SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K405/A
[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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO _____________
COMMISSION FILE NUMBER: 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 No.)
Craigmiur Chambers
P.O. Box 71
Road Town, Tortola, British Virgin Islands
(Address of principal executive offices)
NONE
(Zip Code)
Registrant's telephone number, including area code: (507) 441-6566
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO 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. [_]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of March 29, 1999 was approximately $86,292 based on the $.125
closing sale price for the Common Stock quoted on OTC Bulletin Board on such
date. For purposes of this computation, all executive officers and directors of
the registrant have been deemed to be affiliates. Such determination should not
be deemed to be an admission that such directors and officers are, in fact,
affiliates of the registrant.
The number of shares of Common Stock of the registrant outstanding as of March
20, 1999 was 4,510,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into the
parts indicated: The registrant's definitive Proxy Statement to be filed with
the Securities and Exchange Commission not later than 120 days after the end of
the fiscal year covered by this report - Part III.
EZCONY INTERAMERICA INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 4
Item 3. Legal Proceedings................................................. 4
Item 4. Submission of Matters to a Vote of Security Holders............... 4
PART II
Item 5. Market for Registrant's Common Stock Equity and Related
Stockholder Matters.......................................... 4
Item 6. Selected Financial Data........................................... 5
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 5
Item 8. Financial Statements and Supplementary Data....................... 5
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures.................................... 5
PART III
Item 10. Directors and Executive Officers of the Registrant................ 5
Item 11. Executive Compensation............................................ 5
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 5
Item 13. Certain Relationships and Related Transactions.................... 5
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 6
PART I
ITEM 1. BUSINESS
GENERAL
Ezcony Interamerica Inc. ("Ezcony" or the "Company") is a leading distributor to
Latin America of major brand name consumer electronics, including but not
limited to, Sony, Pioneer, AIWA, Samsung, Sharp, Motorola, Brother and Philips.
See "Major Brand Name Products."
The Company's consumer electronics products are sold principally to other
wholesalers and distributors as well as directly to retail chains. The Company
believes that it is one of the largest independent distributors of Sony and
Pioneer products to Latin America.
MARKET OVERVIEW
Since the Company began operations in 1982, the principal Latin American markets
for its products have varied significantly. The largest Latin American markets
for the Company's products in 1998 were Colombia, Venezuela, Paraguay, and
Ecuador.
The following table illustrates, for the periods presented, the changes in the
principal Latin American markets for the Company's products by sales volume (in
thousands) and percentage of total net sales from continuing operations. A
portion of the Company's sales were made through distributors and exporters
located in the United States, however, this means of distribution has been
substantially eliminated as of the end of fiscal 1998.
1998 1997 1996
Amount % Amount % Amount %
Colombia $ 29,000 27 $ 52,996 33 $ 28,421 26
Venezuela 18,120 17 12,099 8 1,922 2
Paraguay 15,728 14 28,486 18 22,552 21
Ecuador 8,015 7 12,401 8 10,816 10
Others 38,067 35 52,841 33 45,035 41
----------- ---- --------- ---- ---------
Total $ 108,930 100% $ 158,823 100% $ 108,746 100%
========== === ======== ========
For a variety of political and economic reasons, the importation of
non-essential 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. 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. Future
political and economic changes in particular Latin American countries, including
changes in exchange rates, import duties or quotas, imposition or lifting of
exchange controls and other import restrictions, are likely to result in changes
in the importance to the Company of particular countries.
As described above, the Company does a substantial amount of business in Latin
America and it believes it is in compliance with all applicable governmental
regulations. 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 in which the United States Government has taken a particular interest
in monitoring the flow of funds, especially those involving "structured
payments," e.g., payment practices using a repetitive high volume of cash or
financial instruments in "round" amounts.
The Company experienced a loss as a result of a forfeiture dispute that arose
with the United States Government over certain structured payments received in
early 1998; the resolution of this matter was "recognized" for financial
purposes, in fiscal 1997. The Company has discontinued accepting this form of
payment in connection with its Colombian receivables. The Company does not
believe that this change in payment policy will materially or adversely affect
its business; however, there can be no assurance that other, similar forms of
payment will not be challenged by the United
1
States Government, or that the business done in Colombia by the Company will not
be materially affected by this governmental scrutiny.
The Company believes that the consumer electronics markets in Latin America
differ from similar markets in the United States. First, the Company believes
that in Latin America independent regional distributors are usually the
principal means of distribution of consumer electronics, unlike in the United
States where direct sales by manufacturers are more typical. Although most major
consumer electronics manufacturers have single-country distributors, operating
subsidiaries or joint ventures in the major Latin American countries,
independent regional distributors such as Ezcony still represent the predominant
channel for consumer electronic sales in Latin America. The Company expects that
over a period of time this means of distribution may well evolve into a system
more like that in the United States. Second, the Company believes that
state-of-the-art technology, while an important factor in marketing consumer
electronics in the United States, is less important in Latin America where
consumers generally are willing to purchase less advanced products for longer
periods of time. Finally, Latin American markets for consumer electronics
generally are less developed than in the United States. For example, products
such as televisions and radios have reached relatively low consumer penetration
levels in Latin America compared to that of the United States.
MAJOR BRAND NAME PRODUCTS
Ezcony distributes a wide range of major brand name consumer electronics,
including televisions, video cassette recorders, cellular products, automobile
audio equipment, personal portable stereos, home audio equipment, camcorders and
appliances. In 1998, sales of Sony, Pioneer, Samsung, and AIWA products
accounted for approximately 31%, 30%, 17% and 11%, respectively, of the
Company's total net sales.
Ezcony purchases most of its major brand name consumer electronics directly from
manufacturers. As is customary with independent distributors of consumer
electronics in Latin America, Ezcony has no written distributorship agreement or
arrangement with any manufacturer. The Company has a continuing relationship
with Sony for over 15 years. The Company has not experienced difficulty in
obtaining a satisfactory supply of marketable consumer electronics from Sony,
Pioneer, Samsung, and AIWA without having written distributorship or other
agreements. From time to time, the Company has purchased major brand name
consumer electronics from other sources, including other wholesalers and
distributors.
Most of the purchases of Sony and Pioneer products, are supplied from inventory
of these manufacturers located at their respective warehouses in the Colon
Panama Free Zone. This method of supply allows the Company to limit the amount
of inventory that it must keep on hand, the related inventory holding costs and
to reduce the lead time on the placement of orders for products. Sony, Pioneer
and Samsung extend the Company credit for its purchases; during 1998 AIWA
required the Company to pay cash for shipment of products which were purchased
directly from the Far East. At December 31, 1998, the Company's trade accounts
payable to Sony, Pioneer and Samsung were approximately $3.7 million, $1.6
million and $456,000, respectively.
Sales of Sony products accounted for approximately 31%, 33% and 37% of the
Company's major brand name product sales in 1998, 1997, and 1996, respectively.
Sales of Pioneer products accounted for approximately 30%, 34% and 36% of the
Company's major brand name products sales in 1998, 1997, and 1996, respectively.
Sales of Samsung products represented 17% and 9% of the Company's major brand
name products sales in 1998 and 1997 and was not part of the Company's major
brand name products in 1996. Sales of AIWA products accounted for approximately
11%, 12% and 14% of the Company's major brand name product sales in 1998, 1997
and 1996, respectively.
DISCONTINUED OPERATIONS
In August 1997, the Company's Board of Directors approved a plan to sell or
liquidate its noncore 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 all operations December 31, 1997; in
this regard, during 1998 New World Interactive returned inventory to vendors
valued at approximately $50,000, and resolved a pending legal action against it.
The Company anticipates no further corporate action in this regard; however,
there can be no assurance that additional obligations of New World Interactive
will not be asserted against it.
2
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).
SALES AND DISTRIBUTION
Ezcony sells its products primarily to wholesalers and distributors for re-sale
in Latin America. In addition, the Company sells directly to several Latin
American retail chains. Ezcony has a direct sales staff, which regularly calls
on and visits customers and prospective customers and assists the Company in
evaluating market conditions and customers' creditworthiness in their assigned
market areas.
