SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 0-119698
COSMO COMMUNICATIONS CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-2268005
- ------------------------------- -----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
16501 N.W. 16TH COURT, MIAMI, FLORIDA 33169
-------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (305) 621-4227
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE
ACT:
COMMON STOCK, $.05 PAR VALUE
----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] [No]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K.
Yes [ ] No[X]
As of March 21, 1997, the market value of the registrant's Common Stock held by
nonaffiliates of the registrant was approximately $309,000 based on the closing
bid price of $ 0.25 for the Common Stock as reported on the OTC Bulletin Board
on such date.
DOCUMENTS INCORPORATED BY REFERENCE
None.
2
PART I
ITEM 1. BUSINESS
GENERAL
The Registrant, Cosmo Communications Corporation (the "Company"), imports,
markets and distributes in the United States, Canada and Latin America, consumer
electronic products, including digital alarm clocks, quartz alarm clocks, quartz
wall clocks, clock radios and combination products such as clock radio
telephones. The Company also imports, markets and distributes into Latin America
a full line of audio products, including personal cassette players, portable
stereos and music centers with and without compact disc players.
The Company's products are marketed principally under its own label to mass
merchandisers, drug store chains, other specialty chain stores and other
high-volume retailers. The Company's products are generally manufactured in
accordance with its specifications by subcontractors in a number of countries in
the Far East.
The Company's principal executive offices are located at 16501 N.W. 16th Court,
Miami, Florida 33169 and its telephone number at such location is (305)
621-4227.
On October 31, 1994, the Company effected a 1 for 5 reverse stock split.
Accordingly, certain related information herein has been retroactively effected,
as if the reverse stock split had occurred in the first period presented.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
Management believes that this annual report contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934,
including statements regarding, among other items, (i) the Company's growth
strategies, (ii) anticipated trends in the consumer electronics industry, and
(iii) the Company's ability to obtain and maintain adequate financing for its
operations. These forward-looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, certain of
which are beyond the Company's control. Actual results could differ materially
from these forward-looking statements as a result of such uncontrollable
factors, including, among others, general economic conditions, governmental
regulation and competitive factors, and, more specifically, interest rate
levels, availability of financing, consumer confidence and preferences, the
effectiveness of the Company's competitors, and costs of materials and labor. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this annual report will in fact
transpire.
3
FINANCIAL AND MANAGEMENT'S PLANS
During 1996, the Company experienced a continuation of a difficult retail
climate and increased competition. In addition, several large retailers in the
United States continued their corporate policies to reduce their inventory
levels. During 1997, management continued its plan to eliminate the Company's
losses. This plan includes an intensification of the Company's sales efforts
through the addition of new sales representatives and the introduction of new
products within existing product lines. The Company has also pursued new product
categories through increased sourcing activities in the Far East. It is
anticipated that the introduction of new product categories will assist the
Company in capturing new markets within the retail arena. The Company is also
introducing in 1997 a new line of product of cellular phone and accessories
components under the brand of "Cosmo Telecom".
Management believes that through its existing credit facilities and the
continued commitment by the Company's principal stockholder to provide
additional financing at his discretion, the Company will be able to meet it's
working capital requirements during 1997. The Company's ability to successfully
implement its plans to eliminate its losses is dependent upon a number of
factors beyond its control. These factors include the overall retail climate and
competition. There can be no assurance that the Company's sales, gross margins,
operating results or financial condition will improve in fiscal year 1997 (See
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations).
PRODUCTS
TIME DIVISION - The Company has a wide range of clocks including electronic
digital alarm clocks, quartz alarm clocks and quartz wall clocks. The Company
introduced its first electronic digital clock in 1977 and currently offers
approximately 40 models which retail at various prices ranging from
approximately $5 to $20. The Company's electronic digital clocks contain
micro-processors, printed circuit boards, light emitting diodes and ceramic
buzzers. These products were manufactured by subcontractors in Hong Kong and the
People's Republic of China who sometimes use components and materials supplied,
and assembling methods developed, by the Company. The Company offered a total of
approximately 85 models of quartz wall clocks in 1996, retailing from
approximately $5 to $40. The Company's wall clocks are manufactured by
subcontractors in Hong Kong, Taiwan, and the People's Republic of China. The
Company also sold approximately 20 models of battery operated quartz alarm
clocks during 1996, retailing from approximately $5 to $20. The Company's
battery operated quartz alarm clocks are manufactured by subcontractors in Hong
Kong and the People's Republic of China.
Sales of the entire Time Division accounted for approximately 53.0% of the
Company's sales in 1996, compared to approximately 59.2% and 66.5% in 1995 and
1994, respectively.
ELECTRONIC DIVISION - The Company introduced its first electronic digital clock
radio in 1982 and currently offers 13 models, with retail prices ranging from
approximately $10 to $30. The Company's electronic digital clock radios contain
audio components as well as components similar to those in its electronic
digital clocks. In 1996, most of the units were manufactured by subcontractors
in Hong Kong and the People's Republic of China who sometimes use components and
materials supplied by the Company. In the early 1990's, the Company began to
market a line of audio products in the Latin American market. Sales of the
entire Electronics
4
Division accounted for approximately 47.0% of the Company's sales in 1996,
compared to approximately 40.8% and 33.5% of sales in 1995 and 1994,
respectively.
MARKETING - The Company's marketing strategy is targeted at high volume
retailers with broad distribution networks such as mass merchandisers, drug and
other specialty chain stores, and other retailers. Because of economic
conditions, a number of past customers of the Company have filed for bankruptcy,
merged with other retailers, reorganized operations or have ceased to operate.
During 1996, sales to retailers became more difficult as a result of economic
conditions and fierce competition from other manufacturers and importers. The
Company is attempting to overcome these difficulties in 1997. The following
table illustrates the Company's primary marketing channels and representative
customers in 1996.
MASS MERCHANDISER DRUG STORE CHAINS SPECIALTY CHAINS
- ----------------- ----------------- ----------------
Wal-Mart (U.S. & Canada) American Drug AAFES
Target Genovese Canadian Tire
Fedco Fay's Costco
Kohl's Osco Drug Builders Square
Roses Stores Savon Drug
Meijer's Brooks
Dollar General
Hills
Fred Meyer
Ames Dept. Stores
L. Luria & Sons
The Company believes that its sales to high volume retailers depends upon its
ability to deliver a large volume of attractive and reliable items at prices
generally at or below those of its competitors.
Substantially all of the Company's domestic sales are generated by either the
Company's full-time sales staff or its approximately 20 independent sales
representatives. Approximately 60% of the Company's sales in 1996 were to
customers within the United States, with the remainder to customers in Canada,
Latin America and Europe. See Note 9 of "Notes to Consolidated Financial
Statements" for financial information about foreign and domestic operations.
