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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 NO. 000-22101
SPIGADORO, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS
CHARTER)
DELAWARE 13-3920210
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
SPIGADORO, INC.
70 EAST 55TH STREET, 24TH FLOOR
NEW YORK, NEW YORK 10022
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 754-4271
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant as of the close of business on March
27, 2000 was approximately $22,919,179.
As of March 27, 2000, 60,892,099 shares of the registrant's common
stock, $0.01 par value (excluding treasury shares), were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
See Part III hereof with respect to incorporation by reference from the
registrant's definitive proxy statement for the fiscal year ended December 31,
1999 to be filed pursuant to Regulation 14A under the Securities Exchange Act of
1934 and the Exhibit Index hereto.
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PART I
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning
of the "safe harbor" provisions under Section 21E of the Securities Exchange Act
of 1934 and the Private Securities Litigation Reform Act of 1995. We use
forward-looking statements in our description of our plans and objectives for
future operations and assumptions underlying these plans and objectives.
Forward-looking terminology includes the words "may," "expects," "believes,"
"anticipates," "intends," "projects," or similar terms, variations of such terms
or the negative of such terms. These forward-looking statements are based on
management's current expectations and are subject to factors and uncertainties
which could cause actual results to differ materially from those described in
such forward-looking statements. We expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained in this Form 10-K to reflect any change in our expectations
or any changes in events, conditions or circumstances on which any
forward-looking statement is based. Factors which could cause such results to
differ materially from those described in the forward-looking statements include
those set forth under "Risk Factors" and elsewhere in, or incorporated by
reference into this Form 10-K. These factors include the following: we have
changed our principal business and we may not be successful operating a new
business; if we do not successfully sell our existing computer business, the
combined company may be adversely affected; Vertical Financial Holdings and
affiliated entities control Spigadoro; our substantial debt may adversely affect
our ability to obtain additional funds and increase our vulnerability to
economic or business downturns; our operating results will be adversely affected
by charges from acquisitions; our strategy of acquiring other companies for
growth may not succeed and may adversely affect our financial condition, results
of operations and cash flows; intense competition in the pasta and animal feed
industries may adversely affect operating results; our business may be adversely
affected by risks associated with foreign operations; and other risks.
ITEM 1. BUSINESS
(a) General Development of Business
We produce and sell animal feed and pasta and flour products. Our
animal feed business produces animal feed for industrial breeders, family-owned
breeding farms and domestic pets. We offer over 600 animal feed products under
the brand name "Petrini." Our pasta and flour business produces traditional,
specialty and health and diet pastas, as well as flours for use by the bakery
industry. Our pasta product line consists of over 150 products which are
primarily marketed under the brand name "Spigadoro."
Since January 1, 1999, we:
o acquired Petrini, S.p.A., an Italian company that produces and
sells animal feed and pasta and flour products;
o sold our enhanced visual communications technology and equity
interests in the entities formed in connection with our
reorganization in March 1998 in exchange for 750,000 shares of
Algo Vision plc, an English company whose shares trade on the
European Association of Securities Dealer Automated Quotation
System;
o sold the 750,000 shares of Algo Vision plc in a series of
transactions for approximately $16.8 million in cash in
February 2000; and
o sold our equity interests in FSE Computer Handel GmbH & Co. KG
and FSE Computer Handel-Verwaltung GmbH, a German company that
markets high-performance personal computers in Germany in
January 2000.
As a result of these transactions, we changed the focus of our business
from the sale of computers and computer components and peripherals to the
production and sale of animal feed and pasta and flour products. We continue to
distribute personal computer components, peripherals and software, as well as
personal computers, in Germany through Columbus Computer Handel and its
affiliates. We intend to sell Columbus and have commenced discussions relating
to the sale of Columbus, but no agreement has been reached with any party
regarding the terms of a potential transaction and we cannot predict whether we
will be able to sell this business on terms favorable to us or at all. See
"--Recent Transactions" and "Note 3 of the Notes to the Consolidated Financial
Statements of Spigadoro."
We were incorporated in Delaware in September 1996. Our address is 70
East 55th Street, 24th Floor, New York, New York 10022 and our telephone number
is (212) 754-4271. Unless the context otherwise requires, "we" or "Spigadoro"
refers to Spigadoro, Inc., the Delaware corporation, and our subsidiaries, and
"Petrini" refers to Petrini S.p.A., an Italian corporation and wholly-owned
subsidiary of Spigadoro.
(b) Financial Information about Industry Segments
We operate in two business segments:
o pasta and other food products; and
o animal feed and other activities.
See " - General" and "Note 18 of the Notes to the Consolidated Financial
Statements of Spigadoro."
(c) Narrative Description of Business
GENERAL
We produce and sell animal feed and pasta and flour products. Our
animal feed business produces animal feed for:
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o industrial breeders, including specific lines for the
nutrition of dairy cows, beef cattle, pigs, rabbits, birds,
sheep, goats and horses;
o family-owned breeding farms, including specific lines for the
nutrition of rabbits, sheep, goats, birds and horses; and
o domestic pets, including specific lines for the nutrition of
principally dogs and cats.
We offer over 600 animal feed products that are manufactured in our seven
facilities located in Italy. These products are marketed under the brand name
"Petrini" and sold in Italy through direct sales by us, through our independent
sales agents and through our franchised network of stores.
Our pasta and flour business produces traditional, specialty and health
and diet pastas, as well as flours for use by the bakery industry. Our pasta
product line consists of over 150 products which are primarily marketed under
the brand name "Spigadoro," including:
o long goods, such as spaghetti, linguine, fettuccine, angel
hair and lasagna; and
o short goods, such as penne, elbow macaroni, mostaccioli,
rigatoni, rotini, ziti and egg noodles.
We sell our pasta products directly and through independent sales agents
principally through two distribution channels:
o retail distribution which supply shops and supermarkets that
sell our pasta products to consumers; and
o food service distribution which supply restaurants, hotels,
schools and hospitals.
We sell our flour products directly and through independent sales agents to:
o major Italian food groups such as Nestle, Ferrero, Plasmon and
Bauli; and
o small and medium sized bakeries for the production of cookies,
panenoni, pandori, pizzas and croissants.
Our pasta and flour products are manufactured at our facility located in
Perugia, Italy. By-products of our pasta and flour business are used as raw
materials for our animal feed products. Our pasta products are sold primarily in
Italy and, to a lesser extent, in the United States, Europe and Southeast Asia
and our flour products are sold in Italy.
Our goals are to expand our markets by acquiring complementary
businesses and by increasing market share, to provide superior quality and
customer service and to reduce costs and
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improve operating efficiencies. We intend to achieve these goals through the
application of the following strategies:
Acquire Complementary Businesses. We intend to pursue a consolidation strategy
within our two core businesses. Although our initial focus will likely be on
Italy, we may seek acquisition candidates in the Mediterranean food and animal
feed sectors throughout Europe. Our acquisition criteria include:
o the ability to increase our market share and customer base and
allow us to compete more effectively;
o the ability to achieve operating efficiencies through
consolidation of facilities, equipment, purchasing and
personnel;
o the ability to expand our product lines, including the
expansion of the food division into other Mediterranean
products that utilize similar distribution networks and
marketing strategies as pasta and which comprise the popular
and growing Mediterranean diet trend, such as olive oil,
tomato sauce, bread products and vinegar;
o the ability to increase production and distribution capacity;
and
o the ability to capitalize on the strength of our brand names.
Increase Market Share. We pursue opportunities to increase market share and
improve profitability through:
o the expansion and rationalization of our product lines;
o penetration into new, and expansion in existing, geographic
markets, including Europe, North America and the Asia/Pacific
region, where we believe the opportunities for growth and/or
competitive conditions are favorable;
o the development of opportunities to cross-market and bundle
multiple products to new and existing customers;
o the expansion of our Agripui franchising network; and
o increased marketing and advertising to create brand
recognition and consumer awareness of our products in new and
existing markets.
Reduce Costs and Improve Operating Efficiencies. In order to reduce our costs,
we intend to continually identify opportunities, and implement production and
capital investment strategies, designed to create operating efficiencies and
reduce the costs of manufacturing our products. For
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example, since November 1998, we have been implementing the recommendations of
an efficiency plan conducted by an independent consulting firm, which includes:
o the consolidation of our animal feed production and the
conversion of less efficient plants into advanced warehouses;
o the reduction of overhead costs through streamlining
management processes and rationalizing personnel;
o investments in new production technology and process control
equipment;
o the rationalization of purchasing and use of raw materials;
and
o tighter credit control and a reduction in the collection
period for receivables.
Capitalize on Brand-Name Recognition. We intend to capitalize on the success of
our well-recognized Spigadoro and Petrini brand names by extending those
trademarks to innovative or complementary new products, including new pasta and
food products, and product lines, including new products that may be acquired
through strategic acquisitions. We also intend to leverage the success of our
animal feed brand names, including AgriPiu, by extending our franchising network
in Italy which is currently comprised of approximately 220 stores. We believe
that our brand names communicate product consistency and high quality.
All amounts stated in US Dollars in the description of our business
have been translated into US Dollars for the convenience of the reader at the
rate of Lire 1,927 = US $1.00, which approximates the Noon Buying Rate of the
Federal Reserve Bank of New York of Lire for US Dollars on December 31, 1999.
See "Note 1 of the Notes to the Consolidated Financial Statements of Spigadoro."
The following table shows, in thousands of US Dollars, net sales,
percentage of total revenues, earnings before interest, income taxes,
depreciation and amortization ("EBITDA") and total fixed assets for our
divisions for the fiscal years ended December 31, 1999, 1998 and 1997:
Year Ended December 31, 1999 Year Ended December 31, 1998
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PERCENTAGE PERCENTAGE
OF TOTAL LONG TERM OF TOTAL LONG TERM
NET SALES NET SALES EBITDA ASSETS NET SALES NET SALES EBITDA ASSETS
--------- --------- ------ ------ --------- --------- ------ ------
ANIMAL FEED.. $ 99,928 73.6% $6,510 $36,597 $101,268 73.3% $6,076 $23,875
FOOD......... 35,809 26.4 1,593 9,998 36,929 26.7 1,198 6,015
-------- ---- ------- ------- -------- ---- ------ -------
TOTAL ....... $135,737 100% $8,103 $46,595 $138,197 100% $7,274 $29,890
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Year Ended December 31, 1997
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PERCENTAGE
OF TOTAL LONG TERM
NET SALES NET SALES EBITDA ASSETS
--------- --------- ------ ------
ANIMAL FEED .... $115,067 75.2% $4,771 $25,311
FOOD............. 37,948 24.8 1,276 6,737
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TOTAL............ $153,015 100% $6,047 $32,048
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THE ANIMAL FEED BUSINESS
We produce a complete variety of animal feed products for industrial
breeders, family-owned breeding farms and domestic pets. Animal feed products
distributed to industrial breeders include specific lines for the nutrition of
dairy cows, beef cattle, pigs, rabbits, birds, sheep, goats and horses. Animal
feed products distributed to family-farm type breeding establishments include
feed for rabbits, sheep, goats, birds and horses. We also provide ancillary
services to our customers, including advisory and veterinary services. In
addition, we develop, produce and distribute a large variety of feeds for cats,
dogs and other domestic pets.
PRODUCTS
We offer over 600 animal feed products, including the following:
PRODUCT TRADENAME
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Feed for farmyard animals Sani Sapori, Grani, Natural Fiocco
Il Biologico
Ruma Pass, Ruminat, Masticontrol
Profitto Latte, Milk Profit, Milkoss
Integra, Concentra, Casea, Lacta
Calibra, La Nutrilinea
Pig Perform, Maxi Parma & Magro, Supera,
Big Supera, P.A.S.T.O., Alfa, Biosana and
Gran Nidiata
Horse feed Petrini First, Il Pastone Ippodieta,
Ipposport-Mixer, Ippocomplet, Ipporanch,
Ippojunior Ipposviluppo and Ippoplus
Pet food (includes dry and moist Tradizione Italiana, Primo Alimento, Il
dog and cat food and birdseed) Pasto Tutta Energia, Il Pastacotto, La
Zuppa di Campagna, Il Pasto Completo, La
Prima Dieta, La Dieta Sportiva, Pastomaxi,
Ralf, Ralfette, Mio Micio, Le Crocchette
del Mio Micio, Vispo, Vispizie and Allegri
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Non-Food items (includes vegetable Seme d'oro, Nasco, I Confortevoli,
I and garden seeds and accessories Salutevoli and Equibed cats,
for dogs and cagebirds)
The following table shows the net sales, in thousands of US
Dollars, and sales volume, in tons, for each product line in our animal feed
business for each of the fiscal years ended December 31, 1999, 1998 and 1997:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
NET SALES VOLUME NET SALES VOLUME NET SALES VOLUME
--------- ------ --------- ------ --------- ------
Dairy cows.......... $29,813 130,544 $ 29,012 122,524 $ 31,357 125,910
Pigs................ 8,160 33,300 8,340 32,816 10,158 37,593
Birds............... 16,603 60,508 18,235 63,724 21,993 72,277
Rabbits............. 14,571 62,102 13,819 58,133 14,833 58,448
Beef cattle......... 10,212 45,437 11,422 49,870 13,463 56,016
Pets................ 5,323 8,616 5,152 8,094 4,504 7,162
Sheep and goats.......... 2,731 12,481 3,027 13,076 3,352 13,877
Horses.................... 974 3,656 952 3,530 1,097 3,964
Others.................... 11,541 33,428 11,309 33,280 14,310 37,881
------- ------- -------- ------- -------- -------
Total..................... $99,928 390,072 $101,268 385,047 $115,067 413,128
======= ======= ======== ======= ======== =======
Our animal feed products for farmyard animals include specific lines
for the natural nutrition of dairy cows, beef cattle, pigs, rabbits, birds,
sheep and goats and horses. Set forth below is a description of the some of our
major product lines:
DAIRY COWS
We produce and market a complete line of dairy cow feed products. We
believe that the success of our dairy cow feed business is largely a result of
the implementation of innovative feed programs aimed at improving the yield of
feed and the launching of high quality products such as "Casea" and "Lacta"
which have resulted from our research and development programs. We assist our
customers in increasing production, reducing costs and decreasing the amount of
phosphorus and ozone emissions released into the atmosphere by implementing a
nutritional model developed by Cornell University and utilizing our proprietary
computer software to reformulate our animal feed products for dairy cows. We
also maintain a field staff who work with dealers and customers to develop
specialized products, programs and services to meet their individual needs.
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BEEF CATTLE
We produce and market a complete line of beef cattle feed products. As
a result of tighter European Union regulations and the mad cow disease scare,
feed producers are under increasing pressure to ensure a high quality product at
all stages of the food chain. Consequently, we reorganized our beef cattle feed
production and focused our research and development activities on:
o studying the metabolism of beef cattle;
o transforming the traditional feeding system; and
o designing various products and innovative feeding programs.
Based on our research and development activities, we implemented a special
program to guarantee the production of high quality feed and began to produce
and market our "Cotton Beef" product line, which increases the amount of protein
in beef cattle, and other high quality beef cattle feed products. We believe
that the success of our beef cattle feed line is primarily due to our ability
to:
o implement innovative feeding programs; and
o offer high quality products, such as "Cotton Beef" animal
feed.
PIGS
We produce and market a complete line of pig feed products. Our
P.A.S.T.O. pig feed line is part of our "Cross System" program which was
launched in 1998. This system is a composed nutrition program structured on the
breeders' specific needs and demands which allows the breeder to optimize
characteristics such as the fat/lean meat ratio in pigs, which is important in
the production of Parma Ham. The P.A.S.T.O. pig feed line contains
polyunsaturated fatty acids to address the health concerns of consumers.
RABBITS
We produce and market a complete line of rabbit feed products. Our
product brands for rabbits are "Alfa" and "Biosana" for industrial breedings.
Biosana is aimed at guaranteeing the delicate bacterial-intestinal balance of
the digestive system of the rabbit and allows breeders to considerably reduce
the use of pharmaceutical additives, thus reducing costs to breeders.
BIRDS
We produce and market a complete line of feed products for birds, such
as chickens, turkeys and ducks. The Italian meatbird (including broiler
chickens, turkeys and ducks), and egg
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production industries are highly concentrated with a relatively small number of
very large producers. As a result of the relative simplicity of the diet and the
large scale operations in this market, breeders generally manufacture their own
animal feed. Accordingly, the available market for bird feed sales is small
relative to the amount of feed consumed in the meatbird and egg production
industries.
The breeding of birds, in particular poultry, at the domestic level is
quite widespread in Italy. Many Italian consumers of poultry choose to breed
their own poultry because they can control the quality of the breeding process.
Consequently, we have created the "Sani Sapori" and "Grani" brands of bird feed
products which allow breeders to obtain proven quality through an accurate
selection of raw materials and constant monitoring of production. Breeders have
increased their sensitivity towards healthy feeds and, as a result, we have
launched our "Il Biologico" product line which utilizes only raw materials
derived from all natural biological agriculture.
We develop and sell our products for our farmyard animal business as
part of a package that includes nutrition and management programs. Our nutrition
programs include information and services regarding the care of the animals and
their facilities, as well as nutritional, genetic and breeding counseling. We
employ 138 sales representatives and technical services staff, including
approximately 30 field-based veterinary consultants, who work closely with
customers to help ensure that our feed products, programs and services are
matched with the animal producer's facilities and overall management practices,
as well as the genetic potential of the specific animal species. To support
increasingly sophisticated customers, in areas with the highest number of
breeding farms, approximately 75% of our salespeople are specialists who focus
on individual species or distribution channels.
We believe that animal feed represents, on average, about 70% of the
total costs of production of animal breeders. We also believe that the quality
and yield of our products are important competitive features of our business. As
a result, our investment in product research and development is considered
critical, as is supporting our sales with advisory and veterinary services for
our customers. Our commitment to our research and development activities has
enabled us to produce high quality animal feed products that are sold to our
customers at competitive prices. We believe that these areas represent our most
important strengths. We believe that the continued market leadership of our
various products and programs will depend, in part, upon maintaining a
cost-effective balance between: weight gain, feed efficiency, yield, meat, milk
and egg quality and animal health and price.
In 1999, we utilized a farm with approximately 500 sows to test and
demonstrate the quality of the feed we produce. We have discontinued operations
at this farm and have sold the assets related to these activities. In addition,
we have also entered into various agreements to provide animal feed and related
services to breeders, receiving in return payment based on the quantity of feed
provided by us and the increase in weight or yield of the animals. These
agreements allow us to test and constantly improve the quality of our animal
feed and services by virtue of our indirect participation in the breeding of
animals.
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In 1999, we also directly managed several farms for the breeding of
livestock and pigs in order to demonstrate and test the performance and
effectiveness of our products.
RESEARCH, DEVELOPMENT AND QUALITY CONTROL
Our research and development and quality control department is centered
at the Bastia Umbra Research and Quality Control Center, and includes an
internal staff of eight people, including technical staff and nutritionists. We
also maintain laboratories at each of our production facilities for the purpose
of quality control. Our research, development, and quality control department
has advisory arrangements with a number of agricultural programs at various
Italian agricultural and veterinary medicine universities departments, such as
Piacenza, Bologna and Pavia. We also have relationships with foreign
institutions and universities including:
o Cornell University;
o Institute National De Recherche Agromonique;
o Scottish Agricultural College-Edinburgh;
o Meat Quality Institute-Bristol; and
o Kibbutz Afikim-Israel.
For research purposes and to assist our field-based technicians, we
designed a herd management software program called "RAAN," which stands for
Ration Analyser, and a raw material management program called "Feed Manager,"
based on a model developed by Cornell University. The Feed Manager program:
o optimizes raw material utilization in relation with the
nutritional facts requested; and
o contributes to environmental impact reduction by decreasing
phosphorus and ozone emissions in the atmosphere.
Our researchers have gained extensive knowledge of the nutritional
composition and values of the primary ingredients used in feed, the full range
of acceptable substitute ingredients and process technology. We utilize the
extensive knowledge of our research and development department to develop:
o high-performance, value-added feed products;
o breeding programs and methods; and
o techniques designed to optimize the genetic performance
potential of animals.
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Our products are designed to provide the balance of nutrients that meet
the needs of a particular species of animal at each phase of its life cycle. We
believe that the scope of our research and development activities and the
synergies created from conducting research across various product lines and
species provide us with a significant competitive advantage.
Our research and development and quality control expenditures were
approximately $1,065,000, $744,000 and $729,000 for the fiscal years ended
December 31, 1999, 1998, and 1997, respectively.
RAW MATERIALS, PACKAGING AND PRICING
The principal raw materials used for the production of animal feed are
vegetable products, the by-products of our pasta and flour business, flour and
food integrators. Packaging represents a small part of feed production costs.
Approximately 10% of the raw materials used by us for the production of
animal feed is provided internally from the by-products of our flour processing
operation. The remainder of the raw materials we use are acquired from large
national and foreign companies and local cooperatives. We do not depend to a
significant extent on any single supplier. All of the raw materials are readily
available and we have not experienced a material interruption in supply.
The raw materials we purchase are usually delivered to a seaport and
then transported either by freight or common carrier to our seven manufacturing
facilities located throughout Italy. As a result, raw material costs may vary
substantially among our manufacturing facilities due to local supply and demand
and varying freight costs.
The prices of many of our raw materials may be volatile. We use the
futures markets only for purchasing soybean meal. We generally price our animal
feed products based on the cost of raw materials, packaging and certain other
costs plus a conversion charge, which includes a profit factor, and periodically
adjust our prices based on fluctuations in raw material and packaging costs.
There can be no assurance that future price increases will be obtained in the
event of increased raw materials costs.
We believe that one of our major strengths is our ability to obtain an
optimal feed composition at reduced costs by selecting economical raw materials
without compromising nutritional values.
PRODUCTION
In the animal feed industry, potential manufacturing economies of scale
are generally not sufficient to offset the cost of shipping products significant
distances because raw materials, which make up a large percentage of finished
products, are often available locally. As a result, we operate primarily in
central and southern Italy with a network of seven manufacturing facilities with
sufficient capacity to meet the demands of the local market in which each
facility is located. We produce approximately 97% of our animal feed products at
our manufacturing facilities.
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Approximately 3% of our animal feed products are produced by third parties, who
ship the products to our manufacturing facilities for distribution. Each of our
manufacturing facilities is self-contained, from production to storage and
delivery, so as to meet the differing needs of local customers.
Before we process our raw materials, we sample them for quality control
purposes. The basic underlying production process consists of combining the raw
materials to form a feed product which is then mixed with nutritional additives,
such as:
o vitamins;
o minerals and amino acids; and
o in some cases, medications.
We sell the resulting products in a variety of forms, including:
o flour;
o nuts;
o cubes;
o crumble;
o flakes; and
o pellets.
The feeds produced are either:
o the "complete" type, which are ready to use; or
o the "supplementary" type, to which other products must be
added by the breeder.
Our feed formulas are based upon the nutrient content as determined
through our proprietary scientific research. When the price of certain raw
ingredients increases, we can generally adjust feed formulas by substituting
lower cost alternative ingredients to produce feed with equivalent nutritional
value.
In June 1998, we initiated steps to comply with ISO 9002 Certification
which ensures that we manufacture our products in conformity with European
standards. We expect that this certification will be granted to our pasta plant
in Bastia Umbra by the third quarter of
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2000 and expect that certification will be granted for our other plants by
December 31, 2000. The processes put in place to attain such certification will
ensure and demonstrate the high quality of our products.
DISTRIBUTION
Animal feed is produced with fresh ingredients and, as a result,
delivery must be rapid. We deliver approximately 1,500 tons of animal feed on a
daily basis to supply breeders and our AgriPiu franchise stores. See "--
Marketing and Sales."
Our products are distributed through a network of external carriers
under long term agreements. The ability to supply certain clients directly has
been a factor in determining the location of certain of our manufacturing
plants. We believe our plants are well situated to service our customer base
across Italy.
