Filed Pursuant to Rule 424(b)(3)
Registration File No.: 333-92001
IAT MULTIMEDIA, INC.
70 EAST 55TH STREET
24TH FLOOR
NEW YORK, NEW YORK 10022
On behalf of the Board of Directors, you are cordially invited to a
Special Meeting of stockholders, to be held at the Waldorf Astoria, 301 Park
Avenue, New York, New York 10022 on Wednesday, December 22, 1999 starting at
10:00 a.m. local time. At the Special Meeting, you will be asked to consider
and approve the issuance of our common stock to the stockholder of Petrini
S.p.A. under the terms of our previously announced acquisition of Petrini. You
will also be asked to consider and approve an increase of our authorized common
stock which is necessary for us to issue the shares required for the
acquisition in addition to other proposals.
Gruppo Spigadoro, N.V. is the owner of all of the outstanding capital
stock of Petrini. In exchange for the shares of Petrini, we will issue up to
48,366,530 shares of our common stock to Spigadoro. We will also assume
approximately $20 million of short term indebtedness of Spigadoro, all of which
will be payable during 2000. Of the shares to be issued to Spigadoro,
12,241,400 of the shares will, at Spigadoro's request, be issued to Carlo
Petrini to satisfy a part of Spigadoro's obligations to Mr. Petrini. Mr.
Petrini will also become a director of IAT after the acquisition. Following the
acquisition, Spigadoro and Mr. Petrini will beneficially own approximately
59.5% and 20.2%, respectively, of our outstanding common stock, excluding
shares issuable upon conversion of convertible promissory notes to be issued to
Spigadoro and Mr. Petrini in the acquisition.
Because of certain relationships we have with Spigadoro, the Board of
Directors formed a Special Committee, consisting of two independent directors,
to consider and evaluate the Petrini acquisition. The Special Committee
unanimously determined that the transaction is in the best interests of our
stockholders and recommended to our Board of Directors that the acquisition and
related transactions be approved. Following the recommendation from the Special
Committee, the Board of Directors determined that the Petrini acquisition is in
the best interests of our stockholders, and unanimously recommend voting FOR
approval of the issuance of our common stock under the terms of the
acquisition. The Board of Directors also unanimously recommends voting FOR
approval of the other proposals described in this proxy statement/prospectus.
The acquisition cannot be completed unless our stockholders approve the
issuance of our common stock and the increase of our authorized common stock.
Whether or not you plan to attend the Special Meeting, it is important
that your shares be voted. Please take the time to vote by completing and
mailing the enclosed proxy card to us. If you sign, date and mail your proxy
card without indicating how you wish to vote, your proxy will be counted as a
vote in favor of the proposals. If your shares are held by your broker in
"street name," you must instruct your broker in order to vote. If you fail to
vote or to instruct your broker to vote your shares, the effect will be the
same as a vote against the proposals.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN
FACTORS THAT YOU SHOULD CONSIDER IN EVALUATING THE ACQUISITION AND THE OTHER
PROPOSALS.
Jacob Agam
Chairman of the Board and Chief Executive
Officer
IAT Multimedia, Inc.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE IAT STOCK TO BE ISSUED UNDER THIS
PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated December 3, 1999 and is first
being mailed to our stockholders on or about December 6, 1999.
IAT MULTIMEDIA, INC.
70 EAST 55TH STREET
24TH FLOOR
NEW YORK, NEW YORK 10022
NOTICE OF SPECIAL MEETING TO BE HELD ON DECEMBER 22, 1999
To the Stockholders of IAT Multimedia, Inc.:
You are cordially invited to attend a Special Meeting of stockholders of
IAT Multimedia, Inc., a Delaware corporation. This Special Meeting will be held
at the Waldorf Astoria, 301 Park Avenue, New York, New York 10022 on December
22, 1999, starting at 10:00 a.m. local time, for the following purposes:
1. To consider and vote upon a proposal to authorize the issuance of up to
48,366,530 shares of IAT common stock, subject to adjustment as described
in the proxy statement/prospectus, in connection with the acquisition by
IAT of all of the outstanding shares of capital stock of Petrini S.p.A.,
a corporation organized under the laws of the Republic of Italy;
2. To consider and vote upon a proposal to amend the IAT Amended and
Restated Certificate of Incorporation to increase the authorized number
of shares of IAT common stock that IAT is authorized to issue from 50
million shares to 100 million shares so that IAT has enough authorized
shares of common stock available for issuance in the acquisition;
3. To consider and vote upon a proposal to amend the IAT Amended and
Restated Certificate of Incorporation to change the name of IAT
Multimedia, Inc. to Spigadoro, Inc.;
4. To consider and vote upon a proposal to approve IAT's 1999 Stock Option
Plan;
5. To consider and vote upon a proposal to authorize the issuance of
578,763 shares of IAT common stock in connection with the conversion of
IAT's convertible debenture; and
6. To transact such other business as may properly come before the Special
Meeting, including any adjournments or postponements thereof.
The first proposal is conditioned upon approval of the second proposal so
that we have enough authorized shares of common stock available for issuance in
the acquisition.
Only stockholders of record at the close of business on December 1, 1999
are entitled to notice of and to vote at the Special Meeting and at any
adjournment or postponement thereof.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, YOU ARE ENCOURAGED TO MARK,
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE. A RETURN
ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES IS ENCLOSED
FOR YOUR CONVENIENCE.
ANY STOCKHOLDER ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF
THAT STOCKHOLDER HAS RETURNED A PROXY CARD.
By Order of the Board of Directors
Jacob Agam
Chairman of the Board
and Chief Executive Officer
December 3, 1999
TABLE OF CONTENTS
PAGE
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LETTER TO IAT STOCKHOLDERS FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS
IAT MULTIMEDIA, INC. NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
QUESTIONS AND ANSWERS ABOUT THE ACQUISITION AND THE RELATED PROPOSALS ................ 1
SUMMARY .............................................................................. 4
The Companies ...................................................................... 4
Reasons for the Acquisition ........................................................ 4
Consideration to be Received ....................................................... 4
Recent Market Prices for Our Common Stock .......................................... 5
Tax Consequences of the Acquisition ................................................ 5
Our Financial Advisor Considers the Acquisition Fair to Our Stockholders ........... 5
We Recommend that You Vote for the Proposals ....................................... 5
The Special Meeting ................................................................ 5
Record Date; Voting Power .......................................................... 6
Quorum; Votes Required ............................................................. 6
What You Need to Do Now ............................................................ 6
Some of Our Directors and Officers Have Interests in the Acquisition ............... 6
Our Directors and Executive Officers Following the Acquisition ..................... 8
Resale of Our Common Stock Received in the Acquisition ............................. 8
Terms of the Stock Purchase Agreement .............................................. 8
Conversion of Convertible Debenture ................................................ 9
Additional Information ............................................................. 9
The Acquisition Requires Certain Regulatory Approvals .............................. 10
Ownership of Our Shares of Common Stock by Our Officers, Directors and Principal
Stockholders ..................................................................... 10
Comparative Per Share Market Price Information ..................................... 10
Exchange Rates ..................................................................... 11
Summary Historical and Unaudited Pro Forma Financial Information ................... 12
Summary Comparative Per Share Data ................................................. 15
RISK FACTORS ......................................................................... 16
A WARNING ABOUT FORWARD-LOOKING STATEMENTS ........................................... 30
THE SPECIAL MEETING .................................................................. 30
General ............................................................................ 30
Matters to be Considered at the Special Meeting .................................... 30
Record Date; Vote Required; Voting at the Special Meeting .......................... 31
Voting of Proxies .................................................................. 31
Solicitation of Proxies ............................................................ 32
Recommendation of the Special Committee and the Board of Directors ................. 32
THE ACQUISITION ...................................................................... 33
Background of the Acquisition ...................................................... 33
Recommendations of the Special Committee and the Board of Directors ................ 36
Opinion of Financial Advisor ....................................................... 37
Interests of Some of Our Officers and Directors in the Acquisition ................. 39
Continued Inclusion in the Nasdaq National Market .................................. 40
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PAGE
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Accounting Treatment ........................................................ 41
Regulatory Approvals ........................................................ 41
Federal Securities Law Consequences ......................................... 42
THE STOCK PURCHASE AGREEMENT ................................................... 43
Background ................................................................... 43
General ...................................................................... 44
Representations and Warranties ............................................... 45
Covenants .................................................................... 46
Conditions ................................................................... 48
Termination Rights ........................................................... 49
Effect of Termination ........................................................ 49
Amendment .................................................................... 50
Extension; Waiver ............................................................ 50
Expenses ..................................................................... 50
Management of IAT After the Acquisition ...................................... 50
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES .................................. 50
THE COMPANIES .................................................................. 51
IAT Multimedia, Inc. ......................................................... 51
Petrini S.p.A. ............................................................... 57
FINANCIAL INFORMATION .......................................................... 78
Unaudited Pro Forma Condensed Consolidated Financial Information ............. 78
Selected Consolidated Financial Data of IAT .................................. 84
Management's Discussion and Analysis of Financial Condition and Results of
Operations of IAT ............................................................ 86
Selected Financial Data of Petrini ........................................... 95
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Petrini ........................................................ 96
MANAGEMENT OF IAT .............................................................. 102
Directors and Executive Officers ............................................. 102
Directors and Executive Officers of IAT Following the Acquisition ............ 103
Rights to Nominate Directors ................................................. 104
Committees of the Board of Directors ......................................... 104
Director Compensation ........................................................ 104
Executive Compensation ....................................................... 105
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements ................................................................. 108
Compensation Committee Interlocks and Insider Participation .................. 109
Security Ownership of Management and Principal Stockholders of IAT ........... 109
MANAGEMENT OF PETRINI .......................................................... 112
Executive Compensation ....................................................... 112
Employment Contracts and Termination of Employment
and Change-In-Control Arrangements .......................................... 113
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................................. 114
Stockholder Loans and Guarantees ............................................. 114
Stock Purchase Agreement and Related Transactions ............................ 114
Escrow Shares ................................................................ 115
Simmet Purchase Agreement .................................................... 116
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PAGE
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Spinoffs ...................................................................... 117
Algo Vision Transaction ....................................................... 118
Lease ......................................................................... 118
Employment Agreements ......................................................... 119
DESCRIPTION OF CAPITAL STOCK .................................................... 119
Common Stock .................................................................. 119
Preferred Stock ............................................................... 119
Stock Purchase Warrants ....................................................... 120
Convertible Debenture ......................................................... 120
OTHER MATTERS TO BE VOTED UPON AT THE SPECIAL MEETING ........................... 121
Authorized Stock Proposal ..................................................... 121
Name Change Proposal .......................................................... 122
Option Plan Proposal .......................................................... 122
Convertible Debenture Proposal ................................................ 125
LEGAL MATTERS ................................................................... 125
EXPERTS ......................................................................... 125
OTHER MATTERS ................................................................... 126
STOCKHOLDER PROPOSALS ........................................................... 126
WHERE YOU CAN FIND MORE INFORMATION ............................................. 126
INDEX TO FINANCIAL STATEMENTS ................................................... F-1
ANNEXES
Stock Purchase Agreement ........................................................ A-1
Opinion of Royce Investment Group, Inc. ......................................... B-1
Form of Amendment to the Amended and Restated Certificate of Incorporation of IAT
Multimedia, Inc. .............................................................. C-1
Form of Amendment to the Amended and Restate Certificate of Incorporation of IAT
Multimedia, Inc ............................................................... D-1
IAT's 1999 Stock Option Plan .................................................... E-1
iii
[THIS PAGE INTENTIONALLY LEFT BLANK]
QUESTIONS AND ANSWERS ABOUT THE ACQUISITION
AND THE RELATED PROPOSALS
Q: WHO IS PETRINI?
A: Petrini is an Italian company that produces and sells animal feed and pasta
and flour products. Petrini's animal feed business produces animal feed for
industrial breeders, family-owned breeding farms and domestic pets. Petrini's
pasta and flour business produces traditional, specialty and health and diet
pastas and flours for use by the bakery industry. By-products of Petrini's
pasta and flour business are used as raw materials for its animal feed
products. Petrini's products are marketed and sold principally in Italy.
However, in 1998, approximately 35% of its pasta products were marketed and
sold in the United States, Europe and Southeast Asia.
Q: WHY IS IAT ACQUIRING THE OUTSTANDING CAPITAL STOCK OF PETRINI?
A: We are proposing to purchase of all of the outstanding capital stock of
Petrini because we believe that the acquisition will provide significant
benefits to our stockholders. The acquisition of Petrini and the planned
sale of our existing business will change the focus of our business from
the sale of computers and computer peripherals and components to the
production and sale of animal feed and pasta and flour products. We
believe that the following factors support the Petrini acquisition:
o Due to the low operating margins typical of the personal computer
business and our inability to identify appropriate acquisition candidates
that would enable us to achieve the critical mass necessary to operate
profitably within our industry, we developed concerns regarding our
ability to compete effectively against larger entities within the
industry.
o Petrini's experienced management team has demonstrated its ability to
execute its business strategy and to deliver strong operating
performance.
o We believe that Petrini will be able to execute its strategy of
consolidation within the food and animal feed sectors in Italy and
Europe. We believe that there are a number of small to mid-size companies
within these sectors that are constrained by limited capital resources,
limited operating efficiencies and/or a desire of the family
shareholders/managers for liquidity and are, therefore, potentially
available for acquisition by Petrini.
o The Petrini acquisition will create a larger market capitalization for
our company which could provide increased research coverage and
institutional ownership, increased liquidity for our stockholders and
provide us with greater access to debt and equity financing.
Q: WHAT WILL IAT DO WITH ITS EXISTING COMPUTER BUSINESS?
A: Following the completion of the acquisition, we intend to sell our existing
computer business. We have commenced discussions relating to the sale of
this business. However, no agreement has been reached with any party
regarding the terms of any sale and we cannot assure that we will be able
to sell our computer business on terms favorable to us or at all.
Q: ARE THERE RISKS THAT I SHOULD CONSIDER?
A: Yes. There are risks associated with all acquisitions, including the
proposed acquisition of all of the outstanding capital stock of Petrini.
Your decision to approve the proposals described in this proxy
statement/prospectus involves certain risks, which are more fully
described beginning on page 16, including the following:
o We may not be able to operate a new business or retain the management
and personnel of Petrini following the acquisition;
o A substantial portion of Petrini's business is located in Italy and we
will be subject to risks associated with foreign operations;
o The number of shares to be issued in the acquisition is fixed.
Accordingly, reductions in the market price of our common stock prior to
the completion of the acquisition will reduce the value of the shares to
be issued. Similarly, increases in the market price of our common stock
will increase the value of the shares being issued in the acquisition;
1
o Certain of our directors and officers have interests in the acquisition
in addition to their interests as stockholders of IAT;
o We may not be able to sell our computer business on acceptable terms,
and we may not be able to operate two significantly different businesses
simultaneously;
o Following the acquisition, Vertical Financial Holdings, one of our
principal stockholders, will have the ability to vote, together with its
affiliates, 56.7% of our outstanding common stock and therefore will
control IAT; and
o In the acquisition, we will be assuming approximately $20 million of
short term indebtedness of Spigadoro, all of which will become payable or
convertible into our common stock during 2000. As a result, we may need
to obtain sufficient additional funds to repay this indebtedness.
You should review the section of this proxy statement/prospectus entitled
"Risk Factors" with particular care.
Q: WHAT ARE THE PROPOSALS TO BE PRESENTED AT THE SPECIAL MEETING?
A: At the special meeting you will be asked to consider and approve the
following:
o a proposal to authorize the issuance of shares of IAT common stock in
connection with the acquisition;
o a proposal to increase the authorized number of shares of common stock
that we are authorized to issue from 50 million shares to 100 million
shares so that we have enough authorized shares of common stock available
for issuance in the acquisition;
o a proposal to change our name from IAT Multimedia, Inc. to Spigadoro,
Inc.;
o a proposal to approve our 1999 Stock Option Plan; and
o a proposal to authorize the issuance of shares of IAT common stock in
connection with the conversion of IAT's convertible debenture.
The first proposal is conditioned upon approval of the second proposal so
that we have enough authorized shares of common stock available for
issuance in the acquisition.
Q: WHAT DOES THE SPECIAL COMMITTEE AND OUR BOARD OF DIRECTORS RECOMMEND?
A: The Special Committee and our Board of Directors unanimously recommend that
our stockholders approve the issuance of our common stock under the terms
of the acquisition. The Board of Directors also unanimously recommends
that our stockholders approve the other proposals described in this proxy
statement/prospectus.
Q: WHEN AND WHERE IS THE SPECIAL MEETING?
A: The special meeting will take place at 10:00 a.m. local time on December 22,
1999 at the Waldorf Astoria, 301 Park Avenue, New York, New York 10022.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares may be represented at the special meeting.
In order to assure that we obtain your vote, please give your proxy as
instructed on your proxy card even if you currently plan to attend the
meeting in person.
Q: WHAT SHOULD I DO IF I WANT TO CHANGE MY VOTE?
A: Send in a later-dated, signed proxy card to our Secretary before the special
meeting. Or, you can attend the special meeting in person and vote. You
may also revoke your proxy by sending a notice of revocation to our
Secretary at the address under "Summary--The Companies" on page 4.
2
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker will not be permitted to vote them. You
should be sure to provide your broker with instructions on how to vote
your shares. If you do not give voting instructions to your broker, you
will, in effect, be voting against the proposals unless you appear in
person at the special meeting and vote in favor of the proposals.
Q: WHEN DO YOU EXPECT THE ACQUISITION TO BE COMPLETED?
A: We are working towards completing the acquisition as quickly as practicable.
In addition to stockholder approval, we must also obtain certain
regulatory approvals. We hope to complete the acquisition either late in
1999 or during the first quarter of 2000.
Q: WHO DO I CALL IF I HAVE QUESTIONS ABOUT THE SPECIAL MEETING OR THE
ACQUISITION?
A: You may call Klaus Grissemann, our Chief Financial Officer, at
011-41-26-921-0092.
3
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To understand the acquisition and the proposals fully and for
a more complete description of the legal terms of the acquisition, you should
read this entire document carefully, as well as the other documents we have
referred you to, including the stock purchase agreement. All amounts in US
Dollars which have been converted from Italian Lire have been translated for
the convenience of the reader at the rate of Lire 1,887 = US $1.00, the noon
buying rate of Lire for U.S. Dollars on November 23, 1999. See "The Stock
Purchase Agreement--General" on page 44 and "Where You Can Find More
Information" on page 126.
THE COMPANIES
IAT Multimedia, Inc.
70 East 55th Street
24th Floor
New York, New York 10022
(212) 754-4271
We currently market high-performance personal computers in Germany
assembled according to customer specifications and sold under the trade name
"Trinology." We also sell components, peripherals and software for personal
computers. In connection with the proposed acquisition, we intend to sell our
computer business.
Petrini S.p.A.
Via IV Novembre, 2/4
06083 Bastia Umbra (Perugia)
Italy
011-39-075-8009338
Petrini is an Italian company that produces and sells animal feed and
pasta and flour products. Petrini's animal feed business produces animal feed
for industrial breeders, family-owned breeding farms and domestic pets.
Petrini's pasta and flour business produces traditional, specialty and health
and diet pastas and flours for use by the bakery industry. By-products of
Petrini's pasta and flour business are used as raw materials for its animal
feed business. Petrini's products are marketed and sold principally in Italy.
However, in 1998, approximately 35% of its pasta products were marketed and
sold in the United States, Europe and Southeast Asia.
After the acquisition of Petrini, we will operate the business currently
operated by Petrini.
REASONS FOR THE ACQUISITION (PAGE 33)
We are proposing to acquire Petrini because we believe the acquisition
will provide significant benefits to our stockholders. The acquisition will
change the focus of our business from the sale of computers and computer
components and peripherals to the production and sale of animal feed and pasta
and flour products. We believe significant growth opportunities are available
in these and related markets. The Special Committee and our Board of Directors
have unanimously approved the acquisition. To review our reasons for the
acquisition and our decision to discontinue our computer business in greater
detail, as well as to see how we came to agree on the terms of the acquisition,
please see pages 33 through 39.
CONSIDERATION TO BE RECEIVED (PAGE 44)
Spigadoro will receive up to 48,366,530 shares of our common stock in
exchange for all of the outstanding shares of Petrini common stock. At
Spigadoro's request, 12,241,400 of these shares of our common stock will be
issued to Carlo Petrini to satisfy part of Spiradoro's obligations to Mr.
Petrini. Mr. Petrini will become a director of IAT after the acquisition. In
the acquisition we will also be assuming approximately $20 million of short
term indebtedness of Spigadoro, approximately $13.7 million of which
4
is owed to Mr. Petrini. $6.2 million of the debt owed to Mr. Petrini will be
convertible into shares of our common stock at the option of Mr. Petrini. In
addition, approximately $6.3 million of debt owed to stockholders of Spigadoro
will be convertible into shares of our common stock at our option. The per
share conversion ratio for the convertible notes to be issued to Spigadoro and
Mr. Petrini will be equal to the greater of $2.50 or 85% of the average price
of our common stock for the five trading days prior to the conversion. After
the acquisition, Spigadoro and Mr. Petrini will beneficially own approximately
59.5% and 20.2%, respectively, of our outstanding common stock, excluding
shares issuable upon conversion of the convertible debt described above.
Because the number of shares of our common stock that Spigadoro will receive is
fixed, the value of the shares of our common stock that Spigadoro will receive
will fluctuate as the market price of our common stock changes. Each currently
outstanding share of our common stock will remain issued and outstanding as one
share of our common stock.
RECENT MARKET PRICES FOR OUR COMMON STOCK (PAGE 10)
November 3, 1999 was the last full trading day prior to our announcement
of the signing of the stock purchase agreement to acquire Petrini. The closing
price for our common stock on this day was $2.50. December 3, 1999 was the last
practicable trading day prior to the mailing of this proxy statement/
prospectus for which stock prices were available. The closing price for our
common stock on this day was $213/32. See page 10 for information concerning
market price data for our common stock. Similar information is not available
for Petrini since it is a privately held company.
TAX CONSEQUENCES OF THE ACQUISITION (PAGE 50)
We will not recognize any gain or loss for US federal income tax purposes
upon the exchange of our shares for Spigadoro's shares of Petrini. In addition,
we expect that the exchange of shares by Spigadoro will be tax-free to
Spigadoro for US federal income tax purposes.
OUR FINANCIAL ADVISOR CONSIDERS THE ACQUISITION FAIR TO OUR STOCKHOLDERS
(PAGE 37)
The Special Committee has obtained an opinion dated November 2, 1999, from
its financial advisor, Royce Investment Group, Inc. The opinion stated that, on
that date and subject to certain matters stated in the opinion, the exchange of
the shares of our common stock to be issued in the acquisition for all of the
outstanding shares of Petrini common stock and the assumption by us of
approximately $20 million of short term indebtedness of Spigadoro, is fair to
our stockholders from a financial point of view. A copy of the written opinion
from Royce is attached to this proxy statement/prospectus as annex B and should
be read in its entirety. We have paid Royce a fee of $125,000 for its financial
advisory services, including rendering its opinion.
WE RECOMMEND THAT YOU VOTE FOR THE PROPOSALS (PAGE 36)
The Special Committee and our Board of Directors believe that the
acquisition is fair to us and to our stockholders and is in our best interests
and unanimously recommend that you vote FOR the proposal to approve the
issuance of the shares of our common stock in the acquisition. The Board of
Directors also unanimously recommends that you vote FOR the other proposals
described in this proxy statement/ prospectus.
THE SPECIAL MEETING (PAGE 30)
The special meeting will be held on December 22, 1999 at 10:00 a.m., local
time, at the Waldorf Astoria, 301 Park Avenue, New York, New York 10022. At the
special meeting, you will be asked:
o to approve the issuance of up to 48,366,530 shares of our common
stock, subject to adjustment as described in this proxy
statement/prospectus, under a stock purchase agreement that provides
for the acquisition by us of all of the outstanding capital stock of
Petrini;
o to approve an amendment to our Amended and Restated Certificate of
Incorporation to increase the number of shares of our common stock that
we are authorized to issue from 50 million shares to 100 million shares
so that we have enough authorized shares of our common stock available
for issuance in the acquisition;
5
o to approve an amendment to our Amended and Restated Certificate of
Incorporation to change the name of the corporation from IAT
Multimedia, Inc. to Spigadoro, Inc.;
o to approve our 1999 Stock Option Plan;
o to approve the issuance of 578,763 shares of our common stock in
connection with the conversion of our convertible debenture; and
o to transact such other business as may properly come before the
special meeting, including any adjournment or postponement thereof.
RECORD DATE; VOTING POWER (PAGE 31)
You are entitled to vote at the special meeting if you owned shares
entitled to vote as of the close of business on December 1, 1999, the record
date for the special meeting. On the record date, there were 11,748,551 shares
of common stock entitled to vote at the special meeting.
QUORUM; VOTES REQUIRED (PAGE 31)
One-third of the shares outstanding entitled to vote on any matter and
represented at the special meeting in person or by proxy will constitute a
quorum. Assuming a quorum is present, approval by our stockholders of the
issuance of our common stock in the acquisition, the amendments to our Amended
and Restated Certificate of Incorporation, the 1999 Stock Option Plan and the
issuance of our common stock upon conversion of the convertible debenture will
require the affirmative vote of a majority of the shares so represented and
entitled to vote at the special meeting, excluding broker non-votes. As of
December 1, 1999, our directors, executive officers and principal stockholders,
excluding JNC Opportunity Fund Ltd., had the power to vote approximately 34.3%
of the outstanding shares of our common stock, and they have advised us that
they intend to vote in favor of each of the proposals. In addition, JNC
Opportunity Fund Ltd., the holder of our Series A convertible debenture and one
of our principal stockholders, owns approximately 15.9% of our outstanding
common stock. JNC has agreed to vote in favor of each of the proposals and has
given Jacob Agam, our Chairman of the Board and Chief Executive Officer, an
irrevocable proxy to vote JNC's shares at the special meeting. See "Description
of Capital Stock--Convertible Debenture."
WHAT YOU NEED TO DO NOW (PAGE 31)
Just indicate on your proxy card how you want to vote, sign it and mail it
in the enclosed return envelope as soon as possible, so that your shares will
be represented at the special meeting.
If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be counted as a vote in favor of the proposals. If you do
not vote or you abstain, it will have the effect of a vote against the
proposals.
The special meeting will take place on December 22, 1999, at 10:00 a.m.
local time. You may attend the special meeting and vote your shares in person,
rather than signing and mailing in your proxy card. In addition, you may
withdraw your proxy up to and including the day of the special meeting by
following the directions on page 31 and either changing your vote or attending
the special meeting and voting in person. Merely attending the special meeting
will not revoke your proxy.
Your broker will vote your shares only if you provide instructions on how
to vote. Without instructions, your shares will not be voted. The shares that
you do not vote will have the effect of voting against the proposals. Your vote
is very important.
SOME OF OUR DIRECTORS AND OFFICERS HAVE INTERESTS IN THE ACQUISITION (PAGE 39)
Some of our directors and officers have interests in the acquisition that
are different from, or in addition to, their interests as stockholders of IAT.
These interests include the following:
o Jacob Agam, our Chairman of the Board and Chief Executive Officer, is
the Chairman of the
6
Board of Spigadoro. Spigadoro owns 40,700,000 shares of common stock of
Petrini representing all of the outstanding common stock of Petrini.
Spigadoro will receive up to 48,366,530 shares of our common stock in
the acquisition. At Spigadoro's request, 12,241,400 of these shares
will be issued to Carlo Petrini. Mr. Petrini will become a director of
IAT following the acquisition. As a result, Spigadoro and Mr. Petrini
will beneficially own approximately 59.5% and 20.2%, respectively, of
our outstanding common stock following the acquisition, excluding
shares issuable upon conversion of notes to be issued to Spigadoro and
Mr. Petrini in the acquisition. We will also be assuming approximately
$20 million of short term indebtedness of Spigadoro in the acquisition,
approximately $13.7 million of which is owed to Mr. Petrini. $6.2
million of the debt owed to Mr. Petrini will be convertible into shares
of our common stock at the option of Mr. Petrini. In addition,
approximately $6.3 million of debt owed to stockholders of Spigadoro
will be convertible into shares of our common stock at our option. The
per share conversion price for the convertible notes to be issued to
Spigadoro and Mr. Petrini will be equal to the greater of $2.50 or 85%
of the average price of our common stock for the five trading days
prior to the notice of conversion.
Jacob Agam is also the Chairman of the Board of Vertical Financial
Holdings, one of our principal stockholders, and certain of its
affiliates. Entities affiliated with Vertical Financial Holdings have
economic ownership of approximately 76% of the outstanding common stock
of Spigadoro and have the power to vote approximately 91% of the
outstanding common stock of Spigadoro. Following the closing of the
acquisition, Vertical Financial Holdings and entities affiliated with
Vertical Financial Holdings will be deemed to indirectly beneficially
own approximately 49.1% of our outstanding common stock. In addition,
the Agam Family Trust, of which Mr. Agam is one of the beneficiaries,
indirectly owns approximately 60% of the shares of common stock of
Petrini through an entity that controls Spigadoro. See "Risk Factors--
Vertical controls IAT, substantially reducing the influence of our
other stockholders" and "The Stock Purchase Agreement--General."
o Marc S. Goldfarb, one of our directors, is the President and Managing
Director of Orida Capital USA, Inc., the U.S. representative of the
Vertical Group, and beneficially owns 171,324 shares of capital stock
of Spigadoro, or approximately 1% of the outstanding shares.
o Under the terms of the acquisition, Spigadoro and its assignees will
have the right to nominate up to a majority of the members for election
to our Board of Directors, so long as Spigadoro, its affiliates and
Carlo Petrini continue to beneficially own, in the aggregate, a
specified number of our securities.
o In October 1998, Spigadoro entered into a consulting agreement with
Orida Capital USA under which Orida agreed to perform consulting and
advisory services for Spigadoro, including identifying acquisition and
investment opportunities. The agreement expires in October 2003 and
provides for an annual fee of $100,000. Payments for 1998 and 1999 have
been made and, following the acquisition, Orida has agreed to provide
such services to us and we have agreed to assume the obligations of
Spigadoro under the agreement.
o We have an employment agreement with Jacob Agam, our Chairman of the
Board and Chief Executive Officer, which expires in September 2001 and
provides for an annual salary of $75,000 per year, plus a bonus to be
approved by our Board of Directors. Under the terms of the Petrini
acquisition, Mr. Agam's employment agreement with us will be amended,
effective as of the closing of the acquisition. Under the amended
employment agreement, Mr. Agam will be employed as our Chief Executive
Officer for an initial term of three years with an initial annual base
salary of $300,000, plus a bonus to be approved by our Board of
Directors. Mr. Agam will also be entitled to receive a severance
payment equal to his base salary for one year if his employment
agreement is terminated by us without cause.
The members of the Special Committee and our Board of Directors knew about
these conflicts of interests, and considered them when they approved the
acquisition. For a more complete description of these conflicts of interest,
see "The Acquisition--Interests of Some of Our Directors and Officers in the
Acquisition" at page 39.
7
OUR DIRECTORS AND EXECUTIVE OFFICERS FOLLOWING THE ACQUISITION (PAGE 103)
Following the acquisition, our Board of Directors will consist of the
following seven members, two of whom are members of Petrini's management:
o Jacob Agam
o Lucio De Luca
o Carlo Petrini
o Marc S. Goldfarb
o Klaus Grissemann
o Erich Weber
o Robert Weiss
Following the acquisition, Petrini will operate as a wholly-owned
subsidiary of IAT and is expected to retain all of the members of its current
management team. In addition, our executive officers and the executive officers
of Petrini will consist of:
o Jacob Agam, Chairman of the Board and Chief Executive Officer of IAT
o Lucio De Luca, Chief Operating Officer of IAT and Petrini
o Klaus Grissemann, Chief Financial Officer of IAT
o Carlo Petrini, Chairman of the Board of Petrini
o Dario Ciolina, Chief Financial Officer of Petrini
RESALE OF OUR COMMON STOCK RECEIVED IN THE ACQUISITION (PAGE 42)
All of the shares of our common stock issued to Spigadoro in the
acquisition will be subject to resale restrictions under the federal securities
laws. However, we intend to register for resale the shares of our common stock
to be issued in the acquisition, which would remove those resale restrictions.
TERMS OF THE STOCK PURCHASE AGREEMENT (PAGE 43)
The stock purchase agreement is attached to this proxy
statement/prospectus as annex A. You are encouraged to read the stock purchase
agreement in its entirety. It is the legal document that establishes the terms
of the Petrini acquisition.
General. We will acquire from Spigadoro all of the outstanding common
stock of Petrini and we will assume approximately $20 million of short term
indebtedness of Spigadoro, all of which will become payable during 2000.
Approximately $12.5 million of this indebtedness is convertible into shares of
our common stock. Under the terms of the acquisition, Spigadoro will be
entitled to receive up to 48,366,530 shares of our common stock, including
1,012,065 shares to be issued under the anti-dilution provisions of the stock
purchase agreement, as described below. At Spigadoro's request, 12,241,400 of
the shares to be issued to Spigadoro will be issued to Carlo Petrini, to
satisfy a part of Spigadoro's obligations to Mr. Petrini. See "The Stock
Purchase Agreement--General" and "The Acquisition--Interests of Some of Our
Officers and Directors in the Acquisition."
Conditions to the acquisition. The completion of the acquisition depends
on a number of conditions being met. In addition to customary conditions
relating to our and Spigadoro's compliance with the agreement, these conditions
include the following:
o the approval by our stockholders of the issuance of our common stock
to be issued in the acquisition;
o the approval by our stockholders of the amendment to our Amended and
Restated Certificate of Incorporation to increase the number of shares
of common stock we are authorized to issue so that we can complete the
acquisition; and
8
o the absence of any injunction or legal restraint blocking the
acquisition or of certain other proceedings to block the acquisition.
Each party may, at its option, waive the satisfaction of any condition to its
obligations under the agreement. If we or Spigadoro waive a condition to our
obligations to perform under the agreement, we will resolicit stockholder
approval only if we are required to do so by the rules of the Nasdaq Stock
Market or applicable law. EVEN IF OUR STOCKHOLDERS APPROVE THE PROPOSALS
DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS, THERE CAN BE NO ASSURANCE THAT
THE ACQUISITION WILL BE CONSUMMATED.
Termination of the stock purchase agreement. We and Spigadoro can agree at
any time to terminate the agreement without completing the acquisition, even if
our stockholders have approved the proposals. Also, the agreement can be
terminated in various circumstances, including the following:
o if there is any law or regulation that makes the acquisition illegal
or if any governmental authority issues a final, non-appealable order
blocking the acquisition;
o if the acquisition has not been completed by April 30, 2000;
o if the other party breaches the agreement in a way that would entitle
the party seeking to terminate the agreement to not consummate the
acquisition, and the breaching party does not correct the breach
promptly;
o if the other party's representations in the agreement either were
inaccurate when made or cease to be accurate as a result of subsequent
events, except that generally in order to terminate for this reason the
inaccuracy must result in a "material adverse effect"; and
o if, at the special meeting, the requisite vote of our stockholders
needed to approve the issuance of the shares of our common stock to be
issued in the acquisition and to amend our Amended and Restated
Certificate of Incorporation to increase the number of shares of our
common stock we are authorized to issue is not obtained.
Expenses. Each party will pay its own fees and expenses.
CONVERSION OF CONVERTIBLE DEBENTURE (PAGE 125)
As a result of the acquisition, JNC Opportunity Fund, Ltd. had the right
to accelerate payment under our Series A convertible debenture. JNC has entered
into an agreement with us under which JNC agreed not to accelerate repayment of
the debenture. JNC also agreed to fix the number of shares of our common stock
that are issuable upon conversion of the debenture at 2,451,745 shares. On
November 23, 1999, JNC converted a substantial portion of the debenture into
1,872,982 shares of our common stock. JNC has informed us that it intends to
convert the remaining principal amount of the debenture upon the closing of the
acquisition, subject to the receipt of stockholder approval for the issuance of
the shares of common stock as described in this proxy statement/prospectus. As
a result of the conversions, we will be required to issue up to 1,012,065
additional shares of our common stock to Spigadoro under the anti-dilution
provisions of the stock purchase agreement, all of which are included in the
48,366,530 shares to be issued in the acquisition.
ADDITIONAL INFORMATION
If you would like additional copies of this proxy statement/prospectus, or
if you have questions about the acquisition, you should contact us as indicated
below:
In writing:
IAT Multimedia, Inc.
70 East 55th Street
24th Floor
New York, New York 10022
9
By telephone:
Klaus Grissemann, Chief Financial Officer
011-41-26-921-0092
THE ACQUISITION REQUIRES CERTAIN REGULATORY APPROVALS (PAGE 41)
Completion of the acquisition will not occur until after applicable
regulatory approvals required for the transaction have been received.
OWNERSHIP OF OUR SHARES OF COMMON STOCK BY OUR OFFICERS, DIRECTORS AND
PRINCIPAL STOCKHOLDERS (PAGE 109)
As of December 1, 1999, our officers, directors and principal stockholders
beneficially owned approximately 59.4% of our outstanding common stock.
Following the acquisition, our officers, directors and principal stockholders
will beneficially own approximately 90.4% of our outstanding common stock.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
Our common stock is quoted on the Nasdaq National Market. On November 3,
1999, the last full trading day before the announcement of the Petrini
acquisition, our common stock closed at $2.50.
On December 3, 1999, the most recent practicable date prior to the mailing
of this proxy statement/prospectus, our common stock closed at $213/32. As of
December 1, 1999, there were approximately 50 record holders and we believe the
number of beneficial holders of our common stock exceeds 700.
Petrini is a privately held company and there is no public market for its
capital stock.
Our common stock began trading on the Nasdaq National Market on March 26,
1997 and is quoted for trading under the symbol "IATA." Prior to that date,
there was no public market for our common stock. Our common stock also trades
on the Freiverkehr in Germany. The following table sets forth the range of high
and low sales price per share for our common stock on the Nasdaq National
Market for the periods indicated.
HIGH LOW
---- ---
FISCAL YEAR ENDED DECEMBER 31, 1999:
Quarter ended December 31, 1999
(through December 3, 1999) .............. $ 2 7/8 $1 9/16
Quarter ended September 30, 1999 ......... 4 2 1/8
Quarter ended June 30, 1999 .............. 6 3
Quarter ended March 31, 1999 ............. 9 11/16 4 3/8
FISCAL YEAR ENDED DECEMBER 31, 1998:
Quarter ended December 31, 1998 .......... 6 3/4 3 9/16
Quarter ended September 30, 1998 ......... 11 3/4 4 3/16
Quarter ended June 30, 1998 .............. 12 5/8 4 3/16
Quarter ended March 31, 1998 ............. 6 9/16 4 1/8
FISCAL YEAR ENDED DECEMBER 31, 1997:
Quarter ended December 31, 1997 .......... 7 3/8 6 1/8
Quarter ended September 30, 1997 ......... 6 3/4 4
Quarter ended June 30, 1997 .............. 7 3/4 6
Quarter ended March 31, 1997 ............. 8 7/8 8 1/2
We encourage you to obtain current market quotations for our common stock.
We have never paid cash dividends on our common stock and, following the
acquisition, do not anticipate or intend paying cash dividends in the
foreseeable future on our common stock.
10
We intend to file an application with the Nasdaq National Market to list
the shares of our common stock that Spigadoro will receive in the acquisition.
We also intend to change our trading symbol upon the completion of the
acquisition.
EXCHANGE RATES
IAT's and Petrini's functional currencies are the US Dollar and the
Italian Lira, respectively. The functional currency of certain of IAT's
subsidiaries are the Swiss Franc and the Deutsche Mark. References in this
proxy statement/prospectus to "US Dollars" or "$" are to United States
currency, and references to "Deutsche Mark" or "DM," "Swiss Franc" or "SF" and
"Italian Lira," "lira," "lire" or "Lit." are to the German, Swiss and Italian
currencies, respectively. IAT and Petrini have presented their financial
statements in accordance with generally accepted accounting principles in the
United States. IAT has presented its consolidated financial statements in US
Dollars and Petrini has presented its financial statements in Italian Lira,
with a convenience translation into US Dollars. Amounts originally measured in
Deutsche Mark, Swiss Franc and Italian Lira for all periods presented have been
translated into US Dollars in accordance with the methodology set forth in
Statement of Financial Accounting Standards No. 52. For the convenience of the
reader, translations of certain Deutsche Mark, Swiss Franc or Italian Lira
amounts into US Dollars have been included herein, but should not be construed
as a representation that such Deutsche Mark, Swiss Franc or Italian Lira
amounts actually represent such US Dollar amounts or could be, or could have
been, converted into US Dollars at the rates indicated or at any other rate.
These rates may differ from the actual rates in effect during the periods
covered by the financial information discussed herein.
The following table sets forth, for the periods indicated, the noon buying
rates as certified for custom purposes by the Federal Reserve Bank of New York
for the Deutsche Mark, the Swiss Franc and the Italian Lira, respectively, per
US Dollar. On December 1, 1999, such rates, were DM 1.9444 = $1.00, SF 1.5920 =
$1.00 and Lit. 1,924.9130 =$1.00.
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1994 1995
-------------------------------------- --------------------------------------
DM SF LIT. DM SF LIT.
----------- ----------- -------------- ----------- ----------- --------------
Exchange rate at end of period .... 1.5495 1.3100 1622.0000 1.4345 1.1540 1584.4000
Average exchange rate during
period (a) ....................... 1.6216 1.3667 1611.4900 1.4321 1.1812 1629.4500
Highest exchange rate during
period ........................... 1.7627 1.4910 1706.7500 1.5612 1.3130 1736.2500
Lowest exchange rate during
period ........................... 1.4920 1.2450 1511.5000 1.3565 1.1172 1580.8000
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
--------------------------------------
1996
--------------------------------------
DM SF LIT.
----------- ----------- --------------
Exchange rate at end of period .... 1.5387 1.3390 1519.0000
Average exchange rate during
period (a) ....................... 1.5049 1.2361 1542.7600
Highest exchange rate during
period ........................... 1.5655 1.3515 1601.2500
Lowest exchange rate during
period ........................... 1.4354 1.1573 1496.0000
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1997 1998
-------------------------------------- --------------------------------------
DM SF LIT. DM SF LIT.
----------- ----------- -------------- ----------- ----------- --------------
Exchange rate at end of period .... 1.7991 1.4610 1769.0000 1.6670 1.3735 1654.0000
Average exchange rate during
period (a) ....................... 1.7348 1.4514 1703.8100 1.7597 1.4506 1736.8500
Highest exchange rate during
period ........................... 1.8810 1.5360 1840.7500 1.8542 1.5385 1827.6000
Lowest exchange rate during
period ........................... 1.5413 1.3430 1515.7000 1.6060 1.2935 1592.0000
AS OF AND FOR THE
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------------------
1999
--------------------------------------
DM SF LIT.
----------- ----------- --------------
Exchange rate at end of period .... 1.8375 1.5022 1819.2899
Average exchange rate during
period (a) ....................... 1.8173 1.4893 1799.1730
Highest exchange rate during
period ........................... 1.9290 1.5828 1909.7240
Lowest exchange rate during
period ........................... 1.6558 1.3585 1639.2390
- ----------
(a) The average of the exchange rates on the last day of each month during
the applicable period.
11
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION
IAT Summary Historical Consolidated Financial Information
The following summary consolidated financial information is derived from,
and should be read in conjunction with, the consolidated financial statements
of IAT that have been audited by Rothstein, Kass & Company, P.C., IAT's
independent auditor, and the related notes thereto included elsewhere in this
proxy statement/prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------- ----------------------------
(UNAUDITED)
1994 1995 1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales ........................ $ 1,053 $ 1,510 $ 1,193 $ 5,880 $ 38,340 $ 23,544 $ 31,165
Cost of sales .................... 700 968 811 5,167 35,465 21,524 29,376
-------- -------- -------- -------- -------- -------- --------
Gross margin ..................... 353 542 382 713 2,875 2,020 1,789
-------- -------- -------- -------- -------- -------- --------
Research and development
expenses, net ................... 62 1,663 2,331 2,426 -- -- --
Selling, general and
administrative expenses ......... 1,538 2,640 2,957 5,436 4,933 3,517 3,791
-------- -------- -------- -------- -------- -------- --------
1,600 4,303 5,288 7,862 4,933 3,517 3,791
-------- -------- -------- -------- -------- -------- --------
Operating loss ................... $ (1,247) $ (3,761) $ (4,906) $ (7,149) $ (2,058) $ (1,497) $ (2,002)
======== ======== ======== ======== ======== ======== ========
Net income (loss) ................ $ (1,335) $ (3,730) $ (5,108) $ (6,894) $ (1,743) $ (1,421) $ 1,591(2)
======== ======== ======== ======== ======== ======== ==========
Basic income (loss) per common
share ........................... $ (0.33) $ (0.77) $ (0.89) $ (0.84) $ (0.19) $ (0.15) $ 0.17(2)
======== ======== ======== ======== ======== ======== ==========
Diluted income (loss) per
common share .................... $ (0.33) $ (0.77) $ (0.89) $ (0.84) $ (0.19) $ (0.15) $ 0.16(2)
======== ======== ======== ======== ======== ======== ==========
Weighted average number of
shares of Common Stock
outstanding -- basic ............ 4,002 4,839 5,752 8,261 9,327 9,278 9,332
======== ======== ======== ======== ======== ======== ==========
Weighted average number of
shares of Common Stock
outstanding -- diluted .......... 4,002 4,839 5,752 8,261 9,327 9,278 10,614
======== ======== ======== ======== ======== ======== ==========
Income (loss) before interest,
income taxes, depreciation and
amortization(1) ................. $ (1,058) $ (3,407) $ (4,665) $ (6,687) $ (1,356) $ (990) $ 2,112(2)
======== ======== ======== ======== ======== ======== ==========
- ----------
(1) Income (loss) before interest, income taxes, depreciation and
amortization should not be considered an alternative to operating loss,
net income (loss), 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.
(2) Includes a non-recurring gain of $3,440,000 from IAT's sale of its
intellectual property.
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
-------------------------------------------------------- -------------------
(UNAUDITED)
1994 1995 1996 1997 1998 1998 1999
---------- ------------ ------------ --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficiency) .............. $ (865) $ (1,106) $ (2,729) $ 4,123 $ 6,884 $ 7,591 $ 9,426
Total assets .............................. 1,771 2,056 2,216 16,660 16,864 16,972 17,596
Total liabilities ......................... 2,509 2,944 4,896 8,564 6,874 7,405 6,091
Accumulated deficit ....................... 3,455 7,185 12,293 19,239 20,982 20,660 19,392
Stockholders' equity (deficiency) ......... (738) (888) (4,080) 8,096 9,990 9,567 11,505
12
Petrini Summary Historical Financial Information
The following summary financial information is derived from, and should be
read in conjunction with, the financial statements of Petrini that have been
audited by Reconta Ernst & Young S.p.A., Petrini's independent auditor, and the
related notes thereto included elsewhere in this proxy statement/prospectus.
Reconta Ernst & Young S.p.A. has audited the Petrini historical financial
statements prepared in accordance with Italian GAAP for the years from 1994
through 1998. Reconta Ernst & Young S.p.A. has issued an audit opinion on the
US GAAP historical financial statements of Petrini included herein at December
31, 1998 and 1997 and for each of the three years in the period ended December
31, 1998.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
(UNAUDITED)
-----------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(IN MILLIONS OF LIRE)
STATEMENT OF INCOME DATA:
Net sales .................... 302,207 319,341 320,292 294,859 266,307
Cost of sales ................ 230,436 248,372 244,490 224,216 196,902
------- ------- ------- ------- -------
Gross profit ................. 71,771 70,969 75,802 70,643 69,405
------- ------- ------- ------- -------
Selling expenses ............. 44,957 46,097 48,638 47,633 46,194
General and
administrative expenses...... 16,748 15,904 15,717 16,079 14,719
------- ------- ------- ------- -------
61,705 62,001 64,355 63,712 60,913
------- ------- ------- ------- -------
Operating income ............. 10,066 8,968 11,447 6,931 8,492
======= ======= ======= ======= =======
Net income ................... 2,390 693 2,082 278 829
======= ======= ======= ======= =======
Basic and diluted earnings
per share (Lire, U.S. $)..... 59 17 51 7 20
======= ======= ======= ======= =======
Weighted average number
of shares of Common
Stock outstanding
(millions of shares) ........ 40.7 40.7 40.7 40.7 40.7
======== ======== ======== ======== ========
EBITDA (2) ................... 15,695 14,271 16,499 12,249 14,110
======== ======== ======== ======== ========
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
--------------- --------------------------------------
(UNAUDITED)
1998 1998 1999 1999
--------------- ----------- ----------- --------------
(IN THOUSANDS (IN THOUSANDS
OF US (IN MILLIONS OF US
DOLLARS)(1) OF LIRE) DOLLARS)(1)
STATEMENT OF INCOME DATA:
Net sales .................... $ 141,127 200,356 194,783 $ 103,224
Cost of sales ................ 104,347 148,964 140,042 74,214
--------- ------- ------- ---------
Gross profit ................. 36,780 51,392 54,741 29,010
--------- ------- ------- ---------
Selling expenses ............. 24,480 36,579 36,480 19,332
General and
administrative expenses...... 7,800 8,658 10,884 5,768
--------- ------- ------- ---------
32,280 45,237 47,364 25,100
--------- ------- ------- ---------
Operating income ............. $ 4,500 6,155 7,377 $ 3,910
========= ======= ======= =========
Net income ................... $ 439 162 1,541 $ 817
========= ======= ======= =========
Basic and diluted earnings
per share (Lire, U.S. $)..... $ 0.01 4 38 $ 0.02
========= ======= ======= =========
Weighted average number
of shares of Common
Stock outstanding
(millions of shares) ........ 40.7 40.7 40.7 40.7
========= ======== ======== =========
EBITDA (2) ................... $ 7,477 10,328 10,913 $ 5,783
========= ======== ======== =========
- ----------
(1) Exchange Rate: Lire 1,887 = US $1.00 as of November 23, 1999.
(2) EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization. Although EBITDA is not recognized under generally
accepted accounting principles, it is accepted in the food industry as a
generally recognized measure of performance. However, EBITDA should not
be considered an alternative to operating income, net income, cash flows
or any other measure of performance as determined in accordance with
generally accepted accounting principles, as an indicator of operating
performance or as a measure of liquidity.
AS OF DECEMBER 31,
---------------------------------------------------------------------
(UNAUDITED)
------------------------------
1994 1995 1996 1997 1998 1998
---------- --------- --------- --------- --------- ------------------
(IN THOUSANDS OF
(IN MILLIONS OF LIRE) U.S. DOLLARS)(1)
BALANCE SHEET DATA:
Working capital ........... 7,757 18,670 10,416 14,366 12,398 $ 6,571
Total assets .............. 180,227 190,010 183,754 187,725 186,690 98,936
Total liabilities ......... 135,494 144,585 136,244 139,937 138,073 73,171
Stockholders' equity ...... 44,733 45,426 47,510 47,788 48,617 25,765
AS OF SEPTEMBER 30,
-------------------------------------
(UNAUDITED)
1998 1999 1999
--------- --------- -----------------
(IN MILLIONS (IN THOUSANDS OF
OF LIRE) U.S. DOLLARS)(1)
BALANCE SHEET DATA:
Working capital ........... 13,205 18,646 $ 9,883
Total assets .............. 183,792 184,952 98,013
Total liabilities ......... 135,842 134,737 71,402
Stockholders' equity ...... 47,950 50,215 26,611
- ----------
(1) Exchange Rate: Lire 1,887 = US $1.00 as of November 23, 1999.
13
Unaudited Pro Forma Condensed Consolidated Summary Financial Information
We have included this unaudited pro forma condensed consolidated summary
information only for the purposes of illustration. It does not necessarily
indicate what the operating results or financial position of the combined
entity would have been if the transaction had been completed at the dates
indicated. Moreover, this information does not necessarily indicate what the
future operating results or financial position of the combined company will be.
You should read this unaudited pro forma condensed consolidated summary
financial information in conjunction with the "Unaudited Pro Forma Condensed
Consolidated Financial Statements" and the notes included elsewhere in this
proxy statement/prospectus. The unaudited pro forma condensed consolidated
summary balance sheet data gives effect to the transaction as if it had
occurred on September 30, 1999. The unaudited pro forma condensed consolidated
summary results of operations data gives effect to the transaction as if it
occurred on January 1, 1998. See "Note B of the Notes to the Unaudited Pro
Forma Condensed Consolidated Financial Statements" for a discussion of the
accounting method used for the acquisition.
FOR THE NINE MONTHS FOR THE YEAR ENDED
ENDED SEPTEMBER 30, 1999 DECEMBER 31, 1998
---------------------------- -------------------
(IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION)
RESULTS OF OPERATIONS:
Net sales .................................... $103,245 $141,152
Cost of sales ................................ 74,882 105,238
Gross profit ................................. 28,363 35,914
Operating expenses ........................... 26,128 33,746
Operating income ............................. 2,235 2,168
Income (loss) before income taxes ............ 555 (1,070)
Net loss ..................................... (1,121) (2,591)
Net loss per share basic and diluted ......... (0.02) (0.04)
EBITDA (1) ................................... 5,022 6,313
AS OF SEPTEMBER 30, 1999
----------------------------
BALANCE SHEET:
Working capital .............................. $ 9,615
Total assets ................................. 127,818
Total liabilities ............................ 94,739
Total stockholders' equity ................... 33,079
- ----------
(1) EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization. Although EBITDA is not recognized under generally
accepted accounting principles, it is accepted in the food industry as a
generally recognized measure of performance. However, EBITDA should not
be considered an alternative to operating income, net income (loss), 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.
14
SUMMARY COMPARATIVE PER SHARE DATA
The table below presents historical per share financial information for us
and Petrini. This information should be read in conjunction with the audited
financial statements and the notes thereto of us and Petrini included elsewhere
in this proxy statement/prospectus. In addition, it is important that you read
the pro forma financial information included in this document. However, the pro
forma information is not necessarily indicative of what the actual financial
results would have been had the transaction taken place on September 30, 1999
or on January 1, 1998, nor does it purport to indicate results of future
operations. No dividends were paid by us or Petrini during the periods
presented.
HISTORICAL
------------------------------ IAT AS EQUIVALENT
IAT(1) PETRINI(2) ADJUSTED(1) PRO FORMA(1)
--------------- ------------ --------------- -------------
Book value per share
September 30, 1999 ................................... $ 1.23 $ 0.55 $ 0.88 $ 0.55
Net income (loss) per share -- basic:
For the nine months ended September 30, 1999 ......... 0.17 (3) 0.02 0.29 (3) (0.02)
For the year ended December 31, 1998 ................. (0.19) 0.01 (0.14) (0.04)
Net income (loss) per share -- diluted:
For the nine months ended September 30, 1999 ......... 0.16 (3) 0.02 0.27 (3) (0.02)
For the year ended December 31, 1998 ................. (0.19) 0.01 (0.14) (0.04)
- ----------
(1) The per share calculations for historical IAT, IAT as adjusted, and
equivalent pro forma exclude 498,285 shares which are being held in
escrow.
(2) Computed based on 48,366,530 shares of IAT common stock, the maximum
number of shares to be issued in exchange for all of the outstanding
common stock of Petrini.
(3) Includes a non-recurring gain of $3,440,000 from IAT's sale of its
intellectual property.
15
RISK FACTORS
In considering whether to vote in favor of the proposals relating to the
Petrini acquisition described in this proxy statement/prospectus, you should be
aware that there are various risks, including those described below. You should
consider these risks, including risks relating to the acquisition, together
with all of the other information included in this proxy statement/prospectus.
You should understand that the risks related to the business after the
acquisition relate primarily to Petrini's business as we will be operating that
business following the acquisition of Petrini and the proposed sale of our
computer business. As a result, references to "we", us" and "our" refer to the
combined company. These risk factors could cause actual results to differ
materially from those currently anticipated and contained in forward-looking
statements made in this proxy statement/prospectus. See "A Warning About
Forward-Looking Statements."
RISKS RELATING TO THE ACQUISITION
FOLLOWING THE CLOSING OF THE ACQUISITION, WE WILL BE OPERATING A NEW
BUSINESS.
Our sole business has been the marketing and distribution of personal
computers and personal computer components, peripherals and software. The
production and marketing of animal feed and pasta and flour products is a new
business for us and the IAT management group has limited experience operating
this type of business. Although we intend to retain the management personnel of
Petrini following the acquisition, we cannot assure that we will be able to
retain such individuals or that our management team will be successful in
managing this new business. If we are unable to successfully operate the
Petrini business, our business and operating results will be materially
impaired.
IF WE DO NOT SUCCESSFULLY SELL OUR COMPUTER BUSINESS, THE COMBINED COMPANY
MAY BE ADVERSELY AFFECTED.
In deciding that the acquisition is in the best interests of our
stockholders, our Board of Directors determined that we should sell our
computer business following the Petrini acquisition. However, in the event we
are unable to sell our computer business, we would be subject to various risks
relating to the operation of two significantly different businesses including:
o the possibility that the business cultures of the two businesses may
not mesh;
o the possibility that management may be distracted from regular business
concerns by the need to integrate operations or operate the businesses
separately;
o difficulty in obtaining additional financing;
o problems in retaining employees;
o challenges in retaining customers;
o potential adverse effects on operating results; and
o unanticipated costs relating to the operation of each of the
businesses.
If we are unable to sell our computer business and discontinue these
operations, we may incur costs and expenses relating to the discontinuation of
operations, the termination of some of our employees and the termination of
certain contracts, including our leases. These costs could reduce our available
cash and our profitability and could adversely affect our business and
operating results.
We have commenced discussions relating to the sale of our computer
business. However, we have no agreements or arrangements for the sale of our
computer business. We cannot assure that we will be able to sell our computer
business on terms favorable to us or at all or that there will not be
substantial unanticipated costs associated with such sale.
16
VERTICAL FINANCIAL HOLDINGS WILL CONTROL IAT AFTER THE ACQUISITION.
As of the date of this proxy statement/prospectus, Vertical Financial
Holdings beneficially owned approximately 23.5% of the outstanding shares of
our common stock, including shares beneficially owned by entities in which
Vertical Financial Holdings owns equity interests. In connection with the
acquisition of Petrini, Spigadoro will receive approximately 36,125,130 shares
of our common stock. Entities affiliated with Vertical Financial Holdings have
economic ownership of approximately 76% of the outstanding common stock of
Spigadoro and have the power to vote approximately 91% of the outstanding
common stock of Spigadoro. As a result, following the acquisition, Vertical
Financial Holdings and entities affiliated with Vertical Financial Holdings,
will have the ability to vote or direct the vote of approximately 56.7% of our
outstanding common stock and will control the actions that require stockholder
approval, including:
o the election of our directors; and
o the outcome of mergers, sales of assets or other corporate transactions
or matters submitted for stockholder approval.
Under the terms of the acquisition, Spigadoro or its assignee will have the
right to nominate up to a majority of the members for election to our Board of
Directors so long as Spigadoro, its affiliates and Carlo Petrini continue to
own, in the aggregate, a specified number of our securities.
BECAUSE WE ARE A HOLDING COMPANY, OUR ABILITY REPAY THE INDEBTEDNESS
ASSUMED IN THE ACQUISITION WILL DEPEND UPON THE LEVEL OF OUR CASH RESERVES, THE
DISTRIBUTION OF FUNDS FROM PETRINI AND OUR ABILITY TO OBTAIN SUFFICIENT
ADDITIONAL FUNDS.
We are a holding company and substantially all of our operating results
will be derived from the operations of Petrini and other businesses that we may
acquire in the future. In connection with the acquisition, we are assuming
approximately $20 million of short term indebtedness of Spigadoro,
approximately $12.5 million of which will be convertible into shares of our
common stock. All of the assumed indebtedness will become payable during 2000.
Our ability to repay the assumed indebtedness will depend on the level of our
cash reserves, including any proceeds from the sale of our personal computer
business, and the operating results of Petrini and the distribution of
sufficient funds from Petrini to us. The ability of Petrini to make such funds
available to us may be restricted by the terms of Petrini's indebtedness and by
applicable law. If our available working capital, together with any
distributions from Petrini, are not sufficient to enable us to repay our
indebtedness, we will be required to obtain additional debt or equity financing
for the repayment of this debt. One of the promissory notes to be issued by us
will be denominated and payable in Lire in the principal amount of
12,050,000,000 Lire or approximately $6.4 million. Although the maximum amount
payable by us under this note is capped at $7.0 million, the amount to be paid
by us under this note will be subject to fluctuations in the value of the Lire
against the US Dollar.
OUR SUBSTANTIAL DEBT MAY ADVERSELY AFFECT OUR ABILITY TO OBTAIN ADDITIONAL
FUNDS AND INCREASES OUR VULNERABILITY TO ECONOMIC OR BUSINESS DOWNTURNS.
Our indebtedness as of September 30, 1999 aggregated approximately $3.2
million, and on a pro forma basis after giving effect to the Petrini
acquisition, would have aggregated approximately $51.3 million. Accordingly, we
are subject to the risks associated with substantial indebtedness, including:
o we have less funds available for operations, future business
opportunities and other purposes;
o our ability to obtain additional financing to repay our debt and for
acquisitions, working capital, capital expenditures, general corporate
or other purposes may be impaired;
o it may be more difficult and expensive to obtain additional funds, if
available at all;
o we are more vulnerable to economic downturns, less able to withstand
competitive pressures and less flexible in reacting to changes in our
industry and general economic conditions; and
o if we default under any of our debt instruments or if our creditors
demand payment of a portion or all of our indebtedness, we may not have
sufficient funds to make such payments.
17
Any of these risks may materially adversely affect our operations and
financial condition and adversely affect our stock price.
A portion of our debt following the acquisition will be secured by our
assets. If we default under the debt instruments secured by our assets, such
assets would be available to the creditor to satisfy our obligations to the
creditor before any payment could be made to our stockholders.
SOME OF OUR OFFICERS AND DIRECTORS WILL RECEIVE CERTAIN BENEFITS IN THE
ACQUISITION.
In considering the recommendation in favor of the proposals described in
this proxy statement/
prospectus, you should be aware that certain of our officers and directors may
be deemed to have conflicts of interest with respect to the acquisition.
o Jacob Agam, our Chairman of the Board and Chief Executive Officer, is
the Chairman of the Board of Spigadoro and Vertical Financial Holdings.
Vertical and its affiliates will have the ability to vote approximately
56.7% of our common stock following the acquisition.
o Under the terms of the acquisition, Mr. Agam will be entering into an
amended employment agreement under which Mr. Agam will serve as our
Chied Executive Officer and will receive a significant increase in his
annual salary following the acquisition.
o Marc S. Goldfarb, one of our directors, is President and Managing
Director of Orida Capital USA, the U.S. representative of the Vertical
Group, and owns approximately 1% of the outstanding shares of common
stock of Spigadoro.
o Under the terms of the acquisition, Spigadoro or its assignee will have
the right to nominate members for election to our Board of Directors, so
long as Spigadoro, its affiliates and Carlo Petrini continue to own a
specified number of our securities.
o Mr. Agam will continue as our Chairman of the Board and Mr. Goldfarb
will continue as one of our directors following the acquisition.
The Special Committee and our Board of Directors considered these
interests, together with other relevant factors, in deciding to recommend that
you approve the proposals described in this proxy statement/prospectus.
WE HAVE AGREED TO ISSUE A FIXED NUMBER OF SHARES EVEN THOUGH OUR STOCK
PRICE MAY FLUCTUATE.
Upon completion of the acquisition, all of the outstanding shares of
Petrini common stock will be exchanged for an aggregate of up to 48,366,530
shares of our common stock. The number of shares to be issued is fixed and will
not be adjusted despite any increase or decrease in the price of our common
stock. The price of our common stock at the time the acquisition is completed
may be higher or lower than its price on the date of this document or on the
date of the special meeting. Certain factors may affect the prices of our
common stock, including:
o changes in the business, operations or prospects of IAT or Petrini;
o changes in market assessments of our or Petrini's business, operations
or prospects or in market assessments of the likelihood that the
acquisition will be completed;
o regulatory considerations; and
o general market and economic conditions.
Most of these factors are beyond our control. Since the acquisition will
be completed only after all the conditions to the acquisition are satisfied,
including the approval by our stockholders of certain of the proposals
described in this proxy statement/prospectus, there is no way to be sure that
the price of our common stock on the date of the special meeting will be
indicative of the price of our common stock at the time the acquisition is
completed. Thus, at the time of the special meeting, our stockholders will not
know the exact value of the shares that we will be issuing in connection with
the acquisition. We urge you to obtain current market quotations for our common
stock.
18
Furthermore, no assurances can be given to Spigadoro of the value of the
shares of our common stock to be issued in the acquisition. After the
completion of the acquisition, the price of our common stock is likely to
change based upon changes in the business, operations and prospects of the
combined business, general market and economic conditions, regulatory
considerations and other factors beyond our control.
BECAUSE SPIGADORO IS A HOLDING COMPANY, OUR ABILITY TO RECOVER FOR AN
INDEMNIFICATION CLAIM UNDER THE STOCK PURCHASE AGREEMENT MAY BE LIMITED.
Spigadoro is a holding company whose assets immediately following the
acquisition will consist primarily of the shares of our common stock issued to
it in the acquisition. Spigadoro is not restricted from distributing such
shares to its stockholders following the acquisition. If a claim for
indemnification arises out of the stock purchase agreement and Spigadoro has
transferred such shares to its stockholders, Spigadoro may not have sufficient
assets to pay a claim for indemnification. In addition, we may not be able to
pursue claims against those stockholders. As a result, a mispresentation by
Spigadoro may result in a material loss to us.
REGULATORY APPROVALS REQUIRED IN CONNECTION WITH THE ACQUISITION MAY BE
DELAYED OR CONDITIONED.
Completion of the acquisition is conditioned on receipt of all material
regulatory consents and approvals, including approval under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. There can be no assurance
that such approvals will be granted on a timely basis, or without materially
adverse conditions.
RISKS RELATING TO OUR BUSINESS FOLLOWING THE ACQUISITION
PETRINI EXPERIENCES FLUCTUATIONS IN ITS OPERATING RESULTS WHICH MAY CAUSE
OUR STOCK PRICE TO FLUCTUATE.
Petrini's results of operations have fluctuated significantly in recent
years and may continue to fluctuate in the future. In 1998, net sales decreased
by approximately 9.7% as compared to 1997. In 1997, net sales decreased by
approximately 7.9% as compared to 1996. A number of factors have caused and may
continue to cause these fluctuations, including:
o price fluctuations for raw materials;
o demand for Petrini's products;
o increased marketing costs;
o pricing and competition;
o the timing and scope of new customer and new product volumes;
o plant expansion or consolidation and equipment upgrade costs; and
o general economic conditions.
Any of these factors may adversely affect Petrini's business which could
materially adversely affect our financial condition. Petrini's results of
operations for any past or interim periods may not be indicative of our future
performance.
OUR OPERATING RESULTS WILL BE ADVERSELY AFFECTED BY CHARGES FROM
ACQUISITIONS.
Because we plan to grow our business through acquisitions, we will likely
incur significant non-cash charges for depreciation and amortization as we
acquire additional businesses. These charges will adversely affect our results
of operations and may result in increased net losses. In connection with our
acquisition of Petrini, we will incur approximately $6.0 million of goodwill.
We intend to amortize this goodwill over 20 years, which will cause us to
record in our financial statements an annual non-cash charge of approximately
$300,000. In addition, if we finance new acquisitions through borrowings, we
will also incur increased interest expense.
19
OUR STRATEGY OF ACQUIRING OTHER COMPANIES FOR GROWTH MAY NOT SUCCEED AND
MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our strategy of growth through acquisitions presents risks that could
materially adversely affect our business and financial performance, including:
o the diversion of our management's attention;
o the assimilation of the operations and personnel of the acquired
business;
o the contingent and latent risks associated with the past operations of
and other unanticipated problems arising in the acquired business;
o the need to expand management, administration, and operational
systems; and
o increased competition for acquisition opportunities and qualified
employees.
We cannot predict whether:
o we will be able to identify suitable acquisition candidates;
o we will be able to acquire additional businesses on terms favorable to
us or at all;
o we will be able to successfully integrate into our business the
operations of any new businesses;
o we will realize any anticipated benefits of completed acquisitions; or
o there will be substantial unanticipated costs associated with new
acquisitions.
Because expansion of Petrini's operations will likely be predominately in
international markets, acquisitions could also involve risks relating to
operating in other foreign countries, including those relating to:
o management of remote operations;
o cultural incompatibilities;
o currency exchange rates; and
o additional legal, tax, accounting and regulatory requirements.
The failure to manage growth effectively may adversely affect Petrini's
business and our financial condition. We are evaluating, and are in preliminary
discussions in connection with, the potential acquisition of assets or equity
of businesses related to Petrini's business. However, we have no agreements or
arrangements with respect to any particular acquisitions and we may not be able
to complete any additional acquisitions on terms favorable to us or at all. If
we are unable to acquire additional businesses, our growth may be reduced.
We intend to issue our securities in connection with future acquisitions.
If businesses we want to acquire will not accept our securities as payment of
all or a portion of the purchase price, we may be unable to make additional
acquisitions, except through the use of cash.
IF WE DO NOT OBTAIN SUFFICIENT ADDITIONAL FUNDS OUR ABILITY TO GROW
THROUGH ACQUISITIONS MAY BE LIMITED.
We will likely require additional funds for acquisitions and integration
and management of acquired businesses. We have no commitments or arrangements
for any additional funds. We cannot predict whether additional funds will be
available on terms acceptable to us or at all. If we cannot obtain funds when
required, the growth of Petrini's business may be adversely affected which
could materially adversely affect our financial condition. If we issue our
securities to obtain additional funds, or in our acquisitions, our existing
stockholders will experience dilution.
THE LOSS OF OUR KEY PERSONNEL MAY ADVERSELY AFFECT OUR BUSINESS.
Because we have a limited number of management personnel, we are dependent
on our executive officers, including Jacob Agam, our Chairman of the Board and
Chief Executive Officer, and following the
20
Petrini acquisition, Lucio De Luca, our Chief Operating Officer, as well as
other principal members of our management team and the management team at
Petrini. Mr. Agam will be providing services to us on a part-time basis. We
cannot assure that any of our management personnel, including Mr. Agam and Mr.
De Luca, will continue to devote sufficient time to our business. The loss of
services of, or a material reduction in the amount of time devoted to our
business by, these individuals could adversely affect Petrini's business and
our financial condition. Competition for qualified executive officers is
intense. In addition, if we are unable to attract, retain and motivate other
highly skilled employees, Petrini's business and prospects and our financial
condition could be materially adversely affected.
INDUSTRY RISKS
INTENSE COMPETITION IN THE PASTA AND ANIMAL FEED INDUSTRIES MAY ADVERSELY
AFFECT OUR OPERATING RESULTS.
Petrini operates in a highly competitive environment and competes with
numerous well established national, regional and foreign companies, as well as
many smaller companies in:
o the production, marketing and distribution of animal feed and pasta
and flour products;
o the procurement of raw materials;
o the development and improvement of animal feed and the design of
optimal animal nutrition and genetic breeding programs; and
o the development, improvement and expansion of pasta and flour products
and product lines.
As compared to Petrini, many of Petrini's competitors have:
o significantly longer operating histories and broader product lines;
o significantly greater brand recognition; and
o greater production capacity and financial, management and other
resources.
As a result, Petrini's competitors may be able to:
o adapt more quickly to new or emerging production technologies and
product development;
o adapt more quickly to changing market conditions and customer
preferences;
o devote greater resources to the promotion and sale of their products;
and
o respond more effectively to competitive pressures.
Petrini's competitive environment depends to a significant extent on the
industry capacity relative to demand for pasta and animal feed products. We
believe that the worldwide pasta and animal feed industries have significant
excess production capacity. This excess capacity has given rise to intense
competition for sales, often focused on product pricing. A variety of discount
programs are used by industry participants to obtain market share. The effect
of such competition has been to put pressure on profit margins and to involve
Petrini in vigorous competition to obtain and retain product customers.
Significant industry capacity levels above demand for pasta and animal feed
products may materially adversely affect Petrini's business which could
adversely affect our financial condition.
Petrini's direct competitors in its pasta business include Barilla, the
industry leader in Italy, as well as approximately 45 other Italian pasta
producers. In the United States, Petrini also competes with:
o Large United States based multi-national companies such as:
o New World Pasta with brands such as San Giorgio (Registered
Trademark) and Ronzoni (Registered Trademark) ; and
o Borden, Inc. with brands such as Prince (Registered Trademark) and
Creamette (Registered Trademark) ; and
o Regional U.S. producers of retail and institutional pasta.
21
The animal feed industry is highly fragmented, with the bulk of the
industry consisting of national and regional competitors, including
cooperatives. Petrini believes its largest competitors in Italy are:
o in Northern Italy: Purina Italia S.p.A., Raggio di Sole Mangimi S.p.A.
and Veronesi Finaziaria S.p.A.; and
o in Central-Southern Italy: Progeo S.c.a.r.l., F. lli Martini & C.
S.p.A. and Mignini S.p.A.
However, as animal breeders become larger they tend to integrate their
business by acquiring or constructing feed production facilities. As a result,
the available market for commercial feed may become smaller and competition may
increase, which could materially adversely affect Petrini's business and our
financial condition.
PETRINI'S FINANCIAL RESULTS MAY BE AFFECTED BY INCREASES IN THE COSTS OF
RAW MATERIALS AND PACKAGING.
Petrini's financial results depend to a large extent on the cost of raw
materials and packaging and Petrini's ability to pass along to its customers
increases in these costs. Historically, market prices for commodity grains and
food stocks have fluctuated in response to a number of factors, including:
o change in the agricultural policies of the European Community;
o changes in United States government farm support programs;
o changes in international agricultural and trading policies;
o weather conditions during the growing and harvesting seasons;
o level of international stocks in storage;
o currency fluctuations;
o shipping costs;
o speculations on commodities; and
o other factors over which Petrini has no control.
Lower prices for durum wheat and the resulting semolina, when combined
with excess production capacity, has placed downward pressure on pasta prices
and has intensified competition in the pasta industry. In the event costs for
raw materials increase, Petrini would be required to increase sales prices for
its products in order to avoid margin deterioration. However, because there is
significant competition in the pasta and animal feed industries in Italy,
Petrini may not be able to increase prices without losing market share. If
Petrini is unable to increase prices in response to increased raw material
costs, Petrini's business and our financial condition may be materially
adversely affected.
PETRINI'S BUSINESS MAY BE ADVERSELY AFFECTED BY, AND PETRINI MAY BE
SUBJECT TO LEGAL LIABILITY FOR, DEFECTS IN ITS PRODUCTS.
The sale of food products for human consumption involves the risk of
injury to consumers and, to a lesser extent, the sale of animal feed products
involves the risk of injury to animals as a result of:
o tampering by unauthorized third parties;
o product contamination or spoilage;
o the presence of foreign objects, substances, chemicals, and other
agents; or
o residues introduced during the growing, storage, handling or
transportation phases.
We cannot assure that consumption of Petrini's products will not cause a
health-related illness in the future or that it will not be subject to claims
or lawsuits relating to such matters. There can be no assurance that Petrini
will not incur claims or liabilities for which it is not insured or that exceed
the amount of its insurance coverage.
22
PETRINI IS DEPENDENT UPON INDEPENDENT AGENTS AND DISTRIBUTORS TO MARKET
ITS PRODUCTS.
Petrini markets and distributes a substantial portion of its products
through a network of independent agents and distributors and the loss of
certain key agents or distributors could adversely affect its business. In
addition to Petrini's products, the independent agents and distributors selling
Petrini's products typically sell other food products manufactured by third
parties. The performance of Petrini's agents and distributors is outside
Petrini's control and it cannot predict whether such agents and distributors
will continue to market Petrini's products. If Petrini is unable to attract,
retain and motivate other highly skilled agents and distributors, its business
could be materially adversely affected. In addition, Petrini's arrangements
with several of its agents are governed by a national collective labor
agreement. If Petrini terminates any of these relationships, Petrini would be
required to pay an indemnity which could, in the aggregate, be material to
Petrini's business.
PETRINI'S BUSINESS MAY BE ADVERSELY AFFECTED BY ITS DEPENDENCE UPON ITS
SUPPLIERS.
Petrini requires a high volume of raw materials to produce its products.
Petrini's inability to obtain these raw materials in a timely manner could
adversely affect Petrini's business and our financial condition. Petrini does
not have any long term contracts with its suppliers. The availability of such
raw materials is affected by factors such as:
o demand for raw materials, including durum wheat;
o weather conditions during the growing and harvesting seasons; and
o political and economic downturns in the countries in which such
suppliers are located.
PETRINI'S BUSINESS MAY BE ADVERSELY AFFECTED BY THE POTENTIAL RELOCATION
OF ITS LARGEST PRODUCTION FACILITY.
Petrini's largest plant for the production of animal feed and its only
plant for the production of pasta may need to be relocated due to a rezoning of
the land on which these plants are located. These plants are located on land
owned by Petrini in Bastia Umbra in a region of Italy called Regione Umbria. In
1996, the municipality of Bastia Umbra initiated a rezoning proceeding to
reclassify this land as residential and public park space. The municipality has
since finalized its rezoning plan, which is now being considered by the
government of the Regione Umbria which must also approve the plan before it can
become effective. Unless the Regione Umbria amends the rezoning plan or Petrini
is able to appeal the decision, Petrini will be required to:
o terminate operations at this plant;
o possibly terminate the employees who work at this plant; and
o relocate these operations to a new location.
Although Petrini does not expect a decision to be finalized in the near
future and would be compensated for the fair value of the property, relocation
of these operations to a new location could materially and adversely affect its
business operations and our financial condition as a result of:
o operational problems;
o production interruptions;
o quality control concerns;
o delays in shipments; and
o costs and other risks associated with the relocation of these
operations and the possible hiring of new employees.
PETRINI IS DEPENDENT UPON THIRD PARTIES FOR THE DELIVERY OF ITS RAW
MATERIALS AND PRODUCTS.
Petrini's raw materials, including durum wheat and commercialized
products, are shipped to its production facilities from different collection
centers by third parties. Petrini's finished products are then
23
transported by third parties to its customers in Italy and elsewhere. An
extended interruption in Petrini's ability to ship raw materials to its
facilities, or finished products from its facilities, could adversely affect
its business which could materially adversely affect our financial condition.
If Petrini were to experience an interruption due to strike, natural disasters
or otherwise, it may not be successful in transporting such materials or
finished products in a timely and cost-effective manner.
PETRINI'S BUSINESS MAY BE ADVERSELY AFFECTED BY AN INABILITY TO
SUCCESSFULLY MANAGE ITS PRODUCTION AND INVENTORY.
