UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT OF 1934
Commission File Number 0-22101
IAT MULTIMEDIA, INC.
(exact name of registrant as specified in its charter)
Delaware 13-3920210
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(State or other jurisdiction of (I.R.S Employer
Incorporation or organization) Identification No.)
Geschaftshaus Wasserschloss
Aarestrasse 17
CH-5300 Vogelsang-Turgi, Switzerland
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(Address of principal executive offices)
(011) (41) (56) 223-5078
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(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at November 12, 1998
- ---------------------------- --------------------------------
Common Stock, $.01 par value 9,998,826 shares
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Operations for Three Months
ended September 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Operations for Nine Months
ended September 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for Nine Months
ended September 30, 1998 and 1997 (unaudited) 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Default upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE PAGE 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30 December 31,
1998 1997
(unaudited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,219,016 $ 5,472,928
Marketable securities 750,000 2,726,865
Accounts receivable, less allowance for doubtful
accounts of $102,515 in 1998 and $71,111 in 1997 2,038,354 1,258,914
Inventories 1,588,404 1,699,338
Other current assets 166,611 277,057
Current deferred taxes receivable 46,433 -
Assets held for disposition - 1,077,920
------------ ------------
Total current assets 11,808,818 12,513,022
Equipment and improvements, net 708,942 633,605
Other assets:
Notes receivable from affiliates 831,669
Investments in affiliated companies 20,436
Excess of cost over net assets acquired, net 3,450,721 3,373,254
Other assets 151,580 139,635
------------ ------------
$ 16,972,166 $ 16,659,516
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 420,247 $ 449,121
Accounts payable and other current liabilities 2,779,660 3,649,882
Loans payable, stockholders 1,017,833 2,339,451
Liabilities held for disposition - 1,640,029
Deferred taxes payable - 311,347
------------ ------------
Total current liabilities 4,217,740 8,389,830
------------ ------------
Convertible debenture 3,000,000 -
------------ ------------
Minority interest 187,553 174,007
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Stockholders' equity:
Preferred stock, $.01 par value, authorized
500,000 shares, none issued
Common stock, $.01 par value, authorized
20,000,000 shares, issued 9,502 97,519
9,950,204 in 1998 and 9,751,949 in 1997 99,502 97,519
Capital in excess of par value 29,660,151 27,103,657
Accumulated deficit (20,660,301) (19,239,283)
Cumulative translation adjustment 673,781 340,046
Treasury stock (50,000 shares) (206,260) (206,260)
------------ ------------
Total stockholders' equity 9,566,873 8,095,679
------------ ------------
$ 16,972,166 $ 16,659,516
============ ============
See Notes to Consolidated Financial Statements
3
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 30,
-----------------------------
1998 1997
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Net Sales $ 8,093,257 $ 122,310
Cost of Sales 7,516,272 82,867
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Gross margin 576,985 39,443
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Operating expenses:
Research and development costs, net -- 531,007
Selling expenses 710,698 450,051
General and administrative expenses 133,705 297,296
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844,403 1,278,354
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Operating loss before corporate overhead,
depreciation and amortization (267,418) (1,238,911)
Corporate overhead 317,803 246,329
Depreciation and amortization 165,409 73,729
----------- -----------
Operating loss (750,630) (1,558,969)
Other income (expense):
Interest expense (52,225) (45,671)
Interest income 99,154 171,874
Discount on convertible debenture -- --
Other income (expense) (31,453) 1,351
----------- -----------
Loss before recovery of income taxes and minority interest (735,154) (1,431,415)
Recovery of income taxes 203,560 --
----------- -----------
Loss before minority interest (531,594) (1,431,415)
Minority interest in net loss of subsidiary 53,754 --
----------- -----------
Net loss $ (477,840) $(1,431,415)
=========== ===========
Net loss per share - basic and diluted $ (0.05) $ (0.16)
=========== ===========
Weighted average number of common shares outstanding 9,401,919 9,059,324
=========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
Net loss $ (477,840) $(1,431,415)
Other comprehensive income (loss) net of tax
- Foreign currency translation adjustments 330,437 39,821
----------- ------------
Comprehensive loss $ (147,403) $ (1,391,594)
=========== ============
See Notes to Consolidated Financial Statements
4
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Nine Months Ended
September 30,
----------------------------
1998 1997
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Net Sales $ 23,544,503 $ 537,561
Cost of Sales 21,524,407 328,613
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Gross margin 2,020,096 208,948
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Operating expenses:
Research and development costs, net -- 1,793,528
Selling expenses 1,752,816 1,365,413
General and administrative expenses 492,926 795,634
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2,245,742 3,954,575
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Operating loss before corporate overhead,
depreciation and amortization (225,646) (3,745,627)
Corporate overhead 807,560 555,093
Depreciation and amortization 463,839 212,410
------------ ------------
Operating loss (1,497,045) (4,513,130)
Other income (expense):
Interest expense (107,344) (169,454)
Interest income 252,666 362,322
Discount on convertible debenture (448,277) --
Other income (expense) (24,528) 17,428
------------ ------------
