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 March 31, 1999
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT OF 1934
Commission File Number 0-22101
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IAT MULTIMEDIA, INC.
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(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 May 12, 1999
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Common Stock, $.01 par value 9,815,764 shares
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED MARCH 31, 1999
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 1999 3
(unaudited) and December 31, 1998
Consolidated Statements of Operations for Three Months 4
ended March 31, 1999 and 1998 (unaudited)
Consolidated Statements of Comprehensive Loss for the 4
Three Months ended March 31, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows for Three Months 5
ended March 31, 1999 and 1998 (unaudited)
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of 9-14
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 14
About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Default upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15-16
Item 6. Exhibits and Reports on Form 8-K 16-17
SIGNATURE PAGE 18
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
(unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 4,902,466 $ 5,614,182
Marketable securities 750,000 750,000
Accounts receivable, less allowance for doubtful
accounts of $148,350 in 1999 and $166,159 in 1998 1,872,688 1,564,945
Inventories 1,963,712 2,359,896
Other current assets 407,224 396,924
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Total current assets 9,896,090 10,685,947
Equipment and improvements, net 509,841 578,939
Other assets:
Other receivables 535,493 580,385
Notes receivable from affiliates 540,595 562,286
Excess of cost over net assets acquired, net 3,739,954 4,155,972
Other assets 419,026 300,541
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$ 15,640,999 $ 16,864,070
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 306,243 $ --
Accounts payable 2,289,183 2,696,911
Other current liabilities 1,066,466 1,104,774
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Total current liabilities 3,661,892 3,801,685
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Convertible debenture 3,000,000 3,000,000
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Minority interest 24,957 72,079
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Stockholders' equity:
Preferred stock, $.01 par value, authorized 10,000,000
shares, issued 2,000 shares in 1999 and nil
shares in 1998 20 --
Common stock, $.01 par value, authorized 50,000,000
shares, issued 10,057,387 in 1999 and 10,048,826
in 1998 100,574 100,488
Capital in excess of par value 32,435,947 30,416,979
Accumulated deficit (21,460,366) (20,982,472)
Cumulative translation adjustment 82,252 661,571
Treasury stock (248,255 shares in 1999 and 50,000
shares in 1998) (2,204,277) (206,260)
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Total stockholders' equity 8,954,150 9,990,306
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$ 15,640,999 $ 16,864,070
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See Notes to Consolidated Financial Statements
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
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1999 1998
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Net Sales $ 12,964,431 $ 8,762,063
Cost of Sales 12,260,186 7,829,594
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Gross margin 704,245 932,469
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Operating expenses:
Selling expenses 641,594 557,254
General and administrative expenses 167,947 128,293
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809,541 685,547
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Operating income (loss) before corporate overhead
depreciation and amortization (105,296) 246,922
Corporate overhead 283,308 174,211
Depreciation and amortization 188,215 136,366
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Operating loss (576,819) (63,655)
Other income (expense):
Interest expense (50,057) (23,394)
Interest income 66,113 88,454
Other income 36,591 3,907
Minority interest in net (income) loss of
subsidiary 42,485 (40,416)
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Loss before income taxes benefit (481,687) (35,104)
Income taxes benefit 3,793 282
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Net loss $ (477,894) $ (34,822)
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Net loss per share - basic and diluted $ (0.05) $ (0.00)
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Weighted average number of
common shares outstanding 9,329,751 9,203,664
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
Net loss $ (477,894) $ (34,822)
Other comprehensive income (loss) net of tax -
Foreign currency translation adjustments (579,319) (47,012)
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Comprehensive loss $ (1,057,213) $ (81,834)
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See Notes to Consolidated Financial Statements
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
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1999 1998
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Cash flows from operating activities:
Net loss $ (477,894) $ (34,822)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation of equipment 72,268 57,317
Amortization of goodwill 115,947 79,049
Minority interest in income (42,485) 40,416
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Accounts receivable (428,211) (284,088)
Inventories 218,479 99,681
Other current assets 3,637 79,596
Other assets 8,475 (37,663)
Accounts payable and other current liabilities (228,094) (1,436,137)
