SECURITIES AND EXCHANGE COMMISSION
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2008
Commission File Number 119698
COSMO COMMUNICATIONS
CORPORATON
(Exact name of Registrant as Specified in Its Charter)
FLORIDA (State or Other Jurisdiction of Incorporation or Organization) | | 59-2268025 (IRS Employer Identification No.) |
(Address and Telephone Number of Principal Executive Offices)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $.05 Par Value Per Share
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant of Section 13 or 15(d) of the Act. Yes ¨ No þ
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 þ No ¨
Indicate by check mark if the 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. ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large accelerated filler ¨ Accelerated filer ¨ Non-accelerated filer þ
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ¨ No þ
The aggregate market value of the Registrant's voting stock held by non-affiliates was undetermined as there have been no quotes on the bid and ask price of the registrant’s common stock. There were 40,467,636 shares of Common Stock issued and outstanding as of June 30, 2008.
COSMO COMMUNICATIONS CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2008
| | | Page | |
| | | | |
| PART I |
| Item 1. | | Business | | | 3 | |
| Item 1A | | Risk Factors | | | 12 | |
| Item 2. | | Properties | | | 16 | |
| Item 3. | | Legal Proceedings | | | 17 | |
| Item 4. | | Submission of Matters to a Vote of Security Holders | | | 17 | |
| |
| PART II |
| Item 5. | | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities | | | 17 | |
| Item 6. | | Selected Financial Data | | | 18 | |
| Item 7. | | Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations | | | 19 | |
| Item 7A | | Quantitative and Qualitative Disclosures About Market Risk | | | 27 | |
| Item 8. | | Financial Statements and Supplementary Data | | | 29 | |
| Item 9. | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | | | 46 | |
| Item 9A. | | Controls and Procedures | | | 46 | |
| Item 9B. | | Other Information | | | 47 | |
| |
| PART III |
| Item 10. | | Directors and Executive Officers of the Registrant | | | 47 | |
| Item 11. | | Executive Compensation | | | 49 | |
| Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | | 52 | |
| Item 13. | | Certain Relationships and Related Transactions | | | 53 | |
| Item 14. | | Principal Accountant Fees and Services | | | 54 | |
| |
| PART IV |
| Item 15. | | Exhibits, Financial Statement Schedules and Reports on Form 8-K | | | 55 | |
| Signatures | | | 57 | |
Table of Contents
Cosmo Communications Corporation is filing this amendment #2 on Form 10-K/A to amend the results of Item9A, controls and procedures, to disclose that our disclosure controls and procedures were not effective. This Form 10-K/A also includes amended certifications on Exhibits 31.1 and 31.2 in accordance with Item 601(b)(31) of Regulation S-K. Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as a result of this amended report, the certifications pursuant to Section 302 and Section 906 of the Sarbanes- Oxley Act of 2002, filed and furnished, respectively, as exhibits to the Form 10-K have been re-executed and re- filed as of the date of this amended report and are included as exhibits hereto.
Forward-Looking Statements and Risk Factors
We make forward-looking statements in this report including, without limitation, statements concerning the future of our industry, product development, business strategy, continued acceptance and growth of our products, dependence on significant customers and suppliers, and the adequacy of our available cash resources. Statements may contain projections of results of operations or of financial condition. These statements may be identified by the use of forward-looking terminology such as “may,” “will,” “believe,” “expect,” “anticipate,” “estimate,” “continue” or other similar words.
Forward-looking statements are subject to many risks and uncertainties. We caution you not to place undue reliance on these forward-looking statements, which speak only as at the date on which they are made. Actual results may differ materially from those described in these forward-looking statements. We disclaim any obligation or undertaking to update these forward-looking statements to reflect changes in our expectations or changes in events, conditions, or circumstances on which our expectations are based.
When considering our forward-looking statements, you should keep in mind the risk factors and other cautionary statements identified in this report. The risk factors noted throughout this Annual Report, particularly in the discussion in Item 1A, and other risk factors that Cosmo has not anticipated or discussed, could cause our actual results to differ significantly from those anticipated in our forward-looking statements.
Table of Contents
Cosmo Communications Corporation (the “Company”, "Cosmo" "we," "us" or "our") was incorporated in the state of Florida in 1983.
The Company is engaged in the development, production, distribution, marketing and sale of consumer electronic audio and video equipment, accessories and clocks. We contract for the manufacture of all electronic equipment products with factories located in China. We market certain lines of our products under labels that we have distribution agreements with. We also sell products under private labels for our major clients.
During our early years of operations, the products we sold were principally that of quartz and digital clocks, and radio cassette players. In the 90’s, we began marketing Compact Disc (“CD”) equipment, cordless telephones and small screen televisions.
In April 2000, we entered into a Stock Purchase Agreement pursuant to which we offered shares of common stock representing 84.89% of the outstanding common stock to Master Light Enterprise Limited. (“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, 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 26,585,008 of our common stock shares, representing 91.3% of our currently issued and outstanding common stock. In September, 2001, additional financing from Starlight allowed us to discharge all our obligations to our financial institution lenders. Starlight owns and operates a number of subsidiaries globally. Its principal activity is in the manufacture, sale and distribution of consumer electronic products.
Since 2001, we closed our operation in United States and focused our business in Canada. We re-entered the USA market when Starlight became a licensee of Disney electronics products in September 2006. In fiscal 2007, we hired two sales executives and began selling in the United States in the second quarter of fiscal 2007. We are able to distribute Disney licensed electronics through Starlight. Our principal executive office is located in Ontario, Canada with two sales offices located in California and Kansas, USA.
Since 2001, our common stock shares have not traded on the OTC Bulletin Board. As used herein, the “Company”, "Cosmo," "we," us" and similar terms include Cosmo Communications Corporation, and its subsidiaries, Cosmo Communications Corporation Canada Inc., Cosmo Communications Corporation (HK) Limited and Cosmo Communication USA Corp. unless the context indicates otherwise.
Table of Contents
We market and distribute an assortment of video products including DVD/TV combination units in both CRT’s and LCD’s with retails ranging from $99 – $299. In addition to the TV line up we also market a variety of DVD players both portable with TFT screens and stand alone players, retail pricing ranging from $25-$99.
We market and distribute a variety of MP3 players. This year we introduced to our product line a series of MP4 players which include both photo and video playback. Over the course of the year we have seen the elimination of both the 256MB & 512MB memory MP3 players and have sold all players with a memory size of 1GB – 4GB capacity. Retail prices have ranged from $30 - $89.
Cosmo marketing and product development efforts are designed to enhance its brand images and generate increased loyalty among its consumers in each market segment and among the retailers who sell Cosmo products. Cosmo markets its products under the following primary brands:
| · | Cosmo. Initially, we established Cosmo brand name for clocks and digital alarm clocks. We will keep this brand name for this product category to capitalize on brand recognition. This category represents 7% of our total sales. |
| · | Audiologic. The Audiologic brand offers a range of radios, CD players, telephones, clock radios, portable boom boxes and multiple CD music systems. These items represent 8.3% of total sales during the year. |
| · | Digital Lab: This Cosmo introduced Digital Lab an upgraded line up from the audio category including clock radio’s, MP3 players and audio products with Ipod connectivity. Digital Lab accounted for 13.7% of total sales during the year. |
| · | Diamond Brand. Cosmo introduced Diamond Vision and Diamond Sound as a new brand at the end of the 2005 fiscal year with DVD players. We have since added to this line Televisions, portable DVD players and MP3 Players. These items represent 15.3% of the total sales of the group. |
| · | Disney. This is a licensed brand name of Disney Enterprises, Inc. The licensed electronics products include television, DVD players, CD players, and radio alarm clocks. These items represent 36% of the total sales of the group. |
Strategy for Cosmo’s Brands
Cosmo’s goal is to develop, distribute, market and sell consumer electronic audio and video equipment, accessories and clocks of well recognized and respected brands to customers around the world. Cosmo’s strategy is intended to enhance and reinforce Cosmo’s global brand images among consumers and retailers. Key elements of Cosmo’s strategy are to:
| • | Continue to introduce new and technologically innovative products that embody distinctive Cosmo qualities; style and new features; |
| • | Expand the current product lines by introducing LCD and Plasma TV’s, MP4 player and IPOD docking unit; |
| • | Expand Cosmo’s distribution with new and existing customers; |
| • | Continue the penetration into the US market and expand focus in the Disney brand products |
Percent of Sales by Product Class
Cosmo sales since 2005 were divided among Cosmo’s principal product classes as shown in the following table:
| | | Year Ended March 31, | | | | |
| | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | |
| | | | | | | | | | | | | |
| Product Class: | | % | | | % | | | % | | | % | |
| MP3 Players | | | 7 | | | | 12 | | | | 7 | | | | - | |
| Other Audio (1) | | | 36 | | | | 27 | | | | 29 | | | | 55 | |
| Video (2) | | | 48 | | | | 59 | | | | 62 | | | | 40 | |
| Clocks | | | 8 | | | | 2 | | | | 2 | | | | 5 | |
| Tools | | | 1 | | | | - | | | | - | | | | - | |
| Total | | | 100.0 | % | | | 100.0 | % | | | 100 | % | | | 100 | % |
(1) Includes boom boxes, CD players, IPOD docking system)
(2) Includes digital photo frames, DVD players, LCD TV, portable DVD and TV/DVD combo
Financial information about geographic segments may be found at Note 12 of the Notes to Consolidated Financial Statements of this Form 10-K.
Table of Contents
Cosmo introduces new products and enhances its existing products on a regular basis. During fiscal 2007, we began distributing Disney licensed electronics products. In fiscal 2008, we marketed and distributed over six Disney characters. Our Canada sales force also introduced the Hyundai brand of home improvement products including small garden tools such as cordless weed cutters and edge trimmers in fiscal 2008. In fiscal 2009, we expect to distribute a limited edition of karaoke products using the popular Disney characters Hannah Montana and Princess. Our product development team will launch a new youth line of electronics that incorporates a series of products with environmental theme in fiscal 2009.
Sales, Marketing and Distribution
Cosmo endeavors to have its brands project images that appeal to consumers who appreciate quality and value. Cosmo products are promoted with advertisements in the various flyers of the companies that sell its products including Wal-Mart, Home Hardware, Best Buy, Loblaws, Hart Department Stores, Bargain Shop, etc.
We also market our products at various trade shows each year. We regularly attend the following trade shows and conventions: the Consumer Electronics Show each January in Las Vegas; the Hardware Shop in Los Angeles and the Hong Kong Electronics Show each October in Hong Kong.
Our products are sold in United States, Canada and to selective customers in United Kingdom, Mexico, Argentina and Brazil, primarily through mass merchandisers, department stores, electronic stores, chains, and specialty stores. Our products are currently sold in such stores as Wal-Mart (USA and Canada), Super-Stores, Home Hardware, Bargain Shop, Toys “R” Us (Canada) and Army and Air Force Exchange Service (“AAFES”).
In fiscal 2008, approximately 52% of our sales were to the customers within Canada, 47% of sales were to the customers in USA. Sales made to Mexico made up approximately 1% of our sales revenue. Sales are handled by our in-house sales team and our independent sales representatives. Our independent sales representatives are paid a commission based upon sales in their respective territories. The sales representative agreements are generally one year agreements, which automatically renew on an annual basis, unless terminated by either party on 30 days' notice. During the fiscal year March 31, 2008, we worked with two independent sales representatives in Canada and one in USA.
As a percentage of total revenues, our net sales in the aggregate to our five largest customers during the fiscal years ended March 31, 2008, and 2007 were approximately 82% and 98% respectively.
Although we have long-established relationships with all of our customers, we do not have contractual arrangements with any of them. A decrease in business from any of our major customers could have a material adverse effect on our results of operations and financial condition.
