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 June 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 August 14, 2000, there were 20,464,626 shares of the Common Stock
of the Company, no par value, outstanding.
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
VITECH AMERICA, INC.
Consolidated Balance Sheet
Assets
December 31, June 30,
1999 2000
------------- -------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,024,420 $ 5,719,478
Accounts receivable, net 58,772,833 61,407,088
Inventories, net 28,678,882 19,555,098
Deferred tax asset 1,510,000 1,510,000
Taxes receivable credits 2,468,391 1,908,064
Due from officers 179,093 389,667
Other current assets 1,321,502 7,283,607
------------- -------------
Total current assets 93,955,121 97,773,002
Property and equipment, net 24,113,528 23,785,943
Investments 1,104,222 7,690,734
Goodwill, net 19,097,686 18,550,706
Other assets 10,167,620 9,577,480
------------- -------------
Total assets $ 148,438,177 $ 157,377,865
------------- -------------
Liabilities and Shareholders' Equity
Current liabilities
Trade accounts payable $ 25,208,408 $ 16,788,528
Accrued expenses 1,986,919 2,401,574
Deferred tax liability 940,000 940,000
Notes payable - related party 13,564,505 13,564,505
Note payable -- 9,000,000
Convertible notes -- 39,507,765
Current maturities of long-term debt 1,371,757 1,362,514
Short-term debt 4,949,846 4,224,726
------------- -------------
Total current liabilities 48,021,435 87,789,612
------------- -------------
Long-term liabilities
Convertible notes 43,882,921 --
Long-term debt 2,808,789 2,198,078
------------- -------------
Total long-term liabilities 46,691,710 2,198,078
------------- -------------
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 19,375,030 shares issued and outstanding 72,385,718 86,808,045
Accumulated other comprehensive loss (43,541,146) (46,162,857)
Retained earnings 24,880,460 26,744,987
------------- -------------
Total shareholders' equity 53,725,032 67,390,175
------------- -------------
Total liabilities and shareholders' equity $ 148,438,177 $ 157,377,865
------------- -------------
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
VITECH AMERICA, INC.
Consolidated Statement of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1999 2000 1999 2000
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net sales $25,641,391 $34,927,406 $40,944,105 $ 57,487,567
Cost of sales 14,832,923 22,515,518 23,192,059 37,568,398
----------- ----------- ----------- -------------
Gross profit 10,808,468 12,411,888 17,752,046 19,919,169
Selling, general and administrative expenses 5,570,733 7,379,916 12,313,993 13,559,085
----------- ----------- ----------- -------------
Income from operations 5,237,735 5,031,972 5,438,053 6,360,084
----------- ----------- ----------- -------------
Other (income) expenses
Interest expense, net 2,954,322 -- 6,957,522 5,992,579
Discount on sale of receivables 1,277,747 3,135,016 3,540,243 --
Foreign currency exchange loss (gain) 540,243 38,000 17,197,123 (1,506,301)
----------- ----------- ----------- -------------
Total other expenses 4,772,312 3,173,016 27,694,888 4,486,278
----------- ----------- ----------- -------------
Income (loss) before provision for
income taxes 465,423 1,858,956 (22,256,835) 1,873,806
Provision for income taxes -- 9,279 -- 9,279
----------- ----------- ----------- -------------
Net income (loss) $ 465,423 $ 1,849,677 $(22,256,835) $ 1,864,527
----------- ----------- ----------- -------------
Net income per common share - Basic:
Weighted common shares 14,635,655 16,384,121 14,635,655 16,365,030
Net income (loss) per common share $ 0.03 $ 0.11 $ (1.52) $ 0.11
----------- ----------- ----------- -------------
Net income per common share - Assuming dilution:
Weighted common shares 14,650,355 16,384,121 14,660,446 16,365,030
Net income (loss) per common share $ 0.03 $ 0.11 $ (1.52) $ 0.11
----------- ----------- ----------- -------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
VITECH AMERICA, INC.
