<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE
ACT OF 1934
Commission File Number 0-22101
IAT MULTIMEDIA, INC.
(exact name of registrant as specified in its charter)
Delaware 13-3920210
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(State or other jurisdiction of (I.R.S Employer
Incorporation or organization) Identification No.)
Geschaftshaus Wasserschloss
Aarestrasse 17
CH-5300 Vogelsang-Turgi, Switzerland
------------------------------------
(Address of principal executive offices)
(011) (41) (56) 223-5078
------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at November 12, 1998
- ---------------------------- --------------------------------
Common Stock, $.01 par value 9,998,826 shares
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Operations for Three Months
ended September 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Operations for Nine Months
ended September 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for Nine Months
ended September 30, 1998 and 1997 (unaudited) 6
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Default upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE PAGE 20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31,
1998 1997
(unaudited)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,219,016 $ 5,472,928
Marketable securities 750,000 2,726,865
Accounts receivable, less allowance for doubtful
accounts of $102,515 in 1998 and $71,111 in 1997 2,038,354 1,258,914
Inventories 1,588,404 1,699,338
Other current assets 166,611 277,057
Current deferred taxes receivable 46,433 -
Assets held for disposition - 1,077,920
------------ ------------
Total current assets 11,808,818 12,513,022
Equipment and improvements, net 708,942 633,605
Other assets:
Notes receivable from affiliates 831,669
Investments in affiliated companies 20,436
Excess of cost over net assets acquired, net 3,450,721 3,373,254
Other assets 151,580 139,635
------------ ------------
$ 16,972,166 $ 16,659,516
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 420,247 $ 449,121
Accounts payable and other current liabilities 2,779,660 3,649,882
Loans payable, stockholders 1,017,833 2,339,451
Liabilities held for disposition - 1,640,029
Deferred taxes payable - 311,347
------------ ------------
Total current liabilities 4,217,740 8,389,830
------------ ------------
Convertible debenture 3,000,000 -
------------ ------------
Minority interest 187,553 174,007
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value, authorized
500,000 shares, none issued
Common stock, $.01 par value, authorized
20,000,000 shares, issued 9,502 97,519
9,950,204 in 1998 and 9,751,949 in 1997 99,502 97,519
Capital in excess of par value 29,660,151 27,103,657
Accumulated deficit (20,660,301) (19,239,283)
Cumulative translation adjustment 673,781 340,046
Treasury stock (50,000 shares) (206,260) (206,260)
------------ ------------
Total stockholders' equity 9,566,873 8,095,679
------------ ------------
$ 16,972,166 $ 16,659,516
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
3
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1998 1997
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<S> <C> <C>
Net Sales $ 8,093,257 $ 122,310
Cost of Sales 7,516,272 82,867
----------- -----------
Gross margin 576,985 39,443
----------- -----------
Operating expenses:
Research and development costs, net -- 531,007
Selling expenses 710,698 450,051
General and administrative expenses 133,705 297,296
----------- -----------
844,403 1,278,354
----------- -----------
Operating loss before corporate overhead,
depreciation and amortization (267,418) (1,238,911)
Corporate overhead 317,803 246,329
Depreciation and amortization 165,409 73,729
----------- -----------
Operating loss (750,630) (1,558,969)
Other income (expense):
Interest expense (52,225) (45,671)
Interest income 99,154 171,874
Discount on convertible debenture -- --
Other income (expense) (31,453) 1,351
----------- -----------
Loss before recovery of income taxes and minority interest (735,154) (1,431,415)
Recovery of income taxes 203,560 --
----------- -----------
Loss before minority interest (531,594) (1,431,415)
Minority interest in net loss of subsidiary 53,754 --
----------- -----------
Net loss $ (477,840) $(1,431,415)
=========== ===========
Net loss per share - basic and diluted $ (0.05) $ (0.16)
=========== ===========
Weighted average number of common shares outstanding 9,401,919 9,059,324
=========== ===========
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
Net loss $ (477,840) $(1,431,415)
Other comprehensive income (loss) net of tax
- Foreign currency translation adjustments 330,437 39,821
----------- ------------
Comprehensive loss $ (147,403) $ (1,391,594)
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1997
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<S> <C> <C>
Net Sales $ 23,544,503 $ 537,561
Cost of Sales 21,524,407 328,613
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Gross margin 2,020,096 208,948
------------ ------------
Operating expenses:
Research and development costs, net -- 1,793,528
Selling expenses 1,752,816 1,365,413
General and administrative expenses 492,926 795,634
------------ ------------
2,245,742 3,954,575
------------ ------------
Operating loss before corporate overhead,
depreciation and amortization (225,646) (3,745,627)
Corporate overhead 807,560 555,093
Depreciation and amortization 463,839 212,410
------------ ------------
Operating loss (1,497,045) (4,513,130)
Other income (expense):
Interest expense (107,344) (169,454)
Interest income 252,666 362,322
Discount on convertible debenture (448,277) --
Other income (expense) (24,528) 17,428
------------ ------------
Loss before recovery of income taxes and minority interest (1,824,528) (4,302,834)
Recovery of income taxes 334,666 --
------------ ------------
Loss before minority interest (1,489,862) (4,302,834)
Minority interest in net loss of subsidiary 68,844 --
------------ ------------
Net loss $ (1,421,018) $ (4,302,834)
============ ============
Net loss per share - basic and diluted $ (0.15) $ (0.54)
============ ============
Weighted average number of
common shares outstanding 9,278,444 7,970,762
============ ============
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Net loss $(1,421,018) $(4,302,834)
Other comprehensive income (loss) net of tax - Foreign
currency translation adjustments 333,735 316,158
----------- -----------
Comprehensive loss $(1,087,283) $(3,986,676)
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1997
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,421,018) $ (4,302,834)
Adjustments to reconcile net loss to net cash used
in operating activities:
Discount on convertible debenture 448,277
Depreciation of equipment 199,798 212,410
Amortization of goodwill 264,041
Common stock/and stock options issued for services 37,500 22,500
Minority interest in income (68,844)
Deferred taxes payable (356,719)
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Accounts receivable (640,100) 189,068
Inventories 228,189 58,415
Other current assets 111,872 (168,748)
Other assets (13,855) (341,363)
Accounts payable and other current liabilities (1,614,395) (192,852)
------------ ------------
Net cash used in operating activites (2,825,254) (4,523,404)
------------ ------------
Cash flows from investing activities:
Loans to and investments in, affiliated companies (966,725)
Purchases of equipment and improvements (224,206) (295,765)
Sale (purchase) of marketable securities 1,976,865 (3,177,570)
------------ ------------
Net cash provided (used) in investing activities 785,934 (3,473,335)
------------ ------------
Cash flows from financing activities:
Repayments of loans payable, stockholders (1,326,923) (1,054,310)
Proceeds from issuance of convertible debenture 3,000,000
Proceeds from issuance of common stock, net proceeds 1,608,698 17,098,164
Payment of preferred stock dividend -- (51,625)
Capital contribution, stockholders, net proceeds 464,002 --
Payment for treasury stock -- (206,260)
Repayments of short-term bank loan, net (54,845) (226,158)
------------ ------------
Net cash provided by financing activities 3,690,932 15,559,811
------------ ------------
Effect of exchange rate changes on cash 94,476 110,611
------------ ------------
Net increase in cash 1,746,088 7,673,683
Cash and cash equivalents, beginning of period 5,472,928 264,661
------------ ------------
Cash and cash equivalents, end of period $ 7,219,016 $ 7,938,344
============ ============
Supplemental disclosures of cash flow information,
cash paid during the period for interest $ 66,899 $ 181,028
============ ============
cash paid during the period for income related taxes $ 96,748 $ --
============ ============
Supplemental schedule of non-cash operating activities,
Common stock/stock options issued for services $ 37,500 $ 22,500
============ ============
Supplemental schedule of non-cash financing activities,
deferred registration costs included in accounts
payable and other liabilities $ -- $ 276,525
============ ============
Spinoff of assets and liabilities held for disposition $ 1,077,920 $ --
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION - The unaudited interim consolidated
financial statements contain all adjustments consisting of normal recurring
adjustments, which are, in the opinion of the management of IAT Multimedia,
Inc. (hereinafter the "Company" or "IAT"), necessary to present fairly the
consolidated financial position of the Company as of September 30, 1998, and
the consolidated results of operations and cash flows of the Company for the
periods presented. Results of operations for the periods presented are not
necessarily indicative of the results for the full fiscal year. These financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission for the year
ended December 31, 1997.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of IAT Multimedia, Inc., its wholly owned subsidiaries IAT
AG, Switzerland ("IAT AG") and IAT Deutschland GmbH Interaktive Medien Systeme,
Bremen ("IAT GmbH"), 100% of the General Partner of FSE Computer-Handel GmbH &
Co. KG (FSE) and 80% of the limited partnership interest of FSE. All
intercompany accounts and transactions have been eliminated in consolidation.
EXCESS OF COST OVER NET ASSETS ACQUIRED - Goodwill represents the
excess of cost over the fair market value of net assets of acquired businesses
and is amortized over a period of 10 years from the acquisition date. The
Company monitors the cash flows of the acquired operation to assess whether any
impairment of recorded goodwill has occurred. Amortization for the nine months
period ended September 30, 1998 was approximately $264,000.
