U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
/ x / ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______________ to __________________
Commission File number 0-14575
IL INTERNATIONAL INC.
(Name of small business issuer in its charter)
Delaware 06-1331343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 Long Beach Boulevard,
Stratford, Connecticut 06497
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (203) 378-4000
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 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 / /
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and if no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
Page 1 of 45 pages
Exhibit Index at page 43
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The issuer's revenues for its most recent fiscal year were
$9,735,494.
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days.
Aggregate market value as of March 21,
1997.................$476,250
Check whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes / x / No / /
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Common stock, $.01 par value, as of March 21,
1997.............. 79,375,497 shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the documents, all or portions of which are
incorporated by reference herein and the Part of the Form 10-KSB into which the
document is incorporated:
Part III -- Proxy Statement to be filed with respect to the Annual
Meeting of Stockholders to be held on May 22, 1997.
Transitional Small Business Disclosure Format (Check one:)
Yes / / No / x /
<PAGE>
3
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
IL International Inc. (the "Company") was incorporated in Delaware
on June 13, 1991.
The Company's business, transacted through its operating
subsidiaries, is the design, marketing and distribution worldwide of
contemporary lamps and lighting products.
Operating Units
Italiana Luce and IL USA, Inc. (formerly known as "PAF USA, Inc."),
a Delaware corporation ("IL USA"), are the Company's two operating subsidiaries.
Italiana Luce, which is based in Settimo Milanese, a suburb of Milan, Italy,
designs, markets and distributes worldwide high quality contemporary lamps and
lighting products. Italiana Luce's products are manufactured by a network of
subcontractors, some of which work almost exclusively for Italiana Luce, using
molds and machinery owned by Italiana Luce. IL USA is the exclusive distributor
of Italiana Luce's products in the United States and Canada.
Incorporated in 1975, Italiana Luce shipped its first products,
principally classic hand-blown Venetian glass lamps, in early 1979. In 1984,
Italiana Luce introduced the first of its modern design lamps and began to phase
out its traditional product line. In 1993, a new line of traditionally designed,
high quality, hand-blown lamps was marketed under the Le Stelle trade name.
Italiana Luce currently sells 42 collections of lighting products
consisting of about 360 line items. In the United States the suggested retail
prices of these fixtures range from $95 to $1,600 with an estimated weighted
average list price of $300. Actual selling prices in the United States are
commonly 20% or more below the suggested retail prices. Prices of these products
are generally higher in the rest of the world.
In 1993, IL USA acquired distribution rights in North America for
certain lighting products of contemporary design produced by two non-affiliated
Italian lighting
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manufacturers, Nemo S.r.l. and Effetre Industriale S.p.A. In October 1994, IL
USA also began to distribute in the United States a line of lighting products
produced by Foscarini Murano S.p.A. ("Foscarini"). Besides its contemporary line
of lighting fixtures featuring very high quality hand-blown Venetian glass,
Foscarini offers an array of classic custom designed chandeliers. In sum, these
three lines consist of 54 collections of lighting products or about 400 line
items (excluding custom-made products). The fixtures have suggested retail
selling prices which range from $85 to $2,790 with an estimated weighted average
list price of $350.
Industry Segments
The Company operates within the lighting segment of the interior
furnishings market. Sales are made principally to the residential sector of the
market. The Company considers its present product line to comprise a single
industry segment.
Design
The Company's design policy is to develop innovative contemporary
lighting products directed at the high-end of the lighting market. The Company
does not have an in-house design group but instead develops its designs in close
cooperation with a small group of top architects and designers recognized for
their excellence in the field of modern design. In order to assure that new
product development is directly focused on market needs, the Company outlines
for its designers current market trends both in design and material content,
identifies product niches, and sets price guidelines. The majority of the
designers create lighting products exclusively for the Company. The "Italiana
Luce Collection" has been created principally by Italian designers such as Mario
Barbaglia, Marco Colombo and Stefano Marcato. Prominent German and French
designers such as Ferdinand Porsche and Sacha Ketoff have also designed products
for the Company. Italiana Luce's products have been exhibited in various museums
of modern art in Europe, the United States and South America. They have also
been highly acclaimed by contemporary design periodicals throughout the world.
Marketing
The majority of the Company's products are sold
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in Western Europe where the top three markets are Italy, Germany and France.
Sales in the United States and Canada account for close to 25% of worldwide
sales when expressed in U.S. dollars. The Company also sells its products in
Japan, Australia and certain countries in South America. Products are
distributed to the retail consumer through independent stores, furniture stores,
department stores and mail order houses. Fixtures are also sold directly to
contractors, purchasing agents, architects and designers for use in commercial
applications such as offices, hospitality centers and restaurants.
The residential markets around the world for high-end lighting
fixtures of contemporary design have been very soft for the past few years while
the contract market has seen some growth over the same period. As a result, the
Company has taken steps in recent times to increase its presence in the contract
market. It is estimated that currently less than 10% of the Company's sales are
made directly to the contract market. An additional unquantifiable volume of
sales is made to third parties who themselves sell the products into the
contract market.
The Company's products are sold in Italy through a network of
independent sales representatives. In other countries in Europe sales are made
on an exclusive basis either through a local distributor or through an importing
agent. In the United States, the products are sold through independent sales
agent organizations hired by IL USA. IL USA sells its products to a Canadian
distributor for distribution throughout Canada.
The Company's marketing strategy is directed primarily at the
residential segment of the lighting market. Marketing efforts of the sales
representatives, who call principally on retail outlets, are supplemented by
promotional programs, including catalogue mailings, incentive plans, attendance
at trade shows, and national advertising through trade and popular interior
design publications. The generally weak economies in Europe in recent years have
negatively affected the Company's sales and cash flow. To conserve its
resources, the Company has advertised only sparingly in the past three years.
Instead, the Company has increased the level of its promotional activities to
the trade.
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Competition
In each of the countries in which the Company markets its products,
the residential lighting sector of the interior furnishings industry is highly
competitive and fragmented, with many hundreds of companies operating within it.
The Company's major worldwide competitors in the high-end, contemporary lighting
sector of the interior furnishings market are Artemide, Flos, Leucos and Arte
Luce. Other competitors in the United States include George Kovacs and Koch &
Lowy. Some of the Company's competitors have greater financial and operating
resources than the Company. In addition, there is strong competition from
imports from the Far East which are priced substantially lower than the
Company's products, are often very similar in design, and are generally of a
lower quality.
The Company believes its principal competitive advantages to be its
superior design capability, the Italian provenance of its products, the brand
name recognition of its products in the trade, and its professional management.
Seasonality
Because it is the custom in Italy, as it is in much of Europe, to
shut down operations during the month of August, shipments for the third quarter
of the calendar year have historically accounted for approximately 15% of total
annual sales. The first and fourth quarters of the year have in recent years
each accounted for approximately 30% of total annual sales.
