<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
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Commission File No. 1-10927
VSI ENTERPRISES, INC.
A Delaware Corporation
(IRS Employer Identification No. 84-1104448)
5801 Goshen Springs Road
Norcross, Georgia 30071
(770) 242-7566
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
None
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Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $.00025 par value per share
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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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant (39,222,741 shares) on March 18, 1998 was
approximately $42,752,788, based on the closing price of the registrant's common
stock as quoted on the Nasdaq Small Cap Market on March 18, 1998. For the
purposes of this response, officers, directors and holders of 5% or more of the
registrant's common stock are considered the affiliates of the registrant at
that date.
The number of shares outstanding of the registrant's common stock, as of March
18, 1998: 47,034,970 shares of $.00025 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be delivered
to shareholders in connection with the 1998 annual meeting of shareholders
scheduled to be held on May 19, 1998, are incorporated by reference in response
to Part III of this Report.
<PAGE> 2
PART I
ITEM 1. BUSINESS.
GENERAL
VSI Enterprises, Inc. (the "Company"), through its five wholly-owned
subsidiaries, is in the videoconferencing and system integration business. The
Company, along with its strategic partners, offers customers turnkey solutions
by supplying videoconferencing products and services, as well as transmission
equipment and a complete internal network, to support video, voice and data
applications. Its core business is the design, manufacture, marketing and
servicing of interactive group and desktop videoconferencing systems (the "VSI
Systems"). Each VSI System is designed with open software and modular subsystems
which allow a VSI System to be expanded or reconfigured as technologies, user
requirements or new applications evolve. The Company's products are designed to
allow multiple participants at geographically dispersed sites to see and hear
each other on live television and share graphical and pictorial information
using standard commercially available telecommunications transmission
facilities. The Company integrates standard video, audio and transmission
components with its own proprietary video, audio and computer control components
and software.
The Company's open software and modular subsystems streamline
production and allow the product to be tailored to meet customers' specific
needs, with or without the necessity of custom design. The Company's lead
products are marketed under the trade name Omega(TM). Customers are offered a
variety of option packages to fit specific applications. Customers are also
offered upgrade packages that make the Company's new product compatible with
older models. To date, the Company has sold over 1,500 videoconferencing systems
to approximately 300 customers, including Bell Atlantic, Boeing, MCI,
NationsBank, BellSouth, General DataComm and Johnson & Johnson; various foreign,
U.S. and state government departments and agencies; educational institutions;
and health care facilities.
The Company was incorporated under the laws of Delaware on September
19, 1988 as Fi-Tek III, Inc. ("Fi-Tek") for the purpose of raising capital and
to seek out business opportunities in which to acquire an interest. On August
21, 1990, the Company acquired 89.01% of the total common stock and common stock
equivalents then issued and outstanding of Videoconferencing Systems, Inc., a
Delaware corporation ("VSI"). VSI was founded in 1985 through the acquisition of
a portion of the assets of a Sprint Corporation videoconferencing subsidiary. In
December 1990, the Company changed its name from Fi-Tek III, Inc. to VSI
Enterprises, Inc. During the first half of 1991, the Company acquired the
remaining additional outstanding shares of common stock of VSI.
On July 31, 1992, the Company acquired substantially all of the
outstanding shares of Common Stock of CyberVision, n.v., a Belgian corporation.
In April 1994, the Company changed the name of CyberVision, n.v. to
Videoconferencing Systems, n.v. (hereinafter referred to as "VSI Europe") to
permit both companies to market products under the common trade name of "VSI."
VSI Europe is a distributor of the Company's videoconferencing systems in
Europe. VSI Europe has offices located in London and Antwerp.
<PAGE> 3
In April 1995, the Company acquired cR Solutions, a software company
whose products include a reservation system for the management of
videoconferencing systems. This business is being operated by the Company
through its VSI Solutions, Inc. subsidiary ("VSI Solutions").
On June 28, 1996, the Company merged with Integrated Network Services,
Inc. ("INS"), a company engaged in the design, installation and support of local
and wide area networks, primarily for the healthcare industry. This business is
operated by the Company through its VSI Network Services, Inc. subsidiary. INS
is an integration firm specializing in the connectivity of multi-protocol
environments, ranging from small, local area networks to large, enterprise-wide
networks employing WAN technologies to connect multiple sites.
On October 2, 1996, the Company acquired Eastern Telecom, Inc. ("ETI"),
a company engaged in the business of marketing and sales of telecommunications
services and products. ETI sells network services such as Centrex, frame relay
and basic rate interface, primary rate interface and ISDN connections on behalf
of a number of major telecommunications providers.
VSI, VSI Europe, VSI Solutions, INS and ETI will continue their
respective businesses as operating subsidiaries of the Company. References to
the Company herein refer to VSI Enterprises, Inc., VSI, VSI Europe, VSI
Solutions, INS and ETI as a consolidated operation, unless the context indicates
otherwise.
The Company's principal executive offices and manufacturing facilities
are located at 5801 Goshen Springs Road, Norcross, Georgia 30071, and its
telephone number is (770) 242-7566.
VSI SYSTEMS & APPLICATIONS
VSI Systems enable participants in multiple locations to hold
interactive group meetings remotely, thus avoiding costly and time-consuming
travel. Participants at any connected location can be seen and heard by all
other participants. If the VSI System is equipped with the appropriate options,
the participants can also utilize slides, graphs, plain paper drawings,
computer-generated graphics, computer data, laser discs and video tape
interactively. Unlike audio teleconferencing systems which only allow voice
communications, audiographic teleconferencing which is limited to voice plus
still images, and business television which does not provide for interaction
among the participants (also known as one-way videoconferencing), the Company
believes its VSI Systems foster the look and feel of live, face-to-face meetings
and promote a natural interaction among the participants.
A typical VSI videoconference involves three major elements: (i) access
to transmission services, (ii) a "codec" for coding/decoding digitized signal
transmissions and (iii) the VSI System, which contains television monitors,
cameras, audio system, microphones, cabinetry, various control systems for
interfacing the componentry to the user, and various optional components
specific to the user's application. The Company designs, manufactures,
assembles, installs and services the VSI Systems, and it has nonexclusive
remarketing agreements with codec manufacturers to resell the codecs. The
Company may sell the transmission services through its ETI subsidiary, or in
many instances the customer will secure the services independently through
telecommunications carriers for either fixed monthly or hourly usage prices.
These transmission services may vary, depending upon the customer's application
and preferences, and include a range of transmission bandwidths. In general, the
higher the bandwidth the better the quality of the transmitted images, although
the choice of codec will
<PAGE> 4
affect image quality for a given speed. The VSI Systems operate over the range
of available transmission bandwidths and are compatible with all major brands of
codecs known by the Company to be currently available; they also operate without
codecs, for certain specialized networks.
The primary users of videoconferencing are major corporations,
government agencies, educational institutions and health care organizations.
Corporate and government organizations often use meetings to provide
information, review operations, make plans, resolve problems, introduce new
ideas or products, conduct training sessions and communicate with customers and
vendors. Such conventional group meetings usually require at least some of the
participants to travel to the meeting site. When meetings are required on a
frequent, repetitive or emergency basis, travel costs and productivity losses
can be substantial. The VSI Systems provide users with the ability to hold
two-way and multi-way meetings, often at significant savings over the costs of
travel and lost productivity while traveling. As an added and in some cases a
more important benefit, because travel time and costs are eliminated, it may be
more economic for more people to participate via videoconferencing, thereby
causing the direct dissemination of pertinent information to more parties
simultaneously, which may improve efficiency in problem solving and decision
making.
The Company also supplies and installs the VSI Systems for use in
educational and training settings to connect one or more distant classrooms with
a centrally-based instructor. These "distance learning" applications of
videoconferencing are used by corporations, state and federal governments,
hospitals and clinics, high schools, technical schools and universities.
The Company also provides "judicial systems" to state and local
governments. Judicial systems equip court systems with the ability to link court
rooms with prisons and jails, thereby reducing the costs and security risks
associated with inmate-related travel including: arraignments, attorney/client
conferences, booking and prisoner processing and depositions.
In the area of telemedicine, the Company supplies standalone group and
desktop videoconferencing systems. It also, in an alliance with strategic
partner Global Telemedix, Inc., offers systems used in conjunction with
telemedicine software, specialty devices and desktop/rollabout workstations.
These systems can offer a multimedia platform for use by physicians, medical
researchers and administrators for a wide variety of applications, including:
patient consults, remote monitoring, grand rounds, treatment protocols, research
and administration.
PROPRIETARY TECHNOLOGY
The Company has developed proprietary technology in the areas of
videoconferencing control systems, system diagnostics, information access and
communications access. While VSI Systems make use of some other manufacturers'
components, the Company's primary product, Omega(TM) utilizes internally
developed proprietary software and products as key elements in differentiating
the Company's systems in the marketplace. Since VSI Systems use standards based
codecs, VSI Systems are interoperable with systems of other standards-compliant
manufacturers.
The heart of the Omega(TM) is the System Controller, a proprietary
software suite that must be installed on a properly configured 486 or Pentium
Windows-based PC. The software suite
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includes the Omega(TM) real time operating system, Omega(TM) videoconferencing
application package, device drivers, and a third party SQL database engine (as
licensed to VSI for resale). This software is delivered in object code format.
The Company has also developed and manufactures certain proprietary components:
Omega(TM) Audio Processor, Omega(TM) Video Processor, Omega(TM) Power Supply,
the Omega(TM) Basic/Serial IQ Connectors, the Omega(TM) Pan/Tilt/Zoom/Focus
Controller, the Omega(TM) Infra-red User Control Panel and proprietary
cabinetry. These proprietary components are designed to work exclusively with
the Omega(TM) System Controller software.
The Company regards its Omega(TM) software as proprietary and has
implemented protective measures of both a legal (copyright) and practical
nature. The Company derives considerable practical protection for its software
by supplying and licensing only a non-modifiable run-time version to its
customers and keeping confidential all versions that can be modified. By
licensing the software rather than transferring title, the Company in most cases
has been able to incorporate restrictions in the licensing agreements which
impose limitations on the disclosure and transferability of the software. No
determination has yet been made, however, as to the legal or practical
enforceability of these restrictions or the extent of customer liability for
violations.
The Company has been granted seven patents from the U.S. Patent and
Trademark Office that cover certain aspects of the Omega(TM) user interface,
remote management and system architecture (which is a network videoconferencing
system which combines the advantages of central and distributed intelligence
systems). The patents protect the Company's innovative technology and enables
the Company to pursue opportunities to license its technology to other
manufacturers. The Company also has confidentiality agreements with certain of
its employees and has implemented other security measures.
PRODUCTS
Historically, videoconferencing systems were used to provide
"point-to-point" connectivity through proprietary codecs. Most videoconferences
were conducted on an intra-network basis. With the recent acceptance and
implementation of interoperability standards (collectively referred to as H.320
of the ITU-TS) and the growth of the installed base of systems, the Company
believes that customers are beginning to seek "one-to-many" system solutions on
both an intra-network as well as an inter-network basis. This has resulted in a
significant shift in use of videoconferencing, leading to a complex matrix of
interconnectivity, scheduling, service and user interface issues. The Company
believes that the videoconferencing world is becoming a world of "networks of
systems" where all systems from boardroom to rollabout to desktop will have to
interconnect. The Company believes that most systems in use today are not
equipped to handle these demands.
The Omega(TM) platform features a system control architecture based
upon a PC486 or Pentium engine, proprietary software compatible with Microsoft's
Windows 3.1/95 and MS DOS 6.0+ operating systems, and distributed component
intelligence. In addition, the Company introduced a new state of the art 7kHz
audio system, sophisticated 8x8 video switcher/processor, a new high speed
pan/tilt/zoom/focus, and new cabinetry. The key features and benefits of the
Omega(TM) platform include:
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Compression Technology Independence
- Investment protection, by separating system control from
compression technology
- Customer choice of compression technology
Open Network Architecture
- Wide support for options and peripherals (e.g., multiple
cameras, VCRs, laser disc players, video printers, PC
presentations)
- Built-in flexibility for adding new devices and advanced
technology as it evolves
- Support for a wide number of network connection technologies
(including switched 56, ISDN, T1, T3 or ATM)
- Network management for centralized administration and
diagnostics
Ease of Use
- Easy to understand onscreen icons provide heads up control of
all videoconferencing functions
- Point and Click camera control provides effortless camera
positioning for both local and distant participants
- Dialing Directories for both phone and videoconference
connections makes initiating a conference as easy as using
your phone
System Management
- Remote management support is extended to all devices
comprising the videoconferencing system
- Device health and status represented locally with 3D graphical
display of system components
- FTP server integration into the Omega(TM) allows for remote
transfer of files between a wide variety of computers
- Open system support of industry standards
Software Based System
- Remote upgrades of new Omega(TM) software releases
- Custom configuration of icons and system settings
- Sign-on security and system accounting totals for individual
users
The Omega(TM) product line offers a complete range of group and desktop
videoconferencing systems, including the deluxe, full-featured Executive series,
the economical Flex Plus and Flex rollabout series and the Desk PC-based desktop
series. Other customized systems are offered for such application-specific
markets as telemedicine and video arraignment.
The Executive series is engineered for stationary videoconferencing
applications in dedicated boardrooms, classrooms and courtrooms. Its dual
monitors allow users to see local and remote sites easily, which is especially
helpful when using multimedia tools or application-specific devices for
meetings, presentations and training. Flex and Flex Plus models offer a
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spectrum of options, configurations and peripherals. Their single-monitor
cabinets are portable and move easily between rooms for the widest range of
applications in any environment. They are also upgradable to the Executive
series. The Desk series adds videoconferencing to almost any 486 IBM-compatible
PC and works with Windows 95 software. It offers flexible configuration through
easy-to-use Windows menus and dialog boxes and supports a wide range of
peripheral devices and multiple video inputs for supporting varied
videoconferencing applications.
Customers are offered a menu of options which allows them to tailor
systems to meet their specific needs. The Omega(TM) is sold on a standalone
basis, with or without codec. The Omega(TM) is offered with single or dual color
monitors of 27" or 35" size, for rollabout cabinets or in the wall installation.
Other options include: audio and video expansion packages, multiple cameras
(either single or three chip), a graphics stand, a computer graphics interface,
facsimile transmission and reception, transmission network interface, and a
variety of videocassette recorders, slides chains and peripheral devices.
The Company began shipping the first version of Omega(TM) during the
first quarter of calendar 1994.
Video Administrator is a custom software package that facilitates
network management by providing scheduling, reservations and connection services
with minimal human intervention. Video Administrator is being utilized by
BellSouth for its multipoint videoconferencing service, as well as by other
corporate and institutional clients.
NEW PRODUCT DEVELOPMENT
The Company continues to upgrade its present products and to develop
new and innovative products for the videoconferencing market. Extensions of its
product line will include a LAN-based gateway offering, and software upgrades of
existing products. Additional system and network management products are under
development.
The Company is also upgrading the design of application specific
packages of the Omega(TM) videoconferencing system for the judicial, distance
learning and telemedicine markets.
CUSTOMER SERVICE
The Company generally provides a warranty for parts and labor on its
systems for 90 days from the date of delivery. The Company maintains
videoconference rooms and the necessary transmission facilities and codecs to
provide on-line assistance to its installed customers at its executive offices
near Atlanta, Georgia and at its European offices. It also provides a telephone
helpline to assist customers in the diagnosis of system failures. Approximately
95% of all customer calls for assistance have been resolved through telephone or
videoconference contact. The remaining 5% have generally been resolved by the
removal and replacement of field replaceable units by Company or customer
personnel. The Company maintains a spare parts inventory, and its policy is to
replace failed units which are under warranty or subject to a service contract
within 24 hours of notification.
