ended December 31, 2003:
Expected dividend yield 0%, risk-free interest rate of 4%, volatility 110.05%
and expected term of five years.
NOTE 2 - GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
The Company has net operating losses since fiscal 2004. Our unencumbered assets
are limited. We might not be able to meet some short term obligations. These
factors, among others, indicate that the Company may be unable to continue
operations as a going concern.
Subsequent to December 31, 2004, we plan to finance our operations as follows:
1) Vendor financing - The Company's key vendors in China have agreed to
manufacture on behalf of the Company, without advanced payments. We have
substantially improved our payment status with vendors this year. We are current
with our suppliers except one factory in China, which we have agreed to a
payment plan. We are working with this supplier in China to extend payment
terms, which would reduce our financing needs.
2) Borrowing against Letter of Credit - A significant amount of committed
customer orders have been sold under customer letters of credit terms. The
customer's letters of credit will be used as collateral to provide advances to
our vendors. The customers will pay and take title of the karaoke machines in
China as the karaoke machines are delivered to their freight forwarders. This
will generate immediate funds to pay the vendors and generate additional cash
flows.
3) Factoring of accounts receivable - The Company would factor its accounts
receivable through the factoring company for the sales originated in the United
States.
4) Debts to equity conversion - On January 5, 2005, the debt holders converted
insiders' loans in the amount of $400,000 plus interest into 563,274 shares of
the Company's common stock.
7
5) Cost reduction - The Company has reduced significant operating expenses in
this fiscal year. The cost reduction initiatives are part of our intensive
effort to achieve a successful turn-around restructuring. The Company plans to
continue its cost cutting efforts in the 4th quarter of fiscal 2005.
There can be no assurances that forecasted results will be achieved or that
additional financing will be obtained. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
NOTE 3 - CREDIT FACILITY AND LOANS
CREDIT FACILITIES
The Hong Kong Subsidiary maintains separate credit facilities at two
international banks. The primary purpose of the facilities is to provide the
Subsidiary with the following abilities:
o Overdraft protection facilities
o Issuance and negotiation of letters of credit
o Trust receipts
o A Company credit card
These facilities are secured by a corporate guarantee from the U.S. Company,
restricted cash on deposit with the lender and require that the International
SMC maintain a minimum tangible net worth of approximate $2 million.
International SMC was in compliance with minimum tangible net worth as of
December 31, 2004. The maximum available credit under the facilities is $1.5
million. The interest rate is approximately 5%. The balance due at December 31,
2004 and March 31, 2004 was 0 and $62,282, respectively. At December 31, 2004,
the total availability under the theses facilities is $1.5 million.
RELATED PARTY LOANS
On or about July 10, 2003, an officer and directors of our Company advanced $1
million to our Company pursuant to written loan agreements. The officer is Yi
Ping Chan and the directors were Josef A. Bauer and Howard Moore. Mr. Moore
resigned from our Board, effective as October 17, 2003. Additionally, Maureen
LaRoche, a business associate of Mr. Bauer, participated in the financing. The
loans are subordinated to factoring company and accrue interest at 9.5% per
annum and as of December 31, 2004, all interest was accrued, and the unpaid
amount totaled approximately $23,750. These loans were originally scheduled to
be repaid by October 31, 2003, they were extended to March 31, 2005. A portion
of the loans in the amount of $400,000 has been converted into 563,274 shares of
common stock on January 5, 2005.
NOTE 4 - ACCOUNTS RECEIVABLE FACTORING AGREEMENT
On August 4, 2004, the Company started to factor its accounts receivables
through Crestmark Bank , Detroit, Michigan. The agreement allows the Company, at
the discretion of Crestmark, to factor its outstanding receivables, with
recourse, up to a maximum of the lesser of $2.5 million or 70% of eligible
accounts receivable. The Company pays 1% of gross receivables in fees with a
$9,000 minimum maintenance fee per month. The average balance of the line will
be subject to interest payable on a monthly basis at prime plus 2%. The rate at
December 31, 2004 is 7.25%. The agreement contains a liquidated damage fee of
$162,000 payable for early termination by the Company.
