UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-11968
COSMO COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 59-2268005
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Unit 2 - 55 Travail Road, Markham, Ontario, Canada
(Address of principal executive offices)
Registrant's telephone number including area code: (905) 209-0488
Former name, former address, and former fiscal year, if changed since
last report.
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) and has
been subject to such filing requirements for the past 90 days.
Yes __x__ No ___
29,104,000 shares of the issuer's Common Stock were outstanding as of
the latest practicable date June 30,2004
PART 1 - FINANCIAL INFORMATION
Item I. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Cosmo Communications Corporation
We have reviewed the accompanying consolidated balance sheets of
Cosmo Communications Corporation and Subsidiaries as of June 30, 2004 and
2003, and the related consolidated statements of operations and statements
of cash flows for the three-month periods then ended. These interim
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the consolidated financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with United States generally accepted accounting
principles.
SF Partnership, LLP
Toronto, Ontario
October 12, 2004
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June March
30, 2004 31, 2004
$ $
(in '000s) (in '000s)
(unaudited) (audited)
CURRENT ASSETS
Cash and cash equivalents 687 770
Accounts receivable,(note 2) 5,719 4,128
Inventories 2,693 2,534
Prepaid and sundry receivable 18 3
_________ ________
Total current assets 9,117 7,435
_________ ________
PROPERTY AND EQUIPMENT, net 85 91
DEFERRED CHARGES,NET OF AMORTIZATION 18 20
DEFERRED TAXES 127 126
___________ __________
TOTAL 9,347 7,672
_________ _________
See notes to unaudited condensed consolidated financial statements
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
June March
30, 2004_ 31, 2004
$ $
(in 000's) (in 000's)
(unaudited) (audited)
CURRENT LIABILITIES
Accounts payable and accrued expenses 1,197 685
Income taxes payable 47 47
Accounts payable to parent company 5,501 4,228
(note 3)
Loan from parent company (note 4) 1,547 1,525
_______ _______
Total current liabilities 8,292 6,485
STOCKHOLDERS' EQUITY
Common Stock 1,571 1,571
Treasury stock (116) (116)
Additional paid-in capital 26,273 26,273
Accumulated deficit (25,533) (25,506)
Accumulated other comprehensive loss (1,140) (1,035)
_________ ________
Total stockholders' deficiency 1,055 1,187
TOTAL 9,347 7,672
_________ ________
See notes to unaudited condensed consolidated financial statements
COSMO COMMUNCIATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
JUNE 30 JUNE 30
2004 2003
(In 000's) (In 000's)
(Unaudited) (unaudited)
Sales $ 7,845 $ 10,156
Cost of Sales 7,322 9,850
_______ _______
Gross Margin 523 306
Commission income 272 264
Exchange gain 17 24
_______ _______
Total operating income 812 594
Operating expenses:
Selling Expenses 336 250
General and Administrative 459 282
Amortization 8 2
_______ _______
Total operating expenses 803 534
Income from operation 9 60
Interest expenses ( 36) (38)
_______ ________
NET INCOME (LOSS) (27) 22
_______ ________
INCOME (loss) PER SHARE - -
OUTSTANDING (AVERAGE) 29,104,000 29,104,000
See notes to unaudited condensed consolidated financial statements
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
2004 2003
(in 000's) (in 000's)
(Unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ ( 27) $ 22
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Depreciation & amortization 6 2
Interest accrued 23
(Increase) Decrease in accounts receivable,net (1,592) (2,016)
(Increase) Decrease in inventories ( 159) ( 29)
(Increase) Decrease in future tax 2
(Increase) Decrease in others ( 15) 36
Increase (Decrease) in accounts payable, trade 515 927
and services
Translation adjustment ( 108) ( 183)
Net cash used in operating activities (1,355) (1,241)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property & equipment - ( 1)
Net cash used in investing activities - ( 1)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in due to parent company 1,272 1247
Net increase in loan due parent company - 21
Net cash provided by financing activities 1,272 1,268
Increase (Decrease) in cash and cash equivalents ( 83) 26
Cash and cash equivalents at the beginning of the 770 815
period
Cash and cash equivalents at the end of the period $ 687 $ 841
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ 13 $ 1
See notes to unaudited condensed consolidated financial statements
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
1. SIGNIFICANT ACCOUNTING POLICIES:
a) Principles of Consolidation
The Company includes, in consolidation, its wholly owed
Subsidiaries, Cosmo Communications Canada Corporation and
Cosmo Communications (HK) Limited. All signiificant inter-
Company transactions and balances have been eliminated upon
Consolidation.
