<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1996
Commission File Number 0-21369
VITECH AMERICA, INC
(Exact name of registrant as specified in its charter)
FLORIDA 65 041 9086
(State of incorporation) (I.R.S. Employer ID No.)
8807 Northwest 23 Street
Miami, Florida 33172-2419
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (305) 477-1161
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 ___ No _X_
As of December 2, 1996, there were 10,722,457 shares of the Common
Stock of the Company, no par value, outstanding.
<PAGE>
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Vitech America, Inc.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
Assets
September 30, 1996 December 31, 1995
------------------ ------------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 429,231 $ 115,925
Accounts receivable 10,141,483 15,346,651
Inventories 15,145,438 5,578,974
Deferred tax assets 102,530 102,530
Other current assets 385,392 123,801
------------------- ------------------
Total current assets 26,204,074 21,267,881
Property and equipment, net 2,972,008 295,646
Land held for development 586,639 592,000
Other assets 240,083 105,290
------------------- ------------------
Total assets $ 30,002,804 $ 22,260,817
=================== ==================
Liabilities and Shareholders' Equity
Current liabilities
Trade accounts payable $ 5,452,851 $ 7,030,201
Borrowings under lines-of-credit 2,266,960 -
Current portion of note payable 9,002 -
Accrued expenses 208,695 161,948
Due to shareholder (41,030) 124,433
Sales tax payable 1,267,337 -
Income tax payable 1,052,622 1,060,391
Notes payable - related party 2,000,000 3,911,917
Short-term debt 4,692,851 2,566,837
------------------- ------------------
Total current liabilities 16,909,288 14,855,727
Long-term liabilities
Loans payable 863,209 -
------------------- ------------------
Total long-term liabilities 863,209 -
------------------- ------------------
Total Liabilities 17,772,497 14,855,727
Shareholders' equity
Common stock, no par value, 30,000,000
shares authorized, 8,013,648 shares
issued and outstanding 326,870 306,398
Retained earnings 11,903,437 7,098,692
-------------------
------------------
Total shareholders' equity 12,230,307 7,408,090
------------------- ------------------
Total liabilities and shareholders' equity $ 30,002,804 $ 22,260,817
=================== ==================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
2
<PAGE>
Vitech America, Inc.
Consolidated Statement of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales (including $8,066,878
and $26,398,265 to an affiliate
in the nine months of 1996 and
1995, respectively) $ 17,845,553 $ 7,005,348 $ 43,925,852 $ 27,462,396
Cost of sales 12,317,392 6,529,549 31,005,728 25,597,166
---------------- ----------------- ---------------- ----------------
Gross profit 5,528,161 475,798 12,920,124 1,865,229
Selling, general and administrative
expenses 1,885,902 352,711 4,348,547 1,172,091
---------------- ----------------- ---------------- ----------------
Income from operations 3,642,259 123,087 8,571,576 693,138
Other expenses:
Discount on sale of receivables 774,778 - 1,941,120 -
Interest Expense 321,560 41,862 844,165 205,840
Foreign currency exchange losses 167,413 - 541,040 -
---------------- ----------------- ---------------- ----------------
Income before taxes 2,378,508 81,225 5,245,252 487,298
Provision for income taxes 277,904 1,671 440,506 10,023
---------------- ----------------- ---------------- ----------------
Net income $ 2,100,604 $ 79,554 $ 4,804,745 $ 477,275
================ ================= ================ ================
Weighted average shares and share
equivalents outstanding 8,508,606 8,235,255 8,508,606 8,235,255
Net income per share $ 0.25 $ 0.01 $ 0.56 $ 0.06
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
Vitech America, Inc.
