SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 COMMISSION FILE NO. 0-20406
EZCONY INTERAMERICA INC.
(Exact Name of Registrant as Specified in Its Charter)
BRITISH VIRGIN ISLANDS NOT APPLICABLE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
CRAIGMUIR CHAMBERS, P.O. BOX 71,
ROAD TOWN, TORTOLA BRITISH VIRGIN ISLANDS
(Address of Principal Executive Offices) (Country)
Registrant's telephone number, including area code:
(507) 441-6566 (PANAMA) AND (305) 599-1352 (U.S.A.)
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 the filing
requirements for at least the past 90 days.
YES X NO _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
At November 6, 1998 there were outstanding:
4,510,000 common shares, no par value
<PAGE>
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997...................... 3
Condensed Consolidated Statements of Operations and
Accumulated Deficit
Three Months Ended September 30, 1998 and 1997................ 4
Condensed Consolidated Statements of Operations and Accumulated
Deficit Nine Months Ended September 30, 1998 and 1997......... 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997................. 6
Notes to Condensed Consolidated Financial Statements.......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 14
Signatures ............................................................ 15
2
<PAGE>
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,131,192 $ 1,280,887
Trade accounts receivable, net 23,066,235 31,510,345
Due from directors, officers and employees, net 280,745 179,162
Inventories 5,434,125 9,176,952
Prepaid expenses and other current assets 1,009,400 1,465,637
Restricted cash 6,007,461 8,834,319
------------- -------------
Total current assets 36,929,158 52,447,302
Property and equipment, net 4,357,749 4,432,704
Other assets 110,582 48,616
------------- -------------
Total assets $ 41,397,489 $ 56,928,622
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 231,580 $ 214,537
Notes and acceptances payable 22,751,183 28,842,438
Accounts payable 12,261,665 18,252,706
Accrued expenses and other current liabilities 1,122,895 1,693,543
------------- -------------
Total current liabilities 36,367,323 49,003,224
Long-term debt 1,547,536 1,717,361
Other liabilities 202,493 -
------------- -------------
Total liabilities 38,117,352 50,720,585
------------- -------------
Shareholders' equity:
Common stock, no par value; 15,000,000 shares
authorized; 4,510,000 shares issued and outstanding 12,954,723 12,954,723
Accumulated deficit (9,674,586) (6,746,686)
-------------- --------------
Total shareholders' equity 3,280,137 6,208,037
------------- -------------
Total liabilities and shareholders' equity $ 41,397,489 $ 56,928,622
============= =============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
3
<PAGE>
<TABLE>
<CAPTION>
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
Three Months Ended September 30,
------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Net sales $ 24,954,125 $ 49,607,025
Cost of sales 23,355,821 46,457,876
--------------- ---------------
Gross profit 1,598,304 3,149,149
Selling, general and administrative expenses 2,934,632 2,769,272
--------------- ---------------
Operating income (loss) (1,336,328) 379,877
---------------- ---------------
Other income (expense):
Interest income 93,604 124,976
Interest expense (767,279) (595,950)
Other 5,802 46,229
--------------- ---------------
(667,873) (424,745)
--------------- ---------------
Net loss (2,004,201) (44,868)
Accumulated deficit, beginning of period (7,670,385) (6,934,504)
--------------- ---------------
Accumulated deficit, end of period $ (9,674,586) $ (6,979,372)
=============== ===============
Loss per common share - basic and assuming dilution $ (0.44) $ (0.01)
=============== ===============
Weighted average number of common shares
outstanding - basic and assuming dilution 4,510,000 4,504,456
=============== ===============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
4
<PAGE>
<TABLE>
<CAPTION>
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
Nine Months Ended September 30,
------------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Net sales $ 90,687,109 $ 110,185,419
Cost of sales 85,007,335 103,046,669
--------------- ---------------
Gross profit 5,679,774 7,138,750
Selling, general and administrative expenses 6,814,545 6,608,938
--------------- ---------------
Operating income (loss) (1,134,771) 529,812
--------------- ---------------
Other income (expense):
Interest income 385,169 320,411
Interest expense (2,312,090) (1,484,762)
Other 133,792 139,181
--------------- ---------------
(1,793,129) (1,025,170)
--------------- ---------------
Loss from continuing operations (2,927,900) (495,358)
