<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 June 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
- -------- ----------
(State or other jurisdiction of (I.R.S Employer
Incorporation or organization) Identification No.)
Geschaftshaus Wasserschloss
Aarestrasse 17
CH-5300 Vogelsang-Turgi, Switzerland
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(Address of principal executive offices)
(011) (41) (56) 223-5078
------------------------
(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 August 10, 1998
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Common Stock, $.01 par value 9,900,204 shares
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
FOR QUARTERLY PERIOD ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Operations for Three Months
ended June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Operations for Six Months
ended June 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for Six Months
ended June 30, 1998 and 1997 (unaudited) 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Default upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURE PAGE 19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(unaudited)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,771,347 $ 5,472,928
Marketable securities 1,748,525 2,726,865
Accounts receivable, less allowance for doubtful accounts of
$97,278 in 1998 and $71,111 in 1997 1,420,110 1,258,914
Inventories 1,377,259 1,699,338
Other current assets 154,392 277,057
Assets held for disposition -- 1,077,920
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Total current assets 11,471,633 12,513,022
Equipment and improvements, net 684,251 633,605
Other assets:
Notes receivable from affiliates 804,555
Investments in affiliated companies 18,937
Excess of cost over net assets acquired, net 3,295,617 3,373,254
Other assets 258,808 139,635
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$ 16,533,801 $ 16,659,516
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, banks $ 116,597 $ 449,121
Accounts payable and other current liabilities 2,346,608 3,649,882
Loans payable, stockholders 1,001,401 2,339,451
Liabilities held for disposition -- 1,640,029
Deferred taxes payable 174,609 311,347
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Total current liabilities 3,639,215 8,389,830
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Convertible debenture 3,000,000 --
------------ ------------
Minority interest 174,007 174,007
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Stockholders' equity:
Preferred stock, $.01 par value, authorized 500,000 shares,
none issued
Common stock, $.01 par value, authorized 20,000,000 shares,
issued 9,950,204 in 1998 and 9,751,949 in 1997 99,502 97,519
Capital in excess of par value 29,666,454 27,103,657
Accumulated deficit (20,182,461) (19,239,283)
Cumulative translation adjustment 343,344 340,046
Treasury stock (50,000 shares) (206,260) (206,260)
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Total stockholders' equity 9,720,579 8,095,679
------------ ------------
$ 16,533,801 $ 16,659,516
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------------------
1998 1997
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<S> <C> <C>
Net Sales $ 6,689,183 $ 216,246
Cost of Sales 6,178,541 106,235
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Gross margin 510,642 110,011
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Operating expenses:
Research and development costs, net -- 679,428
Selling expenses 484,864 510,137
General and administrative expenses 230,928 277,114
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715,792 1,466,679
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Operating loss before corporate overhead, depreciation
and amortization (205,150) (1,356,668)
Corporate overhead 315,546 213,266
Depreciation and amortization 162,064 74,824
----------- -----------
Operating loss (682,760) (1,644,758)
Other income (expense):
Interest expense (31,725) (38,465)
Interest income 65,058 188,519
Discount on convertible debenture (448,277) --
Other income (expense) 2,736 (3,511)
----------- -----------
Loss before recovery of income taxes and minority interest (1,094,968) (1,498,215)
Recovery of income taxes 131,106 --
----------- -----------
Loss before minority interest (963,862) (1,498,215)
Minority interest in net loss of subsidiary 55,506 --
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Net loss $ (908,356) $(1,498,215)
=========== ===========
Net loss per share - basic and diluted $ (0.10) $ (0.16)
=========== ===========
Weighted average number of
common shares outstanding 9,227,629 9,101,715
=========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
Net loss $ (908,356) $(1,498,215)
Other comprehensive income (loss) net of tax - Foreign
currency translation adjustments 50,310 63,603
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Comprehensive loss $ (858,046) $(1,434,612)
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
1998 1997
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<S> <C> <C>
Net Sales $ 15,451,246 $ 415,251
Cost of Sales 14,008,135 245,746
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Gross margin 1,443,111 169,505
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Operating expenses:
Research and development costs, net -- 1,262,521
Selling expenses 1,042,118 915,362
