10-K 1 final2000.txt 10K FILE SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-119698 COSMO COMMUNICATIONS CORPORATION (Exact name of small business issuer as specified in its charter) Florida 59-2268005 (State or other jurisdiction (I.R.S. Employer of incorporation or organization)Identification No.) 106 Ferrier Street, Markham, Ontario, Canada (Address of principal executive offices) Registrant's telephone number, including area code: (905) 940-0560 Securities registered pursuant to Section 12 (b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.05 par value (Title of Class) Check whether the registrant (1) 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_ No X Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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. The registrant's revenues for the fiscal year ended December 31, 2000 were $9,117,000. As of September 14 , 2001, the market value of the registrant's Common Stock held by non- affiliates of the registrant was approximately $29,104 based on average of the bid and asked price of $ 0.001 for the Common Stock as reported on the OTC Bulletin Board on such date. The number of shares outstanding of the registrant's common stock is 29,104,066 as of November 30, 2001. Documents Incorporated by Reference None. PART I Forward-Looking Statements and Associated Risk This annual report of Cosmo Communications Corporation (the "Company") 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 not materially differ from actual results. Item 1. Description of Business General Since its inception in March 1983, the Company, through its subsidiaries, has imported, marketed and distributed in the United States and Canada consumer electronic products, including televisions, video cassette recorders, 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. During the year ended December 31, 2000, substantially all of the Company's sales activity occurred in Canada. 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 by subcontractors in China. The Company's principal executive offices are located at 106 Ferrier Street, Markham, Ontario, Canada and its telephone number at such location is (905) 940-0560. Subsequent Events and Financial and Management's Plans. During 2001, a change in control of the Company occurred. In April 2000, the Company and certain controlling shareholders of the Company at that time entered into a Stock Purchase Agreement pursuant to which the Company agreed to sell shares of common stock representing 84.89% of the outstanding common stock to Master Light Enterprises Ltd. ("Master Light"), a subsidiary of Starlight International Limited ("Starlight"), a publicly held company traded on the Hong Kong Stock Exchange, for $1 million. Pursuant to an amendment to the Stock Purchase Agreement, in January, 2001, Master Light acquired 1,347,420 shares of the Company's Common Stock, representing 49.11% of the Company's Common Stock outstanding at that time, and representatives of Starlight were appointed to the Board of Directors of the Company replacing the incumbent directors. In August 2001, the transactions contemplated by the Stock Purchase Agreement, as amended, were consummated and, after rescinding the purchase of 1,347,420 shares, Master Light acquired from the Company 26,585,008 shares of the Company's Common Stock, representing 91.3% of the Company's currently issued and outstanding Common Stock. As part of the Stock Purchase Agreement, the stock of two of the Company's subsidiaries, Cosmo Telecom Corp. and Cosmo World Wide Corp., were transferred to the former controlling shareholders of the Company. In September 2001, additional capital contributions from Starlight allowed the Company to discharge all the Company's obligations to its lending institutions and provided further capital to allow the Company to meet its ongoing operational needs. Starlight owns and operates a number of subsidiaries throughout the world engaged in the manufacture, sale and distribution of consumer electronic products. Management anticipates Starlight will provide enhanced resources for the Company to operate more competitively. Management believes that growth is driven by new products and new product design. With the capital that is now available through Starlight, management expects the Company's products will have higher quality and more updated designs. This should allow the Company to improve sales in the near future, barring no significant deterioration in the economic conditions and more particularly, in consumer spending. Products Clocks - The Company manufactures and markets 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 are manufactured by subcontractors in Hong Kong and the People's Republic of China, which manufacturers sometimes use components and materials supplied, and assembling methods developed, by the Company. The Company offered approximately 40 models of quartz wall clocks in 2000, 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 2000, 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 2000, most of the units were manufactured by subcontractors in Hong Kong and the People's Republic of China which sometimes use components and materials supplied by the Company. Compact Disc Players - The Company currently offered a wide range