Loss before recovery of income taxes and minority interest (1,824,528) (4,302,834)
Recovery of income taxes 334,666 --
------------ ------------
Loss before minority interest (1,489,862) (4,302,834)
Minority interest in net loss of subsidiary 68,844 --
------------ ------------
Net loss $ (1,421,018) $ (4,302,834)
============ ============
Net loss per share - basic and diluted $ (0.15) $ (0.54)
============ ============
Weighted average number of
common shares outstanding 9,278,444 7,970,762
============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
Net loss $(1,421,018) $(4,302,834)
Other comprehensive income (loss) net of tax - Foreign
currency translation adjustments 333,735 316,158
----------- -----------
Comprehensive loss $(1,087,283) $(3,986,676)
=========== ===========
See Notes to Consolidated Financial Statements
5
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
----------------------------
1998 1997
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Cash flows from operating activities:
Net loss $ (1,421,018) $ (4,302,834)
Adjustments to reconcile net loss to net cash used
in operating activities:
Discount on convertible debenture 448,277
Depreciation of equipment 199,798 212,410
Amortization of goodwill 264,041
Common stock/and stock options issued for services 37,500 22,500
Minority interest in income (68,844)
Deferred taxes payable (356,719)
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Accounts receivable (640,100) 189,068
Inventories 228,189 58,415
Other current assets 111,872 (168,748)
Other assets (13,855) (341,363)
Accounts payable and other current liabilities (1,614,395) (192,852)
------------ ------------
Net cash used in operating activites (2,825,254) (4,523,404)
------------ ------------
Cash flows from investing activities:
Loans to and investments in, affiliated companies (966,725)
Purchases of equipment and improvements (224,206) (295,765)
Sale (purchase) of marketable securities 1,976,865 (3,177,570)
------------ ------------
Net cash provided (used) in investing activities 785,934 (3,473,335)
------------ ------------
Cash flows from financing activities:
Repayments of loans payable, stockholders (1,326,923) (1,054,310)
Proceeds from issuance of convertible debenture 3,000,000
Proceeds from issuance of common stock, net proceeds 1,608,698 17,098,164
Payment of preferred stock dividend -- (51,625)
Capital contribution, stockholders, net proceeds 464,002 --
Payment for treasury stock -- (206,260)
Repayments of short-term bank loan, net (54,845) (226,158)
------------ ------------
Net cash provided by financing activities 3,690,932 15,559,811
------------ ------------
Effect of exchange rate changes on cash 94,476 110,611
------------ ------------
Net increase in cash 1,746,088 7,673,683
Cash and cash equivalents, beginning of period 5,472,928 264,661
------------ ------------
Cash and cash equivalents, end of period $ 7,219,016 $ 7,938,344
============ ============
Supplemental disclosures of cash flow information,
cash paid during the period for interest $ 66,899 $ 181,028
============ ============
cash paid during the period for income related taxes $ 96,748 $ --
============ ============
Supplemental schedule of non-cash operating activities,
Common stock/stock options issued for services $ 37,500 $ 22,500
============ ============
Supplemental schedule of non-cash financing activities,
deferred registration costs included in accounts
payable and other liabilities $ -- $ 276,525
============ ============
Spinoff of assets and liabilities held for disposition $ 1,077,920 $ --
============ ============
See Notes to Consolidated Financial Statements
6
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION - The unaudited interim consolidated
financial statements contain all adjustments consisting of normal recurring
adjustments, which are, in the opinion of the management of IAT Multimedia,
Inc. (hereinafter the "Company" or "IAT"), necessary to present fairly the
consolidated financial position of the Company as of September 30, 1998, and
the consolidated results of operations and cash flows of the Company for the
periods presented. Results of operations for the periods presented are not
necessarily indicative of the results for the full fiscal year. These financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission for the year
ended December 31, 1997.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of IAT Multimedia, Inc., its wholly owned subsidiaries IAT
AG, Switzerland ("IAT AG") and IAT Deutschland GmbH Interaktive Medien Systeme,
Bremen ("IAT GmbH"), 100% of the General Partner of FSE Computer-Handel GmbH &
Co. KG (FSE) and 80% of the limited partnership interest of FSE. All
intercompany accounts and transactions have been eliminated in consolidation.
EXCESS OF COST OVER NET ASSETS ACQUIRED - Goodwill represents the
excess of cost over the fair market value of net assets of acquired businesses
and is amortized over a period of 10 years from the acquisition date. The
Company monitors the cash flows of the acquired operation to assess whether any
impairment of recorded goodwill has occurred. Amortization for the nine months
period ended September 30, 1998 was approximately $264,000.
FOREIGN CURRENCY TRANSLATION -- The Company has determined that the
local currency of its Switzerland subsidiary, Swiss Francs, is the functional
currency for IAT AG and IAT GmbH and the Deutsch Mark is the functional
currency for FSE. The financial statements of the subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, "Foreign Currency Translation". SFAS 52
provides that all balance sheet accounts are translated at period-end rates of
exchange (1.39 and 1.45 Swiss Francs and 1.67 and 1.80 Deutsch Mark for each
U.S. Dollar at September 30, 1998 and December 31, 1997, respectively), except
for equity accounts which are translated at historical rates. Income and
expense accounts, and cash flows are translated at the average of the exchange
rates in effect during the period. The resulting translation adjustments are
included as a separate component of stockholders' equity, whereas gains or
losses arising from foreign currency transactions are included in results of
operations.