Sources of Supply
The primary materials used by the Company are metal, technopolymer
and glass. These materials are in plentiful supply and are available from many
sources throughout Europe. The Company has not experienced any material delays
in the delivery of any of these items in recent years.
Principal Customers
The Company's five largest customers account, in the aggregate, for
less than 5% of its total sales.
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Patents and Trademarks
The Company has patents and trademarks in many countries on the
design of certain of its products. In those countries in which the Company has
significant sales, these patents and trademarks expire between 2006 and 2010.
Restructuring of Italiana Luce
Confronted with continued weak demand for its products in every
major market in continental Europe and with no prospect of any improvement
during 1997, the Company determined that more radical cost cutting measures than
those implemented over the past few years were necessary. Consequently, the
following actions have been taken:
1. After protracted negotiations with the national body representing its
employees in Italy the Company terminated nine of its workforce,
equivalent to thirty percent of its headcount, effective February 14,
1997. The Company agreed to pay each terminated employee a lump sum equal
to between five and seven months salary.
2. Compensation of the Company's officers and directors was cut by about 30%,
commencing January 1, 1997 and a bonus arrangement with one of its
officers and directors was eliminated.
3. Effective April 1, 1997, Italiana Luce will relinquish approximately
13,000 square feet of its current warehouse space.
4. The Le Stelle line of traditional Venetian-style lighting fixtures will be
closed out during 1997 to enable the Company to focus on its core
business. It is anticipated that the inventory will be sold at or above
its carrying value plus estimated selling costs.
The annual savings accruing from this major restructuring are
estimated to be about Lit. 770 million or approximately $500,000 when converted
at the average 1996 exchange rate.
Employees
At December 31, 1996, the Company had 36 employees of whom 21 were
employed in executive, management, sales,
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8
administrative, and clerical positions and 14 in warehousing, shipping, assembly
and technical support. In connection with the restructuring of Italiana Luce,
nine employees were terminated during February 1997 thereby reducing the total
headcount to 27 employees.
Manufacture of the Company's products is undertaken by small
independent subcontractors in Italy. Each subcontractor produces a limited
number of the Company's products. For many of the larger selling volume items,
the Company has two or more sources of supply.
Although the Company has no collective bargaining arrangements, all
of its employees in Italy are covered by broad national wage and benefit
agreements mandated by various agencies of the Italian central government. The
Company considers its employee relations to be good.
Foreign and Domestic Operations
A summary of the Company's operations by geographical area for the
years ended December 31, 1996 and 1995 is as follows:
Years Ended December 31,
1996 1995
----------- -----------
Net sales to
unaffiliated customers:
United States (a) $ 2,381,598 $ 2,132,195
Italy 3,389,958 3,635,168
Other countries 3,963,938 4,455,445
----------- -----------
Total $ 9,735,494 $10,222,808
=========== ===========
Net sales between
geographic areas (b):
Italy $ 877,620 $ 859,123
=========== ===========
Operating profits/(losses):
United States $ 27,562 $ 28,766
Italy (741,977) 191,905
----------- -----------
Total $ (714,415) $ 220,671
=========== ===========
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December 31,
1996 1995
----------- -----------
Identifiable assets:
United States $1,078,840 $ 993,260
Italy 5,654,301 6,033,445
---------- ----------
Total $6,733,141 $7,026,705
========== ==========
- ----------
(a) Includes export sales of $45,132 and $50,372 during the years ended December
31, 1996 and 1995, respectively.
(b) Net sales between geographic areas refers to products sold by Italiana Luce
to IL USA. These sales have been eliminated in consolidation.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive offices are located at 400 Long Beach
Boulevard, Stratford, Connecticut where the Company leases 800 square feet of
office space from IL USA.
The offices of Italiana Luce are located at Via Edison, 118, Settimo
Milanese, Italy. The leased premises consist of offices of approximately 3,200
square feet and a warehouse of approximately 39,000 square feet. In connection
with its restructuring, Italiana Luce will be vacating approximately 13,000
square feet of this warehouse space, effective March 31, 1997,
The Company's distribution center in the United States is leased by
IL USA and is located at 400 Long Beach Boulevard, Stratford, Connecticut. It
consists of offices of approximately 1,600 square feet and a warehouse of
approximately 9,120 square feet.
The Company's total annualized rental expense in 1996 was $276,233.
Leases generally are subject to periodic rent adjustments. Lease expirations
range from December 1997 to September 1998.
The Company anticipates that it will be able to renew its leases
upon their expiration or lease other facilities on comparable terms if the
current leases are not renewed. The Company believes that its facilities are
well maintained and are of adequate size for its current
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needs and for its projected needs in the immediate future.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings, other than routine litigation
incidental to the Company's business, to which the Company is a party or of
which any of its property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
Not applicable.
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11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded in the over-the-counter
("O-T-C") market on (i) the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") under the symbol ILIL, and is included in the NASDAQ
OTC Bulletin Board and (ii) the National Quotation Bureau's "Pink Sheets".
The quarterly high and low bid prices of the Company's common stock
during 1995 and 1996 are set forth below. Prices are as reported by the National
Quotation Bureau, Inc.
High Low
---- ---
1995
- ----
First Quarter $0.02 $0.01
Second Quarter 0.02 0.01
Third Quarter 0.02 0.01
Fourth Quarter 0.02 0.01
1996
- ----
First Quarter $0.01 $0.01
Second Quarter 0.02 0.01
Third Quarter 0.02 0.01
Fourth Quarter 0.01 0.01
The foregoing O-T-C quotations are inter-dealer quotations without
retail markups, markdowns or commissions and may not represent actual
transactions.
On March 21, 1997, the Company estimates that it had 1,800
shareholders, comprised of 463 shareholders of record and 1,337 beneficial
shareholders whose shares are being held in brokerage firm accounts in "street
name."
No cash dividends have been paid or declared on the common stock of
the Company since the Company was organized.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Background
IL International Inc. (the "Company") was incorporated in
Delaware on June 13, 1991 in connection with the Amended Plan of
Reorganization (the "Plan") of Chartwell Group Ltd. ("Chartwell") and
CGL Finance, Inc. (together with Chartwell, the "Debtors"). In
accordance with the Plan's provisions, Chartwell was dissolved on February 13,
1992.
On April 8, 1991, a voluntary petition for reorganization pursuant
to Chapter 11 of the United States Bankruptcy Code was filed by the Debtors with
the United States Bankruptcy Court (the "Court"). The Effective Date of the Plan
was November 27, 1991. On October 1, 1992, the Court issued a Final Decree
approving the closure of the estates of the Debtors.
On the Effective Date, the Company became the owner of Chartwell's
sole remaining operating subsidiary, Italiana Luce S.r.l., an Italian
corporation ("Italiana Luce"), and certain other assets and properties of
Chartwell, free and clear of all liens, claims and encumbrances.