of compact disc player and recorder products with retail prices ranging from $30 to $100. All of the products are manufactured by subcontractors in the People's Republic of China under the Company's specifications. Components and material are supplied by the subcontractors. Licensed Products - The Company is a party to a sub-distribution agreement to market in Canada audio products utilizing the brand- name "Memorex". It plans to expand the licensing to include some alarm clock products to be sold 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. The Company did not make any sales in the US during 2000. The Company's current strategy for re- entering the US market is to locate niche markets. The following customers illustrate the Company's primary marketing channels and major customers in 2000. Wal-Mart Canada Inc.- Mass Merchandiser Canadian Tire Corporation -- 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 Canadian sales are generated by either the Company's full-time sales staff or sales representatives. Almost all of the Company's sales in 2000 were to customers within Canada. See Note 10 of "Notes to Consolidated Financial Statements" for financial information about foreign and domestic operations. Sales to the Company's largest customer, Wal-Mart Canada Inc., accounted for approximately 88% of sales for 2000, 71% of sales in 1999. The loss of Wal-Mart of Canada Inc. as a 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 and Supply Most of the Company's products are manufactured by subcontractors in the People's Republic of China. Substantially all of the subcontractors assemble products for the Company in accordance with the Company's specifications. The Company performs quality control inspections on the premises of its subcontractors, and also inspects its products upon their arrival in its warehouse in 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 2000, the Company did not introduce any new electronic digital alarm clocks (LED and LCD), quartz alarm clocks, quartz wall clocks and clock radios. New audio and other products were developed in conjunction with the sub-contractors and expenses were borne by the sub-contractors. During the year ended December 31, 2000, the Company did not spend any significant amount in product development. 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 During 2000, the Company consolidated its operations. Sales, warehousing and administration are now headquartered in Toronto, Canada. Sourcing, supply and quality inspection operations are based in Hong Kong. See Note 10 of "Notes to Consolidated Financial Statements." Foreign currency exposure is limited to Canadian and Hong Kong exchange rate fluctuation. Most sales and costs are quoted in US dollars. The Company's cost structure is affected by 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. The Company will continue to subcontract its manufacturing needs to subcontractors in Hong Kong and the People's Republic of China. Any material change in the trade policies between the United States and China might have an adverse effect on the Company's operations. Product Liability The Company maintains product liability coverage for the Company's operations in the aggregate amount of $3,000,000. The Company has not been the subject of any product liability litigation. Government Regulation The Company's operation is not regulated by the Federal Government nor any State authorities. Import tariffs are payable on some products in accordance with the prevailing tariff rates. Employees On December 31, 2000, the Company had 21 full-time employees, including 1 in Hong Kong and 20 in Canada. In Hong Kong, one employee is engaged in sales and sourcing support duties. In Canada, 9 employees were engaged in warehouse distribution and service operations and 11 were sales, administrative and executive personnel. The Company believes that its relations with its employees are satisfactory. Where You Can Find More Information The Company files annual, quarterly and special reports, proxy statements and other information with the SEC. The Company's SEC filings are available to the public over the Internet at the SEC's web site at http://www.sec.gov. The Company's documents which are filed may be read or copied at the SEC's public reference room in Washington, D.C., at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC -0330 for further information on the public reference room. Item 2. Description of Property. The Company's executive offices and principal domestic manufacturing warehouse facilities are located in a 26,865 square foot building at 106 Ferrier Street, Markham, Ontario, Canada. Both the land and building are leased by the Company under the terms of a lease expiring in July 31, 2005. Monthly rental is $6,600. The Company also made a contribution of $3,000 a month to share facilities for its Hong Kong based operation. The Company believes that its current facilities are satisfactory for its present needs and that insurance coverage is adequate for the premises. 