<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------ -----
COMMISSION FILE NUMBER 1-10927
VSI ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 84-1104448
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5801 GOSHEN SPRINGS ROAD
NORCROSS, GEORGIA 30071
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(770) 242-7566
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS OF SECURITIES AUGUST 5, 1999
------------------- --------------
<S> <C>
COMMON STOCK, $.001 PAR VALUE 12,300,144
</TABLE>
================================================================================
<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, 1999 and December 31, 1998.................................... 3
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 1999 and 1998...................... 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998................................ 5
Notes to Condensed Consolidated Financial Statements................... 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations:
Financial Condition.................................................... 8
Results of Operations.................................................. 8
Liquidity and Sources of Capital....................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 12
PART II. Item 4. Submission of Matters to a Vote of Security Holders........... 13
Item 5. Other Information ............................................ 13
Item 6. Exhibits and Reports on Form 8-K.............................. 14
</TABLE>
2
<PAGE> 3
VSI ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31,
1999 1998
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 366,617 $ 1,134,231
Accounts Receivable, net 3,607,833 5,975,254
Inventories, net 814,170 1,059,142
Demo inventory 76,716 136,883
Prepaid expenses and other assets 72,095 164,088
Current assets of discontinued operations 29,665 334,022
------------ ------------
TOTAL CURRENT ASSETS 4,967,096 8,803,620
PROPERTY AND EQUIPMENT, NET 894,605 1,048,983
OTHER ASSETS
Goodwill, net 907,904 955,688
Software development costs, net 50,522 75,349
Other long term assets 87,409 77,325
------------ ------------
$ 6,907,536 $ 10,960,965
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes payable
and short term borrowings $ 3,227,288 $ 2,795,324
Accounts Payable 1,462,116 2,235,852
Accrued Expenses 2,066,262 1,965,051
Deferred Revenues 1,018,392 1,522,416
Current liabilities of discontinued operations 162,686 334,022
------------ ------------
TOTAL CURRENT LIABILITIES 7,936,744 8,852,665
NOTES PAYABLE LESS CURRENT PORTION 23,345 1,105,655
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, authorized 40,000,000 shares of
$.001 par value; issued and outstanding
12,300,144 at June 30, 1999 and
December 31, 1998, respectively 12,300 12,300
Additional paid in capital 48,183,581 48,209,039
Accumulated deficit (48,789,086) (46,877,847)
Cumulative comprehensive income (459,348) (340,847)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,052,553) 1,002,645
------------ ------------
$ 6,907,536 $ 10,960,965
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE> 4
VSI ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES $ 3,158,741 $ 6,830,019 $ 6,110,482 $ 9,268,817
COSTS AND EXPENSES
Cost of Sales 669,082 3,889,741 1,538,331 5,615,464
Selling, general and administrative 2,839,015 3,235,327 5,619,982 6,300,989
Research and development 175,237 203,947 308,098 409,594
------------ ------------ ------------ ------------
3,683,334 7,329,015 7,466,411 12,326,047
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (524,593) (498,996) (1,355,929) (3,057,230)
Other expenses, primarily financing charges (90,748) (672,161) (317,109) (789,464)
------------ ------------ ------------ ------------
NET LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (615,341) (1,171,157) (1,673,038) (3,846,694)
Income Taxes -- -- -- --
------------ ------------ ------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (615,341) (1,171,157) (1,673,038) (3,846,694)
LOSS FROM DISCONTINUED OPERATIONS (60,369) (158,721) (238,201) (387,598)
------------ ------------ ------------ ------------
NET LOSS $ (675,710) $ (1,329,878) $ (1,911,239) $ (4,234,292)
============ ============ ============ ============
Net loss per common share
Loss from continuing operations (0.05) (0.10) (0.14) (0.33)
Loss from discontinued operations (0.00) (0.01) (0.02) (0.03)
------------ ------------ ------------ ------------
(0.05) (0.11) (0.16) (0.36)
============ ============ ============ ============
Weighted average shares outstanding 12,300,144 11,801,778 12,300,144 11,713,994
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE> 5
VSI ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,911,239) $(4,234,292)
Adjustments to reconcile net loss to net
cash (used) provided in operating activities:
Loss from discontinued operations 238,201 387,597
Depreciation and amortization 334,709 1,424,599
Allowance to reduce inventory to lower
of cost or market 32,000 72,000
Allowance for doubtful accounts 117,001 49,998