Crestmark Bank also received a security interest in all of the Company's
accounts receivables and inventory in the United States. The Company's debenture
holders and insider loan holders have subordinated their debt to the Crestmark
Bank debt.
As of December 31, 2004, the outstanding amount due to Crestmark bank for
factoring is $577,994.
NOTE 5 - CONVERTIBLE DEBENTURES WITH WARRANT
In September 2003, the Company issued $4 million of 8% Convertible Debentures in
a private offering which are due February 20, 2006 ("Convertible Debentures").
The net cash proceeds received by the Company were $3,745,000 after deduction of
cash commissions and other expenses.
The Convertible Debentures are convertible at the option of the holders and were
initially convertible into 1,038,962 common shares at a conversion price of
$3.85 per common share subject to certain anti-dilution adjustment provisions,
at any time after the closing date. The repayment of the Convertible Debentures
was subordinated to a factoring agreement with Milberg Factors, which was
terminated as of July 14, 2004.
These Convertible Debentures were issued with 457,143 detachable stock purchase
warrants with an exercise price of $4.03 per share. These warrants may be
exercised at anytime after September 8, 2003 and before September 7, 2006 and
are subject to certain anti-dilution provisions. The warrants are also subject
to an adjustment provision; whereas the price of the warrants may be changed
under certain circumstances.
8
The Convertible Debentures bear interest at the stated rate of 8% per annum.
Interest is payable quarterly on March 1, June 1, September 1, and December 1.
The interest may be payable in cash, shares of Common Stock, or a combination
thereof subject to certain provisions and at the discretion of the Company.
In accounting for this transaction, the Company allocated the proceeds based on
the relative estimated fair value of the stock purchase warrants and the
convertible debentures. This allocation resulted in a discount on the
convertible debentures of $3.3 million, which is being amortized over the life
of the debt on a straight-line basis to interest expense, which is not
materially different from effective interest method.
On February 9, 2004, the Company amended its convertible debenture agreements to
increase the interest rate to 8.5% and to grant warrants to purchase an
aggregate of 30,000 shares of the Company's common stock to the debenture
holders on a pro-rata basis. These concessions are in consideration of the
debenture holder's agreements to (i) enter into new subordination agreements
with Milberg, (ii) to waive all liquidated damages due under the transaction
documents through July 1, 2004 and (iii) to extend the effective date of the
Form S-1 registration statement until July 1, 2004. The new warrants have an
exercise price equal to $1.52 per share and the fair value of these warrants was
estimated by using the Black-Scholes Option-Pricing Model and totaled $30,981.
This amount was expensed as a component of selling, general and administrative
expenses during the three months ended December 31, 2003. Pursuant to the
Convertible Debenture agreements, the Company was required to register the
shares of common stock underlying the debentures and detachable stock purchase
warrants issued in connection with the debentures. The registration of the
common shares was required to be effective by July 1, 2004. The Form S-1
registration statement was effective on January 21, 2005.
On November 8, 2004, the Company executed a letter agreement with the debenture
holders, whereby the Company agreed to change the interest rate on the debenture
to 9% in exchange for the debenture holders agreeing to (i) execute a
subordination agreement with Crestmark Bank, (ii) waive all liquidated damages
due under the transaction documents through January 7, 2005, and (iii) withdraw
any demand for repayment under the debenture.
According to the anti-dilution adjustment provision, If the Singing Machine
sells shares of its common stock at an effective price less than Set Price, the
debentures' holders are entitled to convert their debentures into shares at a
new conversion price, which equals to the original set price minus 75% of the
difference between the Set Price and the new price if the event occurs before
September 8, 2004. On July 30, 2004, the Singing Machine received the court
approval of the Class Action Lawsuit (case# 03-CV-80596). The Singing Machine
issued 400,000 shares to the plaintiff as part of the settlement on September
23, 2004. The market closing price on July 30, 2004 was $0.60 per share. The
event has triggered the conversion price reset for the convertible debentures.
