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 June 30, 2001 Commission File No. 0-20406
EZCONY INTERAMERICA INC.
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(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
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(Address of Principal Executive Offices) (Country)
Registrant's telephone number, including area code:
(507) 441-6566 (Panama)
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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 _____
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
At June 30, 2001 there were outstanding:
4,188,780 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
June 30, 2001 and December 31, 2000....................................................... 3
Condensed Consolidated Statements of Operations and Accumulated Deficit
Three Months Ended June 30, 2001 and 2000................................................ 4
Condensed Consolidated Statement of Operations and Accumulated
Deficit for Six Months Ended June 30, 2001 and 2000....................................... 5
Condensed Consolidated Statement of Comprehensive Income
Three Months Ended June 30, 2001 and 2000................................................. 6
Condensed Consolidated Statement of Comprehensive Income.
Six Months Ended June 30, 2001 and 2000................................................... 6
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2001 and 2000................................................... 7
Notes to Condensed Consolidated Financial Statements...................................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................... 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................................... 13
Signatures ........................................................................................ 14
2
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS June 30, December 31,
2001 2000
------------- ------------
Current assets:
Cash and cash equivalents $ 275,791 $ 379,031
Trade accounts receivable, net 11,434,380 11,006,830
Other Receivables 498,763 381,897
Due from directors, officers and employees, net 554,439 494,910
Inventories 3,101,625 3,700,662
Marketable Securities 284,279 388,706
Prepaid expenses and other current assets 1,113,967 1,173,682
Restricted cash 2,777,174 2,775,665
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Total Current Assets 20,040,418 20,301,383
Property and equipment, net 3,865,108 3,962,308
Other asset 151,756 75,963
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Total assets $ 24,057,282 $ 24,339,654
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank Overdraft $ 1,036,603 $ 957,802
Current portion of long-term debt 769,618 1,237,824
Notes and acceptances payable 10,144,614 8,928,294
Accounts payable 7,436,063 8,752,251
Accrued expenses and other current liabilities 105,718 175,771
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Total current liabilities 19,492,616 20,051,942
Long-term debt 2,774,863 2,774,863
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Total liabilities $ 22,267,479 $ 22,826,805
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Shareholders' equity:
Common stock, no par value; 15,000,000 shares
authorized; 4,188,780 and 4,510,000 shares issued and
outstanding 12,954,723 12,954,723
Less: Treasury Stock at cost (454,398) (454,398)
Accumulated other comprehensive income:
Unrealized losses on securities available for sale (81,361) 0
Accumulated deficit (10,629,161) (10,987,476)
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Total shareholders' equity 1,789,803 1,512,849
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Total liabilities and shareholders' equity $ 24,057,282 $ 24,339,654
============= =============
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 June 30,
-----------------------------------
2001 2000
------------ ------------
Net sales $ 11,736,711 $ 14,430,119
Cost of sales 10,507,849 13,158,568
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Gross profit 1,228,862 1,271,551
Selling, general and administrative expenses 848,719 897,276
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Operating income 380,143 374,275
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Other income (expenses):
Interest income 65,290 137,460
Interest expense (406,280) (412,830)
Other 62,843 (90,056)
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Total Other Income (Expenses) (278,147) (365,426)
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Net Income 101,996 8,849
Accumulated deficit, beginning of period (10,731,157) (8,934,395)
------------ ------------
Accumulated deficit, end of period (10,629,161) $ (8,925,546)
============ ============
Income per common share - basic:
Net Income per share: $ 0.02 $ 0.002
============ ============
Weighted average number of common shares
outstanding - basic 4,188,780 4,192,309
------------ ------------
Net Income per share: $ 0.02 $ 0.002
------------ ------------
Weighted average number of common shares
Outstanding - dilutive 4,188,780 4,385,182
============ ============
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
4
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
Six Months Ended June 30,
------------------------------
2001 2000
-------------- -------------
Net Sales $ 25,694,858 $ 33,116,433
Cost of Sales 23,044,803 30,460,576
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Gross Profit 2,650,055 2,655,857