Table of Contents
Geographic Distribution of Sales
Cosmo’s sales to external customers by geographic region were as follows:
| | | | | | | | | | | | Years Ended March 31, | | | | |
| | | | | | | | | | | | | | | | | | | |
| Region | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2008 | | | 2008 | |
| | | | | | | | | | | | | | | | | | % | |
| | | (In thousands) | | | | |
| | | | |
| USA | | | - | | | | - | | | | - | | | | 13,350 | | | | 16,568 | | | | 48 | % |
| Canada | | $ | 30,934 | | | $ | 34,179 | | | $ | 49,743 | | | | 42,384 | | | | 17,891 | | | | 51 | % |
| Europe | | | 1,225 | | | | 1,273 | | | | 920 | | | | 113 | | | | - | | | | - | % |
| Others | | - | | | - | | | 348 | | | 440 | | | | 362 | | | | 1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total sales | | $ | 32,159 | | | $ | 35,452 | | | $ | 51,011 | | | $ | 56,287 | | | | 34,821 | | | | 100.0 | % |
Returns
Returns of electronic products by our customers are generally not permitted except in approved situations involving quality defects, damaged goods, or goods shipped in error. Our policy is to give credit to our customers for their returns. Our total returns represented 3% and 5% of our net sales in fiscal 2008 and 2007, respectively.
We have an ongoing arrangement with Starlight to refurbish our defective products, which are manufactured by Starlight’s factory. We do not have return privileges with the other five factories we work with. We have a workshop within our warehouse facility to refurbish minor defective products. Refurbished products are packaged to be resold in the secondary markets by secondary market dealers. We expect to recover at least 35% of the costs from the refurbishment.
Distribution
We distribute our products to retailers and wholesale distributors through two methods: shipment of products from inventory held at our warehouse facility in Canada and USA (domestic sales), and shipments directly through our Hong Kong subsidiary (direct sales). Domestic sales are made to customers located throughout USA and Canada from inventories maintained at our warehouse facilities. In the fiscal year ended March 31, 2008, approximately 76% of our sales were sales from our domestic warehouses ("Domestic Sales") and 24% were sales shipped directly from China ("Direct Sales").
Table of Contents
Domestic Sales. Our strategy of selling products from a domestic warehouse enables us to provide timely delivery and serve as a domestic supplier of imported goods. We purchase products overseas from certain factories in China for our own account, and warehouse the products in leased facilities in USA and in Canada. We are responsible for the costs of shipping, insurance, customs clearance, duties, storage and distribution related to such products and, therefore, domestic sales command higher sales prices than direct sales. We generally sell from our own inventory in less than container-sized lots.
Direct Sales. We ship some of our products directly to customers from China through our subsidiary in Hong Kong. Sales made through our subsidiary are completed by either delivering products to the customers' common carriers at the shipping point or by shipping the products to the customers' distribution centers, warehouses, or stores. Direct sales are made in larger quantities (generally container sized lots), who pay our subsidiary pursuant to irrevocable, transferable letters of credit or on open account.
Manufacturing and Production
Our products are manufactured and assembled by third parties pursuant to design specifications provided by us. Currently, substantially all of our video and CD products are manufactured by Starlight’s factory located in Guangdong Province in the People’s Republic of China (PRC). We also have ongoing relationships with five factories, located in the southern provinces of the PRC. For fiscal 2009, we anticipate that majority of our products will be produced by Starlight’s factory. We believe that the manufacturing capacity of our factories is adequate to meet the demands for our products in fiscal year 2009. However, if Starlight’s primary factory in China was prevented from manufacturing and delivering our products, our operation would be severely disrupted (see Item 1A – Risk Factors). Our products are manufactured using molds and certain other tooling owned by Starlight and our other factories. Our products contain electronic components manufactured by other companies such as Sanyo, Toshiba, Hitachi and National Semiconductor. Our manufacturers purchase and install these electronic components in our products under our specifications.
While our equipment manufacturers purchase our supplies from a small number of large suppliers, all of the electronic components and raw materials used by us are available from several sources of supply, and we do not anticipate that the loss of any single supplier would have a material long-term adverse effect on our business, operations, or financial condition. To ensure that our high standards of product quality and factories meet our shipping schedules, we utilize independent contractors as our representatives. These contractors include product inspectors who are knowledgeable about product specifications and work closely with the factories to verify that such specifications are met. Additionally, our key personnel frequently visit our factories for quality assurance and to maintain good working relationships.
All of the electronic equipment sold by us is warranted to the end user against manufacturing defects for a period of ninety (90) days for labor and parts. During the fiscal years ended March 31, 2008 and 2007, warranty claims have not been material to our results of operations.
Table of Contents
Cosmo believes that its sources and supplies of finished goods, components and other materials are adequate for its needs. Cosmo has not experienced a significant inability to obtain necessary finished goods, components or other materials.
Reverse Logistic Operation
We have an arrangement with certain manufacturers that distribute television sets and DVD players in Canada to handle customer returns for them. Our warehouse facility in Canada has the capacity to handle a high volume of defective products. We charge the manufacturers a fee on a per piece basis or a percentage based on the retail sales value of the merchandise and reported this as commission and other income. Our agreement with these manufacturers to handle their returns is on an on-going and mutually agreed basis with no expiration date.
Commission
With our close relationship with Starlight, we have developed a good knowledge of their manufacturing capability and facility. Starlight pays us a commission based on sales made between Starlight and our customers at a percentage of sales. We report income on our consolidated income statement from this category under “Commission income”.
License Agreements
The license agreement with Disney Enterprises, Inc. is between Starlight International and Disney. We are not obligated to pay license fees to Disney.
Competition
Our business is highly competitive. Our major competitors of our CD category are Citizens, Philips and GE. Competitors of our TV and DVD category are Apex, Cyberhome and Philips. We believe that competition for our products is based primarily on price, product features, reputation, delivery times, and customer support. We believe that our brand names are recognized in the industry and help us to compete in these categories. Our financial position depends, among other things, on our ability to keep pace with changes and developments in the household entertainment industry and to respond to the requirements of our customers. Many of our competitors have significantly greater financial, marketing, and operating resources and broader product lines than we do.
Table of Contents
Intellectual Property
We have registered “Audiologic”, “Diamond Vision” and “Diamond Sound” as our trade marks in United States and in Canada.
We believe our intellectual property is adequately protected, but there are no assurances that these rights can be successfully asserted in the future or will not be invalidated or challenged.
Government Regulation
Our products must meet the safety standards imposed in various national, state, local and provincial jurisdictions. Our products sold in Canada are designed, manufactured and tested to meet the safety standards of Underwriters Laboratories, Inc. ("ULE") or Electronic Testing Laboratories ("ETL"). In Europe and other foreign countries, our products are manufactured to meet the CE marking requirements. CE marking is a mandatory European product marking and certification system for certain designated products. When affixed to a product and product packaging, CE marking indicates that a particular product complies with all applicable European product safety, health and environmental requirements within the CE marking system. Products complying with CE marking are now accepted to be safe in 28 European countries.
The manufacturing operations of our foreign suppliers in China are subject to foreign regulation. China has permanent "normal trade relations" ("NTR") status under Canadian tariff laws, which provides a favorable category of Canadian import duties. China's NTR status became permanent on January 1, 2002. This substantially reduces the possibility of China losing its NTR status, which would result in increasing costs for us.
Seasonality and Seasonal Financing
Our business is highly seasonal, with consumers making a large percentage of purchases of our products around the traditional holiday season in our second and third quarter. These seasonal purchasing patterns and requisite production lead times cause risk to our business associated with the underproduction or overproduction of products that do not match consumer demand. Retailers also attempt to manage their inventories more tightly, requiring that we ship products closer to the time that retailers expect to sell the products to consumers. These factors increase the risk that we may not be able to meet demand for certain products at peak demand times, or that our own inventory levels may be adversely impacted by the need to pre-build products before orders are placed. As of March 31, 2008, we had inventory of $11 million (net of reserves totaling $554,224) compared to inventory of $9.6 million as of March 31, 2007 (net of reserves totaling $381,000). We carried higher inventory levels in the current fiscal year because we had increased domestic sales activities (76%) compared with 34% in the prior year.
Table of Contents
Our financing of seasonal working capital during fiscal 2008 was from selling of the inventory carried over from prior year. We rely on credit terms from our manufacturers to finance the purchase of new inventory. We also have an understanding from Starlight to provide short term working funds to purchase inventory should we require them.
For fiscal 2009, we plan on financing our inventory purchases with short term working funds provided by Starlight.
Information Systems
Cosmo’s information systems are designed to respond quickly to inquiries from managers, employees, suppliers and customers. Cosmo has implemented internet-based systems to provide accurate and timely information and allow Cosmo’s representatives, dealers and distributors to check the status of their orders at a secure Internet site. Cosmo has also implemented internet systems to provide accurate and timely information to its suppliers in support of just-in-time delivery of components to Cosmo’s manufacturing facilities. These systems help Cosmo reduce costs by reducing inventory requirements and for a more timely and accurate exchange of information with our suppliers.
Backlog
We ship our products in accordance with delivery schedules specified by our customers, which usually request delivery within three months of the date of the order. In the consumer electronics industry, orders are subject to cancellation or change at any time prior to shipment. In recent years, a trend toward just-in-time inventory practices in the consumer electronics industry has resulted in fewer advance orders and therefore less backlog of orders for us. We believe that backlog orders at any given time may not accurately indicate future sales. As of March 31, 2008 we had no backlog of orders and none in the same period in fiscal 2007. Backlog orders do not take into account of any sales ordered by customers directly from our domestic inventory with order turnaround time of one to two weeks. We normally have to keep the minimum inventory in our domestic warehouses for this type of sales.
Employees
As of March 31, 2008, we employed 36 people, all of whom are full-time employees, including four executive officers. Three of our employees are located at our subsidiary in Hong Kong and three in the United States. The remaining employees are based in Canada, 18 engaged in warehousing and technical support, and 12 in accounting, marketing, sales and administrative functions. We have never had a work stoppage and none of our employees are unionized. We believe we have good employee relations.
Table of Contents
Item 1A. Risk Factors
RISK FACTORS THAT MAY AFFECT COSMO’S OPERATING RESULTS, BUSINESS PROSPECTS AND STOCK PRICE
Before you buy or sell Cosmo stock, you should be aware that there are risks, including those described below and others Cosmo has not anticipated or discussed. You should consider carefully these and other risk factors, together with all of the other information included in Cosmo’s periodic filings and current reports filed with the SEC, before you decide to buy or sell shares of Cosmo’s common stock.
As you consider these risk factors, Cosmo also calls your attention to Cosmo’s statements about Forward Looking Statements and Risk Factors in Part I of this Annual Report.
We have significant working capital needs and if we are unable to obtain additional financing when needed, we may not have sufficient cash flow to continue operations.
As of March 31, 2008, our cash on hand is limited. We will finance our working capital needs from the collection of accounts receivable, and sales of existing inventory. See "Liquidity and Capital Resources" beginning on page 22. As of March 31, 2008, our inventory was valued at approximately $11 million. If these sources do not provide us with adequate financing, we will be seeking financing from our factories. If we are not able to obtain adequate financing from our factories when needed, it will have a material adverse effect on our cash flow and our ability to continue operations.
A small number of our customers account for a substantial portion of our revenues, and the loss of one or more of these key customers could significantly reduce our revenues and cash flow.
As a percentage of total revenues, our net sales to our five largest customers during the fiscal period ended March 31, 2008 and 2007 were approximately 86% and 98% respectively. We do not have long-term contractual arrangements with any of our customers and they can cancel their orders at any time prior to delivery. A substantial reduction in or termination of orders from our largest customers would decrease our revenues and cash flow significantly.
We rely on Starlight to manufacture and produce the majority of our CD players, DVD players and television sets and if Starlight does not support our delivery schedule, it would affect our revenues and profitability.
We believe that because Starlight has a substantial investment in our operation they will support us unconditionally. In the event of disruption in its factory, Starlight will source outside factories to manufacture our products but we risk losing sales and goodwill to our customers.
Table of Contents
We are subject to pressure from our customers relating to price reduction and financial incentive and if we are pressured to make these concessions to our customers, it will reduce our revenues and profitability.
Because there is intense competition in the consumer electronic market, we are subject to pricing pressure from our customers. Many of our customers have demanded that we lower our prices or they will purchase from our competitor's products. If we do not meet our customer's demands for lower prices, we will not sell as many products. We are also subject to pressure from our customers regarding certain financial incentives, such as return credits or advertising allowances, which effectively reduce our profit. We gave advertising allowances in the amount of $403,000 during fiscal 2008 and $727,000 during fiscal 2007. We have historically offered advertising allowances to our customers because it is standard practice in the retail industry.
We experience difficulty forecasting the demand for our products and if we do not accurately forecast demand, our revenues, net income and cash flow may be affected.
