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, 1999
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 Oct , 2000, the market value of the registrant's Common Stock
held
by
non-affiliates of
the registrant was approximately $ 370,800 based on the closing bid
price of
$
0.30 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 continued to experience intense price competition in the
consumer
electronic retail
market in 1999, particularly in the US. During the year, management
scaled
back
the US
operation and focused its business in Canada and in South and Central
America.
Sales in
Canada have achieved moderate success in distributing, under agreement,
the
Memorex brand in
audio, TV and VCR product lines.
On May 21,1999 the Company entered into a stock purchase agreement with
Communications
Systems Engineering Inc. ("CSE") and CSE Technologies Inc F/K/A CSE-
Nextel
Inc
(CSE
Technologies). The Company acquired 60% of the total shares outstanding.
CSE
and
CSE
Technologies design telecommunication equipment and telephone systems,
and
market its
products in South and Central America. The Company believes that this
new
business will help
to improve profitability in the future.
Management believes that the transaction described in Note 10 and the
support of
the new
shareholder will provide the Company with the resources necessary to
meet
its
obligation over
the next year. The Company's ability to ultimately return to
profitability
is
dependent upon a
number of factors beyond its control, including 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 2001 (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 1999, 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 1999, 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 markets
Licensed Product - In 1997 Cosmo finalized an agreement to market in
Canada
audio products
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
the
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 1999, sales to retailers in Canada had improved,
specially
with
Wal-Mart
(Canada). Sales in the US continued to be weak as a result of strong
competition from other
manufacturers and importers. The Company is attempting to overcome
these
difficulties in
2000. The following customers illustrate the Company's primary
marketing
channels and major
customers in 1999.
Wal-Mart (Canada) - Mass Merchandiser
Canadian Tire - Specialty Chain
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 (Canada) are generated
by
either the
Company's full-time sales staff or sales representatives. Approximately
7%
of
the Company's
sales in 1999 were to customers within the United States, with the
remainder
of 93% 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 largest customer, Wal-Mart of Canada, accounted
for
approximately
71% of sales for 1999. During 1999, 1998 and 1997, sales to Wal-Mart
accounted
for
approximately 71%, 44% and 43%, 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 specifi-
cations. Subcontractors in Hong Kong, the Peoples Republic of China and
Taiwan
assemble
clocks, clock radios and audio products. The Company performs quality
control
inspections on
the premises of its subcontractors, and also inspects its products upon
their
arrival in the United
States and Canada.
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 1999, 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, 1999, the
Company
did not spend
any significant amount in this area.
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).
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, 1999, the Company had 21 full-time employees, including
1 in
the
United
States, 1 in Hong Kong and 19 in Canada. In the United States, 1 engaged
in
administrative and
executive personnel duties. In Hong Kong one employee is engaged in
sales
and
administrative
duties. In Canada, 9 employees engaged in manufacturing, distribution
and
service operations
and 10 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, 2000:
Name Age Position
Amancio Victor Suarez .......... 63 Chairman of the Board of
Directors,
Chief
Executive Officer and Chief
Financial Officer
Carlos Ortega ............ 55 President, Chief Operating Officer
and
Director
Yu Wing Kin 48 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. 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 foot 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, 1999 of approximately
$1,253,000.