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Net cash used in operating activites (757,878) (1,436,651)
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Cash flows from investing activities:
Loans to and investments in, affiliated companies -- (652,571)
Repayment of loans receivable, affiliates 20,738 --
Purchases of equipment and improvements (169,195) (80,865)
Sale of investments -- 1,045,470
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Net cash provided by (used in) investing activities (148,457) 312,034
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Cash flows from financing activities:
Repayment of loans payable, stockholders -- (1,317,077)
Capital contribution, stockholders -- 494,003
Proceeds from (repayments of) short-term bank loan 309,738 (385,696)
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Net cash provided by (used by) financing activities 309,738 (1,208,770)
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Effect of exchange rate changes on cash (115,119) 7,082
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Net decrease in cash (711,716) (2,326,305)
Cash and cash equivalents, beginning of period 5,614,182 5,472,928
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Cash and cash equivalents, end of period $ 4,902,466 $ 3,146,623
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Supplemental disclosures of cash flow information,
Cash paid during the period for interest $ 13,221 $ 50,604
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Cash paid during the period for income related
taxes $ 51,554 $ 50,817
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Spinoff of assets and liabilities held for
disposition $ -- $ 1,077,920
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See Notes to Consolidated Financial Statements
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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 March 31, 1999, 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, 1998.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of IAT, its wholly-owned subsidiaries IAT AG, Switzerland ("IAT
AG"), IAT Deutschland GmbH Interactive Medien Systeme Bremen ("IAT GmbH"), and
the General Partner of FSE Computer-Handel GmbH & Co. KG, and 80% of the limited
partnership interest of FSE (collectively "FSE"), and 100% of both the General
Partner of and the limited partnership interests in Columbus-Computer-Handels
und Vertriebs GmbH & Co. KG ("Columbus") (collectively the "Company"). All
intercompany accounts and transactions have been eliminated.
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 operations to assess whether any
impairment of recorded goodwill has occurred. Amortization for the three month
periods ended March 31, 1999 and 1998 was approximately $116,000 and $79,000,
respectively.
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
and Columbus. The financial statements of the subsidiaries have been translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
No. 52 (SFAS 52), "Foreign Currency Translation". SFAS 52 provides that all
balance sheet accounts are translated at period-end rates of exchange (1.48 and
1.37 Swiss Francs and 1.81 and 1.67 Deutsch Marks for each U.S. dollar at March
31, 1999 and December 31, 1998, 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 year.
The resulting translation adjustments are included as a separate component of
other comprehensive income in the statements of stockholders' equity and
consolidated statement of comprehensive loss, whereas gains or losses arising
from foreign currency transactions are included in results of operations.
LOSS PER COMMON SHARE - 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 Company's common stock (the "Common Stock") placed in
escrow upon the completion of the IPO. 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.
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Diluted loss per common share is the same as basic loss per common share for the
periods ended March 31, 1999 and 1998. 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".
NOTE 2. INVENTORIES:
March 31, December 31,
1999 1998
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Work in process........................ $ 71,129 $ 70,659
Purchased finished goods............... 1,892,583 2,289,237
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$ 1,963,712 $ 2,359,896
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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, ALGO Vision Systems (the "German Spinoff"). ALGO
Vision Systems is substantially owned by an entity controlled by the former
co-chairman of the Board of Directors of the Company. The Company owns 15% of
the outstanding common stock of ALGO Vision Systems. 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 ALGO
Vision Systems with a loan of approximately $300,000 for working capital
requirements through March 6, 1998. This loan bears interest at a rate of 5% per
annum. The balance of the loan at March 31, 1999 was approximately $133,000 and
was repaid in April 1999.
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, ALGO Vision Schweiz (the "Swiss Spinoff") ALGO Vision Schweiz is
substantially owned by an entity controlled by the former co-chairman of the
Board of Directors of the Company. The Company owns 15% of the outstanding
common stock of ALGO Vision Schweiz. The Swiss Spinoff was effective January 1,
1998. At closing, the Company received a note ("Purchase Note"), due March 24,
2001, for approximately $325,000 representing the value of the assets in excess
of the liabilities that were transferred on March 24, 1998. In addition, the
Company loaned ALGO Vision Schweiz $250,000 ("The Note") for operating cash
flow. The Note is due the earlier of the date that ALGO Vision Schweiz raises
either debt or equity financing in excess of SF 1,000,000 or March 24, 2001.
