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, 1997
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 19, 1998, the market value of the registrant's Common
Stock held by non affiliates of the registrant was approximately $309,000
based on the closing bid price of $ 0.25 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
The Registrant, Cosmo Communications Corporation (the "Company"),
imports, markets and distributes in the United States, Canada and Latin
America, consumer electronic products, including digital alarm clocks,
quartz alarm clocks, quartz wall clocks, clock radios, combination
products such as clock radio telephones, and cellular phones and
accessories. The Company also imports, markets and distributes 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.
Forward-Looking Statements and Associated Risk
Management believes that this annual report contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, including statements regarding, among other items, (i)
the Company's growth strategies, (ii) anticipated trends in the consumer
electronics industry, and (iii) the Company's ability to obtain and
maintain adequate financing for its operations. These forward-looking
statements are based largely on the Company's expectations and are
subject to a number of risks and uncertainties, certain of which are
beyond the Company's control. Actual results could differ materially
from these forward-looking statements as a result of such uncontrollable
factors, including, among others, general economic conditions,
governmental regulation and competitive factors, and, more specifically,
interest rate levels, availability of financing, consumer confidence
and preferences, the effectiveness of the Company's competitors, and
costs of materials and labor. In light of these risks and uncertainties,
there can be no assurance that the forward-looking information contained
in this annual report will in fact transpire.
Financial and Management's Plans
The Company has been experiencing a continuation of a difficult retail
climate and strong competition in recent years. During the last three
years, several large retailers in the United States have been reducing
inventory levels. Management has continued its efforts to address and
eliminate the Company's losses. Management's plans include a
restructuring of the Company's sales department and the introduction
of new products within existing product lines. The Company has also
pursued new product categories through increased sourcing activities
in the Far East. The Company has introduced a new line of product of
cellular phones and cellular phone accessories under the brand of
"Cosmo Telecom" and has finalized an agreement to market in Canada
audio product utilizing the brand name "Memorex". 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 on an as-needed basis, the Company will be able to
meet it's working capital requirements during 1998. 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 1998 (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. 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 40 models of quartz wall clocks in 1997,
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 1997, 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.
Electronic Division - The Company introduced its first electronic digital
clock radio in 1982 and currently offers 13 models, 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 1997, 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 the early 1990's, the Company began to market a line of audio products
in the Latin American and Canadian market.
Sales for both the Time Division and Electronic Division accounted
approximately for a 48% of the total sales or a total of $8,137,000
corresponding $7,392,000 to Domestic Sales and $745,000 to D.I. Sales.
Licensed Product: In 1997 Cosmo finalized an agreement to market in
Canada audio product utilizing the brand name "Memorex". Use of this
name is expected to significantly increase the volume of business in that
market. Cosmo will also license the "Memorex" brand name for an alarm
clock to be sold in conjunction with the Cosmo brand both in U.S. and
Canada.
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 1997, 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 1998. The following table illustrates the
Company's primary marketing channels and representative customers in 1997.
Mass Merchandiser Drug Store Chains Specialty Chains
Wal-Mart (U.S. & Canada) American Drug AAFES
Target Genovese Canadian Tire
Fedco Osco Drug Builder Square
Kohls Savon Drug Fortun Off
Roses Stores Brooks Bed, Bath & Beyond
Meijer's
Dollar General
Bi-Mart
Fred Meyer
Ames Dept. Stores
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 55% of the Company's
sales in 1997 were to customers within the United States with the
remainder of sales to customer in Canada and Latin America. 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
60% of sales in 1997. During 1997, 1996, and 1995, sales to Walmart
accounted for approximately 43%, 34% and 34%, respectively, of total 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 1997, the Company introduced and marketed several new electronic
digital alarm clocks (LED and LCD), quartz alarm clocks, quartz wall
clocks, clock radios and audio products. During the years ended
December 31, 1997, 1996, and 1995, the Company spent approximately
$200,000, $210,000, and $225,000, respectively, 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 into the audio
and clock business 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 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, General Time Westclox and Spartus Corporation and
Avance (Timex). Major suppliers of electronic digital clock radios and
audio product 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, 1997, the Company had 29 full-time employees, including 18
in the United States, 1 in Hong Kong and 10 in Canada. Of those employed
in the United States, 4 were engaged in manufacturing, distribution and
service operations and 14 were sales, administrative and executive
personnel. In Hong Kong one employee is engaged in sales and
administrative duties. In Canada, 5 employees were engaged in
manufacturing, distribution and service operations and 5 were sales,
administrative and executive personnel.
