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 March 31, 1999
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 May 15, 1999, there were 14,635,655 shares of the Common Stock of
the Company, no par value, outstanding.
<PAGE>
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
VITECH AMERICA, INC.
Balance Sheet
Assets
March 31, December 31,
1999 1998
----------------- -----------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 4,797,353 $ 7,719,185
Accounts receivable, net 39,747,775 75,893,857
Inventories, net 32,688,694 40,351,585
Investment in subordinated debentures - short term - 14,676,585
Other current assets 5,128,838 8,538,379
----------------- -----------------
Total current assets 82,362,660 147,179,591
Property and equipment, net 19,474,114 19,696,097
Investment in subordinated debentures - long term - 2,677,906
Investments 1,135,152 1,248,434
Goodwill, net 19,918,156 20,191,646
Deferred tax asset 1,567,000 1,567,000
Other assets 2,218,917 3,106,301
----------------- -----------------
Total assets $ 126,675,999 $ 195,666,975
----------------- -----------------
Liabilities and Shareholders' Equity
Current liabilities
Trade accounts payable $ 33,056,101 $ 36,748,951
Accrued expenses 1,579,667 4,811,130
Taxes payable 1,298,213 1,804,792
Deferred tax liability 1,041,000 1,041,000
Notes payable - related party 17,200,000 6,700,000
Current maturities of long-term debt 433,689 863,021
Short-term debt 14,403,501 25,036,536
----------------- -----------------
Total current liabilities 69,012,171 77,005,430
----------------- -----------------
Long-term liabilities
Convertible notes 11,530,535 13,730,535
Long-term debt 2,143,102 2,709,655
----------------- -----------------
Total long-term liabilities 13,673,637 16,440,190
----------------- -----------------
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 14,635,655 shares issued and outstanding 60,844,866 60,844,866
Accumulated other comprehensive loss (40,115,970) (4,607,064)
Retained earnings 23,261,295 45,983,553
----------------- -----------------
Total shareholders' equity 43,990,191 102,221,355
----------------- -----------------
Total liabilities and shareholders' equity $ 126,675,999 $ 195,666,975
----------------- -----------------
</TABLE>
See notes to financial statements
2
<PAGE>
<TABLE>
<CAPTION>
VITECH AMERICA, INC.
Statement of Income
(unaudited)
Three Months Ended
---------------------------------------------
March 31, 1999 March 31, 1998
--------------------- ---------------------
<S> <C> <C>
Net sales $ 15,302,714 $ 33,774,644
Cost of sales 8,359,136 20,707,324
--------------------- ---------------------
Gross profit 6,943,578 13,067,320
Selling, general and administrative expenses 6,743,260 7,137,360
--------------------- ---------------------
Income from operations 200,318 5,929,960
--------------------- ---------------------
Other (income) expenses
Interest expense, net 4,003,200 1,057,531
Discount on sale of receivables 2,262,496 354,648
Foreign currency exchange losses 16,656,880 1,125,673
--------------------- ---------------------
Total other expenses 22,922,576 2,537,852
--------------------- ---------------------
Income (loss) before provision for income
taxes and minority interest (22,722,258) 3,392,108
Provision for income taxes - 258,560
--------------------- ---------------------
Income (loss) before minority interest (22,722,258) 3,133,548
Minority interest - 27,048
--------------------- ---------------------
Net income (loss) $ (22,722,258) $ 3,106,500
--------------------- ---------------------
Net income per common share - Basic:
Weighted common shares 14,635,655 12,175,639
Net income (loss) per common share $ (1.55) $ 0.26
--------------------- ---------------------
Net income per common share - Assuming dilution:
Weighted common shares 14,670,538 12,407,005
Net income (loss) per common share $ (1.55) $ 0.25
--------------------- ---------------------
</TABLE>
See notes to financial statements
3
<PAGE>
<TABLE>
<CAPTION>
VITECH AMERICA, INC.
