10-K 1 cosmo10k01.txt COSMO COMMUNICATIONS CORP 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-11968 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, 2001 were $10,425,000. As of March 31, 2002, the market value of the registrant's Common Stock held by non- affiliates of the registrant was not able to be determined as there were no quotes on the bid and ask price of the Company's common stock. The number of shares outstanding of the registrant's common stock is 29,104,066 as of March 28, 2002. 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, 2001, substantially all of the Company's sales activity related to customers located 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. 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. 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 20 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. Subcontractors in Hong Kong and the People's Republic of China manufacture the Company's wall clocks and battery operated quartz alarm clocks. Radios - The Company introduced its first electronic digital clock radio in 1982 and currently offers 8 models, with retail prices ranging from approximately $9 to $20. The Company's electronic digital clock radios contain audio components as well as components similar to those in its electronic digital clocks. 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 approximately 25 models of compact disc player and recorder products with retail prices ranging from $20 to $120. 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. Starlight, the Company's parent company also supplies a selection of compact disc products. 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. The Company did not make any sales in the US during 2001 but has made steady progress in establishing a wholesale distribution channel in Canada. The Company is now selling its licensed brand-name "Memorex" products to Wal-Mart Canada on an exclusive basis. The Company continues to look for opportunity to add licensed brand names to its products line and is in negotiation with a third party for an exclusive distribution right. 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 2001. 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 2001 were to customers within Canada. See Note 10 "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 2001, 88% of sales in 2000. 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. Since becoming part of the Starlight group, the Company has been able to obtain supply from Starlight mainly in the compact disc categories. The Company believes this has improved its position to compete with other distributors. Product Development During 2001, 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, 2001, the Company did not spend any significant amount in product development and yet was able to introduce several new audio products 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. In 2001, the Company has been able to compete better in the market place. Sales improved by 14% despite a sudden slowdown in economy after September 2001. Average gross profit margin also improved significantly by more aggressive sourcing of supplies. The Company believes that, through its parent support, it is a significant manufacturer of compact disc players products and competes with several companies, including GPX and Emerson. Foreign Operations The Company's sales, warehousing and administration are 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. 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, 2001, the Company had 22 full- time employees, including 1 in Hong Kong and 21 in Canada. In Hong Kong, one employee is engaged in sales and sourcing support duties. In Canada, 8 employees were engaged in warehouse distribution and service operations and 13 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. Rental commitment is $79,200 per annum under the existing lease. 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 2001, 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 March 28, 2002. 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 2000 First Quarter 0.56 0.31 Second Quarter No quote No quote Third Quarter No quote No quote Fourth Quarter 0.001 0.001 2001 First Quarter .... 0.5625 0.001 Second Quarter ............................................... . No Quote No Quote Third Quarter No Quote No Quote Fourth Quarter No quote No quote On March 22, 2002, the last reported sales price for the Common Stock on the OTC Bulletin Board was $0.003 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 2001 2000 2000 to 2001 ____________________ ____________________ Sales 100.0% 100.0% 14.3% Cost of Sales 89.08 95.6 6.6% Gross Margin.. 