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 March 31, 1998
( ) 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.)
16501 N.W. 16th Court, Miami, Florida 33169
(Address of principal executive offices)
Registrant's telephone number including area code: (305) 621-4227
Not applicable
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
2,642,000 shares of the issuer's Common Stock were outstanding as of the
latest practicable date March 31, 1998.
INDEX
Registrant's Representations...........................................3
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997.............................4-5
Condensed Consolidated Statements of Operations
for the three months ended March 31,
1998 and 1997..........................................................6
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1998..................................7
Notes to Condensed Consolidated
Financial Statements...................................................8
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................9-11
Signature.............................................................12
PART I - FINANCIAL INFORMATION
Item I. Financial Statements
The registrant represents that the Condensed Consolidated Financial
Statements furnished herein have been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with prior
years and that such Condensed Consolidated Financial Statements reflect,
in the opinion of the management of the Company, all adjustments (which
include only of normal recurring adjustments) necessary to present fairly
the consolidated financial position of Cosmo Communications Corporation and
its subsidiaries (the "Company"), as of March 31, 1998 and the results of
its operations and its cash flows for the three months then ended.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
March 31, December 31,
1998 1997
CURRENT ASSETS
Cash and cash equivalents $83,000 $ 85,000
Receivables-
Trade, less allowance for doubtful
accounts of $ 151,000 at March 31,
1998 and $ 134,000 at December
31, 1997. 2,756,000 3,068,000
Inventories 2,682,000 2,901,000
Other 90,000 215,000
Total current assets 5,611,000 6,269,000
PROPERTY AND EQUIPMENT, at cost 3,431,000 3,429,000
Less - Accumulated depreciation (2,090,000) (2,057,000)
PROPERTY AND EQUIPMENT, net 1,341,000 1,372,000
OTHER ASSETS 263,000 299,000
TOTAL $ 7,215,000 $ 7,940,000
See notes to condensed consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
March 31, December 31,
1998 1997
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,235,000 $ 1,027,000
Credit facilities 4,502,000 5,011,000
Due to principal stockholder 881,000 901,000
Other 46,000 210,000
Total current liabilities 6,664,000 7,149,000
LONG-TERM DEBT 1,303,000 1,323,000
Total liabilities 7,967,000 7,753,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible cumulative preferred stock,
$.01 par value; 30,000 shares authorized,
none issued.
Preferred stock, $.01 par value; 9,970,000
shares authorized, none issued.
Common stock, $.05 par value,
4,000,000 shares authorized,
2,642,000 shares issued and
outstanding at March 31, 1998
and December 31, 1997. 133,000 133,000
Additional paid-in capital 25,410,000 25,410,000
Accumulated deficit (24,663,000) (24,329,000)
Cumulative translation adjustment (1,632,000) (1,746,000)
TOTAL STOCKHOLDERS' EQUITY (752,000 ) (532,000)
TOTAL $ 7,215,000 $ 7,940,000
See notes to condensed consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
March 31, March 31,
1998 1997
SALES $ 3,109,000 $ 3,466,000
COST OF SALES 2,543,000 2,324,000
Gross Margin 566,000 1,142,000
SELLING EXPENSES 408,000 583,000
GENERAL AND ADMINISTRATIVE EXPENSES 292,000 426,000
Income / (loss) from operations (134,000) 133,000
OTHER INCOME / (EXPENSE):
Interest expense (202,000) (149,000)
Other, net 2,000 1,000
Total other expense, net (200,000) (148,000)
Net income / (loss) $ (334,000) $ (15,000)
INCOME / (LOSS) PER SHARE (.11) (.01)
SHARES OUTSTANDING (AVERAGE): 2,642,000 2,642,000
See notes to condensed consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ ( 334,000) $ (15,000)
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation & Amortization 49,000 48,000
Beginning Retained Earnings "Cosmo Telecom 31,000
(Increase) Decrease in accounts receivable, net 312,000 (410,000)
(Increase) Decrease in inventories, prepaid
expenses and other assets 364,000 (547,000)
(Decrease) Increase in accounts payable,
accrued expenses and other current
liabilities 44,000 292,000
Translation adjustment 114,000
Net cash used by operating activities 549,000 ( 592,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (2,000) (6,000)
Net cash used by investing activities (2,000) (6,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in credit facilities and
long-term debt repayments (529,000) 601,000
Net increase(decrease) in due to principal
stockholders (20,000)
Net cash provided (used)byfinancing activities (549,000) 601,000
Increase in cash and cash equivalents (2,000) 3,000
Cash and cash equivalents at the beginning of the
period 85,000 89,000
Cash and cash equivalents at the end of the period 83,000 $ 92,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 202,000 $ 138,000
See notes to condensed consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 and 1997
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES:
The accounting policies followed by quarterly financial reporting are the
same as those disclosed in Note 1 of the Notes to the Consolidated
Financial Statements included in the Company's report on Form 10K for the
fiscal year ended December 31, 1997.
2. INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventory at March 31, 1998 and December 31, 1997 consisted primarily of
finished goods.
3. INCOME /(LOSS)PER SHARE:
Income (loss) per common share is computed based upon the weighted average
number of common shares and dilutive common equivalent shares outstanding
for each period. As of March 31, 1998and December 31, 1997, common
equivalent shares include the dilutive effect of stock options using the
treasury stock method.
