SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-119698
COSMO COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Florida 59-2268005
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
16501 N.W. 16th Court, Miami, Florida 33169
(Address of principal executive offices)
Registrant's telephone number, including area code: (305) 621-4227
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.05 par value
(Title of Class)
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 if disclosure of delinquent filers pursuant
to item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this form 10-K. Yes __ No X
As of March 22, 1996, the market value of the registrant's Common Stock held
by nonaffiliates of the registrant was approximately $283,000 based on
the closing bid price of $ 0.50 for the Common Stock as reported on
the OTC Bulletin Board on such date.
Documents Incorporated by Reference
None.
PART I
ITEM 1. BUSINESS
General
During 1995 the Registrant, Cosmo Communications Corporation (the "Company"),
imported, marketed, and distributed in the United States, Canada and Latin
America, consumer electronic products, including digital alarm clocks, quartz
alarm clocks, quartz wall clocks, clock radios, and combination products such
as clock radio telephones. The Company also imported, marketed and
distributed into Latin America a full line of audio products, including
personal cassette players, portable stereos and music centers with and without
compact disc players.
The Company's products are marketed principally under its own label to mass
merchandisers, drug store chains, other specialty chain stores and other
high-volume retailers. The Company's products are generally manufactured
in accordance with its specifications by subcontractors in a number of
countries in the Far East.
The Company's principal executive offices are located at 16501 N.W. 16th
Court, Miami, Florida 33169 and its telephone number at such location
is (305) 621-4227.
On October 31, 1994, the Company effected a 1 for 5 reverse stock split.
Accordingly, certain related information herein has been retroactively
effected, as if the reverse stock split had occurred in the first period
presented.
Financial and Management's Plans
During 1995, the Company experienced a difficult retail climate and increased
competition. In addition, several large retailers in the United States changed
their corporate policies to reduce their inventory levels. As a result of
these factors, the Company's gross margins decreased, sales projected for 1995
were not met and an operating loss from operations was incurred. Additionally,
the Company's inventory levels increased from 1994 to 1995 which also resulted
in an increase in interest expense. During 1996, management has begun
implementing a plan to eliminate its losses. This plan includes an
intensification of the Company's sales efforts through the addition of new
sales representatives and the introduction of new products within existing
product lines. The Company will also pursue new product categories through
increased sourcing activities in the Far East. It is anticipated that the
introduction of new product categories will assist the Company in capturing
new markets within the retail arena. Management believes that through its
existing credit facilities and the continued commitment by the Company's
principal stockholder to provide additional financing at his discretion, the
Company will be able to meet it's working capital requirements during 1996.
The Company's ability to successfully implement its plans to eliminate its
losses is dependent upon a number of factors beyond its control. These
factors include the overall retail climate and competition. There can be no
assurance that the Company's sales, gross margins, operating results or
financial condition will improve in fiscal year 1996. (See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations.)
Products
Time Division - The Company has a wide range of clocks including electronic
digital alarm clocks, quartz alarm clocks and quartz wall clocks. The
Company introduced its first electronic digital clock in 1977 and currently
offers approximately 40 models which retail at various prices ranging from
approximately $5 to $20. The Company's electronic digital clocks contain
micro-processors, printed circuit boards, light emitting diodes and
ceramic buzzers. In 1995, these products were manufactured by subcontractors
in Hong Kong and the People's Republic of China who sometimes use components
and materials supplied and assembling methods developed by the Company. The
Company offered a total of approximately 75 models of quartz wall clocks in
1995, retailing from approximately $5 to $40. The Company's wall clocks are
manufactured by subcontractors in Hong Kong, Taiwan, and the People's
Republic of China. The Company also sold approximately 20 models of battery
operated quartz alarm clocks during 1995, retailing from approximately $5 to
$20. The Company's battery operated quartz alarm clocks are manufactured by
subcontractors in Hong Kong and the People's Republic of China.
Sales of the entire Time Division accounted for approximately 59.2% of the
Company's sales in 1995, compared to approximately 66.5% and 75.2% in 1994
and 1993, respectively.
Electronic Division - The Company introduced its first electronic digital
clock radio in 1982 and currently offers approximately 13 models by the end
of 1995, with retail prices ranging from approximately $10 to $30. The
Company's electronic digital clock radios contain audio components as well
as components similar to those in its electronic digital clocks. In 1995,
most of the units were manufactured by subcontractors in Hong Kong and the
People's Republic of China who sometimes use components and materials
supplied by the Company. In 1993, the Company began to market a line of
audio products in the Latin American market. Sales of the entire Electronics
Division accounted for approximately 40.8% of the Company's sales in 1995,
compared to approximately 33.5% and 24.8% of sales in 1994 and 1993,
respectively.
Marketing - The Company's marketing strategy is targeted at high volume
retailers with broad distribution networks such as mass merchandisers, drug
and other specialty chain stores, and other retailers. Because of economic
conditions, a number of past customers of the Company have filed for
bankruptcy, merged with other retailers, reorganized operations or have
ceased to operate. During 1995, sales to retailers became more difficult
as a result of economic conditions and fierce competition from other
manufacturers and importers. The Company is attempting to overcome these
difficulties in 1996. The following table illustrates the Company's primary
marketing channels and representative customers in 1995.
Mass Merchandiser Drug Store Chains Specialty Chains
Wal-Mart (U.S. & Canada) American Drug AAFES
Target Genovese Canadian Tire
Fedco Fay's Costco
Kohl's Osco Drug Navy Exchange
Roses Stores Savon Drug
Meijer's
Dollar General
Kmart
Fred Meyer
Ames Dept. Stores
L. Luria & Sons
The Company believes that its sales to high volume retailers depends upon
its ability to deliver a large volume of attractive and reliable items at
prices generally at or below those of its competitors.
Substantially all of the Company's domestic sales are generated by either
the Company's full-time sales staff or its approximately 20 independent
sales representatives. Approximately 60% of the Company's sales in 1995 were
to customers within the United States, with the remainder to customers in
Canada, Latin America and Europe. See Note 9 of "Notes to Consolidated
Financial Statements" for financial information about foreign and domestic
operations.
Sales to the Company's four largest customers accounted for approximately
49.1% of sales for 1995, with Wal-Mart (US & Canada) accounting for
approximately 34% of sales.
The Company's products are generally sold with a one year limited warranty on
labor and parts.
Manufacturing
Most of the Company's products are manufactured by subcontractors.
Substantially all of the subcontractors assemble products for the Company in
accordance with the Company's specifications. Subcontractors in Hong Kong,
the Peoples Republic of China and Taiwan assemble clocks, clock-radios and
audio products. Several of the subcontractors dedicate their entire
production capacity to the Company's orders. The Company performs quality
control inspections on the premises of its facilities and its subcontractors'
facilities, and also inspects its various products upon their arrival in the
United States and Canada.
The Company uses microprocessors from Texas Instruments, Sanyo Semiconductor,
Hitachi, Ltd., Motorola Inc. and Phillips Hong Kong, Ltd. Various
subcontractors in the Far East produce printed circuit boards, light emitting
diodes, audio components, receivers, transmitters and internal antennas in
accordance with specifications of the Company.
All of the components and raw materials used by the Company are available
from several sources of supply and the Company does not anticipate that the
loss of any single supplier would have a material adverse effect on its
business, operations or financial condition.
Product Development
During 1995, the Company marketed several new electronic digital alarm clocks
(LED and LCD), quartz alarm clocks, quartz wall clocks, clock radios and
audio products to be introduced in 1996. During the years ended December 31,
1995, 1994, and 1993, the Company spent approximately $225,000, in both 1995
and 1994 and $195,000 in 1993 for new product design, engineering, tooling
and testing.
Competition
The consumer products industry in which the Company operates is characterized
by intense price competition, ease of entry and changing patterns of consumer
demand. Sales volume and profitability of particular consumer products can
change significantly within a relatively short period. Accordingly, the
Company is highly dependent on the ability of its management to anticipate
and respond quickly to changes in trends for its products. In response to
such factors, the Company has been required to change its emphasis on its
products and product lines. The Company believes that important competitive
factors necessary to compete include price, quality and reliability of
products, attractive packaging, speed of delivery to customers and new or
additional product features. A well-recognized consumer brand name is also
an important competitive factor which the Company is not able to provide in
its product lines. The Company believes that its future success will depend
upon its ability to develop and manufacture reliable products which
incorporate developments in technology and satisfy consumer tastes with
respect to style and design and its ability to market such products at
competitive prices which compensate for the lack of strong consumer name
recognition.