The following table sets forth certain information with respect to the
executive officers of the Company as of March 31, 1998:
Name Age Position
Amancio Victor Suarez ............. 61 Chairman of the Board of
Directors, Chief Executive
Officer and Chief Financial
Officer
Carlos Ortega .......................... 53 President, Chief Operating
Officer and Director
Robert L. Scott 61 Vice President of Sales and
Marketing
Jose Bueno 43 Vice President, International
Operations
Yu Wing Kin 46 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. Carlos Ortega, a Director and shareholder of the Company was appointed
as the new President and Chief Operating Officer in July 1996. Mr. Ortega
has been a director of the Company since December 1992, and was one of the
founders and principals of Cargil International Corporation, a company
engaged in the distribution of household products and appliances to Latin
America.
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 international operations in the Far East. 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.
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 outstanding
principal balance at December 31, 1997 of approximately $2,148,115.
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 1997, 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 1997, the Company's common stock
("Common Stock") was traded in the over-the-counter market under the
NASDAQ symbol "CSMO." There were approximately 258 record holders of the
Common Stock as of March 19,1998. 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, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
On March 5, 1996, the Common Stock was delisted 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.
Fiscal Period High Low
1996 First Quarter 15/16 3/8
Second Quarter 5/8 1/4
Third Quarter 1/2 1/8
Fourth Quarter 3/8 1/8
1997 First Quarter 11/32 9/64
Second Quarter 11/32 3/32
Third Quarter 5/16 3/32
Fourth Quarter 5/8 1/16
Dividend Policy. It is the present policy of the Company's Board of
Directors to retain earnings. The Company has not declared any dividends
in the past. 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's Discussion and Analysis of Financial
Condition and Results of Operations."
(In thousands, except share data)
December 31: 1997 1996 1995 1994 1993
Statement of Operations Data:
Sales $16,761 $15,964 $15,243 $15,772 $13,883
Cost of sales 12,430 11,779 12,044 11,611 10,211
Gross margin 4,331 4,185 3,199 4,161 3,672
Selling, general and
administrative expenses 4,158 4,011 3,589 3,497 3,047
Income (loss) from operations 173 174 (390) 664 625
Other expense, net (749) (584) (587) (426) (449)
Net (loss) income (576) (410) (977) 238 176
Net (loss) income per share :
Basic $ (0.22) (0.16) (0.37) $ 0.08 $ 0.11
Fully diluted $0.06
Weighted average shares
outstanding :
Basic 2,642 2,642 2,642 2,863 1,657
Fully Diluted 2,856
Balancee Sheet Data:
Working Capital (Deficit) $ (880) $ (58) $(1,089) $ (414) $ (654)
Total Assets 7,940 7,805 11,826 9,927 8,796
Long-term Debt 1,323 1,702 465 487 518
Stockholders' Equity(Deficit) (532) 52 462 1,433 1,193
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,
1996 1995
1997 1996 1995 to 1997 to 1996
Sales 100.0% 100.0% 100.0% 5.5% 4.7%
Cost of Sales 74.2 74.0 79.0 6.3% (2.2)%
Gross Margin 25.8 26.0 21.0 3.5% 30.8%
Selling, general and
administrative 24.8 25.0 23.5 3.7% 11.8%
Income (loss)from operations 1.0 1.0 (2.5) (1.1)% 144.6%
Other expense, net (4.5) (3.6) (3.9) 28.4% (.6)%
Net Income (Loss) (3.4) (2.6) (6.4) 41.0 58.0
1997 Compared to 1996: Sales increased from 1996 to 1997 by
approximately $797,000, an increase of 5.5%. The sales increased is
attributable in part to sales of a broader range of products ,including
Telecom accessories and cellular phones, to existing accounts. Gross
margins as a percentage of sales remain almost the same in 1996 and 1997.
Selling, general and administrative expenses as a percentage of sales did
not have a noticeable change from 1996 to 1997. Other expenses, net of
interest, and other miscellaneous income, increased by 28.2% from 1996
to 1997. This was the result of a decrease in interest income of $36,000
and the fact that in 1996 the company received approximately $75,000 as a
result of proceeds from a class action antidumping in which Cosmo was a
party.
