<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- - --- ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-13068
IRATA, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0366015
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8554 KATY FREEWAY, SUITE 100, HOUSTON, TEXAS 77024
(Address of principle executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 467-4300
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
--- ---
At May 14, 1996 there were 2,544,318 shares of Class A Common Stock, par
value $0.10 per share, outstanding and 1,500,000 shares of Class B Common Stock,
par value $0.01 per share, outstanding.
<PAGE>
IRATA,INC.
INDEX TO FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1996
Part I Financial Information (unaudited)
Item 1. Financial Statements
Statement of Operations.............................. 2
Balance Sheet........................................ 3
Statement of Cash Flows.............................. 5
Notes to Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 8
Part II Other Information
None
Signatures........................................................... 11
<PAGE>
PART I. FINANCIAL INFORMATION
IRATA, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
March 31, March 31,
------------------------ --------------------------
1995 1996 1995 1996
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues............................................................. $1,544,447 $1,645,373 $3,859,890 $5,606,854
Cost of services:
Site rent.......................................................... 468,160 649,220 1,128,735 2,107,364
Route labor........................................................ 168,441 184,745 435,317 599,899
Equipment depreciation............................................. 199,977 265,307 431,172 765,243
Consumables........................................................ 170,674 169,664 426,493 511,126
Loss on disposal of property & equipment........................... - 415,698 - 557,364
Other costs of service............................................. 47,897 164,025 124,845 407,264
---------- ----------- ----------- -----------
Total cost of services............................................... 1,055,149 1,848,659 2,546,562 4,948,357
Gross profit (loss).................................................. 489,298 (203,286) 1,313,328 658,497
Selling, general and administrative expenses:
Salaries and wages................................................. 245,580 300,209 629,660 874,735
Professional fees ................................................. 83,698 100,663 225,276 261,381
Other selling, general and administrative expenses................. 120,158 249,282 342,063 546,236
Depreciation and amortization...................................... 6,735 10,985 22,492 28,428
---------- ----------- ----------- -----------
Total selling, general and administrative expenses................... 456,171 661,139 1,219,491 1,710,780
Operating income (loss).............................................. 33,127 (864,425) 93,837 (1,052,283)
Other income (expense):
Interest expense................................................... (947) (111,913) (6,573) (300,222)
Financing costs.................................................... - (67,842) - (204,183)
Interest income.................................................... 85 33 28,588 265
Other, net......................................................... 1,638 275 (2,295) 3,478
---------- ----------- ----------- -----------
Total other income (expense)......................................... 776 (179,447) 19,720 (500,662)
---------- ----------- ----------- -----------
Net income (loss).................................................... $ 33,903 $(1,043,872) $ 113,557 $(1,552,945)
========== =========== =========== ===========
Net income (loss) per share.......................................... $ 0.01 $ (0.41) $ 0.04 $ (0.61)
========== =========== =========== ===========
Weighted average number of common or equivalent shares outstanding.. 2,536,405 2,544,318 2,534,130 2,544,318
========== =========== =========== ===========
</TABLE>
See accompanying notes.
2
<PAGE>
PART I. FINANCIAL INFORMATION
IRATA, INC.
BALANCE SHEET
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1996
----------
<S> <C>
Current assets:
Cash.......................................................... $ 139,966
Accounts receivable-trade, net of $70,000 allowance........... 383,657
Accounts receivable-other..................................... 146,329
Accounts receivable-officer................................... 3,935
Consumable inventory.......................................... 218,098
Prepaids and other current assets............................. 37,376
----------
Total current assets........................................ 929,361
Property and equipment, at cost:
Booths........................................................ 6,099,880
Components and hardware....................................... 720,077
Furniture, fixtures and equipment............................. 200,984
Accumulated depreciation...................................... (1,334,011)
----------
Total property and equipment, net............................... 5,686,930
Other assets:
Proprietary process, net...................................... 25,875
Organization costs, net....................................... 1,500
Deferred loan costs, net...................................... 519,973
Other......................................................... 38,380
----------
Total other assets............................................ 585,728
----------
Total assets.................................................... $7,202,019
==========
</TABLE>
3
<PAGE>
PART I. FINANCIAL INFORMATION
IRATA, INC.
