-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JMOBeqE3scMREhoCIAFrTiL0SiIPoCDld5JgW77DbG99jM6zWpNUnU0oHkfukopo j+/0c2B5QPdy2l7GL+kT9A== 0000950144-98-003237.txt : 19980326 0000950144-98-003237.hdr.sgml : 19980326 ACCESSION NUMBER: 0000950144-98-003237 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VSI ENTERPRISES INC CENTRAL INDEX KEY: 0000846775 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 841104448 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10927 FILM NUMBER: 98573181 BUSINESS ADDRESS: STREET 1: 5801 GOSHEN SPRINGS RD CITY: NORCROSS STATE: GA ZIP: 30071 BUSINESS PHONE: 7702427566 MAIL ADDRESS: STREET 1: 5801 GOSHEN SPRINGS ROAD CITY: NORCROSS STATE: GA ZIP: 30071 FORMER COMPANY: FORMER CONFORMED NAME: FI TEK III INC DATE OF NAME CHANGE: 19910219 10-K405 1 VSI ENTERPRISES FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K --------------------- Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1997 ------------------------------ 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 ---- Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934: Common Stock, $.00025 par value per share ----------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the common stock of the registrant held by non-affiliates of the registrant (39,222,741 shares) on March 18, 1998 was approximately $42,752,788, based on the closing price of the registrant's common stock as quoted on the Nasdaq Small Cap Market on March 18, 1998. For the purposes of this response, officers, directors and holders of 5% or more of the registrant's common stock are considered the affiliates of the registrant at that date. The number of shares outstanding of the registrant's common stock, as of March 18, 1998: 47,034,970 shares of $.00025 par value common stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement to be delivered to shareholders in connection with the 1998 annual meeting of shareholders scheduled to be held on May 19, 1998, are incorporated by reference in response to Part III of this Report. 2 PART I ITEM 1. BUSINESS. GENERAL VSI Enterprises, Inc. (the "Company"), through its five wholly-owned subsidiaries, is in the videoconferencing and system integration business. The Company, along with its strategic partners, offers customers turnkey solutions by supplying videoconferencing products and services, as well as transmission equipment and a complete internal network, to support video, voice and data applications. Its core business is the design, manufacture, marketing and servicing of interactive group and desktop videoconferencing systems (the "VSI Systems"). Each VSI System is designed with open software and modular subsystems which allow a VSI System to be expanded or reconfigured as technologies, user requirements or new applications evolve. The Company's products are designed to allow multiple participants at geographically dispersed sites to see and hear each other on live television and share graphical and pictorial information using standard commercially available telecommunications transmission facilities. The Company integrates standard video, audio and transmission components with its own proprietary video, audio and computer control components and software. The Company's open software and modular subsystems streamline production and allow the product to be tailored to meet customers' specific needs, with or without the necessity of custom design. The Company's lead products are marketed under the trade name Omega(TM). Customers are offered a variety of option packages to fit specific applications. Customers are also offered upgrade packages that make the Company's new product compatible with older models. To date, the Company has sold over 1,500 videoconferencing systems to approximately 300 customers, including Bell Atlantic, Boeing, MCI, NationsBank, BellSouth, General DataComm and Johnson & Johnson; various foreign, U.S. and state government departments and agencies; educational institutions; and health care facilities. The Company was incorporated under the laws of Delaware on September 19, 1988 as Fi-Tek III, Inc. ("Fi-Tek") for the purpose of raising capital and to seek out business opportunities in which to acquire an interest. On August 21, 1990, the Company acquired 89.01% of the total common stock and common stock equivalents then issued and outstanding of Videoconferencing Systems, Inc., a Delaware corporation ("VSI"). VSI was founded in 1985 through the acquisition of a portion of the assets of a Sprint Corporation videoconferencing subsidiary. In December 1990, the Company changed its name from Fi-Tek III, Inc. to VSI Enterprises, Inc. During the first half of 1991, the Company acquired the remaining additional outstanding shares of common stock of VSI. On July 31, 1992, the Company acquired substantially all of the outstanding shares of Common Stock of CyberVision, n.v., a Belgian corporation. In April 1994, the Company changed the name of CyberVision, n.v. to Videoconferencing Systems, n.v. (hereinafter referred to as "VSI Europe") to permit both companies to market products under the common trade name of "VSI." VSI Europe is a distributor of the Company's videoconferencing systems in Europe. VSI Europe has offices located in London and Antwerp. 3 In April 1995, the Company acquired cR Solutions, a software company whose products include a reservation system for the management of videoconferencing systems. This business is being operated by the Company through its VSI Solutions, Inc. subsidiary ("VSI Solutions"). On June 28, 1996, the Company merged with Integrated Network Services, Inc. ("INS"), a company engaged in the design, installation and support of local and wide area networks, primarily for the healthcare industry. This business is operated by the Company through its VSI Network Services, Inc. subsidiary. INS is an integration firm specializing in the connectivity of multi-protocol environments, ranging from small, local area networks to large, enterprise-wide networks employing WAN technologies to connect multiple sites. On October 2, 1996, the Company acquired Eastern Telecom, Inc. ("ETI"), a company engaged in the business of marketing and sales of telecommunications services and products. ETI sells network services such as Centrex, frame relay and basic rate interface, primary rate interface and ISDN connections on behalf of a number of major telecommunications providers. VSI, VSI Europe, VSI Solutions, INS and ETI will continue their respective businesses as operating subsidiaries of the Company. References to the Company herein refer to VSI Enterprises, Inc., VSI, VSI Europe, VSI Solutions, INS and ETI as a consolidated operation, unless the context indicates otherwise. The Company's principal executive offices and manufacturing facilities are located at 5801 Goshen Springs Road, Norcross, Georgia 30071, and its telephone number is (770) 242-7566. VSI SYSTEMS & APPLICATIONS VSI Systems enable participants in multiple locations to hold interactive group meetings remotely, thus avoiding costly and time-consuming travel. Participants at any connected location can be seen and heard by all other participants. If the VSI System is equipped with the appropriate options, the participants can also utilize slides, graphs, plain paper drawings, computer-generated graphics, computer data, laser discs and video tape interactively. Unlike audio teleconferencing systems which only allow voice communications, audiographic teleconferencing which is limited to voice plus still images, and business television which does not provide for interaction among the participants (also known as one-way videoconferencing), the Company believes its VSI Systems foster the look and feel of live, face-to-face meetings and promote a natural interaction among the participants. A typical VSI videoconference involves three major elements: (i) access to transmission services, (ii) a "codec" for coding/decoding digitized signal transmissions and (iii) the VSI System, which contains television monitors, cameras, audio system, microphones, cabinetry, various control systems for interfacing the componentry to the user, and various optional components specific to the user's application. The Company designs, manufactures, assembles, installs and services the VSI Systems, and it has nonexclusive remarketing agreements with codec manufacturers to resell the codecs. The Company may sell the transmission services through its ETI subsidiary, or in many instances the customer will secure the services independently through telecommunications carriers for either fixed monthly or hourly usage prices. These transmission services may vary, depending upon the customer's application and preferences, and include a range of transmission bandwidths. In general, the higher the bandwidth the better the quality of the transmitted images, although the choice of codec will 4 affect image quality for a given speed. The VSI Systems operate over the range of available transmission bandwidths and are compatible with all major brands of codecs known by the Company to be currently available; they also operate without codecs, for certain specialized networks. The primary users of videoconferencing are major corporations, government agencies, educational institutions and health care organizations. Corporate and government organizations often use meetings to provide information, review operations, make plans, resolve problems, introduce new ideas or products, conduct training sessions and communicate with customers and vendors. Such conventional group meetings usually require at least some of the participants to travel to the meeting site. When meetings are required on a frequent, repetitive or emergency basis, travel costs and productivity losses can be substantial. The VSI Systems provide users with the ability to hold two-way and multi-way meetings, often at significant savings over the costs of travel and lost productivity while traveling. As an added and in some cases a more important benefit, because travel time and costs are eliminated, it may be more economic for more people to participate via videoconferencing, thereby causing the direct dissemination of pertinent information to more parties simultaneously, which may improve efficiency in problem solving and decision making. The Company also supplies and installs the VSI Systems for use in educational and training settings to connect one or more distant classrooms with a centrally-based instructor. These "distance learning" applications of videoconferencing are used by corporations, state and federal governments, hospitals and clinics, high schools, technical schools and universities. The Company also provides "judicial systems" to state and local governments. Judicial systems equip court systems with the ability to link court rooms with prisons and jails, thereby reducing the costs and security risks associated with inmate-related travel including: arraignments, attorney/client conferences, booking and prisoner processing and depositions. In the area of telemedicine, the Company supplies standalone group and desktop videoconferencing systems. It also, in an alliance with strategic partner Global Telemedix, Inc., offers systems used in conjunction with telemedicine software, specialty devices and desktop/rollabout workstations. These systems can offer a multimedia platform for use by physicians, medical researchers and administrators for a wide variety of applications, including: patient consults, remote monitoring, grand rounds, treatment protocols, research and administration. PROPRIETARY TECHNOLOGY The Company has developed proprietary technology in the areas of videoconferencing control systems, system diagnostics, information access and communications access. While VSI Systems make use of some other manufacturers' components, the Company's primary product, Omega(TM) utilizes internally developed proprietary software and products as key elements in differentiating the Company's systems in the marketplace. Since VSI Systems use standards based codecs, VSI Systems are interoperable with systems of other standards-compliant manufacturers. The heart of the Omega(TM) is the System Controller, a proprietary software suite that must be installed on a properly configured 486 or Pentium Windows-based PC. The software suite 5 includes the Omega(TM) real time operating system, Omega(TM) videoconferencing application package, device drivers, and a third party SQL database engine (as licensed to VSI for resale). This software is delivered in object code format. The Company has also developed and manufactures certain proprietary components: Omega(TM) Audio Processor, Omega(TM) Video Processor, Omega(TM) Power Supply, the Omega(TM) Basic/Serial IQ Connectors, the Omega(TM) Pan/Tilt/Zoom/Focus Controller, the Omega(TM) Infra-red User Control Panel and proprietary cabinetry. These proprietary components are designed to work exclusively with the Omega(TM) System Controller software. The Company regards its Omega(TM) software as proprietary and has implemented protective measures of both a legal (copyright) and practical nature. The Company derives considerable practical protection for its software by supplying and licensing only a non-modifiable run-time version to its customers and keeping confidential all versions that can be modified. By licensing the software rather than transferring title, the Company in most cases has been able to incorporate restrictions in the licensing agreements which impose limitations on the disclosure and transferability of the software. No determination has yet been made, however, as to the legal or practical enforceability of these restrictions or the extent of customer liability for violations. The Company has been granted seven patents from the U.S. Patent and Trademark Office that cover certain aspects of the Omega(TM) user interface, remote management and system architecture (which is a network videoconferencing system which combines the advantages of central and distributed intelligence systems). The patents protect the Company's innovative technology and enables the Company to pursue opportunities to license its technology to other manufacturers. The Company also has confidentiality agreements with certain of its employees and has implemented other security measures. PRODUCTS Historically, videoconferencing systems were used to provide "point-to-point" connectivity through proprietary codecs. Most videoconferences were conducted on an intra-network basis. With the recent acceptance and implementation of interoperability standards (collectively referred to as H.320 of the ITU-TS) and the growth of the installed base of systems, the Company believes that customers are beginning to seek "one-to-many" system solutions on both an intra-network as well as an inter-network basis. This has resulted in a significant shift in use of videoconferencing, leading to a complex matrix of interconnectivity, scheduling, service and user interface issues. The Company believes that the videoconferencing world is becoming a world of "networks of systems" where all systems from boardroom to rollabout to desktop will have to interconnect. The Company believes that most systems in use today are not equipped to handle these demands. The Omega(TM) platform features a system control architecture based upon a PC486 or Pentium engine, proprietary software compatible with Microsoft's Windows 3.1/95 and MS DOS 6.0+ operating systems, and distributed component intelligence. In addition, the Company introduced a new state of the art 7kHz audio system, sophisticated 8x8 video switcher/processor, a new high speed pan/tilt/zoom/focus, and new cabinetry. The key features and benefits of the Omega(TM) platform include: 6 Compression Technology Independence - Investment protection, by separating system control from compression technology - Customer choice of compression technology Open Network Architecture - Wide support for