<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 SEPTEMBER 30, 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 NOVEMBER 6, 1997
-------------------
<S> <C>
COMMON STOCK, $.00025 PAR VALUE 45,822,505
</TABLE>
================================================================================
<PAGE> 2
VSI ENTERPRISES, INC. AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets
September 30, 1997 and December 31, 1996........................................ 3
Consolidated Condensed Statements of Operations
Three Months and Nine Months Ended September 30, 1997 and 1996.................. 4
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 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
Changes in Securities and Use of Proceeds....................................... 10
OTHER INFORMATION
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>
September 30, December 31,
1997 1996
(Unaudited)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,956,020 $ 2,260,185
Accounts receivable, net 5,359,112 3,884,446
Inventories, net 2,668,451 2,810,231
Rental and demonstration inventory, net 1,316,172 1,542,667
Prepaid expenses 676,455 365,435
------------ ------------
Total current assets 11,976,210 10,862,964
------------ ------------
Property and equipment, net 1,110,564 1,356,313
Costs in excess of assets acquired, net 9,168,004 9,537,558
Software development costs 762,235 980,110
Other assets 863,820 560,665
------------ ------------
$ 23,880,833 $ 23,297,610
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 477,068 $ 501,641
Bank credit facilities 133,619 127,605
Accounts payable 2,942,189 2,410,049
Accrued expenses 1,631,054 1,463,952
Deferred revenue 690,134 725,662
------------ ------------
Total current liabilities 5,874,064 5,228,909
Convertible Debentures 0 4,250,000
Stockholders' Equity:
Common stock, authorized 60,000,000 shares of
$.00025 par value; issued and outstanding
45,822,505 and 39,516,249 shares, respectively 11,456 9,879
Additional paid-in capital 45,466,867 38,222,005
Accumulated deficit (26,962,794) (24,124,509)
Cumulative translation adjustment (508,760) (288,674)
------------ ------------
Total Stockholders' Equity 18,006,769 13,818,701
------------ ------------
$ 23,880,833 $ 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>
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 16,936,793 $ 10,739,244 $ 5,178,872 $ 3,743,983
Costs and expenses:
Cost of revenue 8,042,521 8,108,219 2,418,922 3,013,730
Selling, general and administrative 10,659,234 6,745,247 3,460,804 2,321,629
Research & development 779,084 938,969 239,053 272,768
------------ ------------ ------------ ------------
Total costs and expenses 19,480,838 15,792,435 6,118,779 5,608,127
------------ ------------ ------------ ------------
Loss from operations (2,544,045) (5,053,191) (939,907) (1,864,144)
Other expenses, primarily financing charges (239,107) (365,795) (89,072) (99,188)
------------ ------------ ------------ ------------
Net loss from operations before income taxes (2,783,152) (5,418,986) (1,028,979) (1,963,332)
------------ ------------ ------------ ------------
Income tax (provision) benefit (55,133) 53,772 (18,281) 0
------------ ------------ ------------ ------------
Net Loss $ (2,838,285) $ (5,365,214) $ (1,047,260) $ (1,963,332)
============ ============ ============ ============
Net loss per common share $ (0.07) $ (0.15) $ (0.02) $ (0.05)
============ ============ ============ ============
Weighted average shares outstanding 42,830,493 35,666,183 44,552,928 36,451,585
============ ============ ============ ============
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
VSI Enterprises, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,838,285) $(5,365,214)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,534,162 1,013,525
Allowance to reduce inventory to lower
of cost or market 345,225 112,525
Provision for doubtful accounts, net 22,916 (54,458)
Changes in operating assets and liabilities:
Accounts receivable (1,497,582) 3,373,342
Inventories (203,445) 146,283
Rental and demonstration inventory (236,050) (890,499)
Prepaid expenses and other assets (311,020) 279,924
Accounts payable 532,140 (596,328)
Accrued expenses 167,102 (882,770)
Deferred revenue (35,528) 321,976
----------- -----------
Net cash used by operating activities (2,520,364) (2,541,694)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (160,554) (624,100)
Change in other assets (303,155) (124,522)
Capitalized software development costs (77,885) (30,663)
----------- -----------
Net cash used by investing activities (541,595) (779,285)
----------- -----------
Cash flows from financing activities:
Net borrowings (payments) on notes payable (24,573) (2,830,259)
Net borrowings (payments) on short term credit facilities 6,014 (42,069)
Proceeds from issuance of common stock in connection
with debt and vendor agreements 368,002 591,424
Proceeds from issuance of common stock in connection
with acquisition of ETI -- 4,966,920
Proceeds from exercise of stock options, warrants
and stock purchase plan 141,210 395,319
Proceeds from private placements net of
issuance costs 2,487,227 2,489,776
----------- -----------
Net cash provided by financing activities 2,977,879 5,571,111
----------- -----------
Effect of exchange rate changes on cash (220,086) 28,198
Increase (decrease) in cash and cash equivalents (304,166) 2,278,330
Cash and cash equivalents at beginning of the period 2,260,185 4,202,613
----------- -----------
Cash and cash equivalents at end of the period $ 1,956,019 $ 6,480,943
=========== ===========
Cash paid during the nine month period:
Interest $ 203,140 $ 261,370
=========== ===========
</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 and nine month periods ended
September 30, 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: The comparative results from third quarter 1996 have been restated to
reflect a reduction in revenues of approximately $500,000 and a corresponding
increase in net loss of approximately $200,000 from that reported in the third
quarter 1996 Form 10-Q, filed November 13, 1996. The changes resulted from a
reconciliation in the records of Integrated Network Services, which was acquired
by VSI in June, 1996. The restatement did not impact VSI's third quarter 1996
loss per share.