BALANCE SHEET (CONTINUED)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31,
1996
-----------
<S> <C>
Current liabilities:
Trade accounts payable........................................ $ 1,006,011
Long-term debt in default..................................... 2,115,000
Short-term notes.............................................. 223,224
Accrued liabilities:
Accrued interest............................................ 120,286
Other accrued liabilities .................................. 745,979
-----------
Total current liabilities................................. 4,210,500
Commitments
Stockholders' equity:
Preferred stock, $1 par value:
100,000 shares authorized, zero issued...................... -
Class A common stock, $.10 par value:
20,000,000 shares authorized, 2,544,318 issued and
outstanding................................................ 254,432
Class B common stock, $.01 par value:
1,500,000 shares authorized, issued and outstanding......... 15,000
Additional paid-in capital.................................... 6,496,037
Accumulated deficit........................................... (3,773,950)
-----------
Total stockholders' equity.................................. 2,991,519
-----------
Total liabilities and stockholders' equity.................. $ 7,202,019
===========
</TABLE>
See accompanying notes
4
<PAGE>
PART I. FINANCIAL INFORMATION
IRATA, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Operating activities
Net income (loss)................................. $ 113,557 $(1,552,945)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Other............................................. 8,531 6,829
Depreciation and amortization..................... 460,537 793,671
Financing costs................................... - 204,183
Loss on disposal of property and equipment........ 6,353 557,364
Changes in operating assets and liabilities:
Accounts receivable--trade, net................... (370,377) 184
Accounts receivable--officer...................... (1,207) 16,985
Other current assets.............................. (381,583) (33,958)
Other assets...................................... - (85,022)
Accounts payable.................................. 476,859 177,726
Accrued liabilities............................... (195,579) 647,613
----------- -----------
Net cash provided by operating activities........... 117,091 732,630
Investing activities
Purchases of property and equipment............... (3,587,654) (1,159,769)
Maturity of short-term investments................ 1,016,765 -
----------- -----------
Net cash used in investing activities............... (2,570,889) (1,159,769)
Financing activities
Proceeds from exercise of overallotment, net...... 692,694 -
Proceeds from the Loan Agreement, net............. - 315,000
Proceeds from bank note........................... 500,000 -
Proceeds from stockholder's notes................. - 160,000
Principle payments on vendor note................. - (93,947)
----------- -----------
Net cash provided by financing activities........... 1,192,694 381,053
----------- -----------
Net decrease in cash and cash equivalents........... (1,261,104) (46,086)
Cash and cash equivalents at beginning of year...... 1,398,226 186,052
----------- -----------
Cash and cash equivalents at end of year............ $ 137,122 $ 139,966
=========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
IRATA, Inc. (the "Company") was incorporated March 20, 1992 under the
laws of the State of Texas, for the purpose of acquiring and operating VIDEO
FOTO booths ("Booths") throughout the United States at shopping malls, theme
parks, discount stores and other areas of high customer traffic. The Booths
produce a black & white computer generated, laser printed image with various
background options.
The accompanying unaudited interim financial statements of the Company
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information in footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to these rules and
regulations. The accompanying unaudited interim financial statements reflect all
adjustments which the Company considers necessary for a fair presentation of the
results of operations for the interim periods covered and the financial
condition of the Company at the date of the interim balance sheet. All such
adjustments (except as otherwise disclosed herein) are of a normal recurring
nature. Results for the interim periods are not necessarily indicative of
results for the year.
Certain financial information for the quarter ended March 31, 1995 has been
reclassified to provide comparability to the presentation format used for the
quarter ended March 31, 1996.
Revenue Recognition
The Company recognizes revenue as products and services are provided.
Location owners where booths are sited are paid a fixed rental, percentage of
net revenues or a combination thereof, which is recorded as site rent. The
independent service contractor is also paid a percentage based upon the net
revenues generated by the Booths serviced, which is recorded as route labor.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for major
additions and improvements are capitalized while minor replacements, maintenance
and repairs which do not improve or extend the life of such assets are expensed
as incurred. Depreciation is provided using the straight line method over the
estimated useful lives of the various classes of assets, as follows:
Estimated
Useful Life
-----------
Booths.............................. 5 to 7 Year
Furniture, fixtures and equipment... 3 to 7 Year
Components and hardware consist of parts used to construct and repair
Booths. No depreciation is provided on new parts until they are installed into a
Booth and that Booth is placed into service.