Both notes provide for the payment of interest semi-annually beginning September
1, 1998 at a rate of 3% per annum. The balance of the notes at March 31, 1999 is
approximately $540,000.
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NOTE 4 - CONVERTIBLE DEBENTURES:
The Company entered into a securities purchase agreement (the "Purchase
Agreement"), dated as of June 19, 1998, with two purchasers (the "Investors").
The transaction consisted of the issuance of 198,255 shares of the Company's
Common Stock and $3 million aggregate principal amount of the Company's 5%
Convertible Debentures due 2001 ("Debentures") for $5 million. The Debentures
are immediately convertible into shares of common stock at the option of either
the Company (subject to certain limitations) or the Investors. The holders of
shares of common stock issued upon conversion, at the option of the Investors,
were prohibited from selling the shares prior to March 16, 1999; 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
preceding 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 Company recorded a
discount on the Debentures due to the conversion features of approximately
$450,000 which is included in interest expense for the year ended December 31,
1998.
In January 1999, the Company exchanged the 198,255 shares of common stock
issued in June 1998 for 2,000 shares of Series B Convertible Preferred Stock
("Series B Stock"). Each share of Series B Stock shall be convertible into
shares of common stock, and at the option of the holder, at any time from the
issue date at $10.88 per share. The Series B Stock shall be convertible into
shares of common stock, at the option of the Company, at any time on or after
December 30, 1999, if certain conditions are met, or prior to such time if the
common stock reaches certain thresholds. All shares of Series B Stock not
previously converted into shares of common stock shall automatically convert in
January 2002.
In April 1999, the holder of the Debentures converted $27,000 of the
Debenture, plus accrued interest on the principal amount converted, and received
6,632 shares of the Company's common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless the context otherwise requires, "we" or "us" refers to IAT
Multimedia, Inc., the Delaware corporation, and its subsidiaries. The
subsidiaries are:
o FSE Computer-Handel GmbH & Co. KG, a German limited partnership of
which we own 80% of the partnership interest, and FSE Computer-Handel
Verwaltungs GmbH, a German corporation of which we own 100% of the
stock ; and
o the following subsidiaries of which we own 100% of the equity:
o Columbus Computer Handels- und Vertriebs GmbH & Co. KG, a German
limited partnership, and Columbus Computer Handels- und Vertriebs-
Verwaltungs GmbH, a German corporation;
o IAT AG, a Swiss corporation, and
o IAT Deutschland GmbH Interaktive Medien Systeme, a German
corporation
This Form 10-Q 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-Q 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 from time to time into our filings with the Securities and Exchange
Commission. These factors include the following: we have experienced significant
operating losses, changed our principal business and we cannot predict whether
we will become profitable; our operating results will be adversely affected by
charges from acquisitions; our strategy of acquiring other companies for growth
may not succeed; we need additional funds for future acquisitions; our
substantial debt reduces cash available for our business, may adversely affect
our abilitiy to obtain additional funds and increase our vulnerability to
economic or business downturns; we face intense competition in the German PC
industry; risks relating to foreign operations and other risks.
OVERVIEW
We were formed in September 1996 as a holding company for the existing
business of IAT AG and IAT Germany, which were engaged in developing products
for the visual communications industry. In November 1997, we acquired 100% of
the shares of capital stock of the general partner of FSE and 80% of the
outstanding limited partnership interests of FSE. Effective October 31, 1998, we
acquired 100% of the shares of capital stock of the general partner of Columbus
and all of the outstanding limited partnership interests of Columbus.
Through FSE and Columbus, we market in Germany high-performance PCs
assembled according to customer specifications and sold under the trade name
"Trinology," as well as components, software and peripherals for PCs. Our
product line includes high-performance IBM-compatible desktop PCs as well as
components, such as motherboards, hard disks, graphic cards and plug-in cards,
peripherals, such as printers, monitors and
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cabinets, and software. Our clients are corporate customers, including
industrial, pharmaceutical, service and trade companies, the military and value
added resellers. We market our products directly through our internal sales
force to dealers and end-users and also maintain two retail showrooms and a
mail-order department. We work directly with a wide range of suppliers to
evaluate the latest developments in PC-related technology and engage in
extensive testing to optimize the compatibility and speed of the components
which are sold and integrated into Trinology PCs.