Results of Operations
The Italian lira strengthened against the U.S. dollar during 1996.
The weighted average exchange rate of the lira used in the conversion of
Italiana Luce's income statement for 1996 was 5.2% greater than that used in
1995.
Net sales for the Company for the year ended December 31, 1996 were
$9,735,494, a decrease of 4.8% on net sales of $10,222,808 for the year ended
December 31, 1995.
Expressed in lire, net sales for the year ended December 31, 1996,
exclusive of sales in North America, fell 13.8% as compared to 1995. With
continental Europe continuing to experience rising unemployment and stagnant
economies, the Company's sales declined in all major European markets with the
largest drops being recorded in France and Germany. Unit sales to European
countries
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13
outside Italy have fallen in each of the past few years but the extent of the
drop has been cushioned by the decline in the value of the lira against those
currencies since the Company invoices its customers in their local currencies.
In 1996, however, as a first step towards participation in the proposed European
single currency, the exchange rate of the lira was set at a relatively high
level versus the German mark and French franc, among other currencies. As a
result, the Company now receives between 10% and 15% less in lire when selling
the same volume of goods to customers in those countries. Despite the soft
economies in these major markets for the Company, management intends shortly to
increase its prices in these countries.
Sales in North America rose 11.7% in 1996. Continued growth in the
Italiana Luce and Foscarini lines was partially offset by a drop in the sales of
the Rialto line which in 1995 benefited from a major delivery to the Olympic
Village in Atlanta, Georgia.
The gross profit margin for 1996 was 41.6% of net sales compared to
46.0% in 1995. The primary reasons for the drop in the gross profit percentage
were the significant increase in price promotions offered by Italiana Luce in
its efforts to boost volume and reduce inventory and the lower revenue received
from European customers outside Italy because of the stronger lira. The stronger
lira also resulted in an increase in the cost of imports into the United States
which adversely affected IL USA's margins.
The Company's gross profit margin has benefited from the write-down
in Italy for financial reporting purposes of the Company's fixed assets in
connection with the adoption of Fresh Start Accounting. Without the write-down,
the charge to cost of sales for depreciation would have been approximately
$20,000 more in 1996 and $60,000 more in 1995.
Selling, general and administrative expenses for 1996 were 47.2% of
net sales compared to 43.9% in 1995. Major factors contributing to the increase
in expenses as a percentage of net sales were the lower sales volume, the costs
of participation in the biennial Euroluce Fair, an advertising campaign
introduced to coincide with the new product introductions at Euroluce, and the
strengthening of the lira.
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Total expenses in 1996 were $114,000 greater than in the prior year.
However, converting the 1995 expenses at the 1996 rate and eliminating all other
foreign exchange effects, expenses for the current year are $151,000 less than
those in 1995.
Confronted with continued weak demand for its products in every
major market in continental Europe and with no prospect of any improvement
during 1997, the Company determined that more radical cost cutting measures than
those implemented over the past few years were necessary. Consequently, after
protracted negotiations with the national body representing its employees in
Italy the Company terminated nine of its workforce, equivalent to thirty percent
of its headcount, effective February 14, 1997. Each terminated employee received
a lump sum equal to between five and seven months salary. On March 31, 1997,
Italiana Luce will relinquish approximately 13,000 square feet of its current
warehouse space. Costs associated with these actions are estimated to be
$165,000. This amount is reported on the income statement as a restructuring
charge.
In addition to the above actions, the Company decided to close out
its Le Stelle line of traditional Venetian-style lighting fixtures during 1997
in order to focus on its core business. It is anticipated that the inventory
will be sold at or above its carrying value plus estimated selling costs. The
Company has also reduced the compensation of its officers and directors for 1997
by about 30% and eliminated a bonus arrangement with one of its officers and
directors. In summary, this major downsizing of the Company's cost base is
expected to save about $500,000 in 1997.
Because of the poor financial performance of the Company in 1996 and
no certainty of any immediate improvement, management decided not to recognize
$262,193 of deferred tax assets arising in Italy in 1996, principally the net
operating loss carryforward, and to write off the balance of $308,947 of
deferred tax assets brought forward from prior years. However, should Italiana
Luce return to profitability in the next few years these credits, totalling
$571,140, will be available to offset future taxable income.
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Financial Condition
Capital expenditures, inclusive of expenditures on intangible
assets, were $304,032 and $269,574 for the years ended December 31, 1996 and
1995, respectively.
Net working capital at December 31, 1996 and December 31, 1995 was
$1,821,925 and $2,485,845, respectively. Converted at the December 31, 1996
exchange rate, the 1995 net working capital was $2,589,321.
Total assets at December 31, 1996 and December 31, 1995 were
$6,733,141 and $7,026,705, respectively. Converted at the December 31, 1996
exchange rate, the 1995 total assets were $7,304,927.
Liquidity and Capital Resources
The Company's current major source of financing is its
short-term lines of credit with certain Italian banks. The Company uses
these facilities primarily to fund its seasonal needs. The lines of
credit totalled Lit. 6,450,000,000 at December 31, 1996 ($4,249,000 when
converted at the December 31, 1996 exchange rate). Lit. 2,587,209,000
($1,704,354) and Lit. 751,644,000 ($473,327 when converted at the
December 31, 1995 exchange rate) was outstanding under these lines at
December 31, 1996 and 1995, respectively.
The persistent economic problems in the Company's major European
markets and the resultant decline in its sales revenue have adversely affected
its liquidity and financial flexibility. During 1996, the Company took actions
which are expected to reduce its annual costs by approximately $500,000 (see
"Restructuring of Italiana Luce"). Although there can be no assurance that these
measures will be successful, the Company presently believes the steps it has
taken, supplemented by the amounts available under its short-term lines of
credit, will provide sufficient liquidity to fund its operations.
For further discussion see Footnote (1B) Basis of Presentation.
Inflation
In 1995, the Company's business was adversely affected by an
inflation rate in Italy which was higher
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than in most of the Company's other major markets. The primary cause of the
inflation was the substantial devaluation of the lira against the currencies of
Italy's major trading partners. The result was an upward pressure on the costs
of many raw materials as well as energy supplies since Italy is heavily
dependent on imports of both. However, partly because of the stagnant economy
and partly because the lira strengthened inflation began to abate in Italy
towards the end of 1995 and this trend has carried through 1996. Annual cost
increases are now expected to be no more than 4% to 5%.
Currency Fluctuations
Between the end of 1994 and the end of 1996 the Italian lira has
strengthened approximately 6% against the U.S. dollar. However, this relatively
minor movement masks the quite significant day-to-day swings of the currency
which has ranged during this time from a low of Lit. 1,745 to a high of Lit.