--------------- ---------------
Discontinued operations:
Loss from discontinued operations, net
of income taxes - (733,938)
Loss on disposal, net of income taxes - (2,544,786)
--------------- ---------------
- (3,278,724)
--------------- ---------------
Net loss (2,927,900) (3,774,082)
Accumulated deficit, beginning of period (6,746,686) (3,205,290)
--------------- ---------------
Accumulated deficit, end of period $ (9,674,586) $ (6,979,372)
=============== ===============
Loss per common share - basic and assuming dilution:
Loss from continuing operations $ $(0.65) $ (0.11)
Loss from discontinued operations - (0.73)
--------------- ---------------
Net loss $ (0.65) $ (0.84)
--------------- ---------------
Weighted average number of common shares
outstanding - basic and assuming dilution 4,510,000 4,501,485
=============== ===============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
5
<PAGE>
<TABLE>
<CAPTION>
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,927,900) $ (3,774,082)
Reconciliation of net loss to net cash provided by
(used in) operating activities-
Depreciation and amortization 206,561 146,526
Provision for doubtful accounts 2,204,223 1,358,874
Provision for restructuring charges 440,979 --
Loss (gain) on sale of equipment (1,332) 5,198
Loss on disposal of discontinued operations -- 2,544,786
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable 6,239,887 (14,414,203)
Increase in due from directors, officers and employees, net (101,583) (372,173)
Decrease (increase) in inventories 3,742,827 (993,540)
Decrease (increase) in prepaid expenses and other
current assets 456,237 (1,048,084)
Increase in other assets (61,966) (122,002)
Increase (decrease) in accounts payable (5,991,041) 9,118,441
Increase (decrease) in accrued expenses and other
current liabilities (758,248) 521,272
Net changes in discontinued operations -- (647,807)
------------ ------------
Net cash provided by (used in) operating activities 3,448,644 (7,676,794)
------------ ------------
Cash flows from investing activities:
Decrease (increase) in restricted cash, net 2,826,858 (2,501,395)
Purchases of property and equipment (192,910) (871,445)
Proceeds from sale of equipment 11,750 2,895
------------ ------------
Net cash provided by (used in) investing activities 2,645,698 (3,369,945)
------------ ------------
Cash flows from financing activities:
Borrowings (repayments) of notes and acceptances payable, net (6,091,255) 12,948,687
Repayment of long-term debt (152,782) (53,589)
Issuance of common stock -- 12,813
------------ ------------
Net cash provided by (used in) financing activities (6,244,037) 12,907,911
------------ ------------
Net increase (decrease) in cash and cash equivalents (149,695) 1,861,172
Cash and cash equivalents at beginning of period 1,280,887 311,419
------------ ------------
Cash and cash equivalents at end of period $ 1,131,192 $ 2,172,591
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 2,051,319 $ 1,426,932
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
6
<PAGE>
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
In management's opinion, the accompanying unaudited condensed consolidated
financial statements of Ezcony Interamerica Inc. and subsidiaries (the
"Company") contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's financial position and
the results of its operations.
The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for the reporting on Form 10-Q. Pursuant to such rules and
regulations, certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The condensed consolidated
financial statements should be read in conjunction with the Consolidated
Financial Statements and the Notes to Consolidated Financial Statements included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
The accounting policies followed for interim financial reporting are the same as
those disclosed in Note 2 of the Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
(2) USE OF ESTIMATES
The preparation of 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
financial statements and the reported amount of revenues and expenses during the
reporting period. These estimates primarily relate to the determination of the
allowance for doubtful accounts and restructuring charges. The Company's
accounts receivable are concentrated in Latin America where political and
economic changes affect the Company's ability and timing of collections.
Additionally, the Company collects certain receivables on a short-term
installment basis. Although these estimates are based on management's knowledge
of current events and actions that it may undertake in the future, actual
results may ultimately differ from these estimates.
