<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _______________
Commission file number: 811-854
IIC Industries, Inc.
--------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 13-567594
- ------------------------------------------ ----------------------------------
(STATE OF OTHER JURISDICTION OF (IRS IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
420 Lexington Avenue; New York, N.Y. 10170
- ------------------------------------------ ----------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 297-6132
- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.
Indicate by check 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 5,693,472 shares of common
stock outstanding at July 31, 1999.
<PAGE>
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets
at June 30, 1999
and December 31, 1998 3
Consolidated Statements of Operations and Comprehensive Loss
for the Six Months Ended
June 30,1999 and June 30, 1998 5
Consolidated Statements of Operations and Comprehensive Income
for the Three Months Ended
June 30,1999 and June 30, 1998 6
Consolidated Statement of Cash Flows
for the Six Months Ended
June 30, 1999 and June 30, 1998 7
Notes to Consolidated Financial
Statements 8
2
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(dollar amounts in thousands, except share data)
JUNE 30, December 31,
ASSETS 1999 1998
----------- ---------
CURRENT ASSETS
Cash and cash equivalents $13,923 $10,957
Accounts receivable, net 38,888 34,797
Inventories, net (Note C) 33,525 32,603
Deposit 2,000 2,000
Other current assets 6,327 8,143
----- -------
Total current assets $94,663 88,500
RESTRICTED CASH 42 367
PROPERTY AND EQUIPMENT, NET 29,884 34,738
INVESTMENTS 41,344 40,585
OTHER ASSETS 3,436 2,648
----- ---------
$169,369 $166,838
======== ========
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
(dollar amounts in thousands, except share data)
JUNE 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
----------- ---------
CURRENT LIABILITIES
Accounts payable $29,300 $18,492
Bank loans 10,534 11,609
Current maturities of long-term debt 43 355
Accrued expenses and other payables 9,195 13,813
Due to related parties 746 3,247
Advances from customers 5,197 4,655
----- ---------
Total current liabilities 55,015 52,171
LONG-TERM DEBT, less current portion 3,564 3,281
DUE TO AFFILIATES 1,451 1,738
OTHER LIABILITIES AND DEFERRED
CREDITS 7,309 6,477
MINORITY INTERESTS 14,321 14,738
------ --------
81,660 78,405
CONTINGENCIES (Note D)
STOCKHOLDERS' EQUITY
Common stock, $0.25 par value per share;
Authorized 7,200,000 shares; issued
6,343,224 shares 1,586 1,586
Additional paid-in capital 22,941 22,941
Retained earnings 103,381 101,055
Accumulated other comprehensive loss (37,474) (34,424)
Less treasury stock - at cost (649,752 shares) (2,725) (2,725)
------- --------
87,709 88,433
------ --------
$169,369 $166,838
======== ========
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
(dollar amounts in thousands, except share data)
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 1998
---- ----
Net sales $91,030 $112,503
Cost of sales 66,188 89,151
------ ------
Gross profit 24,842 23,352
Selling, general and administrative expenses 21,712 21,496
------ ------
Operating income 3,130 1,856
----- -----
Other income (expenses)
Interest income 565 979
Equity in earnings of affiliates 1,343 1,652
Foreign currency loss (Note B) (1,370) (290)
Gain(loss) on sale of noncurrent assets, net 314 (74)
Interest expense (816) (1,760)
Other, net 720 448
--- ---
Income before income taxes and
Minority interest 3,886 2,811
Income taxes (609) (1,488)
---- ------
Income before minority interest 3,277 1,323
Minority Interests (953) (66)
---- ---
NET INCOME $2,324 $1,257
Other comprehensive loss:
Foreign currency translation adjustments (3,050) (2,312)
------ ------
COMPREHENSIVE LOSS (726) (1,055)
==== ======
Basic net income per common share 0.41 0.22
==== ====
Basic average number of common shares outstanding 5,693,472 5,693,472
========= =========
The accompanying notes are an integral part of these statements
-5-
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
(dollar amounts in thousands, except share data)
