-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CmFL7DSwctNioCAn90xsqVEMUlQ8LI2nrcaWX7o1TE9voZMK7XgaSkETCwvXX+F+ r7UacPvhOwfZC1GSw94VAQ== 0000718096-98-000001.txt : 19980401 0000718096-98-000001.hdr.sgml : 19980401 ACCESSION NUMBER: 0000718096-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COSMO COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000718096 STANDARD INDUSTRIAL CLASSIFICATION: WATCHES, CLOCKS, CLOCKWORK OPERATED DEVICES/PARTS [3873] IRS NUMBER: 592268005 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11968 FILM NUMBER: 98580452 BUSINESS ADDRESS: STREET 1: 16501 NW 16TH COURT CITY: MIAMI STATE: FL ZIP: 33169 BUSINESS PHONE: 3056214227 MAIL ADDRESS: STREET 1: 16501 N W 16 COURT CITY: MIAMI STATE: FL ZIP: 33169 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission file number 0-119698 COSMO COMMUNICATIONS CORPORATION (Exact name of registrant as specified in its charter) Florida 59-2268005 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 16501 N.W. 16th Court, Miami, Florida 33169 (Address of principal executive offices) Registrant's telephone number, including area code: (305) 621-4227 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.05 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. Yes __ No X As of March 19, 1998, the market value of the registrant's Common Stock held by non affiliates of the registrant was approximately $309,000 based on the closing bid price of $ 0.25 for the Common Stock as reported on the OTC Bulletin Board on such date. Documents Incorporated by Reference None. PART I ITEM 1. BUSINESS General The Registrant, Cosmo Communications Corporation (the "Company"), imports, markets and distributes in the United States, Canada and Latin America, consumer electronic products, including digital alarm clocks, quartz alarm clocks, quartz wall clocks, clock radios, combination products such as clock radio telephones, and cellular phones and accessories. The Company also imports, markets and distributes into Latin America a full line of audio products, including personal cassette players, portable stereos and music centers with and without compact disc players. The Company's products are marketed principally under its own label to mass merchandisers, drug store chains, other specialty chain stores and other high-volume retailers. The Company's products are generally manufactured in accordance with its specifications by subcontractors in a number of countries in the Far East. The Company's principal executive offices are located at 16501 N.W. 16th Court, Miami, Florida 33169 and its telephone number at such location is (305) 621-4227. Forward-Looking Statements and Associated Risk Management believes that this annual report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including statements regarding, among other items, (i) the Company's growth strategies, (ii) anticipated trends in the consumer electronics industry, and (iii) the Company's ability to obtain and maintain adequate financing for its operations. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from these forward-looking statements as a result of such uncontrollable factors, including, among others, general economic conditions, governmental regulation and competitive factors, and, more specifically, interest rate levels, availability of financing, consumer confidence and preferences, the effectiveness of the Company's competitors, and costs of materials and labor. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this annual report will in fact transpire. Financial and Management's Plans The Company has been experiencing a continuation of a difficult retail climate and strong competition in recent years. During the last three years, several large retailers in the United States have been reducing inventory levels. Management has continued its efforts to address and eliminate the Company's losses. Management's plans include a restructuring of the Company's sales department and the introduction of new products within existing product lines. The Company has also pursued new product categories through increased sourcing activities in the Far East. The Company has introduced a new line of product of cellular phones and cellular phone accessories under the brand of "Cosmo Telecom" and has finalized an agreement to market in Canada audio product utilizing the brand name "Memorex". It is anticipated that the introduction of new product categories will assist the Company in capturing new markets within the retail arena.Management believes that through its existing credit facilities and the continued commitment by the Company's principal stockholder to provide additional financing at his discretion on an as-needed basis, the Company will be able to meet it's working capital requirements during 1998. The Company's ability to successfully implement its plans to eliminate its losses is dependent upon a number of factors beyond its control. These factors include the overall retail climate and competition. There can be no assurance that the Company's sales, gross margins, operating results or financial condition will improve in fiscal year 1998 (See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations). Products Time Division - The Company has a wide range of clocks including electronic digital alarm clocks, quartz alarm clocks and quartz wall clocks. The Company introduced its first electronic digital clock in 1977 and currently offers approximately 40 models which retail at various prices ranging from approximately $5 to $20. The Company's electronic digital clocks contain micro-processors, printed circuit boards, light emitting diodes and ceramic buzzers. These products were manufactured by subcontractors in Hong Kong and the People's Republic of China who sometimes use components and materials supplied, and assembling methods developed, by the Company. The Company offered a total of approximately 40 models of quartz wall clocks in 1997, retailing from approximately $5 to $40. The Company's wall clocks are manufactured by subcontractors in Hong Kong, Taiwan, and the People's Republic of China. The Company also sold approximately 20 models of battery operated quartz alarm clocks during 1997, retailing from approximately $5 to $20. The Company's battery operated quartz alarm clocks are manufactured by subcontractors in Hong Kong and the People's Republic of China. Electronic Division - 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 1997, most of the units were manufactured by subcontractors in Hong Kong and the People's Republic of China who sometimes use components and materials supplied by the Company. In the early 1990's, the Company began to market a line of audio products in the Latin American and Canadian market. Sales for both the Time Division and Electronic Division accounted approximately for a 48% of the total sales or a total of $8,137,000 corresponding $7,392,000 to Domestic Sales and $745,000 to D.I. Sales. Licensed Product: In 1997 Cosmo finalized an agreement to market in Canada audio product utilizing the brand name "Memorex". Use of this name is expected to significantly increase the volume of business in that market. Cosmo will also license the "Memorex" brand name for an alarm clock to be sold in conjunction with the