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, 1997
|_| 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 46 pages
Exhibit Index at page 44
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2
The issuer's revenues for its most recent fiscal year were
$8,230,730.
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 4,
1998.................$396,900
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 4,
1998.............. 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 28, 1998.
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 worldwide distribution 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 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 32 collections of lighting products
consisting of about 290 line items. In the United States the suggested retail
prices of these fixtures range from $105 to $1,875 with an estimated weighted
average list price of $315. Actual selling prices in the United States for
portable fixtures are commonly 10% to 20% 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
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4
North America for certain lighting products of contemporary design produced by
two non-affiliated Italian lighting manufacturers, Nemo S.r.l. ("Nemo") 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"), located near Venice, Italy. Besides its contemporary line
of lighting fixtures featuring high quality hand-blown Venetian glass, Foscarini
offers an array of classic custom designed chandeliers. Effective June 30, 1997,
IL USA voluntarily relinquished its rights to distribute the Nemo line and
subsequently signed an agreement with Tre Ci Luce snc ("Tre Ci Luce"), a
manufacturer of contemporary lighting fixtures located outside Milan, Italy, to
become its exclusive distributor in the United States. Shipments of the Tre Ci
Luce line began in late January 1998.
In total, the lines of non-affiliated product now currently
represented by IL USA consist of 53 collections of lighting products or about
1,000 line items (excluding custom-made products). The fixtures have suggested
retail selling prices which range from $95 to $3,200. During 1997, the estimated
weighted average list price was $425.
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 higher-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,
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5
Marco Colombo and Stefano Marcato. Ferdinand Porsche of F.A. Porsche Design, a
prominent German design group, has 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 in Western Europe
where the top three markets are Italy, Germany and France. Sales in the United
States and Canada account for about 30% 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 to increase its presence in the contract market. It is
estimated that currently less than 15% 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,
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6
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
recent years. Instead, the Company has increased the level of its promotional
activities to the trade.
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 Luce
Plan. 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 most recent
years each accounted for close to 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
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7
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.
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 previously undertaken were necessary. Consequently, the Company
implemented a plan in early 1997 to revise its operating and financial
requirements. Actions taken included close-out of a number of slower selling
products and liquidation of the Le Stelle line of traditional Venetian-style
fixtures, termination of one-third of the Company's workforce in Italy; reduced
compensation for the Company's officers and directors; cancellation of a lease
on approximately 13,000 square feet of warehouse space at Italiana Luce; and
elimination in Italy of all advertising. Savings in 1997 resulting from these
actions are estimated to have been in excess of $500,000.
Employees
At December 31, 1997, the Company had 26 full-time employees and one
part-time employee. Fifteen full-time employees and the part-time employee were
employed in executive, management, sales, administrative, and clerical positions
and 10 in warehousing, shipping, assembly and technical support.
Manufacture of the Company's products is undertaken by small
independent subcontractors in Italy. Each subcontractor produces a limited
number of the
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8
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 satisfactory.
Foreign and Domestic Operations
A summary of the Company's operations by geographical area for the
years ended December 31, 1997 and 1996 is as follows:
Years Ended December 31,
1997 1996
----------- -----------
Net sales to unaffiliated customers:
United States (a) $ 2,509,174 $ 2,381,598
Italy 2,513,690 3,389,958
Germany 1,198,460 1,560,432
Other countries 2,009,406 2,403,506
----------- -----------
Total $ 8,230,730 $ 9,735,494
=========== ===========
Net sales between geographic areas (b):
Italy $ 807,543 $ 877,620
=========== ===========
Operating profits/(losses):
United States $ 187,942 $ 27,562
Italy (701,791) (741,977)
----------- -----------
Total $ (513,849) $ (714,415)
=========== ===========
December 31,
1997 1996
----------- -----------
Identifiable assets:
United States $ 1,063,640 $ 1,078,840
Italy 3,970,123 5,654,301
----------- -----------
Total $ 5,033,763 $ 6,733,141
=========== ===========
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9
- ----------
(a) Includes export sales of $47,394 and $45,132 during the years ended
December 31, 1997 and 1996, 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 26,000 square feet.
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 1997 was $198,305.
Leases generally are subject to periodic rent adjustments. Current leases expire
at varying times between 1998 and 2003.
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 in Italy for its projected needs in the
near term. The Company is looking to lease larger space in the United States at
the expiration of its lease at September 30, 1998 in order to accommodate its
projected business growth.