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 2000, the Company did not submit any matter to a vote of security holders. PART II Item 5. Market for Common Equity and Related Stockholder Matters Since March 6, 1996, the Company's Common Stock has been listed for trading on the OTC Bulletin Board under the symbol "CSMO." There were 166 record holders of the Common Stock on September _o/s_, 2001. However those shares being held at various clearing houses, including Cede & Company have not been broken down. Accordingly, the Company believes there are many more beneficial owners of the Company's Common Stock whose shares are held in "street name", not in the name of the individual shareholder 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. Fiscal Period High Low 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 2000 First Quarter .... 0.56 0.31 SecondQuarter ..... No Quote Third Quarter No Quote Fourth Quarter 0.001 0.001 On September 14, 2001, the last reported sales price for the Common Stock on the OTC Bulletin Board was $0.001 per share. 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. Item 6. Management's Discussion and Analysis 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 ____________________ ____________________________ 2000 1999 1999 to 2000 ____________________ ____________________ Sales 100.0% 100.0% 5.9% Cost of Sales 95.6 89.5 13.0% Gross Margin.. 4.4 10.5 (55.3)% Selling, general and Administrative expenses........... 19.2 16.7 22.0% Loss from operations (14.8) (6.2) 152.3% Other income (expense) 18.2 (6.1) 416.2% Net Loss 3.4% (12.3)% 129.0% Comparison of the year ended December 31, 2000 to the year ended December 31, 1999 Sales increased by 5.9% while cost of sales rose by 13%, resulting in a drop in gross profit margin of 55%. During 2000, sales of compact disc players were strong but profit margin was decreased due to highly competitive pricing in this product category. Selling, general and administrative expenses increased by 22%, largely due to higher selling expenses in selling products as representative of a distributor in the United States of America. Goodwill of $136,000 was written off during the year. Other income increased 416% in 2000. The increase was attributable to commissions earned ($368,000) as a representative, and gains in the sale of the Company's property in Miami, Florida ($726,000) and gain on the sale of two subsidiaries ($831,000) to the previous controlling stockholders of the Company. Net result improved from a loss of $1,059,000 in 1999 to a profit of $307,000 in 2000, representing a 129% improvement. Liquidity and Capital Resources The Company's working capital deficit improved by $382,000 from a deficit of $2,945,000 in 1999 to $2,563,000 in 2000. The ratio of current assets to current liabilities at December 31, 2000 was .52 to 1, as compared to .46 to 1 at December 31, 1999. During 2000, the Company repaid the mortgage, which represented the long term debt at December 31, 1999, with the proceeds from the sale of land and buildings. Credit facility and other financing arrangements consist of the following: The Company had a credit facility of up to $1,000,000 during 2000. The credit facility was secured by all accounts receivable and inventories. Borrowings were based on a formula of eligible accounts receivable and inventories. Interest was charged on outstanding borrowings at the prime rate plus 2%. The credit facility contained a restrictive covenant related to minimum net worth requirements, which was not met by the Company as of December 31, 2000. The lender waived such requirement through December 31, 2000. As of December 31, 2000 and 1999, borrowings outstanding under this credit facility amounted to $998,000 and $1,001,000 respectively. This borrowing was repaid in full in August 2001. The Company was indebted to a financial institution in the amount of $750,000, which was payable on demand. Interest was charged on outstanding borrowings at prime plus 1%. This note was secured by a second lien on the Company's land and building in the United States. During 2000, the Company paid interest only. As of December 31, 2000 and 1999, the outstanding amount of this indebtedness was $749,000 and $750,000 respectively. This borrowing was repaid in full in August 2001. The Company had a revolving note payable to a financial institution in the amount of $800,000, which was payable on demand as of December 30, 2000. The note bore interest on outstanding borrowings at prime plus 2%. This note was secured by a lien on all corporate assets, including the Company's land and buildings in the United States. As of December 31, 2000, this note was assumed by the previous controlling stockholders of the Company as part of the Stock Purchase Agreement and the Company was relieved of all its liabilities under this note. During 2000, the Company received a bridge loan of $400,000 from Starlight as part of the Stock Purchase Agreement. Interest accrued at a rate of 12% per annum. As at December 31, 2000, the principal of $400,000 and accrued interest of $40,000 are outstanding. The loan has been repaid at the closing of the Stock Purchase Agreement in 2001. Management believes that with the support of the Starlight, the Company will have adequate resources necessary to operate in 2001. The Company is subject to risk from exchange rate fluctuations. While the Company's product purchases are transacted in United States dollars, most transactions among the suppliers and subcontractors are effected in HK dollars. Accordingly, fluctuations in Hong Kong monetary rates may have an impact on the Company's cost of goods. Furthermore, appreciation of Chinese currency values relative to the Hong Kong dollar could increase the cost to the Company of the products manufactured in the People's Republic of China, and thereby have a negative impact on the Company. As well since the majority of the Company's sales are in Canadian dollars, the Company is at risk with regards to the conversion of Canadian dollars to US dollars to pay its suppliers. Therefore, fluctuations in the conversion rate may have an impact on the Company. 