Our success depends upon an effective system of distribution for our
products. While our method of delivery has been reliable and available at
acceptable rates thus far, there can be no assurance that we will continue to be
able to negotiate acceptable freight rates in the future and that delivery will
not be disrupted for reasons including:
o adverse weather;
o natural disasters; or
o labor disputes in the trucking industry.
MARKETING AND SALES
We primarily market our animal feed products in Italy, through a number
of channels, including:
o direct sales to industrial breeders;
o our franchised network of AgriPiu stores; and
o other retail stores.
AGRIPIU STORES AND OTHER RETAIL STORES
We sell feed to approximately 2,500 agricultural retail stores, of
which approximately 220 have a franchising agreement to use our AgriPiu
trademark. AgriPiu stores, which are located throughout Italy, sell animal feed
to family farms and retail customers for the breeding of domestic animals. They
also offer a complete range of products for animal care. The agreements
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with the AgriPiu franchisees generally provide that we furnish support for the
marketing of our products, and contain obligations on the franchisee to maintain
an adequate stock of products and to ensure that 100% of the sales of animal
feed of the stores are made up of our products.
DIRECT SALES
We sell our products directly to approximately 4,400 industrial
breeders. We sell approximately 50% of the animal feed we produce directly to
industrial breeders through a network of exclusive agents. These agents also
provide breeders with a series of ancillary services of a health and nutritional
nature.
We also sell the animal feed we produce to approximately 6,900 other
clients through a network of over 127 agents who work at the local level
throughout Italy. The price of our animal feed for farmyard animals includes
certain services, such as technical assistance. We also use marketing efforts
and trade shows to generate new business and expand sales to existing customers.
A number of factors impact the demand for particular animal feed
products, including the price of grains and the price of the end-products of
animal producers. When the price of grains has been relatively high, more of our
customers have tended to purchase feed of the "complete" type and our sales
volume has been correspondingly higher. During periods when commodity prices,
particularly for corn, have been relatively low, animal breeders have tended to
provide their own grains, resulting in decreased volume, and have purchased feed
of the "supplementary" type, concentrated and with nutritional additives, which
have higher per unit margins.
COMPETITION
ANIMAL FEED
The animal feed industry is currently going through a phase of
consolidation in Italy, and we believe that this trend will continue. We believe
that our market share is currently approximately 5.6% of the total
non-integrated animal feed market.
Strong competition exists among national as well as local producers.
Some of our competitors have:
o longer operating histories;
o broader product lines;
o significantly greater brand recognition;
o greater production capacity; and
-15-
o greater financial, marketing and other resources.
Our major competitors in the animal feed market are:
o in Northern Italy-Purina, Raggio di Sole and Veronesi,
Martini, Progeo, Ferrari and Sagip;
o in Central and Southern Italy-Martini, Mignini, Raggio di
Sole, Nicolai, Valigi, Dell'Aventino, Russo e Pezzullo.
To date, we have been successful at generating business directly with
some large animal breeders. However, as animal breeders become larger, they
historically have tended to integrate their business by acquiring or
constructing feed production facilities to meet some or all of their
requirements and, consequently, have relied less on outside suppliers of animal
feed. As the consolidation of animal breeders continues, the available market
for commercial animal feed may be reduced if breeders integrate feed production
into their business, thereby increasing competition.
We distinguish ourself from our competitors through:
o our range of high quality products;
o our national production and distribution capacity; and
o offering customers assistance during product utilization.
Our services include assistance in the technical and economic
management of breeding and food and veterinary services. We believe that this
supportive strategy creates strong customer loyalty and allows for premium
pricing. In addition, our extensive expertise in animal nutrition requirements
and the nutritional content of various ingredients, developed through our
research and development activities, combined with our manufacturing expertise
and ingredient purchasing capabilities, allow us to use lower-cost ingredients,
as well as alternative ingredients, to a greater extent than many of our
competitors.
PET FOOD
The major companies that produce and market pet food in Italy are
national or international conglomerates which are substantially larger than we
are and possess significantly greater financial, marketing and other resources
than we possess. We compete for access for shelf space on the basis of the
quality and price of our pet food products.
We believe that we differentiate ourselves from animal feed
manufacturers which also sell pet food by offering:
-16-
o higher quality products;
o national production and distribution capabilities; and
o a reputation for increasing customers' pet food sales, in the
agricultural retail stores, which represents approximately 10%
of the total pet food market.
Much of the competition in the animal feed and pet food industries
centers around price due to the commodity-like aspects of the basic product
lines. However, we believe we are able to mitigate this price-oriented
competition somewhat by focusing our efforts on high-performance, value-added
products which are designed to be cost effective on the basis of weight gain,
feed efficiency, yield, animal health and price. To the extent that there is
significant price competition, our operating results and cash flow could be
adversely affected. We also compete on the basis of service by:
o providing training programs for our customers;
o using species specialists with advanced technical
qualifications to consult with our customers;
o developing and manufacturing customized products and feeding
programs for our customers; and
o offering various financing assistance programs to attract and
retain dealers and direct customers.
THE PASTA AND FLOUR BUSINESS
We operate two mills at our Bastia Umbra facility near Perugia, Italy
which produce durum wheat semolina for pasta and flour for the bakery industry.
A portion of the flour we produce is sold to third parties. The by-products from
soft and durum wheat grinding is used in our animal feed business.
We distinguish ourselves by being among the few Italian pasta producers
that vertically integrate the durum wheat milling function with the pasta
production process. This allows us to manage the grain procurement process and
to better control the consistency, quality and cost of our raw materials. Our
pasta product line consists of over 150 products, including:
o long goods, such as spaghetti, linguine, fettuccine, angel
hair and lasagna; and
o short goods, such as penne, elbow macaroni, mostaccioli,
rigatoni, rotini, ziti and egg noodles.
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PASTA INDUSTRY AND MARKET
In 1997, worldwide pasta consumption exceeded 9,278,000 tons, including
more than 1,620,000 tons in Italy and 2,250,000 tons in the United States. We
believe that our current production represents about 1% of the Italian pasta
market and that it also accounts for about 1% of pasta exported from Italy. We
currently export approximately 35% of our pasta production.
Based on industry and trade sources and our own analysis, we do not
expect the Italian pasta market to experience significant growth. However, other
countries continue to experience significant growth in pasta consumption. For
example, in the United States, the world's largest pasta market, average pasta
consumption increased by 11% overall during the period from 1993 to 1997,
representing an annual average increase of approximately 2.3%.
About 12.5% of the overall amount of pasta consumed in the United
States is imported pasta. In 1997, pasta imported from Italy accounted for about
8.5% of the overall market for pasta in the United States.
We believe that the United States market offers significant
opportunities for increased sales. In 1999 and 1998, sales to the United States
accounted for approximately 5.5 and 5.0%, respectively, of our sales volume for
our total pasta sales worldwide. With the aim of expanding our presence in the
United States, we formed a company in the United States called Petrini Foods
International, Inc.
We believe that there are opportunities for continued growth in the
United States market for pasta products as a result of a variety of factors,
including:
o consumer perception of pasta as a healthy food;
o ease of preparation;
o low cost in comparison to other types of foods; and
o flexibility of pasta products as an ingredient in salads and
entrees.
We also believe that American consumers are demanding more healthy food
products as they learn more about the importance of diet in a healthy lifestyle.
We believe that the sale of pasta, which is generally low in fat and high in
complex carbohydrates, is benefiting from the trend towards healthier eating.
However, we cannot predict whether the pasta industry will continue to expand in
the United States, or elsewhere, or that current levels of public attention to
personal health, fitness and diet or current perceptions of healthfulness
associated with pasta will continue. Different countries and regions within
countries may have different public perceptions and concerns about health and
diet. This may adversely impact our marketing and expansion strategy and cause
us to incur greater expenses in promoting our products.
-18-
To date, the majority of our sales in the United States pasta market
have been through supermarket chains. Our primary strategy for expanding our
presence in the United States market is to exploit the significant hotels,
restaurants and catering market, which we believe may enable us to achieve
higher operating margins.
We also intend to expand our presence in other European markets such as
Germany, France and England.
THE INDUSTRIAL FLOUR BUSINESS AND MARKET
Our industrial flour is sold to:
o major Italian food groups such as Nestle, Ferrero, Plasmon and
Bauli; and
o small and medium sized bakeries for the production of cookies,
panenoni, pandori, pizzas and croissants.
The flour is produced using advanced technologies and a selection of high grade
raw materials imported from countries including, the United States, Canada and
France.
In 1999, we sold 41,650 tons of industrial flour, realizing total
revenues of approximately $12.8 million.
PRODUCTS
Products manufactured and sold by our food division and their
corresponding tradenames include the following:
PRODUCT TRADENAME
------- ---------
Traditional pasta Spigadoro
Specialty pasta Maestro Umbri
Egg noodles LaSfoglia di casa
Pasta from organically produced semolina Cascina
Bakery line Spigadoro
Special flours Flourtoba
Extra virgin olive oil Cascina
The following table shows the net sales, in thousands of US Dollars,
and sales volume, in tons, for each main product line in our food business for
each of the fiscal years ended December 31, 1999, 1998 and 1997:
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YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
NET SALES VOLUME NET SALES VOLUME NET SALES VOLUME
--------- ------ --------- ------ --------- ------
Traditional types of pasta.. $12,815 18,519 $13,042 18,592 $13,943 20,441
Specialty types of pasta.... 5,276 4,070 5,856 4,381 5,403 4,199
Health and diet pasta....... 2,801 2,640 3,195 3,076 4,080 3,365
Industrial flour............ 12,822 41,668 12,966 38,975 12,350 36,917
Other products.............. 2,095 2,392 1,870 2,631 2,172 2,685
------- ------ ------- ------ ------- ------
Total....................... $35,809 69,289 $36,929 67,655 $37,948 67,607
======= ====== ======= ====== ======= ======
RAW MATERIALS
Raw materials for the production of pasta and flour are readily
available and we have not experienced supply interruptions. We are not dependent
on any single supplier.
The main raw materials used in the production of pasta and flour are
wheat, semolina, eggs and gluten. The semolina we use for the production of
pasta is entirely supplied by our own mill in Bastia Umbra, which mills 45,000
tons of durum wheat each year. We purchase our durum wheat from farmers,
cooperatives and importers. Ninety percent of this durum wheat comes from Italy.
This purchasing method ensures that the extracted semolina meets our
specifications. We believe that using an integrated production cycle is an
essential element in producing high quality pasta.
The price of durum wheat has fluctuated in past years by as much as
35%. We believe that, due to the new European Union agricultural policy which
provides for the elimination of duties relating to imports from non-European
Union countries and for the support of national farming, the price of wheat will
become more stable in the future.
We purchase our packaging materials for pasta, including flexible
films, cardboard containers and boxes, from external suppliers and we believe
that the packaging costs represent approximately 13% of the cost for the
finished product with respect to pasta and approximately 1% with respect to
flour. We believe that we have adequate sources of packaging supplies.
PRODUCTION
Our Bastia Umbra plant near Perugia, Italy produces both semolina,
which is used to make pasta, and industrial flour.
Pasta's primary ingredient is semolina, which is extracted from durum
wheat through our milling process. Each variety of durum wheat has its own
unique set of protein, gluten content, moisture, density, color and other
attributes which affect the quality and other characteristics of the semolina.
We blend semolina from different wheat varieties.
-20-
Durum wheat is shipped to our Bastia Umbra production facility near
Perugia, directly from collection warehouses, by our contract truckers. The
durum wheat delivered to the facility is sampled, blended and pre-cleaned. Next,
the wheat is tempered by raising its moisture content to the optimal level
required for milling. The cleaned and tempered wheat is then conveyed to the
mill where grinding, sifting, and purifying processes extract the semolina.
Semolina is then pneumatically distributed from the mill to the pasta production
area of the facility.
After being mixed with water, the semolina is extruded into the desired
pasta shapes, travels through computer-controlled high-temperature dryers and is
stabilized at room temperature. We then package the pasta in a wide variety of
packaging configurations on highly-automated film, carton and bulk packaging
systems and forward it through automated conveyors to the distribution center to
be palletized and stored prior to shipment.
Our entire pasta production process is controlled by programmable logic
controllers which enable all of the production lines to be operated and
monitored by minimal staff.
The quality of our pasta products is tested through regular internal
laboratory testing on physical characteristics such as color, presence of
impurities, shape and consistency following the cooking process, including the
loss of starch and proteins. Our use of bronze molds is a key element in
ensuring the production of high quality pasta.
The production of industrial flour involves the feeding of unprocessed
wheat into a series of automatic milling cylinders followed by an extended
sieving process. Flour obtained in this way is then packaged, boxed and stored
in a warehouse until it is shipped.
DISTRIBUTION
Our pasta distribution center is located in our Bastia Umbra facility.
Warehousing and distribution facilities are integrated with our production
process.
In 1999, we sold 17,570 tons of food products in Italy. The principal
channels of distribution were traditional retail outlets and wholesale
distributors. We produce a significant amount of health and diet pasta which is
sold by other companies under their own brand names. We arrange for the
distribution of our pasta products to our customers in Italy, using contract
carriers to transport products to their final destination. We can usually
satisfy client demand within 3 or 4 days.
Most of our customers use inventory management systems which track
sales of particular products and rely on reorders being rapidly filled by
suppliers. We work with our customers to forecast consumer demand which allows
us to anticipate customer demand.
-21-
SALES AND MARKETING
PASTA
The following chart shows our sales of pasta and flour products, in
thousands of US Dollars, in our major markets for the years ended December 31,
1999, 1998 and 1997:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
Italy........... $27,563 $29,048 $29,636
Japan........... 2,322 2,567 2,756
United States... 1,537 748 1,152
South Korea..... 766 728 685
Denmark......... 533 472 447
Australia....... 276 479 478
Portugal........ 375 360 316
Lebanon......... 208 249 214
France.......... 315 346 280
Other countries 1,914 1,932 1,984
------- ------- -------
Total........... $35,809 $36,929 $37,948
======= ======= =======
Approximately 77% of the pasta produced by us is sold in Italy. Of this
amount, approximately 20% of pasta sales are effected directly by us to our
clients while the remaining 80% of sales are carried out by a sales organization
consisting of 80 independent agents. Most of these sales arrangements are for
indefinite periods, and we generally cannot terminate such arrangements without
paying an indemnity under the Italian Civil Code. The amount of such indemnity
varies from contract to contract. Under these arrangements, products are usually
ordered, produced, sold and shipped within 30 days. As a result, we do not
generally have any significant backlog of orders. We have also entered into
supply arrangements under which we manufacture private label pasta products for
certain of our customers in quantities established in advance. The prices of our
private label pasta are generally tied to a market price near the time of order.
During the years ended December 31, 1997, 1998 and 1999, approximately
3.0%, 2.0%, and 4.3%, respectively, of our total pasta revenues were derived
from the United States. In the United States, our pasta is sold primarily in the
East to supermarket chains including:
o Wakefern;
o Food Emporium;
o Shaws;
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o King Kullen; and
o Pathmark.
We also sell approximately 35% of our pasta products outside of Italy
and the United States. Our exports are sold to importers, who then resell them
abroad. We have distribution agreements with distributors in several countries
located in Southeast Asia which accounted for approximately 9% of our total food
division revenues for the years ended December 31, 1999.
We market our pasta, both in Italy and abroad, principally through two
distribution channels:
o Retail: The retail distribution channel consists of shops and
supermarkets which sell various types of pasta both with our
brands and private labels to consumers. Retail distribution
accounts for the majority of pasta distribution by us; and
o Food Service or Catering: The food service distribution
channel is comprised of distributors who supply restaurants,
hotels, schools and hospitals.
FLOUR
Approximately 50% of our production of industrial flour is sold to
large companies, such as Ferrero, Nestle and Plasmon, for use in producing
confectionery products. The remaining 50% is sold through our sales agents. All
of our flour sales are made in Italy.
COMPETITION
We operate in a highly competitive environment with numerous
well-established Italian, regional and foreign companies, and many smaller
companies. Our competitive environment depends to a significant extent on the
aggregate industry capacity relative to aggregate demand for pasta products. We
believe that pasta production capacity in Italy is currently approximately three
million tons in the aggregate. No significant increases or decreases in capacity
have been announced or are expected by other companies. We believe there is
worldwide over-capacity in the industry, and as a result, there has been
consolidation, which is expected to continue in the future. We believe that
consolidation and over-capacity has placed significant pressure on price,
thereby increasing competition. We compete for:
o the procurement of raw materials;
o the development of new products and product lines;
o the improvement and expansion of previously introduced
products and product lines; and
-23-
o the production, marketing and distribution of our products.
Our competition in Italy includes:
o Barilla, the largest pasta producer in Italy; and
o approximately 150 other Italian pasta producers, of which
approximately 50 have a potential production capacity of over
100 tons a day.
We believe that no pasta producer other than Barilla has more than 5% of the
Italian market.
Our competitors in the United States include:
o large multi-national companies such as:
o New World Pasta, with brands such as San Giorgio and
Ronzoni; and
o Borden, with brands such as Prince and Creamette;
o regional U.S. producers of retail and institutional pasta; and
o Italian producers such as De Cecco and Barilla.
Compared to us, some of our competitors have:
o longer operating histories;
o broader product lines;
o significantly greater brand recognition;
o greater production capacity; and
o financial, marketing and other resources.
Our products also compete with a broad range of food products. Competition in
these markets generally is based on product quality and taste, pricing,
packaging and customer service and logistics capabilities.
In May 1995, we and 20 other Italian pasta producers were named as
subjects of a petition filed with the United States International Trade
Commission and the Department of Commerce by producers of pasta in the United
States, including Borden, Hershey and Gooch Foods, Inc. The petition alleged
that the pasta industry in the United States was materially injured or
threatened with material injury by reason of certain imports from Italy and
Turkey that
-24-
were being subsidized and sold in the United States at less than fair market
value. In connection with the petition, the International Trade Commission
instituted anti-dumping investigations covering the period from October 17, 1995
through December 31, 1996. As a result of the investigations, the Department of
Commerce instructed United States customs officials to assess countervailing
duties on certain pasta exporters, based on net subsidy rates. An ad valorem
rate of 2.27% was applied to exports by Petrini for the period of October 17,
1995 to December 31, 1995. Such practices by American pasta producers or by
exporters, if continued or increased, may materially adversely affect our
ability to expand in the United States market. We cannot predict whether we will
be subject to review by the Department of Commerce again, or what impact any
such review may have on the importation of pasta into the United States.
MANAGEMENT INFORMATION SYSTEMS
Our production, distribution, sales and marketing operations are
supported by a computer system that uses software which has been tailored to our
management processes and integrates our:
o production;
o purchasing;
o order entry;
o inventory management;
o distribution; and
o accounting systems.
Our management information systems were recently upgraded in anticipation of our
growth and desire to continue to offer our customers value-added, efficient
services. We have invested substantial amounts in electronic data interchange
and efficient consumer response systems to streamline the order, invoicing and
inventory management functions.
TRADEMARKS AND PATENTS
We hold a number of registered and common law trademarks which we
consider to be of considerable value and importance to our business. Our main
trademarks include the following:
-25-
ANIMAL FEED
- -----------
Casea Alfa Activa Lacta Biosana
Cotton Beef Integra First Vispo Nutrilinea
Sani Sapori Ovicomplet P.A.S.T.O. Il Biologico Tradizione
Italiana
PASTA AND FLOUR
- ---------------
Spigadoro La Sfoglia diCasa Vogliadi Pasta Flourtoba
We own the trademarks listed above and we have registered those
trademarks in Italy and in our other principal markets. In addition, we have
filed trademark applications or registrations for our trademarks in China,
Japan, Malaysia, South Korea, Taiwan, the United States and Venezuela. We
believe that all material trademark registrations are valid and current, and
that all licenses have either been recorded or applications have been filed to
record such licenses where required to avoid forfeiture of our trademarks in our
principal markets.
Our trademarks are widely used in product marketing and are themselves
frequently incorporated into product designs. In view of the importance of our
trademarks, we have a policy to prosecute trademark infringement vigorously.
We are not a party to any material litigation involving our trademarks
and there are no material restrictions on our ability to use our trademarks.
EMPLOYEES
As of March 27, 2000, we had 430 full-time employees and six part-time
employees. Of our employees, approximately 187 work in the animal feed business,
181 work in the pasta and flour business and 46 perform administrative services.
We also have 15 full-time employees and five part-time employees at Columbus. We
intend to sell this computer business and have commenced discussions relating to
the sale of this business. However, we have no agreements or arrangements for
the sale of our remaining computer business. We cannot assure that we will be
able to sell this business on terms favorable to us or at all or that there will
not be substantial unanticipated costs associated with such sale.
Our employment relations in Italy are governed by numerous regulatory
and contractual requirements, including:
o the Italian Civil Code;
o the Statute of Laborers;
o national collective labor agreements; and
-26-
o individual employer collective labor agreements.
See "-- Government Regulation" for a discussion of the Italian Civil Code and
employment relations.
Employees in Italy in the food sector are covered by a national
collective bargaining agreement that is negotiated between the national
association of the companies within the food sector and the national union. The
agreement addresses work time, benefits, wages and bonuses and other specific
issues affecting the working conditions of our employees. In addition to the
national collective bargaining agreement, individual employers such as us enter
into separate local contracts with the labor unions representing their
employees. We are also subject to a number of similar regulatory and contractual
requirements governing our relations with our managers. In addition, upon a
transfer of property of a going concern, a manager may resign and receive:
o an indemnity for termination of employment; and
o an additional indemnity in an amount equal to 1/3 of the
termination indemnity in the event that the employer does not
provide notice of discharge, which is equal to the amount of
salary the employee would have received during the required
notice period which ranges from eight to twelve months
depending on the seniority of management.
Italian law provides that, upon termination of employment, employees
are entitled to receive a severance payment based on annual salary, length of
employment and inflation. As of December 31, 1999, we had approximately $8.0
million reserved for such termination payments, as required by Italian law.
We have not experienced any significant work stoppages and believe that
our relationship with our employees is good.
GOVERNMENTAL REGULATION
GENERAL
Many aspects of our operations are subject to government regulation in
the countries in which we operate. Such regulations include those relating to:
-27-
o the operation of our production facilities;
o the production, packaging, labeling and marketing of our
products;
o environmental regulations;
o currency conversion and repatriation;
o taxation of our earnings and earnings of our personnel; and
o our use of local employees and suppliers.
For example, we are required to obtain licenses and permits, and are
subject to governmental inspections in connection with our operations in Italy,
including licenses and permits relating to the manufacture of pasta and flour,
building codes, safety and usability of plants and other areas of our daily
operations. We are affected by changing taxes, price controls and laws and
regulations relating to the industries in which we operate.
Our operations are also subject to the risk of changes in Italian and
foreign laws and policies which may impose restrictions on us, including trade
restrictions, which could materially adversely affect our business, financial
condition and results of operations. Other types of government regulation which
could, if enacted or implemented, materially and adversely affect our operations
include:
o expropriation or nationalization decrees;
o confiscatory tax systems;
o primary or secondary boycotts or embargoes directed at
specific countries or companies;
o import restrictions or other trade barriers;
o mandatory sourcing rules;
o high labor rates; and
o fuel price regulation.
We cannot determine to what extent future operations and earnings may
be affected by new legislation, new regulations or changes in or new
interpretations of existing regulations.
Our animal feed products are also subject to regulation by the Italian
Industry Ministry and the Italian Health Ministry. The Health Ministry regulates
all ingredients that are part of
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animal feed or that contact animal feed. It also regulates animal drugs that
come in dosage form for administration to animals, or that are added through
water or feed. Our production facilities are also subject to periodic inspection
by a local health agency.
LABOR RELATIONS
Our employment relations in Italy are governed by numerous regulatory
and contractual requirements, including:
o the Italian Civil Code;
o the Statute of Laborers;
o national collective labor agreements; and
o individual employer labor agreements.
