<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 31, 1999
-------------------------------
VSI Enterprises, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-10927 84-1104448
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
5801 Goshen Springs Road, Norcross, Georgia 30071
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 242-7566
-----------------------------
Not applicable
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(Former name or former address, if changed since last report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On August 31, 1999, VSI Enterprises, Inc. (the "Company" or "VSI")
restructured its debt with Thomson Kernaghan & Co., Ltd. ("Kernaghan"), which
totaled $1,089,750 at August 31, 1999. VSI made a cash payment of $150,000 at
closing, and the remaining balance was exchanged for a 7% Secured Convertible
Debenture, with a one year term (the "Debenture"). The Debenture is secured by a
lien on VSI's ownership interest in VSI Network Solutions, Inc., d/b/a Eastern
Telecom, Inc. ("ETI"), which is junior to the Company's converting term note
holders and new investors, as discussed below. ETI is a marketer and reseller of
telecommunications services and products. Additionally, under the terms of the
agreement, Kernaghan released its existing security interest in VSI's patents.
Kernaghan has the option to commence converting the Debenture into shares of VSI
common stock at the initial rate of 7.5% per month beginning January 1, 2000.
This rate will increase to 15% per month commencing April 1, 2000. The
conversion price is the lesser of $1.00 per share or the five-day average
closing bid price of the VSI Common Stock prior to the date of any such
conversion, with a floor of $0.50 per share. Furthermore, Kernaghan has the
option of converting the Debenture into shares of ETI common stock at any time
and at the rate of one share of ETI Common Stock for each $6.50 of principal so
converted. Any remaining balance of the Debenture will be payable on the
maturity date.
As part of closing the Kernaghan transaction, $1,213,000 of the
Company's 18-month term notes due March 31, 2000 were converted into 195,099
shares of ETI common stock which were owned by VSI, representing a 19.5%
minority interest in ETI. In addition, $1,040,000 of new capital was raised by
selling a 16.0% minority interest in ETI. The consideration received for the
sale of shares of common stock of ETI was based on an internal valuation of ETI.
VSI still holds the remaining 64.5% majority ownership interest in ETI.
Participants in the term note conversion and new equity participants
also received 1,098,492 and 396,497 warrants to acquire shares of VSI common
stock at an exercise price of $0.50 and $1.00 per share, respectively. Under the
terms of the Kernaghan agreement, VSI has undertaken to sell its remaining
interest in ETI at not less than fair market value, provided the terms of any
such transaction are otherwise acceptable to VSI. Additionally, ETI's minority
shareholders have a put option, which gives then the right to put their ETI
shares back to VSI after one year, and VSI has a call option to reacquire shares
of ETI at any time, both at a price of $6.50 per share of ETI Common Stock.
In connection with the above-described transactions, an aggregate of
255,480 shares of ETI common stock were sold to affiliates of VSI, as follows:
<TABLE>
<CAPTION>
ETI Shares Issued in ETI Shares Issued
Name Title Exchange for Term Notes for New Equity
- ---- ----- ----------------------- --------------
<S> <C> <C> <C>
Richard E. Harrison CEO -- 76,923 (1)
Richard Egan Officer 1,613 --
Edward S. Redstone Director 32,265 76,923
Larry M. Carr Director 64,530 --
Julia B. North Director 1,613 --
Harlan D. Platt Director 1,613 --
</TABLE>
- -------------------------------
(1) Represents shares of ETI common stock owned by OHA Financial, Inc., of
which Mr. Harrison serves as President and a director.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(b) Pro Forma Financial Information:
Introduction
Unaudited Pro Forma Condensed Consolidated Balance
Sheet - June 30, 1999
Unaudited Pro Forma Condensed Consolidated Statements
of Operations - six months ended June 30, 1999 and
year ended December 31, 1998
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements
(c) Exhibits:
10.20 Promissory Note Restructuring Agreement, dated as of
August 31, 1999, by and between VSI Enterprises, Inc.
and Thomson Kernaghan & Co., Ltd.
10.21 7% Secured Convertible Debenture, dated August 31,
1999, issued to Thomson Kernaghan & Co., Ltd. in the
principal amount of $1,089,750.
10.22 Stock Pledge Agreement, dated as of August 31, 1999,
by and among VSI Enterprises, Inc., Thomson Kernaghan
& Co., Ltd., the secured parties named therein, and
Jackson Walker L.L.P., as Depository Agent.
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<PAGE> 4
PRO FORMA FINANCIAL INFORMATION
INTRODUCTION
The following unaudited pro forma condensed consolidated financial
statements give effect to the disposition of 35.5% of VSI's equity interest in
ETI.
The unaudited pro forma condensed consolidated balance sheet presents
the financial position of VSI at June 30, 1999 giving effect to the disposition
as if it has occurred on such date. The unaudited pro forma condensed
consolidated statements of operations for the six months ended June 30, 1999 and
for the year ended December 31, 1998 give effect to the disposition as if it had
occurred at the beginning of each period, respectively.
The unaudited pro forma financial information is presented for
information purposes only and it is not necessarily indicative of the financial
position and results of operations that would have been achieved had the
disposition been completed as of the dates indicated and is not necessarily
indicative of VSI's future financial position or results of operations.
The unaudited pro forma condensed consolidated financial statements
should be read in conjunction with the historical consolidated financial
statements of VSI, including the related notes thereto.
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<PAGE> 5
VSI ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
ASSETS HISTORICAL ADJUSTMENTS PRO FORMA
------ ---------- ----------- ---------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 366,617 $ 1,040,000 (c) $ 1,246,617
$ (160,000)(a)
Accounts Receivables, net $ 3,607,833 $ 3,607,833
Inventories, net $ 814,170 $ 814,170
Demo inventory $ 76,716 $76,716
Prepaid expenses and other assets $ 72,095 $72,095
Current assets of discontinued operations $ 29,665 $29,665
------------ ----------- ------------
TOTAL CURRENT ASSETS $ 4,967,096 $ 880,000 $ 5,847,096
Property and Equipment, net $ 894,605 $ 894,605
OTHER ASSETS
Goodwill, net $ 907,904 $ 907,904
Software development costs, net $ 50,522 $ 50,522
Other long terms assets $ 87,409 $ 87,409
------------ ----------- ------------
TOTAL ASSETS $ 6,907,536 $ 880,000 $ 7,787,536
============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of notes payable and
short term borrowings $ 3,227,288 $(1,213,000)(b) $ 2,054,038
39,750 (a)
Account Payable 1,462,116 1,462,116
Accrued Expenses 2,066,262 (55,150)(b) 1,846,362
(164,750)(a)
Deferred Revenues 1,018,392 1,018,392
Current Liabilities of discontinued operations 162,686 162,686
------------ ----------- ------------
TOTAL CURRENT LIABILITIES 7,936,744 (1,393,150) 6,543,594
Notes Payable less Current Portion 23,345 23,345
Minority Interest 1,040,000 (c) 2,308,150
1,268,150 (b)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock authorized 15,000,000 shares of
$.001 par value; issued and outstanding
12,300,144 shares at June 30, 1999 and
December 31, 1998, respectively 12,300 12,300
Additional paid-in-capital 48,183,581 48,183,581
Accumulated deficit (48,789,086) (35,000)(a) (48,824,086)
Cumulative comprehensive income (459,348) (459,348)
------------ ----------- ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) $ (1,052,553) $ (35,000) $ (1,087,553)
============ =========== ============
============ =========== ============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 6,907,536 $ 880,000 $ 7,787,536
============ =========== ============
</TABLE>
The accompany notes are an integral part of this consolidated pro forma
financial information.
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VSI ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
REVENUES $ 19,437,411 $ 19,437,411
COSTS AND EXPENSES
Cost of Sales 12,242,823 12,242,823
Selling, general and administrative 13,023,732 13,023,732
Research and development 786,103 786,103
Impairment loss 7,767,444 7,767,444
------------ ----------- ------------
33,820,102 - 33,820,102
LOSS FROM OPERATIONS (14,382,691) (14,382,691)
Loss on sale of investments (452,005) (452,005)
Other expenses, primarily financing charges (1,682,303) 205,130 (a) (1,477,173)
NET LOSS FROM CONTINUING OPERATIONS
------------ ----------- ------------
BEFORE MINORITY INTEREST AND INCOME TAXES (16,516,999) 205,130 (16,311,869)
Minority Interest - 454,150 (b) 454,150
Income Taxes - -
============ =========== ============
NET LOSS FROM CONTINUING OPERATIONS $(16,516,999) $ 659,280 $(15,857,719)
============ =========== ============
NET LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE $ (1.38) $ (1.33)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 11,931,232 11,931,232
============ ============
</TABLE>
The accompany notes are an integral part of this consolidated pro forma
financial information.