In connection with the Columbus acquisition we consolidated a portion of our
existing peripherals business into that of Columbus. FSE will concentrate
primarily on the production and marketing of its high-performance built-to-order
PCs and Columbus will focus primarily on the distribution of components and
peripherals. As part of this consolidation, we terminated approximately 20 FSE
employees, including Dr. Simmet, the former general manager of FSE who resigned,
effective as of December 31, 1998.
We have also developed visual communications technology. In connection with
our reorganization in March 1998, effective January 1, 1998, (Note 3 - Spinoffs)
we licensed this technology to Algo Vision Schweiz. To date, we have received
limited royalty income from sales of products by Algo Vision Schweiz
incorporating this technology. We may also offer products incorporating our
visual communications technology manufactured by the entities in which we own a
minority interest, in our PCs and as an additional product line for sale to our
customers.
Our sales are made to customers principally in Switzerland and Germany with
revenues created in Deutsche Marks and Swiss Francs. The functional currency of
IAT Switzerland and IAT Germany is the Swiss Franc. The functional currency of
Columbus and FSE is the Deutsche Mark. We currently engage in limited hedging
transactions, which are not material to our operations, to offset the risk of
currency fluctuations. We 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 MARCH 31, 1999 COMPARED TO THREE MONTH PERIOD ENDED
MARCH 31, 1998
The average exchange rate for the U.S. Dollar decreased as compared to the Swiss
Franc and the Deutsch Mark by approximately 1.4% and 2.2% respectively. The
average Swiss Franc to U.S. Dollar exchange rate was SF 1.45 = $1.00 in the
first quarter of 1999 as compared to SF 1.47 in the first quarter of 1998. The
average Deutsch Mark to U.S. Dollar exchange rate was DM 1.77 = $1.00 in the
first quarter of 1999 as compared to DM 1.81 in the first quarter of 1998.
We acquired FSE in November 1997 and Columbus effective as of October 31,
1998 and transferred the assets and liabilities and the businesses of one of our
German subsidiaries and our Swiss subsidiary in March 1998, effective January
1998. These transactions cause a lack of quarter to quarter comparability
because our results of operations for the three months ended March 31, 1999
include the operations of FSE and Columbus, while our results of operations for
the three months ended March 31, 1998 include only the operations of FSE.
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REVENUES. Revenues for the first quarter 1999 increased by 48% to
$12,964,000 from $8,762,000 in the first quarter 1998. This increase is
primarily a result of Columbus' PC peripheral sales, partially offset by a
reduction of FSE's sales due to the closing of one of the FSE's retail stores
and the transfer of certain of FSE's customers to Columbus in December 1998.
COST OF SALES. Cost of sales increased by 56.6% to $12,260,000 in the first
quarter 1999 from $7,830,000 in the first quarter 1998. The cost of sales as a
percentage of sales increased to 94.6% in the first quarter 1999 from 89.4% in
the first quarter 1998 primarily as a result of an increase in sales of PC
components which produce lower gross profit margins than fully assembled PCs. In
addition, many of the components purchased by us during the first quarter 1999
were purchased in U.S. dollars and we incurred higher costs for these components
as a result of the strengthening of the U.S.Dollar against the Deutsch Mark of
approximately 8% during the first quarter 1999.
SELLING EXPENSES. Selling expenses increased by 15.2% to $642,000 in the
first quarter 1999 from $557,000 in the first quarter 1998. This increase is due
to Columbus' selling expenses which are not included in the first quarter 1998,
and is partially offset by a reduction of selling expenses incurred by FSE.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 31.3% to $168,000 in the first quarter 1999 from $128,000 in the
first quarter 1998, primarily due to Columbus' administrative expenses which are
not included in the first quarter 1998, partially offset by a reduction of
administrative expenses incurred by FSE.
CORPORATE OVERHEAD. Corporate Overhead increased by 62.6% to $283,000 in the
first quarter 1999 from $174,000 in the first quarter 1998, primarily due to a
new corporate structure in connection with the Columbus and FSE acquisitions and
in anticipation of future acquisitions.
INTEREST. Interest expense increased by 117.4% to $50,000 in the first
quarter 1999 from $23,000 in the first quarter 1998. This increase is primarily
a result of interest accrued on our 5% convertible debentures.