The Italian Civil Code addresses:
o protection of personal data of employees and consents of such
employees prior to disclosure;
o vacation, illness and maternity leave;
o requires employers with more than 35 employees (such as us) to
hire at least 15% of our total employees from among those in
certain protected classes; and
o upon termination of employment, entitles employees to receive
a defined compensation payment based on length of employment,
employment category and compensation.
ENVIRONMENTAL
Our operations, particularly our manufacturing activities, are affected
by Italian environmental protection laws and regulations, such as those
governing discharges into the air and water, the handling and disposal of solid
and hazardous wastes, the remediation of soil and groundwater contaminated by
petroleum products or hazardous substances or wastes, and the health and safety
of employees.
Environmental laws and regulations have changed substantially and
rapidly over the last 20 years and the requirements of these laws and
regulations have tended to become increasingly more stringent, complex and
costly to comply with. Although we believe that we are in substantial compliance
with existing laws and regulations, there can be no assurance that substantial
costs for compliance will not be incurred in the future. Moreover, it is
possible that
-29-
other developments, such as stricter environmental laws, regulations and
enforcement policies thereunder, could result in additional costs or liabilities
to us.
We have conducted a number of environmental audits of our major
facilities to identify and categorize potential environmental exposures and to
ensure compliance with applicable environmental laws, regulations and permit
requirements. This effort has required and may continue to require operational
modifications to our facilities, including installation of pollution control
devices and cleanups. The costs incurred to date by us in connection with the
performance of environmental audits and operation modifications to our
facilities have not been material. To the extent we might incur any such
compliance costs, these costs most likely would be incurred over a number of
years. However, no assurance can be given that future regulatory action
regarding soil or groundwater at our facilities, as well as continued compliance
with environmental requirements, will not require us to incur significant costs
that may have a material adverse effect on our financial condition and results
of operations.
Additionally, we maintain a proactive approach to dealing with
environmental matters and it is our policy to eliminate and minimize generation
of wastes at our facilities through plant operations, process design and
maintenance. Our program includes:
o formal environmental training for targeted employees;
o assistance in complying with environmental regulations; and
o identifying potential environmental liabilities.
We have also implemented management procedures designed to:
o reduce the generation of hazardous waste;
o reduce the on-site use and storage of hazardous chemicals; and
o prevent exposure to such substances.
We believe the continued development and maintenance of our environmental
program will continue to reduce the potential for unanticipated expenditures for
environmental remediation and compliance. We continually strive to reduce wastes
by sending waste off-site for recycling and/or reuse. We have taken, and
continue to take into account, the requirements of such environmental laws and
regulations in the improvement, modernization, expansion and start-up of our
facilities and believe that we are currently in substantial compliance with such
material laws and regulations.
We have been unable to obtain adequate environmental insurance at a
reasonable cost. Although we maintain general liability insurance, this
insurance is subject to coverage limitations, deductibles and exclusions and may
exclude coverage for losses or liabilities relating
-30-
to environmental issues. As a result, we cannot assure that liabilities that may
be incurred by us will be covered by our insurance policies, or if covered, that
the dollar amount of such liabilities will not exceed the policy limits. Even a
partially uninsured claim, if successful and of significant magnitude, could
have a material adverse effect on our business, financial condition and results
of operations.
The above mentioned laws identify the liabilities of the employer
and/or of the persons delegated by the employer. Persons who are or were
responsible for releases of hazardous substances may be subject to joint and
several liability for the costs of cleaning up the hazardous substances that
have been released into the environment and for damages to natural resources,
and it is not uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment. Italian environmental law
also imposes criminal penalties upon persons who are or were responsible for
releases of hazardous substances in cases of major damage to natural resources.
Additionally, various Italian laws, regulations and ordinances govern
the removal, encapsulation or disturbance of asbestos containing materials
("ACMs"). Such laws and regulations may impose liability for the release of ACMs
and may provide for third parties to seek recovery from owners or operators of
facilities at which ACMs were or are located for personal injury associated with
exposure to ACMs. We are aware of the presence of ACMs at our facilities, but we
believe that such materials are in acceptable condition at this time. We believe
that any future costs related to remediation of ACMs at these sites will not be
material, either on an annual basis or in the aggregate, although there can be
no assurance with respect thereto.
It is possible that environmental liabilities in addition to those
described above may arise in the future. As a result, we could incur significant
future liability should the laws of the jurisdictions in which we operate change
to impose additional environmental remedial obligations. The precise costs
associated with these or other future environmental liabilities are difficult to
predict at this time.
ENFORCEMENT OF CIVIL LIABILITIES
We are organized under the laws of the State of Delaware. Investors in
our common stock will be able to effect service of process on us in the United
States. However, we are primarily a holding company which holds stock in
entities in Switzerland, Germany and Italy and all or a substantial portion of
our assets are located outside the United States. In addition, six of our seven
directors and all of our executive officers are residents of foreign countries
and all or a substantial portion of the assets of such directors and officers
are located outside of the United States. As a result, it may not be possible
for investors to effect service of process upon our directors and officers or
enforce judgments of U.S. courts predicated upon the civil liability provisions
of U.S. laws against our directors' and officers' assets. The market price of
our common stock may be affected by the difficulty for investors to enforce
judgments of U.S.courts.
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RESTRUCTURING AND RECENT TRANSACTIONS
PETRINI ACQUISITION
In December 1999, we acquired all of the outstanding shares of common
stock of Petrini from Gruppo Spigadoro, N.V. As a result of the transaction, we
changed our name from IAT Multimedia, Inc. to Spigadoro, Inc. In consideration
for the Petrini shares, we:
o issued an aggregate of 48,366,530 shares of our common stock,
of which 12,241,400 shares were issued at Gruppo Spigadoro's
request, to Carlo Petrini, our Co-Chairman, to satisfy part of
Gruppo Spigadoro's obligations to Mr. Petrini; and
o assumed approximately $20 million of short term indebtedness
of Gruppo Spigadoro.
In assuming such debt, we issued:
o a convertible promissory note to Gruppo Spigadoro in the
principal amount of approximately $6.3 million, which note
accrues interest at a rate of 5% per annum and matures upon
the earlier of (i) the completion of a public offering by us
in which we realize at least $20 million of net proceeds or
(ii) December 31, 2000. The note is convertible at any time at
our option into shares of our common stock at a conversion
price equal to the greater of $2.50 or 85% of the average
closing price of our common stock for the five trading days
prior to the notice of conversion. We have repaid $1.2 million
of the principal amount of such note since December 1999;
o a non-interest bearing promissory note to Mr. Petrini in the
principal amount of $1.0 million, which note was repaid in
March 2000;
o a non-interest bearing promissory note to Mr. Petrini in the
principal amount of 12.05 billion Lire or approximately $6.3
million, which note matures on June 30, 2000. The note will be
repaid in Lire, but the maximum amount payable under the note
will not exceed the U.S. Dollar equivalent of $7.0 million;
and
o a non-interest bearing convertible promissory note to Mr.
Petrini in the principal amount of approximately $6.2 million,
which note matures on December 31, 2000. The note is
convertible at any time at Mr. Petrini's option into shares of
our common stock at a conversion price equal to the greater of
$2.50 or 85% of the average closing price of our common stock
for the five trading days prior to the notice of conversion.
Repayment of the $6.3 million and $6.2 million promissory notes by us
has been guaranteed by Gruppo Spigadoro and has been secured by 6,120,700 shares
of our common stock owned by Gruppo Spigadoro which have been placed in escrow
for the benefit of Mr. Petrini. If any of the these shares of common stock are
sold to satisfy our obligations under these two
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promissory notes, we will be required to compensate Gruppo Spigadoro for the
loss of such shares by issuing an equal number of shares of our common stock to
Gruppo Spigadoro.
Under the terms of the transaction, we agreed that for so long as
Gruppo Spigadoro (or its current shareholders), their respective affiliates and
Carlo Petrini collectively hold at least:
o 50% of the outstanding shares of our common stock, Gruppo
Spigadoro or its assignees will have the right to nominate 50%
of the members for election to our Board of Directors;
o 25% of the outstanding shares of our common stock, Gruppo
Spigadoro or its assignees will have the right to nominate 25%
of the members for election to our Board of Directors;
o 10% of the outstanding shares of our common stock, Gruppo
Spigadoro or its assignees will have the right to nominate a
single member for election to our Board of Directors.
As a result of the Petrini transaction, as of March 27, 2000, Gruppo
Spigadoro and Mr. Petrini beneficially owned approximately 59.3% and 27.1%,
respectively, of our outstanding common stock. Jacob Agam, our Chairman of the
Board and Chief Executive Officer, is also Chairman of the Board of Gruppo
Spigadoro, Vertical Financial Holdings and certain affiliates of Vertical. Prior
to the Petrini transaction, Vertical was the largest beneficial owner of our
common stock. Entities affiliated with Vertical have economic ownership of
approximately 75% of the outstanding common stock of Gruppo Spigadoro and have
the power to vote approximately 90% of the outstanding common stock of Gruppo
Spigadoro and, as a result, Vertical and entities affiliated with Vertical have
the ability to vote or direct the vote of approximately 59.3% of our outstanding
common stock as of March 27, 2000.
Effective upon the closing of the Petrini transaction, we added two new
members to our Board of Directors, Mr. Petrini and Lucio De Luca, both of whom
are members of Petrini's management. In addition, Mr. De Luca was appointed as
our Chief Operating Officer, effective January 1, 2000 and Mr.
Petrini was appointed as our Co-Chairman.
We also entered into an Amended and Restated Employment Agreement dated
January 1, 2000 with Mr. Agam pursuant to which Mr. Agam will serve as our Chief
Executive Officer for an initial term of three years with an annual base salary
of $300,000, plus a bonus to be approved by our Board of Directors. Under the
agreement, Mr. Agam will be entitled to receive a severance payment if his
employment agreement is terminated without cause or for constructive discharge
equal to his base salary for the lesser of (i) the remainder of the existing
term of Mr. Agam's employment and (ii) one year from the effective date of
termination.
In addition, we entered into an Employment Agreement dated January 1,
2000 with Mr. De Luca pursuant to which Mr. De Luca will serve as our Chief
Operating Officer for an initial term of three years with an annual base salary
of $55,000, housing expenses of up to $20,000 per
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year and a bonus to be approved by the Board of Directors. Mr. De Luca also
received a one-time signing bonus of $75,000 and an initial grant of options to
purchase 250,000 shares of our common stock, which options vest over a period of
three years. Under the agreement, Mr. De Luca will be entitled to receive a
severance payment if his employment agreement is terminated without cause or for
constructive discharge equal to his base salary for the lesser of (i) the
remainder of the existing term of Mr. De Luca's employment and (ii) two years
from the effective date of termination. Mr. De Luca is also compensated by
Petrini for services rendered as the Chief Operating Officer of Petrini.
SALE OF FSE
In January 2000, we sold our 80% equity interest in FSE Computer-Handel
GmbH & Co. KG and our 100% equity interest in FSE Computer Handel-Verwaltung
GmbH to Frank Strauss (the founder of FSE) and the certain other parties, some
of whom are employees or former employees of FSE (collectively, the
"Purchasers"). In addition, Dr. Alfred Simmet, the former Chief Operating
Officer of FSE, sold his 20% equity interest in FSE Computer-Handel GmbH & Co.
KG to the Purchasers. FSE was responsible for the marketing of our high
performance personal computers in Germany. Under the terms of the transaction,
the Purchasers assumed all of the outstanding third party liabilities of FSE
(aggregating approximately $1.4 million) and agreed to pay us up to an aggregate
of approximately $263,000 (DM 500,000) based upon the "cash flow" of FSE (as
defined in the purchase agreement) over the next several years. Of the purchase
price, up to approximately $53,000 (DM 100,000) was attributable to Dr. Simmet's
ownership and under the terms of the transaction, Dr. Simmet transferred his
right to receive the approximately $53,000 to us to satisfy a portion of Dr.
Simmet's obligations to us. The purchase price will be paid as follows:
o 5% of the "cash flow" of FSE for the fiscal year ending
December 31, 2000;
o 15% of the "cash flow" of FSE for the fiscal year ending
December 31, 2001; and
o 25% of the "cash flow" of FSE for the fiscal years ending
December 31, 2002 through 2004.
We also intend to sell Columbus Computer Handel and its affiliates
(collectively, "Columbus"). Columbus distributes personal computer components,
peripherals and software, as well as personal computers, in Germany. We have
commenced discussions relating to the sale of Columbus, but no agreement has
been reached with any party regarding the terms of a potential transaction and
we cannot predict whether we will be able to sell this business on terms
favorable to us or at all.
ALGO VISION TRANSACTION
In connection with the spin-off of our research and development
activities in March 1998, we granted Algo Vision Schweiz AG, one of the entities
formed in connection with the
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spin-off, an option to purchase a 50% co-ownership interest in our visual
communications intellectual property. In July 1999, as part of the
reorganization of the Algo Vision entities, Algo Vision Schweiz and Algo Vision
Systems GmbH, the other entity formed in connection with the spin-off, became
wholly-owned subsidiaries of Algo Vision plc, an English company whose shares
began trading on the European Association of Securities Dealers Automated
Quotation System on July 23, 1999. In July 1999, Algo Vision plc, exercised its
option to purchase an ownership interest in our intellectual property and, as a
result, we entered into a series of agreements related to (i) the sale of our
visual communications intellectual property rights (other than the IAT name or
mark) and (ii) the exchange our 15% equity interest in each of Algo Vision
Systems and Algo Vision Schweiz, for shares of capital stock of Algo Vision plc.
Dr. Vogt, one of our directors, is a significant stockholder of Algo Vision plc.
Under the terms of the agreements, Algo Vision plc purchased a 50%
interest in our visual communications intellectual property rights for
$1,000,000 in July 1999, and purchased the remaining 50% interest for an
additional $2,500,000 in August 1999. Algo Vision plc has agreed to pay us
royalties (ranging from 5% to 10%) on the sale of certain products utilizing the
visual communications technology purchased by them until August 2001. In
connection with the transaction, Algo Vision Schweiz repaid outstanding loans
aggregating approximately $500,000, made by us to Algo Vision Schweiz as part of
the spin-offs.
In July 1999, we exchanged our 15% interest in each of Algo Vision
Systems and Algo Vision Schweiz, for 500,000 shares of Algo Vision plc. In
August 1999, as part of the transaction, we also purchased an additional 250,000
shares of Algo Vision plc for a purchase price of $2,500,000.
In a series of transactions during February 2000, we sold the 750,000
shares of capital stock of Algo Vision plc for approximately $16.8 million in
cash.
TRANSACTION WITH JNC
In June 1998, we issued a Series A 5% Convertible Debenture due June
19, 2001 to JNC Opportunity Fund Ltd. in the principal amount of $3.0 million.
The Debenture was convertible into an indefinite number of shares of our common
stock at a conversion price equal to the lesser of $13.45 and 87% of the average
of the five lowest closing prices of our common stock on the Nasdaq National
Market during the 15 trading days preceding the date of conversion. Under the
terms of the debenture, JNC had the right to accelerate the payment of the
debenture upon the occurrence of our acquisition of Petrini. In November 1999,
we entered into a waiver and amendment agreement with JNC under which JNC agreed
not to accelerate the debenture because of the Petrini acquisition. JNC also
agreed to fix the number of shares of our common stock that were issuable upon
conversion of the Debenture at 2,451,745 shares.
In November, 1999, JNC converted $2,325,000 of the outstanding
principal amount of the debenture, plus accrued interest, into a total of
1,872,982 shares of our common stock. At the time of this conversion, the amount
converted, together with all previous conversions, equaled the maximum amount
permitted to be converted under the debenture without
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stockholder approval under the rules of the Nasdaq Stock Market. The remaining
$718,500 principal amount of the debenture outstanding was convertible into
578,763 shares of our common stock, but, under the terms of the debenture, the
shares could not be issued to JNC without stockholder approval. In December
1999, we obtained stockholder approval for the issuance of the shares of common
stock and JNC converted the remaining principal amount of the debenture, plus
accrued interest, into 578,763 shares of our common stock. In addition, in
December 1999, JNC converted the 2,000 shares of our Series B Convertible
Preferred Stock into 198,255 shares of our common stock.
JNC has agreed not to sell any of these shares of our common stock
until June 29, 2000, subject to certain exceptions, including JNC's right to
sell up to 1,325,000 shares of our common stock after March 29, 2000.
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of our
executive officers and directors:
NAME AGE POSITION
- ---- --- --------
Jacob Agam 44 Chairman of the Board and Chief Executive Officer
Carlo Petrini 66 Co-Chairman of the Board
Klaus Grissemann 56 Director and Chief Financial Officer
Lucio De Luca 49 Director and Chief Operating Officer
Marc S. Goldfarb (1) 36 Director
Erich Weber (1) 57 Director
Robert Weiss (1) 53 Director
- ----------------------------------
(1) Member of Audit Committee
JACOB AGAM has served as our Co-Chairman of the Board since our
organization in October 1996 and became our Chairman and our Chief Executive
Officer in April 1998. Mr. Agam has served as the Chairman of the Board and
Chief Executive Officer of Gruppo Spigadoro N.V., a Dutch holding company, since
September 1998 and the Chairman of the Board of iEntertainment Network, Inc., a
developer and publisher of proprietory Internet and on-line multi-player games,
since August 1999. Mr. Agam is a founder and Chairman of Orida Capital Ltd. and
Vertical Capital Ltd., each a merchant banking and venture capital firm since
their inception in 1993, and the Chairman of Vertical Financial Holdings, a
principal stockholder of Spigadoro, since 1995. Mr. Agam, in his capacity as
Chairman of Orida, spends a portion of his business time providing services to
companies other than Spigadoro. Orida provides services for Vertical pursuant to
an agreement between Orida and Vertical. Mr. Agam received a law degree from Tel
Aviv University in 1984 and an LLM degree in securities and Corporate finance
from the University of Pennsylvania in 1986.
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CARLO PETRINI has served as Co-Chairman of the Board since February
2000 and has served as a director of Spigadoro since December 1999. Mr. Petrini
is a direct descendant of the founder of Petrini, has worked for Petrini for 43
years and has served as its President since 1980. Mr. Petrini also co-founded
the American-Italian Pasta Company, a United States pasta manufacturing and
distribution company, which was sold in 1989. Mr. Petrini is also a board member
of various Italian trade groups, industrial and food companies, as well as Banca
d'Italia (Perugia).
KLAUS GRISSEMANN has served as our Chief Financial Officer since our
organization in October 1996 and has served as a director since December 1996.
In 1989, Mr. Grissemann joined IAT AG, one of our subsidiaries, as Chief
Financial officer and has served as a director of IAT AG, one of our
subsidiaries, since 1993. From 1979 until 1988, Mr. Grissemann was Chief
Financial Officer of Jaeger Le Coultre AG, a Swiss watch manufacturer. Mr.
Grissemann graduated from Kantonale Handelsschule business school in Zurich.
LUCIO DE LUCA has served as our Chief Operating Officer since December
1999. Mr. De Luca has over 24 years of experience in the food and manufacturing
industry and has served as Chief Operating Officer of Petrini since 1998. From
1994 to 1998, Mr. De Luca was General Manager of several divisions of Averna
Group, a large Italian industrial holding company. From 1990 to 1993, Mr. De
Luca was President of Pepsi Cola Foods International Inc. Italy. From 1987 to
1989, he was Divisional Manager of Mars (Italy) and from 1978 to 1987, Mr. De
Luca served in various capacities, including Marketing Director of Henkel
(Italy), a large German chemical company. Mr. De Luca also served in London,
England from 1974 to 1978, as General Manager of Compagnia Commerciale
Meridionale, an Italian import-export company.
MARC S. GOLDFARB has served as a director of Spigadoro since September
1999. Since August 1998, Mr. Goldfarb has been the President and Managing
Director of Orida Capital USA, Inc., a consulting firm that is the U.S.
representative of the Vertical Group, a global merchant banking firm, and an
affiliate of Orida Capital Ltd. Prior to joining Orida Capital, Mr. Goldfarb was
a corporate and securities attorney for over 10 years, most recently as a
partner at Bachner, Tally & Polevoy LLP in New York, where he specialized in
corporate finance, venture capital and mergers and acquisitions. Mr. Goldfarb
holds a B.S. degree in Management and Industrial Relations from Cornell
University and a J.D. from the University of Pennsylvania Law School.
DR. ERICH WEBER has served as a director of Spigadoro since June 1998.
Dr. Weber's expertise is in information automation. Dr. Weber has served in
several management positions at Revi Informatik, a data processing consulting
company, since 1992 following ten years as a partner and manager of electronic
data processing consulting of Revisuisse Price Waterhouse, Zurich. Prior
thereto, he was a department manager of infomatics for Migros
Genossenschaftsbund and Alusuisse, a producer of aluminum products. Dr. Weber
earned his doctorate in Economic Science from the University of Zurich in 1970.
ROBERT WEISS has served as a director of Spigadoro since June 1998. In
1980, Mr. Weiss founded Robert Weiss Consulting, an independent electrical
engineering consulting company,
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and has served as its President since 1980. Previously, he served nine years as
a consultant to Alusuisse, a producer of aluminum products, in its headquarters
and department of research and development. Mr. Weiss received a degree in
Chemistry from Technical College Winterthur in 1970.
All directors hold office unit the next annual meeting of stockholders
or until their successors are elected and qualified; vacancies and any
additional positions created by board action are filled by action of the
existing Board of Directors. All officers serve at the discretion of the Board
of Directors.
RISK FACTORS
The following factors should be reviewed carefully, in conjunction with
the other information in this prospectus and our consolidated financial
statements. These factors could cause actual results to differ materially from
those currently anticipated and contained in forward-looking statements made in
this prospectus and presented elsewhere by our management from time to time. See
"--This prospectus contains forward looking statements which may not prove to be
accurate or complete."
COMPANY RISKS
WE HAVE CHANGED OUR PRINCIPAL BUSINESS AND WE MAY NOT BE SUCCESSFUL OPERATING A
NEW BUSINESS.
Prior to our acquisition of Petrini, our sole business has been the
marketing and distribution of personal computers and personal computer
components, peripherals and software. The production and marketing of animal
feed and pasta and flour products is a new business for us and our management
group has limited experience operating this type of business. Although we have
retained the management personnel of Petrini, we cannot assure that we will be
able to continue to retain such individuals or that our management team will be
successful in managing this new business. If we are unable to successfully
operate this new business, our business and operating results will be materially
impaired.
IF WE DO NOT SUCCESSFULLY SELL OUR EXISTING COMPUTER BUSINESS, THE COMBINED
COMPANY MAY BE ADVERSELY AFFECTED.
We sold the FSE entities at a loss. We intend to sell our remaining
computer business. However, in the event we are unable to sell our computer
business, we would be subject to various risks relating to the operation of two
significantly different businesses including:
o the possibility that the business cultures of the two
businesses may not mesh;
o the possibility that management may be distracted from regular
business concerns by the need to integrate operations or
operate the businesses separately;
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o difficulty in obtaining additional financing;
o problems in retaining employees;
o challenges in retaining customers;
o potential adverse effects on operating results; and
o unanticipated costs relating to the operation of each of the
businesses.
If we are unable to sell our remaining computer business and
discontinue these operations, we may incur costs and expenses relating to the
discontinuation of operations, the termination of some of our employees and the
termination of certain contracts, including our leases. These costs could reduce
our available cash and our profitability and could adversely affect our business
and operating results.
We have commenced discussions relating to the sale of this business.
However, we have no agreements or arrangements for the sale of our remaining
computer business. We cannot assure that we will be able to sell this business
on terms favorable to us or at all or that there will not be substantial
unanticipated costs associated with such sale.
VERTICAL FINANCIAL HOLDINGS AND AFFILIATED ENTITIES CONTROL SPIGADORO.
As of March 27, 2000, Vertical Financial Holdings and entities
affiliated with Vertical Financial Holdings had the ability to vote or direct
the vote of approximately 59.3% of our outstanding common stock and will control
the actions that require stockholder approval, including:
o the election of our directors; and
o the outcome of mergers, sales of assets or other corporate
transactions or matters submitted for stockholder approval.