(3) DISCONTINUED OPERATIONS
In August 1997, the Company's Board of Directors approved a plan to sell or
liquidate its non-core business subsidiary, New World Interactive, Inc. ("New
World Interactive"), as part of an overall restructuring program designed to
focus the Company's resources on its core business, the distribution of consumer
electronics. New World Interactive ceased operations on December 31, 1997. The
condensed consolidated statements of operations have been reclassified to report
separately the operating results of the discontinued operations in the prior
periods. Sales for the nine months ended September 30, 1997 were $1,116,000.
(4) RESTRUCTURING CHARGES
In the third quarter of 1998, the Company decided to restructure its operations
by closing the facility in the United States and transferring the operations to
the Colon Free Zone, Panama, facilities. The Company recorded restructuring
charges totaling $441,000 to recognize severance and benefits for employees to
be terminated ($29,000), lease obligations ($361,000) and a provision for asset
impairment ($51,000).
7
<PAGE>
(5) LOSS PER COMMON SHARE
Basic earnings or loss per common share is computed by dividing income or loss
available to common shareholders by the weighted average number of common shares
outstanding. Diluted earnings or loss per common share includes the diluting
effect of stock options and warrants. For the three and nine months ended
September 30, 1998 and 1997, the effect of stock options and warrants were not
included in the computation because such inclusion would have been antidilutive.
(6) INCOME TAXES
Effective January 1, 1997, all income derived from export operations of
companies operating in the Colon Free Zone, Panama, are tax exempt. Therefore,
the Company did not record any provision for income taxes for its operations in
Panama.
The Company did not record a benefit for income taxes for its operations in the
United States due to the full valuation that has been recorded on the taxable
loss recognized for the period.
(7) LEGAL MATTERS
A former vendor of New World Interactive has filed a civil lawsuit against the
Company and its now defunct subsidiary, New World Interactive, for breach of
contract on licensing agreements previously entered into between New World
Interactive and the former vendor. The lawsuit seeks damages of $90,750 plus
interest along with costs and attorney fees.
New World Interactive has ceased all operations and does not intend to defend
this action. The Company does not believe that it has any material liability in
this regard.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein should be read in conjunction with the Consolidated
Financial Statements, the related Notes to Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, and the Condensed Consolidated Financial Statements and
the related Notes to Condensed Consolidated Financial Statements included in
Item 1. of this quarterly report on Form 10-Q.
The financial information given below for the three months and nine months ended
September 30, 1998 and 1997 refers to the continuing operations of the Company
and excludes the operations of New World Interactive, which were discontinued in
1997.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET SALES
Net sales decreased almost 50% to $25.0 million for the three months ended
September 30, 1998 from $49.6 million for the same period in 1997. The decrease
is primarily attributable to the significant deterioration in the economic
environments of the foreign countries in which the Company sells its products.
In addition, the Company has taken steps to reduce sales to various foreign
companies due to their unacceptable credit risk.
The foreign countries in which significant decreases in sales occurred were
Colombia ($12.4 million), Paraguay ($3.7 million), Ecuador ($2.1 million) and
Peru ($1.9 million).
GROSS PROFIT
Gross profit decreased almost 50% from $3.1 million for the three months ended
September 30, 1997 to $1.6 million for the same period in 1998, as a direct
result of decreased sales in the latter period.
The Company's gross profit margin increased slightly to 6.4% for the three
months ended September 30, 1998 compared to 6.3% in the comparable 1997
period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $2.9 million for the
three months ended September 30, 1998 compared to $2.8 million for the same
period in 1997.
The increase in selling, general and administrative expenses (despite the fact
that sales decreased almost 50%) is primarily attributable to an increase of
$795,000 in provision for doubtful accounts, which represents a 100% increase as
compared to the comparable 1997 period. In addition, the Company recorded
non-recurring restructuring charges totaling $441,000 relating to the
restructuring of the Company's operations. These increases were partially offset
by a decrease in salary and commission expenses of $315,000, a reserve of
$100,000 recorded in 1997 for disputed amounts arising in the normal course of
business that did not recur in 1998 and an overall reduction in other operating
expenses.
INTEREST
Interest income decreased primarily due to lower average daily balances of
restricted cash.
9
<PAGE>
Notwithstanding the significant decrease in sales, interest expense materially
increased for the three months ended September 30, 1998 compared to the same
period in 1997 as a result of increased borrowings due to delays in the
collection of the accounts receivable and bad debts, as well as higher interest
rates applicable to the Company.