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 1999, 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 1999, 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
October
,2000. 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
1998 First Quarter 1.625 0.4375
Second Quarter 0.625 0.3125
Third Quarter 0.3125 0.25
Fourth Quarter 0.25 0.1875
1999 First Quarter .... 0.13 0.09
Second Quarter................ 0.13 0.11
Third Quarter 0.15 0.12
Fourth Quarter 0.36 0.29
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: 1999 1998 1997
1996
1995
Statement of Operations Data:
Sales $8,264 $14,221
$16,761 $15,964 $15,243
Cost of sales 7,710 12,163
12,430
11,779 12,044
Gross margin 554 2,058
4,331
4,185 3,199
Selling, general and
administrative expenses 1,438 2,867 4,158
4,011 3,589
Income (loss) from operations (884) (809) 173
174 (390)
Other expense, net (175) (664)
(749)
(584) (587)
Net (loss) income $(1,059) $(1,473) $(576)
$(410)
$(977)
===== ===== =====
===== ====
Basic and diluted (loss) earnings
per share $(0.40) $(0.56)
$(0.22)
$(0.16) $(0.37)
===== ===== =====
=====
====
Shares used in computing
Loss per share 2,642 2,642
2,642
2,642 2,642
===== ===== =====
=====
=====
Balance Sheet Data:
Working Capital Deficit $(2,918) $(2,094) $(880)
$(58)
$(1,089)
Total Assets 3,841 5,022
7,940
7,805 11,826
Long-term Debt 1,177 1,247 1,323
1,702 465
Stockholders' Equity(Deficit) (2,832) (1,890) (532)
52 462
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 bear to
sales
and
the percentage
of change in those items from period to period:
As a Percent of
Sales
Percentage of Increase
Year Ended December
31,
(Decrease) for period December 31
____________________
____________________________
1998
1997
1999 1998 1997
to
1999 to 1998
___________________________
____________________
Sales 100.0% 100.0% 100.0% (41.9)% (15.2)%
Cost of Sales 93.3 85.5 74.2 (36.6)%
(2.2)%
Gross Margin.. 6.7 14.5 25.8 (73.1)%
(52.5)%
Selling, general and
Administrative expenses........... 17.4 20.2
24.8
(49.8)% (31.2)%
Income (loss) from operations (10.7) (5.7)
1.0
9.2% (567.6)%
Other expense, net (2.1) (4.7)
(4.5) (73.6)% (11.3)%
Net Loss (12.8)%
(10.4)%
(3.4)% (28.1)% 155.7%
1999 Compared to 1998: Sales decreased from 1998 to 1999 by
approximately
$5,957,000 or
41.9% as a result of scaling back sales activities in the US. During
1999
the
volume of direct
import sales in audio equipment also decreased by approximately
$271,000.
Gross
margin, as a
percentage of sales, decreased by 73.1% , as a result of the Company
liquidating
its inventory
held in the US. Selling, general and administrative expenses were
reduced
by
49.8% due to a
diminished US operation. Other expenses, net of interest and other
miscellaneous income
decreased due to a decrease in credit facility balances during the year.
Net loss improved slightly from 1998 to a loss of $1,059,000 in 1999.
(See
Item
1 "Financial
and Management's Plans for additional comments on fiscal year 1999 and
fiscal
year 2000)
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 clocks and digital radios. During 1998
the
volume of direct
import sales from Asia in audio equipment increased by approximately
$4,069,000
due to the
introduction of Memorex products. Gross margin, as a 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. Other
expenses, net of interest decreased due to a decrease in credit facility
balances outstanding
during the year.
Net loss increased from $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 the
Company's plans for fiscal year 1999).
Liquidity and Capital Resources
Working capital has a deficit of approximately $2,918,000 at December
31,
1999,
an increase
of approximately $824,000 from December 31, 1998. The ratio of current
assets
to current
liabilities at December 31, 1999 was .47 to 1, as compared to .63 to 1
at
December 31, 1998.
Credit facility and other financing arrangements consist of the
following:
The Company utilizes a credit facility of up to $7,500,000, expired on
December
31, 1999. The
credit facility is secured by all accounts receivable and inventories.
Borrowings are based on a
by formula to eligible accounts receivable and inventories. Interest is
charged
on outstanding
borrowings at the prime rate (8.50% at December 31, 1999) plus 2%. The
credit
facility
contains a restrictive covenant related to minimum net worth
requirements,
which
was not met
by the Company as of December 31, 1999. The lender has waived such
requirement
through
December 31, 2000. As of December 31, 1999 and 1998, borrowings
outstanding
under this
credit facility amounted to $1,001,000 and $1,948,000, respectively.
The Company has a promissory note to a financial institution in the
amount
of
$750,000, which
is due on demand. Interest is charged on outstanding borrowings at
prime
plus
1%. This note is
secured by a secondary position on the Company's land and building in
the
United
States.
During the current year, the Company has paid interest only. As of
December
31,
1999 and
1998, there were borrowings outstanding under this credit facility of
$749,000
in each year.