Because of our reliance on manufacturers in China for our products, our production lead times range from one to four months. Therefore, we must commit to production in advance of customers orders. It is difficult to forecast customer demand because we do not have any scientific or quantitative method to predict this demand. Our forecasting is based on management's general expectations about customer demand, the general strength of the retail market and management's historical experiences. In the past, our experienced management team has been able to plan our production and inventory requirements without building excessively high inventory.
Our gross profit margins have not improved over the past year and we expect a continued competitive market in the future.
Over the past year, our gross profit margins have not improved due to price competition. We expect that our gross profit margin might decrease under downward pressure in fiscal 2009 but we are also putting pressure on our manufacturers to lower their production costs. Based on past experience, we expect that we can pass on the price pressure to our manufacturers.
Our business is seasonal and therefore our annual operating results will depend, in large part, on our sales during the relatively brief holiday season.
Sales of consumer electronics in the retail channel are highly seasonal, with a majority of retail sales occurring during the period from September through December in anticipation of the holiday season, which includes Christmas. A substantial majority of our sales occur during the second quarter ended September 30 and the third quarter ended December 31. Sales in our second and third quarter, combined, accounted for approximately 65% and 46% of total sales in fiscal 2008 and 2007 respectively.
Table of Contents
If Cosmo does not continue to develop, introduce and achieve market acceptance of new and enhanced products, sales may decrease.
The consumer electronic industry is characterized by rapid technological change, frequent new product introductions and enhancements and ongoing customer demands for greater performance. In addition, the average selling price of an electronic product has historically decreased over its life cycle, and we expect that trend to continue. As a result, our products may not be competitive if we fail to introduce new products or product enhancements that meet evolving customer demands. The development of new products is complex, and we may not be able to complete development in a timely manner. To introduce products on a timely basis, we must:
| | · | accurately define and design new products to meet market needs; |
| | · | design features that continue to differentiate our products from those of our competitors; |
| | · | update our manufacturing process technologies; |
| | · | identify emerging technological trends in our target markets; |
| | · | anticipate changes in end-user preferences with respect to our customers' products; |
| | · | introduce products to market on a timely basis at competitive prices; and |
| | · | respond effectively to technological changes or product announcements by our competitors. |
We believe that we will need to continue to enhance our products and develop new merchandise to keep pace with competition, technological developments, and to achieve market acceptance for our products. At the same time, we are identifying other products which may be different from audio and video equipment.
Our products are shipped from China and any disruption of shipping could prevent or delay our customers’ receipt of inventory.
We rely principally on independent ocean carriers to ship virtually all of the products that we import to our warehouse facility in Los Angeles, USA and in Toronto, Canada. Retailers that take delivery of our products in China rely on a variety of carriers to import those products. Any disruptions in shipping, whether in Los Angeles, Toronto or China, caused by labor strikes, other labor disputes, terrorism, and international incidents may prevent or delay our customers' receipt of inventory. If our customers do not receive their inventory on a timely basis, they may cancel their orders or return products to us. Consequently, our revenues and net income would be affected.
Table of Contents
Our manufacturing operations are located in the People’s Republic of China, subjecting us to risks common in international operations. If there is any problem with the manufacturing process, our revenues and net profitability may be affected.
We are using five factories in the People's Republic of China to manufacture the majority of our products. These factories will be producing all of our products in fiscal 2008. Our arrangements with these factories are subject to the risks of running business abroad, such as import duties, trade restrictions, work stoppages, and foreign currency fluctuations, limitations on the repatriation of earnings and political instability, which could have an adverse impact on our business. Furthermore, we have limited control over the manufacturing processes themselves. As a result, any difficulties encountered by our third-party manufacturers that result in product defects, production delays, cost overruns or the inability to fulfill orders on a timely basis could adversely affect our revenues, profitability and cash flow. Also, since we do not have written agreements with any of these factories, we are subject to additional uncertainty if the factories do not deliver products to us on a timely basis.
We depend on third party suppliers for parts for our products, and if we cannot obtain supplies as needed, our operations will be severely damaged.
Our growth and ability to meet customer demand depends in part on our ability to obtain timely deliveries of our electronic products. We rely on third party suppliers to produce the parts and materials we use to manufacture and produce these products. If our suppliers are unable to provide our factories with the parts and supplies, we will be unable to produce our products. We cannot guarantee that we will be able to purchase the parts we need at reasonable prices or in a timely fashion. In the last several years, there have been shortages of certain components that we use in our DVD players. If we are unable to anticipate any shortages of parts and materials in the future, we may experience severe production problems, which would impact our sales.
We are exposed to the credit risk of our customers who are experiencing financial difficulties, and if these customers are unable to pay us, our revenues and profitability will be reduced.
We sell products to retailers, including department stores, hardware stores and specialty stores. In the past, we have been diligent to screen credit worthiness of our customers and experience of bad debts has been insignificant. Deterioration in the financial condition of our customers could have a material adverse effect on our revenues and future profitability.
Our common stock currently is not actively traded.
Our common stock is inactive and has no bid and ask price. We believe that if we can establish a pattern of profitability in the near future, our common stock may be more actively traded.
Table of Contents
The loss of its largest customer or significant reductions in the purchases of Cosmo’s products would reduce sales.
Cosmo’s largest customer accounts for 76%, 93% and 91% of Cosmo’s sales in 2008, 2007 and 2006 respectively. Cosmo anticipates that this customer will continue to account for a significant portion of its sales for the foreseeable future but is not obligated to any long-term purchases. It has considerable discretion to reduce, change or terminate purchases of Cosmo’s products. Cosmo cannot be certain that it will retain this customer or maintain a favorable relationship.
If Cosmo fails to manage its inventory effectively, Cosmo could incur additional costs or lose sales.
Cosmo customers have many brands to choose from when they decide to order products. If Cosmo cannot deliver products quickly and reliably, customers will order from a competitor. Cosmo must stock enough inventories to fill orders promptly, which increases Cosmo’s financing requirements and the risk of inventory obsolescence. Because competition has forced Cosmo to shorten its product life cycles and more rapidly introduce new and enhanced products, while simultaneously sourcing more products overseas and carrying larger inventories, there is a significant risk that Cosmo’s inventory could become obsolete.
Currency fluctuations may reduce the profitability of Cosmo’s foreign sales.
Cosmo currently makes sales to Canadian and certain European dealers and distributors in their respective currencies. However, as part of the transition to local distributors, an increasing portion of Cosmo’s sales are denominated in U.S. dollars. If Cosmo is unsuccessful in its transition to distributors, Cosmo’s exposure to gains and losses on foreign currency transactions will continue. Cosmo does not trade in derivatives or other financial instruments to reduce currency risks. In some instances this will subject Cosmo’s earnings to fluctuations because Cosmo is not protected against substantial currency fluctuations.
Item 2. Properties
Our corporate headquarters are located in Markham, Ontario, Canada in a 35,000 sq. ft. office and warehouse facility.
We have two sales offices in USA, one located in San Jose, California and one located in Kansas.
Our subsidiary in Hong Kong shares office space with Starlight in Hong Kong from which we oversee China based manufacturing operations. There is no lease agreement with Starlight and we do not pay rent to Starlight for the facility.
We believe that our facility is well maintained, in substantial compliance with environmental laws and regulations, and adequately covered by insurance. We also believe that our leased facility is not unique and could be replaced, if necessary, at the end of the term of the existing lease.
Table of Contents
| Item 3. | Legal Proceedings |
We are from time to time involved in routine litigation incidental to our business, most of which is adequately covered by insurance and none of which is expected to have a material adverse affect on our business, financial condition or results of operation. Our subsidiary company in Canada has settled a lawsuit concerning a certain agreement violation for a sum of $210,893 in March 2008.
| Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of security holders during the fourth quarter of our 2008 fiscal year.
| Item 5. | Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities |
Since 2001, our common stock shares have not been traded on the OTC Bulletin Board. There were no quotes of high and low during fiscal 2008. We have 396 recorded holders of our common stock on June 30, 2008.
Dividends
Our policy is to retain earnings and we have not declared any dividends in the past. Any payment of cash dividends in the future will be dependent upon the financial condition, capital requirements, earnings, contractual restrictions and other factors considered relevant by our Board of Directors.
Equity Compensation Plan Information
The Company does not have any stock option plan or 401K plan as long-term compensation.
Recent Sales of Unregistered Securities
None.
Table of Contents
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations” and Item 8, “Financial Statements and Supplementary Data” Included elsewhere in this Annual Report. The statements of operations data for the years ended March 31, 2008, 2007, 2006, and 2005 and the balance sheet data at March 31, 2008, 2007, and 2006 are derived from our audited financial statements which are included elsewhere in this Annual Report. The statement of operations data for the year ended March 31, 2005 and 2004 and the balance sheet data at March 31, 2005 and 2004 are derived from our audited financial statements which are not included in this Form 10-K. The historical results are not necessarily indicative of results to be expected for future periods. Prior period amounts have been reclassified to conform to the 2008 presentation.
| | | Years Ended March 31, | |
| | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 Restated | | | 2004 | |
| | | | |
| | | (In thousands, except per share data) | |
| Consolidated Statements of Operations: | | | | | | | | | | | | | | | |
| Net sales | | | 34,821 | | | $ | 56,287 | | | $ | 51,011 | | | $ | 35,452 | | | $ | 32,159 | |
| Cost of products sold | | | 32,915 | | | | 53,034 | | | | 48,157 | | | | 32,846 | | | | 29,476 | |
| | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | | 1,906 | | | | 3,253 | | | | 2,854 | | | | 2,606 | | | | 2,683 | |
| Other income | | | 852 | | | | 1,566 | | | | 1,509 | | | | 1,854 | | | | 1,283 | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | | |
| Selling and delivery | | | 1,089 | | | | 1,677 | | | | 1,033 | | | | 1,382 | | | | 1,616 | |
| General and administrative | | | 3,040 | | | | 2,901 | | | | 2,684 | | | | 1,921 | | | | 1,382 | |
| Depreciation and amortization | | | 14 | | | | 19 | | | | 23 | | | | 32 | | | | 21 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 4,143 | | | | 4,597 | | | | 3,740 | | | | 3,335 | | | | 3,019 | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating income (loss) | | | (1,385 | ) | | | 223 | | | | 623 | | | | 1,125 | | | | 947 | |
| Interest and other expense | | | 126 | | | | 238 | | | | 304 | | | | 232 | | | | 257 | |
| Taxes – current and deferred | | | 329 | | | | (164 | ) | | | 172 | | | | 697 | | | | (29 | |
| Net income (loss) | | | (1,840 | ) | | | 148 | | | | 147 | | | | 196 | | | | 719 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income per common share: | | | | | | | | | | | | | | | | | | | | |
| Income from operations | | | | | | | | | | | | | | | | | | | | |
| Basic and diluted | | | (0.05 | ) | | | 0.01 | | | | 0.01 | | | | 0.01 | | | | 0.02 | |
| Weighted average shares: | | | | | | | | | | | | | | | | | | | | |
| Basic and diluted | | | 40,467 | | | | 29,602 | | | | 29,104 | | | | 29,104 | | | | 29,104 | |
Table of Contents
| | | | | | As of March 31 (in thousands) | | | | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 Restated | | | 2004 | |
Balance Sheet Data: | | | | | | | | | | | | | | | |
| Cash | | | 512 | | | $ | 1,112 | | | $ | 549 | | | $ | 629 | | | $ | 770 | |
| Total assets | | | 15,486 | | | | 20,133 | | | | 8,249 | | | | 7,616 | | | | 7,642 | |
| Total current liabilities | | | 12,287 | | | | 15,826 | | | | 5,989 | | | | 5,772 | | | | 6,485 | |
| Total long-term liabilities | | | 0 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
| Stockholders’ equity | | | 3,199 | | | | 4,307 | | | | 2,260 | | | | 1,844 | | | | 1,157 | |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with the Financial Statements and Notes filed herewith. Our fiscal year ends March 31. This document contains certain forward-looking statements including, among others, regarding anticipated trends in our financial condition and results of operations and our business strategy. (See Part I, Item 1A, "Risk Factors "). These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include (i) changes in external factors or in our internal budgeting process which might impact trends in our results of operations; (ii) unanticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the industries in which we operate; and (iv) various competitive market factors that may prevent us from competing successfully in the marketplace.
