U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|x| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1997
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________ to ______________
Commission File number 0-14575
IL INTERNATIONAL INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified 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)
(203) 378-4000
----------------------------------------
(Issuer's telephone number)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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 whether the registrant 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:
As of October 31, 1997: 79,375,497 shares of Common Stock, $.01 par value
Transitional Small Business Disclosure Format (Check one:)
Yes ___ No x
Page 1 of 13 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 563,197 $ 324,298
Trade accounts receivable, net 1,907,393 2,675,435
Inventories, net 1,930,625 2,488,006
Other current assets 200,567 368,793
----------- -----------
Total current assets 4,601,782 5,856,532
Plant and equipment, net 642,831 775,529
Intangibles, net 11,639 32,445
Other assets 56,495 68,635
----------- -----------
Total Assets $ 5,312,747 $ 6,733,141
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,549,387 $ 1,704,354
Current installments of long-term debt 21,393 35,642
Accounts payable 640,994 922,612
Income taxes payable 2,722 325
Other accrued liabilities 985,675 1,371,674
----------- -----------
Total current liabilities 3,200,171 4,034,607
Long-term debt, excluding current installments 11,628 30,104
Other liabilities 366,786 482,715
----------- -----------
Total Liabilities 3,578,585 4,547,426
----------- -----------
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 2,229,415
Retained earnings (701,277) (467,643)
Foreign currency translation adjustments (523,878) (305,959)
Treasury stock at cost
- 2,554,113 common shares (63,853) (63,853)
----------- -----------
Total stockholders' equity 1,734,162 2,185,715
----------- -----------
Total Liabilities and Stockholders' Equity $ 5,312,747 $ 6,733,141
=========== ===========
See accompanying notes to condensed consolidated financial statements.
Page 2 of 13 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Nine months ended Quarter ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $ 6,000,219 $ 6,851,132 $ 1,684,788 $ 2,001,859
Cost of sales 3,616,926 3,990,496 989,336 1,194,266
----------- ----------- ----------- -----------
Gross profit 2,383,293 2,860,636 695,452 807,593
Selling, general and
administrative
expenses 2,531,666 3,545,982 736,136 1,009,055
----------- ----------- ----------- -----------
Operating loss (148,373) (685,346) (40,684) (201,462)
Other income (expense):
Interest income 9,336 5,694 2,015 1,386
Interest expense (84,946) (66,510) (19,987) (32,169)
----------- ----------- ----------- -----------
Loss before
income taxes (223,983) (746,162) (58,656) (232,245)
Income taxes 28,347 (255,813) 21,788 (89,575)
----------- ----------- ----------- -----------
Net loss $ (252,330) $ (490,349) $ (80,444) $ (142,670)
=========== =========== =========== ===========
Loss per
common share: $ (0.0033) $ (0.0064) $ (0.0011) $ (0.0019)
=========== =========== =========== ===========
Weighted average
number of common
shares outstanding: 76,821,384 76,821,384 76,821,384 76,821,384
=========== =========== =========== ===========
Page 3 of 13 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
--------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net loss $ (252,330) $ (490,349)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 236,443 270,139
Other (38,220) 7,289
Change in net assets and liabilities:
(Increase) decrease in:
Trade accounts receivable 501,667 354,925
Inventories 322,519 (763,946)
Other current assets 135,425 (487,091)
Other long-term assets 683 390
Increase (decrease) in:
Accounts payable (177,888) (437,641)
Income taxes payable 2,387 (23,202)
Other accrued liabilities (301,098) (20,067)
----------- -----------
Net cash provided by (used in)
operating activities: 429,598 (1,589,553)
----------- -----------
Cash flows from investing activities:
Additions to plant and equipment, net (176,200) (303,265)
Additions to intangibles (886) (1,624)
----------- -----------
Net cash used in investing activities (177,086) (304,889)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in short-term debt 44,758 1,506,129
Payments of long-term debt (23,720) (28,333)
----------- -----------
Net cash provided by financing activities 21,038 1,477,796
----------- -----------
Effect of exchange rate changes on cash (34,651) 14,299
----------- -----------
Net increase (decrease) in cash
and cash equivalents 238,899 (402,347)
Cash and cash equivalents at beginning of year 324,298 686,215
----------- -----------
Cash and cash equivalents at end of period $ 563,197 $ 283,868
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 68,494 $ 24,521
Income taxes 2,498 13,665
See accompanying notes to condensed consolidated financial statements.