The Company offers several different maintenance programs, ranging from
"helpline" telephone consultation to extended field service on a contract basis,
which includes parts, labor, and travel service with a guaranteed on-site
response within 48 hours. Warranty and contract
<PAGE> 8
service is provided from the Company's U.S. and European locations and through
various service arrangements in the Far East.
TELEPHONE NETWORK RESELLING
In addition, the Company, through its ETI subsidiary, serves as a sales
agent for a number of major telecommunications clients, including Bell Atlantic
and Southern New England Telephone. ETI is paid a commission by its clients for
products and services sold to other entities. Among ETI's core product offerings
are network services such as Centrex, frame relay and basic rate interface,
primary rate interface and ISDN connections. In the year ended December 31,
1997, ETI contributed about 34% of the Company's consolidated revenues.
MARKETS
The Company has defined its near-term, primary target markets for its
products as the "Fortune 1000" companies in North America, Europe and the
Pacific Rim. Typically, these large companies, often with numerous offices in
different cities, are more likely to realize significant savings on travel and
related costs by installing a videoconferencing network. Cost/benefit analyses
are generally performed by the Company's customers themselves prior to
purchasing a system. In addition, the Company has targeted as a secondary market
small to mid-sized companies, as well as educational institutions, governments
and healthcare providers. The Company's systems are marketed through a direct
sales force, as well as through a select group of co-marketing partners and
distributors.
For the fiscal years ended December 31, 1997, 1996 and 1995,
international sales (sales outside of the United States and Canada) represented
approximately 13%, 15% and 13%, respectively, of the Company's total sales. Net
product sales attributable to VSI Europe increased from approximately $2.5
million during the year ended December 31, 1996 to approximately $2.8 million
for the year ended December 31, 1997. VSI Europe has contributed substantially
all of the Company's international sales, although sales in China began in late
1997. The Company believes it presently maintains an approximate 1% to 2% share
of the total worldwide videoconferencing equipment market as measured by 1997
total sales volume for the industry.
CUSTOMERS
The Company's customers include Fortune 1000 companies, mid-sized
corporations, agencies of state, local and federal governments, and health care
facilities. They include Boeing, MCI, NationsBank, Duracell, BellSouth, Bell
Atlantic and Johnson & Johnson.
During fiscal 1997, approximately 27% of the Company's revenue -
primarily, commissions earned by wholly-owned subsidiary ETI -- were from Bell
Atlantic. During fiscal 1996, approximately 14% of the Company's sales were to
Bell Atlantic; the 1996 percentage is much smaller than the percentage for 1997
because revenue contributed by ETI was only included in fourth quarter results
for 1996, when ETI was acquired by the Company. No other customers accounted for
more than 10% of the Company's revenue during the years ended December 31, 1997
or 1996.
ORDER BACKLOG AND INVENTORY
As of December 31, 1997, the Company had a backlog of orders for
service and/or equipment of approximately $9.0 million for systems and/or
service to be delivered during the next 12 months. As of December 31, 1996, the
Company had a backlog of orders for service
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and/or equipment of approximately $4,700,000. The Company had inventories, net
of allowance, of $2,541,754 at December 31, 1997. The Company's inventory is
pledged to secure the Company's line of credit.
COMPETITION
The Company competes in the videoconferencing industry by providing
custom solutions (products and services) for its customers' videoconferencing
needs. Because the Company's videoconferencing systems are compression
technology-independent, they can be sold to customers with standard codecs, high
speed codecs, board-level codecs or specialty codecs with direct links to ATM
and fiber optic networks.
The videoconferencing industry covers a broad spectrum of
videoconferencing services available to businesses and others, all of which are,
in a general sense, competitive with the Company's systems. The VSI Systems,
however, are designed and marketed primarily for the group videoconferencing
segment of the industry. Within this segment of the industry, the Company
presently competes primarily with two companies, all of which presently have
significantly greater resources and market shares than the Company. In addition,
four of the Company's suppliers of codecs directly compete with the Company in
the group videoconferencing segment. The Company believes demand for
videoconferencing will continue to increase, which will attract additional
competitors to the industry, some of which may have greater financial and other
resources than the Company.
RESEARCH AND DEVELOPMENT
All of the Company's product engineering, including costs associated
with design and configuration of fully-developed VSI Systems for particular
customer applications, is accounted for in the Company's financial statements as
research and development expenses. During the years ended December 31, 1997,
1996 and 1995, the Company's aggregate expenses for research and development of
new products or new components for existing VSI Systems were $1,031,814,
$1,192,010 and $953,955, respectively. During fiscal 1997, the Company's
research and development expenses decreased by 13%, due to the completion in
early 1997 of projects related to forthcoming generations of the Omega product
line and other projects.
EMPLOYEES
As of December 31, 1997, the Company employed 169 persons full time,
including five executive officers. Of the full-time employees who are not
executive officers, 72 are engaged in sales and marketing, 8 in production, 49
in service, 12 in research and development, and 23 in general administration.
Employee relations are considered good, and the Company has no collective
bargaining contracts covering any of its employees.
ITEM 2. PROPERTIES.
The Company maintains its primary executive and sales offices, as well
as its production facilities, in 44,140 square feet of leased office and
warehouse space in Norcross, Georgia, under a five-year lease which expires in
September, 2002. The lease - originally for 26,140 square feet of space -- was
renewed in September, 1997, and now includes an additional 18,000 square feet of
space currently being subleased to another tenant. The Company and some of its
subsidiaries-
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- - VSI Europe, INS and ETI -- lease a number of facilities (primarily sales
offices) in the United States and Europe under operating lease agreements that
expire at various dates through 2006.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party
or to which its properties are subject; nor are there any material proceedings
known to the Company to be contemplated by any governmental authority; nor are
there any material proceedings known to the Company, pending or contemplated, in
which any director, officer or affiliate or any principal security holder of the
Company, or any associate of any of the foregoing is a party or has an interest
adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There has been no occurrence requiring a response to this Item.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Nasdaq Small Cap Market
under the Nasdaq symbol "VSIN". The Company's Common Stock had been traded on
the Boston Stock Exchange under the symbol "VSI" from November, 1991 until
February 18, 1998, when the Company voluntarily delisted from the exchange. The
Common Stock has been quoted on the Nasdaq System since February 28, 1992. The
following table sets forth the quarterly high and low bid quotations per Common
Share on the Nasdaq Small Cap Market as reported for the periods indicated.
These prices also represent inter-dealer quotations without retail mark-ups,
mark-downs, or commissions and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
HIGH LOW
------------------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1996
First Quarter $4.31 $1.88
Second Quarter 4.06 2.44
Third Quarter 3.13 2.00
Fourth Quarter 3.06 1.88
FISCAL YEAR ENDED DECEMBER 31, 1997
First Quarter $3.00 $1.00
Second Quarter 1.56 1.03
Third Quarter 2.00 1.06
Fourth Quarter 2.75 1.22
</TABLE>
As of March 6, 1997, the Company had approximately 500 holders of
record of its Common Shares and in excess of 9,000 beneficial holders of its
Common Shares.
The Company has never paid cash dividends on its Common Stock and has
no plans to pay cash dividends in the foreseeable future. The policy of the
Company's Board of Directors is to retain all available earnings for use in the
operation and expansion of the Company's business.
<PAGE> 11
Whether dividends may be paid on the Common Shares in the future will depend
upon the Company's earnings, capital requirements, financial condition, prior
rights of the preferred stockholders, and other relevant factors.
RECENT SALES OF UNREGISTERED SECURITIES
On December 30, 1997, the Company issued 7,214 shares of Common Stock
to Paul D'Haeyer, an employee of the Company, in payment of $9,018 of sales
commissions earned by Mr. D'Haeyer.
In the period from October 21, 1997 through December 31, 1997, the
Company issued 250,000 shares of Common Stock to two vendors in consideration
for reduction in accounts payable.
All issuances 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 6. SELECTED FINANCIAL DATA.
The following selected financial data for the four years ended
December 31, 1997, 1996, 1995 and 1994, and for the nine-month transition period
ended December 31, 1993, are derived from the consolidated financial statements
of the Company. All financial information prior to 1997 was restated to reflect
the June 1996 acquisition by the Company of Integrated Network Services, Inc.,
which was accounted for as a pooling of interest. Information for the years
ended December 31, 1997 and 1996 includes Eastern Telecom, Inc., which was
acquired in October 1996. Information for the years ended December 31, 1997,
1996 and 1995 include VSI Solutions Inc., which was acquired in April 1995. See
Notes 2 and 3 to the consolidated financial statements. The data should be read
in conjunction with the consolidated financial statements, related notes and
other financial information included herein.
<TABLE>
<CAPTION>
9 Months
Year Ended December 31, Ended
-------------------------------------------- Dec. 31,
1997 1996 1995 1994 1993(1)
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue ................... $ 21,765 $ 17,056 $ 20,541 $ 19,226 $ 12,370
Cost of revenues .......... 11,342 12,102 14,255 13,131 9,141
-------- -------- -------- -------- --------
Gross Profit .............. 10,423 4,954 6,196 6,095 3,229
Operating and other
expenses ............... 16,240 11,661 10,764 8,505 6,357
-------- -------- -------- -------- --------
Net loss from continuing
operations ............. $ (5,817) $ (6,707) $ (4,568) $ (2,410) $ (3,128)
======== ======== ======== ======== ========
Net loss per share from
continuing operations .. $ (0.13) $ (0.18) $ (0.15) $ (0.11) $ (0.19)
======== ======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993(1)
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ........... $ 3,690 $ 5,634 $ 6,904 $ 1,260 $ 1,963
Total assets .............. 22,880 24,832 19,666 13,393 10,001
Long-term debt ............ -- 4,250 -- 44 68
Stockholders' equity ...... 15,591 13,819 10,535 4,401 4,242
</TABLE>
- -------------------
(1) On October 20, 1993, the Company changed it fiscal year end from March
31 to December 31.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL CONDITION
During the year ended December 31, 1997, the Company's total assets
decreased approximately 8% to $22,880,459 from $24,832,257. Assets for 1996 were
restated to reflect the adoption of a new accounting pronouncement in 1997 to
on-balance sheet financing of the Company's credit facility with Fidelity
Funding.
Cash as of December 31, 1997, decreased $1,394,176, or approximately
62%, from December 31, 1996. Accounts receivable increased by $723,843,
primarily due to the delivery of orders late in 1997 for which payment had not
been received by year end. Inventories decreased $268,477, primarily due to the
write-off of approximately $2,111,000 for obsolete inventory and an increase in
inventory reserve. The charge was partially offset by an increase in inventory
needed to fill orders deliverable in early 1998.
Demonstration inventory decreased approximately 36% from $1,542,667 at
December 31, 1996, to $990,054 at December 31, 1997, due primarily to additional
allowance recorded in accordance with the Company's policy (Note 2).
Total current liabilities as of December 31, 1997 increased $525,979,
or approximately 8%, from December 31, 1996, primarily as a result of a $991,498
increase in accounts payable. Accounts payable increased due to the purchase of
inventory used to fill orders in late 1997 and early 1998. Notes payable
decreased by $613,921, or approximately 30%, from December 31, 1996, a primary
reason for an approximate 62% decrease in cash.
Total stockholders' equity increased $1,772,223, or approximately 13%,
from December 31, 1996, primarily because of two private equity placements and a
conversion of
<PAGE> 13
debt, which were partially offset by a $5,817,365 increase in accumulated
deficit as a result of the net loss for the year.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues
Revenues for the year ended December 31, 1997 were $21,765,181 an
approximately 28% increase over revenues for the year ended December 31, 1996.
The increase was due to an increase in videoconferencing system sales and to
growth in sales and account management commissions from wholly-owned subsidiary
ETI, which contributed about 34% of the Company's consolidated 1997 revenues.
ETI was acquired in October 1996.
The Company's backlog of purchase orders for service and/or equipment
at December 31, 1997 was approximately $9,000,000, an approximately 91% increase
over the backlog of purchase orders of approximately $4,700,000 at December 31,
1996.
Gross Margin
Gross margin as a percentage of revenues for the year ended December
31, 1997 was approximately 48%, up from approximately 29% for the year ended
December 31, 1996, due primarily to a full year of high margin sales and account
management commissions from ETI, a sales agency for a number of
telecommunications companies, and also due to an increase in sales of higher
margin videoconferencing system products and, corporate-wide cost reduction
initiatives. The percentage would have been higher had the Company not taken a
charge of approximately $2,111,000 to reflect obsolescence of certain inventory
and to increase inventory reserve.
Selling, General & Administrative Expenses
Selling, general and administrative expenses for the year ended
December 31, 1997 were $14,939,302, an increase of $4,728,361, or approximately
46%, over the year ended December 31, 1996, due to an increase in the Company's
sales, marketing and distribution initiatives in the United States (primarily
due to the October 1996 acquisition of ETI and its sales force) and the Far
East.
Research and Development Expenses
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 year ended December 31, 1997, the Company's research and
development expenses were $1,031,814, an approximate 13% decrease over the year
ended December 31, 1996. Expenses in 1996 had been somewhat higher than
historical levels, due to an expansion in the research and development workforce
to accommodate projects related to forthcoming generations of the Omega product
line and other software projects. Many of those
<PAGE> 14
projects were completed or were winding down by first quarter 1997, and the
workforce -- primarily at subsidiary VSI Solutions, Inc. -- was reduced.
Other Expenses/Income Taxes
Non-operating expenses and income taxes for the year ended December 31,
1997 were $269,410, an approximate 5% increase over non-operating expenses for
the year ended December 31, 1996.
Net Loss
Net loss for the year ended December 31, 1997 was $5,817,366, an
approximate 13% improvement over the net loss for the year ended December 31,
1996. Excluding a charge to reflect obsolescence of certain inventory and an
inventory reserve of approximately $2,111,000, the net loss for the year was
$3,706,366, an approximate 45% improvement over 1996. The decrease in the loss
was primarily due to an approximate 28% increase in revenues and a substantial
improvement in gross margins.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Revenues for the year ended December 31, 1996 decreased approximately
17% to $17,055,947 from the $20,450,958 recorded during the year ended December
31, 1995. The decrease was due primarily to lower revenues for INS, as the
sudden and unexpected death in early 1996 of INS' then-chairman and CEO, Bill
Rogers, adversely affected sales efforts during the year. Core sales of
videoconferencing systems also declined, due to longer than anticipated sales
cycles in closing key accounts.
The Company's backlog of purchase orders for service and/or equipment
at December 31, 1996 was approximately $4,700,000, an increase of approximately
62% over the December 31, 1995 order backlog of approximately $2,900,000.
Gross Margin
Gross margin as a percentage of revenues was approximately 29% for the
year ended December 31, 1996, a slight decrease from approximately 30% for the
year ended December 31, 1995.
Selling, General and Administrative Expenses
The increase in selling, general and administrative expenses of
$1,091,418, or approximately 12% over the year ended December 31, 1995 is the
result of additional administrative costs associated with the acquisitions of
INS and ETI, the addition of several new salespeople, and an increase in the
Company's sales and marketing expenses to support strategic partner BellSouth's
rollout of its videoconferencing sales and service program.
<PAGE> 15
Research and Development Expenses
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 year ended December 31, 1996, the Company's research and
development expenses were $1,192,010, an approximate 25% increase over the year
ended December 31, 1995. The increase in expense was a result of expanding the
research and development workforce to accommodate efforts relating to
forthcoming generations of the Omega product line and other software products.