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<PAGE> 7
VSI ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
REVENUES $ 6,110,482 $ 6,110,482
COSTS AND EXPENSES
Cost of Sales 1,538,331 1,538,331
Selling, general and administrative 5,619,982 5,619,982
Research and development 308,098 308,098
------------ ----------- ------------
7,466,411 7,466,411
LOSS FROM OPERATIONS (1,355,929) (1,355,929)
Other expenses, primarily financing charges (317,109) 141,000 (a) (176,109)
NET LOSS FROM CONTINUING OPERATIONS
------------ ----------- ------------
BEFORE MINORITY INTEREST AND INCOME TAXES (1,673,038) 141,000 (1,532,038)
Minority Interest - 46,655 (b) 46,655
Income Taxes - -
============ =========== ============
NET LOSS FROM CONTINUING OPERATIONS $ (1,673,038) $ 187,655 $ (1,485,383)
============ =========== ============
NET LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE $ (0.14) $ (0.12)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 12,300,144 12,300,144
============ ============
</TABLE>
The accompany notes are an integral part of this consolidated pro forma
financial information.
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<PAGE> 8
VSI ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - The pro forma balance sheet has been prepared to reflect the conversion
of certain of the Company's 18-month term notes into a minority interest in ETI
and additional capital raised by selling a minority interest in ETI. The pro
forma balance sheet also reflects the payment of a portion of the outstanding
debt with Kernaghan. Pro forma adjustments are made to reflect:
a. A $160,000 payment to Kernaghan which was paid at the closing of the
promissory note restructuring transaction, including legal fees and the
accrual of estimated additional fees to complete the transaction.
b. The conversion of $1,213,000 of the Company's 18-month term notes,
including accrued interest of $55,150 into a 19.5% minority interest in
ETI.
c. Additional capital of $1,040,000 raised by selling a 16.0% minority
interest in ETI.
NOTE 2 - The pro forma income statement has been prepared to reflect the
following pro forma adjustments necessary to reflect the sale of a minority
interest in VSI outlined in Note 1 as if the transactions had occurred at the
beginning of the period presented.
a. A reduction in interest charges of $205,130 and $141,000 on the
18-month term notes for the year ended December 31, 1998 and for the
six months ended June 30, 1999, respectively.
b. A reduction in the loss from continuing operations to reflect the
interests of minority shareholders.
NOTE 3 - Basic and diluted net loss are the same for the six month period ended
June 30, 1999 and the year ended December 31, 1998 because the Company's
potentially dilutive securities, convertible debentures and stock options, are
antidilutive in all periods presented.
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<PAGE> 9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
VSI ENTERPRISES, INC.
By: /s/ Karen T. Franklin
--------------------------------------------
Karen T. Franklin, Chief Financial Officer
Dated: September 14, 1999
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<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
10.20 Promissory Note Restructuring Agreement, dated as of August 31, 1999,
by and between VSI Enterprises, Inc. and Thomson Kernaghan & Co., Ltd.
10.21 7% Secured Convertible Debenture, dated August 31, 1999, issued to
Thomson Kernaghan & Co., Ltd. in the principal amount of $1,089,750.
10.22 Stock Pledge Agreement, dated as of August 31, 1999, by and among VSI
Enterprises, Inc., Thomson Kernaghan & Co., Ltd., the secured parties
named therein, and Jackson Walker L.L.P., as Depository Agent.
</TABLE>
<PAGE> 1
EXHIBIT 10.20
PROMISSORY NOTE RESTRUCTURING AGREEMENT
This Promissory Note Restructuring Agreement (this "Agreement") is made
and entered into as of the 31st day of August 1999, by and between VSI
Enterprises, Inc., a Delaware corporation (the "Company"), and Thomson Kernaghan
& Co., Ltd. ("TKC"). The Company and TKC are sometimes each referred to herein
as a "Party" and collectively, as the "Parties".
W I T N E S S E T H :
WHEREAS, the Company is the "maker" of that certain promissory note,
dated November 16, 1998, in the original principal amount of $900,000, and with
TKC as "payee" (the "Note"); and
WHEREAS, the Company is currently undertaking a capital restructuring,
and TKC is willing to participate in such restructuring on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE 1
TERMS AND COVENANTS OF THE DEBT RESTRUCTURING
1.1 Amendment and Restatement. The parties hereto agree that the
Note is hereby amended and restated to read in its entirety as set forth in this
Agreement as Exhibit A attached hereto (the "Secured Convertible Debenture").
The principal balance of the Secured Convertible Debenture represents the
outstanding principal balance of the Note plus all accrued but unpaid interest
of, and damages under, the Note as of August 31, 1999. At the Closing (as
defined below), TKC shall deliver the original Note to the Company and VSI shall
deliver to TKC the Secured Convertible Debenture.
1.2 Payment of Cash. At the Closing, the Company shall pay to TKC
$150,000 by wire transfer or other immediately available funds (the "Cash
Payment"). The Cash Payment shall be a payment against the Secured Convertible
Debenture.
1.3 Registration of Securities. As soon as practicable after the
Closing Date (but in no event later than September 30, 1999 the ("Filing
Deadline")), the Company shall file a registration statement (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC") with respect
to the resale by TKC of the shares of Company common stock, par value $.001 per
share (the "Common Stock"), underlying the Secured Convertible Debenture (the
"Registrable Securities"), with such Registrable Securities being equal to the
maximum number of shares of Common Stock underlying the Secured Convertible
Debenture (assuming the Conversion Price is equal to the Floor Price, as such
terms are defined in the Secured Convertible
<PAGE> 2
Debenture, which amount is 1,879,500 shares). The Company shall cause the
Registration Statement to become effective as soon as possible after the Closing
Date, but in no event later than January 1, 2000 (the "Effectiveness Deadline").
If the Company fails to cause the Registration Statement to (i) be filed by the
Filing Deadline, (ii) become effective by the Effectiveness Deadline or (iii)
remain effective until the maturity date of the Secured Convertible Debenture,
then the Company will pay TKC a cash penalty each month until the Registration
Statement is filed, becomes effective or becomes re-effective(as the case may
be) equal to two percent (2%) of the principal balance of the Secured
Convertible Debenture at the beginning of such month, such payment being due and
payable within ten (10) days after the end of such month. The Company shall
deliver to TKC evidence of filing and effectiveness of the Registration
Statement.
1.4 Security Interests. The Company's obligations under the
Secured Convertible Debenture shall be secured by that certain Pledge Agreement,
in the form of Exhibit B attached hereto (the "Pledge Agreement"), whereby the
Company shall grant to TKC a third priority lien on the shares of VSI Network
Solutions, Inc., a Delaware corporation doing business as "Eastern Telecom"
("ETI") owned by the Company (the "ETI Security Interest") which shall be junior
only to the first priority lien of the New Equity (as defined below) and the
second priority lien of the holders of the Term Note Holders (as defined below).
TKC hereby agrees that, as of the Closing, the Assignment of Security Interest
executed by Video Conferencing Systems, Inc., a subsidiary of the Company, in
favor of TKC on November 16, 1998, a copy of which is attached hereto as Exhibit
C (the "Patent Security Interest") is hereby terminated and canceled and of no
further force or effect.
ARTICLE 2
CLOSING; CONDITIONS TO CLOSING
2.1 Closing. The closing of the transactions contemplated herein
(the "Closing") will take place at the executive offices of the Company, at a
time and date mutually agreeable to the Parties (the "Closing Date"); provided,
however, that the Parties agree that this Agreement shall terminate and be of no
further force or effect if the Closing does not occur on or prior to September
10, 1999 (it being agreed and understood that if the Closing Date occurs after
August 31, 1999, then the principal of the Secured Convertible Debenture shall
be increased by an amount equal to the accrued but unpaid interest on the Note
from August 31, 1999 to the Closing Date).