Consolidated Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------------------
September 30, September 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,804,745 $ 477,275
Adjustments to reconcile net income to net cash provided
operating activities:
Depreciation 142,626 14,904
Changes in assets and liabilities:
Accounts receivable 5,205,168 (4,184,400)
Inventories (9,566,464) 938,698
Deferred tax asset - -
Other assets (173,976) (20,272)
Trade accounts payable (1,577,350) 1,541,646
Accrued expenses 46,747 28,070
Due to shareholder (165,463) 185,889
Income and other taxes payable 1,259,568 10,487
------------------
-------------------
Total adjustments (4,829,144) (1,484,978)
------------------- ------------------
Net cash provided/(used) by operating activities (24,399) (1,007,703)
------------------- ------------------
Cash flows (used) by investing activities:
Purchase of property and equipment (2,818,988) (52,034)
Cash flows from financing activities:
Deferred offering costs (217,047) -
Net Proceeds under lines of credit and other borrowings 3,890,171 (796,919)
Proceed under private placement debentures 1,375,014 -
Proceed from issuance of common stock 20,472 -
Proceed from notes payable - related party (1,911,917) 1,777,591
------------------
-------------------
Net cash provided by financing activities 3,156,693 980,672
------------------- ------------------
Net increase in cash and cash equivalents 313,306 (79,065)
Cash and cash equivalents - beginning of period 115,925 45,906
------------------- ------------------
Cash and cash equivalents - end of period $ 429,231 $ (33,159)
=================== ==================
Supplemental disclosure of non cash investing activity:
During the period ended September 30, 1996, the Company's
subsidiary received property and assets valued at approximately
$1,517,258 as settlement of an outstanding accounts receivable
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
Vitech America, Inc.
Notes to Consolidated Financial Statements
September 30, 1996
Note 1 - Basis of Presentation
The accompanying unaudited financial statements of Vitech America, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all adjustments necessary for a fair presentation of the interim
financial statements have been included, and all adjustments are of a normal and
recurring nature. The financial statements as of and for the interim period
ended September 30, 1996 should be read in conjunction with the Company's
financial statements as of and for the year ended December 31, 1995, which are
included in the Company's registration statement filed with the Securities and
Exchange Commission on Form S-1(Registration #33-11505). Operating results for
the nine months ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1996. The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates.
The financial statements for 1996 include the accounts of the Company
and its subsidiary, Bahiatech - Bahia Tecnologia, Ltda. The 1995 financial
statements include only the accounts of the Company individually, since the
subsidiary was not acquired until the fourth quarter of 1995. All of the
Company's sales are concentrated in Brazil, with approximately 30% to one
customer and 18% to Vitoria Tecnologia S.A. (an affiliate through common
ownership) for the nine months ended September 30, 1996.
Note 2 - Inventories
Inventories as of September 30, 1996 consisted of the following:
Finished goods $ 2,105,676
Components 9,783,928
Work in process 960,858
Consigned inventories 2,294,976
=================
Total inventories $ 15,145,438
=================
Note 3 - Note payable - related party
The Company had the following notes payable to an affiliate of the
shareholders' at September 30, 1996:
9% promissory note payable, due on demand $ 2,000,000
In connection with this note, the Company granted the lender the right
to convert the note into 5.925% of the outstanding common stock of the Company.
5
<PAGE>
Note 4 - Short-term debt
Short-term debt consisted of the following at September 30, 1996:
<TABLE>
<S> <C>
12% note payable - Meris Financial Incorporated (see
note 10) $ 1,792,973
9% senior debenture issued in the Company's August,
1996 Private Placement (see note 9) 1,375,014
Bank loans payable (resulting from discounted
accounts receivable) bearing an average
interest rate of 3% per month 1,026,537
-----------------
Total $ 4,194,524
=================
</TABLE>
Note 5 - Lines of credit
The Company had the following lines-of-credit borrowings with various
banks at September 30, 1996:
<TABLE>
<S> <C>
Various bank line-of-credit and other borrowings due banks
at interest rates ranging from 3% to 4%
per month and expiring through March 1997 $ 2,765,287
</TABLE>
Note 6 - Long Term Debt
On July 25, 1996, the Company entered into a loan agreement for the
purchase of a vehicle. The loan has a five year term bearing an annual interest
rate of 9.9%. As of September 30, 1996, there was approximately $43,509 in
principal amount owed under such loan.
On August 2, 1996, the Company received a loan commitment from the
development bank of the State of Bahia in Brazil of $3.4 million to be used for
the development of a new plant and administration center in Ilheus, Brazil. The
terms of commitment provide for a six year term loan with interest at 4% above
the long-term rate imposed by the Central Bank of Brazil (currently representing
16% per annum). As of September 30, 1996, $828,702 has been drawn on such loan
commitment.
