<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, 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)
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.
OUTSTANDING AT
CLASS OF SECURITIES NOVEMBER 11, 1998
-------------------
COMMON STOCK, $.00025 PAR VALUE 48,800,578
================================================================================
<PAGE> 2
VSI ENTERPRISES, INC. AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
FINANCIAL INFORMATION Page No.
--------------------- --------
PART I. Item 1. Financial Statements:
<S> <C> <C>
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997........................................ 3
Condensed Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 1998 and 1997.................. 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997.................................. 5
Notes to Condensed Consolidated Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations:
Financial Condition............................................................. 10
Results of Operations........................................................... 10
Liquidity and Sources of Capital................................................ 12
PART II. Item 6. Exhibits and Reports on Form 8-K....................................... 15
</TABLE>
2
<PAGE> 3
CONDENSED CONSOLIDATED BALANCE SHEETS
VSI Enterprises, Inc. and subsidiaries
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited)
- --------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,584,905 $ 866,009
Accounts receivable, net 6,594,598 6,142,936
Inventories, net 2,344,782 2,541,754
Rental and demonstration inventory, net 484,237 990,054
Prepaid expenses and other 150,642 438,665
------------ ------------
Total current assets 11,159,164 10,979,418
------------ ------------
Property and equipment, net 1,319,961 1,194,908
Goodwill, net 8,651,161 9,020,715
Software development costs, net 339,822 658,052
Other assets 950,644 1,027,366
------------ ------------
$ 22,420,752 $ 22,880,459
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 2,035,971 $ 1,422,367
Bank credit facilities 130,324 154,938
Accounts payable 2,568,704 3,401,547
Accrued expenses 1,928,197 1,803,506
Deferred revenue 1,850,631 507,177
------------ ------------
Total current liabilities 8,513,827 7,289,535
------------ ------------
Convertible Debentures 2,340,000 0
Shareholders' Equity:
Common stock, authorized 60,000,000 shares of
$.00025 par value; issued and outstanding
48,800,578 and 45,822,505 shares, respectively 12,200 11,546
Additional paid-in capital 47,660,676 45,976,291
Accumulated deficit (35,727,259) (29,941,875)
Cumulative translation adjustment (378,692) (455,038)
------------ ------------
Total Shareholders' Equity 11,566,925 15,590,924
------------ ------------
$ 22,420,752 $ 22,880,459
============ ============
</TABLE>
3
See notes to condensed consolidated financial statements.
<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
VSI Enterprises, Inc. and subsidiaries
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 15,829,853 $ 16,936,793 $ 5,703,941 $ 5,178,872
Costs and expenses
Cost of revenue 9,271,273 8,042,520 3,005,037 2,418,922
Selling, general and administrative 10,345,005 10,659,234 3,497,043 3,460,804
Research & development 638,330 779,084 228,736 239,053
------------ ------------ ------------ ------------
Total costs and expenses 20,254,608 19,480,838 6,730,816 6,118,779
------------ ------------ ------------ ------------
Loss from operations (4,424,755) (2,544,045) (1,026,875) (939,907)
Amortization of debt discount (529,000) 0 (81,000) 0
Amortization of debt issuance costs (65,625) 0 (28,125) 0
Loss on sale of investment (302,005) 0 (302,005) 0
Other expenses (463,999) (239,107) (113,086) (89,072)
------------ ------------ ------------ ------------
Net loss before income taxes (5,785,384) (2,783,152) (1,551,091) (1,028,979)
------------ ------------ ------------ ------------
Income tax expense 0 (55,133) 0 (18,281)
------------ ------------ ------------ ------------
Net Loss $ (5,785,384) $ (2,838,285) $ (1,551,091) $ (1,047,260)
============ ============ ============ ============
Net loss per common share $ (0.12) $ (0.07) $ (0.03) $ (0.02)
============ ============ ============ ============
(basic and diluted)
Weighted average shares outstanding 47,339,359 42,830,493 48,290,369 44,552,928
(basic and diluted) ============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
VSI Enterprises, Inc. and subsidiaries
Nine months ended September 30,
1998 1997
(Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,785,384) $(2,838,285)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,068,315 1,902,303
Changes in operating assets and liabilities:
Accounts receivable (451,662) (1,497,582)
Inventories 73,394 (203,445)
Rental and demonstration inventory 275,542 (236,050)
Prepaid expenses and other assets 288,022 (311,020)
Accounts payable (832,843) 532,140
Accrued expenses 124,691 167,102
Deferred revenue 1,343,454 (35,528)
----------- -----------
Net cash used by operating activities (2,896,471) (2,520,364)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (638,105) (160,554)
Change in other assets 236,096 (303,155)
Capitalized software development costs 0 (77,885)
----------- -----------
Net cash used by investing activities (402,009) (541,595)
----------- -----------
Cash flows from financing activities:
Net borrowings/(payments) on notes payable 613,605 (24,573)
Net borrowings/(payments) on bank credit facilities (24,614) 6,014
Proceeds from issuance of common stock in connection
with debt and vendor agreements 393,004 368,002
Proceeds from exercise of stock options, warrants
and stock purchase plan 184,035 141,210
Proceeds from private placements net of
issuance costs 2,775,000 2,487,227
----------- -----------
Net cash provided by financing activities 3,941,030 2,977,879
----------- -----------
Effect of exchange rate changes on cash 76,346 (220,086)
Increase (decrease) in cash and cash equivalents 718,896 (304,166)
Cash and cash equivalents at beginning of the period 866,009 2,260,185
----------- -----------
Cash and cash equivalents at end of the period $ 1,584,905 $ 1,956,019
=========== ===========
</TABLE>
5
See notes to condensed consolidated financial statements.