For the year ended December 31, 1996, development costs of $153,007 were
capitalized as software development costs, compared to $345,097 capitalized for
the year ended December 31, 1995.
Other Expenses
Non-operating expenses for the year ended December 31, 1996 decreased
approximately 62% to $257,610, from $680,616 for the year ended December 31,
1995. This decrease was primarily due to a reduction in costs associated with
the Company's secured credit facilities.
Net Loss
Net loss for the year ended December 31, 1996 was $6,706,894,
representing approximately 39% of revenue, as compared to $5,340,557, or
approximately 26% of revenue, for the year ended December 31, 1995. The increase
in losses was due to an approximate 17% decrease in revenues as well as a 12%
increase in selling, general and administrative expenses. The decrease in
revenues was attributed to lower revenues for INS during 1996 and a longer than
anticipated sales cycle for some videoconferencing orders.
LIQUIDITY AND SOURCES OF CAPITAL
General
On February 23, 1998, the Company issued $3,000,000 of 5% Convertible
Debentures due February 2000 (the "Debentures"), the proceeds of which were
utilized for working capital purposes. Subject to acceptance by the Company, the
Debenture purchaser may purchase an additional $2,000,000 of Debentures on or
before May 24, 1998. The Debentures are convertible into shares of common stock
of the Company at the option of the holder, as follows: 33-1/3% commencing on
May 24, 1998; 66-2/3% commencing on June 23, 1998; and 100% commencing on July
23, 1998. Any conversion shall be the lessor of (i) $2.00 per share or (ii) 85%
of the average closing bid price of the Company's Common Stock. "Average closing
bid price" is defined to mean the lowest average of the daily last bid price for
the Common Stock for any three trading days in any 20 day period preceding the
conversion. The Company may, at its option, redeem the Debentures at any time
prior to February 23, 1999 at a price equal to 115% of the outstanding principal
amount thereof, plus any accrued but unpaid interest.
During 1997, the Company issued an aggregate of 2,253,882 shares of
Common Stock in private placement transactions. The net proceeds of $2,487,500
were added to the working capital of the Company and utilized for general
corporate purposes.
As of December 31, 1997, the Company had cash and cash equivalents of
$866,009. The Company's liquidity sources also include existing credit
facilities. In order to meet its cash flow and working capital requirements, the
Company may require additional financing in 1998. This additional funding could
be in the form of debt, equity or both. A reduction in operating expenses could
also be effected. However, there can be no assurance that the Company will be
able to obtain such financing if and when needed, or that if obtained, such
financing will be sufficient or on terms and conditions acceptable to the
Company.
<PAGE> 16
Credit Facilities
VSI
Since June 1995, Videoconferencing Systems, Inc. (VSI), a subsidiary of
the Company, has had a revolving credit and security agreement with Fidelity
Funding of California, Inc. This credit facility provides the Company with up to
$4,000,000 at an interest rate of prime plus 2%. Funds available under the
credit facility are based on 80% of eligible VSI accounts receivable invoices,
with certain restrictions. The credit facility is secured by the accounts
receivable, inventory and certain fixed assets of VSI. At March 9, 1998,
approximately $325,000 was owed to Fidelity Funding under the credit facility.
In March, 1998, VSI was approved for a working capital loan for
approximately $2,000,000 from AmTrade International Bank of Georgia. The loan is
guaranteed by the Export-Import Bank of the United States, and is collateralized
by a letter of credit from a VSI customer. Funds will be used for
pre-/post-export financing for the manufacture and delivery of videoconferencing
equipment in China. The interest rate is prime plus 2.5%. Repayment will be made
through proceeds of the letter of credit, which will be applied first to the
loan principal and interest, with the remaining amount remitted to VSI.
ETI
In October, 1997, ETI, a wholly-owned subsidiary of the Company,
entered into a revolving credit and security agreement with Foothill Capital
Inc. This credit facility provides ETI with up to $1,500,000 at an interest rate
of prime plus 2%. Funds available under the credit facility are based on 80% of
eligible ETI accounts receivable invoices, with certain restrictions. The credit
facility is secured by accounts receivables, inventory and fixed assets of ETI.
At March 9, 1998, approximately $157,000 was owed to Foothill Capital.
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 prime plus 1%. The
credit facility is secured by 550,000 shares of Common Stock of the Company,
held in escrow by Kredietbank, n.v. At March 9, 1998, no amounts were
outstanding under this credit facility.
As of December 31, 1997, Videoconferencing Systems, n.v. had a secured
bank credit facility of $219,030, of which $154,938 was outstanding at that
time.
INS
In December 1996, INS, a wholly-owned subsidiary of the Company,
established a revolving credit and security agreement with Presidential
Financial Corporation. This credit facility provides INS with up to $750,000 at
an interest rate of prime plus 3%. Funds available under the credit facility are
based on 80% of accounts receivable invoices, with certain restrictions. The
credit facility is secured by accounts receivables, inventory and fixed assets
of INS. At March 9, 1998, approximately $121,000 was owed to Presidential
Financial Corporation.
<PAGE> 17
ACCUMULATED DEFICIT
As of December 31, 1997, the Company had an accumulated deficit of
$29,941,875, of which $5,817,366 was realized in 1997. The Company believes
that given its highest ever purchase order backlog, recent debt financing for
working capital purposes, several revolving credit facilities and recent
management changes, the Company will continue to aggressively compete in the
global videoconferencing and multimedia marketplace.
As of December 31, 1997, the Company had operating loss carryforwards
for income tax purposes of approximately $20,000,000 available to reduce taxable
income through 2012. The Company also has research and development credits of
approximately $89,000 available to reduce income taxes payable through 2002.
During 1993, the Company experienced a change in control, as defined under
Section 382 of the Internal Revenue Code. As a result, the utilization of
approximately $7,000,000 in tax loss carryforwards will be limited to
approximately $1,000,000 annually.
YEAR 2000
As of December 31, 1997, 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. Expenditures for the Year 2000 project have not
had, nor are they expected to have, a material impact on the Company's
consolidated financial position, results of operations or cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which will be
effective for the Company beginning in fiscal 1998. The Company does not believe
that these statements will significantly change its financial statement
disclosure.
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.
<PAGE> 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are filed with this report:
Report of Independent Public Accountants
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996
Consolidated Statements of Operations for Years Ended December 31, 1997, 1996
and 1995
Consolidated Statement of Stockholders' Equity for Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows for Years Ended December 31, 1997, 1996
and 1995
Notes to Consolidated Financial Statements
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of VSI Enterprises, Inc.:
We have audited the accompanying consolidated balance sheet of VSI ENTERPRISES,
INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and the
related statements of operations, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VSI Enterprises, Inc. and
subsidiaries as of December 31, 1997 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 18, 1998
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of VSI Enterprises, Inc.:
We have audited the accompanying consolidated balance sheet of. VSI ENTERPRISES,
INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1996 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of VSI Enterprises,
Inc. and Subsidiaries as of December 31, 1996 and the consolidated results of
their operations and their consolidated cash flows for the year then ended in
conformity with generally accepted accounting principles.
We previously audited and reported on the consolidated statements of operations,
stockholders' equity, and cash flows of VSI Enterprises, Inc. and Subsidiaries
for the year ended December 31, 1995, prior to their restatement for the 1996
pooling of interests with Integrated Network Services, Inc. The contribution of
VSI Enterprises, Inc. and subsidiaries to total revenue and net loss represented
58% and 86% of the respective restated totals for 1995. Separate financial
statements of INS included in the restated consolidated statements of
operations, stockholders' equity and cash flows for the year ended December 31,
1995 were audited and reported on separately by other auditors.
We also have audited the combination of the accompanying consolidated statements
of operations, stockholders' equity and cash flows for the year ended December
31, 1995 after restatement for the 1996 pooling of interests; in our opinion,
such consolidated statements have been properly combined on the basis described
in Note 3 of the notes to the consolidated financial statements.
/s/ Grant Thornton LLP
Atlanta, Georgia
February 21, 1997
<PAGE> 21
VSI ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
ASSETS 1997 1996
- ------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 866,009 $ 2,260,185
Accounts receivable, less allowance for doubtful
accounts of $447,174 and $271,000 at
December 31, 1997 and 1996, respectively 6,142,936 5,419,093
Inventories, less allowance of $178,235 and $494,000 at
December 31, 1997 and 1996, respectively 2,541,754 2,810,231
Demonstration inventory, net of allowance of $839,184
and $374,922 at December 31, 1997 and 1996,
respectively 990,054 1,542,667
Prepaid expenses and other current assets 438,665 365,435
------------ ------------
Total current assets 10,979,418 12,397,611
------------ ------------
PROPERTY AND EQUIPMENT, NET 1,194,908 1,356,313
------------ ------------
OTHER ASSETS:
Goodwill, net 9,020,715 9,537,558
Software development costs, net 658,052 980,110
Other long-term assets 1,027,366 560,665
------------ ------------
Total other assets 10,706,133 11,078,333
------------ ------------
$ 22,880,459 $ 24,832,257
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- ------------------------------------------------------- ------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 1,422,367 $ 2,036,288
Short-term borrowings 154,938 127,605
Accounts payable 3,401,547 2,410,049
Accrued expenses 1,116,326 1,158,951
Accrued Commissions 687,180 305,001
Deferred revenue 507,177 725,662
------------ ------------
Total current liabilities 7,289,535 6,763,556
------------ ------------
CONVERTIBLE DEBENTURES 0 4,250,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.00025 par value; authorized 800,000
shares, none issued and outstanding 0 0
Common stock, authorized 60,000,000 shares of $.00025
par value; issued and outstanding 46,184,970 and
39,516,249 shares at December 31, 1997 and 1996,
respectively 11,546 9,879
Additional paid-in capital 45,976,291 38,222,005
Accumulated deficit (29,941,875) (24,124,509)
Cumulative translation adjustment (455,038) (288,674)
------------ ------------
Total stockholders' equity 15,590,924 13,818,701
------------ ------------
$ 22,880,459 $ 24,832,257
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE> 22
VSI ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
(as restated
see Note 3)
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE:
Videoconferencing systems $ 12,168,107 $ 11,159,943 $ 11,920,437
System integration 2,145,388 4,346,723 8,530,521
Commissions from telephone network reselling 7,451,686 1,549,281 0
------------ ------------ ------------
21,765,181 17,055,947 20,450,958
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of videoconferencing systems 9,686,633 9,115,556 8,344,196
Cost of system integration 1,655,388 2,986,724 5,910,559
Selling, general, and administrative 14,939,302 10,210,941 9,119,523
Research and development 1,031,814 1,192,010 953,955
------------ ------------ ------------
27,313,137 23,505,231 24,328,233
------------ ------------ ------------
Loss from operations (5,547,956) (6,449,284) (3,877,275)
OTHER EXPENSES 76,169 257,610 680,616
------------ ------------ ------------
Net loss from continuing operations
before income taxes (5,624,125) (6,706,894) (4,557,891)
INCOME TAXES 193,241 0 10,483
------------ ------------ ------------
Net loss from continuing operations (5,817,366) (6,706,894) (4,568,374)
DISCONTINUED OPERATIONS:
Loss from operations (net of tax benefits of
$236,000) 0 0 (539,053)
Loss on disposal (net of tax benefit of $102,000) 0 0 (233,130)
------------ ------------ ------------
Loss from discontinued operations 0 0 (772,183)
------------ ------------ ------------
Net loss $ (5,817,366) $ (6,706,894) $ (5,340,557)
============ ============ ============
NET LOSS PER COMMON SHARE:
Loss from continuing operations $ (.13) $ (.18) $ (.15)
Loss from discontinued operations .00 .00 (.02)
------------ ------------ ------------
$ (.13) $ (.18) $ (.17)
============ ============ ============
Weighted average shares outstanding 43,606,481 36,476,932 31,070,908
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 23
Page 1 of 2
VSI ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL CUMULATIVE
NUMBER OF PAID-IN ACCUMULATED TRANSLATION
SHARES PAR VALUE CAPITAL DEFICIT ADJUSTMENT TOTAL
---------- --------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 (AS RESTATED - NOTE 3) 26,481,868 $ 6,620 $16,600,715 $(12,077,058) $(129,089) $ 4,401,188
Purchase of treasury stock of INS 0 0 (163,561) 0 0 (163,561)
Exercise of warrants, net of exercise costs
of $77,989 6,424,470 1,606 8,473,641 0 0 8,475,247
Exercise of stock options 298,533 75 372,755 0 0 372,830
Issuance of common shares for employee stock
purchase plan 52,975 13 68,181 0 0 68,194
Issuance of common shares for conversion of
notes payable and related costs 646,275 161 722,739 0 0 722,900
Sale of common shares 362,319 91 499,909 0 0 500,000
Issuance of common shares in lieu of cash
compensation 452,736 113 342,376 0 0 342,489
Issuance of common shares for products and
services 100,000 25 874,083 0 0 874,108
Issuance of common shares for acquisition of
VSI solutions 188,000 47 300,753 0 0 300,800
Foreign currency translation adjustment 0 0 0 0 (18,580) (18,580)
Net loss 0 0 0 (5,340,557) 0 (5,340,557)
---------- ------- ----------- ------------ --------- ------------
</TABLE>
<PAGE> 24
Page 2 of 2
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL CUMULATIVE
NUMBER OF PAID-IN ACCUMULATED TRANSLATION
SHARES PAR VALUE CAPITAL DEFICIT ADJUSTMENT TOTAL
---------- --------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 (AS RESTATED--NOTE 3) 35,007,176 $ 8,751 $28,091,591 $(17,417,615) $(147,669) $ 10,535,058
Issuance of common shares in lieu of cash
compensation 110,775 28 139,464 0 0 139,492
Issuance of common shares for employee stock
purchase plan 44,477 11 109,413 0 0 109,424
Exercise of stock options 305,631 76 298,789 0 0 298,865
Issuance of common shares for products and
services 250,000 63 599,946 0 0 600,009
Issuance of common shares for conversion of
notes payable 244,817 61 337,052 0 0 337,113
Private placement of common shares, net of
issuance costs of $41,998 1,122,361 281 2,388,247 0 0 2,388,528
Issuance of common shares for acquisition of
Eastern Telecom, Inc. 2,007,339 502 5,499,498 0 0 5,500,000
Issuance of common shares for conversion of
convertible debentures 423,673 106 758,005 0 0 758,111
Foreign currency translation adjustment 0 0 0 0 (141,005) (141,005)
Net loss 0 0 0 (6,706,894) 0 (6,706,894)
---------- ------- ----------- ------------ --------- ------------
BALANCE, DECEMBER 31, 1996 39,516,249 9,879 38,222,005 (24,124,509) (288,674) 13,818,701
Issuance of common shares for products
and services 550,000 138 650,001 0 0 650,139
Issuance of common shares for
conversion of convertible debentures 3,465,473 866 4,352,772 0 0 4,353,638
Issuance of common shares for employee
stock purchase plan 146,612 37 156,002 0 0 156,039
Issuance of common shares for
conversion of private placement 2,253,882 563 2,486,937 0 0 2,487,500
Exercise of stock options 252,754 63 108,574 0 0 108,637
Foreign currency translation adjustment 0 0 0 0 (166,364) (166,364)
Net loss for the year 0 0 0 (5,817,366) 0 (5,817,366)
---------- ------- ----------- ------------ --------- ------------
BALANCE, DECEMBER 31, 1997 46,184,970 $11,546 $45,976,291 $(29,941,875) $(455,038) $ 15,590,924
========== ======= =========== ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 25
VSI ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
(as restated
see Note 3)
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,817,366) $ (6,706,894) $ (5,340,557)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,438,054 1,420,547 1,092,666
Provision for doubtful accounts 176,174 62,000 431,512
Allowance to reduce inventory to lower of cost or market (315,645) 250,000 78,025
Issuance of common stock in lieu of cash compensation 0 139,492 342,489
Loss on sale of property and equipment 0 28,145 1,069
Changes in related assets and liabilities, net of businesses acquired:
Accounts receivable (900,018) 2,797,035 (2,472,752)
Inventories 584,122 794,139 (1,948,281)
Demonstration inventory 568,877 (1,491,934) (59,109)
Prepaid expenses and other current assets (73,230) 344,616 (197,925)
Accounts payable 991,498 (139,772) 815,555
Accrued expenses 339,554 (746,742) 196,400
Deferred revenue (218,484) 289,483 139,955
------------ ------------ ------------
Net cash used in operating activities (3,226,464) (2,959,885) (6,920,953)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for business acquisitions, net of cash acquired 0 (3,668,131) (62,946)
Proceeds from sale of property and equipment 0 30,314 30,213
Purchases of property and equipment (400,230) (418,304) (623,625)
Capitalized software development costs (77,886) (153,007) (345,097)
Other assets (442,596) (405,760) 43,632
------------ ------------ ------------
Net cash used in investing activities (920,712) (4,614,888) (957,823)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in notes payable and short-term borrowings, net (586,588) (2,062,849) 1,433,986
Proceeds from convertible debentures 0 5,000,000 0
Proceeds from exercise of stock options and warrants, net of related costs 264,676 298,865 8,848,077
Proceeds from issuance of common stock, net of issuance costs 650,139 109,424 568,194
Proceeds from private placements financings, net of issuance costs 2,487,500 2,388,528 0
Acquisition of treasury stock by INS 0 0 (163,561)
------------ ------------ ------------
Net cash provided by financing activities 2,815,727 5,733,968 10,686,696
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (62,727) (101,623) (74,361)
------------ ------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,394,176) (1,942,428) 2,733,559
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,260,185 4,202,613 1,469,054
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 866,009 $ 2,260,185 $ 4,202,613
============ ============ ============
SUPPLEMENTARY DISCLOSURES:
Interest paid $ 247,744 $ 357,216 $ 436,059
============ ============ ============
Income taxes paid $ 180,000 $ 0 $ 10,483
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of debt to common stock $ 4,353,638 $ 1,095,224 $ 722,900
============ ============ ============
Common stock issued for products and services $ 650,139 $ 600,009 $ 874,108
============ ============ ============
ACQUISITIONS OF BUSINESSES:
Fair value of assets acquired 0 9,540,923 396,282
Cash paid 0 (3,685,128) (78,318)
Common stock and options issued 0 (5,500,000) (300,800)
------------ ------------ ------------
Liabilities assumed $ 0 $ 355,795 $ 17,164
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 26
VSI ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. NATURE OF BUSINESS
VSI Enterprises, Inc. and its wholly-owned subsidiaries (the "Company")
were incorporated in Delaware in September 1988. The Company provides
network multimedia products and services including videoconferencing
systems, software, and service; design, installation, and integration of
local and wide area computer networks; and commission-based reselling of
telephone network services for telephone operating companies and related
communication entities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, including all wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
For financial reporting purposes, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
<PAGE> 27
INVENTORIES
Inventories primarily consist of videoconferencing system and integration
services, components and parts and are valued at the lower of cost
(first-in, first-out method) or market.