Cosmo brand both in U.S. and Canada. Marketing - The Company's marketing strategy is targeted at high volume retailers with broad distribution networks such as mass merchandisers, drug and other specialty chain stores, and other retailers. Because of economic conditions, a number of past customers of the Company have filed for bankruptcy, merged with other retailers, reorganized operations or have ceased to operate. During 1997, sales to retailers became more difficult as a result of economic conditions and fierce competition from other manufacturers and importers. The Company is attempting to overcome these difficulties in 1998. The following table illustrates the Company's primary marketing channels and representative customers in 1997. Mass Merchandiser Drug Store Chains Specialty Chains Wal-Mart (U.S. & Canada) American Drug AAFES Target Genovese Canadian Tire Fedco Osco Drug Builder Square Kohls Savon Drug Fortun Off Roses Stores Brooks Bed, Bath & Beyond Meijer's Dollar General Bi-Mart Fred Meyer Ames Dept. Stores The Company believes that its sales to high volume retailers depends upon its ability to deliver a large volume of attractive and reliable items at prices generally at or below those of its competitors. Substantially all of the Company's domestic sales are generated by either the Company's full-time sales staff or its approximately 20 independent sales representatives. Approximately 55% of the Company's sales in 1997 were to customers within the United States with the remainder of sales to customer in Canada and Latin America. See Note 9 of "Notes to Consolidated Financial Statements" for financial information about foreign and domestic operations. Sales to the Company's four largest customers accounted for approximately 60% of sales in 1997. During 1997, 1996, and 1995, sales to Walmart accounted for approximately 43%, 34% and 34%, respectively, of total sales The Company's products are generally sold with a one year limited warranty on labor and parts. Manufacturing Most of the Company's products are manufactured by subcontractors. Substantially all of the subcontractors assemble products for the Company in accordance with the Company's specifications. Subcontractors in Hong Kong, the Peoples Republic of China and Taiwan assemble clocks, clock-radios and audio products. Several of the subcontractors dedicate their entire production capacity to the Company's orders. The Company performs quality control inspections on the premises of its facilities and its subcontractors' facilities, and also inspects its various products upon their arrival in the United States and Canada. The Company uses microprocessors from Texas Instruments, Sanyo Semiconductor, Hitachi, Ltd., Motorola Inc. and Phillips Hong Kong, Ltd. Various subcontractors in the Far East produce printed circuit boards, light emitting diodes, audio components, receivers, transmitters and internal antennas in accordance with specifications of the Company. All of the components and raw materials used by the Company are available from several sources of supply and the Company does not anticipate that the loss of any single supplier would have a material adverse effect on its business, operations or financial condition. Product Development During 1997, the Company introduced and marketed several new electronic digital alarm clocks (LED and LCD), quartz alarm clocks, quartz wall clocks, clock radios and audio products. During the years ended December 31, 1997, 1996, and 1995, the Company spent approximately $200,000, $210,000, and $225,000, respectively, for new product design, engineering, tooling and testing. Competition The consumer products industry in which the Company operates is characterized by intense price competition, ease of entry into the audio and clock business 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. In response to such factors, the Company has been required to change its emphasis on its products and product lines. The Company believes that important competitive factors necessary to compete include price, quality and reliability of products, attractive packaging, speed of delivery to customers and new or additional product features. A well-recognized consumer brand name is also an important competitive factor which the Company is able to provide in its product lines. 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 and its ability to market such products at competitive prices which compensate for the lack of strong consumer name recognition. The Company believes that, through its subcontractors, it is a significant manufacturer of electronic digital clocks and competes with several companies, including, General Time Westclox and Spartus Corporation and Avance (Timex). Major suppliers of electronic digital clock radios and audio product include General Electric Company, Panasonic Industrial Company, Sony Corporation, Sanyo Manufacturing Corporation and Emerson Radio Corporation. Foreign Operations The Company has significant foreign operations. See Note 9 of "Notes to Consolidated Financial Statements." The Company purchases finished products from various suppliers in the Far East. The supply and cost of products and components can be adversely affected by changes in foreign currency exchange rates, increased import duties, loss of favorable tariff rates for products produced in the countries in which the Company subcontracts the manufacture of goods, imposition of import quotas, interruptions in sea or air transportation and political or economic changes in countries from which components or products are exported or into which they are imported. On occasion, in order to meet unexpected levels of demand, the Company has utilized more costly air shipping to fill orders promptly. The Company will continue to subcontract a significant portion of its manufacturing needs to subcontractors in the Peoples Republic of China, Hong Kong and Taiwan. Any material change in the trade policies of the United States or these countries might have an adverse effect on the Company's operations. Employees On December 31, 1997, the Company had 29 full-time employees, including 18 in the United States, 1 in Hong Kong and 10 in Canada. Of those employed in the United States, 4 were engaged in manufacturing, distribution and service operations and 14 were sales, administrative and executive personnel. In Hong Kong one employee is engaged in sales and administrative duties. In Canada, 5 employees were engaged in manufacturing, distribution and service operations and 5 were sales, administrative and executive personnel. The following table sets forth certain information with respect to the executive officers of the Company as of March 31, 1998: Name Age Position Amancio Victor Suarez ............. 61 Chairman of the Board of Directors, Chief Executive Officer and Chief Financial Officer Carlos Ortega .......................... 