According to the Emerging Issue Task Force (EITF) Issue No. 00-27, if the terms
of a contingent conversion option do not permit an issuer to compute the number
of shares that the holder would receive if the contingent event occurs and the
conversion price is adjusted, an issuer should wait until the contingent event
occurs and then compute the resulting number of shares that would be received
pursuant to the new conversion price. The incremental intrinsic value that
resulted from the price reset equals additional shares multiplied by the stock
market price at the issuing date of the debentures, which would be recorded as
discount of convertible debentures and amortized over the remaining life of the
debentures. The new adjusted conversion price of stock is $1.41 [3.85-
(3.85-0.60) X 75%] while the conversion price of warrant is $1.46. As of July
30,2004, the number of shares issuable upon conversion of debenture is
2,831,858. The amount of $687,638 was recorded as additional discounts of the
debentures and will be amortized for the remaining life of the debentures. Total
amortization for the nine months ending December 31, 2004 is $1,190,115 and the
unamortized discount is $2,052,033 as of December 31, 2004.
In connection with the Convertible Debentures the Company paid financing fees as
follows: 103,896 stock purchase warrants, with a fair value of $268,386, 28,571
shares of common stock with a fair value of $141,141, and cash of $255,000.
Total financing fees of $664,527 were recorded as deferred fees and are being
amortized over the term of the debentures.
The unamortized deferred fees are reported in other non-current assets in the
accompanying balance sheets and total $310,755 as of December 31, 2004.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Merchandise License Agreement
The Company has terminated the license agreement with Care Bear on December 31,
2004. The Company has met the minimum payment requirement during the licensing
period. The Company has expended the prepaid royalty remaining balance in the
quarter ended December 31, 2004.
The Company has terminated the license agreement with MTV Network on December
31, 2004. The Company has met the minimum payment requirement during the
licensing period. The Company has expended the prepaid royalty remaining balance
in the quarter ended December 31, 2004. The Company has three months to sell off
MTV licensed inventory.
Commitments
Our commitments for debt and other contractual arrangements are summarized as
follows as of December 31, 2004:
9
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Total Less than 1 year 1 - 3 years 3 - 5 years ver 5 years
-------------------------------------------------------------------------------------
Merchandise License Guarantee $ 50,000 $ 50,000 $ - $ - $ -
Property Leases 1,499,292 759,492 739,800 - -
Equipment Leases 31,400 17,174 14,226 - -
Subordinated Debt - Related Party 600,000 600,000 - - -
Convertible Debentures 4,000,000 - 4,000,000 - -
Interest payments 434,250 374,250 60,000 - -
-------------------------------------------------------------------------------------
Total $ 6,614,942 $ 1,800,916 $ 4,814,026 $ - $ -
=====================================================================================
NOTE 7 - STOCKHOLDERS' EQUITY
COMMON STOCK ISSUANCES
During the nine months ended December 31, 2004 and 2003, the Company issued the
following shares of stock.
- ----------------------------------------------------------------------
Period Number of Shares Issued Proceeds to Company
- ----------------------------------------------------------------------
2004 450,000 None
- ----------------------------------------------------------------------
2003 580,642 $981,972
- ----------------------------------------------------------------------
On May 11, 2004, the Company issued 50,000 shares of common stock to a former
executive for consulting services rendered. The Company expensed the consulting
costs in the three months ended December, 31, 2003, the period which services
were provide.
On September 23, 2004, the Company issued 400,000 thousand shares to the
plaintiffs for the class action settlement.
As of December 31, 2004, the Company had outstanding 1,121,490 options with
exercise prices ranging from $0.57 to $9.00, 591,040 warrants with exercise
prices ranging from $1.52 to $4.03. The Company also had $4,000,000 outstanding
convertible debentures, which would convert into 2,831,858 shares of common
stock.
On January 3, 2005, the Company has authorized the issuance of 563,274 shares of
common stock for the conversion of $400,000 insider loan and $9,500 interest
payment. The conversion rate is $0.73 per share, which is based on the 5 days
average stock closing price prior to December 20, 2004.
EARNINGS (LOSS) PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings per Share," basic earnings per share are computed by dividing the net
earnings for the period by the weighted average number of common shares
outstanding. Diluted earnings per share is computed by dividing net earnings by
the weighted average number of common shares outstanding including the effect of
common stock equivalents.