2.2 Conditions to Closing of TKC. Except as may be waived in
writing by TKC, the obligations of TKC to consummate the transactions
contemplated herein shall be subject to the fulfillment at or prior to the
Closing Date of each of the following conditions:
a. The Company shall have delivered to TKC the
following:
i. the Secured Convertible Debenture;
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<PAGE> 3
ii. the Cash Payment (which shall be delivered
to William Hechter in trust, pursuant to
wire instructions delivered to the Company
by TKC);
iii. the Pledge Agreement; and
iv. the Stockholders Agreement with the Former
Note Holders and the New Equity Holders.
b. The President of the Company shall have delivered to
TKC an Officer's Certificate certifying to TKC that:
i. the representations and warranties of the
Company contained in this Agreement and the
other documents, agreements and instruments
executed in connection with this Agreement
(the "Transaction Documents") were true and
correct in all material respects when
initially made and are true and correct in
all material respects as of the Closing
Date;
ii. the Company has performed and complied in
all material respects with all covenants and
conditions required by the Transaction
Documents to be performed and complied with
by the Company prior to the Closing Date;
iii. the holders of at least $1 million in
principal amount of the Company's Term
Notes, dated October 1, 1998 (the "Term Note
Holders"), have converted at least such
dollar amount of the Term Notes into shares
of common stock of ETI (the "ETI Common
Stock");
iv. the Company shall have raised at least
$1,000,000 in new cash (the "New Equity")
pursuant to a sale of shares of ETI Common
Stock; and
v. following the transactions contemplated in
(iii) and (iv) above, the Company shall
continue to own at least sixty percent (60%)
of the issued and outstanding shares of ETI
Common Stock.
c. All authorizations, approvals, consents and waivers
of any governmental authority or third party, each as
required to permit the consummation of the
transactions contemplated by the Transaction
Documents, shall have been obtained and shall not
have been
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<PAGE> 4
obtained and shall not have been terminated,
suspended or withdrawn as of the Closing Date.
d. No investigation, action, suit or proceeding shall be
pending or threatened before any court or
governmental body which seeks to restrain, prohibit
or otherwise challenge or interfere with the
consummation of the transactions contemplated herein.
2.3 Conditions to Closing of the Company. Except as may be waived
in writing by the Company, the obligations of the Company to consummate the
transactions contemplated herein shall be subject to the fulfillment at or prior
to the Closing Date of each of the following conditions:
a. TKC shall deliver to the Company the Note.
b. TKC shall deliver to the Company all documents and
instruments deemed by the Company to be necessary or
desirable in order to terminate and cancel the Patent
Security Interest.
c. An authorized officer or director of TKC shall have
delivered to the Company an Officer's Certificate
certifying to the Company that:
i. The representations and warranties of TKC
contained in the Transaction Documents were
true and correct in all material respects
when initially made and are true and correct
in all material respects as of the Closing
Date; and
ii. TKC has performed and complied in all
material respects with all covenants and
conditions required by the Transaction
Documents to be performed and complied with
by TKC prior to the Closing Date.
d. All authorizations, approvals, consents and waivers
of any governmental authority or third party, each as
required to permit the consummation of the
transactions contemplated by this Agreement, shall
have been obtained and shall not be terminated,
suspended or withdrawn as of the Closing Date.
e. No investigation, action, suit or proceeding shall be
pending or threatened before any court or
governmental body which seeks to restrain, prohibit
or otherwise challenge or interfere with the
consummation of the transactions contemplated herein.
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<PAGE> 5
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to TKC that the following are true
and correct as of the date hereof and will be true and correct as of the Closing
Date as if made on that date:
3.1 Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
The Company is not barred or otherwise prevented from doing business in any
jurisdiction where the failure to conduct such business would have a material
adverse effect on the Company.
3.2 Power. The Company and each of its subsidiaries have all
required corporate power and authority to own their respective properties and to
carry on their respective businesses as presently conducted. The Company has all
required power and authority to execute and deliver the Transaction Documents
and to carry out the transactions contemplated by the Transaction Documents.
3.3 Authorization. All action on the part of the Company necessary
for the authorization, execution, delivery and performance of the Transaction
Documents by the Company and the performance of all of the Company's obligations
thereunder have been taken. The Transaction Documents executed by the Company
are valid and binding obligations of the Company enforceable according to their
terms, except as may be limited by (a) applicable bankruptcy, insolvency,
reorganization or other similar laws of general application relating to or
affecting the enforcement of creditor rights or the relief of debtors, (b) laws
and judicial decisions regarding indemnification for violations of federal
securities laws, and (c) the availability of specific performance or other
equitable remedies.
3.4 Consents. Except as set forth on Schedule 3.4, no consent,
authorization, approval, permit or license of, or filing with, any governmental
or public body or authority, any lender or lessor or any other person or entity
is required to authorize, or is required in connection with, the execution,
delivery and performance of the Transaction Documents on the part of the
Company.
3.5 Litigation. There is no litigation, arbitration or
governmental proceeding or investigation pending or, to the knowledge of the
Company threatened in writing against the Company which conflicts with the
rights of the Company hereunder or the performance of the Company's obligations
hereunder or have a material adverse effect on the Company's financial position.
The Company is not subject to any judgment, order or decree which may prevent
the Company from conducting its business. The Company is not a party to any
litigation, arbitration, proceeding or investigation pending, or to the
knowledge of the Company threatened, involving any federal, state or local
government or agency which would conflict with, or in any way impact, the
Company's ability to perform its duties hereunder, or have a material adverse
effect on the Company's financial position.
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<PAGE> 6
3.6 Financial Statements. The consolidated balance sheets and the
related statements of income, stockholders' equity and cash flow (including the
notes related thereto) of the Company and its consolidated subsidiaries included
in the forms, documents and reports filed by the Company with the SEC complied
as to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles applied on
a basis consistent with prior periods (except as otherwise noted therein) and
present fairly the consolidated financial position of the Company and its
consolidated subsidiaries as of their respective dates, and the results of their
operations and their cash flow for the periods presented therein.
3.7 Exchange Act. The Company has furnished or made available to
TKC a true and complete copy of its Form 10-K for the fiscal year ended December
31, 1998, and any other document dated on or after the date of such Form 10-K
which the Company filed under the Securities Exchange Act of 1934, as amended,
with the SEC.
3.8 Estimated Value of ETI. Management of ETI in good faith
believes that the fair market value of ETI is at least $6 million; although
there can be no assurances that such valuation will ultimately be realized.
ARTICLE 4
REPRESENTATIONS OF TKC
TKC represents and warrants to the Company that the following are true
as of the date hereof and will be true and correct through the Closing Date as
if made on that date:
4.1 Organization. TKC is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization. TKC is not barred or otherwise prevented from doing business in
any jurisdiction where the failure to conduct such business would have a
material adverse effect on TKC.
4.2 Power. TKC has all required corporate power and authority to
own its properties and to carry on its business as presently conducted. TKC has
all required power and authority to execute and deliver the Transaction
Documents and to carry out the transactions contemplated by the Transaction
Documents.
4.3 Authorization. All action on the part of TKC necessary for the
authorization, execution, delivery and performance of the Transaction Documents
by TKC and the performance of all of TKC's obligations thereunder have been
taken. The Transaction Documents executed by TKC are valid and binding
obligations of TKC enforceable according to their terms, except as may be
limited by (a) applicable bankruptcy, insolvency, reorganization or other
similar laws of general application relating to or affecting the enforcement of
creditor rights or the relief of
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<PAGE> 7
debtors, (b) laws and judicial decisions regarding indemnification for
violations of federal securities laws, and (c) the availability of specific
performance or other equitable remedies.
4.4 Status of TKC. TKC is knowledgeable and experienced in making
venture capital investments and is able to bear the economic risk of loss of its
investment in the Company. TKC is an "accredited investor," as that term is
defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as
amended (the "Securities Act"). TKC is acting on its own behalf in connection
with the investigation and examination of the Company and its decision to
execute these documents.
4.5 Shares Purchased for Investment. TKC agrees that the Secured
Convertible Debenture and the Common Stock underlying the Secured Convertible
Debenture, (collectively, the "Securities") shall be acquired solely for TKC's
own account and not as a nominee or agent for any other person, for investment,
and not with a view to, or for offer or resale in connection with, any
distribution thereof within the meaning of the Securities Act or other
applicable securities laws. TKC understands that if any Securities have not been
registered under the Securities Act or under any applicable blue sky or other
state securities law or regulation (hereinafter collectively referred to as
"blue sky laws"), TKC cannot offer for sale, sell, pledge, transfer or otherwise
dispose of such Securities unless such Securities have been registered under the
Securities Act and under any applicable blue sky laws, or unless an exemption
from such registration is available with respect to any such proposed offer,
sale, pledge, transfer or other disposition. TKC agrees that a restrictive
legend addressing the foregoing restrictions on transfer may be placed on
certificates representing any Securities so acquired and that transfer of such
Securities may be refused by the Company or its transfer agent, if any, if in
the opinion of counsel to the Company any proposed sale or other disposition
thereof by TKC would not be in compliance with the Securities Act or any other
applicable federal securities laws or blue sky laws.
4.6 Litigation. There is no litigation, arbitration or
governmental proceeding or investigation pending or, to the knowledge of TKC,
threatened in writing against TKC, which conflicts with the rights of the
Company hereunder or the performance of TKC's obligations hereunder or have a
material adverse effect on TKC's financial position. TKC is not subject to any
judgment, order or decree which may prevent TKC from conducting its business.
TKC is not a party to any litigation, arbitration, proceeding or investigation
pending, or to the knowledge of TKC threatened, involving any federal, state or
local government or agency which would conflict with, or in any way impact,
TKC's ability to perform its duties hereunder, or have a material adverse effect
on TKC's financial position.
