<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 2000
REGISTRATION NO. - 333-36018
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
VITECH AMERICA, INC.
(Exact name of registrant as specified in our charter)
<TABLE>
<S> <C>
FLORIDA 65-0419086
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
</TABLE>
WILLIAM C. ST. LAURENT, PRESIDENT
VITECH AMERICA, INC.
2190 NORTHWEST 89TH PLACE
MIAMI, FLORIDA 33172
(305) 477-1161
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
WITH COPIES TO:
<TABLE>
<S> <C>
JAMES D. SCHNEIDER, ESQ. THOMAS J. POLETTI, ESQ.
JOEL D. MAYERSOHN, ESQ. KIRKPATRICK & LOCKHART LLP
ATLAS, PEARLMAN, P.A. 9100 WILSHIRE BLVD., 8(TH) FLOOR, EAST TOWER
350 EAST LAS OLAS BLVD., SUITE 1700 BEVERLY HILLS, CA 90212
FORT LAUDERDALE, FLORIDA 33301 (310) 285-1629
(954) 763-1200 TELECOPIER: (310) 274-8357
TELECOPIER: (954) 766-7800
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, no par value...... 3,450,000 Shs (1) $5.50 (2) $18,975,000 $5,009.40
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Representative's Warrants (3)... 300,000 Wts. $0.001 (4) $300 $0.08
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Common Stock, no par value...... 300,000 Shs (5)(6) $9.075 (7) $2,722,500 (7) $0 (7)
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Total........................... $21,697,800 $5,009.48(*)
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</TABLE>
* Previously paid.
(1) Includes up to 450,000 shares which the underwriters have the option to
purchase from us to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933, as amended,
based upon the average of the high and low trading prices of the common
stock of the Registrant on the Nasdaq National Market on June 20, 2000.
(3) Issued to the representative of the underwriters.
(4) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(g) under the Securities Act of 1933, as amended.
(5) Issuable upon exercise of the representative's warrants.
(6) Pursuant to Rule 416, this registration statement also covers such
indeterminable additional shares as may become issuable as a result of
anti-dilution adjustment in accordance with the terms of the
representative's warrants.
(7) Pursuant to Rule 457(g), no additional registration fee is required for
these shares.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS
SUBJECT TO COMPLETION. DATED JUNE 21, 2000.
3,000,000 SHARES
(VITECH LOGO)
COMMON STOCK
Vitech America, Inc. is offering 3,000,000 shares of its common stock.
Our common stock is traded on the Nasdaq National Market under the symbol
"VTCH". On June 20, 2000, the last sale price of our common stock, as reported
by the Nasdaq National Market, was $5.50 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price............................... $ $
Underwriting discounts and
commissions......................................... $ $
Proceeds, before expenses, to Vitech
America, Inc. ...................................... $ $
</TABLE>
The underwriters have a 45-day option to purchase up to 450,000 additional
shares from us to cover over-allotments. The underwriters expect to deliver the
shares on , 2000.
JOSEPH CHARLES & ASSOC., INC. I-BANKERS SECURITIES, INC.
(EUROPEAN CO-MANAGER)
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE> 3
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us and the sale of our common stock, and our financial
statements and notes to those financial statements that appear elsewhere in this
prospectus.
OUR BUSINESS
We are a leading manufacturer and marketer of computer products,
peripherals and software to business, governmental and individual customers in
Brazil. Our diversified family of products includes desktop and notebook
personal computers, workstations, network servers, networking equipment,
peripherals and software. We sell our own branded products and are the exclusive
distributor of Gateway computer products in Brazil.
We provide integrated information technology solutions for our corporate
and governmental customers. We recently introduced a group of integrated
solutions for specific vertical markets in response to the growing need for
client-server distributed computing solutions in Brazil. Our turn-key business
solutions include computer and networking hardware, software, Internet
connectivity and support services.
We believe that we are well positioned to capitalize on the opportunities
in the Brazilian marketplace based upon our:
- Strong brand awareness. Our primary brand, Microtec, has existed since
1982 and is one of the most widely recognized and respected brands in
technology in Brazil today. We believe our well known brand helps drive
demand for our computer products and turn-key information technology
solutions. We believe that the strength of the Microtec brand also
facilitates the introduction of new products and provides co-branding
opportunities with companies such as Gateway.
- Significant management experience in the Brazilian market. Our
management team has substantial experience with prevailing business
customs, regional and national tax policies, marketing dynamics and
economic conditions in Brazil which we believe provides us with
significant competitive advantages.
- Gateway relationship. We enjoy a broad strategic relationship with
Gateway Companies, Inc., a leading direct seller of personal computers.
Our strategic relationship with Gateway allows us access to a globally
recognized brand and provides us with assistance in vendor and supply
relationships, purchasing, engineering, brand development, logistics,
financing, and strategic development of the Brazilian market.
- National direct distribution network in Brazil. We strive to attain a
direct relationship with the end-users of our products and services
through various channels including commissioned network representatives,
our own retail stores, focused account teams in government and corporate
markets, telemarketing, and Internet commerce. We believe that
interfacing directly with end-users promotes customer loyalty and fosters
brand awareness. The direct end-user relationships also allow us to
maintain, monitor and update database information about our customers and
their current and future information technology products and service
needs, which can be used to shape future product offerings and support
services.
- Substantial installed base of business and governmental customers. For
1999 approximately 70% of our net sales were derived from business and
governmental customers. We believe that this customer base affords us
additional opportunities to expand sales of our higher margin business
system integration solutions.
With a population of approximately 166 million people and a 1998 gross
domestic product of over $744 billion, Brazil is the largest country in Latin
America. Demand for personal computers in Brazil has increased significantly
over the last seven years, expanding at the average annualized rate of
approximately 30% on a unit basis for computers through 1999. In 1999, the
Brazilian market for personal computers was estimated to be $2.5 billion, and
the broader information technology products and services market was estimated at
$12.4 billion.
1
<PAGE> 4
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... 3,000,000 shares
Common stock outstanding
after the offering......................... 19,345,939 shares
Use of proceeds.............................. To repay indebtedness and for general
corporate and working capital purposes.
Nasdaq National Market Symbol................ "VTCH"
</TABLE>
ADDITIONAL INFORMATION
The number of shares of our common stock outstanding after this offering is
based on the number of shares of common stock outstanding on March 31, 2000. The
number of shares that will be outstanding after this offering excludes:
- 4,742,127 shares of common stock issuable upon exercise of stock options
outstanding as of March 31, 2000 at a weighted average price of $18.71
per share;
- 262,873 shares of common stock available as of March 31, 2000 for future
issuance under our 1996 stock option plan;
- 870,251 shares of common stock issuable upon exercise of warrants
outstanding as of March 31, 2000 at a weighted average price of $10.97
per share; and
- 3,817,864 shares of common stock issuable upon exercise of convertible
notes.
- approximately 565,000 shares of common stock issuable in connection with
our purchase agreement with Intel Corporation.
Unless otherwise indicated, this prospectus assumes that the underwriters
have not exercised their option to purchase additional shares and also gives
effect to a 1-for-10 stock dividend paid in July 1998.
In this prospectus, the terms "company," "Vitech," "we," "us," and "our"
refer to Vitech America, Inc., a Florida corporation, and, unless the context
otherwise requires, "common stock" refers to the common stock, no par value, of
Vitech America, Inc.
We own the registration for the trademarks Microtec(TM), Microtec Digital
World(TM), Vision(TM), Vision Plus(TM), Mythus(TM), Quest(TM), Spalla(TM),
Vesper(TM) and Mr. Micro(TM), which we use in conjunction with the sale of our
products and services, and we intend to apply for the registration of other
trademarks. All other trade names and trademarks used in this prospectus are the
property of their respective owners.
We were incorporated in Florida in 1993. Our principal executive offices
are located at 2190 Northwest 89th Place, Miami, Florida 33172, and our
telephone number is (305) 477-1161. Our website address is www.vitech.net. The
information on our website is not incorporated by reference into this
prospectus.
2
<PAGE> 5
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize our financial data. The as adjusted column
reflects the sale of 3,000,000 shares of our common stock in this offering at an
assumed price of $5.50 per share, after deducting the underwriting discounts and
commissions, the estimated offering expenses payable by us, and the application
of these proceeds, including the repayment of $12.0 million of indebtedness.
SUMMARY STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------------- --------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................. $48,488,996 $73,321,398 $117,537,403 $195,334,579 $100,423,084 $ 15,302,714 $22,560,161
Cost of sales............. 39,156,239 53,470,340 76,813,191 115,630,389 59,655,561 8,359,136 15,052,880
Gross profit.............. 9,332,757 19,851,058 40,724,212 79,704,190 40,767,523 6,943,578 7,507,281
Selling, general and
administrative
expenses................ 1,234,108 8,083,287 18,167,737 41,586,843 28,496,987 6,743,260 6,179,169
Income from operations.... 8,098,649 11,767,771 22,556,475 38,117,347 12,270,536 200,318 1,328,112
Interest and financing
expense, net............ 328,278 2,310,704 6,011,396 17,357,001 17,127,358 6,265,696 2,857,563
Other expense (income).... -- -- -- -- (2,719,065) -- --
Foreign currency exchange
loss (gain)............. 16,229 547,077 2,665,224 1,603,670 19,009,336 16,656,880 (1,544,301)
Net income (loss)......... 6,904,834 8,230,588 12,792,261 17,862,012 (21,103,093) (22,722,258) 14,850
Earnings (loss) per common
share -- basic (1)...... $ 0.78 $ 0.90 $ 1.07 $ 1.36 $ (1.42) $ (1.55) $ 0.00
Earnings (loss) per common
share -- diluted (1).... $ 0.76 $ 0.85 $ 1.06 $ 1.34 $ (1.42) $ (1.55) $ 0.00
</TABLE>
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(1) See note 2 to our consolidated financial statements for a determination of
the shares used in computing basic and diluted earnings (loss) per share.
SUMMARY BALANCE SHEET DATA:
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Current assets.............................................. $102,650,154 $105,282,654
Working capital............................................. 11,903,284 16,535,784
Total assets................................................ 160,323,427 162,955,927
Long-term liabilities....................................... 13,535,998 3,535,998
Total liabilities........................................... 104,282,868 92,282,868
Shareholders' equity........................................ 56,040,559 70,673,059
</TABLE>
3
<PAGE> 6
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below, based on our business and
the industry in which we operate, together with all of the other information
included in this prospectus, before deciding whether to invest in our common
stock. The occurrence of any of the following risks could harm our business,
financial condition or results of operations. In such case, the trading price of
our common stock could decline, and you may lose all or part of your investment.
The risks and uncertainties described below are not exhaustive. Additional risks
and uncertainties not presently known to us, or that we currently consider
immaterial, may also harm our business.
FACTORS RELATING TO US
We have gone from profitability in 1998 to a net loss in 1999 and there is no
assurance that we will be profitable in the future.
During 1999, we experienced a substantial decrease in net sales from $195.3
million to $100.4 million and a substantial decrease of net income from $17.9
million to a net loss of $21.1 million. These decreases were principally related
to the devaluation of the Brazilian currency, the Real, and the related economic
conditions in Brazil. During 1999, we relied and currently we rely upon
significant borrowings to finance our working capital requirements. We may
operate in a negative cash flow from operations position for the foreseeable
future. There are no assurances that we will be profitable or operate in a cash
flow positive position.
We are highly leveraged and we may not be able to obtain additional capital on
acceptable terms.
As of March 31, 2000, we had outstanding indebtedness from third party
lenders of $78.1 million, of which $62.5 million is convertible into our common
stock. $75.6 million of our outstanding indebtedness is due on or before May 31,
2001. We will be required to repay this indebtedness, including any unconverted
portion, either through internally generated funds or third party financing or
through refinancing of the indebtedness with the lenders. Our ability to repay
the indebtedness from internally generated funds or through refinancing will
depend in part upon our future performance which will be subject to economic,
financial, and other factors, many of which are beyond our control. Any ability
to access third party financing to repay this indebtedness will also be
substantially dependent on conditions in the financial markets which are subject
to fluctuations and factors outside of our control. Adequate funds may not be
available when needed or may not be available on terms favorable to us. If
additional funds are raised by issuing equity securities or related instruments
with conversion or warrant features, dilution to our existing shareholders may
result. If funding is insufficient, we may be required to delay, reduce the
scope of or eliminate some or all of our expansion programs or we may default
under our existing indebtedness, any of which would harm our business. The level
of our indebtedness affects:
- our vulnerability to adverse economic and industry;
- our ability to obtain additional financing for future working
capital expenditures, general corporate and other purposes; and
- the dedication of a substantial portion of our future cash flow from
operations to the payment of principal and interest on indebtedness,
thereby reducing the funds available for operations and future
business opportunities.
4
<PAGE> 7
We expect our quarterly results will continue to fluctuate and this
fluctuation could cause our stock price to decline resulting in investor
losses.
Our industry generally has been subject to seasonality and to significant
quarterly and annual fluctuations in operating results. Our operating results
have been subject to such fluctuations. Our quarterly net sales and operating
results have varied significantly as a result of, among other things:
- historical seasonal purchasing patterns and the general economic
climate in Brazil;
- the volume and timing of orders received during a quarter;
- variations in sales mix;
- delays in production schedules;
- new product developments or introductions;
- availability of components;
- changes in product mix and pricing; and
- product reviews and other media coverage.
As a result of these and other factors, our operating results could fall
below the expectations of securities analysts and investors in future periods.
If this happens, the market for our stock would likely decrease. Our common
stock has traded from a historical high of $21.25 to a historical low of $4.375.
Our historical financial performance is not necessarily a meaningful indicator
of future results.
We may not be successful as an information technology solutions provider.
In 1999 we began to diversify our sales mix by offering technology services
and solutions in addition to hardware and software sales. The technology
solutions and services business in Brazil is extremely competitive and involves
different operating risks than the sale of computer products and peripherals. It
is uncertain whether our technology services and solutions business will be able
to perform in a way we have anticipated. You should consider our prospects based
on the risks, expenses and difficulties frequently encountered in the operation
of a new business segment in a rapidly evolving industry characterized by
intense competition. If we are not be able to profitably grow this portion of
our business our operating results would be affected.
We depend on key personnel for our operations and may not be able to find
additional personnel if needed.
We are dependent upon the efforts and abilities of senior management,
including Georges C. St. Laurent III, Chairman of the Board and Chief Executive
Officer, and William C. St. Laurent, President and Chief Operating Officer. The
loss or unavailability of the services of these individuals could harm our
business. We have obtained key-person life insurance in the amount of $2.0
million on the life of each of Messrs. St. Laurent. In addition, our ability to
attract and retain highly skilled personnel is critical to our operations. If we
are unable to attract and retain personnel with necessary skills when needed,
our business and expansion plans could be materially adversely affected.
We depend on our tax-exempt status in Brazil.
Under Brazilian state law, our operating subsidiary in Brazil, Microtec, is
currently exempt from the payment of state import duties, state sales tax, and
state services tax through 2005. Additionally, Microtec is exempted from the
payment of Brazilian federal income tax through 2007, provided that we meet
certain budgeted production goals. The normal rate of federal taxation on a
non-exempt basis is 33%. In the event that we are unable to extend this
tax-exempt status, our after-tax earnings would decline by the amount of the tax
benefit, which may be substantial. In addition, earnings derived from tax
exemption benefits cannot be distributed as dividends to the U.S. parent company
in U.S. Dollars and are segregated for capital reserves and offsetting
accumulated losses in accordance with Brazilian law.
5
<PAGE> 8
We depend on our suppliers for quality components for our manufacturing
process.
We purchase all of our parts from third party suppliers. Reliance on
suppliers involves several risks, including:
- defective parts which can adversely affect the reliability and reputation
of our products;
- a shortage of components and reduced control over delivery schedules
which can adversely affect our manufacturing efficiencies; and
- increases in component costs which can adversely affect our
profitability.
We have several single-source supplier relationships, either because
alternative sources are not available or the relationship is advantageous due to
performance or price. If our third party suppliers are unable to provide timely
and reliable supply, we could experience manufacturing delays or inefficiencies
which may adversely affect our results of operations.
We depend on credit sales and there are risks associated with customer
lending.
Our customer credit activities expose us to significant risks. At March 31,
2000, our outstanding exposure to customer credit risk was approximately $101.2
million. In 1999, approximately 90% of our net sales were made on credit. Our
results of operations would be materially and adversely affected if demand for
customer credit falls, if Brazilian Government policies curtail our ability to
extend credit or to fund our extensions of credit or if customers fail to timely
pay their accounts receivable when due. There can be no assurance that the
allowances for doubtful accounts reserved by us will be sufficient to cover
actual losses.
We have only one manufacturing facility.
All of our products are manufactured in our one facility in Brazil. In the
event this facility were to experience substantial damage or our operations
there were disrupted, we may be required to suspend manufacturing operations or
retain third party manufacturers. Any prolonged suspension or disruption of our
manufacturing operations could have a material adverse effect on us and our
results of operations.
FACTORS RELATING TO OUR INDUSTRY
We have lost money in the past due to the fluctuation of the Real and we are
not hedged to protect ourselves from future currency losses.
The relationship of the Real to the value of the U.S. Dollar have affected,
and may in the future affect, our financial condition and results of operations.
Principally all of our sales and receivables are denominated in the Real, while
our operating results and payables are recorded in U.S. Dollars. The highest
hedge coverage we had at any one time had only met 20% of our exposure.
Currently, we are not engaged in hedging activities and we are not 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 will have a
material adverse effect on our operating results and financial condition.
We are subject to economic, political and social conditions in Brazil.
The Brazilian economy has been characterized by high rates of inflation and
economic, political and social instability. This has resulted in frequent and
occasionally drastic intervention by the Brazilian government. The Brazilian
government's actions to address instability and effect other policies have often
involved wage and price controls as well as other measures, such as tariffs,
exchange controls, freezing bank accounts, imposing capital controls, seizing
assets and limiting imports into Brazil. Changes in policy and other political,
economic or social developments could have a material adverse effect on us.
6
<PAGE> 9
Continuous and rapid technological advances and evolving industry standards
characterize our products and services.
In order to remain competitive, we must respond effectively to
technological changes by continuing to enhance and improve our existing products
and services to incorporate emerging or evolving standards. We must also
successfully develop and introduce new products and services that meet customer
requirements. We can not assure you that we will successfully develop, market,
or support these products and services or that we will respond effectively to
technological changes or new product announcements or introductions by others
which may adversely affect our financial results. Also, as a result of
technological changes, all or a portion of our inventory may be rendered
obsolete.
We may not be able to compete effectively.
The markets in which we compete are highly competitive. We compete with,
and will compete with, numerous international, national, and regional companies,
many of which have significantly larger operations and greater financial,
marketing, human, and other resources than us. Competitors in the computer
hardware market include internationally recognized companies such as IBM, Acer,
Dell, Hewlett Packard and Compaq. We also compete with other small manufacturers
of computer equipment sold on what is known as the "gray market" in Brazil. Gray
market manufacturers are able to offer lower prices because of the avoidance of
import duties and other taxes, and the avoidance of necessary software licensing
fees. Additionally, we compete in the systems integration market with
internationally recognized systems integrators such as IBM, EDS and Unisys. We
may not successfully compete in any market in which we conduct or may conduct
operations.
FACTORS RELATING TO THE OFFERING
A substantial number of shares of our common stock will be eligible for sale
in the near future, which could cause the market price for our common stock to
decline.
Sales of substantial amounts of our common stock in the public market
following this offering, or the appearance that a large number of shares is
available for sale, could adversely affect the market price for our common
stock. The number of shares of common stock available for sale in the public
market will be limited by lock-up agreements under which the beneficial holders
of 7,945,935 of our outstanding shares of common stock will agree not to sell or
otherwise dispose of any of their shares for a period of 180 days after the date
of this prospectus without the prior written consent of Joseph Charles and
Assoc., Inc. However Joseph Charles and Assoc., Inc. may, in its sole discretion
and at any time without notice, release all or any portion of the securities
subject to lock-up agreements. In addition to the adverse effect a price decline
could have on holders of our common stock, a decline would likely impede our
ability to raise capital through the issuance of additional shares of our common
stock or other equity securities. As of the date of this prospectus, there were
850,794 shares of our common stock outstanding that will not be sold in this
offering and are not subject to lock-up but which will be eligible for sale into
the public market under Rule 144. We have issued and outstanding options and
warrants to purchase an aggregate of 5,612,378 shares of our common stock at
exercise prices between $6.50 and $22.73 per share. The existence of such
options and warrants may adversely affect the terms under which we could obtain
additional equity capital and adversely affect the market price of our common
stock. Additionally, we have 3,817,864 shares of our common stock that may be
issued pursuant to the conversion of certain convertible notes. Upon their
conversion, 954,091 of the shares will be eligible for immediate resale pursuant
to a resale registration statement filed by us. Also, we have granted
registration rights with respect to shares we will issue to Intel in exchange
for the cancellation of indebtedness.
We are at risk of securities class action litigation as a result of our stock
price volatility.
Securities class action litigation is often brought against a company
following a decline in the market price of its securities. This risk is
especially acute for us because companies in our industry have experienced
greater than average stock price volatility in recent years and, as a result,
have generally been subject to a greater number of securities class action
claims than companies in other industries. We may in the future be
7
<PAGE> 10
the target of similar litigation. Securities litigation could result in
substantial costs and divert management's attention and resources, and could
seriously harm our business. Also, while we are a U.S. corporation with
executive offices in Florida, our principal operations are conducted by our
Brazilian subsidiary. For the foreseeable future, a substantial portion of our
assets will be held or used outside the U.S. Consequently, enforcement by
investors of civil liabilities under the federal securities laws may be
adversely affected.
We expect to experience volatility in our stock price.
The market for securities of companies in our industry historically has
been more volatile than the market for stocks in general. Within the last 15
months, the price of our stock has fluctuated between $4.375 and $12.875. The
price of our common stock may be subject to wide fluctuations in response to:
- quarter-to-quarter variations in operating results;
- vendor additions or cancellations;
- creation or elimination of funding opportunities;
- favorable or unfavorable coverage of us or our officers by the
press; and
- the availability of new products, technology, or services.
We have broad discretion to use the proceeds of this offering.
We presently intend to use the net proceeds of this offering for the
purposes set forth in "Use of Proceeds". Investors will be relying upon the
discretion and judgment of our management with respect to the application and
allocation of the net proceeds of this offering.
Our principal shareholders exercise significant influence.
Immediately following the offering, our principal shareholders together
will beneficially own approximately 39% of the outstanding shares of our common
stock. Accordingly, our principal shareholders are able to exercise significant
influence over the election of our Board of Directors and the outcome of all
matters submitted to a vote of our shareholders. Pursuant to our agreement,
Gateway may acquire control of us through an option they have to enter into a
merger agreement with us which expires on September 16, 2001. If Gateway
exercises their option they will be able to elect our entire Board of Directors
and control the outcome of all matters submitted to a vote of our shareholders.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus, including under
the sections "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Conditions and Results of Operations," "Business" and
elsewhere in this prospectus, that are based on our management's beliefs and
assumptions and on information currently available to our management.