LOSS PER COMMON SHARE -- Effective December 31, 1997, the Company
adopted SFAS 128, "Earnings Per Share." SFAS 128 requires dual presentation of
basic and diluted earnings per share for all periods presented. Basic earnings
per share excludes dilution and is computed by dividing loss applicable to
common stockholders by the weighted average number of common shares outstanding
for the period. The weighted average number of common shares includes shares
issued within one year of the Company's initial public offering ("IPO") with an
issue price less than the IPO price, and excludes shares of the
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Company's common stock (the "Common Stock") placed in escrow upon the
completion of the IPO. In addition, all shares have been adjusted to reflect
the reverse stock split. 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. Prior period
loss information has been restated as required by SFAS No. 128. Diluted loss
per common share is the same as basic loss per common share for the periods
ended September 30, 1998 and 1997. The Company has unexercised options and
warrants in addition to shares issuable upon conversion of its convertible
debentures which are not included in the computation of diluted loss per share
because their effect would have been antidilutive as a result of the Company's
losses.
COMPREHENSIVE LOSS - Effective January 1, 1998 the Company adopted
SFAS 130, "Reporting Comprehensive Income". The Company reclassified its 1997
financial statements, as required.
NOTE 2. INVENTORIES:
September 30, December 31,
1998 1997
------------- ------------
Work in process............................... $ 254,549 $ 124,445
Purchased finished goods ...................... 1,333,855 1,574,893
---------- ----------
$1,588,404 $1,699,338
========== ==========
NOTE 3. SPINOFFS:
On March 6, 1998, the Company transferred the business and
substantially all of the assets and the liabilities of its majority-owned
subsidiary, IAT GmbH, to a newly-formed German company ("German Newco"). German
Newco (the "German Spinoff") is substantially owned by the former Co-chairman
of the Board of Directors of the Company. In addition, IAT AG owns 15% of the
outstanding common stock of the German Newco. The German Spinoff was effective
on January 1, 1998 and required the Company to infuse approximately $650,000 of
capital. In connection with the German Spinoff, IAT AG purchased the remaining
25.1% interest in IAT GmbH from the minority stockholder for a purchase price
of approximately $100,000. In addition, the Company provided German Newco with
a loan in the aggregate amount of approximately $300,000 for working capital
requirements through March 6, 1998. This loan bears interest of 5% per annum
and is due on or before December 31, 1998.
On March 24, 1998, the Company transferred the business and certain of the
assets and liabilities of its wholly-owned subsidiary IAT AG to a newly-formed
Swiss company ("Swiss Newco"). Swiss Newco (the "Swiss Spinoff") is
substantially owned by the former Co-chairman of the Board of Directors of the
Company. In addition, IAT AG owns 15% of the outstanding common stock of the
Swiss Newco. The Swiss Spinoff was effective on January 1, 1998. At closing,
the Company received a note for approximately $325,000 representing the value
of the assets in excess of the liabilities that were spunoff ("Purchase Note")
on March 24, 1998. In addition, the Company loaned the Swiss Newco $250,000
("The Note")
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for operating cash flow. The notes provide for the payment of interest
semi-annually beginning September 1, 1998 at a rate of 3% per annum, but
interest will be recorded using a discount rate of 8% per annum. The Purchase
Note is due on March 24, 2001. The Note is due the earlier of the date that
Swiss Newco raises either debt or equity financing in excess of SF 1,000,000 or
on March 24, 2001.
On September 11, 1998 Bremer Investitionsgesellschaft, a German Federal
Development Agency, increased its equity position in the German Newco from 2%
to 25.1%. In connection with this transaction, Bremer Investitionsgesellschaft
and Dr. Viktor Vogt have agreed to provide German Newco with loans of
approximately $1.75 million and approximately $1.9 million, of which an
aggregate amount of $2.25 million has been paid in 1998 and an aggregate amount
of $1.4 million will be payable in 1999, respectively. The loans will be used
for development and marketing of the Wonderboard family of multimedia and
desktop videoconferencing products.
NOTE 4. PRIVATE PLACEMENTS:
The Company entered into a securities purchase agreement (the "Purchase
Agreement"), dated as of June 19, 1998, with two purchasers (the "Investors")
and consummated the first transaction contemplated thereby ("Tranche A") in a
private placement of its securities pursuant to Regulation D. Tranche A
consisted of the issuance of 198,255 shares of its Common Stock and $3 million
aggregate principal amount of the Company's 5% Convertible Debentures due 2001
("Debentures") in exchange for $5 million in cash. In addition, the Company
issued five-year warrants to purchase 88,241 shares of Common Stock at a price
equal to $13.25 per share, 120% of the Average Price (as defined in the
Debentures; the "Warrants") to the Investors and the transaction's placement
agent. On October 27, 1998 a Registration Statement on Form S-3 registering the
shares of Common Stock issued to the Investors and issuable upon conversion of
the Debentures issued in Tranche A was declared effective by the Securities and
Exchange Commission.
