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, 1998
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, 1999, the market value of the registrant's Common Stock
held by non-affiliates of the registrant was approximately $ 86,520 based
on the closing bid price of $ 0.07 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 TV, VCR, audio equipment, digital
alarm clocks, quartz alarm clocks, quartz wall clocks, clock radios and
combination products such as clock radio telephones. The audio equipment
includes 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, 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 four years,
several large retailers in the United States continued their corporate
policies to reduce their inventory levels. In addition, the Company is not
currently selling to Walmart (USA). Although not successful during
the last three fiscal years. Management has continued its efforts to return
the Company to profitability. Management's plans include a restructuring
of the Company's sales department and the introduction of new products.
The Company has also pursued 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. The Company introduced in 1998 a new line of audio
equipment ,TV and VCR under the brand of "Memorex", for distribution
exclusively in Canada. In 1998, the Company increased its sales in /canada
as a result of the introduction of these products and management intends to
focus its sales efforts in the Canadian market in 1999.
Management believes that through its existing credit facilities and the
continued commitment by the Company's principal stockholder to provide
additional financing, the Company will be able to meet its working capital
requirements during 1999. The Company's ability to successfully implement
its plans to eliminate its losses and return to profitability 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 1999 (See Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations).
Products
Clocks - 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
microprocessors, 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 1998, retailing from approximately $5 to $40. Subcontractors in Hong
Kong, and the People's Republic of China manufacture the Company's wall
clocks. The Company also sold approximately 20 models of battery operated
quartz alarm clocks during 1998, retailing from approximately $5 to $20.
Subcontractors in Hong Kong and the People's Republic of China manufacture
the Company's battery operated quartz alarm clocks.
Radios - 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 1998, 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
Licensed Product: In 1997 Cosmo finalized an agreement to market in Canada
audio product utilizing the brand name "Memorex". 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 1998, sales to retailers became more difficult
as a result of economic conditions and strong competition from other
manufacturers and importers, as a result. the Company is not currently
selling to Walmart (USA). The Company is attempting to overcome these
difficulties by focusing its sales efforts in Canada in 1999 through the
expansion of the Memorex products
The following table illustrates the Company's primary
marketing channels and representative customers in 1998.
Mass Merchandiser Drug Store Chains Specialty Chains
Wal-Mart (Canada) American Drug AAFES
Target Genovese Canadian Tire
Fedco Osco Drug Fortun Off
Kohl's Savon Drug Bed, Bath & Beyond
Roses Stores Brooks
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 (United States) are
generated by either the Company's full-time sales staff or its approximately
20 independent sales representatives. Approximately 52% of the Company's
sales in 1998 were to customers within the United States, with the remainder
of 48% to customers in Canada. 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
56.4% of sales for 1998. During 1998, 1997 and 1996, sales to Walmart
accounted for approximately 44%, 43% and 34%, respectively, of total sales.
The loss of any major customer would have a significantly negative impact
on the Company.
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 the facilities
of its subcontractors, and also inspects its products upon their arrival
in the United States and Canada.
The Company uses microprocessors from Texas Instruments, Sanyo Semiconductor
, Hitachi, Ltd., Motorola Inc. , Phillips Hong Kong, Ltd. and Memcorp of
Asia. 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 1998, the Company introduced no new electronic digital alarm clocks
(LED and LCD), quartz alarm clocks, quartz wall clocks and clock radios
into the market. However in audio products, which are where the company
intensified the sales efforts, all the expenses were incurred by the supplier
During the year ended December 31, 1998, the Company did not spend any
significant amount in this area , however the Company spent approximately
$200,000 in 1997 and $210,000 in 1996 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.
The Company believes that important factors necessary to compete include
name recognition, price, quality reliability, attractive packaging, speed
of delivery to customers and new or additional product features. 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.
Further, the Company's ability to market such products at competitive prices
is necessary in order to 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 , Emerson Radio
Corporation and Memcorp of Asia.