Jacob Agam, our Chairman of the Board and Chief Executive Officer, is also the
Chairman of the Board of Gruppo Spigadoro, N.V. and Vertical Financial Holdings
and some of its affiliated entities. Entities affiliated with Vertical Financial
Holdings have the power to vote approximately 90% of the shares of our common
stock owned by Gruppo Spigadoro. Gruppo Spigadoro or its assignee also has the
right to nominate up to a majority of the members for election to our Board of
Directors so long as Gruppo Spigadoro, its affiliates and Carlo Petrini, one of
our directors, continue to own, in the aggregate, a specified number of our
securities.
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BECAUSE WE ARE A HOLDING COMPANY, OUR ABILITY REPAY OUR INDEBTEDNESS WILL DEPEND
UPON THE LEVEL OF OUR CASH RESERVES AND, THE DISTRIBUTION OF FUNDS FROM OUR
OPERATING SUBSIDIARIES.
We are a holding company and substantially all of our operating results
will be derived from the operations of our operating subsidiaries and other
businesses that we may acquire in the future. In connection with the Petrini
acquisition, we assumed approximately $20 million of short term indebtedness,
approximately $12.5 million of which is convertible into shares of our common
stock. All of the assumed indebtedness will become payable during 2000. We have
repaid approximately $2.2 million of such indebtedness since December 1999. Our
ability to repay this indebtedness will depend on the level of our cash
reserves, including any proceeds from the sale of our personal computer
business, and the operating results of our operating subsidiaries and the
distribution of sufficient funds from these subsidiaries to us. The ability of
our operating subsidiaries to make such funds available to us may be restricted
by the terms of their indebtedness and by applicable law. If our available
working capital, together with any distributions from our subsidiaries, are not
sufficient to enable us to repay our indebtedness, we will be required to obtain
additional debt or equity financing for the repayment of this debt. One of the
promissory notes issued by us in the Petrini acquisition is denominated and
payable in Lire in the principal amount of 12.05 billion Lire or approximately
$6.3 million. Although the maximum amount payable by us under this note is
capped at $7.0 million, the amount to be paid by us under this note is subject
to fluctuations in the value of the Lire against the U.S. Dollar.
OUR SUBSTANTIAL DEBT MAY ADVERSELY AFFECT OUR ABILITY TO OBTAIN ADDITIONAL FUNDS
AND INCREASES OUR VULNERABILITY TO ECONOMIC OR BUSINESS DOWNTURNS.
Our indebtedness as of December 31, 1999, aggregated approximately
$46.4 million. Accordingly, we are subject to the risks associated with
substantial indebtedness, including:
o we have less funds available for operations, future business
opportunities and other purposes;
o our ability to obtain additional financing to repay our debt
and for acquisitions, working capital, capital expenditures,
general corporate or other purposes may be impaired;
o it may be more difficult and expensive to obtain additional
funds, if available at all;
o we are more vulnerable to economic downturns, less able to
withstand competitive pressures and less flexible in reacting
to changes in our industry and general economic conditions;
and
o if we default under any of our debt instruments or if our
creditors demand payment of a portion or all of our
indebtedness, we may not have sufficient funds to make such
payments.
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Any of these risks may materially adversely affect our operations and financial
condition and adversely affect our stock price.
A portion of our debt is secured by our assets. If we default under the
debt instruments secured by our assets, such assets would be available to the
creditor to satisfy our obligations to the creditor before any payment could be
made to our stockholders.
WE EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS WHICH MAY CAUSE OUR STOCK
PRICE TO FLUCTUATE.
Our results of operations have fluctuated significantly in recent years
and may continue to fluctuate in the future. In 1999, Petrini's net sales
decreased by approximately 1.8% as compared to 1998. In 1998, Petrini's net
sales decreased by approximately 9.7% as compared to 1997. In 1997, Petrini's
net sales decreased by approximately 7.9% as compared to 1996. A number of
factors have caused and may continue to cause these fluctuations, including:
o price fluctuations for raw materials;
o demand for our products;
o increased marketing costs;
o pricing and competition;
o the timing and scope of new customer and new product volumes;
o plant expansion or consolidation and equipment upgrade costs;
and
o general economic conditions.
Any of these factors may adversely affect our business and financial
condition. Our results of operations for any past or interim periods may not be
indicative of our future performance.
OUR OPERATING RESULTS WILL BE ADVERSELY AFFECTED BY CHARGES FROM ACQUISITIONS.
Because we plan to grow our business through acquisitions, we will
likely incur significant non-cash charges for depreciation and amortization as
we acquire additional businesses. These charges will adversely affect our
results of operations and may result in decreased net income or increased net
loss. In connection with our acquisition of Petrini, we incurred approximately
$5.2 million of goodwill. We will amortize this goodwill over 20 years, which
will cause us to record in our financial statements an annual non-cash charge of
approximately $260,000. We will also incur increased interest expense if we
finance new acquisitions through borrowings.
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OUR STRATEGY OF ACQUIRING OTHER COMPANIES FOR GROWTH MAY NOT SUCCEED AND MAY
ADVERSELY AFFECT OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS.
Our strategy of growth through acquisitions presents risks that could
materially adversely affect our business and financial performance, including:
o the diversion of our management's attention;
o the assimilation of the operations and personnel of the
acquired business;
o the contingent and latent risks associated with the past
operations of and other unanticipated problems arising in the
acquired business;
o the need to expand management, administration, and operational
systems; and
o increased competition for acquisition opportunities and
qualified employees.
We cannot predict whether:
o we will be able to identify suitable acquisition candidates;
o we will be able to acquire additional businesses on terms
favorable to us or at all;
o we will be able to successfully integrate into our business
the operations of any new businesses;
o we will realize any anticipated benefits of completed
acquisitions; or
o there will be substantial unanticipated costs associated with
new acquisitions.
Because expansion of our operations will likely be predominately in
international markets, acquisitions could also involve risks relating to
operating in other foreign countries, including those relating to:
o management of remote operations;
o cultural incompatibilities;
o currency exchange rates; and
o additional legal, tax, accounting and regulatory requirements.
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The failure to manage growth effectively may adversely affect our
business and financial condition. We are evaluating, and are in preliminary
discussions in connection with, the potential acquisition of assets or equity of
businesses related to our business. However, we have no agreements or
arrangements with respect to any particular acquisitions and we may not be able
to complete any additional acquisitions on terms favorable to us or at all. If
we are unable to acquire additional businesses, our growth may be reduced.
We intend to issue our securities in connection with future
acquisitions. If businesses we want to acquire will not accept our securities as
payment of all or a portion of the purchase price, we may be unable to make
additional acquisitions, except through the use of cash.
IF WE DO NOT OBTAIN SUFFICIENT ADDITIONAL FUNDS OUR ABILITY TO GROW THROUGH
ACQUISITIONS MAY BE LIMITED.
We will likely require additional funds for acquisitions and
integration and management of acquired businesses. We have no commitments or
arrangements for any additional funds. We cannot predict whether additional
funds will be available on terms acceptable to us or at all. If we cannot obtain
funds when required, the growth of our business may be adversely affected which
could materially adversely affect our financial condition. If we issue our
securities to obtain additional funds, or in our acquisitions, our existing
stockholders will experience dilution.
THE LOSS OF OUR KEY PERSONNEL MAY ADVERSELY AFFECT OUR BUSINESS.
Because we have a limited number of management personnel, we are
dependent on our executive officers, including Jacob Agam, our Chairman of the
Board and Chief Executive Officer, and Lucio De Luca, our Chief Operating
Officer, as well as other principal members of our management team and the
management team at Petrini. Mr. Agam provides services to us on a part-time
basis. We cannot assure that any of our management personnel, including Mr. Agam
and Mr. De Luca, will continue to devote sufficient time to our business. The
loss of services of, or a material reduction in the amount of time devoted to
our business by these individuals could adversely affect our business and
financial condition. Competition for qualified executive officers is intense. In
addition, if we are unable to attract, retain and motivate other highly skilled
employees, our business, prospects and financial condition could be materially
adversely affected.
BECAUSE THE SELLER OF PETRINI IS A HOLDING COMPANY, OUR ABILITY TO RECOVER FOR
AN INDEMNIFICATION CLAIM UNDER THE STOCK PURCHASE AGREEMENT MAY BE LIMITED.
Gruppo Spigadoro, the seller of Petrini, is a holding company whose
assets consist primarily of the shares of our common stock issued to it in the
acquisition. Gruppo Spigadoro is not restricted from distributing such shares to
its stockholders. If a claim for indemnification arises out of the stock
purchase agreement and Gruppo Spigadoro has transferred such shares to its
stockholders, Gruppo Spigadoro may not have sufficient assets to pay a claim for
indemnification. In addition, we may not be able to pursue claims against those
stockholders. As
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a result, a misrepresentation by Gruppo Spigadoro in the stock purchase
agreement may result in a material loss to us.
INDUSTRY RISKS
INTENSE COMPETITION IN THE PASTA AND ANIMAL FEED INDUSTRIES MAY ADVERSELY AFFECT
OUR OPERATING RESULTS.
We operate in a highly competitive environment and compete with
numerous well established national, regional and foreign companies, as well as
many smaller companies in:
o the production, marketing and distribution of animal feed and
pasta and flour products;
o the procurement of raw materials;
o the development and improvement of animal feed and the design
of optimal animal nutrition and genetic breeding programs; and
o the development, improvement and expansion of pasta and flour
products and product lines.
As compared to us, many of our competitors have:
o significantly longer operating histories and broader product
lines;
o significantly greater brand recognition; and
o greater production capacity and financial, management and
other resources.
As a result, our competitors may be able to:
o adapt more quickly to new or emerging production technologies
and product development;
o adapt more quickly to changing market conditions and customer
preferences;
o devote greater resources to the promotion and sale of their
products; and
o respond more effectively to competitive pressures.
Our competitive environment depends to a significant extent on the
industry capacity relative to demand for pasta and animal feed products. We
believe that the worldwide pasta and animal feed industries have significant
excess production capacity. This excess capacity has given
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rise to intense competition for sales, often focused on product pricing. A
variety of discount programs are used by industry participants to obtain market
share. The effect of such competition has been to put pressure on profit margins
and to involve us in vigorous competition to obtain and retain product
customers. Significant industry capacity levels above demand for pasta and
animal feed products may materially adversely affect our business and financial
condition.
Our direct competitors in our pasta business include Barilla, the
industry leader in Italy, as well as approximately 45 other Italian pasta
producers. In the United States, we also compete with:
o Large United States based multi-national companies such as:
o New World Pasta with brands such as San Giorgio
(Registered Trademark) and Ronzoni(Registered
Trademark); and
o Borden, Inc. with brands such as Prince(Registered
Trademark) and Creamette(Registered Trademark); and
o Regional U.S. producers of retail and institutional pasta.
The animal feed industry is highly fragmented, with the bulk of the
industry consisting of national and regional competitors, including
cooperatives. We believe our largest competitors in Italy are:
o in Northern Italy: Purina Italia S.p.A., Raggio di Sole
Mangimi S.p.A. and Veronesi Finaziaria S.p.A.; and
o in Central-Southern Italy: Progeo S.c.a.r.l., F. lli Martini &
C. S.p.A. and Mignini S.p.A.
However, as animal breeders become larger they tend to integrate their
business by acquiring or constructing feed production facilities. As a result,
the available market for commercial feed may become smaller and competition may
increase, which could materially adversely affect our business and financial
condition.
OUR FINANCIAL RESULTS MAY BE AFFECTED BY INCREASES IN THE COSTS OF RAW MATERIALS
AND PACKAGING.
Our financial results depend to a large extent on the cost of raw materials and
packaging and our ability to pass along to our customers increases in these
costs. Historically, market prices for commodity grains and food stocks have
fluctuated in response to a number of factors, including:
o change in the agricultural policies of the European Community;
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o changes in United States government farm support programs;
o changes in international agricultural and trading policies;
o weather conditions during the growing and harvesting seasons;
o level of international stocks in storage;
o currency fluctuations;
o shipping costs;
o speculations on commodities; and
o other factors over which we have no control.
Lower prices for durum wheat and the resulting semolina, when combined
with excess production capacity, has placed downward pressure on pasta prices
and has intensified competition in the pasta industry. In the event costs for
raw materials increase, we would be required to increase sales prices for our
products in order to avoid margin deterioration. However, because there is
significant competition in the pasta and animal feed industries in Italy, we may
not be able to increase prices without losing market share. If we are unable to
increase prices in response to increased raw material costs, our business and
financial condition may be materially adversely affected.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY, AND WE MAY BE SUBJECT TO LEGAL
LIABILITY FOR, DEFECTS IN OUR PRODUCTS.
The sale of food products for human consumption involves the risk of
injury to consumers and, to a lesser extent, the sale of animal feed products
involves the risk of injury to animals as a result of:
o tampering by unauthorized third parties;
o product contamination or spoilage;
o the presence of foreign objects, substances, chemicals, and
other agents; or
o residues introduced during the growing, storage, handling or
transportation phases.
We cannot assure that consumption of our products will not cause a
health-related illness in the future or that it will not be subject to claims or
lawsuits relating to such matters. There can
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be no assurance that we will not incur claims or liabilities for which we are
not insured or that exceed the amount of our insurance coverage.
WE ARE DEPENDENT UPON INDEPENDENT AGENTS AND DISTRIBUTORS TO MARKET OUR
PRODUCTS.
We market and distribute a substantial portion of our products through
a network of independent agents and distributors and the loss of certain key
agents or distributors could adversely affect our business. In addition to our
products, the independent agents and distributors selling our products typically
sell other food products manufactured by third parties. The performance of our
agents and distributors is outside our control and we cannot predict whether
such agents and distributors will continue to market our products. If we are
unable to attract, retain and motivate other highly skilled agents and
distributors, our business could be materially adversely affected. In addition,
our arrangements with several of our agents are governed by a national
collective labor agreement. If we terminate any of these relationships, we would
be required to pay an indemnity which could, in the aggregate, be material to
our business.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY OUR DEPENDENCE UPON OUR SUPPLIERS.
We require a high volume of raw materials to produce our products Our
inability to obtain these raw materials in a timely manner could adversely
affect our business and financial condition. We do not have any long term
contracts with our suppliers. The availability of such raw materials is affected
by factors such as:
o demand for raw materials, including durum wheat;
o weather conditions during the growing and harvesting seasons;
and
o political and economic downturns in the countries in which
such suppliers are located.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY THE POTENTIAL RELOCATION OF OUR
LARGEST PRODUCTION FACILITY.
Our largest plant for the production of animal feed and our only plant
for the production of pasta and flour may need to be relocated due to a rezoning
of the land on which these plants are located. These plants are located on land
owned by us in Bastia Umbra in a region of Italy called Regione Umbria. In 1996,
the municipality of Bastia Umbra initiated a rezoning proceeding to reclassify
this land as residential and public park space. The municipality has since
finalized its rezoning plan, which is now being considered by the government of
the Regione Umbria which must also approve the plan before it can become
effective. Unless the Regione Umbria amends the rezoning plan or we are able to
appeal the decision, we will be required to:
o terminate operations at this plant;
o possibly terminate the employees who work at this plant; and
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o relocate these operations to a new location.
Although we do not expect a decision to be finalized in the near future
and would be compensated for the fair value of the property, relocation of these
operations to a new location could materially and adversely affect our business
operations and financial condition as a result of:
o operational problems;
o production interruptions;
o quality control concerns;
o delays in shipments; and
o costs and other risks associated with the relocation of these
operations and the possible hiring of new employees.
WE ARE DEPENDENT UPON THIRD PARTIES FOR THE DELIVERY OF OUR RAW MATERIALS AND
PRODUCTS.
Our raw materials, including durum wheat and commercialized products,
are shipped to our production facilities from different collection centers by
third parties. Our finished products are then transported by third parties to
our customers in Italy and elsewhere. An extended interruption in our ability to
ship raw materials to our facilities, or finished products from our facilities,
could adversely affect our business and our financial condition. If we were to
experience an interruption due to strike, natural disasters or otherwise, we may
not be successful in transporting such materials or finished products in a
timely and cost-effective manner.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY AN INABILITY TO SUCCESSFULLY MANAGE
OUR PRODUCTION AND INVENTORY.
Most of our customers use inventory management systems which track
sales of particular products and rely on reorders being rapidly filled by
suppliers to meet consumer demand rather than on large inventories being
maintained by these customers. These systems increase pressure on us to fill
orders promptly and thereby shift a portion of the customer's inventory
management cost to us. Our production of excess inventory to meet anticipated
retailer demand could result in markdowns and increased inventory carrying costs
for us. In addition, if we underestimate the demand for our products, we may be
unable to provide adequate supplies of products to retailers in a timely
fashion, and may consequently lose sales.
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OUR BUSINESS MAY BE ADVERSELY AFFECTED BY OUR LIMITED PROPRIETARY RIGHTS OR BY
LEGAL ACTIONS TO ENFORCE OR DEFEND OUR PROPRIETARY RIGHTS.
We hold trademarks that are of fundamental value and importance for our
business. Although these trademarks have been registered in Italy and certain
other countries in which our products are sold, we may not be able to prevent
misappropriation of our trademarks or protect our other intellectual property.
The laws of some foreign countries where we sell our products may not
protect our proprietary rights to the same extent as do laws in the United
States. Our inability to protect our proprietary rights could materially
adversely affect our operations which may adversely affect our financial
condition. Litigation also may be necessary to:
o enforce our intellectual property rights;
o protect our trademarks and other proprietary rights;
o determine the scope and validity of such intellectual property
rights; and
o defend claims of infringement of other parties' proprietary
rights.
Litigation may not be successful, could result in substantial costs and
diversion of management time and resources and could materially adversely affect
our operations and our financial condition.
In the event a third party brings an infringement claim against us,
such party could secure a judgment awarding substantial damages, as well as
injunctive or other equitable relief. This relief could effectively block our
ability to make, use, sell, distribute or market our products. If we fail to
obtain a necessary license or other right to proprietary rights held by third
parties, it could preclude the sale, manufacture or distribution of our products
and could materially adversely affect our financial condition.
OUR OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATIONS.
Many aspects of our operations are subject to government regulations in
Italy and the other countries within which we operate. Such regulations include
those relating to:
o the production, packaging, labeling and marketing of our
products;
o price controls;
o currency conversion and repatriation;
o significant taxation of our earnings and earnings of our
personnel;
o manufacturing, environmental, safety and other regulations
relating to our operations and the industries in which we
operate;
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o restrictive labor policies; and
o our use of local employees and suppliers.
Our operations are also subject to the risk of changes in
international, national, foreign and local laws and policies that may impose
restrictions on us, including trade restrictions, that could have a material
adverse effect on our operations and financial condition. Other types of
government regulation which could, if enacted or implemented, materially and
adversely affect our business include:
o expropriation or nationalization decrees;
o confiscatory tax systems;
o primary or secondary boycotts or embargoes directed at
specific countries or companies;
o import restrictions or other trade barriers;
o mandatory sourcing rules; and
o high labor rate and fuel price regulation.
We cannot determine to what extent our future operations and earnings may be
affected by new legislation, new regulations or changes in or new
interpretations of existing regulations.
RISKS RELATING TO FOREIGN OPERATIONS
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY RISKS ASSOCIATED WITH FOREIGN
OPERATIONS.
Substantially all of our revenues are generated from operations in
Italy and, to a lesser extent, in 45 countries throughout the world. Conducting
an international business inherently involves a number of difficulties and
risks, such as:
o currency fluctuations;
o export restrictions;
o compliance with existing and changing regulatory requirements;
o tariffs and other trade barriers;
o difficulties in staffing and managing international
operations;
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o cultural issues;
o longer payment cycles;
o problems in collecting accounts receivable;
o political instability and economic downturns;
o seasonal reductions in business activity in Europe during the
summer months; and
o potentially adverse tax consequences.
Any of these factors may materially adversely affect our business and
financial condition.
WE ARE SUBJECT TO A NUMBER OF REGULATORY AND CONTRACTUAL RESTRICTIONS GOVERNING
OUR RELATIONS WITH OUR EMPLOYEES.
We are subject to a number of regulatory and contractual restrictions
governing our relations with our employees, including our management. Our
employment relations in Italy are governed by numerous regulatory and
contractual requirements, including:
o national collective labor agreements; and
o individual employer labor agreements.
These arrangements address a number of specific issues affecting our
working conditions, including:
o hiring;
o work time;
o wages and benefits; and
o termination of employment.
We will be required to make extraordinary or significant payments in
order to comply with these requirements. The cost of complying with these
requirements may materially adversely affect our business and financial
condition. In addition, our arrangements with several of our agents who market
our products are governed by a national collective labor agreement. In the event
we were to terminate any of these relations, we would be required to pay an
indemnity which could, in the aggregate, materially adversely affect our
business and financial condition.
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OUR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY FOREIGN CURRENCY
FLUCTUATIONS AND TRANSITION TO THE EURO.
Historically, a substantial portion of our revenues has been
denominated in the Italian Lire. Our results of operations are subject to
fluctuations in the value of the Italian Lire, and will be subject to
fluctuations in the value of the Euro against the U.S. Dollar and other
currencies. Accordingly, fluctuations in exchange rates could materially
adversely affect our business and financial condition.
On January 1, 1999, certain members of the European Union, including
Italy, introduced a single currency, the Euro. During the transition period
ending January 1, 2002, European Monetary Union (EMU) countries will have the
option of settling transactions in local currencies or in the Euro. We have not
yet determined when we intend to convert to the Euro. The conversion to the Euro
will result in increased costs to us related to updating operating systems,
review of the effect of the Euro on our contracts and updating catalogues and
sales materials for our products. In addition, adoption of the Euro will limit
the ability of an individual EMU country to manage fluctuations in the business
cycles through monetary policy.
INVESTORS MAY NOT BE ABLE TO ENFORCE JUDGMENTS AGAINST US OR OUR OFFICERS AND
DIRECTORS.
Although we are organized under the laws of the State of Delaware, we
are primarily a holding company which primarily holds stock in entities outside
the United States and a substantial portion of our assets are located outside
the United States. In addition, six of our seven directors and all of our
executive officers are residents of foreign countries and all or a substantial
portion of the assets of such directors and officers is located outside of the
United States. As a result, it may not be possible for investors to:
o effect service of process upon most of our directors and
officers; or
o enforce judgments of U.S. courts predicated upon the civil
liability provisions of U.S. laws against our directors' and
officers' assets.
The market price of our common stock may be adversely affected by the
difficulty for investors to enforce judgments of U.S. courts.
STOCK AND MARKET RISKS
OUR STOCK MAY BE DELISTED FROM THE AMERICAN STOCK EXCHANGE IF WE DO NOT MEET THE
CONTINUED LISTING CRITERIA.
We will be subject to the continued listing requirements of The
American Stock Exchange and if we are unable to satisfy any of these
requirements, our stock may be delisted from The American Stock Exchange. If our
stock is delisted from The American Stock Exchange, the liquidity of our stock
could be impaired, not only in the number of securities which
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could be bought and sold, but also through delays in the timing of transactions,
reduction in coverage by security analysts and the news media and lower prices
for our common stock than might otherwise be attained.
WE DO NOT INTEND TO PAY DIVIDENDS TO OUR STOCKHOLDERS.
We have not paid any cash dividends on our common stock and do not
expect to do so in the foreseeable future.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY AFFECT OUR
STOCK PRICE AND OUR ABILITY TO RAISE NEW FUNDS.
Sales of shares of stock by existing stockholders could have an adverse
effect on our stock price. As of March 27, 2000, we had 60,892,099 shares of
common stock outstanding, of which approximately 7,700,000 shares are eligible
for sale without restriction. The remaining shares are subject to the resale
provisions of Rule 144 and Rule 145 under the Securities Act of 1933. We have
registered for resale of 4,892,480 shares of common stock and we intend to
register for resale the 48,366,530 shares of our common stock issued in the
Petrini acquisition. As a result, the
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market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market or the perception
that substantial sales could occur.