10.92 4.4 181.7% Selling, general and Administrative expenses...........17.6 19.2 13.3% Loss from operations (6.7) (14.8) (42.7)% Other income (expense) 6.1 8.2 (62.7)% Net Income (Loss ) (2.8)% 3.4% (195.1)% Comparison of the year ended December 31, 2001 to the year ended December 31, 2000 Sales increased by 14.35% or $1,308,000 for the year ended December 31, 2001. Higher sales were due to stronger consumer demand of the compact disc players and the introduction of on a trial basis, several higher end products such as a combined television and DVD player unit and other newer design compact disc players in the last quarter of 2001. Cost of sales rose by 6.6% as a result of aggressive sourcing of products. Gross margin was lifted from 4.4% of sales in 2000 to 10.9% in 2001. Selling, general and administrative expenses increased by 13.4%, largely due to higher sales activities. Revenue earned as commission rose by 88% or $324,000 in 2001. The Company earned commissions as distributor for an unrelated party in Canada through its existing sales channels. Net result in 2001 was a loss of $292,000 in 2001compared with a profit of $307,000 in 2000. The profit in 2000 included two non-recurring events which contributed $1,557,000 windfall gain in that year. Without these events, results in 2001 would have been better than 2000 by 77%. Liquidity and Capital Resources The Company's working capital deficit improved by $1,843,000 from a deficit of $2,563,000 in 2000 to $720,000 in 2001. The ratio of current assets to current liabilities at December 31, 2001 was .81 to 1, as compared to .52 to 1 at December 31, 2000. During 2001, the Company repaid all its short term loans and notes payable as follows: Credit facilities from financial institution $998,000 Notes payable $749,000 Bridge loan $440,000 The repayments were financed by a loan provided by Starlight. The balance of this loan bears interest at prime plus 1% per annum. Balance at December 31, 2001 was $1,322,000 including interest accrued. In addition, Starlight provided working capital to the Company through trades. Balance of trade payable to Starlight at year end was $1,242,000. The Company received $1,000,000 in shares subscription from Starlight at the closing of the Stock Purchase in August 2001. Proceeds of this transaction were used to discharge the short term liabilities with financial institutions. Loan due to the previous principal stockholder was settled fully by common shares issued in pursuant of the Stock Purchase Agreement. 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. 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 54 Chairman of the Board of Directors, and President Peter Horak 61 Chief Executive Officer, Canada Yu Wing Kin 50 Vice President, Administration, Hong Kong Carol Atkinson 53 Director Jacky Lau 43 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, 2001, 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 2001and 2000 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 2001 fiscal year totaled $100,000 or more (collectively, the "Named Executive Officers"). Annual Compensation(1) 2001 2000 2001 2000 All Other Name and Principal Position Salary ($) Bonus ($) Compensation Starlight International 5/F, Shing Dao Industrial Building 232 Aberdeen Main Road Hong Kong Philip Lau none none none none (1) Peter Horak CEO, Canada 129,000 105,200 none none (1) Carol Atkinson none none none none (1) Jacky Lau none none none none (1) (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 2001. Aggregated Fiscal Year-End Option Value Table. No Named Executive Officers held any options as of the end of the 2001 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 2001. 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 2001. 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 on September 14, 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 Philip Lau Carol Atkinson Jacky Lau Peter Horak 26,585,008(1) 26,585,008(1) none none 257,500 91.3% 91.3% 0.9% 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, 2001, the Company owed approximately $2,564,000 to Starlight group of companies, principal shareholders of the Company. $1,242,000 was owed in the form of trades payable. The balance was in the form of a loan. In August 2001, in accordance with the Letter Agreements described below, the previous principal shareholders received 1,555,000 new shares of the Company's Common Stock as repayment of the loan owed to them. These principal shareholders also agreed to surrender an aggregate of 2,294,567 shares as treasury stock. 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. 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: March 28, 2002 /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: March 28, 2002 /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, 2001 AND 2000 F-2 CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2001 F-3 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2001 F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED DECEMBER 31, 2001 F-5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 Schwartz Levitsky Feldman LLP Chartered Accountants Toronto, Montreal, Ottawa REPORT OF INDEPENDENT AUDITORS 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 (incorporated in Florida) as of December 31, 2001, and the related consolidated statements of operations, stockholders' deficiency, and cash flows for the year ended December 31, 2001. 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. The consolidated financial statements of Cosmo Communications Corporation and Subsidiaries as of December 31, 2000 were audited by other auditors whose report dated September 14, 2001, expressed an unqualified opinion on those statements, accompanied by an explanatory paragraph on the ability of the Company to continue as a going concern. 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 referred to above present fairly, in all material respects, the consolidate financial position of Cosmo Communication and Subsidiaries as of December 31, 2001 and the results of its operations and its cash flows for each of the year ended December 31, 2001, in accordance 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. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding to those 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. Chartered Accountants Toronto, Canada March 28, 2002 COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000 ASSETS 2001 2000 ($ in 000's) ($ in 000's) CURRENT ASSETS: Cash and cash equivalents $ 449 $ 646 Accounts receivable, net of allowance for doubtful accounts of $32,000 and $52,000, in 2001 and 2000, respectively (note 2) 990 784 Inventories 1,657 1,393 Other assets 7 7 __________ _________ Total current assets 3,103 2,830 PROPERTY AND EQUIPMENT, net (note 3) 14 9 ___________ __________ Total $ 3,117 $2,839 LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,307 $ 2,025 Credit facility and other financing arrangements(note 4) - 2,187 Due to principal stockholder - 1,181 Accounts payable to related party(note 4 &5) 1,194 - Loan from related party (note 4 &5) 1,322 - __________ __________ Total current liabilities 3,823 5,393 STOCKHOLDERS' DEFICIENCY: Common Stock (note 6 and note 7) 1,571 137 Treasury stock (note 6) ( 116) - Additional paid-in capital 26,273 25,410 Accumulated deficit (26,846) (26,554) Accumulated other comprehensive loss (1,588) (1,547) __________ _________ Total stockholders' deficiency (706) (2,554) __________ _________ Total $ 3.117 $ 2,839 The accompanying notes are an integral part of these 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, 2001 2001 2000 ($ in 000's) ($ in 000's) (except per share data) SALES, net $ 10,425 $ 9,117 COST OF SALES 9,287 8,713 __________ GROSS MARGIN 1,138 404 __________ __________ OPERATING EXPENSE: Selling expenses 803 960 General and administrative expenses 1,031 794 __________ _________ 1,834 1,754 __________ _________ LOSS FROM OPERATIONS ( 696) ( 1,350) ________ _________ OTHER INCOME (EXPENSE): Interest expense (232) (290) Interest income 35 22 Commissions 692 368 Gain on sale of fixed assets - 726 Gain on sale of subsidiaries - 831 Exchange losses ( 91) - Total other income (expense), net 404 1,657 ___________ __________ NET INCOME ( LOSS) $ (292) $ 307 BASIC AND DILUTED INCOME (LOSS) PER COMMON STOCK $ (.025) $ .11 WEIGHTED AVERAGE NUMBER OF COMMON STOCKS USED IN COMPUTING INCOME (LOSS) PER SHARE 11,524,000 2,692,000 The accompanying notes are an integral part of these 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, 2001 ($ in 000s except issued share data) Common Accumulated Stock Additional Other __ Shares __ Paid-in Accumulated Comprehensive Number Amount Capital Deficit Income Total BALANCE, DECEMBER 31, 1999 2,642,000 133 25,410 (26,861) (1,514) ( 2,832) Shares issued 102,000 4 4 Net income 307 307 Other comprehensive income : Foreign Currency Translation (33) (33) ________ ________ __________ __________ ________ ________ BALANCE, DECEMBER 31, 2000 2,744,000 137 25,410 (26,554) (1,547) (2,554) Shares issued 28,675,000 1,434 863 2,297 Treasury stock (2,335,000) (116) (116) Net loss (292) (292) Other comprehensive loss : Foreign Currency Translation (41) (41) _________ ________ __________ __________ _________ ________ BALANCE, DECEMBER 31, 2001 29,104,000 $1,455 $ 26,273 $ (26,846) $ (1,588) $ (706) The accompanying notes are an integral part of these 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, 2001 2001 2000 ($ in 000's) ($ in 000's) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (292) $ 307 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4 205 Gain from sale of fixed assets - (726) Gain on sale of subsidiaries - (831) Decrease (increase) in accounts receivable, net (206) 575 (Increase) decrease in inventories, other current assets and other assets (264) (300) Increase in accounts payable and accrued expenses and other current liabilities 766 566 Increase in accounts payable with related party 1,242 - Foreign Currency Translation adjustment (41) - _________ __________ Net cash provided by (used in) operating activities (323) (204) CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of fixed assets - 1,801 Purchases of property and equipment (9) - ___________ _________ Net cash provided by (used in) investing activities (9) 1,801 ____________ _________ CASH FLOWS FROM FINANCING ACTIVITIES : Repayment of notes and loans (1,189) (1,253) Proceeds from related party loan 1,322 440 Repayment of credit facility (998) (3) Net increase(decrease)in due to stockholders (note 4) (170) Proceeds from shares issued 1,000 4 _________ __________ Net cash (used in) provided by financing activities 135 (982) __________ __________ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (197) 615 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 646 31 _______ __________ CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 449 $ 646 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - Cash paid during the year for interest $ 169 $ 250 SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING and INVESTING ACTIVITIES: Credit facility settled by sale of subsidiaries - $ 859 Disposal cost of fully depreciated assets - $175 Loan due previous principal shareholder $ 1,181 $ - The accompanying notes are an integral part of these consolidated financial statements F-5 COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE TWO YEARS ENDED DECEMBER 31, 2001 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 2001. 