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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
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Commission File No. 1-10927
VSI ENTERPRISES, INC.
A Delaware Corporation
(IRS Employer Identification No. 84-1104448)
5801 Goshen Springs Road
Norcross, Georgia 30071
(770) 242-7566
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
None
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Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
Common Stock, $.001 par value per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant (12,599,669 shares) on March 27, 2000 was
approximately $81,141,868, based on the closing price of the registrant's common
stock as quoted on the Over The Counter Bulletin Board on March 27, 2000. For
the purposes of this response, officers, directors and holders of 5% or more of
the registrant's common stock are considered the affiliates of the registrant
at that date.
The number of shares outstanding of the registrant's common stock, as of March
27, 2000: 14,899,280 shares of $.001 par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
Portions of the registrant's definitive proxy statement to be
delivered to shareholders in connection with the 2000 Annual Meeting of
Shareholders scheduled to be held on May 18, 2000, are incorporated by
reference in
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response to Part III of this Report.
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PART I
ITEM 1. BUSINESS.
GENERAL
VSI Enterprises, Inc., an Atlanta-based holding company, was incorporated under
the laws of Delaware on September 19, 1988 as Fi-Tek III, Inc. to raise capital
and to seek out business opportunities in which to acquire an interest. On
August 21, 1990, we acquired 89.01% of the total common stock and common stock
equivalents then issued and outstanding of Videoconferencing Systems, Inc., a
Delaware corporation. Videoconferencing Systems was founded in 1985 through the
acquisition of a portion of the assets of a Sprint Corporation
videoconferencing subsidiary. In December 1990, the name was changed from
Fi-Tek III, Inc. to VSI Enterprises, Inc. During the first half of 1991, we
acquired the remaining additional outstanding shares of common stock of
Videoconferencing Systems.
We primarily conduct our operations under (1) Videoconferencing Systems, Inc.,
a wholly-owned subsidiary, which designs, manufactures, markets and supports
software-based command and control systems, including videoconferencing control
systems, which operate on PC platforms; and (2), VSI Network Solutions, Inc.,
a majority owned subsidiary, doing business as Eastern Telecom which is engaged
in the business of marketing and selling telecommunications services and
products. On February 18, 2000, we entered into a definitive agreement to sell
Eastern Telecom.
In addition to our Videoconferencing Systems and Eastern Telecom subsidiaries,
we conducted our operations in 1999 through the following subsidiaries:
- - Videoconferencing Systems, n.v., a Belgian corporation, otherwise
known as VSI Europe, was a distributor of our videoconference systems
in Europe and has installed videoconference room systems in Europe.
VSI Europe has offices located in London and Antwerp. We sold our
interest in VSI Europe in September 1999 to management of the Belgium
subsidiary.
- - VSI Solutions, Inc. is a software company whose products include a
reservation system for the management of videoconferencing systems. We
closed VSI Solutions on June 30, 1999, upon the completion of a
contract with a customer and the sale of our reservation system source
code.
- - VSI Network Services, Inc., doing business as Integrated Network
Services, Inc., was engaged in the design, installation and support of
local and wide area networks. Integrated Network Services was an
integration firm specializing in the connectivity of multi-protocol
environments, ranging from small, local area networks to large,
enterprise-wide networks employing WAN technologies to connect
multiple sites. Integrated Network Services discontinued operations in
December 1998 and filed for protection under Chapter 7 of the U.S.
Bankruptcy Code in September 1999.
We operate through two primary reportable segments:
- - control and videoconferencing systems, and
- - through our Eastern Telecom subsidiary, network services and
telecommunication equipment. We consider this segment to be a
discontinued operation, because we have entered into a definitive
agreement to sell the assets of the subsidiary.
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On January 15, 1999, we implemented a 1-for-4 reverse split of the shares of
VSI Common Stock. All shares and per share amounts included in this report
reflect the effects of the reverse split.
Our principal executive offices and manufacturing facilities are located at
5801 Goshen Springs Road, Norcross, Georgia 30071, and our telephone number is
(770) 242-7566.
RECENT DEVELOPMENTS
Private Placement. On March 10, 2000, we raised $4,054,876 million through the
private sale of 1,351,625 common shares at $3.00 per share to 38 accredited
investors. Additionally, certain Eastern Telecom minority interest holders
exchanged 240,265 shares of Eastern Telecom for 524,126 shares of our common
stock. We have agreed to undertake to register these shares.
Sale of Eastern Telecom. On February 18, 2000, we entered into a definitive
agreement to sell substantially all the assets of Eastern Telecom to
PentaStar Communications, Inc., a Denver, Colorado based communications
services agent. The Eastern Telecom assets will be combined with the assets
of USTeleCenters, Inc. and Vermont Network Services Corporation, which were
acquired directly by PentaStar on February 18, 2000, rather than through
Eastern Telecom as had been originally contemplated. Terms of the transaction
include initial cash consideration in the amount of $2,100,000, PentaStar
common stock valued at $950,000, and PentaStar's assumption of certain
liabilities. In addition, under an earn-out provision in the agreement, we
are entitled to additional compensation based on financial results of the
combined Eastern Telecom, USTeleCenters and Vermont Network Services acquired
operations for calendar year 2000. The definitive agreement is subject to
approval by our shareholders at the annual meeting to be held on May 18,
2000. We should realize a gain of approximately $1.0 million on the sale,
which is expected to close in the second quarter of calendar 2000. A portion
of the cash proceeds will be used to repurchase the remaining Eastern Telecom
minority interest shares pursuant to the terms of a shareholders agreement.
Debt Restructuring. On August 31, 1999, we restructured our debt with Thomson
Kernaghan & Co., Ltd., which totaled $1,089,750 at that date. We 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 was
secured by a lien on our ownership interest in Eastern Telecom, which was
junior to our converting term note holders and new investors, as discussed
below. Thomson Kernaghan had the option to commence converting the debenture
into shares of our common stock at the initial rate of 7.5% per month beginning
January 1, 2000. The conversion price was the lesser of $1.00 per share or the
five-day average closing bid price of our common stock prior to the date of any
such conversion, with a floor of $0.50 per share. Kernaghan converted $140,962
of principal plus accrued interest into 216,945 shares of VSI Common Stock
during January and February 2000. On March 1, 2000, we repaid the remaining
balance of the debt, including interest, of $826,660.
As part of closing the August 31, 1999 Thomson Kernaghan transaction,
$1,213,000 of our 18-month term notes due March 31, 2000 were converted into
195,099 shares of Eastern Telecom common stock which were owned by us,
representing a 19.5% minority interest in Eastern Telecom. In addition,
$1,040,000 of new capital was raised by selling a 16.0% minority interest in
Eastern Telecom. The consideration received for the sale of shares of common
stock of Eastern Telecom was based on an internal valuation of Eastern Telecom.
Under the terms of the Thomson Kernaghan agreement, we agreed to sell our
remaining interest in Eastern Telecom at not less than fair market value,
provided the terms of any such transaction are otherwise acceptable to us.
Additionally, Eastern Telecom's minority shareholders have a put option, which
gives them the right to put their Eastern Telecom shares back to us
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after one year, and we have a call option to reacquire shares of Eastern
Telecom at any time, both at a price of $6.50 per share of Eastern Telecom
common stock. As described above, we entered into a definitive agreement to
sell Eastern Telecom, and anticipate that the Eastern Telecom minority interest
will be repurchased.
Participants in the term note conversion and new equity participants also
received 1,098,492 and 396,497 warrants to acquire shares of our common stock
at an exercise price of $0.50 and $1.00 per share, respectively.
We currently hold a 88.5% majority ownership interest in Eastern Telecom.
Nasdaq Listing. Effective as of the close of business on September 22, 1999,
our common stock was delisted from the Nasdaq SmallCap Market and began trading
on the OTC Bulletin Board. The delisting occurred as a result of the minimum
bid price on our common stock being less than $1.00 per share and our net
tangible assets being under $2.0 million. We are appealing Nasdaq's decision to
delist our shares and have been advised by Nasdaq that its review council will
likely issue its decision in April 2000.
Sale of VSI Europe. On September 30, 1999, we sold our European subsidiary, VSI
Europe, to its senior management team. As a condition of such sale, we were
released from all liabilities, including certain guarantees under VSI Europe's
bank credit agreements. Concurrent with the sale, VSI Enterprises and VSI
Europe have agreed to enter into a non-exclusive reseller agreement wherein VSI
Europe will retain the right to market our videoconferencing product line in
Europe.
Co-Development Agreement with ACIS, Inc. VSI has developed an advanced
state-of-the-art operating kernel under a co-development agreement with ACIS,
Inc., a Texas-based software technology company. VSI has licensed this
technology from ACIS to support VSI's PC-based device controls. As part of this
co-development agreement, VSI and ACIS agreed to an equity transaction whereby
VSI exchanged 500,000 shares of its common stock for 250,000 shares of common
stock of ACIS, representing approximately 5.0% of ACIS' outstanding shares.
This equity exchange occurred on February 29, 2000 and on March 7, 2000, the
United States Patent and Trademark Office issued the patent certificate to
ACIS. VSI received an additional 50,000 shares of ACIS common stock as
consideration for developing the kernel. Lastly, VSI received a warrant to
acquire additional shares in ACIS at an exercise price of $2.00 per share. Once
exercised, VSI's total ownership in ACIS would be 20% of the then outstanding
ACIS shares. The 20% maximum is determined on a fully diluted basis and
includes the 300,000 shares issued by ACIS, as described above. This option is
exercisable at any time within 18 months following the date the patent
certificate is received by ACIS and may be exercised by VSI for cash or the
issuance of shares of VSI common stock. VSI's chief technology officer, Richard
Mays, is the founder and controlling shareholder of ACIS. VSI's chairman of the
board, Larry Carr, also serves on the board of directors of ACIS. VSI expects
this technology to provide it with a more robust, full featured and
cost-effective controller for videoconferencing and other complex audio/visual
applications.
VIDEOCONFERENCING SYSTEMS
Our core business is the design, manufacture, marketing and support of software
based command and control systems, including videoconferencing control systems,
which operate on PC platforms. Our command and control solutions allow end
users to operate, as a single system, a broad range of electronic equipment
such as projectors, VCRs, computers, sound systems, lighting and temperature
controls and other audio/video devices in a variety of settings. Our
videoconferencing products are designed to allow multiple participants at
geographically dispersed sites to see and hear each other on live television
and share graphical and pictorial information using standard commercially
available telecommunications transmission facilities. We integrate standard
video, audio and transmission components with our own proprietary video, audio
and computer control components and patented software under the trade name
Omega. A typical customer is a large, multi-site organization that utilizes
sophisticated audio, video and communications network technologies that require
complex command and control solutions. These solutions can be used in a variety
of settings, including corporate meetings and conferences, distance learning
and judicial arraignment systems. These customers also require superior
after-the-sale service. Historically, we have utilized a direct sales model.
However, in order to grow sales and to reach and maintain profitability,
management believes that Videoconferencing Systems can better leverage its
technological and service competencies by marketing and selling its products
through third party resellers and system integrators, who specialize in the
sale, installation, support and service of audio/visual equipment, and by
entering new markets for its control system technology.
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Videoconferencing Control Systems
Each Videoconferencing control system (the "VSI System") is designed with open
software and modular subsystems which allow a VSI System to be expanded or
reconfigured as technologies, user requirements or new applications evolve. Our
products are designed to allow multiple participants at geographically
dispersed sites to see and hear each other on live television and share
graphical and pictorial information using standard commercially available
telecommunications transmission facilities. We integrate standard video, audio
and transmission components with our own proprietary video, audio and computer
control components and software.
Our open software and modular subsystems streamline production and allow the
product to be tailored to meet customers' specific needs, with or without the
necessity of custom design. Our lead products are marketed under the trade name
Omega(TM). Customers are offered a variety of option packages to fit specific
applications. Customers are also offered upgrade packages that make our new
products compatible with older models. To date, we have sold over 1,800
videoconferencing systems to approximately 330 customers, including Bank of
America, Bell Atlantic, Boeing, Duracell, MCI, General DataComm, Lockheed and
Johnson & Johnson; various foreign, U.S. and state government departments and
agencies; educational institutions; and health care facilities.
VSI Systems enable participants in multiple locations to hold interactive group
meetings remotely, thus avoiding costly and time-consuming travel. Participants
at any connected location can be seen and heard by all other participants. If
the VSI System is equipped with the appropriate options, the participants can
also utilize slides, graphs, plain paper drawings, computer-generated graphics,
computer data, laser discs and video tape interactively. Unlike audio
teleconferencing systems which only allow voice communications, audiographic
teleconferencing which is limited to voice plus still images, and business
television which does not provide for interaction among the participants (also
known as one-way videoconferencing), we believe VSI Systems foster the look and
feel of live, face-to-face meetings and promote a natural interaction among the
participants.
A typical videoconference involves three major elements: (i) access to
transmission services, (ii) a "codec" for coding/decoding digitized signal
transmissions and (iii) the VSI System, which contains television monitors,
cameras, audio system, microphones, cabinetry, various control systems for
interfacing the components to the user, and various optional components
specific to the user's application.
As the name implies, codecs are used to encode and decode (or compress and
decompress) various types of data -- particularly those that would otherwise
use up inordinate amounts of disk space, such as sound and video files. Common
codecs include those for converting analog video signals into compressed video
files (such as MPEG) or analog sound signals into digitized sound (such as
RealAudio). Codecs can be used with either streaming (live video or audio) or
files-based (AVI, WAV) content.
We develop, manufacture, assemble, install and service the VSI Systems, and
have nonexclusive marketing agreements with codec manufacturers to resell the
codecs. Customers secure the transmission services independently though
telecommunications carriers for either fixed monthly or hourly usage prices.
These transmission services may vary, depending upon the customer's application
and preferences, and include a range of transmission bandwidths. In general,
the higher the bandwidth the better the quality of the transmitted images,
although the choice of codec will affect image quality for a given speed. The
VSI Systems operate over the range of available transmission bandwidths and are
compatible with all major brands of codecs known by us to be currently
available; they also operate without codecs, for certain specialized networks.
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The primary users of our videoconferencing products and services are major
corporations, government agencies, educational institutions and health care
facilities.
Corporate and government organizations often use meetings to provide
information, review operations, make plans, resolve problems, introduce new
ideas or products, conduct training sessions and communicate with customers and
vendors. Such conventional group meetings usually require at least some of the
participants to travel to the meeting site. When meetings are required on a
frequent, repetitive or emergency basis, travel costs and productivity losses
can be substantial. VSI Systems provide users with the ability to hold two-way
and multi-way meetings, often at significant savings over the costs of travel
and lost productivity while traveling. As an added and in some cases a more
important benefit, it may be more economic for more people to participate via
videoconferencing, which eliminates travel time and costs. This causes direct
dissemination of pertinent information to more parties simultaneously, which
may improve efficiency in problem solving and decision making.
We also supply and install the VSI Systems for use in educational and training
settings to connect one or more distant classrooms with a centrally based
instructor. These "distance learning" applications of videoconferencing are
used by corporations, state and federal governments, hospitals and clinics,
high schools, technical school, colleges and universities.
We also provide "judicial systems" to state and local governments. Judicial
systems equip court systems with the ability to link court rooms with prisons
and jails, thereby reducing the costs and security risks associated with
inmate-related travel including: arraignments, attorney/client conferences,
booking and prisoner processing and depositions.
Products
We believe that the videoconferencing world is evolving into a "networks of
systems" where all systems from boardroom to rollabout to desktop will have to
interconnect. We believe that most systems in use today are not equipped to
handle these demands.
Our lead products are marketed under the trade name Omega. The key features and
benefits of the Omega(TM) platform include:
- Compression Technology Independence - separating control system
from compression technology
- Open Network Architecture - wide support for options and
peripherals; flexibility; support for most network connection
technologies; and centralized network management
- Ease of Use - point-and-click camera control and on-screen icons
to control all functions
- System Management - remote management support and open system
support of industry standards
- Software-Based System - remote upgrades of software;
customization; and sign-on security and system accounting
The Omega(TM) product line offers a complete range of solutions from single
monitor rollabout systems to customer room solutions.
Customers are offered a menu of options which allows them to tailor systems to
meet their specific needs. The Omega(TM) is sold on a standalone basis, with or
without codec. The Omega(TM) is offered with single, dual or more color
monitors of 27" to 35" size, for rollabout cabinets or in-the-wall
installation. Other
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options include: audio and video expansion packages, multiple cameras (either
single or three chip), a graphics stand, a computer graphics interface,
facsimile transmission and reception, transmission network interface, and a
variety of videocassette recorders, slides chains and peripheral devices.
Proprietary Technology
We have developed proprietary technology in the areas of videoconferencing
control systems, system diagnostics, information access and communications
access. While VSI Systems use some other manufacturers' components, the
Omega(TM) utilizes internally developed proprietary software and products as
key elements in differentiating our systems in the marketplace. Since VSI
Systems use standards-based codecs, they are interoperable with systems of
other standards-compliant manufacturers.
The heart of the Omega(TM) is the System Controller, a proprietary software
suite that must be installed on a properly configured personal computer. The
software suite includes the Omega(TM) real time operating system, Omega(TM)
videoconferencing application package, device drivers, and a third party SQL
database engine (as licensed to VSI for resale). This software is delivered in
object code format. We also develop and manufacture certain proprietary
components: Omega(TM) Audio Processor, Omega(TM) Video Processor, Omega(TM)
Power Supply, the Omega(TM) Basic/Serial IQ Connectors, the Omega(TM)
Pan/Tilt/Zoom/Focus Controller, the Omega(TM) Infra-red User Control Panel and
proprietary cabinetry. These proprietary hardware components are designed to
work exclusively with the Omega(TM) System Controller software.
We regard our Omega(TM) software as proprietary and have implemented protective
measures of both a legal (copyright) and practical nature. We derive
considerable practical protection for its software by supplying and licensing
only a non-modifiable run-time version to our customers and keeping
confidential all versions that can be modified. By licensing the software
rather than transferring title, we in most cases have been able to incorporate
restrictions in the licensing agreements, which impose limitations on the
disclosure and transferability of the software. No determination has been made
as to the legal or practical enforceability of these restrictions, or the
extent of customer liability for violations.
To date, we have been granted seven patents from the U.S. Patent and Trademark
Office that cover certain aspects of the Omega(TM) user interface, remote
management and system architecture (which is a network videoconferencing system
that combines the advantages of central and distributed intelligence systems).
The patents protect our innovative technology and enable us to pursue
opportunities to license our technology to other manufacturers.
We also have confidentiality agreements with certain employees and have
implemented other security measures.
Product Development and Strategy for Software Based Command and Control
Systems
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Historically, Videoconferencing Systems utilized a direct sales model. However,
in order to grow sales and to reach and maintain profitability, management
believes that Videoconferencing Systems can better leverage its technological
and service competencies by marketing and selling its products through third
party resellers and system integrators, who specialize in the sale,
installation, support and service of audio-visual equipment; and by entering
new markets for our patented Omega technology.
This strategic shift resulted from a thorough review and analysis of VSI
Enterprises conducted by management. In addition to redefining VSI Enterprises'
business strategy, management identified opportunities for improving short-term
operating results. We closed operations that were unprofitable or inconsistent
with our core strategy, reduced administrative overhead and negotiated the
restructuring of our short- and long-term debt. We implemented a new pricing
strategy thereby improving gross margins, instituted more focused marketing and
sales support campaigns, realigned our videoconferencing product families and
implemented new operating procedures and financial controls. Once fully
implemented, Videoconferencing Systems' shift to channel resellers should
expand sales, lower the cost of sales and shorten the sales cycle for its
products and services.
These strategic initiatives have enabled Videoconferencing Systems to
reposition its product line and to expand its presence in the audio/visual
command and control systems market. This market, which to some degree overlaps
the high-end videoconferencing market already served by Videoconferencing
Systems, is almost exclusively maintained by thousands of resellers and system
integrators. Videoconferencing Systems' products are being re-engineered such
that they may also be sold through these third party channels. We believe that,
once product development has been completed, Videoconferencing Systems will
offer a functionally superior, lower cost, fully integrated solution that
provides command and control and remote diagnostics for audio, visual and room
environment devices, and for network connectivity. Videoconferencing Systems
has already experienced success in this market, having completed approximately
$1.7 million of custom command and control projects for two long-time customers
in 1999.
Cutting edge software allows VSI to custom design systems that consistently
perform a myriad of complicated functions. With a simple touch of a control
panel, a technician in the A/V control room can perform any number of customer
specified tasks in rooms linked up to a VSI control system. VSI program
engineers design complex systems that have the ability to play a VCR tape, run
a ceiling projector, re-position a camera, start a player piano in a different
room, or open window draperies - simultaneously when necessary - all with
precision. Our new web-based delivery system and configuration tools, will
allow third party system integrators to sell and install the software which
will greatly improve VSI's margins and will extend its customer reach.
As a part of a co-development agreement, VSI has partnered with ACIS to assist
in the development of an advanced operating kernel (the "Kernel"). VSI licensed
the Kernel to support its new product architecture for PC-based device control
and we believe, will be the most robust, full featured and cost effective
controller for videoconferencing and other complex A/V applications on the
market today. In the fourth quarter of 2000, VSI will launch a new PC-based
control product, code-named "Voyager". Voyager represents the second generation
of commercial applications incorporating the ACIS Kernel. VSI will be moving
aggressively to establish Voyager as the preferred solution for complex
audio/visual command and control applications.
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Once established in the audio/visual command and control market, we envision
developing additional applications for other command and control system
markets, including process control applications in manufacturing environments
and the burgeoning home entertainment market, that may involve licensing
aspects of the patented Omega technology to manufacturers, in addition to
third-party reseller channels.
Customer Service
We generally provide a warranty for parts and labor on systems for 90 days from
the date of delivery. We maintain videoconference rooms and the necessary
transmission facilities and codecs to provide on-line assistance to our
installed customers at our executive offices near Atlanta, Georgia. We also
provide a telephone help line to assist customers in the diagnosis of system
failures. Approximately 90% of all customer calls for assistance are generally
resolved through telephone or videoconference contact. The remaining 10% are
resolved by the removal and replacement of field replaceable units by customer
personnel or us. We maintain a spare parts inventory, and our policy is to
replace failed units which are under warranty or subject to a service contract
within 24 hours of notification.
We offer several different maintenance programs, ranging from "help line"
telephone consultation to extended field service on a contract basis, which
includes parts, labor, and travel service with a guaranteed on-site response
within 48 hours. Warranty and contract service is provided from our U.S.
location.
Markets
For our videoconferencing control systems we have defined our target market as
the "Fortune 1,000" companies in North America. Typically, these large
companies, often with numerous offices in different cities, are more likely to
realize significant savings on travel and related costs by installing a
videoconferencing network. Prior to purchasing a system, our customers generally
perform their own cost/benefit analyses. In addition, we have targeted a
secondary market consisting of small to mid-sized companies, as well as
educational institutions, governments and healthcare providers. Our systems are
marketed through a direct sales force, as well as through a select group of
co-marketing partners and distributors, including partners for whom we are an
original equipment manufacturer ("OEM"). For our new "Voyager" product, the
target market is the audio/visual controller market. We anticipate that the
product will be marketed through channel resellers.
For each of the fiscal years ended December 31, 1999, 1998, and 1997,
international sales (sales outside of the United States and Canada) represented
approximately 9%, 22%, and 23%, respectively, of our total sales. Net product
sales attributable to VSI Europe decreased from approximately $2.9 million in
1998 to approximately $664,000 in 1999, principally as a result of the sale of
the subsidiary. Net product sales attributable to VSI Europe increased from
approximately $2.8 million during 1997 to $2.9 million in 1998. VSI Europe had
historically contributed substantially all of our international sales, although
sales in China of $2.3 million were recorded in 1998 by VSI. See
"-Videoconferencing Systems, n.v. ("VSI Europe")." We believe we presently
maintain less than 2% of the total worldwide videoconferencing equipment market
as measured by 1999 total sales volume for the industry.
Customers
Our customers include Fortune 1,000 companies, mid-sized corporations, agencies
of state, local and federal governments, and health care facilities. They
include Bank of America, Boeing, MCI, Duracell, BellSouth, Bell Atlantic and
Johnson & Johnson.