Forward-looking statements include the information concerning our possible or
assumed future results of operations, business strategies, financing plans,
competitive position, potential growth opportunities, this offering, the effects
of future regulation and the effects of competition. Forward-looking statements
include all statements that are not historical facts and, in some cases, can be
identified by the use of forward-looking terminology such as the words
"believes," "expects," "anticipates," "intends," "plans," "estimates," or
similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions.
Actual results may differ materially from those expressed in these
forward-looking statements. You should not put undue reliance on any
forward-looking statements.
You should understand that many important factors, in addition to those
discussed elsewhere in this prospectus, could cause our results to differ
materially from those expressed in forward looking statements. These factors
include our competitive environment, economic and other conditions in the
markets in which we operate, relationships with third-party suppliers,
performance of our services and continuation of relationships with third
parties.
8
<PAGE> 11
USE OF PROCEEDS
The net proceeds from the sale of 3,000,000 shares of our common stock,
after deducting our estimated offering expenses and underwriting discounts, are
estimated to be approximately $14.6 million, assuming an offering price of $5.50
per share, or $16.9 million if the underwriters' over-allotment option is
exercised in full.
We intend to use a portion of the net proceeds to repay indebtedness. As of
March 31, 2000, we had outstanding approximately $8.7 million under our
short-term revolving working capital lines of credit and other debts with
various creditors in Brazil and the United States. Such debt accrues interest at
an average annualized rate of approximately 24% and matures on a rotating basis
through 2000. As of the date of this prospectus, we had outstanding $41.0
million under certain 10% convertible promissory notes. Beginning June 30, 2000,
we are required to repurchase $10.0 million of the convertible notes pursuant to
the note holders exercise of their put option. The repurchase price is equal to
116% of the principal amount outstanding, plus accrued and unpaid interest, and
is paid in four equal monthly installments. We do not intend to use any of the
proceeds of this offering to repay indebtedness owed to affiliates or related
entities.
We intend to use the balance of the net proceeds for working capital and
general corporate purposes. Although we may use a portion of the net proceeds to
acquire technology or businesses that are complimentary to our business, we have
no current plans to do so. Pending use of the net proceeds from the sale of the
shares, we intend to invest such funds in short-term, interest-bearing,
investment-grade obligations.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"VTCH". The following table sets forth, for the periods indicated, the high and
low sales price for our common stock as reported in the consolidated transaction
reporting system.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR 1998:
Quarter ended March 31.................................... $17.16 $13.41
Quarter ended June 30..................................... 19.25 14.77
Quarter ended September 30................................ 21.25 7.50
Quarter ended December 31................................. 18.00 8.25
FISCAL YEAR 1999:
Quarter ended March 31.................................... 15.50 8.00
Quarter ended June 30..................................... 12.75 7.88
Quarter ended September 30................................ 12.88 6.88
Quarter ended December 31................................. 10.00 6.00
FISCAL YEAR 2000:
Quarter ended March 31.................................... 8.50 4.875
Quarter ending June 30 (through June 20, 2000)............ 6.50 4.375
</TABLE>
On June 20, 2000, the last sale price for the common stock as reported by
the Nasdaq National Market was $5.50 per share. These prices do not include
retail mark-ups, mark-downs or commissions, and may not necessarily represent
actual transactions. As of April 26, 2000, there were approximately 2,550
holders of record of our common stock.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock since
our inception and we do not intend to pay any cash dividends in the foreseeable
future. We currently intend to reinvest earnings, if any, in the development and
expansion of our business.
Restrictions presently exist under Brazilian law on the ability of Microtec
to distribute to our U.S. parent company dividends derived from certain tax
exemption benefits.
9
<PAGE> 12
CAPITALIZATION
The following table sets forth our short-term debt and capitalization as of
March 31, 2000, on an actual basis and as adjusted to give effect to the sale of
3,000,000 shares of our common stock at an assumed offering price of $5.50 and
to the application of the estimated net proceeds therefrom. This table should be
read in conjunction with our consolidated financial statements and the notes
thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Short-term debt, including current portion of long-term
debt...................................................... $ 64,606,508 $ 62,606,508
============ ============
Long-term liabilities, less current portion................. $ 13,535,998 $ 3,535,998
------------ ------------
Shareholders' equity:
Preferred stock, no par value; authorized, 3,000,000
shares; none issued and outstanding actual and as
adjusted............................................... -- --
Common stock, no par value; authorized, 30,000,000 shares;
issued and outstanding, 16,345,939 actual, and
19,345,939 as adjusted................................. 72,385,718 87,018,218
Accumulated other comprehensive loss...................... (41,240,469) (41,240,469)
Retained earnings......................................... 24,895,310 24,895,310
------------ ------------
Total shareholders' equity........................ 56,040,559 70,673,059
------------ ------------
Total capitalization.............................. $ 69,576,557 $ 74,209,057
============ ============
</TABLE>
10
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain of our selected consolidated
financial data. The Selected Statement of Operations Data for the years ended
December 31, 1995, 1996, 1997, 1998 and 1999 are derived from our Consolidated
Financial Statements, which have been audited by Pannell Kerr Forster PC,
independent certified public accountants. The audited consolidated financial
statements for the years ended 1997, 1998 and 1999, and the report thereon,
appear elsewhere in this prospectus. The Selected Statement of Operations Data
for the three month periods ended March 31, 1999 and 2000 and the Summary
Balance Sheet Data as of March 31, 2000 have been derived from our unaudited
Consolidated Financial Statements, which, in the opinion of our management,
include all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of the interim periods. The data in such tables should
be read together with "Summary Consolidated Financial Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our Consolidated Financial Statements and the Notes to Consolidated Financial
Statements appearing elsewhere herein.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------------- --------------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................... $48,488,996 $73,321,398 $117,537,403 $195,334,579 $100,423,084 $ 15,302,714 $22,560,161
Cost of sales............... 39,156,239 53,470,340 76,813,191 115,630,389 59,655,561 8,359,136 15,052,880
Gross profit................ 9,332,757 19,851,058 40,724,212 79,704,190 40,767,523 6,943,578 7,507,281
Selling, general and
administrative expenses... 1,234,108 8,083,287 18,167,737 41,586,843 28,496,987 6,743,260 6,179,169
Income from operations...... 8,098,649 11,767,771 22,556,475 38,117,347 12,270,536 200,318 1,328,112
Interest and financing
expense, net.............. 328,278 2,310,704 6,011,396 17,357,001 17,127,358 6,265,696 2,857,563
Other expense (income)...... -- -- -- -- (2,719,065) -- --
Foreign currency exchange
loss (gain)............... 16,229 547,077 2,665,224 1,603,670 19,009,336 16,656,880 (1,544,301)
Net income (loss)........... 6,904,834 8,230,588 12,792,261 17,862,012 (21,103,093) (22,722,258) 14,850
Earnings (loss) per common
share -- basic (1)........ $ 0.78 $ 0.90 $ 1.07 $ 1.36 $ (1.42) $ (1.55) $ 0.00
Earnings (loss) per common
share -- diluted (1)...... $ 0.76 $ 0.85 $ 1.06 $ 1.34 $ (1.42) $ (1.55) $ 0.00
</TABLE>
---------------
(1) See note 2 to our consolidated financial statements for a determination of
the shares used in computing basic and diluted earnings (loss) per share.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets........................ $21,267,881 $41,959,441 $121,939,015 $147,179,591 $ 93,955,121 $102,650,154
Working capital....................... 6,412,154 31,873,405 82,555,097 70,174,161 45,933,686 11,903,284
Total assets.......................... 22,260,817 47,376,586 155,504,902 195,666,975 148,438,177 160,323,427
Long-term liabilities................. -- 1,757,367 61,085,153 16,440,190 46,691,710 13,535,998
Total liabilities..................... 14,855,727 11,843,403 100,469,071 93,445,620 94,713,145 104,282,868
Shareholders' equity.................. 7,405,090 35,533,183 53,608,389 102,221,355 53,725,032 56,040,559
</TABLE>
11
<PAGE> 14
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 our consolidated financial statements and the notes thereto
appearing elsewhere in this report.
OVERVIEW
We are a leading manufacturer and marketer of computer products,
peripherals and software to business, governmental and individual clients in
Brazil. We also provide integrated technology solutions for our business and
governmental clients.
Our company was formed in 1993 as a Miami-based computer components and
parts distributor, selling products to Brazilian clients. In 1995 we organized
Bahiatech as a wholly-owned subsidiary to act as our manufacturing and
distribution entity in Brazil. The creation of Bahiatech marked our
transformation from a low-margin U.S.-based distributor to a higher-margin
vertically integrated manufacturer and marketer.
In furtherance of our business strategy, in July 1997, we acquired
Microtec, a Brazilian company, engaged in the manufacture and sale of personal
computers and servers in Brazil. Microtec sells directly to corporate and
government customers and through a national network of channel partners. In
order to enhance our market penetration and our direct relationship with
end-users in Brazil, in November 1997, we acquired Techshop and Rectech, two
Brazilian companies engaged in the regional distribution and sales of computers
and related equipment in the Brazilian corporate and retail markets. The
acquisition of these two companies enhanced our direct marketing and support
efforts in the central and northeastern regions of Brazil.
Beginning in 1999 we expanded our business focus to provide integrated
turn-key business solutions. During 1999, we consolidated our Brazilian
operations and transferred certain assets and certain liabilities relating to
our current operations of Bahiatech, Techshop, and Rectech, into the operations
of Microtec. This consolidation allowed us to centralize our operations,
eliminate redundant positions and better control costs.
Our current business model consists of a U.S. operation, Vitech, which
sources and distributes components to our Brazilian subsidiary, Microtec. The
subsidiary manufactures personal computers and related products and develops
business solutions, which in turn, along with our business integration turn-key
solutions, are marketed and sold directly by the subsidiary to end-users in
Brazil. This model results in substantially all of our consolidated earnings
being attributable to our subsidiary's operations.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain line items
from our consolidated statement of operations as a percentage of our
consolidated net sales:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------------
1997 1998 1999 1999 2000
---- ---- ----- ------ ----
<S> <C> <C> <C> <C> <C>
Net sales..................................... 100% 100% 100% 100% 100%
Cost of sales................................. 65.4 59.2 59.4 54.6 66.7
Gross profit.................................. 34.6 40.8 40.6 45.4 33.3
Selling, general and administrative
expenses.................................... 15.5 21.3 28.4 44.1 27.4
Income from operations........................ 19.1 19.5 12.2 1.3 5.9
Interest and financing expense, net........... 5.1 8.9 17.1 40.9 12.7
Other expense (income)........................ -- -- (2.7) -- --
Foreign currency exchange loss (gain)......... 2.3 0.8 18.9 108.8 (6.8)
Net income (loss)............................. 10.9 9.1 (21.0) (148.5) 0.01
</TABLE>
12
<PAGE> 15
Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31,
1999
Net sales increased by $7.3 million, or 47.4%, to $22.6 million for the
three months ended March 31, 2000, as compared to $15.3 million for the
comparable fiscal period in 1999. For the three months ended March 31, 2000, we
sold approximately 14,000 personal computer units as compared to approximately
9,500 personal computer units during 1999. Such increases were primarily
attributable to the improved business conditions in 2000 as compared to the 1999
conditions which were effected by the devaluation of the Real in the first
quarter of 1999.
Cost of sales during the three months ended March 31, 2000 increased by
$6.7 to $15.1 million as compared to $8.4 million for the comparable fiscal
period in 1999. The increase in cost of sales as a percentage of net sales was
primarily attributable to our sales mix which included a higher percentage of
low-end personal computers that have lower gross margins than our higher-end
products. The increase in cost of sales as a percentage of net sales was also
attributable to the downward pressures on our unit sales prices as expressed in
U.S. Dollars which exceeded decreases in component costs.
Selling, general, and administrative expenses decreased by $564,000, or
8.4%, to $6.2 million for the three months ended March 31, 2000, as compared to
$6.7 million for the comparable fiscal period in 1999. The decrease was
primarily attributable to our expense reduction plans which included the closure
of a factory and the elimination of redundant positions. Selling, general, and
administrative expense as a percentage of net sales was 27.4% for the three
months ended March 31, 2000, compared to 44.1% for the comparable fiscal period
in 1999. Such decrease was primarily attributable to the increased level of net
sales.
Income from operations increased by $1.1 million, or 563.0%, to $1.3
million for the three months ended March 31, 2000, as compared to $200,000 for
the comparable fiscal period in 1999. Such increase was primarily attributable
to the increase in net sales. Income from operations as a percentage of net
sales increased to 5.9% for the three months ended March 31, 2000 from 1.3% for
the comparable fiscal period in 1999. This increase was primarily attributable
to the decrease in selling, general, and administrative expense as a percentage
of net sales.
Interest and financing expense, net decreased by $3.4 million, or 54.4%, to
$2.9 million for the three months ended March 31, 2000, as compared to $6.3
million for the comparable fiscal period in 1999. Interest and financing expense
as a percentage of net sales decreased to 12.7% for the three months ended March
31, 2000 from 40.9% for the comparable fiscal period in 1999. These decreases
were primarily attributable to reductions in our cost of financing.
During the three months ended March 31, 2000, we experienced a foreign
currency exchange gain of $1.5 million, or 6.8% of net sales, associated with
certain U.S. Dollar denominated monetary assets and liabilities of our Brazilian
operations. During the period, the Real appreciated from R$1.802 per U.S.$1.00
to R$1.73 per U.S.$1.00. This is compared to a foreign currency exchange loss of
$16.7 million, or 108.8% of net sales for the comparable fiscal period in 1999
which was a direct result of the devaluation of the Real in January 1999.
We had net income for the three months ended March 31, 2000 of $14,850 as
compared to a net loss of $22.7 million for the comparable fiscal period in
1999.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Net sales decreased by $94.9 million, or 48.6%, to $100.4 million for 1999,
as compared to $195.3 million for 1998. For 1999, we sold approximately 71,000
personal computer units as compared to approximately 110,000 personal computer
units during 1998. Such decreases were primarily attributable to the devaluation
of the Real in the first quarter of 1999 and the resulting unfavorable business
conditions in Brazil. Also, after the devaluation, we adjusted the sale prices
of our products in Reais upward and maintained them indexed to the U.S. Dollar.
This resulted in our products becoming more expensive in the Brazilian currency
which contributed to reduced demand for our products.
Cost of sales during 1999 decreased by $55.9 to $59.7 million as compared
to $115.6 million for 1998. The increase as a percentage of net sales was
attributable to the downward pressures on our unit sales prices as
13
<PAGE> 16
expressed in U.S. Dollars which exceeded decreases in component costs. Average
unit sales decreased from approximately $2,000 at the beginning of 1999 to
approximately $1,350 at the end of 1999.
Selling, general, and administrative expenses decreased by $13.1 million,
or 31.5%, to $28.5 million for 1999, as compared to $41.6 million for 1998. The
decrease was primarily attributable to the devaluation of the Real which reduced
these expenses in U.S. Dollar terms and the elimination of redundant positions.
Selling, general, and administrative expense as a percentage of net sales was
28.4% for 1999, compared to 21.3% for 1998. Such increase was primarily
attributable to the reduced level of net sales.
Income from operations decreased by $25.8 million, or 67.8%, to $12.3
million for 1999, as compared to $38.1 million for 1998. Such decrease was
primarily attributable to the decrease in sales. Income from operations as a
percentage of net sales decreased to 12.2% for 1999 from 19.5% for 1998. This
decrease was primarily attributable to the increase in selling, general, and
administrative expense as a percentage of net sales.
Interest and financing expense, net decreased by $229,643, or 1.3%, to
$17.1 million for 1999, as compared to $17.4 million for 1998. Interest and
financing expense as a percentage of net sales increased to 17.1% for 1999 from
8.9% for 1998. This increase was primarily attributable to discounts on the sale
of accounts receivable to third parties and our increased use of debt financing
to support our working capital needs and the increased costs of this financing.
Other income for 1999 was $2.7 million as compared to zero for 1998. This
consisted of a gain on the sale of certain assets of Bahiatech unrelated to
current operations to an unaffiliated third party.
During 1999, we experienced a foreign currency exchange loss of $19.0
million, or 18.9% of net sales, associated with certain U.S. Dollar denominated
monetary assets and liabilities of our Brazilian operations. Of this amount, $17
million is related to the writedown of our residual interest in an accounts
receivable securitization This is compared to a foreign currency exchange loss
of $1.6 million, or 0.8% of net sales for 1998. The increase was a direct result
of the devaluation of the Real. At December 31, 1999, the commercial market rate
for the Real was R$1.802 per U.S.$1.00 as compared to R$1.2090 per U.S.$1.00 at
December 31, 1998.
We experienced a net loss for 1999 of $21.1 million as compared to net
income of $17.9 million for 1998.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Net sales increased by $77.8 million, or 66.2%, to $195.3 million for 1998,
as compared to $117.5 million for 1997. In 1998 we sold approximately 110,000
personal computer units as compared to approximately 72,000 personal computer
units during the 1997. Such increases were primarily attributable to the
acquisition of Microtec, increased demand by our customers, the expansion of our
direct end-user sales strategy and the expansion of our sales through new
channels and into new markets.
Cost of sales during 1998 increased $38.8 million, or 50.5% to $115.6
million, as compared to $76.8 million for 1997. The cost of sales as a
percentage of net sales for 1998 was 59.2% as compared to 65.4% for 1997. The
decrease in the cost of sales as a percentage of net sales during 1998 was
attributable to the expansion of our direct end-user sales strategy. The
decrease was also attributable to a more favorable product mix resulting from
higher percentage of net sales of networking products.
Selling, general, and administrative expenses increased by $23.4 million,
or 128.6%, to $41.6 million for 1998, as compared to $18.2 million for 1997.
Selling, general, and administrative expense as a percentage of net sales was
21.3% for 1998, compared to 15.5% for 1997. These increases were primarily
attributable to costs associated the acquisition of Microtec, the expansion of
manufacturing capacity, internal growth and expenditures associated with our
direct end-user sales strategy and the increased operating expenses associated
with selling higher end integrated networking systems.
Income from operations increased by $15.5 million, or 68.5%, to $38.1
million in 1998, as compared to $22.6 million for 1997. Income from operations
as a percentage of net sales increased to 19.5% for 1998 from
14
<PAGE> 17
19.1% for 1997. These increases were primarily attributable to the increase in
sales and the decrease in cost of sales as a percentage of net sales which
offset the increase in selling, general, and administrative expenses.
Interest and financing expense, net increased by $11.4 million, or 190.0%,
to $17.4 million for 1998, as compared to $6.0 million for 1997. Interest and
financing expense as a percentage of net sales increased to 8.9% for 1998 from
5.1% for 1997. These increases were primarily attributable to our increased use
of debt financing and the discount on the sale of accounts receivable to a
special purpose securitization entity. Additionally, interest and financing
expense for 1998 includes a non-recurring charge of $1.1 million associated with
the additional shares given as an incentive for certain holders of convertible
notes to convert their notes early into our common stock during the third
quarter of 1998, and a financing expense of $1.1 million associated with a put
premium for certain convertible notes that were put to us during the fourth
quarter of 1998.
During 1998, we experienced a foreign currency transaction loss of $1.6
million, or 0.8% of net sales, from the settlement of certain receivables and
payables denominated in Real. At December 31, 1998, the commercial market rate
for the Real was R$1.2090 per U.S.$1.00 as compared to R$1.1164 per U.S.$1.00 at
December 31, 1997.
Net income increased by $5.1 million, or 39.6%, to $17.9 million for 1998,
as compared to $12.8 million for 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our primary cash requirements were used to develop our
infrastructure and expand our operations. However, in 1999 and during the first
quarter of 2000 our primary cash requirements were to fund the payment of
accounts payable and to meet certain debt maturities. During 1999 and the first
quarter of 2000, we principally used cash flow from operations and debt
financing to satisfy our working capital requirements.
At December 31, 1999, we had a working capital surplus of $45.9 million
compared to $70.2 million at December 31, 1998. This decrease in working capital
was primarily attributable to the devaluation of the Real and the corresponding
devaluation of our accounts receivable. At March 31, 2000, we had a working
capital surplus of $11.9 million. This decrease in working capital was primarily
attributable to the increases in short-term debt and the reclassification of
convertible debt maturing within one year.
Net cash used in operating activities for 1999 was $21.1 million as
compared to $348,000 in cash provided by operating activities during 1998 and
resulted primarily from the net loss for 1999 and the payment of trade accounts
payable and accrued expenses which offset decreases in accounts receivable and
inventory. Net cash provided from operating activities during the first quarter
of 2000 was $4.2 million as compared to $886,000 in cash provided from operating
activities during the comparable fiscal period in 1999 and resulted primarily
from the increase in trade accounts payable.
Net cash used in investing activities was $9.2 million for 1999 as compared
to $11.1 million in 1998. The investments in 1999 primarily related to the
acquisition of software to be integrated for resale with our integrated product
offerings and for the purchase of computer hardware and software to support our
management information system. Net cash used in investing activities was
$763,000 during the first quarter of 2000 as compared to $479,000 during the
comparable fiscal period in 1999. The investments during the first quarter of
2000 primarily related to the acquisition of equipment for our manufacturing
operation.
Net cash provided from financing activities was $24.1 million for 1999 as
compared to $2.7 million used in financing activities for 1998. The increase
resulted primarily from the short-term debt borrowings from a related party and
from a convertible note investment made by Gateway as the result of a strategic
alliance formed in September 1999. Net cash provided from financing activities
was $1.3 million during the first quarter of 2000 as compared to $3.3 million
used in financing activities during the comparable fiscal period in 1999. The
increase resulted primarily from short-term debt borrowings from banks in
Brazil.
15
<PAGE> 18
We have a revolving line of credit in the amount of $2.0 million with
Eastern National Bank in Miami, Florida, with which we maintain our primary
banking relationship. This credit line is secured by a lien on certain property
owned by us. The credit line bears interest at a floating rate equal to prime
plus two percent. As of March 31, 2000, there was $1.8 million owed under the
facility.
As of March 31, 2000, we had approximately $6.9 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, 2000, we had
available approximately $15.0 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 $18.0
of our convertible notes exercised their put right, pursuant to the terms of the
notes, and requested 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, we were 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. We made the first two of such payments on November 30 and
December 31, 1998. In February 1999, we 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 $2.0
million plus accrued interest. We repaid a portion of the notes during this
period and in a series of transactions between April and July 1999, the holders
of such convertible notes sold the remaining principal balance of $5.2 million
of their notes to an unrelated third party investor. Simultaneously with such
sale, we amended and restated the terms of the convertible notes. The revised
terms provide the note holder with a conversion price equal to $11.00 per share
and provide the holder with the right to require us to repurchase the notes at a
premium, as defined in the agreement. In the event we decline 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 us to repurchase these notes at a premium, as defined in the
agreement, which resulted in the conversion of a principal amount of $4.7
million plus accrued interest and put premiums of their notes into 950,000
shares of the our Common stock. As of December 31, 1999, there was a principal
amount of approximately $558,000 outstanding on such notes.