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 for the Hong Kong dollar. Item 7. Financial Statements. See the Company's Consolidated Financial Statements following page 17 of this Annual Report on Form 10-KSB. Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The Company has reported no disagreements. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. Directors and Executive Officers Pursuant to the Bylaws of the Company, the number of directors constituting the full Board of Directors has been fixed by the Board at three (3). At the Annual Meeting of Shareholders, three (3) individuals will be elected to serve as directors until the next annual meeting and until their successors are duly elected, appointed and qualified. Set forth below is the name, age, principal occupation during the past five years and other information concerning each director and executive officer. Name Age Position Philip Lau 53 Chairman of the Board of Directors, and President Peter Horak 60 Chief Executive Officer, Canada Yu Wing Kin 49 Vice President, Administration, Hong Kong Carol Atkinson 52 Director Jacky Lau 42 Director Mr. Philip Lau, Chairman of the Board of Directors, was appointed in January 2001 after Starlight International Limited acquired 49% of the voting shares of the Company. Since 1987, Mr. Lau has been the Chairman of Starlight International, an electronics company the shares of which are listed on the Hong Kong Stock Exchange, and has extensive experience in the consumer electronics business. Mr. Peter Horak, President of Cosmo Canada, was appointed as the Chief Executive Officer in January 2001. Mr. Horak was the co-founder of Cosmo's Canadian subsidiary and has been its chief executive officer since 1988. Mr. Horak is the Company's chief sales, marketing, and sourcing executive. Mr. Kin has served as Vice President of Administration of Cosmo Hong Kong since joining the Company in August 1978. Ms. Atkinson has served as a director of the Company since January 2001 after Starlight International Limited acquired its shares. Since January 2001, Ms. Atkinson has served as Chief Financial Officer of Cosmo Communications Corporation. Prior to this, she was self-employed as a financial consultant. Mr. Jacky Lau has served as a director of the Company since January 2001 after Starlight International Limited acquired its shares. He joined Starlight International in 1987 as the Director of Material Sourcing. Mr. Philip Lau, Mr. Jacky Lau and Ms. Atkinson are siblings. Directors are elected annually by the shareholders and hold office until the next annual meeting and until their respective successors are elected and qualified. There are no other family relationships among any of the Company's directors and executive officers. Section 16(a) Beneficial Ownership and Reporting Compliance The directors and executive officers of the Company, and the owners of more than ten (10%) percent of the Company's outstanding Common Stock, are required to file reports with the Securities and Exchange Commission, reporting changes in the number of shares of the Company's Common Stock beneficially owned by them and provide the Company with copies of all such reports. Based solely on its review of the copies of such reports furnished to the Company and written representations from the executive officers and directors, the Company believes that all reports were timely made for the year ended December 31, 2000, with the following exceptions: (i) Philip Lau, reported late on Form 3, filed February 16, 2000, his beneficial ownership of 1,347,420 shares of Common Stock purchased on January 23, 2000; (ii) Carol Atkinson, Director, reported late on a Form 3, filed on November 14, 2001, her appointment as a director of the Company on January 23, 2001; and (iii) Jacky Lau, Director, reported late on reported late on a Form 3, filed on November 14,, 2001, his appointment as a director of the Company on January 23, 2001 Item 10. Executive Compensation Summary Compensation Table. The following table sets forth, for the 2000and 1999 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 2000 fiscal year totaled $100,000 or more (collectively, the "Named Executive Officers"). Annual Compensation(1) 2000 1999 2000 1999 All Other Name and Principal Position Salary ($) Bonus ($) Compensation Amancio Victor Suarez none none none none (1) Chairman of the Board, Chief Executive Officer and Chief Financial Officer (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 or exercised during fiscal 2000. Aggregated Fiscal Year-End Option Value Table. No Named Executive Officers held any options as of the end of the 2000 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 2000. 