<PAGE> 11
Competition
We compete in the audio/visual command and control industry; including
videoconferencing by providing application-specific and custom solutions
(products and services) for our customers' needs. Because our videoconferencing
systems are compression technology-independent, they can be sold to customers
with standard codecs, high speed codecs, board-level codecs or specialty codecs,
as well as with direct links to ATM and fiber optic networks.
The videoconferencing industry covers a broad spectrum of videoconferencing
services available to businesses and others, all of which are, in a general
sense, competitive with our systems. The VSI Systems, however, are designed and
marketed primarily for the group and custom videoconferencing segment of the
industry. Within this segment of the industry, we presently compete primarily
with two companies that presently have significantly greater resources and
market shares than VSI. In addition, three suppliers of codecs directly compete
with us in the group videoconferencing segment. We believe demand for
videoconferencing will continue to increase, which will attract additional
competitors to the industry, some of whom may have greater financial and other
resources than VSI.
Within the audio/visual control system market, we primarily compete with two
companies, both of which have significantly greater resources and market share.
Both companies offer control solutions based on proprietary hardware and
software. We offer control solutions which utilize open PC technology.
NETWORK SERVICES ("EASTERN TELECOM")
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Eastern Telecom serves as a sales agent for a number of major
telecommunications clients, which include the regional Bell operating companies
("RBOCs"), Cable and Wireless and 3Com Corporation. Eastern Telecom is paid a
commission by its clients for products and services sold to other entities.
Among Eastern Telecom's core product offerings are high speed data transfer
systems, internet connections, T-1 connections, network services such as
Centrex, frame relay and basic rate interface, primary rate interface and ISDN
connections. Eastern Telecom's business is conducted primarily in the
northeastern United States.
Market
The large telecommunications companies have pared fixed costs and overhead by
outsourcing many functions including marketing to the lower tier business
customer which is the niche that Eastern Telecom has successfully captured.
Eastern Telecom usually targets customers who generate less than $60,000 per
year in telecommunications/network service billings.
Competition
Competition within this industry is intense. Competition is determined in part
by the large telecommunications companies' agent selection criteria. In addition
to other RBOC agents, Eastern Telecom competes with other providers of local
access telecommunications services.
Product Line
Eastern Telecom's products fall under the classifications of:
- Data Services
- Voice Products
- Account Management Services
- Long Distances Services
Data Services include Internet connections, dedicated data transmission lines,
and other information technology related services.
Voice Products include interexhange services, on-premises voice mail products,
toll free number telephone lines, and a broad range of other services.
Account Management Services provides the customer with technical and customer
service assistance, as well as, manage customer accounts for its vendors.
Long Distance Services is a new area of the market that Eastern Telecom has
begun to target. This service along with cellular and other telecommunication
products and services offer a significant potential revenue source.
VIDEOCONFERENCING SYSTEMS, N.V. ("VSI EUROPE")
<PAGE> 13
VSI Europe distributed our videoconference systems in Europe through September
1999. Most of its international business was conducted through two offices
located in London and Antwerp, Belgium For each of the fiscal years ended
December 31, 1999, 1998, and 1997, international sales (sales outside of the
United States and Canada) represented approximately 9%, 22%, and 23%,
respectively, of our total sales. Net product sales attributable to VSI Europe
decreased in from approximately $2.9 million in 1998 to approximately $664,000
in 1999, principally as a result of the sale of the subsidiary. Net product
sales attributable to VSI Europe increased from approximately $2.8 million
during 1997 to $2.9 million in 1998. VSI Europe had historically contributed
substantially all of our international sales, although sales in China of $2.3
million were recorded in 1998 by Videoconferencing Systems, Inc.
RESEARCH AND DEVELOPMENT
All of our product engineering, including costs associated with design and
configuration of fully developed VSI Systems for particular customer
applications, is accounted for in our financial statements as research and
development expenses. During the years ended December 31, 1999, 1998, and 1997,
our aggregate expenditures for research and development of new products or new
components for existing VSI Systems were $416,225, $786,103 and $1,031,814,
respectively. During fiscal 1999, our research and development expenses
decrease by approximately 47% due to the capitalization of $180,000 in costs
related to the development of our new PC-based command and control product. Our
research and development expenses decreased by approximately 24% from 1997 to
1998 due to a reduction in workforce.
EMPLOYEES
As of March 15, 2000, we employed 111 persons full time, including four
executive officers. Of the full-time employees who were not executive officers,
48 were engaged in sales and marketing, six in production, 21 in service, 9 in
research and development, and 23 in general administration. Employee relations
are considered good, and we have no collective bargaining contracts covering any
of our employees.
ITEM 2. PROPERTIES.
We maintain our executive and sales offices, as well as our production
facilities, in 26,140 square feet of leased office and warehouse space in
Norcross, Georgia, under a five-year lease, which expires in October, 2002. We
also lease 18,000 square feet of office and warehouse space in an adjoining
facility, which it is currently being subleased on a month-to-month basis. VSI
leases a number of other facilities in the United States under operating lease
agreements that expire at various dates through 2002.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings which we are a party to, or to
which our properties are subject; nor are there any material proceedings known
by us to be contemplated by any governmental authority; nor are there any
material proceedings known by us, pending or contemplated, in which any
director, officer or affiliate or any principal security holder of the
<PAGE> 14
Company, or any associate of any of the foregoing is a party or has an interest
adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There has been no occurrence requiring a response to this Item.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the OTC Bulletin Board under the symbol
"VSIN". Our common stock had been traded on the Boston Stock Exchange under the
symbol "VSI" from November 1991 until February 18, 1998, when we voluntarily
delisted from the exchange. The common stock was quoted on the Nasdaq SmallCap
Market from February 28, 1992 through September 22, 1999, when we were
delisted.
On January 15, 1999, we implemented a 1-for-4 reverse split of shares
of our common stock. The following table sets forth the quarterly high and low
bid quotations per share of common stock on the Nasdaq SmallCap Market and/or
OTC Bulletin Board, as applicable, as reported for the periods indicated,
adjusted to reflect the effects of the reverse split. These prices also
represent inter-dealer quotations without retail mark-ups, markdowns, or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter $6.38 $4.00
Second Quarter 4.88 2.63
Third Quarter 3.50 1.00
Fourth Quarter 2.75 0.88
FISCAL YEAR ENDED DECEMBER 31, 1999
First Quarter $1.38 $0.25
Second Quarter 0.69 0.34
Third Quarter 0.97 0.28
Fourth Quarter 0.63 0.31
</TABLE>
- ---------------------------
As of March 15, 2000, we had approximately 583 holders of record of
common stock and in excess of 7,000 beneficial holders of VSI Common Shares.
We have never paid cash dividends on our common stock and have no
plans to pay cash dividends in the foreseeable future. The policy of our Board
of Directors is to retain all available earnings for use in the operation and
expansion of our business. Whether dividends may be paid
<PAGE> 15
on the Common Shares in the future will depend upon our earnings, capital
requirements, financial condition, prior rights of the preferred stockholders,
and other relevant factors.
RECENT SALES OF UNREGISTERED SECURITIES
In August 1999, $1,213,000 of our 18-month term notes were converted
into 195,099 shares of Eastern Telecom, representing a 19.5% interest in
Eastern Telecom. We also raised $1,040,000 of additional capital by selling a
16% minority interest in Eastern Telecom. Participants in the term note
conversion and new equity participants received 1,098,492 and 396,497 warrants
to acquire shares of VSI at $0.50 and $1.00 per share, respectively.
In May 1999, we issued 325,000 warrants to acquire shares of VSI to
certain executive officers of VSI. In August 1999, we issued 25,000 warrants to
acquire shares of VSI to an executive officer of VSI.
On March 10, 2000, we raised $4,054,876 through the private sale of
1,351,625 common shares at $3.00 per share to 38 accredited investors.
Additionally, certain Eastern Telecom minority interest holders exchanged
240,265 shares of Eastern Telecom for 524,126 shares of our common stock.
All issuances of securities described above were made in reliance on
the exemption from registration provided by Section 4(2) and/or 3(b) of the
Securities Act of 1933, and regulations thereunder, as transactions by an
issuer not involving a public offering. All of the securities were acquired by
the recipients thereof for investment with no view toward the resale or
distribution thereof. In each instance, the offers and sales were made without
any public solicitation and the stock certificates bear restrictive legends. No
underwriter was involved in the transactions.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data for the five years ended
December 31, 1999, 1998, 1997, 1996, and 1995 are derived from the consolidated
financial statements of the Company. All financial information prior to 1997
was restated to reflect the June 1996 acquisition of Integrated Network
Services, Inc., which was accounted for as a pooling of interest. Integrated
Network Services was closed in December 1998, so its results for each year
listed below are stated as discontinued operations. Information for the years
ended December 31, 1999, 1998, 1997 and 1996 includes Eastern Telecom, which
was acquired in October 1996. We have entered into a definitive agreement to
sell Eastern Telecom, so its results for each year listed below are also stated
as discontinued operations. See Note B to the consolidated financial
statements. Information for the years ended December 31, 1999, 1998, 1997, 1996
and 1995 includes VSI Solutions Inc., which was acquired in April 1995. The
data should be read in conjunction with the consolidated financial statements,
related notes and other financial information included herein.
<PAGE> 16
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenue ................ $ 7,132 $ 13,574 $ 12,168 $ 11,160 $ 11,920
Cost of revenues ....... 3,716 12,243 9,687 9,116 8,344
Gross Profit ........... 3,416 1,331 2,481 2,044 3,576
Operating and other
Expenses ............... 5,936 9,558 8,418 8,523 8,168
------- -------- -------- -------- --------
Net loss from continuing
Operations ............. (2,520) (8,227)(1) (5,937) (6,479) (4,592)
Income (Loss) from
discontinued
Operations ............. (320) (8,709)(1) 120 (228) (748)
------- -------- -------- -------- --------
Net loss ............... $(2,840) $(16,936) $ (5,817) $ (6,707) $ (5,340)
======= ======== ======== ======== ========
Net loss per share from:
Continuing operations $ (.20) $ (.69) $ (.54) $ (.71) $ (.59)
Discontinued operations (.03) (.73) .01 (.03) (.10)
======= ======== ======== ======== ========
$ (.23) $ (1.42) $ (.53) $ (.74) $ (.69)
======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....... $ (951) $ (49) $ 3,690 $ 5,634 $ 6,904
Total assets.......... 4,911 8,275 20,809 22,965 19,666
Long-term debt........ -- 1,106 -- 4,250 --
Stockholders' equity.. (1,197) 1,003 15,591 13,819 10,535
</TABLE>
(1) The Company took a non-cash and non-recurring charge of approximately $10.3
million in 1998. The charge included: the write-down of obsolete or slow-moving
videoconferencing and demonstration inventory ($1.88 million); the loss from
the sale of investments in two companies ($450,000); a write-down of
capitalized software development costs ($180,000); and the write-off of most of
the goodwill from the acquisitions of VSI Europe in 1992 and Eastern Telecom in
1996 ($7.76 million).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
<PAGE> 17
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included in the
Company's 1999 Annual Report to Shareholders.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, such as statements relating to financial results and plans for future
business development activities, and are thus prospective. All statements other
than statements of historical fact we make in this report are forward-looking.
Such forward-looking statements are subject to risks, uncertainties and other
factors, which could cause actual results to differ materially from future
results expressed or implied by such forward-looking statements. Potential
risks and uncertainties include, but are not limited to; economic conditions,
competition and other uncertainties set out below under "Factors Affecting
Future Performance" and as detailed from time to time in our Securities and
Exchange Commission filings.
OVERVIEW
VSI Enterprises, Inc. is an Atlanta-based holding company. Our core
business is the design, manufacture, marketing and servicing of software based
command and control systems, including videoconferencing control systems, which
operate on PC platforms, through our wholly owned subsidiary, Videoconferencing
Systems, Inc. In addition, we resell voice and data services and equipment on
behalf of large telecommunications companies, through our majority-owned
subsidiary, VSI Network Solutions, Inc., doing business as Eastern Telecom. We
have entered into a definitive agreement to sell Eastern Telecom to PentaStar
Communications, Inc.; a Denver, Colorado based communications services agent.
The definitive agreement is subject to, among other things, approval by the
stockholders of VSI Enterprises at the Annual Meeting to be held on May 18,
2000. The consolidated statements of operations have been adjusted to reflect
the discontinuance of Eastern Telecom's operations.
Our command and control solutions allow end users to operate, as a
single system, a broad range of electronic equipment such as projectors, VCRs,
computers, sound systems, lighting and temperature controls and other
audio/video devices in a variety of settings. Our videoconferencing products
are designed to allow multiple participants at geographically dispersed sites
to see and hear each other on live television and share graphical and pictorial
information using standard commercially available telecommunications
transmission facilities. We integrate standard video, audio and transmission
components with our own proprietary video, audio and computer control
components and patented software under the trade name Omega. A typical customer
is a large, multi-site organization that utilizes sophisticated audio, video
and communications network technologies that require complex command and
control solutions. These solutions can be used in a variety of settings,
including corporate meetings and conferences, distance learning and judicial
arraignment systems. These customers also require superior after-the-sale
service. Historically, we have utilized a direct sales model. However, in order
to grow sales and to reach and maintain profitability, management believes that
Videoconferencing Systems can better leverage its technological and service
competencies by marketing and selling its products through third party
resellers and system integrators, who
<PAGE> 18
specialize in the sale, installation, support and service of audio/visual
equipment, and by entering new markets for its control system technology.
During 1999 and continuing into 2000, we undertook a restructuring of
our business operations and balance sheet that are intended to achieve
profitable operations and provide positive operating cash flows. As part of
this restructuring, we raised additional equity capital and paid off our debt
holders. This restructuring included raising additional equity capital through
the private sale of common stock and exchanging our common stock for shares of
Eastern Telecom held by its minority interest holders, restructuring and then
subsequently retiring our debt, selling non-strategic assets and aggressively
managing accounts receivable and inventory.
These restructuring initiatives have enabled Videoconferencing Systems
to reposition its product line and to expand its presence in the audio/visual
command and control systems market. This market, which to some degree overlaps
the high-end videoconferencing market historically served by Videoconferencing
Systems, is almost exclusively maintained by thousands of resellers and system
integrators. Videoconferencing Systems' products are being re-engineered such
that they may also be sold through these third party channels. We believe that,
once product development has been completed, Videoconferencing Systems will
offer a functionally superior, lower cost, fully integrated solution which
provides command and control and remote diagnostics for audio, visual and room
environment devices, and for network connectivity. Videoconferencing Systems
has already experienced success in this market, having completed approximately
$1.7 million of custom command and control projects for two long-time customers
in 1999.
Once established in the audio/visual command and control market, we
envision developing additional applications for other command and control
system markets, including process control applications in manufacturing
environments and the burgeoning home entertainment market, that may involve
licensing our control software to existing OEM vendors, in addition to
third-party reseller channels.
FINANCIAL CONDITION
During the year ended December 31, 1999, our total assets decreased
approximately 41% to $4,910,533 from $8,274,668 at December 31, 1998. A large
part of the decrease resulted from a $2,297,234 decrease in accounts receivable
principally due to the downsizing of our business, a $299,060 decrease in
inventory, also as a result of downsizing of our business and better inventory
management practices, a $254,259 decrease in property and equipment (continuing
operations) due to depreciation, and a $300,892 decrease in cash. A net
$129,946 increase in capitalized software development costs related to new
products that are currently being developed offset these decreases.
Current liabilities decreased by $2,177,061 or 35% principally due to:
- - a $1,218,563 decrease in accounts payable resulting from the
downsizing of our business, a larger than usual payable for inventory
orders at the end of 1998, and on-going efforts in 1999 to pay down
amounts owed to vendors;
- - a reduction in the INS line of credit in the amount of $248,116; and,
<PAGE> 19
- - a $521,904 decrease in deferred revenue.
Additionally, $1,213,000 of our 18-month term notes were converted into 195,099
shares of Eastern Telecom stock and we sold a 16% minority interest in Eastern
Telecom for $1,040,000.
RESULTS OF OPERATIONS
Many of the comparisons between 1999, 1998 and 1997 financial results
are significantly impacted by non-recurring charges in 1998, as described
below. Additionally, results for 1999, 1998 and 1997 have been restated to
reflect the discontinuance of operations of Eastern Telecom.
In 1998, as part of an ongoing effort to restructure and refocus our
strategic direction, and to eliminate assets that were either non-performing,
impaired or unrelated to our core business, we took a non-cash and
non-recurring charge of approximately $10.3 million. The charge included: the
write-down of obsolete or slow-moving videoconferencing and demonstration
inventory ($1.88 million); the loss from the sale of investments in two
companies ($450,000); a write-down of capitalized software development costs
($180,000); and the write-off of most of the goodwill from the acquisitions of
VSI Europe in 1992 and Eastern Telecom in 1996 ($7.76 million).
REVENUES
Revenues were $7,132,248, $13,574,213 and $12,168,107 in fiscal 1999,
1998 and 1997, respectively. The 47% decrease from 1998 to 1999 was primarily
due to our efforts to only pursue profitable sales and to become smaller and
more efficient, as we reduced our losses and began to pursue strategies more
consistent with our mission. The increase from 1997 to 1998 was due to a large
order from a customer in China of $2.3 million.
GROSS MARGIN
Gross margin as a percentage of revenues was approximately 48%, 24%
(before non-recurring items) and 20% in fiscal 1999, 1998 and 1997,
respectively. The increase is due to the emphasis on shedding low margin
products and services, and higher than usual sales of lower margin
videoconferencing products during fiscal 1998, primarily from a $2.3 million
order to a customer in China.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $4,467,821,
$5,939,448, and $7,314,431 for fiscal 1999, 1998 and 1997, respectively. The
25% decrease from fiscal 1998 to 1999 results from the consolidation of
operations, reductions in personnel and ongoing efforts to cut costs,
principally in the first quarter of 1999. The 19% decrease from fiscal 1997 to
1998 was due to improvements in parts procurement and ongoing cost reduction
programs and an approximate 10% reduction in workforce during 1998.
<PAGE> 20
RESEARCH AND DEVELOPMENT EXPENSES
We charge research and development costs to expense as incurred until
technological feasibility of a software product has been established. Software
development costs incurred after technological feasibility has been established
are capitalized and amortized over the useful life of the product. These
expensed costs were $416,225, $786,103 and $1,031,814 for fiscal 1999, 1998 and
1997, respectively. The 47% decrease from 1998 to 1999 principally resulted
from the capitalization of approximately $180,000 in software development costs
related to new products under development. The 24% decrease from 1997 to 1998
was due to the completion in 1998 of projects related to the development of the
Company's new videoconferencing system product line, and due to a reduction in
workforce.
IMPAIRMENT LOSS
In 1998, an impairment loss of $772,233 was charged to operations,
principally due to a $577,077 charge recorded to eliminate all remaining
goodwill related to VSI Europe, and an additional $195,156 charge recorded to
write down VSI Europe's net assets to zero. Management recorded this impairment
in light of VSI Europe's continuing operating losses.
Additionally, a $6,995,000 write-off of the original goodwill recorded
with our acquisition of Eastern Telecom is reflected in the loss from
discontinued operations. We compared the carrying value of Eastern Telecom at
December 31, 1998 to the undiscounted anticipated cash flows for the next ten
years to determine if there had been impairment. As the anticipated
undiscounted cash flows were lower than the carrying value of Eastern Telecom,
we then used the present value of the estimated expected future cash flows,
using a 15% discount rate (discounted cash flows), to determine the impairment
charge. This evaluation was triggered by Eastern Telecom's net operating loss
during 1998, a reduction in commissions paid to Eastern Telecom by Bell
Atlantic during 1998 and an informal valuation of Eastern Telecom performed
during the fourth quarter of 1998.
LOSS ON SALE OF INVESTMENTS/SUBSIDIARY
The $167,539 loss on the sale of subsidiary in 1999 resulted from the
sale of VSI Europe, and included the write-off of cumulative foreign currency
translation adjustments of $319,000.
The loss on the sale of investments in 1998 was the result of the sale
of our investment in Global TeleMedix, Inc., which was sold in October 1998 at
a loss of $302,000 and the loss of $150,000 in the investment in Educational
Video Conferencing, Inc., which was sold on December 31, 1998.
OTHER EXPENSES
Other expenses, primarily finance charges, were $884,244, $1,607,735,
and $71,968 for fiscal 1999, 1998 and 1997, respectively. The decrease from
1998 to 1999 is primarily related to a $1,010,000 decrease in interest expense
and debt discount costs; a decrease in foreign currency exchange losses of
$93,000, offset by an increase of $303,000 in amortization of warrant discounts
and an increase in penalties of $111,000 related to state sales tax
liabilities. The increase from 1997 to 1998 is primarily related to increased
interest expense related to
<PAGE> 21
convertible debentures and the associated amortization of debt discount costs
during the vesting period of the conversion feature of these debentures of
$1,433,000.
DISCONTINUED OPERATIONS
We discontinued operations of our system integration subsidiary, VSI
Network Services, Inc. on December 31, 1998. Also, On February 18, 2000, we
entered into a definitive agreement to sell Eastern Telecom, our network
reselling subsidiary; and, as a result have accounted for Eastern Telecom as
discontinued operations. Accordingly, operating results for both subsidiaries
have been reclassified and reported as discontinued operations. Operating
income (loss) from discontinued operations was ($319,625) in 1999, ($9,054,570)
in 1998 and $119,373 in 1997. In 1998, we recorded a gain on disposal of the
system integration operation of $344,732. The loss for 1998 included a
$6,995,000 impairment loss, as previously discussed.
NET LOSS
Net losses from continuing operations were $2,519,969, $8,226,134 and
$5,936,739 for fiscal 1999, 1998 and 1997, respectively. The net loss in 1998
included non-cash and non-recurring charges, including the write-down of
obsolete or slow-moving videoconferencing and demonstration inventory ($1.88
million); the loss from the sale of investments in two companies ($450,000);
and a write-down of capitalized software development costs ($180,000).
The net loss for fiscal 1999 was $2,839,594 or $0.23 per share. The
net loss for fiscal 1998, before non-recurring charges, was approximately $6.6
million, or $0.55 per share. Including the non-recurring charges of
approximately $10.3 million, the net loss for fiscal 1998 was $16,935,972, or
$1.42 per share. The 1999 net loss, excluding non-recurring charges was reduced
by approximately $3.8 million over 1998, primarily due to considerable
improvements in gross margins and decreases in overhead and other expenses.
LIQUIDITY AND SOURCES OF CAPITAL
GENERAL
As of December 31, 1999, we had cash and cash equivalents of $798,826. Our
liquidity sources include existing cash and credit facilities. In March 2000,
we raised a total of approximately $5.6 million in new equity through two
related transactions. In the first transaction, we raised $4,054,876 through
the sale of 1,351,625 shares of common stock at $3.00 per share to 38
accredited investors. Approximately $826,668 of the proceeds was used to repay
the remaining balance of the 7% Secured Convertible Debenture held by Thompson
Kernaghan & Co. Ltd. ("Kernaghan"). Under the terms of a debt restructuring
agreement, Kernaghan had the option to convert the Secured Convertible
Debenture into shares of VSI Common Stock beginning January 1, 2000 at the
initial rate of 7.5% per month, with a conversion price of the lesser of $1.00
or the 5-day average closing bid price of the VSI Common Stock prior to the
date of any such transaction, with a floor of $0.50 per share. Kernaghan had
previously converted $140,962 of principal plus accrued interest into 216,945
shares of VSI Common Stock.
In the second transaction, we exchanged 524,126 of our common shares for
240,265 (24%) of the
<PAGE> 22
Eastern Telecom shares held by its minority shareholders. By this transaction,
we retired 68% of our put obligations under a shareholders agreement that gave
Eastern Telecom's minority shareholders the right to put their shares to VSI at
$6.50 per share. The remaining minority interest shares will be repurchased
pursuant to the terms of a shareholders agreement. VSI is now entitled to
retain $1.3 million of the initial cash proceeds ($2.1 million less the cash
required to repurchase the remaining minority shares) and $950,000 of the stock
proceeds which will be paid by PentaStar Communications, Inc. upon the closing
of the pending sale of Eastern Telecom; there can be no assurances, however,
that such closing will occur.