In April 1999, in order to induce the holders of $3.6 million of our 10%
convertible notes, we amended and restated the terms of the notes. The
conversion price of the notes was adjusted to $10.00 per share and the holders
were provided with an additional put option in October 1999 and again in April
2000. In October 1999, the holders of these notes exercised their put right to
require us to repurchase the notes at 120% of the principal amount. In November,
we began to repay the notes in accordance with their terms over a four month
period. We repaid the notes in full during the first quarter of 2000.
In April 1998, we formed a special purpose securitization entity that was
established solely to participate in a $150.0 million accounts receivable
securitization program. We formed the special purpose entity to acquire and hold
designated accounts receivable from us and to issue collateralized notes to
third party investors. Through December 1998, we sold approximately $140.0
million of our accounts receivable to this entity under the program. As a result
of the devaluation of the Real in January 1999, the securitization program
became in default. While the program remains in default, we are not allowed to
transfer additional accounts receivable to the special purpose entity other than
pursuant to our repurchase obligation under the program. The program remains in
default and we do not believe that it will be a viable financing source for us
in the future.
Under the terms of the securitization program, we are required to
repurchase the accounts receivable sold to the special purpose entity under
certain circumstances. The repurchase obligation may be satisfied by
transferring to the entity, for no additional consideration, an aggregate amount
of additional receivables, the net present value of which is equal to the
repurchase price in exchange for the subject receivables. If the net present
value of the accounts receivable available to affect this substitution is less
than the repurchase price thereof, then a cash payment must be paid for the
excess of the repurchase price over the net present value of the additional
accounts receivable transferred to the special purpose entity. As a result of
the structure of the program, at March 31, 2000, there is a contingent liability
in the amount of approximately $41.3 million which
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<PAGE> 19
represents the balance, at face value, of the accounts receivable sold to the
special purpose entity. We maintain an allowance for doubtful accounts on our
balance sheet with respect to the sold accounts receivable.
In March 1999, we received loans from a related party for the principal
amount of $10.5 million in addition to the $6.7 million in loans that we had
received in 1998 from that party. The $10.5 million loan bears interest at the
annual rate of 10% and is payable upon demand with 90 days notice. The loan is
evidenced by a promissory note and, at the maker's option, can be exchanged for
a convertible note, convertible at $9.25 per share, should the loan not be
repaid at maturity. In connection with the loan, we issued four year warrants to
purchase 300,000 shares of our common stock at a purchase price of $9.25 per
share. During 1999, we repaid approximately $3.6 million on such loans.
In May 1999, we completed a private placement of a $10.0 million
convertible debenture. The debenture is a two year 10% note convertible into our
common stock at an initial conversion price of $11.00. The debenture contains a
provision whereby the holder may require us to repurchase the debenture after
nine months at a price equal to 112% of the principal amount and on a quarterly
basis thereafter at a price adjusted accordingly. Should the holder elect to
require us to repurchase the debentures, we may repay the debentures in four
equal monthly payments. If we elect 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. We issued 100,000 warrants to purchase
shares of our common stock in connection with this financing and 36,000 warrants
to the placement agent.
In April 1999, we received a short-term loan from Gateway for the principal
amount of $11.0 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, we formed a strategic alliance with Gateway which
resulted in a $31.0 million investment by Gateway. Pursuant to a convertible
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
subject to adjustment. Each of William C. St. Laurent and Georges C. St.
Laurent, III, our President and Chief Executive Officer, have personally
guaranteed $11.0 million of the note. We also granted an option, exercisable at
our election, to acquire certain exclusive territorial rights in Brazil, and
other rights, from Gateway. For this option, we issued 538,284 shares of our
common stock to Gateway.
We have also granted an option to Gateway, exercisable until September 16,
2001, to engage in the following transactions with us: (i) extend an additional
$40.0 million convertible loan to us on the same terms and conditions as the
initial $31.0 million 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 our common
stock as defined in the agreement and/or (ii) enter into a merger agreement
whereby our shareholders have the option to (x) exchange their shares for $14.00
per share in cash or (y) receive one share of a new callable and putable common
stock. The new stock shall have a call provision whereby Gateway will have the
right to call 100%, but not less than 100% of the new stock, which it does not
already own, at a price which shall be determined by our performance. The new
stock shall also have a put provision whereby the new stockholders will have the
right to put annually to Gateway 100% but not less than 100% of their new stock,
at a price which shall be determined by our performance.
In March 2000, we entered into a $10.0 million loan agreement with Gateway
for the purchase of components. The one year loan bears interest at 10% per year
payable quarterly. At the option of Gateway, the note is convertible into our
common stock if not repaid by us at maturity by dividing the conversion amount
by the weighted daily average bid price per share of our common stock during the
30 consecutive day trading period immediately before the date of conversion.
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<PAGE> 20
In March 1998, we entered into a capital lease for $1.2 million for the
purchase of manufacturing equipment. The capital lease has a term of 60 months,
bears an adjustable interest rate, currently 9.9%, and requires a monthly
payment of $25,000. In October 1998, we entered into a capital lease for
$529,000 for the acquisition of equipment. The capital lease has a term of 3
years and bears an annual interest rate of 9.7% and requires quarterly payments
of $51,000. In November 1999, we restructured an operating lease for computer
software as a capital lease in the principal amount of $2.2 million. The capital
lease has a term of 36 months and bears an annual interest rate of 10.29% and
requires monthly payments of $70,000. As of December 31, 1999, the cost of
equipment under capital leases was $4.3 million as compared to $2.2 million as
of December 31, 1998. As of December 31, 1999, accumulated amortization of
equipment under capital leases was $701,000 as compared to $260,000 as of
December 31, 1998.
In May 2000, we entered into an agreement with Intel pursuant to which
Intel agreed to purchase shares of our common stock. The purchase price of the
shares is approximately $3.6 million and is being satisfied by a swap of our
indebtedness to Intel. We agreed to issue Intel shares at a per share price
equal to the average closing sales price of our common stock for the 20 trading
days prior to the date of issuance.
QUARTERLY RESULTS
The market for computer products in Brazil can be affected by seasonal
purchasing patterns and the general economic climate in Brazil. Accordingly, our
quarterly net sales and results of operations may vary significantly from
quarter to quarter. Our historical financial performance is not necessarily a
meaningful indicator of future results and, in general, management expects that
our financial results may vary materially from quarter to quarter. The following
table presents the unaudited quarterly financial information for the last eight
consecutive eight quarters:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1999 1999 1999
----------- ------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............ $38,635,842 $47,410,603 $75,513,490 $ 15,302,714 $25,641,391 $28,191,885
Income from
operations......... 7,195,953 11,066,274 13,925,160 200,318 5,237,735 5,030,826
Net income (loss).... 3,924,101 4,638,840 6,192,570 (22,722,258) 465,423 550,580
Earnings (loss) per
common share,
basic.............. $ 0.32 $ 0.36 $ 0.42 $ (1.55) $ 0.03 $ 0.04
Earnings (loss) per
common share,
diluted............ $ 0.32 $ 0.36 $ 0.42 $ (1.55) $ 0.03 $ 0.04
<CAPTION>
QUARTER ENDED
--------------------------
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
<S> <C> <C>
Net sales............ $31,287,094 $22,560,161
Income from
operations......... 1,801,657 1,328,112
Net income (loss).... 603,162 14,850
Earnings (loss) per
common share,
basic.............. $ 0.04 $ 0.00
Earnings (loss) per
common share,
diluted............ $ 0.04 $ 0.00
</TABLE>
Our sales have increased in the third and fourth quarters due to holiday
spending and the budget spending requirements of our customers.
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 Real 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. We have no assurance that the
Real Plan or current strategies will continue to be effective at combating
inflation. Inflation affects us by increasing the cost of goods and services we
use in the operation of our business and by increasing our financing costs. The
reaction of the Brazilian government to economic uncertainties such as rising
inflation can lead to adverse conditions for our business.
RECENT ACCOUNTING PRONOUNCEMENT
In June 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, 2000. The objective of the
statement is to establish accounting and reporting standards for derivative
instruments and hedging activities. We may use foreign currency forward
contracts, a derivative instrument, to hedge foreign currency transactions and
anticipated foreign currency transactions. The adoption of this new
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<PAGE> 21
accounting pronouncement is not expected to be material to our consolidated
financial position or results of operations.
HEDGING ACTIVITIES
Although our consolidated financial statements are presented in U.S.
Dollars in accordance with U.S. generally accepted accounting principles, our
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
our results of operations and financial condition. Currently, we are not engaged
in any hedging activities. We are, however, analyzing our exposure to currency
risks and developing a plan to use hedging activities to offset currency risks
as deemed appropriate. Any significant devaluation, such as occurred during the
first quarter of 1999, of the Real relative to the U.S. Dollar would have a
material adverse effect on our operating results.
FOREIGN CURRENCY TRANSLATION
Our financial statements 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 Real were re-measured 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 our 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 non-monetary items. Revenue
and expense accounts are translated at the average exchange rate in effect
during each month, except for those accounts that relate to non-monetary assets
and liabilities which are translated at historical rates.
Effective January 1, 1998, we determined that Brazil ceased to be a highly
inflationary economy under SFAS 52. Accordingly, as of January 1, 1998, we began
using the Real as the functional currency of our 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. Any translation
adjustments are reflected as a component of shareholders' equity.
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<PAGE> 22
BUSINESS
OVERVIEW
We are a leading manufacturer and marketer of computer products,
peripherals and software to business, governmental and individual clients in
Brazil. Our diversified family of products includes desktop personal computers,
notebook personal computers, workstations, network servers, networking
equipment, peripherals and software. We offer our own branded products and are
the exclusive distributor of Gateway computer products in Brazil.
We also provide integrated information technology solutions for our
corporate and governmental customers. We recently introduced a group of
integrated solutions for specific vertical markets in response to the growing
need for client-server distributed computing solutions in Brazil. These turn-key
business solutions include computer and networking hardware, software, Internet
connectivity and support services.
INDUSTRY OVERVIEW
Demand for personal computers and business systems integration products in
Brazil has increased significantly over the last seven years. Prior to 1993, the
market for computer products in Brazil was closed to foreign competition,
protected from foreign imports and reserved for Brazilian companies. During this
period of protection, the demand for computers was left largely unfulfilled,
resulting in pent-up demand for information technology products, including
personal computers and servers.
The installed base of personal computers in Brazil is approximately 50 per
1,000 inhabitants, as compared to approximately 595 per 1,000 in the United
States and approximately 170 per 1,000 in the countries of Southern Europe. The
majority of the growth of personal computer sales in Brazil is coming from the
first time personal computer buyer as opposed to the second or third generation
personal computer buyer. First time personal computer buyers generally require
more customer interaction at the time of sale and direct personal contact.
Businesses and governmental agencies in Brazil have been typically
underserved for their information management needs. This has historically been
due to the low level of business automation at these entities and the
unavailability and cost prohibitiveness of information technology solutions.
Such entities increasingly require a complete, single-source solution for their
integrated business information requirements.
STRATEGY
Our goal is to be the leading manufacturer and marketer of personal
computer products and turn-key information technology solutions in Brazil and
South America. The key elements of our strategy to accomplish this goal are the
following:
- Direct Marketing. We believe that our national direct sales strategy
affords us significant competitive advantages. We market our products and
services directly to end-users primarily through commissioned
representatives, our own retail stores, focused account teams in
government and corporate markets, and Internet commerce. Our national
network of over 250 active representatives directly targets small
business and consumer users and provides for the efficient gathering of
credit information. Our 15 company-owned retail stores feature a
diversified selection of our products and services and affords a person
to person interaction with end-users. Our internal direct sales staff
focuses on selling our products and services directly to business and
governmental clients. Our website was designed specifically for the
Brazilian market allowing for high speed and efficient product purchases.
We believe this direct sales strategy helps us maintain competitive
pricing by avoiding the traditional costs associated with third party
distribution channels.
- Brand Development. We intend to continue to develop our brand and trade
names in support of our direct marketing efforts. We believe that our
efforts should enhance the awareness of our brands among the end-users of
information technology and enable us to expand the penetration of our
products and
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<PAGE> 23
services. We believe that using the strength of the Microtec brand should
allow for the entry of new brands that we may introduce into the market,
such as Gateway.
- Enhanced Product Offerings. We seek to leverage our business and
governmental customer base to sell such customers our leading-edge
information technology solutions. As part of this strategy, in 1999 we
introduced Microtec Digital World, a series of new integrated solution
products. We will continue to promote to our existing customers enhanced
value added services to serve the growing need for business process
automation solutions in Brazil.
- Customer Financing. We believe that the lack of available credit to
consumers is a significant barrier for selling computer products in
Brazil. In response to this need, we offer the ability for our customers
to purchase our products on credit through our proprietary credit system.
All installment sales to customers are conducted in accordance with a
proprietary credit approval process that has been developed by us based
upon our experience in the Brazilian market. Our system permits us to
capture comprehensive credit history that allows for rapid and
high-quality credit decisions. We believe this credit approval process
significantly enhances our access to potential customers.
- New Market Expansion. We believe that there are opportunities to market
our products and services in other South American countries.
PRODUCTS
Information Technology Solutions
We have created a family of information technology solutions in Brazil. Our
service offerings feature standard and customized solutions for business and
governmental clients. The solutions contain components of hardware, software,
Internet connectivity, installation, training, support and administration.
Microtec Digital World
Microtec Digital World is a group of solutions tailored to specific
vertical markets. Our solutions are directed toward strategically chosen markets
where we have a traditional presence and a known customer base and provide a
single source approach. The Microtec Digital World solutions include:
- Microtec Educational is our fully integrated enterprise resource planning
solution for public and private schools in Brazil. The solution includes
web-based administration and teaching software which improves the
efficiency of operations and teaching by facilitating data management and
the interchange of information. This solution targets the approximately
100,000 public and private schools in Brazil.
- Smart City is an integrated solution directed at the administrative and
fiscal management of the approximately 5,500 municipal governments in
Brazil. We developed this solution in response to the Brazilian
government mandate that all municipal governments' processes be
automated.
- Smart Health is a web-based solution for managing healthcare systems in
Brazil. The solution can be used for systems ranging from small clinics
to large public hospitals. It uses a hybrid set of tools, including smart
card technology, and web-based tools to provide for simplified and
convenient client scheduling, as well as health care management. There
are over 50,000 health clinics and medical offices as well as over 7,700
hospitals in Brazil.
- Retail Automation targets retail establishments such as supermarkets,
pharmacies, and gas stations. It provides sales checkout automation and
control of inventory at the point of sale.
Customized Solutions
As a developing country migrating from a mainframe system-dominant
environment, Brazil has an increasing demand for distributed computing
solutions. Many of our system integration customers do not yet have the
expertise to design complex systems. In response, we assembled our own business
systems integration
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<PAGE> 24
team that supplies technical expertise to design customized turn-key business
solutions, including local and wide area networks, for our corporate and
government customers.
Computer Systems
We are a vertically integrated computer manufacturer and direct marketer
based in Brazil. We offer a full line of computer products from low-end
workstations to high-end multimedia workstations and powerful multi-processor
servers. Our products include desktop and notebook personal computers,
workstations, network servers, peripherals, and software. We offer our products
under the Microtec Vision, Microtec Mythus, Microtec Quest, Microtec Spalla and
Microtec Vesper names. In 1999, we entered into a strategic relationship with
Gateway. We currently sell certain Gateway branded products in Brazil and expect
to expand our manufacturing and marketing of Gateway products in Brazil.
As part of our relationship with Gateway, we benefit from access to their
technology and processes. Also, we have established relationships with leading
information technology developers. We are an original equipment manufacturer of
Intel products and a participant in the "Intel Inside" cooperative marketing
program. We are a direct OEM supplier of Microsoft products, and are a Microsoft
Solutions Provider for database, network and connectivity solutions.
Engineering and Product Development
Our 20 person engineering department is responsible for designing products,
producing the technical specifications for components required for manufacture,
training personnel, line engineering, and quality control/quality assurance
programs. The engineering group constructs the bill of materials of components
that are required for manufacture and designs the manufacturing line so that the
tasks can be undertaken reliably within the capabilities of our specially
trained labor force. Our engineering group also participates in the design of
customized business solutions for our business and governmental clients.
SALES CHANNELS
Our primary channels of distribution are as follows:
- Network Representatives. Network representatives, working through
regional managers who control 60 regions covering Brazil, sell
house-to-house and office-to-office. These network representatives work
as independent contractors on a strict commission basis and use our
retail stores as regional distribution hubs. Prior to becoming active,
our network representatives participate in a sales and technical training
program administered by us and designed to insure consistency in
marketing.
- Direct Sales Teams. We have established a sales team that is focused on
selling our products and services directly to business and governmental
customers.
- Company-Owned Retail Stores. Our own retail stores are located in
important strategic markets in Brazil. In addition to facilitating direct
sales to end-users, these stores serve as regional distribution and
support centers. Our stores also feature sales personnel promoting our
integrated information technology solutions for corporate and government
customers.
- Telemarketing. Our 15 telemarketing personnel sell our products direct
to consumer end-users and market our products to small resellers. In
addition to generating sales to end-users, this channel also serves as a
lead-generator for network representatives and our direct sales staff.
- Internet Sales. We have an online store for selling our computer
products and services. During 1999, we introduced a program for
business-to-business sales, where clients are given specific home pages
to facilitate their specific purchasing needs.
In addition, we provide post sales technical support for our products. This
support is provided by our network representatives and direct sales team and
includes on-site servicing for corporate and government clients. Additionally,
we offer a telephone support service to respond to customer inquires.
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CUSTOMER FINANCING
Financing is an important component of our operations. Before extending
credit to a prospective customer, we thoroughly analyze the credit history and
ability to pay of such prospective customer. We have developed specific credit
analysis procedures for individual and business customers.
Individuals wishing to make a purchase utilizing installment sale
agreements are required to fill out a standard form where the applicant provides
certain information, including income, taxpayer registration number, address,
age and bank references. In addition to this information, we require proof of
income or employment, residence and the identity information issued by the
Brazilian government. Our credit manual also provides for alternative
requirements based on the applicant's profession and income stream.
Business entities seeking credit are subject to a similar credit analysis.
As with individuals, credit applications are processed and reviewed directly by
us in accordance with our credit manual. Business customers are required to fill
out a standard form in which they must disclose organizational information, such
as the nature of business, taxpayer registration number, and commercial and
banking references, business customers must also submit copies of documents such
as financial statements, corporate organizational documents and taxpayer
registration card.
MANUFACTURING
Our manufacturing facility consists of a modern 160,000 square foot leased
facility in northern Brazil. We have a manual and an automated production line
that together have the capacity to produce over 25,000 units per month and we
currently employ over 300 factory workers.
Operating in the Brazilian market requires logistics and materials handling
experience in order to overcome the infrastructure challenges of Brazil. We
maintain an integrated manufacturing requirements planning system which helps to
optimize our investments in inventory. We source components directly from
manufacturers and distributors in Asia and the United States. Virtually all of
the products that we purchase are received and consolidated in containers at our
U.S. facility for sea or air freight to our facility in Brazil. Components are
then shipped to our manufacturing facility in Brazil on a coordinated basis to
allow production goals to be met in accordance with our sales objectives. Our
material requirements planning system allows us to track and control components
throughout the entire procurement process.
We address quality assurance at all stages of the manufacturing process. We
have implemented a total quality program at our manufacturing facility and have
an ISO-9001 process certification. Incoming components receive a physical damage
inspection upon receipt and again at the start of the production process. A
statistical sampling of components in every category is electronically tested
prior to assembly. Each complete unit is then functionally tested at the end of
the production process to demonstrate that all components are engaged and fully
operational. Thereafter, each complete unit is subject to a burn-in test.
During 1999, we received governmental approval to be able to transfer
shipments within 24 hours from the port of entry in Brazil to our own in-bond
facility at our manufacturing facility. Under this program, we are allowed
immediate use of the product and a deferment of import duties and fees by up to
30 days. We maintain a fleet of tractor-trailers and a fleet of vans and trucks
for delivery of finished goods to our distribution points and to end-users.
COMPETITION
The manufacturing and distribution of computer equipment and related
products is highly competitive and requires substantial capital. We compete
with, and will compete with, numerous international, national, and regional
companies, many of which have significantly larger operations and greater
financial, marketing, human, and other resources than us, which may give such
competitors competitive advantages, including economies of scale and scope.
Competitors include internationally recognized companies such as IBM, Acer,
Dell, Hewlett Packard and Compaq. Additionally, we compete with internationally
recognized systems integrators such as IBM, EDS and Unisys. Competition is based
on price, product quality, customer support and the ability to deliver products
in a timely fashion.
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In addition, we compete with other manufacturers of computer equipment sold
on what is known as the "gray market" in Brazil. Such manufacturers are able to
sell such equipment at prices that are often significantly lower than those
offered by us and other legitimate manufacturers because of the avoidance of
import duties, taxes, and software licensing fees.
BACKLOG
Our backlog as of March 31, 2000 was approximately $3.5 million. We expect
to ship our entire current backlog within our current fiscal year. Variations in
the magnitude and duration of contracts received by us and customer delivery
requirements may result in substantial fluctuations in backlog from period to
period. Since customers may cancel or reschedule deliveries, backlog may not be
a meaningful indicator of future financial results.
EMPLOYEES
As of March 31, 2000, we employed approximately 750 persons, including 3
executive officers, 30 executive personnel, 20 engineering personnel, and 120
administrative personnel. We believe that our employee relations are
satisfactory.
PROPERTIES
We lease from an unaffiliated landlord approximately 23,000 square feet of
corporate office and warehouse space in Miami, Florida pursuant to a lease which
expires in March 2005, at an approximate annual rent of $146,000.
We lease approximately 15,000 square feet of office space in Sao Paulo,
Brazil pursuant to a lease which expires in October 2000 for an annual rent of
approximately $156,000. We have an option to renew for up to three more years
and are currently evaluating the renewal of the lease. We lease approximately
160,000 square feet of manufacturing and administrative space in Ilheus, Brazil
pursuant to a lease which expires in November 2000 for an annual rent of
approximately $122,000. We have an option to renew the lease for up to six
months. We are currently evaluating the renewal of such lease and the possible
purchase of the facility. In addition, we lease warehouse and retail space in
Recife and Belo Horizonte, Brazil.
We believe that in the event that the lease with respect to any of the
aforementioned facilities should not be renewed, alternative space will be
available at comparable rates.