FOREIGN CURRENCY TRANSLATION -- The Company has determined that the
local currency of its Switzerland subsidiary, Swiss Francs, is the functional
currency for IAT AG and IAT GmbH and the Deutsch Mark is the functional
currency for FSE. The financial statements of the subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, "Foreign Currency Translation". SFAS 52
provides that all balance sheet accounts are translated at period-end rates of
exchange (1.39 and 1.45 Swiss Francs and 1.67 and 1.80 Deutsch Mark for each
U.S. Dollar at September 30, 1998 and December 31, 1997, respectively), except
for equity accounts which are translated at historical rates. Income and
expense accounts, and cash flows are translated at the average of the exchange
rates in effect during the period. The resulting translation adjustments are
included as a separate component of stockholders' equity, whereas gains or
losses arising from foreign currency transactions are included in results of
operations.
LOSS PER COMMON SHARE -- Effective December 31, 1997, the Company
adopted SFAS 128, "Earnings Per Share." SFAS 128 requires dual presentation of
basic and diluted earnings per share for all periods presented. Basic earnings
per share excludes dilution and is computed by dividing loss applicable to
common stockholders by the weighted average number of common shares outstanding
for the period. The weighted average number of common shares includes shares
issued within one year of the Company's initial public offering ("IPO") with an
issue price less than the IPO price, and excludes shares of the
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<PAGE>
Company's common stock (the "Common Stock") placed in escrow upon the
completion of the IPO. In addition, all shares have been adjusted to reflect
the reverse stock split. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue Common
Stock were exercised or converted into Common Stock or resulted in the issuance
of Common Stock that then shared in the earnings of the entity. Prior period
loss information has been restated as required by SFAS No. 128. Diluted loss
per common share is the same as basic loss per common share for the periods
ended September 30, 1998 and 1997. The Company has unexercised options and
warrants in addition to shares issuable upon conversion of its convertible
debentures which are not included in the computation of diluted loss per share
because their effect would have been antidilutive as a result of the Company's
losses.
COMPREHENSIVE LOSS - Effective January 1, 1998 the Company adopted
SFAS 130, "Reporting Comprehensive Income". The Company reclassified its 1997
financial statements, as required.
NOTE 2. INVENTORIES:
September 30, December 31,
1998 1997
------------- ------------
Work in process............................... $ 254,549 $ 124,445
Purchased finished goods ...................... 1,333,855 1,574,893
---------- ----------
$1,588,404 $1,699,338
========== ==========
NOTE 3. SPINOFFS:
On March 6, 1998, the Company transferred the business and
substantially all of the assets and the liabilities of its majority-owned
subsidiary, IAT GmbH, to a newly-formed German company ("German Newco"). German
Newco (the "German Spinoff") is substantially owned by the former Co-chairman
of the Board of Directors of the Company. In addition, IAT AG owns 15% of the
outstanding common stock of the German Newco. The German Spinoff was effective
on January 1, 1998 and required the Company to infuse approximately $650,000 of
capital. In connection with the German Spinoff, IAT AG purchased the remaining
25.1% interest in IAT GmbH from the minority stockholder for a purchase price
of approximately $100,000. In addition, the Company provided German Newco with
a loan in the aggregate amount of approximately $300,000 for working capital
requirements through March 6, 1998. This loan bears interest of 5% per annum
and is due on or before December 31, 1998.
On March 24, 1998, the Company transferred the business and certain of the
assets and liabilities of its wholly-owned subsidiary IAT AG to a newly-formed
Swiss company ("Swiss Newco"). Swiss Newco (the "Swiss Spinoff") is
substantially owned by the former Co-chairman of the Board of Directors of the
Company. In addition, IAT AG owns 15% of the outstanding common stock of the
Swiss Newco. The Swiss Spinoff was effective on January 1, 1998. At closing,
the Company received a note for approximately $325,000 representing the value
of the assets in excess of the liabilities that were spunoff ("Purchase Note")
on March 24, 1998. In addition, the Company loaned the Swiss Newco $250,000
("The Note")
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<PAGE>
for operating cash flow. The notes provide for the payment of interest
semi-annually beginning September 1, 1998 at a rate of 3% per annum, but
interest will be recorded using a discount rate of 8% per annum. The Purchase
Note is due on March 24, 2001. The Note is due the earlier of the date that
Swiss Newco raises either debt or equity financing in excess of SF 1,000,000 or
on March 24, 2001.
On September 11, 1998 Bremer Investitionsgesellschaft, a German Federal
Development Agency, increased its equity position in the German Newco from 2%
to 25.1%. In connection with this transaction, Bremer Investitionsgesellschaft
and Dr. Viktor Vogt have agreed to provide German Newco with loans of
approximately $1.75 million and approximately $1.9 million, of which an
aggregate amount of $2.25 million has been paid in 1998 and an aggregate amount
of $1.4 million will be payable in 1999, respectively. The loans will be used
for development and marketing of the Wonderboard family of multimedia and
desktop videoconferencing products.
NOTE 4. PRIVATE PLACEMENTS:
The Company entered into a securities purchase agreement (the "Purchase
Agreement"), dated as of June 19, 1998, with two purchasers (the "Investors")
and consummated the first transaction contemplated thereby ("Tranche A") in a
private placement of its securities pursuant to Regulation D. Tranche A
consisted of the issuance of 198,255 shares of its Common Stock and $3 million
aggregate principal amount of the Company's 5% Convertible Debentures due 2001
("Debentures") in exchange for $5 million in cash. In addition, the Company
issued five-year warrants to purchase 88,241 shares of Common Stock at a price
equal to $13.25 per share, 120% of the Average Price (as defined in the
Debentures; the "Warrants") to the Investors and the transaction's placement
agent. On October 27, 1998 a Registration Statement on Form S-3 registering the
shares of Common Stock issued to the Investors and issuable upon conversion of
the Debentures issued in Tranche A was declared effective by the Securities and
Exchange Commission.
The Debentures are immediately convertible into shares of Common Stock at
the option of either the Company (subject to certain limitations) or the
Investors. Resales of shares of Common Stock issued upon conversions at the
option of the Investors are prohibited for a period of nine months from the
date of issuance; thereafter, sales by the Investors are subject to certain
volume limitations. Any portion of the Debentures remaining unconverted on
October 27, 2000 shall convert automatically into shares of Common Stock. The
number of shares of Common Stock issuable upon conversion of the Debentures is
the lesser of (i) 120% of the average of the closing bid prices from the five
trading days immediately preceeding the Original Issue Date (as defined in the
Purchase Agreement) and (ii) 87% of the average of the five lowest closing bid
prices during the 15 trading days immediately preceding the conversion date.
The conversion price as of October 23, 1998 on the Tranche A Closing Date (as
defined in the Purchase Agreement) would have been $3.46 per share. The terms
and conditions with respect to conversion of Debentures and the number of
shares of Common Stock issuable thereunder are set forth in the Purchase
Agreement.
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<PAGE>
Pursuant to the Purchase Agreement the Investors agreed to purchase up to
$12 million aggregate amount of additional Debentures under certain conditions.
This provision expired by its terms in September 1998.
NOTE 5. LETTER OF INTENT WITH ATEC GROUP:
On August 1, 1998 the Company entered into a non-binding Letter of
Intent with ATEC Group, Inc. ("ATEC") whereby the Company would have purchased
all of the outstanding shares of ATEC in a stock swap valued at approximately
$77,000,000 (based on an assumed $10 market price per share of IAT Common
Stock). On August 21, 1998 the parties mutually agreed to terminate the letter
of intent.
NOTE 6. SUBSEQUENT EVENTS:
On October 27, 1998, the Company entered into a purchase agreement to
acquire all of the issued and outstanding shares of Columbus Handels- und
Vertriebs GmbH & Co. KG ("KG") and Columbus Handels- und Vertriebs GmbH
("GmbH"), the general partner of KG, for a purchase price of approximately $1.7
million in cash and 98,622 shares of the Company's Common Stock equaling
approximately $760,000 (the "Columbus Agreement"). In connection with the
transaction, IAT expects to make a working capital loan of approximately
$700,000 to KG and will take a non-cash charge for amortization of goodwill.
Pursuant to the Columbus Agreement, Axel Hundt, the founder and owner of each
of KG and GmbH, will enter into a two-year employment contract. This
transaction was consummated on November 13, 1998, effective on October 31,
1998.
KG is a distributor of PC peripherals in Germany and in parts of
Austria. With the KG acquisition the Company continues the vertical integration
of its distribution channels which began with the acquisition of FSE Computer
Handel in November 1997.
In connection with the KG acquisition the Company plans to consolidate
a majority of FSE's existing peripherals business into that of KG. FSE will
concentrate primarily on the production and marketing of its high-performance
built-to-order PCs and KG will focus primarily on the distribution of
peripherals. As a result of this consolidation, IAT will benefit from cost
savings through the implementation of corporate best practices and the
elimination of a approximately 25 employees who have already been officially
notified and whose employment contracts will be terminated effective as of
December 31, 1998. Aggregate severance payments in connection with the
termination of the employment contracts will amount to approximately $60,000.
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<PAGE>
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Except for the descriptions of historical facts contained herein,
statements concerning future results, performance or expectations are
forward-looking statements. Actual results, performance or developments could
differ materially from those expressed or implied by such forward-looking
statements as a result of known and unknown risks, uncertainties and other
factors including those described from time to time in the Company's filings
with the Securities and Exchange Commission, under "Risk Factors" and
elsewhere, including the Company's history of operating losses; future charges
to operations and losses; holding company structure; reliance on subsidiaries;
risks relating to acquisitions and managing growth; need for additional funds;
competition; foreign markets; control by existing stockholders; potential
anti-takeovers provisions; risks relating to Year 2000 issues and other risks.