Changes in operating assets and liabilities:
Accounts receivable 2,250,420 265,114
Inventories 212,972 (878,755)
Rental and demonstration inventory -- 243,872
Prepaid expenses and other assets 91,993 177,038
Accounts payable (799,194) 413,582
Accrued expenses 111,849 (136,418)
Deferred revenues (504,024) 587,372
----------- -----------
Net cash provided (used) by operating activities
of continuing operations 174,688 (1,628,293)
Net cash (used) by discontinued operations (104,889) (291,702)
----------- -----------
Net cash provided (used) by operating activities 69,799 (1,919,995)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (58,481) (476,077)
Change in other assets (10,084) (36,114)
----------- -----------
Net cash provided (used) by investing activities (68,565) (512,191)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on notes payable
and short term credit facilities (650,346) 736,737
Proceeds from exercise of stock options
and stock purchase plan -- 184,035
Proceeds from private placement net of
issuance costs -- 2,775,000
----------- -----------
Net cash provided (used) by financing activities (650,346) 3,695,772
----------- -----------
Effect of exchange rate changes on cash (118,502) 11,668
Increase (decrease) in cash and cash and cash equivalents (767,614) 1,275,254
Cash and cash equivalents at beginning of the period 1,134,231 866,009
----------- -----------
Cash and cash equivalents at end of the period $ 366,617 $ 2,141,263
=========== ===========
</TABLE>
The accompanying notes are an integral part of these 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, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and related footnotes included in the Company's 1998 Annual
Report on Form 10-K, as filed with the SEC on April 15, 1999.
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.
During 1998, the shareholders of the Company approved a 1-for-4 reverse split of
shares of the Company's common stock, to be implemented at the discretion of the
Board of Directors. The board implemented the reverse split effective January
15, 1999 to shareholders of record on January 14, 1999. All references to shares
of common stock and per share amounts have been restated to reflect the effects
of the reverse common stock split.
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 - DISCONTINUED OPERATIONS
During the fourth quarter of 1998, the Company discontinued operations of its
wholly-owned system integration subsidiary, VSI Network Services, Inc., d/b/a
Integrated Network Services, Inc. (INS). Accordingly, operating results for the
discontinued operations have been reclassified and reported as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30 for all
periods presented.
NOTE 4 - 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 month periods ended June 30, 1999
and 1998 and six month periods ended June 30, 1999 and 1998 because the
Company's potentially dilutive securities, convertible debentures and stock
options, are antidilutive in all periods presented.
6
<PAGE> 7
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 June 30, 1999 and 1998, total comprehensive loss was
approximately $728,960 and $1,295,286, respectively. For the six months ended
June 30, 1999 and 1998, total comprehensive loss was approximately $2,029,741
and $4,222,624, respectively.
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 October 1998, the Company's Board of Directors authorized a stock
repurchase program that will allow the Company to purchase up to 250,000 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. As of August 13, 1999, the Company
had not repurchased any shares of its common stock. Any future purchases will be
financed from the Company's cash reserves.
7
<PAGE> 8
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, 1998, the Company's total assets decreased $4,053,429, or
approximately 37% to $6,907,536, primarily as a result of an approximately 68%
decrease in cash and an approximately 40% decrease in accounts receivable.
Accounts receivable declined because sales for the three months ended June 30,
1999 were lower than sales for the three months ended December 31, 1998. Cash
was negatively impacted by the Company's operating loss of $675,710 for the
quarter, and was further reduced by an approximately 35% reduction in accounts
payable.
Current liabilities as of June 30, 1999 were $7,936,744, a decrease of $915,921,
or approximately 10%, from December 31, 1998. The decrease was primarily due to
a decrease of approximately 35% in accounts payable and a decrease of
approximately 33% in deferred revenues, which combined to more than offset
increases in the current portion of notes payable and short term borrowings and
in accrued expenses.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1998
Results for the three months ended June 30, 1998 have been restated to reflect
the December 1998 closure of VSI Network Services, Inc., d/b/a Integrated
Network Services, Inc. (INS), a wholly-owned subsidiary of the Company.