In addition to the facilities discussed above, we own, for investment
purposes, two undeveloped parcels of land near Ilheus, Brazil. We do not plan to
make material capital expenditures or improvements with respect to properties
during this year.
LEGAL PROCEEDINGS
On October 28, 1995, Meris Financial Incorporated entered into a loan
agreement with us pursuant to which Meris made available a loan to us in the
principal amount of $2.0 million. The loan was to mature on October 28, 1997 and
bore interest at a rate of 12% per annum payable monthly. The loan was secured
by our assets exclusive of inventory and receivables. In connection with the
loan, Meris received a guarantee by Georges St. Laurent III, our Chairman of the
Board and Chief Executive Officer, and by William C. St. Laurent, our President
and Chief Operating Officer, and his wife, Wendy St. Laurent, a stock pledge
agreement by such parties, a collateral assignment of various rights of the St.
Laurents as well as assignments of life insurance policies on the lives of
Messrs. St. Laurent. The note was convertible into approximately 4.7% of the
shares of our common stock. In addition, certain options were provided to Meris
which afforded them the right to purchase up to an aggregate of 5% of our
capital stock. On July 20, 1996, we and Meris entered into an amendment of the
loan agreement pursuant to which we were obligated to make principal and
interest payments during the period between July 20, 1996 and by November 1,
1996, with the remaining principal balance to be paid on November 1, 1996. In
connection with the amendment, the conversion rights provided by the note and
the options were cancelled provided all payments of principal and interest under
the note are
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made as set forth above. We made all payments in accordance with such amendment
and on October 30, 1996, repaid the note in full.
In October 1996, Meris had advised us that, irrespective of the amendment,
it believed it had certain rights to an equity ownership position in us. In
February of 1998, Meris filed a UCC-3 in our favor releasing any claim that
Meris had on our assets as a result of a UCC-1 filed when Meris entered into the
loan agreement with us. In June 1998, Meris filed a law suit with the United
States District Court in Arizona affirming such claim against us. While we
believe such claims are without merit, Georges C. St. Laurent III and William C.
St. Laurent have agreed to settle such equity claims, should the need arise,
from their personal share holdings. In November 1999, we filed a motion for
dismissal of the case stating that we had complied with all the terms of the
loan agreement between us and Meris and any amendment thereto. The court has
decided not to rule on our motion for dismissal until we have entered into
settlement discussions with Meris in an attempt to reach a settlement on the
case. Should we be unsuccessful in reaching an agreeable settlement with Meris
during such court suggested settlement discussions, then we will pursue our
motion filed for the dismissal of the case.
Other than as discussed above and other than in the ordinary course of our
business, we know of no other material litigation or claims pending, threatened,
or contemplated to which we are or may become a party.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our directors and executive officers and certain of our key employees and
their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Georges C. St. Laurent, III(1)............. 39 Chairman of the Board of Directors and
Chief Executive Officer
William C. St. Laurent(2).................. 35 President, Chief Operating Officer, and
Director
Edward A. Kelly............................ 32 Chief Financial Officer
Francisco Suarez Warden(1)................. 57 Director
H.R. Shepherd(1)(2)........................ 78 Director
William Robin Blackhurst(2)................ 65 Director
Vicente Borges Soares...................... 46 Chief Operating Officer -- Brazilian
Operations
Paulo Alouche.............................. 36 Executive Vice President -- Sales and
Marketing
Sergio Lima................................ 38 Financial Director -- Brazilian Operations
Gerson Vasconcelos Pasquini................ 48 Chief Technology Officer -- Brazilian
Operations
Randolpho Abreu Pereira da Silva........... 33 Senior Vice President -- Consumer Sales
</TABLE>
---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
DIRECTORS AND EXECUTIVE OFFICERS
GEORGES C. ST. LAURENT III has served as our Chairman of the Board and
Chief Executive Officer since 1993. Between 1986 and January 1993, Mr. St.
Laurent operated GSL Trading Co., a re-manufacturer of computer hardware for
sale to Brazil and other Latin American countries. Between 1986 and 1993, Mr.
St. Laurent was also an officer and principal shareholder of TNT Systems Inc., a
computer parts broker selling to customers in Latin America and the United
States. From 1986 to the present, Mr. St. Laurent has been a director of Clinica
Kirpalamar, a not-for-profit Latin American medical foundation. Mr. St. Laurent
graduated from Yale University in 1982 with a Bachelor of Science in Molecular
Biology. Georges C. St. Laurent III is the brother of William C. St. Laurent.
WILLIAM C. ST. LAURENT has served as our President and Chief Operating
Officer and a Director since 1993. Mr. St. Laurent has also served as Vice
Chairman of the Board of Directors of the Western Bank of Oregon from January
1989 through January 1996. Mr. St. Laurent previously owned several private food
processing companies located in Oregon from 1988 to 1992. Mr. St. Laurent
graduated from Cornell University in 1986 with a Bachelor of Science in Hotel
Administration. William C. St. Laurent is the brother of Georges C. St. Laurent
III.
EDWARD A. KELLY has served as our Chief Financial Officer since June 1997.
Mr. Kelly served as our Corporate Controller from June 1996 to June 1997. Mr.
Kelly graduated from the University of Florida with a Bachelor of Science Degree
in Finance and holds a Master of Business Administration from the University of
Florida. Prior to joining us, Mr. Kelly worked as an associate with a seed
capital fund that assisted start-up technology companies. Prior to that, Mr.
Kelly worked in the cellular industry with Bell South Mobility, Inc.
FRANCISCO SUAREZ WARDEN, CPA. has been a director since February 2000. Mr.
Suarez is the Director of Human Resources for Groupo Financiero Bancomer in
Mexico. He has over 25 years of senior management experience with U.S. companies
operating in Latin America, including Mexico and Brazil. Mr. Suarez is a former
President of the Mexican Institute of Financial Executives and Vice President of
the Board of the National Chapter. He received his CPA degree from the Instituto
Tecnologico de Monterrey, Mexico.
26
<PAGE> 29
H.R. SHEPHERD has been a director since November 1996. Since 1993, Mr.
Shepherd has served as special advisor to the Chairman of Medeva PLC, a
pharmaceutical company. From 1955 to 1993 Mr. Shepherd served as Founder and
Chairman of Armstrong Pharmaceuticals, previously known as Aerosol Techniques, a
pharmaceutical drug delivery company which was acquired by Medeva PLC. Mr.
Shepherd is the Chairman of the Albert F. Sabin Vaccine Foundation.
WILLIAM ROBIN BLACKHURST has served as director since January 1998. Mr.
Blackhurst retired in 1997 after serving as managing director for the Sao Paulo
office of UBS Securities LLC since 1994. Prior to 1994, Mr. Blackhurst was
engaged in managerial positions at Banco Multiplic S.A., ACP, Inc. and Brazil
Venture Capital Partic. Ltda. Mr. Blackhurst holds a Master of Arts degree in
Law from the Balliol College, Oxford University in England.
Directors are elected at our annual meeting of shareholders and serve a
term of one year or until their successors are elected and qualified. Officers
are appointed by the Board of Directors and serve at the discretion of the Board
of Directors.
Our Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee administers our stock option plan
and makes recommendations to the full Board of Directors concerning
compensation, including incentive arrangements, of our officers and key
employees. The Audit Committee reviews the engagement of the independent
accountants and reviews the independence of the accounting firm. The Audit
Committee also reviews the audit and non-audit fees of the independent
accountants and the adequacy of our internal accounting controls. Additionally,
the Audit Committee reviews any affiliated transactions by us. Independent
directors comprise a majority of each of the Compensation Committee and the
Audit Committee.
KEY EMPLOYEES
VICENTE BORGES SOARES has been the Chief Operating Officer of our Brazilian
operations since December 1999. From May 1995 to December 1999, he served as
Commercial Director of our Brazilian operations. Prior to that, Mr. Borges
Soares was a Managing Partner and Commercial Director of Grupo Maspa. Mr. Borges
Soares is also President and Treasurer of the Academic Directory of XXI of April
at the Campinas State University. Mr. Borges Soares graduated from the
Universidade de Campinas with a Master in Dentistry.
PAULO ALOUCHE has served as Executive Vice President of Sales and Marketing
since January 1998. Prior to that, he served as Sales and Marketing Director at
Microtec since 1989. Prior to 1989, Mr. Alouche was employed as a Support
Engineer at Elebra Informatica Ltda. Mr. Alouche holds a Bachelor of Science
degree in Production Engineering from Universidade Paulista and another Bachelor
of Science degree in Business Administration, with an emphasis in Marketing,
from Fundacao Getulio Vargas.
SERGIO LIMA has been the Financial Director of our Brazilian operations
since December 1995. Prior to joining us, Mr. Lima served as the Credit and
Collections Manager for Filcril Com. Imp. e Exp. Ltda., a computer products
dealer, and Credit and Collections Manager for Sonata Ind. de Aparelhos
Electronicos Ltda., a sound systems manufacturer. Mr. Lima has a degree in
Business Administration from the Pontificia Universidade Catolica de Sao Paulo.
GERSON VASCONCELOS PASQUINI has served as Chief Technology Officer of our
Brazilian operations since October 1998. He has over 20 years experience in the
Technology / Systems Development area, most recently in senior technical
management positions with the software companies SID Informatica and Situal
Informatica. Mr. Vasconcelos graduated in 1978 from the Faculdades Integradas
Tereza Martin with a Bachelor of Science in Mathematics.
RANDOLPHO ABREU PEREIRA DA SILVA joined Microtec in 1997 as Senior Vice
President of Consumer Sales. He was the founder and President of Techshop, a
computer and peripherals retailer which we acquired in 1997. He has over 15
years experience in the Brazilian computer industry. Mr. Pereira received a
degree in Economics from the Pontificia Universidade Catolica of Minas Gerais in
1983.
27
<PAGE> 30
EMPLOYMENT AGREEMENTS
Messrs. Georges C. St. Laurent III and William C. St. Laurent are each
parties to two-year employment agreements which terminate on December 31, 2002.
Under the terms of each employment agreement, Messrs. St. Laurent and St.
Laurent will each receive annual compensation of $240,000. In the event that
either Georges C. St. Laurent, III or William C. St. Laurent were to die or
become disabled anywhere outside Brazil, that individual, or his estate, would
receive his annual compensation for 12 months. In the event that either was to
become disabled in Brazil, that individual would receive his annual compensation
for 24 months. In the event that either was to die in Brazil, that individual's
estate would receive that individual's compensation for the greater of 24 months
or the remaining term of the employment agreement.
EXECUTIVE COMPENSATION
The following table sets forth information relating to the compensation
paid by us for the past three fiscal years to: (1) our Chairman and Chief
Executive Officer; and (2) each of our executive officers who earned more than
$100,000 during the fiscal year ended December 31, 1999 (collectively, the
"Named Executive Officers"):
<TABLE>
<CAPTION>
STOCK ALL OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION
--------------------------- ---- -------- ------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Georges C. St. Laurent III,................. 1999 $192,000 $50,000 -- --
Chairman of the Board 1998 240,000 50,000 -- --
and Chief Executive Officer 1997 240,000 -- -- --
William C. St. Laurent,..................... 1999 $192,000 $50,000 -- --
President and 1998 240,000 50,000 -- --
Chief Operating Officer 1997 240,000 -- -- --
Edward A. Kelly............................. 1999 $100,000 $30,000 25,000 --
Chief Financial 1998 100,000 18,063 -- --
Officer 1997 68,500 13,000 27,500 --
</TABLE>
OPTION GRANTS
During the year ended December 31, 1999, we granted options to purchase
25,000 shares of our common stock to Edward A. Kelly. The options are
exercisable at a price of $9.00 per share and are exercisable over a five year
period. Other than this, no other options were granted to the Named Executive
Officers during the year ended December 31, 1999.
AGGREGATED FISCAL YEAR-END OPTIONS VALUE TABLE
The table below sets forth certain information pertaining to unexercised
stock options held by the named executive officers during the year ended
December 31, 1999. No stock options were exercised by the named executive
officers during the year ended December 31, 1999. The closing price of our
common stock on December 31, 1999 was $8.00.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES HELD AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Georges C. St. Laurent,
III..................... -- -- 2,075,700 -- -- --
William C. St. Laurent.... -- -- 1,994,300 -- -- --
Edward A. Kelly........... -- -- 59,540 -- $47,450 --
</TABLE>
28
<PAGE> 31
STOCK OPTION PLAN
Our 1996 Stock Option Plan provides for the grant of options to purchase up
to 550,000 shares of our common stock to our employees, officers, directors, and
consultants. Options may be either incentive stock options within the meaning of
Section 422 of the United States Internal Revenue Code of 1986, as amended, or
non-qualified options. Incentive stock options may be granted only to employees,
while non-qualified options may be issued to non-employee directors,
consultants, and others, as well as to employees.
This plan is administered by the Compensation Committee of the Board of
Directors, which determines, among other things, those individuals who shall
receive options, the time period during which the options may be partially or
fully exercised, the number of shares of our common stock issuable upon the
exercise of each option, and the option exercise price.
The exercise price of an incentive stock option may not be less than the
fair market value per share of our common stock on the date the option is
granted. The exercise price of a non-qualified option may be established by the
Board of Directors or the Compensation Committee. The aggregate fair market
value of our common stock for which any person may be granted incentive stock
options which first become exercisable in any calendar year may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to such person, 10% or more of the total
combined voting power of all classes of our stock shall be eligible to receive
any incentive stock options under this plan unless the exercise price is at
least 110% of the fair market value of the shares of our common stock subject to
the option, determined on the date of grant. Non-qualified options are not
subject to such limitations.
Incentive stock options may not be transferred by an optionee other than by
will or the laws of descent and distribution, and, during the lifetime of an
optionee, the option may be exercised only by the optionee. In the event of
termination of employment for cause or voluntary termination of employment by
the optionee, the option will expire upon such termination. In the event of
termination of employment other than by death or disability, for cause, or
voluntary termination by the optionee, the optionee will have no more than
thirty days after such termination during which the optionee shall be entitled
to exercise the option, unless otherwise determined by our Board of Directors.
Upon termination of employment of an optionee by reason of death or permanent
and total disability, such optionee's options remain exercisable for one year
thereafter to the extent such options were exercisable on the date of such
termination. No similar limitation applies to non-qualified options.
Options under this plan must be issued within ten years from August 20,
1996, the effective date of this plan. Incentive stock options granted under
this plan cannot be exercised more than ten years from the date of grant.
Incentive stock options issued to a 10% shareholder are limited to five year
terms. Options granted under this plan generally provide for the payment of the
exercise price in cash and may provide for the payment of the exercise price by
delivery to us of shares of our common stock already owned by the optionee
having a fair market value equal to the exercise price of the options being
exercised, or by a combination of such methods. Therefore, if so provided in an
optionee's grant, such optionee may be able to tender shares of our common stock
to purchase additional shares of our common stock and may theoretically exercise
all of his or her stock options with no additional investment other than the
consideration paid for the purchase of such optionee's original shares.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by us become available again for issuance under this
plan.
This plan may be terminated or amended at any time by the Board of
Directors, except that the number of shares of our common stock reserved for
issuance upon the exercise of options granted under this plan may not be
increased without the consent of our shareholders.
As of the date of this prospectus, options for 287,127 shares of our common
stock have been issued pursuant to this plan. Such options were issued to our
employees, directors and consultants at exercise prices ranging from $6.50 to
$18.00 per share.
29
<PAGE> 32
ADDITIONAL OPTIONS
In November 1996, we issued four year options to purchase 4.4 million
shares of our common stock to Georges C. St. Laurent III and William St.
Laurent. Of these options, 1.1 million are exercisable at $13.64 per share, 1.1
million are exercisable at $18.18 per share and 2.2 million are exercisable at
$22.73 per share. In June 1997, Georges C. St Laurent III and William St.
Laurent transferred 330,000 of these options exercisable at $13.64 per share to
certain members of our management.
CERTAIN TRANSACTIONS
In March 1999, we received a loan from Georges St. Laurent Jr., the father
of Georges St. Laurent III, our Chairman of the Board and Chief Executive
Officer, and William St. Laurent, our President and Chief Operating Officer, for
$10.5 million. This loan was in addition to the $6.7 million in loans that we
had received in 1998 from Georges St. Laurent Jr. The $6.7 million loans are
evidenced by promissory notes, are secured by certain of our assets, bear
interest at the annual rate of 10%, and are payable upon demand with 90 days'
notice. The $10.5 million loan is evidenced by a promissory note bearing
interest at the annual rate of 10%. At Mr. St. Laurent's option the note can be
exchanged for a convertible note convertible at $9.25 per share should the loan
not be repaid on demand with 90 days notice. In connection with this loan we
issued to Georges St. Laurent Jr., warrants to purchase 300,000 shares of our
common stock at an exercise price of $9.25 per share. During 1999, we repaid
approximately $3.6 million of such loans.
During 1999, we entered into transactions with an aggregate value of $3.5
million with ITC.net, an entity whose principal shareholders are Georges St.
Laurent III and William St. Laurent. In 1998 we entered into transactions with
an aggregate value of $1.1 million with ITC.net. As of December 31, 1999, we had
a receivable outstanding from ITC.net of $1.6 million. Additionally, during
1998, we entered into a joint marketing agreement with ITC.net, whereby the two
companies will cross sell each others' products. In consideration for the joint
marketing agreement, ITC.net granted to our shareholders of record date March 1,
1999, warrants to purchase one share of ITC.net common stock for every share of
our stock owned by the shareholder. The warrants have an exercise price of $0.15
per share and are non-exercisable and non-transferable until such time that
there is an effective registration statement covering the securities of ITC.net.
In September 1999, we formed a strategic alliance with Gateway that
resulted in a $31.0 million investment by Gateway. The investment was in the
form of a 10% convertible promissory note, with interest payable quarterly. The
note matures on March 16, 2001 and is initially convertible at $11.02. We were
also granted an option to acquire certain exclusive territorial rights in Brazil
from Gateway. For this option, we issued 538,284 shares of our common stock to
Gateway. In March 2000, we entered into a $10.0 million loan agreement with
Gateway for the purchase of components. The one year loan bears interest at 10%
per year payable quarterly. At the option of Gateway, the note is convertible
into our common stock if not repaid by us at maturity. During 1999, we purchased
products valued at $2.6 million from Gateway.
During 1999, we made loans to Georges C. St. Laurent III. The highest
amount outstanding during 1999 was $650,000. The balance outstanding at March
31, 2000 was $307,000.
30
<PAGE> 33
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act permits the indemnification of
directors, employees, officers and agents of Florida corporations. Our Amended
and Restated Articles of Incorporation provide for the indemnification of our
directors and officers to the fullest extent permitted by law.
At present, there is no pending litigation or proceeding involving a
director, officer, employee, or other agent of ours as to which indemnification
is being sought, nor are we aware of any threatened litigation that may result
in claims for indemnification by any director, officer, employee, or other
agent.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers, and controlling persons of ours
pursuant to the foregoing provisions or otherwise, we have been advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
31
<PAGE> 34
PRINCIPAL SHAREHOLDERS
The following table shows common stock ownership with respect to:
- each person known to us to be the beneficial owner of more than 5% of our
common stock;
- each director and Named Executive Officer; and
- all of our directors and executive officers as a group.
This table assumes the following:
- unless otherwise indicated, the address of each of the listed beneficial
owners identified is c/o Vitech America, Inc., 2190 N.W. 89th Place,
Miami, Florida 33172;
- unless otherwise noted, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of
common stock beneficially owned by them;
- a person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this prospectus;
and
- as of the date of this prospectus there were issued and outstanding
16,345,939 shares of our common stock.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
-----------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES BEFORE THE OFFERING AFTER THE OFFERING
------------------------------------ ---------------- ------------------- ------------------
<S> <C> <C> <C>
Georges C. St. Laurent, III............... 6,232,610(1) 33.8% 29.1%
William C. St. Laurent.................... 5,783,325(2)(3) 31.5 27.1
H.R. Shepherd............................. 53,000(4) * *
William Robin Blackhurst.................. 31,000(5) * *
Francisco Suarez Warden................... 10,000(6) * *
Edward A. Kelly........................... 104,300(7) * *
Georges C. St. Laurent, Jr. .............. 3,357,827(8) 20.1 17.0
5115 Dubois Avenue
Vancouver, WA 98661
Gateway Companies, Inc. .................. 3,351,351(9) 17.5 15.1
4545 Towne Centre Court
San Diego, CA 92121
St. Denis J. Villere & Company, Inc. ..... 1,060,616 6.5 5.5
210 Baronne St., Suite 808
New Orleans, LA 70112-1727
All directors and executive officers as a
group (6 persons)....................... 12,214,235(10) 59.3 51.7
</TABLE>
---------------
* Less than 1%
(1) Includes options to purchase 2,075,700 shares of common stock.
(2) Includes 2,485,608 shares of common stock held by Wolf Partners, a family
Limited Partnership of which William C. St. Laurent is the general partner.
(3) Includes options to purchase 1,994,300 shares of common stock.
(4) Represents options to purchase shares of common stock.
(5) Represents options to purchase shares of common stock.
(6) Represents options to purchase shares of common stock.
(7) Includes options to purchase 99,540 shares of common stock.
(8) Includes options and warrants to purchase 387,467 shares of common stock.
(9) Includes a note convertible into 2,813,067 shares of common stock.
(10) Includes options to purchase 4,263,540 shares of common stock.
32
<PAGE> 35
EXCHANGE RATES
All references herein to the "Real", "Reais" or "R$" are to Brazilian
Reais, the official currency of Brazil. All references to "U.S. Dollars",
"Dollars", "$" or "U.S.$" are to United States Dollars. The exchange rate of
Real amounts into U.S. Dollars was R$1.736 to U.S.$1.00 at March 31, 2000, based
on the commercial selling as reported by Central Bank of Brazil. See "Exchange
Rates" for information regarding exchange rates applicable to the Brazilian
currency since January 1, 1993.
There are two legal foreign exchange markets in Brazil: the commercial rate
exchange market (the "Commercial Market") and the floating rate exchange market
(the "Floating Market"). The Commercial Market is reserved primarily for foreign
trade transactions and transactions that generally require prior approval from
or registration with Brazilian monetary authorities, such as the purchase and
sale of registered investments by foreign persons and related remittances of
funds abroad. Purchases of foreign exchange in the Commercial Market may be
carried out only through a financial institution in Brazil authorized to buy and
sell currency in that market. The "Commercial Market Rate" is the commercial
selling rate for Brazilian currency into U.S. Dollars, as reported by the
Central Bank. The "Floating Market Rate" generally applies to transactions to
which the Commercial Market Rate does not apply. Prior to the implementation of
the Real Plan, the Commercial Market Rate and the Floating Market Rate differed
significantly at times. Since the introduction of the Real, the two rates have
not differed significantly, although there can be no assurance that there will
not be significant differences between the two rates in the future. Both the
Commercial Market Rate and the Floating Market Rate are reported by the Central
Bank on a daily basis.