Statement of Cash Flows
(unaudited)
Three Months Ended
---------------------------------------------
March 31, 1999 March 31, 1998
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities
Net income / (loss) $ (22,722,258) $ 3,106,500
Adjustments to reconcile net income to net cash
provided from / (used) in operating activities
Depreciation 814,258 410,905
Amortization of goodwill 273,490 219,625
Minority interest - 27,048
Allowance for doubtful accounts - (585,444)
Changes in assets and liabilities
Accounts receivable 17,991,667 (405,868)
Inventories 7,662,891 (907,659)
Deferred tax asset - (54,000)
Other assets 4,296,925 (706,674)
Trade accounts payable (3,692,850) (92,350)
Accrued expenses (3,231,463) (99,189)
Due to/from officers - (12,546)
Income and sales taxes payable (506,579) (41,997)
----------------------- ---------------------
Total adjustments 23,608,339 (2,248,149)
----------------------- ---------------------
Net cash provided from operating activities 886,081 858,351
----------------------- ---------------------
Cash flows from investing activities
Purchases of property and equipment (592,275) (2,413,847)
Payment for business acquisition - (136,000)
Other investments 113,282 (19,625)
----------------------- ---------------------
Net cash used in investing activities (478,993) (2,569,472)
----------------------- ---------------------
Cash flows from financing activities
Net (payments)/proceeds under short-term bank borrowings (10,633,035) 7,075,954
Net payments of taxes payable (309,762) (46,839)
Payment of convertible notes (2,200,000) -
Payment of note payable for business acquisition - (874,356)
Proceeds from note payable - related party 10,500,000 -
Net (payments) of notes payable (686,123) (481,317)
----------------------- ---------------------
Net cash provided by financing activities (3,328,920) 5,673,442
----------------------- ---------------------
Net increase / (decrease) in cash and cash equivalents (2,921,832) 3,962,321
Cash and cash equivalents - beginning of period 7,719,185 22,704,632
----------------------- ---------------------
Cash and cash equivalents - end of period $ 4,797,353 $ 26,666,953
----------------------- ---------------------
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest and discount on sale of receivables $ 5,979,045 $ 1,923,044
----------------------- ---------------------
Income taxes $ 256,762 $ 80,009
----------------------- ---------------------
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
March 31, 1999
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 March
31, 1999 should be read in conjunction with the Company's financial statements
as of and for the year ended December 31, 1998, 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 ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. 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 1999 and 1998 include the accounts of the Company
and its subsidiaries. All of the Company's sales are concentrated in Brazil.
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
March 31,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Net income (loss) for basic and diluted
income per common share $ (22,722,258) $ 3,106,500
--------------- ---------------
Weighted average number of shares
for basic income per share 14,635,655 12,175,639
Dilutive securities:
Stock options 8,588 182,273
Warrants 26,295 49,093
--------------- ---------------
Weighted average number of shares
for diluted income per share 14,670,538 12,407,005
--------------- ---------------
Net income (loss) per common share:
Basic $ (1.55) $ 0.26
Diluted $ (1.55) $ 0.25
</TABLE>
For the three month period ended March 31, 1999 and 1998, the effects on
earnings per share of the $11,530,535 and $13,730,535 aggregate principal amount
of 10% convertible notes, respectively, would have been antidilutive and
therefore are not included in the computations.
For the three month period ended March 31, 1999, there were outstanding
4,577,427 stock options and 461,387 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.
For the three month period ended March 31, 1998, there were outstanding
3,300,000 stock options 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.
Note 4 - Accounts receivable
- ----------------------------
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
March 31,
1999
----------------
<S> <C>
Trade accounts receivable $ 43,776,525
Allowance for doubtful accounts (4,028,750)
----------------
Total $ 39,747,775
----------------
</TABLE>
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 in
exchange for cash and a subordinated debentures. The subordinated debentures are
revolving non-interest bearing bearer notes. (See Note 5).
