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, 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 November 12, 1999, there were 15,195,939 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,
1999 1998
----------------- -----------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 9,594,084 $ 7,719,185
Accounts receivable, net 42,446,445 75,893,857
Inventories, net 31,961,146 40,351,585
Investment in subordinated debentures - short term -- 14,676,585
Due from officer 327,286 --
Other current assets 5,511,676 8,538,379
------------- -------------
Total current assets 89,840,637 147,179,591
Property and equipment, net 23,225,654 19,696,097
Investment in subordinated debentures - long term -- 2,677,906
Investments 1,087,926 1,248,434
Goodwill, net 19,371,176 20,191,646
Deferred tax asset 1,113,317 1,567,000
Other assets 9,027,855 3,106,301
------------- -------------
Total assets $ 143,666,565 $ 195,666,975
------------- -------------
Liabilities and Shareholders' Equity
Current liabilities
Trade accounts payable $ 29,246,085 $ 36,748,951
Accrued expenses 2,271,691 4,811,130
Taxes payable 541,461 1,804,792
Deferred tax liability 610,439 1,041,000
Notes payable - related party 14,200,000 6,700,000
Notes payable -- --
Current maturities of long-term debt 533,574 863,021
Short-term debt 2,890,956 25,036,536
------------- -------------
Total current liabilities 50,294,206 77,005,430
------------- -------------
Long-term liabilities
Convertible notes 50,309,620 13,730,535
Long-term debt 1,872,299 2,709,655
------------- -------------
Total long-term liabilities 52,181,919 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,
15,195,939 and 14,635,655 shares issued and outstanding 65,346,448 60,844,866
Accumulated other comprehensive loss (48,433,306) (4,607,064)
Retained earnings 24,277,298 45,983,553
------------- -------------
Total shareholders' equity 41,190,440 102,221,355
------------- -------------
Total liabilities and shareholders' equity $ 143,666,565 $ 195,666,975
------------- -------------
</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,
1999 1998 1999 1998
------------------- ------------------ --------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 28,191,885 47,410,603 $ 69,135,990 $ 119,821,089
Cost of sales 17,466,101 27,546,045 40,658,160 70,683,914
------------- ------------- ------------- -------------
Gross profit 10,725,784 19,864,558 28,477,830 49,137,175
Selling, general and administrative expenses 5,694,958 8,798,284 18,008,951 24,944,988
------------- ------------- ------------- -------------
Income from operations 5,030,826 11,066,274 10,468,879 24,192,187
------------- ------------- ------------- -------------
Other expenses
Interest expense, net 3,018,171 2,625,106 9,975,693 5,873,117
Discount on sale of receivables 556,386 1,895,834 4,096,629 3,475,198
Foreign currency exchange losses 905,689 1,842,460 18,102,812 3,235,811
------------- ------------- ------------- -------------
Total other expenses 4,480,246 6,363,400 32,175,134 12,584,126
------------- ------------- ------------- -------------
Income (loss) before provision for
income taxes and minority 550,580 4,702,874 (21,706,255) 11,608,061
interest
Provision for income taxes -- 315,250 -- 921,810
------------- ------------- ------------- -------------
Income (loss) before minority interest 550,580 4,387,624 (21,706,255) 10,686,251
Minority interest -- (251,216) -- (983,191)
------------- ------------- ------------- -------------
Net income (loss) $ 550,580 $ 4,638,840 $ (21,706,255) $ 11,669,442
------------- ------------- ------------- -------------
Net income (loss) per common share - Basic:
Weighted common shares 14,735,147 12,997,111 14,668,819 12,450,196
Net income (loss) per common share $ 0.04 $ 0.36 $ (1.48) $ 0.94
------------- ------------- ------------- -------------
Net income (loss) per common share - Assuming
dilution:
Weighted common shares 14,746,423 13,045,149 14,689,105 12,645,691
Net income (loss) per common share $ 0.04 $ 0.36 $ (1.48) $ 0.92
------------- ------------- ------------- -------------
</TABLE>
See notes to financial statements
3
<PAGE>
VITECH AMERICA, INC.
Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------------
September 30, 1999 September 30, 1998
---------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities
Net income / (loss) $(21,706,255) $ 11,669,442
Adjustments to reconcile net income to net cash
provided from / (used) in operating activities
Depreciation 2,364,429 1,761,863
Amortization of goodwill 820,470 676,053
Minority interest -- (983,191)
Translation adjustment -- (450,000)
Allowance for doubtful accounts -- 46,506
Reserve for inventory obsolescence -- 17,204
Changes in assets and liabilities
Accounts receivable 6,975,661 12,134,298
Inventories 8,390,439 (24,824,229)
Deferred tax asset 23,122 12,000
Other assets 1,606,731 (7,024,989)
Trade accounts payable (7,502,866) 7,239,915
Accrued expenses (2,539,439) (668,881)
Due to/from officers (327,286) 171,231
Income and sales taxes payable (1,263,331) 2,750,782
------------ ------------
Total adjustments 8,547,930 (9,141,438)
------------ ------------
Net cash (used) / provided from operating activities (13,158,325) 2,528,004
------------ ------------
Cash flows from investing activities
Purchases of property and equipment (5,893,986) (8,422,186)
Payment for business acquisition -- (591,906)
Other investments 160,508 (115,114)
------------ ------------
Net cash used in investing activities (5,733,478) (9,129,206)
------------ ------------
Cash flows from financing activities
Net (payments)/proceeds under short-term bank borrowings (22,145,580) (5,829,497)
Net payments of taxes payable (309,762) (472,839)
Payment of convertible notes (4,420,915) --
Proceeds from convertible notes 41,000,000 450,000
Payment of note payable for business acquisition -- (2,231,250)
Net proceeds from note payable - related party 7,500,000 --
Proceeds from note payable -- --
Net (payments)/proceeds of notes payable (857,041) 454,688
Proceeds from sale of common stock -- 123,909
------------ ------------
Net cash provided / (used) by financing activities 20,766,702 (7,504,989)
------------ ------------
Net increase / (decrease) in cash and cash equivalents 1,874,899 (14,106,191)
Cash and cash equivalents - beginning of period 7,719,185 22,704,632
------------ ------------
Cash and cash equivalents - end of period $ 9,594,084 $ 8,598,441
------------ ------------
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest and discount on sale of receivables $ 13,857,322 $ 12,635,058
------------ ------------
Income taxes $ 256,762 $ 217,168
------------ ------------
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, 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
September 30, 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 nine month period ended September 30, 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 Nine Months Ended
September 30, September 30,
----------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) for basic and diluted
income per common share $ 550,580 $ 4,638,840 $(21,706,255) $ 11,669,442
------------ ------------ ------------ ------------
Weighted average number of shares
for basic income per share 14,735,147 12,997,111 14,668,819 12,450,196
Dilutive securities:
Stock options 1,200 34,350 5,421 151,542
Warrants 10,076 13,688 14,865 43,953
------------ ------------ ------------ ------------
Weighted average number of shares
for diluted income per share 14,746,423 13,045,149 14,689,105 12,645,691
------------ ------------ ------------ ------------
Net income (loss) per common share:
Basic $ 0.04 $ 0.36 $ (1.48) $ 0.94
Diluted $ 0.04 $ 0.36 $ (1.48) $ 0.92
</TABLE>
For the three month and nine month periods ended September 30, 1999 and 1998,
the effects on earnings per share of the $50,309,620 and $24,903,750 aggregate
principal amount of 10% convertible notes, respectively, would have been
antidilutive and therefore are not included in the computations.
For the three month and nine month periods ended September 30, 1999, there were
outstanding 4,685,487 stock options and 742,418 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 and nine month periods ended September 30,
1998, there were outstanding 4,438,999 stock options and 271,087 warrants not
included in the computation of diluted earnings per share of common stock
because the option 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,
1999
--------------
Trade accounts receivable $ 45,987,144
Allowance for doubtful accounts (3,540,699)
--------------
Total $ 42,446,445
--------------
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"), could 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 would 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 accounts
receivable delinquencies, accounts receivable default or violations of certain
accounts receivable concentration limits. The repurchase obligation may be
satisfied by transferring to TAC 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 $40.7
million which represents the balance as of September 30, 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 has not been 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 substantially from its values at December 31, 1998. With an
exchange rate of 1.938 REAIS to the U.S. dollar at September 30, 1999, the
overcollateral ratio was less than 100% and therefore the value of the
subordinated debentures was equal to zero.