ADDITIONAL SHARES OF OUR COMMON STOCK MAY BE ISSUED IF OPTIONS OR WARRANTS ARE
EXERCISED OR OUR CONVERTIBLE PROMISSORY NOTES ARE CONVERTED, CAUSING DILUTION TO
OUR STOCKHOLDERS.
As of March 27, 2000, we had outstanding:
o warrants to purchase an aggregate of approximately 2,800,000
shares of common stock at exercise prices ranging from $3.00
to $13.25;
o options to purchase approximately 1,450,000 shares of our
common stock; and
o convertible promissory notes which are convertible into
approximately 5,000,000 shares of our common stock at the
conversion price of $2.50. We cannot predict the actual number
of shares of our stock that may be issued upon conversion of
the notes, which depends on:
o the conversion price in effect from time to time during
the term of the promissory notes; and
o timing of any conversion.
The existence of these securities may adversely affect us or our
stockholders for many reasons, including:
o the market price of our stock may be adversely affected by the
existence of convertible securities;
o if any of these securities are exercised, the value of the
stock held by our stockholders will be diluted if the value of
such stock immediately prior to the exercise of such
securities exceeds the exercise price;
o these securities give the holders the opportunity, at nominal
cost, to profit from a rise in the market price of our stock;
and
o the terms upon which we could issue additional common stock or
obtain additional financing may be adversely affected.
Holders of warrants and options are also likely to exercise them when,
in all likelihood, we could obtain additional capital on terms more favorable
than those provided by the warrants and options.
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ANTI-TAKEOVER PROVISIONS MAY ADVERSELY AFFECT OUR STOCKHOLDERS.
We are subject to a Delaware statute regulating business combinations
that could discourage, hinder or preclude an unsolicited acquisition of us and
could make it less likely that stockholders receive a premium for their shares
as a result of any such attempt. In addition, our Board of Directors may issue,
without stockholder approval, shares of preferred stock. The preferred stock
could have voting, liquidation, dividend or other rights superior to those of
the common stock. Therefore, if we issue preferred stock, your rights as a
common stockholder may be adversely affected. These factors could depress our
stock price.
ITEM 2. PROPERTIES
Our principal offices and facilities, owned or leased, and their
current uses are described in the following table:
PLANT FACILITY SIZE CAPACITY ANNUAL OWNED
LOCATION (SQ Ft.) USE TON/DAY RENT OR LEASED
- -------- -------- --- ------- ---- ---------
Bastia Umbra 1,355,725 Corporate -- Owned
(Perugia) headquarters
Bastia Umbra Mill 335/tons -- Owned
(Perugia)
Bastia Umbra Pasta plant 130/tons -- Owned
(Perugia)
Bastia Umbra Animal feed plant 800/tons -- Owned
(Perugia)
Padua 322,917 Animal feed plant 390/tons -- Owned
Naples 416,563 Animal feed plant 225/tons -- Owned
Alessandria 348,643 Animal feed plant 150/tons -- Owned
Bari 215,633 Animal feed plant 130/tons -- Owned
Cagliari 55,570 Animal feed plant 120/tons -- Owned
Catania 80,586 Animal feed plant 80/tons -- Owned
Other Locations
Genetic Centre Cannara Pig breeding plant 500/sows in -- Owned (1)
production
Pig Finishing Plant Magione Pig finishing plant 500/hogs in -- Leased (2)
production
- ----------
(1) Leased to third parties since October 1, 1999
(2) Subleased to third parties since October 10, 1999
Our largest plant for the production of both animal feed and pasta and
flour products is located in Bastia Umbra, near Perugia. The municipality of
Bastia has initiated a rezoning proceeding with respect to the land upon which
our plant is located. The rezoning proceeding envisions the total demolition of
existing buildings and re-classifying the land as residential and public park
space. In the event that the rezoning is implemented, we will be required to
relocate our entire plant from its current location in Bastia Umbra.
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Although we do not expect a decision to be finalized in the near future
and would be compensated for the fair value of the property, relocation of these
operations to a new location could materially and adversely affect our business
operations and financial condition as a result of:
o operational problems;
o production interruptions;
o quality control concerns;
o delays in shipments; and
o costs and other risks associated with the relocation of these
operations and the possible hiring of new employees.
We have undertaken a study of possible relocation alternatives, which
include both the subsidized construction or acquisition of another plant. As a
result of such study, we believe that some of the adverse consequences arising
out of a need to move our plant from Bastia Umbra can be mitigated.
We also:
o lease approximately 4,600 square feet of office space in New
York, New York from an affiliate of our Chairman and Chief
Executive Officer. This lease terminates in January 2002 and
has annual rental cost of approximately $230,000, which amount
includes administrative and office services; and
o lease approximately 860 square meters of space in Erding,
Germany. This lease terminates in March 2003 and has annual
rental costs of approximately $40,000.
We believe that these facilities are suitable for our current and
anticipated need. We believe that, if necessary, we can obtain additional leased
space and renew our existing leases at similar rates.
ITEM 3. LEGAL PROCEEDINGS
We are a party to numerous legal proceedings incidental to the conduct
of our business, none of which individually or in the aggregate is material to
our financial condition and results of operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special stockholders meeting held on December 22, 1999, the following
matters were approved:
o issuance of up to 48,366,530 shares of our common stock in
connection with our acquisition of all of the outstanding
shares of capital stock of Petrini;
o the amendment to our Amended and Restated Certificate of
Incorporation to increase the authorized number of shares of
our common stock that we are authorized to issue from 50
million shares to 100 million shares;
o the amendment of our Amended and Restated Certificate of
Incorporation to change our name from IAT Multimedia, Inc. to
Spigadoro, Inc.;
o our 1999 Stock Option Plan; and
o the issuance of 578,763 shares of our common stock in
connection with the conversion of our outstanding convertible
debenture. See "Business-Recent Transactions."
The respective vote tabulations are detailed below:
Proposal 1 For Withhold Abstain
- -------- ----- -------- -------
Issuance of 48,366,530 5,920,261 51,320 700
shares of our common
stock in the Petrini
acquisition
Proposal 2 For Against Abstain
- -------- ----- ------- -------
Amendment to our 5,952,761 19,020 500
Amended and Restated
Certificate of Incorporation
to increase our authorized
capital
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Proposal 3 For Against Abstain
- -------- ----- ------- -------
Amendment to our 5,961,361 10,120 800
Amended and Restated
Certificate of Incorporation
to change our name from
IAT Multimedia, Inc. to
Spigadoro, Inc.
Proposal 4 For Against Abstain
- -------- ----- ------- -------
Approval of our 1999 5,905,851 47,800 18,630
Stock Option Plan
Proposal 5 For Against Abstain
- -------- ----- ------- -------
Issuance of shares of our 4,039,838 50,500 1,881,943
common stock upon the
conversion of our
outstanding convertible debenture
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock began trading on the Nasdaq National Market on March
26, 1997 and was quoted for trading under the symbol "IATA." Prior to that date,
there was no public market for our common stock. On January 18, 2000, our stock
began trading on the American Stock Exchange and is quoted for trading under the
symbol "SRO." The following table sets forth the range of high and low closing
sales prices per share for our common stock on the Nasdaq National Market for
the periods indicated.
FISCAL YEAR ENDED DECEMBER 31, 1999: High Low
October 1, 1999 through December 31, 1999 $3 5/8 $1 5/8
July 1, 1999 through September 30, 1999 4 2 3/16
April 1, 1999 through June 30, 1999 5 5/8 3 1/8
January 1, 1999 through March 31, 1999 9 1/4 4 3/4
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FISCAL YEAR ENDED DECEMBER 31, 1998: High Low
October 1, 1998 through December 31, 1998 $6 3/4 $3 9/16
July 1, 1998 through September 30, 1998 11 3/4 4 3/16
April 1, 1998 through June 30, 1998 12 5/8 4 3/16
January 1, 1998 through March 31, 1998 6 9/16 4 1/8
On March 27, 2000, the closing price of our common stock on the
American Stock Exchange was $2 1/8 per share. As of March 27, 2000, there were
approximately 55 record holders and we believe that the number of beneficial
owners of our common stock exceeds 700.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not
anticipate or intend paying cash dividends in the foreseeable future on our
common stock.
CHANGES IN SECURITIES AND USE OF PROCEEDS
We did not issue any equity securities during the quarter ended
December 31, 1999 which were not registered under the Securities Act of 1933, as
amended, except that:
o In September 1999, we granted options to purchase an aggregate
of 200,000 shares of our common stock to our directors and
executive officers, which options are immediately exercisable,
at $1.875, the fair market value of our common stock on the
date of grant;
o In connection with the acquisition of Petrini in December
1999, we issued:
o a convertible promissory note to Gruppo Spigadoro in
the principal amount of approximately $6.3 million,
which note accrues interest at a rate of 5% per annum
and matures upon the earlier of (i) the completion of
a public offering by us in which we realize at least
$20 million of net proceeds or (ii) December 31,
2000. The note is convertible at any time at our
option into shares of common stock at a conversion
price equal to the greater of $2.50 or 85% of the
average closing price of our common stock for the
five trading days prior to the notice of conversion.
We repaid $1.2 million of the principal amount of
such note since December 1999;
o a non-interest bearing promissory note to Carlo
Petrini, our Co-chairman, in the principal amount of
$1.0 million, which note was repaid in March, 2000;
o a non-interest bearing promissory note to Mr. Petrini
in the principal amount of 12.05 billion Lire or
approximately $6.3 million, which note matures on
June 30, 2000. The note will be repaid in Lire, but
the maximum amount payable under the note will not
exceed the U.S. Dollar equivalent of $7.0 million;
and
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o a non-interest bearing convertible promissory note to
Mr. Petrini in the principal amount of approximately
$6.2 million, which note matures on December 31,
2000. The note is convertible at any time at Mr.
Petrini's option into shares of Common Stock at a
conversion price equal to the greater of $2.50 or 85%
of the average closing price of the Common Stock for
the five trading days prior to the notice of
conversion;
o In November 1999, we issued 1,872,982 shares of our common
stock to JNC Opportunity Fund Ltd. upon the conversion of
$2,325,000 of the principal amount of our 5% Convertible
Debenture, plus accrued interest on the principal amount
converted;
o In December 1999, we issued 578,763 shares of our common stock
to JNC upon the conversion of the remaining principal amount
of our 5% Convertible Debenture, plus accrued interest on the
principal amount converted;
o In December 1999, we issued 198,255 shares of our common stock
to JNC upon the conversion of the 2,000 shares of our Series B
Preferred Stock owned by JNC; and
o In December 1999, we granted options to purchase an aggregate
of 400,000 shares of our common stock to two of our officers,
which options vest over a period of four years, at $2.75, the
fair market value of our common stock on the date of grant.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933 under Section 4(2) or Regulation D of the Securities Act. The sale of
such securities was without the use of an underwriter, and the certificates for
the shares contain a restrictive legend permitting the transfer of such
securities only upon registration of the shares or an exemption under the
Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below summarizes certain
financial data which has been derived from and should be read together with the
more detailed consolidated financial statements of Spigadoro, Inc. and the notes
thereto included elsewhere in this Annual Report on Form 10-K.
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YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
(IN
(IN MILLION OF LIRE, EXCEPT PER SHARE AMOUNTS) THOUSANDS OF
U.S.
DOLLARS, EXCEPT
PER SHARE AMOUNTS)(1)
STATEMENT OF INCOME
DATA:
Net sales 319,341 320,292 294,859 266,307 261,565 $135,737
Cost of sales 248,372 244,490 224,216 196,902 189,124 98,144
------- ------- ------- ------- ------- --------
Gross profit 70,969 75,802 70,643 69,405 72,441 37,593
------- ------- ------- ------- ------- --------
Selling Expenses 46,097 48,638 47,633 46,194 48,931 25,392
General and
administrative 15,904 15,717 16,079 14,719 13,840 7,182
expenses ------- ------- ------- ------- ------- --------
62,001 64,355 63,712 60,913 62,771 32,574
------- ------- ------- ------- ------- --------
Operating income 8,968 11,447 6,931 8,492 9,670 5,019
======= ======= ======= ======= ======= ========
Net income 693 2,082 278 829 2,295 1,193
======= ======= ======= ======= ======= ========
Basic and diluted
earnings per share
(Lire, US $) 17 51 5 14 40 $ .02
======= ======= ======= ======= ======= ========
Weighted average
number of shares of
Common Stock
outstanding (millions
of shares) 40.7 40.7 54.1 57.7 58.1 58.1
==== ==== ==== ==== ==== ====
EBITDA(2) 14,271 16,499 11,651 14,018 15,613 $ 8,103
======= ======= ======= ======= ======= =======
(1) Exchange Rate: Lire 1,927 = U.S. $1 as of December 31, 1999.
(2) EBITDA is defined as earnings before interest, income taxes,
depreciation and amortization. Although EBITDA is not recognized under
GAAP, it is accepted in the food industry as a generally recognized
measure of performance. However, EBITDA should not be considered an
alternative to operating income, net income, cash flows or any other
measure of performance as determined in accordance with generally
accepted accounting principles, as an indicator of operating
performance or as a measure of liquidity.
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YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
(IN
(IN MILLION OF LIRE) THOUSANDS OF
U.S.
DOLLARS)(1)
BALANCE SHEET DATA:
Working capital (deficiency) 18,670 10,416 14,366 10,467 (3,396) $ (1,762)
Total assets 190,010 183,754 187,725 186,219 217,245 112,737
Total liabilities 144,585 136,244 139,937 137,602 158,838 82,428
Stockholders' equity 45,426 47,510 47,788 48,617 58,407 30,309
(1) Exchange Rate: Lira 1,927 = U.S. $1 as of December 31, 1999.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our historical consolidated financial
condition and results of operations should be read in conjunction with the
Consolidated Financial Statements and the Notes to such consolidated financial
statements included elsewhere in this Form 10-K.
OVERVIEW
In December 1999, we acquired all of the outstanding shares of common
stock of Petrini from Gruppo Spigadoro, N.V. As a result of the transaction, we
changed our name from IAT Multimedia, Inc. to Spigadoro, Inc. In consideration
for the Petrini shares, we:
o issued an aggregate of 48,366,530 shares of our common stock,
of which 12,241,400 shares were issued, at Gruppo Spigadoro's
request, to Carlo Petrini, our Co-Chairman, to satisfy part of
Gruppo Spigadoro's obligation to Mr. Petrini; and
o assumed approximately $20 million of short term indebtedness
of Gruppo Spigadoro, of which approximately $2.2 million has
been repaid.
All of the indebtedness will be payable or convertible into common stock during
2000. See "Business-Restructuring and Recent Transactions."
As a result of this transaction, we changed the focus of our business
from the sale of computers and computer components and peripherals to the
production and sale of food products, including animal feed and pasta and flour
products. Our animal feed business produces feed for industrial breeders, family
owned breeding farms and domestic pets. Our pasta and flour business produces
traditional, specialty and diet pastas and flours for the use of bakery
industry. We also engage, to a lesser extent, in animal breeding, selling
gardening articles and supplying accessories for pets.
Our animal feed business and our pasta and flour business represented
approximately 74% and approximately 26%, respectively, of our revenues in 1999.
Virtually all of our sales of animal feed are in Italy, while approximately 23%
of our pasta and flour products are exported to the United States, Europe and
Southeast Asia.
We continue to distribute personal computer components, peripherals
and software, as well as personal computers, in Germany through our subsidiary
Columbus Computer Handel and its affiliates. We intend to sell Columbus and have
commenced discussions relating to the sale of Columbus, but no agreement has
been reached with any party regarding the terms of a potential transaction and
we cannot predict whether we will be able to sell this business on terms
favorable to us or at all. See "Business-Restructuring and Recent Transactions"
and "Note 3 to the Consolidated Financial Statements of Spigadoro."
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As a result of the Petrini transaction, we issued a controlling
amount of our common stock to the stockholders of Petrini and the transaction
has been accounted for as a reverse acquisition. In a reverse acquisition,
although we were the legal acquiror, Petrini is considered the acquiror for
accounting purposes. Therefore, the financial statements for all periods
presented prior to the December 29, 1999 acquisition date are the financial
statements of Petrini. For all periods subsequent to December 29, 1999, the
financial statements are the financial statements of Petrini and Spigadoro. As a
result of our change in business strategy prior to the Petrini transaction, we
discontinued, for accounting purposes, all of our operations related to the
distribution of personal computers and personal computer components, peripherals
and software. See "Notes 1 and 3 to the Consolidated Financial Statements of
Spigadoro."
Since all of our operations are currently in Italy, our functional
currency is the Italian Lire. Therefore, our financial statements are presented
in Lire for financial statement reporting. All amounts stated in US Dollars have
been translated into US Dollars for the convenience of the reader at the rate of
Lire 1,927 = US $1.00, which approximates the Noon Buying Rate of the Federal
Reserve Bank of New York on December 31, 1999.
In the following discussions, most percentages and Lire and US Dollar
amounts have been rounded to aid presentation. As a result, all such figures are
approximations.
RESULT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Sales. Net sales for the year ended December 31, 1999 decreased by 1.8% to
Lire 261.6 billion ($135.7 million) from Lire 266.3 billion ($138.2 million) for
the year ended December 31, 1998. The decrease in net sales was primarily due to
a 4.8% decrease in sales prices to our customers resulting from a decrease in
raw material costs, partially offset by a slight increase in total sales volume
to 456,020 tons in 1999 from 452,492 tons in 1998. Net sales for animal feed for
the year ended December 31, 1999 decreased by 1.3% to Lire 192.6 billion ($99.9
million) from Lire 195.1 billion ($101.3 million) for the year ended December
31, 1998, while the sales volume was unchanged at approximately 387,000 tons for
the years ended December 31, 1999 and 1998. Net sales for pasta and flour for
the year ended December 31, 1999 decreased by 3.0% to Lire 69.0 billion ($35.8
million) from Lire 71.2 billion ($36.9 million) for the year ended December 31,
1998 despite an increase of 2.4% in sale volumes resulting from new marketing
campaigns.
Gross Profit. Gross profit for the year ended December 31, 1999 increased by
4.4% to Lire 72.4 billion ($37.6 million) from Lire 69.4 billion ($36.0 million)
for the year ended December 31, 1998. The increase in gross profit resulted in
an increase in the gross margin percentage to 27.7% in 1999 from 26.1% in 1998.
This increase was primarily due to a decrease
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in raw material prices which contributed to an increase in gross profit and was
also due to increased production efficiencies. Gross profit in the year ended
December 31, 1999 was impacted by a loss of approximately Lire 1.5 billion
($764,000) due to costs related to the discontinuation of a pig breeding farm
during the last quarter of 1999.
Operating Expenses. Operating expenses, including selling expenses and general
and administrative expenses, for the year ended December 31, 1999 increased by
3.1% to Lire 62.8 billion ($32.6 million), or 24.0% of net sales, from Lire 60.9
billion ($31.6 million) for the year ended December 31, 1998, or 22.9% of net
sales. This increase was primarily due to a non-recurring cost associated with
the introduction of an efficiency plan, including management consulting and
professional services as well as overhead costs of approximately Lire 0.8
billion ($400,000) relating to Petrini Foods International Inc. which were not
incurred during 1998.
Income from Operations. Income from operations for the year ended December 31,
1999 increased by 13.9% to Lire 9.7 billion ($5.0 million) from Lire 8.5 billion
($4.4 million) for the year ended December 31, 1998. This increase was primarily
due to an increase in gross profit as a result of improved production
efficiencies, partially offset by an increase in operating expenses.
Interest Expense. Interest expense for the year ended December 31, 1999
decreased by 27.1% to Lire 2.9 billion ($1.5 million) from Lire 4.0 billion
($2.1 million) for the year ended December 31, 1998. The significant decrease in
interest expense was primarily due to lower interest rates in Italy,
improvements in our lending margins and a reduction in our average outstanding
indebtedness.
Income Before Taxes. Income before taxes for the year ended December 31, 1999
increased by 52.1% to Lire 6.7 billion ($3.5 million) from Lire 4.4 billion
($2.3 million) for the year ended December 31, 1998. This increase was primarily
due to an increase in income from operations and a significant reduction in net
interest expense caused primarily by a reduction in Italian interest rates
during 1999 and a reduction in our outstanding indebtness.
Net Income. Net income for the year ended December 31, 1999 increased by 176.8%
to Lire 2.3 billion ($1.2 million) from Lire 0.8 billion ($430,000) for the year
ended December 31, 1998. Income taxes for the year ended December 31, 1999
increased to Lire 4.4 billion ($2.3 million) from Lire 3.6 billion ($1.9
million) for the year ended December 31, 1998. The increase in net income was
primarily due to an increase in gross profit, and a decrease in interest expense
during 1999, partially offset by an increase in operating expenses during 1999.
EBITDA. EBITDA for the year ended December 31, 1999 increased by 11.4% to
Lire 15.6 billion ($8.1 million) from Lire 14.0 billion ($7.3 million) for the
year ended December 31, 1998. The increase was primarily due to increased gross
margins as a result of increased production efficiencies and a reduction in raw
material prices partially offset by an increase in operating expenses. EBITDA in
the year ended December 31, 1999 was impacted by non recurring operating
expenses of approximately Lire 1.6 billion ($830,000) and the losses incurred by
Petrini Foods International. EBITDA should not be considered an alternative to
income from operations, net income, cash flow or any other measure of
performance as
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determined in accordance with generally accepted accounting principles, as an
indicator of operating performance or as a measure of liquidity.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales. Net sales for the year ended December 31, 1998 decreased by 9.7% to
Lire 266.3 billion ($138.2 million) from Lire 294.9 billion ($153.0 million)
for the year ended December 31, 1997. This decrease was primarily due to a
decrease in sales volume, which decreased by 4.9% to 385,000 tons in 1998 from
405,000 tons in 1997 and decreases in the prices of raw materials which resulted
in lower sales prices to our customers. Net sales for animal feed for the year
ended December 31, 1998 decreased by 12.0% to Lire 195.1 billion ($101.3
million) from Lire 221.7 billion ($115.1 million) for the year ended December
31, 1997. During 1998, our animal feed sales volumes decreased primarily as the
result of:
o Reduced European Union milk quotas, which reduced demand for feed for
dairy cows;
o Lower pork prices, which reduced demand for pig feed; and
o Continued concern relating to mad cow disease, which reduced demand
for beef cattle.
Net sales for pasta and flour for the year ended December 31, 1998 decreased by
2.7% to Lire 71.2 billion ($36.9 million) from Lire 73.1 billion ($37.9
million) for the year ended December 31, 1997. In pasta and flour, aggressive
pricing strategies by the Italian pasta market leader, Barilla, led to a
reduction in our sales volumes. We chose to raise our own prices marginally in
order to enhance our premium-quality positioning and maintain margins as raw
material prices increased during 1998 which resulted in a slight decrease in our
sales volumes.
Gross Profit. Gross profit for the year ended December 31, 1998 decreased by
1.8% to Lire 69.4 billion ($36.0 million) from Lire 70.6 billion ($36.7
million) for the year ended December 31, 1997. Gross margins for the year ended
December 31, 1998 increased to 26.1% from 24.0% for the year ended December 31,
1997. The increase in gross margins was primarily due, in pasta and flour, to
our polices of maintaining premium pricing in our pasta brands, and, in animal
feed, to our policy of reformulating certain feed products to take advantage of
lower raw material prices.
Operating Expenses. Operating expenses, comprising of selling costs and general
and administrative expenses, for the year ended December 31, 1998 decreased by
4.4% to Lire 60.9 billion ($31.6 million), or 22.9% of net sales, from Lire
63.7 billion ($33.1 million), or 21.6% net sales, for the year ended December
31, 1997. The decrease in operating expenses was primarily due to a reduction in
labor costs as central overhead costs were marginally reduced in light of
declining sales activity.