b) Inventories
Inventories are stated at the lower of cost (first-in, first
Out) or market.
c) Equipment
Equipment is stated at cost less accumulated Depreciation.
Depreciation, based on the estimated useful lives of the
Assets, is provided using the undernoted annual rates and
Methods:
Furniture and fixtures 20% Declining balance
Office equipment 20% Declining balance
Computer equipment 25% Declining balance
Warehouse equipment 20% Declining balance
Leasehold improvements 5 years Straight-line
d) Deferred charges
Deferred charges consist of costs of the financing and reorganization of
the Company and are amortized over 5 years.
e) Foreign Translation Adjustment
The accounts of the foreign subsidiaries were translated into
US dollars in accordance with the provisions of Financial
Accounting Standards Board Statement No. 52 ("SFAS").
Management has determined that the Hong Kong dollar is the
functional currency of the Hong Kong 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 US dollars. In accordance
with the provisions of the SFAS 52, transactions 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
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 fro the relevant periods.
f) Revenue Recognition
Sales are recognized upon shipment of goods as that is the
point at which title passes to the customer, net of estimated
sales returns. Revenue is recognized if persuasive evidence of
an agreement exists, the sales price is fixed or determinable,
and collectibility is reasonably assured.
g) Concentration of Credit Risks
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.
h) Fair Value of Financial Instruments
The Company's financial instruments include cash and cash
equivalents, receivables, payables, debt and credit facilities.
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 of the Company could realize in a
current market exchange. At June 30, 2004 and 2003, the
carrying amounts of cash, accounts receivable, accounts payable
and accrued charges, and loans payable approximate their fair
values due to the short-term maturities of these instruments.
i) Use of Estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles in
the United States of America requires management to make
estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from these amounts.
j) 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
statements 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 applicable to the periods
in which the differences are expected to affect taxable income.
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 r refundable for the period increased or decreased by
the change in deferred tax assets and liabilities during the
period.
k) Earnings Per Share
Basic earnings per share is computed based on the average
number of common shares outstanding and diluted gain per share
is computed based on the average number of common and
potential common shares outstanding. As of each period ended
there were no dilutive common equivalent shares.
2 Accounts Receivable
The activity for the allowance for doubtful accounts is as
follows for the three months ended June 30, 2004 and 2003:
The Company carries accounts receivable at the amounts it
deems to be collectible. Accordingly, the Company provides
allowance for accounts receivable it deems to be uncollectible
based on management's best estimates. Recoveries are
recognized in the period they are received. The ultimate
amount of accounts receivable that become uncollectible
could differ from those estimated.
3 Accounts Payable to Parent Company
As of June 30, 2004, the Company owed approximately $7,048,000
($5,938,000 in June 30, 2003) to the parent company ("Starlight")
the principal shareholders of the Company. Of this amount
$5,501,000 was owed in the form of trade payable ($4,479,000
in June 30, 2003) and the remainder was in the form of a loan.
(note 4)
4. Loan from Parent Company
The loan from Starlight bears interest at Hong Kong prime
Rate plus 1% and is payable on demand. Interest accrued as
Of June 30, 2004 was $386,000 ($248,000 in June 2003).