In June 1999, TAC received approval on a consent solicitation proposal made 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. With the approval of the
consent solicitation, TAC paid a 1% fee to the holders of TAC notes and the
Company put up additional collateral (in the form of eligible accounts
receivable) for the benefit of the TAC note holders to put the collateralization
ratio at 100%. Since June, however, because of the continuing difficult economic
conditions of Brazil, the poor payment performance of the receivables held by
TAC and the conditions of the financial markets which have prohibited TAC from
refinancing its short-term obligations, TAC has not had the liquidity available
to meet is current obligations which has caused trigger and default events for
TAC. Considering these events, the TAC program is expected to remain in default
and to self-amortize over the life of the receivable portfolio held by TAC. The
Company also believes that TAC will no longer be a viable financing source for
the Company in the future.
7
<PAGE>
NOTE 6 - INVENTORIES
- --------------------
Inventories are summarized as follows:
September 30,
1999
---------------
Finished goods $ 9,868,458
Work in process 1,798,250
Components in the factory 16,647,975
Components in transit (a) 4,648,703
---------------
32,963,386
Allowance for obsolescence (1,002,240)
---------------
Total $ 31,961,146
---------------
(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 nine
month period ended September 30, 1999, the Company had a comprehensive loss of
$65.5 million as compared to a reporting net loss of $21.7 million.
Comprehensive loss includes a cumulative translation adjustment of $43.8 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 $18,102,812 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 Notes 9, 10, and 11).
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.
NOTE 9 - NOTE PAYABLE - RELATED PARTY
- -------------------------------------
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
15% and is payable on demand with 90 days notice. The loan is evidenced by a
8
<PAGE>
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 10 - CONVERTIBLE NOTES
- ---------------------------
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.
NOTE 11 - STRATEGIC ALLIANCE
- ----------------------------
In April 1999, the Company received a short-term loan from Gateway Companies,
Inc. ("Gateway") for the principal amount of $11 million, bearing interest at
the annual rate of 10%. The loan originally had a term of 90 days, but was
extended by mutual agreement to 180 days. The proceeds of the loan were used for
the repayment of indebtedness and for general working capital purposes. This
short term-loan was repaid in full out of the proceeds from a convertible note
investment by Gateway made in September 1999 as discussed below.
In September 1999, the Company formed a strategic alliance with Gateway which
resulted in a $31 million investment by Gateway. Pursuant to a Convertible Loan
Agreement (the "Loan Agreement"), the investment was in the form of a 10%
Convertible Promissory Note. The Note bears interest at 10% per annum with
interest payable quarterly. The Note matures on March 16, 2001. The Note is
initially convertible at $11.02 (the "initial Conversion Price") subject to
stock-splits, stock dividends, rights offering by the Company and certain
combinations, capitalizations, reclassifications, extraordinary distributions
and other similar events. Under the terms of the Agreement, beginning six months
after the Closing Date, Gateway may demand registration of the securities
underlying the Note. William C. St. Laurent and Georges C. St. Laurent, III, the
Company's President and Chief Executive Officer, jointly and severally, have
guaranteed $11,000,000 of the Note.
In no event shall the Company issue more than 19.9% of the then issued and
outstanding shares of Common Stock of the Company, unless the Company shall
obtain stockholder approval or a waiver of such requirement by the Nasdaq Stock
Market. Messrs. St. Laurent have agreed to vote their shares in favor of any
transaction contemplated by the Agreement, at any meeting, for the purpose of
issuing in excess of 19.9% of the Company's Common Stock.
The Company also was granted an option, exercisable at the Company's election,
to acquire certain exclusive territorial rights in Brazil from Gateway. For this
option, the Company issued 538,284 shares of the Company's common stock to
Gateway.