Overview
Our primary objectives for fiscal 2008 were to expand our sales and build solid relationships with our major customers. We consider these factors necessary to position us for further growth and to compete in the industry. Our major focus in sales in fiscal 2008 was in expanding the USA market by distributing more Disney electronics products. Our sales in this segment were $17 million. Our overall net sales decreased by 38% in fiscal 2008 due to extremely competitive price bidding in the MP3 players, television and DVD player market. Our gross margin remained steady at approximately 5.5% (2007 - 5.8%). Our gross margin did not deteriorate with sales decline because we made improvement in selling Disney brand products in USA and in Canada, which provide a better margin than the general consumer electronic products.
Our operating expenses (compensation, selling, general and administrative expenses) in fiscal 2008 decreased to approximately $4.1 million from $4.6 million in the prior year. The decrease in operating expenses was mainly in selling and distribution. Freight expenses decreased compared with the previous year because we changed the selling terms from freight prepaid to freight collect with some of our customers.
Table of Contents
Fiscal Year Ended March 31, 2008 Compared with Fiscal Year Ended March 31, 2007
Sales
Net sales for the fiscal year ended March 31, 2008 decreased by approximately $21 million compared to revenues of $56 million in the fiscal year ended March 31, 2007. The decrease in sales is primarily due to weakening of consumer spending during the holiday season and strong competition in the low end TV and DVD player market.
We continuously made improvement in selling in the USA market using the Disney brand but sales of consumer electronics of television and DVD products declined in Canada by $16 million. As the United States imposed a deadline of March 2007 to import NTSC TV system into the country, Canada was flooded with NTSC system TV sets which resulted in deterioration in prices. We opted to sell less rather than suffering an erosion of our gross profit margin. In Canada, sales of the MP3 player line declined by $4 million due to severe price competition. Our audio and clock radio lines showed steady sales in the two years in comparison.
In fiscal 2008, 24% of our sales were direct sales, which represented sales made by our subsidiary in Hong Kong, and 76% were domestic sales, which represent sales made from our warehouses in USA and in Canada. In fiscal 2007, 66% of our sales were direct sales, and 34% were domestic sales.
In fiscal 2008, sales in Canada represent 51% of our total sales; sales in USA represent 48% and the remaining 1% was sales to other countries. In fiscal 2007, 75% of our sales were made to Canada, 24% in USA and 1% to Europe and other countries.
Gross Profit
Gross profit for fiscal 2008 was approximately $1.9 million or 5.5% of total revenues compared to $3.2 million or 5.8% of sales for fiscal 2007. Our future expansion is to continue to target a product mix that will improve our gross profit margin. It is uncertain if existing products will suffer further deterioration in gross profit margin as we cannot predict how our competitors will cut prices.
Our gross profit may not be comparable to those of other entities, since some entities include the costs of warehousing, inspection, freight out charges and other distribution costs in their cost of sales. We account for the above expenses as operating expenses and classify them under selling, general and administrative expenses.
Table of Contents
Commission Income
Our commission and other income which consist of commissions earned on brokering sales and handling return products for Starlight and another manufacturer. Total income was $0.9 million in fiscal 2008 compared with $1.6 million in fiscal 2007. Our plan is to increase income earned on brokering sales. We are less certain with income earned on handling returns since we cannot forecast how many pieces of returns we will process for our customers, therefore we have no control over the revenue we earn from the reverse logistic operation.
Operating Expenses
Operating expenses for the fiscal year ended March 31, 2008 decreased to $4.1 million from $4.6 million in fiscal 2007. The decrease in operating expenses consists of a decrease in variable expenses and fixed expenses. The variable expenses (advertising, commission, freight and royalty expenses) decreased proportionally as revenues decreased. The fixed expense increase of $0.2 million was primarily due to higher cost of operation in general.
Income Tax Expenses
Significant management judgment is required in developing our provisions for income taxes, including the determination of foreign tax liabilities, deferred tax assets and liabilities and any valuation allowances that might be required against deferred tax assets. Management evaluates its ability to realize its deferred tax assets on a quarterly basis and adjusts its valuation allowance when it believes that it is not likely to be realized.
For the fiscal year ended March 31, 2008, we recovered income tax expense in the amount of $254,247. In the current and prior year a tax audit on the Canadian subsidiary was conducted on years 2004 and 2005 and additional taxes were reassessed. Taxes related to these audits amounted to $714,638 in 2008. Tax recovery was a result of an adjustment for the 2006 fiscal year related to foreign exchange gains in our Canadian subsidiary and to carryback of losses in the current year to the 2005 year. The Company does not anticipate future changes in rates and as such does not anticipate such variances in its current or deferred taxes in subsequent years.
We operate within multiple taxing jurisdictions and we are subject to audit in each jurisdiction. Because of the complex issues involved, any claims can require an extended period of time to resolve. In management's opinion, adequate provisions for income taxes have been made.
Fiscal Year Ended March 31, 2007 Compared with Fiscal Year Ended March 31, 2006
Sales
Net sales for the fiscal year ended March 31, 2007 increased to $56 million compared to revenues of $51 million in the fiscal year ended March 31, 2006. The increase in sales is primarily attributed to:
| | · | Penetration in the toys section of electronics by distributing Disney characters electronics in television sets, DVD players, and CD players in the United States market (new sales in 2007 $13M). |
| | · | focusing on the products which are popular among the younger consumers such as MP3 Players; |
| | · | competing aggressively by providing advertising allowances to our retail customers to promote our products |
Table of Contents
Despite our success in re-opening the US market, sales of television and DVD products declined in Canada by $8 million. As the United States imposed a deadline of March 2007 to import NTSC TV system into the country, Canada was flooded with NTSC system TV sets which resulted in deterioration in prices. We opted to sell less rather than suffering an erosion of our gross profit margin. Our audio and clock radio lines showed steady sales in the two years in comparison.
In fiscal 2007, 66% of our sales were direct sales, which represented sales made by our subsidiary in Hong Kong, and 34% were domestic sales, which represent sales made from our warehouses in USA and in Canada. In fiscal 2006, 90% of our sales were direct sales, and 10% were domestic sales. All our Disney characters sales were from our warehouse facility in USA.
In fiscal 2007, sales in Canada represent 75% of our total sales; sales in USA represent 24% and the remaining 1% was sales to Europe and other countries. In fiscal 2006, 98% of our sales were made to Canada, 2% to Europe and other countries.
Gross Profit
Gross profit for fiscal 2007 was $3.3 million or 5.8% of total revenues compared to $2.9 million or 5.6% of sales for fiscal 2006. Our future expansion is to continue to target a product mix that will improve our gross profit margin. It is uncertain if existing products will suffer further deterioration in gross profit margin as we cannot predict how our competitors will cut prices.
Our gross profit may not be comparable to those of other entities, since some entities include the costs of warehousing, inspection, freight charges out and other distribution costs in their cost of sales. We account for the above expenses as operating expenses and classify them under selling, general and administrative expenses.
Commission Income
Our commission and other income which consist of commissions earned on brokering sales and handling return products for Starlight and another manufacturer. Total income was $1.6 million in fiscal 2007 compared with $1.5 million in fiscal 2006. Our plan is to increase income earned on brokering sales. We are less certain with income earned on handling returns since our customers choose how many of their returns they will give to us to process, therefore we have no control over how many returns are received.
Operating Expenses
Operating expenses for the fiscal year ended March 31, 2007 increased to $4.6 million from $3.7 million in fiscal 2006. The increase in operating expenses consists of an increase in variable expenses and fixed expenses. The variable expenses (advertising, commission, freight and royalty expenses) increased proportionally as revenues increased. The fixed expense increase of $0.5 million was primarily due to the following factors:
| | l | consultancy fees to provide marketing research and opening new accounts in the USA |
| | l | insurance costs in our business package; and |
| | l | storage costs due to a higher percentage of domestic sales than direct sales |
Income Tax Expenses
Significant management judgment is required in developing our provisions for income taxes, including the determination of foreign tax liabilities, deferred tax assets and liabilities and any valuation allowances that might be required against deferred tax assets. Management evaluates its ability to realize its deferred tax assets on a quarterly basis and adjusts its valuation allowance when it believes that it is not likely to be realized.
For the fiscal year ended March 31, 2007, we recovered income tax expense in the amount of $310,442 and a prior year reassessment of taxes of $189,610. Prior year reassessment was the result of a tax audit on the Canadian subsidiary conducted on years 2004 and 2005. Tax recovery was also a result of some prior year adjustments related to foreign exchange gains in our Canadian subsidiary. The Company does not anticipate future changes in rates and as such does not anticipate such variances in its current or deferred taxes in subsequent years.
We operate within multiple taxing jurisdictions and we are subject to audit in each jurisdiction. Because of the complex issues involved, any claims can require an extended period of time to resolve. In management's opinion, adequate provisions for income taxes have been made.
Table of Contents
Liquidity and Capital Resources
On March 31, 2008, we had cash on hand of $512,172 compared to cash on hand of $1,112,228 on March 31, 2007. The decrease of cash on hand was primarily due to cash used in operating activities, rather than provided by operating activities.
Cash flows used in operating activities were $1,416,734 for the year ended March 31, 2008. We carried a lower receivable balance in 2008 due to exceptionally higher sales activity in the first quarter of calendar 2007 when the USA imposed a deadline to import TV built for the NTSC system. The majority of our receivables are due from large chain discount stores and we expect our receivable turnover will be steady throughout the year.
We increased our inventory level at fiscal 2008 year end by approximately $1.5 million because of sales during the holiday season had been less than expected. Receivables and inventory were financed by trade payables due to our parent company.
Cash used in investing activities for the year ended March 31, 2008 was $2,298. Cash used in investing activities was for the purchase of office equipment in Canada.
There have been no cash flows from financing activities for the fiscal year ended March 31, 2008.
As of March 31, 2008, our working capital was $3.7 million. Our current liabilities of $12 million include:
| | · | amount due to Starlight resulting from normal course of the business for $10.7 million; |
| | · | current liabilities resulting from normal course of the business with other factories for $0.6 million; |
| | · | advance from Starlight for $0.6 million |
As of June 2008, our cash on hand is sufficient to cover approximately two months of operation. We expect our factories will continue to provide credits to us and that Starlight will provide financing to us if we require additional short term working capital.
Off Balance Sheet Arrangements
Cosmo does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or variable interest entities (VIE’s), which would be established for the purpose of facilitating off-balance sheet arrangements. As of March 31, 2008, Cosmo did not have any unconsolidated VIE’s.
Table of Contents
Contractual Obligations as of March 31, 2008
Cosmo had contractual obligations at March 31, 2008 as follows:
| | | Payments Due by Period | |
| | | | |
| | | | | Less Than | | | | | More Than | |
| Contractual Obligations | | Total | | | 1 Year | | | 1-3 Years | | | 3-5 Years | | | 5 Years | |
| | | | | | | | | | | | | | | | |
| Interest payable to related party | | $ | 604,627 | | | $ | 604,627 | | | $ | — | | | | — | | | | — | |
| Operating leases | | $ | 172,268 | | | $ | 172,268 | | | $ | | | | $ | — | | | | — | |
Working Capital Requirements for the Short and Long Term
During the next twelve month period, we plan on financing our working capital needs from:
| | · | The collection of accounts receivable; |
| | · | Sales of existing inventory; and |
| | · | The Continued support of factories in China that finance our purchases of goods for fiscal 2009. |
Our sources of cash for working capital in the long term are the same as our sources for the short term. If we need additional financing for the long term use, one of the options that we may explore in the near future is by private offerings. However, we cannot guarantee that our financing plan will succeed. If we need to obtain additional financing and fail to do so, it may have a material adverse effect on our ability to meet our financial obligations and continue our operations.
During fiscal 2009, we will continue to control our operating costs. We expect domestic sales will continue to expand which will put pressure on our working capital to finance inventory and accounts receivable.
Except for the foregoing, we do not have any present commitment that is likely to cause our liquidity to increase or decrease in any material way. In addition, except for the Company's need for additional capital to finance inventory purchases, the Company is not aware of any trend, additional demand, event or uncertainty that will result in, or that is reasonably likely to result in, the Company's liquidity increasing or decreasing in any material way.
