<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-b(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11( c ) or ss. 240.14a-12
VSI ENTERPRISES, INC.
(Name of Registrant as Specified in its Charter)
NOT APPLICABLE
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:________
2) Aggregate number of securities to which transaction applies:___________
3) Per unit price of other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:1 __________________________________
4) Proposed maximum aggregate value of transaction: ______________________
5) Total fee paid: _______________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
of the Form or Schedule and the date of its filing.
1) Amount Previously Paid: _______________________________________________
2) Form, Schedule or Registration No.: ___________________________________
3) Filing Party: _________________________________________________________
4) Date Filed: ___________________________________________________________
================================================================================
1 Set forth amount on which the filing fee is calculated and state how it
was determined
<PAGE> 2
May 10, 1999
Dear Shareholders:
Following this letter you will find the proxy statement for the 1999 Annual
Meeting of Shareholders of VSI Enterprises, Inc. Please carefully read the
entire proxy statement and accompanying Annual Report, and vote your shares
either on the enclosed proxy card, via the Internet or by telephone, as detailed
in the instructions on the card.
I ask that you pay special attention to proxy agenda items 2 and 3, in which we
are requesting an amendment to the Company's Certificate of Incorporation for
the purpose of increasing the number of authorized shares of common stock.
Approval of agenda item 2 will provide the Company with 8,000,000 additional
shares of common stock, which will be sufficient to permit the Company to
complete, subject to certain conditions, a restructuring of its outstanding
indebtedness. Approval of agenda item 3 will provide the Company with 25,000,000
additional shares of common stock, which, after giving effect to the shares
proposed to be issued in the debt restructuring, will provide the Company with
17,000,000 additional shares of common stock to pursue acquisitions, financings
and other corporate transactions. THE BOARD OF DIRECTORS AND SENIOR MANAGEMENT
OF THE COMPANY BELIEVE IT IS ESSENTIAL, FOR THE SURVIVAL AND PROSPERITY OF THE
COMPANY, THAT BOTH OF THESE AGENDA ITEMS BE APPROVED BY SHAREHOLDERS.
REGARDING AGENDA ITEM 2
The Company has undertaken a restructuring of its business operations and
balance sheet which, when fully implemented, are intended to achieve profitable
operations, generate positive cash flows and improve prospects for raising
additional equity capital, all of which are essential for increasing the value
of your shares. Thus far, under the leadership of President & CEO Judi North,
VSI has closed an unprofitable subsidiary, drastically reduced operating
expenses, written off impaired and under-performing assets and improved
marketing efforts and sales management. Perhaps most importantly, VSI has
developed an entrepreneurial persona, which makes the Company more realistic
about its current situation and opportunistic with respect to its core
capabilities.
As announced on April 22, 1999 (and as is detailed under "Agenda Item Two" in
the accompanying proxy statement), the Company has entered into an agreement
with the holder of its $900,000 term note due May 16, 1999, that, if
consummated, will enable the Company to retire this debt and to regain control
of its patents, which are being held as collateral for the note. The agreement
replaces the existing debt with cash and equity, the latter in the form of new
shares of VSI common stock. The agreement is conditioned upon, among other
things, the conversion of at least $1 million in VSI's other long-term debt to
new shares of VSI common stock, and the completion of a $1 million private
placement of VSI common stock. Warrants to purchase shares of VSI common stock
will also be issued to all participants in the debt restructuring.
These shares will not be eligible for resale for 12 months, unless the share
price of the Company's stock reaches $1.25 before that time. Also, at no time
can more than 10% of the issued shares be sold in a 30-day period. Thus, while
the number of outstanding shares of VSI common stock will increase if these
transactions are completed, we have attempted to minimize any short-term
disruption in the market for the Company's common stock. We believe this
protects existing shareholders without placing an unreasonable burden on the
participants in the debt restructuring.
By closing the transactions described above, VSI will realize two extremely
important accomplishments. First, VSI can meet its financial obligations and
avoid having to seek protection under federal bankruptcy laws. Second, VSI will
regain control of the patented technology underlying its Omega(TM) product line.
Should VSI default on the $900,000 term note, the note holder will have the
right to sell these patents. There can be no assurance that any subsequent owner
of these patents would license this technology to VSI, thus rendering the
Company unable to sell and service its videoconferencing products.
(OVER)
<PAGE> 3
To Shareholders (continued):
In summary, VSI MUST CLOSE THESE RESTRUCTURING TRANSACTIONS IN ORDER TO SURVIVE
AND PROSPER, AND THEREFORE MUST RECEIVE SHAREHOLDER APPROVAL AUTHORIZING THE
INCREASE IN COMMON SHARES, AS PROPOSED IN AGENDA ITEM 2.
REGARDING AGENDA ITEM 3
As stated above, the Board of Directors and VSI's management team have worked
diligently to develop a business strategy that is both realistic and
opportunistic. VSI's core competency is solving for its customers complex
telecommunications problems, not manufacturing and selling "in-a-box"
videoconferencing systems, a strategy VSI previously pursued. Because VSI
depends, in part, on technology purchased from its competitors, the Company
cannot be competitive at the same gross margin unless the application is
sufficiently complex so as to require significant customization. The Omega(TM)
software enables VSI to integrate complex, multimedia conferencing technologies
at a lower cost and with better results than can the competition.
VSI is focusing on high-end applications and exploring alternative uses of its
core technology capabilities. Additionally, more attention is being placed on
other appropriate opportunities, including possible future acquisitions that
would be accretive to earnings per share.
Which brings me to my point: VSI cannot capitalize on its core strengths if its
hands are tied due to financing constraints. VSI must be able to make
appropriate acquisitions, raise working capital and attract new management team
members by issuing additional shares. Accordingly, agenda item 3 seeks
shareholder approval to increase the number of authorized common shares beyond
those required under agenda item 2. This authorization will allow the Company to
complete the restructuring transactions described under agenda item 2 and give
VSI the flexibility to pursue such other opportunities in a timely and efficient
fashion, without having to call a special shareholders' meeting.
Now is not the time for this Company to fail. Our customer base includes many
sophisticated, satisfied clients who are planning to add to their
videoconferencing networks, and our pipeline of qualified prospects is larger
than ever. Our Omega(TM) architecture continues to be the standard of excellence
in the high-end market, and we are aggressively evaluating other applications
and opportunities to utilize or license Omega's(TM) underlying technology. While
we have a long way to go, we believe that with the steps that have and are being
taken, the Company can become profitable at some point in 1999, for the first
time in five years.
As your new Chairman, I believe there is a future for this Company and an
opportunity to increase its value to you, our shareholders. I am committed to
bringing together and maintaining the right team of management, employees,
directors and advisors necessary to make this happen.
I ASK YOUR HELP IN ACHIEVING THESE GOALS BY VOTING IN FAVOR OF ALL AGENDA ITEMS
ON THE ENCLOSED PROXY. I also encourage you to attend our Annual Meeting of
Shareholders, on Friday, June 11, 1999.
Very truly yours,
/s/ Larry M. Carr
Larry M. Carr
Chairman of the Board -- VSI Enterprises, Inc.
<PAGE> 4
VSI ENTERPRISES, INC.