Page 4 of 13 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As at September 30, 1997
NOTE 1 - Background
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. The Company is the successor corporation to Chartwell. The Company's
two operating subsidiaries are Italiana Luce S.r.l. ("Italiana Luce") and IL USA
Inc. ("IL USA").
NOTE 2 - Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Forms
10-QSB and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.
Financial statements prepared in accordance with generally accepted
accounting principles 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 a substantial
operating loss. During 1996, the Company used, rather than provided, cash in its
operations. In view of these events, recoverability of a major portion of the
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 various 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 in fixed expenses of approximately $500,000.
Operating results for the nine months ended September 30, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
Page 5 of 13 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As at September 30, 1997
For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended December 31, 1996.
NOTE 3 - Fresh Start Accounting
Effective December 1, 1991, the Company 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
Accountants ("Fresh Start Accounting"). 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).
NOTE 4 - Inventories
The components of inventory consist of the following:
September 30,
1997
--------------
Raw materials $ 809,733
Work-in-progress 334,186
Finished goods 786,706
-----------
$ 1,930,625
===========
NOTE 5 - Loss Per Common Share
Loss per common share is 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.
Page 6 of 13 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As at Sepember 30, 1997
(Continued)
NOTE 6 - New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No 128, "Earnings per Share," which
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. The new standard eliminates primary and fully diluted
earnings per common share and requires presentation of basic and, if applicable,
diluted earnings per common share. Basic earnings per common share is computed
by dividing income available to common shareholders by the weighted average
common shares outstanding for the period. Diluted earnings per common share
reflects the weighted average common shares outstanding and dilutive potential
common shares such as stock options. The adoption of this new standard is not
expected to have a material impact on the disclosure of earnings per common
share in the financial statements of the Company.
NOTE 7 - 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 it will generate sufficient
taxable income to utilize any of its deferred tax assets, the Company has set up
an allowance equal to 100% of the value of such deferred assets, inclusive of
the full amount of the available loss carryforwards.
NOTE 8 - 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. For the nine months ended September 30, 1997 and 1996, $18,696
and $0, respectively, arising from the utilization of such unrecorded tax assets
have been reported as direct additions to paid-in capital.
Additional paid-in capital has also been credited in the
Page 7 of 13 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As at September 30, 1997
(Continued)
nine months ended September 30, 1997 and 1996 with $0 and $840, respectively, in
respect of the reversal of tax liabilities set up on the Effective Date which
were no longer required.
Page 8 of 13 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Management's Discussion and Analysis or Plan of Operation:
Results of operations
The Italian lira exchange rates used for the conversion of the
statements of operations were the weighted average rates of exchange versus the
U.S. dollar during the respective periods. The exchange rates used for the nine
months ended September 30, 1997 and September 30, 1996 were Lit. 1,677 and Lit.
1,552, respectively. For the quarters ended September 30, 1997 and September 30,
1996, the exchange rates used were Lit. 1,706 and Lit. 1,521, respectively.
Balance sheet items have been converted at the end of period rates of exchange.
On September 30, 1997, the spot rate for the lira was Lit. 1,720 versus the U.S.
dollar; at December 31, 1996 it was Lit. 1,518.
The effect of these exchange rate fluctations on the financial
statements has been to decrease, as compared to the comparable periods in the
prior year, the reported dollar amounts of those items relating to 1997 which
were initially denominated in Italian lire. Revenues and expenses for the
current quarter and the year to date have been decreased by 12.2% and 8.1%,
respectively, while the values on the balance sheet at September 30, 1997 have
been decreased by 13.3% as compared to those at December 31, 1996.
Net sales of the Company for the quarter ended September 30, 1997
were $1,684,788, 15.9% less than net sales of $2,001,859 for the quarter ended
September 30, 1996. Adjusting for the exchange rate change, net sales for the
quarter ended September 30, 1997 were 8.7% less than those for the comparable
period in 1996.
Sales of Italiana Luce, when expressed in lire, fell 11.6% during
the third quarter of 1997 versus 1996 reflecting principally the continued
extreme softness of consumer demand in Europe for Italian lighting fixtures of
contemporary design. As in prior years, the operations of Italiana Luce were
closed for the month of August.