Revenues for the three months ended June 30, 1999 were $3,158,741, a decrease of
approximately 54% from revenues of $6,830,019 earned during the three months
ended June 30, 1998. The decrease was due primarily to a decline in
videoconferencing revenue, stemming primarily from the fact that revenue earned
during 1998 was abnormally high due to the shipment of a $2.6 million order to a
customer in China.
Gross margin as a percentage of revenues for the three months ended June 30,
1999 was approximately 79%, as compared to approximately 43% for the three
months ended June 30, 1998. The improvement was primarily due to higher margins
in the sale of videoconferencing products and services, a larger proportion of
revenue from wholly-owned subsidiary Eastern Telecom Inc. (which has no cost of
sales) and higher than usual anticipated chargebacks for disconnections and
cancellations in the second quarter of 1998.
Selling, general and administrative expenses for the three months ended June 30,
1999 were $2,839,015, a decrease of $396,312 or approximately 12%, over for the
three months ended June 30, 1998. The decrease was primarily due to the
consolidation of operations at the Company's videoconferencing subsidiaries,
reductions in personnel and ongoing efforts to cut costs throughout the Company.
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
months ended June 30, 1999, the Company's research and development expenses were
$175,237, a decrease of approximately 14% over the three-month period ended June
30, 1998. The decrease was primarily due to the completion in 1998 of projects
related to the development of the Company's new videoconferencing system product
line, and to reductions in workforce.
Non-operating expenses for the three months ended June 30, 1999 were $90,748, a
decrease of approximately 86%, from the three months ended June 30, 1998. This
decrease was primarily due to the fact that expenses were higher than usual in
1998, due to charges related to the Company's convertible debentures and other
financing-related charges.
8
<PAGE> 9
Loss from discontinued operations for the three months ended June 30, 1999 was
$60,369, a decrease of approximately 62% from the three months ended June 30,
1998.
The net loss for the three months ended June 30, 1999 was $675,710, a decrease
of approximately 49% from the net loss of $1,329,878 for the three months ended
June 30, 1998. The decrease in net loss was due primarily to higher margins in
the sale of videoconferencing products and services, higher margin commissions
from telephone network reselling at ETI and the Company's ongoing efforts to
reduce costs.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998
Results for the six months ended June 30, 1998 have been restated to reflect the
December 1998 closure of VSI Network Services, Inc., d/b/a Integrated Network
Services, Inc. (INS), a wholly-owned subsidiary of the Company.
Revenues for the six months ended June 30, 1999 were $6,110,482, a decrease of
approximately 34% from revenues of $9,268,817 earned during the six months ended
June 30, 1998. The decrease was due primarily to a decline in videoconferencing
revenue in 1999, stemming primarily from the fact that revenue earned during
1998 was abnormally high due to the shipment of a large order to a customer
in China.
Gross margin as a percentage of revenues for the six months ended June 30, 1999
was approximately 75%, as compared to approximately 39% for the six months ended
June 30, 1998. The improvement was primarily due to higher margins in the sale
of videoconferencing products and services, a larger proportion of revenue from
ETI (which has no cost of sales) and higher than usual anticipated chargebacks
for disconnections and cancellations in the second quarter of 1998.
Selling, general and administrative expenses for the six months ended June 30,
1999 were $5,619,982, a decrease of $681,007 or approximately 11%, over for the
six months ended June 30, 1998. The decrease was primarily due to the
consolidation of operations at the Company's videoconferencing subsidiaries,
reductions in personnel in March and ongoing efforts to cut costs throughout the
Company.
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
months ended June 30, 1999, the Company's research and development expenses were
$308,098, a decrease of approximately 25% over the six month period ended June
30, 1998. The decrease was primarily due to the completion in 1998 of projects
related to the development of the Company's new videoconferencing system product
line, and to reductions in workforce.
Non-operating expenses for the six months ended June 30, 1999 were $317,109, a
decrease of approximately 60%, from the six months ended June 30, 1998. This
decrease was primarily due to the fact that expenses were higher than usual in
1998, due to charges related to the Company's convertible debentures and other
financing-related charges.
Loss from discontinued operations for the six months ended June 30, 1999 was
$238,201, a decrease of approximately 39% from the six months ended June 30,
1998. Management does not anticipate additional expenses related to the
liquidation of the assets and liabilities of INS, a wholly-owned subsidiary
closed by the Company in December 1998.