Both the Commercial Market Rate and the Floating Market Rate are freely
negotiated but are strongly influenced by the Central Bank, which typically
intervened in the Commercial Market, prior to the implementation of the Real
Plan, in order to control fluctuations and to regulate disparities between the
Commercial Market Rate and the Floating Market Rate. After implementation of the
Real Plan, the Central Bank allowed the Real to float with minimal intervention.
However, as described below, on March 6, 1995, the Central Bank announced its
intention to intervene in the foreign exchange markets and has subsequently
intervened in the markets and taken other actions affecting such markets.
On March 6, 1995, the Central Bank announced that it would intervene in the
market and buy or sell U.S. Dollars, establishing a band in which the exchange
rate between the Real and the U.S. Dollar could fluctuate. The Central Bank
initially set the band with a floor of R$0.86 per U.S.$1.00 and a ceiling of
R$0.90 per U.S.$1.00 and provided that, from and after May 2, 1995, the band
would fluctuate between R$0.86 and R$0.98 per U.S.$1.00. Shortly thereafter, the
Central Bank issued a new directive providing that the band would be between
R$0.88 and R$0.93 per U.S.$ 1.00. On June 22, 1995, the Central Bank issued
another directive providing that the band would be between R$0.91 and R$0.99 per
U.S.$1.00. This was subsequently reset on January 30, 1996 to between R$0.97 and
R$1.06 per U.S.$1.00 and on February 17, 1997 to between R$1.05 and R$1.14 per
U.S.$1.00. On February 26, 1998, the band was once again reset to between R$1.13
and R$1.22 per U.S.$1.00. 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
Real then traded in a range from R$1.2114 per U.S. $1.00 to R$2.17 per U.S.
$1.00, closing the year at R$1.736 per U.S. $1.00.
33
<PAGE> 36
The following table sets forth the Commercial Market Rate for the periods
indicated.
<TABLE>
<CAPTION>
EXCHANGE RATES OF UNITS OF
BRAZILIAN CURRENCY PER U.S.$1.00(1)
---------------------------------------------
YEARS ENDED DECEMBER 31, LOW HIGH AVERAGE(2) PERIOD END
------------------------ -------- -------- ---------- ----------
<S> <C> <C> <C> <C>
1993............................................... 0.004557 0.118584 0.032809 0.118584
1994............................................... 0.120444 0.940000 0.645000 0.846000
1995............................................... 0.834000 0.972600 0.917742 0.972500
1996............................................... 0.972600 1.040700 1.005000 1.039400
1997............................................... 1.039500 1.116400 1.080375 1.116400
1998............................................... 1.116500 1.208700 1.164350 1.208700
1999............................................... 1.207800 2.170000 1.851500 1.802000
Period Ended March 31, 2000........................ 1.720000 1.855000 1.762333 1.736000
</TABLE>
---------------
(1) Amounts expressed in nominal Reais have been translated from the predecessor
Brazilian currencies in effect during the relevant periods, at the rates of
exchange at the times the successor currencies became the lawful currency of
Brazil.
(2) Represents the average of the month-end exchange rates during the relevant
period.
Brazilian law provides that, whenever there is a serious imbalance in
Brazil's balance of payments or serious reasons to foresee such imbalance,
temporary restrictions may be imposed on remittances of foreign capital abroad.
For approximately six months in 1989 and early 1990, for example, to conserve
Brazil's foreign currency reserves, the Brazilian government froze all dividend
and capital repatriations that were owed to foreign equity investors and held by
the Central Bank. These amounts were subsequently released in accordance with
Brazilian government directives.
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue 60,000,000 shares of common stock, no par value
per share, of which 16,345,939 shares of our common stock are outstanding as of
the date of this prospectus. The holders of our common stock are entitled to one
vote for each share held of record on all matters submitted to a vote of
shareholders. Holders of our common stock are entitled to receive ratably such
dividends as may be declared by our Board of Directors out of funds legally
available. In the event of a liquidation, dissolution, or winding up of our
company, holders of common stock are entitled to share ratably all assets
remaining after payment of liabilities. Holders of our common stock have no
preemptive rights and have no rights to convert their common stock into any
other securities.
PREFERRED STOCK
We are authorized to issue up to 3,000,000 shares of preferred stock, no
par value per share, of which no shares are outstanding as of the date hereof.
The preferred stock may be issued in one or more series, the terms of which may
be determined at the time of issuance by our Board of Directors, without further
action by shareholders, and may include voting rights (including the right to
vote as a series on particular matters), preferences as to dividends and
liquidation, conversion rights, redemption rights, and sinking fund provisions.
The issuance of any preferred stock could adversely affect the rights of the
holders of our common stock and, therefore, reduce the value of our common
stock. The ability of our Board of Directors to issue preferred stock could
discourage, delay, or prevent a takeover of our company. We have no plans to
issue any shares of preferred stock.
34
<PAGE> 37
NASDAQ NATIONAL MARKET
Our common stock is traded on the Nasdaq National Market under the symbol
"VTCH".
ANTI-TAKEOVER PROVISIONS OF FLORIDA LAW
We may be subject to the affiliated transaction and the control-share
acquisition provisions of Sections 607.0901 and 607.0902 of the Florida Business
Corporation Act.
These provisions of the Florida Business Corporation Act are designed to
restrict the occurrence of highly coercive takeovers. It also limits certain
related party transactions otherwise permissible under the Florida Business
Corporation Act. The law specifically provides that certain transactions between
a Florida corporation and an interested shareholder or affiliate or associate of
the interested shareholder, defined as any person who beneficially owns more
than 10% of the outstanding voting shares of the corporation, must be approved
by the affirmative vote of at least two-thirds of the holders of the other
voting shares.
Transactions that require the approval of two-thirds of the voting shares
beneficially owned by disinterested shareholders include: (1) mergers or
consolidations with the interested shareholder; (2) the sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to the interested shareholder
of five percent or more of either the corporation's total assets or total
outstanding shares, or representing five percent or more of the earning power or
net income of the corporation; (3) issuance or transfers of shares to the
interested shareholder having a market value of five percent or more of the
total market value of the corporation's outstanding shares (except pursuant to
the exercise of stock warrants or rights, or a dividend or distribution pro rata
to all shareholders); (4) a liquidation or dissolution of the corporation
proposed by or pursuant to a written or unwritten agreement or understanding
with the interested shareholder; (5) a reclassification of securities or other
corporate reorganization with the interested shareholder that has the effect of
increasing the percentage voting ownership of the interested shareholder by more
than five percent; and (6) any receipt by the interested shareholder of a
benefit, directly or indirectly, of any loans, advances, guarantees, pledges,
other financial assistance, or tax credits or advantages provided by or through
the corporation.
Transactions that are approved by majority of disinterested directors are
exempted from the above shareholder approval requirement. A disinterested
director is defined to mean any person who was a member of the our Board of
Directors before the date the interested shareholder became the owner of more
than 10% of the outstanding voting shares of the corporation, or anyone who
subsequently becomes a member of the Board of Directors with the approval of the
majority of the disinterested directors.
The control share acquisition provisions state that control shares acquired
in an acquisition have no voting rights until a resolution is approved by a
majority of shares entitled to vote.
Approval of voting rights requires: (1) approval by each class entitled to
vote separately, by majority vote and (2) approval by each class or series
entitled to vote separately, by a majority of all votes entitled to be cast by
that group excluding all control shares.
If an acquiring person proposes to make or has made a control share
acquisition, he may deliver to the issuing public corporation an acquiring
person's statement. The acquiring person may then request that the corporation
call a special meeting of the shareholders to consider granting rights to the
control shares.
If no acquiring person's statement has been filed, any control shares
acquired in an acquisition may, after 60 days has passed since the last
acquisition of control shares, be redeemed at their fair market value. If an
acquiring person's statement is filed, the shares are not subject to redemption
unless the shares are not given full voting rights by shareholders.
The effect and intent of the control share acquisition provision is to
deter corporate takeovers. Therefore, it is more likely than not that control of
our company will remain in the hands of the existing principal shareholders.
35
<PAGE> 38
TRANSFER AND WARRANT AGENT AND REGISTER
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, our common stock has traded on the Nasdaq National
Market, and no prediction can be made as to the effect, if any, that future
market sales of shares of common stock or the availability of shares of common
stock for sale will have on the market price of the common stock prevailing from
time to time. Nevertheless, sales of substantial amounts of common stock in the
public market, or the perception that sales could occur, could cause the market
price of the common stock to decline and could impair our future ability to
raise capital through the sale of our equity securities.
SHARES OUTSTANDING AND FREELY TRADABLE IMMEDIATELY FOLLOWING THIS OFFERING
After this offering, we will have an aggregate of 19,345,939 shares of
common stock outstanding. Of the shares outstanding immediately after the
offering, 10,549,210 shares, including the 3,000,000 shares sold in this
offering, will be freely tradable without restriction or further registration
under the Securities Act, except that any shares purchased by our affiliates, as
that term is defined in Rule 144 under the Securities Act, in this offering or
in the public market may only be sold in compliance with the volume and manner
of sale limitations of Rule 144 described below.
SHARES SUBJECT TO RULE 144
The remaining 8,796,729 shares of common stock held by existing
shareholders will be deemed restricted securities as that term is defined in
Rule 144. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule 144
or 144(k) promulgated under the Securities Act. These rules are summarized
below.
Subject to the lock-up agreements described below and the provisions of
Rules 144 and 144(k), additional shares will be eligible for sale in the public
market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<S> <C>
850,794 As of the date of this prospectus all of
these shares will be subject to the
volume and manner of sale limitations of
Rule 144; and
7,945,935 180 days after the date of this
prospectus all of these shares will be
subject to the volume and manner of sale
limitations of Rule 144.
</TABLE>
In general, under Rule 144 as currently in effect, a person or persons whose
shares are aggregated, including an affiliate, who has beneficially owned shares
for at least one year is entitled to sell, within any three-month period
commencing 90 days after the date of this prospectus, a number of shares that
does not exceed the greater of:
- one percent of the then outstanding shares of common stock, which will
equal approximately 205,000 shares immediately after this offering; or
- the average weekly trading volume in the common stock during the four
calendar weeks preceding the date on which notice of that sale is filed
with the SEC, subject to restrictions.
In addition, a person who is not deemed to have been an affiliate of ours
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years is entitled to sell those
shares under Rule 144(k) without regard to the requirements described above. To
the extent that shares are acquired from an affiliate of ours, the acquiring
person's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
36
<PAGE> 39
Upon closing we will have options to purchase a total of 4,742,127 shares
of our common stock, all of which are currently exercisable. The outstanding
options have a weighted average exercise price of $18.71 per share.
Upon the closing of the offering, 1,286,918 shares will be issuable upon
the exercise of outstanding warrants. Upon the closing of the offering,
3,817,864 shares will be issuable upon exercise of other convertible securities
which have been registered under the Securities Act.
REGISTRATION RIGHTS
We entered into an agreement with Intel Corporation which will result in
Intel's purchase of our common stock. Pursuant to the agreement, Intel has
agreed to cancel $3.6 million of indebtedness owed to them, plus interest from
April 1, 2000 to the effective date of a registration statement to be filed with
respect to the shares by June 25, 2000. In exchange we have agreed to issue
Intel shares of our common stock at a per share price equal to the average
closing sales price of our common stock for the 20 trading days prior to the
date of issuance. We are obligated to file a registration statement to register
all of the common stock to be issued to Intel under the agreement. We currently
estimate that Intel will receive approximately 565,000 shares. If we fail to
effect the registration statement within 90 days after the registration is filed
or we fail to keep the registration statement for an agreed upon period of time
as described in the agreement, Intel shall have the right to require the Company
to repurchase any of the shares held by Intel at the purchase price described in
the agreement.
37
<PAGE> 40
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement the form
of which has been filed as an exhibit to the registration statement of which
this prospectus forms a part, the underwriters named below, acting through
Joseph Charles & Assoc., Inc. and I-Bankers Securities, Inc. as representatives,
have severally agreed to purchase from us, and we have agreed to sell, an
aggregate of 3,000,000 shares of common stock. The underwriters' obligations to
pay for and accept delivery of a comfort letter from our auditors, receipt of an
opinion of our counsel and other closing conditions. The underwriters are
committed to purchase all of the shares of common stock if any securities are
purchased. Under certain circumstances, the commitments of non-defaulting
underwriters may be increased.
<TABLE>
<S> <C>
Joseph Charles & Assoc., Inc................................
I-Bankers Securities, Inc...................................
Total............................................. 3,000,000
=========
</TABLE>
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover page of this prospectus and
to certain dealers, who are members of the NASD, at such price less an
underwriting discount of 8% of the public offering price, or $ per share.
The underwriters may allow a concession of $ per share to dealers that are
members of the NASD. The representatives may permit dealers to reallow to other
dealers securities and receive a reallowance of $ per share. Until
completion of this offering, the public offering price, the underwriting
discount, concession and reallowances will not be changed.
We have agreed to pay the representatives a non-accountable expense
allowance of 1 1/2% of the aggregate offering price of the securities sold in
this offering, including any shares purchased pursuant to the over-allotment
option, of which $25,000 has been paid.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act of 1933, as amended, in connection with this offering.
We have granted to the underwriters an option, exercisable until
, 2000, to purchase up to 450,000 additional shares of the common
stock at the public offering price, less underwriting discounts and a pro rata
portion of the non-accountable expense allowance. The underwriters may exercise
this option solely to cover over-allotments, if any, made in the sale of the
securities offered hereby. Generally, to the extent that these options are
exercised, each underwriter will become obligated to purchase approximately the
same percentage of such additional securities as the percentage of securities it
was originally obligated to purchase as set forth above.
We have agreed to sell to the representatives or their designees, for
nominal consideration, the representatives' common stock purchase warrants to
purchase an aggregate of 300,000 shares of common stock at a price of $ per
share. The shares of common stock subject to the representatives' warrants will
be identical to the shares of common stock offered to the public hereby in all
respects. All of the representatives' warrants will be exercisable for a
four-year period commencing one year after the date of the consummation of this
offering and for a period of one year from the effective date of this offering,
the representative's warrant will be restricted from sale, transfer, assignment,
or hypothecation except to officers or partners (not directors) of the
representative and members of the selling group and/or their officers and
partners. The representatives' warrants will contain anti-dilution provisions
providing for appropriate adjustment of the exercise price and number of
securities that may be purchased upon the occurrence of specified certain
specified events. The representatives' warrants will also grant the holders
thereof certain rights of registration of such warrants and the shares of common
stock issuable upon exercise of such warrants.
Until the distribution of securities in this offering is completed, the
rules of the SEC may limit the ability of the underwriters and certain selling
group members to bid for and purchase the securities. As an exception to these
rules, the underwriters are permitted to engage in certain transactions that
stabilize the price of the securities. Such transactions consist of bids or
purchases for the purchases for the purpose of maintaining the
38
<PAGE> 41
price of the securities. If the underwriters create a short position in the
securities in connection with this offering, i.e., if they sell more shares of
common stock or warrants than are set forth on the cover page of this
prospectus, the underwriters may reduce the short position by purchasing common
stock in the open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
In addition, the representatives may impose a penalty bid on certain
underwriters and selling group members. This means that if the representatives
purchase shares of common stock in the open market to reduce the underwriters'
short position or to stabilize the price of the common stock, they may reclaim
the amount of the selling concession from the underwriters and selling group
members that sold those securities as part of this offering. In general,
purchases of a security for the purpose of stabilization or to reduce a short
position could cause the price of the security to be higher than it might be in
the absence of such purchases. The imposition of a penalty bid might also have
an effect on the price of a security to the extent that it discouraged resales
of that security. Neither the representatives nor any of the underwriters makes
any representations or predictions as to the direction or magnitude of any
effect that the transactions described above may have on the price of the
securities. In addition, neither the representatives nor any of the underwriters
makes any representations that the representatives or any such underwriter will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
The underwriters have informed us that sales to any account over which the
underwriters exercise discretionary authority will not exceed 1% of this
offering.
LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be
passed upon for us by Atlas Pearlman, P.A., Fort Lauderdale, Florida. Members of
Atlas Pearlman, P.A. own 14,430 shares of our common stock. Certain matters will
be passed upon for the underwriters by Kirkpatrick & Lockhart LLP, Beverly
Hills, California.
EXPERTS
The audited consolidated financial statements of Vitech America, Inc., as
of December 31, 1998 and 1999, and for each of the three fiscal years in the
period ended December 31, 1999, included in this Prospectus, have been audited
by Pannell Kerr Forster PC, independent certified public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
We are subject to the informational reporting requirements of the Exchange
Act, and file reports, proxy statements and other information with the
Securities and Exchange Commission. Such reports, proxy statements and other
information filed by us may be inspected at the public reference facilities of
the Commission located at Judiciary Plaza, 450 Fifth Street, N.W., Washington
D.C. 20549, at the New York Regional Office of the Commission, Seven World Trade
Center, Suite 1300, New York, New York 10048, and at the Chicago Regional Office
of the Commission, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621.
Copies of such material can also be obtained at prescribed rates from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a World Wide Website on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. In addition, our common stock is quoted on the Nasdaq
National Market. Reports and other information concerning us may be inspected at
the National Association of Securities Dealers Inc., 1735 K Street, Washington
D.C. 20006.
39
<PAGE> 42
We filed with the Commission a registration statement on Form S-1 under the
Securities Act, for the shares of common stock in this offering. This prospectus
does not contain all of the information in the registration statement and the
exhibits and schedule that were filed with the registration statement. For
further information with respect to us and our common stock, we refer you to the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedule that were filed with the registration statement. Any document we file
may be read and copied at the Commission's public reference room at 450 Fifth
Street, N.W. in Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information about the public reference room. Our
filings with the Commission are available to the public from the Commission's
Website at http://www.sec.gov.
40
<PAGE> 43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report................................ F-2
Consolidated Balance Sheet.................................. F-3
Consolidated Statement of Operations........................ F-4
Consolidated Statement of Changes in Shareholders' Equity... F-5
Consolidated Statement of Cash Flows........................ F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 44
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
Vitech America, Inc.
We have audited the accompanying consolidated balance sheet of Vitech
America, Inc. and Subsidiaries as of December 31, 1998 and December 31, 1999,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1997 financial statements of Microtec Sistemas
Industria e Comercio S.A. (Microtec), a subsidiary, which statements reflect
revenues of $34,714,000 for the period July 10, 1997 (date of acquisition)
through December 31, 1997 and are included in the consolidated totals. The
financial statements of Microtec were audited by other auditors whose report
thereon has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Microtec, is based solely upon the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Vitech America, Inc. and
Subsidiaries as of December 31, 1998 and 1999 and the results of its operations
and its cash flows for each of the three years ended December 31, 1999 in
conformity with generally accepted accounting principles.
