<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, 1998
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)
<TABLE>
<S> <C>
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)
</TABLE>
(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.
OUTSTANDING AT
CLASS OF SECURITIES AUGUST 11, 1998
COMMON STOCK, $.00025 PAR VALUE 48,248,224
- --------------------------------------------------------------------------
<PAGE> 2
VSI ENTERPRISES, INC. AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
FINANCIAL INFORMATION Page No.
--------
<S> <C> <C>
PART I. Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997............................................. 3
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 1998 and 1997........................ 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997........................................ 5
Notes to Condensed Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations:
Financial Condition............................................................. 9
Results of Operations........................................................... 9
Liquidity and Sources of Capital................................................ 11
PART II. Item 4. Submission of Matters to a Vote of Security Holders..................... 14
Item 5. Other Matters ......................................................... 14
Item 6. Exhibits and Reports on Form 8-K....................................... 14
</TABLE>
2
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CONSENSED CONSOLIDATED BALANCE SHEETS
VSI Enterprises, Inc. and subsidiaries
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,141,262 $ 866,009
Accounts receivable, net 5,931,960 6,142,936
Inventories, net 3,272,930 2,541,754
Rental and demonstration inventory, net 642,576 990,054
Prepaid expenses 232,681 438,665
------------ ------------
Total current assets 12,221,409 10,979,418
------------ ------------
Property and equipment, net 1,315,349 1,194,908
Goodwill, net 8,774,346 9,020,715
Software development costs, net 439,865 658,052
Other assets 1,250,979 1,027,366
------------ ------------
$ 24,001,948 $ 22,880,459
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 1,814,518 $ 1,422,367
Bank credit facilities 63,524 154,938
Accounts payable 3,873,486 3,401,547
Accrued expenses 1,719,535 1,803,506
Deferred revenue 1,094,549 507,177
------------ ------------
Total current liabilities 8,565,612 7,289,535
Convertible Debentures 2,918,588 0
Stockholders' Equity:
Common stock, authorized 60,000,000 shares of
$.00025 par value; issued and outstanding
47,416,754 and 45,822,505 shares, respectively 11,854 11,546
Additional paid-in capital 47,125,431 45,976,291
Accumulated deficit (34,176,167) (29,941,875)
Cumulative translation adjustment (443,370) (455,038)
------------ ------------
Total Stockholders' Equity 12,517,748 15,590,924
------------ ------------
$ 24,001,948 $ 22,880,459
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
VSI Enterprises, Inc. and subsidiaries
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 10,125,912 $ 11,757,921 7,266,990 $ 6,251,505
Costs and expenses
Cost of revenue 6,266,236 5,623,599 4,213,027 2,889,276
Selling, general and administrative 6,847,962 7,198,424 3,481,635 3,591,048
Research & development 409,594 540,037 203,940 255,536
------------ ------------ ------------ ------------
Total costs and expenses 13,523,792 13,362,060 7,898,602 6,735,860
------------ ------------ ------------ ------------
Loss from operations (3,397,880) (1,604,139) (631,612) (484,355)
Amortization of debt discount (448,000) 0 (448,000) 0
Amortization of debt issuance costs (37,500) 0 (37,500) 0
Other expenses (350,912) (127,001) (212,767) (25,330)
------------ ------------ ------------ ------------
Net loss before income taxes (4,234,292) (1,731,140) (1,329,879) (509,685)
------------ ------------ ------------ ------------
Income tax (provision) benefit 0 (59,885) 0 (38,101)
------------ ------------ ------------ ------------
Net Loss $ (4,234,292) $ (1,791,025) (1,329,879) $ (547,786)
============ ============ ============ ============
Net loss per common share $ (0.09) $ (0.04) (0.03) $ (0.01)
============ ============ ============ ============
Weighted average shares outstanding 46,855,974 41,955,001 47,207,112 43,260,163
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
VSI Enterprises, Inc. and subsidiaries
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
(Unaudited) (Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,234,292) $(1,791,025)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,485,727 1,033,531
Changes in operating assets and liabilities:
Accounts receivable 210,977 (2,362,436)
Inventories (807,603) (17,571)
Rental and demonstration inventory 243,872 98,109
Prepaid expenses and other assets 205,983 (586,124)
Accounts payable 471,939 282,550
Accrued expenses (83,970) 375,814
Deferred revenue 587,372 226,340
----------- -----------
Net cash used by operating activities (1,919,995) (2,740,812)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (476,077) (256,967)
Change in other assets (36,114) (71,904)
Capitalized software development costs 0 (31,635)
----------- -----------