6
<PAGE>
IRATA, INC.
NOTES TO FINANCIAL STATEMENTS-(Continued)
(UNAUDITED)
2. DEBT
The Company disclosed in the June 30, 1995 10-KSB, that it had entered
into a $3,500,000 credit facility with its "Primary Lender". As of March 31,
1996 the Company had borrowed $2,115,000 under the credit facility. The Loan
Agreement contains various loan covenants and the Company is in default with
certain covenants, other than payment of debt service obligations which are
current. The Company is continuing to negotiate with the Primary Lender to cure
these defaults.
On December 21, 1995 the Company entered into short-term, unsecured and
subordinated loans with three stockholders, two of which are principal
stockholders. The combined loans totalled $274,000. Each loan is a revolving
loan with a maturity date of June 5, 1996, and an interest rate equal to the
prime rate published in the Wall Street Journal's "Money Rates" table plus 1%.
As of March 31, 1996 the total amounts advanced against the loans was $160,000.
As additional consideration for these loans, the respective lenders were
granted options to acquire 50 shares of Class A common stock for each $1,000
drawn down under the debt arrangement at an exercise price of $5.00 per share.
Since the loans were not repaid in full by February 15, 1996, in accordance with
the loan agreement, the exercise price for the options was reduced from $5.00 to
$4.00 per share and the number of options increased to 100 shares for each
$1,000 drawn under the respective loan.
As of March 31, 1996, 70% of the Company's trade payables were older
than 90 days, and the Company is delinquent on its obligation under a short-
term note to a vendor in the amount of $63,224.
3. CORRECTION OF AN ERROR
During the third quarter of fiscal year 1996, the Company discovered errors in
its method of handling and accounting for sales tax. Accordingly, the financial
statements for the quarters ended September 30, 1995 and December 31, 1995 will
be restated to correct these errors based upon management's calculation. The
effect for the quarter ended September 30, 1995 is to increase the net
loss from $127,649 to $202,615, an increased loss per share of $0.03. For the
quarter ended December 31,1995, the effect is to increase the net loss
from $186,011 to $306,458, an increased loss per share of $0.05.
4. PROPERTY AND EQUIPMENT ADJUSTMENT
The Company elected to dispose of certain used Booth inventory and used
components and hardware inventory, which was primarily acquired in 1992. The
loss on disposal of Booth's, components and hardware for the quarter ended March
31, 1996 was $415,698. These write-offs were deemed appropriate by management to
reflect the proper, carrying value of the Company's property and equipment.
5. SUBSEQUENT EVENTS
The Company was served on May 7, 1996 with a lawsuit filed by a trade creditor
seeking to collect approximately $43,000 which is past due.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto, and is qualified in its entirety by
the foregoing and by other more detailed financial information appearing
elsewhere.
Irata, Inc., a Texas Corporation (the "Company"), was incorporated on
March 20, 1992. The Company has developed and operates a computerized version of
the traditional self service photo booth known as Video Foto. Video Foto booths
("Booths") combine traditional photo options with a variety of souvenir,
novelty, and amusement options, utilizing computer imaging technology, a black &
white laser printing device, and other hardware and software. Booths provide
customers a variety of photo product options, including various traditional
prints ranging in size up to 8X10, and novelty items such as a "Wanted Poster",
newspaper front page, photo calendar, etc.
The Company's strategy is to grow by placing on location a steadily
increasing number of additional Video Foto Booths. The Company also is
attempting to maximize average revenue per Booth by placing the Booths in
locations that meet the Company's criteria, while simultaneously relocating
Booths to more profitable locations when Booths are determined to be performing
below standard.
The Company's level of monthly sales revenues are affected by seasonal
increases and decreases in customer traffic. The Company's experience shows that
June, July, August, and December generate the highest levels of traffic through
its Booths, with peak revenues experienced during school breaks and holiday
shopping periods. Additionally, revenues of the Company are generally affected
by adverse weather conditions, economic downturn or any event having a material
affect on traffic patterns of retail customers or tourists.
