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 QUARTER ENDED MARCH 31, 1999 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)
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 May 1, 1999 there were outstanding:
4,510,000 common shares, no par value
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EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
<TABLE>
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INDEX TO FORM 10-Q
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998.....................................................................3
Condensed Consolidated Statements of Operations and Accumulated Deficit
Three Months Ended March 31, 1999 and 1998...............................................................4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998...............................................................5
Notes to Condensed Consolidated Financial Statements.....................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................................................7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................................10
Signatures.......................................................................................................11
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<TABLE>
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EZCONY INTERAMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 876,939 $ 1,253,073
Trade accounts receivable, net 15,404,237 19,268,099
Due from directors, officers and employees, net 355,535 347,044
Inventories 3,915,509 2,218,369
Prepaid expenses and other current assets 951,006 664,429
Restricted cash 4,498,214 4,491,914
------------ ------------
Total current assets 26,001,440 28,242,928
Property and equipment, net 4,283,535 4,295,643
Other assets 75,005 92,281
------------ ------------
Total assets $ 30,359,980 $ 32,630,852
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 444,701 $ 444,701
Notes and acceptances payable 14,549,611 19,079,097
Accounts payable 8,909,005 6,453,328
Accrued expenses and other current liabilities 437,925 657,138
------------ ------------
Total current liabilities 24,341,242 26,634,264
Long-term debt 2,677,309 2,732,386
------------ ------------
Total liabilities 27,018,551 29,366,650
------------ ------------
Shareholders' equity:
Common stock, no par value; $15,000,000 shares 12,954,723 12,954,723
authorized; 4,510,000 shares issued and outstanding
Accumulated deficit (9,613,294) (9,690,521)
------------ ------------
Total shareholders' equity 3,341,429 3,264,202
------------ ------------
Total liabilities and shareholders' equity $ 30,359,980 $ 32,630,852
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets
3
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<TABLE>
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EZCONY INTERAMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 15,711,922 $ 28,398,521
Cost of sales 14,393,721 26,352,595
------------ ------------
Gross profit 1,318,201 2,045,926
Selling, general and administrative expenses 935,540 1,884,755
------------ ------------
Operating income 382,661 161,171
------------ ------------
Other income (expenses):
Interest income 97,515 142,270
Interest expense (458,837) (730,965)
Other 55,888 60,734
------------ ------------
(305,434) (527,961)
------------ ------------
Net Income or (Loss) 77,227 (366,790)
Accumulated deficit, beginning of period (9,690,521) (6,746,686)
------------ ------------
Accumulated deficit, end of period $ (9,613,294) $ (7,113,476)
============ ============
Income per common share - basic and assuming dilution:
Net Income (loss) $ 0.02 $ 0.08
============ ============
Weighted average number of common shares
outstanding - basic 4,510,000 4,510,000
Dilutive effect of stock options and -- 0
------------ ------------
Weighted average number of common shares
outstanding - assuming dilution $ 4,510,000 $ 4,510,000
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements
4
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<CAPTION>
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 77,227 $ (366,790)
Reconciliation of net income (loss) to net cash used in
Operating activities -
Depreciation and amortization 54,446 76,205
Provision for doubtful accounts 157,180 44,409
Changes in operating assets and liabilities:
Decrease in trade accounts receivable 3,706,682 8,534,840
Increase in due from directors, officers and employees, net (16,320) (61,233)
Increase in inventories (1,697,140) (6,735,792)
Increase in prepaid expenses and other current assets (286,577) (440,397)
Decrease (increase) in other assets 17,276 (67,039)
Increase (decrease) in accounts payable 2,463,507 (975,561)
Decrease in accrued expenses and other current liabilities (219,214) (114,759)
----------- -----------
Net cash provided by (used in) operating activities 4,257,067 (106,117)
----------- -----------
Cash flows from investing activities:
Net increase in restricted cash (6,300) (532,674)
Purchases of property and equipment (42,338) (131,927)
----------- -----------
Net cash used in investing activities (48,638) (664,601)
----------- -----------
Cash flows from financing activities:
(Repayment of) proceeds from notes and acceptances payable (4,529,486) 149,521
Repayment of long-term debt (55,077) (54,134)
----------- -----------
Net cash (used in) provided by financing activities (4,584,563) (95,387)
----------- -----------
Net decrease in cash and cash equivalents (376,134) (675,331)
Cash and cash equivalents at beginning of period 1,253,073 1,280,887
----------- -----------
Cash and cash equivalents at end of period $ 876,939 $ 605,556
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 458,837 $ 787,142
=========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements
5
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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 results of operations or cash flows for the
three months ended March 31, 1999 are not necessarily indicative of the results
of operations or cash flows which may be reported for the remainder of 1999.