5801 GOSHEN SPRINGS ROAD
NORCROSS, GEORGIA 30071
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 11, 1999
The annual meeting of shareholders of VSI Enterprises, Inc. (the
"Company") will be held on Friday, June 11, 1999 at 10:00 a.m., at the Company's
offices, 5801 Goshen Springs Road, Norcross, Georgia 30071, for the following
purposes:
(1) To elect four (4) directors to constitute the Board of
Directors, to serve for a term of one year and until their
successors are elected and qualified;
(2) To approve an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of
common stock from 15,000,000 shares to 23,000,000 shares,
which will allow the Company to complete the debt
restructuring transactions described in the accompanying
Proxy Statement;
(3) To approve an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of
common stock from 15,000,000 shares to 40,000,000 shares,
which will allow the Company to complete the debt
restructuring transactions described in the accompanying
Proxy Statement and would result in approximately
17,000,000 additional shares of common stock being available
for future issuance by the Company; and
(4) To transact such other business as may properly come before
the meeting or any adjournments or postponements thereof.
Only shareholders of record at the close of business on April 15, 1999
will be entitled to notice of and to vote at the meeting or any adjournments or
postponements thereof.
A Proxy Statement and a proxy solicited by the Board of Directors are
enclosed. Please sign, date and return the proxy promptly; you may also vote by
telephone according to the directions on the proxy card. If you attend the
meeting, you may, if you wish, withdraw your proxy and vote in person.
By Order of the Board of Directors,
/s/ Larry M. Carr
Larry M. Carr, Chairman of the Board
Norcross, Georgia
May 10, 1999
PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY PROMPTLY SO THAT YOUR VOTE MAY BE
RECORDED AT THE MEETING IF YOU DO NOT ATTEND PERSONALLY.
<PAGE> 5
VSI ENTERPRISES, INC.
5801 GOSHEN SPRINGS ROAD
NORCROSS, GEORGIA 30071
ANNUAL MEETING OF SHAREHOLDERS
JUNE 11, 1999
-----------------------
PROXY STATEMENT
-----------------------
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of VSI Enterprises, Inc. (the "Company")
for the Annual Meeting of Shareholders to be held on Friday, June 11, 1999, and
any adjournments or postponements thereof, at the time and place and for the
purposes set forth in the accompanying notice of the meeting. The expense of
this solicitation, including the cost of preparing and mailing this Proxy
Statement, will be paid by the Company. In addition to solicitations by mail,
officers and regular employees of the Company, at no additional compensation,
may assist in soliciting proxies by telephone. The Company may also use the
services of a proxy solicitation firm in connection with the solicitation of
proxies. Although the exact cost of these services is not known at this time, it
is anticipated that the cost will not exceed $5,000. This Proxy Statement and
the accompanying proxy are first being mailed to shareholders on or about May
10, 1999. The address of the principal executive offices of the Company is 5801
Goshen Springs Road, Norcross, Georgia 30071.
Any proxy given pursuant to this solicitation may be revoked by any
shareholder who attends the meeting and gives oral notice of his election to
vote in person, without compliance with any other formalities. In addition, any
proxy given pursuant to this solicitation may be revoked prior to the meeting by
delivering to the Secretary of the Company an instrument revoking it or a duly
executed proxy for the same shares bearing a later date. Proxies which are
returned properly executed and not revoked will be voted and will be voted in
accordance with the shareholder's directions specified thereon. Where no
direction is specified, proxies will be voted for the election of the nominees
named below to constitute the entire Board of Directors and for adoption of both
proposals to increase in the number of authorized shares of Common Stock.
Abstentions and broker non-votes will be counted as shares present for purposes
of determining the presence of a quorum but will not be counted as votes cast
for purposes of determining whether the proposals to amend the Certificate of
Incorporation have received sufficient votes for adoption. Since approval of an
amendment to the Certificate of Incorporation requires the affirmative vote of
holders of a majority of shares outstanding, a shareholder who fails to return a
proxy or who abstains from voting on the proposals in his proxy will have
functionally voted against the proposals.
The record of shareholders entitled to vote at the annual meeting was
taken on April 15, 1999. On that date the Company had outstanding and entitled
to vote 12,300,144 shares of common stock, par value $.001 per share (the
"Common Stock"), with each share of Common Stock entitled to one vote.
All share and per share amounts included in this proxy statement have
been adjusted to reflect the effects of a 1-for-4 reverse split of the Company's
Common Stock, effected on January 15, 1999.
<PAGE> 6
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of April 15, 1999 by (i)
each person known by the Company to be the beneficial owner of more than five
percent (5%) of the outstanding Common Stock; (ii) each director of the Company;
(iii) the Named Executive Officers (as defined herein); and (iv) all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Shares
Name of Beneficially Percent
Beneficial Owner Owned(1) of Class
- ---------------- -------- --------
<S> <C> <C>
Larry M. Carr 550,869(2) 4.5%
Julia B. North 78,750(3) *
Harlan D. Platt, Ph.D 29,237(4) *
Edward S. Redstone 913,610(5) 7.4%
Richard W. Egan 6,574(6) *
E. Anthony Godfrey -0-(7) *
All Directors and Executive Officers 1,596,336 12.8%
as a Group (7 persons)
</TABLE>
- ----------
* Less than 1% of outstanding shares.
(1) "Beneficial Ownership" includes shares for which an individual,
directly or indirectly, has or shares voting or investment power or
both and also includes options which are exercisable within sixty days
of the date of this Proxy Statement. All of the listed persons have
sole voting and investment power over the shares listed opposite their
names unless otherwise indicated in the notes below. Beneficial
ownership as reported in the above table has been determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934. The
percentages are based upon 12,300,144 shares outstanding, except for
certain parties who hold options to purchase shares which are
exercisable within the next sixty days. The percentages for those
parties who hold presently exercisable options are based upon the sum
of 12,300,144 shares plus the number of options held by them which are
exercisable within the next sixty days, as indicated in the following
notes.
(2) Includes 23,750 shares of Common Stock subject to stock options which
are exercisable within the next sixty days and 62,500 shares of Common
Stock subject to presently exercisable Common Stock Purchase Warrants.
(3) Includes 75,000 shares of Common Stock subject to stock options which
are exercisable within the next sixty days.
(4) Includes 25,000 shares of Common Stock subject to stock options which
are exercisable within the next sixty days, and 1,575 shares of Common
Stock jointly owned by Dr. Platt's spouse.
2
<PAGE> 7
(5) Includes 16,250 shares of Common Stock subject to stock options which
are exercisable within the next sixty days, and 625 shares owned by Mr.
Redstone's spouse. Mr. Redstone's address is 222 Merrimack Street,
Suite 210, Lowell, Massachusetts 01852.
(6) Includes 4,074 shares of Common Stock subject to stock options which
are exercisable within the next sixty days.
(7) Mr. Godfrey resigned from his positions as Chief Financial Officer &
Secretary on January 5, 1999. All options held by Mr. Godfrey expired
on or before April 5, 1999 without being exercised.
AGENDA ITEM ONE
ELECTION OF DIRECTORS
The Board of Directors of the Company consists of four directors. The
Company's By-Laws provide that the Board of Directors shall consist of not less
than three nor more than seven members, the precise number to be determined from
time to time by the Board of Directors. The number of directors has been set at
four by the Board. The Board of Directors recommends the election of the four
nominees listed below.
Each of the nominees has consented to being named in this Proxy
Statement and to serve as a director of the Company if elected. In the event
that any nominee withdraws or for any reason is not able to serve as a director,
the proxy will be voted for such other person as may be designated by the Board
of Directors, but in no event will the proxy be voted for more than four
nominees. The affirmative vote of a plurality of all votes cast at the meeting
by the holders of the Common Stock is required for the election of the four
nominees standing for election. Management of the Company has no reason to
believe that any nominee will not serve if elected.