As a result of the foregoing, net loss increased from $410,000 in 1996 to
$576,000 in 1997. (See Item 1-" Financial and Management's Plans" for
additional comments on fiscal year 1997 and the Company's plans for fiscal
year 1998).
1996 Compared to 1995: Sales increased from 1995 to 1996 by approximately
$721,000, an increase of 4.7%. Management believed that the sales
increased was attributable in part to sales of a broader range of products
to existing accounts. Gross margins as a percentage of sales also increased
from 21.0% in 1995 to 26.0% in 1996. This increase was attributable to a
decrease in the cost of product from the Far East. Selling, general and
administrative expenses as a percentage of sales increased from 23.5%
in 1995 to 25.0% in 1996. The increase was primarily attributed to minor
overall increases in selling and administrative overhead expenses, due in
part to more intense sales efforts. Other expenses, net of interest, and
other miscellaneous income, increased slightly by 0.6% from 1995 to 1996.
Even though the interest and other miscellaneous expenses increased 115,000
(or 17%), there was miscellaneous income of approximately $75,000 as a
result of proceeds received by the Company from a class action antidumping in
which Cosmo was a party.
As a result of the foregoing net loss decreased from net loss of $977,000
in 1995 to a net loss of $410,000 in 1996. (See Item 1-"Financial and
Management's Plans" for additional comments on fiscal year 1996 and the
Company's plans for fiscal year 1997.
Liquidity and Capital Resources
Working capital was a deficit of approximately $880,000 at December 31,1997
an increase of approximately $822,000 from December 31, 1996. The ratio
of current assets to current liabilities at December 31, 1997 was .88 to 1,
as compared to .99 to 1 at December 31, 1996.
The Company has a credit facility of up to $7,500,000 with a financial
institution, expiring on December 31, 1998. The credit facility is secured
by substantially all assets of the Company, except for 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 the prime rate (8.5% at December 31, 1997)
plus 2.5%. As of December 31, 1997 and 1996, borrowings outstanding under
this credit facility amounted to $3,160,000 and $3,089,000, respectively.
The credit facility contains certain restrictive covenants, the most
restrictive covenant of which relates to a minimum net worth requirement,
which was not met by the Company as of December 31, 1997. The lender has
waived the minimum net worth requirement for the 1998 year.
The Company has another credit facility from a financial institution in the
amount of $750,000 expiring on December 1, 2001. This credit facility is
secured by a second mortgage on the Company's land and building in the
United States. Interest is charged on outstanding borrowings at prime
plus 1%. The Company commenced borrowing under this line in 1997. As
of December 31, 1997 borrowings outstanding under this credit facility
amounted to $750,000.
The Company has another credit facility from a financial institution in
the amount of $1,200,000. Interest is charged on outstanding borrowings
at the prime rate plus 2.5%. As of December 31, 1997 and 1996, borrowings
outstanding under this credit facility amounted to $302,000 and $462,000,
respectively. As of December 31, 1997, this financial institution has
restricted the Company's ability to borrow amounts under this line.
The Company has another line of credit from a financial institution in the
amount of $800,000 due on demand. Interest is charged on outstanding
borrowings at prime plus 2%. As of December 31, 1997 borrowings under
this line of credit amounted to $799,000. This line of credit facility is
secured by a subsidiary's accounts receivable and inventory.
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 on an as needed basis(see Item 13)
the Company will be able to meet its working capital requirements during
1998.
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 24 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, 1997.
Name Age Director Since
Cesar L. Alvarez 50 1987
Mr. Alvarez became a director of the Company in August 1987. Mr. Alvarez
has been a principal shareholder of Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quentel, P.A., a law firm in Miami, Florida for more than 5 years
and is presently its Chief Executive Officer and managing shareholder.
Mr. Alvarez also serves on the Board of Directors of Pediatrix Medical
Group, Inc., Ft. Lauderdale, Florida, FDP Corp., Miami, Florida and
CompuTrac, Inc., Dallas, Texas.
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 1997 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 1997,
1996 and 1995 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 1996 fiscal year 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 1997
1996 $108,000
1995 $200,000 $ 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 1997.
Aggregated Fiscal Year-End Option Value Table. No Named Executive Officers
held any options as of the end of the 1997 fiscal year.