DEMONSTRATION INVENTORY
Demonstration inventory is stated at cost. Demonstration inventory
allowance is provided for in amounts sufficient to reflect the asset at
its estimated fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided for
in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated useful lives on straight-line basis.
GOODWILL
The excess acquisition cost over the fair value of net assets of acquired
businesses are amortized over 20 years on a straight-line basis.
Accumulated amortization of goodwill was $802,584 and $309,846 at
December 31, 1997 and 1996, respectively. Amortization charged to
operations was $492,738, $156,784, and $44,799 for the years ended
December 31, 1997, 1996, and 1995, respectively.
SOFTWARE DEVELOPMENT COSTS
All software development costs are charged to expense as incurred until
technological feasibility has been established for the product. Software
development costs incurred after technological feasibility has been
established are capitalized and amortized, commencing with product
release, on a straight-line basis over three years or the useful life of
the product, whichever is shorter. Accumulated amortization of software
development costs was $1,052,194 and $652,249 at December 31, 1997 and
1996, respectively. Amortization expense charged to operations was
$399,945, $416,407 and $180,352 for the years ended December 31, 1997,
1996 and 1995 respectively.
INVESTMENTS
The Company accounts for investments in entities in which it owns less
than 20% under the cost method. At December 31, 1997 and 1996, other
assets included $544,781 and
<PAGE> 28
$406,000, respectively, representing the Company's cost investment in
Global Telemedix. Global Telemedix provides computer hardware and
software to healthcare providers. At December 31, 1997, other assets also
included $400,000, representing the Company's cost investment in
Educational Video Conferencing ("EVC"). EVC acts as a marketing and
technological bridge between higher education institutions and
corporations. Investments are included in other long term assets in the
accompanying consolidated balance sheets. At December 31, 1997 and 1996,
receivables outstanding from Global Telemedix and EVC were approximately
$250,000 and $0, respectively. Further, sales to Global Telemedix and EVC
were approximately $1,038,000, $35,000 and $0 for the years ended
December 31, 1997, 1996 and 1995 respectively.
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 consolidated balance sheets are
appropriately valued.
FOREIGN CURRENCY TRANSLATION
The asset and liability accounts of the Company's foreign subsidiaries
are translated into U.S. dollars at the current exchange rate in effect
at the balance sheet date. Stockholders' equity is translated at
historical rates. Income statement items are translated at average
currency exchange rates. The resulting translation adjustment is recorded
as a separate component of stockholders' equity.
Transaction gains and losses were not significant for any period
presented.
REVENUE RECOGNITION
Revenue from sales of videoconferencing systems and related maintenance
contracts on these systems are included in videoconferencing systems
revenues. Revenue on system sales are recognized upon shipment. Revenue
on maintenance contracts are recognized over the term of the related
contract.
System integration revenues include computer network design, installation
and integration services and sales of related computer hardware. Revenues
on integration services are recognized as services are performed.
Integration hardware revenues are recognized upon shipment.
Commission revenue from telephone network service sales are recognized
upon receipt of order and when the Company has no further obligation
related to the order.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates applied to taxable
income. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided for deferred tax assets
when it is more likely than not that the asset will not be realized.
(Note 9)
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees". Effective in 1995, the Company adopted the disclosure
option of Statement of Financial Accounting
<PAGE> 29
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 requires that companies that do not choose to account for
stock-based compensation as prescribed by the statement, shall disclose
the proforma effects on earnings and earnings per share as if SFAS No.
123 had been adopted. Additionally, certain other disclosures are
required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS No. 123. (Note 8)
NET LOSS PER SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". That
statement requires the disclosure of basic net income (loss) per share
and diluted net income (loss) per share when different from basic. Basic
net income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted net income (loss) per share
gives effect to all potentially dilutive securities. There is no
difference between basic loss per share and diluted loss per share for any
period presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
notes payable and, in 1996, convertible debentures. Estimates of fair
value of these instruments are as follows:
CASH AND CASH EQUIVALENTS
The carrying amount of cash and cash equivalents approximates
fair value due to the relatively short maturity of these
instruments.
NOTES PAYABLE AND CONVERTIBLE DEBENTURES
The carrying amount of the Company's notes payable and
convertible debentures approximate fair value based on borrowing
rates currently available to the Company for borrowings with
comparable terms and conditions.
NEW ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which will be effective for the Company beginning in fiscal 1998. The
Company does not believe that these statements will significantly change
its financial statement disclosures.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the current year presentation.
TECHNOLOGICAL CHANGE AND NEW PRODUCTS
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and frequent
product introductions. Product introductions are generally characterized
by increased functionally and better picture quality at reduced prices.
The introduction of products embodying new technology may render existing
products obsolete and unmarketable. The Company's ability to successfully
develop and introduce on a timely basis new and enhanced products that
embody new technology, and achieve levels of functionality and price
acceptable to the market, will be a significant factor in the Company's
ability to grow and to remain competitive. If the Company is unable, for
technological or other reasons, to develop competitive products in a
timely manner in response to changes in the industry, the Company's
business and operating results will be materially and adversely affected.
DEPENDENCE ON THIRD PARTIES
Substantially all of the Company's components, subsystems and assemblies
are made by outside vendors. Disruption in supply, a significant increase
in price of one or more of these components or failure of a third-party
supplier to remain competitive in functionality or price could have a
material adverse effect on the Company's business and operating results.
There can be no assurance that the Company will not experience such
problems in the future. Similarly, excessive rework costs associated with
defective components or process errors associated with the Company's
anticipated new product line of videoconferencing systems could adversely
affect the Company's business and operating results.
FOREIGN SALES AND OPERATIONS
International sales and operations are subject to inherent risks,
including difficulties and delays in obtaining pricing approvals and
reimbursement, unexpected changes in regulatory requirements, tariffs
and other barriers, political instability, difficulties in staffing and
managing foreign operations, longer payment cycles, greater difficulty
in accounts receivable collection and adverse tax consequences. Currency
translation gains and losses on the conversion to United States dollars
and international operations could contribute to fluctuations in the
Company's results of operations. If for any reason exchange or price
controls or other restrictions on the conversion or repatriation of
foreign currencies were imposed, the Company's operating results could
be adversely affected. There can be no assurance that these factors
will not have an adverse impact on the Company's future international
sales and operations and, consequently, on the Company's operating
results.
COMPETITION
Competition in the video communications market is intense. In the
videoconferencing market, the Company's primary competitors are
PictureTel Corporation and VTEL Corporation, each of which has
greater resources and market share than those of the Company. The
Company expects other competitors, some with significantly greater
technical and financial resources, to enter the videoconferencing
market. If the Company cannot continue to offer new videoconferencing
products with improved performance and reduced cost, its competitive
position will erode. Moreover, competitive price reductions may
adversely affect the Company's results of operations.
<PAGE> 30
3. MERGER AND ACQUISITIONS
INS MERGER
On June 25, 1996, the Company, through its wholly-owned subsidiary, INS
Acquisition Co., issued 481,670 shares of its common stock in exchange
for all of the outstanding common stock of Integrated Network Services,
Inc. ("INS"). The merger has been accounted for as a pooling of interests
and accordingly, the Company's consolidated financial statements have
been restated to include the accounts and operations of INS for all
periods prior to the merger. INS provides integration services for local
and wide area networks.
Separate results of operations for the periods prior to the merger are as
follows for the years ending December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Revenue:
VSI $ 12,709,224 $ 11,920,437
INS 4,346,723 8,530,521
------------ ------------
Combined $ 17,055,947 $ 20,450,958
============ ============
Net (loss) earnings from continuing
operations:
VSI $ (5,992,477) $ (4,592,340)
INS (714,417) 23,966
------------ ------------
Combined $ (6,706,894) $ (4,568,374)
============ ============
Net (loss):
VSI $ (5,992,477) $ (4,592,340)
INS (714,417) (748,217)
------------ ------------
Combined $ (6,706,894) $ (5,340,557)
============ ============
</TABLE>
ACQUISITIONS
In October 1996, the Company acquired all of the outstanding common stock
of Eastern Telecom, Inc. ("ETI") in exchange for 2,007,339 shares of VSI
common stock, 127,754 options to purchase VSI common stock at less than
$.01 per share and $3,500,000 in cash. The cash portion of the purchase
was funded from the issuance of $5,000,000 of convertible debentures. The
acquisition was valued at approximately $9,185,000 including acquisition
costs of approximately $185,000. ETI is engaged in the selling of network
services of telephone operating companies and long distance carriers.
<PAGE> 31
In April 1995, the Company acquired all of the outstanding common stock
of cR Solutions, Inc. in exchange for 188,000 shares of VSI common stock.
The transaction was valued at approximately $379,000, including
acquisition costs of approximately $78,000. cR Solutions, whose name as
changed to VSI Solutions, is engaged in the development of software for
videoconferencing systems.
The ETI and cR Solutions acquisitions were accounted for as purchases.
Accordingly, the purchase prices were allocated to assets and liabilities
based on their estimated fair values at the dates of acquisition. Results
of operations of ETI and cR Solutions have been included in the
consolidated financial statements from the respective date of each
acquisition. Goodwill of approximately $9,000,000 related to the ETI
purchase is being amortized on a straight-line basis over 20 years.
The unaudited pro forma results of operations which follow assume that
the ETI acquisition had occurred at the beginning of each period
presented. The results of operations of cR Solutions were not material.
In addition to combining the historical results of operations of the
companies, the pro forma calculations include adjustments for the
estimated effects on the Company's historical results of operations for
amortization and interest. These results are not necessarily indicative
of the results that would have occurred if the transactions had occurred
at the beginning of each period presented nor are the results indicative
of future results.
Unaudited pro forma results of operations for the years ended December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revenue $20,962,562 $25,068,972
Net loss from continuing operations (5,906,652) (3,364,029)
Net loss (5,906,652) (4,136,212)
Net loss per common share from
continuing operations $ (.16) $ (.10)
Net loss per common share (.16) (.13)
</TABLE>
4. DISCONTINUED OPERATIONS
Subsequent to December 31,1995, INS discontinued the operations of its
cable television system design and commercial personal computer
distribution businesses. These operations are accounted for as
discontinued operations, and accordingly, their operations are segregated
in the accompanying consolidated statements of operations. Net sales,
operating expenses, and other expenses for 1995 have been reclassified
for amounts associated with the discontinued businesses.
<PAGE> 32
The loss on disposal of discontinued businesses, including provisions to
reduce related assets to estimated net realizable value and estimated
losses from operations during the disposal period, was $233,130. Summary
operating results of discontinued operations, excluding the loss on
disposal, is as follows for the year ended December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
Revenue $6,336,394
Net loss from discontinued operations
(net of tax benefits of $236,000) (539,053)
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 1997
and 1996:
<TABLE>
<CAPTION>
Estimated
1997 1996 Service Life
-------------- -------------- -------------
<S> <C> <C> <C>
Machinery and equipment $3,199,101 $3,095,859 3-10 years
Furniture and fixtures 668,132 475,068 10 years
Leasehold improvements 169,857 65,933 5 years
-------------- --------------
4,037,090 3,636,860
Less accumulated depreciation 2,842,182 2,280,547
-------------- --------------
$1,194,908 $1,356,313
============== ==============
</TABLE>
Certain property and equipment are pledged under financing arrangements.
(Note 6)
Depreciation expense charged to operations was approximately $561,635,
$814,000, and $722,000 for the years ended December 31, 1997, 1996 and
1995, respectively and is included in selling, general and administrative
expense in the accompanying consolidated statements of operation.