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. In order to meet unexpected levels of demand or to better
secure its customers, the Company has utilized costly air shipping rather
than 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, 1998, the Company had 21 full-time employees, including 5
in the United States, 1 in Hong Kong and 15 in Canada. Of those employed
in the United States, 2 were engaged in manufacturing, distribution and
service operations and 3 were sales, administrative and executive personnel.
In Hong Kong one employee is engaged in sales and administrative duties. In
Canada, 7 employees were engaged in manufacturing, distribution and service
operations and 8 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, 1999:
Name Age Position
Amancio Victor Suarez ............................ 62 Chairman of the
Board of Directors,
Chief Executive
Officer and Chief
Financial Officer
Carlos Ortega ....................................... 54 President, Chief
Operating Officer
and Director
Jose Bueno 44 Vice President,
International
Operations
Yu Wing Kin 47 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. 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, 1998 of approximately $1,323,000.
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 1998, 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 1998, the Company's common stock
("Common Stock") was traded in the over-the-counter market under the OTC
Bulettin Board symbol "CSMO." There were approximately 258 record holders
of the Common Stock as of March 22,1999. 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,
markdown 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
1997 First Quarter 0.34375 0.3125
Second Quarter 0.34375 0.3125
Third Quarter 0.3125 0.3125
Fourth Quarter 1.625 0.1875
1998 First Quarter .... 1.625 0.4375
Second Quarter......... 0.625 0.3125
Third Quarter 0.3125 0.25
Fourth Quarter 0.25 0.14
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: 1998 1997 1996 1995 1994
Statement of Operations Data:
Sales 14,221 $16,761 $15,964 $15,243 $15,772
Cost of sales 12,163 12,430 11,779 12,044 11,611
Gross margin 2,058 4,331 4,185 3,199 4,161
Selling, general and
administrative expenses 2,867 4,158 4,011 3,589 3,497
Income (loss) from operations (809) 173 174 (390) 664
Other expense, net (664) (749) (584) (587) (426)
Net (loss) income (1,473) (576) (410) (977) 238
Basic and diluted (loss) earnings
per share $(0.56) $(0.22) $(0.16) $(0.37) $0.08
Shares used in computing
Loss per share 2,642 2,642 2,642 2,642 2,863
Balance Sheet Data:
Working Capital Deficit $(2,095) $(880) $(58) $(1,089) $(414)
Total Assets 5,022 7,940 7,805 11,826 9,927
Long-term Debt 1,247 1,323 1,702 465 487
Stockholders' Equity(Deficit) (1,890) (532) 52 462 1,433
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,
1997 1996
1998 1997 1996 to 1998 to 1997
Sales 100.0% 100.0% 100.0% (15.2)% 5.0%
Cost of Sales 85.5 74.2 74.0 (2.2)% 6.3%
Gross Margin 14.5 25.8 26.0 (52.5)% 3.5%
Selling, general and
administrative 20.2 24.8 25.0 (31.2)% 3.7%
Income (loss)
from operations (5.7) 1.0 1.0 ( 567.6)% (0.6)%
Other expense,net (4.7) (4.5) (3.6) (11.3)% 28.3%
Net Loss (10.4) (3.5) (2.6) 155.7% 41.0%
1998 Compared to 1997: Sales decreased from 1997 to 1998 by approximately
$2,540,000 or 15.2% primarily resulting from the Company not selling
to Walmart(USA) due to a higher level of competition in the market
of clock and digital radios. During 1998 the volume of direct import sales
from the orient in audio equipment increased by approximately $4,069,000
due to the introduction of Memorex products. Gross margin, as percentage
of sales, decreased by 52.5% ,mainly due to the fact that direct import
sales have a lower margin than other products sold by the Company.
Additionally the cost of inventory had a negative effect as a result of a
fluctuation in the canadian exchange rate as compared to 1997. Selling,
general and administrative expenses decreased as a percentage of sales,due
to the Company's policy during the year to reduce operating expenses,
primarily from a reduction in personnel in the United States headquarters.
Other expenses, net of interest decreased due to a decrease in credit
facility balances outstanding during the year.
