<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, 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.
OUTSTANDING AT
CLASS OF SECURITIES NOVEMBER 5, 1999
------------------- ----------------
COMMON STOCK, $.001 PAR VALUE 12,300,144
================================================================================
<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
September 30, 1999 and December 31, 1998........................................ 3
Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 1999 and 1998......................... 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998................................... 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................................................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 13
PART II. Item 2. Changes in Securities and Use of Proceeds.............................. 14
Item 5. Other Information ..................................................... 14
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>
SEPT 30, DECEMBER 31,
1999 1998
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 830,842 $ 1,134,231
Accounts Receivable, net 3,705,409 5,975,254
Inventories, net 463,435 1,059,142
Demo inventory 46,636 136,883
Prepaid expenses and other assets 21,630 164,088
Current assets of discontinued operations 14,545 334,022
------------ ------------
TOTAL CURRENT ASSETS 5,082,497 8,803,620
PROPERTY AND EQUIPMENT, NET 761,771 1,048,983
OTHER ASSETS
Goodwill, net 884,012 955,688
Software development costs, net 38,109 75,349
Other long term assets 44,032 77,325
------------ ------------
$ 6,810,421 $ 10,960,965
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of notes payable
and short term borrowings $ 869,153 $ 2,795,324
Accounts Payable 1,267,341 2,235,852
Accrued Expenses 1,601,482 1,965,051
Deferred Revenues 950,567 1,522,416
Current liabilities of discontinued operations 98,895 334,022
------------ ------------
TOTAL CURRENT LIABILITIES 4,787,438 8,852,665
NOTES PAYABLE LESS CURRENT PORTION -- 1,105,655
COMMITMENTS AND CONTINGENCIES -- --
CONVERTIBLE DEBENTURES 939,750 --
MINORITY INTEREST 1,955,096 --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, authorized 40,000,000 shares of
$.001 par value; issued and outstanding
12,300,144 at September 30, 1999 and
December 31, 1998, respectively 12,300 12,300
Additional paid in capital 48,504,549 48,209,039
Accumulated deficit (49,388,712) (46,877,847)
Cumulative comprehensive income -- (340,847)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (871,863) 1,002,645
------------ ------------
$ 6,810,421 $ 10,960,965
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
Page 3
<PAGE> 4
VSI ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Videoconferencing systems $ 2,050,673 $ 3,702,328 $ 5,153,565 $ 10,777,632
Network reselling 2,037,218 1,591,402 5,044,808 3,784,915
------------ ------------ ------------ ------------
4,087,891 5,293,730 10,198,373 14,562,547
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales, videoconferencing systems 1,073,484 2,723,196 2,611,815 8,338,660
Cost of sales, network reselling 139,255 -- 139,255 --
Selling, general and administrative 2,789,736 3,268,167 8,409,718 9,569,156
Research and development 99,591 228,736 407,689 638,330
------------ ------------ ------------ ------------
4,102,066 6,220,099 11,568,477 18,546,146
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (14,175) (926,369) (1,370,104) (3,983,599)
Loss on sale of subsidiary (167,537) -- (167,537) --
Other expenses, primarily financing charges (399,050) (516,189) (716,159) (1,305,653)
------------ ------------ ------------ ------------
NET LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST (580,762) (1,442,558) (2,253,800) (5,289,252)
Income taxes -- -- -- --
Minority interest in net income of subsidiary (5,441) -- (5,441) --
------------ ------------ ------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (586,203) (1,442,558) (2,259,241) (5,289,252)
Loss from discontinued operations, net of taxes (13,423) (108,534) (251,624) (496,132)
------------ ------------ ------------ ------------
NET LOSS $ (599,626) $ (1,551,092) $ (2,510,865) $ (5,785,384)
============ ============ ============ ============
Net loss per common share
Loss from continuing operations $ (0.05) $ (0.12) $ (0.18) $ (0.45)
Loss from discontinued operations (0.00) (0.01) (0.02) (0.04)
------------ ------------ ------------ ------------
$ (0.05) $ (0.13) $ (0.20) $ (0.49)
============ ============ ============ ============
Weighted average shares outstanding 12,300,144 12,072,592 12,300,144 11,834,840
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements
Page 4
<PAGE> 5
VSI ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,510,865) $(5,785,384)
Adjustments to reconcile net loss to net