General and administrative expenses 359,221 498,338
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1,401,339 2,676,221
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Operating income (loss) before corporate overhead,
depreciation and amortization 41,772 (2,506,716)
Corporate overhead 489,757 308,764
Depreciation and amortization 298,430 138,681
------------ ------------
Operating loss (746,415) (2,954,161)
Other income (expense):
Interest expense (55,119) (123,783)
Interest income 153,512 190,448
Discount on convertible debenture (448,277) --
Other income 6,925 16,077
------------ ------------
Loss before recovery of income taxes and minority interest (1,089,374) (2,871,419)
Recovery of income taxes 131,106 --
------------ ------------
Loss before minority interest (958,268) (2,871,419)
Minority interest in net loss of subsidiary 15,090 --
------------ ------------
Net loss $ (943,178) $ (2,871,419)
============ ============
Net loss per share - basic and diluted $ (0.10) $ (0.39)
============ ============
Weighted average number of
common shares outstanding 9,215,713 7,426,715
============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
Net loss $ (943,178) $ (2,871,419)
Other comprehensive income (loss) net of tax - Foreign
currency translation adjustments 3,298 276,337
------------ ------------
Comprehensive loss $ (939,880) $ (2,595,082)
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (943,178) $ (2,871,419)
Adjustments to reconcile net loss to net cash used
in operating activities:
Discount on convertible debenture 448,277
Depreciation of equipment 123,087 138,681
Amortization of goodwill 175,343
Minority interest in income (15,090)
Deferred taxes payable (136,738)
Increase (decrease) in cash attributable to
changes in assets and liabilities:
Accounts receivable (161,196) 76,544
Inventories 322,079 30,854
Other current assets 122,665 (191,437)
Other assets (119,173) (368,182)
Accounts payable and other current liabilities (1,865,383) (52,684)
------------ ------------
Net cash used in operating activites (2,049,307) (3,237,643)
------------ ------------
Cash flows from investing activities:
Loans to and investments in, affiliated companies (921,198)
Purchases of equipment and improvements (173,733) (200,490)
Sale (purchase) of marketable securities 978,340 (2,725,623)
------------ ------------
Net cash used in investing activities (116,591) (2,926,113)
------------ ------------
Cash flows from financing activities:
Repayments of loans payable, stockholders (1,322,960) (1,055,382)
Proceeds from issuance of convertible debenture 3,000,000
Proceeds from issuance of common stock, net proceeds 1,652,500 17,098,164
Payment of preferred stock dividend -- (51,625)
Capital contribution, stockholders, net proceeds 464,003
Repayments of short-term bank loan, net (332,524) (208,634)
------------ ------------
Net cash provided by financing activities 3,461,019 15,782,523
------------ ------------
Effect of exchange rate changes on cash 3,298 86,004
------------ ------------
Net increase in cash 1,298,419 9,704,771
Cash and cash equivalents, beginning of period 5,472,928 264,661
------------ ------------
Cash and cash equivalents, end of period $ 6,771,347 $ 9,969,432
============ ============
Supplemental disclosures of cash flow information,
cash paid during the period for interest $ 65,391 $ 128,267
============ ============
cash paid during the period for income related taxes $ 73,336 $ --
============ ============
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
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<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. (the "Company"), necessary to present fairly the consolidated financial
position of the Company as of June 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 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 business
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 six months
period ended June 30, 1998 was approximately $175,000.
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 (1.50 and 1.45 Swiss Francs and 1.80 and 1.80 Deutsch Mark for each
U.S. Dollar at June 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 common
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 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:
June 30, December 31,
1998 1997
---------- ----------
Work in process....................... $ 127,778 $ 124,445
Purchased finished goods ............. 1,249,481 1,574,893
---------- ----------
$1,377,259 $1,699,338
========== ==========
NOTE 3. SPINOFF:
On March 6, 1998, the Company spun off 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 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 spinoff was effective on January 1, 1998 and required the Company to infuse
approximately $650,000 of capital. In connection with the 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 spun off certain of the assets and
liabilities of its wholly-owned subsidiary IAT AG to a newly-formed Swiss
company ("Swiss Newco"). Swiss Newco 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 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 spunoff ("Purchase Note") on March 24, 1998. In addition, the
Company loaned the Swiss Newco $250,000 ("The Note") 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
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 the end of three
years.