Net loss increased from of $ 576,000 in 1997 to a net loss of $1,473,000
in 1998. ( See Item 1-" Financial and Management's Plans" for additional
comments on fiscal year 1998 and theCompany's plans for fiscal year 1999).
1997 Compared to 1996: Sales increased from 1996 to 1997 by approximately
$797,000, an increase of 5.0%. The sales increase 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 28.3% 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.
Liquidity and Capital Resources
Working capital has a deficit of approximately $2,095,000 at December 31,
1998, an increase of approximately $1,215,000 from December 31, 1997.
The ratio of current assets to current liabilities at December 31, 1998
was .63 to 1, as compared to .88 to 1 at December 31, 1997.The Company met
its capital requirement thru cash generated from operations.
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, 1999. Maximum borrowings are tied by formula to
eligible accounts receivable and inventories. Interest is charged on
outstanding borrowings at the prime rate (7.75% at December 31, 1998) plus
2%. This credit facility is secured substantially by all the accounts
receivable and inventories of the Company. At December 31, 1998 and 1997,
borrowings outstanding under this credit facility amounted to $1,949,000
and $3,160,000, 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 31,1998. However, the
lender has waived the minimum net worth requirements through
December 31,1999.
The Company has another credit facility from a financial institution in
the amount of $750,000, which is due on demand. Interest is charged on
outstanding borrowings at prime plus 1%. As of December 31, 1998 and 1997,
there were borrowings outstanding under this credit facility of $750,000
in each year.
The Company has another credit facility with a financial institution in
the amount of $422,254. Interest is charged on outstanding borrowings at 10%.
As of December 31, 1998 and 1997, borrowings outstanding under this credit
facility amounted to $212,000 and $302,000, respectively. The Company has
entered into an agreement with this financial institution whereby a portion
of the net proceeds collected from letter of credits are applied to reduce
the outstanding borrowings.
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, 1998 and 1997, borrowings
under this line of credit amounted to approximately $799,000 in each year.
This line of credit facility is secured by a subsidiary's accounts
receivable and inventory. In the current year, the Company has only made
interest payments on this line.
Management believes that through its existing credit facilities and the
continued commitment by the Company's principal stockholder to provide
additional financing, (see Item 13), the Company will be able to meet its
working capital requirements during 1999.However, there can be assurance
that the Company will be able to obtain sufficient financing during year 1999.
See No. 4 and 5 of the Notes to Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
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 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth, for the 1998,
1997 and 1996 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 1998 -
1997 - - -
1996 $108,000 - -
(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.
Option Grants Table. No options were granted during fiscal 1998.
Aggregated Fiscal Year-End Option Value Table. No Named Executive Officers
held any options as of the end of the 1998 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 1998. 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 1998.
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, 1998 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 (4 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, 1998, the Company owed approximately $592,000 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 to finance
its working capital needs. During 1998, Mr. Suarez had an informal
commitment with the Company to lend from time to time, as needed,
to the Company on a demand basis. The loans bear interest at 10.25%. As
of December 31, 1998 the aggregate amount owed by the Company to Mr. Suarez
was approximately $592,000, on a demand basis. During 1998 there was a
reduction on the balance owed to Mr. Suarez in the amount of $309,000.