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 and uncertainties, certain of which
are beyond the Company's control. Actual results could differ materially
from these forward-looking statements as a result of such risks and
uncertainties , including, among others, general economic conditions,
governmental regulation and competitive factors, and, more specifically,
interest rate levels availability of financing, consumer confidence and
preferences, the effectiveness of the Company's competitors, and costs of
materials and labor. In light of these risks and uncertainties, there can
be no assurance that the forward-looking information contained in this
quarterly report will in fact transpire.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was approximately ($1,053,000) at March 31, 1998, a
reduction of approximately $173,000 from December 31, 1997. The ratio of
current assets to current liabilities at March 31, 1998 was .84 to 1, as
compared to .88 to 1 at December 31, 1997. The Company has met its working
capital requirements for the three months ended March 31, 1998 primarily
from internally generated funds and the use of cash and cash equivalents.
The Company utilizes a revolving credit facility with Congress Financial
Corporation ("Congress") providing for borrowings up to $7,500,000 which
expires on December 31, 1998. Maximum borrowings are tied by formula to
eligible accounts receivable and inventories. Interest is charged on
outstanding borrowings at prime plus 2.5%. This credit facility is secured
by all assets of the Company, including a second mortgage on the Company's
headquarters in the United States. As of March 31, 1998 and December 31,
1997, borrowings outstanding under this credit facility amounted to
approximately $ 2,580,000 and $3,089,000, respectively, and are classified
as current liabilties.
This credit facility with Congress contains certain restrictive covenants.
The minimum net worth requirements were not met by the Company as of
March 31, 1998 and December 31, 1997. However, the lender has waived the
minimum net worth requirements through December 31, 1998. Management
anticipates that this credit facility may be renegotiated or extended during
1998.
The Company has another credit facility from a financial institution in the
amount of $750,000 expiring on December 1,2001. This credit facility is
secured by a second mortgage on the Company's land and building in the
United States. Interest is charged on outstanding borrowings at prime
plus 1%. The company commenced borrowings under this line in 1997. As of
March 31, 1998 borrowings outstanding under this credit facility amounted
to $750,000. In addition to this credit facility the Company borrowed from
the same institution $1,520,000 that was used primarily to pay off the
second mortgage on the land and building to Congress and to pay off the
loan on the first mortgage to First Union, as well as to provide working
capital. The balance of the note on March 31, 1998 was $1,373,000.
The company has another credit line from a financial institution in the
amount of $800,000 due on demand. Interest is charged on oustanding
borrowings at prime plus 2%. As of March 31, 1998 borrowings under this line
of credit amounted to $799,000. This line of credit facility is secured by
a subsidiary's accounts receivable and inventory.
The Company, during 1992, obtained an additional credit facility from a
financial institution in the amount of $1,200,000. This facility was
collateralized by $300,000 in interest-bearing deposits and interest is
charged on outstanding borrowing at prime plus 2.5%, which funds were used
to pay down the loan during l996. At March 31,1998 and December 31, 1997
borrowings under this line amounted to $302,000.. As of March 31, 1998
there were no open letters of credit under this line.
Management believes that through existing credit facilities and the
continued commitment by the Company's principal stockholder to provide
additional financing at his discretion, the Company will be able to meet
its working capital requirements during 1998.
FINANCIAL AND MANAGEMENT PLANS
The Company's stockholders' equity at March 31, 1998 and December 31, 1997
was $(752,000) and $(532,000). During first quarter of 1998, management
continued to implement its plan to reduce the Company's losses. Beginning
in the second quarter of 1998 the Company will start selling the new line
of TVs and Audio equipment under the name of "Memorex" in the canadian
market .It is anticipated that the addition of this new line of products
will provide an improvement in the profitability of the Company. However,
the Company's ability to successfully implement its plan to reduce losses
is dependent upon a number of factors beyond its control. Theses factors
include the overall retail climate and competition, the success of new
products and sales efforts, and fluctuation in the supply and costs of
products sold. There can be no assurance that the Company's sales, gross
margins operating results or financial condition will improve during 1998.
RESULTS OF OPERATIONS
SALES
Sales for the first quarter of 1998 decreased by approximately $357,000 or
10% compared to the corresponding period in 1997. Sales decreased in part
due to decreased sales to Walmart, the Company's largest customer. Sales
to Walmart during the three months ended March 31, 1998 represented
approximately 12.7% of total sales as compared to 16.4% in the same period
for 1997.
COST OF SALES AND GROSS MARGIN
Gross margin as percentage of sales was approximately 18.2% in the first
quarter of 1998 as compared to approximately 33.0% for the same period in
1997. This decrease is attributed mainly to a distorsion produced by the
sales of cellular phones under the new "Cosmo Telecom" brand . This product
has only a gross margin between 2% and 3%. Also there was a decrease in
gross margin in the direct import sales from Hong Kong.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the first quarter of 1998
decreased by $309,000 as compared to the corresponding period in 1997. This
decrease has been the result of the effort of the Company in reducing the
cost of the its operation.
INTEREST EXPENSE AND OTHER COSTS
Interest expense and other costs increased by $52,000 during the three
months ended March 31, 1998 compared to the corresponding period in 1997.
This increase is primarily attributed to an overall increase in interest
expense resulting from an increase in average borrowings during the first
quarter of 1998 compared to the same period in 1997.
NET LOSS AND INCOME
The Company incurred a net loss of approximately $334,000 for the quarter
ending March 31, 1998 compared to net loss of $15,000 for the same period
in 1997. This reduction in the loss can primarily be attributed to a
reduction in sales and a decrease in gross margin for the explanations
given above.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned - thereunto duly authorized.
COSMO COMMUNICATIONS CORPORATION
Date: May 11, 1998
/s/ Amancio V. Suarez
Amancio V. Suarez
Chairman of the Board
Chief Financial Officer
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