THREE MONTHS ENDED JUNE 30,
--------------------------
1999 1998
---- ----
Net sales $51,108 $55,774
Cost of sales 38,058 43,038
------ ------
Gross profit 13,050 12,736
Selling, general and administrative expenses 11,254 11,080
------ ------
Operating income 1,796 1,656
----- -----
Other income (expenses)
Interest income 275 456
Equity in earnings of affiliates 2,053 1,805
Foreign currency loss (Note B) (488) (38)
Gain(loss) on sale of noncurrent assets, net 243 (190)
Interest expense (329) (811)
Other, net 602 372
--- ---
Income before income taxes and
Minority interest 4,152 3,250
Income taxes (419) (1,074)
----- -------
Income before minority interest 3,733 2,176
Minority Interests (688) (68)
----- ----
NET INCOME $3,045 $2,108
Other comprehensive loss:
Foreign currency translation adjustments (931) (942)
------ -----
COMPREHENSIVE INCOME $2,114 $1,166
====== ======
Basic net income per common share 0.53 0.37
---- ====
Basic average number of common shares outstanding 5,693,472 5,693,472
========= =========
The accompanying notes are an integral part of these statements
-6-
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollar amounts in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Net cash provided by operating activities $2,220 $9,304
------ ------
Cash flows from investing activities
Purchase of property and equipment (1,807) (2,489)
Purchase of investments (879) (13,006)
Proceeds on disposal of property and equipment 2,152 522
Proceeds on disposal of investments 40 38
Restricted cash 325 211
--- ---
Net cash (used in) by investing activities (169) (14,724)
----- --------
Cash flows from financing activities
Payments to acquire subsidiary shares, net of cash acquired (134)
Issuance of long-term debt 290 652
Principal payments of long term debt (290) (208)
Net receipts (payments) of short-term bank loans 1,266 (8,252)
----- -------
Net cash provided by (used in) financing activities 1,132 (7,808)
Effect of exchange rate on cash (217) (95)
----- ----
Net increase (decrease) in cash and cash equivalents
during the period 2,966 (13,323)
Cash and cash equivalents at beginning of period 10,957 22,781
------ ------
sh and cash equivalents at end of period $13,923 $9,458
======= ======
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest $821 $1,453
Income taxes 1,078 799
</TABLE>
The accompanying notes are an integral part of these statements.
-7-
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements included herein which have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission, include the accounts
of IIC Industries, Inc. and all material majority-owned subsidiaries
(collectively the "Company"). All material intercompany transactions and
balances have been eliminated. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations.
In the opinion of management, the consolidated financial statements contain
all adjustments which are those of a normal recurring accrual nature and
disclosures necessary to present fairly the financial position of the
Company as of June 30, 1999 and December 31, 1998 and the results of
operations and cash flows for the six months ended June 30, 1999 and June
30, 1998.
NOTE B - FOREIGN CURRENCY TRANSLATION
Investor Rt ("Investor"), a majority-owned subsidiary, uses the local
currency, the Hungarian forint, as its functional currency and translates
all assets and liabilities at year-end exchange rates, all income and
expense accounts at average rates and records adjustments resulting from
the translation in a separate component of shareholders' equity.
The Israel Tractors and Equipment Company Limited ("Israel Tractor"), a
wholly-owned subsidiary, uses the US dollar as the functional currency,
since the dollar is the currency in which most of the significant business
of Israel Tractor is conducted, or to which it is linked. Balton C.P.
Limited ("Balton"), a majority-owned subsidiary, uses the US dollar as the
functional currency for some of its operations, since the subsidiaries in
Nigeria, Ghana and Zambia operate in hyperinflationary economies. These
subsidiaries translate monetary assets and liabilities at historical rates.