The Debentures are immediately convertible into shares of Common Stock at
the option of either the Company (subject to certain limitations) or the
Investors. Resales of shares of Common Stock issued upon conversions at the
option of the Investors are prohibited for a period of nine months from the
date of issuance; thereafter, sales by the Investors are subject to certain
volume limitations. Any portion of the Debentures remaining unconverted on
October 27, 2000 shall convert automatically into shares of Common Stock. The
number of shares of Common Stock issuable upon conversion of the Debentures is
the lesser of (i) 120% of the average of the closing bid prices from the five
trading days immediately preceeding the Original Issue Date (as defined in the
Purchase Agreement) and (ii) 87% of the average of the five lowest closing bid
prices during the 15 trading days immediately preceding the conversion date.
The conversion price as of October 23, 1998 on the Tranche A Closing Date (as
defined in the Purchase Agreement) would have been $3.46 per share. The terms
and conditions with respect to conversion of Debentures and the number of
shares of Common Stock issuable thereunder are set forth in the Purchase
Agreement.
-9-
Pursuant to the Purchase Agreement the Investors agreed to purchase up to
$12 million aggregate amount of additional Debentures under certain conditions.
This provision expired by its terms in September 1998.
NOTE 5. LETTER OF INTENT WITH ATEC GROUP:
On August 1, 1998 the Company entered into a non-binding Letter of
Intent with ATEC Group, Inc. ("ATEC") whereby the Company would have purchased
all of the outstanding shares of ATEC in a stock swap valued at approximately
$77,000,000 (based on an assumed $10 market price per share of IAT Common
Stock). On August 21, 1998 the parties mutually agreed to terminate the letter
of intent.
NOTE 6. SUBSEQUENT EVENTS:
On October 27, 1998, the Company entered into a purchase agreement to
acquire all of the issued and outstanding shares of Columbus Handels- und
Vertriebs GmbH & Co. KG ("KG") and Columbus Handels- und Vertriebs GmbH
("GmbH"), the general partner of KG, for a purchase price of approximately $1.7
million in cash and 98,622 shares of the Company's Common Stock equaling
approximately $760,000 (the "Columbus Agreement"). In connection with the
transaction, IAT expects to make a working capital loan of approximately
$700,000 to KG and will take a non-cash charge for amortization of goodwill.
Pursuant to the Columbus Agreement, Axel Hundt, the founder and owner of each
of KG and GmbH, will enter into a two-year employment contract. This
transaction was consummated on November 13, 1998, effective on October 31,
1998.
KG is a distributor of PC peripherals in Germany and in parts of
Austria. With the KG acquisition the Company continues the vertical integration
of its distribution channels which began with the acquisition of FSE Computer
Handel in November 1997.
In connection with the KG acquisition the Company plans to consolidate
a majority of FSE's existing peripherals business into that of KG. FSE will
concentrate primarily on the production and marketing of its high-performance
built-to-order PCs and KG will focus primarily on the distribution of
peripherals. As a result of this consolidation, IAT will benefit from cost
savings through the implementation of corporate best practices and the
elimination of a approximately 25 employees who have already been officially
notified and whose employment contracts will be terminated effective as of
December 31, 1998. Aggregate severance payments in connection with the
termination of the employment contracts will amount to approximately $60,000.
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Except for the descriptions of historical facts contained herein,
statements concerning future results, performance or expectations are
forward-looking statements. Actual results, performance or developments could
differ materially from those expressed or implied by such forward-looking
statements as a result of known and unknown risks, uncertainties and other
factors including those described from time to time in the Company's filings
with the Securities and Exchange Commission, under "Risk Factors" and
elsewhere, including the Company's history of operating losses; future charges
to operations and losses; holding company structure; reliance on subsidiaries;
risks relating to acquisitions and managing growth; need for additional funds;
competition; foreign markets; control by existing stockholders; potential
anti-takeovers provisions; risks relating to Year 2000 issues and other risks.
IAT Multimedia, Inc. was formed in September 1996 as a holding company for
the existing business of IAT AG and IAT Germany. Since then, Multimedia has
been engaged in developing products for the visual communications industry. In
November 1997, Multimedia acquired 100% of the shares of capital stock of the
general partner of FSE and 80% of the outstanding limited partnership interests
of FSE, a German limited partnership.
The Company, through its acquisition of FSE, markets in Germany
high-performance PCs assembled according to customer specifications and sold
under the trade name "Trinology", as well as components and peripherals for
PCs. The Company also licenses its state-of-the-art, customizable proprietary
visual communications technology designed to enable users to participate in
real time, multi-point video conferencing and provide improved features and
functionality over competing technology.
FSE's product line includes high-performance IBM-compatible desktop PCs as
well as components, such as motherboards, hard disks, graphic cards and plug-in
cards, and peripherals, such as printers, monitors and cabinets, to its
customers. Substantially all of FSE's clients are corporate customers,
including industrial, pharmaceutical, service and trade companies, the military
and VARs. FSE markets its products directly through its internal sales force to
dealers and end-users and also maintains three retail showrooms and a
mail-order department. FSE works directly with a wide range of suppliers to
evaluate the latest developments in PC-related technology and engages in
extensive testing to optimize the compatibility and speed of the components
which are sold and integrated into Trinology PCs.