Net cash used by investing activities (512,191) (360,506)
----------- -----------
Cash flows from financing activities:
Net borrowings / (payments) on notes payable 392,151 12,264
Net borrowings / (payments) on short term credit facilities (91,414) (46,587)
Proceeds from issuance of common stock in connection
with debt and vendor agreements 436,000 538,991
Proceeds from exercise of stock options, warrants
and stock purchase plan 184,035 114,780
Proceeds from private placements net of
issuance costs 2,775,000 1,037,227
----------- -----------
Net cash provided by financing activities 3,695,772 1,656,675
----------- -----------
Effect of exchange rate changes on cash 11,668 (86,916)
Increase (decrease) in cash and cash equivalents 1,275,253 (1,531,561)
Cash and cash equivalents at beginning of the period 866,009 2,260,185
----------- -----------
Cash and cash equivalents at end of the period $ 2,141,262 $ 728,624
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
VSI ENTERPRISES, INC. AND SUBSIDIARIES
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited and
have been prepared by the management of VSI Enterprises, Inc. and subsidiaries
(the "Company" or "VSI") in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, certain information and
footnote disclosures usually found in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. In the opinion of the management of the Company, all adjustments
(consisting only of normal recurring adjustments) considered necessary for fair
presentation of the condensed consolidated financial statements have been
included, and the accompanying condensed consolidated financial statements
present fairly the financial position and the results of operations for the
interim periods presented. Operating results for the three and six month periods
ended June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related footnotes included in the Company's 1997 Annual
Report on Form 10-K, as filed with the SEC on March 25, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
NOTE 3 - NET INCOME (LOSS) PER SHARE OF COMMON STOCK
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." That statement requires the disclosure
of basic net income (loss) per share and diluted net income (loss) per share.
Basic net income (loss) per share is computed by dividing net income (loss)
available to common shareholders by the weighted-average number of common shares
outstanding during the period and does not include any other potentially
dilutive securities. Diluted net income (loss) per share gives effect to all
potentially dilutive securities. There is no difference between basic net income
(loss) per share and diluted net income (loss) per share for any period
presented.
NOTE 4 - CONVERTIBLE DEBENTURES
On February 23, 1998, the Company issued $3,000,000 of 5% Convertible Debentures
due February 2000 (the "Debentures"), the proceeds of which are being utilized
for working capital purposes. Proceeds were $3,000,000, less debt issuance costs
of $225,000. In addition, the Company issued 37,500 common stock purchase
warrants to the holder of the Debentures and 37,500 warrants to an agent
involved in the transaction. The warrants, which expire on February 23, 2003,
entitle the holder to purchase one common share of the common stock of the
Company at the price of $2.50.
The Debentures are convertible into shares of common stock of the Company at the
option of the holder. Any conversion shall be the lesser of (i) $2.00 per share
or (ii) 85% of the average closing bid price of the Company's Common Stock.
"Average closing bid price" is defined to mean the lowest average of the daily
last bid price for the Common Stock for any three trading days in any 20-day
period preceding the conversion. On February
6
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19, 1998, the Company placed in an escrow account 4,000,000 shares of Common
Stock. As Debentures are converted, the shares in escrow will be reduced by the
same amount. The Company may, at its option, redeem the Debentures at any time
prior to February 23, 1999 at a price equal to 115% of the outstanding principal
amount thereof, plus any accrued but unpaid interest.
In accordance with SEC requirements, $529,000 of the debt issuance proceeds has
been allocated to additional paid in capital in the accompanying balance sheet,
to recognize the beneficial conversion feature of the Debentures. Debt issuance
costs are included in "Other assets" in the accompanying balance sheet and are
being amortized over the stated term of the debt, 24 months.
The debt discount resulting from the beneficial conversion feature of the
Debentures is being amortized to interest expense during the vesting period of
the conversion feature. During the quarter ended June 30, 1998, $448,000 of this
debt discount was charged to interest expense. The remaining $81,000 will be
recognized in the third quarter of 1998 when the debt becomes fully convertible.
At June 30, 1998, no Debentures had been converted. On July 11, 1998, $500,000
of Debentures (plus an additional $7,976.06 of accrued interest) were converted
at the request of the Debenture holder into 831,475 shares of VSI Common Stock.
The remaining balance of Debentures is $2,500,000.