Table of Contents
Exchange Rates
For direct sales, we sell our products in U.S. dollars and pay for all of our manufacturing costs in either U.S. or Hong Kong dollars. Operating expenses of the Hong Kong office are paid in Hong Kong dollars. The exchange rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong government since 1983 at approximately HK $7.80 to U.S. $1.00 and, accordingly, has not represented a currency exchange risk to the U.S. dollar. Operating expenses of our Canada office is paid in Canadian dollar, and domestic sales are received in Canadian dollars. The exchange rate between the Canadian dollar and US dollar can represent an exchange risk to us. Therefore any adverse fluctuation in this exchange rate may have a material effect on our business, financial condition or results of operation. The overall percentage of domestic sales in Canadian dollar is relatively small at approximately 29% of total sales. We have not taken any steps to hedge the exchange risk. In the event that domestic sales will increase to a higher level, we are considering entering into hedging transactions to insure currency risk is minimized.
Seasonal and Quarterly Results
Historically, our operations have been seasonal, with the highest net sales occurring in the second and third quarters (reflecting increased orders for electronic audio and video equipment during the Christmas selling months) and to a lesser extent the first and fourth quarters of the fiscal year. Sales in our fiscal second and third quarter, combined, accounted for approximately 65% and 46% of net sales in fiscal 2008, and 2007, respectively.
Our results of operations may also fluctuate from quarter to quarter as a result of the amount and timing of orders placed and shipped to customers, as well as other factors. The fulfillment of orders can therefore significantly affect results of operations on a quarter-to-quarter basis.
Inflation
Inflation has not had a significant impact on the Company's operations. The Company has historically passed any price increases on to its customers since prices charged by the Company are generally not fixed by long-term contracts.
Critical Accounting Policies and Estimates
The methods, estimates and judgments Cosmo uses in applying its accounting policies have a significant impact on the results reported in its consolidated financial statements. Cosmo evaluates its estimates and judgments on an on-going basis. Cosmo bases its estimates on historical experience and assumptions that Cosmo believes to be reasonable under the circumstances. Cosmo’s experience and assumptions form the basis for its judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what Cosmo anticipates and different assumptions or estimates about the future could change its reported results.
Cosmo believes the following accounting policies are the most critical to Cosmo, in that they are important to the portrayal of Cosmo’s consolidated financial statements and they require Cosmo’s most difficult, subjective or complex judgments in the preparation of its consolidated financial statements:
Table of Contents
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings in the period in which they become known.
Revenue Recognition
Sales, net of estimated sales returns, are recognized upon passage of title to the customer. This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Revenue is recognized if persuasive evidence of an agreement exists, the sales price is fixed or determinable, and collectability is reasonably assured.
Commission income is derived from reverse logistic services that consist of handling other distributor companies returned goods. In providing these services, the Company acts as an agent or broker without assuming the risks and rewards of ownership of the goods and therefore reports the commissions on a net basis. Revenue is recognized based on the completion of the contracted services.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined on a first-in, first-out basis. Inventory is comprised of finished products that the Company intends to sell to its customers. The Company periodically makes judgments and estimates regarding the future utility and carrying value of its inventory. The carrying value of inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from the inventory is less than its carrying value. The Company has inventory reserves for estimated obsolescence or unmarketable inventory which is equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.
Foreign Translation Adjustment
The accounts of the foreign subsidiaries were translated into U.S. dollars in accordance with the provisions of SFAS No. 52, Foreign Currency Translation. 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.
Table of Contents
Income Taxes
The Company accounts for income taxes pursuant to SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents, receivables, payables, and advances from the parent company.
The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required in estimating fair value. Accordingly, the estimates may not be indicative of the amounts the Company could realize in a current market exchange.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and interest rates. We are exposed to market risk in the areas of changes in Canada and International borrowing rates and changes in foreign currency exchange rates. In addition, we are exposed to market risk in certain geographic areas that have experienced or remain vulnerable to an economic downturn, such as China. We purchase substantially all our inventory from companies in China and, therefore, we are subject to the risk that such manufacturers will be unable to provide inventory at competitive prices.
While we believe that if such an event were to occur we would be able to find alternative sources of inventory at competitive prices, we cannot assure you that we would be able to do so. These exposures are directly related to our normal operating and funding activities. Historically and as of March 31, 2008, we have not used derivative instruments or engaged in hedging activities to minimize market risk.
Interest Rate Risk
As of March 31, 2008, we have borrowed from Starlight and discounted our trade bills to obtain cash advance on our direct sales. An increase in prime rate will increase our costs of borrowing accordingly.
Foreign Currency Risk
We have a wholly-owned subsidiary in USA, a wholly-owned subsidiary in Canada and a wholly-owned subsidiary in Hong Kong. Sales by the Canadian operations made in Canada are denominated in Canadian dollar; purchases of inventory are denominated in US or Hong Kong dollar, and operating expenses in Canadian dollar. The Hong Kong operating expenses are denominated in Hong Kong dollar, sales are denominated in U.S. dollar, and purchases of inventory are denominated in U.S. or Hong Kong dollar. These transactions create exposures to changes in exchange rates. Changes in the Hong Kong dollar exchange rate and Canadian dollar exchange rate with the U.S. dollar may positively or negatively affect our gross margins, operating income and retained earnings. We do not believe that near-term changes in the exchange rates, if any, will result in a material effect on our future earnings, fair values or cash flows, and therefore, we have chosen not to enter into foreign currency hedging transactions. We cannot assure you that this approach will be successful, especially in the event of a significant and sudden change in the value of the Canadian and Hong Kong dollar.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | Page # | |
| Consolidated Financial Statements of Cosmo Communications Corporation and Subsidiaries | | | | |
| Report of Independent Registered Public Accounting Firm | | | 30 | |
| Consolidated Balance Sheets as at March 31, 2008 and 2007 | | | 31 | |
| Consolidated Statements of Income and Comprehensive Income for the years ended March 31, 2008, 2007, and 2006 | | | 32 | |
| Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2008, 2007, and 2006 | | | 33 | |
| Consolidated Statements of Cash Flows for the years ended March 31, 2008, 2007, and 2006 | | | 34 | |
| Notes to the Consolidated Financial Statements | | | 35 | |
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 as of 31 March 2008 and 2007 and the related consolidated statements of income, stockholders' equity and cash flows for the years ended 31 March 2008, 2007 and 2006. 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 audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, based on our audits, such consolidated financial statements present fairly, in all material respects, the financial position of Cosmo Communications Corporation and Subsidiaries as of 31 March 2008 and 2007 and the results of its operations and cash flows for the years ended 31 March 2008, 2007 and 2006, in conformity with accounting principles generally accepted in the United States of America.
/s/ DNTW Chartered Accountants, LLP
Licensed Public Accountants
Markham, Ontario, Canada
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS AT 31 MARCH
(Expressed in United States Dollars)
| | | Note | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| ASSETS | | | | | | | | | |
| | | | | | | | | | |
| Current Assets | | | | | | | | | |
| Cash | | | | | $ | 512,172 | | | $ | 1,112,228 | |
| Accounts receivable, less allowance of $25,927 and $6,520 at 31 March 2008 and 2007, respectively | | | 3 | | | | 3,842,366 | | | | 8,917,837 | |
| Inventories | | | | | | | 11,029,996 | | | | 9,515,488 | |
| Prepaid expenses and other | | | | | | | 48,227 | | | | 16, 496 | |
| Taxes recoverable | | | | | | | - | | | | 514,327 | |
| | | | | | | | | | | | | |
| Total Current Assets | | | | | | | 15,432,761 | | | | 20,076,376 | |
| Equipment and Other Assets | | | | | | | | | | | | |
| Equipment, net | | | 4 | | | | 44,847 | | | | 56,752 | |
| Deferred taxes | | | 5 | | | | 8,317 | | | | - | |
| | | | | | | | | | | | | |
| Total Equipment and Other Assets | | | | | | | 53,164 | | | | 56,752 | |
| | | | | | | | | | | | | |
| Total Assets | | | | | | $ | 15,485,925 | | | $ | 20,133,128 | |
| | | | | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | | | | |
| Current Liabilities | | | | | | | | | | | | |
| Accounts payable and accrued liabilities | | | | | | $ | 630,563 | | | $ | 1,725,237 | |
| Accounts payable to parent company | | | 6 | | | | 10,739,893 | | | | 13,372,367 | |
| Taxes payable | | | 5 | | | | 311,767 | | | | - | |
| Interest payable to parent company | | | 6 | | | | 604,627 | | | | 604,627 | |
| Deferred taxes | | | 5 | | | | - | | | | 123,590 | |
| | | | | | | | | | | | | |
| Total Liabilities | | | | | | | 12,286,850 | | | | 15,825,821 | |
| | | | | | | | | | | | | |
| Commitments | | | 7 | | | | | | | | | |
| | | | | | | | | | | | | |
| Stockholders' Equity | | | | | | | | | | | | |
| Capital stock | | | 8 | | | | 2,023,382 | | | | 2,023,382 | |
| Additional paid-in capital | | | | | | | 27,704,592 | | | | 27,704,592 | |
| Accumulated other comprehensive income (loss) | | | | | | | 323,676 | | | | (408,005 | ) |
| Accumulated deficit | | | | | | | (26,852,575 | ) | | | (25,012,662 | ) |
| | | | | | | | | | | | | |
| Total Stockholders' Equity | | | | | | | 3,199,075 | | | | 4,307,307 | |
| | | | | | | | | | | | | |
| Total Liabilities and Stockholders' Equity | | | | | | $ | 15,485,925 | | | $ | 20,133,128 | |
The accompanying notes are an integral part of these consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED 31 MARCH
(Expressed in United States Dollars)
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | | | | |
| SALES | | $ | 34,820,750 | | | $ | 56,287,515 | | | $ | 51,010,554 | |
| | | | | | | | | | | | | |
| COST OF PRODUCTS SOLD | | | 32,915,382 | | | | 53,034,341 | | | | 48,156,516 | |
| | | | | | | | | | | | | |
| GROSS PROFIT | | | 1,905,368 | | | | 3,253,174 | | | | 2,854,038 | |
| | | | | | | | | | | | | |
| COMMISSION INCOME | | | 852,238 | | | | 1,566,157 | | | | 1,508,990 | |
| | | | | | | | | | | | | |
| OPERATING EXPENSES | | | | | | | | | | | | |
| Salaries and wages | | | 1,822,066 | | | | 1,748,757 | | | | 1,669,275 | |
| General and administrative | | | 1,217,493 | | | | 1,151,962 | | | | 1,014,849 | |
| Selling and delivery | | | 1,088,947 | | | | 1,677,460 | | | | 1,033,210 | |
| Amortization | | | 14,202 | | | | 18,622 | | | | 23,183 | |
| | | | | | | | | | | | | |
| TOTAL OPERATING EXPENSES | | | 4,142,708 | | | | 4,596,801 | | | | 3,740,517 | |
| | | | | | | | | | | | | |
| (LOSS) INCOME FROM OPERATIONS | | | (1,385,102 | ) | | | 222,530 | | | | 622,511 | |
| | | | | | | | | | | | | |
| Financial | | | 104,916 | | | | 345,838 | | | | 266,644 | |
| Loss (gain) on foreign exchange | | | 21,413 | | | | (107,817 | ) | | | 36,696 | |
| | | | | | | | | | | | | |
| (LOSS) INCOME BEFORE TAXES | | | (1,511,431 | ) | | | (15,491 | ) | | | 319,171 | |
| | | | | | | | | | | | | |
| INCOME TAXES (RECOVERY) | | | (254,247 | ) | | | (310,442 | ) | | | 296,013 | |
| | | | | | | | | | | | | |
| DEFERRED INCOME TAXES | | | (131,906 | ) | | | (42,746 | ) | | | (151,738 | ) |
| | | | | | | | | | | | | |
| REASSESSMENT OF PRIOR YEARS INCOME TAXES | | | 714,638 | | | | 189,610 | | | | 27,918 | |
| | | | | | | | | | | | | |
| NET (LOSS) INCOME | | $ | (1,839,916 | ) | | $ | 148,087 | | | $ | 146,978 | |
| | | | | | | | | | | | | |
| FOREIGN CURRENCY TRANSLATION ADJUSTMENT | | | 731,681 | | | | (101,130 | ) | | | 269,150 | |
| | | | | | | | | | | | | |
| COMPREHENSIVE (LOSS) INCOME | | $ | (1,108,235 | ) | | $ | 46,957 | | | $ | 416,128 | |
| | | | | | | | | | | | | |
| (LOSS) INCOME PER WEIGHTED NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED | | $ | (0.05 | ) | | $ | 0.01 | | | $ | 0.01 | |
| | | | | | | | | | | | | |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED | | | 40,467,636 | | | | 29,602,132 | | | | 29,104,000 | |
The accompanying notes are an integral part of these consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED 31 MARCH 2008, 2007 AND 2006
(Expressed in United States Dollars)
| | | Shares | | | Capital Stock | | | Additional Paid-In Capital | | | Accumulated Other Comprehensive Income (Loss) | | | Accumulated Deficit | | | Total Stockholders' Equity | |