NOTE 4. PRIVATE PLACEMENT:
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 158,829 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. The Company has undertaken to register with the Securities and Exchange
Commission (the "SEC") the shares of common stock issued and subsequently
issuable upon conversion of the Debentures issued in Tranche A within 75 days
of their issuance.
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 the
second anniversary of the effectiveness of the registration statement for the
underlying shares shall convert automatically. 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) 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 on the Tranche A Closing
Date (as defined in the Purchase Agreement) would have been $8.265 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.
The Purchase Agreement also provides that, among other things, upon or
simultaneously with the consummation of an acquisition which had positive
EBITDA in its last fiscal quarter and revenues of at least DM 100 million in
its most recent fiscal year, the Investors will purchase up to $12 million
aggregate principal amount of additional Debentures ("Tranche B"). Additional
Warrants to purchase 141,171 shares of common stock are also issuable in
Tranche B. The amount of Debentures issuable in Tranche B is limited to such
amount, assuming the conversion of the full principal amount of such Debentures
occurs on the Original Issue Date thereof and the payment of interest on
account of such principal amount is made for the full term in shares of Common
Stock, result in the issuance of a number of underlying shares which, when
added to the number of underlying shares previously issued in respect of
conversions of Debentures and as payment of interest theron and as are then
issuable upon conversion in full of the unconverted principal amount of all
previously issued Debentures and as payment of interest thereon in shares of
Common Stock, as would equal 70% of the otherwise issuable amount.
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company is also obligated to register the shares of Common Stock
issuable upon exercise of the Warrants and upon conversion of the Debentures in
Tranche B with the SEC and maintain such registration for three years or until
the Investors have sold all such Common Stock. The complete terms and
conditions relating to all such registration requirements are set forth in the
Registration Rights Agreement.
In compliance with NASDAQ rules, at no time may the Investors convert
Debentures into such number of shares of Common Stock as would exceed 19.99% of
the outstanding Common Stock on the date of the closing of Tranche A unless the
stockholders of the IAT approved such transaction. The Company will pay an
amount in cash to the Investors for any conversions prohibited by such
restriction 22 months after the effectiveness of the Registration Statement.
NOTE 5. SUBSEQUENT EVENT:
On August 1, 1998 the Company entered into a Letter of Intent with ATEC
Group, Inc. whereby the Company will purchase all of the outstanding shares of
ATEC Group, Inc. ("ATEC") in a stock swap valued at approximately $77,000,000
(based on an assumed $10 market price per share of IAT Common Stock). Under the
terms of the agreement each share of ATEC Common Stock will be exchanged for
one share of IAT Common Stock, subject to adjustment. Under the terms of the
Letter of Intent, ATEC will have the right to designate two board members to
IAT's board upon closing of the transaction. The Letter of Intent is
non-binding, and consummation of the transaction is subject to closing
conditions, including shareholder approval of both companies.
ATEC Group, Inc. is a leading system integrator and provider of a full line of
YEAR 2000 solutions as well as information technology products and services to
business, professionals, government agencies and educational institutions. ATEC
offers leading computer hardware, software, connectivity devices, multimedia
products, data communications via satellite, video conferencing, as well as
Internet and Intranet solutions to their clients.
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IAT MULTIMEDIA, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Except for the descriptions of historical facts contained herein,
statements concerning future results, performance or expectations are
forward-looking statements. Actual results, performance or developments could
differ materially from those expressed or implied by such forward-looking
statements as a result of known and unknown risks, uncertainties and other
factors including those described from time to time in the Company's filings
with the Securities and Exchange Commission, under "Risk Factors" and
elsewhere, including the Company's history of operating losses; future charges
to operations and losses; holding company structure; reliance on subsidiaries;
risks relating to acquisitions and managing growth; need for additional funds;
competition; foreign markets; control by existing stockholders; potential
anti-takeovers provisions and other risks.
The Company, through its recent 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.
Multimedia 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.
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, the Company completed the spinoff of substantially all of
the assets and the liabilities (other than
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<PAGE>
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. Multimedia'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 JUNE 30, 1998 COMPARED TO THREE MONTH PERIOD ENDED
JUNE 30, 1997
The average exchange rate for the U.S. Dollar increased as compared to the
Swiss Franc and the Deutsch Mark by approximately 3.5% and 4.7% respectively.
