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 March 31, 1998
|_| 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 May 12, 1998: 79,375,497 shares of Common Stock, $.01 par value
Transitional Small Business Disclosure Format (Check one:)
Yes |_| No |X|
Page 1 of 14 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
1998 1997
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 199,035 $ 557,115
Trade accounts receivable, net 1,908,296 1,834,331
Inventories, net 1,901,757 1,801,817
Other current assets 163,864 238,860
----------- -----------
Total current assets 4,172,952 4,432,123
Plant and equipment, net 268,827 182,047
Other assets 55,166 56,545
----------- -----------
Total Assets $ 4,496,945 $ 4,670,715
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 779,153 $ 920,961
Current installments of long-term debt 12,856 16,255
Accounts payable 1,061,443 1,058,652
Income taxes payable 10,832 660
Other accrued liabilities 1,717,474 999,213
----------- -----------
Total current liabilities 3,581,758 2,995,741
Long-term debt, excluding current installments 7,521 9,593
Other liabilities -- 335,569
----------- -----------
Total Liabilities 3,589,279 3,340,903
----------- -----------
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 2,251,193 2,248,111
Retained earnings (1,502,587) (1,100,952)
Accumulated other comprehensive income (570,842) (547,249)
Treasury stock at cost
- 2,554,113 common shares (63,853) (63,853)
----------- -----------
Total stockholders' equity 907,666 1,329,812
----------- -----------
Total Liabilities and Stockholders' Equity $ 4,496,945 $ 4,670,715
=========== ===========
See accompanying notes to condensed consolidated financial statements.
Page 2 of 14 pages
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IL INTERNATIONAL INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
and Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
1998 1997
------------ ------------
Net sales $ 2,001,440 $ 2,317,322
Cost of sales 1,185,843 1,369,708
------------ ------------
Gross profit 815,597 947,614
Selling, general and administrative expenses 891,003 900,514
Termination benefits (see Note 6) 285,000 --
------------ ------------
Operating income (loss) (360,406) 47,100
Other income (expense):
Interest income 985 2,482
Interest expense (27,337) (31,571)
------------ ------------
Profit (loss) before income taxes (386,758) 18,011
Income taxes 14,877 3,333
------------ ------------
Net income (loss) (401,635) 14,678
Other comprehensive loss (see Note 9):
Foreign currency translation adjustments (23,593) (176,983)
------------ ------------
Other comprehensive loss before taxes (23,593) (176,983)
Income taxes on other comprehensive loss -- --
------------ ------------
Other comprehensive loss (23,593) (176,983)
------------ ------------
Comprehensive loss $ (425,228) $ (162,305)
============ ============
Earnings (loss) per common share
- basic and diluted
Net income (loss) $ (0.005) $ 0.0002
============ ============
Weighted average number of
common shares outstanding: 76,821,384 76,821,384
============ ============
See accompanying notes to condensed consolidated financial statements.
Page 3 of 14 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
1998 1997
--------- ---------
Cash flows from operating activities:
Net income (loss) $(401,635) $ 14,678
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 43,496 79,654
Other 3,082 (61,610)
Change in net assets and liabilities:
(Increase) decrease in:
Trade accounts receivable (119,026) 269,730
Inventories (137,566) 168,256
Other current assets 69,936 26,669
Other long-term assets -- 702
Increase (decrease) in:
Accounts payable (2,479) 181,329
Income taxes payable 10,562 2,238
Other accrued liabilities 396,581 (244,586)
--------- ---------
Net cash provided by (used in)
operating activities: (137,049) 437,060
--------- ---------
Cash flows from investing activities:
Additions to plant and equipment, net (94,843) (143,989)
--------- ---------
Net cash used in investing activities (94,843) (143,989)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in short-term debt (114,513) 40,572
Payments of long-term debt (5,042) (7,781)
--------- ---------
Net cash provided by (used in)
financing activities (119,555) 32,791
--------- ---------
Effect of exchange rate changes on cash (6,633) (28,496)
--------- ---------
Net increase (decrease) in cash
and cash equivalents (358,080) 297,366
Cash and cash equivalents at beginning of year 557,115 324,298
--------- ---------
Cash and cash equivalents at end of period $ 199,035 $ 621,664
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 29,026 $ 23,399
Income taxes 1,242 1,103
See accompanying notes to condensed consolidated financial statements.
