<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 MARCH 31, 1997
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 MAY 7, 1997
-------------------
<S> <C>
COMMON STOCK, $.00025 PAR VALUE 43,476,750
</TABLE>
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<PAGE> 2
VSI ENTERPRISES, INC. AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
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<S> <C> <C>
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
March 31, 1997 and December 31, 1996............................... 3
Consolidated Condensed Statements of Operations
Three Months Ended March 31, 1997 and 1996......................... 4
Consolidated Condensed Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996......................... 5
Notes to Consolidated Condensed Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations:
Financial Condition................................................ 7
Results of Operations.............................................. 7
Liquidity and Sources of Capital................................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 9
</TABLE>
2
<PAGE> 3
CONSOLIDATED CONDENSED BALANCE SHEETS
VSI Enterprises, Inc. and Subsidiaries
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,051,256 $ 2,260,185
Accounts receivable, net 4,577,132 3,884,446
Inventories, net 2,606,922 2,810,231
Rental and demonstration inventory, net 1,438,041 1,542,667
Prepaid expenses 438,679 365,435
------------ ------------
Total current assets 10,112,030 10,862,964
------------ ------------
Property and equipment, net 1,313,457 1,356,313
Costs in excess of net assets acquired, net 9,420,003 9,537,558
Software development costs 876,008 980,110
Other assets 612,195 560,665
------------ ------------
$ 22,333,693 $ 23,297,610
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 605,695 $ 501,641
Bank credit facilities 51,842 127,605
Accounts payable 2,665,168 2,410,049
Accrued expenses 1,468,737 1,463,952
Deferred revenue 707,433 725,662
------------ ------------
Total current liabilities 5,498,875 5,228,909
Convertible Debentures 1,541,000 4,250,000
Stockholders' Equity:
Common stock, authorized 46,000,000 shares of
$.00025 par value; issued and outstanding
41,334,578 and 39,516,249 shares, respectively 10,334 9,879
Additional paid-in capital 41,001,892 38,222,005
Accumulated deficit (25,367,749) (24,124,509)
Cumulative translation adjustment (350,659) (288,674)
------------ ------------
Total Stockholders' Equity 15,293,818 13,818,701
------------ ------------
$ 22,333,693 $ 23,297,610
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
VSI Enterprises, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
(Unaudited) (Unaudited)
- -------------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 5,506,416 $ 2,968,558
Costs and expenses
Cost of revenue 2,734,323 2,051,045
Selling, general and administrative 3,607,377 2,153,573
Research & development 284,501 348,746
------------ ------------
Total costs and expenses 6,626,201 4,553,364
------------ ------------
Loss from operations (1,119,785) (1,584,806)
Other expenses, primarily financing charges (101,671) (163,268)
------------ ------------
Net loss from operations before income taxes (1,221,456) (1,748,074)
------------ ------------
Income tax (provision) benefit (21,784) 38,606
------------ ------------
Net Loss $ (1,243,240) $ (1,709,468)
============ ============
Net loss per common share $ (0.03) $ (0.05)
============ ============
Weighted average shares outstanding 40,639,919 35,154,391
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
VSI Enterprises, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,243,240) $(1,709,468)
Adjustments to reconcile net loss to net
cash provided (used) in operating activities:
Depreciation and amortization 283,014 278,984
Allowance to reduce inventory to lower
cost or market 105,225 37,525
Provision for doubtful accounts, net (79,379) 89,073
Changes in operating assets and liabilities:
Accounts receivable (613,307) (270,239)
Inventories 98,084 (502,592)
Rental and demonstration inventory (12,817) 0
Prepaid expenses and other assets (73,244) 16,328
Accounts payable 255,119 (275,152)
Accrued expenses 4,785 (323,485)
Deferred revenue (18,229) 66,637
----------- -----------
Net cash provided (used) by operating activities (1,293,989) (2,592,389)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (136,076) (24,521)
Change in other assets (51,530) 18,716
Capitalized software development costs 235,018 (22,997)
----------- -----------
Net cash used by investing activities 47,412 (28,802)
----------- -----------
Cash flows from financing activities:
Borrowings / (payments) on notes payable 104,054 (18,917)
Net borrowings / (payments) on short term credit facilities (75,763) (1,185)
Proceeds from exercise of stock options
and warrants -- 68,645
Proceeds from stock issuance 71,342 115,330
----------- -----------
Net cash provided by financing activities 99,633 163,873
----------- -----------
Effect of exchange rate changes on cash (61,985) (19,663)
Increase (decrease) in cash and cash equivalents (1,208,929) (2,476,981)
Cash and cash equivalents at beginning of the period 2,260,185 4,144,066
----------- -----------
Cash and cash equivalents at end of the period $ 1,051,256 $ 1,667,085
=========== ===========
Cash paid during the three month period:
Interest $ 73,707 $ 45,716
=========== ===========
</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 three month period ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. 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, 1996.