cash (used) provided by operating activities:
Loss from discontinued operations 251,624 496,132
Loss on sale of subsidiary 167,537 --
Depreciation and amortization 643,653 1,976,305
Allowance to reduce inventory to lower
of cost or market -- 256,000
Allowance for doubtful accounts 131,002 49,998
Changes in operating assets and liabilities:
Accounts receivable 1,827,284 (429,181)
Inventories 500,806 (191,501)
Rental and demonstration inventory -- 275,542
Prepaid expenses and other assets 107,350 262,121
Accounts payable (704,778) (860,244)
Accrued expenses (148,876) 167,170
Deferred revenues (403,050) 1,343,454
----------- -----------
Net cash provided (used) by operating activities
of continuing operations (138,313) (2,439,588)
Net cash (used) by discontinued operations (169,158) (456,883)
----------- -----------
Net cash provided (used) by operating activities (307,471) (2,896,471)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (70,879) (638,105)
Sale of minority interest in subsidiary 1,040,000 --
Change in other assets (4,097) 236,096
----------- -----------
Net cash provided (used) by investing activities 965,024 (402,009)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on notes payable
and short term credit facilities (942,239) 981,995
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 (942,239) 3,941,030
----------- -----------
Effect of exchange rate changes on cash 21,581 76,346
Increase (decrease) in cash and cash equivalents (263,105) 718,896
Cash disposed of by sale of subsidiary (40,284) --
Cash and cash equivalents at beginning of the period 1,134,231 866,009
----------- -----------
Cash and cash equivalents at end of the period $ 830,842 $ 1,584,905
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
Page 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 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, 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 and majority 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. During September 1999, INS filed for bankruptcy under Chapter
7 provisions of the United States Bankruptcy Code.
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 September 30,
1999 and 1998 and nine month periods ended September 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 in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived
Assets and Long-lived Assets to be disposed of", which requires that the
impairment loss be measured as the amount by which the carrying value of the
asset exceeds the fair value of the asset. Management believes long-lived assets
in the accompanying condensed consolidated balance sheets are appropriately
valued in accordance with SFAS No.121.
NOTE 6 - REVENUE RECOGNITION
Revenue from sales of videoconferencing systems and related maintenance
contracts on these systems are included in videoconferencing systems revenues.
Revenues on systems sales are recognized upon shipment. If installation costs
relating to the systems sold are significant, revenue is only recognized for the
installation as the costs associated with the installation are incurred. Revenue
on maintenance contracts are recognized over the term of the related contract.
Commission revenue represents commissions received by the Company for reselling
certain telephone network services. These telephone network services include
additional telephone lines to business and residential customers as well as high
speed ISDN lines. Commission revenue is recognized upon receipt of the order and
when the Company has no further obligation related to the order. This revenue is
recognized net of any chargebacks.
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 September 30, 1999 and 1998, total comprehensive loss was
approximately $141,000 and $1,486,000, respectively. For the nine months ended
September 30, 1999 and 1998, total comprehensive loss was $2,170,000 and
$5,709,000, 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 - 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 November 5, 1999, the Company
had not repurchased any shares of its common stock.
NOTE 10 - SALE OF VSI N.V.
On September 30, 1999, the Company sold its European subsidiary
Videoconferencing Systems, n.v. ("VSINV") to certain members of VSINV's
executive management team. As a condition of the sale, the Company was released
from all liabilities including certain guarantees under VSINV's bank credit
agreements and was issued warrants to purchase up to 24.0% of VSINV. Concurrent
with the sale, the Company and VSINV agreed to enter into a non-exclusive
reseller agreement wherein VSINV shall have the rights to market the Company's
videoconferencing
7
<PAGE> 8
product line in Europe. The sale resulted in a loss of $168,000, which included
the write-off of the cumulative foreign currency translation adjustment of
$319,000.