53 President, Chief Operating Officer and Director Robert L. Scott 61 Vice President of Sales and Marketing Jose Bueno 43 Vice President, International Operations Yu Wing Kin 46 Vice President,Administration Far East Mr. Suarez is a co-founder of the Company and served as its Chief Financial Officer from its inception. On December 24, 1985, Mr. Suarez assumed the position of Chief Executive Officer. Mr. Suarez is also involved in other business ventures ,primarily in the real estate industry, which do not compete with the Company. Mr. Carlos Ortega, a Director and shareholder of the Company was appointed as the new President and Chief Operating Officer in July 1996. Mr. Ortega has been a director of the Company since December 1992, and was one of the founders and principals of Cargil International Corporation, a company engaged in the distribution of household products and appliances to Latin America. Mr. Scott joined the Company in October 1990 as Vice President of Sales and Marketing. From July of 1989 until October of 1990, Mr. Scott served as the national sales manager of Cheyenne Lamps, a corporation engaged in the portable lighting business. From May of 1988 until June of 1989, Mr. Scott served as Vice President of Sales for Robeson, a company engaged in the kitchen appliance business. Prior to that time, for more than eight years, Mr. Scott served as Vice President of Sales of Spartus Corporation. Mr. Bueno joined the Company in July 1988 as Vice President of International Sales and Far East Operations. Mr. Bueno is responsible for marketing and international operations in the Far East. Mr. Bueno is also responsible for sales and marketing of all Cosmo products into the Latin American market. Before joining the Company Mr. Bueno was employed by Johnson and Johnson as Divisional Sales Manager, from 1985 through June 1988. Prior to that time, Mr. Bueno served as Regional Sales Manager for Colgate Palmolive Company, from 1983 through 1985. Mr. Kin has served as Vice President of Administration for the Far East since joining the Company in August 1978. ITEM 2. PROPERTIES The Company's executive offices and principal domestic manufacturing warehouse facilities are located in a 48,000 square feet building at 16501 N.W. 16th Court, Miami, Florida. Both the land and building are owned by the Company subject to mortgage indebtedness with an outstanding principal balance at December 31, 1997 of approximately $2,148,115. 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 1997, the Company did not submit any matter to a vote of security holders. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock. During 1997, the Company's common stock ("Common Stock") was traded in the over-the-counter market under the NASDAQ symbol "CSMO." There were approximately 258 record holders of the Common Stock as of March 19,1998. 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, mark-down or commission and may not necessarily represent actual transactions. On March 5, 1996, the Common Stock was delisted from the NASDAQ SmallCap Market as a result of the Company's inability to meet the minimum $1.00 bid price or its alternative, as required for continued listing on the NASDAQ SmallCap Market. On March 6, 1996, the Common Stock was listed on the OTC Bulletin Board. Fiscal Period High Low 1996 First Quarter 15/16 3/8 Second Quarter 5/8 1/4 Third Quarter 1/2 1/8 Fourth Quarter 3/8 1/8 1997 First Quarter 11/32 9/64 Second Quarter 11/32 3/32 Third Quarter 5/16 3/32 Fourth Quarter 5/8 1/16 Dividend Policy. It is the present policy of the Company's Board of Directors to retain earnings. The Company has not declared any dividends in the past. Any payment of cash dividends in the future will be dependent upon the financial condition, capital requirements and earnings of the Company and other factors which the Board of Directors may deem relevant. At the present time, the financial condition of the Company and the credit facilities of the Company with Congress Financial Corporation prevent the payment of dividends. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following data should be read in conjunction with the Company's Consolidated Financial Statements included elsewhere herein and the notes thereto, and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations." (In thousands, except share data) December 31: 1997 1996 1995 1994 1993 Statement of Operations Data: Sales $16,761 $15,964 $15,243 $15,772 $13,883 Cost of sales 12,430 11,779 12,044 11,611 10,211 Gross margin 4,331 4,185 3,199 4,161 3,672 Selling, general and administrative expenses 4,158 4,011 3,589 3,497 3,047 Income (loss) from operations 173 174 (390) 664 625 Other expense, net (749) (584) (587) (426) (449) Net (loss) income (576) (410) (977) 238 176 Net (loss) income per share : Basic $ (0.22) (0.16) (0.37) $ 0.08 $ 0.11 Fully diluted $0.06 Weighted average shares outstanding : Basic 2,642 2,642 2,642 2,863 1,657 Fully Diluted 2,856 Balancee Sheet Data: Working Capital (Deficit) $ (880) $ (58) $(1,089) $ (414) $ (654) Total Assets 7,940 7,805 11,826 9,927 8,796 Long-term Debt 1,323 1,702 465 487 518 Stockholders' Equity(Deficit) (532) 52 462 1,433 1,193 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table sets forth, for the periods indicated, the relative percentages that certain items in the Company's Consolidated Statements of Operations are to sales and the percentage changes in those items from period to period: Income & Expense Items Period-to-Period Percentage As a Percent of Sales Increase(Decreases) Year Ended December 31, Year Ended December 31, 1996 1995 1997 1996 1995 to 1997 to 1996 Sales 100.0% 100.0% 100.0% 5.5% 4.7% Cost of Sales 74.2 74.0 79.0 6.3% (2.2)% Gross Margin 25.8 26.0 21.0 3.5% 30.8% Selling, general and administrative 24.8 25.0 23.5 3.7% 11.8% Income (loss)from operations 1.0 1.0 (2.5) (1.1)% 144.6% Other expense, net (4.5) (3.6) (3.9) 28.4% (.6)% Net Income (Loss) (3.4) (2.6) (6.4) 41.0 58.0 1997 Compared to 1996: Sales increased from 1996 to 1997 by approximately $797,000, an increase of 5.5%. The sales increased is attributable in part to sales of a broader range of products ,including Telecom accessories and cellular phones, to existing accounts. Gross margins as a percentage of sales remain almost the same in 1996 and 1997. Selling, general and administrative expenses as a percentage of sales did not have a noticeable change from 1996 to 1997. Other expenses, net of interest, and other miscellaneous income, increased by 28.2% from 1996 to 1997. This was the result of a decrease in interest income of $36,000 and the fact that in 1996 the company received approximately $75,000 as a result of proceeds from a class action antidumping in which Cosmo was a party. As a result of the foregoing, net loss increased from $410,000 in 1996 to $576,000 in 1997. (See Item 1-" Financial and Management's Plans" for additional comments on fiscal year 1997 and the Company's plans for fiscal year 1998). 