Sales in North America in the quarter were slightly below those for
the prior year with many of the Company's major stocking dealers reporting soft
sales throughout the summer for lighting fixtures in general. In September 1997,
the Company signed a long-term agreement with Tre Ci Luce to become its
exclusive distributor in the United States. Tre Ci Luce is a manufacturer of
contemporary lighting fixtures located outside Milan, Italy. Presently, it has
only limited representation in the United States. The Company plans to commence
the sell-in of this new line in late November with initial deliveries to
customers scheduled for early January 1998.
Net sales of the Company for the nine months ended September 30,
1997 were $6,000,219, 12.4% less than net sales of
Page 9 of 13 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Management's Discussion and Analysis (continued):
$6,851,132 for the nine months ended September 30, 1996. Adjusting for the
exchange rate change, net sales for the nine months ended September 30, 1997
were 7.3% less than those for the comparable period in 1996. Sales of Italiana
Luce, when expressed in lire, fell by 13.1% while sales of IL USA rose by 8.7%.
Gross profit as a percent of net sales was 41.2% for the quarter
ended September 30, 1997, compared to 40.3% for the quarter ended September 30,
1996. This improvement in the percentage gross profit margin was attributable to
the lower cost of imports for IL USA resulting from the weaker lira. For the
nine months ended September 30, 1997, gross profit was 39.7% of net sales versus
41.8% for the same period in 1996. The lower gross profit margin percentage was
due to heavy price discounting by Italiana Luce as it tried to boost revenue,
and to the effects of close out sales. In order to focus on its core business,
the Company has discontinued both its Le Stelle line of traditional Venetian
design lamps and many of its slow-moving contemporary design products.
Selling, general and administrative expenses were 43.7% and 42.2% of
net sales for the quarter and nine months, respectively, ended September 30,
1997 compared to 50.4% and 51.8%, respectively, for the comparable periods in
1996. The reduction in expenses as a percent of net sales was a result
principally of the actions taken by the Company during the first quarter to
reduce its headcount and cut back on its warehouse space. Costs associated with
these measures were written off against the $165,000 restructuring charge
included in the financial statements for the year ended December 31, 1996. In
addition, the Company has eliminated during 1997 much of its advertising
expenditures in Europe as well as cutting drastically its discretionary
expenses.
Excluding the cut backs in advertising expenditures, expenses which
are variable with sales, and the foreign exchange effects of the changing
relationship of the lira against the dollar, selling, general and administrative
expenses for the three and nine months ended September 30, 1997, were
approximately $125,000 and $525,000, respectively less than in the comparable
periods in 1996.
Liquidity and Capital Resources
The Company's current major source of financing is its short term
lines of credit with certain Italian banks. The lines of credit total Lit. 7.45
billion ($4.3 million when converted at the end of period rate of exchange) of
which Lit. 2.7 billion ($1.5 million) had been drawn down at September 30, 1997.
The persistent economic problems in the Company's major European
markets and the resultant decline in its sales revenue have
Page 10 of 13 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Management's Discussion and Analysis (continued):
adversely affected its liquidity and financial flexibility.
During 1996, the Company took actions which it anticipated would
reduce its annual fixed costs by approximately $500,000. The Company has also
taken actions during 1997 to reduce its discretionary spending. Although there
can be no assurance that these measures will be sucessful, the Company presently
believes that 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.
Page 11 of 13 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K during the quarter
ended September 30, 1997.
Page 12 of 13 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IL INTERNATIONAL INC.
--------------------------------
(Registrant)
November 3, 1997 By /s/ Keith G. Frey
-----------------------------
Keith G. Frey
Vice President, Finance and
Administration and Chief
Financial Officer
Page 13 of 13 pages
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 563,197
<SECURITIES> 0
<RECEIVABLES> 2,228,431
<ALLOWANCES> (321,038)
<INVENTORY> 1,930,625
<CURRENT-ASSETS> 4,601,782
<PP&E> 1,888,162
<DEPRECIATION> (1,245,331)
<TOTAL-ASSETS> 5,312,747
<CURRENT-LIABILITIES> 3,200,171
<BONDS> 0
0
0
<COMMON> 793,755
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,312,747
<SALES> 6,000,219
<TOTAL-REVENUES> 6,000,219
<CGS> 3,616,926
<TOTAL-COSTS> 2,531,666
<OTHER-EXPENSES> (9,336)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84,946
<INCOME-PRETAX> (223,983)
<INCOME-TAX> 28,347
<INCOME-CONTINUING> (252,330)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (252,330)
<EPS-PRIMARY> (0.003)
<EPS-DILUTED> (0.003)
</TABLE>