Income From Operations. Income from operations for the year ended December 31,
1998 increased by 22.5% to Lire 8.5 billion ($4.4 million) from Lire 6.9 billion
($3.6 million) for the year ended
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December 31, 1997. The increase was primarily due to increased gross margins as
well as a decrease in operating expenses.
Interest Expense. Interest expense for the year ended December 31, 1998
decreased by 29.1% to Lire 4.0 billion ($2.1 million) from Lire 5.6 billion
($2.9 million) for the year ended December 31, 1997. This decrease was primarily
due to a decrease in interest rates on our borrowing during this period.
Income Before Taxes. Income before taxes for the year ended December 31, 1998
increased by 517.6% to Lire 4.4 billion ($2.3 million) from Lire 0.7 billion
($371,000) for the year ended December 31, 1997. This increase was primarily due
to increased income from operations and a significant reduction in net interest
expense caused by a reduction in Italian interest rates during 1998.
Net Income. Net income for the year ended December 31, 1998 increased by 198.2%
to Lire 0.8 billion ($430,000) from Lire 0.3 billion ($144,000) for the year
ended December 31, 1997. In 1998, income taxes were Lire 3.6 billion ($1.9
million) or 81.2% of pretax income, due to the Italian system for computing
taxation, which fluctuates based on both a regional tax on production activities
and a national tax based on taxable income.
EBITDA. EBITDA for the year ended December 31, 1998 increased by 20.3% to Lire
14.0 billion ($7.3 million) from Lire 11.7 billion ($6.0 million) for the year
ended December 31, 1997. EBITDA increased primarily as a result of the matters
described above. EBITDA should not be considered an alternative to income from
operations, net income, cash flow or any other measure of performance as
determined in accordance with generally accepted accounting principles, as an
indicator of operating performance or as a measure of liquidity.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, our cash and cash equivalents increased to
Lire 16.0 billion ($8.3 million) from to Lire 0.9 billion ($451,000) at
December 31, 1998.
Net cash provided by operating activities was Lire 26.5 billion
($13.7 million) during the year ended December 31, 1999 compared to Lire 10.7
billion ($5.6 million) during the year ended December 31, 1998. This increase
was primarily due to a reduction of trade accounts receivable in the amount of
Lire 20.6 billion ($10.7 million) as a result of the factoring of certain of our
accounts receivable, partially offset by an increase in cash used to repay trade
accounts payable.
Net cash provided by investing activities amounted to Lire 3.6
billion ($1.9 million) for the year ended December 31, 1999 as compared to net
cash used in investing activities of Lire 3.5 billion ($1.8 million) for the
year ended December 31, 1998. In both periods cash was primarily used for the
purchase of machinery and equipment for production. This use of cash was offset
in the year ending December 31, 1999 by Lire 8.0 billion ($4.1 million) as a
result of the net cash of Spigadoro acquired in the reverse acquisition.
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Net cash used in financing activities totaled Lire 15.0 billion
($7.8 million) during the year ended December 31, 1999 and Lire 7.7 billion
($4.0 million) during the year ended December 31, 1998. This increase was
primarily due to cash used to reduce short term borrowings by Lire 16.3 billion
($8.5 million), partially offset by an increase in long term debt.
At December 31, 1999, our total indebtedness increased to Lire 89.5
billion ($46.4 million) compared to Lire 68.0 billion ($35.3 million) at
December 31, 1998 primarily due to the assumption of indebtedness in the
acquisition of Petrini, partially offset by a reduction in short term
borrowings.
At December 31, 1999, we had short term debt in the aggregate amount of
Lire 72.4 billion ($37.6 million) comprised of borrowings under short term
credit facilities and indebtedness assumed in the acquisition of Petrini. We
maintain unsecured short term credit facilities with over 20 Italian banks.
These facilities are typically available for terms up to one year and accrue
interest at rates that fluctuate relative to the official Italian rate of
discount. At December 31, 1999, the aggregate amount outstanding under these
facilities was Lire 36.0 billion ($18.7 million) and approximately Lire 50.7
billion ($26.3 million) was unused and available for borrowing. Borrowings
under these facilities are used to support Petrini's operations and are serviced
by cash flow from operations. At December 31, 1999, the aggregate amount
outstanding under the promissory notes issued in the acquisition of Petrini was
Lire 36.4 billion ($18.9 million). All of this debt is payable in 2000.
At December 31, 1999, we had long term debt in the aggregate amount of
Lire 17.1 billion ($8.9 million). The debt matures over varying terms ranging
from June 2000 to March 2007 and accrues interest either at fixed annual
interest rates ranging from 3.4% to 12.2% or variable rates based upon various
interest rates measures. Substantially all of the long term debt is secured by
liens on Petrini's property. A portion of the long term debt is subsidized by
government agencies.
In June 1999, we entered into a factoring arrangement whereby we sell a
portion of our accounts receivable without recourse. A portion of the proceeds
of this arrangement have been used to pay short-term and long-term indebtedness
while the remaining proceeds have been used for working capital. We intend to
expand our factoring activity in the future and believe that it will result in
increased cash and decreased short-term debt, while increasing our flexibility
to incur additional indebtedness if necessary or advisable to execute our
consolidation strategy. See "Note 4 of the Notes to the Consolidated Financial
Statements of Spigadoro."
In February 2000, we sold in a series of transactions 750,000 shares of
capital stock of Algo Vision plc, for approximately $16.8 million in cash. See
"Business - Restructuring and Recent Transactions."
In November, 1999, JNC converted $2,325,000 of the outstanding
principal amount of our convertible debenture, plus accrued interest, into a
total of 1,872,982 shares of our common stock and in December 1999, JNC
converted the remaining principal amount of the debenture, plus accrued
interest, into 578,763 shares of our common stock. In addition, in December
1999,
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JNC converted the 2,000 shares of our Series B Convertible Preferred Stock into
198,255 shares of our common stock. See "Business Restructuring and Recent
Transactions."
We believe that our funds, including cash generated from operations and
from the sale of our Algo Vision shares, together with amounts available under
our credit facilities and factoring arrangements, should be sufficient to
finance our working capital requirements and our capital and debt service
requirements for approximately the 12 month period following December 31, 1999,
depending on acquisitions. We may require additional funds for acquisitions and
integration and management of acquired business. However, we have no commitments
or arrangements to obtain any additional funds and we cannot predict whether
additional funds will be available on terms favorable to us or at all. If we
cannot obtain funds when required, the growth of our business may be adversely
affected.
ESCROW SHARES
In connection with our initial public offering in March 1997, certain
of our stockholders placed an aggregate of 498,285 shares of our common stock
into escrow. We expect that the 498,285 shares held in escrow will be canceled
on March 31, 2000.
YEAR 2000 COMPLIANCE
We recognized the importance of the Year 2000 issue and established a
project team which was responsible for ensuring an uninterrupted transition to
the year 2000 by assessing, testing and modifying our information technology and
non-IT systems so that such systems and software would perform as intended and
information and dates could be processed with expected results. The scope of the
Year 2000 compliance effort included (i) IT such as software and hardware; (ii)
non-IT systems or embedded technology; and (iii) the readiness of key third
parties, including suppliers and customers, and the electronic date interchange
with those key third parties.
Independent of the Year 2000 issue, we installed new financial
accounting, procurement, order management and invoicing systems.
We have developed a contingency plan to deal with certain critical Year
2000 situations should they arise. Under our Year 2000 contingency plan, we have
and will continue to inventory and collect documentation on all of our
computers, computer related equipment, and equipment with embedded processors.
In addition, we will continue to monitor and test systems as necessary.
We have also communicated with significant vendors, suppliers and
critical business partners to determine the extent to which we might be
vulnerable in the event those parties failed to properly remediate their own
Year 2000 issues. Based on those communications, we believe that our significant
vendors, suppliers and critical business partners are Year 2000 compliant.
We believe that we are currently Year 2000 compliant. All of our
operating systems have continued to function beyond January 1, 2000 without any
business interruption. As the Year 2000 progresses, however, we may experience
problems associated with the Year 2000 that have not yet been discovered. There
can be no assurances that our internal systems or those of third
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parties on which we rely will not suffer disruptions relating to Year 2000
issues. The failure to achieve Year 2000 compliance or to have appropriate
contingency plans in place to deal with any noncompliance could result in
significant disruption of our operations and could have a material adverse
effect on our financial condition and results of operations.
Based on the assessments described above, we estimate that we spent
approximately $550,000 to update our operating systems, only a portion of which
was attributable to Year 2000 compliance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is included in a separate section of this
report. See the Consolidated Financial Statements attached hereto beginning on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
The information called for by Item 10: Directors and Executive Officers
of the Registrant; Item 11: Executive Compensation; Item 12: Security Ownership
of Certain Beneficial Owners and Management; and Item 13: Certain Relationships
and Related Transactions will be included in and is incorporated by reference
from our definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the close of our fiscal year.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) 1. Financial Statements
An index to Consolidated Financial Statements appears on page F-1.
2. Schedules
All financial statement schedules are omitted because they are not applicable,
not required under the instructions or all the information required is set forth
in the financial statements or notes thereto.
(b) Reports on Form 8-K
We filed reports on Form 8-K on December 10, 1999 reporting information under
Item 5, on January 12, 2000 reporting information under Items 1, 2 and 7, on
January 19, 2000 reporting information under Item 4, on January 19, 2000
reporting information under Item 5, on February 2, 2000 reporting information
under Item 2 and Item 7, and on February 29, 2000 reporting information under
Item 2.
(c) Exhibits
Exhibit
Number Description
- ------ -----------
2.1 -- Stock Purchase Agreement, dated as of November 3, 1999, by and
between the Registrant and Gruppo Spigador, N.V.(14)
3.1(a)-- Amended and Restated Certificate of Incorporation (10)
3.1(b)-- Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Registrant (17)
3.2 -- Amended and Restated By-laws of the Registrant (11)
4.1 -- Form of Warrant Agreement (1)
4.2 -- Form of Underwriter's Warrant (1)
4.3 -- Warrant issued to Stockholders (one in a series of warrants with
identical terms) (11)
4.4 -- Warrant issued to Stockholders (one in a series of warrants with
identical terms) (1)
4.5 -- Escrow Agreement, dated March 26, 1997, among the Registrant,
American Stock transfer & Trust Company and certain stockholders of the
Registrant (1)
10.2 -- Spinoff Agreement, dated as of March 5, 1998, by and among HIBEG,
IAT GmbH, and Communications Systems (5)
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10.3 -- Agreement concerning the Assignment and Transfer of Corporate
Shares, dated as of March 5, 1998, by and among HIBEG, IAT GmbH, and
Communications Systems (5)
10.4 -- Loan Transfer Agreement, dated as of March 5, 1998, by and among
HIBEG, IAT GmbH, and Communications Systems (5)
10.5 -- Option Agreement, dated as of March 5, 1998, by and among Dr. Viktor
Vogt and HIBEG (5)
10.6 -- Spinoff Agreement, dated as of March 11, 1998, by and among the
Registrant, Dr. Viktor Vogt, and Swiss Newco (5)
10.7 -- Transfer Agreement, dated as of March 11, 1998, by and among the
Registrant, IAT AG, Dr. Viktor Vogt, and IAT Communications AG (5)
10.8 -- Agreement on the Acquisition of Assets, dated as of March 18, 1998,
between IAT AG and Swiss Newco (5)
10.9 -- Restructuring Agreement, dated as of March 5, 1998, by and among IAT
GmbH. IAT AG, Dr. Vogt and HIBEG (5)
10.10 -- Amendment to the Transfer Agreement, dated as of March 24, 1998, by
and among the Registrant, IAT AG, Dr. Viktor Vogt and IAT Communication
AG (6)
10.11 -- Promissory Note, dated March 24, 1998, by IAT Communication AG to
the Registrant (6)
10.12 -- Promissory Note, dated March 24, 1998, by IAT Communication AG to
Dr. Viktor Vogt (6)
10.13 -- Promissory Note, dated March 24, 1998, by IAT Communication AG to
IAT AG (6)
10.15 -- Loan Agreement for current Account Credit Lines between IAT
Deutschland GmbH and Volksbank Sottrum AG (1)
10.16 -- Agreement, dated September 1, 1992, by and between Grissemann
Consulting SA and IAT AG (1)
10.17 -- Addendum to the Agreement of September 1, 1992, dated December 14,
1994, by and between Grissemann consulting SA and IAT AG (1)
10.18 -- Employment Contract, dated as of July 1, 1993, by and between IAT,
IAG and Mr. Franz Muller (1)
10.19 -- Amendment No. 1 to Stock Purchase Agreement, dated as of October 4,
1996, by and among IAT Multimedia, Inc. (formerly known as IAT
Holdings, Inc.), IAT AG, IAT Deutschland GmbH Vertical Financial
Holdings, and the stockholders of IAT AG (1)
10.20 -- Amendment No. 1 to Marketing Agreement, dated as of October 24,
1996, by and between IAT Multimedia, Inc. (formerly known as IAT
Holdings, Inc.) and General Capital (1)
10.22 -- Registration Rights Agreement, dated February 27, 1997, between the
Registrant, Vertical Financial Holdings and Viktor Vogt (1)
10.24 -- Registration Rights Agreement, dated February 27, 1997, between the
Registrant, Vertical Financial Holdings, and Klauss-Dirk Sippel (1)
10.26 -- Registration Rights Agreement, dated February 27, 1997, between the
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Registrant, Vertical Financial Holdings, and Walter Glas GmbH (1)
10.27 -- Purchase Agreement, dated November 13, 1997, by and between the
Registrant and Dr. Alfred Simmet (3)
10.28 -- Irrevocable Letter of Credit and Indemnity, dated November 7, 1997,
by and between the Registrant and Citibank, N.A. (3)
10.35 -- Credit Agreement, dated as of February 5, 1996, by and between IAT
AG and Swiss Bank Corporation (4)
10.36 -- Agreement by and between Swiss Bank Corporation and the Registrant
(4)
10.47 -- Agreement, dated as of December 22, 1997, by and among Richard
Suter, Klaus-Dirk Sippel and Cornelius Holthuizen, IAT AG and the
Registrant (4)
10.48 -- Amended and Restated Agreement, dated as of December 22, 1997, by
and among Richard Suter, Klaus-Dirk Sippel and Cornelius Holthuizen,
IAT AG and the Registrant (4)
10.51 -- Securities Purchase Agreement, dated as of June 19, 1998, by and
among the Registrant, JNC Opportunity Fund Ltd. and JNC Strategic Fund,
Ltd. (8)
10.52 -- Registration Rights Agreement, dated as of June 19, 1998, by and
among the Registrant, JNC Opportunity Fund Ltd. and JNC Strategic Fund,
Ltd. (8)
10.53 -- 5% Convertible Debenture due 2008, dated as of June 19, 1998, issued
by the Registrant (8)
10.54 -- Form of Warrant, attached as exhibit to Securities Purchase
Agreement(8)
10.55 -- Agreement, dated October 27, 1998, between the Registrant and Axel
Hundt, the sole shareholder of Columbus Handles-und Vertrieb GmbH & Co.
KG and Columbus Handels-und Vertrieb GmbH (9)
10.56 -- Exchange Agreement, dated as of December 31, 1998, by and among the
Registrant, JNC Opportunity Fund Ltd. and JNC Strategic Fund Ltd. (10)
10.57 -- Executive Employment Agreement, dated as of September 1, 1998,
between IAT AG and Jacob Agam (11)
10.58 -- Employment Agreement, dated as of February 18, 1999, between IAT AG
and Nicolaas Hildebrand (11)
10.59 -- Sublease Agreement, dated as of January 29, 1999, between the
Registrant and Petrini, N.V. for offices located at 70 East 55th
Street, New York, New York 10022 (11)
10.60 -- Purchase Agreement, dated February 12, 1999, between the Registrant
and Dr. Alfred Simmet (11)
10.61 -- Amendment, dated July 1, 1998, to Agreement, dated September 1,
1992, between Grissmann Consulting SA and IAT AG (incorporated by
reference to the Registrant's Annual Report on Form 10-K/A as filed on
April 30, 1999)
10.62 -- Agreement for the Acquisition of Intellectual Property Rights, dated
July
-73-
22, 1999, among the Registrant, IAT AG, Alco Vision Schweiz AG and
Algo Vision pic (12)
10.63 -- Intellectual Property Assignment, dated July 22, 1999, among the
Registrant, IAT AG and Algo Vision pic (12)
10.64 -- Intellectual Property Assignment, dated August 10, 1999, among the
Registrant, IAT AG and Algo Vision pic (13)
10.65 -- Share Exchange and Subscription Agreement, dated July 22, 1999,
between Algo Vision pic and IAT AG (12)
10.66 -- Second Subscription Agreement, dated July 22, 1999, between Algo
Vision pic and IAT AG (12)
10.67 -- Lock-in Agreement, dated July 22, 1999, among Algo Vision pic,
Beeson Gregory Limited and IAT AG (12)
10.68 -- 1999 Stock Option Plan
10.69 -- Employment Agreement, dated November 30, 1999, between Petrini
S.p.A. and Lucio De Lucio (15)
10.70 -- Factoring Agreement, dated June 28, 1999, between Petrini S.p.A. and
Comit Factoring S.p.A. (15)
10.71 -- Waiver Agreement and First amendment to IAT Multimedia, Inc. Series
A 5% Convertible Debenture, dated November 23, 1999, by and between the
Registrant and JNC Opportunity Fund Ltd. (16)
10.72 -- Employment Agreement dated January 1, 2000 by and between the
Company and Lucio De Luca. (17)
10.73 -- Amended and Restated Employment Agreement dated January 1, 2000 by
and between the Company and Jacob Agam. (17)
10.74 -- Promissory Note issued to Gruppo Spigadoro, N.V. in the principal
amount of $6,337,000. (17)
10.75 -- Promissory Note issued to Carlo Petrini in the principal amount of
$1,000,000. (17)
10.76 -- Promissory Note issued to Carlo Petrini in the principal amount of
ITL 12,050,000,000. (17)
10.77 -- Promissory Note issued to Carlo Petrini in the principal amount of
$6,150,000. (17)
10.78 -- Stock Purchase Agreement dated as of January 19, 2000 by and between
the Company and the other parties named therein. (18)
21.1 -- List of Subsidiaries of Registrant
27.1 -- Financial Data Schedule
- ----------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-18529) as filed on December 23, 196, as amended
(2) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q as filed on November 14, 1997
(3) Incorporated by reference to the Registrant's Registration Statement on
Form 8-K as filed on November 26, 1997
-74-
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-41835) as filed on December 10, 1997, as amended
(5) Incorporated by reference to the Registrant's Current Report on Form
8-K as filed on March 20, 1998
(6) Incorporated by reference to the Registrant's Current Report on Form
8-K/A as filed on April 30, 1998
(7) Incorporated by reference to the Registrant's Annual Report on Form
10-K as filed on April 15, 1998
(8) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q as filed on November 15, 1998
(9) Incorporated by reference to the Registrant's Current Report on Form
8-K as filed on January 11, 1999
(10) Incorporated by reference to the Registrant's Current Report on Form
8-K as filed on January 11, 1999
(11) Incorporated by reference to the Registrant's Annual Report on Form
10-K as filed on March 31, 1999
(12) Incorporated by reference to the Registrant's Current Report on Form
8-K as filed on August 4, 1999
(13) Incorporated by reference to the Registrant's Current Report on Form
8-K/A as filed on August 24, 1999
(14) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999
(15) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 filed on December 9, 1999
(16) Incorporated by reference to the Registrant's Current Report on Form
8-K as filed on December 10, 1999
(17) Incorporated by reference to the Registrant's Current Report on Form
8-K as filed on January 12, 2000
(18) Incorporated by reference to the Registrant's Current Report on Form
8-K as filed on February 2, 2000.
-75-
SPIGADORO, INC. AND SUSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Independent Auditors' Report F-2
Independent Auditors' Report F-3
Consolidated Financial Statements
Consolidated Balance Sheets F-4-5
Consolidated Statements of Income F-6
Consolidated Statements of Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8-9
Consolidated Notes to Financial Statements F-10-27
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Spigadoro, Inc.
We have audited the accompanying consolidated balance sheet of Spigadoro, Inc.
and Subsidiaries (the "Company") as of December 31, 1999 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Spigadoro, Inc. and
Subsidiaries as of December 31, 1999 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
Parsippany, New Jersey
March 24, 2000
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Spigadoro, Inc.
We have audited the accompanying balance sheet of Spigadoro, Inc. and
Subsidiaries as of December 31, 1998 and the related statements of income,
stockholders' equity and cash flows for the years ended December 31, 1998 and
1997. 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 auditing standards generally accepted
in the United States. 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 statements
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above presents fairly, in
all material respects, the financial position of Spigadoro, Inc. and
Subsidiaries as of December 31, 1998 and the results of their operations and
their cash flows for the years ended December 31, 1998 and 1997, in conformity
with accounting principles generally accepted in the United States.
/s/ Reconta Ernst & Young S.p.A.
Perugia, Italy
October 14, 1999 except to Note 1, which date is
March 24, 2000
F-3
SPIGADORO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
1999 1999 1998
---------------- ---------------- ----------------
(thousands of (millions of Lire)
Dollars) (1)
ASSETS
Current assets:
Cash and cash equivalents $ 8,303 15,999 869
Accounts receivable-trade, net of allowance
for doubtful accounts of Lire 1,857 millions
in 1999 and Lire 2,686 millions in 1998 26,433 50,937 73,435
Securities held for sale 3,007 5,794
Taxes receivable 7,211 13,895 13,129
Inventories 11,307 21,789 25,121
Deferred income taxes 3,155 6,080 518
Other current assets 1,244 2,397 2,084
---------- -------- -------
Total current assets 60,660 116,891 115,156
Property, equipment and improvements, net 36,629 70,584 49,210
Other assets:
Intangible assets, at amortized cost 9,966 19,205 8,388
Deferred income taxes 7,920
Other assets 3,491 6,728 5,545
Assets held for disposition 1,991 3,837
---------- -------- -------
$ 112,737 217,245 186,219
========== ======== =======
(1) Exchange rate: Lire 1,927 = U.S. $1 as of December 31, 1999, unaudited and
presented for convenience purposes only.
See accompanying notes to consolidated financial statements.
F-4
SPIGADORO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1999 and 1998
1999 1999 1998
--------------- --------------- --------------
(thousands of (millions of Lire)
Dollars) (1)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 37,569 72,395 52,337
Current portion of long-term debt 1,862 3,589 4,266
Accounts payable 16,829 32,429 36,295
Income taxes payable 460 886 1,151
Accrued payroll and social contributions 3,087 5,949 5,974
Deferred income taxes 1,931
Other current liabilities 2,615 5,039 2,735
--------- -------- -----------
Total current liabilities 62,422 120,287 104,689
Long-term debt, less current portion 6,995 13,479 11,442
Employees and agents termination
indemnities 7,954 15,328 16,735
Deferred income taxes 2,576 4,963
Social contributions and income
taxes payable 2,481 4,781 4,736
--------- -------- --------
Total liabilities 82,428 158,838 137,602
--------- -------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 (Lire 19.27) par value,
authorized 100,000,000, none issued
Common stock, $.01 (Lire 19.27) par value,
authorized 100,000,000, issued
60,942,099 in 1999 and 10,048,826 in 1998 609 1,174 193
Capital in excess of par value 29,466 56,781 23,977
Retained earnings 391 754 24,844
Accumulated other comprehensive income 49 95
Less treasury stock (50,000 shares) (206) (397) (397)
--------- -------- --------
Total stockholders' equity 30,309 58,407 48,617
--------- -------- --------
$112,737 217,245 186,219
========= ======== ========
(1) Exchange rate: Lire 1,927 = U.S. $1 as of December 31, 1999, unaudited and
presented for convenience purposes only.
See accompanying notes to consolidated financial statements.