Most of Petrini's customers use inventory management systems which track
sales of particular products and rely on reorders being rapidly filled by
suppliers to meet consumer demand rather than on large inventories being
maintained by these customers. These systems increase pressure on Petrini to
fill orders promptly and thereby shift a portion of the customer's inventory
management cost to Petrini. Petrini's production of excess inventory to meet
anticipated retailer demand could result in markdowns and increased inventory
carrying costs for Petrini. In addition, if Petrini underestimates the demand
for its products, it may be unable to provide adequate supplies of products to
retailers in a timely fashion, and may consequently lose sales.
PETRINI'S BUSINESS MAY BE ADVERSELY AFFECTED BY ITS LIMITED PROPRIETARY
RIGHTS OR BY LEGAL ACTIONS TO ENFORCE OR DEFEND ITS PROPRIETARY RIGHTS.
Petrini holds trademarks that are of fundamental value and importance for
its business. Although these trademarks have been registered in Italy and
certain other countries in which its products are sold, Petrini may not be able
to prevent misappropriation of its trademarks or protect its other intellectual
property.
The laws of some foreign countries where Petrini sells its products may
not protect Petrini's proprietary rights to the same extent as do laws in the
United States. Petrini's inability to protect its proprietary rights could
materially adversely affect Petrini's operations which may adversely affect our
financial condition. Litigation also may be necessary to:
o enforce Petrini's intellectual property rights;
o protect Petrini's trademarks and other proprietary rights;
o determine the scope and validity of such intellectual property rights;
and
o defend claims of infringement of other parties' proprietary rights.
Litigation may not be successful, could result in substantial costs and
diversion of management time and resources and could materially adversely
affect Petrini's operations which may adversely affect our financial condition.
In the event a third party brings an infringement claim against Petrini,
such party could secure a judgment awarding substantial damages, as well as
injunctive or other equitable relief. This relief could effectively block
Petrini's ability to make, use, sell, distribute or market its products. If
Petrini fails to obtain a necessary license or other right to proprietary
rights held by third parties, it could preclude the sale, manufacture or
distribution of Petrini's products and could materially adversely affect our
financial condition.
PETRINI'S BUSINESS MAY BE ADVERSELY AFFECTED IF ITS SYSTEMS ARE NOT YEAR
2000 COMPLIANT.
Computers, software and other equipment utilizing microprocessors that use
only two digits to identify a year in a date field may be unable to process
accurately certain date-based information at or after the year 2000. This is
commonly referred to as the "Year 2000 issue." If Petrini's information
technology and non-information technology systems fail to achieve Year 2000
compliance, it would have to:
o purchase additional hardware and software components to update and
enhance such systems; or
o purchase new systems which are Year 2000 compliant.
24
Petrini cannot predict whether these costs would be material to its
operations and financial condition. The failure of such systems to achieve Year
2000 compliance could result in:
o a slow down of operations;
o production interruptions;
o delays in shipments;
o adverse publicity;
o delays in collecting accounts receivable; and
o delays in processing accounts payable.
As part of Petrini's ongoing effort to modernize its information
technology and non-information technology systems, Petrini has assessed, tested
and modified its systems for the purposes of Year 2000 compliance. Petrini has
also contacted third parties, including key vendors and suppliers, to determine
their readiness.
Achieving Year 2000 compliance is dependent on many factors, some of which
are not completely within Petrini's control. Petrini cannot predict whether it
or its vendors and suppliers will achieve Year 2000 compliance. If such
compliance is not achieved, Petrini has developed a contingency plan which
includes:
o increasing normal inventories of critical supplies prior to December 31,
1999; and
o ensuring that all critical staff are available or scheduled to work
prior to, during and immediately after December 31, 1999.
However, we cannot assure that such contingency plan will be sufficient if
Petrini's systems fail to achieve Year 2000 compliance.
PETRINI'S OPERATIONS ARE SUBJECT TO GOVERNMENT REGULATIONS.
Many aspects of Petrini's operations are subject to government regulations
in Italy and the other countries within which Petrini operates. Such
regulations include those relating to:
o the production, packaging, labeling and marketing of its products;
o price controls;
o currency conversion and repatriation;
o taxation of Petrini's earnings and earnings of its personnel;
o manufacturing, environmental, safety and other regulations relating to
Petrini's operations and the industries in which it operates;
o restrictive labor policies; and
o Petrini's use of local employees and suppliers.
Petrini's operations are also subject to the risk of changes in
international, national, foreign and local laws and policies that may impose
restrictions on it, including trade restrictions, that could have a material
adverse effect on our operations and financial condition. Other types of
government regulation which could, if enacted or implemented, materially and
adversely affect Petrini's business include:
o expropriation or nationalization decrees;
o confiscatory tax systems;
o primary or secondary boycotts or embargoes directed at specific
countries or companies;
o import restrictions or other trade barriers;
o mandatory sourcing rules; and
25
o high labor rate and fuel price regulation.
Petrini cannot determine to what extent its future operations and earnings
may be affected by new legislation, new regulations or changes in or new
interpretations of existing regulations.
RISKS RELATING TO FOREIGN OPERATIONS
PETRINI'S BUSINESS MAY BE ADVERSELY AFFECTED BY RISKS ASSOCIATED WITH
FOREIGN OPERATIONS.
Substantially all of Petrini's revenues are generated from operations in
Italy and, to a lesser extent, in 45 countries throughout the world. Conducting
an international business inherently involves a number of difficulties and
risks, such as:
o currency fluctuations;
o export restrictions;
o compliance with existing and changing regulatory requirements;
o tariffs and other trade barriers;
o difficulties in staffing and managing international operations;
o cultural issues;
o longer payment cycles;
o problems in collecting accounts receivable;
o political instability and economic downturns;
o seasonal reductions in business activity in Europe during the summer
months; and
o potentially adverse tax consequences.
Any of these factors may materially adversely affect Petrini's business
and our financial condition.
PETRINI IS SUBJECT TO A NUMBER OF REGULATORY AND CONTRACTUAL RESTRICTIONS
GOVERNING ITS RELATIONS WITH ITS EMPLOYEES.
Petrini is subject to a number of regulatory and contractual restrictions
governing its relations with its employees, including its management. Petrini's
employment relations in Italy are governed by numerous regulatory and
contractual requirements, including:
o national collective labor agreements; and
o individual employer labor agreements.
These arrangements address a number of specific issues affecting Petrini's
working conditions, including:
o hiring;
o work time;
o wages and benefits; and
o termination of employment.
Petrini will be required to make extraordinary or significant payments in
order to comply with these requirements. The cost of complying with these
requirements may materially adversely affect Petrini's business and our
financial condition. In addition, Petrini's arrangements with several of its
agents who market Petrini's products are governed by a national collective
labor agreement. In the event Petrini were to terminate any of these relations,
Petrini would be required to pay an indemnity which could, in the aggregate,
materially adversely affect Petrini's business and our financial condition.
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PETRINI'S RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY FOREIGN
CURRENCY FLUCTUATIONS AND TRANSITION TO THE EURO.
Historically, a substantial portion of Petrini's revenues has been
denominated in the Italian Lire. Petrini's results of operations are subject to
fluctuations in the value of the Italian Lire, and will be subject to
fluctuations in the value of the Euro, against the US Dollar and other
currencies, accordingly fluctuations in exchange rates could materially
adversely affect Petrini's business and our financial condition.
On January 1, 1999, certain members of the European Union, including
Italy, introduced a single currency, the Euro. During the transition period
ending January 1, 2002, European Monetary Union (EMU) countries will have the
option of settling transactions in local currencies or in the Euro. Petrini has
not yet determined when it intends to convert to the Euro. The conversion to
the Euro will result in increased costs to Petrini related to updating
operating systems, review of the effect of the Euro on its contracts and
updating catalogues and sales materials for its products. In addition, adoption
of the Euro will limit the ability of an individual EMU country to manage
fluctuations in the business cycles through monetary policy.
INVESTORS MAY NOT BE ABLE TO ENFORCE JUDGMENTS AGAINST US OR OUR OFFICERS
AND DIRECTORS.
Although we are organized under the laws of the State of Delaware, we are
primarily a holding company which holds stock in entities outside the United
States and all or a substantial portion of our assets are located outside the
United States. In addition, following the acquisition, six of our seven
directors and all of our executive officers will be residents of foreign
countries and all or a substantial portion of the assets of such directors and
officers will be located outside of the United States. As a result, it may not
be possible for investors to:
o effect service of process upon most of our directors and officers; or
o enforce judgments of U.S. courts predicated upon the civil liability
provisions of U.S. laws against our directors' and officers' assets.
The market price of our common stock may be adversely affected by the
difficulty for investors to enforce judgments of U.S. courts.
ANTI-TAKEOVER PROVISIONS MAY ADVERSELY AFFECT OUR STOCKHOLDERS.
We are subject to a Delaware statute regulating business combinations that
could discourage, hinder or preclude an unsolicited acquisition of IAT and
could make it less likely that stockholders receive a premium for their shares
as a result of any such attempt. In addition, our Board of Directors may issue,
without stockholder approval, shares of preferred stock. The preferred stock
could have voting, liquidation, dividend or other rights superior to those of
the common stock. Therefore, if we issue preferred stock, your rights as a
common stockholder may be adversely affected. These factors could depress our
stock price.
STOCK AND MARKET RISKS
OUR STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET IF WE DO NOT
MEET THE LISTING CRITERIA FOLLOWING THE PETRINI ACQUISITION.
As a result of the acquisition, we may be required to meet the initial
listing requirements of the Nasdaq National Market in order for our common
stock to continue to be included for quotation on the Nasdaq National Market.
If we are unable to satisfy any of those listing requirements, our stock may be
delisted from the Nasdaq National Market. In addition to certain subjective
standards, the initial listing requirements include the following:
o net tangible assets of at least $6 million;
o pretax income of at least $1 million for two of the last three fiscal
years;
o public float of at least $8 million; and
27
o a minimum bid price for our common stock of $5.00 per share.
Based upon the recent price of our common stock, we would not meet the
minimum bid price requirement. In addition, we may not meet some of the other
quantitative initial listing requirements.
If our stock is delisted from the Nasdaq National Market, the liquidity of
our stock could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of transactions,
reduction in coverage by security analysts and the news media and lower prices
for our common stock than might otherwise be attained.
We cannot assure that we will meet the criteria for initial listing on the
Nasdaq National Market if required following the acquisition. Even if we meet
the initial listing requirements, we will be subject to the continued listing
requirements and if we are unable to satisfy these requirements, our stock may
be delisted from the Nasdaq National Market.
If our stock is delisted from the Nasdaq National Market, trading, if any,
in our stock would thereafter be conducted:
o on the Nasdaq SmallCap Market, assuming we meet the requirements for
initial listing on the Nasdaq SmallCap Market, some of which we may not
currently meet, including the minimum bid price requirement;
o on the National Association of Securities Dealers, Inc.'s "Electronic
Bulletin Board"; or
o in the over the counter market in the "pink sheets."
If our stock was delisted from Nasdaq National Market and could not be
quoted on Nasdaq SmallCap Market, it could become subject to Rule 15g-9 under
the Exchange Act, which imposes additional sales practice requirements on
broker-dealers which sell such securities to persons other than established
customers and "accredited investors" (generally, individuals with net worth in
excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
with their spouses). For transactions covered by this rule, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale.
Consequently, such rule may adversely affect the ability of broker-dealers to
sell our common stock and may adversely affect the ability of stockholders to
sell any of the shares of common stock in the secondary market.
WE DO NOT INTEND TO PAY DIVIDENDS TO OUR STOCKHOLDERS.
We have not paid any cash dividends on our common stock and do not expect
to do so in the foreseeable future.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD ADVERSELY
AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE NEW FUNDS.
Sales of shares of stock by existing stockholders could have an adverse
effect on our stock price. Upon closing of the acquisition of Petrini, we will
have approximately 60,700,000 shares of common stock outstanding, of which
approximately 8,000,000 shares will be eligible for sale without restriction.
The remaining shares are subject to the resale provisions of Rule 144 and Rule
145 under the Securities Act. We intend to register for resale the shares of
our common stock to be issued in the acquisition and the shares of our common
stock issued and to be issued upon conversion of our convertible debenture. As
a result, the market price of our common stock could decline as a result of
sales of substantial amounts of our common stock in the public market or the
perception that substantial sales could occur.
THE EXERCISE OF REGISTRATION RIGHTS BY OUR STOCKHOLDERS MAY ADVERSELY
AFFECT OUR STOCK PRICE.
The holders of a substantial number of shares of our common stock and
securities exercisable or convertible into shares of our common stock have
demand and piggy-back registration rights with respect to their respective
securities. Sales of the shares offered by our stockholders, or the possibility
of such sales, in the public market may adversely affect our stock price. The
exercise of registration rights by our other stockholders may further adversely
affect our stock price.
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ADDITIONAL SHARES OF OUR COMMON STOCK MAY BE ISSUED IF OPTIONS OR WARRANTS
ARE EXERCISED OR THE DEBENTURE OR PREFERRED STOCK ARE CONVERTED, CAUSING
DILUTION TO OUR STOCKHOLDERS.
We have outstanding:
o warrants to purchase an aggregate of approximately 2,800,000 shares of
common stock;
o Series B Convertible preferred stock which is convertible into 198,255
shares of common stock;
o the remaining portion of our Series A convertible debenture which is
convertible into 578,763 shares of our common stock and which will be
converted upon the closing of the acquisition if stockholder approval
for such issuance is obtained as described in this proxy statement/
prospectus; and
o options to purchase approximately 750,000 shares of our common stock.
Following the acquisition, we will also have convertible notes outstanding
which will be convertible into approximately 5,000,000 shares of our common
stock at the conversion price of $2.50 as of December 1, 1999. We cannot
predict the actual number of shares of our stock that may be issued upon
conversion of the notes, which depends on:
o the conversion price in effect from time to time during the term of
the promissory notes; and
o the timing of any conversion.
The existence of these securities may adversely affect us or our
stockholders for many reasons, including:
o the market price of our stock may be adversely affected by the
existence of convertible securities;
o if any of these securities are exercised, the value of the stock held
by our stockholders will be diluted if the value of such stock
immediately prior to the exercise of such securities exceeds the
exercise price;
o these securities give the holders the opportunity, at nominal cost, to
profit from a rise in the market price of our stock; and
o the terms upon which we could issue additional common stock or obtain
additional financing may be adversely affected.
Holders of warrants and options are also likely to exercise them when, in
all likelihood, we could obtain additional capital on terms more favorable than
those provided by the warrants and options.
WE WILL RECORD CHARGES TO OPERATIONS IN THE EVENT SHARES OF OUR STOCK ARE
RELEASED FROM ESCROW.
498,285 shares of common stock were deposited in escrow pursuant to an
escrow agreement in connection with our initial public offering in March 1997.
These shares will be released from escrow to our stockholders who were
stockholders prior to our initial public offering, if, prior to March 31, 2000,
our common stock trades at certain levels for any 30 consecutive trading days,
commencing in April 1999.
In the event of the probable release of the escrow shares, we will
recognize during the period in which the specified revenue levels are probable
of being met or stock levels achieved, a substantial non-cash charge to
operations, equal to the then fair value of these shares. The position of the
Securities and Exchange Commission is that in the event any shares are released
from escrow to stockholders who are our officers, directors, employees or
consultants, we will record a non-cash compensation charge in our financial
statements. We cannot deduct this charge to operations for income tax purposes.
This charge would significantly increase our loss or reduce or eliminate
earnings, if any, at such time.
The recognition of this compensation expense may depress the market price
of our common stock. We cannot predict whether our revenues or our stock price
will attain the targets that would enable the shares to be released from
escrow.
29
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this document that are subject to
risks and uncertainties. These statements are based on the beliefs and
assumptions of our management and on information currently available to our
management. Forward-looking statements include the information concerning
possible or assumed future results of our operations set forth under "Summary,"
"The Acquisition--Background of the Acquisition," "--Recommendations of the
Special Committee and the Board," "--Opinion of Financial Advisor" and
"Financial Information--Unaudited Pro Forma Condensed Consolidated Financial
Statements," and statements preceded by, followed by or that include the words
"believes," "expects," "anticipates," "intends," "plans," "estimates" or
similar expressions.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and stockholder values
of the combined company following the acquisition may differ materially from
those expressed in these forward-looking statements. Many of the factors that
will determine these results and values are beyond our ability to control or
predict. Important factors currently known to our management that could cause
actual results to differ materially from those in forward-looking statements
include, but are not limited to, the risks set forth under "Risk Factors."
Stockholders are cautioned not to put undue reliance on any forward-looking
statements. In addition, we do not have any intention or obligation to update
forward-looking statements after we distribute this proxy statement/prospectus,
even if new information, future events or other circumstances have made them
incorrect or misleading. For those statements, we are relying on the protection
of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
THE SPECIAL MEETING
GENERAL
This proxy statement/prospectus is being furnished to our stockholders in
connection with the solicitation of proxies by our Board of Directors for use
at the special meeting of our stockholders to be held on December 22, 1999, at
the Waldorf Astoria, 301 Park Avenue, New York, New York 10022, commencing at
10:00 a.m., local time, and at any adjournment or postponement thereof.
This proxy statement/prospectus, the Notice of the Special Meeting and the
form of proxy for use at the special meeting are first being mailed to our
stockholders on or about December 6, 1999.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the special meeting, our stockholders will consider and vote on:
o A proposal to approve the issuance of an aggregate of up to 48,366,530
shares of our common stock, subject to adjustment if anti-dilution
provisions are triggered, in connection with the acquisition of all of
the outstanding shares of capital stock of Petrini. A copy of the stock
purchase agreement related to the acquisition is attached as annex A to
this proxy statement/prospectus;
o A proposal to amend our Amended and Restated Certificate of
Incorporation to increase the number of shares of our common stock that
we are authorized to issue from 50 million shares to 100 million shares.
The first proposal is conditioned upon approval of this proposal so that
we have enough authorized shares of common stock available for issuance
in the acquisition. A copy of the proposed amendment is attached as
annex C to this proxy statement/prospectus;
o A proposal to amend our Amended and Restated Certificate of
Incorporation to change the name of IAT Multimedia, Inc. to Spigadoro,
Inc. A copy of the proposed amendment is attached as annex D to this
proxy statement/prospectus;
o A proposal to approve our 1999 Stock Option Plan, a copy of which is
attached as annex E to this proxy statement/prospectus;
o A proposal to approve the issuance of 578,763 shares of our common
stock in connection with the conversion of our convertible debenture;
and
30
o Such other business as may properly come before the special meeting or
any adjournment or postponement of the special meeting.
RECORD DATE; VOTE REQUIRED; VOTING AT THE SPECIAL MEETING
Our Board of Directors has fixed December 1, 1999 as the record date for
determination of our stockholders entitled to notice of and to vote at the
special meeting. Accordingly, only holders of our common stock of record at the
close of business on the record date will be entitled to notice of and to vote
at the special meeting. Each holder of record of our common stock on the record
date is entitled to cast one vote per share, exercisable in person or by a
properly executed proxy, at the special meeting. As of the record date, there
were 11,748,551 shares of our common stock entitled to vote.
One-third of the outstanding shares entitled to vote on any matter and
represented at the special meeting in person or by proxy will constitute a
quorum. Assuming a quorum is present, the affirmative vote of a majority of the
shares of our common stock so represented and entitled to vote, excluding
broker non-votes, is required to approve each of the proposals. Abstentions and
broker non-votes are counted for purposes of determining the presence or
absence of a quorum for the transaction of business. If a stockholder, present
in person or by proxy, abstains on any matter, the stockholder's shares will
not be voted on such matter. Thus, an abstention from voting on any matter has
the same legal effect as a vote "against" the matter, even though the
stockholder may interpret such action differently.
As of December 1, 1999, our directors, executive officers and principal
stockholders, excluding JNC, had the power to vote approximately 34.3% of the
outstanding shares of our common stock, and they have advised us that they
intend to vote in favor of each of the proposals. In addition, JNC, the holder
of our Series A convertible debenture and one of our principal stockholders,
owns approximately 15.9% our outstanding common stock. JNC has agreed to vote
in favor of each of the proposals and has given Jacob Agam, our Chairman of the
Board and Chief Executive Officer, an irrevocable proxy to vote JNC's shares at
the special meeting. See "Description of Capital Stock."
VOTING OF PROXIES
All of our stockholders who are entitled to vote and are represented at
the special meeting by properly executed proxies received prior to or at the
special meeting and not duly and timely revoked, will be voted at the special
meeting in accordance with the instructions indicated in such proxies. If no
instructions are indicated, such proxies will be voted "FOR" approval and
adoption of each of the proposals.
We are not aware of any matters expected to be presented at the special
meeting other than as described in our Notice of Special Meeting. However, if
any other matters are properly presented at the special meeting for
consideration, the persons named in the enclosed form of proxy will have
discretion to vote on such matters in accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by filing with
our Secretary before the taking of the vote at the special meeting, a written
notice of revocation bearing a later date than the date of the proxy or a
later-dated proxy relating to the same shares, or by attending the special
meeting and voting in person. In order to vote in person at the special
meeting, stockholders must attend the special meeting and cast their votes in
accordance with the voting procedures established for the special meeting.
Attendance at the special meeting will not in and of itself constitute a
revocation of a proxy. Any written notice of revocation or subsequent proxy
must be sent so as to be delivered at or before the taking of the vote at the
special meeting as follows:
IAT Multimedia, Inc.
70 East 55th Street
24th Floor
New York, New York 10022
Attn: Secretary
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IAT stockholders who require assistance in changing or revoking a proxy
should contact Klaus Grissemann, at the address or phone numbers provided
elsewhere in this proxy statement/prospectus.
SOLICITATION OF PROXIES
We are responsible for the cost of soliciting proxies for the special
meeting, including the costs of filing, printing and mailing this proxy
statement/prospectus. In addition to solicitation by mail, proxies may be
solicited by our directors, officers and employees in person or by telephone,
telegram or other means. These persons will receive no additional compensation
for solicitation of proxies, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Arrangements will also be made
by us with custodians, nominees and fiduciaries for forwarding proxy
solicitation materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and we will reimburse such entities for
reasonable expenses incurred in connection with such activity.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
The Special Committee and our Board of Directors have determined that the
terms of the acquisition are fair to, and in the best interests of, us and our
stockholders. Accordingly, the Special Committee and our Board of Directors
recommend that our stockholders vote FOR the issuance of our common stock under
the terms of the acquisition. The Board of Directors also recommends that our
stockholders vote FOR each of the other proposals.
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THE ACQUISITION
BACKGROUND OF THE ACQUISITION
In pursuing our strategy for enhancing stockholder value, we regularly
consider opportunities for acquisitions, joint ventures and other strategic
alliances.
During the first quarter of 1999, Jacob Agam, our Chairman of the Board
and Chief Executive Officer, Klaus Grissemann, our Chief Financial Officer and
one of our directors, and other members of the Board of Directors held several
informal meetings to review our business prospects and our ability to expand
our distribution capabilities through strategic business combinations with
other computer companies. During the second and third quarters of 1999, our
management continued to actively evaluate our ability to consummate strategic
acquisitions or business combinations in the computer business that would
expand our business, improve our distribution capabilities and increase our
profit margins and that would be a good fit for our business strategy and would
leverage our existing assets. During 1999, our management evaluated
approximately ten computer and computer related companies, including computer
assemblers, system integrators and distributors, and several non-computer
related business opportunities. Extensive conversations were held with many of
these potential acquisition or merger candidates. However, all of the
acquisition candidates we evaluated either did not complement our existing
business, did not provide any potential synergies with our existing operations,
or could not be obtained at valuations that management considered attractive.
As a result of these discussions, our management grew concerned that there were
few significant opportunities to make acquisitions in our industry that would
enhance our operating performance. In addition, due to the low operating
margins typical of the personal computer business and our inability to identify
appropriate acquisition candidates that would enable us to achieve the critical
mass necessary to operate profitably within our industry, our management began
to develop concerns regarding our ability to compete effectively against larger
entities within the industry. This raised doubts about the long-term viability
of operating our current business in the absence of additional acquisitions.
Our management was also concerned about our declining stock price and the
resulting impact upon our ability to attract and retain qualified management,
as well as our ability to utilize our common stock in connection with
acquisitions.
On September 27, 1999, we held our annual meeting of the Board of
Directors during which Mr. Agam reviewed with the Board of Directors the
inquiries received by management regarding our interest in consummating a
business combination with certain companies, which included several computer
and computer related business and several non-computer related businesses.
After discussing the proposals received from computer and computer related
businesses, the Board turned its attention to potential transactions with a
number of non-computer related businesses. Mr. Agam then informed the Board of
Directors that, in addition to these potential transactions, management of IAT
was evaluating a potential transaction with Petrini. Mr. Agam informed the
Board of Directors that Mr. Agam served as the Chairman of the Board of Gruppo
Spigadoro, a Dutch holding company that at such time owned approximately 67% of
the outstanding shares of common stock of Petrini and had an exclusive option
to acquire the remaining 33% of the outstanding common stock. Mr. Agam also
informed the Board of Directors that the Agam Family Trust, of which Mr. Agam
is one of the beneficiaries, indirectly beneficially owned approximately 60% of
the shares of Petrini through an entity that controlled Spigadoro. The Board of
Directors determined that Mr. Agam and Mr. Grissemann should continue to
evaluate and have informal conversations with all of the potential candidates,
including Petrini, and should keep the Board of Directors appraised of the
results of such evaluations and conversations. At that time, the Board of
Directors also authorized our management to begin evaluating and seeking
candidates for the potential sale of our computer business in the event that we
determined to acquire Petrini or another business outside of the personal
computer industry.
On October 12, 1999, members of our management, our accountants and our
legal counsel held a telephonic meeting with representatives of Petrini, its
accountants and legal counsel to discuss the possibilities of a transaction
between us and Petrini and certain legal and accounting issues relating to a
potential transaction.
33
On October 15, 1999, a special meeting of our Board of Directors was held
to evaluate our existing business and several acquisition or merger
opportunities. Mr. Agam presented an overview of our current business and the
likelihood of our ability to successfully execute our business plan within the
personal computer industry. Mr. Agam then reviewed several opportunities for
the Board to consider and evaluate. The Board was concerned with the
performance of our current business, including its low operating margins, and
our inability to successfully complete strategic acquisitions. Further, the
Board was concerned that the market price of our common stock could decline
further as a result of our inability to successfully expand our operations and
increase our marketing and distribution capabilities. The Board determined that
it should consider alternatives that would permit our public stockholders to
maximize the value of our common stock held by them. The Board believed that it
was appropriate for us to pursue the potential transaction with Petrini as the
available alternative most likely to enhance stockholder value.
In arriving at its decision, the Board of Directors considered:
o That to date, we have not been able to execute our strategy of growth
through acquisition of other computer companies and that we have been
unable to sell our current business at an attractive price. Also the
market price of our common stock has not reflected, and for an
indefinite period of time would not reflect, the value that may be
inherent in our business strategy due to a difficult market for small
capitalization stocks such as ours. The Board of Directors believed
that our stock price was having and would continue to have an adverse
impact upon our ability to attract and retain qualified management.
The Board of Directors also believed that our stock price was having
and would continue to have an adverse impact upon our ability to
utilize our common stock in connection with acquisitions and that we
would need to raise more money in order to consummate additional
acquisitions.
o Petrini's experienced management team has demonstrated its ability to
execute its business strategy and to deliver strong operating
performance.
o The likelihood that Petrini would be able to execute its strategy of
consolidation within the food and animal feed sectors in Italy and
Europe. The Board of Directors believed that there are a number of small
to mid-size companies within these sectors that are constrained by
limited capital resources, few operating efficiencies and/or a desire of
the family shareholders/managers for liquidity and are, therefore,
potentially available for acquisition by Petrini.
o The Petrini acquisition could create a larger market capitalization for
our company, and if so, might create the opportunity for increased
research coverage by financial analysts and increased institutional
ownership as well as larger trading "float" that could provide increased
liquidity for our stockholders. As a result, the Board of Directors
believed that we would likely have greater access to debt and equity
financing.
Also at the October 15, 1999 meeting, the Board of Directors formed a
Special Committee of the Board consisting of Erich Weber and Robert Weiss, two
members of the Board of Directors who are not employed by us or any of our
subsidiaries, to evaluate the proposed transaction on behalf of our
stockholders. The Special Committee was authorized to recommend to the full
Board of Directors whether to accept or reject and to negotiate the proposed
transaction with Petrini. In making its determinations, the Special Committee
was authorized to establish such procedures, review such information and engage
such financial advisors and legal counsel as it deemed reasonable and
necessary.
The Special Committee promptly retained independent legal counsel. On
October 18, 1999, the Special Committee and its legal counsel discussed the
procedures to be followed in analyzing the proposed transaction. As part of
this discussion, legal counsel advised the Special Committee as to the Special
Committee's fiduciary responsibilities and the legal principles applicable to,
and the legal consequences of, actions taken by the Special Committee with
respect to the Spigadoro offer.
On October 19, the Special Committee retained Royce Investment Group, Inc.
to serve as financial advisor to the Special Committee to assist in the
negotiation of the terms of the acquisition, and render an opinion to the
Special Committee as to whether the transaction is fair to IAT stockholders
from a financial point of view. The Special Committee chose Royce because of
Royce's experience and previous association and familiarity with IAT.
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During the period from October 19, to November 3, 1999, Royce reviewed
certain financial and other information concerning IAT and Petrini, met with
certain members of IAT's management team and met telephonically with certain
members of Petrini's management to discuss Petrini's business and prospects.
During the period from October 19 to November 3, 1999, Royce and the
Special Committee's legal counsel conducted a due diligence review of Petrini's
business, consulted with IAT's U.S. legal counsel and IAT's Italian legal
counsel regarding the results of the due diligence investigation they were
conducting, and conducted interviews with certain members of Petrini's
management. During that period, at the direction of the Special Committee,
Royce and the Special Committee's legal counsel also negotiated, directly and
through IAT's legal counsel, with representatives of Spigadoro in order to
obtain changes to the financial and legal terms of the transaction.
On October 27, 1999, the Special Committee held a telephonic meeting with
Royce and with the Committee's legal counsel to discuss the preliminary review
and analyses performed by Royce and the results of the due diligence
investigation that had been conducted at that time. A representative of Royce
discussed with the Special Committee Royce's preliminary findings. The Royce
representative reviewed with the Special Committee the proposed financial terms
of the transaction, as they had been negotiated to date, and explained the
terms still needing further clarification and suggested others that might be
negotiated further. The Royce representative also explained the advantages of
IAT entering into this new market versus remaining in the personal computer and
peripherals industry.
On October 29, 1999, the Special Committee, together with a representative
of Royce and the Committee's legal counsel, held a telephonic meeting to
consider further the transaction terms and to review updated due diligence
materials. Legal counsel to the Special Committee reviewed the due diligence
conducted to date. The Royce representative reviewed certain financial
developments.
On October 31, 1999, the Special Committee, together with its legal
counsel and a representative of Royce, held a telephonic meeting to discuss the
proposed transaction. During the meeting, IAT's Italian counsel presented the
results of the due diligence being conducted in Italy and responded to
questions. Also during the meeting, Royce delivered a presentation to the
Special Committee of its findings and gave its oral opinion that the
consideration in the proposed transaction was fair to IAT's stockholders from a
financial point of view. The Committee also obtained financial and legal advice
about the draft stock purchase agreement and various deal documents.
At the conclusion of the October 31 Special Committee meeting, the Special
Committee determined that the acquisition as reflected in the draft form of
stock purchase agreement presented to the Committee was fair and in the best
interests IAT and the IAT stockholders. The Special Committee adopted a
resolution recommending to the full Board of Directors that the Board approve
the transaction and complete and execute a stock purchase agreement. The
Special Committee's recommendation was conditioned on the final form of stock
purchase agreement not containing any changes that were materially adverse to
IAT, and on the remaining pre-execution due diligence not indicating previously
unknown facts that were materially adverse to IAT. The Special Committee agreed
to meet again on November 2, 1999 to review further developments.
On November 2, 1999, the Special Committee, together with a representative
of Royce and its legal counsel, held a telephonic meeting to review additional
financial and due diligence developments and proposed revisions to the form of
stock purchase agreement. After reviewing the additional information, Royce
confirmed its fairness opinion and the Special Committee confirmed its earlier
recommendation to the Board.
Immediately following the Special Committee meeting on November 2, 1999,
the full Board of Directors met to receive the report of the Special Committee.
At this meeting, the Special Committee unanimously recommended to our Board of
the Directors that the Board approve the transaction and complete and execute
the stock purchase agreement. At the Board meeting, Royce also summarized its
presentation given to the Special Committee on October 31, 1999 for the full
Board of Directors (with the appropriate updates arising from the additional
due diligence conducted since the October 31, 1999, meeting) and confirmed its
fairness opinion.
35
After hearing the recommendations of the Special Committee, the Board of
Directors unanimously determined, with Jacob Agam abstaining, that the
acquisition, the stock purchase agreement and the transactions contemplated
thereby were advisable, fair and in the best interests of us and our
stockholders and authorized management to execute a stock purchase agreement
reflecting the terms of the acquisition.
On November 3, 1999, upon completion of negotiations and resolution of the
final terms of the stock purchase agreement, Royce again orally confirmed its
fairness opinion. Subsequently, Royce provided us with a written opinion to
that effect. This opinion is set forth as Annex B to this proxy statement/
On November 3, 1999, the Special Committee met telephonically to review
proposed revisions to the form of stock purchase agreement. The Committee and
their legal counsel reviewed the proposed revisions and the Special Committee
confirmed its earlier recommendation to the Board.
On November 3, 1999, the stock purchase agreement was executed by us and
Spigadoro.
On November 3, 1999, we issued a press release announcing that the Board
of Directors had approved the Petrini acquisition and that we had entered into
a stock purchase agreement with Spigadoro to purchase all of the outstanding
capital stock of Petrini.
RECOMMENDATIONS OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS
The Board of Directors formed the Special Committee, comprised of
disinterested directors, to review and evaluate the proposed acquisition of
Petrini because certain of our directors have an interest in the acquisition.
As discussed above under "-- Background of the Acquisition", the Special
Committee unanimously recommended that the Board approve the acquisition with
Petrini, the stock purchase agreement and related transactions. Following the
unanimous recommendation of the Special Committee, the Board concurred in the
analyses and findings of the Special Committee after considering the same
material factors evaluated by the Special Committee in connection with the
acquisition, as described below. The Board subsequently approved and declared
advisable, fair and in the best interests of us and our stockholders, the
Petrini acquisition, the stock purchase agreement and the transactions
contemplated thereby and recommended that our stockholders approve the issuance
of the shares of our common stock in the acquisition and the other proposals
described in this proxy statement/prospectus. In connection with their
recommendations, the Special Committee and the Board each adopted the analyses
and findings of the Special Committee's financial advisor, Royce. See "--
Opinion of Financial Advisor."
The Special Committee met on seven occasions between October 18, 1999 and
November 3, 1999 to consider the acquisition of the outstanding common stock of
Petrini. The Special Committee was assisted in its deliberations by its
financial advisor, Royce, and its legal counsel. At a meeting held on October
31, 1999, the Special Committee determined that the Petrini acquisition, the
stock purchase agreement and the transactions contemplated thereby were
advisable, fair and in the best interests of our stockholders and recommended
that the full Board approve and adopt the Petrini acquisition, the stock
purchase agreement and the related transactions. The Committee met again on
November 2 and November 3 to consider further revisions to the stock purchase
agreement and on each occasion confirmed its earlier recommendation.
The material factors the Special Committee evaluated in connection with
the Petrini acquisition included those described below.
o Royce's opinion delivered to the Special Committee on October 31, 1999,
which was subsequently confirmed in writing, that the exchange of shares
of our common stock for the common stock of Petrini and the other terms
of the Petrini acquisition were fair to our stockholders from a
financial point of view. Royce's financial analysis and findings were
presented to the Committee on October 31, 1999. The Special Committee
and the Board considered the opinion and the analyses and findings of
Royce in their determination that the Petrini acquisition is fair from
a financial point of view to our stockholders.
o The financial terms of the stock purchase agreement, including an
exchange ratio that provides certainty about the number of shares of our
common stock that will be issued in the acquisition.
36
o The potential positive impact of the acquisition on the general
long-term interests, prospects and objectives of IAT and our
stockholders.
Our Special Committee and Board also considered certain countervailing
factors in their discussions of the acquisition. These factors are described
under "Risk Factors" on page 16 and under "-- Interests of Certain Officers and
Directors in the Acquisition" on page 39. The Special Committee and our Board,
after review of all of the information available to them, determined that the
benefits of the Petrini acquisition and related transactions outweighted the
countervailing factors.
This discussion of the factors considered by the Special Committee and our
Board is not intended to be exhaustive. Because of the wide variety of factors
considered in connection with its evaluation of the acquisition, the Special
Committee and our Board did not find it practicable to, and did not, quantify
or otherwise attempt to assign relative weights to the specific factors
considered in reaching its conclusions. In addition, individual directors may
have given different weights to different factors.
FOR THE REASONS DISCUSSED ABOVE, THE SPECIAL COMMITTEE AND OUR BOARD OF
DIRECTORS HAVE DETERMINED THAT THE TERMS OF THE STOCK PURCHASE AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO AND IN THE BEST INTERESTS OF
IAT AND OUR STOCKHOLDERS. ACCORDINGLY, THE SPECIAL COMMITTEE AND THE BOARD OF
DIRECTORS UNANIMOUSLY RECOMMEND THAT IAT STOCKHOLDERS VOTE FOR THE APPROVAL AND
ADOPTION OF THE STOCK ISSUANCE PROPOSAL. IN ADDITION, THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT IAT STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION
OF THE OTHER PROPOSALS DESCRIBED IN THIS PROXY STATEMENT/PROSPECTUS.
OPINION OF FINANCIAL ADVISOR
General. Pursuant to an engagement letter dated as of October 19, 1999,
the Special Committee retained Royce Investment Group, Inc. to act as its
financial advisor and to render to the Special Committee a fairness opinion in
connection with the Petrini acquisition. On October 31, 1999, Royce delivered
to the Special Committee its opinion, subsequently reduced to writing, to the
effect that, as of such date and based upon and subject to certain factors and
assumptions stated therein, the consideration to be paid in the acquisition to
Spigadoro in the form of our common stock and assumption of liabilities was
fair, from a financial point of view, to the IAT stockholders.
Royce was selected as the Special Committee's financial advisor because of
its previous association and familiarity with IAT's operations and prospects.
Royce is an investment banking firm which regularly engages in the evaluation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements of public and private companies and valuations for corporate and
other purposes. Royce, in the normal course of its business, may hold and
actively trade in our securities for its own account or for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
THE FULL TEXT OF THE ROYCE OPINION, WHICH SETS FORTH A DESCRIPTION OF THE
ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, FACTORS CONSIDERED AND
LIMITATIONS OF THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX B AND IS
INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF THE ROYCE OPINION SET FORTH IN
THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF SUCH OPINION.
The summary set forth below does not purport to be a complete description
of the analyses underlying the Royce opinion or the presentation made by Royce
to the Special Committee. The preparation of a fairness opinion is a complex
analytical process involving various determinations as to the most appropriate
quantitative and qualitative factors to consider in the particular
circumstances and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. In arriving at its opinion, Royce did
not attribute any particular weight to any analysis or factor but instead made
qualitative judgments as to the significance and relevance of each analysis and
factor. Accordingly, Royce's opinion should be considered as a whole and
particular analyses or portions of its judgments, without considering all of
the factors collectively, may create an incomplete view of the process
underlying the Royce opinion. In its analysis, Royce made numerous assumptions
with respect to industry performance, existing market conditions, general
business and economic conditions, the proposed terms of the transaction and
other matters, many of which were beyond the control of IAT and Petrini. Any
estimates
37
contained in arriving at the opinion are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses
relating to the value of businesses do not purport to be appraisals or reflect
the prices at which businesses actually may be sold or the price at which stock
would be bought/sold in a public offering. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty.
We agreed to pay Royce $125,000 for its financial advisory services in
connection with rendering its opinion. In addition, we agreed to reimburse
Royce for its reasonable out-of-pocket expenses, including the reasonable fees
and disbursements of Royce's legal counsel incurred in connection with Royce's
engagement. We also agreed to indemnify Royce and its officers, employees and
agents for certain losses incurred in connection with its engagement, including
certain liabilities under the federal securities laws. Royce has, in the past,
provided financial advisory and investment banking services to IAT unrelated to
the Petrini acquisition, including acting as the lead manager for our initial
public offering in March 1997, for which Royce received usual and customary
compensation, including warrants to purchase 335,000 shares of our common
stock. In addition, Royce may in the future provide investment banking services
to IAT. Prior to 1996, Jacob Agam, the chairman of the Board of IAT and
Spigadoro, introduced Royce to a company and received a finder's fee from the
company for the introduction. Royce does not believe a conflict of interest
exists with respect to its representation of the Special Committee and delivery
of its opinion in connection with the Petrini acquisition.
In arriving at its opinion, Royce assumed and relied upon the accuracy and
completeness of the material and other information provided to it by Petrini
and IAT without assuming any responsibility for independent verification of
such information and further relied upon the assurances of the management of
each of Petrini and IAT that they are not aware of any facts or circumstances
that would make such information inaccurate or misleading. With respect to the
financial projections of Petrini, Royce assumed that such projections were
reasonably prepared on a basis reflecting the best currently available
estimates and judgment of Petrini's management as to the future financial
performance of Petrini and that Petrini will perform substantially in
accordance with such projections. Royce did not make or obtain any evaluations
or appraisals of the assets or liabilities of Petrini or IAT, nor was Royce
furnished with any such evaluations or appraisals.
Royce relied on the information contained in the materials described in
its opinion which describes the acquisition as a result of which, on the date
of the opinion, we would have issued 47,354,465 shares of our common stock to
Spigadoro, subject to adjustment under the anti-dilution provisions in the
stock purchase agreement, in exchange for all of the outstanding shares of
Petrini's common stock. We will also assume approximately $20 million of short
term indebtedness of Spigadoro, all of which is due or convertible into shares
of our common stock on or before December 31, 2000.
In connection with its opinion, Royce reviewed and analyzed, among other
things:
o the stock purchase agreement dated November 3, 1999, by and between
IAT and Spigadoro;
o a draft of this proxy statement/prospectus;
o historical financial statements and pro forma financial statements of
IAT and Petrini;
o documents and reports filed by IAT with the Commission;
o internal information and documents relating to IAT and Petrini provided
to Royce by the respective managements of IAT and Petrini, including
historical financial information;
o the reported prices and trading activity of our common stock;
o the financial and business prospects for IAT alone and for the combined
entity and the industries in which it will compete;
o certain publicly available information concerning certain other
companies engaged in businesses which it believed to be comparable to
Petrini and the trading markets for such other companies' securities;
and
38
o information concerning certain other business transactions which Royce
believed to be relevant to the acquisition.
In addition, Royce had discussions with officers and employees of Petrini
and IAT concerning their respective businesses, operations, assets, financial
conditions and prospects and potential strategic benefits from a combination of
the businesses of Petrini and IAT, and undertook such other studies, analyses
and investigations as Royce deemed appropriate.
In performing its analysis, Royce took into account a number of factors
relating to IAT, Petrini and the acquisition. Among these factors pertaining to
IAT were the current status of its business activity, its current financial
position, including cash balances, and the trading activity of our common stock
before the announcement of the acquisition. In performing its analysis with
respect to Petrini, Royce took into account, among other things, Petrini's
current business opportunities and growth plans and its historical revenue and
financial position.
Royce noted that its opinion was necessarily based upon financial,
economic, market and other conditions as they existed and could be evaluated by
Royce on, and the information made available to it as of, the date of its
opinion. Royce has disclaimed any undertaking or obligation to advise any
person of any change in any fact or matter affecting its opinion that is
brought to its attention after the date of its opinion. Although Royce
evaluated the fairness to the holders of our common stock of the consideration
to be received from Spigadoro, from a financial point of view, it was not asked
to and did not recommend the specific consideration payable in the acquisition,
which was determined through negotiations between IAT and Petrini.
Royce has advised us that the Royce opinion is for the information of the
Special Committee for its use in evaluating the fairness from a financial point
of view to our stockholders of the consideration to be paid in the acquisition
to Spigadoro. The opinion does not constitute a recommendation as to any action
our Board of Directors or any shareholder of IAT should take in connection with
the acquisition or any aspect of the acquisition. The Royce opinion is not an
opinion as to the structure, terms or effect of any aspect of the acquisition
or of any transactions contemplated by the acquisition or as to the merits of
the decision to enter into the acquisition.
Conclusion. Based on and subject to the foregoing, Royce delivered its
oral opinion to the Special Committee on October 31, 1999, which opinion was
confirmed orally and in writing on November 2, 1999, that, as of November 2,
1999, the consideration to be paid to Spigadoro in the acquisition with IAT was
fair to our stockholders from a financial point of view.
INTERESTS OF SOME OF OUR OFFICERS AND DIRECTORS IN THE ACQUISITION
In considering the recommendation of the Board with respect to the
acquisition, our stockholders should be aware that some of our officers,
directors and affiliates have interests in the acquisition that are different
from and in addition to the interests of our stockholders generally. The
Special Committee and the Board were aware of these interests and took them
into account in approving the stock purchase agreement and the transactions
contemplated by it. These interests are summarized below.
o Jacob Agam, our Chairman of the Board and Chief Executive Officer, is
the Chairman of the Board of Spigadoro. Spigadoro owns 40,700,000 shares
of common stock of Petrini, representing all of the outstanding common
stock of Petrini. Spigadoro will receive up to 48,366,530 shares of our
common stock in the acquisition. At Spigadoro's request, 12,241,400 of
these shares will be issued to Carlo Petrini, who also will become a
director of IAT following the acquisition. As a result, Spigadoro and
Mr. Petrini will beneficially own approximately 59.5% and 20.2%,
respectively, of our outstanding common stock following the
acquisition, excluding shares issuable upon conversion of notes to be
issued in the acquisition to Spigadoro and Mr. Petrini. We will also
assume approximately $20 million of short term indebtedness of
Spigadoro in the acquisition, approximately $13.7 million of which is
owed to Mr. Petrini. $6.2 million of the debt owed to Mr. Petrini will
be convertible into shares of our common stock at the option of Mr.
Petrini. In addition, approximately $6.3 million of debt owed to
stockholders of Spigadoro will be convertible into shares of our
common stock at our option. The per share conversion price for the
39
convertible notes to be issued to Spigadoro and Mr. Petrini will be
equal to the greater of $2.50 or 85% of the average price of our
common stock for the five trading days prior to the conversion. Jacob
Agam is also the Chairman of the Board of Vertical Financial Holdings,
one of our principal stockholders, and certain of its affiliates.
Entities affiliated with Vertical Financial Holdings, have economic
ownership of approximately 76% of the outstanding common stock of
Spigadoro and have the power to vote approximately 91% of the
outstanding capital stock of Spigadoro. Following the closing of the
acquisition, Vertical Financial Holdings and entities affiliated with
Vertical Financial Holdings, including Spigadoro, will be deemed to
indirectly beneficially own approximately 49.1% of our outstanding
common stock. In addition, the Agam Family Trust, of which Mr. Agam is
one of the beneficiaries, indirectly owns approximately 60% of the
shares of Petrini through an entity that controls Spigadoro. See "The
Stock Purchase Agreement -- General."
o Marc S. Goldfarb, one of our directors, is the President and Managing
Director of Orida Capital USA, Inc., the U.S. representative of the
Vertical Group, and beneficially owns 171,324 shares of capital stock of
Spigadoro or approximately 1% of the outstanding shares.
o Following the acquisition, for so long as Spigadoro or its current
shareholders, their respective affiliates and Carlo Petrini collectively
hold at least:
o 50% of the outstanding shares of our common stock, Spigadoro or
its assignee will have the right to nominate 50% of the members
for election to our Board of Directors;
o 25% of the outstanding shares of our common stock, Spigadoro or
its assignee will have the right to nominate 25% of the members
for election to our Board of Directors; and
o 10% of the outstanding shares of our common stock, Spigadoro or
its assignee will have the right to nominate a single member for
election to our Board of Directors.
o In October 1998, Spigadoro entered into a consulting agreement with
Orida under which Orida agreed to perform consulting and advisory
services for Spigadoro, including identifying acquisition and investment
opportunities. The agreement expires in October 2003 and provides for an
annual fee of $100,000. Payments for 1998 and 1999 have been made and,
following the acquisition, Orida has agreed to provide such services to
us and we have agreed to assume the obligations of Spigadoro under the
agreement.
o We have an employment agreement with Jacob Agam, our Chairman of the
Board and Chief Executive Officer, which expires in September 2001 and
provides for an annual salary of $75,000 per year, plus a bonus to be
approved by our Board of Directors. Under the terms of the Petrini
acquisition, Mr. Agam's employment agreement with us will be amended,
effective as of the closing of the acquisition. Under the amended
employment agreement Mr. Agam will be employed as our Chief Executive
Officer for an initial term of three years with an initial annual base
salary of $300,000, plus a bonus to be approved by our Board of
Directors. Mr. Agam will also be entitled to receive a severance payment
equal to his base salary for one year if his employment agreement is
terminated by us without cause. See "Management of IAT -- Employment
Contracts and Termination of Employment and Change-In-Control
Arrangements."
CONTINUED INCLUSION IN THE NASDAQ NATIONAL MARKET
As a result of the Petrini acquisition, we may be required to comply with
the initial listing criteria of the Nasdaq National Market in order for our
common stock to continue to be included for quotation on the Nasdaq National
Market. The initial listing criteria are more difficult to meet than the
criteria for continued inclusion and include both quantitative and qualitative
criteria. See "Risk Factors--Stock and Market Risks."
Although we meet the criteria for continued inclusion of our common stock
on the Nasdaq National Market, we do not meet all of the criteria applied to
companies seeking initial inclusion of their stock because, among other things,
we would not meet the minimum bid price requirement of $5 per share
40
based on recent trading prices for our common stock. If the initial listing
criteria are applied to us as a result of the Petrini acquisition and we are
unable to meet such criteria, the Nasdaq Stock Market would, in all likelihood,
remove the common stock from inclusion in the Nasdaq National Market.
If the common stock was removed from the Nasdaq National Market, we could
seek to include the common stock in the Nasdaq SmallCap Market or to qualify
the common stock for listing on a national securities exchange. However, the
Nasdaq SmallCap Market and all of the national securities exchanges also
require companies to meet certain quantitative and qualitative requirements as
a condition to listing. We cannot assure you that we would meet the listing
criteria specified by these other trading markets.
We are currently discussing with Nasdaq whether the initial listing
criteria will be applied to us as a result of the Petrini acquisition. Nasdaq,
however, has not made a determination as of the date of this proxy
statement/prospectus whether to apply the criteria to our common stock.
If the initial listing criteria are applied to the common stock, there are
various ways in which we could seek to comply with those requirements. For
example, we could attempt to satisfy the minimum bid requirement by effecting a
reverse split of the common stock, which should have the effect of increasing
the bid price for our common stock. However, the securities of companies
effecting reverse stock splits typically trade at a significant discount to
their pre-split value. Accordingly, if we are required to effect a reverse
split to satisfy the minimum bid requirement, the market value of our common
stock may be adversely affected thereby. We cannot assure you that we will be
able to satisfy the initial listing criteria if they are applied to us as a
result of the Petrini acquisition nor can we assure you that any actions we
might take to satisfy the Nasdaq criteria will not have a material adverse
effect on the trading prices or liquidity of the common stock.
If we are unable to satisfy the Nasdaq listing requirements and we are
unable to qualify for listing on a national securities exchange, the liquidity
of our common stock would be adversely affected. See "Risk Factors--Stock and
Market Risks."
ACCOUNTING TREATMENT
The acquisition of Petrini will be accounted for as a reverse acquisition
and Petrini will be considered the accounting acquirer and IAT will be
considered the legal acquirer. Accounting treatment for a reverse acquisition
requires the historical financial statements of the accounting acquirer to be
presented as the historical statements of the combined enterprise and the
assets and liabilities of the acquired enterprise or legal acquirer to be
accounted for as required by the purchase method of accounting. The results of
our operations will be included in the combined enterprise only from the date
of the acquisition even though we are the surviving enterprise. In addition to
purchase accounting adjustments required for us, Petrini will also be required
to reflect purchase accounting adjustments resulting from Spigadoro's
acquisition of 100% of the Petrini stock by Spigadoro. The cost of the
acquisition by Spigadoro will be allocated to the assets of Petrini based on
their fair market values with any excess allocated to goodwill. The goodwill
created will be amortized over a twenty-year period. The purchase accounting
adjustments resulting from Spigadoro's acquisition of Petrini will also result
in additional depreciation expense to Petrini based on the fair market value of
depreciable assets in excess of their historical depreciated basis. Please see
"Financial Information -- Unaudited Pro Forma Condensed Consolidated Financial
Information" on page 78.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the regulations promulgated thereunder, the acquisition may not be
consummated unless certain filings have been submitted to the Antitrust
Division of the U.S. Department of Justice and the U.S. Federal Trade
Commission and certain waiting period requirements have expired or are
otherwise earlier terminated by the Antitrust Division and the FTC.
The Antitrust Division and the FTC frequently scrutinize the legality
under the antitrust laws of transactions such as the acquisition. At any time
before or after the consummation of the acquisition, the Antitrust Division or
the FTC could take such action under the antitrust laws as it deems necessary
or
41
desirable in the public interest, including seeking to enjoin the consummation
of the acquisition or seeking the divestiture of substantial assets of Petrini
or IAT. The relevant filings were made on November 23, 1999. Petrini and IAT
believe that the consummation of the acquisition will not violate the antitrust
laws. There can be no assurance, however, that a challenge to the acquisition
on antitrust grounds will not be made, or, if such a challenge is made, what
the result will be.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of our common stock issued in connection with the acquisition
will be received by persons who are deemed to be "affiliates" (as defined under
the Securities Act) of IAT or Petrini prior to the acquisition. Such shares may
be sold by them only in transactions permitted by the resale provisions of Rule
145 under the Securities Act with respect to affiliates of IAT or Petrini, or
Rule 144 under the Securities Act with respect to persons who are or become
affiliates of IAT, or as otherwise permitted under the Securities Act. Persons
who may be deemed to be affiliates of IAT or Petrini generally include
individuals or entities that control, are controlled by or are under common
control with, IAT or Petrini, as the case may be, and generally include the
executive officers and directors of the companies as well as their principal
stockholders.
Affiliates may not sell their shares of our common stock acquired in
connection with the acquisition, except pursuant to an effective registration
under the Securities Act covering such shares or in compliance with Rule 145
under the Securities Act (or Rule 144 under the Securities Act, in the case of
persons who become affiliates of IAT) or another applicable exemption from the
registration requirements of the Securities Act. In general, Rule 145 under the
Securities Act provides that for one year following the completion of the
acquisition, an affiliate (together with certain related persons) would be
entitled to sell shares of our common stock acquired in connection with the
acquisition only through unsolicited "broker transactions" or in transactions
directly with a "market maker," as such terms are defined in Rule 144 under the
Securities Act. Additionally, the number of shares to be sold by an affiliate
(together with certain related persons and certain persons acting in concert)
within any three-month period for purposes of Rule 145 under the Securities Act
may not exceed the greater of 1% of the outstanding shares of our common stock
or the average weekly trading volume of shares of our common stock during the
four calendar weeks preceding such sale. Rule 145 under the Securities Act will
remain available to affiliates if we remain current with our informational
filings with the Commission under the Exchange Act. One year after the closing
date of the acquisition, an affiliate will be able to sell such shares of our
common stock without being subject to such manner of sale or volume
limitations, provided that we are current with its Exchange Act informational
filings and such affiliate is not then an affiliate of IAT. Two years after the
closing date of the acquisition, an affiliate will be able to sell such shares
of our common stock without any restrictions so long as such affiliate had not
been an affiliate of ours for at least three months prior to the date of such
sale. We intend to register for resale the shares of our common stock to be
issued in the acquisition.
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THE STOCK PURCHASE AGREEMENT
The terms of and conditions to the acquisition are contained in the stock
purchase agreement which is attached as annex A to this proxy
statement/prospectus and is incorporated herein by reference. The discussion in
this proxy statement/prospectus and the summary description of the principal
terms of the stock purchase agreement are subject to and qualified in their
entirety by reference to the more complete information set forth in the stock
purchase agreement.
BACKGROUND
In July 1998, Vertical Capital Limited entered into an agreement with
Carlo Petrini and Giorgio Petrini to purchase an aggregate of 27,400,400 shares
of common stock of Petrini, or 67% of the outstanding shares of Petrini, for an
aggregate purchase price of approximately $31.2 million, consisting of cash and
promissory notes. Vertical subsequently assigned all of its rights and
obligations under the agreement to Spigadoro, including rights to the option
described below. The purchase price for the shares representing 67% of the
outstanding shares of Petrini was payable as follows:
o $5 million was paid in cash at the closing in August 1998;
o $26.2 million was paid through the issuance of non-interest bearing
notes to Carlo Petrini payable as follows:
o $6.2 million due on August 11, 1999;
o $5.0 million due on February 11, 2000; and
o $15.0 million due on the earlier of August 11, 2001 or a public
offering of Spigadoro payable, at Spigadoro's option, in cash or
in shares of common stock of Spigadoro valued at $22.5 million.
Approximately 56% of the shares of common stock of Petrini received by
Spigadoro in the purchase were pledged by Spigadoro to Mr. Petrini to secure
its obligations under these notes.
In July 1998, payment of the $6.2 million note due August 11, 1999, was
postponed until September 30, 1999. In August 1998, Carlo Petrini, on behalf of
Vertical Capital Limited, entered into an agreement for an exclusive option to
purchase the remaining 33% of the outstanding shares of common stock of Petrini
from the receiver of F.lli Pardini S.p.A., an Italian entity in bankruptcy. In
consideration for the option, Vertical paid the receiver 1.5 billion Lire
(approximately $795,000) and agreed to pay an additional 13 billion Lire
(approximately $6,889,000) upon exercise of the option, which was to occur no
later than August 1999. In August 1999, the option was extended to November
1999 and, in consideration for the extension, Spigadoro as assignee of Vertical
paid an additional 1.5 billion Lire of the option price and agreed to pay
interest on the remaining 11.5 billion Lire (approximately $6,096,000) from
August 1999 to November 1999.
In November 1999, the payment obligations of Spigadoro under the notes
issued to Carlo Petrini were restructured as follows:
o Spigadoro agreed to pay Carlo Petrini $4 million of the $5 million note
originally due February 11, 2000 on or before November 5, 1999 with the
remaining $1 million due by March 31, 2000;
o The $6.2 million note due September 30, 1999 was exchanged for a
convertible note due December 20, 2000 which is convertible into shares
of common stock of Spigadoro at 85% of the fair market value of the
common stock of Spigadoro;
o The $15.0 million note due on August 11, 2001 was amended to provide
that it will be convertible into common stock of Spigadoro valued at $30
million; and
o Spigadoro agreed to issue a note to Carlo Petrini for approximately
$6.5 million, including interest, the amount Mr. Petrini paid to finance
the purchase of the remaining 33% of the shares of Petrini from the
receiver, which note will be due on June 30, 2000.
43
GENERAL
Under the stock purchase agreement, subject to satisfaction of certain
conditions, we will purchase all of the outstanding capital stock of Petrini
from Spigadoro in exchange for up to 48,366,530 shares of our common stock and
we will assume approximately $20 million of short-term indebtedness of
Spigadoro through the issuance of promissory notes as follows:
o we will issue a note to Spigadoro in the principal amount of
approximately $6.3 million, which will bear interest at a rate of 5%
annually. The note will be due on the earlier of the completion of a
public offering by us in which we realize at least $20 million of net
proceeds or December 31, 2000. The note will be convertible at any time
at our option into shares of our common stock at a conversion price
equal to the greater of $2.50 or 85% of the average closing price of
our common stock for the five trading days prior to the notice of
conversion;
o we will issue a non-interest bearing note to Carlo Petrini in the
principal amount of $1 million, which will be payable on March 31, 2000;
o we will issue a non-interest bearing note to Carlo Petrini in the
principal amount of 12,050,000,000 Lire or approximately $6.4 million,
which will be payable on June 30, 2000. The note will be repaid in Lire,
but the maximum amount payable under the note will not exceed the U.S.
Dollar equivalent of $7.0 million. As a result, the amount to be paid
under this note will be subject to fluctuation in the value of the Lire
against the US Dollar. The note will be guaranteed by Spigadoro and will
be secured by a number of shares of our common stock issued to Spigadoro
in the acquisition having a value of $15 million. If any of such pledged
shares of common stock are sold to satisfy our obligations under the
note, we will be required to compensate Spigadoro for the loss of such
shares by issuing an equal number of shares of our common stock to
Spigadoro;
o we will issue a non-interest bearing convertible note to Carlo Petrini
in the principal amount of approximately $6.2 million, which will be
payable on December 31, 2000 and will be convertible into shares of our
common stock at any time at the option of Mr. Petrini at a conversion
price equal to the greater of $2.50 or 85% of the average closing price
of our common stock for the five trading days prior to the notice of
conversion. The note will be guaranteed by Spigadoro and will be secured
by a number of shares of our common stock issued to Spigadoro in the
acquisition having a value of $15 million. If any of such pledged shares
of common stock are sold to satisfy our obligations under the note, we
will be required to compensate Spigadoro for the loss of such shares by
issuing an equal number of shares of our common stock to Spigadoro.
In exchange for the cancellation of the $15 million note issued to Carlo
Petrini by Spigadoro, we will issue to Mr. Petrini, at Spigadoro's request,
12,241,400 shares of the 48,366,530 shares of our common stock to be issued in
the acquisition.
Following the acquisition, Petrini will become a wholly-owned subsidiary
of IAT and Spigadoro, Carlo Petrini and our current stockholders, will own
approximately 59.5%, 20.2% and 20.3%, respectively, of the outstanding shares
of our common stock.
Under the agreement, we agreed to issue additional shares of our common
stock to Spigadoro if:
o we issue shares of our common stock at a purchase price of less than
$2.50 per share before the closing of the acquisition; or
o upon the conversion of our Series A convertible debenture before or
after the closing.
As a result of the acquisition, JNC had the right to accelerate payment
under our Series A convertible debenture. JNC has entered into an agreement
with us under which JNC agreed not to accelerate repayment of the debenture.
JNC also agreed to fix the number of shares of our common stock that are
issuable upon conversion of the debenture at 2,451,745 shares. On November 23,
1999, JNC converted a substantial portion of the debenture into 1,872,982
shares of our common stock. JNC has informed us that it intends to convert the
remaining principal amount of the debenture upon the closing of the
acquisition, subject to the receipt of stockholder approval for the issuance of
the shares of common stock as described in this proxy statement/prospectus. As
a result of the conversion, we will be required to issue 1,012,065 additional
shares of our common stock to Spigadoro under the anti-dilution provision of
the stock purchase agreement, all of which are included in the 48,366,530
shares to be issued in the acquisition.
44
We will be required to increase the number of shares of our common stock
we are authorized to issue under our Amended and Restated Certificate of
Incorporation in order to issue the shares of our common stock to Spigadoro
under the agreement. It is currently anticipated that the closing of the
acquisition will occur shortly after the date of the special meeting of our
stockholders.
On the closing of the acquisition:
o Petrini will cancel all of its issued and outstanding common stock
certificates that were delivered to Petrini by the holders of such
stock;
o Petrini will deliver a new certificate to us representing all of the
outstanding shares of Petrini common stock;
o we will issue and deliver certificates representing the shares of our
common stock that will be issued as consideration for the shares of
Petrini common stock; and
o we will issue promissory notes representing the assumed debt which is
part of the consideration.
REPRESENTATIONS AND WARRANTIES
Spigadoro's Representations and Warranties. Spigadoro has made customary
representations and warranties as to itself and Petrini in the stock purchase
agreement regarding:
o corporate organization and qualification of Petrini and Spigadoro;
o authority to enter into the agreement;
o consents and approvals required to enter into the agreement and
consummate the transactions contemplated thereby;
o absence of any conflicts between the stock purchase agreement, on the
one hand, and corporate documents, contracts and applicable laws, on
the other hand;
o capitalization of Petrini;
o absence of litigation;
o title to Petrini's shares and the absence of options, warrants and
other rights;
o accuracy of Petrini's financial statements and its books and records;
o absence of condemnation proceedings;
o absence of certain changes in the business of Petrini and its
subsidiaries since January 1, 1999;
o absence of undisclosed liabilities;
o timely filing of tax returns and timely payment of all applicable
taxes;
o Year 2000 issues;
o absence of any existing violations of applicable laws or governmental
orders and judgments, and absence of existing defaults or events that
would result in defaults, under any contracts;
o possession and validity of required licenses and permits to conduct
business and own, lease or operate properties;
o title to and condition of properties;
o environmental compliance matters;
o relationships with customers and suppliers;
o employee matters and employee benefit plans;
o ownership and possession of all intellectual property;
o brokers and finder's fees and related compensation arrangements;
o insurance; and
o absence of indemnification and other charges under the 1998 agreement
pursuant to which Spigadoro acquired a 67% interest in Petrini.
45
Our Representations and Warranties. We have made customary representations
and warranties in the agreement regarding:
o corporate organization and qualification;
o authority to enter into the agreement;
o our capitalization;
o consents and approvals required to enter into the agreement and
consummate the transactions contemplated thereby;
o absence of any conflicts between the stock purchase agreement, on the
one hand, and corporate documents, contracts and applicable laws, on
the other hand;
o approval by our board of directors and the special committee of the
board of directors;
o compliance with all rules of and accuracy of all information filed
with the Commission;
o receipt of a fairness opinion; and
o brokers and finder's fees and related compensation arrangements.
Survival of Representations and Warranties. Generally, the representations
and warranties made by the parties to the agreement will survive the closing of
the acquisition and remain in full force and effect for 18 months from the
closing. However, Spigadoro's representations and warranties regarding
litigation, taxes and environmental matters remain in full force and effect for
the applicable statute of limitations and the representations and warranties
regarding title to the common stock of Petrini, options and warrants, and
brokers and finders will survive the closing and remain in full force and
effect forever.
COVENANTS
Spigadoro's Affirmative Covenants. Prior to the closing of the
acquisition, Spigadoro has agreed to cause Petrini and its subsidiaries to do
the following:
o conduct its business in the ordinary and regular course of business
consistent with past practices;
o keep in full force and effect its corporate existence and all material
rights, franchises, intellectual property and goodwill relating or
obtaining to its business;
o endeavor to retain its employees and preserve its present
relationships with customers, suppliers, contractors, distributors and
employees and continue to compensate such employees consistent with
past practices;
o maintain its intellectual property rights so as not to affect
adversely the validity or enforcement thereof;
o maintain its other assets in customary repair, order and condition and
maintain insurance reasonably comparable to that in effect on the date
of the agreement;
o maintain its books, accounts and records of Petrini and its
subsidiaries in accordance with Italian GAAP;
o use its best efforts to obtain all authorizations, consents, waivers,
approvals or other actions necessary or desirable to consummate the
transactions contemplated by the acquisition; and
o promptly inform us in writing of any material breach of or change in
the representations and warranties of Spigadoro.
Our Affirmative Covenants. Prior to the closing of the acquisition, we
have agreed to do the following:
o conduct our business in the ordinary and regular course of business
consistent with past practices, provided that we may sell our computer
business;
o maintain our books, accounts and records in accordance with US GAAP;
o use our best efforts to obtain all authorizations, consents, waivers,
approvals or other actions necessary or desirable to consummate the
transactions contemplated by the acquisition; and
46
o promptly inform the sellers in writing of any material breach of or
change in our representations and warranties.
Spigadoro's Negative Covenants. Prior to the closing of the acquisition,
Spigadoro has agreed not to, and has agreed to cause Petrini and its
subsidiaries not to:
o incur trade accounts payable, increase indebtedness, guaranty
obligations, sell or dispose of any assets or modify, amend or
terminate any material contract outside of the ordinary course of
business;
o merge or consolidate with, purchase substantially all of the assets
of, or otherwise acquire any business or any proprietorship, firm,
association, limited liability company, corporation or other business
organization;
o increase or decrease the rate or type of compensation payable to any
officer, director, employee or consultant (other than regularly
scheduled increases in base salary and annual bonuses consistent with
prior practice);
o issue any shares of capital stock or securities convertible into
shares of capital stock;
o change any method or principle of accounting in a manner that is
inconsistent with past practice, except to the extent required by
Italian GAAP;
o take any action that would likely result in its representations and
warranties becoming false or inaccurate in any material respect;
o incur or create any encumbrances on assets other than permitted
encumbrances;
o take any action or omit to take any action which would prejudice our
rights;
o incur, create or suffer to exist any encumbrances on the shares of
common stock of Petrini; or
o take or omit to be taken any action which would reasonably be expected
to result in a material adverse change to Petrini's business.
Our Negative Covenants. Prior to the closing of the acquisition, we have
agreed not to, and have agreed to cause our subsidiaries not to:
o change any method or principle of accounting in a manner that is
inconsistent with past practice, except to the extent required by US
GAAP;
o take any action that would likely result in our representations and
warranties becoming false or inaccurate in any material respect;
o take any action or omit to take any action which would prejudice
Spigadoro's rights to consummate each of the transactions contemplated
by the acquisition; or
o take or omit to be taken any action which would reasonably be expected
to result in a material adverse change to our business.
Additional Covenants. Prior to the closing of the acquisition, the parties
have also agreed to do the following:
o Petrini will deliver to us employment agreements from the officers of
Petrini identified in the agreement satisfactory to us at or before the
consummation of the acquisition;
o we will use our reasonable efforts to cause our common stock issuable
in the acquisition to be approved for listing on the Nasdaq National
Market prior to the closing of the acquisition; and
o neither Spigadoro nor any affiliate of Spigadoro will (and Spigadoro
will cause Petrini and its affiliates not to) solicit or encourage
inquiries or proposals with respect to the acquisition or purchase of
the shares of Petrini common stock or all or a substantial portion of
the assets of, or of a substantial equity interest in, Petrini or any
of its subsidiaries.
47
Our Post-Closing Covenants. Following the closing of the acquisition, we
have agreed to the following:
o For so long as Spigadoro (or its current shareholders), their
respective affiliates and Carlo Petrini collectively hold at least:
o 50% of the outstanding shares of our common stock, Spigadoro or
its assignee will have the right to nominate 50% of the members
for election to our Board of Directors;
o 25% of the outstanding shares of our common stock, Spigadoro or
its assignee will have the right to nominate 25% of the members
for election to our Board of Directors; and
o 10% of the outstanding shares of our common stock, Spigadoro or
its assignee will have the right to nominate a single member for
election to our Board of Directors; and
o If we fail to repay the notes issued to Carlo Petrini and Mr. Petrini
forecloses on the shares of our common stock pledged by Spigadoro as
security for repayment of the debt we will issue additional shares of
our common stock to Spigadoro on a share for share basis.
Spigadoro's Post-Closing Covenent. Following the closing of the
acquisition, Spigadoro has agreed not to do the following:
o For a period ending the earlier of five years from the closing or the
date we sell substantially all of our assets or merge or consolidate and
our stockholders no longer own a majority of our stock, compete with us
in the sale and distribution of animal feed and pasta and flour
products;
o for a period of five years from the closing solicit the services of
any of our employees; and
o use for its benefit any confidential information relating to the
Petrini business.
CONDITIONS
Mutual Conditions. The obligations of us and Spigadoro to complete the
acquisition will be subject to the satisfaction of certain conditions,
including the following:
o the issuance of the shares of our common stock to be issued in the
acquisition and other matters to be approved by our stockholders which
are necessary to consummate the acquisition will have been approved by
our stockholders at the special meeting in the manner required by
applicable laws and the rules of the Nasdaq National Market;
o no governmental authority will have enacted any rule or regulation
which would prohibit the acquisition or the transactions contemplated
thereby;
o any and all applicable US, European and Italian or other governmental
agencies will have approved the acquisition; and
o the registration statement covering our shares of common stock to be
issued to Spigadoro will have been declared effective.
Conditions to Our Obligations. Our obligations to complete the acquisition
will be subject to the satisfaction of certain conditions, including the
following:
o all representations and warranties made by Spigadoro in the agreement
will be true, correct and complete upon the consummation of the
acquisition and Spigadoro will have duly performed or complied with
each of its covenants and obligations under the agreement;
o there will have been no material adverse change with respect to
Petrini;
o all authorizations, consents, waivers, approvals or other actions
required in connection with the execution, delivery and performance of
the agreement by Spigadoro, Petrini and us will have been obtained;
o we will have completed our due diligence investigation of Petrini and
we shall be satisfied in our sole discretion with the condition of
Petrini and its future prospects;
48
o prior to or at the closing of the acquisition, we will have received
new certificates representing all of the outstanding shares of common
stock of Petrini registered in the name of IAT Multimedia, Inc.;
o at the closing of the acquisition, we will have received a letter from
each of Reconta, Ernst & Young S.p.A. and Rothstein, Kass & Company,
P.C. stating their conclusions and findings with respect to the
financial information in the proxy statement/prospectus; and
o Spigadoro and Petrini will have delivered to us the closing documents
specified in the agreement including a document transferring all
rights, title and interest in the name "Spigadoro" and all variations
thereof.
Conditions to Spigadoro's Obligations. The obligations of Spigadoro to
complete the acquisition will be subject to the satisfaction of certain
conditions, including the following:
o all representations and warranties made by us in the agreement are
true, correct and complete upon the completion of the acquisition and
we have duly performed or complied with each of our covenants and
obligations under the agreement;
o all authorizations, consents, waivers, approvals or other actions
required in connection with the execution, delivery and performance of
the agreement and the transactions contemplated thereby by us will have
been obtained; and
o we will have delivered to Spigadoro the closing documents specified
in the agreement.
TERMINATION RIGHTS
The agreement may be terminated at any time prior to the closing of the
acquisition as follows, even if our stockholders have approved the issuance of
our shares of common stock in the acquisition:
o by mutual consent of us and Spigadoro;
o by us if any authorization, consent, waiver or approval required for
the consummation of the acquisition will require the divestiture or
cessation of any of the present business or operations conducted by us
and our subsidiaries or Petrini and its subsidiaries or shall impose
any other condition or requirement, which divestiture, cessation,
condition or requirement we determine, in our good faith judgment, to
be materially burdensome or to deny to us in any material respect the
benefits intended to be obtained by us in the acquisition;
o by either Spigadoro or us if, at the special meeting, the requisite
vote of our stockholders to approve the proposals required to
consummate the acquisition shall not have been obtained;
o by either Spigadoro or us if any representation or warranty made in
the agreement for its or our benefit is untrue in any material respect;
o by either Spigadoro or us if the other party shall have defaulted in
the performance of any material covenant or agreement under the
agreement and such default cannot or has not been cured within 30 days
of such default;
o by us, in the event that the conditions to our obligations to close
have not been satisfied or waived;
o by Spigadoro, in the event that the conditions to their obligations to
close have not been satisfied or waived; and
o by either Spigadoro or us if the acquisition has not been consummated
on or before April 30, 2000, or such later date as may be agreed upon
in writing by the parties to the agreement.
EFFECT OF TERMINATION
If the agreement is terminated as described above, the agreement, except
for certain provisions, will become void and have no effect without any
liability on the part of any party. However, no party will be relieved from
liability for any breach of any representation, warranty, agreement or covenant
contained in the agreement prior to such termination.
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AMENDMENT
The agreement may be amended by the parties, at any time before or after
our stockholders have approved the necessary proposals required to complete the
acquisition, but after any such approval, no amendment shall be made which by
law requires further approval or authorization by our stockholders without such
further approval or authorization. However, the agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties to
the agreement.
EXTENSION; WAIVER
At any time prior to the closing date, we (with respect to Spigadoro) and
Spigadoro (with respect to us) may, to the extent legally allowed:
o extend the time for the performance of any of the obligations or
other acts of such party;
o waive any inaccuracies in the representations and warranties contained
in the agreement or in any document delivered pursuant thereto; and
o waive compliance with any of the agreements or conditions contained
in the agreement.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in a written instrument signed on behalf of
such party.
EXPENSES
All costs and expenses incurred in connection with the acquisition are to
be paid by the party incurring such expenses.
MANAGEMENT OF IAT AFTER THE ACQUISITION
Following the completion of the acquisition, our Board of Directors will
be increased in size from five members to seven members and will consist of the
current five members of our Board plus Lucio De Luca, the Chief Operating
Officer of Petrini, and Carlo Petrini, the Chairman of the Board of Petrini.
Following the completion of the acquisition, Petrini will operate as a
wholly-owned subsidiary of IAT and is expected to retain all of the members of
its current management team. In addition, our executive officers and the
executive officers of Petrini will consist of:
o Jacob Agam, Chairman of the Board and Chief Executive Officer of IAT
o Lucio De Luca, Chief Operating Officer of IAT and Petrini
o Klaus Grissemann, Chief Financial Officer of IAT
o Carlo Petrini, Chairman of the Board of Petrini
o Dario Ciolina, Chief Financial Officer of Petrini
Under the terms of the acquisition, Mr. Agam's employment agreement with
us will be amended and we expect to enter into an employment agreement with Mr.
De Luca. See "Management of IAT" and "Management of Petrini."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
We will not recognize any gain or loss for US federal income tax purposes
upon the exchange of our shares for Spigadoro's Petrini shares. Assuming that
Spigadoro does not hold its Petrini shares in connection with its conduct of
any trade or business within the US, the exchange of Spigadoro's Petrini shares
for our shares will not be subject to US federal income tax.
50
THE COMPANIES
IAT MULTIMEDIA, INC.
Currently, we market high-performance personal computers in Germany
assembled according to customer specifications and sold under the trade name
"Trinology." We also sell components, peripherals and software for personal
computers. In connection with the proposed acquisition, we intend to sell our
computer business and operate the business currently operated by Petrini.
We currently conduct our business through the following subsidiaries:
o FSE Computer-Handel GmbH & Co. KG, a German limited partnership of
which we own 80% of the partnership interests, and FSE Computer-Handel
Verwaltungs GmbH, a German corporation which is a wholly-owned
subsidiary of IAT. FSE markets high performance personal computers in
Germany; and
o the following wholly-owned subsidiaries of IAT:
o IAT Multimedia GmbH, a German corporation, which, through Columbus
Computer Handel und Vertrieb, its branch office, distributes
personal computer components, peripherals and software in Germany;
and
o IAT AG, a Swiss corporation, and Columbus Computer Handels und
Vertriebs Verwaltungs GmbH which are non-operating subsidiaries.
We also receive limited license fees and royalty payments from the sale of
products incorporating the visual communications technology we sold to Algo
Vision plc in July 1999.
We were incorporated in Delaware in September 1996 as a holding company
for the existing business of IAT AG, and IAT Deutschland GmbH Interaktive
Medien Systeme. Our initial business, operated through our subsidiaries, was to
develop and market customizable proprietary visual communications technology,
including video conferencing and data compression software technology.