Income and expense accounts are translated at the rate of exchange
prevailing at the date of transaction, except that depreciation is
translated at historical rates. Adjustments resulting from the translation
of these entities are included in results of operations. The remaining
Balton subsidiairies, which operate in Tanzania, Uganda, Kenya and the Cote
D'Ivoire, use the local currencies, as their functional currency and
translate all assets and liabilities at year-end exchange rates, all income
and expense accounts at average rates and record adjustments resulting from
the translation in a separate component of shareholders' equity.
Transactions arising in a foreign currency are translated into the
functional currency at the rate of exchange effective at the date of the
transaction and gains or losses are included in results of operations.
-8-
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE C - INVENTORIES
Inventories are as follows:
JUNE 30, December 31,
1999 1998
---- ----
Raw materials $3,173 $ 5,380
Work-in-progress 473 536
Finished goods 29,879 26,687
------ ------
$33,525 $32,603
======= =======
NOTE D - CONTINGENCIES
The Company has given a guarantee to the bankers of Balton amounting to
$2.1 million. The guarantee is in respect of various outstanding letters of
credit given by the bankers of certain of Balton's creditors. The Company
has also agreed to indemnify a co-guarantor for any losses accumulating to
$735,000.
Balton has given guarantees to third parties in the amount of approximately
$1,600,000.
Investor and certain subsidiaries are potentially liable with respect to
certain guarantees of debt and other financial instruments of other related
and nonrelated companies to the extent of approximately $8.9 million.
NOTE E - INVESTMENT IN AFFILIATE
At June 30, 1999, the Company's effective ownership percentage of Danubius,
Rt. ("Danubius"), a publicly traded company, was approximately 37% at a
cumulative cost of approximately $37 million.
Danubius owns a number of hotels in Hungary and specializes in spa
facilities.
-9-
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE E (CONTINUED)
Accordingly, the Company accounted for this investment under the equity
method at June 30, 1999. Under this method,the investment is carried at
cost plus the Company's share of earnings or losses less distributions.
Since the Company's share of the underlying net assets of Danubius
exceeded the cost at the various purchase dates, the excess of the fair
value of the net assets acquired over the cost is amortized over a period
of forty years.
The following is summarized financial information of Danubius (in
thousands), which was prepared in accordance with international accounting
standards. (See the Investor section of Management's Discussion and
Analysis) There were no significant differences between international
accounting standards and generally accepted accounting standards in the
United States:
JUNE 30, 1999 June 30, 1998
------------- -------------
Current assets $32,437 $33,496
Noncurrent assets 132,834 144,228
Current liabilities 18,057 16,822
Noncurrent liabilities 31,449 47,966
Stockholders' equity 115,765 112,936
SIX MONTHS ENDED Six Months ended
JUNE 30, 1999 June 30, 1998
------------- -------------
Sales $48,554 $50,229
Operating income 5,063 8,140
Net income 4,262 5,105
-10-
<PAGE>
IIC Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE F- NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for
hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company does not expect that the
adoption of SFAS No. 133 will have a significant impact on the Company's
results of operations.
-11-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is presently operated as a holding company with subsidiaries in
three principal operating geographic areas: (1) Investor RT, a Hungarian holding
company ("Investor" or "Investor Group"), which through its subsidiaries,
engages in a variety of commercial activities in Hungary; (2) The Israel
Tractors and Equipment Company Limited ("Israel Tractor"), an Israeli
corporation, which distributes tractors and related heavy machinery in Israel
and (3) Balton C.P. Limited, an English holding company with African
subsidiaries ("Balton CP") engaged in trading activities in several African
countries.
The Company has three primary areas of operation with respect to its
subsidiaries:
(a) Investor and its subsidiaries in Hungary
(b) Israel Tractor in Israel
(c) Balton CP and its subsidiaries in Nigeria, Ghana, Zambia, Tanzania,
Kenya, Uganda and the Cote D'Ivoire.