Interest income decreased by 25.0% to $66,000 in the first quarter 1999 from
$88,000 in the first quarter 1998, primarily as a result of a reduction of our
interest bearing time deposits and marketable securities.
NET LOSS. The net loss for the three months ended March 31, 1999 increased
to $478,000 from $35,000 for the three months ended March 31, 1998. This
increase is primarily a result of an increase in sales of PC components which
produce lower gross profit margins than fully assembled PCs. In addition, many
of the components purchased by us during the first quarter 1999 were purchased
in U.S. dollars and we incurred higher costs for those components as a result of
the strengthening of the U.S.Dollar against the Deutsch Mark of approximately 8%
during the first quarter 1999. Net loss also increased as a result of an
increase in operating expenses and an increase in goodwill amortization related
to the Columbus acquisition.
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
March 31, 1999 increased to $105,000 from an income of $247,000 in the three
months ended March 31, 1998. This increase is primarily a result of increased
sales of PC components which produce lower gross profit margins than fully
assembled PCs, increased costs for components purchased by us during the first
quarter 1999 in U.S. dollars and operating expenses incurred by Columbus, which
are not included in the first quarter 1998. Operating loss before corporate
overhead, interest, income taxes, depreciation and amortization 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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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company's cash and cash equivalents and
investments in corporate bonds decreased to $4,902,000 and $750,000,
respectively, as compared to $5,614,000 and $750,000, respectively, at December
31, 1998.
Net cash used in operating activities totaled $758,000 during the three
months ended March 31, 1999 compared to $1,437,000 during the three months ended
March 31, 1998. This decrease is primarily due to a reduction of cash used for
the payment of accounts payable and other current liabilities partially offset
by the net loss.
Net cash used in investing activities totaled $148,000 during the three
months ended March 31, 1999 compared to $312,000 net cash provided by investing
activities during the three months ended March 31, 1998. During the three months
ended March 31, 1999 cash was primarily used for the purchase of equipment and
for the new accounting, procuring, order management and invoicing system. During
the three months ended March 31, 1998 cash was used to pay for the acquisition
of 25.1% of the common stock of IAT Germany in the amount of $96,000, for 15%
each of the common stock of Algo Vision Systems and Algo Vision Schweiz in the
aggregate amount of $19,000 and for loans to these companies in the aggregate
amount of $538,000 and for the purchase of equipment. These payments were offset
by the sale of marketable securities.
Net cash provided by financing activities amounted to $310,000 due to an
increase in short-term bank loans during the three months ended March 31, 1999
as compared to net cash used by financing activities of $1,209,000 during the
three months ended March 31, 1998. During the three months ended March 31, 1998
cash was primarily used for the repayment of stockholder loans including the
second installment of the FSE purchase price in the amount of $890,000 and the
repayment of short-term bank loans. These payments were partially offset 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.
Cash, cash equivalents and investments in corporate bonds at March 31, 1999
amount to $5,652,000. We believe that our funds should be sufficient to finance
our working capital requirements and our capital and debt service requirements
for approximately the 12 months period following March 31, 1999, depending on
acquisitions. We may require additional funds for acquisitions and integration
and management of acquired businesses. 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.
In June 1998, we sold $3,000,000 aggregate principal amount of our 5%
Convertible Debentures due 2001. In April 1999, the holder of the debentures
converted $27,000 of such debentures, plus accured interest on the principal
amount converted, and received 6,632 shares of our common stock. As a result,
as of May 1, 1999, $2,973,000 aggregate princiapl amount of such debenture,
plus interest, remained outstanding. (See Note 4).
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 our operations and adversely affect its cash flows and results of
operations.
We recognize the importance of the Year 2000 issue and have 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 and non-IT systems so that such
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systems and software will perform as intended and information and dates can be
processed with expected results. 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 with those key third parties.
Independent of the Year 2000 issue, we are in the process of installing new
financial accounting, procurement, order management and invoicing systems. These
systems are expected to be fully operational by the end of the second quarter
of 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 second quarter of 1999. If such compliance is not achieved, we have
developed a contingency plan which includes increasing normal inventories of
critical supplies prior to December 31, 1999 and ensuring that all critical
staff are available or scheduled to work prior to, during and immediately after
December 31, 1999.
