<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 2000
Commission File Number 0-21369
VITECH AMERICA, INC
(Exact name of registrant as specified in its charter)
FLORIDA 65 041 9086
(State of incorporation) (I.R.S. Employer ID No.)
2190 Northwest 89th Place
Miami, Florida 33172-2427
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (305) 477-1161
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 14, 2000, there were 20,504,626 shares of the Common
Stock of the Company, no par value, outstanding.
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
VITECH AMERICA, INC.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------- -------------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 1,024,420 $ 827,168
Accounts receivable, net 58,772,833 61,077,268
Inventories, net 28,678,882 22,805,019
Deferred tax asset 1,510,000 1,510,000
Taxes receivable credits 2,468,391 986,184
Due from officers 179,093 --
Other current assets 1,321,502 6,352,513
------------- -------------
Total current assets 93,955,121 93,558,152
Property and equipment, net 24,113,528 27,956,060
Investments 1,104,222 7,531,135
Goodwill, net 19,097,686 18,277,216
Other assets 10,167,620 13,352,609
------------- -------------
Total assets $ 148,438,177 $ 160,675,172
------------- -------------
Liabilities and Shareholders' Equity
Current liabilities
Trade accounts payable $ 25,208,408 $ 13,132,557
Accrued expenses 1,986,919 2,761,305
Deferred tax liability 940,000 940,000
Notes payable - related party 13,564,505 13,564,505
Note payable -- 9,000,000
Convertible notes -- 31,450,000
Convertible notes - related party -- 8,700,000
Current maturities of long-term debt 1,371,757 1,324,164
Due to officers -- 142,120
Short-term debt 4,949,846 4,852,190
------------- -------------
Total current liabilities 48,021,435 85,866,841
------------- -------------
Long-term liabilities
Convertible notes 43,882,921 --
Long-term debt 2,808,789 1,914,805
------------- -------------
Total long-term liabilities 46,691,710 1,914,805
------------- -------------
Commitments and contingencies
Shareholders' equity
Preferred stock, no par value, 3,000,000 shares authorized, no shares issued -- --
Common stock, no par value, 60,000,000 shares authorized,
16,345,939 and 20,464,626 shares issued and outstanding 72,385,718 92,314,587
Accumulated other comprehensive loss (43,541,146) (48,651,195)
Retained earnings 24,880,460 29,230,134
------------- -------------
Total shareholders' equity 53,725,032 72,893,526
------------- -------------
Total liabilities and shareholders' equity $ 148,438,177 $ 160,675,172
------------- -------------
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 3
VITECH AMERICA, INC.
Consolidated Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 28,191,885 $ 26,978,507 $ 69,135,990 $ 84,466,074
Cost of sales 17,466,101 15,982,445 40,658,160 53,550,843
------------ ------------ ------------ ------------
Gross profit 10,725,784 10,996,062 28,477,830 30,915,231
Selling, general and administrative expenses 5,694,958 6,271,151 18,008,951 19,830,236
------------ ------------ ------------ ------------
Income from operations 5,030,826 4,724,911 10,468,879 11,084,995
------------ ------------ ------------ ------------
Other (income) expenses
Interest expense, net 3,018,171 2,026,250 9,975,693 8,018,829
Discount on sale of receivables 556,386 -- 4,096,629 --
Foreign currency exchange loss (gain) 905,689 213,514 18,102,812 (1,292,787)
------------ ------------ ------------ ------------
Total other expenses 4,480,246 2,239,764 32,175,134 6,726,042
------------ ------------ ------------ ------------
Income (loss) before provision for
income taxes 550,580 2,485,147 (21,706,255) 4,358,953
Provision for income taxes -- -- -- 9,279
------------ ------------ ------------ ------------
Net income (loss) $ 550,580 $ 2,485,147 $(21,706,255) $ 4,349,674
------------ ------------ ------------ ------------
Net income per common share - Basic:
Weighted common shares 14,735,147 20,215,933 14,668,819 17,654,893
Net income (loss) per common share $ 0.04 $ 0.12 $ (1.48) $ 0.25
------------ ------------ ------------ ------------
Net income per common share - Assuming dilution:
Weighted common shares 14,746,423 20,215,933 14,689,105 17,654,893
Net income (loss) per common share $ 0.04 $ 0.12 $ (1.48) $ 0.25
------------ ------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
VITECH AMERICA, INC.