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.
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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 quoted on the OTC ("Over-The-Counter")
Bulletin Board under the symbol ILIL, and is included in the National Quotation
Bureau's "Pink Sheets".
The quarterly high and low bid prices of the Company's common stock
during 1996 and 1997 are set forth below. Prices are as reported by the National
Quotation Bureau, LLC.
High Low
------- -------
1996
- ----
First Quarter $0.01 $0.01
Second Quarter 0.02 0.01
Third Quarter 0.02 0.015
Fourth Quarter 0.015 0.01
1997
- ----
First Quarter $0.01 $0.006
Second Quarter 0.006 0.001
Third Quarter 0.0015 0.001
Fourth Quarter 0.005 0.001
The foregoing OTC quotations are inter-dealer quotations without
retail markup, markdown or commission and may not represent actual transactions.
On March 3, 1998, the Company estimates that it had 1,750
shareholders, comprised of 460 shareholders of record and 1,290 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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12
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 continued its roller-coaster ride against the U.S.
dollar during 1997. The weighted average exchange rate of the lira used in the
conversion of Italiana Luce's income statement for 1997 was 9.5% less than that
used in 1996. The comparable 1996 rate was 5.2% greater than that for 1995.
Net sales for the Company for the year ended December 31, 1997 were
$8,230,730, a decrease of 15.5% on net sales of $9,735,494 for the year ended
December 31, 1996.
Expressed in lire, net sales for the year ended December 31, 1997,
exclusive of sales in North America, fell 14.8% as compared to 1996. With
continental Europe continuing to experience high unemployment and stagnant
economies, the Company's sales declined in all major
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13
European markets.
Sales in North America rose 5.5% in 1997. Strong sales of the
Foscarini line more than offset a decline in the Rialto line and only partial
year sales from the Nemo line for which IL USA voluntarily relinquished
distribution rights in early 1997. 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 and previously had been only sparsely represented
in the United States. Initial shipments of Tre Ci Luce products were made in
late January 1998.
The gross profit margin for 1997 was 39.8% of net sales compared to
41.6% in 1996. The drop in the gross profit percentage was due principally to
heavy price promotions offered by Italiana Luce in its efforts to boost volume
and the close out, in connection with its restructuring plan, of a number of
slower selling line items as well as the complete Le Stelle line of traditional
Venetian-style lighting fixtures. The weaker lira enabled IL USA to improve its
margins and to price promote its portable fixtures aggressively.
Selling, general and administrative expenses for 1997 were 41.4% of
net sales compared to 47.2% in 1996. The substantial drop in expenses as a
percentage of net sales was directly attributable to the restructuring plan
implemented by the Company in early 1997 and for which a reserve of $165,000 was
charged against 1996 income. Actions taken in addition to the inventory
reduction measures mentioned above included termination of one-third of the
Company's workforce in Italy; reduced compensation for the Company's officers
and directors; cancellation of a lease on approximately 13,000 square feet of
warehouse space at Italiana Luce; and elimination in Italy of all advertising.
Despite these significant steps which resulted in estimated savings
during 1997 of approximately $500,000, the Company has continued to lose money.
With further meaningful restructuring difficult to envision, management
determined that it would be in the best interests of the stockholders if the
Company were sold and, to that end, on March 5, 1998 signed a conditional
agreement to sell substantially all of its assets to Nemo S.r.l. ("Nemo"),
located near Milan, Italy and a subsidiary of Cassina
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14
S.p.A., a major European contemporary furniture manufacturer. See Footnotes 1[B]
Basis of Presentation and (21) Subsequent Event for further discussion).
As a result of this possible sale and in conformity with new
reporting requirements relating to the accounting for the impairment of
long-lived assets, the Company wrote down the value of its fixed assets and
intangibles at December 31, 1997 by $380,000 to reflect the price to be paid by
Nemo for certain of these assets plus the estimated net proceeds from the
liquidation of the fixed assets which Nemo has elected not to acquire.
In 1996, because of the poor financial performance of the Company
and with 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.
Financial Condition
Capital expenditures, inclusive of expenditures on intangible
assets, were $161,643 and $304,032 for the years ended December 31, 1997 and
1996, respectively.
Net working capital at December 31, 1997 and December 31, 1996 was
$1,436,382 and $1,821,925, respectively. Converted at the December 31, 1997
exchange rate, the 1996 net working capital was $1,606,624.