options and peripherals (e.g., multiple cameras, VCRs, laser disc players, video printers, PC presentations) - Built-in flexibility for adding new devices and advanced technology as it evolves - Support for a wide number of network connection technologies (including switched 56, ISDN, T1, T3 or ATM) - Network management for centralized administration and diagnostics Ease of Use - Easy to understand onscreen icons provide heads up control of all videoconferencing functions - Point and Click camera control provides effortless camera positioning for both local and distant participants - Dialing Directories for both phone and videoconference connections makes initiating a conference as easy as using your phone System Management - Remote management support is extended to all devices comprising the videoconferencing system - Device health and status represented locally with 3D graphical display of system components - FTP server integration into the Omega(TM) allows for remote transfer of files between a wide variety of computers - Open system support of industry standards Software Based System - Remote upgrades of new Omega(TM) software releases - Custom configuration of icons and system settings - Sign-on security and system accounting totals for individual users The Omega(TM) product line offers a complete range of group and desktop videoconferencing systems, including the deluxe, full-featured Executive series, the economical Flex Plus and Flex rollabout series and the Desk PC-based desktop series. Other customized systems are offered for such application-specific markets as telemedicine and video arraignment. The Executive series is engineered for stationary videoconferencing applications in dedicated boardrooms, classrooms and courtrooms. Its dual monitors allow users to see local and remote sites easily, which is especially helpful when using multimedia tools or application-specific devices for meetings, presentations and training. Flex and Flex Plus models offer a 7 spectrum of options, configurations and peripherals. Their single-monitor cabinets are portable and move easily between rooms for the widest range of applications in any environment. They are also upgradable to the Executive series. The Desk series adds videoconferencing to almost any 486 IBM-compatible PC and works with Windows 95 software. It offers flexible configuration through easy-to-use Windows menus and dialog boxes and supports a wide range of peripheral devices and multiple video inputs for supporting varied videoconferencing applications. Customers are offered a menu of options which allows them to tailor systems to meet their specific needs. The Omega(TM) is sold on a standalone basis, with or without codec. The Omega(TM) is offered with single or dual color monitors of 27" or 35" size, for rollabout cabinets or in the wall installation. Other options include: audio and video expansion packages, multiple cameras (either single or three chip), a graphics stand, a computer graphics interface, facsimile transmission and reception, transmission network interface, and a variety of videocassette recorders, slides chains and peripheral devices. The Company began shipping the first version of Omega(TM) during the first quarter of calendar 1994. Video Administrator is a custom software package that facilitates network management by providing scheduling, reservations and connection services with minimal human intervention. Video Administrator is being utilized by BellSouth for its multipoint videoconferencing service, as well as by other corporate and institutional clients. NEW PRODUCT DEVELOPMENT The Company continues to upgrade its present products and to develop new and innovative products for the videoconferencing market. Extensions of its product line will include a LAN-based gateway offering, and software upgrades of existing products. Additional system and network management products are under development. The Company is also upgrading the design of application specific packages of the Omega(TM) videoconferencing system for the judicial, distance learning and telemedicine markets. CUSTOMER SERVICE The Company generally provides a warranty for parts and labor on its systems for 90 days from the date of delivery. The Company maintains videoconference rooms and the necessary transmission facilities and codecs to provide on-line assistance to its installed customers at its executive offices near Atlanta, Georgia and at its European offices. It also provides a telephone helpline to assist customers in the diagnosis of system failures. Approximately 95% of all customer calls for assistance have been resolved through telephone or videoconference contact. The remaining 5% have generally been resolved by the removal and replacement of field replaceable units by Company or customer personnel. The Company maintains a spare parts inventory, and its policy is to replace failed units which are under warranty or subject to a service contract within 24 hours of notification. The Company offers several different maintenance programs, ranging from "helpline" telephone consultation to extended field service on a contract basis, which includes parts, labor, and travel service with a guaranteed on-site response within 48 hours. Warranty and contract 8 service is provided from the Company's U.S. and European locations and through various service arrangements in the Far East. TELEPHONE NETWORK RESELLING In addition, the Company, through its ETI subsidiary, serves as a sales agent for a number of major telecommunications clients, including Bell Atlantic and Southern New England Telephone. ETI is paid a commission by its clients for products and services sold to other entities. Among ETI's core product offerings are network services such as Centrex, frame relay and basic rate interface, primary rate interface and ISDN connections. In the year ended December 31, 1997, ETI contributed about 34% of the Company's consolidated revenues. MARKETS The Company has defined its near-term, primary target markets for its products as the "Fortune 1000" companies in North America, Europe and the Pacific Rim. Typically, these large companies, often with numerous offices in different cities, are more likely to realize significant savings on travel and related costs by installing a videoconferencing network. Cost/benefit analyses are generally performed by the Company's customers themselves prior to purchasing a system. In addition, the Company has targeted as a secondary market small to mid-sized companies, as well as educational institutions, governments and healthcare providers. The Company's systems are marketed through a direct sales force, as well as through a select group of co-marketing partners and distributors. For the fiscal years ended December 31, 1997, 1996 and 1995, international sales (sales outside of the United States and Canada) represented approximately 13%, 15% and 13%, respectively, of the Company's total sales. Net product sales attributable to VSI Europe increased from approximately $2.5 million during the year ended December 31, 1996 to approximately $2.8 million for the year ended December 31, 1997. VSI Europe has contributed substantially all of the Company's international sales, although sales in China began in late 1997. The Company believes it presently maintains an approximate 1% to 2% share of the total worldwide videoconferencing equipment market as measured by 1997 total sales volume for the industry. CUSTOMERS The Company's customers include Fortune 1000 companies, mid-sized corporations, agencies of state, local and federal governments, and health care facilities. They include Boeing, MCI, NationsBank, Duracell, BellSouth, Bell Atlantic and Johnson & Johnson. During fiscal 1997, approximately 27% of the Company's revenue - primarily, commissions earned by wholly-owned subsidiary ETI -- were from Bell Atlantic. During fiscal 1996, approximately 14% of the Company's sales were to Bell Atlantic; the 1996 percentage is much smaller than the percentage for 1997 because revenue contributed by ETI was only included in fourth quarter results for 1996, when ETI was acquired by the Company. No other customers accounted for more than 10% of the Company's revenue during the years ended December 31, 1997 or 1996. ORDER BACKLOG AND INVENTORY As of December 31, 1997, the Company had a backlog of orders for service and/or equipment of approximately $9.0 million for systems and/or service to be delivered during the next 12 months. As of December 31, 1996, the Company had a backlog of orders for service 9 and/or equipment of approximately $4,700,000. The Company had inventories, net of allowance, of $2,541,754 at December 31, 1997. The Company's inventory is pledged to secure the Company's line of credit. COMPETITION The Company competes in the videoconferencing industry by providing custom solutions (products and services) for its customers' videoconferencing needs. Because the Company's videoconferencing systems are compression technology-independent, they can be sold to customers with standard codecs, high speed codecs, board-level codecs or specialty codecs with direct links to ATM and fiber optic networks. The videoconferencing industry covers a broad spectrum of videoconferencing services available to businesses and others, all of which are, in a general sense, competitive with the Company's systems. The VSI Systems, however, are designed and marketed primarily for the group videoconferencing segment of the industry. Within this segment of the industry, the Company presently competes primarily with two companies, all of which presently have significantly greater resources and market shares than the Company. In addition, four of the Company's suppliers of codecs directly compete with the Company in the group videoconferencing segment. The Company believes demand for videoconferencing will continue to increase, which will attract additional competitors to the industry, some of which may have greater financial and other resources than the Company. RESEARCH AND DEVELOPMENT All of the Company's product engineering, including costs associated with design and configuration of fully-developed VSI Systems for particular customer applications, is accounted for in the Company's financial statements as research and development expenses. During the years ended December 31, 1997, 1996 and 1995, the Company's aggregate expenses for research and development of new products or new components for existing VSI Systems were $1,031,814, $1,192,010 and $953,955, respectively. During fiscal 1997, the Company's research and development expenses decreased by 13%, due to the completion in early 1997 of projects related to forthcoming generations of the Omega product line and other projects. EMPLOYEES As of December 31, 1997, the Company employed 169 persons full time, including five executive officers. Of the full-time employees who are not executive officers, 72 are engaged in sales and marketing, 8 in production, 49 in service, 12 in research and development, and 23 in general administration. Employee relations are considered good, and the Company has no collective bargaining contracts covering any of its employees. ITEM 2. PROPERTIES. The Company maintains its primary executive and sales offices, as well as its production facilities, in 44,140 square feet of leased office and warehouse space in Norcross, Georgia, under a five-year lease which expires in September, 2002. The lease - originally for 26,140 square feet of space -- was renewed in September, 1997, and now includes an additional 18,000 square feet of space currently being subleased to another tenant. The Company and some of its subsidiaries- 10 - - VSI Europe, INS and ETI -- lease a number of facilities (primarily sales offices) in the United States and Europe under operating lease agreements that expire at various dates through 2006. ITEM 3. LEGAL PROCEEDINGS. There are no material legal proceedings to which the Company is a party or to which its properties are subject; nor are there any material proceedings known to the Company to be contemplated by any governmental authority; nor are there any material proceedings known to the Company, pending or contemplated, in which any director, officer or affiliate or any principal security holder of the Company, or any associate of any of the foregoing is a party or has an interest adverse to the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There has been no occurrence requiring a response to this Item. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the Nasdaq Small Cap Market under the Nasdaq symbol "VSIN". The Company's Common Stock had been traded on the Boston Stock Exchange under the symbol "VSI" from November, 1991 until February 18, 1998, when the Company voluntarily delisted from the exchange. The Common Stock has been quoted on the Nasdaq System since February 28, 1992. The following table sets forth the quarterly high and low bid quotations per Common Share on the Nasdaq Small Cap Market as reported for the periods indicated. These prices also represent inter-dealer quotations without retail mark-ups, mark-downs, or commissions and may not necessarily represent actual transactions.
HIGH LOW ------------------ FISCAL YEAR ENDED DECEMBER 31, 1996 First Quarter $4.31 $1.88 Second Quarter 4.06 2.44 Third Quarter 3.13 2.00 Fourth Quarter 3.06 1.88 FISCAL YEAR ENDED DECEMBER 31, 1997 First Quarter $3.00 $1.00 Second Quarter 1.56 1.03 Third Quarter 2.00 1.06 Fourth Quarter 2.75 1.22
As of March 6, 1997, the Company had approximately 500 holders of record of its Common Shares and in excess of 9,000 beneficial holders of its Common Shares. The Company has never paid cash dividends on its Common Stock and has no plans to pay cash dividends in the foreseeable future. The policy of the Company's Board of Directors is to retain all available earnings for use in the operation and expansion of the Company's business. 11 Whether dividends may be paid on the Common Shares in the future will depend upon the Company's earnings, capital requirements, financial condition, prior rights of the preferred stockholders, and other relevant factors. RECENT SALES OF UNREGISTERED SECURITIES On December 30, 1997, the Company issued 7,214 shares of Common Stock to Paul D'Haeyer, an employee of the Company, in payment of $9,018 of sales commissions earned by Mr. D'Haeyer. In the period from October 21, 1997 through December 31, 1997, the Company issued 250,000 shares of Common Stock to two vendors in consideration for reduction in accounts payable. All issuances of securities described above were made in reliance on the exemption from registration provided by Section 4(2) and/or 3(b) of the Securities Act of 1933 as transactions by an issuer not involving a public offering. All of the securities were acquired by the recipients thereof for investment and with no view toward the resale or distribution thereof. In each instance, the offers and sales were made without any public solicitation and the stock certificates bear restrictive legends. No underwriter was involved in the transactions and no commissions were paid. ITEM 6. SELECTED FINANCIAL DATA. The following selected financial data for the four years ended December 31, 1997, 1996, 1995 and 1994, and for the nine-month transition period ended December 31, 1993, are derived from the consolidated financial statements of the Company. All financial information prior to 1997 was restated to reflect the June 1996 acquisition by the Company of Integrated Network Services, Inc., which was accounted for as a pooling of interest. Information for the years ended December 31, 1997 and 1996 includes Eastern Telecom, Inc., which was acquired in October 1996. Information for the years ended December 31, 1997, 1996 and 1995 include VSI Solutions Inc., which was acquired in April 1995. See Notes 2 and 3 to the consolidated financial statements. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.