Selling, general and administrative expenses 1,730,195 1,717,750
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Operating Income 919,860 938,107
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Other Income (expenses)
Interest Income 151,523 188,187
Interest (Expense) (805,283) (808,369)
Other 92,215 (61,709)
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Total Other Income (Expenses) (561,545) (681,891)
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Net Income 358,315 256,216
Accumulated deficit, beginning of period (10,987,476) (9,181,762)
-------------- ------------
Accumulated deficit, end of period (10,629,161) 8,925,546
============== ============
Income per common share - basic:
Net Income per share: $ 0.086 $ 0.06
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Weighted average number of common shares
Outstanding - basic 4,188,780 4,350,278
============== ============
Income per common share - dilutive
Net Income per share: $ 0.086 $ 0.06
============== ============
Weighted average number of common shares
Outstanding - dilutive 4,188,780 4,483,530
============== ============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
EZCONY INTERAMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
COMPREHENSIVE INCOME
Three Months Ended June 30
--------------------------
2001 2000
--------------------------
Net Income $ 101,996 $ 8,849
Other Comprehensive Income:
Unrealized holding gains arising during the period 10,938 0
Less: reclassification adjustments for gains included in
net income 0 0
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Total Comprehensive Income $ 112,934 $ 8,849
========= ========
SIX MONTHS ENDED JUNE 30
2001 2000
--------------------------
Net Income
Other Comprehensive Income: $ 358,315 $256,216
Unrealized holding losses arising during the period (81,361) 0
Less: reclassification adjustments for gains included in
Net income 0 0
--------- --------
Total Comprehensive Income $ 276,954 $256,216
========= ========
6
EZCONY INTERAMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
------------------------------------
2001 2000
------------------------------------
Cash flows from operating activities:
Net Income $ 358,315 $ 256,216
Reconciliation of net Income to net cash provided by
operating activities:
Depreciation and amortization 110,616 108,294
Provision for doubtful accounts 386,426 331,809
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (813,976) (995,772)
(Increase) decrease in other receivables (116,866) (195,522)
Increase in due from directors, officers and employees, net (59,529) (128,582)
(Increase) decrease in inventories 599,037 (2,008,949)
Decrease (Increase) in prepaid expenses and other assets 59,715 225,347
(Increase) Decrease in trading securities 23,066 (260,916)
Increase in other assets (75,793) (30,070)
Increase (decrease) in accounts payable (1,316,188) 6,213,274
Increase in accrued expenses, other
current liabilities and bank overdraft 8,748 22,509
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Net cash provided by operating activities $ (836,429) $ 3,537,638
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Cash flows from investing activities:
Decrease (Increase) in restricted cash, net $ (1,509) $ 1,185,504
Purchase of securities available for sale 0 (287,998)
Purchases of property and equipment (13,416) (15,942)
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Net cash provided by investing activities $ (14,925) $ 881,564
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Cash flows from financing activities:
(Repayment of) proceeds from notes and acceptances payable $ 1,216,320 $ (5,937,294)
Repayment of long-term debt (468,206) 1,550,352
Purchase of Treasury Stock 0 (454,398)
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Net cash used by financing activities $ 748,114 $ (4,841,340)
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Net increase (decrease) in cash and cash equivalents $ (103,240) (422,138)
Cash and cash equivalents at beginning of period 379,031 660,644
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Cash and cash equivalents at end of period $ 275,791 $ 238,506
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Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 805,283 $ 808,369
============= ============
Supplemental disclosure of non-cash investing and financing activities:
Net unrealized gains (loss) on securities available for sale for the six months
period ended June 30, 2001 and 2000 amounted to $(81,362) and $ 0 respectively.
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
7
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
six months ended June 30, 2001 are not necessarily indicative of the results of
operations or cash flows which may be reported for the remainder of 2001.
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, 2000.
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, 2000.
(2) EARNINGS PER SHARE - COMMON STOCK
Basic earnings or loss per common share is computed by dividing income or loss
available to common shareholders by the weighted average number of common shares
outstanding. Diluted earnings or loss per common share includes the diluting
effect of stock options and warrants. For the six months period ended June 30,
2001 and 2000, options and warrants totaling 725,030 and 640,030 were not
included in the computation because their exercise price was greater than the
average market price of the shares.