| Balance, 31 March 2005 Restated | | | 29,104,000 | | | | 1,455,200 | | | | 26,272,774 | | | | (576,025 | ) | | | (25,307,727 | ) | | | 1,844,222 | |
| Foreign currency translation | | | - | | | | - | | | | - | | | | 269,150 | | | | - | | | | 269,150 | |
| Net gain for the period restated | | | - | | | | - | | | | - | | | | - | | | | 146,978 | | | | 146,978 | |
| Balance, 31 March 2006 | | | 29,104,000 | | | | 1,455,200 | | | | 26,272,774 | | | | (306,875 | ) | | | (25,160,749 | ) | | | 2,260,350 | |
| Common stock issued for debt | | | 11,363,636 | | | | 568,182 | | | | 1,431,818 | | | | - | | | | - | | | | 2,000,000 | |
| Foreign currency translation | | | - | | | $ | - | | | $ | - | | | $ | (101,130 | ) | | $ | - | | | $ | (101,130 | ) |
| Net gain for the period | | | - | | | | - | | | | - | | | | - | | | | 148,087 | | | | 148,087 | |
| Balance, 31 March 2007 | | | 40,467,636 | | | | 2,023,382 | | | | 27,704,592 | | | | (408,005 | ) | | | (25,012,662 | ) | | | 4,307,307 | |
| Foreign currency translation | | | - | | | | - | | | | - | | | | 731,681 | | | | - | | | | 731,681 | |
| Net ( loss) for the period | | | - | | | | - | | | | - | | | | - | | | | (1,839,916 | ) | | | (1,839,916 | ) |
| Balance, 31 March 2008 | | | 40,467,636 | | | $ | 2,023,382 | | | $ | 27,704,592 | | | $ | 323,676 | | | $ | (26,852,575 | ) | | $ | 3,199,075 | |
The accompanying notes are an integral part of these consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED 31 MARCH
(Expressed in United States Dollars)
| | | 2008 | | | 2007 | | | 2006 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | |
| Net (loss) income | | $ | (1,839,916 | ) | | $ | 148,087 | | | $ | 146,978 | |
| Adjustment to reconcile net earnings to net cash provided by (used in) operating activities | | | | | | | | | | | | |
| Depreciation | | | 14,202 | | | | 18,622 | | | | 23,183 | |
| Deferred income taxes | | | (131,906 | ) | | | (42,746 | ) | | | (151,738 | ) |
| | | | (1,957,620 | ) | | | 123,963 | | | | 18,423 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Accounts receivable | | | 5,075,471 | | | | (5,795,642 | ) | | | (1,399,688 | ) |
| Inventories | | | (1,514,507 | ) | | | (5,379,148 | ) | | | 929,490 | |
| Prepaid expenses and other | | | (31,731 | ) | | | 355,525 | | | | (369,457 | ) |
| Accounts payable and accrued liabilities | | | (1,094,672 | ) | | | 713,737 | | | | 104,829 | |
| Taxes payable | | | 826,095 | | | | (791,072 | ) | | | 123,821 | |
| Accounts payable to parent company | | | (2,632,474 | ) | | | 12,554,223 | | | | 152,176 | |
| CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES | | | (1,329,438 | ) | | | 1,781,586 | | | | (440,406 | ) |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | |
| Acquisition of equipment | | | (2,299 | ) | | | (5,254 | ) | | | (7,604 | ) |
| CASH FLOWS USED IN INVESTING ACTIVITIES | | | (2,299 | ) | | | (5,254 | ) | | | (7,604 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | |
| Advances to (from) related parties | | | - | | | | (1,111,480 | ) | | | 98,805 | |
| CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | - | | | | (1,111,480 | ) | | | 98,805 | |
| EFFECT OF FOREIGN CURRENCY TRANSLATION | | | 731,681 | | | | (101,130 | ) | | | 269,150 | |
| NET INCREASE (DECREASE) IN CASH | | | (600,056 | ) | | | 563,722 | | | | (80,055 | ) |
| CASH, BEGINNING OF YEAR | | | 1,112,228 | | | | 548,506 | | | | 628,561 | |
| CASH, END OF YEAR | | $ | 512,172 | | | $ | 1,112,228 | | | $ | 548,506 | |
The accompanying notes are an integral part of these consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 MARCH 2008 AND 2007
(Expressed in United States Dollars)
Cosmo Communications Corporation and subsidiaries (the "Company" or "Cosmo") market and distribute consumer electronic products. The Company has operations in the United States, Hong Kong and Canada.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The accounting policies of the Company are in accordance with accounting principles generally accepted in the United States of America. Presented below are those policies considered particularly significant:
Principles of Consolidation
The Company includes, in consolidation, its wholly owned subsidiaries, Cosmo Communications Canada Inc., Cosmo Communications (H.K.) Limited and Cosmo Communication USA Corp. All significant intercompany transactions and balances have been eliminated upon consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings in the period in which they become known.
Revenue Recognition
Sales, net of estimated sales returns, are recognized upon passage of title to the customer. This occurs upon shipment or upon receipt by the customer depending on the country of the sale and the agreement with the customer. Revenue is recognized if persuasive evidence of an agreement exists, the sales price is fixed or determinable, and collectability is reasonably assured.
Commission income is derived from reverse logistic services that consist of handling other distributor companies returned goods. In providing these services, the Company acts as an agent or broker without assuming the risks and rewards of ownership of the goods and therefore reports the commissions on a net basis. Revenue is recognized based on the completion of the contracted services.
Cost of Products Sold
Included in cost of sales are cost of purchases (FOB cost) and cost associated with the import of the products. Import cost components are customs entry fees levied by the country of import and the freight and handling cost to unload containers.
Advertising Allowances
Effective 1 January 2002, the Company adopted Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products (“EITF 01-9”). Upon adoption of EITF 01-9, the Company is required to classify certain payments to its customers as a reduction of sales. The Company grants advertising allowances to its major customers as contributions to promote the Company's products. Management has determined that the Company meets the requirements of EITF 01-9 in order to characterize these contributions as a cost as opposed to a reduction in revenue and accordingly these costs are included in selling and delivery expenses.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Consolidated Statements of Income Classifications
The Company calculates its gross profit as the difference between its revenue and the associated cost of products sold. Cost of products sold includes direct product costs, inbound freight, excise taxes, casualty insurance, import duties and broker fees, vendor allowances, and increases or decreases to the Company’s FIFO reserve. The Company’s gross profit may not be comparable to other entities whose shipping and handling expenses are a component of cost of sales. Instead the Company includes these costs in selling and delivery expenses which amounted to $606,396 (2007 - $912,829).
The Company classifies the following expense categories separately on its statement of operations: salaries and wages; selling and delivery; and general and administrative. The Company’s labor costs of the warehouse and office staff are included in the salaries and wages expense category. The Company’s selling expenses primarily include shipping and handling costs, sales commissions, travel, entertainment, and product promotional costs. General and administrative expenses of the Company primarily include legal costs, insurance, rent, repairs, and general office expenses.
Cash and Cash Equivalents
Cash and cash equivalents consist of commercial accounts and interest-bearing bank deposits and are carried at cost, which approximates current value. Items are considered to be cash equivalents if the original maturity is three months or less.
Inventories
Inventories are valued at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis. Inventory is comprised of finished products that the Company intends to sell to its customers. The Company periodically makes judgments and estimates regarding the future utility and carrying value of its inventory. The carrying value of inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from the inventory is less than its carrying value. The Company has inventory reserves for estimated obsolescence or unmarketable inventory which is equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. For the year ended 31 March 2008, the Company increased its inventory reserve to $554,224.
Trade receivables
Trade and other receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that we will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognized in the statement of income.
Equipment
Equipment is stated at historical cost less accumulated depreciation. Depreciation, based on the estimated useful lives of the assets, is provided using the under noted annual rates and methods:
| | Furniture and fixtures | 20% declining balance | |
| | Equipment | 20% declining balance | |
| | Computer | 25% declining balance | |
| | Warehouse equipment | 20% declining balance | |
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Foreign Translation Adjustment
The accounts of the foreign subsidiaries were translated into U.S. dollars in accordance with the provisions of SFAS No. 52, Foreign Currency Translation. Management has determined that the Hong Kong dollar is the functional currency of the Hong Kong subsidiary, the US dollar is the functional currency of the US subsidiary 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.
Income Taxes
The Company accounts for income taxes pursuant to SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recorded for differences between the financial statement and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period.
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents, receivables, payables, and advances from the parent company.
The estimated fair value of financial instruments has been determined by the Company using available market information and valuation methodologies. Considerable judgment is required in estimating fair value. Accordingly, the estimates may not be indicative of the amounts the Company could realize in a current market exchange. At 31 March 2008 and 2007, the carrying amounts of cash, accounts receivable, accounts payable and accrued liabilities, and loans payable approximate their fair values due to the short-term maturities of these instruments.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income that establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income is presented in the statements of changes in stockholders' equity, and consists of net income (loss) and unrealized gains (losses) on available for sale marketable securities, foreign currency translation adjustments and changes in market value of future contracts that qualify as a hedge; and negative equity adjustments recognized in accordance with SFAS 87, Employers' Accounting for Pensions. SFAS No. 130 requires only additional disclosures in the financial statements and does not affect the Company's financial position or results of operations.
Earnings or Loss Per Share
The Company accounts for earnings per share pursuant to SFAS No. 128, Earnings per Share, which requires disclosure on the financial statements of "basic" and "diluted" earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options and warrants for each year.
There were no dilutive financial instruments for the years ended 31 March 2008 and 2007.
Valuation of Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value of the asset less cost to sell.
Concentration of Credit Risks
SFAS No. 105, Disclosure of Information About Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk, requires disclosure of any significant off-balance sheet risk and credit risk concentration. The Company is exposed to credit risk on accounts receivable from its customers. In order to reduce its credit risk, the Company has adopted credit policies which includes the analysis of the financial position of its customers and the regular review of their credit terms.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 ("FIN 48"), which clarifies the accounting for uncertainty in tax positions. This interpretation requires that the Company determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position, and measure the amount of benefit to be recognized in the financial statements for a tax position that meets the more- likely-than-not recognition threshold. FIN 48 is effective for fiscal years beginning after 15 December 2006. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Defining Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after 15 November 2007. The Company is currently evaluating the impact of adopting SFAS No. 157 on its consolidated financial statements.
In December 2006, the FASB issued FASB Staff Position Emerging Issues Task Force ("FSP EITF") 00-19-2, Accounting for Registration Payment Arrangements which addresses accounting for registration payment arrangements. FSP 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. FSP 00-19-2 further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of EITF 00-19-2, this guidance is effective for financial statements issued for fiscal years beginning after 15 December 2006 and interim periods within those fiscal years. The adoption of FIN 48 did not have a material impact on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. SFAS No. 159 applies to reporting periods beginning after 15 November 2007. The adoption of SFAS No. 159 is not expected to have a material impact on the Company’s financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141 (R) Business Combinations. SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of the Company’s fiscal year beginning after 15 December 2008. Management believes the adoption of this pronouncement will not have a material impact on the Company's consolidated financial statements.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Recent Accounting Pronouncements (Continued)
In December 2007, the FASB issued SFAS No. 160 Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of the Company’s fiscal year beginning after 15 December 2008. Management believes the adoption of this pronouncement will not have a material impact on the Company's consolidated financial statements.