<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 nine month
periods ended September 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 amounts 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
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" 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. Basic and diluted
net income (loss) are the same for the three and nine month periods ended
September 30, 1998 and 1997 because the Company's potentially dilutive
securities, convertible debentures and stock options, are antidilutive in all
periods 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 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 which such shares are actually traded. On
February 19, 1998, the Company placed in an escrow account 4,000,000 shares of
common
6
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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 condensed
consolidated balance sheet, to recognize the beneficial conversion feature of
the Debentures. Debt issuance costs are included in "Other assets" in the
accompanying condensed consolidated balance sheet and are being amortized over
the stated term of the debt, which is two years.
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 three and nine months ended September 30,
1998, the Company recognized $81,000 and $529,000, respectively, of the debt
discount which is included in amortization of debt discount in the accompanying
condensed consolidated statements of operations.
On July 11, 1998, $500,000 of Debentures (plus an additional $7,976 of accrued
interest) were converted at the request of the Debenture holder into 831,475
shares of VSI Common Stock. Subsequent conversions totaling $160,000 (plus an
additional $4,079 of accrued interested) occurred on August 14, August 20 and
September 16, for an additional 552,354 shares of VSI Common Stock.
On October 1, 1998, the Company - under terms of an amended agreement with the
holder of the Debentures -- bought back $1,040,000 of Debentures at face value.
The Company also paid $128,858 in accrued interest and fees. Under terms of the
amended agreement, the Company has until November 16, 1998 to repurchase the
remaining $1,300,000 of convertible debentures at face value. Until that date,
the debenture holder has agreed to refrain from converting any of the remaining
Debentures or selling any shares of VSI common stock. Any Debentures outstanding
after November 16, 1998 would revert to the terms of the original agreement.
Under the terms of an amended agreement, the Company will issue an additional
100,000 warrants to the holder of the Debentures on November 16, 1998, in return
for the ability to repurchase (through November 16, 1998) the remaining
Debentures at face value. The warrants, which expire on November 16, 2003,
entitle the holder to purchase one share of the common stock of the Company at
the price of $0.60. In addition, the 37,500 warrants issued to the holder of the
Debentures on February 23, 1998 were repriced from $2.50 per share to $0.60 per
share.
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 indicate 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 sheets are appropriately valued.
NOTE 6 - 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 September 30, 1998 and 1997, total comprehensive loss was
approximately $1,486,000 and $1,180,000, respectively. For the nine months ended
September 30, 1998 and 1997, total comprehensive loss was approximately
$5,709,000 and $3,003,000, respectively.
7
<PAGE> 8
NOTE 7 - 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 8 - SHAREHOLDERS' EQUITY
During the nine months ended September 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.
During October 1998, the Company's Board of Directors authorized a stock
repurchase program that will allow the Company to purchase up to 1,000,000
shares of its common stock over a one-year period. The authorization allows
repurchases to be made from time to time on the open market at prevailing market
prices or in negotiated transactions off the market. No shares will be knowingly
purchased from Company insiders or their affiliates. The Company does not expect
to begin repurchases before November 16, 1998, the deadline for it to buy back,
at face value, its remaining Debentures.
NOTE 9 - STOCK OPTIONS
At the annual meeting in May 1998, 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.