The Eastern Telecom assets will be combined with the assets of USTeleCenters,
Inc. and Vermont Network Services Corporation, which were acquired by PentaStar
on February 18, 2000. Under an earn-out provision in the sales agreement, VSI
is entitled to additional compensation based on the combined financial results
of the combined Eastern Telecom, USTeleCenters and Vermont Network Services
acquired operations for calendar year 2000.
We believe that the funding received from the private placement, the Eastern
Telecom share exchange and the funds to be received from the sale of Eastern
Telecom will be sufficient to meet our cash flow requirements for at least the
next 12 months. We may require additional funding in fiscal 2001 to fund our
development activities. This additional funding could be in the form of the
sale of assets, debt, equity, or a combination of these financing methods.
However, there can be no assurance that we will be able to obtain such
financing if and when needed, or that if obtained, such financing will be
sufficient or on terms and conditions acceptable to the Company.
We expect to spend approximately $400,000 for capital expenditures in fiscal
2000.
CREDIT FACILITIES
VSI
Since June 1995, Videoconferencing Systems, Inc., a wholly owned subsidiary,
has had a revolving credit and security agreement with Fidelity Funding of
California Inc. This credit facility provides up to $4,000,000 at an interest
rate of prime plus 2% per annum. Funds available under the credit facility are
based on 80% of eligible VSI accounts receivable invoices, with certain
restrictions. The credit facility is secured by the accounts receivable,
inventory and certain fixed assets of Videoconferencing Systems. At December
31, 1999, we were due $85,000 from reserves Fidelity Funding was holding for
its account. There are no balances owed under this credit facility as of
December 31, 1999.
ETI
On October 8, 1998, Eastern Telecom entered into a financing agreement with RFC
Capital, Inc., whereby RFC Capital, Inc. purchases eligible accounts receivable
for 90% of the accounts receivable amount, up to $1,500,000, at an interest
rate of prime plus 2.75% per annum. This amount may be increased, subject to
the payment of additional commitment fees by Eastern Telecom, to $5,000,000. If
any account receivable is not paid within 90 days, Eastern Telecom is required
to buy back the account receivable for the full purchase price. The credit
facility is secured by eligible accounts receivable. As of December 31, 1999,
$757,746 was owed to RFC Capital, Inc.
<PAGE> 23
INS
In December 1996, VSI Network Services, Inc. (d/b/a Integrated Network
Services, or INS), a wholly owned subsidiary of the Company, established a
revolving credit and security agreement with Presidential Financial
Corporation. This credit facility provided INS with up to $750,000 at an
interest rate of prime plus 3% per annum. Funds available under the credit
facility are based on 80% of eligible accounts receivable invoices, with
certain restrictions. The credit facility is secured by accounts receivable,
inventory and fixed assets of INS.
With INS ceasing operations on December 31, 1998, VSI is obligated to repay the
balance owed Presidential Financial Corporation. On December 31, 1999, that
amount was $19,000. VSI repaid the full amount owing under this obligation in
fiscal 2000.
CONVERTIBLE DEBENTURES/TERM NOTES
On February 23, 1998, the Company issued $3,000,000 of 5% Convertible
Debentures due February 2000 ("the Debentures") to Kernaghan, the proceeds of
which were utilized for working capital purposes. During 1998, $710,000 of
debentures, plus accrued interest of $13,531, were converted by the debenture
holder into 445,956 shares of VSI common stock. VSI also paid $128,858 in
accrued interest and fees. In November 1998, the remaining debentures were
converted into a $900,000 term note to Kernaghan, due May 16, 1999.
On August 31, 1999, we restructured our debt with Kernaghan, which totaled
$1,089,750 at that date. We 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 was secured by a lien on our ownership interest in
Eastern Telecom, which was junior to our converting term note holders and new
investors, as discussed below. Kernaghan had the option to commence converting
the debenture into shares of our common stock at the initial rate of 7.5% per
month beginning January 1, 2000. The conversion price was the lesser of $1.00
per share or the five-day average closing bid price of our common stock prior
to the date of any such conversion, with a floor of $0.50 per share. Kernaghan
converted $140,962 of principal plus accrued interest into 216,945 shares of
VSI Common Stock during January and February 2000. On March 1, 2000, we repaid
the remaining balance of the debt, including interest, of $826,668.
As part of closing the August 31, 1999 Kernaghan transaction, $1,213,000 of our
18-month term notes due March 31,2000 were converted into 195,099 shares of
Eastern Telecom common stock which were owned by us, representing a 19.5%
minority interest in Eastern Telecom. In addition, $1,040,000 of new capital
was raised by selling a 16.0% minority interest in Eastern Telecom. The
consideration received for the sale of shares of common stock of Eastern
Telecom was based on an internal valuation of Eastern Telecom. Under the terms
of the Kernaghan agreement, we agreed to sell our remaining interest in Eastern
Telecom at not less than fair market value, provided the terms of any such
transaction are otherwise acceptable to us. Additionally, Eastern Telecom's
minority shareholders have a put option, which gives them the right to put
their Eastern Telecom shares back to us after one year, and we have a call
option to reacquire shares of Eastern Telecom at any time, both at a price of
$6.50 per share of Eastern Telecom common stock. As described above, we entered
into a definitive agreement to sell Eastern Telecom, and anticipate that the
remaining Eastern Telecom minority interest will be repurchased utilizing the
<PAGE> 24
cash proceeds from the Eastern Telecom sale transaction.
Participants in the term note conversion and new equity participants also
received 1,098,492 and 396,497 warrants to purchase VSI common stock at $0.50
and $1.00 per share, respectively. In conjunction with the issuance of the
warrants, VSI valued the warrants at $320,968 using the Black-Scholes option
pricing model in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation". This warrant value is being amortized to interest expense over
the term of the put, which is one year, and will be fully expensed upon the
sale of Eastern Telecom.
We currently hold an 88.5% majority ownership interest in Eastern Telecom.
OPERATING LOSS CARRYFORWARDS
As of December 31, 1999, we had operating loss carryforwards for U.S. income
tax purposes of approximately $33,575,000 available to reduce future taxable
income through 2014. We also have investment, research and experimental credits
of approximately $89,000 available to reduce future income taxes payable
through 2014. During 1993, we experienced a change in control, as defined under
Section 382 of the Internal Revenue Code. As a result, the utilization of
approximately $7,000,000 in tax loss carryforwards will be limited to
approximately $1,000,000 annually.
FACTORS AFFECTING FUTURE PERFORMANCE
The following summarizes certain of the risks inherent in our business:
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FINANCE OUR OPERATIONS WHEN
NEEDED.
We will require additional capital or other funding to finance our
operations, new market development and continued growth. We may seek additional
equity financing through the sale of securities on a public or a private
placement basis on such terms as are reasonably attainable. We may not be able
to obtain such financing when needed, or that if obtained, it may not be
sufficient or on terms and conditions acceptable to us.
WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY IN THE FUTURE.
After 14 years of operations, we have not reported any profits for a
full year of operations and, as of December 31, 1999, we had an accumulated
deficit of $49.7 million. We may not be able to achieve or sustain
profitability in the future. We anticipate an increase in expenses as a result
of research and development and marketing for our new products. As a result, we
may incur additional losses and negative cash flow from operations for the
foreseeable future.
IF WE FAIL TO SECURE SUFFICIENT CAPITAL OR FAIL TO CREATE A STRONG MARKETING
SUPPORT TEAM, THEN OUR EFFORTS TO PENETRATE NEW MARKETS COULD FAIL, RESULTING
IN DECREASED CASH FLOW.
Expanding our presence in the audio/visual command and control market will
require capital for further software product development, and the creation of
sales channels and a marketing support team. The inability to secure sufficient
capital or the failure to create a strong sales
<PAGE> 25
channel/marketing support organization could result in a failed effort to
penetrate these new markets, and adversely affect operating results and cash
flow.
IF WE FAIL TO DEVELOP COMPETITIVE PRODUCTS IN RESPONSE TO TECHNOLOGICAL
CHANGES, OUR BUSINESS WILL NOT GROW OR REMAIN COMPETITIVE.
The market for our products is characterized by rapidly changing
technology, evolving industry standards and frequent product introductions.
Product introductions are generally characterized by increased functionality
and quality at reduced prices. If we are unable, for technological or other
reasons, to develop competitive products in a timely manner in response to
changes in the industry, our business and operating results would be
significantly harmed. For example, the successful launch in the last quarter of
2000 of Voyager, our second-generation PC-based device controller, depends on
our ability to complete the design and development of complex audio/visual
control software built on a new software kernel co-developed with ACIS, Inc.
Our ability to successfully develop and introduce on a timely basis
new and enhanced products that embody new technology, and achieve levels of
functionality and prices that are acceptable to the market will be a
significant factor in our ability to grow and to remain competitive. For
instance, the ability to transact business via the Internet is becoming
increasingly important. Accordingly, in order to remain competitive, we are
currently developing a system, that will allow us to deliver products and
services to our customers via the Internet. We may not be able to timely or
effectively implement this strategy.
OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY A DISRUPTION IN SUPPLY OR A
SIGNIFICANT PRICE INCREASE OF VIDEOCONFERENCING COMPONENTS OR FAILURE OF A
THIRD PARTY SUPPLIER TO REMAIN COMPETITIVE IN PRICE.
Substantially all of our videoconferencing components, subsystems and
assemblies are made by outside vendors. Disruption in supply, a significant
increase in price of one or more of these components or failure of a third
party supplier to remain competitive in functionality or price could result in
lost sales. We could experience such problems in the future. Similarly,
excessive rework costs associated with defective components or process errors
associated with our anticipated new product line of videoconferencing systems
could adversely affect our business and operating results.
WE DEPEND ON PURCHASES FROM A FEW SIGNIFICANT CUSTOMERS, AND ANY LOSS
CANCELLATION, OR REDUCTION OF PURCHASES BY THESE CUSTOMERS COULD HARM OUR
BUSINESS.
We currently sell control and videoconferencing systems to a small
number of major customers. During the year ended December 31, 1999,
approximately 50% of our revenues were from three large customers. Further, we
do not have long term contracts with any of our other customers, so our
customers could stop purchasing our products at any time. The loss of Bell
Atlantic as a customer of Videoconferencing Systems, any termination or
material modification of Eastern Telecom's agency agreement with Bell Atlantic
or the loss other major customers, or any reduction in purchases by these
customers, could significantly harm our business.
<PAGE> 26
IF WE CANNOT ATTRACT, RETAIN, TRAIN OR MANAGE OUR KEY MANAGEMENT OR TECHNICAL
PERSONNEL EFFECTIVELY, OUR ABILITY TO DEVELOP AND SELL NEW PRODUCTS COULD BE
HINDERED, RESULTING IN A REDUCTION IN SALES.
Our development, management of our growth and other activities depend on the
efforts of key management and technical employees. Competition for such persons
is intense. Since we do not have long-term employment agreements with our key
management personnel or technical employees, we could lose one or more of our
key management or technical personnel that could significantly harm our
business. Our future success is also dependent upon our ability to effectively
attract, retain, train, motivate and manage our employees, and failure to do so
could hinder the development and marketing of our new products which could
result in a reduction in sales, and our customers could shift their purchases
to our competitors.
WE MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR COMPETITIVE POSITION BECAUSE
THERE ARE COMPETITORS WHO MAY ENTER THE MARKET WITH FAR GREATER TECHNICAL AND
FINANCIAL RESOURCES THAN WE HAVE.
Competition in the command and control and video communications
markets is intense. We expect other competitors, some with significantly
greater technical and financial resources, may enter these markets. If we
cannot continue to offer new command and control and videoconferencing products
with improved performance and reduced cost, our competitive position will
erode. Moreover, competitive price reductions may adversely affect our results
of operations. In the command and control market, our primary competitors are
Panja, Inc. and Crestron Electronics, Inc. In the videoconferencing market, our
primary competitors are PictureTel Corporation, VTEL Corporation and Polycom
Inc.
FLUCTUATIONS IN OUR QUARTERLY PERFORMANCE COULD ADVERSELY AFFECT OUR TOTAL
REVENUES AND NET INCOME LEVELS.
Our revenues have historically occurred predominantly in the third
month of each fiscal quarter. Accordingly, our quarterly results of operations
are difficult to predict, and delays in the closing of sales near the end of
the quarter could cause quarterly revenues and, to a greater degree, operating
and net income to fall substantially short of anticipated levels. Our total
revenues and net income levels could also be adversely affected by:
- - cancellations or delays of orders,
- - interruptions or delays in the supply of key components
- - changes in customer base or product mix,
- - seasonal patterns of capital spending by customers,
- - delays in purchase decisions due to new product announcements by us or
our competitors, and
- - increased competition and reductions in average selling prices.
<PAGE> 27
WE MAY NOT BE ABLE TO REGAIN OUR NASDAQ LISTING.
Effective as of the close of business on September 22, 1999, our
common stock was delisted from the Nasdaq SmallCap Market and began trading on
the OTC Bulletin Board. The delisting occurred as a result of the minimum bid
price on our common stock being less than $1.00 per share and our net tangible
assets being under $2.0 million. We are appealing Nasdaq's decision to delist
our shares and have been advised by Nasdaq that its review council will likely
issue its decision in April 2000. If our appeal is unsuccessful, our common
stock will continue to trade on the OTC Bulletin Board until such time as we
qualify for inclusion on the Nasdaq Stock Market. Because the requirements for
a new listing on the Nasdaq Stock Market are substantially more onerous than
the requirements for continued listing, we may not be in a position in the
future to reapply for listing on Nasdaq. Because the OTC Bulletin Board is
generally a less efficient market than the Nasdaq Stock Market, the liquidity
and volatility of our shares could be adversely impacted. Furthermore,
institutional investors are less likely to be interested in stocks trading on
the OTC Bulletin Board.
THE SECURITIES AND EXCHANGE COMMISSION'S RULES REGARDING PENNY STOCKS MAY
RESTRICT YOUR ABILITY TO RESELL OUR SHARES.
Our common stock is subject to Rules 15g-1 through 15g-9 of the
Securities Exchange Act of 1934, which imposes additional sales practice
requirements on broker/dealers who sell such securities to persons other than
established customers and accredited investors. Generally, accredited investors
include institutions with assets in excess of $5,000,000 or individuals with
net worths in excess of $1,000,000 or annual incomes exceeding $200,000 or
$300,000 jointly with their spouses. The broker/ dealer must make a special
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to the sale. The broker/dealer must furnish
the purchaser a document outlining the risks associated with investing in penny
stocks. Furthermore, the broker/dealer must inform the purchaser of:
- - the bid and offer price quotes for penny stock,
- - the number of shares to which the quoted prices apply;
- - the brokerage firm's compensation for the trade; and
- - the compensation received by the brokerage firm's salesperson for the
trade.
Consequently, the rules may adversely affect the ability of broker/dealers to
sell our common stock, which may affect your ability to resell our common
stock.
RESALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
We currently have an effective registration statement covering the
resale of 4,258,865 shares of our common stock by certain shareholders,
although, as a result of the repayment of convertible debentures held by
Kernaghan, we intend to file an amendment to this registration statement to
reduce the number of shares registered to 2,561,935. We are also obligated to
register the 1,351,625 shares of common stock sold in the March 10, 2000
private placement and 524,126 shares of common stock that were issued in
exchange for Eastern Telecom shares held by its minority shareholders. The sale
of these shares into the market may adversely affect the market price of our
common stock.
<PAGE> 28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
VSI conducts most of its business in the United States and therefore, we
believe our exposure to foreign currency exchange rate risk at December 31,
1999 was not material. The value of our financial instruments is generally not
significantly impacted by changes in the interest rates and we have no
investments in derivatives. Fluctuations in interest rates are not expected to
have a material impact on interest expense incurred under our credit facilities
due to the relative short-term nature of this debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements are filed with this report:
Report of Independent Certified Public Accountants
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and December 31, 1998
Consolidated Statements of Operations for Years Ended December 31, 1999, 1998
and 1997
Consolidated Statement of Stockholders' Equity for Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for Years Ended December 31, 1999, 1998
and 1997
Notes to Consolidated Financial Statements
<PAGE> 29
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
VSI Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of VSI
Enterprises, Inc. (a Delaware corporation) and Subsidiaries as of December 31,
1999 and 1998 and the related statements of operations, stockholders' equity,
and cash flows for the years ended December 31, 1999 and 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VSI Enterprises, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998,
in conformity with accounting principles generally accepted in the United
States.
/s/ GRANT THORNTON LLP
Atlanta, Georgia
March 7, 2000 (except for Note M which date is March 10, 2000)
<PAGE> 30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To VSI Enterprises, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of VSI ENTERPRISES, INC. (a Delaware
corporation) AND SUBSIDIARIES for the year ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of VSI
Enterprises, Inc. and subsidiaries for the year ended December 31, 1997 in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 12, 1999 (except with respect to the
effect of the pending sale of
Eastern Telecom, Inc. discussed
in Note B, as to which the date
is March 27, 2000)
<PAGE> 31
VSI Enterprises, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 798,826 $1,099,718
Accounts receivable, less allowance
for doubtful accounts of $148,289
and $360,000 at December 31, 1999
and 1998, respectively 986,754 3,283,988
Inventories, less allowance for obsolescence
of $1,000,000 and $1,677,440 at December 31,
1999 and 1998, respectively 760,082 1,059,142
Demonstration inventory, net of allowance for
obsolescence of $772,796 and $1,074,765 at
December 31, 1999 and 1998, respectively 16,258 136,883
Prepaid expenses and other current assets -- 131,515
Net current assets of discontinued operations 476,153 406,077
---------- ----------
Total current assets 3,038,073 6,117,323
PROPERTY AND EQUIPMENT, net
Continuing operations 166,572 420,831
Discontinued operations 577,676 628,152
OTHER ASSETS
Software development costs, net 205,295 75,349
Other long-term assets 14,614 56,322
Other assets of discontinued operations, net 908,303 976,691
---------- ----------
1,128,212 1,108,362
---------- ----------
$4,910,533 $8,274,668
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 32
VSI Enterprises, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Current portion of notes payable $ 105,907 $ 1,235,425
Short-term borrowings -- 157,376
Convertible debentures 939,750 --
Accounts payable 941,301 2,159,864
Accrued expenses 1,001,837 1,091,287
Deferred revenue 1,000,512 1,522,416
----------- -----------
Total current liabilities 3,989,307 6,166,368
NOTES PAYABLE, LESS CURRENT PORTION -- 1,105,655
REDEEMABLE MINORITY INTEREST 2,118,293 --
COMMITMENTS AND CONTINGENCIES (Note L) -- --
STOCKHOLDERS' EQUITY
Preferred stock, $.00025 par value; authorized
800,000 shares, none issued and outstanding -- --
Common stock, authorized 40,000,000 shares of
$.001 par value; issued and outstanding
12,300,144 shares at December 31, 1999
and 1998, respectively 12,300 12,300
Additional paid-in capital 48,508,074 48,209,039
Accumulated deficit (49,717,441) (46,877,847)
Cumulative comprehensive income -- (340,847)
----------- -----------
(1,197,067) 1,002,645
----------- -----------
$ 4,910,533 $ 8,274,668
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 33
VSI Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue
Videoconferencing systems $ 7,132,248 $ 13,574,213 $ 12,168,107
Costs and expenses
Cost of videoconferencing systems 3,716,388 12,242,823 9,686,633
Selling, general and administrative 4,467,821 5,939,448 7,314,431
Research and development 416,225 786,103 1,031,814
Impairment loss -- 772,233 --
------------ ------------ ------------
8,600,434 19,740,607 18,032,878
------------ ------------ ------------
Loss from operations (1,468,186) (6,166,394) (5,864,771)
Loss on sale of investments (167,539) (452,005) --
Other expenses, primarily financing charges (884,244) (1,607,735) (71,968)
------------ ------------ ------------
Net loss from continuing operations
before income taxes (2,519,969) (8,226,134) (5,936,739)
Income taxes -- -- --
------------ ------------ ------------
Net loss from continuing operations (2,519,969) (8,226,134) (5,936,739)
Discontinued operations
Operating income (loss) from
discontinued operations (319,625) (9,054,570) 119,373
Gain on disposal of a subsidiary -- 344,732 --
------------ ------------ ------------
Income (loss) from discontinued operations (319,625) (8,709,838) 119,373
------------ ------------ ------------
NET LOSS $ (2,839,594) $(16,935,972) $ (5,817,366)
============ ============ ============
Net loss per common share
Loss from continuing operations $ (0.20) $ (0.69) $ (0.54)
Loss from discontinued operations (0.03) (0.73) 0.01
------------ ------------ ------------
$ (0.23) $ (1.42) $ (0.53)
============ ============ ============
Weighted average shares outstanding 12,300,144 11,931,232 10,901,620
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 34
VSI Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Common stock
------------------------------- Additional
Number of paid-in
Shares Par value capital
------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1996 9,879,062 $ 9,879 $ 38,222,005
Net loss for the year -- -- --
Other comprehensive income
Foreign currency translation adjustment -- -- --
------------- ------------- -------------
Comprehensive income -- -- --
------------- ------------- -------------
Issuance of common shares for products and services 137,500 138 650,001
Issuance of common shares for conversion of
convertible debentures 866,368 866 4,352,772
Issuance of common shares for employee stock purchase plan 36,653 37 156,002
Issuance of common shares for conversion of private placement 563,471 563 2,486,937
Exercise of stock options 63,188 63 108,574
------------- ------------- -------------
Balance, December 31, 1997 11,546,242 11,546 45,976,291
------------- ------------- -------------
Net loss for the year -- -- --
Other comprehensive income
Foreign currency translation adjustment -- -- --
------------- ------------- -------------
Comprehensive income -- -- --
------------- ------------- -------------
Issuance of common shares for products and services 237,500 238 516,606
Issuance of common shares for conversion of
convertible debentures 445,956 446 702,097
Issuance of common shares for employee stock purchase plan 20,446 20 59,019
Exercise of stock options 50,000 50 124,969
Issuance of stock warrants -- -- 830,057
------------- ------------- -------------
<CAPTION>
Other
Accumulated comprehensive
deficit income Total
------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1996 $ (24,124,509) $ (288,674) $ 13,818,701
Net loss for the year (5,817,366) -- (5,817,366)
Other comprehensive income
Foreign currency translation adjustment -- (166,364) (166,364)
------------- ------------- -------------
Comprehensive income (5,817,366) (166,364) (5,983,730)
------------- ------------- -------------
Issuance of common shares for products and services -- -- 650,139
Issuance of common shares for conversion of
convertible debentures -- -- 4,353,638
Issuance of common shares for employee stock purchase plan -- -- 156,039
Issuance of common shares for conversion of private placement -- -- 2,487,500
Exercise of stock options -- -- 108,637
------------- ------------- -------------
Balance, December 31, 1997 (29,941,875) (455,038) 15,590,924
------------- ------------- -------------
Net loss for the year (16,935,972) -- (16,935,972)
Other comprehensive income
Foreign currency translation adjustment -- 114,191 114,191
------------- ------------- -------------
Comprehensive income (16,935,972) 114,191 (16,821,781)
------------- ------------- -------------
Issuance of common shares for products and services -- -- 516,844
Issuance of common shares for conversion of
convertible debentures -- -- 702,543
Issuance of common shares for employee stock purchase plan -- -- 59,039
Exercise of stock options -- -- 125,019
Issuance of stock warrants -- -- 830,057
------------- ------------- -------------
</TABLE>
<PAGE> 35
VSI Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - CONTINUED
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Common stock
------------------------------- Additional
Number of paid-in
Shares Par value capital
------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1998 12,300,144 $ 12,300 $ 48,209,039
------------- ------------- -------------
Net loss for the year -- -- --
Other comprehensive income
Foreign currency translation adjustment and other -- -- (21,932)
------------- ------------- -------------
Comprehensive income -- -- (21,932)
------------- ------------- -------------
Issuance of stock warrants -- -- 320,967
------------- ------------- -------------
Balance, December 31, 1999 12,300,144 $ 12,300 $ 48,508,074
============= ============= =============
<CAPTION>
Other
Accumulated comprehensive
deficit income Total
------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31, 1998 $ (46,877,847) $ (340,847) $ 1,002,645
------------- ------------- -------------
Net loss for the year (2,839,594) -- (2,839,594)
Other comprehensive income
Foreign currency translation adjustment and other -- 340,847 318,915
------------- ------------- -------------
Comprehensive income (2,839,594) 340,847 (2,520,679)
------------- ------------- -------------
Issuance of stock warrants -- -- 320,967
------------- ------------- -------------
Balance, December 31, 1999 $ (49,717,441) $ -- $ (1,197,067)
============= ============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 36
VSI Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,839,594) $(16,935,972) $(5,817,366)
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on sale of investments -- 452,005 --
Loss on sale of subsidiary 167,539 -- --
Depreciation and amortization 715,290 1,737,341 796,919
Allowance to reduce inventory to
lower of cost or market -- 1,694,360 (315,645)
Allowance for doubtful accounts 135,679 213,462 132,235
Changes in operating assets and liabilities:
Accounts receivable 1,849,996 16,511 (32,342)
Inventories 204,159 (288,684) 516,418
Rental and demonstration inventory -- 617,590 568,877
Prepaid expenses and other assets 96,407 61,759 (34,040)
Accounts payable (1,230,288) (727,692) 894,910
Accrued expenses 130,597 969,611 95,441
Deferred revenue (353,104) 1,077,170 (183,880)
Effect of operating activities of
discontinued operations 448,238 8,583,905 152,009
------------ ------------ -----------
Net cash used by operating
activities (675,081) (2,528,634) (3,226,464)
Cash flows from investing activities:
Purchases of property and equipment (26,161) (13,163) (76,707)
Proceeds from sale of minority interest
in subsidiary 1,040,000 -- --
Change in other assets (183,434) 17,878 (519,387)
Proceeds from sale of investments -- 492,776 --
Effect of investing activities of
discontinued operations (132,622) (368,609) (324,618)
------------ ------------ -----------
Net cash provided (used) by
investing activities 697,783 128,882 (920,712)
------------ ------------ -----------
</TABLE>
<PAGE> 37
VSI Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowings (payments) on notes
payable and short term credit facilities (317,054) 2,384,237 (894,761)
Proceeds from exercise of stock options
and stock purchase plan -- 184,058 264,676
Proceeds from private placement, net of
issuance costs -- -- 2,487,500
Proceeds from issuance of common stock,
net of issuance costs -- -- 650,139
Effect of financing activities
of discontinued operations -- -- 308,173
----------- ---------- -----------
Net cash provided (used) by financing
activities (317,054) 2,568,295 2,815,727
----------- ---------- -----------
Effect of exchange rate changes on cash
and cash equivalents 21,581 114,190 (62,727)
----------- ---------- -----------
Increase (decrease) in cash and cash
equivalents (272,771) 282,733 (1,394,176)
Cash of subsidiary sold (40,284) -- --
Change in cash and cash equivalents included
in net current assets of discontinued
operations 12,163 494,550 (254,937)
Cash and cash equivalents at beginning
of the period 1,099,718 322,435 1,971,548
----------- ---------- -----------
Cash and cash equivalents at end of the period $ 798,826 $1,099,718 $ 322,435
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 38
VSI Enterprises, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Supplementary disclosure:
Interest paid $ 459,453 $ 427,737 $ 207,415
========== ========== ==========
Income taxes paid $ -- $ -- $ 180,000
========== ========== ==========
Supplemental schedule of noncash
investing and financing activities:
Noncash investing and financing activities:
Conversion of debt to common stock $ -- $ 702,543 $4,353,638
========== ========== ==========
Conversion of debt to subsidiary's stock $1,213,000 $ -- $ --
========== ========== ==========
Common stock issued for products and
services $ -- $ 516,844 $ 650,139
========== ========== ==========
Issuance of stock warrants $ 320,967 $ -- $ --
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 39
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
VSI Enterprises, Inc. was incorporated in Delaware in September 1988 and,
together with its majority and wholly-owned subsidiaries (the "Company"),
develops, manufactures, markets and supports software based audio/visual
control systems and videoconferencing products that operate on PC platforms.
1. Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
3. Cash and Cash Equivalents
For financial reporting purposes, the Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
4. Inventories
Inventories consist of videoconferencing system components and parts and are
valued at the lower of cost (first-in, first-out method) or market.
5. Demonstration Inventory
Demonstration inventory is stated at cost. Demonstration inventory allowance
is provided for in amounts sufficient to reflect the asset at its estimated
fair value.
<PAGE> 40
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
6. Property and Equipment
Property and equipment are stated at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated useful lives on a straight-line basis.
7. Goodwill
The excess acquisition cost over the fair value of net assets of acquired
businesses are amortized over 10 years on a straight-line basis. At December
31, 1998, as a result of continued losses incurred by the Company's network
reselling subsidiary, Eastern Telecom, Inc. ("ETI"), an impairment loss of
$6,995,211 was incurred related to the write-down of the majority of the
original goodwill recorded with the Company's acquisition of ETI in 1996, in
accordance with SFAS 121, Accounting for the Impairment of Long-Lived Assets
and For Long-Lived Assets to be Disposed of. As the Company has signed a
definitive agreement for the sale of ETI subsequent to year end (Note M),
this impairment loss has been reclassified to discontinued operations in the
statement of operations for the year ended December 31, 1998 and the
remaining unamortized goodwill amount of $860,120 at December 31, 1999 is
included in the consolidated balance sheet in the caption "other assets of
discontinued operations". Also in 1998, an additional impairment loss of
$577,077 was recorded to eliminate all remaining goodwill related to the
Company's European subsidiary. Management recorded the impairment loss in
light of the Company's European subsidiary's continuing operating losses and
expectations of future losses. This European subsidiary was sold on
September 30, 1999 for $2.00 (Note B). The sale resulted in a loss of
$167,539, primarily as a result of writing off $319,266 of cumulative
foreign currency translation adjustments. Goodwill amortization in the
amount of $95,569, $492,739 and $492,738 for the years ended December 31,
1999, 1998 and 1997, respectively is included in the "operating loss from
discontinued operations" caption in the consolidated statement of operations
for each year presented.
8. Software Development Costs
All software development costs are charged to expense as incurred until
technological feasibility has been established for the product. Software
development costs incurred after technological feasibility has been
established are capitalized and amortized, commencing with product release,
on a straight-line basis over three years or the useful life of the product,
whichever is shorter. Accumulated amortization of software development costs
was $1,684,550 and $1,634,897 at December 31, 1999 and 1998, respectively.
Amortization expense charged to operations was $49,653, $582,703 and $399,945
for the years ended December 31, 1999, 1998 and 1997, respectively. The
Company capitalized $179,599 and $0 of software development costs in 1999 and
1998, respectively.
<PAGE> 41
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
9. Investments
The Company accounts for investments in entities in which it owns less than
20% under the cost method. During 1998, the Company sold its cost
investments in Global Telemedix and Educational Video Conferencing ("EVC")
resulting in a loss of $452,005. Global Telemedix provides computer hardware
and software to healthcare providers and EVC acts as a marketing and
technological bridge between higher education institutions and corporations.
There were no receivables outstanding from investees at December 31, 1999
and 1998. In addition, sales to investees were approximately $116,000 and
$1,038,000 for the years ended December 31, 1998 and 1997, respectively.
10. Accounting for Impairment of Long-Lived Assets
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting For
The Impairment Of Long-Lived Assets and For Long-Lived Assets To Be Disposed
Of, requires impairment losses to be recognized for long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. At December 31, 1998, the Company recorded a charge against
continuing operations of $577,077 related to the writedown of goodwill
previously recorded upon the Company's acquisition of its European
subsidiary, and a charge against discontinued operations of $6,995,215
related to the writedown of goodwill previously recorded upon the Company's
acquisition of its telephone network reselling subsidiary (Note A-7). Also
in 1998, the Company recorded an additional impairment charge of $195,156
related to the writedown of its European subsidiary's net asset value to
zero based on the European subsidiary's continuing losses. Management
believes that remaining long-lived assets in the accompanying consolidated
balance sheets at December 31, 1999 are appropriately valued.
11. Foreign Currency Translation
The asset and liability accounts of the Company's foreign subsidiaries are
translated into U.S. dollars at the current exchange rate in effect at the
balance sheet date. Stockholders' equity is translated at historical rates.
Income statement items are translated at average currency exchange rates.
The resulting translation adjustment is recorded as a separate component of
stockholder's equity.
<PAGE> 42
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
12. Revenue Recognition
Revenue from sales of videoconferencing systems and related maintenance
contracts on these systems are included in videoconferencing systems
revenues. Revenue on system sales are recognized upon shipment. Revenues
from installation of these systems are billed separately and recognized upon
completion of the installation. Revenue on maintenance contracts are
recognized over the term of the related contract.
13. Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates applied to taxable income. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. A valuation allowance is
provided for deferred tax assets when it is more likely than not that the
asset will not be realized.
14. Stock Based Compensation
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Effective in 1995, the Company adopted the disclosure option of Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 required that companies that do not choose to
account for stock-based compensation as prescribed by the statement, shall
disclose the pro forma effects on earnings and earnings per share as if SFAS
No. 123 had been adopted. Additionally, certain other disclosures are
required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS No. 123 (see Note H).
The Company accounts for common stock issued for goods or services under
SFAS No. 123 whereby the transaction is measured at the fair value of the
common stock issued. No shares were issued for goods or services in the year
ended December 31, 1999 while 237,500 and 137,500 common shares were issued
for goods or services in the years ended December 31, 1998 and 1997,
respectively.
<PAGE> 43
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
15. Net Loss Per Common Share
In 1997, the Company adopted SFAS No. 128, Earnings Per Share. That
statement requires the disclosure of basic net earnings (loss) per share and
diluted net earnings (loss) per share when different from basic. Basic net
earnings (loss) per share is computed by dividing net earnings (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted net earnings (loss) per share
gives effect to all potentially dilutive securities. There is no difference
between basic loss per share and diluted loss per share for any period
presented.
During 1998, the shareholders approved a one-for-four reverse common stock
split, effective January 15, 1999 to shareholders of record on January 14,
1999. All references to shares of common stock, stock options and per share
amounts have been restated to reflect this reverse common stock split.
16. Fair Value of Financial Instruments
The Company's financial instruments include cash, cash equivalents and notes
payable. Estimates of fair value of these instruments are as follows:
Cash and cash equivalents - The carrying amount of cash and cash equivalents
approximates fair value due to the relatively short maturity of these
instruments.
Notes payable - The carrying amount of the Company's notes payable
approximate fair value based on borrowing rates currently available to the
Company for borrowings with comparable terms and conditions.
17. Technological Change and New Products
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and frequent product introductions.
Product introductions are generally characterized by increased functionality
and better videoconferencing picture quality at reduced prices. The
introduction of products embodying new technology may render existing
products obsolete and unmarketable. The Company's ability to successfully
develop and introduce on a timely basis new and enhanced products that
embody new technology, and achieve levels of functionality at a price
acceptable to the market, will be a significant factor in the Company's
ability to grow and to remain competitive. If the Company is unable, for
technological or other reasons, to develop competitive products in a timely
manner in response to changes in the industry, the Company's business and
operating results will be materially and adversely affected.
<PAGE> 44
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
17. Technological Change and New Products - Continued
Management periodically evaluates the realizability of its
technology-related assets, including inventories, software development costs
and goodwill. During the year ended December 31, 1998, the Company recorded
approximately $1,651,000 of additional cost of videoconferencing systems
related to the write-down of certain inventories determined to be
technologically obsolete. No write-down of these inventories was recorded in
1999. Management believes that no material impairment of remaining
inventories and other assets existed at December 31, 1999. It is possible,
however, that management's estimates may change in the near term due to
technological, regulatory, and other changes in the Company's industry.
18. Dependence on Third Parties
Substantially all of the Company's components, subsystems and assemblies are
made by outside vendors. Disruption in supply, a significant increase in the
price of one or more of these components, or failure of a third party
supplier to remain competitive in functionality or price could have a
material adverse effect on the Company's business and operating results.
There can be no assurance that the Company will not experience such problems
in the future. Similarly, excessive rework costs associated with defective
components or process errors associated with the Company's anticipated new
PC-based control systems product could adversely affect the Company's
business and operating results.
19. Foreign Sales and Operations
International sales and operations are subject to inherent risks, including
difficulties and delays in obtaining pricing approvals and reimbursement,
unexpected changes in regulatory requirements, tariffs and other barriers,
political instability, difficulties in staffing and managing foreign
operations, longer payment cycles, greater difficulty in accounts receivable
collection and adverse tax consequences. Currency translation gains and
losses on the conversion to United States dollars and international
operations could contribute to fluctuations in the Company's results of
operations. If for any reason, exchange or price controls or other
restrictions on the conversion or repatriation of foreign currencies were
imposed, the Company's operating results could be adversely affected. There
can be no assurance that these factors will not have an adverse impact on
the Company's future international sales and operations and, consequently,
on the Company's operating results.
20. Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform to the current year presentation.
<PAGE> 45
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE B - DISCONTINUED OPERATIONS AND SALE OF EUROPEAN SUBSIDIARY
During the fourth quarter of 1998, the Company discontinued operations of
its system integration subsidiary, Integrated Network Services, Inc and in
September 1999, INS filed for protection under Chapter 7 of the U.S.
Bankruptcy Code. Also, on February 18, 2000 the Company and its network
reselling subsidiary, Eastern Telecom, Inc. (ETI) entered into a definitive
agreement to sell substantially all of the assets of ETI to a communications
services company (see Note M). Accordingly, operating results for both
subsidiaries have been reclassified and reported as discontinued operations
in accordance with Accounting Principles Board Opinion No. 30 for the years
ended December 31, 1999, 1998 and 1997. Summary operating results of the
discontinued network reselling and system integration operations are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ----------
<S> <C> <C> <C>
Revenue:
Network reselling $ 6,449,770 $ 5,863,198 $7,451,686
System integration -- 1,518,952 2,145,388
------------ ------------ ----------
6,449,770 7,382,150 9,597,074
------------ ------------ ----------
Costs and expenses:
Network reselling 6,517,771 14,154,063 6,386,551
System integration 251,624 2,282,657 3,091,150
------------ ------------ ----------
6,769,395 16,436,720 9,477,701
------------ ------------ ----------
Income(loss) from discontinued operations $ (319,625) $ (9,054,570) $ 119,373
============ ============ ==========
</TABLE>
Assets and liabilities of the discontinued network reselling and system
integration operations are included in the consolidated balance sheets as
assets and liabilities of discontinued operations and are made up as
follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Current assets of network reselling $ 2,682,800 $ 2,758,352
Current liabilities of network reselling (2,122,297) (2,352,275)
------------ ------------
Net current assets of network reselling 560,503 406,077
Current assets of system integration 14,545 334,022
Current liabilities of system integration (98,895) (334,022)
------------ ------------
Net current deficit of system integration (84,350) --
Property and equipment, net of network reselling 577,676 617,224
Property and equipment, net of system integration -- 10,928
Other assets of network reselling 908,303 976,691
Other assets of system integration -- --
------------ ------------
Total assets $ 1,962,132 $ 2,010,920
============ ============
</TABLE>
<PAGE> 46
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE B - DISCONTINUED OPERATIONS AND SALE OF EUROPEAN SUBSIDIARY -
(Continued)
The Company recognized a gain on disposal of the system integration
operation at December 31, 1998 of approximately $345,000.
On September 30, 1999 the Company sold its European subsidiary,
Videoconferencing Systems, n.v. ("VSINV") to certain members of VSINV's
executive management team for $2.00. As a condition of the sale, the Company
was released from all liabilities including certain guarantees under VSINV's
bank credit agreements and the Company received warrants to purchase up to
24.0% of VSINV. The sale resulted in a loss of $167,539.
NOTE C - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
During 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 outlines the requirements for revenue recognition under
generally accepted accounting principles ("GAAP"), in particular the
requirement that revenue be realized or realizable and earned. SAB 101 is
effective no later than the first quarter of the fiscal year beginning after
December 15, 1999. The Company will adopt SAB 101 effective January 1, 2000.
Adoption of SAB 101 has a direct impact on the revenue recognition of the
commission revenue of its majority owned subsidiary, ETI, which operations
have been classified as discontinued at December 31, 1999. Currently,
commission revenue represents commissions paid to VSI for reselling of
telephone network services which include additional telephone lines, ISDN
connections, high speed data transfer systems, internet connections, T-1
connections and certain network services. In accordance with currently
accepted GAAP, commission revenue is recognized upon receipt of the order
when the Company has no further obligation related to the order, net of any
chargebacks. Based on the definitive agreement to sell ETI, this revenue is
included in loss from discontinued operations in the consolidated statement
of operations for all periods presented. Adoption of SAB 101 will result in
a change in accounting principle recognizing commission revenue upon
installation of the services by the third party rather than upon receipt of
the order. Adoption of SAB 101 in the current year would not have had a
material impact on operations for 1999.
<PAGE> 47
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 1999 and
1998:
<TABLE>
<CAPTION>
Estimated
Service
1999 1998 Life
------------ ------------ ----------
<S> <C> <C> <C>
Machinery and equipment $ 1,508,857 $ 2,091,505 3-10 years
Furniture and fixtures 238,179 612,182 10 years
Leasehold improvements 60,463 60,463 5 years
------------ ------------
1,807,499 2,764,150
Less accumulated depreciation (1,640,927) (2,343,319)
------------ ------------
$ 166,572 $ 420,831
============ ============
</TABLE>
Depreciation expense charged to continuing operations was approximately
$158,000, $297,000 and $256,000 for the years ended December 31, 1999, 1998
and 1997, respectively, and is included in selling, general and
administrative expense in the accompanying consolidated statements of
operations.
NOTE E - NOTES PAYABLE AND SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
Notes Payable
------------- 1999 1998
------------ ------------
<S> <C> <C>
VSI line of credit; provides for maximum borrowings of $4,000,000, limited
to 80% of eligible accounts receivable, interest payable monthly at the
prime rate plus 2% (10.5 % at December 31, 1999); collateralized by
accounts receivable, certain property and equipment and inventory of VSI $ -- $ 82,556
VSI term note payable in two installments of $300,000 and $600,000 due on
February 16, 1999 and May 16, 1999, respectively. Interest is payable
upon retirement of note at 14%; collateralized by security interests in
certain patents owned by VSI -- 900,000
</TABLE>
<PAGE> 48
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE E - NOTES PAYABLE AND SHORT-TERM BORROWINGS - Continued
Notes Payable - Continued
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
VSI term notes payable due on March 31, 2000; interest payable quarterly
at the prime rate plus 3% (11.5 % at December 31, 1999). These term
notes are unsecured. The term notes payable are shown net of debt
discount of $4,093 and $227,345 at December 31, 1999 and 1998, respectively 105,907 1,105,655
INS line of credit; provides for maximum borrowings of $750,000, limited
to 80% of eligible accounts receivable; interest payable monthly at the
prime rate plus 3%; collateralized by accounts receivable, property and
equipment and inventory of INS -- 248,116
ETI line of credit; provides for maximum borrowings of $1,500,000, limited
to 90% of eligible accounts receivable; interest payable monthly at the
prime rate plus 2.75% (11.25% at December 31, 1999); collateralized by
eligible accounts receivable of ETI 757,746 1,402,523
Note payable to bank of European subsidiary; provides for
maximum borrowings of approximately $550,000; interest
payable monthly at 5% -- 252,869
------------ ------------
863,653 3,991,719
Current portion of notes payable 105,907 1,235,425
------------ ------------
757,746 2,756,294
Less notes payable included in net current assets
of discontinued operations 757,746 1,650,639
------------ ------------
$ -- $ 1,105,655
============ ============
</TABLE>
<PAGE> 49
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE E - NOTES PAYABLE AND SHORT-TERM BORROWINGS - Continued
Notes Payable - Continued
In 1997, the Company adopted SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (the
"Statement"). This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. At December 31, 1999 and 1998,
the Company has recognized approximately $0 and $83,000, respectively of
accounts receivable financing as notes payable in the accompanying
consolidated balance sheets and $757,746 and $1,650,639 as net assets from
discontinued operations at December 31, 1999 and 1998, respectively.
In March 1998, the Company secured a working capital loan for approximately
$2.0 million from AmTrade International Bank of Georgia. The loan was
guaranteed by the Export-Import Bank of the United States, and was
collateralized by a letter of credit from a VSI customer. Funds were used
for pre-/post-export financing for the manufacture and delivery of
videoconferencing equipment in China. The interest rate was prime plus 2.5%.
Repayment was made in 1998 through proceeds of the letter of credit, which
was applied first to the loan principal and interest, with the remaining
amount remitted to VSI. Interest expense related to this note was
approximately $57,000 for the year ended December 31, 1998.
<PAGE> 50
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE E - NOTES PAYABLE AND SHORT-TERM BORROWINGS - Continued
Notes Payable - Continued
During September 1998, the Company began offering $3,000,000 of term notes.
A minimum of $5,000 was required for each subscription and each purchaser of
the term notes received warrants to purchase shares of common stock of the
Company on the basis of one warrant for each $8.00 of term notes purchased.
The warrants had a term of five years, expiring on October 1, 2003 and were
to become exercisable on April 1, 2000 at an exercise price of $1.68 per
share. At December 31, 1998, the Company had issued $1,333,000 of term notes
and 166,625 warrants. The Company valued these warrants at $270,645 using
the Black-Scholes option-pricing model in accordance with SOFAS No. 123,
Accounting for Stock-Based Compensation. This warrant value was recorded as
debt discount to be amortized to interest expense over the period until the
warrants become exercisable on April 1, 2000. In conjunction with the
Company's debt restructuring on August 31, 1999, $1,213,000 of term notes,
including accrued interest, were converted into 195,099 shares of the
Company's network reselling subsidiary, ETI, common stock, representing a
19.5% minority interest in ETI. ETI's minority shareholders have a put
option, which gives them the right to put their ETI shares back to the
Company at the price converted, at the earlier of the sale of ETI or August
31, 2000, and the Company has a call option to reacquire shares of ETI at
any time. In conjunction with this restructuring, 151,625 of the original
warrants were cancelled and the remaining unamortized debt discount related
to these warrants of $96,548 was charged to interest expense. Total interest
expense related to these warrants was $223,252 and $43,300 for the years
ended December 31, 1999 and 1998, respectively. Also in conjunction with
this restructuring, the Company issued converting term note holders 318,492
warrants to purchase shares of common stock of the Company at $0.50 per
share and 136,497 warrants to purchase shares of common stock of the Company
at $1.00 per share. These warrants have a term of five years, expiring on
August 31, 2004 and were exercisable immediately. The Company valued these
warrants at $97,367 using the Black-Scholes option-pricing model in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation
utilizing the following assumptions: expected volatility of 117%, risk free
interest rate of 6.09%, and an expected term of five years. The value of
these warrants is to be amortized to interest expense over the period to the
first date on which the shares of ETI are eligible to be put back to the
Company, which is one year. Interest expense related to these warrants was
$32,456 for the year ended December 31, 1999.
<PAGE> 51
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE F - CONVERTIBLE DEBENTURES
On February 23, 1998, the Company issued $3,000,000 of 5% convertible
Debentures due February 2000 (the "Debentures"), the proceeds of which were
utilized for working capital purposes. In addition, the Company issued 9,375
common stock purchase warrants to the holder of the Debentures and 9,375
common stock purchase warrants to an agent involved in the transaction. The
warrants expire on February 23, 2003. Each warrant entitles the holder to
purchase one common stock share of the Company at the price of $10.00. The
Debentures were convertible at the lower of (i) $8.00 per share or (ii) 85%
of the average closing bid price of the Company's common stock. "Average
closing bid price" is defined to mean the lowest average of the daily last
bid price for the common stock for any three trading days in any 20-day
period preceding the conversion. During the year, $710,000 of Debentures
plus accrued interest of $13,531 were converted into 445,956 common shares;
$1,440,000 of the Debentures were redeemed by the Company at face value and
the remaining Debentures were converted into a $900,000 term note (see Note
F). 50,000 shares of the 445,956 issued in connection with the conversion
were held in escrow at December 31, 1998 with 25,000 of these issued in
January 1999 and 25,000 issued in February 1999.