The Company believes that, through its subcontractors, it is a significant
manufacturer of electronic digital clocks and competes with several companies,
including Westclox and Spartus Corporation. Major suppliers of electronic
digital clock radios include General Electric Company, Panasonic Industrial
Company, Sony Corporation, Sanyo Manufacturing Corporation and Emerson Radio
Corporation.
Foreign Operations
The Company has significant foreign operations. See Note 9 of "Notes to
Consolidated Financial Statements." The Company purchases finished products
from various suppliers in the Far East. The supply and cost of products and
components can be adversely affected by changes in foreign currency exchange
rates, increased import duties, loss of favorable tariff rates for products
produced in the countries in which the Company subcontracts the manufacture
of goods, imposition of import quotas, interruptions in sea or air
transportation and political or economic changes in countries from which
components or products are exported or into which they are imported. On
occasion, in order to meet unexpected levels of demand, the Company has
utilized more costly air shipping to fill orders promptly.
The Company will continue to subcontract a significant portion of its
manufacturing needs to subcontractors in the Peoples Republic of China,
Hong Kong and Taiwan. Any material change in the trade policies of the United
States or these countries might have an adverse effect on the Company's
operations.
Employees
On December 31, 1995, the Company had 46 full-time employees, including 29 in
the United States, 7 in Hong Kong and 10 in Canada. Of those employed in the
United States, 15 were engaged in manufacturing, distribution and service
operations and 14 were sales, administrative and executive personnel. Of the
Hong Kong employees, 4 were engaged in manufacturing, engineering,
distribution and service operations, and 3 were sales, administrative and
executive personnel. In Canada, 6 employees were engaged in manufacturing,
distribution and service operations and 4 were sales, administrative and
executive personnel.
Executive Officers
The following table sets forth certain information with respect to the
executive officers of the Company as of March 31, 1996:
Name Age Position
Amancio Victor Suarez 59 Chairman of the Board of Directors,
Chief Executive Officer and Chief
Financial Officer
Andrew I. Neckowitz 44 President, Chief Operating Officer and
Director
Robert L. Scott 59 Vice President of Sales and Marketing
Jose Bueno 41 Vice President, International Operations
Yu Wing Kin 44 Vice President, Administration, Far East
Mr. Suarez is a co-founder of the Company and served as its Chief Financial
Officer from its inception. On December 24, 1985, Mr. Suarez assumed the
position of Chief Executive Officer. Mr. Suarez is also involved in other
business ventures primarily in the real estate industry, which do not compete
with the Company.
Mr. Andrew I. Neckowitz joined the Company in January 20, 1991 as President,
Chief Operating Officer and a director. From 1977 to January 1990,
Mr. Neckowitz served in various capacities with Spartus Corporation,
a company engaged in the time and lighting business. Mr. Neckowitz's last
position with Spartus Corporation was as the Chief Operating Officer of
Spartus Lighting Division.
Mr. Scott joined the Company in October 1990 as Vice President of Sales and
Marketing. From July of 1989 until October of 1990, Mr. Scott served as the
national sales manager of Cheyenne Lamps, a corporation engaged in the
portable lighting business. From May of 1988 until June of 1989, Mr. Scott
served as Vice President of Sales for Robeson, a company engaged in the
kitchen appliance business. Prior to that time for more than eight years,
Mr.Scott served as Vice President of Sales of Spartus Corporation.
Mr. Bueno joined the Company in July 1988 as Vice President of International
Sales and Far East Operations. Mr. Bueno is responsible for marketing and
Far East international operations. Mr. Bueno is also responsible for sales
and marketing of all Cosmo products into the Latin American market. Before
joining the Company Mr. Bueno was employed by Johnson and Johnson as
Divisional Sales Manager, from 1985 through June 1988. Prior to that time,
Mr. Bueno served as Regional Sales Manager for Colgate Palmolive Company,
from 1983 through 1985.
Mr. Kin has served as Vice President of Administration for the Far East since
joining the Company in August 1978.
Mr. Neckowitz and Mr. Scott had employment agreements with the Company which
expired on December 31, 1995. See Item 11.
ITEM 2. PROPERTIES
The Company's executive offices and principal domestic manufacturing
warehouse facilities are located in a 48,000 square feet building at
16501 N.W. 16th Court, Miami, Florida. Both, the land and building are
owned by the Company subject to mortgage indebtedness with an aggregate
outstanding principal balance at December 31, 1995 of approximately $500,000.
In October 1989 a second mortgage on this property was given to Congress
Financial Corporation in the amount of $850,000.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental
to its business most of which is adequately covered by insurance and none
of which, in the opinion of management, is expected to have a material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1995, the Company did not submit any
matter to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock. During 1995, the Company's common stock
("Common Stock") was traded in the over-the-counter market under the
NASDAQ symbol "CSMO." There were approximately 469 record holders of the
Common Stock as of March 19, 1996. The following table sets forth the high
and low prices for the Common Stock as reported for the periods indicated.
These prices reflect interdealer prices, with-out retail mark-up, mark-down
or commission and may not necessarily represent actual transactions. On
March 5, 1996, the Common Stock was de-listed from the NASDAQ SmallCap
Market as a result of the Company's inability to meet the minimum $1.00
bid price or its alternative, as required for continued listing on the
NASDAQ SmallCap Market. On March 6, 1996, the Common Stock was listed on
the OTC Bulletin Board.
On October 31, 1994, the Company effected a 1 for 5 reverse stock split for
the purpose of maintaining the Company's compliance with Nasdaq listing
requirements. The prices below have been adjusted to reflect the reverse
stock split.
Fiscal Period High Low
1994 First Quarter ....... 6-9/16 3-1/8
Second Quarter ....... 6-7/8 2-1/2
Third Quarter ....... 3-3/4 1-7/8
Fourth Quarter ....... 2-3/16 1
1995 First Quarter ....... 1-3/4 1
Second Quarter ....... 1/1/2 7/8
Third Quarter ....... 1-1/4 3/4
Fourth Quarter ....... 1-3/16 1/2
Dividend Policy. It is the present policy of the Company's Board of Directors
to retain earnings. The Company has not in the past declared any dividends.
Any payment of cash dividends in the future will be dependent upon the
financial condition, capital requirements and earnings of the Company and
other factors which the Board of Directors may deem relevant. At the present
time, the financial condition of the Company and the credit facilities of the
Company with Congress Financial Corporation prevent the payment of dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following data should be read in conjunction with the Company's
Consolidated Financial Statements included elsewhere herein and the notes
thereto, and "Item 7 - Management'sDiscussion and Analysis of Financial
Condition and Results of Operations."