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.
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 $43.6
million which represents the balance as of March 31, 1999, 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 - Investment in subordinated debentures
- ----------------------------------------------
In connection with the TAC financing program whereby the Company receives cash
and subordinated debentures (which represents its retained interest in the
program) in consideration for the sale of its accounts receivable to TAC, the
Company had an investment in subordinated debentures at December 31, 1998 as
follows:
Current portion $ 14,676,585
Long term portion 2,677,906
-----------------
Total $ 17,354,491
-----------------
The subordinated debentures are U.S. dollar denominated, non-interest bearing
bearer notes that are subordinated to the senior notes issued by TAC and arise
from the overcollateral amount and the unpaid principal amount of each series of
senior notes outstanding. The financing program requires a minimum
overcollateral ratio, as defined, of 125%. With the exception of amounts payable
to it on any excess overcollateral date, as defined, the bearer of the debenture
will not be entitled to receive any payment until the final termination date, as
defined, of the program. The overcollateral ratio of the program at December 31,
1998 was approximately 127%.
In January 1999, the Brazilian government allowed its currency, the Real, to
trade freely against other foreign currencies, which resulted in an immediate
devaluation of the Real against the U.S. dollar in excess of 30%. With the post
devaluation exchange rates of the Real to the U.S. dollar the overcollateral
ratio fell below its required minimum which caused trigger and default events,
as defined, of the TAC program. As a result, the Company is currently not
selling any of its accounts receivable to TAC, and may not, other than pursuant
to its repurchase obligation. Additionally, with the devaluation of the Real
against the U.S. dollar in excess of the overcollateral ratio, the Company's
residual interest in the program represented by the subordinated debentures has
been written down to zero. Should the Real recover in value against the U.S.
dollar, then the Company could regain its value in the subordinated debentures.
TAC has made a proposal to the holders of TAC notes for temporary and permanent
adjustments to the structure of the TAC program in order to allow the TAC
program to operate more effectively in the post devaluation environment. While
the Company continues to believe that TAC could continue to be a viable
financing source, should TAC fail to gain consensus among the holders of TAC
notes concerning its proposal or should the macroeconomic conditions fail to
recover, then the Company may choose not to sell any additional accounts
receivable to TAC, other than pursuant to its repurchase obligation.
Note 6 - Inventories
- --------------------
Inventories are summarized as follows:
March 31,
1999
-----------------
Finished goods $ 9,899,061
Work in process 714,736
Components in the factory 15,645,042
Components in transit (a) 7,432,095
----------------
33,690,934
Allowance for obsolescence (1,002,240)
----------------
Total $ 32,688,694
----------------
7
<PAGE>
(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 7 - Comprehensive Income
- -----------------------------
The Company adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income" during the year ended December
31, 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 ended March 31, 1999, the Company had a comprehensive loss of $58.2
million as compared to a reporting net loss of $22.7 million. Comprehensive loss
includes a cumulative translation adjustment of $35.5 million associated with
the translation of the Company's subsidiary financial statements to the US
dollar.
Note 8 - Business Conditions
- ----------------------------
In January 1999, the Brazilian government allowed its currency, the Real, to
trade freely against other foreign currencies, which resulted in an immediate
devaluation of the Real against the U.S. dollar. The Company's accounts
receivable are denominated in the Real while principally all of the Company's
trade accounts payable and other debts are denominated in U.S. dollars.
Accordingly, with the devaluation, the Company recorded a currency transaction
loss of $16,656,880 associated with dollar-denominated monetary assets and
liabilities held by the Company's Brazilian subsidiaries.
Furthermore, the devaluation and the resulting unfavorable business conditions
in Brazil have resulted in reduced demand as well as less liquidity in the
borrowing capacity among the Company's customers and in the market in general.