On November 16, 1998, the Company issued an additional 25,000 stock purchase
warrants to the holder of the Debentures to enable the Company to purchase
the $1,440,000 outstanding Debentures at face value. The warrants, which
expire on November 16, 2003, entitle the holder to shares of the common
stock of the Company at a price of $2.40 per share. At this time, the
Company also repriced the 9,375 warrants issued to the Debenture holder on
February 23, 1998 to a price of $2.40 per share. The impact of this
repricing was less than $10,000 and due to its insignificance, was not
expensed by the Company.
In conjunction with the issuance of the 18,750 common stock warrants to the
Debenture holder and agent, $529,412 of the debt issuance proceeds relating
to the issuance of the Debentures was allocated to additional paid in
capital in the accompanying consolidated balance sheet, to recognize the
beneficial conversion feature of the Debentures. This debt discount was
amortized to interest expense upon conversion and redemption of the
Debentures and is included in other expenses in the consolidated statements
of operations for the year ended December 31, 1998. In conjunction with the
issuance of the additional 25,000 purchase warrants, the Company valued the
warrants at $30,000 using the Black-Scholes option pricing model in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation. This
warrant value was recorded as interest expense upon issuance of the
warrants.
<PAGE> 52
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE F - CONVERTIBLE DEBENTURES - Continued
Effective August 31, 1999, the Company restructured its note payable, which
consisted of principal and accrued interest totaling $1,089,750. The Company
paid $150,000 at closing, and the remaining balance of $939,750 was
exchanged for a 7% Secured Convertible Debenture, due and payable on August
31, 2000. The debenture is secured by a lien on the Company's interest in
its subsidiary, ETI, which is junior to the Company's converting term note
holders and new investors, as discussed in notes F and G. Additionally,
under the terms of the agreement, the debenture holder released its existing
security interest in the Company's patents. The debenture holder has the
option to commence converting the debenture into shares of the Company's
Common Stock at the initial rate of 7.5% per month beginning January 1,
2000. This rate will increase to 15% per month commencing April 1, 2000. The
conversion price is the lesser of $1.00 or the preceding five-day average
closing bid price of the Company's Common Stock prior to the date of any
such transaction, with a floor of $0.50 per share. The debenture holder also
has the option of converting the debenture into common stock of ETI, the
Company's Subsidiary, instead of shares of the Company. This conversion can
be done at any time by the debenture holder at the rate of one share of ETI
common stock for each $6.50 of principal so converted.
On January 5, 2000, the convertible debenture holder converted $72,198 of
principal and interest into 144,396 shares of the Company's common stock.
Additionally, on February 1, 2000 the debenture holder converted $72,549 of
principal and interest into 72,549 shares of the Company's common stock. The
remaining balance of the convertible debentures, $826,668, was paid by the
Company on March 1, 2000.
NOTE G - REDEEMABLE MINORITY INTEREST
On August 31, 1999, the Company received $1,040,000 in proceeds from the
sale of 16.0% of its ownership interest in its subsidiary, ETI. These
minority shareholders have a put option, which gives them the right to put
their ETI shares back to the Company at the price paid at the earlier of the
sale of ETI or August 31, 2000, and the Company has a call option to
reacquire shares of ETI at any time. In conjunction with this transaction,
the Company issued minority shareholders 780,000 warrants to purchase shares
of common stock of the company at $0.50 per share and 260,000 warrants to
purchase shares of common stock of the Company at $1.00 per share. These
warrants have a term of five years, expiring on August 31, 2004 and were
exercisable immediately. The Company valued these warrants at $223,600 using
the Black-Scholes option-pricing model in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation utilizing the following assumptions:
expected volatility of 117%, risk free interest rate of 6.09%, and an
expected term of five years. The value of these warrants is to be amortized
to interest expense over the period to the first date on which the shares of
ETI are eligible to be put back to the Company, which is one year. Interest
expense related to these warrants was $74,533 for the year ended December
31, 1999.
<PAGE> 53
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE G - REDEEMABLE MINORITY INTEREST - Continued
As a result of this transaction and the conversion of the term notes into
shares of ETI as discussed in Note F, at December 31, 1999 the Company holds
a 64.5% majority ownership in ETI. These shares of ETI are redeemable by the
minority shareholders for a total of $2,332,889 at the earlier of the sale
of ETI or August 31, 2000. The minority interest share of the earnings from
ETI in the amount of approximately $8,000 is included in operating loss from
discontinued operations for the year ended December 31, 1999. Subsequent to
year end, the Company exchanged 524,126 of its common shares for the
majority of the shares of ETI held by minority shareholders.
NOTE H - STOCK OPTIONS, WARRANTS, AND EMPLOYEE STOCK PURCHASE PLAN
Stock Option Plan and Warrants
The Company's board of directors has approved a stock option plan which
covers up to 915,514 shares of common stock. The plan provides for the
expiration of options ten years from the date of grant and requires the
exercise price of the options granted to be at least equal to 100% of market
value on the date granted. Stock option transactions are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 593,322 $5.46 475,867 $6.88 480,856 $ 6.52
Granted 173,697 0.40 196,250 1.75 84,000 6.20
Exercised -- -- (50,000) 2.50 (63,189) 3.36
Forfeited (236,324) 7.25 (28,795) 7.82 (25,800) 10.76
-------- ----- ------- ----- ------- ------
Outstanding, end of year 530,695 $3.01 593,322 $5.46 475,867 $ 6.88
======== ===== ======= ===== ======= ======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price December 31, 1999 Life (Years) Price December 31, 1999 Price
----- ----------------- ------------ ----- ----------------- -----
<S> <C> <C> <C> <C> <C>
$0.34 - $1.00 246,197 9.35 $ 0.60 49,134 $ 1.00
$1.12 - $1.87 33,500 8.14 1.36 27,805 1.31
$2.87 - $4.25 34,168 7.33 3.05 17,460 3.22
$4.60 - $5.50 182,501 7.11 5.09 153,993 5.07
$6.94 - $9.88 21,079 4.79 8.89 20,328 8.96
$11.00 - $14.75 11,000 6.26 13.13 11,000 13.13
$17.25 2,250 5.80 17.25 2,250 17.25
------- ---- ----- ------- -------
530,695 8.11 $ 3.01 281,970 $ 4.57
======= ==== ====== ======= =======
</TABLE>
<PAGE> 54
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE H - STOCK OPTIONS, WARRANTS, AND EMPLOYEE STOCK PURCHASE PLAN - Continued
Stock Option Plan - Continued
In connection with the purchase of the outstanding notes payable and
establishment of a line of credit during 1994, 62,500 common stock purchase
warrants were granted to a director at an exercise price of $1.60 per share.
These warrants expire in July 2004.
On May 1, 1999, 325,000 purchase stock warrants were granted to officers of
the Company at an exercise price of $0.53 per share. These warrants expire
May 1, 2004 and vest through May 1, 2000. Additionally, on August 17, 1999,
25,000 purchase stock warrants were granted to an officer of the Company at
an exercise price of $0.43 per share. These warrants vested on January 1,
2000 and expire on August 17, 2004.
The Company uses the intrinsic value method in accounting for its stock
option plans and warrants granted to employees. In applying this method, no
compensation cost has been recognized. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant dates for awards under those plans, the Company's net loss and loss
per share would have resulted in the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ----------------- --------------
<S> <C> <C> <C>
Net loss
As reported $ (2,839,594) $ (16,935,972) $ (5,817,366)
Pro forma (3,148,115) (17,248,878) (6,490,242)
Net loss per common share
As reported $ (0.23) $ (1.42) $ (0.53)
Pro forma (0.26) (1.45) (0.60)
</TABLE>
For purposes of the pro forma amounts above, the fair value of each option
grant was estimated on the date of grants using the Black-Scholes options
pricing model with the following weighted average assumptions used for
grants in 1999, 1998 and 1997, respectively; expected volatility of 117%,
87% and 88%, risk-free interest rates of $4.75-5.88%, $5.0%-6.1% and
$5.9%-6.7% and expected lives of 3-7 years for all periods presented.
<PAGE> 55
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE H - STOCK OPTIONS, WARRANTS, AND EMPLOYEE STOCK PURCHASE PLAN - Continued
Employee Stock Purchase Plan
The Company has an employee stock purchase plan ("Plan") that provides for
the sale of up to 75,000 shares of common stock to eligible employees. The
purchase price for shares of common stock purchased pursuant to the Plan is
the lesser of: 85% of the fair market value of common stock on the first pay
date or 85% of the fair market value of common stock on the last pay date of
each plan period. The Plan was suspended by the Board of Directors in
September 1998. The Company has no current plans to reinstate the Plan.
During the year ended December 31, 1998, 20,446 shares of common stock were
purchased by employees under this Plan.
NOTE I - INCOME TAXES
The Company's temporary differences result in a net deferred income tax
asset which is reduced to zero by a related deferred tax valuation
allowance, summarized as follows at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Deferred income tax assets:
Operating loss carryforwards $ 12,927,000 $ 11,315,000
Nondeductible accruals and allowances 636,000 1,117,000
Capitalized inventory costs 94,000 140,000
Tax credit carryforwards 89,000 89,000
Other 52,000 195,000
------------ ------------
Gross deferred income tax assets 13,798,000 12,856,000
Deferred income tax asset valuation allowance (13,742,000) (12,675,000)
------------ ------------
Net deferred income tax asset $ 56,000 $ 181,000
============ ============
Deferred income tax liabilities $ (56,000) $ (181,000)
============ ============
Net deferred income tax $ -- $ --
============ ============
</TABLE>
<PAGE> 56
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE I - INCOME TAXES - Continued
At December 31, 1999, the Company had net operating loss carryforwards for
U.S. income tax purposes of approximately $33,575,000 available to reduce
future taxable income and approximately $89,000 of investment and research
and experimental credits available to reduce future income taxes payable,
which expire in varying amounts through the year 2014.
The Company experienced a change in control, as defined under Section 382 of
the Internal Revenue code during calendar year 1993. As a result,
approximately $7,000,000 of the available tax loss carryforwards will be
limited to a maximum utilization of approximately $1,000,000 annually.
NOTE J- MAJOR CUSTOMERS
Revenue from three customers comprised approximately 50% of consolidated
revenues for the year ended December 31, 1999. At December 31, 1999, related
accounts receivable from these companies comprised 66% of consolidated
receivables.
Revenue from three customers comprised approximately 37% of consolidated
revenues for the year ended December 31, 1998. At December 31, 1998, related
accounts receivable from these companies comprised 9% of consolidated
receivables.
Revenue from three customers comprised approximately 35% of consolidated
revenues for the year ended December 31, 1997.
Management believes that concentration of credit risk with respect to trade
receivables is minimal due to the composition of the customer base. The
Company's customers are primarily large national and multinational companies
and agencies of the U.S. government. Allowances are maintained for potential
credit losses, and such losses have been within management's expectations.
<PAGE> 57
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE K - OPERATING SEGMENTS AND RELATED INFORMATION
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement requires the disclosure
of certain information regarding the Company's operating segments.
Prior to 1998, the Company's three industry segments were made up of
video conferencing, computer system integration and telephone network
reselling. These industry segments were all operating in separate, one
hundred percent owned, subsidiaries. In 1998, the Company discontinued
operations of its computer system integration subsidiary. On February 22,
2000, the Company entered into a definitive agreement to sell substantially
all of the assets of its network reselling subsidiary. These segments are
included in discontinued operations in the accompanying consolidated balance
sheets and statements of operations. As a result, at December 31, 1999, the
Company is operating only in the video conferencing segment.
The Company also had operations in the United States and Europe until the
sale of the European subsidiary on September 30, 1999. The majority of the
European revenue, operating loss, capital expenditures and identifiable
assets detailed below originates in Belgium. Summary information related to
the United States and European operations are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
United States $ 6,467,958 $ 10,652,157 $ 9,399,825
Europe 664,290 2,922,056 2,768,282
------------ ------------ ------------
$ 7,132,248 $ 13,574,213 $ 12,168,107
============ ============ ============
Operating loss:
United States $ (1,374,860) $ (5,736,760) $ (5,826,959)
Europe (93,326) (429,634) (37,812)
------------ ------------ ------------
$ (1,468,186) $ (6,166,394) $ (5,864,771)
============ ============ ============
Capital expenditures:
United States $ 19,363 $ 4,833 $ 8,374
Europe 6,798 8,330 68,333
------------ ------------ ------------
$ 26,161 $ 13,163 $ 76,707
============ ============ ============
</TABLE>
<PAGE> 58
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE K - OPERATING SEGMENTS AND RELATED INFORMATION - Continued
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Identifiable assets:
United States $4,910,533 $7,517,322
Europe -- 757,346
---------- ----------
$4,910,533 $8,274,668
========== ==========
</TABLE>
NOTE L - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and equipment under noncancelable operating
leases expiring at various dates through 2002. Rent expense for the years
ended December 31, 1999, 1998 and 1997 was approximately $388,000, $660,000
and $572,000, respectively. Approximate minimum annual future rental
payments under the leases are as follows at December 31:
<TABLE>
<CAPTION>
Year ending:
<S> <C>
2000 $ 322,000
2001 313,000
2002 240,000
------------
$ 875,000
============
</TABLE>
Litigation
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
<PAGE> 59
VSI Enterprises, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
NOTE M - SUBSEQUENT EVENTS
On February 18, 2000, the Company and ETI entered into a definitive
agreement to sell substantially all the assets of ETI to PentaStar
Communications, Inc., a Denver, Colorado based communications services
agent. Terms of the agreement include initial cash consideration in the
amount of $2,100,000, PentaStar common stock valued at $950,000, and
PentaStar's assumption of certain liabilities. In addition, under an
earn-out provision in the agreement, the Company is entitled to additional
compensation based on financial results of the acquired operations for
calendar year 2000. The definitive agreement is subject to approval by the
Company's shareholders at the annual meeting to be held in May 2000. The
Company anticipates realizing a gain of approximately $1,000,000 on the
sale, which is expected to close in the second quarter of calendar 2000. As
ETI comprised a separate operating segment, network reselling, the financial
statements have been reclassified for all years presented with the
operations of ETI included in operating income (loss) from discontinued
operations and ETI's assets and liabilities reclassified to assets and
liabilities of discontinued operations.
On September 9, 1999, the Company entered into a co-development agreement
with ACIS, Inc. ("ACIS"), a Texas based, privately-held software technology
Company, for the development of an advanced operating kernel (the "Kernel")
to support the Company's new product architecture for PC-based device
control. The Company and ACIS agreed to an equity transaction whereby the
Company will issue to ACIS 500,000 shares of its common stock in exchange
for 250,000 shares of the common stock of ACIS, approximately 5% of ACIS'
common stock. This equity exchange occurred on March 3, 2000. In further
consideration of the Company's development contribution, ACIS has granted
VSI a warrant to acquire up to 20% of ACIS' common stock at an exercise
price of $2.00 per share. This option is exercisable by VSI at any time
within 18 months from the date of the transaction. This investment in ACIS
will be accounted for at cost until such time that the Company exercises the
warrant to purchase the additional 15%.
On February 24, 2000, the Company issued a private placement memorandum for
the sale of up to 1,500,000 shares of the Company's stock at $3.00 per
share. As of March 10, 2000 the Company raised a total of $5,627,254 in new
equity through two related transactions. In the first transaction, the
Company raised $4,054,876 through the sale of 1,351,625 shares of common
stock at $3.00 per share. Approximately $826,668 of these proceeds were used
to repay the remaining balance of the 7% Secured Convertible Debenture held
by Thompson Kernaghan & Co. Ltd. ("Kernaghan"). In the second transaction,
VSI exchanged 524,126 of its common shares for 240,265 shares of VSI Network
Solutions, Inc. doing business as Eastern Telecom held by its minority
shareholders. By this transaction, VSI retired approximately 70% of its put
obligations under a shareholders agreement wherein Eastern Telecom's
minority shareholders had the right to put their shares to VSI at $6.50 per
share.
<PAGE> 60
Report of Independent Certified Public Accountants
--------------------------------------------------
on Schedule II
--------------
Board of Directors
VSI Enterprises, Inc.
In connection with our audit of the consolidated financial statements of VSI
Enterprises, Inc. and Subsidiaries referred to in our report dated March 7,
2000 (except for Note M which date is March 10, 2000), which is included in the
annual report to security holders and incorporated by reference in Part II of
this form, we have also audited Schedule II for the years ended December 31,
1999 and 1998. In our opinion, the schedule presents fairly, in all material
respects, the information required to be set forth therein as of and for the
years ending December 31, 1999 and 1998.
/s/ GRANT THORNTON LLP
Atlanta, Georgia
March 7, 2000
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SCHEDULE II
To VSI Enterprises, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated balance sheet of VSI ENTERPRISES, INC. (a
Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and the related
statements of operations, stockholders' equity, and cash flows for the year then
ended and have issued our report thereon dated April 12, 1999 (except with
respect to the effect of the pending sale of Eastern Telecom, Inc. discussed in
Note B, as to which the date is March 27, 2000). Our audit was made for the
purposes of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in Item 14 herein is the responsibility of management
and is presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of a the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects, the financial data for the year ended December
31, 1997 as required to be set forth therein in relation to the basic financial
statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
April 12, 1999
<PAGE> 62
VSI
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at Charged to Balance at
Beginning Costs and Deductions End of
Description of Period Expenses Describe (1)(2) Period
----------- ------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Reserve for obsolete inventory $ 1,677,440 $ 56,000 $ 733,440 $ 1,000,000
Reserve for doubtful accounts receivable 360,000 135,669 347,380 148,289
Allowance for demonstration inventory 1,074,765 120,324 422,293 772,796
Year ended December 31, 1998
Reserve for obsolete inventory $ 178,235 $ 1,499,205 $ - $ 1,677,440
Reserve for doubtful accounts receivable 323,079 213,462 176,541 360,000
Allowance for demonstration inventory 839,182 712,322 476,739 1,074,765
Year ended December 31, 1997
Reserve for obsolete inventory $ 494,200 $ 557,060 $ 873,025 $ 178,235
Reserve for doubtful accounts receivable 153,566 223,374 53,861 323,079
Allowance for demonstration inventory 318,611 520,571 - 839,182
</TABLE>
(1) - Obsolete items which have been disposed and bad debt write offs.
(2) - Column C-2 "Charged to other accounts" has been omitted as the response
is "none".
<PAGE> 63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements on accounting and financial disclosure matters
which are required to be described by Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to directors and executive officers of the Company
contained in the registrant's definitive proxy statement to be delivered to
shareholders in connection with the 2000 Annual Meeting of Shareholders
scheduled to be held on May 18, 2000 is incorporated hereby by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation contained in the
registrant's definitive proxy statement to be delivered to Shareholders in
connection with the 2000 Annual Meeting of shareholders scheduled to be held on
May 18, 2000 are incorporated hereby by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information relating to security ownership of certain beneficial owners and
management contained in the registrant's definitive proxy statement to be
delivered to shareholders in connection with the 2000 Annual Meeting of
Shareholders scheduled to be held on May 18, 2000 are incorporated hereby by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to related party transactions contained in the
registrant's definitive proxy statement to be delivered to shareholders in
connection with the 2000 Annual Meeting of Shareholders scheduled to be held on
May 18, 2000 are incorporated hereby by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) 1. Financial Statements.
The following financial statements and accountant's report have been filed as
Item 8 in Part II of this report:
Report of Independent Certified Public Accountants
<PAGE> 64
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and December 31,
1998
Consolidated Statements of Operations for Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statement of Stockholders' Equity for Years
Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
1. Financial Statement Schedules
The following financial statement schedule of VSI Enterprises, Inc. for
the years ended December 31, 1999, 1998 and 1997 is included pursuant to Item 8:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants on Schedule II..............
Report of Independent Certified Public Accountants on Schedule II .............
Schedule II: Valuation and Qualifying Accounts.................................
</TABLE>
2. Exhibits.
The following exhibits are filed with or incorporated by reference into this
report. The exhibits which are denominated by an asterisk (*) were previously
filed as a part of, and are hereby incorporated by reference from either (i) the
Post-Effective Amendment No. 1 to the Company's Registration Statement on Form
S-18 (File No. 33-27040-D) (referred to as "S-18 No. 1"), (ii) Post-Effective
Amendment No. 2 to the Company's Registration Statement on Form S-18 (File No.
33-27040-D) (referred to as "S-18 No. 2"), (iii) Post-Effective Amendment No. 3
to the Company's Registration Statement on Form S-18 (File No. 33-27040-D)
(referred to as "S-18 No. 3"); (iv) the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1992 (referred to as "1992 10-Q"); (v) the
Company's Annual Report on Form 10-K for the year ended March 31, 1993 (referred
to as "1993 10-K"); (vi) the Company's Registration Statement Form S-1 (File No.
33-85754) (referred to as "S-1"); (vii) the Company's Annual Report on Form 10-K
for the year ended December 31, 1994 (referred to as "1994 10-K"); (viii) the
Company's Annual Report on Form 10-K for the year ended December 31, 1995
(referred to as "1995 10-K"); (ix) the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997 (referred to as "1997 10-Q"); (x) the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
(referred to as "1996 10-K"); (xi) the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, as amended (referred to as "1998 10-K/A"),
(xii) the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 (referred to as "March 1999 10-Q"), (xiii) the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999 (referred to as
"June 1999 10-Q"), (xiv) the Company's Form S-8 Registration Statement
(File No. 333-18239), (referred to as "Warrant Plan S-8"), (xiii) the Company's
Form S-8 Registration Statement (File No. 333-18237), (referred to as
"Option Plan S-8"), (xv) the Company's Current Report on Form 8-K dated
August 31, 1999 (referred to as "1999 8-K") and (xvi) the Company's
Registration Statement on Form S-3 amended January 31, 1999 ("1999 S-3").
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
--------------------------------------------------------------------
<S> <C>
*3.1 Certificate of Incorporation, including Certificate
of Stock Designation dated September 25, 1990, and
amendments dated December 26, 1990, August 19, 1991
and October 17, 1991 (S-18 No. 3, Exhibit 3-1)
*3.2 Amended Bylaws of the Registrant as
presently in use (S-18 No. 1, Exhibit 3.2)
*3.3 Certificate of Amendment to Certificate of
Incorporation filed on February 10, 1993
(1992 10-Q)
*3.6 Certificate of Amendment to Certificate of
Incorporation filed on February 13, 1995
(1994 10-K)
*3.7 Certificate of Amendment to Certificate of
Incorporation filed on September 8, 1995
(1995 10-K)
*3.9 Certificate of Amendment of Certificate of
Incorporation filed on January 13, 1999 (1998 10-K/A)
*3.10 Certificate of Amendment to Certificate of
Incorporation filed on June 28, 1999 (June 1999 10-Q)
*10.3 1991 Stock Option Plan (S-18 No. 2,
Exhibit 10.1(a))
*10.3.1 Amendment No. 1 to 1991 Stock Option Plan
(1993 10-K)
*10.3.2 Amendment No. 2 to 1991 Stock Option Plan (S-1)
*10.3.3 Amendment No. 3 to 1991 Stock Option Plan
(S-1)
*10.3.4 Amendment No. 4 to 1991 Stock Option Plan
(Option Plan S-8, Exhibit 4.5)
*10.3.5 Amendment No. 5 to 1991 Stock Option Plan
*10.4 Revolving Credit and Security Agreement
dated June 7, 1995 by and between
Video conferencing Systems, Inc. ("VSI")
and Fidelity Funding of California, Inc.
(1995 10-K)
*10.5 1995 Performance Warrant Plan (Warrant
Plan S-8, Exhibit 4.1)
*10.6 Employment Agreement dated August 4, 1997,
by and between the Registrant and Judi
North (1997 10-Q)
*10.7 Consulting Agreement dated May 1, 1999 by and
between the Registrant, Taconic Partners, L.L.C.,
and Richard Harrison (June 1999 10-Q)
*10.15 1994 Employee Stock Purchase Plan (1994 10-K)
</TABLE>
<PAGE> 66
<TABLE>
<S> <C>
*10.16 Promissory Note, dated November 18, 1999, issued to
Thomson Kernaghan & Co., Ltd. in the
principal amount of $900,000 (1998 10-K/A)
*10.17 Assignment of Security Interest in
Patents, dated November 18, 1999, by and
between the Registrant and Thomson
Kernaghan & Co., Ltd. (1998 10-K/A)
*10.18 Receivable Sale Agreement, dated October
8, 1998, by and between VSI Network
Solutions, Inc. and RFC Capital
Corporation (1998 10-K/A)
*10.19 Promissory Note Restructuring Agreement,
dated as of August 31, 1999, by and
between VSI Enterprises, Inc. and Thomson
Kernaghan & Co., Ltd. (1999 8-K)
*10.20 7% Secured convertible Debenture, dated
August 31, 1999, issued to Thomson
Kernaghan & Co., Ltd. in principal amount
of $1,089,750 (1999 8-K)
*10.21 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 Depositary
Agent (1999 8-K)
*10.22 License Agreement between ACIS, Inc. and the
Registrant dated September 9, 1999 (1999 S-3)
*10.23 Strategic Investment Agreement between the ACIS, Inc.
and the Registrant dated September 9, 1999 (1999 S-3)
10.24 Stock Purchase Agreement dated as of September 28,
1999, by and among the Registrant, Paul D'Haeyer and
Walter De Rop and Videoconferencing Systems, n.v.