1,494, a spread of nearly 17%. Against the German mark, the lira rate was
virtually constant on the last day of trading in 1994 and the comparable day in
1996, However, during 1995 the lira fell about 12% against the mark but then
regained those losses in 1996.
Since Italiana Luce invoices most of its European customers outside
of Italy in their local currencies it enjoyed some protection against the
effects of the lira devaluation during 1995. In 1996, however, these benefits
turned to costs as the lira regained some of its value. Since approximately 80%
of the financial results of the Company are prepared initially in lire and
subsequently converted to dollars, the effect of these fluctuations has been to
distort substantially the reported value of the Company's assets and, over time,
the value of its sales revenue since a given amount of lire produces a lesser
dollar amount upon conversion as the lira depreciates against the U.S. currency.
The average value of the lira during 1996 was nearly 25% less than in 1992.
The exchange rates used in the conversion of the income
statements are the weighted average rates of exchange for each year,
namely Lit. 1,543 in 1996 and Lit. 1,627 in 1995. The balance sheets
have been converted at the end of year exchange rates. At December 31,
1996, the rate was Lit. 1,518; at December 31, 1995 it was Lit. 1,588.
Since the end of 1996, the lira has softened considerably against the
U.S. dollar since year end and closed at Lit. 1,685 on March 21, 1997.
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17
Cautionary Statement
This Annual Report on Form 10-KSB may contain forward-looking
information about the Company. The Company is hereby setting forth statements
identifying important factors that may cause the Company's actual results to
differ materially from those set forth in any forward-looking statements made by
the Company. Some of the most significant factors include: an unanticipated
down-turn in the lighting fixtures market resulting in lower demand for the
Company's products; the unanticipated loss of, or decline in sales to, a major
customer; poor reception in the marketplace for the Company's new products; and
foreign currency fluctuations resulting in lower receipts for the Company from
sales and/or cost increases in the Company's purchases.
ITEM 7. FINANCIAL STATEMENTS.
Financial statements of the Company and its consolidated
subsidiaries are set forth herein beginning on page 21.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required with respect to this Item will be contained
in the Proxy Statement, and such information is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information required with respect to this Item will be contained
in the Proxy Statement, and such information is incorporated herein by
reference.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required with respect to this Item will be contained
in the Proxy Statement, and such information is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required with respect to this Item will be contained
in the Proxy Statement, and such information is incorporated herein by
reference.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Documents filed as part of the Report:
1. Exhibits
Information with respect to this Item is contained in
the attached Index to Exhibits.
2. Financial Statements
Information with respect to this Item is contained on
pages 21 to 42 of this Annual Report on Form 10-KSB.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1996.
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19
POWER OF ATTORNEY
The registrant and each person whose signature appears below hereby
appoint Michel F. Leemans and Keith G. Frey as attorneys-in-fact with full power
of substitution, severally, to execute in the name and on behalf of the
registrant and each such person, individually and in each capacity stated below,
one or more amendments to the annual report which amendments may make such
changes in the report as the attorney-in-fact acting on the premises deems
appropriate and to file any such amendment to the report with the Securities and
Exchange Commission.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 26, 1997
IL INTERNATIONAL INC.
By /s/ Michel F. Leemans
-------------------------------------
Michel F. Leemans
President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Dated: March 26, 1997 By /s/ Michel F. Leemans
-------------------------------------
Michel F. Leemans
President and Chief
Executive Officer
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20
Dated: March 26, 1997 By /s/ Keith G. Frey
-------------------------------------
Keith G. Frey
Chief Financial and
Accounting Officer,
Vice President, Finance and
Administration, and
Director
Dated: March 26, 1997 By /s/ Luigi Giroletti
-------------------------------------
Luigi Giroletti
Vice President and Director
Dated: March 26, 1997 By /s/ Thomas R. Reardon
-------------------------------------
Thomas R. Reardon
Director
Dated: March 26, 1997 By /s/ Lewis G. Singer
-------------------------------------
Lewis G. Singer
Director
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21
IL INTERNATIONAL INC. AND SUBSIDIARIES
Index to Financial Statements
The following consolidated financial statements of the Company and
its subsidiaries are submitted herewith in response to Item 7 and Item 13(a)(1):
Page
Number
------
Report of Grant Thornton LLP,
Independent Certified Public Accountants .............................. 22
Consolidated Balance Sheets
- December 31, 1996 and 1995 .......................................... 23
Consolidated Statements of Operations
- For the Years Ended
December 31, 1996 and 1995 ........................................ 24
Consolidated Statement of Stockholders' Equity
- For the Years Ended
December 31, 1996 and 1995 ........................................ 25
Consolidated Statements of Cash Flows
- For the Years Ended
December 31, 1996 and 1995 ........................................ 26
Notes to Consolidated Financial Statements
- December 31, 1996 and 1995 .......................................... 27
<PAGE>
22
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
IL International Inc.
We have audited the accompanying consolidated balance sheets of IL
International Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the financial statements,
the Company experienced declining sales, decreasing margins and incurred a net
loss of $1,129,625 during the year ended December 31, 1996. In addition, the
Company has used rather than provided cash in its operations. These factors,
among others, as discussed in Note 1 to the financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IL
International Inc. and Subsidiaries as of December 31, 1996 and December 31,
1995, and the consolidated results of their operations and their consolidated
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
New York, New York
March 24, 1997
<PAGE>
23
IL INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
1996 1995
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 324,298 $ 686,215
Trade accounts receivable, less allowance
for doubtful receivables of $356,381
in 1996 and $341,861 in 1995 2,675,435 2,512,104
Inventories 2,488,006 2,337,470
Other current assets 368,793 237,439
---------- ----------
Total current assets 5,856,532 5,773,228
Plant and equipment, net 775,529 818,366
Deferred taxes - 295,329
Intangibles, net of accumulated amortization
of $292,964 in 1996 and $229,116 in 1995 32,445 80,453
Other assets 68,635 59,329
---------- ----------
Total Assets $6,733,141 $7,026,705
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $1,704,354 $ 473,327
Current installments of long-term debt 35,642 37,896
Accounts payable 922,612 1,423,778
Income taxes payable 325 27,126
Other accrued liabilities 1,371,674 1,325,256
---------- ----------
Total current liabilities 4,034,607 3,287,383
Long-term debt, excluding current installments 30,104 62,849
Other liabilities 482,715 479,561
---------- ----------
Total Liabilities 4,547,426 3,829,793
---------- ----------
Stockholders' equity:
Common stock, $.01 par value per share;
authorized, 100,000,000 shares;
issued, 79,375,497 shares 793,755 793,755
Additional paid-in capital 2,229,415 2,228,571
Retained earnings (467,643) 661,982
Foreign currency translation adjustments (305,959) (423,543)
Treasury stock, at cost
- 2,554,113 common shares (63,853) (63,853)
---------- ----------
Total stockholders' equity 2,185,715 3,196,912
---------- ----------
Total Liabilities and Stockholders' Equity $6,733,141 $7,026,705
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
24
IL INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31,
1996 1995
------------ ------------
Net sales $ 9,735,494 $ 10,222,808
Cost of sales 5,687,962 5,519,330
------------ ------------
Gross profit 4,047,532 4,703,478
Selling, general and
administrative expenses 4,596,947 4,482,807
Restructuring charge 165,000 --
------------ ------------
Operating income (loss) (714,415) 220,671
Other income (expense):
Interest income 15,323 22,214
Interest expense (108,819) (66,514)
------------ ------------
Profit (loss) before income taxes (807,911) 176,371
Income taxes 321,714 126,992
------------ ------------
Net income (loss) $ (1,129,625) $ 49,379
============ ============
Earnings (loss) per common share: $ (0.0147) $ 0.0006
============ ============
Weighted average number
of common shares outstanding: 76,821,384 76,821,384
============ ============
The accompanying notes are an integral part of these statements.