Total assets at December 31, 1997 and December 31, 1996 were
$4,670,715 and $6,733,141, respectively. Converted at the December 31, 1997
exchange rate, the 1996 total assets were $5,851,521.
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 currently uses these
facilities to finance its day-to-day operations. The lines of credit totalled
Lit. 7,450,000,000 at December 31, 1997 ($4,214,000 when converted at the
December 31, 1997 exchange rate). Lit. 1,628,259,000 ($920,961) and Lit.
2,587,209,000 ($1,704,354 when converted at the December 31, 1996 exchange rate)
was
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outstanding under these lines at December 31, 1997 and 1996, respectively.
As the Company's financial position has continued to deteriorate
despite the significant restructuring measures implemented during 1997,
management has become increasingly concerned that its unsecured lines of credit
might be withdrawn by the lenders without notice. For this and other reasons, a
decision was taken in late February 1998, upon the consent of the majority
stockholder, to sell substantially all of the assets of the Company to Nemo. See
Footnotes 1[B] Basis of Presentation and (21) Subsequent Event for further
discussion.
Currency Fluctuations
After holding firm against the U.S. dollar during 1996, the Italian
lire experienced a marked decline in 1997 falling from Lit. 1,518 on the last
day of 1996 to Lit. 1,768 at the end of 1997, a drop of 16.5%.
Since approximately 70% of the financial results of the Company are
prepared initially in lire and subsequently converted to dollars, the effect of
this decline 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 exchange rates used in the conversion of the income statements
are the weighted average rates of exchange for each year, namely Lit. 1,689 in
1997 and Lit. 1,543 in 1996. The balance sheets have been converted at the end
of year exchange rates. At December 31, 1997, the rate was Lit. 1,768; at
December 31, 1996 it was Lit. 1,518.
Year 2000
Many existing computer programs use two digits to identify a year in
the date field. These programs were designed and developed without considering
the upcoming change in century. If not corrected, many computer applications
could fail or create erroneous results by or at the year 2000.
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16
The Company has conducted a comprehensive review of its computer
systems to identify the systems which could be affected by the Year 2000 issue,
and is developing an implementation plan to resolve the problem. Based on this
review, the Company does not believe that the cost of remediation will be
material to its financial position and results of operations.
ITEM 7. FINANCIAL STATEMENTS.
Financial statements of the Company and its consolidated
subsidiaries are set forth herein beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
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17
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.
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.
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.
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18
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 F-1 to F-22 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, 1997.
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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 5, 1998
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 5, 1998 By /s/ Michel F. Leemans
--------------------------------
Michel F. Leemans
President and Chief
Executive Officer
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20
Dated: March 5, 1998 By /s/ Keith G. Frey
--------------------------------
Keith G. Frey
Chief Financial and
Accounting Officer,
Vice President, Finance and
Administration, and
Director
Dated: March 5, 1998 By /s/ Luigi Giroletti
--------------------------------
Luigi Giroletti
Vice President and Director
Dated: March 5, 1998 By /s/ Thomas R. Reardon
--------------------------------
Thomas R. Reardon
Director
Dated: March 5, 1998 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, 1997 and 1996................... 23
Consolidated Statements of Operations
- For the Years Ended
December 31, 1997 and 1996................. 24
Consolidated Statement of Stockholders' Equity
- For the Years Ended
December 31, 1997 and 1996................. 25
Consolidated Statements of Cash Flows
- For the Years Ended
December 31, 1997 and 1996................. 26
Notes to Consolidated Financial Statements
- December 31, 1997 and 1996................... 27
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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,
1997 and 1996, 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 Company has determined that it is no longer a going concern.
However, it has not valued the individual assets and liabilities on a
liquidation basis because of the pending sale of the Company as described in
Note 21 which is expected to result in the recovery of the net asset value.
This conclusion is further supported by an independent valuation of the Company
on an orderly liquidation basis.