Pannell Kerr Forster PC
New York, New York
April 12, 2000
F-2
<PAGE> 45
VITECH AMERICA, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1998 1999 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 7,719,185 $ 1,024,420 $ 4,087,839
Accounts receivable, net........................... 75,893,857 58,772,833 59,892,438
Inventories, net................................... 40,351,585 28,678,882 32,184,017
Deferred tax asset................................. -- 1,510,000 1,510,000
Taxes receivable credits........................... -- 2,468,391 3,575,657
Due from officers.................................. -- 179,093 307,432
Investment in subordinated debentures -- short
term............................................ 14,676,585 -- --
Other current assets............................... 8,538,379 1,321,502 1,092,771
------------ ------------ ------------
Total current assets....................... 147,179,591 93,955,121 102,650,154
Property and equipment, net.......................... 19,696,097 24,113,528 24,113,528
Investment in subordinated debentures -- long term... 2,677,906 -- --
Investments.......................................... 1,248,434 1,104,222 1,092,771
Goodwill, net........................................ 20,191,646 19,097,686 18,824,196
Deferred tax asset................................... 1,567,000 -- --
Other assets......................................... 3,106,301 10,167,620 13,169,351
------------ ------------ ------------
Total assets............................... $195,666,975 $148,438,177 $160,323,427
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable............................. $ 36,748,951 $ 25,208,408 $ 23,258,639
Accrued expenses................................... 4,811,130 1,986,919 1,941,723
Taxes payable...................................... 1,804,792 -- --
Deferred tax liability............................. 1,041,000 940,000 940,000
Notes payable -- related party..................... 6,700,000 13,564,505 13,564,505
Notes payable...................................... -- -- 10,000,000
Convertible note................................... -- -- 31,000,000
Current maturities of long-term debt............... 863,021 1,371,757 1,371,757
Short-term debt.................................... 25,036,536 4,949,846 8,670,246
------------ ------------ ------------
Total current liabilities.................. 77,005,430 48,021,435 90,746,870
------------ ------------ ------------
Long-term liabilities:
Convertible notes.................................. 13,730,535 43,882,921 11,007,765
Long-term debt..................................... 2,709,655 2,808,789 2,528,233
------------ ------------ ------------
Total long-term liabilities................ 16,440,190 46,691,710 13,535,998
------------ ------------ ------------
Commitments and contingencies
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 16,345,939 shares
issued and outstanding.......................... 60,844,866 72,385,718 72,385,718
Accumulated other comprehensive loss............... (4,607,064) (43,541,146) (41,240,469)
Retained earnings.................................. 45,983,553 24,880,460 24,895,310
------------ ------------ ------------
Total shareholders' equity................. 102,221,355 53,725,032 56,040,559
------------ ------------ ------------
Total liabilities and shareholders'
equity................................... $195,666,975 $148,438,177 $160,323,427
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 46
VITECH AMERICA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------------ --------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................... $117,537,403 $195,334,579 $100,423,084 $ 15,302,714 $22,560,161
Cost of sales............... 76,813,191 115,630,389 59,655,561 8,359,136 15,052,880
------------ ------------ ------------ ------------ -----------
Gross profit...... 40,724,212 79,704,190 40,767,523 6,943,578 7,507,281
Selling, general and
administrative expenses... 18,167,737 41,586,843 28,496,987 6,743,260 6,179,169
------------ ------------ ------------ ------------ -----------
Income from
operations...... 22,556,475 38,117,347 12,270,536 200,318 1,328,112
------------ ------------ ------------ ------------ -----------
Other (income) expenses:
Interest expense.......... 6,416,206 17,021,670 15,488,266 4,003,200 2,857,563
Interest (income)......... (1,866,222) (8,240,546) (2,464,155) -- --
Discount on sale of
receivables............ 1,497,412 7,496,268 4,103,247 2,262,496 --
Other expense (income).... -- -- (2,719,065) -- --
Foreign currency exchange
loss (gain)............ 2,665,224 1,603,670 19,009,336 16,656,880 (1,544,301)
Other financing
expenses............... (36,000) 1,079,609 -- -- --
------------ ------------ ------------ ------------ -----------
Total other
expenses........ 8,676,620 18,960,671 33,417,629 22,922,576 1,313,262
------------ ------------ ------------ ------------ -----------
Income (loss)
before provision
(benefit) for
income taxes and
minority
interest........ 13,879,855 19,156,676 (21,147,093) (22,722,258) 14,850
Provision (benefit) for
income taxes.............. 980,510 2,007,830 (44,000) -- --
------------ ------------ ------------ ------------ -----------
Income (loss)
before minority
interest........ 12,899,345 17,148,846 (21,103,093) (22,722,258) 14,850
Minority interest........... 107,084 (713,166) -- -- --
------------ ------------ ------------ ------------ -----------
Net income
(loss).......... $ 12,792,261 $ 17,862,012 $(21,103,093) $(22,722,258) $ 14,850
------------ ------------ ------------ ------------ -----------
Earnings (loss) per common
share -- Basic:
Net income (loss)...... $ 12,792,261 $ 17,862,012 $(21,103,093) $(22,722,258) $ 14,850
Weighted common
shares............... 11,924,422 13,166,157 14,899,862 14,635,655 16,345,939
------------ ------------ ------------ ------------ -----------
Net income (loss)
per common
share........... $ 1.07 $ 1.36 $ (1.42) $ (1.55) $ 0.00
------------ ------------ ------------ ------------ -----------
Earnings (loss) per common
share -- Assuming
dilution:
Net income (loss)...... $ 12,792,261 $ 17,862,012 $(21,103,093) $(22,722,258) $ 14,850
Weighted common
shares............... 12,033,798 13,348,269 14,899,862 14,670,538 16,345,939
------------ ------------ ------------ ------------ -----------
Net income (loss)
per common
share........... $ 1.06 $ 1.34 $ (1.42) $ (1.55) $ 0.00
------------ ------------ ------------ ------------ -----------
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 47
VITECH AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
ACCUMULATED
NUMBER OF COMMON RETAINED COMPREHENSIVE
SHARES STOCK EARNINGS LOSS TOTAL
---------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996............. 11,794,705 $20,203,903 $15,329,280 $ -- $35,533,183
Issuance of common stock for cash from
the exercise of warrants ($9.09 per
share)............................... 22,327 202,960 -- -- 202,960
Issuance of common stock for
acquisition of business ($12.73 per
share)............................... 212,145 2,700,000 -- -- 2,700,000
Issuance of common stock for
acquisition of businesses ($16.25 per
share)............................... 146,462 2,379,985 -- -- 2,379,985
Net income............................. -- -- 12,792,261 -- 12,792,261
---------- ----------- ----------- ------------ -----------
Balance at December 31, 1997............. 12,175,639 25,486,848 28,121,541 -- 53,608,389
Issuance of common stock for cash from
the exercise of warrants ($9.09 per
share)............................... 2,200 20,000 -- -- 20,000
Issuance of common stock for cash from
the exercise of warrants ($12.73 per
share)............................... 27,500 350,075 -- -- 350,075
Issuance of common stock for conversion
of notes payable ($14.40 average
price per share)..................... 2,430,316 34,987,943 -- -- 34,987,943
Net income............................. -- -- 17,862,012 -- 17,862,012
Foreign currency translation
adjustment........................... -- -- -- (4,607,064) (4,607,064)
---------- ----------- ----------- ------------ -----------
Balance at December 31, 1998............. 14,635,655 60,844,866 45,983,553 (4,607,064) 102,221,355
Issuance of common stock for
acquisition of Gateway territorial
rights option ($8.06 average price
per share)........................... 538,284 4,340,184 -- -- 4,340,184
Issuance of common stock for payment of
financing expenses and other debt
($6.58 average price per share)...... 222,000 1,461,398 -- -- 1,461,398
Issuance of common stock for conversion
of notes payable ($6.04 average price
per share)........................... 950,000 5,739,270 -- -- 5,739,270
Net (loss)............................. -- -- (21,103,093) -- (21,103,093)
Foreign currency translation
adjustment........................... -- -- -- (38,934,082) (38,934,082)
---------- ----------- ----------- ------------ -----------
Balance at December 31, 1999............. 16,345,939 72,385,718 24,880,460 (43,541,146) 53,725,032
Net income (unaudited)................. -- -- 14,850 -- 14,850
Foreign currency translation adjustment
(unaudited).......................... -- -- -- 2,300,677 2,300,677
---------- ----------- ----------- ------------ -----------
Balance at March 31, 2000 (unaudited).... 16,345,939 $72,385,718 $24,895,310 $(41,240,469) $56,040,559
---------- ----------- ----------- ------------ -----------
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 48
VITECH AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ --------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................... $ 12,792,261 $ 17,862,012 $(21,103,093) $(22,722,258) $ 14,850
Adjustments to reconcile net income
(loss) to net cash provided (used)
in operating activities
Depreciation...................... 1,184,707 2,584,643 3,164,680 814,258 798,015
Amortization of goodwill.......... 321,369 924,949 1,093,960 273,490 273,490
Amortization of deferred costs.... -- 77,846 2,076,507 -- 72,845
Minority interest................. 107,084 (713,166) -- -- --
Other financing expenses.......... -- 1,079,609 1,059,290 -- --
Gain on sale of business.......... -- -- (2,700,898) -- --
Provision for doubtful accounts... 286,276 3,314,367 (1,644,251) -- 181,227
Provision for inventory
obsolescence.................... -- 913,546 (1,228,750) -- (10,052)
Deferred income taxes............. (398,995) 669,000 (215,303) -- --
Changes in assets and liabilities
Accounts receivable............. (22,137,077) (39,980,910) 8,301,780 17,991,667 961,568
Inventories..................... (12,259,189) (6,918,044) (490,318) 7,662,891 (2,369,783)
Other assets.................... (4,855,932) (6,097,756) 81,142 4,296,925 (2,569,805)
Trade accounts payable.......... 1,858,457 21,266,311 (8,416,009) (3,692,850) 8,009,807
Accrued expenses................ 502,512 1,679,460 (347,314) (3,231,463) (67,655)
Due to/from officers............ (298,411) 370,623 (179,093) -- (128,339)
Tax receivable credits.......... (1,333,389) 3,315,737 (596,279) (506,579) (981,834)
------------ ------------ ------------ ------------ -----------
Net cash provided (used) in
operating activities....... (24,230,327) 348,227 (21,143,949) 886,081 4,184,334
------------ ------------ ------------ ------------ -----------
Cash flows from investing activities:
Purchases of property and
equipment......................... (6,597,303) (7,266,677) (9,630,614) (592,275) (763,000)
Proceeds from sale of business, net
of cash sold...................... -- -- 663,882 -- --
Payment for business acquisitions,
net of cash acquired.............. (10,376,969) (3,810,166) -- -- --
Other investments................... (398,440) (66,802) (271,615) 113,282 --
------------ ------------ ------------ ------------ -----------
Net cash (used) in investing
activities................. (17,372,712) (11,143,645) (9,238,347) (478,993) (763,000)
------------ ------------ ------------ ------------ -----------
Cash flows from financing activities:
Deferred financing expense.......... (637,609) (1,804,204) (524,000) -- --
Net proceeds (payments) under short-
term bank borrowings.............. 13,443,649 6,848,617 (16,259,131) (10,633,035) 3,511,151
Net payments of taxes payable....... (230,236) (163,077) (206,110) (309,762) --
Proceeds from notes
payable -- related party.......... 5,000,000 6,700,000 10,500,000 10,500,000 --
Repayment of notes
payable -- related party.......... (10,000,000) -- (3,635,495) -- --
Proceeds from convertible
note -- related party............. 20,000,000 -- -- -- --
Proceeds from convertible notes..... 38,608,250 -- 41,000,000 -- --
Repayments of convertible notes..... -- (11,173,215) (6,167,634) (2,200,000) (1,875,156)
Payment of note payable for business
acquisition....................... (3,718,750) (2,231,250) -- -- --
Proceeds from notes payable......... 768,225 -- -- --
Repayment of notes payable.......... (886,549) (1,236,975) (571,046) (686,123) (297,125)
Net proceeds from sale of common
stock............................. 202,960 370,075 -- -- --
------------ ------------ ------------ ------------ -----------
Net cash provided (used) by
financing activities....... 62,549,940 (2,690,029) 24,136,584 (3,328,920) 1,338,870
------------ ------------ ------------ ------------ -----------
Foreign exchange effect on cash and
cash equivalents.................... $ -- $ (1,500,000) $ (449,053) $ -- $(1,696,725)
------------ ------------ ------------ ------------ -----------
Net increase (decrease) in
cash and cash
equivalents................ 20,946,901 (14,985,447) (6,694,765) (2,921,832) 3,063,419
Cash and cash equivalents -- beginning
of period........................... 1,757,731 22,704,632 7,719,185 7,719,185 1,024,420
------------ ------------ ------------ ------------ -----------
Cash and cash equivalents -- end of
period.............................. $ 22,704,632 $ 7,719,185 $ 1,024,420 $ 4,797,353 $ 4,087,839
------------ ------------ ------------ ------------ -----------
</TABLE>
F-6
<PAGE> 49
VITECH AMERICA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ --------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest and discount on sale of
receivables....................... $ 6,836,325 $ 12,504,000 $ 14,915,825 $ 5,979,045 $ 2,518,450
------------ ------------ ------------ ------------ -----------
Income taxes........................ $ 565,446 $ 351,552 $ -- $ 256,762 $ --
------------ ------------ ------------ ------------ -----------
Supplemental schedule of non-cash
investing and financing activities:
Conversion of note payable to
950,000 shares of common stock.... $ -- $ -- $ 5,739,270 $ -- $ --
------------ ------------ ------------ ------------ -----------
Issuance of 222,000 shares of common
stock as payment for financing
expenses and other debt........... $ -- $ -- $ 1,461,398 $ -- $ --
------------ ------------ ------------ ------------ -----------
Issuance of 538,284 shares for
acquisition of territorial rights
option............................ $ -- $ -- $ 4,340,184 $ -- $ --
------------ ------------ ------------ ------------ -----------
Conversion of notes payable to
2,430,316 shares of common
stock............................. $ -- $ 34,154,500 $ -- $ -- $ --
------------ ------------ ------------ ------------ -----------
Note receivable in partial payment
for sale of business.............. $ -- $ -- $ 2,637,126 $ -- $ --
------------ ------------ ------------ ------------ -----------
Investment in property and equipment
through financing agreements...... $ 871,503 $ 2,122,330 $ 2,160,000 $ -- $ --
------------ ------------ ------------ ------------ -----------
Issuance of common stock and a note
payable for the acquisitions of
subsidiaries...................... $ 11,029,985 $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------ -----------
Satisfaction of accounts payable and
purchase of inventory through
issuance of note payable.......... $ -- $ -- $ -- $ -- $10,000,000
------------ ------------ ------------ ------------ -----------
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE> 50
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 2000 AND FOR
THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000 IS UNAUDITED)
NOTE 1. ORGANIZATION AND PRINCIPAL INDUSTRY
Vitech America, Inc. (the "Company"), a Florida corporation, was
incorporated in June 1993. The Company, through its subsidiaries, is engaged in
the manufacture and sale of computer equipment and related products. On March 7,
1995, the majority shareholders of the Company formed Bahiatech Bahia
Tecnologia, Ltda. ("Bahiatech") and on October 12, 1995, the Company acquired a
99% interest in Bahiatech. Bahiatech, located in Ilheus, Bahia, Brazil, is
engaged in the manufacture and sale of computer and electronic equipment and
their components. On July 10, 1997, the Company acquired a 94.4% interest in
Microtec Sistemas Industria e Comercio S.A. ("Microtec"). Microtec, located in
Sao Paulo, Brazil, is engaged in the manufacture and sale of computers and
related products. In September 1998, the Company acquired an additional 4.1%
interest in Microtec to bring its total ownership interest up to 98.5%. In
November 1997, the Company acquired a controlling interest in Techshop Ltda.,
Tech Stock Ltda. (collectively "Techshop") and Rectech -- Recife Tecnologia
Ltda. ("Rectech"), all of which are located in Brazil and are engaged in the
distribution and retail sale of computers and related equipment. In December
1998, the Company acquired an additional interest in Techshop Ltda., Tech Stock
Ltda. and Rectech -- Recife Tecnologia Ltda., to bring its ownership interest up
to 99% for each.
During the year ended December 31, 1999, the Company consolidated the
operations and transferred certain assets and liabilities of its Brazilian
subsidiaries, Bahiatech, Techshop, and Rectech, into the operations of Microtec.
The remaining operations of Bahiatech which were not transferred to Microtec
included certain assets and liabilities associated with Bahiatech's consumer
electronics manufacturing business. Principally all of the assets and
liabilities of Techshop and Rectech were transferred to Microtec. After the
transfer the Company sold Bahiatech with its consumer electronics operation,
Techshop, and Rectech to an unrelated third party for an aggregate sales price
of $4 million and recorded a gain on the sale of $2.7 million which is included
in other (income) expense in the accompanying consolidated statement of
operations for the year ended December 31, 1999. The terms of the sale were
$850,000 in cash and the Company received a four year note, payable in equal
monthly installments, for the balance. The Company discounted the note at the
effective interest rate of 9% per annum.
All of the sales of the Company are concentrated in Brazil, with
approximately 9%, 0% and 0% to one unrelated customer in 1997, 1998 and 1999,
respectively.
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information (Unaudited)
The unaudited financial statements as of and for the three months ended
March 31, 1999 and 2000, 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
consolidated financial statements have been included, and all adjustments are of
a normal and recurring nature. Operating results for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
F-8
<PAGE> 51
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during reporting
periods. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less at the time of acquisition to be a cash
equivalent. The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not experienced any
losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method or
average cost method) or market. Inventories consist primarily of components and
subassemblies and finished products held for sale. Rapid technological change
and new product introductions and enhancements could result in excess or
obsolete inventory. To minimize this risk, the Company evaluates inventory
levels and expected usage on a periodic basis and records adjustments as
required.
Certain components and products that meet the Company's requirements are
available from a limited number of suppliers. The rapid rate of technological
change and the necessity of developing and manufacturing products with short
life-cycles may intensify these risks. The inability to obtain components and
products as required, or to develop alternative sources, if and as required in
the future, could result in delays or reductions in product shipments, which in
turn could have a material adverse effect on the Company's business, financial
condition, and results of operations.
Disclosure About Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments is a reasonable
approximation of fair value, except for related party debt which is not
practical to estimate as no similar market exists for these instruments.
Property and Equipment
Property and equipment are stated at cost. The cost of maintenance and
repairs is charged against results of operations as incurred. Depreciation is
computed over the estimated service lives of the related assets using the
straight-line method. When assets are retired or otherwise disposed of, the cost
and accumulated depreciation are removed from the respective accounts and any
gain or loss is recognized.
Revenue Recognition
The Company's policy is to record revenues upon transfer of title to the
customer. Title transfers to the customer upon receipt of the merchandise by the
customer.
F-9
<PAGE> 52
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company discounts all of the sales associated with its "10X" consumer
financing program using a present value calculation with an imputed annual rate
of 15%. Such 10X program enables customers to enter into a consumer contract
with the Company whereby the customer makes equal monthly payments over a
specified term ranging from 6 to 24 months. The discounted portion of such
revenues is then recognized over the remaining term of the contract.
Purchased and Developed Software
The Company capitalizes the qualifying costs of developing its software
products. Capitalization of such costs requires that technological feasibility
has been established. The Company defines the establishment of technological
feasibility as the completion of all planning, designing, coding and testing
activities that are necessary to establish products that meet design
specifications, including functions, features and technical performance
requirements. Development costs incurred prior to the establishment of
technological feasibility are expensed as incurred. When the software is fully
documented and available for unrestricted sale, capitalization of development
costs ceases, and amortization commences and is computed on a product-by-
product basis, based on a straight-line basis over the economic life of the
product.
The Company capitalizes as purchased software the costs associated with
software products either purchased from other companies for resale or developed
by other companies under contract with the Company. The cost of the software is
amortized on the same basis as capitalized software development costs. The
amortization period is re-evaluated quarterly with respect to certain external
factors including the estimated economic life and changes in software and
hardware technologies.
The establishment of technological feasibility and the ongoing assessment
of recoverability of capitalized software development costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technologies.
Realization of capitalized software costs is subject to the Company's ability to
market its software products in the future and generate cash flows sufficient to
support future operations.
Goodwill
Goodwill, representing the excess of the cost over the net tangible and
identifiable assets of acquired businesses, is stated at cost and is amortized,
on a straight-line basis, over the estimated future periods to be benefited (20
years). On an annual basis, the Company reviews the recoverability of goodwill
based primarily upon an analysis of undiscounted cash flows from the acquired
businesses. At December 31, 1998 and 1999, the accumulated amortization of
goodwill was $1,246,318 and $2,340,278, respectively.
Investments
Investments include land held for development which is carried at cost and
is comprised of undeveloped parcels near Ilheus, Bahia, Brazil.
Research and Development
Research and product development costs are expensed as incurred. For the
years ended December 31, 1997, 1998 and 1999, research and development expenses
amounted to $1,346,000, $1,736,000, and $2,919,000, respectively.
Income Taxes
The Company applies the asset and liability approach to financial
accounting and reporting for income taxes. The difference between the financial
statement and tax bases of assets and liabilities is determined
F-10
<PAGE> 53
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
annually. Deferred income tax assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the period in which they are expected to affect
taxable income. Valuation allowances are established, if necessary, to reduce
the deferred tax asset to the amount that will more likely than not be realized.
Income tax expense is the current tax payable or refundable for the period plus
or minus the net change in the deferred tax assets and liabilities.
Microtec operates in the North-east region of Brazil and enjoys an
exemption from income taxes through and including the year 2007. Microtec is
entitled to an exemption from income taxes on the Brazilian operating profit
("Lucro da Exploracao") once twenty percent of the budgeted production goals in
units are met in each year during the exemption period. This benefit is reported
as a reduction of income tax expense for the period in which earned.
Net Income (Loss) Per Share
Basic and diluted earnings (loss) per share ("EPS") are calculated in
accordance with SFAS 128, "Earnings Per Share". Basic EPS is computed by
dividing reported net income (loss) by the weighted average shares outstanding.
Diluted EPS assumes the conversion of outstanding convertible debt and the
dilutive effect of stock options and warrants. The following table sets forth
the computation of basic and diluted earnings (loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss) for basic
income (loss) per common
share....................... $12,792,261 $17,862,012 $(21,103,093) $(22,722,258) $ 14,850
Adjustments to net income
(loss) (a).................. -- -- -- -- --
----------- ----------- ------------ ------------ -----------
Net income (loss) for diluted
income (loss) per common
share....................... $12,792,261 $17,862,012 $(21,103,093) $(22,722,258) $ 14,850
----------- ----------- ------------ ------------ -----------
Weighted average number of
shares for basic income
(loss) per share............ 11,924,422 13,166,157 14,899,862 14,635,655 16,345,939
Dilutive securities:
Stock options (b)........... 81,746 142,515 -- 8,588 --
Warrants (b)................ 27,630 39,597 -- 26,295 --
Convertible debt (a)........ -- -- -- -- --
----------- ----------- ------------ ------------ -----------
Weighted average number of
shares for diluted income
(loss) per share............ 12,033,798 13,348,269 14,899,862 14,670,538 16,345,939
----------- ----------- ------------ ------------ -----------
Net income (loss) per common
share:
Basic....................... $ 1.07 $ 1.36 $ (1.42) $ (1.55) $ 0.00
----------- ----------- ------------ ------------ -----------
Assuming Dilution........... $ 1.06 $ 1.34 $ (1.42) $ (1.55) $ 0.00
----------- ----------- ------------ ------------ -----------
</TABLE>
---------------
(a) For the years ended December 31, 1997, 1998, and 1999, the effects on
earnings per share of the 10% convertible notes (see Note 12), which are
convertible into 3,990,447; 930,369; and 4,005,380 shares of common stock,
respectively, would have been antidilutive and therefore are not included
in the above
F-11
<PAGE> 54
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
computation. For the three months ended March 31, 1999 and 2000, the
effects on earnings (loss) per share of the $11,530,535 and $42,007,765
aggregate principal amount of 10% convertible notes, respectively, would
have been antidilutive and therefore are not included in the computations.
(b) For the year ended December 31, 1999, the effect on earnings per share of
4,065 outstanding stock options and 11,150 outstanding warrants would have
been antidilutive and therefore are not included in the computation.
For the year ended December 31, 1997, there were 3,326,400 outstanding
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. For the year ended December 31, 1998, there
were 3,300,000 outstanding 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. For the year
ended December 31, 1999, there were 4,798,282 outstanding stock options and
859,101 outstanding 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 months ended March 31, 1999, there were outstanding 4,577,427
stock options and 461,387 warrants not included in the computation of diluted
earnings (loss) 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 months ended March 31, 2000, there were outstanding 4,832,347
stock options and 870,251 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.
Translation into U.S. Dollars
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. Any translation adjustments are reflected as a
component of shareholders' equity. In addition, the Company recorded a currency
exchange transaction loss associated with Dollar-denominated monetary assets and
liabilities held by the Company's Brazilian subsidiaries.
Exemption of Value Added Tax (ICMS)
Microtec is exempt from ICMS (Value Added Tax) on imported materials and
components, and on the sales of the finished products arising from such raw
materials through and including the year 2005. The benefits are reflected in
sales and cost of sales.
F-12
<PAGE> 55
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
International Operations
The Company operates in one industry segment (the manufacture and
distribution of computer and electronic equipment and related products) and
manufactures and markets its products and services through its foreign
subsidiaries located in Brazil. As a result, principally all of the Company's
sales and operations are subject to certain risks, including adverse
developments in the foreign political and economic environment, exchange rates,
tariffs and other trade barriers, staffing and managing foreign operations and
potentially adverse tax consequences. There can be no assurance that any of
these factors will not have a material adverse effect on the Company's financial
condition or results of operations in the future. During 1998 and 1999, the
Company did not enter into any significant foreign exchange contracts as a hedge
against exposures to fluctuations in currency exchange rates associated with its
foreign subsidiaries.
Stock-Based Compensation
The Company accounts for its stock option plan in accordance with
Accounting Principles Board Opinion No. 25 (APB Opinion No. 25) and related
interpretations. The Company adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123). The Company has included in note 13, the impact of
the fair value of employee stock-based compensation plans on net income and
earnings per share on a pro forma basis for awards granted.