NET LOSS
The net loss was $2,004,000 ($0.44 per share) for the three months ended
September 30, 1998 compared to the loss of $45,000 ($0.01 per share) for the
three months ended September 30, 1997. The change was primarily due to decreased
sales, higher provision for doubtful accounts and higher interest expense.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET SALES
Net sales decreased 17.7% to $90.7 million for the nine months ended September
30, 1998 from $110.2 million for the same period in 1997. The decrease is
primarily attributable to the deterioration in the economic environments of the
foreign countries in which the Company sells its products. In addition, the
Company has taken steps, in the latter period, to reduce sales to various
foreign companies due to their unacceptable credit risk.
Decreased sales to Colombia ($11.5 million decrease), Paraguay ($5.1 million
decrease), United States ($3.9 million decrease), Peru ($3.4 million decrease),
Brazil ($3.3 million decrease) and various other markets were partially offset
by increased sales to Venezuela ($8.8 million increase) and the Dominican
Republic ($3.1 million increase).
GROSS PROFIT
Gross profit decreased 20.4% to $5.7 million for the nine months ended September
30, 1998 from $7.1 million for the same period in 1997, primarily as a direct
result of decreased sales in the latter period.
The Company's gross profit margin decreased to 6.3% in the nine months ended
September 30, 1998 compared to 6.5% in the comparable 1997 period. The decrease
is primarily attributable to excess merchandise in the markets in which the
Company sells its products as a result of the Asian economic crisis, which
caused a reduction in sales prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $6.8 million for the
nine months ended September 30, 1998 compared to $6.6 million for the same
period in 1997.
Despite the fact that sales decreased almost 18%, the increase in selling,
general and administrative expenses is primarily attributable to an increase of
$845,000 in provision for doubtful accounts for the nine months ended September
30, 1998, compared to the same period in 1997. In addition, the Company recorded
non-recurring restructuring charges totaling $441,000 relating to the
restructuring of the Company's operations. These increases were partially offset
by a decrease in salary and commission expenses of $140,000, reserves recorded
in 1997 for disputed amounts arising in the normal course of business and other
losses totaling $373,000 that did not recur in 1998 and an overall reduction in
other operating expenses.
INTEREST
Interest income increased primarily due to higher average daily balances of
restricted cash.
Notwithstanding the decrease in sales, interest expense increased for the nine
months ended September
10
<PAGE>
30, 1998 compared to the same period in 1997 as a result of increased borrowings
due to delays in the collection of the accounts receivable and bad debts, as
well as higher interest rates applicable to the Company.
LOSS FROM CONTINUING OPERATIONS
Loss from continuing operations was $2.9 million ($0.65 per share) for the nine
months ended September 30, 1998 compared to a loss from continuing operations of
$0.5 million ($0.11 per share) for the nine months ended September 30, 1997. The
change was primarily due to decreased sales, higher provision for doubtful
accounts and higher interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically, and will continue to finance its operations
through short-term bank borrowings, trade credit and, to a lesser extent,
internally generated funds. The Company has decreased its bank borrowings during
1998 due to decreased sales resulting from the deterioration in the economic
environments of the foreign countries in which it sells its products and the
Company's steps to reduce sales to high credit risk customers.
The Company generated $3.4 million in cash from operating activities for the
nine months ended September 30, 1998. This was primarily due to a decrease of
$6.2 million in accounts receivable and a decrease of $3.7 million in inventory
which were partially offset by a decrease of $6.0 million in accounts payable.
Cash provided by investing activities was $2.6 million for the nine months ended
September 30, 1998 which is attributable to a decrease in restricted cash
balances of $2.8 million resulting from the decrease in bank credit lines, as
described below, offset by capital expenditures of $193,000.
Cash used in financing activities was $6.2 million for the nine months ended
September 30, 1998 for the repayments of borrowings.
Management continues to believe that the Company's ability to repay its
indebtedness must be achieved primarily through funds generated from its
operations. During 1998, the Company continues to experience increasing delays
in collecting on its accounts receivable. This is primarily attributable to a
decline in the international economic and political climate, particularly in the
Latin American countries in which the Company sells its products, which, in
turn, has affected the cash flows of its customers. Future political and
economic changes in these Latin American countries in which the Company sells
its products may further materially affect the Company's ability to collect its
accounts receivable on a timely basis.