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, 1997 and 1996, 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 1, 1998 (except for Footnotes 1[A] and 21, as to which the date is
March 5, 1998)
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IL INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
1997 1996
----------- -----------
ASSETS
------
Current assets:
Cash and cash equivalents $ 557,115 $ 324,298
Trade accounts receivable, less allowance
for doubtful receivables of $309,805
in 1997 and $356,381 in 1996 1,834,331 2,675,435
Inventories 1,801,817 2,488,006
Other current assets 238,860 368,793
----------- -----------
Total current assets 4,432,123 5,856,532
Plant and equipment, net 182,047 775,529
Intangibles, net of accumulated amortization
of $280,527 in 1997 and $292,964 in 1996 -- 32,445
Other assets 56,545 68,635
----------- -----------
Total Assets $ 4,670,715 $ 6,733,141
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term debt $ 920,961 $ 1,704,354
Current installments of long-term debt 16,255 35,642
Accounts payable 1,058,652 922,612
Income taxes payable 660 325
Other accrued liabilities 999,213 1,371,674
----------- -----------
Total current liabilities 2,995,741 4,034,607
Long-term debt, excluding current installments 9,593 30,104
Other liabilities 335,569 482,715
----------- -----------
Total Liabilities 3,340,903 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 2,248,111 2,229,415
Retained earnings (1,100,952) (467,643)
Foreign currency translation adjustments (547,249) (305,959)
Treasury stock, at cost
- 2,554,113 common shares (63,853) (63,853)
----------- -----------
Total stockholders' equity 1,329,812 2,185,715
----------- -----------
Total Liabilities and Stockholders' Equity $ 4,670,715 $ 6,733,141
=========== ===========
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,
1997 1996
------------ ------------
Net sales $ 8,230,730 $ 9,735,494
Cost of sales 4,956,243 5,687,962
------------ ------------
Gross profit 3,274,487 4,047,532
Selling, general and
administrative expenses 3,408,336 4,596,947
Write-down of fixed assets 380,000 --
Restructuring charge -- 165,000
------------ ------------
Operating loss (513,849) (714,415)
Other income (expense):
Interest income 20,594 15,323
Interest expense (109,398) (108,819)
------------ ------------
Loss before income taxes (602,653) (807,911)
Income taxes 30,656 321,714
------------ ------------
Net loss $ (633,309) $ (1,129,625)
============ ============
Loss per common share - basic and diluted $ (0.0082) $ (0.0147)
============ ============
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
IL INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Foreign
Common Stock 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, 1996 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
Net loss for the year
ended December 31, 1997 -- -- -- (633,309) -- -- (633,309)
Utilization of deferred
tax benefits not recorded
as of the Effective Date -- -- 18,696 -- -- -- 18,696
Unrealized foreign currency
translation adjustment -- -- -- -- (241,290) -- (241,290)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 79,375,497 $ 793,755 $ 2,248,111 $(1,100,952) $ (547,249) $ (63,853) $ 1,329,812
========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
26
IL INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31,
1997 1996
----------- -----------
Cash flows from operating activities:
Net loss $ (633,309) $(1,129,625)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 313,918 432,794
Write-down of fixed assets 380,000 --
Deferred tax benefits 18,696 844
Other (88,603) (18,654)
Changes in net assets and liabilities:
(Increase) decrease in:
Trade accounts receivable 519,681 (61,260)
Inventories 402,790 (62,689)
Deferred taxes -- 308,947
Other current assets 90,353 (123,380)
Other long-term assets (692) (1,808)
Increase (decrease) in:
Accounts payable 261,196 (565,360)
Income taxes payable 335 (28,016)
Other accrued liabilities (236,920) 17,490
----------- -----------
Net cash provided by (used in)
operating activities 1,027,445 (1,230,717)
----------- -----------
Cash flows from investing activities:
Additions to plant and equipment, net (149,171) (242,515)
Additions to intangibles (880) (61,517)
----------- -----------
Net cash used in investing activities (150,051) (304,032)
----------- -----------
Cash flows from financing activities:
Increase (decrease) in short-term debt (567,718) 1,189,677
Payments of long-term debt (29,892) (36,613)
----------- -----------
Net cash provided by financing activities (597,610) 1,153,064
----------- -----------
Effect of exchange rate changes on cash (46,967) 19,768
----------- -----------
Net increase (decrease) in cash and
cash equivalents 232,817 (361,917)
Cash and cash equivalents at beginning of year 324,298 686,215
----------- -----------
Cash and cash equivalents at end of year $ 557,115 $ 324,298
=========== ===========
The accompanying notes are an integral part of these statements.
<PAGE>
27
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(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 worldwide distribution of
contemporary lamps and lighting products.
As more fully described in Note 21, on March 5, 1998, the Company
signed a conditional agreement to sell substantially all of its assets to Nemo
S.r.l., an Italian corporation ("Nemo").
(1B) Basis of Presentation
The Company has determined that it is no longer a going concern.