<PAGE> 33
6. NOTES PAYABLE AND SHORT-TERM BORROWINGS
NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
VSI line of credit; provides for maximum borrowings of $4,000,000,
limited to 80% of eligible accounts receivable, interest payable monthly
at the prime rate plus 2% (10.5% at December 31, 1997); collateralized
by accounts receivable, certain property and equipment and inventory of
VSI. $ 905,684 $1,534,647
INS line of credit; provides for maximum borrowings of $750,000, limited
to 80% of eligible accounts receivable; interest payable monthly at the
prime rate plus 3% (11.5% at December 31, 1997); collateralized by
accounts receivable, property and equipment and inventory of INS. 279,355 181,725
ETI line of credit; provides for maximum borrowings of $1,500,000,
limited to 80% of eligible accounts receivable; interest payable monthly
at the prime rate plus 2% (10.5% at December 31, 1997); collateralized
by accounts receivable, property and equipment and inventory of ETI. 210,543 0
Note payable to bank of European subsidiary; interest payable monthly at 5% 26,785 315,278
Other 0 4,638
---------- ----------
$1,422,367 $2,036,288
========== ==========
</TABLE>
In 1997, the Company adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (the
"Statement"). This Statement provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. At December
31, 1997 and 1996, the Company has recognized approximately $1,396,000
and $1,716,000 of accounts receivable financing, respectively, as notes
payable in the accompanying balance sheets.
During 1996, note agreements with directors were terminated. The
remaining balances of these notes of $299,656 plus accrued interest of
$37,457, were retired by the issuance of 244,817 common shares. Interest
expense under notes due to directors totaled
<PAGE> 34
approximately $0, $16,000, and $71,000 for the years ended December 31,
1997, 1996, and 1995, respectively.
The common stock and common stock purchase warrants issued as
consideration for the note agreements with the director have been
accounted for as debt issue costs and are amortized on a straight-line
basis over the terms of the agreements.
SHORT-TERM BORROWINGS
At December 31, 1997, the Company's foreign subsidiary had short-term
borrowings which provided for maximum borrowings of approximately
$219,000 and $570,000 at December 31, 1997 and 1996, respectively. These
bank credit facilities are collateralized by the subsidiary's accounts
receivable and inventory and bear interest at 8.75%. Outstanding
borrowings under these agreements were $ 154,938 and $127,605 at December
31, 1997 and 1996, respectively.
7. CONVERTIBLE DEBENTURES
In September 1996, the Company issued $5,000,000 of 5% convertible
debentures, due in September 1999. The debentures were convertible into
common stock at the lesser of the per share market price at the time of
funding or 80% of the per share price of the common stock at the time of
conversion. During 1997 and 1996, all convertible debentures amounting to
$5,000,000 plus accrued interest of $111,749 were converted into
3,889,146 common shares. As of December 31, 1997, there were no
outstanding convertible debentures.
8. STOCK OPTIONS, WARRANTS, AND EMPLOYEE STOCK PURCHASE PLAN
STOCK OPTION PLANS
The Company's board of directors has approved a stock option plan which
covers up to 2,700,000 shares of common stock. The plan provides for the
expiration of options ten years from the date of grant and requires the
exercise price of the options granted to be at least equal to 100% of
market value on the date granted. Stock options transactions for each of
the three years in the year ended December 31, 1997 are summarized below:
<PAGE> 35
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 1,923,425 $1.63 1,936,967 $1.48 1,285,012 $1.01
Granted 336,000 1.55 550,954 2.27 1,002,646 2.01
Exercised (252,754) (.84) (305,631) .98 (298,533) 1.25
Forfeited (103,202) 2.69 (258,865) 2.58 (52,158) 1.25
--------- ----- --------- ----- --------- -----
Outstanding, end of year 1,903,469 1.72 1,923,425 $1.63 1,936,967 $1.48
========= ===== ========= ===== ========= =====
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------
Weighted
Range of Number Average Weighted Number Weighted
Excise Outstanding at Remaining Average Exercisable at Average
Price December 31, Contractual Exercise December 31, Exercise
1997 Life (Years) Price 1997 Price
---------- -------------- -------------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C>
$0.47-0.94 397,667 6.7 $ .63 397,667 $0.63
$1.06-1.94 944,002 7.8 1.45 632,170 1.45
$2.13-2.81 336,854 8.0 2.35 194,854 2.35
$3.63-4.31 224,946 8.1 3.88 122,466 3.88
----------- -------- ------- ---------- -------
1,903,469 7.6 $1.72 1,347,157 $1.72
=========== ======== ======= ========== =======
</TABLE>
The Company uses the intrinsic value method in accounting for its stock
option plans. In applying this method, no compensation cost has been
recognized. Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant dates for awards
under those plans, the Company's net loss and loss per share would have
resulted in the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Net loss As reported $(5,817,366) $(6,706,894) $(5,340,557)
Pro forma (6,490,242) (7,509,903) (5,615,345)
Net loss per common share As reported $ (.13) $ (.18) $ (.17)
Pro forma (.15) (.21) (.18)
</TABLE>
<PAGE> 36
For purposes of the pro forma amounts above, the fair value of each
option grant was estimated on the date of grant using the Black-Scholes
options-pricing model with the following weighted average assumptions
used for grants in 1997, 1996 and 1995, respectively; expected volatility
of 88%, 110% and 100% risk-free interest rates of 5.9%-6.7%, 5.3%-6.6%
and 5.8%-7.8% and expected lives of 3-7 years for all periods presented.
WARRANTS
In connection with the purchase of the outstanding notes payable and
establishment of a line of credit during 1994, 250,000 common stock
purchase warrants were granted to a director at an exercise price of
$0.40 per share. These warrants expire in July 2004.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan ("Plan") that provides
for the sale of up to 300,000 shares of common stock to eligible
employees. The purchase price for shares of common stock purchased
pursuant to the Plan is the lesser of 85% of the fair market value of
common stock on the first pay date or last pay date of each plan period.
146,612 and 44,477 shares of common stock were purchased by employees
under this Plan for the years ended December 31, 1997 and 1996,
respectively.
9. INCOME TAXES
The Company's temporary differences result in a net deferred income tax
asset which is reduced to zero by a related deferred tax valuation
allowance, summarized as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $7,700,000 $6,232,000
Nondeductible accruals and allowances 758,000 359,000
Capitalized inventory costs 147,000 151,000
Tax credit carryforwards 89,000 89,000
Other 205,000 219,000
---------- ----------
Gross deferred tax assets 8,899,000 7,050,000
Deferred tax asset valuation allowance (8,689,000) (6,883,000)
---------- ----------
Net deferred tax asset 210,000 167,000
---------- ----------
Deferred tax liabilities (210,000) (167,000)
---------- ----------
Net deferred tax $ 0 $ 0
========== ==========
</TABLE>
Income tax expense for 1997 represents state income taxes associated with
the operations
<PAGE> 37
of ETI and are calculated using the statutory rates applicable in the
various states to which income has been apportioned. Income tax expense
for 1995 represents income tax expense of INS and approximated income
taxes as computed at the statutory rates for the separate pretax earnings
of INS.
At December 31, 1997, the Company had operating loss carryforwards for
U.S. income tax purposes of approximately $20,000,000 available to reduce
future taxable income and approximately $89,000 of investment and
research and experimental credits available to reduce future income taxes
payable, which expire in varying amounts through the year 2012.
The Company's European subsidiary has net operating loss carryforwards of
approximately $3,000,000 that can be used to offset future taxable
income. These carryforwards can be carried forward indefinitely. The
resulting deferred income tax asset has been reduced to zero by a related
valuation allowance.
The Company experienced a change in control, as defined under Section 382
of the Internal Revenue Code, during calendar year 1993. As a result, the
utilization of approximately $7,000,000 in tax loss carryforwards will be
limited to approximately $1,000,000 annually.
10. MAJOR CUSTOMERS
Revenue from healthcare providers and related entities comprised
approximately 10%, 25%, and 42% of consolidated revenues for the years
ended December 31, 1997, 1996, and 1995, respectively. Revenue from
telephone operating companies and related communications entities
comprised approximately 43%, 23%, and 18% of consolidated revenues for the
years ended December 31, 1997, 1996, and 1995, respectively. At December
31, 1997 and 1996, accounts receivable from telephone operating companies
and related communication entities comprised 44% and 46%, respectively, of
consolidated receivables, and accounts receivable from health care
providers comprised 7% and 17%, respectively of consolidated receivables.
Sales to one customer accounted for approximately 27%, 14%, and 12% of
consolidated sales for the years ended December 31, 1997, 1996, and 1995,
respectively. Additionally, approximately 28% of consolidated accounts
receivable at December 31, 1997 were from one customer; at December 31,
1996, approximately 43% of consolidated accounts receivable were from two
customers, accounting for 31% and 12% of consolidated accounts receivable.
Management believes that concentration of credit risk with respect to
trade receivables is minimal due to the composition of the customer base.
The Company's customers are primarily large national and multinational
companies and agencies of the U.S. government. Allowances are maintained
for potential credit losses, and such losses have been within
management's expectations.
The Company's operations are subject to rapid technological developments.
Management
<PAGE> 38
periodically evaluates the realizability of its technology-related
assets, including inventories, software development costs and goodwill.
During the year ended December 31, 1997, the Company recorded
approximately $2,111,000 of additional cost of videoconferencing systems
related to the write down of certain inventories determined to be
technologically obsolete. Management believes that no material impairment
of remaining inventories and other assets exists at December 31, 1997. It
is possible, however, that management's estimates may change in the near
term due to technological, regulatory, and other changes in the Company's
industry.
11. OPERATIONS BY SEGMENT
The following table presents information regarding the Company's
different geographical regions:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Revenue:
United States $ 18,996,899 $ 14,556,279 $ 17,723,799
Europe 2,768,282 2,499,668 2,727,159
------------ ------------ ------------
$ 21,765,181 $ 17,055,947 $ 20,450,958
============ ============ ============
Operating loss:
United States $ (5,510,144) $ (5,721,928) $ (2,501,593)
Europe (37,812) (727,356) (1,375,682)
------------ ------------ ------------
$ (5,547,956) $ (6,449,284) $ (3,877,275)
============ ============ ============
Capital expenditures:
United States $ 331,897 $ 333,588 $ 520,053
Europe 68,333 84,716 103,572
------------ ------------ ------------
$ 400,230 $ 418,304 $ 623,625
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---------------------------
<S> <C> <C>
Identifiable assets:
United States $22,002,184 $23,421,755
Europe 878,275 1,410,502
----------- -----------
$22,880,459 $24,832,257
=========== ===========
</TABLE>
<PAGE> 39
The following table presents information regarding the Company's
different industry segments:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1997 1996
------------------------------------
<S> <C> <C>
Revenue:
Videoconferencing systems $ 14,313,495 $ 15,506,666
Telephone network reselling 7,451,686 1,549,281
------------ ------------
$ 21,765,181 $ 17,055,947
============ ============
Operating (loss) income:
Videoconferencing systems $ (6,849,741) (6,935,577)
Telephone network reselling 1,301,785 486,293
------------ -----------
$ (5,547,956 $ (6,449,284)
============ ============
Capital Expenditures:
Videoconferencing systems $ 98,096 369,117
Telephone network reselling 302,134 49,187
------------ -----------
$ 400,230 $ 418,304
============ ============
Identifiable Assets
Videoconferencing systems $ 11,348,173 $ 14,564,569
Telephone network reselling 11,532,286 10,267,688
------------ ------------
$ 22,880,459 $ 24,832,257
============ ============
</TABLE>
The Company acquired its telephone network reselling subsidiary in October
1996.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases office space and equipment under noncancelable
operating leases expiring at various dates through February 2002. Rent
expense for the years ended December 31, 1997, 1996, and 1995 was
approximately $572,000, $660,000, and $735,000, respectively. Approximate
minimum annual future rental payments under the leases are as follows at
December 31:
<TABLE>
<CAPTION>
Year ending:
<S> <C>
1998 $ 432,000
1999 341,000
2000 328,000
2001 360,000
2002 216,000
----------
$1,677,000
==========
</TABLE>
LITIGATION
In January 1997, the Company together with an officer were named as
defendants in a
<PAGE> 40
lawsuit filed by certain stockholders of the Company. The lawsuit, which
purported to represent a class of stockholders, alleged that the
defendants made certain misrepresentations and omissions in connection
with certain disclosures about the Company. On August 18, 1997, a motion
filed by the Company to dismiss the lawsuit was granted.
The Company is also 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.
13. SUBSEQUENT EVENTS
On February 23, 1998, the Company issued $3,000,000 of 5% Convertible
Debentures due February 2000 (the "Debentures"), the proceeds of which
were utilized for working capital purposes. Subject to acceptance by the
Company, the Debenture purchaser may purchase an additional $2,000,000 of
Debentures on or before May 24, 1998. The Debentures are convertible into
shares of common stock of the Company at the option of the holder, as
follows: 33-1/3% commencing on May 24, 1998; 66-2/3% commencing on June
23, 1998; and 100% commencing on July 23, 1998. Any conversion shall be
the lessor of (i) $2.00 per share or (ii) 85% of the average closing bid
price of the Company's Common Stock. "Average closing bid price" is
defined to mean the lowest average of the daily last bid price for the
Common Stock for any three trading days in any 20 day period preceding
the conversion. The Company may, at its option, redeem the Debentures at
any time prior to February 23, 1999 at a price equal to 115% of the
outstanding principal amount thereof, plus any accrued but unpaid
interest.
In March 1998, VSI secured a working capital loan for approximately $2.0
million from AmTrade International Bank of Georgia. The loan is
guaranteed by the Export-Import Bank of the United States, and is
collateralized by a letter of credit from a VSI customer. Funds will be
used for pre-/post-export financing for the manufacture and delivery of
videoconferencing equipment in China. The interest rate is prime plus
2.5%. Repayment will be made through proceeds of the letter of credit,
which will be applied first to the loan principal and interest, with the
remaining amount remitted to VSI.
In March 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 20 million Belgium Francs or approximately
$550,000, at an interest rate of prime plus 1%. The credit facility is
secured by 550,000 shares of VSI Enterprises, Inc. common stock, held in
escrow by Kredietbank, n.v.
<PAGE> 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements on accounting and financial disclosure matters
which are required to be described by Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to directors and executive officers of the
Company contained in the registrant's definitive proxy statement to be
delivered to shareholders in connection with the 1998 annual meeting of
shareholders scheduled to be held on May 19, 1998 is incorporated hereby by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation contained in the
registrant's definitive proxy statement to be delivered to shareholders in
connection with the 1998 annual meeting of shareholders scheduled to be held on
May 19, 1998 is incorporated hereby by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of certain beneficial
owners and management contained in the registrant's definitive proxy statement
to be delivered to shareholders in connection with the 1998 annual meeting of
shareholders scheduled to be held on May 19, 1998 is incorporated hereby by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to related party transactions contained in
the registrant's definitive proxy statement to be delivered to shareholders in
connection with the 1998 annual meeting of shareholders scheduled to be held on
May 19, 1998 is incorporated hereby by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
<PAGE> 42
The following financial statements and accountant's report have been
filed as Item 8 in Part II of this report:
Report of Independent Public Accountants
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and December 31,
1996
Consolidated Statements of Operations for Years Ended December 31,
1997, 1996 and 1995
Consolidated Statement of Stockholders' Equity for Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for Years Ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedule of VSI Enterprises, Inc. for
the years ended December 31, 1997, 1996 and 1995 is included pursuant to Item 8:
Report of Independent Public Accountants............................S-1
Report of Independent Certified Public Accountants on Schedule II...S-2
Schedule II Valuation and Qualifying Accounts.................S-3
3. Exhibits.
The following exhibits are filed with or incorporated by reference
into this report. The exhibits which are denominated by an asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from
either (i) the Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-18 (File No. 33-27040-D) (referred to as "S-18 No. 1"),
(ii) Post-Effective Amendment No. 2 to the Company's Registration Statement on
Form S-18 (File No. 33-27040-D) (referred to as "S-18 No. 2"), (iii)
Post-Effective Amendment No. 3 to the Company's Registration Statement on Form
S-18 (File No. 33-27040-D) (referred to as "S-18 No. 3"); (iv) the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1992 (referred
to as "1992 10-Q"); (v) the Company's Annual Report on Form 10-K for the year
ended March 31, 1993 (referred to as "1993 10-K"); (vi) the Company's
Registration Statement Form S-1 (File No. 33-85754) (referred to as "S-1");
(vii) the Company's Annual Report on Form 10-K for the year ended December 31,
1994 (referred to as "1994 10-K"); (viii) the Company's Annual Report on Form
10-K for the year ended December 31, 1995 (referred to as "1995 10-K"); (ix)
the Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997 (referred to as "1997 10-Q"); (x) the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 (referred to as "1996 10-K"); and (xi) the
Company's Form S-8 Registration Statement (File No. 333-18239, referred to as
"S-8").