General Development of Our Business
Prior to November 1997, our business was focused on the development of
visual communications technology and products incorporating such technology. As
a result of a series of transactions during 1997 and 1998 that are discussed
below, we changed the focus of our business to the sale and distribution of
personal computers and personal computer components, peripherals and software
in Germany.
In November 1997, we commenced our operations as a marketer and
distributor of personal computers and personal computer components and
peripherals through our acquisition of FSE.
In March 1998, we transferred substantially all of the assets and the
liabilities (other than intercompany accounts) of one of our majority-owned
German subsidiaries, IAT Deutschland, into a newly formed German company,
Communication Systems, in exchange for a 15% equity interest. Communication
Systems changed its name to Algo Vision Systems in February 1999. IAT
Deutschland, had provided our research and development and also was responsible
for sales and marketing in Germany of such technology.
In March 1998, we transferred certain of the assets and liabilities of our
wholly-owned subsidiary, IAT AG (excluding our intellectual property and our
ownership interests in IAT Germany), to Swiss Newco, a newly formed Swiss
corporation, in exchange for a 15% equity interest. At the time of the
transfer, IAT AG owned our visual communications technology. Swiss Newco
changed its name to Algo Vision Schweiz in February 1999.
In connection with the restructuring of our Swiss and German subsidiaries,
we granted Algo Vision Schweiz a non-exclusive five-year license to use our
intellectual property for certain applications. We, however, maintained
ownership of all of our intellectual property developed for our multimedia and
compression/decompression hardware and software products. Also as part of the
restructuring, we granted to Algo Vision Schweiz a five-year option to purchase
a 50% co-ownership interest in our intellectual property for $1 million.
51
In November 1998, we acquired, effective as of October 31, 1998, Columbus
Computer Handels-und Vertriebs GmbH & Co. KG and Columbus Computer Handels-und
Vertriebs-Verwaltungs GmbH, the general partner of Columbus. Columbus
distributes personal computer components, peripherals and software in Germany.
In connection with the Columbus acquisition we consolidated a portion of
our existing peripherals business into that of Columbus. Since the acquisition,
FSE has concentrated primarily on the production and marketing of its
high-performance built-to-order personal computers and Columbus has focused
primarily on the distribution of components and peripherals.
In August 1999, we merged Columbus with our wholly-owned subsidiary, IAT
Deutschland, and changed its name to IAT Multimedia GmbH.
In July 1999, as part of a reorganization of the Algo Vision entities,
Algo Vision Schweiz and Algo Vision Systems, became wholly-owned subsidiaries
of Algo Vision plc, a newly formed English company whose shares are listed in
Europe on EASDAQ, the European Association of Securities Dealers Automated
Quotation System. Under the terms of the reorganization:
o Algo Vision Schweiz transferred its option to purchase our intellectual
property rights to Algo Vision plc;
o Algo Vision plc purchased for cash our visual communications
intellectual property rights (other than the IAT name or mark); and
o we exchanged our 15% equity interest in each of Algo Vision Systems and
Algo Vision Schweiz for shares of capital stock of Algo Vision plc.
Algo Vision plc also agreed to pay us royalties (ranging from 5% to 10%)
on the sale of certain products utilizing the visual communications technology
until August 2001. At the time of these transactions, Dr. Viktor Vogt, one of
our directors at the time of the transaction, owned approximately 26.2% of the
outstanding shares of Algo Vision plc. Dr. Vogt serves as the Chairman of the
Board and Chief Executive Officer of Algo Vision plc. As a result of the
transaction, Dr. Vogt chose not to stand for re-election at our annual meeting
of stockholders.
Industry Background
During the past decade, significant advances in computer technology have
led to the development of smaller, more powerful personal computers available
to the public at progressively lower prices. These developments have stimulated
rapid growth in the demand for personal computers and personal computer
products, including components and peripherals. Growth has been particularly
strong in international markets in recent years. According to Dataquest,
approximately 5.6 million personal computers were sold in Germany in 1998 and
more than 6 million personal computers are expected to be sold in Germany in
1999. According to the German market research company GfK, a majority of all
personal computers bought in Germany are purchased by distributors and not
directly from manufacturers.
Historically, internal sales forces and retail computer dealers were the
primary source of purchasing information and support for computer buyers.
However, as the personal computer market has matured it has become more
segmented. As a result, customers are now offered distribution channels more
closely tailored to their specific needs. Users who require high-quality and
high-performance personal computers that are capable of performing complex
functions may purchase computers, components and peripherals directly from
manufacturers who can customize a personal computer to the customer's needs as
well as provide system design services and specialized software instead of
purchasing computers, components and peripherals from retail computer dealers.
52
Products
We market high-performance personal computers in Germany assembled
according to customer specifications and sold under the trade name "Trinology."
We also sell components, peripherals and software for personal computers. Our
product line includes:
o high-performance IBM-compatible desktop personal computers;
o components, such as motherboards, hard disks, graphic cards and
plug-in cards;
o peripherals, such as printers, monitors and cabinets; and
o software, such as operating systems and office software.
We believe that Trinology computers have a reputation in Germany for high
quality and performance. We do not develop or manufacture components,
peripherals or software. Instead, we purchase components from suppliers and
integrate them into our personal computers or sell them separately. We work
directly with a wide range of suppliers to evaluate the latest developments in
related technology and engage in extensive testing to optimize the
compatibility and speed of the components which are sold and integrated into
our Trinology computers. We believe that our extensive testing and selection
gives Trinology computers an advantage over computers built by our competitors.
See "--Suppliers and Production."
Our sale of customized high-quality personal computers and high
performance components and peripherals in the upper price and performance
categories is a customer-focused business which promotes direct, comprehensive
customer relationships, and service and support programs tailored to customer
needs. Information received directly from our customers is the most significant
factor in our determination to develop a newer line of Trinology computers
providing new technology and features. Customers for Trinology computers are
typically users who need systems with a high processing speed and high
reliability for use in professional applications.
We offer a comprehensive service and support program to our customers. Our
Trinology computers, components and peripherals come with warranties ranging
from one to three years. We also maintain a free service hotline providing
operational and technical support and an online "support mailbox" for our
customers, through which customers may send inquiries to technical support
personnel via computer. We are generally able to provide repairs or replacement
of defective computers, components and peripherals within 36 hours.
Customers and Marketing
Our customers include:
o corporate customers, such as industrial, pharmaceutical, service and
trade companies;
o the military;
o value-added resellers; and
o retail computer stores.
These customers are located primarily in Germany. Components and
peripherals are primarily marketed and sold to value added resellers, retailers
and end-users. None of our customers accounted for more than 10% of our
revenues in 1998.
We market our products to our customers through:
o our internal sales staff;
o our mail order department;
o our website;
o our two showrooms located in Kaiserslautern and Pirmasens, Germany;
53
o advertisements in trade journals;
o weekly fax messages to approximately 3,000 dealers;
o industry trade fairs; and
o dealer days, during which dealers may view our new product lines.
We also appear in reports in trade journals and general distributions of
news items. We believe that these appearances highlight us and increase our
visibility and the marketability of our products.
We provide our customers with knowledgeable sales assistance, custom
configuration and service and support. We believe that our marketing and
distribution system provides the following advantages over traditional retail
channels by:
o gaining access to end-users without having to compete for limited shelf
space at traditional retail outlets;
o reducing obsolescence risk and delays in introducing new personal
computers because we do not need to support an extensive pipeline of
dealer inventory;
o providing direct customer contact which allows us to maintain, monitor
and update a database of information about customers and their current
and future product service needs; and
o using our customer service contact and direct customer contact to shape
future product offerings as well as post-sale service and support.
We currently maintain a customer database of approximately 9,000
customers, and approximately 70% of our sales of personal computers in 1998
were to repeat customers.
Suppliers and Production
Components and peripherals used in Trinology computers and sold by us are
manufactured by companies in Germany, the United States and Asia such as:
o Actebis Computer Handels GmbH;
o Peacock AG;
o CTX Computer GmbH;
o Ingram Micro GmbH;
o Iiyama;
o Asus Computer GmbH; and
o Matrox Electronic Systems.
In most cases, we acquire these components and peripherals through
manufacturers and primary distributors. We do not maintain any long-term
contracts with these suppliers and believe that suitable alternative suppliers
are available for each of our existing suppliers. The availability of such
personal computer components and peripherals is affected by factors such as
world-wide demand for components and peripherals, seasonal fluctuations in
business activities and political and economic conditions in the countries in
which such suppliers are located.
We work directly with a wide range of suppliers and manufacturers to
evaluate the latest developments in personal computer-related technology. Prior
to distributing our products, we test and optimize the compatibility and speed
of the components which we sell and which are integrated into our Trinology
personal computers.
The assembly process for our Trinology personal computers is designed to
provide custom-configured products to our customers, and includes assembling
components, loading software and performing quality control tests. We rely on
outside assemblers to assemble most of our Trinology personal computers. Our
54
production team performs quality control tests on each personal computer, and
the quality department inspects samples of all completed computers to ensure
that quality specifications have been met. Once completed, each computer is
shipped ready for use with the requested software applications already
installed.
Competition
The German personal computer industry is highly competitive, especially
with respect to pricing and the introduction of new products and features. We
compete with our competitors primarily on the basis of adding new performance
features without corresponding price increases. We may not be able to continue
to compete successfully if we are unable to:
o introduce products or performance features on a timely basis; or
o add new features to our products without corresponding increases in
prices.
Furthermore, in recent years we and many of our competitors have regularly
lowered prices, and we expect these pricing pressures to continue. If these
pricing pressures are not mitigated by increases in volume, cost reductions or
changes in product mix, our revenues and profits could be substantially
reduced. As compared to us, many of our competitors have:
o significantly longer operating histories;
o significantly greater managerial, financial, marketing, technical and
other competitive resources; and
o greater name recognition.
As a result, our competitors may be able to:
o adapt more quickly to new or emerging technologies and changes in
customer requirements;
o devote greater resources to the promotion and sale of their products
and services; and
o respond more effectively to competitive pressures.
These factors could materially adversely affect our operations and
financial condition.
We also compete with other personal computer direct marketers as well as
with personal computer manufacturers that market their products in distribution
channels in which we do not participate. We cannot predict whether we will be
able to compete successfully with existing or new competitors. In addition,
competition could increase if:
o new companies enter the market;
o existing competitors expand their service offerings; or
o we expand into new markets.
An increase in competition could result in material price reductions or
loss of our market share and could materially adversely affect our operations
and financial condition.
Intellectual Property
We do not have, and do not rely upon, patentable technology with respect
to the sale of our Trinology computers, components, peripherals or software. We
have trade secrets regarding our component evaluation, assembly procedures,
marketing and other areas. In addition, we believe Trinology, which is a
non-registered trademark, is important to our businesses and intend to
vigorously protect this trademark. Our inability to protect our proprietary
rights could materially adversely affect our operations and financial
condition. Litigation may be necessary to:
o enforce our intellectual property rights;
o protect our trade secrets; and
o determine the scope and validity of such intellectual property rights.
55
Any such litigation, whether or not successful, could result in
substantial costs and diversion of resources and could materially adversely
affect our operations and financial condition.
We may receive notice of claims of infringement of other parties'
proprietary rights. Such actions could result in litigation and we could incur
significant costs and diversion of resources in defending such claims. The
party making such claims could secure a judgment awarding substantial damages,
as well as injunctive or other equitable relief. Such relief could effectively
block our ability to make, use, sell, distribute or market our products and
services in such jurisdiction. We may also be required to seek licenses to such
intellectual property. We cannot predict, however, whether such licenses would
be available or, if available, that such licenses could be obtained on terms
that are commercially reasonable and acceptable to us. The failure to obtain
the necessary licenses or other rights could preclude the sale, manufacture or
distribution of our products and could materially adversely affect our
operations and financial condition.
In July 1999, we sold the intellectual property rights relating to our
visual communications technology to Algo Vision. See "--General Development of
IAT's Business."
Employees
As of December 1, 1999, we had 36 full-time employees and seven part-time
employees. Except for 22 employees located in Pirmasens, Germany who are
members of a labor union, none of our employees is a party to any collective
bargaining agreement or a member of a labor union. We have not experienced any
work stoppages and believe that our relations with our employees are good. In
addition, Algo Vision Schweiz, a former affiliate of ours, provides
administrative and related services to us for a cost of $20,000 per annum.
Enforcement of Civil Liabilities
We are organized under the laws of the State of Delaware. Investors in our
common stock will be able to effect service of process on us in the United
States. However, we are primarily a holding company which holds stock in
entities in Switzerland, Germany and England and all or a substantial portion
of our assets are located outside the United States. In addition, five of our
six directors and all of our executive officers are residents of foreign
countries and all or a substantial portion of the assets of such directors and
officers are located outside of the United States. Following the proposed
Petrini acquisition, six of our seven directors and all of executive officers
will be residents of foreign countries, including Germany, Switzerland and
Italy. As a result, it may not be possible for investors to effect service of
process upon our directors and officers or enforce judgments of US courts
predicated upon the civil liability provisions of US laws against the assets of
our directors and officers.
We have been advised that judgments of US courts predicated solely upon
the laws of the United States, in each case against our subsidiaries, our
directors, officers and employees who are domiciled in Italy, Switzerland and
Germany may not be enforceable in Italy, Switzerland and Germany. In addition,
awards of punitive damages in actions brought in the United States or elsewhere
may be unenforceable in Italy, Switzerland and Germany. The market price of our
common stock may be affected by the difficulty for investors to enforce
judgments of US courts.
Properties
We lease approximately 37,500 square feet of office, showroom, assembly
and warehouse space in Pirmasens, Kaiserslautern and Erding, Germany. These
leases terminate between December 2001 and December 2003 and have an aggregate
annual rental cost of approximately $150,000. The rent on the lease in
Pirmasens is subject to the condition that we continue to employ at least 35
Pirmasens residents. However, as of December 1, 1999, we did not employ 35
Pirmasens residents, and as a result, we expect that the annual rental cost at
this location will be increased, but do not expect such increase to be
material. In addition, we sublease a portion of approximately 4,600 square feet
of office space in New York, New York from Spigadoro. This sublease terminates
in January 2002 and has an annual rental cost of $100,000, which amount
includes administrative and office services.
56
We believe that these facilities are suitable for our current and
anticipated needs and upon the proposed sale of our computer business we intend
to assign or terminate these leases other than the lease in New York. We
believe that, if necessary, we can obtain additional leased space and renew our
existing leases at similar rates. In the event we are unable to renew our lease
in Pirmasens, we would not be able to lease space in Pirmasens at similar
rates. While we do not believe that these spaces are material to our
operations, finding alternative space at market rates could have an adverse
impact on our results of operations.
Legal Proceedings
We may be involved from time to time in litigation incidental to our
business, although no legal proceedings are currently pending against us.
PETRINI S.P.A.
Petrini is an Italian company that produces and sells animal feed and
pasta and flour products. Petrini's animal feed business produces animal feed
for industrial breeders, family-owned breeding farms and domestic pets.
Petrini's pasta and flour business produces traditional, specialty and health
and diet pastas and flours for use in food products sold by the bakery
industry. By-products of Petrini's pasta and flour business are used as raw
materials for its animal feed products. Petrini also engages, to a lesser
extent, in animal breeding, selling gardening articles and supplying
accessories for pets. Petrini's products are marketed and sold principally in
Italy. After the acquisition, we intend to sell our computer business and to
operate the business currently operated by Petrini.
All amounts stated in US dollars in the description of the Petrini
business have been translated into US dollars for the convenience of the reader
at the rate of Lire 1,887 = US $1.00, the noon buying rate of Lire for US
Dollars on November 23, 1999. See "Note 16 of the Notes to the Financial
Statements of Petrini."
The following table shows revenues, earnings before interest, income
taxes, depreciation and amortization ("EBITDA") and total fixed assets for
Petrini's divisions for the nine months ended September 30, 1999 and the fiscal
years ended December 31, 1998, 1997 and 1996:
NINE MONTHS ENDED SEPTEMBER 30, 1999 YEAR ENDED DECEMBER 31, 1998
------------------------------------- -------------------------------------
(IN THOUSANDS)
REVENUE EBITDA ASSETS REVENUE EBITDA ASSETS
----------- ---------- ---------- ----------- ---------- ----------
Animal Feed ......... $ 71,485 $5,060 $17,012 $ 98,743 $6,343 $19,535
Food ................ 27,537 1,248 6,459 37,712 1,224 6,398
Others .............. 4,202 (525) 6,907 4,672 (89) 5,864
-------- ------ ------- -------- ------ -------
Total ............... $103,224 $5,783 $30,378 $141,127 $7,478 $31,797
======== ====== ======= ======== ====== =======
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------------------- -----------------------------------
(IN THOUSANDS)
REVENUE EBITDA ASSETS REVENUE EBITDA ASSETS
----------- ---------- ---------- ----------- -------- ----------
Animal Feed ......... $110,962 $5,262 $19,812 $123,832 $6,558 $20,159
Food ................ 38,752 1,303 6,880 40,199 1,807 6,866
Others .............. 6,544 (73) 6,036 5,706 378 6,111
-------- ------ ------- -------- ------ -------
Total ............... $156,258 $6,492 $32,728 $169,737 $8,743 $33,136
======== ====== ======= ======== ====== =======
General Development of the Business
Petrini was founded in 1822 by Antonio Petrini, an ancestor of the current
chairman of the board of directors, Carlo Petrini. Until the 1920's, Petrini's
activities were concentrated in the industrial flour
57
business. Thereafter, Petrini started to produce and sell pasta, building its
first plant in Bastia Umbra, near Perugia. In the 1950's, Petrini entered the
animal feed market using by-products of industrial flour production. Employing
advanced research and development techniques to create new products and provide
customer assistance, Petrini grew to become one of the market leaders in Italy.
Business Strategy
Petrini is committed to enhancing stockholder value through the following
strategies:
Acquiring Complementary Businesses
Petrini believes that a significant number of attractive acquisitions may
be made by the combined company in both the food and animal feed sectors. In
Italy, these market sectors are highly fragmented and characterized by
relatively small, typically family-owned businesses. Many of these businesses
are constrained by limited capital resources, few operating efficiencies and/or
a desire of the family shareholders/managers for liquidity. Petrini intends to
capitalize on potential consolidation opportunities by virtue of its
established market position, its capital resources and a management team
experienced in both operations and acquisitions. Petrini believes that the
higher profile of the combined company following Petrini's acquisition by IAT,
together with the combined company's publicly traded shares as a currency, will
enhance the combined company's ability to identify and finance strategic
acquisitions.
Petrini's intention is to concentrate on expansion within Italy, where the
potential synergistic benefits are greatest. In the longer term, however, the
combined company may also consider acquisitions outside of Italy. Petrini also
intends to focus its food industry expension efforts within the Mediterranean
diet sector of the industry, which Petrini believes represents a popular
segment and a significant growth opportunity. Petrini's acquisition criteria
include the ability to:
o increase its market share and customer base;
o allow it to compete more effectively;
o achieve operating efficiencies through consolidation of facilities,
equipment, purchasing and personnel; and
o expand product lines.
Improving Operating Efficiencies
Since November 1998, Petrini has invested significant time and expense in
an efficiency plan prepared by a leading consulting company. The efficiency
plan has identified several areas for improving Petrini's operating
efficiencies, such as:
o the reduction of overhead costs through the streamlining of management.
Since January 1999, there has been a reduction of approximately 4% in
head office staff;
o concentration of production and conversion of less efficient plants
into advanced warehouses;
o investment in more automated production and process control equipment;
o rationalization of customer service to reduce department costs;
o incentivization of the sales force to improve credit collection and
credit control;
o investment in improved information technology systems for selecting and
mixing raw materials; and
o reductions in excess personnel.
58
Expanding Existing Businesses
Petrini intends to increase its market share in the sectors in which it
operates and to improve profitability through the expansion and rationalization
of its product lines. The key elements behind this program include:
o in the animal feed sector: increase the variety of products produced by
Petrini through the continued use of research and development and
increasing the number of Petrini's AgriPiu retail store franchises in
order to increase its sales to family-owned breeders. AgriPiu franchises
have increased from 183 stores to 213 stores since June 1998, see "The
Animal Feed Business--Marketing and Sales"; and
o in the pasta sector: increase the volume of exports, taking advantage
of the growing consumption of pasta in markets such as the United States
and Europe. Petrini has recently appointed a new Sales Manager,
recruited from the Italian market leader, Barilla, to assist in this
expansion in U.S. markets. In Italy, Petrini intends to increase its
market penetration by expanding the distribution of its products through
large supermarkets and into new geographic areas.
Promoting New Marketing Strategy
Petrini intends to strengthen its marketing in the animal feed sector, by
enhancing its sales service. This will include customer assistance during
product utilization, assistance in the technical and economic management of
breeding and food and veterinary assistance. Petrini believes that such a
supportive strategy will create strong customer loyalty and allow premium
pricing. For customers, the purchase of feeds from other producers would
involve not only a change of supplier, but would also have implications on the
breeding standard of the entire herd.
The Animal Feed Business
Petrini produces a complete variety of feed for industrial breeders,
family-owned breeding farms and domestic pets. Animal feed products distributed
to industrial breeders include specific lines for the nutrition of dairy cows,
beef cattle, pigs, rabbits, birds, sheep, goats and horses. Animal feed
products distributed to family-farm type breeding establishments include feed
for rabbits, sheep, goats, birds and horses.
Petrini also provides ancillary services to its customers, such as
advisory and veterinary services. In addition, Petrini develops, produces and
distributes a large variety of feeds for principally cats and dogs and to a
lesser extent, other domestic pets.
The following table shows the annual variation in the Italian market
during the period 1993-1998:
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- ----------
(IN THOUSANDS OF TONS)
Production .......... 118,405 115,236 115,610 113,430 110,590 107,870
Import .............. 2,446 2,765 2,967 4,111 4,925 4,396
Export .............. 4,673 2,961 2,523 2,366 2,010 1,724
Consumption ......... 116,178 115,040 116,054 115,175 113,505 110,542
Products
Petrini offers over 600 items through its animal feed business, including
the following:
Product Tradename
- --------------------------- -------------------------------------
Feed for farmyard animals Sani Sapori, Grani, Natural Fiocco
Il Biologico
Ruma Pass, Ruminat, Masticontrol
Profitto Latte, Milk Profit, Milkoss
Integra, Concentra, Casea, Lacta
Calibra, La Nutrilinea
Pig Perform, Maxi Parma & Magro,
Supera, Big Supera, P.A.S.T.O.
59
Product Tradename
- -------------------------------------- ------------------------------------------------
Alfa, Biosana, Gran Nidiata
Horse feed Petrini First, Il Pastone Ippodieta, Ipposport-
Mixer, Ippocomplet, Ipporanch, Ippojunior,
Ipposviluppo, Ippoplus
Pet food (includes dry and moist Tradizione Italiana, Primo Alimento, Il Pasto
dog and cat food and birdseed) Tutta Energia, Il Pastacotto, La Zuppa di
Campagna, Il Pasto Completo, La Prima
Dieta, La Dieta Sportiva, Pastomaxi, Ralf,
Ralfette, Mio Micio, Le Crocchette del Mio
Micio, Vispo, Vispizie, Allegri
Non-Food items (includes vegetable Seme d'oro, Nasco, I Confortevoli, I
and garden seeds and accessories for Salutevoli, Equibed
cats, dogs and cagebirds)
The following table shows the gross revenues, in thousands of US Dollars,
and sales volume, in tons, for each product line in Petrini's animal feed
business for each of the nine months ended September 30, 1999 and the fiscal
years ended December 31, 1998, 1997 and 1996:
NINE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- ------------------- --------------------- ----------------------
REVENUE VOLUME REVENUE VOLUME REVENUE VOLUME REVENUE VOLUME
--------- ---------- --------- --------- ----------- --------- ----------- ----------
Dairy cows .......... $22,446 96,532 $29,633 122,524 $ 32,028 125,910 $ 35,151 140,675
Pigs ................ 6,061 24,026 8,519 32,816 10,375 37,593 12,525 44,963
Birds ............... 12,790 45,732 18,625 63,724 22,464 72,277 24,260 76,821
Rabbits ............. 10,692 45,287 14,115 58,133 15,151 58,448 16,978 63,542
Beef cattle ......... 7,632 33,224 11,667 49,870 13,751 56,016 16,016 65,235
Pets ................ 3,960 6,129 5,262 8,094 4,600 7,162 4,879 7,571
Sheep and goats ..... 1,980 8,911 3,092 13,076 3,424 13,877 3,782 15,250
Horses .............. 739 2,715 972 3,530 1,120 3,964 1,349 4,824
Others .............. 5,185 24,788 6,857 33,280 8,049 37,881 8,892 25,832
------- ------ ------- ------- -------- ------- -------- -------
Total ............... $71,485 287,344 $98,742 385,047 $110,962 413,128 $123,832 444,713
======= ======= ======= ======= ======== ======= ======== =======
Petrini believes that animal feed represents, on average, about 70% of the
total costs of production of animal breeders. Consequently, controlling the
cost of animal feed is critical to the economic management of animal breeding.
Petrini also believes that the quality and yield of its products are important
competitive features of its business. Consequently, investment in product
research and development is considered critical, as is supporting sales with
advisory and veterinary services for breeders. Petrini's management believes
that these areas represent Petrini's most important strengths. Following
tighter European Union regulations and the mad cow disease scare, feed
producers are under increasing pressure to ensure a high quality product at all
stages of the food chain. In this context, Petrini has already implemented a
special program to guarantee such high quality.
Petrini's primary market for its animal feed products is currently in
Italy, with very little being exported.
Petrini's animal feed products for farmyard animals include specific lines
for the natural nutrition of dairy cows, beef cattle, pigs, rabbits, birds,
sheep and goats and horses. Set forth below is a description of each major
product line:
o Dairy Cows
Petrini develops, manufactures and markets dairy cow feed products ranging
from economy to high performance products. Petrini's production of feed for
dairy cows represented approximately 5.8% and
60
5.7% of the Italian market in 1998 and 1997, respectively, and approximately
6.0% in the first nine months ended September 30, 1999. This makes Petrini the
fourth largest producer of feed for dairy cows in Italy in both years.
Petrini believes that the success of its dairy cow feed business is
largely a result of the implementation of innovative feed programs aimed at
improving the yield of feed and the launching of high quality products such as
"Casea" and "Lacta" which have resulted from careful research and development
programs. For example, Petrini has helped its customers to increase production,
reduce costs and minimize the impact on the environment by implementing a
nutritional model from Cornell University in conjunction with its proprietary
computer software which Petrini has used to reformulate its feed for dairy
cows. In addition, Petrini maintains a field staff who work with dealers and
customers to develop specialized products, programs and services to meet their
individual needs.
o Beef Cattle
Petrini believes that its production of feed for beef cattle represented
approximately 5.3% of the Italian market in both 1998 and 1997 and
approximately 5.0% in the first nine months ended September 30, 1999. Petrini
was the fourth and fifth largest seller of feed for beef cattle during 1997 and
1998, respectively.
The Italian beef cattle market has shrunk by 8.0% since the BSE (mad cow's
disease) world problem. Following the BSE scare, which encouraged customers to
buy local products, Petrini relaunched its feed production in the Italian
market in 1997, and focused its research and development activities on
rethinking and transforming the traditional feeding system, designing various
products and suitable feeding programs. Based on this research, the "Cotton
Beef" product line and other products went into production at the end of 1998.
Petrini believes that the success of its beef cattle feed line is due, among
other things, to the implementation of innovative feed programs and to offering
high quality products, such as "Cotton Beef" animal feed, resulting from its
intensive scientific research into the metabolism of livestock.
o Pigs
Petrini produces a complete line of pig feed products. Petrini believes
that its production of feed for pigs represented approximately 1.5% and 1.6% of
the Italian market in 1998 and 1997, respectively, and approximately 1.5% in
the first nine months ended September 30, 1999. Petrini was the eleventh
largest Italian producer in this sector in both years. Petrini's P.A.S.T.O.
feed line, part of its "Cross System" program, launched in 1998, is a composed
nutrition program structured on the breeder `s specific needs and demands which
allows him to optimize characteristics such as the fat/lean meat ratio in pigs,
important in the production of Parma Ham. The P.A.S.T.O. feed line contains
polyunsaturated fatty acids to help ensure consumer health.
o Rabbits
Petrini believes that its production of feed for rabbits represented
approximately 10.1% and 10.0% of the Italian market in 1998 and 1997,
respectively, and approximately 10.4% in the first nine months ended September
30, 1999, making it the market leader in 1997 and the second largest producer
of feed for 1998. Petrini's product brands for rabbits are "Alfa" for
industrial breedings, and "Biosana", which was launched in 1997, is aimed at
guaranteeing the delicate bacterial-intestinal balance of the digestive system
of the rabbit and allows breeders to considerably reduce the use of
pharmaceutical additives, thus reducing costs.
o Birds
Petrini believes that its production of feed for birds, such as chickens,
turkeys and ducks, represented approximately 1.5% and 1.7% of the Italian
market in 1998 and 1997, respectively, and approximately 1.6% in the first nine
months ended September 30, 1999.
The Italian meatbird (including broiler chickens, turkeys, ducks, etc.),
and egg production industries are highly concentrated with a relatively small
number of very large producers that generally manufacture their own feed, due
to the relative simplicity of the diet and large scale of operations in this
market. Accordingly, the available market for feed sales is small relative to
the amount of feed consumed in the meatbird and egg production industries.
61
The breeding of birds, in particular poultry, at the domestic level is
quite widespread in Italy. Many Italian consumers of poultry choose to breed
their own poultry because they can control the quality of the breeding process.
Consequently, the Group has created the "Sani Sapori" and "Grani" brands which
allow breeders to obtain proven quality through an accurate selection of raw
materials and constant monitoring of production. Breeders have increased their
sensitivity towards healthy feeds and, as a result, Petrini has launched their
product line "Il Biologico" which utilizes only raw materials deriving from
biological agriculture. With respect to the market for breeding birds at the
domestic level, Petrini believes that it held a market share of approximately
17% in 1997, 1998 and the first nine months ended September 30, 1999.
o Sheep and Goats
At present, this is not a major market for Petrini. However, Petrini
believes that its presence in this market has been improved by the launch in
October 1998 of a new line of products called "Ovicomplet" aimed at optimizing
the use of pastures. Petrini believes that its production of feed for sheep and
goat, represented approximately 7.4% and 7.3% of the Italian market in 1998 and
1997, respectively, and 7.6% in the first nine months ended September 30, 1999.
o Horses
Petrini also distributes feed for horses, mainly to family farm type
breeders. Petrini believes that its production of feed for horses represented
approximately 4.9% and 3.9% of the Italian market in 1998 and 1997,
respectively, and approximately 5.3% in the first nine months ended September
30, 1999.
In recent years Petrini has concentrated its attention on the market for
quality feed, where it believes its brand name has the greatest impact.
o Pets
Petrini develops, produces and distributes a large variety of feed, both
dry and humid, for domestic animals, principally cats and dogs, and to a lesser
extent, other domestic pets.
Petrini's line of feed for dogs is one of the widest in the marketplace
and is accompanied by a variety of supplementary feeds. Petrini offers feed for
all stages of development of domestic animals, and is also present in the high
quality end of the market with its Activa Cani and Vispo Gatti brands.
Approximately 90% of feed for domestic animals marketed with Petrini
brands are produced by others on behalf of Petrini according to its
specifications.
o Other Products and Activities.
Petrini has a marginal involvement in the following sectors:
o accessories, health care and hygiene products for domestic
animals;
o products for gardening and cultivating vegetables, seeds and
bulbs; and
o the breeding and marketing of poultry and the breeding and genetic
selection of pigs and livestock.
In 1999, Petrini utilized a farm with approximately 500 sows to test and
demonstrate the quality of the feed it produces. Petrini has discontinued
operations at this farm and anticipates selling the assets related to these
activities. In addition, Petrini has also entered into various agreements to
provide animal feed and related services to breeders, receiving in return a sum
based on the quantity of feed provided by Petrini and the increase in weight or
yield of the animals. These agreements allow Petrini to test and constantly
improve the quality of its animal feed and services by virtue of its indirect
participation in the breeding of animals.
Petrini also directly managed in 1999 several farms for the breeding of
livestock and pigs in order to demonstrate and test the performance and
effectiveness of its products.
62
Research, Development and Quality Control
Petrini's research and development and quality control department is
centered at the Bastia Umbra Research and Quality Control Center, and includes
an internal staff of eight people, including technical staff and nutritionists.
Petrini also maintains laboratories at each of its production facilities for
the purpose of quality control. Petrini's research and development and quality
control department has advisory arrangements with a number of agricultural
programs at various Italian agriculture and veterinary medicine university
departments, such as Piacenza, Bologna and Pavia. Petrini also has
relationships with foreign institutions and universities including:
o Cornell University
o Institute National De Recherche Agromonique
o Scottish Agricultural College-Edinburgh
o Meat Quality Institute-Bristol
o Kibbutz Afikim-Israel
For research purposes and to assist its field-based technicians, Petrini
designed a herd management software program called "RAAN", short for Ration
Analyser, and a raw material management program called "Feed Manager", based on
implementation of a model by Cornell University. The Feed Manager program
optimizes raw materials utilization in relation with the nutritional facts
requested. It also contributes to environmental impact reduction, decreasing
phosphorus and ozone emissions in the atmosphere.
Petrini's researchers have gained extensive knowledge of the nutritional
composition and values of the primary ingredients used in feed, the full range
of acceptable substitute ingredients and process technology. Petrini leverages
the extensive knowledge of its research and development department to develop:
o high-performance, value-added feed products;
o programs and breeding methods; and
o techniques designed to optimize the genetic performance potential of
animals.
Petrini's products are designed to provide the balance of nutrients that
meet the needs of a particular species of animal at each phase of its life
cycle. Petrini believes that the scope of its research and development
activities and the synergies created from conducting research across various
product lines and species provide it with a significant competitive advantage.
For its farmyard animal business, Petrini develops and sells its products
as part of a package that includes nutrition and management programs. Petrini's
nutrition programs include information and services regarding the care of the
animals and their facilities, as well as nutritional, genetic and breeding
counseling. Petrini's approximately 138 sales representatives and technical
services staff, including approximately 30 field-based veterinary consultants,
work closely with customers to help ensure that its feed products, programs and
services are matched with the animal producer's facilities and overall
management practices, as well as the genetic potential of the specific animal
species. To support increasingly sophisticated customers, in areas with the
highest number of breeding farms, approximately 75% of Petrini's salespeople
are specialists who focus on individual species or distribution channels.
Petrini believes that the continued market leadership of its various
products and programs will depend, in part, upon maintaining a cost-effective
balance between: weight gain, feed efficiency, yield, meat, milk and egg
quality and animal health and price.
Petrini's research and development and quality control expenditures were
approximately $760,000 per year in 1996, 1997 and 1998 and approximately
$710,000 for the nine months ended September 30, 1999.
63
Raw Materials and Packaging
The principal raw materials used for the production of animal feed are
vegetable products, the by-products of Petrini's pasta and flour business,
flour and food integrators. Packaging represents a small part of feed
production costs.
Approximately 10% of the raw materials used by Petrini for the production
of animal feed is provided internally from the by-products of its flour
processing operation. The remainder of the raw materials are acquired from
large national and foreign companies and local cooperatives. All raw materials
are readily available and Petrini has not experienced a material interruption
in supply. Petrini does not depend to a significant extent on any single
supplier.
The raw materials Petrini purchases are usually delivered at port and then
transported either by freight or common carrier to Petrini's seven
manufacturing facilities located throughout Italy. As a result, raw material
costs may vary substantially among manufacturing facilities due to local supply
and demand and varying freight costs.
The prices of many of Petrini's raw materials may be volatile. Petrini
uses the futures markets only for purchasing soybean meal. Petrini generally
prices its animal feed products based on the cost of raw materials, packaging
and certain other costs plus a conversion charge, which includes a profit
factor, and periodically adjusts its prices based on fluctuations in raw
material and packaging costs. There can be no assurance that future price
increases will be obtained in the event of increased raw materials costs.
Petrini believes that one of its major strengths is its ability to obtain
an optimal feed composition by selecting economical raw materials with the same
nutritional values in order to reduce costs.
Production
In the feed industry, potential manufacturing economies of scale are
generally not sufficient to offset the cost of shipping products significant
distances because raw materials, which make up a large percentage of finished
products, are often available locally. As a result, Petrini operates primarily
in central and southern Italy with a network of seven manufacturing facilities
with sufficient capacity to meet the demands of the local market in which each
facility is located. Petrini manufactures approximately 97% of its animal feed
products at its facilities throughout Italy. Approximately 3% of its animal
feed products are manufactured by third parties, who then ship the goods to
Petrini's manufacturing facilities for distribution. Each of Petrini's
manufacturing facilities is self-contained, from production to storage and
delivery, so as to meet the differing needs of local customers. Raw materials
are typically purchased at the local level.
In order to manufacture its products, Petrini first transports the raw
materials by freight or common carrier to its manufacturing facilities. The raw
materials are then unloaded and sampled for quality. The basic underlying
production process consists of combining the raw materials to form a feed
product which is then mixed with nutritional additives, such as:
o vitamins
o minerals and amino acids
o in some cases, medications
Petrini sells the resulting products in a variety of forms, including:
o flour
o nuts
o cubes
o crumble
o flakes
o pellets
64
The feeds produced are either of the "complete" type, which are ready to
use, or of the "supplementary" type, to which other products must be added by
the breeder.
Petrini's feed formulas are based upon the nutrient content as determined
through its proprietary scientific research. When the price of certain raw
ingredients increases, Petrini can generally adjust feed formulas by
substituting lower cost alternative ingredients to produce feed with equivalent
nutritional value.
In June 1998, Petrini initiated steps to comply with ISO 9002
Certification which certification ensures that Petrini manufactures its
products in conformity with European standards. Petrini expects that this
certification will be granted to its pasta plant in Bastia Umbra at the end of
1999, and expects that certification will be granted for its other plants by
December 31, 2000. The processes put in place to attain such certification will
ensure and demonstrate the high quality of Petrini's products.
Distribution
Animal feed is produced with fresh ingredients and delivery must therefore
be rapid. Petrini delivers approximately 1,500 tons of animal feed on a daily
basis to supply breeders and Petrini's AgriPiu franchise stores. See "--
Marketing and Sales."
The products are distributed through a network of external carriers on the
basis of long term agreements. The ability to supply certain clients directly
has been a factor in determining the location of certain production plants.
Petrini believes its plants are well situated to service its customer base
across Italy.
Petrini's success depends upon an effective system of distribution for its
products. While this method of delivery has been reliable and available at
acceptable rates thus far, there can be no assurance that Petrini will continue
to be able to negotiate acceptable freight rates in the future and that
delivery will not be disrupted for reasons including:
o adverse weather;
o natural disasters; or
o labor disputes in the trucking industry.
Marketing and Sales
Petrini primarily markets its animal feed products in Italy, through a
number of channels, including:
o direct sales to industrial breeders;
o Petrini's franchised network of AgriPiu stores; and
o other retail stores.
AgriPiu Stores and Other Retail Stores
Petrini sells feed to approximately 2,500 agricultural retail stores, of
which approximately 213 have a franchising agreement to use Petrini's trademark
AgriPiu. AgriPiu stores, which are located throughout Italy, sell feed to
family farms and retail customers for the breeding of domestic animals. They
also offer a complete range of products for animal care. The agreements with
the AgriPiu franchisees generally provide for the furnishing by Petrini of
support for the marketing of its products, and contain obligations on the
franchisee to maintain an adequate stock of products and to ensure that 100% of
its sales of animal feed are made up of products of Petrini.
Direct Sales
Petrini currently sells its products directly to approximately 4,400
breeders. Petrini sells approximately 50% of the animal feed it produces
directly to industrial breeders through a network of exclusive agents. These
agents also provide breeders with a series of ancillary services of a health
and nutritional nature.
65
The animal feed produced is sold to approximately 6,900 clients through a
network of over 138 agents who work at the local level throughout Italy. The
price of Petrini's animal feed for farmyard animals includes certain services,
such as technical assistance. Petrini also uses marketing efforts and trade
shows to generate new business and expand sales to existing customers.
The demand for particular animal feed products is affected by a number of
factors, including the price of grains and the price of the end-products of
animal producers. When the price of grains has been relatively high, more of
Petrini's customers have tended to purchase feed of the "complete" type and
Petrini's sales volume has been correspondingly higher. During periods when
commodity prices, particularly for corn, have been relatively low, animal
breeders have tended to provide their own grains, resulting in decreased
volume, and have purchased feed of the "supplementary" type, concentrated and
with nutritional additives, which have higher per unit margins.
Competition
Animal feed
The animal feed industry is currently going through a phase of
consolidation in Italy, and Petrini believes that this trend will continue.
Petrini believes that its market share is currently approximately 5.4% of the
total non-integrated animal feed market.
Strong competition exists among national as well as local producers. Some
of Petrini's competitors have:
o longer operating histories;
o broader product lines;
o significantly greater brand recognition;
o greater production capacity; and
o greater financial, marketing and other resources.
The major Italian competitors of Petrini in the animal feed market are:
o in Northern Italy, Purina, Raggio di Sole and Veronesi, Martini,
Progeo, Ferrari and Sagip;
o in Central and Southern Italy, Martini, Mignini, Raggio di Sole,
Nicolai, Valigi, Dell'Aventino, Russo e Pezzullo.
To date, Petrini has been successful at generating business directly with
some large animal breeders. However, as animal breeders become larger, they
historically have tended to integrate their business by acquiring or
constructing feed production facilities to meet some or all of their
requirements and, consequently, have relied less on outside suppliers of feed.
As the consolidation of animal breeders continues, the available market for
commercial animal feed may shrink if breeders integrate feed production and, if
so, competition may increase.
Petrini believes it distinguishes itself from its competitors through:
o its range of high quality products;
o its national production and distribution capacity; and
o offering customers assistance during product utilization.
These services include assistance in the technical and economic management
of breeding and food and veterinary services. Petrini believes that this
supportive strategy creates strong customer loyalty and allows for premium
pricing. In addition, Petrini's extensive expertise in animal nutrition
requirements and the nutritional content of various ingredients, developed
through its research and development department, combined with its
manufacturing expertise and ingredient purchasing capabilities, allow it to use
lower-cost ingredients, as well as alternative ingredients, to a greater extent
than many of its competitors.
66
Pet Food
The major companies that produce and market pet food in Italy are national
or international conglomerates that are substantially larger than Petrini and
possess significantly greater financial, marketing and other resources than
Petrini. Petrini's pet food products compete for access for shelf space on the
basis of quality and price.
Petrini believes that it differentiates itself from animal feed
manufacturers which also sell pet food by offering higher quality products,
national production and distribution capabilities and a reputation for
increasing customers' pet food sales, in the agricultural retail stores, which
represents 10% of the total pet food market.
Much of the competition in the animal feed and pet food industries centers
around price due to the commodity-like aspects of the basic product lines.
However, Petrini believes it is able to mitigate this price-oriented
competition somewhat by focusing its efforts on high-performance, value-added
products which are designed to be cost effective on the basis of weight gain,
feed efficiency, yield, animal health and price. To the extent that there is
significant price competition, Petrini's operating results and cash flow could
be adversely affected. Petrini also competes on the basis of service by:
o providing training programs for dealers;
o using species specialists with advanced technical qualifications to
consult with customers;
o developing and manufacturing customized products and feeding programs
for customers; and
o offering various financing assistance programs to attract and retain
dealers and direct customers.
The Pasta and Flour Business
Petrini operates two mills at its Bastia Umbra facility near Perugia,
Italy which produce durum wheat semolina for pasta and flour for the bakery
industry. A portion of the flour it produces is sold to third parties. The
by-products from soft and durum wheat grinding is used in Petrini's animal feed
business.
Petrini distinguishes itself by being among the few Italian pasta
producers that vertically integrate the durum wheat milling function with the
pasta production process. This allows Petrini to manage the grain procurement
process and to better control the consistency, quality and cost of its raw
materials. Petrini's pasta product line consists of over 150 products,
including:
o long goods, such as spaghetti, linguine, fettuccine, angel hair and
lasagna; and
o short goods, such as penne, elbow macaroni, mostaccioli, rigatoni,
rotini, ziti and egg noodles.
Products
Products manufactured, sold/commercialized by Petrini's food division and
their corresponding trade names include the following:
Product Tradename
Traditional pasta Spigadoro
Specialty pasta Maestri Umbri
Egg noodles La Sfoglia di casa
Pasta from organically produced semolina Cascina
Bakery line Spigadoro
Special flours Flourtoba
Extra virgin olive oil Cascina
The following table shows the gross revenue, in thousands of U.S. dollars,
and sales volume, in tons, for each main product line in Petrini's food
business for each of the nine months ended September 30, 1999 and the fiscal
years ended December 31, 1998, 1997 and 1996:
67
NINE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------ ------------------ -------------------
REVENUE VOLUME REVENUE VOLUME REVENUE VOLUME REVENUE VOLUME
--------- -------- --------- -------- --------- -------- --------- ---------
Pasta
Traditional types ......... $10,523 14,028 $13,321 18,592 $14,242 20,441 $15,008 21,892
Specialty types ........... 3,972 2,988 5,981 4,381 5,519 4,199 4,471 3,134
Health and diet pasta ..... 2,437 2,483 3,263 3,076 4,167 3,365 4,605 3,296
Industrial flour ........... 9,257 28,998 13,244 38,975 12,614 36,917 13,585 37,154
Other products ............. 1,348 1,766 1,902 2,631 2,210 2,685 2,529 2,991
------- ------ ------- ------ ------- ------ ------- ------
Total ...................... $27,537 50,263 $37,711 67,454 $38,752 67,607 $40,198 68,467
======= ====== ======= ====== ======= ====== ======= ======
Pasta Industry and Market
In 1997, worldwide pasta consumption exceeded 9,278,000 tons, including
more than 1,620,000 tons in Italy and 2,250,000 tons in the United States.
Petrini believes that its current production represents about 1% of the Italian
pasta market and that it also accounts for about 1% of pasta exported from
Italy. Petrini currently exports approximately 35% of its pasta production.
Based on industry and trade sources and Petrini's own analysis, Petrini
does not expect the Italian pasta market to experience significant growth.
However, other countries continue to experience significant growth in pasta
consumption. For example, in the United States, the world's largest pasta
market, average pasta consumption increased by 11% overall during the period
from 1993 to 1997, representing an annual average increase of approximately
2.3%.
About 12.5% of the overall amount of pasta consumed in the United States
is imported pasta. In 1997, pasta imported from Italy accounted for about 8.5%
of the overall market for pasta in the United States.
Petrini believes that the United States market offers significant
opportunities for increased sales. In 1998, sales to the United States
accounted for just 5% of Petrini's total pasta sales worldwide. With the aim of
expanding its presence in the United States, Petrini recently formed a company
in the United States called Petrini Foods International, Inc.
Petrini believes that there are opportunities for continued growth in the
United States market for pasta products as a result of a variety of factors,
including:
o consumer perception of pasta as a healthy food;
o ease of preparation;
o low cost in comparison to other types of foods; and
o flexibility of pasta products as an ingredient in salads and entrees.
Petrini also believes that American consumers are demanding more healthy
food products as they learn more about the importance of diet in a healthy
lifestyle. Petrini believes that the sale of pasta, which is generally low in
fat and high in complex carbohydrates, is benefiting from the trend towards
healthier eating. However, Petrini cannot predict whether the pasta industry
will continue to expand in the United States, or elsewhere, or that current
levels of public attention to personal health, fitness and diet or current
perceptions of healthfulness associated with pasta will continue. Different
countries and regions within countries may have different public perceptions
and concerns about health and diet. This may adversely impact Petrini's
marketing and expansion strategy and cause it to incur greater expenses in
promoting its products.
To date, the majority of Petrini's sales in the United States pasta market
have been through supermarket chains. Petrini's primary strategy for expanding
its presence in the United States market is to exploit the significant hotels,
restaurants and catering market, which Petrini believes may enable it to
achieve higher operating margins.
Petrini also intends to expand its presence in other European markets such
as Germany, France and England.
68
The Industrial Flour Business and Market
The industrial flour produced by Petrini is sold to:
o major Italian food groups such as Nestle, Ferrero, Plasmon and Bauli;
and
o small and medium sized bakeries for the production of cookies,
panenoni, pandori, pizzas and croissants.
The flour is produced using advanced technologies and a selection of high grade
raw materials imported from, among other countries, the United States, Canada
and France.
In 1998, Petrini sold 38,975 tons of industrial flour, realizing total
revenues of approximately $14 million.
Raw Materials
Raw materials for the production of pasta and flour are readily available
and Petrini has not experienced supply interruptions. Petrini is not dependent
on a single supplier.
The main raw materials used in the production of pasta and flour are
wheat, semolina, eggs and gluten. The semolina used by Petrini for the
production of pasta is entirely supplied by its own mill in Bastia Umbra, which
mills 45,000 tons of durum wheat each year. Petrini purchases its durum wheat
from farmers, cooperatives and importers. 90% of this durum wheat comes from
Italy. This purchasing method ensures that the extracted semolina meets
Petrini's specifications. Petrini believes that using an integrated production
cycle is an essential element in producing high quality pasta.
The price of durum wheat has fluctuated in past years by as much as 35%.
Although, there can be no assurances, Petrini believes that, due to the new
European Union agricultural policy which provides for the elimination of duties
relating to imports from non-European Union countries and for the support of
national farming, the price of wheat will become more stable in future.
Petrini purchases its packaging materials for pasta, including flexible
films, cardboard containers and boxes, from external suppliers and it believes
that the packaging costs represent approximately 13% of the cost for the
finished product with respect to pasta and approximately 1% with respect to
flour. Petrini believes that it has adequate sources of packaging supplies.
Production
Petrini's Bastia Umbra plant near Perugia, Italy produces both semolina,
which is used to make pasta, and industrial flour.
Pasta's primary ingredient is semolina, which is extracted from durum
wheat through Petrini's milling process. Each variety of durum wheat has its
own unique set of protein, gluten content, moisture, density, color and other
attributes which affect the quality and other characteristics of the semolina.
Petrini blends semolina from different wheat varieties.
Durum wheat is shipped to Petrini's Bastia Umbra production facility near
Perugia, directly from collection warehouses, by Petrini's contract truckers.
The durum wheat delivered to the facility is sampled, blended and pre-cleaned.
Next, the wheat is tempered by raising its moisture content to the optimal
level required for milling. The cleaned and tempered wheat is then conveyed to
the mill where grinding, sifting, and purifying processes extract the semolina.
Semolina is then pneumatically distributed from the mill to the pasta
production area of the facility.
After being mixed with water, the semolina is extruded into the desired
pasta shapes, travels through computer-controlled high-temperature dryers and
is stabilized at room temperature. Petrini then packages the pasta in a wide
variety of packaging configurations on highly-automated film, carton and bulk
packaging systems and forwards it through automated conveyors to the
distribution center to be palletized and stored prior to shipment.
Petrini's entire pasta production process is controlled by programmable
logic controllers which enable all of the production lines to be operated and
monitored by minimal staff.
69
The quality of Petrini's pasta products is tested through regular internal
laboratory testing on physical characteristics such as color, presence of
impurities, shape and consistency following the cooking process, including the
loss of starch and proteins. Petrini's use of bronze molds is a key element in
ensuring the production of high quality pasta.
The production of industrial flour involves the feeding of unprocessed
wheat into a series of automatic milling cylinders followed by an extended
sieving process. Flour obtained in this way is then packaged, boxed and stored
in a warehouse until it is shipped.
Distribution
Petrini's pasta distribution center is located in its Bastia Umbra
facility. Warehousing and distribution facilities are integrated with Petrini's
production process.
In 1998, Petrini sold 18,880 tons of food products in Italy. The principal
channels of distribution were traditional retail outlets and wholesale
distributors. Petrini produces a significant amount of health and diet pasta
which is sold by other companies under their own brand names. Petrini arranges
for the distribution of its pasta products to its customers in Italy, using
contract carriers to transport products to their final destination. Petrini can
usually satisfy client demand within 3 or 4 days.
Most of Petrini's customers use inventory management systems which track
sales of particular products and rely on reorders being rapidly filled by
suppliers. Petrini works with its customers to forecast consumer demand which
allows it to anticipate customer demand.
Sales and Marketing
Pasta
Approximately 65% of the pasta produced by Petrini is sold in Italy. Of
this amount, approximately 20% of pasta sales are effected directly by Petrini
to its own clients while the remaining 80% of sales are carried out by a sales
organization consisting of 80 independent agents. Most of these sales
arrangements are for indefinite periods, and Petrini generally cannot terminate
such arrangements without paying an indemnity under the Italian Civil Code. The
amount of such indemnity varies from contract to contract. Under these
arrangements, products are usually ordered, produced, sold and shipped within
30 days. As a result, Petrini does not generally have any significant backlog
of orders. Petrini has also entered into supply arrangements under which it
manufactures private label pasta products for certain of its customers in
quantities established in advance. The prices of Petrini's private label pasta
are generally tied to a market price near the time of order.
During the years ended December 31, 1996, 1997 and 1998 and the nine
months ended September 30, 1999, approximately 5%, 4%, 3%, and 8%,
respectively, of Petrini's total pasta revenues were derived from the United
States. In the United States, Petrini's pasta is sold primarily in East Coast
supermarket chains including:
o Wakefern;
o Food Emporium;
o Shaws;
o King Kullen; and
o Pathmark.
Petrini also sells approximately 30% of its pasta products outside of
Italy and the United States. Petrini's exports are sold to importers, who then
resell them abroad. Petrini has distribution agreements with distributors in
several countries located in Southeast Asia which accounted for approximately
16% of its total food division revenues for each of the six months ended June
30, 1999 and the year ended December 31, 1998.
70
Petrini markets its pasta, both in Italy and abroad, principally throug
two distribution channels:
o Retail: The retail distribution channel consists of shops and
supermarkets which sell consumers various types of pasta both with
Petrini's brands and private labels. Retail distribution accounts for
the majority of pasta distribution by Petrini.
o Food Service or Catering: The food service distribution channel
comprises distributors which supply restaurants, hotels, schools and
hospitals.
Flour
Approximately 50% of Petrini's production of industrial flour is sold to
large companies, such as Ferrero, Nestle and Plasmon, for use in producing
confectionery products. The remaining 50% is sold through Petrini's sales
agents. All of Petrini's flour sales are made in Italy.
The following chart shows Petrini's sales of pasta and flour products in
its major markets for the nine months ended September 30, 1999 and the years
ended December 31, 1998, 1997 and 1996:
NINE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- ------------------- ------------------- ------------------
(IN THOUSANDS)
Italy ................... $21,462 $29,670 $30,270 $31,838
Japan ................... 1,921 2,630 2,979 2,823
United States ........... 754 769 1,181 1,444
South Korea ............. 676 744 700 613
Denmark ................. 434 482 457 443
Australia ............... 214 489 488 314
Portugal ................ 277 368 323 286
Lebanon ................. 139 254 219 292
France .................. 240 353 286 213
Other countries ......... 1,419 1,954 1,839 1,932
------- ------- ------- -------
Total ................... $27,536 $37,713 $38,752 $40,198
======= ======= ======= =======
Competition
Petrini operates in a highly competitive environment against numerous
well-established Italian, regional and foreign companies, and many smaller
companies. Petrini's competitive environment depends to a significant extent on
the aggregate industry capacity relative to aggregate demand for pasta
products. Petrini believes that pasta production capacity in Italy is currently
approximately three million tons in the aggregate. No significant increases or
decreases in capacity have been announced or are expected by other companies.
Petrini believes there is worldwide over-capacity in the industry, and as a
result, there has been consolidation, which is expected to continue in the
future. Petrini believes that consolidation and over-capacity has placed
significant pressure on price, thereby increasing competition. Petrini competes
in:
o the procurement of raw materials;
o the development of new products and product lines;
o the improvement and expansion of previously introduced products and
product lines; and
o the production, marketing and distribution of its products.
Petrini's competition in Italy includes:
o Barilla, the largest pasta producer in Italy, with approximately 29%
of the market; and
o approximately 150 other Italian pasta producers, of which approximately
50 have a potential production capacity of over 100 tons a day.
Petrini believes that no pasta producer other than Barilla has more than
5% of the Italian market.
Petrini's competitors in the United States include:
71
o large multi-national companies such as:
o New World Pasta, with brands such as San Giorgio and Ronzoni; and
o Borden, with brands such as Prince and Creamette;
o regional U.S. producers of retail and institutional pasta; and
o Italian producers such as De Cecco and Barilla.
Compared to Petrini, some of Petrini's competitors have:
o longer operating histories;
o broader product lines;
o significantly greater brand recognition;
o greater production capacity; and
o financial, marketing and other resources.
Petrini's products also compete with a broad range of food products.
Competition in these markets generally is based on product quality and taste,
pricing, packaging and customer service and logistics capabilities.
In May 1995, Petrini and 20 other Italian pasta producers were named as
subjects of a petition filed with the United States International Trade
Commission and the Department of Commerce by producers of pasta in the United
States, including Borden, Hershey and Gooch Foods, Inc. The petition alleged
that the pasta industry in the United States was materially injured or
threatened with material injury by reason of certain imports from Italy and
Turkey that were being subsidized and sold in the United States at less than
fair market value. In connection with the petition, the International Trade
Commission instituted anti-dumping investigations covering the period from
October 17, 1995 through December 31, 1996. As a result of the investigations,
the Department of Commerce instructed United States customs officials to assess
countervailing duties on certain pasta exporters, based on net subsidy rates.
An ad valorem rate of 2.27% was applied to exports by Petrini for the period of
October 17, 1995 to December 31, 1995. Such practices by American pasta
producers or by exporters, if continued or increased, may materially adversely
affect Petrini's ability to expand in the United States market. Petrini cannot
predict whether it will be subject to review by the Department of Commerce
again, or what impact any such review may have on the importation of pasta into
the United States.
Management Information Systems
Petrini's production, distribution, sales and marketing operations are
supported by a computer system UNISYS 2200-400 that uses software which has
been tailored to Petrini's management processes and integrates its:
o production;
o purchasing;
o order entry;
o inventory management;
o distribution; and
o accounting systems.
Petrini's management information systems were recently upgraded in anticipation
of Petrini's growth and desire to continue to offer its customers value-added,
efficient services. Petrini has invested substantial amounts in electronic data
interchange and efficient consumer response systems to streamline the order,
invoicing and inventory management functions. Petrini believes that its recent
hardware and software upgrades have adequately addressed the systems operations
issues relating to the year 2000.
72
Trademarks and Patents
Petrini holds a number of registered and common law trademarks which it
considers to be of considerable value and importance to its business. Petrini's
main trademarks include the following:
Animal feed
Casea Alfa Activa Lacta Biosana
Cotton Beef Integra First Vispo Nutrilinea
Sani Sapori Ovicomplet P.A.S.T.O. Il Biologico Tradizione
Italiana
Pasta and flour
Spigadoro La Sfoglia diCasa Vogliadi Pasta Flourtoba
Petrini's trademarks listed above are owned by Petrini and registered in
Italy and in Petrini's other principal markets. In addition, Petrini has filed
trademark applications or registrations for its trademarks in China, Japan,
Malaysia, South Korea, Taiwan, the United States and Venezuela. Petrini
believes that all material trademark registrations are valid and current, and
that all licenses have either been recorded or applications have been filed to
record such licenses where required to avoid forfeiture of its trademarks in
its principal markets.
Petrini's trademarks are widely used in product marketing and are
themselves frequently incorporated into product designs. In view of the
importance of Petrini's trademarks to its business, Petrini has a policy to
prosecute trademark infringement vigorously.
Petrini is not a party to any material litigation involving its trademarks
and there are no material restrictions on Petrini's ability to use its
trademarks.
Employees
As of October 31, 1999, Petrini had 413 full-time employees plus 10
part-time employees with contracts expiring no later than December 31, 1999,
all of whom were located in Italy. Of its employees, approximately 188 work in
the animal feed business, 171 work in the pasta and flour business and 64
perform administrative services.
Petrini's employment relations in Italy are governed by numerous layers of
regulatory and contractual requirements, including:
o the Italian Civil Code;
o the Statute of Laborers;
o national collective labor agreements; and
o individual employer collective labor agreements.
See "-- Government Regulation" for a discussion of the Italian Civil Code and
employment relations.
Employees in Italy in the food sector are covered by a national collective
bargaining agreement (the "CLA") that is negotiated between the national
association of the companies within the food sector and the national union. The
CLA addresses work time, benefits, wages and bonuses and other specific issues
affecting the working conditions of Petrini's employees. In addition to the
national collective bargaining agreement, individual employers such as Petrini
enter into separate local contracts with the labor unions representing their
employees. Petrini is also subject to a number of similar regulatory and
contractual requirements governing its relations with its managers. In
addition, upon a transfer of property of a going concern, a manager may resign
and receive:
o an indemnity for termination of employment; and
73
o an additional indemnity in an amount equal to 1/3 of the termination
indemnity in the event that the employer does not provide notice of
discharge, which is equal to the amount of salary the employee would
have received during the required notice period which ranges from eight
to twelve months depending on the seniority of management.
Italian law provides that, upon termination of employment, employees are
entitled to receive a severance payment based on annual salary, length of
employment and inflation. As of September 30, 1999, Petrini had approximately
$8.0 million reserved for such termination payments, as required by Italian
law.
Petrini has not experienced any significant work stoppages and believes
that its relationship with its employees is good.
Facilities
Petrini's principal offices and facilities, owned or leased, and their
current uses are described in the following table:
FACILITY SIZE CAPACITY ANNUAL OWNED
PLANT LOCATION (SQ FT.) USE TON/DAY RENT OR LEASED
- -------------------------------- --------------- --------------------- ------------- -------- ----------
Bastia Umbra (Perugia) ......... 1,355,725 Corporate
headquarters
Mill 335/tons -- Owned
Pasta plant 130/tons -- Owned
Animal feed plant 800/tons -- Owned
Padua .......................... 322,917 Animal feed plant 390/tons -- Owned
Naples ......................... 416,563 Animal feed plant 225/tons -- Owned
Alessandria .................... 348,643 Animal feed plant 150/tons -- Owned
Bari ........................... 215,633 Animal feed plant 130/tons -- Owned
Cagliari ....................... 55,570 Animal feed plant 120/tons -- Owned
Catania ........................ 80,586 Animal feed plant 80/tons -- Owned
Other Locations ................
Genetic Centre ................. Cannara Pig breeding plant 500 -- Owned(1)
sows in
production
Pig Finishing Plant ............ Magione Pig finishing plant 500 hogs in N/A Leased(2)
production
- ----------
(1) Leased to third parties since October 1, 1999
(2) Subleased to third parties since October 10, 1999
Petrini's largest plant for the production of both animal feed and pasta
and flour products is located in Bastia Umbra, near Perugia. The municipality
of Bastia has initiated a rezoning proceeding with respect to the land upon
which Petrini's plant is located. The rezoning proceeding envisions the total
demolition of existing buildings and re-classifying the land as residential and
public park space.
In the event that the rezoning is implemented, Petrini will be required to
relocate its entire plant from its current location in Bastia Umbra.
Although Petrini does not expect a decision to be finalized in the near
future and would be compensated for the fair value of the property, relocation
of these operations to a new location could materially and adversely affect its
business operations and financial condition as a result of:
o operational problems;
o production interruptions;
74
o quality control concerns;
o delays in shipments; and
o costs and other risks associated with the relocation of these
operations and the possible hiring of new employees.
Petrini has undertaken a study of possible relocation alternatives, which
include both the subsidized construction or acquisition of another plant. As a
result of such study, Petrini believes that some of the adverse consequences
arising out of a need to move its plant from Bastia Umbra can be mitigated.
Legal Proceedings
Petrini is a party to numerous legal proceedings incidental to the conduct
of its business, none of which individually or in the aggregate is material to
its financial condition and results of operations.
Governmental Regulation
Many aspects of Petrini's operations are subject to government regulation
in the countries in which it operates. Such regulations include those relating
to:
o the operation of Petrini's production facilities;
o the production, packaging, labeling and marketing of Petrini's
products;
o environmental regulations;
o currency conversion and repatriation;
o taxation of Petrini's earnings and earnings of its personnel; and
o Petrini's use of local employees and suppliers.
For example, Petrini is required to obtain licenses and permits, and is
subject to governmental inspections in connection with its operations in Italy,
including licenses and permits relating to the manufacture of pasta and flour,
building codes, safety and usability of plants and other areas of its daily
operations. Petrini is affected by changing taxes, price controls and laws and
regulations relating to the industries in which it operates.
Petrini's operations are also subject to the risk of changes in Italian
and foreign laws and policies which may impose restrictions on it, including
trade restrictions, which could materially adversely affect its business,
financial condition and results of operations. Other types of government
regulation which could, if enacted or implemented, materially and adversely
affect Petrini's operations include:
o expropriation or nationalization decrees;
o confiscatory tax systems;
o primary or secondary boycotts or embargoes directed at specific
countries or companies;
o import restrictions or other trade barriers;
o mandatory sourcing rules;
o high labor rates; and
o fuel price regulation.
Petrini cannot determine to what extent future operations and earnings may
be affected by new legislation, new regulations or changes in or new
interpretations of existing regulations.
Petrini's animal feed products are also subject to regulation by the
Italian Industry Ministry and the Italian Health Ministry. The Health Ministry
regulates all ingredients that are part of animal feed or that contact animal
feed. It also regulates animal drugs that come in dosage form for
administration to animals, or that are added through water or feed. Petrini's
production facilities are also subject to periodic inspection by a local health
agency.
75
Labor Relations
Petrini's employment relations in Italy are governed by numerous layers of
regulatory and contractual requirements, including:
o the Italian Civil Code;
o the Statute of Laborers;
o national collective labor agreements; and
o individual employer labor agreements.
The Italian Civil Code addresses:
o protection of personal data of employees and consents of such
employees prior to disclosure;
o vacation, illness and maternity leave;
o requires employers with more than 35 employees (such as Petrini) to
hire at least 15% of its total employees from among those in certain
protected classes; and
o upon termination of employment, entitles employees to receive a defined
compensation payment based on length of employment, employment category
and compensation. As of September 30, 1999, Petrini had approximately
$8.0 million reserved for such termination payments, as required by
Italian law.
See "--Employees" for a discussion of the collective employment agreements
by which Petrini is bound.
Environmental
Petrini's operations, particularly its manufacturing activities, are
affected by Italian environmental protection laws and regulations, such as
those governing discharges into the air and water, the handling and disposal of
solid and hazardous wastes, the remediation of soil and groundwater
contaminated by petroleum products or hazardous substances or wastes, and the
health and safety of employees.
Environmental laws and regulations have changed substantially and rapidly
over the last 20 years and the requirements of these laws and regulations have
tended to become increasingly more stringent, complex and costly to comply
with. Although Petrini believes that it is in substantial compliance with
existing laws and regulations, there can be no assurance that substantial costs
for compliance will not be incurred in the future. Moreover, it is possible
that other developments, such as stricter environmental laws, regulations and
enforcement policies thereunder, could result in additional costs or
liabilities to Petrini.
Petrini has conducted a number of environmental audits of its major
facilities to identify and categorize potential environmental exposures and to
ensure compliance with applicable environmental laws, regulations and permit
requirements. This effort has required and may continue to require operational
modifications to Petrini's facilities, including installation of pollution
control devices and cleanups. The costs incurred to date by Petrini in
connection with the performance of environmental audits and operation
modifications to its facilities have not been material. To the extent Petrini
might incur any such compliance costs, these costs most likely would be
incurred over a number of years. However, no assurance can be given that future
regulatory action regarding soil or groundwater at Petrini's facilities, as
well as continued compliance with environmental requirements, will not require
it to incur significant costs that may have a material adverse effect on
Petrini's financial condition and results of operations.
Additionally, Petrini maintains a proactive approach to dealing with
environmental matters and it is Petrini's policy to eliminate and minimize
generation of wastes at its facilities through plant operations, process design
and maintenance. Petrini's program includes, among other things, formal
environmental training for targeted employees and assistance to its facilities
in complying with environmental regulations and identifying potential
environmental liabilities. Furthermore, Petrini has implemented management
76
procedures designed to reduce the generation of hazardous waste and the on-site
use and storage of hazardous chemicals and to prevent exposure to such
substances. Petrini believes the continued development and maintenance of its
environmental program will continue to reduce the potential for unanticipated
expenditures for environmental remediation and compliance. Petrini continually
strives to reduce wastes by sending these materials off-site for recycling
and/or reuse. Petrini has taken, and continues to take into account, the
requirements of such environmental laws and regulations in the improvement,
modernization, expansion and start-up of its facilities and believes that it is
currently in substantial compliance with such material laws and regulations.
Petrini has been and may continue to be unable to obtain adequate
environmental damage or pollution insurance at a reasonable cost. Although
Petrini maintains general liability insurance, this insurance is subject to
coverage limitations, deductibles and exclusions and may exclude coverage for
losses or liabilities relating to pollution damage. Therefore, there can be no
assurance that liabilities that may be incurred by Petrini will be covered by
its insurance policies, or if covered, that the dollar amount of such
liabilities will not exceed the policy limits. Even a partially uninsured
claim, if successful and of significant magnitude, could have a material
adverse effect on Petrini's business, financial condition and results of
operations.
The above mentioned laws identify the liabilities of the employer and/or
of the persons delegated by the employer. Persons who are or were responsible
for releases of hazardous substances may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment and for damages to natural resources, and it is
not uncommon for neighboring landowners and other third parties to file claims
for personal injury and property damage allegedly caused by the hazardous
substances released into the environment. Italian environmental law also
imposes criminal penalties upon persons who are or were reponsible for releases
of hazardous substances in cases of major damage to natural resources.
Additionally, various Italian laws, regulations and ordinances govern the
removal, encapsulation or disturbance of asbestos containing materials
("ACMs"). Such laws and regulations may impose liability for the release of
ACMs and may provide for third parties to seek recovery from owners or
operators of facilities at which ACMs were or are located for personal injury
associated with exposure to ACMs. Petrini is aware of the presence of ACMs at
its facilities, but it believes that such materials are in acceptable condition
at this time. Petrini believes that any future costs related to remediation of
ACMs at these sites will not be material, either on an annual basis or in the
aggregate, although there can be no assurance with respect thereto.
It is possible that environmental liabilities in addition to those
described above may arise in the future. As a result, Petrini could incur
significant future liability should the laws of the jurisdictions in which it
operates change to impose additional environmental remedial obligations. The
precise costs associated with these or other future environmental liabilities
are difficult to predict at this time.
77
FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements are based on the historical financial statements of IAT and Petrini
included elsewhere in this proxy statement/prospectus which give effect to the
following:
o the acquisition of 100% of the outstanding common stock of Petrini by
IAT;
o the discontinuance of the computer businesses of IAT; and
o the push-down accounting adjustments relating to the acquisition of
100% of the outstanding common stock of Petrini by Spigadoro.
The transaction will be accounted for as a reverse acquisition whereby IAT
will be the legal acquirer and Petrini will be the accounting acquirer. The
allocation of the push-down accounting adjustments for Petrini and the purchase
accounting adjustments for IAT are preliminary. However, IAT does not expect
that the final allocations will materially differ from the preliminary
allocations set forth herein. The unaudited pro forma condensed consolidated
statements of operations give effect to the events described above as if they
occurred as of January 1, 1998, and the unaudited pro forma condensed
consolidated balance sheet gives effect to the events described above as if
they occurred as of September 30, 1999. The events described above and the
related adjustments are described in the accompanying notes. The pro forma
adjustments are based upon available information and certain assumptions that
management believes are reasonable. The Pro Forma Financial Statements do not
purport to represent what IAT's results of operations or financial condition
would actually have been had the events described above in fact occurred on
such dates or to project IAT's results of operations or financial condition for
any future period or date. The Pro Forma Financial Statements should be read in
conjunction with the historical financial statements of IAT and Petrini
included elsewhere in this proxy statement/prospectus and "--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
78
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
IAT IAT IAT
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------ ---------------- -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 5,102 $ (373)(A) $ 4,729
Marketable securities .............................. 746 746
Securities held for sale ........................... 2,940 2,940
Accounts receivable, net ........................... 1,965 (1,965)(A)
Taxes receivable ...................................
Deferred income taxes ..............................
Inventories ........................................ 1,713 (1,713)(A)
Cash to factor .....................................
Other current assets ............................... 176 (126)(A) 50
---------- ---------- ----------
Total current assets ............................... 12,642 (4,177) 8,465
---------- ---------- ----------
Equipment and improvements, net ..................... 391 (391)(A)
---------- ---------- ----------
Other assets:
Intangible assets ..................................
Excess of cost over net assets acquired ............ 3,437 (3,437)(A)
Deferred income taxes ..............................
Other assets ....................................... 1,126 (1,067)(A) 59
Assets held for disposition ........................ 3,000 (A) 3,000
---------- ---------- ----------
Total other assets ................................. 4,563 (1,504) 3,059
---------- ---------- ----------
Total assets ....................................... $ 17,596 $ (6,072) $ 11,524
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings .............................. $ 356 $ (356)(A)
Current portion of long-term debt ..................
Liability to factor ................................
Accounts payable and other current liabilities ..... 2,861 (2,465)(A) $ 396
---------- ---------- ----------
Total current liabilities .......................... 3,217 (2,821) 396
---------- ---------- ----------
Long-term debt, net of current portion ..............
Employee termination indemnities ....................
Other liabilities ................................... 27 (27)(A)
---------- ---------- ----------
Total long-term liabilities ........................ 27 (27)
---------- ---------- ----------
Total liabilities .................................. 3,244 (2,848)(A) 396
---------- ---------- ----------
Convertible debentures .............................. 2,848 2,848
---------- ---------- ----------
Stockholders' Equity
Preferred stock ....................................
Common stock ....................................... 101 101
Capital in excess of par ........................... 32,595 32,595
Step up adjustments ................................
Accumulated other comprehensive income ............. 404 404
Treasury stock ..................................... (2,204) (2,204)
Retained earnings (accumulated deficit) ............ (19,392) (3,224)(A) (22,616)
----------- ---------- -----------
Total stockholders' equity ......................... 11,504 (3,224) 8,280
----------- ---------- -----------
Total liabilities and stockholders' equity ......... $ 17,596 $ (6,072) $ 11,524
=========== ========== ===========
PETRINI ADJUSTMENTS PRO FORMA
------------ -------------------- ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 110 $ 4,839
Marketable securities .............................. 746
Securities held for sale ........................... 2,940
Accounts receivable, net ........................... 35,909 35,909
Taxes receivable ................................... 7,207 7,207
Deferred income taxes .............................. 532 $ (532)(B)
Inventories ........................................ 12,495 12,495
Cash to factor ..................................... 4,422 4,422
Other current assets ............................... 1,212 1,262
---------- ------------ --------
Total current assets ............................... 61,887 (532) 69,820
---------- ------------ --------
Equipment and improvements, net ..................... 26,125 15,380 (B) 41,505
---------- ------------ --------
Other assets:
Intangible assets .................................. 4,253 606 (B) 4,859
Excess of cost over net assets acquired ............ 5,923 (B) 5,923
Deferred income taxes .............................. 3,095 (3,095)(B)
Other assets ....................................... 2,652 2,711
Assets held for disposition ........................ 3,000
---------- ------------ --------
Total other assets ................................. 10,000 3,434 16,493
---------- ------------ --------
Total assets ....................................... $ 98,012 $ 18,282 $127,818
========== ============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings .............................. $ 21,945 $ 21,945
Current portion of long-term debt .................. 2,473 $ 7,388(D) 9,861
Liability to factor ................................ 4,422 4,422
(183)(E)
Accounts payable and other current liabilities ..... 23,164 600 (E) 23,977
---------- ------------ --------
Total current liabilities .......................... 52,004 7,805 60,205
---------- ------------ --------
Long-term debt, net of current portion .............. 7,355 12,115 (D) 19,470
Employee termination indemnities .................... 8,333 8,333
Other liabilities ................................... 3,709 3,022 (B) 6,731
---------- ------------ --------
Total long-term liabilities ........................ 19,397 15,137 34,534
---------- ------------ --------
Total liabilities .................................. 71,401 22,942 94,739
---------- ------------ --------
Convertible debentures .............................. (2,848)(E)
---------- ------------ --------
Stockholders' Equity
Preferred stock ....................................
(21,085)(C)
Common stock ....................................... 21,569 25 (E) 610
15,260 (B)
(12,878)(C)
(19,503) (D)
Capital in excess of par ........................... 2,781 2,406 (E) 20,661
Step up adjustments ................................ (11,751) 11,751 (C)
Accumulated other comprehensive income ............. 30 (404)(C) 30
Treasury stock ..................................... (2,204)
Retained earnings (accumulated deficit) ............ 13,982 22,616 (C) 13,982
----------- ------------ ----------
Total stockholders' equity ......................... 26,611 (1,812) 33,079
----------- ------------ ----------
Total liabilities and stockholders' equity ......... $ 98,012 $ 18,282 $127,818
=========== ============ ==========
79
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
IAT IAT IAT
HISTORICAL ADJUSTMENTS AS ADJUSTED PETRINI ADJUSTMENTS PRO FORMA
------------ ------------------- ------------- ----------- ----------------- ------------
(IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION)
Net sales ......................... $ 31,164 $ (31,143)(A) $ 21 $103,224 $103,245
Cost of sales ..................... 29,445 (29,445)(A) 74,214 $ 668 (F) 74,882
-------- ---------- -------- -------- --------- --------
Gross profit ...................... 1,719 (1,698) 21 29,010 (668) 28,363
-------- ---------- ------- -------- --------- --------
Operating expenses:
Selling expenses ................. 1,825 (1,825)(A) 19,332 19,332
General & administrative
expenses ....................... 1,897 (1,114)(A) 783 5,768 245 (F) 6,796
-------- ---------- ------- -------- --------- --------
Total operating expenses ......... 3,722 (2,939) 783 25,100 245 26,128
-------- ---------- ------- -------- --------- --------
Operating income (loss) ........... (2,003) 1,241 (762) 3,910 (913) 2,235
(3,440)(E)
110 (E)
Other income (expense) ............ 3,593 (83)(A) 3,510 (1,132) (728)(G) (1,680)
-------- ---------- ------- -------- --------- --------
Income (loss) before
income taxes ..................... 1,590 1,158 2,748 2,778 (1,531) 555
Income taxes (benefit) ............ 1,961 (285)(H) 1,676
-------- ---------- ------- -------- --------- --------
Income (loss) from
continuing operations ............ $ 1,590 $ 1,158 $ 2,748 $ 817 $ (1,246) $ (1,121)
======== ========== ======= ======== ========= ========
Income per common share --
basic .......................... $ 0.17 $ 0.29 $ (0.02)
======== ======= ========
diluted ........................ $ 0.16 $ 0.27 $ (0.02)
======== ======= ========
Weighted average number of
common shares
outstanding -- basic ............. 9,332 9,332 60,150
======== ======= ========
diluted .................... 10,614 10,614 60,150
======== ======= ========
80
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
IAT IAT IAT
HISTORICAL ADJUSTMENTS AS ADJUSTED PETRINI ADJUSTMENTS PRO FORMA
------------ ------------------- ------------- ----------- ---------------- ------------
(IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION)
Net sales ......................... $ 38,340 $ (38,315)(A) $ 25 $141,127 $141,152
Cost of sales ..................... 35,465 (35,465)(A) 104,347 891 (F) 105,238
-------- ---------- -------- -------- ---- --------
Gross profit ...................... 2,875 (2,850) 25 36,780 (891) 35,914
-------- ---------- -------- -------- ---- --------
Operating expenses:
Selling expenses ................. 2,821 (2,821)(A) 24,480 24,480
General & administrative
expenses ....................... 2,112 (972)(A) $ 1,140 7,800 326 (F) 9,266
-------- ---------- -------- -------- ---- --------
Total operating expenses ......... 4,933 (3,793) 1,140 32,280 326 33,746
-------- ---------- -------- -------- ---- --------
Operating income (loss) .......... (2,058) 943 (1,115) 4,500 (1,217) 2,168
75 (E)
Other income (expense) ............ (97) (85)(A) (182) (2,160) (971)(G) (3,238)
-------- ---------- -------- -------- ------ --------
Income (loss) before
income taxes ..................... (2,155) 858 (1,297) 2,340 (2,113) (1,070)
Income taxes (benefit) ............ (412) 412 (A) 1,901 (380)(H) 1,521
-------- ---------- -------- -------- ------ --------
Income (loss) from
continuing operations ............ $ (1,743) $ 446 $ (1,297) $ 439 $(1,733) $ (2,591)
======== ========== ======== ======== ======= ========
Loss per common share --
basic and diluted ................ $ (0.19) $ (0.14) $ (0.04)
======== ======== ========
Weighted average number of
common shares outstanding
-- basic and diluted ............. 9,327 9,327 60,145
======== ======== ========
81
NOTES TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(A) The pro forma financial statements give effect to the proposed
discontinuance of the computer businesses of IAT as contemplated in this proxy
statement/prospectus in connection with the acquisition of Petrini. The
unaudited pro forma condensed consolidated balance sheet reflects the
reclassification of the assets and liabilities of the computer businesses to
assets held for sale. The amounts recorded have been adjusted to give effect to
management's estimate of their net realizable value resulting in an estimated
loss on disposal of $3,224,000. The unaudited pro forma condensed consolidated
statements of operations reflect the reclassification of the operations of
these computer businesses to discontinued operations resulting in a loss from
discontinued operations for the nine months ended September 30, 1999 and the
year ended December 31, 1998 of $1,158,000 and $446,000, respectively.
