SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported: December 10, 1997 (November
13, 1997)
IAT MULTIMEDIA, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 0-22486 13-3920210
- ----------------------------- --------------------- ---------------------------------
(State or Other Jurisdiction (Commission File No.) (IRS Employer Identification No.)
of Incorporation)
Geschaftshaus Wasserschloss, Aarestrasse 17, CH-5300 Vogelsang-Turgi, Switzerland
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (011)(41)(56)223-5022
N/A
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(Former name or former address, if changed since last report)
This Form 8-K/A amends the Form 8-K of IAT Multimedia, Inc. (the
"Company") filed on November 26, 1997.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired.
The following financial information for FSE is attached hereto as Annex A:
Independent Auditors' Report
Balance Sheets as of December 31, 1995 and 1996
Income Statements for the years ended December 31, 1994, 1995 and 1996
Statements of Partners Capital for the years ended December 31, 1994, 1995
and 1996
Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996
Notes to Financial Statements
Balance Sheets as of September 30, 1996 and 1997 (unaudited)
Income Statements for the Nine Months ended September 30, 1996 and 1997
(unaudited)
Statements of Partners Capital for the Nine Months ended September 30, 1996
and 1997 (unaudited)
Statements of Cash Flows for the Nine Months ended September 30, 1996 and
1997 (unaudited)
Notes to the Unaudited Financial Statements
(b) Pro Forma Financial Information.
Pro Forma financial statements, which give effect to the acquisition by
the Company of FSE, are attached hereto as Annex B.
(c) Exhibits
2
ANNEX A
INDEPENDENT AUDITORS' REPORT
To the Partners of FSE Computer-Handel GmbH & Co. KG, Pirmasens:
We have audited the accompanying balance sheets of FSE Computer-Handel GmbH &
Co. KG, Pirmasens, as of December 31, 1995 and 1996, and the related statements
of income, partners' capital accounts and cash flows for each of the three
years in the period ended December 31, 1996. 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSE Computer-Handel GmbH & Co.
KG, Pirmasens, as of December 31, 1995 and 1996 and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
The significant differences in the amounts due to partners resulting from
variances between accounting principles generally accepted in Germany and those
generally accepted in the United States are described in note 4 to the
financial statements.
Rothstein Kass & Company, P.C.
Roseland, New Jersey
December 7, 1997
3
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
BALANCE SHEETS
December 31, December 31,
1995 1996
DM DM
-------------- -------------
ASSETS
Current assets
Cash .................................................................. 1,752,142 1,299,834
Marketable securities ................................................ 0 231,972
Accounts receivable ................................................... 2,930,308 1,872,498
Merchandise inventory ................................................ 2,242,308 2,930,748
Prepaid expenses ...................................................... 16,416 0
--------- ---------
Total current assets ................................................ 6,941,174 6,335,052
--------- ---------
Noncurrent assets
Leasehold improvements, operating equipment, furniture and fixtures ... 670,873 618,144
Deferred tax receivable ............................................. 8,700 0
Goodwill ............................................................ 1,166,424 975,082
--------- ---------
Total noncurrent assets ............................................. 1,845,997 1,593,226
--------- ---------
Total assets ...................................................... 8,787,171 7,928,278
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Bank indebtedness ................................................... 224 0
Accounts payable ...................................................... 3,679,366 1,538,252
Loans payable ......................................................... 227,565 205,000
Payroll taxes and social security payable ........................... 214,489 138,323
Value-added tax payable ............................................. 6,211 182,520
Other current taxes payable .......................................... 863,061 761,125
Accrued liabilities ................................................... 679,693 686,611
Deferred taxes payable ................................................ 197,472 265,400
Due to limited partner ................................................ 1,248,980 1,878,100
Due to silent partner ................................................ 0 7,500
Due to general partner ................................................ 0 199,382
Current portion of long-term bank loans .............................. 7,829 0
--------- ---------
Total current liabilities .......................................... 7,124,890 5,862,213
--------- ---------
Noncurrent liabilities
Long-term bank loan
Ford bank AG ......................................................... 7,829 0
Less: current portion ................................................ 7,829 0
--------- ---------
0 0
Accrued pension liability ............................................. 96,216 0
Loan from silent partner ............................................. 0 500,000
--------- ---------
Total noncurrent liabilities ....................................... 96,216 500,000
--------- ---------
Total liabilities ................................................... 7,221,106 6,362,213
--------- ---------
Partners' capital
Partners' fixed capital
General partner ...................................................... 0 0
Limited partner ...................................................... 250,000 250,000
Limited partner's revaluation capital ................................. 1,316,065 1,316,065
--------- ---------
Total Partners' capital ............................................. 1,566,065 1,566,065
--------- ---------
Total Liabilities and partners' capital ........................... 8,787,171 7,928,278
========= =========
See accompanying notes to the financial statements
4
FSE COMPUTER-HANDEL GmbH & CO, KG, PIRMASENS
INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996
DM DM DM
------------ ------------ -----------
Net sales ............................................... 36,266,391 64,235,750 61,648,921
Cost of sales ........................................... 32,576,879 57,905,896 55,486,691
---------- ---------- ----------
Gross margin .......................................... 3,689,512 6,329,854 6,162,230
Selling expenses ....................................... 2,319,552 3,211,364 3,185,293
Administration expenses ................................. 805,771 991,513 1,699,712
Other operating expenses .............................. 0 65,588 24,628
---------- ---------- ----------
Operating income ....................................... 564,189 2,061,389 1,252,597
Other income .......................................... 81,481 12,133 131,516
Interest expense ....................................... 89,090 63,098 95,936
---------- ---------- ----------
Net income before income and income-related taxes ...... 556,580 2,010,424 1,288,177
Provision for income and income-related taxes ......... 297,667 692,840 292,274
---------- ---------- ----------
Net income .............................................. 258,913 1,317,584 995,903
========== ========== ==========
See accompanying notes to the financial statements
5
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
STATEMENT OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Limited Partner Limited Partner
Fixed Capital Revaluation Capital Limited Partner
DM DM DM
----------------- --------------------- ----------------
Balances January 1, 1994 .............................. 100,000 0 0
Net income .............................................. 258,913
Reclassification of amount due to limited partner ...... (258,913)
------- --------- ---------
Balances December 31, 1994 .............................. 100,000 0 0
Net income .............................................. 1,317,584
Contribution ............................................ 150,000
Withdrawals ............................................. (686,369)
Revaluation capital .................................... 1,316,065
Reclassification of amount due to limited partner ...... (631,215)
------- --------- ---------
Balances December 31, 1995 .............................. 250,000 1,316,065 0
Net income .............................................. 995,903
Withdrawals .............................................
Reclassification of amount due to limited partner ...... (995,903)
------- --------- ---------
Balances December 31, 1996 .............................. 250,000 1,316,065 0
======= ========= =========
See accompanying notes to the financial statements
6
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1994 1995 1996
DM DM DM
------------ --------------- ---------------
OPERATING ACTIVITIES
Net income .............................................. 258,913 1,317,584 995,903
Add: items not affecting cash
Depreciation of equipment .............................. 176,974 186,544 248,825
Amortization of goodwill .............................. 0 0 116,642
Loss (gain) on disposal of equipment .................. (14,419) 20,857 (14,916)
Gain on sale of marketable securities .................. 0 0 (8,034)
Pension expense ....................................... 0 96,216 44,758
Deferred tax expense (recovery), current ............... 158,000 (46,000) 142,628
Deferred tax expense, noncurrent ........................ 9,600 12,800 0
Increase (decrease) in cash from changes in non-cash assets
and liabilities:
Accounts receivable .................................... (463,099) (1,592,949) 1,057,810
Merchandise inventory ................................. (505,802) (797,951) (688,440)
Prepaid expenses ....................................... 3,012 (13,630) 16,416
Bank indebtedness ....................................... (3,395) 80 (224)
Accounts payable ....................................... 720,957 2,082,790 (2,141,114)
Loans payable .......................................... 0 (298,591) (22,565)
Payroll taxes and social security payable ............... 99,083 74,807 (76,166)
Value-added tax payable ................................. (30,280) (33,635) 176,309
Other current taxes payable ........................... 126,603 599,713 (101,936)
Accrued liabilities .................................... 142,610 341,001 6,918
Current portion of long-term bank loans ............... 456,623 (448,794) (7,829)
Due to silent partner ................................. 0 0 7,500
Due to general partner ................................. 0 0 67,108
Due to affiliate ....................................... (291,667) 0 0
-------- ---------- ----------
Cash inflow (outflow) from operating activities .......... 843,713 1,500,842 (180,407)
-------- ---------- ----------
FINANCING ACTIVITIES .......................................
