<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 September 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: 0-27860
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)
171 Madison Avenue; New York, N.Y. 10016
- -------------------------------------------- ------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 889-7201
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 October 31, 1999.
<PAGE>
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets
at September 30, 1999
and December 31, 1998 3
Consolidated Statements of Income and Comprehensive Income
for the Nine Months Ended
September 30, 1999 and September 30, 1998 5
Consolidated Statements of Income and Comprehensive Income
for the Three Months Ended
September 30, 1999 and September 30, 1998 6
Consolidated Statement of Cash Flows
for the Nine Months Ended
September 30, 1999 and September 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)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $10,524 $10,957
Accounts receivable, net 38,101 34,797
Inventories, net (Note C) 37,245 32,603
Deposit 2,000 2,000
Other current assets 4,857 8,143
-------- -------
Total current assets 92,727 88,500
RESTRICTED CASH 367
PROPERTY AND EQUIPMENT, NET 24,268 34,738
INVESTMENTS 51,583 40,585
OTHER ASSETS 3,493 2,648
-------- -------
$172,071 $166,838
======== ========
</TABLE>
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)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
-------------- ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $23,459 $18,492
Bank loans 18,378 11,609
Current maturities of long-term debt 355
Accrued expenses and other payables 6,607 13,813
Due to related parties 3,247
Advances from customers 3,480 4,655
-------- -------
Total current liabilities 51,924 52,171
LONG-TERM DEBT, less current portion 3,736 3,281
DUE TO AFFILIATES 2,887 1,738
OTHER LIABILITIES AND DEFERRED
CREDITS 9,190 6,477
MINORITY INTERESTS 15,648 14,738
-------- -------
83,385 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 105,287 101,055
Accumulated other comprehensive loss (38,403) (34,424)
Less treasury stock - at cost (649,752 shares) (2,725) (2,725)
-------- -------
88,686 88,433
-------- -------
$172,071 $166,838
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Net sales $131,952 $154,814
Cost of sales 95,973 120,489
--------- ---------
Gross profit 35,979 34,325
Selling, general and administrative expenses 32,888 31,507
--------- ---------
Operating income 3,091 2,818
--------- ---------
Other income (expenses)
Interest income 988 1,165
Equity in earnings of affiliates 4,313 4,964
Foreign currency loss (Note B) (2,642) (600)
(Loss) Gain on sale of noncurrent assets, net (45) 245
Interest expense (1,195) (2,136)
Other, net 880 566
--------- ---------
Income before income taxes and
Minority interest 5,390 7,022
Income taxes (965) (1,941)
--------- ---------
Income before minority interest 4,425 5,081
Minority Interests (195) (248)
--------- ---------
NET INCOME $4,230 $4,833
Other comprehensive income:
Foreign currency translation adjustments (3,979) (2,265)
--------- ---------
COMPREHENSIVE INCOME $251 $2,568
========= =========
Basic net income per common share $0.74 $0.85
========= =========
Basic average number of common shares outstanding 5,693,472 5,693,472
========= =========
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
IIC Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
(dollar amounts in thousands, except share data)
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Net sales $40,922 $42,311
Cost of sales 29,785 31,338
--------- ---------
Gross profit 11,137 10,973
Selling, general and administrative expenses 11,176 10,011
--------- ---------
Operating (loss) income (39) 962
--------- ---------
Other income (expenses)
Interest income 423 186
Equity in earnings of affiliates 2,970 3,312
Foreign currency loss (Note B) (1,272) (310)
(Loss) Gain on sale of noncurrent assets, net (359) 319
Interest expense (379) (376)
Other, net 160 118
--------- ---------
Income before income taxes and
Minority interest 1,504 4,211
Income taxes (356) (453)
--------- ---------
Income before minority interest 1,148 3,758
Minority Interests 758 (182)
--------- ---------
NET INCOME $1,906 $3,576
Other comprehensive income:
Foreign currency translation adjustments (929) 47
--------- ---------
COMPREHENSIVE INCOME $977 $3,623
========= =========
Basic net income per common share $0.33 $0.63
========= =========
Basic average number of common shares outstanding 5,693,472 5,693,472
========= =========
</TABLE>
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>
Nine months ended September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Net cash (used in) provided by operating activities $(1,839) $3,639
------- -------
Cash flows from investing activities
Purchase of subsidiary shares, net of cash acquired (380) (1,738)
Purchase of property and equipment (2,006) (3,502)
Purchase of investments (1,593) (13,041)
Advances to affiliates (379) (2,000)
Proceeds on disposal of property and equipment 655 1,365
Proceeds on disposal of investments 1,261 108
Restricted cash 367 211
------- -------