NOTE 11 - PARTIAL SALE OF SUBSIDIARY
On August 31, 1999, the Company as part of a restructuring of its debt, sold a
35.5% interest in its previously wholly-owned subsidiary, VSI Network Solutions,
Inc. d/b/a Eastern Telecom Inc. ("ETI"). The transaction included the conversion
of $1,213,000 of 18-month term notes due March 31, 2000 into 195,099 shares of
ETI common stock which were owned by VSI, representing a 19.5% minority interest
in ETI. In addition $1,040,000 of new capital was raised by selling a 16.0%
minority interest in ETI.
NOTE 12 - DEBT RESTRUCTURING
Effective August 31, 1999, the Company restructured its note payable which
consisted of principal and accrued interest totaling $1,089,750. The Company
paid $150,000 at closing, and the remaining balance was exchanged for a 7%
Secured Convertible Debenture, with a one year term. The debenture is secured by
a lien on the Company's interest in ETI, which is junior to the Company's
converting term note holders and new investors, as discussed below.
Additionally, under the terms of the agreement, the debenture holder released
its existing security interest in the Company's patents. The debenture holder
has the option to commence converting the debenture into shares of the Company's
Common Stock at the initial rate of 7.5% per month beginning January 1, 2000.
This rate will increase to 15% per month commencing April 1, 2000. The
conversion price is the lesser of $1.00 or the five-day average closing bid
price of the Company's Common Stock prior to the date of any such transaction,
with a floor of $0.50 per share. The debenture holder also has the option of
converting the debenture into common stock of ETI, the Company's Subsidiary,
instead of shares of the Company. This conversion can be done at any time by the
debenture holder at the rate of one share of ETI common stock for each $6.50 of
principal so converted. Any remaining balance of the debenture will be payable
on August 31, 2000.
As part of the closing of the transaction, $1,213,000 of the Company's term
notes due March 31, 2000 were converted into 195,099 shares of ETI common stock
which represents a 19.5% ownership interest in ETI. In addition, $1,040,000 of
new capital was raised by selling an additional 16.0% ownership interest in ETI.
ETI's minority shareholders have a put option, which gives them the right to put
their ETI shares back to the Company at the price paid or converted, at the
earlier of the sale of ETI or one year, and the Company has a call option to
reacquire shares of ETI at any time. The Company still holds the remaining 64.5%
majority ownership of ETI.
Participants in the term note conversion and new equity participants also
received 1,098,492 and 396,497 warrants to purchase the Company's common stock
at $0.50 and $1.00 per share, respectively. In conjunction with the issuance of
the warrants, the Company valued the warrants at $320,968 using the
Black-Scholes option pricing model in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation". This warrant value will be amortized to interest
expense over the term of the put, which is one year.
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, 1998, the Company's total assets decreased $4,151,000, or
37.9% to $6,810,000, primarily as a result of a 26.7% decrease in cash, a 38.0%
decrease in accounts receivable and a 56.2% decrease in inventory. Accounts
receivable declined because sales for the three months ended September 30, 1999
were lower than sales for the three months ended December 31, 1998. Cash was
negatively impacted by the Company's net loss of $2,511,000 for the nine months
ended September 30, 1999 and inventory decreased as a result of both improved
inventory management practices and systems and the shipment of a large
order prior to the end of September 1999.
Current liabilities at September 30, 1999 were $4,787,000, a decrease of
$4,065,000, or 45.9%, from December 31, 1998. This was due to a decrease of
68.9% in the current portion of notes payable, a decrease of 43.3% in accounts
payable, a 18.5% decrease in accrued expenses and a 37.6% decrease in deferred
revenues.
RESULTS OF OPERATIONS
Results for the three months and nine months ended September 30, 1998 have been
restated to reflect the December 1998 closure of VSI Network Services, Inc.,
d/b/a Integrated Network Services, Inc., a wholly-owned subsidiary of the
Company.