The Company has developed visual communications technology for
multi-functional visual communication systems, wavelet data
compression/decompression software technology for high-speed, high-quality
still image transfer, and related technology. The Company expects to receive
royalty income from this technology. The Company intends to offer products
incorporating its visual communication system technology which will be produced
by Communication AG and Communication Systems (see below), in FSE's computers.
In March 1998, the Company completed the restructuring of one of its
German subsidiaries and its Swiss subsidiary, (collectively the "Spinoffs"). On
March 5 and 6, 1998,
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the Company completed the spinoff of substantially all of the assets and the
liabilities (other than intercompany accounts) of one of its majority-owned
German subsidiaries, IAT Germany, which has provided the Company's research and
development and has functioned as the Company's sales and marketing arm for
multimedia products in Germany, into a newly formed German company,
Communication Systems GmbH. On March 24, the Company transferred certain of the
assets and liabilities of IAT AG, other than, among others, the Company's
intellectual property and the ownership interests in IAT Germany to
Communication AG, a newly formed Swiss corporation. Both transfers were
effective January 1, 1998. As a result of the Spinoffs, the Company owns 80% of
FSE, 100% of each of IAT AG and IAT Germany and 15% of each of Communication
Systems GmbH and Communication AG.
The FSE Acquisition and the Spinoffs of the German and the Swiss
subsidiaries will result in substantial differences in the business and results
of operations of the Company. Accordingly, results of operations of the Company
prior to the acquisition of FSE and of the Spinoffs will not be indicative of
the Company's results of operations after such acquisition and the Spinoffs.
The Company's sales are made to customers principally in Switzerland and
Germany with revenues created in Deutsche Marks and Swiss Francs. IAT
Switzerland's and IAT Germany's functional currency is the Swiss Franc. FSE's
functional currency is the Deutsche Mark. The Company currently engages in
limited hedging transactions, which are not material to its operations, to
offset the risk of currency fluctuations. The Company may increase or
discontinue these hedging activities in the future.
In the following discussions, most percentages and dollar amounts have
been rounded to aid presentation. As a result, all such figures are
approximations.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTH PERIOD
ENDED SEPTEMBER 30, 1997
The average exchange rate for the U.S. Dollar decreased as compared to the
Swiss Franc and the Deutsch Mark by approximately 3.4% and 3.3% respectively.
The average Swiss Franc to U.S. Dollar exchange rate was SF 1.44 = $1.00 in the
third quarter 1998 as compared to SF 1.49 in the third quarter 1997. The
average Deutsch Mark to U.S. Dollar exchange rate was DM 1.74 = $1.00 in the
third quarter 1998 as compared to DM 1.80 in the third quarter 1997.
FSE was acquired in November 1997, and therefore, the following discussion of
IAT's results of operations includes IAT's results of operations for the three
months ended September 30, 1998 and September 30, 1997, respectively, and FSE's
results and operations for the three months ended September 30, 1998.
REVENUES. Revenues for the third quarter 1998 increased to $8,093,000
from $122,000 in the third quarter 1997. This increase is primarily a result of
sales of FSE high performance PCs and PC-components during the third quarter
1998.
COST OF SALES. Cost of sales increased to $7,516,000 in the third
quarter 1998 from $83,000 in the third quarter 1997. The cost of sales as a
percentage of sales increased to 92.9% in the third quarter 1998 from 67.8% in
the third quarter 1997 primarily as a result of
-12-
the sale of FSE PCs, PC-components and PC peripherals producing lower gross
profit margins.
RESEARCH AND DEVELOPMENT COSTS. Research and development costs
decreased to $0 in the third quarter 1998 from $531,000 in the third quarter
1997. The Company no longer incurs research and development costs as a result
of the Spinoffs of its research and development activities to Communication AG
and Communication Systems GmbH.
SELLING EXPENSES. Selling expenses increased by 58% to $711,000 in the
third quarter 1998 from $450,000 in the third quarter 1997. This increase is a
result of a change in the business structure of IAT and a different marketing
approach for FSE PCs and products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased by 54.9% to $134,000 in the third quarter 1998 from $297,000
in the third quarter 1997. This decrease is a result of a change in the
business structure of IAT.
CORPORATE OVERHEAD. Corporate overhead increased by 29.3% to $318,000
in the third quarter 1998 from $246,000 in the third quarter 1997 primarily due
to an increase in expenses for professional services relating to the Spinoffs
and acquisitions and increased investor relation activities.
INTEREST. Interest expense increased by 13.0% to $52,000 in the third
quarter 1998 from $46,000 in the third quarter 1997. This increase is primarily
a result of interest payable on the convertible debentures. Interest income
decreased to $99,000 in the third quarter 1998 from $172,000 in the third
quarter 1997 primarily as a result of a reduction of the Company's interest
bearing cash and cash equivalents and in investments in corporate bonds.
NET LOSS. The net loss for the three months ended September 30, 1998
decreased to $478,000 from $1,431,000 for the three months ended September 30,
1997. This decrease is the result of the acquisition of the FSE operations in
November 1997 and of the Spinoffs of the research and development and marketing
activities to Communication AG and Communication Systems GmbH effective as of
January 1, 1998.