The Company has a note payable to a financial institution in the amount
of
$422,254. The notes
bears interest on outstanding borrowings at prime plus 1% and is
secured by
the
personal
guarantee of a stockholder. 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. As of December 31, 1999 and 1998,
borrowings
outstanding under this credit facility amounted to $61,000 and $212,000,
respectively. The
outstanding balance was paid off in fiscal year 2000.
The Company has a revolving note payable to a financial institution in
the
amount of $800,000
due on demand. The note bears interest on outstanding borrowings at
prime
plus
2%. This note
is secured by all corporate assets and including a first mortgage in
conjuction
with the long term
debt on the Company's land and buildings in the United States. In the
current
year, the
Company has paid interest only. As of December 31, 1999 and 1998,
borrowings
under this
line of credit amounted to approximately $799,000 in each year. The note
will
mature in
December 2001.
Management believes that the transaction described in Note 10 and the
support of
the new
shareholder will provide the Company with the resources necessary to
meet
its
obligation over
the next year. (see Item 13)
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 17 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
1999,
1998
and 1997
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 totalled $100,000 or more
(collectively,
the
"Named
Executive Officers").
Annual
Compensation(1)
All Other
Name and Principal Position Year Salary ($)
Bonus
($)
Compensation
Amancio Victor Suarez
Chairman of the Board,
Chief Executive Officer and
Chief Financial Officer 1999
- - -
1998
- - -
1997
- -
-
(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 1999.
Aggregated Fiscal Year-End Option Value Table. No Named Executive
Officers
held any
options as of the end of the 1999 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 1999 Annual retainers are not currently provided to
directors;
however, such
retainers may be re-instituted 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 1999.
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, 1999 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, 1999, the Company owed approximately $1,052,000 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
1999, Mr. Suarez had an informal commitment with the Company to lend
from
time
to time, as
needed, up to an additional $500,000 to the Company on a demand basis.
The
loans
bear
interest at 10.25%. As of December 31, 1999 the aggregate amount owed
by
the
Company to
Mr. Suarez was approximately $1,052,000, on a demand basis. During 1999
there
was an
increase on the balance owed to Mr. Suarez in the amount of $461,000.
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 17of 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 17 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: November , 2000 /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: November , 2000
/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, 1999 AND 1998
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1999
F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFIENCY
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1999
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1999
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, 1999 and
1998,
and the
related consolidated statements of operations, stockholders' deficiency,
and
cash flows for each
of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted
in the United
States of America. 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, 1999 and 1998, and
the
results of its
operations and its cash flows for each of the three years in the period
ended
December 31, 1999,
in conformity with accounting principles generally accepted in the
United
States
of America.
As discussed in Note 10, the Company has entered into a transaction
resulting in
a significant
transfer of ownership.
Certified Public Accountants
Miami, Florida
August 25, 2000
COSMO COMMUNICATIONS CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 and 1998
ASSETS
1999 1998
CURRENT ASSETS:
Cash and cash equivalents
$ 31,000 $ 137,000
Accounts receivable, net of allowance for doubtful accounts
of $19,000 and $98,000, in 1999 and 1998, respectively
1,359,000
1,268,000
Inventories
1,051,000 1,848,000
Other assets (including $99,000 and $149,000 receivable from
a related party in 1999 and 1998
110,000 317,000
__________ _________
Total current assets
2,551,000 3,570,000
PROPERTY AND EQUIPMENT, net
1,154,000 1,244,000
OTHER ASSETS
136,000 208,000
___________ _________
Total
$ 3,841,000 $5,022,000
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Accounts payable and accrued expenses
$ 1,459,000 $ 1,244,000
Credit facility and other financing arrangements
2,610,000 3,708,000
Due to principal stockholder
1,351,000 592,000
Other liabilities, including current portion
of long-term debt
76,000 121,000
__________ __________
Total current liabilities
5,464,000 5,665,000
LONG-TERM DEBT, net
1,177,000 1,247,000
