<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _____
COMMISSION FILE NUMBER 1-10927
VSI ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1104448
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5801 GOSHEN SPRINGS ROAD
NORCROSS, GEORGIA 30071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(770) 242-7566
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
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, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS OF SECURITIES AUGUST 13, 1996
------------------------------- ---------------
<S> <C>
COMMON STOCK, $.00025 PAR VALUE 36,794,324
</TABLE>
================================================================================
<PAGE> 2
VSI ENTERPRISES, INC. AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
June 30, 1996 and December 31, 1995........................ 3
Consolidated Condensed Statements of Operations
Three Months and Six Months Ended June 30, 1996 and 1995... 4
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995.................... 5
Notes to Consolidated Condensed Financial Statements....... 6
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations:
Financial Condition........................................ 7
Results of Operations...................................... 7
Liquidity and Sources of Capital........................... 8-9
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K.................. 10
</TABLE>
2
<PAGE> 3
CONSOLIDATED CONDENSED BALANCE SHEETS
VSI Enterprises, Inc. and Subsidiaries
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
(Unaudited)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,108,826 $ 4,202,613
Accounts receivable, net 4,503,961 6,809,037
Cost and estimated earnings in excess of billings on
uncompleted contracts - 206,361
Inventories, net 3,251,236 3,854,370
Rental and demonstration inventory, net 1,041,149 290,555
Prepaid expenses 546,928 672,375
-------------- --------------
Total current assets 10,452,101 16,035,311
-------------- --------------
Property and equipment, net 1,598,086 1,497,559
Software Development Costs 1,086,863 1,243,510
Costs in excess of net assets acquired, net 713,178 735,578
Other assets 103,635 154,136
-------------- --------------
$ 13,953,864 $ 19,666,094
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 986,876 $ 3,339,420
Bank credit facilities 151,004 155,676
Accounts payable 2,526,282 3,299,294
Accrued expenses 1,185,513 1,872,167
Billings in excess of costs and estimated
earnings on uncompleted contracts - 174,578
Deferred revenue 932,739 261,601
-------------- --------------
Total current liabilities 5,782,414 9,102,736
Deferred rent 7,289 7,289
Stockholders' equity:
Common stock, authorized 46,000,000 shares of
$.00025 par value; issued and outstanding
35,642,872 and 34,525,506 shares, respectively 8,911 8,756
Additional paid-in-capital 29,021,343 28,112,597
Accumulated deficit (20,779,908) (17,417,615)
Cumulative translation adjustment (86,185) (147,669)
-------------- --------------
Total stockholders' equity 8,164,161 10,556,069
-------------- --------------
$ 13,953,864 $ 19,666,094
============== ==============
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
VSI Enterprises, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net product sales $ 6,995,264 $ 9,832,054 $ 4,026,707 $ 5,818,990
Costs and expenses
Cost of product sales 5,059,686 6,362,879 3,008,641 3,795,725
Selling, general and administrative 4,411,251 4,240,482 2,257,679 2,207,388
Research & development 666,201 367,299 317,455 239,043
------------ ------------ ------------- ------------
Total costs and expenses 10,137,138 10,970,660 5,583,775 6,242,156
------------ ------------ ------------- ------------
Loss from Operations (3,141,874) (1,138,606) (1,557,068) (423,166)
Other expenses, primarily financing charges (266,607) (272,331) (103,339) (137,381)
------------ ------------ ------------- ------------
Loss from continuing operations
before income taxes (3,408,481) (1,410,937) (1,660,407) (560,547)
Income tax (provision) benefit 46,189 (52,666) 7,583 (69,071)
------------ ------------ ------------- ------------
Loss from continuing operations (3,362,292) (1,463,603) (1,652,824) (629,618)
------------ ------------ ------------- ------------
Loss from discontinued operations 0 (25,620) 0 (56,683)