The Company has five principal business segments:
(a) vehicle sales and service
(b) processing/storage of agricultural products
(c) the distribution of tractors and other heavy equipment
(d) the sale of agricultural, communications and electrical equipment
(e) other industries including, warehousing, retail and wholesale
consumer products and Hungarian corporate.
12
<PAGE>
RESULTS OF OPERATIONS
The table below sets forth for fiscal quarters ended June 30, 1999 and 1998
certain information with respect to the results of operations of the Company and
its principal subsidiaries.
<TABLE>
<CAPTION>
Income (loss) before
Income Taxes and
Six Months Ended Net Sales Gross Profit Minority Interests Net Income (Loss)
- ---------------- --------- ------------ -------------------- -----------------
June 30, 1999
- ------------- Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ -
(In thousands) (In thousands) (In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IIC Industries Inc. -- -- -- -- $(6) (0.1) $27 1.2
(parent company)
Israel Tractors & $25,999 28.6 $7,314 29.4 721 18.5 481 20.7
Equipment Co. (Israel)
Balton CP Group (Africa) 36,289 39.9 10,327 41.6 1,749 45.0 744 32.0
Investor RT Group 28,742 31.5 7,201 29.0 1,422 36.6 1,072 46.1
(Hungary) ------ ---- ----- ---- ----- ---- ----- ----
$91,030 100.0 $24,842 100.0 $3,886 100.0 $2,324 100.0
======= ===== ======= ===== ====== ===== ====== =====
<CAPTION>
Income (loss) before
Income Taxes and
Six Months Ended Net Sales Gross Profit Minority Interests Net Income (Loss)
- ---------------- --------- ------------ -------------------- -----------------
June 30, 1998
- ------------- Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ -
(In thousands) (In thousands) (In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IIC Industries Inc. -- -- -- -- $(63) (2.2) $(88) (7.0)
(parent company )
Israel Tractors & $27,526 24.5 $8,107 34.7 231 8.2 (119) (9.4)
Equipment Co. (Israel)
Balton CP Group (Africa) 35,059 31.2 9,257 39.6 1,766 62.8 541 43.0
Investor RT Group 49,918 44.3 5,988 25.7 877 31.2 923 73.4
(Hungary) ------ ---- ----- ---- --- ---- --- ----
$112,503 100.0 $23,352 100.0 $2,811 100. 0 $1,257 100.0
======== ===== ======= ===== ====== ==== = ====== =====
</TABLE>
13
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------
Net Sales. Net Sales on a consolidated basis for the fiscal quarter ended
June 30, 1999 decreased by approximately $21 million as compared to the
comparable period in 1998. The decrease is primarily due to the rationalization
of Investor's agricultural commodity business.
Gross Profit. Gross Profit on a consolidated basis for the fiscal quarter
ended June 30, 1999 increased by approximately $1.5 million or approximately 6%,
to approximately $24.9 million, or approximately 27% of Net Sales, from
approximately $23.4 million, or approximately 21% of Net Sales, in the
corresponding period in 1998. This increase was mainly attributable to the
rationalization of Investor's agricultural commodity business.
Operating income. Operating income on a consolidated basis for the first
fiscal half of 1999 increased by approximately $1.3 million, to $3.1 million, or
approximately 3.4% of net sales, from approximately $1.9 million, or
approximately 1.6% of Net Sales for the corresponding period in 1998. This
increase was principally due to the rationalization of Investor's agricultural
commodity business.
Interest income. Interest income decreased for the first half by $414,000,
or approximately 42%, to $565,000. This decrease was principally due to lower
cash balances and lower rates of interest in the various countries in which
the Company's operations are located.
Interest expense. Interest expense in the first half decreased by $944,000,
or approximately 54%, to approximately $816,000 due to the decrease in bank
loans and lower rates of interest.
Income before Income Taxes and Minority Interests Income before Income
Taxes and Minority Interest in the first fiscal half of 1999 was approximately
$3,886,000, compared to Income before Income Taxes and Minority Interest in the
first fiscal half of 1998 of approximately $2,811,000.
