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, 1998
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 _X_ No ___
As of November 13, 1998, there were 14,635,655 shares of the Common
Stock of the Company, no par value, outstanding.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
VITECH AMERICA, INC.
Balance Sheet
<TABLE>
<CAPTION>
Assets
September 30, December 31,
1998 1997
----------------- -----------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 8,598,441 $ 22,704,632
Accounts receivable, net 33,134,021 59,137,869
Inventories, net 59,154,112 34,347,087
Investment in subordinated debenture, current portion 12,300,510 -
Deferred tax asset 702,000 702,000
Due from officers 199,392 370,623
Other current assets 8,017,045 4,676,804
----------------- -----------------
Total current assets 122,105,521 121,939,015
Property and equipment, net 20,786,846 12,946,523
Investment in subordinated debenture 1,662,231 -
Investments 1,296,746 1,181,632
Goodwill 17,485,783 17,570,705
Deferred tax asset 481,000 493,000
Other assets 4,079,830 1,374,027
----------------- -----------------
Total assets $ 167,897,957 $ 155,504,902
----------------- -----------------
Liabilities and Shareholders' Equity
Current liabilities
Trade accounts payable $ 22,722,555 $ 15,482,640
Accrued expenses 2,462,789 3,131,670
Current maturities of long-term debt 553,458 350,439
Taxes payable 1,118,676 -
Short-term debt 12,335,898 20,419,169
----------------- -----------------
Total current liabilities 39,193,376 39,383,918
----------------- -----------------
Long-term liabilities
Convertible notes - related party - 20,000,000
Convertible notes 24,903,750 38,608,250
Taxes payable 594,000 472,839
Long-term debt 2,985,418 2,004,064
----------------- -----------------
Total long-term liabilities 28,483,168 61,085,153
----------------- -----------------
Commitments and contingencies
Minority interest 115,174 1,427,442
----------------- -----------------
Shareholders' equity
Preferred stock, no par value, 3,000,000 shares authorized, no shares issued - -
Common stock, no par value, 30,000,000 shares authorized,
14,635,655 and 12,175,639 shares issued and outstanding 60,765,257 25,486,848
Retained earnings 39,790,982 28,121,541
Accumulated other comprehensive income (loss) (450,000) -
----------------- -----------------
Total shareholders' equity 100,106,239 53,608,389
----------------- -----------------
Total liabilities and shareholders' equity $ 167,897,957 $ 155,504,902
================= =================
</TABLE>
See notes to financial statements
2
<PAGE>
VITECH AMERICA, INC.
Statement of Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------
----------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------------ ------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 47,410,603 31,270,598 $ 119,821,089 $ 71,607,921
Cost of sales 27,546,045 20,007,009 70,683,914 47,596,686
------------------ ------------------- ---------------- -----------------
Gross profit 19,864,558 11,263,589 49,137,175 24,011,235
Selling, general and administrative expenses 8,798,284 5,001,365 24,944,988 10,678,699
------------------ ------------------- ---------------- -----------------
Income from operations 11,066,274 6,262,224 24,192,187 13,332,536
------------------ ------------------- ---------------- -----------------
Other (income) expenses
Interest expense, net 2,625,106 1,570,240 5,873,117 2,281,700
Discount on sale of receivables 1,895,834 509,104 3,475,198 802,104
Foreign currency exchange losses 1,842,460 345,007 3,235,811 1,615,863
------------------ ------------------- ---------------- -----------------
Total other expenses 6,363,400 2,424,351 12,584,126 4,699,667
------------------ ------------------- ---------------- -----------------
Income before provision for income
taxes and minority interest 4,702,874 3,837,873 11,608,061 8,632,868
Provision for income taxes 315,250 219,341 921,810 485,374
------------------ ------------------- ---------------- -----------------
Income before minority interest 4,387,624 3,618,532 10,686,251 8,147,494
Minority interest (251,216) 40,541 (983,191) 40,541
------------------ ------------------- ---------------- -----------------
Net income $ 4,638,840 $ 3,577,991 $ 11,669,442 $ 8,106,954
------------------ ------------------- ---------------- -----------------
Net income per common share - Basic:
Weighted common shares 12,997,111 12,013,452 12,450,196 11,869,090
Net income per common share $ 0.36 $ 0.30 $ 0.94 $ 0.68
------------------ ------------------- ---------------- -----------------
Net income per common share - Assuming
dilution:
Weighted common shares 13,045,149 12,113,903 12,645,691 11,912,462
Net income per common share $ 0.36 $ 0.30 $ 0.92 $ 0.68
------------------ ------------------- ---------------- -----------------
</TABLE>
See notes to financial statements
3
<PAGE>
VITECH AMERICA, INC.
Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------------
September 30, 1998 September 30, 1997
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 11,669,442 $ 8,106,954
Adjustments to reconcile net income to net cash
provided from / (used) in operating activities
Depreciation 1,761,863 714,791
Amortization of goodwill 676,053 131,248
Minority interest (983,191) 40,541
Accumulated translation adjustment (450,000) -
Allowance for doubtful accounts 46,506 375,432
Reserve for inventory obsolescence 17,204 233,458
Changes in assets and liabilities
Accounts receivable 12,134,298 (11,796,981)
Inventories (24,824,229) (15,991,702)
Deferred tax asset 12,000 (52,000)
Other assets (7,024,989) (1,352,710)
Trade accounts payable 7,239,915 8,238,017
Accrued expenses (668,881) (202,361)
Due from officers 171,231 -
Income and sales taxes payable 2,750,782 (810,673)
---------------------- ----------------------
Total adjustments (9,141,438) (20,472,940)
---------------------- ----------------------
Net cash provided from / (used) in operating activities 2,528,004 (12,365,986)
---------------------- ----------------------
Cash flows from investing activities
Purchases of property and equipment (8,422,186) (3,818,511)
Payment for business acquisition (591,906) (4,003,000)
Other investments (115,114) (31,939)
---------------------- ----------------------
Net cash used in investing activities (9,129,206) (7,853,450)
---------------------- ----------------------
Cash flows from financing activities
Net (payments)/proceeds under short-term bank borrowings (5,829,497) 2,474,969
Net payments of taxes payable (472,839) (374,486)
Payment of note payable for business acquisition (2,231,250) (1,487,500)
Proceeds from issuance of convertible note 450,000 -
Proceeds from note payable - related party - 6,474,942
Proceeds from issuance of convertible note - related party - 15,000,000
Net proceeds of notes payable 454,688 125,300
Net proceeds from sale of common stock 123,909 60,000
---------------------- ----------------------
Net cash provided by financing activities (7,504,989) 22,273,225
---------------------- ----------------------
Net increase in cash and cash equivalents (14,106,191) 2,053,789
Cash and cash equivalents - beginning of period 22,704,632 1,757,731
---------------------- ----------------------
Cash and cash equivalents - end of period $ 8,598,441 $ 3,811,520
---------------------- ----------------------
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest and discount on sale of receivables $ 12,635,058 $ 2,569,927
----------------------- ----------------------
Income taxes $ 217,168 $ 644,434
----------------------- ----------------------
Supplemental schedule of non-cash investing and financing activities
Investment in property equipment through financing agreements $ 1,180,000 $ -
----------------------- ----------------------
</TABLE>
See notes to financial statements
4
<PAGE>
Vitech America, Inc.
Notes to Financial Statements
September 30, 1998
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, 1998 should be read in conjunction with the Company's financial
statements as of and for the year ended December 31, 1997, which are included in
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission. Operating results for the three month period and the nine month
period ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. 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 reporting period. Actual results could differ from those estimates.
The financial statements for 1998 and 1997 include the accounts of the Company
and its subsidiaries. All of the Company's sales are concentrated in Brazil. The
Company had one customer that accounted for in excess of 5% of sales during the
nine month period ended September 30, 1998. During the nine month period ended
September 30, 1997, approximately 25% of the Company's sales were to two
unrelated customers.
On June 15, 1998, the Board of Directors of the Company, approved a 10% common
stock dividend to be distributed to shareholders of record of the Company's
common stock as of July 13, 1998. The common stock issued as a result of this
stock dividend was distributed on July 27, 1998. All references in this report
to the common stock of the Company and net income per common share have been
recalculated to reflect the 10% common stock dividend.
Note 2 - Significant accounting policy - Translation into U.S. Dollar
- ---------------------------------------------------------------------
The financial statements of the Company have been prepared in accordance with
generally accepted accounting principles in the United States in U.S. dollars.
Until December 31, 1997, amounts in Brazilian currency were remeasured into U.S.
Dollars in accordance with the methodology set forth in Statement of Financial
Accounting Standards No. 52 ("SFAS 52") as it applies to entities operating in
highly inflationary economies. The assets and liabilities of the Company's
subsidiaries are translated into U.S. dollars at exchange rates in effect at the
balance sheet date for monetary items and at historical rates for nonmonetary
items. Revenue and expense accounts are translated at the average exchange rate
in effect during each month, except for those accounts that relate to
nonmonetary assets and liabilities which are translated at historical rates.
Effective January 1, 1998, the Company determined that Brazil ceased to be a
highly inflationary economy under SFAS 52. Accordingly, as of January 1, 1998,
the Company began using the Brazilian currency, the Real, as the functional
currency of its Brazilian subsidiaries. As a result, all assets and liabilities
are translated into dollars at period end exchange rates and all income and
expense items are translated into U.S. dollars at the average exchange rate
prevailing during the period. In addition, the Company recorded a currency
exchange loss associated with dollar-denominated monetary assets and liabilities
held by the Company's Brazilian subsidiaries. Any translation adjustments are
reflected as a component of shareholders' equity.
Note 3 - Net income per share
- -----------------------------
In 1997, the Financial Accounting Standards Board issued Statement No. 128 (SFAS
128), "Earnings per Share". SFAS 128 replaced the calculation of primary and
fully diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of stock options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS 128 requirements.
5
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net income for basic and diluted
income per common share $ 4,638,840 $ 3,577,991 $ 11,669,442 $ 8,106,954
--------------- --------------- --------------- --------------
Weighted average number of shares
for basic income per share 12,997,111 12,013,452 12,450,196 11,869,090
Dilutive securities:
Stock options 34,350 71,819 151,542 30,650
Warrants 13,688 28,632 43,953 12,722
--------------- --------------- --------------- --------------
Weighted average number of shares
for diluted income per share 13,045,149 12,113,903 12,645,691 11,912,462
--------------- --------------- --------------- --------------
Net income per common share:
Basic $ 0.36 $ 0.30 $ 0.94 $ 0.68
Diluted $ 0.36 $ 0.30 $ 0.92 $ 0.68
</TABLE>
The effects on earnings per share of the $24,903,750 aggregate principal amount
of 10% convertible notes would have been antidilutive and therefore are not
included in the computations.