In an effort to minimize any further effects of the currency devaluation,
unfavorable business conditions and to improve the liquidity of the Company,
management has taken the following actions:
o Indexed the pricing of its products in Reais to the U.S. dollar.
o Significantly reduced the credit terms that it extends to customers.
o Renegotiated trade accounts payable of approximately $22 million at
December 31, 1998 to terms which average 10 months.
o Negotiated short term financing (see below).
o Modified the repayment terms of certain convertible notes.
o Continue to negotiate with TAC (see Note 5).
o Completion of the consolidation of the manufacturing facilities in
1999 which reduces administrative expenses and inventory carrying
costs.
While the Company continues to believe that the long-term growth opportunities
remain for the Brazilian information technology market, it continues to evaluate
the impact of the current business conditions on its operations. The ultimate
resolution of these matters could have a material adverse effect on the
financial condition and results of operation for future quarters.
In March 1999, the Company received a loan from a related party for the
principal amount of $10 million. The loan bears interest at the annual rate of
10% and has a term of 120 days. The loan is evidenced by a promissory note and,
at the makers option, can be exchanged for a convertible note, with a conversion
price of $9.25 per share, should the loan not be repaid at maturity. The
proceeds of the loan are being used to repay certain indebtedness and for
general working capital purposes. The maker had a pre-existing relationship with
the Company and was provided with and had access to relevant information
concerning the Company. The security was exempt from registration pursuant to
Section 4(2) of the Securities and Exchange Act of 1933, as amended (the
"Securities Act").
Note 9 - Subsequent Events
- --------------------------
In April 1999, the Company received a loan from an unrelated third party for the
principal amount of $11 million. The loan bears interest at the annual rate of
10% and has a term of 90 days. The loan is evidenced by a promissory note and is
personally guaranteed by the Company's two principal executive officers and
majority shareholders. The proceeds of these loans are being used for the
repayment of indebtedness and for general working capital purposes. The investor
was accredited and sophisticated and was provided with and had access to
relevant information concerning the Company. The security was exempt from
registration pursuant to Section 4(2) of the Securities and Exchange Act of
1933, as amended (the "Securities Act").
8
<PAGE>
In May 1999, the Company completed a private placement of a $10 million
convertible debenture. The debenture is a two year 10% note convertible into the
Company's common stock at an initial conversion price of $11.00. The debenture
contains a provision whereby the holder may require the Company to repurchase
the debenture after nine months at a price equal to 112% of the principal
amount. For every quarter thereafter the repayment amount shall increase 4%.
Should the holder elect to require the Company to repurchase the debentures, the
Company may repay the debentures in four equal monthly payments. If the Company
elects not to repurchase the notes, the conversion price of the debentures will
be adjusted to equal .85 times the market price, as defined, at the time of
conversion. The Company issued 100,000 warrants to purchase shares of the
Company's common stock in connection with this financing and 36,000 warrants to
the placement agent. The investors were accredited and sophisticated and was
provided with and had access to relevant information concerning the Company. The
security was exempt from registration pursuant to Rule 506 of Regulation D and
Section 4(2) of the Securities Act.
9
<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 Company's 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 net sales:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------------
1999 1998
---------------------------- --------------------------
<S> <C> <C> <C> <C>
Net sales $ 15,302,714 100% $33,774,644 100%
Cost of sales 8,359,136 54.6 20,707,324 61.3
Gross profit 6,943,578 45.4 13,067,320 38.7
Selling, general and
administrative expenses 6,743,260 44.1 7,137,360 21.1
Income from operations 200,318 1.3 5,929,960 17.6
Net interest and financing expense 6,265,696 40.9 1,412,179 4.2
Foreign currency exchange losses 16,656,880 109.0 1,125,673 3.3
Net income (loss) $ (22,722,258) (148.5)% $ 3,106,500 9.2%
</TABLE>
Net sales decreased by $18.5 million, or approximately 55%, to $15.3
million for the quarter ended March 31, 1999, as compared to $33.8 million for
the quarter ended March 31, 1998. For the quarter ended March 31, 1999, the
Company sold approximately 9,500 PC units as compared to approximately 20,000 PC
units during the quarter ended March 31, 1998. Such decrease in sales (both in
dollars and in PC units sold) was primarily attributable to the devaluation of
the Real and the resulting unfavorable business conditions in Brazil which have
resulted in reduced demand as well as less liquidity in the borrowing capacity
among the Company's customers and in the market in general. After the
devaluation the Company had customers postponing their information technology
purchases until the economic conditions stabilized in Brazil. The Company also
had to cancel contracts with its customers to renegotiate their pricing to
reflect the post devalutation exchange rates. Also, after the devaluation, the
Company adjusted the sale prices of its products in Reais upward and maintained
them indexed to the U.S. dollar. This resulted in the Company's products
becoming more expensive in the Brazilian currency which contributed to the
reduced demand.