Sales to the Company's four largest customers accounted for approximately 60.0%
of sales for 1996, with Wal-Mart (US & Canada) accounting for approximately 31%
of sales.
The Company's products are generally sold with a one year limited warranty on
labor and parts.
5
MANUFACTURING
Most of the Company's products are manufactured by subcontractors. Substantially
all of the subcontractors assemble products for the Company in accordance with
the Company's specifications. Subcontractors in Hong Kong, the Peoples Republic
of China and Taiwan assemble clocks, clock-radios and audio products. Several of
the subcontractors dedicate their entire production capacity to the Company's
orders. The Company performs quality control inspections on the premises of its
facilities and its subcontractors' facilities, and also inspects its various
products upon their arrival in the United States and Canada.
The Company uses microprocessors from Texas Instruments, Sanyo Semiconductor,
Hitachi, Ltd., Motorola Inc. and Phillips Hong Kong, Ltd. Various subcontractors
in the Far East produce printed circuit boards, light emitting diodes, audio
components, receivers, transmitters and internal antennas in accordance with
specifications of the Company.
All of the components and raw materials used by the Company are available from
several sources of supply and the Company does not anticipate that the loss of
any single supplier would have a material adverse effect on its business,
operations or financial condition.
PRODUCT DEVELOPMENT
During 1996, the Company introduced and marketed several new electronic digital
alarm clocks (LED and LCD), quartz alarm clocks, quartz wall clocks, clock
radios and audio products. During the years ended December 31, 1996, 1995, and
1994, the Company spent approximately $210,000 in 1996 and $225,000 in both 1995
and 1994 for new product design, engineering, tooling and testing.
COMPETITION
The consumer products industry in which the Company operates is characterized by
intense price competition, ease of entry and changing patterns of consumer
demand. Sales volume and profitability of particular consumer products can
change significantly within a relatively short period. Accordingly, the Company
is highly dependent on the ability of its management to anticipate and respond
quickly to changes in trends for its products. In response to such factors, the
Company has been required to change its emphasis on its products and product
lines.
The Company believes that important competitive factors necessary to compete
include price, quality and reliability of products, attractive packaging, speed
of delivery to customers and new or additional product features. A
well-recognized consumer brand name is also an important competitive factor
which the Company is able to provide in its product lines. The Company believes
that its future success will depend upon its ability to develop and manufacture
reliable products which incorporate developments in technology and satisfy
consumer tastes with respect to style and design and its ability to market such
products at competitive prices which compensate for the lack of strong consumer
name recognition.
The Company believes that, through its subcontractors, it is a significant
manufacturer of electronic digital clocks and competes with several companies,
including Westclox and Spartus Corporation. Major suppliers of electronic
digital clock radios include General Electric
6
Company, Panasonic Industrial Company, Sony Corporation, Sanyo Manufacturing
Corporation and Emerson Radio Corporation.
FOREIGN OPERATIONS
The Company has significant foreign operations. See Note 9 of "Notes to
Consolidated Financial Statements." The Company purchases finished products from
various suppliers in the Far East. The supply and cost of products and
components can be adversely affected by changes in foreign currency exchange
rates, increased import duties, loss of favorable tariff rates for products
produced in the countries in which the Company subcontracts the manufacture of
goods, imposition of import quotas, interruptions in sea or air transportation
and political or economic changes in countries from which components or products
are exported or into which they are imported. On occasion, in order to meet
unexpected levels of demand, the Company has utilized more costly air shipping
to fill orders promptly.
The Company will continue to subcontract a significant portion of its
manufacturing needs to subcontractors in the Peoples Republic of China, Hong
Kong and Taiwan. Any material change in the trade policies of the United States
or these countries might have an adverse effect on the Company's operations.
EMPLOYEES
On December 31, 1996, the Company had 44 full-time employees, including 29 in
the United States, 5 in Hong Kong and 10 in Canada. Of those employed in the
United States, 10 were engaged in manufacturing, distribution and service
operations and 19 were sales, administrative and executive personnel. Of the
Hong Kong employees, 1 was engaged in manufacturing, engineering, distribution
and service operations, and 4 were sales, administrative and executive
personnel. In Canada, 5 employees were engaged in manufacturing, distribution
and service operations and 5 were sales, administrative and executive personnel.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the executive
officers of the Company as of March 31, 1997:
NAME AGE POSITION
- ---- ------ ---------------
Amancio Victor Suarez .......... 60 Chairman of the Board of
Directors, Chief Executive
Officer and Chief Financial
Officer
Carlos Ortega .................. 52 President, Chief Operating
Officer and Director
Robert L. Scott................. 60 Vice President of Sales and
Marketing
Jose Bueno...................... 42 Vice President, International
Operations
7
Yu Wing Kin..................... 45 Vice President, Administration,
Far East
Mr. Suarez is a co-founder of the Company and served as its Chief Financial
Officer from its inception. On December 24, 1985, Mr. Suarez assumed the
position of Chief Executive Officer. Mr. Suarez is also involved in other
business ventures ,primarily in the real estate industry, which do not compete
with the Company.
Mr. Carlos Ortega, a Director and shareholder of the Company was appointed as
the new President and Chief Operating Officer in July 1996. Mr. Ortega has been
a director of the Company since December 1992, and was one of the founders and
principals of Cargil International Corporation, a company engaged in the
distribution of household products and appliances to Latin America.
Mr. Scott joined the Company in October 1990 as Vice President of Sales and
Marketing. From July of 1989 until October of 1990, Mr. Scott served as the
national sales manager of Cheyenne Lamps, a corporation engaged in the portable
lighting business. From May of 1988 until June of 1989, Mr. Scott served as Vice
President of Sales for Robeson, a company engaged in the kitchen appliance
business. Prior to that time, for more than eight years, Mr. Scott served as
Vice President of Sales of Spartus Corporation.
Mr. Bueno joined the Company in July 1988 as Vice President of International
Sales and Far East Operations. Mr. Bueno is responsible for marketing and
international operations in the Far East. Mr. Bueno is also responsible for
sales and marketing of all Cosmo products into the Latin American market. Before
joining the Company Mr. Bueno was employed by Johnson and Johnson as Divisional
Sales Manager, from 1985 through June 1988. Prior to that time, Mr. Bueno served
as Regional Sales Manager for Colgate Palmolive Company, from 1983 through 1985.
Mr. Kin has served as Vice President of Administration for the Far East since
joining the Company in August 1978.