In January 2008, the FASB issued Statement No. 133 Implementation Issue No. E23, Hedging — General: Issues Involving the Application of the Shortcut Method under Paragraph 68 (Issue No. E23). Issue No. E23 provides guidance on certain practice issues related to the application of the shortcut method by amending paragraph 68 of FASB Statement No. 133 with respect to the conditions that must be met in order to apply the shortcut method for assessing hedge effectiveness of interest rate swaps. The provisions of Issue No. E23 became effective for us for our hedging arrangements designated on or after January 1, 2008. Additionally, pre-existing hedging arrangements must be assessed on January 1, 2008 to determine whether the provisions of Issue No. E23 were met as of the inception of the hedging arrangement. We have evaluated the effects of the adoption of Issue No. E23 and have determined it to have no material impact on our consolidated financial position, results of operations and cash flows.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. FASB Statement No. 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. FASB Statement No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. FASB Statement No. 161 permits, but does not require, comparative disclosures for earlier periods at initial adoption. We have not yet commenced evaluating the potential impact, if any, of the adoption of FASB Statement No. 161 on our consolidated financial position, results of operations, cash flows or disclosures related to derivative instruments and hedging activities.
In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. FASB Statement No. 162 defines the order in which accounting principles that are generally accepted should be followed. FASB Statement No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We have not yet commenced evaluating the potential impact, if any, of the adoption of FASB Statement No. 162 on our consolidated financial position, results of operations and cash flows.
| 3. | VALUATION AND QUALIFYING ACCOUNTS AND RESERVES |
The carrying amounts of trade accounts receivable are reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances and creates an allowance for doubtful accounts based on the credit worthiness of specific accounts and an estimate of other uncollectible accounts based on historical performance and current economic conditions.
Allowances for estimated returns are recorded at the estimated gross profit based upon our historical return patterns. Sales return allowances are recorded in accounts payable and accrued liabilities in the consolidated balance sheets.
The following is the activity within the Company’s consolidated valuation and qualifying accounts and reserves for fiscal 2008 and 2007:
| | | Balance at Beginning of Year | | | Additions (Reductions) Charged to Costs and Expenses | | | Deductions | | | Balance at End of Year |
| Year ended 31 March 2008 | | | | | | | | | | | |
| Deducted from asset account: | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 6,520 | | | $ | 30,323 | | | $ | 10,916 | | | $ | 25,927 | |
| Sales return and allowance reserve | | | 381,270 | | | | 1,359,375 | | | | 1,602,207 | | | | 138,438 | |
| Total | | $ | 387,790 | | | $ | 1,389,698 | | | $ | 1,613,123 | | | $ | 164,365 | |
| Year ended 31 March 2007 | | | | | | | | | | | | | | | | |
| Deducted from asset account: | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 14,040 | | | $ | (18,387 | ) | | $ | (10,867 | ) | | $ | 6,520 | |
| Sales return and allowance reserve | | | 245,770 | | | | 2,992,413 | | | | 2,856,913 | | | | 381,270 | |
| Total | | $ | 259,810 | | | $ | 2,974,026 | | | $ | 2,846,046 | | | $ | 387,790 | |
The components of equipment are as follows:
| | | Cost | | | Accumulated Depreciation | | | Net 2008 | | | Net 2007 | |
| | | | | | | | | | | | | |
| Furniture and fixtures | | $ | 42,462 | | | $ | (39,315 | ) | | $ | 3,147 | | | $ | 4,261 | |
| Equipment | | | 31,858 | | | | (29,014 | ) | | | 2,844 | | | | 3,020 | |
| Computer | | | 53,295 | | | | (38,062 | ) | | | 15,233 | | | | 18,529 | |
| Warehouse equipment | | | 68,308 | | | | (44,685 | ) | | | 23,623 | | | | 30,942 | |
| | | $ | 193,625 | | | $ | (136,873 | ) | | $ | 44,847 | | | $ | 56,752 | |
The Company accounts for income taxes in accordance with SFAS No. 109. SFAS No. 109 prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates. The effects of future changes in tax laws or rates are not anticipated. Under SFAS No. 109 income taxes are recognized for the following: a) amount of tax payable for the current year, and b) deferred tax liabilities and assets for future tax consequences of events that have been recognized differently in the financial statements than for tax purposes.
The provision for income taxes reconciles to the amount obtained by applying the statutory income tax rates of 36.12% (2007 - 36.12%) in Canada, 17.5% (2007 - 17.5%) in Hong Kong and 15.5% (2007 - 15.5%) in US to income before provision for taxes as follows:
| | | 2008 | | | 2007 | |
| | | | | | | |
| Computed expected tax | | | (278,083 | ) | | | (53,879 | ) |
| Expenses not deductible for tax purposes | | | 15,653 | | | | 13,119 | |
| Equipment | | | 3,376 | | | | (7,224 | ) |
| Unrealized foreign exchange gains | | | - | | | | (10,851 | ) |
| Tax losses avalaible for carryforward | | | 3,907 | | | | - | |
| Prior year adjustments | | | - | | | | (255,450 | ) |
| Other | | | 900 | | | | 3,843 | |
| Provision for income taxes | | $ | (254,247 | ) | | $ | (310,442 | ) |
The components of deferred income taxes have been determined at the combined Canadian federal and provincial statutory rate of 36.12% as follows:
| | | 2008 | | | 2007 | |
| | | | | | | |
| Deferred income tax assets (liabilities): | | | | | | |
| Book over tax depreciation | | | 8,317 | | | | 5,946 | |
| Unrealized foreign exchange transaction gains | | | - | | | | (129,536 | ) |
| Deferred income taxes | | $ | 8,317 | | | $ | (123,590 | ) |
During the year, Cosmo Communications Canada Inc. settled a corporate tax audit with the Canada Revenue Agency related to allocation of income between Canada and Hong Kong. The adjustments were to taxable income for the fiscal years 31 March 2004 and 2005 and totaled $714,638 in corporate taxes payable. The tax audits are now closed for these years.
| 6. | AMOUNTS PAYABLE TO PARENT COMPANY |
As of 31 March 2008, the Company owed $11,344,520 (2007 - $13,976,994) to The Starlight Group of Companies, the principal corporate shareholder of the Company ("Starlight"). Of this amount $10,739,893 (2007 - $13,372,367) was owed in the form of trade payable and the remainder was in the form of advances and interest on advances. The advances from Starlight were paid for by the issuance of shares in the fiscal year ended 31 March 2007, leaving only the accrued interest as payable. These amounts are payable on demand and Starlight has agreed not to charge further interest on the accrued interest payable. Interest accrued as of 31 March 2008 was $604,627 (2007 - $604,627).
The Company leases premises under an operating lease with a five year term in Canada and shares the facilities for its Hong Kong operation. Minimum lease commitments under the leases at 31 March 2008 were:
| 2009 | | $ | 172,268 | |
| Thereafter | | | - | |
| | | $ | 172,268 | |
| 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, voting, participating |
| | | | | 2008 | | | 2007 | |
| Issued | | | | | | | | |
| 40,467,636 | | Common stock (2006 - 29,104,000) | | $ | 2,139,132 | | | $ | 2,139,132 | |
| 2,314,567 | | Treasury stock | | | (115,750 | ) | | | (115,750 | ) |
| | | | | $ | 2,023,382 | | | $ | 2,023,382 | |
| | On 15 March 2007, the Board of Directors approved the issuance of 11,363,636 shares of common stock in exchange for advances and trade payables to Starlight in the amount of $2,000,000. The parties agreed to issue one share for every $0.176 of debt. |
| 10. | RELATED PARTY TRANSACTIONS |
Apart from those as disclosed in note 5, the Company's transactions with related parties were, in the opinion of the directors, carried out on normal commercial terms and in the ordinary course of the Company's business.
During the year ended 31 March 2008, the Company purchased $27,532,352 (2007 - $46,377,415) of goods from Starlight and received $56,648 (2007 - $29,014) in commissions.
The Company is economically dependent on its parent company for the supply of inventory products to its customers. A mass-market merchandiser and chain store located in Canada and US is the Company's largest customer, which accounted for approximately 76% of sales in 2008 and 93% in 2007. Economic dependence exists with this identified customer. Loss of the customer may have significant adverse results to the financial position of the Company.
As of 31 March 2008, the accounts receivable from this customer amounted to approximately $1,721,833 (2007 - $7,914,451) and claims payable for inventory returns amounted to approximately $56,771 (2007 - $485,486).
| 12. | OPERATING SEGMENT INFORMATION |
The Company operated in one business segment and all of its sales are consumer electronic products. The Company's customers are principally in Canada and in the USA. Borrowings are principally in the United States.
| | | Canada | | | Hong Kong | | | United States | | | Total | |
| | | | | | | | | | | | | |
| 2008 | | | | | | | | | | | | |
| Assets | | | 6,966,433 | | | | 783,441 | | | | 7,978,424 | | | | 15,728,298 | |
| Sales, net | | | 9,882,697 | | | | 8,369,762 | | | | 16,568,291 | | | | 34,820,750 | |
| Gross margin | | | 736,784 | | | | 348,152 | | | | 820,432 | | | | 1,905,368 | |
| Net income (loss) | | | (1,660,839 | ) | | | (153,868 | ) | | | (25,209 | ) | | | (1,839,916 | ) |
| | | | | | | | | | | | | | | | | |
| 2007 | | | | | | | | | | | | | | | | |
| Assets | | | 6,239,283 | | | | 652,480 | | | | 13,241,365 | | | | 20,133,128 | |
| Sales, net | | | 5,844,032 | | | | 37,093,544 | | | | 13,349,939 | | | | 56,287,515 | |
| Gross margin | | | 329,644 | | | | 1,868,034 | | | | 1,055,467 | | | | 3,253,174 | |
| Net income (loss) | | | 32,922 | | | | 236,209 | | | | (121,044 | ) | | | 148,087 | |
| 13. | SUPPLEMENTAL CASH FLOW INFORMATION |
During the year ended 31 March 2008 the Company paid interest of $74,593 (2007 - $356,705) and income taxes of $392,118 were recovered (2006 - $703,117 were paid).
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
(a) Evaluation of Disclosure Controls. Our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of our 2008 fiscal year. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, as appropriate to allow timely decisions regarding required disclosure.
Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2008. Due to an oversight, Management did not timely include its Report on Internal Control over Financial Reporting on the Company’s Form 10-K filed on June 30, 2008. However, Management has since included its Report on Internal Control over Financial Reporting and has remediated its disclosure controls and procedures by engaging legal counsel to identify and stay apprised of applicable rules and regulations.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
(b) Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the year ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our management team will continue to evaluate our internal control over financial reporting in 2008.
Management’s Report on Internal Control over Financial Reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) and has assessed its effectiveness using the components established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorization of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Management concluded that we did maintain effective internal control over financial reporting as of March 31, 2008.
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
Item 9B. Other Information
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth information concerning the directors, executive officers and significant employees of Cosmo as of June 30, 2007:
| Name | | Age | | Position |
| Philip Lau | | 60 | | Chairman of the Board of Directors and President |
| Peter Horak | | 66 | | Chief Executive Officer and Director |
| Carol Atkinson | | 59 | | Chief Financial Officer |
| Rick Bond | | 58 | | Vice President – sales and marketing – USA operation |
| Yu Wing King | | 56 | | Vice President, Hong Kong operation |
| Jacky Lau | | 49 | | Director |
| Jeff Horak | | 50 | | Vice President –Sales and Marketing - Canada Operations |
Philip Lau - Chairman and President
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.
Peter Horak – Chief Executive Officer, Canada
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.
Carol Atkinson – Chief Finance Officer
Ms. Atkinson has served as Chief Finance Officer of the Company since January 2001 after Starlight International Limited acquired its shares. Ms Atkinson is a licensed public accountant.
Rick Bond – Vice President, sales and marketing
Mr. Bond joined the company in January 2007 and is responsible for sales and marketing in the USA operation. Mr. Bond held high level of sales executive positions in the consumer electronics industry prior to joining the Company.
Yu Wing Kin – Vice President, Administration, Hong Kong
Mr. Kin has served as Vice President of Administration of Cosmo Hong Kong since joining the Company in August 1978.
Jacky Lau – Director
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.
Anthony Lau – Director
Mr. Anthony Lau was appointed in September 2006 and has been a director of Starlight International since 1987.
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.
Family Relationships
Mr. Philip Lau, Mr. Jacky Lau, Mr. Anthony Lau and Ms Carol Atkinson are siblings. Peter Horak is the brother of Jeff Horak.
Code of Ethics
Our Board of Directors has not yet adopted a formal Code of Ethics and Business Conduct that applies to our Chief Executive Officer and Chief Financial Officer, as well as to our directors, officers and employees. Once adopted, a copy of our Code of Ethics will be filed as an exhibit to an amendment to this registration statement or filed as part our future filings with the SEC.