In certain countries sales are made to a small number of customers, while in
other countries (such as Colombia) sales are made to approximately 150
customers. The Company's customers included distributors and exporters located
in the United States, most of whom re-export the Company's products directly to
Latin America; however, this aspect of the Company's distribution has been
significantly curtailed. During the last three fiscal years, no customers
accounted for more than 10% of the Company's total net sales.
The Company maintains warehouse facilities in Panama. During 1998 the Company
also leased a warehouse in Miami, Florida, and used on an "as needed" basis a
customs-bonded warehouse also in Miami; the Company ceased using these U.S.
facilities in the last quarter of 1998. Operating from a customs-bonded
warehouse in the Colon Free Zone allows the Company to import, store and export
products without incurring customs duties unless the products are sold locally.
See "Properties", below.
Generally, sales are recorded upon delivery of merchandise to the shipper. The
Company at times sells inventory while still on board vessels inbound from the
Far East. In these instances, inbound freight containers are transloaded in port
or at public warehouses for shipment to the Company's customers to minimize
warehousing and handling costs. Since products are normally shipped to its
customers shortly after receiving an order, the Company historically has not
maintained a significant backlog of orders relative to its sales.
CUSTOMER CREDIT
The majority of sales by the Company are made on open account terms, with
payment due within 30 to 60 days after receipt of goods by the customers. All
other sales are made on the basis of payment on or in advance of delivery of
merchandise to the shipper or upon receipt of a letter of credit. Certain sales
made by the Company are collected in cash and other negotiable instruments. The
Company requires payment in U. S. dollars for all of its sales. The Company
establishes credit limits for its customers based on its knowledge of the
customer, the customer's payment history with available trade references, market
conditions and other factors. The Company performs its own analysis of the
creditworthiness of its customers, as the credit reporting systems in Latin
America do not have an extensive base. In addition to the risks customarily
associated with extending credit, the Company has experienced losses from
uncollectible receivables due to the difficulty of pursuing judicial remedies in
most Latin American countries.
COMPETITION
The Company competes in the sale of consumer electronics with numerous
wholesalers and distributors, some of which have greater financial and other
resources than the Company. The Company believes that the most important
competitive factors in the sale of consumer electronics in Latin America are
extension of customer credit, price, quality and variety of merchandise and the
ability to obtain sufficient quantities of merchandise for immediate delivery.
EMPLOYEES
At December 31, 1998, the Company had 71 full-time employees, all in Panama. As
of that date, there were no employees in the United States. None of the
Company's employees are represented by a labor union and the Company has not
experienced any material work stoppages. The Company considers its relations
with its employees to be good.
3
GEOGRAPHICAL SEGMENT INFORMATION
See Notes to the Company's Consolidated Financial Statements, Part II, Item 8,
for geographical segment information regarding sales, assets and operating
income for 1998, 1997 and 1996.
ITEM 2. PROPERTIES
In October 1997, the Company transferred its warehousing operations from two
leased warehouses to a 106,000 square foot warehouse in the Colon Free Zone. In
January 1998, the Company took occupancy of its new 16,140 square feet office &
showroom in the Colon Free Zone, which was completed at a cost of approximately
$1,235,000. The Company believes that the new warehouse and office & showroom
were needed to support the current operations and future growth; these
facilities are leased from "La Zone Libre De Colon" a governmental agency which
owns the land of the Colon Free Zone. The leases of the real property underlying
the warehouse and the office & showroom land expire on July 31, 2014 and October
31, 2016, respectively, and require annual payments of $12,952 and $6,811,
respectively. The leases can be renewed for a 20-year renewal term, at the
option of the Company at the rental rate and terms which are in effect for the
Colon Free Zone at the time of renewal.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation. The Company
believes that presently pending actions will not have a material adverse impact
on its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on "OTC Bulletin Board" under the symbol
"EZCOF". The following table sets forth the high and low sales prices for the
Common Stock for each quarter during the last two fiscal years as reported by
the Nasdaq National Market, and the "OTC Bulletin Board".
1997 1998
High Low High Low
First Quarter 3/31 $ 3.81 $ 1.81 $ 2.19 $ 1.06
Second Quarter 6/30 3.13 2.25 1.06 0.63
Third Quarter 9/30 3.13 1.88 0.75 0.25
Fourth Quarter 12/31 2.75 1.88 0.31 0.13
The Company is not in compliance with the new market value of public float
requirement pursuant to NASD Marketplace Rule 4450 (a) (2), which became
effective February 23, 1998. Because of this deficiency, effective August 6,
1998, the Company's common stock was no longer included in the Nasdaq SmallCap
Market, and thereafter the Company's Common Stock began trading on the "OTC
Bulletin Board" market.
There were 73 shareholders of record of the Company's Common Stock on March 20,
1999.
4
The Company presently has no plans to pay any dividends on its Common Stock and
has never paid any dividends. All earnings will be retained for the foreseeable
future to support operations and to finance the growth and development of the
Company's business. The payment of future cash dividends, if any, will be at the
discretion of the Board of Directors of the Company and will depend upon, among
other things, future earnings, capital requirements, the Company's financial
condition and on such other factors deemed relevant by the Board of Directors.
The Company is not currently subject to any law or regulation of the British
Virgin Islands which would restrict or affect the remittance of dividends or
other payments to any holders of its Common Stock or which require tax
withholding from any United States holders of its Common Stock. There is no
reciprocal tax treaty between the British Virgin Islands and the United States
regarding withholding.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for each of the years in the five-year period ended
December 31, 1998 are derived from the Company's Consolidated Financial
Statements which have been prepared in accordance with generally accepted
accounting principles in the United States and have been audited by the
Company's independent accountants. The selected financial data should be read in
conjunction with the Company's Consolidated Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Part II Item 7 of this Form 10-K405/A.
YEAR ENDED DECEMBER 31,
1994(1) 1995(1) 1996(1) 1997 1998
(in thousands, except per share data)
INCOME STATEMENT DATA:
Net sales - continuing operations $ 104,322 $ 77,529 $ 108,746 $ 158,823 $ 108,930
Operating income (loss) from
Continuing operations 1,848 (370) 2,596 929 (810)
Income (loss) from continuing operations 2,073 104 1,930 (933) (2,944)
Income (loss) from discontinued operations (848) (385) (852) (2,609) --
Net income (loss) 1,225 (281) 1,078 (3,541) (2,944)
PER COMMON SHARE:
Income (loss) from continuing operations $ 0.46 $ 0.02 $ 0.43 (0.21) $ (0.65)
Income (loss) from discontinued operations (0.19) (0.08) (0.19) (0.58) --
--------- --------- --------- --------- ---------
Net income (loss) $ 0.27 $ (0.06) $ 0.24 $ (0.79) $ (0.65)
========= ========= ========= ========= =========
Weighted average number of
Common shares outstanding 4,500 4,500 4,500 4,504 4,510
========= ========= ========= ========= =========
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital $ 7,603 $ 7,414 $ 8,386 $ 3,444 $ 1,609
Total assets 33,996 29,336 37,542 56,929 32,631
Short-term debt 7,903 7,728 11,765 29,057 19,524
Long-term debt 574 519 458 1,717 2,732
Shareholders' equity 8,940 8,659 9,737 6,208 3,264
<FN>
- ----------
(1) Amounts have been restated to reflect the discontinued operations of New
World Interactive.
</FN>
5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 and the related Notes to Consolidated Financial Statements.
The financial information in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to the continuing operations of the
Company and excludes the operations of New World Interactive.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
NET SALES. Net sales decreased 31% to $109 million in 1998 from $159 million in
1997. The decrease is primarily attributable to the decreased sales in the
Company's existing markets, as well as the winding up of business in the United
States of America. The Company has also reduced its product lines to eliminate
low selling brand names. Decreased sales to Colombia ($24 million decrease),
Paraguay ($13 million decrease), Ecuador ($4.4 million decrease) and various
other markets could not be offset by increased sales to Venezuela ($6 million
increase), Dominican Republic ($3.0 million increase) and Guatemala ($2.8
million increase).