Consolidated Statement of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1999 2000
-----------------------------
<S> <C> <C>
Cash flows from operating activities
Net income / (loss) $(22,256,835) $ 1,864,527
Adjustments to reconcile net income / (loss) to net cash
provided from / (used) in operating activities
Depreciation 1,593,036 1,648,792
Amortization of goodwill 546,980 546,980
Amortization of deferred costs -- 145,695
Provision for doubtful accounts (200,743) 404,978
Provision for inventory obsolescence -- (10,052)
Changes in assets and liabilities
Accounts receivable 13,176,508 (9,507,195)
Inventories 5,778,973 9,486,661
Deferred tax asset 116,799 --
Other assets 2,975,435 (5,622,621)
Trade accounts payable (8,139,057) 1,781,626
Accrued expenses (2,857,406) 400,306
Due to/from officers (619,234) (210,574)
Tax receivable credits (1,907,182) 587,312
------------ ------------
Net cash provided from / (used) in operating activities (11,792,726) 1,516,435
------------ ------------
Cash flows from investing activities
Purchases of property and equipment (1,988,411) (1,353,439)
Other investments 117,608 (509,928)
------------ ------------
Net cash (used) in investing activities (1,870,803) (1,863,367)
------------ ------------
Cash flows from financing activities
Net (payments)/proceeds under short-term bank borrowings (17,798,701) (760,485)
Net payments of taxes payable (309,762) --
Proceeds from issuance of common stock -- 14,242,327
Payment of convertible notes (4,277,165) (4,375,156)
Proceeds from convertible notes 10,000,000
Proceeds from note payable - related party 10,500,000 --
Proceeds from note payable 11,000,000
Net (payments) of notes payable (870,537) (1,621,158)
------------ ------------
Net cash provided from financing activities 8,243,835 7,485,528
------------ ------------
Foreign exchange effect on cash and cash equivalents -- (2,443,538)
------------ ------------
Net increase / (decrease) in cash and cash equivalents (5,419,694) 4,695,058
Cash and cash equivalents - beginning of period 7,719,185 1,024,420
------------ ------------
Cash and cash equivalents - end of period $ 2,299,491 $ 5,719,478
------------ ------------
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest and discount on sale of receivables $ 9,589,939 $ 4,067,078
------------ ------------
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 $ - $ 180,000
------------ ------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Vitech America, Inc.
Notes to Consolidated Financial Statements
June 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 June 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 June 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 June 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
six month period ended June 30, 2000, the Company had net sales of approximately
$10.0 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 June 30, Six Months Ended June 30,
----------------------------------- ---------------------------------
1999 2000 1999 2000
---------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) for basic and diluted
income per common share $ 465,423 $ 1,849,677 $ (22,256,835) $ 1,864,527
---------------- --------------- -------------- --------------
Weighted average number of shares
for basic income per share 14,635,655 16,384,121 14,635,655 16,365,030
Dilutive securities:
Stock options 6,474 - 7,531 -
Warrants 8,226 - 17,260 -
---------------- --------------- -------------- --------------
Weighted average number of shares
for diluted income per share 14,650,355 16,384,121 14,660,446 16,365,030
---------------- --------------- -------------- --------------
Net income (loss) per common share:
Basic $ 0.03 $ 0.11 $ (1.52) $ 0.11
Diluted $ 0.03 $ 0.11 $ (1.52) $ 0.11
</TABLE>
For the interim periods ended June 30, 1999 and 2000, the effects on earnings
(loss) per share of the $19,453,370 and $39,507,765 aggregate principal amount
of 10% convertible notes, respectively, would have been antidilutive and
therefore are not included in the computations.
For the three months ended June 30, 1999, there were outstanding 4,795,872 stock
options and 725,661 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
six month period ended June 30, 1999, there were outstanding 4,794,815 stock
5
<PAGE>
options and 716,627 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. For the three month period and
the six month period ended June 30, 2000, there were outstanding 4,832,347 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:
<TABLE>
<CAPTION>
June 30,
2000
-----------------
<S> <C>
Trade accounts receivable $ 65,510,234
Allowance for doubtful accounts (4,103,146)
-----------------
Total $ 61,407,088
-----------------
</TABLE>
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 June 30, 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 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:
<TABLE>
<CAPTION>
June 30,
2000
-----------------
<S> <C>
Finished goods $ 6,501,144
Work in process 714,908
Components in the factory 9,526,095
Components in transit (a) 2,996,794
-----------------
19,738,941
Allowance for obsolescence (183,843)
-----------------
Total $ 19,555,098
-----------------
</TABLE>
(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
<PAGE>
comprehensive income and its components. The Company's comprehensive income is
comprised of net income adjusted for foreign currency translation. For the six
months ended June 30, 1999, the Company had a comprehensive loss of $57.7
million as compared to a reporting net loss of $22.2 million. The comprehensive
loss includes a cumulative translation adjustment of $35.5 million associated
with the translation of the Company's subsidiary financial statements to the
U.S. Dollar. For the six months ended June 30, 2000, the Company had
comprehensive net loss of $0.8 million as compared to a reporting net income of
$1.9 million. The comprehensive net loss includes a cumulative translation
adjustment of $2.6 million associated with the translation of the Company's
subsidiary financial statements to the U.S. Dollar.