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 and nine month
periods ended September 30, 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 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
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
VSI ENTERPRISES, INC. AND SUBSIDIARIES
FINANCIAL CONDITION
Since December 31, 1996, the Company's total assets increased 3% to $23,880,833,
primarily due to a $1,474,666, or 38%, increase in accounts receivable. This
increase was partially offset by small decreases in cash, inventories, rental
and demonstration inventory, software development costs, costs in excess of net
assets acquired and property and equipment. The rise in accounts receivable was
due to an increase in revenues late in the third quarter that were not collected
by September 30. Also, the cash position on December 31, 1996 was positively
affected by the issuance in September 1996 of $5.0 million 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 September 30, 1997 were $5,874,064, an increase of
$645,155, or 12%, from December 31, 1996, primarily as a result of a $532,140,
or 22%, increase in accounts payable. The rise in accounts payable was due to
the purchase of inventory late in the third quarter of 1997 used to fill orders
received late in the quarter.
In September 1996, the Company issued $5.0 million of 5% convertible debentures,
due in September 1999. As of June 9, 1997, all convertible debentures amounting
to $5.0 million plus accrued interest of $111,749 were converted into 3,889,146
common shares. There are no outstanding convertible debentures.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1996
Revenues for the three months ended September 30, 1997 were $5,178,872, an
increase of 38% over the revenues of $3,743,983 recorded for the three months
ended September 30, 1996. The increase was due primarily to growth in sales and
account management commissions from wholly-owned subsidiary ETI, which
contributed 35% of the Company's consolidated third quarter 1997 revenues. ETI
was acquired in October 1996.
The Company's backlog of purchase orders at September 30, 1997 was $4,238,959.
Gross margin as a percentage of revenues for the three months ended September
30, 1997 was 53%, up from 20% for the three months ended September 30, 1996, due
to an increase in sales of higher margin videoconferencing system products,
corporate-wide cost reduction initiatives and the addition of high margin sales
and account management commissions from ETI, a sales agency for a number of
major telecommunications companies.
Selling, general and administrative expenses for the three months ended
September 30, 1997 were $3,460,804, an increase of $1,139,175, or 49%, over the
three months ended September 30, 1996, due to an increase in the Company's
sales, marketing and distribution initiatives in the United States (primarily
from the acquisition of ETI and its 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 September 30, 1997, the Company's research and development
expenses were $239,053, a 12% decrease over the three month period ended
September 30, 1996. At September 30, 1997, the balance in software development
costs was $762,235, a 22% decrease as compared to the $980,110 capitalized as of
December 31, 1996.
7
<PAGE> 8
Non-operating expenses for the three month period ended September 30, 1997 were
$89,072, a decrease of $10,116, or 10%, from the three month period ended
September 30, 1996. This decrease was primarily due to reduced costs associated
with the Company's secured credit facilities.
Net losses for the three month period ended September 30, 1997 were $1,047,260,
representing 20% of net product sales, as compared to $1,963,332, or 52% of net
product sales, for the three month period ended September 30, 1996. The decrease
in losses was due to a 38% increase in revenues and a substantial improvement in
gross margins.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1996
Revenues for the nine months ended September 30, 1997 were $16,936,793, an
increase of 58% over the revenues of $10,739,244 recorded for the nine months
ended September 30, 1996. The increase was due primarily to an increase in
videoconferencing system sales and to growth in sales and account management
commissions from wholly-owned subsidiary ETI, which contributed about 32% of the
Company's consolidated year-to-date revenues. ETI was acquired in October 1996.