Consolidated Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income / (loss) $(21,706,255) $ 4,349,674
Adjustments to reconcile net income / (loss) to net cash
(used) in operating activities
Depreciation 2,364,429 2,535,761
Amortization of goodwill 820,470 820,470
Amortization of deferred costs -- 452,244
Other financing expenses -- 1,341,951
Provision for doubtful accounts -- 547,370
Provision for inventory obsolescence -- (21,395)
Changes in assets and liabilities
Accounts receivable 6,975,661 (10,562,142)
Inventories 8,390,439 5,677,407
Deferred tax asset 23,122 --
Other assets 1,606,731 (9,325,653)
Trade accounts payable (7,502,866) 1,503,790
Accrued expenses (2,539,439) 778,696
Due to/from officers (327,286) 321,213
Tax receivable credits (1,263,331) 1,519,074
------------ ------------
Net cash (used) in operating activities (13,158,325) (61,540)
------------ ------------
Cash flows from investing activities
Purchases of property and equipment (5,893,986) (7,060,743)
Other investments 160,508 (499,639)
------------ ------------
Net cash (used) in investing activities (5,733,478) (7,560,382)
------------ ------------
Cash flows from financing activities
Net (payments)/proceeds under short-term bank borrowings (22,145,580) 25,698
Net (payments) of taxes payable (309,762) --
Proceeds from issuance of common stock -- 15,438,541
Payment of convertible notes (4,420,915) (4,375,156)
Proceeds from convertible notes 41,000,000 --
Proceeds from note payable - related party 7,500,000 --
Net (payments) of notes payable (857,041) (1,933,417)
------------ ------------
Net cash provided from financing activities 20,766,702 9,155,666
------------ ------------
Foreign exchange effect on cash and cash equivalents -- (1,730,996)
------------ ------------
Net increase / (decrease) in cash and cash equivalents 1,874,899 (197,252)
Cash and cash equivalents - beginning of period 7,719,185 1,024,420
------------ ------------
Cash and cash equivalents - end of period $ 9,594,084 $ 827,168
------------ ------------
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest and discount on sale of receivables $ 13,857,322 $ 6,038,801
------------ ------------
Income taxes 256,762 $ --
------------ ------------
Supplemental schedule of non-cash investing and financing activities
Payment of accounts payable and purchase of inventory
through issuance of note payable $ -- $ 10,000,000
------------ ------------
Conversion of account receivable into equity investment $ -- $ 6,336,150
------------ ------------
Payment of accounts payable through issuance of common stock $ -- $ 3,790,612
------------ ------------
Payment of financing expense with convertible note $ -- $ 1,200,000
------------ ------------
Conversion of note payable and payment of financing expenses
through issuance of 150,154 shares of common stock $ -- $ 699,716
------------ ------------
</TABLE>
See notes to consolidated financial statements
4
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Vitech America, Inc.
Notes to Consolidated Financial Statements
September 30, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Vitech America,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information. In the opinion of
management, all adjustments necessary for a fair presentation of the interim
consolidated financial statements have been included, and all adjustments are of
a normal and recurring nature. The consolidated financial statements as of and
for the interim period ended September 30, 2000 should be read in conjunction
with the Company's consolidated financial statements as of and for the year
ended December 31, 1999, which are included in the Company's Annual Report on
Form 10-K/A filed with the Securities and Exchange Commission. Operating results
for the interim period ended September 30, 2000 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2000. The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The consolidated financial statements for the interim periods ended September
30, 1999 and 2000 include the accounts of the Company and its subsidiary.