Revenues for the three months and nine months ended September 30, 1999 were
$4,088,000 and $10,198,000, respectively, compared to revenues of $5,294,000 and
$14,563,000, in the like periods of 1998. For the three months ended September
30, 1999 revenues decreased $1,206,000 or 22.8% compared to the three months
ended September 30, 1998. For the nine months ended September 30, 1999 revenues
decreased $4,365,000, or 30.0%.
Videoconferencing revenues for the three months and nine months ended September
30, 1999 were $2,051,000 and $5,154,000, respectively, compared to revenues of
$3,702,000 and $10,778,000, in the like periods of 1998. For the three months
ended September 30, 1999 revenues decreased $1,651,000 or 44.6% compared to the
three months ended September 30, 1998. For the nine months ended September 30,
1999 Videoconferencing revenues decreased $5,624,000 or 52.2%. The decrease in
revenue for the three month period was due primarily to the Company's efforts to
shed low margin business, while on a year to date basis it was a combination of
shedding low margin business and the fact that revenue earned during 1998 was
abnormally high from a large order to a customer in China.
The commission revenue from the network reselling business for the three months
ended September 30, 1999 was $2,037,000, compared to $1,591,000 for the three
months ended September 30, 1998, an increase of $446,000 or 28.0%. This increase
was primarily due to a lower number of chargebacks in the current period versus
last year and to a lesser extent the new line of equipment sales the network
reselling business entered this year. Revenues for the nine months ended
September 30, 1999 were $5,045,000, an increase of $1,260,000 or 33.3% over
revenues of $3,785,000 for the nine months ended September 30, 1998. The
increase was due to the fact that the 1998 period was lower as a result of
commissions being decreased due to a large number of chargebacks for
disconnections and cancellations that occurred in the first quarter of that year
and to a lesser extent an increase in equipment sales in the 1999 period.
Gross margins as a percentage of revenues for the three months and nine months
ended September 30, 1999 were 70.3% and 73.0%, respectively. This compares to
48.6% for the three months ended September 30, 1998 and 42.7%
9
<PAGE> 10
for the nine months ended September 30,1998. Videoconferencing margins for the
three and nine months ended September 30, 1999 increased to 47.7% and 49.3%,
respectively. This compares to 26.4% for the three months ended September 30,
1998 and 22.6% for the nine months ended September 30, 1998. The increase in
both periods is due to the emphasis of shedding low margin products and
services. The network reselling business which basically has no cost of sales,
except for some small sales of equipment, had gross margins for the three and
nine months ended September 30, 1999 of 93.2% and 97.2%, respectively. This
compares to the like periods of 1998 in which there were no equipment sales and
gross margins were 100.0%.
Selling, general and administrative expenses for the three months and nine
months ended September 30, 1999 were $2,790,000 and $8,410,000, respectively.
This compares to $3,268,000 and $9,569,000, respectively for the three months
and nine months ended September 30, 1998. The decrease in expenses of $478,000
or 14.6%, for the three months ended September 30, 1999 and the decrease in
expenses of $1,159,000 or 12.1% for the nine months ended September 30, 1999,
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 September 30, 1999, the Company's research and development expenses
were $100,000, a decrease of 56.5% over the three-month period ended September
30, 1998. For the nine months ended September 30, 1999, the Company's research
and development expenses were $408,000, a decrease of 36.1% over the nine month
period ended September 30, 1998. The decrease in both periods 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 the
workforce.
Non-operating expenses for the three months ended September 30, 1999 were
$567,000, an increase of 9.8%, from the three months ended September 30, 1998.
Non-operating expenses for the nine months ended September 30, 1999 were
$884,000, a decrease of 32.3%, from the nine months ended September 30, 1998.
The increase in the three months ended September 30, 1999 was primarily due to
the recognition of the loss of $168,000 from the sale of the Belgium subsidiary,
which includes the write-off of cumulative foreign currency translation
adjustments of $319,000. For the nine month period ended September 30, 1999
expenses were lower due to the fact that in the like period of 1998, expenses
were higher due to charges related to the Company's convertible debentures and
other financing-related expenditures. If the loss on the sale had not been
recognized, non-operating expenses for the three months and nine months ended
September 30, 1999 would have been $399,000, a decrease of 22.7%, and $716,000,
a decrease of 45.1% from the like periods in 1998.