Minority Interests. The value of the Minority Interests for the first
fiscal half of 1999 increased by $887,000 as compared to the first fiscal half
of 1998 as a result of the rationalization of Investor's agricultural commodity
business.
Net Income. Net Income for the first fiscal half of 1999 was approximately
$2,324,000, compared to Net Income in the first fiscal half of 1998 of
approximately $1,257,000.
14
<PAGE>
The table below sets forth for the three months ended June 30, 1999 and
1998 certain information with respect to the results of operations of the
Company and its five principal business segments.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 Six Months Ended June 30, 1998
Income (Loss) before Income (Loss) before
Income Taxes and Income Taxes and
Net Sales Minority Interest Net Sales Minority Interest
--------- ----------------- --------- -----------------
Amount % Amount % Amount % Amount %
(In thousands) (In thousands) (In thousands) (In thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vehicle sales and $6,926 7.6 $211 5.4 $6,353 5.6 $143 5.1
distribution (Investor)
Processing/storage of 14,762 16.1 359 9.2 42,811 38.1 (653) (23.2)
agricultural products
(Investor)
Other Industries (Investor) 7,054 7.8 846 21.9 754 0.6 1,324 47.1
Tractors and heavy equipment
(Israel Tractor) 25,999 28.6 721 18.5 $27,526 24.5 231 8.2
Agricultural, communications
and electrical equipment 36,289 39.9 1,749 45.0 35,059 31.2 1,766 62.8
(Balton CP) ------ ---- ----- ---- ------ ---- ----- ----
$91,030 100.0 $3,886 100.0 $112,503 100.0 $2,811 100.0
======= ===== ====== ===== ======== ===== ====== =====
</TABLE>
INVESTOR
--------
The operations of three of the Company's segments are conducted in Hungary
through Investor. Investor's business is significantly affected by general
conditions in Hungary.
Vehicle Sales and Service Segment
---------------------------------
o Net Sales for the six months ended June 30, 1999 increased by
approximately $573,000, or approximately 9%, as compared to the
corresponding period in 1998.
o There was Income before Minority Interests and Income Taxes for the six
months ended June 30, 1999 of $211,000 as compared to a gain of
$143,000 in the corresponding period in 1998.
The increase in Net Sales and in Income before Income Taxes and Minority
Interests was primarily due to increased marketing activity resulting in more
vehicles being sold, while maintaining the margin.
15
<PAGE>
Processing/Storage of Agricultural Products Segment
- ---------------------------------------------------
o Net Sales for the six months ended June 30, 1999 decreased by
approximately $28 million or 66%, as compared to the corresponding
period in 1998. The decrease in Net Sales was primarily due to the
rationalization of the agricultural commodity trading business.
o The Income before Income Taxes and Minority Interest for the six months
ended June 30, 1999 was $359,000 compared to a Loss before Income Taxes
and Minority Interest of ($653,000) for the corresponding period in
1998. This increase in income was primarily due to the rationalization
of the agricultural commodity trading business.
Other Industries
- ----------------
o Net Sales for the first half ended June 30, 1999 increased by
approximately $6.3 million as compared to the corresponding period in
1998.
o The Income before Income Taxes and Minority Interest was approximately
$846,000 for the six months ended June 30, 1999, compared to income of
approximately $1,324,000 for the six months ended June 30, 1998. The
decrease in income arose primarily due to higher interest costs and the
effect on earnings of the devaluation of the Forint.
ISRAEL TRACTOR: TRACTORS AND HEAVY EQUIPMENT SEGMENT
----------------------------------------------------
o Net Sales for the six months ended June 30, 1999 decreased by $1.5
million,or approximately 5.6% as compared to the corresponding period
in 1998. This decrease was due to a decrease in demand for the
Company's products.
o The Income before Income Taxes and Minority Interest for the six months
ended June 30, 1999 was $721,000 as compared to $231,000 for the
corresponding period in 1998 as a result of a reduction of expenses.