THIRD PARTIES. In addition to internal Year 2000 IT and non-IT remediation
activities, we are in contact with key suppliers and vendors to minimize
disruptions in the relationship between us and these important third parties
from the Year 2000 issue. We have 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 we cannot
guarantee compliance by third parties, we will consider alternate sources of
supply, which we believe are generally available in the event a key supplier
cannot demonstrate its systems or products are Year 2000 compliant.
OUR PRODUCTS. We believe 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. We have requested Year 2000
compliance certificates from each of our suppliers and vendors from parts and
components installed in our Trinology PCs.
The replacement of our existing financial accounting, procurement, order
management and invoicing systems is estimated at approximately $300,000,
however, only a portion of the cost of these systems is attributable to the Year
2000 issue. While we estimate 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.
Our current estimates of the amount of time and costs necessary to remediate
and test our 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 our estimates of the
amount of time and costs needed to modify and test our 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 our IT and non-IT systems; and (iv) the
planning and Year 2000 compliance success that suppliers and vendors attain.
We cannot determine the impact of these potential developments on the
current estimate of probable costs of making our products and IT and non-IT
systems Year 2000 compliant. Accordingly, we are not able to estimate our
possible future costs beyond the current estimate of costs. As new developments
occur, these cost estimates may be revised to
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reflect the impact of these developments on the costs to us of making our
products and IT and non-IT systems Year 2000 compliant. Such revisions in costs
could have a material adverse impact on our results of operations in the
quarterly period in which they are recorded. Although we consider it unlikely,
such revisions could also have a material adverse effect on our business,
financial condition or results of operations.
Like virtually every company, we are at risk for the failure of major
infrastructure providers to adequately address potential Year 2000 problems. We
are highly dependent on a variety of public and private infrastructure providers
to conduct our business in numerous jurisdictions throughout the country.
Failures of the banking system, basic utility providers, telecommunication
providers and other services, as a result of Year 2000 problems, could have a
material adverse effect on our ability to conduct our business. While we are
cognizant of these risks, a complete assessment of all such risks is beyond the
scope of our Year 2000 assessment or our ability to address. We have focused our
resources and attention on the most immediate and controllable Year 2000 risks.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
We did not issue any equity securities during the three months ended March
31, 1999 which were not registered under the Securities Act of 1933, except as
follows:
In January 1999, we exchanged the 198,255 shares of common stock issued to a
private investor in June 1998 for 2,000 shares of Series B Convertible Preferred
Stock. Each share of Series B shall be convertible into shares of our common
stock, subject to limitations, and at the option of the holder, at any time from
the issue date at $10.88 per share. The Series B shall be convertible into
shares of common stock, at our option, at any time on or after December 30,
1999, if certain conditions are met, or prior to such time if the common stock
reaches certain thresholds. All shares of Series B not previously converted into
shares of common stock shall automatically convert in January 2002.
In February 1999, we issued 8,561 shares of our common stock to Reiner
Hallauer upon the exercise of options granted to Mr. Hallauer pursuant to a
Stock Option Agreement dated August 25, 1997 between the Company and Mr.
Hallauer.
In February 1999, we granted options to purchase 60,000 shares of our common
stock to Nico Hildebrand, our Chief Operating Officer.
In April 1999, we issued 6,632 shares of our common stock to holder of our
5% Convertible Debentures upon the conversion of $27,000 of the debenture, plus
accrued interest on the principal amount converted.
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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 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
CONVERTIBLE DEBENTURE EXCHANGE AND CONVERSION
In January 1999, the Company exchanged the 198,255 shares of common stock
issued in June 1998 for 2,000 shares of Series B Convertible Preferred Stock
("Series B"). Each share of Series B shall be convertible into shares of common
stock, and at the option of the holder, at any time from the issue date at
$10.88 per share. The Series B shall be convertible into shares of common stock,
at our option, at any time on or after December 30, 1999, if certain conditions
are met, or prior to such time if the common stock reaches certain thresholds.
All shares of Series B not previously converted into shares of common stock
shall automatically convert in January 2002.
In April 1999, the holder of the Debentures converted $27,000 of the
Debentures, plus accrued interest on the principal amount converted, and
received 6,632 shares of the Company's common stock.