Gateway was also granted an option, exercisable within two years from the
Closing Date, to engage in the following transactions with the Company: (i)
extend an additional $40 million convertible loan to the Company on the same
terms and conditions as the Note, with a conversion price equal to the lower of
(x) $11.02 per share or (y) a 20% premium over the then market value of the
Company's common stock as reported on the Nasdaq Stock Market determined by
taking the arithmetic average of the closing price of the Company's common stock
for a period of twenty (20) trading days preceding the date on which Gateway
gives notice of its intent to exercise this option and/or (ii) subject to
compliance with applicable law, enter into a merger agreement whereby the
Company's shareholders shall have the option to (x) exchange their shares for
$14.00 per share in cash or (y) one share of a new callable putable common stock
(the "New Stock"). The New Stock shall have a call provision whereby Gateway
will have the right to call 100% (and not less than 100%) of the New Stock,
including all vested options, which it does not already own, at a price which
shall be determined by the Company's performance. The New Stock shall also have
a put provision whereby the New Stock holders will have the right to put
annually to Gateway 100% (and not less than 100%) of their New Stock, including
all vested dilutive options and warrants, at a price which shall be determined
by the Company's performance.
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 and their percentage of the
Company's consolidated net sales:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------- ----------------------------------------------
1999 1998 1999 1998
-------------------- ------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 28,191,885 100% $47,410,603 100% $ 69,135,990 100% $119,821,089 100%
Cost of sales 17,466,101 61.9 27,546,045 58.1 40,658,160 58.8 70,683,914 59.0
Gross profit 10,725,784 38.1 19,864,558 41.9 28,477,830 41.2 49,137,175 41.0
Selling, general and
administrative expenses 5,694,958 20.2 8,798,284 18.6 18,008,951 26.1 24,944,988 20.8
Income from operations 5,030,826 17.8 11,066,274 23.3 10,468,879 15.1 24,192,187 20.2
Net interest and financing
expense 3,574,557 12.7 4,520,940 9.5 14,072,322 20.4 9,348,315 7.8
Foreign currency exchange losses 905,689 3.2 1,842,460 3.9 18,102,812 26.2 3,235,811 2.7
Net income (loss) $ 550,580 2.0 $ 4,638,840 9.8 $(21,706,255) (31.4) $ 11,669,442 9.7
</TABLE>
Net sales decreased by $19.2 million, or approximately 41%, to $28.2
million for the quarter ended September 30, 1999, as compared to $47.4 million
for the quarter ended September 30, 1998. For the quarter ended September 30,
1999, the Company sold approximately 20,000 PC units as compared to
approximately 27,000 PC units during the quarter ended September 30, 1998. For
the nine month period ended September 30, 1999, net sales decreased by $50.7
million, or approximately 42%, to $69.1 million as compared to $119.8 million
for the nine month period ended September 30, 1998. Such decrease in sales (both
in dollars and in PC units sold) was primarily attributable to the devaluation
of the REAL, which occurred in January 1999, 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 devaluation 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. During the quarter ended June
30, 1999, the Company began to see the business conditions improve in Brazil.
This began with the stabilizing of the REAL in the currency markets which
occurred around mid-April. Conditions, however, have not yet returned to the
pre-devaluation levels.
Cost of sales during the quarter ended September 30, 1999 were $17.5
million, representing 62% of sales during the period, as compared to $27.5
million for the quarter ended September 30, 1998, representing 58.1% of sales
for the period. Cost of sales during the nine month period ended September 30,
1999 were $40.7 million, representing 58.8% of sales during the period, as
compared to $70.7 million for the nine month period ended September 30, 1998,
representing 59% of sales for the period. The increase in cost of sales as a
percentage of sales during the quarter ended September 30, 1999, when compared
to the quarter ended September 30, 1998, was attributable to the downward
pressures that the Company has been experiencing on its unit sales prices which
has exceeded any decreases in component costs. Average unit sales have decreased
from approximately $2,000 at the beginning of the year to approximately $1,250
at the end of the quarter ended September 30, 1999. This overall industry trend
has been intensified in Brazil this year with the effects of the devaluation
which have reduced consumer buying power and intensified competition. The
Company does expect that any further increases in costs of sales as a percentage
of sales can be mitigated by the Company's continued integration of services and
integrated solutions into its product offering.
Selling, general, and administrative expenses decreased by $3.1
million, or approximately 35%, to $5.7 million for the quarter ended September
30, 1999, as compared to $8.8 million for the quarter ended September 30, 1998.
For the nine month period ended September 30, 1999, selling, general, and
administrative expenses decreased by $6.9 million, or approximately 28%, to $18
million as compared to $24.9 million for the nine month period ended September
30, 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 20.2%
for the quarter ended September 30, 1999, compared to 18.6% for the quarter
ended September 30, 1998. Such increase was primarily attributable to the
reduced level of sales for the quarter.