(In thousands, except share data)
December 31: 1995 1994 1993 1992 1991
Statement of Operations Data:
Sales $15,243 $15,772 $13,883 $ 9,538 $11,304
Cost of sales 12,044 11,611 10,211 7,479 8,584
Gross margin 3,199 4,161 3,672 2,059 2,720
Selling, general and
administrative expenses 3,589 3,497 3,047 3,134 4,041
(Loss) income from operations (390) 664 625 (1,075) (1,321)
Other expense, net (587) (426) (449) (463) (601)
Net (loss) income (977) 238 176 (1,538) (1,922)
Net (loss) per share :
Primary $ (0.37) $ .08 $ 0.11 $ (1.51) $ (1.90)
Fully diluted - - $ 0.06 - -
Weighted average shares
outstanding :
Primary 2,640 2,863 1,657 1,020 1,012
Fully Diluted - - 2,856 - -
Balance Sheet Data:
Working Capital $ (1,089) $ (414) $ (654) $ (747) $(1,462)
Total Assets 11,826 9,927 8,796 6,954 7,643
Long-term Debt 465 487 518 547 570
Stockholders' Equity 462 1,433 1,193 1,040 616
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain items in the Company's Consolidated Statements
of Operations are to sales and the percentage changes in those items
from period to period:
Income & Expense Items Period-to-Period Percentage
As a Percent of Sales Increase(Decreases)
Year Ended December 31, Year Ended December 31,
1994 1993
1995 1994 1993 to 1995 to 1994
Sales 100.0% 100.0% 100.0% (3.4) % 13.6%
Cost of Sales 79.0 73.6 73.5 3.7 13.7
Gross Margin 21.0 26.4 26.5 (23.1) 13.3
Selling, general and
administrative 23.5 22.2 22.0 2.9 14.7
(Loss) Income from
operations (2.5) 4.2 4.5 (158.7) 6.2
Other expense, net (3.9) (2.7) (3.2) 37.8 (5.1)
Net Income (Loss) (6.4) 1.5 1.3 (510.5) 35.2
1995 Compared to 1994: Sales decreased from 1994 to 1995 by approximately
$529,000, a decrease of 3.4%. The decrease in sales is attributed to a
difficult retail climate and increased competition experienced by the
Company in 1995. Gross margins as a percentage of sales also decreased from
26.4% in 1994 to 21% in 1995. This decrease is also attributed to increased
competition in the retail arena during 1995. Selling, general and
administrative expenses as a percentage of sales increased from 22.2% in
1994 to 23.5% in 1995. The increase is primarily attributed to minor overall
increases in general and administrative overhead expenses. Other expense, net
increased by 37.8% from 1994 to 1995. This increase is primarily attributed
to an increase in interest expense as a result of increased borrowings
during 1995. Borrowings in 1995 increased as a result of working capital
shortfalls (See "Liquidity and Capital Resources" section below).
As a result of the forgoing, net income (loss) decreased from net income
of $238,000 in 1994 to a net loss of ($977,000) in 1995. (See Item 1-
"Financial and Management's Plans" for additional comments on fiscal year
1995 and the Company's plans for fiscal year 1996).
1994 Compared to 1993: Sales increased by approximately $1.9 million or
13.6% from 1993 to 1994. The increase in sales can be attributed to an
increase in the Company's market share in the United States and Canada and
the Company's continued expansion into the Latin American market during 1994.
Gross margin as a percentage of sales was 26.4% in 1994 compared to 26.5% in
1993. Selling, general and administrative expenses as a percentage of sales
remained relatively consistent at 22.2% in 1994 as compared to 22.0% in 1993.
Net income increased by approximately $62,000 from $176,000 in 1993 to
$238,000 in 1994.
Liquidity and Capital Resources
Working capital was approximately ($1,089,000) at December 31, 1995, a
reduction of approximately $675,000 from December 31, 1994. The ratio of
current assets to current liabilities at December 31, 1995 was .90 to 1,
as compared to .95 to 1 at December 31, 1994. The Company met its working
capital requirements in 1995 primarily from the funding of credit facilities
and loans from the Company's principal shareholder.
The Company utilizes a revolving credit facility with Congress Financial
Corporation ("Congress") providing for borrowings up to $7,500,000, which
expires on December 31, 1996. Maximum borrowings are tied by formula to
eligible accounts receivable and inventories. Interest is charged on
outstanding borrowings at prime (8.75% at December 31, 1995) plus 2.5%.
This credit facility is secured by all assets of the Company, including a
second mortgage on the Company's headquarters in the United States. At
December 31, 1995 and 1994, borrowings outstanding under this credit facility
amounted to $3,752,000 and $3,617,000, respectively, and are classified as
current liabilities.
This credit facility with Congress contains certain restrictive covenants.
The most restrictive covenant relates to minimum net worth requirements,
which were not met by the Company as of December 31, 1995. However, the
lender has waived the minimum net worth requirements through December 31,
1996. The Company may not meet this covenant during 1996. Management
anticipates that this credit facility may be renegotiated in 1996.
The Company, during 1992, obtained an additional credit facility from a
financial institution in the amount of $1,200,000. This facility is
collateralized by $300,000 in interest-bearing deposits and interest is
charged on outstanding borrowings at prime plus 2.5%. At December 31,
1995 and 1994, outstanding borrowings under this line amounted to $1,062,000
and $840,000, respectively. As of December 31, 1995, there were no open
letters of credit under this line.
The Company has an additional line of credit facility from a financial
institution. The credit facility is secured by a secondary interest in all
assets of the Company. Interest was charged on outstanding borrowings at
prime plus 2%. At December 31, 1995 and 1994, borrowings outstanding under
this credit facility amounted to $1,131,000 and $357,000, respectively.
Subsequent to December 31, 1995, the Company agreed to payoff the remaining
balance amounting to $490,000, on a term basis, but no later than December 31,
1996. Unless this line is renegotiated, the Company cannot draw on this line
of credit.
The Company utilizes an overseas overdraft and trade financing credit
facility. Maximum borrowings under this facility are approximately $777,000
to cover bank overdrafts. Interest is charged on borrowings at the local
prime rate (approximately 7.35% at December 31, 1995) plus 1%. The
facility is secured by short-term bank deposits of approximately $612,000.
At December 31, 1995 and 1994, total borrowings under the facility amounted
to approximately $547,000 and $494,000, respectively.
Management believes that through its existing credit facilities and the
continued commitment by the Company's principal stockholder to provide
additional financing at his discretion (see Item 13), the Company will be
able to meet its working capital requirements during 1996.
The Company is subject to risk from exchange rate fluctuations. Based on the
Company's evaluation of anticipated changes in exchange rates, the Company may
from time to time purchase forward exchange contracts to hedge against these
risks. However, the Hong Kong dollar remains the functional currency of the
Company's Hong Kong subsidiaries, and the Company does not hedge against
risks of foreign currency transaction or translation loss.
Impact of Inflation
The effect of inflation on the Company's costs and operating expenses has
not been significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Company's Consolidated Financial Statements following page 14 of
this Annual Report on Form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has reported no disagreements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
For certain information regarding the executive officers of the Company,
see "Item 1 - Business - Executive Officers," above. The following table and
text presents certain information with respect to the directors of the
Company who were not also executive officers as of March 31, 1996.
Name Age Director Since
Cesar L. Alvarez 48 1987
Carlos Ortega 51 1992
Giraldo Leyva 49 1992
Mr. Alvarez became a director of the Company in August 1987. Mr. Alvarez has
been a principal shareholder and director of Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, P.A., a law firm in Miami, Florida since February
1983. Mr. Alvarez also serves on the Board of Directors of FDP Corp., Miami,
Florida and CompuTrac, Inc., Dallas, Texas.
Mr. Ortega became a director of the Company in December 1992. Mr. Ortega is
one of the founders and principals of Cargil International Corporation, a
company engaged in the distribution of appliances in Latin America.
Mr. Leyva became a director of the Company in December 1992. Mr. Leyva is
one of the founders and principals of Cargil International Corporation,
a company engaged in the distribution of appliances in Latin America.
Mr. Ortega and Mr. Leyva were appointed as directors of the Company pursuant
to a shareholders agreement entered into in connection with their purchases
of Common Stock in a private offering. See Item 1, Item 7 and Item 13.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10 percent of
the Company's Common Stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Such
persons are required by SEC regulation to furnish the Company with copies of
all Section 16(a) forms they file.
To the Company's knowledge, based on a review of any such reports furnished
to the Company during or with respect to the 1995 fiscal year, there were no
Section 16(a) reports filed after the due date.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth, for the 1995,
1994 and 1993 fiscal years, respectively, compensation paid or accrued by
the Company to or on behalf of the Company's Chief Executive Officer and
each other executive officer whose total annual salary and bonus for the
respective fiscal years were $100,000 or more (collectively, the "Named
Executive Officers").