Loss from discontinued operations for the three months ended September 30, 1999
was $13,000, a decrease of 87.6% from the three months ended September 30, 1998.
Loss from discontinued operations for the nine months ended September 30, 1999
was $252,000, a decrease of 49.3% from the nine months ended September 30, 1998.
The decrease in both the three months and nine months ended September 30, 1999,
compared to the like periods in 1998 is due to the ceasing of all operations and
related expenses. Management does not anticipate any 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 three months ended September 30, 1999 was $600,000; a decrease
of 61.3% from the net loss of $1,551,000 for the three months ended September
30, 1998. Net loss for the nine months ended September 30, 1999 was $2,511,000;
a decrease of 56.6% from the net loss of $5,785,000 for the nine months ended
September 30, 1998. The decrease in net loss for the periods was due primarily
to higher margins in the sale of videoconferencing products and services and the
Company's ongoing efforts to reduce costs. This was offset somewhat by the
recognition of the loss on the sale of the Belgium subsidiary.
LIQUIDITY AND SOURCES OF CAPITAL
As of September 30, 1999, the Company had cash and cash equivalents of $831,000.
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
10
<PAGE> 11
in operating expenses could also be effected 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 September 30, 1999, the Company was due $109,000 from reserves Fidelity
Funding was holding for its account. There are no balances owed under this
credit facility as of September 30, 1999.
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 September 30, 1999, $767,000 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 September 30, 1999, that
amount was $43,000. The Company expects to repay the full amount during 1999.
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.
Effective August 31, 1999, the Company again restructured its debt with Thomson
Kernaghan & Co. Ltd., which totaled $1,089,750 at August 31, 1999. VSI made a
cash payment of $150,000 at closing, and the remaining balance was exchanged for
a 7% Secured Convertible Debenture, with a one year term. The debenture is
secured by a lien on the Company's ownership interest in ETI, which is junior to
the Company's converting term note holders and new investors, as discussed
below. ETI is a marketer and seller of telecommunications services and products.
Additionally, under the terms of the agreement, Thomson Kernaghan released its
existing security interest in the Company's patents. Thomson Kernaghan has the
option to commence converting the debenture into shares of VSI
11
<PAGE> 12
Common Stock at the initial rate of 7.5% per month beginning January 1, 2000.
This rate will increase to 15% per month commencing April 1, 2000. The
conversion price is the lesser of $1.00 or the five-day average closing bid
price of the VSI Common Stock prior to the date of any such transaction, with a
floor of $0.50 per share. Furthermore, Thomson Kernaghan has the option of
converting the debenture into shares of ETI common stock at any time and at the
rate of one share of ETI common stock for each $6.50 of principal so converted.
Any remaining balance of the debenture will be payable on the maturity date.
As part of the closing of the transaction, $1,213,000 of the Company's term
notes due March 31, 2000 were converted into 195,099 shares of ETI common stock
which represents a 19.5% ownership interest in ETI. In addition, $1,040,000 of
new capital was raised by selling an additional 16.0% ownership interest in ETI.
ETI's minority shareholders have a put option, which gives them the right to put
their ETI shares back to the Company at the price paid or converted, at the
earlier of the sale of ETI or one year, and the Company has a call option to
reacquire shares of ETI at any time. The Company still holds the remaining 64.5%
majority ownership of ETI.
Participants in the term note conversion and new equity participants also
received 1,098,492 and 396,497 warrants to purchase the Company's common stock
at $0.50 and $1.00 per share, respectively. In conjunction with the issuance of
the warrants, the Company valued the warrants at $320,968 using the
Black-Scholes option pricing model in accordance with SFAS No. 123, "Accounting
for Stock-Based Compensation". This warrant value will be amortized to interest
expense over the term of the put, which is one year.
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. New software was installed
and upgraded as part of the normal course of business in October, 1999. Most are
PC-based and are Year 2000 compliant, with the exception of some older
workstations that will be phased out by 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 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 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.