NOTE B - PRINCIPLES OF CONSOLIDATION.
The consolidated financial statements include the accounts of VSI Enterprises,
Inc. and its subsidiaries, Videoconferencing Systems, Inc., VSI Network Services
Inc. (d/b/a. Integrated Network Services, or INS), Videoconferencing Systems,
n.v., VSI Solutions, Inc. and VSI Network Solutions, Inc. (d/b/a Eastern
Telecom, or ETI). 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 periods ended
March 31, 1997 and 1996 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 - CONVERTIBLE DEBENTURES
In September 1996, the Company issued $5.0 million of 5% convertible debentures,
due in September 1999. The debentures are convertible into common stock at the
lesser of the per share market price at the time of funding or 80% of the per
share price of the common stock at the time of conversion. The Company can force
conversion of the debentures anytime after September 30, 1997, provided that the
per share price of the common stock has increased by at least 50% from the date
of funding. Market price of the common stock is defined as the five day average
closing bid price.
During the first quarter of 1997, convertible debentures amounting to $2,709,000
plus accrued interest of $46,082 were converted into 1,752,092 common shares.
NOTE E - NEW ACCOUNTING PRONOUNCEMENT
The FASB has issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which is effective for financial statements issued after
December 15, 1997. Early adoption of the new standard is not permitted. The new
standard eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure of
how the per share amounts were computed. The adoption of this new standard is
not expected to have a material impact on the disclosure of earnings per share
in the financial statements.
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. (INS), which was
accounted for as a pooling of interest.
Since December 31, 1996, the Company's total assets decreased 4% to $22,333,693,
primarily due to a $1,208,929, or 53%, decrease in cash and a $203,309, or 7%,
decrease in inventories, partially offset by a $692,686, or 18%, increase in
accounts receivable. The rise in accounts receivable was due to an increase in
revenues late in the first quarter that were not collected by March 31. Also,
the cash position on December 31, 1996 was positively affected by the issuance
in September 1996 of $5,000,000 in 5% convertible debentures due September 1999,
the proceeds of which were used to fund the cash portion of the October 2, 1996
acquisition of Eastern Telecom (ETI) and for working capital purposes.
Current liabilities as of March 31, 1997 were $5,498,875, an increase of
$269,966, or 5%, from December 31, 1996, primarily as a result of an increase in
notes payable and an increase in accounts payable. Partially offsetting the
increases was a 59% decrease in bank credit facilities.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1996
Revenue for the three months ended March 31, 1997 was $5,506,416, an increase of
85% over revenue of $2,968,558 recorded for the three months ended March 31,
1996. The increase was due primarily to a 60% increase in videoconferencing
system sales and to growth in sales and account management commissions from
wholly-owned subsidiary ETI, which contributed about 31% of first quarter
revenues. ETI was acquired in October 1996.
The Company's backlog of purchase orders at March 31, 1997 was $3,287,923.
Gross margin as a percentage of revenues for the three months ended March 31,
1997 was 50%, up from 31% for the three months ended March 31, 1996, due to an
increase in sales of higher margin videoconferencing system products and the
addition of high margin sales and account management commissions from ETI, a
sales agency for a number of telecommunications companies.
Selling, general and administrative expenses for the three months ended March
31, 1997 were $3,607,377, an increase of $1,453,801, or 68%, over the three
months ended March 31, 1996, due primarily to an increase in the Company's
sales, marketing and distribution initiatives in the United States (through the
acquisition of ETI and its 40-person sales force) and the Far East.
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 March 31, 1997, the Company's research and development
expenses were $284,501, an 18 % decrease over the three month period ended March
31, 1996. Expenses in 1996 had been somewhat higher than historical levels, due
to an expansion in the research and development workforce to accommodate
projects related to forthcoming generations of the Omega product line and other
software projects. Many of those projects were completed or were winding down by
first quarter 1997, and the workforce -- primarily at subsidiary VSI Solutions,
Inc. -- was reduced. At March 31, 1997, the balance in software development
costs was $876,008, an 11% decrease as compared to the $980,110 capitalized as
of March 31, 1996.
7
<PAGE> 8
Non-operating expenses for the three month period ended March 31, 1997 decreased
$61,597, or 38%, to $101,671 from the three month period ended March 31, 1996.
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 March 31, 1997.
Net losses for the three month period ended March 31, 1997 were $1,243,240,
representing 23% of net product sales, as compared to $1,709,468, or 58% of net
product sales, for the three month period ended March 31, 1996. The decrease in
losses was due to an 85% increase in revenues and an improvement in gross
margins.