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 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-K405 for the year ended December 31, 1998.
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-K405 for the year ended
December 31, 1998.
(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 estimate 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) 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 $250,759 to recognize severance and benefits for employees to
be terminated ($45,000), lease obligations ranging from a minimum of $20,800 to
a maximum of $137,259, legal fees ($17,500) and a provision for asset impairment
($51,000).
(4) INCOME TAXES
Effective January 1, 1997, all income derived from export operations of
companies operating in the Colon Free Zone are 100% tax exempt. Therefore, the
Company did not record any provision for income taxes for its operations in
Panama.
The Company did not record a provision for income taxes for its operations in
the United States of America due to the taxable loss recognized for the period.
6
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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-K405 for the year
ended December 31, 1998, 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 ended March 31, 1999
and 1998 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 MARCH 31, 1999 AND 1998
NET SALES
Net sales decreased 44.7% to $ 15.7 million for the three months ended March 31,
1999 from $28.4 million for the same period in 1998. The decrease is primarily
attributable to the decreased sales in the Company's existing markets and also
resulting from the winding up of business in the United States of America. The
Company has also reduced its product lines to eliminate slow selling brand
names.
GROSS PROFIT
Gross profit decreased 35.6% to $1.3 million for the three months ended March
31, 1999 from $2.0 million for the same period in 1998.
The Company's gross profit margin increased to 8.4% in the three month period
ended March 31, 1999 compared to 7.2% in the comparable 1998 period.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses decreased to $936,000 for the
three months ended March 31, 1999 compared to $1.9 million for the same period
in 1998.
The decrease in selling, general, and administrative expenses is primarily
attributable to the following: (i) decrease in salaries and commissions (ii)
closing of sales offices (iii) implementation of a severe austerity program to
reduce operating expenses, and (iv) benefits of the implementation of the
restructuring program.
INTEREST
Interest income decreased to $97,515 for the three months ended March 31, 1999
compared to $142,270 for the same period in 1998 due to lower average daily
balances of restricted cash in time deposits.
Interest expense decreased to $459,000 for the three months ended March 31, 1999
compared to $731,000 for the same period in 1998, as a result of a programmed
reduction of bank credit facilities to conform to the reduced sales volume.
7
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INCOME (LOSS) FROM CONTINUING OPERATIONS
Profit from continuing operations was $77,000 ($0.02 per share) for the three
months ended March 31, 1999 compared to loss from continuing operations of
$367,000 ($0.08 per share) for the three months ended March 31, 1998. The change
was primarily due to a decrease in selling, general and administrative expenses
and interest expense, as described above.
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 generated $4.3 million in cash from operating activities in the
three months ended March 31, 1999. This was primarily due to a $3.7 million
decrease in trade accounts receivable, $2.5 million increase in accounts
payable, which was offset by a $1.7 million increase in inventory.
Cash used in investing activities was $49,000 for the three months ended March
31, 1999 which is attributable to an increase in restricted cash balances of
$6,300 and capital expenditures of $42,000.
Cash used by financing activities was $4.5 million in the three months ended
March 31, 1999 principally due to repayment of bank notes and acceptances
payable.