4.7 Consents. No consent, authorization, approval, permit or
license of, or filing with, any governmental or public body or authority, any
lender or lessor or any other person or entity is required to authorize, or is
required in connection with, the execution, delivery and performance of the
Transaction Documents on the part of TKC.
- 7 -
<PAGE> 8
ARTICLE 5
OTHER COVENANTS
5.1 Sale of ETI. The Company agrees that it will undertake to sell
ETI (i.e., its capital stock or assets) for the purpose of paying in full the
Secured Convertible Debenture and any other obligations arising from the
restructuring of the Company on the closing of such sale. All cash proceeds from
the sale of any subsidiary of the Company shall be used to pay the Secured
Convertible Debenture consistent with the priority of liens established by the
Company, including those set forth in Section 1.4 above. The Company shall make
the sole determination whether the terms of a sale of any of its subsidiaries is
acceptable; provided that ETI shall not be sold by the Company for less than
fair market value.
5.2 Assistance in Transfers. The Company agrees that once TKC is
eligible to sell the shares underlying the Secured Convertible Debenture
pursuant to Rule 144, Regulation S or an effective Registration Statement, if
TKC sells any such shares in the public market, then the Company will use all
reasonable commercial efforts to cause such shares to be transferred on the
books of its transfer agent. In addition, the Company agrees to use all
reasonable commercial efforts to cause its Transfer Agent to issue to TKC, upon
conversion of all or any portion of the Secured Convertible Debenture, stock
certificates as and when provided in the Secured Convertible Debenture.
ARTICLE 6
GENERAL
6.1 Amendments. This Agreement may not be amended, except in a
written document signed by both the Parties.
6.2 Headings. The headings of the Sections and paragraphs of this
Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.
6.3 Governing Law. THIS AGREEMENT IS TO BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING
EFFECT TO THE CHOICE OF LAW PROVISIONS THEREOF.
6.4 Notices and Demands. Any notice or demand which is permitted
or required hereunder will be deemed to have been sufficiently received (except
as otherwise provided herein) (a) upon receipt when personally delivered, (b) or
one (1) day after sent by one-day overnight delivery providing confirmation or
receipt of delivery, or (c) three (3) days after being sent by certified or
registered mail, postage and charges prepaid, return receipt requested to the
addresses listed on Schedule 6.4 attached hereto, or at any other address
designated by either Party hereto to the other Party in writing.
- 8 -
<PAGE> 9
6.5 Severability. If any provision of this Agreement is held
invalid or unenforceable under applicable law, such provision will be
ineffective to the extent of such invalidity or unenforceability, and such
provision will be modified to the extent necessary to make it valid and
enforceable. Any such invalidity or unenforceability will not invalidate or make
unenforceable the remainder of this Agreement.
6.6 Expenses. Each Party will bear its own fees for counsel and
accountants and other expenses relating to the transactions contemplated herein
(including any broker's or finder's fees); provided, however, that the Company
shall reimburse TKC in an amount up to $10,000 for its reasonable attorney's
fees and expenses.
6.7 Publicity and Disclosures. Within five (5) business days after
the consummation of the transactions contemplated herein, the Parties agree that
the Company shall publicly announce such consummation and the terms and
conditions of this Agreement; and TKC agrees not to purchase or sell any Common
Stock until two (2) business days after such public announcement.
6.8 Entire Agreement. This Agreement and the Schedules and
Exhibits to this Agreement constitute the entire agreement of the Parties with
respect to the subject matter hereof and supersede all prior agreements and
understanding, both written and oral, among the Parties, or any of them, with
respect to the subject matter hereof.
6.9 Assignment. Neither this Agreement nor any right or obligation
created hereby or in any agreement entered into in connection with the
transactions contemplated hereby shall be assignable by any party hereto.
6.10 Parties in Interest; No Third Party Beneficiaries. Except as
otherwise provided herein, the terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the Parties and their respective
heirs, legal representatives, successors and assigns. Neither this Agreement nor
any other agreement contemplated hereby shall be deemed to confer upon any
person not a Party any rights or remedies hereunder or thereunder.
6.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be taken to be an original; but such
counterparts will together constitute one document.
- 9 -
<PAGE> 10
The undersigned have executed this Agreement as of the date first
written above.
VSI ENTERPRISES, INC.
By: /s/ Richard E. Harrison
-----------------------------
Title: CEO
--------------------------
THOMSON KERNAGHAN & CO., LTD.
By: /s/ Mark Valentine
-----------------------------
Title: Chairman
--------------------------
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<PAGE> 1
EXHIBIT 10.21
NEITHER THIS DEBENTURE, NOR THE SHARES OF COMMON STOCK FOR WHICH IT MAY BE
CONVERTED, HAVE BEEN REGISTERED FOR SALE UNDER THE SECURITIES ACT OF 1933 AS
AMENDED, ANY APPLICABLE STATE SECURITIES LAWS, OR OTHER APPLICABLE SECURITIES
LAWS AND THIS DEBENTURE HAS BEEN ISSUED IN RELIANCE UPON EXEMPTIONS CONTAINED
IN SUCH LAWS FOR TRANSACTIONS NOT INVOLVING ANY PUBLIC OFFERING. THIS DEBENTURE
HAS BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED,
HYPOTHECATED, PLEDGED OR DISPOSED OF IN ANY MANNER IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH LAWS COVERING SUCH TRANSACTION, OR,
IN THE ABSENCE THEREOF, AN OPINION OF HOLDERS' COUNSEL THAT SUCH REGISTRATION
IS NOT REQUIRED AND ALL CONDITIONS NECESSARY FOR THE AVAILABILITY OF ANY
EXEMPTIONS FROM SUCH REGISTRATION REQUIREMENTS HAVE BEEN SATISFIED.
THIS DEBENTURE IS SUBJECT TO CONVERSION, IN WHOLE OR IN PART, BY WRITTEN NOTICE
TO THE COMPANY AS PROVIDED IN SECTION 5 BELOW, ALTHOUGH DELIVERY TO THE COMPANY
OF THIS DEBENTURE SHALL ONLY OCCUR UPON THE CONVERSION OF THE ENTIRE THEN
OUTSTANDING PRINCIPAL BALANCE OF THIS DEBENTURE. ACCORDINGLY, ANY ASSIGNEE OR
TRANSFEREE OF ALL OR ANY PORTION OF THIS DEBENTURE IS HEREBY ADVISED TO CONTACT
THE COMPANY IN ORDER TO ASCERTAIN THE THEN OUTSTANDING PRINCIPAL BALANCE OF,
AND ACCRUED BUT UNPAID INTEREST ON, THIS DEBENTURE.
VSI ENTERPRISES INC.
7% SECURED CONVERTIBLE DEBENTURE
$1,089,750.00 August 31, 1999
VSI Enterprises Inc., a Delaware corporation (the "Company"), the
principal office of which is located at 5801 Goshen Springs Road, Norcross,
Georgia, 30071, USA, for value received hereby promises to pay Thomson,
Kerhaghan & Co. Ltd. ("TKC"), or its registered assigns, the sum of
$1,089,750.00, together with interest accrued thereon (as provided below). The
principal of, and accrued but unpaid interest on, this Debenture shall be due
and payable on August 31, 2000 (the "Maturity Date"). Payment for all amounts
due hereunder shall be made by mail to the registered address of the Holder.
This Debenture amends and restates in its entirety that certain
promissory note, dated November 16, 1998, in the original principal amount of
$900,000, and with the Company as "maker" and TKC as "payee", and is issued in
connection with the transactions described in that certain
VSI 7% SECURED CONVERTIBLE DEBENTURE Page 1
<PAGE> 2
Promissory Note Restructuring Agreement between the Company and the Holder,
dated as of the date hereof, as the same may from time to time be amended,
modified or supplemented (the "Restructuring Agreement"). The Holder is subject
to certain restrictions set forth in the Restructuring Agreement and shall be
entitled to certain rights and privileges set forth in the Restructuring
Agreement. Holder acknowledges and agrees that pursuant to the terms of the
Restructuring Agreement, on the date hereof the Company is making a $150,000
prepayment on the principal of this Debenture.
The following is a statement of the rights of the Holder of this
Debenture and conditions to which this Debenture is subject, and to which the
Holder hereof, by the acceptance of this Debenture, agrees:
1. DEFINITIONS. As used in this Debenture, the following terms,
unless the context otherwise requires, have the following meanings:
"AVERAGE CLOSING BID PRICE" means the average of the daily last bid
price for the shares of Common Stock for the five trading days on which such
shares are actually traded as over-the-counter securities and quoted on the
Nasdaq Market (as reported by Bloomberg Business News or, if not reported
thereby, any other authoritative source) ending at the close of trading on the
trading day immediately preceding the date of a Notice of Conversion.