Each of the following persons has been nominated by management for
election to the Board of Directors to succeed themselves for a term of one year
and until their successors are elected and qualified:
Larry M. Carr. Mr. Carr, age 55, has been a director of the Company
since June 1994. Mr. Carr founded Nursefinders, Inc., a temporary services
company in the healthcare industry, in 1974. Although Mr. Carr's interest in
this company was acquired by Adia Services, Inc., Mr. Carr still owns and
operates numerous Nursefinders franchises and assists in the administration and
management of several other franchises through an entity known as Management
Services, Inc. Mr. Carr is Chairman of the Board of Northwest National Bank,
located in Arlington, Texas, and is a director of several privately held
companies, including OHA Financial, Inc., Trinity Airweights, LLC and
Computerized Healthcare, Inc.
Julia B. North. Ms. North, age 51, has served as President and Chief
Executive Officer and as a director of the Company since October 1997. Ms. North
served in various capacities with BellSouth Corporation from 1972 to October
1997, including most recently as President of its Consumer Services Division.
Ms. North is a director of Winn-Dixie Stores, Inc., a food retailer,
ChoicePoint, Inc., a provider of risk management services, and Wisconsin Energy
Corp., a holding company with subsidiaries in utility and non-utility
businesses.
Harlan D. Platt, Ph.D. Dr. Platt, age 48, has been a Professor of
Finance in the College of Business Administration at Northeastern University in
Boston since 1981. His research interests are in the areas of corporate renewal
and turnaround management. Dr. Platt is the author of three books, with
3
<PAGE> 8
the most recent Principles of Corporate Renewal published in April 1998 by the
University of Michigan Press. Dr. Platt serves on the Board of Directors of
Prospect Street High Income Portfolio, Inc., and is the president of 911RISK
Inc., which develops predictive models of corporate distress. He is also the
faculty dean of the Turnaround Management Association.
Edward S. Redstone. Mr. Redstone, age 70, has been a director of the
Company since July 1996. Mr. Redstone has been a private investor since 1994.
From 1984 to 1994, he served as Chairman of the Board of Martha's Vineyard
National Bank.
There are no family relationships between any director or executive
officer and any other director or executive officer of the Company.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers and persons who own more than 10% of the
outstanding Common Stock of the Company to file with the Securities and Exchange
Commission reports of changes in ownership of the Common Stock of the Company
held by such persons. Officers, directors and greater than 10% shareholders are
also required to furnish the Company with copies of all forms they file under
this regulation. To the Company's knowledge, based solely on a review of the
copies of such reports furnished to the Company and representations that no
other reports were required, during the year ended December 31, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10% shareholders were complied with, except that Richard W. Egan
and Richard C. Mays each failed to timely file their respective Initial
Statement of Beneficial Ownership (Form 3).
Although it is not the Company's obligation to make filings pursuant to
Section 16 of the Securities Exchange Act of 1934, the Company has adopted a
policy requiring all Section 16 reporting persons to report monthly to the Chief
Financial Officer of the Company as to whether any transactions in the Company's
securities occurred during the previous month.
MEETINGS OF THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD
The Board of Directors held 14 meetings during the year ended December
31, 1998. Each director attended at least 75% or more of the aggregate number of
meetings held by the Board of Directors and the committees on which he or she
served. The Company's Board of Directors has four standing committees -- the
Executive Committee, the Audit Committee, the Compensation Committee and the
Stock Option Committee. The Board of Directors does not have a standing
nominating committee, such function being reserved to the full Board of
Directors.
The Executive Committee presently consists of Larry M. Carr and Edward
S. Redstone. The Executive Committee exercises the authority of the Board of
Directors in accordance with the By-Laws of the Company between meetings of the
Board. The Executive Committee did not meet during the year ended December 31,
1998.
4
<PAGE> 9
The Audit Committee presently consists of Harlan D. Platt, Ph.D.
(Chairman), Larry M. Carr and Edward S. Redstone. The Audit Committee has been
assigned the principal functions of: (i) recommending the independent auditors;
(ii) reviewing and approving the annual report of the independent auditors;
(iii) approving the annual financial statements; and (iv) reviewing and
approving summary reports of the auditors' findings and recommendations. The
Audit Committee held one meeting during the year ended December 31, 1998.
The Compensation Committee presently consists of Larry M. Carr
(Chairman), Edward S. Redstone and Julia B. North. The Compensation Committee
has been assigned the functions of approving and monitoring the remuneration
arrangements for senior management and establishing the targets that determine
awards payable under the Company's incentive compensation plan. The Compensation
Committee held one meeting during the year ended December 31, 1998.
The Stock Option Committee presently consists of Edward S. Redstone
(Chairman) and Larry M. Carr. The Stock Option Committee has been assigned the
functions of administering the Company's Stock Option Plans and Employee Stock
Purchase Plan and granting options thereunder. The Stock Option Committee held
three meetings during the year ended December 31, 1998.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
---- --- -------------
<S> <C> <C>
Julia B. North 51 President and Chief Executive Officer
Richard W. Egan 33 Executive Vice President - Global Sales
Richard C. Mays 42 Vice President and Chief Technical Officer
Emmett H. Reed 48 Vice President - Operations and Service
</TABLE>
Executive officers are chosen by and serve at the discretion of the
Board of Directors of the Company. Executive officers will devote their full
time to the affairs of the Company. See "Election of Directors" for information
with respect to Julia B.
North.
Richard W. Egan. Mr. Egan joined the Company in June 1995 and, since
February 1, 1998, has served as Executive Vice President - Global Sales. From
July 1996 until February 1998 he served as National Account Manager, and from
June 1995 until July 1996 as Regional Sales Director. He was previously employed
as Eastern Region Sales Manager for DBA Software and as Account Manager for
Training America/Goal Systems.
Richard C. Mays. Mr. Mays joined the Company in April 1993 and, since
February 1, 1998, has served as Vice President and Chief Technical Officer. From
April 1993 until September 1994, he served as Lead Software Engineer, and from
September 1994 until April 1996 as Software Development Manager.
Emmett H. Reed. Mr. Reed joined the Company in September 1989 and,
since August 1998, has served as Vice President - Operations and Service. He
served as Director of Service from April 1997 until August 1998. Previously, Mr.
Reed had worked in a variety of capacities for the Company, including Senior
Network Engineer, Sales Engineer, Installation Manager, Customer Service Manager
and Test Technician.
5
<PAGE> 10
EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
years ended December 31, 1998, 1997 and 1996 concerning compensation paid or
accrued by the Company to or on behalf of the Company's Chief Executive Officer
and the other executive officers of the Company whose total annual salary and
bonus exceeded $100,000 during the year ended December 31, 1998 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------------- ------------
OTHER NUMBER OF
NAME AND ANNUAL OPTIONS
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDED
- ------------------ ---- ------ ----- ------------ -------
<S> <C> <C> <C> <C> <C>
Julia B. North ............ 1998 $161,539 $ -- $1,538 12,500
President and Chief 1997(1) 32,000 -- -- 112,500
Executive Officer
Richard W. Egan ........... 1998(2) $132,553(3) -- $ 769 25,000
Executive Vice President
-- Global Sales
E. Anthony Godfrey ........ 1998(4) $101,538 $5,850 $1,106 12,500
Chief Financial Officer & 1997 62,731 4,433 963 --
Secretary
</TABLE>
- ----------
(1) Ms. North joined the Company in October 1997.
(2) Mr. Egan was named Executive Vice President - Global Sales on January
31, 1998.
(3) Includes sales commissions of $53,995.
(4) Mr. Godfrey served as Chief Financial Officer and Secretary of the
Company from November 1997 until January 5, 1999, when he resigned
those positions.
DIRECTORS' FEES
The Company's present policy is not to pay any cash compensation to
directors who are also employees of the Company for their services as directors.