Management believes that the Company's ability to repay its indebtedness must be
achieved primarily through funds generated from its operations. As the Company
expanded sales in existing markets such sales were primarily made on a credit
basis as compared to cash basis. Future political and economic changes in the
Latin American countries in which the Company sells its products, such as the
imposition or lifting of exchange controls, may affect the Company's ability to
collect its account receivable.
From time to time, the Company experiences temporary liquidity problems that are
typically related to the company's extension of credit to its customers.
Beginning in 1998, the Company has taken measures to decrease the number of days
to collect on its accounts receivable by not shipping merchandise to certain
customers that have significant past due balances and increasing the collection
efforts of the Company's credit and collection department and sales force.
At March 31, 1999, the Company had available with six banks an aggregate of $25
million in bank facilities of which $17.7 million was utilized. From time to
time, the Company is overdue with various bank lenders for periods of a few days
for amounts the Company does not consider to be significant in light of the size
of its borrowing. All of the Company's lines of credit and credit facilities
form its various lenders are "on demand."
The Company intends to consolidate its borrowings with its existing creditors
and new creditors in an effort to obtain lower interest rates and reduce
inventory carrying costs by factoring its trade accounts receivables which would
also limit the Company's exposures to credit, political and transfer risk. There
can be no assurances that the Company will be able to finance its trade accounts
receivables.
The Company continues to have a good relationship with its suppliers, Sony and
Pioneer. At March 31, 1999, the Company's credit facility with Sony was $4.8
million, which was partially collateralized by $2.4 million in stand-by letters
of credit. The Company's credit facility with Pioneer at March 31, 1999, was $6
million which was partially collateralized by $1.9 million in stand-by letters
of credit.
For a variety of political and economic reasons, the import of nonessential
items such as consumer electronics has been restricted or prohibited from time
to time 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 sustain continued sales growth is greatly dependent on
the continuing favorable economic and political
8
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climate of the Latin American countries that it is currently operating in, the
Company's ability to maintain or increase the profit margins on its sales within
the competitive market that it operates in, availability of payment methods to
its customers, and, to a lesser extent, product availability.
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 those 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 the 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. Typically, higher third and
fourth quarter sales result from increased sales in anticipation of the
Christmas holiday season. In addition, sales may also vary by fiscal quarter as
a result of the availability of merchandise for sale. Therefore, the results of
any 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 flow. 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) expansion of the Company's "core" business into new
geographic markets and within its current markets; (ii) 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
and their forbearance from time to time; (iii) the expansion of available credit
through the successful consolidation of the Company's borrowings; (iv) the
Company's ability to maintain or increase the profit margins on its sales within
markets which
9
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it operates in; (v) continued positive economic developments in those foreign
countries in which the Company conducts a material amount of business, including
Colombia, Paraguay, Ecuador and Venezuela.
10
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27 - Financial Data Schedule
(b) There were no Form 8-K's filed during the quarter ended
March 31, 1999.
11
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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: May 24, 1999 /S/ EZRA COHEN
------------------------------------
Ezra Cohen, President and
Chief Executive Officer
Date: May 24, 1997 /S/ CARLOS N. GALVEZ
------------------------------------
Carlos N. Galvez
Acting Chief Financial Officer
12
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
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27 Financial Data Schedule
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 876,939
<SECURITIES> 0
<RECEIVABLES> 20,826,218
<ALLOWANCES> 5,421,981
<INVENTORY> 3,915,509
<CURRENT-ASSETS> 26,001,440
<PP&E> 5,320,292
<DEPRECIATION> 1,036,757
<TOTAL-ASSETS> 30,359,980
<CURRENT-LIABILITIES> 24,341,242
<BONDS> 0
0
0
<COMMON> 12,943,723
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,359,980
<SALES> 15,711,922
<TOTAL-REVENUES> 15,865,325
<CGS> 14,393,721
<TOTAL-COSTS> 14,393,721
<OTHER-EXPENSES> 935,540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 458,837
<INCOME-PRETAX> 77,227
<INCOME-TAX> 0
<INCOME-CONTINUING> 77,227
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,227
<EPS-BASIC> .02
<EPS-DILUTED> .02
</TABLE>