Principally all of the Company's sales are concentrated in Brazil. During the
nine month period ended September 30, 2000, the Company had net sales of
approximately $10.1 million to ITC.net, an entity related through common
ownership, for network equipment, software and solutions. During June 2000, the
Company converted accounts receivable of $6.3 million into shares of common
stock of ITC.net.
NOTE 2 - NET INCOME 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 Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) for basic and diluted
income per common share $ 550,580 $ 2,485,147 $(21,706,255) $ 4,349,674
------------ ------------ ------------ ------------
Weighted average number of shares
for basic income per share 14,735,147 20,215,933 14,668,819 17,654,893
Dilutive securities:
Stock options 1,200 -- 5,421 --
Warrants 10,076 -- 14,865 --
------------ ------------ ------------ ------------
Weighted average number of shares
for diluted income per share 14,746,423 20,215,933 14,689,105 17,654,893
------------ ------------ ------------ ------------
Net income (loss) per common share:
Basic $ 0.04 $ 0.12 $ (1.48) $ 0.25
Diluted $ 0.04 $ 0.12 $ (1.48) $ 0.25
</TABLE>
For the interim periods ended September 30, 1999 and 2000, the effects on
earnings (loss) per share of the $50,309,620 and $40,150,000 aggregate principal
amount of 10% convertible notes, respectively, would have been antidilutive and
therefore are not included in the computations.
5
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For the three month and nine month periods ended September 30, 1999, there were
outstanding 4,685,487 stock options and 742,418 warrants not included in the
computation of diluted earnings (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 month and nine month periods ended
September 30, 2000, there were outstanding 4,857,347 stock options and 1,170,251
warrants not included in the computation of diluted earnings per share of common
stock because the option exercise prices were greater than the average market
price of the common shares.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
September 30,
2000
-------------
Trade accounts receivable $ 65,480,465
Allowance for doubtful accounts (4,403,197)
------------
Total $ 61,077,268
------------
In April 1998, the Company formed a special purpose securitization entity that
was established solely to participate in a $150.0 million accounts receivable
securitization program. The special purpose entity was formed to acquire and
hold designated accounts receivable from the Company and to issue collateralized
notes to third party investors. Through December 1998, the Company sold
approximately $140.0 million of its accounts receivable to this entity under the
program. As a result of the devaluation of the Brazilian currency, the REAL, in
January 1999, the securitization program became in default. While the program
remains in default, the Company is not allowed to transfer additional accounts
receivable to the special purpose entity other than pursuant to the Company's
repurchase obligation under the program. The program remains in default and the
Company does not believe that it will be a viable financing source in the
future.
Under the terms of the securitization program, the Company is 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 September 30, 2000, there is a contingent
liability in the amount of approximately $39.0 million which represents the
balance, at face value, of the accounts receivable sold to the special purpose
entity. The Company maintains an allowance for doubtful accounts on its balance
sheet with respect to the sold accounts receivable.
NOTE 4 - INVENTORIES
Inventories are summarized as follows:
September 30,
2000
-------------
Finished goods $ 7,377,703
Work in process 524,454
Components in the factory 10,520,431
Components in transit (a) 4,562,286
-----------
22,984,874
Allowance for obsolescence (179,855)
-----------
Total $22,805,019
-----------
(a) Components in transit consist of inventories in the Company's Miami,
Florida facility and inventories in route to the Company's factory in
Brazil.
NOTE 5 - COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "Reporting Comprehensive Income" during the year ended December 31, 1998.
SFAS 130 establishes new rules for the reporting and presentation of
6
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comprehensive income and its components. The Company's comprehensive income is
comprised of net income adjusted for foreign currency translation. For the nine
months ended September 30, 1999, the Company had a comprehensive loss of $65.5
million as compared to a reporting net loss of $21.7 million. The comprehensive
loss includes a cumulative translation adjustment of $43.8 million associated
with the translation of the Company's subsidiary financial statements to the
U.S. Dollar. For the nine months ended September 30, 2000, the Company had
comprehensive net loss of $0.8 million as compared to a reporting net income of
$4.3 million. The comprehensive net loss includes a cumulative translation
adjustment of $5.1 million associated with the translation of the Company's
subsidiary financial statements to the U.S. Dollar.