IAT Multimedia, Inc. was formed in September 1996 as a holding company for
the existing business of IAT AG and IAT Germany. Since then, Multimedia has
been engaged in developing products for the visual communications industry. In
November 1997, Multimedia acquired 100% of the shares of capital stock of the
general partner of FSE and 80% of the outstanding limited partnership interests
of FSE, a German limited partnership.
The Company, through its acquisition of FSE, markets in Germany
high-performance PCs assembled according to customer specifications and sold
under the trade name "Trinology", as well as components and peripherals for
PCs. The Company also licenses its state-of-the-art, customizable proprietary
visual communications technology designed to enable users to participate in
real time, multi-point video conferencing and provide improved features and
functionality over competing technology.
FSE's product line includes high-performance IBM-compatible desktop PCs as
well as components, such as motherboards, hard disks, graphic cards and plug-in
cards, and peripherals, such as printers, monitors and cabinets, to its
customers. Substantially all of FSE's clients are corporate customers,
including industrial, pharmaceutical, service and trade companies, the military
and VARs. FSE markets its products directly through its internal sales force to
dealers and end-users and also maintains three retail showrooms and a
mail-order department. FSE works directly with a wide range of suppliers to
evaluate the latest developments in PC-related technology and engages in
extensive testing to optimize the compatibility and speed of the components
which are sold and integrated into Trinology PCs.
The Company has developed visual communications technology for
multi-functional visual communication systems, wavelet data
compression/decompression software technology for high-speed, high-quality
still image transfer, and related technology. The Company expects to receive
royalty income from this technology. The Company intends to offer products
incorporating its visual communication system technology which will be produced
by Communication AG and Communication Systems (see below), in FSE's computers.
In March 1998, the Company completed the restructuring of one of its
German subsidiaries and its Swiss subsidiary, (collectively the "Spinoffs"). On
March 5 and 6, 1998,
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<PAGE>
the Company completed the spinoff of substantially all of the assets and the
liabilities (other than intercompany accounts) of one of its majority-owned
German subsidiaries, IAT Germany, which has provided the Company's research and
development and has functioned as the Company's sales and marketing arm for
multimedia products in Germany, into a newly formed German company,
Communication Systems GmbH. On March 24, the Company transferred certain of the
assets and liabilities of IAT AG, other than, among others, the Company's
intellectual property and the ownership interests in IAT Germany to
Communication AG, a newly formed Swiss corporation. Both transfers were
effective January 1, 1998. As a result of the Spinoffs, the Company owns 80% of
FSE, 100% of each of IAT AG and IAT Germany and 15% of each of Communication
Systems GmbH and Communication AG.
The FSE Acquisition and the Spinoffs of the German and the Swiss
subsidiaries will result in substantial differences in the business and results
of operations of the Company. Accordingly, results of operations of the Company
prior to the acquisition of FSE and of the Spinoffs will not be indicative of
the Company's results of operations after such acquisition and the Spinoffs.
The Company's sales are made to customers principally in Switzerland and
Germany with revenues created in Deutsche Marks and Swiss Francs. IAT
Switzerland's and IAT Germany's functional currency is the Swiss Franc. FSE's
functional currency is the Deutsche Mark. The Company currently engages in
limited hedging transactions, which are not material to its operations, to
offset the risk of currency fluctuations. The Company may increase or
discontinue these hedging activities in the future.
In the following discussions, most percentages and dollar amounts have
been rounded to aid presentation. As a result, all such figures are
approximations.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTH PERIOD
ENDED SEPTEMBER 30, 1997
The average exchange rate for the U.S. Dollar decreased as compared to the
Swiss Franc and the Deutsch Mark by approximately 3.4% and 3.3% respectively.
The average Swiss Franc to U.S. Dollar exchange rate was SF 1.44 = $1.00 in the
third quarter 1998 as compared to SF 1.49 in the third quarter 1997. The
average Deutsch Mark to U.S. Dollar exchange rate was DM 1.74 = $1.00 in the
third quarter 1998 as compared to DM 1.80 in the third quarter 1997.
FSE was acquired in November 1997, and therefore, the following discussion of
IAT's results of operations includes IAT's results of operations for the three
months ended September 30, 1998 and September 30, 1997, respectively, and FSE's
results and operations for the three months ended September 30, 1998.
REVENUES. Revenues for the third quarter 1998 increased to $8,093,000
from $122,000 in the third quarter 1997. This increase is primarily a result of
sales of FSE high performance PCs and PC-components during the third quarter
1998.
COST OF SALES. Cost of sales increased to $7,516,000 in the third
quarter 1998 from $83,000 in the third quarter 1997. The cost of sales as a
percentage of sales increased to 92.9% in the third quarter 1998 from 67.8% in
the third quarter 1997 primarily as a result of
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<PAGE>
the sale of FSE PCs, PC-components and PC peripherals producing lower gross
profit margins.
RESEARCH AND DEVELOPMENT COSTS. Research and development costs
decreased to $0 in the third quarter 1998 from $531,000 in the third quarter
1997. The Company no longer incurs research and development costs as a result
of the Spinoffs of its research and development activities to Communication AG
and Communication Systems GmbH.
SELLING EXPENSES. Selling expenses increased by 58% to $711,000 in the
third quarter 1998 from $450,000 in the third quarter 1997. This increase is a
result of a change in the business structure of IAT and a different marketing
approach for FSE PCs and products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased by 54.9% to $134,000 in the third quarter 1998 from $297,000
in the third quarter 1997. This decrease is a result of a change in the
business structure of IAT.
CORPORATE OVERHEAD. Corporate overhead increased by 29.3% to $318,000
in the third quarter 1998 from $246,000 in the third quarter 1997 primarily due
to an increase in expenses for professional services relating to the Spinoffs
and acquisitions and increased investor relation activities.
INTEREST. Interest expense increased by 13.0% to $52,000 in the third
quarter 1998 from $46,000 in the third quarter 1997. This increase is primarily
a result of interest payable on the convertible debentures. Interest income
decreased to $99,000 in the third quarter 1998 from $172,000 in the third
quarter 1997 primarily as a result of a reduction of the Company's interest
bearing cash and cash equivalents and in investments in corporate bonds.
NET LOSS. The net loss for the three months ended September 30, 1998
decreased to $478,000 from $1,431,000 for the three months ended September 30,
1997. This decrease is the result of the acquisition of the FSE operations in
November 1997 and of the Spinoffs of the research and development and marketing
activities to Communication AG and Communication Systems GmbH effective as of
January 1, 1998.
OPERATING LOSS BEFORE CORPORATE OVERHEAD, INTEREST, INCOME TAXES,
DEPRECIATION AND AMORTIZATION. Operating loss before corporate overhead,
interest, income taxes, depreciation and amortization in the three months ended
September 30, 1998 decreased to $267,000 from $1,239,000 in the three months
ended September 30, 1997. This decrease is primarily a result of the Spinoff of
the research and development and marketing activities to Communication AG and
Communication Systems GmbH effective as of January 1, 1998 and of the
acquisition of the FSE operations in November 1997.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1997
The average exchange rate for the U.S. Dollar increased as compared to the
Swiss Franc and the Deutsch Mark by approximately 1.4% and 3.5% respectively.
The average Swiss Franc to U.S. Dollar exchange rate was SF 1.47 = $1.00 in the
nine months ended September 30, 1998 as compared to SF 1.45 in the nine months
ended September 30, 1997. The average Deutsch Mark to U.S. Dollar exchange rate
was DM 1.78 = $1.00 in the nine months ended September 30, 1998 as compared to
DM 1.72 in the nine months ended September 30, 1997.
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<PAGE>
FSE was acquired in November 1997, and therefore, the following discussion of
IAT's results of operations includes IAT's results of operations for the nine
months ended September 30, 1998 and September 30, 1997, respectively, and FSE's
results of operations for the nine months ended September 30, 1998.
REVENUES. Revenues for the nine months ended September 30, 1998
increased to $23,545,000 from $538,000 in the nine months ended September 30,
1997. This increase is primarily a result of sales of FSE high performance PCs
and PC-components during the nine month period ended September 30, 1998.
COST OF SALES. Cost of sales increased to $21,524,000 in the nine
months ended September 30, 1998 from $329,000 in the nine months ended
September 30, 1997. The cost of sales as a percentage of sales increased to
91.4% in the nine months ended September 30, 1998 from 61.1% in the nine months
ended September 30, 1997 primarily as a result of the sale of FSE PCs,
PC-components and PC peripherals producing lower gross profit margins.
RESEARCH AND DEVELOPMENT COSTS. Research and development costs
decreased to $0 in the nine months ended September 30, 1998 from $1,794,000 in
the nine months ended September 30, 1997. The Company no longer incurs research
and development costs as a result of the Spinoffs of its research and
development activities to Communication AG and Communication Systems GmbH.
SELLING EXPENSES. Selling expenses increased by 28.4% to $1,753,000 in
the nine months ended September 30, 1998 from $1,365,000 in the nine months
ended September 30, 1997. This increase is a result of a change in the business
structure of IAT and a different marketing approach for FSE PCs and products.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased by 38.1% to $493,000 in the nine months ended September 30,
1998 from $796,000 in the nine months ended September 30, 1997. This decrease
is a result of a change in the business structure of IAT and the integration of
FSE.