Note 7 - Sale of Receivables
During the period January 1, 1996 through September 30, 1996, the
Company's subsidiary sold to an affiliate $17,340,544 of its trade accounts
receivable for $14,737,508 and, accordingly, recognized a discount on the sale
in the amount of $1,941,120, which is reflected in the accompanying statement of
income. At September 30, 1996, the affiliate has collected $5,906,665 of the
$17,340,544 of purchased receivables.
Note 8 - Per Share Information
Per share information is based on the weighted average of common shares
outstanding during each period and, the weighted average number of common
equivalent shares resulting from the assumed conversion of a $2,000,000
promissory note issued in May of 1995. Such note is payable to an affiliate of
the shareholders and is convertible into 5.925% of the outstanding common stock
of the Company. Fully diluted earnings per common and common equivalent shares
are not presented as such amounts are the same as primary earnings per share.
6
<PAGE>
Note 9 - Private Placement
On August 30, 1996 the Company completed a private placement offering
issuing 27.3 units for $50,750 per unit to eleven accredited investors. Each
unit consisted of $50,000 principal amount of 9% senior debentures, 1,000 common
stock purchase warrants, and 500 shares, no par value per share, of the
Company's common stock. The principal amount of, and the accrued and unpaid
interest on, the debentures was payable on the date which was the earlier of (i)
fifteen months from the date of the initial closing of the offering and (ii) the
date of the closing of a public offering of securities of the Company. Interest
on the Debentures accrued at the rate of 9% per annum payable semi-annually on
July 31, and January 31, beginning on January 31, 1997. The debentures were not
otherwise redeemable prior to maturity. Each warrant entitles the registered
holder thereof to acquire from the Company one share of common stock, no par
value per share, of the Company at an exercise price per share of $10.00,
subject to adjustment as provided therein, for the period commencing on the date
of the initial closing and terminating on the third anniversary of such date.
Note 10 - Subsequent events
Repayment of Loan
On October 30, 1996, the Company repaid in full a $2,000,000 loan,
bearing 12% interest per year, to Meris Financial Incorporated. Such repayment
was made in accordance with the modification agreement associated with such
loan. According to such modification agreement, all conversion rights and
options associated with such loan expired upon the repayment of the loan.
The Company obtained a short-term loan in the amount of approximately
$1,720,000, bearing an 18% annual interest rate, from Georges C. St. Laurent,
Jr., the father of Georges C. St. Laurent, III and William C. St. Laurent, the
Company's Chief Executive Officer and Chief Operating Officer, respectively, to
be used to repay the Meris Financial Incorporated loan. On November 7, 1996, the
Company used a portion of the proceeds from it's initial public offering to
repay such short-term loan.
Public Offering
On November 7, 1996, the Company completed an initial public offering
of securities issuing 2,000,000 shares of the Company's common stock, no par
value, for $10.00 per share. Such offering provided the Company with net
proceeds of approximately $17,650,000 which will be used to expand inventory, to
expand consumer financing operations, to expand marketing activities, to repay
indebtedness, to increase manufacturing capacity, and for general working
capital purposes. On November 22, 1996, the underwriter exercised its option to
purchase 115,500 shares of an over-allotment option that was issued in
connection with this offering. Additionally, in connection with this offering,
the underwriter was issued warrants to purchase up to 200,000 shares of the
Company's common stock at an exercise price of $14 per share for a period of
four years commencing one year from the commencement date the offering.
Repurchase of Receivables
On November 15, 1996, the Company's subsidiary, Bahiatech - Bahia
Tecnologia Ltda., repurchased $7,681,430 of its trade accounts receivable for
$6,895,186 from an affiliate. Such repurchase was the result of the Company
exercising its first right of refusal on the sale of such receivables. Such
receivables were generated from the Company's 10X consumer financing program and
were repurchased at the same discount rate as they were sold for.