Net loss for the six months ended June 30, 1999 was $1,911,239, a decrease of
approximately 55% from the net loss of $4,234,292 for the six months ended June
30, 1998. The decrease in net loss was due primarily to higher margins in the
sale of videoconferencing products and services, higher margin commissions from
telephone network reselling at ETI and the Company's ongoing efforts to reduce
costs.
9
<PAGE> 10
LIQUIDITY AND SOURCES OF CAPITAL
As of June 30, 1999, the Company had cash and cash equivalents of $366,617. The
Company's liquidity sources include existing cash and credit facilities. In
order to meet its cash flow requirements, the Company will require additional
funding in 1999. This additional funding could be in the form of debt, equity or
both. A further 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.
Credit Facilities
VSI
Since June 1995, Videoconferencing Systems, Inc. (VSI), a wholly-owned
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 June 30, 1999, approximately $135,000 was owed to Fidelity Funding.
ETI
On October 8, 1998, ETI entered into a financing agreement with RFC Capital,
Inc., whereby RFC Capital, Inc. purchases eligible accounts receivable for 90%
of the accounts receivable amount, up to $1,500,000, at an interest rate of
prime plus 2.75% per annum. This amount may be increased, subject to additional
payment of commitment fees by ETI, to $5,000,000. If any account receivable is
not paid within 90 days, ETI is required to buy back the account receivable for
the full purchase price. The credit facility is secured by eligible accounts
receivable. As of June 30, 1999, approximately $758,825 was owed to RFC Capital,
Inc.
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 provided 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 receivable, inventory and fixed assets of INS.
With INS ceasing operations on December 31, 1998, VSI is obligated to repay the
balance owed Presidential Financial Corporation. On June 30, 1999, that amount
was approximately $64,000. The Company expects to repay the full amount during
1999.
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 137,500 shares of Common Stock of the Company,
held in escrow by Kredietbank, n.v. At June 30, 1999, approximately $260,000 was
owed to Kredietbank, n.v.
At June 30, 1999, Videoconferencing Systems, n.v. had a secured bank facility
with Generale Bank of approximately $161,000, with no outstanding balance at
that time.
10
<PAGE> 11
CONVERTIBLE DEBENTURES/TERM NOTES
On February 23, 1998, the Company issued $3,000,000 of 5% Convertible Debentures
due February 2000 ("the Debentures") to Thomson Kernaghan & Co. Ltd. ("Thomson
Kernaghan"), the proceeds of which were utilized for working capital purposes.
During 1998, $710,000 of debentures, plus accrued interest of $13,531, were
converted by the debenture holder into 445,956 shares of common stock of the
Company. The Company also paid $128,858 in accrued interest and fees. In
November 1998, the remaining debentures were converted into a $900,000 term note
to Thomson Kernaghan, due May 16, 1999.
On April 22, 1999 the Company entered into an agreement with the Debenture
holder to restructure the term note. The agreement, as amended on July 27, 1999,
calls for the exchange of the existing term note into a 14% Secured Convertible
Debenture, with a one-year term from the date of closing. Commencing January 1,
2000, the Debenture holder will have the option to begin converting the
Debenture at an initial rate of 7.5% of the Debenture per month; the rate will
increase to 15% per month on April 1, 2000. The conversion price will be the
lesser of $1.00 per share or the 5-day average closing bid price prior to the
date of a Debenture conversion, with a floor of $0.50 per share. The Debenture
will be secured by all existing patents which secure the original Thomson
Kernaghan note, and will be further secured by a lien on VSI's stock in
wholly-owned subsidiary Eastern Telecom Inc. (ETI). The lien will be junior to
the Company's existing term note holders and the new investors on closing. The
agreement is contingent upon the Company meeting certain conditions, including
the receipt of $1,000,000 in new cash ($500,000 of which had been received as of
August 3, 1999 from OHA Financial, Inc.); and the conversion of $1,000,000 of
the Company's 18 month term notes (due March 31, 2000) into shares of VSI common
stock or exchanging the 18 month term notes into shares of ETI. The deadline for
closing the modified term note restructuring agreement is August 31, 1999. As of
June 30, 1999, the outstanding balance under this note, including accrued
interest and penalties, was $1,085,450.