10.25 Securityholders Agreement dated September 30, 1999,
by and among the Registrant, Paul D'Haeyer, and
Walter De Rop
10.26 Warrant Agreement dated September 30, 1999 issued
to Registrant by Videoconferencing Systems, n.v.
10.27 Form of Subscription Agreement used in connection
with Registrant's private placement that closed March
2000
*21.1 Subsidiaries of the Registrant (1996 10-K)
23.1 Consent of Grant Thornton LLP
23.2 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (SEC use only)
27.2 Financial Data Schedule -- 1998 (SEC use only)
27.3 Financial Data Schedule -- 1997 (SEC use only)
</TABLE>
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the quarter
ended December 31, 1999.
<PAGE> 67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VSI ENTERPRISES, INC.
By: /s/ Richard E. Harrison
------------------------
Date: March 29, 2000 Richard E. Harrison, CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the following
capacities on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Larry M. Carr Chairman of the Board March 29, 2000
- --------------------------
Larry M. Carr
/s/ Richard E. Harrison Chief Executive Officer March 29, 2000
- --------------------------
Richard E. Harrison
/s/ Karen T. Franklin Chief Financial Officer March 29, 2000
- -------------------------- (Principal Financial and
Karen T. Franklin Accounting Officer)
/s/ Julia B. North Director March 29, 2000
- --------------------------
Julia B. North
/s/ Harlan D. Platt, Ph.D. Director March 29, 2000
- --------------------------
Harlan D. Platt, Ph.D.
/s/ Edward S. Redstone Director March 29, 2000
- --------------------------
Edward S. Redstone
</TABLE>
<PAGE> 1
EXHIBIT 10.24
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement"), dated as of September
28, 1999, is by and among VSI Enterprises, Inc., a Delaware corporation ("VSI"),
Paul D'Haeyer ("D'Haeyer") and Walter De Rop ("De Rop") (D'Haeyer and De Rop are
sometimes each referred to herein as a "Purchaser" and collectively, as the
"Purchasers") and Videoconferencing Systems, n.v., a limited liability company
organized under the laws of Belgium (the "Company"). The parties hereto 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, VSI owns all of the issued and outstanding shares of capital
stock of the "Company", and desires to sell, and Purchasers desire to purchase,
certain shares of the capital stock of the Company from VSI;
NOW, THEREFORE, in consideration of the mutual representations,
warranties and covenants herein contained, and on the terms and subject to the
conditions herein set forth, the Parties agree as follows:
SECTION 1. DEFINITIONS. As used in this Agreement, the following terms shall
have the meanings set forth below:
"Closing" shall mean the closing of the transactions contemplated by
this Agreement, which shall occur at 10:00 a.m., Atlanta time, on the Closing
Date in the offices of VSI at 5801 Goshen Springs Road, Norcross, Georgia 30071,
or at such other time and place as shall be mutually agreed in writing by the
Parties.
"Closing Date" shall mean the date of the Closing, which shall occur
as soon as practicable after the date hereof, but in no event may the Closing
Date be later than September 30, 1999.
SECTION 2. PURCHASE AND SALE OF STOCK. Subject to and upon the terms and
conditions contained herein, at the Closing: (i) VSI shall sell, transfer,
assign, convey and deliver to D'Haeyer and De Rop, 81,338 and 47,770 shares,
respectively, of the common stock of the Company which shares constitute 100% of
the issued and outstanding shares of capital stock of the Company (collectively,
the "Shares"), in each case, free and clear of all adverse claims, security
interests, liens, claims and encumbrances, and Purchasers shall purchase, accept
and acquire from VSI, the Shares. The Purchase Price for the Shares shall be
$1.00 from each Purchaser, payable in cash.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF VSI. VSI represents and warrants
that the following are true and correct as of the date hereof and will be true
and correct through the Closing Date as if made on that date:
1
<PAGE> 2
3.1 OWNERSHIP OF THE STOCK. VSI owns, beneficially and of record, good
and marketable title to all of the issued and outstanding capital stock of the
Company. At the Closing, VSI will convey to Purchasers good and marketable title
to the Shares, free and clear of any security interests, liens, adverse claims,
encumbrances, equities, proxies, options, shareholders' agreements or
restrictions.
3.2 CAPITALIZATION. The authorized capital stock of the Company consists
of 129,108 shares of common stock. There exist no options, warrants,
subscriptions or other rights to purchase, or securities convertible into or
exchangeable for, the capital stock of the Company.
3.3 AUTHORIZATION AND VALIDITY. The execution, delivery and performance
by VSI of this Agreement and the other agreements contemplated hereby, and the
consummation of the transactions contemplated hereby and thereby, have been duly
authorized by VSI. This Agreement and each other agreement contemplated hereby
have been or will be as of the Closing Date duly executed and delivered by VSI
and constitute or will constitute legal, valid and binding obligations of VSI,
enforceable against VSI in accordance with their respective terms, except as may
be limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally or the availability of equitable remedies.
3.4 NO VIOLATION. Neither the execution, delivery or performance of this
Agreement or the other agreements contemplated hereby nor the consummation of
the transactions contemplated hereby or thereby will conflict with, or result in
a violation or breach of the terms, conditions or provisions of, or constitute a
default under, the Certificate of Incorporation or Bylaws of VSI or any
agreement, indenture or other instrument under which VSI is bound.
3.5 CONSENTS. Except for the security interest on the capital stock of
the Company referred to in Section 8.4 below, 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 this Agreement or the agreements contemplated hereby on the part
of VSI.
3.6 FINDER'S FEE. VSI has not incurred any obligation for any finder's,
broker's or agent's fee in connection with the transactions contemplated hereby.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASERS. Purchasers, jointly
and severally, represent and warrant that the following are true and correct as
of the date hereof and will be true and correct through the Closing Date as if
made on that date:
4.1 AUTHORIZATION AND VALIDITY. This Agreement and each other agreement
contemplated hereby have been duly executed and delivered by each Purchaser and
constitute legal, valid and binding obligations of each Purchaser, enforceable
against each Purchaser in accordance with their respective terms, except as may
be limited by applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally or the availability of equitable remedies.
2
<PAGE> 3
4.2 FINDER'S FEE. Neither Purchaser has incurred any obligation for any
finder's, broker's or agent's fee in connection with the transactions
contemplated hereby.
4.3 LIMITATION ON REPRESENTATIONS AND WARRANTIES. Purchasers acknowledge
and agree that as senior management of the Company, they have extensive
knowledge concerning the condition (financial, business or otherwise) of the
Company, and that except for the representations and warranties contained in
Section 3 above, are purchasing the Shares "AS IS, WHERE IS", without any other
representations or warranties, express or implied.
SECTION 5. VSI'S COVENANTS. VSI agrees that between the date hereof and the
Closing:
5.1 CONSUMMATION OF AGREEMENT. VSI shall use all commercially reasonable
efforts to cause the consummation of the transactions contemplated hereby in
accordance with their terms and conditions.
5.2 APPROVALS OF THIRD PARTIES. VSI shall use all commercially
reasonable efforts to secure, as soon as practicable after the date hereof, all
necessary approvals and consents of third parties to the consummation of the
transactions contemplated hereby.
SECTION 6. PURCHASERS' COVENANTS. Each Purchaser agrees that between the date
hereof and the Closing:
6.1 CONSUMMATION OF AGREEMENT. Such Purchaser shall use all commercially
reasonable efforts to cause the consummation of the transactions contemplated
hereby in accordance with their terms and conditions.
6.2 APPROVALS OF THIRD PARTIES. Such Purchaser shall use all
commercially reasonable efforts to secure, as soon as practicable after the date
hereof, all necessary approvals and consents of third parties to the
consummation of the transactions contemplated hereby.
SECTION 7. PURCHASERS' CONDITIONS PRECEDENT. Except as may be waived in writing
by Purchasers, the obligations of Purchasers hereunder are subject to the
fulfillment at or prior to the Closing Date of each of the following conditions:
7.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of VSI contained herein shall have been true and correct in all respects when
initially made and shall be true and correct in all respects as of the Closing
Date.
7.2 COVENANTS AND CONDITIONS. VSI shall have performed and complied with
all covenants and conditions required by this Agreement to be performed and
complied with by VSI prior to the Closing Date.
3
<PAGE> 4
7.3 APPROVALS OF THIRD PARTIES. Purchasers shall have received all
necessary approvals and consents of third parties to the consummation of the
transactions contemplated hereby.
7.4 PROCEEDINGS. No action, proceeding or order by any court or
governmental body or agency shall have been threatened, orally or in writing,
asserted, instituted or entered to restrain or prohibit the carrying out of the
transactions contemplated hereby.
7.5 CLOSING DELIVERIES. Purchaser shall have received all documents,
duly executed in form satisfactory to Purchaser and its counsel, referred to in
Section 9.1.
SECTION 8. VSI'S CONDITIONS PRECEDENT. Except as may be waived in writing by
VSI, the obligations of VSI hereunder are subject to fulfillment at or prior to
the Closing Date of each of the following conditions:
8.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Purchasers contained herein shall be true and correct in all respects as of
the Closing Date.
8.2 COVENANTS AND CONDITIONS. Purchasers shall have performed and
complied in all material respects with all covenants and conditions required by
this Agreement to be performed and complied with by it prior to the Closing
Date.
8.3 APPROVALS OF THIRD PARTIES. VSI shall have received all necessary
approvals and consents of third parties to the consummation of the transactions
contemplated hereby.
8.4 RELEASES. VSI shall have been released from any and all financial
obligations for, or with respect to, the Company, including, without limitation,
any guaranties of indebtedness and any liens or security interests held by any
entity in and to the capital stock of the Company owned by VSI as collateral for
any such guaranty or obligation.
8.5 PROCEEDINGS. No action, proceeding or order by any court or
governmental body or agency shall have been threatened in writing, asserted,
instituted or entered to restrain or prohibit the carrying out of the
transactions contemplated hereby.
8.6 CLOSING DELIVERIES. VSI shall have received all documents referred
to in Section 9.2.
SECTION 9. CLOSING DELIVERIES.
9.1 DELIVERIES OF VSI. At the Closing, VSI shall deliver to Purchasers
the following, all of which shall be in form and content satisfactory to
Purchaser and its counsel:
(a) Certificates representing the Shares, duly endorsed and in proper
form for transfer to Purchasers by delivery under applicable law, or
accompanied by duly executed instruments of transfer in blank; and
4
<PAGE> 5
(b) A certificate of the Chief Executive Officer of VSI, dated the
Closing Date, verifying that the matters set forth in Sections 7.1 and 7.2
above are true and correct as of the Closing Date.
9.2 DELIVERIES OF PURCHASERS. At the Closing, Purchasers shall deliver
the following, all of which shall be in form and content satisfactory to VSI and
its counsel:
(a) The purchase price in cash;
(b) The Capital Stock Purchase Warrant described in Section 10.3 below;
and
(c) Written confirmation of the items described in Section 8.4 above
(including, without limitation, the stock certificates of the Company owned
by VSI which are pledged as collateral).
SECTION 10. OTHER MATTERS.
10.1 DISTRIBUTION AGREEMENT. At the Closing, VSI and the Company shall
have entered into a Distribution Agreement, substantially in the form of Exhibit
A attached hereto.
10.2 SECURITYHOLDERS AGREEMENT. At the Closing, VSI, the Purchasers and
the Company shall have entered into a Securityholders Agreement, substantially
in the form of Exhibit B attached hereto.
10.3 WARRANT. At the Closing, the Company shall issue to VSI a warrant to
purchase 40,771 of the Company's common shares, substantially in the form of
Exhibit C attached hereto (the "Capital Stock Purchase Warrant").
SECTION 11. TERMINATION. This Agreement may be terminated:
(a) At any time prior to the Closing Date by mutual agreement of all
Parties.
(b) After the Closing Date by Purchasers if the conditions stated in
Section 7 have not been satisfied by the Closing Date.
(c) After the Closing Date by VSI if the conditions stated in Section 8
have not been satisfied by the Closing Date.
5
<PAGE> 6
In the event this Agreement is terminated pursuant to subparagraph (b) or (c)
above, Purchasers and VSI shall each be entitled to pursue, exercise and enforce
any and all remedies, rights, powers and privileges available at law or in
equity. In the event of a termination of this Agreement under the provisions of
this Section, a party not then in material breach of this Agreement shall stand
fully released and discharged of any and all obligations under this Agreement.
SECTION 12. MISCELLANEOUS
12.1 AMENDMENT. This Agreement may be amended, modified or supplemented
only by an instrument in writing executed by all the parties hereto.
12.2 ASSIGNMENT. Neither this Agreement nor any right created hereby or
in any agreement entered into in connection with the transactions contemplated
hereby shall be assignable by any Party.
12.3 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 respective heirs, legal
representatives, successors and assigns of the Parties. 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.
12.4 ENTIRE AGREEMENT. This Agreement and the agreements contemplated
hereby constitute the entire agreement of the Parties regarding the subject
matter hereof, and supersede all prior agreements and understandings, both
written and oral, among the Parties, or any of them, with respect to the subject
matter hereof.
12.5 SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable and this Agreement
shall be construed and enforced as if such illegal, invalid or unenforceable
provision never comprised a part hereof; and the remaining provisions hereof
shall remain in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance herefrom. Furthermore, in
lieu of such illegal, invalid or unenforceable provision, there shall be added
automatically as part of this Agreement a provision as similar in its terms to
such illegal, invalid or unenforceable provision as may be possible and be
legal, valid and enforceable.
12.6 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations, warranties and covenants contained herein shall survive the
Closing and all statements contained in any certificate, exhibit or other
instrument delivered by or on behalf of the Parties pursuant to this Agreement
shall be deemed to have been representations and warranties by the Parties, as
the case may be, and, notwithstanding any provision in this Agreement to the
contrary, shall survive the Closing for a period of one (1) year.
6
<PAGE> 7
12.7 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE
STATE OF NEW YORK, UNITED STATES OF AMERICA.
12.8 CAPTIONS. The captions in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
12.9 CONFIDENTIALITY; PUBLICITY AND DISCLOSURES. Each Party shall keep
this Agreement and its terms confidential, and shall make no press release or
public disclosure, either written or oral, regarding the transactions
contemplated by this Agreement, or the terms, conditions or other facts with
respect thereto, without in each case the prior written consent of the other
Parties; provided that the foregoing shall not prohibit any disclosure: (a) to
attorneys, accountants, investment bankers or other agents of the Parties
assisting the parties in connection with the transactions contemplated by this
Agreement and; (b) as required by law (including, without limitation, United
States securities laws) or regulation or by court or administrative agency.
12.10 NOTICE. Any notice or communication hereunder or in any agreement
entered into in connection with the transactions contemplated hereby must be in
writing and given by depositing the same in the United States mail, addressed to
the Party to be notified, postage prepaid and registered or certified with
return receipt requested, or by delivering the same in person or by facsimile
transmission. Such notice shall be deemed received on the date on which it is
hand-delivered or received by facsimile transmission or on the third business
day following the date on which it is so mailed. For purposes of notice, the
addresses of: (a) VSI shall be 5801 Goshen Springs Road, Norcross, Georgia
30071; (b) the Shareholders shall be Ingberthoeveweg 3/G, Aartselaar, Belgium
B-2630. Any Party may change its address for notice by written notice given to
the other Party in accordance with this Section.
12.11 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 instrument.
EXECUTED as of the date first above written.
VSI ENTERPRISES, INC.
/s/ Karen T. Franklin
-----------------------------------
By: Karen T. Franklin
Title: Chief Financial Officer
SHAREHOLDERS:
/s/ Paul D'Haeyer
-----------------------------------
Paul D'Haeyer
/s/ Walter De Rop
-----------------------------------
Walter De Rop
VIDEOCONFERENCING SYSTEMS, N.V.
/s/ Paul D'Haeyer
-----------------------------------
By: Paul D'Haeyer
Title: President
7
<PAGE> 1
EXHIBIT 10.25
Exhibit B
SECURITYHOLDERS AGREEMENT
This Securityholders Agreement (this "Agreement") is made as of the
30th day of September, 1999, by and among VSI Enterprises, Inc., a Delaware
corporation ("VSI"), Paul D'Haeyer ("D'Haeyer"), and Walter De Rop ("De Rop")
All of them are each, a "Securityholder", and collectively, "Securityholders"
of Videoconferencing Systems, n.v., a limited liability company organized under
the laws of Belgium (the "Company"), which is also a party to this Agreement.
Future new securityholders can be invited to become part of this
Securityholders Agreement by unanimous approval of all then current
participants in this Securityholders Agreement.
For good and valuable consideration, the receipt and sufficient of
which are hereby acknowledged and agreed, the parties hereto hereby agree as
follows:
SECTION 1. DEFINITIONS. In addition to other terms defined in this
Agreement, the following terms shall have the following meanings:
"Common Stock" means the common stock of the Company.
"Securities" means any securities of the Company including, without
limitation, Securities of Common Stock of the Company.
"Securityholder" means the person or entity being part of this
Securityholders Agreement.
"Offer Notice" shall mean a written notice sent not more than 60 nor
less than 20 days prior to the proposed date of a Sale that sets forth: (i) the
name and address of the Proposed Purchaser; (ii) the proposed amount and forms
of all consideration of forbearances to be paid or received by the
Securityholders per Share, (iii) the terms and conditions or payment offered by
the Proposed Purchaser; and (iv) the proposed closing date of the Sale.
"Proposed Purchaser" means the person or entity making the offer of
Sale.
"Sale" means the sale, in one or a series of related transactions, of
more than 50% of the outstanding Securities owned by the Securityholders.
SECTION 2. TAG-ALONG RIGHTS.
(A) If any combination of the Securityholders receives an offer of
Sale, the other Securityholders shall have the right to require the Proposed
Purchaser to purchase all or any portion of their Securities at the same price
per Share and upon the same terms and conditions as the selling
Securityholder(s) receive in the Sale (the "Tag-Along Right").
(B) Upon receiving an offer of Sale, the selling Securityholder(s)
shall provide the other Securityholder(s) with the Offer Notice.
1
<PAGE> 2
Exhibit B
(C) The other Securityholder(s) may exercise the Tag-Along Right by
delivering a written notice (the "Tag-Along Notice") to the selling
Securityholder(s) and the Proposed Purchaser, within ten days following its
receipt of the Offer Notice, which Tag-Along Notice shall state the number of
Securities that they will include in the Sale.
(D) If no Tag-Along Notice is received during the ten day period set
forth in Section 2(c) above, the selling Securityholder(s) may complete the
Sale on terms no less favorable to them than those contained in the Offer
Notice.
(E) If the Tag-Along Notice is received during the ten day period set
forth in Section 2(c) above, the selling Securityholder(s) may not complete the
Sale without including in such Sale the Securities which were tendered for
purchase pursuant to such Tag-Along Notice; provided, however, that in order to
participate in such Sale, the other Securityholder(s) must deliver to the
Proposed Purchaser by the closing date a certificate representing the
Securities so tendered, together with a stock power executed in blank, together
with any other document or instrument reasonably requested by the Proposed
Purchaser (it being agreed and understood that VSI will not make any
representations or warranties or give any indemnification regarding the
Company, but will represent and warrant as to its ownership of the Securities
so tendered).
SECTION 3. RIGHT OF FIRST REFUSAL. In the event any Securityholder
receives a bona fide offer to purchase any Common Stock held by such
Securityholder, and which offer such Securityholder desires to accept, then
such Securityholder shall give written notice thereof to the other
Securityholders, which written notice shall state the number of shares to be
acquired and the price per Share to be paid, and the other Securityholders will
have thirty (30) days after receipt of such written notice to purchase the
Shares which are the subject of such offer for the purchase price so offered
(in cash). In order to exercise this purchase option, the other Securityholders
shall deliver to the selling Securityholder written notice of their election to
purchase, together with the purchase price. In the event the other
Securityholder(s) elect(s) not to exercise such purchase option within the
above thirty (30) day period, then such Securityholder shall have sixty (60)
days following such thirty (30) day period to consummate such sale, but in no
event may the terms be more favorable then those described in the written
notice delivered by such Securityholder.
Nothing contained herein shall restrict or prohibit a Securityholder
from transferring, by gift, by will or by laws of descent and devise, shares of
Common Stock to a member of his immediate family or to a trust or other entity
for estate planning purposes; provided (i) that such transferee becomes a party
to this Agreement and (ii) that the transferring Securityholder and the
transferee(s) collectively, shall only have the right to nominate one member of
the Board as provided in Section 4.
In the event Common Stock is sold in a transaction subject to the
first paragraph of this Section 3 to a person not a party to this Agreement,
such transferee shall not be required to, and shall have no right to, become a
party to this Agreement and to be subject to all the rights and restrictions
contained herein.
2
<PAGE> 3
Exhibit B
SECTION 4. BOARD SEAT. Each Securityholder shall have the right to
nominate one member of the board of directors of the Company (the "Board"). All
Securityholders will take all such action which may be necessary or advisable
(including, without limitation, the voting of securities of the Company) in
order to cause the nominees to be elected as a members of the Board.
Thereafter, at any meeting of the Securityholders of the Company to elect
directors, the Securityholders shall have the right to designate one person for
the election as a director of the Company, the Board shall cause such designee
to be nominated, and the Securityholders shall take all such action which may
be necessary or advisable (including, without limitation, the voting of
securities of the Company) in order to cause such nominee to be elected as a
member of the Board.
SECTION 5. TERMINATION.
(A) This Agreement shall terminate automatically upon the dissolution
of the Company or upon the occurrence of any event which reduces the number of
Securityholders to one.
(B) This Agreement shall terminate upon the written consent of all
Securityholders owning each at least 5% of the Common Stock of the Company,
calculated on an as-converted basis.
SECTION 6. ISSUANCE OF SECURITIES TO AFFILIATES. In addition to the
provisions set forth in the Company's by-laws regarding the issuance of
Securities, the Company shall not issue Securities to any officer, director or
holder of five percent (5%) or more of the voting capital stock of the Company
(on a fully diluted basis) unless such issuance is approved in writing by the
unanimous consent of all of the directors of the Company. Notwithstanding the
foregoing, the Company may issue Securities to a holder of five percent (5%) or
more of the voting capital stock of the company (on a fully diluted basis)
provided such holder is not a party to this agreement and provided such
Securities are issued for not less than their fair market value as determined
by a majority vote of the disinterested members of the Board.
SECTION 7. STOCK LEGEND. The Company and the Securityholders agree that
all certificates or agreements representing Securities (or options or other
instruments to purchase Securities) that at any time are subject to the
provisions of this Agreement will have endorsed upon them in capitalized type a
legend in substantially the following form:
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO A SECURITYHOLDERS
AGREEMENT, DATED AS OF SEPTEMBER 30, 1999 (THE "AGREEMENT"), AS MAY BE
AMENDED FROM TIME TO TIME, AMONG THE COMPANY AND CERTAIN OF ITS
SECURITYHOLDERS, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
THE COMPANY. THE AGREEMENT CONTAINS CERTAIN RESTRICTIONS ON SUCH
SECURITIES, AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED, HYPOTHECATED, OR
3
<PAGE> 4
Exhibit B
OTHERWISE DISPOSED OF EXCEPT IN STRICT ACCORDANCE WITH THE TERMS OF
THE AGREEMENT. A COPY OF THE AGREEMENT WILL BE FURNISHED WITHOUT
CHARGE TO THE HOLDER OF THIS CERTIFICATE UPON RECEIPT BY THE COMPANY
AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE OF A WRITTEN
REQUEST FROM THE HOLDER REQUESTING SUCH A COPY.