Each non-employee director of the Company receives an automatic grant of options
to purchase 3,750 shares of Common Stock on each January 5. Each non-employee
director of the Company also receives $500 for each Board meeting attended, plus
reimbursement of travel and other expenses incurred in connection with the
performance of their duties.
In addition, all new non-employee directors of the Company receive a
one-time grant of an option to purchase 5,000 shares of Common Stock at an
exercise price equal to the fair market value of such stock on the date of
grant. Such options expire, unless previously exercised or terminated, ten years
from the date of grant.
6
<PAGE> 11
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is currently
comprised of Larry M. Carr, Edward S. Redstone and Julia B. North. With the
exception of Ms. North, who serves as President & Chief Executive Officer of the
Company, none of the members of the Compensation Committee served as an officer
or employee of the Company or any of its subsidiaries during fiscal 1998. Except
as set forth below, there were no material transactions between the Company and
any of the members of the Compensation Committee during fiscal 1998.
On February 18, 1998, Edward S. Redstone, a director of the Company,
loaned $500,000 to the Company in order to provide the Company with short-term
liquidity. This loan was repaid in full on February 27, 1998, including accrued
interest of $1,045.
In connection with private placement transactions by the Company in
1998, Messrs. Carr and Redstone purchased 18-month term notes on October 1, 1998
in the amount of $400,000 and $200,000, respectively. Interest accrues on the
outstanding principal indebtedness at a rate per annum equal to three percent in
excess of the prime rate. In addition, Messrs. Carr and Redstone were granted
50,000 and 25,000 warrants, respectively, to purchase shares of Common Stock of
the Company. The warrants will have a term of five years, expiring on October 1,
2003, and will become exercisable on April 1, 2000 at an exercise price of $1.68
per share. The term notes were purchased and warrants received by these
directors on the same terms as were offered to other investors.
STOCK OPTION PLAN
The Company, by action of its Board of Directors, adopted the 1991
Stock Option Plan (the "1991 Plan") for officers, directors and employees of the
Company or of a wholly-owned subsidiary of the Company. The 1991 Plan was
approved by the shareholders of the Company on October 10, 1991. In July 1992,
the 1991 Plan was amended to, among other things, provide for the automatic
grant of options to the Company's non-employee directors, to increase the number
of shares of Common Stock available for grant thereunder and to expand the class
of persons eligible to receive options under the 1991 Plan to include employees
of majority-owned subsidiaries of the Company. In November 1993, the 1991 Plan
was further amended to expand the class of persons eligible to receive options
under the 1991 Plan and to increase the number of shares of Common Stock
available for grant thereunder. The 1991 Plan, as amended by the shareholders of
the Company on May 19, 1998, provides for the grant of options to purchase up to
an aggregate of 915,514 shares of the Company's Common Stock. Under the terms of
the 1991 Plan, the Stock Option Committee of the Board of Directors may grant
options to purchase shares of Common Stock to officers, directors and employees
of the Company or of a subsidiary of the Company.
The following table provides certain information concerning individual
grants of stock options under the Company's 1991 Stock Option Plan made during
the year ended December 31, 1998 to the Named Executive Officers:
7
<PAGE> 12
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS EXERCISE ANNUAL RATES OF STOCK
GRANTED TO OR BASE PRICE APPRECIATION FOR
OPTIONS EMPLOYEES PRICE OPTION TERM(1)
GRANTED IN FISCAL ($ PER EXPIRATION ----------------------
NAME (#) YEAR SHARE) DATE 5% 10%
---- --- ---- ------ ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Julia B. North ... 12,500(2) 7.9 $1.000 12/21/08 $ 7,861 $19,922
Richard W. Egan .. 12,500(3) 7.9 2.876 6/16/08 22,609 57,295
12,500(4) 7.9 1.000 12/21/08 7,861 19,922
E. Anthony Godfrey 12,500(5) 7.9 2.876 6/16/08 22,609 57,295
</TABLE>
- ----------
(1) The dollar amounts under these columns represent the potential
realizable value of each grant of option assuming that the market price
of the Company's Common Stock appreciates in value from the date of
grant at the 5% and 10% annual rates prescribed by the SEC and
therefore are not intended to forecast possible future appreciation, if
any, of the price of the Company's Common Stock.
(2) Option is fully vested.
(3) Options vest as follows: 4,167, 4,167 and 4,166 shares on each of June
16, 1999, 2000 and 2001, respectively.
(4) Options vest as follows: 4,167, 4,167 and 4,166 shares on each of
December 21, 1999, 2000 and 2001, respectively.
(5) Options vest as follows: 4,167, 4167 and 4,166 shares on each of June
16, 1999, 2000 and 2001, respectively. Mr. Godfrey resigned his
positions as Chief Financial Officer and Secretary on January 5, 1999.
Accordingly, options granted to him in 1998 expired without being
exercised.
The following table provides certain information concerning the value of
unexercised options held by the Named Executive Officers under the Company's
Stock Option Plans as of December 31, 1998. No options were exercised by any of
the Named Executive Officers during 1998.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FISCAL YEAR MONEY OPTIONS AT FISCAL
END YEAR END (A)
--- ------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Julia B. North ... 75,000 50,000 $ -- $ --
Richard W. Egan .. 4,074 27,168 -- --
E. Anthony Godfrey 22,916 12,500 -- --
</TABLE>
8
<PAGE> 13
- ----------
(a) Dollar values were calculated by determining the difference between the fair
market value of the underlying securities at year-end ($1.00 per share) and the
exercise price of the options.
CERTAIN TRANSACTIONS
Reference is made to "Executive Compensation - Compensation Committee
Interlocks and Insider Participation" for information regarding certain
transactions between the Company and each of Larry M. Carr and Edward S.
Redstone, directors of the Company, during fiscal 1998.
STOCKHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
the cumulative total stockholder return on the Company's Common Stock against
the cumulative total return of the Nasdaq Stock Market Index and the Nasdaq
Electronics Components Stock Index for the period commencing on December 31,
1993 and ending December 31, 1998 (the "Measuring Period"). The graph assumes
that the value of the investment in the Company's Common Stock and each index
was $100 on December 31, 1993. The yearly change in cumulative total return is
measured by dividing (i) the sum of (a) the cumulative amount of dividends for
each fiscal year, assuming dividend reinvestment, and (b) the change in share
price between the beginning and end of the Measuring Period, by (ii) the share
price at the beginning of the Measuring Period. The Company has not paid any
cash dividends.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
VSI ENTERPRISES, INC., NASDAQ STOCK MARKET INDEX AND
NASDAQ ELECTRONICS COMPONENTS STOCK INDEX
<TABLE>
<CAPTION>
NASDAQ
NASDAQ ELECT.
MEASUREMENT PERIOD STOCK MARKET COMPONENTS
(FISCAL YEAR COVERED) VSI ENTERPRISES, INC. INDEX S.I.
- --------------------- --------------------- ----- ----
<S> <C> <C> <C>
12/31/93 100 100 100
12/30/94 61 98 110
12/29/95 45 138 183
12/31/96 137 170 316
12/31/97 76 209 332
12/31/98 9 294 513
</TABLE>
ASSUMES $100 INVESTED ON DECEMBER 31, 1993 IN VSI ENTERPRISES, INC.
COMMON STOCK, NASDAQ STOCK MARKET INDEX AND
NASDAQ ELECTRONICS COMPONENTS STOCK INDEX
9
<PAGE> 14
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
During the year ended December 31, 1998, the Compensation Committee of the
Board of Directors was comprised of two non-employee members and one employee
member of the Board. The Compensation Committee is responsible for: (i) setting
the Company's compensation philosophy and policies; (ii) setting the terms and
the administration of compensation plans for officers of the Company; (iii)
review and approval of pay recommendations for the executive officers of the
Company; and (iv) initiation of all compensation actions for the Chief Executive
Officer of the Company.