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 rules for the reporting and presentation of
comprehensive income (loss) and its components. The Company's comprehensive
income (loss) is comprised of net income (loss) adjusted for foreign currency
translation. For the year ended December 31, 1997, comprehensive income and
reported net income were the same. For the year ended December 31, 1998,
comprehensive income was $13.3 million as compared to reported net income of
$17.9 million. Comprehensive income includes a cumulative translation adjustment
of $4.6 million associated with the translation of the Company's subsidiary
financial statements to the U.S. Dollar. For the year ended December 31, 1999,
the Company had a comprehensive loss of $60 million as compared to a reporting
net loss of $21.1 million. The comprehensive loss includes a cumulative
translation adjustment of $38.9 million.
Segment Data
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.
New Accounting Pronouncement
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, 2000. 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
F-13
<PAGE> 56
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of this new accounting pronouncement is not expected to be material to the
Company's consolidated financial position or results of operations.
NOTE 3. RELATED PARTY TRANSACTIONS
As discussed in note 8, the Company has outstanding debt obligations to a
related party.
During 1998 and 1999, the Company bought and sold products and services
from/to ITC.net, an entity related through common ownership, valued in the
amount of approximately $1.1 million and $3.5 million, respectively. At December
31, 1998, the Company had a payable outstanding to ITC.net of $329,548 included
in trade accounts payable. As of December 31, 1999, the Company had a receivable
outstanding from ITC.net of $1.6 million which is included in trade accounts
receivable. Additionally, during 1998, the Company entered into a joint
marketing agreement with ITC.net, whereby the two companies will cross sell each
others products. In consideration for the joint marketing agreement, ITC.net
granted to the Company's shareholders of record date March 1, 1999, warrants to
purchase one share of ITC.net common stock for every share of the Company owned
by the shareholder. The warrants have an exercise price of $0.15 per share and
are non-exercisable and non-transferable until such time that there is an
effective registration statement covering the securities of ITC.net.
NOTE 4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts receivables...................... $81,393,935 $62,628,660 $63,929,492
Allowance for doubtful accounts................. (5,500,078) (3,855,827) (4,037,054)
----------- ----------- -----------
$75,893,857 $58,772,833 $59,892,438
=========== =========== ===========
</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 certain of its accounts receivable may be sold by
the Company's subsidiary (the "Seller") 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.
During the year ended December 31, 1998, the Company completed the sale of
an aggregate face amount of approximately $140 million of its accounts
receivable to TAC at a discount of approximately $7.5 million for cash and a
subordinated debenture. The subordinated debenture is a revolving, non-interest
bearing, bearer note, which constitutes the Company's retained interest in the
program. (See Note 5.)
There is a repurchase provision whereby the Seller, as defined in the
program, 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
affect such substitution is less than the repurchase price thereof, then a cash
payment must be paid for the excess of the
F-14
<PAGE> 57
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
repurchase price over the net present value of the additional receivables
transferred to TAC pursuant to such substitution. The U.S. parent company of the
Seller, Vitech America, Inc., serves as guarantor of the repurchase obligation.
If the repurchase obligation is not complied with on or prior to the required
repurchase date, the U.S. parent company is required to deposit, within
twenty-four hours of the expiration of the required repurchase date, the amount
of the repurchase price not paid. As a result of the structure of the program,
at March 31, 2000, there is a contingent liability in the amount of
approximately $41.3 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.
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 has an investment in subordinated debentures at December 31 as follows:
<TABLE>
<CAPTION>
1998 1999
----------- ------
<S> <C> <C>
Current portion............................................. $14,676,585 $ --
Long term portion........................................... 2,677,906 --
----------- ------
Total............................................. $17,354,491 $ --
=========== ======
</TABLE>
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 for TAC 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 to zero from its values at December 31, 1998.
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 its 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. While the Company believes that it will continue to
be able to maintain its obligations under the repurchase provision and that it
has adequately reserved for such contingent
F-15
<PAGE> 58
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liability, there can be no assurances that the Company will have available the
required accounts receivables or cash liquidity to affect such repurchases.
NOTE 6. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Finished goods.................................. $ 8,962,317 $ 3,856,000 $ 6,172,406
Work in process................................. 893,905 24,000 1,084,525
Components in the factory....................... 22,886,048 21,175,385 21,948,127
Components in transit (a)....................... 9,039,315 3,824,747 3,170,157
----------- ----------- -----------
41,781,585 28,880,132 32,375,215
Less allowance for obsolescence................. (1,430,000) (201,250) (191,198)
----------- ----------- -----------
$40,351,585 $28,678,882 $32,184,017
=========== =========== ===========
</TABLE>
---------------
(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. PROPERTY AND EQUIPMENT
Property and equipment at December 31 is summarized as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Property.................................................... $ 3,889,000 $ 2,267,675
Furniture, office and transportation equipment.............. 8,198,197 9,453,885
Warehouse and manufacturing equipment....................... 7,029,570 8,692,503
Computers and telecommunications equipment.................. 4,066,794 10,923,857
Construction in progress and projects....................... 1,604,516 395,505
----------- -----------
24,788,077 31,733,425
Less accumulated depreciation............................... (5,091,980) (7,619,897)
----------- -----------
$19,696,097 $24,113,528
=========== ===========
</TABLE>
The Company leases equipment under capital leases (see note 10 and 15). As
of December 31, 1998 and 1999, the cost of such equipment approximated
$2,223,000 and $4,383,000, respectively. As of December 31, 1998 and 1999,
accumulated amortization of equipment under capital leases was approximately
$260,000 and $701,000, respectively.
NOTE 8. NOTES PAYABLE AND CONVERTIBLE DEBT-RELATED PARTY
The Company had the following note payable to an affiliate of the majority
shareholders' at December 31:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Promissory notes payable, due on demand with 90 days notice
bearing interest at 15% in 1998 and 10% in 1999........... $6,700,000 $13,564,505
</TABLE>
In March of 1999, the Company received loans from a related party, Georges
C. St Laurent Jr., ("GSL Jr."), the father of Georges C. St. Laurent III, the
Chairman of the Board and Chief Executive Officer of the Company, and William
St. Laurent, the President and Chief Operating Officer of the Company, for the
principal amount of $10.5 million in addition to the $6.7 million in loans that
the Company had received in
F-16
<PAGE> 59
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 from such related party. The $10.5 million loan bears interest at the
annual rate of 10% 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 connection with the loan, the Company issued four year warrants to
purchase 300,000 shares of the Company's common stock at a purchase price of
$9.25 per share. During 1999, the Company repaid approximately $3.6 million of
such loans.
On June 26, 1997, the Company completed a private placement of a two year
senior convertible note to GSL Jr. for the principal amount of $10 million. The
note accrued interest at an annual rate of 10% payable monthly and was
convertible into Common Stock, in whole or in part, at the rate of one share of
Common Stock for each $13.64 of principal converted. The proceeds of the note
were used for the acquisition of Microtec and for general working capital
purposes. On July 15, 1998, GSL Jr. converted such note into an aggregate of
755,333 shares of Common Stock, which included 22,000 shares as an incentive for
GSL Jr. to convert such note.
On August 19, 1997, the Company entered into a loan agreement with GSL Jr.
for a principal amount of up to $10,000,000 to be evidenced by senior
convertible notes. The notes had a two year term and accrued interest at an
annual rate of 10% payable monthly and were convertible into Common Stock, in
whole or in part, at the rate of one share of Common Stock for each $14.64 of
principal converted. On August 19, 1997, the Company issued the first of such
notes for the principal sum of $5,000,000. On October 10, 1997, the Company
issued the second of such notes for the principal sum of $5,000,000. The
proceeds of the notes were used for general working capital purposes. The
Company registered the resale of the shares of Common Stock issuable upon
conversion. On July 15, 1998, GSL Jr. converted such notes into an aggregate of
703,727 shares of Common Stock, which included 21,497 shares as an incentive for
GSL Jr. to convert such notes.
During 1997, 1998 and 1999, the Company incurred interest expense of
$1,265,754, $77,424, and $1,365,475, respectively, in connection with related
party loans. In addition, during 1998 the Company recorded a financing expense
of $706,500 for the issuance of the additional shares included as an incentive
for GSL Jr.'s conversion of the notes.
NOTE 9. SHORT-TERM DEBT
Short-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
----------- ----------
<S> <C> <C>
Short-term bank loans denominated in Brazilian currency
bearing interest rates averaging 2.5% per month and
maturing on a revolving basis............................. $11,629,143 $3,094,430
Short-term bank loans denominated in U.S. Dollars, bearing
interest rates averaging 1% per month and maturing on a
revolving basis........................................... 13,407,393 1,855,416
----------- ----------
$25,036,536 $4,949,846
=========== ==========
</TABLE>
Weighted average interest rate on short-term borrowing amounted to
approximately 1% and 1.5% per month for the years ended December 31, 1998 and
1999, respectively.
As of December 31, 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.
F-17
<PAGE> 60
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1999 is summarized as follows:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Construction loan payable................................... $ 623,305 $ --
Note payable maturing October 1999 which requires monthly
payments of $10,503 applied first to interest at 6.67% per
annum and the balance to reduction of principal........... 92,074 --
Note payable maturing September 2001 which requires
quarterly payments of $13,075 applied first to interest at
10.5% per annum and the balance to reduction of
principal................................................. 123,529 82,625
Note payable maturing August 2001 which requires monthly
payments of $750 applied first to interest at 9.9% per
annum and the balance to reduction of principal. (Repaid
in 1999).................................................. 20,578 --
Note payable maturing September 2001 which requires monthly
payments of $10,754 applied first to interest at 8.47% per
annum and the balance to reduction of principal........... -- 209,214
Capital leases payable (a).................................. 1,622,621 3,473,071
Others...................................................... 1,090,569 415,636
---------- -----------
3,572,676 4,180,546
Less current maturities..................................... (863,021) (1,371,757)
---------- -----------
$2,709,655 $ 2,808,789
========== ===========
</TABLE>
---------------
(a) In March 1998, the Company entered into a capital lease for $1,200,000 for
the purchase of manufacturing equipment. The capital lease has a term of 60
months, bears an adjustable interest rate (currently 9.9%) and requires a
monthly payment of $25,437. In October 1998, the Company entered into a
capital lease for $529,105 for the acquisition of equipment. The capital
lease has a term of 3 years and bears an annual interest rate of 9.7% and
requires quarterly payments of $51,000. In November 1999, the Company
restructured an operating lease for computer software as a capital lease in
the principal amount of $2,160,000. The capital lease has a term of 36
months and bears an annual interest rate of 10.29% and requires monthly
payments of $70,000.
Maturities of long-term debt at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
2000........................................................ $1,371,757
2001........................................................ 1,599,456
2002........................................................ 912,305
2003........................................................ 259,738
2004........................................................ 37,290
----------
$4,180,546
==========
</TABLE>
F-18
<PAGE> 61
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- --------
<S> <C> <C> <C>
Current Federal..................................... $ 39,342 $ -- $ --
State............................................. -- -- --
Foreign........................................... 989,718 1,338,830 --
---------- ---------- --------
1,029,060 1,338,830 --
---------- ---------- --------
Deferred Federal.................................... -- -- --
State............................................. -- -- --
Foreign........................................... (48,550) 669,000 (44,000)
---------- ---------- --------
(48,550) 669,000 (44,000)
---------- ---------- --------
$ 980,510 $2,007,830 $(44,000)
========== ========== ========
</TABLE>
There were no material reconciling items between the U.S. Federal Statutory
tax rate and the effective tax rate on U.S. based income.
Included in the accompanying balance sheet at December 31, 1998, is a
non-current deferred tax asset of $1,567,000 and a current deferred tax
liability of $1,041,000 related to the operations of Microtec. Included in the
accompanying balance sheet at December 31, 1999, is a current deferred tax asset
of $1,510,000 and a current deferred tax liability of $940,000 related to the
operations of Microtec. Deferred income taxes reflect the effects of (a)
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes
calculated using enacted rates in effect in the years in which the differences
are expected to reverse and (b) tax-loss carryforwards.
Principal components of deferred tax assets and liabilities included in the
balance sheet at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets (liabilities) Net operating loss
carryforward.............................................. $ 1,567,000 $ 3,719,000
Operating costs currently not deductible.................. 925,000 1,850,000
Revenues currently not taxable............................ (1,966,000) (2,711,000)
----------- -----------
526,000 2,858,000
Less valuation allowance.................................. -- (2,288,000)
----------- -----------
Net deferred tax assets........................... $ 526,000 $ 570,000
=========== ===========
</TABLE>
The valuation allowance at December 31, 1999 relates entirely to the
deferred tax assets generated by the Company's U.S. operations and is
principally attributable to the net operating loss carryforward available to the
Company to offset future taxable income. The change in the valuation allowance
for 1999 resulted from a valuation allowance placed on the deferred tax assets
of the Company based on management's evaluation of the likelihood of the
realization of the future benefits related to these accounts. Although the
realization of the net deferred tax asset is not assured, management believes
such realization is more likely than not to occur. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period should be
reduced.
F-19
<PAGE> 62
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, the Company had the following net operating tax loss
carryforwards in the indicated geographical areas with the following expiration
dates:
<TABLE>
<S> <C> <C>
Brazil (Microtec)................... $6,485,000 No expiration date
United States (Vitech U.S.
operations)....................... 5,500,000 Expires during the years 2018
and 2019
</TABLE>
The Brazilian federal statutory income tax rate varies according to the
level of income and to the taxes and levies applicable to any one year. The
federal statutory income tax rate applicable to the subsidiary is a composite
rate approximating 33% for 1998 and 1999. This rate includes a 8% (for 1998) and
12% (for 1999) federal levy on net income, sometimes referred to as Social
Contribution. The difference from the effective tax rate and the composite rate
relates to the income tax exemption of Microtec as described in note 2.
As of December 31, 1998 and 1999, the Company has not provided for
withholding or U.S. federal income taxes on accumulated undistributed earnings
of its foreign subsidiaries as the Company does not intend to distribute such
earnings in the foreseeable future. The cumulative undistributed earnings of the
Company's foreign subsidiaries amounted to $39,430,996 and $23,536,302 at
December 31, 1998 and 1999, respectively. (See note 13.)
NOTE 12. CONVERTIBLE NOTES
Convertible notes at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
10% convertible notes due October 2000, convertible at $10
(subject to adjustment in certain events)................. $13,280,535 $ 1,875,156
10% convertible notes due October 2000, convertible at $11
(subject to adjustment in certain events)................. -- 557,765
10% convertible note due September 2000, convertible at
$10....................................................... 450,000 450,000
10% convertible notes due May 2001, convertible at $11
(subject to adjustment in certain events)................. -- 10,000,000
10% convertible note due March 2001, convertible at
$11.02.................................................... -- 31,000,000
----------- -----------
$13,730,535 $43,882,921
=========== ===========
</TABLE>
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. The Company repaid a portion of the notes during
this period and in a series of transactions between April and July of 1999, the
holders of such convertible notes sold the remaining principal balance of
$5,237,745 of their 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
F-20
<PAGE> 63
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of these notes exercised their put right to require the Company to repurchase
these notes at a premium, as defined in the agreement, which resulted in the
conversion of a principal amount of $4,679,765 plus accrued interest and put
premiums of their notes into 950,000 shares of the Common stock of the Company.
As of December 31, 1999, there was a principal amount of $557,765 outstanding on
such 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. 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
and on a quarterly basis thereafter at a price adjusted accordingly. 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 36,364 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.
In September 1999, the Company formed a strategic alliance with Gateway
Companies Inc. ("Gateway") which resulted in a $31 million investment by Gateway
in the form of a 10% convertible promissory note. The note is convertible at
$11.02, bears interest at 10% per annum with interest payable quarterly, and
matures in March 2001. (See note 17.)
During the years ended December 31, 1998 and 1999, the Company incurred
financing expense of approximately $1,150,000 and $1,777,000, respectively, in
connection with the put and call provisions of convertible notes. During the
year ended December 31, 1998, the Company incurred a financing expense of
$373,109 for the issuance of additional shares of common stock as an incentive
for conversion of certain convertible notes. In addition, during the year ended
December 31, 1999, the Company incurred fees and expenses of approximately
$1,724,000 in connection with the issuance of convertible notes which are being
amortized over the life of the notes.
F-21
<PAGE> 64
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. SHAREHOLDERS' EQUITY
Common Stock
Information on warrants is shown in the following table:
<TABLE>
<CAPTION>
WARRANTS WARRANTS PRICE WEIGHTED
OUTSTANDING EXERCISABLE RANGE AVERAGE PRICE
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996.................. 250,026 30,026 $9.09 - 12.73 $12.27
Granted in 1997.............................. 241,387 241,387 8.00 - 15.00 15.00
Became exercisable........................... -- 220,000 12.73 12.73
Warrants exercised........................... (22,326) (22,326) 9.09 9.09
------- ------- ------------- ------
Balance at December 31, 1997................... 469,087 469,087 9.09 - 15.00 13.62
Granted in 1998.............................. -- -- -- --
Became exercisable........................... -- -- -- --
Warrants exercised........................... (29,700) (29,700) 9.09 - 12.73 12.46
------- ------- ------------- ------
Balance at December 31, 1998................... 439,387 439,387 9.09 - 15.00 13.94
Granted in 1999.............................. 436,364 436,364 9.25 - 13.20 10.09
Became exercisable........................... -- -- -- --
Warrants exercised........................... -- -- -- --
Warrants expired............................. (5,500) (5,500) 9.09 9.09
------- ------- ------------- ------
Balance at December 31, 1999................... 870,251 870,251 8.00 - 15.00 10.97
------- ------- ------------- ------
</TABLE>
Of the warrants outstanding, 192,500 expire in November 2001, 241,387 expire in
October 2002, 300,000 expire in July 2003, and 136,364 expire in May 2004.
Subsidiary Retained Earnings and Dividends
For the foreseeable future, Microtec does not intend to distribute any
retained earnings to the U.S. parent company, Vitech America, Inc., but intends
to reinvest such earnings, if any, in the development and expansion of its
business. Up to now, substantially all of the retained earnings of the Company
on a consolidated basis have been attributable to the Company's Brazilian
subsidiaries including Microtec. Microtec is exempted from the payment of
Brazilian federal income tax through and including the year 2007, provided that
the Company meets certain budgeted production goals. The Company is not exempted
from the payment of a federal social contribution tax of approximately 12% of
pre-tax income. The normal rate of federal taxation on a non-exempt basis is
33%. Tax exemption benefits cannot be distributed as dividends to the U.S.
parent company in U.S. Dollars and are segregated for capital reserves and
offsetting accumulated losses in accordance with Brazilian law. For the years
ended December 31, 1997, 1998 and 1999 the tax exemption benefits amounted to
approximately $3,000,000 ($0.25 per share), $5,600,000 ($0.42 per share), and
$0, respectively.
F-22
<PAGE> 65
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock options
Information on stock options is shown in the following table:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS OPTIONS PRICE AVERAGE
OUTSTANDING EXERCISABLE RANGE PRICE
----------- ----------- ------------- --------
<S> <C> <C> <C> <C>
Balances at December 31, 1996..................... 4,744,663 4,605,260 $ .04 - 22.73 $18.10
Granted in 1997................................... 144,427 -- 8.18 - 16.36 12.16
Became exercisable................................ -- 176,437 .04 - 16.36 8.09
Exercised......................................... (152,130) (152,130) .04 - 1.16 .07
Other............................................. 24,387 (26,180) -- --
--------- --------- ------------- ------
Balances at December 31, 1997..................... 4,761,347 4,603,387 .04 - 22.73 18.40
Granted in 1998................................... 33,000 -- 14.09 14.09
Became exercisable................................ -- 103,730 .04 - 14.09 4.51
Exercised......................................... (11,440) (11,440) .04 .04
Other............................................. (28,600) (2,200) -- --
--------- --------- ------------- ------
Balances at December 31, 1998..................... 4,754,307 4,693,477 .04 - 22.73 18.14
Granted in 1999................................... 86,300 -- 9.00 - 18.00 9.59
Became exercisable................................ 47,130 .04 - 1.16 .23
Exercised(a)...................................... (38,260) (38,260) .04 - 1.16 .32
--------- --------- ------------- ------
Balances at December 31, 1999(b).................. 4,802,347 4,802,347 .04 - 22.73 18.44
--------- --------- ------------- ------
</TABLE>
---------------
(a) Such exercised options consisted of options issued by principal shareholders
to certain employees of the Company. The exercise of such options did not
result in the issuance of new shares by the Company.
(b) Of the options outstanding at December 31, 1999, 90,220 consist of options
issued by principal shareholders to certain employees of the Company. The
exercise of such options will not result in the issuance of new shares by
the Company. The remainder of such options consist of options granted by the
Company to purchase shares from the Company.
In January 1997, 1998 and 1999, the Company granted options to purchase up
to 22,000, 33,000 and 40,000 shares of common stock to directors with an
exercise price of $8.18, $14.09 and $9.00 per share, respectively.
During 1997, the Company granted options to purchase a total of 82,827
shares of the Company's common stock at exercise prices of from $10.91 to $16.36
per share to a related party. Such options were granted in connection with
consulting services performed for the Company. The options are exercisable for a
five year period. The options were issued pursuant to the provisions of the
Company's 1996 Stock Option Plan.
In June 1997, the majority shareholders of the Company transferred a
portion of their options totaling 330,000 to purchase shares of the Company's
common stock to certain members of the Company's management. The options are
exercisable at $13.64 per share, and were transferred with the same terms and
conditions as originally granted.
F-23
<PAGE> 66
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans and, accordingly, no compensation cost has
been recognized because stock options granted under the plans were at exercise
prices which were equal to or greater than market value at date of grant. Had
compensation expense been determined as provided in SFAS 123 for stock options
using the Black-Scholes option-pricing model, the pro forma effect on the
Company's net income (loss) and per share amounts would have been:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net income (loss):
As reported.................................. $12,792,261 $17,862,012 $(21,103,093)
Pro forma.................................... 12,565,061 17,680,512 (21,329,103)
Income (loss) per share:
Basic
As reported............................... 1.07 1.36 (1.42)
Pro forma................................. 1.05 1.34 (1.43)
Assuming dilution
As reported............................... 1.06 1.34 (1.42)
Pro forma................................. 1.04 1.32 (1.43)
</TABLE>
The fair value of each option grant is calculated using the following
weighted average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Expected life (years)....................................... 4 4 5
Interest rate............................................... 6% 6% 6%
Volatility.................................................. 30 40 25
Dividend yield.............................................. 0 0 0
</TABLE>
NOTE 14. MAJOR SUPPLIERS
The Company purchased merchandise principally from suppliers located in the
United States. In 1997, one unrelated supplier accounted for 12% of total
purchases. In 1998, purchases from one unrelated supplier account for
approximately 15.5% of total purchases. In 1999, no one supplier accounted for
in excess of 10% of total purchases.
NOTE 15. COMMITMENTS AND CONTINGENCIES
In February 2000, the Company entered into a five-year noncancelable lease
agreement for an office and warehouse building in Miami, Florida, at an annual
rental of approximately $146,000. The lease requires the Company to pay for its
proportionate share of real estate taxes, insurance and other taxes and
assessments.