The failure of the Company to restructure its indebtedness to Thomson Kernaghan
would result in the Company being unable to repay this debt. The failure of the
Company to timely repay this indebtedness may result in Thomson Kernaghan taking
possession of or selling the Company's patents, which have been pledged by the
Company as collateral for this debt. If Thomson Kernaghan takes possession of or
sells the patents, the Company no longer has any rights in the technology
described therein. To continue to be able to sell and service its
videoconferencing products, which embody the technology covered by the patents,
the Company will be required to license this technology from Thomson Kernaghan
or any subsequent owner. There can be no assurance that any such license will be
granted on commercially reasonable terms or at all. Accordingly, if the Company
is unable to restructure its debt with Thomson Kernaghan, and is unable to
license the technology covered by the patents on commercially reasonable terms,
it will be unable to sell and service its videoconferencing products, in which
event, the Company may seek protection under federal bankruptcy laws. In order
to avoid a default under the note issued to Thomson Kernaghan, the Board of
Directors has determined the agreement to restructure the note to be in the best
interests of the Company and its shareholders.
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. Most are PC-based and are
Year 2000 compliant, with the exception of some older workstations that will be
phased out by 2000. Also, the primary accounting systems at Videoconferencing
Systems, Inc. and at ETI are not currently Year 2000 compliant, and management
plans during August 1999 to implement any necessary vendor upgrades and
modifications to ensure continued functionality with respect to any accounting
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
11
<PAGE> 12
software libraries are in no danger of being out of compliance before the year
2038.
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.
Contingency planning is a normal part of VSI's sales cycle, given lead time for
parts and installation windows. VSI has included Year 2000 concerns into normal
contingency planning without forming a separate department or task force to
address these concerns. The Company has not developed a separate 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 which are estimated at less than $30,000,
have to date been immaterial and are being expensed as incurred. These
expenditures have not had, and are not expected to have, a material impact on
the 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
12
<PAGE> 13
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 11 and June 25, 1999, the Company held its 1999 Annual Meeting of
Shareholders (the "Annual Meeting"). After the election of directors June 11,
1999, the meeting was adjourned until June 25, 1999 in order to give
shareholders more time to vote on the remaining agenda items.
At the Annual 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: Larry M. Carr, Julia B. North, Harlan D. Platt,
Ph.D. and Edward S. Redstone. The number of votes cast for and against election
of each nominee director was as follows:
<TABLE>
<CAPTION>
Director For Against
-------- --- -------
<S> <C> <C>
Larry M. Carr....................... 10,780,619 109,747
Julia B. North...................... 10,751,932 138,434
Harlan D. Platt, Ph.D............... 10,790,323 100,043
Edward S. Redstone.................. 10,787,603 102,763
</TABLE>
In addition, the Company's shareholders approved an Amendment to the Certificate
of Incorporation to increase the number of authorized shares of common stock
from 15,000,000 to 23,000,000 shares, which will allow the Company to complete
the debt restructuring transactions described in the Proxy Statement: 6,794,484
shares in favor (representing approximately 55% of the shares issued and
outstanding), 213,640 shares against and 35,081 shares abstaining. There were
5,596,638 broker non-votes.
Also, the Company's shareholders approved an Amendment to the Certificate of
Incorporation to increase the number of authorized shares of common stock from
15,000,000 to 40,000,000 shares, which will allow the Company to complete the
debt restructuring transactions described in the Proxy Statement and would
result in approximately 17,000,000 additional shares of common stock being
available for future issuance: 6,412,743 shares in favor (representing
approximately 52% of the shares issued and outstanding), 584,981 shares against
and 45,481 shares abstaining. There were 5,596,638 broker non-votes.
Immediately following the Annual Meeting, the Company filed a Certificate of
Amendment to its Certificate of Incorporation with the Delaware Secretary of
State to increase the number of authorized shares of common stock to 40,000,000
shares.
ITEM 5. OTHER INFORMATION
Management Changes
On May 1, 1999, the Company entered into consulting agreements with Dallas,
Texas-based venture capital, merchant banking and consulting firm Taconic
Partners, L.L.C., and with Karen Franklin to assist with its ongoing and
anticipated operational and financial restructuring. On June 7, 1999, Ms.
Franklin replaced interim Chief Financial Officer Sam Horgan. On June 8, 1999,
the Company announced that President and Chief Executive Officer Judi North
would be resigning her position, effective June 11, 1999, for personal reasons.