Cost of sales during the quarter ended March 31, 1999 were $8.4
million, representing 54.6% of sales during the period, as compared to $20.7
million for the quarter ended March 31, 1998, representing 61.3% of sales for
the period. The decrease in cost of sales as a percentage of sales during the
quarter ended March 31, 1999, when compared to the quarter ended March 31, 1998,
was attributable to the Company increasing the pricing of its products after the
devaluation of the Real. Also contributing to the decrease in cost of sales as a
percentage of sales was the Company's product mix. As the Company has expanded
into the corporate and governmental markets, it has focused on developing
integrated solutions for its customers utilizing hardware, software and
networking products. For the quarter ended March 31, 1999, there were a higher
percentage of integrated solution products, which have a higher margin, included
in the Company's sales mix.
Selling, general, and administrative expenses decreased by $394,100, or
approximately 5.5%, to $6.7 million for the quarter ended March 31, 1999, as
compared to $7.1 million for the quarter ended March 31, 1998. The decrease was
primarily attributable to the devaluation of the Real which reduced the expenses
in U.S. dollar terms of the Company's Brazilian subsidiaries. Also contributing
to the decrease was the execution of the Company's expense reduction plans as
part of its consolidation of the operations of its two subsidiaries, Bahiatech
and Microtec which involved closing the Microtec factory in the state of Sao
Paulo and eliminating redundant positions. Selling, general, and administrative
expense as a percentage of sales was 44.1% for the quarter ended March 31, 1999,
compared to 21.1% for the quarter ended March 31, 1998. Such increase was
primarily attributable to the aforementioned decrease in sales.
Income from operations decreased by $5.7 million, or approximately 97%,
to $200,318 for the quarter ended March 31, 1999, as compared to $5.9 million
for the quarter ended March 31, 1998. Such decrease was primarily attributable
to the aforementioned decrease in sales. Income from operations as a percentage
of sales decreased to 1.3% for the quarter ended March 31, 1999 from 17.6% for
the quarter ended March 31, 1998. This decrease was primarily attributable to
the aforementioned decrease in sales.
10
<PAGE>
Interest and financing expense increased by $4.9 million, or
approximately 344%, to $6.3 million for the quarter ended March 31, 1999, as
compared to $1.4 million for the quarter ended March 31, 1998. Interest and
financing expense as a percentage of sales increased to 40.9% for the quarter
ended March 31, 1999 from 4.2% for the quarter ended March 31, 1998. These
increases were primarily attributable to the Company's increased use of debt
financing and the discount on the sale of accounts receivable to TAC to support
its working capital needs and the increase costs of financing, primarily the
debt financing with Brazilian banks.
During the quarter ended March 31, 1999, the Company experienced a
foreign currency transaction loss of $16.7 million, or 109% of sales, associated
with certain U.S. dollar denominated monetary assets and liabilities of the
Company's Brazilian subsidiaries. The increased currency transaction loss during
the quarter was primarily attributable to the devaluation of the Brazilian
currency, the Real, which occurred during the quarter. At March 31, 1999, the
Commercial Market Rate for the Real was R$1.7250 per US$1.00 as compared to
R$1.2090 per US$1.00 at December 31, 1998. Also included in foreign currency
translation loss for the quarter ended March 31, 1999 is a write down of the
Company's investment in a subordinated debenture from TAC (see Note 5 to the
Company's financial statements dated March 31, 1999).