Net cash (used in) investing activities (2,075) (18,597)
------- -------
Cash flows from financing activities
Payments to acquire treasury shares by subsidiary (1,140)
Issuance of long-term debt 563 844
Principal payments of long term debt (331) (211)
Net receipts (payments) of short-term bank loans 4,527 1,242
------- -------
Net cash provided by (used in) financing activities 3,619 1,875
Effect of exchange rate on cash (138) (176)
------- -------
Net (decrease) in cash and cash equivalents during the period (433) (13,259)
Cash and cash equivalents at beginning of period 10,957 22,781
------- -------
Cash and cash equivalents at end of period $10,524 $9,522
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for
Interest $1,051 $1,824
Income taxes 1,121 1,743
</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 September 30, 1999 and December 31, 1998 and the results of
operations and cash flows for the nine months ended September 30, 1999 and
September 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") and
Balton C.P. Limited ("Balton"), a wholly-owned and a majority owned
subsidiary, respectively, use the US dollar as the functional currency,
since the dollar is the currency in which most of the significant business
of Israel Tractor and Balton is conducted, or to which it is linked. 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.
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:
September 30, December 31,
1999 1998
---- -----
Raw materials $7,526 $ 5,380
Work-in-progress 597 536
Finished goods 29,122 26,687
------- -------
$37,245 $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
$615,000.
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
$7.4 million.
NOTE E - INVESTMENT IN AFFILIATE
At September 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 September 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:
September 30, 1999 September 30, 1998
------------------ ------------------
Current assets $41,411 $45,215
Noncurrent assets 134,426 144,344
Current liabilities 16,193 16,126
Noncurrent liabilities 31,855 50,356
Stockholders' equity 127,789 123,077
Nine Months ended Nine Months ended
September 30, 1999 September 30, 1998
------------------ ------------------
Sales $81,489 $86,534
Operating income 15,362 22,594
Net income 13,297 15,246
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, 2000. The adoption of SFAS No. 133 will not or is
not expected to 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 September 30, 1999 and
1998 certain information with respect to the results of operations of the
Company and its principal subsidiaries.
<TABLE>
<CAPTION>
Nine Months Ended Net Sales Gross Profit Income (loss) before Net Income (Loss)
September 30, 1999 --------- ------------ Income Taxes and -----------------
- ------------------ Minority Interests
------------------
Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ -
(In thousands) (In thousands) (In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IIC Industries Inc. -- -- -- -- $(411) (7.6) $(465) (11.0)
(parent company)
Israel Tractors & $39,325 29.8 $11,256 31.3 1,707 31.7 922 21.8
Equipment Co. (Israel)
Balton CP Group (Africa) 50,237 38.1 14,445 40.1 644 11.9 328 7.8
Investor RT Group 42,390 32.1 10,278 28.6 3,450 64.0 3,445 81.4
(Hungary) -------- ----- ------- ----- ------ ----- ------ -----
$131,952 100.0 $35,979 100.0 $5,390 100.0 $4,230 100.0
======== ===== ======= ===== ====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Net Sales Gross Profit Income (loss) before Net Income (Loss)
September 30, 1998 --------- ------------ Income Taxes and -----------------
- ------------------ Minority Interests
------------------
Amount % Amount % Amount % Amount %
------ - ------ - ------ - ------ -
(In thousands) (In thousands) (In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IIC Industries Inc. -- -- -- -- $(117) (1.7) $(144) (3.0)
(parent company)
Israel Tractors & $41,254 26.6 $11,571 33.8 42 0.6 (525) (10.8)
Equipment Co. (Israel)
Balton CP Group (Africa) 49,934 32.3 13,541 39.4 2,480 35.3 827 17.1
Investor RT Group 63,626 41.1 9,213 26.8 4,617 65.8 4,675 96.7
(Hungary) -------- ----- ------- ----- ------ ----- ------ -----
$154,814 100.0 $34,325 100.0 $7,022 100.0 $4,833 100.0
======== ===== ======= ===== ====== ===== ====== =====
</TABLE>
13
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
Net Sales. Net Sales on a consolidated basis for the nine months ended
September 30, 1999 decreased by approximately $23 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 nine months
ended September 30, 1999 increased by approximately $1.65 million or
approximately 5%, to approximately $36 million, or approximately 27% of Net
Sales, from approximately $34 million, or approximately 22% 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 nine
months ended September 30, 1999 increased by approximately $273 thousand, to
$3.1 million, or approximately 2.3% of net sales, from approximately $2.8
million, or approximately 1.8% of Net Sales for the corresponding period in
1998. This increase was principally due to the improved performance of Israel
Tractor.