5. RELATED PARTY TRANSACTIONS
Apart from those as disclosed in note 4, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The following is management's discussion and analysis of certain
significant factors, which have affected the Company's financial
condition, and results of operation during the period included in the
accompanying condensed consolidated financial statements.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
This quarterly report may contain forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks could differ
materially from these forward-looking statements as a result of
such risks and uncertainties, including, among others, general
economic conditions, governmental regulation and competitive factors,
and, more specially, interest rate levels availability of financing,
consumer confidence and preferences, the effectiveness of the Company's
competitors, and costs of materials and labor. In light of these risks
and uncertainties, there can be no assurance that the forward-looking
information contained in this quarterly report will in fact transpire.
RESULTS OF OPERATIONS
NET SALES
Sales in this quarter in 2004 decreased by $2,311,000 or 23% compared
to the corresponding period in 2003. The difference reflected the
way the Company's customers transacted in sales. In the previous
corresponding period, the Company sold directly to the Customers.
In this quarter, while business level was maintained at the same level,
the Company acted as middleman between the customers and the makers
of the products. Income was reported as commission which showed a
gain of 3% over the same period in 2003.
COST OF SALES AND GROSS MARGIN
Gross margin as a percentage of sales was approximately 7% in this
quarter as compared to 3% for the same period in 2003. The change
in cost of sales and gross margin in the two periods in comparison
reflected the change in transacting sales explained in the preceding
paragraph.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses in this quarter increased
by 49% Some of the increases were seasonal in nature. As a standard
industry practice, the Company provided promotional and discount
allowances to major customers. It also incurred extra freight costs
in order to make shipment deadlines. Other expenses represent
permanent overhead increases, in payment of rent for additional
warehouse and storage facilities and additional staff and a moderate
salary increase
INTEREST EXPENSES
The Company accrued interest at 6.125% p.a. on the loan advanced by the
parent company. Other interest expenses were charged by banks in
discounting letters of credit of sales. Interest expenses in this
quarter was similar to the corresponding period in 2003.
NET EARNINGS
Net earnings in this quarter was a loss of $27,000 compared with a net
earnings of $22,000 in the corresponding period in 2003. The change was
attributable to higher operating costs despite an improvement in
gross margin on sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital in this quarter was $953,000,
and was about the same level as at March 31, 2004. The ratio
of current assets to current liabilities was 1.11 to 1, as compared to
1.16 to 1 March 31, 2004. The Company had sufficient working capital
for the three months ended June 30, 2004.
Majority of the Company's working capital was provided by the parent
company in the form of trade payable. Management believes
that the parent company will continue to provide financing at its
discretion. The Company expects to meet its working capital
requirements throughout 2004.
FINANCIAL AND MANAGEMENT PLANS
The Company's business operates in a highly competitive industry.
The Company's overall business strategy involves identifying products
that consumers will accept without the brand name recognition. In this
strategy, the Company partnered with its major customers to introduce
private labels and designs in selective consumer electronic products.
This strategy seems to work in television, DVD and CD products.
The Company is constantly evaluating the appropriate mix of products
to improve gross margin performance. The recent expansion of the
product returns handling center has provided potential growth in
revenue in the future.
The Company also plans to expand customer base by seeking new sales
outside Canada.
The Company's top priority is improving stockholder value and will
actively identify opportunities to improve performance.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by the
undersigned - thereunto duly authorized.
COSMO COMMUNICATIONS CORPORATION
Date: September 30, 2004
/s/Philip Lau
Chairman of the Board
/s/Peter Horak
President, Cosmo Communications Corporation
EXHIBIT 1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Philip Lau, certify that:
1. I have reviewed this QUARTERLY report on Form 10-q of Cosmo
Communications Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Philip Lau
Philip Lau
Chairman and President
Date: September 30, 2004
EXHIBIT 2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Peter Horak, certify that:
I have reviewed this report on Form 10-q of Cosmo Communications
Corporation;
Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
reports;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
and;
c) disclosed in this report any change in the registrants
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting;
The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
The registrant's other certifying officers and I have indicated in this
Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Peter Horak
Peter Horak
Chief Executive Officer
Date: September 30, 2004