For the three month period and the nine month period ended September 30, 1998,
there were 4,438,999 outstanding stock options and 271,087 warrants not included
in the computation of diluted earnings per share of common stock because the
options' exercise prices were greater than the average market price of the
common shares. For the three month period and the nine month period ended
September 30, 1997, there were 3,305,999 outstanding stock options and 241,387
warrants not included in the computation of diluted earnings per share of common
stock because the options and warrants' exercise prices were greater than the
average market price of the common shares.
Note 4 - Accounts receivable
- ----------------------------
Accounts receivable consisted of the following:
September 30,
1998
-----------------
Trade accounts receivable $ 35,366,237
Allowance for doubtful accounts (2,232,216)
-----------------
Total $ 33,134,021
-----------------
In April 1998, the Company entered into an accounts receivable financing program
with Technology Acceptance Corp. ("TAC"), an independently owned special purpose
corporation, whereby the Company's subsidiary, Bahiatech - Bahia Tecnologia
Ltda. ("Bahiatech"), may sell certain of its accounts receivable to TAC. The
program is a $150 million collateralized global medium term note program whereby
TAC may issue notes which are collateralized by the purchased accounts
receivable. TAC is an exempted company incorporated under the laws of the Cayman
Islands. One hundred percent (100%) of TAC's voting shares are held by a Cayman
Islands trust. TAC is a special purpose company that was established solely to
participate in the securitization, to acquire and hold the designated
receivables and to issue collateralized global medium term notes under a note
program. TAC has covenanted in the indenture pursuant to which the notes are
issued not to engage in any activities other than those contemplated by the
indenture. The receivables constitute the principal asset of TAC.
During the nine month period ended September 30, 1998, the Company completed the
sale of an aggregate amount of approximately $106 million of its accounts
receivable to TAC at a discount of approximately $4.8 million for cash and a
subordinated note. The subordinated note is a revolving non-interest bearing
bearer note.
6
<PAGE>
There is a repurchase provision whereby Bahiatech is required to repurchase the
receivables sold to TAC under certain circumstances including default under the
program, delinquencies or violations of certain concentration limits. The
repurchase obligation may be satisfied by transferring to TAC, for no additional
consideration, an aggregate amount of additional receivables the net present
value of which is equal to the repurchase price. If the net present value of the
receivables available to Bahiatech to effect such substitution is less than the
relevant repurchase price thereof, then Bahiatech will be required to pay in
cash the excess of the repurchase price over the net present value of the
additional receivables transferred to TAC pursuant to such substitution. The
Company serves as guarantor of the repurchase obligation. If Bahiatech fails to
comply in full with its repurchase obligation on or prior to the relevant
repurchase date, the Company shall be required to deposit, within twenty-four
(24) hours of such expired required repurchase date, the amount of the
repurchase price not paid by Bahiatech. As a result of the structure of the
program, there is a contingent liability in the amount of approximately $61
million which represents the balance as of September 30, 1998, at face value, of
the accounts receivable sold to TAC. The Company maintains an allowance for
doubtful accounts on its balance sheet with respect to the sold receivables.
Note 5 - Inventories
- --------------------
Inventories are summarized as follows:
September 30,
1998
-----------------
Consigned inventories $ 4,664,706
Finished goods 16,458,098
Work in process 3,973,797
Components in the factory 18,034,379
Components in transit (a) 16,556,790
-----------------
59,687,770
Allowance for obsolescence (533,658)
-----------------
Total $ 59,154,112
-----------------
(a) Components in transit consist of inventories in the Company's Miami,
Florida facility and inventories in route to the Company's factories in
Brazil.
Note 6 - Stock options
- ----------------------
In January 1998, the Company granted options to purchase 30,000 shares of the
Company's common stock at an exercise price of $14.09 per share to Directors of
the Company. The options were granted pursuant to the provisions of the
Company's 1996 Stock Option Plan.
Note 7 - Comprehensive Income
- -----------------------------
The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income" during the nine month period ended
September 30, 1998. SFAS 130 establishes new rules for the reporting and
presentation of comprehensive income and its components. The Company's
comprehensive income is comprised of net income adjusted for foreign currency
translation. For the three month period and nine month period ended September
30, 1998, comprehensive income was not materially different from reported net
income.
Note 8 - Note Conversion
- --------------------------
During the quarter ended September 30, 1998, the Company issued an aggregate
amount 2,430,316 shares of Common Stock upon conversion of $ 34.2 million of
principal amount of 10% convertible notes. The Company has registered the resale
of the shares of common stock issuable upon conversion of such 10% convertible
notes.
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.