1996 Compared to 1995: Sales increased from 1995 to 1996 by approximately $721,000, an increase of 4.7%. Management believed that the sales increased was attributable in part to sales of a broader range of products to existing accounts. Gross margins as a percentage of sales also increased from 21.0% in 1995 to 26.0% in 1996. This increase was attributable to a decrease in the cost of product from the Far East. Selling, general and administrative expenses as a percentage of sales increased from 23.5% in 1995 to 25.0% in 1996. The increase was primarily attributed to minor overall increases in selling and administrative overhead expenses, due in part to more intense sales efforts. Other expenses, net of interest, and other miscellaneous income, increased slightly by 0.6% from 1995 to 1996. Even though the interest and other miscellaneous expenses increased 115,000 (or 17%), there was miscellaneous income of approximately $75,000 as a result of proceeds received by the Company from a class action antidumping in which Cosmo was a party. As a result of the foregoing net loss decreased from net loss of $977,000 in 1995 to a net loss of $410,000 in 1996. (See Item 1-"Financial and Management's Plans" for additional comments on fiscal year 1996 and the Company's plans for fiscal year 1997. Liquidity and Capital Resources Working capital was a deficit of approximately $880,000 at December 31,1997 an increase of approximately $822,000 from December 31, 1996. The ratio of current assets to current liabilities at December 31, 1997 was .88 to 1, as compared to .99 to 1 at December 31, 1996. The Company has a credit facility of up to $7,500,000 with a financial institution, expiring on December 31, 1998. The credit facility is secured by substantially all assets of the Company, except for the Company's land and building in the United States. Borrowings are tied by formula to eligible accounts receivable and inventories. Interest is charged on outstanding borrowings at the prime rate (8.5% at December 31, 1997) plus 2.5%. As of December 31, 1997 and 1996, borrowings outstanding under this credit facility amounted to $3,160,000 and $3,089,000, respectively. The credit facility contains certain restrictive covenants, the most restrictive covenant of which relates to a minimum net worth requirement, which was not met by the Company as of December 31, 1997. The lender has waived the minimum net worth requirement for the 1998 year. The Company has another credit facility from a financial institution in the amount of $750,000 expiring on December 1, 2001. This credit facility is secured by a second mortgage on the Company's land and building in the United States. Interest is charged on outstanding borrowings at prime plus 1%. The Company commenced borrowing under this line in 1997. As of December 31, 1997 borrowings outstanding under this credit facility amounted to $750,000. The Company has another credit facility from a financial institution in the amount of $1,200,000. Interest is charged on outstanding borrowings at the prime rate plus 2.5%. As of December 31, 1997 and 1996, borrowings outstanding under this credit facility amounted to $302,000 and $462,000, respectively. As of December 31, 1997, this financial institution has restricted the Company's ability to borrow amounts under this line. The Company has another line of credit from a financial institution in the amount of $800,000 due on demand. Interest is charged on outstanding borrowings at prime plus 2%. As of December 31, 1997 borrowings under this line of credit amounted to $799,000. This line of credit facility is secured by a subsidiary's accounts receivable and inventory. Management believes that through its existing credit facilities and the continued commitment by the Company's principal stockholder to provide additional financing, at his discretion on an as needed basis(see Item 13) the Company will be able to meet its working capital requirements during 1998. The Company is subject to risk from exchange rate fluctuations. Based on the Company's evaluation of anticipated changes in exchange rates, the Company may from time to time purchase forward exchange contracts to hedge against these risks. However, the Hong Kong dollar remains the functional currency of the Company's Hong Kong subsidiaries, and the Company does not hedge against risks of foreign currency transaction or translation loss. Impact of Inflation The effect of inflation on the Company's costs and operating expenses has not been significant. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Company's Consolidated Financial Statements following page 24 of this Annual Report on Form 10-K. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has reported no disagreements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY For certain information regarding the executive officers of the Company, see "Item 1 - Business - Executive Officers," above. The following table and text presents certain information with respect to the directors of the Company who were not also executive officers as of March 31, 1997. Name Age Director Since Cesar L. Alvarez 50 1987 Mr. Alvarez became a director of the Company in August 1987. Mr. Alvarez has been a principal shareholder of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., a law firm in Miami, Florida for more than 5 years and is presently its Chief Executive Officer and managing shareholder. Mr. Alvarez also serves on the Board of Directors of Pediatrix Medical Group, Inc., Ft. Lauderdale, Florida, FDP Corp., Miami, Florida and CompuTrac, Inc., Dallas, Texas. Compliance with Section 16(a) of the Securities Exchange Act of 1934. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10 percent of the Company's Common Stock, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Such persons are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based on a review of any such reports furnished to the Company during or with respect to the 1997 fiscal year, there were no Section 16(a) reports filed after the due date. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth, for the 1997, 1996 and 1995 fiscal years, respectively, compensation paid or accrued by the Company to or on behalf of the Company's Chief Executive Officer and each other executive officer whose total annual salary and bonus for the 1996 fiscal year were $100,000 or more (collectively, the "Named Executive Officers"). Annual Compensation(1) All Other Name and Principal Position Year Salary($) Bonus($) Compensation Amancio Victor Suarez Chairman of the Board, Chief Executive Officer and Chief Financial Officer 1997 1996 $108,000 1995 $200,000 $ 162 (2) (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. (2) The indicated amount represents premiums paid by the Company for term life insurance for the benefit of the Named Executive Officer. Option Grants Table. No options were granted during fiscal 1997. Aggregated Fiscal Year-End Option Value Table. No Named Executive Officers held any options as of the end of the 1997 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 1997. Annual retainers are not currently provided to directors; however, such retainers may be reinstituted in the future. Directors are eligible to receive grants of options under the Company's stock option plan. No stock options were granted to any directors of the Company during 1997. Employment Agreements, Termination of Employment and Change-in-Control Arrangements. Currently there are no employment agreements with any Executives or Officers of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following information is furnished as of December 31, 1997 as to the beneficial ownership of the Company's Common Stock by (i) each of the Named Executive Officers (as defined in Item 11 above); (ii) each other director of the Company; (iii) each person known by the Company to be a beneficial owner of more than 5% of the Common Stock; and (iv) all directors and executive officers of the Company as a group: Shares of Percentage Name and Address Common Stock of Class Amancio Victor Suarez(1) 1,054,160 40.0% 16501 N.W. 16th Court Miami, Florida 33169 Carlos Ortega 333,333 12.6% 16501 N.W. 16th Court Miami, Florida 33169 A.J. Suarez 333,333 12.6% 16501 N.W. 16th Court Miami, Florida 33169 Jose R. Aldariz 333,333 12.6% c/o Cargil International Corp. 6812 N.W. 77th Court Miami, Florida 33166 All directors and officers 1,423,493 53.5% as a group (6 persons)(2) (1) Includes 21,000 shares owned of record by a relative of Mr. Suarez. (2) Includes 26,000 shares subject to presently exercisable options. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As of December 31, 1996, the Company owed approximately $962,000 to Amancio Victor Suarez, Chairman of the Board and Chief Executive Officer of the Company, on loans previously made by Mr. Suarez to the Company from time to time. During 1997, Mr. Suarez had an informal commitment with the Company to lend from time to time, at his sole discretion on an as needed basis, up to an additional $500,000 to the Company on a demand basis. The loans bear interest at prime rate plus 2.5%. As of December 31, 1997, the aggregate amount owed by the Company to Mr. Suarez was approximately $901,000, due on demand. For 1997, Mr. Suarez has continued his informal commitment to loan up to an additional $500,000 to the Company on a demand basis, at his discretion. During 1997 there was a reduction of $61,000 on the balance owed to Mr. Suarez. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements: Reference is made to the index to the Company's Consolidated Financial Statements following page 24 of this Annual Report on Form 10-K. 2. Financial Statement Schedules: These schedules are otherwise contained within the Company's Consolidated Financial Statements following page 24 of this Annual Report on Form 10-K. 3. Exhibits: Exhibit No. Description 3.1 Registrant's Articles of Incorporation, as amended (1) 3.2 Registrant's Bylaws (2) 10.1 Employment Agreement with Andrew Neckowitz (3) 10.2 Employment Agreement with Robert L. Scott (3) 10.3 Amended and Restated 1990 Stock Option Plan(Compensatory Plan)(4) 10.4 Credit Facility with Congress Financial Corporation and Amendments thereto(5) 10.5 Shareholders Agreement (1) 22.1 List of Registrant's Subsidiaries (1) (1) Incorporated by reference to the exhibit with the same number filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, as amended. (2) Incorporated by reference to the exhibit with the same number filed with the Registrant's Registration Statement No. 2-83088. (3) Incorporated by reference to the exhibit with the same number filed with the Registrant's Annual Report on Form 10-K for fiscal 1990. (4) Incorporated by reference to the exhibit with the same number filed with the Registrant's Annual Report on Form 10-K for fiscal 1990. (5) Filed in part herewith, and incorporated by reference to (i) exhibits 10.8, 10.9, 10.10, 10.11, 10.12 and 10.13 filed with the Registrant's Annual Report on Form 10-K for fiscal 1989, and (ii) exhibits 10.4 filed with the Registrant's Annual Reports on Form 10-K for fiscal 1990, 1991 and 1992, respectively. (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of the period covered by this report. Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COSMO COMMUNICATIONS CORPORATION DATED: March 23, 1998 /s/ Amancio V. Suarez AMANCIO VICTOR SUAREZ, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. DATED: MARCH 23, 1998 /s/ Amancio V. Suarez AMANCIO VICTOR SUAREZ, Chairman of the Board Chief Financial Officer Chief Executive Officer /s/ Carlos Ortega CARLOS ORTEGA President, Chief Operating Officer and Director /s/ Cesar L. Alvarez CESAR L. ALVAREZ Director COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page INDEPENDENT AUDITORS' REPORT F-1 CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND 1996 F-2 CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 F-3 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 F-4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity(deficit), and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Miami, Florida March 23, 1998 COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 and 1996 ASSETS 1997 1996 CURRENT ASSETS: Cash and cash equivalents $ 85,000 $ 89,000 Accounts receivable, net of allowance for doubtful accounts of $134,000 and $235,000, in 1997 and 1996, respectively 3,068,000 2,820,000 Inventories 2,901,000 2,973,000 Other (including $136,000 receivable from a related party in 1997) 215,000 111,000 Total current assets 6,269,000 5,993,000 PROPERTY AND EQUIPMENT, net 1,372,000 1,455,000 OTHER 299,000 357,000 Total $ 7,940,000 $ 7,805,000 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 1,027,000 $ 1,241,000 Credit facilities 5,011,000 3,551,000 Due to principal stockholder 901,000 962,000 Other liabilities, including current portion of long-term debt 210,000 297,000 Total current liabilities 7,149,000 6,051,000 LONG-TERM DEBT, net 1,323,000 1,702,000 CONTINGENCIES (NOTE 7) STOCKHOLDERS' EQUITY(DEFICIT): Convertible cumulative preferred stock, $0.01 par value; 30,000 shares authorized, none issued Preferred stock, $0.01 par value; 9,970,000 shares authorized,none issued Common stock, $0.05 par value; 4,000,000 shares authorized;2,642,000 shares issued and outstanding 133,000 133,000 Additional paid-in capital 25,410,000 25,410,000 Accumulated deficit (24,329,000) (23,753,000) Cumulative translation adjustment (1,746,000) (1,738,000) Total stockholders' equity (deficit) (532,000) 52,000 Total $ 7,940,000 $ 7,805,000 See notes to consolidated financial statements. F-2 COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 1997 1996 1995 SALES $ 16,761,000 $15,964,000 $15,243,000 COST OF SALES 12,430,000 11,779,000 12,044,000 GROSS MARGIN 4,331,000 4,185,000 3,199,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,158,000 4,011,000 3,589,000 INCOME(LOSS) FROM OPERATIONS 173,000 174,000 (390,000) INCOME (EXPENSE): Interest expense (787,000) (800,000) (685,000) Interest income 5,000 41,000 57,000 Other, net 33,000 175,000 41,000 Total other expense, net (749,000) (584,000) (587,000) NET LOSS $ (576,000) $ (410,000) $ (977,000) BASIC LOSS PER SHARE $ (0.22) $ (0.16) $ (0.37) WEIGHTED AVERAGE COMMON AND EQUIVALENT SHARES OUTSTANDING 2,642,000 2,642,000 2,642,000 See notes to consolidated financial statements. F-3 COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(DEFICIT) FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 Common Stock Additional Cumulative Shares Paid-In Accumulated Translation Issued Amount Capital Deficit Adjustment Total BALANCE, DECEMBER 31,1994 2,633 $ 131,000 $25,406,000 $(22,366,000) $(1,738,000) $1,433,000 Issuance of 9,000 shares of common stock 9 2,000 4,000 6,000 Net loss (977,000) (977,000) BALANCE, DECEMBER 31, 1995 2,642 133,000 25,410,000 (23,343,000) (1,738,000) 462,000 Net loss (410,000) (410,000) BALANCE, DECEMBER 31, 1996 2,642 133,000 25,410,000 (23,753,000) (1,738,000) 52,000 Net loss (576,000) (576,000) Translation Adjustment (8,000) (8,000) BALANCE, DECEMBER 31, 1997 2,642 $133,000 $ 25,410,000 $(24,329,000) $(1,746,000) $(532,000) See notes to consolidated financial statements. F-4 COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (576,000) $ (410,000) $(977,000) Adjustments to reconcile net loss to net cash (used) provided by operating activities: Depreciation and amortization 197,000 172,000 318,000 Issuance of shares of common stock to certain employees 5,000 Decrease (increase) in accounts receivable, net (248,000) 2,125,000 (1,654,000) Decrease (increase) in inventories, other current assets and other assets (40,000) 736,000 (177,000) (Decrease) increase in accounts payable ,accrued expenses and other current liabilities (301,000) (2,265,000) 1,306,000 Translation adjustment (8,000) Net cash (used) provided by operating activities ( 976,000) 358,000 (1,179,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (48,000) (20,000) (224,000) CASH FLOWS FROM FINANCING ACTIVITIES : Net increase (decrease) in credit facilities and long-term debt repayments 1,081,000 (1,704,000) 1,162,000 Net increase (decrease) in due to stockholders (61,000) 358,000 402,000 Net cash provided (used) by financing activities 1,020,000 (1,346,000) 1,564,000 DECREASE INCREASE IN CASH AND CASH EQUIVALENTS (4,000) (1,008,000) 161,000 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 89,000 1,097,000 936,000 CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 85,000 $ 89,000 $1,097,000 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - Cash paid during the year for interest $ 666,000 $ 731,000 $ 588,000 SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES: Issuance of shares of common stock to certain employees $ 4,000 Disposal of fully depreciated assets $ 93,000 See notes to consolidated financial statements. COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General - Cosmo Communications Corporation and subsidiaries (the "Company") is a publicly-owned entity. The Company markets and distributes clocks and other consumer electronic products. The Company has significant operations in the United States, Hong Kong and Canada. Financial Difficulties and Management's Plans - The Company has been experiencing a continuation of a difficult retail climate and strong competition in recent years. During the last three years, several large retailers in the United States have been reducing inventory levels. Management has continued its efforts to address and eliminate the Company's losses. Management's plans include a restructuring of the Company's sales department and the introduction of new products within existing product lines. The Company has also pursued new product categories through increased sourcing activities in the Far East. The Company has introduced a new line of product of cellular phones and cellular phone accessories under the brand of "Cosmo Telecom" and has finalized an agreement to market in Canada audio product utilizing the brand name "Memorex". It is anticipated that the introduction of new product categories will assist the Company in capturing new markets within the retail arena. Management believes that through its existing credit facilities and the continued commitment by the Company's principal stockholder to provide additional financing at his discretion on an as-needed basis, the Company will be able to meet it's working capital requirements during 1998. The Company's ability to successfully implement its plans to eliminate its losses is dependent upon a number of factors beyond its control. These factors include the overall retail climate and competition. There can be no assurance that the Company's sales, gross margins, operating results or financial condition will improve in fiscal year 1998. Use of Estimates - The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fair Value of Financial Instruments - The Company's financial instruments include cash and cash equivalents, receivables, payables, debt and credit facilities. The fair value of such financial instruments have been determined based on current market interest rates as of December 31, 1996. The fair values of these instruments were not materially different than their carrying (or contract) values. Principles of Consolidation - The Company includes, in consolidation, its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents - All highly liquid instruments with a maturity of three months or less when acquired are considered cash equivalents. Inventories - Inventories are stated at the lower of cost (first-in, first-out) or market. Property and Equipment - Property and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets which range from three to eight years for property and equipment, other than the building, which is depreciated over thirty years. Other Assets - Other assets include an original amount of $983,000 of excess cost over fair market value of net assets acquired. Such amount is being amortized on a straight-line basis over fifteen years. The unamortized balance at December 31, 1997 and 1996 amounted to $268,000 and $325,000, respectively. Foreign Currency Translation - The accounts of the foreign subsidiaries were translated into U.S. dollars in accordance with the provisions of Financial Accounting Standards Board No. 52 ("SFAS 52"). Management has determined that the Hong Kong dollar is the functional currency of the Hong Kong subsidiaries and the Canadian dollar is the functional currency of the Canadian subsidiary. Certain current assets and liabilities of these foreign entities are denominated in U.S. dollars. In accordance with the provisions of SFAS 52, transaction gains and losses on these assets and liabilities are included in the determination of income for the relevant periods. Adjustments resulting from the translation of the financial statements from their functional currencies to U.S. dollars are accumulated as a separate component of stockholders' equity and have not been included in the determination of income for the relevant periods. Revenue Recognition - Sales are recognized upon shipment of goods. During the years ended December 31, 1997, 1996, and 1995, sales to a single customer accounted for approximately 43%, 34%, and 34%, respectively, of total sales. Accounts receivable corresponding to this customer approximated $881,000 and $672,000 as of December 31, 1997 and 1996, respectively. Warranty Costs - The Company's products are sold with a one-year limited warranty. The net cost of warranty repairs is charged to cost of sales when the repair work is performed. Historically, the Company's annual net warranty liability has not been significant. Research and Development - The costs of research and development associated with new product design, engineering, tooling, and testing are charged to cost of sales as incurred. Such expenses aggregated approximately $200,000 in 1997, $210,000 in 1996 and $225,000 in 1995. 