9 Months Year Ended December 31, Ended -------------------------------------------- Dec. 31, 1997 1996 1995 1994 1993(1) -------- -------- -------- -------- -------- (in thousands, except per share data) STATEMENT OF INCOME DATA: Revenue ................... $ 21,765 $ 17,056 $ 20,541 $ 19,226 $ 12,370 Cost of revenues .......... 11,342 12,102 14,255 13,131 9,141 -------- -------- -------- -------- -------- Gross Profit .............. 10,423 4,954 6,196 6,095 3,229 Operating and other expenses ............... 16,240 11,661 10,764 8,505 6,357 -------- -------- -------- -------- -------- Net loss from continuing operations ............. $ (5,817) $ (6,707) $ (4,568) $ (2,410) $ (3,128) ======== ======== ======== ======== ======== Net loss per share from continuing operations .. $ (0.13) $ (0.18) $ (0.15) $ (0.11) $ (0.19) ======== ======== ======== ======== ========
12
December 31, -------------------------------------------------------- 1997 1996 1995 1994 1993(1) (in thousands) BALANCE SHEET DATA: Working capital ........... $ 3,690 $ 5,634 $ 6,904 $ 1,260 $ 1,963 Total assets .............. 22,880 24,832 19,666 13,393 10,001 Long-term debt ............ -- 4,250 -- 44 68 Stockholders' equity ...... 15,591 13,819 10,535 4,401 4,242
- ------------------- (1) On October 20, 1993, the Company changed it fiscal year end from March 31 to December 31. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FINANCIAL CONDITION During the year ended December 31, 1997, the Company's total assets decreased approximately 8% to $22,880,459 from $24,832,257. Assets for 1996 were restated to reflect the adoption of a new accounting pronouncement in 1997 to on-balance sheet financing of the Company's credit facility with Fidelity Funding. Cash as of December 31, 1997, decreased $1,394,176, or approximately 62%, from December 31, 1996. Accounts receivable increased by $723,843, primarily due to the delivery of orders late in 1997 for which payment had not been received by year end. Inventories decreased $268,477, primarily due to the write-off of approximately $2,111,000 for obsolete inventory and an increase in inventory reserve. The charge was partially offset by an increase in inventory needed to fill orders deliverable in early 1998. Demonstration inventory decreased approximately 36% from $1,542,667 at December 31, 1996, to $990,054 at December 31, 1997, due primarily to additional allowance recorded in accordance with the Company's policy (Note 2). Total current liabilities as of December 31, 1997 increased $525,979, or approximately 8%, from December 31, 1996, primarily as a result of a $991,498 increase in accounts payable. Accounts payable increased due to the purchase of inventory used to fill orders in late 1997 and early 1998. Notes payable decreased by $613,921, or approximately 30%, from December 31, 1996, a primary reason for an approximate 62% decrease in cash. Total stockholders' equity increased $1,772,223, or approximately 13%, from December 31, 1996, primarily because of two private equity placements and a conversion of 13 debt, which were partially offset by a $5,817,365 increase in accumulated deficit as a result of the net loss for the year. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Revenues Revenues for the year ended December 31, 1997 were $21,765,181 an approximately 28% increase over revenues for the year ended December 31, 1996. The increase was due to an increase in videoconferencing system sales and to growth in sales and account management commissions from wholly-owned subsidiary ETI, which contributed about 34% of the Company's consolidated 1997 revenues. ETI was acquired in October 1996. The Company's backlog of purchase orders for service and/or equipment at December 31, 1997 was approximately $9,000,000, an approximately 91% increase over the backlog of purchase orders of approximately $4,700,000 at December 31, 1996. Gross Margin Gross margin as a percentage of revenues for the year ended December 31, 1997 was approximately 48%, up from approximately 29% for the year ended December 31, 1996, due primarily to a full year of high margin sales and account management commissions from ETI, a sales agency for a number of telecommunications companies, and also due to an increase in sales of higher margin videoconferencing system products and, corporate-wide cost reduction initiatives. The percentage would have been higher had the Company not taken a charge of approximately $2,111,000 to reflect obsolescence of certain inventory and to increase inventory reserve. Selling, General & Administrative Expenses Selling, general and administrative expenses for the year ended December 31, 1997 were $14,939,302, an increase of $4,728,361, or approximately 46%, over the year ended December 31, 1996, due to an increase in the Company's sales, marketing and distribution initiatives in the United States (primarily due to the October 1996 acquisition of ETI and its sales force) and the Far East. Research and Development Expenses The Company charges research and development costs to expense as incurred until technological feasibility of a software product has been established. Software development costs incurred after technological feasibility has been established are capitalized and amortized over the useful life of the product. For the year ended December 31, 1997, the Company's research and development expenses were $1,031,814, an approximate 13% decrease over the year ended December 31, 1996. Expenses in 1996 had been somewhat higher than historical levels, due to an expansion in the research and development workforce to accommodate projects related to forthcoming generations of the Omega product line and other software projects. Many of those 14 projects were completed or were winding down by first quarter 1997, and the workforce -- primarily at subsidiary VSI Solutions, Inc. -- was reduced. Other Expenses/Income Taxes Non-operating expenses and income taxes for the year ended December 31, 1997 were $269,410, an approximate 5% increase over non-operating expenses for the year ended December 31, 1996. Net Loss Net loss for the year ended December 31, 1997 was $5,817,366, an approximate 13% improvement over the net loss for the year ended December 31, 1996. Excluding a charge to reflect obsolescence of certain inventory and an inventory reserve of approximately $2,111,000, the net loss for the year was $3,706,366, an approximate 45% improvement over 1996. The decrease in the loss was primarily due to an approximate 28% increase in revenues and a substantial improvement in gross margins. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues Revenues for the year ended December 31, 1996 decreased approximately 17% to $17,055,947 from the $20,450,958 recorded during the year ended December 31, 1995. The decrease was due primarily to lower revenues for INS, as the sudden and unexpected death in early 1996 of INS' then-chairman and CEO, Bill Rogers, adversely affected sales efforts during the year. Core sales of videoconferencing systems also declined, due to longer than anticipated sales cycles in closing key accounts. The Company's backlog of purchase orders for service and/or equipment at December 31, 1996 was approximately $4,700,000, an increase of approximately 62% over the December 31, 1995 order backlog of approximately $2,900,000. Gross Margin Gross margin as a percentage of revenues was approximately 29% for the year ended December 31, 1996, a slight decrease from approximately 30% for the year ended December 31, 1995. Selling, General and Administrative Expenses The increase in selling, general and administrative expenses of $1,091,418, or approximately 12% over the year ended December 31, 1995 is the result of additional administrative costs associated with the acquisitions of INS and ETI, the addition of several new salespeople, and an increase in the Company's sales and marketing expenses to support strategic partner BellSouth's rollout of its videoconferencing sales and service program. 15 Research and Development Expenses The Company charges research and development costs to expense as incurred until technological feasibility of a software product has been established. Software development costs incurred after technological feasibility has been established are capitalized and amortized over the useful life of the product. For the year ended December 31, 1996, the Company's research and development expenses were $1,192,010, an approximate 25% increase over the year ended December 31, 1995. The increase in expense was a result of expanding the research and development workforce to accommodate efforts relating to forthcoming generations of the Omega product line and other software products. For the year ended December 31, 1996, development costs of $153,007 were capitalized as software development costs, compared to $345,097 capitalized for the year ended December 31, 1995. Other Expenses Non-operating expenses for the year ended December 31, 1996 decreased approximately 62% to $257,610, from $680,616 for the year ended December 31, 1995. This decrease was primarily due to a reduction in costs associated with the Company's secured credit facilities. Net Loss Net loss for the year ended December 31, 1996 was $6,706,894, representing approximately 39% of revenue, as compared to $5,340,557, or approximately 26% of revenue, for the year ended December 31, 1995. The increase in losses was due to an approximate 17% decrease in revenues as well as a 12% increase in selling, general and administrative expenses. The decrease in revenues was attributed to lower revenues for INS during 1996 and a longer than anticipated sales cycle for some videoconferencing orders. LIQUIDITY AND SOURCES OF CAPITAL General On February 23, 1998, the Company issued $3,000,000 of 5% Convertible Debentures due February 2000 (the "Debentures"), the proceeds of which were utilized for working capital purposes. Subject to acceptance by the Company, the Debenture purchaser may purchase an additional $2,000,000 of Debentures on or before May 24, 1998. The Debentures are convertible into shares of common stock of the Company at the option of the holder, as follows: 33-1/3% commencing on May 24, 1998; 66-2/3% commencing on June 23, 1998; and 100% commencing on July 23, 1998. Any conversion shall be the lessor of (i) $2.00 per share or (ii) 85% of the average closing bid price of the Company's Common Stock. "Average closing bid price" is defined to mean the lowest average of the daily last bid price for the Common Stock for any three trading days in any 20 day period preceding the conversion. The Company may, at its option, redeem the Debentures at any time prior to February 23, 1999 at a price equal to 115% of the outstanding principal amount thereof, plus any accrued but unpaid interest. During 1997, the Company issued an aggregate of 2,253,882 shares of Common Stock in private placement transactions. The net proceeds of $2,487,500 were added to the working capital of the Company and utilized for general corporate purposes. As of December 31, 1997, the Company had cash and cash equivalents of $866,009. The Company's liquidity sources also include existing credit facilities. In order to meet its cash flow and working capital requirements, the Company may require additional financing in 1998. This additional funding could be in the form of debt, equity or both. A reduction in operating expenses could also be effected. However, there can be no assurance that the Company will be able to obtain such financing if and when needed, or that if obtained, such financing will be sufficient or on terms and conditions acceptable to the Company. 16 Credit Facilities VSI Since June 1995, Videoconferencing Systems, Inc. (VSI), a subsidiary of the Company, has had a revolving credit and security agreement with Fidelity Funding of California, Inc. This credit facility provides the Company with up to $4,000,000 at an interest rate of prime plus 2%. Funds available under the credit facility are based on 80% of eligible VSI accounts receivable invoices, with certain restrictions. The credit facility is secured by the accounts receivable, inventory and certain fixed assets of VSI. At March 9, 1998, approximately $325,000 was owed to Fidelity Funding under the credit facility. In March, 1998, VSI was approved for a working capital loan for approximately $2,000,000 from AmTrade International Bank of Georgia. The loan is guaranteed by the Export-Import Bank of the United States, and is collateralized by a letter of credit from a VSI customer. Funds will be used for pre-/post-export financing for the manufacture and delivery of videoconferencing equipment in China. The interest rate is prime plus 2.5%. Repayment will be made through proceeds of the letter of credit, which will be applied first to the loan principal and interest, with the remaining amount remitted to VSI. ETI In October, 1997, ETI, a wholly-owned subsidiary of the Company, entered into a revolving credit and security agreement with Foothill Capital Inc. This credit facility provides ETI with up to $1,500,000 at an interest rate of prime plus 2%. Funds available under the credit facility are based on 80% of eligible ETI accounts receivable invoices, with certain restrictions. The credit facility is secured by accounts receivables, inventory and fixed assets of ETI. At March 9, 1998, approximately $157,000 was owed to Foothill Capital. VSI, n.v. In February, 1998, Videoconferencing Systems, n.v., a wholly-owned subsidiary of the Company, entered into a revolving credit and security agreement with Kredietbank, n.v. This credit facility provides Videoconferencing Systems, n.v. with up to $550,000 at an interest rate of prime plus 1%. The credit facility is secured by 550,000 shares of Common Stock of the Company, held in escrow by Kredietbank, n.v. At March 9, 1998, no amounts were outstanding under this credit facility. As of December 31, 1997, Videoconferencing Systems, n.v. had a secured bank credit facility of $219,030, of which $154,938 was outstanding at that time. INS In December 1996, INS, a wholly-owned subsidiary of the Company, established a revolving credit and security agreement with Presidential Financial Corporation. This credit facility provides INS with up to $750,000 at an interest rate of prime plus 3%. Funds available under the credit facility are based on 80% of accounts receivable invoices, with certain restrictions. The credit facility is secured by accounts receivables, inventory and fixed assets of INS. At March 9, 1998, approximately $121,000 was owed to Presidential Financial Corporation. 17 ACCUMULATED DEFICIT As of December 31, 1997, the Company had an accumulated deficit of $29,941,875, of which $5,817,366 was realized in 1997. The Company believes that given its highest ever purchase order backlog, recent debt financing for working capital purposes, several revolving credit facilities and recent management changes, the Company will continue to aggressively compete in the global videoconferencing and multimedia marketplace. As of December 31, 1997, the Company had operating loss carryforwards for income tax purposes of approximately $20,000,000 available to reduce taxable income through 2012. The Company also has research and development credits of approximately $89,000 available to reduce income taxes payable through 2002. During 1993, the Company experienced a change in control, as defined under Section 382 of the Internal Revenue Code. As a result, the utilization of approximately $7,000,000 in tax loss carryforwards will be limited to approximately $1,000,000 annually. YEAR 2000 As of December 31, 1997, the Company has assessed the impact of the Year 2000 issue on its computer systems and is in the process of remediating the affected hardware and software. Expenditures for the Year 2000 project have not had, nor are they expected to have, a material impact on the Company's consolidated financial position, results of operations or cash flows. NEW ACCOUNTING PRONOUNCEMENTS During 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which will be effective for the Company beginning in fiscal 1998. The Company does not believe that these statements will significantly change its financial statement disclosure. FORWARD-LOOKING STATEMENTS Certain statements contained in this filing are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to financial results and plans for future business development activities, and are thus prospective. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Potential risks and uncertainties include, but are not limited to, economic conditions, competition and other uncertainties detailed from time to time in the Company's Securities and Exchange Commission filings. 