Ms. North was replaced, on an interim basis, by Richard E. Harrison, President
of Taconic Partners. Concurrent with the announcement of Ms. North's
resignation, the Company promoted Rick Egan to President of its wholly-owned
subsidiary, Videoconferencing Systems, Inc. Ms. North will remain on the
Company's Board of Directors.
Richard E. Harrison, age 41, is the President and a Manager of Taconic Partners,
L.L.C., a Dallas, Texas-based venture capital, merchant banking and consulting
firm. From October 1999 through May 1999, Mr. Harrison served as Chairman,
President and CEO of OHA Financial, Inc., an affiliated investment of Taconic
engaged in the specialty finance industry. Before founding Taconic Partners,
Inc. in 1990 (predecessor to Taconic Partners, L.L.C.), Mr. Harrison was a
senior consultant with Towers Perrin, where he specialized in post-merger
integration of
13
<PAGE> 14
operations and organizations for larger international companies. Prior to
joining Towers Perrin, Mr. Harrison worked for Thomson McKinnon in corporate
finance. Before that, Mr. Harrison was on the marketing staff of Reliance
Electric Company. Mr. Harrison holds a B.B.A. degree in Finance from Baylor
University and an M.B.A. degree from the University of Texas at Austin, where he
graduated with honors.
Karen T. Franklin, age 41, served as Controller of OHA Financial, Inc. from
September 1997 through May 1999. Previously, she had served as Director of
Financial Accounting for Jayhawk Acceptance Corporation, a publicly held
specialty finance company, and in managerial positions with Pricewaterhouse
Coopers and US Trails, Inc. She holds a master of science degree in accounting
from the University of North Texas. She is a Certified Public Accountant.
Sale of VSI n.v.
Currently, the Company is negotiating to sell 76% of the capital stock of its
European subsidiary, Videoconferencing Systems, n.v. ("VSINV"), to certain
members of VSINV's executive management team. As a condition of such sale, the
Company must be released from all liabilities including certain guarantees under
VSINV's bank credit agreements. Concurrent with the sale, the Company and VSINV
have agreed to enter into an exclusive reseller agreement wherein VSINV shall
have the exclusive rights to market the Company's videoconferencing product line
in Europe. The Company anticipates completing the sale in August or September
1999.
Nasdaq Listing
On April 19, 1999, the Company was informed by the Nasdaq Stock Market Inc. that
it no longer meets the requirements for continued listing on the Nasdaq SmallCap
Market, due to deficiencies in the net tangible assets requirement and the
minimum bid price requirement. Nasdaq initiated a review of the Company's
eligibility for continued listing, and requested that the Company submit by May
3 a detailed proposal for achieving compliance as well as a discussion of the
Company's plans to address specific concerns highlighted by its independent
auditor in its 1998 Form 10-K. The Company submitted a detailed proposal and
discussion of all relevant issues by the May 3 deadline.
On June 25, 1999, Nasdaq notified VSI that the Company's common stock would be
delisted from the Nasdaq SmallCap Market on July 6 unless the Company filed an
appeal and request for a hearing with the Nasdaq Listing Qualifications Panel.
The Company filed the appeal and request for hearing on July 1, thereby staying
the delisting order. The Company's common stock will continue to be listed on
the Nasdaq SmallCap Market without restriction until the hearing is conducted
and the Nasdaq Listing Qualifications Panel renders a decision. The hearing is
scheduled for August 19, 1999 in Washington, D.C.
Following the hearing, the Company may be granted more time to regain compliance
or the shares may be delisted to the OTC Bulletin Board. However, the trading
market for the common stock could be adversely affected, as price quotations for
the common stock may not be as readily obtainable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibit are filed with this report:
3.10 Certificate of Amendment to Certificate of Incorporation,
filed on June 28, 1999
10.19 Consulting Agreement between Taconic Partners, L.L.C.,
Richard E. Harrison and VSI Enterprises, Inc.
27.1 Financial Data Schedule (for SEC use only)
27.2 Restated Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
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, 1999 /s/ Richard E. Harrison
--------------- -----------------------------------------
Chief Executive Officer
/s/ Karen T. Franklin
-----------------------------------------
Chief Financial Officer
15
<PAGE> 1
EXHIBIT 3.10
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
VSI ENTERPRISES, INC.