There were 4,000,387 and 2,159,082 common stock equivalents, which were excluded
in the diluted per share calculations in the nine months periods ended December
31, 2004 and 2003 since their effect will be antidilutive
NOTE 8 - SEGMENT INFORMATION
The Company operates one business segment and maintains its records accordingly.
The majority of sales to customers outside of the United States are made by the
Company's Subsidiary in Hong Kong. Sales by geographic region for the quarter
ended December 31 were as follows:
10
The geographic area of sales is based primarily on the location where the
product is delivered.
For the three months ended Dec 31 For the nine months ended Dec 31
2004 2003 2004 2003
North America $ 9,306,588 $20,132,384 $ 27,386,433 $ 42,016,183
Europe 4,848,992 8,687,809 9,111,894 26,497,706
Australia 212,808 582,385 451,053 892,964
Others - 210,407 29,168 708,343
--------------------- ------------------ ----------------- -------------------
$ 14,368,388 $29,612,985 $ 36,978,548 $ 70,115,196
===================== ================== ================= ===================
11
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.
OVERVIEW
The Singing Machine Company, Inc., a Delaware corporation, and its subsidiary
(the "Singing Machine," "we," or "us") are primarily engaged in the design,
marketing, and sale of consumer karaoke audio equipment, accessories, and
musical recordings. The products are sold directly to distributors and retail
customers. Our electronic karaoke machines and audio software products are
marketed under The Singing Machine(R) and Motown trademarks.
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 major
retail outlets as Best Buy, Circuit City, Costco, Kohl's, J.C. Penney, Radio
Shack and Sam's Club.
The following table sets forth, for the periods indicated, certain items related
to our consolidated statements of operations as a percentage of net revenues for
the three and nine months ended December 31, 2004 and 2003.
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
--------------- --------------- -------------- ----------------
DEC 31, 2004 DEC 31, 2003 DEC 31, 2004 DEC 31, 2003
--------------- --------------- -------------- ----------------
Net Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of Goods Sold 65.7 % 102.9 % 73.1 % 91.0 %
Gross Profit 34.3 % (2.9) % 26.9 % 9.0 %
Operating Expenses
Advertising 1.9 % 3.1 % 1.9 % 2.9 %
Commissions 4.2 % 1.7 % 2.6 % 1.5 %
Compensation 5.6 % 3.7 % 5.8 % 5.1 %
Freight & Handling 3.4 % 1.8 % 2.1 % 1.6 %
Royalty Expense 3.2 % 2.8 % 2.2 % 2.4 %
Selling, general and administrative expenses 8.9 % 9.9 % 9.4 % 11.2 %
Total Operating Expenses 27.2 % 22.9 % 24.0 % 24.7 %
Income (Loss) from Operations 7.1 % (25.8) % 2.9 % (15.7)%
Other Income (Expenses)
Other income(expense) 0.9 % 0.1 % 0.7 % (0.1)%
Interest expense (1.4)% (1.1) % (1.2) % (1.1)%
Interest expense - Amortization of discount - % - % - % - %
on convertible debentures (3.1)% (1.2) % (3.2) % (0.6)%
Net Other Expenses (3.6)% (2.2) % (3.7) % (1.8)%
Income (Loss) Before Income Taxes 3.5 % (28.1) % (0.8) % (17.5)%
Income Taxes Expense - % 7.3 % - % 1.7 %
Net Income (Loss) 3.5 % (35.4) % (0.8) % (19.2)%
12
QUARTER ENDED DECEMBER 31, 2004 COMPARED TO THE QUARTER ENDED DECEMBER 31, 2003
NET SALES
Net sales for the quarter ended December 31, 2004 decreased to $14,368,388 from
$29,612,985, a decrease of $15,244,597 or 51% as compared to the same period
ended December 31, 2003. The decrease in sales is primarily attributed to:
1) We lost approximately $0.5 million in sales because we made a decision not to
pursue low margin accounts which tied up cash flow but not providing us with
enough profit margins.