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 2000. Item 11. Security Ownership of Certain Beneficial Owners and Management. The information contained in the table was furnished by the persons listed therein. The calculations of the percent of shares beneficially owned are based on 29,104,066 shares of common stock outstanding November 30, 2001. None of the persons named below own any options or warrants to purchase shares of the Corporation's common stock. Name and Address Beneficial Ownership of Common Stock Current Percent of Class Starlight International 5/F, Shing Dao Industrial Building 232 Aberdeen Main Road, 5th Floor Hong Kong 26,585,008(1) 91.3% All Directors and Executive Officers as a Group (4 persons) 26,842,508(1) 92.2% (1) Includes 26,585,008 shares owned by Master Light Enterprises, Ltd., of which Mr. Lau is the controlling stockholder. Item 12. Certain Relationships and Related Transactions. As of December 31, 2000, the Company owed approximately $1,180,000 to Amancio Victor Suarez ("AV Suarez"), Amancio J Suarez ("AJ Suarez")and Carlos Ortega ("Ortega") all principal shareholders of the Company, on loans previously made to the Company to finance its working capital needs. In August 2001, in accordance with the Letter Agreements described below, the principal shareholders received 1,555,000 new shares of the Company's Common Stock as repayment of the loan in full. These principal shareholders also agreed to surrender an aggregate of 2,294,567 shares as treasury stock. During 2000, the Company received a bridge loan of $400,000 from Starlight. Interest accrued on the loan at a rate of 12% per annum. On August 20, 2001, Master Light, a company controlled by Philip Lau, the Chairman of the Board and President of the Company, acquired from the Company 26,585,008 shares of the Company's Common Stock, representing 91.3% of the Company's currently issued and outstanding Common Stock for $1,000,000. A portion of the purchase price paid for the shares was taken as a credit against the principal and interest due on the Starlight bridge loan to the Company, which was then deemed paid in full. The purchase was consummated pursuant to the terms of the Stock Purchase Agreement dated April 28, 2000 (the "Stock Purchase Agreement") by and among the Company, Amancio Victor Suarez, Carlos Ortega ("Ortega), Amancio J. Suarez ("AJ Suarez" and collectively with AV Suarez and Ortega, the "Stockholders") and Master Light, as assignee of Starlight, and the related letter agreements supplementing and modifying the terms of the Stock Purchase Agreement among the Stockholders, Peter Horak ("P. Horak") and/or Jeffrey Horak ("J. Horak") and Master Light dated April 19, 2000, July 13, 2000, July 27, 2000, November 20, 2000 and August 20, 2001(the "Letter Agreements"). Pursuant to the terms of the Letter Agreements, on January 23, 2001, Master Light acquired an aggregate of 1,347,420 shares (the "Phase I Shares") of the Common Stock of the Company from the Stockholders (the "Phase I Purchase") for an aggregate of $50,843 (the "Purchase Price"). The Phase I Shares were acquired as an interim measure since the Company could not consummate the sale contemplated by the Stock Purchase Agreement until the stockholders of the Company approved an increase in the number of authorized shares of Common Stock of the Company from 4,000,000 to 50,000,000, which was approved on June 9, 2001. On the date of Master Light's purchase of the shares from the Company, the purchase of the Phase I Shares was rescinded. Under the terms of the Letter Agreements, the Company issued to Peter Horak and Jeff Horak, Executive Officers of the Company's Canadian operating subsidiary, an aggregate of 535,000 shares of newly issued common stock in consideration for P Horak's and J Horak's agreement to release the Company from its obligation to repay $79,425 owed to them and from any other claims which P Horak and J Horak might have against the Company or its subsidiaries or their respective directors, officers or stockholders. They agreed to surrender an aggregate of 20,000 shares as treasury stock. Finally, as part of the consideration for the transactions contemplated by the Stock Purchase Agreement, the stock of two of the Company's subsidiaries, Cosmo Telecom Corp. and Cosmo World Wide Corp., were transferred to the Stockholders. Item 13. Exhibits, Lists 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 17 of this Annual Report on Form 10-KSB. 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-KSB. 3. Exhibits: Exhibit No. Description 3.1.1 Registrant's Articles of Incorporation, as amended 3.2 Registrant's Bylaws (1) 10.1 Amended and Restated 1990 Stock Option Plan (Compensatory Plan)(2) 10.2 Stock Purchase Agreement dated April 28, 2000 by and among Company, Amancio Victor Suarez, Carlos Ortega, Amancio J. Suarez and Master Light Enterprises Ltd., as assignee of Starlight Marketing Development Ltd. and the related letter agreements supplementing and modifying the terms of the Stock Purchase Agreement April 19, 2000, July 13, 2000, July 27, 2000, November 20, 2000 and August 20, 2001. 