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 18 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 18 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 Amended and Restated 1990 Stock Option Plan
(Compensatory Plan)(3)
10.2 Credit Facility with Congress Financial Corporation
and Amendments thereto(4)
10.3 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) 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: April 09,1999 /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:April 9, 1999
/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
COSMO COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1998 F-3
CONSOLIDATED OF STOCKHOLDERS' DEFICIENCY
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1998 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1998 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
COSMO COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 and 1997
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 137,000 $ 85,000
Accounts receivable, net of allowance
for doubtful accounts of $98,000 and
$134,000, in 1998 and 1997, respectively 1,268,000 3,068,000
Inventories 1,848,000 2,901,000
Other (including $149,000 and $136,000
receivable from a related party
in 1998 and 1997) 317,000 215,000
Total current assets 3,570,000 6,269,000
PROPERTY AND EQUIPMENT, net 1,244,000 1,372,000
OTHER 208,000 299,000
Total $ 5,022,000 $7940,000
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,244,000 $ 1,027,000
Credit facilities 3,708,000 5,011,000
Due to principal stockholder 592,000 901,000
Other liabilities, including current
portion of long-term debt 121,000 210,000
Total current liabilities 5,665,000 7,149,000
LONG-TERM DEBT, net 1,247,000 1,323,000
CONTINGENCIES (NOTE 7)
STOCKHOLDERS' DEFICIENCY:
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 as of
December 31, 1998 and 1997 133,000 133,000
Additional paid-in capital 25,410,000 25,410,000
Accumulated deficit (25,802,000) (24,329,000)
Accumulated Other Comprehensive Loss (1,631,000) (1,746,000)
Total stockholders' deficiency (1,890,000) (532,000)
Total $ 5,022,000 $ 7,940,000
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, 1998
1998 1997 1996
SALES, net $ 14,221,000 $16,761,000 $15,964,000
COST OF SALES 12,163,000 12,430,000 11,779,000
GROSS MARGIN 2,058,000 4,331,000 4,185,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Selling expenses 1,903,000 2,638,000 2,032,000
General and administrative expenses 964,000 1,520,000 1,979,000
Totall selling, general and
administrative expenses 2,867,000 4,158,000 4,011,000
NCOME(LOSS) FROM OPERATIONS (809,000) 173,000 174,000
OTHER INCOME (EXPENSE):
Interest expense (669,000) (787,000) (800,000)
Interest income 5,000 5,000 41,000
Other, net 33,000 175,000
Total other expense, net (664,000) (749,000) (584,000)
NET LOSS $ 1,473,000 $ 576,000 $ 410,000
BASIC AND DILUTED LOSS PER SHARE $ (0.56) $ (0.22) $ (0.16)
SHARES USED IN COMPUTING
LOSS PER SHARE 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' DEFICIENCY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
Common Accumulated
Stock Additional Other
Shares Paid-in Accumulated Comprehensive
Issued Amount Capital Deficit Income Total
BALANCE,
DEC.31/95 2,642,000 $133,000 $25,410,000 (23,343,000) (1,738,000) $462,000
Net loss (410,000) (410,000)
BALANCE,
DEC.31/96 2,642,000 133,000 25,410,000 (23,753,000) (1,738,000) 52,000
Net loss (576,000) (576,000)
Foreign
Currency
Translation (8,000) (8,000)
Comprehensive Loss (584,000)
BALANCE,
DEC.31/97 2,642,000 133,000 25,410,000 (24,329,000) (1,746,000) (532,000)
Net loss (1,473,000) (1,473,000)
Foreign Currency Translation 115,000 115,000
Comprehensive Loss (1,358,000)
BALANCE,
DEC.31/98 2,642,000 $133,000 $25,410,000$(25,802,000$(1,631,000$(1,890,000)
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, 1998
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,473,000) $ (576,000) $(410,000)
Adjustments to reconcile net loss to net
cash (used) provided by operating activities:
Depreciation and amortization 131,000 197,000 172,000
Decrease (increase) in accounts receivable
net 1,800,000 (248,000) 2,125,000
Decrease (increase) in inventories and
other assets 1,042,000 (40,000) 736,000
(Decrease) increase in accounts payable,
accrued expenses and other current
liabilities 217,000 (301,000)(2,265,000)
Foreign Currency Translation 115,000 (8,000)
Net cash (used) provided by
operating activities 1,832,000 (976,000) 358,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ( 3,000) (48,000) (20,000)
CASH FLOWS FROM FINANCING ACTIVITIES :
Net increase (decrease) in credit
facilities and long- term debt
repayments (1,468,000) 1,081,000 (1,704,000)
Net increase (decrease) in due to
stockholders (309,000) (61,000) 358,000
Net cash provided (used) by
financing activities (1,777,000) 1,020,000 (1,346,000)
DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS 52,000 (4,000)(1,008,000)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR 85,000 89,000 1,097,000
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR $ 137,000 $ 85,000 $ 89,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the
year for interest $ 599,000 $ 666,000 $ 731,000
SUPPLEMENTAL DISCLOSURES OF NONCASH
ACTIVITIES:
Disposal of fully depreciated assets $ 93,000
See notes to consolidated financial statements.