NOTE 6 - NOTES PAYABLE
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. The principal balance
outstanding on the loan as of September 30, 2000 was $9.0 million.
In June 2000, the holders of a principal amount of $10.0 million convertible
debentures exercised their right to require us to repurchase the debentures at a
price equal to 116% of the principal amount over a four month period. In June
2000, we repurchased $2.5 million of the principal amount at the repurchase
price of $2.9 million. In July 2000, a related party purchased the balance of
the debentures from the holders including the rights to the 16% re-purchase
premium, representing a total of $8.7 million. As a result of this transaction,
we incurred a financing expense in July equal to the premium of $1.2 million. As
an incentive for the related party to purchase the debentures, we adjusted the
initial conversion price to $5.2925 and extended the provision whereby the
holder may require us to repurchase the debentures at a premium. This provision
allows the holder, at their option, to require us to repurchase the notes at an
annualized premium of 16%. This option is available to the holder on a quarterly
basis.
NOTE 7 - SIGNIFICANT SUPPLIER
For the nine months ended September 30, 1999, no one supplier accounted for in
excess of 10% of the Company's total purchases. For the nine months ended
September 30, 2000, two unrelated suppliers accounted for approximately 50% of
the Company's total purchases.
NOTE 8 - SHAREHOLDERS' EQUITY
On June 5, 2000, the shareholders' of the Company voted on and approved an
amendment to the Company's Articles of Incorporation increasing the Company's
number of authorized shares of Common Stock from 30,000,000 to 60,000,000.
On June 30, 2000, the Company completed a public equity offering of 3,000,000
shares of its Common Stock at a price per share of $5.25. The net proceeds to
the Company after underwriters' commissions and expenses were approximately
$14.2 million and were used to repay indebtedness and for general corporate and
working capital purposes. In connection with this offering, the Company issued
warrants to purchase 300,000 shares of its Common Stock at a price of $8.1375
per share. In July 2000, the underwriters' for the offering exercised their
overallotment option to purchase an additional 290,000 shares of the Company's
Common Stock at the purchase price of $5.25 less the underwriters' commission
and expense allowance.
In July 2000, the Company completed the sale of 644,789 shares of its Common
Stock to Intel Corporation Inc. The purchase price of the shares was
approximately $3.6 million and was paid for with the cancellation of the
Company's indebtedness to Intel. Pursuant to the terms of the sale, the Company
registered the shares of Common Stock for resale.
In July 2000, holders of the Company's 10% convertible notes in the aggregate
principal amount of $558,000 exercised their right to convert the notes into
150,154 shares of the Company's Common Stock.
7
<PAGE> 8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
INFORMATION CONTAINED IN THE COMPANY'S FINANCIAL STATEMENTS AND THE NOTES
THERETO APPEARING ELSEWHERE IN THIS REPORT.
In this report, 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.