Results of Operations
The following table sets forth for the periods indicated certain line
items from the Company's statement of income as a percentage of the Company's
consolidated sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100% 100% 100% 100%
Cost of sales 58.1 64.0 59.0 66.5
Gross profit 41.9 36.0 41.0 33.5
Selling, general and
administrative expenses 18.6 16.0 20.8 14.9
Income from operations 23.3 20.0 20.2 18.6
Interest and financing expense 9.5 6.6 7.8 4.3
Foreign currency exchange losses 3.9 1.1 2.7 2.3
Net Income 9.8 11.4 9.7 11.3
</TABLE>
Net sales increased by $16,140,005, or approximately 52%, to
$47,410,603 for the third quarter of 1998 as compared to $31,270,598 for the
third quarter of 1997. For the nine month period ended September 30, 1998, net
sales increased by $48,213,168, or approximately 67%, to $119,821,089 as
compared to $71,607,921 for the nine month period ended September 30, 1997. For
the nine month period ended September 30, 1998, the Company sold approximately
73,000 units as compared to approximately 42,000 units during the nine month
period ended September 30, 1997. Such increase in sales was primarily
attributable to the acquisition of Microtec Sistema Industria e Comercio S.A.
("Microtec"), increased demand by the Company's customers, the expansion of the
Company's direct end-user sales strategy and the expansion of the Company's
sales through new channels and into new markets. The acquisition of Microtec,
which was completed in July 1997 and accounted for under the purchase method of
accounting, has enabled the Company to expand into the corporate and
governmental markets offering complete integrated solutions from high-end
network servers to low-end workstations. Additionally, the acquisitions of two
retail and distribution operations in the fourth quarter of 1997 strengthened
the Company's direct relationship with end-users in the consumer market.
Cost of sales during the third quarter of 1998 were $27,546,045,
representing 58.1% of sales during the period, as compared to $20,007,009 for
the third quarter of 1997, representing 64% of sales for the period. Cost of
sales during the nine month period ended September 30, 1998 were $70,683,914,
representing 59% of sales during the period, as compared to $47,596,686 for the
nine month period ended September 30, 1997, representing 66.5% of sales for the
period. The decrease in cost of sales as a percentage of sales during the
quarter and nine month period ended September 30, 1998, when compared to the
quarter and nine month period ended September 30, 1997, was attributable to the
expansion of the Company's end-user sales strategy which has provided the
Company with better control over its margins through the elimination of
distribution layers and the retention of pricing power. The decrease was also
attributable to the Company's product mix. As the Company has expanded into the
corporate and governmental markets with integrated network solutions, there were
a higher percentage of servers and networking products, which have a higher
margin, included in its sales mix. Also contributing to the reduction in cost of
sales as a percentage of sales was the Company's reduction of consumer
electronics in its product mix. Contract manufacturing of consumer electronics
represents a lower margin sale than that of the Company's core products,
personal computers. The Company phased out the contract manufacturing of
consumer manufacturing in July 1997, and as a result, none of the sales during
the nine month period ended September 30, 1998 resulted from such business.
During the nine month period ended September 30, 1997, approximately 20% of the
Company's sales resulted from the contract manufacturing of consumer
electronics.
Selling, general, and administrative expenses increased by $3,796,918,
or approximately 76%, to $8,798,284 for the third quarter of 1998 as compared to
$5,001,366 for the third quarter of 1997. For the nine month period ended
September 30, 1998, selling, general, and administrative increased by
$14,266,289, or approximately 134%, to $24,944,988 as compared
8
<PAGE>
to $10,678,699 for the nine month period ended September 30, 1997. The increase
was primarily attributable to the acquisition of Microtec and to the increased
costs associated with expanding the Company's manufacturing capacity as well as
the increase in operating expenses required to meet the demands of the Company's
growth. Selling, general, and administrative expense as a percentage of sales
was 18.6% for the quarter ended September 30, 1998, compared to 16% for the
quarter ended September 30, 1997. Such increase was primarily attributable to
the acquisition of Microtec and the incorporation of its general and
administrative expenses into the Company's operations which more than offset the
Company's increases in sales. Also contributing to the increase in selling,
general, and administrative expenses as a percentage of sales was the increased
marketing expenditures associated with the Company's direct end-user sales
strategy and the increased operating expenses associated with selling higher end
integrated networking systems. While the level of these expenses in future years
can not be predicted and is dependent in large part upon the Company's success
in implementing its business strategy, management anticipates that the increased
expenses will be offset by the increases in revenues resulting from the
expansion of distribution channels.
Income from operations increased by $4,804,050, or approximately 77%,
to $11,066,274 for the third quarter of 1998 as compared to $6,262,224 for the
third quarter of 1997. For the nine month period ended September 30, 1998,
income from operations increased by $10,859,651, or approximately 81%, to
$24,192,187 as compared to $13,332,536 for the nine month period ended September
30, 1997. 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 20.2% for
the nine month period ended September 30, 1998 from 18.6% for the nine month
period ended September 30, 1997. 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 $2,441,596, or
approximately 117%, to $4,520,940 for the third quarter of 1998 as compared to
$2,079,344 for the third quarter of 1997. For the nine month period ended
September 30, 1998, interest and financing expense increased by $6,264,511, or
approximately 203%, to $9,348,315 as compared to $3,083,804 for the nine month
period ended September 30, 1997. This increase was primarily attributable to the
Company's increased use of debt financing and the discounted sale of accounts
receivable to support its working capital needs. Additionally, interest and
financing expense for the third quarter and nine month period ended September
30, 1998 includes a non-recurring charge of $1,000,000 associated with the
additional shares given as an incentive for certain holders of convertible notes
to convert their notes early into the Common Stock of the Company during the
third quarter of 1998. See "Liquidity and Capital Resources".