During 1998, sales of Sony products decreased to $33.7 million or 31% of net
sales as compared to 1997 sales of $52.4 million or 33% of net sales. Pioneer
sales were $32.3 million in 1998 or 30% of net sales compared to $54.5 million
or 34% of net sales in 1997. Samsung represented a new brand name product line
for the Company in 1997 and contributed $18 million in net sales in 1998 as
compared to $13.8 million in net sales in 1997.
GROSS PROFIT. Gross profit decreased 35% to $7.1 million in 1998 from $10.9
million in 1997. The Company's gross profit margin decreased to 6.5% in 1998
from 6.9% in 1997. The decrease is primarily attributable to excess merchandise
in the markets in which the Company sells its products, which the Company
believes to be an indirect result of the current Asian economic crisis and as a
result of this increased competition the Company experienced a reduction in its
prices for goods sold and decreased margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $7.9 million in 1998 versus $10 million in
1997. Selling, general and administrative expenses were principally affected by
charges incurred by the Company in 1998 in connection with (i) decrease in
salaries and commissions, closing a sales office, and (ii) the implementation of
a severe austerity program to reduce operating expenses to the minimum.
INTEREST. Interest income increased from $454,102 in 1997 to $495,540 in 1998
due to higher average daily balances of restricted cash.
Interest expense increased from $2.2 million in 1997 to $2.9 million in 1998
from borrowings which were a result of decreased sales.
OTHER INCOME. Other income increased to $276,268 in 1998 from $175,509 in 1997.
This increase is primarily attributable to the additional rental income derived
from partially leasing the warehouse and the yearly increase of rental income
from property leased to third parties.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Loss from continuing operations was
$2.9 million ($.65 per share) in 1998 compared to a loss from continuing
operations of $933,000 ($.21 per share) in 1997. The change was primarily due to
the decrease in gross profit margins because of increasing competition and the
decreased sales volume (principally because of an increased amount of "cheaper"
Asian products), higher provisions for doubtful accounts and higher interest
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operation 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 the decreased
sales resulting from deterioration in the economic environment of the foreign
countries in which it sells its goods.
6
The Company generated approximately $4.3 million in cash for operating
activities in 1998. This was primarily due to a decrease in trade accounts
receivables of $8.9 million primarily as a result of reduced sales on credit
which was offset in part by $11.7 million decrease in accounts payable and $6.9
million decreased inventory.
Cash provided for investing activities was approximately $4.2 million in 1998
primarily attributable to a decrease in restricted cash and capital expenditures
related to the purchase of the new warehouse, office and showroom.
Cash used for financing activities was approximately $8.5 million in 1998
principally due to the repayment of notes and acceptances due banks and long
term debt.
The Company receives open account credit from the majority of its principal
suppliers, with the exception of AIWA in amounts determined by such
manufacturers from time to time and are due on terms which range from 30 days to
90 days after receipt of inventory.
The Company continues to have good relationships with its principal suppliers,
Sony and Pioneer. At December 31, 1998 and 1997, 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
December 31, 1998, was $6 million which was partially collateralized by $1.9
million in stand-by letters of credit as compared to $2.5 million at December
31, 1997. From time to time both Sony and Pioneer have allowed the Company to
exceed its credit line above its stated amount. At December 31, 1998, the
Company's trade payable to Sony and Pioneer was approximately $3.8 million and
$1.6 million, respectively.
The Company finances its purchases of inventory from the Far East by opening
letters of credit to the suppliers up to 45 days in advance of shipment. Upon
receipt of inventory, the related letter of credit is converted to trade
acceptances, typically maturing within 120 to 180 days. The Company incurs bank
charges for the issuance and negotiation of letters of credit as well as
interest charges for the time the promissory notes are outstanding.
At December 31, 1998, the Company had outstanding $19.1 million in notes and
acceptances principally maturing at varying dates through 1999 at varying
interest rates based on LIBOR, IBOR and prime rate ranging from 8.8% to a rate
fixed at 10.3%.
The Company's short-term borrowings are partially collateralized by
approximately $4.5 million of time deposits owned by the Company. None of the
Company's lenders is under any obligation to continue to provide credit to the
Company under currently existing terms.
Management believes that the Company's ability to repay its indebtedness must be
achieved primarily through funds generated from its operations. The Company
intends to consolidate its borrowings 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 risks. There can be no assurances that the Company will be able to
consolidate its borrowings or finance its trade accounts receivables.
As the Company reduced sales in existing markets such sales were primarily made
on a credit basis as compared to cash basis. Therefore, the number of day's
sales in accounts receivable decreased to 64 days at December 31, 1998 from 72
days at December 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.
At December 31, 1998, the Company's working capital decreased to $1.6 million
from $3.4 million at December 31, 1997, primarily due to loss from continuing
operations and maintaining a lower inventory.
At December 31, 1998, and March 31, 1999, the Company had available with seven
banks an aggregate of $28 million in bank facilities of which $22.3 million and
$23.1 million, respectively, 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
borrowings. All of the Company's lines of credit and credit facilities from its
various lenders are "on demand".
7
For a variety of political and economic reasons, the importation 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 it
operates in, availability of payment methods to our customers, and, to a lesser
extent, product availability.
SEASONALITY
The Company's operations have historically been seasonal with generally higher
sales in the third and fourth fiscal quarters. Higher third and fourth quarter
sales result from increased sales to retail chains and in anticipation of the
Christmas holiday season. 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.
FOREIGN EXCHANGE FLUCTUATIONS
Although fluctuations in foreign exchange rates could affect the Company's cost
of inventory, such fluctuations have not been material to the Company's results
of operations since the Company makes all its purchases in U.S. dollars.
Unforeseen fluctuations in foreign exchange rates could result in the Company's
customers being unable to meet their obligations since the Company requires
payment in U.S. dollars for all of its sales.
ASSET MANAGEMENT
In 1998, the Company's inventory turnover from continuing operations was 17
times compared to 14 times for the year ended December 31, 1997. The generally
high rate of inventory turnover benefits the Company by allowing it to maximize
its sales within its limitations in supplier and bank credit. The Company
generally does not maintain significant inventory of its products. At December
31, 1998 inventories were $2.2 million compared to $9.2 million at December 31,
1997, a decrease of 76%.
At December 31, 1998 trade accounts receivable were $19.3 million compared to
$31.5 million at December 31, 1997, a decrease of 38.9%. The decrease was
primarily due to the reduced level of sales which has primarily been on credit.
At December 31, 1998, the number of days of sales from continuing operations in
accounts receivable was 64 days compared to 72 days at December 31, 1997. This
decrease was principally due to an decrease in the extension of credit and terms
to existing customers over the prior year as a result of negative economic
developments in the countries in which the Company sells its products.
The Company grants credit to its customers after considering various factors,
including reputation, location, available financial information and the number
of years in business. No formal credit reporting is available for Latin American
companies. The Company closely monitors credit sales by monitoring each
customer's payment history and other relevant information.
YEAR 2000 ISSUES
The Company's year 2000 compliance issue, is comprised of two areas, business
applications and equipment. The business applications issue 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.
The Company's internal accounting package is currently not in year 2000
compliance; however, the Company can secure the software to bring the accounting
system into compliance for less than $50,000. The Company is still in the
assessment phase to determine what will be required of the Company's hardware to
bring the accounting system into
8
compliance. The Company does not believe that the year 2000 will have any impact
on its buyers; however, the Company will initiate communications with
significant suppliers, including SONY and Pioneer, and other 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 10K, 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 successful retrenchment of the Company's
operations in Panama, (ii) the general availability of credit from its principal
suppliers and banks to the Company to finance its inventory, specifically, the
continued cooperation of its major suppliers and its banks to provide credit,
and their forbearance from time to time as well as the successful consolidation
of the Company's borrowings; (iii) the discontinuation of certain non-profit
aspects of its business, e.g., certain products and customers; (iv) the
Company's ability to maintain or increase the profit margins on its sales within
the highly competitive markets in which it operates; (v) economic developments
in those foreign countries in which the Company conducts a material amount of
business, including Colombia, Paraguay, Ecuador and Venezuela, as well as in
those markets which are the source of competition, e.g., in Asia.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Furnished.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
The Company was formally advised in writing on December 2, 1998, that
its independent certified public accountants were withdrawing from their
engagement to audit the Company's financial statements. The accountants' report
on the Company's financial statements for the previous two years did not contain
any adverse opinion, or disclaimer of opinion, nor were any such reports
modified as to uncertainty, audit scope or accounting principles. Further, there
have been no disagreements with the former accountants on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which disagreement, if not resolved to the satisfaction of
the accountants, would have caused the accountants to make reference to the
subject matter of the disagreement(s) in connection with their report(s) thereon
during the Company's two most recent fiscal years and the subsequent interim
period through December 2, 1998 (the date of the former accountant's
resignation). A copy of the accountants' resignation letter appears as an
exhibit hereto.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information with respect to directors and executive officers of the Company
is incorporated by reference to the Company's Proxy Statement to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by reference
to the Company's Proxy Statement to be
9
filed with the Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required in response to this item is incorporated by reference
to the Company's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by reference
to the Company's Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) (1) FINANCIAL STATEMENTS
Financial statements of the Company will be filed by amendment and will
be set forth in Part II, Item 8.