"CLOSING DATE" shall have the meaning given that term in the
Restructuring Agreement.
"COMMON STOCK" shall mean the $0.001 par value common stock of the
Company.
"COMPANY" means VSI Enterprises, Inc., and any corporation which shall
succeed to or assume its obligations under this Debenture.
"CONVERSION PRICE" shall mean the lessor of: (i) $1.00; or (ii) the
Average Closing Bid Price; provided, however, that in no event shall the
Conversion Price be less than the Floor Price.
"FLOOR PRICE" shall mean $0.50.
"ETI" means VSI Network Solutions, Inc., a Delaware corporation [d/b/a
"Eastern Telecom, Inc."].
"HOLDER" when the context refers to a Holder of this Debenture, shall
mean any person who shall at the time be the registered Holder of this
Debenture.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
VSI 7% SECURED CONVERTIBLE DEBENTURE Page 2
<PAGE> 3
"STOCK PLEDGE AGREEMENT" means that certain Stock Pledge Agreement, of
even date herewith, by and among the Company, the shareholders of ETI and
Jackson Walker L.L.P.
"STOCKHOLDERS AGREEMENT" means that certain Stockholders Agreement, of
even date herewith, by and among the Company and the Stockholders of ETI.
2. INTEREST:
Interest on this Debenture (computed on the basis of a 365-day year)
shall accrue at a rate of seven percent (7%) per annum from the date hereof
until the date this Debenture is paid in full or otherwise converted. The
interest on this Debenture shall be due and payable on the Maturity Date;
provided, however, that accrued but unpaid interest on the principal amount of
this Debenture converted in accordance with Section 5 below shall be payable at
the time of conversion thereof.
3. PREPAYMENTS:
At the option of the Company, the unpaid principal balance of this
Debenture may be prepaid in whole or in part at any time without premium or
penalty (at which time any accrued but unpaid interest must be paid in full),
upon at least ten (10) days prior written notice to the Holder.
4. EVENTS OF DEFAULT:
If any of the events specified in this Section 4 shall occur (herein
individually referred to as an "Event of Default"), the Holder may, so long as
such condition exists, declare the entire principal and unpaid accrued interest
hereon immediately due and payable, by notice in writing to the Company:
(i) Default in the payment of the principal and unpaid accrued
interest of this Debenture when due and payable, or default in the payment of
liquidated damages as and when provided in Section 1.3 of the Restructuring
Agreement if such default is not cured by the Company within ten (10) days
after the Holder has given the Company written notice of such default;
(ii) Default by the Company of any of its obligation under Section
5.2 of the Restructuring Agreement;
(iii) the taking of any action by any "Former Term Note Holder" or
"New Equity Holder" to enforce its "Security Interest" in order to pay the
"Secured Indebtedness" (all capitalized terms used in this subsection (iii)
shall have the meanings ascribed thereto in that certain Stock Pledge
Agreement, of even date herewith, by and among the Company, TKC and the other
parties thereto;
(iv) The institution by the Company of proceedings to be adjudicated
as bankrupt or insolvent, or the consent by it to institution of bankruptcy or
insolvency proceedings against it or the
VSI 7% SECURED CONVERTIBLE DEBENTURE Page 3
<PAGE> 4
filing by it of a petition or answer or consent seeking reorganization or
release under the federal Bankruptcy Act, or any other applicable federal or
state law, or the consent by it to the filing of any such petition or the
appointment of a receiver, liquidator, assignee, trustee or other similar
official of the Company, or of any substantial part of its property, or the
making by it of an assignment for the benefit of creditors, or the taking of
corporate action by the Company in furtherance of any such action; or
(v) If, within sixty (60) days after the commencement of an action
against the Company (and service of process in connection therewith on the
Company) seeking any bankruptcy, insolvency, reorganization, liquidation,
dissolution or similar relief under any present or future statue, law or
regulation, such action shall not have been resolved in favor of the Company or
all orders or proceedings thereunder affecting the operation or the business of
the Company stayed, or if the stay of any such order or proceeding shall
thereafter be set aside, or if, within sixty (60) days after the appointment
without the consent or acquiescence of the Company of any trustee, receiver, or
liquidator of the Company or of all or any substantial part of the properties
of the Company, such appointment shall not have been vacated.
5. CONVERSION:
5.1 VOLUNTARY CONVERSION. The Holder of this Debenture has the right
at the Holder's option, to convert this Debenture into shares of Common Stock
beginning on January 1, 2000 at a rate of up to 7.5% of the original principal
balance hereof per month (i.e., $81,731); provided, however, that such
conversion rate shall increase to 15% per month beginning on April 1, 2000; and
provided further, however, that any conversions shall be cumulative so that any
unused portions may be applied to subsequent months. The number of shares of
Common Stock into which this Debenture may be converted shall be determined by
dividing the aggregate principal amount of this Debenture being converted by
the Conversion Price in effect on the date of conversion. Any remaining balance
of this Debenture that has not been converted shall be due and payable on the
Maturity Date. Accrued but unpaid interest on the principal amount of this
Debenture so converted shall be payable at the time of conversion.
5.2 CONVERSION PROCEDURE:
NOTICE OF CONVERSION PURSUANT TO SECTION 5.1. Before the Holder shall
be entitled to convert this Debenture into shares of Common Stock, it shall
give written notice in accordance with Section 9 below to the Company at its
principal corporate office of the election to convert the same pursuant to
Section 5.1, and shall state therein the principal amount being converted and
the name or names in which the certificate or certificates for shares of Common
Stock are to be issued. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date that such notice is
actually received by the Company (the "Notice Date"). The person or persons
entitled to receive shares of Common Stock issuable upon such conversion shall
be treated for all
VSI 7% SECURED CONVERTIBLE DEBENTURE Page 4
<PAGE> 5
purposes as the record holder or holders of any such shares of Common Stock
immediately prior to the close of business on the Notice Date.
DELIVERY OF STOCK CERTIFICATES. The Company agrees to use all
reasonable commercial efforts to cause its Transfer Agent to issue to TKC, upon
conversion of all or any part of this Debenture, stock certificates for the
Common Stock underlying such converted portion within five (5) business days
after such conversion and to cause its legal counsel to issue a legal opinion
to the Company's transfer agent (to the extent such legal counsel is able to do
so under applicable law) within three (3) business days after such counsel has
received from TKC all representations, assurances and covenants reasonably
required by such counsel in order to render such opinion and, in the event such
counsel is able to, but does not, render such opinion within such time period,
the Company shall pay to the Holder, as liquidated damages, $500.00 per day,
until such opinion is delivered.
SURRENDER OF DEBENTURE. Upon conversion of any remaining principal
balance of this Debenture, the Holder at its expense shall surrender the
Debenture to the Company, duly endorsed, at the principal offices of the
Company.
MECHANICS AND EFFECT OF CONVERSION. No fractional shares of Common
Stock shall be issued upon conversion of this Debenture. In lieu of the Company
issuing any fractional shares to the Holder upon the conversion of this
Debenture, the Company shall pay to the Holder the amount in cash that would be
equal to the price of a fractional share at the Conversion Price. The stock
certificates issued by the Company may bear such legends, if any, as are
required by applicable state and federal securities laws. Upon conversion of
any remaining principal balance of this Debenture, the Company shall be forever
released from all its obligations and liabilities under this Debenture.
5.3 ALTERNATIVE CONVERSION. In addition to the conversion rights set
forth in Sections 5.1 and 5.2 above, the Holder shall also have the right at
any time, but in lieu of the right to convert the Debenture into shares of
Common Stock, to exchange the principal of this Debenture (or any part thereof)
for shares of common stock, par value $0.01 per share, of ETI (the "ETI Common
Stock"), at the rate of one (1) share of ETI Common Stock for each $6.50 of
principal so converted, which shares will be delivered in name to Holder by the
Company from the shares of ETI Common Stock owned by the Company (it being
acknowledged and agreed that such shares are, and will be, held as collateral
pursuant to the terms and provisions of the Stock Pledge Agreement). In order
to make any such conversion, Holder shall: (a) follow the procedures set forth
in Section 5.2 above; and (b) execute and deliver (1) to the Company a
signature page to the Stockholders Agreement (and in doing so, agreeing to be a
"Stockholder" thereunder) and (2) to the Depository Agent under the Stock
Pledge Agreement a Stock Power (executed in blank). The Company represents and
warrants to Holder that the New Equity Holders (as defined in the Stock Pledge
Agreement) paid $6.50 per share of ETI Common Stock purchased by them in such
transaction.