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 1997. 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 1997.
Employment Agreements, Termination of Employment and Change-in-Control
Arrangements.
Currently there are no employment agreements with any Executives or Officers
of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is furnished as of December 31, 1997 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) 1,054,160 40.0%
16501 N.W. 16th Court
Miami, Florida 33169
Carlos Ortega 333,333 12.6%
16501 N.W. 16th Court
Miami, Florida 33169
A.J. Suarez 333,333 12.6%
16501 N.W. 16th Court
Miami, Florida 33169
Jose R. Aldariz 333,333 12.6%
c/o Cargil International
Corp.
6812 N.W. 77th Court
Miami, Florida 33166
All directors and
officers 1,423,493 53.5%
as a group (6 persons)(2)
(1) Includes 21,000 shares owned of record by a relative of Mr. Suarez.
(2) Includes 26,000 shares subject to presently exercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1996, the Company owed approximately $962,000 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 1997, Mr. Suarez had an informal commitment with the Company
to lend from time to time, at his sole discretion on an as needed basis,
up to an additional $500,000 to the Company on a demand basis. The loans
bear interest at prime rate plus 2.5%. As of December 31, 1997, the
aggregate amount owed by the Company to Mr. Suarez was approximately
$901,000, due on demand. For 1997, 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 1997 there was a reduction of $61,000 on
the balance owed to Mr. Suarez.
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 24 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 24 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 23, 1998 /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 23, 1998
/s/ Amancio V. Suarez
AMANCIO VICTOR SUAREZ,
Chairman of the Board
Chief Financial Officer
Chief Executive Officer
/s/ Carlos Ortega
CARLOS ORTEGA
President, Chief Operating Officer
and Director
/s/ Cesar L. Alvarez
CESAR L. ALVAREZ
Director
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1997 AND 1996 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1997 F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY(DEFICIT) FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1997 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1997 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, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity(deficit), and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Miami, Florida
March 23, 1998
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 and 1996
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 85,000 $ 89,000
Accounts receivable, net of
allowance for doubtful accounts
of $134,000 and $235,000, in 1997
and 1996, respectively 3,068,000 2,820,000
Inventories 2,901,000 2,973,000
Other (including $136,000 receivable
from a related party in 1997) 215,000 111,000
Total current assets 6,269,000 5,993,000
PROPERTY AND EQUIPMENT, net 1,372,000 1,455,000
OTHER 299,000 357,000
Total $ 7,940,000 $ 7,805,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,027,000 $ 1,241,000
Credit facilities 5,011,000 3,551,000
Due to principal stockholder 901,000 962,000
Other liabilities, including
current portion of long-term debt 210,000 297,000
Total current liabilities 7,149,000 6,051,000
LONG-TERM DEBT, net 1,323,000 1,702,000
CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY(DEFICIT):
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
shares issued and outstanding 133,000 133,000
Additional paid-in capital 25,410,000 25,410,000
Accumulated deficit (24,329,000) (23,753,000)
Cumulative translation adjustment (1,746,000) (1,738,000)
Total stockholders' equity (deficit) (532,000) 52,000
Total $ 7,940,000 $ 7,805,000
See notes to consolidated financial statements.
F-2
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
1997 1996 1995
SALES $ 16,761,000 $15,964,000 $15,243,000
COST OF SALES 12,430,000 11,779,000 12,044,000
GROSS MARGIN 4,331,000 4,185,000 3,199,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,158,000 4,011,000 3,589,000
INCOME(LOSS) FROM OPERATIONS 173,000 174,000 (390,000)
INCOME (EXPENSE):
Interest expense (787,000) (800,000) (685,000)
Interest income 5,000 41,000 57,000
Other, net 33,000 175,000 41,000
Total other expense, net (749,000) (584,000) (587,000)
NET LOSS $ (576,000) $ (410,000) $ (977,000)
BASIC LOSS PER SHARE $ (0.22) $ (0.16) $ (0.37)
WEIGHTED AVERAGE COMMON
AND EQUIVALENT SHARES
OUTSTANDING 2,642,000 2,642,000 2,642,000
See notes to consolidated financial statements.