(2) FINANCIAL STATEMENTS SCHEDULE
Schedule II - Valuation and Qualifying accounts for the year ended
December 31, 1998, 1997 and 1996, will be filed
by amendment.
(3) EXHIBITS
Exhibit
No. Description Method of Filing
3 (a) Amended and Restated Memorandum of Association and Articles of
Association of the Registrant (2)
3 (b) Amendment to Amended and Restated Memorandum of Association and
Articles of Association (3)
4 (a) Form of Warrant Agreement (1)
4 (b) Amendment to Warrant Agreement (5)
4 (c) Second Amendment to Warrant Agreement (6)
10.1 Amended and Restated Stock Option Plan (6)
10.2 Retirement Agreement dated February 26, 1996 with Moises Ezra Cohen (5)
10.3 "Poliza de Credito" from "Banco Exterior" dated January 27, 1992 (with
accompanying English summary) (1)
10.4 "Poliza de Credito" from "Banco Exterior" dated September 4, 1991 (with
accompanying English summary) (1)
10.5 Confidentiality and Non-Competition Agreement of Enrique P. Lacs (1)
10.6 "Permiso de Operacion 179" (with accompanying English summary) (1)
10.7 Lease from Ezcony Trading Corporation to Hooters and Dreams, S.A. dated
March 18, 1994 (with accompanying English summary) (4)
10.8 Hamilton Bank Security Agreement made by Ezcony Trading Corporation (5)
10
(continued)
Exhibit
No. Description Method of Filing
10.9 Loan Contract (Line of Credit) with Banco de Iberoamerica (with English
summary) (5)
10.10 Addendum dated May 12, 1997 to the Distribution Agreement for Motorola
Cellular Products dated June 17, 1996 by and between King David Com.
Exportacao e Importacao Ltda. and Ezcony Interamerica Inc. (7)
10.11 Termination Agreement dated June 18, 1997 and Confidentiality and
Noncompetition Agreement by and between Ezcony Interamerica Inc. and
Subsidiaries and Ezra Homsany (7)
10.12 "Poliza de Credito" from "Banco Exterior" dated July 8, 1997 (with
accompanying English summary) (8)
10.13 "Poliza de Credito" from "The Chase Manhattan Bank" dated June 4, 1997
(with accompanying English summary) (8)
10.14 "Poliza de Credito" from "Banco Confederado De America Latina, S.A."
dated June 18, 1997 (with accompanying English summary) (8)
10.15 "Poliza de Credito" from "Banco Panamericano, S.A." dated June 17, 1997
(with accompanying English summary) (8)
10.16 Loan Contract (Line of Credit) with Banco de Iberoamerica (with
accompanying English summary) (8)
10.17 "Contrato de Compraventa De Acciones" dated September 2, 1997 (with
accompanying English summary) (8)
10.18 Contract for purchase of building from COFRISA dated July 28, 1997 (with
accompanying English summary) (8)
10.19 Credit Facility with Hamilton Bank dated December 30, 1998 (10)
16 Accountant's letter (9)
22 List of subsidiaries (5)
23 Consent of McClain & Company, L.C. (10)
27.1 Financial Data Schedule (10)
99 Accountant's resignation letter (11)
<FN>
- ----------
(1) Incorporated by reference to Ezcony's Form F-1 dated May 21, 1992 (No. 33-48061)
(2) Incorporated by reference to Ezcony's Amendment No. 1 dated July 9, 1992 to Ezcony's Form F-1
(3) Incorporated by reference to Ezcony's Form 10-Q for the quarterly period ended September 30, 1994
(4) Incorporated by reference to Ezcony's Form 10-K for the year ended December 31, 1994
(5) Incorporated by reference to Ezcony's Form 10-K for the year ended December 31, 1995
(6) Incorporated by reference to Ezcony's Form 10-K for the year ended December 31, 1996
(7) Incorporated by reference to Ezcony's Form 10-Q for the quarterly period ended June 30, 1997
(8) Incorporated by reference to Ezcony's Form 10-K405/A as filed with the Securities and Exchange
Commission on April 15, 1998
(9) Incorporated by reference to Ezcony's Form 8-K/A as filed with the Securities and Exchange Commission
on December 18, 1998
(10) To be filed by amendment
(11) Incorporated by reference to Ezcony's Form 8-K as filed with the Securities and Exchange Commission on December 7, 1998
</FN>
(b) Reports on Form 8-K
The following reports on Form 8-K were filed in the last quarter
of the period covered by this report:
(1) Form 8-K dated December 2, 1998, as filed with the
Securities and Exchange Commission on December 7,
1998
(2) Form 8-K/A dated December 18, 1998, as filed with the
Securities & Exchange Commission on December 21,
1998.
11
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.
EZCONY INTERAMERICA INC.
Date: APRIL 26, 1999 BY: /s/ EZRA COHEN
------------------
Ezra Cohen
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.
SIGNATURE TITLE DATE
/S/ EZRA COHEN Director, Chairman of the Board, April 26, 1999
- -------------- President and Chief Executive Officer
Ezra Cohen
/S/ CARLOS N. GALVEZ Acting Chief Financial Officer April 26, 1999
- -------------------- (Principal Financial and Accounting
Carlos N. Galvez Officer)
/S/ MOISES EZRA COHEN Director April 26, 1999
- ---------------------
Moises Ezra Cohen
/S/ MICHAEL DOWLING Director April 26, 1999
- -------------------
Michael Dowling
/S/ LEONARD J. SOKOLOW Director April 26, 1999
- ----------------------
Leonard J. Sokolow
/S/ EZRA HOMSANY GATENO Director April 26, 1999
- -----------------------
Ezra Homsany Gateno
/S/ ENRIQUE LACS Director April 26, 1999
- -----------------------
Enrique Lacs
12
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
EZCONY INTERAMERICA, INC. AND
SUBSIDIARIES
ROAD TOWN, TORTOLA
BRITISH VIRGIN ISLANDS
[MCCLAIN & COMPANY, L.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ezcony Interamerica, Inc. and Subsidiaries
British Virgin Islands
We have audited the consolidated balance sheet of Ezcony Interamerica, Inc. and
subsidiaries as of December 31, 1998 and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated balance sheet of Ezcony Interamerica, Inc. and
subsidiaries as of December 31, 1997 and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended December 31,
1997 and 1996, were audited by other auditors whose report dated March 30, 1998,
expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Ezcony
Interamerica, Inc. and subsidiaries as of December 31, 1998, and the
consolidated results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ McClain & Company, L.C.