F-5
SPIGADORO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
1999 1999 1998 1997
-------------- -------------- --------------- --------------
(thousands of (millions of Lire, except per share amounts)
Dollars,
except
per share
amounts) (1)
Net sales $135,737 261,565 266,307 294,859
Cost of sales 98,144 189,124 196,902 224,216
-------------- -------------- --------------- --------------
Gross profit 37,593 72,441 69,405 70,643
-------------- -------------- --------------- --------------
Operating expenses:
Selling expenses 25,392 48,931 46,194 47,633
General and administrative expenses 7,182 13,840 14,719 16,079
-------------- -------------- --------------- --------------
32,574 62,771 60,913 63,712
-------------- -------------- --------------- --------------
Income from operations 5,019 9,670 8,492 6,931
-------------- -------------- --------------- --------------
Other expenses:
Interest expense 1,508 2,906 3,984 5,618
Other, net 25 49 92 598
-------------- -------------- --------------- --------------
1,533 2,955 4,076 6,216
-------------- -------------- --------------- --------------
Income before income taxes 3,486 6,715 4,416 715
Income taxes 2,293 4,420 3,587 437
-------------- -------------- --------------- --------------
Net income $ 1,193 2,295 829 278
============== ============== =============== ==============
Basic and diluted earnings per share
of common stock $ 0.02 40 14 5
============== ============== =============== ==============
Weighted average number of common
shares outstanding (in thousands):
Basic and diluted 58,095 58,095 57,694 54,118
============== ============== =============== ==============
(1) Exchange rate: Lire 1,927 = U.S. $1 as of December 31, 1999, unaudited and
presented for convenience purposes only.
See accompanying notes to consolidated financial statements.
F-6
SPIGADORO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(in millions of Lire, except as otherwise indicated)
Common Stock Accumulated
------------------------- Capital Other
Shares in excess Comprehensive Comprehensive Retained
(Millions) Amount of Par Value Income Income Earnings
----------- ------------ ------------- ---------------- ---------------- --------------
Balance, January 1, 1997 4.4 84 24,086 - - 23,737
Issuance of common stock 5.4 104 (104)
Net income 278 278
----------------
Total comprehensive income 278
----------- ------------ ------------- ================ ---------------- --------------
Balance, December 31, 1997 9.8 188 23,982 - 24,015
Issuance of common stock 0.2 5 (5)
Net income 829 829
----------------
Total comprehensive income 829
----------- ------------ ------------- ================ ---------------- --------------
Balance, December 31, 1998 10.0 193 23,977 - 24,844
Issuance of common stock 2.5 49 (49)
Reverse merger 48.4 932 32,853 (26,385)
Translation adjustments 95 95
Net income 2,295 2,295
----------------
Total comprehensive income 2,390
----------- ------------ ------------- ================ ---------------- --------------
Balance, December 31, 1999 60.9 1,174 56,781 95 754
=========== ============ ============= ================ ==============
Balance, December 31, 1999
(in thousands of Dollars) (1) 60.9 $ 609 $ 29,466 $ 1,240 $ 49 $ 391
=========== ============ ============= ================ ================ ==============
Total
Treasury Stockholders'
Stock Equity
------------ ----------------
Balance, January 1, 1997 (397) 47,510
Issuance of common stock
Net income 278
Total comprehensive income
------------ ----------------
Balance, December 31, 1997 (397) 47,788
Issuance of common stock
Net income 829
Total comprehensive income
------------ ----------------
Balance, December 31, 1998 (397) 48,617
Issuance of common stock
Reverse merger 7,400
Translation adjustments 95
Net income 2,295
Total comprehensive income
------------ ----------------
Balance, December 31, 1999 (397) 58,407
============ ================
Balance, December 31, 1999
(in thousands of Dollars) (1) $ (206) $ 30,309
============ ================
(1) Exchange rate: Lire 1,927 = U.S. $1 as of December 31, 1999, unaudited and
presented for convenience purposes only.
See accompanying notes to consolidated financial statements.
F-7
SPIGADORO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
1999 1999 1998 1997
-------------- ------------- ------------- -------------
(thousands of (millions of Lire)
Dollars) (1)
Cash flows from operating activities
Net income $ 1,193 2,295 829 278
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 2,341 4,511 4,342 4,111
Amortization 769 1,481 1,276 1,207
Provision for employees and agents
termination indemnities 1,084 2,089 2,167 2,550
Provision for doubtful accounts 860 1,658 1,391 982
Deferred income taxes (222) (427) 7 (39)
Other non-cash items, net 141 272 230 637
Payment of employees and agents
termination indemnities (1,814) (3,496) (2,397) (2,332)
Changes in operating assets and liabilities:
Accounts receivable-trade 10,815 20,840 (1,958) (1,862)
Inventories 1,744 3,361 1,655 1,286
Accounts payable (2,495) (4,808) 2,084 (3,611)
Accrued payroll and social contributions (13) (25) 1,329 (1,947)
Other, net (671) (1,293) (236) (3,051)
-------------- ------------- ------------- -------------
Net cash provided by (used in) operating activites 13,732 26,458 10,719 (1,791)
-------------- ------------- ------------- -------------
Cash flows from investing activities
Purchases of property, equipment and improvements (1,354) (2,610) (3,067) (6,876)
Proceeds from disposal of property, equipment
and improvements
435 838 255 866
Additions to intangible assets (1,332) (2,567) (644) (812)
Cash of business acquired 4,139 7,976
-------------- ------------- ------------- -------------
Net cash provided by (used in) investing activities 1,888 3,637 (3,456) (6,822)
-------------- ------------- ------------- -------------
(1) Exchange rate: Lire 1,927 = U.S. $1 as of December 31, 1999, unaudited and
presented for convenience purposes only.
See accompanying notes to consolidated financial statements.
F-8
SPIGADORO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
1999 1999 1998 1997
--------------- -------------- ------------ -------------
(thousands of (millions of Lire)
Dollars) (1)
Cash flows from financing activities
Proceeds from long-term debt 5,175 9,972 1,210 7,549
Payments of long-term debt (4,469) (8,612) (8,107) (6,118)
Net change in short-term borrowings (8,472) (16,325) (785) 6,856
--------------- ------------- ------------- -------------
Net cash provided by (used in) financing activities (7,766) (14,965) (7,682) 8,287
--------------- ------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 7,854 15,130 (419) (326)
Cash and cash equivalents, beginning of year 449 869 1,288 1,614
--------------- ------------- ------------- -------------
Cash and cash equivalents, end of year $ 8,303 15,999 869 1,288
=============== ============= ============= =============
Supplemental disclosure of cash flow information,
cash paid during the year for:
Interest $ 1,764 3,400 4,580 5,801
=============== ============= ============= =============
Income taxes $ 2,515 4,847 4,393 1,371
=============== ============= ============= =============
Non-cash disclosure of investing activity for the
year ended December 31, 1999 represents
acquisition of assets for common stock:
Property, plant and equipment $ 12,417 23,928 - -
=============== ============= ============= =============
Intangible assets $ 4,713 9,081 - -
=============== ============= ============= =============
(1) Exchange rate: Lire 1,927 = U.S. $1 as of December 31, 1999, unaudited and
presented for convenience purposes only.
Cash disbursements for additions to fixed assets in 1998 were Lire 496 lower
than the additions of the period, in 1997 were Lire 2,126 higher than the
additions, due to the time delay between the recording of the addition and the
related payment.
See accompanying notes to consolidated financial statements.
F-9
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Spigadoro, Inc. (Spigadoro) (formerly IAT Multimedia, Inc.) was
incorporated under the laws of Delaware in September 1996. Spigadoro,
prior to December 1999, marketed principally in Germany, high
performance personal computers, computer hardware and software,
components and peripherals through retail stores, telephone and mail
order sales. At a special meeting of stockholders in December 1999,
the stockholders approved the acquisition of Petrini S.p.A. and
Subsidiary (Petrini) from Gruppo Spigadoro N.V. (N.V.), the sole
shareholder of Petrini, in exchange for the issuance of 48,366,530
shares of the Company's common stock, representing approximately 79%
of outstanding common stock of Spigadoro and the assumption of certain
obligations of N.V. At this special meeting the shareholders also
approved, among other things, the name change of the corporation from
IAT Multimedia, Inc. to Spigadoro, Inc., and authorized the Board to
adopt the 1999 Stock Option Plan. In addition to purchase accounting
adjustments required for Spigadoro, Petrini will also be required to
reflect purchase accounting adjustments resulting from N.V.'s
acquisition of 100% of the Petrini stock prior to the acquisition by
Spigadoro. The cost of the acquisition by N.V. has been allocated to
the assets of Petrini based on their fair market values with any
excess allocated to goodwill. The goodwill is being amortized over a
twenty-year period (See Note 3 for further discussions of
acquisition).
Petrini principally produces and sells pasta, flour and animal feed
throughout the world. The products are manufactured in seven factories
located in Italy. As a result of the Petrini acquisition, the
shareholders of Petrini have control of Spigadoro and the acquisition
has been accounted for as a reverse acquisition. In a reverse
acquisition, although Spigadoro was the legal acquirer, Petrini is
considered the acquirer for accounting purposes. Therefore, the
financial statements for all periods presented prior to the December
1999 acquisition date are those of Petrini with the financial
statements of Spigadoro only included from the December 1999
acquisition date. The shareholders equity section of the balance sheet
is that of Petrini adjusted retroactively to give effect to the par
value and number of shares of Spigadoro common stock issued.
The financial statements of Spigadoro, Inc. and Subsidiaries have been
prepared in Italian Lire, the Company's functional currency, since
principally all of the continuing operations are headquartered in
Italy. Subsidiaries located in the United States, Switzerland and
Germany have been converted to Lire from US dollars, Swiss Francs and
Deutsche Marks using the exchange rate at the end of the period for
balance sheet items and the average exchange rates for the period for
statement of income items. The translation differences are recorded as
accumulated other comprehensive income in the consolidated statements
of shareholders' equity.
The consolidated financial statements of the Company, including U.S.
Dollar information in the notes to the consolidated financial
statements, have been translated into U.S. Dollars for the convenience
of the readers and have been made at the rate of Italian Lire 1,927 to
U.S. $1, approximating the Noon Buying rate of the Federal Reserve
Bank of New York at December 31, 1999. All monetary amounts are in
million of Lire and thousands of U.S. Dollars excluding per share
information. Such translation should not be construed as a
representation that the Lire amounts could be converted into U.S.
Dollars at that, or any other rate.
F-10
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Spigadoro, Inc., its wholly-owned subsidiaries
Petrini S.p.A. and its wholly-owned subsidiary Petrini Foods
International Inc., (PFI) (Note 3), IAT AG, Switzerland (IAT AG), IAT
Multimedia GmbH with its branch office Columbus- Computer-Handels und
Vertriebs (IAT GmbH), the General Partner of FSE Computer-Handel GmbH
& Co. KG (FSE), and 80% of the limited partnership interest of FSE,
and 100% Columbus-Computer-Handels und Vertriebs Verwaltungs GmbH
(collectively the Company). All intercompany accounts and transactions
have been eliminated. The Company formed PFI for the purpose of
acquiring from its former distributor the business of distributing its
Spigadoro products in the United States. The acquisition was completed
in the third quarter of 1998 but the effects of the acquisition and
the operations of PFI were immaterial in 1998. At December 31, 1999,
the operations of Petrini represent the only continuing operations of
the Company.
CASH AND CASH EQUIVALENTS - The company maintains its cash and cash
equivalents with financial institutions in accounts which at times may
exceed insured limits. The Company has not experienced any losses in
such accounts and believes it is not subject to any significant credit
risk on cash. The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
USE OF ESTIMATES - The preparation of the 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 these estimates.
INVESTMENTS - The Company classifies its securities as available for
sale and are recorded at fair value with unrealized gains and losses
included in comprehensive income in stockholders' equity.
INVENTORIES - Inventories are carried at the lower of cost or market
value, using the weighted average cost method.
PROPERTY, EQUIPMENT AND IMPROVEMENTS - Property, equipment and
improvements are stated at cost. Depreciation and amortization are
provided using the straight-line method over the following estimated
useful lives:
Buildings and improvements 10-55 Years * 10-35 Years
Machinery, equipment and other 4-22 Years * 4-20 Years
* Prior to the acquisition of Petrini by NV
GOVERNMENT GRANTS - Government grants on new property, plant and
equipment acquired in accordance with Government's plans are recorded
when authorized. Such grants are reflected as a reduction in the
related property, plant and equipment.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be fully
recoverable. To determine the recoverability of its long-lived assets,
the Company evaluates the probability that future undiscounted net
cash flows will be less than the carrying amount of the assets.
Impairment is the amount by which the carrying value of the asset
exceeds its fair value.
EXCESS OF COST OVER NET ASSETS ACQUIRED - Goodwill represents the
excess of cost over the fair market value of net assets of an acquired
business and is amortized over a period of 20 years from the
acquisition date. The Company monitors the cash flows of the acquired
operations to assess whether any impairment of recorded goodwill has
occurred.
F-11
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INTANGIBLE ASSETS - Trademarks represent the amount of the purchase
price allocated to the "Supermangimi Petrini" tradename as determined
by independent appraisers. Amortization is provided on a straight-line
basis over 17 years. Other intangible assets represent primarily
patents and software costs and are amortized over their respective
lives, not longer than five years. Amortization for the years ended
December 31, 1999, 1998 and 1997 was approximately $5,837 (Lire
11,248), Lire 10,013 and Lire 8,796, respectively.
REVENUE RECOGNITION - Revenue from sale of products is recorded when
ownership is transferred to the customers, which is when shipment is
made. It is not Company's policy to accept returns; in specific cases
returns are accepted, however, the Company has not experienced any
significant amounts of such returns. Revenue is presented net of
returns and net of quantity, cash and other discounts.
RESEARCH AND DEVELOPMENT - Research and development costs relate to
the development of both present and future products and are charged to
expense as incurred. Research and development expenses recorded by the
Company totaled approximately $1,065 (Lire 2,052), Lire 1,434 and
Lire 1,405, for the fiscal years ended December 31, 1999, 1998 and
1997, respectively.
INCOME TAXES - The Company complies with Statement of Financial
Accounting Standards No. 109 (SFAS 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
basis of assets and liabilities that will result in taxable or
deductible amounts in the future based on enacted tax laws and rates
applicable to the period in which the differences are expected to
affect taxable income. Valuation allowances are established, when
necessary, to reduce the deferred income tax assets to the amount
expected to be realized.
STATEMENTS OF CASH FLOWS - The Company's short-term borrowings arise
primarily through short-term credit facilities. The short-term
borrowings are normally payable on demand. The cash flows from these
items are included under the caption "Net Change in Short-Term
Borrowings" in the statements of cash flows.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash,
accounts receivable and accounts payable and notes payable to banks
approximate fair value because of the short-term nature of these
items. The carrying amount of substantially all of the Company's
long-term debt approximates fair value due to the floating interest
rate on the debts.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
This statement establishes accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as
assets or liabilities in the statement of financial position and
measurement of these instruments at fair value. The statement, as
amended, is effective for fiscal years beginning after June 15, 2000.
Spigadoro will be required to adopt this standard, as amended, in its
year ending December 31, 2001. Management believes that adopting this
statement will not have a material impact on the financial position,
results of operations, or cash flows of the Company.
STOCK OPTIONS - The Company has adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation". SFAS 123 requires
compensation expense to be recorded (i) using the new fair value
method or (ii) using existing accounting rules prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations with pro
forma disclosure of what net income and earnings per share would have
been had the Company adopted the new fair value method. The Company
accounts for its stock based compensation plans in accordance with the
provisions of APB 25.
F-12
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INCOME PER COMMON SHARE - Effective December 31, 1997, the Company
adopted Statement of Financial Accounting Standards No. 128 (SFAS
128), "Earnings Per Share". SFAS 128 requires dual presentation of
basic and diluted earnings per share for all period presented. Basic
earnings per share is computed by dividing income of the entity by the
weighted average number of common shares outstanding for the period.
Basic earnings per share excludes shares held in treasury and shares
held in escrow pending release upon the occurrence of specified
economic events (Note 13). Shares held in treasury and in escrow for
the years ended December 31, 1999, 1998 and 1997 were 50,000 and
498,285, respectively. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted income per common share is the same as
basic income per common share for the years ended December 31, 1999,
1998 and 1997. At December 31, 1999, the Company has unexercised stock
options to purchase 950,000, shares, and has unexercised common stock
purchase warrants to purchase 2,771,726 shares (Notes 12 and 13).
RECLASSIFICATIONS - Certain reclassifications to prior years financial
statements were made in order to conform to the 1999 presentation.
NOTE 3 - ACQUISITIONS:
During September 1998, N.V. had acquired 67% of the outstanding common
stock of Petrini from Carlo Petrini and received an option to acquire
the remaining 33% interest from the bankruptcy receiver of the
minority shareholder of Petrini. N.V. exercised its option to acquire
the 33% interest in November 1999. The acquisition was accounted for
as a purchase and the aggregate purchase price of Petrini by N.V was
allocated on the basis of the relative fair values of the assets
acquired and the liabilities assumed while the balance of $5,213 (Lire
10,046) was recorded as goodwill and is being amortized over 20 years
on a straight line basis. All purchase acquisition adjustments have
been recorded in the consolidated financial statements of Petrini. In
connection with N.V.'s acquisition of Petrini, management discontinued
certain business operations of Petrini relating to pig and chicken
breeding and implemented a plan to terminate certain employees. The
restructuring costs related to these activities of approximately
$1,129 (Lire 2,175) have been recorded as obligations resulting from
the acquisition. At December 31, 1999, approximately $337 (Lire 650)
is included in accrued liabilities related to unpaid restructuring
charges.
In December 1999 Spigadoro acquired 100% of the common stock of
Petrini from N.V. in exchange for the issuance of 48,366,530 shares of
Spigadoro's common stock, the assumption of approximately $13,244
(Lire 25,521) of promissory notes from N.V., and the issuance of a
promissory note to N.V. in the amount of $6,300 (Lire 12,140). This
acquisition was recorded as a reverse acquisition with Petrini being
considered the acquiring Company for financial reporting purposes.
Therefore, the assets and liabilities of Spigadoro were recorded at
their fair market value in December 1999 as follows:
December 31, 1999
-------------------------------------
(Dollars) (Lire)
Current assets $ 9,952 19,177
Total assets 11,992 23,110
Current liabilities 1,128 2,173
Total liabilities 588 1,134
Stockholders' equity 11,404 21,976
As Spigadoro had no continuing operations at the date of the
acquisition, no goodwill was recorded. The excess was recorded to
capital in excess of par value.
F-13
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 3 - ACQUISITIONS:
The consolidated financial statements of the Company include the
balance sheet of Spigadoro as of December 31, 1999. The results of its
operations for the period December 29, 1999 (date of acquisition)
through December 31, 1999 are insignificant and not included in the
consolidated financial statements. Simultaneously with the acquisition
on December 29,1999, Spigadoro discontinued all its previous
operations consisting of manufacturing and distributing computers and
peripherals principally in Germany through its subsidiaries located in
Germany. The net assets held for disposition are recorded at their
estimated net realizable value at December 31, 1999. The Company has
written down the net assets based upon estimated fair value for
Columbus and expected sales proceeds for FSE to be received over a
period of six years.
The following pro forma condensed statements of operations for 1999
and 1998 give effect to the acquisitions and the decision to
discontinue Spigadoro's previous operations as if they occurred on
January 1 of each year:
1999 1999 1998
---------------------------------------------
(Dollars) (Lire)
Net sales $ 135,737 261,565 266,307
Net income (loss) 4,728 9,110 (1,613)
Basic and diluted income (loss)
per share 0.08 156.81 (27.96)
Weighted average number of common
shares outstanding (in thousands) 58,095 58,095 57,694
NOTE 4 - FACTORING OF RECEIVABLES:
Starting from June 1999, the Company executed contracts with a
factoring agency for the sale without recourse of trade receivables.
Pursuant to the contract, the Company continues to collect and account
for the collection of the receivables sold to the factoring agency.
The amount of such collections are included in cash and cash
equivalents and the liability to the factoring agency is reported as
short-term borrowings for an amount of approximately $3,000 (Lire
5,923). The interest rate on unremitted funds is EURIBOR plus .4 to
.5%.
NOTE 5 - INVENTORIES:
At December 31, 1999 and 1998, inventories consisted of:
1999 1999 1998
------------ ------------- ----------
(Dollars) (Lire)
Raw materials and consumables $ 7,823 15,074 17,397
Work-in-process 181 349 2,255
Finished goods 3,303 6,366 5,469
------------- ------------- -------------
$ 11,307 21,789 25,121
============= ============= =============
F-14
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
At December 31, 1999 and 1998, property, plant and equipment consists
of:
1999 1999 1998
------------- ------------- -------------
(Dollars) (Lire)
Land $ 3,968 7,647 4,659
Building and improvements 14,753 28,429 38,567
Machinery, equipment and other 18,463 35,578 88,272
------------- ------------- -------------
37,184 71,654 131,498
Less accumulated depreciation
and amortization 555 1,070 82,288
------------- ------------- -------------
36,629 70,584 49,210
============= ============= =============
NOTE 7 - INTANGIBLE ASSETS:
At December 31, 1999 and 1998, intangible assets consisted of:
1999 1999 1998
------------ ------------- -------------
(Dollars) (Lire)
Goodwill $ 6,787 13,079 6,560
Other intangible assets 3,474 6,694 11,841
------------ ------------- -------------
10,261 19,773 18,401
Less: accumulated
amortization (295) (568) (10,013)
----------- ------------- -------------
Total $ 9,966 19,205 8,388
============ ============= =============
NOTE 8 - OTHER ASSETS:
At December 31, 1999 and 1998, other assets consisted of:
1999 1999 1998
------------- ------------- -------------
(Dollars) (Lire)
Investments $ 56 108 1,136
Receivable from Spigadoro NV 229 442
Advances on employees severance obligations 826 1,591 1,543
Accounts receivable-long-term 991 1,909 321
Other 1,389 2,678 2,545
------------- ------------- -------------
Total $ 3,491 6,728 5,545
============= ============= =============
F-15
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 9 - SHORT-TERM BORROWINGS:
At December 31, 1999 and 1998, the Company had unsecured short-term
lines of credit aggregating approximately $46,000 (Lire 88,000) and
$48,000 (Lire 92,000), respectively, from banks, of which
approximately $27,000 (Lire 52,000) and $21,000 (Lire 40,000),
respectively, were available for further borrowing. At December 31,
1999 and 1998, the weighted average interest rates for these lines of
credit were 4% and 4.4%, respectively. Amounts outstanding under these
lines of credits are normally payable upon demand.
In connection with the Petrini transaction, the Company issued the
following unsecured notes:
1999 1999
------------- -------------
(Dollars) (Lire)
$6,337(Lire 12,211), due December 31, 2000,
with a fixed interest rate of 5% per annum (a) $ 5,637 10,862
$1,000 (Lire 1,927), due March 31, 2000,
non-interest bearing, discounted at an interest
rate of 5% per annum 988 1,904
Lire 12,050 ($6,253), due June 30, 2000,
non-interest bearing, discounted at an interest
rate of 5% per annum (b) 6,405 12,342
$6,150 (Lire 11,851), due December 31, 2000,
non-interest bearing, discounted at an interest
rate of 5% per annum (a) 5,851 11,275
------------- -------------
$ 18,881 36,383
============= =============
(a) The notes are convertible into stock of the Company at the greater of
$2.50 per share or 85% of the market value of the Company's common
stock.
Short-term borrowings include overdrafts of approximately $15,000
(Lire 28,000) and $26,000 (Lire 50,000) at December 31, 1999 and 1998,
respectively, and by lines of credit for the discounting of
"agriculture" drafts (a technical form of borrowing applicable to the
sector in which the Company operates, which is based on the
discounting of drafts) for approximately $1,300 (Lire 2,500) at
December 31, 1999 and 1998. Included in the short-term borrowings at
December 31, 1999 is also the liability to the factoring agency for an
amount approximating $3,000 (Lire 5,923), as indicated in Note 4.