The Company's compensation policies have been designed to align the
financial interests of the Company's management with those of its stockholders,
and reflect the nature of the Company by taking into account the Company's
operating environment and the expectations for growth and enhanced
profitability. Compensation for each of the Company's executive officers
consists of a base salary, discretionary performance bonus and stock options.
The Company does not currently provide executive officers with other long-term
incentive compensation other than the ability to contribute their earnings to
the Company's 401(k) Plan.
The Compensation Committee's philosophy is that the predominant portion of
an executive's compensation should be based directly upon the value of long-term
incentive compensation in the form of stock options. The Compensation Committee
believes that providing executives with the opportunities to acquire significant
stakes in the growth and prosperity of the Company (through grants of stock
options), while maintaining other elements of the Company's compensation program
at conservative levels, will enable the Company to attract and retain executives
with the outstanding management abilities and entrepreneurial spirit which are
essential to the Company's ongoing success. Furthermore, the Compensation
Committee believes that this approach to compensation motivates executives to
perform to their full potential.
At least annually, the Compensation Committee reviews salary
recommendations for the Company's executives (other than the Chief Executive
Officer) and then approves such recommendations, with any modifications it has
deemed appropriate. The annual salary recommendations are made under the
ultimate direction of the Chief Executive Officer, based on peer group and
national industry surveys of total compensation packages, as well as evaluations
of the individual executive's past and expected future performance. Similarly,
the Compensation Committee fixes the base salary of the Chief Executive Officer
based on a review of competitive compensation data, the Chief Executive
Officer's overall compensation package, and the Compensation Committee's
assessment of his or her past performance and its expectation as to his future
performance in leading the Company. Generally, such salaries have been below
levels paid to executives with comparable qualifications, experience and
responsibilities at other similarly situated companies.
The Compensation Committee also determines, based upon the recommendation
of the Chief Executive Officer, the annual bonus, if any, to be paid to
executive officers (other than the Chief Executive Officer). The amount of each
individual bonus is determined based upon an evaluation of such factors as
individual performance, increases in the Company's revenue, net income, net
income per share and market penetration, as well as improvements in operating
efficiencies. The assessment of performance achievement is considered in
relation to the maximum normal bonus opportunity, which is paid for
10
<PAGE> 15
achieving outstanding levels of performance. The Compensation Committee applies
similar criteria in setting the amount of annual bonus, if any, earned by the
Chief Executive Officer.
Stock options represent a substantial portion of compensation for the
Company's executive officers, including the Chief Executive Officer. Stock
options are granted at the prevailing market price on the date of grant, and
will only have value if the Company's stock price increases. Generally, option
grants vest in equal amounts over a period of three years (although certain
special types of grants may vest either immediately or over a shorter period)
and executives must be employed by the Company at the time of vesting in order
to exercise the options. Grants of stock options generally are based upon the
level of the executive's position with the Company and an evaluation of the
executive's past and expected future performance. The Compensation Committee
believes that dependence on stock options for a significant portion of
executives' compensation more closely aligns such executives' interests with
those of the Company's stockholders, since the ultimate value of such
compensation is linked directly to stock price.
In the year ended December 31, 1998, the Company granted: its Chief
Executive Officer Julia B. North options to purchase 12,500 shares of the
Company's Common Stock; its Chief Financial Officer E. Anthony Godfrey options
to purchase 12,500 shares of the Company's Common Stock; its Executive Vice
President-Global Sales Richard W. Egan options to purchase 25,000 shares of the
Company's Common Stock; its Vice President-Operations Emmett H. Reed options to
purchase 18,750 shares of the Company's Common Stock; and its Chief Technical
Officer Richard C. Mays options to purchase 12,500 shares of the Company's
Common Stock.
The Compensation Committee continually evaluates the Company's compensation
policies and procedures with respect to executives. Although the Compensation
Committee believes that current compensation policies have been successful in
aligning the financial interests of executive officers with those of the
Company's stockholders and with Company performance, it continues to examine
what modifications, if any, should be implemented to further link executive
compensation with both individual and Company performance.
Larry M. Carr, Chairman
Edward S. Redstone
Julia B. North
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, that might incorporate future filings,
including this Proxy Statement, in whole or in part, the foregoing Report of
Compensation Committee on Executive Compensation and the Stockholder Return
Performance Graph shall not be incorporated by reference into any such filings.
11
<PAGE> 16
AGENDA ITEM TWO
PROPOSAL TO AMEND CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED COMMON STOCK TO 23,000,000 SHARES
GENERAL
On April 21, 1999, the Company entered into an agreement with Thomson
Kernaghan & Co., Ltd. ("Thomson Kernaghan") to restructure, subject to certain
conditions, a $900,000 term note held by Thomson Kernaghan. This note matures on
May 16, 1999 and is secured by the Company's patents. As of April 1, 1999,
approximately $1,007,000 was outstanding under the note, including accrued
interest and penalties. As described below, the restructuring of the note would
involve (i) the issuance of shares of common stock of the Company to Thomson
Kernaghan, (ii) the issuance of common stock purchase warrants to Thomson
Kernaghan, (iii) the similar restructuring of not less than $1.0 million of
other indebtedness of the Company through the issuance of shares of common stock
and warrants, and (iv) the receipt by the Company of not less than $1.0 million
in new equity capital, which would require the issuance of shares of common
stock and warrants. The completion of these transactions will require the
Company to issue up to 5,000,000 shares of common stock and to reserve an
additional 3,000,000 shares of common stock for subsequent issuance upon the
exercise of warrants issued in connection therewith. The actual number of shares
and warrants issued could be less, depending on the price of the Company's
common stock at the time of the closing of the transactions.
The Company currently has approximately 1,600,000 shares of common
stock available for issuance. As a consequence, in order to complete these
transactions, the Certificate of Incorporation of the Company must be amended to
increase the number of shares of common stock available for issuance.
Accordingly, the following resolution will be introduced at the Annual Meeting:
RESOLVED: That Section 5.01 of the Certificate of Incorporation, as
heretofore added to or amended by certificates filed pursuant to law, is amended
to read in its entirety as follows:
"5.01 Authorized Shares. The aggregate number of shares which
the Company shall have authority to issue is Twenty-Three
Million Eight Hundred Thousand (23,800,000). Twenty-Three
Million (23,000,000) shares shall be designated 'Common Stock'
and shall have a par value of $.001. Eight Hundred Thousand
(800,000) shares shall be designated 'Preferred Stock' and
shall have a par value of $.00025. All shares of the Company
shall be issued for such consideration, as expressed in
dollars, as the Board of Directors may from time to time
determine."
The Board of Directors recommends that shareholders approve the
proposed amendment to the Company's Certificate of Incorporation because it
considers the proposal to be in the best long-term and short-term interests of
the Company, its shareholders and its other constituencies.
BACKGROUND
On February 23, 1998, the Company issued $3.0 million of 5% convertible
debentures due February 2000 to Thomson Kernaghan. The proceeds of the
debentures were utilized by the Company
12
<PAGE> 17
for working capital purposes and to allow the Company to deliver two large
customer orders. The debentures were convertible into shares of common stock of
the Company at the option of the holder at the lesser of (i) $8.00 per share or,
(ii) 85% of the average closing bid price of the Company's common stock.