During the nine month period ended September 30, 1998, the Company
experienced a foreign currency exchange loss of $3,235,811 from the settlement
of certain receivables and payables denominated in the Brazilian Real and the
translation of financial statements from the Real to the U.S. Dollar as compared
to $1,615,863 during the nine month period ended September 30, 1997. At
September 30, 1998, the Commercial Market Rate for the Real was R$1.1856 per
US$1.00 as compared to R$1.1164 per US$1.00 at December 31, 1997.
Net income increased by $1,060,849, or approximately 30%, to $4,638,840
for the third quarter of 1998 as compared to $3,577,991 for the third quarter of
1997. For the nine month period ended September 30, 1998, net income increased
by $3,562,488, or approximately 44%, to $11,669,442 as compared to $8,106,954
for the nine month period ended September 30, 1997. The increase in net income
was primarily attributable to the aforementioned increase in income from
operations which more than offset increases in interest and financing expense
and foreign currency exchange losses. Net income as a percentage of sales
decreased to 9.7% for the nine month period ended September 30, 1998 from 11.3%
for the nine month period ended September 30, 1997. This decrease was primarily
attributable to the increases in interest and financing expense as a percentage
of sales and foreign currency exchange losses as a percentage of sales which
more than offset the increase in income from operations as a percentage of
sales.
Net income per common and common share equivalent, assuming dilution,
increased by $0.06, or 20%, to $0.36 for the third quarter of 1998 as compared
to $0.30 for the third quarter of 1997. For the nine month period ended
September 30, 1998, net income per common and common share equivalent, assuming
dilution increased by $0.24, or approximately 35%, to $0.92 as compared to $0.68
for the nine month period ended September 30, 1997.
Hedging Activities
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 had used Brazilian Real futures and options contracts during 1996, in an
effort to hedge
9
<PAGE>
against currency risks, its highest coverage at any one time had only met 20% of
its exposure, consisting of accounts receivable denominated in Reais, net of
accounts payable and other current liabilities denominated in Reais. Currently,
the Company is not engaged in any hedging activities, however, the Company is
constantly monitoring its exposure to currency risks and plans to use hedging
activities to offset currency risks as it deems appropriate. Accordingly, any
significant devaluation of the Real relative to the U.S. Dollar could have a
material adverse effect on the Company's operating results.
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund increased
levels of inventories and accounts receivable. During the nine month period
ended September 30, 1998, the Company used cash generated from operations,
short-term bank borrowings, and accounts receivable financing to finance its
working capital needs.
At September 30, 1998, the Company had a working capital surplus of
$82,912,145 compared to $82,555,097 at December 31, 1997. This increase in
working capital was primarily attributable to the increased levels of inventory
and decreased level of short-term debt which more than offset the increases in
trade accounts payable.
Net cash generated by operating activities for the nine month period
ended September 30, 1998 was $2,528,004 as compared to $12,365,986 in cash used
by operating activities during the nine month period ended September 30, 1997.
The increase in cash generated was primarily attributable to the increases in
net income and the sale of accounts receivable to TAC, which more than offset
the increases in inventories and other assets.
Net cash used in investing activities was $9,129,206 for the nine month
period ended September 30, 1998. Such use of cash was primarily related to the
purchase of production equipment associated with the expansion of the Company's
manufacturing capacity, the purchase of computer hardware and software to
support the Company's management information system and the acquisition of
facilities.
Net cash used in financing activities was $7,504,989 for the nine month
period ended September 30, 1998 and resulted primarily from repayment of
short-term borrowings at various banks in Brazil and the repayment of a note
payable for the acquisition of Microtec.
The Company has a revolving line of credit in the amount of $4,000,000
with Eastern National Bank in Miami, Florida, with which the Company maintains
its primary banking relationship. Such line consists of $3,000,000 for working
capital and $1,000,000 for trade finance used to support letters of credit which
the Company may issue to secure purchase obligations. This credit line is
secured by a lien on certain property owned by the Company. The credit line
bears interest at the rate of 8.75% and terminates in June 1999. As of September
30, 1998, there was $2,800,000 owed under this facility. As of September 30,
1998, the Company had approximately $9,200,000 in short-term borrowings from
various banks in Brazil with rates of interest averaging 1.5% per month and
maturing on a revolving basis through June 1999.
On June 26, 1997, the Company completed a private placement of a two
year senior convertible note to Georges C. St. Laurent Jr. ("GSL Jr.") for the
principal amount of $10 million. The note accrued interest at an annual rate of
10% payable monthly and was convertible into Common Stock, in whole or in part,
at the rate of one share of Common Stock for each $13.64 of principal converted.
The proceeds of the note were used for the acquisition of Microtec and for
general working capital purposes. The Company registered the resale of the
shares of Common Stock issuable upon conversion. On July 15, 1998, GSL Jr.
converted such note into an aggregate of 755,333 shares of Common Stock, which
included 22,000 shares as an incentive for GSL Jr. to convert such note.
On August 19, 1997, the Company entered into a loan agreement with GSL
Jr. for a principal amount of up to $10,000,000 to be evidenced by senior
convertible notes. The notes had a two year term and accrued interest at an
annual rate of 10% payable monthly and were convertible into Common Stock, in
whole or in part, at the rate of one share of Common Stock for each $14.64 of
principal converted. On August 19, 1997, the Company issued the first of such
notes for the principal sum of $5,000,000. On October 10, 1997, the Company
issued the second of such notes for the principal sum of $5,000,000. The
proceeds of the notes were used for general working capital purposes. The
Company registered the resale of the shares of Common Stock issuable upon
conversion. On July 15, 1998, GSL Jr. converted such notes into an aggregate of
703,727 shares of Common Stock, which included 21,497 shares as an incentive for
GSL Jr. to convert such notes.
