<PAGE> 1
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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, 2000
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 8, 2000
-------------------
<S> <C>
COMMON STOCK, $.001 PAR VALUE 15,043,301
</TABLE>
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<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, 2000 and December 31, 1999.................................... 3
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 2000 and 1999............... 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999................................ 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.... 11
PART II. Item 2. Changes in Securities and Use of Proceeds..................... 12
Item 4. Submission of Matters to a Vote of Security Holders.......... 12
Item 5. Other Information ............................................ 12
Item 6. Exhibits and Reports on Form 8-K.............................. 13
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
VSI ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,377,653 $ 798,826
Accounts receivable, net 1,990,062 986,754
Inventories, net 646,773 776,340
Prepaid expenses and other assets 4,977 --
Net current assets of discontinued operations -- 476,153
------------ ------------
TOTAL CURRENT ASSETS 5,019,465 3,038,073
PROPERTY AND EQUIPMENT, NET
Continuing operations 238,336 166,572
Discontinued operations -- 577,676
OTHER ASSETS
Software development costs, net 434,762 205,295
Investments 3,626,545 --
Other long term assets 14,614 14,614
Other assets of discontinued operations -- 908,303
------------ ------------
$ 9,333,722 $ 4,910,533
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of notes payable and short term borrowings $ -- $ 105,907
Convertible debentures -- 939,750
Accounts payable 608,977 941,301
Accrued expenses 568,528 1,001,837
Deferred revenues 1,152,239 1,000,512
Current liabilities of discontinued operations 84,350 --
------------ ------------
TOTAL CURRENT LIABILITIES 2,414,094 3,989,307
COMMITMENTS AND CONTINGENCIES
REDEEMABLE MINORITY INTEREST -- 2,118,293
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, authorized 40,000,000 shares of
$.001 par value; issued and outstanding, 15,000,791 at
June 30, 2000 and 12,300,144 at December 31, 1999 15,001 12,300
Additional paid in capital 56,524,286 48,508,074
Accumulated deficit (49,802,204) (49,717,441)
Unrealized gain on marketable securities 182,545 --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 6,919,628 (1,197,067)
------------ ------------
$ 9,333,722 $ 4,910,533
============ ============
</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,
------------------------------ ------------------------------
2000 1999 2000 1999
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 1,022,395 $ 1,397,438 $ 2,676,183 $ 3,102,892
Cost of sales 500,473 669,082 1,413,885 1,538,331
Selling, general and administrative 844,683 1,239,159 1,673,037 2,526,998
Research and development 122,523 175,237 259,877 308,098
------------ ------------ ------------ ------------
1,467,679 2,083,478 3,346,799 4,373,427
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (445,284) (686,040) (670,616) (1,270,535)
Other expenses, primarily financing charges (109,680) (69,568) (315,420) (271,079)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (554,964) (755,608) (986,036) (1,541,614)
Income tax benefit 373,000 -- 373,000 --
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (181,964) (755,608) (613,036) (1,541,614)
Income (loss) from discontinued operations, net of taxes -- 79,899 (32,556) (369,624)
Gain on disposal of subsidiary, net of taxes 560,829 -- 560,829 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 378,865 $ (675,709) $ (84,763) $ (1,911,238)
============ ============ ============ ============
Net Income (loss) per common share (basic)
Continuing operations $ (0.01) $ (0.06) $ (0.04) $ (0.13)
Discontinued operations 0.04 0.01 0.03 (0.03)
------------ ------------ ------------ ------------
$ 0.03 $ (0.05) $ (0.01) $ (0.16)
============ ============ ============ ============
Net Income (loss) per common share (diluted)
Continuing operations $ (0.01) $ (0.06) $ (0.04) $ (0.13)
Discontinued operations 0.03 0.01 0.03 (0.03)
------------ ------------ ------------ ------------
$ 0.02 $ (0.05) $ (0.01) $ (0.16)
============ ============ ============ ============
Weighted shares outstanding
Basic 14,964,249 12,300,144 14,037,763 12,300,144
Diluted 16,796,251 12,300,144 14,037,763 12,300,144