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, 1999 and 1998
133,000 133,000
Additional paid-in capital
25,410,000 25,410,000
Accumulated deficit
(26,861,000) (25,802,000)
Accumulated Other Comprehensive Loss
(1,514,000) (1,631,000)
___________
___________
Total stockholders' deficiency
(2,832,000) (1,890,000)
___________ ___________
Total
$
3,841,000 $ 5,022,000
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, 1999
1999
1998 1997
SALES, net $
8,613,000
$14,221,000 $16,761,000
COST OF SALES
7,710,000 12,163,000 12,430,000
__________
__________ _________
GROSS MARGIN 903,000
2,058,000 4,331,000
__________
__________ _________
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Selling expenses
995,000 1,903,000 2,638,000
General and administrative expenses
443,000 964,000 1,520,000
_________
_________ __________
Total selling, general and administrative expenses
1,438,000
2,867,000 4,158,000
_________ _________ __________
INCOME(LOSS) FROM OPERATIONS (535,000)
(809,000) 173,000
__________
_________ ___________
OTHER INCOME (EXPENSE):
Interest expense
(526,000)
(669,000) (787,000)
Interest income
2,000
5,000 5,000
Other, net
33,000
___________
__________ ___________
Total other expense, net
(524,000) (664,000) (749,000)
___________
__________ ___________
NET LOSS
$
(1,059,000) $ ( 1,473,000) $( 576,000)
BASIC AND DILUTED LOSS PER SHARE $ (.40) $
(.56) $ (.22)
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, 1999
Common
Accumulated
Stock
Additional
Other
__ Shares __ Paid-
in
Accumulated Comprehensive
Issued Amount Capital
Deficit Income Total
BALANCE,
DECEMBER 31, 1996 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)
_________ ________ __________
___________
___________ _______
BALANCE,
DECEMBER 31, 1997 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,
DECEMBER 31, 1998 2,642,000 133,000 25,410,000
(25,802,000) (1,631,000) (1,890,000)
Net loss
(1,059,000) (1,059,000)
Foreign Currency Translation
117,000
117,000
Comprehensive Loss _________ ________ __________
__________ _________ ( 942,000)
BALANCE,
DECEMBER 31, 1999 2,642,000 $ 133,000 $ 25,410,000 $
(26,861,000) $ (1,514,000) $(2,832,000)
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, 1999
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$ (1,059,000) $ (1,473,000)
$(576,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization
157,000 131,000
197,000
Decrease (increase) in accounts receivable, net
(91,000) 1,800,000 (248,000)
Decrease (increase) in inventories, other current
assets and other assets
1,010,000 1,042,000
(40,000)
(Decrease) increase in accounts payable and accrued expenses
and other current liabilities
246,000 217,000
(301,000)
Foreign Currency Translation adjustment
117,000
115,000 (8,000)
_________
________ ________
Net cash provided by (used in) operating activities
380,000 1,832,000 (976,000)
________ ________ ________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment
(1,000)
(3,000) (48,000)
________ _________
________
CASH FLOWS FROM FINANCING ACTIVITIES :
Net increase(decrease) in credit facility, other financing
Arrangement and long-term debt
(1,244,000)
(1,468,000) 1,081,000
Net increase(decrease)in due to stockholders
759,000
(309,000) (61,000)
_________
__________ _________
Net cash (used in)provided by financing activities
(485,000) (1,777,000) 1,020,000
_________
_________ _________
DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
(106,000) 52,000 (4,000)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR
137,000 85,000
89,000
__________ __________ ________
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR
$
31,000 $ 137,000 $
85,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the year for interest
$
271,000 $ 599,000 $
66,000
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Disposal of fully depreciated assets
$ 866,000 $ 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, 1999
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,
and has a significant working capital and stockholder deficiency. The
Company
continued to
experience intense price competition in the consumer electronic retail
market in
1999,
particularly in the US. During the year, management scaled back the US
operation and focused
its business in Canada and in South and Central America.
Management believes that the transaction described in Note 10 and the
support of
the new
shareholder will provide the Company with the resources necessary to
meet
its
obligation over
the next year. The Company's ability to ultimately return to
profitability
is
dependent upon a
number of factors beyond its control, including the overall retail
climate
and
competition.
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,
1999. 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 inter-company 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.
Other asset- Other asset as December 31, 1999 and 1998 consisted
primarily
of
goodwill
associated with the purchase of a trademark. The unamortized balance at
December 31, 1999
and 1998 amounted to $202,000 and $136,000, respectively.
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.