Decrease in long-term bank loans .......................... (142,171) (7,829) 0
Loan from silent partner ................................ 0 0 500,000
Increase in limited partner's fixed capital .............. 100,000 0 0
Increase (decrease) in amount due to limited partner ..... (192,739) 520,263 (366,783)
Withdrawal ............................................... 0 (686,369) 0
-------- ---------- ----------
Cash inflow (outflow) from financing activities ............ (234,910) (173,935) 133,217
-------- ---------- ----------
INVESTING ACTIVITIES .......................................
Proceeds from sale of equipment .......................... 18,694 115,565 19,935
Proceeds from sale of marketable securities .............. 0 0 1,129,868
Purchase of equipment ................................... (26,991) (323,352) (201,115)
Purchase of marketable securities ....................... 0 0 (1,353,806)
-------- ---------- ----------
Cash outflow from investing activities ..................... (8,297) (207,787) (405,118)
-------- ---------- ----------
CASH INFLOW (OUTFLOW) DURING YEARS ........................ 600,506 1,119,120 (452,308)
CASH, BEGINNING OF YEARS ................................. 32,516 633,022 1,752,142
-------- ---------- ----------
CASH, END OF YEARS ....................................... 633,022 1,752,142 1,299,834
======== ========== ==========
Supplementary cash flow information:
Cash paid during the year for interest .................. 90,037 62,176 84,528
======== ========== ==========
Cash paid during the year for income and
income-related taxes .................................... 3,464 126,327 251,582
======== ========== ==========
See accompanying notes to the financial statements
7
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (Continued)
1994 1995 1996
DM DM DM
-------- ------------- -------------
Supplemental schedule of non-cash financing activities:
Transfer of assets from entities under common control not
affecting cash:
Leasehold improvements transferred in ........................ 176,824
Transfer in of deferred tax asset .............................. 59,700
-------
Change in amount due to affiliates ........................... 236,524
=======
Changes in assets and liabilities from the revaluation due to the
application of push-down accounting not affecting cash:
Loan granted by Mr. Strauss .................................... (526,156)
Current deferred income tax payable ........................... (166,706)
Noncurrent deferred income tax assets ........................ 228,397
Valuation allowance on noncurrent deferred income tax assets (266,597)
Current deferred income tax assets ........................... 185,234
Inventory ...................................................... 339,547
Leasehold improvements ....................................... 276,997
Automobiles ................................................... 30,074
Operating equipment .......................................... 45,685
Furniture and fixtures ....................................... 3,166
Goodwill ...................................................... 1,166,424
---------
Revaluation capital .......................................... 1,316,065
=========
Noncash change in pension liability due to:
Deferred tax receivable transferred ........................ 8,700
Amount of pension obligation transferred ..................... (140,974)
--------
Change in amount due to general partner ..................... (132,274)
========
See accompanying notes to the financial statements
8
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE FINANCIAL STATEMENTS
1) Business and Organization:
FSE Computer-Handel GmbH & Co. KG, Pirmasens ("the Company") is a German
GmbH & Co. KG (Gesellschaft mit beschrankter Haftung and Company
Kommanditgesellschaft), a German limited partnership with a German GmbH (a
German limited liability company) as general partner. FSE Computer-Handel
Verwaltungsgesellschaft mbH, Mainz is the Company's sole general partner. The
Company's registered offices, head office and seat of business operations are
located in Pirmasens, Rhineland-Palatinate, Germany, but a retail store is also
maintained in Kaiserslautern, Rhineland-Palatinate.
The Company sells computer hardware, peripherals and accessories to
businesses, institutions and government agencies principally in Germany through
its direct sales force and its retail stores. The Company also engages in
mail-order sales.
2) Reorganization:
The Company was originally founded in 1987 as a sole proprietorship named
"Frank-Strauss-Elektronik" by Mr. Frank Strauss. In 1991 the net assets and
business of the proprietorship were transferred by Mr. Strauss to the GmbH
"FSE Computer Handelsgesellschaft mbH" in exchange for 100 percent of the
GmbH-ownership interests. On December 21, 1995 Mr. Strauss sold 100 percent
of his GmbH interests to Dr. Alfred Simmet. Under an owner's resolution dated
July 26, 1996 notarized on August 1, 1996 Dr. Simmet resolved to convert the
Company from a GmbH into a GmbH & Co. KG, its present legal form, in
accordance with SectionSection 190 ff. i.V.m. SectionSection 226
Umwandlungsgesetz (Article 190 et seq. in connection with Articles 226 of the
German Conversion Law). The conversion became legally effective on September
17, 1996 upon the notarized resolution having been registered at the
Amtsgericht Pirmasens (Official Court Pirmasens). Through this conversion, Dr.
Simmet became the sole limited partner and FSE Computer-Handel
Verwaltungsgesellschaft mbH, Mainz, which is 100 percent owned by Dr. Simmet,
became the sole general partner.
The limited partnership is an unincorporated business and these financial
statements do not include all of the assets, liabilities, revenues and expenses
of the individual partners, and in particular, of the general partner.
3) Summary of Significant Accounting Policies:
a) Basis of Presentation and Preparation
These financial statements have been prepared in German marks ("DM") in
conformity with accounting principles generally accepted in the United States.
The effect of material differences between the financial statements prepared in
accordance with the German Commercial Code and those prepared in conformity
with accounting principles generally accepted in the United States on the
amounts due to partners are disclosed in note 4.
b) Accounting for Changes in Legal Form, Transfers and Exchanges between
Entities under Common Control, and Business Combinations
The transfer of the net assets of the proprietorship
"Frank-Strauss-Elektronik" to FSE Computer Handelsgesellschaft mbH by Mr.
Frank Strauss in exchange for 100% of its ownership interests has been
recorded at historical cost similar to that in pooling of interests
accounting. Similarly, leasehold improvements and bank loans payable
transferred by affiliates under common control in 1994 have been recorded at
historical cost.
Because Dr. Simmet acquired all of the ownership interests of FSE Computer
Handelsgesellschaft mbH on December 21, 1995, the financial statements as of
December 31, 1995 reflect the application of push-down accounting, in which a
new basis of accounting for the purchased assets and liabilities has been
established. The net purchase price of DM 3,092 thousand for the Company
exceeded the net book value of the assets as at December 21, 1995 by some DM
1,316 thousand.
9
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE FINANCIAL STATEMENTS
3) Summary of Significant Accounting Policies -- (Continued):
The adjustments to the book values of the identifiable assets and
liabilities of the Company to fair market value are summarized as follows:
DM '000
--------
Loan payable to Mr. Strauss out of capital otherwise transferred . (526)
Inventory ......................................................... 340
Leasehold improvements .......................................... 277
Operating and office equipment (including automobiles) ............ 76
Furniture and fixtures .......................................... 3
Current deferred tax liabilities, net ........................... 18
Noncurrent deferred tax assets, net .............................. 228
Valuation allowance for deferred tax assets ..................... (266)
Goodwill (see f) ................................................ 1,166
-----
1,316
=====
The new basis of accounting is reflected in partners' capital as
revaluation capital. Because the purchase occurred a few business days before
the end of the year and business in 1995 subsequent to purchase was negligible,
it is assumed that no income was earned subsequent to purchase to December 31,
1995.
The conversion of FSE Computer Handelsgesellschaft mbH into FSE
Computer-Handel GmbH & Co. KG effective on September 17, 1996 was accounted for
at historical cost in a manner similar to that in pooling of interest
accounting.
Under pooling of interests accounting, the comparative figures of prior
years presented are restated on a combined basis as if companies had been
combined since the beginning of the earliest date presented. Therefore, the
equity in the Company of prior years has been restated to present the Company
as if it had been a limited partnership since inception.
c) Marketable Securities
Marketable Securities are accounted for in accordance with SFAS No. 115,
in which "Available-for-sale Securities" are reported at fair value and
unrealized holding gains and losses, if material, are reported as a separate
component of partners' equity. The cost of marketable securities is calculated
on a moving weighted average basis.
d) Inventory
Inventory items are valued individually at the lower of cost or market,
with cost determined on a moving weighted average basis for like items.
e) Leasehold Improvements, Operating Equipment, Furniture and Fixtures
Leasehold improvements, operating equipment, furniture and fixtures are
stated at cost net of accumulated depreciation. Depreciation is provided on a
straight-line basis over the estimated useful lives of the individual assets as
follows:
Leasehold improvements ....................................... Over term of lease
Operating and office equipment (including automobiles) ...... 2 - 5 years
Furniture and fixtures ....................................... 3 years
f) Goodwill
Goodwill is stated at cost less accumulated amortization. The goodwill
relating to the purchase of the business by Dr. Simmet from Mr. Strauss is
being amortized over its estimated useful life of ten years. Recognized tax
benefits for tax deductions for which valuation allowances have been
recognized for deferred tax assets at acquisition are applied to reduce
goodwill related to that acquisition.