<PAGE>
25
11. INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS, EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Foreign
---------------------- Additional Currency Total
Number Par Paid-in Retained Translation Treasury Stockholders'
Of Shares Value Capital Earnings Adjustment Stock Equity
---------- -------- ---------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 79,375,497 $793,755 $2,097,877 $ 612,603 $(483,526) $ (63,853) $ 2,956,856
Net income for the year
ended December 31, 1995 -- -- -- 49,379 -- -- 49,379
Utilization of deferred
tax benefits not recorded
as of the Effective Date -- -- 130,694 -- -- -- 130,694
Unrealized foreign currency
translation adjustment -- -- -- -- 59,983 -- 59,983
---------- -------- ---------- ----------- --------- --------- -----------
Balance at December 31, 1995 79,375,497 793,755 2,228,571 661,982 (423,543) (63,853) 3,196,912
Net loss for the year
ended December 31, 1996 -- -- -- (1,129,625) -- -- (1,129,625)
Utilization of deferred
tax benefits not recorded
as of the Effective Date -- -- 844 -- -- -- 844
Unrealized foreign currency
translation adjustment -- -- -- -- 117,584 -- 117,584
---------- -------- ---------- ----------- --------- --------- -----------
Balance at December 31, 1996 79,375,497 $793,755 $2,229,415 $ (467,643) $(305,959) $ (63,853) $ 2,185,715
========== ======== ========== =========== ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
26
IL INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31,
1996 1995
----------- ---------
Cash flows from operating activities:
Net income (loss) $(1,129,625) $ 49,379
Adjustments to reconcile net income loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 432,794 315,308
Deferred tax benefits 844 130,694
Other (18,654) 94,748
Changes in net assets and liabilities:
(Increase) decrease in:
Trade accounts receivable (61,260) 463,632
Inventories (62,689) (260,832)
Deferred taxes 308,947 (23,338)
Other current assets (123,380) 103,871
Other long-term assets (1,808) 4,565
Increase (decrease) in:
Accounts payable (565,360) (615,864)
Income taxes payable (28,016) (20,973)
Other accrued liabilities 17,490 181,635)
----------- ---------
Net cash provided by (used in)
operating activities (1,230,717) 422,825
----------- ---------
Cash flows from investing activities:
Additions to plant and equipment, net (242,515) (262,937)
Additions to intangibles (61,517) (6,637)
----------- ---------
Net cash used in investing activities (304,032) (269,574)
----------- ---------
Cash flows from financing activities:
Increase in short-term debt 1,189,677 292,253
Payments of long-term debt (36,613) (120,878)
----------- ---------
Net cash provided by financing activities 1,153,064 171,375
----------- ---------
Effect of exchange rate changes on cash 19,768 12,051
----------- ---------
Net increase (decrease) in cash and
cash equivalents (361,917) 336,677
Cash and cash equivalents at beginning of year 686,215 349,538
----------- ---------
Cash and cash equivalents at end of year $ 324,298 $ 686,215
=========== =========
The accompanying notes are an integral part of these statements.
<PAGE>
27
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(1A) Background and Nature of Business
IL International Inc. (the "Company") was incorporated in June 1991
in connection with the Amended Plan of Reorganization (the "Plan") of Chartwell
Group Ltd. ("Chartwell") and CGL Finance, Inc., a wholly-owned subsidiary of
Chartwell (together with Chartwell, the "Debtors"), which filed a voluntary
petition for reorganization pursuant to Chapter 11 of the United States
Bankruptcy Code in April 1991. The Effective Date of the Plan was November 27,
1991. In October 1992, the Court issued a Final Decree approving the closure of
the estates of the Debtors.
On the Effective Date, ownership of certain assets and properties of
Chartwell, including the stock of Italiana Luce S.r.l., an Italian corporation
("Italiana Luce"), and its wholly-owned subsidiary, IL USA, Inc. (at that time
named PAF USA, Inc.) ("IL USA"), vested in the Company free and clear of all
liens, claims and encumbrances.
The Company's business, transacted through its operating
subsidiaries, is the design, marketing and distribution worldwide of
contemporary lamps and lighting products.
(1B) Basis of Presentation
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, during the year ended
December 31, 1996 the Company experienced declining sales and decreasing margins
which caused an operating loss of $714,415 after deduction of a restructuring
charge of $165,000 (a loss of $549,415 before deduction of such charge). Because
of management's decision to write off $571,140 of its deferred tax assets
arising in Italy, $262,193 of which arose during 1996 and $308,947 in prior
years, the net loss amounted to $1,129,625. During 1996, the Company has used,
rather than provided, cash in its operations.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the
<PAGE>
28
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
recorded asset amounts shown in the accompanying balance sheet is dependent upon
continued operations of the Company, which in turn is dependent upon the
Company's ability to meet its financing requirements on a continuing basis, to
maintain present financing, and to succeed in its future operations. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Management has taken the following steps to revise its operating and
financial requirements, which it believes are sufficient to provide the Company
with the ability to continue as a going concern and which it estimates will
result in annual savings of approximately $500,000:
a) Terminated nine of its Italian workforce, equivalent to thirty percent
of its headcount, effective February 14, 1997.
b) Reduced the compensation of the Company's officers and directors by
about 30%, effective January 1, 1997 and eliminated a bonus arrangement
with one of its officers and directors.
c) Reduced its warehouse space in Italy by approximately 13,000 square
feet, one-third of its total, effective March 31, 1997.
d) Implemented a plan to close out its Le Stelle line of traditional
Venetian-style lighting fixtures during 1997.
There can be no assurance that these measures will achieve the intended
results.
(2) Summary of Significant Accounting Policies
(a) Fresh Start Accounting
The Company has implemented the accounting for entities emerging from
Chapter 11 and reorganization as set forth in Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
issued by the American Institute of Certified Public
<PAGE>
29
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Accountants ("Fresh Start Accounting").