NOTE 5 - ACCOUNTING FOR IMPAIRMENTS IN LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles are reviewed for impairment
whenever events or changes in circumstances indicated that the carrying amounts
of assets may not be recoverable. Management periodically evaluates the carrying
value and the economic useful life of its long-lived assets based on the
Company's operating performance and the expected future undiscounted cash flows
and will adjust the carrying amount of assets which may not be recoverable.
Management believes long-lived assets in the accompanying condensed consolidated
balance sheet are appropriately valued.
NOTE 6 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The Statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate and assess the
effectiveness of the transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance.
The Company has not yet quantified the impact of adopting SFAS No .133 on its
financial statements and has not determined the timing of or method of its
adoption of the Statement. The adoption of SFAS No. 133 is not expected to have
a material impact on earnings or other comprehensive income. However, changes in
the Company's derivative instruments and hedging activities could increase
volatility in earnings and other comprehensive income.
NOTE 7 - COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income includes the changes in equity resulting from transactions
with non-owners for periods reported. Foreign currency translation adjustments
represent the Company's only component of other comprehensive income. For the
three months ended June 30, 1998 and 1997, total comprehensive loss was
approximately $1,318,000 and $635,000,
7
<PAGE> 8
respectively. For the six months ended June 30, 1998 and 1997, total
comprehensive loss was approximately $4,223,000 and $1,878,000, respectively.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
NOTE 9 - STOCKHOLDERS' EQUITY
During the six months ended June 30, 1998, the Company issued a total of 950,000
shares of common stock to two vendors in exchange for products and services. The
issuances took place in the months of February and March.
NOTE 10 - STOCK OPTIONS AND WARRANTS
At the annual meeting in May, the Company's shareholders approved an amendment
to the Company's 1991 Stock Option Plan that increased the number of shares of
Common Stock available for grant thereunder from 2,762,057 shares to 3,662,057
shares.
On February 23, 1998, in conjunction with the issuance of $3,000,000 of 5%
Convertible Debentures, the Company issued 37,500 common stock purchase warrants
to the holder of the Debentures and 37,500 warrants to an agent involved in the
transaction. The warrants, which expire on February 23, 2003, entitle the holder
to purchase one common share of the common stock of the Company at the price of
$2.50.
8
<PAGE> 9
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, 1997, the Company's total assets increased approximately 5%
to $24,001,948. A $1,275,253, or approximately 147%, increase in cash and a
$731,176, or approximately 29%, increase in inventories accounted for most of
the amount. Partially offsetting the increase were large decreases in rental and
demonstration inventory (down approximately 35%), prepaid expenses (down
approximately 47%) and software development costs (down approximately 33%).
Current liabilities as of June 30, 1998 were $8,565,612, an increase of
$1,276,077, or approximately 18%, from December 31, 1997. The increase was
primarily due to an increase of $587,372, or approximately 116%, of deferred
revenue comprised primarily of extended service contracts from videoconferencing
customers. Notes payable also increased by approximately 28%, as the Company
utilized to a greater extent its accounts receivable financing sources, and
accounts payable increased by approximately 14%, due to the purchase of
videoconferencing system components used in the delivery of orders received late
in the second quarter.
On February 23, 1998, the Company issued $3,000,000 of 5% Convertible Debentures
due February 2000 (the "Debentures"), the proceeds of which are being utilized
for working capital purposes. The Debentures are convertible into shares of
common stock of the Company at the option of the holder. Any conversion shall be
the lessor of (i) $2.00 per share or (ii) 85% of the average closing bid price
of the Company's Common Stock. "Average closing bid price" is defined to mean
the lowest average of the daily last bid price for the Common Stock for any
three trading days in any 20-day period preceding the conversion. The Company
may, at its option, redeem the Debentures at any time prior to February 23, 1999
at a price equal to 115% of the outstanding principal amount thereof, plus any
accrued but unpaid interest.
Additionally, at the request of the Debenture holder, the Company on February
19, 1998 issued 4,000,000 shares of VSI Common Stock, which are being held in
escrow by a third party. As Debentures are converted into shares of VSI Common
Stock, the number of shares held in escrow will be reduced by an identical
amount. At June 30, 1998, no debentures had been converted. On July 11, 1998,
$500,000 of debentures (plus an additional $7,976.06 of accrued interest) were
converted at the request of the Debenture holder into 831,475 shares of VSI
Common Stock. The remaining balance of Debentures is $2,500,000.
In April 1998, VSI entered into a working capital loan agreement for
approximately $2,000,000 with AmTrade International Bank of Georgia ("AmTrade").