10
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE FINANCIAL STATEMENTS
3) Summary of Significant Accounting Policies -- (Continued):
g) Pension Obligations
Pension obligations are accounted for under the provisions of Statement of
Financial Accounting Standards No. 87 "Employers' Accounting for Pensions" in
which the minimum liability disclosed in the balance sheet is the sum of the
accumulated benefit obligation and accrued pension cost and pension cost is the
sum of service costs, interest on the projected benefit obligation, prior
service costs and gains or losses resulting from changes in the amount of the
projected benefit obligation. Since the pension plan is unfunded, no
determination of the value of plan assets is required.
h) Fair Value of Financial Instruments
The fair values of the Company's assets and liabilities which qualify as
financial instruments under Statement of Financial Accounting Standards No. 107
approximate the carrying amounts presented in the balance sheets.
i) Revenue Recognition
Revenue is recognized when the merchandise has been delivered to the
customer and the significant risks and rewards of ownership have been
transferred from the Company to the customer.
j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
k) Foreign Exchange
Foreign exchange gains and losses on transactions during the period are
reflected in income. Assets and liabilities denominated in foreign currencies
are translated at the rate of exchange prevailing at the balance sheet date.
l) Income Taxes
The Company complies with Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes", which requires an asset and liability
approach to financial reporting for income taxes. Deferred income tax assets
and liabilities are computed based on differences between the financial
reporting and tax bases of assets and liabilities that will result in taxable
or deductible amounts in future, based on enacted laws and rates applicable to
the period in which the differences are expected to reverse. Valuation
allowances are established, when necessary, to reduce the deferred income tax
assets to the amount expected to be realized.
4) Significant Differences Between U.S. GAAP and German Accounting Principles
Resulting in Limitations on Partner Withdrawals:
These financial statements prepared under U.S. GAAP deviate significantly
from the statements prepared under German accounting principles. Under German
law, the amounts that can be withdrawn from the partnership are defined by
German accounting law rather than by U.S. GAAP. As at December 31, 1996 the
financial statements in accordance with German accounting principles disclose
an amount due to limited partner equal to DM 968,644, which is the amount that
is owed the limited partner under German law, rather than the DM 1,878,100 as
disclosed under U.S. GAAP. In addition, German accounting principles do not
allow the application of push-down accounting and therefore no revaluation
capital is included in the limited partner's capital accounts in the financial
statements prepared under German accounting principles.
11
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE FINANCIAL STATEMENTS
5) Specific Provisions of the Partnership Agreement:
Under the limited partnership agreement, the limited partner, Dr. Simmet,
has fixed limited partner's capital of DM 250,000 and the general partner,
which has unlimited liability and is charged with managing the Company, has no
fixed capital in the limited partnership. The Company is to reimburse all
expenses incurred by the general partner in connection with its activities as
general partner. In addition, the general partner is to receive a risk premium
of DM 5,000 per year for providing its unlimited liability. The general partner
does not participate in the profits of the Company or in its losses insofar as
the losses do not cause its insolvency.
A current account is to be maintained for each partner, in which
transactions between each partner and the limited partnership are recorded.
Losses are to be recorded in special accumulated loss accounts. A separate
account is to be maintained for reserves held jointly and severally by the
partners. Partners' current account balances at the end of each month bear
interest at 2% annually above the current German Bundesbank discount rate. Ten
percent of the net income for the year after the deduction of the general
partner's risk premium and expense reimbursements are to be set aside as a
joint and severally held capital reserve of the partnership, as long as no
accumulated losses remain on the partners' special loss accounts. The remaining
net income is to be credited to the partners' current accounts.
In a general meeting of the partners on November 22, 1996, the partners
agreed to waive their right to interest on their current accounts and also
waived the creation of the capital reserve for the period ended December 31,
1996.
6) Silent Partner:
Under a silent partnership agreement dated January 1, 1996,
Mittelstandische Beteiligungsgesellschaft Rheinland-Pfalz mbH, Mainz ("MBG")
provided DM 500,000 in capital to the Company to assist in the financing of Dr.
Simmet's purchase of the Company. The silent partnership terminates on December
30, 2002. For the capital provided, MBG receives annual fixed compensation
equal to 7% of the capital provided payable quarterly. In addition, MBG
receives a share of annual net income for tax purposes, before special
write-downs and special items with an equity portion, of the Company not
exceeding 1.5% of its capital contribution and not exceeding 50% of the annual
net income of the Company. Unpaid amounts are accumulated and are payable in
subsequent years. MBG does not participate in the losses of the Company insofar
as it does not become insolvent: MGB's capital contribution is subordinated to
that of other creditors but ranks ahead of the liabilities due to general and
limited partners.
MBG has the right to represent its interests on any supervisory board of
the Company and its approval is required for any changes in the ownership
structure of the Company.
Because MBG does not participate in the losses of the Company and its
capital contribution receives a fixed compensation amount based on the size of
the contribution, which is analogous to interest, in economic substance the
capital contribution is a long-term loan rather than partnership capital.
Consequently, the MBG's interests in the Company are treated as a long-term
loan in these financial statements.
7) Marketable Securities:
Marketable securities consists of 30 Commerzbank US Dollar Money Market
Fund interest-bearing investment certificates which are being held as
"Available-for-sale Securities". The securities were purchased at a cost not
materially different from the market value presented in the balance sheet.
Other income for the year ended December 31, 1996 includes a gross gain (equal
to the net gain) of DM 8,034 from the sale of marketable securities purchased
at a cost of DM 1,121,834.
12
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE FINANCIAL STATEMENTS
8) Leasehold Improvements, Operating Equipment, Furniture and Fixtures:
Leasehold improvements, operating equipment (including automobiles),
furniture and fixtures are as follows at December 31, 1995 and 1996:
1995 1996
DM DM
----------- ----------
Leasehold improvements .............................. 439,842 451,200
Automobiles .......................................... 260,030 307,820
Operating and office equipment ..................... 495,663 597,542
Furniture and fixtures .............................. 46,267 46,265
------- -------
1,241,802 1,402,827
Less accumulated depreciation and amortization ...... 570,929 784,683
--------- ---------
670,873 618,144
========= =========
9) Goodwill:
Goodwill relates to the application of push-down accounting as noted in
Note 3b. The development of goodwill during the year 1996 is depicted as
follows:
DM '000
--------
Goodwill per acquisition ...................................................... 1,166
Amortization of goodwill ...................................................... (116)
-----
Reduction of goodwill due to recognition ....................................... 1,050
of tax benefit for which a valuation allowance had been accrued at acquisition (75)
-----
Goodwill as at December 31, 1996 ............................................. 975
=====
The accumulated amortized goodwill as of December 31, 1996 was DM 116
thousand.
10) Long-term Bank Loan:
The long-term bank loan related to a car finance loan which bore interest
at 4.4% and was discharged in 1996.
11) Loan Payable:
The loan as at December 31, 1996 is payable to the former owner of the
Company, Mr. Strauss, and is unsecured, bears interest at 7% per annum as of
October 1, 1995 and is due in January 1997. The loan was repaid in 1997.
12) Accrued Liabilities:
Accrued liabilities as at December 31, 1995 and 1996 include DM 385,000
and DM 370,000, respectively, estimated liability for warranties.
13) Accrued Pension Liability:
Under the terms of a pension agreement signed by the Company on December
22, 1995, Dr. Simmet is to receive a defined benefit pension with survivor's
benefits for his wife upon his reaching the age of 65. The pension includes
provisions for payment in case of disability or if he leaves the firm after
reaching the age of 60. The pension vests as of plan inception. The monthly
pension amount is calculated based upon 40% of the monthly gross salary
received before retirement, but includes increases based on Class A16 civil
servants' pension increases of the Federal Republic of Germany. His wife is to
receive 60% of the pension as survivor's benefits in the event of his decease.
The pension plan is entirely unfunded.
13
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE FINANCIAL STATEMENTS
13) Accrued Pension Liability -- (Continued):
The pension liability and cost was based upon the report of an actuary
with the following assumptions: a 6% interest rate, an average 3% increase in
gross salary per year, and an average 2% increase in pensions per year for
civil servants Class A16.