However, it has not valued the individual assets and liabilities on a
liquidation basis because of the pending sale of the Company as described in
Note 21 which is expected to result in the recovery of the net asset value.
This conclusion is further supported by an independent valuation of the Company
on an orderly liquidation basis.
<PAGE>
28
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(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 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
<PAGE>
29
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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:
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.
(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 three months 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" ("SFAS 121"). Accordingly, when
<PAGE>
30
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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. In accordance with
SFAS 121, the Company wrote down the value of its fixed assets in 1997 (see Note
5).
(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 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 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.
However, it is currently anticipated that the Company will account 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 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
<PAGE>
31
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 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
<PAGE>
32
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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 operations is insignificant.
(m) 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 and has been computed in
accordance with Statement of Financial Accounting Standards No 128, "Earnings
Per Share." Basic loss per share is computed using the weighted average common
shares outstanding during the period. Diluted loss per share is computed using
the weighted average common shares and common equivalent shares outstanding
during the period. The Company does not have any common equivalent shares
outstanding.
(n) Information about Capital Structure
In February 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 129 (SFAS 129), "Disclosure of Information
about Capital Structure," is effective for financial statements issued for
fiscal years ending after December 15, 1997. As the purpose of SFAS 129 was
primarily to consolidate certain disclosure requirements previously contained in
other pronouncements with which the Company was already in compliance, the
adoption of this statement had no effect on the Company's consolidated financial
statements.
(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.
<PAGE>
33
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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).
(4) Restructuring Charges
During 1996, the Company recorded restructuring charges of $165,000.
These charges related to the downsizing of the Italian operations in reaction to
persistent weak demand in Europe for the Company's products. The charges
consisted of $132,000 for severance and related costs and the balance
principally for lease termination expenses. All employee severances occurred in
February 1997 and the lease termination was effective March 31, 1997.
(5) Write-Down of Fixed Assets
In accordance with SFAS 121 and in connection with the proposed sale
of substantially all of its assets, the Company wrote down the value of its
fixed assets and intangibles by $380,000 in 1997 to reflect the price to be paid
by Nemo for certain of these assets (see Notes 1(A) and 21) plus the estimated
net proceeds from the liquidation of the remaining fixed assets.
<PAGE>
34
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(6) Inventories
Inventories consist of the following:
December 31,
1997 1996
---------- ----------
Raw materials $ 733,775 $1,076,372
Work-in-progress 233,782 456,212
Finished goods 834,260 955,422
---------- ----------
$1,801,817 $2,488,006
========== ==========
Work-in-progress represents partially completed inventories acquired
from third parties.
(7) Other Current Assets
Other current assets consist of the following:
December 31,
1997 1996
---------- ----------
Advances $ 96,834 $ 156,226
Credit notes receivable 33,285 1,307
Prepaid rent 28,641 2,347
Catalogs 28,423 79,857
Tax refunds 27,414 40,073
Miscellaneous prepaid expenses 13,158 13,588
Product development costs 6,640 18,672
Interest receivable 512 27,495
Other 3,953 29,228
---------- ----------
$ 238,860 $ 368,793
========== ==========
<PAGE>
35
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(8) Plant and Equipment
Plant and equipment consist of the following:
December 31,
1997 1996
---------- -----------
Leasehold improvements $ 39,470 $ 42,204
Machinery and equipment 1,773,785 1,889,472
Furniture and fixtures 12,229 14,103
---------- -----------
1,825,484 1,945,779
Less accumulated depreciation
and amortization (1,643,437) (1,170,250)
---------- -----------
$ 182,047 $ 775,529
========== ===========
Amortization of capitalized leases amounted to $28,354 in 1997 and
$39,077 in 1996.
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).
(10) 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 basis. These unsecured lines of credit may be terminated at the
option of the banks or the Company. At December 31, 1997, the amount available
under these arrangements aggregated Lit. 7,450,000,000 ($4,214,000 when
converted at the December 31, 1997 exchange rate), of which Lit. 1,628,259,000
($920,961) was outstanding, bearing a weighted average interest rate of 8.5%. At
December 31, 1996, Lit. 2,587,209,000 ($1,704,354 when converted at the December
31, 1996 exchange rate) was outstanding, bearing a weighted average interest
rate of 10.9%.