10
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Income from operations decreased by $6 million, or approximately 55%,
to $5 million for the quarter ended September 30, 1999, as compared to $11.1
million for the quarter ended September 30, 1998. For the nine month period
ended September 30, 1999, income from operations decreased by $13.7 million, or
approximately 57%, to $10.5 million as compared to $24.2 million for the nine
month period ended September 30, 1998. Such decrease was primarily attributable
to the aforementioned decrease in sales. Income from operations as a percentage
of sales decreased to 17.8% for the quarter ended September 30, 1999 from 23.3%
for the quarter ended September 30, 1998. This decrease was primarily
attributable to the aforementioned increase in cost of sales as a percentage of
sales.
Interest and financing expense decreased by $946,383, or approximately
20.9%, to $3.6 million for the quarter ended September 30, 1999, as compared to
$4.5 million for the quarter ended September 30, 1998. For the nine month period
ended September 30, 1999, interest and financing expense increased by $4.7
million, or approximately 50.5%, to $14.1 million as compared to $9.3 million
for the nine month period ended September 30, 1998. Interest and financing
expense as a percentage of sales increased to 12.7% for the quarter ended
September 30, 1999 from 9.5% for the quarter ended September 30, 1998. These
increases were primarily attributable to the Company's increased use of debt
financing to support its working capital needs and the increase costs of such
financing.
During the quarter ended September 30, 1999, the Company experienced a
foreign currency exchange loss of $905,689, or 3.2% of sales, associated with
certain U.S. dollar denominated monetary assets and liabilities of the Company's
Brazilian subsidiaries. For the nine month period ended September 30, 1999, the
Company experienced a foreign currency transaction loss of $18.1 million, which
included $16.7 million which occurred during the first quarter and was a direct
result of the devaluation of the Brazilian currency. At September 30, 1999, the
Commercial Market Rate for the REAL was R$1.9380 per US$1.00 as compared to
R$1.7520 per US$1.00 at June 30, 1999, and R$1.2090 per US$1.00 at December 31,
1998. Also included in foreign currency exchange loss for the nine month period
ended June 30, 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 September 30, 1999).
Net income for the quarter ended September 30, 1999 was $550,580, or
$0.04 per share assuming dilution, representing 2% of sales during the period,
as compared to $4.6 million, or $0.36 per assuming dilution, representing 9.9%
of sales during the period. For the nine month period ended September 30, 1999,
the Company incurred a net loss of $21.7 million, as compared to net income of
$11.7 million for the nine month period ended September 30, 1998. The decrease
in net income was primarily attributable to the aforementioned decrease in sales
that resulted from devaluation and the unfavorable business conditions.
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. The Company is, however, analyzing its exposure to currency
risks and developing a plan to use hedging activities to offset currency risks
as it deems appropriate. Currently though 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.
11
<PAGE>
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund the payment
of accounts payable and to meet certain debt maturities. During the nine month
period ended September 30, 1999, the Company used debt financing to satisfy its
working capital requirements.
At September 30, 1999, the Company had a working capital surplus of
$39.5 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 used in operating activities for the nine month period ended
September 30, 1999 was $13.2 million as compared to $2.5 million in cash
provided by operating activities during the nine month period ended September
30, 1998 and resulted primarily from the net loss for the period and the
repayment of trade accounts payable and accrued expenses which more than offset
the decreases in accounts receivable and inventory for the period.
Net cash used in investing activities was $5.7 million for the nine
month period ended September 30, 1999. Such use of cash was primarily related to
the acquisition of software to be integrated for resale with the Company's
integrated product offerings and for the purchase of computer hardware and
software to support the Company's management information system. Net cash
provided from financing activities was $20.8 million for the nine month period
ended September 30, 1999 and resulted primarily from the short-term debt
borrowings from a related party and from a convertible note investment made by
Gateway Companies, Inc. as the result of a strategic partnership formed in
September 1999.
The Company has a revolving line of credit in the amount of $2,000,000
with Eastern National Bank in Miami, Florida, with which the Company maintains
its primary banking relationship. 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. As of September 30, 1999, there was $1.8 million
owed under the facility.
