10-Q 1 file001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------ FORM 10-Q (MARK ONE) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to _______________ Commission file number: 0-27860 IIC Industries, Inc. ----------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 889-7201 ---------------------------------------------------- FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT. Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes x No -- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 5,693,472 shares of common stock outstanding at April 30, 2001. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets Page at March 31, 2001 ---- and December 31, 2000 3 Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2001 and March 31, 2000 5 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2001 and March 31, 2000 6 Notes to Consolidated Financial Statements 7 2 IIC Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollar amounts in thousands, except share data)

The accompanying notes are an integral part of these statements. -3- IIC Industries, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (CONTINUED) (UNAUDITED) (dollar amounts in thousands, except share data)

The accompanying notes are an integral part of these statements. -4- IIC Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) (dollar amounts in thousands, except share data)

The accompanying notes are an integral part of these statements -5- IIC Industries, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollar amounts in thousands)

The accompanying notes are an integral part of these statements. -6- IIC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The consolidated financial statements included herein which have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, include the accounts of IIC Industries, Inc. and all material majority-owned subsidiaries (collectively the "Company"). All material intercompany transactions and balances have been eliminated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the consolidated financial statements contain all adjustments which are those of a normal recurring accrual nature and disclosures necessary to present fairly the financial position of the Company as of March 31, 2001 and December 31, 2000 and the results of operations and cash flows for the three months ended March 31, 2001 and March 31, 2000. NOTE B - FOREIGN CURRENCY TRANSLATION Investor Rt ("Investor"), a majority-owned subsidiary, uses the local currency, the Hungarian forint, as its functional currency and translates all assets and liabilities at year-end exchange rates, all income and expense accounts at average rates and records adjustments resulting from the translation in a separate component of shareholders' equity. The Israel Tractors and Equipment Company Limited ("Israel Tractor") and , Balton C.P. Limited ("Balton"), a wholly-owned and a majority-owned subsidiary, respectively, use the US dollar as the functional currency, since the dollar is the currency in which most of the significant business of Israel Tractor and Balton is conducted, or to which it is linked. These subsidiaries translate monetary assets and liabilities at year-end exchange rates and nonmonetary assets and liabilities at historical rates. Income and expense accounts are translated at the rate of exchange prevailing at the date of transaction, except that depreciation is translated at historical rates. Adjustments resulting from the translation of these entities are included in results of operations. Transactions arising in a foreign currency are translated into the functional currency at the rate of exchange effective at the date of the transaction and gains or losses are included in results of operations. -7- IIC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE C - INVENTORIES Inventories are as follows: MARCH 30, December 31, 2001 2000 ------- ----- Raw materials $7,169 $5,326 Work-in-progress 1,322 1,887 Finished goods 27,305 24,531 ------ ------ $35,796 $31,744 ======= ======= NOTE D - CONTINGENCIES The Company has given a guarantee to the bankers of Balton amounting to $2.1 million. The guarantee is in respect of various outstanding letters of credit given by the bankers of certain of Balton's creditors. Investor and certain subsidiaries are potentially liable with respect to certain guarantees of debt and other financial instruments of other related and nonrelated companies to the extent of approximately $ 1.8 million. NOTE E - INVESTMENT IN AFFILIATE At March 31, 2001, the Company's effective ownership percentage of Danubius, Rt. ("Danubius"), a publicly traded company, was approximately 49.35% at a cumulative cost of approximately $49 million. Danubius owns a number of hotels in Hungary and the Czech Republic, which specialize in spa facilities. -8- IIC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE E (CONTINUED) Accordingly, the Company accounted for this investment under the equity method at March 31, 2001. Under this method, the investment is carried at cost plus the Company's share of earnings or losses less distributions. Since the Company's share of the underlying net assets of Danubius exceeded the cost at the various purchase dates, the excess of the fair value of the net assets acquired over the cost is amortized over a period of forty years. The following is summarized financial information of Danubius (in thousands), which was prepared in accordance with international accounting standards. There were no significant differences between international accounting standards and generally accepted accounting standards in the United States:

-9- IIC Industries, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE F- NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133. "Accounting for Derivative Instruments and for Hedging Activities" ("Statement 133"). In June 2000 the FASB issued Statement of Financial Accounting Standards Board No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS No. 133 ("Statement 138"). Statement 133 and Statement 138 require companies to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. They also require that changes in fair value of a derivative be recognized currently in the statement of operations unless specific hedge accounting criteria are met. The Company adopted Statement 133 and Statement 138 on January 1, 2001. The adoption of Statement 133 and Statement 138 had no material impact on the Company's balance sheet or statement of operations. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is presently operated as a holding company with subsidiaries in three principal operating geographic areas: (1) Investor RT, a Hungarian holding company ("Investor" or "Investor Group"), which through its subsidiaries, engages in a variety of commercial activities in Hungary; (2) The Israel Tractors and Equipment Company Limited ("Israel Tractor"), an Israeli corporation, which distributes tractors and related heavy machinery in Israel and (3) Balton C.P. Limited, an English holding company with African subsidiaries ("Balton CP") engaged in trading activities in several African countries. The Company has three primary areas of operation with respect to its subsidiaries: (a) Investor and its subsidiaries in Hungary (b) Israel Tractor in Israel (c) Balton CP and its subsidiaries in Nigeria, Ghana, Zambia, Tanzania, Kenya, Uganda and the Cote D'Ivoire. The Company has five principal business segments: (a) vehicle sales and service (b) processing/storage of agricultural products (c) the distribution of tractors and other heavy equipment (d) the sale of agricultural, communications and electrical equipment (e) other industries including retail and wholesale consumer products and corporate. 11 RESULTS OF OPERATIONS The table below sets forth for fiscal quarters ended March 31, 2001 and 2000, certain information with respect to the results of operations of the Company and its principal subsidiaries.

12 CONSOLIDATED RESULTS OF OPERATIONS The table below sets forth for the three months ended March 31, 2001 and 2000, certain information with respect to the results of operations of the Company and its five principal business segments.