18 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following financial statements are filed with this report: Report of Independent Public Accountants Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996 Consolidated Statements of Operations for Years Ended December 31, 1997, 1996 and 1995 Consolidated Statement of Stockholders' Equity for Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of VSI Enterprises, Inc.: We have audited the accompanying consolidated balance sheet of VSI ENTERPRISES, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of VSI Enterprises, Inc. and subsidiaries as of December 31, 1997 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Atlanta, Georgia March 18, 1998 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of VSI Enterprises, Inc.: We have audited the accompanying consolidated balance sheet of. VSI ENTERPRISES, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of VSI Enterprises, Inc. and Subsidiaries as of December 31, 1996 and the consolidated results of their operations and their consolidated cash flows for the year then ended in conformity with generally accepted accounting principles. We previously audited and reported on the consolidated statements of operations, stockholders' equity, and cash flows of VSI Enterprises, Inc. and Subsidiaries for the year ended December 31, 1995, prior to their restatement for the 1996 pooling of interests with Integrated Network Services, Inc. The contribution of VSI Enterprises, Inc. and subsidiaries to total revenue and net loss represented 58% and 86% of the respective restated totals for 1995. Separate financial statements of INS included in the restated consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1995 were audited and reported on separately by other auditors. We also have audited the combination of the accompanying consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1995 after restatement for the 1996 pooling of interests; in our opinion, such consolidated statements have been properly combined on the basis described in Note 3 of the notes to the consolidated financial statements. /s/ Grant Thornton LLP Atlanta, Georgia February 21, 1997 21 VSI ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ASSETS 1997 1996 - ------------------------------------------------------- ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 866,009 $ 2,260,185 Accounts receivable, less allowance for doubtful accounts of $447,174 and $271,000 at December 31, 1997 and 1996, respectively 6,142,936 5,419,093 Inventories, less allowance of $178,235 and $494,000 at December 31, 1997 and 1996, respectively 2,541,754 2,810,231 Demonstration inventory, net of allowance of $839,184 and $374,922 at December 31, 1997 and 1996, respectively 990,054 1,542,667 Prepaid expenses and other current assets 438,665 365,435 ------------ ------------ Total current assets 10,979,418 12,397,611 ------------ ------------ PROPERTY AND EQUIPMENT, NET 1,194,908 1,356,313 ------------ ------------ OTHER ASSETS: Goodwill, net 9,020,715 9,537,558 Software development costs, net 658,052 980,110 Other long-term assets 1,027,366 560,665 ------------ ------------ Total other assets 10,706,133 11,078,333 ------------ ------------ $ 22,880,459 $ 24,832,257 ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 - ------------------------------------------------------- ------------ ------------ CURRENT LIABILITIES: Notes payable $ 1,422,367 $ 2,036,288 Short-term borrowings 154,938 127,605 Accounts payable 3,401,547 2,410,049 Accrued expenses 1,116,326 1,158,951 Accrued Commissions 687,180 305,001 Deferred revenue 507,177 725,662 ------------ ------------ Total current liabilities 7,289,535 6,763,556 ------------ ------------ CONVERTIBLE DEBENTURES 0 4,250,000 ------------ ------------ COMMITMENTS AND CONTINGENCIES (NOTE 12) STOCKHOLDERS' EQUITY: Preferred stock, $.00025 par value; authorized 800,000 shares, none issued and outstanding 0 0 Common stock, authorized 60,000,000 shares of $.00025 par value; issued and outstanding 46,184,970 and 39,516,249 shares at December 31, 1997 and 1996, respectively 11,546 9,879 Additional paid-in capital 45,976,291 38,222,005 Accumulated deficit (29,941,875) (24,124,509) Cumulative translation adjustment (455,038) (288,674) ------------ ------------ Total stockholders' equity 15,590,924 13,818,701 ------------ ------------ $ 22,880,459 $ 24,832,257 ============ ============
The accompanying notes are an integral part of these consolidated balance sheets. 22 VSI ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(as restated see Note 3) 1997 1996 1995 ------------ ------------ ------------ REVENUE: Videoconferencing systems $ 12,168,107 $ 11,159,943 $ 11,920,437 System integration 2,145,388 4,346,723 8,530,521 Commissions from telephone network reselling 7,451,686 1,549,281 0 ------------ ------------ ------------ 21,765,181 17,055,947 20,450,958 ------------ ------------ ------------ COSTS AND EXPENSES: Cost of videoconferencing systems 9,686,633 9,115,556 8,344,196 Cost of system integration 1,655,388 2,986,724 5,910,559 Selling, general, and administrative 14,939,302 10,210,941 9,119,523 Research and development 1,031,814 1,192,010 953,955 ------------ ------------ ------------ 27,313,137 23,505,231 24,328,233 ------------ ------------ ------------ Loss from operations (5,547,956) (6,449,284) (3,877,275) OTHER EXPENSES 76,169 257,610 680,616 ------------ ------------ ------------ Net loss from continuing operations before income taxes (5,624,125) (6,706,894) (4,557,891) INCOME TAXES 193,241 0 10,483 ------------ ------------ ------------ Net loss from continuing operations (5,817,366) (6,706,894) (4,568,374) DISCONTINUED OPERATIONS: Loss from operations (net of tax benefits of $236,000) 0 0 (539,053) Loss on disposal (net of tax benefit of $102,000) 0 0 (233,130) ------------ ------------ ------------ Loss from discontinued operations 0 0 (772,183) ------------ ------------ ------------ Net loss $ (5,817,366) $ (6,706,894) $ (5,340,557) ============ ============ ============ NET LOSS PER COMMON SHARE: Loss from continuing operations $ (.13) $ (.18) $ (.15) Loss from discontinued operations .00 .00 (.02) ------------ ------------ ------------ $ (.13) $ (.18) $ (.17) ============ ============ ============ Weighted average shares outstanding 43,606,481 36,476,932 31,070,908 ============ ============ ============
The accompanying notes are an integral part of these consolidated statements. 23 Page 1 of 2 VSI ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
COMMON STOCK --------------------- ADDITIONAL CUMULATIVE NUMBER OF PAID-IN ACCUMULATED TRANSLATION SHARES PAR VALUE CAPITAL DEFICIT ADJUSTMENT TOTAL ---------- --------- ----------- ------------ ----------- ------------ BALANCE, DECEMBER 31, 1994 (AS RESTATED - NOTE 3) 26,481,868 $ 6,620 $16,600,715 $(12,077,058) $(129,089) $ 4,401,188 Purchase of treasury stock of INS 0 0 (163,561) 0 0 (163,561) Exercise of warrants, net of exercise costs of $77,989 6,424,470 1,606 8,473,641 0 0 8,475,247 Exercise of stock options 298,533 75 372,755 0 0 372,830 Issuance of common shares for employee stock purchase plan 52,975 13 68,181 0 0 68,194 Issuance of common shares for conversion of notes payable and related costs 646,275 161 722,739 0 0 722,900 Sale of common shares 362,319 91 499,909 0 0 500,000 Issuance of common shares in lieu of cash compensation 452,736 113 342,376 0 0 342,489 Issuance of common shares for products and services 100,000 25 874,083 0 0 874,108 Issuance of common shares for acquisition of VSI solutions 188,000 47 300,753 0 0 300,800 Foreign currency translation adjustment 0 0 0 0 (18,580) (18,580) Net loss 0 0 0 (5,340,557) 0 (5,340,557) ---------- ------- ----------- ------------ --------- ------------
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COMMON STOCK -------------------- ADDITIONAL CUMULATIVE NUMBER OF PAID-IN ACCUMULATED TRANSLATION SHARES PAR VALUE CAPITAL DEFICIT ADJUSTMENT TOTAL ---------- --------- ----------- ------------ ----------- ------------ BALANCE, DECEMBER 31, 1995 (AS RESTATED--NOTE 3) 35,007,176 $ 8,751 $28,091,591 $(17,417,615) $(147,669) $ 10,535,058 Issuance of common shares in lieu of cash compensation 110,775 28 139,464 0 0 139,492 Issuance of common shares for employee stock purchase plan 44,477 11 109,413 0 0 109,424 Exercise of stock options 305,631 76 298,789 0 0 298,865 Issuance of common shares for products and services 250,000 63 599,946 0 0 600,009 Issuance of common shares for conversion of notes payable 244,817 61 337,052 0 0 337,113 Private placement of common shares, net of issuance costs of $41,998 1,122,361 281 2,388,247 0 0 2,388,528 Issuance of common shares for acquisition of Eastern Telecom, Inc. 2,007,339 502 5,499,498 0 0 5,500,000 Issuance of common shares for conversion of convertible debentures 423,673 106 758,005 0 0 758,111 Foreign currency translation adjustment 0 0 0 0 (141,005) (141,005) Net loss 0 0 0 (6,706,894) 0 (6,706,894) ---------- ------- ----------- ------------ --------- ------------ BALANCE, DECEMBER 31, 1996 39,516,249 9,879 38,222,005 (24,124,509) (288,674) 13,818,701 Issuance of common shares for products and services 550,000 138 650,001 0 0 650,139 Issuance of common shares for conversion of convertible debentures 3,465,473 866 4,352,772 0 0 4,353,638 Issuance of common shares for employee stock purchase plan 146,612 37 156,002 0 0 156,039 Issuance of common shares for conversion of private placement 2,253,882 563 2,486,937 0 0 2,487,500 Exercise of stock options 252,754 63 108,574 0 0 108,637 Foreign currency translation adjustment 0 0 0 0 (166,364) (166,364) Net loss for the year 0 0 0 (5,817,366) 0 (5,817,366) ---------- ------- ----------- ------------ --------- ------------ BALANCE, DECEMBER 31, 1997 46,184,970 $11,546 $45,976,291 $(29,941,875) $(455,038) $ 15,590,924 ========== ======= =========== ============ ========= ============
The accompanying notes are an integral part of these consolidated statements. 25 VSI ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(as restated see Note 3) 1997 1996 1995 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (5,817,366) $ (6,706,894) $ (5,340,557) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,438,054 1,420,547 1,092,666 Provision for doubtful accounts 176,174 62,000 431,512 Allowance to reduce inventory to lower of cost or market (315,645) 250,000 78,025 Issuance of common stock in lieu of cash compensation 0 139,492 342,489 Loss on sale of property and equipment 0 28,145 1,069 Changes in related assets and liabilities, net of businesses acquired: Accounts receivable (900,018) 2,797,035 (2,472,752) Inventories 584,122 794,139 (1,948,281) Demonstration inventory 568,877 (1,491,934) (59,109) Prepaid expenses and other current assets (73,230) 344,616 (197,925) Accounts payable 991,498 (139,772) 815,555 Accrued expenses 339,554 (746,742) 196,400 Deferred revenue (218,484) 289,483 139,955 ------------ ------------ ------------ Net cash used in operating activities (3,226,464) (2,959,885) (6,920,953) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for business acquisitions, net of cash acquired 0 (3,668,131) (62,946) Proceeds from sale of property and equipment 0 30,314 30,213 Purchases of property and equipment (400,230) (418,304) (623,625) Capitalized software development costs (77,886) (153,007) (345,097) Other assets (442,596) (405,760) 43,632 ------------ ------------ ------------ Net cash used in investing activities (920,712) (4,614,888) (957,823) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Change in notes payable and short-term borrowings, net (586,588) (2,062,849) 1,433,986 Proceeds from convertible debentures 0 5,000,000 0 Proceeds from exercise of stock options and warrants, net of related costs 264,676 298,865 8,848,077 Proceeds from issuance of common stock, net of issuance costs 650,139 109,424 568,194 Proceeds from private placements financings, net of issuance costs 2,487,500 2,388,528 0 Acquisition of treasury stock by INS 0 0 (163,561) ------------ ------------ ------------ Net cash provided by financing activities 2,815,727 5,733,968 10,686,696 ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (62,727) (101,623) (74,361) ------------ ------------ ------------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,394,176) (1,942,428) 2,733,559 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,260,185 4,202,613 1,469,054 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 866,009 $ 2,260,185 $ 4,202,613 ============ ============ ============ SUPPLEMENTARY DISCLOSURES: Interest paid $ 247,744 $ 357,216 $ 436,059 ============ ============ ============ Income taxes paid $ 180,000 $ 0 $ 10,483 ============ ============ ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: NONCASH INVESTING AND FINANCING ACTIVITIES: Conversion of debt to common stock $ 4,353,638 $ 1,095,224 $ 722,900 ============ ============ ============ Common stock issued for products and services $ 650,139 $ 600,009 $ 874,108 ============ ============ ============ ACQUISITIONS OF BUSINESSES: Fair value of assets acquired 0 9,540,923 396,282 Cash paid 0 (3,685,128) (78,318) Common stock and options issued 0 (5,500,000) (300,800) ------------ ------------ ------------ Liabilities assumed $ 0 $ 355,795 $ 17,164 ============ ============ ============
The accompanying notes are an integral part of these consolidated statements. 26 VSI ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 1. NATURE OF BUSINESS VSI Enterprises, Inc. and its wholly-owned subsidiaries (the "Company") were incorporated in Delaware in September 1988. The Company provides network multimedia products and services including videoconferencing systems, software, and service; design, installation, and integration of local and wide area computer networks; and commission-based reselling of telephone network services for telephone operating companies and related communication entities. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, including all wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. CASH AND CASH EQUIVALENTS For financial reporting purposes, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. 27 INVENTORIES Inventories primarily consist of videoconferencing system and integration services, components and parts and are valued at the lower of cost (first-in, first-out method) or market. DEMONSTRATION INVENTORY Demonstration inventory is stated at cost. Demonstration inventory allowance is provided for in amounts sufficient to reflect the asset at its estimated fair value. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated useful lives on straight-line basis. GOODWILL The excess acquisition cost over the fair value of net assets of acquired businesses are amortized over 20 years on a straight-line basis. Accumulated amortization of goodwill was $802,584 and $309,846 at December 31, 1997 and 1996, respectively. Amortization charged to operations was $492,738, $156,784, and $44,799 for the years ended December 31, 1997, 1996, and 1995, respectively. SOFTWARE DEVELOPMENT COSTS All software development costs are charged to expense as incurred until technological feasibility has been established for the product. Software development costs incurred after technological feasibility has been established are capitalized and amortized, commencing with product release, on a straight-line basis over three years or the useful life of the product, whichever is shorter. Accumulated amortization of software development costs was $1,052,194 and $652,249 at December 31, 1997 and 1996, respectively. Amortization expense charged to operations was $399,945, $416,407 and $180,352 for the years ended December 31, 1997, 1996 and 1995 respectively. INVESTMENTS The Company accounts for investments in entities in which it owns less than 20% under the cost method. At December 31, 1997 and 1996, other assets included $544,781 and 28 $406,000, respectively, representing the Company's cost investment in Global Telemedix. Global Telemedix provides computer hardware and software to healthcare providers. At December 31, 1997, other assets also included $400,000, representing the Company's cost investment in Educational Video Conferencing ("EVC"). EVC acts as a marketing and technological bridge between higher education institutions and corporations. Investments are included in other long term assets in the accompanying consolidated balance sheets. At December 31, 1997 and 1996, receivables outstanding from Global Telemedix and EVC were approximately $250,000 and $0, respectively. Further, sales to Global Telemedix and EVC were approximately $1,038,000, $35,000 and $0 for the years ended December 31, 1997, 1996 and 1995 respectively. ACCOUNTING FOR IMPAIRMENTS IN LONG-LIVED ASSETS Long-lived assets and identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of assets may not be recoverable. Management periodically evaluates the carrying value and the economic useful life of its long-lived assets based on the Company's operating performance and the expected future undiscounted cash flows and will adjust the carrying amount of assets which may not be recoverable. Management believes long-lived assets in the accompanying consolidated balance sheets are appropriately valued. FOREIGN CURRENCY TRANSLATION The asset and liability accounts of the Company's foreign subsidiaries are translated into U.S. dollars at the current exchange rate in effect at the balance sheet date. Stockholders' equity is translated at historical rates. Income statement items are translated at average currency exchange rates. The resulting translation adjustment is recorded as a separate component of stockholders' equity. Transaction gains and losses were not significant for any period presented. REVENUE RECOGNITION Revenue from sales of videoconferencing systems and related maintenance contracts on these systems are included in videoconferencing systems revenues. Revenue on system sales are recognized upon shipment. Revenue on maintenance contracts are recognized over the term of the related contract. System integration revenues include computer network design, installation and integration services and sales of related computer hardware. Revenues on integration services are recognized as services are performed. Integration hardware revenues are recognized upon shipment. Commission revenue from telephone network service sales are recognized upon receipt of order and when the Company has no further obligation related to the order. INCOME TAXES The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets when it is more likely than not that the asset will not be realized. (Note 9) STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Effective in 1995, the Company adopted the disclosure option of Statement of Financial Accounting 29 Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 requires that companies that do not choose to account for stock-based compensation as prescribed by the statement, shall disclose the proforma effects on earnings and earnings per share as if SFAS No. 123 had been adopted. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS No. 123. (Note 8) NET LOSS PER SHARE In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". That statement requires the disclosure of basic net income (loss) per share and diluted net income (loss) per share when different from basic. Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share gives effect to all potentially dilutive securities. There is no difference between basic loss per share and diluted loss per share for any period presented. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments include cash and cash equivalents, notes payable and, in 1996, convertible debentures. Estimates of fair value of these instruments are as follows: CASH AND CASH EQUIVALENTS The carrying amount of cash and cash equivalents approximates fair value due to the relatively short maturity of these instruments. NOTES PAYABLE AND CONVERTIBLE DEBENTURES The carrying amount of the Company's notes payable and convertible debentures approximate fair value based on borrowing rates currently available to the Company for borrowings with comparable terms and conditions. NEW ACCOUNTING PRONOUNCEMENTS During 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which will be effective for the Company beginning in fiscal 1998. The Company does not believe that these statements will significantly change its financial statement disclosures. RECLASSIFICATIONS Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform to the current year presentation. TECHNOLOGICAL CHANGE AND NEW PRODUCTS The market for the Company's products is characterized by rapidly changing technology, evolving industry standards and frequent product introductions. Product introductions are generally characterized by increased functionally and better picture quality at reduced prices. The introduction of products embodying new technology may render existing products obsolete and unmarketable. The Company's ability to successfully develop and introduce on a timely basis new and enhanced products that embody new technology, and achieve levels of functionality and price acceptable to the market, will be a significant factor in the Company's ability to grow and to remain competitive. If the Company is unable, for technological or other reasons, to develop competitive products in a timely manner in response to changes in the industry, the Company's business and operating results will be materially and adversely affected. DEPENDENCE ON THIRD PARTIES Substantially all of the Company's components, subsystems and assemblies are made by outside vendors. Disruption in supply, a significant increase in price of one or more of these components or failure of a third-party supplier to remain competitive in functionality or price could have a material adverse effect on the Company's business and operating results. There can be no assurance that the Company will not experience such problems in the future. Similarly, excessive rework costs associated with defective components or process errors associated with the Company's anticipated new product line of videoconferencing systems could adversely affect the Company's business and operating results. FOREIGN SALES AND OPERATIONS International sales and operations are subject to inherent risks, including difficulties and delays in obtaining pricing approvals and reimbursement, unexpected changes in regulatory requirements, tariffs and other barriers, political instability, difficulties in staffing and managing foreign operations, longer payment cycles, greater difficulty in accounts receivable collection and adverse tax consequences. Currency translation gains and losses on the conversion to United States dollars and international operations could contribute to fluctuations in the Company's results of operations. If for any reason exchange or price controls or other restrictions on the conversion or repatriation of foreign currencies were imposed, the Company's operating results could be adversely affected. There can be no assurance that these factors will not have an adverse impact on the Company's future international sales and operations and, consequently, on the Company's operating results. COMPETITION Competition in the video communications market is intense. In the videoconferencing market, the Company's primary competitors are PictureTel Corporation and VTEL Corporation, each of which has greater resources and market share than those of the Company. The Company expects other competitors, some with significantly greater technical and financial resources, to enter the videoconferencing market. If the Company cannot continue to offer new videoconferencing products with improved performance and reduced cost, its competitive position will erode. Moreover, competitive price reductions may adversely affect the Company's results of operations. 30 3. MERGER AND ACQUISITIONS INS MERGER On June 25, 1996, the Company, through its wholly-owned subsidiary, INS Acquisition Co., issued 481,670 shares of its common stock in exchange for all of the outstanding common stock of Integrated Network Services, Inc. ("INS"). The merger has been accounted for as a pooling of interests and accordingly, the Company's consolidated financial statements have been restated to include the accounts and operations of INS for all periods prior to the merger. INS provides integration services for local and wide area networks. Separate results of operations for the periods prior to the merger are as follows for the years ending December 31, 1996 and 1995:
1996 1995 ------------ ------------ Revenue: VSI $ 12,709,224 $ 11,920,437 INS 4,346,723 8,530,521 ------------ ------------ Combined $ 17,055,947 $ 20,450,958 ============ ============ Net (loss) earnings from continuing operations: VSI $ (5,992,477) $ (4,592,340) INS (714,417) 23,966 ------------ ------------ Combined $ (6,706,894) $ (4,568,374) ============ ============ Net (loss): VSI $ (5,992,477) $ (4,592,340) INS (714,417) (748,217) ------------ ------------ Combined $ (6,706,894) $ (5,340,557) ============ ============
ACQUISITIONS In October 1996, the Company acquired all of the outstanding common stock of Eastern Telecom, Inc. ("ETI") in exchange for 2,007,339 shares of VSI common stock, 127,754 options to purchase VSI common stock at less than $.01 per share and $3,500,000 in cash. The cash portion of the purchase was funded from the issuance of $5,000,000 of convertible debentures. The acquisition was valued at approximately $9,185,000 including acquisition costs of approximately $185,000. ETI is engaged in the selling of network services of telephone operating companies and long distance carriers. 31 In April 1995, the Company acquired all of the outstanding common stock of cR Solutions, Inc. in exchange for 188,000 shares of VSI common stock. The transaction was valued at approximately $379,000, including acquisition costs of approximately $78,000. cR Solutions, whose name as changed to VSI Solutions, is engaged in the development of software for videoconferencing systems. The ETI and cR Solutions acquisitions were accounted for as purchases. Accordingly, the purchase prices were allocated to assets and liabilities based on their estimated fair values at the dates of acquisition. Results of operations of ETI and cR Solutions have been included in the consolidated financial statements from the respective date of each acquisition. Goodwill of approximately $9,000,000 related to the ETI purchase is being amortized on a straight-line basis over 20 years. The unaudited pro forma results of operations which follow assume that the ETI acquisition had occurred at the beginning of each period presented. The results of operations of cR Solutions were not material. In addition to combining the historical results of operations of the companies, the pro forma calculations include adjustments for the estimated effects on the Company's historical results of operations for amortization and interest. These results are not necessarily indicative of the results that would have occurred if the transactions had occurred at the beginning of each period presented nor are the results indicative of future results. Unaudited pro forma results of operations for the years ended December 31, 1996 and 1995 are as follows:
1996 1995 ----------- ----------- Revenue $20,962,562 $25,068,972 Net loss from continuing operations (5,906,652) (3,364,029) Net loss (5,906,652) (4,136,212) Net loss per common share from continuing operations $ (.16) $ (.10) Net loss per common share (.16) (.13)
4. DISCONTINUED OPERATIONS Subsequent to December 31,1995, INS discontinued the operations of its cable television system design and commercial personal computer distribution businesses. These operations are accounted for as discontinued operations, and accordingly, their operations are segregated in the accompanying consolidated statements of operations. Net sales, operating expenses, and other expenses for 1995 have been reclassified for amounts associated with the discontinued businesses. 32 The loss on disposal of discontinued businesses, including provisions to reduce related assets to estimated net realizable value and estimated losses from operations during the disposal period, was $233,130. Summary operating results of discontinued operations, excluding the loss on disposal, is as follows for the year ended December 31, 1995:
Revenue $6,336,394 Net loss from discontinued operations (net of tax benefits of $236,000) (539,053)
5. PROPERTY AND EQUIPMENT Property and equipment consist of the following as of December 31, 1997 and 1996:
Estimated 1997 1996 Service Life -------------- -------------- ------------- Machinery and equipment $3,199,101 $3,095,859 3-10 years Furniture and fixtures 668,132 475,068 10 years Leasehold improvements 169,857 65,933 5 years -------------- -------------- 4,037,090 3,636,860 Less accumulated depreciation 2,842,182 2,280,547 -------------- -------------- $1,194,908 $1,356,313 ============== ==============
Certain property and equipment are pledged under financing arrangements. (Note 6) Depreciation expense charged to operations was approximately $561,635, $814,000, and $722,000 for the years ended December 31, 1997, 1996 and 1995, respectively and is included in selling, general and administrative expense in the accompanying consolidated statements of operation. 33 6. NOTES PAYABLE AND SHORT-TERM BORROWINGS NOTES PAYABLE Notes payable consist of the following:
1997 1996 ---------- ---------- VSI line of credit; provides for maximum borrowings of $4,000,000, limited to 80% of eligible accounts receivable, interest payable monthly at the prime rate plus 2% (10.5% at December 31, 1997); collateralized by accounts receivable, certain property and equipment and inventory of VSI. $ 905,684 $1,534,647 INS line of credit; provides for maximum borrowings of $750,000, limited to 80% of eligible accounts receivable; interest payable monthly at the prime rate plus 3% (11.5% at December 31, 1997); collateralized by accounts receivable, property and equipment and inventory of INS. 279,355 181,725 ETI line of credit; provides for maximum borrowings of $1,500,000, limited to 80% of eligible accounts receivable; interest payable monthly at the prime rate plus 2% (10.5% at December 31, 1997); collateralized by accounts receivable, property and equipment and inventory of ETI. 210,543 0 Note payable to bank of European subsidiary; interest payable monthly at 5% 26,785 315,278 Other 0 4,638 ---------- ---------- $1,422,367 $2,036,288 ========== ==========
In 1997, the Company adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (the "Statement"). This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. At December 31, 1997 and 1996, the Company has recognized approximately $1,396,000 and $1,716,000 of accounts receivable financing, respectively, as notes payable in the accompanying balance sheets. During 1996, note agreements with directors were terminated. The remaining balances of these notes of $299,656 plus accrued interest of $37,457, were retired by the issuance of 244,817 common shares. Interest expense under notes due to directors totaled 34 approximately $0, $16,000, and $71,000 for the years ended December 31, 1997, 1996, and 1995, respectively. The common stock and common stock purchase warrants issued as consideration for the note agreements with the director have been accounted for as debt issue costs and are amortized on a straight-line basis over the terms of the agreements. SHORT-TERM BORROWINGS At December 31, 1997, the Company's foreign subsidiary had short-term borrowings which provided for maximum borrowings of approximately $219,000 and $570,000 at December 31, 1997 and 1996, respectively. These bank credit facilities are collateralized by the subsidiary's accounts receivable and inventory and bear interest at 8.75%. Outstanding borrowings under these agreements were $ 154,938 and $127,605 at December 31, 1997 and 1996, respectively. 7. CONVERTIBLE DEBENTURES In September 1996, the Company issued $5,000,000 of 5% convertible debentures, due in September 1999. The debentures were convertible into common stock at the lesser of the per share market price at the time of funding or 80% of the per share price of the common stock at the time of conversion. During 1997 and 1996, all convertible debentures amounting to $5,000,000 plus accrued interest of $111,749 were converted into 3,889,146 common shares. As of December 31, 1997, there were no outstanding convertible debentures. 8. STOCK OPTIONS, WARRANTS, AND EMPLOYEE STOCK PURCHASE PLAN STOCK OPTION PLANS The Company's board of directors has approved a stock option plan which covers up to 2,700,000 shares of common stock. The plan provides for the expiration of options ten years from the date of grant and requires the exercise price of the options granted to be at least equal to 100% of market value on the date granted. Stock options transactions for each of the three years in the year ended December 31, 1997 are summarized below: 35
1997 1996 1995 --------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------- -------- --------- -------- --------- -------- Outstanding, beginning of year 1,923,425 $1.63 1,936,967 $1.48 1,285,012 $1.01 Granted 336,000 1.55 550,954 2.27 1,002,646 2.01 Exercised (252,754) (.84) (305,631) .98 (298,533) 1.25 Forfeited (103,202) 2.69 (258,865) 2.58 (52,158) 1.25 --------- ----- --------- ----- --------- ----- Outstanding, end of year 1,903,469 1.72 1,923,425 $1.63 1,936,967 $1.48 ========= ===== ========= ===== ========= =====
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable --------------------------------------------------------------------------------------------------- Weighted Range of Number Average Weighted Number Weighted Excise Outstanding at Remaining Average Exercisable at Average Price December 31, Contractual Exercise December 31, Exercise 1997 Life (Years) Price 1997 Price ---------- -------------- -------------- --------- -------------- ---------- $0.47-0.94 397,667 6.7 $ .63 397,667 $0.63 $1.06-1.94 944,002 7.8 1.45 632,170 1.45 $2.13-2.81 336,854 8.0 2.35 194,854 2.35 $3.63-4.31 224,946 8.1 3.88 122,466 3.88 ----------- -------- ------- ---------- ------- 1,903,469 7.6 $1.72 1,347,157 $1.72 =========== ======== ======= ========== =======
The Company uses the intrinsic value method in accounting for its stock option plans. In applying this method, no compensation cost has been recognized. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans, the Company's net loss and loss per share would have resulted in the pro forma amounts indicated below:
1997 1996 1995 ------------ ------------- ------------- Net loss As reported $(5,817,366) $(6,706,894) $(5,340,557) Pro forma (6,490,242) (7,509,903) (5,615,345) Net loss per common share As reported $ (.13) $ (.18) $ (.17) Pro forma (.15) (.21) (.18)
36 For purposes of the pro forma amounts above, the fair value of each option grant was estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 1997, 1996 and 1995, respectively; expected volatility of 88%, 110% and 100% risk-free interest rates of 5.9%-6.7%, 5.3%-6.6% and 5.8%-7.8% and expected lives of 3-7 years for all periods presented. WARRANTS In connection with the purchase of the outstanding notes payable and establishment of a line of credit during 1994, 250,000 common stock purchase warrants were granted to a director at an exercise price of $0.40 per share. These warrants expire in July 2004. EMPLOYEE STOCK PURCHASE PLAN The Company has an employee stock purchase plan ("Plan") that provides for the sale of up to 300,000 shares of common stock to eligible employees. The purchase price for shares of common stock purchased pursuant to the Plan is the lesser of 85% of the fair market value of common stock on the first pay date or last pay date of each plan period. 146,612 and 44,477 shares of common stock were purchased by employees under this Plan for the years ended December 31, 1997 and 1996, respectively. 9. INCOME TAXES The Company's temporary differences result in a net deferred income tax asset which is reduced to zero by a related deferred tax valuation allowance, summarized as follows at December 31, 1997 and 1996:
1997 1996 ---------- ---------- Deferred tax assets: Operating loss carryforwards $7,700,000 $6,232,000 Nondeductible accruals and allowances 758,000 359,000 Capitalized inventory costs 147,000 151,000 Tax credit carryforwards 89,000 89,000 Other 205,000 219,000 ---------- ---------- Gross deferred tax assets 8,899,000 7,050,000 Deferred tax asset valuation allowance (8,689,000) (6,883,000) ---------- ---------- Net deferred tax asset 210,000 167,000 ---------- ---------- Deferred tax liabilities (210,000) (167,000) ---------- ---------- Net deferred tax $ 0 $ 0 ========== ==========
Income tax expense for 1997 represents state income taxes associated with the operations 37 of ETI and are calculated using the statutory rates applicable in the various states to which income has been apportioned. Income tax expense for 1995 represents income tax expense of INS and approximated income taxes as computed at the statutory rates for the separate pretax earnings of INS. At December 31, 1997, the Company had operating loss carryforwards for U.S. income tax purposes of approximately $20,000,000 available to reduce future taxable income and approximately $89,000 of investment and research and experimental credits available to reduce future income taxes payable, which expire in varying amounts through the year 2012. The Company's European subsidiary has net operating loss carryforwards of approximately $3,000,000 that can be used to offset future taxable income. These carryforwards can be carried forward indefinitely. The resulting deferred income tax asset has been reduced to zero by a related valuation allowance. The Company experienced a change in control, as defined under Section 382 of the Internal Revenue Code, during calendar year 1993. As a result, the utilization of approximately $7,000,000 in tax loss carryforwards will be limited to approximately $1,000,000 annually. 10. MAJOR CUSTOMERS Revenue from healthcare providers and related entities comprised approximately 10%, 25%, and 42% of consolidated revenues for the years ended December 31, 1997, 1996, and 1995, respectively. Revenue from telephone operating companies and related communications entities comprised approximately 43%, 23%, and 18% of consolidated revenues for the years ended December 31, 1997, 1996, and 1995, respectively. At December 31, 1997 and 1996, accounts receivable from telephone operating companies and related communication entities comprised 44% and 46%, respectively, of consolidated receivables, and accounts receivable from health care providers comprised 7% and 17%, respectively of consolidated receivables. Sales to one customer accounted for approximately 27%, 14%, and 12% of consolidated sales for the years ended December 31, 1997, 1996, and 1995, respectively. Additionally, approximately 28% of consolidated accounts receivable at December 31, 1997 were from one customer; at December 31, 1996, approximately 43% of consolidated accounts receivable were from two customers, accounting for 31% and 12% of consolidated accounts receivable. Management believes that concentration of credit risk with respect to trade receivables is minimal due to the composition of the customer base. The Company's customers are primarily large national and multinational companies and agencies of the U.S. government. Allowances are maintained for potential credit losses, and such losses have been within management's expectations. The Company's operations are subject to rapid technological developments. Management 38 periodically evaluates the realizability of its technology-related assets, including inventories, software development costs and goodwill. During the year ended December 31, 1997, the Company recorded approximately $2,111,000 of additional cost of videoconferencing systems related to the write down of certain inventories determined to be technologically obsolete. Management believes that no material impairment of remaining inventories and other assets exists at December 31, 1997. It is possible, however, that management's estimates may change in the near term due to technological, regulatory, and other changes in the Company's industry. 11. OPERATIONS BY SEGMENT The following table presents information regarding the Company's different geographical regions:
For the Years Ended December 31, -------------------------------- 1997 1996 1995 ------------------------------------------------ Revenue: United States $ 18,996,899 $ 14,556,279 $ 17,723,799 Europe 2,768,282 2,499,668 2,727,159 ------------ ------------ ------------ $ 21,765,181 $ 17,055,947 $ 20,450,958 ============ ============ ============ Operating loss: United States $ (5,510,144) $ (5,721,928) $ (2,501,593) Europe (37,812) (727,356) (1,375,682) ------------ ------------ ------------ $ (5,547,956) $ (6,449,284) $ (3,877,275) ============ ============ ============ Capital expenditures: United States $ 331,897 $ 333,588 $ 520,053 Europe 68,333 84,716 103,572 ------------ ------------ ------------ $ 400,230 $ 418,304 $ 623,625 ============ ============ ============
December 31, ------------ 1997 1996 --------------------------- Identifiable assets: United States $22,002,184 $23,421,755 Europe 878,275 1,410,502 ----------- ----------- $22,880,459 $24,832,257 =========== ===========
39 The following table presents information regarding the Company's different industry segments:
For the Years Ended December 31, -------------------------------- 1997 1996 ------------------------------------ Revenue: Videoconferencing systems $ 14,313,495 $ 15,506,666 Telephone network reselling 7,451,686 1,549,281 ------------ ------------ $ 21,765,181 $ 17,055,947 ============ ============ Operating (loss) income: Videoconferencing systems $ (6,849,741) (6,935,577) Telephone network reselling 1,301,785 486,293 ------------ ----------- $ (5,547,956 $ (6,449,284) ============ ============ Capital Expenditures: Videoconferencing systems $ 98,096 369,117 Telephone network reselling 302,134 49,187 ------------ ----------- $ 400,230 $ 418,304 ============ ============ Identifiable Assets Videoconferencing systems $ 11,348,173 $ 14,564,569 Telephone network reselling 11,532,286 10,267,688 ------------ ------------ $ 22,880,459 $ 24,832,257 ============ ============
The Company acquired its telephone network reselling subsidiary in October 1996. 12. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases office space and equipment under noncancelable operating leases expiring at various dates through February 2002. Rent expense for the years ended December 31, 1997, 1996, and 1995 was approximately $572,000, $660,000, and $735,000, respectively. Approximate minimum annual future rental payments under the leases are as follows at December 31:
Year ending: 1998 $ 432,000 1999 341,000 2000 328,000 2001 360,000 2002 216,000 ---------- $1,677,000 ==========
LITIGATION In January 1997, the Company together with an officer were named as defendants in a 40 lawsuit filed by certain stockholders of the Company. The lawsuit, which purported to represent a class of stockholders, alleged that the defendants made certain misrepresentations and omissions in connection with certain disclosures about the Company. On August 18, 1997, a motion filed by the Company to dismiss the lawsuit was granted. The Company is also involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations. 13. SUBSEQUENT EVENTS On February 23, 1998, the Company issued $3,000,000 of 5% Convertible Debentures due February 2000 (the "Debentures"), the proceeds of which were utilized for working capital purposes. Subject to acceptance by the Company, the Debenture purchaser may purchase an additional $2,000,000 of Debentures on or before May 24, 1998. The Debentures are convertible into shares of common stock of the Company at the option of the holder, as follows: 33-1/3% commencing on May 24, 1998; 66-2/3% commencing on June 23, 1998; and 100% commencing on July 23, 1998. Any conversion shall be the lessor of (i) $2.00 per share or (ii) 85% of the average closing bid price of the Company's Common Stock. "Average closing bid price" is defined to mean the lowest average of the daily last bid price for the Common Stock for any three trading days in any 20 day period preceding the conversion. The Company may, at its option, redeem the Debentures at any time prior to February 23, 1999 at a price equal to 115% of the outstanding principal amount thereof, plus any accrued but unpaid interest. In March 1998, VSI secured a working capital loan for approximately $2.0 million from AmTrade International Bank of Georgia. The loan is guaranteed by the Export-Import Bank of the United States, and is collateralized by a letter of credit from a VSI customer. Funds will be used for pre-/post-export financing for the manufacture and delivery of videoconferencing equipment in China. The interest rate is prime plus 2.5%. Repayment will be made through proceeds of the letter of credit, which will be applied first to the loan principal and interest, with the remaining amount remitted to VSI. In March 1998, Videoconferencing Systems, n.v., a wholly-owned subsidiary of the Company, entered into a revolving credit and security agreement with Kredietbank, n.v. This credit facility provides Videoconferencing Systems, n.v. with up to 20 million Belgium Francs or approximately $550,000, at an interest rate of prime plus 1%. The credit facility is secured by 550,000 shares of VSI Enterprises, Inc. common stock, held in escrow by Kredietbank, n.v. 41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no disagreements on accounting and financial disclosure matters which are required to be described by Item 304 of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information relating to directors and executive officers of the Company contained in the registrant's definitive proxy statement to be delivered to shareholders in connection with the 1998 annual meeting of shareholders scheduled to be held on May 19, 1998 is incorporated hereby by reference. ITEM 11. EXECUTIVE COMPENSATION. The information relating to executive compensation contained in the registrant's definitive proxy statement to be delivered to shareholders in connection with the 1998 annual meeting of shareholders scheduled to be held on May 19, 1998 is incorporated hereby by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information relating to security ownership of certain beneficial owners and management contained in the registrant's definitive proxy statement to be delivered to shareholders in connection with the 1998 annual meeting of shareholders scheduled to be held on May 19, 1998 is incorporated hereby by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information relating to related party transactions contained in the registrant's definitive proxy statement to be delivered to shareholders in connection with the 1998 annual meeting of shareholders scheduled to be held on May 19, 1998 is incorporated hereby by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. 42 The following financial statements and accountant's report have been filed as Item 8 in Part II of this report: Report of Independent Public Accountants Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996 Consolidated Statements of Operations for Years Ended December 31, 1997, 1996 and 1995 Consolidated Statement of Stockholders' Equity for Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 2. Financial Statement Schedules The following financial statement schedule of VSI Enterprises, Inc. for the years ended December 31, 1997, 1996 and 1995 is included pursuant to Item 8: Report of Independent Public Accountants............................S-1 Report of Independent Certified Public Accountants on Schedule II...S-2 Schedule II Valuation and Qualifying Accounts.................S-3 3. Exhibits. The following exhibits are filed with or incorporated by reference into this report. The exhibits which are denominated by an asterisk (*) were previously filed as a part of, and are hereby incorporated by reference from either (i) the Post-Effective Amendment No. 1 to the Company's Registration Statement on Form S-18 (File No. 33-27040-D) (referred to as "S-18 No. 1"), (ii) Post-Effective Amendment No. 2 to the Company's Registration Statement on Form S-18 (File No. 33-27040-D) (referred to as "S-18 No. 2"), (iii) Post-Effective Amendment No. 3 to the Company's Registration Statement on Form S-18 (File No. 33-27040-D) (referred to as "S-18 No. 3"); (iv) the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 1992 (referred to as "1992 10-Q"); (v) the Company's Annual Report on Form 10-K for the year ended March 31, 1993 (referred to as "1993 10-K"); (vi) the Company's Registration Statement Form S-1 (File No. 33-85754) (referred to as "S-1"); (vii) the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (referred to as "1994 10-K"); (viii) the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (referred to as "1995 10-K"); (ix) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (referred to as "1997 10-Q"); (x) the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (referred to as "1996 10-K"); and (xi) the Company's Form S-8 Registration Statement (File No. 333-18239, referred to as "S-8"). 43
EXHIBIT NO. DESCRIPTION OF EXHIBIT *3.1 Certificate of Incorporation, including Certificate of Stock Designation dated September 25, 1990, and amendments dated December 26, 1990, August 19, 1991 and October 17, 1991 (S-18 No. 3, Exhibit 3-1) 3.2 Amended and Restated Bylaws of the Registrant *3.3 Certificate of Amendment to Certificate of Incorporation filed on February 10, 1993 (1992 10-Q) *3.6 Certificate of Amendment to Certificate of Incorporation filed on February 13, 1995 (1994 10-K) *3.7 Certificate of Amendment to Certificate of Incorporation filed on September 8, 1995 (1995 10-K) *3.8 Certificate of Amendment to Certificate of Incorporation filed on April 21, 1997 (1997 10-Q, Exhibit 3.1.1) *10.3 1991 Stock Option Plan (S-18 No. 2, Exhibit 10.1(a)) *10.3.1 Amendment No. 1 to 1991 Stock Option Plan (1993 10-K) *10.3.2 Amendment No. 2 to 1991 Stock Option Plan (S-1) *10.3.3 Amendment No. 3 to 1991 Stock Option Plan (S-1) *10.4 Revolving Credit and Security Agreement dated June 7, 1995 by and between Videoconferencing Systems, Inc. ("VSI") and Fidelity Funding of California, Inc. (1995 10-K) *10.5 1995 Performance Warrant Plan (S-8, Exhibit 4.1) 10.6 Employment Agreement dated August 4, 1997, by and between the Registrant and Judi North *10.15 1994 Employee Stock Purchase Plan (1994 10-K) *21.1 Subsidiaries of the Registrant (1996 10-K) 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Grant Thornton LLP 27.1 Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended December 31, 1997. 44 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of VSI Enterprises, Inc.: We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of VSI ENTERPRISES, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 1997 and the related statements of operations, stockholders' equity, and cash flows for the year then ended and have issued our report thereon dated March 18, 1998. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14 hereon is the responsibility of management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects, the financial data for the year ended December 31, 1997 as required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Atlanta, Georgia March 18, 1998 S-1 45 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II To the Board of Directors and Stockholders of VSI Enterprises, Inc. In connection with our audit of the consolidated financial statements of VSI Enterprises, Inc. and subsidiaries referred to in our report dated February 21, 1997, which is included in the annual report to security holders and incorporated by reference in Part II of this form, we have also audited Schedule II of VSI Enterprises, Inc. and subsidiaries for the year ended December 31, 1996. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. We have previously audited and reported on Schedule II of VSI Enterprises, Inc. and subsidiaries for the year ended December 31, 1995 prior to its restatement for the 1996 pooling of interests with Integrated Network Services, Inc. (INS). Separate financial statements of INS included in the restated consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1995 were audited and reported on separately by other auditors. We have also audited the combination of Schedule II for the year ended December 31, 1995, after restatement for the 1996 pooling of interests; in our opinion, such schedule has been properly combined on the basis described in Note 2 of the notes to the consolidated financial statements. /s/ Grant Thornton LLP Atlanta, GA February 21, 1997 S-2 46 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND DEDUCTIONS END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE(1) PERIOD ----------- ----------- ----------- ---------- Year ended December 31, 1997 Reserve for obsolete inventory $ 494,200 $ 557,060 $ 873,025 $ 178,235 Reserve for doubtful accounts receivable 271,000 332,633 156,459 447,174 Year ended December 31, 1996 Reserve for obsolete inventory 244,000 250,000 -- 494,200 Reserve for doubtful accounts receivable 658,402 (28,558) 358,844 271,000 Year ended December 31, 1995 Reserve for obsolete inventory 166,200 78,000 -- 244,200 Reserve for doubtful accounts receivable 349,832 431,512 122,942 658,402