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
<S> <C>
*3.1 Certificate of Incorporation, including
Certificate of Stock Designation dated September
25, 1990, and amendments dated December 26, 1990,
August 19, 1991 and October 17, 1991 (S-18 No. 3,
Exhibit 3-1)
3.2 Amended and Restated Bylaws of the Registrant
*3.3 Certificate of Amendment to Certificate of Incorporation filed on February 10, 1993
(1992 10-Q)
*3.6 Certificate of Amendment to Certificate of Incorporation filed on February 13, 1995
(1994 10-K)
*3.7 Certificate of Amendment to Certificate of Incorporation filed on September 8, 1995
(1995 10-K)
*3.8 Certificate of Amendment to Certificate of Incorporation filed on April 21, 1997 (1997
10-Q, Exhibit 3.1.1)
*10.3 1991 Stock Option Plan (S-18 No. 2, Exhibit 10.1(a))
*10.3.1 Amendment No. 1 to 1991 Stock Option Plan (1993 10-K)
*10.3.2 Amendment No. 2 to 1991 Stock Option Plan (S-1)
*10.3.3 Amendment No. 3 to 1991 Stock Option Plan (S-1)
*10.4 Revolving Credit and Security Agreement dated June 7, 1995
by and between Videoconferencing Systems, Inc. ("VSI") and Fidelity Funding
of California, Inc. (1995 10-K)
*10.5 1995 Performance Warrant Plan (S-8, Exhibit 4.1)
10.6 Employment Agreement dated August 4, 1997, by and between
the Registrant and Judi North
*10.15 1994 Employee Stock Purchase Plan (1994 10-K)
*21.1 Subsidiaries of the Registrant (1996 10-K)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Grant Thornton LLP
27.1 Financial Data Schedule (SEC use only)
</TABLE>
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter ended
December 31, 1997.
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
VSI Enterprises, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated balance sheet of VSI ENTERPRISES, INC. (a Delaware corporation)
AND SUBSIDIARIES as of December 31, 1997 and the related statements of
operations, stockholders' equity, and cash flows for the year then ended and
have issued our report thereon dated March 18, 1998. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in Item 14 hereon is the responsibility of management
and is presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects, the financial data for the year ended December 31, 1997 as
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 18, 1998
S-1
<PAGE> 45
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
SCHEDULE II
To the Board of Directors and Stockholders
of VSI Enterprises, Inc.
In connection with our audit of the consolidated financial statements of
VSI Enterprises, Inc. and subsidiaries referred to in our report dated February
21, 1997, which is included in the annual report to security holders and
incorporated by reference in Part II of this form, we have also audited Schedule
II of VSI Enterprises, Inc. and subsidiaries for the year ended December 31,
1996. In our opinion, this schedule presents fairly, in all material respects,
the information required to be set forth therein.
We have previously audited and reported on Schedule II of VSI Enterprises,
Inc. and subsidiaries for the year ended December 31, 1995 prior to its
restatement for the 1996 pooling of interests with Integrated Network Services,
Inc. (INS). Separate financial statements of INS included in the restated
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1995 were audited and reported on separately by
other auditors.
We have also audited the combination of Schedule II for the year ended
December 31, 1995, after restatement for the 1996 pooling of interests; in our
opinion, such schedule has been properly combined on the basis described in Note
2 of the notes to the consolidated financial statements.
/s/ Grant Thornton LLP
Atlanta, GA
February 21, 1997
S-2
<PAGE> 46
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE(1) PERIOD
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Reserve for obsolete inventory $ 494,200 $ 557,060 $ 873,025 $ 178,235
Reserve for doubtful accounts receivable 271,000 332,633 156,459 447,174
Year ended December 31, 1996
Reserve for obsolete inventory 244,000 250,000 -- 494,200
Reserve for doubtful accounts receivable 658,402 (28,558) 358,844 271,000
Year ended December 31, 1995
Reserve for obsolete inventory 166,200 78,000 -- 244,200
Reserve for doubtful accounts receivable 349,832 431,512 122,942 658,402
</TABLE>
(1) Obsolete items which have been disposed as bad debt write offs.
Column C-2 "Charged to other accounts" has been omitted as the response is
"none".
S-3
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Julia B. North
----------------------------
Date: March 20, 1998 Julia B. North, President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the following
capacities on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Richard K. Snelling Chairman of the Board March 20, 1998
- -----------------------
Richard K. Snelling
/s/ Julia B. North President and March 20, 1998
- ------------------ Chief Executive Officer
Julia B. North
/s/ E. Anthony Godfrey Chief Financial Officer March 20, 1998
- ---------------------- and Secretary
E. Anthony Godfrey (Principal Financial and
Accounting Officer)
/s/ Carleton A. Brown Director March 20, 1998
- ---------------------
Carleton A. Brown
/s/ Larry M. Carr Director March 20, 1998
- -----------------
Larry M. Carr
/s/ Edward S. Redstone Director March 20, 1998
- ------------------------
Edward S. Redstone
<PAGE> 48
EXHIBIT INDEX
EXHIBIT
NUMBER
DESCRIPTION OF EXHIBIT SEQUENTIAL
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
3.2 Amended and Restated Bylaws of the Registrant
10.6 Employment Agreement, dated August 4, 1997, by and between
the Registrant and Judi North
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Grant Thornton LLP
27.1 Financial Data Schedule (for SEC use only)
27.2 Financial Data Schedule Restated for the Period Ended December 31, 1996 (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
VSI ENTERPRISES, INC.
(A Delaware Corporation)
(Effective January 23, 1992)
ARTICLE I
Offices
1.01 Principal Office. The principal office of this Corporation
(hereinafter, the "Company") shall be selected by the Board of Directors from
time to time and may be within or without the State of Delaware.
1.02 Other Offices. The Company may have such other offices, within or
without the State of Delaware, as the Board of Directors may, from time to time,
determine.
1.03 Registered Office. The registered office of the Company required
by the General Corporation Law of Delaware to be maintained in Delaware may be,
but need not be, identical with the principal office if in Delaware, and the
address of the registered office may be changed from time to time by the Board
of Directors.
1.04 Repeal of Inconsistent Provisions. All prior by-laws and
resolutions of the Board of Directors are repealed to the extent in conflict
with the provisions of these By-Laws.
ARTICLE II
Stock and the Transfer Thereof
2.01 Stock Certificates. The shares of the Company's capital stock
shall be represented by consecutively numbered certificates signed by the
President or a Vice President and the Secretary or Assistant Secretary of the
Company, and sealed with the seal of the Company, or a facsimile thereof. If
certificates are signed by a transfer agent, acting on behalf of the Company,
and a registrar, the signatures of the officers of the Company may be facsimile.
In case any officer who has signed (by real or facsimile signature) shall have
ceased to be such officer before such certificate is issued, it may be issued by
the Company with the same effect as if he were such officer on the date of its
issue.
Each certificate representing shares shall state upon the face thereof:
(a) that the Company is organized under the laws of the State of
Delaware;
<PAGE> 2
(b) the name of the person to whom issued;
(c) the number, class and series (if any) of shares which such
certificate represents; and
(d) the par value, if any, of the shares represented by such
certificate, or a statement that the shares have no par value.
If any class or series of shares is subject to special powers,
designations, preferences or relative, participating or other special rights,
then such (together with all qualifications, limitations or restrictions of such
preferences or rights) shall be set forth in full or summarized on the
certificate representing such class or series. However, in lieu of such
requirement, the certificate may state that the Company will furnish, without
charge, to the registered holder of the shares represented by such certificate
who so requests a statement setting forth such information in full.
Each certificate also shall set forth restrictions upon transfer, if
any, or a reference thereto, as shall be adopted by the Board of Directors or by
the shareholders, or as may be contained in this Article II.
No certificate shall be issued for any share until such share is fully
paid, as defined in the Certificate of Incorporation.
2.02 Consideration for Shares. Shares shall be issued for such
consideration expressed in dollars as shall be fixed from time to time by the
Board of Directors. Treasury shares may be disposed of by the Company for such
consideration expressed in dollars as may be fixed from time to time by the
Board of Directors. No shares shall be issued for less than the par value
thereof. The consideration for the issuance of shares may be paid, in whole or
in part, in money, in other property, tangible or intangible, or in labor or
services actually performed for the Company, or as permitted in the Certificate
of Incorporation. Future services shall not constitute payment or part payment
for shares of the Company.
2.03 Lost Certificate. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Company alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, and the Board of Directors when authorizing
such issue of a new certificate or certificates may in its discretion, and as a
condition precedent to the issuance thereof, require the owner of such lost or
destroyed certificate or certificates or his legal representative to advertise
the same in such manner as it shall require, and/or furnish to the Company a
bond in such sum as it may direct, as indemnity against any claim that may be
made against the Company. Except as hereinabove in this section provided, no new
certificate or certificates evidencing shares of stock shall be issued unless
and until the old certificate or certificates, in lieu of which the new
certificate or certificates are issued, shall be surrendered for cancellation.
2.04 Registered Holder as Owner. The Company shall be entitled to treat
the holder of record of any share of stock as the owner thereof entitled to
receive dividends and to vote such shares, and accordingly shall not be bound to
recognize any equitable or any other claim to or
-2-
<PAGE> 3
interest in such shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as may be required by a valid proxy
or by the laws of the State of Delaware.
2.05 Returned Certificates. All certificates for shares changed or
returned to the Company for transfer shall be marked by the Secretary
"Cancelled," with the date of cancellation, and the transaction shall be
immediately recorded in the certificate book opposite the memorandum of their
issue. The returned certificate may be inserted in the certificate book.
2.06 Transfer of Shares. Upon surrender to the Company or to a transfer
agent of the Company of a certificate of stock endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, and such
documentary stamps as may be required by law, it shall be the duty of the
Company to issue a new certificate. Each such transfer of stock shall be entered
on the stock book of the Company.
2.07 Transfer Agent. The Board of Directors shall have power to appoint
one or more transfer agents and registrars for the transfer and registration of
certificates of stock of any class, and may require that stock certificates
shall be countersigned and registered by one or more of such transfer agents and
registrars. Any powers or duties with respect to the transfer and registration
of certificates may be delegated to the transfer agent and registrar.
ARTICLE III
Shareholders and Meetings Thereof
3.01 Annual Meeting. The annual meeting of the shareholders for the
election of directors and the transaction of such other business as may properly
come before the meeting shall be held on such date as may be determined by
resolution of the Board of Directors, but if such day be a holiday, then on the
first business day thereafter which is not a holiday; provided, however, that
the Board of Directors may, by resolution, postpone such meeting for a period of
time not in excess of sixty (60) days. The place of the annual meeting shall be
the principal office of the Company or such other place within or without the
State of Delaware as the Board of Directors may determine.
3.02 Special Meeting. Special meetings of the shareholders may be
called by the President, a Vice President, the Board of Directors, or the
holders of not less than one-tenth of all the shares entitled to vote at the
meeting. Special meetings shall be held at the principal office of the Company,
unless the Board of Directors determines otherwise.
3.03 Notice of Meetings. Written or printed notice stating the place,
day, and hour of the meeting and, in the case of a special meeting, the purpose
or purposes for which the meeting is called, shall be delivered not less than
ten (10) nor more than sixty (60) days before the date of the meeting, either
personally or by mail, by or at the direction of the President, the Secretary,
or the officer or persons calling the meeting, to each shareholder of record in
the manner above provided. No business other than that specified in the notice
of special meeting shall be transacted at any such special meeting. The notice
of special meeting may be waived by submitting a signed waiver or by attendance
at the meeting.
-3-
<PAGE> 4
3.04 Closing of Transfer Books and Fixing Record Date. For the purposes
of determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors of the Company may provide that the stock
transfer books shall be closed for a stated period not to exceed in any case
sixty (60) days immediately preceding such meeting. In lieu of closing the stock
transfer books, the Board of Directors may fix in advance a date as the record
date for any such determination of shareholders, such date in any case to be not
more than sixty (60) days, and in case of a meeting of shareholders, not less
than ten (10) days prior to the date on which the particular action, requiring
such determination of shareholders, is to be taken, and in no event may the
record date precede the date upon which the Directors adopt a resolution fixing
the record date. If the stock transfer books are not closed and no record date
is fixed for the determination of shareholders entitled to notice of or to vote
at a meeting of shareholders, or shareholders entitled to receive payment of a
dividend, the date on which notice of the meeting is given (as defined in
Article IX hereof) or the date on which the resolution of the Board of Directors
declaring such dividend is adopted, as the case may be, shall be the record date
for such determination of the shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided in
this Paragraph, such determination shall apply to any adjournment thereof,
unless the Board of Directors fixes a new record date for the adjournment. The
record date for determining shareholders entitled to consent to corporate
actions without a meeting shall be fixed as provided in Section 3.12.
3.05 Voting List. The officer or agent having charge of the stock
transfer books for shares of the Company shall make, at least ten (10) days
before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each,
which list, for a period of ten (10) days prior to such meeting, shall be kept
on file at the principal office of the Company, and shall be subject to
inspection by any shareholder at any time during usual business hours. Such list
shall also be produced and kept open at the time and place of the meeting and
shall be subject to the inspection of any shareholder during the whole time of
the meeting. The original stock transfer books shall be prima facie evidence as
to who are the shareholders entitled to examine such list or transfer books or
to vote at any meeting of shareholders.
3.06 Quorum. A quorum at any meeting of the shareholders shall consist
of one-third (1/3) of the shares entitled to vote represented in person or by
proxy. If a quorum is present, the affirmative vote of the majority of the
shares represented at the meeting entitled to vote on the subject matter shall
be the act of the shareholders. If less than one-third (1/3) of the shares
entitled to vote be represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time to the same place without
further notice. At such adjourned meeting, at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
a meeting as originally notified. The shareholders present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum.
3.07 Proxies. At all meetings of shareholders, a shareholder may vote
by proxy, executed in writing by the shareholder or by his duly authorized
attorney in fact. Such proxy shall
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be filed with the Secretary of the Company before or at the time of the meeting.
No proxy shall be valid after three (3) years from the date of its execution,
unless otherwise provided in the proxy.
3.08 Voting of Shares. Each outstanding share shall be entitled to one
vote and each fractional share shall be entitled to a corresponding fractional
vote on each matter submitted to vote at a meeting of shareholders.
3.09 Voting of Shares by Certain Holders. Neither treasury shares, nor
shares of its own stock held by the Company in a fiduciary capacity, nor shares
held by another Company if the majority of the shares entitled to vote for the
election of directors of such other Corporation is held by the Company, shall be
voted at any meeting or counted in determining the total number of outstanding
shares at any given time.
Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent, or proxy as the bylaws of such
corporation may prescribe, or, in the absence of such provision, as the board of
directors of such company may determine.
Shares held by an administrator, executor, personal representative,
guardian, or conservator may be voted by him, either in person or by proxy,
without a transfer of such shares into his name. Shares standing in the name of
a trustee may be voted by him, either in person or by proxy, but no trustee
shall be entitled to vote shares held by him without a transfer of such shares
into his name.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority to do so
be contained in an appropriate order of the court by which such receiver was
appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
3.10 Chairman. The Chairman of the Board of Directors of the Company,
if there is one, or in his absence, the President, shall act as chairman at all
meetings of shareholders.
3.11 Shareholder Voting. Voting at any shareholders meeting shall be
oral or by show of hands; provided, however, that voting shall be by written
ballot if such demand is made by any shareholder present in person or by proxy
and entitled to vote.
3.12 Informal Action by Shareholders; Record Date. Any action required
to be taken at a meeting of the shareholders, or any other action which may be
taken at a meeting of the shareholders, may be taken without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of a majority of shares of every
class and series entitled to vote with respect to the subject matter thereof.
Each written consent shall bear the date of every shareholder's signature, and
no written consent will be effective unless written consents, signed by a
sufficient number of shareholders to take action, are delivered to the Company
within sixty (60) days of the date of the earliest such consent. Such consent
shall
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have the same force and effect as a vote of the shareholders, and may be stated
as such in any document filed with the Secretary of State of Delaware under the
General Corporation Law of Delaware. Prompt notice of such action by written
consent of less than all shareholders entitled to vote shall be given to all
shareholders who have not consented in writing to the action taken.
The record date for determining shareholders entitled to consent to
corporate actions in writing without a meeting (the "consent record date") shall
not precede, and shall not be more than ten (10) days after, the date upon which
the resolution fixing the record date was adopted; however, if no consent record
date is fixed and prior action by the Board of Directors is required for the
consent to be validly taken, the consent record date shall be at the close of
business on the day the Board of Directors is required, then the consent record
date shall be the first date on which a properly signed and dated consent
setting forth the action taken or proposed to be taken is delivered as required
above.
3.13 Annual Report. The President of the Company shall prepare an
annual report which will set forth a statement of affairs of the Company as of
the end of its last fiscal year, including a balance sheet and an income
statement, and present it at the Annual Meeting of Shareholders. Failure to
prepare or present an annual report shall not affect the validity of any
shareholder meeting. No such report need be prepared or presented for any fiscal
year in which the Company was inactive.
ARTICLE IV
Directors, Powers and Meetings
4.01 General Powers. The business and affairs of the Company shall be
managed by its Board of Directors, except as otherwise provided in the General
Corporation Law of Delaware or the Certificate of Incorporation.
4.02 Number, Tenure and Qualifications. The Company's Board of
Directors shall consist of not less than three (3) and not more than seven (7)
Directors, as resolved from time to time by the Board of Directors. If such
number is not so fixed, the Company shall have three (3) Directors. Directors
shall be elected at each Annual Meeting of Shareholders. Each Director shall
hold office until the next Annual Meeting of Shareholders and thereafter until
his successor shall have been elected and qualified. Directors need not be
residents of Delaware or shareholders of the Company. Directors shall be
removable in the manner provided by the General Corporation Law of Delaware.
Directors shall be elected by plurality vote.
4.03 Vacancies. Any Director may resign at any time by giving written
notice to the President or to the Secretary of the Company. Such resignation
shall take effect at the time specified therein; and unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective. Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the remaining Directors though less than a
quorum, or by a sole remaining Director. A Director elected to fill a vacancy
shall be elected for the unexpired term of his predecessor in office. Any
directorship to be filled by reason of an increase in the number of Directors
shall be filled by the affirmative vote of a majority of the Directors then in
office or by
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an election at an annual meeting or at a special meeting of shareholders called
for that purpose, and a Director so chosen shall hold office for the term
specified in Paragraph 4.02 of this Article.
4.04 Removal of Directors. Any Director may be removed only in the
manner provided in the Company's Certificate of Incorporation, as amended, and
if no such provision appears therein: any Director may be removed either with or
without cause, at any time by a vote of the shareholders holding a majority of
the shares then issued and outstanding and who are entitled to vote for the
election of Directors, present at any special meeting called for that purpose.
In case any vacancy so created shall not be filled by the shareholders at such
meeting, such vacancy may be filled by the Board of Directors as provided
hereinafter.
4.05 Regular Meetings. A regular meeting of the Board of Directors
shall be held without other notice than this By-Law immediately after and at the
same place as the Annual Meeting of Shareholders. The Board of Directors may
provide by resolution the time and place, either within or without the State of
Delaware, for the holding of additional regular meetings without other notice
than such resolution.
4.06 Special Meetings. Special meetings of the Board of Directors may
be called by or at the request of the President, the Chairman of the Board, or
any two Directors. The person or persons authorized to call special meetings of
the Board of Directors may fix any place, either within or without the State of
Delaware, as the place for holding any special meeting of the Board of Directors
called by them.
4.07 Telephonic Meetings. Members of the Board of Directors or any
committee designated by the Board may participate in a meeting of the Board of
Directors or committee by means of conference telephone or similar
communications equipment by which all persons participating in the meeting can
hear one another at the same time. Such participation shall constitute presence
in person at the meeting. All participants in any meeting of Directors, by
virtue of their participation and without further action on their part, shall be
deemed to have consented to the recording of such meeting by electronic device
or otherwise, and to the making of a written transcript thereof, in order that
minutes thereof shall be available for the Company's records.
4.08 Notice. Notice of any special meeting shall be given at least four
(4) days previous thereto by written notice delivered personally or mailed to
each Director at his business address, or by notice given at least two (2) days
prior to the meeting, in person or by any means specified in Section 9.01(b) or
(c). Any Director may waive notice of any meeting. The attendance of a Director
at a meeting shall constitute a waiver of notice of such meeting, except where a
Director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
4.09 Quorum. A majority of the number of Directors fixed by these
By-Laws shall constitute a quorum for the transaction of business. The act of
the majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.
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4.10 Compensation. By resolution of the Board of Directors, any
Director may be paid any one or more of the following: his expenses, if any, of
attendance at a meeting; a fixed sum for attendance at each meeting; or a stated
salary as Director. No such payment shall preclude any Director from serving the
Company in any other capacity and receiving compensation therefor.
4.11 Presumption of Assent. A Director of the Company who is present at
a meeting of the Board of Directors at which action on any corporate matter is
taken shall be presumed to have assented to the action taken unless his dissent
shall be entered in the minutes of the meeting or unless he shall file his
written dissent to such action with the person acting as the Secretary of the
meeting before the adjournment thereof, or shall forward such dissent by
registered or certified mail to the Secretary of the Company immediately after
the adjournment of the meeting. Such right to dissent shall not apply to a
Director who voted in favor of such action.
4.12 Executive Committee. The Board of Directors, by resolution adopted
by a majority of the number of Directors, may designate two (2) or more
Directors to constitute an Executive Committee, which may exercise all of the
authority of the Board of Directors in the management of the Company, during the
period of time between meetings of the Board of Directors; but the designation
of such committee and the delegation thereto of authority shall not operate to
relieve the Board of Directors, or any member thereof, of any responsibility
imposed upon it or him by law.
4.13 Action by Directors Without Meeting. Any action required to be
taken at a meeting of the Directors of the Company or any action which may be
taken at such a meeting, may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the Directors
entitled to vote with respect to the subject matter thereof. A consent shall be
sufficient for this Paragraph if it is executed in counterparts, in which event
all of such counterparts, when taken together, shall constitute one and the same
consent.
4.14 Chairman of the Board. The Chairman of the Board, if such officer
shall be chosen by the Board of Directors, shall preside at all meetings of the
Board of Directors and meetings of shareholders at which he is present. He
shall, subject to the direction of the Board of Directors, have general
supervision over the affairs of the Company, and shall, from time to time,
consult and advise with the President in the direction and management of the
Company's business and affairs, and shall do and perform such other duties as
may, from time to time, be assigned to him by the Board of Directors.
4.15 Bank Accounts, etc. Anything herein to the contrary
notwithstanding, the Board of Directors may, except as may otherwise be required
by law, authorize any officer or officers, agent or agents, in the name of and
on behalf of the Company, to sign checks, drafts, or other orders for the
payment of money or notes or other evidences of indebtedness, to endorse for
deposit, deposit to the credit of the Company at any bank or trust company or
banking institution in which the Company may maintain an account or to cash
checks, notes, drafts, or other bankable securities or instruments, and such
authority may be general or confined to specific instances, as the Board of
Directors may elect.
4.16 Inspection of Records. Every Director shall have the absolute
right at any reasonable time to inspect all books, records, documents of every
kind, and the physical properties,
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of the Company and of its subsidiaries. Such inspection may be made personally
or by an agent and includes the right to make copies and extracts.
ARTICLE V
Officers and Agents
5.01 General. The officers of the Company shall be a President, one or
more Vice Presidents, a Secretary and a Treasurer. The Board of Directors may
appoint such other officers, assistant officers, as they may consider necessary,
who shall be chosen in such manner and hold their offices for such terms and
have such authority and duties as from time to time may be determined by the
Board of Directors. The salaries of all the officers of the Company shall be
fixed by the Board of Directors. One person may hold any two offices, except
that no person may simultaneously hold the offices of President and Secretary.
In all cases where the duties of any officer, agent or employee are not
prescribed by the By-Laws or by the Board of Directors, such officer, agent or
employee shall follow the orders and instructions of the President.
5.02 Election and Term of Office. The officers of the Company shall be
elected by the Board of Directors annually at the first meeting of the Board
held after each Annual Meeting of the Shareholders. If the election of officers
shall not be held at such meeting, such election shall be held as soon
thereafter as conveniently may be. Each officer shall hold office until the
first of the following to occur: Until his successor shall have been duly
elected and shall have qualified; or until his death; or until he shall resign;
or until he shall have been removed in the manner hereinafter provided.
5.03 Removal. Any officer or agent may be removed by the Board of
Directors or by the Executive Committee whenever in its judgment the best
interest of the Company will be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not in itself create
contract rights.
5.04 Vacancies. A vacancy in any office, however occurring, may be
filled by the Board of Directors for the unexpired portion of the term.
5.05 President. The President shall, subject to the direction and
supervision of the Board of Directors, be the chief executive officer of the
Company and shall have general and active control of its affairs and business
and general supervision of its officers, agents and employees. He shall, unless
otherwise directed by the Board of Directors, attend in person or by substitute
appointed by him, or shall execute in behalf of the Company written instruments
appointing a proxy or proxies to represent the Company, at all meetings of the
stockholders of any other company in which the Company shall hold any stock. He
may, on behalf of the Company, in person or by substitute or by proxy, execute
written waivers of notice and consents with respect to any such meetings. At all
such meetings and otherwise, the President, in person or by substitute or proxy
as aforesaid, may vote the stock so held by the Company and may execute written
consent and other instruments and power incident to the ownership of said stock,
subject however to the instructions, if any, of the Board of Directors. The
President shall have custody of the Treasurer's bond, if any.
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<PAGE> 10
5.06 Vice Presidents. The Vice Presidents shall assist the President
and shall perform such duties as may be assigned to them by the President or by
the Board of Directors. In the absence of the President, the Vice President
designated by the Board of Directors or (if there be no such designation)
designated in writing by the President shall have the powers and perform the
duties of the President. If no such designation shall be made all Vice
Presidents may exercise such powers and perform such duties.
5.07 Secretary. The Secretary shall: (a) Keep the minutes of the
proceedings of the shareholders, executive committee and the Board of Directors;
(b) See that all notices are duly given in accordance with the provisions of
these By-Laws or as required by law; (c) Be custodian of the corporate records
and of the seal of the Company and affix the seal to all documents when
authorized by the Board of Directors; (d) Keep at its registered office or
principal place of business within or outside Delaware a record containing the
names and addresses of all shareholders and the number and class of shares held
by each, unless such a record shall be kept at the office of the Company's
transfer agent or registrar; (e) Sign with the President, or a Vice President,
certificates for shares of the Company, the issuance of which shall have been
authorized by resolution of the Board of Directors; (f) Have general charge of
the stock transfer books of the Company, unless the Company has a transfer
agent; and (g) In general, perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the President or the Board of Directors. Assistant secretaries, if any, shall
have the same duties and power, subject to supervision by the Secretary.
5.08 Treasurer. The Treasurer shall be the principal financial officer
of the Company and shall have the care and custody of all funds, securities,
evidence of indebtedness and other personal property of the Company and shall
deposit the same in accordance with the instructions of the Board of Directors.
He shall receive and give receipts and acquittances for monies paid in on
account of the Company, and shall pay out of the funds on hand all bills,
payrolls and other just debts of the Company of whatever nature upon maturity.
He shall perform all other duties incident to the office of the Treasurer and,
upon request of the Board, shall make such reports to it as may be required at
any time. He shall, if required by the Board, give the Company a bond in such
sums, and with such sureties as shall be satisfactory to the Board, conditioned
upon the faithful performance of his duties and for the restoration to the
Company of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Company. He shall
have such other powers and perform such other duties as may be from time to time
prescribed by the Board of Directors or the President. The assistant treasurers,
if any, shall have the same powers and duties, subject to the supervision of the
Treasurer.
The Treasurer shall also be the principal accounting officer of the
Company. He shall prescribe and maintain the methods and systems of accounting
to be followed, keep complete books and records of account, prepare and file all
local, state and federal tax returns, prescribe and maintain an adequate system
of internal audit, and prepare and furnish to the President and the Board of
Directors statements of account showing the financial position of the Company
and the results of its operations.
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ARTICLE VI
Indemnification
Every Director, Officer, employee and agent of the Company, and every
person serving at the Company's request as a director, officer (or in a position
functionally equivalent to that of officer or director), employee or agent of
another corporation, partnership, joint venture, trust or other entity, shall be
indemnified to the extent and in the manner provided by the Company's
Certificate of Incorporation, as it may be amended.
ARTICLE VII
Miscellaneous
7.01 Declaration of Dividends. The Board of Directors at any regular or
special meeting may declare dividends payable out of the funds of the Company,
whenever in the exercise of its discretion it may deem such declaration
advisable and such is permitted by law. Such dividends may be paid in cash,
property, or shares of the Company.
7.02 Benefit Programs. Directors shall have the power to install and
authorized any pension, profit sharing, stock option, insurance, welfare,
educational, bonus, health and accident or other benefit program which the Board
deems to be in the interest of the Company, at the expense of the Company, and
to amend or revoke any plan so adopted.
7.03 Seal. The corporate seal of the Company shall be circular in form
and shall contain the name of the Company and the words "Seal, Delaware".
7.04 Fiscal Year. The Board of Directors shall have the power to fix,
and from time to time change, the fiscal year of the Company. Any such adoption
of or change in a fiscal year shall not constitute or require an amendment to
these By-Laws.
ARTICLE VIII
Amendments to By-Laws
These By-Laws may be amended or repealed in the manner provided for in
the Certificate of Incorporation, or if none is there provided: by majority vote
of the Board of Directors, taken at any meeting or by written consent, subject
to the shareholders' right to change or repeal any ByLaws so made. By-Laws
amendments may be proposed by any Director.