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 September 30, Nine Months Ended September 30,
---------------------------------------------- ----------------------------------------------
1999 2000 1999 2000
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 28,191,885 100% $ 26,978,507 100% $ 69,135,990 100% $ 84,466,074 100%
Cost of sales 17,466,101 61.9 15,982,445 59.2 40,658,160 58.8 53,550,843 63.4
Gross profit 10,725,784 38.1 10,996,062 40.8 28,477,830 41.2 30,915,231 36.6
Selling, general and
administrative expenses 5,694,958 20.2 6,271,151 23.2 18,008,951 26.1 19,830,236 23.5
Income from operations 5,030,826 17.8 4,724,911 17.5 10,468,879 15.1 11,084,995 13.1
Net interest and financing
expense 3,574,557 12.7 2,026,250 7.5 14,072,322 20.4 8,018,829 9.5
Foreign currency exchange
Losses (gains) 905,689 3.2 213,514 0.8 18,102,812 26.2 (1,292,787) (1.5)
Net income (loss) 550,580 2.0 2,485,147 9.2 (21,706,255) (31.4) 4,349,674 5.2
</TABLE>
Net sales decreased by $1.2 million, or 4.3%, to $27.0 million for the
three months ended September 30, 2000, as compared to $28.2 million for the
comparable fiscal period in 1999. For the three months ended September 30, 2000,
we sold approximately 18,000 personal computer units as compared to
approximately 20,000 personal computer units during 1999. Such decreases were
primarily attributable to significant difficulties that we experienced in the
procurement of certain products for orders that we had from corporate clients,
which prevented the invoicing and booking of the revenues for these orders
during the period. For the nine months ended September 30, 2000, net sales
increased by $15.3 million, or 22.2%, to $84.5 million as compared to $69.1
million for the comparable fiscal period in 1999. During the nine months ended
September 30, 2000, we had net sales of approximately $10.1 million to ITC.net,
an entity related through common ownership, for network equipment, software and
solutions. We received shares of ITC.net common stock as payment for $6.3
million of these sales.
Cost of sales during the three months ended September 30, 2000
decreased by $1.5 million to $16.0 million as compared to $17.5 million for the
comparable fiscal period in 1999. The decreases in cost of sales as a percentage
of net sales during the quarter was primarily attributable to our sales mix
which included a higher percentage of our integrated solutions products and
services. Cost of sales during the nine months ended September 30, 2000
increased by $12.9 million to $53.6 million as compared to $40.7 million for the
comparable fiscal period in 1999. The increase in cost of sales as a percentage
of net sales for the nine month period was attributable to the downward
pressures on our unit sales prices that we have been experiencing which has
exceeded decreases in component costs.
Selling, general, and administrative expenses increased by $0.6
million, or 10.1%, to $6.3 million for the three months ended September 30,
2000, as compared to $5.7 million for the comparable fiscal period in 1999. The
increase in selling, general, and administrative expenses for the quarter was
primarily attributable to the increased selling expenses incurred in
anticipation of increased sales. The increase in the selling, general, and
administrative expenses as a percentage of net sales for the quarter was
primarily attributable to the lower than anticipated sales that resulted from
the difficulties in our procurement of certain products. For the nine months
ended September 30, 2000, selling, general, and administrative expenses
increased by $1.8 million, or 10.1%, to $19.8 million as compared to $18.0
million for the comparable fiscal period in 1999 The increase was primarily
attributable to our increased level of sales. The decreases in selling, general,
and administrative expenses as a percentage of net sales for the nine months
ended September 30, 2000 was primarily attributable to the increased level of
net sales.
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<PAGE> 9
Income from operations decreased by $0.3 million, or 6.1%, to $4.7
million for the three months ended September 30, 2000, as compared to $5.0
million for the comparable fiscal period in 1999. Such decrease was primarily
attributable to the decrease in sales for the period. For the nine months ended
September 30, 2000, income from operations increased by $0.6 million, or 5.9%,
to $11.1 million as compared to $10.5 million for the comparable fiscal period
in 1999. The increase was primarily attributable to the increase in net sales.
The decrease in income from operations as a percentage of net sales for the nine
months ended September 30, 2000 was primarily attributable to the increases in
cost of sales as a percentage of net sales.
Interest and financing expense, net decreased by $1.6 million, or
43.3%, to $2.0 million for the three months ended September 30, 2000, as
compared to $3.6 million for the comparable fiscal period in 1999. For the nine
months ended September 30, 2000, interest and financing expense, net decreased
by $6.1 million, or 43.0%, to $8.0 million as compared to $14.1 million for the
comparable fiscal period in 1999. The decreases in interest and financing
expense, net were primarily attributable to reductions in our cost of financing.
During the three months ended September 30, 2000, we experienced a
foreign currency exchange loss of $0.2 million associated with certain U.S.