</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,
------------------------------
2000 1999
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (84,763) $ (1,911,238)
Adjustments to reconcile net loss to net cash
(used) provided by operating activities:
Gain on sale of subsidiary (933,829) --
Depreciation and amortization 350,193 262,812
Changes in operating assets and liabilities:
Accounts receivable, net (503,308) 1,900,533
Inventories, net 117,560 244,972
Prepaid expenses and other assets (101,329) 83,118
Accounts payable (332,324) (951,488)
Accrued expenses (428,877) 176,423
Deferred revenues 151,727 (504,024)
Effect of operating activities of discontinued operations (110,320) 114,459
------------ ------------
Net cash provided (used) by operating activities (1,875,270) (584,433)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, continuing operations (117,867) (17,470)
Purchases of property and equipment, discontinued operations (27,087) (41,114)
Change in other assets, continuing operations (295,529) (18,504)
Change in other assets, discontinued operations 25,514 8,420
Proceeds from sale of subsidiary 1,287,835 --
------------ ------------
Net cash provided (used) by investing activities 872,866 (68,668)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on notes payable
and short term credit facilities (894,695) (6,649)
Proceeds from exercise of stock options 91,912 --
Proceeds from private placement, net of issuance costs 4,054,876 --
Repurchase of minority interest (709,722) --
------------ ------------
Net cash provided (used) by financing activities 2,542,371 (6,649)
------------ ------------
Effect of exchange rate changes on cash -- (118,501)
Increase (decrease) in cash and cash equivalents 1,539,967 (778,251)
Cash provided (used) by discontinued operations 38,860 (29,185)
Cash and cash equivalents at beginning of the period 798,826 1,099,718
------------ ------------
Cash and cash equivalents at end of the period $ 2,377,653 $ 292,282
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
VSI ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 month period and six
month period ended June 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related footnotes included in the
Company's 1999 Annual Report on Form 10-K, as filed with the SEC on March 30,
2000.
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 and majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
NOTE 3 - DISCONTINUED OPERATIONS
On February 18, 2000, the Company and its network reselling subsidiary, VSI
Network Solutions Inc., doing business as Eastern Telecom, entered into a
definitive agreement to sell substantially all of the assets of Eastern Telecom
to PentaStar Communications, Inc., a Denver, Colorado based communications
services agent. The definitive agreement was subject to, among other things,
stockholder approval, which occurred at the Annual Meeting held on May 18, 2000.
We received initial consideration of approximately $1.8 million in cash,
$500,000 of which will remain in escrow until specified accounts receivable have
been collected. In addition, we received 57,122 shares of PentaStar
Communications, Inc. stock, with a current value of approximately $1,320,000. As
a result of the decision to discontinue the Company's network reselling
business, operating results for Eastern Telecom 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.
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.
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 - COMPREHENSIVE INCOME
In 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income".
Comprehensive income includes the changes in equity resulting from transactions
with non-owners for the periods reported. The unrealized gain on marketable
securities represents the only component of comprehensive income. Comprehensive
income for the three and six month period ended June 30, 2000 was $182,545.
NOTE 9 - INVESTMENTS
Investments consist primarily of equity securities, which are accounted for as
available for sale and are stated at fair value. Unrealized gains and losses on
these investments are included in the shareholders' equity section of the
balance sheet.
NOTE 10 - CONVERTIBLE DEBENTURES
During the first quarter ended March 31, 2000, we raised $4,054,876 through the
sale of 1,351,625 shares of common stock at $3.00 per share to 38 accredited
investors. Approximately, $826,668 of the proceeds were used to repay the
balance of the 7% Secured Convertible Debentures held by Thompson Kernaghan &
Co. LTD.