22.1 List of Registrant's Subsidiaries (3) ____________________ (1) Incorporated by reference to the exhibit with the same number filed with the Registrant's Registration Statement No. 2-83088. (2) Incorporated by reference to exhibit 10.2 filed with the Registrant's Annual Report on Form 10-K for fiscal 1990. (3) 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 In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COSMO COMMUNICATIONS CORPORATION DATED: November 30 , 2001 /s/ Peter Horak PETER HORAK Chief Executive Officer, Canadian Operation In accordance with the 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 30, 2001 /s/ Philip Lau PHILIP LAU, Chairman of the Board President /s/ Carol Atkinson CAROL ATKINSON Chief Financial Officer COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page INDEPENDENT AUDITORS' REPORT F-1 CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 1999 F-2 CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2000 F-3 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2000 F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2000 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, 2000 and 1999, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for each of the two years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant losses and has significant working capital and stockholder deficiencies, which raise substantial doubt about its ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/Deloitte & Touche Chartered Accountants Toronto, Canada September 14, 2001 COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 ASSETS 2000 1999 ($ in 000's) ($ in 000's) CURRENT ASSETS: Cash and cash equivalents $ 646 $ 31 Accounts receivable, net of allowance for doubtful accounts of $52,000 and $19,000, in 2000 and 1999, respectively 784 1,359 Inventories 1,393 1,051 Other assets (including $99,000 receivable from a related party in 1999) 7 110 __________ _________ Total current assets 2,830 2,551 PROPERTY AND EQUIPMENT, net 9 1,154 OTHER ASSETS - 136 ___________ __________ Total $ 2,839 $3,841 LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 2,025 $ 1,459 Credit facility and other financing arrangements 2,187 2,610 Due to principal stockholder 1,181 1,351 Other liabilities, including current portion of long-term debt - 76 __________ __________ Total current liabilities 5,393 5,496 LONG-TERM DEBT, net - 1,177 CONTINGENCIES (NOTE 8) 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; 2,744,000 shares issued and outstanding as of December 31, 2000(2,642,000 shares-1999) 137 133 Additional paid-in capital 25,410 25,410 Accumulated deficit(26,554) (26,861) Accumulated other comprehensive loss (1,547) (1,514) __________ _________ Total stockholders' deficiency (2,554) (2,832) __________ _________ Total $ 2,839 $ 3,841 See notes to consolidated financial statements. F-2 COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2000 2000 1999 ($ in 000's) ($ in 000's) (except per share data) SALES, net $ 9,117 $ 8,613 COST OF SALES 8,713 7,710 __________ GROSS MARGIN 404 903 __________ __________ SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling expenses 960 995 General and administrative expenses 794 443 __________ _________ Total selling, general and administrative expenses 1,754 1,438 __________ _______ LOSS FROM OPERATIONS (1,350) (535) __________ _______ OTHER INCOME (EXPENSE): Interest expense (290) (526) Interest income 22 2 Commissions 368 - Gain on sale of fixed assets 726 - Gain on sale of subsidiaries 831 - Total other income (expense), net 1,657 (524) ___________ __________ NET PROFIT( LOSS) $307 $ ( 1,059) BASIC AND DILUTED LOSS PER SHARE $ .11 $ (.40) SHARES USED IN COMPUTING LOSS PER SHARE 2,692,000 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 TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2000 ($ in 000s except issued share data) Common Accumulated Stock Additional Other _______ Shares __ Paid-in Accumulated Comprehensive Issued Amount Capital Deficit Income Total BALANCE, DECEMBER 31, 1998 2,642,000 133 25,410 (25,802) (1,631) ( 1,890) Net loss (1,059) (1,059) Other comprehensive income : Foreign Currency Translation 117 117 Comprehensive income (loss) (942) ________ ________ __________ __________ ________ ________ BALANCE, DECEMBER 31, 1999 2,642,000 133 25,410 (26,861) (1,514) (2,832) Shares issued 102,000 4 4 Net Profit 307 307 Other comprehensive loss : Foreign Currency Translation (33) (33) Comprehensive income 274 _________ ________ __________ __________ _________ ________ BALANCE, DECEMBER 31, 2000 2,744,000 $ 137 $ 25,410 $ (26,554) $ (1,547) $(2,554) See notes to consolidated financial statements. F-4 COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2000 2000 1999 ($ in 000's) ($ in 000's) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ 307 $ (1,059) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 205 157 Gain from sale of fixed assets (726) - Gain on sale of subsidiaries (831) -- Decrease (increase) in accounts receivable, net 575 (91) (Increase) decrease in inventories, other current assets and other assets (300) 1,010 Increase in accounts payable and accrued expenses and other current liabilities 566 246 Foreign Currency Translation adjustment - 117 _________ __________ Net cash provided by (used in) operating activities (204) 380 CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of fixed assets 1,801 - Purchases of property