Dollar denominated monetary assets and liabilities of our Brazilian operations.
During the nine months ended September 30, 2000 we experienced a foreign
currency exchange gain $1.3 million associated with certain U.S. Dollar
denominated monetary assets and liabilities of our Brazilian operations. This is
compared to a foreign currency exchange loss of $18.1 million for the nine
months ended September 30, 1999 which was a direct result of the devaluation of
the REAL in January 1999.
Our net income for the three months ended September 30, 2000 increased
by $1.9 million to $2.5 million as compared to a net income of $551,000 for the
comparable fiscal period in 1999. For the nine months ended September 30, 2000,
net income increased by $26.1 million to $4.3 million as compared to a net loss
of $21.7 million for the comparable fiscal period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2000 our primary cash
requirements were to fund increased levels of accounts receivable, for the
payment of certain debt maturities, and the purchase of equipment. During the
nine months ended September 30, 2000, we principally used cash flow from
operations and equity financing to satisfy our working capital requirements. On
June 30, 2000, we completed a public equity offering which resulted in the
issuance of 3,290,000 shares of our common stock, including the underwriter's
overallotment option, at a price per share of $5.25. The net proceeds to us
after underwriters' commissions and expenses were approximately $15.4 million
and were used to repay indebtedness and for general corporate and working
capital purposes.
At September 30, 2000, we had a working capital surplus of $7.7 million
compared to $45.9 million at December 31, 1999. This decrease in working capital
was primarily attributable to the reclassification of convertible debt maturing
within one year.
Net cash used in operating activities during the nine months ended
September 30, 2000 was $62,000 as compared to $13.2 million in cash used in
operating activities during the comparable fiscal period in 1999 and resulted
primarily from an increase in net income and a decrease in inventories.
Net cash used in investing activities was $7.6 million during the nine
months ended September 30, 2000 as compared to $5.7 million during the
comparable fiscal period in 1999. The investments during the nine months ended
September 30, 2000 primarily related to the acquisition of property and
equipment for expansion of our sales distribution network in Brazil, and the
purchase of equipment for our management information systems. Net cash provided
from financing activities was $9.2 million during the nine months ended
September 30, 2000 as compared to $20.8 million provided from financing
activities during the comparable fiscal period in 1999. The decrease resulted
primarily from repayment of convertible notes.
In July 2000, we replaced 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, with a $1.0 million trade finance
facility with Eastern National Bank and $1.0 million working capital facility
with Merrill Lynch. The new facilities are secured by liens on certain assets
owned by us and by personal guarantees from our principals. As of September 30,
2000, there was $1 million owed under these facilities.
As of September 30, 2000, we had approximately $3.8 million in
short-term borrowings from various banks in Brazil with rates of interest
averaging 1.75% per month and maturing on a revolving basis. As of September 30,
2000, we
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<PAGE> 10
had available approximately $20.0 million in unused credit facilities at various
banks in Brazil at rates of approximately 1.75% per month and subject to certain
collateral requirements as defined.
In October 1999, the holders of convertible notes in the principal
amount of $3.6 million exercised their put right to require us to repurchase the
notes at 120% of the principal amount. In November 1999, 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 September 30, 2000, there is a contingent
liability in the amount of approximately $39.0 million which 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.
As of September 30, 2000, we had $13.6 million in loans from a related
party. The loans bear interest at the annual rate of 10% and are payable upon
demand with 90 days notice. $10.0 million of the loans are 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.
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 June 2000, the holders of the debentures exercised
their right to require us to repurchase the debentures at a price equal to 116%
of the principal amount over a four month period. In June 2000, we repurchased
$2.5 million of the principal amount at the repurchase price of $2.9 million. In
July 2000, a related party purchased the balance of the debentures from the
holders including the rights to the 16% re-purchase premium, representing a
total of $8.7 million. As a result of this transaction, we incurred a financing
expense in July equal to the premium of $1.2 million. As an incentive for the
related party to purchase the debentures, we adjusted the initial conversion
price to $5.2925 and extended the provision whereby the holder may require us to
repurchase the debentures at a premium. This provision allows the holder, at
their option, to require us to repurchase the notes at an annualized premium of
16%. This option is available to the holder on a quarterly basis.