NOTE 10 - TERM NOTES AND COMMON STOCK PURCHASE WARRANTS
During September 1998, the Company began offering $3.0 million of term notes and
common stock purchase warrants ("Warrants"). A minimum of $10,000 is required
for each subscription. Each purchaser of the term notes will receive warrants to
purchase shares of common stock of the Company on the basis of one warrant for
each $2.00 of term notes purchased. The Warrants will have a term of five years,
expiring on October 1, 2003, and will become exercisable on April 1, 2000 at an
exercise price of $0.42 per share. Interest will accrue on the outstanding
principal indebtedness and will accrue at a rate per annum equal to three
percent in excess of the prime rate. Interest shall be paid quarterly on the
last business day of each calendar quarter until maturity, commencing on
December 31, 1998. None of these term notes and common stock purchase warrants
were issued at September 30, 1998.
From October 1 through November 9, 1998, the Company issued $1,163,000 of term
notes and 581,500 warrants. The Company has valued these warrants using the
Black-Scholes option-pricing model as allowed by SFAS No. 123 and computed a
value of approximately $154,000. The difference between the redemption price and
carrying amount of the warrants will be accrued to the earliest put date, April
1, 2000, and the accretion will be charged to interest expense in the Company'
statement of operations.
NOTE 11 - REVOLVING CREDIT AND SECURITY AGREEMENT
During October 1998, Eastern Telecom, Inc. (ETI) entered into a revolving credit
and security agreement with RFC Capital, Inc. This credit facility provides ETI
initially with up to $1,500,000 at an interest rate of prime plus 3.25% per
annum. The facility may increase - at RFC Capital's option -- in $500,000
increments each month, up to a maximum of $5,000,000, and if certain conditions
are met for any two consecutive fiscal quarters, the interest rate will be
reduced to prime plus 2.75% per annum. Funds available under the credit facility
are based on 90% of eligible ETI accounts receivable invoices, with certain
restrictions. The credit facility is secured by accounts receivables, inventory
and fixed assets of ETI.
NOTE 12 - SALE OF INVESTMENT
In October 1998, VSI sold its interest in Global TeleMedix, Inc., a provider of
telemedicine software, back to that company for approximately $243,000. The
proceeds will be used on November 16, 1998 to buy back a portion of the
Company's debentures. The carrying value of the investment in Global TeleMedix,
Inc. at September 30, 1998 has been reduced to reflect the October 1998 sale
price. The resulting loss of approximately $302,000 is included in the
accompanying statement of operations.
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 decreased $459,707, or less
than 2% to $22,420,752. A $718,896, or approximately 83%, increase in cash and a
$451,662, or approximately 7%, increase in accounts receivable were offset
primarily by large decreases in rental and demonstration inventory (down
$505,817, or approximately 51%), prepaid expenses (down $288,023, or
approximately 66%) and software development costs (down $318,230, or
approximately 48%). The increase in cash was primarily due to proceeds from the
placement in February of $3,000,000 of 5% convertible debentures. The increase
in accounts receivable was primarily due to the Company's recording the largest
(the three-month period ended June 30, 1998) and fourth largest (the three-month
period ended September 30, 1998) revenue quarters in its history. The decrease
in rental and demonstration inventory was primarily due to efforts to allocate
demonstration resources with respect to the Company's decision to pursue a
narrower range of geographic and vertical videoconferencing markets, and the
ongoing amortization of rental and demonstration inventory. The decrease in
prepaid expenses was primarily due to a decline in the market value of VSI
common stock held by vendors and to be used as payment for products and
services. The decrease in software development costs was primarily due to the
ongoing amortization of previously capitalized software development projects.
Current liabilities as of September 30, 1998 were $8,513,827, an increase of
$1,224,292, or approximately 17%, from December 31, 1997. The increase was
primarily due to an increase of $1,343,454, or approximately 265%, of deferred
revenue comprised primarily of extended service contracts from videoconferencing
customers. Notes payable also increased by $613,604, or approximately 43%, as
the Company utilized to a greater extent its accounts receivable financing
sources, but accounts payable decreased by $832,843, or approximately 24%, due
to the Company's efforts to enhance vendor relationships by accelerating the
payment schedule of certain accounts.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 1997
Revenues for the three months ended September 30, 1998 were $5,703,941, an
increase of approximately 10% from revenues of $5,178,872 earned during the
three months ended September 30, 1997. The increase was due primarily to an
expansion of the Company's base of videoconferencing customers and to additional
sales from a number of existing customers.
Gross margin as a percentage of revenues for the three months ended September
30, 1998 was approximately 47%, as compared to approximately 53% for the three
months ended September 30, 1997. The decrease was primarily due to expenses
associated with the delivery of a portion of a large videoconferencing account
with lower than usual margins, and the costs associated with the delivery and
installation of a videoconferencing account in China.