The loan was guaranteed by the Export-Import Bank of the United States, and was
collateralized by a letter of credit from a VSI customer. Funds were used for
pre-/post-export financing for the manufacture and delivery of videoconferencing
equipment in China. The interest rate was prime plus 2.5%. On June 18, 1998, the
full amount of the loan proceeds, interest and fees was repaid to AmTrade.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1997
Revenues for the three months ended June 30, 1998 were $7,266,990, an increase
of approximately 16% from the revenues of $6,251,505 recorded for the three
months ended June 30, 1997. The increase was due primarily to the shipment of
several large videoconferencing orders, including a $2.6 million order to a
customer in China, and increased orders in such niche markets as video
arraignment and distance education.
The Company's backlog of purchase orders at June 30, 1998 was approximately $5.1
million, compared to approximately $3.3 million at June 30, 1997.
9
<PAGE> 10
Gross margin as a percentage of revenues for the three months ended June 30,
1998 was approximately 42%, as compared to approximately 54% for the three
months ended June 30, 1997. The decrease was primarily due to higher than usual
sales of lower margin videoconferencing products (especially a $2.6 million
order to a customer in China).
Selling, general and administrative expenses for the three months ended June 30,
1998 were $3,481,635, a decrease of $109,413, or approximately 3%, over the
three months ended June 30, 1997. The decrease was primarily due to a reduction
in workforce.
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, 1998, the Company's research and development
expenses were $203,940, a decrease of approximately 20% over the three month
period ended June 30, 1997. The decrease was primarily due to the completion of
initial development of a new product introduced in mid-1997. At June 30, 1998,
the balance in software development costs was $439,865, an approximately 33%
decrease as compared to the $658,052 capitalized as of December 31, 1997.
Non-operating expenses for the three-month period ended June 30, 1998 were
$698,267, an increase of $672,937 from the three month period ended June 30,
1997. This increase was primarily due to increased expenses associated with the
Company's convertible debentures, working capital loan with AmTrade
International Bank and secured credit facilities.
In accordance with SEC requirements, $529,000 of the debt issuance proceeds has
been allocated to additional paid in capital in the accompanying balance sheet,
to recognize the beneficial conversion feature of the Debentures. Debt issuance
costs are included in "Other assets" in the accompanying balance sheet and are
being amortized over the stated term of the debt, 24 months.
The debt discount resulting from the beneficial conversion feature of the
Debentures is being amortized to interest expense during the vesting period of
the conversion feature. During the quarter ended June 30, 1998, $448,000 of this
debt discount was charged to interest expense. The remaining $81,000 will be
recognized in the third quarter of 1998 when the debt becomes fully convertible.
Net losses for the three month period ended June 30, 1998 were $1,329,879, or
approximately 18% of revenue, as compared to $547,786, or approximately 9% of
revenue, for the three month period ended June 30, 1997. The increase in losses
was due to higher than usual sales of lower margin videoconferencing products
(especially a $2.6 million order to a customer in China), and to $485,500 in
amortization of debt discount and debt issuance costs.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997
Revenues for the six months ended June 30, 1998 were $10,125,912, a decrease of
approximately 14% from the revenues of $11,757,921 recorded for the six months
ended June 30, 1997. The decrease was due primarily to customer-requested
delays, at the end of the second quarter, of approximately $500,000 in
videoconferencing orders, and lower commissions during the three months ended
March 31, 1998 from telephone network reselling at wholly-owned subsidiary
Eastern Telecom, Inc. (ETI). Those lower commissions primarily resulted from
lower commission rates and higher than anticipated chargebacks for
disconnections and cancellations during the first quarter of 1998.
The Company's backlog of purchase orders at June 30, 1998 was approximately $5.1
million, compared to approximately $3.3 million at June 30, 1997.
Gross margin as a percentage of revenues for the six months ended June 30, 1998
was approximately 38%, as compared to approximately 52% for the six months ended
June 30, 1997. The decrease was primarily due to higher than usual sales of
lower margin videoconferencing products, and a decline in higher margin
commissions from telephone network reselling at ETI.
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Selling, general and administrative expenses for the six months ended June 30,
1998 were $6,847,962, a decrease of $350,462, or approximately 5%, over the six
months ended June 30, 1997. The decrease was primarily due to a reduction in
workforce.