Note Conversion
On November 13, 1996, Georges C. St. Laurent, Jr. exercised his right
to convert a $2,000,000 promissory note from the Company into 593,309 shares of
the Company's common stock. Such note bore interest of 9% annually and was due
to the lender upon demand. The lender had the right to convert the note into
5.925% of the outstanding common stock of the Company at any time.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
information contained in the Consolidated Financial Statements and the Notes
thereto appearing elsewhere in this report.
Overview
The Vitech America, Inc. (the "Company") is a manufacturer and
distributor of computer equipment and related products for markets in Brazil.
Based on continuing efforts by management to maximize long-term profit margins
and increase penetration into the marketplace directly to end-users, the Company
has evolved from a Miami-based distributor dedicated to sales of computer
peripheral products for large original equipment manufacturers ("OEM") in 1993
to a vertically integrated manufacturer and integrator of complete computer
systems and business network systems selling directly to end-users in 1996. This
evolution has left the Company with a diversified customer base widely
distributed throughout Brazil. For the nine month period ended September 30,
1996, the Company had over 8,000 customers as compared to one customer during
the period ended December 31, 1993. As the Company establishes and maintains
relationships with end-users of its products, the Company has developed a
clearly defined channel for marketing additional hardware products, such as
updated peripheral products, new computers, new network products, as well as
services, such as internet access services. The Company markets its products
throughout Brazil under the trademarks EasyNet(TM), MultiShow(TM), and Vitech
Vision(TM).
In June 1993, Vitech America, Inc. was incorporated for the purpose of
sourcing, purchasing, seeking supplier credit in order to distribute products to
its sole customer, Vitoria Tecnologia S.A. ("Vitoria"), an affiliate of the
Company through common ownership. A 16,000 square foot warehouse with adjoining
offices was leased to receive, inspect, process incoming quality control,
consolidate, ship, and administer purchases and accounts payable. In 1993 and
1994, the Company distributed electronic parts and finished peripheral products,
such as small capacity hard disk drives of 40 megabyte to 120 megabyte capacity,
floppy disk drives, and dot matrix printers, multimedia products, networking
products, and other related products. The products were ultimately destined to a
few large-and medium-sized Brazilian OEM computer manufacturers and
distributors.
In order to take advantage of the large margins available with
in-country distribution of computer products in Brazil, on March 7, 1995,
Bahiatech - Bahia Tecnologia, Ltda. ("Bahia") was organized as a wholly-owned
subsidiary of the Company to act as the Company's manufacturing and distribution
entity in Brazil. The creation of Bahia marked the transformation of the Company
from a low-margin U.S.-based distributor to a high-margin vertically integrated
manufacturer using the model of other direct distribution computer companies.
Simultaneously with the development and expansion of Bahia's operation and
independent of Vitoria, the Company shifted its focus and dependence away from
Vitoria, a company principally engaged in sales to OEM's and resellers.
Similarly, the Company's customer base shifted to a diversified group of end
users. The Company did not in any material respect assume the prior activity of
Vitoria. In 1996, management of Vitoria disclosed to the Company that based on
lack of competitive tax and fiscal incentives in the State of Espirito Santo,
Vitoria ceased all manufacturing and selling operations. Since that time,
Vitoria has paid all outstanding amounts owed to the Company.
Management negotiated directly with the Governor of the State of Bahia
to create a High Technology Park in Ilheus, Bahia, approximately 1,200
kilometers north of Rio de Janeiro on the Brazilian coast. To create incentives
to attract high technology companies, the state government declared a total
exemption from ICMS, the State of Bahia value added tax, for those companies
residing in the technology park. Bahia was the pilot project and first company
8
<PAGE>
to receive this incentive. Additionally, since the State of Bahia lies within
the Northeast Regional Development Area (SUDENE), the new facilities were
eligible for, and received, an exemption from corporate income tax. Ilheus has
its own deep water port and is close to the major markets in Brazil. In
September 1995, the Company commenced leasing a 160,000 square foot factory at
such location.