(B) The unaudited pro forma condensed consolidated balance sheet gives
effect to the proposed acquisition of Petrini by IAT by combining the
historical balance sheet of Petrini and the historical balance sheet of IAT,
adjusted for the discontinued operations as mentioned in (A) above and the
purchase accounting adjustments in (E) below, at September 30, 1999. The
transaction will be accounted for as a reverse acquisition, and Petrini will be
the accounting acquirer and IAT will be the legal acquirer, using the purchase
method of accounting. During September 1998, Spigadoro entered into a
transaction to acquire 67% of the outstanding common stock of Petrini from
Carlo Petrini and received an option to acquire the remaining 33% interest from
the bankruptcy receiver of the minority shareholder of Petrini. The option to
purchase the remaining 33% will be exercised prior to the consummation of the
acquisition by IAT. Since Spigadoro will own 100% of Petrini immediately prior
to IAT's acquisition, the purchase accounting adjustments are "pushed-down" to
Petrini and are included within the pro forma adjustments in the accompanying
pro forma financial statements. The purchase price for Petrini paid by
Spigadoro, including cash paid at closing and the issuance of debt, aggregated
$44,360,000 and is allocated as follows:
(IN THOUSANDS)
Cash, notes and common stock issued .......... $ 44,360
Petrini liabilities assumed .................. 82,073
--------
$126,433
========
Allocated to assets as follows:
SEPTEMBER 30, 1998
----------------------------------------
(IN THOUSANDS)
FMV HISTORICAL ADJUSTMENT
----------- ------------ -----------
Current assets ..................... $ 68,261 $ 68,793 $ (532)
Equipment and improvements ......... 46,645 31,265 15,380
Intangibles ........................ 5,935 5,329 606
Other assets ....................... 2,691 5,786 (3,095)
Deferred tax liability ............. (3,022) -- (3,022)
Goodwill ........................... 5,923 -- 5,923
-------- -------- --------
$126,433 $111,173 $ 15,260
======== ======== ========
The above adjustment was included in the pro forma condensed consolidated
balance sheet in the adjustment column.
82
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(C) The unaudited pro forma condensed consolidated balance sheet was
adjusted to reflect the issuance of 48,366,530 shares of IAT common stock to
Spigadoro, in exchange for 100% of the outstanding common stock of Petrini. As
a result of the reverse acquisition, the unaudited pro forma condensed
consolidated balance sheet was adjusted to reflect the historical equity of
Petrini. The historical retained earnings of Petrini has been carried forward
and the remaining equity accounts of Petrini have been reclassified to reflect
the par value of the IAT stock issued with any differences reflected as paid-in
capital. In addition, paid-in capital of Petrini has been increased by an
amount equal to the excess of cost over book basis of net assets acquired and
reduced by the amount of Spigadoro's debt assumed by IAT. The pro forma
condensed consolidated balance sheet also reflects the reclassification of
IAT's equity accounts exclusive of common stock and treasury stock to paid-in
capital.
(D) In connection with this transaction, IAT assumed certain debt of
Spigadoro related to its acquisition of Petrini in the amount of $19,503,000
(face value of approximately $20 million), resulting in an increase in
liabilities and a decrease in paid-in capital. Certain notes have a stated
interest rate of 5% per annum and certain other notes have no stated interest
rate and were discounted at an average rate of 5%. The notes require principal
payments of $7,388,000 and $12,115,000 for the years ended September 30, 2000
and 2001, respectively.
(E) The unaudited pro forma condensed consolidated balance sheet reflects
IAT's assets at their fair market value and the conversion of the Series A
convertible debentures and accrued interest into approximately 2,452,000 shares
of common stock which will be completed simultaneously with the acquisition.
The unaudited pro forma condensed consolidated statements of operations
reflects the elimination of the $3,440,000 gain realized by IAT on the sale of
intellectual property during the nine months ended September 30, 1999 to give
effect to the adjustment of IAT's assets to their fair value as of January 1,
1998. The unaudited pro forma condensed consolidated statements of operations
also reflects the elimination of interest related to the convertible debentures
for the nine months ended September 30, 1999 and the year ended December 31,
1998 of $110,000 and $75,000, respectively. In addition, IAT recorded an
accrual of $600,000 relating to estimated costs to be incurred in the proposed
Petrini acquisition which has been charged to paid-in capital.
(F) The purchase accounting for the acquisition of Petrini by Spigadoro
resulted in an increase in the basis of equipment and improvements of
$15,380,000 and trademarks of $606,000 as well as the recording of $5,923,000
of goodwill. The increase in the basis of assets acquired is being depreciated
and amortized over the estimated useful lives ranging from 10 to 33 years. The
goodwill is being amortized over twenty years. The unaudited pro forma
condensed consolidated statements of operations reflect depreciation and
amortization expense recorded in cost of sales and general and administrative
expenses for the nine months ended September 30, 1999 and the year ended
December 31, 1998 of $668,000 and $891,000, respectively, and $245,000 and
$326,000, respectively.
(G) Interest expense in the unaudited pro forma condensed consolidated
statements of operations, has been adjusted to reflect the increase in interest
relating to the debt assumed in the acquisition as if it occurred on January 1,
1998. The amount of interest expense recorded for the nine months ended
September 30, 1999 and the year ended December 31, 1998 was $728,000 and
$971,000, respectively.
(H) Income taxes (benefit) in the pro forma condensed consolidated
statements of operations have been adjusted to reflect the tax effect of the
pro forma adjustments relating to the additional depreciation and amortization
on purchase accounting adjustments made to fixed assets and trademarks using
the combined company's effective tax rate of 41.25%.
83
SELECTED CONSOLIDATED FINANCIAL DATA OF IAT
The selected financial data presented below as of and for the years ended
December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from our
historical consolidated financial statements that have been audited by
Rothstein, Kass & Company, P.C., independent auditors. The selected financial
data as of and for the nine months ended September 30, 1998 and 1999 were
derived from our unaudited consolidated financial statements. In the opinion of
management, the selected financial data presented below as of and for the nine
months ended September 30, 1998 and 1999 include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for these periods. The nine month
results are not necessarily indicative of the results to be expected for the
full year. This information should be read in conjunction with "--Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our historical consolidated financial statements, including the notes thereto,
appearing elsewhere in this proxy statement/prospectus.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------- ----------------------------
(UNAUDITED)
1994 1995 1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales ........................ $ 1,053 $ 1,510 $ 1,193 $ 5,880 $ 38,340 $ 23,544 $31,165
Cost of sales .................... 700 968 811 5,167 35,465 21,524 29,376
-------- -------- -------- -------- -------- -------- -------
Gross margin ..................... 353 542 382 713 2,875 2,020 1,789
-------- -------- -------- -------- -------- -------- -------
Research and development
expenses, net ................... 62 1,663 2,331 2,426 -- -- --
Selling, general and
administrative expenses ......... 1,538 2,640 2,957 5,436 4,933 3,517 3,791
-------- -------- -------- -------- -------- -------- -------
1,600 4,303 5,288 7,862 4,933 3,517 3,791
-------- -------- -------- -------- -------- -------- -------
Operating loss ................... $ (1,247) $ (3,761) $ (4,906) $ (7,149) $ (2,058) $ (1,497) $(2,002)
======== ======== ======== ======== ======== ======== =======
Net income (loss) ................ $ (1,335) $ (3,730) $ (5,108) $ (6,894) $ (1,743) $ (1,421) $ 1,591(2)
======== ======== ======== ======== ======== ======== =========
Basic income (loss) per
common share .................... $ (0.33) $ (0.77) $ (0.89) $ (0.84) $ (0.19) $ (0.15) $ 0.17(2)
======== ======== ======== ======== ======== ======== =========
Diluted income (loss) per
common share .................... $ (0.33) $ (0.77) $ (0.89) $ (0.84) $ (0.19) $ (0.15) 0.16 (2)
======== ======== ======== ======== ======== ======== ==========
Weighted average number of
shares of Common Stock
outstanding -- basic ............ 4,002 4,839 5,752 8,261 9,327 9,278 9,332
======== ======== ======== ======== ======== ======== ==========
Weighted average number of
shares of Common Stock
outstanding -- diluted .......... 4,002 4,839 5,752 8,261 9,327 9,278 10,614
======== ======== ======== ======== ======== ======== ==========
Income (loss) before interest,
income taxes, depreciation
and amortization(1) ............. $ (1,058) $ (3,407) $ (4,665) $ (6,687) $ (1,356) $ (990) $ 2,112(2)
======== ======== ======== ======== ======== ======== ==========
- ----------
(1) Income (loss) before interest, income taxes, depreciation and
amortization should not be considered an alternative to operating loss,
net income (loss), 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.
(2) Includes a non-recurring gain of $3,440,000 from IAT's sale of its
intellectual property.
84
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------------------- ---------------------
(UNAUDITED)
1994 1995 1996 1997 1998 1998 1999
--------- ----------- ----------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Current assets ....................... $1,308 $ 1,489 $ 1,204 $12,513 $10,686 $11,809 $12,642
Working capital (deficiency) ......... (865) (1,106) (2,729) 4,123 6,884 7,591 9,426
Total assets ......................... 1,771 2,056 2,216 16,660 16,864 16,972 17,596
Current liabilities .................. 2,173 2,595 3,932 8,390 3,802 4,218 3,217
Loans payable--stockholders,
net of current portion .............. 336 349 964 -- -- -- --
Total liabilities .................... 2,509 2,944 4,896 8,564 6,874 7,405 6,091
Series A Preferred Stock ............. -- -- 1,400 -- -- -- --
Accumulated deficit .................. 3,455 7,185 12,293 19,239 20,982 20,660 19,392
Stockholders' equity
(deficiency) ........................ (738) (888) (4,080) 8,096 9,990 9,567 11,505
85
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF IAT
The following discussion should be read together with our historical
consolidated financial statements, including the notes appearing elsewhere in
this proxy statement/prospectus.
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 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 concentrates
primarily on the marketing of its high-performance built-to-order PCs and
Columbus focuses primarily on the distribution of components and peripherals.
In July 1999, we sold a 50% interest in our visual communications
intellectual property rights to Algo Vision plc. In August 1999, Algo Vision
plc purchased the remaining 50% interest in our visual communications
intellectual property and agreed to pay us royalties (ranging from 5% to 10%)
on the sale of certain products utilizing the visual communications technology
until August 2001. In connection with the transaction, Algo Vision Schweiz, a
wholly owned subsidiary of Algo Vision plc, repaid in August 1999 outstanding
loans, aggregating approximately $500,000, made by us to Algo Vision Schweiz as
a part of the spin-off in March 1998.
In addition, as a part of the reorganization of the Algo Vision entities,
we exchanged our 15% interest in each of Algo Vision Systems and Algo Vision
Schweiz, for 500,000 shares of Algo Vision plc. These shares are subject to a
lock-up agreement until January 24, 2000, subject to certain exceptions. In
August 1999, we purchased an additional 250,000 shares of Algo Vision plc for
$2,500,000. None of these shares are subject to a lock-up arrangement.
On November 3, 1999, we entered into a stock purchase agreement under
which we will acquire all of the shares of outstanding common stock of Petrini
and, as a result, Petrini will become a wholly-owned subsidiary of IAT. All
existing shares of our common stock will remain outstanding. The Board of
Directors also authorized our management to begin evaluating and seeking
candidates for the potential sale of our computer business and we have
commenced discussions relating thereto. However, no agreement has been reached
with any party regarding the terms of any sale and we cannot assure that we
will be able to sell our computer business on terms favorable to us or at all.
The following discussion relates to our existing business which we intend
to sell in connection with the Petrini acquisition.
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.
86
In the following discussions, most percentages and dollar amounts have
been rounded to aid presentation. As a result, all of the figures are
approximations.
Results of Operations
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1998
The average Swiss Franc to US Dollar exchange rate was SF 1.49 = $1.00 in
the nine months ended September 30, 1999 as compared to SF 1.47 = $1.00 in the
nine months ended September 30, 1998. The average Deutsch Mark to US Dollar
exchange rate was DM 1.82 = $1.00 in the nine months ended September 30, 1999
and DM 1.78 = $1.00 in the nine months ended September 30, 1998.
We acquired FSE in November 1997 and Columbus effective as of October 31,
1998. These transactions cause a lack of comparability because our results of
operations for the nine months ended September 30, 1999 include the operations
of FSE and Columbus, while our results of operations for the nine months ended
September 30, 1998 include only the operations of FSE.
Revenues. Revenues for the nine months ended September 30, 1999 increased
by 32.4% to $31,165,000 from $23,545,000 for the nine months ended September
30, 1998. This increase is a result of Columbus's PC peripheral sales, which
are not included in the third quarter 1998, partially offset by a decrease of
FSE's sales due primarily to restructuring of the FSE business, including the
closing of one of the retail stores.
Cost of Sales. Cost of sales increased by 36.5% to $29,376,000 for the
nine months ended September 30, 1999 from $21,524,000 for the nine months ended
September 30, 1998. The cost of sales as a percentage of sales increased to
94.3% in the nine months ended September 30, 1999 from 91.4% in the nine months
ended September 30, 1998 primarily as a result of an increase in sales of PC
components, which generally produce lower gross profit margins than fully
assembled PCs. In addition, many of the components purchased by us during the
nine months ended September 30, 1999 were purchased in US Dollars and we
incurred higher costs for these components as a result of the strengthening of
the US Dollar against the Deutsch Mark of approximately 10% since January 1,
1999. In addition cost of sales increased due to a write-down of certain
inventory.
Selling Expenses. Selling expenses increased by 4.1% to $1,824,000 for the
nine months ended September 30, 1999, or 5.9% of revenues, from $1,753,000 for
the nine months ended September 30, 1998, or 7.4% of revenues. This increase is
due to selling expenses incurred by Columbus which are not included in the nine
months ended September 30, 1998, partially offset by a reduction of selling
expenses incurred by FSE due to the restructuring of FSE.
General and Administrative Expenses. General and administrative expenses
decreased by 7.9% to $454,000 for the nine months ended September 30, 1999 from
$493,000 for the nine months ended September 30, 1998, primarily due to a
reduction of expenses incurred by FSE as a result of our restructuring of FSE,
partially offset by administrative expenses incurred by Columbus which are not
included in the nine months ended September 30, 1998.
Corporate Overhead. Corporate overhead increased by 18.2% to $954,000 for
the nine months ended September 30, 1999 from $808,000 for the nine months
ended September 30, 1998, primarily due to a new corporate structure, including
costs related to the employment of additional management personnel.
Interest. Interest expense increased by 47.7% to $158,000 for the nine
months ended September 30, 1999 from $107,000 for the nine months ended
September 30, 1998. This increase is primarily a result of interest accrued on
our 5% convertible debentures.
Interest income decreased by 23.3% to $194,000 for the nine months ended
September 30, 1999 from $253,000 for the nine months ended September 30, 1998,
primarily as a result of a reduction of our interest bearing time deposits and
marketable securities and a reduction of interest rates in the marketplace.
87
Net Income. The net income for the nine months ended September 30, 1999
increased to $1,591,000 from a net loss of $1,421,000 for the nine months ended
September 30, 1998. Net income for the nine months ended September 30, 1999 is
the result of the sale of our intellectual property to Algo Vision plc included
in other income in the amount of $3,440,000, net of expenses incurred.
Excluding the one-time gain relating to the Algo Vision transaction, net loss
for the nine months ended September 30, 1999 would have increased by 30.1% to
$1,849,000 from $1,421,000 for the nine months ended September 30, 1998
primarily as a result of reduced gross profit margins, and a reduction of the
deferred income tax benefits, partially offset by a one time charge for
discount on convertible debenture recorded during the nine months ended
September 30, 1998.
EBITDA. Earnings before interest, income taxes, depreciation and
amortization for the nine months ended September 30, 1999 was $2,112,000 as
compared to a net loss before interest, income taxes, depreciation and
amortization for the nine months ended September 30, 1998 of $990,000. This
increase for the nine months ended September 30, 1999 is primarily the result
of a non-recurring gain on the sale of our intellectual property to Algo Vision
plc of $3,440,000. Excluding the one-time gain, the nine months ended September
30, 1999 would have generated a net loss before interest, income taxes,
depreciation and amortization of $1,328,000, an increase of $338,000 or 34.1%
as compared to the same period in 1998. This increase is primarily a result of
increased costs for components purchased by us during the first quarter 1999 in
US Dollars resulting in lower gross profit margins due to the strengthening of
the US Dollar against the Deutsch Mark, in addition to an increase in corporate
overhead of approximately $147,000 for the period ended September 30, 1999.
EBITDA should not be considered an alternative to operating income, net income,
cash flows or any other measure of performance as determined in accordance with
generally accepted accounting principles, as an indicator of operating
performance or as a measure of liquidity.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The average Swiss Franc to US Dollar exchange rate was SF 1.45 = $1.00 in
the years ended December 31, 1998 and December 31, 1997, respectively. The
average Deutsch Mark to US Dollar exchange rate was DM 1.76 = $1.00 in the year
ended December 31, 1998 as compared to DM 1.73 in the year ended December 31,
1997.
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 year to year comparability because of
the following:
o our results of operations for 1997 include FSE only since November
1997, while our results of operations for 1998 include FSE for the
entire year;
o our results of operations for 1997 include the operations of one of our
German subsidiaries and our Swiss subsidiary the assets and liabilities
and the businesses of which were transferred in March 1998, effective
January 1998; and
o our results of operations for 1998 include two months of operations of
Columbus, none of which operations were included in 1997.
Revenues. Revenues increased by 552.0% to $38,340,000 for the year ended
December 31, 1998 from $5,880,000 for the year ended December 31, 1997. This
increase is a result of the FSE and Columbus acquisitions and consists of sales
of FSE PCs and PC-components during the year ended December 31, 1998 and of
Columbus sales of PC-components and software for the period of November 1, 1998
through December 31, 1998. $6,470,000 or 16.8% of our total revenues during
1998 were generated by Columbus during this two month period.
Cost of sales. Cost of sales increased by 586.4% to $35,465,000 for the
year ended December 31, 1998 from $5,167,000 for the year ended December 31,
1997. The cost of sales as a percentage of sales
88
increased to 92.5% in the year ended December 31, 1998 from 87.9% in the year
ended December 31, 1997 primarily as a result of the FSE and Columbus sales of
PCs, PC-components and PC peripherals producing lower gross profit margins
compared to higher margins on our video conferencing products.
Research and development costs. Research and development costs decreased
to $0 for the year ended December 31, 1998 from $2,426,000 for the year ended
December 31, 1997. We no longer incur research and development costs as a
result of the transfer of our research and development activities in connection
with our reorganization in March 1998 and change in our business as a result of
the FSE and Columbus acquisitions.
Selling expenses. Selling expenses increased by 8.5% to $2,821,000 for
the year ended December 31, 1998, or 7.4% of revenues, from $2,600,000 for the
year ended December 31, 1997 or 44.2% of revenues. This increase is a result of
a change in our business as a result of our reorganization and the integration
of the FSE and Columbus businesses which entities incur substantial expenses
for sales and marketing. In addition, for the year ended December 31, 1997,
approximately $500,000 of the costs related to the marketing agreement entered
into between us and General Capital were recorded in selling expenses.
General and administrative expenses. General and administrative expenses
decreased by 16.9% to $2,066,000 for the year ended December 31, 1998 from
$2,486,000 for the year ended December 31, 1997. This decrease is a result of a
change in our business as a result of our reorganization and the integration of
the FSE and Columbus businesses and a decrease in offering expenses in the
amount of approximately $390,000 incurred in the year ended December 31, 1997.
Interest. Interest expense increased by 151.1% to $585,000 for the year
ended December 31, 1998 from $233,000 for the year ended December 31, 1997. The
increase is primarily the result of the discount on the convertible debenture
of $448,000 recorded in the year ended December 31, 1998. The discount is based
on an assumed conversion price of 87% of the current market value on the date
of issuance. This increase was offset by a decrease in interest as a result of
a reduction of outstanding bank loans and the repayment of certain
stockholders' loans partially offset by interest payable on the outstanding
convertible debenture. Interest income decreased by 25.4% to $361,000 in the
year ended December 31, 1998 from $484,000 in the year ended December 31, 1997
primarily as a result of a reduction of our interest bearing cash and cash
equivalents and investments in corporate bonds.
Non-recurring spinoff expenses. Non-recurring reorganization expenses
decreased by 86.9% to $46,000 for the year ended December 31, 1998 from
$350,000 for the year ended December 31, 1997. The expenses charged in 1997
relate to operating expenses incurred by the businesses transferred in our
reorganization for the period of January 1, 1998 through March 24, 1998
according to the agreements entered into in connection with our reorganization.
Net loss. The net loss decreased by 74.7% to $1,743,000 for the year
ended December 31, 1998 from $6,894,000 for the year ended December 31, 1997.
This decrease is the result of the acquisitions of the FSE operations in
November 1997 and the Columbus operations in October 1998, the transfer of our
research and development and marketing activities effective as of January 1,
1998, a reduction in non-recurring reorganization expenses and a recovery of
income taxes partially offset by a one-time charge to operations for (i) the
discount on convertible bonds of $448,000 and (ii) the restructuring of certain
operations of FSE we implemented when we acquired Columbus.
EBITDA. Net loss before interest income taxes, depreciation and
amortization decreased by 79.7% to $1,356,000 for the year ended December 31,
1998 from $6,687,000 for the year ended December 31, 1997. This decrease is
primarily the result of the transfer of our research and development and
marketing activities to Algo Vision Schweiz and Algo Vision Systems and the
acquisition of the FSE and Columbus operations in November 1997 and October
1998, respectively. Depreciation and amortization expenses increased by 25.0%
to $575,000 for the year ended December 31, 1998 from $460,000 for the year
ended December 31, 1997. Amortization of goodwill on our acquisitions increased
by 537.8% to $287,000 for the year ended December 31, 1998 from $45,000 for the
year ended December 31, 1997. A portion of our depreciation and amortization
expenses for 1998 and 1997 are included in each of cost of sales, selling
expenses and general and administrative expenses and for 1997 are also included
in research and
89
development costs. EBITDA should not be considered an alternative to operating
income, net income, cash flows or any other measure of performance as
determined in accordance with generally accepted accounting principles, as an
indicator of operating performance or as a measure of liquidity.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The average exchange rate for the US Dollar increased by 16.9% as compared
to Swiss Franc, for the year ended December 31, 1997 as compared to the year
ended December 31, 1996 resulting in a decrease in all revenue and expense
accounts in the year ended December 31, 1997 by this same percentage. The
average Swiss Franc to US Dollar exchange rate was SF 1.45 = $1.00 in the year
ended December 31, 1997 as compared to SF 1.24 = $1.00 in the year ended
December 31, 1996.
Revenues and expenses in the following discussion include IAT revenues and
expenses for the year ended December 31, 1997 and FSE revenues and expenses
from November 18, 1997 through December 31, 1997.
Revenues. Revenues increased by 392.9% to $5,880,000 for the year ended
December 31, 1997 from $1,193,000 for the year ended December 31, 1996. FSE
revenues amounted to $5,248,000 for the period from November 18, 1997 through
December 31, 1997. Our revenues (excluding FSE's revenues) decreased by 47.0%
to $632,000 for the year ended December 31, 1997 from $1,193,000 for the year
ended December 31, 1996. Sales for the year ended December 31, 1996 resulted
from the introduction of our second generation visual communication systems.
Sales for the year ended December 31, 1997 decreased primarily as a result of a
decrease in orders for such systems in anticipation of the release of our third
generation visual communication systems.
Cost of sales. Cost of sales increased by 536.3% to $5,167,000 for the
year ended December 31, 1997 from $812,000 for the year ended December 31,
1996. FSE cost of sales amounted to $4,711,000 for the period from November 18,
1997 through December 31, 1997. Our cost of sales (excluding FSE's cost of
sales) for the year ended December 31, 1997 decreased by 43.8% to $456,000 from
$812,000 for the year ended December 31, 1996. Cost of sales as a percentage of
sales increased to 87.9% for the year ended December 31, 1997 from 68.0% for
the year ended December 31, 1996 primarily as a result of lower profit margins
on the sale of FSE PCs, PC-components and PC peripherals for the period
November 18, 1997 through December 31, 1997.
Research and development costs. Research and development costs decreased
by 7.5% to $2,523,000 for the year ended December 31, 1997 from $2,729,000 for
the year ended December 31, 1996. These costs reflect (i) an increase in the
number of employees in the product development area to complete our third
generation Vision and Live products in the first six months of 1997 partially
offset by a reduction in personnel in the second six months of 1997, (ii)
additional development costs by third parties in connection with the
development of the wavelet compression technology performed by the Technical
University of Berlin and (iii) software and product licenses acquired in
connection with the development of the third generation products. FSE does not
incur research and development costs.
We received research participations which are reimbursements from third
parties for research and development projects in which each party retains
certain legal rights for the products developed during such projects. Research
participations for the year ended December 31, 1997 decreased by 75.6% to
$97,000 from $398,000 for the year ended December 31, 1996. This decrease was
primarily a result of the completion of all of our joint development projects
with Deutsche Telekom. During the year ended December 31, 1997, $84,000 of the
total of $97,000 in research participations received by us came from a
government subsidy granted by the state government of Berlin. The subsidy was
granted for 35%-40% of the actual expenditures incurred in Berlin in connection
with the development of the wavelet compression technology by the Technical
University of Berlin.
Selling expenses. Selling expenses increased by 77.8% to $2,600,000 for
the year ended December 31, 1997, or 44.2% of revenues, from $1,462,000 for the
year ended December 31, 1996, or 122.6% of revenues. FSE selling expenses
amounted to $361,000 for the period from November 18, 1997 through December 31,
1997. Our selling expenses (excluding FSE) for the year ended December 31, 1997
increased by 53.1% to $2,239,000 from $1,462,000 for the year ended December
31, 1996. This increase was
90
primarily a result of approximately $500,000 in costs related to the marketing
agreement entered into between us and General Capital in October 1996, expenses
incurred in connection with the production of product brochures, an increase in
trade fair expenses and an increase in the number of sales and marketing
personnel. Effective as of the fourth quarter of 1997 we reduced marketing
expenses primarily by terminating approximately 12 sales and sale support
employees resulting in aggregate severance payments of approximately $40,000.
General and administrative expenses. General and administrative expenses
increased by 66.3% to $2,486,000 for the year ended December 31, 1997 from
$1,495,000 for the year ended December 31, 1996. FSE general and administrative
expenses amounted to $116,000 for the period from November 18, 1997 through
December 31, 1997. Our general and administrative expenses (excluding FSE) for
the year ended December 31, 1997 increased by 58.5% to $2,370,000 from
$1,495,000 for the year ended December 31, 1996. The increase was primarily a
result of us becoming a public company in April 1997, resulting in D&O
liability and life insurance premiums and investor relations services not
incurred in the year ended December 31, 1996 and in an increase of board member
fees, legal and auditing expenses and other corporate overhead. Included in
general and administrative expenses in the year ended December 31, 1997 are
offering expenses in the amount of $390,000 relating to our proposed offering
of convertible notes and other professional fees relating to the evaluation of
potential acquisition candidates.
Interest. Interest expenses increased by 9.4% to $233,000 for the year
ended December 31, 1997 from $213,000 for the year ended December 31, 1996. FSE
interest expenses amounted to $16,000 for the period from November 18, 1997
through December 31, 1997. Our interest expense excluding FSE increased by 1.9%
to $217,000 for the year ended December 31, 1997 from $213,000 for the year
ended December 31, 1996. This increase was principally due to an increase in
stockholders' loans in the first quarter of 1997, a portion of which were
repaid in April 1997, partially offset by a reduction of outstanding bank
loans. Interest income increased to $484,000 for the year ended December 31,
1997 from zero in the year ended December 31, 1996 as a result of the
investment of the net proceeds from the initial public offering in investments
bearing interest at an average of 5.5%.
Non-recurring spinoff expenses. Non-recurring expenses amounted to
$350,000 during the year ended December 31, 1997 relating to operating expenses
of the business transferred to Algo Vision Schweiz as compared to none for the
year ended December 31, 1996.
Net loss. The net loss increased by 35.0% to $6,894,000 for the year
ended December 31, 1997 from $5,108,000 for the year ended December 31, 1996.
The loss increased primarily as a result of an increase in non-recurring
expenses in connection with the marketing agreement, our reorganization,
offering expenses relating to our withdrawn offering of convertible notes and
operating expenses including expenses relating to the evaluation of potential
acquisition candidates. This loss was partially offset by the net income of FSE
for the period from November 18, 1997 through December 31, 1997 and an increase
in interest income.
EBITDA. Net loss before interest income taxes, depreciation and
amortization increased by 43.3% to $6,687,000 for the year ended December 31,
1997 from $4,665,000 for the year ended December 31, 1996. This increase is
primarily a result of an increase of non-recurring expenses in connection with
the marketing agreement, spin-off expenses and offering expenses relating to
our withdrawn offering of convertible notes. Depreciation and amortization
expenses increased by 100.0% to $460,000 for the year ended December 31, 1997
from $230,000 for the year ended December 31, 1996. Amortization of goodwill on
the FSE acquisition amounted to $45,000 for the year ended December 31, 1997
compared to none for the year ended December 31, 1996. A portion of our
depreciation and amortization expenses for 1997 and 1996 are included in each
of cost of sales, selling expenses, general and administrative expenses and
research and development costs. EBITDA should not be considered an alternative
to operating income, net income, cash flows or any other measure of performance
as determined in accordance with generally accepted accounting principles, as
an indicator of operating performance or as a measure of liquidity.
Liquidity and Capital Resources
As of September 30, 1999, our cash and cash equivalents and investments in
corporate bonds decreased to $5,102,000 and $746,000, respectively, as compared
to $5,614,000 and $750,000, respectively, at December 31, 1998.
91
Net cash used in operating activities totaled $2,039,000 during the nine
months ended September 30, 1999 compared to $2,825,000 during the nine months
ended September 30, 1998. The decrease was primarily the result of a reduction
of cash used for the payment of accounts payable and other current liabilities.
Net cash used in operating activities for the years ended December 31, 1998,
1997, and 1996 was $2,018,000, $5,306,000 and $4,607,000, respectively
principally due to the net loss for the respective year.
Net cash provided by investing activities were $1,330,000 during the nine
months ended September 30, 1999 compared to $786,000 during the nine months
ended September 30, 1998. During the nine months ended September 30, 1999 cash
was primarily used for the purchase of Algo Vision plc shares in the amount of
$2,466,000 and for the purchase of equipment and for the new accounting,
procuring, order management and invoicing system, offset by the repayment of
certain loans by Algo Vision in the amount of $695,000 and the net proceeds
from the sale of intellectual property to Algo Vision in the amount of
$3,440,000. During the nine months ended September 30, 1998 cash was used to
pay for the acquisition of 25.1% of the common stock of IAT Germany and for 15%
each of the common stock of Algo Vision Systems and Algo Vision Schweiz in the
aggregate amount of $135,000 and for loans to the Algo Vision companies in the
aggregate amount of $832,000 and for the purchase of equipment. These payments
were offset by the sale of marketable securities in the amount of $1,977,000.
Net cash used in investing activities for the years ended December 31, 1998,
1997 and 1996 was $242,000, $4,151,000 and $371,000, respectively. Net cash
used in investing activities during 1998 was principally due to the use of
$1,262,000 for the acquisition of businesses, offset by the receipt of
$1,977,000 from the sale of investments. Net cash used in investing activities
for 1997 was principally due to $1,006,000 used for the acquisition of FSE and
$2,727,000 used for the purchase of investments with a portion of the proceeds
from our initial public offering. Net cash used in investing activities for
1996 was due to the purchase of equipment and improvements.
Net cash provided by financing activities during the nine months ended
September 30, 1999 was $356,000 as compared to $3,691,000 during the nine
months ended September 30, 1998. During the nine months ended September 30,
1999 cash was provided by an increase in short-term bank loans. During the nine
months ended September 30, 1998 cash was primarily provided from the issuance
of common stock and the issuance of convertible debentures in the aggregate
amount of $4,609,000. In addition, cash was provided by a capital contribution
by certain stockholders. These amounts were partially offset by the repayment
of stockholder loans, including the third installment of the FSE purchase price
and the repayment of short-term bank loans. Net cash provided by financing
activities for the years ended December 31, 1998, 1997 and 1996 was $2,292,000,
$14,576,000 and $5,068,000, respectively. Net cash provided by financing
activities during 1998 was principally due to the sale of convertible
debentures for $3,000,000, proceeds from the issuance of common stock of
$1,607,000, partially offset by repayment of stockholder loans, net of
contributed capital of approximately $1,869,000. Net cash provided by financing
activities for 1997 was principally due to $17,079,000 of net proceeds from our
initial public offering offset by $1,091,000 of repayments of stockholder loans
and $1,020,000 of repayments of other loans. Net cash provided by financing
activities for 1996 was principally due to the receipt of $1,540,000 and
$1,400,000 from the sale of common stock and preferred stock, respectively, in
addition to the receipt of stockholder loans of $1,931,000.
Cash, cash equivalents and investments in corporate bonds at September 30,
1999 amounted to $5,848,000. 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 September 30,
1999, depending on acquisitions. If the proposed Petrini acquisition is
completed, we will assume $20 million of short term indebtedness, of which
$12.5 million will be convertible into shares of our common stock. All of the
indebtedness will be payable in 2000 and, as a result, we may need to obtain
additional funds to repay this debt if the acquisition is completed. We may
also 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.
92
In June 1998, we issued a $3,000,000 principal amount of our Series A
convertible debenture due 2001, plus other of our securities, to JNC for
$5,000,000. As of September 30, 1999, JNC has converted $152,000, of such
debenture, plus accrued interest on the principal amount converted, into an
aggregate of 66,437 shares of our common stock. As a result of the acquisition,
JNC had the right to accelerate payment under the debenture. JNC has entered
into an agreement with us under which JNC agreed not to accelerate repayment of
the debenture. JNC also agreed to fix the number of shares of common stock that
are issuable upon conversion of the debenture at 2,451,745 shares. On November
23, 1999, JNC converted $2,325,000 of the outstanding principal amount of the
debenture, including accrued interest into 1,872,982 shares of our common
stock. JNC has informed us that it intends to convert the remaining $718,500
principal amount of the debenture upon the closing of the acquisition, subject
to receipt of stockholder approval for the issuance of the shares of common
stock as described under "Other Matters to be Voted Upon at the Special
Meeting--Convertible Debenture Proposal." See "Description of Capital
Stock--Convertible Debenture."
In July 1999, we sold a 50% interest in our visual communications
intellectual property rights to Algo Vision plc for $1,000,000. In August 1999,
Algo Vision plc purchased the remaining 50% interest in our visual
communication intellectual property for an additional $2,500,000 and agreed to
pay us royalties (ranging from 5% to 10%) on the sale of certain products
utilizing the visual communications technology until August 2001. In connection
with the transaction, Algo Vision Schweiz, a wholly owned subsidiary of Algo
Vision plc, repaid in August 1999, outstanding loans, aggregating approximately
$500,000, made by us to Algo Vision Schweiz as part of the spin-off in March
1998.
In addition, as part of the reorganization of the Algo Vision entities, we
exchanged our 15% interest in each of Algo Vision Systems and Algo Vision
Schweiz, for 500,000 shares of Algo Vision plc. These shares are subject to a
lock-up agreement until January 24, 2000 subject to certain exceptions. In
August 1999, we purchased an additional 250,000 shares of Algo Vision plc for a
purchase price of $2,500,000.
Escrow Shares
At the closing of our initial public offering in March 1996, our
stockholders at the time put some of their shares into escrow. These shares
will not be released from escrow unless we attain certain performance targets
as described below. We contemplate that in the event the 498,285 shares held in
escrow are released from escrow because the specified targets are met, we will
incur a substantial non-cash compensation charge to operations, based on the
then fair market value of these shares. Such charge could substantially
increase our loss or reduce or eliminate our net income, if any, for financial
reporting purposes for the period during which shares are or become probable of
being released from escrow. Although the amount of compensation expense
recognized by us will not affect our total stockholders equity, it may depress
the market price of our securities.
Our minimum revenues, as defined in our escrow agreement, for the years
ended December 31, 1997 and 1998 were less than the targeted $5.5 million, and,
accordingly, the 332,190 escrow shares were not released. The escrow shares may
also be released if our stock price reaches certain targets. Any shares not
released prior to March 31, 2000 will be cancelled. The escrow shares are not
included in our calculation of our per share loss. See "Risk Factors--We will
record charges to operations in the event shares of our stock are released from
escrow."
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 ends with "00" instead of the familiar "99." 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
93
products and information technology and non-IT systems so that such 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:
o IT such as software and hardware;
o non-IT systems or embedded technology; and
o 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 have installed new financial
accounting, procurement, order management and invoicing systems. These systems
are fully operational. Testing of these systems for Year 2000 compliance has
been completed and we believe that such systems are Year 2000 compliant. In the
event such systems are not Year 2000 compliant, 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 upgrades or software patches which are
purchased by our customers. We have requested Year 2000 compliance certificates
from each of our suppliers and vendors from parts and components installed in
our Trinology PCs.
The cost of replacing our existing financial accounting, procurement,
order management and invoicing systems was approximately $350,000, 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 achieve
Year 2000 compliance 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 achieve Year 2000 compliance. These developments include,
but are not limited to:
o the availability and cost of personnel trained in this area;
o unanticipated failures in our IT and non-IT systems; and
o 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 achieving Year 2000 compliance.
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 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.
94
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.
SELECTED FINANCIAL DATA OF PETRINI
Reconta Ernst & Young S.p.A. has audited the Petrini S.p.A. historical
financial statements prepared in accordance with Italian GAAP for the years
from 1994 through 1998. Reconta Ernst & Young S.p.A. has issued an audit
opinion on the US GAAP historical financial statements of Petrini S.p.A. at
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998. The selected financial data as of and for the nine months
ended September 30, 1998 and 1999 were derived from Petrini's unaudited
financial statements. In the opinion of management of Petrini, the selected
financial data presented below as of and for the nine months ended September
30, 1998 and 1999 include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for these periods. The nine month results are not
necessarily indicative of the results to be expected for the full year. This
information should be read in conjunction with "--Management's Discussion and
Analysis of Financial Condition and Results of Operations of Petrini" and
Petrini's historical financial statements, including the notes thereto,
appearing elsewhere in this proxy statement/prospectus.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
(UNAUDITED)
-----------------------
1994 1995 1996 1997 1998 1998
----------- ----------- ----------- ----------- ----------- ---------------
(IN THOUSANDS
OF U.S.
(IN MILLIONS OF LIRE) DOLLARS)(1)
STATEMENT OF INCOME
DATA:
Net sales .................... 302,207 319,341 320,292 294,859 266,307 $ 141,127
Cost of sales ................ 230,436 248,372 244,490 224,216 196,902 104,347
------- ------- ------- ------- ------- ---------
Gross profit ................. 71,771 70,969 75,802 70,643 69,405 36,780
------- ------- ------- ------- ------- ---------
Selling expenses ............. 44,957 46,097 48,638 47,633 46,194 24,480
General and administrative
expenses .................... 16,748 15,954 15,717 16,079 14,719 7,800
------- ------- ------- ------- ------- ---------
61,705 62,051 64,355 63,712 60,913 32,280
------- ------- ------- ------- ------- ---------
Operating income ............. 10,066 8,968 11,447 6,931 8,492 $ 4,500
======= ======= ======= ======= ======= =========
Net income ................... 2,390 693 2,082 278 829 $ 439
======= ======= ======= ======= ======= =========
Basic and diluted earnings per
share (Lire, US $)........... 59 17 51 7 20 $ 0.01
======= ======= ======= ======= ======= =========
Weighted average number of
shares of Common Stock
outstanding (millions of
shares) ..................... 40.7 40.7 40.7 40.7 40.7 40.7
======== ======== ======== ======== ======== =========
EBITDA (2) ................... 15,695 14,271 16,499 12,249 14,110 $ 7,477
======== ======== ======== ======== ======== =========
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
(UNAUDITED)
1998 1999 1999
----------- ----------- --------------
(IN THOUSANDS
OF U.S.
(IN MILLIONS OF LIRE) DOLLARS)(1)
STATEMENT OF INCOME
DATA:
Net sales .................... 200,356 194,783 $ 103,224
Cost of sales ................ 148,964 140,042 74,214
------- ------- ---------
Gross profit ................. 51,392 54,741 29,010
------- ------- ---------
Selling expenses ............. 36,579 36,480 19,332
General and administrative
expenses .................... 8,658 10,884 5,768
------- ------- ---------
45,237 47,364 25,100
------- ------- ---------
Operating income ............. 6,155 7,377 $ 3,910
======= ======= =========
Net income ................... 162 1,541 $ 817
======= ======= =========
Basic and diluted earnings per
share (Lire, US $)........... 4 38 $ 0.02
======= ======= =========
Weighted average number of
shares of Common Stock
outstanding (millions of
shares) ..................... 40.7 40.7 40.7
======== ======== =========
EBITDA (2) ................... 10,328 10,913 $ 5,783
======== ======== =========
- ----------
(1) Exchange Rate: Lire 1,887 = U.S. $1 as of November 23, 1999.
(2) EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization. Although EBITDA is not recognized under GAAP, it is
accepted in the food industry as a generally recognized measure of
performance. However, EBITDA should not be considered an alternative to
operating income, net income, cash flows or any other measure of
performance as determined in accordance with generally accepted
accounting principles, as an indicator of operating performance or as a
measure of liquidity.
95
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------------------------------ ----------------------------------
(UNAUDITED)
------------------------------ (UNAUDITED)
1994 1995 1996 1997 1998 1998 1998 1999 1999
---------- --------- --------- --------- --------- --------------- --------- --------- --------------
(IN THOUSANDS (IN THOUSANDS
OF U.S. (IN MILLIONS OF U.S.
(IN MILLIONS OF LIRE) DOLLARS)(1) OF LIRE) DOLLARS)(1)
BALANCE SHEET DATA:
Working capital .......... 7,757 18,670 10,416 14,366 12,398 $ 6,571 13,205 18,646 $ 9,883
Total assets ............. 180,227 190,010 183,754 187,725 186,690 98,936 183,792 184,952 98,013
Total liabilities ........ 135,494 144,585 136,244 139,937 138,073 73,171 135,842 134,737 71,402
Stockholders' equity ..... 44,733 45,426 47,510 47,788 48,617 25,765 47,950 50,215 26,611
- ----------
(1) Exchange Rate: Lire 1,887 = U.S. $1 as of November 23, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PETRINI
The following discussion should be read together with Petrini's historical
financial statements, including the notes appearing elsewhere in this proxy
statement/prospectus.
Overview
Petrini is an Italian company that produces and sells animal feed and
pasta and flour products. Petrini's animal feed business produces feed for
industrial breeders, family-owned breeding farms and domestic pets. Petrini's
pasta and flour business produces traditional, specialty and health and diet
pastas and flours for use by the bakery industry. By-products of Petrini's
pasta and flour business are used as raw materials for its animal feed
products. Petrini also engages, to a lesser extent, in animal breeding, selling
gardening articles and supplying accessories for pets.
Animal feed represented approximately 70% of Petrini's revenues in 1998,
with pasta and flour accounting for the remaining 30%. Virtually all of
Petrini's sales of animal feed are made in Italy, while approximately 21% of
its pasta and flour products are exported to the United States, Europe and
Southeast Asia.
Petrini's wholly-owned subsidiary, Petrini Foods International, Inc.,
which has been operating since September 1998, acts as Petrini's exclusive
distributor in the US market for Petrini's pasta products.
The dollar amounts set forth below have been translated into US Dollars
for the convenience of the reader of the rate of Lire 1,887 = US $1.00 as of
November 23, 1999.
In the following discussions, most percentages and dollar amounts have
been rounded to aid presentation. As a result, all of the figures are
approximations.
Results of Operations
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
Revenues. Revenues for the nine months ended September 30, 1999 decreased
by 2.8% to $103.2 million from $106.1 million for the nine months ended
September 30, 1998 due primarily to a 2% decrease in sales unit prices to
customers resulting from a decrease in raw material costs. Animal feed revenues
for the nine months ended September 30, 1999 decreased by 3.3% to $75.7 million
from $78.2 million for the nine months ended September 1998, while sale volumes
for both periods were 287,000 tons. Pasta and flour revenues for the nine
months ended September 30, 1999 decreased by 1.5% to $27.5 million from $27.9
million for the nine months ended September 30, 1998 despite an increase of
1.2% in sale volumes resulting from new marketing initiatives. The decrease in
revenues in both animal feed and pasta flour was primarily due to a decrease in
the cost of raw materials which resulted in lower sales prices to our
customers.
Gross Profit. Gross profit for the nine months ended September 30, 1999
increased by 6.5% to $29.0 million from $27.2 million for the nine months ended
September 30, 1998. The increase in gross
96
profit resulted in a increase in gross margin percentage to 28.1% in the nine
months ended September 30, 1999 from 25.6% in the nine months ended September
30, 1998. This increase was primarily due to reductions in raw materials prices
which contributed to an increase in gross profit as well as improvements in
production efficiencies. The gross profit of the animal feed division was
impacted by a loss of approximately $495,000 arising out of Petrini's operation
of a pig breeding farm. Petrini's operations at this farm are expected to be
discontinued by the end of 1999.
Operating Expenses. Operating expenses, consisting of selling costs and
general and administrative expenses, increased by 4.7% to $25.1 million for the
nine months ended September 30, 1999 or 24.3% of revenues, from $24.0 million
for nine months ended September 30, 1998, or 22.6% of revenues. This increase
was primarily due to one-time costs associated with the introduction of
management's efficiency plan, including costs relating to redundancies,
management consulting and professional services, and to one-time start-up costs
of approximately $293,000 relating to the establishment of Petrini's United
States subsidiary.
Operating Income. Operating income increased by 19.9% to $3.9 million for
the nine months ended September 30, 1999 from $3.3 million for the nine months
ended September 30, 1998. This increase was primarily due to an increase in
gross profit in both the animal feed and pasta and flour businesses resulting
from declines in the price of raw materials, the initial benefits of
management's efficiency plan and new marketing initiatives in Petrini pasta
operations.
Interest Expense. Interest expense decreased by 50.2% to $900,000 for the
nine months ended September 30, 1999 from $1.7 million for the nine months
ended September 30, 1998. The decrease in interest expense was primarily the
result of a decrease in interest rates on our borrowings resulting from an
increase in working capital at Petrini during the nine months ended September
30, 1999 and an overall reduction in debt levels.
Other Expenses. Other expenses increased to $271,000 for the nine months
ended September 30, 1999 from $9,000 for the nine months ended September 30,
1998. This increase is mainly due to the costs associated with the 1999
factoring activity of Petrini.
Income Before Taxes. Income before taxes increased by 82.4% to $2.8
million for the nine months ended September 30, 1999 from $1.5 million for the
nine months ended September 30, 1998 primarily as a result of the matters
described above.
Income After Taxes. Net income increased to $816,000 for the nine months
ended September 30, 1999 from $86,000 for the nine months ended September 30,
1998. Income taxes increased to $2.0 million for the nine months ended
September 30, 1999 from $1.4 million for the nine months ended September 30,
1998, as a result of Petrini's improved profitability.
EBITDA. EBITDA increased by 5.5% to $5.8 million for the nine months ended
September 30, 1999 from $5.5 million for the nine months ended September 30,
1998, primarily as a result of the matters described above. EBITDA should not
be considered an alternative to operating income, net income, cash flows or any
other measure of performance as determined in accordance with generally
accepted accounting principles, as an indicator of operating performance or as
a measure of liquidity.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues decreased by 9.7% to $141.1 million in 1998 from $156.2
million in 1997. This decrease was primarily due to a decrease in sales volume,
which decreased by 4.9% from 405,000 tons in 1997 to 385,000 tons in 1998, and
decreases in the prices of raw materials which resulted in lower sales prices
to customers. Animal feed revenues decreased by 11.1% to $99.2 million in 1998
from $111.5 million in 1997. In animal feed, decreases in sales volumes were
due to:
o reduced European Union milk quotas, which reduced demand for feed for
dairy cows,
o lower pork prices, which reduced demand for pig feed; and
o continued concerns relating to mad cow disease, which reduced demand
for beef cattle.
97
Pasta and flour revenues decreased by 2.7% to $37.7 million in 1998 from
$38.7 million in 1997. In pasta and flour, aggressive pricing strategies by the
Italian pasta market leader, Barilla, led to a reduction in Petrini's sales
volumes. Petrini chose to raise its own prices marginally in order to enhance
its premium-quality positioning and maintain margins as raw material prices
increased during 1998, but did so at the expense of a slight decrease in its
sales volumes.
Gross Profit. Gross profit decreased by 1.7% to $36.8 million in 1998 from
$37.4 million in 1997, with gross margins rising from 24.7% to 26.1%. The
increase in margins was primarily due, in pasta and flour, to Petrini's
policies of maintaining premium pricing in its pasta brands, and, in animal
feed, to its policy of reformulating certain feed products to take advantage of
lower raw material prices.
Operating Expenses. Operating expenses, comprising of selling costs and
general and administrative expenses, decreased by 4.7% to $32.2 million in 1998
or 22.9% of revenues, from $33.8 million in 1997, or 21.6% of revenues. The
decrease in operating expenses resulted primarily from reduction in labor costs
as central overhead costs were marginally reduced in light of declining sales
activity.
Operating Income. Operating income increased by 21.6% to $4.5 million in
1998 from $3.7 million in 1997. The increase resulted primarily from increased
gross margins as well as a reduction in operating expenses.
Interest Expense. Net interest expense decreased by 30.0% to $2.1 million
in 1998 from $3.0 million in 1997. This decrease was due primarily to a
decrease in interest rates on our borrowings during this period.
Income Before Taxes. Income before taxes increased to $2.3 million in 1998
from $379,000 in 1997. This increase was primarily a result of increased
operating income and a significant reduction in net interest expense caused by
a reduction in Italian interest rates during 1998.
Income After Taxes. Net income increased by 198.6% to $439,000 in 1998
from $147,000 in 1997. In 1998, income taxes were $1.9 million or 81% of pretax
income, due to the Italian system for computing taxation, which fluctuates
based on both a regional tax on production activities and a national tax based
on taxable income.
EBITDA. EBITDA increased by 15.2% to $7.5 million in 1998 from $6.5
million in 1997, primarily as a result of the matters described above. EBITDA
should not be considered an alternative to operating income, net income, cash
flows or any other measure of performance as determined in accordance with
generally accepted accounting principles, as an indicator of operating
performance or as a measure of liquidity.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues decreased by 7.8% to $156.2 million in 1997 from $169.7
million in 1996. Each of the main business lines of Petrini experienced a
decline in revenues during this period. Animal feed revenues decreased by 9.0%
to $111.5 million in 1997 from $124.3 million in 1996. Pasta and flour revenues
decreased by 5.2% to $38.7 million in 1997 from $40.2 million in 1996. The
principal reasons for the decrease in revenues were:
o reduced consumption of beef and lower beef prices triggered by concerns
regarding mad cow disease;
o reduced volumes of feed for rabbits due to a decline in rabbit
breeding;
o the beginning of reductions in European Union milk quotas which reduced
demand for feed for dairy cows; and
o in pasta, reductions in prices due to pricing pressures from some
supermarket groups.
Gross Profit. Gross profit decreased by 6.9% to $37.4 million in 1997 from
$40.2 million in 1996, with gross margins increasing slightly from 23.7% to
23.9%. This resulted in part from a decrease in prices for raw materials in
animal feed which accompanied a decrease in sales volume and prices. Petrini's
ability to maintain premium pricing for its industrial flour during 1997 also
contributed to this result.
98
Operating Expenses. Operating expenses, comprising of selling costs and
general and administrative expenses, decreased by 1.1% to $33.8 million in
1997, or 21.6% of revenues, from $34.1 million in 1996, or 20.1% of revenues,
as a result of a decrease in sales.
Operating Income. Operating income decreased by 39.1% to $3.7 million in
1997 from $6.1 million in 1996. The decline in operating income resulted
primarily from a decrease in revenues during 1997.
Interest Expense. Interest expense decreased by 20.5% to $3.0 million in
1997 from $3.8 million in 1996 due primarily to a significant decrease in
Italian interest rates during 1997.
Income Before Taxes. Income before taxes decreased to $379,000 in 1997
compared to $2.3 million in 1996 primarily as a result of a decrease in
revenues.
Income After Taxes. Net profits decreased to $147,000 in 1997 from $1.1
million in 1996 primarily as a result of a decrease in revenues and decrease in
gross profits in 1997.
EBITDA. EBITDA decreased by 25.8% to $6.5 million in 1997 from $8.7
million in 1996, primarily as a result of the matters described above. EBITDA
should not be considered an alternative to operating income, net income, cash
flows or any other measure of performance as determined in accordance with
generally accepted accounting principles, as an indicator of operating
performance or as a measure of liquidity.
Liquidity and Capital Resources
Petrini has historically financed its operations through cash flow
generated from operations and borrowings under various credit facilities.
Petrini's principal uses of cash have been to fund working capital, including
financing inventories and trade receivables and other operating expenses, debt
service and capital expenditures. At September 30 , 1999, Petrini had working
capital of $34.2 million compared to $35.6 million at September 30, 1998.
As of September 30, 1999, Petrini's cash and cash equivalents decreased to
$110,000 from $461,000 at December 31, 1998. At September 30, 1999, Petrini had
total indebtedness of $32.0 million, $22.1 million of which is short term
borrowings.
Cash provided by operating activities was $5.5 million during the nine
months ended September 30, 1999 almost unchanged with reference to the same
period of previous year. Cash provided by operating activities for the years
ended December 31, 1998 was $5.7 million. Cash used in operating activities for
the year ended December 31, 1997 was $949,000 principally due to the reduction
in accounts payable. Cash provided by operating activities for the year ended
December 31, 1996 was $4.4 million partially from net income of $1.1 million.
Net cash used in investing activities during the nine months ended
September 30, 1999 was $1.3 million almost unchanged with reference to the same
period of previous year. Net cash used for the years ended December 31, 1998,
1997 and 1996 was $1.8 million, $3.6 million and $3.4 million, respectively. In
all periods cash used in investing activities resulted primarily from the
purchase of machinery and equipment for production activity and partially
offset by proceeds from the sale of property, plant, and equipment.
Net cash used in financing activities during the nine months ended
September 30, 1999 was $4.5 million compared with $3.4 million for same period
of 1998. During the nine months ended September 30, 1999 cash was used to
reduce short term borrowings by $5.8 million and repay long term debt in the
amount of $3.8 million. During the same period, $5.3 million was provided by
proceeds from long term debt. Net cash used in financing activities for the
year ended December 31, 1998 was $4.1 million principally due to payments of
long-term debt. Net cash provided by financing activities for the year ended
December 31, 1997 was $4.4 million primarily from the receipt of $7.6 million
of long and short-term borrowings, offset by $3.2 million of repayments on
long-term debt. Net cash used in financing operations for the year ended
December 31, 1996 was $1.6 million primarily due to net repayments on long-term
debt.
99
Petrini maintains unsecured short term credit facilities with over 20
Italian banks. These facilities are typically available for terms up to one
year and accrue interest at rates that fluctuate relative to the official
Italian rate of discount. At September 30, 1999 the aggregate amount
outstanding under these facilities was $22.1 million and $18.0 million was
unused and available for borrowing. Borrowings under these facilities are used
to support Petrini's operations and are serviced by cash flow from operations.
At September 30, 1999, Petrini had long term debt in the aggregate amount
of $9.9 million. The debt matures over varying terms ranging from June 2000 to
March 2007 and accrues interest either at fixed annual interest rates ranging
from 3.2% to 6.9% or variable rates based upon various interest rates measures.
Substantially all of the long term debt is secured by liens on Petrini's
property. A portion of the long term debt is subsidized by governmental
agencies.
In June 1999, Petrini entered into a factoring arrangement whereby it
sells a portion of its accounts receivable without recourse. A portion of the
proceeds of this arrangement has been used to pay short-term and long-term
indebtedness while the remaining proceeds have been used for working capital.
Petrini intends to expand its factoring activity in the future and believes
that it will result in increased cash and decreased short-term debt, while
increasing Petrini's flexibility to incur additional indebtedness if necessary
or advisable to execute its consolidation strategy.
Petrini believes that its cash and cash generated from operations,
together with amounts available under its credit facilities and factoring
arrangements, will be sufficient to meet its working capital needs and capital
expenditure requirements for the foreseeable future.
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 microcontrollers. As a result, these programs do not
properly recognize a year that ends with "00" instead of the familiar "99." 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.
Petrini recognizes the importance of the Year 2000 issue and 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 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:
o IT such as software and hardware;
o non-IT systems or embedded technology; and
o the readiness of key third parties, including suppliers, distributors,
carriers and customers, and the electronic date interchange with those
key third parties.
Independent of the Year 2000 issue, Petrini has installed new management
information systems. These systems are fully operational and have been tested
and Petrini believes they are Year 2000 compliant. If Petrini's systems are not
Year 2000 compliant, Petrini has developed a contingency plan which includes
increasing normal inventories of critical raw materials and other supplies
prior to December 31, 1999, and making alternate arrangements for the transport
of its products, if necessary, which efforts have already begun, and ensuring
that all critical staff are available or scheduled to work prior to, during and
immediately after December 31, 1999.
In addition to internal Year 2000 IT and non-IT remediation activities,
Petrini has contacted its key suppliers and vendors, distributors and carriers
to minimize disruptions in the relationship between Petrini and these important
third parties from the Year 2000 issue. Petrini has requested year 2000
compliance certification from each of such vendors and suppliers, distributors
and carriers for their hardware and software products and for their internal
business applications and processes. While Petrini cannot guarantee compliance
by third parties, it will consider alternate sources of supply and other means
100
of transport, which it believes are generally available in the event a key
supplier or carrier cannot demonstrate is systems or products are year 2000
compliant.
The costs of updated our systems for Year 2000 compliance has been
approximately $200,000, only a portion of which is attributable to Year 2000
compliance. While Petrini believes that it has completed the updates required
for the operation of its IT and non-IT systems and does not expect to incur any
material costs in the future relating to the Year 2000, there can be no
assurance as to the ultimate cost of Petrini's Year 2000. Such additional
costs, if any, will be expensed as incurred, except to the extent such costs
are incurred for the purchase or lease of capital equipment.
Petrini's current estimates of the amount of time and costs necessary to
remediate and test its computer systems, to the extent not already completed,
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 Petrini'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:
o the availability and cost of personnel trained in this area;
o the ability to locate and correct all relevant date-sensitive codes in
both IT and non-It systems;
o unanticipated failures in our IT and non-IT systems; and
o the planning and Year 2000 compliance success that suppliers and
vendors attain.
Petrini 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, Petrini is not able to estimate its
possible future costs beyond the current estimate of costs. As new developments
occur, these costs estimates may be revised to reflect the impact of these
developments on the costs to us of making its products and IT and non-IT
systems Year 2000 compliant. Such revisions in costs could have a material
adverse impact on Petrini's results of operations in the quarterly period in
which they are recorded. Although Petrini consider it unlikely, such revisions
could also have a material adverse effect on its business, financial condition
or results of operations.
Like virtually every company, Petrini is at risk for the failure of major
infrastructure providers to adequately address potential Year 2000 problems.
Petrini is highly dependent on a variety of public and private infrastructure
providers to conduct its business in numerous jurisdictions throughout Italy
and the rest of the countries in which it distributes its products. Failures of
the banking systems, basic utility providers, telecommunication providers and
other services, as a result of Year 2000 problems, could have a material
adverse effect on Petrini's ability to conduct its business. While Petrini is
cognizant of these risks, a complete assessment of all such risks is beyond the
scope of its Year 2000 assessment or its ability to address. Petrini has
focused its resources and attention on the most immediate and controllable Year
2000 risks.
101
MANAGEMENT OF IAT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of our
executive officers and directors:
NAME AGE POSITION
- ------------------------------- ----- --------------------------------------------------
Jacob Agam .................... 44 Chairman of the Board and Chief Executive Officer
Klaus Grissemann .............. 56 Director and Chief Financial Officer
Nicolaas Hildebrand ........... 49 Chief Operating Officer
Marc S. Goldfarb(1)(2) ........ 35 Director
Erich Weber(1)(2) ............. 57 Director
Robert Weiss(1)(2) ............ 52 Director
- ----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
JACOB AGAM has served as our Co-Chairman of the Board since our
organization in October 1996 and became our Chairman and our Chief Executive
Officer in April 1998. Mr. Agam has served as the Chairman of the Board and
Chief Executive Officer of Gruppo Spigadoro N.V., a Dutch holding company
operating in the Italian food and animal feed markets, since September 1998 and
the Chairman of the Board of Interactive Magic, Inc., an e-commerce and
Internet advertising company, since August 1999. Mr. Agam is a founder and
Chairman of Orida Capital Ltd. and Vertical Capital Ltd., each a merchant
banking and venture capital firm since their inception in 1993, and the
Chairman of Vertical Financial Holdings, a principal stockholder of IAT, since
1995. Mr. Agam, in his capacity as Chairman of Orida, spends a portion of his
business time providing services to companies other than IAT. Orida provides
services for Vertical pursuant to an agreement between Orida and Vertical. Mr.
Agam received a law degree from Tel Aviv University in 1984 and an LLM degree
in securities and corporate finance from the University of Pennsylvania in
1986.
KLAUS GRISSEMANN has served as our Chief Financial Officer since our
organization in October 1996 and has served as a director since December 1996.
Mr. Grissemann joined IAT AG, a subsidiary of IAT, in 1989 as Chief Financial
Officer and has served as a director of IAT AG since 1993. From 1979 until
1988, Mr. Grissemann was Chief Financial Officer of Jaeger Le Coultre AG, a
Swiss watch manufacturer. Mr. Grissemann graduated from Kantonale Handelsschule
business school in Zurich.
NICOLAAS HILDEBRAND has served as our Chief Operating Officer since
February 1999. Prior to joining IAT, Mr. Hildebrand served as the Managing
Director of Asys Holding. Prior to joining Asys in July 1996, Mr. Hildebrand
served as the General Manager, Central Europe, for Compuware, an information
technology consulting company, from May 1994 until September 1995 and Director
of Marketing and Research and Development for Wang Europe, a computer
manufacturer, from January 1987 until February 1994.
MARC S. GOLDFARB has served as a director of IAT since September 1999.
Since August 1998, Mr. Goldfarb has been the President and Managing Director of
Orida Capital USA, Inc., a consulting firm that is the U.S. representative of
the Vertical Group, a global merchant banking firm, and an affiliate of Orida
Capital Ltd. Prior to joining Orida Capital, Mr. Goldfarb was a corporate and
securities attorney for over 10 years, most recently as a partner at Bachner,
Tally & Polevoy LLP in New York, where he specialized in corporate finance,
venture capital and mergers and acquisitions. Mr. Goldfarb holds a B.S. degree
in Management and Industrial Relations from Cornell University and a J.D. from
the University of Pennsylvania Law School.
DR. ERICH WEBER has served as a director of IAT since June 1998. Dr.
Weber's expertise is in information automation. Dr. Weber has served in several
management positions at Revi Informatik, a data processing consulting company,
since 1992 following ten years as a partner and manager of electronic data
processing consulting of Revisuisse Price Waterhouse, Zurich. Prior thereto, he
was a department
102
manager of infomatics for Migros Genossenschaftsbund and Alusuisse, a producer
of aluminum products. Dr. Weber earned his doctorate in Economic Science from
the University of Zurich in 1970.
ROBERT WEISS has served as a director of IAT since June 1998. In 1980 Mr.
Weiss founded Robert Weiss Consulting, an independent electrical engineering
consulting company, and has served as its President since 1980. Previously, he
served nine years as a consultant to Alusuisse, a producer of aluminum
products, in its headquarters and department of research and development. Mr.
Weiss received a degree in Chemistry from Technical College Winterthur in 1970.
All directors hold office until the next annual meeting of stockholders or
until their successors are elected and qualified; vacancies and any additional
positions created by board action are filled by action of the existing Board of
Directors. All officers serve at the discretion of the Board of Directors.
DIRECTORS AND EXECUTIVE OFFICERS OF IAT FOLLOWING THE ACQUISITION
The following table sets forth the names, ages and positions of our
executive officers and directors and executive officers of Petrini following
the acquisition:
NAME AGE POSITION
- --------------------------------- ----- -----------------------------------------------
Jacob Agam ...................... 44 Chairman of the Board and Chief Executive
Officer of IAT
Klaus Grissemann ................ 56 Director and Chief Financial Officer of IAT
Lucio De Luca ................... 48 Director of IAT and Chief Operating Officer of
IAT and Petrini
Marc S. Goldfarb(1)(2) .......... 35 Director
Erich Weber(1)(2) ............... 57 Director
Robert Weiss(1)(2) .............. 52 Director
Carlo Petrini ................... 65 Director of IAT and Chairman of the Board of
Petrini
Dario Ciolina ................... 53 Chief Financial Officer of Petrini
- ----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
For biographies of Messrs. Agam, Grissemann, Goldfarb, Weber and Weiss,
see "Management of IAT--Directors and Executive Officers".
LUCIO DE LUCA has over 24 years of experience in the food and
manufacturing industry and has served as Chief Operating Officer of Petrini
S.p.A. since 1998. From 1994 to 1998, Mr. De Luca was General Manager of
several divisions of Averna Group, a large Italian industrial holding company.
From 1990 to 1993, Mr. De Luca was President of Pepsi Cola Foods International
Inc. Italy. From 1987 to 1989, he was Divisional Manager of Mars (Italy) and
from 1978 to 1987, Mr. De Luca served in various capacities, including
Marketing Director of Henkel (Italy), a large German chemical company. Mr. De
Luca also served in London, England from 1974 to 1978, as General Manager of
Compagnia Commerciale Meridionale, an Italian import-export company.
CARLO PETRINI is a direct descendant of the founder of Petrini, has worked
for Petrini for 43 years and has served as President since 1980. Mr. Petrini
also co-founded the American-Italian Pasta Company, a United States pasta
manufacturing and distribution company, which was sold in 1989. Mr. Petrini is
also a board member of various Italian trade groups, industrial and food
companies, as well as Banca d'Italia (Perugia).
DARIO CIOLINA has served as the Chief Financial Officer of Petrini since
April 1999. Prior to joining Petrini, Mr. Ciolina served as Director of Special
Projects of Cinzano S.p.A., a United Distillers (Diageo Plc) company, from 1996
to 1998. From 1992 to 1995, Mr. Ciolina served as Group Finance Director of
Krizia S.p.A., one of the largest Italian fashion companies. From 1985 to 1991,
Mr. Ciolina served as Vice
103
President Finance of Oral-B Italy S.p.A., a Gillette company. From 1971 to
1984, Mr. Ciolina served in various capacities in consulting and in the
manufacturing industry at Price Waterhouse, Cadbury Schweppes Italy S.p.A. and
Frendo-Abex S.p.A., an IC Industries Inc. company, operating in Italy in the
automotive components industry. Mr. Ciolina graduated with a degree in
Economics from Bocconi University in Milan.
All directors hold office until the next annual meeting of stockholders or
until their successors are elected and qualified; vacancies and any additional
positions created by board action are filled by action of the existing Board of
Directors. All officers serve at the discretion of the Board of Directors.
See "Management of Petrini" for a discussion of the compensation of
Messrs. De Luca, Petrini and Ciolina at Petrini.
RIGHTS TO NOMINATE DIRECTORS
Following the acquisition, for so long as Spigadoro (or its current
shareholders), their respective affiliates and Carlo Petrini collectively hold
at least:
o 50% of the outstanding shares of our common stock, Spigadoro or its
assignee will have the right to nominate 50% of the members for election
to our Board of Directors;
o 25% of the outstanding shares of our common stock, Spigadoro or its
assignee will have the right to nominate 25% of the members for election
to our Board of Directors; and
o 10% of the outstanding shares of our common stock, Spigadoro or its
assignee will have the right to nominate a single member for election to
our Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee
The Audit Committee consists of Messrs. Goldfarb, Weber and Weiss. The
primary functions of the Audit Committee are to recommend engagement of our
independent public accountants and to maintain communications among such
independent accountants, the Board of Directors and our internal accounting
staff with respect to accounting and audit procedures, the implementation of
recommendations by such independent public accountants, the adequacy of our
internal controls and related matters.
Compensation Committee
The Compensation Committee consists of Messrs. Goldfarb, Weber and Weiss.
The principal functions of the Compensation Committee are to review the
management organization and development, review significant employee benefit
programs, including bonus plans, stock option and other equity-based programs,
deferred compensation plans and any other cash or stock incentive programs and
advise the Board of Directors accordingly.
We do not have a nominating committee.
DIRECTOR COMPENSATION
Our directors currently do not receive any compensation as such, but
directors who are not also our executive officers are reimbursed for expenses
incurred in connection with their service on the Board of Directors. We may
establish different compensation policies in the future. Vertical currently
receives a monthly payment of $12,000 as compensation for the services of our
Chairman of the Board nominated by Vertical. Jacob Agam is the current nominee
of Vertical. During fiscal 1998, Vertical received $144,000 as consideration
for Mr. Agam's services as our Chairman of the Board.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth the aggregate
compensation paid or accrued by us to Viktor Vogt, our Chief Executive Officer
until April 1998 and Jacob Agam, our Chief Executive Officer since April 1998,
one of our other executive officers whose annual compensation exceeded $100,000
for fiscal 1998 who was serving as an executive officer at December 31, 1998,
two executive officers who were no longer serving in such capacity at December
31, 1998, and one executive officer who was elected in February 1999, for
services rendered during the fiscal years ended December 31, 1998, 1997 and
1996:
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
--------------------------------------------- ---------------------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
SALARY BONUS COMPENSATION STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) AWARDS(S) OPTIONS(#) ($)
- ------------------------------ ------ ---------- --------- ----------------- ------------ ------------ -------------
Jacob Agam (2)
Chairman and Chief
Executive Officer ........... 1998 25,000 -- -- -- -- --
Viktor Vogt (3)
Co-Chairman, Chief
Executive Officer and
President ................... 1998 70,655 -- 4,377(4) -- 75,000 --
2,336(5)
1997 136,458 10,000 16,965(4) -- -- --
9,387(5)
1996 120,833 -- 15,178(4) -- -- --
9,325(5)
Nicolaas Hildebrand (6)
Chief Operating Officer . 1998 -- -- -- -- -- --
Klaus Grissemann (7)
Chief Financial Officer ..... 1998 144,845 -- 8,731(5) -- 50,000 --
25,000(10)
1997 142,083 -- 8,792(5) -- -- --
1996 136,163 -- 8,792(5) -- -- --
Franz Muller (8)
Chief Technical Officer of
IAT AG ...................... 1998 -- -- -- -- --
1997 95,632 -- 7,774(4) -- -- --
8,633(5)
1996 87,299 -- 7,729(4) -- --
8,633(5)
Alfred Simmet (9)
Chief Operating Officer
of FSE ...................... 1998 56,818 -- -- -- 25,000 --
1997 22,066 -- -- -- -- --
- ----------
(1) Compensation is paid in Swiss Francs or German Deutsche Marks and is
converted into U.S. Dollars at the exchange rate of $1.00 = 1.44 SF and
$1.00 = 1.775DM for 1996 and 1997 and $1.00 = 1.45 SF for 1998.
(2) Mr. Agam served as Co-Chairman of the Board since our organization in
1996 and became the sole Chairman and Chief Executive Officer in April
1998. For 1998, represents amounts accrued from September 1, 1998 to
December 31, 1998, all of which was paid in 1999. Under an employment
105
agreement effective September 1, 1998, Mr. Agam is entitled to an annual
salary of $75,000 per year plus certain other benefits. Excludes $123,000
and $144,000 paid to Vertical as compensation for the services of Mr.
Agam, as Chairman of the Board, during 1997 and 1998, respectively. See
"--Director Compensation" and "--Employment Contracts and Termination of
Employment and Change-In-Control Arrangements."
(3) Dr. Vogt resigned as our Co-Chairman, President and Chief Executive
Officer as of April 1, 1998 in connection with our restructuring in March
1998. Includes $36,000 paid to Dr. Vogt for services rendered in 1998 as
a consultant to IAT. See "--Employment Contracts and Termination of
Employment and Change-In-Control Arrangements" and "Certain Relationships
and Related Transactions--Spinoffs."
(4) Pursuant to the pension system in existence in Switzerland, we contribute
these amounts to pension funds selected by the executive officer from
among several independent pension funds chartered by the government to
collect pension contributions and to make pension payments upon
retirement.
(5) Represents payments made by us for automobile leases.
(6) We entered into an employment agreement effective as of February 1, 1999
with Mr. Hildebrand under which Mr. Hildebrand agreed to serve as our
Chief Operating Officer until January 31, 2000. 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).
(7) Mr. Grissemann is not directly employed by IAT. His services are provided
on a per diem basis by Grissemann Consulting S.A. See "--Employment
Contracts and Termination of Employment and Change-In-Control
Arrangements."
(8) Mr. Muller served as the Chief Technical Officer of IAT AG until March
1998 when he resigned from his position with IAT AG. Salary accrued from
January 1, 1998 through March 31, 1998 was assumed by Algo Vision Schweiz
in connection with our restructuring in March 1998. See "--Employment
Contracts and Termination of Employment and Change-In-Control
Arrangements" and "Certain Relationships and Related
Transactions--Spinoffs."
(9) Dr. Simmet became the Chief Operating Officer of FSE Computer-Handel GmbH
& Co. on November 13, 1997 in connection with our acquisition of FSE. Dr.
Simmet waived his rights to a portion of his salary during 1998. Dr.
Simmet's compensation in 1997 represents amounts accrued from November
13, 1997 to December 31, 1997, all of which was paid in 1997. Dr. Simmet
resigned as the Chief Operating Officer of FSE effective December 31,
1998. See "--Employment Contracts and Termination of Employment and
Change-In-Control Arrangements" and "Certain Relationships and Related
Transactions--Simmet Purchase Agreement."
(10) Consists of a payment to Mr. Grissemann for services rendered in
connection with the acquisition of Columbus Computer Handels-und
Vertriebs. See "--Employment Contracts and Termination of Employment and
Change In-Control Arrangements."
106
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth certain information regarding stock options
granted to our named executive officers during the fiscal year ended December
31, 1998. No stock appreciation rights were granted to these individuals during
such year.
INDIVIDUAL GRANTS
------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL POTENTIAL REALIZABLE
SECURITIES OPTIONS EXERCISE VALUE AT ASSUMED
UNDERLYING GRANTED TO OR BASE ANNUAL RATES OF STOCK
OPTIONS EMPLOYEES IN PRICE EXPIRATION PRICE APPRECIATION FOR
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE OPTION TERM(1)
- ---- --------------- -------------- ---------- ------------ -----------------------
5% ($) 10% ($)
---------- ----------
Jacob Agam ..................... -- -- -- -- --
Victor Vogt(2) ................. 50,000(3) 28.6 $ 5.00 3/11/03 69,070 152,628
25,000(4) 14.3 $ 6.00 4/16/03 41,442 91,577
Nicolaas Hildebrand(5) ......... -- -- -- -- -- --
Klaus Grissemann ............... 50,000(6) 28.6 $ 6.00 4/16/08 188,668 478,123
Franz Muller(7) ................ -- -- -- -- -- --
Alfred Simmet(8) ............... 25,000(6) 14.3 $ 6.00 4/16/03 94,334 239,061
- ----------
(1) Calculated by multiplying the exercise price by the annual appreciation
rate shown (as prescribed by the SEC rules) and compounded for the term
of the options, subtracting the exercise price per share and multiplying
the gain per share by the number of shares covered by the options. These
amounts are not intended to forecast possible future appreciation, if
any, of the price of our common stock. The actual value realized upon
exercise of the options will depend on the fair market value of our
common stock on the date of exercise.
(2) Dr. Vogt resigned as an executive officer of IAT effective April 1, 1998.
See "--Employment Contracts and Termination of Employment and
Change-In-Control Arrangements."
(3) The options are exercisable in equal annual installments of one-third on
a cumulative basis commencing from the date of grant.
(4) The options are all exercisable in full commencing from the date of
grant.
(5) Mr. Hildebrand was granted options to purchase 60,000 shares of our
common stock on February 1, 1999 which vest one third on November 1,
1999, one third on February 1, 2000 and one third on February 1, 2001.
(6) The options are exercisable in equal annual installments of 50% on a
cumulative basis commencing from the date of grant.
