-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DmZAkc84i0fWHjn5+9UaAbfpdzZ64PsHC3LnSx/DcxRmFL7XR/MXGikEePAJ43Gy 9a5ncxJNAzySsduOal2rxw== 0000943440-98-000051.txt : 19980714 0000943440-98-000051.hdr.sgml : 19980714 ACCESSION NUMBER: 0000943440-98-000051 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980710 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SINGING MACHINE CO INC CENTRAL INDEX KEY: 0000923601 STANDARD INDUSTRIAL CLASSIFICATION: PHONOGRAPH RECORDS & PRERECORDED AUDIO TAPES & DISKS [3652] IRS NUMBER: 953795478 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-24968 FILM NUMBER: 98663966 BUSINESS ADDRESS: STREET 1: 3101 N W 25TH AVENUE CITY: POMPANO STATE: FL ZIP: 33069 BUSINESS PHONE: 9549688006 MAIL ADDRESS: STREET 1: 3101 N W 25TH AVENUE CITY: POMPANO BEACH STATE: FL ZIP: 33069 10QSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1997 0 - 24968 Commission File Number THE SINGING MACHINE COMPANY, INC. (Exact name of registrant as specified in its charter) Delaware 95-3795478 (State of Incorporation ) (IRS Employer I.D. No.) 3101 N.W. 25th Avenue, Pompano Beach, FL 33069 (Address of principal executive offices ) (954) 968-8006 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required 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 No x . APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicated by check mark 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 No x . APPLICABLE ONLY TO CORPORATE ISSUERS There were 2,883,582 shares of Common Stock, $.01 par value, issued and outstanding at December 31, 1997. THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - December 31, 1997 (Unaudited) and March 31, 1996. Consolidated Statement of Operations - Three months ended December 31, 1997 and 1996 (Unaudited). Consolidated Statement of Shareholders' Equity - December 31, 1993 through December 31, 1997. Consolidated Statement of Cash Flows - Nine months ended December 31, 1997 and 1996 (Unaudited). Notes to Consolidated Financial Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. PART II. OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security-Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY PART I - FINANCIAL INFORMATION Item I. Financial Statements THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS December 31, March 31, 1997 1997 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 33,599 $ 10,222 Trade accounts receivable - net of $80,000 allowance for doubtful accounts 546,632 309,480 Accounts receivable - related parties 24,924 31,178 Inventories - net 480,948 1,170,017 Prepaid expenses and other assets 47,754 52,834 TOTAL CURRENT ASSETS 1,133,857 1,573,731 PROPERTY & EQUIPMENT - net of accumulated depreciation of $428,462 77,322 178,030 INTANGIBLE ASSETS: Investments in song library net of accumulated amortization Of $364,959 57,713 91,082 Total intangible assets 57,713 91,082 OTHER ASSETS 7,757 - TOTAL ASSETS $1,276,649 $1,842,843
See accompanying notes to financial statements. THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED CONDENSED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31, 1997 1997 (Unaudited) CURRENT LIABILITIES Trade accounts payable $ 620,542 $ 1,097,487 Pre-petition Creditors 4,418,744 4,418,744 TOTAL CURRENT LIABILITIES 5,039,286 5,516,231 COMMISSIONS & CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value - 10,000,000 shares authorized, 2,883,582 issued and outstanding at December 31, 1997 and March 31, 1997 28,836 28,836 Additional paid in capital 5,844,448 5,844,448 Accumulated deficit (9,635,921) (9,546,672) Total stockholders' equity (3,762,637) 3,673,388 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,276,649 $ 1,842,843
See accompany notes to financial statements. THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended December 31, December 31, 1997 1996 1997 1996 (Unaudited) (Unaudited) REVENUES: Equipment sales, net $3,257,985 $ 3,990,887 $ 5,264,197 $ 9,425,247 Music sales, net 301,983 677,733 654,815 1,398,440 Commission income - related party 1,389 12,947 5,832 82,111 Other 35,010 5,802 74,894 71,974 3,596,367 4,687,369 5,999,738 10,977,772 COSTS AND EXPENSES: Cost of equipment sales 2,722,679 3,167,527 4,479,896 7,925,747 Cost of music sales 84,338 423,080 190,188 959,323 Other operating expenses 99,470 236,255 281,377 490,604 Selling general and administrative expenses 366,139 659,670 911,166 1,610,566 Depreciation and amortization 46,675 67,319 140,025 204,849 3,319,301 4,553,851 6,002,652 11,191,089 OPERATING INCOME (LOSS) 277,066 133,518 (2,914) (213,318) OTHER INCOME (EXPENSES): Interest income 496 704 1,621 2,146 Interest expense (700) (23,532) (4,915) (100,242) Settlement costs - (247,938) - (247,938) Factor fees (37,109) (65,517) (83,041) (131,425) (37,313) (336,283) (86,335) (477,459) INCOME (LOSS) BEFORE TAXES AND EXTRAORDINARY ITEM 239,753 (202,765) (89,249) (690,777)
THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended December 31, December 31, 1997 1996 1997 1996 (Unaudited) (Unaudited) (Unaudited) (Unaudited) EXTRAORDINARY ITEM, NET OF INCOME TAXES: Gain from debt extinguishment - 1,156 - 72,441 INCOME (LOSS) BEFORE TAXES 239,753 (201,609) (89,249) (618,336) NET INCOME (LOSS) $ 239,753 $ (201,609) $ (89,249) $ (618,336) NET INCOME (LOSS) PER SHARE $ .08 $ (.07) $ (.03) $ (.22) WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 2,883,582 2,811,582 2,883,582 2,811,582
See accompanying notes to financial statements. THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY) FROM MARCH 31, 1995 THROUGH December 31, 1997
Common Stock Additional $.01 Par Value Paid-In Accumulated Shares Amount Capital (Deficit) Total Balance - March 31, 1995 2,539,332 $ 25,393 $5,509,314 $(1,820,564) $3,714,143 Exercise of Bridge Warrants 272,250 2,723 317,855 - 320,578 Net loss for the period - - - (3,850,980) (3,850,980) Balance - March 31, 1996 2,811,582 28,116 5,827,169 (5,671,544) 183,741 Issuance of Common Shares for debt settlement 72,000 720 17,279 - 17,999 Net loss for the period - - - (3,875,128) (3,875,128) Balance - March 31, 1997 2,883,582 28,836 5,844,448 (9,546,672) (3,672,388) Balance - June 30, 1997 2,883,582 28,836 5,844,448 (9,875,674) (3,672,388) Balance - December 31, 1997 2,883,582 $ 28,836 $ 5,844,448 $(9,635,921) $(3,762,637)
See accompanying notes to financial statements. THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (Unaudited)
Three Months Ended Nine Months Ended December 31, December 31, 1997 1996 1997 1996 (Unaudited) (Unaudited) (Unaudited) (Unaudited) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 46,751 $ (179,120) $ 30,399 $ (82,134) CASH FLOWS FROM INVESTING ACTIVITIES: Property & equipment - 1,014 - (2,024) Additions to song library - - - (1) Receivable from related parties (495) (704) 6,254 (1,797) Other assets 53,040 (801) (2,677) (803) Net cash provided by (used in) investing activities 52,545 (491) 3,577 (4,625) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable - - - 492,732 Repayments of notes payable - (150,908) - (350,069) Repayment of long term debt - (6,270) - (17,084) Net cash provided by (used in) financing activities - (157,178) - 125,579 INCREASE (DECREASE) IN CASH (5,794) (336,789) 33,976 38,821 CASH - BEGINNING OF PERIOD 39,393 375,723 (377) 113 CASH - END OF PERIOD $ 33,599 $ 375,723 $ 33,599 $ 38,934
See accompanying notes to financial statements. NOTE 1 - CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The accompanying consolidated condensed financial statements of the Company have been prepared in accordance with the instructions to Form 10-QSB and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. It is suggested that these consolidated condensed financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's audited financial statements on Form 10-KSB for the fiscal year ended March 31, 1997. The accounting policies followed for interim financial reporting are the same as those disclosed in Note 1 of the Notes to Financial Statements included in the Company's audited financial statements for the fiscal year ended March 31, 1997 which are included in Form 10- KSB. In the opinion of management, all adjustments which are of a normal recurring nature and considered necessary to present fairly the financial positions, results of operations, and cash flows for all periods presented have been made. The results of operations for the three months and nine months ended December 31, 1997 are not necessarily indicative of the results that may be expected for the entire fiscal year ending March 31, 1998. The accompanying consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant inter company balances and transactions have been eliminated. Assets and liabilities of the foreign subsidiary are translated at the rate of exchange in effect at the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustment is not material. NOTE 2 - REORGANIZATION On April 11, 1997, the Company filed a voluntary bankruptcy petition for relief pursuant to 11 U.S.C. Chapter 11 of the United States Bankruptcy Act. Under Chapter 11, creditors are prohibited from taking actions against the Company without court approval while the Debtor operates the Company and formulates a Plan of Reorganization. NOTE 3 - MAJOR CUSTOMERS During the three months ended December 31, 1997 and 1996, 84.7% and 66.8%, respectively, of the Company's total revenue were derived from net sales to its five largest customers. Sales derived from customers who individually purchased greater than 10% of total revenues were as follows: NINE MONTHS ENDED NINE MONTHS ENDED December 31, 1997 December 31, 1996 J.C. Penney 18.8% 11.6% Target 34.1% 41.0% Best Buy 19.2$ - NOTE 4 - SUBSEQUENT EVENTS Since the Chapter 11 filing, the Company has made considerable positive advancements. The Company has reduced the size of its corporate offices and warehousing operations with an emphasis on reduction of inventory. Total combined operating space was reduced from 29,000 to 10,000 square feet, thereby reducing rental facility expenses by $12,000 per month, and the Company's staff has been reduced to the minimum needed to continue to operate efficiently. The Company has also arranged with Asiatech 52 Manufacturing Ltd. ("A-Tech") in Hong Kong for 90 day document of acceptance ("DA") financing up to $200,000. With regard to the retention of the Company's customer base, the major accounts, Target, J.C. Penney, Fingerhut, and FAO Schwarz have continued to purchase products from the Company. In addition, the Company began a new customer relationship with Best Buy, which had shipments exceeding $1,000,000 during the fiscal 1998 selling season. The Company filed motion with the Bankruptcy Court, which was approved, regarding the treatment of the Harry Fox Agency in the plan. The Harry Fox Agency, Inc. ("HFA") is the Company's principal copyright royalty creditor to NOTE 4 - SUBSEQUENT EVENTS (Cont'd) whom the company owes approximately $820,000, including royalties on the Company's current inventory. These royalties were governed by the terms of a prior settlement agreement and collateralized by the Company's master song recordings. In the agreement, HFA agreed to amend its proof of claim and to reflect this $820,000 as general unsecured debt and further, to elect to accept issuance of shares of the recognized Company on the following basis: for each $2.00 of debt, HFA will receive one share of common stock or approximately 410,000 shares. On February 9, 1998, the Bankruptcy Court granted the Company's motion to approve a settlement agreement entered into on December 24,1997, between the Company and Eugene Settler ("Settler"), a shareholder as well as former officer and director of the Company. Prior to this settlement agreement, there was pending in the Bankruptcy Court an adversary proceeding brought by the Company against Settler, for recovery of certain alleged preferential transfers arising from certain payments made to Settler as a result of legal proceedings brought by Settler against the Company for wrongful termination. The parties mediated the dispute and reached a settlement which resolves the adversary proceeding, certain alleged claims by Settler against the Company and others, and provides for an exchange of releases amongst all parties. Under the terms of agreement, Settler also resigned as a director of the Company and assigned all of his stock certificates and options to Colony Electronics. This settlement did not require the payment of any funds by the Company other than a portion of the mediation costs incurred. The Bankruptcy court approved the Plan of Reorganization on February 26, 1998. The significant elements of the plan include (i) additional estimated administrative costs of $116,000 for the company's bankruptcy counsel, (ii) the secured claim by Bankers Capital, the Company's factor, of $106,000 shall be paid according to the terms of its contract with the Company, which is current, (iii) general unsecured creditors whose claims are equal to or less than $300 shall receive a cash payment of 10% of the amount of their allowed claim, and (iv) general unsecured creditors whose claim exceed $300 were given the option of receiving a cash payment of 10% of the amount of their allowed claim or receiving one share of new common stock NOTE 4 - SUBSEQUENT EVENTS (Cont'd) in the reorganized company for each $2.00 of an allowed claim. Over 90% of the general unsecured creditors chose shares of stock in the reorganized company. This resulted in a significant transfer of the Company's debt to equity on the Company's post reorganization balance sheet. Any cash payments to unsecured creditors would be paid in two equal installments ten days after the Plan is confirmed and six months thereafter. Holders of existing common shares of the Company, equity interest holders, will have their interest diluted by ninety percent (90%) at confirmation under the Plan, so that for each ten shares of common stock owed they will receive one share of new common stock in the reorganized company. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The analysis of the Company's financial condition, liquidity, capital resources, and results of operations should be reviewed in conjunction with the accompanying financial statements, including the notes thereto. General The Singing Machine Company Inc., incorporated in Delaware in 1994, together with its wholly owned subsidiary, International (SMC) HK, Ltd. (hereafter referred to as the "Company"), engages in the production and distribution of karaoke audio software and electronic recording equipment. The Company's electronic recording and playback products are marketed under The Singing Machine or Memorex trademarks. The Company's audio software is marketed under the trademark Karaoke Kassette , Karaoke Kompact Disc and Karaoke Video kassette . The Company's products are sold throughout the United States, primarily through department stores, lifestyle merchants, mass merchandisers, direct mail catalogs and showrooms, music and record stores, national chains, specialty stores and warehouse clubs. The Company's karaoke machines and karaoke software are currently sold in such retail outlets as Target, Best Buy, J.C. Penney and Fingerhut. On October 27, 1995 the Company signed an exclusive five (5) year sub-distribution agreement with Memcorp, Inc. a Florida company holding rights to MEMOREX, a registered trademark name. Under the