Annual Compensation (1)
All Other
Name and Principal Position Year Salary ($) Bonus ($) Compensation
Amancio Victor Suarez
Chairman of the Board,
Chief Executive Officer and
Chief Financial Officer 1995 $200,000 - $162 (2)
1994 $200,000 - $162 (2)
1993 $222,940 - $162 (2)
Andrew I. Neckowitz
President and Chief
Operating Officer 1995 $120,000 - $162 (2)
1994 $120,000 - $162 (2)
1993 $124,622 - $162 (2)
(1) The column for "Other Annual Compensation" has been omitted because there
is no compensation required to be reported in such column. The aggregate
amount of perquisites and other personal benefits provided to each Named
Executive Officer is less than 10% of the total of annual salary and bonus
of such officer.
(2) The indicated amount represents premiums paid by the Company for term
life insurance for the benefit of the Named Executive Officer.
Option Grants Table. No options were granted during fiscal 1995.
Aggregated Fiscal Year-End Option Value Table. The following table sets
forth certain information concerning unexercised stock options held by the
Named Executive Officers as of the end of the 1995 fiscal year. No stock
options were exercised by any of the Named Executive Officers during the
1995 fiscal year.
Number of Unexersized Value of Unexercised
Options at 1995 In-the-Money Options at
Name Fiscal Year End 1995 Fiscal Year End
Exercisable (E) Exercisable (E)
Unexercisable (U) Unexercisable (U)
Andrew I. Neckowitz 80,000 (E) $ 7,492 (E)
- (U) - (U)
Long-Term Incentive and Pension Plans. The Company does not have any
long-term incentive or pension plans.
Compensation of Directors. Directors who are not officers of the Company
generally receive meeting attendance fees of $300. However, each such
director waived his right to receive such fees during 1995. Annual retainers
are not currently provided to directors; however, such retainers may be
reinstituted in the future. Directors are eligible to receive grants of
options under the Company's stock option plan. No stock options were
granted to any directors of the Company during 1995.
Employment Agreements, Termination of Employment and Change-in-Control
Arrangements.
In December 1990 the Company entered into a five-year employment agreement
with Andrew Neckowitz, which commenced on January 20, 1991 and expired on
December 31, 1995. As of March 31, 1996, Mr. Neckowitz' expired employment
agreement has not been renewed by the Company; however, Mr. Neckowitz
continues to serve as the Company's President and Chief Operating Officer.
Pursuant to the agreement, Mr. Neckowitz served as the President and Chief
Operating Officer of the Company. The agreement provides for an initial
base salary of $120,000 that increased from year to year throughout the
term of the agreement to a maximum of $150,000 in 1995, plus cost of living
adjustments. Under the agreement, Mr. Neckowitz was also entitled to
annual cash bonuses starting at $50,000 for the first year of the agreement
and increasing from year to year to a maximum of $105,000 for 1995, subject
to reduction in the event the Company did not attain certain financial goals.
Pursuant to the agreement, Mr. Neckowitz was granted options for 80,000 shares
of Common Stock at an exercise price of $.46875 per share, subject to vesting
at 25% per year if certain financial goals were achieved by the Company.
Mr.Neckowitz also received a grant of 20,000 shares of Common Stock that
vested 25% per year. The above-referenced financial goals were not attained
in fiscal 1991, 1992 and 1993, and the Company's Board of Directors has
waived such requirements with respect to bonuses and stock options for fiscal
year 1991 and with respect to stock options for fiscal years 1992, 1993, 1994
and 1995. Although no bonuses were granted under the employment agreement
for 1993, 1994 and 1995, management reserves the right to grant an additional
bonus to Mr. Neckowitz in a future period at management's discretion.
The Company has also entered into a five-year employment agreement with
Robert L. Scott, which commenced on January 20, 1991 and expired on
December 31, 1995. As of March 31, 1996, Mr. Scott's expired employment
agreement has not been renewed by the Company; however, Mr. Scott continues
to serve as the Company's Vice President of Sales and Marketing.
Pursuant to the agreement, Mr. Scott served as the Vice President of Sales
and Marketing of the Company. The agreement provided for an annual base
salary of $94,000, subject to annual adjustment for cost of living increases.
The agreement also provided for an annual cash bonus not to exceed $40,000 if
certain financial goals were met by the Company. Such financial goals were
not attained in fiscal 1991, 1992 and 1993; however, the Company's Board of
Directors waived such requirements for fiscal 1991 and 1992. Although no
bonuses were granted under the employment agreement for 1993, 1994 and 1995,
management reserves the right to grant an additional bonus to Mr. Scott in a
future period at management's discretion. Pursuant to the agreement, Mr. Scott
was granted 10,000 shares of Common Stock and options to acquire 30,000 shares
of Common Stock at a price of $.46875. These shares and options vest at the
rate of 20% per year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following information is furnished as of December 31, 1995 as to the
beneficial ownership of the Company's Common Stock by (i) each of the Named
Executive Officers (as defined in Item 11 above); (ii) each other director
of the Company; (iii) each person known by the Company to be a beneficial
owner of more than 5% of the Common Stock; and (iv) all directors and
executive officers of the Company as a group:
Shares of Percentage
Name and Address Common Stock of Class
Amancio Victor Suarez(1)(2) 1,054,160 36.6%
16501 N.W. 16th Court
Miami, Florida 33169
Andrew I. Neckowitz(2)(3) 80,000 3.5%
16501 N.W. 16 Court
Miami, Florida 33169
Carlos Ortega(2) 433,334 15.1%
c/o Cargil International Corp.
6812 N.W. 77th Court
Miami, Florida 33166
Giraldo Leyva(2) 433,334 15.1%
c/o Cargil International Corp.
6812 N.W. 77th Court
Miami, Florida 33166
Jose R. Aldariz(2) 133,334 4.6%
c/o Cargil International Corp.
6812 N.W. 77th Court
Miami, Florida 33166
All directors and officers 2,076,328 72.8%
as a group (8 persons)(4)
(1) Includes 21,000 shares owned of record by a relative of Mr. Suarez.
(2) The shares owned by such persons are subject to a shareholders
agreement providing for, among other things, the election of certain
persons to the Company's Board of Directors and certain restrictions
on transfer of such shares. See Item 13.
(3) Includes 80,000 shares subject to presently exercisable options.
(4) Includes 135,500 shares subject to presently exercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1994, the Company owed approximately $202,000 to Amancio
Victor Suarez, Chairman of the Board and Chief Executive Officer of the
Company, on loans previously made by Mr. Suarez to the Company from time
to time. During 1995, Mr. Suarez had an informal commitment with the Company
to lend from time to time, at his sole discretion, up to an additional
$500,000 to the Company on a demand basis. The loans bear interest at prime
plus 2.5%. During 1995, Mr. Suarez loaned the Company approximately $402,000.
As of December 31, 1995, the aggregate amount owed by the Company to
Mr. Suarez was approximately $604,000 on a demand basis. For 1996, Mr. Suarez
has continued his informal commitment to loan up to an additional $500,000 to
the Company on a demand basis, at his discretion.
During 1991, 1992 and 1995, Andrew Neckowitz, the Company's President and
Chief Operating Officer, advanced certain funds to the Company. This amount
bears a market rate of interest, is due upon demand and had an outstanding
balance of approximately $158,000 at December 31, 1995.
In connection with the Company's private placement of common stock to Carlos
Ortega, Giraldo Leyva and Jose Aldariz ( the "Investors") in 1992, the
Investors entered into a shareholders agreement ("Shareholders Agreement")
with the Company, Mr. Suarez and Mr. Neckowitz. Mr. Suarez and the Investors,
respectively, are sometimes referred to below as the "Shareholders." The
Shareholders Agreement includes certain provisions governing the size and
composition of the Company's Board of Directors and restricting the manner and
terms by which Common Stock owned by Mr. Suarez and the Investors may be sold
or transferred. More specifically, among other things, Mr. Suarez and the
Investors have agreed to vote their shares of Common Stock so that (i) the
number of directors on the Board shall be five, provided that the number of
directors shall be reduced by one for each 20,000 shares transferred by Mr.