------------ ------------ ------------- ------------
Net loss $ (3,362,292) $ (1,489,223) $ (1,652,824) $ (686,301)
============ ============ ============= ============
Earnings Per Common Share:
Loss per common share
for continuing operations: $ (0.10) $ (0.05) $ (0.05) $ (0.02)
============ ============ ============= ============
Loss per common share
for discountined operations: $ 0.00 $ (0.00) $ 0.00 $ (0.00)
============ ============ ============= ============
Loss per common share: $ (0.10) $ (0.05) $ (0.05) $ (0.02)
============ ============ ============= ============
Weighted average shares outstanding 35,269,167 28,899,115 35,275,222 30,017,221
============ ============ ============= ============
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
VSI Enterprises, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Six months ended June 30,
1996 1995
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,362,292) $ (1,463,603)
Adjustments to reconcile net loss to net
cash provided (used) in operating activities:
Depreciation and amortization 710,126 315,814
Allowance to reduce inventory to lower
cost or market 75,025 42,025
Provision for doubtful accounts, net (28,525) (9,373)
Changes in operating assets and liabilities:
Accounts receivable 2,539,962 156,482
Inventories 528,109 (644,557)
Rental and demonstration inventory (822,339) 0
Prepaid expenses and other assets 125,447 28,287
Accounts payable (773,012) (646,727)
Accrued expenses (861,232) (380,847)
Deferred revenue 671,138 334,860
------------- ------------
Net cash (used) by operating activities (1,197,593) (2,267,639)
------------- ------------
Cash flows from investing activities:
Purchases of property and equipment (529,201) (632,096)
Change in other assets 50,501 (18,155)
Capitalized software development costs (30,663) (552,909)
------------- ------------
Net cash used by investing activities (509,363) (1,203,160)
------------- ------------
Cash flows from financing activities:
Payments on notes payable (2,352,544) (1,199,777)
Net borrowings (payments) on short term credit
facilities (4,672) (195,510)
Net borrowings on long term debt - -
Proceeds from exercise of stock options
and warrants 146,194 2,959,481
Proceeds from issuance of common stock in connection
with debt agreements 591,424 1,223,954
Proceeds from issuance of common stock in connection
with employee services and employee stock
purchase plan 171,283 378,831
Proceeds from issuance of common stock in connection
with acquisition of cR Solutions - 300,753
Proceeds from private placement - 110,380
------------- ------------
Net cash provided (used) by financing
activities (1,448,315) 3,578,112
------------- ------------
Effect of exchange rate changes on cash 61,484 (94,967)
Increase (decrease) in cash and cash equivalents (3,093,787) 12,346
Cash and cash equivalents at beginning of the period 4,202,613 1,469,054
------------- ------------
Cash and cash equivalents at end of the period $ 1,108,826 $ 1,481,400
============= ============
Cash paid during the six month period:
Interest $ 191,370 $ 150,770
============= ============
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
VSI ENTERPRISES, INC. AND SUBSIDIARIES
NOTE A - BASIS OF PRESENTATION.
The accompanying unaudited consolidated condensed financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been made and are
of a normal recurring nature. Operating results for the six month period ended
June 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended December 31, 1995.
NOTE B - PRINCIPLES OF CONSOLIDATION.
The consolidated financial statements include the accounts of VSI Enterprises,
Inc. and its subsidiaries, Videoconferencing Systems, Inc., Integrated Network
Services Inc., Videoconferencing Systems, n.v., and VSI Solutions, Inc. All
significant intercompany transactions and balances have been eliminated.
NOTE C - NET INCOME (LOSS) PER SHARE OF COMMON STOCK.
Net income (loss) per share of Common Stock for the three month and six month
periods ended June 30, 1996 and 1995 have been computed based on the weighted
average number of shares and common equivalent shares outstanding during each
period. Fully diluted information is not presented as fully diluted earnings
per share is not significantly different from the primary earnings per share
presented.