and equipment - (1) ___________ _________ Net cash provided by (used in) investing activities 1,801 (1) ____________ _________ CASH FLOWS FROM FINANCING ACTIVITIES : Repayment of mortgage note (1,253) - Proceeds from note payable 440 - Net decrease in credit facility (3) (1,244) Net increase(decrease)in due to stockholders (170) 759 Proceeds from shares issued 4 - _________ __________ Net cash (used in) provided by financing activities (982) (485) __________ __________ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 615 (106) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 31 137 __________ ________ CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 646 $ 31 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - Cash paid during the year for interest $ 250 $ 271 SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING and INVESTING ACTIVITIES: Credit facility settled by sale of subsidiaries $ 859 - Disposal cost of fully depreciated assets $ 175 $ 866 See notes to consolidated financial statements. F-5 COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 2000 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 operations in 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 2000. During the year, management consolidated the US operation and merged it with the Canadian operation to focus its business in Canada. Management believes that the transaction described in Note 11 and the support of the new shareholder will provide the Company with the resources necessary to meet its obligations 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 and resources injected by the new shareholder. Use of Estimates - The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America 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, 2000. The fair values of these instruments were not materially different than their carrying (or contract) values. Principles of Consolidation - The Company includes, in consolidation, its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated upon 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 consists of deposits on rental leases. 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 Statement 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 as that is the point at which title passes to the customer, net of estimated sales returns. Revenue is recognized if persuasive evidence of an agreement exists, the sales price is fixed or determinable, and collectibility is reasonably assured. 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 is 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 2000 or 1999. Comprehensive Income - Statement of Financial Standards No. 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. Derivative Instruments and Hedging Activities - 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. Recent accounting pronouncements - FASB has issued SFAS No. 141 to 144. These new accounting and reporting standards address business combinations, goodwill and intangible assets, asset retirement obligations and impairment or disposal of long-lived assets. The Company is in the process of identifying the impact, if any, of adoption of these standards. 2. ACCOUNTS RECEIVABLE The activity for the allowance for doubtful accounts is as follows for the years ended December 31: 2000 1999 ($ in 000's) ($ in 000's) Beginning balance $ 19 $ 98 Provision 138 36 Write-offs, net of recoveries (105) (115) Ending balance $ 52 $ 19 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: 2000 1999 ($ in 000's) ($ in 000's) Land $ - $ 400 Building - 1,600 Leasehold improvements 12 288 Plant and equipment 34 196 Auto and trucks - 21 Furniture and fixtures 29 63 Total 75 2,568 Less accumulated depreciation and amortization ( 66) (1,414) $ 9 $ 1,154 During 2000, land and building were sold and a gain of $726,000 was realized. 4. CREDIT FACILITY AND OTHER FINANCING ARRANGEMENTS Credit facility and other financing arrangements consist of the following: 2000 1999 ($ in 000's) ($ in 000's) Credit facility $ 998 $ 1,001 Promissory note 749 750 Revolving note payable - 859 Note payable 440 - $ 2,187 $ 2,610 Credit facility - The Company utilizes a credit facility of up to $7,500,000 which had expired on December 31, 1999, but borrowings continued to be outstanding subsequent to its formal expiry. 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, 2000) 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, 2000. The lender has waived such requirement through December 31, 2000. As of December 31, 2000 and 1999, borrowings outstanding under this credit facility amounted to $998,000 and $1,001,000, 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, 2000, there were borrowings outstanding under this credit facility of $749,000 (1999 $750,000). The note was fully repaid on August 23, 2001. 