Suarez or the Investors other than pursuant to a "Permitted Transfer"
(as defined), but in no event will the Board consist of less than three
directors, (ii) the following persons will be elected to the Board: (a) two
representatives designated by Mr. Suarez (which representatives currently
consist of Mr. Suarez and Mr. Neckowitz), subject to reduction in the event
of certain share transfers other than Permitted Transfers; (b) two
representatives designed by the Investors (which representatives currently
consist of Mr. Ortega and Mr. Leyva), subject to reduction in the event of
certain share transfers other than Permitted Transfers; and (c) one
representative mutually agreed by Mr. Suarez and the Investors, (iii)
Mr. Suarez or his designee shall be Chairman of the Board, so long as
certain share transfers do not occur, and (iv) the removal of any such
representative from the Board may be made only by the Shareholder that
designated the representative. For purposes of the Shareholders Agreement,
a Permitted Transfer is generally defined as a pledge of shares to any
bona-fide financial institution pursuant to a written loan agreement,
but any transfer of shares resulting from a foreclosure on such a pledge
will not constitute a Permitted Transfer.
The Shareholders Agreement will terminate by its terms in November 1997,
subject to earlier termination upon certain specified events, including
(i) in the event that Mr. Suarez and the Investors each sells more than
200,000 shares other than pursuant to a Permitted Transfer, or (ii) at the
option of Mr. Suarez or the Investors, if the other sells more than 40,000
shares other than pursuant to a Permitted Transfer.
Under the Shareholders Agreement, no Shareholder may sell or transfer any
shares other than pursuant to a Permitted Transfer or in the public market
or in private transactions, provided, however, that such public or private
sales may be made only if the shares to be sold by a Shareholder are first
offered for sale to the other Shareholders at comparable terms and such
other Shareholders do not purchase the shares.
Pursuant to the Shareholders Agreement, the Company granted Mr. Suarez,
Mr. Neckowitz and the Investors certain demand and piggy-back registration
rights to have the sale of certain amounts of their shares of Common Stock
registered pursuant to a registration statement filed by the Company under
the Securities Act of 1933. The Shareholders Agreement provides that any
participation of Mr. Suarez, Mr. Neckowitz and the Investors in any such
registration will be allocated pro-rata based upon their proportionate
ownership of the Company's Common Stock.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) 1. Financial Statements:
Reference is made to the index to the Company's Consolidated
Financial Statements following page 14 of this Annual Report
on Form 10-K.
2. Financial Statement Schedules:
These schedules are otherwise contained within the Company's
Consolidated Financial Statements following page 14 of this
Annual Report on Form 10-K.
3. Exhibits:
Exhibit No. Description
3.1 Registrant's Articles of Incorporation,
as amended(1)
3.2 Registrant's Bylaws(2)
10.1 Employment Agreement with Andrew Neckowitz(3)
10.2 Employment Agreement with Robert L. Scott(3)
10.3 Amended and Restated 1990 Stock Option Plan
(Compensatory Plan)(4)
10.4 Credit Facility with Congress Financial
Corporation and Amendments thereto(5)
10.5 Shareholders Agreement(1)
22.1 List of Registrant's Subsidiaries(1)
(1) Incorporated by reference to the exhibit with the same number filed with
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992, as amended.
(2) Incorporated by reference to the exhibit with the same number filed with
the Registrant's Registration Statement No. 2-83088.
(3) Incorporated by reference to the exhibit with the same number filed with
the Registrant's Annual Report on Form 10-K for fiscal 1990.
(4) Incorporated by reference to the exhibit with the same number filed with
the Registrant's Annual Report on Form 10-K for fiscal 1990.
(5) Filed in part herewith, and incorporated by reference to (i) exhibits
10.8, 10.9, 10.10, 10.11, 10.12 and 10.13 filed with the Registrant's
Annual Report on Form 10-K for fiscal 1989, and (ii) exhibits 10.4 filed
with the Registrant's Annual Reports on Form 10-K for fiscal 1990, 1991
and 1992, respectively.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
COSMO COMMUNICATIONS CORPORATION
DATED: March 29, 1996 /s/ Amancio V. Suarez
AMANCIO VICTOR SUAREZ,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
DATED: MARCH 29, 1996 /s/ Amancio V. Suarez
AMANCIO VICTOR SUAREZ,
Chairman of the Board
Chief Financial Officer
Chief Executive Officer
/s/ Andrew I. Neckowitz
ANDREW I. NECKOWITZ
President, Chief Operating
Officer and Director
/s/ Carlos Ortega
CARLOS ORTEGA,
Director
/s/ Giraldo Leyva
GIRALDO LEYVA,
Director
/s/ Cesar Alvarez
CESAR L. ALVAREZ,
Director
EXHIBIT 10.4
December 31, 1995
Cosmo Communications Corporation
Cosmo Electronics, Inc.
16501 N.W 16 Court
Miami, Florida 33169
and
Cosmo Communications Canada, Inc.
1200 Eglinton Avenue
East Don Mills, Ontario
RE: Amendment to the Addendum to Accounts Financing Agreement
Dated October 30, 1989
Gentlemen:
Reference is made to the Addendum to Accounts Financing Agreement entered
between us dated October 31, 1989.
By mutual agreement, Section 6.20 of the Addendum to Accounts Financing
Agreement dated October 30, 1989 is hereby amended as follows:
Section 6.20 Working Capital is deleted.
Except as amended herein, all the terms and conditions of the Security
Agreements between us remain in full force and effect.
CONGRESS FINANCIAL CORPORATION
(Florida)
By: /s/ Ramon Lebron
Ramon Lebron
Vice President
Accepted:
COSMO COMMUNICATIONS CORPORATION
By: /s/ Amancio V. Suarez
Print Name: Amancio V. Suarez
Title: Chairman of the Board
COSMO ELECTRONICS, Inc.
By: /s/ Amancio V. Suarez
Print Name: Amancio V. Suarez
Title: Chairman of the Board
COSMO COMMUNICATIONS CANADA, Inc.
By: /s/ Amancio V. Suarez
Print Name: Amancio V. Suarez
Title: Chairman of the Board
EXHIBIT 10.4
March 28, 1996
Mr. Amancio V. Suarez, Chairman
Cosmo Communications Corporation
16501 N.W. 16 Court
Miami, Florida 33169
Dear Mr. Suarez:
Please be advised that Congress Financial Corporation ( Florida) hereby waives
the $1,000,000 net worth requirement specified in Section 6.19 of the Accounts
inancing Agreement between us dated October 30, 1989 through December 31, 1996.
We have not waived any other events of default whether with respect to this
item or any other items with respect to the period ending December 31, 1996
or any other period.
Very truly yours,
Congress Financial Corporation (Florida)
/s/ Ramon Lebron
Ramon Lebron
Vice President
COSMO COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1995 F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1995 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1995 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Cosmo Communications Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Cosmo
Communications Corporation and subsidiaries (the "Company") as of December 31,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1995. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1995 and 1994, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche
Deloitte & Touche LLP
Miami, Florida
March 25, 1996
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 and 1994
ASSETS 1995 1994
CURRENT ASSETS:
Cash and cash equivalents $ 1,097,000 $ 936,000
Accounts receivable, net of an allowance for
doubtful accounts of $184,000 and $57,000, in
1995 and 1994, respectively 4,945,000 3,291,000
Inventories 3,703,000 3,246,000
Other 65,000 120,000
__________ _________
Total current assets 9,810,000 7,593,000
PROPERTY AND EQUIPMENT, net 1,542,000 1,571,000
OTHER 474,000 763,000
___________ __________
TOTAL $ 11,826,000 $ 9,927,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 3,576,000 $ 2,312,000
Credit facilities 6,492,000 5,308,000
Due to principal stockholder 604,000 202,000
Other 227,000 185,000
__________ ___________
Total current liabilities 10,899,000 8,007,000
__________ ___________
LONG-TERM DEBT 465,000 487,000
__________ ___________
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Convertible cumulative preferred stock,
$0.01 par value; 30,000 shares authorized,
none issued
Preferred stock, $0.01 par value; 9,970,000
shares authorized, none issued
Common stock, $0.05 par value; 4,000,000
shares authorized; 2,642,000 and 2,633,000
shares issued and outstanding as of
December 31, 1995 and 1994, respectively 133,000 131,000
Additional paid-in capital 25,410,000 25,406,000
Accumulated deficit (23,343,000) (22,366,000)
Cumulative translation adjustment (1,738,000) (1,738,000)
___________ ___________
Total stockholders' equity 462,000 1,433,000
___________ ___________
TOTAL $11,826,000 $ 9,927,000
See notes to consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
1995 1994 1993
SALES $ 15,243,000 $ 15,772,000 $ 13,883,000
COST OF SALES 12,044,000 11,611,000 10,211,000
___________ __________ ___________
GROSS MARGIN 3,199,000 4,161,000 3,672,000
___________ __________ __________
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Selling expenses 1,540,000 1,536,000 1,314,000
General and administrative
expenses 2,049,000 1,961,000 1,733,000
____________ ___________ __________
Total selling, general and
administrative expenses 3,589,000 3,497,000 3,047,000
____________ ___________ ___________
(LOSS) INCOME FROM OPERATIONS (390,000) 664,000 625,000
____________ ___________ ___________
OTHER INCOME (EXPENSE):
Interest expense (685,000) (577,000) (558,000)
Interest income 57,000 93,000 100,000
Other, net 41,000 58,000 9,000
____________ __________ ___________
Total other expense, net (587,000) (426,000) (449,000)__
NET (LOSS) INCOME $ (977,000) $ 238,000 $ 176,000
NET (LOSS) INCOME PER SHARE:
Primary $ (0.37) $ 0.08 $ 0.11
Fully diluted 0.06
WEIGHTED AVERAGE COMMON
AND EQUIVALENT SHARES
OUTSTANDING:
Primary 2,640,000 2,863,000 1,657,000
Fully diluted 2,856,000
See notes to consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
7-1/2%
Convertible
Cumulative Common
Preferred Stock Add. Cumul.