(7) Mr. Muller resigned as an executive officer of IAT effective April 1,
1998. See "--Employment Contracts and Termination of Employment and
Change-In-Control Arrangements."
(8) Dr. Simmet resigned as an executive officer of IAT effective December 31,
1998 and as a result these options have terminated. See "--Employment
Contracts and Termination of Employment and Change-In-Control
Arrangements."
107
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information with respect to the
exercise of stock options during fiscal 1998 by our named executive officers
and the number and value of unexercised options held by each of our named
executive officers as of December 31, 1998:
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF
SHARES OPTIONS UNEXERCISED
ACQUIRED VALUE AT IN-THE-MONEY OPTIONS
NAME ON EXERCISE (#) REALIZED ($) FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
- ---- ----------------- -------------- ----------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------- --------------- ------------- --------------
Jacob Agam -- -- -- -- -- --
Victor Vogt (2) -- -- 41,666 33,334 -- --
Nicolaas Hildebrand (3) -- -- -- -- --
Klaus Grissemann -- -- 25,000 25,000 -- --
Franz Muller (4) -- -- -- -- -- --
Alfred Simmet (5) -- -- 12,500 12,500 -- --
- ----------
(1) None of the options outstanding at December 31, 1998 were exercisable at
below $4.25, the market price of our common stock December 31, 1998.
(2) Dr. Vogt resigned as an executive officer of IAT Multimedia effective
April 1, 1998. See "--Employment Contracts and Termination of Employment
and Change-In-Control Arrangements" and "Certain Relationships and
Related Transactions--Algo Vision Transaction."
(3) Mr. Hildebrand was granted 60,000 options to purchase shares of our
common stock on February 1, 1999, the effective date on which he was
hired as an executive officer of IAT.
(4) Mr. Muller resigned as an executive officer of IAT Multimedia effective
April 1, 1998. See "--Employment Contracts and Termination of Employment
and Change-In-Control Arrangements."
(5) Dr. Simmet resigned as an executive officer of IAT Multimedia effective
December 31, 1998 and as a result these options have terminated. See
"--Employment Contracts and Termination of Employment and
Change-In-Control Arrangements."
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Mr. Agam
We entered into an employment agreement effective as of September 1, 1998
with Mr. Agam under which Mr. Agam has agreed to serve as our Chief Executive
Officer for a three year term expiring September 1, 2001. Under the employment
agreement, Mr. Agam is entitled to an annual salary of $75,000 per year, plus a
bonus to be approved by the Board of Directors. If the employment agreement is
terminated by us without cause, Mr. Agam is entitled to receive his base salary
for a period of one year following the date of termination. In connection with
the acquisition, Mr. Agam's employment will be amended to provide that Mr. Agam
will serve as our Chief Executive Officer for a three year term and will
receive an annual salary of $300,000, plus a bonus to be approved by the Board
of Directors. Mr. Agam will continue to be employed by us on a part-time basis.
Mr. Grissemann
Mr. Grissemann's services as our Chief Financial Officer are provided to
us on a per diem basis by Grissemann Consulting S.A. pursuant to an agreement,
dated September 1, 1992, and amended on December 19, 1994, between IAT AG and
Grissemann Consulting S.A. This agreement has an indefinite term and provides
that Mr. Grissemann is responsible for the administration and accounting of IAT
Multimedia and that the amount of his business time which he is to devote to
our affairs is to be agreed among the parties but shall not be less than 30% of
Mr. Grissemann's business time. Grissemann Consulting S.A. is paid a fee of
approximately $538 (SF775) per day to be amended yearly in line with increases
in salary of our other executive officers plus expenses of an automobile to be
provided to Mr. Grissemann. In July 1998, we further amended the agreement to
provide for a payment to
108
Mr. Grissemann for services provided by him in connection with our acquisitions
or financings. The amount to be paid to Mr. Grissemann for such services in any
year will not exceed $50,000. In 1998, we paid $25,000 to Mr. Grissemann for
services provided in connection with our acquisition of Columbus.
Mr. Hildebrand
We entered into an employment agreement effective as of February 1, 1999
with Mr. Hildebrand under which Mr. Hildebrand has agreed to serve as our Chief
Operating Officer until January 31, 2000. The term of employment could be
extended until January 31, 2002 if agreed to by us and Mr. Hildebrand. In
October 1999, we elected not to extend the term of employment. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1998, our Compensation Committee
consisted of Messrs. Walther, Grissemann, Weber and Weiss, none of whom is a
current or former employee or officer of IAT or any of our subsidiaries, except
Mr. Grissemann who, while not our employee, provides the services of a Chief
Financial Officer and is indirectly compensated by us. None of our executive
officers and no member of our Compensation Committee is a member of any other
business entity that has an executive officer that sits on our Board of
Directors or on our Compensation Committee. See "--Employment Contracts and
Termination of Employment and Change-In-Control Arrangement."
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS OF IAT
The following table sets forth certain information regarding ownership of
our common stock as of December 1, 1999 by (i) each of our directors, (ii) each
of our executive officers named under "Management of IAT--Executive
Compensation," (iii) each person known by us to own beneficially more than five
percent of our outstanding common stock, and (iv) all of our executive officers
and directors as a group. Unless otherwise indicated, the address of these
directors and officers is c/o IAT Multimedia, Inc., 70 East 55th Street, 24th
Floor, New York, New York 10022. Beneficial ownership is defined in accordance
with the rules of the Commission and generally means the power to vote and/or
to dispose of the securities regardless of any economic interest therein. In
computing number and percentage ownership of shares of our common stock
beneficially owned by a person, shares of common stock subject to options held
by that person which are exercisable within 60 days of December 1, 1999 are
deemed outstanding. Such shares of our common stock, however, are not deemed
outstanding for purposes of computing the percentage ownership of stockholders
other than such person.
We have been advised that Vertical Financial Holdings owns equity
interests in Behala Anstalt, Lupin Investments Services Ltd. and Henilia
Financial Ltd. and that Vertical has agreements with third party investors in
each such entity. These entities beneficially own an aggregate of 660,526
shares of common stock and 890,151 shares of common stock issuable upon
exercise of warrants. These equity interests and agreements entitle Vertical to
varying percentages of the profits resulting from the sale of the shares of
each of these entities. Under agreements with each of these entities, the
trustee of each such entity has voting and dispositive power over the shares
held by that entity, although Vertical retains the right to appoint or
terminate the appointment of the trustee.
109
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF SHARES
OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED (%)
- ------------------------------------------------------ ----------------------- -----------------------
Jacob Agam (1) ....................................... 40,000 (2) *
Klaus Grissemann ..................................... 264,395 (3) 2.2%
Marc Goldfarb ........................................ 25,000 (2) --
Alfred Simmet (4) .................................... 146,949 1.3
Viktor Vogt .......................................... 227,938 (5) 1.9
Volker Walther (6) ................................... 940,750 (7) 8.0
Franz Muller (8) ..................................... -- --
Erich Weber .......................................... 25,000 (2) *
Robert Weiss ......................................... 25,000 (2) *
Nicolaas Hildebrand .................................. 40,000 (9) *
Behala Anstalt (10) .................................. 592,804 (11) 5.0
Lupin Investments Services Ltd. (12) ................. 592,804 (13) 5.0
Klaus-Dirk Sippel (14) ............................... 1,055,923 (15) 8.7
Richard Suter (16) ................................... 721,551 (17) 6.0
Vertical Financial Holdings (18) ..................... 1,580,304 (19) 12.7
JNC Opportunity Fund, Ltd. (20) ...................... 1,908,282 (21) 16.2
All of our executive officers and directors as a group
(6 persons) ......................................... 419,395 (22) 3.5
- ----------
* Less than 1%
(1) Jacob Agam, our Chairman and Chief Executive Officer, is the Chairman of
the Board of Vertical Financial Holdings, a company organized under the
laws of Liechtenstein, which beneficially owns 1,580,304 shares of common
stock. Pursuant to an agreement between Orida Capital Ltd. and Vertical,
Orida has the right to receive a portion of the profits from the sale of
the shares of common stock held by Vertical. Mr. Agam is the Chairman of
Orida. Excludes an aggregate of 660,526 shares of our common stock and
890,151 shares of our common stock issuable upon exercise of warrants
held by Behala Anstalt, Lupin Investment Services Ltd. and Henilia
Financial Ltd. Mr. Agam disclaims beneficial ownership of the shares held
by Vertical, Behala, Lupin and Henilia.
(2) Represents shares of common stock issuable upon exercise of options that
are exercisable within 60 days of December 1, 1999.
(3) Includes:
o 15,151 shares of common stock which are held in escrow but in respect
of which Mr. Grissemann retains the power to vote; and
o 75,000 shares of common stock issuable upon exercise of options that
are exercisable within 60 days of December 1, 1999.
See "Certain Relationships and Related Transactions--Escrow Shares."
(4) Dr. Simmet resigned as an officer of IAT Multimedia effective December
31, 1998.
(5) Includes:
o 69,605 shares of common stock which are held in escrow but in respect
of which Dr. Vogt retains the power to vote; and
o 58,333 shares of common stock issuable upon exercise of options that
are exercisable within 60 days of December 1, 1999. Excludes 16,667
shares of common stock issuable upon exercise of options that are not
exercisable within 60 days of December 1, 1999.
See "Certain Relationships and Related Transactions--Escrow Shares."
(6) Volker Walther's address is Pohlweg 44, D-33098, Paderborn.
110
(7) Includes:
o 831,985 shares of common stock held by Walther Glas GmbH of which Mr.
Walther is the majority shareholder, of which 12,495 shares of common
stock are held in escrow but in respect of which Walther Glas GmbH
retains the power to vote;
o 58,765 shares of common stock which are held in escrow but in respect
of which Mr. Walther retains the power to vote; and
o 50,000 shares of common stock issuable upon exercise of options that
are exercisable within 60 days of December 1, 1999.
See "Certain Relationships and Related Transactions--Escrow Shares."
(8) Mr. Muller resigned as an officer of IAT Multimedia in April 1998.
(9) Represents shares of common stock issuable upon exercise of options that
are exercisable within 60 days of December 1, 1999. Excludes 20,000
shares of common stock issuable upon exercise of options that are not
exercisable within 60 days of December 1, 1999.
(10) The address of Behala Anstalt is Heiligkreuz 6, PL-9490 Vaduz,
Liechtenstein.
(11) Includes:
o 296,402 shares of common stock issuable upon exercise of warrants
beneficially owned by Behala Anstalt and exercisable within 60 days of
December 1, 1999; and
o 23,712 shares of common stock which are held in escrow but in respect
of which Behala Anstalt retains the power to vote.
See "Certain Relationships and Related Transactions--Escrow Shares."
(12) The address of Lupin Investments Services Ltd. is P.O. Box 3186, Road
Town, Tortola, British Virgin Islands.
(13) Includes:
o 296,402 shares of common stock issuable upon exercise of warrants
beneficially owned by Lupin Investments Services Ltd. and exercisable
within 60 days of December 1, 1999; and
o 23,712 shares of common stock which are held in escrow but in respect
of which Lupin Investments Services Ltd. retains the power to vote.
See "Certain Relationships and Related Transactions--Escrow Shares."
(14) The address of Klaus-Dirk Sippel is Tannenweg 2, CH-5415 Nussbaumen,
Switzerland.
(15) The number of shares beneficially owned by Mr. Sippel is based upon
information provided by Mr. Sippel in a Schedule 13G dated March 11, 1998
filed under to the Securities Exchange Act of 1934. Includes:
o 398,864 shares of common stock issuable upon exercise of warrants
beneficially owned by Klaus-Dirk Sippel and exercisable within 60 days
of December 1, 1999; and
o 56,565 shares of common stock which are held in escrow but in respect
of which Mr. Sippel retains the power to vote.
Excludes 76,941 shares sold in October 1996 by Mr. Sippel to Mr. Jurgen
Henning. While Mr. Sippel does not have any voting or dispositive power
with respect to these shares, an agreement between Messrs. Sippel and
Henning provides that Mr. Sippel will share in the proceeds of the sale of
Mr. Henning's shares.
See "Certain Relationships and Related Transactions--Escrow Shares."
(16) Richard Suter's address is Lendikerstrasse 25, CH-8484 Weisslingen,
Switzerland.
(17) The number of shares beneficially owned by Mr. Suter is based upon
information provided by Mr. Suter in a Schedule 13G dated March 16, 1998
filed under to the Securities Exchange Act of 1934. Includes:
o 198,864 shares of common stock issuable upon exercise of warrants
beneficially owned by Richard Suter and exercisable within 60 days of
December 1, 1999; and
o 45,815 shares of common stock which are held in escrow but in respect
of which Mr. Suter retains the power to vote.
See "Certain Relationships and Related Transactions--Escrow Shares."
(18) The address of Vertical Financial Holdings Establishment is
Hombrechtikerstrasse 61, CH-8640 Rapperswil, Switzerland.
(19) Includes:
o 690,152 shares of common stock issuable upon exercise of warrants
beneficially owned by Vertical and exercisable within 60 days of
December 1 1999; and
o 71,212 shares of common stock which are held in escrow but in respect
of which Vertical retains the power to vote.
Excludes an aggregate of 660,526 shares of common stock and 890,151 shares
of common stock issuable upon exercise of warrants held by Behala Anstalt,
Lupin Investments Services Ltd. and Henilia Financial Ltd. Vertical has
the right to receive a percentage of the proceeds from the sale of shares
by these entities. Also excludes 69,605 shares of common stock owned by
Dr. Vogt in which Vertical does not have any voting or dispositive power.
However, under an agreement between Vertical and Dr. Vogt, Vertical has
the right to receive a portion of the proceeds of the sale of these shares
by Dr. Vogt.
See "Certain Relationships and Related Transactions--Escrow Shares."
111
(20) JNC's address is c/o Encore Capital Management, L.L.C., 12007 Sunrise
Valley Drive, Suite 460, Reston, Virginia 20191.
(21) Includes 35,300 shares of common stock issuable upon exercise of warrants
beneficially owned by JNC and exercisable within 60 days of December 1,
1999.
Excludes:
o 578,763 shares of our common stock which are issuable upon exercise of
a convertible debenture held by JNC, subject to receipt of stockholder
approval for the issuance of the shares of common stock as described in
this proxy statement/ prospectus; and
o 23,529 shares of common stock issuable upon exercise of warrants and
198,255 shares of common stock issuable upon conversion of convertible
preferred stock held by JNC Strategic Fund, Ltd., all of which are
exercisable within 60 days of December 1, 1999. JNC and JNC Strategic
Fund, Ltd. have a common investment manager.
(22) Includes:
o 15,151 shares of common stock which are held in escrow but in respect
which the officer retains the power to vote; and
o 230,000 shares of common stock issuable upon exercise of options that
are exercisable within 60 days of December 1, 1999.
Excludes 20,000 shares of common stock issuable upon exercise of options
that are not exercisable within 60 days. Also excludes shares of common
stock beneficially owned by:
o Viktor Vogt, Volker Walther, Dr. Simmet and Mr. Muller former
directors and officers of IAT Multimedia; and
o Vertical, of which Mr. Agam is Chairman of the Board.
MANAGEMENT OF PETRINI
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth the aggregate
compensation paid or accrued by Petrini to Carlo Petrini, the Chairman of the
Board of Petrini, Lucio De Luca, the Chief Operating Officer of Petrini, and
Dario Ciolina, the Chief Financial Officer of Petrini, for services rendered
during the fiscal years ended December 31, 1998, 1997 and 1996. Each of these
persons will remain as executive officers of Petrini following the closing of
the acquisition. Mr. De Luca will also become the Chief Operating Officer of
IAT following the acquisition.
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
------------------------------------------------ ---------------------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
SALARY BONUS COMPENSATION STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) AWARD(S) OPTIONS(#) ($)
- ----------------------------- ------ ------------------ ------- -------------- ------------ ------------ -------------
Carlo Petrini
Chairman of the Board ...... 1998 -- -- 265,000 (2) -- -- --
18,600 (3)
1997 -- -- 265,000 (2) -- -- --
18,600 (3)
1996 -- -- 265,000 (2) -- -- --
18,600 (3)
Lucio De Luca
Chief Operating Officer . 1998 13,250 (4) -- 21,000 (5) -- -- --
10,600 (3)
Dario Ciolina
Chief Financial
Officer (6) ................ 1998 -- -- -- -- -- --
- ----------
(1) Compensation is paid in Lire and is converted into US Dollars at the
exchange rate of Lire 1.887=U.S. $1.00.
(2) Mr. Petrini is entitled to an annual salary of approximately $265,000 for
services provided to Petrini as Chairman of the Board of Petrini.
(3) Represents payments made by Petrini for automobile leases.
112
(4) Mr. De Luca's employment commenced as of November 30, 1998 and,
accordingly, represents amounts accrued from November 30, 1998 to
December 31, 1998, all of which was paid in 1998. Under an employment
agreement with Mr. De Luca, Mr. De Luca is entitled to an annual salary
of approximately $160,000, plus bonuses based upon Petrini's operating
performance. See "--Employment Agreements."
(5) Represents payments made by Petrini for director fees.
(6) Mr. Ciolina's employment commenced in April 1999. Mr. Ciolina is entitled
to a salary of approximately $155,000 per year.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Lucio De Luca
Petrini entered into an employment agreement effective December 1, 1998
with Mr. De Luca under which Mr. De Luca agreed to serve as the Chief Operating
Officer of Petrini until June 1, 2000. The employment agreement is governed by
Italian law. Mr. De Luca is entitled to an annual salary of Lit. 300,000,000
(approximately $160,000), subject to an increase of up to Lit. 50,000,000
(approximately $26,500) if Petrini meets certain performance thresholds. Mr. De
Luca is also entitled to a bonus of Lit. 50,000,000 (approximately $26,500) if
Petrini meets the established performance thresholds. Under the agreement,
Petrini pays for a car for Mr. De Luca's use. Under the agreement, Mr. De Luca
is subject to a confidentiality provision. Following the closing of the
acquisition, Mr. De Luca will also become the Chief Operating Officer of IAT
and is expected to enter into an employment agreement with IAT.
113
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCKHOLDER LOANS AND GUARANTEES
On November 6, 1996, Mr. Sippel made an unsecured subordinated loan to IAT
AG in the amount of SF 650,000 (approximately $481,500). A portion of this loan
was used by IAT AG to repay an unsecured non-interest bearing loan in the
amount of SF 150,000 (approximately $111,000) made in February 1996 to IAT AG
by Telefutura, a company controlled by Mr. Sippel. The loan by Mr. Sippel to
IAT AG had an annual interest rate of 8% and principal and accrued interest was
repaid in February 1998.
On December 19, 1995, HIBEG, a German government entity, the then 25.1%
shareholder of IAT Germany, made an unsecured subordinated loan to IAT Germany
in the amount of approximately DM 500,000 (approximately $321,467) which was
increased in June 1996 to DM 750,000 (approximately $482,200). The loan accrued
interest at 5% per annum payable semi-annually and the interest rate was to be
increased to 10% per annum during the year when the retained earnings of IAT
Germany exceeded DM 87,500 (approximately $56,300). IAT Germany was required to
make semi-annual payments of 10% of the principal starting on June 30, 2000
until the principal was repaid in full. This loan was assumed by Algo Vision
Systems in our reorganization in March 1998. See "--Spinoffs."
Mr. Sippel and Richard Suter, each a principal stockholder of IAT
Multimedia, jointly and severally guaranteed two bank loans from Swiss Bank
Corporation to IAT AG each in the amount of SF 600,000 (approximately $444,400)
prior to our organization in September 1996. Each of Messrs. Sippel, Suter and
Cornelius Holthuizen, a stockholder of IAT Multimedia, jointly and severally
guaranteed a bank loan from Swiss Bank Corporation to IAT AG in the amount of
SF 700,000 (approximately $518,500) under IAT AG's credit agreement with Swiss
Bank Corporation for an aggregate of SF 1,900,000 (approximately $1.4 million).
IAT AG's line of credit with the Swiss Bank Corporation was reduced to the
aggregate principal amount of SF 1,300,000 (approximately $900,000), and we
agreed with Swiss Bank Corporation to repay IAT AG's credit line in monthly
installments of approximately $140,000, the first installment of which was made
on October 31, 1997. In connection with the agreement between us and Swiss Bank
Corporation pursuant to which we agreed to repay IAT AG's credit line
installments, we were assigned the rights of Swiss Bank Corporation under the
guarantees of Messrs. Sippel, Suter and Holthuizen. Under an agreement dated as
of December 22, 1997 between us and Messrs. Sippel, Suter and Holthuizen,
Messrs. Sippel, Suter and Holthuizen sold 50,000, 50,000 and 20,000 shares of
our common stock, respectively, in March 1998 and we received approximately
$494,000 from the proceeds of such sales which was used to repay the credit
line with Swiss Bank Corporation. As a result, the guarantees of Messrs.
Sippel, Suter and Holthuizen were released.
IAT Germany obtained a line of credit from Volksbank Sottrum in January
1996 in the amount of DM 1,050,000 (approximately $675,000). IAT AG, HIBEG and
Dr. Vogt each guaranteed DM 350,000 (approximately $225,000) of this line of
credit. Amounts outstanding under this line of credit were assumed by Algo
Vision Systems in our reorganization in March 1998. See "--Spinoffs."
All amounts in U.S. dollars were converted based on the exchange rate in
effect at the time of the respective transactions.
STOCK PURCHASE AGREEMENTS AND RELATED TRANSACTIONS
Under a stock purchase agreement among us, IAT AG, IAT Germany and
Vertical dated October 4, 1996, we sold an aggregate of 1,875,000 shares of
Series A preferred stock and warrants to purchase 1,875,000 shares of common
stock to Vertical, Behala Anstalt, Lupin Investments Services Ltd., Henilia
Financial Ltd. and Avi Suriel for an aggregate purchase price of $1.5 million.
Upon consummation of our initial public offering in April 1997 all
outstanding shares of the Series A preferred stock were converted into shares
of common stock.
The Stock Purchase Agreement further provides that until October 24, 1999
we will pay to Vertical monthly compensation of $12,000 for the services of our
Chairman nominated by Vertical. Jacob Agam is the current nominee of Vertical.
During fiscal 1998, Vertical received $144,000 as compensation for the
114
services rendered by Mr. Agam to us. We also agreed that, for so long as
Vertical holds the common stock issued upon conversion of its Series A
preferred stock or upon exercise of the warrants held by Vertical, the
composition of the Board of Directors of IAT AG and IAT Germany will be
identical to the composition of our Board of Directors and will not be changed
without Vertical's consent.
We further agreed in the Stock Purchase Agreement that we will cause IAT
AG and IAT Germany not to issue, and will not permit the issuance of, any
shares of capital stock (or any security convertible into shares of capital
stock) of IAT AG or IAT Germany, it being the intention of us and Vertical that
IAT AG shall remain our direct or indirect wholly-owned subsidiary and IAT
Germany shall remain our direct or indirect subsidiary.
Amendment No. 1 to the Stock Purchase Agreement, effective as of December
19, 1997, provides that Vertical will not enter into an agreement or make any
investment in an entity engaged in the video conferencing business without
first providing us the opportunity to enter into such agreement or make such
investment instead of Vertical.
In connection with the Stock Purchase Agreement, we also entered into an
investor rights agreement with Vertical which provides that Vertical has the
right to nominate as a member of the management slate for election to the Board
of Directors one or two persons for so long as Vertical holds at least 5% or
10%, respectively, of the 1,875,000 shares of common stock issued by us upon
conversion of our Series A preferred stock in April 1997 or the 1,875,000
shares of common stock issuable upon exercise of the warrants. As of December
1, 1999, Vertical held 850,152 of such shares of common stock and held warrants
to purchase 690,152 shares of common stock. We agreed that one such person will
be elected Chairman of the Board of Directors. Vertical has nominated, and our
stockholders have elected Jacob Agam as a director, and Vertical nominated and
Mr. Agam was elected as our Chairman. Vertical has the right to nominate a
second director. The Investor Rights Agreement further provides for one demand
and two piggy-back registration rights for the shares of common stock held by
Vertical and issuable upon exercise of warrants held by Vertical. Vertical
exercised such demand for its common stock in February 1999 and we registered
for resale shares of our common stock held by Vertical and certain other
stockholders.
We also entered into a marketing agreement with General Capital, an
affiliate of Vertical. The Marketing Agreement provides that General Capital
will assist us in connection with marketing our products worldwide, arranging
debt or equity financing for our products to be purchased by our customers, and
arranging financing for our operations, leasing programs, joint ventures and
distribution arrangements, in each case for the further enhancement of our
marketing strategy. The Marketing Agreement has a five year term expiring on
October 26, 2001. Under the Marketing Agreement, we paid General Capital
$100,000 in October 1996 and the remaining $400,000 was paid with a portion of
the proceeds of our initial public offering in April 1997.
ESCROW SHARES
Prior to our initial public offering our then stockholders deposited an
aggregate of 498,285 shares of common stock into escrow in connection with our
initial public offering. The escrow shares are not assignable or transferable.
All of the escrow shares will be released if, for the fiscal year ending
December 31, 1999, our minimum revenues equal or exceed $12.0 million and our
income before provision for taxes equal or exceeds $1.0 million. All of the
escrow shares will also be released from escrow if one or more of the following
remaining conditions is met:
o the average of the closing bid prices of our common stock for any 30
consecutive trading days commencing March 26, 1999 exceeds $13.00 per
share; or
o we are acquired by or merged into another entity commencing March 26,
1999 in a transaction in which the value of the per share consideration
received by our stockholders (after giving effect to the release of
shares from escrow) on the date of such transaction exceeds $13.00 per
share.
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The minimum revenues and minimum income amounts set forth above will be:
o derived solely from the business owned and operated by us at the time
of the initial public offering and will not give effect to any
operations relating to businesses or assets acquired after April 1,
1997;
o calculated exclusive of any extraordinary earnings including, but not
limited to, any charge to income resulting from the release of the
escrow shares; and
o audited by our independent public accountants.
Any money, securities, rights or property distributed in respect of the
escrow shares will be received by the escrow agent, including any property
distributed as dividends or pursuant to any stock split, merger,
recapitalization, dissolution or total or partial liquidation of IAT
Multimedia. On March 31, 2000, any remaining escrow shares, as well as any
dividends or other distributions made with respect thereto, will be canceled
and contributed to our capital. We expect that the release of the escrow shares
to our officers, directors, employees and consultants will be deemed
compensatory and, accordingly, will result in a substantial charge to
operations, which would equal the then fair market value of such shares. Such
charges could substantially increase the loss or reduce or eliminate our net
income for financial reporting purposes for the period during which such shares
are, or become probable of being, released from escrow. Although the amount of
compensation expense recognized by us will not affect our total stockholders'
equity, it may have a negative effect on the market price of our common stock.
The minimum revenues and minimum income amounts and closing bid price
levels set forth above were determined by negotiation between us and the
underwriters in our initial public offering and should not be construed to
imply or predict any future earnings by us or any increase in the market price
of our 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 from Dr.
Simmet, the former Chief Operating Officer at 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. Under the terms of the
transaction documents, Dr. Simmet had the right to receive from us an aggregate
amount of approximately $1,000,000 . During 1998, Dr. Simmet received
approximately $150,000 of such amount. Dr. Simmet resigned as an officer of FSE
effective December 31, 1998. 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 with the FSE acquisition, Dr. Simmet agreed 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 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
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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.
SPINOFFS
German Restructuring. In March 1998, we transferred the business and
substantially all of the assets and the liabilities (other than intercompany
accounts) of one of our majority-owned German subsidiaries, IAT Germany, to a
newly formed German company, Algo Vision Systems. IAT Germany had provided our
research and development and was responsible for sales and marketing in Germany
of our visual communications technology. The transfer was given economic effect
at January 1, 1998. We acquired a 15% interest in Algo Vision Systems, which
interest was exchanged in July 1999 for shares of capital stock of Algo Vision
plc, an English company whose shares trade on the European Association of
Securities Dealers Automated Quotation System (EASDAQ) and the parent company
of Algo Vision Systems and Algo Vision Schweiz. See "--Algo Vision
Transaction."
In connection with the restructuring, HIBEG transferred all of its
approximately 25% interest in IAT Germany to IAT AG for a purchase price of DM
175,700 (approximately $100,000), and IAT Germany became a wholly-owned
subsidiary of IAT AG.
In connection with this transaction, we contributed approximately $650,000
to Algo Vision Systems, which represented the excess of the book value of the
assumed liabilities over the assets transferred. We also provided Algo Vision
Systems with a working capital loan of approximately $300,000, of which
$160,000 plus interest was repaid in 1998 and the remaining $140,000 plus
interest was repaid in April 1999. Algo Vision Systems assumed substantially
all of the liabilities of IAT Germany (other than intercompany amounts). IAT
Germany represented and warranted that the liabilities assumed by Algo Vision
Systems were not to be more than the assets transferred to Algo Vision Systems
and IAT Germany agreed to pay Algo Vision Systems an amount equal to the
nominal value of such additional shortfall. We have no further obligation to
make future contributions to Algo Vision Systems.
Algo Vision Systems also assumed all rights and obligations under a credit
agreement dated December 19, 1995 between HIBEG, as creditor, and IAT Germany,
as debtor, relating to a loan in the aggregate principal amount of DM 750,000
(approximately $430,000).
IAT Germany agreed not to compete for a period of five years with the
present core business of Algo Vision Systems (systems, system kits and software
system solutions for visual communications) within Germany.
Swiss Restructuring. In March 1998, we also transferred the business and
certain of the assets and liabilities of IAT AG, other than, among others, our
intellectual property and the ownership interests in IAT Germany, to Algo
Vision Schweiz, a newly formed Swiss corporation. The transfer was given
economic effect at January 1, 1998. We acquired a 15% interest in Algo Vision
Schweiz, which interest was exchanged for shares of capital stock of Algo
Vision, plc in July 1999.
Algo Vision Schweiz gave IAT AG a three year note, denominated in U.S.
Dollars, with an aggregate principal amount equal to the book value of the
transferred assets less the book value of the assumed liabilities as of January
1, 1998 plus the pro-rata portion of any prepaid expenses and any portion of
the liabilities assumed by Algo Vision Schweiz which were paid by IAT AG prior
to the closing date of the transaction. The note has an aggregate principal
amount of approximately $325,000, which will be reduced by the amount of
certain expenses of IAT AG to be paid by Algo Vision Schweiz. The note bears
interest at the rate of 3% per annum, payable semi-annually on March 1 and
September 1 commencing September 1, 1998. The note is payable in March 2001.
The note may be pre-paid at any time without penalty. In connection with the
transaction with Algo Vision plc, Algo Vision Schweiz repaid the note. See
"--Algo Vision Transaction."
We loaned Algo Vision Schweiz $250,000 which is evidenced by a note from
Algo Vision Schweiz. This note bears interest at the rate of 3% per annum,
payable semi-annually on March 1 and September 1
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commencing September 1, 1998. The note is payable upon certain events, but no
later than March 2001. In connection with the transaction with Algo Vision plc,
Algo Vision Schweiz repaid the note. We have no further obligation to make
future contributions to Algo Vision Schweiz. See "--Algo Vision Transaction."
At the time of the spin-off transaction, an entity controlled by Dr.
Viktor Vogt, one of our directors and an officer and a principal stockholder of
Algo Vision plc, loaned Algo Vision Schweiz $250,000. The loan bears interest
at the rate of 3% per annum, payable semi-annually on March 1 and September 1
commencing September 1, 1998. The loan is payable on the third anniversary of
the closing date of the transaction. The loan may be pre-paid at any time
without penalty; provided, however, that the loan may not be paid prior to the
time that the loans by us to Algo Vision Schweiz are paid in full. The loan by
Dr. Vogt to Algo Vision Schweiz is subordinated to the loans made by us to Algo
Vision Schweiz. In connection with the transaction with Algo Vision, plc, Algo
Vision Schweiz repaid the note.
In connection with the restructuring, we maintained our ownership of all
intellectual property developed for our visual communications products but
granted Algo Vision Schweiz a non-exclusive five-year license to use our
intellectual property for multimedia and compression/decompression
applications. Algo Vision Schweiz has the right to grant sublicenses to Algo
Vision Systems and other affiliates. In most cases, the royalty varies between
10% and 20% of the sales price of the software sold. Algo Vision Schweiz was
granted a five-year option to purchase a 50% co-ownership of our intellectual
property for $1 million. Upon the exercise of such option, the royalty paid by
Algo Vision Schweiz to us would be cut in half and we would pay Algo Vision
Schweiz half of the royalties received by us from third-parties. In addition,
after exercise of the option, Algo Vision Schweiz can grant sub-licenses to
third-parties or transfer the license or co-ownership interest. In July 1999,
the option was transferred to and exercised by Algo Vision plc. See "--Algo
Vision Transaction."
In connection with our restructuring, Dr. Vogt resigned from his positions
as our Co-Chairman of the Board, Chief Executive Officer and President and from
management positions in our subsidiaries, but remained a director and
consultant of IAT Multimedia.
ALGO VISION TRANSACTION
In July 1999, Algo Vision plc exercised its option to purchase an
ownership interest in our intellectual property and, as a result, we entered
into a series of agreements related to (i) the sale of our visual
communications intellectual property rights (other than the IAT name or mark)
and (ii) the exchange of our 15% equity interest in each of Algo Vision Systems
and Algo Vision Schweiz, for shares of capital stock of Algo Vision plc. Dr.
Vogt, one of our current directors, owns approximately 26.2% of the outstanding
shares Algo Vision plc. Dr. Vogt also serves as the Chairman of the Board and
Chief Executive Officer of Algo Vision plc, and, as a result of these
positions, Dr. Vogt did not stand for re-election to the Board of Directors.
Under the terms of the agreements, Algo Vision plc purchased a 50%
interest in our visual communications intellectual property rights for
$1,000,000 in July 1999, and purchased the remaining 50% interest for an
additional $2,500,000 in August 1999. Algo Vision plc has agreed to pay us
royalties (ranging from 5% to 10%) on the sale of certain products utilizing
the visual communications technology purchased by them until August 2001. In
connection with the transaction, Algo Vision Schweiz repaid outstanding loans
aggregating approximately $500,000 made by us to Algo Vision Schweiz as part of
the spin-offs.
In July 1999, we also exchanged our 15% interest in each of Algo Vision
Systems and Algo Vision Schweiz for 500,000 shares of Algo Vision plc. These
shares are subject to a lock-up agreement until January 24, 2000, subject to
certain exceptions. In August 1999, as part of the transaction, we also
purchased an additional 250,000 shares of Algo Vision plc for a purchase price
of $2,500,000.
LEASE
We sublease 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.
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EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of our executive
officers and have granted options to certain of our executive officers. See
"Management of IAT--Executive Compensation--Employment Contracts and
Termination of Employment and Change-in-Control Arrangements."
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of IAT consists of 50,000,000 shares of
common stock, par value $.01 per share, and 10,000,000 shares of preferred
stock. As of December 1, 1999, there were 11,748,551 shares of common stock
outstanding, 2,000 shares of Series B Convertible Preferred Stock outstanding,
and 248,255 shares of common stock held in our treasury. As of December 1,
1999, approximately 7,000,000 shares of common stock were reserved for issuance
upon the exercise or conversion of our outstanding options, warrants or
convertible securities. If the proposal to increase the number of shares we are
authorized to issue is approved, we will amend our Amended and Restated
Certificate of Incorporation to increase our authorized capital stock to
110,000,000 shares, of which 100,000,000 shares will be designated as common
stock and 10,000,000 shares will be designated as preferred stock. If the
Petrini acquisition is consummated, we will have 60,693,844 shares of common
stock outstanding and approximately 11,750,000 shares of common stock reserved
for issuance.
COMMON STOCK
Holders of common stock have the right to cast one vote for each share
held of record on all matters submitted to a vote of the stockholders,
including the election of directors. Holders of common stock are entitled to
receive such dividends, pro rata, based on the number of shares held, when, as
and if declared by the Board of Directors, from funds legally available
therefor, subject to the rights of holders of any outstanding preferred stock.
We have never paid cash dividends on our common stock and do not anticipate or
intend paying cash dividends in the foreseeable future on our common stock. In
the event of the liquidation, dissolution or winding up of our affairs, all
assets and funds remaining after the payment of all debts and other
liabilities, subject to the rights of the holders of any outstanding preferred
stock, will be distributed to the holders of common stock, pro rata on a per
share basis. Holders of common stock are not entitled to preemptive,
subscription, cumulative voting or conversion rights, and there are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and the shares of common stock offered
hereby will be, when issued, fully paid and non-assessable.
PREFERRED STOCK
Series B Convertible Preferred Stock. The 2,000 shares of Series B
Preferred Stock outstanding are convertible into 198,255 shares of our common
stock, subject to adjustment for certain events including stock splits,
recapitalizations, mergers or consolidations of IAT. The Series B Preferred
Stock is convertible into our common stock at the option of the holder at any
time and, at our option, at any time on or after December 30, 1999 or earlier,
in the event the closing sales price of our common stock as reported by Nasdaq
attains certain levels during certain periods of time. In addition, if any
shares of the Series B Preferred Stock are not converted by January 7, 2002,
the remaining shares will be converted automatically into shares of our common
stock. The Series B Preferred Stock has no voting rights, has a liquidation
preference of $1.00 per share and is redeemable by us under certain
circumstances. The holder of the Series B Preferred Stock has registration
rights with respect to the shares of our common stock issuable upon conversion
of the Series B Preferred Stock.
Blank Check Preferred Stock. We are authorized to issue up to an
additional 9,998,000 shares of blank check preferred stock. The Board of
Directors has the authority to issue this blank check preferred stock in one or
more series and to fix the number of shares and the relative rights, conversion
rights, voting rights and terms of redemption (including sinking fund
provisions) and liquidation preferences, without further vote or action by the
stockholders. If shares of blank check preferred stock with voting rights are
issued, such issuance could affect the voting rights of the holders of our
common stock by
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increasing the number of outstanding shares having voting rights, and by the
creation of class or series voting rights. If the Board of Directors authorizes
the issuance of shares of blank check preferred stock with conversion rights,
the number of shares of common stock outstanding could potentially be increased
by up to the authorized amount. Issuances of blank check preferred stock could,
under certain circumstances, have the effect of delaying or preventing a change
in control of IAT and may adversely affect the rights of holders of common
stock. Also, blank check preferred stock could have preferences over the common
stock (and other series of preferred stock) with respect to dividend and
liquidation rights. We currently have no plans to issue any additional shares
of blank check preferred stock.
STOCK PURCHASE WARRANTS
We have issued warrants to purchase up to an aggregate of 2,298,241 shares
of common stock. Each of the warrants entitles the holder to purchase one share
of common stock at exercise prices per share ranging from $7.80 to $13.45 at
any time or from time to time. The warrants expire at different times with the
latest warrants expiring on December 31, 2006. These warrants generally provide
for adjustment of the exercise price and for a change in the number of shares
issuable upon exercise to protect holders against dilution in the event of a
stock dividend, stock split, combination or reclassification of the common
stock, upon issuances of shares of common stock at prices lower than the market
price of the common stock, or upon issuances of securities convertible into
common stock at an exercise or conversion price which is less than the exercise
price of these warrants at the time, with certain exceptions. In addition,
certain of these warrants contain a cashless exercise option provision. Shares
issued upon exercise of these warrants and payment in accordance with the terms
of these warrants will be fully paid and non-assessable. These warrants do not
confer upon the holders any voting or other rights of a stockholder of IAT. The
holders of the warrants have registration rights.
CONVERTIBLE DEBENTURE
In connection with a securities purchase agreement, dated June 1998, IAT
issued a convertible debenture in an aggregate principal amount of $3,000,000,
due June 19, 2001 to JNC Opportunity Fund Ltd. As of December 1, 1999, $718,500
of the principal was outstanding.
The debenture is convertible, subject to certain limitations, into shares
of common stock at the option of JNC. JNC may elect to convert the debenture,
in whole or in part, at any time. During any 30-day period, the holder shall be
permitted to resell the greater of:
o the number of underlying shares issuable upon conversion of $1,000,000
of debenture; and
o the average of the daily trading volume of our common stock during
such 30-day period.
In the event we elect to convert the debenture, JNC is not subject to the
foregoing restrictions. Any portion of the debenture remaining unconverted on
October 27, 2000 shall convert automatically into shares of common stock.
Under the terms of the debenture, the debenture is convertible at a
conversion price equal to the lesser of:
o $13.45 and
o 87% of the average of the five lowest closing prices of common stock on
the Nasdaq National Market during the 15 trading days preceding the date
of conversion.
The debenture accrues interest at a rate of 5% per annum payable quarterly
in arrears commencing June 30, 1998, except that interest shall cease to accrue
if the closing price of our common stock is equal to or greater than $13.50 for
30 consecutive trading days during any calendar quarter. All overdue, accrued
and unpaid interest will accrue interest at a rate of 15% per annum. At our
option, interest due on the principal amount, but not on overdue interest, is
payable in the form of cash or shares of common stock at the conversion price
then in effect.
As a result of the acquisition, JNC had the right to accelerate payment
under the debenture. JNC has entered into an agreement with us under which JNC
agreed not to accelerate repayment of the debenture.
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JNC also agreed to fix the number of shares of common stock that are issuable
upon conversion of the debenture at 2,451,745 shares. On November 23, 1999, JNC
converted $2,325,000 of the outstanding principal amount of the debenture,
including accrued interest, into 1,872,982 shares of our common stock. JNC has
informed us that it intends to convert the remaining $718,500 principal amount
of the debenture upon the closing of the acquisition, subject to receipt of
stockholder approval for the issuance of the shares of common stock as
described under "Other Matters to be Voted Upon at the Special Meeting --
Convertible Debenture Proposal." JNC has agreed to vote all of the shares of
common stock held by it in favor of the proposals described in this proxy
statement/prospectus and has granted an irrevocable proxy to Jacob Agam, our
Chairman of the Board and Chief Executive Officer, to vote JNC's shares at the
special meeting. JNC has also agreed not to sell of any of the shares of common
stock issued for a period of six months from the closing of the acquisition,
subject to certain exceptions, including the right to sell up to 1,325,000
shares following the three month anniversary of the closing of the acquisition.
We intend to register for resale the shares of common stock issued to JNC upon
conversion of the debenture.
OTHER MATTERS TO BE VOTED UPON
AT THE SPECIAL MEETING
In addition to voting upon the stock issuance proposal, our stockholders
will be asked to vote upon the authorized stock proposal, the name change
proposal, the option plan proposal and the convertible debenture proposal at
the special meeting. These proposals are described below, together with the
recommendations of our Board of Directors with respect to each such matter.
AUTHORIZED STOCK PROPOSAL (ITEM 2 ON THE PROXY CARD)
The Board of Directors has unanimously approved an amendment to Article
Four A of our Amended and Restated Certificate of Incorporation to increase the
authorized number of shares of capital stock from 60,000,000 to 110,000,000
shares, of which 100,000,000 shares will be designated as common stock and of
which 10,000,000 shares will be designated as preferred stock. The Board of
Directors recommends that our stockholders approve and adopt the amendment. The
full text of Article Four A reflecting this amendment is attached to this proxy
statement/prospectus as annex C.
The additional shares of common stock would have the same rights and
privileges as our common stock. See "Description of Capital Stock." Holders of
our common stock are not entitled to preemptive, subscription, cummulative
voting or conversion rights, and there are no redemption or sinking fund
provisions applicable to the common stock.
As of December 1, 1999, 11,748,551 shares of our common stock were
outstanding, 248,255 were issued and held in treasury, and approximately
7,000,000 shares were reserved for issuance under outstanding stock options,
warrants or convertible securities. As of such date, approximately 31,250,000
authorized shares of our common stock were available for issuance. As a result
of the Petrini acquisition, it is currently contemplated that we will issue up
to 48,366,530 additional shares of our common stock. Currently, we do not have
enough authorized but unissued shares of our common stock to issue in the
acquisition.
The Board of Directors also believes that it is desirable to have
additional authorized but unissued common stock available for possible employee
benefit programs, financing and acquisition transactions, and other general
corporate purposes. Although there can be no assurance that such transactions
will occur in the future, the Board wishes to have common stock available for
such purposes if conditions warrant. Like the presently authorized but unissued
common stock, the additional shares of common stock would be available for
issuance without further action by our stockholders, unless such action is
required by applicable law or the rules of the Nasdaq National Market or any
other stock exchange on which our common stock may be listed in the future. The
authorization of additional common stock will enable us, as the need may arise,
to take timely advantage of market conditions and the availability of favorable
opportunities without the delay and expense associated with the holding of a
special meeting of our stockholders.
The existence of additional shares of our common stock that could be
issued without further stockholder action could discourage an attempt by
another person or entity, through the acquisition of a
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substantial number of shares of common stock, to acquire control of us with a
view to effecting a merger, sale of our assets, or similar transaction. The
additional authorized shares will not have a dilutive effect until they are
issued.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE
AUTHORIZED STOCK PROPOSAL.
NAME CHANGE PROPOSAL (ITEM 3 ON THE PROXY CARD)
Our board of directors believes that it is advisable to amend Article One
of our Amended and Restated Certificate of Incorporation to change the
corporate name of IAT Multimedia, Inc. to "Spigadoro, Inc." following the
Petrini acquisition. Accordingly, our board of directors has unanimously
adopted a resolution approving the change of our corporate name and directing
that the change of our corporate name be presented to our stockholders at the
special meeting for their approval. The full text of Article One reflecting the
amendment to change our corporate name is attached to this proxy
statement/prospectus as annex D.
Through the Petrini acquisition and the anticipated sale of our computer
business, we are redirecting our business focus away from personal computers
and peripherals and toward animal feed and pasta and flour products. Our board
of directors believes that the new name more accurately identifies our company
with our new strategic focus and that the new name will assist us in marketing
our products and services in these new commercial markets.
If the proposal to change our corporate name is approved by the
stockholders, it will become effective upon the filing of a Certificate of
Amendment to our Amended and Restated Certificate of Incorporation in
accordance with the provisions of the Delaware General Corporation Law.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE NAME CHANGE
PROPOSAL.
OPTION PLAN PROPOSAL (ITEM 4 ON THE PROXY CARD)
On November 2, 1999, the Board of Directors adopted our 1999 Stock Option
Plan, a copy of which is attached hereto as annex E.
Summary of the Plan
Under the 1999 Plan, pursuant to which 2,500,000 shares of our common
stock are authorized for issuance, employees, officers and directors of, and
consultants or advisers to, IAT and any subsidiary corporations are eligible to
receive incentive stock options ("incentive options") within the meaning of
Section 422 of the Internal Revenue Code and/or options that do not qualify as
incentive options ("non-qualified options"). The 1999 Plan, which expires in
November 2009, is administered by the Board of Directors or a committee of the
Board of Directors. The purposes of the 1999 Plan are to ensure the retention
of existing executive personnel, key employees, directors, consultants and
advisors who are expected to contribute to our future growth and success and to
provide additional incentive by permitting such individuals to participate in
the ownership of IAT. The criteria to be utilized by the Board of Directors or
the committee in granting options pursuant to the 1999 Plan will be consistent
with these purposes. If any stock option expires or terminates, in whole or in
part, without having been exercised in full, the shares of common stock not
purchased under such option will revert to and become available for issuance
under the 1999 Plan. The shares of common stock subject to the 1999 Plan may be
unissued shares, reacquired shares or otherwise.
Options granted under the 1999 Plan may be either incentive options or
non-qualified options. Incentive options granted under the 1999 Plan are
exercisable for a period of up to 10 years from the date of grant at an
exercise price which is not less than the fair market value of our common stock
on the date of the grant, except that the term of an incentive option granted
under the 1999 Plan to a shareholder owning more than 10% of the outstanding
voting power may not exceed five years and its exercise price may not be less
than 110% of the fair market value of the shares on the date of grant. To the
extent that the aggregate fair market value, as of the date of grant, of the
shares of common stock for which incentive
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options become exercisable for the first time by an optionee during the
calendar year exceeds $100,000, the portion of such option which is in excess
of the $100,000 limitation will be treated as a nonqualified option. The 1999
Plan has a per-employee, per calendar year period limitation on the number of
shares of common stock that may be made subject to options equal to 875,000
shares of common stock. Options granted under the 1999 Plan to our officers,
directors or employees may be exercised only while the optionee is employed or
retained by us or within 90 days of the date of termination of the employment
relationship or directorship. However, options which are exercisable at the
time of termination by reason of death or permanent disability of the optionee
may be exercised within 12 months of the date of termination of the employment
relationship or directorship. Upon the exercise of an option, payment may be
made by cash, by surrender of shares of common stock having a fair market value
equal to the purchase price, by provisions for cashless exercise or by any
other means that the Board of Directors or the committee determines. No options
may be granted under the 1999 Plan after November 2009.
Options may be granted only to such employees, officers and directors of,
and consultants and advisors to, IAT or any subsidiary of IAT as the Board of
Directors or the committee of the Board shall select from time to time in its
sole discretion, provided that only employees of IAT or a subsidiary of IAT
shall be eligible to receive incentive options. An optionee may be granted more
than one option under the 1999 Plan. The Board of Directors or the committee
will, in its discretion, determine (subject to the terms of the 1999 Plan) who
will be granted options, the time or times at which options shall be granted,
and the number of shares of our common stock subject to each option, whether
the options are incentive options or nonqualified options, and the manner in
which options may be exercised. In making such determination, consideration may
be given to the value of the services rendered by the respective individuals,
their present and potential contributions to the success of us and our
subsidiaries and such other factors deemed relevant in accomplishing the
purpose of the 1999 Plan.
The 1999 Plan may be amended or terminated by the Board at any time. No
amendment or termination may adversely affect any outstanding option without
the written consent of the optionee. The foregoing summary of the 1999 Plan is
qualified in its entirety by the specific language of the 1999 Plan a copy of
which is attached to this proxy statement/prospectus.
Federal Income Tax Consequences
The following is a summary of the effect of federal income taxation upon
the optionee and us with respect to the grant and exercise of stock options
under the 1999 Plan. The summary does not purport to be complete and does not
discuss the income tax laws of any state or foreign country in which an
optionee may reside. The summary is based upon current federal income tax rules
and may change when those rules change. Because the tax consequences to any
optionee under the 1999 Plan may depend on his or her particular situation,
each optionee should consult his or her tax advisor as to the federal, state,
local and other tax consequences before exercising any stock option or
disposing of any shares of our common stock acquired upon the exercise of any
stock option.
Under current tax law, there are no federal income tax consequences to
either the employee or us on the grant of non-qualified options if granted
under the terms set forth in the 1999 Plan. Upon exercise of a non-qualified
option, the excess of the fair market value of the shares subject to the option
over the option price (the "Spread") at the date of exercise is taxable as
ordinary income to the optionee in the year it is exercised and is generally
deductible by us as compensation expense for federal income tax purposes
(subject to the requirement of reasonableness, the provisions of Code Section
162(m) and the satisfaction of a tax reporting obligation). However, if the
shares of common stock are subject to vesting restrictions conditioned on
future employment or the holder is subject to the short-swing profits liability
restrictions of Section 16(b) of the 1934 Act (i.e., is an executive officer,
director or 10% shareholder of IAT) then taxation and measurement of the Spread
is deferred until such restrictions lapse, unless a special election is made
under Section 83(b) of the Code to report such income currently without regard
to such restrictions. The optionee's basis in the shares will be equal to the
fair market value on the date taxation is imposed and the holding period
commences on such date.
Holders of incentive options incur no regular federal income tax liability
at the time of grant or upon exercise of such option, assuming that the
optionee was an employee of IAT from the date the option was
123
granted until three months before such exercise. However, upon exercise, the
Spread must be added to regular federal taxable income in computing the
optionee's "alternative minimum tax" liability. An optionee's basis in the
shares of common stock received upon exercise of an incentive stock option for
regular income tax purposes will be the option price of such shares. No
deduction is allowable to us for federal income tax purposes in connection with
the grant or exercise of such option.
If the holder of shares of common stock acquired through exercise of an
incentive option sells such shares within two years of the date of grant of
such option or within one year from the date of exercise of such option (a
"Disqualifying Disposition"), the optionee will realize income taxable at
ordinary rates. Ordinary income is reportable during the year of such sale
equal to the difference between the option price and the fair market value of
the shares of common stock at the date the option is exercised, but the amount
includable as ordinary income shall not exceed the excess, if any, of the
proceeds of such sale over the option price. In addition to ordinary income, a
Disqualifying Disposition may result in taxable income subject to capital gains
treatment if the sales proceeds exceed the optionee's basis in the shares,
i.e., the option price plus the amount includable as ordinary income. The
amount of the optionee's taxable ordinary income will generally be deductible
by us as a compensation expense (subject to the requirement of reasonableness,
the provisions of Code Section 162(m) and the satisfaction of a tax reporting
obligation) in the year of the Disqualifying Disposition.
At the time of sale of shares received upon exercise of an option (other
than a Disqualifying Disposition of shares received upon the exercise of an
incentive option), any gain or loss is deemed long-term or short-term capital
gain or loss, depending upon the holding period. The holding period for federal
income tax purposes for long-term capital gains taxed at 20% is more than one
year. In general, the holding period for long-term capital losses is more than
one year, subject to rules setting priorities for offsetting such losses
against long-term capital gains taxed at the 20% rate.
Code Section 162(m) denies a deduction to any publicly held corporation
for compensation paid to certain "covered employees" in a taxable year to the
extent that compensation exceeds $1 million for a covered employee. It is
possible that compensation attributable to stock options granted in the future
under the 1999 Plan, when combined with all other types of compensation
received by a covered employee from us, may cause this limitation to be
exceeded in any particular year. Certain kinds of compensation, including
qualified "performance-based compensation," are disregarded for purposes of the
deduction limitation. In accordance with Treasury regulations issued under Code
Section 162(m), compensation attributable to stock options will qualify as
performance-based compensation, provided that: (i) the stock award plan
contains a per-employee limitation on the number of shares for which stock
options may be granted during a specified period; (ii) the per-employee
limitation is approved by the shareholders; (iii) the award is granted by a
compensation committee comprised solely of "outside directors"; and (iv) the
exercise price of the award is no less than the fair market value of the stock
on the date of grant.
As of December 1, 1999, approximately 37 of our employees were eligible to
participate in the 1999 Plan. Upon the consummation of the Petrini acquisition,
approximately 450 of the employees of the combined company will be eligible to
participate in the 1999 Plan. On December 3, 1999, the closing price of our
shares on the Nasdaq National Market was $213/32.
Future grants under the 1999 Plan have not yet been determined.
The affirmative vote of the holders of the majority of the shares of
common stock present in person or by proxy at the special meeting and entitled
to vote on the matter is required to approve and ratify the 1999 Plan. In the
event stockholder approval of the 1999 Plan is not obtained by November 2000,
any incentive options granted under the 1999 Plan will become non-qualified
stock options and no future incentive options may be granted under the 1999
Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL AND RATIFICATION
OF THE 1999 PLAN.
124
CONVERTIBLE DEBENTURE PROPOSAL (ITEM 5 ON THE PROXY CARD)
In June 1998, we issued a convertible debenture to JNC Opportunity Fund
Ltd. in the principal amount of $3.0 million. The debenture was convertible
into an indefinite number of shares of our common stock at a conversion price
equal to the lesser of $13.45 and 87% of the average of the five lowest closing
prices of our common stock on the Nasdaq National Market during the 15 trading
days preceding the date of conversion. Under the terms of the debenture, JNC
had the right to accelerate the payment of the debenture upon the occurrence of
the Petrini acquisition. On November 23, 1999, we entered into an agreement
with JNC under which JNC agreed not to accelerate repayment of the debenture
because of the Petrini acquisition. JNC also agreed to fix the number of shares
of our common stock that are issuable upon conversion of the debenture at
2,451,745 shares. See "Description of Capital Stock -- Convertible Debenture."
Under the rules of the Nasdaq Stock Market, an issuer is required to
obtain stockholder approval for the issuance of shares of its common stock
equal to 20% or more of the outstanding common stock of such issuer before the
issuance of common stock or securities convertible into shares of common stock,
if the shares of common stock are issued at a price less than the market value
of the common stock on the date of issuance. The 2,451,745 shares of common
stock that we have agreed to issue to JNC exceeds 20% of our outstanding common
stock on the date the convertible debenture was originally issued to JNC.
On November 23, 1999, JNC converted $2,325,000 of the outstanding
principal amount of the debenture, plus accrued interest, into a total of
1,872,982 shares of our common stock. At the time of this conversion, the
amount converted, together with all previous conversions, equaled the maximum
amount permitted to be converted under the debenture without stockholder
approval under the rules of the Nasdaq Stock Market. The remaining $718,500
principal amount of the debenture outstanding is convertible into 578,763
shares of common stock, but under the terms of the debenture, these shares of
our common stock cannot be issued to JNC without stockholder approval.
Accordingly, we are seeking stockholder approval for the conversion of the
remaining portion of the convertible debenture into 578,763 shares of our
common stock. We believe that the conversion of the debenture will strengthen
our financial position by eliminating a portion of our outstanding debt, the
terms of which may impact our ability to issue additional common stock or
obtain additional financing. If the stockholders do not approve the issuance,
we could be required to either repay the outstanding principal amount of the
debenture, plus penalties and accrued interest, at the closing of the
acquisition or issue the additional shares of common stock to JNC without
stockholder approval which may cause us to be delisted from the Nasdaq Stock
Market. See "Risk Factors -- Our stock may be delisted from the Nasdaq National
Market if we do not meet the listing criteria following the Petrini
acquisition." In addition, we could find it more difficult to obtain future
financing.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE OF
THE SHARES OF OUR COMMON STOCK TO JNC UPON CONVERSION OF THE DEBENTURE.
LEGAL MATTERS
The validity of the shares of our common stock to be issued in the Petrini
acquisition will be passed upon for us by Lowenstein Sandler PC.
EXPERTS
The consolidated financial statements of IAT and its subsidiaries for each
of the three years in the period ended December 31, 1998 in this proxy
statement/prospectus have been audited by Rothstein, Kass & Company, P.C.,
independent public accountants, as indicated in their report appearing herein
in reliance upon the authority of said firm as experts in accounting and
auditing. A representative of Rothstein, Kass & Company, P.C., will be at the
special meeting to answer appropriate questions and will have the opportunity
to make a statement, if they have the desire to do so.
The financial statements of Petrini for each of the three years in the
period ended December 31, 1998 in this proxy statement/prospectus have been
audited by Reconta Ernst & Young S.p.A., independent public accountants, as
indicated in their report appearing herein in reliance upon the authority of
said firm as experts in accounting and auditing.
125
OTHER MATTERS
Our management does not know of any matters other than those stated in this
proxy statement/ prospectus which are to be presented for action at the special
meeting. If any other matters should properly come before the special meeting,
it is intended that proxies in the accompanying form will be voted on any such
other matters in accordance with the judgment of the persons voting such
proxies. Discretionary authority to vote on such matters is conferred by such
proxies upon the persons voting them.
STOCKHOLDER PROPOSALS
The Annual Meeting of Stockholders for the fiscal year ending December 31,
1999 is expected to be held in June 2000. All proposals intended to be
presented at our next Annual Meeting of Stockholders must be received in
writing and in compliance with SEC requirements at our executive office no
later than March 31, 2000, for inclusion in the proxy statement and form of
proxy related to that meeting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement under the
Securities Act that registers the offer and sale to Petrini stockholders of the
shares of our common stock to be issued in connection with the Petrini
acquisition. The registration statement, including the attached exhibits and
schedules, contains additional relevant information about us and Petrini.
In addition, we file reports, proxy statements and other information with
the Commission under the Exchange Act. Please call the Commission at
1-800-SEC-0330 for further information on the public reference rooms. You may
read and copy this information at the following locations of the Commission:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
You may also obtain copies of this information by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains an
Internet world wide web site that contains reports, proxy statements and other
information about issuers, like us, who file electronically with the
Commission. The address of that site is http://www.sec.gov. You can also
inspect reports, proxy statements and other information about us from the
Nasdaq, National Market Reports Section, 1735 K Street, N.W., Washington, D.C.
20006.
126
INDEX TO FINANCIAL STATEMENTS
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
Pro Forma Financial Information ......................................................... F-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet September 30, 1999 ............. F-3
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Nine
Months Ended September 30, 1999 ....................................................... F-4
Unaudited Pro Forma Condensed Consolidated Statement of Operations Year Ended
December 31, 1998 ..................................................................... F-5
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements ................ F-6
Consolidated Balance Sheets at September 30, 1999 and September 30, 1998 (Unaudited) F-8
Consolidated Statements of Operations for the Nine Months Ended September 30, 1999
and 1998 (Unaudited) .................................................................. F-9
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999
and 1998 (Unaudited) .................................................................. F-10
Notes to Consolidated Financial Statements .............................................. F-11
Independent Auditors' Report ............................................................ F-15
Consolidated Balance Sheets at December 31, 1998 and 1997 ............................... F-16
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997
and 1996 .............................................................................. F-17
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended
December 31, 1998, 1997 and 1996 ...................................................... F-18
Consolidated Statements of Cash Flows for the Years ended December 31, 1998, 1997
and 1996 .............................................................................. F-19
Notes to Consolidated Financial Statements .............................................. F-20
PETRINI S.P.A.
Consolidated Balance Sheets Unaudited as of September 30, 1999 and 1998 ................. F-29
Consolidated Income Statements Unaudited for the Nine Months Ended September 30,
1999 and 1998 ......................................................................... F-31
Consolidated Statements of Cash Flows Unaudited for the Nine Months Ended
September 30, 1999 and 1998 ........................................................... F-32
Consolidated Statements of Shareholders' Equity Unaudited for the Nine Months ended
September 30, 1999 and 1998 ........................................................... F-33
Notes to the Unaudited Consolidated Interim Financial Statements as of September 30,
1999 and 1998 ......................................................................... F-34
Report of Independent Auditors .......................................................... F-38
Balance Sheets as of December 31, 1998 and 1997 ......................................... F-39
Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 ............... F-41
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 ........... F-42
Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997
and 1996 .............................................................................. F-43
Notes to Financial Statements December 31, 1998, 1997, and 1996 ......................... F-44
F-1
FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
statements are based on the historical financial statements of IAT and Petrini
included elsewhere in this proxy statement/prospectus which give effect to the
following:
o the acquisition of 100% of the outstanding common stock of Petrini by
IAT;
o the discontinuance of the computer businesses of IAT; and
o the push-down accounting adjustments relating to the acquisition of
100% of the outstanding common stock of Petrini by Spigadoro.
The transaction will be accounted for as a reverse acquisition whereby IAT
will be the legal acquirer and Petrini will be the accounting acquirer. The
allocation of the push-down accounting adjustments for Petrini and the purchase
accounting adjustments for IAT are preliminary. However, IAT does not expect
that the final allocations will materially differ from the preliminary
allocations set forth herein. The unaudited pro forma condensed consolidated
statements of operations give effect to the events described above as if they
occurred as of January 1, 1998, and the unaudited pro forma condensed
consolidated balance sheet gives effect to the events described above as if
they occurred as of September 30, 1999. The events described above and the
related adjustments are described in the accompanying notes. The pro forma
adjustments are based upon available information and certain assumptions that
management believes are reasonable. The Pro Forma Financial Statements do not
purport to represent what IAT's results of operations or financial condition
would actually have been had the events described above in fact occurred on
such dates or to project IAT's results of operations or financial condition for
any future period or date. The Pro Forma Financial Statements should be read in
conjunction with the historical financial statements of IAT and Petrini
included elsewhere in this proxy statement/prospectus and "--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
F-2
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999 (IN THOUSANDS)
IAT IAT IAT
HISTORICAL ADJUSTMENTS AS ADJUSTED
------------ ---------------- -------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 5,102 $ (373)(A) $ 4,729
Marketable securities .............................. 746 746
Securities held for sale ........................... 2,940 2,940
Accounts receivable, net ........................... 1,965 (1,965)(A)
Taxes receivable ...................................
Deferred income taxes ..............................
Inventories ........................................ 1,713 (1,713)(A)
Cash to factor .....................................
Other current assets ............................... 176 (126)(A) 50
---------- ---------- ----------
Total current assets ............................... 12,642 (4,177) 8,465
---------- ---------- ----------
Equipment and improvements, net ..................... 391 (391)(A)
---------- ---------- ----------
Other assets:
Intangible assets ..................................
Excess of cost over net assets acquired ............ 3,437 (3,437)(A)
Deferred income taxes ..............................
Other assets ....................................... 1,126 (1,067)(A) 59
Assets held for disposition ........................ 3,000 (A) 3,000
---------- ---------- ----------
Total other assets ................................. 4,563 (1,504) 3,059
---------- ---------- ----------
Total assets ....................................... $ 17,596 $ (6,072) $ 11,524
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings .............................. $ 356 $ (356)(A)
Current portion of long-term debt ..................
Liability to factor ................................
Accounts payable and other current liabilities ..... 2,861 (2,465)(A) $ 396
---------- ---------- ----------
Total current liabilities .......................... 3,217 (2,821) 396
---------- ---------- ----------
Long-term debt, net of current portion ..............
Employee termination indemnities ....................
Other liabilities ................................... 27 (27)(A)
---------- ---------- ----------
Total long-term liabilities ........................ 27 (27)
---------- ---------- ----------
Total liabilities .................................. 3,244 (2,848)(A) 396
---------- ---------- ----------
Convertible debentures .............................. 2,848 2,848
---------- ---------- ----------
Stockholders' Equity
Preferred stock ....................................
Common stock ....................................... 101 101
Capital in excess of par ........................... 32,595 32,595
Step up adjustments ................................
Accumulated other comprehensive income ............. 404 404
Treasury stock ..................................... (2,204) (2,204)
Retained earnings (accumulated deficit) ............ (19,392) (3,224)(A) (22,616)
---------- ---------- ----------
Total stockholders' equity ......................... 11,504 (3,224) 8,280
---------- ---------- ----------
Total liabilities and stockholders' equity ......... $ 17,596 $ (6,072) $ 11,524
========== ========== ==========
PETRINI ADJUSTMENTS PRO FORMA
------------ ------------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 110 $ 4,839
Marketable securities .............................. 746
Securities held for sale ........................... 2,940
Accounts receivable, net ........................... 35,909 35,909
Taxes receivable ................................... 7,207 7,207
Deferred income taxes .............................. 532 $ (532)(B)
Inventories ........................................ 12,495 12,495
Cash to factor ..................................... 4,422 4,422
Other current assets ............................... 1,212 1,262
---------- ----------- --------
Total current assets ............................... 61,887 (532) 69,820
---------- ----------- --------
Equipment and improvements, net ..................... 26,125 15,380 (B) 41,505
---------- ----------- --------
Other assets:
Intangible assets .................................. 4,253 606 (B) 4,859
Excess of cost over net assets acquired ............ 5,923 (B) 5,923
Deferred income taxes .............................. 3,095 (3,095)(B)
Other assets ....................................... 2,652 2,711
Assets held for disposition ........................ 3,000
---------- ----------- --------
Total other assets ................................. 10,000 3,434 16,493
---------- ----------- --------
Total assets ....................................... $ 98,012 $ 18,282 $127,818
========== =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings .............................. $ 21,945 $ 21,945
Current portion of long-term debt .................. 2,473 $ 7,388(D) 9,861
Liability to factor ................................ 4,422 4,422
(183)(E)
Accounts payable and other current liabilities ..... 23,164 600 (E) 23,977
---------- ----------- --------
Total current liabilities .......................... 52,004 7,805 60,205
---------- ----------- --------
Long-term debt, net of current portion .............. 7,355 12,115 (D) 19,470
Employee termination indemnities .................... 8,333 8,333
Other liabilities ................................... 3,709 3,022 (B) 6,731
---------- ----------- --------
Total long-term liabilities ........................ 19,397 15,137 34,534
---------- ----------- --------
Total liabilities .................................. 71,401 22,942 94,739
---------- ----------- --------
Convertible debentures .............................. (2,848)(E)
---------- ----------- --------
Stockholders' Equity
Preferred stock ....................................
(21,085)(C)
Common stock ....................................... 21,569 25 (E) 610
15,260 (B)
(12,878)(C)
(19,503)(D)
Capital in excess of par ........................... 2,781 2,406 (E) 20,661
Step up adjustments ................................ (11,751) 11,751 (C)
Accumulated other comprehensive income ............. 30 (404)(C) 30
Treasury stock ..................................... (2,204)
Retained earnings (accumulated deficit) ............ 13,982 22,616 (C) 13,982
---------- ----------- --------
Total stockholders' equity ......................... 26,611 (1,812) 33,079
---------- ----------- --------
Total liabilities and stockholders' equity ......... $ 98,012 $ 18,282 $127,818
========== =========== ========
F-3
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
IAT IAT IAT
HISTORICAL ADJUSTMENTS AS ADJUSTED PETRINI ADJUSTMENTS PRO FORMA
------------ ------------------- ------------- ----------- ----------------- ------------
(IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION)
Net sales ......................... $ 31,164 $ (31,143)(A) $ 21 $103,224 $103,245
Cost of sales ..................... 29,445 (29,445)(A) 74,214 668 (F) 74,882
-------- ---------- ------- -------- --------- --------
Gross profit ...................... 1,719 (1,698) 21 29,010 (668) 28,363
-------- ---------- ------- -------- --------- --------
Operating expenses:
Selling expenses ................. 1,825 (1,825)(A) 19,332 19,332
General & administrative
expenses ....................... 1,897 (1,114)(A) 783 5,768 245 (F) 6,796
-------- ---------- ------- -------- --------- --------
Total operating expenses ......... 3,722 (2,939) 783 25,100 245 26,128
-------- ---------- ------- -------- --------- --------
Operating income (loss) ........... (2,003) 1,241 (762) 3,910 (913) 2,235
(3,440)(E)
110 (E)
Other income (expense) ............ 3,593 (83)(A) 3,510 (1,132) (728)(G) (1,680)
-------- ---------- ------- -------- --------- --------
Income (loss) before
income taxes ..................... 1,590 1,158 2,748 2,778 (1,531) 555
Income taxes (benefit) ............ 1,961 (285)(H) 1,676
-------- ---------- ------- -------- --------- --------
Income (loss) from
continuing operations ............ $ 1,590 $ 1,158 $ 2,748 $ 817 $ (1,246) $ (1,121)
======== ========== ======= ======== ========= ========
Income per common share --
basic .......................... $ 0.17 $ 0.29 $ (0.02)
======== ======= ========
diluted ...................... $ 0.16 $ 0.27 $ (0.02)
======== ======= ========
Weighted average number of
common shares
outstanding -- basic ............. 9,332 9,332 60,150
======== ======= ========
diluted .................... 10,614 10,614 60,150
======== ======= ========
F-4
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,1998
IAT IAT IAT
HISTORICAL ADJUSTMENTS AS ADJUSTED PETRINI ADJUSTMENTS PRO FORMA
------------ ------------------- ------------- ----------- ---------------- ------------
(IN THOUSANDS EXCEPT FOR PER SHARE INFORMATION)
Net sales ......................... $ 38,340 $ (38,315)(A) $ 25 $141,127 $141,152
Cost of sales ..................... 35,465 (35,465)(A) 104,347 891 (F) 105,238
-------- ---------- -------- -------- ---- --------
Gross profit ...................... 2,875 (2,850) 25 36,780 (891) 35,914
-------- ---------- -------- -------- ---- --------
Operating expenses:
Selling expenses ................. 2,821 (2,821)(A) 24,480 24,480
General & administrative
expenses ....................... 2,112 (972)(A) $ 1,140 7,800 326 (F) 9,266
-------- ---------- -------- -------- ---- --------
Total operating expenses ......... 4,933 (3,793) 1,140 32,280 326 33,746
-------- ---------- -------- -------- ---- --------
Operating income (loss) .......... (2,058) 943 (1,115) 4,500 (1,217) 2,168
75 (E)
Other income (expense) ............ (97) (85)(A) (182) (2,160) (971)(G) (3,238)
-------- ---------- -------- -------- ------ --------
Income (loss) before
income taxes ..................... (2,155) 858 (1,297) 2,340 (2,113) (1,070)
Income taxes (benefit) ............ (412) 412 (A) 1,901 (380)(H) 1,521
-------- ---------- -------- -------- ------ --------
Income (loss) from
continuing operations ............ $ (1,743) $ 446 $ (1,297) $ 439 $(1,733) $ (2,591)
======== ========== ======== ======== ======= ========
Loss per common share --
basic and diluted ................ $ (0.19) $ (0.14) $ (0.04)
======== ======== ========
Weighted average number of
common shares outstanding
-- basic and diluted ............. 9,327 9,327 60,145
======== ======== ========
F-5
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Amounts included within the notes to the Unaudited Pro Forma Condensed
Consolidated Financial Statements are reflected in thousands in order to comply
with the presentation of the accompanying Pro Forma Financial Statements.
(A) The Pro Forma Financial Statements give effect to the proposed
discontinuance of the computer businesses of IAT as contemplated in this proxy
statement/prospectus in connection with the acquisition of Petrini. The
unaudited pro forma condensed consolidated balance sheet reflects the
reclassification of the assets and liabilities of the computer businesses to
assets held for sale. The amounts recorded have been adjusted to give effect to
management's estimate of their net realizable value resulting in an estimated
loss on disposal of $3,224,000. The unaudited pro forma condensed consolidated
statements of operations reflect the reclassification of the operations of
these computer businesses to discontinued operations resulting in a loss from
discontinued operations for the nine months ended September 30, 1999 and the
year ended December 31, 1998 of $1,158,000 and $446,000, respectively.
(B) The unaudited pro forma condensed consolidated balance sheet gives
effect to the proposed acquisition of Petrini by IAT by combining the
historical balance sheet of Petrini and the historical balance sheet of IAT,
adjusted for the discontinued operations as mentioned in (A) above and the
purchase accounting adjustments in (E) below, at September 30, 1999. The
transaction will be accounted for as a reverse acquisition, whereby Petrini
will be the accounting acquirer and IAT will be the legal acquirer, using the
purchase method of accounting. During September 1998, Spigadoro entered into a
transaction to acquire 67% of the outstanding common stock of Petrini from
Carlo Petrini and received an option to acquire the remaining 33% interest from
the bankruptcy receiver of the minority shareholder of Petrini. The option to
purchase the remaining 33% will be exercised prior to the consummation of the
acquisition by IAT. Since Spigadoro will own 100% of Petrini immediately prior
to IAT's acquisition, the purchase accounting adjustments are "pushed-down" to
Petrini and are included within the pro forma adjustments in the accompanying
Pro Forma Financial Statements. The purchase price for Petrini paid by
Spigadoro, including cash paid at closing and the issuance of debt, aggregated
$44,360,000 and is allocated as follows:
(IN THOUSANDS)
Cash, notes and common stock issued .......... $ 44,360
Petrini liabilities assumed .................. 82,073
--------
$126,433
========
Allocated to assets as follows:
SEPTEMBER 30, 1998
----------------------------------------
FMV HISTORICAL ADJUSTMENT
----------- ------------ -----------
(IN THOUSANDS)
Current assets ..................... $ 68,261 $ 68,793 $ (532)
Equipment and improvements ......... 46,645 31,265 15,380
Intangibles ........................ 5,935 5,329 606
Other assets ....................... 2,691 5,786 (3,095)
Deferred tax liability ............. (3,022) (3,022)
Goodwill ........................... 5,923 5,923
-------- -------- --------
$126,433 $111,173 $ 15,260
======== ======== ========
The above adjustment was included in the pro forma condensed consolidated
balance sheet in the adjustment column.
F-6
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(C) The unaudited pro forma condensed consolidated balance sheet was
adjusted to reflect the issuance of 48,366,530 shares of IAT common stock to
Spigadoro, in exchange for 100% of the outstanding common stock of Petrini. As
a result of the reverse acquisition, the unaudited pro forma condensed
consolidated balance sheet was adjusted to reflect the historical equity of
Petrini. The historical retained earnings of Petrini has been carried forward
and the remaining equity accounts of Petrini have been reclassified to reflect
the par value of the IAT stock issued with any differences reflected as paid-in
capital. In addition, paid-in capital of Petrini has been increased by an
amount equal to the excess of cost over book basis of net assets acquired and
reduced by the amount of Spigadoro's debt assumed by IAT. The pro forma
condensed consolidated balance sheet also reflects the reclassification of
IAT's equity accounts exclusive of common stock and treasury stock to paid-in
capital.
(D) In connection with this transaction, IAT assumed certain debt of
Spigadoro related to its acquisition of Petrini in the amount of $19,503,000
(face value of approximately $20 million), resulting in an increase in
liabilities and a decrease in paid-in capital. Certain notes have a stated
interest rate of 5% per annum and certain other notes have no stated interest
rate and were discounted at an average rate of 5%. The notes require principal
payments of $7,388,000 and $12,115,000 for the years ended September 30, 2000
and 2001, respectively.
(E) The unauidted pro forma condensed consolidated balance sheet reflects
IAT's assets at their fair market value and the conversion of the Series A
convertible debentures and accrued interest into approximately 2,452,000 shares
of common stock which will be completed simultaneously with the acquisition.
The unaudited pro forma condensed consolidated statements of operations reflect
the elimination of the $3,440,000 gain realized by IAT on the sale of
intellectual property during the nine months ended September 30, 1999 to give
effect to the adjustment of IAT's assets to their fair value as of January 1,
1998. The unaudited pro forma condensed consolidated statements of operations
also reflects the elimination of interest related to the convertible debentures
for the nine months ended September 30, 1999 and the year ended December 31,
1998 of $110,000 and $75,000 respectively. In addition, IAT recorded an accrual
of $600,000 relating to estimated costs to be incurred in the proposed Petrini
acquisition which has been charged to paid-in capital.
(F) The purchase accounting for the acquisition of Petrini by Spigadoro
resulted in an increase in the basis of equipment and improvements of
$15,380,000 and trademarks of $606,000 as well as the recording of $5,923,000
of goodwill. The increase in the basis of assets acquired is being depreciated
and amortized over the estimated useful lives ranging from 10 to 33 years. The
goodwill is being amortized over twenty years. The unaudited pro forma
condensed consolidated statements of operations reflect depreciation and
amortization expense recorded in cost of sales and general and administrative
expenses for the nine months ended September 30, 1999 and the year ended
December 31, 1998 of $668,000 and $891,000, respectively, and $245,000 and
$326,000 respectively.
(G) Interest expense in the unaudited pro forma condensed consolidated
statements of operations, has been adjusted to reflect the increase in interest
relating to the debt assumed in the acquisition as if it occurred on January 1,
1998. The amount of interest expense recorded for the nine months ended
September 30, 1999 and the year ended December 31, 1998 was $728,000 and
$971,000, respectively.
(H) Income taxes (benefit) in the pro forma condensed consolidated
statements of operations have been adjusted to reflect the tax effect of the
pro forma adjustments relating to the additional depreciation and amortization
on purchase accounting adjustments made to fixed assets and trademarks using
the Company's effective tax rate of 41.25%.