F-3
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
Common
Stock Additional Cumulative
Shares Paid-In Accumulated Translation
Issued Amount Capital Deficit Adjustment Total
BALANCE,
DECEMBER
31,1994 2,633 $ 131,000 $25,406,000 $(22,366,000) $(1,738,000) $1,433,000
Issuance
of 9,000
shares of
common
stock
9 2,000 4,000 6,000
Net loss (977,000) (977,000)
BALANCE,
DECEMBER
31, 1995 2,642 133,000 25,410,000 (23,343,000) (1,738,000) 462,000
Net loss (410,000) (410,000)
BALANCE,
DECEMBER
31, 1996 2,642 133,000 25,410,000 (23,753,000) (1,738,000) 52,000
Net loss (576,000) (576,000)
Translation Adjustment (8,000) (8,000)
BALANCE,
DECEMBER
31, 1997 2,642 $133,000 $ 25,410,000 $(24,329,000) $(1,746,000) $(532,000)
See notes to consolidated financial statements.
F-4
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (576,000) $ (410,000) $(977,000)
Adjustments to reconcile net loss to net
cash (used) provided by operating
activities:
Depreciation and amortization 197,000 172,000 318,000
Issuance of shares of common stock to
certain employees 5,000
Decrease (increase) in accounts
receivable, net (248,000) 2,125,000 (1,654,000)
Decrease (increase) in inventories,
other current assets and other assets (40,000) 736,000 (177,000)
(Decrease) increase in accounts payable
,accrued expenses and other current
liabilities (301,000) (2,265,000) 1,306,000
Translation adjustment (8,000)
Net cash (used) provided by operating
activities ( 976,000) 358,000 (1,179,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (48,000) (20,000) (224,000)
CASH FLOWS FROM FINANCING ACTIVITIES :
Net increase (decrease) in credit
facilities and long-term debt repayments 1,081,000 (1,704,000) 1,162,000
Net increase (decrease) in due to
stockholders (61,000) 358,000 402,000
Net cash provided (used) by financing
activities 1,020,000 (1,346,000) 1,564,000
DECREASE INCREASE IN CASH AND CASH
EQUIVALENTS (4,000) (1,008,000) 161,000
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR 89,000 1,097,000 936,000
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR $ 85,000 $ 89,000 $1,097,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the
year for interest $ 666,000 $ 731,000 $ 588,000
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Issuance of shares of common stock
to certain employees $ 4,000
Disposal of fully depreciated assets $ 93,000
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, 1997
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.
Financial Difficulties and Management's Plans - The Company has been
experiencing a continuation of a difficult retail climate and strong
competition in recent years. During the last three years, several
large retailers in the United States have been reducing inventory
levels. Management has continued its efforts to address and eliminate
the Company's losses. Management's plans include a restructuring of
the Company's sales department and the introduction of new products
within existing product lines. The Company has also pursued new
product categories through increased sourcing activities in the Far
East. The Company has introduced a new line of product of cellular
phones and cellular phone accessories under the brand of "Cosmo
Telecom" and has finalized an agreement to market in Canada audio
product utilizing the brand name "Memorex". 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 on an as-needed basis,
the Company will be able to meet it's working capital requirements
during 1998. 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 1998.
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, 1996. The fair values of these instruments
were not materially different than their carrying (or contract) values.
Principles of Consolidation - The Company includes, in consolidation,
its wholly owned subsidiaries. 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, 1997 and 1996 amounted
to $268,000 and $325,000, respectively.
Foreign Currency Translation - The accounts of the foreign subsidiaries
were translated into U.S. dollars in accordance with the provisions of
Financial Accounting Standards Board No. 52 ("SFAS 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 SFAS 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, 1997, 1996, and 1995, sales to a
single customer accounted for approximately 43%, 34%, and 34%,
respectively, of total sales. Accounts receivable corresponding to
this customer approximated $881,000 and $672,000 as of December 31,
1997 and 1996, 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 $200,000 in 1997, $210,000 in 1996 and $225,000 in 1995.
Income Taxes - The Company follows the guidelines contained in
Financial Accounting Standards Board Statement 109, Accounting for
Income Taxes ("SFAS 109"). SFAS 109 requires an asset and liability
approach for financial accounting and reporting for income taxes.