Interest income. Interest income decreased for the nine months ended
September 30, 1999 by $177,000, or approximately 15%, to $988,000. 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 nine months ended September
30, 1999 decreased by $941,000, or approximately 44%, to approximately $1.2
million 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 Interests in the first nine months ended September 30, 1999
was approximately $5,390,000, compared to Income before Income Taxes and
Minority Interest in the first nine months of 1998 of approximately $7,022,000.
Minority Interests. The value of the Minority Interests for the first nine
months ended September 30, 1999 decreased by $53,000 as compared to the first
nine months of 1998.
Net Income. Net Income for the first nine months ended September 30, 1999
was approximately $4,230,000, compared to Net Income in the first nine months of
1998 of approximately $4,833,000.
14
<PAGE>
The table below sets forth for the nine months ended September 30, 1999 and
1998 certain information with respect to the results of operations of the
Company and its five principal business segments.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999 Nine Months Ended September 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 $10,513 8.0 $284 5.3 $10,057 6.5 $200 2.8
distribution (Investor)
Processing/storage of 22,969 17.4 178 3.3 52,238 33.8 (321) (4.6)
agricultural products
(Investor)
Other Industries (Investor) 8,908 6.7 2,577 47.8 1,131 0.8 4,621 65.9
Tractors and heavy equipment 39,325 29.8 1,707 31.7 41,254 26.6 42 0.6
(Israel Tractor)
Agricultural, communications 50,237 38.1 644 11.9 49,934 32.3 2,480 35.3
and electrical equipment
(Balton CP)
$131,952 100.0 $5,390 100.0 $154,814 100.0 $7,022 100.0
======== ===== ====== ===== ======== ===== ====== =====
</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 Distribution Segment
o Net Sales for the nine months ended September 30, 1999 increased by
approximately $456,000, or approximately 4.5%, as compared to the
corresponding period in 1998.
o There was Income before Minority Interests and Income Taxes for the
nine months ended September 30, 1999 of $284,000 as compared to a gain
of $200,000 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 nine months ended September 30, 1999 decreased by
approximately $29 million or 56%, as compared to the corresponding
period in 1998. The decrease in Net Sales was primarily due to the
rationalization of Investor's agricultural commodity business.
o The Income before Income Taxes and Minority Interest for the nine
months ended September 30, 1999 was $178,000 compared to a Loss before
Income Taxes and Minority Interest of ($321,000) 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 nine months ended September 30, 1999 increased by
approximately $7.8 million as compared to the corresponding period in
1998.
o The Income before Income Taxes and Minority Interest was approximately
$2,577,000 for the nine months ended September 30, 1999 compared to
income of approximately $4,621,000 for the nine months ended September
30, 1998. The decrease in income arose primarily due to higher
interest costs, foreign currency transaction losses and the lower
equity earnings from Danubius.