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. Earnings and Loss Per Share - The Company adopted the guidelines contained in Financial Accounting Standards Board Statement 128, Earnings Per Share ("SFAS 128") during 1997. Under SFAS No. 128, basic earnings per share is computed based on the average number of common shares outstanding and diluted earnings per share is computed based on the average number of common and potential common shares outstanding. SFAS 128 requires the restatement of all prior period earnings per share. As of each period ended, there were no dilutive common equivalent shares. The stock options described in Note 8 could potentially dilute earnings per share in the future but were not included in diluted loss per share since they would be antidilutive for the periods presented. Impairment of Long-lived Assets - In March 1995, the Financial Accounting Standards Board issued Statement of Financial Standards No. 121, Accounting for the Impairment of Long-Lived Assets ("SFAS 121"). SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of.SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value amount of an asset may not be recoverable.SFAS 121 was adopted without a material impact on the financial position of the Company or its results of operations. Stock -Based Compensation - In October 1995, the Financial Accounting Standards Board issued Statement of Financial Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123 establishes accounting and financial reporting for stock-based compensation plans. Those plans include all arrangements by which employees and non-employee members of the Board receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. SFAS 123 encourages that these transactions be accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued whichever is more reliably measurable. The Company has chosen to continued to account for stock-based plans using the intrinsic value method prescribed by Accounting Principles Board Opinion("APB") No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, compensation cost of stock based compensation are measured as the excess, if any, of the fair value of the Company's stock at the date of the grant over the amount an employee or non-employee member of the Board must pay for the stock. The Company did not grant any stock options in 1997,1996 and 1995. Recently Issued Accounting Pronouncement - In June 1997, the Financial Accounting Standards Board issued Statement of Financial Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS No. 130 requires that all components of comprehensive income be reported on one of the following: (1) the statement of income, (2) the statement of changes in stockholder's equity, or (3) a separate statement of comprehensive income. Comprehensive income is comprised of net income and all changes to stockholders' equity, except those due to investments by owners (changes in paid in capital) and distributions to owners (dividend). SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 is not expected to have a material impact on the Company's financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, Disclosures about Segment of an Enterprise and Related Information, (SFAS No. 131"). SFAS No. 131, establishes standards for the way that public companies report selected information about operating segments in annual financial statements and requires that those companies report selected information about segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for the periods beginning after December 15, 1997. The Company has not determined the effects, if any, SFAS No. 131 will have on the disclosure in its financial statements. 2. ACCOUNTS RECEIVABLE The activity for the allowance for doubtful accounts is as follows for the years ended December 31 : 1997 1996 1995 Beginning balance $ 235,000 $184,000 $ 57,000 Provision 409,000 138,000 136,000 Write-offs,net of recoveries (492,000) (87,000) (9,000) Ending balance $134,000 $235,000 $184,000 The company carries accounts receivable at the amounts it deems to be collectible. Accordingly, the Company provides allowances for accounts receivable it deems to be uncollectible based on management's best estimates. Recoveries are recognized in the period they are received. The ultimate amount of accounts receivable that become uncollectible could differ from those estimated. 3. PROPERTY AND EQUIPMENT Property and equipment consisted of the following as of December 31: 1997 1996 Land $ 400,000 $ 400,000 Building 1,600,000 1,610,000 Leasehold improvements 286,000 286,000 Plant and equipment 964,000 964,000 Auto and trucks 21,000 26,000 Furniture and fixtures 159,000 192,000 Total 3,430,000 3,478,000 Less accumulated depreciation and amortization ( 2,058,000) (2,023,000) $ 1,372,000 $ 1,455,000 4. CREDIT FACILITIES The following are the Company's credit facilities: The Company has a credit facility of up to $7,500,000 with a financial institution, expiring on December 31, 1998. The credit facility is secured by substantially all assets of the Company, except for the Company's land and building in the United States. Borrowings are tied by formula to eligible accounts receivable and inventories. Interest is charged on outstanding borrowings at the prime rate (8.5% at December 31, 1997) plus 2.5%. As of December 31, 1997 and 1996, borrowings outstanding under this credit facility amounted to $3,160,000 and $3,089,000, respectively. The credit facility contains certain restrictive covenants, the most restrictive covenant of which relates to a minimum net worth requirement, which was not met by the Company as of December 31, 1997. The lender has waived the minimum net worth requirement through December 31, 1998. The Company has another credit facility from a financial institution in the amount of $750,000 expiring on December 1, 2001. This credit facility is secured by a mortgage on the Company's land and building in the United States. Interest is charged on outstanding borrowings at prime plus 1%. The Company commenced borrowing under this line in 1997. As of December 31, 1997 borrowings outstanding under this credit facility amounted to $750,000. The Company has another unsecured credit facility from a financial institution. Interest is charged on outstanding borrowings at the prime rate plus 2.5%. As of December 31, 1997 and 1996, borrowings outstanding under this credit facility amounted to $302,000 and $462,000, respectively. As of December 31, 1997, this financial institution has not permitted the Company to borrow any further amounts under this line. The line is now due in full. The Company has another line of credit from a financial institution in the amount of $800,000 due on demand. Interest is charged on outstanding borrowings at prime plus 2%. As of December 31, 1997 borrowings under this line of credit amounted to $799,000. This line of credit facility is secured by a subsidiary's accounts receivable and inventory. 5. LONG-TERM DEBT Long-term debt consisted of the following as of December 31: 1997 1996 Note payable at prime rate plus 1% in monthly installments of principal and interest of approximately $18,000 expiring in December 2001, at which time the entire outstanding balance is due, collateralized by a mortgage on the Company's land and building in the United States. 