In 1995, with the creation of Bahia and its manufacturing facilities,
the Company introduced its own brand of computers and also began to sell
integrated business network solutions through its own reseller network. In 1996,
the Company launched its "10X Promotion" of the Vitech Vision(TM) brand PCs
direct to end-users, paying a commission to the reseller, but ultimately
retaining the client for itself. The strategy of attaining the end- user adds to
the long-term viability of the distribution network created by the Company to
bring new technology products to market in the future. Those potential products
include hardware upgrades, software, internet access services, data network
services, and integrated business systems. In addition to its branded computer,
Vitech also sells the MultiShow(TM) brand of Brazilian Portuguese multimedia
kits and the EasyNet(TM) brand of networking kits.
The evolution of the Company from a Miami-based distributor to a
vertically integrated manufacturer and integrator of complete computer systems
has resulted in the current business model which management believes will
maximize the long-term profit margin of the Company. This business model
consists of a U.S. operation, Vitech America, Inc., which serves as the sole
distributor to its subsidiary, Bahia. Vitech America, Inc. purchases components
worldwide for consolidation and processing at its Miami operation to be sold and
shipped to Bahia. Bahia serves as the Company's manufacturing and sales
operation in Brazil. Because of the tax-exempt status that Bahia has attained,
Vitech America, Inc. sells the components to Bahia at a gross margin of
approximately 9%. This has resulted in substantially all of the consolidated
earnings of the Company being attributable to Bahia. For the foreseeable future,
the Company will continue with this model in order to maximize the earnings in
Brazil which will be reinvested in Bahia for the continued growth of the
Company's Brazilian operations.
Although the Company's financial statements are presented in U.S.
dollars in accordance with generally accepted accounting principles, the
Company's transactions are consummated in both the Brazilian Real and the U.S.
dollar. Inflation and devaluation have had, and may continue to have, an effect
on the Company's results of operations and financial condition. Although the
Company has used Brazilian Real futures and options contracts, during 1996, in
an effort to hedge against currency risks, its highest coverage at any one time
has only met 20% of its exposure consisting of accounts receivable denominated
in Reals, net of accounts payable and other current liabilities denominated in
Reals. The Company plans to continue to use hedging activities to offset
currency risks as appropriate.
9
<PAGE>
Results of Operations
The following table sets forth for the periods indicated certain line
items from the Company's statement of operations as a percentage of the
Company's consolidated revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Sales 100% 100% 100% 100%
Cost of sales 69.0 93.2 70.6 93.2
Gross profit 31.0 6.8 29.4 6.8
Selling, general and administrative
expenses 10.6 5.0 9.9 4.3
Income from operations 20.4 1.8 19.5 2.5
Interest and financing expense 6.1 0.6 6.3 0.8
Net Income 11.8 1.1 10.9 1.7
</TABLE>
Sales increased by $10,840,205, or approximately 154.7% to $17,845,553
for the third quarter of 1996 as compared to $7,005,348 for the third quarter of
1995. For the nine months ended September 30, 1996, sales increased by
$16,463,456, or approximately 60%, to $43,925,852 as compared to $27,462,396 for
the nine months ended September 30, 1995. Such increase in sales was primarily
attributable to increased demand by the Company's customers, the broadening of
the Company's customer base, and the further establishment of the Company's
brands in the Brazilian marketplace. During the nine months ended September 30,
1996, the Company had sales to over 8,000 different customers as compared to
less than 20 different customers during the nine months ended September 30,
1995.
Cost of sales during the third quarter of 1996 were $12,317,392,
representing 69% of the sales during the period, as compared to $6,529,549 for
the third quarter of 1995, representing 93.2% of sales for the period. Cost of
sales during the nine months ended September 30, 1996 were $31,005,728,
representing 70.6% of the sales during the period, as compared to $25,597,166
for the nine months ended September 30, 1995, representing 93.2% of sales for
the period. The decrease in cost of sales as a percentage of sales during the
nine months ended September 30, 1996, when compared to the nine months ended
September 30, 1995, was attributable to the Company's continuing business
strategy of the transformation from being solely a Miami-based distributor to
being a vertically integrated manufacturing and distribution company attaining a
broad spectrum of clients throughout Brazil. As a result of this transformation,
the Company has been able to achieve higher margins through vertical
integration. The decrease was also attributable to the Company's migration from
peripheral products and related products to a full line of branded computer
systems and network solutions with greater aggregated value and greater control
over pricing to the customer.