Compliance with Section 16(A) of the Exchange Act.
To our knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that during the year ended March 31, 2008, its officers, directors and 10% shareholders complied with all Section 16(a) filing requirements.
Table of Contents
Item 11. Executive Compensation
Compensation of Directors
The following table sets forth with respect to the named directors, compensation information inclusive of equity awards and payments made in the fiscal year ended March 31, 2008.
Director Compensation (1)
Name (a) | | Fees Earned or Paid in Cash ($) (b) | | | Stock Awards ($) (c) | | | Option Awards ($) (d)(1) | | | Non-Equity Incentive Plan Compensation ($) (e) | | | Change in Pension Value and Nonqualified Deferred Compensation Earnings (f) | | | All Other Compensation ($) (g) | | | Total ($) (h) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) As permitted under the rules promulgated by the Securities and Exchange Commission, this table omits columns that are not applicable.
Board Directors generally receive meeting attendance fees of $300. However, each such director waived his/her rights to receive such fees during fiscal 2008. Annual retainers are not currently provided to directors; however, such retainers may be re-instituted in the future.
Executive Compensation
The following table sets forth certain compensation information for the fiscal years ended March 31, 2007, 2006 and 2005 with regard to (i) Peter Horak, our Chief Executive Officer, and to each of the four most highly compensated executive officers of Cosmo for fiscal 2007, 2006 and 2005:
Summary Compensation Table
| Name & Principal Position | | Year | | Salary ($) | | | Bonus ($) (5) | | | Stock Awards($) (5) | | | Option Awards ($) | | | Non-Equity Incentive Plan Compensation ($) | | | Change in Pension Value and Non-Qualified Deferred Compensation Earnings ($) | | | All Other Compensation ($) (1) | | | Total ($) | |
| Peter Horak | | 2008 | | | 99,324 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11,370 | | | | 110,694 | |
| CEO and Director (2) | | 2007 | | | 175.800 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 13,600 | | | | 194,.400 | |
| | | 2006 | | | 138,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3.000 | | | | 141,000 | |
| Jeff Horak | | 2008 | | | 131,063 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 12,671 | | | | 143,734 | |
| Vice President - Canada | | 2007 | | | 175,800 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9,493 | | | | 185,293 | |
| | | 2006 | | | 138.000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 22,000 | | | | 160,000 | |
| Rick Bond | | 2008 | | | 100.000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 159,250- | | | | 259,250 | |
| Vice President - USA | | 2007 | | | 25,000 | (2) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25,000— | |
| | | 2006 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Yu Wing King | | 2008 | | | 43,524 | | | | | | | | — | | | | — | | | | — | | | | — | | | | 2,418 | | | | 45,942 | |
| Vice President – Hong Kong | | 2007 | | | 42,832 | | | | 14,318 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 63,150 | |
| | | 2006 | | | 47,114 | | | | 4,017 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 51,131 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| E. J. Colin | | 2008 | | | 67,959 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 7,511 | | | | 75,470 | |
| National Sales Manager - Canada | | 2007 | | | 92,300 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,800 | | | | 98,100 | |
| | | 2006 | | | 64,200 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 12,600 | | | | 76,800 | |
| (1) | Includes automobile expense allowances and other employee benefits |
| (2) | Salary commenced on January 1, 2007 |
Table of Contents
Employment Agreements
The Company signed no new employment agreements during fiscal 2008 and signed two employment agreements with two executive officers during fiscal 2007.
OPTION GRANTS IN FISCAL 2007 (1)
The following table set forth information concerning each grant of an award made to a named executive officer in the last completed fiscal year under any plan, including awards that subsequently have been transferred.
GRANTS OF PLAN-BASED AWARDS
| | | | | | Estimated Future Payouts Under Non- Equity Incentive Plan Awards | | | Estimated Future Payouts Under Equity Incentive Plan Awards | | | All Other Stock Awards: Number of Shares of Stocks or | | | All Other Option Awards: Number of Securities Underlying | | | Exercise or Base Price of | | | Grant Date Fair Value of Stock | |
Name (a) | | Grant Date (b) | | | Threshold ($) (c) | | | Target ($) (d) | | | Maximum ($) (e) | | | Threshold ($) (f) | | | Target ($) (g) | | | Maximum ($) (h) | | | Units (#) (i) | | | Options (#) (j) | | | Option Awards ($/Sh) k | | | and Option Awards l | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) As permitted under the rules promulgated by the Securities and Exchange Commission, this table omits columns that are not applicable.
Outstanding Equity Awards At Fiscal Year-End (1)
The following table sets forth information for the named executive officers regarding the number of shares subject to both exercisable and unexercisable stock options, as well as the exercise prices and expiration dates thereof, as of March 31, 2007.
| | | Option Awards | | | Stock Awards | |
| Name | | Number of Securities Underlying Unexercised Options (#) Exercisable | | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | | Option Exercise Price ($) | | | Option Expiration Date | | | Number of Shares or Units of Stock That Have Not Vested (#) | | | Market Value of Shares or Units of Stock That Have Not Vested ($) | | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) As permitted under the rules promulgated by the Securities and Exchange Commission, this table omits columns that are not applicable.
Long-term Compensation – Stock Option Grants and 401K Plan
The Company does not have any stock option plan or 401K plan as long-term compensation.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The following table sets forth the name, address, number of shares beneficially owned, and the percentage of the Registrant’s total outstanding common stock shares owned by: (i) each of the Registrant’s Officers and Directors; (ii) the Registrant’s Officers and Directors as a group; and (iii) other shareholders of 5% or more of the Registrant’s total outstanding common stock shares. The percentages have been calculated by taking into account all Shares owned on the record date as well as all such Shares with respect to which such person has the right to acquire beneficial ownership at such date or within 60 days thereafter. Unless otherwise indicated, all persons listed below have sole voting and sole investment power over the Shares owned. Unless otherwise provided, each person's address is c/o Cosmo Communications Corporation, Unit 2 – 55 Travail Road, Markham, Ontario, Canada.
| Title of Class | | Name and Address of Beneficial Owner | | Amount and Nature of Beneficial Ownership | | | Percent of Class | |
| | | | | | | | | |
| Common Stock | | Philip Lau Chairman and President | | | — | | | | — | |
| Common Stock | | Peter Horak Chief Executive Officer and Director | | | 257,500 | | | | * | |
| Common Stock | | Carol Atkinson Chief Financial Officer | | | — | | | | — | |
| Common Stock | | Rick Bond Vice President – sales and marketing – USA operation | | | — | | | | — | |
| Common Stock | | Yu Wing King Vice President, Hong Kong operation | | | — | | | | — | |
| Common Stock | | Jacky Lau Director | | | — | | | | — | |
| Common Stock | | Jeff Horak Vice President –Sales and Marketing - Canada Operations | | | — | | | | — | |
| Common Stock | | Starlight International, 5/F, 232 Aberdeen Road Hong Kong | | | 37,948,644 | | | | 93.8 | % |
| | | | | | | | | | | |
| Common Stock | | All Officers and Directors, as a Group | | | 257,500 | | | | * | |
* Less then one percent.
Equity Compensation Plan Information
The Company does not have any stock option plan or 401K plan as long-term compensation.
Item 13. Certain Relationships and Related Transactions
During the year ended March 31, 2008, we purchased $27,532,352 (2007 - $46,377,415) of goods from our parent company, Starlight and received $56,648 (2007 - $29,014) in commissions.
Item 14. Principal Accountant Fees and Services
The following is a summary of the fees billed to the Company by DNTW Chartered Accountants, LLP, Deloitte & Touche LLP and Chan & Watt Company for professional services rendered to our company for the fiscal years ended March 31, 2008 and 2007:
| | | 2008 | | | 2007 | |
| 1. Audit Fees (a) | | $ | 37,500 | | | $ | 29,000 | |
| 2. Audit Related Fees | | | - | | | | 4,498 | |
| 3. Tax Fees (b) | | | 29,315 | | | | 59,000 | |
| 4. Total Fees | | | 66,815 | | | | 92,498 | |
| (a) | Consists of fees billed for professional services rendered for the audit of the Company's consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports. |
| (b) | Consists primarily of fees paid for tax compliance and tax planning services. This category includes services regarding tax return assistance, assistance with tax return filings in certain foreign jurisdictions, assistance with tax audits and appeals, and general U.S. and foreign tax advice. |
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm
The Company currently does not have a designated Audit Committee, and accordingly, the Company's Board of Directors' policy is to pre-approve all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Company's Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.
Table of Contents
Item 15. Exhibits, Financial Statement Schedules.
Consolidated Financial Statements
See Index to Consolidated Financial Statements on page 28 of this report.
Financial Statement Schedule
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COSMO COMMUNICATIONS CORPORATION
| | Balance at Beginning of Year | | | Additions (Reductions) Charged to Costs and Expenses | | | Deductions | | | Balance at End of Period | |
| Year ended March 31, 2008 | | | | | | | | | | | | |
| Deducted from asset account: | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 6,520 | | | $ | 30,323 | | | $ | 10,916. | | | $ | 25,927 | |
| Sales return and allowance reserve | | | 381,270 | | | | 1,359,375 | | | | 1,602,207 | | | | 138,438 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 387,790, | | | $ | 1,389,698. | | | $ | 1,613,123 | | | $ | 164,365. | |
| | | | | | | | | | | | | | | | | |
| Year ended March 31, 2007 | | | | | | | | | | | | | | | | |
| Deducted from asset account: | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 14,401 | | | $ | (18,387 | ) | | $ | (10,867 | ) | | $ | 6,520 | |
| Sales return and allowance reserve | | | 245,770 | | | | 2,992,413 | | | | 2,856,913 | | | | 381,270 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 259,810 | | | $ | 2,974,026 | | | $ | 2,846,046 | | | $ | 387,790 | |
| | | | | | | | | | | | | | | | | |
| Year ended March 31, 2006 | | | | | | | | | | | | | | | | |
| Deducted from asset account: | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 4,401 | | | $ | 10,855 | | | $ | 1,216 | | | $ | 14,040 | |
| Sales return and allowance reserve | | | 81,017 | | | | 3,756,254 | | | | 3,591,501 | | | | 245,770 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 85,418 | | | $ | 3,767,109 | | | $ | 3,592,717 | | | $ | 259,810 | |
Other financial statement schedules have not been presented, as they are not applicable.
Exhibits
| Exhibit | | |
| Number | | Description of Document |
| | | |
| 3.1 | | Articles of Incorporation as amended + |
| | | |
| 3.2 | | Registrant's Bylaws ++ |
| | | |
| 16.1 | | Letter on Change in Accountant +++ |
| | | |
| 21.1 | | List of Subsidiaries of Cosmo Communications Corporation ++++ |
| | | |
| 31.1 | | Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Peter Horak * |
| | | |
| 31.2 | | Certification pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Carol Atkinson * |
| | | |
| 32.1 | | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * |
| | | |
| 32.2 | | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * |
| | | |
| + | Incorporated by reference to our Annual Report on Form 10-K for the year ended March 31, 1992, as amended. |
| ++ | Incorporated by reference to our Registration Statement (File No. 2-83088). |
| +++ | Incorporated by reference to our Current Report on Form 8-K filed with the SEC on September 28, 2005. |
| ++++ | Incorporated by reference to our Annual Report on Form 10-K for the year ended March 31, 2006 filed with the SEC on August 8, 2006. |
Table of Contents
Pursuant to the requirements of the Section 13 or 15(d), as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Markham, Ontario, Canada on June 30, 2008.
|
| | | |
| By: | /s/ Peter Horak | |
| Peter Horak |
| Chief Executive Officer (Principal Executive Officer) |
| | | |
| By: | /s/ Carol Atkinson | |
|
| Chief Executive Officer (Principal Financial Officer and Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed by the following persons in the capacities and on the dates indicated:
| Name | | Title | | Date |
| | | | | |
| /s/ PETER HORAK | | Chief Executive Officer and | | June 11, 2009 |
| Peter Horak | | Director (Principal Executive Officer) | | |
| | | | | |
/s/ CAROL ATKINSON | | Chief Financial Officer and | | June 11, 2009 |
| Carol Atkinson | | Principal Financial Officer and Principal Accounting Officer | | |
| | | | | |
| /s/ JACKY LAU | | Director | | June 11, 2009 |
| Jacky Lau | | | | |