Shortly after the debentures were issued, the Company's stock price
began to decline. Management of the Company believed that this decline was due
to, among other things, a decrease in demand for the stock resulting from
uncertainty in the investment community as to the potential dilution upon
conversion of the debentures. In an attempt to eliminate the overhang presented
by the debentures, the Company redeemed $1,040,000 of the debentures in October
1998. This redemption was funded from the proceeds of a private placement of
$1.3 million of term notes to accredited investors. These notes mature on March
31, 2000 and accrue interest at an annual rate of prime plus 3%. In November
1998, the Company redeemed an additional $400,000 of the debentures and
converted the remaining debentures to a $900,000 term note.
The $900,000 term note issued to Thomson Kernaghan matures on May 16,
1999 and accrues interest at an annual rate of 14%. The note is secured by the
Company's seven patents. The Company has not paid a $300,000 installment of
principal under the note, which installment was due February 16, 1999. The
failure to make this repayment subjected the Company to a $30,000 per month
penalty until the full balance is repaid. If the Company does not repay the note
by May 16, 1999, the Company will be obligated to pay Thomson Kernaghan an
additional $30,000 on the 16th of each month until the debt is paid.
Additionally, Thomson Kernaghan may take possession of the Company's patents,
which have been pledged as collateral for this debt.
TERMS OF THE DEBT RESTRUCTURING
The restructuring of the note issued to Thomson Kernaghan involves a
cash payment by the Company of $150,000 and the issuance of up to 1,500,000
shares of common stock of the Company to Thomson Kernaghan to repay the balance
of the note. Shares to be issued to Thomson Kernaghan will be valued at the
greater of (i) the average closing price of the common stock of the Company for
the ten trading days immediately preceding closing, or (ii) $0.67 per share.
Thomson Kernaghan will also receive warrants to purchase up to 300,000 shares of
common stock, as follows: (a) a warrant to purchase one share of common stock,
exercisable for a term of five years at a price of $1.00 per share, for each
$4.00 of principal and interest retired (less the $150,000 cash payment), and
(b) a warrant to purchase one share of common stock, exercisable for a term of
five years at a price of $1.50 per share, for each $12.00 of principal and
interest retired (less the $150,000 cash payment).
The agreement with Thomson Kernaghan requires the Company to file with
the Securities and Exchange Commission, on or before the closing date, a
registration statement covering the shares of common stock to be issued to
Thomson Kernaghan in exchange for the repayment of the note, as well as shares
issuable upon exercise of the warrants granted to Thomson Kernaghan. The Company
has agreed to cause such registration statement to become effective as soon as
possible after the closing date, but in no event later than 90 days following
the closing date. Notwithstanding such registration, Thomson Kernaghan has
agreed not to sell any shares for a period of one year after the closing date
and, thereafter, Thomson Kernaghan will not, during any period of 30 consecutive
days, sell more than 10% of the shares issued to it; provided that, commencing
30 days following the closing, during any period of 30 consecutive days, sales
of no more than 10% of the shares issued to it may be made by Thomson Kernaghan
if (i) closing price for the common stock equals or exceeds $1.25 per share for
each of the five trading days immediately preceding the sale and (ii) any such
sale by Thomson Kernaghan is at a price which equals or exceeds $1.25 per share.
13
<PAGE> 18
Completion of the transactions contemplated by the agreement with
Thomson Kernaghan is subject, among other things, to
- - approval by the shareholders of the Company of an amendment to the
Certificate of Incorporation to increase the number of authorized
shares of common stock to an amount sufficient to complete the
transactions contemplated by the agreement,
- - the agreement of the holders of not less than $1.0 million of term
notes to similarly restructure their debt to the Company,
- - the receipt of not less than $1.0 million in new equity capital, and
- - closing on or before July 15, 1999.
REASONS FOR AND EFFECT OF THE DEBT RESTRUCTURING
The failure of the Company to restructure its indebtedness to Thomson
Kernaghan would result in the Company being unable to repay this debt when it
comes due on May 16, 1999. The failure of the Company to timely repay this
indebtedness may result in Thomson Kernaghan taking possession of or selling the
Company's patents, which have been pledged by the Company as collateral for this
debt. If Thomson Kernaghan takes possession of or sells the patents, the Company
no longer has any rights in the technology described therein. To continue to be
able to sell and service its videoconferencing products, which embody the
technology covered by the patents, the Company will be required to license this
technology from Thomson Kernaghan or any subsequent owner. There can be no
assurance that any such license will be granted on commercially reasonable terms
or at all. Accordingly, if the Company is unable to restructure its debt with
Thomson Kernaghan, and is unable to license the technology covered by the
patents on commercially reasonable terms, it will be unable to sell and service
its videoconferencing products, in which event, the Company may seek protection
under federal bankruptcy laws.
In order to avoid a default under the note issued to Thomson Kernaghan,
the Board of Directors has determined the agreement to restructure the note to
be in the best interests of the Company and its shareholders.
If consummated, the transactions contemplated by the agreement with
Thomson Kernaghan will result in a reduction of not less than $2.0 million in
the Company's current indebtedness, resulting in a stronger balance sheet and
reducing interest expense.
These transactions, however, will result in the immediate issuance of
up to 5,000,000 shares of common stock of the Company, which represent
approximately 41% of the Company's currently outstanding shares. Giving effect
to the exercise of the warrants to be issued in connection with the debt
restructuring, up to an additional 3,000,000 shares of common stock would be
issued, which would collectively represent approximately 65% of the Company's
currently outstanding shares. The issuance of these additional shares would
substantially dilute the ownership interest of the Company's existing
shareholders.
The Company has agreed to register these shares for resale and, subject
to certain restrictions described above, a portion of such shares can be sold
beginning 30 days after the effectiveness of such registration. Sales and
potential sales of substantial amounts of common stock of the Company in the
public market could adversely affect the prevailing market prices for the common
stock and impair the
14
<PAGE> 19
Company's ability to raise additional capital through the sale of equity
securities.
Even if the proposed amendment to the Certificate of Incorporation is
approved by the Company's shareholders, all of the other conditions contained in
the debt restructuring agreement with Thomson Kernaghan will need to be
satisfied. One of such conditions is the restructuring of not less than $1.0
million of other indebtedness. The Company is currently in discussions with the
holders of its term notes due March 31, 2000 regarding the restructuring of this
debt. To date, the holders of approximately $800,000 of these term notes have
indicated to the Company that they intend to agree to the debt restructuring.
There can be no assurance that the transactions contemplated by the agreement
with Thomson Kernaghan will be consummated.
If the proposed amendment to the Certificate of Incorporation is
approved by the Company's shareholders, the Company intends to immediately file
a Certificate of Amendment with the Delaware Secretary of State to effect the
increase in authorized shares. Accordingly, if the proposed debt restructuring
is not completed, these additional shares will be available for other corporate
purposes.
VOTE REQUIRED
The approval of the holders of a majority of the issued and outstanding
shares of Common Stock of the Company is required for the adoption of the
proposed amendment to the Certificate of Incorporation. THE BOARD OF DIRECTORS
RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS APPROVE THE PROPOSED AMENDMENT TO THE
CERTIFICATE OF INCORPORATION.
15
<PAGE> 20
AGENDA ITEM THREE
PROPOSAL TO AMEND CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED COMMON STOCK TO 40,000,000 SHARES
In addition to the 8,000,000 additional shares of authorized common
stock required to complete the transactions described under "Agenda Item Two"
herein, the Board of Directors deems it advisable to have additional shares of
common stock available for issuance in connection with any possible future
transactions approved by the Board of Directors, including, among others,
acquisitions, financings and other corporate transactions. If the transactions
described under "Agenda Item Two" herein are completed, approval of the proposal
set forth in this agenda item would result in approximately 17,000,000
additional shares of common stock being available for future issuance by the
Company.