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
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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 principal and/or
interest on 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 determination. The conversion price is
subject to adjustments for stock splits, stock dividends and other similar
transactions. At September 30, 2000, the outstanding balance under this loan
agreement was $9.0 million.
As of September 30, 2000, we had outstanding indebtedness from third
party lenders of $70.8 million, of which $59.2 million is convertible into our
common stock. $68.9 million of our outstanding indebtedness is due on or before
September 30, 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:
o our vulnerability to adverse economic and industry;
o our ability to obtain additional financing for future working
capital expenditures, general corporate and other purposes;
and
o 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.
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 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
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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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II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 28, 1995, Meris Financial Incorporated ("Meris") entered
into a Loan Agreement with the Company pursuant to which Meris made available a
loan to the Company in the principal amount of US$ 2,000,000. The loan was to
mature on October 28, 1997 and bore interest at a rate of 12% per annum payable
monthly. The loan was secured by the assets of the Company exclusive of
inventory and receivables. In connection with the loan, Meris received a
guarantee by Georges St. Laurent III and William C. St. Laurent, the President
and Chief Operating Officer of the Company, and his wife, Wendy St. Laurent, a
stock pledge agreement by such parties, a collateral assignment of various
rights of the St. Laurents as well as assignments of life insurance policies on
the lives of Messrs. St. Laurent and St. Laurent. The note was convertible into
approximately 4.7% of the shares of the Company's common stock. In addition,
certain options were provided to Meris which afforded them the right to purchase
up to an aggregate of 5% capital stock interest in the Company. On July 20,
1996, the Company and Meris entered into an Amendment of such Loan Agreement
pursuant to which the Company was obligated to make principal and interest
payment during the period between July 20, 1996 and by November 1, 1996, with
the remaining principal balance to be paid on November 1, 1996. In connection
with the Amendment, the conversion rights provided by the Note and the options
were cancelled provided all payments of principal and interest under the Note
are made as set forth above. The Company made all payments in accordance with
such Amendment and on October 30, 1996, repaid the note in full. In February of
1998, Meris filed a UCC-3 in favor of the Company releasing any claim that Meris
had on the assets of the Company as a result of a UCC-1 filed when Meris entered
into the Loan Agreement with the Company.
In October 1996, Meris had advised the Company that, irrespective of
the Amendment, it believed it had certain rights to an equity ownership position
in the Company. In June 1998, Meris filed a law suit with the United States
District Court in Arizona affirming such claim against the Company. While the
Company believes such claims are without merit, Georges C. St. Laurent III and
William C. St. Laurent have agreed to settle such equity claims, should the need
arise, from their personal share holdings. Expenses associated with defending
this claim are incurred as an expense by the Company. In November 1999, the
Company filed a motion for dismissal of the case reiterating the Company's
position that it had complied with all the terms of the loan agreement between
the Company and Meris and any amendment thereto. The court initially decided not
to rule on the Company's motion for dismissal until the Company has entered into
settlement discussions with Meris in an attempt to reach a settlement on the
case. The Company was unsuccessful in reaching an agreeable settlement with
Meris during such court suggested settlement discussions, and has since pursued
its motion filed for the dismissal of the case. The court has denied the
Company's motion for dismissal of the case and has scheduled the case for jury
trial to begin in December 2000. The Company will rigorously defend its position
in such trial.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by item 601 of Regulation S-K
The following exhibits are filed as part of this report:
Exhibits:
(27.1) Financial Data Schedule
(b) Reports on Form 8-K.
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Vitech America, Inc.
By: /s/ Edward A. Kelly
-------------------------------------------
Edward A. Kelly
Chief Financial Officer
(authorized officer and chief accounting officer)
Date: November 14, 2000
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