1,399,000 1,520,000 First mortgage note at 11%, payable in monthly installments of principal and interest of approximately $7,400 in 1996 through the year 2004, collateralized by the Company's land and building in the United States. $ 318,000 Total 1,399,000 1,838,000 Less current portion (76,000) (136,000) Long-Term Debt $ 1,323,000 $ 1,702,000 6. INCOME TAXES The domestic and foreign components of net (loss) income were as follows for the years ended December 31: 1997 1996 1995 Domestic $ (882,000) $ (1,049,000) $ (1,095,000) Foreign 306,000 639,000 118,000 Total balance $ (576,000) $ (410,000) $ (977,000) Domestic - The Company has unused domestic tax loss carryforwards of approximately $40,174,000 to offset future taxable income. Such carryforwards expire from the year 1998 through the year 2012. Included in the tax loss carryforwards are approximately $14,037,000 obtained in connection with the acquisition of Cosmo Electronics, Inc. which are only available to offset future taxable income of Cosmo Electronics, Inc. The deferred tax asset and related valuation allowance recorded by the Company as a result of these domestic tax loss carryforwards is $15,098,000 as of December 31, 1997. Foreign - The Company has unused foreign tax loss carryforwards of approximately $1,300,000 to offset future taxable income. Approximately $600,000 of these tax loss carryforwards expire by 2002. The remainder may be carried forward indefinitely. The deferred tax asset and related valuation allowance recorded by the Company as a result of these foreign tax loss carryforwards is $424,000. The Company has reduced the deferred tax assets resulting from its domestic and foreign tax loss carryforwards by a valuation allowance as it has determined that it is more likely than not that the deferred tax assets will not be realized. The change in the valuation allowances from December 31, 1996 to December 31, 1997 for the domestic and foreign components was a decrease of $1,384,000 and $194,000, respectively. 7. CONTINGENCIES Litigation - From time to time, the Company is engaged in ordinary routine litigation incidental to its operations. The Company, after considering the advice of legal counsel, believes that any such litigation will not have a material adverse effect on its consolidated financial position. 8. STOCKHOLDERS' EQUITY Stock Option Plan - The Board of Directors of the Company (the "Board") adopted the 1990 Stock Option Plan effective December 15, 1990. Effective December 23, 1994, the 1990 Stock Option Plan was amended and restated (the "Plan"). The Plan reserved 270,000 shares of common stock for issuance thereunder. Under the Plan, the Company may grant incentive stock options, nonqualified stock options, and stock appreciation rights. The purpose of the Plan is to further the best interests of the Company and its subsidiaries by encouraging employees and consultants of the Company and its subsidiaries to continue association with the Company. The employees eligible to participate in the Plan as recipients of stock options or stock appreciation rights are such officers and employees of the Company and such other key employees of the Company and its subsidiaries as the Board shall from time to time determine, subject to the limitations of the Plan. The Plan is administered by the Board or by a committee of the Board designated by the Board. The Board, or such committee, determines, among other things, which officers, employees and directors of the Company receive options or stock appreciation rights under the Plan, the number of shares to be covered by the options, and the date of grant of such options. The options granted under the Plan terminate at the earlier of (i) a date set by the Board at the time of grant, or (ii) ten years from their respective dates of grant, except in the case of incentive stock options granted to a shareholder owning ten percent (10%) or more of the Company's common stock, with respect to whom options granted are exercisable over a period no longer than five years. The exercise price for stock options granted under the Plan is determined by the Board and is required to be at least the par value per share of the common stock, except in the case of incentive stock options (which must have a price which is not less than fair market value) granted to a shareholder owning ten percent (10%) or more of the Company's common stock, with respect to whom the exercise price is required to be at least one hundred ten percent (110%) of such fair market value. The exercise price must be paid in full by an employee in cash, common stock of the Company or any other form of payment permitted by the Board. As of December 31, 1997, 252,000 stock options were outstanding of which 230,000 were exercisable. No stock options were granted , excercised , forfeited or expired during the last three years. The exercise price of the stock options range from $.45 - $1.55 per option. 9. GEOGRAPHIC AREA AND FOREIGN OPERATIONS INFORMATION The Company operates in one industry segment. The Company's principal operations, where identifiable assets are maintained, are in the United States, Hong Kong, and Canada. Identifiable assets are those assets which are identified with operations of a particular geographic area. Corporate assets include cash and cash equivalents and the intangible asset resulting from the Canadian acquisition. Domestic Foreign Eliminations Total ( in thousands) 1997 Sales to unaffiliated customers $ 9,271 $ 7,490 $ $ 16,761 Transfers between geographic areas 89 ( 89) Total sales $ 9,271 $ 7,579 $ ( 89) $ 16,761 (Loss) income from operations $ (134) $ 307 $ 173 Identifiable assets $ 5,559 $ 1,918 $ 7,477 Corporate assets 277 186 463 Total assets $ 5,836 $ 2,104 $ 7,940 1996 Sales to unaffiliated customers $ 9,565 $ 6,399 $ 15,964 Transfers between geographic areas 303 (303) Total sales $ 9,565 $ 6,702 $ (303) $ 15,964 (Loss) income from operations $ (476) $ 650 $ 174 Identifiable assets $ 3,985 $ 1,808 $ 5,793 Corporate asssets 1,774 238 2,012 Total assets $ 5,759 $ 2,046 $ 7,805 1995 Sales to unaffiliated customers $ 8,992 $ 6,251 $ $ 15,243 Transfers between geographic areas 140 (140) Total sales $ 8,992 $ 6,391 $(140) $ 15,243 (Loss) income from operations $ (538) $ 148 $ (390) Identifiable assets $ 8,362 $ 1,977 $ 10,339 Corporate assets 872 615 1,487 Total assets $ 9,234 $ 2,592 $ 11,826 10. RELATED PARTY BALANCES Amounts due to the principal stockholder bear interest at the prime rate plus 2.5% and are due on demand. Included in other current liabilities is $70,000 due to the Company's current President. Total interest expense incurred due to related party payables for the years ended December 31, 1997 ,1996 and 1995 approximated $98,000 , $115,000 and $38,000 respectively. * * * * * * EXHIBIT 10.4 February 19, 1998 Mr. Amancio V. Suarez, Chairman Cosmo Communications Corporation 16501 N.W. 16 Court ` Miami, Florida 33169 Dear Mr. Suarez: Please be advised that Congress Financial Corporation ( Florida) hereby waives the $1,000,000 net worth requirement specified in Section 6.19 of the Accounts Financing Agreement between us dated October 30, 1989 through December 31, 1998. We have not waived any other events of default whether with respect to this item or any other items with respect to the period ending December 31, 1998 or any other period. Very truly yours, Congress Financial Corporation (Florida) /s/ Ramon Lebron Ramon Lebron Vice President 32 EX-27 2
5 12-MOS DEC-31-1997 DEC-31-1997 85,000 0 3,202,000 (134,000) 2,901,000 215,000 3,430,000 (2,058,000) 7,940,000 7,149,000 0 133,000 0 0 (665,000) 7,940,000 16,761,000 16,761,000 12,430,000 12,430,000 4,158,000 0 749,000 (576,000) 0 (576,000) 0 0 0 (576,000) ( 0.22) 0
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