Selling, general and administrative expenses for the three months ended
September 30, 1998 were $3,497,043, an increase of $36,239, or approximately 1%,
over for the three months ended September 30, 1997.
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
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September 30, 1998, the Company's research and development expenses were
$228,736, a decrease of approximately 4% over the three month period ended
September 30, 1997.
Non-operating expenses for the three-month period ended September 30, 1998 were
$524,216, an increase of $435,144, or approximately 489%, from the three month
period ended September 30, 1997. This increase was primarily due to the
reevaluation of the Company's interest in Global TeleMedix, Inc., as that
investment was sold at a loss in October 1998 (approximately $302,000 in
expenses); the amortization of debt discount costs (approximately $81,000)
during the vesting period of the conversion feature of the Company's convertible
debentures and the amortization of debt issuance costs (approximately $28,000)
associated with the Company's convertible debentures; and interest expenses from
the convertible debentures.
The debt discount resulting from the beneficial conversion feature of the
convertible debentures is being amortized to interest expense during the vesting
period of the conversion feature. During the quarter ended September 30, 1998,
$81,000 of this debt discount was charged to interest expense. The remaining
$448,000 was recognized in the second quarter of 1998.
Net loss for the three month period ended September 30, 1998 was $1,551,091 as
compared to $1,047,260 for the three month period ended September 30, 1997. The
increase in net loss was due to the reevaluation of the Company's interest in
Global TeleMedix, Inc., as that investment was sold at a loss in October 1998
(approximately $302,000 in expenses); expenses associated with the delivery of a
portion of a large videoconferencing account with lower than usual margins and
the costs associated with the delivery and installation of videoconferencing
equipment in China; and to amortization of debt discount and debt issuance costs
associated with the convertible debentures.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1997
Revenues for the nine months ended September 30, 1998 were $15,829,853, a
decrease of approximately 7% from the revenues of $16,936,793 earned during for
the nine months ended September 30, 1997. The decrease was due primarily to
lower revenues during the three months ended March 31, 1998 from telephone
network reselling at wholly-owned subsidiary Eastern Telecom, Inc. (ETI). Those
lower revenues primarily resulted from lower commission rates and higher than
anticipated chargebacks for disconnections and cancellations during the first
quarter of 1998.
Gross margin as a percentage of revenues for the nine months ended September 30,
1998 was approximately 41%, as compared to approximately 53% for the nine months
ended September 30, 1997. The decrease was primarily due to higher than usual
sales of lower margin videoconferencing products during the second and third
quarters of 1998.
Selling, general and administrative expenses for the nine months ended September
30, 1998 were $10,345,005, a decrease of $314,229, or approximately 3%, over the
nine months ended September 30, 1997. The decrease was primarily due to
improvements in parts procurement and ongoing cost reduction programs, and a
slight 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 nine
month period ended September 30, 1998, the Company's research and development
expenses were $638,330, a decrease of approximately 18% over the nine month
period ended September 30, 1997. The decrease was primarily due to the
completion of initial development of a new product introduced in mid-1997, which
reduced development costs thereafter.
Non-operating expenses for the nine-month period ended September 30, 1998 were
$1,360,629, an increase of $1,121,522, or approximately 469%, from the nine
month period ended September 30, 1997. This increase was primarily due to the
reevaluation of the Company's interest in Global TeleMedix, Inc., as that
investment was sold
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at a loss in October 1998 (approximately $302,000 in expenses); the amortization
of debt discount costs (approximately $529,000) during the vesting period of the
conversion feature of the Company's convertible debentures and the amortization
of debt issuance costs (approximately $66,000) associated with the Company's
convertible debentures; and interest expenses from the convertible debentures.
Net loss for the nine-month period ended September 30, 1998 was $5,785,384 as
compared to $2,838,285 for the nine month period ended September 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; a reevaluation of the Company's investment in Global TeleMedix, Inc.;
and to $529,000 in amortization of debt discount costs and $66,000 in debt
issuance costs, a result of the vesting of the conversion feature of VSI's
convertible debentures issued on February 23, 1998.
LIQUIDITY AND SOURCES OF CAPITAL
As of September 30, 1998, the Company had cash and cash equivalents of
$1,584,905. The Company's liquidity sources include existing cash and credit
facilities. In order to meet its cash flow requirements, the Company may require
additional funding in 1999. This additional funding could be in the form of
debt, equity or both. A reduction in operating expenses could also be affected
in order to maximize the Company's allocation of cash resources. 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.