During the three months ended March 31, 1996 the Company's number of
Booths on location decreased by 16. The lack of Booth growth is directly
attributable to the working capital deficit discussed in the Liquidity and
Capital Resource section. The decrease in Booths on location is primarily
attributable to the temporary removal of Booths located in seasonal locations.
At the present time the Company has an inventory of Booths on hand but needs
additional funds to equip Booths for placement on location.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1995 Compared to Three Months Ended March 31,
1996
Revenues. Revenues increased 7% from $1,544,447 for the three month
period ended March 31, 1995 to $1,645,373 for the three month period ended March
31, 1996. The growth in revenues was primarily attributable to the increased
number of Booths on location. The number of Booths shipped and operating was 702
at March 31, 1995 and 745 at March 31, 1996, an increase of 6%.
Cost of Services. Cost of services, as a percent of revenue, increased
from 68% to 112% for the three months ended March 31,1995 and 1996,
respectively. The increase is primarily due to the loss on disposal of
equipment, rent increases attributable to a greater number of fixed rent
locations and larger depreciation expense. Cost of services consists primarily
of site rents paid to location owners, depreciation on equipment, commissions to
independent service contractors, consumables, loss on disposal of equipment and
other costs associated with placing and operating Booths on location. Site rent
to location owners and commissions to independent service contractors generally
are based on a percentage of revenues. Consumable costs are primarily related to
the number of customer transactions conducted by the Company.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses, as a percent of revenues, were 29% and 40% for the
quarters ending March 31, 1995 and 1996, respectively. This increase was
primarily attributable to the creation of a $70,000 bad debt reserve, an
increase in salaries attributable to an increase in the number of employees as
well as a vacation accrual of $27,000 recorded in the three month period ended
March 31, 1996, and increases in office expense and professional expense
categories. The selling, general and administrative expenses increased 45% from
$456,171 for the three months ended March 31, 1995 to $661,139 for the three
months ended March 31, 1996, this increase is attributable to the same events
described above.
8
<PAGE>
Other Expense. Other income decreased from $776 for the three months
ended March 31, 1995 to an expense of $179,447 for the three months ended March
31, 1996. This decrease was attributable primarily to the interest expense of
$64,155 associated with the $2,115,000 financing put in place in June, 1995, and
the amortization of deferred loan costs of $67,842 associated with the
financing and accrued interest related to the error in handling and accounting
for sales tax. The deferred loan costs are amortized over a thirty-six month
period.
Net Loss. For the three months ended March 31, 1996 the Company realized
a net loss of $1,043,872 versus a net profit of $33,903 for the three months
ended March 31, 1995. This difference is attributable primarily to an increased
operating loss, increased interest of $111,913, finance costs of $67,842 related
to the financing obtained in June, 1995, loss on disposal of equipment of
$415,698, and the bad debt reserve of $70,000.
Nine Months Ended March 31, 1995 Compared to Nine Months Ended March 31, 1996
Revenues. Revenues increased 45% from $3,859,890 for the nine month
period ended March 31, 1995 to $5,606,854 for the nine month period ended March
31, 1996. The growth in revenues was primarily attributable to the increased
number of Booths on location during the full reporting period ended March 31,
1996. A substantial portion of the Booths in operation for the nine months ended
March 31, 1995 were placed in service toward the end of that reporting period.
Cost of Services. Cost of services, as a percent of revenue, increased
from 66% to 88% for the nine months ended March 31, 1995 and 1996, respectively.
The increase is primarily due to rent increases attributable to a greater number
of fixed rent locations, larger depreciation expense and the $557,643 loss on
disposal of property and equipment. Cost of services consists primarily of site
rents paid to location owners, equipment depreciation, commissions to
independent service contractors, consumables, loss on disposal of equipment and
other fees associated with placing and operating Booths on location. Site rent
paid to location owners and commissions to independent service contractors
generally are based on a percentage of revenue. Consumable costs are primarily
related to the number of customer transactions conducted by the Company.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses, as a percent of revenue, decreased from 32% to 31% for
the nine months ended March 31, 1995 and 1996, respectively. However, the
selling, general and administrative expenses increased 40% from $1,219,491 for
the nine months ended March 31, 1995 to $1,710,780 for the nine months ended
March 31, 1996. This increase is attributable primarily to increases in salaries
and wages related to the increased number of employees, the cost of insurance
and the bad debt reserve, although increases also occurred in professional fees
and office expenses.