April 13, 1999
Page 1 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(STATED IN U.S. DOLLARS)
ASSETS
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 1,253,073 $ 1,280,887
Trade accounts receivables, net 19,268,099 31,510,345
Due from directors, officers and employees, net 347,044 179,162
Inventories 2,218,369 9,176,952
Prepaid expenses and other current assets 664,429 1,465,637
Restricted cash 4,491,914 8,834,319
------------ ------------
Total current assets 28,242,928 52,447,302
PROPERTY AND EQUIPMENT, NET 4,295,643 4,432,704
OTHER ASSETS 92,281 48,616
------------ ------------
Total assets $ 32,630,852 $ 56,928,622
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and acceptances payable $ 19,079,097 $ 28,842,438
Current portion of long-term debt 444,701 214,537
Accounts payable 6,453,328 18,252,706
Accrued expenses and other current liabilities 657,138 1,693,543
------------ ------------
Total current liabilities 26,634,264 49,003,224
LONG-TERM DEBT 2,732,386 1,717,361
Total liabilities 29,366,650 50,720,585
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 14 AND 15)
SHAREHOLDERS' EQUITY:
Common stock, no par value, 15,000,000 shares
authorized; issued and outstanding 4,510,000
shares in 1998 and 1997 12,954,723 12,954,723
Accumulated deficit (9,690,521) (6,746,686)
------------ ------------
Total shareholders' equity 3,264,202 6,208,037
------------ ------------
Total liabilities and shareholders' equity $ 32,630,852 $ 56,928,622
============ ============
See independent auditors' report and the accompanying notes to consolidated
financial statements, which are an integral part of these statements.
Page 2 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(STATED IN U.S. DOLLARS)
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
NET SALES $ 108,930,340 $ 158,822,628 $ 108,746,024
COST OF SALES 101,836,237 147,921,363 100,175,931
------------- ------------- -------------
Gross profit 7,094,103 10,901,265 8,570,093
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 7,904,052 9,971,888 5,973,991
------------- ------------- -------------
Operating (loss) income (809,949) 929,377 2,596,102
OTHER INCOME (EXPENSES)
Interest income 495,540 454,102 337,246
Interest expense (2,905,694) (2,235,660) (1,148,697)
Litigation expense -- (255,000) --
Other 276,268 174,509 281,667
------------- ------------- -------------
(Loss) income from continuing
operations before income taxes (2,943,835) (932,672) 2,066,318
PROVISION FOR INCOME TAXES -- -- (136,490)
------------- ------------- -------------
(Loss) income from continuing
operations (2,943,835) (932,672) 1,929,828
------------- ------------- -------------
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of
income taxes -- (733,938) (852,174)
Loss on disposal, including $687,106 for
operating losses during the phase out
period, net of income taxes
(1,874,786) -- --
-- (2,608,724) (852,174)
------------- ------------- -------------
Net (loss) income $ (2,943,835) $ (3,541,396) $ 1,077,654
============= ============= =============
EARNINGS PER COMMON SHARE-BASIC
AND ASSUMING DILUTION
(Loss) income from continuing operations $ (0.65) $ (0.21) $ 0.43
Loss from discontinued operations -- (0.58) (0.19)
------------- ------------- -------------
Net (loss) income $ (0.65) $ (0.79) $ 0.24
============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING-BASIC 4,510,000 4,503,644 4,500,000
DILUTIVE EFFECT OF STOCK OPTIONS
AND WARRANTS -- -- 21,688
------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING-ASSUMING
DILUTION 4,510,000 4,503,644 4,521,688
============= ============= =============
See independent auditors' report and the accompanying notes to consolidated
financial statements, which are an integral part of these statements.
Page 3 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(STATED IN U.S. DOLLARS)
NUMBER OF
SHARES TOTAL
ISSUED AND COMMON (ACCUMULATED SHAREHOLDERS'
OUTSTANDING STOCK DEFICIT) EQUITY
----------- ----------- ----------- -----------
BALANCE, January 1, 1995 4,500,000 $12,941,910 $(4,282,944) $ 8,658,966
Net income -- -- 1,077,654 1,077,654
----------- ----------- ----------- -----------
BALANCE, December 31, 1996 4,500,000 12,941,910 (3,205,290) 9,736,620
Stock options exercised 10,000 12,813 -- 12,813
Net loss -- -- (3,541,396) (3,541,396)
----------- ----------- ----------- -----------
BALANCE, December 31, 1997 4,510,000 12,954,723 (6,746,686) 6,208,037
Net loss -- -- (2,943,835) (2,943,835)
----------- ----------- ----------- -----------
BALANCE, December 31, 1998 4,510,000 $12,954,723 $(9,690,521) $ 3,264,202
=========== =========== =========== ===========
See independent auditors' report and the accompanying notes to consolidated
financial statements, which are an integral part of these statements.
Page 4 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(STATED IN U.S. DOLLARS)
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (2,943,835) $ (3,541,396) $ 1,077,654
Adjustments to reconcile net (loss) income
to net cash provided by (used in) operating
activities:
Depreciation and amortization 262,709 262,390 187,611
Provision for doubtful accounts 3,326,551 2,646,509 901,950
Loss on abandonment 50,886 -- --
Provision for inventory write-down -- 12,189 166,652
Loss on sale of fixed assets, net -- 1,830 8,113
Loss on disposal of discontinued
operations -- 1,874,786 --
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable 8,915,695 (15,962,811) (5,599,150)
Decrease (increase) in due from
affiliates, net 9,686 --
Increase in due from directors, officers
and employees, net (167,882) (69,810) (60,885)
Decrease (increase) in inventories 6,958,583 737,357 (4,410,741)
Decrease (increase) in prepaid
expenses and other assets 757,543 (332,886) (240,398)
(Decrease) increase in accounts payable (11,799,378) 3,450,059 3,026,862
(Decrease) increase in accrued expenses
and other current liabilities (1,044,233) 1,016,007 77,770
Net changes in discontinued operations -- (1,976,643) 355,455
------------ ------------ ------------
Net cash provided by (used in)
operating activities 4,316,639 (11,872,733) (4,509,107)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in restricted cash 4,342,405 (2,751,395) (951,521)
Purchases of property and equipment (176,534) (1,487,904) (308,021)
Proceeds from sale of property and equipment -- 17,543 23,450
------------ ------------ ------------
Net cash provided by (used in)
investing activities 4,165,871 (4,221,756) (1,236,092)
------------ ------------ ------------
See independent auditors' report and the accompanying notes to consolidated
financial statements, which are an integral part of these statements.
Page 5 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(STATED IN U.S. DOLLARS)
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment of) proceeds from notes and
acceptances payable, net $ (9,755,513) $ 17,138,752 $ 3,975,810
Proceeds from long-term borrowings 1,450,000 500,000 --
Repayment of long-term debt (204,811) (587,608) (54,525)
Issuance of common stock 12,813 --
------------ ------------ ------------
Net cash (used in) provided by
financing activities (8,510,324) 17,063,957 3,921,285
------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents (27,814) 969,468 (1,823,914)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,280,887 311,419 2,135,333
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 1,253,073 $ 1,280,887 $ 311,419
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for interest $ 2,425,377 $ 2,435,047 $ 1,429,316
============ ============ ============
Cash paid during the year for taxes $ -- $ -- $ 256,263
============ ============ ============
NON-CASH INVESTING ACTIVITIES:
Long-term debt acquired in purchase
of warehouse $ -- $ 1,500,000 $ --
============ ============ ============
See independent auditors' report and the accompanying notes to consolidated
financial statements, which are an integral part of these statements.
Page 6 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 1 - ORGANIZATION
Ezcony Interamerica, Inc. and subsidiaries ("the Company") was
incorporated in the British Virgin Islands on November 29, 1990.
The Company is a wholesale distributor to Latin American markets of a
wide range of brand name consumer electronic products, including
televisions, videocassette recorders, home and automobile audio
equipment, cellular products and appliances. The Company's products
are distributed to a variety of customers, including wholesalers and
distributors who resell to retail markets.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Ezcony
Interamerica, Inc. and its wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash equivalents include all highly liquid investments with maturities
of three months or less when acquired.
INVENTORIES
Inventories are stated at the lower of cost or market, using the
first-in, first-out method. Inventories in transit are stated at cost.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation on equipment is computed
using the straight-line method over the estimated lives of these
assets, which range from 7 years to 20 years. Depreciation on property
is computed using the straight-line method over a period of 40 years.
Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the lease term (including
renewal periods) or the estimated useful life of the related asset.
Repairs and maintenance are charged to expense as incurred while
expenditures for major renewals and betterments are capitalized.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial
statements and tax bases of assets and liabilities using tax rates in
effect for the year in which the differences are expected to reverse.
A valuation allowance is established when it is more likely than not
that some or all of the deferred tax assets will not be realized.