ARTICLE IX
Notices
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9.01 Giving of Notice. Except as otherwise provided by the General
Corporation Law of Delaware, these By-Laws, the Company's Certificate of
Incorporation, or resolution of the Board of Directors, every meeting notice or
other notice, demand, bill, statement or other communication (collectively,
"Notice") to or from the Company from or to a Director, Officer or shareholder
shall be duly given if it is written or printed and is (a) sent by first class
mail or by overnight service of the U.S. Postal Service, postage prepaid, (b)
sent by any established overnight air courier service, such as Federal Express,
Emery, Airborne or UPS, (c) sent by telegraph, tested telex or other tested
facsimile transmission, (d) delivered by any commercial messenger service which
regularly retains its receipts, or (e) personally delivered, provided a receipt
is obtained reflecting the date of delivery. Notice shall not be duly given
unless all delivery or postage charges are pre-paid. Notice shall be given to an
addressee's most recent address as it appears on the Company's records. A Notice
shall be deemed "given" when dispatched for delivery, or if mailed, on the date
postmarked. This Section shall not have the effect of shortening any notice
period provided for in these By-Laws.
9.02 Waiver of Notice. Any Notice required by the General Corporation
Law of Delaware, the Certificate of Incorporation or these By-Laws may be waived
in writing at any time by the person entitled to the Notice, and such waiver
shall be equivalent to the giving of notice. Notice of any meeting shall be
waived by attendance (if a Shareholders' meeting, in person or by proxy) at the
meeting. A waiver of Notice of a special meeting of Shareholders shall state the
purpose for which the meeting was called or the business to be transacted
thereat.
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<PAGE> 1
EXHIBIT NUMBER 10.6
EMPLOYMENT AGREEMENT
August 4, 1997
Ms. Judi North
76 Brighton Drive, N.E.
Atlanta, GA 30309
Dear Judi:
I along with the Board of Directors of VSI Enterprises are pleased to offer you
the position of CEO of VSI Enterprises as well as a position on its Board of
Directors. The position also includes responsibilities within VSI's
subsidiaries as depicted on Attachment A.
This offer and subsequent contract is contingent on BellSouth's agreement as
reflected by approval of VSI as a noncompetitive post retirement opportunity
for you.
Your compensation can be flexible depending on your personal financial wishes
but would be based on the below amounts with appropriate mutually agreed upon
equivalents.
1. Base Salary: $160,000 annualized.
2. Initial grant of 150,000 VSI options at the close of business last trade
strike price on the date of contract signature.
3. Three year vesting (1/3 each year at the annual contract date) of 300,000
shares of VSI stock options with the same strike price as item 2.
4. There will be additional incentives granted which will be performance
oriented at the discretion of the Board as part of its annual compensation
review (normally determined in November).
5. Automobile car allowance on a lease basis of the Mercury Marquis or
equivalent category.
VSI has a number of employee benefits, a copy of which I have included for your
information. Should you be terminated except for cause, not including
resignation, after six months you will be afforded six months base salary. I
have also attached a VSI Employment Agreement.
We realize you may wish to continue your BellSouth benefits and are therefore
flexible regarding compensation. We also understand you wish to complete your
"age/service" and other BellSouth-related responsibilities with an employment
date of October 1, 1997. The contract signature date should be no later than
August 4, 1997. As I further indicated to you it is my intent to remain as
Chairman of the Board of Directors for a time (subject to the wishes of the
Board and my successor CEO). After that period I would resign as Chairman in
favor of the successor CEO (subject to Board and shareholder approval).
Judi, I am very enthusiastic about working with you as VSI-CEO. The Board of
Directors is unanimous in its opinion you are an ideal match for VSI and its
opportunities and challenges.
Sincerely,
/s/ R.K. Snelling, P.E.
Chairman & CEO
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective as
of the 4th day of August, 1997 by and between VSI ENTERPRISES, INC., a
Delaware corporation, ("Company") and JUDI NORTH ("Employee"), an
individual.
For and in consideration of the mutual covenants described below, the
parties hereto agree as follows:
1. EMPLOYMENT. The Company agrees to employ or continue to employ Employee,
and Employee agrees to accept and continue such employment, upon the following
terms and conditions.
2. DUTIES. Employee shall assume the responsibilities and perform the duties
specified in the attached organization chart. Such duties may be revised from
time to time at the sole discretion of the Company. Employee agrees to devote
his or her full time and energy to the furtherance of the business of the
Company and shall not during the term hereof work or perform services in any
advisory or other capacity for any individual, firm, company, or corporation
other than for the Company, except as otherwise agreed to by the Company.
3. COMPENSATION. The Company shall pay as compensation for all the services to
be rendered the salary and additional compensation, if any, described in the
transmittal letter (the "Employee Compensation") and as the Employee
Compensation may be determined by the Company in its sole discretion from time
to time. The Company's obligation to pay Employee any Employee Compensation
shall cease upon termination of Employee's employment with the Company.
Employee's annual salary shall be prorated on a daily basis for the years in
which Employee commences and terminates his or her employment relationship with
the Company.
4. TERM AND TERMINATION. This Agreement shall be effective upon execution by
the parties and shall remain in full force and effect thereafter, until
terminated as provided herein. Either party may terminate this Agreement at any
time for any reason, whether for cause or not for cause, by providing written
notice to the other party on or prior to the proposed date of termination. This
Agreement shall terminate immediately upon the death of Employee. Upon
termination of employment for any reason, Employee shall return immediately to
the Company all documents, property, and other records of the Company, and all
copies thereof, within Employee's possession, custody or control, including but
not limited to any materials containing any Trade Secrets or Confidential
Information (as defined below) or any portion thereof.
5. OWNERSHIP. For purposes of this Agreement, "Work Product" shall mean the
data, materials, documentation, computer programs, inventions (whether or not
patentable), and all works of authorship, including all worldwide rights
therein under patent, copyright, trade secret, confidential information, or
other property right, created or developed in whole or in part by Employee,
whether prior to the date of this Agreement or in the future, either (i) while
retained by the Company and that have been or will be paid for by the Company,
or (ii) while employed by the Company (whether developed during work hours or
not). All Work Product shall be considered work made for hire by the Employee
and owned by the Company. If any of the Work Product may not, by operation of
law, be considered work made for hire by Employee for the Company, or if
ownership of all right, title, and interest of the intellectual property rights
therein shall not otherwise vest exclusively in the Company, Employee hereby
assigns to the Company, and upon the future creation thereof automatically
assigns to the Company, without further consideration, the ownership of all
Work Product. The Company shall have the right to obtain and hold in its own
name copyrights, registrations, and any other protection available in the Work
Product. Employee agrees to perform, during or after Employee's employment,
such further acts as may be necessary or desirable to transfer, perfect, and
defend the Company's ownership of the Work Product that are reasonably
requested by the Company.
6. TRADE SECRETS AND CONFIDENTIAL INFORMATION.
(a) The Company may disclose to Employee certain Trade Secrets and
Confidential Information (defined below). Employee acknowledges and agrees that
the Trade Secrets and Confidential Information are the sole and exclusive
property of the Company (or a third party providing such information to the
Company) and that the Company or such third party owns all worldwide rights
therein under patent, copyright, trade secret, confidential information, or
other property right. Employee acknowledges and agrees that the disclosure of
the Trade Secrets and Confidential Information to Employee does not confer upon
Employee any license, interest or rights of any kind in or to the Trade Secrets
or Confidential Information. Employee may use the Trade Secrets and
Confidential Information solely for the benefit of the Company while Employee
is employed or retained by the Company. Except in the performance of services
for the Company, Employee will hold in confidence and not reproduce,
distribute, transmit, reverse engineer, decompile, disassemble, or transfer,
directly or indirectly, in any form, by any means, or for any purpose, the
Trade Secrets or the Confidential Information or any portion thereof. Employee
agrees to return to the Company, upon request by the Company, the Trade Secrets
and Confidential Information and all materials relating thereto.
(b) Employee's obligations under this Agreement with regard to the Trade
Secrets shall remain in effect for as long as such
<PAGE> 3
information shall remain a trade secret under applicable law. Employee
acknowledges that its obligations with regard to the Confidential Information
shall remain in effect while Employee is employed or retained by the Company
and for three (3) years thereafter. As used herein, "Trade Secrets" means
information of the Company, its licensors, suppliers, customers or prospective
licensors or customers, including, but not limited to, technical or
nontechnical data, formulas, patterns, compilations, programs, devices,
methods, techniques, drawings, processes, financial data, financial plans,
product plans, or a list of actual or potential customers or suppliers, which
(a) derives economic value, actual or potential, from not being generally known
to, and not being readily ascertainable by proper means by, other persons who
can obtain economic value from its disclosure or use; and (b) is the subject of
efforts that are reasonable under the circumstances to maintain its secrecy.
(c) Employee acknowledges that existing or prospective customers of the
Company may be companies which are publicly traded and subject to various rules
and regulations of the Securities and Exchange Commission. Employee
acknowledges that the Company has a policy that no one associated with the
Company may trade in securities of any customer of the Company based on
material, nonpublic information concerning the customer. Additionally, the
Company expressly forbids the unauthorized disclosure of any nonpublic
information acquired by anyone associated with the Company relating to a
customer of the Company. Employee shall notify the Company prior to trading the
securities of any customer of the Company.
7. CUSTOMER NON-SOLICITATION. Employee agrees that for a period of eighteen
(18) months immediately following termination of Employee's employment with the
Company for any reasons, including, without limitation, voluntary resignation
from employment by Employee ("Non-Solicitation Period"), Employee shall not, on
Employee's own behalf or on behalf of any person, firm, partnership,
association, corporation or business organization, entity or enterprise,
solicit, contact, call upon, communicate with or attempt to communicate with
any customer or prospect of the Company, or any representative of any customer
or prospect of the Company, with a view to sale or providing of any deliverable
or service sold or provided or under development by the Company during the time
of two (2) years immediately preceding cessation of Employee's employment with
the Company, provided that the restrictions set forth in this paragraph shall
apply only to customers or prospects of the Company, or representatives of
customers or prospects of the Company, with which Employee had material contact
during such two (2) year period. The actions prohibited by this paragraph shall
not be engaged in by Employee directly or indirectly, whether as manager,
salesperson, agent, technical support, sales, or service representative, or
otherwise. Employee acknowledges that the Company provides products and
services to small and large customers throughout the United States and
internationally and that a territorial restriction on the non-solicitation
provisions of this paragraph would not adequately protect the legitimate
interests of the Company.
8. EMPLOYEE NON-SOLICITATION. Employee agrees that Employee shall not call
upon, solicit, recruit, or assist others in calling upon, recruiting or
soliciting any person who is or was an employee of the Company within the
Non-Solicitation Period, for the purposes of having such person work in any
other corporation, association, entity, or business engaged in providing video
conferencing or satellite downlink services of the same or similar kind as
offered by the Company.
9. EQUITABLE RELIEF. The parties to this Agreement acknowledge that a breach by
Employee of any of the terms or conditions of this Agreement will result in
irrevocable harm to the Company and that the remedies at law for such breach
may not adequately compensate the Company for damages suffered. Accordingly,
Employee agrees that in the event of such breach, the Company shall be entitled
to injunctive relief or such other equitable remedy as a court of competent
jurisdiction may provide. Nothing contained herein will be construed to limit
the Company's right to any remedies at law, including the recovery of damages
for breach of this Agreement.
10. SEVERABILITY. If any provision or part of any provision of this Agreement
is held invalid or unenforceable by a court of competent jurisdiction, such
holding shall not affect the enforceability of any other provisions or parts
thereof, and all other provisions and parts thereof shall continue in full
force and effect.
11. MISCELLANEOUS. This Agreement shall not be amended or modified except by a
writing executed by both parties. This Agreement shall be binding upon and
inure to the benefit of the Company and its successors and assigns. Due to the
personal nature of this Agreement, Employee shall not have the right to assign
Employee's rights or obligations under this Agreement without the prior written
consent of Company. This Agreement shall be governed by the laws of the State
of Georgia without regard to its rules governing conflicts of law. This
Agreement and the attached Exhibits represent the entire understanding of the
parties concerning the subject matter hereof and supersede all prior
communications, agreements and understandings, whether oral or written,
relating to the subject matter hereof. All communications required or otherwise
provided under this Agreement shall be in writing and shall be deemed given
when delivered to the address provided below such party's signature (as may be
amended by notice from time to time), by hand, by courier or express mail, or
by registered or certified Unites States mail, return receipt requested,
postage prepaid. The transmittal letter and organization chart, attached
hereto, are incorporated herein by this reference.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
affixed their hands and seals effective as of the date first above written.
EMPLOYEE: VSI ENTERPRISES, INC.
/s/ Judi North By:/s/ R. K. Snelling
- --------------------------------- ---------------------------
Signature Chairman & CEO
Date: Date: 8-4-97
---------------------------- -------------------------
Address:
76 Brighton Drive, N.E. 5801 Goshen Springs Road
- -------------------------- Norcross, Georgia 30071
- --------------------------
Atlanta, GA 30309
- --------------------------
<PAGE> 1
EXHIBIT NUMBER 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion
in this Form 10-K of our report dated March 18, 1998, included in
this Annual Report into VSI Enterprises, Inc. previously filed Registration
Statement No. 33-44036 on Form S-8 dated November 14, 1991, Registration
Statement No. 33-44035 on Form S-8 dated November 14, 1991, Registration
Statement No. 33-55094 on Form S-3 dated November 25, 1992, Registration
Statement No. 33-56856 on Form S-8 dated January 8, 1993, Registration
Statement No. 33-72512 on Form S-8 dated December 3, 1993, Registration
Statement No. 33-81314 on Form S-8 dated July 7, 1994, Registration Statement
No. 333-728 on Form S-3 dated January 30, 1996, Registration Statement No.
33-85754 on Form S-3 dated January 30, 1996 (Post-Effective Amendment No. 1),
Registration Statement No. 333-15123 on Form S-3 dated October 30, 1996,
Registration Statement No. 333-18237 on Form S-8 dated December 19, 1996,
Registration Statement No. 333-18239 on Form S-8 dated December 19, 1996.
Registration Statement No. 333-30597 on Form S-3 dated June 30, 1997 and
Registration Statement No. 333-44407 on Form S-3 dated January 14, 1998.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 18, 1998
<PAGE> 1
EXHIBIT NUMBER 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
VSI Enterprises, Inc.
We hereby consent to the incorporation by reference in the Registration
Statement No. 33-44036 on Form S-8 dated November 14, 1991, Registration
Statement No. 33-44035 on Form S-8 dated November 14, 1991, Registration
Statement No. 33-55094 on Form S-3 dated November 25, 1992, Registration
Statement No. 33-56856 on Form S-8 dated January 8, 1993, Registration
Statement No. 33-72512 on Form S-8 dated December 3, 1993, Registration
Statement No. 33-81314 on Form S-8 dated July 7, 1994, Registration Statement
No. 333-728 on Form S-3 dated January 30, 1996, Registration Statement No.
33-85754 on Form S-3 dated January 30, 1996 (Post-Effective Amendment No. One),
Registration Statement No. 333-15123 on Form S-3 dated October 30, 1996,
Registration Statement No. 333-18237 on Form S-8 dated December 19, 1996,
Registration Statement No. 333-18239 on Form S-8 dated December 19, 1996,
Registration Statement No. 333-30597 on Form S-3 dated June 30, 1997 and
Registration Statement No. 333-44407 on Form S-3 dated January 14, 1998, of our
report dated February 21, 1997, relating to the 1995 and 1996 consolidated
financial statements of VSI Enterprises, Inc. and subsidiaries appearing in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
/s/ Grant Thornton LLP
Atlanta, Georgia
March 20, 1998
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