OPERATING LOSS BEFORE CORPORATE OVERHEAD, INTEREST, INCOME TAXES,
DEPRECIATION AND AMORTIZATION. Operating loss before corporate overhead,
interest, income taxes, depreciation and amortization in the three months ended
September 30, 1998 decreased to $267,000 from $1,239,000 in the three months
ended September 30, 1997. This decrease is primarily a result of the Spinoff of
the research and development and marketing activities to Communication AG and
Communication Systems GmbH effective as of January 1, 1998 and of the
acquisition of the FSE operations in November 1997.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1997
The average exchange rate for the U.S. Dollar increased as compared to the
Swiss Franc and the Deutsch Mark by approximately 1.4% and 3.5% respectively.
The average Swiss Franc to U.S. Dollar exchange rate was SF 1.47 = $1.00 in the
nine months ended September 30, 1998 as compared to SF 1.45 in the nine months
ended September 30, 1997. The average Deutsch Mark to U.S. Dollar exchange rate
was DM 1.78 = $1.00 in the nine months ended September 30, 1998 as compared to
DM 1.72 in the nine months ended September 30, 1997.
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FSE was acquired in November 1997, and therefore, the following discussion of
IAT's results of operations includes IAT's results of operations for the nine
months ended September 30, 1998 and September 30, 1997, respectively, and FSE's
results of operations for the nine months ended September 30, 1998.
REVENUES. Revenues for the nine months ended September 30, 1998
increased to $23,545,000 from $538,000 in the nine months ended September 30,
1997. This increase is primarily a result of sales of FSE high performance PCs
and PC-components during the nine month period ended September 30, 1998.
COST OF SALES. Cost of sales increased to $21,524,000 in the nine
months ended September 30, 1998 from $329,000 in the nine months ended
September 30, 1997. The cost of sales as a percentage of sales increased to
91.4% in the nine months ended September 30, 1998 from 61.1% in the nine months
ended September 30, 1997 primarily as a result of the sale of FSE PCs,
PC-components and PC peripherals producing lower gross profit margins.
RESEARCH AND DEVELOPMENT COSTS. Research and development costs
decreased to $0 in the nine months ended September 30, 1998 from $1,794,000 in
the nine months ended September 30, 1997. The Company no longer incurs research
and development costs as a result of the Spinoffs of its research and
development activities to Communication AG and Communication Systems GmbH.
SELLING EXPENSES. Selling expenses increased by 28.4% to $1,753,000 in
the nine months ended September 30, 1998 from $1,365,000 in the nine months
ended September 30, 1997. This increase is a result of a change in the business
structure of IAT and a different marketing approach for FSE PCs and products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased by 38.1% to $493,000 in the nine months ended September 30,
1998 from $796,000 in the nine months ended September 30, 1997. This decrease
is a result of a change in the business structure of IAT and the integration of
FSE.
CORPORATE OVERHEAD. Corporate overhead increased by 45.6% to $808,000
in the nine months ended September 30, 1998 from $555,000 in the nine months
ended September 30, 1997 primarily due to an increase in expenses for
professional services relating to the Spinoffs and acquisitions, the
integration of FSE and as a result of the Company becoming a public company in
April 1997 resulting in higher corporate overhead as from such date.
INTEREST. Interest expense decreased by 36.7% to $107,000 in the nine
months ended September 30, 1998 from $169,000 in the nine months ended
September 30, 1997. This decrease is primarily a result of a reduction of
outstanding bank loans and the repayment of certain stockholders' loans
partially offset by interest payable on the convertible debentures. Interest
income decreased by 30.1% to $253,000 in the nine months ended September 30,
1998 from 362,000 in the nine months ended September 30, 1997 primarily as a
result of a reduction of the Company's interest bearing cash and cash
equivalents and investments in corporate bonds.
DISCOUNT ON CONVERTIBLE DEBENTURES. Discount on convertible debentures
increased to $448,000 in the nine months ended September 30, 1998 from $0 in
the nine months ended September 30, 1997. The Company recorded a charge to
operations on the convertible
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debentures issued on June 19, 1998 based on an assumed conversion price of 87%
of the current market value on the date of issuance.
NET LOSS. The net loss for the nine months ended September 30, 1998
decreased to $1,421,000 from $4,303,000 for the nine months ended September 30,
1997. This decrease is the result of the acquisition of the FSE operations in
November 1997 and of the Spinoffs of the research and development and marketing
activities to Communication AG and Communication Systems GmbH effective as of
January 1, 1998 partially offset by a one-time charge to operations for the
discount on convertible bonds of $448,000 and higher expenses for professional
services relating to Spinoffs.
OPERATING LOSS BEFORE CORPORATE OVERHEAD, INTEREST, INCOME TAXES,
DEPRECIATION AND AMORTIZATION. Operating loss before corporate overhead,
interest, income taxes, depreciation and amortization in the nine months ended
September 30, 1998 amounted to $226,000. In the nine months ended September 30,
1997 the operating loss amounted to 3,746,000. This improvement is primarily a
result of the Spinoffs of the research and development and marketing activities
to Communication AG and Communication Systems GmbH effective as of January 1,
1998 and of the acquisition of the FSE operations in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's cash and cash equivalents and
investments in corporate bonds amounted to $7,219,000 and $750,000,
respectively, as compared to $5,473,000 and $2,727,000, respectively, at
December 31, 1997.