Approval of this agenda item would result in sufficient shares being
authorized so as to permit the Company to complete the transactions described
under "Agenda Item Two" herein. Accordingly, your attention is directed to the
discussion under "Agenda Item Two."
At a meeting of the Board of Directors of the Company on March 23,
1999, the directors approved an amendment to Section 5.01 of the Company's
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
to increase the number of authorized shares of Common Stock of the Company from
15,000,000 to 40,000,000 shares. In connection therewith, the following
resolution will be introduced at the Annual Meeting:
RESOLVED: That Section 5.01 of the Certificate of Incorporation, as
heretofore added to or amended by certificates filed pursuant to law, is amended
to read in its entirety as follows:
"5.01 Authorized Shares. The aggregate number of shares which
the Company shall have authority to issue is Forty Million
Eight Hundred Thousand (40,800,000). Forty Million
(40,000,000) shares shall be designated 'Common Stock' and
shall have a par value of $.001. Eight Hundred Thousand
(800,000) shares shall be designated 'Preferred Stock' and
shall have a par value of $.00025. All shares of the Company
shall be issued for such consideration, as expressed in
dollars, as the Board of Directors may from time to time
determine."
The Board of Directors recommends that shareholders approve the
proposed amendment to the Company's Certificate of Incorporation because it
considers the proposal to be in the best long-term and short-term interests of
the Company, its shareholders and its other constituencies. In addition to
permitting the completion of the transactions described under "Agenda Item Two"
herein, the proposed increase in the number of shares of authorized Common Stock
will ensure that additional shares of Common Stock will be available, if needed,
for issuance in connection with any possible future transactions approved by the
Board of Directors, including, among others, stock splits, stock dividends,
acquisitions, financings and other corporate purposes.
The Board of Directors believes that the availability of the additional
shares of Common Stock for such purposes without delay or the necessity for a
special shareholders' meeting (except as may be
16
<PAGE> 21
required by applicable law or regulatory authorities or by the rules of any
stock exchange on which the Company's securities may then be listed) will be
beneficial to the Company by providing it with the flexibility required to
consider and respond to future business opportunities and needs as they arise.
The availability of additional authorized shares of Common Stock will also
enable the Company to act promptly when the Board of Directors determines that
the issuance of additional shares of Common Stock is advisable. It is possible
that shares of Common Stock may be issued at a time and under circumstances that
may increase or decrease earnings per share and increase or decrease the book
value per share of shares presently held.
Although the Company will require additional capital or other financing
to fund its operations and continued growth, except as described under "Agenda
Item Two" herein, the Company does not have any immediate agreements,
arrangements, commitments or understandings with respect to the issuance of any
of the additional shares of Common Stock which would be authorized by the
proposal to increase the number of authorized shares.
On April 15, 1999, 12,300,144 shares of Common Stock were issued and
outstanding and an aggregate of 1,095,789 shares of Common Stock were reserved
for issuance under outstanding stock options and warrants.
It should be noted that the availability of additional shares could
render more difficult or discourage a takeover attempt. For example, additional
shares of Common Stock could be issued and sold to purchasers who oppose a
takeover bid which is not in the best long-term and short-term interests of the
Company, its shareholders and its other constituencies or could be issued to
increase the aggregate number of outstanding shares of Common Stock and thereby
dilute the interest of parties attempting to obtain control of the Company. In
connection with any issuance of shares of Common Stock, the Board of Directors
is required to determine that such issuance would be in the best long-term and
short-term interests of the Company, its shareholders and its other
constituencies. The Board of Directors is presently unaware of any specific
effort to accumulate the shares of Common Stock of the Company or obtain control
of the Company.
The approval of the holders of a majority of the issued and outstanding
shares of Common Stock of the Company is required for the adoption of the
proposed amendment to the Certificate of Incorporation. THE BOARD OF DIRECTORS
RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS APPROVE THE PROPOSED AMENDMENT TO THE
CERTIFICATE OF INCORPORATION.
INDEPENDENT PUBLIC ACCOUNTANTS
Grant Thornton LLP has served as independent auditors of the Company
for the fiscal year ended December 31, 1998. The Company has not selected its
independent accountants for the fiscal year ending December 31, 1999.
Representatives of Grant Thornton LLP are expected to be present at the
shareholders' meeting and will have the opportunity to make a statement if they
desire to do so and to respond to appropriate questions.
ENGAGEMENT OF GRANT THORNTON LLP
17
<PAGE> 22
On January 5, 1999, the Company dismissed its independent auditors,
Arthur Andersen LLP, and on the same date authorized the engagement of the firm
of Grant Thornton LLP as its independent auditors for the fiscal year ending
December 31, 1998. Each of these actions was approved by the Board of Directors
of the Company.
Arthur Andersen LLP was engaged as the Company's independent auditor on
October 16, 1997 and has only reported on the consolidated financial statements
of the Company for the fiscal year ended December 31, 1997. The report of Arthur
Andersen LLP on the consolidated financial statements of the Company for the
fiscal year ended December 31, 1997 did not contain any adverse opinions or a
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit
scope or accounting principles.
In connection with the audit of the fiscal year ended December 31, 1997
and for the unaudited interim period through January 5, 1999, there were no
disagreements with Arthur Andersen LLP on any matter of accounting principle or
practice, financial statement disclosure, or audit procedure or scope which
disagreement, if not resolved to the satisfaction of Arthur Andersen LLP, would
have caused it to make reference to the subject matter of the disagreement in
its report. Further, during the fiscal year ended December 31, 1997 and the
unaudited interim period through January 5, 1999, neither the Company nor any of
its representatives sought the advice of Grant Thornton LLP regarding the
application of accounting principles to a specific completed or contemplated
transaction or the type of audit opinion that might be rendered on the Company's
financial statements, which advice was an important factor considered by the
Company in reaching a decision as to the accounting, auditing or financial
reporting issue.
In connection with the audit of the fiscal year ended December 31,1997
and the unaudited interim period through January 5, 1999, Arthur Andersen LLP
did not advise the Company that (i) the internal controls necessary for the
Company to develop reliable financial statements did not exist; (ii) information
had come to its attention that led it to no longer be able to rely on
management's representations, or that made it unwilling to be associated with
the financial statements prepared by management; (iii) there existed a need to
expand significantly the scope of its audit, or that information had come to
Arthur Andersen LLP's attention during the fiscal periods, that if further
investigated may (a) materially impact the fairness or reliability of either: a
previously issued audit report or the underlying financial statements, or the
financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report (including information that may prevent it from rendering an
unqualified audit report on those financial statements), or (b) cause Arthur
Andersen LLP to be unwilling to rely on management's representations or be
associated with the Company's financial statements, and due to Arthur Andersen
LLP's dismissal did not so expand the scope of its audit or conduct such further
investigation; or (iv) information had come to Arthur Andersen LLP's attention
that it concluded materially impacts the fairness or reliability of either (a) a
previously issued audit report or the underlying financial statements, or (b)
the financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report (including information that, unless resolved to Arthur Andersen
LLP's satisfaction, would prevent it from rendering an unqualified audit report
on those financial statements), and due to Arthur Andersen LLP's dismissal, the
issue has not been resolved to Arthur Andersen LLP's satisfaction prior to its
dismissal.
ENGAGEMENT OF ARTHUR ANDERSEN LLP
On September 18, 1997, the Company dismissed its independent auditors,
Grant Thornton LLP, and on the same date authorized the engagement of the firm
of Arthur Andersen LLP as its independent auditors for the fiscal year ending
December 31, 1997. Arthur Andersen LLP was formally engaged by the
18
<PAGE> 23
Company on October 6, 1997. Each of these actions was approved by the Board
of Directors of the Company.