As at December 31, 1995 the accumulated benefit obligation of DM 96,216
presented in the balance sheet does not materially deviate from the projected
benefit obligation of DM 116,790. Included in the income statement as pension
expense for 1995 is the increase in the accumulated benefit obligation from
plan inception of DM 96,216. The pension cost relates to service costs only.
As part of the conversion of the Company from a GmbH to a limited
partnership on September 17, 1996, the general partner accepted the obligations
under the pension plan.
14) Income Taxes:
No provision for corporate income tax has been made in these financial
statements for the year 1996, since the Company, as a limited partnership, is
not subject to this tax as of January 1, 1996. The financial statements for the
year 1996 include only provisions for income-related business taxes levied at a
local level. Both resident and nonresident incorporated partners of the Company
would be subject to German corporate tax on income earned from the partnership;
both resident and nonresident natural persons would be subject to income tax on
income earned from the partnership.
The tax rates applied to the years ended December 31, 1994 and 1995 were
calculated from the combined effect of both the locally-levied business income
tax and the corporate income tax levied at the state level.
December 31, December 31,
1995 1996
DM DM
-------------- -------------
Components of net deferred tax liabilities or assets:
Total current deferred tax liabilities at applicable tax rate ........ 235,706 316,800
======= =======
Total current deferred tax assets at applicable tax rate .............. 38,234 51,400
======= =======
Total noncurrent deferred tax assets at applicable tax rate ........... 275,297 191,897
======= =======
Valuation allowance for noncurrent deferred tax assets .............. 266,597 191,897
======= =======
Approximate tax effect of temporary differences and carryforwards before
valuation allowances tax benefit (tax liability):
Allowance for doubtful accounts ...................................... 5,700
Accrued liability for warranties ...................................... (161,000) (177,000)
Differences in step up at purchase between GAAP and tax:
Inventory ........................................................... (36,472)
Leasehold improvements ............................................... 176,890 139,000
Automobiles ........................................................ 6,108
Operating and office equipment ...................................... 17,454
Lease contract ..................................................... 66,145 52,897
Pension obligation .................................................. 8,700
Inventory valuation .................................................. (139,800)
Loans payable valuation ............................................... 15,800
Value-added tax liability valuation ................................... 4,000
Other taxes payable valuation ......................................... 19,000
Due to general partner valuation ...................................... 6,900
-------- --------
Net temporary differences ............................................ 77,825 (73,503)
======== ========
14
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE FINANCIAL STATEMENTS
14) Income Taxes -- (Continued):
1994 1995 1996
DM DM DM
------------ -------------- --------------
Significant components of income tax expense attributable to
continuing operations:
Current tax expense ......................................... 130,067 726,040 149,646
Deferred tax expense (recovery) ............................. 138,600 (33,200) 67,928
Benefits of operating loss carryforwards (without expiry date) 29,000 0 0
Tax expense resulting from allocation of tax benefits to
reduce goodwill ........................................... 0 0 74,700
------- ------------ -------
297,667 692,840 292,274
======= ============ =======
Reconciliation of reported income tax expense to amount of
income tax expense resulting from applying statutory tax
rates:
Income tax expense resulting from applying statutory tax rates
Income before tax .......................................... 556,580 2,010,423 1,288,177
Combined statutory tax rate ................................. 51.3% 54% 19%
------- ------------ ---------
Notional income tax expense ................................. 285,526 1,085,628 244,754
======= ============ =========
Reconciliation to reported income tax expense
Reported income tax expense ................................. 297,667 692,840 292,274
Tax effect of permanent differences:
Deemed dividend for tax purposes ........................... (13,600)
Corporate tax component of temporary differences not
subject to valuation allowances that will not reverse
due to conversion of Company from corporation to
limited partnership ....................................... 348,000
Tax expense from reduction of goodwill for tax benefit
previously allowed for .................................... (74,700)
Component II goodwill amortization ........................ 22,200
Miscellaneous items ....................................... 1,459 44,788 4,980
------- ------------ ---------
285,526 1,085,628 244,754
======= ============ =========
15) Financial Commitments:
Future annual commitments under operating leases requiring annual rental
payments are estimated as follows:
DM
--------
1997 ........................ 99,414
1998 ........................ 93,099
1999 ........................ 0
2000 ........................ 0
2001 ........................ 0
Thereafter .................. 0
------
192,513
=======
During 1994, 1995 and 1996 expenses incurred under operating leases
amounted to DM 149,909, DM 99,483, and DM 99,414, respectively.
The Company has two long-term contracts for services which result in
financial commitments of approximately DM 210,000 for 1997 and DM 10,000 for
1998. The expense incurred for such services amounted to DM 0 in 1995 and 1994
and DM 191,000 for 1996.
15
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE FINANCIAL STATEMENTS
16) Related Party Transactions:
During 1996 the Company reimbursed DM 511,537 in expenses incurred by the
general partner on behalf of the Company. DM 506,537 of these expenses had been
charged by the Company to the general partner. Other transactions with the
limited partner and the silent partner are presented in the statement of
partners' current accounts. On October 1, 1995 the Company signed an agreement
with Dr. Simmet whereby he is to manage the Company as managing director. Under
the agreement, Dr. Simmet is to receive a gross salary totalling DM 25,000 per
month plus a bonus equal to 10% of income before taxes and bonuses under German
accounting principles. This agreement remained effective after the change in
ownership of the Company.
Dr. Simmet's wife is employed by the Company as an administrative
assistant at a gross salary of DM 5,548 per month.
17) Contingencies:
The Company has given guarantees on a DM 1,233,330 bank loan granted to
Dr. Simmet from the Kreissparkasse Kusel. In particular, the Company has given
a general guarantee and has pledged its merchandise inventory and trade
accounts receivable as well as its leasehold improvements, operating and office
equipment (including automobiles), furniture and fixtures.
In the ordinary course of business activities, the Company may become
contingently liable for litigation and claims with customers, suppliers and
former employees. Although it is not possible to estimate the extent of
potential costs and losses, if any, management believes that the ultimate
resolution of any such contingencies which may arise will not have a material
adverse effect on the financial position of the Company. Management believes
that the provisions made for contingent losses for estimated future warranty
claims (see note 12) are adequate.
18) Subsequent Events:
On November 13, 1997, 100% of the general partnership interest of the
Company and 80% of the limited partnership interests in the Company were sold
for an aggregate purchase price of DM 6,400,000, subject to certain
adjustments as defined. Pursuant to the agreement an amount up to an
additional 10% limited partnership interest may be sold to the purchaser for
DM 1 million, subject to certain conditions, and the remaining 10% may be sold
to certain managers of the Company for DM 800,000, subject to certain
conditions. The purchase price will be paid in cash of DM 3.2 million on
November 18, 1997, DM 1.6 million in cash payable on March 13, 1998 and DM 1.6
million of common stock on the date of issuance (146,949 shares) of IAT
Multimedia, Inc., the purchaser. In connection with the sale, the Company's
general guarantee and pledge of certain of its assets to Kreissparkasse Kusel
(see note 17) have been released. In addition, the Company entered into a two
year employment agreement with Dr. Simmet, the selling partner. The agreement
provides for a monthly salary of DM 25,000.
On November 15, 1997, the Company repaid all amounts due to the Company's
silent partner.
16
FSE COMPUTER-HANDEL GmbH & CO, KG, PIRMASENS
UNAUDITED BALANCE SHEETS AS OF SEPTEMBER 30, 1996 AND 1997
1996 1997
DM DM
----------- ----------
Assets
Current assets
Cash ................................................ 1,707,974 1,447,697
Marketable securities .............................. 1,121,834 893,427
Accounts receivable ................................. 2,406,131 2,658,304
Merchandise inventory .............................. 2,793,704 2,235,734
Prepaid expenses .................................... 12,792 21,315
--------- ---------
Total current assets .............................. 8,042,435 7,256,477
--------- ---------
Noncurrent Assets .......................................