The Company's Brazilian operations are centered in the states of Sao Paulo
and Bahia. The Company leases approximately 15,000 square feet of office space
in Sao Paulo for an annual rent of approximately $156,000. The lease on such
property expires in April 2000 with an option to renew for up to three more
years. The Company is currently evaluating the renewal of the lease. The Company
leases approximately 160,000 square feet of manufacturing and administrative
space in Ilheus for an annual rent of approximately $122,000. Such lease expires
in May 2000, with an option to renew for up to three years. The Company is
currently evaluating the renewal of such lease and the possible purchase of the
facility. In addition, the Company leases warehouse and retail space in Recife
and Belo Horizonte.
In 1998, the Company entered into operating leases for equipment ranging
from 36 to 84 months and requiring monthly payments of $105,965. These leases
are noncancelable and expire at various dates through 2005.
F-24
<PAGE> 67
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1998, the Company entered into sale leaseback transaction,
whereby the Company sold a net amount of $2,500,000 of assets to an unrelated
third party. The Company in turn entered into an operating lease for the use of
the assets. In November 1999, the Company restructured an operating lease for
computer software as a capital lease in the principal amount of $2,160,000.
The following are the minimum lease payments that will have to be made in
each of the years indicated based on capital and operating leases (inclusive of
the warehouse and office lease) in effect as of December 31, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------- ----------
<S> <C> <C>
2000........................................................ $ 1,367,329 $ 622,029
2001........................................................ 1,261,664 592,563
2002........................................................ 993,579 522,199
2003........................................................ 287,731 514,489
2004........................................................ 191,821 514,489
Thereafter.................................................. -- 268,663
----------- ----------
Total minimum lease payments...................... 4,102,124 $3,034,432
==========
Less amount representing interest........................... (629,053)
-----------
Present value of minimum lease payments..................... 3,473,071
Less current portion........................................ (1,216,458)
-----------
Long term portion........................................... $ 2,256,613
===========
</TABLE>
Rent expense under all operating leases in 1997, 1998 and 1999, was
approximately $495,000, $831,000, and $948,000, respectively.
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 plus two. As of December 31, 1999, there was $1.8 million owed
under the facility.
The Company is subject to inspections and potential claims arising out of
the conduct of its business, principally in connection with tax, labor and
government regulatory matters, and is the defendant in certain legal actions
arising from its normal business practice. While the ultimate results of
inspections, claims, administrative processes and lawsuits cannot be determined,
management does not expect that the resolution of such matters will have a
material effect on the financial position or future results of operations of the
Company.
NOTE 16. RETIREMENT SAVINGS PLAN
Effective April 1, 1997, the Company established a retirement savings plan
which qualifies under Section 401(k) of the Internal Revenue Code. This
retirement plan allows eligible employees to contribute a percentage of their
income on a pretax basis to the plan. The Company matches 25% of the first 6% of
the employee's contribution. Such matching Company contributions are invested in
shares of the Company's common stock and have a five-year vesting period. In
addition, the plan provides for a discretionary employer contribution which may
be determined each year by the Company's Board of Directors. The Company made no
contributions to the plan during 1997, 1998 or 1999 other than the Company's 25%
matching amounts.
F-25
<PAGE> 68
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17. GATEWAY STRATEGIC ALLIANCE
In April 1999, the Company received a short-term loan from 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.
In March 2000, the Company entered into a $10.0 million loan agreement with
Gateway Companies, Inc. for the purchase of components. The one year loan bears
interest at 10% per year payable quarterly. At the option of Gateway, the
principal and/or interest on the note is convertible into the common stock of
the Company if not repaid by us at maturity by dividing the conversion amount by
the weighted daily average bid price per share of the Company's common stock
during the 30 consecutive day trading period, immediately before the date of
determination. The conversion price is subject to adjustments for stock splits,
stock dividends and other similar transactions.
F-26
<PAGE> 69
VITECH AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 18. 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 $19,009,336 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:
- Indexed the pricing of its products in Reais to the U.S. Dollar.
- Significantly reduced the credit terms that it extends to customers.
- Renegotiated trade accounts payable of approximately $22 million at
December 31, 1998 to terms which average 12 months.
- Negotiated short term financing.
- Modified the repayment terms of certain convertible notes.
- Continue to negotiate with TAC (see notes 4 and 5).
- Completion of the consolidation of the manufacturing facilities and
reduction of certain overheads 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.
F-27
<PAGE> 70
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR
TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON ANY
UNAUTHORIZED INFORMATION OR REPRESENTATIONS. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE UNDER THIS PROSPECTUS IMPLIES THAT THERE HAS BEEN
NO CHANGE IN OUR AFFAIRS SINCE THE DATE OF THIS PROSPECTUS OR THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS AN OFFER TO SELL ONLY THE
SECURITIES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS
WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CURRENT ONLY AS OF ITS DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 4
Special Note Regarding Forward-
Looking Statements.................. 8
Use of Proceeds....................... 9
Price Range of Common Stock........... 9
Dividend Policy....................... 9
Capitalization........................ 10
Selected Consolidated Financial
Data................................ 11
Management's Discussion and
Analysis of Financial Condition and
Results of Operations............... 12
Business.............................. 20
Management............................ 26
Certain Transactions.................. 30
Principal Shareholders................ 32
Exchange Rates........................ 33
Description of Securities............. 34
Shares Eligible for Future Sale....... 36
Underwriting.......................... 38
Legal Matters......................... 39
Experts............................... 39
Available Information................. 39
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
3,000,000 SHARES
(VITECH LOGO)
COMMON STOCK
-----------------
PROSPECTUS
-----------------
JOSEPH CHARLES & ASSOC., INC.
I-BANKERS SECURITIES, INC.
(EUROPEAN CO-MANAGER)
, 2000
------------------------------------------------------
------------------------------------------------------
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
<TABLE>
<S> <C>
Registration Fees -- Securities and Exchange Commission..... $ 7,590
Filing Fee -- National Association Securities Dealers....... 5,000
Nasdaq National Market Listing Fee.......................... 40,000
--------
Transfer Agent Fees......................................... 5,000
--------
Cost of Printing and Engraving.............................. 100,000
Legal Fees and Expenses..................................... 75,000
Accounting Fees and Expenses................................ 35,000
Blue Sky Fees and Expenses.................................. 10,000
Miscellaneous............................................... 22,410
--------
Total............................................. $300,000
========
</TABLE>
---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our articles of incorporation provide that every director and every officer
of our corporation, every former director and former officer of our corporation,
and every person who may have served at our request as a director or officer of
another corporation in which we own shares of capital stock or of which we are a
creditor, and the heirs, executors, administrators, and assignors of all of the
above persons shall be indemnified by us for expenses actually and necessarily
incurred by him in connection with the defense of any action, suit, or
proceeding to which he may be a party by reason of his being or having been a
director or officer of our corporation or of such other corporation regardless
of whether or not he continues to be a director or officer at the time of
incurring such expenses, except with respect to matters as to which he shall be
finally adjudged in such action, suit, or proceeding to be liable for negligence
or misconduct in the performance of his duty. The rights of indemnification set
forth in our articles of incorporation shall not be exclusive of any other
rights to which such person may be entitled by law or otherwise.
The provisions of the Florida Business Corporation Act that authorize
indemnification do not eliminate the duty of care of the director and, in
appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available under Florida law. In addition,
each director will continue to be subject to liability for:
(a) violations of criminal laws, unless the director had reasonable
cause to believe his conduct was lawful or had no reasonable cause to
believe his conduct was unlawful;
(b) deriving an improper personal benefit from a transaction;
(c) voting for, or assenting to, an unlawful distribution; and
(d) willful misconduct or conscious disregard for our best interests
in a proceeding by, or in the right of, us to procure a judgment in its
favor or in a proceeding by, or in the right of, a shareholder. The statute
does not effect the director's responsibilities under any other law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On June 26, 1997, we completed a private placement of a two year senior
convertible note to George C. St. Laurent, Jr., the father of our chief
executive officer for the principal amount of $10 million. The note accrued
interest at an annual rate of 10% payable monthly and was convertible into
common stock, in whole or in part, at the rate of one share of common stock for
each $13.64 of principal converted. The proceeds of the note were used for the
acquisition of Microtec and for general working capital purposes. On July 15,
1998, Mr. St. Laurent, Jr. converted this note into an aggregate of 755,333
shares of common stock, which included 22,000 shares of our common stock as an
incentive for Mr. St. Laurent, Jr. to convert the note.
II-1
<PAGE> 72
In June 1997, some of our shareholders transferred 330,000 of their options
to purchase shares of our common stock to certain members of our management. The
options are exercisable at $13.64 per share, and were transferred with the same
terms and conditions as originally granted.
In July 1997, we issued 212,145 shares of our common stock in connection
with our acquisition of Microtec. Each investor receiving such shares was
accredited or sophisticated based on his, her or its knowledge of investments.
On August 19, 1997, we entered into a loan agreement with Mr. St. Laurent,
Jr. for a principal amount of up to $10,000,000 to be evidenced by senior
convertible notes. The notes had a two year term and accrued interest at an
annual rate of 10% payable monthly and were convertible into common stock, in
whole or in part, at the rate of one share of common stock for each $14.64 of
principal converted. On August 19, 1997, we issued the first of these notes for
the principal sum of $5,000,000. On October 10, 1997, we issued the second of
these notes for the principal sum of $5,000,000. The proceeds of the notes were
used for general working capital purposes. We registered the sale of the shares
of common stock issuable upon conversion. On July 15, 1998, Mr. St. Laurent, Jr.
converted these notes into an aggregate of 703,727 shares of common stock, which
included 21,497 shares as an incentive for Mr. St. Laurent, Jr. to convert the
notes.
During 1997, we granted five year options to purchase a total of 82,827
shares of our common stock at exercise prices of from $10.91 to $16.36 per share
to Georges St. Laurent Jr. These options were granted in connection with
consulting services performed for us. The options were issued pursuant to the
provisions of our 1996 stock option plan.
On June 15, 1998, we declared a 10% common stock dividend. The dividend was
distributed on July 27, 1998 to holders of record of our common stock as of July
13, 1998.
In November 1997, we issued 100,307 shares of our common stock in
connection with our acquisition of Techshop Holdings, USA, Inc. Also in November
1997, we issued 46,155 shares of our common stock in connection with our
acquisition of Recife Holdings, USA, Inc. Each investor receiving these shares
was accredited or sophisticated based on their knowledge of investments.
In March of 1999, we received loans from Georges C. St. Laurent, Jr. for
the principal amount of $10.5 million in addition to the $6.7 million in loans
that we had received in 1998 from Mr. St. Laurent, Jr. The $10.5 million loan
bears interest at the annual rate of 10% and is payable upon demand with 90 days
notice. The loan is evidenced by a promissory note and, at Mr. St. Laurent's
option, can be exchanged for a convertible note should the loan not be repaid at
maturity. In connection with the loan, we issued four year warrants to purchase
300,000 shares of our common stock at a purchase price of $9.25 per share.
During 1999, we repaid approximately $3.6 million of such loans.
In May 1999, we completed a private placement of a $10 million convertible
debenture. The debenture is a two year 10% note convertible into our common
stock at an initial conversion price of $11.00. The debenture contains a
provision whereby the holder may require us to repurchase the debenture after
nine months at a price equal to 112% of the principal amount and on a quarterly
basis thereafter at a price adjusted accordingly. Should the holder elect to
require us to repurchase the debentures, we may repay the debentures in four
equal monthly payments. If we elect 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. We also issued 100,000 warrants to purchase
shares of our common stock in connection with this financing and an additional
36,000 warrants to our placement agent. The investors were accredited and
sophisticated and were provided with and had access to relevant information
concerning our company. These securities were issued in reliance of Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
In September 1999, we formed a strategic alliance with Gateway which
resulted in a $31 million investment by Gateway. Pursuant to a convertible 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
subject to adjustment. Under the terms of the agreement, beginning six months
after the closing date, Gateway may demand registration of the
II-2
<PAGE> 73
securities underlying the note. William C. St. Laurent and Georges C. St.
Laurent, III, our president and chief executive officer, have personally
guaranteed $11,000,000 of the note.
We were granted an option, exercisable at our election, to acquire certain
exclusive territorial rights in Brazil from Gateway. For this option, we issued
538,284 shares of our common stock to Gateway.
In January 1999, 1998 and 1997, we granted options to purchase up to
40,000, 33,000 and 22,000 shares of common stock to directors with an exercise
price of $9.00, $14.09 and $8.18 per share, respectively.
In March 2000, we entered into a $10.0 million loan agreement with Gateway
for the purchase of components. The one year loan bears interest at 10% per year
payable quarterly. At the option of Gateway, the principal and/or interest on
the note is convertible into our common stock if not repaid by us at maturity.
Unless otherwise indicated, securities were issued to accredited investors
pursuant to Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
a. The exhibits constituting part of the Registration Statement are as follows:
<TABLE>
<CAPTION>
EXHIBITS
--------
<S> <C> <C>
(1.1) -- Form of Underwriting Agreement.*
(2.1) -- Contract for Discontinuation of Company Participations and
other Agreements between Vitech America, Inc., Microtec
Holding USA, Inc. and Microhold Participacoes e
Empreendimentos S/C Ltda. dated July 10, 1997.(1)
(2.2) -- Purchase agreement between Vitech America, Inc. and Microtec
Holdings USA, Inc. dated July 10, 1997.(1)
(2.3) -- Buy-Sell Contract between Vitech America, Inc. and Tech Shop
Holdings USA, Inc. dated November 17, 1997.(2)
(2.4) -- Buy-Sell Contract between Vitech America, Inc. and Recife
Holdings USA, Inc. dated November 18, 1997.(2)
(3.1) -- Articles of Incorporation dated June 24, 1993.(3)
(3.2) -- Amendments to the Company's Articles of Incorporation dated
November 13, 1995 and July 26, 1996.(3)
(3.3) -- By-Laws of the Company.(3)
(3.4) -- Amendment to the Company's Articles of Incorporation dated
June 5, 2000.*
(4.1) -- Form of Common Stock Certificate.(3)
(5.1) -- Opinion of Atlas Pearlman, P.A. concerning legality of
shares being registered pursuant to this Registration
Statement.*
(10.1) -- Stock Option Plan.(3)
(10.5) -- Option Agreements for William C. St. Laurent and Georges St.
Laurent, III.(3)
(10.17) -- Securities Purchase Agreement dated October 10, 1997, by and
between the Company, H.W. Partners, L.P., as Purchaser's
Representative and Investor.(4)
(10.18) -- Form of Convertible Promissory Note dated October 10, 1997
for the Investors.(4)
(10.19) -- Put and Call Agreement dated October 10, 1997 between the
Company and the Investors.(4)
(10.20) -- Registration Rights Agreement dated October 10, 1997 between
the Company and the Investors.(4)
(10.21) -- Form of Convertible Promissory Note dated October 10,
1997.(4)
(10.22) -- Master Sales and Servicing Agreement among Technology
Acceptance Corp., Technology Trust S.A., Bahiatech-Bahia
Tecnologia Ltda., Banco Credibanco, S.A. and Vitech America,
Inc., dated April 16, 1998.(5)
</TABLE>
II-3
<PAGE> 74
<TABLE>
<CAPTION>
EXHIBITS
--------
<S> <C> <C>
(10.23) -- Convertible Loan Agreement between Vitech America, Inc. and
Gateway Companies, Inc. dated September 19, 1999.(6)
(10.24) -- Convertible Promissory Note dated September 16, 1999.(6)
(10.25) -- Guaranty dated September 16, 1999.(6)
(10.26) -- Loan Agreement Dated March 24, 2000 between Vitech America,
Inc. and Gateway Companies, Inc.*
(10.27) -- Agreement dated as of May 31, 2000 between Vitech America
and Intel Corporation.(7)
(10.28) -- Form of Representatives' Warrant.*
(21) -- Subsidiaries of the Company.(8)
(23.1) -- Consent of Independent Accountants
(23.3) -- Consent of Atlas Pearlman, P.A., counsel for the Company, is
included in an opinion filed in Exhibit 5.1.*
</TABLE>
---------------
* Previously Filed.
(1) Incorporated by reference to exhibit filed with the Company's Form 8-K dated
July 10, 1997 as amended.
(2) Incorporated by reference to exhibit filed with the Company's Form 8-K dated
November 17, 1997.
(3) Incorporated by reference to exhibit filed with the Company's Registration
Statement on Form S-1, file #333-11505.
(4) Incorporated by reference to exhibit filed with the Company's Form 8-K dated
October 10, 1997.
(5) Incorporated by reference to exhibit filed with the Company's Form 10-Q for
the quarterly period ended March 31, 1998.
(6) Incorporated by reference to exhibit filed with the Company's Form 8-K dated
September 16, 1999.
(7) Incorporated by reference to exhibit filed with the Company's, Form 8-K
dated June 14, 2000.
(8) Incorporated by reference to exhibit filed with the Company's Form 10-K for
the fiscal year ended December 31, 1999.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE> 75
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement which
includes any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration statement.
(5) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officer, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Miami, State of Florida on this 21st day of June, 2000.
VITECH AMERICA, INC.
By: /s/ WILLIAM C. ST. LAURENT
------------------------------------
William C. St. Laurent
President
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints each of William
C. St. Laurent and Edward A. Kelly, severally, acting alone and without the
other, his true and lawful attorney-in-fact with the authority to execute in the
name of each such person, any and all amendments (including without limitation,
post-effective amendments) to this Registration Statement on Form S-1, to sign
any and all additional registration statements relating to the same offering of
securities as this Registration Statement that are filed pursuant to Rule 462(b)
of the Securities Act, and to file such registration statements with the
Securities and Exchange Commission, together with any exhibits thereto and other
exhibits therewith, necessary or advisable to enable the registrant to comply
with the Securities Act, and any rules, regulations and requirements of the
Securities and Exchange Commission in respect thereof, which amendments may make
such other changes in the Registration Statement as the aforesaid
attorney-in-fact executing the same deems appropriate.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GEORGES C. ST. LAURENT, III Chairman of the Board of June 21, 2000
----------------------------------------------------- Directors
Georges C. St. Laurent, III and Chief Executive Officer
(Principal Executive Officer)
/s/ WILLIAM C. ST. LAURENT President, Chief Operating June 21, 2000
----------------------------------------------------- Officer and Director
William C. St. Laurent
/s/ EDWARD A. KELLY Chief Financial Officer June 21, 2000
----------------------------------------------------- (Principal Accounting Officer)
Edward A. Kelly
/s/ H.R. SHEPHERD Director June 21, 2000
-----------------------------------------------------
H.R. Shepherd
/s/ WILLIAM ROBIN BLACKHURST Director June 21, 2000
-----------------------------------------------------
William Robin Blackhurst
/s/ FRANCISCO SUAREZ WARDEN Director June 21, 2000
-----------------------------------------------------
Francisco Suarez Warden
</TABLE>
II-6
<PAGE> 77
EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
--------
<S> <C> <C>
(1.1) -- Form of Underwriting Agreement.*
(2.1) -- Contract for Discontinuation of Company Participations and
other Agreements between Vitech America, Inc., Microtec
Holding USA, Inc. and Microhold Participacoes e
Empreendimentos S/C Ltda. dated July 10, 1997.(1)
(2.2) -- Purchase agreement between Vitech America, Inc. and Microtec
Holdings USA, Inc. dated July 10, 1997.(1)
(2.3) -- Buy-Sell Contract between Vitech America, Inc. and Tech Shop
Holdings USA, Inc. dated November 17, 1997.(2)
(2.4) -- Buy-Sell Contract between Vitech America, Inc. and Recife
Holdings USA, Inc. dated November 18, 1997.(2)
(3.1) -- Articles of Incorporation dated June 24, 1993.(3)
(3.2) -- Amendments to the Company's Articles of Incorporation dated
November 13, 1995 and July 26, 1996.(3)
(3.3) -- By-Laws of the Company.(3)
(3.4) -- Amendment to the Company's Articles of Incorporation dated
June 5, 2000.*
(4.1) -- Form of Common Stock Certificate.(3)
(5.1) -- Opinion of Atlas Pearlman, P.A. concerning legality of
shares being registered pursuant to this Registration
Statement.*
(10.1) -- Stock Option Plan.(3)
(10.5) -- Option Agreements for William C. St. Laurent and Georges St.
Laurent, III.(3)
(10.17) -- Securities Purchase Agreement dated October 10, 1997, by and
between the Company, H.W. Partners, L.P., as Purchaser's
Representative and Investor.(4)
(10.18) -- Form of Convertible Promissory Note dated October 10, 1997
for the Investors.(4)
(10.19) -- Put and Call Agreement dated October 10, 1997 between the
Company and the Investors.(4)
(10.20) -- Registration Rights Agreement dated October 10, 1997 between
the Company and the Investors.(4)
(10.21) -- Form of Convertible Promissory Note dated October 10,
1997.(4)
(10.22) -- Master Sales and Servicing Agreement among Technology
Acceptance Corp., Technology Trust S.A., Bahiatech-Bahia
Tecnologia Ltda., Banco Credibanco, S.A. and Vitech America,
Inc., dated April 16, 1998.(5)
(10.23) -- Convertible Loan Agreement between Vitech America, Inc. and
Gateway Companies, Inc. dated September 19, 1999.(6)
(10.24) -- Convertible Promissory Note dated September 16, 1999.(6)
(10.25) -- Guaranty dated September 16, 1999.(6)
(10.26) -- Loan Agreement Dated March 24, 2000 between Vitech America,
Inc. and Gateway Companies, Inc.*
(10.27) -- Agreement dated as of May 31, 2000 between Vitech America
and Intel Corporation.(7)
(10.28) -- Form of Representatives' Warrant.*
(21) -- Subsidiaries of the Company.(7)
(23.1) -- Consent of Independent Accountants
(23.3) -- Consent of Atlas Pearlman, P.A., counsel for the Company, is
included in an opinion filed in Exhibit 5.1.*
</TABLE>
---------------
* Previously Filed.
(1) Incorporated by reference to exhibit filed with the Company's Form 8-K dated
July 10, 1997 as amended.
(2) Incorporated by reference to exhibit filed with the Company's Form 8-K dated
November 17, 1997.
(3) Incorporated by reference to exhibit filed with the Company's Registration
Statement on Form S-1, file #333-11505.
(4) Incorporated by reference to exhibit filed with the Company's Form 8-K dated
October 10, 1997.
(5) Incorporated by reference to exhibit filed with the Company's Form 10-Q for
the quarterly period ended March 31, 1998.
(6) Incorporated by reference to exhibit filed with the Company's Form 8-K dated
September 16, 1999.
(7) Incorporated by reference to exhibit filed with the Company's, Form 8-K
dated June 14, 2000.
(8) Incorporated by reference to exhibit filed with the Company's Form 10-K for
the fiscal year ended December 31, 1999.