Gross margin as a percentage of revenues for the nine months ended September 30,
1997 was 53%, up from 25% for the nine months ended September 30, 1996, due to
an increase in sales of higher margin videoconferencing system products,
corporate-wide cost reduction initiatives and the addition of high margin sales
and account management commissions from ETI, a sales agency for a number of
major telecommunications companies.
Selling, general and administrative expenses for the nine months ended September
30, 1997 were $10,659,234, an increase of $3,913,987, or 58%, over the nine
months ended September 30, 1996, due to an increase in the Company's sales,
marketing and distribution initiatives in the United States (primarily from the
acquisition of ETI and its 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 nine
month period ended September 30, 1997, the Company's research and development
expenses were $779,084, a 17% decrease over the nine month period ended
September 30, 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 September 30, 1997, the balance in
software development costs was $762,235, a 22% decrease as compared to the
$980,110 capitalized as of December 31, 1996.
Non-operating expenses for the nine month period ended September 30, 1997
decreased $126,688, or 35%, to $239,107 from the nine month period ended
September 30, 1996. This decrease was primarily due to reduced costs associated
with the Company's secured credit facilities.
Net losses for the nine month period ended September 30, 1997 were $2,838,285,
representing 17% of net product sales, as compared to $5,365,214, or 50% of net
product sales, for the nine month period ended September 30, 1996. The decrease
in losses was due to a 58% increase in revenues and a substantial improvement in
gross margins.
LIQUIDITY AND SOURCES OF CAPITAL
In April, 1997, the Company completed a private placement of 843,882 shares of
common stock to two VSI insiders and four 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.
8
<PAGE> 9
In September, 1997, the Company issued 1,160,000 shares of common stock
in a private placement to three VSI insiders and five other accredited
investors, resulting in proceeds of $1,450,000. The proceeds of this offering
were utilized to acquire inventory to fill customer orders and 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 and inventory of VSI. At September 30, 1997, $1,177,947 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 September 30, 1997,
$369,628 was owed to Presidential Financial Corporation.
On October 2, 1997, VSI Network Solutions, Inc. (d/b/a Eastern Telecom, or ETI),
a subsidiary of VSI Enterprises, Inc., entered into a revolving credit and
security agreement with Foothill Capital Inc. This credit facility provides ETI
with up to $1.5 million at an interest rate of prime plus 2%. Funds available
under the credit facility are based on 80% of eligible ETI accounts receivable
invoices, with certain restrictions. The credit facility is secured by accounts
receivables, inventory and fixed assets of ETI.
As of September 30, 1997, Videoconferencing Systems, n.v. had a secured bank
facility of $274,348, of which $203,068 was outstanding at that time.
As of September 30, 1997, the Company had cash and cash equivalents of
$1,956,020. The Company's liquidity sources include existing cash, accounts
receivable and credit facilities. In order to meet its cash flow requirements,
the Company may 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.
9
<PAGE> 10
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In September, 1997, the Company issued 1,160,000 shares of common stock in a
private placement to three VSI insiders and five other accredited investors,
resulting in proceeds of $1,450,000. The proceeds of this offering were utilized
to acquire inventory to fill customer orders and for general corporate purposes.
All issuances of securities described above were made in reliance on the
exemption from registration provided by Section 4(2) and/or 3(b) of the
Securities Act of 1933 as transactions by an issuer not involving a public
offering. All of the securities were acquired by the recipients thereof for
investment and with no view toward the resale or distribution thereof. In each
instance, the offers and sales were made without any public solicitation and the
stock certificates bear restrictive legends. No underwriter was involved in the
transactions and no commissions were paid.
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:
During the quarter ended September 30, 1997, the Company filed (i) a Current
Report on Form 8-K dated September 25, 1997, and (ii) Amendment No. 1 on Form
8-K/A dated October 7, 1997 to its Current Report on Form 8-K dated September
25, 1997.
10
<PAGE> 11
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: November 10, 1997 /s/ Julia B. North
------------------- --------------------------------------------
President & Chief Executive Officer
/s/ B.R. Brewer
--------------------------------------------
Group President & Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,956
<SECURITIES> 0
<RECEIVABLES> 5,359
<ALLOWANCES> 0
<INVENTORY> 2,668
<CURRENT-ASSETS> 11,976
<PP&E> 1,111
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,881
<CURRENT-LIABILITIES> 5,874
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 17,995
<TOTAL-LIABILITY-AND-EQUITY> 23,881
<SALES> 16,937
<TOTAL-REVENUES> 16,937
<CGS> 8,043
<TOTAL-COSTS> 19,481
<OTHER-EXPENSES> 239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,783)
<INCOME-TAX> 55
<INCOME-CONTINUING> (2,838)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,838)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