Stock Shares Shares Paid-in Accum. Transl.
Issued Amount Issued Amount Capital Deficit Adjust. Total
(in thousands)
BALANCE,
DECEMBER 31,
1992 120 $1 1,419 $ 71 $25,459 $(22,780) $(1,711) $1,040
Issuance of
7,000 shares
of common
stock 7 3 3
Conversion of
the 7 -1/2%
convertible
preferred stock
into common
stock 120 (1) 1,200 60 (59)
Net income 176 176
Translation
adjustment (26) (26)
______ _____ ______ _____ ______ _______ ______ _____
BALANCE,
DECEMBER
31, 1993 2,626 131 25,403 (22,604) (1,737) 1,193
Issuance of
7,000 shares
of common
stock 7 3 3
Net income 238 238
Translation
adjustment (1) (1)
______ ______ ______ _____ _______ _______ _______ _____
BALANCE,
DECEMBER
31, 1994 2,633 131 25,406 (22,366) (1,738) 1,433
Issuance
of 9,000
shares
of common
stock 9 2 4 6
Net (loss) (977) (977)
_______ _____ ______ _____ ______ _______ _______ ______
BALANCE,
DECEMBER
31, 1995 2,642 133 25,410 (23,343) (1,738) 462
______ _____ ______ _____ _______ _______ _______ ______
See notes to consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (977,000) $ 238,000 $ 176,000
Adjustments to reconcile net (loss) income
to net cash (used) provided by operating
activities:
Depreciation and amortization 318,000 230,000 156,000
Issuance of shares of common stock to
certain employees 5,000 3,000 3,000
(Increase) in accounts receivable,net (1,654,000) (547,000) (1,326,000)
(Increase) in inventories and other assets (177,000) (773,000) (497,000)
Increase (decrease) in accounts payable,
accrued expenses and other current
liabilities 1,306,000 921,000 366,000
Translation adjustment (1,000) (26,000)
_________ _________ _________
Net cash (used) provided by financing
activities ( 1,179,000) 71,000 (1,148,000)
_________ _________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (224,000) (138,000) (12,000)
CASH FLOWS FROM FINANCING ACTIVITIES :
Net increase (decrease) in credit
facilities and long-term debt
repayments 1,162,000 (201,000) 1,289,000
Net increase in due to stockholders 402,000 19,000 188,000
_________ __________ ________
Net cash provided (used) by financing
activities 1,564,000 (182,000) 1,477,000
_________ __________ ________
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS 161,000 (249,000) 317,000
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR 936,000 1,185,000 868,000
_________ __________ ________
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR $ 1, 097,000 $ 936,000 $1,185,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION- Cash paid during the year
for interest $ 588,000 $ 510,000 $ 468,000
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Conversion of the 7-1/2% convertible
cumulative preferred stock into
common stock $ 1,200,000
Issuance of shares of common stock to
certain employees $ 4,000 $ 3,000 $ 3,000
See notes to consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - Cosmo Communications Corporation and subsidiaries (the "Company")
is a publicly-owned entity. The Company markets and distributes clocks and
other consumer electronic products. The Company has significant operations
in the United States, Hong Kong and Canada.
Use of Estimates - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair Value of Financial Instruments - The Company's financial instruments
include cash and cash equivalents, receivables, payables, debt and credit
facilities. The fair value of such financial instruments have been determined
based on current market interest rates as of December 31, 1995. The fair
values of these instruments were not materially different than their carrying
( or contract) values.
Financial and Management's Plans - During 1995, the Company experienced a
difficult retail climate and increased competition. In addition, several
large retailers in the United States changed their corporate policies to
reduce their inventory levels. As a result of these factors, the Company's
gross margins decreased, sales projected for 1995 were not met and an
operating loss from operations was incurred. During 1996, management has
implemented a plan to eliminate its losses. This plan includes an
intensification of the Company's sales efforts through the addition of new
sales representatives and the introduction of new products within existing
product lines. The Company will also pursue new product categories through
increased sourcing activities in the Far East. It is anticipated that the
introduction of new product categories will assist the Company in capturing
new markets within the retail arena.
Management believes that through its existing credit facilities and the
informal commitment of the Company's principal stockholder to loan up to
an additional $500,000 to the Company on a demand basis, at his discretion,
the Company will be able to meet it's working capital requirements during
1996. The Company's ability to successfully implement its plans to eliminate
its losses is dependent upon a number of factors beyond its control.
These factors include the overall retail climate and competition. There can
be no assurance that the Company's sales, gross margins, operating results
and financial condition will improve in fiscal year 1996.
Principles of Consolidation - The Company includes, in consolidation, its
wholly owned subsidiaries which are as follows: Cosmo Time Corporation,
Caonabo Cigars Corporation (formerly known as Cosmo Air, Inc.), Cosmo
Lighting, Inc., Cosmo Electronics, Inc. (formerly Topp Electronics, Inc.),
Cosmo Communications (H. K.) Limited, Cosmo Communications Canada, Inc., and
Cosmo Worldwide Corporation. All significant intercompany transactions and
balances have been eliminated in consolidation.
Cash and Cash Equivalents - All highly liquid instruments with a maturity of
three months or less when acquired are considered cash equivalents.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets which range from three to eight years for
property and equipment other than the building which is depreciated over
thirty years.
Other Assets - Other assets include an original amount of $983,000 of excess
cost over fair market value of net assets acquired. Such amount is being
amortized on a straight-line basis over fifteen years. The unamortized
balance at December 31, 1995 and 1994 amounted to $ 390,000 and $455,000,
respectively.
Foreign Currency Translation - The accounts of the foreign subsidiaries were
translated into U.S. dollars in accordance with the provisions of Statement
of Financial Accounting Standards No. 52 ("Statement No. 52"). Management
has determined that the Hong Kong dollar is the functional currency of the
Hong Kong subsidiaries and the Canadian dollar is the functional currency of
the Canadian subsidiary. Certain current assets and liabilities of these
foreign entities are denominated in U.S. dollars. In accordance with the
provisions of Statement No. 52, transaction gains and losses on these assets
and liabilities are included in the determination of income for the relevant
periods. Adjustments resulting from the translation of the financial
statements from their functional currencies to U.S. dollars are accumulated
as a separate component of stockholders' equity and have not been included
in the determination of income for the relevant periods.
Revenue Recognition - Sales are recognized upon shipment of goods. During
the years ended December 31, 1995, 1994, and 1993, sales to a single customer
accounted for approximately 34%, 37%, and 20%, respectively, of total sales.