(b) Principles of Consolidation
The consolidated financial statements include the accounts of IL
International Inc. and its subsidiaries, all of which are wholly-owned. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(c) Using Estimates in Financial Statements
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
(d) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Fair Value of
Financial Instruments," requires disclosure of the estimated fair value of an
entity's financial instrument assets and liabilities. For the Company, financial
instruments consist principally of cash and cash equivalents and short-term
debt.
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate that value:
Cash and cash equivalents and forward exchange contracts:
The carrying amount reasonably approximates fair value because of the
short maturity of those instruments.
Short-term debt:
The carrying amount reasonably approximates fair value because of the
short maturity of those instruments.
<PAGE>
30
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(e) Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and amounts due from
banks. Short-term investments which have a maturity of ninety days or less are
considered cash equivalents.
(f) Impairment
In 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Accordingly, when indicators of impairment
are present, the Company periodically evaluates the carrying value of property,
plant and equipment and intangibles in relation to the operating performance and
future undiscounted cash flows of the underlying business. The Company adjusts
the carrying amounts of the respective assets if the expected future cash flows
are less than the book value.
(g) Accounting for Stock-Based Compensation Plans
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") which defines the fair value based method of
accounting for an employee stock option. Under the fair value based method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period. A company may elect to adopt
the fair value method or elect to continue accounting for its stock option or
similar equity awards using the intrinsic method, where compensation cost is
measured at the date of grant based on the excess of the market value of the
underlying stock over the exercise price. If a company elects not to adopt the
fair value method, it must provide a pro forma disclosure of net income and
earnings per share, as if the fair value based method had been applied.
SFAS No. 123 is effective for transactions entered into for fiscal
years that begin after December 15, 1995. Pro forma disclosures for entities
that elect to continue to measure compensation cost under the old method must
include the effects of all awards granted in fiscal years that begin after
December 15, 1994. At present, the Company does not have any stock-based
compensation plans.
<PAGE>
31
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
However, it is currently anticipated that the Company willaccount for any
stock-based compensation plan it introduces in the future under the intrinsic
method and will make the appropriate pro forma disclosures. Therefore, SFAS No.
123 is not expected to have any effect on the Company's consolidated financial
statements.
(h) Inventories
Inventories are stated at the lower of cost or market (net realizable
value) using the first-in, first-out ("FIFO") method.
(i) Plant and Equipment
In accordance with Fresh Start Accounting, plant and equipment were
restated at approximate fair value as of November 30, 1991 (see Note 3).
Commencing December 1, 1991, depreciation and amortization of all newly acquired
plant and equipment as well as the plant and equipment stated at approximate
fair value have been provided by the straight-line method using the following
estimated useful lives:
Leasehold improvements 5 years
Machinery and equipment 3 to 10 years
Furniture and fixtures 3 to 10 years
(j) Intangible Assets
The unamortized balances of all intangible assets were written off as
of November 30, 1991. Intangible assets capitalized subsequent to November 30,
1991 are being amortized on a straight-line basis over five years.
(k) Income Taxes
The provision for income taxes is computed on the basis of financial
statement income. Deferred taxes result from temporary differences between the
amounts reported for financial statement and income tax purposes. These
temporary differences give rise to deferred tax assets. In view of the
uncertainty as to whether the Company would produce sufficient taxable income in
the future to utilize the benefits related to deferred tax assets available at
the time of reorganization, the Company did not record those deferred tax assets
in the consolidated financial statements. Instead, all such tax benefits are
reported as
<PAGE>
32
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
additions to paid-in capital when realized.
(l) Foreign Currency Translation
The financial statements of the foreign subsidiary of the Company
have been translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation." All balance sheet
accounts have been translated using the current exchange rate at the balance
sheet date. Income statement amounts have been translated using the average
exchange rate for the year. The gains and losses resulting from the change in
exchange rates from year to year have been reported separately as a component of
stockholders' equity. Foreign currency transaction gains and losses are included
in determining net income. Their effect on the statement of income is
insignificant.
(m) Earnings (Loss) Per Common Share
Earnings (loss) per common share are based on 76,821,384 shares of
common stock, being the sum of the 79,375,497 shares of common stock issued
under the Plan less 2,554,113 shares of common stock held in treasury.
(3) Fresh Start Accounting
In 1991, the Company adopted Fresh Start Accounting in accordance
with Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." Under this method, all assets and
liabilities were restated to reflect the emergence equity value of the
reorganized entity, which was determined to be $2,000,000.
In accordance with the provisions of Statement of Position 90-7, the
excess of the carrying value of the assets of the Company immediately prior to
its reorganization over the emergence equity value of the entity was utilized
to reduce the carrying values of the non-current assets as of the Effective Date
by $1,106,220. Consequently, depreciation and amortization charges in the income
statement in subsequent years, principally 1992 through 1996, were less than
they would otherwise have been by a cumulative amount equal to the amount of the
write-down (as adjusted for exchange rate changes).
<PAGE>
33
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(4) Restructuring Charges
During 1996, the Company recorded restructuring charges of $165,000.
These charges relate to the downsizing of the Italian operations in reaction to
persistent weak demand in Europe for the Company's products.
The Company began working on a restructuring program in December
1996. The restructuring charges consist of $132,000 in severance and related
costs in connection with a reduction of 30% of the Company's Italian workforce
or nine salaried and hourly jobs and $33,000 relating principally to lease
termination expenses. All employee severances occurred in February 1997 and the
lease termination will be effective March 31, 1997.
(5) Inventories
Inventories consist of the following:
December 31,
1996 1995
---------- ----------
Raw materials $1,076,372 $ 846,392
Work-in-progress 456,212 337,161
Finished goods 955,422 1,153,917
---------- ----------
$2,488,006 $2,337,470
========== ==========
Work-in-progress represents partially completed inventories acquired
from third parties.
<PAGE>
34
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(6) Other Current Assets
Other current assets consist of the following:
December 31,
1996 1995
---------- ----------
Advances $156,226 $ 71,484
Catalogs 79,857 19,290
Tax refunds 40,073 25,178
Interest receivable 27,495 26,565
Product development costs 18,672 26,218
Miscellaneous prepaid expenses 15,935 33,206
Other 30,535 35,498
-------- --------
$368,793 $237,439
======== ========
(7) Plant and Equipment
Plant and equipment consist of the following:
December 31,
1996 1995
---------- ----------
Leasehold improvements $ 42,204 $ 40,647
Machinery and equipment 1,889,472 1,573,472
Furniture and fixtures 14,103 13,434
----------- -----------
1,945,779 1,627,553
Less accumulated depreciation
and amortization (1,170,250) (809,187)
----------- -----------
$ 775,529 $ 818,366
=========== ===========
Amortization of capitalized leases amounted to $39,077 in 1996 and
$32,638 in 1995.