See independent auditors' report.
Page 7 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company does not file a consolidated tax return in the United
States. The Company's United States subsidiaries file an income tax
return for both state and federal taxes. The Company's Panamanian
subsidiary, which operates in the Colon Free Zone, Republic of Panama,
enjoys special tax rates granted by the Panamanian tax authorities.
Effective January 1, 1997, all income derived from export operations
of companies operating in the Colon Free Zone are tax exempt.
EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Standards ("SFAS")
No. 128, EARNINGS PER SHARE issued by the Financial Accounting
Standards Board ("FASB"). SFAS No. 128 requires the presentation of
basic earnings per common share and diluted earnings per common share.
Basic earnings per common share are computed by dividing income
available to common stockholders by the weighted average number of
common shares outstanding. Diluted earnings per common share include
the diluting effect of stock options and warrants. All prior year
earnings per share calculations have been restated in accordance with
the provisions of SFAS No. 128. The adoption of SFAS No. 128 did not
have a material effect on the Company's historically disclosed
earnings per share.
REVENUE RECOGNITION
The Company recognizes revenue when products are shipped to customers.
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,
liabilities and disclosure of contingent 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.
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 estimates.
NEW ACCOUNTING STANDARDS
Effective for the year ended December 31, 1998, the Company adopted
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, which requires a new basis of determining reportable
business segments. This approach (contrasted with the prior
requirement which utilized a specific classification system for
determining segments) designates the Company's internal organizational
structure, as used by management for making operating decisions, as
the basis for determining business segments. On this basis, the
Company has one reportable segment:
Wholesale distributor of consumer electronic products.
See independent auditors' report.
Page 8 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS (CONTINUED)
During 1998, the Company adopted SFAS No. 130, reporting comprehensive
income. It requires disclosure of non-owner changes in stockholders'
equity and is defined as net income, plus direct adjustments to
stockholders' equity.
The adoption of SFAS Nos. 131 and 130 will have no effect on the
Company's reported net income.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107, DISCLOSURES
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (FAS 107) requires the
Company to disclose the fair value of financial instruments for which
it is practicable to estimate that value. FAS 107 also requires the
entity to disclose the method(s) and significant assumptions used to
estimate the fair value of financial instruments.
The following assumptions were used to estimate the fair value of each
class of financial instruments for which it is practical to estimate
that value:
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
The carrying amounts of cash, cash equivalents, and restricted
cash approximate their fair value.
DUE FROM DIRECTORS, OFFICERS AND EMPLOYEES, NET
The carrying amounts of due from directors, officers and
employees approximate their fair value.
NOTES PAYABLE, ACCEPTANCES PAYABLE, AND LONG-TERM DEBT
The fair values of the notes payable, acceptances payable, and
long-term debt are estimated based upon current rates offered to
the Company for debt of the same remaining maturities. Carrying
amounts of notes payable, acceptances payable and long-term debt
are reasonable estimates of their fair values.
RECLASSIFICATIONS
Certain amounts included in the prior years' consolidated financial
statements have been reclassified to conform with the current year's
presentation.
See independent auditors' report.
Page 9 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 3 - DISCONTINUED OPERATIONS
In August 1997, the Company's Board of Directors approved a plan to
sell or liquidate its noncore business subsidiary, New World
Interactive, Inc. ("New World Interactive") as part of an overall
reorganization program designed to focus the Company's resources on
its core business, the distribution of consumer electronics. New World
Interactive was engaged in the production and distribution of Spanish
and Portuguese CD-ROM software. The decision to discontinue the
subsidiary was based in part upon continuing significant working
capital requirements and the Company's inability to obtain separate
additional capital through bank financing, public or private placement
debt, or a combination of these for the subsidiary, and the lack of
sufficient sales volumes.
Due to the significant contractual obligations existing at the time of
approval of the plan to discontinue the subsidiary and due to the
nature and conduct of the business, New World Interactive's creditors
were advised that New World Interactive was experiencing significant
cash flow problems and a deteriorating financial condition and that
management had decided to stop the production of any "new" titles and
continue with the production of titles already contracted for. The
Company anticipated that upon completion of these titles, and with its
existing inventory on completed titles, sufficient sale volumes would
materialize as a result of the Christmas holiday season, and generate
sufficient cash flows allowing New World Interactive to repay its
obligations and avoid having to pay to creditors a pro rata share of
New World Interactive's assets. New World Interactive closed its
production facility on October 31, 1997, and ceased operations on
December 31, 1997. Subsequent to December 31, 1997, New World
Interactive is in the process of self-liquidating its remaining assets
(consisting primarily of trade receivables of approximately $92,000
and inventory of approximately $66,000) on a pro rata basis to its
remaining creditors. New World Interactive surrendered all contract
rights it may have had in any software to its remaining creditors and
returned all existing inventory. These rights and inventory were given
to the creditors without prejudice to any remaining debt or any claim
that the creditors may have against New World Interactive. It is
management's intentions that any claims that creditors may have
against New World Interactive will not be defended or responded to by
New World Interactive as there are no other remaining assets to
distribute. The Company believes that the ultimate completion of the
liquidation of New World Interactive, including any potential
litigation, will not have a further material adverse impact on the
financial condition and results of operations of the Company.
Net liabilities of the discontinued operation at December 31, 1997,
consist primarily of accounts payable and accrued expenses (including
severance to a key officer and employees) offset by accounts
receivable and inventory. The inventory is recorded at liquidation
value and not at a potential selling price as surrendered to its
creditors. At December 31, 1997, the loss on the disposal of New World
Interactive totaled $1,874,786, which includes a loss of $687,106 for
operating losses during the phase out period, and is reflected as loss
on disposal in the accompanying Consolidated Statements of Operations.
See independent auditors' report.
Page 10 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 3 - DISCONTINUED OPERATIONS (CONTINUED)
The accompanying consolidated statements of operations have been
reclassified to report separately the discontinued operations in the
prior periods. Selected results of the discontinued operations were as
follows:
1998 1997 1996
----------- ----------- -----------
Net sales $ -- $ 1,909,405 $ 3,135,047
=========== =========== ===========
Gross profit $ -- $ 214,881 $ 860,390
=========== =========== ===========
Selling, general and admin-
istrative expenses $ -- $ 930,564 $ 1,579,878
=========== =========== ===========
Net loss $ -- $(2,608,724) $ (852,174)
=========== =========== ===========
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.
NOTE 4 - RESTRICTED CASH
At December 31, 1998 and 1997, certificates of deposit were pledged by
the Company with various banks to guarantee the credit lines. The
certificates of deposit were placed in various banks in the following
locations:
1998 1997
---------- ----------
United States $1,378,003 $1,484,319
Panama 3,113,911 7,350,000
---------- ----------
$4,491,914 $8,834,319
========== ----------
The certificates of deposit at December 31, 1998 and 1997 have annual
interest rates ranging from 5.2% to 6.6% and 4.9% to 7.8%,
respectively.
NOTE 5 - INVENTORIES
At December 31, 1998 and 1997, inventories consisted primarily of
consumer electronic products at the following locations:
1998 1997
----------- -----------
Colon Panama Free Zone warehouse $ 2,273,084 $ 7,343,318
U.S. warehouses -- 830,717
In transit -- 1,091,712
----------- -----------
2,273,084 9,265,747
Reserve for obsolescence (54,715) (88,795)
----------- -----------
$ 2,218,369 $ 9,176,952
=========== ===========
See independent auditors' report.
Page 11 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 6 - PROPERTY AND EQUIPMENT
At December 31, 1998 and 1997, property and equipment consists of the
following:
1998 1997
----------- -----------
Buildings $ 3,950,408 $ 3,796,730
Furniture and office equipment 1,014,103 977,765
Transportation equipment 319,863 355,847
Leasehold improvements -- 87,109
Machinery and equipment 237,195 251,957
----------- -----------
5,521,569 5,469,408
Less accumulated depreciation and
amortization (1,225,926) (1,036,704)
----------- -----------
$ 4,295,643 $ 4,432,704
=========== ===========
During 1997, the Company purchased a warehouse in the Panama Colon
Free Zone for $1,700,000 and transferred its warehousing operations
from two leased warehouses. In addition, the construction of the
Company's office and showroom in the Panama Colon Free Zone was
completed in December 1997 at costs totaling approximately $1,100,000.