ITEM 2. PROPERTIES
The Company's executive offices and principal domestic manufacturing warehouse
facilities are located in a 48,000 square feet building at 16501 N.W. 16th
Court, Miami, Florida. Both the land and building are owned by the Company
subject to mortgage indebtedness with an aggregate outstanding principal balance
at December 31, 1996 of approximately $318,000. In October 1989, a second
mortgage on this property was given to Congress Financial Corporation in the
amount of $850,000, which was paid off in December 1996 with proceeds from a new
mortgage loan obtained from Ocean Bank.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental to
its business most of which is adequately covered by insurance and none of which,
in the opinion of management, is expected to have a material adverse effect on
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
8
During the fourth quarter of fiscal 1996, the Company did not submit any matter
to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK. During 1996, the Company's common stock ("Common
Stock") was traded in the over-the-counter market under the NASDAQ symbol
"CSMO." There were approximately 458 record holders of the Common Stock as of
March 21,1997. The following table sets forth the high and low prices for the
Common Stock as reported for the periods indicated. These prices reflect
interdealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions. On March 5, 1996, the Common Stock
was delisted from the NASDAQ SmallCap Market as a result of the Company's
inability to meet the minimum $1.00 bid price or its alternative, as required
for continued listing on the NASDAQ SmallCap Market. On March 6, 1996, the
Common Stock was listed on the OTC Bulletin Board.
FISCAL PERIOD HIGH LOW
------------- ---- ---
1995 First Quarter................ 1-3/4 1
Second Quarter............... 1-1/2 7/8
Third Quarter................ 1-1/4 3/4
Fourth Quarter............... 1-3/16 1/2
1996 First Quarter................ 15/16 3/8
Second Quarter............... 5/8 1/4
Third Quarter................ 1/2 1/8
Fourth Quarter............... 3/8 1/8
DIVIDEND POLICY. It is the present policy of the Company's Board of Directors to
retain earnings. The Company has not declared any dividends in the past. Any
payment of cash dividends in the future will be dependent upon the financial
condition, capital requirements and earnings of the Company and other factors
which the Board of Directors may deem relevant. At the present time, the
financial condition of the Company and the credit facilities of the Company with
Congress Financial Corporation prevent the payment of dividends.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following data should be read in conjunction with the Company's Consolidated
Financial Statements included elsewhere herein and the notes thereto, and "Item
7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations."
9
(In thousands, except share data)
DECEMBER 31: 1996 1995 1994 1993 1992
STATEMENT OF OPERATIONS DATA:
Sales $15,964 $15,243 $15,772 $13,883 $9,538
Cost of sales 11,779 12,044 11,611 10,211 7,479
------- ------- ------- ------- ------
Gross margin 4,185 3,199 4,161 3,672 2,059
Selling, general
and administrative expenses 4,011 3,589 3,497 3,047 3,134
------- ------- ------- ------- ------
Income (loss) from operations 174 (390) 664 625 (1,075)
Other expense, net (584) (587) (426) (449) (463)
------- ------- ------- ------- ------
Net (loss) income (410) (977) 238 176 (1,538)
------- ------- ------- ------- ------
Net (loss) income per share :
Primary $ (0.16) $ (0.37) $ 0.08 $ 0.11 $(1.51)
Fully diluted -- -- -- $ 0.06 --
Weighted average shares
outstanding :
Primary 2,640 2,640 2,863 1,657 1,020
Fully Diluted -- -- -- 2,856 --
BALANCE SHEET DATA:
Working Capital (Deficit) $ (58) $(1,089) $ (414) $ (654) $ (747)
Total Assets 7,805 11,826 9,927 8,796 6,954
Long-term Debt 1,702 465 487 518 547
Stockholders' Equity 52 462 1,433 1,193 1,040
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
percentages that certain items in the Company's Consolidated Statements of
Operations are to sales and the percentage changes in those items from period to
period:
INCOME & EXPENSE ITEMS PERIOD-TO-PERIOD PERCENTAGE
AS A PERCENT OF SALES INCREASE(DECREASE)
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1994
1996 1995 1994 TO 1996 TO 1995
---------------------------------------------------------
Sales .............. 100.0% 100.0% 100.0% 4.7 % (3.4)%
Cost of Sales ...... 74.0 79.0 73.6 (2.2)% 3.7
----- ------ ------ ------ ------
Gross Margin ....... 26.0 21.0 26.4 30.8 (23.1)
Selling, general and
administrative .. 25.0 23.5 22.2 11.8 2.9
Income (loss) from
operations ...... 1.0 (2.5) 4.2 144.6 (158.7)
Other expense, net . (3.6) (3.9) (2.7) (.6) 37.8
----- ------ ------ ------ ------
Net Income (Loss) .. (2.6) (6.4) 1.5 58.0 (510.5)
====== ====== ====== ====== ======
1996 COMPARED TO 1995: Sales increased from 1995 to 1996 by approximately
$721,000, an increase of 4.7%. Management believes that the sales increase is
attributable in part to sales of a broader range of products to existing
accounts. Gross margins as a percentage of sales also increased from 21.0% in
1995 to 26.0% in 1996. This increase is attributable to a decrease in the cost
of product from the Far East. Selling, general and administrative expenses as a
percentage of sales increased from 23.5% in 1995 to 25.0% in 1996. The increase
is primarily attributed to minor overall increases in selling and administrative
overhead expenses, due in part to more intense sales efforts. Other expenses,
net of interest and other miscellaneous income, increased slightly by 0.6% from
1995 to 1996. Even though interest and other miscellaneous expenses increased by
$115,000(or 17%), there was miscellaneous income of approximately $75,000 as a
result of proceeds received by the Company from a class action antidumping case
in which Cosmo is a party.
As a result of the foregoing, net loss decreased from a net loss of ($977,000)
in 1995 to a net loss of ($410,000) in 1996. ( See Item 1-" Financial and
Management's Plans" for additional comments on fiscal year 1996 and the
Company's plans for fiscal year 1997).
1995 COMPARED TO 1994: Sales decreased from 1994 to 1995 by approximately
$529,000, a decrease of 3.4%. The decrease in sales is attributed to a difficult
retail climate and increased
11
competition experienced by the Company in 1995. Gross margins as a percentage of
sales also decreased from 26.4% in 1994 to 21% in 1995. This decrease is also
attributed to increased competition in the retail arena during 1995. Selling,
general and administrative expenses as a percentage of sales increased from
22.2% in 1994 to 23.5% in 1995. The increase is primarily attributed to minor
overall increases in general and administrative overhead expenses. Other
expense, net increased by 37.8% from 1994 to 1995. This increase is primarily
attributed to an increase in interest expense as a result of increased
borrowings during 1995. Borrowings in 1995 increased as a result of working
capital shortfalls (See "Liquidity and Capital Resources" section below).
As a result of the forgoing, net income (loss) decreased from net income of
$238,000 in 1994 to a net loss of ($977,000) in 1995. (See Item 1-"Financial and
Management's Plans" for additional comments on fiscal year 1995 and the
Company's plans for fiscal year 1996).
LIQUIDITY AND CAPITAL RESOURCES
Working capital was approximately ($58,000) at December 31, 1996, an improvement
of approximately $1,031,000 from December 31, 1995. The ratio of current assets
to current liabilities at December 31, 1996 was .99 to 1, as compared to .90 to
1 at December 31, 1995 . The Company met its working capital requirements in
1996 primarily from operations.