F-5
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - Cosmo Communications Corporation and subsidiaries (the "Company")
markets and distributes 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 incurred
significant losses in working capital and has a stockholder deficiency
as of December 31,1997 and 1998 of $532,000 and $1,890,000, respectively.
Management attributes its losses to a highly competitive retail market.
The Company has met its obligations through the support of its principal
shareholder. Such shareholder has agreed to continue to finance the
Company as needed during 1999.
The Company's plans are to increase its sales efforts in the Canadian
market through a distribution agreement for a major brand item and to
intensify sales effort through the introduction of new product lines.
It is anticipated that the introduction of these product lines will assist
the Company in capturing new markets within the retail arena. Further,
the Company continues its effort to reduce operating costs. Although no
assurances can be given, the Company believes its sales and cost reduction
plans will ultimately allow the Company to return to profitability.
Management believes that through its existing credit facilities and the
continued commitment by the Company's principal stockholder to provide
additional financing, the Company will be able to meet its working capital
requirements during 1999. The Company's ability to successfully implement
its plans to improve its operations 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 operating results
or financial condition will improve in fiscal year 1999.
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 values of such financial instruments have been
determined based on current market interest rates as of December 31, 1998.
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.
F-6
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 goodwill with an original cost of
983,000. Such amount is being amortized on a straight-line basis over
fifteen years. The unamortized balance at December 31, 1998 and 1997
amounted to $202,000 and $268,000, respectively.
Foreign Translation Adjustment - 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, 1998, 1997, and 1996, sales to a single customer
accounted for approximately 44%, 43%, and 34%, respectively, of total sales.
Accounts receivable corresponding to this customer approximated $492,000
and $881,000 as of December 31, 1998 and 1997, 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 since the Company's annual net warranty
liability is not 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 and $210,000 in 1996. The Company did not spend any significant
amount in this area in 1998.
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.
Loss Per Share - The Company adopted the guidelines contained in Financial
Accounting Standards Board Statement 128 Earning Per Share ("SFAS 128")
during 1997. Under SFAS No 128 , basis earnings or loss per share is
computed based on the average number of common shares outstanding and
diluted earnings or loss 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 discussed
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.
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-employees 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
reliable measurable.
The Company has chosen to continue 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 1998, 1997 and 1996.
Comprehensive Income - In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Standards N0. 130, Reporting
Comprehensive Income (SFAS 130"). SFAS N0. 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 charges to stockholders' equity,
except those due to investments by owners (changes in paid in capital) and
distributions to owners (dividend). The Company adopted SFAS No. 130 in 1998
and has revised all prior periods in its financial statements. Accumulated
other comprehensive loss as presented on the consolidated statements of
stockholders' deficiency represents the foreign currency translation.
Segment Reporting - 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 adopted SFAS No. 131 in 1998.See
Note No. 9
2. ACCOUNTS RECEIVABLE
The activity for the allowance for doubtful accounts is as follows for the
years ended December 31 :
1998 1997 1996
Beginning balance $ 134,000 $235,000 $ 184,000
Provision 105,000 409,000 138,000
Write-offs, net of recoveries (141,000) (492,000) (87,000)
Ending balance $ 98,000 $134,000 $ 235,000
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:
1998 1997
Land $ 400,000 $ 400,000
Building 1,600,000 1,600,000
Leasehold improvements 286,000 286,000
Plant and equipment 966,000 964,000
Auto and trucks 21,000 21,000
Furniture and fixtures 160,000 159,000
Total $ 3,433,000 $ 3,430,000
Less accumulated depreciation and
amortization ( 2,189,000) (2,058,000)
$ 1,244,000 $ 1,372,000
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, 1999. 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 (7.75% at December 31, 1998) plus
2%. As of December 31, 1998 and 1997, borrowings outstanding under this
credit facility amounted to $1,948,000 and $3,160,000, 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, 1998. However, the lender has
waived the minimum net worth requirement through December 31, 1999.