NOTE 11 - MINORITY INTEREST
With the sale of Eastern Telecom to PentaStar Communications, Inc., we exchanged
524,126 of our common shares for 240,265 (24%) of Eastern Telecom shares held by
its minority shareholders. In so doing, we retired 68% of our put obligations
under a shareholders agreement that gave Eastern Telecom's minority shareholders
the right to put their shares to VSI at $6.50 per share. The remaining minority
interest shares were repurchased pursuant to the terms of a shareholders
agreement at the time of the sale of Eastern Telecom, which amounted to
$709,722.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
During the six months ended June 30, 2000, total assets increased approximately
90% to $9,333,722 from $4,910,533, primarily as a result of a $1,578,827
increase in cash and cash equivalents and a $3,626,515 increase in long-term
investments offset by a reduction in assets of $1,384,456 due to the sale of our
network reselling subsidiary, VSI Network Solutions Inc., doing business as
Eastern Telecom to PentaStar Communications. In March 2000, we raised $4,054,876
through the sale of 1,351,625 shares of common stock at $3.00 per share to 38
accredited investors. Approximately $826,668 of the proceeds were used to repay
the remaining balance of the 7% Secured Convertible Debenture held by Thompson
Kernaghan & Co. Ltd. ("Kernaghan"). The increase in long term investments
results from an equity transaction whereby we issued to ACIS, Inc., a Texas
based, privately-held software technology company 500,000 shares of our common
stock in exchange for 250,000 shares of the common stock of ACIS. The
transaction was valued at the closing price of our common stock on the date of
the transaction, February 29, 2000. In addition, we received 50,000 additional
shares in ACIS for the development of an advanced operating kernel to support
our new product architecture for PC-based device control, which was valued based
on the estimated fair value of the services provided. On May 18, 2000 we
received $1,887,000 in cash from the sale of Eastern Telecom, of which $500,000
was placed in escrow pending the collection of specified accounts receivable. We
also received 57,122 shares of PentaStar Communications stock with present
market value as of June 30, 2000 of $1,324,985.
Current liabilities decreased by $1,575,213 or 39% principally due to the
repayment of the Kernaghan debt, other borrowings and a $765,661 decrease in
accounts payable and accrued expenses resulting from on-going efforts to pay
down amounts owed to vendors.
Additionally, we exchanged 524,126 of our common shares for 240,265 (24%) of the
Eastern Telecom shares held by its minority shareholders. By this transaction,
we retired 68% of our put obligations under a shareholders agreement that gave
Eastern Telecom's minority shareholders the right to put their shares to VSI at
$6.50 per share. The remaining minority interest shares were repurchased
pursuant to the terms of a shareholders agreement at the time of the sale of
Eastern Telecom which amounted to $709,722.
RESULTS OF OPERATIONS
Results for the three months and six months ended June 30, 1999 have been
restated to reflect the discontinuance and sale of the operations of Eastern
Telecom.
REVENUES
Revenues were $1,022,395 and $1,397,438 for the three months ended June 30, 2000
and 1999, respectively. The 27% decrease from 1999 to 2000 was primarily due to
our continuing efforts to only pursue profitable sales and to become smaller and
more efficient, as we reduced our losses and began to pursue strategies more
consistent with our mission.
For the six months ended June 30, 2000, revenues were $2,676,183, reflecting a
decrease of 14% from revenues of $3,102,892 from the same period in 1999. Sales
decreased as we refocused our efforts on new business opportunities related to
our new "Voyager" product.
8
<PAGE> 9
GROSS MARGIN
Gross margin as a percentage of revenues was approximately 51% and 52% for the
three months ended June 30, 2000 and 1999, respectively. For the six months
ended June 30, 2000 and 1999, respectively, the gross margins as a percentage of
revenues were 47% and 50%. The decrease in the gross margin percentages for both
the three months and six months periods resulted from variations in the product
mix.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $844,683 and $1,239,159 for
the three months ended June 30, 2000 and 1999, respectively. For the six months
ended June 30, 2000 and 1999, the selling, general and administrative expenses
were $1,673,037 and $2,526,998, respectively. The decreases in the both three
months and six months periods ended June 30, 2000 compared to the similar
periods in 1999 resulted from the consolidation of operations, reductions in
personnel and ongoing efforts to cut costs.
RESEARCH AND DEVELOPMENT EXPENSES
We charge 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. These
expensed costs were $122,523 and $175,237 for the three months ended June 30,
2000 and 1999, respectively. The expensed costs for the six months ended June
30, 2000 and 1999 were $259,877 and $308,098, respectively. During the three
months and six months ended June 30, 2000, we capitalized $129,325 and $244,881,
respectively, in software development costs related to new products under
development.
OTHER EXPENSES
Other expenses, primarily finance charges, were $109,680 and $69,568 for three
months ended June 30, 2000 and 1999, respectively. Other expenses were $315,420
and $271,079 for the six months ended June 30, 2000 and 1999, respectively. The
increase in both the three and six month periods is primarily related to an
increase in the amortization of warrant values, offset by a decrease in interest
expense, debt discount costs, and foreign currency exchange losses.