Leasehold improvements, operating equipment, furniture
and fixtures ....................................... 641,771 736,510
Goodwill ............................................. 1,018,004 852,502
--------- ---------
Total noncurrent assets ........................... 1,659,775 1,589,012
--------- ---------
Total assets ....................................... 9,702,210 8,845,489
========= =========
Liabilities and Partners' Capital
Liabilities
Current liabilities
Bank indebtedness .................................... 3,021 0
Accounts payable .................................... 4,359,476 3,039,594
Loans payable ....................................... 239,512 0
Payroll taxes and social security payable ............ 0 99,571
Value-added tax payable .............................. 2,090 69,597
Other current taxes payable ........................ 849,698 19,274
Accrued liabilities ................................. 549,682 650,758
Deferred taxes payable .............................. 211,000 280,000
Due to limited partner .............................. 1,222,608 2,359,985
Due to silent partner .............................. 15,250 7,125
Due to general partner .............................. 183,808 253,520
--------- ---------
Total current liabilities ........................... 7,636,145 6,779,424
Noncurrent liabilities
Loan from silent partner .............................. 500,000 500,000
--------- ---------
Total liabilities .................................... 8,136,145 7,279,424
--------- ---------
Parnters' Capital
Partners' fixed capital
General partner ....................................... 0 0
Limited partner ....................................... 250,000 250,000
Limited partner's revaluation capital .................. 1,316,065 1,316,065
--------- ---------
Total partners' capital .............................. 1,566,065 1,566,065
--------- ---------
Total liabilities and partners' capital ............ 9,702,210 8,845,489
========= =========
See accompanying notes to the unaudited financial statements
17
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
UNAUDITED INCOME STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997
1996 1997
DM DM
------------ -----------
Net sales ........................................... 43,292,061 46,356,386
Cost of sales ...................................... 39,634,365 41,829,606
---------- ----------
Gross margin ....................................... 3,657,696 4,526,780
Selling expenses .................................... 2,121,243 2,311,881
Administration expenses ........................... 1,190,907 1,433,268
Other operating expenses ........................... 15,065 26,495
---------- ----------
Operating income .................................... 330,481 755,136
Other income ....................................... 166,605 327,187
---------- ----------
Income before interest and income taxes ............ 497,086 1,082,323
Interest expense .................................... 87,041 72,020
---------- ----------
Income before income and income-related taxes ...... 410,045 1,010,303
Provision for income and income-related taxes ...... 98,778 227,863
---------- ----------
Net income ......................................... 311,267 782,440
========== ==========
See accompanying notes to the unaudited financial statements
18
FSE COMPUTER-HANDEL GMBH & CO. KG, PIRMASENS
UNAUDITED STATEMENTS OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Limited Limited
Partner Partner Limited
Fixed Capital Revaluation Capital Partner
DM DM DM
--------------- --------------------- -------------
Balances January 1, 1996 .............................. 250,000 1,316,065 0
Net income ............................................. 311,267
Reclassification of amount due to limited partner ...... (311,267)
------- --------- --------
Balances September 30, 1996 ........................... 250,000 1,316,065 0
======= ========= ========
Balances January 1, 1997 .............................. 250,000 1,316,065 0
Net income ............................................. 782,440
Reclassification of amount due to limited partner ...... (782,440)
------- --------- --------
Balances September 30, 1997 ........................... 250,000 1,316,065 0
======= ========= ========
See accompanying notes to the unaudited financial statements
19
FSE COMPUTER-HANDEL GmbH & CO, KG, PIRMASENS
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
1996 1997
DM DM
--------------- ---------------
OPERATING ACTIVITIES:
Net income ........................................................... 311,267 782,440
Add: items not affecting cash
Depreciation of equipment ........................................... 182,943 235,646
Amortization of goodwill .......................................... 87,482 87,480
Gain on disposal of equipment ....................................... (14,925) (7,021)
Gain on sale of marketable securities .............................. 0 (39,125)
Pension expense ................................................... 44,758 0
Deferred tax expense ................................................ 74,466 49,700
Increase (decrease) in cash from changes in non-cash assets and
liabilities:
Accounts receivable ................................................ 524,177 (785,806)
Merchandise inventory ............................................. (551,396) 695,014
Prepaid expenses ................................................... 3,624 (21,315)
Bank indebtedness ................................................... (5,032) 0
Accounts payable ................................................... 680,110 1,501,342
Loans payable ...................................................... 11,947 (205,000)
Value-added tax payable ............................................. (4,121) (112,923)
Payroll taxes and social security payable ........................... (214,489) (38,752)
Other current payable ............................................. (13,363) (741,851)
Due to silent partner ............................................. 15,250 (375)
Due to general partner ............................................. 51,534 54,138
Accrued liabilities ................................................ (130,011) (35,853)
-------- ---------
Cash inflow from operating activities ................................. 1,054,221 1,417,739
--------- ---------
FINANCING ACTIVITIES:
Loan from silent partner ............................................. 500,000 0
Decrease in amount due to limited partner ........................... (337,639) (300,555)
--------- ---------
Cash inflow (outflow) from financing activities ..................... 162,361 (300,555)
--------- ---------
INVESTING ACTIVITIES:
Proceeds from sale of equipment ....................................... 19,935 18,051
Proceeds from sale of marketable securities ........................... 0 861,598
Purchase of marketable securities .................................... (1,121,834) (1,483,928)
Purchase of equipment ................................................ (158,851) (365,042)
---------- ----------
Cash outflow from investing activities .............................. (1,260,750) (969,321)
---------- ----------
CASH INFLOW (OUTFLOW) DURING PERIODS ................................. (44,168) 147,863
CASH, BEGINNING OF PERIODS ............................................. 1,752,142 1,299,834
---------- ----------
CASH, END OF PERIODS ................................................... 1,707,974 1,447,697
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the periods for interest ............................. 68,041 47,190
========== ==========
Cash paid during the periods for income and income-related taxes ..... 37,675 920,014
========== ==========
See accompanying notes to the unaudited financial statements
20
FSE COMPUTER-HANDEL GmbH & CO, KG, PIRMASENS
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (CONTINUED)
1996 1997
DM DM
------------- ------
Supplemental disclosure of non-cash financing activity:
Noncash change in pension liability due to:
Deferred tax receivable transferred .................. 8,700 --
Amount of pension obligation transferred ............ (140,974) --
-------- ------
Change in amount due to general partner ............ (132,274) --
======== ======
See accompanying notes to the unaudited financial statements
21
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
1) Business and Organization:
FSE Computer-Handel GmbH & Co. KG, Pirmasens ("the Company") is a German
GmbH & Co. KG (Gesellschaft mit beschrankter Haftung and Company
Kommanditgesellschaft), a German limited partnership with a German GmbH (a
German limited liability company) as general partner. FSE Computer-Handel
Verwaltungsgesellschaft mbH, Mainz is the Company's sole general partner. The
Company's registered offices, head office and seat of business operations are
located in Pirmasens, Rhineland-Palatinate, Germany, but a retail store is also
maintained in Kaiserslautern, Rhineland-Palatinate. The Company's fiscal year
is the calender year.
The Company sells computer hardware, peripherals and accessories to
businesses, institutions and government agencies principally in German through
its direct sales force and its retail stores. The Company also engages in
mail-order sales.
2) Reorganization:
The Company was originally founded in 1987 as a sole proprietorship named
"Frank-Strauss-Elektronik" by Mr. Frank Strauss. In 1991 the net assets and
business of the proprietorship were transferred by Mr. Strauss to the GmbH
"FSE Computer Handelsgesellschaft mbH" in exchange for 100 percent of the
GmbH-ownership interests. On December 21, 1995 Mr. Strauss sold 100 percent of
his GmbH interests to Dr. Alfred Simmet. Under an owner's resolution dated
July 26, 1996 notarized on August 1, 1996 Dr. Simmet resolved to convert the
Company from a GmbH into a GmbH & Co. KG, its present legal form, in
accordance with Sections 190 ff. i.V.m. Sections 226 Umwandlungsgesetz
(Article 190 et seq. in connection with Articles 226 of the German Conversion
Law). The conversion became legally effective on September 17, 1996 upon the
notarized resolution having been registered at the Amtsgericht Pirmasens
(Official Court Pirmasens). Through this conversion, Dr. Simmet became the
sole limited partner and FSE Computer-Handel Verwaltungsgesellschaft mbH,
Mainz, the sole general partner, which is 100% owned by Dr. Simmet.
The limited partnership is an unincorporated business and these financial
statements do not include all of the assets, liabilities, revenues and expenses
of the partners, and in particular, of the general partner.