INVESTOR The operations of three of the Company's segments are conducted in Hungary through Investor. Investor's business is significantly affected by general conditions in Hungary. Vehicle Sales and Distribution Segment o Net Sales for the three months ended March 31, 2001 decreased by approximately $139,000, or approximately 4.6%, as compared to the corresponding period in 2000. o There was Income before Minority Interests and Income Taxes for the three months ended March 31, 2001 of $60,000 as compared to income of $75,000 in the corresponding period in 2000. The decrease in Net Sales and in Income before Income Taxes and Minority Interests was primarily due to tight competition in the marketplace. Consumers are delaying purchasing and servicing their vehicles. Processing/Storage of Agricultural Products Segment o Net Sales for the three months ended March 31, 2001 increased by approximately $1.7 million or 22%, as compared to the corresponding period in 2000. The increase in Net Sales was primarily 13 due to an increase in demand of the Company's products both on the domestic and export markets. However, market conditions remain competitive and unpredictable. o The Income before Income Taxes and Minority Interest for three months ended March 31, 2001 , was $702,000 compared to Loss before Income Taxes and Minority Interest of $219,000 for the corresponding period in 2000. This increase in income was primarily due to maintaining margins while increasing turnover (approximately $450,000 of the increase) and a gain on disposal of two surplus properties of $477,000. Other Industries o Net Sales for the three months ended March 31, 2001 decreased by approximately $952,000 as compared to the corresponding period in 2000. This decrease in 2001 was primarily due to a subsidiary being sold and another subsidiary being reclassified as an investment held for sale. o The Loss before Income Taxes and Minority Interest was approximately $1,917,000 for the three months ended March 31, 2001 compared to income of approximately $1,617,000 for the three months ended March 31, 2000. The decrease in income arose primarily due to the higher equity loss from the Danubius investment in 2001 and the inclusion in the first three months of 2000 of a gain on a sale of equity shares in an oil and gas venture for approximately $2.1 million. ISRAEL TRACTOR: TRACTORS AND HEAVY EQUIPMENT SEGMENT o Net Sales for the three months ended March 31, 2001 increased by $669,000,or approximately 5% as compared to the corresponding period in 2000. o The Loss before Income Taxes and Minority Interest for the three months ended March 31, 2001 was $1,100,000 as compared to income of $169,000 for the corresponding period in 2000. The political situation in Israel has remained volatile throughout the period, leading to difficult business conditions. An operating loss was incurred in the first three months of 2001, together with a one time charge for bad debt, legal cases and redundancy provisions. BALTON CP: AGRICULTURAL, COMMUNICATIONS AND ELECTRICAL EQUIPMENT SEGMENT o Net Sales for the three months ended March 31, 2001 increased by $157,000 million or approximately 1.3%, as compared to the corresponding period in 2000. o Income before Income Taxes and Minority Interests for the three months ended March 31, 2001 increased by approximately $434,000, as compared to the corresponding period in 2000, as a result of the sale in the first three months of 2000 of a joint venture which produced a loss of $355,000. 14 Analysis of other income and expense Interest income. Interest income decreased for the three months ended March 31, 2001 by $113,000, or approximately 26%, to $319,000. Interest expense. Interest expense in the three months ended March 31, 2001, increased by $83,000, or approximately 14%, to approximately $499,000. Income before Income Taxes and Minority Interests. Loss before Income Taxes and Minority Interests in the first three months ended March 31, 2001 was approximately $2,176,000, compared to Income before Income Taxes and Minority Interest in the first three months of 2000 of approximately $1,287,000. INCOME TAXES The Company may be subject to tax in some or all of the foreign countries in which it has operations. However, foreign taxes imposed on the Company's income may qualify as a foreign income tax and therefore be eligible for credit against the Company's United States income tax liability subject to certain limitations set out in the Internal Revenue Code of 1986, as amended (or alternatively, for deduction against income in determining such liability). The limitations set out in the Code include, among others, computation rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the United States federal income taxes otherwise payable with respect to each class of income. Foreign income taxes exceeding the credit limitation for the year of payment or accrual can be carried back for two taxable years and forward for five taxable years, in order to reduce United States federal income taxes, subject to the credit limitations applicable in each of such years. Other restrictions on the foreign tax credit include a prohibition on the use of the credit to reduce liability for the United States corporate alternative minimum taxes by more than 90%. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations through funds generated internally and through cash and cash equivalents available at the beginning of 2001. At March 31, 2001, IIC Industries Inc., 15 (the "Parent Company"), and its wholly-owned Israel Tractor subsidiary, had working capital of $16.5 million, including cash and cash equivalents of $3.9 million. Cash of subsidiaries that are not wholly-owned (including the Investor Group and the Balton CP Group) is generally not available for use by the Parent Company or other subsidiaries (except to the extent paid to the Parent Company as reimbursement for general overhead paid by the Parent Company or as management fees) other than in the form of dividends, if and when declared. Dividends to the Parent Company from its Israel Tractor subsidiary are subject to a withholding tax of 15% to 25%. The Parent Company does not expect to receive cash dividends or other distributions in the foreseeable future from any of its subsidiaries. At March 31, 2001, Israel Tractor, Investor and Balton had outstanding short-term indebtedness of approximately $7.8 million, $6.6 million and $7.1 million, respectively. At March 31, 2001, Israel Tractor, Investor and Balton had unused lines of short-term credit of $670,000, $2.6 million and $4.8 million, respectively. During the first three months of 2001, Israel Tractor, Investor, and Balton made capital expenditures of $566,000; $167,000 and $258,000 respectively, for the purchase of equipment and vehicles and improvements to property. Such expenditures were made from internally generated funds. At March 31, 2001, the Company had no significant capital commitments. INFLATION Inflation has been a persistent aspect of the Hungarian economy in recent years, although the annual rate of inflation has been predictable and has therefore been taken into account by the government and private businesses. Inflation has contributed to the devaluation of the Hungarian currency and has therefore had an effect on Investor's financial condition. Inflation in Israel was moderate in 2000 and during the first three months of 2001, and therefore did not significantly affect operations in that country. Revaluation of the Israeli shekel against the U.S. Dollar in the first three months of 2001 was insignificant. Significant rates of inflation persisted in the African countries where Balton CP operates, triggering significant devaluations of local currencies. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133. "Accounting for Derivative Instruments and for Hedging Activities" ("Statement 133"). In June 2000 the FASB issued Statement of Financial Accounting Standards Board No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS No. 133 ("Statement 138"). Statement 133 and Statement 138 require companies to recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. They also require that changes in fair value of a derivative be recognized currently in the statement of operations unless specific hedge accounting criteria are met. The Company adopted Statement 16 133 and Statement 138 on January 1, 2001. The adoption of Statement 133 and Statement 138 had no material impact on the Company's balance sheet or statement of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DISCLOSURE ABOUT FOREIGN CURRENCY RISK Substantially all of the Company's revenues are derived from foreign operations. As such, its income is significantly affected by fluctuations in currency exchange rates and by currency controls. Most of the countries where the Company operates such as Hungary and several African countries do not have freely convertible currencies and their currencies have been subject to devaluations in recent years. In particular, during 2000 and the three months ended March 31, 2001, the income from the Company's Hungarian, and African subsidiaries was significantly reduced by losses arising from foreign exchange transactions due to significant currency devaluations against the U.S. dollar. The Hungarian currency, which floats against a basket of two currencies (the U.S. dollar and the European Currency Unit) underwent devaluations against the U.S. dollar at the rate of 12% during 2000. Since the beginning of 2001, the Hungarian currency has been further devalued by approximately 7% against the U.S. Dollar. Since the functional currency for Investor is the Forint, these devaluations have resulted in certain currency translation adjustments directly impacting stockholders' equity. Furthermore, certain of the African countries such as Zambia and Uganda operate in hyper-inflationary economies. Derivative financial instruments are utilized by the Company to reduce foreign exchange risk and price risk relating to its heavy equipment distribution and agricultural commodity business. The Company does not hold or issue derivative financial instruments for trading purposes. Israel Tractor enters into foreign currency forward contracts and call option contracts to reduce the impact of fluctuations of certain currencies against the U.S. dollar. Gains and losses resulting from such transactions are reflected in the results of operations. These contracts reduce exposure to currency movements resulting primarily from nondollar-denominated trade receivables and the Israeli tax effects of dollar-denominated trade purchases. At March 31, 2001, Israel Tractor had foreign currency forward contracts, with notional values of $1 million, to purchase and sell Israeli shekels. All of the contracts mature in the next six months. Current pricing models were used to estimate the fair values of foreign currency forward contracts, and call options. The counterparties to these contracts are creditworthy multinational commercial banks or other financial institutions, which are recognized market makers. DISCLOSURE ABOUT INTEREST RATE RISK The Company is subject to market risk from exposure to changes in interest rates based on its financing, investing, and cash management activities. The Company utilizes a balanced mix of debt maturities along with both fixed-rate and variable-rate debt to manage its exposures to changes in interest rates. The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2001, although there can be no assurances that interest rates will not significantly change. 17 OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K None 18 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 18, 2001 IIC INDUSTRIES, INC. By: /s/ Fortunee F. Cohen ------------------------------ Fortunee F. Cohen, Secretary By: /s/ John E, Smith ------------------------- John E. Smith, Director, (Principal Financial Officer and Chief Accounting Officer). SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: ________________, 2001 IIC INDUSTRIES, INC. By: ------------------------------------- Fortunee F. Cohen, Secretary By: ------------------------------------- John E. Smith, Director, (Principal Financial Officer and Chief Accounting Officer).

IIC INDUSTRIES INC 10-Q