The average Swiss Franc to U.S. Dollar exchange rate was SF 1.49 = $1.00 in the
second quarter 1998 as compared to SF 1.44 in the second quarter 1997. The
average Deutsch Mark to U.S. Dollar exchange rate was DM 1.79 = $1.00 in the
second quarter 1998 as compared to DM 1.71 in the second 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 June 30, 1998 and June 30, 1997, respectively, and FSE's results
and operations for the three months ended June 30, 1998.
REVENUES. Revenues for the second quarter 1998 increased to $6,689,000
from $216,000 in the second quarter 1997. This increase is primarily a result
of sales of FSE high performance PCs and PC-components during the second
quarter 1998.
COST OF SALES. Cost of sales increased to $6,179,000 in the second
quarter 1998 from $106,000 in the second quarter 1997. The cost of sales as a
percentage of sales increased to 92.4% in the second quarter 1998 from 49.1% in
the second quarter 1997 primarily as a result
-12-
<PAGE>
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 second quarter 1998 from $679,000 in the second 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 decreased by 4.9% to $485,000 in the
second quarter 1998 from $510,000 in the second quarter 1997. This decrease 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 16.6% to $231,000 in the second quarter 1998 from $277,000 in the
second quarter 1997. This decrease is a result of a change in the business
structure of IAT.
CORPORATE OVERHEAD. Corporate overhead increased by 48.3% to $316,000 in
the second quarter 1998 from $213,000 in the second quarter 1997 primarily due
to an increase in expenses for professional services relating to the Spinoffs
and the integration of FSE.
INTEREST. Interest expense decreased by 15.8% to $32,000 in the second
quarter 1998 from $38,000 in the second quarter 1997. This decrease is
primarily a result of a reduction of outstanding bank loans and the repayment
of certain stockholders' loans. Interest income decreased to $65,000 in the
second quarter 1998 from $189,000 in the second 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.
DISCOUNT ON CONVERTIBLE DEBENTURES. Discount on convertible debentures
increased to $448,000 in the second quarter 1998 from $0 in the second quarter
1997. The Company recorded a charge to operations on the convertible debentures
issued on June 19, 1998. The convertible debentures are convertible into common
stock at the lesser of 120% of the price on the date of issuance or 87% of the
current market value.
NET LOSS. The net loss for the three months ended June 30, 1998
decreased to $908,000 from $1,498,000 for the three months ended June 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 three months ended
June 30, 1998 decreased to $205,000 from $1,357,000 in the three months ended
June 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.
-13-
<PAGE>
SIX MONTH PERIOD ENDED JUNE 30, 1998 COMPARED TO SIX MONTH PERIOD ENDED
JUNE 30, 1997
The average exchange rate for the U.S. Dollar increased as compared to the
Swiss Franc and the Deutsch Mark by approximately 2.8% and 7.1% respectively.
The average Swiss Franc to U.S. Dollar exchange rate was SF 1.48 = $1.00 in the
six months ended June 30, 1998 as compared to SF 1.44 in the six months ended
June 30, 1997. The average Deutsch Mark to U.S. Dollar exchange rate was DM
1.80 = $1.00 in the six months ended June 30, 1998 as compared to DM 1.68 in
the six months ended June 30, 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 six
months ended June 30, 1998 and June 30, 1997, respectively, and FSE's results
of operations for the six months ended June 30, 1998.
REVENUES. Revenues for the six months ended June 30, 1998 increased to
$15,451,000 from $415,000 in the six months ended June 30, 1997. This increase
is primarily a result of sales of FSE high performance PCs and PC-components
during the six month period ended June 30, 1998.
COST OF SALES. Cost of sales increased to $14,008,000 in the six months
ended June 30, 1998 from $246,000 in the six months ended June 30, 1997. The
cost of sales as a percentage of sales increased to 90.7% in the six months
ended June 30, 1998 from 59.2% in the six months ended June 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 six months ended June 30, 1998 from $1,263,000 in the six months
ended June 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 13.9% to $1,042,000 in
the six months ended June 30, 1998 from $915,000 in the six months ended June
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 27.9% to $359,000 in the six months ended June 30, 1998 from
$498,000 in the six months ended June 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 58.6% to $490,000 in
the six months ended June 30, 1998 from $309,000 in the six months ended June
30, 1997 primarily due to an increase in expenses for professional services
relating to the Spinoffs, 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 55.6% to $55,000 in the six
months ended June 30, 1998 from $124,000 in the six months ended June 30, 1997.