As of September 30, 1999, the Company had approximately $1 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 June 30, 1999,
the Company had available approximately $20 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. As of September 30, 1999, there was a principal
amount of $5,237,745 outstanding on such notes. In a series of transactions
between April and July of 1999, the holders of such convertible notes sold their
position in the notes to an unrelated third party investor. Simultaneously with
such sale, the Company amended and restated the terms of the convertible notes
and entered into revised put and call agreements for the notes. The revised
terms provide the note holder with a conversion price equal to $11 per share and
provide the holder with the right to require the Company to repurchase the notes
at a premium during a put period, as defined in the agreement. In the event the
Company declines to repurchase the notes upon the exercise of a holder put
option during a put period, the conversion price of the note would be adjusted
to equal 85% of the market price, as defined. In October 1999, the holders of
these notes exercised their put right to require the Company to repurchase these
notes at a premium, as defined in the agreement. The Company is currently
negotiating with the note holders to convert a portion of the notes and to
extend the maturity of the balance.
In April 1999, in order to induce the holders of $3,621,875 of the
Company's 10% convertible notes, the Company amended and restated the terms of
the notes. The conversion price of the notes was adjusted to $10 per share and
the holders were provided with an additional put option in October of 1999 and
again in April of 2000. In October 1999, the holders of these notes exercised
their put right to require the Company repurchase the notes at 120% of the
principal amount. The Company is planning to repay the notes in accordance with
their terms over a four month period.
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.
12
<PAGE>
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 accounts receivable
delinquencies, accounts receivable defaults or violations of certain accounts
receivable concentration limits. The repurchase obligation may be satisfied by
transferring to TAC 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 September 30, 1999,
there is a contingent liability in the amount of approximately $40.7 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 has not
been 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 substantially from its values at December 31,
1998. With an exchange rate of 1.938 REAIS to the U.S. dollar at September 30,
1999, the overcollateral ratio was less than 100% and therefore the values of
the subordinated debentures was equal to zero.
In June 1999, TAC received approval on a consent solicitation proposal
made 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. With the approval of the
consent solicitation, TAC paid a 1% fee to the holders of TAC notes and the
Company put up additional collateral (in the form of eligible accounts
receivable) for the benefit of the TAC note holders to put the collateralization
ratio at 100%. Since June, however, because of the continuing difficult economic
conditions of Brazil, the poor payment performance of the receivables held by
TAC and the conditions of the financial markets which have prohibited TAC from
refinancing its short-term obligations, TAC has not had the liquidity available
to meet is current obligations which has caused trigger and default events for
TAC. Considering these events, the TAC program is expected to remain in default
and to self-amortize over the life of the receivable portfolio held by TAC. The
Company also believes that TAC will no longer be a viable financing source for
the Company in the future. (See Notes 4 and 5 to the Company's financial
statements dated June 30, 1999).
In March of 1999, the Company received a loan from a related party for
the principal amount of $10 million in addition to the $7.2 million in loans
that the Company had received in 1998 from such related party. The $10 million
loan bears interest at the annual rate of 15% and is payable upon demand with 90
days notice. The loan is evidenced by a promissory note and, at the makers
option, can be exchanged for a convertible note (convertible at $9.25) should
the loan not be repaid at maturity.
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 and 36,000
warrants to the placement agent.
In April 1999, the Company received a short-term loan from Gateway
Companies, Inc. ("Gateway") for the principal amount of $11 million, bearing
interest at the annual rate of 10%. The loan originally had a term of 90 days,
but was extended by mutual agreement to 180 days. The proceeds of the loan were
used for the repayment of indebtedness and for general working capital purposes.
This short term-loan was repaid in full out of the proceeds from a convertible
note investment by Gateway made in September 1999 as discussed below.
In September 1999, the Company formed a strategic alliance with Gateway
which resulted in a $31 million investment by Gateway. Pursuant to a Convertible
Loan Agreement (the "Loan Agreement"), the investment was in the form of a 10%
13
<PAGE>
Convertible Promissory Note. The Note bears interest at 10% per annum with
interest payable quarterly. The Note matures on March 16, 2001. The Note is
initially convertible at $11.02 (the "initial Conversion Price") subject to
stock-splits, stock dividends, rights offering by the Company and certain
combinations, capitalizations, reclassifications, extraordinary distributions
and other similar events. Under the terms of the Agreement, beginning six months
after the Closing Date, Gateway may demand registration of the securities
underlying the Note. William C. St. Laurent and Georges C. St. Laurent, III, the
Company's President and Chief Executive Officer, jointly and severally, have
guaranteed $11,000,000 of the Note.