CORPORATE OVERHEAD. Corporate overhead increased by 45.6% to $808,000
in the nine months ended September 30, 1998 from $555,000 in the nine months
ended September 30, 1997 primarily due to an increase in expenses for
professional services relating to the Spinoffs and acquisitions, the
integration of FSE and as a result of the Company becoming a public company in
April 1997 resulting in higher corporate overhead as from such date.
INTEREST. Interest expense decreased by 36.7% to $107,000 in the nine
months ended September 30, 1998 from $169,000 in the nine months ended
September 30, 1997. This decrease is primarily a result of a reduction of
outstanding bank loans and the repayment of certain stockholders' loans
partially offset by interest payable on the convertible debentures. Interest
income decreased by 30.1% to $253,000 in the nine months ended September 30,
1998 from 362,000 in the nine months ended September 30, 1997 primarily as a
result of a reduction of the Company's interest bearing cash and cash
equivalents and investments in corporate bonds.
DISCOUNT ON CONVERTIBLE DEBENTURES. Discount on convertible debentures
increased to $448,000 in the nine months ended September 30, 1998 from $0 in
the nine months ended September 30, 1997. The Company recorded a charge to
operations on the convertible
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<PAGE>
debentures issued on June 19, 1998 based on an assumed conversion price of 87%
of the current market value on the date of issuance.
NET LOSS. The net loss for the nine months ended September 30, 1998
decreased to $1,421,000 from $4,303,000 for the nine months ended September 30,
1997. This decrease is the result of the acquisition of the FSE operations in
November 1997 and of the Spinoffs of the research and development and marketing
activities to Communication AG and Communication Systems GmbH effective as of
January 1, 1998 partially offset by a one-time charge to operations for the
discount on convertible bonds of $448,000 and higher expenses for professional
services relating to Spinoffs.
OPERATING LOSS BEFORE CORPORATE OVERHEAD, INTEREST, INCOME TAXES,
DEPRECIATION AND AMORTIZATION. Operating loss before corporate overhead,
interest, income taxes, depreciation and amortization in the nine months ended
September 30, 1998 amounted to $226,000. In the nine months ended September 30,
1997 the operating loss amounted to 3,746,000. This improvement is primarily a
result of the Spinoffs of the research and development and marketing activities
to Communication AG and Communication Systems GmbH effective as of January 1,
1998 and of the acquisition of the FSE operations in November 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company's cash and cash equivalents and
investments in corporate bonds amounted to $7,219,000 and $750,000,
respectively, as compared to $5,473,000 and $2,727,000, respectively, at
December 31, 1997.
Net cash used in operating activities totaled $2,825,000 during the
nine months ended September 30, 1998 compared to $4,523,000 during the nine
months ended September 30, 1997. This decrease is primarily due to a reduction
of accounts payable and other short-term liabilities offset by a decrease of
the net loss for the nine months ended September 30, 1998, net of the
amortization of the goodwill on the FSE acquisition and the discount on
convertible debentures.
Net cash provided by investing activities totaled $786,000 during the
nine months ended September 30, 1998 compared to net cash used in investing
activities of $3,473,000 during the nine months ended September 30, 1997.
During the nine months ended September 30, 1998 cash in the amount of $135,000
was used to pay for the acquisition of 25.1% of the common stock of IAT
Germany, for 15% each of the common stock of IAT Communication Systems GmbH and
Communication AG and for loans in the aggregate amount of $832,000 to these
companies and for the purchase of equipment. These payments were offset by a
sale of marketable securities. In the nine months ended September 30, 1997 cash
was used for the purchase of marketable securities and for the purchase of
equipment.
Net cash provided by financing activities amounted to $3,691,000
during the nine months ended September 30, 1998 as compared to net cash
provided by financing activities of $15,560,000 during the nine months ended
September 30, 1997. During the nine months ended September 30, 1998 cash was
provided by net proceeds of $1,609,000 primarily from the issuance of 198,255
shares of Common Stock and the issuance of convertible Debentures, in the
amount of $3,000,000 partially offset by the repayment of stockholder loans of
$1,327,000, including the third installment of the FSE purchase price in the
aggregate amount of $890,000 and the repayment of short-term bank loans of
$55,000. In addition, cash in the
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amount of $464,000, net of financing cost, was provided by a capital
contribution by certain stockholders in exchange for the Company assuming the
obligation of IAT AG under the repayment of the Swiss bank loan. During the
nine months ended September 30, 1997 cash was provided by net proceeds received
from the Company's IPO in the amount of $17,098,000 partially offset by a
repayment of certain stockholder loans, short-term bank loans, the payment of
the preferred stock dividend and a repurchase by the Company of its Common
Stock pursuant to a stock repurchase plan.
Cash, cash equivalents and investments in corporate bonds at
September 30, 1998 amount to $7,969,000 of which approximately $2,600,000 is
anticipated to be used for the KG acquisition. The Company believes that its
funds should be sufficient to finance its working capital requirements and its
capital and debt service requirements for approximately the 12 month period
following September 30, 1998.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of using only the last two digits to
indicate the year in computer hardware and software programs and embedded
technology such as micro-controllers. As a result, these programs do not
properly recognize a year that begins with "20" instead of the familiar "19".
If uncorrected, such programs will be unable to interpret dates beyond the year
1999, which could cause computer system failure or miscalculations and could
disrupt the Company's operations and adversely affect its cash flows and
results of operations.
The Company recognizes the importance of the Year 2000 issue and has
established a project team with the objective to ensure an uninterrupted
transition to the year 2000 by assessing, testing and modifying products and
information technology ("IT") and non-IT systems so that such systems and
software will perform as intended and information and dates can be processed
with expected results ("Year 2000 Compliant"). The scope of the Year 2000
compliance effort includes (i) IT such as software and hardware; (ii) non-IT
systems or embedded technology; and (iii) the readiness of key third parties,
including suppliers and customers, and the electronic date interchange (EDI)
with those key third parties.
Independent of the Year 2000 issue, the Company is in the process of
installing new financial accounting, procurement, order management and
invoicing systems. These systems are expected to be fully operational by the
first quarter 1999 and be Year 2000 Compliant. Testing of these systems to
become compliant for Year 2000 has begun and should be fully completed by the
end of the first quarter 1999. As results of this testing process become
available over the next three months, the Company will make contingent plans
where it deems necessary to become Year 2000 Compliant. However, the Company
believes that its new systems will be Year 2000 compliant and that no
contingency plan will be necessary.
Third Parties - In addition to internal Year 2000 IT and non-IT
remediation activities, the Company is in contact with key suppliers and
vendors to minimize disruptions in the relationship between the Company and
these important third parties from the Year 2000 issue. The Company has
requested Year 2000 compliance certification from each of such vendors and
suppliers for their hardware and software products and for their internal
business applications and processes. While the Company cannot guarantee
compliance by third parties, the Company will consider alternate sources of
supply, which the Company believes are generally available in the event a key
supplier cannot demonstrate its systems or products are Year 2000 Compliant.
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Company products - The Company believes that all hardware products
included in Trinology PCs shipped since the fourth quarter of 1997 are Year
2000 Compliant and hardware products included in Trinology PCs shipped prior to
such time can be made Year 2000 Compliant through upgrade of software patches.
The Company has requested Year 2000 compliance certificates from each of its
suppliers and vendors from parts and components installed in its Trinology
PC's.
The replacement of the Company's existing financial accounting/
procurement/order management and invoicing systems are estimated at
approximately $230,000, however, only a portion of the cost of it is
attributable to the Year 2000 issue. While the Company's estimate is that the
Year 2000 effort will have a nominal cost impact, there can be no assurance as
to the ultimate cost of the Year 2000 effort or the total cost of information
systems. Such costs will be expensed as incurred, except to the extent such
costs are incurred for the purchase or lease of capital equipment.
The Company's current estimates of the amount of time and costs
necessary to remediate and test its computer systems are based on the facts and
circumstances existing at this time. The estimates were made using assumptions
of future events including the continued availability of certain resources,
Year 2000 modification plans, implementation success by key third-parties, and
other factors. New developments may occur that could affect the Company's
estimates of the amount of time and costs needed to modify and test its IT and
non-IT systems for Year 2000 compliance. These developments include, but are
not limited to: (i) the availability and cost of personnel trained in this
area; (ii) the ability to locate and correct all relevant date-sensitive codes
in both IT and non-IT systems; (iii) unanticipated failures in its IT and
non-IT systems; and (iv) the planning and Year 2000 compliance success that
suppliers and vendors attain.
The Company cannot determine the impact of these potential
developments on the current estimate of probable costs of making its products
and IT and non-IT systems Year 2000 Compliant. Accordingly, the Company is not
able to estimate its possible future costs beyond the current estimate of
costs. As new developments occur, these cost estimates may be revised to
reflect the impact of these developments on the costs to the Company of making
its products and IT and non-IT systems Year 2000 Compliant. Such revisions in
costs could have a material adverse impact on the Company's results of
operations in the quarterly period in which they are recorded. Although the
Company considers it unlikely, such revisions could also have a material
adverse effect on the business, financial condition or results of operations of
the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The shares of Common Stock issued in the Company's IPO were registered
under a registration statement on Form S-1 (file No. 333-18529) which became
effective on March 26, 1997.