NOTE 7 - CONCENTRATION OF CREDIT RISK
The Company's sales were made to customers located in, or for
distribution in, the following countries:
1998 1997 1996
------------ ------------ ------------
Colombia $ 29,000,026 $ 52,995,593 $ 28,420,660
Paraguay 15,727,964 28,486,493 22,551,519
United States 11,883,274 15,691,848 11,188,364
Ecuador 8,015,145 12,401,457 10,815,594
Venezuela 18,119,708 12,099,287 1,921,862
Mexico 4,461,177 4,742,561 5,441,236
Peru 812,023 4,458,382 2,553,372
Brazil 512,299 3,831,209 6,264,275
All other countries (primarily in
Latin America) 20,398,724 24,115,798 19,589,142
------------ ------------ ------------
$108,930,340 $158,822,628 $108,746,024
============ ============ ============
See independent auditors' report.
Page 12 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 7 - CONCENTRATION OF CREDIT RISK (CONTINUED)
A summary of accounts receivable by country of distribution is as
follows:
1998 1997
------------ ------------
Paraguay $ 3,919,770 $ 10,186,458
Colombia 7,520,378 9,849,299
Venezuela 4,514,485 4,062,259
Ecuador 2,430,869 3,620,585
Argentina 891,977 1,005,294
All other countries (primarily in Latin
America) 6,346,816 7,406,552
------------ ------------
25,624,295 36,130,447
Less allowance for doubtful accounts (6,356,196) (4,620,102)
------------ ------------
$ 19,268,099 $ 31,510,345
============ ============
Certain sales made by the Company are collected in cash or other
negotiable instruments. During 1998, 1997, and 1996, the Company had
no major customers whose sales exceeded 10% of total net sales.
At various times during the years ended December 31, 1998 and 1997,
the Company maintained cash balances with financial institutions in
excess of the amount insured by the Federal Deposit Insurance
Corporation, $100,000.
NOTE 8 - MAJOR SUPPLIERS
During the years ended December 31, 1998, 1997, and 1996, 31%, 33%,
and 37%, respectively, of the Company's purchases consisted of
products purchased from Sony Corporation of Panama, S.A. ("Sony").
Amounts payable to Sony as of December 31, 1998 and 1997, were
approximately $3,758,000 and $5,346,000, respectively. Beginning in
1995, the Company significantly increased its purchases from Pioneer
International Latin America, S.A. ("Pioneer"). Pioneer purchases
represented 30%, 34%, and 36% of total purchases for the year ended
December 31, 1998, 1997, and 1996, respectively. Amounts payable to
Pioneer as of December 31, 1998 and 1997 were approximately $1,575,000
and $5,000,000, respectively.
The Company does not have a written agreement with either Sony or
Pioneer to act as a distributor in any particular country. Sony and
Pioneer could, at any time, stop or limit sales to the Company or
prohibit the Company from distributing its products in any one or more
countries. The Company is extended credit terms from year-to-year.
See independent auditors' report.
Page 13 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 9 - GEOGRAPHICAL SEGMENT INFORMATION
Sales originating from Panama, the United States and British Virgin
Islands for the years ended December 31, 1998, 1997 and 1996 were as
follows:
1998 1997 1996
------------ ------------ ------------
Panama $ 90,391,151 $139,471,528 $103,648,266
United States 18,439,249 19,220,055 5,052,613
British Virgin Islands 99,940 131,045 45,145
------------ ------------ ------------
$108,930,340 $158,822,628 $108,746,024
============ ============ ============
Identifiable assets by geographical area are as follows:
1998 1997
----------- -----------
Panama $30,714,394 $52,002,854
United States 1,783,858 4,685,063
British Virgin Islands 132,600 240,705
----------- -----------
$32,630,852 $56,928,622
=========== ===========
Operating income (loss) from continuing operations by geographical
area is as follows:
1998 1997 1996
----------- ----------- -----------
Panama $ 699,225 $ 2,615,913 $ 2,953,042
United States (557,112) (802,393) 109,324
British Virgin Islands (952,062) (884,143) (466,264)
----------- ----------- -----------
$ (809,949) $ 929,377 $ 2,596,102
=========== =========== ===========
Income (loss) from continuing operations before income taxes by
geographical area is as follows:
1998 1997 1996
----------- ----------- -----------
Panama $(1,247,559) $ 788,760 $ 2,333,567
United States (756,503) (845,755) 81,795
British Virgin Islands (939,773) (875,677) (349,044)
----------- ----------- -----------
$(2,943,835) $ (932,672) $ 2,066,318
=========== =========== ===========
See independent auditors' report.
Page 14 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 10 - NOTES AND ACCEPTANCES PAYABLE
Acceptances payable to banks and borrowings under several lines of
credit aggregating approximately $28,000,000 at December 31, 1998 and
$36,500,000 at December 31, 1997, bearing interest between 8.8% to
10.3%, maturing at varying dates through 1999, collateralized by
certificates of deposit of $4,491,914 and $8,834,319 at December 31,
1998 and 1997, respectively, trade accounts receivables, inventories
and guaranteed by certain of the Company's shareholders.
The weighted average interest rates as of December 31, 1998 and 1997
were 9.35% and 9.62%, respectively.
NOTE 11 - LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consists of the
following:
1998 1997
---------- ----------
Note payable, bearing interest at 10%, payable in monthly
installments in the amount of $12,681, expiring in May 2001,
collateralized by a first mortgage on the rental building $ 327,032 $ 438,887
Note payable, bearing interest at prime (8.5% at December 31,
1998 and 1997) plus 2%, payable in monthly installments in
the amount of $21,090, with the unpaid balance due in
December 2002, collateralized by a first mortgage on the
warehouse 1,400,055 1,493,011
Note payable, bearing interest at prime plus 2%, payable in
monthly installments of $17,262, expiring in 2002,
collateralized by a first mortgage on building 1,450,000 --
---------- ----------
3,177,087 1,931,898
Less current portion 414,701 214,537
---------- ----------
$2,732,386 $1,717,361
========== ==========
Maturities of long-term debt as follows:
YEAR ENDING
DECEMBER 31,
------------
1999 $444,701
2000 470,191
2001 408,936
2002 1,853,259
2003 -
Thereafter -
----------
$3,177,087
==========
See independent auditors' report.
Page 15 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 12 - INCOME TAXES
The provision for income taxes includes the following components:
1998 1997 1996
-------- -------- --------
United States - Federal $ -- $ -- $ --
Panama -- -- 136,490
-------- -------- --------
$ -- $ -- $136,490
======== ======== ========
The provision for income taxes differed from the amounts computed by
applying the U.S. Federal income tax rate of 34% in 1998, 1997 and
1996 to income (loss) before income tax expense as a result of the
following:
1998 1997 1996
--------- --------- ---------
Computed "expected" United States
tax (benefit) expense $ 118,896 $(317,108) $ 702,548
Effect of foreign operations -- 29,552 (504,700)
Valuation allowance change (118,896) 286,282 (75,395)
Other, net -- 1,274 14,037
--------- --------- ---------
Provision for income taxes $ -- $ -- $ 136,490
========= ========= =========
At December 31, 1998, the Company's U.S. subsidiaries had net
operating loss carryforwards for U.S. tax purposes of approximately
$1,990,000 (continuing operations) and $2,845,000 (discontinued
operations), expiring in various years through 2012. A full valuation
allowance has been recorded by the Company since management believes
that it is more likely than not that the deferred tax assets will not
be realized.
The Company's Panamanian subsidiary operates in the Colon Free Zone,
Republic of Panama, and sells to customers abroad. Prior to January 1,
1997, companies operating in the Colon Free Zone derived local tax
benefits from their foreign sales. These companies enjoyed a special
tax rate of 8.5%, as compared to a statutory rate of up to 34%, on
profits derived from sales of merchandise re-exported from the Colon
Free Zone to countries other than Panama. In addition, profits derived
from sales not shipped through Panama (offshore sales) are exempt from
Panamanian taxes. Effective January 1,1997, all income derived form
export operation of companies operating in the Colon Free Zone are
100% tax exempt.