In addition, SFAS 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 and Loss Per Share - The Company adopted the guidelines
contained in Financial Accounting Standards Board Statement 128,
Earnings Per Share ("SFAS 128") during 1997. Under SFAS No. 128,
basic earnings per share is computed based on the average number of
common shares outstanding and diluted earnings per share is computed
based on the average number of common and potential common shares
outstanding. SFAS 128 requires the restatement of all prior period
earnings per share. As of each period ended, there were no dilutive
common equivalent shares. The stock options described in Note 8 could
potentially dilute earnings per share in the future but were not
included in diluted loss per share since they would be antidilutive
for the periods presented.
Impairment of Long-lived Assets - In March 1995, the Financial
Accounting Standards Board issued Statement of Financial Standards
No. 121, Accounting for the Impairment of Long-Lived Assets
("SFAS 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 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 value amount of an asset may not be recoverable.SFAS 121
was adopted without a material impact on the financial position of
the Company or its results of operations.
Stock -Based Compensation - In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123
establishes accounting and financial reporting for stock-based
compensation plans. Those plans include all arrangements by which
employees and non-employee members of the Board receive shares of
stock or other equity instruments of the employer or the employer
incurs liabilities to employees in amounts based on the price of the
employer's stock. SFAS 123 encourages that these transactions be
accounted for based on the fair value of the consideration received
or the fair value of the equity instrument issued whichever is more
reliably measurable.
The Company has chosen to continued to account for stock-based plans
using the intrinsic value method prescribed by Accounting Principles
Board Opinion("APB") No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, compensation
cost of stock based compensation are measured as the excess, if any,
of the fair value of the Company's stock at the date of the grant
over the amount an employee or non-employee member of the Board must
pay for the stock. The Company did not grant any stock options in
1997,1996 and 1995.
Recently Issued Accounting Pronouncement - In June 1997, the
Financial Accounting Standards Board issued Statement of Financial
Standards No. 130, Reporting Comprehensive Income ("SFAS 130").
SFAS No. 130 requires that all components of comprehensive income
be reported on one of the following: (1) the statement of income,
(2) the statement of changes in stockholder's equity, or (3) a
separate statement of comprehensive income. Comprehensive income is
comprised of net income and all changes to stockholders' equity,
except those due to investments by owners (changes in paid in
capital) and distributions to owners (dividend). SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 130 is not expected to have a material impact
on the Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segment of an Enterprise and
Related Information, (SFAS No. 131"). SFAS No. 131, establishes
standards for the way that public companies report selected
information about operating segments in annual financial statements
and requires that those companies report selected information about
segments in interim financial reports issued to shareholders. It
also establishes standards for related disclosures about products
and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for the periods beginning
after December 15, 1997. The Company has not determined the effects,
if any, SFAS No. 131 will have on the disclosure in its financial
statements.
2. ACCOUNTS RECEIVABLE
The activity for the allowance for doubtful accounts is as follows for
the years ended December 31 :
1997 1996 1995
Beginning balance $ 235,000 $184,000 $ 57,000
Provision 409,000 138,000 136,000
Write-offs,net of recoveries (492,000) (87,000) (9,000)
Ending balance $134,000 $235,000 $184,000
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:
1997 1996
Land $ 400,000 $ 400,000
Building 1,600,000 1,610,000
Leasehold improvements 286,000 286,000
Plant and equipment 964,000 964,000
Auto and trucks 21,000 26,000
Furniture and fixtures 159,000 192,000
Total 3,430,000 3,478,000
Less accumulated depreciation
and amortization ( 2,058,000) (2,023,000)
$ 1,372,000 $ 1,455,000
4. CREDIT FACILITIES
The following are the Company's credit facilities:
The Company has a credit facility of up to $7,500,000 with a financial
institution, expiring on December 31, 1998. The credit facility is
secured by substantially all assets of the Company, except for 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 the prime rate (8.5% at
December 31, 1997) plus 2.5%. As of December 31, 1997 and 1996,
borrowings outstanding under this credit facility amounted to
$3,160,000 and $3,089,000, respectively. The credit facility contains
certain restrictive covenants, the most restrictive covenant of which
relates to a minimum net worth requirement, which was not met by the
Company as of December 31, 1997. The lender has waived the minimum net
worth requirement through December 31, 1998.
The Company has another credit facility from a financial institution
in the amount of $750,000 expiring on December 1, 2001. This credit
facility is secured by a mortgage on the Company's land and building
in the United States. Interest is charged on outstanding borrowings
at prime plus 1%. The Company commenced borrowing under this line
in 1997. As of December 31, 1997 borrowings outstanding under this
credit facility amounted to $750,000.