Accounts receivable corresponding to this customer approximated $554,000
and $834,000 as of December 31, 1995 and 1994, respectively.
Warranty Costs - The Company's products are sold with a one-year limited
warranty. The net cost of warranty repairs is charged to cost of sales
when the repair work is performed. Historically, the Company's annual net
warranty liability has not been significant.
Research and Development - The costs of research and development associated
with new product design, engineering, tooling, and testing are charged to
cost of sales as incurred. Such expenses aggregated approximately $225,000
in both 1995 and 1994, and $195,000 in 1993.
Income Taxes - The Company follows the guidelines contained in Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes
("SFAS No. 109"). SFAS No. 109 requires an asset and liability approach
for financial accounting and reporting for income taxes. In addition,
SFAS No. 109 requires that deferred tax liabilities and assets be adjusted
in the period of enactment for the effect of an enacted change in tax laws
or rates.
Earnings Per Share - Earnings per share has been presented after giving
retroactive effect to the first period presented for a 1 for 5 reverse
stock split effected October 31, 1994 (see Note 8).
Primary earnings per common share is computed based upon the weighted
average number of common shares and dilutive common equivalent shares
outstanding for each period. As of December 31, 1995, there were no
dilutive common equivalent shares outstanding. As of December 31, 1994 and
1993, common equivalent shares include the dilutive effect of the stock
grants (see Note 7) and of the stock options using the treasury stock method
(see Note 8). As of December 31, 1993, fully diluted earnings per common
share assumes the conversion of the 7.5% convertible cumulative preferred
stock as of January 1, 1993 with net income adjusted for the related interest
expense.
Recently Issued Accounting Pronouncement - In March 1995, the Financial
Accounting Standards Board issued Statement of Financial Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of ("SFAS No. 121"). SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. SFAS No. 121 will apply to the
Company for the year ended December 31, 1996. Adoption of SFAS No. 121 is not
expected to have a material impact on the financial position of the Company
or its results of operations.
2. ACCOUNTS RECEIVABLE
The activity for the allowance for doubtful accounts is as follows
for the years ended December 31 :
1995 1994 1993
Beginning balance $ 57,000 $ 57,000 $ 65,000
Provision 136,000 23,000 32,000
Write-offs, net of recoveries (9,000) (23,000) (40,000)
Ending balance $184,000 $ 57,000 $ 57,000
The Company carries accounts receivable at the amounts it deems to be
collectible. Accordingly, the Company provides allowances for accounts
receivable it deems to be uncollectible based on management's best estimates.
Recoveries are recognized in the period they are received. The ultimate
amount of accounts receivable that become uncollectible could differ from
those estimated.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31:
1995 1994
Land $ 400,000 $ 400,000
Building 1,600,000 1,600,000
Leasehold improvements 269,000 296,000
Plant and equipment 964,000 747,000
Auto and trucks 21,000 14,000
Furniture and fixtures 204,000 177,000
Subtotal 3,458,000 3,234,000
Less accumulated
depreciation
and amortization ( 1,916,000) (1,663,000)
Total $ 1,542,000 $ 1,571,000
4. CREDIT FACILITIES
The following are the Company's credit facilities:
United States and Canada Operations - The Company utilizes a credit facility
of up to $7,500,000 expiring on December 31, 1996. The credit facility is
secured by substantially all assets of the Company, including a second
mortgage on the Company's land and building in the United States.
Borrowings are tied by formula to eligible accounts receivable and
inventories. Interest is charged on outstanding borrowings at prime (8.75%
at December 31, 1995) plus 2.5%. As of December 31, 1995 and 1994,
borrowings outstanding under this credit facility amounted to $3,752,000
and $3,617,000, respectively. The credit facility contains certain
restrictive covenants. The most restrictive covenant relates to a minimum
net worth requirement, which was not met by the Company as of December 31,
1995. However, the lender has waived the minimum net worth requirement
through December 31, 1996.
The Company, during 1992, obtained an additional credit facility from a
financial institution in the amount of $1,200,000. This facility is
collateralized by $300,000 in interest-bearing deposits and is guaranteed
by certain stockholders of the Company. Interest is charged on outstanding
borrowings at prime plus 2.5%. As of December 31, 1995 and 1994, borrowings
outstanding under this credit facility amounted to $1,062,000 and $840,000,
respectively. As of December 31, 1995, there were no open letters of credit
under this line.
The Company has an additional line of credit facility from a financial
institution. This credit facility is secured by a secondary interest in
all assets of the Company. Interest is charged on outstanding borrowings
at prime plus 2%. As of December 31, 1995 and 1994, borrowings outstanding
under this credit facility amounted to $1,131,000 and $357,000, respectively.
Subsequent to December 31, 1995, the Company has agreed to payoff the
remaining balance amounting to $490,000 on a term basis, but no later than
December 31, 1996.
Hong Kong Operations - The Company utilizes an overdraft credit facility.
Maximum borrowings under this facility are approximately $777,000 to cover
bank overdrafts. Interest is charged on outstanding borrowings at the local
prime rate (approximately 7.25% as of December 31, 1995) plus 1%. The
facility is secured by short-term bank deposits of approximately $612,000.
As of December 31, 1995 and 1994, borrowings outstanding under the overdraft
credit facility amounted to approximately $547,000 and $494,000, respectively.
5. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31:
1995 1994
First mortgage note at 11%, payable
in monthly installments of principal and
interest of approximately $7,000 through
the year 2004, collateralized by land and a
building with a net book value of $996,000
at December 31, 1995 $ 500,000 $ 518,000
Less amount payable in one year (35,000) (31,000)
Total $ 465,000 $ 487,000
6. INCOME TAXES
The domestic and foreign components of net (loss) income were as follows for
the years ended December 31:
1995 1994 1993
Domestic $ (1,095,000) $ (500,000) $ (496,000)
Foreign 118,000 738,000 672,000
Total balance $ (977,000) $ 238,000 $ 176,000
Domestic - The Company has unused domestic tax loss carryforwards of
approximately $45,760,000 to offset future taxable income. Such
carryforwards expire from the year 1996 through the year 2010. Included in
the tax loss carryforwards are approximately $23,847,000 obtained in
connection with the acquisition of Cosmo Electronics, Inc. which are only
available to offset future taxable income of Cosmo Electronics, Inc. The
deferred tax asset and related valuation allowance recorded by the Company as
a result of these domestic tax loss carryforwards is $17,200,000 as of
December 31, 1995.
Foreign - The Company has unused foreign tax loss carryforwards of
approximately $2,000,000 to offset future taxable income. Approximately
$1,200,000 of these tax loss carryforwards expire in the years 1997 and 1998.
The remainder may be carried forward indefinitely. The deferred tax asset
and related valuation allowance recorded by the Company as a result of these
foreign tax loss carryforwards is $720,000.
The Company has reduced the deferred tax assets resulting from its domestic
and foreign tax loss carryforwards by a valuation allowance as it has
determined that it is more likely than not that the deferred tax assets will
not be realized. The change in the valuation allowances from December 31,
1994 to December 31, 1995 for the domestic and foreign components was a
decrease of $2,038,000 and an increase of $66,000, respectively.
During 1994, the Company's Hong Kong subsidiary made a distribution to a
domestic subsidiary in the amount of approximately $7,500,000. Under U.S.
income tax laws, such transaction is treated similar to a taxable
distribution of a foreign subsidiary's accumulated earnings. The tax
liability resulting from this transaction was offset entirely by net operating
loss carryforwards.
7. COMMITMENTS AND CONTINGENCIES
Litigation - From time to time, the Company is engaged in ordinary routine
litigation incidental to its operations. The Company, after considering
the advice of legal counsel, believes that any such litigation will not have
a material adverse effect on its consolidated financial position.
Employment Agreements - In 1991, the Company entered into a five-year
employment agreement with Andrew Neckowitz to serve as President and Chief
Operating Officer of the Company. This agreement, which became effective on
January 20, 1991 and expired on December 31, 1995, provides for an initial
base salary of $120,000, escalating throughout the five-year term to $150,000
plus cost of living adjustments. Under his employment agreement, Mr.
