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 MARCH 31, 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 May 1, 1998 there were outstanding:
4,510,000 common shares, no par value
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997............................ 3
Condensed Consolidated Statements of Operations and Accumulated
Deficit Three Months Ended March 31, 1998 and 1997.............. 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997...................... 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................................ 11
Signatures .............................................................. 12
2
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
Current assets:
Cash and cash equivalents $ 605,556 $ 1,280,887
Trade accounts receivable, net 22,931,096 31,510,345
Due from directors, officers and employees, net 240,395 179,162
Inventories 15,912,744 9,176,952
Prepaid expenses and other current assets 1,906,034 1,465,637
Restricted cash 9,366,993 8,834,319
------------- -------------
Total current assets 50,962,818 52,447,302
Property and equipment, net 4,488,426 4,432,704
Other assets 115,655 48,616
------------- -------------
Total assets $ 55,566,899 $ 56,928,622
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 220,074 $ 214,537
Notes and acceptances payable 28,991,959 28,842,438
Accounts payable 17,277,145 18,252,706
Accrued expenses and other current liabilities 1,578,784 1,693,543
------------ -------------
Total current liabilities 48,067,962 49,003,224
Long-term debt 1,657,690 1,717,361
------------- -------------
Total liabilities 49,725,652 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 (7,113,476) (6,746,686)
------------- -------------
Total shareholders' equity 5,841,247 6,208,037
------------- -------------
Total liabilities and shareholders' equity $ 55,566,899 $ 56,928,622
============= =============
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
3
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
-------- --------
Net sales $ 28,398,521 $ 26,860,210
Cost of sales 26,352,595 24,945,404
--------------- ---------------
Gross profit 2,045,926 1,914,806
Selling, general and administrative expenses 1,884,755 1,503,062
--------------- ---------------
Operating income 161,171 411,744
--------------- ---------------
Other income (expenses):
Interest income 142,270 122,369
Interest expense (730,965) (432,640)
Other 60,734 42,017
--------------- ---------------
(527,961) (268,254)
---------------- ---------------
Income (loss) from continuing operations (366,790) 143,490
Loss from discontinued operations, net of income taxes of $0 - (208,860)
--------------- ---------------
Net loss (366,790) (65,370)
Accumulated deficit, beginning of period (6,746,686) (3,205,290)
--------------- ---------------
Accumulated deficit, end of period $ (7,113,476) $ (3,270,660)
=============== ===============
Income per common share - basic and assuming dilution:
Income (loss) from continued operations $ (0.08) $ 0.03
Loss from discontinued operations - (0.04)
--------------- ---------------
Net loss $ (0.08) $ (0.01)
=============== ===============
Weighted average number of common shares
outstanding - basic 4,510,000 4,500,000
Dilutive effect of stock options and warrants - 215,351
--------------- ---------------
Weighted average number of common shares
outstanding - assuming dilution 4,510,000 4,715,351
=============== ===============
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
4
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
-------- -------
Cash flows from operating activities:
Net loss $ (366,790) $ (65,370)
Reconciliation of net loss to net cash used in
operating activities-
Depreciation and amortization 76,205 45,889
Provision for doubtful accounts 44,409 113,187
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable 8,534,840 (1,323,246)
Increase in due from directors, officers and employees, net (61,233) (182,564)
Increase in inventories (6,735,792) (1,181,564)
Increase in prepaid expenses and other current assets (440,397) (507,438)
Increase in other assets (67,039) (63,319)
Increase (decrease) in accounts payable (975,561) 827,995
Increase (decrease) in accrued expenses and other
current liabilities (114,759) 375,294
Net changes in discontinued operations - (340,028)
--------------- --------------
Net cash used in operating activities (106,117) (2,301,164)
--------------- ---------------
Cash flows from investing activities:
Increase in restricted cash, net (532,674) (231,078)
Purchases of property and equipment (131,927) (233,063)
---------------- ----------------
Net cash used in investing activities (664,601) (464,141)
--------------- ---------------
Cash flows from financing activities:
Proceeds from notes and acceptances payable, net 149,521 3,042,344
Repayment of long-term debt (54,134) (14,585)
--------------- -----------------
Net cash provided by financing activities 95,387 3,027,759
--------------- -----------------
Net increase (decrease) in cash and cash equivalents (675,331) 262,454
Cash and cash equivalents at beginning of period 1,280,887 311,419
--------------- ---------------
Cash and cash equivalents at end of period $ 605,556 $ 573,873
=============== ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 787,142 $ 351,977
=============== ===============
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
5
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, 1998 are not necessarily indicative of the results
of operations or cash flows which may be reported for the remainder of 1998.
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-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) 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
period. Sales for the three months ended March 31, 1997 were $513,000.
(3) NET INCOME (LOSS) PER COMMON SHARE
Basic earnings per common share is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding.
Diluted earnings per common share includes the diluting effect of stock options
and warrants. The 1997 earnings per share amounts have been restated to reflect
the dilutive effect of stock options and warrants in order to conform to the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share".
(4) INCOME TAXES
Effective January 1, 1997, all income derived from export operations of
companies operating in the Colon Free Zone 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 provision for income taxes for its operations in
the United States of America due to the taxable loss recognized for the period.