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 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, 2001. 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, Cosmo Canada Communications Corporation and Cosmo Hong Kong communications Limited Company. 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. Amortization 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 amortized 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 accumulated 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. Concentrations of Credit Risks - The Company's receivables are unsecured and are generally due in 30 days. 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 9 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 2001 or 2000. 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: 2001 2000 ($ in 000's) ($ in 000's) Beginning balance $ 52 $ 19 Provision 32 138 Write-offs, net of recoveries (52) (105) Ending balance $ 32 $ 52 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: 2001 2000 ($ in 000's) ($ in 000's) Leasehold improvements 12 12 Plant and equipment 43 34 Furniture and fixtures 29 29 Total 84 75 Less accumulated depreciation and amortization ( 70) (66) $ 14 $ 9 4. CREDIT FACILITY AND OTHER FINANCING ARRANGEMENTS AND OTHER CURRENT LIABILITIES Credit facility and other financing arrangements consist of the following: 2001 2000 ($ in 000's) ($ in 000's) Credit facility $ - $ 998 Promissory note - 749 Note payable - 440 $ - $ 2,187 Credit facility - The Company repaid all credit facility as of December 31, 2001. Promissory note - The Company repaid the promissory note as of December 31, 2001. Note payable 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. Other current liabilities consist of: Due to previous principal stockholders - On August 23, 2001, this loan was converted to equity by the Company issuing 1,555,000 new shares to the stockholders. Loan from related party - The Company received a loan from Starlight in August 2001. This loan bears interest at prime rate plus 1% and is payable on demand. As of December 31, 2001, total owed was $1,322,000 including interest accrued 5. RELATED PARTY TRANSACTIONS Apart from those as disclosed in note 4, the Company's transactions with related party which in the opinion of the directors, were carried out on normal commercial terms and in the ordinary course of the Company's business. As of December 31, 2001, the Company owed approximately $2,564,000 to Starlight group of companies, principal shareholders of the Company. $1,242,000 was owed in the form of trades payable. The balance was in the form of a loan. During the year, the Company purchased $4,860,491 of goods from Starlight and paid $163,000 in handling charges for repair of products. 6. COMMON STOCK AND TREASURY STOCK Authorized 30,000 Preferred stock, cumulative, convertible at $0.01 par value 9,970,000 Preferred stock, at $0.01 par value 50,000,000 common stock at $0.05 par value Issued 2001 2000 $ $ ('000) ('000) 29,104,000 common stock (2000 - 2,744,000) 1,571 137 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 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 26,585,000 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. Under the terms of the Agreement above, the Company issued to two executive officers of the Company's Canadian operating subsidiary an aggregate of 535,000 shares of newly issued common stock in consideration of their agreement to release the Company from its obligation to repay $79,425 owed to them and from any other claims which they might have against the Company and its subsidiaries and thereof respective directors, officers or stockholders. They agreed to surrender an aggregate of 20,000 shares as treasury stock. 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. These principal shareholders also agreed to surrender an aggregate of 2,294,567 shares as treasury stock (note 4). 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 . 7. STOCK OPTION PLAN Stock Option Plan - The Board of Directors of the Company (the "Board") adopted the 1990 Stock Option Plan (the "Plan) effective December 15, 1990. Effective December 23, 1994, the 1990 Stock Option Plan was amended and restated. 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, 2001, 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. 8. 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 2002 through the year 2017. 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 2001 and 2000. 9. 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. 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 2001 (88% in 2000). Economic dependence exists with this identified customer. Loss of the customer may imply a significant adverse to the financial position of the Company. 2001 Domestic Foreign Other Total Assets $0 $ 3,117 - $3,117 Sales, net - 10,425 - 10,425 Gross Margin - 1,138 - 1,138 Net income (loss) (141) (151) - ( 292) 2000 Assets $ 0 $ 2,839 $ - $ 2,839 Sales, net 0 9,117 - 9,117 Gross Margin 0 404 - 404 Net loss 1,059 (1,366) - 307 11. COMMITMENT The Company leases premises under an operating lease with a four year term in Canada and shares the facilities for its Hong Kong operation. Rent expense during the 12 months ended December 31, 2001 was approximately $108,000. Minimum lease commitments under the leases at December 31, 2001 were: 12 months $107,000 24 months $107,000 36 months $122,000 48 months $ 65,000 $401,000 * * * * * * 1 - 1 -