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 September 30, 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 No X
2,642,000 shares of the issuer's Common Stock were outstanding as of the
latest practicable date September 30, 1998.
INDEX
Registrant's Representations..........................................3
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997..........................4-5
Condensed Consolidated Statements of Operations
for the three months ended September 30,
1998 and 1997.....................................................6
Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1998 and 1997..........................7
Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 1998 and 1997.................8
Notes to Condensed Consolidated
Financial Statements..............................................9
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................10-12
Signature.............................................................13
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 September 30, 1998and the results
of its operations and its cash flows for the nine months then ended.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
September 30, December 31
1998 1997
CURRENT ASSETS
Cash and cash equivalents $ 334,000 $ 85,000
Receivables-
Trade, less allowance for doubtful
accounts of $ 42,000 at September 30,
1998and $ 134,000 at December
31, 1997. 3,042,000 3,068,000
Inventories 2,909,000 2,901,000
Other 118,000 215,000
Total current assets 6,403,000 6,269,000
PROPERTY AND EQUIPMENT, at cost 3,433,000 3,429,000
Less - Accumulated depreciation (2,146,000) (2,057,000)
PROPERTY AND EQUIPMENT, net 1,287,000 1,372,000
OTHER ASSETS 236,000 299,000
TOTAL $ 7,926,000 $ 7,940,000
See notes to condensed consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
September 30, December 31,
1998 1997
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,126,000 $ 1,027,000
Credit facilities 4,377,000 5,011,000
Due to principal stockholder 625,000 901,000
Other 58,000 210,000
Total current liabilities 7,186,000 7,149,000
LONG-TERM DEBT 1,323,000 1,323,000
Total liabilities 8,509,000 8,472,000
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 and 2,642,000 shares issued and
outstanding at September 30, 1998
and December 31, 1997, respectively. 133,000 133,000
Additional paid-in capital 25,410,000 25,410,000
Accumulated deficit (24,288,000) (24,329,000)
Cumulative translation adjustment (1,838,000) (1,746,000)
TOTAL STOCKHOLDERS' EQUITY (583,000) ( 532,000)
TOTAL $ 7,926,000 $ 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 SEPTEMBER 30, 1998 AND 1997
(Unaudited)
September,30 September 30,
1998 1997
SALES $ 5,111,000 $ 3,838,000
COST OF SALES 4,010,000 2,797,000
Gross Margin 1,101,000 1,041,000
SELLING EXPENSES 500,000 535,000
GENERAL AND ADMINISTRATIVE EXPENSES 245,000 445,000
Income / (loss) from operations 356,000 61,000
OTHER INCOME / (EXPENSE):
Interest expense (172,000) (127,000)
Interest income
Other, net 112,000 0
Total other expense, net (60,000) (127,000)
Net income / (loss) $ 296,000 $ (66,000)
INCOME / (LOSS) PER SHARE 0.11 (0.02)
SHARES OUTSTANDING (AVERAGE) 2,642,000 2,642,000
See notes to condensed consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
September 30, September 30,
1998 1997
SALES $ 11,869,000 $ 11,772,000
COST OF SALES 9,418,000 8,506,000
Gross Margin 2,451,000 3,266,000
SELLING EXPENSES 1,266,000 1,708,000
GENERAL AND ADMINISTRATIVE EXPENSES 713,000 1,218,000
Income (Loss) from operations 472,000 340,000
Interest expense (545,000) (471,000)
Interest income
Other, net 114,000 66,000
Total other expense, net (431,000) (405,000)
Net income / (loss) $ 41,000 $ (65,000)
INCOME / (LOSS) PER SHARE 0.02 (0.01)
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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 41,000 $ (65,000)
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation & Amortization 139,000 86,000
Beginning Retained Earnings "Cosmo Telecom" 31,000
(Increase) Decrease in accounts receivable,
net 26,000 (268,000)
(Increase) Decrease in inventories,
prepaid expenses and other assets 102,000 (1,076,000)
Increase (Decrease) in accounts payable,
accrued expenses and other current
liabilities 947,000 121,000
Translation Adjustment (92,000) 0
Net cash provided (used) by
operating activities 1,163,000 (1,171,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (4,000)
Disposal Property Equipment 0 12,000
Net cash used by investing activities (4,000) 12,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in credit facilities
and long-term debt repayments (634,000) 1,083,000
Net increase in due to principal stockholder (276,000) 0
Net cash provided (used) by financing
activities (910,000) 1,083,000
Decrease in cash and cash equivalents 249,000 (76,000)
Cash and cash equivalents at the beginning
of the period 85,000 89,000
Cash and cash equivalents at the end of the
period $ 334,000 $ 13,000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for interest $ 545,000 $ 471,000
See notes to condensed consolidated financial statements.