agreement the Company became the exclusive sub-distributor of karaoke hardware products under "Memorex" trademark. The Company has shown improvement in its financial results. For the first nine months of fiscal 1998, the Company lost approximately ($89,000) and for the quarter ended December 3, 1997, the Company posted net income of approximately $240,000, or $.08 per share, as compared to the quarter ended December 31, 1996, which showed a loss of approximately ($202,000) or ($.07) per share. The Company's working capital deficit as of December 31, 1997, was approximately $3.9 million. As a result of historical losses, a net working capital deficiency and lack of financing, the Company's auditors expressed substantial doubt about the Company's ability to continue as a going concern based on their audit of the Company's financial statements for the fiscal year ended March 31, 1997. See "Results of Operations", "Liquidity and Capital Resources" and "Going Concern", for the fiscal quarter ended December 31, 1997 for further information. Strategy Currently the Company is focusing on its audio equipment operations with the intention of increasing cash flow, improving operating efficiency, increasing internal growth and returning to profitability. The Company's intent is to obtain additional market share through an emphasis on the affordability, selection, and quality of its products. The Company is also focusing greater sales efforts on mass market retailers, such as Target, J.C. Penney and Best Buy, which the Company believes have greater potential for increased software sales. The Company has historically sold its software products predominately to chain music stores and music distributors and believes that potential in this market has decreased. In order to reduce expenses, management has limited the development of new products for both audio equipment and audio software. There can be no assurance that the Company will be able to successfully implement its strategy. RESULTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996 REVENUES Total revenues decreased by approximately $1,091,002 or 23% during the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997. The decrease in revenue is primarily a result of decreases in equipment and software sales. Revenues from equipment sales decreased 18% to approximately $3,258,000 for the third quarter of fiscal 1998 compared to $3,991,000 for the third quarter of fiscal 1997. The decrease in equipment sales was primarily a result of the reduction of the Company's existing inventory and the inability of the Company to obtain new financing to purchase new inventory in the Chapter 11 reorganization. Revenues from music sales declined by 55% to approximately $302,000 for the third quarter of fiscal 1998 compared to $678,000 for the third quarter of fiscal 1997. Commissions and other income decreased by approximately $12,000 to $1,389 for the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997. The decrease reflects lower commission income from a related party, primarily due to International's increased business operations in Hong Kong, reflecting lower licensing fees. GROSS PROFIT Gross profit from equipment and music sales decreased approximately $325,000 to $753,000 or 21.2% for the third quarter of fiscal 1998, compared to $1,078,000 or 23.1% for the third quarter of fiscal 1997. The decrease in gross profit was primarily a result of the reduction of the Company's existing inventory and the inability of the Company to obtain new financing to purchase new inventory in the Chapter 11 reorganization. OTHER OPERATING EXPENSES Other operating expenses decreased approximately $137,000, or 58% during the third quarter of fiscal 1998 compared to the same period a year ago, The decrease is primarily due to a reduction in staff and moving to a small facility. SELLING, GENERAL ADMINISTRATIVE EXPENSES Selling, general & administrative expenses decreased approximately $294,000 or 44%, during the third quarter of fiscal 1998 compared to the first quarter of fiscal 1997. The decrease is primarily due to a reduction in staff and moving to a small facility and warehousing operations during the third quarter of fiscal 1998. Also during the third quarter of fiscal 1997, the Company incurred $89,100 for administration of the Company's subsidiary in Hong Kong. This cost was incurred in cost of sales during the first nine months of fiscal 1998. DEPRECIATION AND AMORTIZATION EXPENSES Depreciation and amortization expense decreased approximately $21,000 or 31% to $46,700 for the third quarter of fiscal 1998 compared to the $67,000 recorded last year. The decrease is primarily the result of the write off of the costs of trademarks no longer used, cost in excess of net assets (goodwill), and the write-down of the song library due to the bankruptcy reorganization. OTHER EXPENSES Net interest expense decreased approximately $23,000 or 97% during the first quarter of fiscal 1998 compared to the same period year ago. The decrease is primarily the result of a stay of interest during the first quarter of 1998 due to the Chapter 11 bankruptcy filing. Loss on sales