(3) EXAMINATION OF NEW OR DIFFERENT TYPES OF BUSINESS
Management is of the opinion that the shareholders might be better served if the
Company were able to successfully transition into a business with greater growth
potential than its current business. Management believes that there will be
continued pressure on margins and the ability to achieve profitable operations
in its current line of business. Management has sought guidance from investment
bankers in this regard and has involved counsel in its review of potential
opportunities. The Company's efforts in these new ventures are in the planning
stages and no information regarding these activities has been made public.
(4) INCOME TAXES
Effective January 1, 1997, all income derived from export operations of
companies operating in the Colon Free Zone are tax exempt. Accordingly, the
Company did not record any provision for income taxes for its operations in
Panama.
8
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, 2000, 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 six months ended June 30, 2001 and
2000 refers to the continuing operations of the Company.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Net Sales
- ---------
Net sales decreased 18.51% to $11.7 million for the three months ended June 30,
2001, from $14.4 million for the same period in year 2000. The decrease is
primarily attributable to the decrease of sales in the Company's existing
markets, restriction of credit sales and the elimination of clients in default.
We have also reduced our product line to eliminate low selling brand names and
have implemented a customer and margin selective sales program.
Gross Profit
- ------------
Gross profit decreased 3.3% to $1.229 million for the three months ended June
30, 2001 from $1.271 million for the same period in 2000. Although sales were
18.7% less in the three months ended June 30, 2001, this gross margin level
contribution was attained due to an increase in selective sales of merchandise
with better margins than in the previous year.
The Company's gross profit margin increased to 10.5% in the three-month period
ended June 30, 2001 compared to 8.8% in the comparable 2000 period as a result
of selling products with higher profit margins than in the previous year.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative expenses decreased to $848,719 for the three
months ended June 30, 2001 compared to $897,276 for the same period in 2000.
The decrease in selling, general and administrative expenses is primarily
attributable to the following factors: (i) a decrease in commissions due to
changes in our commission policy and sales force; and (ii) a decrease of bank
charges paid to our lender as a result of a reduction in financing transactions.
Interest
- --------
Interest income decreased to $65,290 for the three months ended June 30, 2001
compared to $137,460 for the same period in 2000 due to a decrease in the
interest charged to customers for past due balances.
Interest expense decreased to $406,280 for the three months ended June 30, 2001
compared to $412,830 for the same period in 2000 as a result of a decrease in
interest rates. While our balance of bank borrowings increased, interest rates
on bank debt was lower than in the previous year.
9
Other Income
- ------------
Other Income increased to a profit of $62,843 for the three months ended June
30, 2001 compared to a loss of $90,056 for the same period in 2000 primarily due
to the reduction of losses incurred on trading securities and an increase in
commissions for goods transferred in the Free Zone.
Income (Loss) from Continuing Operations
- ----------------------------------------
Profit from continuing operations was $101,996 ($0.02 per share) for the three
months ended June 30, 2001 compared to a profit from continuing operations of
$8,849 ($0.002 per share) for the three months ended June 30, 2000. The change
was primarily due to obtaining better margins on selective sales, of products,
decrease in commissions and bank charges and a reduction of losses incurred on
trading securities.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2001 AND 2000
NET SALES
Total Net Sales amounted to $25.7 million for the six months ended June 30,
2001, compared to $33.1 million for the same period in year 2000. The decrease
in total sales is primarily attributable to the decrease of sales in the
Company's existing markets, restriction of credit sales and the elimination of
default clients. The Company has also reduced its product lines to eliminate
slow selling brand names and has implemented a customer and margin selective
sales program.
GROSS PROFIT
Gross profit decreased to $2,650,055 for the six months ended June 30, 2001
compared to $2,655,857 for the same period in year 2000. The Company's margin
increased to 10.3% in the six months period ended June 30, 2001 compared to 8.0%
for the same period in 2000. The increase is primarily due to selective sales of
merchandise with improved margins during this period as compared to the same
period in the previous year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative expenses increased 0.7% to $1,730,195 for
the six months ended June 30, 2001, compared to $1,717,750 for the same period
in 2000. The increase is primarily attributable to increases in insurance
coverage, promotional expenses related to the marketing of our exclusive
products, an increase in the reserve for doubtful accounts receivable and an
increase in severance payments made in connection with a reduction of our
personnel.