F-7
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 5,101,571 $ 7,219,016
Marketable securities .......................................... 746,156 750,000
Securities held for sale ....................................... 2,940,000
Accounts receivable, less allowance for doubtful accounts of
$142,283 in 1999 and $102,515 in 1998......................... 1,964,710 2,038,354
Inventories .................................................... 1,713,492 1,588,404
Other current assets ........................................... 176,563 166,611
Current deferred taxes receivable .............................. 46,433
------------- -------------
Total current assets ......................................... 12,642,492 11,808,818
Equipment and improvements, net ................................. 391,125 708,942
Other assets:
Other receivables .............................................. 602,413
Notes receivable from affiliates ............................... 831,669
Excess of cost over net assets acquired, net ................... 3,436,681 3,450,721
Investments in affiliated companies ............................ 20,436
Other assets ................................................... 523,503 151,580
------------- -------------
$ 17,596,214 $ 16,972,166
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, banks ........................................... $ 355,615 $ 420,247
Accounts payable and other current liabilities ................. 2,861,180 2,779,660
Loans payable, stockholders .................................... 1,017,833
------------- -------------
Total current liabilities .................................... 3,216,795 4,217,740
------------- -------------
Convertible debenture ........................................... 2,848,000 3,000,000
------------- -------------
Minority interest ............................................... 26,596 187,553
------------- -------------
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 10,123,824 in 1999 and 9,950,204 in 1998 .............. 101,238 99,502
Capital in excess of par value ................................. 32,595,559 29,660,151
Accumulated deficit ............................................ (19,391,550) (20,660,301)
Accumulated comprehensive income ............................... 403,833 673,781
Treasury stock (248,255 shares in 1999 and 50,000
shares in 1998) .............................................. (2,204,277) (206,260)
------------- -------------
Total stockholders' equity .................................. 11,504,823 9,566,873
------------- -------------
$ 17,596,214 $ 16,972,166
============= =============
See Notes to Consolidated Financial Statements
F-8
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1999 1998
-------------- -----------------
Net sales ............................................... $ 31,164,654 $ 23,544,503
Cost of sales ........................................... 29,375,953 21,524,407
------------ -------------
Gross margin ............................................ 1,788,701 2,020,096
------------ -------------
Operating expenses:
Selling expenses ....................................... 1,824,327 1,752,816
General and administrative expenses .................... 453,905 492,926
------------ -------------
2,278,232 2,245,742
------------ -------------
Operating loss before corporate overhead depreciation and
amortization ........................................... (489,531) (225,646)
Corporate overhead ...................................... 954,460 807,560
Depreciation and amortization ........................... 558,577 463,839
------------ -------------
Operating loss .......................................... (2,002,568) (1,497,045)
Other income (expense):
Interest expense ....................................... (157,854) (107,344)
Interest income ........................................ 194,253 252,666
Discount on convertible debenture ...................... (448,277)
Other income (expense) ................................. 3,452,588 (24,528)
Minority interest in net loss of subsidiary ............ 104,064 68,844
------------ -------------
Income (loss) before income taxes (benefit) ............ 1,590,483 (1,755,684)
Income taxes (benefit) ................................. (439) (334,666)
------------ -------------
Net income (loss) ...................................... $ 1,590,922 $ (1,421,018)
============ =============
Net income (loss) per share -- basic ................... $ 0.17 $ (0.15)
============ =============
Net income (loss) per share -- diluted ................. $ 0.16 $ (0.15)
============ =============
Weighted average number of common shares outstanding
-- basic ............................................. 9,332,005 9,278,444
============ =============
-- diluted ........................................... 10,614,005 9,278,444
============ =============
See Notes to Consolidated Financial Statements
F-9
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1999 1998
--------------- ----------------
Cash flows from operating activities:
Net income (loss) ................................................................. $ 1,590,922 $ (1,421,018)
Adjustments to reconcile net income (loss) to net cash provided (used) in operating
activities:
Discount on convertible debenture ................................................ 0 448,277
Gain on sale of intellectual property ............................................ (3,440,268)
Depreciation of equipment ........................................................ 219,740 199,798
Amortization of goodwill ......................................................... 338,837 264,041
Common stock issued for services and interest expense ............................ 8,276 37,500
Minority interest in loss ........................................................ (104,064) (68,844)
Deferred taxes payable ........................................................... (508) (356,719)
Increase (decrease) in cash attributable to changes in assets and liabilities:
Accounts receivable .............................................................. (540,349) (640,100)
Inventories ...................................................................... 433,078 228,189
Other current assets ............................................................. 91,796 111,872
Other assets ..................................................................... 25,425 (13,855)
Accounts payable and other current liabilities ................................... (661,979) (1,614,395)
------------ ------------
Net cash used in operating activites .............................................. (2,039,094) (2,825,254)
------------ ------------
Cash flows from investing activities:
Loans to and investments in, affiliated companies ................................ (966,725)
Repayment of loans receivable, affiliates ........................................ 695,271
Purchases of equipment and improvements .......................................... (343,257) (224,206)
Proceeds from sale of intellectual property ...................................... 3,440,268
Sale (purchase) of investments ................................................... (2,462,599) 1,976,865
------------ ------------
Net cash provided by investing activities ......................................... 1,329,683 785,934
------------ ------------
Cash flows from financing activities:
Repayment of loans payable, stockholders ......................................... (1,326,923)
Proceeds from (repayment of) convertible debenture ............................... 3,000,000
Proceeds from issuance of Common stock, net proceeds ............................. 1,608,688
Capital contribution, stockholders ............................................... 464,002
Proceeds from (repayments of) shortterm bank loan ................................ 356,098 (54,845)
------------ ------------
Net cash provided by financing activities ......................................... 356,098 3,690,932
------------ ------------
Effect of exchange rate changes on cash ........................................... (159,298) 94,476
------------ ------------
Net increase (decrease) in cash ................................................... (512,611) 1,746,088
Cash and cash equivalents, beginning of period .................................... 5,614,182 5,472,928
------------ ------------
Cash and cash equivalents, end of period .......................................... $ 5,101,571 $ 7,219,016
============ ============
Supplemental disclosures of cash flow information,
Cash paid during the period for interest ......................................... $ 28,704 $ 66,899
============ ============
Cash paid during the period for income related taxes ............................. $ 34,187 $ 96,748
============ ============
Supplemental disclosure of non-cash financing activities,
Common stock issued for repayment of convertible debentures ...................... $ 160,276 $ 0
============ ============
Common stock issued for services ................................................. $ 0 $ 37,500
============ ============
Spinoff of assets and liabilities held for disposition ........................... $ 0 $ 1,077,920
============ ============
See Notes to Consolidated Financial Statements
F-10
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999, and
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, 1998.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of IAT, its wholly-owned subsidiaries IAT AG, Switzerland
(IAT AG), IAT Multimedia Bremen (IAT GmbH), 100% of the General Partner of FSE
Computer-Handel GmbH & Co. KG, and 80% of the limited partnership interest of
FSE (collectively FSE), and 100% of each of Columbus-Computer-Handels und
Vertriebs-Verwaltungs GmbH and Columbus Computerhandel und Vertriebs GmbH & Co.
KG, Branch office of IAT Multimedia Gmbh (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 nine month
periods ended September 30, 1999 and 1998 was approximately $338,000 and
$264,000, 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 (1.50 and 1.37 Swiss Francs and 1.84 and 1.67
Deutsch Marks for each U.S. dollar at September 30, 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 period. 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 excludes shares of the Company's common stock
(the Common Stock) placed in escrow upon the completion of the Company's
initial public offering in March 1997. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
Common Stock were exercised or converted into Common Stock or resulted in the
issuance of Common Stock that then shared in the earnings of the entity.
Diluted loss per common share is the same as basic loss per common share for
the period ended September 30, 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
for the period ended Sepember 30, 1998 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".
F-11
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. INVENTORIES:
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
--------------- --------------
Work in process .................. $ 0 $ 254,549
Purchased finished goods ......... 1,713,492 1,333,855
---------- ----------
$1,713,492 $1,588,404
========== ==========
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 was substantially owned by an entity controlled
by the former co-chairman of the Board of Directors. 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, which accrued interest at a rate of 5% per
annum. The loan was repaid in two installments 1998 and 1999 and the 15 %
interest in Algo Vision Systems owned by the Company was exchanged for shares
of Algo Vision plc. (See Note 5).
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 was
substantially owned by an entity controlled by the former co-chairman of the
Board of Directors. 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 for operating cash flow, which note was 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 provided for
the payment of interest semi-annually beginning September 1, 1998 at a rate of
3% per annum. The notes were repaid in August 1999 in connection with the Algo
Vision Transaction and the 15% interest in Algo Vision Schweiz owned by the
Company was exchanged for shares of Algo Vision plc.(See Note 5).
NOTE 4. CONVERTIBLE DEBENTURE:
The Company entered into a securities purchase agreement (the Purchase
Agreement), dated as of June 19, 1998. 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 Debenture due 2001
(Debenture) for $5 million. The Debenture is convertible into shares of common
stock at the option of either the Company (subject to certain limitations) or
the investor. Sales of the shares of common stock issuable upon conversion by
the investor are subject to certain volume limitations. Any portion of the
Debenture 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 Debenture is the lesser of (i) $13.45 or (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 Debenture due to the conversion feature of approximately $450,000 which is
included in interest expense in the nine month period ended September 30, 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
F-12
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
To date, the holder of the Debenture has converted an aggregate of
$152,000 of the principal amount of the Debenture, plus accrued interest, on
the principal amount converted, and received an aggregate of 66,437 shares of
the Company's common stock.
As of September 30, 1999, $2,848,000 principal amount, plus accrued
interest, remained on the Debenture. Under the terms of Debenture, the holder
will have the right to accelerate repayment of the Debenture upon the Company's
previously announced transaction with Spigadoro. (See Note 7).
NOTE 5. ALGO VISION TRANSACTION:
In connection with the transfer of our research and development activities
in March 1998, the Company granted Algo Vision Schweiz AG, one of the entities
formed in connection with the transfer, an option to purchase a 50%
co-ownership interest in the Company's visual communications intellectual
property. In July 1999, as part of the reorganization of the Algo Vision
entities, Algo Vision Schweiz and Algo Vision Systems Gmbh, the other entity
formed in connection with the transfer, became wholly-owned subsidiaries of
Algo Vision plc, an English company whose shares began trading on the European
Association of Securities Dealers Automated Quotation System on July 23, 1999.
Under the terms of a series of agreements between the Company, Algo Vision plc
and Algo Vision Schweiz, (i) Algo Vision Schweiz transferred its option to
purchase the Company's intellectual property rights to Algo Vision plc, (ii)
Algo Vision plc agreed to purchase the Company's visual communications
intellectual property rights ( other than the IAT name or mark) and (iii) the
Company agreed to exchange its 15% equity interest in each of Algo Vision
Systems and Algo Vision Schweiz, for shares of capital stock of Algo Vision
plc. Dr. Vogt, one of the Company's former directors, owns approximately 26.2%
of the outstanding shares of Algo Vision plc.
Under the terms of the agreements, Algo Vision plc purchased a 50%
interest in the Company's visual communications intellectual property rights
for $1,000,000 in July 1999 and purchased the remaining 50% interest for an
additional $2,500,000 in August 1999. Algo Vision plc also agreed to pay the
Company royalties (ranging from 5% to 10%) on the sale of certain products
utilizing the visual communications technology until August 2001. In connection
with the transaction, Algo Vision Schweiz repaid in August 1999 outstanding
loans, aggregating approximately $500,000, made by the Company to Algo Vision
Schweiz in March 1998.
In addition, as part of the reorganization of the Algo Vision entities,
the Company exchanged its 15% interest in each of Algo Vision Systems and
Vision Schweiz, for 500,000 shares of Algo Vision plc. These shares are subject
to a lock-up agreement until January 24, 2000, subject to certain exceptions.
In August 1999, the Company purchased an additional 250,000 shares of Algo
Vision plc for a purchase price of $2,500,000. These shares were subject to a
lock-up agreement which expired in November 1999.
This transaction resulted in a one time gain during the three months ended
September 30,1999 of approximately $3,500,000, approximately $2,500,000 of
which was used to purchase the Algo Vision shares.
NOTE 6. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1999 1998
------------- ----------------
Net income (loss) ........................................... $1,590,922 $ (1,421,018)
Other comprehensive income (loss) net of tax-Foreign currency
translation adjustments .................................... (706,516) 333,735
Gain on securities held available for sale .................. 448,778 --
---------- ------------
$1,963,184 $ (1,087,283)
========== ============
F-13
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. SUBSEQUENT EVENTS
On November 3, 1999, the Company entered into a definitive Stock Purchase
Agreement with Gruppo Spigadoro, N.V. under which the Company will acquire all
of the outstanding common stock of Petrini, S.p.A. Petrini is an Italian
company that produces and sells animal feed and pasta and flour products
principally in Italy, and also in the United States, Europe and Southeast Asia.
Under the terms of the Stock Purchase Agreement, the Company will issue
47,354,465 shares of the Company's common stock to Spigadoro, subject to
adjustment if the anti-dilution provisions of the agreement are triggered. The
Company will also assume approximately $20 million of short term indebtedness
of Spigadoro in the acquisition, of which $12.5 million will be convertible
into shares of the Company's common stock. All of the indebtedness will be
payable or convertible into the Company's common stock during 2000.
Consummation of the acquisition is subject to a number of conditions,
including stockholder approval of the issuance of the shares of the Company's
common stock to be issued in the acquisition and other proposals. Following the
acquisition, the Company intends to sell its computer business. The Board of
Directors of the Company authorized management to evaluate and seek candidates
for the potential sale of the computer business. Management has commenced
discussions relating to the sale of the computer business. However, no
agreement has been reached with any party regarding the terms of a potential
transaction and the Company cannot assure that it will be able to sell the
computer business on terms favorable to the Company or at all.
F-14
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
IAT Multimedia, Inc.
We have audited the accompanying consolidated balance sheets of IAT Multimedia,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity (deficit), cash
flows, and financial statement schedule for each of the three years in the
period ended December 31, 1998. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of IAT Multimedia,
Inc. and Subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
Rothstein, Kass & Company, P.C.
Roseland, New Jersey
March 25, 1999
F-15
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------------
1998 1997
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 5,614,182 $ 5,472,928
Investments ...................................................... 750,000 2,726,865
Accounts receivable, less allowance for doubtful accounts of
$166,159 in 1998 and $71,111 in 1997............................ 1,564,945 1,258,914
Inventories ...................................................... 2,359,896 1,699,338
Other current assets ............................................. 396,924 277,057
Assets held for disposition ...................................... 1,077,920
------------- --------------
Total current assets .......................................... 10,685,947 12,513,022
Equipment and improvements, net ................................... 578,939 633,605
Other assets:
Other receivables ................................................ 580,385
Notes receivable from affiliates ................................. 562,286
Excess of cost over net assets acquired, net ..................... 4,155,972 3,373,254
Other assets ..................................................... 300,541 139,635
------------- -------------
$ 16,864,070 $ 16,659,516
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable, bank ............................................... $ -- $ 449,121
Accounts payable ................................................. 2,696,911 1,803,389
Other current liabilities ........................................ 1,104,774 1,846,493
Loans payable, stockholders ...................................... 2,339,451
Liabilities held for disposition ................................. 1,640,029
Deferred income taxes payable .................................... 311,347
------------- -------------
Total current liabilities ..................................... 3,801,685 8,389,830
------------- -------------
Convertible debentures ............................................ 3,000,000
------------- -------------
Minority interest ................................................. 72,079 174,007
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, authorized 10,000,000 shares,
none issued ....................................................
Common stock, $.01 par value, authorized 50,000,000 shares,
issued 10,048,826 in 1998 and 9,751,949 shares in 1997 ......... 100,488 97,519
Capital in excess of par value ................................... 30,416,979 27,103,657
Accumulated deficit .............................................. (20,982,472) (19,239,283)
Accumulated other comprehensive income ........................... 661,571 340,046
Treasury stock (50,000 shares) ................................... (206,260) (206,260)
------------- -------------
Total stockholders' equity .................................... 9,990,306 8,095,679
------------- -------------
$ 16,864,070 $ 16,659,516
============= =============
See accompanying notes to consolidated financial statements.
F-16
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
---------------- --------------- ---------------
Net sales ................................................ $ 38,339,643 $ 5,879,820 $ 1,193,302
Cost of sales ............................................ 35,465,080 5,167,198 811,771
------------ ------------ ------------
Gross margin ............................................. 2,874,563 712,622 381,531
------------ ------------ ------------
Operating expenses:
Research and development costs, net ..................... 2,425,580 2,330,638
Selling expenses ........................................ 2,821,248 2,599,663 1,462,191
General and administrative expenses ..................... 2,065,828 2,486,443 1,494,858
Non-recurring spin-off expenses ......................... 45,652 350,000
------------ ------------ ------------
4,932,728 7,861,686 5,287,687
------------ ------------ ------------
Operating loss ........................................... (2,058,165) (7,149,064) (4,906,156)
------------ ------------ ------------
Other income (expense):
Interest income ......................................... 360,623 484,394
Interest expense ........................................ (584,510) (232,518) (213,136)
Other income ............................................ 17,584 36,662 10,814
Minority interest in net (income) loss of
subsidiaries .......................................... 109,569 (33,685)
------------ ------------ ------------
(96,734) 254,853 (202,322)
------------ ------------ ------------
Loss before income taxes (benefit) ....................... (2,154,899) (6,894,211) (5,108,478)
Income taxes (benefit) ................................... (411,710) ------------ ------------
------------
Net loss ................................................. (1,743,189) (6,894,211) (5,108,478)
Preferred stock dividends ................................ (51,625)
------------ ------------ ------------
Net loss applicable to common stock ...................... $ (1,743,189) $ (6,945,836) $ (5,108,478)
============ ============ ============
Basic and diluted loss per share of common stock ......... $ (.19) $ (.84) $ (.89)
============ ============ ============
Weighted average number of common shares
outstanding ............................................. 9,327,144 8,260,709 5,751,715
============ ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net loss ................................................. $ (1,743,189) $ (6,894,211) $ (5,108,478)
Other comprehensive income --
foreign currency translation adjustments ................ 321,525 173,516 376,268
------------ ------------ ------------
Comprehensive loss ....................................... $ (1,421,664) $ (6,720,695) $ (4,732,210)
============ ============ ============
See accompanying notes to consolidated financial statements
F-17
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998, 1997
AND 1996
--------------------------------------
COMMON STOCK
-----------------------
CAPITAL IN
EXCESS OF
SHARES AMOUNT PAR VALUE
------------ ---------- --------------
Balances, January 1, 1996 ............ 3,500,000 $ 35,000 $ 6,472,051
Issuance of common stock ............. 875,000 8,750 1,530,833
Change in cumulative translation
adjustments .........................
Net loss ............................. --------- ------ ----------
Balances, December 31, 1996 .......... 4,375,000 43,750 8,002,884
Issuance of common stock ............. 5,376,949 53,769 19,100,773
Change in cumulative translation
adjustments .........................
Dividends ............................
Acquisition of treasury stock
(50,000 shares) .....................
Net loss ............................. --------- ------ ----------
Balances, December 31, 1997 .......... 9,751,949 97,519 27,103,657
Issuance of common stock ............. 296,877 2,969 2,281,943
Change in cumulative translation
adjustments .........................
Stock options issued for services..... 119,100
Discount on convertible
debentures .......................... 448,277
Contributions of capital by
stockholders ........................ 464,002
Net loss ............................. ---------- -------- -----------
Balances, December 31, 1998 .......... 10,048,826 $100,488 $30,416,979
========== ======== ===========
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS'
DEFICIT INCOME STOCK EQUITY
---------------- --------------- ------------- ---------------
Balances, January 1, 1996 ............ $ (7,184,969) $ (209,738) $ -- $ (887,656)
Issuance of common stock ............. 1,539,583
Change in cumulative translation
adjustments ......................... 376,268 376,268
Net loss ............................. (5,108,478) (5,108,478)
------------- ----------- ---------- -------------
Balances, December 31, 1996 .......... (12,293,447) 166,530 -- (4,080,283)
Issuance of common stock ............. 19,154,542
Change in cumulative translation
adjustments ......................... 173,516 173,516
Dividends ............................ (51,625) (51,625)
Acquisition of treasury stock
(50,000 shares) ..................... (206,260) (206,260)
Net loss ............................. (6,894,211) (6,894,211)
------------- ----------- ---------- -------------
Balances, December 31, 1997 .......... (19,239,283) 340,046 (206,260) 8,095,679
Issuance of common stock ............. 2,284,912
Change in cumulative translation
adjustments ......................... 321,525 321,525
Stock options issued for services..... 119,100
Discount on convertible
debentures .......................... 448,277
Contributions of capital by
stockholders ........................ 464,002
Net loss ............................. (1,743,189) (1,743,189)
------------- ----------- ---------- -------------
Balances, December 31, 1998 .......... $ (20,982,472) $ 661,571 $ (206,260) $ 9,990,306
============= ========== ========== =============
See accompanying notes to consolidated financial statements
F-18
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Cash flows from operating activities:
Net loss ............................................................ $ (1,743,189) $ (6,894,211) $ (5,108,478)
Adjustments to reconcile net loss to net cash used in operating
activities:
Discount on convertible debenture ................................. 448,277
Depreciation and amortization ..................................... 575,368 459,287 230,134
Common stock issued for services .................................. 37,500 22,500
Minority interest ................................................. (109,569) 33,685
Deferred income taxes ............................................. (387,641)
Increase (decrease) in cash attributable to changes in assets and
liabilities:
Accounts receivable .............................................. 459,309 537,428 216,016
Inventories ...................................................... 339,046 (30,926) (34,002)
Other current assets ............................................. 81,457 (121,509) (8,480)
Other assets ..................................................... (32,430) 92,581 (96,667)
Accounts payable and other current liabilities ................... (1,685,999) 595,397 194,949
------------ ------------ ------------
Net cash used in operating activities ................................ (2,017,871) (5,305,768) (4,606,528)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ....................... (1,261,755) (1,005,678)
Loans to and investments in, affiliated companies ................... (721,348)
Purchase of equipment and improvements .............................. (235,328) (418,297) (370,780)
Proceeds from sale (payments for purchase) of investments ........... 1,976,865 (2,726,865)
------------ ------------ -------------
Net cash used in investing activities ................................ (241,566) (4,150,840) (370,780)
------------ ------------ ------------
Cash flows from financing activities:
Cash held for disposition ........................................... (1,654)
Proceeds from (repayments of) loans payable, stockholders ........... (2,333,101) (1,090,657) 1,931,250
Proceeds from issuance of convertible debentures .................... 3,000,000
Deferred registration costs ......................................... (133,920) (276,525)
Payment of preferred stock dividends ................................ (51,625)
Proceeds from issuance of common stock .............................. 1,607,052 17,079,849 1,539,583
Proceeds form issuance of preferred stock ........................... 1,400,000
Capital contributions, stockholders ................................. 464,002
Repayment of loan payable ........................................... (310,362)
Purchase of treasury stock .......................................... (206,260)
Proceeds from (repayments of) short-term bank loan .................. (445,696) (709,321) 473,235
------------ ------------ ------------
Net cash provided by financing activities ............................ 2,292,257 14,576,050 5,067,543
------------ ------------ ------------
Effect of exchange rate changes on cash .............................. 108,434 88,825 (24,453)
------------ ------------ ------------
Net increase in cash and cash equivalents ............................ 141,254 5,208,267 65,782
Cash and cash equivalents, beginning of year ......................... 5,472,928 264,661 198,879
------------ ------------ ------------
Cash and cash equivalents, end of year ............................... $ 5,614,182 $ 5,472,928 $ 264,661
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest .............................. $ 69,921 $ 243,365 $ 162,473
============ ============ ============
Cash paid during the year for income taxes .......................... $ 98,998 $ -- $ --
============ ============ ============
Supplemental schedules of noncash investing and financing activities:
Issuance of shares of common stock related to acquisitions .......... $ 753,472 $ 928,718 $ --
============ ============ ============
Issuance of note payable related to acquisition ..................... $ -- $ 890,000 $ --
============ ============ ============
Conversion of Series A Convertible Preferred Stock into 1,875,000
shares of common stock ............................................ $ -- $ 1,400,000 $ --
============ ============ ============
Spin-off of net assets and liabilities held for disposition ......... $ 562,109 $ -- $ --
============ ============ ============
Decrease in loans payable, stockholders and goodwill relating to an
acquistion ........................................................ $ 1,502,994 $ -- $ --
============ ============ ============
See accompanying notes to consolidated financial statements
F-19
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND ORGANIZATION:
IAT Multimedia, Inc. ("IAT") was incorporated under the laws of Delaware
in September 1996. During October 1996, IAT issued 4,375,000 shares of its
common stock for 100% of the outstanding shares of common stock of IAT AG, a
corporation organized under the laws of Switzerland, in a transaction accounted
for as a pooling of interests. IAT, through its recent acquisitions (Note 3),
markets in Germany high performance personal computers assembled according to
customer specifications, computer hardware, components and peripherals mainly
to wholesale and retail businesses through telephone and mail order sales. In
addition, IAT licenses its visual communications technology to ALGO Vision
Schweiz (Note 4).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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),
the General Partner of FSE Computer-Handel GmbH & Co. KG (FSE), and 80% of the
limited partnership interest of FSE, and 100% of both the General Partner of
and the limited partnership interests in Columbus-Computer-Handels und
Vertriebs GmbH & Co. KG (Columbus) (Note 3) (collectively the Company). All
intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS -- The Company maintains its cash and cash
equivalents with financial institutions in accounts which at times may exceed
insured limits. The Company has not experienced any losses in such accounts and
believes it is not subject to any significant credit risk on cash. The Company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
INVESTMENTS -- The Company's investments in certificates of deposit are
carried at cost which approximates fair value.
INVENTORIES -- Inventories are valued at the lower of cost, on the
first-in, first-out (FIFO) method, or market.
REVENUE RECOGNITION -- Revenues from the sale of personal computers,
computer hardware, components, peripherals and communications systems are
recognized upon shipment to customers.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
EQUIPMENT AND IMPROVEMENTS -- Equipment and improvements are stated at
cost. Depreciation and amortization are provided using the straight-line method
over the following estimated useful lives:
Operating and office equipment ............................... 2-5 years
Office furniture and fixtures, including automobiles ......... 3-8 years
Leasehold improvements ....................................... Life of the respective lease
DEFERRED FINANCING COSTS -- Deferred financing costs are being amortized
using the straight-line method over the life of the related financing.
IMPAIRMENT OF LONG-LIVED ASSETS -- The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be fully recoverable. To determine
the recoverability of its long-lived assets, the Company evaluates the
F-20
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
probability that future undiscounted net cash flows will be less than the
carrying amount of the assets. Impairment is the amount by which the carrying
value of the asset exceeds its fair value.
EXCESS OF COST OVER NET ASSETS ACQUIRED -- Goodwill represents the excess
of cost over the fair market value of net assets of 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 years ended
December 31, 1998, 1997 and 1996 was approximately $287,000, $45,000 and nil,
respectively.
FOREIGN CURRENCY TRANSLATION -- The Company has determined that the local
currency of its Swiss 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 year-end rates of exchange
(1.37 and 1.45 Swiss Francs and 1.67 and 1.80 Deutsch Marks for each U.S.
dollar at December 31, 1998 and 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
year. The resulting translation adjustments are included as a separate
component of other comprehensive income in the statements of stockholders'
equity (deficit), whereas gains or losses arising from foreign currency
transactions are included in results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The fair value of the Company's
assets and liabilities which qualify as financial instruments under Statement
of Financial Accounting Standards No. 107 approximate the carrying amounts
presented in the consolidated balance sheets.
STOCK OPTIONS -- The Company has adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation". SFAS 123 requires compensation expense to be
recorded (i) using the new fair value method or (ii) using existing accounting
rules prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25") and related interpretations with pro
forma disclosure of what net income (loss) and earnings (loss) per share would
have been had the Company adopted the new fair value method. The Company
accounts for its stock based compensation plans in accordance with the
provisions of APB 25.
INCOME TAXES -- The Company complies with Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes", which
requires an asset and liability approach to financial reporting for income
taxes. Deferred income tax assets and liabilities are computed based on
differences between the financial reporting and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the period in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce the deferred income tax assets to the
amount expected to be realized.
RESEARCH AND DEVELOPMENT COSTS -- Research and development expenditures
conducted for internal purposes are expensed as incurred. The expenditures
include the following cost elements directly relating to research and
development: materials costs, equipment and facilities depreciation, personnel
costs, contract services and certain general and administrative expenses.
Software development costs incurred subsequent to establishment of
technological feasibility have not been material. In addition, the Company had
entered into various agreements relating to the joint development of the
Company's video conferencing products. In accordance with these agreements, the
Company and its counterparts each have rights for the use of the developed
technology. Reimbursed research and development costs for the years ended
December 31, 1998, 1997 and 1996 were nil, $97,397 and $398,177, respectively.
F-21
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -- The Company records the
minority interest in its consolidated subsidiary at the cost of the investment,
adjusted for the income (loss) of the subsidiary. Losses, however, will be
recorded only to the extent of the original investment and previously
recognized equity in earnings, if any.
LOSS PER COMMON SHARE -- Effective December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share." SFAS 128 requires dual presentation of basic and diluted earnings per
share for all periods presented. Basic earnings per share excludes dilution and
is computed by dividing loss available 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 common stock placed in escrow upon the completion
of the IPO. In addition, all shares have been adjusted to reflect the reverse
stock split discussed in Note 10. 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 years
ended December 31, 1998, 1997 and 1996. At December 31, 1998, 1997 and 1996,
the Company has unexercised stock options to purchase 530,000, 145,000 and nil
shares, respectively, and has unexercised common stock purchase warrants to
purchase 2,771,726, 2,683,485 and 2,348,485 shares, respectively. These
unexercised options and warrants were not included in the computations of
diluted loss per share because their effect would have been antidilutive as a
result of the Company's losses.
NOTE 3 -- ACQUISITIONS:
In October 1998, the Company acquired 100% each of the general partner and
of the limited partnership interests in Columbus. Columbus markets in Germany
computer hardware, components, peripherals and accessories, as well as standard
software mainly to wholesale and retail businesses through telephone and
mail-order sales. The aggregate purchase price was $2,588,060, comprised of
$1,693,908 in cash, the issuance of 98,622 shares of the Company's common stock
valued at fair market value of $7.64 per share, $140,680 of acquisition costs
and the assumption of liabilities of $2,041,183. In addition, the Company has
issued the seller a conditional guarantee on the market value of the Company's
common stock issued in connection with the acquisition, if sold prior to four
years from issuance. The agreement requires the Company to issue a maximum of
17,296 additional shares of common stock, if the sales proceeds of the 98,622
shares are less than 1,250,000 Deutsch Mark (approximately $753,000). As of
December 31, 1998, no additional shares of common stock were issued.
In November 1997, the Company acquired the general partner of FSE and 80%
of the limited partnership interest of FSE from the sole limited partner. FSE
markets in Germany high performance personal computers (PC's) assembled
according to customer specifications and sold under the trade name Trinology,
as well as components and peripherals for PC's. The aggregate purchase price
was $4,074,653, comprised of $1,857,225 in cash, the issuance of a promissory
note for $928,608, the issuance of 146,949 shares of the Company's common stock
valued at fair market value of $6.32 per share, $360,212 of acquisition costs
and the assumption of liabilities of $4,438,547. Pursuant to the purchase
agreement, the seller has agreed to reimburse the Company approximately
$1,500,000 based upon the difference between the guaranteed EBITDA of FSE for
1998 and the actual EBITDA of FSE. Therefore, the Company has reduced goodwill
by this amount, reduced loans payable, stockholders by approximately $920,000
and recorded a receivable of approximately $580,000. This receivable will be
offset against the payment due for the acquisition of the remaining 20%
interest in the FSE Limited Partnership.
F-22
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- ACQUISITIONS: (CONTINUED)
The acquisitions were accounted for as purchases and the purchase prices
were allocated on the basis of the relative fair values of the assets acquired
and the liabilities assumed, as follows:
COLUMBUS FSE
--------------- ---------------
Cash ......................... $ 682,434 $ 1,139,645
Accounts receivable .......... 693,862 1,596,341
Inventories .................. 887,896 1,696,997
Prepaid expenses ............. 11,638
Equipment .................... 65,457 673,276
Goodwill ..................... 2,299,594 3,577,086
Minority interest ............ (181,783)
Liabilities assumed .......... (2,041,183) (4,438,547)
------------ ------------
$ 2,588,060 $ 4,074,653
============ ============
The following unaudited pro forma condensed statements of operations for
1998 and 1997 give effect to the acquisitions as if they had occurred on
January 1 of each year:
1998 1997
---------------- ----------------
Net sales ..................................................... $ 66,067,865 $ 60,831,044
============ ============
Net loss ...................................................... $ (1,105,958) $ (6,673,062)
============ ============
Basic and diluted loss per share .............................. (.12) (.79)
============ ============
Weighted average number of common shares outstanding .......... 9,408,203 8,487,911
============ ============
EBITDA ........................................................ $ (372,776) $ (5,308,909)
============ ============
NOTE 4 -- 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. ALGO Vision
Systems (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 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 December 31, 1998, is approximately
$140,000 which is due on or before March 31, 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. ALGO Vision Schweiz (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
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.
F-23
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- SPINOFFS: (CONTINUED)
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
December 31, 1998 is approximately $560,000.
NOTE 5 -- INVENTORIES:
Inventories consist of the following:
DECEMBER 31,
----------------------------
1998 1997
------------ -------------
Work in process .................. $ 70,659 $ 124,445
Purchased finished goods ......... 2,289,237 1,574,893
---------- ----------
$2,359,896 $1,699,338
========== ==========
NOTE 6 -- EQUIPMENT AND IMPROVEMENTS:
Equipment and improvements consist of the following:
DECEMBER 31,
-----------------------
1998 1997
---------- ----------
Automobiles ............................................ $ 95,202 $ 83,110
Operating and office equipment ......................... 507,795 339,686
Office furniture and fixtures .......................... 15,133 14,040
Leasehold improvements ................................. 301,880 231,993
-------- --------
920,010 668,829
Less accumulated depreciation and amortization ......... 341,071 35,224
-------- --------
$578,939 $633,605
======== ========
NOTE 7 -- 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 holder of shares of common stock issued upon conversion, at the
option of the Investors, are 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.
F-24
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- OTHER CURRENT LIABILITIES:
Other current liabilities consist of the following:
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
Value added and income taxes ........... $ 333,177 $ 147,060
Payroll taxes .......................... 109,171 80,826
Professional fees ...................... 159,449 523,297
Non-recurring spinoff expenses ......... 350,000
Other current liabilities .............. 502,977 745,310
---------- ----------
$1,104,774 $1,846,493
========== ==========
NOTE 9 -- LOANS PAYABLE, STOCKHOLDERS:
Loans payable, stockholders consisted of the following at December 31,
1997:
Unsecured loan payable to a stockholder bearing interest at 8% per annum and paid in
January 1998. The loan was subordinated to to all other creditor claims. ........... $ 448,276
Loan payable to a stockholder relating to the purchase of FSE and paid in March 1998.
The loan was collateralized by a letter of credit. ................................. 890,000
Loan payable to a limited partner of FSE, bearing interest at 2% above the current
German Bundesbank annual discount rate and due on demand, subject to certain
financial covenants. ............................................................... 1,001,175
----------
$2,339,451
==========
NOTE 10 -- STOCKHOLDERS' EQUITY:
In June 1998, in connection with the issuance of the Convertible
Debentures, the Company issued 198,255 shares of common stock for proceeds of
$1,524,454, net of commissions and offering expenses of $475,546. In addition,
the Company issued five-year warrants to purchase 88,241 shares of common stock
at a price of $13.25 per share, which is 120% of the average price to the
Investors and the placement agent.
In exchange for IAT assuming the obligations of IAT AG under the Swiss
bank note, the bank transferred the guarantees of certain stockholders of the
Company to the Company. In December 1997, the Company exercised its rights
under the guarantees, and required the guarantors to agree to sell an aggregate
of 120,000 shares of the Company's common stock. In March 1998, the common
stock was sold for total proceeds of approximately $494,000, which was
contributed to the Company as capital in excess of par value.
In April 1997, the Company completed its IPO. Through the offering, the
Company sold 3,350,000 shares of its common stock which generated net proceeds
of approximately $16,803,000 after underwriter's commissions and offering
expenses of approximately $3,297,000. In addition, the Company issued the
underwriter warrants to purchase 335,000 shares of the Company's common stock.
The warrants are exercisable at a per share price of $9.90 and expire in March
2002. As of December 31, 1998, no warrants were exercised.
In 1996, in connection with the issuance of the Company's common stock to
certain former IAT AG stockholders, the Company issued warrants to purchase an
aggregate of 473,485 shares of common stock, exercisable at $7.80 per share,
and expiring on December 31, 2006. As of December 31, 1998, no warrants have
been exercised.
F-25
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- STOCKHOLDERS' EQUITY: (CONTINUED)
Certain of the Company's stockholders have agreed to place an aggregate of
498,285 of their shares of the Company's common stock in escrow. These shares
will not be assignable or transferable (but may be voted) until such time as
they are released from escrow based upon the Company meeting certain annual
revenue and/or earnings levels or the common stock attaining certain price
levels. All shares remaining in escrow on March 31, 2000 will be forfeited and
contributed to the Company's capital. In the event the Company attains any of
the thresholds providing for the release of the escrowed shares to the
stockholders, the Company will recognize compensation expense for the shares
released to certain stockholders, computed at the time based on the fair market
value of the shares.
In December 1996, the Board of Directors and stockholders of the Company
approved a reverse stock split whereby .947 shares of common stock and
preferred stock were issued for each share outstanding at that time. All share
information in the consolidated financial statements has been restated to
reflect such stock split.
In October 1996, the Company issued 1,875,000 shares of Series A
Convertible Preferred Stock, par value $.01 per share (Series A), for net
proceeds of $1,400,000, after deducting expenses of $100,000. The Series A was
converted into 1,875,000 shares of the Company's common stock upon the
consummation of the Company's IPO in April 1997. At the time of conversion, the
Company paid the required dividend of $51,625 ($.056 per share annualized). In
addition, the Company issued warrants to purchase 1,875,000 shares of common
stock, exercisable at $7.80 per share, and expiring on December 31, 2006. As of
December 31, 1998, no warrants have been exercised.
NOTE 11 -- STOCK OPTIONS:
In December 1996, the Company's Board of Directors and stockholders
approved the adoption of the Company's 1996 Stock Option Plan (the 1996 Plan).
The 1996 Plan provides for the grant of 500,000 non-qualified and incentive
stock options to eligible employees and advisors. The 1996 Plan is administered
by the Stock Option Committee consisting of the independent directors of the
Company. Each option granted pursuant to the 1996 Plan is designated at the
time of grant as either an incentive stock option or as a non-qualified stock
option. As of December 31, 1998 and 1997, 100,000 and nil options,
respectively, have been granted under the 1996 Plan.
During 1998, the Company entered into stock option agreements outside the
1996 Plan. The agreements provide for the issuance of non-transferable options
to purchase up to an aggregate of 285,000 shares of the Company's common stock
at purchase prices ranging from $4.25 to $6.00 per share, the fair market value
on the dates of the grants. The options vest in installments through June 1999,
as defined, and have piggy-back registration rights. As of December 31, 1998,
no options have been exercised.
In July and August 1997, the Company entered into stock option agreements
outside the 1996 Plan. These agreements provide for the issuance of
non-transferable options to purchase up to an aggregate of 70,000 and 75,000,
respectively, shares of the Company's common stock at purchase prices of $5.00
and $6.00 per share, respectively, the fair market value on the dates of the
grants. The options vest in installments through July 1999, as defined, and
have piggy-back registration rights. As of December 31, 1998, no options have
been exercised.
F-26
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- STOCK OPTIONS: (CONTINUED)
The following summarizes the information relating to outstanding stock
options during 1997 and 1998:
NUMBER PER
OF OPTION WEIGHTED
SHARES PRICE AVERAGE
---------- -------------- ---------
Shares under option at January 1, 1997 ........... -- $ -- $ --
Granted in 1997 .................................. 145,000 5.00-6.00 5.52
------- ----------- -----
Shares under option at December 31, 1997 ......... 145,000 5.00-6.00 5.52
Granted in 1998 .................................. 385,000 4.25-6.00 5.50
------- ----------- -----
Shares under option at December 31, 1998 ......... 530,000 $ 4.25-6.00 $ 5.50
======= ============ ======
Exercisable at December 31, 1998 ................. 381,666 $ 4.25-6.00 $ 5.51
======= ============ ======
Had compensation cost for the Company's stock based compensation plans
been determined based on the fair value at the grant dates, consistent with the
provisions of SFAS 123, the Company's net loss and loss per share would have
been increased to the pro forma amounts indicated below:
1998 1997
---------------- ----------------
Net loss applicable to common stockholders:
As reported .............................. $ (1,743,189) $ (6,945,836)
Pro forma ................................ (2,921,342) (7,263,565)
Basic and diluted loss per share:
As reported .............................. (.19) (.84)
Pro forma ................................ (.31) (.88)
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option pricing model with the following weighted average
assumptions used for 1998 and 1997 grants, respectively: risk-free interest
rate of 5% and 6%, respectively; no dividend yield; expected lives of 5 to 10
years; and expected volatility of 86% and 55%, respectively.
NOTE 12 -- DEPENDENCE UPON KEY RELATIONSHIPS:
Approximately $923,000 of the Company's revenues for the year ended
December 31, 1996, was attributable to sales to one customer or affiliates of
that customer. The Company had no significant customers in 1998 and 1997.
Substantially all of the sales for the years ended December 31, 1998, 1997 and
1996, respectively, are to customers located primarily in Germany and
Switzerland. At December 31, 1998, 1997 and 1996, substantially all of the
Company's operations, operating assets and liabilities were located in Germany
and Switzerland.
NOTE 13 -- INCOME TAXES:
For the years ended December 31, 1998, 1997 and 1996, income taxes
computed at the statutory federal rates differ from the Company's effective
rate due to the change in the deferred tax asset valuation allowance.
At December 31, 1998, the Company has net operating loss carryforwards
(NOL) for Swiss, German and United States income tax purposes of approximately
$15,200,000, $3,984,000 and $2,500,000, respectively. The Swiss NOLs expire
between 1999 and 2006, the German NOLs have no expiration date and the United
States NOLs expire through 2018. As a result, at December 31, 1998 and 1997,
the
F-27
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- INCOME TAXES: (CONTINUED)
Company recorded deferred tax assets of approximately $6,790,000 and
$5,660,000, respectively, and valuation allowances in the same amounts relating
principally to the NOLs.
SFAS 109 requires that the Company record a valuation allowance when it is
"more likely than not that some portion or all of the deferred tax asset will
not be realized". The ultimate realization of this deferred tax asset depends
on the ability to generate sufficient taxable income in the future.
NOTE 14 -- COMMITMENTS AND CONTINGENCIES:
The Company has entered into operating leases for the use of office space,
manufacturing facilities and equipment. Rent expense for the years ended
December 31, 1998, 1997 and 1996 was approximately $123,000, $346,000 and
$400,000, respectively.
Aggregate approximate future minimum annual rental payments under these
operating leases are as follows:
Year Ending December 31,
1999 ................... $ 276,000
2000 ................... 277,000
2001 ................... 277,000
2002 ................... 138,000
2003 ................... 74,000
----------
$1,042,000
==========
NOTE 15 -- RELATED PARTY TRANSACTIONS:
In connection with the sale of the Series A shares, the Company entered
into a marketing agreement with an affiliate of a Series A stockholder to
assist in marketing the Company's products worldwide, and to arrange financing
for the Company's operations, leasing programs and distribution arrangements.
The agreement provided for the payment of $500,000 for such services which is
included in selling expenses in 1997.
In January 1999, the Company entered into a sublease of office facilities
with an affiliate, at annual rent of $100,000 through January 2002.
NOTE 16 -- SUBSEQUENT EVENT:
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, 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 the option of the Company, subject to certain
limitations and at any time on or after December 30, 1999, if certain
conditions are met. All shares of Series B not previously converted into shares
of common stock shall automatically convert in January 2002.
F-28
PETRINI S.P.A. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
AS OF SEPTEMBER 30, 1999 AND 1998
ASSETS
1999 1999 1998
--------------- ------------ ------------
(THOUSANDS (MILLIONS OF LIRE)
OF DOLLARS)(1)
CURRENT ASSETS
Cash ........................................................... $ 110 208 2,348
Accounts receivable trade, net of allowance for doubtful
accounts of Lire 3,533 millions in 1999 and Lire 3,316 millions
in 1998 ....................................................... 35,909 67,761 71,928
Taxes receivable, principally V.A.T. ........................... 7,207 13,600 12,482
Deferred income taxes .......................................... 532 1,003 996
Inventory (Note 2) ............................................. 12,495 23,579 22,567
Cash to be transferred to factor (Note 3) ...................... 4,422 8,344 --
Other current assets ........................................... 1,212 2,287 2,927
--------- ------ ------
Total current assets ........................................... 61,887 116,782 113,248
PROPERTY, PLANT AND EQUIPMENT
Land and buildings ............................................. 22,911 43,234 43,045
Machinery, equipment and other ................................. 48,040 90,651 90,476
--------- ------- -------
70,951 133,885 133,521
--------- ------- -------
Accumulated depreciation ....................................... (44,826) (84,587) (81,745)
--------- ------- -------
Property, plant and equipment, net ............................. 26,125 49,298 51,776
INTANGIBLE ASSETS, at amortized cost ........................... 4,253 8,026 8,542
DEFERRED INCOME TAXES .......................................... 3,095 5,841 6,020
OTHER ASSETS ................................................... 2,652 5,005 4,206
--------- ------- -------
TOTAL ASSETS ................................................... $ 98,012 184,952 183,792
========= ======= =======
- ----------
(1) Exchange rate: Lire 1,887 = U.S.$1 as of November 23, 1999
See accompanying notes
F-29
PETRINI S.P.A. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
AS OF SEPTEMBER 30, 1999 AND 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1999 1998
--------------- ------------ ------------
(THOUSANDS (MILLIONS OF LIRE)
OF DOLLARS)(1)
CURRENT LIABILITIES
Short-term borrowings .................................. $ 21,945 41,410 52,100
Current portion of long-term debt ...................... 2,473 4,666 4,333
Liability to factor (Note 3) ........................... 4,422 8,344 --
Accounts payable trade ................................. 17,545 33,111 31,637
Income taxes payable ................................... 1,377 2,598 2,283
Accrued payroll and social contributions ............... 2,873 5,422 6,623
Other current liabilities .............................. 1,369 2,585 3,067
--------- ------ ------
Total current liabilities ............................. 52,004 98,136 100,043
LONG-TERM DEBT, less current portion ................... 7,355 13,878 12,920
EMPLOYEES AND AGENTS
TERMINATION INDEMNITIES ............................... 8,333 15,724 16,336
DEFERRED INCOME, unearned portion of
Government grants ..................................... 1,199 2,263 2,448
SOCIAL CONTRIBUTIONS AND INCOME
TAXES PAYABLE, less current portion ................... 2,510 4,736 4,095
SHAREHOLDERS' EQUITY
Share capital 40.7 million ordinary shares,
authorized, issued and outstanding, par value
Lire one thousand per share ......................... 21,569 40,700 40,700
Additional paid-in capital ............................ 2,781 5,248 5,248
Less step-up applicable to predecessor owners ......... (11,751) (22,175) (22,175)
--------- ------- -------
12,599 23,773 23,773
Accumulated other comprehensive income ................. 30 57 --
Retained earnings ...................................... 13,982 26,385 24,177
--------- ------- -------
Total shareholders' equity ............................ 26,611 50,215 47,950
--------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ................................................ $ 98,012 184,952 183,792
========= ======= =======
- ----------
(1) Exchange rate: Lire 1,887 = U.S.$1 as of November 23, 1999
See accompanying notes
F-30
PETRINI S.P.A. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1999 1998
-------------------- ------------------- ----------------
(THOUSANDS (MILLIONS OF LIRE)
OF DOLLARS)(1)
NET SALES ................................... $ 103,224 194,783 200,356
COST OF SALES ............................... 74,214 140,042 148,964
------------- ------- -------
GROSS PROFIT ................................ 29,010 54,741 51,392
OPERATING COSTS AND EXPENSES
Selling expenses ............................ 19,332 36,480 36,579
General and administrative expenses ......... 5,768 10,884 8,658
------------- ------- -------
25,100 47,364 45,237
------------- ------- -------
INCOME FROM OPERATIONS ...................... 3,910 7,377 6,155
OTHER (INCOME) EXPENSES
Net interest expense ....................... 861 1,625 3,265
Other expenses, net ........................ 271 511 17
------------- ------- -------
1,132 2,136 3,282
------------- ------- -------
INCOME BEFORE INCOME TAXES .................. 2,778 5,241 2,873
INCOME TAXES (Note 8) ....................... 1,961 3,700 2,711
------------- ------- -------
NET INCOME .................................. $ 817 1,541 162
============= ======= =======
EARNINGS PER SHARE .......................... U.S.$0.02 Lire 38 Lire 4
============= ========= ========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING ......................... 40.7 Million 40.7 Million 40.7 Million
============= =========== ============
- ----------
(1) Exchange rate: Lire 1,887 = U.S.$1 as of November 23, 1999
See accompanying notes
F-31
PETRINI S.P.A. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1999 1998
--------------- ----------- -----------
(THOUSANDS (MILLIONS OF LIRE)
OF DOLLARS)(1)
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME ...................................................... $ 817 1,541 162
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation .................................................... 1,607 3,032 3,231
Amortization .................................................... 538 1,015 942
Provision for employees and agents termination indemnities ...... 896 1,690 1,599
Provision for doubtful accounts ................................. 797 1,503 671
Deferred income taxes ........................................... (179) (337) 5
Other non cash items ............................................ 498 938 (303)
Payment of employees and agents termination indemnities ......... (971) (1,832) (2,402)
Changes in operating assets and liabilities:
Accounts receivable trade ..................................... 2,557 4,825 269
Government grants ............................................. -- -- 3,244
Inventories ................................................... 813 1,534 4,209
Accounts payable trade ........................................ (1,330) (2,510) (1,611)
Accrued payrolland social contributions ....................... (293) (552) 1,978
Other -- net .................................................. 718 1,355 (2,027)
-------- ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................ 5,472 10,326 9,967
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursements for additions to property, plant and equipment..... (1,048) (1,977) (2,187)
Proceeds from disposal of property, plant and equipment ......... 224 423 38
Additions to intangible assets .................................. (490) (925) (384)
-------- ------ ------
NET CASH USED IN INVESTING ACTIVITIES ............................ (1,314) (2,479) (2,533)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt .................................... 5,285 9,972 314
Payments of long-term debt ...................................... (3,781) (7,135) (5,666)
Loan to Parent Company .......................................... (232) (437) --
Net change in short-term borrowings ............................. (5,791) (10,927) (1,022)
-------- ------- ------
NET CASH USED IN FINANCING ACTIVITIES ............................ (4,519) (8,527) (6,374)
EFFECT OF EXCHANGE RATE CHANGES ON CASH .......................... 10 19 --
-------- ------- ------
NET INCREASE (DECREASE) IN CASH .................................. (351) (661) 1,060
CASH AT BEGINNING OF PERIOD ...................................... 461 869 1,288
-------- ------- ------
CASH AT END OF PERIOD ............................................ $ 110 208 2,348
======== ======= ======
- ----------
(1) Exchange rate: Lire 1,887 = U.S.$1 as of November 23, 1999
Supplemental information:
-- Interest paid ............. $1,293 2,319 3,533
====== ===== =====
-- Income taxes paid ......... $1,499 2,687 828
====== ===== =====
Cash disbursements for additions to fixed assets in the nine months ended
September 30, 1999 and 1998 were respectively Lire 673 and Lire 467 higher than
the additions of the period, due to the time delay between the recording of the
additions and the related payments.
See accompanying notes
F-32
PETRINI S.P.A. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(IN MILLIONS OF LIRE, EXCEPT AS OTHERWISE INDICATED)
ELIMINATION
OF STEP-UP
ADDITIONAL APPLICABLE TO
SHARE PAID-IN PREDECESSOR
CAPITAL CAPITAL OWNERS SUBTOTAL
--------- ------------ --------------- ----------
BALANCE AT
DECEMBER 31,
1997 ................ 40,700 5,248 (22,175) 23,773
NET INCOME NINE
MONTHS 1998 ......... ------ ----- -------- ------
BALANCE AT
SEPTEMBER 30,
1998 ................ 40,700 5,248 (22,175) 23,773
====== ===== ======= ======
BALANCE AT
DECEMBER 31,
1998 ................ 40,700 5,248 (22,175) 23,773
NET INCOME NINE
MONTHS 1999 .........
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENTS ......... ------ ----- -------- ------
BALANCE AT
SEPTEMBER 30,
1999 ................ 40,700 5,248 (22,175) 23,773
====== ===== ======= ======
BALANCE AT
SEPTEMBER 30,
1999 in thousands of
dollars (1) ......... $21,569 $2,781 $ (11,751) $12,599
======= ====== ========= =======
RETAINED EARNINGS
--------------------------------
ACCUMULATED OTHER
OTHER RETAINED TOTAL
COMPREHENSIVE LEGAL EARNINGS SHAREHOLDERS'
INCOME RESERVE (DEFICIT) SUBTOTAL EQUITY
-------------- --------- ----------- ---------- --------------
BALANCE AT
DECEMBER 31,
1997 ................ 269 23,746 24,015 47,788
NET INCOME NINE
MONTHS 1998 ......... 162 162 162
------ --- ------ ------ ------
BALANCE AT
SEPTEMBER 30,
1998 ................ -- 269 23,908 24,177 47,950
== === ====== ====== ======
BALANCE AT
DECEMBER 31,
1998 ................ 269 24,575 24,844 48,617
NET INCOME NINE
MONTHS 1999 ......... 1,541 1,541 1,541
FOREIGN
CURRENCY
TRANSLATION
ADJUSTMENTS ......... 57 57
-- --- ------ ------ -------
BALANCE AT
SEPTEMBER 30,
1999 ................ 57 269 26,116 26,385 50,215
== === ====== ====== ======
BALANCE AT
SEPTEMBER 30,
1999 in thousands of
dollars (1) ......... $30 $143 $13,839 $13,982 $26,611
=== ==== ======= ======= =======
- ----------
(1) Exchange rate: Lire 1,887 = U.S.$1 as of November 23, 1999
See accompanying notes
F-33
PETRINI S.P.A. AND SUBSIDIARY
NOTES TO THE UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999 AND 1998
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The unaudited interim consolidated financial statements include the
financial statements of Petrini S.p.A. (the "Company") and its wholly owned
subsidiary Petrini Foods International Inc. ("PFI").
The Company formed PFI for the purpose of acquiring from its former
distributor the business of distributing its Spigadoro products in the United
States. The acquisition was completed in the third quarter of 1998 but the
effects of the acquisition and the operations of PFI were immaterial in 1998.
The accompanying interim financial statements are presented in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP") for interim financial information. Accordingly, they do not
include all the information and footnotes required by U.S. GAAP.
The basis of presentation and the significant accounting policies are
reported in the notes to the audited financial statements presented for each of
the three years in the period ended December 31, 1998.
The consolidated interim financial statements have been prepared applying
the following principles of consolidation:
i) all significant intercompany transactions and balances are
eliminated; unrealized intercompany gains and losses are also eliminated;
ii) the financial statements of the U.S. subsidiary are translated into
Lire using the current exchange rate at the end of the period for balance
sheet items and the average exchange rates for the period for statement of
income items. The translation differences are recorded as accumulated other
comprehensive income in consolidated shareholders' equity.
The consolidated financial statements contain all adjustments consisting of
normal recurring adjustments, which are, in the opinion of management of the
Company, necessary to present fairly the consolidated financial position of the
Company and of its wholly owned subsidiary as of September 30, 1999 and 1998 and
the related consolidated results of operations and cash flows for the nine month
periods ended September 30, 1999 and 1998.
Results of operations for the periods presented are not necessarily
indicative of the results of operations for the full fiscal years. These
consolidated financial statements should be read in conjunction with the audited
financial statements presented for each of the three years in the period ended
December 31, 1998.
Information expressed in U.S. Dollars
The consolidated financial statements are stated in Italian Lire, the
currency of the country in which the Company, which represents 99% of total
consolidated revenue, is incorporated and operates. Translation of Lire amounts
into U.S. Dollar amounts is included solely for the convenience of the readers
and has been made at the rate of Lire 1,887 to U.S.$1, the Noon Buying Rate of
the Federal Reserve Bank of New York at November 23, 1999. Such translation
should not be construed as a representation that the Lire amounts could be
converted into U.S. Dollars at that or any other rate.
F-34
PETRINI S.P.A. AND SUBSIDIARY
NOTES TO THE UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF SEPTEMBER 30, 1999 AND 1998
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
2. INVENTORIES
Inventories consist of:
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
--------------- --------------
Raw materials and consumables ......... 15,929 15,362
Work-in-process ....................... 1,681 1,866
Finished goods ........................ 5,969 5,339
------ ------
23,579 22,567
====== ======
3. FACTORING OF RECEIVABLES
In June 1999 the Company executed a contract with a factoring agency for
the sale without recourse of trade receivables with a carrying value of Lire
27,900 for a price of Lire 27,600. Pursuant to the contract, the Company
continues to collect and account for the collection of the receivables sold to
the factoring agency. The amount of such collections are reported as a
restricted asset and a contra liability to the factoring agency in the balance
sheet as of September 30, 1999.
On November 12, 1999 the Company executed another contract with a
factoring agency for the sale of trade receivables with a carrying value of
Lire 9,700.
4. CONTINGENCIES
The Company provides for costs related to contingencies when a loss is
probable and the amount is reasonably determinable. No changes have occurred in
the matters described in the notes to the audited financial statements for 1998
with respect to:
a) the modifications to the general regulatory plan of the City Council
of Bastia Umbra that, applying a rezoning of the land on which the
Company's largest plant for the production of both pasta and animal feed is
located, could require the Company to terminate operations at this plant;
and to
b) the agreements with the workers of co-operatives to limit the risks
connected to the eventual future request of the workers to be recognized as
employees of the Company.
5. INFORMATION BY SEGMENT
The Company manages its business on a segment basis. The significant
segments operated by the Company consist of: i) pasta and other food products
and ii) animal feed and other activities. Information relative to significant
segments is reported below for the nine month periods ended September 30, 1999
and 1998. The Company evaluates performance of the segments based on EBITDA and
income from operations. The accounting policies of the segment are
substantially the same as those described in Note 1.
F-35
PETRINI S.P.A. AND SUBSIDIARY
NOTES TO THE UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF SEPTEMBER 30, 1999 AND 1998
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
5. INFORMATION BY SEGMENT (CONTINUED)
ANIMAL
PASTA AND FEED AND
OTHER FOOD OTHER TOTAL
PRODUCTS ACTIVITIES GROUP
------------ ------------ ----------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Total revenue .............................................. 51,962 142,821 194,783
Depreciation and amortization .............................. 932 3,115 4,047
EBITDA ..................................................... 2,355 8,558 10,913
Income from operations ..................................... 1,561 5,816 7,377
Identifiable long-term assets (property, plant and equipment
and intangibles) .......................................... 12,188 45,136 57,324
Capital expenditures ....................................... 211 1,093 1,304
NINE MONTHS ENDED SEPTEMBER 30,1998
Total revenue .............................................. 52,727 147,629 200,356
Depreciation and amortization .............................. 919 3,254 4,173
EBITDA ..................................................... 307 10,021 10,328
Income (loss) from operations .............................. (612) 6,767 6,155
Identifiable long-term assets (property plant and equipment
and intangibles) .......................................... 15,703 44,615 60,318
Capital expenditures ....................................... 549 1,172 1,720
6. DISCONTINUED LINE OF BUSINESS
In 1999 the Company decided to discontinue the pig and chicken breeding
activity. Reported operating data related to the discontinued line of business
follow:
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1999 1998
---------------------------- ---------
(THOUSANDS OF
DOLLARS) (1)
Net sales ...................................................... 2,295 4,331 2,553
Cost of sales .................................................. 2,791 5,266 2,878
----- ----- -----
(496) (935) (325)
Operating expenses ............................................. 119 224 117
----- ----- -----
Operating loss from discontinued breeding activity ............. (615) (1,159) (442)
Income taxes ................................................... (240) (452) (191)
----- ------ -----
Loss from discontinued breeding activity, net of taxes ......... (375) (707) (351)
===== ====== =====
- ----------
(1) Exchange rate Lire 1,887 = U.S.$1 as of November 23, 1999
The discontinued line of business was operated directly and indirectly
through agreements with external breeders. Starting October 1, 1999 the plant
leased for such activity under an operating lease has been subleased to other
breeders. Terms of the lease (Lire 150 annual rent with a duration of two
years) have been applied to the sublease agreement. Starting the same date
October 1, 1999, own premises and
F-36
PETRINI S.P.A. AND SUBSIDIARY
NOTES TO THE UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF SEPTEMBER 30, 1999 AND 1998
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
6. DISCONTINUED LINE OF BUSINESS (CONTINUED)
plants, with a net book value at September 30, 1999 of Lire 2,571 have been
rented for an annual rent of Lire 200 for a period of five years. No decision
has been taken to date on the remaining own plants, with a net book value at
September 30, 1999 of Lire 2,295. Management believes that the book value of
such assets approximates its fair value and no material impairment will derive
from the disposition of such assets.
7. COMPREHENSIVE INCOME AND RELATED COMPONENTS
The only addition to net income for the disclosure of comprehensive income
for the nine month period ended September 30, 1999 is solely with respect to
foreign currency translation adjustments of Lire 57. Accordingly, comprehensive
income for this period amounts to Lire 1,598. No components of comprehensive
income was present for the corresponding period of 1998.
8. INCOME TAXES
The decrease of 23 percentage points in the tax rate (from 94% for the
nine month period ended September 30, 1998 to 71% for the nine month period
ended September 30, 1999) is substantially due to the higher level of taxable
income in the current period compared with the corresponding period in 1998,
while the two major items of permanent differences (consisting of salaries and
interest costs which are undeductible for purposes of the Regional income tax,
IRAP), did not vary substantially in the two comparative periods (for further
details, see reconciliation of the statutory tax rate to the effective tax
rate, reported in Note 3 to the audited financial statements at December 31,
1998 and 1997 and for each of the three years in the period ended December 31,
1998).
F-37
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Petrini S.p.A.
We have audited the accompanying balance sheets of Petrini S.p.A. as of
December 31, 1998 and 1997 and the related statements of income, cash flows and
shareholders' equity for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Petrini S.p.A. as of December
31, 1998 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States of America.
Reconta Ernst & Young S.p.A.
Perugia, Italy
October 14, 1999, except for the convenience translation of the financial
statements into U.S. Dollars as to which the date is November 23, 1999.
F-38
PETRINI S.P.A
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
ASSETS
1998 1998 1997
--------------- ------------ ------------
(THOUSANDS (MILLIONS OF LIRE)
OF DOLLARS)(1)
CURRENT ASSETS
Cash ................................................... $ 461 869 1,288
Accounts receivable trade, net of allowance for doubtful
accounts of Lire 2,686 millions in 1998 and Lire 2,646
millions in 1997 ..................................... 38,916 73,435 72,868
Taxes receivable (Note 3) .............................. 6,958 13,129 11,278
Inventories (Note 4) ................................... 13,313 25,121 26,776
Deferred income taxes (Note 3) ......................... 275 518 402
Government grant (Note 5) .............................. -- -- 3,244
Other current assets ................................... 1,104 2,084 1,447
--------- ------ ------
Total current assets ................................. 61,027 115,156 117,303
PROPERTY, PLANT AND EQUIPMENT
Land and buildings ..................................... 22,907 43,226 42,870
Machinery, equipment and other ......................... 48,070 90,708 88,367
--------- ------- -------
70,977 133,934 131,237
Accumulated depreciation ............................... (43,626) (82,322) (78,579)
--------- ------- -------
Property, plant and equipment, net ..................... 27,351 51,612 52,658
INTANGIBLE ASSETS, at amortized cost (Note 6) ........... 4,445 8,388 9,100
DEFERRED INCOME TAXES (Note 3) .......................... 3,174 5,989 6,112
OTHER ASSETS (Note 7) ................................... 2,939 5,545 2,552
--------- ------- -------
TOTAL ASSETS ......................................... $ 98,936 186,690 187,725
========= ======= =======
- ----------
(1) Exchange rate: Lire 1,887 = U.S. $1 as of November 23, 1999
See accompanying notes
F-39
PETRINI S.P.A
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1998 1997
--------------- ------------ ------------
(THOUSANDS (MILLIONS OF LIRE)
OF DOLLARS)(1)
CURRENT LIABILITIES
Short-term borrowings (Note 8) ................................. $ 27,736 52,337 53,122
Current portion of long-term debt (Note 9) ..................... 2,261 4,266 8,107
Accounts payable trade ......................................... 19,234 36,295 33,715
Income taxes payable ........................................... 610 1,151 748
Accrued payroll and social contributions ....................... 3,166 5,974 4,645
Other current liabilites ....................................... 1,449 2,735 2,600
--------- ------ ------
Total current liabilities .................................... 54,456 102,758 102,937
LONG-TERM DEBT, less current portion (Note 9): .................. 6,064 11,442 14,498
EMPLOYEES AND AGENTS TERMINATION
INDEMNITIES (Note 10) .......................................... 8,868 16,735 17,442
DEFERRED INCOME, unearned portion of Government
grant (Note 5) ................................................. 1,273 2,402 2,587
SOCIAL CONTRIBUTIONS AND INCOME TAXES
PAYABLE (Note 11) .............................................. 2,510 4,736 2,473
SHAREHOLDERS' EQUITY (Note 12):
Share capital 40.7 million ordinary shares, authorized,
issued and outstanding, par value
Lire one thousand per share .................................. 21,569 40,700 40,700
Additional paid-in capital ..................................... 2,781 5,248 5,248
Less step-up applicable to predecessor owners (Note 1) ......... (11,751) (22,175) (22,175)
--------- ------- -------
12,599 23,773 23,773
Retained earnings .............................................. 13,166 24,844 24,015
--------- ------- -------
Total shareholders' equity ................................... 25,765 48,617 47,788
--------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY ...................................................... $ 98,936 186,690 187,725
========= ======= =======
- ----------
(1) Exchange rate: Lire 1,887 = U.S. $1 as of November 23, 1999
See accompanying notes
F-40
PETRINI S.P.A
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1998 1997 1996
--------------- -------------- ------------------- -------------
(THOUSANDS (MILLIONS OF LIRE)
OF DOLLARS)(1)
NET SALES (Note 16) .......................... $141,127 266,307 294,859 320,292
COST OF SALES ................................ 104,347 196,902 224,216 244,490
-------- ------- ------- -------
GROSS PROFIT ................................. 36,780 69,405 70,643 75,802
OPERATING COSTS AND EXPENSES
Sellling expenses ........................... 24,480 46,194 47,633 48,638
General and administrative expenses ......... 7,800 14,719 16,079 15,717
-------- ------- ------- -------
32,280 60,913 63,712 64,355
-------- ------- ------- -------
INCOME FROM OPERATIONS ....................... 4,500 8,492 6,931 11,447
OTHER INCOME (EXPENSES)
Net interest expense ........................ 2,111 3,984 5,618 7,124
Other (income) expenses, net ................ 49 92 598 (72)
-------- ------- ------- -------
2,160 4,076 6,216 7,052
-------- ------- ------- -------
INCOME BEFORE INCOME TAXES ................... 2,340 4,416 715 4,395
INCOME TAXES (Note 3) ........................ 1,901 3,587 437 2,313
-------- ------- ------- -------
NET INCOME ................................... $ 439 829 278 2,082
======== ======= ======= =======
EARNINGS PER SHARE ........................... U.S. $0.01 Lire 20 Lire 7 Lire 51
=============== ============ ============== ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING .......................... 40.7 Million 40.7 Million 40.7 Million 40.7 Million
=============== ============ ============== ============
- ----------
(1) Exchange rate: Lire 1,793 = U.S. $1 as of October 14, 1999
See accompanying notes
F-41
PETRINI S.P.A
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1998 1997 1996
--------------- ----------- ----------- -----------
(THOUSANDS (MILLIONS OF LIRE)
OF DOLLARS)(1)
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME ........................................................... $ 439 829 278 2,082
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ....................................................... 2,301 4,342 4,111 3,980
Amortization ....................................................... 676 1,276 1,207 1,072
Provision for employees and agents termination indemnities
(Note 10) ......................................................... 1,148 2,167 2,550 2,374
Provision for doubtful accounts (Note 17) .......................... 737 1,391 982 1,178
Deferred income taxes (Note 3) ..................................... 4 7 (39) 1,094
Other non cash items, net .......................................... 122 230 637 (61)
Payment of employees and agents termination indemnities ............ (1,270) (2,397) (2,332) (1,832)
Changes in operating assets and liabilities:
Accounts receivable trade ......................................... (1,038) (1,958) (1,862) 471
Inventories (Note 4) .............................................. 877 1,655 1,286 3,191
Accounts payable trade ............................................ 1,104 2,084 (3,611) (4,313)
Accrued payroll and social contributions .......................... 704 1,329 (1,947) 476
Other, net ........................................................ (125) (236) (3,051) (1,412)
-------- ------ ------ ------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES ........................................................... 5,679 10,719 (1,791) 8,300
CASH FLOWS FROM INVESTING ACTIVITIES
Disbursements for additions to property, plant and equipment ......... (1,625) (3,067) (6,876) (6,741)
Proceeds from disposal of property, plant and equipment .............. 135 255 866 306
Additions to intangible assets ....................................... (341) (644) (812) (50)
-------- ------ ------ ------
NET CASH USED IN INVESTING ACTIVITIES ................................. (1,831) (3,456) (6,822) (6,485)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt (Note 9) ................................ 641 1,210 7,549 3,766
Payments of long-term debt (Note 9) .................................. (4,296) (8,107) (6,118) (5,476)
Net change in short-term borrowings (Note 8) ......................... (416) (785) 6,856 (1,296)
-------- ------ ------ ------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES ........................................................... (4,071) (7,682) 8,287 (3,006)
-------- ------ ------ ------
NET DECREASE IN CASH .................................................. (223) (419) (326) (1,191)
CASH AT BEGINNING OF YEAR ............................................. 684 1,288 1,614 2,805
-------- ------ ------ ------
CASH AT END OF YEAR ................................................... $ 461 869 1,288 1,614
======== ====== ====== ======
- ------------
(1) Exchange rate: Lire 1,887 = U.S. $1 as of November 23, 1999
Supplemental information:
- -- Interest paid ...................................................... $ 2,427 4,580 5,801 7,462
======== ====== ====== ======
- -- Income taxes paid .................................................. $ 2,328 4,393 1,371 --
======== ====== ====== ======
Cash disbursements for additions to fixed assets in 1998 were Lire 496 lower
than the additions of the period, in 1997 were Lire 2,126 higher and in 1996
were Lire 1,963 lower than the additions, due to the time delay between the
recording of the addition and the related payment.
See accompanying notes
F-42
PETRINI S.P.A
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF LIRE, EXCEPT AS OTHERWISE INDICATED)
ELIMINATION
OF STEP-UP
APPLICABLE TO
ADDITIONAL PREDECESSOR
SHARE PAID-IN OWNERS
CAPITAL CAPITAL (NOTE 1) SUB-TOTAL
--------- ------------ -------------- ----------
BALANCE AT
DECEMBER 31, 1995 .............. 40,700 5,248 (22,175) 23,773
TRANSFER ........................
NET INCOME 1996 ................. ------ ----- -------- ------
BALANCE AT
DECEMBER 31, 1996 .............. 40,700 5,248 (22,175) 23,773
TRANSFER ........................
NET INCOME 1997 ................. ------ ----- -------- ------
BALANCE AT
DECEMBER 31, 1997 .............. 40,700 5,248 (22,175) 23,773
TRANSFER ........................
NET INCOME 1998 ................. ------ ----- -------- ------
BALANCE AT
DECEMBER 31, 1998 .............. 40,700 5,248 (22,175) 23,773
====== ===== ======= ======
BALANCE AT
DECEMBER 31, 1998
in thousands of dollars (1)..... $21,569 $2,927 $ (12,368) $13,259
======= ====== ========= =======
RETAINED EARNINGS
-------------------------------------
OTHER
RETAINED TOTAL
LEGAL EARNINGS SHAREHOLDERS'
RESERVE (DEFICIT) SUB-TOTAL EQUITY
--------- --------------- ----------- --------------
BALANCE AT
DECEMBER 31, 1995 .............. 255 21,400 21,655 45,428
TRANSFER ........................ 8 (8) -- --
NET INCOME 1996 ................. 2,082 2,082 2,082
--- -------- ------ ------
BALANCE AT
DECEMBER 31, 1996 .............. 263 23,474 23,737 47,510
TRANSFER ........................ 6 (6) -- --
NET INCOME 1997 ................. 278 278 278
--- -------- ------ ------
BALANCE AT
DECEMBER 31, 1997 .............. 269 23,746 24,015 47,788
TRANSFER ........................ -- --
NET INCOME 1998 ................. 829 829 829
--- -------- ------ ------
BALANCE AT
DECEMBER 31, 1998 .............. 269 24,575 24,844 48,617
=== ======== ====== ======
BALANCE AT
DECEMBER 31, 1998
in thousands of dollars (1)..... $150 $13,706 $13,856 $27,115
==== ======== ======= =======
- ----------
(1) Exchange rate: Lire 1,887 = U.S. $1 as of November 23, 1999
See accompanying notes
F-43
PETRINI S.P.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Petrini S.p.A (the "Company") principally produces and sells pasta, flour
and animal feed. The production is located in Italy in seven factories.
Financial data by segment are included in Note 16.
The Company was established in 1988 through a leveraged buy-out by members
of management who then owned 37% of the predecessor company. Upon completion of
the leveraged buy-out, the members of management who had also been predecessor
owners owned 76% of the Company. As of September 6, 1998, before the sale of the
shares to Gruppo Spigadoro N.V., the members of management owned a 67% interest
in the Company, while the remaining 33% interest was owned by a third party. For
Italian accounting purposes the purchase of the predecessor company by the
Company was accounted for as a purchase by new controlling investors for which
there was a complete change in the basis of accounting for net assets acquired
based on the fair value of the transaction at the date of the transaction.
On August 6, 1998 Vertical Capital Limited ("VCL") Channel Islands a
subsidiary of the Vertical Group underwrote a stock purchase agreement with
Carlo and Giorgio Petrini for the purchase of their 67% interest in the Company.
Subsequently, such purchase agreement was transferred to Gruppo Spigadoro by its
parent company to which the contract had been transferred by VCL. Also, at
December 31, 1998 Gruppo Spigadoro held an option to purchase from a third party
the remaining 33% interest of the Company.
The Company is a legal entity incorporated under the laws of Italy and its
books and records are maintained in conformity with Italian statutory and tax
requirements, applying generally accepted accounting principles in Italy
("Italian GAAP"). To comply with the accounting principles generally accepted
in the United States of America ("U.S. GAAP"), the accompanying financial
statements include adjustments to reduce the step-up in the basis of assets (as
a result of the management leveraged buy-out mentioned above) related to the
37% interest owned by the controlling shareholder in the predecessor company,
to eliminate revaluations of fixed assets recorded after the leveraged buy-out,
to recognize the equity tax as a cost of the period, to write-off certain
expenses which were capitalized or deferred and to recognize deferred tax
assets on all significant temporary differences between the book value and tax
basis of assets and liabilities, in addition to certain other minor
adjustments.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from those
estimates.
INVENTORIES -- Inventories are carried at the lower of cost or market
value, using the weighted average cost method.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated
at cost.
DEPRECIATION -- Depreciation is computed on the cost of the assets using
the straight line method over the estimated useful lives of the assets, as
follows:
Buildings ................................. 1.8%-10%
Machinery and equipment and other ......... 4.5%-25%
LONG-LIVED ASSETS -- Impairments on long lived assets are recorded when
indicators of an other than temporary impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Long-lived assets to be disposed of are recorded at
the lower of cost and net realizable value.
F-44
PETRINI S.P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS -- Goodwill arose from the 1988 leverage buy-out. It
represents the excess of the purchase price over the fair values of tangible and
intangible assets. Amortization is computed on a straight-line basis over 20
years, the estimated future period to be benefited. Trademarks represent the
amount of the purchase price allocated to the "Supermangimi Petrini" tradename
as determined by independent appraisers. Amortization is provided on a straight
line basis over 17 years. Other intangible assets represent primarily patents
and software costs and are amortized over their respective lives, not longer
than five years.
GOVERNMENT GRANTS -- Government grants on new property, plant and equipment
acquired in accordance with Government's plans are recorded when authorized.
Such grants are deferred and are recognized to income on the basis of the
depreciation of the related assets.
REVENUE RECOGNITION -- Revenue from sale of products is recorded when
ownership is transferred to the customers, which is when shipment is made. It is
not Company's policy to accept returns; in specific cases returns are accepted,
however the Company has not experienced any significant amounts of such returns.
Revenue is presented net of returns and net of quantity, cash and other
discounts.
INCOME TAXES -- Income taxes are accounted for under the liability method
and reflect the tax effect of significant temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. A valuation allowance against deferred tax assets is recognized if,
based on the weight of the evidence available, it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
STATEMENTS OF CASH FLOWS -- The Company's short-term borrowings arise
primarily through short-term credit facilities. The short-term borrowings are
normally payable on demand. The cash flows from these items are included under
the caption "Net change in short-term borrowings" in the Statements of Cash
Flows.
INFORMATION EXPRESSED IN U.S. DOLLARS -- The financial statements are
stated in Italian Lire, the currency of the country in which the Company is
incorporated and operates. Translation of Lire amounts into U.S. Dollar amounts
is included solely for the convenience of the readers and has been made at the
rate of Lire 1,887 to U.S.$1, the Noon Buying Rate of the Federal Reserve Bank
of New York at November 23, 1999. Such translation should not be construed as a
representation that the Lire amounts could be converted into U.S. Dollars at
that or any other rate.
EARNINGS PER SHARE ("EPS") -- The EPS for each of the three years in the
period ended December 31, 1998 have been calculated on the basis of the weighted
average number of shares outstanding during the year in accordance with SFAS No.
128 "Earnings per Share".
3. TAXES
V.A.T. Taxes
Taxes receivable of Lire 13,129 at December 31, 1998 and Lire 11,278 at
December 31, 1997 relate principally to V.A.T. taxes for which the Company
periodically receives reimbursement from the V.A.T. office. The V.A.T.
receivable position derives from the fact that the V.A.T. rate applicable to the
products sold by the Company is lower than the average rate applied to its
purchases, costs and expenses.