NOTE D - ACQUISITION
On June 28, 1996, the Company acquired all outstanding shares of Integrated
Network Services Inc. (INS), in exchange for 500,000 shares of the Company's
common stock. The transaction was accounted for as a pooling of interest.
Accordingly, all previously reported financial information has been restated to
reflect the acquisition.
INS designs, installs and supports intelligent computer networks. It is an
integration firm specializing in the connectivity of multi-protocol
environments, ranging from small local area networks to large, enterprise wide
networks employing WAN technologies to connect multiple sites.
The results of operations previously reported by the separate companies and the
combined amounts are presented below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
VSI $ 2,878,309 $3,338,026 $ 4,879,030 $6,104,731
INS 1,148,398 2,480,964 2,116,234 3,727,323
----------- ---------- ----------- ----------
Combined $ 4,026,707 $5,818,990 $ 6,995,264 $ 9,832,054
Net earnings (loss) from continuing operations:
VSI $(1,626,930) $ (790,784) $(3,246,316) $(1,586,493)
INS (25,894) 161,166 (115,976) 122,889
----------- ---------- ----------- -----------
Combined $(1,652,824) $ (629,618) $(3,362,292) $(1,463,603)
</TABLE>
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
VSI ENTERPRISES, INC. AND SUBSIDIARIES
FINANCIAL CONDITION
All previously reported financial information has been restated to reflect the
June 28, 1996 acquisition of Integrated Network Services Inc., which was
accounted for as a pooling of interest.
Since December 31, 1995, the Company's total assets decreased 29% to
$13,953,864, primarily due to a 74% decrease in cash. The cash was used for
first and second quarter operations, and to significantly reduce notes payable
(down 70%) and accounts payable (down 23%). Partially offsetting the decrease
in cash during the six month period ended June 30, 1996, was a 258% increase in
rental and demonstration inventory, at both domestic and international
locations. On December 31, 1995, cash was higher than historical levels due to
the exercise during the fourth quarter of 829,740 Class B Common Stock
Purchase Warrants of the Company, which yielded $3.5 million in cash.
Current liabilities as of June 30, 1996 decreased $3,320,322 from December 31,
1995, primarily as a result of a 70% decrease in notes payable, a 37% decrease
in accrued expenses and a 23% decrease in accounts payable. During the
three-month period ending June 30, 1996, the Company increased deferred revenue
by 257%, primarily due to an increase in service billings that have been
invoiced but are not yet recognizable as revenue.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1995
Revenues for the three months ended June 30, 1996 decreased 31% to $4,026,707
from the revenues of $5,818,990 recorded for the three months ended June 30,
1995. The decrease was due primarily to lower than usual revenues in early
1996 for Integrated Network Services Inc., a wholly-owned subsidiary of VSI
which was acquired June 28, 1996, in a pooling of interest transaction. The
sudden and unexpected death in early 1996 of INS' then-chairman and CEO, Bill
Rogers, adversely affected subsequent sales efforts prior to VSI's acquisition
of INS.
The Company's backlog of purchase orders at June 30, 1996 was $3,448,810.
Gross margin as a percentage of revenues for the three months ended June 30,
1996 was 25%, down from 35% for the three months ended June 30, 1995, due to an
increase in the sale of lower margin items in the product mix.
Selling, general and administrative expenses for the three months ended June
30, 1996, increased only marginally to $2,257,679, a 2% increase over the
three months ended June 30, 1995.
The Company charges research and development costs to expense as
incurred until technological feasibility of a software product has been
established. Software development costs incurred after technological
feasibility has been established are capitalized and amortized over the useful
life of the product. For the three month period ended June 30, 1996, the
Company's research and development expenses were $317,455, a 33% increase over
the three month period ended June 30, 1995. The increase was a result of
expanding the research and development work force to accommodate efforts
related to forthcoming generations of the Omega group and desktop systems
product lines and other software products, along with amortization of costs
previously capitalized. At June 30, 1996, the balance in software development
costs was $1,086,863, a 13% decrease as compared to the $1,243,510 capitalized
as of June 30, 1995.