The Company has another unsecured credit facility from a financial
institution. Interest is charged on outstanding borrowings at the
prime rate plus 2.5%. As of December 31, 1997 and 1996, borrowings
outstanding under this credit facility amounted to $302,000 and
$462,000, respectively. As of December 31, 1997, this financial
institution has not permitted the Company to borrow any further
amounts under this line. The line is now due in full.
The Company has another line of credit from a financial institution
in the amount of $800,000 due on demand. Interest is charged on
outstanding borrowings at prime plus 2%. As of December 31, 1997
borrowings under this line of credit amounted to $799,000. This line
of credit facility is secured by a subsidiary's accounts receivable
and inventory.
5. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31:
1997 1996
Note payable at prime rate plus 1% in monthly
installments of principal and interest of
approximately $18,000 expiring in December
2001, at which time the entire outstanding
balance is due, collateralized by a mortgage
on the Company's land and building in the
United States. 1,399,000 1,520,000
First mortgage note at 11%, payable
in monthly installments of principal and
interest of approximately $7,400 in 1996
through the year 2004, collateralized by the
Company's land and building in the United
States. $ 318,000
Total 1,399,000 1,838,000
Less current portion (76,000) (136,000)
Long-Term Debt $ 1,323,000 $ 1,702,000
6. INCOME TAXES
The domestic and foreign components of net (loss) income were as
follows for the years ended December 31:
1997 1996 1995
Domestic $ (882,000) $ (1,049,000) $ (1,095,000)
Foreign 306,000 639,000 118,000
Total balance $ (576,000) $ (410,000) $ (977,000)
Domestic - The Company has unused domestic tax loss carryforwards of
approximately $40,174,000 to offset future taxable income. Such
carryforwards expire from the year 1998 through the year 2012.
Included in the tax loss carryforwards are approximately $14,037,000
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 $15,098,000 as of December 31, 1997.
Foreign - The Company has unused foreign tax loss carryforwards of
approximately $1,300,000 to offset future taxable income.
Approximately $600,000 of these tax loss carryforwards expire by 2002.
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 $424,000.
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, 1996 to December 31, 1997 for the
domestic and foreign components was a decrease of $1,384,000 and
$194,000, respectively.
7. 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.
8. STOCKHOLDERS' EQUITY
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, 1997, 252,000 stock options were outstanding of
which 230,000 were exercisable. No stock options were granted ,
excercised , forfeited or expired during the last three years.
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.
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)
1997
Sales to unaffiliated customers $ 9,271 $ 7,490 $ $ 16,761
Transfers between geographic
areas 89 ( 89)
Total sales $ 9,271 $ 7,579 $ ( 89) $ 16,761
(Loss) income from operations $ (134) $ 307 $ 173
Identifiable assets $ 5,559 $ 1,918 $ 7,477
Corporate assets 277 186 463
Total assets $ 5,836 $ 2,104 $ 7,940
1996
Sales to unaffiliated customers $ 9,565 $ 6,399 $ 15,964
Transfers between geographic
areas 303 (303)
Total sales $ 9,565 $ 6,702 $ (303) $ 15,964
(Loss) income from operations $ (476) $ 650 $ 174
Identifiable assets $ 3,985 $ 1,808 $ 5,793
Corporate asssets 1,774 238 2,012
Total assets $ 5,759 $ 2,046 $ 7,805
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) income 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
10. RELATED PARTY BALANCES
Amounts due to the principal stockholder bear interest at the prime
rate plus 2.5% and are due on demand. Included in other current
liabilities is $70,000 due to the Company's current President. Total
interest expense incurred due to related party payables for the years
ended December 31, 1997 ,1996 and 1995 approximated $98,000 , $115,000
and $38,000 respectively.
* * * * * *
EXHIBIT 10.4
February 19, 1998
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 Financing Agreement between us dated October 30, 1989 through
December 31, 1998. 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, 1998 or any other period.
Very truly yours,
Congress Financial Corporation (Florida)
/s/ Ramon Lebron
Ramon Lebron
Vice President
32
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<PERIOD-END> DEC-31-1997
<CASH> 85,000
<SECURITIES> 0
<RECEIVABLES> 3,202,000
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<COMMON> 133,000
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