Note 6 - Note 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.
Note 7 - Significant supplier
-----------------------------
For the six months ended June 30, 1999, no one supplier accounted for in excess
of 10% of the Company's total purchases. For the six months ended June 30, 2000,
two unrelated suppliers accounted for 52% 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.
Note 9 - Subsequent events
--------------------------
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
has an effective registration statement for the resale of the shares of Common
Stock.
In July 2000, the underwriters' for the Company's June 30, 2000 equity 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, 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>
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 June 30, Six Months Ended June 30,
------------------------------------------------ -------------------------------------------------
1999 2000 1999 2000
---------------------- ---------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 25,641,391 100% $ 34,927,406 100% $40,944,105 100% $ 57,487,567 100%
Cost of sales 14,832,923 57.9 22,515,518 64.5 23,192,059 56.6 37,568,398 65.4
Gross profit 10,808,468 42.1 12,411,888 35.5 17,752,046 43.4 19,919,169 34.6
Selling, general and
administrative expenses 5,570,733 21.7 7,379,916 21.1 12,313,993 30.1 13,559,085 23.6
Income from operations 5,237,735 20.4 5,031,972 14.4 5,438,053 13.3 6,360,084 11.0
Net interest and financing
expense 4,232,069 16.5 3,135,016 9.0 10,497,765 25.6 5,992,579 10.4
Foreign currency exchange
Losses (gains) 540,243 2.1 38,000 0.1 17,197,123 42.0 (1,506,301) (2.6)
Net income (loss) 465,423 1.8 1,849,677 5.3 (22,256,835) (54.3) 1,864,527 3.2
</TABLE>
Net sales increased by $9.3 million, or 36.3%, to $34.9 million for the
three months ended June 30, 2000, as compared to $25.6 million for the
comparable fiscal period in 1999. For the three months ended June 30, 2000, we
sold approximately 18,000 personal computer units as compared to approximately
19,500 personal computer units during 1999. For the six months ended June 30,
2000, net sales increased by $16.6 million, or 40.5%, to $57.5 million as
compared to $40.9 million for the comparable fiscal period in 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. Such increases were also attributable
to the increased demand for our integrated solutions products and services.
During the six months ended June 30, 2000, we had net sales of approximately
$10.0 million to ITC.net, an entity related through common ownership, for
network equipment, software and solutions.
Cost of sales during the three months ended June 30, 2000 increased by
$7.7 million to $22.5 million as compared to $14.8 million for the comparable
fiscal period in 1999. Cost of sales during six months ended June 30, 2000
increased by $14.4 million to $37.6 million as compared to $23.2 million for the
comparable fiscal period in 1999. The increases 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 increased by $1.8
million, or 32.1%, to $7.4 million for the three months ended June 30, 2000, as
compared to $5.6 million for the comparable fiscal period in 1999. For the six
months ended June 30, 2000, selling, general, and administrative expenses
increased by $1.3 million, or 10.6%, to $13.6 million as compared to $12.3
million for the comparable fiscal period in 1999 The increases were primarily
attributable to our increased level of sales. The decreases in selling, general,
and administrative expenses as a percentage of net sales for the three months
and six months ended June 30, 2000 was primarily attributable to the increased
level of net sales.
Income from operations decreased by $205,000, or 3.9%, to $5.0 million
for the three months ended June 30, 2000, as compared to $5.2 million for the
comparable fiscal period in 1999. Such decrease was primarily attributable to
the increase in cost sales which increased by a greater percentage than the
increase in net sales. For the six months ended June 30, 2000, income from
operations increased by $922,000, or 17.0%, to $6.4 million as compared to $5.4
million for the comparable fiscal period in 1999. The increase was primarily
attributable to the increase in net sales. The decreases in income from
8
<PAGE>
operations as a percentage of net sales was primarily attributable to the
increases in cost of sales as a percentage of net sales.