Each holder of Securities (or options or other instruments to purchase
Securities) subject to the provisions of this Agreement issued prior to the
date hereof agrees to deliver all certificates and agreements representing
Securities to the Company for the purpose of endorsing said legend thereon. The
Company agrees to maintain a counterpart of this Agreement in its principal
and/or registered office.
Upon a transfer of Securities to a person not a party to this
Agreement, the Company shall issue a certificate to such person without the
legend set forth above.
SECTION 8. MISCELLANEOUS.
(A) Further Assurances. Each party to this Agreement agrees to perform
all further acts and to execute and deliver all further documents that may be
reasonably necessary to carry out the provisions of this Agreement.
(B) Severability. In the event that any of the provisions of this
Agreement is held to be unenforceable or invalid by any court of competent
jurisdiction, the validity and enforceability of the remaining provisions will
not be affected, and in lieu of such unenforceable provision there shall be
added automatically as part of this Agreement a provision as similar in terms
as may be valid and enforceable.
(C) Terms; Captions. Whenever used in this Agreement, the singular
number will include the plural, and the plural number will include the
singular, and pronouns in the masculine, feminine, or neuter gender will
include each other gender. The captions of this Agreement are for convenience
of reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
(D) Applicable Law. This Agreement has been executed in and will be
governed by the laws of the Belgium, without regard to the choice of law
provisions thereof.
(E) Binding Effect. Subject to the restrictions against transfer or
assignment and other provisions of this Agreement, the provisions of this
Agreement will benefit and will be binding on the assigns, successors in
interest, personal representatives, estates, heirs and legatees of each of the
parties hereto.
(F) Amendment; Waiver. This Agreement may only be amended, or
provision waived, by the written consent of all Securityholders owning each at
least 5% of the Common Stock of the Company, calculated on an as-converted
basis.
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Exhibit B
(G) Entire Agreement. This Agreement contains the entire understanding
among the parties hereto concerning the subject matter hereof.
(H) Notices. All notices required or permitted to be given hereunder
will be deemed to be duly given (a) on the date of delivery if delivered in
person, (b) one (1) day after sent by overnight delivery or by telecopy, where
receipt of delivery or confirmation of telecopy is received, or (c) seven (7)
days after the date of mailing if mailed by registered or certified mail, first
class postage prepaid, return receipt requested, to the Securityholder(s), as
appropriate, at the respective addresses indicated on the signature pages to
this Agreement. The addresses of the Securityholders, or any of them, may be
changed only by giving written notice of such change or address to all of the
other parties hereto in the manner provided above.
(I) Performance. If any party to this Agreement fails to perform,
observe or discharge any of its respective obligations under this Agreement,
any other party hereto shall be entitled to temporary and permanent injunctive
relieve in such case without the necessity of proving actual damages, and such
remedy shall be in addition to other relief as may be provided by law. If any
legal action is required to enforce the terms of this Agreement, the prevailing
party shall be entitled to the reasonable costs of enforcement, including
attorneys' fees.
(J) 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 instrument.
IN WITNESS WHEREOF, the parties hereto have entered into this
Agreement as of the date first indicated above.
VSI ENTERPRISES, INC.
By: /s/ Karen T. Franklin
--------------------------------
Karen T. Franklin, CFO
Address: 5801 Goshen Springs Road
Norcross, Georgia 30071
U.S.A.
/s/ Paul D'Haeyer /s/ Walter De Rop
- -------------------------------- -----------------------------------
PAUL D'HAEYER WALTER DE ROP
Address: H. Van Brederodestraat 18 Address: Opstal 62/3
9000 Gent 2650 Edegem
Belgium Belgium
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Exhibit B
VIDEOCONFERENCING SYSTEMS, N.V.
By:
----------------------------------
Name:
--------------------------------
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<PAGE> 1
EXHIBIT 10.26
Exhibit C
NEITHER THIS WARRANT, NOR THE SHARES OF COMMON STOCK FOR WHICH IT IS
EXERCISABLE, HAVE BEEN REGISTERED FOR SALE UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, ANY APPLICABLE STATE SECURITIES LAWS, OR ANY OTHER APPLICABLE
SECURITIES LAWS AND THIS WARRANT HAS BEEN ISSUED IN RELIANCE UPON EXEMPTIONS
CONTAINED IN SUCH LAWS FOR TRANSACTIONS NOT INVOLVING ANY PUBLIC OFFERING. THIS
WARRANT 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 BUYER'S COUNSEL THAT SUCH REGISTRATION IS
NOT REQUIRED AND ALL CONDITIONS NECESSARY FOR THE AVAILABILITY OF ANY EXEMPTIONS
FROM SUCH REGISTRATION REQUIREMENTS HAVE BEEN SATISFIED.
VIDEOCONFERENCING SYSTEMS, N.V.
CAPITAL STOCK PURCHASE WARRANT
This is to certify that the Holder (as defined below) is entitled upon
the due exercise hereof to purchase from Videoconferencing Systems, n.v., a
Belgian limited liability company (the "Company"), 40,771 Common Shares at a
price per share as specified in Section 2 of this Warrant (subject to adjustment
as provided herein) and to exercise the other rights, power and privileges
hereinafter provided, all on the terms and subject to the conditions specified
herein.
SECTION 1. Certain Definitions. Unless the context otherwise requires,
the following terms as used in this Warrant shall have the following meanings:
"Affiliate" shall mean any partnership or corporation controlled by or
under common control with the initial Holder.
"Common Stock" shall mean the Company's capital stock or any stock into
which such Common Stock shall have been changed or any stock resulting from
reclassification of such Common Stock.
"Exercise Date" has the meaning set forth in Section 3 hereof.
"Exercise Price" shall mean the price specified in Section 2 hereof, as
the same shall be adjusted from time to time pursuant to the provisions of this
Warrant.
"Expiration Date" shall mean September 30, 2015.
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"Fair Market Value" shall mean (i) the last sales price for a share of
Common Stock as officially reported on the principal national securities
exchange or domestic over-the-counter market on which the Common Stock is at the
time listed or traded at the time of determination of such Fair Market Value or
(ii) if such Common Stock is not at such time listed on a national securities
exchange or quoted in the domestic over-the-counter market, the fair market
value as determined by the Board of Directors of the Company in good faith after
review of all relevant factors.
"Holder" or "Warrant Holder" shall mean VSI Enterprises, Inc., a
Delaware corporation, and its successors and registered assigns of this Warrant.
"Warrant" means this Warrant and all warrants issued upon the transfer
or division of or in substitution for this Warrant.
SECTION 2. Exercise Price. The Exercise Price shall be $4,077.00 (U.S.
Dollars) in the aggregate for the Common Stock. The Exercise Price shall be paid
in cash or other immediately available funds.
SECTION 3. Exercise. On or prior to the Expiration Date, this Warrant may
be exercised by the Holder, as to all or less than all of the shares of Common
Stock covered hereby, by surrender of this Warrant at the Company's principal
office (for all purposes of this Warrant, Ingberthoeveweg 3/G, Aartselaar,
Belgium B-2630 or such other address as the Company may advise the registered
Holder hereof by notice given by certified or registered mail), together with
the form of election to subscribe attached hereto as Exhibit A duly executed and
payment to the Company of the Exercise Price for the shares so purchased. Upon
the date of receipt of all of the above by the Company (herein called the
"Exercise Date"), this Warrant shall be deemed to have been exercised and the
person exercising the same shall become a holder of record of shares of Common
Stock (or of the other securities or property to which he or it is entitled upon
such exercise) purchased hereunder for all purposes, and certificates for such
shares so purchased shall be delivered to the Holder or its transferee within a
reasonable time (not exceeding 10 days) after this Warrant shall have been
exercised as set forth hereinabove. In the event that this Warrant is exercised
in part, the Company will execute and deliver a new Warrant of like tenor
exerciseable for the number of shares for which this Warrant may then be
exercised. If this Warrant is not exercised on or prior to the Expiration Date,
this Warrant shall become void and all rights of the Holder hereunder shall
cease.
SECTION 4. Taxes. The Company shall pay all expenses in connection with,
and all transfer taxes and other governmental charges that may be imposed with
respect to, the issue or delivery of the shares of Common Stock covered hereby
unless such tax or charge is imposed by law upon the Holder, in which case such
taxes or charges shall be paid by the Holder. The Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares of Common Stock issuable
upon exercise of this Warrant in any name other than that of the Holder, and in
such case the Company shall not be required to issue or deliver any stock
certificate until such tax or the
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<PAGE> 3
charge has been paid or it has been established to the satisfaction of the
Company that no such tax or other charge is due.
SECTION 5. Warrant Register. The Company shall at all times while any
portion of this Warrant remains outstanding and exerciseable keep and maintain
at its principal office a register (the "Warrant Register") in which the
registration, transfer and exchange of this Warrant shall be recorded. The
Warrant Register shall contain the names and addresses of the Holder or Holders.
Any Holder of this Warrant or any portion thereof may change his or her address
as shown on the Warrant Register by written notice to the Company requesting
such change. Any notice or written communication required or permitted to be
given to the Holder may be delivered or given by mail to such Holder as shown on
the Warrant Register and at the address shown on the Warrant Register. The
Company shall not at any time, except upon the dissolution, liquidation or
winding up of the Company, close such register so as to result in preventing or
delaying the exercise or transfer of this Warrant. If at any time, the Company
shall appoint an agent (the "Warrant Agent") to maintain such register, the
Company shall promptly give notice by certified or registered mail to the
registered Holder hereof of the name of such Warrant Agent and of the place or
places at which this Warrant may be presented for transfer, exchange or
exercise. The terms of the agreement between the Company and any Warrant Agent
at any time in effect will be in conformity with the terms of this Warrant.
SECTION 6. Transfer. The Company shall register the transfer of any
Warrant upon records to be maintained by the Company for that purpose, upon
surrender of this Warrant, with the form of transfer authorization attached
hereto as Exhibit B duly filled in and signed, to the Company at the office
specified above. Upon any such registration of transfer, a new Warrant, in
substantially the form of this Warrant, evidencing the Warrant rights so
transferred, shall be issued to the transferee and a new Warrant, in similar
form, evidencing the remaining Warrant rights not so transferred, if any, shall
be issued to the then registered Holder thereof. The Holder understands that
this Warrant has not been and will not be registered under the Securities Act of
1933, as amended (the "Securities Act") and that the Warrant and the shares of
Common Stock issuable upon exercise hereof may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of in the absence of an
effective registration statement under the Securities Act, relating to such
Warrant or shares; provided, however that this Warrant and the shares of Common
Stock issuable upon exercise hereof may be sold, assigned, transferred, pledged
or otherwise encumbered or disposed of if the holder obtains a written opinion
of counsel acceptable to the Company to the effect that the proposed sale,
assignment, transfer, pledge or other encumbrance or disposition is exempt from
registration under the Securities Act, and all other applicable securities laws.
The Holder acknowledges and agrees that the shares of Common Stock issued upon
the exercise of this Warrant will contain a legend to the above effect.
SECTION 7. Exchange. This Warrant is exchangeable, upon the surrender
hereof by the Holder at the principal offices of the Company, together with the
form of transfer authorization attached hereto duly executed, for new warrants
of like tenor and date, in such denominations as the Holder shall designate at
the time of surrender for exchange, provided that
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the total number of shares of Common Stock issuable upon the exercise of the
Warrant shall not be changed as a result thereof.
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<PAGE> 5
SECTION 8. Covenants of the Company.
(a) The Company covenants and agrees that all shares of Common
Stock which may be issued upon the exercise of the rights represented by this
Warrant will, upon issuance, be fully paid and nonassessable, free from
preemptive rights, and free from all taxes, liens, encumbrances and charges with
respect to the issue thereof (other than taxes in respect of any transfer
occurring contemporaneously with such issue). The Company further covenants and
agrees that during the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved a sufficient number of shares of Common Stock to provide for the
exercise in full of the rights represented by this Warrant.
(b) As long as the Warrant remains outstanding, the Company shall
maintain an office or agency (which may be the principal executive office of the
Company) where the Warrant may be presented for exercise, registration of
transfer, exchange, division or combination as provided in this Warrant.
SECTION 9. Adjustments for Stock Splits and Subdivisions.
(a) 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 other
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 Exercise
Price of this Warrant shall be appropriately decreased so that the number of
shares of Common Stock issuable upon exercise of this Warrant shall be increased
in proportion to such increase of outstanding shares.
(b) 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
Exercise Price for this Warrant shall be appropriately increased so that the
number of shares of Common Stock issuable on exercise hereof shall be decreased
in proportion to such decrease in outstanding shares.
SECTION 10. Holder's Rights. This Warrant shall not entitle the Holder to
any rights of a stockholder of the Company, except that should the Company,
during the period in which this Warrant is exerciscable, declare a dividend upon
the Common Stock payable other than in cash out of earnings or surplus (computed
in accordance with generally accepted accounting principles consistently
applied) or other than in Common Stock or securities convertible into Common
Stock, then, thereafter, the Warrant Holder, upon exercise of this Warrant,
shall
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<PAGE> 6
receive the number of shares of Common Stock purchasable upon such exercise and,
in addition and without further payment, the cash, stock or other securities
and/or other property which the Warrant Holder would have received by way of
dividends (otherwise than in cash out of earnings or earned surplus or in Common
Stock or securities convertible into Common Stock) and/or any other
distributions in respect of the Common Stock as if, continuously since the date
hereof, such Warrant Holder (a) had been the record holder of the number of
shares of Common Stock then being purchased, and (b) had retained all such cash,
stock and other securities (other than dividends in cash out of earnings or
earned surplus or in Common Stock or securities convertible into Common Stock)
and/or other property payable in respect of such Common Stock or in respect of
any stock or securities paid as dividends and originating directly or indirectly
from such Common Stock.
SECTION 11. Notice of Adjustments. If there shall be any adjustment as
provided in Section 9, the Company shall forthwith cause written notice thereof
to be sent by facsimile, overnight or registered mail, postage prepaid, to the
registered Holder of this Warrant at the address of such Holder shown on the
books of the Company. At the request of Holder and upon surrender of this
Warrant, the Company shall reissue this Warrant in a form conforming to such
adjustments.
SECTION 12. Cash in Lieu of Fractional Shares. The Company shall not be
required to issue fractional shares upon the exercise of this Warrant if, by
reason of any change made pursuant to Section 9 or 10 hereof, the Holder of this
Warrant would be entitled, upon the exercise of any rights evidenced hereby, to
receive a fractional interest in a share, the Company shall, upon such exercise,
purchase such fractional interest for an amount in cash equal to the fair market
value of such fractional interest, determined as of the Exercise Date.
SECTION 13. Lost, Stolen, Mutilated or Destroyed Warrants. If this Warrant
is lost, stolen, mutilated, or destroyed, the Company will issue, in exchange
for and upon cancellation of the mutilated Warrant, or in substitution for the
lost, stolen or destroyed Warrant, a new Warrant, in substantially the form of
this Warrant, of like tenor and representing the right to purchase the
equivalent number of the remaining shares of Common Stock issuable upon exercise
hereof, but, in the case of loss, theft or destruction, only upon receipt of
evidence satisfactory to the Company of such loss, theft or destruction of this
Warrant and, if requested by the Company, an indemnification also satisfactory
to it (it being understood that the written agreement of the Holder shall be
sufficient indemnity), provided, in the case of mutilation, no indemnity shall
be required if this Warrant in identifiable form is surrendered to the Company
for cancellation.
SECTION 14. Certain Limitations. Notwithstanding anything herein to the
contrary, the Company agrees not to enter into any transaction which, by reason
of any adjustment hereunder, would cause the current Exercise Price to be less
than the par value per share of Common Stock.
SECTION 15. No Impairment. The Company represents and warrants that there
are no restrictions in the Company's Certificate of Incorporation or Bylaws
which prevent it from
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satisfying its obligation to issue the shares of Common Stock issuable upon
exercise of the Warrant. The Company shall not by any action including, without
limitation, amending its Certificate of Incorporation or Bylaws, or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities or any other voluntary action, to avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, and will at all
times in good faith assist in the carrying out of all such terms and in the
taking of all such actions as may be necessary or appropriate to protect the
rights of the Holder against impairment.
SECTION 16. Applicable Law, Payments. The validity, interpretation and
performance of this Warrant shall be governed by the laws of Belgium. All
payments shall be in U.S. Dollars by immediately available funds.
SECTION 17. Successors and Assigns. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
assigns of the Company and the Holder.
SECTION 18. Headings. Headings of the paragraphs in this Warrant are for
convenience and reference only and shall not, for any purpose, be deemed a part
of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its duly authorized officer as of the 30th day of September, 1999.
VIDEOCONFERENCING SYSTEMS, N.V.
/s/ Paul D'Haeyer
-----------------------------------
By: Paul D'Haeyer
Title: President
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EXHIBIT A
FORM OF SUBSCRIPTION
The undersigned, registered holder or assignee of such registered
holder of the within Warrant, hereby (1) subscribes for __________ shares of
Common Stock (subject to adjustment as provided herein) which the undersigned is
entitled to purchase under the terms of the within Warrant, (2) makes the full
cash payment called for by the within Warrant, and (3) directs that the shares
of Common Stock issuable upon exercise of said Warrant be issued as follows:
Name:
----------------------------
Address:
-------------------------
Dated as of _________________________________.
----------------------------------
(Name of Holder)
By:
Title:
NOTICE: The name and signature on this subscription form must correspond with
the name as written upon the face of the within Warrant, or upon the assignment
form on the reverse thereof, in every particular, without alteration or
enlargement.
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EXHIBIT B
FORM OF ASSIGNMENT
FOR VALUE RECEIVED ______________________________________ hereby sells, assigns,
and transfers unto _____________________, the right to purchase shares of Common
Stock of Videoconferencing Systems, n.v. (the "Company"), subject to adjustment
as provided herein, evidenced by the within Warrant, and hereby irrevocably
constitutes and appoints __________to transfer such right on the books of the
Company, with full power of substitution.
Date: ________________, _______.
Name:
By:
Title
Date:
------------------------------
- -----------------------------------
NOTICE: The name and signature on this assignment must correspond with the name
as written upon the face of the within Warrant, or upon any assignment form duly
executed pursuant to the terms of the within Warrant, in every particular,
without alteration or enlargement.
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EXHIBIT 10.27
SUBSCRIPTION AGREEMENT
VSI Enterprises, Inc.
5801 Goshen Springs Road
Norcross, Georgia 30071
Ladies and Gentlemen:
The undersigned ("Subscriber") hereby tenders this Subscription
Agreement ("Agreement") in accordance with and subject to the terms and
conditions set forth herein.
1. Subscription.
1.1 The undersigned hereby irrevocably subscribes for and agrees
to purchase the number of shares (the "Shares") of common stock, par value
$.001 per share (the "Common Stock"), of VSI Enterprises, Inc., a Delaware
corporation (the "Company"), indicated on the signature page attached hereto at
the purchase price per Share set forth on such signature page (the "Purchase
Price"). The undersigned has made payment by wire transfer of funds in
accordance with instructions from the Company in the full amount of the
purchase price of the Shares for which the undersigned is subscribing (the
"Payment").
1.2 The undersigned understands that it will not earn interest on
any funds held by the Company prior to the date of closing of the Offering. The
Company may hold an initial closing of the Offering (the "Initial Closing") at
any time. The date of the Initial Closing is hereinafter referred to as the
"Initial Closing Date." The Company may hold additional interim closings after
the Initial Closing. Any such interim closings are each hereinafter referred to
as an "Additional Closing" and shall occur on one or more dates each
hereinafter referred to as an "Additional Closing Date." The Initial Closing
Date and the Additional Closing Dates are each hereinafter sometimes referred
to as a "Closing Date." Upon receipt by the Company of the requisite payment
for all Shares to be purchased by the subscribers whose subscriptions are
accepted (each, a "Subscriber") at the Initial Closing or any Additional
Closing, as applicable, and subject to the satisfaction of certain conditions,
the Shares so purchased will be issued in the name of each such Subscriber, and
the name of such Subscriber will be registered on the stock transfer books of
the Company as the record owner of such Shares. The Company will issue to each
Subscriber a stock certificate for the Shares purchased.
1.3 The undersigned hereby agrees to be bound hereby upon (i)
execution and delivery to the Company, of the signature page to this
Subscription Agreement and (ii) acceptance on the Initial Closing Date or an
Additional Closing Date, as the case may be, by the Company of the
undersigned's subscription (the "Subscription").
1.4 The undersigned agrees that the Company may, in its sole and
absolute discretion, reduce the undersigned's subscription to any number of
shares of Common Stock that in the aggregate does not exceed the number of
Shares of Common Stock hereby applied for without any prior notice to or
further consent by the undersigned. The undersigned hereby irrevocably
constitutes and appoints the Company and each officer of the Company, each of
the foregoing acting singularly, in each case with full power of substitution,
the true and lawful agent and attorney-in-fact of the undersigned, with full
power and authority in the undersigned's name, place and stead to amend this
Subscription Agreement, including, in each case, the undersigned's signature
page thereto, to effect any of the foregoing provisions of this Section 1.4.
2. Offering Material.
2.1 Subscriber represents and warrants that it is in receipt of
and that it has carefully read and understands the following items:
(a) the Confidential Offering Memorandum of the Company,
dated February 24, 2000 (the "Memorandum");
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(b) the Quarterly Report to the Securities and Exchange
Commission (the "SEC") on Form 10-Q of the Company for the quarter
ended September 30, 1999, (the "Form 10-Q");
(c) the Annual Report to the SEC on Form 10-K of the
Company for the fiscal year ended December 31, 1998, (the "Form
10-K"); and
(d) any other information provided by the Company.
The Form 10-Q and the Form 10-K shall be referred to herein as the
"Public Reports."
3. Conditions to Subscriber's Obligations.
3.1 The obligation of the Subscriber to close the transactions
contemplated by this Agreement (the "Transaction") is subject to the
satisfaction on or prior to the date of the Closing (as hereinafter defined) of
the following conditions set forth in Sections 3.2 through 3.3 hereof.
3.2 The representations and warranties made by the Company herein
shall be true in all material respects on and as of the Closing Date with the
same effect as if they had been made on and as of the Closing Date.
3.3 All proceedings to be taken in connection with the
Transaction are to be consummated at or prior to the Closing, and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Subscriber and its counsel, and the Subscriber and its counsel shall have
received copies of all documents and information which it may have reasonably
requested in connection with the Transaction and of all corporate proceedings
in connection therewith, in form and substance reasonably satisfactory to
Subscriber and its counsel.
4. Representations and Warranties; Covenants; Survival.
4.1 The Company represents and warrants that, at the date of this
Agreement:
(a) The Company is a corporation duly organized and
validly existing and in good standing under the laws of the State of
Delaware, entitled to own its property of a material nature and to
carry on its business of a material nature as and in places where such
property is now owned or operated and such business is conducted;
(b) Each of the subsidiaries of the Company is a
corporation duly organized and validly existing and in good standing
under the laws of the jurisdiction of their respective incorporation,
entitled to own their respective properties of a material nature and
to carry on their respective businesses of a material nature in places
where such properties are now owned or operated and such businesses
are conducted, and, except as disclosed in the Public Reports, there
is no action or proceeding pending or, to the Company's best knowledge
threatened, brought by or before any federal or state agency having
jurisdiction over the operations of a material nature of the Company
which threatens in any material respect the continued operation of any
material phase of the Company's business now conducted by it or its
subsidiaries;
(c) The Company's certified consolidated financial
statements as of December 31, 1998, contained in the Form 10-K, and
its unaudited financial statements as of September 30, 1999, contained
in the Form 10-Q, including the notes contained therein, fairly
present the consolidated financial position of the Company at the
respective dates thereof and the results of its consolidated
operations for the periods purported to be covered thereby. Such
financial statements have been prepared in conformity with generally
accepted accounting principles consistently applied with prior periods
subject to any comments and notes contained therein. Since September
30, 1999, there has been no material adverse change in the financial
condition of the Company from the financial condition stated in such
financial statements subject to changes occurring in the ordinary
course of its business;
(d) The Company, by appropriate and required corporate
action, has, or will have prior to the Initial Closing, duly
authorized the execution of this Agreement, and the issuance and
delivery of the
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Common Stock. The shares of Common Stock are not subject to preemptive
or other rights of any stockholders and when issued in accordance with
the terms of this Agreement, the shares of Common Stock will be
validly issued, fully paid and nonassessable; and
(e) Performance of this Agreement and compliance with
the provisions hereof will not violate any provision of any applicable
law or of the Certificate of Incorporation or Bylaws of the Company,
or of any of its subsidiaries, and, will not conflict with or result
in any breach of any of the terms, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of
any lien, charge or encumbrance upon, any of the properties or assets
of a material nature of the Company, or of any of its subsidiaries,
pursuant to the terms of any indenture, mortgage, deed of trust or
other agreement or instrument binding upon the Company, or any of its
subsidiaries, other than such breaches, defaults or liens which would
not have a material adverse effect on the Company and its subsidiaries
taken as a whole.