Non-operating expenses for the three month period ended June 30, 1996 decreased
25% from the three month period ended June 30, 1995. This decrease was
primarily due to reduced costs associated with the Company's secured credit
facilities, as those balances were reduced significantly during the three month
period ended June 30, 1996.
7
<PAGE> 8
Net losses from continuting operations for the month period ended June 30, 1996
were $1,652,824, representing 41% of net product sales, as compared to
$629,618, or 11% of net product sales, for the three month period ended June
30, 1995. The increase in losses was due to a 31% decrease in revenues, along
with an 33% increase in research and development expenses.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1995
Revenues for the six months ended June 30, 1996 decreased 29% to $6,995,264
from the revenues of $9,832,054 recorded for the six months ended June 30,
1995. The decrease was due primarily to lower than usual revenues in early 1996
for Integrated Network Services Inc., a wholly-owned subsidiary of VSI which
was acquired June 28, 1996, in a pooling of interest transaction. The sudden
and unexpected death in early 1996 of INS' then-chairman and CEO, Bill Rogers,
adversely affected subsequent sales efforts prior to VSI's acquisition of INS.
The Company's backlog of purchase orders at June 30, 1996 was $3,448,810.
Gross margin as a percentage of revenues for the six months ended June 30, 1996
was 28%, down from 35% for the six months ended June 30, 1995, due to an
increase in the sale of lower margin items in the product mix.
Selling, general and administrative expenses for the six months ended June 30,
1996, increased only marginally to $1,411,251, a 4% increase over the six
months ended June 30, 1995.
The Company charges research and development costs to expense as incurred until
technological feasibility of a software product has been established. Software
development costs incurred after technological feasibility has been established
are capitalized and amortized over the useful life of the product. For the six
month period ended June 30, 1996, the Company's research and development
expenses were $666,201, an 81% increase over the six month period ended June
30, 1995. The increase in expense was a result of expanding the research and
development work force to accommodate efforts related to forthcoming
generations of the Omega group and desktop systems product lines and other
software products, along with amortization of costs previously capitalized. At
June 30, 1996, the balance in software development costs was $1,086,863, a 13%
decrease as compared to the $1,243,510 capitalized as of June 30, 1995.
Non-operating expenses for the six month period ended June 30, 1996 decreased
2% from the six month period ended June 30, 1995. This decrease was primarily
due to reduced costs associated with the Company's secured credit facilities,
as those balances were reduced significantly during the six month period ended
June 30, 1996.
Net losses from continuing operations for the six month period ended June 30,
1996 were $3,362,292, representing 69% of net product sales, as compared to
$1,463,603, or 24% of net product sales, for the six month period ended June
30, 1995. The increase in losses was due to a 29% decrease in revenues, along
with an 81% increase in research and development expenses.
LIQUIDITY AND SOURCES OF CAPITAL
As of June 30, 1996, the Company had cash and cash equivalents of $1,108,826.
On March 31, 1996, the Company was indebted to Larry M. Carr, a director of the
Company, under an unsecured credit facility of $327,261. The unsecured note
bore interest the greater of 12 1/2% per year or prime plus 2%. Principal and
interest on the note were due June 6, 1996. On June 5, 1996, the Company
retired the credit facility by issuing to Mr. Carr 244,817 shares of common
stock, including 27,202 shares issued with respect to accrued interest.
Since June 1995, Videoconferencing Systems, Inc. (VSI), a subsidiary of VSI
Enterprises, Inc., has had a revolving credit and security agreement with
Fidelity Funding of California Inc. This credit facility provides the company
with up to $4.0 million at an interest rate of prime plus 2%. Funds available
under the credit facility are based on 80% of eligible VSI accounts receivable
invoices, with certain restrictions. The credit facility is secured by the
accounts receivable, inventory and fixed assets of VSI. At June 30, 1996,
approximately $1,063,000 was owed to Fidelity Funding under the credit
facility.