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, 1998, the Company's research and development
expenses were $409,594, a decrease of approximately 24% over the six month
period ended June 30, 1997. The decrease was primarily due to the completion of
initial development of a new product introduced in mid-1997. At June 30, 1998,
the balance in software development costs was $439,865, an approximately 33%
decrease as compared to the $658,052 capitalized as of December 31, 1997.
Non-operating expenses for the six-month period ended June 30, 1998 were
$836,412, an increase of $709,413 from the six month period ended June 30, 1997.
This increase was primarily due to increased costs associated with the Company's
secured credit facilities, working capital loan with AmTrade International Bank
and convertible debentures.
Net losses for the six month period ended June 30, 1998 were $4,234,292, or
approximately 42% of revenue, as compared to $1,791,025, or approximately 15% of
revenue, for the six month period ended June 30, 1997. The increase in losses
was due to higher than usual sales of lower margin videoconferencing products
(especially a $2.6 million order to a customer in China), a decline in higher
margin commissions from telephone network reselling at ETI and to $485,500 in
amortization of debt discount and debt issuance costs, primarily a result of the
vesting of the conversion feature of VSI's convertible debentures issued on
February 23, 1998.
LIQUIDITY AND SOURCES OF CAPITAL
On February 23, 1998, the Company issued $3,000,000 of 5% Convertible Debentures
due February 2000 ("the Debentures"), the proceeds of which were utilized for
working capital proposes. The Debentures are convertible into shares of common
stock of the Company at the option of the holder. Any conversion shall be the
lesser of (i) $2.00 per share or (ii) 85% of the average closing bid price of
the Company's Common Stock. "Average closing bid price" is defined to mean the
lowest average of the daily last bid price for the Common Stock for any three
trading days in any 20-day period preceding the conversion. The Company may, at
its option, redeem the Debentures at any time prior to February 23, 1999 at a
price equal to 115% of the outstanding principal amount thereof, plus any
accrued but unpaid interest.
On July 11, 1998, $500,000 of Debentures (plus an additional $7,976.06 of
accrued interest) were converted at the request of the Debenture holder into
831,470 shares of VSI Common Stock. The remaining balance of debentures is
$2,500,000.
As of June 30, 1998, the Company had cash and cash equivalents of $2,141,262.
The Company's liquidity sources include existing cash and credit facilities. In
order to meet its cash flow requirements, the Company may require additional
financing in 1998. 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.
Credit Facilities
VSI
Since June 1995, Videoconferencing Systems, Inc. (VSI), a subsidiary of the
Company, has had a revolving credit and security agreement with Fidelity Funding
of California Inc. This credit facility provides the Company with up to
$4,000,000 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
11
<PAGE> 12
receivable, inventory and certain fixed assets of VSI. At June 30, 1998,
approximately $751,000 was owed to Fidelity Funding.
In April 1998, VSI entered into a working capital loan agreement for
approximately $2,000,000 with AmTrade International Bank of Georgia. The loan
was guaranteed by the Export-Import Bank of the United States, and was
collateralized by a letter of credit from a VSI customer. Funds were used for
pre-/post-export financing for the manufacture and delivery of videoconferencing
equipment in China. The interest rate was prime plus 2.5%. On June 18, 1998, the
full amount of the loan proceeds, interest and fees was repaid to AmTrade.
ETI
In October 1997 VSI Network Solutions, Inc. (d/b/a Eastern Telecom, or ETI), a
wholly owned subsidiary of the Company, entered into a revolving credit and
security agreement with Foothill Capital Inc. This credit facility provides ETI
with up to $1,500,000 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. At June 30, 1998, approximately
$512,000 was owed to Foothill Capital.
INS
In December 1996, VSI Network Services, Inc. (d/b/a Integrated Network Services,
or INS), a wholly owned subsidiary of the Company, established 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 invoices, with certain restrictions. The credit facility is
secured by accounts receivables, inventory and fixed assets of INS. At June 30,
1998, approximately $291,000 was owed to Presidential Financial Corporation.
VSI n.v.
In February 1998, Videoconferencing Systems, n.v., a wholly owned subsidiary of
the Company, entered into a revolving credit and security agreement with
Kredietbank, n.v. This credit facility provides Videoconferencing Systems, n.v.
with up to $550,000 at an interest rate of U.S. prime plus 1%. The credit
facility is secured by 550,000 shares of Common Stock of the Company, held in
escrow by Kredietbank, n.v. At June 30, 1998, approximately $186,000 was owed to
Kredietbank, n.v.