All fixed assets acquired prior to December 1, 1991 have been
recorded at their approximate fair value in accordance with Fresh Start
Accounting (see Note 3).
(8) Short-term Debt
Loan arrangements have been established with certain Italian banks
under which the Company's foreign subsidiary may borrow on an overdraft and
short-term
<PAGE>
35
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
basis. These unsecured lines of credit may be terminated at the option
of the banks or the Company. At December 31, 1996, the amount available
under these arrangements aggregated Lit. 6,450,000,000 ($4,249,000 when
converted at the December 31, 1996 exchange rate), of which Lit.
2,587,209,000 ($1,704,354) was outstanding, bearing a weighted average
interest rate of 10.9%. At December 31, 1995, Lit. 751,644,000
($473,327 when converted at the December 31, 1995 exchange rate) was
outstanding, bearing a weighted average interest rate of 9.1%.
(9) Other Accrued Liabilities
Other accrued liabilities consist of the following:
December 31,
1996 1995
---------- ----------
Salaries, benefits and
payroll taxes $ 253,807 $ 335,367
Reorganization liabilities
(see Note 16) 287,218 298,707
Restructuring charge
(see Note 4) 165,000 --
Sales commissions 135,385 192,232
Product warranty reserves 122,314 114,458
Professional fees 117,282 133,618
Royalties 102,366 72,791
Other 188,302 178,083
---------- ----------
$1,371,674 $1,325,256
========== ==========
(10) Long-term Debt
Long-term debt consists of the following:
December 31,
1996 1995
---------- ----------
Capitalized leases
(see Note 14) $ 65,746 $ 100,745
Less current installments (35,642) (37,896)
-------- ---------
$ 30,104 $ 62,849
======== =========
<PAGE>
36
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
As of December 31, 1996, long-term debt, including current
installments, matures as follows:
1997 $ 35,642
1998 18,931
1999 9,105
2000 2,068
---------
$ 65,746
=========
Cash paid for interest was $104,313 in 1996 and $48,321 in
1995.
(11) Income Taxes
The Company and its domestic subsidiaries file a consolidated Federal
income tax return. Income tax expense is computed on the basis of financial
statement profit before income taxes as follows:
Years Ended December 31,
1996 1995
--------- --------
Domestic $ 30,917 $ 33,173
Foreign (838,828) 143,198
--------- --------
$(807,911) $176,371
========= ========
The income tax provision consists of:
Years Ended December 31,
1996 1995
-------- --------
Current tax expense
Federal $ -- $ --
State 3,276 2,964
Foreign 318,438 124,028
-------- --------
$321,714 $126,992
======== ========
<PAGE>
37
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Deferred tax assets are comprised of the following:
December 31,
1996 1995
----------- ---------
Operating loss carryforwards
Pre-reorganization $ 635,835 $ 508,035
Post-reorganization 428,298 91,472
Bad debt allowances 146,443 142,465
Product warranty reserves 51,720 50,252
Inventory reserves 43,889 49,118
Accrued compensation -- 36,098
Other 54,518 42,276
----------- ---------
Gross deferred tax assets $ 1,360,703 919,716
Valuation allowance (1,360,703) (624,387)
----------- --------
$ -- $ 295,329
=========== =========
In view of the uncertainty as to whether it will generate sufficient
taxable income to utilize its deferred tax assets, the Company set up an
allowance at December 31, 1996 equal to 100% of such deferred tax assets,
inclusive of the net operating loss carryforwards, arising from both its Italian
and United States operations. At December 31, 1995, the Company set up a
valuation allowance equal to the deferred tax assets arising only from its
United States operations and its pre-reorganization net operating loss
carryforwards.
The provision for income taxes differs from the amount of income tax
determined by applying the statutory Federal income tax rate of 34.0% to profit
before income taxes as a result of the following differences:
Years Ended December 31,
1996 1995
----------- ---------
Computed expected tax provision $(274,689) $ 59,966
Foreign earnings at
different rates (156,836) 33,132
Permanent tax differences
in Italy 188,723 42,489
Valuation allowance in Italy 571,140 --
Foreign withholding taxes 13,695 15,314
Other items (20,319) (23,909)
--------- ---------
$ 321,714 $ 126,992
========= =========
<PAGE>
38
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Cash paid for income taxes was $5,638 in 1996 and $5,867 in
1995.
Provision is not made for income taxes on the undistributed earnings
($672,000 when converted at the December 31, 1996 exchange rate) of the
Company's foreign subsidiary since they are expected to be invested indefinitely
in the operations. It is not practical to estimate the amount of tax that might
be payable on the eventual remittance of such earnings.
(12) Pre-Reorganization Tax Benefits
The Company has available to it certain tax benefits which arose
prior to the Effective Date. In view of the uncertainty as to whether the
Company would ever produce sufficient taxable income to utilize such benefits,
these tax assets were never recorded in the consolidated financial statements as
of the Effective Date. Instead, the Company determined that it would report any
benefits derived from such tax assets as additions to paid-in capital as they
were realized.
In Italy, due principally to the write down for financial statement
purposes of (i) the Company's trademarks and trade names following the name
change of its Italian subsidiary in June 1991 (from PAF S.r.l. to Italiana Luce
S.r.l.) and (ii) the reduction in the carrying values of the Company's
non-current assets as a result of the application of Fresh Start Accounting (see
Note 3), the Company recorded charges in its consolidated financial statements
prior to the Effective Date which may give rise to future tax assets when such
assets are amortized for Italian tax purposes.
As of the Effective Date, the Company acquired from Chartwell
$2,000,000 in net operating loss carryforwards which expire in 2006. These net
operating loss carryforwards may be used to offset taxable income in the United
States and are subject to a cumulative annual limitation of $127,800. At
December 31, 1996, $635,835 were available for immediate use.
For the years ended December 31, 1996 and 1995, $0 and $106,596,
respectively, arising from the utilization of unrecorded tax assets have been
reported as direct additions to paid-in capital. Additional paid-in capital
<PAGE>
39
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
was also credited in 1996 and 1995 with $844 and $24,098, respectively, in
respect of the reversal of tax liabilities set up on the Effective Date which
were no longer required.
As of December 31, 1996, pre-reorganization tax assets remaining
unrecorded and potentially available to reduce future tax liabilities amounted
to approximately $4,900,000, of which $4,580,000 related to tax loss
carryforwards ($2,074,000 in the United States with an expiration date of 2006
and $2,506,000 in Italy with expiration dates between 1997 and 2001).
(13) Severance Indemnities
Other long-term liabilities consist of the Company's obligations to
its employees and sales representatives in Italy and to its agents in other
European countries, payable upon the termination of their employment or agency
relationship, as applicable. The amounts payable are calculated in accordance
with existing legal requirements, national labor contracts and individual
agreements. These liabilities are fully provided for and have been charged to
consolidated income in the period in which the liabilities vest.