DISCONTINUED OPERATIONS
We discontinued operations of our system integration subsidiary, VSI Network
Services, Inc. on December 31, 1998. Also, on February 18, 2000, we entered into
a definitive agreement to sell Eastern Telecom, our network reselling subsidiary
to PentaStar Communications, Inc., and, as a result have accounted for Eastern
Telecom as discontinued operations. The sale of Eastern Telecom was approved at
our annual meeting of shareholders, which was held on May 18, 2000. We received
initial consideration of approximately $1.8 million in cash, $500,000 of which
will remain in escrow until specified accounts receivable have been collected.
In addition, we received 57,122 shares of PentaStar Communications stock, with a
current value of approximately $1,320,000. Immediately prior to the closing, we
repurchased the remaining redeemable minority interest in Eastern Telecom for
$709,722. Accordingly, operating results for both subsidiaries have been
reclassified and reported as discontinued operations. Operating income (loss)
from discontinued operations was $0 and ($32,556) for the three months and six
months ended June 30, 2000 compared to a profit of $79,899 for the three months
ended June 30, 1999 and a loss of ($369,624) for the six months ended June 30,
1999.
GAIN ON DISPOSAL OF SUBSIDIARY
We realized a gain of $560,829 for the three month and six month periods ended
June 30, 2000, net of taxes of $373,000, from the sale of Eastern Telecom.
9
<PAGE> 10
NET INCOME (LOSS)
Net income for the three months ended June 30, 2000 was $378,865; an increase of
157% in income from the net loss of $675,709 for the three months ended June 30,
1999. The increase in income was the result of the sale of Eastern Telecom for a
net gain of $933,829, before taxes. If the sale had not occurred we would have
lost $554,964 for the three months ended June 30, 2000 a decrease of 18% from
the comparable prior year loss, which was due primarily to decreases in overhead
expenses. The net loss for the six months ended June 30, 2000 was $84,763; a
decrease of $1,826,475 from the net loss of $1,911,238 for the six months ended
June 30, 1999. If the Eastern Telecom sale had not occurred the net loss for the
six months period ended June 30, 2000, would have been $1,018,592, a decrease of
$892,646 or 47% from the comparable prior year loss. The decrease in net loss
from the prior period was due primarily to decreases in overhead expenses and
decreased losses from discontinued operations.
LIQUIDITY AND SOURCES OF CAPITAL
GENERAL
As of June 30, 2000, we had cash and cash equivalents of $2,377,653. As part of
the sale of Eastern Telecom to PentaStar Communications, Inc. we were required
to escrow $500,000 until specified accounts receivable have been collected. As
of June 30, 2000 approximately $250,000 of the $500,000 in proceeds has been
collected but not yet released from the escrow account.
The Eastern Telecom assets will be combined with the assets of USTeleCenters,
Inc. and Vermont Network Services Corporation, which were acquired by PentaStar
on February 18, 2000. Under an earn-out provision in the sales agreement, VSI is
entitled to additional compensation based on the combined financial results of
the combined Eastern Telecom, USTeleCenters and Vermont Network Services
acquired operations for calendar year 2000.
We believe that existing cash will be sufficient to meet our cash flow
requirements for at least until the end of 2000. We may require additional
funding in fiscal 2001 to fund our development activities. This additional
funding could be in the form of the sale of assets, debt, equity, or a
combination of these financing methods. However, there can be no assurance that
we 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.
We expect to spend approximately $295,000 for capital expenditures in the
remainder of fiscal 2000.
CREDIT FACILITIES
VSI
From June 1995 to June 7, 2000, Videoconferencing Systems, Inc., a wholly owned
subsidiary, had a revolving credit and security agreement with Fidelity Funding
of California Inc. This credit facility provided up to $4,000,000 at an interest
rate of prime plus 2% per annum. Funds available under the credit facility were
based on 80% of eligible VSI accounts receivable invoices, with certain
restrictions. The credit facility was secured by the accounts receivable,
inventory and certain fixed assets of Videoconferencing Systems. At June 30,
2000, we were due $200 from reserves Fidelity Funding was holding for its
account. There were no balances owed under this credit facility as of June 30,
2000. On April 4, 2000, we were notified by Fidelity Funding of the termination
of this credit facility effective June 7, 2000.