At June 30, 1998, Videoconferencing Systems, n.v. had a secured bank facility
with Generale Bank of approximately $215,000, of which approximately $59,000 was
outstanding at that time.
ACCUMULATED DEFICIT
As of June 30, 1998, the Company had an accumulated deficit of $34,176,167, of
which $1,329,879 was realized in the three months ended June 30, 1998. The
Company believes that given its higher than usual purchase order backlog, recent
debt financing for working capital purposes, several revolving credit
facilities, management changes and a growing pipeline of potential orders, the
Company will continue to aggressively compete in the global videoconferencing
and multimedia marketplace.
YEAR 2000
The Company has assessed the impact of the Year 2000 issue on its computer
systems and is in the process of remediating the affected hardware and software.
The Company utilizes various computer software packages as tools in running its
accounting and operations areas. Management plans to implement any necessary
vendor upgrades and modifications to ensure continued functionality with respect
to any potential software problems associated with Year 2000.
12
<PAGE> 13
With respect to the production of its own proprietary software and hardware, the
Company has taken the necessary steps to ensure that its proprietary technology
is Year 2000 compliant. Also, the Company has surveyed the vendors who supply
key computer-based components for its videoconferencing systems and services,
and found that all are Year 2000 compliant. The Company will continue to monitor
and assess the Year 2000 situation on an ongoing basis, especially in its
dealings with new vendors or suppliers, and will take appropriate corrective
action as needed.
Expenditures for the Year 2000 project are being expensed as incurred and are
not expected to have a material impact on the Company's consolidated financial
position, results of operation or cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 6 to Condensed Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
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.
13
<PAGE> 14
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 1998, the Company held its 1998 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: Carleton A. Brown, Larry M. Carr, Julia B. North, Edward S.
Redstone and Richard K. Snelling. The number of votes cast for and against
election of each nominee director was as follows:
<TABLE>
<CAPTION>
Director For Against
-------- --- -------
<S> <C> <C>
Carleton A. Brown........................................ 39,916,954 794,149
Larry M. Carr............................................ 40,258,911 452,192
Julia B. North........................................... 40,284,536 426,567
Edward S. Redstone....................................... 40,294,986 416,117
Richard K. Snelling...................................... 40,167,386 543,717
</TABLE>
In addition, the Company's shareholders approved an Amendment to the Certificate
of Incorporation to effect, if and when the Board of Directors deems
appropriate, and for a period of time expiring at the Company's 1999 Annual
Meeting of Shareholders, a 1-for-4 reverse split of the Company's Common Stock:
38,176,061 shares in favor (representing approximately 81% of the shares issued
and outstanding), 2,402,710 shares against and 132,332 shares abstaining.
Also, the Company's shareholders approved an Amendment to the 1991 Stock Option
Plan to increase the number of shares available for grant thereunder from
2,762,057 shares to 3,662,057 shares: 38,048,722 shares in favor (representing
approximately 93% of the shares present), 2,492,058 shares against and 170,322
shares abstaining.
ITEM 5. OTHER MATTERS
As set forth in the Company's 1998 Proxy Statement, proposals of shareholders
intended to be presented at the Company's 1999 Annual Meeting of Shareholders
must be received at the Company's principal executive offices by December 15,
1998 in order to be eligible for inclusion in the Company's proxy statement and
form of proxy for that meeting.
With respect to any such proposals received by the Company after February 28,
1999, the persons named in the form of proxy solicited by management in
connection with the 1999 Annual Meeting of Shareholders of the Company will have
discretionary authority to vote on any such shareholder proposals in accordance
with their judgment of what is in the best interests of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibit is filed with this report:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended June 30,
1998.
14
<PAGE> 15
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, 1998 /s/ Julia B. North
------------------------ ------------------------------------
President & Chief Executive Officer
/s/ E. Anthony Godfrey
------------------------------------
Chief Financial Officer & Secretary
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,141
<SECURITIES> 0
<RECEIVABLES> 6,478
<ALLOWANCES> 546
<INVENTORY> 3,273
<CURRENT-ASSETS> 12,221
<PP&E> 1,315
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,002
<CURRENT-LIABILITIES> 8,566
<BONDS> 2,919
0
0
<COMMON> 12
<OTHER-SE> 12,506
<TOTAL-LIABILITY-AND-EQUITY> 24,002
<SALES> 10,126
<TOTAL-REVENUES> 10,126
<CGS> 6,266
<TOTAL-COSTS> 13,524
<OTHER-EXPENSES> 836
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,234)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,234)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,234)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