VSI Enterprises, Inc. (the "Company"), a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
The resolution setting forth the proposed amendment is as follows:
RESOLVED: That Section 5.01 of the Certificate of Incorporation, as heretofore
added to or amended by certificates filed pursuant to law, is amended to read in
its entirety as follows:
"5.01 Authorized Shares. The aggregate number of shares which the Company shall
have authority to issue is Forty Million Eight Hundred Thousand (40,800,000).
Forty Million (40,000,000) shares shall be designated 'Common Stock' and shall
have a par value of $.001. Eight Hundred Thousand (800,000) shares shall be
designated 'Preferred Stock' and shall have a par value of $.00025. All shares
of the Company shall be issued for such consideration, as expressed in dollars,
as the Board of Directors may from time to time determine."
SECOND: That thereafter, pursuant to resolution of its Board of Directors, the
annual meeting of stockholders of the Company was duly called and held, upon
notice in accordance with Section 222 of the General Corporation Law of the
State of Delaware, at which meeting the necessary number of shares as required
by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
FOURTH: That the capital of the Corporation shall not be reduced under or by
reason of said amendment.
IN WITNESS WHEREOF, VSI Enterprises, Inc. has caused this Certificate of
Amendment to be signed by its duly authorized officer, this 25th day of June,
1999.
VSI ENTERPRISES, INC.
By: /s/ Richard E. Harrison
--------------------------
Richard E. Harrison,
President and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.19
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement"), dated as of May 1, 1999
is by and between Taconic Partners, L.L.C., a Texas limited liability company
("Taconic"), Richard E. Harrison, a Texas resident ("Harrison") and VSI
Enterprises, Inc., a Delaware corporation ("VSI"). Taconic, Harrison and VSI are
each sometimes referred to herein as a "Party" and collectively as the
"Parties".
SCOPE OF THE ENGAGEMENT: Taconic will provide the services of Harrison to
fulfill the role of interim Chief Executive Officer of VSI. Harrison will devote
not less than 2 days (16 hours) per week to this engagement. VSI acknowledges
that a substantial portion of Harrison's work will be performed at locations
other than VSI's corporate headquarters.
COMPENSATION: Taconic will receive a fee equal to $1,600 per day ($200 per
hour). Taconic shall provide VSI a weekly time sheet specifying the actual time
devoted to this engagement. All fees shall be due and payable upon receipt of
the associated invoice. Additionally, Taconic shall receive a lump sum payment
of $20,000 for work prior to 5/1/99. Such lump sum payment shall be due and
payable at the earlier of July 1, 1999 or upon closing of the debt restructuring
agreement with Thomson Kernaghan & Co. Ltd. ("TKC")
STOCK OPTIONS: As additional consideration for this engagement, Taconic shall
receive options or warrants for 300,000 of VSI's common shares (the "Shares")
with the following terms and conditions:
- Strike Price - 5 day average price beginning 5/1/99
- Vesting - 1/3rd immediately, 1/3rd after 6 months, 1/3rd after
12 months; accelerated vesting upon termination of agreement
- Term - 5 years
- Registration - VSI shall register the shares underlying the
option or warrant concurrent with its registration of the
shares associated with the TKC debt restructuring. If such
restructuring is not completed by August 31, 1999, VSI shall
then immediately undertake to register the Shares.
EXPENSES: VSI shall reimburse Taconic for the following expenses:
- Harrison's health insurance during term of engagement
(approximately $1,500.00 per month)
- All travel, phone, cell phone and other expenses related to
this engagement
- Monthly overhead expense ($500.00)
COMMUNICATION: If directed by Harrison, VSI shall provide videoconferencing
capabilities at the location specified by Harrison.
<PAGE> 2
TERMINATION: The Parties agree to provide a 2 month notice of termination.
INDEMNIFICATION: VSI hereby agrees to indemnify Taconic and Harrison to the
fullest extent for any and all corporate matters unless such matter was the
result of Harrison's gross negligence or willful misconduct.
AGREED TO AND ACCEPTED
as of the date first written above
TACONIC PARTNERS, L.L.C.
/s/ Richard E. Harrison
- -----------------------------------------
By: Richard E. Harrison, President
VSI ENTERPRISES, INC.
/s/ Judi North
- -----------------------------------------
By: Judi North, President & CEO
/s/ Richard E. Harrison
- -----------------------------------------
Richard E. Harrison, Individually
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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0
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