<PAGE>
36
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(9) Other Accrued Liabilities
Other accrued liabilities consist of the following:
December 31,
1997 1996
---------- ----------
Salaries, benefits and
payroll taxes $ 169,864 $ 253,807
Reorganization liabilities
(see Note 17) 311,711 287,218
Restructuring charge (see Note 4) -- 165,000
Sales commissions 121,336 135,385
Product warranty reserves 104,842 122,314
Professional fees 109,450 117,282
Royalties 52,671 102,366
Other 129,339 188,302
---------- ----------
$ 999,213 $1,371,674
========== ==========
(11) Long-term Debt
Long-term debt consists of the following:
December 31,
1997 1996
---------- ----------
Capitalized leases (see Note 14) $ 25,848 $ 65,746
Less current installments (16,255) (35,642)
---------- ----------
$ 9,593 $ 30,104
========== ==========
As of December 31, 1997, long-term debt, including current
installments, matures as follows:
1998 $ 16,256
1999 7,817
2000 1,775
----------
$ 25,848
==========
Cash paid for interest was $98,378 in 1997 and $104,313 in 1996.
<PAGE>
37
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(12) 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 loss before income taxes as follows:
Years Ended December 31,
1997 1996
--------- ----------
Domestic $ 63,050 $ 30,917
Foreign (665,703) (838,828)
--------- ----------
$(602,653) $ (807,911)
========= ==========
The income tax provision consists of:
Years Ended December 31,
1997 1996
--------- ----------
Current tax expense
Federal $ 18,696 $ --
State 2,833 3,276
Foreign 9,127 318,438
--------- ----------
$ 30,656 $ 321,714
========= ==========
Deferred tax assets are comprised of the following:
December 31,
1997 1996
----------- -----------
Operating loss carryforwards
Pre-reorganization $ 763,635 $ 635,835
Post-reorganization 582,366 428,298
Write-down of fixed assets 202,160 --
Bad debt allowances 139,367 146,443
Product warranty reserves 54,043 51,720
Inventory reserves 55,609 43,889
Other 12,916 54,518
----------- -----------
Gross deferred tax assets 1,810,096 1,360,703
Valuation allowance (1,810,096) (1,360,703)
----------- -----------
$ -- $ --
=========== ===========
<PAGE>
38
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Cash paid for income taxes was $5,050 in 1997 and $5,638 in 1996.
In view of the uncertainty as to whether it will generate sufficient
taxable income to utilize its deferred tax assets, the Company has set up an
allowance equal to 100% of such deferred tax assets, inclusive of its 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,
1997 1996
--------- ---------
Computed expected tax provision $(204,902) $(274,689)
Foreign earnings at
different rates (127,815) (156,836)
Permanent tax differences
in Italy 61,664 188,723
Valuation allowance in Italy 292,490 571,140
Foreign withholding taxes 9,127 13,695
Other items 92 (20,319)
--------- ---------
$ 30,656 $ 321,714
========= =========
(13) 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.
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
<PAGE>
39
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
limitation of $127,800. At December 31, 1997, $763,635 were available for
immediate use.
For the years ended December 31, 1997 and 1996, $18,696 and $0,
respectively, arising from the utilization of unrecorded tax assets have been
reported as direct additions to paid-in capital. Additional paid-in capital was
also credited in 1997 and 1996 with $0 and $844, respectively, in respect of the
reversal of tax liabilities set up on the Effective Date which were no longer
required.
As of December 31, 1997, pre-reorganization tax assets remaining
unrecorded and potentially available toreduce future tax liabilities amounted to
approximately $1,901,000, of which $1,787,000 related to tax loss carryforwards
($1,221,000 in the United States with an expiration date of 2006 and $566,000 in
Italy with expiration dates between 1998 and 2002).
(14) 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.
(15) Leases
As of December 31, 1997, 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, insuranceand
other expenses applicable to leased premises and are subject to escalation.
Future minimum lease payments for leases as of December 31, 1997
were as follows:
<PAGE>
40
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Year ending Capital Operating
December 31, Leases Leases
------------ ------- ---------
1998 $18,823 $171,653
1999 8,769 98,416
2000 1,775 98,416
2001 -- 98,416
2002 and thereafter -- 196,833
------- --------
Total minimum lease payments 29,367 $663,734
========
Less amounts representing
interest at an effective
annual rate of 9.50% (3,519)
-------
Present value of minimum
lease payments $25,848
=======
Rent expense was $198,305 in 1997 and $276,233 in 1996.