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 United States. dollars are accumulated as
a
separate component of
other comprehensive income 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, 1999, 1998, and 1997, sales to a single customer accounted
for
approximately
71%, 44%, and 43%, respectively, of total sales. Accounts receivable
corresponding to this
customer approximated $508,000 and $492,000 as of December 31, 1999 and
1998,
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. The Company did
not
incur
any
significant amount in research and development in 1999 and 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.
Valuation
allowances are
established when necessary to reduce deferred tax assets to the amount
expected
to be realized.
Loss Per Share - Basic loss per share is computed based on the average
number
of common
shares outstanding and diluted loss per share is computed based on the
average
number of
common and potential common shares outstanding. 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 anti-dilutive for the periods presented.
Stock-Based Compensation Plans - Stock-based compensation plans include
all
arrangements
by which employees and non-employee members of the Board of Directors
receive
shares of stock
or other equity instruments of the Company or the Company incurs
liabilities
to
employees in
amounts based on the price of the Company's stock. 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 of Directors must pay
for
the
stock. The
Company did not enter into any stock based compensation arrangement in
1999,
1998 and 1997.
Comprehensive Income - Statement of Financial Standards N0. 130,
Reporting
Comprehensive
Income requires that all components of comprehensive income be reported
in
a
full set of general
purpose financial statements. Accumulated other comprehensive loss as
presented
on the
consolidated statements of stockholders' equity represents the foreign
currency
translation
adjustment.
Segment Reporting - Segment reporting establishes standards for
reporting
selected information
about operating segments. It also establishes standards for related
disclosures
about products and
services, geographic areas, and major customers. The Company has
adopted
SFAS
No. 131 in
1998.
New Accounting Pronouncement - In June 1998, the Financial Accounting
Standards
Board("FASB") issued Statement of Financial Accounting Standard ("SFAS")
No.
133,Accounting for Derivative Instruments and Hedging Activities. SFAS
No.
133
establishes
accounting and reporting standards requiring that every derivative
instrument(including certain
derivative instruments embedded in other contracts) be recorded in the
balance
sheet as either an
asset or a liability measured at its fair value. SFAS No. 133 requires
that
changes in the
derivative's fair value be recognized currently in earnings unless
specific
hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses
to offset related results on the hedged item in the income statement,
and
requires that a company
must formally document, designate and assess the effectiveness of
transactions
that receive hedge
accounting treatment. In June 1999, the FASB issued SFAS No. 137,
Accounting
for
Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
adoption
of SFAS No. 133
to fiscal years beginning after June 15, 2000. The Company does not
believe
that the adoption of
SFAS No. 133 will have a material impact on its consolidated financial
statements.
2. ACCOUNTS RECEIVABLE
The activity for the allowance for doubtful accounts is as follows for
the
years
ended
December 31:
1999
1998 1997
Beginning balance
$98,000
$134,000 $ 235,000
Provision
36,000
66,000 409,000
Write-offs, net of recoveries (115,000)
(102,000) (492,000)
Ending balance $
19,000
$ 98,000 $ 134,000
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:
1999 1998
Land
$ 400,000 $ 400,000
Building
1,600,000 1,600,000
Leasehold improvements
288,000
286,000
Plant and equipment
196,000 966,000
Auto and trucks
21,000
21,000
Furniture and fixtures
63,000
160,000
Total
2,568,000 3,433,000
Less accumulated depreciation and amortization (
1,414,000)
(2,189,000)
$
1,154,000 $ 1,244,000
4. CREDIT FACILITY AND OTHER FINANCING ARRANGEMENTS
Credit facility and other financing arrangements consist of the
following:
Credit facility - The Company utilizes a credit facility of up to
$7,500,000
which had expired on
December 31, 1999. The credit facility is secured by all accounts
receivable
and inventories.
Borrowings are based on a formula to eligible accounts receivable and
inventories. Interest is
charged on outstanding borrowings at the prime rate (8.50% at December
31,
1999)
plus 2%.
The credit facility contains a restrictive covenant related to minimum
net
worth
requirements,
which was not met by the Company as of December 31, 1999. The lender
has
waived
such
requirement through December 31, 2000. As of December 31, 1999 and
1998,
borrowings
outstanding under this credit facility amounted to $1,001,000 and
$1,948,000,
respectively.