Page 4 of 14 pages
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IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As at March 31, 1998
NOTE 1 - 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. The Effective Date of the Plan was November 27, 1991. 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").
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 10, 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").
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 years ended December 31, 1997 and 1996, the Company
experienced declining sales and decreasing margins which resulted in operating
losses of $513,849 and $714,415, respectively.
In early 1997, management implemented a plan to revise its operating and
financial requirements. Actions taken included termination of one-third of the
Company's workforce in Italy; reduced compensation for the Company's officers
and directors; elimination of approximately 13,000 square feet of warehouse
space in Italy; and close out of many of the Company's slower selling products.
Despite these significant steps which are estimated to have resulted in annual
savings of approximately $500,000, the Company reported another loss in 1997.
Page 5 of 14 pages
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IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As at March 31, 1998
(Continued)
In view of the matters described above, 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.
Except for the write-down of fixed assets (see Note 5), 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.
Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
For further information, refer to the consolidated financial statements
and footnotes thereto for the year ended December 31, 1997.
NOTE 3 - 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) 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 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).
Page 6 of 14 pages
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IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As at March 31, 1998
(Continued)
(c) Earnings (Loss) Per Common Share
Earnings (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 earnings (loss) per share is computed using the
weighted average common shares outstanding during the period. Diluted earnings
(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.
(d) 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," which 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 has no effect on the Company's consolidated financial
statements.
NOTE 4 - Inventories
The components of inventory consist of the following:
March 31,
1998
----------
Raw materials $ 810,135
Work-in-progress 266,824
Finished goods 824,798
----------
$1,901,757
==========
NOTE 5 - Write-Down of 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 estimated net proceeds
from the liquidation of
Page 7 of 14 pages
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IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As at March 31, 1998
(Continued)
the fixed assets not being acquired by Nemo (see Notes 1 and 10).
The carrying amount of the fixed assets at March 31, 1998 represents fair
value less cost to sell.
At March 31, 1998, the carrying value of assets to be sold to Nemo was
$2,066,003 and the carrying value of assets to be sold under the plan of
liquidation was $2,430,942 (inclusive of $199,035 in cash and cash equivalents)
NOTE 6 - Termination Benefits
In connection with the proposed sale of substantially all of the assets of
the Company (see Notes 1 and 10), management negotiated severance agreements
during March 1998 with the twelve employees and four agents in Italy and the
three agents elsewhere in Europe whom Nemo has elected not to retain. The cost
of such agreements, amounting to approximately $285,000, has been charged
against the Condensed Consolidated Statement of Income and Comprehensive Income
for the three months ended March 31, 1998 and is included in other accrued
liabilities. This sum is in addition to $333,500 which is included in other
accrued liabilities at March 31, 1998 and represents the amount due to employees
in respect of their length of service with the Company. At December 31, 1997,
this amount was reported as a long-term obligation under other liabilities.
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 net operating loss carryforwards.
NOTE 8 - Pre-Reorganization Tax Benefits
The Company has available to it certain tax benefits which
Page 8 of 14 pages
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As at March 31, 1998
(Continued)
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 three months ended March 31, 1998 and 1997, $3,082 and
$0, respectively, arising from the utilization of such unrecorded assets have
been reported as direct additions to paid-in capital.
NOTE 9 - Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No 130, "Reporting Comprehensive Income," which established standards
for reporting and display of comprehensive income and its components in a full
set of financial statements. Comprehensive income is defined as the change in
stockholders' equity during a period from transactions from nonowner sources.
Comprehensive income consists of net income and other comprehensive income,
which includes all other nonowner changes in stockholders' equity. For the
Company, other comprehensive income consists of foreign currency translation
adjustments that amounted to charges of $23,593 and $176,983 for the three
months ended March 31, 1998 and 1997, respectively. The Cumulative Foreign
Currency Translation Adjustment amount previously reported as a separate
component of stockholders' equity is now included in Accumulated Other
Comprehensive Income in the Condensed Consolidated Balance Sheets. Comprehensive
loss for the three months ended March 31, 1998 and 1997 amounted to $425,228 and
$162,305, respectively.
NOTE 10 - Sale of Substantially All of the Assets
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, and 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
Page 9 of 14
<PAGE>
IL INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
As at March 31, 1998
(Continued)
Lit. 1,800). The Company intends to collect its receivables outstanding at the
date of closing and to liquidate the inventoryand 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.