Except as described herein, the report of Grant Thornton LLP on the
consolidated financial statements of the Company for the fiscal years ended
December 31, 1996 and 1995 did not contain any adverse opinion or a disclaimer
of opinion, nor was qualified or modified as to uncertainty, audit scope or
accounting principles. Grant Thornton LLP previously reported on the
consolidated financial statements of the Company as of and for the year ended
December 31, 1995, prior to the restatement for the 1996 merger with Integrated
Network Services, Inc. ("INS"), which was accounted for as a pooling of
interests. Separate financial statements of INS included in the VSI Enterprises,
Inc. and subsidiaries consolidated financial statements as of and for the year
ended December 31, 1995 were audited and reported on separately by other
auditors. Grant Thornton LLP audited the combination of the Company's
consolidated financial statements as of and for the year ended December 31,
1995, after restatement for the 1996 merger with INS. Other than the reference
to the separate financial statements of INS included in VSI Enterprises, Inc.
and subsidiaries consolidated financial statements as of and for the year ended
December 31, 1995, the report of Grant Thornton LLP on the consolidated
financial statements of the Company as of and for the year ended December 31,
1995 did not contain any adverse opinion of disclaimer of opinion, nor was it
modified as to uncertainty, audit scope or accounting principles.
In connection with the audit of the fiscal years ended December 31,
1996 and 1995 and for the unaudited interim period through September 18, 1997,
there were no disagreements with Grant Thornton LLP on any matter of accounting
principle or practice, financial statement disclosure, or audit procedure or
scope which disagreement, if not resolved to the satisfaction of Grant Thornton
LLP, would have caused it to make reference to the subject matter of the
disagreement in its report. Further, during the fiscal years ended December 31,
1996 and 1995 and the unaudited interim period through September 18, 1997,
neither the Company nor any of its representatives sought the advice of Arthur
Andersen LLP regarding the application of accounting principles to a specific
completed or contemplated transaction or the type of audit opinion that might be
rendered on the Company's financial statements, which advice was an important
factor considered by the Company in reaching a decision as to the accounting,
auditing or financial reporting issue.
In connection with the audit of the fiscal years ended December 31,
1996 and 1995 and the unaudited interim period through September 18, 1997, Grant
Thornton LLP did not advise the Company that (i) the internal controls necessary
for the Company to develop reliable financial statements did not exist; (ii)
that information had come to its attention that led it to no longer be able to
rely on management's representations, or that made it unwilling to be associated
with the financial statements prepared by management; (iii) that there existed a
need to expand significantly the scope of its audit, or that information had
come to Grant Thornton LLP's attention during the fiscal periods, that if
further investigated may (a) materially impact the fairness or reliability of
either: a previously issued audit report or the underlying financial statements,
or the financial statements issued or to be issued covering the fiscal period
subsequent to the date of the most recent financial statements covered by an
audit report (including information that may prevent it from rendering an
unqualified audit report on those financial statements), or (b) cause Grant
Thornton LLP to be unwilling to rely on management's representations or be
associated with the Company's financial statements, and due to Grant Thornton
LLP's dismissal did not so expand the scope of its audit or conduct such further
investigation; or (iv) that information had come to Grant Thornton LLP's
attention that it concluded materially impacts the fairness or reliability of
either (a) a previously issued audit report or the underlying financial
statements, or (b) the financial statements issued or to be issued covering the
fiscal period subsequent to the date of the most recent financial statements
covered by an audit report (including information that, unless resolved to Grant
Thornton LLP's satisfaction, would prevent it from rendering an unqualified
audit report on those financial statements), and due to Grant
19
<PAGE> 24
Thornton LLP's dismissal, the issue has not been resolved to Grant Thornton
LLP's satisfaction prior to its dismissal.
ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, as filed with the Securities and Exchange Commission, is
available to shareholders who make written request therefor to the Company's
Investor Relations Department, 5801 Goshen Springs Road, Norcross, Georgia
30071. Copies of exhibits and basic documents filed with that report or
referenced therein will be furnished to shareholders of record upon request.
INCORPORATION BY REFERENCE
The following portions of the Company's Annual Report to Shareholders
for the year ended December 31, 1998, which accompanies this Proxy Statement,
are incorporated by reference herein: (i) consolidated financial statements of
the Company as of December 31, 1998 and 1997 and for the years ended December
31, 1998, 1997 and 1996; and (ii) Management's Discussion and Analysis of
Financial Condition and Results of Operations.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the Company's
2000 annual meeting must be received at the Company's principal executive
offices by December 15, 1999 in order to be eligible for inclusion in the
Company's proxy statement and form of proxy for that meeting.
With respect to any such proposals received by the Company after March
1, 2000, the persons named in the form of proxy solicited by management in
connection with the 2000 annual meeting of shareholders of the Company will have
discretionary authority to vote on any such shareholder proposals in accordance
with their judgment of that is in the best interests of the Company.
OTHER MATTERS
The Board of Directors knows of no other matters to be brought before
the annual meeting. However, if other matters should come before the annual
meeting it is the intention of the persons named in the enclosed form of Proxy
to vote the Proxy in accordance with their judgment of what is in the best
interest of the Company.
By Order of the Board of Directors,
/s/ Larry M. Carr
Larry M. Carr, Chairman of the Board
Norcross, Georgia
May 10, 1999
20
<PAGE> 25
APPENDIX A
VSI ENTERPRISES, INC.
5801 Goshen Springs Road
Norcross, Georgia 30071
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE
1999 ANNUAL MEETING OF SHAREHOLDERS.
The undersigned hereby appoints Julia B. North and J. Kendall Keatley
or either of them, with power of substitution to each, the proxies of the
undersigned to vote the Common Stock of the undersigned at the Annual Meeting of
Shareholders of VSI ENTERPRISES, INC. to be held Friday, June 11, 1999, at 10:00
a.m., at the Company's offices, 5801 Goshen Springs Road, Norcross, Georgia
30071, and any adjournments or postponements thereof.
1. To elect four (4) directors for a term of one year and until their
successors are elected and have qualified
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY to vote for
below (except as marked all nominees listed below
to the contrary below)
LARRY M. CARR, JULIA B. NORTH, HARLAN D. PLATT, PH.D., and EDWARD S.
REDSTONE
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE
WRITE THE NOMINEE'S NAME IN THE SPACE PROVIDED BELOW.
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2. To approve an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of common stock from
15,000,000 shares to 23,000,000 shares, which will allow the Company to
complete the debt restructuring transactions described in the
accompanying Proxy Statement;
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To approve an amendment to the Company's Certificate of Incorporation
to increase the number of authorized shares of common stock from
15,000,000 shares to 40,000,000 shares, which will allow the Company
to complete the debt restructuring transactions described in the
accompanying Proxy Statement and would result in approximately
17,000,000 additional shares of common stock being available for future
issuance by the Company; and
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To vote in accordance with their best judgment with respect to any
other mattes that may properly come before the meeting or any
adjournments or postponements thereof.
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ABOVE PROPOSALS AND UNLESS
INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THIS PROXY
WILL BE SO VOTED.
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Please date and sign this Proxy exactly as
name(s) appears on the mailing label.
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Print Name(s):
NOTE: When signing as an attorney, trustee,
executor, administrator or guardian, please
give your title as such. If a corporation or
partnership, give full name by authorized
officer. In the case of joint tenants, each
joint owner must sign.
Date: --------------------------------------
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