Interest and financing expense, net decreased by $1.1 million, or
26.0%, to $3.1 million for the three months ended June 30, 2000, as compared to
$4.2 million for the comparable fiscal period in 1999. For the six months ended
June 30, 2000, interest and financing expense, net decreased by $4.5 million, or
42.9%, to $6.0 million as compared to $10.5 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 June 30, 2000, we experienced a foreign
currency exchange loss of $38,000 due to currency hedge transactions. During the
six months ended June 30, 2000 we experienced a foreign currency exchange gain
$1.5 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 $17.2 million for the six months ended June 30, 1999 which was
a direct result of the devaluation of the Real in January 1999.
Our net income for the three months ended June 30, 2000 increased by
$1.4 million to $1.9 million as compared to a net income of $465,000 for the
comparable fiscal period in 1999. For the six months ended June 30, 2000, net
income increased by $24.2 million to $1.9 million as compared to a net loss of
$22.3 million for the comparable fiscal period in 1999.
Liquidity and Capital Resources
During six months ended June 30, 2000 our primary cash requirements
were to fund increased levels of accounts receivable, for the payment of
accounts payable and to meet certain debt maturities. During six months ended
June 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 of 3,000,000 shares of our common stock at a
price per share of $5.25. The net proceeds to us after underwriters' commissions
and expenses were approximately $14.2 million and were used to repay
indebtedness and for general corporate and working capital purposes.
At June 30, 2000, we had a working capital surplus of $10.0 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 provided from operating activities during the six months ended
June 30, 2000 was $1.5 million as compared to $11.8 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 $1.9 million during the six
months ended June 30, 2000 as compared to $1.9 million during the comparable
fiscal period in 1999. The investments during the six months ended June 30, 2000
primarily related to the acquisition of equipment for our manufacturing
operation and the purchase of equipment for our management information systems.
Net cash provided from financing activities was $7.5 million during the six
months ended June 30, 2000 as compared to $8.2 million provided from financing
activities during the comparable fiscal period in 1999. The decrease resulted
primarily from repayment of convertible notes.
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 June 30, 2000, there was $1.8 million owed under the
facility. In July 2000, this facility was replaced 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 June 30, 2000, we had approximately $2.4 million in short-term
borrowings from various banks in Brazil with rates of interest averaging 2.5%
per month and maturing on a revolving basis. As of June 30, 2000, we had
available approximately $20.0 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.
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.
9
<PAGE>
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 June 30, 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 the special purpose entity. We
maintain an allowance for doubtful accounts on our balance sheet with respect to
the sold accounts receivable.
As of June 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 to 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 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.
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<PAGE>
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 June 30, 2000, the outstanding balance under this loan
agreement was $9.0 million.
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 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>
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Shareholders' Meeting was held on June 5, 2000. At
the Annual Meeting, the Company's shareholders were asked to consider and vote
upon the following matters:
(1) The election of five members of the Company's Board of Directors
to serve until the Company's 2001 Annual Meeting of Shareholders
or until their successors are duly elected and qualified; and
(2) The ratification of the appointment of Pannell Kerr Forster PC as
auditors of the Company's financial statements for the fiscal year
ending December 31, 2000.
(3) To consider and vote upon a proposal to amend the Company's
Articles of Incorporation to increase the Company's number of
authorized shares of Common Stock from 30,000,000 to 60,000,000.
The following five members of the Company's Board of Directors were
duly elected:
<TABLE>
<CAPTION>
Director Votes For Votes Against Votes Abstained
--------------------------------- --------------------- --------------------- ------------------------
<S> <C> <C>
Georges C. St. Laurent III 13,924,343 - 618,098
William C. St. Laurent 13,924,343 - 618,098
H.R. Shepherd 14,331,733 - 210,598
William Robin Blackhurst 14,331,733 - 210,598
Francisco Suarez Warden 14,331,733 - 210,598
</TABLE>
The results of the vote on the ratification of the appointment of
Pannell Kerr Forster PC as auditors of the Company's financial statements for
the fiscal year ending December 31, 2000, were as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
------------------------ ------------------- -------------------
<S> <C> <C> <C>
14,510,928 11,138 20,375
</TABLE>
The results of the vote on the proposal to amend the Company's Articles
of Incorporation to increase the Company's number of authorized shares of Common
Stock from 30,000,000 to 60,000,000:
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
------------------------ ------------------- -------------------
<S> <C> <C> <C>
14,287,608 243,681 11,152
</TABLE>
ITEM 5. OTHER INFORMATION
None.
12
<PAGE>
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: August 18, 2000
13