LIQUIDITY AND SOURCES OF CAPITAL
In April, 1997, the Company completed a private placement of 850,000 shares of
common stock to two VSI insiders and other accredited investors, resulting in
proceeds of $800,000. The proceeds of this offering were added to the working
capital of the Company and utilized for general corporate purposes.
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 March 31, 1997,
approximately $692,142 was owed to Fidelity Funding under the credit facility.
Outstanding advances under this agreement are classified as a reduction of
accounts receivable in the accompanying consolidated balance sheets.
Since December 1996, VSI Network Services, Inc. (d/b/a Integrated Network
Services, or INS), a subsidiary of VSI Enterprises Inc., has had a revolving
credit and security agreement with Presidential Financial Corporation. This
credit facility provides INS with up to $750,000 at an interest rate of prime
plus 3%. Funds available under the credit facility are based on 80% of eligible
accounts receivable, with certain restrictions. The credit facility is secured
by receivables, inventory and fixed assets of INS. At March 31, 1997,
approximately $292,112 was owed to Presidential Financial Corporation.
As of March 31, 1997, Videoconferencing Systems, n.v. had a secured bank
facility of $435,000, of which $51,842 was outstanding at that time. As of
March 31, 1997, the Company had cash and cash equivalents of $1,051,256. The
Company's liquidity sources include existing cash and credit facilities. The
Company's liquidity sources also include existing credit facilities. In order
to meet its cash flow requirements, the Company will likely require additional
financing in 1997. This additional funding could be in the form of debt, equity
or both. A reduction in operating expenses could also be effected. However,
there can be no assurance that the Company will be able to obtain such
financing if and when needed, or that if obtained, such financing will be
sufficient or on terms and conditions acceptable to the Company.
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, such
as statements relating to financial results and plans for future business
development activities, and are thus prospective. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Potential risks and uncertainties
include, but are not limited to, economic conditions, competition and other
uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings.
8
<PAGE> 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibit is filed with this report:
3.1.1 Certificate of Amendment of Certificate of Incorporation,
dated April 21, 1997
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 March 31,
1997.
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: May 12, 1997 /s/ Richard K. Snelling
------------------------- --------------------------------------------
Chairman & Chief Executive Officer
/s/ B.R. Brewer
--------------------------------------------
Group President & Chief Financial Officer
10
<PAGE> 1
EXHIBIT 3.1.1 - CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF VSI
ENTERPRISES, INC.
VSI Enterprises, Inc. (the "Company"), a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the Company resolutions
were duly adopted setting forth a proposed amendment of the Certificate of
Incorporation of the Company, declaring said amendment to be advisable and
directing that said amendment be considered at the next annual meeting of the
stockholders of the Company. The resolution setting forth the proposed amendment
is as follows:
RESOLVED: That Section 5.01 of the Certificate of Incorporation, as heretofore
added to or amended by certificates filed pursuant to law, is amended to read in
its entirety as follows:
"5.01 Authorized Shares. The aggregate number of shares which the
Company shall have authority to issue is Sixty Million Eight Hundred
Thousand (60,800,000). Sixty Million (60,000,000) shares shall be
designated `Common Stock' and shall have a par value of $.00025. Eight
Hundred Thousand (800,000) shares shall be designated `Preferred
Stock' and shall have a par value of $.00025. All shares of the
Company shall be issued for such consideration, as expressed in
dollars, as the Board of Directors may from time to time
determine."
SECOND: That thereafter, pursuant to resolution of its Board of Directors, the
annual meeting of stockholders of the Company was duly called and held, upon
notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware, at which meeting the necessary number of shares as required
by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
FOURTH: That the capital of the Corporation shall not be reduced under or by
reason of said amendment.
IN WITNESS WHEREOF, VSI Enterprises, Inc. has caused this Certificate of
Amendment to be signed by its duly authorized officers, this 21st day of April,
1997.
VSI ENTERPRISES, INC.
A Delaware Corporation
By: /s/ Richard K. Snelling Attest: /s/ Bill R. Brewer
----------------------- ------------------
Chairman of the Board President, Chief Operating
and Chief Executive Officer Officer, Chief Financial
Officer and Secretary
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,051
<SECURITIES> 0
<RECEIVABLES> 4,577
<ALLOWANCES> 0
<INVENTORY> 2,607
<CURRENT-ASSETS> 10,112
<PP&E> 1,313
<DEPRECIATION> 0
<TOTAL-ASSETS> 22,334
<CURRENT-LIABILITIES> 5,499
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 15,284
<TOTAL-LIABILITY-AND-EQUITY> 22,334
<SALES> 5,506
<TOTAL-REVENUES> 5,506
<CGS> 2,734
<TOTAL-COSTS> 6,626
<OTHER-EXPENSES> 102
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,221)
<INCOME-TAX> (22)
<INCOME-CONTINUING> (1,243)
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