During the three months ended September 30, 1998, the Company utilized
approximately $551,000 of the net proceeds from the IPO. Of this amount
approximately $50,000 was paid for the purchase of machinery and equipment and
approximately $501,000 for working capital and general corporate purposes. As
of September 30, 1998, approximately $3,244,000 of the proceeds from the IPO
remain unused.
In September 1998 the Company granted 25,000 stock options to a
consultant of the Company for services rendered and to be rendered. Of these
stock options 12,500 vest immediately and 12,500 vest on June 30, 1999.
In November 1998 and pursuant to the Columbus Agreement the Company
issued 98,622 shares of Common Stock to Axel Hundt, the sole shareholder of KG
and GmbH, respectively, in connection with the acquisition of KG and GmbH.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not Applicable.
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ITEM 5. OTHER INFORMATION
On August 1, 1998 the Company entered into a non-binding Letter of
Intent with ATEC Group, Inc. ("ATEC") whereby the Company would have purchased
all of the outstanding shares of ATEC in a stock swap valued at approximately
$77,000,000 (based on an assumed $10 market price per share of IAT Common
Stock). On August 21, 1998 the parties mutually agreed to terminate the letter
of intent.
On October 27, 1998, the Company entered into a purchase agreement to
acquire all of the issued and outstanding shares of Columbus Handels- und
Vertriebs GmbH & Co. KG ("KG") and Columbus Handels- und Vertriebs GmbH
("GmbH"), the general partner of KG, for a purchase price of approximately $1.7
million in cash and 98,622 shares of the Company's Common Stock equaling
approximately $760,000 (the "Columbus Agreement"). In connection with the
transaction, IAT expects to make a working capital loan of approximately
$700,000 to KG and will take a non-cash charge for amortization of goodwill.
Pursuant to the Columbus Agreement, Axel Hundt, the founder and owner of each
of KG and GmbH, will enter into a two-year employment contract. This
transaction was consummated on November 13, 1998, effective on October 31,
1998.
KG is a distributor of PC peripherals in Germany and in parts of
Austria. With the KG acquisition the Company continues the vertical integration
of its distribution channels which began with the acquisition of FSE Computer
Handel in November 1997.
In connection with the KG acquisition the Company plans to consolidate
a majority of FSE's existing peripherals business into that of KG. FSE will
concentrate primarily on the production and marketing of its high-performance
built-to-order PCs and KG will focus primarily on the distribution of
peripherals. As a result of this consolidation, IAT will benefit from cost
savings through the implementation of corporate best practices and the
elimination of a approximately 25 employees who have already been officially
notified and whose employment contracts will be terminated effective as of
December 31, 1998. Aggregate severance payments in connection with the
termination of the employment contracts will amount to approximately $60,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.55 Agreement dated October 27, 1998 between Registrant
and Axel Hundt, the sole shareholder of Columbus
Handels- und Vertrieb GmbH & Co. KG and Columbus
Handels- und Vertrieb GmbH
27.1 Financial Data Schedule
(b) The following reports on Form 8-K were filed during the quarter ended
September 30, 1998
Not applicable.
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<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IAT MULTIMEDIA, INC.
By: /s/ Jacob Agam
-----------------------------
Jacob Agam
Chairman of the Board of
Directors and Chief Executive
Officer
/s/ Klaus Grissemann
-----------------------------
Klaus Grissemann
Chief Financial Officer
Date: November 13, 1998
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Exhibit
Urkundenrolle [register of authors] No. 2246 K/1998
Negotiated on
27/10/98
in Munich, [Federal Republic of Germany]
The following persons appeared today before Dr. Karl, the undersigned notary
public, in his office in Munich, [Federal Republic of Germany]:
1. Mr. Axel Hundt, German citizen, whose business address is Am
Lindenhain 14, 85435 Bergham, Aufhausen, Federal Republic of Germany.
Mr. Hundt, who identified himself on the basis of the official photo
ID card issued to him by the Federal Republic of Germany, is
hereinafter referred to as the "Seller,"
and
2. Mr. Klaus Grissemann, Swiss citizen, whose business address is
Geschaftshaus Wasserschloss, Aarestrasse 17, 5300 Vogelsang-Turgi,
Switzerland. Mr. Grissemann identified himself on the basis of the
official photo ID card issued to him by the Swiss Confederation. In
the following, Mr. Grissemann shall not be acting in his own name, but
rather on account of
IAT Multimedia, Inc.
Geschaftshaus Wasserschloss
Aarestrasse 17
5300 Vogelsang-Turgi
Switzerland,
hereinafter referred to as the "Buyer."
To prove that he is authorized to act in the name of the
aforementioned entity, Mr. Grissemann has submitted the original of
the power of attorney issued to him by the Board of Directors of IAT,
Inc.
Now, therefore, at the request of those appearing before me, I notarize the
following oral statements made before me as set forth below:
<PAGE>
SALES AND ASSIGNMENT AGREEMENT
PREAMBLE
The seller is the only limited partner of the corporate entity COLUMBUS
Computer Handels- und Vertriebs GmbH & Co. KG (hereinafter referred to as the
"KG") which is registered with the Commercial Register of the Amtsgericht
[District Court], Munich, [Federal Republic of Germany], under the number HR A
72431 with a fixed capital of 100,000 deutsche marks. COLUMBUS Computer
Handels- und Vertriebs-Verwaltungs GmbH (hereinafter referred to as the "GmbH")
is the only general partner of the KG with a share capital of 100,000 deutsche
marks; the GmbH is registered with the Commercial Register of the Amtsgericht
[District Court], Munich, [Federal Republic of Germany], under the number HR B
115362. Neither the KG nor the GmbH own any real property. The Seller is also
the only shareholder of the GmbH. The Seller intends to sell one hundred
percent of his shares in both the KG and the GmbH (hereinafter referred jointly
to as the "companies") to the Buyer. The Buyer intends to acquire these shares.
NOW, THEREFORE, the parties to this agreement stipulate the following:
SECTION 1
SALE AND TRANSFER
1.1 Subject to Section 1.2 and Section 1.3, the Seller sells and transfers
to the Buyer, who accepts such sale and transfer, the limited
partner's capital contribution to the KG and his share in the GmbH,
hereinafter referred to as the "shares," as set forth below:
a) a limited partner's capital contribution to the KG at a par value
of 100,000 deutsche marks and
b) a share in the GmbH at a par value of 100,000 deutsche marks.
1.2 The transfer in rem of the limited partner's capital contribution to
the KG shall be subject to the following conditions precedent:
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a) The receipt, on the part of the Buyer, of the annual financial
statement, including profit and loss statement, for the KG
(Section 9.1) and the interim financial statement, including
interim profit and loss statement, of the KG (Section 9.2). Such
financial statements must be accompanied, respectively, by an
attestation of audit and a confirmation of audit issued by FIDES
Treuhandgesellschaft mbH, Bremen, [Federal Republic of Germany],
as described in Section 9.3; and
b) The registration of the Buyer in the Commercial Register; and
c) Payment of the purchase price in accordance with Section 3.2 item
a); and
d) The transfer of the shares in accordance with Section 3.2 item
b).
The Buyer may waive the requirements set forth in items a) and b)
above, in writing, vis-a-vis the Seller. The sale and transfer of the
limited partner's capital contribution to the KG shall be effected by
way of special successor rights.
1.3 The transfer in rem of the share in the GmbH shall be subject to the
condition precedent of payment of the purchase price in accordance
with ss. 3.2 item a) and the transfer of the shares in accordance with
Section 3.2 item b).
1.4 In economic terms, the transfer of shares shall take effect on October
31, 1998, at 24:00 hours. As far as the profits for the current fiscal
year are concerned, the Seller and the Buyer stipulate hereby that the
Seller shall be permitted to withdraw an amount of 1,400,000 deutsche
marks from the item entitled "credit balance of the limited partner"
in the interim financial statement and shown as such therein. The
Buyer shall be entitled to a "credit balance of the limited partner,"
if any, that is shown in the interim financial statement of the KG
(Section 9.2) above and beyond the amount of 1,400,000 deutsche marks,
as well as any "credit balance of the limited partner" that is
created between September 01, 1998, and October 31, 1998, 24:00
hours; such amount shall be considered having been paid for by the
purchase price. The Seller undertakes not to withdraw any funds above
and beyond the aforementioned amount of 1,400,000 deutsche marks from
the item "credit balance of the limited partner."
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<PAGE>
1.5 The share in the GmbH shall be sold including any and all profits not
distributed. To date, the Seller has not distributed the profits of
the GmbH or effected any withdrawals.
1.6 The approvals required for the sale and the transfer are attached to
the present agreement as APPENDICES 1.6 (a) AND (b). The comprise:
a) The approval of the KG concerning the transfer of shares
[APPENDIX 1.6 (a)] and
b) The approval of the GmbH concerning the transfer of shares
[APPENDIX 1.6 (b)].
1.7 The applications concerning the change in terms of the limited
partner, which must be signed by the Seller, the GmbH, and the Buyer
and must be filed with the Commercial Register, shall be signed by the
aforementioned parties on the deadline (Section 2). Subsequent to the
transfer in rem of the shares in the GmbH, the Buyer shall notify the
management of the GmbH of the transfer of the shares in accordance
with Section 16 para 1 GmbHG [GmbH-Gesetz - law governing limited
liability companies].
SECTION 2
DEADLINE
Today's date shall be considered the deadline in the sense of the present
agreement.
SECTION 3
PURCHASE PRICE
3.1 The purchase price for the shares shall be 4,100,000 (in words: four
million one hundred thousand) deutsche marks.