3) Significant Accounting Policies:
a) Basis of Presentation and Preparation
These financial statements have been prepared in German marks ("DM") in
conformity with accounting principles generally accepted in the United
States. The effect of material differences between the financial statements
prepared in accordance with the German Commercial Code and those prepared
in conformity with accounting principles generally accepted in the United
States on the amounts due to partners is disclosed in note 4.
b) Accounting for Changes in Legal Form, Transfers and Exchanges between
Entities under Common Control, and Business Combinations
The transfer of the net assets of the proprietorship
"Frank-Strauss-Elektronik" to FSE Computer Handelsgesellschaft mbH by
Mr. Frank Strauss in exchange for 100 % of its ownership interests has
been recorded at historical cost similar to that in pooling of interests
accounting. Similarly, leasehold improvements and bank loans payable
transferred by affiliates under common control in 1994 have been recorded
at historical cost.
Because Dr. Simmet acquired all of the ownership interests of FSE
Computer Handelsgesellschaft mbH on December 21, 1995, the financial
statements since December 21, 1995 reflect the application of push-down
accounting, in which a new basis of accounting for the purchased assets
and liabilities has been established. The net purchase price of DM 3,092
thousand for the Company exceeded the net book value of the assets as at
December 21, 1995 by some DM 1,316 thousand.
22
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
The adjustments to the book values of the identifiable assets and liabilities
of the Company to fair market value are summarized as follows:
DM '000
--------
Loan payable to Mr. Strauss out of Capital otherwise transferred .. (526)
Inventory ......................................................... 340
Leasehold improvements ............................................. 277
Operating and office equipment (including autos) .................. 76
Furniture and fixtures ............................................. 3
Current deferred tax liabilities, net .............................. 18
Noncurrent deferred tax assets, net .............................. 228
Valuation allowance for deferred tax assets ........................ (266)
Goodwill (see f) ................................................... 1,166
-----
1,316
=====
The new basis of accounting is reflected in partners' capital as
revaluation capital. Because the purchase occurred a few business days before
the end of the 1995 business year and business in 1995 subsequent to purchase
was negligible, it was assumed that no income was earned subsequent to purchase
to December 31, 1995. The conversion of FSE Computer Handelsgesellschaft mbH
into FSE Computer-Handel GmbH & Co. KG effective on September 17, 1996 was
accounted for at historical cost in a manner similar to that in pooling of
interest accounting.
Under pooling of interests accounting, the comparative figures of prior
years presented are restated on a combined basis as if companies had been
combined since the beginning of the earliest date presented. Therefore, the
equity in the Company of prior years has been restated to present the Company
as if it had been a limited partnership since inception.
c) Marketable Securities
Marketable Securities are accounted for in accordance with SFAS No. 115,
in which "Available-for-sale Securities" are reported at fair value and
unrealized holding gains and losses, if material, are reported as a
separate component of partners' equity. The cost of marketable securities
is calculated on a moving weighted average basis.
d) Inventory
Inventory items are valued individually at the lower of cost or market,
with cost determined on a moving weighted average basis for like items.
e) Leasehold Improvements, Operating Equipment, Furniture and Fixtures
Leasehold improvements, operating equipment, furniture and fixtures are
stated at cost net of accumulated depreciation. Depreciation is provided on
a straight-line basis over the estimated useful lives of the individual
assets as follows:
Leasehold improvements ....................................... Over term of lease
Operating and office equipment (including automobiles) ...... 2 - 5 years
Furniture and fixtures ....................................... 3 years
f) Goodwill
Goodwill is stated at cost less accumulated amortization. The goodwill
relating to the purchase of the business by Dr. Simmet from Mr. Strauss is
being amortized over its estimated useful life of ten years. Recognized tax
benefits for tax deductions for which valuation allowances have been
recognized for deferred tax assets at acquisition are applied to reduce
goodwill related to that acquisition.
23
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
g) Fair Value of Financial Instruments
The fair value of the Company's assets and liabilities which qualify as
financial instruments under Statement of Financial Accounting Standards
No. 107 approximate the carrying amounts presented in the balance sheets.
h) Revenue Recognition
Revenue is recognized when the merchandise has been delivered to the
customer and the significant risks and rewards of ownership have been
transferred from the Company to the customer.
i) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
j) Foreign Exchange
Foreign exchange gains and losses on transactions during the period are
reflected in income. Assets and liabilities denominated in foreign
currencies are translated at the rate of exchange prevailing at the balance
sheet date.
k) Income Taxes
The Company complies with Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes", which requires an asset and
liability approach to financial reporting for income taxes. Deferred
income tax assets and liabilities are computed based on differences
between the financial reporting and tax bases of assets and liabilities
that will result in taxable or deductible amounts in future, based on
enacted laws and rates applicable to the period in which the differences
are expected to reverse. Valuation allowances are established, when
necessary, to reduce the deferred income tax assets to the amount expected
to be realized.
4) Significant Differences Between U.S. GAAP and German Accounting Principles
Resulting in
Limitations on Partner Withdrawals:
These financial statements prepared under U.S. GAAP deviate significantly
from the statements prepared under German accounting principles. Under German
law, the amounts that can be withdrawn from the partnership are defined by
German accounting law rather than by U.S. GAAP. As at September 30, 1997 the
financial statements in accordance with German accounting principles disclose
an amount due to limited partner equal to DM 1,631,109, which is the amount
that is owed the limited partner under German law, rather than the DM 2,359,985
as disclosed under U.S. GAAP. In addition, German accounting principles do not
allow the application of push-down accounting and therefore no revaluation
capital is included in the limited partner's capital accounts in the financial
statements prepared under German accounting principles.
5) Specific Provisions of the Partnership Agreement:
Under the limited partnership agreement, the limited partner, Dr. Simmet,
has fixed limited partner's capital of DM 250,000 and the general partner,
which has unlimited liability and is charged with managing the Company, has no
fixed capital in the limited partnership. The Company is to reimburse all
expenses incurred by the general partner in connection with its activities as
general partner. In addition, the general partner is to receive a risk premium
of DM 5,000 per year for providing its unlimited liability. The general partner
does not participate in the profits of the Company or in its losses insofar as
the losses do not cause its insolvency.
A current account is to be maintained for each partner, in which
transactions between each partner and the limited partnership are recorded.
Losses are to be recorded on special accumulated loss accounts. A separate
24
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
account is to be maintained for reserves held jointly and severally by the
partners. Partners' current account balances at the end of each month bear
interest at 2% annually above the current German Bundesbank discount rate. Ten
percent of the net income for the year after the deduction of the general
partner's risk premium and expense reimbursements are to be set aside as a
joint and severally held capital reserve of the partnership, as long as no
accumulated losses remain on the partners' special loss accounts. The remaining
net income is to be credited to the partners' current accounts.
In a general meeting of the partners on November 22, 1996, the partners
agreed to waive their right to interest on their current accounts and also
waived the creation of the capital reserve for the period ended December 31,
1996; in another general meeting of the partners on September 29, 1997, the
partners waived the creation of the capital reserve for the period ended
September 30, 1997.
6) Silent Partner:
Under a silent partnership agreement dated January 1, 1996,
Mittelstandische Beteiligungsgesellschaft Rheinland-Pfalz mbH, Mainz ("MBG")
provided DM 500,000 in capital to the Company to assist in the financing of Dr.
Simmet's purchase of the Company. The silent partnership terminates on December
30, 2002. For the capital provided, MBG receives annual fixed compensation
equal to 7% of the capital provided payable quarterly. In addition, MBG
receives a share of annual net income for tax purposes, before special
write-downs and special items with an equity portion, of the Company not
exceeding 1.5% of its capital contribution and not exceeding 50% of the annual
net income of the Company. Unpaid amounts are accumulated and are payable in
subsequent years. MBG does not participate in the losses of the Company insofar
as it does not become insolvent: MBG's capital contribution is subordinated to
that of other creditors but ranks ahead of the liabilities due to general and
limited partners.
MBG has the right to represent its interests on any supervisory board of
the Company and its approval is required for any changes in the ownership
structure of the Company.
Because MBG does not participate in the losses of the Company and its
capital contribution receives a fixed compensation amount based on the size of
the contribution, which is analogous to interest, in economic substance the
capital contribution is a long-term loan rather than partnership capital.
Consequently, the MBG's interests in the Company are treated as a long-term
loan in these financial statements.
7) Marketable Securities:
Marketable securities consists of Commerzbank Money Market Fund US Dollar
investment certificates which are being held as "Available-for-sale
Securities". The market value of the securities presented in the balance sheets
is not materially different from cost.