Net cash used in operating activities totaled $2,825,000 during the
nine months ended September 30, 1998 compared to $4,523,000 during the nine
months ended September 30, 1997. This decrease is primarily due to a reduction
of accounts payable and other short-term liabilities offset by a decrease of
the net loss for the nine months ended September 30, 1998, net of the
amortization of the goodwill on the FSE acquisition and the discount on
convertible debentures.
Net cash provided by investing activities totaled $786,000 during the
nine months ended September 30, 1998 compared to net cash used in investing
activities of $3,473,000 during the nine months ended September 30, 1997.
During the nine months ended September 30, 1998 cash in the amount of $135,000
was used to pay for the acquisition of 25.1% of the common stock of IAT
Germany, for 15% each of the common stock of IAT Communication Systems GmbH and
Communication AG and for loans in the aggregate amount of $832,000 to these
companies and for the purchase of equipment. These payments were offset by a
sale of marketable securities. In the nine months ended September 30, 1997 cash
was used for the purchase of marketable securities and for the purchase of
equipment.
Net cash provided by financing activities amounted to $3,691,000
during the nine months ended September 30, 1998 as compared to net cash
provided by financing activities of $15,560,000 during the nine months ended
September 30, 1997. During the nine months ended September 30, 1998 cash was
provided by net proceeds of $1,609,000 primarily from the issuance of 198,255
shares of Common Stock and the issuance of convertible Debentures, in the
amount of $3,000,000 partially offset by the repayment of stockholder loans of
$1,327,000, including the third installment of the FSE purchase price in the
aggregate amount of $890,000 and the repayment of short-term bank loans of
$55,000. In addition, cash in the
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amount of $464,000, net of financing cost, was provided by a capital
contribution by certain stockholders in exchange for the Company assuming the
obligation of IAT AG under the repayment of the Swiss bank loan. During the
nine months ended September 30, 1997 cash was provided by net proceeds received
from the Company's IPO in the amount of $17,098,000 partially offset by a
repayment of certain stockholder loans, short-term bank loans, the payment of
the preferred stock dividend and a repurchase by the Company of its Common
Stock pursuant to a stock repurchase plan.
Cash, cash equivalents and investments in corporate bonds at
September 30, 1998 amount to $7,969,000 of which approximately $2,600,000 is
anticipated to be used for the KG acquisition. The Company believes that its
funds should be sufficient to finance its working capital requirements and its
capital and debt service requirements for approximately the 12 month period
following September 30, 1998.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of using only the last two digits to
indicate the year in computer hardware and software programs and embedded
technology such as micro-controllers. As a result, these programs do not
properly recognize a year that begins with "20" instead of the familiar "19".
If uncorrected, such programs will be unable to interpret dates beyond the year
1999, which could cause computer system failure or miscalculations and could
disrupt the Company's operations and adversely affect its cash flows and
results of operations.
The Company recognizes the importance of the Year 2000 issue and has
established a project team with the objective to ensure an uninterrupted
transition to the year 2000 by assessing, testing and modifying products and
information technology ("IT") and non-IT systems so that such systems and
software will perform as intended and information and dates can be processed
with expected results ("Year 2000 Compliant"). The scope of the Year 2000
compliance effort includes (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 (EDI)
with those key third parties.
Independent of the Year 2000 issue, the Company is in the process of
installing new financial accounting, procurement, order management and
invoicing systems. These systems are expected to be fully operational by the
first quarter 1999 and be Year 2000 Compliant. Testing of these systems to
become compliant for Year 2000 has begun and should be fully completed by the
end of the first quarter 1999. As results of this testing process become
available over the next three months, the Company will make contingent plans
where it deems necessary to become Year 2000 Compliant. However, the Company
believes that its new systems will be Year 2000 compliant and that no
contingency plan will be necessary.
Third Parties - In addition to internal Year 2000 IT and non-IT
remediation activities, the Company is in contact with key suppliers and
vendors to minimize disruptions in the relationship between the Company and
these important third parties from the Year 2000 issue. The Company has
requested Year 2000 compliance certification from each of such vendors and
suppliers for their hardware and software products and for their internal
business applications and processes. While the Company cannot guarantee
compliance by third parties, the Company will consider alternate sources of
supply, which the Company believes are generally available in the event a key
supplier cannot demonstrate its systems or products are Year 2000 Compliant.
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Company products - The Company believes that all hardware products
included in Trinology PCs shipped since the fourth quarter of 1997 are Year
2000 Compliant and hardware products included in Trinology PCs shipped prior to
such time can be made Year 2000 Compliant through upgrade of software patches.
The Company has requested Year 2000 compliance certificates from each of its
suppliers and vendors from parts and components installed in its Trinology
PC's.