INTEREST
Interest Income decreased to $151,523 for the six months ended June 30, 2001
compared to $188,187 for the same period in 2000. The change is primarily due to
a decrease in the interest charged to customers with past due accounts.
Interest expense remained constant at $805,283 for the six months period ended
June 30, 2001, compared to $808,369 for the same period in year 2000. While our
balances of bank borrowings increased, interest rates on such borrowings during
the six months ended June 30, 2001 were lower from those in the same period in
the previous year.
OTHER INCOME
Other Income increased to a profit of $92,215 for the six months ended June 30,
2001, compared to a loss of $61,709 for the same period in the previous year.
This change is primarily due to an increase of $44,081 in commissions for goods
transferred in the Free Zone and a decrease of $109,864 of losses incurred on
trading securities compared to the previous year.
NET PROFIT
Net income for the six months ended June 30, 2001 was $358,315, compared to
$256,216 for the same period in year 2000. An increase of 39.8% during the
current period is primarily attributable to improved
10
margins obtained in selective sales of merchandise than in the previous year, an
increase in commissions as a result of transferring more inventory in the Free
Zone and a decrease in losses on trading securities.
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 $836,429 in cash from operating activities in the six months
ended June 30, 2001. This was primarily due to a $813,976 increase in trade
accounts receivable and a decrease of $1,316,188 in accounts payable offset by a
decrease in inventory of $559,037 and the provision of an allowance for doubtful
accounts of $386,426.
Cash used in investing activities was $14,925 for the six months ended June 30,
2001 which is attributable to purchases of property and equipment.
Cash provided by financing activities was $748,114 in the six months ended June
30, 2001 principally due to an increase in borrowings on notes and accounts
payable.
Management believes that the Company's ability to repay its indebtedness must be
achieved primarily through funds generated from its operations. Expanded sales
in existing markets were primarily made on a credit basis as compared to cash
basis. Future political and economic changes in the Latin American countries in
which the Company primarily sells its products, 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 1999, the Company has taken measures to decrease the number of days
to collect on its accounts receivable by not shipping merchandise to certain
customers that have significant past due balances and increasing the collection
efforts of the Company's credit and collection department and sales force.
At June 30, 2001, the Company had available with five banks an aggregate of
$17.8 million in bank facilities of which $12.2 million was utilized. From time
to time, the Company is overdue with various bank lenders for periods of a few
days for amounts the Company does not consider to be significant in light of the
size of its borrowings. All of the Company's lines of credit and credit
facilities from its various lenders are due "on demand".
The Company continues to have good relationships with its principal suppliers,
Sony and Pioneer. At June 30, 2001, the Company's credit facility with Sony was
$1 million, which was partially collateralized by $1 million in stand-by letters
of credit. The Company's credit facility with Pioneer at June 30, 2001, was $1.5
million which was partially collateralized by $800,000 million in stand-by
letters of credit. The Company's credit facility with Samsung was $2.0 million
partially collateralized by $ 1 million in stand-by letters of credit.
For a variety of political and economic reasons, the import of nonessential
items such as consumer electronics has been restricted or prohibited from time
to time by many Latin American countries through exchange controls, import
quotas and restrictions, tariffs and other means. Accordingly, changes in the
trade policies of Latin American countries affect both the market for the
Company's products as well as the Company's ability to sell its products. The
ability of the Company to sustain continued sales growth is greatly dependent on
the continuing favorable economic and political 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 .
11
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) 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 in; (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 those
markets which are the source of competition, e.g. Asia.
12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None.
13
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: August 14, 2001 BY: /s/ EZRA COHEN
-------------------------
Ezra Cohen, President and
Chief Executive Officer
Date: August 14, 2001 BY: /s/ CARLOS N. GALVEZ
--------------------
Carlos N. Galvez
Chief Financial Officer
14