VSI 7% SECURED CONVERTIBLE DEBENTURE Page 5
<PAGE> 6
6. CONVERSION PRICE ADJUSTMENTS:
6.1 ADJUSTMENTS FOR STOCK SPLITS AND SUBDIVISIONS. In the event the
Company should at any time or from time to time after the date of issuance
hereof fix a record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of holders of Common
Stock entitled to receive a dividend or the distribution payable in additional
shares of Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly, additional
shares of Common Stock (hereinafter referred to as "Common Stock Equivalents")
without payment of any consideration by such holder for the additional shares
of Common Stock or the Common Stock Equivalents (including the additional
shares of Common Stock issuable upon conversion or exercise thereof), then, as
of such record date (or the date of such dividend distribution, split or
subdivision if no record date is fixed), the Conversion Price of this Debenture
shall be appropriately decreased so that the number of shares of Common Stock
issuable upon conversion of this Debenture shall be increased in proportion to
such increase of the outstanding shares.
6.2 ADJUSTMENTS OF REVERSE STOCK SPLITS. If the number of shares of
Common Stock outstanding at any time after the date hereof is decreased by a
combination of the outstanding shares of Common Stock, then following the
record date of such combination, the Conversion Price for this Debenture shall
be appropriately increased so that the number of shares of Common Stock
issuable on conversion hereof shall be decreased in proportion to such decrease
in outstanding shares.
In the event any adjustments are made pursuant to Sections 6.1 or 6.2
of this Agreement, the Floor Price and the $1.00 maximum Conversion Price shall
adjust accordingly. For example, a 2 for 1 stock split will result in a
decrease in the Floor Price to $0.25 per share, and a decrease in the maximum
Conversion Price to $.50 per share.
6.3 NOTICES OF RECORD DATE, ETC.
In the event of:
(i) Any taking by the Company of a record of the holders of any
class of securities of the Company for the purpose of determining the holders
thereof who are entitled to receive any dividend (other than a cash dividend
payable out of earned surplus at the same rate as that of the last such cash
dividend heretofore paid) or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right; or
(ii) Any capital reorganization of the Company, any reclassification
or recapitalization of the capital stock of the Company or any transfer of all
or substantially all of the assets of the Company to any other person or any
consolidation or merger involving the Company; or.
VSI 7% SECURED CONVERTIBLE DEBENTURE Page 6
<PAGE> 7
(iii) Any voluntary or involuntary dissolution, liquidation or winding
up of the Company.
The Company will mail to the holder of this Debenture at least five (5) days
prior to the earliest date specified therein, a notice specifying (A) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right; and (B) the date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding up is expected to be come effective and the record date for determining
stockholders entitled to vote thereon.
6.4 RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of
the Debenture such number of its shares of Common Stock as shall from time to
time be sufficient, to effect the conversion of the Debenture (but initially
not less than 1,879,500 shares); and if at any time the number of authorized
but unissued shares of Common Stock shall not be sufficient to effect the
conversion of the entire outstanding principal amount of this Debenture, in
addition to such other remedies as shall be available to the holder of this
Debenture, the Company will use its best efforts to take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Common Stock in an amount sufficient to effect the
conversion of the entire outstanding principal amount of this Debenture and all
accrued interest.
7. ASSIGNMENT. Subject to the restrictions on transfer described in
Section 8 below, the rights and obligations of the Company and the Holder of
this Debenture shall be binding upon and benefit the successors, assigns,
heirs, administrators, and transferees of the parties.
8. TRANSFER OF THIS DEBENTURE OR SECURITIES ISSUABLE ON CONVERSION
HEREOF. With respect to any offer, sale or other disposition of this Debenture
or securities into which such Debenture may be converted, the Holder will give
written notice to the Company prior thereto, describing briefly the manner
thereof, together with a written opinion of such Holders counsel, to the effect
that such offer, sale or other distribution may be effected without
registration or qualification (under any such federal or state law then in
effect). Promptly upon receiving such written notice and reasonable
satisfactory opinion, if so requested, the Company, as promptly as practicable,
shall notify such Holder that such Holder may sell or otherwise dispose of this
Debenture or such securities, all in accordance with the terms of the notice
delivered to the Company.
9. NOTICES. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if made by hand delivery, by an express courier company, by registered or
certified mail, or by facsimile transmission, at the respective addresses of
the parties as set forth herein. The address of TKC is 365 Bay Street, 10th
Floor, Toronto, Ontario, Canada _______. The Company or TKC may change its
address upon written notice to each other as provided in this Section 9.
VSI 7% SECURED CONVERTIBLE DEBENTURE Page 7
<PAGE> 8
10. NO STOCKHOLDER RIGHTS. Nothing contained in this Debenture shall
be construed as conferring upon the Holder or any other person the right to
vote or to consent to receive notice as a stockholder in respect of meetings of
stockholders for the election of directors of the Company or any other matter
or any rights whatsoever as a stockholder of the Company; and no dividends
shall be payable or accrued in respect of this Debenture or the shares of
Common Stock issuable upon conversion thereof until, and only to the extent
that, this Debenture shall have been converted.
11. GOVERNING LAW; INTERPRETATION. This Debenture shall be governed
by and construed in accordance with the laws of the State of Delaware, USA
excluding that body of law relating to conflict of laws. All references to
dollars are to U.S. dollars.
12. ARBITRATION. All disputes arising under this Agreement (other
than claims in equity) shall be resolved by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association.
Arbitration shall be by a single arbitrator experienced in the matters at issue
and selected by the Company and the Holder in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. The arbitration
shall be held in such place in Georgia as may be specified by the arbitrator
(or any place agreed to by the Company, the Holder and the arbitrator). The
decision of the arbitrator shall be final and binding as to any matters
submitted under this Agreement; provided, however, if necessary, such decision
and satisfaction procedure may be enforced by either the Company or the Holder
in any court of record having jurisdiction over the subject matter or over any
of the parties to this Agreement. All costs and expenses incurred in connection
with any such arbitration proceedings (including reasonable attorneys fees)
shall be borne by the party against which the decision is rendered, or, if no
decision is rendered, each party shall bear its respective costs and expenses.
If the arbitrator's decision is a compromise, the determination of which party
or parties bears the costs and expenses incurred in connection with any such
arbitration proceeding shall be made by the arbitrator on the basis of the
arbitrator's assessment of the relative merits of the parties' positions.
13. HEADING; REFERENCES. All headings used herein are used for
convenience only and shall not be used to construe or interpret this Debenture.
Except where otherwise indicated, all references herein to Sections refer to
Sections hereof.
14. SECURITY INTERESTS. The Company's obligations hereunder are
secured by certain security interests as provided in Section 1.4 of the
Restructuring Agreement.
VSI 7% SECURED CONVERTIBLE DEBENTURE Page 8
<PAGE> 9
IN WITNESS WHEREOF, the Company has caused this Debenture to be issued
as of the date first above written.
VSI ENTERPRISES, INC.
By: /s/ Richard E. Harrison
--------------------------------------
Title: CEO
----------------------------------
VSI 7% SECURED CONVERTIBLE DEBENTURE Page 9
<PAGE> 1
EXHIBIT 10.22
STOCK PLEDGE AGREEMENT
This Stock Pledge Agreement (this "Agreement") is made and entered
into as of the 31st day of August, 1999 by and among VSI Enterprises, Inc. (the
"Pledgor"), Thomson Kernaghan & Co., Ltd. ("TKC"), the persons and entities
executing a signature page hereto as a "Former Term Note Holder" (collectively,
the "Former Term Note Holders"), the persons and entities executing a signature
page hereto as a "New Equity Holder" (collectively, the "New Equity Holders")
(TKC, the Former Note Holders and the New Equity Holders are each sometimes
referred to herein as a "Secured Party" and collectively as the "Secured
Parties") and Jackson Walker L.L.P., as Depository Agent ("Depository Agent").
RECITALS
WHEREAS, Pledgor owns 644,901 shares (the "Shares") of common stock,
par value $0.01 per share (the "Common Stock"), of VSI Network Solutions, Inc.,
a Delaware corporation [d/b/a Eastern Telecom, Inc.] (the "Company"); and
WHEREAS, concurrently with the execution and delivery hereof, the
Pledgor has: (i) entered into a Stockholders Agreement with the Former Note
Holders and the New Equity Holders (the "Stockholders Agreement"); and (ii)
executed and delivered to TKC a 7% Secured Convertible Debenture, in the
principal amount of $1,089,750 (the "Debenture"); and
WHEREAS, Pledgor has agreed, on the terms set out herein, to secure
its obligations under the Put (as defined in the Stockholders Agreement) (the
"Put") and to secure the payment of the Debenture by granting a security
interest in the Pledged Shares (as hereinafter defined) to the Secured Parties;
NOW, THEREFORE, the parties hereto hereby agree as follows:
AGREEMENT
1. DEFINITIONS. As used in this Agreement, the following terms
shall have the meaning indicated:
a. "Pledged Shares" means the Shares, and any and all
substitutes, replacements, accessions, attachments
and other additions thereto.
b. "Secured Indebtedness" means the Put obligation under the
Shareholders Agreement and the Debenture.