Other Income/expense. Other income decreased from $19,720 for the nine
months ended March 31, 1995 to an expense of $500,662 for the nine months ended
March 31, 1996. This decrease was attributable primarily to the interest expense
of $191,880 associated with the $2,115,000 financing put in place in June, 1995,
the amortization of deferred loan costs of $204,183 associated with the
financing and accrued interest related to the error in handling and accounting
for sales tax. The deferred loan costs are amortized over a thirty-six month
period.
Net Loss. For the nine months ended March 31, 1996 the Company realized
a net loss of $1,552,945 versus a net income of $113,557 for the nine months
ended March 31, 1995. This difference is attributable primarily to an increased
operating loss, increased interest of $300,222, finance costs of $204,183
related to the financing obtained in June, 1995, loss on disposal of equipment
of $557,364, and the bad debt reserve of $70,000.
9
<PAGE>
VARIABILITY OF OPERATING RESULTS
The Company's revenues since inception have continued to increase based
upon the continued growth in the number of Booths in operation. Since July,
1995 the number of Booths in operation has remained relatively constant for the
reasons set out in the Liquidity and Capital Resources section below. This lack
of Booth growth and the strong seasonality impact during the third quarter of
fiscal year 1996 have resulted in larger operating losses for this period.
Management continues to make a concerted effort to resite Booths that are
underperformers and is continuing its effort to increase the number of Booths
in operation.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended March 31, 1996 net cash provided by operating
activities was $732,630 as compared to $117,091 cash provided by operating
activities for the nine months ended March 31, 1995. Net cash provided for the
quarter ended March 31, 1996 is primarily due to an increase in accounts payable
and accrued liabilities.
The Company had a working capital deficit of $3,281,139 as of March 31,
1996. This principally reflects the consequences of the default that resulted in
$2,115,000 of long-term debt being reclassified as short term debt. A portion of
the working capital deficit is attributable to the increase in trade payables
and the failure to receive additional funding from the Primary Lender that would
have allowed trade payables to be converted into long-term debt. A substantial
portion of trade payables continues to be outstanding beyond 90 days.
Since June 30, 1995 the Company has been in default on its loan with its
Primary Lender by failing to comply with certain loan convenants. Since then the
Company has continued to negotiate with the Primary Lender to amend the existing
Loan Agreement to cure the default. As reported in the Form 10-QSB for the
quarter ended December 31, 1995, the Company has received an expression of
interest from its investment banker to provide additional equity by a private
placement by the Company contingent upon customary due diligence and reaching
accommodation with the Primary Lender. Such expression of interest remains
valid. At the present time the Company is current in debt service obligations to
the Primary Lender and has received no demand for full payment of the loan, and
the Company believes that it is not the current intention of the Primary Lender
to make such a demand. While there is no assurance that the Company will be
successful in completing the revision to the loan covenants and obtain a waiver
of the events of default, management and the Primary Lender continue in good
faith to attempt to achieve such a resolution.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IRATA, INC.
BY: /s/ ROBERT A. SEARLES, JR.
--------------------------------
Robert A. Searles, Jr.
President
Dated: May 14, 1996
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 139,966
<SECURITIES> 0
<RECEIVABLES> 603,921
<ALLOWANCES> 70,000
<INVENTORY> 218,098
<CURRENT-ASSETS> 929,361
<PP&E> 7,020,941
<DEPRECIATION> 1,334,011
<TOTAL-ASSETS> 7,202,019
<CURRENT-LIABILITIES> 4,210,500
<BONDS> 0
0
0
<COMMON> 269,432
<OTHER-SE> 2,722,087
<TOTAL-LIABILITY-AND-EQUITY> 7,202,019
<SALES> 5,606,854
<TOTAL-REVENUES> 5,606,854
<CGS> 4,948,357
<TOTAL-COSTS> 4,948,357
<OTHER-EXPENSES> 1,710,780
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 504,405
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,552,945
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,552,945
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
</TABLE>