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<PAGE>
3.2 The purchase price shall be paid as follows:
a) An amount totaling 2,850,000 deutsche marks shall be paid in cash
(cash payment);
b) The Buyer shall transfer to the Seller a number of shares of the
former, such number to be determined in accordance with Section
3.4 (hereinafter referred to as the "shares"); the value of such
shares shall equal 1,250,000 deutsche marks.
3.3 The purchase price shall be due and payable as follows:
a) The cash payment shall be due and payable two banking days upon
satisfaction of the requirements set forth in Section 1.2 a) and
Section 1.2 b) and shall be transferred to the bank account of
the Seller set forth in Section 3.7 below.
b) The shares shall be transferred two banking days upon
satisfaction of the requirements set forth in Section 1.2 a) and
Section 1.2 b). A credit to the securities account of the Seller
as specified in Section 3.7 shall be equivalent to such transfer.
3.4 The number of shares to be transferred as consideration pursuant
to Section 3.2 item b) shall be equivalent to the quotient, in US
dollars, of 1,250,000 deutsche marks at the average price between the
foreign exchange buying rate and the foreign exchange selling rate
officially quoted at the foreign exchange market in Frankfurt,
[Federal Republic of Germany] on October 23, 1998 (hereinafter
referred to as the "average foreign exchange rate"), divided by the
average sale price, in US dollars, as defined below. The "average
sale price" shall be computed as follows: First, the last prices at
which the shares of the Buyer's common stock were sold on Nasdaq in
New York, New York, USA, on each banking day in New York, New York,
USA (hereinafter referred to as the "banking day") in the last four
months preceding October 24, 1998. Subsequently, the result of the
aforementioned addition shall be divided by the number of banking
days in the last four months preceding October 24, 1998.
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<PAGE>
The parties to this agreement stipulate that pursuant to the
definitions set forth above, the average foreign exchange rate shall be DM
1.6590 and the average sale price $7.64; they also stipulate that, based on an
average foreign exchange rate of DM 1.6590 and an average sale price of $7.64,
the number of shares to be transferred in accordance with Section 3.2 item b)
shall be 98,622.
3.5 The Seller undertakes not to sell or transfer the shares acquired in
accordance with Section 3.2 b) within six months of the deadline.
3.6 Subject to the limitations set forth in sentence 3 [of this paragraph]
below, if the Seller sells the shares acquired by him pursuant
to Section 3.2 item b) six months after the deadline but prior to the
fourth anniversary of the deadline, and if the market price achieved
by the Seller for a share at the time he sells the shares on Nasdaq
in New York, New York, USA (hereinafter referred to as the "market
price") is lower than the average sale price (Section 3.4), the Buyer
shall transfer to the Seller a specific number of new shares so that
the result of multiplying the current market price with the total
number of shares that were transferred to the Seller pursuant to
Section 3.2 item b) and Section 3.6 is equal to the equivalent value
in US dollars of 1,250,000 deutsche marks at the average foreign
exchange rate (Section 3.4). If the result of the multiplication set
forth in the preceding sentence calls for the transfer of fractions
of one share of the Buyer's common stock to the Seller, the number of
shares shall be rounded off to the next higher full number. The
maximum number of shares to be transferred in accordance with Section
3.2 item b) and Section 3.6 shall be computed on the basis of the
following equation:
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Maximum number =
Equivalent value in US$ of DM 1,250,000 at the average foreign
exchange rate (Section 3.4)
- -----------------------------------------------------
Last sale price of one share of the Buyer's common stock on
Nasdaq on October 23, 1998
The parties to this agreement stipulate that the last sale price of
one share of the Buyer's common stock on Nasdaq on October 23, 1998,
was $6.50 and that, taking the sale price of $6.50 as the basis, the
maximum number of shares to be transferred in accordance with Section
3.2 item b) and Section 3.6 would be 115,918.
3.7 Any and all payments and/or transfers to the Seller in accordance
with Section 3 shall be made to the bank account and/or the securities
account of the Seller with Sparkasse Dingolfing, bank routing number
743 513 10, account number 100181437, unless the Seller designates
another bank account or another securities account.
SECTION 4
DISCLOSURES
The Seller shall provide the following documents to the Buyer:
4.1 The shareholders agreement of the GmbH, last amended on December 18,
1996;
4.2 The financial statements of the companies, as set forth in greater
detail in Section 9.1 and Section 9.2;
4.3 The notarized spin-off agreement of 08/07/98 for the purpose of
transferring assets of an individual businessman to a GmbH & Co KG
(register of authors no. 1483/1998 of Georg Rie , notary public,
having an office in Dorfen), hereinafter referred to as the "spin-off
agreement"; as well as
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<PAGE>
4.4 The following agreements and documents pertaining to the companies:
a) resolutions of the shareholders and modifications of the articles
of incorporation, in accordance with the list set forth in
APPENDIX 4.4 a);
b) employment contracts, in accordance with the list set forth in
APPENDIX 4.4 b):
c) loan agreements, as well as bank guaranties, warranties,
declarations of patronage, collateral documentation, as well as
loans provided by one of the companies to a third party, in
accordance with the list set forth in APPENDIX 4.4 c);
d) rental and lease agreements, in accordance with the list set
forth in APPENDIX 4.4 d);
e) insurance policies, in accordance with the list set forth in
APPENDIX 4.4 e); and
f) the General Terms and Conditions, General Sales or Purchase Terms
and Conditions, as well as any and all other standard agreements
of the company, in accordance with the list set forth in APPENDIX
4.4 f).
SECTION 5
COVENANTS AND WARRANTIES
5.1 The Seller covenants and warrants by way of an individual warranty
a) that the statements made in Section 5 herein with regard to the
companies are correct and complete as of today's date;
b) that, to the best of his knowledge, he has provided complete and
comprehensive information to the Buyer concerning all
circumstances known to him that are significant to an assessment
of the companies' situation in terms of assets and profits; and
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<PAGE>
c) that, with the exception of general economic developments or
developments specific to the industry, he is unaware of any
significant factors that would negatively affect the future
development of the business activities of the companies relative
to prior years.
5.2 The Seller covenants and warrants, furthermore, by way of an
individual warranty
5.2.1 Legal Situation of the KG and the GmbH
- that the companies were established in a legally effective
manner;
- that the entire fixed capital and/or share capital has been paid
in full, in cash, and that it was not repaid, as well as that
there are no obligations to make additional capital contributions
or to pay outstanding capital contributions;
- that the shares transferred represent 100% of the fixed capital
and/or the share capital of the GmbH;
- that the shares belong exclusively to the Seller and are free of
third-party rights;
- that the Seller may freely dispose of such shares; as well as
- that the statements made in the preamble and in Section 1.5 are
complete and correct.
5.2.2 Section 419 BGB / Section 1365 BGB
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<PAGE>
The Seller covenants and warrants by way of an individual
warranty
that for the Seller, disposing of his shares does not represent
a business in the sense of Section 419 BGB [Burgerliches
Gesetzbuch - civil code] and
- that the disposition of the shares on the part of the Seller does
not require the approval of his spouse in accordance with Section
1365 BGB.
5.2.3 No Challenges
The Seller covenants and warrants by way of an individual warranty
- that the companies have neither applied for nor declared
bankruptcy and that the companies' assets are not subject to a
settlement proceeding before any court, and
- that no circumstances are extant which might justify challenging
the present agreement under the provisions of the Konkurs- und
Vergleichsordnungsgesetz [law governing bankruptcies and
settlements] and the Anfechtungsgesetz [law governing legal
challenges].
5.2.4 Agreements
The Seller covenants and warrants by way of an individual warranty
- that at the time the corporate entity was spun off from his
private assets in accordance with the (registered) spin-off
agreement of July 20, 1998, any and all assets required for
continuing the business activities of the corporate entity were
transferred to the KG;
- that, with the exception of the agreements and obligations set
forth in Section 4, the companies have not concluded any other
agreements or assumed any other obligations that would affect
their financial or operational position in significant ways;
- that the agreements set forth in Section 4, as well as all extant
agreements, remain in full force and effect, unless they were
terminated in the course of normal business; as well as
- that, to the best of his knowledge, there are no circumstances
known to him, not even in consequence of the present agreement,
which would impair or endanger the continued effectiveness of the
agreements set forth in Section 4.
5.2.5 Performance of Agreements
The Seller covenants and warrants by way of an individual warranty
- that, as of today, the companies have performed and continue to
perform all agreements set forth in Section 4, and/or that they
have done everything in their power to place them in the position
to satisfy their duties under such agreements at the time such
performance is required. There are no defects in performance with
regard to the agreements concerned.
5.2.6 Intellectual Property Rights
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The Seller covenants and warrants by way of an individual warranty
- that the companies do not themselves own any intellectual
property rights in connection with their current business
activities (specifically, patents, utility models, copyrights,
trademarks, and know-how), including business secrets,
procedures, and licenses; [change in German text initialed at
right margin]
and
- that, to the best of his knowledge, the companies' business
activities do not violate intellectual property rights of third
parties.
5.2.7 Insurance
The Seller covenants and warrants by way of an individual warranty
- that the KG as the insured party maintains insurance policies
protecting it against fire, theft, and other operational risks
under appropriate insurance policies or insurance policies
customary for the industry, and that such insurance policies
remain in full force and effect.