ISRAEL TRACTOR: TRACTORS AND HEAVY EQUIPMENT SEGMENT
o Net Sales for the nine months ended September 30, 1999 decreased by
$1.9 million,or approximately 5% 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 nine
months ended September 30, 1999 was $1,707,000 as compared to $42,000
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 nine months ended September 30, 1999 increased by
approximately $303 thousand or approximately 0.6%, 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 nine months
ended September 30, 1999 decreased by approximately $1.8 million, as
compared to the corresponding period in 1998, as a result of local
currency devaluation losses.
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
September 30, 1999, IIC Industries Inc., (the "Parent Company"), and its
wholly-owned Israel Tractor subsidiary, had working capital of $25.4 million,
including cash and cash equivalents of $7.4 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 September 30, 1999, Israel Tractor, Investor and Balton had outstanding
short-term indebtedness of approximately $4.6 million, $9.2 million and $4.5
million, respectively.
At September 30, 1999, Israel Tractor, Investor and Balton had unused lines
of short-term credit of $2.4 million, $3.4 million and $ 3.2 million,
respectively .
During the first nine months of 1999, Israel Tractor, Investor, and Balton
made capital expenditures of $293,000; $811,000 and $ 902,000 respectively, for
the purchase of equipment and vehicles and improvements to property. Such
expenditures were made from internally generated funds. At September 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 nine months
of 1999, and therefore did not significantly affect operations in that country.
Furthermore, there was a devaluation of the Israeli shekel against the U.S.
Dollar in the first nine months of 1999 of 2%.
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, 2000. The adoption of SFAS No. 133 will not or is not expected to
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 conducted 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
implemented procedures that it deemed necessary to safeguard the Company from
computer-related issues associated with adverse effects as a result of
improperly recognizing the millennial date change.
The external and internal remediation costs to be incurred for the modification
of internal-use software to address Year 2000 issues were not material. These
cost estimates included the costs of external contractors, non-capitalizable
purchases of software and hardware, and the direct cost of internal
18
<PAGE>
employees working on Year 2000 projects. The Company's cost estimate did not
include any potential litigation or warranty costs related to Year 2000 issues
if the Company's remediation efforts are not successful.
The Company undertook 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 predominant portion of our suppliers is Year 2000 compliant. 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 have followed 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 has
developed contingency plans to address potential issues.
Based upon the Company's review and efforts to date, the Company has completed
its critical Year 2000 compliance issues and testing. 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 has
developed Year 2000 contingency plans that were designed to mitigate the impact
on the Company if its Year 2000 compliance efforts are not successful. The
Company's contingency plans 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 determined it
will not 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-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 implemented.
19
<PAGE>
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, Israeli and certain African 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 devalued by
approximately 2% 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 September 30, 1999, Israel Tractor had foreign currency forward contracts,
with notional values of $2 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.
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.
20
<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
On October 28, 1999, the Company filed an 8-K regarding the change in the
Company's Certifying Accountant.
EXHIBIT NO. DESCRIPTION
----------- -----------
27 Financial Data Schedule
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: November 19, 1999
IIC INDUSTRIES, INC.
By: /s/ Fortunee F. Cohen
-------------------------------
Fortunee F. Cohen, Secretary
By: /s/ Michael M. Wreschner
-------------------------------
Michael M. Wreschner, Director,
Assistant Secretary and assisting
on financial matters.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,924
<SECURITIES> 0
<RECEIVABLES> 38,101
<ALLOWANCES> 2,595
<INVENTORY> 37,245
<CURRENT-ASSETS> 92,727
<PP&E> 24,268
<DEPRECIATION> 18,174
<TOTAL-ASSETS> 172,071
<CURRENT-LIABILITIES> 51,924
<BONDS> 0
0
0
<COMMON> 1,586
<OTHER-SE> 87,100
<TOTAL-LIABILITY-AND-EQUITY> 172,071
<SALES> 131,952
<TOTAL-REVENUES> 131,952
<CGS> 95,973
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 32,888
<LOSS-PROVISION> 90
<INTEREST-EXPENSE> 1,195
<INCOME-PRETAX> 5,195
<INCOME-TAX> 965
<INCOME-CONTINUING> 4,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,230
<EPS-BASIC> 0.74
<EPS-DILUTED> 0.74
</TABLE>