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, 1997. Maximum borrowings are tied by formula to eligible
accounts receivable and inventories. Interest is charged on outstanding
borrowings at the prime rate (8.25% at December 31, 1996) plus 2.5%. This credit
facility is secured by substantially all assets of the Company. At December 31,
1996 and 1995, borrowings outstanding under this credit facility amounted to
$3,089,000 and $3,752,000, respectively, and are classified as current
liabilities.
This credit facility with Congress contains certain restrictive covenants. The
most restrictive covenant relates to minimum net worth requirements, which were
not met by the Company as of December 31,1996. However, the lender has waived
the minimum net worth requirements through December 31, 1997. Management
currently anticipates that this loan may be renegotiated or extended during
1997.
The Company, during 1996, obtained an additional 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
the prime rate plus 1%. As of December 31, 1996, there were no borrowings
outstanding under this credit facility. In addition to this credit facility, the
Company borrowed from the same institution a note payable in the amount of
$1,520,000 that was used primarily to pay off the second mortgage on the land
and building to Congress and to reduce the loan on the first mortgage to First
Union, as well as to provide working capital.
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%. The collateral deposits were used
to pay down the loan during 1996. At December 31, 1996 and 1995, outstanding
borrowings under this line amounted to $462,000 and $1,062,000, respectively. As
of December 31, 1996, there were no open letters of credit under this line.
12
The Company had an additional line of credit facility from a financial
institution, which was paid off and terminated in 1996. The credit facility was
secured by a secondary interest in all assets of the Company. Interest was
charged on outstanding borrowings at prime plus 2%. As of December 31, 1995
borrowings outstanding under this credit facility amounted to $1,131,000.
The Company utilized an overseas overdraft and trade financing credit facility,
which was paid off and terminated in 1996. Maximum borrowings under this
facility were approximately $777,000 to cover bank overdrafts. Interest was
charged on borrowings at the local prime rate (approximately 7.25% at December
31, 1995) plus 1%. The facility was secured by short-term bank deposits of
approximately $612,000.
Management believes that through its existing credit facilities and the
continued commitment by the Company's principal stockholder to provide
additional financing, at his discretion (see Item 13), the Company will be able
to meet its working capital requirements during 1997.
The Company is subject to risk from exchange rate fluctuations. Based on the
Company's evaluation of anticipated changes in exchange rates, the Company may
from time to time purchase forward exchange contracts to hedge against these
risks. However, the Hong Kong dollar remains the functional currency of the
Company's Hong Kong subsidiaries, and the Company does not hedge against risks
of foreign currency transaction or translation loss.
IMPACT OF INFLATION
The effect of inflation on the Company's costs and operating expenses has not
been significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Company's Consolidated Financial Statements following page 24 of this
Annual Report on Form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has reported no disagreements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
For certain information regarding the executive officers of the Company, see
"Item 1 - Business Executive Officers," above. The following table and text
presents certain information with respect to the directors of the Company who
were not also executive officers as of March 31, 1997.
13
NAME AGE DIRECTOR SINCE
---------------- ------ --------------
Cesar L. Alvarez 49 1987
Mr. Alvarez became a director of the Company in August 1987. Mr. Alvarez has
been a principal shareholder of Greenberg, Traurig, Hoffman, Lipoff, Rosen &
Quentel, P.A., a law firm in Miami, Florida for more than 5 years and is
presently its Chief Executive Officer and managing shareholder. Mr. Alvarez also
serves on the Board of Directors of Pediatrix Medical Group, Inc., Ft.
Lauderdale, Florida, FDP Corp., Miami, Florida and CompuTrac, Inc., Dallas,
Texas.
.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934. Section
16(a) of the Securities Exchange Act of 1934 requires the Company's directors
and executive officers, and persons who own more than 10 percent of the
Company's Common Stock, to file with the Securities and Exchange Commission (the
"SEC") initial reports of ownership and reports of changes in ownership of
Common Stock and other equity securities of the Company. Such persons are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based on a review of any such reports furnished to
the Company during or with respect to the 1996 fiscal year, there were no
Section 16(a) reports filed after the due date.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth, for the 1996, 1995
and 1994 fiscal years, respectively, compensation paid or accrued by the Company
to or on behalf of the Company's Chief Executive Officer and each other
executive officer whose total annual salary and bonus for the 1996 fiscal year
were $100,000 or more (collectively, the "Named Executive Officers").
ANNUAL COMPENSATION(1)
----------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION
- --------------------------- ---- --------- -------- ------------
Amancio Victor Suarez 1996 $108,000 -
Chairman of the Board, 1995 $200,000 - $ 162 (2)
Chief Executive Officer and 1994 $200,000 - $ 162 (2)
Chief Financial Officer
(1) The column for "Other Annual Compensation" has been omitted because there
is no compensation required to be reported in such column. The aggregate
amount of
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perquisites and other personal benefits provided to each Named Executive
Officer is less than 10% of the total of annual salary and bonus of such
officer.
(2) The indicated amount represents premiums paid by the Company for term life
insurance for the benefit of the Named Executive Officer.
OPTION GRANTS TABLE. No options were granted during fiscal 1996.
AGGREGATED FISCAL YEAR-END OPTION VALUE TABLE. No Named Executive Officers held
any options as of the end of the 1996 fiscal year.
LONG-TERM INCENTIVE AND PENSION PLANS. The Company does not have any long-term
incentive or pension plans.
COMPENSATION OF DIRECTORS. Directors who are not officers of the Company
generally receive meeting attendance fees of $300. However, each such director
waived his right to receive such fees during 1996. Annual retainers are not
currently provided to directors; however, such retainers may be reinstituted in
the future. Directors are eligible to receive grants of options under the
Company's stock option plan. No stock options were granted to any directors of
the Company during 1996.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS.
Currently there are no employment agreements with any Executive Officers of
the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is furnished as of December 31, 1996 as to the
beneficial ownership of the Company's Common Stock by (i) each of the Named
Executive Officers (as defined in Item 11 above); (ii) each other director of
the Company; (iii) each person known by the Company to be a beneficial owner of
more than 5% of the Common Stock; and (iv) all directors and executive officers
of the Company as a group:
SHARES OF PERCENTAGE
NAME AND ADDRESS COMMON STOCK OF CLASS
Amancio Victor Suarez(1) 1,054,160 40.0%
16501 N.W. 16th Court
Miami, Florida 33169
Carlos Ortega 333,333 12.6%
16501 N.W. 16th Court
Miami, Florida 33169
A.J. Suarez 333,333 12.6%
16501 N.W. 16th Court
Miami, Florida 33169
Jose R. Aldariz 333,333 12.6%
c/o Cargil International Corp.