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, on which such
shares are actually traded. 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 placed in escrow with a third party 4,000,000 shares of VSI common
stock. As debentures are converted into shares of VSI common stock, the number
of shares held in escrow will be reduced by an identical amount. On July 11,
1998, $500,000 of debentures (plus an additional $7,976 of accrued interest)
were converted at the request of the debenture holder into 831,475 shares of VSI
common stock. Subsequent conversions totaling $160,000 (plus an additional
$4,079 of accrued interested) occurred on August 14, August 20 and September 16,
for an additional 552,354 shares of VSI common stock.
On October 1, 1998, the Company, under terms of an amended agreement with the
holder of the Debentures, bought back $1,040,000 of convertible debentures at
face value. The Company also paid $128,858 in accrued interest and fees. Under
terms of the amended agreement, the Company has until November 16, 1998 to
repurchase the remaining $1,300,000 of convertible debentures at face value.
Until that date, the debenture holder has agreed to refrain from converting any
of the remaining convertible debentures or selling any shares of VSI common
stock.
The redemption of the convertible debentures is being funded from the proceeds
of a private placement of term notes by the Company. The Company is offering up
to $3,000,000 of term notes to accredited investors, of which $1,163,000 had
been sold by November 9, 1998 (an additional $243,000 was raised from the
proceeds of the sale of the Company's investment in Global TeleMedix, Inc.). Any
proceeds from the sale of the remaining notes will be used to redeem the
remaining convertible debentures and for general corporate purposes. The notes
mature on March 31, 2000 and accrue interest at an annual rate of prime plus 3%
per annum. Purchasers of notes will also receive a warrant to purchase one share
of common stock of the Company for each $2.00 of notes purchased. Warrants have
an exercise price of $0.42 per share and are exercisable commencing on April 1,
2000.
11
<PAGE> 12
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% per annum. 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 certain fixed assets of VSI. At September 30,
1998, approximately $817,000 was owed to Fidelity Funding.
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% per annum. 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 September 30,
1998, approximately $682,000 was owed to Foothill Capital. The agreement was
terminated, by mutual consent, on October 8, 1998.
On October 8, 1998, ETI entered into a revolving credit and security agreement
with RFC Capital, Inc. This credit facility provides ETI initially with up to
$1,500,000 at an interest rate of prime plus 3.25% per annum. The facility may
increase - at RFC Capital's option -- in $500,000 increments each month, up to a
maximum of $5,000,000, and if certain conditions are met for any two consecutive
fiscal quarters, the interest rate will be reduced to prime plus 2.75% per
annum. Funds available under the credit facility are based on 90% of eligible
ETI accounts receivable invoices, with certain restrictions. The credit facility
is secured by accounts receivables, inventory and fixed assets of ETI.
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% per annum. 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 September 30, 1998, approximately $245,000 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% per annum. The
credit facility is secured by 550,000 shares of Common Stock of the Company,
held in escrow by Kredietbank, n.v. At September 30, 1998, approximately
$292,000 was owed to Kredietbank, n.v.
At September 30, 1998, Videoconferencing Systems, n.v. had a secured bank
facility with Generale Bank of approximately $232,000, of which approximately
$130,000 was outstanding at that time.
12
<PAGE> 13
ACCUMULATED DEFICIT
As of September 30, 1998, the Company had an accumulated deficit of $35,727,259,
of which $1,551,091 was realized in the three months ended September 30, 1998.
The Company believes that due to its several revolving credit facilities,
management and Board of Directors changes, revised strategic direction, revamped
product line and growing pipeline of potential orders, the Company will continue
to aggressively compete in the global videoconferencing 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 workstations and software packages as
tools in running its accounting and operations areas. All are PC-based and are
Year 2000 compliant, with the exception of some older workstations that will be
phased out by 2000. 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.
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. The Company's videoconferencing products use PC
controllers of recent vintage that are computed in and displayed in four-digit
format. In addition, the Company's Omega(TM) software uses "C" libraries that
compute the date based on a count of the number of seconds from January 1970.
Those software libraries are in no danger of being out of compliance before the
year 2032.
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.
The Company has not developed a Year 2000 contingency plan, since to date no
adverse effect from the Year 2000 issue has been identified. Should it be
determined that any major vendors, service providers or partners may be
negatively impacted by the Year 2000 issue, the Company will develop contingency
plans for affected areas or make use of alternate suppliers.
Expenditures for the Year 2000 project have to date been immaterial and are
being expensed as incurred. Expenditures have not had, and are not expected to
have, a material impact on the Company's consolidated financial position,
results of operation or cash flows of the Company.
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 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 September
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: November 11, 1998 /s/ Julia B. North
------------------------ -----------------------------------
President & Chief Executive Officer
/s/ E. Anthony Godfrey
-----------------------------------
Chief Financial Officer & Secretary
15
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