The replacement of the Company's existing financial accounting/
procurement/order management and invoicing systems are estimated at
approximately $230,000, however, only a portion of the cost of it is
attributable to the Year 2000 issue. While the Company's estimate is that the
Year 2000 effort will have a nominal cost impact, there can be no assurance as
to the ultimate cost of the Year 2000 effort or the total cost of information
systems. Such costs will be expensed as incurred, except to the extent such
costs are incurred for the purchase or lease of capital equipment.
The Company's current estimates of the amount of time and costs
necessary to remediate and test its computer systems are based on the facts and
circumstances existing at this time. The estimates were made using assumptions
of future events including the continued availability of certain resources,
Year 2000 modification plans, implementation success by key third-parties, and
other factors. New developments may occur that could affect the Company's
estimates of the amount of time and costs needed to modify and test its IT and
non-IT systems for Year 2000 compliance. These developments include, but are
not limited to: (i) the availability and cost of personnel trained in this
area; (ii) the ability to locate and correct all relevant date-sensitive codes
in both IT and non-IT systems; (iii) unanticipated failures in its IT and
non-IT systems; and (iv) the planning and Year 2000 compliance success that
suppliers and vendors attain.
The Company cannot determine the impact of these potential
developments on the current estimate of probable costs of making its products
and IT and non-IT systems Year 2000 Compliant. Accordingly, the Company is not
able to estimate its possible future costs beyond the current estimate of
costs. As new developments occur, these cost estimates may be revised to
reflect the impact of these developments on the costs to the Company of making
its products and IT and non-IT systems Year 2000 Compliant. Such revisions in
costs could have a material adverse impact on the Company's results of
operations in the quarterly period in which they are recorded. Although the
Company considers it unlikely, such revisions could also have a material
adverse effect on the business, financial condition or results of operations of
the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The shares of Common Stock issued in the Company's IPO were registered
under a registration statement on Form S-1 (file No. 333-18529) which became
effective on March 26, 1997.
During the three months ended September 30, 1998, the Company utilized
approximately $551,000 of the net proceeds from the IPO. Of this amount
approximately $50,000 was paid for the purchase of machinery and equipment and
approximately $501,000 for working capital and general corporate purposes. As
of September 30, 1998, approximately $3,244,000 of the proceeds from the IPO
remain unused.
In September 1998 the Company granted 25,000 stock options to a
consultant of the Company for services rendered and to be rendered. Of these
stock options 12,500 vest immediately and 12,500 vest on June 30, 1999.
In November 1998 and pursuant to the Columbus Agreement the Company
issued 98,622 shares of Common Stock to Axel Hundt, the sole shareholder of KG
and GmbH, respectively, in connection with the acquisition of KG and GmbH.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not Applicable.
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ITEM 5. OTHER INFORMATION
On August 1, 1998 the Company entered into a non-binding Letter of
Intent with ATEC Group, Inc. ("ATEC") whereby the Company would have purchased
all of the outstanding shares of ATEC in a stock swap valued at approximately
$77,000,000 (based on an assumed $10 market price per share of IAT Common
Stock). On August 21, 1998 the parties mutually agreed to terminate the letter
of intent.
On October 27, 1998, the Company entered into a purchase agreement to
acquire all of the issued and outstanding shares of Columbus Handels- und
Vertriebs GmbH & Co. KG ("KG") and Columbus Handels- und Vertriebs GmbH
("GmbH"), the general partner of KG, for a purchase price of approximately $1.7
million in cash and 98,622 shares of the Company's Common Stock equaling
approximately $760,000 (the "Columbus Agreement"). In connection with the
transaction, IAT expects to make a working capital loan of approximately
$700,000 to KG and will take a non-cash charge for amortization of goodwill.
Pursuant to the Columbus Agreement, Axel Hundt, the founder and owner of each
of KG and GmbH, will enter into a two-year employment contract. This
transaction was consummated on November 13, 1998, effective on October 31,
1998.
KG is a distributor of PC peripherals in Germany and in parts of
Austria. With the KG acquisition the Company continues the vertical integration
of its distribution channels which began with the acquisition of FSE Computer
Handel in November 1997.
In connection with the KG acquisition the Company plans to consolidate
a majority of FSE's existing peripherals business into that of KG. FSE will
concentrate primarily on the production and marketing of its high-performance
built-to-order PCs and KG will focus primarily on the distribution of
peripherals. As a result of this consolidation, IAT will benefit from cost
savings through the implementation of corporate best practices and the
elimination of a approximately 25 employees who have already been officially
notified and whose employment contracts will be terminated effective as of
December 31, 1998. Aggregate severance payments in connection with the
termination of the employment contracts will amount to approximately $60,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.55 Agreement dated October 27, 1998 between Registrant
and Axel Hundt, the sole shareholder of Columbus
Handels- und Vertrieb GmbH & Co. KG and Columbus
Handels- und Vertrieb GmbH
27.1 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter ended
September 30, 1998
Not applicable.
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IAT MULTIMEDIA, INC.
By: /s/ Jacob Agam
-----------------------------
Jacob Agam
Chairman of the Board of
Directors and Chief Executive
Officer
/s/ Klaus Grissemann
-----------------------------
Klaus Grissemann
Chief Financial Officer
Date: November 13, 1998
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