BALTON CP: AGRICULTURAL, COMMUNICATIONS AND ELECTRICAL EQUIPMENT SEGMENT
------------------------------------------------------------------------
o Net Sales for the six months ended June 30, 1999 increased by
approximately $1.2 million or approximately 3.5%, as compared to the
corresponding period in 1998. This was due to increased demand for the
Company's products.
o Income before Income Taxes and Minority Interests for the six months
ended June 30, 1999 decreased by approximately $17,000, as compared to
the corresponding period in 1998.
16
<PAGE>
INCOME TAXES
The Company may be subject to tax in some or all of the foreign countries in
which it has operations. However, foreign taxes imposed on the Company's income
may qualify as a foreign income tax and therefore be eligible for credit against
the Company's United States income tax liability subject to certain limitations
set out in the Internal Revenue Code of 1986, as amended (or alternatively, for
deduction against income in determining such liability). The limitations set out
in the Code include, among others, computation rules under which foreign tax
credits allowable with respect to specific classes of income cannot exceed the
United States federal income taxes otherwise payable with respect to each class
of income. Foreign income taxes exceeding the credit limitation for the year of
payment or accrual can be carried back for two taxable years and forward for
five taxable years, in order to reduce United States federal income taxes,
subject to the credit limitations applicable in each of such years. Other
restrictions on the foreign tax credit include a prohibition on the use of the
credit to reduce liability for the United States corporate alternative minimum
taxes by more than 90%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through funds generated internally
and through cash and cash equivalents available at the beginning of 1999. At
June 30, 1999, IIC Industries Inc., (the "Parent Company"), and its wholly-owned
Israel Tractor subsidiary, had working capital of $25.8 million, including cash
and cash equivalents of $7.7 million. Cash of subsidiaries that are not
wholly-owned (including the Investor Group and the Balton CP Group) is generally
not available for use by the Parent Company or other subsidiaries (except to the
extent paid to the Parent Company as reimbursement for general overhead paid by
the Parent Company or as management fees) other than in the form of dividends,
if and when declared. Dividends to the Parent Company from its Israel Tractor
subsidiary are subject to a withholding tax of 15% to 25%. The Parent Company
does not expect to receive cash dividends or other distributions in the
foreseeable future from any of its subsidiaries.
At June 30, 1999, Israel Tractor, Investor and Balton had outstanding
short-term indebtedness of approximately $3.6 million, $5.7 million and $1.2
million, respectively.
At June 30, 1999, Israel Tractor, Investor and Balton had unused lines of
short-term credit of $3.4 million, $11.4 million and $6.5 million, respectively.
During the first half of 1999, Israel Tractor, Investor, and Balton made
capital expenditures of $331,000; $830,000 and $646,000, respectively, for the
purchase of equipment and vehicles and improvements to property. Such
expenditures were made from internally generated funds. At June 30, 1999, the
Company had no significant capital commitments.
17
<PAGE>
INFLATION
Inflation has been a persistent aspect of the Hungarian economy in recent
years, although the annual rate of inflation has been predictable and has
therefore been taken into account by the government and private businesses.
Inflation has contributed to the devaluation of the Hungarian currency and has
therefore had an effect on Investor's financial condition.
Inflation in Israel was moderate in 1998 and during the first half of 1999,
and therefore did not significantly affect operations in that country.
Furthermore, there was a revaluation of the Israeli shekel against the U.S.
Dollar in the first six months of 1999 of 2.7%.
Significant rates of inflation persisted in the African countries where
Balton CP operates, triggering significant devaluations of local currencies.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities and is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company does not expect that the adoption of SFAS No.
133 will have a significant impact on the Company's results of operations.
YEAR 2000 COMPLIANCE
In July 1996, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") issued EITF 96-14, "Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000," which requires
that costs associated with modifying computer software for the Year 2000 be
expensed as incurred.