5.2.8 Concessions and Permits
The Seller covenants and warrants by way of an individual warranty
- that any and all official permits, construction and operational
permits and licenses required for the companies' business
activities, including permits concerning environmental
protection, are in effect, and that the companies are in
possession of any and all other permits deemed necessary for the
performance of their business activities by governmental
authorities; as well as
- that any and all such concessions and permits are in full force
and effect, without any restrictions whatsoever, and that he has
no knowledge of any circumstances that might justify any
withdrawal or restriction of these concessions or permits or the
imposition of requirements in consequence of the present
agreement.
5.2.9 Compliance with Environmental Regulations
The Seller covenants and warrants by way of an individual warranty
- that the companies have not caused or permitted, either
intentionally or unintentionally, any release of environmentally
hazardous substances and materials on the real property utilized
by the companies;
- that he and the companies have done everything in their power to
ensure that all waste and other materials or substances,
irrespective of their hazardous or nonhazardous nature, which are
treated and/or temporarily or permanently stored outside of the
real property utilized by the companies, were treated,
temporarily or permanently stored, or incinerated in accordance
with all applicable laws and regulations; as well as
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<PAGE>
- that, to the best of his knowledge, there are no extant
contaminated sites (pollution of the soil or groundwater) at or
under the real property owned or utilized by the companies, and
that there are no other environmentally hazardous substances
thereon.
5.2.10 Legal Disputes and Compliance with Regulations
The Seller covenants and warrants by way of an individual warranty
- that the companies are not threatened with any civil, criminal,
or administrative claims and that they are not subject to any
court or governmental investigations. There are no court
judgments or administrative findings that enjoin the companies
from carrying out or ordering specific acts or restrict them in
regards thereto and that would impose significant restrictions on
the companies' ability to pursue their business activities or
that assert that the companies have violated laws or regulations.
The companies are not party to any legal dispute, and no legal
dispute is presently threatened against them; and
- that the business activities of the companies are basically
carried out in accordance with all official requirements.
5.2.11 Ownership of the Assets
The Seller covenants and warrants by way of an individual warranty
- that the assets of the companies continue to form, in terms of
civil laws, an integral and unrestricted part of the corporate
assets shown in the interim financial statements, unless they
were sold since August 31, 1998, in the course of the companies'
regular business activities; and
- that with the exception of customary reservations of title
concerning inventories, the assets, including transfers by way of
security, are not subject to third- party rights.
5.2.12 Annual Financial Statement
The Seller covenants and warrants by way of an individual warranty
- that both the annual and the interim financial statements
(Section 9) provide a picture of the financial situation, assets,
liabilities (also those that are qualified or limited), equity,
and profit situation of the companies that reflects the actual
situation, and that both the annual financial statements and the
interim financial statements were prepared in accordance with
generally accepted accounting principles, subject to the
continuity of accounting and valuation criteria, and that are
correct and complete;
- that the inventories set forth in both the annual and the interim
financial statements (Section 9) are shown in accordance with the
commercially applicable lowest value principle, taking into
account adjustments with regard to obsolete inventory or
inventory that can no longer be sold;
- that the trade accounts receivable, which are shown in both the
annual and the interim financial statements (Section 9) subject
to flat-rate and, if applicable, individual adjustments and have
not been settled as of today's date, may be collected by March
31, 1999, at the latest;
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<PAGE>
- that as of August 31, 1998, the companies had future, payable, or
threatened liabilities of any kind only to the extent shown per
cash value of the interim financial statements pursuant to
Section 9.2 or covered by reserves; as well as
- that there have been no hidden distributions of profits.
5.2.13 Tax Returns
The Seller covenants and warrants by way of an individual warranty
- that the companies have filed any and all tax returns to be filed
to date with the respective tax authorities; and
- that the companies are not in default, as of today's date, with
regard to the payment of taxes, fees, and social security taxes
that are due and payable, and that the interim financial
statements pursuant to Section 9.2 contain sufficient reserves
for any taxes, fees, and social security taxes apply to the
period ending August 31, 1998, and that must be paid by the
companies.
5.2.14 Condition of Moveable Assets
The Seller covenants and warrants by way of an individual warranty
- that the moveable and immovable assets of the companies are in
usable condition, taking into account fair wear and tear, age,
and the requisite maintenance work, the latter having been
performed at regular intervals.
5.2.15 Products and Product Liability
The Seller covenants and warrants by way of an individual warranty
- that the products manufactured by the companies conform to any
and all significant governmental or private-sector regulations.
Any and all goods and services are sold subject to customary
warranties. The companies, to the best of the Seller's knowledge,
have not sold or performed defective goods and services as of the
deadline that might lead to warranty claims against them.
Specifically, all goods and services of the companies are fit for
the conversion of deutsche marks to the Euro, as well as for the
millennium date change that will become necessary on 31/12/99;
and
- that the companies, to the best of the Seller's knowledge, did
not manufacture any goods and did not deliver any goods and
services that might entail product liability claims.
5.2.16 No Significant Modifications
The Seller covenants and warrants by way of an individual warranty
- that since August 31, 1998, up to today's date,
(i) the companies have duly continued their business activities
subject to proper business practices and procedures; this
applies, in particular, to investment
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<PAGE>
principles, inventories and purchases, production methods,
payment policies, and collection of receivables;
(ii) that significant contracts concluded by the companies were
not modified or terminated;
(iii) that payments made to the executives, representatives, or
consultants of the companies were not increased above and
beyond customary pay raises;
(iv) that no retirement benefits, bonuses, profit-sharing plans,
or other payments of a similar nature were instituted for
the benefit of executives or other employees of the
companies, or that extant promises of this nature were not
increased;
(v) that the companies did not incur significant liabilities or
that they did not sell any important assets, unless such
acts occurred in the course of normal business; as well as
(vi) that no significant negative changes have occurred with
regard to the financial situation, assets, liabilities,
equity, or operating results of the companies; and
- that the Seller, from today's date until the transfer in rem of
the shares, shall abide by the rules of conduct set forth above
under items (i) to (vi), and that he shall not deviate therefrom
without the prior approval of the Buyer.
SECTION 6
LEGAL RECOURSE
6.1 If one or several of the covenants and warranties made in the present
agreement or any of the duties undertaken herein do not apply or are
not satisfied, the Buyer shall have the right, at its discretion,
a) to demand that the Buyer and the companies be placed in a
situation equivalent to the situation that would exist if the
respective covenant or warranty would apply or if the respective
duty had been satisfied;
and/or
b) to demand compensation for any damages incurred, now or in the
future, by the Buyer and/or the companies;
and/or
c) to claim a reduction of the purchase price, in deviation from
Section 472 BGB, in an amount that equals the reduction in assets
incurred by the Buyer and/or the companies.
6.2 If damages incurred on one level are reflected on another level, any
claims for compensation of such damages may be made only once.
6.3 Notwithstanding any other provisions of the present agreement, the
Seller undertakes to hold the Buyer and, if requested by the latter,
the companies harmless from any and all tax liabilities and
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<PAGE>
other disadvantages related thereto, if any, as of the respective
date on which such liabilities are due and payable, which affect the
tax periods up to the deadline and which are not covered by debit
items in both the annual and interim financial statements. This shall
include interest and surcharges, a well as disadvantages resulting
from a restructuring, if any, of the equity that may be utilized for
tax purposes in the sense of Sections 28, 29 KStG
[Korperschaftssteuergesetz - corporate tax law]. In this connection,
the Buyer shall have all rights pursuant to Section 6.1. If tax
audits or subsequent assessments result in additional tax liabilities
to be paid by the companies, any advantages and disadvantages
resulting from tax savings which, in turn, stem from periodic
deferrals or subsequent capitalization shall be offset only at the
time at which the tax savings actually affect the companies or their
legal successors.
6.4 Any claims pursuant to Section 6 shall be subject to the following
statute of limitations:
a) With the exception of claims for damages due to legal defects
(Section 5.2.1), environmental claims (Section 5.2.9), and
product liability (Section 5.2.15), as well as claims for damages
or reimbursement of tax and social security liabilities (Section
5.2.13 and Section 6.3), all claims under Section 6.1 shall
expire on December 31, 2000;
b) The statutory statute of limitations shall apply to claims for
legal defects (Section 5.2.1);
c) Claims for damages in connection with environmental liabilities
(Section 5.2.9) shall expire on December 31, 2003; and
d) Claims resulting from breaches of covenants and warranties
concerning tax and social security liabilities (Section 5.2.13
and Section 6.3) shall expire within six months of the
effectiveness or nonappealability of the respective tax and/or
social security assessments.
6.5 The statute of limitations concerning claims, if any, made by the
Buyer shall be interrupted by a written demand for performance or a
written notification of defect analogous to the requirements set forth
in Section 202 BGB, in connection with Section 205 BGB, with the
proviso that in order to preserve its claims the Buyer must assert
its claims in court within 12 months of the date of the demand for
performance or the notification of defect, however, not prior to the
expiration of the respective statute of limitations pursuant to
Section 6.4.
6.6 Articles 460 and 464 BGB, as well as Sections 377 ff. HGB
[Handelsgesetzbuch - commercial code] shall not apply.
6.7 Claims on the part of the Buyer under Section 6 shall be valid only if
the amount or the value of the claim, or the sum total of all its
claims, equals at least 50,000 deutsche marks. If this limit is
exceeded, the full amount shall be due and payable or reimbursed in
each case. As far as demands for taxes or social security taxes are
concerned, in this connection the total of any and all subsequent
assessments shall apply.