See independent auditors' report.
Page 16 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 13 - STOCK OPTION PLAN AND OTHER
The Company's 1992 stock option plan ("the Plan"), adopted by the
Board of Directors and the shareholders of the Company on April 21,
1992, is intended to improve the Company's financial performance by
providing long-term incentives to the Company's directors, officers
and key employees and to aid in the recruitment of additional
qualified and competent employees. The Plan is administered by a
committee comprised of outside directors ("the Committee").
On June 28, 1996, the shareholders approved the Board of Directors'
amendment to the Plan to increase the number of shares available for
grant from 450,000 shares to 900,000 shares.
Under the Plan, 900,000 shares of common shares have been reserved for
issuance upon exercise of options. The Plan provides for the granting
of both "incentive stock options" and non-statutory stock options.
Options can be granted under the Plan on such terms and at such prices
as determined by the Committee, except that the per share exercise
price of incentive stock options will not be less than the fair market
value of the common shares on the date of grant. Each option will be
exercisable after the period or periods specified in the option
agreement, but no option will be exercisable within six months after
the date of grant or after the expiration of 10 years from the date of
grant. Options granted under the Plan are not transferable other than
by will or by the laws of descent and distribution. The Plan
authorizes the Company to make loans to optionee's to enable them to
exercise their options and authorizes optionee's to exercise their
stock options by payment with common shares, in each case at the
discretion of the Committee.
In connection with a public offering, in August 1992, the Company
issued warrants to purchase 150,000 common shares to the
representatives of the underwriters, exercisable at a price of $9.45
per share, as adjusted, for a four-year term starting on August 6,
1993. In November 1994, the Company's Board of Directors, in
consideration of financial consulting and advisory services rendered
and to be rendered by such representatives, reduced the exercise price
on the warrants from $9.45 per share to $4.00 per share. In November
1996, the Company's Board of Directors, in consideration of financial
consulting and advisory services to be rendered by one such
representative, reduced the exercise price on 97,750 warrants form
$4.00 per share to $1.63 per share and extended the term one
additional year.
See independent auditors' report.
Page 17 of 21
NOTE 13 - STOCK OPTION PLAN AND OTHER (CONTINUED)
The following table presents additional information concerning the
activity in the stock option plan:
WEIGHTED
AVERAGE OF
NUMBER EXERCISE
OF OPTIONS PRICE
---------- ----------
Balance at December 31, 1995 86,000 $3.38
Options granted 759,660 $1.86
Options terminated (20,000) $2.39
-------
Balance at December 31, 1996 825,660 $2.01
Options granted 25,000 $2.55
Options exercised (10,000) $1.28
Options terminated (135,630) $2.03
-------
Balance at December 31, 1997 705,030 $2.04
Options granted 20,000 $0.22
-------
Balance at December 31, 1998 725,030 $1.98
=======
Options repriced during 1996 97,750
=======
1996 weighted average fair value of options $ .80
=======
No options were repriced during 1997.
1998 1997 1996
----- ----- -----
Weighted average fair value of
options granted during the
year $0.15 $1.82 $1.63
===== ===== =====
See independent auditors' report.
Page 18 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 13 - STOCK OPTION PLAN AND OTHER (CONTINUED)
1998
- -----------------------------------------------------------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING AT CONTRACTUAL EXERCISE EXERCISABLE AT EXERCISE
RANGE OF PRICES DECEMBER 31, LIFE (YEARS) PRICE DECEMBER 31, PRICE
- ---------------- --------------- ------------ -------- -------------- ----------
$0.22 20,000 4.76 $0.22 - N/A
$1.25 - $1.88 277,530 6.76 $1.77 277,530 $1.77
$1.94 - $2.56 371,500 7.08 $1.98 364,495 $1.98
$3.50 - $4.13 56,000 4.49 $3.72 56,000 $3.72
------- -------
725,030 $2.04 698,025
======= =======
As of December 31, 1996, the Company adopted the disclosure provisions
of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly,
the Company is required to disclose proforma net income and earnings
per share as if compensation expense relative to the fair value of the
options granted had been included in earnings. The fair value of each
option grant was estimated using the Black-Scholes option-pricing
model with the following assumptions (weighted average) used for
grants in 1998, 1997, and 1996 expected life of 5 years in 1998, 6
years in 1997, and 10 years for 1996; volatility factors of 80% for
1998, 80% for 1997, and 96% for 1996; risk-free interest rates of 5.2%
in 1998, and 6.1% for 1997 and 1996 and no dividend payments. Had
compensation cost for the Company's option plan been determined and
recorded consistent with SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the proforma amounts as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Net (loss) income
As reported $ (2,943,835) $ (3,541,396) $ 1,077,654
============= ============= =============
Proforma $ (3,032,888) $ (3,864,939) $ 300,479
============= ============= =============
Earnings per share-basic and
assuming dilution
As reported $ (.65) $ (.79) $ .24
============= ============= =============
Proforma $ (.67) $ (.86) $ .07
============= ============= =============
See independent auditors' report.
Page 19 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 13 - STOCK OPTION PLAN AND OTHER (CONTINUED)
The 1998, 1997, and 1996 proforma effect on net income (loss) is not
necessarily indicative of the effect in future years because it does
not take into consideration proforma compensation expense related to
grants made prior to 1996 and does not reflect a tax benefit related
to the compensation expense as such benefit would be reflected
directly in shareholders' equity given that the options are considered
incentive stock options.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company has entered into various operating lease agreements. The
following is a schedule of future rental payments as of December 31,
1998 for operating leases having initial noncancelable lease terms in
excess of one year.
YEAR ENDING
DECEMBER 31,
------------
1999 $ 19,763
2000 19,763
2001 19,763
2002 19,763
2003 19,763
Thereafter 224,483
--------
$323,298
========
As a result of restructuring its operations during 1998, the Company
bought out its existing lease contract for an office facility,
warehouse and equipment located in the United States for approximately
$155,000.
Rent expense was $112,372, $233,181 and $290,242 for the years ended
December 31, 1998, 1997, and 1996, respectively.
The Company leases its building in Panama City, Panama. Rental income
included in other income in the accompanying Consolidated Statements
of Operations was $223,110, $174,509, and $164,883 in 1998, 1997, and
1996, respectively. The minimum future rental payments to be received
on this noncancelable lease as of December 31, 1998 are as follows:
YEAR ENDING
DECEMBER 31,
------------
1999 $ 192,233
2000 201,870
2001 211,963
2002 222,513
2003 -
Thereafter -
---------
$ 828,579
=========
See independent auditors' report.
Page 20 of 21
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(STATED IN U.S. DOLLARS)
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1998, the Company had standby letters of credit in the
amount of $4,400,000, collateralizing the trade accounts of various
vendors, primarily Sony and Pioneer.
The Company is currently in the process of evaluating its computer
software and databases to determine whether or not modifications will
be required to prevent problems related to the year 2000. Management
does not currently anticipate any significant or material impact on
the Company as a result of implications associated with this issue.
NOTE 15 - LEGAL MATTERS
In 1998, the Company was notified of a forfeiture action against
certain funds deposited by the Company. The action requested the
forfeiture of the seized funds to the United States Government. The
Company believes there is no basis for the seizure or forfeiture.
Nonetheless, to avoid the expense and disruption of litigation and
also the use of the seized funds for an extended period of time, the
Company reached an agreement to settle the forfeiture civil action
against these funds. Terms of the agreement require the return of all
funds seized less $255,000. The Company has recorded the settlement
amount as litigation (expense) reversal in the accompanying
Consolidated Statement of Operations, and as accrued expense and other
current liabilities in the accompanying Consolidated Balance Sheet as
the seized funds related to 1997 sales.
The Company is also engaged in ordinary litigation incidental to its
business. The Company does not believe that such ordinary routine
litigation will have a material adverse effect on its consolidated
financial position or results of operations.
See independent auditors' report.
Page 21 of 21
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.19 Credit Facility with Hamilton Bank dated December 30, 1998
23 Consent of McClain & Company, L.C.
27.1 Financial Data Schedule