The Company is in the process of conducting a comprehensive review of its
systems, equipment, product and services, suppliers, customers and building
facilities to identify its exposure to any adverse impact of Year 2000
non-compliance. The Company has implemented or will implement procedures that it
deems necessary to safeguard the Company from computer-related issues associated
with adverse effects as a result of improperly recognizing the millennial date
change.
18
<PAGE>
The Company believes, based upon its review and efforts to date, that external
and internal remediation costs to be incurred for the modification of
internal-use software to address Year 2000 issues will not be material. These
cost estimates include the costs of external contractors, non-capitalizable
purchases of software and hardware, and the direct cost of internal employees
working on Year 2000 projects. The Company's cost estimate does not include the
cost of implementing contingency plans, which are in the process of being
developed, and also does not include any potential litigation or warranty costs
related to Year 2000 issues if the Company's remediation efforts are not
successful.
The Company has undertaken a program to alert its suppliers and dealers of Year
2000 issues. Based on its contacts with suppliers and dealers, the Company
believes that a majority of our most important suppliers are Year 2000
compliant, and the Company anticipates that most of its dealers will be Year
2000 compliant by mid-1999. The Company will continue to work with its remaining
suppliers and its dealers throughout 1999 to secure Year 2000 compliance by
December 31, 1999. Based on third-party representations and internal testing,
and subject to the Company's ongoing compliance efforts, the costs and
uncertainties relating to timely resolution of Year 2000 issues applicable to
the Company's business and operations are not reasonably expected by the Company
to have a material adverse effect on the Company's financial position, cash
flows or results of operations. For those suppliers and dealers that have not
adequately responded to our Year 2000 concerns, we are following up to
ultimately achieve an acceptable level of compliance within our supply chain. As
there can be no assurance that an acceptable level of Year 2000 compliance will
be achieved, the Company is in the process of developing contingency plans to
address potential issues.
Based upon the Company's review and efforts to date, the Company currently
anticipates completion of critical Year 2000 compliance issues by mid-1999, and
the Company plans to continue integration testing throughout the balance of
1999. If the Company's Year 2000 compliance efforts, as well as the efforts of
the Company's suppliers and dealers, individually and in the aggregate, are not
successful, it could have a material adverse effect on the Company's financial
position, cash flows and results of operations. Factors that could cause actual
results to differ include unanticipated supplier or dealer failures, disruption
of utilities, transportation or telecommunications breakdowns, foreign or
domestic governmental failures, as well as unanticipated failures on our part to
address Year 2000 related issues. The most likely worst case scenario for the
Company in light of these risks would involve a potential loss in sales
resulting from order, production and shipping delays throughout the Company's
supply chain caused by Year 2000 related disruptions. The degree of sales loss
impact would depend on the severity of the disruption, the time required to
correct it, whether the sales loss was temporary or permanent, and the degree to
which our primary competitors were also impacted by the disruption. The Company
is in the process of developing Year 2000 contingency plans that will be
designed to mitigate the impact on the Company if its Year 2000 compliance
efforts are not successful. The targeted completion date for the Company's
contingency planning is the end of the third quarter of 1999. The Company's
contingency plans may include the use of alternative systems and
non-computerized approaches to our business including manual procedures for
machine operation, collecting and reporting of its business information, as
well as alternative sources of supply. At this time, the Company has not
determined whether it will be necessary to stockpile inventory or supplies as
part of its contingency planning.
The information included in this "Year 2000" section represents forward-looking
statements and involves risks and uncertainties that could cause actual results
to differ materially from those in the forward-
19
<PAGE>
looking statements. The Company has evaluated the impact of the Year 2000 issue
on the business and does not expect to incur significant costs with year 2000
compliance. The Company believes that all software and hardware requirements to
enable it to cope with year 2000 issue have been or are being currently
implemented. However, there can be no assurance that unanticipated costs may
arise in implementing these requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURE ABOUT FOREIGN CURRENCY RISK
Substantially all of the Company's revenues are derived from foreign operations.