The Company incurred a net loss of $22.7 million for the quarter ended
March 31, 1999, as compared to net income of $3.1 million for the quarter ended
March 31, 1998. The decrease in net income was primarily attributable to the
aforementioned decrease in sales and increase in foreign currency transaction
costs that resulted from devaluation and the unfavorable business conditions.
The Company had a net loss per common share, assuming dilution, of
$1.55 for the quarter ended March 31, 1999 as compared to net income per common
share, assuming dilution, of $0.25 for the quarter ended March 31, 1998.
Hedging Activities
Although the Company's consolidated financial statements are presented
in U.S. Dollars in accordance with U.S. generally accepted accounting
principles, the Company's transactions are consummated in both the Real and the
U.S. Dollar. Inflation and fluctuations in exchange rates have had, and may
continue to have, an effect on the Company's results of operations and financial
condition. Although the Company had used Real futures and options contracts
during 1996, in an effort to hedge 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, to the extent that the Company is not
adequately hedged against currency risks, any significant devaluation, such as
occurred during the first quarter of 1999, 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 quarter ended March
31, 1999, the Company used debt financing to satisfy its working capital
requirements.
At March 31, 1999, the Company had a working capital surplus of $13.4
million compared to $70.2 million at December 31, 1998. This decrease in working
capital was primarily attributable to the devaluation of the Brazilian currency
and the corresponding devaluation of the Company's accounts receivable.
Net cash provided by operating activities for the quarter ended March
31, 1999 was $886,081 as compared to $858,351 million in cash provided by
operating activities during the quarter ended March 31, 1998 and resulted
primarily from the decreases in accounts receivable and inventory which more
than offset the net loss for the period.
Net cash used in investing activities was $478,993 million for the
quarter ended March 31, 1999. Such use of cash was primarily related to the
purchase of computer hardware and software to support the Company's management
information system. Net cash used in financing activities was $3,328,920 million
for the quarter ended March 31, 1999 and resulted primarily from the repayment
of convertible notes and short-term borrowings.
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 a floating rate equal to prime (currently 8.75%) and
11
<PAGE>
terminates in May 1999. As of March 31, 1999, there was $3,000,000 owed under
the working capital line and $450,000 of exposure under the letter of credit
facility. The Company is currently in discussions with Eastern National Bank to
renew such credit facility.
As of March 31, 1999, the Company had approximately $11 million in
short-term borrowings from various banks in Brazil with rates of interest
averaging 2.5% per month and maturing on a revolving basis. As of March 31,
1999, the Company had available approximately $19 million in unused credit
facilities at various banks in Brazil at rates of approximately 2.5% per month
and subject to certain collateral requirements as defined.
On October 31, 1998, the holders of an aggregate principal amount of
$17,967,320 of the Company's convertible notes exercised their put right,
pursuant to the terms of the notes, and requested the Company to repurchase the
remaining balance of the notes at a put price equal to 110% of the principal
amount. In accordance with the terms of the notes, the Company was 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. The Company
made the first two of such payments on November 30, 1998 and December 31, 1998.
In February 1999, the Company entered into an agreement with the holders to
repay the remaining principal outstanding on the notes over a five month period
commencing March 31, 1999, with monthly principal payments of approximately $2
million plus accrued interest. There is currently $5,136,745 owed to such
noteholders.
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. 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 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.
The accounts receivable financing program with TAC contains 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, 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. Vitech serves as
guarantor of the repurchase obligation. If Bahiatech fails to comply in full
with its repurchase obligation on or prior to the required repurchase date,
Vitech is 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, at March 31, 1999, there
is a contingent liability in the amount of approximately $43.6 million which
represents the balance, 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.