Since April 1996, Integrated Network Services Inc. (INS), a subsidiary of VSI
Enterprises Inc., has had a revolving credit and security agreement with
Princeton Capital Finance Company. This credit facility provides INS with up to
$1.2 million at an interest rate of prime plus 4%. Funds available under the
credit facility are based on 80% of eligible accounts receivable invoices, with
certain restrictions. The credit facility is secured by accounts receivable,
inventory and fixed assets of INS, as well as by personal guarantees of certain
INS officers. At June 30, 1996, approximately $655,000 was owed to Princeton
Capital Finance Company.
As of June 30, 1996, VSI Europe had a secured bank facility of $575,264, of
which $482,393 was outstanding at that time.
In July, 1996, VSI completed a private placement of 1,097,361 shares of common
stock, resulting in proceeds of approximately $2.4 million. The proceeds of
this offering were added to the working capital of the Company and will be
utilized for general corporate purposes.
The Company's liquidity sources include existing cash and credit facilities.
However, in order to meet its cash flow requirements as it purchases inventory
to meet anticipated demand for its videoconferencing and networking products
and services, the Company may require additional financing during 1996.
8
<PAGE> 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 13, 1996, the Company held its 1996 Annual Meeting of Shareholders. At
the meeting, the following persons were elected to serve on the Company's Board
of Directors for a term of one year and until their successors are elected and
have qualified: Andre van den Bogaert, Carleton A. Brown, Larry M. Carr, Leo M.
Cortjens, A. John Knapp Jr. and Richard K. Snelling. The number of votes cast
for and against election of each nominee for director was as follows:
<TABLE>
<CAPTION>
Director For Against
-------- ---------- ---------
<S> <C> <C>
Andre van den Bogaert 29,276,890 134,054
Carleton A. Brown 29,297,315 113,629
Larry M. Carr 29,293,290 117,654
Leo M. Cortjens 29,221,122 189,822
A. John Knapp, Jr. 28,023,484 1,387,460
Richard K. Snelling 29,296,690 114,254
</TABLE>
In addition, the Company's shareholders approved the adoption of a 1995
Performance Warrant Plan for the company's employees, the purpose of which is
to enable the Company to attract, retain and motivate its employees as well as
to compensate them for their contributions in meeting or exceeding net income
and revenue goals. The number of votes cast in favor of the plan was 23,893,727
shares and the number of votes cast against the plan was 503,907. There were
5,013,310 abstentions and broker non-votes.
Also, the Company's shareholders approved an amendment to the Company's 1991
Stock Option Plan to increase the number of shares available for grant
thereunder from 2,362,057 shares to 2,762,057 shares. The number of votes cast
in favor of the amendment was 26,322,834 shares and the number of votes cast
against the amendment was 721,004. There were 2,367,106 abstentions and broker
non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibit is filed with this report:
27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended June 30,
1996.
9
<PAGE> 10
SIGNATURES
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.
VSI ENTERPRISES, INC.
Date: August 13, 1996 /s/ Richard K. Snelling
---------------- ----------------------------------------
Chairman & Chief Executive Officer
/s/ B.R. Brewer
----------------------------------------
Vice President-Finance, Administration &
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,109
<SECURITIES> 0
<RECEIVABLES> 4,504
<ALLOWANCES> 0
<INVENTORY> 4,292
<CURRENT-ASSETS> 10,452
<PP&E> 1,598
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,954
<CURRENT-LIABILITIES> 5,782
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 8,155
<TOTAL-LIABILITY-AND-EQUITY> 13,954
<SALES> 6,995,264
<TOTAL-REVENUES> 6,995,264
<CGS> 5,059,686
<TOTAL-COSTS> 10,137,138
<OTHER-EXPENSES> 266,607
<LOSS-PROVISION> 46,189
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,362,292)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,362,292)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,362,292)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