2. GRANT OF SECURITY INTEREST IN THE PLEDGED SHARES. To secure the
full and punctual payment of the Secured Indebtedness, and upon and subject to
the terms, provisions and conditions of this Security Agreement, Pledgor does
hereby grant Secured Parties and their heirs, successors and assigns, a
security interest (the "Security Interest") in the Pledged Shares. In the event
that TKC elects to exchange any principal of the Debenture for Pledged Shares
(as permitted in the Debenture),
<PAGE> 2
TKC shall become an additional shareholder with respect to such Pledged Shares,
and such Pledged Shares shall continue to be subject to the terms and
provisions of this Agreement as if they were owned by VSI Enterprises, Inc.
3. DELIVERY OF SHARE CERTIFICATE TO DEPOSITORY AGENT.
a. The stock certificate evidencing the Pledged Shares and all
other stock certificates and instruments in registered form
which may constitute or evidence at any time or from time to
time a part of the Pledged Shares shall be delivered to
Depository Agent and shall be endorsed in blank for transfer or
be accompanied by proper instruments of assignment and transfer
in blank upon delivery (and Pledgor agrees to deliver a copy of
such stock certificate to each Secured party). Depository Agent
shall hold the Pledged Shares on behalf of all Secured Parties.
Until the happening of an event of Default hereunder, all
certificates for shares of the Company included in the Pledged
Shares shall remain registered in the name of Pledgor. So long
as the Secured Indebtedness, or any part thereof, remains
outstanding and unpaid, the certificate or certificates
representing the Pledged Shares and any other certificates or
instruments which may from time to time constitute or evidence a
part of the Pledged Shares, delivered to the Secured Parties
pursuant to this Section 3, shall be held by the Secured Parties
(through Depository Agent), and Pledgor shall not have the right
to procure the release of any of the Pledged Shares from the
lien hereby created except upon and in compliance with the terms
and conditions herein set forth.
b. Pledgor agrees that it shall not sell any Pledged Shares, or
allow the Company to sell all or substantially all of its assets
outside the ordinary course of business, for less than fair
market value (as determined in good faith by the Board of
Directors of Pledgor). Depository Agent shall not release any
Pledged Shares unless the condition set forth in the above
sentence is satisfied, except with respect to any action taken
by any Secured Party pursuant to Section 5 below.
4. VOTING OF PLEDGED SHARES. Until the occurrence of an event of
Default, the Pledged Shares shall be treated as shares of Pledgor and Pledgor
shall be entitled to vote at any meeting of the stockholders of the Company or
its successor corporations. Until the occurrence of an event of Default, no
dividends shall be payable to the Secured Parties on or with respect to the
Pledged Shares. Pledgor hereby grants to the Secured Parties, upon the
occurrence of an event of Default hereunder, the right to vote the Pledged
Shares during the continuance of such event of Default whether or not the
Secured Parties seek any other remedies available to them under this Security
Agreement or any applicable law or in equity.
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<PAGE> 3
5. DEFAULT AND REMEDIES.
a. The term "Default" as used herein means the occurrence of any of
the following events:
i. The failure of Pledgor to make any payment on any
of the Secured Indebtedness when the same becomes
due and payable in accordance with the terms
thereof, and such failure is not cured by Pledgor
within ten (10) days after any Secured Parties
has given Pledgor written notice of such default;
ii. The occurrence of any Event of Default under the
Debenture;
iii. The institution by Pledgor of proceedings to be
adjudicated as bankrupt or insolvent, or the
consent by it to institution of bankruptcy or
insolvency proceedings against it or the filing
by it of a petition or consent seeking
reorganization or release under the federal
Bankruptcy Act, or any other applicable federal
or state law, or the consent by it to the filing
of any such petition or the appointment of a
receiver, liquidator, assignee, trustee or other
similar official of Pledgor, or of any
substantial part of its property, or the making
by it of an assignment for the benefit of
creditors, or the taking of corporate action by
Pledgor in furtherance of any such action; or
iv. If, within sixty (60) days after the commencement
of an action against Pledgor (and service of
process in connection therewith on Pledgor)
seeking any bankruptcy, insolvency,
reorganization, liquidation, dissolution or
similar relief under any present or future
statue, law or regulation, such action shall not
have been resolved in favor of Pledgor or all
orders or proceedings thereunder affecting the
operation or the business of Pledgor stayed, or
if the stay of any such order or proceeding shall
thereafter be set aside, or if, within sixty (60)
days after the appointment without the consent or
acquiescence of Pledgor, such appointment shall
not have been vacated.
b. If any event of Default shall occur, the Secured Parties may
seek any remedies available to them under any applicable law.
c. Except as otherwise provided herein, Pledgor hereby waives
notice of an event of Default, presentment for payment, demand,
notice of dishonor and protest of the Secured Indebtedness.
d. In addition, full power and authority are hereby given to the
Secured Parties to sell, assign and deliver the whole or any
part of the Pledged Shares at any broker's board, or at public
or private sale, at the option of the Secured Parties, either
for cash or on credit or for future delivery without assumption
of any credit risk, and without either demand or advertisement
of any kind, both of which are hereby waived, and no delay on
the part of the Secured Parties in exercising any power of sale
or any other rights
3
<PAGE> 4
or option hereunder, and no demand, which may be given to or
made upon Pledgor by the Secured Parties to a power of sale or
other right or option hereunder, shall constitute a waiver
thereof, or limit or impair the right of the Secured Parties to
take any action or to exercise any power of sale or any other
rights hereunder, without demand, or prejudice the rights of the
Secured Parties as against the undersigned in any respect. At
any sale of the Pledged Shares in accordance with the preceding
sentence, Pledgor may itself purchase the whole or any part of
the Pledged Shares sold. In event of any sale or other
disposition of any of the Pledged Shares, after deducting all
costs or expenses of every kind for care, safekeeping,
collection, sale, delivery or otherwise, the Secured Parties
shall, after applying the residue of the proceeds of the sale,
or other disposition thereof, as hereinabove authorized, return
any excess to Pledgor. The Secured Parties shall notify Pledgor
in writing of their intent to exercise their right to sell the
Pledged Shares in accordance with this Section at least five (5)
days prior to any such sale.
e. Notwithstanding anything herein to the contrary, the Pledged
Shares and any proceeds from the sale thereof (whether as a
result of a Default or a voluntary sale thereof), shall be
divided and/or paid by the Depository Agent as follows:
i. First, to pay for expenses (including legal and
accounting fees and expenses) of the Secured Parties
in enforcing their rights hereunder and under the
documents pertaining to the Secured Indebtedness;
ii. Second, to the New Equity Holders in an amount equal
to the amount they are to receive under the Put (an
aggregate of $1,040,000);
iii. Third, to the former Term Note Holders in an amount
equal to the amount they are to receive under the
Put (an aggregate of $1,268,152);
iv. Fourth, to TKC in an amount equal to the principal
of and accrued interest on the Debenture (or, if
converted into shares of Common Stock, in an amount
equal to the amount TKC is to receive under the
Put); and
v. The remainder, if any, to the Pledgor.
f. Because of the Securities Act of 1933, as amended, or any other
laws or regulations, there may be legal restrictions or
limitations affecting Secured Parties in any attempts to dispose
of certain portions of the Pledged Shares in the enforcement of
its rights and remedies hereunder. For these reasons Secured
Parties are hereby authorized by Pledgor, but not obligated, in
the event any Default hereunder, to sell, bid upon, and purchase
all or any part of the Pledged Shares at private sale, subject
to investment letter or in any other commercially reasonable
manner which will not require the Pledged Shares, or any part
thereof, to be registered in accordance with the Securities Act
of 1933, as amended, or the rules and regulations promulgated
thereunder, or any other law or regulation. Pledgor acknowledges
Secured Parties may in their
4
<PAGE> 5
discretion approach a restricted number of potential purchasers
and that a sale under such circumstances may yield a lower price
of the Pledged Shares or any part or parts thereon than would
otherwise be obtainable if same were registered and sold in the
open market.
6. SALE OF ASSETS. In the event of a sale of all or substantially
all of the assets of the Company (an "Asset Sale"), the Company will, and VSI
will cause the Company to, direct the purchaser of such assets to directly pay
the purchase price to Depository Agent to hold as collateral hereunder to the
same extent as the Pledged Shares, and as soon as practicable thereafter, to
distribute such proceeds to the Secured Parties in accordance with Section 5(e)
above (as if a Default has occurred). Pledgor agrees to provide to the Secured
Parties at least ten (10) business days prior written notice of the closing of
any Asset Sale or the sale of any of the Pledged Shares.