15
6812 N.W. 77th Court
Miami, Florida 33166
All directors and officers 1,423,493 53.5%
as a group (6 persons)(2)
(1) Includes 21,000 shares owned of record by a relative of Mr. Suarez.
(2) Includes 26,000 shares subject to presently exercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1995, the Company owed approximately $604,000 to Amancio
Victor Suarez, Chairman of the Board and Chief Executive Officer of the Company,
on loans previously made by Mr. Suarez to the Company from time to time. During
1996, Mr. Suarez had an informal commitment with the Company to lend from time
to time, at his sole discretion, up to an additional $500,000 to the Company on
a demand basis. The loans bear interest at prime rate plus 2.5%. During 1996,
Mr. Suarez loaned the Company approximately $358,000. As of December 31, 1996
the aggregate amount owed by the Company to Mr. Suarez was approximately
$962,000, on a demand basis. For 1997, Mr. Suarez has continued his informal
commitment to loan up to an additional $500,000 to the Company on a demand
basis, at his discretion.
During 1996, the Company paid Mr. Andrew Neckowitz, the Company's previous
President, all oustanding debts owed to him in the amount of approximately $
230,000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. FINANCIAL STATEMENTS:
Reference is made to the index to the Company's Consolidated
Financial Statements following page 24 of this Annual Report on Form
10-K.
2. FINANCIAL STATEMENT SCHEDULES:
These schedules are otherwise contained within the Company's
Consolidated Financial Statements following page 24 of this Annual
Report on Form 10-K.
3. EXHIBITS:
EXHIBIT NO. DESCRIPTION
3.1 Registrant's Articles of Incorporation, as amended (1)
3.2 Registrant's Bylaws (2)
16
10.1 Employment Agreement with Andrew Neckowitz (3)
10.2 Employment Agreement with Robert L. Scott (3)
10.3 Amended and Restated 1990 Stock Option Plan(Compensatory
Plan)(4)
10.4 Credit Facility with Congress Financial Corporation and
Amendments thereto(5)
10.5 Shareholders Agreement (1)
22.1 List of Registrant's Subsidiaries (1)
27 Financial Data Schedule
- --------------------
(1) Incorporated by reference to the exhibit with the same number filed
with the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1992, as amended.
(2) Incorporated by reference to the exhibit with the same number filed
with the Registrant's Registration Statement No. 2-83088.
(3) Incorporated by reference to the exhibit with the same number filed
with the Registrant's Annual Report on Form 10-K for fiscal 1990.
(4) Incorporated by reference to the exhibit with the same number filed
with the Registrant's Annual Report on Form 10-K for fiscal 1990.
(5) Filed in part herewith, and incorporated by reference to (i) exhibits
10.8, 10.9, 10.10, 10.11, 10.12 and 10.13 filed with the Registrant's
Annual Report on Form 10-K for fiscal 1989, and (ii) exhibits 10.4
filed with the Registrant's Annual Reports on Form 10-K for fiscal
1990, 1991, 1992, and 1995, respectively.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COSMO COMMUNICATIONS CORPORATION
DATED: MARCH 29, 1997 /s/ AMANCIO V. SUAREZ
---------------------
AMANCIO VICTOR SUAREZ,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
DATED: MARCH 29, 1997
/s/ AMANCIO V. SUAREZ
---------------------
AMANCIO VICTOR SUAREZ,
Chairman of the Board
Chief Financial Officer
Chief Executive Officer
/s/ CARLOS ORTEGA
----------------------
CARLOS ORTEGA
President, Chief Operating Officer
and Director
----------------------
CESAR L. ALVAREZ
Director
18
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1996 AND 1995 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1996 F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED DECEMBER 31, 1996 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
EACH OF THE THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1996 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6
19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Cosmo Communications Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Cosmo
Communications Corporation and subsidiaries (the "Company") as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Miami, Florida
March 25, 1997
F-1
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 89,000 $ 1,097,000
Accounts receivable, net of allowance
for doubtful accounts of $235,000 and
$184,000, in 1996 and 1995, respectively 2,820,000 4,945,000
Inventories 2,973,000 3,703,000
Other 111,000 65,000
------------ -------------
Total current assets 5,993,000 9,810,000
PROPERTY AND EQUIPMENT, net 1,455,000 1,542,000
OTHER 357,000 474,000
------------ -------------
TOTAL $ 7,805,000 $ 11,826,000
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,241,000 $ 3,576,000
Credit facilities 3,551,000 6,492,000
Due to principal stockholder 962,000 604,000
Other liabilities, including current
portion of long-term debt 297,000 227,000
------------ -------------
Total current liabilities 6,051,000 10,899,000
LONG-TERM DEBT, net 1,702,000 465,000
CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Convertible cumulative preferred stock,
$0.01 par value; 30,000 shares
authorized, none issued
Preferred stock, $0.01 par value; 9,970,000
shares authorized, none issued
Common stock, $0.05 par value; 4,000,000
shares authorized; 2,642,000 shares
issued and outstanding as of December 31,
1996 and 1995 133,000 133,000
Additional paid-in capital 25,410,000 25,410,000
Accumulated deficit (23,753,000) (23,343,000)
Cumulative translation adjustment (1,738,000) (1,738,000)
------------ -------------
Total stockholders' equity 52,000 462,000
------------ -------------
TOTAL $ 7,805,000 $ 11,826,000
============ =============
See notes to consolidated financial statements.
F-2
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
1996 1995 1994
SALES $ 15,964,000 $ 15,243,000 $ 15,772,000
COST OF SALES 11,779,000 12,044,000 11,611,000
-------------- -------------- --------------
GROSS MARGIN 4,185,000 3,199,000 4,161,000
-------------- -------------- --------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Selling expenses 2,032,000 1,540,000 1,536,000
General and administrative
expenses 1,979,000 2,049,000 1,961,000
-------------- -------------- --------------
Total selling, general and
administrative expenses 4,011,000 3,589,000 3,497,000
-------------- -------------- --------------
INCOME (LOSS) FROM OPERATIONS 174,000 (390,000) 664,000
-------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest expense (800,000) (685,000) (577,000)
Interest income 41,000 57,000 93,000
Other, net 175,000 41,000 58,000
-------------- -------------- --------------
Total other expense, net (584,000) (587,000) (426,000)
-------------- -------------- --------------
NET (LOSS) INCOME $ (410,000) $ (977,000) $ 238,000
============== ============== ==============
PRIMARY NET (LOSS)INCOME PER SHARE $ (0.16) $ (0.37) $ 0.08
WEIGHTED AVERAGE COMMON
AND EQUIVALENT SHARES OUTSTANDING 2,640,000 2,640,000 2,863,000
See notes to consolidated financial statements.