8) Leasehold Improvements, Operating Equipment, Furniture and Fixtures:
Leasehold improvements, operating equipment (including automobiles),
furniture and fixtures comprise:
1996 1997
DM DM
----------- ----------
Leasehold improvements .............................. 444,564 451,200
Automobiles .......................................... 282,716 315,366
Operating and office equipment ..................... 587,025 918,198
Furniture and fixtures .............................. 46,267 46,265
------- -------
1,360,572 1,731,029
Less accumulated depreciation and amortization ...... 718,801 994,519
--------- ---------
641,771 736,510
========= =========
25
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
9) Goodwill:
Goodwill relates to the application of push-down accounting as noted in
Note 3b. The development of goodwill during the periods is depicted as follows:
1996 1997
DM '000 DM '000
--------- --------
Goodwill at January 1 ............................................. 1,166 975
Amortization of goodwill .......................................... (87) (87)
----- ---
1,079 888
Reduction of goodwill due to recognition of tax benefit for which a
valuation allowance had been accrued at acquisition ............ (61) (35)
----- ---
Goodwill as at September 30 ....................................... 1,018 853
===== ===
The accumulated amortization of goodwill amounted to DM 87 thousand and DM 174
thousand as at September 30, 1996 and 1997, respectively.
10) Loan Payable:
The loan as at September 30, 1996 is payable to the former owner of the
Company, Mr. Strauss and is unsecured, bears interest at 7% per annum as of
October 1, 1995 and is due in January 1997. The loan was repaid in 1997.
11) Accrued Liabilities:
Accrued liabilities include a DM 356,250 and DM 413,430 estimated
liability for warranties as at September 30, 1996 and 1997, respectively.
12) Income Taxes:
No provision for corporate income tax has been made in these financial
statements, since the Company, as a limited partnership, has not been subject
to this tax as of January 1, 1996. The financial statements include only
provisions for income-related business taxes levied at a local level. Both
resident and nonresident incorporated partners of the Company would be subject
to German corporate tax on income earned from the partnership; both resident
and nonresident natural persons would be subject to income tax on income earned
from the partnership.
The provision for income taxes includes DM 24,312 and DM 178,163 current
tax expense as well as DM 74,466 and DM 49,700 deferred tax expense for the nine
months ended September 30, 1996 and 1997, respectively.
13) Financial Commitments:
Future annual commitments under operating leases requiring annual rental
payments are estimated as follows:
DM
--------
1997 ........................ 99,414
1998 ........................ 93,099
1999 ........................ 0
2000 ........................ 0
2001 ........................ 0
------
Thereafter .................. 192,513
=======
During the periods expenses incurred under operating leases amounted to DM
72,656 and DM 97,048 for the nine months ended September 30, 1996 and 1997,
respectively.
26
FSE COMPUTER-HANDEL GmbH & CO. KG, PIRMASENS
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
The Company has two long-term contracts for services which result in
financial commitments of approximately DM 210,000 for 1997 and DM 10,000 for
1998. The expense incurred for such services during the periods amounted to DM
107,623 and DM 184,630 for the nine months ended September 30, 1996 and 1997,
respectively.
14) Related Party Transactions:
On October 1, 1995 the Company signed an agreement with Dr. Simmet whereby
he is to manage the Company as managing director. Under the agreement, Dr.
Simmet is to receive a gross salary totalling DM 25,000 per month plus a bonus
equal to 10% of the income before taxes and bonuses under German accounting
principles. This agreement remained effective after the change in ownership of
the Company. Dr. Simmet's wife is employed by the Company as an administrative
assistant at a gross salary of DM 5,548 per month.
15) Contingencies:
The Company has given guarantees on a DM 1,233,330 bank loan granted to
Dr. Simmet from the Kreissparkasse Kusel. In particular, the Company has given
a general guarantee and has pledged its merchandise inventory and trade
accounts receivable as well as its leasehold improvements, operating and office
equipment (including automobiles), furniture and fixtures.
In the ordinary course of business activities, the Company may become
contingently liable for litigation and claims with customers, suppliers and
former employees. Although it is not possible to estimate the extent of
potential costs and losses, if any, management believes that the ultimate
resolution of any such contingencies which may arise will not have a material
adverse effect on the financial position of the Company. Management believes
that the provisions made for contingent losses for estimated future warranty
claims (see note 11) are adequate.
16) Subsequent Events:
On November 13, 1997, 100% of the general partnership interest of the
Company and 80% of the limited partnership interests of the Company were sold
for an aggregate purchase price of DM 6,400,000, subject to certain
adjustments as defined. Pursuant to the agreement an amount up to an
additional 10% limited partnership interest may be sold to the purchaser for
DM 1 million, subject to certain conditions, and the remaining 10% may be sold
to certain managers of the Company for DM 800,000, subject to certain
conditions. The purchase price will be paid in cash of DM 3.2 million on
November 18, 1997, DM 1.6 million in cash payable on March 13, 1998 and DM 1.6
million of common stock on the date of issuance (146,949 shares) of IAT
Multimedia, Inc., the purchaser. In connection with the sale, the Company's
general guarantee and pledge of certain of its assets to Kreissparkasse Kusel
(see note 15) have been released. In addition, the Company entered into a two
year employment agreement with Dr. Simmet, the selling partner. The agreement
provides for a monthly salary of DM 25,000.
On November 15, 1997, the Company repaid all amounts due to the Company's
silent partner.
27
ANNEX B
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Pro Forma Condensed Consolidated Balance Sheet information
has been prepared based upon the unaudited historical condensed consolidated
balance sheet of IAT as of September 30, 1997 and the unaudited historical
condensed balance sheet of FSE as of September 30, 1997, and sets forth the
pro forma balance sheet giving effect to the consummation of the acquisition
of FSE and the related issuance of 146,949 shares of Common Stock in November
1997 as if such transaction had occurred on September 30, 1997. The following
Unaudited Pro Forma Condensed Consolidated Statements of Operations
information for the nine months ended September 30, 1997 and for the year
ended December 31, 1996 has been prepared based upon the unaudited historical
consolidated statement of operations for the nine months ended September 30,
1997 and the audited historical consolidated statement of operations for the
year ended December 31, 1996 of IAT and the unaudited historical statement of
operations for the nine months ended September 30, 1997 and the audited
historical statement of operations for the year ended December 31, 1996 of FSE
and sets forth the pro forma statements of operations information giving
effect to the acquisition of FSE and the related issuance of 146,949 shares of
Common Stock as if such transaction had occurred on January 1 of each period.
The following Unaudited Pro Forma Condensed Consolidated Balance Sheet
information and Unaudited Pro Forma Condensed Consolidated Statements of
Operations Information are not necessarily indicative of the actual financial
position or results of operations that would have been reported if the events
described above had occurred as of September 30, 1997 or on January 1 of each
period, nor do they purport to indicate the results of the Company's future
operations. Furthermore, the pro forma results do not give effect to all cost
savings, or incremental costs that may occur as a result of the integration and
consolidation of FSE. In the opinion of management, all adjustments necessary
to present fairly such pro forma financial information have been made. The
allocation of the FSE purchase price is preliminary, but is not expected to
differ materially from the purchase price allocation reflected herein.
28
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
IAT FSE
------------- ------------
Assets
Cash and cash equivalents ........................ $ 7,938,344 $ 821,715
Marketable securities ........................... 3,177,570 507,110
Accounts receivable, net ........................ 127,305 1,508,857
Inventories .................................... 348,566 1,269,006
Other current assets ........................... 319,875 12,098
----------- ----------
Total current assets ........................ 11,911,660 4,118,786
Equipment and improvements, net .................. 655,644 418,044
Goodwill, net .................................... -- 483,881
Other assets .................................... 438,030 --
----------- ----------
Total assets ................................. $13,005,334 $5,020,711
=========== ==========
Liabilities and Stockholders' Equity
Notes payable, banks ........................... $ 1,460,726 $ --
Accounts payable and other current liabilities . 751,347 2,360,540
Loans payable, stockholders, current portion . 448,276 1,487,473
----------- ----------
Total current liabilities ..................... 2,660,349 3,848,013
=========== ==========
Loans payable stockholders, net of current
portion .......................................... 425,690 283,801
Notes payable .................................... -- --
Minority interest ..............................