As such, its income is significantly affected by fluctuations in currency
exchange rates and by currency controls. Most of the countries where the Company
operates such as Hungary and several African countries do not have freely
convertible currencies and their currencies have been subject to devaluations in
recent years. In particular, during 1998, the income from the Company's
Hungarian, African and Israeli subsidiaries was significantly reduced by losses
arising from foreign exchange transactions due to significant currency
devaluations against the U.S. dollar. The Hungarian currency, which floats
against a basket of two currencies (the U.S. dollar and the European Currency
Unit) underwent devaluations against the U.S. dollar at the rate of 7% during
1998. Since the beginning of 1999, the Hungarian currency has been further
devalued by approximately 11% against the U.S. Dollar. Since the functional
currency for Investor is the Forint, these devaluations have resulted in certain
currency translation adjustments directly impacting stockholders' equity.
Furthermore, certain African countries such as Nigeria, Ghana & Zambia operate
in hyper-inflationary economies, and, the Israeli shekel devalued 17.6% against
the U.S. dollar in 1998, even though the devaluation was modest in previous
years. Since the beginning of 1999, the Israeli shekel has been revalued by
approximately 2.7% against the U.S. Dollar.
Derivative financial instruments are utilized by the Company to reduce foreign
exchange risk and price risk relating to its heavy equipment distribution and
agricultural commodity business. The Company does not hold or issue derivative
financial instruments for trading purposes.
Israel Tractor enters into foreign currency forward contracts and call option
contracts to reduce the impact of fluctuations of certain currencies against the
U.S. dollar. Gains and losses resulting from such transactions are reflected in
the results of operations. These contracts reduce exposure to currency movements
resulting primarily from nondollar-denominated trade receivables and the Israeli
tax effects of dollar-denominated trade purchases.
At June 30, 1999, Israel Tractor had foreign currency forward contracts, with
notional values of $5 million, to purchase and sell Israeli shekels. All of the
contracts mature in the next six months.
Current pricing models were used to estimate the fair values of foreign currency
forward contracts, and call options. The counterparties to these contracts are
creditworthy multinational commercial banks or other financial institutions,
which are recognized market makers.
20
<PAGE>
DISCLOSURE ABOUT INTEREST RATE RISK
The Company is subject to market risk from exposure to changes in
interest rates based on its financing, investing, and cash management
activities. The Company utilizes a balanced mix of debt maturities along with
both fixed-rate and variable-rate debt to manage its exposures to changes in
interest rates. The Company does not expect changes in interest rates to have a
material effect on income or cash flows in 1999, although there can be no
assurances that interest rates will not significantly change.
21
<PAGE>
SIGNATURES
In accordance with 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.
Date: August 13, 1999
IIC INDUSTRIES, INC.
By: /s/ Fortunee F. Cohen
-------------------------
Fortunee F. Cohen, Secretary
By: /s/ Michael M. Wreschner
-------------------------------
Michael M. Wreschner, Director,
Principal Financial Officer and
Chief Accounting Officer
<PAGE>
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the period covered by this
report.
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 13,923
<SECURITIES> 0
<RECEIVABLES> 38,888
<ALLOWANCES> 2,889
<INVENTORY> 33,525
<CURRENT-ASSETS> 94,663
<PP&E> 29,884
<DEPRECIATION> 17,864
<TOTAL-ASSETS> 169,369
<CURRENT-LIABILITIES> 55,015
<BONDS> 0
0
0
<COMMON> 1,586
<OTHER-SE> 86,123
<TOTAL-LIABILITY-AND-EQUITY> 169,369
<SALES> 91,030
<TOTAL-REVENUES> 91,030
<CGS> 66,188
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 21,712
<LOSS-PROVISION> 32
<INTEREST-EXPENSE> (816)
<INCOME-PRETAX> 2,933
<INCOME-TAX> (609)
<INCOME-CONTINUING> 2,324
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,324
<EPS-BASIC> 0.41
<EPS-DILUTED> 0.41
</TABLE>