2) We lost approximately $0.6 million in sales because we did not meet customer
demands to introduce new karaoke models as a result of our inventories being
overstocked.
3) We lost approximately $1.3 million in sales from customers who did not
purchase from us because of our liquidity concerns.
4) We lost approximately $10.7 million in sales to our distributors in Europe
due to high levels of inventories on hand from the prior year.
5) We lost approximately $1.5 million in sales due to the shipment delay for
unloading in Long Beach port, CA, which has affected many companies importing
goods from Asia this year.
GROSS PROFIT
Despite a decline in revenue, the gross profit for the quarter ended December
31, 2004 increased to $4,923,185 from $(844,344) as compared to same period
ended in prior year. As a percentage of the consolidated revenues, the gross
profit increased to 34.3% from (2.9%) for three months ended December 31, 2004
as compared to the same period in prior year. The increase of gross profit as a
percentage of the revenue was primarily due to:
1) We marketed several new models this year, which has differentiated us from
our competitors. These models come with added features that enable us to sell
them at higher prices and profit margin;
2) We were able to sell older inventory at higher prices than we previously
estimated, which had been markdown to the net realizable value in prior years;
3) We marked down our inventory in the amount $4.9 million to its net realizable
value in the same period last year.
OPERATING EXPENSES
Total operating expenses decreased to $3,912,540 from $6,787,401 a decrease of
$2,874,861 or 42% for the three months ended December 31, 2004 as compared to
the same period in prior year. As percentage of the net revenues, the operating
expenses increased to 27.2% from 22.9%. The increase in the operating expenses
as percentage is due to the decrease of revenues, which partly offset by
reduction of expenses in all categories. In absolute term, the controllable
expenses, which include compensation and the selling, general and administration
expenses have been reduced to $2,089,432 from $4,018,116 a decrease of
$1,928,684 or 48%. The reduction of the controllable expenses was primarily
attributed to:
1) Compensation expenses decreasing from $1,097,327 to $805,557 ($291,770 or
27%);
2) Decreases in professional fees of $220K, loan costs of $60K, bad debt
expenses of $220K, consulting fees of $110K, rent expense of $150K and
music settlement of $70K and decreases in various other expenses.
Management anticipates that the controllable operating expense will continue to
be at approximately the same or lower levels as the quarter ended December 31,
2004 for the remaining period of the fiscal year.
OTHER INCOME/EXPENSES
Net other expenses decreased to $517,601 from $655,080 ($137,479 or 21%) for the
three months ended December 31, 2004 as compared to the same period ended in
prior year. The decrease is primarily due to: 1) The termination of our credit
facility with our previous bank; 2) Write off old credit balance due to
customers, which were not deemed to be applicable to customers' current
balances.
INCOME TAXES
For the three month ended December 31, 2004, The Company has not recorded a tax
provision, since the Company has net operating losses for the nine months ending
December 31, 2004. The Company has not recorded a tax benefit for the current
period's losses because realizability is unlikely.
NINE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THE NINE MONTHS ENDED DECEMBER
31, 2003
NET SALES
Net sales decrease to $36,978,549 from $70,115,195 a decrease of $33,136,646 or
47% for the nine months ended December 31, 2004 as compared to the same period
in prior year. The decrease in sales is a combination of five primary reasons:
1) We lost approximately $2.3 million in sales because we made a decision not to
pursue low margin accounts which tied up cash flow by not providing us with
enough profit margins.
13
2) We lost approximately $2.1 million in sales because we did not meet customer
demands to introduce new karaoke models as a result of our inventories being
overstocked.
3) We lost approximately $12.6 million in sales from customers who were
discouraged from purchasing from us because of our liquidity concerns.
4) We lost approximately $17.7 million in sales to our distributors in Europe
due to high levels of inventories on hand from the prior year.
5) We lost approximately $1.5 million in sales due to the shipment delay
for unloading in Long Beach port, CA, which has affected everyone imported goods
from Asia. The decrease in sales from above accounts was partly offset by an
increase in sales from other accounts.