Stockholders' equity ........................... 9,919,295 888,897
----------- ----------
Total liabilities and stockholders' equity . $13,005,334 $5,020,711
=========== ==========
29
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
PRO FORMA
ADJUSTMENTS PRO FORMA
--------------- -----------
Assets
Cash and cash equivalents ........................ $(3,016,623)A $ 5,743,436
Marketable securities ........................... -- 3,684,680
Accounts receivable, net ........................ -- 1,636,162
Inventories .................................... -- 1,617,572
Other current assets ........................... -- 331,973
--------- ---------
Total current assets ........................ (3,016,623) 13,013,823
Equipment and improvements, net .................. -- 1,073,688
Goodwill, net .................................... 2,879,046B 3,362,927
Other assets .................................... -- 438,030
--------- ---------
Total assets ................................. $ (137,577) $17,888,468
========= ==========
Liabilities and Stockholders' Equity
Notes payable, banks ........................... $ -- $ 1,460,726
Accounts payable and other current liabilities . -- 3,111,887
Loans payable, stockholders, current portion . (415,000)C 1,520,749
--------- ---------
Total current liabilities ..................... (415,000) 6,093,362
========= =========
Loans payable stockholders, net of current
portion .......................................... -- 709,491
Notes payable .................................... -- --
Minority interest .............................. 260,779D 260,779
Stockholders' equity ........................... 16,644E 10,824,836
--------- ----------
Total liabilities and stockholders' equity . $ (137,577) $17,888,468
========= ==========
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
30
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
IAT FSE
----------------- ---------------
Net sales ................................. $ 1,193,302 $40,916,520
Cost of sales ........................... 811,771 36,826,635
------------- -----------
Gross margin .............................. 381,531 4,089,885
------------- -----------
Operating expenses:
Research & development costs, net ...... 2,330,638 --
Selling expenses ..................... 1,462,191 2,114,086
General & administrative expenses ...... 1,494,858 1,144,448
------------- -----------
5,287,687 3,258,534
------------- -----------
Operating income (loss) .................. (4,906,156) 831,351
Other income (expense):
Interest expense ..................... (213,136) (63,673)
Other income ........................... 10,814 87,287
Minority interest ..................... -- --
------------- -----------
Income (loss) before income taxes ......... (5,108,478) 854,965
Provision for income taxes ............... -- 193,983
------------- -----------
Net income (loss) ........................ $ (5,108,478) $ 660,982
============= ===========
Net loss per share of common stock ...... $ (0.89) --
=============
Weighted average number of common
shares outstanding ..................... 5,751,715 --
=============
31
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
PRO FORMA
ADJUSTMENTS PRO FORMA
---------------- -----------------
Net sales ................................. $ -- $ 42,109,822
Cost of sales ........................... -- 37,638,406
---------- -------------
Gross margin .............................. -- 4,471,416
---------- -------------
Operating expenses:
Research & development costs, net . -- 2,330,638
Selling expenses ..................... -- 3,576,277
General & administrative expenses . 259,304 F 2,898,610
---------- -------------
259,304 8,805,525
---------- -------------
Operating income (loss) .................. (259,304) (4,334,109)
Other income (expense):
Interest expense ..................... (301,662)G (578,471)
Other income ........................... -- 98,101
Minority interest ..................... (132,196)H (132,196)
---------- -------------
Income (loss) before income taxes ......... (693,162) (4,946,675)
Provision for income taxes ............... 108,825 I 302,808
---------- -------------
Net income (loss) ........................ $ 801,987 $ (5,249,483)
========== =============
Net loss per share of common stock ...... -- $ (0.89)
=============
Weighted average number of common
shares outstanding ..................... -- 5,898,664
=============
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
32
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
IAT FSE
----------------- ---------------
Net sales ................................. $ 537,561 $26,982,763
Cost of sales .............................. 328,613 24,347,850
------------- -----------
Gross margin .............................. 208,948 2,634,913
------------- -----------
Operating expenses:
Research & development costs, net ...... 1,873,534 --
Selling expenses ........................ 1,474,334 1,345,682
General & administrative expenses ...... 1,374,210 849,687
------------- -----------
4,722,078 2,195,369
------------- -----------
Operating income (loss) .................. (4,513,130) 439,544
Other income (expense):
Interest expense ........................ (169,454) (41,921)
Interest income ........................ 362,322 --
Other income ........................... 17,428 190,446
Minority interest ..................... -- --
------------- -----------
Income (loss) before income taxes ......... (4,302,834) 588,069
Provision for income taxes ............... -- 132,633
------------- -----------
Net income (loss) ........................ $ (4,302,834) $ 455,436
============= ===========
Net loss per share of common stock ......... $ (0.54) --
=============
Weighted average number of common shares
outstanding .............................. 7,970,762 --
=============
PRO FORMA
ADJUSTMENTS PRO FORMA
--------------- -----------------
Net sales ................................. $ -- $ 27,520,324
Cost of sales .............................. -- 24,676,463
---------- -------------
Gross margin .............................. -- 2,843,861
---------- -------------
Operating expenses:
Research & development costs, net ...... -- 1,873,534
Selling expenses ........................ -- 2,820,016
General & administrative expenses ...... 201,580 F 2,425,477
---------- -------------
201,580 7,119,027
---------- -------------
Operating income (loss) .................. (201,580) (4,275,166)
Other income (expense):
Interest expense ........................ -- (211,375)
Interest income ........................ (124,436)G 237,886
Other income ........................... -- 207,874
Minority interest ..................... (91,087)H (91,087)
---------- -------------
Income (loss) before income taxes ......... (417,103) (4,131,868)
Provision for income taxes ............... 69,554 I 202,187
---------- -------------
Net income (loss) ........................ $ (486,657) $ (4,334,055)
========== =============
Net loss per share of common stock ......... -- $ (0.53)
=============
Weighted average number of common shares
outstanding .............................. -- 8,117,711
=============
See accompanying notes to unaudited pro forma
condensed consolidated financial statements.
33
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements give
effect to the acquisition of FSE as if it had occurred on September 30, 1997
for the purposes of the unaudited pro forma condensed consolidated balance
sheet and on January 1 of each period presented for purposes of the unaudited
pro forma condensed consolidated statements of operations. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the
aggregate consideration to be paid in connection with the proposed acquisition
of FSE, will be allocated to FSE's assets purchased and liabilities assumed
based on their fair market values, and any excess will be treated as goodwill.
The purchase price was paid with the issuance of 146,949 shares of
Multimedia's Common Stock and approximately $3,016,000 in cash including
closing costs.
Balance Sheet
(A) Adjustment reflects the cash paid to the prior shareholders of FSE and
anticipated closing costs paid in connection with the transaction.
(B) Goodwill recorded on the acquisition was calculated as follows:
Fair market value of assets received ......... $ 5,020,711
Fair market value of liabilities assumed ...... 3,716,814
-----------
Net assets ................................. 1,303,897
Percentage of the company acquired ............ 80%
-----------
Fair value of net assets acquired ............ 1,043,118
Purchase price ................................. 3,922,164
-----------
Incremental goodwill ........................... 2,879,046
Existing goodwill .............................. 483,881
-----------
Total goodwill on acquisition .................. $ 3,362,927
===========
(C) Represents the amount the limited partner of FSE will be contributing to
capital of FSE, at closing, pursuant to the purchase agreement between FSE
and IAT.
(D) IAT acquired 80% of the outstanding limited partnership interests of FSE;
therefore, minority interest is recorded on the remaining 20% calculated
as follows:
Net assets of FSE acquired ......... $ 1,303,897
Minority interest percentage ...... 20%
-----------
Minority interest .................. $ 260,779
===========
(E) Represents the elimination of stockholders' equity of FSE and the issuance
of 146,949 shares of Common Stock of Multimedia to the FSE shareholder
valued at approximately $905,000 which represented the fair market value
on the date of closing.
Statements of Operations
(F) Adjustment reflects the amortization of the goodwill recorded on the FSE
acquisition over a 10 year life. In addition, FSE has recorded historical
amortization of goodwill from prior acquisitions which is eliminated as
follows:
34
Year ended Nine months ended
December 31, 1996 September 30, 1997
------------------- -------------------
Amortization of goodwill -- IAT ........................... $ 336,293 $ 252,220
Historical amortization of goodwill recorded by FSE ...... (76,989) (50,640)
--------- ---------
$ 259,304 $ 201,580
========= =========
(G) Adjustment reflects additional interest expense at 10% per annum on
additional borrowings which would have been necessary during 1996 in order
to fund the cash portion of the FSE acquisition or a reduction of interest
income during 1997 for the cash used in the FSE acquisition, at a rate of
5.5% which represents the average current earnings on the Company's cash
equivalents and investments in marketable securities.
(H) Adjustment reflects the minority stockholders' equity interest (20%) in
earnings of FSE.
(I) Adjustment reflects the difference between the German corporate tax on FSE
income, which will be payable by IAT, and the German partnership tax
payable by FSE.
35
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
IAT MULTIMEDIA, INC.
By:/s/ Klaus Grissemann
-------------------------------------------
Name: Klaus Grissemann
Title: Chief Financial Officer and Director
Date: December 17, 1997
36