of accounts receivable was 1.0% and 1.4% of total revenues during the third quarter of fiscal 1998 and 1997 respectively. The loss decreased $28,000 to $37,100, compared to the $65,500 recorded last year primarily due to a lower amount of receivables factored during the third quarter of fiscal 1998. SEASONALITY AND QUARTERLY RESULTS Historically, the Company's operations have been seasonal, with the highest net sales occurring in the second and third quarters (reflecting increased orders for equipment and music merchandise during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year. The company's results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter- to-quarter basis. FINANCIAL CONDITION At December 31, 1997, the Company had current assets of $1,133,857, compared to $1,573,731 at March 31, 1997; total assets of $1,276,649 as compared to $1,842,843 at March 31, 1997; current liabilities of $5,599,152 as compared to $5,516,231 at March 31, 1997, and a current net worth of $1,276,649 as compared to $1,842,843 at March 31, 1997. (See "Financial Statements"). The decrease in total assets and net worth are principally due to the net loss incurred for the period. LIQUIDITY AND CAPITAL RESOURCES There was a working capital deficiency of approximately $3.9 million, as of December 31, 1997 compared to a working capital deficit of $2.8 million a year ago. The Company continues to suffer from a lack of liquidity and capital resources which have affected its ability to conduct business in a profitable manner. The Company has made a considerable effort to sell to its customers FOB Hong Kong using letter of credit which reduces Its reliance upon funding for inventory. The Company is a party to a factoring agreement, dated September 5, 1997, with Bankers Capital ("Bankers"), a division of Bankers Leasing Associations, Inc., pursuant to which Bankers purchases certain of the Company's accounts receivable. Under the agreement, Bankers purchases certain selected accounts receivable from the Company and advances 50% of the face amount of those receivables to the Company. Bankers retains discretion to determine which of the Company's accounts receivable it will purchase. The agreement with Bankers expires on June 5, 1998. In addition to Bankers Capital the Company has contracted effective February, 1998 with Asia-Tech Manufacturing to act as the Company's agent in Hong Kong. For a commission of 5% of the manufacturing cost of all FOB Hong Kong orders. Asia-Tech will coordinate and expedite orders and shipments for the Company as well as expedite the negotiation of letters of credit on behalf of the Company. As part of the agency agreement, Asia-Tech will provide a $200,000 line of credit for the purchase of inventory. Although the company is currently engaged in negotiations with regard to securing third-party financing to replace or augment the financing in place, there can be no assurance that such financing will be available on terms satisfactory to the Company or at all. GOING CONCERN The report of the Company's independent auditors on its 1997 financial statements express substantial doubt about the company's ability to continue as a going concern. The independent auditors attributed this substantial doubt to substantial net operating losses in the fiscal year ended March 31, 1997 and an accumulated deficit of approximately $10.0 million. The auditors have further noted that the Company experienced a substantial decline in sales. The Company is currently dependent on the financing provided by Asia-Tech & Bankers Capital to allow it to make inventory purchases in advance of the peak holiday selling season. The Company does not have a dedicated line of credit in place to finance its seasonal needs for inventory purchases. The discontinuance of financing currently in place could result in the Company being forced to curtail its operations. The financial statements do not include adjustments relating to the recoverability and classification of the recorded carrying value of assets or the amounts or classifications of other liabilities that might be necessary should the Company be unable to successfully negotiate additional inventory financing and continue as a going concern. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) There are no exhibits to this report. (b) There were no reports on Form 8- K filed during the quarter. THE SINGING MACHINE COMPANY, INC. AND SUBSIDIARY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Singing Machine Company, Inc. By:/s/Edward Steele Edward Steele Chief Financial Officer EX-27 2
5 This schedule contains summary financial information extracted from Balance Sheet, Statement of Operations, Statements of Cash Flows and Notes thereto incorporated in Part I, Item 1 of this Form 10-QSB and is qualified in its entirety by reference to such financial statements. 9-MOS MAR-31-1998 DEC-31-1997 33,599 0 571,556 80,000 480,948 1,133,857 77,322 428,462 1,276,649 5,309,286 0 0 0 28,836 (3,733,801) 1,507,832 3,559,968 3,596,367 2,807,017 3,319,301 0 0 (700) 239,753 0 239,753 0 0 0 239,753 .08 0
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