F-45
PETRINI S.P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
3. TAXES (CONTINUED)
Income Taxes
Income before income taxes and the provision for income taxes consisted of
the following for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
------------- --------- -----------
Income before income taxes .......... 4,416 715 4,395
Provision for income taxes:
Current ............................ (3,580) (476) (1,219)
Deferred ........................... (7) 39 (1,094)
--------- ---- ------
(3,587) (437) (2,313)
-------- ---- ------
Net income .......................... 829 278 2,082
======== ==== ======
A reconciliation between the Italian statutory tax rate and the effective
tax rate is as follows:
1998 1997 1996
-------------------- -------------------- --------------------
AMOUNT % AMOUNT % AMOUNT %
-------- --------- -------- --------- -------- ---------
Tax provision applying the Italian
statutory rate of 41.25% in 1998 and
of 53.2% in 1997 and 1996 ................... 1,822 41.2 380 53.2 2,338 53.2
Permanent differences for non
deductible expenses:
-- for IRPEG -- ILOR ........................ 349 7.9 814 113.8 696 15.8
-- for IRAP (primarily on salaries
and interest) ............................. 1,416 32.1 -- -- -- --
Tax savings resulting from tax
exemptions for ILOR tax purposes ............ -- -- (404) (56.5) (721) (16.4)
Tax legislation to introduce the IRAP
tax and eliminate the ILOR tax .............. -- -- (353) (49.4) -- --
----- ---- ---- ------ ----- ------
Tax provision and effective tax rate ......... 3,587 81.2 437 61.1 2,313 52.6
===== ==== ==== ====== ===== ======
The Italian statutory tax rate for 1997 and 1996 was 53.2% comprised of a
37% national tax ("IRPEG") and 16.2% local tax ("ILOR"). Because a significant
portion of the Company's operations were exempt from ILOR taxes, it has
effectively paid taxes at the 37% tax rate rather than at the statutory rate of
53.2%. A valuation allowance has been recorded at December 31, 1996 and in prior
years to reduce the deferred tax assets, which were calculated on the basis of
the statutory tax rate of 53.2%, to an amount estimated to be recovered at the
rate of 37%, and the deferred tax liabilities for those years have been provided
at the IRPEG tax rate of 37%, the estimated rate at which the taxes would be
paid when the temporary differences reverse.
A tax law to introduce the Regional Tax on Productive Activities ("IRAP")
was enacted in December 1997 which eliminated the ILOR tax (at a statutory rate
of 16.2%) and other indirect taxes and replaced them with IRAP, at a statutory
rate of 4.25%, on a higher taxable income (principally excluding labour costs
and interest), starting on January 1, 1998. The Italian statutory rate for 1998
was 41.25% comprised of 37% IRPEG and 4.25% IRAP. Accordingly, at December 31,
1997, after the new tax law to introduce the IRAP tax and eliminate the ILOR tax
was enacted, existing deferred ILOR tax assets,
F-46
PETRINI S.P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
3. TAXES (CONTINUED)
valuation allowances provided against those deferred tax assets, and liabilities
have been eliminated and deferred tax assets and liabilities have been recorded
based on the estimated IRAP tax rate of 4.25% on temporary differences that will
be included in the computation of IRAP taxes when they reverse in future years.
The tax exemptions granted for the ILOR taxes in prior years will not be
applicable to the computation of the IRAP taxes. The resulting effect of
accounting for the change to introduce IRAP tax in accordance with the new tax
law at December 31, 1997 was to decrease the deferred tax charge to income for
the year then ended by Lire 353. A valuation allowance of Lire 201 and Lire 203
has been provided against the deferred tax assets at December 31, 1998 and 1997
based on estimates made by management assuming that it is more likely than not
that certain deferred tax assets will not be recovered for both IRPEG and IRAP
tax purposes. Principal items comprising net deferred income tax assets as at
December 31, 1998 and 1997 consist of:
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
ASSETS
Step-up and revaluation of property, plant and equipment ............. 5,524 5,680
Step-up of trademark, net ............................................ 1,686 1,656
Goodwill ............................................................. 710 781
Agents' termination indemnity ........................................ 120 119
Allowance for doubtful accounts ...................................... 849 838
Other ................................................................ 349 333
----- -----
Total assets ......................................................... 9,238 9,407
Less valuation allowance ............................................. (201) (203)
----- -----
Net assets ........................................................... 9,037 9,204
LIABILITIES
Gains on sale of assets which for tax purposes, are deferred ......... (467) (627)
Accelerated amortization of trademarks ............................... (2,063) (2,063)
------ ------
Total liabilities .................................................... (2,530) (2,690)
------ ------
Net deferred tax assets .............................................. 6,507 6,514
====== ======
Tax years for the Companies are open from 1993 and are subject to review
pursuant to Italian law. The Company has been subjected to tax reviews in
previous years. Management believes, based on the advice of its tax consultants,
that the final outcome of the tax assessments deriving from such reviews, if
any, will not determine any significant additional liabilities.
As more fully described in Note 11, the payment of a portion of the current
taxes payable have been postponed on the basis of Government decrees.
F-47
PETRINI S.P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
4. INVENTORIES
Inventories consisted of:
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
Raw materials and consumables ......... 17,397 19,502
Work-in-process ....................... 2,255 1,432
Finished goods ........................ 5,469 5,842
------ ------
25,121 26,776
====== ======
5. GOVERNMENT GRANTS
Government grants receivable of Lire 3,244 at December 31, 1997 have been
received in June 1998 principally from the Ministry of Agriculture for an amount
of Lire 2,825 and from the Ministry of Industry for an amount of Lire 346 for
property, plant and equipment acquired in prior years in accordance with the
enacted Government programs.
At December 31, 1998 and 1997 the portion of the grants amounting to Lire
2,402 and Lire 2,587 was deferred and will be recognized to income in future
years, upon depreciation of the related property, plant and equipment.
6. INTANGIBLE ASSETS
Intangible assets consisted of:
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
Goodwill ........................................... 6,560 6,560
Less: accumulated amortization ..................... (3,281) (2,953)
------ ------
3,279 3,607
------ ------
Trademark "Supermangimi" ........................... 9,721 9,721
Less: accumulated amortization ..................... (5,719) (5,198)
------ ------
4,002 4,583
Other intangible assets, at amortized cost ......... 1,107 910
------ ------
Total .............................................. 8,388 9,100
====== ======
7. OTHER ASSETS
Other assets consisted of:
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
Investments ......................................... 1,136 104
Receivable from a subsidiary in liquidation ......... 1,397 681
Advances on employees leaving indemnities ........... 1,543 925
Other ............................................... 1,469 842
----- -----
Total ............................................... 5,545 2,552
===== =====
F-48
PETRINI S.P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
8. SHORT-TERM BORROWINGS
At December 31, 1998 and 1997, Petrini had unsecured short-term lines of
credit aggregating approximately Lire 92,000 and Lire 86,000, respectively, from
banks, of which approximately Lire 40,000 and Lire 33,000, respectively, were
available for further borrowing. At December 31, 1998 and 1997 the weighted
average interest rates for these lines of credit were 4.4% and 6.8%,
respectively. Amounts outstanding under these lines of credits are normally
payable upon demand. Bank borrowings are represented by overdrafts for Lire
49,837 and Lire 49,622, respectively, at December 31, 1998 and 1997 and by lines
of credit for the discounting of "agriculture" drafts (a technical form of
borrowing applicable to the sector in which the Company operates, which is based
on the discounting of drafts) for Lire 2,500 and Lire 3,500, respectively, at
December 31, 1998 and 1997.
F-49
PETRINI S.P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
9. LONG-TERM DEBT
Long-term debt consisted of :
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
Mortgage loans granted from financial institutions and
guaranteed by mortgages on the Company's properties for a
total of Lire 54,000 and Lire 59,000, respectively, at
December 31, 1998 and 1997:
-- Lire 2,150, due March 31, 1998, fixed annual interest rate
of 9.9% .................................................... -- 181
-- Lire 2,340, due November 10, 2000, fixed annual interest
rate of 12.2% .............................................. 789 1,123
-- Lire 2,000 due November 5, 2003, fixed annual interest rate
of 9.3% .................................................... 1,397 1,615
-- Lire 12,000, due June 30, 2000, variable interest 50% based
on State bonds average rate and 50% on three months
LIBOR plus 1.2 (6.2% and 8.3% at December 31, 1998 and
1997, respectively) ........................................ 3,273 5,455
-- Lire 1,000, due June 15, 2004, variable interest based on
the European Bank's discount rate (4.2% and 7.0% at
December 31, 1998 and 1997, respectively) .................. 688 813
-- Lire 5,000, due September 30, 2002, variable interest 50%
based on semiannual Italian Treasury Bonds average rate
and 50% listed bonds average rate plus 1.0 (annual rate of
5.0% and 6.9% at December 31, 1998 and 1997,
respectively) .............................................. 3,077 3,846
-- Various subsidized loans, fixed annual interest, rates
varying from 3.4% to 5.1% .................................. 784 1,026
-- Lire 3,300, due March 31, 2007, variable interest based on
6 months RIBOR plus 1 (5.3% and 7.2% at December 31,
1998 and 1997, respectively) ............................... 3,067 3,300
-- Lire 3,000, due March 31, 1999, variable interest based on
6 months RIBOR plus 0.7 (5.0% and 7.0% at December 31,
1998 and 1997, respectively) ............................... 175 3,000
-- Variable interest rate loans, interest from 4.1% to 5.5% at
December 31, 1998 and from 7.0% to 7.5% at December
31, 1997 ................................................... 2,458 1,249
------ ------
Subtotal ...................................................... 15,708 21,605
Other loans personally guaranteed by one shareholder:
-- Lire 3,000 due March 31, 1998, variable interest based on
the 3 months LIBOR plus 0.5 (6.9% at December 31, 1997) -- 1,000
------ ------
Total long-term debt .......................................... 15,708 22,605
Less current portion .......................................... (4,266) (8,107)
------ ------
Long-term debt, long-term portion ............................. 11,442 14,498
====== ======
F-50
PETRINI S.P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
9. LONG-TERM DEBT (CONTINUED)
The loans that are subsidized by the Italian Government were obtained under
a Government program for new investments. The interest paid by Italian
Government, amounted to Lire 65 in 1998, Lire 85 in 1997 and Lire 79 in 1996,
respectively. These subsidies reduced the effective interest rates applicable to
these loans from 12.7% to 4.1% in 1998, from 11.6% to 3.4% in 1997 and from
14.6% to 4.2% in 1996. The dates of payment of certain loan installments due to
Medio Credito dell'Umbria in the period June 1997 -- June 1998, following the
earthquake of September 1997, have been postponed The amount of the postponed
payments amount to Lire 2,458 at December 31, 1998 and are to be reimbursed
three years after the original due dates.
Maturities of long-term debt are as follows:
YEAR AMOUNT
- ---- ---------
1999 .................. 4,266
2000 .................. 4,239
2001 .................. 2,744
2002 .................. 1,588
2003 .................. 877
Thereafter ............ 1,994
-----
Total ................. 15,708
======
10. EMPLOYEES AND AGENTS TERMINATION INDEMNITIES
The liability for termination indemnities relates principally to the
Company's employees. In accordance with Italian severance pay statutes, an
employee benefit is accrued for service to date and is payable immediately upon
separation. The termination indemnity liability is calculated in accordance with
local civil and labour laws based on each employee's length of service,
employment category and remuneration. The termination liability is adjusted
annually by a cost-of-living index provided by the Italian Government. There is
no vesting period or funding requirement associated with the liability.
The liability recorded in the balance sheet is the amount to which the
employee would be entitled if the employee separates immediately. The liability
for termination indemnities includes also the liability to the sales agents,
which is recognized to the agent if unilaterally dismissed by an employer or
when he reaches retirement age.
The provision for termination indemnities charged to operations amount to
Lire 2,167, Lire 2,550 and Lire 2,374 in the years 1998, 1997 and 1996
respectively.
F-51
PETRINI S.P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
11. SOCIAL CONTRIBUTIONS AND INCOME TAXES PAYABLE
These non current liabilities consist of social contribution and income
taxes due by the Company whose payment has been postponed beyond 1999 in
application of the Government decrees enacted after the earthquake that hit the
area where the headquarters and the major production activities of the Company
are located. The components of these liabilities are:
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- -------------
Income taxes ................. 958 817
Social contributions ......... 3,778 1,656
----- -----
Total ........................ 4,736 2,473
===== =====
12. SHAREHOLDERS' EQUITY
Italian law requires that 5% of a company's net income be retained as a
legal reserve, until such reserve equals 20% of the share capital. This reserve
is not available for distribution.
Retained earnings or other equity accounts are available for distribution
only if recorded in the Italian official books. At December 31, 1998 balances
distributable to the shareholders amount to approximately Lire 10,000 and are
principally represented by surplus arising from revaluations of fixed assets and
from Government grants both of which are taxable upon distribution. No deferred
taxes of Lire 4,121 have been provided for on such accounts because it is not
management's intent to distribute such amounts and because the revaluations were
effected and the grants were received all prior to December 15, 1992, the
effective date for applying existing U.S. accounting standards with respects to
accounting for income taxes.
13. COMMITMENTS AND CONTINGENCIES
Commitments
Commitments of Lire 2,633 and Lire 3,215 at December 31, 1998 and 1997,
respectively, include principally guarantees given to banks for discounting of
customers' drafts.
Contingencies
The Company provides for costs related to contingencies when a loss is
probable and the amount is reasonably determinable. The amount provided for at
December 31, 1998 and 1997 is Lire 100. It is the opinion of management that the
ultimate resolution of these matters, to the extent not currently provided for,
will not have a material effect on the financial statements of the Company.
Modifications to General Regulatory Plan ("GRP") of the City Council of Bastia
Umbra
The City Council of Bastia Umbra on December 21, 1996 approved a
modification to its GRP, changing the purpose of use of the areas currently
utilized by Petrini for its production activities preventing the continuation of
such activities in Bastia. Petrini presented to the City Council its
observations and comments on such proposed modifications asking to continue its
production activities in the area currently occupied by its factory or,
alternatively, asking for the authorization to transfer its production
facilities to another own area in Ospedalicchio. On September 4, 1999 the City
Council published its decision of May 17, 1999 to reject the request of Petrini
to maintain its production activities in Bastia, while approved the change of
the purpose of use of the area in Ospedalicchio (from agricultural to
industrial) in order to make possible the transfer of the factory. The decision
of the City Council has to be approved by Regione Umbria.
F-52
PETRINI S.P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In the event the modification be definitely approved by the Region, without
changes, and no legal actions could be initiated by Petrini, the entire factory
of Bastia must be tranferred and the Company will be indemnified. Although the
Directors believe that the modification will not be approved without changes,
and accordingly such transfer will not be necessary, they have initiated to
study and evaluate the possible alternatives, which include the construction or
the acquisition of another factory. The Company has already started the
procedures to obtain subsidies of Law 488. The Directors estimate that, due to
the time frame required by the public entities to make effective their
decisions, the actual transfer will take place at least after two years from the
date on which the final decision will be taken. The Directors believe that the
transfer of the production activities will not have a significant impact on the
Company's financial statements.
14. CONCENTRATION OF CREDIT RISK
Concentration of credit risk and the risk of accounting loss with respect
to trade accounts receivable is generally limited due to the number and
diversity of the Company's end customer base and the areas and the markets in
which the customers are located. The Company performs frequent credit
evaluations of its customers' financial condition and normally does not require
collateral from its customers. Net direct sales to any one customer did not
exceed 5% of total direct sales in each of the three years in the period ended
December 31, 1998. As of December 31, 1998, accounts receivable from the largest
customer does not exceed 10% of total accounts receivable.
Cash deposits are maintained with major banks in Italy.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
-- Cash, accounts receivable and accounts payable: the carrying amount
reported in the balance sheet approximates its fair value.
-- Long-term debt and short-term borrowings: the carrying amount of the
Company's borrowing under its short-term revolving credit arrangements
approximates their fair value. The fair values of the Company's
long-term debt are estimated using cash flow analysis, based on the
Company's current borrowing rates for similar types of borrowing
arrangements.
The carrying amounts of the Company's financial instruments at December 31,
1998 and 1997 approximate their fair value.
F-53
PETRINI S.P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
16. INFORMATION BY SEGMENT
The Company manages its business on a segment basis. The significant
segments operated by the Company consist of: i) pasta and other food products
and ii) animal feed and other activities. Information relative to significant
segments is reported below for the years 1998, 1997 and 1996. The Company
evaluates performance of the segments based on EBITDA and income from
operations. The accounting policies of the segment are substantially the same as
those described in Note 2 Significant Accounting Policies.
ANIMAL
PASTA AND FEED AND
OTHER FOOD OTHER TOTAL
PRODUCTS ACTIVITIES COMPANY
------------ ------------ ----------
1998
Total revenue .................................... 71,163 195,144 266,307
Depreciation and amortization .................... 1,251 4,367 5,618
EBITDA ........................................... 2,309 11,801 14,110
Income from operations ........................... 1,058 7,434 8,492
Identifiable long-term assets (property, plant and
equipment and intangibles) ...................... 12,073 47,927 60,000
Capital expenditures ............................ 850 2,713 3,563
1997
Total revenue .................................... 73,125 221,734 294,859
Depreciation and amortization .................... 1,199 4,119 5,318
EBITDA ........................................... 2,458 9,791 12,249
Income from operations ........................... 1,259 5,672 6,931
Identifiable long-term assets (property, plant and
equipment and intangibles) ...................... 12,983 48,775 61,758
Capital expenditures ............................. 1,060 3,690 4,750
1996
Total revenue .................................... 75,854 244,438 320,292
Depreciation and amortization .................... 1,160 3,892 5,052
EBITDA ........................................... 3,410 13,089 16,499
Income from operations ........................... 2,250 9,197 11,447
Identifiable long-term assets (property, plant and
equipment and intangibles) ...................... 12,957 49,568 62,525
Capital expenditures ............................. 1,560 7,144 8,704
Export sales by the Company from Italy, all related to pasta and other
food products were as follows:
COUNTRY -- REGION 1998 1997 1996
- ------------------ -------- -------- --------
Europe ........................................... 3,256 3,238 2,054
U.S.A. ........................................... 1,442 2,219 2,739
Japan ............................................ 4,948 5,311 5,562
Rest of the world ................................ 5,532 5,235 5,420
----- ----- -----
Total ............................................ 15,178 16,003 15,775
====== ====== ======
F-54
PETRINI S.P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(IN MILLIONS OF ITALIAN LIRE UNLESS OTHERWISE SPECIFIED)
17. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
PERIOD EXPENSES DEDUCTIONS END OF PERIOD
-------------- ----------- ------------ --------------
Year ended December 31, 1998:
Allowance for doubtful accounts ......... 2,646 1,391 1,351 2,686
===== ===== ===== =====
Year ended December 31, 1997:
Allowance for doubtful accounts ......... 2,633 982 969 2,646
===== ===== ===== =====
Year ended December 31, 1996:
Allowance for doubtful accounts ......... 2,561 1,178 1,105 2,633
===== ===== ===== =====
18. SUBSEQUENT EVENTS
In the Company's factories the activities of loading, unloading and
cleaning are performed by personnel belonging to workers' co-operatives. Such
independent legal entities provide their services to the Company on the basis of
specific contracts. In 1999, to limit the risks connected to the eventual future
request of the workers to be recognized as employees of the Company, management,
under a conservative approach, has underwritten agreements with such personnel,
approved by the trade unions, where it is declared that the workers renounce to
the request to be recognized as employees for all prior years of service.
F-55
{THIS PAGE INTENTIONALLY BLANK]
ANNEX A
STOCK PURCHASE AGREEMENT
DATED
NOVEMBER 3, 1999
BY AND BETWEEN
GRUPPO SPIGADORO, N.V.,
AND
IAT MULTIMEDIA, INC.
{THIS PAGE INTENTIONALLY LEFT BLANK]
TABLE OF CONTENTS
PAGE
-----
ARTICLE I ................................................................. A-1
Section 1.1 Certain Definitions ................................ A-1
Section 1.2 Interpretation ..................................... A-3
ARTICLE II ................................................................ A-3
Section 2.1 Purchase and Sale of Stock ......................... A-3
Section 2.2 Purchase Price ..................................... A-3
Section 2.3 Purchase Price Adjustment .......................... A-3
Section 2.4 Closing ............................................ A-4
Section 2.5 Deliveries and Actions at Closing .................. A-4
ARTICLE III ............................................................... A-4
Section 3.1 Organization and Qualification of the Company ...... A-4
Section 3.2 Organization and Qualification of Spigadoro ........ A-4
Section 3.3 Authorization; Execution and Delivery; A-4
Enforceability .....................................
Section 3.4 Non-Contravention .................................. A-5
Section 3.5 No Consents ........................................ A-5
Section 3.6 Capitalization ..................................... A-5
Section 3.7 Title to the Shares ................................ A-5
Section 3.8 Options, Warrants, etc. ............................ A-5
Section 3.9 Real Property ...................................... A-5
Section 3.10 No condemnation ................................... A-6
Section 3.11 Inventory ......................................... A-6
Section 3.12 Financial Statements; Books & Records ............. A-7
Section 3.13 Absence of Certain Developments ................... A-7
Section 3.14 Governmental Authorizations; Licenses; Etc. ....... A-8
Section 3.15 Litigation ........................................ A-8
Section 3.16 Taxes ............................................. A-8
Section 3.17 Insurance ......................................... A-9
Section 3.18 Environmental Matters ............................. A-9
Section 3.19 Employee Matters .................................. A-10
Section 3.20 Intellectual Property ............................. A-11
Section 3.21 Contracts ......................................... A-11
Section 3.22 Title to the Property and Assets .................. A-12
Section 3.23 Condition of Assets ............................... A-12
Section 3.24 Customers and Suppliers ........................... A-12
Section 3.25 Brokers ........................................... A-12
Section 3.26 Absence of Questionable Payments .................. A-12
Section 3.27 Transactions with Affiliates ...................... A-12
Section 3.28 Registration Statement; Prospectus/Proxy Statement A-13
Section 3.29 Year 2000 ......................................... A-13
Section 3.30 Indemnity under 1998 Stock Agreement .............. A-13
Section 3.31 Full Disclosure ................................... A-13
i
ARTICLE IV ............................................................... A-14
Section 4.1 Organization and Qualification .................... A-14
Section 4.2 Authorization; Execution and Delivery; A-14
Enforceability ......................... ..........
Section 4.3 Capitalization of the Purchaser ................... A-14
Section 4.4 Non-Contravention ................................. A-15
Section 4.5 No Consents ....................................... A-15
Section 4.6 Board Recommendation .............................. A-15
Section 4.7 Registration Statement; Prospectus/Proxy Statement A-15
Section 4.8 SEC Filings ....................................... A-15
Section 4.9 Opinions of Financial Advisors .................... A-16
Section 4.10 Brokers .......................................... A-16
ARTICLE V ................................................................ A-16
Section 5.1 Access and Information ............................ A-16
Section 5.2 The Seller's Affirmative Covenants ................ A-17
Section 5.3 Purchaser's Affirmative Covenants ................. A-17
Section 5.4 The Seller's Negative Covenants ................... A-18
Section 5.5 Purchaser's Negative Covenants .................... A-19
Section 5.6 Closing Documents ................................. A-19
Section 5.7 Transfer and Other Taxes .......................... A-19
Section 5.8 Employment Agreements ............................. A-20
Section 5.9 Public Announcements .............................. A-20
Section 5.10 Purchaser Special Meeting ......................... A-20
Section 5.11 Preparation of the Prospectus/Proxy Statement and
the Registration Statement ........................ A-20
Section 5.12 Nasdaq Listing ................................... A-21
Section 5.13 Non-Competition and Confidentiality Agreement .... A-21
Section 5.14 Best Efforts; Further Assurances ................. A-21
Section 5.15 Third Party Proposals ............................ A-21
Section 5.16 Hart-Scott-Rodino Filings ........................ A-22
Section 5.17 Affiliates of the Company ........................ A-22
Section 5.18 Purchaser's Post Closing Covenants ............... A-22
Section 5.19 Financial Statements for a Current Report on Form A-23
8-K .............................................. A-23
ARTICLE VI ............................................................... A-23
Section 6.1 Conditions to the Obligations of Each Party ....... A-23
Section 6.2 Conditions to the Purchaser's Obligations ......... A-24
Section 6.3 Conditions to the Seller's Obligations ............ A-25
ARTICLE VII .............................................................. A-26
Section 7.1 Termination and Amendment ......................... A-26
Section 7.2 Effect of Termination ............................. A-27
Section 7.3 Amendment ......................................... A-27
Section 7.4 Extension; Waiver ................................. A-27
ARTICLE VIII ............................................................. A-27
Section 8.1 Survival of Representations and Warranties ........ A-27
Section 8.2 Indemnification ................................... A-27
Section 8.3 Procedures for Third Party Claims ................. A-28
Section 8.4 Procedures for Inter-Party Claims ................. A-28
ii
ARTICLE IX .............................................................. A-29
Section 9.1 Notices ............................................ A-29
Section 9.2 Expenses ........................................... A-29
Section 9.3 Governing Law; Consent to Jurisdiction ............. A-29
Section 9.4 Assignment; Successors and Assigns; No Third Party
Rights ............................................. A-30
Section 9.5 Counterparts ....................................... A-30
Section 9.6 Titles and Headings ................................ A-30
Section 9.7 Entire Agreement ................................... A-30
Section 9.8 Waiver ............................................. A-30
Section 9.9 Severability ....................................... A-30
Section 9.10 No Strict Construction ............................. A-30
EXHIBITS
Exhibit A - Affiliate Letter
iii
DEFINED TERMS
-------------
TERM SECTION
- ---------------------------------- -------------
Accountants Section 3.12
Acquisition Proposal Section 5.15
Additional Shares Section 2.3
Affiliate Letter Section 5.17
Amended and Restated Certificate Section 4.1
Antitrust Division Section 5.16
Assumed Debt Section 2.2
Capital Stock Section 3.6
Closing Section 2.3
Closing Date Section 2.3
Common Stock Section 2.1
Company Recitals
Damages Section 8.2
Employee Benefit Plans Section 3.19
Environmental Laws Section 3.18
Environmental Permits Section 3.18
Financial Statements Section 3.12
FTC Section 5.16
Indemnifying Party Section 8.2
Intellectual Property Rights Section 3.20
Inventory Section 3.11
Leased Properties Section 3.19
Majority Interest Recitals
Material Contracts Section 3.21
Minority Interest Recitals
New Employment Agreements Section 5.8
1998 Stock Agreement Section 3.30
Owned Properties Section 3.9
Prospectus/Proxy Statement Section 3.28
Purchase Price Section 2.2
Purchaser Heading
Purchaser Common Stock Section 2.2
Purchaser Preferred Stock Section 4.3
Purchaser SEC Reports Section 4.8
Purchaser Special Meeting Section 3.28
Registration Statement Section 3.28
Report Section 5.16
Seller Heading
Shares Section 2.1
Spigadoro Heading
Tax Return Section 3.16
Third Party Claim Section 8.3
U.S. Subsidiary Section 3.16
Year 2000 Compliant Section 3.29
iv
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of November 3, 1999, by and between
Gruppo Spigadoro N.V., a corporation organized under the laws of The
Netherlands, with a registered office in Amsterdam, Strawinskylaan 1725, 1077 XX
and registered with the Chamber of Commerce and Industry of Amsterdam under no.
24286977 ("Spigadoro" or the "Seller") and IAT Multimedia, Inc., a Delaware
corporation (the "Purchaser").
W I T N E S S E T H:
WHEREAS, the Seller is the legal and beneficial owner of 67% (the "Majority
Interest") of the issued and outstanding capital stock of Petrini S.p.A., a
corporation organized under the laws of Italy (the "Company"); and
WHEREAS, the Seller holds an exclusive option to acquire the remaining 33%
(the "Minority Interest") of the issued and outstanding capital stock of the
Company from the bankruptcy of F.lli Pardini S.pA.; and
WHEREAS, the Seller desires to sell and transfer to the Purchaser, and the
Purchaser desires to purchase from the Seller, all of the outstanding shares of
capital stock of the Company, all as more specifically provided herein; and
WHEREAS, the Board of Directors and the Special Committee of the Board of
Directors of the Purchaser have determined that the transactions contemplated
herein are desirable and in the best interests of its respective stockholders
and, by resolutions duly adopted, have approved and adopted this Agreement and
the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
and intending to be legally bound, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. Certain Definitions. As used in this Agreement, the following
terms have the respective meanings set forth below.
"Affiliate" means, with respect to any Person, any other Person who
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such Person. The term "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise, and the terms
"controlled" and "controlling" have meanings correlative thereto, provided that
in the case of the Seller, the term Affiliate shall not include the Company.
"Applicable Laws" means all applicable laws, statutes, orders, rules,
regulations, policies or guidelines promulgated, or judgments, decisions or
orders entered, by any Governmental Authority.
"Authorization" means any governmental license, permit, concession,
application, filing, registration and other authorization necessary for the
Company or for any Subsidiary to carry on the Business as presently or
previously conducted or for the ownership or use of its property and assets.
"Books and Records" means all technical, business and financial records,
(including those which are relevant from a tax viewpoint) financial books and
records of account, books, data, reports, files, drawings, plans, briefs,
customer and supplier lists, deeds, certificates, contracts, surveys, or any
other documentation and information in any form whatsoever (including written,
printed, electronic or computer printout form) relating to the Company and its
Subsidiaries.
"Buildings and Fixtures" means all plant, buildings, structures,
erections, improvements, appurtenances and fixtures (including fixed machinery
and fixed equipment) situated on the Owned Properties or the Leased Properties
or any of them as the context requires.
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"Business" means, collectively, the businesses presently and heretofore
carried on by the Company and its Subsidiaries and in particular the activities
in the agricultural and food market related to the pasta production,
zootechnics feeds, distribution of foodstuffs and certain breeding activities.
"Business Day" means a day, other than a Saturday or Sunday, on which
commercial banks in New York are open for the general transaction of business.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company Material Adverse Change" means a material adverse change in the
Business, financial condition, results of operations or prospects (financial
and other) of the Company and its subsidiaries taken as a whole.
"Commission" means the United States Securities and Exchange Commission.
"Environmental Laws" means any European regulation, directive or decision
and any Italian law, ordinance, rule, regulation, license, permit,
authorization, approval, consent, court order, directives, judgment, decree,
injunction, code, requirement or agreement with any Governmental Authority, (x)
relating to pollution (or the cleanup thereof or the filing of information with
respect thereto), human health or the protection of air, surface water, ground
water, drinking water supply, land (including land surface or subsurface),
plant and animal life or any other natural resource, or (y) concerning exposure
to, or the use, storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production or disposal of Polluting Substances,
in each case as amended and as now or hereafter in effect.
"Exchange Act" means the Securities and Exchange Act of 1934, as amended.
"Governmental Authority" means any United States, European or national,
provincial, regional, municipal or local government, foreign or domestic, or
any entity, court, authority, agency, ministry or other similar body exercising
executive, legislative, judicial, regulatory or administrative authority or
functions of or pertaining to government.
"HSR Act" means the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976,
as amended.
"Italian GAAP" means generally accepted Italian accounting principles as
in effect in the Republic of Italy on the date of this Agreement recommended by
the "Consigli Nazionali dei Dottori Commercialisti e dei Ragionieri" and the
accounting principles and rules set out in the Italian Civil Code applied
consistently with past practice.
"Liens" means any pledge, claim, defect of title, mortgage, liens of any
kind, restriction including, without limitation, restriction of the use,
voting, transfer, receipt of income or other attributes of full ownership and
any third parties rights including, without limitation, options and preemption
rights.
"Loans" means those agreements (written or oral) of the Company and its
Subsidiaries for the borrowing of funds or the granting of credit, including,
without limitation, letters of credit and guarantees with any Person.
"Material Contracts" is defined in Section 3.21 hereof.
"Person" means an individual, partnership, corporation, joint stock
company, unincorporated organization or association, trust or joint venture, or
consortia (including, without limitation, pure consortia, mandatory consortia
or societa consortili).
"Polluting Substances" means pollutants, contaminants, hazardous or toxic
substances, compounds or related materials or chemicals, hazardous materials,
hazardous waste, flammable explosives, radon, radioactive materials, asbestos,
urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum and
petroleum products (including, but not limited to, waste petroleum and petroleum
products) as regulated under applicable Environmental Laws.
"Proprietary Information" means the know-how and trade secrets owned,
licensed, or utilized by the Company and/or its subsidiaries.
"Purchaser Material Adverse Change" means a material adverse change in the
business, financial condition, results of operations or prospects (financial and
other) of Purchaser and its subsidiaries taken as a whole.
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"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary" means with respect to any Person, any corporation, limited
liability company or partnership of which such Person owns, either directly or
indirectly, (a) more than 50% of (i) the total combined voting power of all
classes of voting securities of such corporation or (ii) the capital or profit
interests therein in the case of a partnership; (b) or otherwise has the power
to vote or direct the voting of sufficient securities to elect a majority of the
board of directors or similar governing body of a Person.
"Taxes" means any tax, imposed by or payable to any Governmental Authority
any income, gross receipts, license, payroll, employment, excise, severance,
stamp, business, occupation, premium, windfall profits, environmental (including
without limitation taxes under section 59A of the Code), capital stock,
franchise, profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, or value added tax, any alternative or add on minimum tax, any
estimated tax, and any levy, impost, duty, assessment, withholding or any other
governmental charge of any kind whatsoever, in each case including any interest,
penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"U.S. GAAP" means generally accepted accounting principles as in effect in
the United States on the date of this Agreement.
Section 1.2. Interpretation. Unless otherwise indicated to the contrary
herein by the context or use thereof: (i) the words, "herein," "hereto,"
"hereof" and words of similar import refer to this Agreement as a whole and not
to any particular Section or paragraph hereof; (ii) words importing the
masculine gender shall also include the feminine and neutral genders, and vice
versa; and (iii) words importing the singular shall also include the plural, and
vice versa.
ARTICLE II
PURCHASE AND SALE OF STOCK;
ADDITIONAL COVENANTS
Section 2.1. Purchase and Sale of Stock. Upon the terms and subject to the
conditions of this Agreement and on the basis of the representations, warranties
and agreements contained herein, at the Closing (as defined in Section 2.3), the
Seller shall sell, assign, transfer, convey and deliver to the Purchaser an
aggregate of 40,700,000 shares of the capital stock of the Company ("Common
Stock"), constituting all of the issued and outstanding shares (represented by
the certificates described on Schedule 3.6) of the Company's capital stock (the
"Shares"), and the Purchaser shall purchase such Shares from the Seller for the
consideration described in Section 2.2 hereof.
Section 2.2. Purchase Price. The purchase price for the Shares (the
"Purchase Price") shall be equal to and paid for through the (i) issuance and
delivery of an aggregate of 47,354,465 shares of common stock, par value $.01
per share, of the Purchaser ("Purchaser Common Stock") and (ii) the assumption
by the Purchaser of indebtedness of the Seller in the principal amount not to
exceed Twenty Million Four Hundred Eighty Seven Thousand Dollars (US
$20,487,000) by way of the issuance of the promissory notes described on
Schedule 2.2 (the "Assumed Debt"). At the Closing, the Purchaser shall pay the
Purchase Price by issuing and delivering to the Seller (i) a stock certificate
or certificates, registered in accordance with instructions received from Seller
not less than three business days before the Closing, representing an aggregate
of 47,354,465 shares of Purchaser Common Stock and (ii) the promissory notes
representing the Assumed Indebtedness.
Section 2.3. Purchase Price Adjustment.
(a) If on or before the Closing, the Purchaser issues any shares of
Purchaser Common Stock (or securities convertible into Purchaser Common Stock)
to a third party without consideration or for a consideration less than US
$2.50, the Purchaser shall, within the later of the date of the Closing or 10
days
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following the date of such issuance, issue to Seller such number of additional
shares of Purchaser Common Shares as shall equal the product of (i) 0.82
multiplied by (ii) the difference between (A) the number of shares issued in the
third party transaction and (B) the quotient obtained by dividing (x) the
consideration received by the Purchaser in respect of such third party issuance
by (y) the per share Fair Market Value of the Purchaser Common Stock on the date
of such issuance, provided however, that the anti-dilution protection of this
Section 2.3 shall apply to the conversion of Purchaser's Series A Convertible
Debenture whether such conversion occurs before or after the Closing. For
purposes of this Section 2.3, Fair Market Value prior to the Closing of the
transactions contemplated hereunder shall be deemed to be US $2.50 and
thereafter shall be the average closing price reported by the primary stock
market or exchange on which the Purchaser Common Stock is traded for the five
(5) trading days prior to the conversion date.
(b) The number of shares so delivered under (a) above shall be further
adjusted by the Board of Directors of Purchaser or, an authorized committee
thereof, to reflect any issuance of new stock, stock dividend, common stock
split, share combination, exchange of shares, merger, consolidation,
recapitalization, separation, reorganization, liquidation or extraordinary
dividend or similar transaction occurring prior to Closing payable in stock of
Purchaser all for the purpose of providing dilution protection for Seller.
Section 2.4. Closing. The closing of the transactions contemplated hereby
(the "Closing") shall take place, subject to the satisfaction or waiver of the
conditions set forth in Article VI hereof, at the offices of Lowenstein Sandler
PC, 65 Livingston Avenue, Roseland, New Jersey, at 10:00 a.m. within five
Business Days of the satisfaction or waiver of the conditions set forth in
Article VI, or at such other time and place as is mutually agreed by the
Purchaser and the Seller. The time and date of the Closing is herein called the
"Closing Date".
Section 2.5. Deliveries and Actions at Closing. At the Closing, Seller
shall (i) endorse in favor of and deliver to Purchaser the certificates of the
Company representing the Shares free and clear of any Liens and (ii) cause a
member of the board of directors of the Company to enter the transfer of the
Shares to Purchaser in the shareholders' ledger of the Company, and the
Purchaser shall issue the promissory notes representing the Assumed
Indebtedness.
ARTICLE III
REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY AND THE SELLER
The Seller represents and warrants to the Purchaser that, except as set
forth in the Schedules hereto:
Section 3.1. Organization and Qualification of the Company. The Company and
each of its Subsidiaries are companies duly incorporated, validly existing and
in good standing under the laws of the jurisdiction of their organization and
have full corporate power and authority to own their property and to carry on
their business as now conducted. The Company and its Subsidiaries are each duly
qualified to do business in all jurisdictions in which the nature of their
assets or their business makes such qualification necessary. Correct and
complete copies of the certificates of incorporation and of the current by-laws
of the Company and each of its Subsidiaries are attached to Schedule 3.1.
Neither the Company nor any of its Subsidiaries are in violation of any
provisions of their respective organizational documents. The business of the
Company is conducted solely through the Company and its Subsidiaries.
Section 3.2. Organization and Qualification of Spigadoro. The Seller is a
corporation duly organized, validly existing and in good standing under the laws
of the Netherlands, with full power and authority, corporate and other, to own
or lease its property and assets and to carry on its business as presently
conducted.
Section 3.3. Authorization; Execution and Delivery; Enforceability. The
Seller has full power and authority, corporate and other, to execute and deliver
this Agreement and to perform its obligations hereunder, all of which have been
duly and validly authorized by all requisite corporate or other action. This
Agreement has been duly authorized, executed and delivered by the Seller and
constitutes a valid and binding agreement of the Seller, enforceable against the
Seller in accordance with its terms, subject
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to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors'
rights and to general equity principles.
Section 3.4. Non-Contravention. The execution and delivery of this
Agreement by the Seller and the consummation of the transactions contemplated
hereby will not result in: (a) the breach or violation of any of the provisions
of, or constitute a default under, or conflict with or cause the acceleration
of, any obligation of the Company or of any of it's Subsidiaries, under: (i) any
Material Contract; (ii) any Authorization; (iii) any provision of the
constituent documents, by-laws or resolutions of the board of directors (or any
committee thereof) or of the shareholders of the Company or any of its
Subsidiaries; (iv) any judgment, injunction, decree, order or award of any
Governmental Authority having jurisdiction over the Company or any of its
Subsidiaries, having a material effect on the transactions contemplated herein;
(v) any license, permit, approval, consent or authorization necessary to the
ownership or disposition of the Shares and the operation of the Business; or
(vi) any Applicable Law; or (b) the creation or imposition of any Lien on any of
the Shares.
Section 3.5. No Consents. Except for the consents and approvals set forth
in Schedule 3.5, no declaration or filing with any Governmental Authority is
required to be obtained or made on the part of the Seller, the Company or of any
of its Subsidiaries in connection with the execution and delivery of this
Agreement by the Seller and the consummation of the transactions contemplated
hereunder.
Section 3.6. Capitalization. The authorized and issued capital stock of the
Company is equal to Lit. 40,700,000,000 and the shares of the Company which are
issued and outstanding are 40,700,000, Lit. 1,000 par value each (the "Capital
Stock"), and the Persons owning the Capital Stock are: the Seller and the
bankruptcy of F.lli Pardini SpA. All such issued and outstanding shares have
been duly authorized and validly issued and are fully paid and are owned as
indicated above and are represented by the share certificates listed under
Schedule 3.6. Except as set forth in the Company's bylaws, there are no
pre-emptive or other subscription rights with respect to any shares of the
Company's Capital Stock and all of the issued and outstanding shares of Capital
Stock of the Company have been duly authorized, validly issued, are fully paid
and are nonassessable, and were issued in compliance with all applicable
securities laws and without violating any preemptive rights. Except for the
Subsidiaries, the Company does not directly or indirectly own any interest in
any corporation, partnership, limited liability company, joint venture or other
business association or entity.
Section 3.7. Title to Shares. Except as set forth in Schedule 3.7, the
shares representing the Majority Interest are owned by the Seller as the
registered and beneficial owner thereof with a good and valid title thereto. As
of the Closing Date, Seller will also be the registered and beneficial owner of
the shares representing the Minority Interest with a good and valid title
thereto. The delivery of the Shares at the Closing by the Seller to the
Purchaser pursuant to the provisions hereof will transfer to the Purchaser good
and valid title to all of the issued and outstanding capital stock of the
Company, free and clear of all Liens, options, charges and encumbrances of any
kind. As of the Closing, all existing Liens shall have been removed.
Section 3.8. Options, Warrants, etc. As of the Closing, no Person other
than the Purchaser will have any option, warrant, right, call, commitment,
conversion right, right of exchange or other agreement (written or oral) or any
right or privilege (whether by law, preemptive or contractual) capable of
becoming an option, warrant, right, call, commitment, conversion right, right of
exchange or other agreement (i) for the purchase from the Seller, the Company or
its Subsidiaries of any shares of the Companyor any of its Subsidiaries, (ii)
for the purchase, subscription or issuance of any unissued shares in the capital
of the Company or in the capital of any of its Subsidiaries of any securities of
the Company and of any of its Subsidiaries and (iii) for the voting of any of
the Shares.
Section 3.9. Real Property.
(a) Schedule 3.9 sets forth a complete list of all real property and
interests in real property owned in fee by the Company and its Subsidiaries
("Owned Properties"). Except as set forth in Schedule 3.9, each of the Company
and its Subsidiaries has good and marketable title to its interest in the Owned
Properties, free and clear of all Liens.
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(b) Except as set forth in Schedule 3.9, neither the Company or any of its
Subsidiaries is the owner of, or under any agreement or option to own, any real
property or any interest therein, other than the Owned Properties.
(c) Except as set forth in Schedule 3.9, all of the Buildings and Fixtures
on the Owned Properties were built in accordance with all Applicable Laws and
with all required authorizations validly issued pursuant thereto. Except as set
forth in Schedule 3.9, all of the Buildings and Fixtures on the Owned Properties
and the Leased Properties: (i) are in good operating condition and in a state of
good maintenance and repair, except for normal wear and tear; and (ii) are
adequate and suitable for the purposes for which they are presently being used;
and (iii) with respect to each of them, the Company and its Subsidiaries have
adequate rights of ingress and egress for the operation of their business in the
ordinary course. None of the Owned Properties or the Buildings and Fixtures
thereon, nor the use, operation or maintenance thereof for the purpose of
carrying on the Business, violates any restrictive covenant or any provision of
any Applicable Law or encroaches on any property owned by any other Person and
the same is the case regarding the Leased Properties.
(d) Except as set forth in Schedule 3.9, there are no outstanding work
orders with respect to any of the Owned Properties, the Leased Properties or the
Buildings or Fixtures thereon, from or required by any municipality, police
department, fire department, sanitation, health or safety authorities or from
any other Person and there are no matters under discussion with or by the
Company or its Subsidiaries relating to work orders.
(e) Schedule 3.9 contains a true, complete, and correct list of the
building amnesties duly filed by the Companies and its Subsidiaries, in
compliance with the Applicable Laws, with respect to Buildings, Fixtures and
Owned Properties. Except as set forth in Schedule 3.9, all the amounts due in
connection with such amnesties indicated under this subsection (e) have been
fully paid and no further obligations are pending towards the relevant
Governmental Authority and no claims have been filed or are expected to be filed
by such Governmental Authority.
(f) Schedule 3.9 sets forth a complete list of all real property and
interests in real property leased by the Company and its Subsidiaries ("Leased
Properties"), together with a brief description of each of the Leased
Properties, the term of each Leased Property, the rental payments thereunder,
any rights of renewal and the term thereof and any restrictions on assignment
concerning the Company and its Subsidiaries. Except as set forth in Schedule
3.9, none of the Company or its Subsidiaries are a party to, or under any
agreement or option to become a party to, any lease with respect to real
property used or to be used in the Business, other than the Leased Properties.
Each Leased Property is in good standing, creates a good and valid leasehold
estate in the Leased Properties thereby demised and is in full force and effect
without amendment thereto. Except as set forth in Schedule 3.9, with respect to
each Leased Property (i) all rents and additional rents due thereunder have been
paid; (ii) neither the lessor nor the lessee is in material default thereunder;
(iii) no waiver, indulgence or postponement of the lessee's obligations
thereunder has been granted by the lessor; (iv) there exists no event of default
or event, occurrence, condition or act (including, without limitation, the
purchase of the Shares) which, with the giving of notice, the lapse of time or
the happening of any other event or condition, would become a default under any
such Leased Properties; (v) neither the Company nor its Subsidiaries have
violated any of the terms or conditions under any such Leased Properties in any
material respect; and (vi) all of the covenants to be performed by any other
party under any such Leased Properties have been fully performed.
Section 3.10. No Condemnation. Except as set forth in Schedule 3.10,
neither the whole nor any portion of the Owned Property or Leased Property is
subject to any governmental decree or order to be sold nor have any proceedings
for the condemnation, expropriation or other taking of all or any portion of the
Owned Property or Leased Property been instituted or, to the Seller's best
knowledge, threatened by any Governmental Authority, with or without payment
therefor.
Section 3.11. Inventory. Except for such items which, in the aggregate, are
not material to the Company or its Business, all raw material inventories,
warehouse stock, parts, inventories, material, supplies, work-in-process and
finished products, including without limitation, packaging and shipping
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materials (the "Inventory") used or held for sale by the Company and its
Subsidiaries are good and merchantable and of a quantity and quality usable and
saleable in the regular and ordinary course of business consistent with past
practices at prices at least equal to their value on the books of the Company
and its Subsidiaries. The Company and its Subsidiaries have good and marketable
title to all of such Inventory, free and clear of any Liens. Neither the
Company nor any of its Subsidiaries is under any liability or obligation with
respect to the return of Inventory in the possession of its customers.
Section 3.12. Financial Statement; Books & Records.
(a) All Books and Records of the Company and its Subsidiaries have been
fully, properly and accurately kept and completed in accordance with respective
applicable GAAP and respective Applicable Laws and there are no material
inaccuracies or discrepancies of any kind contained or reflected therein. All of
the records, systems, controls, data or information of the Company and its
Subsidiaries are under the exclusive ownership and the direct control of the
Company and its Subsidiaries.
(b) The Company has previously furnished to the Purchaser (i) a true and
complete copy of the balance sheet of the Company and its Subsidiaries as of
December 31, 1998 and the related statements of income, cash flows and changes
in stockholders' equity for each of the years in the three year period then
ended, certified by Reconta Ernst & Young (the "Accountants"), and (ii) a true
and complete copy of the unaudited balance sheet of the Company and its
Subsidiaries as of June 30, 1999 and the related unaudited statements of income,
cash flows and changes in stockholders' equity for the six month period then
ended (collectively, the "Financial Statements"). The Financial Statements have
been prepared in accordance with Italian GAAP applied on a basis consistent with
those of previous fiscal periods and present fairly, respectively: (a) the
property, assets, liabilities (whether accrued, absolute, contingent or
otherwise) and the financial condition the Company and its Subsidiaries, as of
December 31, 1998; (b) the financial position of the Company and its
Subsidiaries, as of June 30, 1999; and (c) the sales and earnings of the Company
and its Subsidiaries during the period covered by the said Financial Statements.
There are no other liabilities, actual or contingent, except for those reflected
in the Financial Statements that would be required to be reflected in such
Financial Statements.
(c) Schedule 3.12 lists and describes all loan agreements, overdraft,
discounted notes and similar credit facilities, to which each of the Company and
its Subsidiaries is a party, directly or indirectly, including, without
limitation, off-balance sheet loans or similar financing arrangements. All such
loan agreements and credit facilities are in full force and effect and there has
been, on the part of the Company and its Subsidiaries, no material default or
delay of payments of principal or interest in respect thereof.
Section 3.13. Absence of Certain Developments. Except as set forth in
Schedule 3.13, since January 1, 1999, there has not been any Company Material
Adverse Change, or any development which could reasonably be expected to result
in a prospective Company Material Adverse Change. Except as set forth in
Schedule 3.13, since January 1, 1999 the Company and each Subsidiary has
conducted its business in the ordinary and usual course consistent with past
practices and has not (i) sold, leased, transferred or otherwise disposed of any
of the assets of the Company or its Subsidiaries (other than dispositions in the
ordinary course of business consistent with past practices), (ii) terminated or
amended in any material respect any contract or lease to which the Company or
any of its Subsidiaries is a party or to which it or any of its Subsidiaries is
bound or to which its or any of its Subsidiaries' properties are subject, (iii)
amended the Articles of Incorporation or by-laws (or other organizational
documents) of the Company or any of its Subsidiaries, or taken any action in
contemplation of an amendment to the Articles of Incorporation or by-laws (or
other organizational documents) of the Company or any of its Subsidiaries or in
contemplation of the liquidation or dissolution of the Company or any of its
Subsidiaries and, to the Seller's best knowledge, no such action has been taken
by the shareholders, directors or officers of the Company or any of its
Subsidiaries, (iv) declared, set aside for payment or paid any dividend or
distribution on any shares of the capital stock of the Company or any of its
Subsidiaries, (v) repurchased or otherwise acquired any shares of the capital
stock of the Company or any of its Subsidiaries or any option, warrant, right,
call or commitment relating to its or their capital stock or any outstanding
securities or obligations convertible into or exchangeable for, or giving any
Person any right to subscribe for or acquire from the Company, any shares of the
capital stock of the Company or any of its Subsidiaries,
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(vi) suffered any material loss, damage or destruction whether or not covered by
insurance, (vii) made any change in the accounting methods or practices followed
by the Company and its Subsidiaries, whether for general financial or tax
purposes, (viii) incurred any liabilities (other than in the ordinary course of
business) none of which, individually or in the aggregate, would result in a
Company Material Adverse Change, (ix) incurred, created or suffered to exist any
Liens on the assets of the Company or any of its Subsidiaries or created in the
ordinary course of business, none of which, individually or in the aggregate,
would result in a Company Material Adverse Change, (x) increased the
compensation payable or to become payable to any of the officers or employees of
the Company or any of its Subsidiaries or increased any bonus, severance,
accrued vacation, insurance, pension or other Employee Benefit Plan (as defined
in Section 3.19), payment or arrangement made by the Company or any of its
Subsidiaries for or with any such officers or employees, (xi) suffered any labor
dispute, strike or other work stoppage, (xii) made or obligated itself or any of
its Subsidiaries to make any capital expenditures in excess of ITL. 200,000,000
individually or in the aggregate, (xiii) entered into any contract or other
agreement requiring the Company or any of its Subsidiaries to make payments in
excess of ITL. 100,000,000 per annum, individually or in the aggregate, other
than in the ordinary course of business consistent with past practices, or (xiv)
entered into any agreement to do any of the foregoing.
Section 3.14. Governmental Authorizations; Licenses; Etc. The business of
the Company and each of its Subsidiaries has been operated in compliance with
all Applicable Laws. All Authorizations required for the operation of the
business of the Company and its Subsidiaries are listed and described on
Schedule 3.14, except for such Authorizations the absence of which would not,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. Neither the Company nor its Subsidiaries is in default,
nor has it received any notice of any claim in default, with respect to any such
Authorizations. No threat of revocation exists and there is no reason to revoke
any of the Authorizations. All such Authorizations are renewable by their terms
or in the ordinary course of business without the need for the Company or its
Subsidiaries to comply with any special qualification or procedure or to pay any
amounts other than routine filing fees.
Section 3.15. Litigation. Except as set forth in Schedule 3.15, neither the
Company nor any of its Subsidiaries is a party to any pending litigation,
whether before the ordinary courts or before administrative or other courts or
arbitrators, and no such litigation is threatened by or against the Company or
its Subsidiaries. Neither the Company nor its Subsidiaries are presently subject
to any judgment, order or decree entered in any law suit or proceeding. It is
understood that litigation which, individually or in the aggregate, potentially
would expose the Company or any of its Subsidiaries to liability of less than
ITL 100,000,000 is not subject to inclusion in Schedule 3.15.
Section 3.16. Taxes.
(a) Each of the Company and its Subsidiaries has filed or caused to be
filed, within the times and within the manner prescribed by Applicable Law, all
tax returns, tax reports and social security returns which are required to be
filed by each of them. Such returns and reports reflect accurately all
liabilities for Taxes of the Company and each of its Subsidiaries for the
periods covered thereby. Except as set forth in Schedule 3.16, all Taxes
(including interest and penalties) payable by or due from each of the Seller,
the Company or its Subsidiaries (as a result of a fiscal assessment or
otherwise), have been fully paid or adequately disclosed and fully provided for
in the Books and Records and the Financial Statements. Each of the Company and
its Subsidiaries has duly applied for the tax and social security amnesties
deemed necessary and has effected payment of the entire amounts due for such
amnesties. Except as set forth in Schedule 3.16, no amount is still due or will
be due in consequence of the filing for the said amnesties in order for the
Company and its Subsidiaries to keep the right to the benefits provided for by
the above-mentioned amnesties.
(b) Except as set forth in Schedule 3.16, neither the Company nor any of
its Affiliates, other than Petrini Foods International, Inc. (the "U.S.
Subsidiary"), has at any time been engaged in a trade or business within the
United States, maintained a permanent establishment or fixed place of business
within the United States. Neither the Company nor any of its Affiliates, other
than the U.S. Subsidiary, is obligated to pay any Taxes to the United States or
any Governmental Authority therein.
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(c) Except as set forth in Schedule 3.16, the U.S. Subsidiary has duly
filed (and until the Closing Date will so file) all tax returns required to be
filed by it (including, without limitation, all tax returns required to be
filed on a consolidated, combined or unitary basis) ("Tax Returns"). All such
Tax Returns were correct and complete as filed. The U.S. Subsidiary has duly
paid (and until the Closing Date will so pay) all Taxes due and payable,
whether or not shown on any Tax Return, other than Taxes disclosed on Schedule
3.16 which Taxes are being contested in good faith. The U.S. Subsidiary has
established (and until the Closing Date will establish) on its Books and
Records reserves that are adequate for the payment of all Taxes not yet due and
payable to the extent required by U.S. GAAP (consistently applied). The Company
has provided to the Purchaser correct and complete copies of all Tax Returns
filed by the U.S. Subsidiary since December 31, 1998.
(d) Except as set forth in Schedule 3.16, there is no Lien on any asset of
any of the U.S. Subsidiary that arose in connection with any failure or alleged
failure to pay any Tax. Schedule 3.16 identifies all income or franchise Tax
Returns filed with respect to the U.S. Subsidiary which have been examined by
any Governmental Authority within the past six years. Except as set forth in
Schedule 3.16, no deficiency was asserted as a result of any such examination
which deficiency has not been finally resolved and paid in full. To the best
knowledge of the Company and the U.S. Subsidiary, there are no audits or other
administrative or court proceedings presently pending nor any other disputes
pending with respect to, or claims asserted for, any Taxes of the U.S.
Subsidiary. The U.S. Subsidiary has not given any currently outstanding waivers
or comparable consents regarding the application of the statute of limitations
with respect to any Taxes or Tax Returns.
(e) Except as set forth in Schedule 3.16, the U.S. Subsidiary (i) has not
requested any extension of time within which to file any Tax Return which Tax
Return has not since been filed, (ii) is not a party to any agreement providing
for the allocation or sharing of Taxes, (iii) is not required to include in
income any adjustment pursuant to Section 481(a) of the Code by reason of a
voluntary change in accounting method initiated by the U.S. Subsidiary (nor does
the U.S. Subsidiary have any knowledge that the United States Internal Revenue
Service has proposed any such adjustment or change of accounting method), (iv)
has not filed a consent pursuant to Section 341(f) of the Code or agreed to have
Section 341(f)(2) of the Code apply, (v) has not been a United States real
property holding corporation as defined in section 897(c)(2) of the Code during
the applicable period specified in section 897(c)(1)(A)(ii) of the Code, and
(vi) has no liability for the Taxes of any Person other than the U.S. Subsidiary
under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local or
foreign law), as a transferee or successor, by contract, or otherwise.
(f) Except as set forth in Schedule 3.16, the U.S. Subsidiary has complied
in all respects with all Applicable Laws relating to the withholding and payment
of Taxes with respect to all amounts paid or owing to any employee, independent
contractor, creditor, stockholder or other third party.
Section 3.17. Insurance. The Company and its Subsidiaries carry insurance
of the kind and in the amounts used for companies in businesses similar to the
Business. Schedule 3.17 contains a correct and complete list of insurance
policies which are maintained by the Companies and its Subsidiaries with respect
to the Business, with an indication of the type of policy, name of insurer,
coverage allowance, expiration dates, annual premiums and any pending claims
thereunder. Except as set forth in Schedule 3.17, neither the Company nor any of
its Subsidiaries is in default with respect to the payment of any premiums under
any such insurance policy and has not failed to give any notice or to present
any claim under any such insurance policy in a due and timely fashion. Such
insurance policies are in full force and effect free from any right of
termination on the part of the insurers, except upon notice as stipulated in
such policies.
Section 3.18. Environmental Matters. Except as set forth in Schedule 3.18,
(a) each of the Company and its Subsidiaries has been and is in material
compliance with all applicable Environmental Laws relating to the protection of
the environment, the manufacture, processing, distribution, use, treatment,
storage, disposal, discharge, transport or handling of any Polluting Substances.
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(b) each of the Company and its Subsidiaries has obtained all
Authorizations, certificates and registrations under Environmental Laws
(hereinafter, "Environmental Permits") required for the operation of the
Business and each part thereof, all of which are described in Schedule 3.18.
Each Environmental Permit is valid, subsisting and in good standing; neither the
Company or any of its Subsidiaries are in default or breach of any Environmental
Permit and no proceeding is pending or threatened, to revoke or limit any
Environmental Permit.
(c) neither the Company or any of its Subsidiaries have used or permitted
to be used, except in compliance with all Environmental Laws, any of its Owned
Properties or Leased Properties or facilities or any property or facility that
it previously owned or leased, to generate, manufacture, process, distribute,
use, treat, store, dispose of, transport or handle any Polluting Substance.
(d) neither the Company nor its Subsidiaries have received any notice of,
nor been prosecuted for an offense alleging non-compliance with any
Environmental Laws, and the Company nor its Subsidiaries have not settled any
allegation of non-compliance short of prosecution. There are no orders or
directions relating to environmental matters requiring any work, repairs,
construction or capital expenditures with respect to the Business or any part
thereof or any property of the Company or of any its Subsidiaries, nor has the
Company or any of its Subsidiaries received notice of any of the same.
(e) neither the Company nor its Subsidiaries has caused or permitted, the
release, in any manner whatsoever, of any Polluting Substance on or from any of
the Owned Properties or Leased Properties or assets or any property or facility
that were previously owned or leased by the Company or by any of its
Subsidiaries or any such release on or from a facility owned or operated by
third parties but, with respect to which the Company or any of its Subsidiaries
is or may reasonably be alleged to have liability regardless of any violation of
Environmental Laws. All Polluting Substances and all other wastes and other
materials and substances used in whole or in part by the Company or any of its
Subsidiaries or resulting from the Business have been disposed of, treated and
stored in compliance with all Environmental Laws. Schedule 3.18 identifies all
of the locations where Polluting Substances, used in whole or in part by the
Company or any of its Subsidiaries have been or are being stored or disposed.
(f) neither the Company or any of its Subsidiaries has received any notice
that it is potentially responsible for state, municipal or local clean-up site
or corrective action under any Environmental Laws.
(g) there are no environmental audits, evaluations, assessments or studies
relating to the Company or any of its Subsidiaries or the Business (or any part
thereof) in the possession of the Seller, the Company or any of its Subsidiaries
which have not been delivered to the Purchaser.
Section 3.19. Employee Matters.
(a) Schedule 3.19 sets forth a complete list of employees of each of the
Company and its Subsidiaries, their position and length of service with the
Company and its Subsidiaries, their salary, bonuses and any other employee
benefits other than those provided by law, and whether any written employment
agreements exist relating to any such employees.
(b) Each of the Company and its Subsidiaries are in material compliance
with all Applicable Laws and applicable labour collective agreements respecting
employment and employment practices, terms and conditions of employment, pay
equity and wages and hours, and laws and regulations concerning health and
safety in the workplace including the D.L. GS 626/94.
(c) There is no labour strike, dispute, slowdown or stoppage actually
pending or involving or threatened against the Company and its Subsidiaries with
respect to the Business or any part thereof.
(d) No employment related complaint or grievance exists which might
reasonably be expected to have a material adverse effect upon the Company and
its Subsidiaries or the conduct of the Business or any part thereof.
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(e) Except as set forth in Schedule 3.19, neither the Company nor its
Subsidiaries are bound by any collective bargaining or similar agreement nor are
any such agreements currently being negotiated.
(f) Except as set forth in Schedule 3.19, no employee of the Company and
its Subsidiaries has any agreement as to length of notice required to terminate
his employment, other than such as may be required by Applicable Law from the
employment of an employee without agreement as to such notice or as to length of
employment.
(g) All vacation pay (including all banked vacation pay), bonuses,
commissions and other employee benefit payments are reflected and have been
accrued in the Books and Records.
(h) Except as set forth in Schedule 3.19, no payments of salary, pension,
bonuses or other remuneration of any nature has been made or authorized since
December 31, 1998 to any officers, directors, former directors, shareholder or
employees of the Company and its Subsidiaries, or to any Person not dealing at
arm's length with any of the foregoing, except in the ordinary course of
business and at regular rates.
(i) Schedule 3.19 contains an accurate and complete list of all employee
benefit plans or any other foreign pension, welfare or retirement benefit plans
(hereinafter, "Employee Benefit Plans") of the Company and its Subsidiaries.
(j) Full payment has been made of all amounts which the Company and its
Subsidiaries are required, under Applicable Law or under any Employee Benefit
Plan or any agreement relating to any Employee Benefit Plan to which the Company
and its Subsidiaries are a party, to have paid as contributions thereto as of
the last day of the most recent fiscal year of such Employee Benefit Plan ended
prior to the date thereof. The Company and its Subsidiaries have made adequate
provision for reserves to meet contributions that have not been made because
they are not yet due under the terms of any Employee Benefit Plan or related
agreements. Benefits under all Employee Benefit Plans are as represented and
have not been increased subsequent to the date as of which documents have been
provided.
(k) The Company and its Subsidiaries have delivered or caused to be
delivered to the Purchaser and their counsel true and complete copies of all
Employee Benefit Plans as in effect, together with all amendments thereto which
will become effective at a later date.
Section 3.20. Intellectual Property. Schedule 3.20 is a true and correct
list (including, where applicable, registration numbers and dates of filing
renewal and termination) of all the patents, patent applications, registered
designs and models, trademarks registrations and applications therefor, service
marks, service mark registrations and applications therefor, trade names
(whether or not registered or registrable), registered copyrights and registered
copyright applications, used or held for use by the Company and its Subsidiaries
in the conduct of the Business as currently, and as proposed to be, conducted
(collectively, "Intellectual Property Rights"). The Company and its Subsidiaries
are the true, lawful and exclusive owners of all right, title and interest in
and to the Intellectual Property Rights and the Proprietary Information, free
and clear of all Liens, and the Intellectual Property Rights and Proprietary
Information are valid and subsisting. With regard to any intellectual property
rights of third parties, Schedule 3.20 lists and describes all such rights,
including the terms and conditions of their use by the Company and its
Subsidiaries. Neither the Company or its Subsidiaries have conveyed, assigned,
licensed or encumbered any of the Intellectual Property Rights and Proprietary
Information. The Company and its Subsidiaries have the exclusive right to use
such Intellectual Property Rights and Proprietary Information. Neither the
Company nor its Subsidiaries are a party to any pending litigation, whether
before the ordinary courts or before administrative or other courts or
arbitrators, and no such litigation is threatened by or against the Company and
its Subsidiaries with respect to Intellectual Property Rights. The conduct of
the Business of the Company and its Subsidiaries does not infringe upon the
intellectual property rights of any other Person.
Section 3.21. Contracts. The contracts listed and described in Schedule
3.21 constitute all of the contracts, agreements or commitments of the Company
and its Subsidiaries, except those contracts, agreements or commitments entered
into in the ordinary course of business which do not have a
A-11
contractual value in excess of Lit. 100,000,000 (the "Material Contracts"). Each
of the Material Contracts is in full force and effect, unamended, and, at the
date hereof, there exists no default or event of default or event, occurrence,
condition or act which, with the giving of notice, the lapse of time or the
happening of any other event or condition, would become a default or event of
default thereunder. The Company and its Subsidiaries have not violated or
breached, in any material respect, any of the terms or conditions of any
Material Contract, and all the covenants to be performed by any other party
thereto have been fully performed.
Section 3.22. Title to the Property and Assets. Except as set forth in
Schedule 3.22, the Company and its Subsidiaries have good and marketable title
to and legal and beneficial ownership of all their respective properties and
assets, free and clear of all Liens. All Liens granted by the Company and its
Subsidiaries to secure fully repaid loan agreements, overdraft, discount notes
or other credit facilities have been duly canceled. The Company and its
Subsidiaries have obtained the consent from the relevant bank institutions for
the cancellation of the registered mortgages pertaining to Loans and obligations
fully reimbursed. No Person has any written or oral agreement, option,
understanding or commitment, or any right or privilege capable of becoming such
for the purchase from the Company or its Subsidiaries of any of their respective
properties or assets.
Section 3.23. Condition of Assets. All of the property and assets owned or
used by each of the Company and its Subsidiaries are in good operating condition
and are in a state of good repair and maintenance, having regard to the age and
use thereof, reasonable wear and tear excepted. During the two years preceding
the date of this Agreement, there has not been any significant interruption of
operations (being an interruption of more than seven days) of the Business due
to inadequate maintenance of any of the property and assets owned and used by
each of the Company and its Subsidiaries.
Section 3.24. Customers and Suppliers. (a) Except as set forth in Schedule
3.24, no customer has notified or otherwise indicated to the Seller, the Company
or any of its Subsidiaries that it will stop, or decrease the rate of, its
purchases of materials, products or services from the Company and its
Subsidiaries, and no customer has, during the year ending December 31, 1999,
ceased or materially decreased its purchases of any such materials, products or
services from the Company or any of its Subsidiaries.
(b) No supplier has notified or otherwise indicated to the Seller, the
Company or any of its Subsidiaries that it will stop, or decrease the rate of,
or, other than publicly announced generally applicable price increases,
materially increase the cost of, its supply of materials, products or services
used by the Company or any of its Subsidiaries, and no supplier has, during the
year ending December 31, 1999, ceased, materially decreased the rate of or
materially raised the cost of, any such materials, products or services.
Section 3.25. Brokers. No Person is or will be entitled to a broker's,
finder's, investment banker's, financial adviser's or similar fee from the
Company or the Seller in connection with this Agreement or any of the
transactions contemplated hereby.
Section 3.26. Absence of Questionable Payments. Neither the Company or any
Subsidiary nor any Affiliate, director, officer, employee, agent, representative
or other Person acting on behalf of the Company or any Subsidiary has: (i) used
any corporate or other funds for unlawful contributions, payments, gifts or
entertainment, or made any unlawful expenditures relating to political
activities to government officials or others, or (ii) accepted or received any
unlawful contributions, payments, gifts or expenditures.
Section 3.27. Transactions with Affiliates. To the Seller's best knowledge,
no director or executive officer of the Company or any of its Subsidiaries (a)
owns, directly or indirectly, any interest in (excepting not more than 1% stock
holdings for investment purposes in securities of publicly held and traded
companies) or is an officer, director, employee or consultant of, any Person
which is a competitor, lessor, lessee, customer or supplier of the Company or
any of its Subsidiaries; (b) owns, directly or indirectly, in whole or in part,
any tangible or intangible property which the Company or any of its Subsidiaries
is using
A-12
or the use of which is necessary for its respective business or (c) has any
cause of action or other claim whatsoever against, or owes any amount to, the
Company or any of its Subsidiaries except for claims in the ordinary course of
business, such as for accrued vacation pay, accrued benefits under Employee
Benefit Plans and similar matters and agreements.
Section 3.28. Registration Statement; Prospectus/Proxy Statement. None of
the information supplied by the Company or the Seller for inclusion in the
registration statement under the Securities Act of 1933, as amended, registering
the Purchaser Common Stock to be issued pursuant to the Agreement (such
registration statement, as amended by any amendments thereto, being referred to
herein as the "Registration Statement") or the prospectus/proxy statement to be
sent to the stockholders of the Purchaser in connection with the special meeting
of stockholders of the Purchaser at which such stockholders will be asked to
approve the Amended and Restated Certificate and the issuance of Purchaser
Common Stock pursuant to this Agreement (the "Purchaser Special Meeting") (such
prospectus/proxy statement, as amended by any amendments thereto, being referred
to herein as the "Prospectus/Proxy Statement"), including all amendments and
supplements to the Registration Statement and Prospectus/Proxy Statement, shall,
in the case of the Registration Statement, at the time the Registration
Statement becomes effective and, in the case of the Prospectus/Proxy Statement,
on the date or dates the Prospectus/Proxy Statement is first mailed to the
Purchaser stockholders and on the date of the Purchaser Special Meeting, contain
any untrue statements of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
Section 3.29. Year 2000. To the extent that any functionality of any
computer system used by the Company or any of its Subsidiaries is dependent upon
or interdependent with the use or specification of any calendar date, the
Company and its Subsidiaries have used commercially reasonable efforts
(including without limitation seeking written confirmations from all material
vendors that such vendors' computer systems are "Year 2000 Compliant") in
implementing and have implemented, a plan pursuant to which any such computer
system shall be "Year 2000 Compliant", except where failure to do so will not
result in a Company Material Adverse Change. For purposes of this Agreement, the
term "Year 2000 Compliant" means that neither the performance nor the
functionality of such computer systems shall be materially affected by dates in,
into and between the 20th and 21st centuries. To be deemed "Year 2000
Compliant", such computer systems shall conform in all material respects to the
following basic requirements: (i) no value for a current date shall cause any
interruption in the operations of the Company or any of its Subsidiaries (or of
the Company's or its Subsidiaries' vendors) in which computer systems are used;
and (ii) any date-based functions shall operate and perform in a consistent
manner for date in, into and between the 20th and 21st centuries and such
computer systems shall calculate, manipulate and represent dates correctly,
although no such computer systems shall use particular date values for special
meanings.
Section 3.30. Indemnity under 1998 Stock Agreement. To the best knowledge
of the Seller, neither party to that certain Stock Purchase Agreement dated July
29, 1998 (the "1998 Stock Agreement") between Carlo Petrini and Vertical
Capital, Ltd. has made any claim for indemnity from the other party pursuant to
the terms of the 1998 Stock Agreement. Seller is not aware of any contest,
challenge, dispute or claim respecting the transactions contemplated by the 1998
Stock Agreement.
Section 3.31. Full Disclosure. All the financial and business and other
information, provided by the Seller, the Company and its Subsidiaries to the
Purchaser are accurate, complete and correct in all material respects. Neither
this Agreement nor any document to be delivered pursuant to this Agreement by
the Seller, the Company or its Subsidiaries nor any certificate, report,
statement or other document furnished by the Seller, the Company or its
Subsidiaries in connection with the negotiation of this Agreement contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statements contained herein or
therein not misleading. There has been no event, transaction or information that
has come to the attention of the Seller, that could reasonably be expected to
have a material adverse effect on the assets, business, earnings, properties or
conditions (financial or otherwise) of the Company and its Subsidiaries that has
not been disclosed to the Purchaser in writing.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES REGARDING THE PURCHASER
The Purchaser represents and warrants to the Seller as follows:
Section 4.1. Organization and Qualification. The Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, with full power and authority, corporate and other, to own or
lease its property and assets and to carry on its business as presently
conducted. The Purchaser is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which the nature of
the business conducted by it or the property it owns, leases or operates, makes
such qualification necessary, except where the failure to be so qualified or in
good standing would not reasonably be expected to result in a Purchaser Material
Adverse Change. The Purchaser has previously provided to the Seller true and
complete copies of its Amended and Restated Certification of Incorporation (the
"Amended and Restated Certificate") and by-laws and any amendments thereto.
Section 4.2. Authorization; Execution and Delivery; Enforceability. The
Purchaser has full power and authority, corporate and other, to execute and
deliver this Agreement and, upon obtaining the requisite approval of the holders
of Purchaser Common Stock at the Purchaser Special Meeting of stockholders or
any adjournment thereof with respect to the Amended and Restated Certificate of
the Purchaser and the issuance of shares of Purchaser Common Stock pursuant to
this Agreement, to perform its obligations hereunder, all of which will have
been duly authorized by all requisite corporate action. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly and validly authorized by the Board of Directors of the
Purchaser, and except as stated in the preceding sentence, no other corporate
proceedings on the part of the Purchaser are necessary to authorize this
Agreement or to consummate transactions contemplated hereby. This Agreement has
been duly authorized, executed and delivered by the Purchaser and, subject to
stockholder approval as aforesaid, constitutes a valid and binding agreement of
the Purchaser, enforceable against the Purchaser in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
Section 4.3. Capitalization of the Purchaser. (a) As of September 30, 1999,
the Purchaser's authorized capital stock consisted solely of (i) 50,000,000
shares of Purchaser Common Stock, of which (A) 9,875,569 shares were issued and
outstanding, (B) 248,255 shares were issued and held in treasury and (C)
6,171,726 shares were reserved for issuance upon the exercise or conversion of
options, warrants or convertible securities granted or issuable by the Purchaser
and (ii) 10,000,000 shares of Preferred Stock, par value $.01 per share (the
"Purchaser Preferred Stock"), of which 2,000 shares of Series B Convertible
Preferred Stock were issued and outstanding. Each outstanding share of Purchaser
Common Stock is, and all shares of Purchaser Common Stock to be issued in
connection with the transactions contemplated hereby will be, duly authorized
and validly issued, fully paid and nonassessable, with no personal liability
attaching to the ownership thereof, and each outstanding share of Purchaser
Common Stock has not been, and all shares of Purchaser Common Stock to be issued
in connection with the transactions contemplated hereby will not be subject to
or issued in violation of any preemptive or similar rights. The shares of
Purchaser Common Stock are registered under the Exchange Act. As of September
30, 1999, except as set forth above or in the "Purchaser SEC Documents" (as
defined herein), the Purchaser does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the purchase or issuance of any shares of Purchaser Common
Stock or Purchaser Preferred Stock or any other equity securities of the
Purchaser or any securities representing the right to purchase or otherwise
receive any shares of Purchaser Common Stock or Purchaser Preferred Stock.
(b) Schedule 4.3 sets forth a list of all of the Subsidiaries of the
Purchaser. The Purchaser owns directly or indirectly each of the outstanding
shares of capital stock of each of its Subsidiaries free and clear of any Liens.
A-14
Section 4.4. Non-Contravention. Neither the execution and delivery of this
Agreement nor the performance by the Purchaser of its obligations hereunder
will, subject to obtaining the requisite approval of the Amended and Restated
Certificate and the issuance of the shares of Purchaser Common Stock pursuant to
this Agreement by the Purchaser, (i) contravene any provision contained in the
Purchaser's Amended and Restated Certificate or by-laws, (ii) violate or result
in a breach (with or without the lapse of time, the giving of notice or both) of
or constitute a default under (A) any contract, agreement, commitment,
indenture, mortgage, lease, pledge, note, license, permit or other instrument or
obligation or (B) any Applicable Law, in each case to which it is a party or by
which it is bound or to which any of its assets or properties are subject, (iii)
result in the creation or imposition of any Liens on any of its assets or
properties, (iv) result in the acceleration of, or permit any Person to
accelerate or declare due and payable prior to its stated maturity, any of its
obligations, except where in the case of (i), (ii), (iii) or (iv) such
violation, contravention, Lien or acceleration would not reasonably be expected
to result in a Purchaser Material Adverse Change.
Section 4.5. No Consents. Except for actions to be taken in connection with
(a) the filing of the amendment to the Amended and Restated Certificate, (b) the
filing and effectiveness of the Registration Statement, (c) the filings required
under and in connection with the applicable requirements of the HSR Act, (d)
filings required pursuant to any state securities or "blue sky" laws, (e)
filings and other matters relating to the listing on Nasdaq of the shares of
Purchaser Common Stock required to be issued pursuant to this Agreement, (f)
filings and approvals as may be required under Italian and EU antitrust laws,
(g) approval by the stockholders of Purchaser of the issuance of Purchaser
Common Stock required to be issued pursuant to this Agreement and other related
matters and (h) any other filings, notices, disclosures or registrations set
forth on Schedule 4.5, no notice to, filing with, or authorization,
registration, consent or approval of any Governmental Authority or other Person
is necessary for the execution, delivery or performance of this Agreement or the
consummation of the transactions contemplated hereby by the Purchaser.
Section 4.6. Board Recommendation. The Board of Directors and the Special
Committee of the Board of Directors of the Purchaser have, by a unanimous vote
at the meetings of the Board of Directors and Special Committee duly each held
on November 2, 1999, approved and adopted this Agreement and the transactions
contemplated hereby. At such meetings, the Board and the Special Committee
recommended that the holders of Purchaser Common Stock approve the Amendment to
the Amended and Restated Certificate and the issuance of shares of Purchaser
Common Stock pursuant to this Agreement.
Section 4.7. Registration Statement; Prospectus/Proxy Statement. None of
the information supplied by the Purchaser for inclusion in, and none of the
information regarding the Purchaser and its subsidiaries incorporated by
reference in, the Registration Statement or the Prospectus/Proxy Statement,
including all amendments and supplements thereto, shall, in the case of the
Registration Statement, at the time the Registration Statement becomes
effective, and, in the case of the Prospectus/Proxy Statement, on the date or
dates the Prospectus/Proxy Statement is first mailed to the Purchaser's
stockholders and on the date of the Purchaser Special Meeting, contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
Registration Statement and the Prospectus/Proxy Statement will comply as to form
in all material respects with the applicable provisions of the Securities Act
and the Exchange Act, as the case may be.