10
<PAGE> 11
ETI
On October 8, 1998, Eastern Telecom 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. The credit facility was secured by eligible
accounts receivable. As part of the sale of Eastern Telecom on May 18, 2000, the
remaining amounts owing to RFC Capital, Inc. have been paid and the financing
agreement was terminated.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein 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 sales and 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, our ability
to complete the development and launch of the Company's new PC-based device
control product, code named "Voyager" and other uncertainties detailed from time
to time in the Company's Securities and Exchange Commission filings, including
our Annual Report on Form 10-K and our quarterly reports on Form 10-Q.
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 have no effect on financial statements subsequent to September
1999, based on the sale of the Company's European Subsidiary.
11
<PAGE> 12
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 10, 2000, we raised $4,054,876 through the private sale of 1,351,625
common shares at $3.00 per share to 38 accredited investors. Additionally,
certain Eastern Telecom minority interest holders exchanged 240,265 shares of
Eastern Telecom for 524,126 shares of our common stock.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 18, 2000, we held our 2000 Annual Meeting of Shareholders and the
following persons were elected to serve on our Board of Directors for a term of
one year and until their successors are elected and have qualified: Larry M.
Carr, Julia B. North, and Edward S. Redstone. Mr. Harlan D. Platt, who was
originally nominated as a Director and appeared in the proxy, resigned his
position as of May 5, 2000 and did not stand for election to the Board of
Directors. 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 13,586,064 37,215
Julia B. North 13,586,064 37,215
Edward S. Redstone 13,586,064 37,215
</TABLE>
In addition, our shareholders approved the sale of substantially all the assets
of our subsidiary, VSI Network Solutions, Inc., doing business as Eastern
Telecom, to PentaStar Communications, Inc. The vote was 8,559,629 shares in
favor (representing approximately 57.4% of the shares outstanding), 13,544
shares against and 7,897 shares abstaining.
Also, our shareholders ratified the selection of Grant, Thornton, LLP as
independent auditors for the year 2000. The vote was 13,604,679 shares in favor,
4,023 shares against and 14,577 shares abstaining.
ITEM 5. OTHER INFORMATION
Nasdaq Listing
On September 22, 1999 we were notified by the Nasdaq Stock Market, Inc. that the
our 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 lack of a minimum bid price per share of $1.00
and net tangible assets of not less than $2.0 million.
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<PAGE> 13
Management and Board changes
Effective July 31, 2000, Robert W. Morris has been named Chief Financial Officer
of VSI Enterprises, Inc. replacing Karen Franklin. Since January 1997, Mr.
Morris has been a financial consultant, serving the high technology industry.
From June 1989 until January 1997, he was Chief Financial Officer, Secretary and
Treasurer, and Division President of Zemex Corporation, a Toronto based,
industrial minerals company. Mr. Morris is a graduate of the University of
Cincinnati and received his master's degree from Xavier University.
Effective May 31, 2000, Richard W. Egan, currently President of
Videoconferencing Systems, Inc., has been named Chief Executive Officer of VSI
Enterprises, Inc., to replace Richard Harrison. Mr. Egan, age 34, is an
engineering graduate of Georgia Institute of Technology. Mr. Egan joined the
Company in June 1995 and, since June 11, 1999 had served as President of the
Videoconferencing Systems subsidiary. From February 1, 1998 through June 11,
1999 he served as Executive Vice President - Global Sales. From July 1996 until
February 1998 he served as National Account Manager, and from June 1995 until
July 1996 as Regional Sales Director.
On May 18, 2000, Mr. Egan was elected to the Board of Directors replacing Mr.
Harlan J. Platt who resigned his position on VSI's Board of Directors as of May
5, 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 (for SEC use only)
27.2 Restated Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
The following report on Form 8-K was filed during the quarter ended June
30, 2000: Current Report dated May 18, 2000 (relating the sale of substantially
all the assets of VSI Network Solutions, Inc., doing business as Eastern
Telecom, to PentaStar Communications, Inc.)
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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 11, 2000 /s/ Richard W. Egan
-----------------------------------
Chief Executive Officer
/s/ Robert W. Morris
-----------------------------------
Chief Financial Officer and
Principal Accounting Officer
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