(b) This note is payable in Lire, however the total amount paid can not
exceed the equivalent of $7 million on the date of payment.
F-16
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 10 - LONG-TERM DEBT:
At December 31, 1999 and 1998, long-term debt consisted of:
1999 1999 1998
------------- ------------- -------------
(Dollars) (Lire)
Mortgage notes (a):
Lire 5,000 ($2,595), due July 31, 2006, variable
interest based on 6 months EURIBOR plus 0.6%
(4.1% at December 31, 1999) $ 2,595 5,000
Lire 2,340 ($1,214), due November 10, 2000, fixed
annual interest rate of 12.2% 104 201 789
Lire 2,000 ($1,038) due November 5, 2003, fixed
annual interest rate of 9.3% 1,397
Lire 12,000 ($6,227), due June 30, 2000, variable
interest 50% based on State bonds average rate
and 50% on three months LIBOR plus 1.2 (6.2%
and 8.3% at December 31, 1999 and 1998,
respectively) 566 1,091 3,273
Lire 1,000 ($519), due June 15, 2004, variable
interest based on the European Bank's discount
rate (4.2% and 7.0% at December 31, 1999 and
1998, respectively) 292 562 688
Lire 5,000 ($2,595), due September 30, 2002,
variable interest 50% based on semiannual Italian
Treasury Bonds average rate and 50% listed
bonds average rate plus 1.0 (annual rate of
4.9% and 5.0% at December 31, 1999 and
1998, respectively) 1,197 2,307 3,077
Various subsidized loans, fixed annual interest,
rates varying from 3.4% to 5.1% 224 432 784
Lire 3,300 ($1,713), due March 31, 2007, variable
interest based on 6 months RIBOR plus 1 (5.3%
and 7.2% at December 31, 1999 and 1998,
respectively) 1,460 2,813 3,067
Lire 3,000 ($1,557), due March 31, 1999, variable
interest based on 6 months RIBOR plus 0.7
(7.0% at December 31, 1998) 175
Variable interest rate loans, (7.0%
to 7.5% at December 31, 1998) 2,458
Lire 4,972 ($2,580), due May 31, 2006 variable
interest based on the 6 months EURIBOR
plus 0.6 (4.1% at December 31, 1999) 2,419 4,662
------------- ------------- -------------
8,857 17,068 15,708
Less current portion 1,862 3,589 4,266
------------- ------------- -------------
Long-term debt, long-term portion $ 6,995 13,479 11,442
============= ============= =============
F-17
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 10 - LONG-TERM DEBT (CONTINUED):
(a) The mortgage notes are collateralized by substantially all of the
Company's properties.
The loans that are subsidized by the Italian Government were obtained
under a Government program for new investments. The interest paid by
Italian Government amounted to Lire 22 in 1999 and Lire 65 in 1998.
These subsidies reduced the effective interest rates applicable to
these loans from 11.6% to 3.6% in 1999 and from 12.7% to 4.1% in 1998.
Maturities of long-term debt are as follows:
Year (Dollars) (Lire)
----------------- -----------------
2000 $ 1,862 3,589
2001 1,338 2,579
2002 1,382 2,664
2003 1,031 1,986
2004 1,048 2,019
Thereafter 2,196 4,231
----------------- -----------------
Total $ 8,857 17,068
================= =================
NOTE 11 - EMPLOYEES AND AGENTS TERMINATION INDEMNITIES:
The liability for termination indemnities relates principally to the
Company's employees. In accordance with Italian severance pay
statutes, an employee benefit is accrued for service to date and is
payable immediately upon separation. The termination indemnity
liability is calculated in accordance with local civil and labor laws
based on each employee's length of service, employment category and
remuneration. The termination liability is adjusted annually by a
cost-of-living index provided by the Italian Government. There is no
vesting period or funding requirement associated with the liability.
The liability recorded in the balance sheet is the amount to which the
employee would be entitled if the employee separates immediately.
The liability for termination indemnities includes also the liability
to the sales agents, which is recognized to the agent if unilaterally
dismissed by an employer or when he reaches retirement age.
The provision for termination indemnities charged to operations amount
to approximately $1,084 (Lire 2,089), Lire 2,167 and Lire 2,550 in the
years ended December 31, 1999, 1998 and 1997, respectively.
F-18
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire, except per share amounts)
NOTE 12 - STOCK OPTIONS:
The following information relates to stock option activity of
Spigadoro (formerly IAT Multimedia) prior to the acquisition of
Petrini:
In December 1996, the Company's Board of Directors and stockholders
approved the adoption of the Company's 1996 Stock Option Plan (the
1996 Plan). The 1996 Plan provides for the grant of 500,000
non-qualified and incentive stock options to eligible employees and
advisors. As of December 31, 1999 and 1998, 240,000 and 100,000
options, respectively, have been granted under the 1996 Plan. As of
December 31, 1999, no options have been exercised.
During 1999, 1998 and 1997, the Company entered into stock option
agreements outside the Plans. The agreements provide for the issuance
of non-transferable options to purchase up to an aggregate of 335,000
shares of the Company's common stock at purchase prices ranging from
$1.87 to $6.00 per share, as defined, and have piggy-back registration
rights. As of December 31, 1999, 25,000 options have been exercised.
In December 1999, the Company's Board of Directors and stockholders
approved the adoption of the Company's 1999 Stock Option Plan (the
1999 Plan). The 1999 Plan provides for the grant of 2,500,000 shares
of non-qualified and incentive stock options to eligible employees,
officers, directors, consultants or advisors. As of December 31, 1999,
400,000 options have been granted under the 1999 Plan and no options
have been exercised.
The following summarizes the information relating to outstanding stock
options during 1999, 1998 and 1997:
Number Per
of Option Weighted
Shares Price Average
-------------- -------------- --------------
Shares under option at January 1, 1997 - - -
Granted 145,000 9,632-11,562 10,637
-------------- --------------- -------------
Shares under option at December 31,1997 145,000 9,632-11,562 10,637
Granted 385,000 8,190-11,562 10,599
-------------- --------------- -------------
Shares under option at December 31, 1998 530,000 8,190-11,562 10,599
Granted 620,000 3,603-13,489 5,010
Exercised (25,000) 11,562 11,562
Cancelled (175,000) 9,632-11,562 11,003
-------------- --------------- -------------
Shares under option at December 31, 1999 950,000 3,603-13,489 6,860
============== =============== =============
Exercisable at December 31, 1999 950,000 $1.87-7.00 $ 3.56
============== =============== =============
F-19
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire, except per share amounts)
NOTE 12 - STOCK OPTIONS (CONTINUED):
Had compensation cost for the Company's stock based compensation plans
been determined based on the fair value at the grant dates, consistent
with the provisions of SFAS 123, the Company's net loss and loss per
share would have been increased to the pro forma amounts indicated
below:
1999 1999 1998 1997
--------------- -------------- -------------- ---------------
(Dollars) (Lire)
Net income applicable to common
stockholders:
As reported $ 1,193 2,295 829 278
Pro forma 702 1,353 (1,442) (335)
Basic and diluted income per share:
As reported 0.02 40 14 5
Pro forma 0.01 23 (25) (6)
The fair value of each option grant is estimated on the grant date
using the Black-Scholes option pricing model with the following
weighted average assumptions used for 1999, 1998 and 1997 grants,
respectively: risk-free interest rate of 5%, 5% and 6%, respectively;
no dividend yield; expected lives of 5 to 10 years; and expected
volatility of 100%, 86% and 55%, respectively.
NOTE 13 - STOCKHOLDERS' EQUITY:
In connection with the Company's IPO, certain of the Company's
stockholders agreed to place an aggregate of 498,285 of their shares
of the Company's common stock in escrow. These shares will not be
assignable or transferable (but may be voted) until such time as they
are released from escrow based upon the Company meeting certain annual
revenue and/or earnings levels or the common stock attaining certain
price levels. All shares remaining in escrow on March 31, 2000 will be
forfeited and contributed to the Company's capital. In the event the
Company attains any of the thresholds providing for the release of the
escrowed shares to the stockholders, the Company will recognize
compensation expense for the shares released to certain stockholders,
computed at the time based on the fair market value of the shares.
As of December 31, 1999, the Company had the following warrants
outstanding:
Date issued Warrants Exercise Price Per Share Expiration date
- ----------- -------- ------------------------- ---------------
(Dollars) (Lire)
June 1998 88,241 $ 13.25 25,533 June 2003
April 1997 335,000 9.90 19,077 March 2002
1996 473,485 7.80 15,031 December 2006
October 1996 1,875,000 7.80 15,031 December 2006
F-20
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED):
Italian law requires that 5% of a company's net income be retained as
a legal reserve, until such reserve equals 20% of the share capital.
This reserve is not available for distribution.
Retained Earnings or other equity accounts are available for
distribution only if recorded in the Italian official books. At
December 31, 1999 balances distributable to the shareholders amount to
approximately $5,500 (Lire 10,500) and are principally represented by
surplus arising from revaluations of fixed assets and from Government
grants both of which are taxable upon distribution. No deferred taxes
have been provided for on such accounts because it is not management's
intent to distribute such amounts.
NOTE 14 - SOCIAL CONTRIBUTIONS AND INCOME TAXES PAYABLE:
These non-current liabilities consist of social contribution and
income taxes due by the Company whose payment has been postponed
beyond 2000 in application of the Government decrees enacted after the
earthquake that hit the area where the headquarters and the major
production activities of the Company are located. At December 31, 1999
and 1998, the components of these liabilities consisted of:
1999 1999 1998
------------- ------------- -------------
(Dollars) (Lire)
Income taxes $ 542 1,044 958
Social contributions 1,939 3,737 3,778
------------- ------------- -------------
Total $ 2,481 4,781 4,736
============= ============= =============
NOTE 15 - TAXES:
Value Added - V.A.T. Taxes
Taxes receivable of $7,211 (Lire 13,895) at December 31, 1999 and
$6,813 (Lire 13,129) at December 31, 1998 relate principally to V.A.T.
taxes for which the Company periodically receives reimbursement from
the V.A.T. office. The V.A.T. receivable position is attributable to
the fact that the V.A.T. rate applicable to the products sold by the
Company is lower than the average rate applied to its purchases, costs
and expenses.
Income Taxes
Income before income taxes and the provision for income taxes
consisted of the following for the years ended December 31, 1999, 1998
and 1997:
1999 1999 1998 1997
--------------- -------------- -------------- ---------------
(Dollars) (Lire)
Income before income taxes $ 3,486 6,715 4,416 715
--------------- -------------- -------------- ---------------
Provision for income taxes:
Current (2,333) (4,496) (3,580) (476)
Deferred 40 76 (7) 39
--------------- -------------- -------------- ---------------
(2,293) (4,420) (3,587) (437)
--------------- -------------- -------------- ---------------
Net income $ 1,193 2,295 829 278
=============== ============== ============== ===============
F-21
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 15 - TAXES (CONTINUED):
A reconciliation between the Italian statutory tax rate and the
effective tax rate is as follows:
1999 1999 1998 1997
------------ ------------------- ------------------ --------------------
Amount Amount % Amount % Amount %
------------ ------------------- --------- ------- --------- ---------
Dollar Lire Lire Lire
Tax provision applying
the Italian statutory rate
of 41.25% in 1999 and
1998 and of 53.2% in
1997 $1,436 2,767 41.2% 1,822 41.2% 380 53.2%
Permanent differences
for non-deductible
expenses:
For IRPEG-ILOR (until
1997) 199 384 5.7 349 7.9 814 113.8
For IRAP (primarily on
salaries and interest) 915 1,763 26.3 1,416 32.1
Tax savings resulting from
exemptions for ILOR tax
purposes (404) (56.5)
Tax legislation to introduce
the IRAP tax and eliminate
the ILOR tax (353) (49.4)
Other (257) (494) (7.4)
------------ --------- -------- --------- ------- --------- ---------
Tax provision and effective
tax rate $2,293 4,420 65.8% 3,587 81.2% 437 61.1%
============ ========= ======== ========= ======== ======= ========
F-22
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 15 - TAXES (CONTINUED):
The Italian Regional Tax on Productive Activities ("IRAP") was enacted in
December 1997 which eliminated the ILOR tax (at a statutory rate of 16.2%) and
other indirect taxes and replaced them with IRAP, at a statutory rate of 4.25%
on a higher taxable income (principally before labor costs and interest),
starting on January 1, 1998. The Italian statutory rate for 1999 and 1998 was
41.25% comprised of 37% IRPEG and 4.25% IRAP. A valuation allowance of $3,971,
Lire 7,653 and Lire 201 has been provided against the deferred tax assets at
December 31, 1999 and 1998 based on estimates made by management assuming that
it is more likely than not that certain deferred tax assets will not be
recovered for both IRPEG and IRAP tax purposes.
At December 31, 1999 and 1998, principal items comprising net deferred income
tax assets consisted of :
1999 1999 1998
------------- ------------- -------------
(Dollars) (Lire)
Assets
Italian tax
revaluation of assets $ 3,973 7,657 7,920
Agents' termination indemnity 120
Allowance for doubtful accounts 356 686 849
Net operating loss carryfowards 6,476 12,480
Other 294 567 349
------------- ------------- -------------
11,099 21,390 9,238
Less valuation allowance (3,971) (7,653) (201)
------------- ------------- -------------
Total assets 7,128 13,737 9,037
------------- ------------- -------------
Liabilities
Gains on sale of assets which for
tax purposes, are deferred (182) (350) (467)
Push-down of step-up adjustments (5,312) (10,237)
Accelerated amortization of
trademarks (1,055) (2,033) (2,063)
------------- ------------- -------------
Total liabilities (6,549) (12,620) (2,530)
------------- ------------- -------------
Net deferred tax assets $ 579 1,117 6,507
============= ============= =============
Tax years for the Companies are open from 1994 and are subject to review
pursuant to Italian law. The Company has been subjected to tax reviews in
previous years. Management believes, based on the advice of its tax consultants,
that the final outcome of the tax assessments deriving from such reviews, if
any, will not result in any significant additional liabilities.
F-23
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 15 - TAXES (CONTINUED):
At December 31, 1999, the Company has net operating loss
carryforwards (NOL) for Swiss, German and United States income
tax purposes of approximately $2,544 (Lire 4,903), $928 (Lire
1,788) and $3,004 (Lire 5,789), respectively. The Swiss NOLs
expire between 2000 and 2006, the German NOLs have no expiration
date and the United States NOLs expire through 2019. As a result,
at December 31, 1999, the Company recorded deferred tax assets of
approximately $6,500 (Lire 12,500) and a valuation allowance of
approximately $3,900 (Lire 7,500) relating to the NOLs.
NOTE 16 - COMMITMENTS AND CONTINGENCIES:
Commitments
Commitments of approximately $1,330 (Lire 2,564) at December 31,
1999 include principally guarantees given to banks for
discounting of customers' drafts.
In February 2000, the Company entered into a sub-lease of office
facilities with an affiliate at an annual rent of approximately
$230 (Lire 443) through January 2002.
Contingencies
The Company provides for costs related to contingencies when a
loss is probable and the amount is reasonably determinable. The
amount provided for at December 31, 1999 and 1998 is $52 (Lire
100). It is the opinion of management that the ultimate
resolution of these matters, to the extent not currently provided
for, will not have a material effect on the financial statements
of the Company.
Modifications to General Regulatory Plan ("GRP") of the City
Council of Bastia Umbra
The City Council of Bastia Umbra on December 21, 1996 approved a
modification to its GRP, changing the purpose of use of the areas
currently utilized by Petrini for its production activities
preventing the continuation of such activities in Bastia. Petrini
presented to the City Council its observations and comments on
such proposed modifications asking to continue its production
activities in the area currently occupied by its factory or,
alternatively, asking for the authorization to transfer its
production facilities to another own area in Ospedalicchio. On
September 4, 1999 the City Council published its decision of May
17, 1999 to reject the request of Petrini to maintain its
production activities in Bastia, while approved the change of the
purpose of use of the area in Ospedalicchio (from agricultural to
industrial) in order to make possible the transfer of the
factory. The decision of the City Council has to be approved by
Regione Umbria.
In the event the modification be definitely approved by the Region,
without changes, and no legal actions could be initiated by Petrini,
the entire factory of Bastia must be transferred and the Company will
be indemnified. Although the Directors believe that the modification
will not be approved without changes, and accordingly such transfer
will not be necessary, they have initiated to study and evaluate the
possible alternatives, which include the construction or the
acquisition of another factory. The Company has already started the
procedures to obtain subsidies of Law 488. The Directors estimate
that, due to the time frame required by the public entities to make
effective their decisions, the actual transfer will take place at
least after two years from the date on which the final decision will
be taken. The Directors believe that the transfer of the production
activities will not have a significant impact on the Company's
financial statements.
NOTE 17 - CONCENTRATION OF CREDIT RISK:
Concentration of credit risk and the risk of accounting loss with
respect to trade accounts receivable is generally limited due to
the number and diversity of the Company's end customer base and
the areas and the markets in which the customers are located. The
Company performs frequent credit evaluations of its customers'
financial condition and normally does not require collateral from
its customers. Net direct sales to any one customer did not
exceed 5% of total direct sales in each of the three years in the
period ended December 31, 1999. As of December 31, 1999, accounts
receivable from the largest customer does not exceed 10% of total
accounts receivable.
Cash deposits are maintained with major banks in Italy.
F-24
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 18 - INFORMATION BY SEGMENT:
The Company manages its business on a segment basis. The significant
segments operated by the Company consist of: i) pasta and other food
products and ii) animal feed and other activities. Information
relative to significant segments is reported below for the years 1999,
1998 and 1997. The accounting policies of the segments are
substantially the same as those described in Note 2 Significant
Accounting Policies.
Animal
Pasta and feed and
other food other Total
products activities Company
--------------- --------------- ---------------
1999 (Dollars)
Total revenue $ 35,809 $ 99,928 $ 135,737
Depreciation and amortization 950 2,160 3,110
Income from operations 643 4,375 5,018
Identifiable long-term assets (property,
plant and equipment and intangibles) 9,998 36,597 46,595
Capital expenditures 321 1,033 1,354
1999 (Lire)
Total revenue 69,003 192,562 261,565
Depreciation and amortization 1,830 4,162 5,992
Income from operations 1,239 8,431 9,670
Identifiable long-term assets (property,
plant and equipment and intangibles) 19,267 70,522 89,789
Capital expenditures 619 1,991 2,610
1998 (Lire)
Total revenue 71,163 195,144 266,307
Depreciation and amortization 1,251 4,367 5,618
Income from operations 1,058 7,434 8,492
Identifiable long-term assets (property,
plant and equipment and intangibles) 11,590 46,008 57,598
Capital expenditures 732 2,335 3,067
1997 (Lire)
Total revenue 73,125 221,734 294,859
Depreciation and amortization 1,199 4,119 5,318
Income from operations 1,259 5,672 6,931
Identifiable long-term assets (property,
plant and equipment and intangibles) 12,983 48,775 61,758
Capital expenditures 1,534 5,342 6,876
F-25
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 18 - INFORMATION BY SEGMENT (CONTINUED):
Export sales by the Company from Italy, all related to pasta and other
food products were as follows:
Country - Region 1999 1999 1998 1997
------------- ------------- ------------- -------------
(Dollars) (Lire)
Europe $ 1,903 3,668 3,256 3,238
U.S.A. 1,537 2,961 1,442 2,219
Japan 2,322 4,474 4,948 5,311
Rest of the world 2,483 4,785 5,532 5,235
------------- ------------- ------------- -------------
Total $ 8,245 15,888 15,178 16,003
============= ============= ============= =============
Substantially all long-lived assets are located in Italy.
NOTE 19 - VALUATION AND QUALIFYING ACCOUNTING:
Balance at Charged to Balance at
beginning costs and end of
of period expenses Deductions period
------------- ------------- ------------- -------------
Year ended December 31, 1999
(thousands of Dollars):
Allowance for doubtful accounts $ 1,394 $ 860 $1,290 $ 964
============= ============= ============= =============
Year ended December 31, 1999
(millions of Lire)
Allowance for doubtful accounts 2,686 1,658 2,487 1,857
============= ============= ============= =============
Year ended December 31, 1998
(millions of Lire)
Allowance for doubtful accounts 2,646 1,391 1,351 2,686
============= ============= ============= =============
Year ended December 31, 1997
(millions of Lire)
Allowance for doubtful accounts 2,633 982 969 2,646
============= ============= ============= =============
F-26
SPIGADORO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dollars; in millions of Lire)
NOTE 20 - DISCONTINUED LINE OF BUSINESS:
In 1999, the Company decided to discontinue the pig and chicken
breeding activity. Reported operating data related to the discontinued
line of business follows:
1999 1999 1998
------------- ------------- -------------
(thousands (millions of Lire)
of Dollars)
Net sales $ 3,578 6,895 4,693
Cost of sales 4,008 7,723 5,545
------------- ------------- -------------
(430) (828) (852)
Operating expenses 116 224 240
------------- ------------- -------------
Operating loss from discontinued line of business $ (546) (1,052) (1,092)
============= ============= =============
The discontinued line of business was operated directly and indirectly
through agreements with external breeders. Effective October 1, 1999,
the plant leased for such activity under an operating lease has been
subleased to other breeders. Terms of the lease $78 (Lire 150) annual
rent with a duration of two years) have been applied to the sublease
agreement. Starting the same date October 1, 1999, owned premises and
plants, with a net book value at December 31, 1999 of $1,311 (Lire
2,526) have been rented for an annual rent of $104 (Lire 200) for a
period of five years. No decision has been made to date regarding the
remaining owned plants, with a net book value at December 31, 1999 of
$1,191 (Lire 2,272). Management believes that the book value of such
assets approximates its fair value and no material impairment will
derive from the disposition of such assets.
NOTE 21 - RELATED PARTY TRANSACTIONS:
At December 31, 1999, the Company had amounts due from N.V. of $229
(Lire 442) and $29 (Lire 55) included in other assets and accounts
receivable, respectively.
N.V. charged the Company an amount of $300 (Lire 578) for expenses
incurred on behalf of Petrini in relation to their acquisition of
Petrini.
NOTE 22 - SUBSEQUENT EVENT:
In February 2000, the Company sold its investment in Algo Vision for
approximately $16,800 (Lire 32,374). The 750,000 shares owned by the
Company had a fair market value as of December 31, 1999 of
approximately $3,000 (Lire 5,793). These shares were recorded at their
fair value at the date of the merger between the Company and Petrini.
The Company has not had any other purchases or sales of investments in
1999, 1998 and 1997.
In January 2000, the Company sold its 100% ownership of the General
Partner of FSE Computer-Handel GmbH & Co. KG (FSE) and its 80%
ownership of the limited partnership interest of FSE for approximately
$200 (Lire 394) payable over a six year period. The consolidated
balance sheet has been adjusted to record this investment at its net
realizable value.
F-27
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) 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.
SPIGADORO, INC.
Dated March 30, 2000 By:
/s/ Jacob Agam
--------------------------------
Jacob Agam
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Jacob Agam
- --------------------
Jacob Agam Chairman of the Board of Directors March 30, 2000
and Chief Executive Officer
(principal executive officer)
/s/ Klaus Grissemann
- --------------------
Klaus Grissemann Chief Financial Officer and Director March 30, 2000
(principal accounting and
financial officer)
/s/ Lucio DeLuca
- --------------------
Lucio DeLuca Chief Operating Officer and March 30, 2000
Director
/s/ Marc S. Goldfarb
- --------------------
Marc S. Goldfarb Director March 30, 2000
/s/ Carlo Petrini
- --------------------
Carlo Petrini Co-Chairman of the Board March 30, 2000
/s/ Robert Weiss
- --------------------
Robert Weiss Director March 30, 2000
/s/ Erich Weber
- --------------------
Erich Weber Director March 30, 2000