7. FURTHER ASSURANCES. Pledgor agrees to execute such stock powers,
endorse such instruments, or execute such additional pledge agreements or other
documents as may be reasonably requested by Secured Parties in order
effectively to grant to Secured Parties the Security Interest in (and pledge
and assignment of) the Pledged Shares and to enforce and exercise Secured
Parties' rights regarding the same.
8. ASSIGNABILITY BY SECURED PARTIES. The rights, powers and
interests held by the Secured Parties hereunder, together with the Pledged
Shares, may be transferred and assigned by the Secured Parties in whole or in
part, upon written notice to Pledgor.
9. DELIVERY OF PLEDGED SHARES. When the Secured Indebtedness has
been paid in full or otherwise satisfied, the Depository Agent shall deliver
the Pledged Shares to Pledgor concurrently with its receipt of such payment or
satisfaction and this Agreement shall terminate.
10. DUTIES OF DEPOSITORY AGENT. The duties of Depository Agent
hereunder shall be limited to the safekeeping of the Pledged Shares and
proceeds from an Asset Sale or sale of the Pledged Shares, and to the transfer
and distribution of the same in accordance with the provisions of this
Agreement, and no implied duties or obligation shall be read into this
Agreement against the Depository Agent. Depository Agent shall be protected in
acting in accordance with the provisions of this Agreement upon any written
notice, request, waiver, consent, receipt, certificate or other document
furnished to it, as to its validity, the effectiveness of its provisions, the
identity or authority of the person executing or deposition the same, the truth
and acceptability of any information therein contained, which Depository Agent
in good faith believes to be genuine. Depository Agent will not be liable for
any error of judgment, or any act or step taken or omitted by it in good faith,
or for any mistake of fact or law or for anything it might do or refrain from
doing in connection herewith, except to the extent such action shall be proved
to constitute gross negligence or willful conduct in bad faith on the part of
Depository Agent. Depository Agent shall have not duties except those that are
expressly stated herein, and it shall not be bound by any notice of any claim,
or demand with respect thereto, or any waiver, modification, amendment or
termination of this Agreement until written notice of the same shall have been
received by it and approved by it. At any time, in the event that Depository
Agent desires to do so, in its sole discretion, Depository Agent may submit
5
<PAGE> 6
the Pledged Shares to a competent court of jurisdiction to determine the
parties to whom such Pledged Shares shall be delivered.
11. INDEMNIFICATION. Pledgor and each Secured Party, jointly and
severally, hereby agree to indemnify Depository Agent against and hold
Depository Agent harmless from, any costs, damages, judgments, attorneys' fees,
expenses, obligations and liabilities of any kind or nature that may be
suffered or incurred by Depository Agent as a result of, in connection with or
arising out of the acts or omissions of Depository Agent in the performance of,
or pursuant to, this Agreement. If any controversy arises between the parties
or with any other person with respect to the subject matter of this Agreement,
Depository Agent shall not be required to determine the same or to take any
action thereupon, but may await the settlement of any such controversy, which
settlement will be concluded by agreement of the parties or, failing agreement,
by final and binding arbitration in Dallas, Texas pursuant to the Commercial
Rules of the American Arbitration Association. In such event Depository Agent
shall not be liable for interest or damages, except to the extent such action
shall be proved to constitute gross negligence or willful conduct in bad faith
on the part of Depository Agent. The parties: (a) acknowledge that Depository
Agent serves as counsel to Pledgor on certain matters and as general counsel to
OHA Financial, Inc., a New Equity Holder ("OHA") and that Richard F. Dahlson, a
partner of Depository Agent, serves as a director of OHA and is involved in
certain investments with Larry M. Carr, a director of Pledgor and a Former Term
Note Holder; and (b) hereby waive any conflicts with respect thereto and
appoint Jackson Walker L.L.P. as Depository Agent.
12. REIMBURSEMENT OF DEPOSITORY AGENT. Except as provided in section
10 above, Pledgor agrees to pay all necessary and reasonable fees and expenses
incurred by Depository Agent in connection with the operation, administration
and enforcement of this Agreement and its obligations hereunder.
13. WAIVER OF DEFAULT. The acceptance by the Secured Parties at any
time and from time to time of partial payment of the aggregate amount of the
Secured Indebtedness then matured shall not be deemed to be a waiver of any
Default then existing. No waiver by any Secured Parties of any Default shall be
deemed to be a waiver of any subsequent Default, nor shall any such waiver by
any Secured Parties be deemed to be a continuing waiver. No delay or omission
by any Secured Parties in exercising any right or power hereunder, except for
the failure by any Secured Parties to give notice as provided herein or in any
document pertaining to the Secured Indebtedness or under any other writings
executed by Pledgor as security for or in connection with the Secured
Indebtedness, shall impair such right or power or be construed as a waiver
thereof or any acquiescence therein, nor shall any single or partial exercise
of any such right or power preclude other or further exercise of any other
right or power of the Secured Parties hereunder.
14. LAWS APPLICABLE. This Agreement and the rights and obligations
of the parties hereto shall be governed, construed and enforced in accordance
with the laws of the state of Delaware.
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<PAGE> 7
15. NOTICES. Any notice, request, instruction or other document to
be given hereunder or to any parties shall be delivered to the address stated
below that parties's signature hereto, and shall be deemed to have been given
and received (i) when actually received by the other parties, if delivered in
person or by facsimile or (ii) if mailed, on the earlier of the date actually
received or (whether ever received or not) three Business Days (as hereinafter
defined) after a letter containing such notice, certified or registered, with
postage prepaid, addressed to the other parties, is deposited in the United
States mail. The address of each party hereto is set forth on its signature
page to this Agreement. "Business Day" means every day which is not a Saturday,
Sunday or legal holiday. Any party may change his address for the purposes of
this Section by giving notice to the other parties in accordance with this
Section.
16. COVENANT OF ASSISTANCE. Pledgor agrees to execute all such
further documents and take all such further action as may reasonably be
requested by the Secured Parties in order to better confirm the Security
Interest herein granted in the Pledged Shares.
17. AMENDMENT. None of the terms or provisions of this Agreement may
be waived, modified or amended, except in writing signed by all parties hereto.
18. BINDING EFFECT. This Agreement shall be binding on Pledgor and
Pledgor's successors and assigns and shall inure to the benefit of the Secured
Parties and their heirs, successors and assigns.
19. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instruments.
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<PAGE> 8
EXECUTED as of the day and year first above written.
VSI ENTERPRISES, INC.
By: /s/ Richard E. Harrison
----------------------------------
Title: CEO
-------------------------------
Address: 5801 Goshen Springs Road
Norcross, GA 30071-7566
THOMSON KERNAGHAN & CO., LTD.
By: /s/ Mark Valentine
----------------------------------
Title: Chairman
-------------------------------
Address: 365 Bay Street
-----------------------------
Toronto, Ontario, MSH-202
-----------------------------
NEW EQUITY HOLDERS AND
FORMER EQUITY HOLDERS
(See attached signature pages)
JACKSON WALKER L.L.P.
By: /s/ Richard F. Dahlson
---------------------------------
Richard F. Dahlson,
Partner
Address: 901 Main Street, Suite 6000
Dallas, Texas 75201
ACKNOWLEDGED AND AGREED
to for the purpose of being bound by
Section 6 hereof,as of the date first
above written:
VSI NETWORK SOLUTIONS, INC.
By: /s/ Brian Rowley
--------------------------------
Title: President
-----------------------------
8
<PAGE> 9
(FORMER TERM NOTE HOLDER)
SIGNATURE PAGE
TO
STOCK PLEDGE AGREEMENT
This Signature Page to the Stock Pledge Agreement (the "Agreement") by
and among VSI Enterprises, Inc., Thomson Kernaghan & Co., Ltd., and the persons
and entities executing signature pages thereto as a "New Equity Holder" or a
"Former Term Note Holder", is hereby executed by the undersigned as a "Former
Term Note Holder" as of the date of the Agreement.
If an individual:
-----------------------------------
Printed Name:
----------------------
If a legal entity:
-----------------------------------
(type in name)
By:
--------------------------------
Title:
-----------------------------
Address:
-----------------------------------
-----------------------------------
9
<PAGE> 10
(NEW EQUITY HOLDER)
SIGNATURE PAGE
TO
STOCK PLEDGE AGREEMENT
This Signature Page to the Stock Pledge Agreement (the "Agreement") by
and among VSI Enterprises, Inc., Thomson Kernaghan & Co., Ltd., and the persons
and entities executing signature pages as a "New Equity Holder" or a "Former
Term Note Holder", is hereby executed by the undersigned as a "New Equity
Holder" as of the date of the Agreement.
If an individual:
-----------------------------------
Printed Name:
----------------------
If a legal entity:
-----------------------------------
(type in name)
By:
--------------------------------
Title:
-----------------------------
Address:
-----------------------------------
-----------------------------------
10