12
<PAGE> 13
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.
The Company has minimal exposure to market risks such as changes in foreign
currency exchange rates and interest rates. The value of the Company's financial
instruments is generally not significantly impacted by changes in the interest
rates and the Company has no investments in derivatives. Fluctuations in
interest rates are not expected to have a material impact on interest expense
incurred under the Company's credit facilities. Changes in foreign currency
exchange rates will have no effect on future financial statements based on the
sale of the Company's European Subsidiary.
13
<PAGE> 14
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 31, 1999, the Company sold a minority interest in its ETI subsidiary
to holders of the Company's term notes and to other accredited investors. In
connection therewith, the Company issued to such persons (i) warrants to
purchase an aggregate of 1,098,492 shares of common stock at an exercise price
of $0.50 per share and (ii) warrants to purchase an aggregate of 396,497 of
common stock at an exercise price of $1.00 per share. The warrants are
exercisable for a period expiring on August 31, 2004.
All issuance's of securities described above were made in reliance on the
exemption from registration provided by Section 4(2) and/or 3 (b) of the
Securities Act of 1933 as transactions by an issuer not involving a public
offering. All of the securities were acquired by the recipients thereof for
investment and with no view toward the resale or distribution thereof. In each
instance, the offers and sales were made without any public solicitation and the
stock certificates bear restrictive legends. No underwriter was involved in the
transactions and no commissions were paid.
ITEM 5. OTHER INFORMATION
Sale of VSI n.v.
On September 30,1999, the Company sold its European subsidiary,
Videoconferencing Systems, n.v. ("VSINV"), to certain members of VSINV's
executive management team. As a condition of the sale, the Company was released
from all liabilities including certain guarantees under VSINV's bank credit
agreements. Concurrent with the sale, the Company and VSINV agreed to enter into
a non-exclusive reseller agreement wherein VSINV shall have the rights to market
the Company's videoconferencing product line in Europe.
Nasdaq Listing
On September 22, 1999 the Company was notified by the Nasdaq Stock Market, Inc.
that the Company's common stock had been delisted from trading on the Nasdaq
SmallCap Market, effective as of the close of business on September 22, 1999.
The delisting occurred as a result of the Company's lack of a minimum bid price
per share of $1.00 and net tangible assets of not less than $2.0 million.
Nasdaq also notified the Company that its securities were immediately eligible
for trading on the OTC Bulletin Board commencing September 23, 1999. The
Company's stock symbol, "VSIN", remained unchanged
The Company has filed a request for the Nasdaq Listing and Hearing Review
Council to review the Nasdaq Listing Qualifications Panel's decision to move the
Company from NASDAQ SmallCap to the OTC Bulletin Board. The Company has been
notified that a likely decision will be issued in April 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are filed with this report:
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
(b) Reports on Form 8-K:
The following report on Form 8-K was filed during the quarter ended
September 30,1999: Current Report dated August 31, 1999 (relating to the
restructuring of its debt with Thomason Kernaghan & Co. Ltd. and sale of a
minority interest in VSI Network Solutions, Inc., d/b/a Eastern Telecom, Inc.).
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 12, 1999 /s/ Richard E. Harrison
------------------------ -------------------------------------
Chief Executive Officer
/s/ Karen T. Franklin
-------------------------------------
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF VSI ENTERPRISES, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 831
<SECURITIES> 0
<RECEIVABLES> 4,461
<ALLOWANCES> (756)
<INVENTORY> 463
<CURRENT-ASSETS> 5,082
<PP&E> 3,483
<DEPRECIATION> (2,721)
<TOTAL-ASSETS> 6,810
<CURRENT-LIABILITIES> 4,787
<BONDS> 940
0
0
<COMMON> 12
<OTHER-SE> (884)
<TOTAL-LIABILITY-AND-EQUITY> 6,810
<SALES> 10,198
<TOTAL-REVENUES> 10,198
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<TOTAL-COSTS> 11,568
<OTHER-EXPENSES> 884
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<CHANGES> 0
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<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF VSI ENTERPRISES, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
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</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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