6.8 If the liability of the Seller is limited to the best of his knowledge
or to his actual knowledge, he shall nevertheless be liable for due
diligence pursuant to Section 43 para 1 GmbHG. The Seller shall be
credited with having acted with the best knowledge or actual
knowledge of a managing director and Prokuristen [persons with
special power of attorney].
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<PAGE>
SECTION 7
COOPERATION
7.1 The Seller undertakes to provide to the Buyer any and all records and
documents pertaining to the companies and to inform the Buyer, at the
latter's request and free of charge, henceforth and without any
restrictions, about matters pertaining to the companies that are
relevant to the time period preceding the deadline, to the extent that
such information is required for safeguarding the interests of the
companies or the Buyer.
7.2 If the companies are audited after the deadline by tax authorities
with regard to assessment periods preceding the deadline, the Seller
shall be given the opportunity to have a representative, who is
subject to confidentiality agreements, participate in the audit,
especially in the final discussions pertaining thereto. Any and all
information required for safeguarding the interests of the Seller
shall be provided to the latter, at his request and expense. In
addition, the Seller may request, also at his expense, that the
company affected by any such tax assessment avail itself of any
recourse available to it. The respective proceedings shall be carried
out by the Seller at his expense.
SECTION 8
PROHIBITION OF COMPETITION
8.1 The Seller undertakes that until 31.12.2000 neither he himself nor any
companies associated with him shall engage in direct or indirect
competition with the companies and that he or companies associated
with him shall not establish, participate in, consult, or otherwise
support a company, either directly or indirectly, that competes with
the companies' current business activities. In geographical terms, the
prohibition of competition shall be limited to the areas in which the
companies currently do business. This provision shall not apply to
investments by the Seller in companies that are traded on stock
exchanges, provided such investments amount to less than two percent
of the share capital of such publicly traded company.
8.2 If the Seller violates the prohibition of competition set forth above,
he shall be liable for a fine of 500,000 deutsche marks for each
violation. In the event of continued violation of the prohibition of
competition, each week of violation shall be considered a separate
instance of such violation. Any right to claim damages resulting from
such violation or claims under the performance guaranty shall be
unaffected thereby.
SECTION 9
BALANCE SHEETS
9.1 The annual financial statements and the profit and loss statements
attendant thereto, which are attached to this agreement as APPENDIX
9.1 (a) and APPENDIX 9.1 (b), respectively, have been prepared for the
fiscal year ended December 31, 1997.
9.2 The interim financial statements and the interim profit and loss
statements attendant thereto, which were prepared for the period from
January 1, 1998, to August 31, 1998, are attached to this agreement as
APPENDIX 9.2 (a) and APPENDIX 9.2 (b), respectively. These interim
financial statements were prepared in accordance with the same
accounting principles that were applied to the financial statements
set forth in Section 9.1. Events that normally are considered at the
end of a
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<PAGE>
fiscal year were posted on a pro-rated basis and were taken into
account in accordance with generally accepted accounting rules.
9.3 The Buyer shall ask FIDES Treuhandgesellschaft mbH, Bremen, [Federal
Republic of Germany], to audit the financial statements attached to
the present agreement as Appendices 9.1 a), 9.1 b), 9.2 a), and 9.2 b)
with regard to whether they were prepared, in all respects, in
accordance with generally accepted accounting principles, subject to
the continuity of accounting and valuation criteria, and whether they
are correct and complete. If the financial statements are deemed to be
correct and complete FIDES Treuhandgesellschaft mbH shall issue an
attestation of audit for Appendices 9.1 a) and 9.1 b), as well as a
positive confirmation of audit for Appendices 9.1 a) and 9.2 b).
FIDES Treuhandgesellschaft mbH, Bremen, [Federal Republic of
Germany], shall adapt the German financial statements in accordance
with the generally accepted accounting principles (GAAP) that apply
in the United States. The costs incurred in connection therewith
shall be borne by the Buyer alone. However, if the Seller breaks off
the negotiations without good reason, he alone shall bear the costs
for adapting the German financial statements to the US-GAAP.
9.4 In connection with its duties pertaining to its audit of the German
financial statements and the adaptation thereof to US-GAAP, FIDES
Treuhandgesellschaft mbH, Bremen, [Federal Republic of Germany], shall
have the right to inspect any and all worksheets and documents related
thereto and to pose questions to the companies' executives. The Seller
and the companies shall ensure that Mr. Neumaier, the accountant of
the companies, assists FIDES Treuhandgesellschaft mbH, Bremen,
[Federal Republic of Germany], to the best of his ability, in
performing the audit.
SECTION 10
EMPLOYMENT CONTRACT
The parties to this agreement stipulate that the Seller shall resign from his
position as the managing director of the GmbH as soon as the transfer in rem of
the shares to the Buyer has been effected, that the parties shall conclude an
annulment agreement concerning the Seller's extant employment contract with the
GmbH, and that the Seller shall conclude the employment contract with the KG
appended hereto as APPENDIX 10.
SECTION 11
WITHDRAWAL FROM AGREEMENT / REPAYMENT OF RENT GUARANTY
11.1 If the Buyer does not pay the purchase price within ten banking days
of the date on which it is due and payable (Section 3.3), the Seller
shall have the right to withdraw from this agreement by declaring
such withdrawal vis-a-vis the Buyer in a letter that is sent via
certified mail, return receipt requested, or by declaring his
withdrawal vis-a-vis the entity authorized to accept service pursuant
to Section 14.2 of the present agreement.
11.2 Pursuant to the declaration attached to the present agreement as
APPENDIX 11.2 (hereinafter referred to as the "guaranty"), the Seller
undertook relative to a third party (hereinafter referred to as the
"lessor"), which has rented office space to the KG at Hauptstrasse 32,
85457 Worth, Wilfing, [Federal Republic of Germany], under a lease
dated 16/10/96 [change initialed], to cover the liabilities incurred
by the KG under such lease. The parties to this agreement stipulate
that once the transfer in rem of the shares to the Buyer has been
effected, they shall jointly endeavor,
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<PAGE>
to the best of their abilities, to have the Seller released from his
liability toward the lessor under the guaranty. If the lessor refuses
to release the Seller from his guaranty obligations, the Buyer
declares, subject to the condition precedent of the transfer in rem
of the shares to the Buyer, that it shall hold the Seller harmless
from any claims under such guaranty. The Buyer shall not have any
offset or retention rights whatsoever relative to the Seller's right
to be held harmless.
SECTION 12
BUNDESKARTELLAMT [FEDERAL ANTITRUST AUTHORITY]
The Buyer shall, at its expense, register the present merger with the
Bundeskartellamt [Federal Antitrust Authority], to the extent necessary. The
Buyer covenants that such application is not required.
SECTION 13
CONFIDENTIALITY
13.1 The parties to this agreement shall treat the conclusion thereof and
its provisions confidentially, unless disclosure to third parties is
required by law or the applicable rules of a stock exchange, or if
such disclosure is warranted in terms of informing the companies'
employees and their elected representatives of the merger in an
appropriate manner.
13.2 The parties to this agreement shall coordinate press releases, if any.
SECTION 14
COSTS & OTHER PROVISIONS
14.1 The cost of having documents related to the present agreement
notarized shall be borne by the Buyer. If the companies own real
property, the Buyer shall bear the property acquisition tax, if any.
Any and all other costs incurred separately by the parties in
connection with this agreement shall be borne by the respective party,
unless stipulated otherwise.
14.2 IAT Deutschland GmbH Interaktive Mediensysteme, Fahrenheitstrasse 9,
28359 Bremen, [Federal Republic of Germany], shall be the entity
authorized to accept service in the sense of Section 174 ZPO
[Zivilprozessordnung - rules of civil procedure].
14.3 Any and all Appendices to this agreement shall be an integral part
thereof.
14.4 Modifications of and amendments to this agreement (including
this Section 14.4) shall be made in writing, unless the law prescribes
stricter formalities.
14.5 The present agreement represents the entire agreement between the
parties thereto. Any earlier agreements between the parties shall be
null and void.
14.6 The legal ineffectiveness of any provisions of this agreement shall
not affect the effectiveness of the other provisions thereof. The same
shall apply to contract lacunae, if any. The ineffective or
unenforceable provision , or the lacuna, shall be replaced or filled,
as the case may be, by a
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<PAGE>
stipulation which, to the extent possible under the law, comes
closest to the original intent of the parties to this agreement.
14.7 This agreement shall be subject to German law. The Landgericht I
[Regional Court], Munich, [Federal Republic of Germany], shall have
jurisdiction.
The transcript of the negotiations set forth above, including all Appendices,
was read to the parties in the presence of the notary public. The
aforementioned documents were approved by the parties to this agreement and
executed by both the parties and the notary public as follows:
[signed]
[signed]
[signed]
[signed]
[seal]
DR. DIETER KARL
NOTARY PUBLIC IN MUNICH, [FEDERAL REPUBLIC OF GERMANY]
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 7,219,016
<SECURITIES> 750,000
<RECEIVABLES> 2,140,869
<ALLOWANCES> 102,515
<INVENTORY> 1,588,404
<CURRENT-ASSETS> 11,808,818
<PP&E> 708,942
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<CURRENT-LIABILITIES> 4,217,740
<BONDS> 3,000,000
0
0
<COMMON> 99,502
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<TOTAL-LIABILITY-AND-EQUITY> 16,972,166
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<TOTAL-COSTS> 21,524,407
<OTHER-EXPENSES> 3,517,141
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<INCOME-PRETAX> (1,755,684)
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