Promissory note - The Company has a promissory note to a financial
institution
in the amount of
$750,000, which is due on demand. Interest is charged on outstanding
borrowings
at prime plus
1%. This note is secured by a secondary position on the Company's land
and
building in the
United States. During the current year, the Company has paid interest
only.
As
of December 31,
1999 and 1998, there were borrowings outstanding under this credit
facility
of
$749,000 in each
year.
Note payable - The Company has a note payable to a financial institution
in
the
amount of
$422,254. The notes bears interest on outstanding borrowings at prime
plus
1%
and is secured
by the personal guarantee of a stockholder. 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. As of December 31, 1999
and
1998, borrowings
outstanding under this credit facility amounted to $61,000 and $212,000,
respectively. The
outstanding balance was paid off in fiscal year 2000.
Revolving note payable - The Company has a revolving note payable to a
financial
institution in
the amount of $800,000 due on demand. The note bears interest on
outstanding
borrowings at
prime plus 2 %. This note is secured by all corporate assets and
including a
first mortgage in
conjuction with the long term debt on the Company's land and buildings
in
the
United States. In
the current year, the Company has paid interest only. As of December
31,
1999
and 1998,
borrowings under this line of credit amounted to approximately $799,000
in
each
year. The note
will mature in December 2001.
5. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31:
1999 1998
Promissory note 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 first mortgage inconjunction
with a revolving note payable on the Company's land
and building in the United States
$1,253,000 $ 1,323,000
Less current portion
(76,000) (76,000)
Long-Term Debt $
1,177,000
$1,247,000
6. INCOME TAXES
The domestic and foreign components of net (loss) income were as follows
for
the
years ended
December 31:
1999
1998 1997
Domestic $ (1,314,000) $
(1,465,000) $ (882,000)
Foreign
255,000
(2,000) 306,000
Total balance
$(1,059,000)
$
(1,463,000) $ (576,000)
Domestic - The Company has unused domestic tax loss carryforwards of
approximately
$32,000,000 to offset future taxable income. Such carryforwards expire
from
the
year 2000
through the year 2015. Included in the tax loss carryforwards is
approximately
$5,820,000
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 $12,000,000 as of December 31, 1999.
Foreign - The Company has unused foreign tax loss carryforwards of
approximately
$5,707,000
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 $1,837,000 as of December 31, 1999.
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, 1998 to December 31, 1999 for the domestic and foreign
components
was an
decrease of $1,449,000 and an increase of $368,000, 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.
The Company is not in compliance with the filing requirements of the
U.S.
Securities and
Exchange Commission. Management is unable to determine what effect, if
any,
this non-
compliance will have on its operations.
8. STOCK OPTION PLAN
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, 1999, 252,000 stock options were outstanding of which
230,000
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.
1999
Domestic Foreign
Other
Total
Assets $2,818
$936
$ 87 $3,841
Sales, net 616 7,648
- 8,264
Gross Margin (481) 1,073
(38) 554
Net income(loss) (1,276) 255
(38) (1,059)
1998
Assets $ 3,302 $
1,508
$ 212 $5,022
Sales, net 7,430 6,791
- 14,221
Gross Margin 1,204
659
- 1,863
Net income(loss) (1,148) (325)
- (1,473)
1997
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)
10. SUBSEQUENT EVENT
During April 2000, the Company and its principal shareholders entered
into
a
stock
purchase agreement with Starlight Marketing Development Ltd.
("Starlight"),
a
Hong
Kong corporation, whereby Starlight will become the Company's new
principal
shareholder for $1,000,000 paid to the Company. Starlight is a
distributor
of
consumer
products in the Far East. During Fiscal year 2000, Starlight has made
bridge
loans to the
Company in the amount of $400,000 to fund operations. As part of the
stock
purchase
agreement, assets and liabilities with a book value of $1,433,000 and
$2,851,000,
respectively as of December 31, 1999 will be assigned to the principal
shareholder.
Additionally, the principal shareholders loans in the amount of
$1,351,000
as of
December
31, 1999 shall be recapitalized into shares of Common Stock. The
current
prinicpal
shareholder also has guaranteed the net asset value of the Company at
the
closing date to
Starlight. The transaction is expected to be consumated in the last
quarter
of
fiscal year
2000.
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