(1) Obsolete items which have been disposed as bad debt write offs. Column C-2 "Charged to other accounts" has been omitted as the response is "none". S-3 47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VSI ENTERPRISES, INC. By: /s/ Julia B. North ---------------------------- Date: March 20, 1998 Julia B. North, President & CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the following capacities on the dates indicated. Signature Title Date --------- ----- ---- /s/ Richard K. Snelling Chairman of the Board March 20, 1998 - ----------------------- Richard K. Snelling /s/ Julia B. North President and March 20, 1998 - ------------------ Chief Executive Officer Julia B. North /s/ E. Anthony Godfrey Chief Financial Officer March 20, 1998 - ---------------------- and Secretary E. Anthony Godfrey (Principal Financial and Accounting Officer) /s/ Carleton A. Brown Director March 20, 1998 - --------------------- Carleton A. Brown /s/ Larry M. Carr Director March 20, 1998 - ----------------- Larry M. Carr /s/ Edward S. Redstone Director March 20, 1998 - ------------------------ Edward S. Redstone 48 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBIT SEQUENTIAL
PAGE NO. 3.2 Amended and Restated Bylaws of the Registrant 10.6 Employment Agreement, dated August 4, 1997, by and between the Registrant and Judi North 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Grant Thornton LLP 27.1 Financial Data Schedule (for SEC use only) 27.2 Financial Data Schedule Restated for the Period Ended December 31, 1996 (for SEC use only)
EX-3.2 2 AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF VSI ENTERPRISES, INC. (A Delaware Corporation) (Effective January 23, 1992) ARTICLE I Offices 1.01 Principal Office. The principal office of this Corporation (hereinafter, the "Company") shall be selected by the Board of Directors from time to time and may be within or without the State of Delaware. 1.02 Other Offices. The Company may have such other offices, within or without the State of Delaware, as the Board of Directors may, from time to time, determine. 1.03 Registered Office. The registered office of the Company required by the General Corporation Law of Delaware to be maintained in Delaware may be, but need not be, identical with the principal office if in Delaware, and the address of the registered office may be changed from time to time by the Board of Directors. 1.04 Repeal of Inconsistent Provisions. All prior by-laws and resolutions of the Board of Directors are repealed to the extent in conflict with the provisions of these By-Laws. ARTICLE II Stock and the Transfer Thereof 2.01 Stock Certificates. The shares of the Company's capital stock shall be represented by consecutively numbered certificates signed by the President or a Vice President and the Secretary or Assistant Secretary of the Company, and sealed with the seal of the Company, or a facsimile thereof. If certificates are signed by a transfer agent, acting on behalf of the Company, and a registrar, the signatures of the officers of the Company may be facsimile. In case any officer who has signed (by real or facsimile signature) shall have ceased to be such officer before such certificate is issued, it may be issued by the Company with the same effect as if he were such officer on the date of its issue. Each certificate representing shares shall state upon the face thereof: (a) that the Company is organized under the laws of the State of Delaware; 2 (b) the name of the person to whom issued; (c) the number, class and series (if any) of shares which such certificate represents; and (d) the par value, if any, of the shares represented by such certificate, or a statement that the shares have no par value. If any class or series of shares is subject to special powers, designations, preferences or relative, participating or other special rights, then such (together with all qualifications, limitations or restrictions of such preferences or rights) shall be set forth in full or summarized on the certificate representing such class or series. However, in lieu of such requirement, the certificate may state that the Company will furnish, without charge, to the registered holder of the shares represented by such certificate who so requests a statement setting forth such information in full. Each certificate also shall set forth restrictions upon transfer, if any, or a reference thereto, as shall be adopted by the Board of Directors or by the shareholders, or as may be contained in this Article II. No certificate shall be issued for any share until such share is fully paid, as defined in the Certificate of Incorporation. 2.02 Consideration for Shares. Shares shall be issued for such consideration expressed in dollars as shall be fixed from time to time by the Board of Directors. Treasury shares may be disposed of by the Company for such consideration expressed in dollars as may be fixed from time to time by the Board of Directors. No shares shall be issued for less than the par value thereof. The consideration for the issuance of shares may be paid, in whole or in part, in money, in other property, tangible or intangible, or in labor or services actually performed for the Company, or as permitted in the Certificate of Incorporation. Future services shall not constitute payment or part payment for shares of the Company. 2.03 Lost Certificate. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Company alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, and the Board of Directors when authorizing such issue of a new certificate or certificates may in its discretion, and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates or his legal representative to advertise the same in such manner as it shall require, and/or furnish to the Company a bond in such sum as it may direct, as indemnity against any claim that may be made against the Company. Except as hereinabove in this section provided, no new certificate or certificates evidencing shares of stock shall be issued unless and until the old certificate or certificates, in lieu of which the new certificate or certificates are issued, shall be surrendered for cancellation. 2.04 Registered Holder as Owner. The Company shall be entitled to treat the holder of record of any share of stock as the owner thereof entitled to receive dividends and to vote such shares, and accordingly shall not be bound to recognize any equitable or any other claim to or -2- 3 interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as may be required by a valid proxy or by the laws of the State of Delaware. 2.05 Returned Certificates. All certificates for shares changed or returned to the Company for transfer shall be marked by the Secretary "Cancelled," with the date of cancellation, and the transaction shall be immediately recorded in the certificate book opposite the memorandum of their issue. The returned certificate may be inserted in the certificate book. 2.06 Transfer of Shares. Upon surrender to the Company or to a transfer agent of the Company of a certificate of stock endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, and such documentary stamps as may be required by law, it shall be the duty of the Company to issue a new certificate. Each such transfer of stock shall be entered on the stock book of the Company. 2.07 Transfer Agent. The Board of Directors shall have power to appoint one or more transfer agents and registrars for the transfer and registration of certificates of stock of any class, and may require that stock certificates shall be countersigned and registered by one or more of such transfer agents and registrars. Any powers or duties with respect to the transfer and registration of certificates may be delegated to the transfer agent and registrar. ARTICLE III Shareholders and Meetings Thereof 3.01 Annual Meeting. The annual meeting of the shareholders for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on such date as may be determined by resolution of the Board of Directors, but if such day be a holiday, then on the first business day thereafter which is not a holiday; provided, however, that the Board of Directors may, by resolution, postpone such meeting for a period of time not in excess of sixty (60) days. The place of the annual meeting shall be the principal office of the Company or such other place within or without the State of Delaware as the Board of Directors may determine. 3.02 Special Meeting. Special meetings of the shareholders may be called by the President, a Vice President, the Board of Directors, or the holders of not less than one-tenth of all the shares entitled to vote at the meeting. Special meetings shall be held at the principal office of the Company, unless the Board of Directors determines otherwise. 3.03 Notice of Meetings. Written or printed notice stating the place, day, and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary, or the officer or persons calling the meeting, to each shareholder of record in the manner above provided. No business other than that specified in the notice of special meeting shall be transacted at any such special meeting. The notice of special meeting may be waived by submitting a signed waiver or by attendance at the meeting. -3- 4 3.04 Closing of Transfer Books and Fixing Record Date. For the purposes of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Company may provide that the stock transfer books shall be closed for a stated period not to exceed in any case sixty (60) days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty (60) days, and in case of a meeting of shareholders, not less than ten (10) days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken, and in no event may the record date precede the date upon which the Directors adopt a resolution fixing the record date. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is given (as defined in Article IX hereof) or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of the shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Paragraph, such determination shall apply to any adjournment thereof, unless the Board of Directors fixes a new record date for the adjournment. The record date for determining shareholders entitled to consent to corporate actions without a meeting shall be fixed as provided in Section 3.12. 3.05 Voting List. The officer or agent having charge of the stock transfer books for shares of the Company shall make, at least ten (10) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the principal office of the Company, and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer books shall be prima facie evidence as to who are the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. 3.06 Quorum. A quorum at any meeting of the shareholders shall consist of one-third (1/3) of the shares entitled to vote represented in person or by proxy. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting entitled to vote on the subject matter shall be the act of the shareholders. If less than one-third (1/3) of the shares entitled to vote be represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time to the same place without further notice. At such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at a meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. 3.07 Proxies. At all meetings of shareholders, a shareholder may vote by proxy, executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall -4- 5 be filed with the Secretary of the Company before or at the time of the meeting. No proxy shall be valid after three (3) years from the date of its execution, unless otherwise provided in the proxy. 3.08 Voting of Shares. Each outstanding share shall be entitled to one vote and each fractional share shall be entitled to a corresponding fractional vote on each matter submitted to vote at a meeting of shareholders. 3.09 Voting of Shares by Certain Holders. Neither treasury shares, nor shares of its own stock held by the Company in a fiduciary capacity, nor shares held by another Company if the majority of the shares entitled to vote for the election of directors of such other Corporation is held by the Company, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such company may determine. Shares held by an administrator, executor, personal representative, guardian, or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so be contained in an appropriate order of the court by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. 3.10 Chairman. The Chairman of the Board of Directors of the Company, if there is one, or in his absence, the President, shall act as chairman at all meetings of shareholders. 3.11 Shareholder Voting. Voting at any shareholders meeting shall be oral or by show of hands; provided, however, that voting shall be by written ballot if such demand is made by any shareholder present in person or by proxy and entitled to vote. 3.12 Informal Action by Shareholders; Record Date. Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of a majority of shares of every class and series entitled to vote with respect to the subject matter thereof. Each written consent shall bear the date of every shareholder's signature, and no written consent will be effective unless written consents, signed by a sufficient number of shareholders to take action, are delivered to the Company within sixty (60) days of the date of the earliest such consent. Such consent shall -5- 6 have the same force and effect as a vote of the shareholders, and may be stated as such in any document filed with the Secretary of State of Delaware under the General Corporation Law of Delaware. Prompt notice of such action by written consent of less than all shareholders entitled to vote shall be given to all shareholders who have not consented in writing to the action taken. The record date for determining shareholders entitled to consent to corporate actions in writing without a meeting (the "consent record date") shall not precede, and shall not be more than ten (10) days after, the date upon which the resolution fixing the record date was adopted; however, if no consent record date is fixed and prior action by the Board of Directors is required for the consent to be validly taken, the consent record date shall be at the close of business on the day the Board of Directors is required, then the consent record date shall be the first date on which a properly signed and dated consent setting forth the action taken or proposed to be taken is delivered as required above. 3.13 Annual Report. The President of the Company shall prepare an annual report which will set forth a statement of affairs of the Company as of the end of its last fiscal year, including a balance sheet and an income statement, and present it at the Annual Meeting of Shareholders. Failure to prepare or present an annual report shall not affect the validity of any shareholder meeting. No such report need be prepared or presented for any fiscal year in which the Company was inactive. ARTICLE IV Directors, Powers and Meetings 4.01 General Powers. The business and affairs of the Company shall be managed by its Board of Directors, except as otherwise provided in the General Corporation Law of Delaware or the Certificate of Incorporation. 4.02 Number, Tenure and Qualifications. The Company's Board of Directors shall consist of not less than three (3) and not more than seven (7) Directors, as resolved from time to time by the Board of Directors. If such number is not so fixed, the Company shall have three (3) Directors. Directors shall be elected at each Annual Meeting of Shareholders. Each Director shall hold office until the next Annual Meeting of Shareholders and thereafter until his successor shall have been elected and qualified. Directors need not be residents of Delaware or shareholders of the Company. Directors shall be removable in the manner provided by the General Corporation Law of Delaware. Directors shall be elected by plurality vote. 4.03 Vacancies. Any Director may resign at any time by giving written notice to the President or to the Secretary of the Company. Such resignation shall take effect at the time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining Directors though less than a quorum, or by a sole remaining Director. A Director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. Any directorship to be filled by reason of an increase in the number of Directors shall be filled by the affirmative vote of a majority of the Directors then in office or by -6- 7 an election at an annual meeting or at a special meeting of shareholders called for that purpose, and a Director so chosen shall hold office for the term specified in Paragraph 4.02 of this Article. 4.04 Removal of Directors. Any Director may be removed only in the manner provided in the Company's Certificate of Incorporation, as amended, and if no such provision appears therein: any Director may be removed either with or without cause, at any time by a vote of the shareholders holding a majority of the shares then issued and outstanding and who are entitled to vote for the election of Directors, present at any special meeting called for that purpose. In case any vacancy so created shall not be filled by the shareholders at such meeting, such vacancy may be filled by the Board of Directors as provided hereinafter. 4.05 Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this By-Law immediately after and at the same place as the Annual Meeting of Shareholders. The Board of Directors may provide by resolution the time and place, either within or without the State of Delaware, for the holding of additional regular meetings without other notice than such resolution. 