Section 4.8. SEC Filings. (a) The Purchaser has filed with the Commission
all required forms, reports and documents required to be filed by it with the
Commission since March 26, 1997 (collectively, the "Purchaser SEC Reports"), all
of which, when filed (in the case of forms, reports and documents filed pursuant
to the Exchange Act) or when declared effective (in the case of registration
statements filed pursuant to the Securities Act), complied as to form in all
material respects with the applicable provisions of the Securities Act and the
Exchange Act, as the case may be. As of their respective dates, the Purchaser
SEC Reports (including documents included as exhibits thereto or incorporated by
reference therein) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
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(b) The Purchaser will deliver to the Seller as soon as they become
available, true and complete copies of any report or statement mailed by the
Purchaser to its security holders generally or filed by it with the Commission,
in each case subsequent to the date hereof and prior to the Closing Date. As of
their respective dates, such reports and statements (excluding any information
therein provided by the Company and the Seller, as to which the Purchaser makes
no representation) will comply as to form in all material respects with the
applicable provisions of the Securities Act and the Exchange Act, will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading, and will
further comply in all material respects with all applicable requirements of law,
except for such failures to comply as to form, untrue statements or omissions or
further failures to comply which would not be reasonably likely to result in,
individually or in the aggregate, a Purchaser Material Adverse Change. The
audited consolidated financial statements and unaudited consolidated interim
financial statements of the Purchaser and its subsidiaries to be included or
incorporated by reference in such reports and statements will be prepared in
accordance with U.S. GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes to such financial statements),
and in accordance with all applicable published accounting requirements under
the Securities Act and the Exchange Act, and will fairly present in all material
respects the consolidated financial position of the Purchaser and its
subsidiaries as of the dates thereof and the consolidated results of operations
and consolidated cash flows of the Purchaser and its subsidiaries for the
periods then ended (subject, in the case of any unaudited interim financial
statements, to normal year-end adjustments and to the extent that they may not
include footnotes or may be condensed or summary statements); provided, however,
that any pro forma financial statements will not necessarily be indicative of
the consolidated financial position of the Purchaser and its subsidiaries as of
the respective dates thereof and the consolidated results of operations and cash
flows of the Purchaser and its subsidiaries for the periods indicated.
Section 4.9. Opinions of Financial Advisors. The Purchaser has received the
written opinion of Royce Investment Group, its financial advisor, to the effect
that, as of the date of this Agreement, the number of shares of Purchaser Common
Stock to be issued pursuant to the terms of this Agreement is fair to the
Purchaser stockholders from a financial point of view. The Purchaser has
heretofore provided copies of such opinion to the Seller.
Section 4.10. Brokers. Except for Royce Investment, Inc., no Person is or
will be entitled to a broker's, finder's, investment banker's, financial
adviser's or similar fee from the Purchaser in connection with this Agreement or
any of the transactions contemplated hereby.
ARTICLE V
COVENANTS AND AGREEMENTS
Section 5.1. Access and Information. (a) Prior to the Closing, and except
for disclosures which would cause the Company to waive the attorney-client
privilege or otherwise violate Applicable Law or any material confidentiality
agreement, the Purchaser shall be entitled to make or cause to be made such
investigation of the Company, and the financial and legal condition thereof, as
the Purchaser deems necessary or advisable, and the Seller shall cause the
Company to cooperate with any such investigation. In furtherance of the
foregoing, but not in limitation thereof, the Seller shall cause the Company to
(a) permit the Purchaser and its agents and representatives or cause them to be
permitted to have full and complete access to the premises, operating systems,
computer systems (hardware and software) and books and records of the Company
upon reasonable notice during regular business hours, (b) furnish or cause to be
furnished to the Purchaser such financial and operating data, projections,
forecasts, business plans, strategic plans and other data relating to the
Company and its businesses as the Purchaser shall request from time to time, (c)
cause the Company's accountants to furnish to the Purchaser and its accountants
access to all work papers relating to any of the periods covered by financial
statements provided by the Company to the Purchaser hereunder and (d) furnish to
the Purchaser's financial advisor complete and
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accurate information comparable to the types of information heretofore furnished
by the Purchaser to the Purchaser's financial advisor in connection with the
transactions contemplated hereby and such other information as such financial
advisor may reasonably request in order to perform its financial advisory role
on behalf of the Purchaser.
(b) Prior to the Closing, and except for disclosures which would cause the
Purchaser or any of its subsidiaries to waive the attorney-client privilege or
otherwise violate any Applicable Laws or any material confidentiality agreement,
the Purchaser shall provide complete and accurate information to the Seller and
its representatives in response to reasonable requests for information made in
order to enable the Seller to make such investigation of the Purchaser and the
financial and legal condition thereof, as the Seller deems necessary or
advisable.
(c) Prior to the Closing, neither party hereto shall use any information
provided to it in confidence for any purposes unrelated to this Agreement.
Except with respect to publicly available documents, in the event that this
Agreement is terminated, (i) the Purchaser will return to the Seller all
documents obtained by them from the Seller or the Company in confidence and any
copies thereof in the possession of the Purchaser or its agents and
representatives or, at the option of the Purchaser, the Purchaser shall cause
all of such documents and all of such copies to be destroyed and shall certify
the destruction thereof to the Seller and (ii) the Seller will return to the
Purchaser all documents obtained by them from the Purchaser and its subsidiaries
in confidence and any copies thereof in the possession of the Seller or its
agents and representatives or, at the option of the Seller, the Seller shall
cause all of such documents and all of such copies to be destroyed and shall
certify the destruction thereof to the Purchaser.
(d) No investigation by any party hereto or hereafter made shall modify or
otherwise affect any representations and warranties of the other party hereto,
which shall survive any such investigation, or the conditions to the obligation
of the parties hereto to consummate the transactions contemplated hereby.
Section 5.2. The Seller'sAffirmative Covenants. Prior to the Closing,
except as otherwise expressly provided herein, the Seller shall cause the
Company and each of its Subsidiaries to:
(a) conduct its business only in the ordinary and regular course of
business consistent with past practices;
(b) keep in full force and effect its corporate existence and all material
rights, franchises, Intellectual Property Rights, Proprietary Information and
goodwill relating or obtaining to its business;
(c) endeavor to retain its employees and preserve its present relationships
with customers, suppliers, contractors, distributors and such employees, and
continue to compensate such employees consistent with past practices;
(d) maintain the Intellectual Property Rights and Proprietary Information
so as not to affect adversely the validity or enforcement thereof; maintain the
other assets of the Company and its Subsidiaries in customary repair, order and
condition and maintain insurance reasonably comparable to that in effect on the
date of this Agreement; and in the event of any casualty, loss or damage to any
of the assets of the Company or any of its Subsidiaries repair or replace such
assets with assets of comparable quality;
(e) maintain the books, accounts and records of the Company and its
Subsidiaries in accordance with Italian GAAP, to the extent applicable,
consistent with past practices;
(f) use its best efforts to obtain all authorizations, consents, waivers,
approvals or other actions necessary or desirable to consummate the transactions
contemplated hereby and to cause the other conditions to the Purchaser's
obligation to close to be satisfied; and
(g) promptly inform the Purchaser in writing of any material breach of or
change in the representations and warranties contained in Article III.
Section 5.3. Purchaser's Affirmative Covenants. Prior to the Closing,
except as otherwise expressly provided herein, the Purchaser shall, and the
Purchaser shall cause each of its subsidiaries to:
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(a) conduct its business only in the ordinary and regular course of
business consistent with past practices, provided that the Purchaser shall have
the right to dispose of the assets relating to its current business upon written
consent of the Seller which shall not be unreasonably withheld;
(b) maintain the books, accounts and records of the Purchaser and its
subsidiaries in accordance with U.S. GAAP, to the extent applicable, consistent
with past practices;
(c) use its best efforts to obtain all authorizations, consents, waivers,
approvals or other actions necessary or desirable to consummate the transactions
contemplated hereby and to cause the other conditions to the Seller's obligation
to close to be satisfied; and
(d) promptly inform the Seller in writing of any material breach of or
change in the representations and warranties contained in Article IV hereof.
Section 5.4. The Seller's Negative Covenants. (a) Prior to the Closing,
without the prior written consent of the Purchaser or as otherwise expressly
provided herein, the Seller will not, and will cause the Company and its
Subsidiaries not to:
(i) take any action or omit to take any action which would result in
the Company's or any of its Subsidiaries' (A) incurring any trade accounts
payable outside of the ordinary course of business or making any commitment
to purchase quantities of any item of inventory in excess of quantities
normally purchased in the ordinary course of business; (B) increasing any
of its indebtedness for borrowed money except in the ordinary course of
business; (C) guaranteeing the obligations of any entity other than its
Subsidiaries; (D) merging or consolidating with, purchasing substantially
all of the assets of, or otherwise acquiring any business or any
proprietorship, firm, association, limited liability company, corporation
or other business organization; (E) increasing or decreasing the rate or
type of compensation payable to any officer, director, employee or
consultant of the Company or any of its Subsidiaries (other than regularly
scheduled increases in base salary and annual bonuses consistent with prior
practice); (F) other than in the ordinary course of business, entering into
or amending any collective bargaining agreement, or creating or modifying
any pension or profit-sharing plan, bonus, deferred compensation, death
benefit, or retirement plan, or any other employee benefit plan, or
increasing the level of benefits under any such plan, or extending the
exercisability of any outstanding stock option or increasing or decreasing
any severance or termination pay benefit or any other fringe benefit; (G)
making any representation to anyone indicating any intention of the
Purchaser or its subsidiaries to retain, institute, or provide any employee
benefit plans; (H) declaring or paying any dividend or making any
distribution with respect to, or purchasing or redeeming, shares of the
capital stock of the Company or any of its Subsidiaries; (I) selling or
disposing of any assets otherwise than in the ordinary course of business
of the Company and its Subsidiaries; (J) making any capital expenditures
other than in the ordinary course of business consistent with past
practices and in no event in excess of US $100,000 in the aggregate; (K)
issuing any shares of the capital stock of any kind of the Company or any
of its Subsidiaries, transferring from the treasury of the Company or any
of its Subsidiaries any shares of the capital stock of the Company or its
Subsidiaries or issuing or granting any subscriptions, options, rights,
warrants, convertible securities or other agreements or commitments to
issue, or contracts or any other agreements obligating the Company or any
of its Subsidiaries to issue, or to transfer from treasury, any shares of
capital stock of any class or kind, or securities convertible into any such
shares; (L) modifying, amending or terminating any material contract other
than in the ordinary course of business consistent with past practices; or
(M) entering into any other transaction outside of the ordinary course of
business;
(ii) change any method or principle of accounting in a manner that is
inconsistent with past practice, except to the extent required by Italian
GAAP as advised by the Company's regular independent accountants;
(iii) take any action that would likely result in the representations
and warranties set forth in Article III (other than representations made as
of a particular date) becoming false or inaccurate in any material respect
(or, as to representations and warranties, which, by their terms, are
qualified as to materiality, becoming false or inaccurate in any respect);
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(iv) incur or create any Liens on assets;
(v) except as contemplated herein, take any action or omit to take any
action which would prejudice the Purchaser's rights to consummate each of
the transactions contemplated by this Agreement or to compel performance of
each of the obligations of the Seller under this Agreement;
(vi) take or omit to be taken any action, or permit any of its
Affiliates to take or to omit to take any action, which would reasonably be
expected to result in a Company Material Adverse Change;
(vii) agree or commit to take any action precluded by this Section
5.4.
(b) Prior to the Closing, without the prior written consent of the
Purchaser or as otherwise expressly provided herein, the Seller will not:
(i) enter into any contract, agreement or commitment or take any other
action which, if entered into or taken prior to the date of this Agreement,
would cause any representation or warranty of the Seller to be untrue or be
required to be disclosed on one or more Schedules referred to in Article
III;
(ii) take or omit to be taken any action, or permit its Affiliates to
take or to omit to take any action, which could reasonably be expected to
result in a Company Material Adverse Change; or
(iii) agree or commit to take any action prescribed by this Section
5.4.
Section 5.5. Purchaser's Negative Covenants. Prior to the Closing, without
the prior written consent of the Seller or as otherwise expressly provided
herein, the Purchaser will not, and the Purchaser will cause its subsidiaries
not to:
(a) change any method or principle of accounting in a manner that is
inconsistent with past practice, except to the extent required by U.S. GAAP as
advised by Purchaser's regular independent accountants;
(b) take any action, except as otherwise provided herein, that would
likely result in the representations and warranties set forth in Article IV
(other than representations made as of a particular date) becoming false or
inaccurate in any material respect (or, as to representations and warranties,
which, by their terms, are qualified as to materiality, becoming false or
inaccurate in any respect);
(c) except as contemplated herein, take any action or omit to take any
action which would prejudice the Seller's rights to consummate each of the
transactions contemplated by this Agreement or to compel performance of each of
the obligations of the Purchaser under this Agreement;
(d) except as contemplated herein, take or omit to be taken any action, or
permit any of its Affiliates to take or to omit to take any action, which would
reasonably be expected to result in a Purchaser Material Adverse Change; or
(e) agree or commit to take any action precluded by this Section 5.5.
Section 5.6. Closing Documents. The Seller shall, prior to or on the
Closing Date, execute and deliver, or cause to be executed and delivered to the
Purchaser, the documents or instruments described in Section 6.2. The Purchaser
shall, prior to or on the Closing Date, execute and deliver, or cause to be
executed and delivered, to the Seller, the documents or instruments described in
Section 6.3.
Section 5.7. Transfer and Other Taxes. (a) The Purchaser shall pay any
stamp, stock transfer, sales, purchase, use or similar tax under the laws of any
Governmental Authority arising out of or resulting from the purchase of the
Shares. The Purchaser shall prepare and file the required tax returns and other
required documents with respect to the taxes and fees required to be paid by
them pursuant to the preceding sentence.
(b) The Seller shall (i) prepare and file all income tax returns reporting
the income of the Seller arising on the Closing Date from the sale to the
Purchaser of the Shares, (ii) be responsible for the conduct of all tax
examinations relating to the tax returns referred to in (i) above, and (iii) pay
all taxes owing with respect to the tax returns referred to in (i) above.
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Section 5.8. Employment Agreements. Prior to the Closing Date, Jacob Agam
and Lucio De Luca will have executed and delivered to the Company employment
agreements satisfactory to Purchaser (the "New Employment Agreements").
Section 5.9. Public Announcements. Unless otherwise required by Applicable
Laws or requirements of Nasdaq (and in that event only if time does not permit),
at all times prior to the earlier of the Closing Date or termination of this
Agreement pursuant to Section 7.1, the Purchaser and the Seller shall (and the
Seller shall cause the Company to) consult with each other before issuing any
press release with respect to the transactions contemplated hereby and shall not
issue any such press release prior to such consultation.
Section 5.10. Purchaser Special Meeting. Subject to Article VII, the
Purchaser shall take all action in accordance with the federal securities laws,
the Delaware General Corporation Law, the Purchaser's Amended and Restated
Certificate and by-laws, as amended, necessary to convene the Purchaser Special
Meeting to be held on the earliest practical date, and to obtain the consent and
approval of the Purchaser's stockholders with respect to this Agreement and the
transactions contemplated hereby, including (in the absence of conditions that
would justify the termination of this Agreement) recommending such approval to
the Purchaser's stockholders.
Section 5.11. Preparation of the Prospectus/Proxy Statement and the
Registration Statement. The Purchaser shall, as soon as is reasonably
practicable, prepare the Prospectus/Proxy Statement to be included in the
Registration Statement. The Seller shall cause the Company to cooperate with the
Purchaser in providing to the Purchaser such consolidated financial statements,
financial data and accountant's reports as the Purchaser shall reasonably
request with respect to the filing of the Registration Statement and the
Prospectus/Proxy Statement. Once both parties consent to the filing of the
Prospectus/Proxy Statement with the SEC (which consent shall not be unreasonably
withheld), the Purchaser shall file the Prospectus/Proxy Statement with the SEC,
which filing shall be made on a confidential basis to the extent permitted by
the regulations of the SEC with respect to such filings. Prior to the mailing of
the Proxy Statement included in the Prospectus/Proxy Statement, Gianni, Origoni
& Partners, counsel to the Company and the Seller, shall deliver its opinion,
dated as of the mailing date, in such form as shall be reasonably satisfactory
to Purchaser. The Purchaser shall prepare and file the Registration Statement
with the SEC as soon as is reasonably practicable following clearance of the
Prospectus/Proxy Statement by the SEC and reasonable approval of the
Prospectus/Proxy Statement by the Purchaser, and the Seller shall cause the
Company to use all reasonable efforts to have the Registration Statement
declared effective by the SEC as promptly as practicable thereafter and to
maintain the effectiveness of the Registration Statement through the Closing
Date. If, at any time prior to the Closing Date, the Purchaser or the Seller
shall obtain knowledge of any information contained in or omitted from the
Registration Statement that would require an amendment or supplement to the
Registration Statement or the Prospectus/Proxy Statement, the party obtaining
such knowledge will promptly so advise the other parties in writing and the
Purchaser and the Seller shall (and the Seller shall cause the Company to)
promptly take such action as shall be required to amend or supplement the
Registration Statement and/or the Prospectus/Proxy Statement. The Seller shall
cause the Company to promptly furnish to the Purchaser all financial and other
information concerning it as may be required for the Prospectus/Proxy Statement
and any supplements or amendments thereto. The Purchaser and the Seller shall
(and the Seller shall cause the Company to) cooperate in the preparation of the
Prospectus/ Proxy Statement in a timely fashion and shall use all reasonable
efforts to clear the Prospectus/Proxy Statement and the Registration Statement
with the staff of the SEC. Promptly after the Registration Statement is declared
effective by the SEC, the Purchaser shall use all reasonable efforts to mail at
the earliest practicable date to its stockholders the Prospectus/Proxy
Statement, which shall include all information required under Applicable Law to
be furnished to the Purchaser's stockholders in connection with the transactions
contemplated thereby and shall include the recommendation of the Board of
Directors and the Special Committee of the Board of Directors of the Purchaser
to the extent not previously withdrawn and the written opinion of Royce
Investment Group described in Section 4.9. The Purchaser also shall take such
other reasonable actions (other than qualifying to do business in any
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jurisdiction in which it is not so qualified or submitting to taxation in any
jurisdiction in which it is not subject to taxation) required to be taken under
any applicable state securities laws in connection with the issuance of
Purchaser Common Stock, pursuant to the terms of this Agreement.
Section 5.12. Nasdaq Listing. The Purchaser shall use its reasonable
efforts to cause the Purchaser Common Stock issuable pursuant to the terms of
this Agreement to be approved for listing on Nasdaq prior to the Closing Date.
Section 5.13. Non-Competition and Confidentiality Agreement. Neither the
Seller nor its Affiliates will (a) for a period ending the earlier of five years
after the Closing Date or such time as Purchaser consummates a Termination
Transaction (as hereinafter defined), directly or indirectly, anywhere in the
world engage in the manufacture or distribution of animal feed, flour or pasta
products; or (b) for a period of five years after the Closing Date, directly or
indirectly employ, engage, contract for or solicit the services in any capacity
of any Person who is employed by the Company on the date hereof, unless the
employment of such Person is terminated by the Purchaser prior to any
solicitation of employment or employment; or (c) use for its own benefit or
divulge or convey to any third party, any Confidential Information (as
hereinafter defined) relating to the Company or any of its Subsidiaries. For
purposes of this Agreement, (i) "Termination Transaction" shall mean (x) the
merger or consolidation of Purchaser with another corporation which is not
Affiliated with Purchaser or Seller where the stockholders of Purchaser,
immediately prior to the merger or consolidation, do not beneficially own
immediately after the merger or consolidation, shares of the corporation issuing
cash or securities in the merger or consolidation entitling such shareholders to
the majority of all votes (without consideration of the rights of any class of
stock to elect directors by a separate class vote) to which all stockholders of
such corporation would be entitled in the election of directors, or (y) the sale
or disposition of all or substantially all of the assets or equity of Purchaser
to a corporation not Affiliated with Purchaser or Seller and (ii) "Confidential
Information" consists of all information, knowledge or data relating to the
Company or any of its Subsidiaries including, without limitation, customer and
supplier lists, formulae, trade know-how, processes, secrets, consultant
contracts, pricing information, marketing plans, product development plans,
business acquisition plans and all other information relating to the operation
of the Company not in the public domain or otherwise publicly available.
Information which enters the public domain or is publicly available loses its
confidential status hereunder so long as neither the Seller nor its Affiliates
directly or indirectly cause such information to enter the public domain.
The Seller acknowledges that the restrictions contained in this Section
5.13 are reasonable and necessary to protect the legitimate interests of the
Purchaser and that any breach by the Seller of any provision hereof will result
in irreparable injury to the Purchaser. The Seller acknowledges that, in
addition to all remedies available at law, the Purchaser shall be entitled to
equitable relief, including injunctive relief, and an equitable accounting of
all earnings, profits or other benefits arising from such breach and shall be
entitled to receive such other damages, direct or consequential, as may be
appropriate. The Purchaser shall not be required to post any bond or other
security in connection with any proceeding to enforce this Section 5.13.
Section 5.14. Best Efforts; Further Assurances. Subject to the terms and
conditions herein provided, each of the parties hereto shall use its best
efforts to take, or cause to be taken, all action, and to do, or cause to be
done, all things reasonably necessary, proper or advisable under applicable laws
and regulations to consummate and make effective the transactions contemplated
by this Agreement. Each of the Purchaser and the Seller shall (and the Seller
shall cause the Company to) use their respective best efforts to obtain consents
of all Governmental Authorities and third parties necessary to the consummation
of the transactions contemplated by this Agreement. In the event that at any
time after the Closing any further action is necessary to carry out the purposes
of this Agreement, each of the Purchaser and the Seller shall (and the Seller
shall cause the Company to) take all such action without any further
consideration therefor.
Section 5.15. Third Party Proposals. Neither the Seller nor any Affiliate
of the Seller shall (nor shall the Seller cause the Company or any of its
Affiliates) to solicit or encourage inquiries or proposals with respect to, or,
except as required by law or a fiduciary obligation in the written opinion of
counsel,
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furnish any information relating to or participate in any negotiations or
discussions concerning, any acquisition or purchase of all or a substantial
portion of the assets of, or of a substantial equity interest in, the Company or
any of its Subsidiaries or any business combination with the Company or any of
its Subsidiaries other than as contemplated by this Agreement (each, an
"Acquisition Proposal"). The Seller shall notify the Purchaser immediately if
any Acquisition Proposal is received by, any such information is requested from,
or any such negotiations or discussions are sought to be initiated with, the
Seller, the Company or any of its Subsidiaries. The Seller and its Affiliates
shall (and the Seller shall cause the Company and its Affiliates to) immediately
cease and cause to be terminated any existing activities, including discussions
or negotiations with any parties, conducted prior to the date hereof with
respect to any Acquisition Proposal. If any Person (other than the Purchaser or
their respective agents and representatives) has been provided with any
confidential information or data relating to an Acquisition Proposal, the Seller
shall cause such information or data to be immediately returned to it. The
Seller shall and the Seller shall cause the Company and their respective
officers, directors, agents, advisors and Affiliates to comply with the
provisions of this Section 5.15.
Section 5.16. Hart-Scott-Rodino Filings. As soon as practicable, but in no
event more than seven (7) Business Days from the date hereof, the Purchaser and
the Seller shall file with the Antitrust Division of the Department of Justice
(the "Antitrust Division") and the Federal Trade Commission (the "FTC") the
notification and report form (the "Report") required under the HSR Act, with
respect to the transactions contemplated hereby. Each of the Purchaser and the
Seller shall (and the Seller shall cause the Company to) cooperate with each
other to the extent necessary to assist the Seller and the Purchaser in the
preparation of the Report, shall request early termination of the waiting period
required by the HSR Act and, if requested, will promptly amend or furnish
additional information thereunder if requested by the Antitrust Division and/or
the FTC.
Section 5.17. Affiliates of the Company. The Seller shall cause each person
who may be on the Closing Date or was on the date hereof an "affiliate" of the
Company for purposes of Rule 145 under the Securities Act, to execute and
deliver to the Purchaser no less than five days prior to the date of the
Closing, the written undertakings in the form attached hereto as Exhibit A (the
"Affiliate Letter"). No later than ten days prior to the date of the Closing,
Seller, after consultation with its outside counsel, shall provide the Purchaser
with a letter (reasonably satisfactory to the Purchaser's counsel) specifying
all of the persons or entities who, in the Seller's opinion, may be deemed to be
"affiliates" of the Company under the preceding sentence. The foregoing
notwithstanding, the Purchaser shall be entitled to place legends as specified
in the Affiliate Letter on the certificates evidencing any shares of the
Purchaser Common Stock to be received by (i) any such "affiliate" of the Company
specified in such letter or (ii) any person the Purchaser reasonably identifies
(by written notice to the Seller and the Company) as being a person who may be
deemed an "affiliate" for purposes of Rule 145 under the Securities Act, and to
issue appropriate stop transfer instructions to the transfer agent for Purchaser
Common Stock, consistent with the terms of the Affiliate Letter, regardless of
whether such person has executed the Affiliate Letter and regardless of whether
such person's name appears on the letter to be delivered pursuant to the
preceding sentence.
Section 5.18. Purchaser's Post Closing Covenants. (a) For so long as
Spigadoro (or its current shareholders), their respective Affiliates and Carlo
Petrini collectively hold at least (i) 50% of the outstanding shares of
Purchaser Common Stock, Spigadoro or its assignee shall have the right, but not
the obligation, to nominate 50% of the members of the management slate for
election to the Purchaser's Board of Directors by the stockholders of the
Purchaser, (ii) 25% of the outstanding shares of Purchaser Common Stock,
Spigadoro or its assignee shall have the right, but not the obligation, to
nominate 25% of the members of the management slate for election to the
Purchaser's Board of Directors by the stockholders of the Purchaser and (iii)
10% of the shares of Purchaser's Common Stock, Spigadoro or its assignee shall
have the right, but not the obligation, to nominate a single member of the
management slate for election to the Purchaser's Board of Directors by the
stockholders of the Purchaser. In each case, the Purchaser agrees to use its
best efforts to ensure that such person or persons are duly elected.
(b) At the Closing Date, Seller and/or its Affiliates will have pledged
6,000,000 shares of Purchaser Common Stock (the "Pledged Stock") as security for
re-payment of certain of the Assumed Indebtedness
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identified as item 4 on Schedule 2.2. In the event that Purchaser should default
on such indebtedness and the creditor should forclose, in whole or in part, upon
the Pledged Stock, Purchaser agrees to promptly issue replacement shares
("Additional Shares") of Purchaser Common Stock to Seller on a share for share
basis. At the time of issuance, the Additional Shares will not be registered for
re-sale or distribution by the Seller under the Securities Act and applicable
state securities or "blue sky" laws. Accordingly, the Seller may not pledge,
transfer, sell or otherwise dispose of any of the Shares (or any interest
therein) unless such transfer or disposition is registered under the Securities
Act and such laws or an exemption from registration is available with respect
thereto. In order to perfect an exemption from registration for the issuance of
the Shares to the Seller, at the time of issuance thereof and as a condition
precedent thereto, the Seller will be required to represent and warrant to the
Purchaser that, among other things, (i) it is an "accredited investor" as such
term is defined pursuant to the Securities Act, (ii) it has sufficient
sophistication and experience to evaluate an investment in the Purchaser, (iii)
an investment in the Shares is suitable for it, and (iv) it understands the
nature of the restrictions on their ability to effect a transfer or disposition
of the Additional Shares. The Seller also will be obligated to agree to other
customary provisions designed to ensure that no transfer or disposition of the
Additional Shares will occur in violation of the Securities Act. In the event
that the Seller seeks to distribute Additional Shares to its stockholders, any
approval of such transfer will be conditioned upon, among other things, (i)
receipt of an opinion of counsel to the Seller in form and substance
satisfactory to the Purchaser to the effect that such distribution may be
effected without violation of the Securities Act and any applicable state
securities laws, and (ii) receipt of an agreement from such stockholders to be
bound by the provisions hereof.
Section 5.19. Financial Statements for a Current Report on Form 8-K. (a)
Prior to the Closing, the Seller shall cause the Company to provide to the
Purchaser, regardless of when the Closing occurs, (i) audited consolidated
balance sheets of the Company and its Subsidiaries as of December 31, 1999 and
1998, (ii) audited consolidated statements of income, cash flows and changes in
shareholders' equity of the Company and its Subsidiaries for the years ended
December 31, 1999, 1998 and 1997, (iii) an unqualified report with respect to
such audited financial statements by the Accountants, which report shall be in
form and substance reasonably satisfactory to the Purchaser, and (iv) unaudited
consolidated balance sheets of the Company and its Subsidiaries and unaudited
consolidated statements of income, cash flows and changes in shareholders'
equity of the Company and its Subsidiaries necessary for the filing of the
Purchaser's current report on Form 8-K. Such financial statements shall be
prepared in accordance with U.S. GAAP, consistently applied, and shall conform
in all material respects to all provisions of the SEC's Regulation S-X, so that
such financial statements meet the requirements for filing by Purchaser with the
SEC.
(b) At the Closing, the Seller shall cause the Accountants to deliver to
the Purchaser an executed consent, in form and substance reasonably satisfactory
to the Purchaser and suitable for filing by the Purchaser with the SEC, which
consent shall authorize the Purchaser to file with the SEC the report delivered
pursuant to paragraph (a) above.
(c) Prior to the Closing, the Seller shall cause the Company to cooperate
with the Purchaser in providing to the Purchaser such consolidated financial
statements, financial data and accountants' reports as the Purchaser shall
reasonably request with respect to any filing that the Purchaser shall make
under the Securities Act or the Exchange Act.
ARTICLE VI
CONDITIONS TO CLOSING
Section 6.1. Conditions to the Obligations of Each Party. The obligations
of the Purchaser and the Seller to consummate the transactions contemplated
hereby shall be subject to the satisfaction (or waiver by each party, to the
extent permitted by law) of the following conditions:
(a) The issuance of the shares of Purchaser Common Stock to be issued
hereunder shall have been approved by the Purchaser's stockholders in the
manner required by any Applicable Law and the applicable rules of Nasdaq.
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(b) No Governmental Authority of competent jurisdiction shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
judgment, decree, injunction or other order which is in effect, which would
prohibit consummation of the transactions contemplated by this Agreement or
which would result in a Purchaser Material Adverse Change or a Company Material
Adverse Change after the Closing Date and after giving effect to consummation of
the transactions contemplated by this Agreement.
(c) The waiting period required by the HSR Act, and any extensions thereof
obtained by request or other action of the FTC and/or the Antitrust Division,
shall have expired or been terminated by the FTC and the Antitrust Division.
(d) The SEC shall have declared the Registration Statement effective under
the Securities Act, and no stop order or similar restraining order suspending
the effectiveness of the Registration Statement shall be in effect and no
proceedings for such purpose shall be pending before or threatened by the SEC or
any state securities administrator.
Section 6.2. Conditions to the Purchaser's Obligations. The obligations of
the Purchaser to consummate the transactions contemplated by this Agreement
shall be subject to the fulfillment prior to or at the Closing of each of the
following conditions:
(a) All representations and warranties made by the Seller in this Agreement
and the Schedules hereto shall be true, correct and complete on the date hereof
and as of the Closing Date as though such representations and warranties were
made as of the Closing Date, and the Seller shall have duly performed or
complied with all of the covenants, obligations and conditions to be performed
or complied with by them under the terms of this Agreement on or prior to or at
the Closing.
(b) There shall have been no (i) Company Material Adverse Change, or any
development which could reasonably be expected to result in a prospective
Company Material Adverse Change, or (ii) material damage, destruction or loss to
the Company's assets, regardless of insurance coverage.
(c) (i) All authorizations, consents, waivers, approvals or other actions
required in connection with the execution, delivery and performance of this
Agreement by the Seller and the consummation by the Seller of the transactions
contemplated hereby shall have been obtained and shall be in full force and
effect; (ii) the Seller and shall cause the Company to have obtained any
authorizations, consents, waivers, approvals or other actions required to
prevent a material breach or default by the Company under any contract to which
the Company is party or for the continuation of any agreement to which the
Company is a party; and (iii) all authorizations, consents, waivers, approvals
or other actions necessary to permit the Purchaser to own the Shares shall have
been obtained and shall be in full force and effect.
(d) The Purchaser shall have completed its investigation of the Company and
the Purchaser shall be satisfied in their sole discretion with the condition of
the Company and its future prospects.
(e) Prior to or at the Closing, the Seller shall have (i) delivered such
documents and instruments acceptable to Purchaser and its counsel so as to
transfer all rights, title and interest in the name "Spigadoro" and all
variations thereof, it being the intent of the Seller and the Purchaser that
from and after the Closing Date, the Purchaser will have the sole right as
against the Seller and all other persons to conduct any business under such name
and that the Purchaser may commence doing so immediately on and after the
Closing Date, and (ii) amended its organizational documents to change its
corporate name to a name that does not include the word "Spigadoro".
(f) Prior to or at the Closing, the Seller shall (and the Seller shall have
caused the Company to) deliver such other closing documents as shall be
requested by the Purchaser in form and substance acceptable to the Purchaser's
counsel, including the following:
(i) a certificate of the President or a Vice President of the Seller,
dated the Closing Date, to the effect that (1) the Person signing such
certificate is familiar with this Agreement and (2) the conditions
specified in Section 6.2(a), (b) and (c) have been satisfied;
(ii) a certificate of the Secretary or Assistant Secretary of the
Seller, dated the Closing Date, as to the incumbency of any officer of the
Seller executing this Agreement or any document related thereto and
covering such other matters as the Purchaser may reasonably request;
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(iii) a certified copy of (1) the Certificate of Incorporation and
by-laws of the Seller and all amendments thereto and (2) a certified copy
of the resolutions of the Seller's Board of Directors authorizing the
execution, delivery and consummation of this Agreement and the transactions
contemplated hereby;
(iv) an opinion of Gianni, Origoni & Partners, counsel to the Company
and the Seller, dated the Closing Date, in such form as shall be reasonably
satisfactory to Purchaser;
(v) the Affiliate Letters pursuant to Section 5.17;
(vi) The Purchaser shall have received from each of Rothstein, Kass &
Company, P.C. and Reconta Ernst & Young, S.p.A. (i) a letter dated as of
the date of the mailing of the Proxy Statement/Prospectus and (ii) a letter
dated as of the effective date of the Registration Statement on Form S-4
("Registration Statement"), each addressed to the Purchaser, (a) confirming
that they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation
S-X of the Commission and (b) stating, as of the date of the letter (or,
with respect to matters involving changes or developments since the
respective dates as of which specified financial information is given in
the Prospectus/Proxy Statement and the prospectus contained in the
Registration Statement, as the case may be, as of a date not more than five
days prior to the date of the letter), the conclusions and findings of such
firm with respect to the financial information contained in the documents
referred to above.
(vii) such other documents or instruments as Purchaser or the
Purchaser reasonably requests to effect the transactions contemplated
hereby.
(g) The Purchaser shall have received the executed Employment Agreements
referenced on Schedule 5.8.
Section 6.3. Conditions to the Seller's Obligations. The obligations of
the Seller to consummate the transactions contemplated by this Agreement shall
be subject to the fulfillment at or prior to the Closing of each of the
following conditions:
(a) All representations and warranties made by the Purchaser in this
Agreement shall be true, correct and complete on the date hereof and as of the
Closing Date as though such representations and warranties were made as of the
Closing Date, and the Purchaser shall have duly performed or complied with all
of the covenants, obligations and conditions to be performed or complied with
by it under the terms of this Agreement on or prior to or at the Closing.
(b) There shall have been no (i) Purchaser Material Adverse Change, or any
development which could reasonably be expected to result in a prospective
Purchaser Material Adverse Change, or (ii) material damage, destruction or loss
to the Purchaser's assets, regardless of insurance coverage.
(c) All authorizations or approvals or other action required in connection
with the execution, delivery and performance of this Agreement by the Purchaser
and the consummation by the Purchaser of the transactions contemplated hereby
and thereby shall have been obtained and shall be in full force and effect.
(d) Prior to or at the Closing, the Purchaser shall have delivered to the
Seller such closing documents as shall be reasonably requested by the Seller in
form and substance reasonably acceptable to its counsel, including the
following:
(i) a certificate of the Chairman of the Board and Chief Executive
Officer of the Purchaser, dated the Closing Date, to the effect that (1)
the Person signing such certificate is familiar with this Agreement and (2)
the conditions specified in Section 6.3(a) and (b) have been satisfied;
(ii) a certificate of the Secretary or Assistant Secretary of the
Purchaser, dated the Closing Date, as to the incumbency of any officer of
the Purchaser executing this Agreement or any document related thereto and
covering such other matters as the Seller may reasonably request;
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(iii) a certified copy of (1) the Amended and Restated Certificate and
by-laws of the Purchaser and all amendments thereto and (2) the resolutions
of the Board of Directors (or any committee thereof) of the Purchaser
authorizing the execution, delivery and consummation of this Agreement and
the transactions contemplated hereby and thereby;
(iv) the shares of Purchaser Common Stock, as set forth in Section
2.2; and
(v) such other documents or instruments as the Seller reasonably
request to effect the transactions contemplated hereby.
ARTICLE VII
TERMINATION
Section 7.1. Termination and Amendment. This Agreement may be terminated at
any time prior to Closing as follows (notwithstanding any approval of this
Agreement by the Purchaser's stockholders):
(a) by mutual consent of the Seller and the Purchaser;
(b) by the Purchaser if any authorization, consent, waiver or approval
required for the consummation of the transactions contemplated hereby shall
require the divestiture or cessation of any of the present business or
operations conducted by the Purchaser and its subsidiaries or the Company and
its Subsidiaries or shall impose any other condition or requirement, which
divestiture, cessation, condition or requirement the Purchaser determines, in
its good faith judgment, to be materially burdensome or to deny to the Purchaser
in any material respect the benefits intended to be obtained by the Purchaser
pursuant to the transactions contemplated by this Agreement;
(c) by either the Seller or the Purchaser if at the Purchaser Special
Meeting (including any adjournment or postponement thereof) the requisite vote
(under all Applicable Laws and the rules and regulations of Nasdaq) of the
Purchaser's stockholders to approve the transactions contemplated hereby shall
not have been obtained;
(d) either the Seller or the Purchaser if any representation or warranty
made in this Agreement for its benefit is untrue in any material respect (other
than representations and warranties which are qualified as to materiality, which
representations and warranties will give rise to termination if untrue in any
respect); provided that, in each case, (a) the party seeking to terminate this
Agreement is not then in material breach of any material representation or
warranty contained in this Agreement, (b) such untrue representation or warranty
cannot be or has not been cured within 30 days after receipt of written notice
of such breach and (c) in the case of the Seller, except for the representations
and warranties contained in Sections 3.1, 3.2, 3.6 and 3.15, and in the case of
the Purchaser, except for the representations and warranties contained in
Sections 4.1 and 4.2 such untrue representation and warranty has, or is
reasonably likely to result in a Company Material Adverse Change or a Purchaser
Material Adverse Change, as the case may be, and in each case after the Closing
Date and after giving effect to consummation of the transactions contemplated by
this Agreement;
(e) by either the Seller or the Purchaser if the other party shall have
defaulted in the performance of any material covenant or agreement under this
Agreement; provided that, in each case, (a) the party seeking to terminate this
Agreement has complied with its covenants and agreements under this Agreement in
all material respects and (b) such failure to comply cannot be or has not been
cured within 30 days after receipt of written notice of such default;
(f) by the Purchaser, in the event that the conditions to their obligations
set forth in Article VI hereof have not been satisfied or waived;
(g) by the Seller, in the event that the conditions to their obligations
set forth in Article VI hereof have not been satisfied or waived; and
(h) by either the Seller or the Purchaser if the transactions contemplated
by this Agreement shall not have been consummated on or before April 30, 2000
(or such later date as may be agreed upon in writing by the parties hereto).
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Section 7.2. Effect of Termination. If this Agreement is terminated
pursuant to Section 7.1 hereof, all rights and obligations of the Seller and the
Purchaser hereunder shall terminate and no party shall have any liability to the
other party, except for obligations of the parties hereto in Sections 5.1, 5.9
and 9.2, which shall survive the termination of this Agreement, and except
nothing herein will relieve any party from liability for any breach of any
representation, warranty, agreement or covenant contained herein prior to such
termination.
Section 7.3. Amendment. This Agreement may be amended by the parties
hereto, at any time before or after adoption of this Agreement by the
Purchaser's stockholders, but after any such approval, no amendment shall be
made which by law requires further approval or authorization by the Purchaser's
stockholders without such further approval or authorization. Notwithstanding the
foregoing, this Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
Section 7.4. Extension; Waiver. At any time prior to the Closing Date, the
Purchaser (with respect to the Seller) and the Seller (with respect to the
Purchaser) by action taken or authorized by their respective Boards of Directors
(or any committee thereof), may, to the extent legally allowed, (a) extend the
time for the performance of any of the obligations or other acts of such party,
(b) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (c) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
Section 8.1. Survival of Representations and Warranties. Except as set
forth below, the representations and warranties provided for in this Agreement
shall survive the Closing and remain in full force and effect for eighteen (18)
months from the Closing Date for the benefit of the parties hereto and their
successors and assigns. The representations and warranties provided for in
Sections 3.15 (Litigation), 3.16 (Taxes) and 3.18 (Environmental) shall survive
the Closing and remain in effect for the statute of limitations applicable to
such matters. The representations and warranties provided for in Sections 3.7
(Title to Shares), 3.8 (Options, Warrants, etc.), and 3.25 (Brokers) shall
survive the Closing and remain in full force and effect forever. The survival
period of each representation or warranty as provided in this Section 8.1 is
hereinafter referred to as the "Survival Period."
Section 8.2. Indemnification. (a) The Seller, subject to the limitations
set forth in Section 8.2(d), shall indemnify and hold harmless the Purchaser and
its respective Affiliates, officers, directors, employees, agents and
representatives, and any Person claiming by or through any of them, against and
in respect of any and all claims, costs, expenses, damages, liabilities, losses
or deficiencies (including, without limitation, counsel's fees and other costs
and expenses incident to any suit, action or proceeding) (the "Damages") arising
out of, resulting from or incurred in connection with (i) any inaccuracy in any
representation or the breach of any warranty made by the Seller in this
agreement for the applicable Survival Period, and (ii) the breach by the Seller
of any covenant or agreement to be performed by it hereunder.
(b) The Purchaser subject to the limitations set forth in Section 8.2(d),
shall indemnify and hold harmless the Seller and its respective Affiliates,
officers, directors, employees, agents and representatives, and any Person
claiming by or through any of them, against and in respect of any and all
Damages arising out of, resulting from or incurred in connection with (i) any
inaccuracy in any representation or the breach of any warranty made by the
Purchaser in this Agreement for the applicable Survival Period, or (ii) the
breach by the Purchaser of any covenant or agreement to be performed by it
hereunder.
(c) Any Person providing indemnification pursuant to the provisions of this
Section 8.2 is hereinafter referred to as an "Indemnifying Party" and any Person
entitled to be indemnified pursuant to the provisions of this Section 8.2 is
hereinafter referred to as an "Indemnified Party."
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(d) Neither parties' indemnification obligation contained in Section 8.2(a)
or (b) hereunder shall apply to any claim for Damages until the aggregate of all
such claims of such party total US $250,000 in which event such party's
indemnity obligation shall apply to the total amount in excess of US $250,000,
subject to a maximum of US $75,000,000 for all claims in the aggregate. All such
claims made during the relevant Survival Period shall be counted in determining
whether the thresholds specified above have been achieved.
(e) The Seller may elect to satisfy its indemnification obligation
hereunder other than by payment of cash by returning to the Purchaser shares of
Purchaser Common Stock issued in connection with this Agreement valued at the
average closing price reported by the primary stock market or exchange on which
the Purchaser Common Stock is traded for the ten (10) trading days prior to the
date on which such payment is due.
(f) The provisions of this Article VIII shall constitute the sole and
exclusive remedy of any Indemnified Party for Damages arising out of, resulting
from or incurred in connection with any inaccuracy in any representation or
breach of any warranty made by the Purchaser or the Seller in this Agreement.
Section 8.3. Procedures for Third Party Claims. In the case of any claim
for indemnification arising from a claim of a third party (a "Third Party
Claim"), an Indemnified Party shall give prompt written notice to the
Indemnifying Party of any claim or demand which such Indemnified Party has
knowledge and as to which it may request indemnification hereunder. The
Indemnifying Party shall have the right to defend and to direct the defense
against any such Third Party Claim, in its name or in the name of the
Indemnified Party, as the case may be, at the expense of the Indemnifying Party,
and with counsel selected by the Indemnifying Party unless (i) such Third Party
Claim seeks an order, injunction or other equitable relief against the
Indemnified Party, or (ii) the Indemnified Party shall have reasonably concluded
that (x) there is a conflict of interest between the Indemnified Party and the
Indemnifying Party in the conduct of the defense of such Third Party Claim or
(y) the Indemnified Party has one or more defenses not available to the
Indemnifying Party. Notwithstanding anything in this Agreement to the contrary,
the Indemnified Party shall, at the expense of the Indemnifying Party, cooperate
with the Indemnifying Party, and keep the Indemnifying Party fully informed, in
the defense of such Third Party Claim. The Indemnified Party shall have the
right to participate in the defense of any Third Party Claim with counsel
employed at its own expense; provided, however, that, in the case of any Third
Party Claim described in clause (i) or (ii) of the second preceding sentence or
as to which the Indemnifying Party shall not in fact have employed counsel to
assume the defense of such Third Party Claim, the reasonable fees and
disbursements of such counsel shall be at the expense of the Indemnifying Party.
The Indemnifying Party shall have no indemnification obligations with respect to
any Third Party Claim which shall be settled by the Indemnified Party without
the prior written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld or delayed.
Section 8.4. Procedures for Inter-Party Claims. In the event that an
Indemnified Party determines that it has a claim for Damages against an
Indemnifying Party hereunder (other than as a result of a Third Party Claim),
the Indemnified Party shall give prompt written notice thereof to the
Indemnifying Party, specifying the amount of such claim and any relevant facts
and circumstances relating thereto. The Indemnified Party shall provide the
Indemnifying Party with reasonable access to its books and records for the
purpose of allowing the Indemnifying Party a reasonable opportunity to verify
any such claim for Damages. The Indemnified Party and the Indemnifying Party
shall negotiate in good faith regarding the resolution of any disputed claims
for Damages. Promptly following the final determination of the amount of any
Damages claimed by the Indemnified Party, the Indemnifying Party shall pay such
Damages to the Indemnified Party by wire transfer or check made payable to the
order of the Indemnified Party, without interest. In the event that the
Indemnified Party is required to institute legal proceedings in order to recover
Damages hereunder, the cost of such proceedings (including costs of
investigation and reasonable attorneys' fees and disbursements) shall be added
to the amount of Damages payable to the Indemnified Party.
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ARTICLE IX
MISCELLANEOUS
Section 9.1. Notices. All notices or other communications required or
permitted hereunder shall be in writing and shall be delivered personally, by
facsimile or sent by certified, registered or express air mail, postage prepaid,
and shall be deemed given when so delivered personally, or by facsimile, or if
mailed, five days after the date of mailing, as follows:
If to Purchaser IAT Multimedia, Inc
70 East 55th Street
New York, NY 10022
Telephone: (212) 754-4445
Facsimile: (212) 754-4044
Attention: Jacob Agam
With a copy to: Lowenstein Sandler PC
65 Livingston Avenue
Roseland, New Jersey 07068
Telephone: (973) 597-2500
Facsimile: (973) 597-2400
Attention: Steven M. Skolnick, Esq.
If to the Seller: Gruppo Spigadoro N.V.
Strawinskylaan 1725, 1077 XX
Amsterdam, The Netherlands
Telephone: 31 305722306
Facsimile: 31 206647557
Attention: Marc S. Goldfarb
With a copy to: Gianni, Origoni & Partners
00184 Roma
Via Quattro Fontane, 20
Italy
Telephone: (39) 06-478751
Facsimile: (39) 06-4871101
Attention: Mario Amoroso, Esq.
or to such other address as any party hereto shall notify the other parties
hereto (as provided above) from time to time.
Section 9.2. Expenses. Regardless of whether the transactions provided for
in this Agreement are consummated, except as otherwise provided herein, each
party hereto shall pay its own expenses incident to this Agreement and the
transactions contemplated herein (including without limitation legal fees,
accounting fees and investment banking fees).
Section 9.3. Governing Law; Consent to Jurisdiction. This Agreement shall
be governed by, and construed in accordance with, the internal laws of the State
of New York, without reference to the choice of law principles thereof. Each of
the parties hereto irrevocably submits to the non-exclusive jurisdiction of the
courts of the State of New Jersey and the United States District Court for the
District of New Jersey for the purpose of any suit, action, proceeding or
judgment relating to or arising out of this Agreement and the transactions
contemplated hereby. Service of process in connection with any such suit, action
or proceeding may be served on each party hereto anywhere in the world by the
same methods as are specified for the giving of notices under this Agreement.
Each of the parties hereto irrevocably consents to the jurisdiction of any such
court in any such suit, action or proceeding and to the laying of venue in such
court. Each party hereto irrevocably waives any objection to the laying of venue
of any such suit, action or proceeding brought in such courts and irrevocably
waives any claim that any such suit, action or proceeding brought in any such
court has been brought in an inconvenient forum.
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Section 9.4. Assignment; Successors and Assigns; No Third Party Rights.
Except as otherwise provided herein, this Agreement may not be assigned by
operation of law or otherwise, and any attempted assignment shall be null and
void. The Purchaser may assign all of its rights under this Agreement to any of
its Affiliates; provided such Affiliate assumes all of the obligations of the
Purchaser hereunder. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors, assigns and legal
representatives. This Agreement shall be for the sole benefit of the parties to
this Agreement and their respective successors, assigns and legal
representatives and is not intended, nor shall be construed, to give any Person,
other than the parties hereto and their respective successors, assigns and legal
representatives, any legal or equitable right, remedy or claim hereunder.
Section 9.5. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original agreement, but all of which together
shall constitute one and the same instrument.
Section 9.6. Titles and Headings. The headings and table of contents in
this Agreement are for reference purposes only, and shall not in any way affect
the meaning or interpretation of this Agreement.
Section 9.7. Entire Agreement. This Agreement, including the Schedules and
Exhibits attached thereto, constitutes the entire agreement among the parties
with respect to the matters covered hereby and supersedes all previous written,
oral or implied understandings among them with respect to such matters.
Section 9.8. Waiver. Any of the terms or conditions of this Agreement may
be waived at any time by the party or parties entitled to the benefit thereof,
but only by a writing signed by the party or parties waiving such terms or
conditions.
Section 9.9. Severability. The invalidity of any portion hereof shall not
affect the validity, force or effect of the remaining portions hereof. If it is
ever held that any restriction hereunder is too broad to permit enforcement of
such restriction to its fullest extent, such restriction shall be enforced to
the maximum extent permitted by law.
Section 9.10. No Strict Construction. Each of the Purchaser and the Seller
acknowledge that this Agreement has been prepared jointly by the parties hereto,
and shall not be strictly construed against either party.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
GRUPPO SPIGADORO, N.V.
By: /s/ Jacob Agam
--------------------------------
Name: Jacob Agam
Title: Chairman
IAT MULTIMEDIA, INC.
By: /s/ Klaus Grissemann
--------------------------------
Name: Klaus Grissemann
Title: Chief Financial Officer
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ROYCE INVESTMENT GROUP, INC.
ANNEX B
November 2, 1999
To the Special Committee of the Board of Directors
IAT Multimedia, Inc.
Gentlemen:
You have requested our professional opinion, as investment bankers, as to the
fairness to the holder of the outstanding shares of IAT Multimedia, Inc. ("IAT"
or the "Company") of the consideration to such shareholders resulting from the
proposed Stock Purchase Agreement (the "Stock Purchase Agreement") between IAT
and Gruppo Spigadoro, N.V. ("Spigadoro"), pursuant to which IAT will acquire
from Spigadoro (the "Acquisition") all the outstanding capital securities of
Petrini, S.p.A. ("Petrini") in exchange for the issuance of 47,354,465 shares of
IAT common stock (additional shares may be issued under the anti-dilution
provision of the Stock Purchase Agreement) and the assumption by IAT of
approximately $20.5 million of short term indebtedness of Spigadoro.
Shareholders of IAT immediately preceding consummation of the Acquisition would
own approximately 17.5 % of the IAT common stock outstanding immediately
following consummation of the Acquisition. No new securities are to be issued to
the current shareholders of IAT in the Acquisition. In this letter, when we
refer to the consideration to be received by the shareholders of IAT in the
Acquisition, we mean the interests which those shareholders will have in IAT
immediately following consummation of the Acquisition.
In connection with our opinion, we have reviewed, among other things, the Stock
Purchase Agreement, Annual Reports on Form 10K of the Company for the two years
ended December 31, 1997 and 1998, certain Quarterly Reports on Form 10-Q of the
Company, drafts of the proxy statement-prospectus which the Company proposes to
file with the Securities and Exchange Commission in connection with the
Acquisition, audited financial statements of (Spigadoro/Petrini) for the two
years ended December 31, 1997 and 1998, certain unaudited quarterly financial
statements of (Spigadoro/Petrini) prepared by management of Spigadoro, certain
financial and other information concerning the Company and Petrini which was
publicly available or furnished to us by the Company or Petrini. In addition,
we held discussions with management of the Company and of Petrini regarding
their respective businesses, financial condition and future prospects.
Furthermore, we have examined the historical and current market data for the
Company's common stock and other materials relating to the Acquisition. We have
conducted such other financial analysis as we have determined, based upon our
judgment as investment bankers, to be appropriate for purposes of this opinion.
We have not been requested to, and did not, solicit third party indications of
interest in acquiring all or any part of the Company. We have participated in
negotiation regarding the financial terms of the proposed Acquisition on behalf
of the Special Committee of the Board of Directors for IAT. We have also advised
the Committee with respect to the alternatives available to IAT other than the
Acquisition. We have not conducted an independent audit or appraisal of the
assets of liabilities (contingent or otherwise) of the company or of Petrini.
In rendering this opinion, we have relied, with your consent, without
independent verification, on the accuracy and completeness of all financial and
other information, which was publicly available or furnished or otherwise
communicated to us by the Company or Petrini. With respect to any projections or
analyses reviewed by us, we have assumed that such materials were reasonably
undertaken, based upon assumptions reflecting the best currently available
estimates and good faith judgments of management as to the future performance of
the Company and of Petrini and that the management of the Company or that of
Petrini do not have any information or beliefs that would make such information
misleading. We express no view as to the assumptions upon which any such
materials are based.
B-1
Our opinion is based upon our review and analysis of the foregoing factors in
the light of our assessment of general economic, financial and market conditions
as they now exist and as they can be evaluated by us as of the date hereof. It
is also based upon certain other non-quantifiable benefits which we believe will
likely accrue to IAT should the Acquisition occur. These benefits include a
greater availability of capital resources from both private and public sources
due to the greater critical mass and cash flow achieved by the Acquisition, and
an opportunity to grow the resulting entity aggressively both internally and
through acquisitions which may or may not occur post the completion of the
transaction being considered. Our opinion is not a recommendation as to whether
any stockholder of the Company of IAT should vote in favor or in opposition to
the proposed Acquisition.
Based upon and subject to the foregoing, we are of the opinion, that the
consideration to be received by the shareholders of IAT in the Acquisition is
fair from a financial point of view.
It is understood that this letter is for the information of the Special
Committee and the full Board of Directors of the Company and may not be used for
any other purpose without our prior written consent, except that this opinion
may be included in its entirety in any filing made by the Company with the
Securities and Exchange Commission with respect to the Acquisition.
Respectfully,
ROYCE INVESTMENT GROUP, INC.
By: /s/ Anthony J. Sarkis
-------------------------------
Anthony J. Sarkis
Vice President/
Corporate Finance
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ANNEX C
FORM OF AMENDMENT TO THE AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION OF
IAT MULTIMEDIA, INC.
AMENDMENT TO ARTICLE FOUR A OF THE IAT AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
Resolved, that ARTICLE FOUR A of the Amended and Restated Certificate of
Incorporation of IAT Multimedia, Inc. be, and the same is hereby deleted in its
entirety and the following substituted in lieu thereof:
"A. Classes of Stock. The Corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares of which the Corporation is authorized to issue is
110,000,000; 100,000,000 shares shall be Common Stock, par value $.01 per share,
and, 10,000,000 shall be Preferred Stock, par value $.01 per share."
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ANNEX D
FORM OF AMENDMENT TO THE AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION OF
IAT MULTIMEDIA, INC.
AMENDMENT TO ARTICLE ONE OF THE IAT AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
Resolved, that ARTICLE ONE of the Amended and Restated Certificate of
Incorporation of IAT Multimedia, Inc. be, and the same is hereby deleted in its
entirety and the following substituted in lieu thereof:
"The name of the corporation is Spigadoro, Inc. (the "Corporation").
D-1
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ANNEX E
IAT MULTIMEDIA, INC.
1999 STOCK OPTION PLAN
1. Purpose.
The purpose of this plan (the "Plan") is to secure for IAT Multimedia, Inc.
(the "Company") and its shareholders the benefits arising from capital stock
ownership by employees, officers and directors of, and consultants or advisors
to, the Company who are expected to contribute to the Company's future growth
and success. Except where the context otherwise requires, the term "Company"
shall include all present and future parent and subsidiary corporations of the
Company as defined, respectively, in Sections 424(e) and 424(f) of the Internal
Revenue Code of 1986, as amended or replaced from time to time (the "Code").
Those provisions of the Plan which make express reference to Section 422 shall
apply only to Incentive Stock Options (as that term is defined in the Plan).
2. Type of Options and Administration.
(a) Types of Options. Options granted pursuant to the Plan shall be
authorized by action of the Board of Directors of the Company (or a Committee
designated by the Board of Directors) and may be either incentive stock options
("Incentive Stock Options") meeting the requirements of Section 422 of the Code
or non-statutory options which are not intended to meet the requirements of
Section 422 of the Code.
(b) Administration. The Plan will be administered by a committee (the
"Committee") appointed by the Board of Directors of the Company, which Committee
can include all of the members of the Board of Directors, whose construction and
interpretation of the terms and provisions of the Plan shall be final and
conclusive. The delegation of powers to the Committee shall be consistent with
applicable laws or regulations (including, without limitation, applicable state
law and Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (the
"Exchange Act"), or any successor rule ("Rule 16b-3")). The Committee may in its
sole discretion grant options to purchase shares of the Company's Common Stock,
$.01 par value per share ("Common Stock") and issue shares upon exercise of such
options as provided in the Plan. The Committee shall have authority, subject to
the express provisions of the Plan, to construe the respective option agreements
and the Plan, to prescribe, amend and rescind rules and regulations relating to
the Plan, to determine the terms and provisions of the respective option
agreements, which need not be identical, and to make all other determinations in
the judgment of the Committee necessary or desirable for the administration of
the Plan. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any option agreement in the manner
and to the extent it shall deem expedient to carry the Plan into effect and it
shall be the sole and final judge of such expediency. No director or person
acting pursuant to authority delegated by the Board of Directors shall be liable
for any action or determination under the Plan made in good faith. Subject to
adjustment as provided in Section 15 below, the aggregate number of shares of
Common Stock that may be subject to Options granted to any person in a calendar
year shall not exceed 35% of the maximum number of shares which may be issued
and sold under the Plan, as set forth in Section 4 hereof, as such section may
be amended from time to time.
(c) Applicability of Rule 16b-3. Those provisions of the Plan which make
express reference to Rule 16b-3 shall apply to the Company only at such time as
the Company's Common Stock is registered under the Exchange Act, subject to the
last sentence of Section 3(b), and then only to such persons as are required to
file reports under Section 16(a) of the Exchange Act (a "Reporting Person").
3. Eligibility.
(a) General. Options may be granted to persons who are, at the time of
grant, employees, officers or directors of, or consultants or advisors to, the
Company or any parent or subsidiary corporation of the Company as defined,
respectively, in Sections 424(e) and 424(f) of the Code ("Participants")
provided,
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that Incentive Stock Options may only be granted to individuals who are
employees of the Company (within the meaning of Section 3401(c) of the Code). A
person who has been granted an option may, if he or she is otherwise eligible,
be granted additional options if the Committee shall so determine.
(b) Grant of Options to Reporting Persons. The selection of a director or
an officer who is a Reporting Person (as the terms "director" and "officer" are
defined for purposes of Rule 16b-3) as a recipient of an option, the timing of
the option grant, the exercise price of the option and the number of shares
subject to the option shall be determined either (i) by the Board of Directors
or (ii) by a committee consisting of two or more directors having full authority
to act in the matter, each of whom shall be an "Outside Director" as defined by
Rule 1.162-27 of the Code.
4. Stock Subject to Plan.
The stock subject to options granted under the Plan shall be shares of
authorized but unissued or reacquired Common Stock. Subject to adjustment as
provided in Section 15 below, the maximum number of shares of Common Stock of
the Company which may be issued and sold under the Plan is 2,500,000 shares. If
an option granted under the Plan shall expire, terminate or is cancelled for any
reason without having been exercised in full, the unpurchased shares subject to
such option shall again be available for subsequent option grants under the
Plan.
5. Forms of Option Agreements.
As a condition to the grant of an option under the Plan, each recipient of
an option shall execute an option agreement in such form not inconsistent with
the Plan as may be approved by the Committee. Such option agreements may differ
among recipients and may contain all terms and conditions as the Committee
considers advisable, including, but not limited to, non-compete,
non-solicitation and confidentiality covenant, representations and warranties of
the Participant and provisions to ensure compliance with all applicable laws,
regulations and rules.
6. Purchase Price.
(a) General. The purchase price per share of stock deliverable upon the
exercise of an option shall be determined by the Committee at the time of grant
of such option; provided, however, that in the case of an Incentive Stock
Option, the exercise price shall not be less than 100% of the Fair Market Value
(as hereinafter defined) of such stock, at the time of grant of such option, or
less than 110% of such Fair Market Value in the case of options described in
Section 11(b). "Fair Market Value" of a share of Common Stock of the Company as
of a specified date for the purposes of the Plan shall mean the closing price of
a share of the Common Stock on the principal securities exchange (including the
Nasdaq National Market) on which such shares are traded on the day immediately
preceding the date as of which Fair Market Value is being determined, or on the
next preceding date on which such shares are traded if no shares were traded on
such immediately preceding day, or if the shares are not traded on a securities
exchange, Fair Market Value shall be deemed to be the average of the high bid
and low asked prices of the shares in the over-the-counter market on the day
immediately preceding the date as of which Fair Market Value is being determined
or on the next preceding date on which such high bid and low asked prices were
recorded. If the shares are not publicly traded, Fair Market Value of a share of
Common Stock (including, in the case of any repurchase of shares, any
distributions with respect thereto which would be repurchased with the shares)
shall be determined in good faith by the Committee.
(b) Payment of Purchase Price. Options granted under the Plan may provide
for the payment of the exercise price by delivery of cash or a check to the
order of the Company in an amount equal to the exercise price of such options,
or by any other means which the Committee determines are consistent with the
purpose of the Plan and with applicable laws and regulations (including, without
limitation, the provisions of Rule 16b-3 and Regulation T promulgated by the
Federal Reserve Board).
7. Option Period.
Subject to earlier termination as provided in the Plan, each option and all
rights thereunder shall expire on such date as determined by the Committee and
set forth in the applicable option agreement, provided, that such date shall not
be later than (10) ten years after the date on which the option is granted.
E-2
8. Exercise of Options.
Each option granted under the Plan shall be exercisable either in full or
in installments at such time or times and during such period as shall be set
forth in the option agreement evidencing such option, subject to the provisions
of the Plan. Subject to the requirements in the immediately preceding sentence,
if an option is not at the time of grant immediately exercisable, the Committee
may (i) in the agreement evidencing such option, provide for the acceleration of
the exercise date or dates of the subject option upon the occurrence of
specified events, and/or (ii) at any time prior to the complete termination of
an option, accelerate the exercise date or dates of such option.
9. Nontransferability of Options.
No option granted under this Plan shall be assignable or otherwise
transferable by the optionee except by will or by the laws of descent and
distribution. An option may be exercised during the lifetime of the optionee
only by the optionee. In the event an optionee dies during his employment by the
Company or any of its subsidiaries, or during the three-month period following
the date of termination of such employment, his option shall thereafter be
exercisable, during the period specified in the option agreement, by his
executors or administrators to the full extent to which such option was
exercisable by the optionee at the time of his death during the periods set
forth in Section 10 or 11(d).
10. Effect of Termination of Employment or Other Relationship.
Except as provided in Section 11(d) with respect to Incentive Stock Options
and except as otherwise determined by the Committee at the date of grant of an
Option, and subject to the provisions of the Plan, an optionee may exercise an
option at any time within three months following the termination of the
optionee's employment or other relationship with the Company or within one (1)
year if such termination was due to the death or disability of the optionee but,
except in the case of the optionee's death, in no event later than the
expiration date of the Option. If the termination of the optionee's employment
is for cause or is otherwise attributable to a breach by the optionee of an
employment or confidentiality or non-disclosure agreement, the option shall
expire immediately upon such termination. The Committee shall have the power to
determine what constitutes a termination for cause or a breach of an employment
or confidentiality or non-disclosure agreement, whether an optionee has been
terminated for cause or has breached such an agreement, and the date upon which
such termination for cause or breach occurs. Any such determinations shall be
final and conclusive and binding upon the optionee.
11. Incentive Stock Options.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) Express Designation. All Incentive Stock Options granted under the
Plan shall, at the time of grant, be specifically designated as such in the
option agreement covering such Incentive Stock Options.
(b) 10% Shareholder. If any employee to whom an Incentive Stock Option is
to be granted under the Plan is, at the time of the grant of such option, the
owner of stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (after taking into account the attribution
of stock ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:
(i) The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the Fair
Market Value of one share of Common Stock at the time of grant;
and
(ii) The option exercise period shall not exceed five years from the
date of grant.
(c) Dollar Limitation. For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options,
in the aggregate, become exercisable for the first time in any one calendar
year for shares of Common Stock with an aggregate Fair Market Value, as of the
respective date or dates of grant, of more than $100,000.
E-3
(d) Termination of Employment, Death or Disability. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the optionee is,
and has been continuously since the date of grant of his or her option,
employed by the Company, except that:
(i) an Incentive Stock Option may be exercised within the period of
three months after the date the optionee ceases to be an employee
of the Company (or within such lesser period as may be specified
in the applicable option agreement), provided, that the agreement
with respect to such option may designate a longer exercise
period and that the exercise after such three-month period shall
be treated as the exercise of a non-statutory option under the
Plan;
(ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an
employee, the Incentive Stock Option may be exercised by the
person to whom it is transferred by will or the laws of descent
and distribution within the period of one year after the date of
death (or within such lesser period as may be specified in the
applicable option agreement); and
(iii) if the optionee becomes disabled (within the meaning of Section
22(e)(3) of the Code or any successor provisions thereto) while
in the employ of the Company, the Incentive Stock Option may be
exercised within the period of one year after the date the
optionee ceases to be such an employee because of such disability
(or within such lesser period as may be specified in the
applicable option agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. Additional Provisions.
(a) Additional Option Provisions. The Committee may, in its sole
discretion, include additional provisions in option agreements covering options
granted under the Plan, including without limitation restrictions on transfer,
repurchase rights, rights of first refusal, commitments to pay cash bonuses, to
make, arrange for or guaranty loans or to transfer other property to optionees
upon exercise of options, or such other provisions as shall be determined by the
Committee; provided, that such additional provisions shall not be inconsistent
with any other term or condition of the Plan and such additional provisions
shall not cause any Incentive Stock Option granted under the Plan to fail to
qualify as an Incentive Stock Option within the meaning of Section 422 of the
Code.
(b) Acceleration, Extension, Etc. The Committee may, in its sole
discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all, or any particular, option or options granted under the
Plan may be exercised; provided, however, that no such extension shall be
permitted if it would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3 (if applicable).
13. General Restrictions.
(a) Investment Representations. The Company may require any person to whom
an Option is granted, as a condition of exercising such option, to give written
assurances in substance and form satisfactory to the Company to the effect that
such person is acquiring the Common Stock subject to the option or award, for
his or her own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities laws, or with covenants or representations made by
the Company in connection with any public offering of its Common Stock,
including any "lock-up" or other restriction on transferability.
(b) Compliance With Securities Law. Each Option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any securities exchange or automated quotation system or under any
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state or federal law, or the consent or approval of any governmental or
regulatory body, or that the disclosure of non-public information or the
satisfaction of any other condition is necessary as a condition of, or in
connection with the issuance or purchase of shares thereunder, such option may
not be exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval, or satisfaction of such condition shall have
been effected or obtained on conditions acceptable to the Committee. Nothing
herein shall be deemed to require the Company to apply for or to obtain such
listing, registration or qualification, or to satisfy such condition.
14. Rights as a Stockholder.
The holder of an option shall have no rights as a stockholder with respect
to any shares covered by the option (including, without limitation, any rights
to receive dividends or non-cash distributions with respect to such shares)
until the date of issue of a stock certificate to him or her for such shares. No
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
15. Adjustment Provisions for Recapitalizations, Reorganizations and Related
Transactions.
(a) Recapitalizations and Related Transactions. If, through or as a result
of any recapitalization, reclassification, stock dividend, stock split, reverse
stock split or other similar transaction, (i) the outstanding shares of Common
Stock are increased, decreased or exchanged for a different number or kind of
shares or other securities of the Company, or (ii) additional shares or new or
different shares or other non-cash assets are distributed with respect to such
shares of Common Stock or other securities, an appropriate and proportionate
adjustment shall be made in (x) the maximum number and kind of shares reserved
for issuance under or otherwise referred to in the Plan, (y) the number and kind
of shares or other securities subject to any then outstanding options under the
Plan, and (z) the price for each share subject to any then outstanding options
under the Plan, without changing the aggregate purchase price as to which such
options remain exercisable. Notwithstanding the foregoing, no adjustment shall
be made pursuant to this Section 15 if such adjustment (i) would cause the Plan
to fail to comply with Section 422 of the Code or with Rule 16b-3 or (ii) would
be considered as the adoption of a new plan requiring stockholder approval.
(b) Reorganization, Merger and Related Transactions. All outstanding
Options under the Plan shall become fully exercisable for a period of sixty (60)
days following the occurrence of any Trigger Event, whether or not such Options
are then exercisable under the provisions of the applicable agreements relating
thereto. For purposes of the Plan, a "Trigger Event" is any one of the following
events, but shall not include the events contemplated by the Stock Purchase
Agreement dated as of November 3, 1999 between the Company and Gruppo Spigadoro,
N.V.:
(i) the date on which shares of Common Stock are first purchased
pursuant to a tender offer or exchange offer (other than such an
offer by the Company, any Subsidiary, any employee benefit plan
of the Company or of any Subsidiary or any entity holding shares
or other securities of the Company for or pursuant to the terms
of such plan), whether or not such offer is approved or opposed
by the Company and regardless of the number of shares purchased
pursuant to such offer;
(ii) the date the Company acquires knowledge that any person or group
deemed a person under Section 13(d)-3 of the Exchange Act (other
than the Company, any Subsidiary, any employee benefit plan of
the Company or of any Subsidiary or any entity holding shares of
Common Stock or other securities of the Company for or pursuant
to the terms of any such plan or any individual or entity or
group or affiliate thereof which acquired its beneficial
ownership interest prior to the date the Plan was adopted by the
Board), in a transaction or series of transactions, has become
the beneficial owner, directly or indirectly (with beneficial
ownership determined as provided in Rule 13d-3, or any successor
rule, under the Exchange Act), of securities of the Company
entitling the person or group to 30% or more of all votes
(without consideration of the rights of any class or stock to
elect directors by a separate class vote) to which all
shareholders of the Company would be entitled in the election of
the Board of Directors were an election held on such date;
E-5
(iii) the date, during any period of two consecutive years, when
individuals who at the beginning of such period constitute the
Board of Directors of the Company cease for any reason to
constitute at least a majority thereof, unless the election, or
the nomination for election by the stockholders of the Company,
of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were
directors at the beginning of such period; and
(iv) the date of approval by the stockholders of the Company of an
agreement (a "reorganization agreement") providing for:
(A) The merger or consolidation of the Company with another
corporation where the stockholders of the Company,
immediately prior to the merger or consolidation, do not
beneficially own, immediately after the merger or
consolidation, shares of the corporation issuing cash or
securities in the merger or consolidation entitling such
shareholders to 80% or more of all votes (without
consideration of the rights of any class of stock to elect
directors by a separate class vote) to which all stockholders
of such corporation would be entitled in the election of
directors or where the members of the Board of Directors of
the Company, immediately prior to the merger or
consolidation, do not, immediately after the merger or
consolidation, constitute a majority of the Board of
Directors of the corporation issuing cash or securities in
the merger or consolidation; or
(B) The sale or other disposition of all or substantially all the
assets of the Company.
(c) Board Authority to Make Adjustments. Any adjustments under this Section
15 will be made by the Board of Directors, whose determination as to what
adjustments, if any, will be made and the extent thereof will be final, binding
and conclusive. No fractional shares will be issued under the Plan on account of
any such adjustments.
16. Merger, Consolidation, Asset Sale, Liquidation, etc.
(a) General. In the event of any sale, merger, transfer or acquisition of
the Company or substantially all of the assets of the Company in which the
Company is not the surviving corporation, and provided that after the Company
shall have requested the acquiring or succeeding corporation (or an affiliate
thereof), that equivalent options shall be substituted and such successor
corporation shall have refused or failed to assume all options outstanding under
the Plan or issue substantially equivalent options, then any or all outstanding
options under the Plan shall accelerate and become exercisable in full
immediately prior to such event. The Committee will notify holders of options
under the Plan that any such options shall be fully exercisable for a period of
sixty (60) days from the date of such notice, and the options will terminate
upon expiration of such notice.
(b) Substitute Options. The Company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.
17. No Special Employment Rights.
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interfere in any way with the right of the Company at any time to
terminate such employment or to increase or decrease the compensation of the
optionee.
18. Other Employee Benefits.
Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale
E-6
of shares received upon such exercise will not constitute compensation with
respect to which any other employee benefits of such employee are determined,
including, without limitation, benefits under any bonus, pension,
profit-sharing, life insurance or salary continuation plan, except as otherwise
specifically determined by the Board of Directors.
19. Amendment of the Plan.
(a) The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect; provided, however, that if at any time the
approval of the stockholders of the Company is required under Section 422 of the
Code or any successor provision with respect to Incentive Stock Options, the
Board of Directors may not effect such modification or amendment without such
approval; and provided, further, that the provisions of Section 3(c) hereof
shall not be amended more than once every six months, other than to comport with
changes in the Code or the rules thereunder.
(b) The modification or amendment of the Plan shall not, without the
consent of an optionee, affect his or her rights under an option previously
granted to him or her. With the consent of the optionee affected, the Board of
Directors may amend outstanding option agreements in a manner not inconsistent
with the Plan. The Board of Directors shall have the right to amend or modify
(i) the terms and provisions of the Plan and of any outstanding Incentive Stock
Options granted under the Plan to the extent necessary to qualify any or all
such options for such favorable federal income tax treatment (including deferral
of taxation upon exercise) as may be afforded incentive stock options under
Section 422 of the Code and (ii) the terms and provisions of the Plan and of any
outstanding option to the extent necessary to ensure the qualification of the
Plan under Rule 16b-3.
20. Withholding.
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall have a Fair
Market Value equal to such withholding obligation as of the date that the amount
of tax to be withheld is to be determined. An optionee who has made an election
pursuant to this Section 20(a) may only satisfy his or her withholding
obligation with shares of Common Stock which are not subject to any repurchase,
forfeiture, unfulfilled vesting or other similar requirements.
(b) The acceptance of shares of Common Stock upon exercise of an Incentive
Stock Option shall constitute an agreement by the optionee (i) to notify the
Company if any or all of such shares are disposed of by the optionee within two
years from the date the option was granted or within one year from the date the
shares were issued to the optionee pursuant to the exercise of the option, and
(ii) if required by law, to remit to the Company, at the time of and in the case
of any such disposition, an amount sufficient to satisfy the Company's federal,
state and local withholding tax obligations with respect to such disposition,
whether or not, as to both (i) and (ii), the optionee is in the employ of the
Company at the time of such disposition.
(c) Notwithstanding the foregoing, in the case of a Reporting Person whose
options have been granted in accordance with the provisions of Section 3(b)
herein, no election to use shares for the payment of withholding taxes shall be
effective unless made in compliance with any applicable requirements of Rule
16b-3.
21. Cancellation and New Grant of Options, Etc.
The Board of Directors shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher
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than the exercise price per share of the cancelled options or (ii) the amendment
of the terms of any and all outstanding options under the Plan to provide an
option exercise price per share which is higher or lower than the then-current
exercise price per share of such outstanding options.
22. Effective Date and Duration of the Plan.
(a) Effective Date. The Plan shall become effective when adopted by the
Board of Directors, but no Incentive Stock Option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve months after the date of the Board's adoption of the Plan, no options
previously granted under the Plan shall be deemed to be Incentive Stock Options
and no Incentive Stock Options shall be granted thereafter. Amendments to the
Plan not requiring stockholder approval shall become effective when adopted by
the Board of Directors; amendments requiring shareholder approval (as provided
in Section 21) shall become effective when adopted by the Board of Directors,
but no Incentive Stock Option granted after the date of such amendment shall
become exercisable (to the extent that such amendment to the Plan was required
to enable the Company to grant such Incentive Stock Option to a particular
optionee) unless and until such amendment shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any Incentive Stock
Options granted on or after the date of such amendment shall terminate to the
extent that such amendment to the Plan was required to enable the Company to
grant such option to a particular optionee. Subject to this limitation, options
may be granted under the Plan at any time after the effective date and before
the date fixed for termination of the Plan.
(b) Termination. Unless sooner terminated in accordance with Section 16,
the Plan shall terminate upon the earlier of (i) the close of business on the
day next preceding the tenth anniversary of the date of its adoption by the
Board of Directors, or (ii) the date on which all shares available for issuance
under the Plan shall have been issued pursuant to the exercise or cancellation
of options granted under the Plan. If the date of termination is determined
under (i) above, then options outstanding on such date shall continue to have
force and effect in accordance with the provisions of the instruments evidencing
such options.
23. Provision for Foreign Participants.
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
24. Governing Law.
The provisions of this Plan shall be governed and construed in accordance
with the laws of the State of Delaware without regard to the principles of
conflicts of laws.
Adopted by the Board of Directors on November 2, 1999.
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