Page 10 of 14 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 Condensed
Consolidated Statements of Income and Comprehensive Income were the weighted
average rates of exchange versus the dollar during the respective periods,
namely Lit. 1,792 for the three months ended March 31, 1998 and Lit. 1,643 for
the comparable period in 1997. Balance sheet items have been converted at the
end of period rates of exchange. On March 31, 1998, the spot rate for the lira
was Lit. 1,822; at December 31, 1997 it was Lit. 1,768. The effect of these
exchange rate fluctuations is (i) to decrease the reported dollar amounts on the
income statement for the three months ended March 31, 1998 of the revenues and
expenses originally denominated in Italian lire by approximately 9% as compared
to those for the quarter ended March 31, 1997 and (ii) to decrease the values on
the balance sheet at the end of the current quarter by about 3% as compared to
those at December 31, 1997.
Net sales of the Company for the quarter ended March 31, 1998 were
$2,001,440, 13.6% less than net sales of $2,317,322 for the quarter ended March
31, 1997. Adjusting for the exchange rate change, net sales for the quarter
ended March 31, 1998 were 8.3% less than in the comparable period in 1997.
Sales of Italiana Luce, when expressed in lire, decreased 11.3% during the
first quarter of 1998, reflecting principally the continued stagnation of
Europe's economies.
Sales of IL USA fell 1.6% compared to the first quarter of 1997 when sales
benefited from a major shipment of custom chandeliers from Foscarini for a
commercial installation. Excluding this one-time sale, revenue grew 11.5% thanks
to strong growth in the Italiana Luce line.
Gross profit as a percentage of net sales was 40.8% for the quarter ended
March 31, 1998, compared to 40.9% for the quarter ended March 31, 1997. The
Company continues to discount its products heavily in Europe in an effort to
stimulate sales with a consequent negative effect on margins.
Selling, general and administrative expenses, before a charge of $285,000
in respect of termination benefits for employees and sales agents of the Company
not being retained by Nemo (see Note 6), were 44.5% of net sales for the quarter
ended March 31, 1998 versus 38.9% for the quarter ended March 31, 1997. The
current quarter's expenses include $40,000 for legal and professional fees
incurred in connection with the proposed sale of the Company. Excluding charges
relating to the proposed sale and adjusting for
Page 11 of 14 pages
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IL INTERNATIONAL INC. AND SUBSIDIARIES
Management's Discussion and Analysis (continued):
the change in exchange rates, selling, general and administrative expenses for
the current quarter were level with those for the comparable period in the prior
year.
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. 6.81 billion
($3,738,000 when converted at the end of period rate of exchange) of which Lit.
1.42 billion ($779,153) had been drawn down at March 31, 1998.
As the Company's financial position continued to deteriorate despite the
significant restructuring measures implemented during 1997, management became
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) and
(10) for further discussion.
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.
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.
Page 12 of 14 pages
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IL INTERNATIONAL INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On March 10, 1998, the Company filed a Current Report on Form 8-K in
connection with a press release announcing that the Company had
entered into an agreement to sell substantially all of its assets to
Nemo S.r.l.
The Company has not filed any other reports on Form 8-K during the
quarter ended March 31, 1998.
Page 13 of 14 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)
May 12, 1998 By /s/ Keith G. Frey
-------------------------
Keith G. Frey
Vice President, Finance and
Administration and Chief
Financial Officer
Page 14 of 14 pages
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 199,035
<SECURITIES> 0
<RECEIVABLES> 2,213,541
<ALLOWANCES> (305,245)
<INVENTORY> 1,901,757
<CURRENT-ASSETS> 4,172,952
<PP&E> 1,908,185
<DEPRECIATION> (1,639,358)
<TOTAL-ASSETS> 4,496,945
<CURRENT-LIABILITIES> 3,581,758
<BONDS> 0
0
0
<COMMON> 793,755
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,496,945
<SALES> 2,001,440
<TOTAL-REVENUES> 2,001,440
<CGS> 1,185,843
<TOTAL-COSTS> 1,176,003
<OTHER-EXPENSES> (985)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,337
<INCOME-PRETAX> (386,758)
<INCOME-TAX> 14,877
<INCOME-CONTINUING> (401,635)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (401,635)
<EPS-PRIMARY> (0.005)
<EPS-DILUTED> (0.005)
</TABLE>