SIMMET PURCHASE AGREEMENT
In November 1997, we purchased 100% of the capital stock of the general
partner of FSE and 80% of the limited liability company shares of FSE for an
aggregate purchase price of approximately $3.7 million, of which approximately
$2.8 million was paid in cash and approximately $900,000 was paid in shares of
our common stock. Dr. Simmet retained a 20% ownership interest in FSE. Pursuant
to the provisions of the transaction documents, Dr. Simmet had the right, under
certain circumstances, to receive from us an aggregate amount of approximately
$1,000,000, which amount represents the retained earnings of FSE prior to the
acquisition of FSE by us. During 1998, Dr. Simmet received approximately
$150,000 of such amount. Dr. Simmet resigned as an officer effective December
31, 1998 and, as a result, the remaining approximately $850,000 owed to Dr.
Simmet by us was applied to reduce the amounts owed by Dr. Simmet to us under
the guarantee discussed below. During 1998, Dr. Simmet elected not to receive a
portion of his salary from FSE.
In connection the FSE acquisition, Dr. Simmet guaranteed to refund a portion
of the purchase price paid by us for FSE if the earnings before interest, income
taxes, depreciation and amortization (EBITDA) of FSE for the fiscal year ended
December 31, 1998 did not reach certain targets. The EBITDA of FSE for the
fiscal year ended December 31, 1998 did not reach such targets and as a result,
Dr. Simmet owed us approximately $1.5 million. In
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February 1999, we entered into a purchase agreement with Dr. Simmet under which
Dr. Simmet agreed to pay us the $1.5 million and we agreed to purchase Dr.
Simmet's remaining 20% interest in FSE by December 31, 2000. The $1.5 million
owed to us by Dr. Simmet was reduced by $920,000, which represented the
remainder of the retained earnings of FSE owed to Dr. Simmet by us, as discussed
above, and pension contributions owed to Dr. Simmet. The remaining approximately
$580,000 is owed by Dr. Simmet to us and will be credited towards the purchase
price for the FSE shares which we agreed to purchase from Dr. Simmet. The
purchase price for a portion of the FSE shares, which we have agreed to purchase
as of either December 31, 1999 or December 31, 2000, will be based upon the
operating results of FSE for the fiscal year ending December 31, 1999 and the
purchase price for the remaining shares of FSE, which we have agreed to purchase
as of December 31, 2000 will be based upon the operating results of FSE for the
fiscal year ending December 31, 2000. If the purchase price for the FSE shares
is less than $580,000 then Dr. Simmet will pay us the difference between
$580,000 and the purchase price for the FSE shares. If the purchase price for
the FSE shares is greater than $580,000 then we will pay Dr. Simmet the
difference between the purchase price for the FSE shares and $580,000.
The foregoing amounts have been translated from Deutsch Marks into U.S.
Dollars based on the exchange rate at December 31, 1998.
EMPLOYMENT OF NICO HILDEBRAND
We entered into an employment agreement effective as of February 1, 1999
with Nico Hildebrand under which Mr. Hildebrand has agreed to serve as our Chief
Operating Officer until January 31, 2000. The term of employment may be extended
until January 31, 2002 if agreed to by us and Mr. Hildebrand. Following such
period, if extended, the agreement will automatically renew for successive two
year terms unless terminated by either party. Under the employment agreement,
Mr. Hildebrand is entitled to an annual salary of DM 240,000 (approximately
$136,000), reimbursement for travel and other business related expenses and an
annual bonus of 3% of the consolidated earnings before interest, taxes,
depreciation and amortization of FSE and Columbus. During the first year of the
agreement, Mr. Hildebrand is entitled to a minimum bonus of DM 60,000
(approximately $34,000). Under the employment agreement, Mr. Hildebrand received
options to purchase 60,000 shares of our common stock.
LEASE
In January 1999, we entered into a sublease under which we rent a portion of
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 $100,000, which amount includes
administrative and office services.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.58 Employment Agreement dated as of February 18, 1999 between IAT AG and
Nico Hildebrand (1)
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 (1)
10.60 Purchase Agreement dated February 12, 1999 between the Registrant and
Dr. Alfred Simmet (1)
27.1 Financial Data Schedule
(1) Incorporated by reference to the Company's Annual Report on Form 10-K
as filed on March 31, 1999.
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(b) The following reports on Form 8-K were filed during the quarter ended
March 31, 1999
We filed a report on Form 8-K on January 11, 1999 reporting
information under Item 5.
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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: May 14, 1998