This decrease is primarily a result of a reduction of outstanding bank loans
and the repayment of certain stockholders' loans. Interest income decreased by
18.9% to $154,000 in the six months ended June 30, 1998
-14-
<PAGE>
from $190,000 in the six months ended June 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 six months ended June 30, 1998 from $0 in the six
months ended June 30, 1997. The Company recorded a charge to operations on the
convertible debentures issued on June 19, 1998. The convertible debentures are
convertible into common stock at the lesser of 120% of the price on the date of
issuance or 87% of the current market value.
NET LOSS. The net loss for the six months ended June 30, 1998 decreased
to $943,000 from $2,871,000 for the six months ended June 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 INCOME BEFORE CORPORATE OVERHEAD, INTEREST, INCOME TAXES,
DEPRECIATION AND AMORTIZATION. Operating income before corporate overhead,
interest, income taxes, depreciation and amortization in the six months ended
June 30, 1998 amounted to $42,000. In the six months ended June 30, 1997 the
operating loss amounted to $2,507,000. This improvement 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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company's cash and cash equivalents and
investments in corporate bonds increased to $6,771,000 and $1,749,000,
respectively, as compared to $5,473,000 and $2,727,000, respectively, at
December 31, 1997.
Net cash used in operating activities totaled $2,049,000 during the six
months ended June 30, 1998 compared to $3,238,000 during the six months ended
June 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 six months ended June 30, 1998, net of the amortization of the goodwill
on the FSE acquisition and the discount on convertible debentures.
Net cash used in investing activities totaled $117,000 during the six
months ended June 30, 1998 compared to $2,926,000 during the six months ended
June 30, 1997. During the six months ended June 30, 1998 cash was used to pay
for the acquisition of 25.1% of the common stock of IAT Germany in the amount
of $97,000, for 15% each of the common stock of IAT Communication Systems GmbH
and Communication AG in the aggregate amount of $19,000 and for loans to these
companies in the aggregate amount of $805,000 and for the purchase of
equipment. These payments were offset by a sale of marketable securities. In
the six months ended June 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 $3,461,000
during the six months ended June 30, 1998 as compared to net cash provided by
financing activities of
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<PAGE>
$15,783,000 during the six months ended June 30, 1997. During the six months
ended June 30, 1998 cash was provided by net proceeds of $4,653,000 primarily
from the issuance of 198,255 shares of common stock and the issuance of
convertible debentures, partially offset by the repayment of stockholder loans
of $1,323,000, including the second installment of the FSE purchase price in
the aggregate amount of $890,000 and the repayment of short-term bank loans of
$333,000. In addition, cash in the 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 six months ended June 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 and
the payment of the preferred stock dividend.
Cash, cash equivalents and investments in corporate bonds at June 30,
1998 amount to $8,520,000 of which approximately $4,500,000 is anticipated to
be used for acquisition purposes. 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 June 30,
1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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<PAGE>
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 June 30, 1998, the Company utilized
approximately $525,000 of the proceeds from the IPO. Of this amount
approximately $300,000 was paid to IAT Communication Systems GmbH in connection
with the spinoff, approximately $93,000 was used for purchase of machinery and
equipment, approximately $63,000 for the repayment of the Swiss bank loan and
approximately $69,000 for working capital and general corporate purposes. As of
June 30, 1998, approximately $3,795,000 of the proceeds from the IPO remain
unused.
In June 1998, the Company issued 198,255 shares of Common Stock to two
purchasers (the "Investors") in a private placement of its securities pursuant
to Regulation D, and $3 million aggregate principal amount of the Company's 5%
Convertible Debenture due 2001 in exchange for $5 million in cash. In addition,
the Company issued five-year warrants to purchase 158,829 shares of Common
Stock at a price equal to $13,25 per share, 120% of the Average Price (as
defined in the Debentures) to the Investors and the transaction placement
agent.
