10-K/A 1 cosmok10a.txt COSMO COMMUNICATIONS 10-K-A 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. * * * * * * 1 10 1