10-Q 1 d10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended March 31, 2001 Commission File No. 0-20406 EZCONY INTERAMERICA INC. ----------------------- (Exact Name of Registrant as Specified in Its Charter) British Virgin Islands Not Applicable ------------------------------------------ ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Craigmuir Chambers, P.O. Box 71, Road Town, Tortola British Virgin Islands ------------------------------------------ ----------------------------- (Address of Principal Executive Offices) (Country) Registrant's telephone number, including area code: (507) 441-6566 (Panama) ------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO ----- ----- As of March 31, 2001, 4,188,000 shares of the Registrant's Common Stock, no par value per share, were outstanding. EZCONY INTERAMERICA INC. AND SUBSIDIARIES INDEX TO FORM 10-Q

2 EZCONY INTERAMERICA INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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)

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 COMPREHENSIVE INCOME

The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 5 EZCONY INTERAMERICA INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 6 EZCONY INTERAMERICA INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) BASIS OF FINANCIAL STATEMENT PRESENTATION In management's opinion, the accompanying unaudited condensed consolidated financial statements of Ezcony Interamerica Inc. and subsidiaries (the "Company") contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's financial position and the results of its operations. The results of operations or cash flows for the three months ended March 31, 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 three months period ended March 31, 2001 and 2000, options and warrants totaling 725,030 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 The Company is exploring opportunities in additional and different businesses including technology and Internet related 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 the guidance from investment bankers 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. Therefore, the Company did not record any provision for income taxes for its operations in Panama. 7 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 our 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 three months ended March 31, 2001 and 2000 refers to our continuing operations. COMPARISON OF THREE MONTHS ENDED MARCH 31, 2001 AND 2000 Net Sales --------- Net sales decreased 25.3% to $13.9 million for the three months ended March 31, 2001, from $18.7 million for the same period in year 2000. The decrease is primarily attributable to decreased sales in our existing markets. We have also reduced our product lines products with low profit margins. Although there were significant increases in some of our markets, these were offset by overall decreases in the Caribbean region. Gross Profit ------------ Gross profit increased 2.7% to $1.42 million for the three months ended March 31, 2001 from $1.384 million for the same period in 2000. Although sales were 25% less in the first three months of 2001, gross margin level contribution was attained due to sales of merchandise with better than historic margins. Our gross profit margin increased 10.2% in the three month period ended March 31, 2001 compared to 7.4% in the comparable 2000 period as a result of selling products with high profit margins. Selling, General and Administrative Expenses -------------------------------------------- Selling, general and administrative expenses increased to $881,476 for the three months ended March 31, 2001 compared to $820,474 for the same period in 2000. The increase in selling, general and administrative expenses is primarily attributable to the following: (i) increase in the allowance for doubtful accounts receivable; (ii) increase in severance payments as a result of personnel reduction; and (iii) increase in professional service expenses in connection with a valuation and fairness opinion agreement. Interest -------- Interest income increased to $86,233 for the three months ended March 31, 2001 compared to $50,727 for the same period in 2000 due to interest charged to customers for past due balances. Interest expense increased to $399,003 for the three months ended March 31, 2001 compared to $395,539 for the same period in 2000 as a result of increased interest paid to Hamilton Bank due to overdrafts. Income (Loss) from Continuing Operations ---------------------------------------- Profit from continuing operations was $256,319 ($0.06 per share) for the three months ended March 31, 2001 compared to profit from continuing operations of $247,367 ($0.06 per share) for the three months ended March 31, 2000. The change was primarily due to selective sales of merchandise with better than historic margins. 8 LIQUIDITY AND CAPITAL RESOURCES We have historically financed our operations through short-term bank borrowings, trade credit and, to a lesser extent, internally generated funds. In the three months ended March 31, 2001, we generated $296,911 in cash from operating activities. This was primarily due to a $964,154 increase in trade accounts receivable, offset by $364,176 increase in accounts payable and $555,461 in accrued expenses and bank overdrafts. We may not have sufficient working capital to continue our present operations. Future decreases in cash from operating activities may force us to rely on further financing from third parties, which may not be available, or, in the sale of certain assets which may not be readily marketable. For the three month period ended March 31, 2001, cash provided by investing activities was $11,964 which is attributable to a decrease in restricted cash balances of $20,000, offset by capital expenditures of $8,036. In the three months ended March 31, 2001, cash used in financing activities was $238,143, principally due to repayment of long term debt. We believe that our ability to repay indebtedness must be achieved through funds generated from our operations. Expanded sales in existing markets were primarily made on a credit basis as opposed to a cash basis. Future political and economic changes in the Latin American countries in which we sell our products, such as the imposition or lifting of exchange controls, may affect our ability to collect our accounts receivable. From time to time, we experience temporary liquidity problems that are typically related to our credit policies with our customers. We have taken measures to decrease the number of days to collect on our accounts receivable by not shipping merchandise to certain customers that have significant past due balances and increasing the collection efforts of our credit and collections department. At March 31, 2001, we had available with three banks an aggregate of $17.8 million in bank facilities of which $14.3 million was utilized. From time to time, we incur overdrafts with various financial institutions for periods of a few days. All of our lines of credit and credit facilities from our various lenders are "on demand." We continue to have good relationships with our principal suppliers, Sony and Pioneer. At March 31, 2001, our credit facility with Sony was $3.4 million, which was partially collateralized by $2.4 million in stand-by letters of credit. Our credit facility with Pioneer at March 31, 2001, was $1.5 million which was partially collateralized by $800,000 million in stand-by letters of credit. 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 the market for our products as well as our ability to sell our products. Future political and economic changes in certain 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 markets we operate in. COUNTRY RISK We do 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. In particular, Colombia, which represents a significant market for us, is a country for which the U.S. government has taken particular interest in monitoring the flow of funds. Although we believe that payments received currently comply with all applicable U.S. government laws and regulations, there can be no assurance that forms of payment will not be challenged by the U.S. government, or that business done in Colombia by us will not be materially affected by U.S. government scrutiny. SEASONALITY Our operations have historically been seasonal with generally higher sales in the second and third fiscal quarters. Higher second and third 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. 9 FORWARD LOOKING STATEMENTS From time to time, we publish "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, 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, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements. Such factors include, among others: (i) increasing working capital, (ii) obtaining and maintaining bank credits despite overdue status or other defaults from time to time, the general availability of credit from our principal suppliers and banks to finance our inventory, specifically, the continued cooperation of our major suppliers and our banks to provide credit, and their forbearance from time to time as well as the successful consolidation of our borrowings; (iii) the discontinuation of certain non-profit aspects of our business, e.g., certain products and customers; (iv)collection of receivables in excess of 90 days; (v) economic developments in those foreign countries in which we conduct 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. 10 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K NONE. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EZCONY INTERAMERICA INC. Date: June 13, 2001 BY: /s/ EZRA COHEN ----------------------------- Ezra Cohen, President and Chief Executive Officer Date: June 13, 2001 BY: /s/ CARLOS N. GALVEZ ----------------------------- Carlos N. Galvez Chief Financial Officer 12

EZCONY INTERAMERICA INC 10-Q