At September 30, 1998, the Company's working capital decreased to $0.6
million from $3.4 million at December 31, 1997, primarily as a result of the net
loss. If the Company is unable to prevent the future deterioration of its
working capital, the Company's operations would be adversely affected. The
Company is in the process of obtaining long term financing on its office and
showroom in the Colon Free Zone, Panama, in order to increase working capital.
In addition, the Company is implementing various action steps that may minimize
or prevent future losses. One such step is the restructuring of its current
operations by closing its facilities in the United States and transferring the
operations to the Colon Free Zone, Panama, facilities. The Company's ability to
reduce losses is greatly dependent on various factors which include the
following: (i) improving gross profit margins; (ii) increasing current sales
volume to credit-worthy customers; (iii) reducing financing costs by reducing
the number of days to collect on its accounts receivable and increasing the
turnover of inventory; and (iv) reducing operating costs by streamlining its
operations. There can be no assurance that the actions steps to be taken will
minimize or prevent future losses and prevent or reduce the future deterioration
of the Company's working capital.
During 1997, in anticipation of increased sales volumes, the Company increased
its bank credit lines. A
11
<PAGE>
general decline in the favorable economic and political climate in the Latin
American countries in which the Company does business, coupled with the Asian
economic crisis which flooded the market with excess merchandise, has adversely
affected the anticipated sales volumes for the three months and nine months
ended September 30, 1998. Since December 31, 1997, the Company's aggregate bank
credit lines have been reduced from $36.5 million to $30.0 million. The Company
has been advised by two of its lenders that their credit lines of $1 million and
$2.5 million, respectively, will not be renewed upon their expiration on
November 30, 1998 and December 31, 1998, respectively. Based on the current
operating performance of the Company and anticipated sales volumes in the next
year, the Company does not anticipate needing to replace these lines. Further,
management does not believe that such decreases will have a material effect on
the operations of the Company but may affect its short-term liquidity needs.
Additionally, the Company's primary lender, which provides the Company with a
$15 million line of credit, is in the process of renewing the line of credit.
This lender is currently allowing the Company to operate under the terms of the
expired line of credit. If the line of credit is not renewed (or is
significantly reduced) and the Company is unable to find replacement lines of
credit, the Company's operations would be materially adversely affected.
At September 30, 1998, the Company utilized $26.7 million of its bank credit
facilities. From time to time, the Company is overdue with various of its bank
lenders for periods of a few days for amounts the Company does not consider to
be significant when compared to the size of its borrowings. All of the Company's
lines of credit and credit facilities from its various lenders are "on demand".
Trade credit is an essential factor in the Company's ability to operate. The
Company believes it has and will continue to have a good relationship with its
two principal suppliers, Sony and Pioneer. At September 30, 1998 and 1997, the
Company had approximately $11.7 million and $20.0 million, respectively,
outstanding on its credit facilities with its principal suppliers.
For a variety of political and economic reasons, the import of non-essential
items such as consumer electronics has from time to time been restricted or
prohibited by many Latin American countries through exchange controls, import
quotas and restrictions, tariffs and other means. Accordingly, changes in the
trade policies of Latin American countries affect both the market for the
Company's products as well as the Company's ability to sell its products. The
ability of the Company to increase sales to credit-worthy customers is greatly
dependent upon at least four factors: (i) a favorable international economic and
political climate particularly in the Latin American countries in which the
Company sells its products, as well as in Asia; (ii) its ability to maintain or
increase profit margins on sales within the highly competitive field of consumer
electronics; (iii) its ability to provide adequate financing to customers; and
(iv) availability of credit from its suppliers and banks.
COUNTRY RISK
The Company does a substantial amount of business in Latin America. There are
significant "country risks" which arise in connection with this business,
including risks associated with the receipt of payment for goods sold. Colombia,
which represents a significant market for the Company, is a country for which
the United States Government has taken a particular interest in monitoring the
flow of funds. Although the Company believes that payments received currently
comply with all applicable United States Government regulations and laws, there
can be no assurance that forms of payment will not be challenged by the United
States Government, or that business done in Colombia by the Company will not be
materially affected by this government scrutiny.