Selling, general, and administrative expenses increased by $1,533,190,
or approximately 434.7% to $1,885,902 for the third quarter of 1996 as compared
to $352,711 for the third quarter of 1995. For the nine months ended September
30, 1996, selling, general and administrative expenses increased by $3,176,456,
or approximately 271%, to $4,348,547 as compared to $1,172,091 for the nine
months ended September 30, 1995. Such increase was primarily related to the
increased costs associated with the creation of Bahia and its manufacturing
facility being brought on line as well as the increased selling activity in
Brazil associated with marketing directly to end-users. Selling, general, and
administrative expense as a percentage of sales was 9.9% for the nine months
ended September 30, 1996, compared to 4.3% for the nine months ended September
30, 1995. This increase in the selling, general, and administrative expense as a
percentage of sales was primarily attributable to the creation of Bahia as well
as the broadening of the Company's customer base.
10
<PAGE>
Income from operations increased by $3,519,172 to $3,642,259 for the
third quarter 1996 as compared to $123,087 for the third quarter of 1995. For
the nine months ended September 30, 1996, income from operations increased by
$7,878,438 to $8,571,576 as compared to $693,138 for the nine months ended
September 30, 1995. Such increase was primarily attributable to the
aforementioned increase in sales and the decrease in cost of sales as a
percentage of sales which more than offset the increase in selling, general, and
administrative expenses. Income from operations as a percentage of sales
increased to 19.5% for the nine months ended September 30, 1996 from 2.5% for
the nine months ended September 30, 1995. This increase was primarily
attributable to the aforementioned decrease in cost of sales as a percentage of
sales which more than offset the increase in selling, general, and
administrative expenses as a percentage of sales.
Interest and financing expense increased by $1,054,476, or
approximately 2,519%, to $1,096,338 for the third quarter of 1996 as compared to
$41,862 for the third quarter of 1995. For the nine months ended September 30,
1996, interest and financing expense increased by $2,579,446, or approximately
1,253%, to $2,785,285 as compared to $205,840 for the nine months ended
September 30, 1995. This increase was primarily attributable to the Company's
increased use of debt financing to support its working capital needs and to
support its sales to end-users. Specifically, $1,941,120 of the increase for the
nine months ended September 30, 1996 was attributable to the Company's sale of
accounts receivable to an affiliate of the Company in connection with the
Company's 10X consumer financing program which was introduced in early 1996. The
$1,941,120 represented the discount on the consumer debt portfolios which had a
face value of approximately $17,340,000. See Note 7 to the Company's Financial
Statements dated September 30, 1996.
Net income increased by $2,021,050, or approximately 2,540%, to
$2,100,604 for the third quarter of 1996 as compared to $79,554 for the third
quarter of 1995. For the nine months ended September 30, 1996, net income
increased by $4,327,469, or approximately 907%, to $4,804,745 as compared to
$477,275 for the nine months ended September 30, 1995. The increase in net
income was primarily attributable to the aforementioned increase in income from
operations more than offsetting the increase in interest and financing expense.
Net income as a percentage of sales increased to 10.9% for the nine months ended
September 30, 1996 from 1.7% for the nine months ended September 30, 1995. This
increase was primarily attributable to the aforementioned decrease in the cost
of sales as a percentage of sales more than offsetting the increases in selling,
general, and administrative expenses as a percentage of sales.
During the nine month period ended September 30, 1996, the Company
experienced a foreign currency exchange loss of $541,040 from the settlement of
certain receivables and payables denominated in the Real and the translation of
financial statements from the Brazilian Real to the U.S. Dollar. At September
30, 1996, the Company had a net exposure to currency fluctuations of
approximately $3,835,443. Additionally, at September 30, 1996, the Company had
$11,433,879 of exposure to currency rate fluctuations as a result of the
Company's sale of receivables to a related party.
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund increased
levels of inventories and accounts receivable. The Company has historically
satisfied its working capital requirements principally through cash flow from
operations and debt financing.