On October 10, 1997, the Company completed a private placement of three
year 10% convertible promissory notes (the "Notes") resulting in gross proceeds
to the Company of $20,000,000. The private placement was between the Company and
four institutional investors. The Notes are initially convertible at a
conversion price of $15.00 subject to stock-splits, stock dividends, rights
offering other similar events. In the event that the Company shall have declined
to repay in full, following the exercise by noteholders of the First or Second
Put Right (as defined below), the Initial Conversion Price shall be
10
<PAGE>
(i) the lesser of .85 multiplied by the 10-day weighted average sale price on
Nasdaq as reported by Bloomberg, LP (or other principal exchange on which the
Company's securities are traded) for the lowest 10-day consecutive period during
the 30 consecutive trading day period ending one trading day prior to the
conversion date or (ii) $15.00 per share. The net proceeds of this offering were
used for the repayment of $10 million of 20% notes payable to GSL Jr., for the
purchase of Microtec and for general corporate and working capital purposes.
Beginning October 10, 1998 and continuing for a period of 30 days
thereafter, each holder fo the Notes shall have the right ("First Put Right") to
request the Company to repurchase all, but not less than all of the outstanding
Notes held by such holder at a price equal to 110% of the principal amount
thereof, plus accrued and unpaid interest thereon. Commencing 180 days after the
First Put Date and continuing for a period of 30 days thereafter, each holder of
the Notes shall have a second right (the "Second Put Right") to request the
Company to repurchase all, but not less than all of the outstanding Notes at a
price equal to 115% of the principal amount thereof plus accrued and unpaid
interest thereon. The purchase price for any Put Right shall be paid in four
equal monthly installments on the last business day of each month commencing on
the first full month following the put notice with respect to the applicable
First or Second Put Right, with interest on each installment at the rate of 10%
per annum. The Company shall have the right at any time from time to time
commencing on October 10, 1998 to purchase 8.33% of the Notes in any one month
from any holder at a call price of 112% of the principal amount, plus accrued in
unpaid interest thereon provided that such call price shall be increased by 1%
per month. In July 1998, holders of the Notes converted $400,000 of principal
plus accrued interest into 26,780 shares of Common Stock. On October 31, 1998,
the Company called and repurchased an aggregate principal amount $1,632,680 of
the Notes at a call price of 112% of the principal amount. On October 31, 1998,
the holders of the Notes exercised their First Put Right and requested the
Company to repurchase the remaining aggregate principal amount of $17,967,320 of
the Notes at a put price equal to 110% of the principal amount. In accordance
with the terms of the Notes, the Company plans to pay the put price in four
equal monthly installments commencing November 30, 1998, with interest on each
installment accruing at the rate of 10% per annum.
Additionally, on October 10, 1997, the Company completed the issuance
of an additional $18,608,250 of three year 10% convertible notes. The notes were
issued in a private placement transaction to 52 accredited investors. The net
proceeds from such offering were used for the expansion of inventory, the
increase of manufacturing capacity and for the repayment of short-term debt to
Brazilian banks. The Offering, which was not conditioned on completion of the
previously described offering of Notes, provided for the issuance of convertible
notes containing substantially the same terms and conditions of the Notes as set
forth above. The Company has registered the resale of the shares of Common Stock
issuable upon conversion. In July 1998, certain holders of these notes converted
$13,754,500 in principal into an aggregate of 944,476 shares of Common Stock,
which included 27,509 shares as an incentive for the noteholders to convert. On
October 1, 1998, holders of an aggregate principal amount of $913,750 of such
notes exercised their right to request the Company to repurchase their notes at
a price equal to 110% of the principal amount. In accordance with the terms of
the notes, the Company plans to pay for the repurchase of the notes in four
equal monthly installments, with interest on each installment accruing at the
rate of 10% per annum.
The issuance of 71,006 shares of Common Stock as incentives for the
conversion of $33,754,500 of convertible notes as discussed above resulted in a
charge to earnings in the amount of $1 million, which is included in interest
expense for the third quarter of 1998. In addition, any premiums paid in
connection with the put or call provisions of the convertible note discussed
above will result in a financing expense for the Company of approximately $2.1
million.
In April 1998, the Company entered into an accounts receivable
financing program with TAC, an independently owned special purpose corporation,
whereby the Company's subsidiary, Bahiatech, may sell certain of its accounts
receivable to TAC. The program is a $150 million collateralized global medium
term note program whereby TAC may issue notes which are collateralized by the
purchased accounts receivable. See Note 3 to the Company's Consolidated
Financial Statements as of September 30, 1998.
In 1996, the Company began the development of a new 70,000 square foot
manufacturing plant and administrative center in Ilheus, Brazil. In connection
with the development thereof, the Company secured a $3.4 million loan from the
Development Bank of the State of Bahia to fund the development of such new
facility. The loan facility consists of a working capital line of credit of
approximately $785,000 and a construction loan credit facility of approximately
$2,619,000. The credit facility is expected to cover 100% of the construction
costs of the facility. In 1997, the Company suspended the ground breaking of
such new manufacturing facility, but intends to restart such construction in the
first half of 1999. As of September 30, 1998, the Company had a balance of
$713,321 associated with such construction loan credit facility. The Company has
become aware that the current leased manufacturing facility in Ilheus that it
currently occupies will be available for purchase through auction and the
Company is currently evaluating the purchase thereof.