SEASONALITY
The Company's operations have historically been seasonal, with generally higher
sales in the third and fourth fiscal quarters, resulting from transactions made
in anticipation of the Christmas holiday season. In 1998, the Company's sales in
the third quarter were lower than the first and second quarter, due to the
continued deterioration in the economic environments of the countries in which
it sells its products and the Company's steps to reduce sales to customers who
are high credit risks. In addition, sales may also vary by fiscal quarter as a
result of the availability of merchandise for sale. Therefore, the results of
any
12
<PAGE>
interim period are not necessarily indicative of the results that might be
expected during a full fiscal year.
YEAR 2000 COMPLIANCE
Many computer programs were written using two digits rather than four digits to
define the applicable year in the twentieth century. Such software may recognize
a date using "00" as the year 1900 rather than the year 2000. The Company's year
2000 issue is comprised of two areas - business applications and equipment. The
business applications component consists of the Company's business computer
systems, as well as the computer systems of third-party suppliers or customers,
whose year 2000 problems could potentially impact the Company. Equipment
exposures consist of personal computers, system servers and telephone equipment
whose year 2000 problems could also impact the Company. The Company's year 2000
project is comprised of three phases: assessment of systems and equipment
affected by the year 2000 issue; development of strategies to address affected
systems and equipment; and remediation of affected systems and equipment. The
Company is in the process of completing the assessment phase. In addition, the
Company will initiate communications with significant suppliers, including Sony
and Pioneer, and customers to determine the extent to which the Company will be
affected by third-party year 2000 issues. The cost of the year 2000 initiatives
is not expected to be material to the Company's results of operations, financial
position or cash flows. Implementation is expected to be completed before
September 30, 1999.
FORWARD LOOKING STATEMENTS
From time to time, the Company publishes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including
certain statements in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations," of this Form 10-Q, which relate to such
matters as anticipated financial performance, business prospects, technological
developments, new products and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. Such factors
include, among others: (i) the general availability of credit from its principal
suppliers and banks to the Company, specifically, the continued cooperation of
its major suppliers and its banks to provide credit, including the renewal of
the line of credit by the Company's primary lender, and their forbearance from
time to time; (ii) the Company's ability to implement action steps, such as the
restructuring ("downsizing") of the Company's operations, that will minimize or
prevent future losses or further deterioration of the Company's working capital;
(iii) the Company's ability to increase sales to credit-worthy customers; (iv)
the Company's ability to increase the profit margins on its sales within the
competitive market it operates in; (v) positive economic developments in those
foreign countries in which the Company sells a material amount of its products,
including Colombia, Venezuela, Paraguay and Ecuador.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27 Financial Data Schedule
(b) No Form 8-K was filed during the quarter ended September 30, 1998.
14
<PAGE>
SIGNATURES
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.
EZCONY INTERAMERICA INC.
Date: November 13, 1998 BY: /s/ EZRA COHEN
-----------------------------------
Ezra Cohen, President and
Chief Executive Officer
Date: November 13, 1998 BY: /s/ KENBIAN A. NG
-----------------------------------
Kenbian A. Ng,
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,131,192
<SECURITIES> 0
<RECEIVABLES> 28,662,287
<ALLOWANCES> 5,596,052
<INVENTORY> 5,434,125
<CURRENT-ASSETS> 36,929,158
<PP&E> 5,628,918
<DEPRECIATION> 1,271,169
<TOTAL-ASSETS> 41,397,489
<CURRENT-LIABILITIES> 36,367,323
<BONDS> 0
0
0
<COMMON> 12,954,723
<OTHER-SE> (9,674,586)
<TOTAL-LIABILITY-AND-EQUITY> 41,397,489
<SALES> 90,687,109
<TOTAL-REVENUES> 90,687,109
<CGS> 85,007,335
<TOTAL-COSTS> 85,007,335
<OTHER-EXPENSES> 6,814,545
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,312,090
<INCOME-PRETAX> (2,927,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,927,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,927,900)
<EPS-PRIMARY> (.65)
<EPS-DILUTED> (.65)
</TABLE>