11
<PAGE>
At September 30, 1996, the Company had a working capital surplus of
$9,294,786 compared to $6,412,154 at December 31, 1995. This increase in working
capital was primarily attributable to the increased levels of inventory which
more than offset the increases in short-term borrowings, and decreases in
accounts receivable.
Net cash used by operating activities for the nine months ended
September 30, 1996 was $24,399. During the nine months ended September 30, 1995,
the Company used $1,007,703 of cash in operating activities. The decrease in
cash used was primarily attributable to the decrease in accounts receivable and
increase in net income and income and other taxes payable which more than offset
increases in inventory.
Net cash used in investing activities was $2,818,988 for the nine
months ended September 30, 1996, as compared to $52,034 for the nine months
ended September 30, 1995. Such increase was primarily attributable to capital
expenditures relating to the purchase of furniture and fixtures, computer
equipment, and warehouse equipment. Approximately $1,500,000 of the increase was
attributable to non cash investing activities where the Company received
property and assets as settlement of an outstanding accounts receivable. Net
cash provided from financing activities was $3,156,693 for the nine months ended
September 30, 1996, as compared to $980,672 in net cash provided from financing
activities for the nine months ended September 30, 1995. The increase in net
cash provided from financing activities was primarily attributable to the
increase in lines-of-credit and other short-term borrowings which more than
offset the reduction in notes payable to related party.
During the nine month period ended September 30, 1996, the Company
received property and assets valued at $1,517,258 as settlement of an
outstanding accounts receivable. Such property consisted of two parcels of real
property located in Brazil. The first parcel was a warehouse located in Sao
Paulo, Brazil valued at approximately $200,000 and the other parcel is a
condominium in Guarapari, Brazil valued at approximately $217,000. The asset was
an airplane valued at approximately $1,100,000. The Company is presently
evaluating the potential sale of the properties based on market conditions. The
value of the properties was based upon a certified appraisal of the properties
which approximated the face value of the related receivables. The value of the
airplane was based on the estimated fair market value of the asset which
approximated the face value of the related receivable. The airplane is currently
being used for corporate travel purposes within Brazil. The transactions were
recorded on the financial statements as a payment on account.
On August 30, 1996, the Company completed a private placement issuing
27.3 units to 11 accredited investors for $50,750 per unit. Each unit consisted
of a $50,000 principal amount of 9% senior debentures, 1,000 common stock
purchase warrants with an exercise price per share of $10, and 500 shares of
Common Stock. The debentures mature on the date which is the earlier of (i)
fifteen months from the date of the closing of the August 1996 Private Placement
and (ii) the date of the closing of a public offering of securities of the
Company. The $1,299,635 in net proceeds of the August 1996 Private Placement are
being used for general corporate and working capital purposes. On November 7,
1996, the Company completed an initial public offering of its securities and,
accordingly, used approximately $1,365,000 of the net proceeds to repay the
principal amount of, and accrued and unpaid interest on the senior debentures
issued in such private placement.
The Company has an overdraft facility of $200,000 with Eastern National
Bank in Miami, Florida, with which the Company maintains its primary banking
relationship. As of September 30, 1996, there were no funds drawn on the
overdraft facility.
On June 28, 1996, the Company secured a line of credit in the amount of
$1 million with Deutsch-Sudamerikanische Bank expiring June 30, 1997 to support
letter of credits which the Company may issue to secure purchase obligations. As
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of September 30, 1996 there were no funds drawn on such line of credit. Such
lines require the Company to provide a cash deposit equal to 30% of each letter
of credit. The credit agreement is secured by a lien of all personal property
owned by the Company.
The Company had borrowings under lines of credit for placing product at
its distributors and resellers and for general working capital purposes in the
amount of $2,765,287 as of September 30, 1996. The rates of interest on these
lines varies by contract and client and averages from 3% to 4% per month.
The Company had open invoices receivable from its clients factored at
various banks in the amount of $1,026,537 at September 30, 1996. The Company
bears full recourse of these receivables. The rates of interest on these
receivables varies by contract and client and averages 3% per month.
The Company borrowed $2,000,000 at 9% interest per year from Georges C.