F-3
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR EACH
OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
COMMON
STOCK
SHARES ADDITIONAL CUMULATIVE
----------------------------- PAID-IN ACCUMULATED TANSLATION
ISSUED AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
BALANCE,
DECEMBER 31, 1993 2,626,000 $ 131,000 $25,403,000 $(22,604,000) $(1,737,000) $1,193,000
Issuance of 7,000
shares of common
stock 7,000 3,000 ` 3,000
Net income 238,000 238,000
Translation adjustment (1,000) (1,000)
--------- --------- ---------- ------------ ----------- ----------
BALANCE,
DECEMBER 31, 1994 2,633,000 131,000 25,406,000 (22,366,000) (1,738,000) 1,433,000
Issuance of 9,000
shares of common
stock 9,000 2,000 4,000 6,000
Net loss (977,000) (977,000)
--------- -------- ---------- ------------ ==--------- ----------
BALANCE,
DECEMBER 31, 1995 2,642,000 133,000 25,410,000 (23,343,000) (1,738,000) 462,000
Net loss (410,000) (410,000)
--------- -------- ---------- ---------- --------- ---------
BALANCE,
DECEMBER 31, 1996 2,642,000 133,000 25,410,000 (23,753,000) (1,738,000) 52,000
--------- --------- ---------- ----------- ---------- ---------
See notes to consolidated financial statements.
F-4
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (410,000) $ (977,000) $ 238,000
Adjustments to reconcile net (loss)
income to net cash (used) provided by
operating activities:
Depreciation and amortization 172,000 318,000 230,000
Issuance of shares of common stock to
certain employees 5,000 3,000
Decrease (increase) in accounts receivable, net 2,125,000 (1,654,000) (547,000)
Decrease (increase) in inventories and other assets 736,000 (177,000) (773,000)
(Decrease) increase in accounts payable, accrued expenses
and other current liabilities (2,265,000) 1,306,000 921,000
Translation adjustment (1,000)
--------- --------- --------
Net cash (used) provided by operating activities 358,000 (1,179,000) 71,000
--------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (20,000) (224,000) (138,000)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES :
Net increase (decrease) in credit facilities and long-
term debt repayments (1,704,000) 1,162,000 (201,000)
Net increase in due to stockholders 358,000 402,000 19,000
--------- --------- --------
Net cash provided (used) by financing activities (1,346,000) 1,564,000 (182,000)
--------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (1,008,000) 161,000 (249,000)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR 1,097,000 936,000 1,185,000
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT THE
END OF THE YEAR $ 89,000 $ 1,097,000 $ 936,000
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the year for interest $ 731,000 $ 588,000 $ 510,000
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
FINANCING ACTIVITIES:
Issuance of shares of common stock to certain employees $ 4,000 $ 3,000
=========== ===========
See notes to consolidated financial statements.
F-5
COSMO COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - Cosmo Communications Corporation and subsidiaries (the
"Company") is a publicly-owned entity. The Company markets and distributes
clocks and other consumer electronic products. The Company has significant
operations in the United States, Hong Kong and Canada.
FINANCIAL DIFFICULTIES AND MANAGEMENT'S PLANS - During the last few years,
the Company experienced a continuation of a difficult retail climate and
increased competition. In addition, several large retailers in the United
States continued their corporate policies to reduce their inventory
levels. Although during 1996 the Company's gross margins increased and it
earned income from operations, a net loss was nonetheless incurred. During
the last few years, management has been implementing a plan to improve
operations. This plan includes an intensification of the Company's sales
efforts through the addition of new sales representatives and the
introduction of new products within existing product lines. The Company
will continue to pursue new product categories through increased sourcing
activities in the Far East. It is anticipated that the introduction of new
product categories will assist the Company in capturing new markets within
the retail arena. In 1997, the Company is also introducing a new line of
product of cellular phone and accessories components under the brand of
"Cosmo Telecom".
Management believes that through its existing credit facilities and the
continued commitment by the Company's principal stockholder to provide
additional financing at his discretion, the Company will be able to meet
it's working capital requirements during 1997. The Company's ability to
successfully implement its plans to improve its operations is dependent
upon a number of factors beyond its control. These factors include the
overall retail climate and competition. There can be no assurance that the
Company's operating results or financial condition will improve in fiscal
year 1997.
USE OF ESTIMATES - The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
include cash and cash equivalents, receivables, payables, debt and credit
facilities. The fair value of such financial instruments have been
determined based on current market interest rates as of December 31, 1996.
The fair values of these instruments were not materially different than
their carrying (or contract) values.
PRINCIPLES OF CONSOLIDATION - The Company includes, in consolidation, its
wholly owned subsidiaries which are as follows: Cosmo Time Corporation,
Caonabo Cigars Corporation (formerly known as Cosmo Air, Inc.), Cosmo
Lighting, Inc., Cosmo Electronics, Inc. (formerly Topp Electronics, Inc.),
Cosmo Communications (H. K.) Limited, Cosmo Communications Canada, Inc.
and Cosmo Worldwide Corporation. All significant intercompany transactions
and balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS - All highly liquid instruments with a maturity
of three months or less when acquired are considered cash equivalents.
F-6
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out) or market.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets which range from three to eight years
for property and equipment, other than the building, which is depreciated
over thirty years.
OTHER ASSETS - Other assets include an original amount of $983,000 of
excess cost over fair market value of net assets acquired. Such amount is
being amortized on a straight-line basis over fifteen years. The
unamortized balance at December 31, 1996 and 1995 amounted to $325,000 and
$390,000, respectively.
FOREIGN CURRENCY TRANSLATION - The accounts of the foreign subsidiaries
were translated into U.S. dollars in accordance with the provisions of
Financial Accounting Standards Board No. 52 ("SFAS 52"). Management has
determined that the Hong Kong dollar is the functional currency of the
Hong Kong subsidiaries and the Canadian dollar is the functional currency
of the Canadian subsidiary. Certain current assets and liabilities of
these foreign entities are denominated in U.S. dollars. In accordance with
the provisions of SFAS 52, transaction gains and losses on these assets
and liabilities are included in the determination of income for the
relevant periods. Adjustments resulting from the translation of the
financial statements from their functional currencies to U.S. dollars are
accumulated as a separate component of stockholders' equity and have not
been included in the determination of income for the relevant periods.
REVENUE RECOGNITION - Sales are recognized upon shipment of goods. During
the years ended December 31, 1996, 1995, and 1994, sales to a single
customer accounted for approximately 34%, 34%, and 37%, respectively, of
total sales. Accounts receivable corresponding to this customer
approximated $672,000 and $554,000 as of December 31, 1996 and 1995,
respectively.
WARRANTY COSTS - The Company's products are sold with a one-year limited
warranty. The net cost of warranty repairs is charged to cost of sales
when the repair work is performed. Historically, the Company's annual net
warranty liability has not been significant.