In January 1999, the Brazilian government allowed its currency, the
Real, to trade freely against other foreign currencies, which resulted in an
immediate devaluation of the Real against the U.S. dollar in excess of 30%. With
the post devaluation exchange rates of the Real to the U.S. dollar the
overcollateral ratio fell below its required minimum which caused trigger and
default events, as defined, of the TAC program. As a result, the Company is
currently not selling any of its accounts receivable to TAC, and may not, other
than pursuant to its repurchase obligation. Additionally, with the devaluation
of the Real against the U.S. dollar in excess of the overcollateral ratio, the
Company's residual interest in the program represented by the subordinated
debentures has been written down to zero. Should the Real recover in value
against the U.S. dollar, then the Company could regain its value in the
subordinated debentures.
TAC has made a proposal to the holders of TAC notes for temporary and
permanent adjustments to the structure of the TAC program in order to allow the
TAC program to operate more effectively in the post devaluation environment.
While the Company continues to believe that TAC could continue to be a viable
financing source, should TAC fail to gain consensus among the holders of TAC
notes concerning its proposal or should the macroeconomic conditions fail to
recover, then the Company may choose not to sell any additional accounts
receivable to TAC, other than pursuant to its repurchase obligation. (See Notes
4 and 5 to the Company's financial statements dated March 31, 1999).
In March of 1999, the Company received a loan from a related party for
the principal amount of $10 million. The loan bears interest at the annual rate
of 10% and has a term of 120 days. The loan is evidenced by a promissory note
12
<PAGE>
and, at the makers option, can be exchanged for a convertible note should the
loan not be repaid at maturity. Additionally, in April of 1999, the Company
received a loan from an unrelated third party for the principal amount of $11
million. The loan bears interest at the annual rate of 10% and has a term of 90
days. The loan is evidenced by a promissory note and is personally guaranteed by
the Company's two principal executive officers and majority shareholders. The
proceeds of these loans are being used for the repayment of indebtedness and for
general working capital purposes.
In May 1999, the Company completed a private placement of a $10 million
convertible debenture. The debenture is a two year 10% note convertible into the
Company's common stock at an initial conversion price of $11.00. The debenture
contains a provision whereby the holder may require the Company to repurchase
the debenture after nine months at a price equal to 112% of the principal
amount. Should the holder elect to require the Company to repurchase the
debentures, the Company may repay the debentures in four equal monthly payments.
If the Company elects not to repurchase the notes, the conversion price of the
debentures will be adjusted to equal .85 times the market price, as defined, at
the time of conversion. The Company issued 100,000 warrants to purchase shares
of the Company's common stock in connection with this financing.
Business Conditions
In January 1999, the Brazilian government allowed its currency, the
Real, to trade freely against other foreign currencies, which resulted in an
immediate devaluation of the Real against the U.S. dollar. The Company's
accounts receivable are denominated in the Real while principally all of the
Company's trade accounts payable and other debts are denominated in U.S.
dollars. Accordingly, with the devaluation, the Company recorded a currency
transaction loss of $16,656,880 associated with dollar-denominated monetary
assets and liabilities held by the Company's Brazilian subsidiaries.
Furthermore, the devaluation and the resulting unfavorable business
conditions in Brazil have resulted in reduced demand as well as less liquidity
in the borrowing capacity among the Company's customers and in the market in
general. In an effort to minimize any further effects of the currency
devaluation, unfavorable business conditions and to improve the liquidity of the
Company, management has taken the following actions:
o Indexed the pricing of its products in Reais to the U.S. dollar.
o Significantly reduced the credit terms that it extends to customers.
o Renegotiated trade accounts payable of approximately $22 million at
December 31, 1998 to terms which average 10 months.
o Negotiated short term financing (see Liquidity and Capital resources
above).
o Modified the repayment terms of certain convertible notes.
o Continue to negotiate with TAC (see Note 5 to the Company's financial
statements dated March 31, 1999).
o Completion of the consolidation of the manufacturing facilities in 1999
which reduces administrative expenses and inventory carrying costs.