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 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 September 30, 1998 and 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 ($783,000) at September 30, 1998, a
reduction of approximately $ 97,000 from December 31, 1997. The ratio of
current assets to current liabilities at September 30, 1998 was .89 to 1,
as compared to .88 to 1 at December 31, 1997. The Company has met its
working capital requirements for the nine months ended September 30, 1998
primarily from a combination of internally generated funds and increase
in borrowings under the credit facility
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. As of September 30, 1998 and December 31,1997
borrowings outstanding under this credit facility amounted to approximately
$ 2,679,000 and $3,160,000, respectively, and are classified as current
liabilities.
This credit facility with Congress contains certain restrictive covenants.
The minimum net worth requirements were not met by the Company as of
September 30,1998 and December 31,1997. However, the lender has waived the
minimum net worth requirements through December 31, 1998. The Company may
not meet this covenant during 1998. Management anticipates that this
credit facility may be renegotiated or extended in 1998.
The Company during 1996, obtained an additional credit facility from a
financial institution in the amount of $750,000.00, 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 the prime rate plus 1%. As of September 30, 198
and December 31, 1997 borrowings outstanding under this credit facility
were $750,000. In addition to this credit facility the Company maintains
from the same institution a note payable in the amount of $1,348,000. The
note bears interest at prime plus 1% and expires on December 2001.
The Company maintains an additional line of credit from a financial
institution in the amount of $800,000 due on demand. Interest is charged
on outstanding borrowings at prime plus 2%. As of December 31, 1997 and
September 30,1998 borrowings under this line of credit amounted to $679,000
and $749,000 respectively. This line of credit is secured by a subsidiary's
account 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 borrowings at prime plus 2.5%, which deposits were
used to pay down the loan during 1996. At September 30, 1998 and
December 31, 1997, outstanding borrowings under this line amounted
to $262,000 and $302,000, respectively. As of September 30, 1998, there
were no open letters of credit under this line.The Company has an agreement
with the lender to pay off the loan by December 1998 at the rate of 10%.
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 September 30, 1998 and
December 31, 1997 was $(583,000) and $(532,000), respectively. During the
third quarter of 1998, management continued the intensification in the
sales of the new line of Audio Equipment under the name of "Memorex", which
started in the second quarter of 1998. As a result of this, the third
quarter shows a profit of $296,000 , which is a notably improvement as
compared to the loss sustained in the same period of last year. However,
the company's ability to successfully implement its plan to reduce losses
is dependent upon a number of factors beyond its control. These 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 or
financial condition will improve during fiscal year 1998.
RESULTS OF OPERATIONS
SALES
Sales for the third quarter of 1998 increased by approximately $1,273,000
or 33% compared to the corresponding period in 1997. Sales for the nine
months ended September 30, 1998 increased by approximately $97,000 as
compared to the corresponding period in 1997. The total increase in sales
was due primarily to the impact produced for the sales of "Memorex"
products which overcame the reduction experienced in domestic sales to
Walmart in the United States.
COST OF SALES AND GROSS MARGIN
Gross margin as a percentage of sales was approximately 21.5% in the third
quarter of 1998 as compared to approximately 27.1% for the same period in
1997. Gross margin as a percentage of sales approximated 20.6% for the nine
months ended September 30,1998 as compared to 27.7% for the corresponding
period in 1997. Even though the volume in sales increased as explained
before in the "Sales" paragraph, there was a reduction in the percentage
of gross margin as a result of the reduction in sales to Walmart, which
has a higher margin than the Memorex products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the third quarter of 1998
decreased by $235,000 as compared to the corresponding period in 1997.
Selling, general and administrative expenses during the nine months ended
September 30, 1998 decreased by $947,000 as compared to the corresponding
period in 1997. This significant decrease on these expenses have been the
result of the effort of the Company in reducing the cost of its operation.
INTEREST EXPENSE AND OTHER COSTS
Interest expense and other costs increased by approximately $45,000 during
the third quarter of 1998 compared to the corresponding period in 1997.
Interest expense and other costs increased by approximately $74,000 during
the nine months ended September 30, 1998 as compared to the corresponding
period in 1997. This increase is primarily attributed to an increase in the
average balance of borrowings outstanding during the first nine months of
1998 compared to the same period in 1997. Other income shows this
quarter $112,000 which represents 1 1/2 % commission earned in the sales
of TV and VCR from Memorex.
NET LOSS AND INCOME
The Company had a net income of approximately $296,000 for the third quarter
ending September 30, 1998 compared to net loss of $ 66,000 for the same
period in 1997, During the nine months ended September 30, 1998, the
Company had a net income of approximately $41,000 as compared to net loss
of $65,000 during the corresponding period in 1997. The overall improvement
noted in the first nine months can be primarily attributed to the sales of
the "Memorex" products,
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: November 12, 1998
/s/ Amancio V. Suarez
Amancio V. Suarez
Chairman of the Board
Chief Financial Officer
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