(16) Foreign and Domestic Operations
Years Ended December 31,
1997 1996
---------- ----------
Net sales by geographic area:
United States $2,461,780 $2,336,466
Italy 2,513,690 3,389,958
Germany 1,198,460 1,560,432
France 419,998 571,331
Other European countries 1,058,073 1,257,936
Rest of the world 578,729 619,371
---------- ----------
$8,230,730 $9,735,494
========== ==========
Net sales to unaffiliated customers:
United States (a) $2,509,174 $2,381,598
Italy 2,513,690 3,389,958
Germany 1,198,460 1,560,432
Other countries 2,009,406 2,403,506
---------- ----------
$8,230,730 $9,735,494
========== ==========
<PAGE>
41
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Years Ended December 31,
1997 1996
----------- -----------
Net sales between geographic areas (b):
Italy $ 807,543 $ 877,620
=========== ===========
Operating profits/(losses):
United States $ 187,942 $ 27,562
Italy (701,791) (741,977)
----------- -----------
$ (513,849) $ (714,415)
=========== ===========
December 31,
1997 1996
----------- -----------
Identifiable assets:
United States $ 1,063,640 $ 1,078,840
Italy 3,970,123 5,654,301
----------- -----------
$ 5,033,763 $ 6,733,141
=========== ===========
(a) Includes export sales of $47,394 and $45,132 during the years ended
December 31, 1997 and 1996, respectively.
(b) Net sales between geographic areas refers to products sold by Italiana
Luce to IL USA. These sales have been eliminated in consolidation.
(17) 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, 1997, the Company has received cash of $311,711, 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 10). In addition, the former owners of
Italiana Luce have paid into escrow Lit. 125,693,000 ($71,093 when converted at
the December 31, 1997 exchange rate) in respect of the potential foreign
national income tax liabilities. The Company's management believes that the net
<PAGE>
42
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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.
(18) Related Party Transactions
For the years ended December 31, 1997 and 1996, the Company paid
$25,800 and $135,049, 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.
For the year ended December 31, 1997, the Company paid $15,915 for
composition and related services to a desk-top publishing company affiliated
with a director of the Company.
(19) 1996 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.
(20) Recent Accounting Pronouncements
In July 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," which requires a separate financial statement showing changes in
comprehensive income. SFAS 130 is effective for financial statements issued for
fiscal years beginning after December 15, 1997 and requires reclassification of
all prior-period financial statements for comparative purposes. The Company is
evaluating alternative formats for presenting this information, but does not
expect this pronouncement will materially impact the Company's results of
operations.
In July 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 131,
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43
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which requires companies to report certain information about
operating segments, including certain information about their products,
services, the geographic areas in which they operate and their major customers.
This statement supersedes FASB Statements Nos. 14, 18, 24 and 30. SFAS 131 is
effective for financial statements for fiscal years beginning after December 31,
1997. The Company is evaluating the requirements of SFAS 131 and the effects, if
any, on the Company's current reporting and disclosures.
(21) Subsequent Event
On March 5, 1998, the Company entered into an Asset Purchase
Agreement ("Agreement") with Nemo S.r.l. ("Nemo"), an Italian corporation,
providing for the sale of substantially all of the Company's assets and
business. Consummation of the Agreement is conditional upon, among other things,
clearance by the Securities and Exchange Commission and completion of certain
legal formalities in Italy relating to personnel matters.
Nemo has agreed to acquire the goodwill and operations, certain
inventory and fixed assets of the Company for an aggregate estimated purchase
price of $4,570,000 (when the estimated proceeds receivable in lire are
converted at an exchange rate of Lit. 1,800). The Company intends to collect its
receivables outstanding at the date of closing and to liquidate the inventory
and fixed assets which Nemo has elected not to purchase and expects the gross
proceeds therefrom will approximate $2,000,000. The Company estimates that it
will have to pay approximately $3,400,000 in respect of its liabilities
outstanding at the date of closing, severance pay, taxes and expenses associated
with the sale and with winding up the affairs of the Company. The ultimate
amount of proceeds to be received and liabilities incurred relating to the sale
and liquidation of the Company may be significantly different from the amounts
stated above. However, management believes that the Company will not incur a
loss on such sale and liquidation.
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44
Index to Exhibits*
Page
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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 --
Plan 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.
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45
Page
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21 Subsidiaries of the Registrant 46
24 Power of Attorney (see "Power of Attorney" --
in Form 10-KSB)
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46
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.