Neckowitz is entitled to an annual cash bonus (starting at $50,000 the first
year and escalating to $105,000 the last year of employment with cost of
living adjustments) and the right to earn options of up to 80,000 shares of
common stock at an exercise price of $.46875 per share if certain financial
goals are achieved by the Company during the term of the employment agreement.
These stock options may be earned by Mr.Neckowitz 25% annually beginning on
March 31, 1992 through March 31, 1995. The Company waived the requirement
that certain financial goals be achieved in order to earn the stock options.
However, no bonuses have been accrued for Mr. Neckowitz at December 31, 1995
and 1994 as the financial goals specified by his employment agreement were not
met in 1995 and 1994. As of December 31, 1995, Mr. Neckowitz held 80,000
stock options all of which are exercisable. Mr. Neckowitz also received a
20,000 common stock grant on January 21, 1991, that earned 25% annually
throughout the term of his employment agreement. As of the date of this
report, Mr. Neckowitz' expired employment agreement has not been renewed
by the Company; however, Mr. Neckowitz continues to serve as the Company's
President and Chief Operating Officer.
The Company also entered into a five-year employment agreement with Robert
L. Scott, commencing on January 20, 1991 and ending on December 31, 1995,
for Mr. Scott to serve as the Vice President of Sales and Marketing of the
Company. The employment agreement provides for an annual base salary of
$94,000, to be adjusted for cost of living increases commencing in January
1994. The agreement also provides for an annual cash bonus not to exceed
$40,000 if certain financial goals are met by the Company. No bonuses have
been accrued for Mr. Scott at December 31, 1995 and 1994 as the financial
goals specified by his employment agreement were not met in 1995 and 1994.
Mr. Scott has been granted 10,000 shares of common stock that was earned
20% annually throughout the term of his employment agreement. In addition,
Mr. Scott has been granted options to acquire up to 30,000 shares of common
stock at $.46875. These options vest and are exercisable 20% annually
throughout the term of his employment agreement. As of December 31, 1995,
Mr. Scott held 30,000 stock options all of which are exercisable. As of the
date of this report, Mr. Scott's expired employment agreement has not been
renewed by the Company; however, Mr. Scott continues to serve as the Company's
Vice President of Sales and Marketing.
In the event that any individual or entity owns a greater percentage of the
common stock of the Company than Mr. Amancio Victor Suarez and his associates
and affiliates or if the Company is liquidated, all or substantially all of
its assets are sold or if the Company is taken private by certain actions of
Mr. Suarez, all grants and stock options granted to Messrs. Neckowitz and
Scott would become fully vested and exercisable immediately.
8. STOCKHOLDERS' EQUITY
Reverse Stock Split - On October 31, 1994, the Company effected a 1 for 5
reverse stock split. Accordingly, the consolidated financial statements have
been retroactively effected, as if the reverse stock split had occurred in the
first period presented.
Convertible Cumulative Preferred Stock - Effective December 31, 1992, the
Company issued 120,000 shares of 7.5% convertible cumulative preferred stock
("Convertible Preferred Stock"), $.01 Par Value, $10 Liquidation Value, to
the principal stockholder in exchange for the conversion of loans made to
the Company in the amount of $1,200,000. The Convertible Preferred Stock may
be converted into common stock at a price of $1 per share of common stock.
Effective December 31, 1993, the holders of the Convertible Preferred Stock
elected to convert their shares into common stock. Primary earnings per
share for the year ended December 31, 1993, as if the conversion had
occurred on January 1, 1993, is .05 per share computed based on 2,854,000
weighted average common and common equivalent shares outstanding.
Stock Option Plan - The Board of Directors of the Company (the "Board")
adopted the 1990 Stock Option Plan effective December 15, 1990. Effective
December 23, 1994, the 1990 Stock Option Plan was amended and restated (the
"Plan"). The Plan reserved 270,000 shares of common stock for issuance
thereunder. Under the Plan, the Company may grant incentive stock options,
nonqualified stock options, and stock appreciation rights. The purpose of
the Plan is to further the best interests of the Company and its subsidiaries
by encouraging employees and consultants of the Company and its subsidiaries
to continue association with the Company. The employees eligible to
participate in the Plan as recipients of stock options or stock appreciation
rights are such officers and employees of the Company and such other key
employees of the Company and its subsidiaries as the Board shall from time
to time determine, subject to the limitations of the Plan.
The Plan is administered by the Board or by a committee of the Board
designated by the Board. The Board, or such committee, determines, among
other things, which officers, employees and directors of the Company receive
options or stock appreciation rights under the Plan, the number of shares to
be covered by the options, and the date of grant of such options. The options
granted under the Plan terminate at the earlier of (i) a date set by the Board
at the time of grant, or (ii) ten years from their respective dates of grant,
except in the case of incentive stock options granted to a shareholder owning
ten percent (10%) or more of the Company's common stock, with respect to whom
options granted are exercisable over a period no longer than five years. The
exercise price for stock options granted under the Plan is determined by the
Board and is required to be at least the par value per share of the common
stock, except in the case of incentive stock options (which must have a price
which is not less than fair market value) granted to a shareholder owning
ten percent (10%) or more of the Company's common stock, with respect to
whom the exercise price is required to be at least one hundred ten percent
(110%) of such fair market value. The exercise price must be paid in full
by an employee in cash, common stock of the Company or any other form of
payment permitted by the Board.
As of December 31, 1995 and 1994, 252,000 stock options were outstanding of
which 215,000 and 149,000, respectively, were exercisable. No stock options
were granted during 1995 and 1994. The exercise price of the stock options
range from $.45 - $1.55 per option.
9. GEOGRAPHIC AREA AND FOREIGN OPERATIONS INFORMATION
The Company operates in one industry segment. The Company's principal
operations, where identifiable assets are maintained, are in the United
States, Hong Kong, and Canada. Sales are primarily to retailers within
the United States, although approximately 40% of net receivables at
December 31, 1995 are from international customers.
Identifiable assets are those assets which are identified with operations
of a particular geographic area. Corporate assets include cash and cash
equivalents and the intangible asset resulting from the Canadian acquisition.
Domestic Foreign Eliminations Total
( in thousands)
1995
Sales to unaffiliated customers $ 8,992 $ 6,251 $ 15,243
Transfers between geographic
areas 140 (140)
______ ________ ________ _______
Total sales $ 8,992 $ 6,391 $ (140) $ 15,243
(Loss) from operations $ (538) $ 148 $ ( 390)
Identifiable assets $ 8,362 $ 1,977 $ 10,339
Corporate assets 872 615 1,487
________ ________ _______
Total assets $ 9,234 $ 2,592 $ 11,826
Domestic Foreign Eliminations Total
( in thousands)
1994
Sales to unaffiliated customers $ 10,017 $ 5,755 $ 15,772
Transfers between geographic
areas $ (485)
_______ ______ ______ _______
Total sales $ 10,017 $ 5,755 $ (485) $ 15,772
(Loss) income from operations $ (98) $ 762 $ 664
Identifiable assets $ 6,599 $ 1,937 $ 8,536
Corporate assets 798 593 1,391
_______ ______ ______
Total assets $ 7,397 $ 2,530 $ 9,927
1993
Sales to unaffiliated customers $ 8,992 $ 4,891 $ 13,883
Transfers between geographic
areas 250 $ (250)
_______ _______ ________ ________
Total sales $ 8,992 $ 5,141 $ (250) $ 13,883
(Loss) income from operations $ (98) $ 723 $ 625
Identifiable assets $ 6,147 $ 1,097 $ 7,244
Corporate assets 1,034 672 1,706
________ _______ ________
Total assets $ 7,181 $ 1,769 $ 8,950
10. RELATED PARTY BALANCES
Due to principal stockholder bears interest at prime plus 2.5% and has no
set repayment terms. Included in other current liabilities is $158,000 and
$118,000 as of December 31, 1995 and 1994, respectively, due to the Company's
President, bearing interest at prime plus 2.5% and with no set repayment
terms. Total interest expense incurred related to these balances for the
years ended December 31, 1995 and 1994 approximated $38,000 and $30,000,
respectively.
* * * * * *
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