RESEARCH AND DEVELOPMENT - The costs of research and development
associated with new product design, engineering, tooling, and testing are
charged to cost of sales as incurred. Such expenses aggregated
approximately $210,000 in 1996, $225,000 in 1995 and 1994.
INCOME TAXES - The Company follows the guidelines contained in Financial
Accounting Standards Board Statement 109, ACCOUNTING FOR INCOME TAXES
("SFAS 109"). SFAS 109 requires an asset and liability approach for
financial accounting and reporting for income taxes. In addition, SFAS 109
requires that deferred tax liabilities and assets be adjusted in the
period of enactment for the effect of an enacted change in tax laws or
rates.
EARNINGS AND LOSS PER SHARE - Earnings per share has been presented after
giving retroactive effect to the first period presented for a 1 for 5
reverse stock split effected October 31, 1994 (see Note 8).
Primary earnings 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 each period ended, there were no
dilutive common equivalent shares. As of December 31, 1994, common
equivalent shares include the dilutive effect of the stock grants (see
Note 7) and of the stock options using the treasury stock method (see Note
8).
F-7
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT - In March 1995, the Financial
Accounting Standards Board issued Statement of Financial Standards No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF ("SFAS 121"). SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and
for long-lived assets and certain identifiable intangibles to be disposed
of. SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. SFAS 121 was adopted in the
current year without a material impact on the financial position of the
Company or its results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
("SFAS 123"). SFAS 123 establishes accounting and financial reporting for
stock-based compensation plans. Those plans include all arrangements by
which employees and non-employee members of the Board receive shares of
stock or other equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of the employer's
stock. SFAS 123 encourages that these transactions be accounted for based
on the fair value of the consideration received or the fair value of the
equity instrument issued whichever is more reliably measureable.
The Company has choosen to continued to account for stock-based plans
using the intrinsic value method prescribed by Accounting Principles Board
Opinion("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations. Accordingly, compensation cost of stock based
compensation are measured as the excess, if any, of the fair value of the
Company's stock at the date of the grant over the amount an employee or
non-employee member of the Board must pay for the stock. The Company did
not grant any stock options in 1996 and 1995.
2. ACCOUNTS RECEIVABLE
The activity for the allowance for doubtful accounts is as follows for the
years ended December 31 :
1996 1995 1994
Beginning balance $ 184,000 $ 57,000 $ 57,000
Provision 138,000 136,000 23,000
Write-offs, net of recoveries (87,000) (9,000) (23,000)
------- ------ ---------
Ending balance $ 235,000 $ 184,000 $ 57,000
========= ========= ========
The Company carries accounts receivable at the amounts it deems to be
collectible. Accordingly, the Company provides allowances for accounts
receivable it deems to be uncollectible based on management's best
estimates. Recoveries are recognized in the period they are received. The
ultimate amount of accounts receivable that become uncollectible could
differ from those estimated.
F-8
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31:
1996 1995
Land $ 400,000 $ 400,000
Building 1,610,000 1,600,000
Leasehold improvements 286,000 269,000
Plant and equipment 964,000 964,000
Auto and trucks 26,000 21,000
Furniture and fixtures 192,000 204,000
------- -------
Total 3,478,000 3,458,000
Less accumulated depreciation and amortization (2,023,000) (1,916,000)
----------- ---------
$1,455,000 $1,542,000
========== ==========
4. CREDIT FACILITIES
The following are the Company's credit facilities:
UNITED STATES AND CANADA OPERATIONS - The Company utilizes a credit
facility of up to $7,500,000, expiring on December 31, 1997. The credit
facility is secured by substantially all assets of the Company, except for
the Company's land and building in the United States. Borrowings are tied
by formula to eligible accounts receivable and inventories. Interest is
charged on outstanding borrowings at the prime rate (8.25% at December 31,
1996) plus 2.5%. As of December 31, 1996 and 1995, borrowings outstanding
under this credit facility amounted to $3,089,000 and $3,752,000,
respectively. The credit facility contains certain restrictive covenants.
The most restrictive covenant relates to a minimum net worth requirement,
which was not met by the Company as of December 31, 1996. However, the
lender has waived the minimum net worth requirement through December 31,
1997.
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 is guaranteed
by certain stockholders of the Company. Interest is charged on outstanding
borrowings at the prime rate plus 2.5%. As of December 31, 1996 and 1995,
borrowings outstanding under this credit facility amounted to $462,000 and
$1,062,000, respectively. As of December 31, 1996, the Company can no
longer borrow amounts under this line.
The Company, during 1996, obtained an additional 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%. As of December 31, 1996, there
were no borrowings outstanding under this credit facility.
The Company had an additional line of credit facility from a financial
institution. This credit facility is secured by a secondary interest in
all assets of the Company. Interest is charged on outstanding borrowings
at prime plus 2%. As of December 31, 1995, borrowings outstanding under
this credit facility amounted to $1,131,000. During 1996, the Company paid
the remaining balance.
F-9
HONG KONG OPERATIONS - The Company utilized an overdraft credit facility
with maximum borrowings of approximately $777,000 to cover bank
overdrafts. Interest was charged on outstanding borrowings at the local
prime rate (approximately 7.25% as of December 31, 1995) plus 1%. During
the second quarter of 1996, the Company paid off the balance outstanding
on this credit facility with the short term bank deposits used to secure
this credit line. As of December 31, 1995, borrowings outstanding under
the overdraft credit facility amounted to approximately $547,000.
5. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31:
First mortgage note at 11%, payable 1996 1995
in monthly installments of principal and
interest of approximately $7,400 and $7,000
in 1996 and 1995, respectively, through the
year 2004, collateralized by land and a
building in the United States. $ 318,000 $500,000
Note payable at prime rate plus 1% in monthly
installments of principal and interest of
approximately $18,000 expiring in December 2001,
at which time the entire outstanding balance as
due, collateralized by a second mortgage on the
Company's land and building in the United States. 1,520,000 --
--------- ---------
Total 1,838,000 500,000
Less current portion (136,000) (35,000)
--------- --------
Long-Term Debt $ 1,702,000 $ 465,000
=========== =========
6. INCOME TAXES
The domestic and foreign components of net (loss) income were as follows
for the years ended December 31:
1996 1995 1996
Domestic $ (1,049,000) $ (1,095,000) $ (500,000)
Foreign 639,000 118,000 738,000
------------ ------------ ----------
Total balance $ (410,000) $ (977,000) $ 238,000
============ ============ ==========
DOMESTIC - The Company has unused domestic tax loss carryforwards of
approximately $43,834,000 to offset future taxable income. Such
carryforwards expire from the year 1997 through the year 2011. Included in
the tax loss carryforwards are approximately $20,872,000 obtained in
connection with the acquisition of Cosmo Electronics, Inc. which are only
available
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to offset future taxable income of Cosmo Electronics, Inc. The deferred
tax asset and related valuation allowance recorded by the Company as a
result of these domestic tax loss carryforwards is $16,482,000 as of
December 31, 1996.