St. Laurent, Jr., a related party, on May 26, 1995. On November 15, 1996, this
note was converted, at the lender's request and in accordance with its terms,
into 593,309 shares of the common stock of the Company. At December 31, 1995 the
Company also had a note in the amount of $1,911,917 bearing 6% interest per year
payable to Georges C. St. Laurent, Jr. As of September 30, 1996, such note was
repaid in full.
The Company has allocated approximately $2,150,000 from the proceeds of
its initial public offering to increase manufacturing facilities. The proceeds
will be used principally to equip the Company's manufacturing plant and
administrative center in Ilheus, Brazil. In connection with the development
thereof, the Company has secured a $3.4 million loan to fund the development of
such facility. The terms of commitment provide for a six year term loan with
interest payable at 4% above the long-term rate imposed by the Central Bank of
Brazil (currently 16% per annum). The payment of interest is delayed for the
first year and is thereafter payable quarterly. Payments of principal shall be
made at maturity. The loan will be secured by the real property and building in
Ilheus, Brazil. As of September 30, 1996, approximately $830,000 had been
borrowed under such loan commitment.
The Company owns an underdeveloped parcel of land near Ilheus, Brazil
held for investment. The Company has no present intention to develop such land.
Other than as stated above, the Company does not plan to make any
significant capital expenditures during the next fiscal year.
The Company borrowed $2,000,000 at 12% per year interest from Meris on
October 28, 1995. The Company repaid this loan in full on October 30, 1996 with
the proceeds from a short-term loan, bearing an 18% annual interest rate,
obtained from Georges C. St. Laurent, Jr. Approximately $1,800,000 of the net
proceeds from the Company's initial public offering were used to repay such
short-term loan.
On November 7, 1996, the Company completed an initial public offering
of securities issuing 2,000,000 shares of the Company's common stock, no par
value, for $10.00 per share. Such offering provided the Company with net
proceeds of approximately $17,650,000 which will be used to expand inventory, to
expand consumer financing operations, to expand marketing activities, to repay
indebtedness, to increase manufacturing capacity, and for general working
capital purposes. On November 22, 1996, the underwriter exercised its option to
purchase 115,500 shares of an over-allotment option that was issued in
connection with this offering. Additionally, in connection with this offering,
the underwriter was issued warrants to purchase up to 200,000 shares of the
Company's common stock at an exercise price of $14 per share for a period of
four years commencing one year from the commencement date the offering.
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The Company has had success in creating good relations with suppliers
which are interested in entering into the Brazilian market. The Company has
provided an opportunity to enter the Brazilian technology sales channel to these
suppliers who have willingly offered favorable terms to the Company. The
increase in supplier credit has allowed the Company to diversify its product
line as well as increase sales. Average days outstanding on accounts payable
balances to suppliers was in excess of 50 days when compared to industry
averages of 30 days or less. The Company has continued to develop these key
strategic relationships as a means to fortify its product offering and support
growth without incurring additional interest-bearing debt.
The Company has a three year employment agreement with its President
and with its Chief Executive Officer. Under the terms of the agreements each
individual will receive annual compensation of $240,000 subject to annual
increases. Each of such agreements will terminate on December 31, 1998.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of"
("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is effective for fiscal years beginning after December 15,
1995. The Company believes that the adoption of SFAS 121 will not have a
material impact on its financial statements.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 establishes a fair value based method of accounting for stock-based employee
compensation plans; however, it also allows companies to continue to measure
costs for such plans using the method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Companies that elect to continue with the accounting under APB 25
must provide certain pro forma disclosures of net income, as if SFAS 123 had
been applied. The accounting and disclosure requirements of SFAS 123 are
effective for the Company for transactions entered into during the year ended
December 31, 1996. The Company is currently evaluating its alternatives under
SFAS 123, and its impact on operating results is not presently known.
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II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by item 601 of Regulation S-K
None.
(b) Reports on Form 8-K.
None.
SIGNATURE
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.
Vitech America, Inc.
By: /s/ Mitchell E. Asher
------------------------
Mitchell E. Asher
Vice President and Chief Financial Officer
(authorized officer and chief accounting officer)
Date: December 6, 1996