GROSS PROFIT
Gross profit increase to $9,953,669 from $6,324,456 a increase of $3,629,213 or
57% for the nine months ended December 31, 2004 as compared to the same period
ended in prior year. As a percentage of the consolidated revenues, the gross
profit increased to 26.9% from 9.0% for the nine months ended December 31, 2004
as compared to the same period in prior year. The reasons for increase of gross
profit as a percentage of the revenue are the same as three months ended
December 31, 2004.
OPERATING EXPENSES
Total operating expenses decreased to $8,870,481 from $17,342,977 a decrease of
$ 8,472,496 or 49% for the nine months ended December 31, 2004 as compared to
the same period in prior year. As percentage of the net revenues, the operating
expenses decreased to 24.0% from 24.7%. The decrease in the operating expenses
as percentage is primarily due to the reduction of expenses in all categories,
which partly offset by the decreases of revenues. In absolute term, the
controllable expenses, which include compensation and the selling, general and
administration expenses have been reduced to $5,603,439 from $11,425,134 a
decrease of $5,821,695 or 51%. The reduction of the controllable expenses was
attributed to:
1) Salary expenses decreased from $3,552,718 to $2,141,337 a decrease of
$1,411,381 or 40% due to the corporate restructuring. Our total number of
employee has been reduced by 42% since April 1, 2003.
2) Decrease in professional fees of $840k, consultant fees of $400k, loan
origination costs of $200k, rent expense $500K, insurance $110K, repair
expenses $300K plus decreases of various other expenses.
Management anticipates that the controllable operating expense will continue to
be at approximately the same level or lower levels as the quarter ended December
31, 2004 for the remaining period of the fiscal year.
OTHER INCOME/EXPENSES
Net other expenses increased to $1,387,955 from $1,245,423 a increase of
$142,532 or 11%) for the nine months ended December 31, 2004 as compared to the
same period ended in prior year. The increase is primarily due to amortization
of discount for the convertible debentures, which started on September 8, 2003.
The increase was partly offset by the termination of our credit facility with
our previous bank and write off old credit balance due to customers from
accounts receivable, which were not deemed to be applicable to customers'
current balances.
INCOME TAXES
Singing Machine has not recorded a tax benefit for the current period's losses
because its realizability is unlikely.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, Singing Machine had cash on hand of $1,342,175 in addition
to $869,955 of restricted cash and no bank overdrafts compared to cash on hand
of $356,342 and restricted cash of $874,283 and a bank overdraft of $62,282 at
March 31, 2004. The increase of cash on hand was primarily due to increases in
cash provided by the operating activities and financing activities, partially
offset by decreases in cash used in investment activities. Working capital
increased to $1,214,306 at December 31, 2004 as compared to ($1,382,939) at
March 31, 2004. The increase of working capital was primarily due to
reclassifying convertible debentures to long term liability after debenture
holders waived the condition of violation of the agreement.
Cash flows provided by operating activities increased to $1.2 million from
($4.9) million for the nine months ended December 31, 2004 as compared to the
same period in prior year. The significant changes were a result of better
inventory planning and selling off the overstocked inventory. Cash provided by
operating activities was primarily attributed to decrease in inventory, receipt
of the federal tax refund and insurance payment, partially offset by decrease of
accounts payable, accrued expenses and customer credit on account.
o Accounts payable decrease was a result of managements commitment to reduce
over due accounts payable invoices with our major supplier in China;
o Accrued expenses decrease was a result of the class action settlement in
the amount of $1.1 million, of which $800,000 was paid by our insurance
company and $240,000 was settled by 400,000 shares of common stock. We
also paid approximate $200,000 for the music royalties;
14
o Customer credit on account decrease was due to the Company paying off some
of the customer credit balance or applying the credit balances to new
customer orders.
Cash used in investing activities for the nine months ended December 31, 2004
was $0.7 million. Cash used in investing activities resulted from the purchase
of tooling and molds for production of new karaoke machines for this fiscal
year.
Cash flows provided by financing activities were $515,712 for the nine months
ended December 31, 2004. This cash inflow was primarily advances from Crestmark
Bank pursuant to the new factoring financial agreement.