5. Transfer and Registration Rights
5.1 Subscriber acknowledges that it is acquiring the Shares for
its own account and for the purpose of investment and not with a view to any
distribution or resale thereof within the meaning of the Securities Act of
1933, as amended (the "Act"), and any applicable state or other securities laws
("State Acts"). Subscriber further agrees that it will not sell, assign or
transfer the Shares in violation of the Act or State Acts and acknowledges
that, in taking unregistered securities, it must continue to bear the economic
risk of its investment for an indefinite period of time because of the fact
that the Shares have not been registered under the Act or State Acts, and
further realizes that the Shares cannot be sold unless subsequently registered
under the Act and State Acts or an exemption from such registration is
available. The Subscriber further recognizes that the Company is not assuming
any obligation to register the Shares except as expressly set forth herein.
Subscriber also acknowledges that appropriate legends reflecting the status of
the Shares under the Act and State Acts may be placed on the face of the
certificates for such Shares at the time of their transfer and delivery to the
holder thereof.
5.2 The Shares issued pursuant to this Agreement may not be
transferred except in a transaction which is in compliance with the Act and
State Acts. Except as provided hereafter with respect to registration of the
Shares, it shall be a condition to any such transfer that the Company shall be
furnished with an opinion of counsel to the holder of such Common Stock,
reasonably satisfactory to the Company, to the effect that the proposed
transfer would be in compliance with the Act and State Acts.
5.3 Within 45 days after the last Closing Date of this Offering,
the Company shall use its best efforts to prepare and file with the SEC on one
occasion, a registration statement and such other documents as may be
necessary, in the opinion of counsel for the Company, in order to comply with
the provisions of the Act so as to permit the registered sale of the Shares for
a period of one year from the date of the last Closing Date by each and every
holder of Shares who desires to register the sale of the Shares and will keep
such registration statement effective for such one year period. Within 30 days
after the last Closing Date, the Company shall give each such holder notice at
the address of such holder appearing on the register and transfer records of
Company of the Company's intention to register the sale of the Shares. The
obligations of the Company to give such notice shall be limited to the
Subscriber and any entity which at the time the Shares may have been
transferred was controlled by the Subscriber, in control of the Subscriber, or
otherwise affiliated with the Subscriber which entities, together with the
Subscriber, are hereafter referred to as "Offering Holders."
5.4 The obligations of the Company identified in this Section 5
shall be suspended and tolled for such period of time (the "Registration
Suspension Period") as is necessary so that under no circumstances shall the
registered sale of the Shares by the holders thereof commence within ninety
days after the commencement of an underwritten primary public offering of the
Company's equity securities (a "Public Offering"). Subscriber acknowledges and
agrees that during the Registration Suspension Period it shall not sell any
Shares. Subscriber further agrees that it shall, upon request, enter into an
agreement with the underwriter of a Public Offering, pursuant to which the
Subscriber shall agree not to sell any Shares during the Registration
Suspension Period.
3
<PAGE> 4
5.5 If and whenever the Company is required by the provisions of
this Agreement to use its best efforts to effect the registration of the Shares
under the Act for the account of an Offering Holder, the Company will, as
promptly as possible:
(a) prepare and file with the SEC a registration
statement with respect to such securities and use its best efforts to
cause such registration statement to become and remain effective;
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the requirements of the Act and
the rules and regulations promulgated by the SEC thereunder relating
to the sale or other disposition of the securities covered by such
registration statement;
(c) furnish to each Offering Holder such numbers of
copies of a prospectus, including a preliminary prospectus, complying
with the requirements of the Act and such other documents as such
Offering Holder may reasonably request in order to facilitate the
public sale or other disposition of the underlying shares of Common
Stock owned by such Offering Holder, but such Offering Holder shall
not be entitled to use any selling materials other than a prospectus
and such other materials as may be approved by the Company, which
approval will not be unreasonably withheld; and
(d) use its best efforts to register or qualify the
securities covered by such registration statement under the State Acts
as any Offering Holder shall reasonably request, and do any and all
such other acts and things as may be necessary or advisable to enable
such Offering Holder to consummate the public sale or other
disposition of the Shares owned by such Offering Holder in such
states; provided, however , that the Company shall not be obligated to
register or qualify such securities in any jurisdiction in which such
registration or qualification would require the Company to qualify as
a foreign corporation or file any general consent to service of
process where it is not then so qualified or has not theretofore so
consented.
5.6 Except as provided below in this Section 5, the expenses
incurred by the Company in connection with action taken by the Company to
comply with this Section 5, including, without limitation, all registration and
filing fees, printing and delivery expenses, accounting fees, fees and
disbursements of counsel to the Company, consultant and expert fees, premiums
for liability insurance, if the Company chooses to obtain such insurance,
obtained in connection with a registration statement filed to effect such
compliance and all expenses, including counsel fees, of complying with State
Acts, shall be paid by the Company. All fees and disbursements of any counsel,
experts, or consultants employed by any Offering Holder shall be borne by such
Offering Holder. The Company shall not be obligated in any way in connection
with any registration pursuant to this Section 5 for any selling commissions or
discounts payable by any Offering Holder to any underwriter or broker of
securities to be sold by such Offering Holder. It shall be a condition
precedent to the obligation of the Company to take any action pursuant to this
Section 5 that the Company shall have received an undertaking satisfactory to
it from each Offering Holder to pay all expenses required to be borne by such
Offering Holder and to furnish or cause to be furnished to the Company
specifically for use in the preparation of the registration statement and
prospectus written information concerning the securities held by such Offering
Holder and also concerning any underwriter of such securities and the intended
method of disposition thereof and any additional information or documentation
as the Company shall reasonably request and as may be required by
administrators of the Act or State Acts in connection with the action to be
taken by the Company hereunder pursuant to such registration.
5.7 In the event of any registration of shares of Common Stock
pursuant to this Section 5, the Company will indemnify and hold harmless each
Offering Holder, its officers, directors and each underwriter of such
securities, and any person who controls such Offering Holder or underwriter
within the meaning of Section 15 of the Act, against all claims, actions,
losses, damages, liabilities and expenses, joint or several, to which any of
such persons may become subject under the Act or otherwise, insofar as such
losses, claims, damages, liabilities or actions arise out of or are based upon
any untrue statement of any material fact contained in any registration
statement under which such securities were registered under the Act, any
preliminary prospectus or final prospectus contained therein, or any amendment
or supplement thereof, or arise out of or are based upon the omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and
4
<PAGE> 5
will reimburse such Offering Holder, its officers, directors and each
underwriter of such securities, and each such controlling person or entity for
any legal and any other expenses reasonably incurred by such Offering Holder,
such underwriter, or such controlling person or entity in connection with
investigating or defending any such loss, action, claim, damage, liability, or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage, liability or action arises out
of or is based upon an untrue statement or omission made in said registration
statement, said preliminary prospectus or said prospectus, or said amendment of
supplement in reliance upon and in conformity with written information
furnished to the Company by such Offering Holder or such underwriter
specifically for use in the preparation thereof, and provided further however,
that the Company will not be liable in any such case to the extent that any
such loss, claim, damage or liability or action arises out of or is based upon
an untrue or omission made in any preliminary prospectus or final prospectus if
(i) such Offering Holder failed to send or deliver a copy of the final
prospectus or prospectus supplement with or prior to the delivery of written
confirmation of the sale of the Common Stock, and (ii) the final prospectus or
prospectus supplement would have corrected such untrue statement or omission.
5.8 At any time when a prospectus relating to the Offering is
required to be delivered under the Act, the Company will notify the Offering
Holder of the happening of any event, upon the notification or awareness of
such event by an executive officer of the Company, as a result of which the
prospectus included in such registration statement, as then in effect, includes
an untrue statement of material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances then existing.
5.9 In the event of any registration of any securities under the
Act pursuant to this Section 5, each Offering Holder will, or will furnish the
written undertaking of such other person or entity as shall be acceptable to
the Company to, indemnify and hold harmless the Company, its officers,
directors and any person who controls such Company within the meaning of
Section 15 of the Act, against any losses, claims, damages, liabilities, or
actions, joint or several, to which the Company, its officers, directors, or
such controlling person or entity may become subject under the Act or
otherwise, insofar as such losses, claims, damages, liabilities, or actions
arise out of or are based upon any untrue statement of any material fact
contained in any registration statement under which such securities were
registered under the Act, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, or arise out of or
are based upon the omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent and only to the extent that any such loss, claim,
damage, liability, or action arises out of or is based upon an untrue statement
or omission made in said registration statement, said preliminary prospectus or
said prospectus or said amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Offering
Holder or any underwriter of such Offering Holder's securities specifically for
use in the preparation thereof.
5.10 Any party entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any settlement made
by the indemnified party without its consent (which consent may not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable
judgment of any indemnified party an conflict of interest may exist between
such indemnified party and any other of such indemnified parties with respect
to such claim.
6. Closing.
6.1 The Initial Closing Date shall be on or before March 8, 2000,
or such other time as the Company and Subscriber shall mutually agree, and
shall occur at the offices of the Company. Additional Closings may be held at
any time thereafter, provided, however, that in no event shall the Initial
Closing or any Additional Closing occur after April 28, 2000.
5
<PAGE> 6
7. Subscriber Representations. The undersigned Subscriber hereby
represents, warrants and acknowledges and agrees with the Company as follows:
7.1 The undersigned has been furnished with and has carefully
read the materials set forth in Section 2.1 hereto and is familiar with and
understands the terms of the offering (the "Offering"). With respect to
individual or partnership tax and other economic considerations involved in
this investment, the undersigned is not relying on the Company (or any agent or
representative of the Company). The undersigned has carefully considered and
has, to the extent the undersigned believes such discussion necessary,
discussed with the undersigned's professional legal, tax, accounting and
financial advisers the suitability of an investment in the Common Stock for the
undersigned's particular tax and financial situation and has determined that
the Shares being subscribed for by the undersigned are a suitable investment
for the undersigned.
7.2 The undersigned acknowledges that all documents, records and
books pertaining to this investment which the undersigned has requested have
been made available for inspection by the undersigned and the undersigned's
attorney, accountant or other adviser(s).
7.3 The undersigned and/or the undersigned's advisor(s) has/have
had a reasonable opportunity to ask questions of and receive answers from a
person or persons acting on behalf of the Company concerning the Offering and
all such questions have been answered to the full satisfaction of the
undersigned.
7.4 The undersigned is not subscribing for shares of Common Stock
as a result of or subsequent to any advertisement, article, notice or other
communication published in any newspaper, magazine or similar media or
broadcast over television or radio or presented at any seminar or meeting.
7.5 The undersigned is an "accredited investor," within the
meaning of Rule 501(a) of Regulation D under the Act. The undersigned, by
reason of the undersigned's business or financial experience or the business or
financial experience of the undersigned's professional advisers who are
unaffiliated with and who are not compensated by the Company or any affiliate
of thereof, directly or indirectly, can be reasonably assumed to have the
capacity to protect its interests in connection with an investment in the
Shares.
7.6 If the undersigned is a natural person, the undersigned has
adequate means of providing for the undersigned's current financial needs and
contingencies, is able to bear the substantial economic risks of an investment
in the Shares for an indefinite period of time, has no need for liquidity in
such investment and, at the present time, could afford a complete loss of such
investment.
7.7 The undersigned or the undersigned's purchaser
representative, as the case may be, has such knowledge and experience in
financial, tax and business matters so as to enable the undersigned to utilize
the information made available to the undersigned in connection with the
Offering to evaluate the merits and risks of an investment in the Shares and to
make an informed investment decision with respect thereto.
7.8 The undersigned acknowledges that the shares of Common Stock
herein subscribed for have not been registered under the Act and under the
securities laws of any state. The undersigned will not sell, transfer or
otherwise dispose of the Shares unless they are registered under the Act and
any applicable state securities laws or pursuant to available exemptions from
such registration, provided that the seller delivers to the Company an opinion
of counsel, which counsel and opinion shall be reasonably satisfactory to the
Company, confirming the availability of such exemption. The undersigned
represents that the undersigned is purchasing the Shares for the undersigned's
own account, for investment and not with a view to resale or distribution
except in compliance with the Act and the restrictions contained in the
immediately preceding sentence. The undersigned has not offered or sold any
portion of the Shares being acquired nor does the undersigned have any present
intention of selling, distributing or otherwise disposing of the Shares either
currently or after the passage of a fixed or determinable period of time or
upon the occurrence or nonoccurrence of any predetermined event or circumstance
in violation of the Act.
7.9 The undersigned recognizes that investment in the Shares
involves substantial risks, including loss of the entire amount of such
investment, and has taken full cognizance of and understands all of the risks
related to a purchase of the Shares.
6
<PAGE> 7
7.10 The undersigned acknowledges that each certificate
representing the Shares shall be stamped or otherwise imprinted with a legend
substantially in the following form:
THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 (THE "SECURITIES ACT") OR UNDER APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND
ANY APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AVAILABLE
EXEMPTIONS FROM SUCH REGISTRATION, PROVIDED THAT THE SELLER
DELIVERS TO THE COMPANY AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY CONFIRMING THE AVAILABILITY OF SUCH EXEMPTION.
INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR
THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE
PERIOD OF TIME.
7.11 The undersigned acknowledges and agrees that it shall not be
entitled to seek any remedies with respect to the Offering from any party other
than the Company.
7.12 If this Subscription Agreement is executed and delivered on
behalf of a partnership, corporation, trust or estate: (i) such partnership,
corporation, trust or estate has the full legal right and power and all
authority and approval required (a) to execute and deliver, or authorize
execution and delivery of, this Subscription Agreement and all other
instruments executed and delivered by or on behalf of such partnership,
corporation, trust or estate in connection with the purchase of the Shares, (b)
to delegate authority pursuant to a power of attorney and (c) to purchase and
hold such Shares; (ii) the signature of the party signing on behalf of such
partnership, corporation, trust or estate is binding upon such partnership,
corporation, trust or estate; and (iii) such partnership, corporation or trust
has not been formed for the specific purpose of acquiring the Shares, unless
each beneficial owner of such entity is qualified as an "accredited investor"
within the meaning of Rule 501(a) of Regulation D under the Act ("Regulation
"D") and has submitted information substantiating such individual
qualification.
7.13 If the undersigned is a retirement plan or is investing on
behalf of a retirement plan, the undersigned acknowledges that investment in
the Shares poses risks in addition to those associated with other investments,
including the inability to use losses generated by an investment in the Shares
to offset taxable income.
7.14 The undersigned shall indemnify and hold harmless the Company
and each officer, director or control person thereof, who is or may be a party
or is or may be threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of or arising from any actual or alleged
misrepresentations or misstatement of facts or omission to represent or state
facts made or alleged to have been made by the undersigned to the Company (or
any agent or representative thereof) or omitted or alleged to have been omitted
by the undersigned, concerning the undersigned or the undersigned's authority
to invest or financial position in connection with the Offering, including,
without limitation, any such misrepresentation, misstatement or omission
contained in the Subscriber Questionnaire or any other document submitted by
the undersigned, against losses, liabilities and expenses actually and
reasonably incurred by the Company, or any officer, director or control person
thereof in connection with such action, suit or proceeding for which the
Company, Subscriber, or such officer, director or control person has not
otherwise been reimbursed (including attorneys' fees, judgments, fines and
amounts paid in settlement).
8. Understandings.
The undersigned Subscriber understands, acknowledges and agrees with
the Company as follows:
8.1 This Subscription may be rejected, in whole or in part, by
the Company, in its sole and absolute discretion, at any time before the
Initial Closing Date or any Additional Closing Dates, as the case may be,
notwithstanding prior receipt by the undersigned of notice of acceptance of the
undersigned's Subscription.
7
<PAGE> 8
8.2 Except as set forth in paragraph 8.1 above, the undersigned
hereby acknowledges and agrees that the Subscription hereunder is irrevocable
by the undersigned, that, except as required by law, the undersigned is not
entitled to cancel, terminate or revoke this Subscription Agreement or any
agreements of the undersigned hereunder and that this Subscription Agreement
and such other agreements shall survive the death or disability of the
undersigned and shall be binding upon and inure to the benefit of the parties
and their heirs, executors, administrators, successors, legal representatives
and permitted assigns. If the undersigned is more than one person, the
obligations of the undersigned hereunder shall be joint and several and the
agreements, representations, warranties and acknowledgments herein contained
shall be deemed to be made by and be binding upon each such person and his/her
heirs, executors, administrators, successors, legal representatives and
permitted assigns.
8.3 No Federal or state agency has made any findings or
determination as to the fairness of the terms of this Offering for investment
nor any recommendations or endorsement of the Shares.
8.4 The Offering is intended to be exempt from registration under
the Act by virtue of Section 4(2) of the Act and the provisions of Regulation D
thereunder, which is in part dependent upon the truth, completeness and
accuracy of the statements made by the undersigned herein and in the Subscriber
Questionnaire.
8.5 There can be no assurance that the undersigned will be able
to sell or dispose of the Shares. It is understood that in order not to
jeopardize the Offering's exempt status under Section 4(2) of the Act and
Regulation D, any transferee may, at a minimum, be required to fulfill the
investor suitability requirements thereunder.
8.6 The undersigned acknowledges that the information furnished
by the Company to the undersigned or its advisers in connection with the
Offering, are confidential and nonpublic and agrees that all such information
shall be kept in confidence by the undersigned and neither used by the
undersigned for the undersigned's personal benefit (other than in connection
with this Subscription), nor disclosed to any third party for any reason;
provided, however, that this obligation shall not apply to any such information
that (i) is part of the public knowledge or literature and readily accessible
at the date hereof, (ii) becomes a part of the public knowledge or literature
and readily accessible by publication (except as a result of a breach of this
provision) or (iii) is received from third parties (except third parties who
disclose such information in violation of any confidentiality agreements or
obligations, including, without limitation, any Subscription Agreement entered
into with the Company).
8.7 The representations, warranties and agreements of the
undersigned contained herein and in any other writing delivered in connection
with the transactions contemplated hereby shall be true and correct in all
respects on and as of the date of the sale of the Shares as if made on and as
of such date and shall survive the execution and delivery of this Subscription
Agreement and the purchase of the Shares.
8.8 IN MAKING AN INVESTMENT DECISION, PURCHASERS MUST RELY ON
THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING
THE MERITS AND RISKS INVOLVED. THE SHARES HAVE NOT BEEN RECOMMENDED BY ANY
FEDERAL OR STATE SECURITIES COMMISSION ON REGULATORY AUTHORITY. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
8.9 The offering and sale of the Shares is intended to be exempt
from registration under the securities laws of certain U.S. states. A purchaser
residing in one or more of the following states shall note the language set
forth below, which is required to be included in this Agreement by the
securities laws of those states. The purchaser must note that there are
restrictions on transfer of all Shares.
ALL STATES: THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OR
THE SECURITIES LAWS OF ANY STATE AND ARE BEING OFFERED AND SOLD IN RELIANCE ON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH
LAWS. THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
8
<PAGE> 9
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT,
AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
TEXAS: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER APPLICABLE SECURITIES
LAWS OF TEXAS AND THEREFORE CANNOT BE RESOLD OR TRANSFERRED UNLESS THEY ARE
SUBSEQUENTLY REGISTERED OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
9. Miscellaneous.
9.1 Except as set forth elsewhere herein, any notice or demand to
be given or served in connection herewith shall be deemed to be sufficiently
given or served for all purposes by being sent as registered or certified mail,
return receipt requested, postage prepaid, in the case of the Company,
addressed to it at the address set forth above;
Attention: Karen Franklin
Chief Financial Officer
and in the case of Subscriber to the address for correspondence set forth on
the Subscriber Questionnaire.
9.2 This Subscription Agreement shall be enforced, governed and
construed in all respects in accordance with the laws of the State of Delaware,
as such laws are applied by Delaware courts to agreements entered into and to
be performed in Delaware by and between residents of Delaware, and shall be
binding upon the undersigned, the undersigned's heirs, estate, legal
representatives, successors and assigns and shall inure to the benefit of the
Company and its successors and assigns. If any provision of this Subscription
Agreement is invalid or unenforceable under any applicable statute or rule of
law, then such provision shall be deemed inoperative to the extent that it may
conflict therewith and shall be deemed to be modified to conform with such
statute or rule of law. Any provision hereof that may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof.
9.3 Except as provided in Section 9.4, this Agreement shall be
binding upon and inure to the benefit of the Company, and Subscriber and their
successors and assigns.
9.4 The rights provided under Section 5 are not assignable except
to a party who is defined in Section 5 as an "Offering Holder."
9.5 In any action, proceeding or counterclaim brought to enforce
any of the provisions of this Agreement or to recover damages, costs and
expenses in connection with any breach of the Agreement, the prevailing party
shall be entitled to be reimbursed by the opposing party for all of the
prevailing party's attorneys' fees, costs and other out-of-pocket expenses
incurred in connection with such action, proceeding or counterclaim.
9.6 This Agreement constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth
herein. This Agreement supercedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
10. Signature. The signature of this Subscription Agreement is
contained as part of the applicable Subscription Package, entitled "Signature
Page."
9
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement No. 33-44036 on Form S-8 dated November 14, 1991, Registration
Statement No. 33-44035 on Form S-8 dated November 14, 1991, Registration
Statement No. 33-55094 on Form S-3 dated November 25, 1992, Registration
Statement No. 33-56856 on Form S-8 dated January 8, 1993, Registration
Statement No. 33-72512 on Form S-8 dated December 3, 1993, Registration
Statement No. 33-81314 on Form S-8 dated July 7, 1994, Registration Statement
No. 333-728 on Form S-3 dated January 30, 1996, Registration Statement No.
33-85754 on Form S-3 dated January 30, 1996 (Post Effective Amendment No. One),
Registration Statement No. 333-15123 on Form S-3 dated October 30, 1996,
Registration Statement No. 333-18237 on Form S-8 dated December 19, 1996,
Registration Statement No. 333-18239 on Form S-8 dated December 19, 1996,
Registration Statement No. 333-30597 on Form S-3 dated June 30, 1997,
Registration Statement No. 333-44407 on Form S-3 dated January 14, 1998,
Registration Statement No. 333-48635 on Form S-3 dated March 25, 1998,
Registration Statement No. 333-83035 on Form S-8 dated July 16, 1999, and
Registration Statement No. 333-87561 on Form S-3, as amended, dated January 31,
1999 of our report dated March 7, 2000 (except for Note M which date is March
10, 2000), relating to the consolidated financial statements of VSI
Enterprises, Inc. and subsidiaries appearing in the Company's annual report on
Form 10-K for the year ended December 31, 1999.
/s/ Grant Thornton LLP
Atlanta, Georgia
March 27, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated April 12, 1999 (except with respect to the effect of the pending sale of
Eastern Telecom, Inc. discussed in Note B, as to which the date is March 27,
2000), related to the consolidated statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 1997 of VSI Enterprises,
Inc. and subsidiaries (the "Company"), included in this Annual Report on Form
10-K, into the Company's previously filed Registration Statements (Files Nos.
33-44036, 33-44035, 33-55094, 33-56856, 33-72512, 33-81314, 333-728, 33-85754,
333-15123, 333-18237, 333-18239, 333-30597, 333-44407, 333-48635, and
333-83035, and 333-87561).
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 27, 2000
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