In no event shall the Company issue more than 19.9% of the then issued
and outstanding shares of Common Stock of the Company, unless the Company shall
obtain stockholder approval or a waiver of such requirement by the Nasdaq Stock
Market. Messrs. St. Laurent have agreed to vote their shares in favor of any
transaction contemplated by the Agreement, at any meeting, for the purpose of
issuing in excess of 19.9% of the Company's Common Stock.
The Company also was granted an option, exercisable at the Company's
election, to acquire certain exclusive territorial rights in Brazil from
Gateway. For this option, the Company issued 538,284 shares of the Company's
common stock to Gateway.
Gateway was also granted an option, exercisable within two years from
the Closing Date, to engage in the following transactions with the Company: (i)
extend an additional $40 million convertible loan to the Company on the same
terms and conditions as the Note, with a conversion price equal to the lower of
(x) $11.02 per share or (y) a 20% premium over the then market value of the
Company's common stock as reported on the Nasdaq Stock Market determined by
taking the arithmetic average of the closing price of the Company's common stock
for a period of twenty (20) trading days preceding the date on which Gateway
gives notice of its intent to exercise this option and/or (ii) subject to
compliance with applicable law, enter into a merger agreement whereby the
Company's shareholders shall have the option to (x) exchange their shares for
$14.00 per share in cash or (y) one share of a new callable putable common stock
(the "New Stock"). The New Stock shall have a call provision whereby Gateway
will have the right to call 100% (and not less than 100%) of the New Stock,
including all vested options, which it does not already own, at a price which
shall be determined by the Company's performance. The New Stock shall also have
a put provision whereby the New Stock holders will have the right to put
annually to Gateway 100% (and not less than 100%) of their New Stock, including
all vested dilutive options and warrants, at a price which shall be determined
by the Company's performance.
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 $18,102,812 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 Notes 4 and 5 to the Company's
financial statements dated September 30, 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.
14
<PAGE>
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.
Through September 30, 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.
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 six
month period ended June 30, 1999, the Company had a comprehensive loss of $57.7
million as compared to a reporting net loss of $22.2 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.
15
<PAGE>
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,
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.
16
<PAGE>
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company had been named in a lawsuit in the United States by IBM
relating to TNT Systems, Inc., a business in which Georges C. St. Laurent III,
the Company's Chairman of the Board and Chief Executive Officer, was a 60%
shareholder and which ceased operations in 1993. The Company believed that the
IBM lawsuit was frivolous and without merit and was not likely to have a
material adverse effect on the Company's financial conditions or results of
operation. Additionally, Georges C. St. Laurent III had agreed to indemnify the
Company against any and all claims having to do with this lawsuit. In September
1999, Georges C. St. Laurent III settled the case with IBM and accordingly the
lawsuit against the Company was dropped by IBM.
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.
On September 23, 1999, the Company filed a current report on form 8-K
disclosing the terms associated with the Company's strategic alliance formed
with Gateway and the corresponding $31 million investment made by Gateway in the
Company.
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 15, 1999
17
<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, 1999 AND THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999
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-30-1999
<CASH> 9,594,084
<SECURITIES> 0
<RECEIVABLES> 42,446,445
<ALLOWANCES> 3,540,699
<INVENTORY> 31,961,146
<CURRENT-ASSETS> 89,840,637
<PP&E> 23,225,654
<DEPRECIATION> 2,364,429
<TOTAL-ASSETS> 143,666,565
<CURRENT-LIABILITIES> 50,294,206
<BONDS> 52,181,919
0
0
<COMMON> 65,346,448
<OTHER-SE> (24,156,008)
<TOTAL-LIABILITY-AND-EQUITY> 143,666,565
<SALES> 69,135,990
<TOTAL-REVENUES> 69,135,990
<CGS> 40,658,160
<TOTAL-COSTS> 58,667,111
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,072,322
<INCOME-PRETAX> (21,706,255)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,706,255)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,706,255)
<EPS-BASIC> (1.48)
<EPS-DILUTED> (1.48)
</TABLE>