While the Company continues to believe that the long-term growth
opportunities remain for the Brazilian information technology market, it
continues to evaluate the impact of the current business conditions on its
operations. The ultimate resolution of these matters could have a material
adverse effect on the financial condition and results of operation for future
quarters.
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 and as of December 31, 1998 had determined that its internal information
systems are Year 2000 compliant.
13
<PAGE>
Through March 31, 1999, 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. See "Factors Affecting the
Company's Business and Prospects - Year 2000 Compliance".
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. Although the Company had used
Real futures and options contracts during 1996, in an effort to hedge 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. 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 1998, 1997, 1996 and 1995 were approximately 1.7%, 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 year ended December
31, 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
quarter ended March 31, 1999, the Company had a comprehensive loss of $58.2
million as compared to a reporting net loss of $22.7 million. Comprehensive loss
includes a cumulative translation adjustment of $35.5 million associated with
the translation of the Company's subsidiary financial statements to the US
dollar.
During 1998, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131 supercedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing
the "industry segment" approach with the "management" approach. The management
approach designates the internal reporting that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS 131 did not
affect the consolidated financial position or results of operations of the
Company. Management has determined it operates in one industry segment.
In June of 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 1999. The objective of the
statement is to establish accounting and reporting standards for derivative
instruments and hedging activities. The Company may use foreign currency forward
contracts, a derivative instrument, to hedge foreign currency transactions and
anticipated foreign currency transactions. The adoption of this new accounting
pronouncement is not expected to be material to the Company's consolidated
financial position or results of operations.
In 1998, the Accounting Standards Executive Committee (AcSEC) issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for fiscal
years beginning after December 15, 1998. The SOP provides guidance on when costs
incurred for internal-use computer software are and are not to be capitalized,
and on the accounting for such software that is marketed to customers. The
adoption of this SOP is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
The Financial Accounting Standards Board issued Statement 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," in June 1996. Statement 125 was effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1996, and the Company adopted it in the first quarter of 1998,
14
<PAGE>
since the Company did not have transactions of this nature prior to 1998.
Statement 125 provides guidance in determining whether a transfer of a financial
asset represents a sale or a secured borrowing, as well as the accounting for
any servicing assets retained. The Statement also provides guidance relating to
extinguishment of liabilities by debtors.
Foreign Currency Translation
The financial statements of the Company have been prepared in
accordance with U.S. generally accepted accounting principles and are stated 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 were 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.
15
<PAGE>
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
The following exhibits are filed as part of this report:
Exhibits:
(27.1) Financial Data Schedule
(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/ Edward A. Kelly
---------------------
Edward A. Kelly
Chief Financial Officer
(authorized officer and chief accounting officer)
Date: May 24, 1999
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM VITECH
AMERICA, INC.'S CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 4,797,353
<SECURITIES> 0
<RECEIVABLES> 39,747,775
<ALLOWANCES> 4,028,750
<INVENTORY> 32,688,694
<CURRENT-ASSETS> 82,362,660
<PP&E> 19,474,114
<DEPRECIATION> 814,258
<TOTAL-ASSETS> 126,675,999
<CURRENT-LIABILITIES> 69,012,171
<BONDS> 13,673,637
0
0
<COMMON> 60,844,866
<OTHER-SE> (16,854,675)
<TOTAL-LIABILITY-AND-EQUITY> 126,675,999
<SALES> 15,302,714
<TOTAL-REVENUES> 15,302,714
<CGS> 8,359,136
<TOTAL-COSTS> 15,102,396
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,265,696
<INCOME-PRETAX> (22,722,258)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,722,258)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,722,258)
<EPS-BASIC> (1.55)
<EPS-DILUTED> (1.55)
</TABLE>