FOREIGN - The Company has unused foreign tax loss carryforwards of
approximately $2,000,000 to offset future taxable income. Approximately
$1,200,000 of these tax loss carryforwards expire in the years 1997 and
1998. The remainder may be carried forward indefinitely. The deferred tax
asset and related valuation allowance recorded by the Company as a result
of these foreign tax loss carryforwards is $618,000.
The Company has reduced the deferred tax assets resulting from its
domestic and foreign tax loss carryforwards by a valuation allowance as it
has determined that it is more likely than not that the deferred tax
assets will not be realized. The change in the valuation allowances from
December 31, 1995 to December 31, 1996 for the domestic and foreign
components was a decrease of $724,000 and $101,000, respectively.
During 1994, the Company's Hong Kong subsidiary made a distribution to a
domestic subsidiary in the amount of approximately $7,500,000. Under U.S.
income tax laws, such transaction is treated similar to a taxable
distribution of a foreign subsidiary's accumulated earnings. The tax
liability resulting from this transaction was offset entirely by net
operating loss carryforwards.
7. CONTINGENCIES
LITIGATION - From time to time, the Company is engaged in ordinary routine
litigation incidental to its operations. The Company, after considering
the advice of legal counsel, believes that any such litigation will not
have a material adverse effect on its consolidated financial position.
In the event that any individual or entity owns a greater percentage of
the common stock of the Company than Mr. Amancio Victor Suarez and his
associates and affiliates or if the Company is liquidated, all or
substantially all of its assets are sold or if the Company is taken
private by certain actions of Mr. Suarez, all grants and stock options
granted to Messrs. Neckowitz and Scott would become fully vested and
exercisable immediately.
8. STOCKHOLDERS' EQUITY
REVERSE STOCK SPLIT - On October 31, 1994, the Company effected a 1 for 5
reverse stock split. Accordingly, the 1994 consolidated financial
statements have been retroactively effected, as if the reverse stock split
occurred on January 1, 1994.
STOCK OPTION PLAN - The Board of Directors of the Company (the "Board")
adopted the 1990 Stock Option Plan effective December 15, 1990. Effective
December 23, 1994, the 1990 Stock Option Plan was amended and restated
(the "Plan"). The Plan reserved 270,000 shares of common stock for
issuance thereunder. Under the Plan, the Company may grant incentive stock
options, nonqualified stock options, and stock appreciation rights. The
purpose of the Plan is to further the best interests of the Company and
its subsidiaries by encouraging employees and consultants of the Company
and its subsidiaries to continue association with the Company. The
employees eligible to participate in the Plan as recipients of stock
options or stock appreciation rights are such officers and employees of
the Company and such other key employees of the Company and its
subsidiaries as the Board shall from time to time determine, subject to
the limitations of the Plan.
The Plan is administered by the Board or by a committee of the Board
designated by the Board. The Board, or such committee, determines, among
other things, which officers, employees and directors of the Company
receive options or stock appreciation rights under the Plan, the number of
shares to be covered by the options, and the date of grant of such
options. The options granted under the Plan terminate at the earlier of
(i) a date set by the Board at the time of grant, or (ii)
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ten years from their respective dates of grant, except in the case of
incentive stock options granted to a shareholder owning ten percent (10%)
or more of the Company's common stock, with respect to whom options
granted are exercisable over a period no longer than five years. The
exercise price for stock options granted under the Plan is determined by
the Board and is required to be at least the par value per share of the
common stock, except in the case of incentive stock options (which must
have a price which is not less than fair market value) granted to a
shareholder owning ten percent (10%) or more of the Company's common
stock, with respect to whom the exercise price is required to be at least
one hundred ten percent (110%) of such fair market value. The exercise
price must be paid in full by an employee in cash, common stock of the
Company or any other form of payment permitted by the Board.
As of December 31, 1996, 172,000 stock options were outstanding, all of
which were exercisable. No stock options were granted during 1996 and
1995. The exercise price of the stock options range from $.45 - $1.55 per
option.
9. GEOGRAPHIC AREA AND FOREIGN OPERATIONS INFORMATION
The Company operates in one industry segment. The Company's principal
operations, where identifiable assets are maintained, are in the United
States, Hong Kong, and Canada.
Identifiable assets are those assets which are identified with operations
of a particular geographic area. Corporate assets include cash and cash
equivalents and the intangible asset resulting from the Canadian
acquisition.
DOMESTIC FOREIGN ELIMINATIONS TOTAL
( IN THOUSANDS)
1996
Sales to unaffiliated customers $9,565 $6,399 $ $ 15,964
Transfers between geographic areas 303 (303)
------ ------ -------- --------
Total sales $9,565 $6,702 $ (303) $ 15,964
====== ====== ======== ========
(Loss) income from operations $ (476) $ 650 $ 174
====== ====== ========
Identifiable assets $3,985 $1,808 $ 5,793
Corporate assets 1,774 238 2,012
------ ------ --------
Total assets $5,759 $2,046 $ 7,805
====== ====== ========
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DOMESTIC FOREIGN ELIMINATIONS TOTAL
( IN THOUSANDS)
1995
Sales to unaffiliated customers $8,992 $6,251 $ $ 15,243
Transfers between geographic areas 140 (140)
------ ------ -------- --------
Total sales $8,992 $6,391 $ (140) $ 15,243
====== ====== ======== ========
(Loss) income from operations $ (538) $ 148 $ 390
====== ====== ========
Identifiable assets $8,362 $1,977 $ 10,339
Corporate assets 872 615 1,487
------ ------ --------
Total assets $9,234 $2,592 $ 11,826
====== ====== ========
1994
Sales to unaffiliated customers $10,017 $5,755 $ $ 15,772
Transfers between geographic areas (485)
------ ------ -------- --------
Total sales $10,017 $5,755 $ (485) $ 15,772
====== ====== ======== ========
(Loss) income from operations $ (98) $ 762 $ 664
====== ====== ========
Identifiable assets $ 6,599 $1,937 $ 8,536
Corporate assets 798 593 1,391
------ ------ --------
Total assets $ 7,397 $2,530 $ 9,927
====== ====== ========
10. RELATED PARTY BALANCES
Amounts due to the principal stockholder bear interest at the prime rate
plus 2.5% and are due on demand. Included in other current liabilities is
$115,000 and $158,000 as of December 31, 1996 and 1995, respectively, due
to the Company's previous President, bearing interest at prime plus 2.5%
and is due on demand. Also included in other current liabilities is
$46,000 due to the Company's current President. Total interest expense
incurred due to related party payables for the years ended December 31,
1996 and 1995 approximated $ 115,000 and $38,000, respectively.
* * * * * *
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
10.4 Credit facility with Congress Financial Corporation and
Amendments thereto.
27 Financial Data Schedule.