In April 1998, the Company granted 225,000 stock options to directors,
officers and employees of the Company and 90,000 stock options to consultants
of the Company for services to be rendered in connection with the anticipated
listing of the Common Stock of the Company at Neuer Markt, Frankfurt.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
On August 1, 1998 the Company entered into a Letter of Intent with ATEC
Group, Inc. whereby the Company will purchase all of the outstanding shares of
ATEC Group, Inc. ("ATEC") in a stock swap valued at approximately $77,000,000
(based on an assumed $10 market price per share of IAT Common Stock). Under the
terms of the agreement each share
-17-
<PAGE>
of ATEC Common Stock will be exchanged for one share of IAT Common Stock,
subject to adjustment. Under the terms of the Letter of Intent, ATEC will have
the right to designate two board members to IAT's board upon closing of the
transaction. The Letter of Intent is non-binding, and consummation of the
transaction is subject to closing conditions, including shareholder approval of
both companies.
ATEC Group, Inc. is a leading system integrator and provider of a full line of
YEAR 2000 solutions as well as information technology products and services to
business, professionals, government agencies and educational institutions. ATEC
offers leading computer hardware, software, connectivity devices, multimedia
products, data communications via satellite, video conferencing, as well as
Internet and Intranet solutions to their clients.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1(1) Securities Purchase Agreement, dated as of June 19, 1998, by and
among IAT Multimedia, Inc., JNC Opportunity Fund Ltd. and JNC
Strategic Fund, Ltd.
10.2(1) Registration Rights Agreement, dated as of June 19, 1998, by and
among IAT Multimedia, Inc., JNC Opportunity Fund Ltd. and JNC
Strategic Fund, Ltd.
10.3(1) 5% Convertible Debenture due 2008, dated as of June 19, 1998,
issued by IAT Multimedia.
10.4(1) Form of Warrant, attached as exhibit to Securities Purchase
Agreement (exhibit 10.1 hereon)
11. Statement Re Computation of Per Share Earnings
27.1 Financial Data Schedule
(1) Incorporated by reference in the Company's report on Form 8-K as
filed on July 1, 1998
(b) The following reports on Form 8-K were filed during the quarter ended June
30, 1998
The Registrant filed a Form 8-K on April 3, 1998 reporting information
under Item 2.
The Registrant filed a Form 8-K on July 1, 1998 reporting information under
Item 5.
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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.
/s/ Jacob Agam
-----------------------------------
Jacob Agam
Chairman of the Board of
Directors and Chief Executive
Officer
/s/ Klaus Grissemann
-----------------------------------
Klaus Grissemann
Chief Financial Officer
Date: August 14, 1998
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<PAGE>
EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
The computation of the weighted average number of shares for the
Company is comprised of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Number June 30, June 30,
-------------------------------------------------------------
Date of Shares 1998 1997 1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance carried forward 01-Jan-96 4,375,000 4,375,000 4,375,000 4,375,000 4,375,000
Stock issued 01-Apr-97 3,350,000 3,350,000 3,350,000 3,350,000 1,675,000
22-Jul-97 5,000 5,000 5,000
13-Nov-97 146,949 146,949 146,949
19-Jun-98 198,255 23,965 12,049
Conversion of
Series A Preferred 1,875,000 1,875,000 1,875,000 1,875,000 1,875,000
Less Treasury Stock 07-Jul-97 (50,000) (50,000) (50,000)
Less escrow shares (498,285) (498,285) (498,285) (498,285) (498,285)
-------------------------------------------------------------
Total 9,227,629 9,101,715 9,215,713 7,426,715
=============================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 6,771,347
<SECURITIES> 1,748,525
<RECEIVABLES> 1,517,388
<ALLOWANCES> 97,278
<INVENTORY> 1,377,259
<CURRENT-ASSETS> 154,392
<PP&E> 684,251
<DEPRECIATION> 0
<TOTAL-ASSETS> 16,533,801
<CURRENT-LIABILITIES> 3,639,215
<BONDS> 3,000,000
0
0
<COMMON> 99,502
<OTHER-SE> 9,621,077
<TOTAL-LIABILITY-AND-EQUITY> 16,533,801
<SALES> 15,451,246
<TOTAL-REVENUES> 15,451,246
<CGS> 14,008,135
<TOTAL-COSTS> 14,008,135
<OTHER-EXPENSES> 2,189,526
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,119
<INCOME-PRETAX> (1,074,284)
<INCOME-TAX> 0
<INCOME-CONTINUING> (943,178)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (943,178)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