As of February 7, 2005, we have paid off the loan from Crestmark Bank. The
Company could borrow up to the lesser of the $2.5 million or 70% of the eligible
accounts receivable. Per the agreement we are allowed to only factor the sales
originated from the warehouses in the United States. The factor company
determines the eligible receivable based on their own credit standard, and the
accounts' aging. As of February 7, 2005, the funds available to borrow from
Crestmark bank are approximately $525,000.
Our Hong Kong subsidiary, International SMC, has credit facilities at HSBC and
Fortis Bank. The primary purpose of these facilities is to provide International
SMC with access to letters of credit so that it can purchase inventory for
direct shipment of goods into the United States and international markets. ISMC
also depends on these facilities to negotiate the letter of credit from the
customer. These facilities are secured by a corporate guarantee from the U.S.
parent company and restricted cash on deposit with the lenders. International
SMC are required to maintain tangible net worth of not less than $2 million. The
maximum credit under the facilities is $1.5 million as of December 31, 2004. The
loan balance at December 31, 2004 and March 31, 2004 was $0 and $62,282,
respectively. The interest rate is approximately 5% per annum. As of December
31, 2004, the availability under these facilities was $1.5 million.
As of December 31, 2004, our unrestricted cash on hand was $1,342,175. Our
average monthly fixed operating costs are approximately $550,000, which includes
the compensation and the selling, general & administration expenses. We expect
that we will need approximately $1.65 million for working capital during the
next three-month period.
During the three-month period between January and March 2005, we plan on
financing our working capital needs from
o Collecting our existing accounts receivable;
o Sales of existing inventory;
o Borrowing from our factoring agreement.
Our sources of cash for working capital in the long term, 12 months and beyond,
are the same as our sources during the short term. If we need additional
financing, we intend to approach other financing companies for financing. If we
need to obtain additional financing and fail to do so, it may have a material
adverse effect on our ability to meet our financial obligations and to continue
our operations.
Our commitments for debt and other contractual arrangements are summarized as
follows as of December 31, 2004:
----------------------------------------------------------------------------
Total Less than 1 year 1 - 3 years 3 - 5 years Over 5 years
--------------------------------------------------------------------------------------------
Merchandise License Guarantee $ 50,000 $ 50,000 $ - $ - $ -
Property Leases 1,499,292 759,492 739,800 - -
Equipment Leases 31,400 17,174 14,226 - -
Subordinated Debt - Related Party 600,000 600,000 - - -
Convertible Debentures 4,000,000 - 4,000,000 - -
Interest payments 434,250 374,250 60,000 - -
--------------------------------------------------------------------------------------------
Total $ 6,614,942 $ 1,800,916 $ 4,814,026 $ - $ -
============================================================================================
15
INVENTORY SELL THROUGH
We monitor the inventory levels and sell through activity of our major customers
to properly accrue our sales returns and maintain the appropriate level of
inventory. As of January 31, 2005, we were aware of two customers who might
return approximately $1.1 million in inventory, which has been accrued for as a
reduction of sales for the period ended December 31, 2004.
SEASONAL AND QUARTERLY RESULTS
Historically, our operations have been seasonal, with the highest net sales
occurring in our fiscal 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. Sales in our
fiscal second and third quarter, combined, accounted for approximately 86% of
net sales in fiscal 2004 and 2003. On the contrary, the higher level of returns
occurred in first and fourth quarter since the customers usually returned the
defective or overstock inventory after holiday season, which is our fiscal 3rd
quarter. Approximate 81% and 84% of the total returns were received in the first
and fourth quarter combined in fiscal 2003 and 2004.
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.
INFLATION
Inflation has not had a significant impact on Singing Machine's operations.
Singing Machine has historically passed any price increases on to its customers
since prices charged by Singing Machine are generally not fixed by long- term
contracts.
CRITICAL ACCOUNTING POLICIES
For the nine months period ended December 31, 2004, there were no significant
changes to our accounting polices from those reported in our Annual Report on
Form 10-K for the fiscal year ended March 31, 2004.
FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
For the nine months period ended December 31, 2004, there were no significant
changes to risk factors from those reported in our Annual Report on Form 10-K
for the fiscal year ended March 31, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial position,
results of operations or cash flows due to adverse changes in financial and
commodity market prices and rates. We are exposed to market risk in the areas of
changes in United States and international borrowing rates and changes in
foreign currency exchange rates. In addition, we are exposed to market risk in
certain geographic areas that have experienced or remain vulnerable to an
economic downturn, such as China. We purchase substantially all of our inventory
from companies in China, and, therefore, we are subject to the risk that such
suppliers will be unable to provide inventory at competitive prices. While we
believe that, if such an event were to occur we would be able to find
alternative sources of inventory at competitive prices, we cannot assure you
that we would be able to do so. These exposures are directly related to our
normal operating and funding activities. Historically and as of December 31,
2004, we have not used derivative instruments or engaged in hedging activities
to minimize market risk.
FOREIGN CURRENCY RISK:
We have a wholly owned subsidiary in Hong Kong. Sales by these operations made
on a FOB China or Hong Kong basis are dominated in U.S. dollars. However,
purchases of inventory and Hong Kong operating expenses are typically
denominated in Hong Kong dollars, thereby creating exposure to changes in
exchange rates. Changes in the Hong Kong dollar/U.S. dollar exchange rates may
positively or negatively affect our gross margins, operating income and retained
earnings. We do not believe that near-term changes in the exchange rates, if
any, will result in a material effect on our future earnings, fair values or
cash flows, and therefore, we have chosen not to enter into foreign currency
hedging transactions. We cannot assure you that this approach will be
successful, especially in the event of a significant and sudden change in the
value of the Hong Kong dollar.
ITEM 4. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this quarterly report, management
concluded its evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. As of the end of the period, our
Chief Executive Officer and our Chief Financial Officer concluded that we
maintain disclosure controls and procedures that are effective in providing
reasonable assurance that information required to be disclosed in our reports
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to the Company's
management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
(b) During the evaluation referred to in Item 4(a) above, we have identified no
change in our internal control over financial reporting that occurred during our
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
16
(b) Not applicable.
(c)) Not applicable
(d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
We held our Annual Meeting of stockholders on Monday, November 29,
2004 at 9:30 a.m. at the Marriott Town Center Hotel. Our shareholders approved
the election of Bernard Appel, Josef Bauer, Yi Ping Chan and Harvey Judkowitz as
directors to serve until the next Annual Meeting and until their successors
shall be elected and qualified and ratifed the appointment of Berkovits, Lago, &
Company LLP as our independent certified public accountants for the fiscal year
ending March 31, 2005.
ITEM 5. OTHER INFORMATION
The Company has terminated the license agreement with Care Bear on December 31,
2004. The Company has met the minimum payment requirement during the licensing
period. The Company has expended the prepaid royalty remaining balance in the
quarter ended December 31, 2004.
The Company has terminated the license agreement with MTV Network on December
31, 2004. The Company has met the minimum payment requirement during the
licensing period. The Company has expended the prepaid royalty remaining balance
in the quarter ended December 31, 2004. The Company has three months to sell off
MTV licensed inventory.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act
32.1 Certifying Statement of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act 32.2 Certifying Statement of
the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the quarterly
period ended December 31, 2004:
Current report on Form 8-K, dated October 19, 2004, furnishing the information
related to change of the independent certified public accountant.
Current report on Form 8-K, dated October 28, 2004, furnishing the information
related to resignation of the director.
Current report on Form 8-K/A, dated October 29, 2004, furnishing the revised
information related to resignation of the director.
Current report on Form 8-K, dated December 6, 2004, furnishing the information
related to election of new director.
Current report on Form 8-K/A, dated December 6, 2004, furnishing the revised
information related to change of the independent certified public accountant.
Current report on Form 8-K/A, dated December 6, 2004, furnishing the revised
information related to change of the independent certified public accountant.
17
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, 2005 By: /s/ YI PING CHAN
--------------------------------------------
Interim Chief Executive Officer and
Chief Operating Officer
Dated: February 14, 2005 By: /s/ JEFFREY S. BAROCAS
--------------------------------------------
Jeffrey S. Barocas
Chief Financial Officer (Principal Financial
Officer)
18