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 conjunction 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, 2000, this note was assumed by the previous controlling stockholders of the Company as part of the Stock Purchase Agreement Note payable - The Company has an outstanding note payable to Starlight Marketing Development Ltd (see Note 11), bearing interest at 12%. As at December 31, 2000, the principal outstanding is $400,000 and accrued interest outstanding is $40,000. This note is repayable upon demand and has a first priority security interest in the Company's inventory. In August 2001, this note was fully discharged together with accrued interest of $76,300 by applying it as a credit against the purchase price Starlight paid for the shares of the Company. (See Note 11). Due to principal stockholders - The principal stockholders provided financing to the company to cover any shortfall in working capital requirements. In 2000, the amount owed to the principal stockholders were reduced by $175,000 when certain subsidiaries were transferred to them as part of the Stock Purchase agreement. As of December 31, 2000, the Company owed $1,181,000 to the principal stockholders. On August 23, 2001, this loan was converted to equity by the Company issuing 1,555,000 new shares to the stockholders. 5. LONG-TERM DEBT Long-term debt consisted of the following as of December 31: 2000 1999 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 in conjunction with a revolving note payable on the Company's land and building in the United States $ - $ 1,253,000 Less current portion - (76,000) Long-Term Debt $ - $1,177,000 The promissory note was fully repaid in November 2000 from proceeds of sale of land and building. 6. INCOME TAXES - The Company has unused tax loss carryforwards, the measurement of which has not been reliably estimated but may be approximately $20 million, which would be available to offset future taxable income. Such carryforwards relate in part to domestic and in part to foreign jurisdictions and expire from the year 2001 through the year 2016. The Company has reduced the deferred tax assets resulting from its domestic and foreign tax loss carryforwards by a 100% valuation allowance as it has determined that it is more likely than not that the deferred tax assets will not be realized. Accordingly, the deferred tax asset net of the valuation allowance is not affected by the measurement uncertainty and is zero at December, 31 2000 and 1999. 7. SALE OF SUBSIDIARIES As part of the terms of the Stock Purchase Agreement, the Company transferred the assets and liabilities of two subsidiaries, Cosmo Telecom Corp. and Cosmo World Wide Corp. to the previous controlling stockholders. The result of these transfers was a net gain of $831,000 to the Company. 8. CONTINGENCIES 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 periodic reporting requirements of the Securities Exchange Act of 1934. Management is unable to determine what effect, if any, this non-compliance will have on its operations. 9. 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, 2000, 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. 10. 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 Canada. Borrowings are principally in the United States. Wal-Mart Canada Inc. is the Company largest customer, which accounted for 88% of sales in 2000 (71% in 1999). 2000 Domestic Foreign Other Total Assets $0 $ 2,839 - $2,839 Sales, net - 9,117 - 9,117 Gross Margin - 404 - 404 Net income (loss) 1,059 (1,366) - 307 1999 Assets $ 2,818 $ 936 $ 87 $3,841 Sales, net 694 7,919 - 8,613 Gross Margin (403) 1,344 (38) 903 Net loss (1,276) 255 (38) (1,059) 11. SUBSEQUENT EVENTS On June 19, 2001, shareholders of the Company at a Special Meeting, approved the amendment of the Company's Articles of Incorporation to increase the number of authorized shares from 4 million to 50 million shares. In April 2000, the Company and certain controlling shareholders of the Company at that time entered into a Stock Purchase Agreement pursuant to which the Company agreed to sell 84.89% of the outstanding common stock to Master Light Enterprises Ltd. ("Master Light"), a subsidiary of Starlight International Limited ("Starlight"), a publicly held company traded on the Hong Kong Stock Exchange, for $1 million. Pursuant to an amendment to the Stock Purchase Agreement, in January, 2001, Master Light acquired 1,347,420 shares of the Company's Common Stock, representing 49.11% of the Company's Common Stock outstanding at that time, and representatives of Starlight were appointed to the Board of Directors of the Company replacing the incumbent directors. In August 2001, the transactions contemplated by the Stock Purchase Agreement, as amended, were consummated and, after the purchase of the 1,347,420. shares by Master Light were rescinded, Master Light acquired from the Company 26,585,008 shares of the Company's Common Stock, representing 91.3% of the Company's currently issued and outstanding Common Stock. As part of the Stock Purchase Agreement, the stock of two of the Company's subsidiaries, Cosmo Telecom Corp. and Cosmo World Wide Corp., were transferred to the former controlling shareholders of the Company. In September 2001, the two loans with outstanding balances as of December 31, 2000 at $997,994 and $749,528 were repaid in full. Further, the loan balance due to major shareholders of $1,181,147 was discharged by the Company through the issuance of 1,555,000 shares of common stock. The Company's outstanding bridge loan of $400,000 with an accrued interest of $76,300 was discharged by a credit against the purchase price Starlight paid for the shares of the Company that it purchased. * * * * * * 1 - 1 - ~NEWY1:2017819:2:|9/24/01 6:33 PM 304085-1