(14) Leases
As of December 31, 1996, the Company leased certain property, plant
and equipment under both capital and operating lease arrangements. Some of the
operating leases provide that the Company pay taxes, maintenance, insurance and
other expenses applicable to leased premises and are subject to escalation.
<PAGE>
40
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Future minimum lease payments for leases as of December 31, 1996 were
as follows:
Year ending Capital Operating
December 31, Leases Leases
- ----------- ---------- ----------
1997 $ 42,715 $ 225,512
1998 21,923 72,313
1999 10,213 -
2000 2,111 -
---------- ----------
Total minimum lease payments 76,962 $ 297,825
==========
Less amounts representing
interest at an effective
annual rate of 10.74% (11,216)
----------
Present value of minimum
lease payments $ 65,746
==========
Plant and equipment acquired under capital leases amounted to $0 in
1996 and $73,435 in 1995.
Rent expense was $276,233 in 1996 and $252,727 in 1995.
(15) Foreign and Domestic Operations
Years Ended December 31,
1996 1995
----------- -----------
Net sales by geographic area:
United States $ 2,336,466 $ 2,081,823
Italy 3,389,958 3,635,168
Germany 1,560,432 1,900,243
France 571,331 712,899
Other European countries 1,257,936 1,458,813
Rest of the world 619,371 433,862
----------- -----------
$ 9,735,494 $10,222,808
=========== ===========
<PAGE>
41
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Net sales to unaffiliated customers:
United States (a) $ 2,381,598 $ 2,132,195
Italy 3,389,958 3,635,168
Other countries 3,963,938 4,455,445
------------ -----------
$ 9,735,494 $10,222,808
============ ===========
Net sales between
geographic areas (b):
Italy $ 877,620 $ 859,123
============ ===========
Operating profits/(losses):
United States $ 27,562 $ 28,766
Italy (741,977) 191,905
------------ -----------
$ (714,415) $ 220,671
============ ===========
December 31,
1996 1995
----------- -----------
Identifiable assets:
United States $1,078,840 $ 993,260
Italy 5,654,301 6,033,445
---------- ----------
$6,733,141 $7,026,705
========== ==========
- ----------
(a) Includes export sales of $45,132 and $50,372 during the years ended
December 31, 1996 and 1995, respectively.
(b) Net sales between geographic areas refers to products sold by Italiana Luce
to IL USA. These sales have been eliminated in consolidation.
(16) Contingency
Certain potential liabilities (pre-reorganization claims) of
Chartwell, principally foreign national and domestic state income taxes, are
still under negotiation and are the responsibility of the Company. At December
31, 1996, the Company has received cash of $287,218, net of expenses, relating
to the liquidation of certain pre-reorganization assets of Chartwell which
vested in the Company on the Effective Date (see Note 1) and is included in
Other Accrued Liabilities (see Note 9). In addition, the former owners of
Italiana Luce have paid into escrow
<PAGE>
42
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Lit. 125,693,000 ($82,801 when converted at the December 31, 1996 exchange rate)
in respect of the potential foreign national income tax liabilities. The
Company's management believes that the net cash received from the liquidation of
Chartwell's assets together with the amount in escrow will be sufficient to pay
any agreed assessments in respect of the pre-reorganization claims. Any amounts
remaining after settlement of all claims will be reported as a direct addition
to paid-in capital.
(17) Related Party Transaction
For the years ended December 31, 1996 and 1995, the Company paid
$135,049 and $141,357, respectively, plus out-of-pocket expenses, for consulting
services to a consulting firm of which a director and officer of the Company is
a director.
(18) Fourth Quarter Adjustment
During the fourth quarter of 1996, the Company increased the
valuation allowance for its deferred tax assets by $571,140, consisting of
$262,193 which had been deferred in the current year and $308,947 which had been
deferred in prior years.
<PAGE>
43
Index to Exhibits*
Page
----
2.1 Amended Plan of Reorganization of Chartwell Group --
Ltd. and CGL Finance, Inc. dated August 16, 1991
(the "Amended Plan of Reorganization")
(incorporated by reference to Exhibit 2.1 to
Chartwell's Current Report on Form 8-K dated
November 6, 1991)
2.2 Order confirming Amended Plan of Reorganization --
dated November 6, 1991 (incorporated by reference
to Exhibit 2.2 to Chartwell's Current Report on
Form 8-K dated November 6, 1991)
2.3 Notice of Entry of Order Confirming Amended Pla --
of Reorganization, and Discharge, dated November
6, 1991 (incorporated by reference to Exhibit 2.3
to Chartwell's Current Report on Form 8-K dated
November 6, 1991)
3.1 Certificate of Incorporation of the Company, as --
amended to date (incorporated by reference to
Exhibit 3.1 to the Company's Current Report on
Form 8-K dated November 27, 1991)
3.2 By-Laws of the Company, as amended to date --
(incorporated by reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K dated
November 27, 1991)
- --------
* Copies of the exhibits filed with this Annual Report on Form 10-KSB or
incorporated by reference herein do not accompany copies hereof for
distribution to stockholders of the Company. The Company will furnish a
copy of any of such exhibits to any stockholder requesting the same for a
nominal charge to cover duplicating costs.
<PAGE>
44
Page
----
10.2 ** Services Agreement dated July 6, 1988 by and --
among Chartwell, Chartwell Italia S.r.l. and Luigi
Giroletti, as amended May 1, 1990 and January 30,
1991 (incorporated by reference to Exhibit 10.2 to
the Company's Annual Report on Form 10-K for 1991)
21 Subsidiaries of the Registrant 45
24 Power of Attorney (see "Power of Attorney" --
in Form 10-KSB)
- --------
** Compensatory agreement with member of management.
45
Exhibit 21
SUBSIDIARIES OF IL INTERNATIONAL INC.
IL International Inc. has the following subsidiaries:
1. Italiana Luce S.r.l, an Italian corporation.
2. IL USA, Inc., a Delaware corporation.
3. IL (Stratford), Inc., a Delaware corporation.
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 324,298
<SECURITIES> 0
<RECEIVABLES> 3,031,816
<ALLOWANCES> (356,381)
<INVENTORY> 2,488,006
<CURRENT-ASSETS> 5,856,532
<PP&E> 1,945,779
<DEPRECIATION> (1,170,250)
<TOTAL-ASSETS> 6,733,141
<CURRENT-LIABILITIES> 4,034,607
<BONDS> 0
0
0
<COMMON> 793,755
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,733,141
<SALES> 9,735,494
<TOTAL-REVENUES> 9,735,494
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,819
<INCOME-PRETAX> (807,911)
<INCOME-TAX> 321,714
<INCOME-CONTINUING> (1,129,625)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,129,625)
<EPS-PRIMARY> (0.015)
<EPS-DILUTED> (0.015)
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