6
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 ended March 31, 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 MARCH 31, 1998 AND 1997
NET SALES
Net sales increased 5.7% to $28.4 million for the three months ended March 31,
1998 from $26.9 million for the same period in 1997. The increase is primarily
attributable to the increased sales in the Company's existing markets and also
resulting from additional sales representatives hired in the latter part of 1997
to expand new product lines.
Increased sales to Venezuela ($3.7 million increase), Colombia ($1.7 million
increase) and the Dominican Republic ($1.3 million increase) were partially
offset by decreased sales to Brazil ($1.9 million decrease), Paraguay ($1.2
million decrease), Mexico ($0.9 million decrease) and various other markets.
GROSS PROFIT
Gross profit increased 6.8% to $2.0 million for the three months ended March 31,
1998 from $1.9 million for the same period in 1997.
The Company's gross profit margin increased slightly to 7.2% in the three month
period ended March 31, 1998 compared to 7.1% in the comparable 1997 period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $1.9 million for the
three months ended March 31, 1998 compared to $1.5 million for the same period
in 1997.
The increase in selling, general and administrative expenses is primarily
attributable to the following: (i) increase in salaries expense of approximately
$225,000 relating to employees hired in the latter part of 1997 to support the
increased operations of the Company and personnel hired to obtain and expand new
product lines, (ii) increased bank charges of approximately $70,000 and (iii)
costs associated with the new warehouse, office and showroom.
INTEREST
Interest income increased to $142,000 for the three months ended March 31, 1998
compared to $122,000 for the same period in 1997 due to higher average daily
balances of restricted cash.
Interest expense increased to $731,000 for the three months ended March 31, 1998
compared to $433,000 for the same period in 1997 as a result of additional
borrowings.
7
INCOME (LOSS) FROM CONTINUING OPERATIONS
Loss from continuing operations was $367,000 ($0.08 per share) for the three
months ended March 31, 1998 compared to income from continuing operations of
$143,000 ($0.03 per share) for the three months ended March 31, 1997. The change
was primarily due to increases 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 used $106,000 in cash for operating activities in the three months
ended March 31, 1998. This utilization was primarily due to the operating loss
for the period, $6.7 million in increased inventories, $976,000 in decreased
accounts payable and $440,000 in increased prepaid and other current assets
offset by $8.5 million in decreased trade accounts receivable.
Cash used in investing activities was $665,000 for the three months ended March
31, 1998 which is attributable to an increase in restricted cash balances of
$533,000 and capital expenditures of $132,000.
Cash provided by financing activities was $95,000 in the three months ended
March 31, 1998 principally due to additional bank borrowings.
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. Therefore, the number of days sales in accounts
receivable increased to 73 days at March 31, 1998 from 65 days at March 31,
1997. Future political and economic changes in the Latin American countries in
which the Company sells, such as the imposition or lifting of exchange controls,
may affect the Company's ability to collect its accounts 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.
The Company has since December 31, 1997 slightly decreased its bank credit lines
from $36.5 million to $36.4 million. The Company believes that the current bank
facilities are adequate to support the projected sales of the Company in the
short-term.
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.
Trade credit is an essential factor to the Company's ability to operate. The
Company believes it has and will continue to enjoy a good relationship with its
two principal suppliers, Sony and Pioneer. At March 31, 1998, December 31, 1997
and March 31, 1997 the Company's credit facility with Sony and Pioneer was $8
million for each supplier. From time to time, Sony and Pioneer have allowed the
Company to exceed its credit line above its stated amount.
At March 31, 1998, the Company had outstanding on its credit facilities with its
principal suppliers approximately $15.2 million. Management believes, that
through internally generated funds and utilization of bank lines, the Company
will maintain all accounts current and be able to support ongoing
8
operations.
At March 31, 1998, the Company had available with ten banks an aggregate of
$36.4 million in bank facilities of which $35.8 million was utilized. 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". In April 1998, the
Company was advised by one of its lenders that, due to new banking regulations
enacted in Panama, the line of credit granted to the Company had to be reduced
from $8.0 million to $2.5 million before the new laws become effective. The
Company is currently negotiating with other lenders to replace such line of
credit. However, there can be no assurances that the Company will be able to
replace the line of credit. Management does not believe that such decrease will
have a material effect on the operations of the Company but may affect
short-term liquidity needs.
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 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 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. 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.
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;
9
(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 the competitive market 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
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 10 (i) Termination of Distribution Agreement between Ezcony
Interamerica Inc. and King David Comercio Importacao e
Exportacao Ltda. dated March 30, 1998.
27 Financial Data Schedule
(b) No Form 8-K was filed during the quarter ended March 31, 1998.
11
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 15, 1998 BY: /S/ EZRA COHEN
--------------
Ezra Cohen, President and
Chief Executive Officer
Date: May 15, 1998 BY: /S/ ANA M. MENENDEZ
-------------------
Ana M. Menendez,
Chief Financial Officer
12
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10 Termination of Distribution Agreement between Ezcony Interamerica
Inc. and King David Comercio Importacao e Exportacao Ltda. dated
March 30, 1998.
27 Financial Data Schedule