The Company has another credit facility from a financial institution in the
amount of $750,000, which is due on demand. Interest is charged on
outstanding borrowings at prime plus 1%. As of December 31, 1998 and 1997,
there were borrowings outstanding under this credit facility of $749,000
in each year.
The Company has another credit facility from a financial institution in the
amount of $422,254. Interest is charged on outstanding borrowings at 10%.
As of December 31, 1998 and 1997, borrowings outstanding under this credit
facility amounted to $212,000 and $302,000, respectively. The Company has
entered into an agreement with this financial institution whereby a portion
of the net proceeds collected from letter of credits are applied to reduce
the outstanding borrowings
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, 1998 and 1997, borrowings
under this line of credit amounted to approximately $799,000 in each year.
This line of credit facility is secured by a subsidiary's accounts
receivable and inventory. In the current year, the Company has only made
interest payments on this line.
5. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31:
1998 1997
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
balanceas due, collateralized by a mortgage on
the Company's land and building in the United
States. 1,323,000 1,399,000
Total 1,323,000 1,399,000
Less current portion (76,000) (76,000)
Long-Term Debt $ 1,247,000 $ 1,323,000
6. INCOME TAXES
The domestic and foreign components of net (loss) income were as follows
for the years ended December 31:
1998 1997 1996
Domestic $ (1,471,000) $ (882,000) $ (1,049,000)
Foreign (2,000) 306,000 639,000
Total balance $(1,473,000) $ (576,000) $ (410,000)
Domestic - The Company has unused domestic tax loss carryforwards of
approximately $36,000,000 to offset future taxable income. Such
carryforwards expire from the year 1999 through the year 2014. Included
in the tax loss carryforwards is approximately $5,820,00 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 $13,524,000
as of December 31, 1998.
Foreign - The Company has unused foreign tax loss carryforwards of
approximately $4,871,000 to offset future taxable income. Approximately
$280,000 of these tax loss carryforwards expires 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 $1,469,000.
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, 1997 to December 31, 1998 for the domestic and foreign components was
an increase of $1,574,000 and an increase of $1,045,000, 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, 1998, 250,000 stock options were outstanding of which
250,000 were exercisable. No stock options were granted, exercised,
forfeited or expired for the last three years. The exercise price of the
stock options range from $.45 - $1.55 per option.
9. OPERATING SEGMENT INFORMATION- ( IN THOUSANDS)
The Company operated in one business segment and all of its sales are
consumer electronic products. The Company's customers are principally
in the United States and Canada. Borrowings are principally in the
United States.
1998 United
States Canada Other Total
Net Assets $ 3,302 $ 1,508 $ 212 $5,022
Sales, net 7,625 6,596 - 14,221
Gross Margin 1,399 659 - 2,058
Net income(loss) (1,148) (325) (1,473)
1997
Net Assets $ 5,836 $ 1,650 $ 454 $7,940
Sales, net 10,728 6,024 9 16,761
Gross Margin 3,080 1,235 16 4,331
Net income(loss) (805) 221 8 (576)
1996
Net Assets $ 5,582 $ 506 $1,717 $7,805
Sales, net 11,213 4,643 58 15,964
Gross Margin 2,820 1,294 71 4,185
Net income(loss) (842) 401 31 (410)
10. RELATED PARTY BALANCES
Amounts due to the principal stockholder bear interest at the 10.25%
and are due on demand. Also included in other current liabilities at
December 31, 1998 and 1997 are $45,000 and $70,000,respectively due to
the Company's current President. Total interest expense incurred due to
related party payables for the years ended December 31, 1998, 1997
and 1996 approximated $83,000, $98,000 and $115,000, respectively.
* * * * * *
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, 1998 and 1997, and the related consolidated statements of
operations, stockholders' deficiency, and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Miami, Florida
April 9,1999
EXHIBIT 10.4
March 29, 1999
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, 1999. 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, 1999 or any other period.
Very truly yours,
Congress Financial Corporation (Florida)
/s/ Ramon Lebron
Ramon Lebron
Vice President
31
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</TABLE>