In March 1998, the Company entered into a capital lease of $1,200,000
for the acquisition of equipment. The capital lease has a term of 60 months and
bears an adjustable interest rate (currently 9.9%). In July 1998, the Company
11
<PAGE>
entered into an operating lease of $2,900,000 for the acquisition of equipment.
This capital lease has a term of 84 months and accrues interest at a fixed
annual rate of 8%.
In connection with its acquisition of Microtec in 1997, the Company
recorded a provision for costs relating to the involuntary termination and
relocation of Microtec employees in the amount of $1.1 million. Such provision
is associated with the Company's plans to cease certain manufacturing operations
at Microtec's facility and to consolidate all of the manufacturing of the
Company at its facility in Bahia. As of September 30, 1998, the Company had
incurred approximately $375,000 in expenses relating to such provision.
On June 15, 1998, the Board of Directors of the Company, approved a 10%
Common Stock dividend to be distributed to shareholders of record of the
Company's common stock as of July 13, 1998. The Common Stock issued as a result
of this stock dividend was distributed on July 27, 1998. All references in this
report to the common stock of the Company and earnings per share have been
recalculated to reflect the 10% dividend.
The market for Computer products in Brazil can be affected by seasonal
purchasing patterns and the general economic climate in Brazil. Accordingly, the
Company's quarterly net sales and results of operations may vary significantly
from quarter to quarter. The Company's historical financial performance is not
necessarily a meaningful indicator of future results and, in general, management
expects that the Company's financial results may vary materially from quarter to
quarter.
Year 2000 Compliance
Computers, software and other equipment utilizing microprocessors that
use only two digits to identify a year in a date field may be unable to process
accurately certain date-based information at or after the year 2000. The Company
recognizes the need to insure that its operations will not be adversely affected
by Year 2000 software failures. Software failures due to processing errors
potentially arising from calculations using the year 2000 date are a recognized
risk, and the Company is addressing this issue on several different fronts.
The Company believes that all Company-branded hardware products shipped
since January 1997 are Year 2000 compliant. Earlier Company-branded hardware
products can be made Year 2000 compliant through BIOS upgrades or software
supplements. In addition to internal Year 2000 software and equipment
implementation activities, the Company is in contact with its suppliers to
assess their compliance. There can be no assurance that there will not be a
material adverse effect on the Company if third parties do not convert their
systems in a timely manner and in a way that is compatible with the Company's
systems. The Company believes that its actions with suppliers will minimize
these risks.
Finally, the Company has established an internal workforce to
coordinate solutions for the Year 2000 issue for its own internal information
systems with a goal of having all its internal information systems Year 2000
compliant by the end of 1998. After evaluation of the responses from suppliers
and the internal workforce, the Company will prepare a contingency plan to
mitigate such Year 2000 issues if necessary.
Through September 30, 1998, the Company has not incurred material
expenses relating to Year 2000 compliance efforts and believes that the expenses
associated with completing its Year 2000 compliance plans will not have a
material adverse impact on the Company's operations. Internal and external
expenses specifically associated with modifying internal-use software for the
Year 2000 will be expensed as incurred. The Company's current estimates of the
amount of time and expenses necessary to implement and test its computer systems
are based on the facts and circumstances existing at this time. Nevertheless,
achieving Year 2000 compliance is dependent on many factors, some of which are
not completely within the Company's control. Should either the Company's
internal system or the internal systems of one or more significant vendors or
suppliers fail to achieve Year 2000 compliance, the Company's business and its
results of operations could be adversely affected.
Statements contained in this report that are not based on historical
fact are "forward-looking statements" within the meaning of the private
securities litigation reform act of 1995. Forward-looking statements may be
identified by the use of forward looking terminology such as "may," "will,"
"expect," "believe," "estimate," "anticipate," "continue," or similar terms or
variations of those terms or the negative of those terms. There are many factors
that affect the Company's business and the results of its operations and may
cause the actual results of operations in future periods to differ materially
from those currently expected or desired. These factors include, but are not
limited to: receipt and fulfillment of expected orders, changes in general
business and economic conditions, the growth of segments in which the Company
operates, market volatility; the effectiveness of price and other competition
faced by the Company; the market acceptance of the Company's products and the
timing of such acceptance; the change in customers' buying patterns; changes in
the Company's sales practice; the raising of capital and other important
factors.
12
<PAGE>
Impact of Inflation on Results of Operations, Liabilities and Assets
For many years prior to July 1994, the Brazilian economy was
characterized by high rates of inflation and devaluation of the Brazilian
currency against the U.S. Dollar and other currencies. However, since the
implementation in July of 1994 of the Brazilian government's latest
stabilization plan, the "Real Plan", inflation, while continuing, has been
significantly reduced and the rate of devaluation has substantially diminished.
The Company has assessed the movement of the Brazilian currency based upon the
trading ranges stated by the policy of the Central Bank of Brazil and has been
able to offset any material effects of inflation. The Company has, at times,
used Brazilian Real futures and options contracts from the Chicago Mercantile
Exchange in order partially to offset Brazilian currency exposure. There can be
no assurance that the Real Plan will continue to be effective in combating
inflation and devaluation of Brazil's currency or that the Company's assessment
of the movement of Brazilian currency will be correct in the future. Inflation
rates in Brazil for the years 1997, 1996 and 1995 were approximately 7.5%, 10.3%
and 22%, respectively.
Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income" during the nine month period
ended September 30, 1998. SFAS 130 establishes new rules for the reporting and
presentation of comprehensive income and its components. The Company's
comprehensive income is comprised of net income, foreign currency translation
adjustments and unrealized gains and losses on marketable securities held as
available-for-sale investments. Comprehensive income was not materially
different from reported net income.
Foreign Currency Translation
The financial statements of the Company have been prepared in
accordance with generally accepted accounting principles in the United States in
U.S. dollars. Until December 31, 1997, amounts in Brazilian currency were
remeasured into U.S. Dollars in accordance with the methodology set forth in
Statement of Financial Accounting Standards No. 52 ("SFAS 52") as it applies to
entities operating in highly inflationary economies. The assets and liabilities
of the Company's subsidiaries are translated into U.S. dollars at exchange rates
in effect at the balance sheet date for monetary items and at historical rates
for nonmonetary items. Revenue and expense accounts are translated at the
average exchange rate in effect during each month, except for those accounts
that relate to nonmonetary assets and liabilities which are translated at
historical rates.
Effective January 1, 1998, the Company determined that Brazil ceased to
be a highly inflationary economy under SFAS 52. Accordingly, as of January 1,
1998, the Company began using the Brazilian currency, the Real, as the
functional currency of its Brazilian subsidiaries. As a result, all assets and
liabilities are translated into dollars at period end exchange rates and all
income and expense items are translated into U.S. dollars at the average
exchange rate prevailing during the period. In addition, the Company recorded a
currency exchange loss associated with dollar-denominated monetary assets and
liabilities held by the Company's Brazilian subsidiaries.
13
<PAGE>
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 28, 1995, Meris Financial Incorporated ("Meris") entered
into a Loan Agreement with the Company pursuant to which Meris made available a
loan to the Company in the principal amount of US$ 2,000,000. The loan was to
mature on October 28, 1997 and bore interest at a rate of 12% per annum payable
monthly. The loan was secured by the assets of the Company exclusive of
inventory and receivables. In connection with the loan, Meris received a
guarantee by Georges St. Laurent III and William C. St. Laurent, the President
and Chief Operating Officer of the Company, and his wife, Wendy St. Laurent, a
stock pledge agreement by such parties, a collateral assignment of various
rights of the St. Laurents as well as assignments of life insurance policies on
the lives of Messrs. St. Laurent and St. Laurent. The note was convertible into
approximately 4.7% of the shares of Common Stock. In addition, certain options
were provided to Meris which afforded them the right to purchase up to an
aggregate of 5% capital stock interest in the Company. On July 20, 1996, the
Company and Meris entered into an Amendment of such Loan Agreement pursuant to
which the Company was obligated to make principal and interest payment during
the period between July 20, 1996 and by November 1, 1996, with the remaining
principal balance to be paid on November 1, 1996. In connection with the
Amendment, the conversion rights provided by the Note and the options were
cancelled provided all payments of principal and interest under the Note are
made as set forth above. The Company made all payments in accordance with such
Amendment and on October 30, 1996, repaid the note in full. In February of 1998,
Meris filed a UCC-3 in favor of the Company releasing any claim that Meris had
on the assets of the Company as a result of a UCC-1 filed when Meris entered
into the Loan Agreement with the Company.
In October 1996, Meris had advised the Company that, irrespective of
the Amendment, it believed it had certain rights to an equity ownership position
in the Company. In June 1998, Meris filed a law suit with the United States
District Court in Arizona affirming such claim against the Company. While the
Company believes such claims are without merit, Georges C. St. Laurent III and
William C. St. Laurent have agreed to settle such equity claims, should the need
arise, from their personal share holdings. Any expense associated with defending
such a claim will be incurred as an expense by the Company. Meris is not an
affiliate of the Company.
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
The following exhibits are filed as part of this report:
Exhibits:
(27.1) Financial Data Schedule
(b) Reports on Form 8-K.
None.
14
<PAGE>
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/ Edward A. Kelly
- -----------------------------------
Edward A. Kelly
Chief Financial Officer
(authorized officer and chief accounting officer)
Date: November 13, 1998
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VITECH
AMERICA, INC.'S CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,598,441
<SECURITIES> 0
<RECEIVABLES> 33,134,021
<ALLOWANCES> 2,232,216
<INVENTORY> 59,154,112
<CURRENT-ASSETS> 122,105,521
<PP&E> 20,786,846
<DEPRECIATION> 1,761,863
<TOTAL-ASSETS> 167,897,957
<CURRENT-LIABILITIES> 39,193,376
<BONDS> 28,483,168
0
0
<COMMON> 60,765,257
<OTHER-SE> 39,340,982
<TOTAL-LIABILITY-AND-EQUITY> 167,897,957
<SALES> 119,821,089
<TOTAL-REVENUES> 119,821,089
<CGS> 70,683,914
<TOTAL-COSTS> 95,628,902
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,348,315
<INCOME-PRETAX> 12,591,252
<INCOME-TAX> 921,810
<INCOME-CONTINUING> 11,669,442
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,669,442
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.92
</TABLE>