4.06 Special Meetings. Special meetings of the Board of Directors may be called by or at the request of the President, the Chairman of the Board, or any two Directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place, either within or without the State of Delaware, as the place for holding any special meeting of the Board of Directors called by them. 4.07 Telephonic Meetings. Members of the Board of Directors or any committee designated by the Board may participate in a meeting of the Board of Directors or committee by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear one another at the same time. Such participation shall constitute presence in person at the meeting. All participants in any meeting of Directors, by virtue of their participation and without further action on their part, shall be deemed to have consented to the recording of such meeting by electronic device or otherwise, and to the making of a written transcript thereof, in order that minutes thereof shall be available for the Company's records. 4.08 Notice. Notice of any special meeting shall be given at least four (4) days previous thereto by written notice delivered personally or mailed to each Director at his business address, or by notice given at least two (2) days prior to the meeting, in person or by any means specified in Section 9.01(b) or (c). Any Director may waive notice of any meeting. The attendance of a Director at a meeting shall constitute a waiver of notice of such meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. 4.09 Quorum. A majority of the number of Directors fixed by these By-Laws shall constitute a quorum for the transaction of business. The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. -7- 8 4.10 Compensation. By resolution of the Board of Directors, any Director may be paid any one or more of the following: his expenses, if any, of attendance at a meeting; a fixed sum for attendance at each meeting; or a stated salary as Director. No such payment shall preclude any Director from serving the Company in any other capacity and receiving compensation therefor. 4.11 Presumption of Assent. A Director of the Company who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof, or shall forward such dissent by registered or certified mail to the Secretary of the Company immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favor of such action. 4.12 Executive Committee. The Board of Directors, by resolution adopted by a majority of the number of Directors, may designate two (2) or more Directors to constitute an Executive Committee, which may exercise all of the authority of the Board of Directors in the management of the Company, during the period of time between meetings of the Board of Directors; but the designation of such committee and the delegation thereto of authority shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed upon it or him by law. 4.13 Action by Directors Without Meeting. Any action required to be taken at a meeting of the Directors of the Company or any action which may be taken at such a meeting, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Directors entitled to vote with respect to the subject matter thereof. A consent shall be sufficient for this Paragraph if it is executed in counterparts, in which event all of such counterparts, when taken together, shall constitute one and the same consent. 4.14 Chairman of the Board. The Chairman of the Board, if such officer shall be chosen by the Board of Directors, shall preside at all meetings of the Board of Directors and meetings of shareholders at which he is present. He shall, subject to the direction of the Board of Directors, have general supervision over the affairs of the Company, and shall, from time to time, consult and advise with the President in the direction and management of the Company's business and affairs, and shall do and perform such other duties as may, from time to time, be assigned to him by the Board of Directors. 4.15 Bank Accounts, etc. Anything herein to the contrary notwithstanding, the Board of Directors may, except as may otherwise be required by law, authorize any officer or officers, agent or agents, in the name of and on behalf of the Company, to sign checks, drafts, or other orders for the payment of money or notes or other evidences of indebtedness, to endorse for deposit, deposit to the credit of the Company at any bank or trust company or banking institution in which the Company may maintain an account or to cash checks, notes, drafts, or other bankable securities or instruments, and such authority may be general or confined to specific instances, as the Board of Directors may elect. 4.16 Inspection of Records. Every Director shall have the absolute right at any reasonable time to inspect all books, records, documents of every kind, and the physical properties, -8- 9 of the Company and of its subsidiaries. Such inspection may be made personally or by an agent and includes the right to make copies and extracts. ARTICLE V Officers and Agents 5.01 General. The officers of the Company shall be a President, one or more Vice Presidents, a Secretary and a Treasurer. The Board of Directors may appoint such other officers, assistant officers, as they may consider necessary, who shall be chosen in such manner and hold their offices for such terms and have such authority and duties as from time to time may be determined by the Board of Directors. The salaries of all the officers of the Company shall be fixed by the Board of Directors. One person may hold any two offices, except that no person may simultaneously hold the offices of President and Secretary. In all cases where the duties of any officer, agent or employee are not prescribed by the By-Laws or by the Board of Directors, such officer, agent or employee shall follow the orders and instructions of the President. 5.02 Election and Term of Office. The officers of the Company shall be elected by the Board of Directors annually at the first meeting of the Board held after each Annual Meeting of the Shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Each officer shall hold office until the first of the following to occur: Until his successor shall have been duly elected and shall have qualified; or until his death; or until he shall resign; or until he shall have been removed in the manner hereinafter provided. 5.03 Removal. Any officer or agent may be removed by the Board of Directors or by the Executive Committee whenever in its judgment the best interest of the Company will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not in itself create contract rights. 5.04 Vacancies. A vacancy in any office, however occurring, may be filled by the Board of Directors for the unexpired portion of the term. 5.05 President. The President shall, subject to the direction and supervision of the Board of Directors, be the chief executive officer of the Company and shall have general and active control of its affairs and business and general supervision of its officers, agents and employees. He shall, unless otherwise directed by the Board of Directors, attend in person or by substitute appointed by him, or shall execute in behalf of the Company written instruments appointing a proxy or proxies to represent the Company, at all meetings of the stockholders of any other company in which the Company shall hold any stock. He may, on behalf of the Company, in person or by substitute or by proxy, execute written waivers of notice and consents with respect to any such meetings. At all such meetings and otherwise, the President, in person or by substitute or proxy as aforesaid, may vote the stock so held by the Company and may execute written consent and other instruments and power incident to the ownership of said stock, subject however to the instructions, if any, of the Board of Directors. The President shall have custody of the Treasurer's bond, if any. -9- 10 5.06 Vice Presidents. The Vice Presidents shall assist the President and shall perform such duties as may be assigned to them by the President or by the Board of Directors. In the absence of the President, the Vice President designated by the Board of Directors or (if there be no such designation) designated in writing by the President shall have the powers and perform the duties of the President. If no such designation shall be made all Vice Presidents may exercise such powers and perform such duties. 5.07 Secretary. The Secretary shall: (a) Keep the minutes of the proceedings of the shareholders, executive committee and the Board of Directors; (b) See that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; (c) Be custodian of the corporate records and of the seal of the Company and affix the seal to all documents when authorized by the Board of Directors; (d) Keep at its registered office or principal place of business within or outside Delaware a record containing the names and addresses of all shareholders and the number and class of shares held by each, unless such a record shall be kept at the office of the Company's transfer agent or registrar; (e) Sign with the President, or a Vice President, certificates for shares of the Company, the issuance of which shall have been authorized by resolution of the Board of Directors; (f) Have general charge of the stock transfer books of the Company, unless the Company has a transfer agent; and (g) In general, perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President or the Board of Directors. Assistant secretaries, if any, shall have the same duties and power, subject to supervision by the Secretary. 5.08 Treasurer. The Treasurer shall be the principal financial officer of the Company and shall have the care and custody of all funds, securities, evidence of indebtedness and other personal property of the Company and shall deposit the same in accordance with the instructions of the Board of Directors. He shall receive and give receipts and acquittances for monies paid in on account of the Company, and shall pay out of the funds on hand all bills, payrolls and other just debts of the Company of whatever nature upon maturity. He shall perform all other duties incident to the office of the Treasurer and, upon request of the Board, shall make such reports to it as may be required at any time. He shall, if required by the Board, give the Company a bond in such sums, and with such sureties as shall be satisfactory to the Board, conditioned upon the faithful performance of his duties and for the restoration to the Company of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Company. He shall have such other powers and perform such other duties as may be from time to time prescribed by the Board of Directors or the President. The assistant treasurers, if any, shall have the same powers and duties, subject to the supervision of the Treasurer. The Treasurer shall also be the principal accounting officer of the Company. He shall prescribe and maintain the methods and systems of accounting to be followed, keep complete books and records of account, prepare and file all local, state and federal tax returns, prescribe and maintain an adequate system of internal audit, and prepare and furnish to the President and the Board of Directors statements of account showing the financial position of the Company and the results of its operations. -10- 11 ARTICLE VI Indemnification Every Director, Officer, employee and agent of the Company, and every person serving at the Company's request as a director, officer (or in a position functionally equivalent to that of officer or director), employee or agent of another corporation, partnership, joint venture, trust or other entity, shall be indemnified to the extent and in the manner provided by the Company's Certificate of Incorporation, as it may be amended. ARTICLE VII Miscellaneous 7.01 Declaration of Dividends. The Board of Directors at any regular or special meeting may declare dividends payable out of the funds of the Company, whenever in the exercise of its discretion it may deem such declaration advisable and such is permitted by law. Such dividends may be paid in cash, property, or shares of the Company. 7.02 Benefit Programs. Directors shall have the power to install and authorized any pension, profit sharing, stock option, insurance, welfare, educational, bonus, health and accident or other benefit program which the Board deems to be in the interest of the Company, at the expense of the Company, and to amend or revoke any plan so adopted. 7.03 Seal. The corporate seal of the Company shall be circular in form and shall contain the name of the Company and the words "Seal, Delaware". 7.04 Fiscal Year. The Board of Directors shall have the power to fix, and from time to time change, the fiscal year of the Company. Any such adoption of or change in a fiscal year shall not constitute or require an amendment to these By-Laws. ARTICLE VIII Amendments to By-Laws These By-Laws may be amended or repealed in the manner provided for in the Certificate of Incorporation, or if none is there provided: by majority vote of the Board of Directors, taken at any meeting or by written consent, subject to the shareholders' right to change or repeal any ByLaws so made. By-Laws amendments may be proposed by any Director. ARTICLE IX Notices -11- 12 9.01 Giving of Notice. Except as otherwise provided by the General Corporation Law of Delaware, these By-Laws, the Company's Certificate of Incorporation, or resolution of the Board of Directors, every meeting notice or other notice, demand, bill, statement or other communication (collectively, "Notice") to or from the Company from or to a Director, Officer or shareholder shall be duly given if it is written or printed and is (a) sent by first class mail or by overnight service of the U.S. Postal Service, postage prepaid, (b) sent by any established overnight air courier service, such as Federal Express, Emery, Airborne or UPS, (c) sent by telegraph, tested telex or other tested facsimile transmission, (d) delivered by any commercial messenger service which regularly retains its receipts, or (e) personally delivered, provided a receipt is obtained reflecting the date of delivery. Notice shall not be duly given unless all delivery or postage charges are pre-paid. Notice shall be given to an addressee's most recent address as it appears on the Company's records. A Notice shall be deemed "given" when dispatched for delivery, or if mailed, on the date postmarked. This Section shall not have the effect of shortening any notice period provided for in these By-Laws. 9.02 Waiver of Notice. Any Notice required by the General Corporation Law of Delaware, the Certificate of Incorporation or these By-Laws may be waived in writing at any time by the person entitled to the Notice, and such waiver shall be equivalent to the giving of notice. Notice of any meeting shall be waived by attendance (if a Shareholders' meeting, in person or by proxy) at the meeting. A waiver of Notice of a special meeting of Shareholders shall state the purpose for which the meeting was called or the business to be transacted thereat. -12- EX-10.6 3 EMPLOYMENT AGREEMENT- JUDI NORTH 1 EXHIBIT NUMBER 10.6 EMPLOYMENT AGREEMENT August 4, 1997 Ms. Judi North 76 Brighton Drive, N.E. Atlanta, GA 30309 Dear Judi: I along with the Board of Directors of VSI Enterprises are pleased to offer you the position of CEO of VSI Enterprises as well as a position on its Board of Directors. The position also includes responsibilities within VSI's subsidiaries as depicted on Attachment A. This offer and subsequent contract is contingent on BellSouth's agreement as reflected by approval of VSI as a noncompetitive post retirement opportunity for you. Your compensation can be flexible depending on your personal financial wishes but would be based on the below amounts with appropriate mutually agreed upon equivalents. 1. Base Salary: $160,000 annualized. 2. Initial grant of 150,000 VSI options at the close of business last trade strike price on the date of contract signature. 3. Three year vesting (1/3 each year at the annual contract date) of 300,000 shares of VSI stock options with the same strike price as item 2. 4. There will be additional incentives granted which will be performance oriented at the discretion of the Board as part of its annual compensation review (normally determined in November). 5. Automobile car allowance on a lease basis of the Mercury Marquis or equivalent category. VSI has a number of employee benefits, a copy of which I have included for your information. Should you be terminated except for cause, not including resignation, after six months you will be afforded six months base salary. I have also attached a VSI Employment Agreement. We realize you may wish to continue your BellSouth benefits and are therefore flexible regarding compensation. We also understand you wish to complete your "age/service" and other BellSouth-related responsibilities with an employment date of October 1, 1997. The contract signature date should be no later than August 4, 1997. As I further indicated to you it is my intent to remain as Chairman of the Board of Directors for a time (subject to the wishes of the Board and my successor CEO). After that period I would resign as Chairman in favor of the successor CEO (subject to Board and shareholder approval). Judi, I am very enthusiastic about working with you as VSI-CEO. The Board of Directors is unanimous in its opinion you are an ideal match for VSI and its opportunities and challenges. Sincerely, /s/ R.K. Snelling, P.E. Chairman & CEO 2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective as of the 4th day of August, 1997 by and between VSI ENTERPRISES, INC., a Delaware corporation, ("Company") and JUDI NORTH ("Employee"), an individual. For and in consideration of the mutual covenants described below, the parties hereto agree as follows: 1. EMPLOYMENT. The Company agrees to employ or continue to employ Employee, and Employee agrees to accept and continue such employment, upon the following terms and conditions. 2. DUTIES. Employee shall assume the responsibilities and perform the duties specified in the attached organization chart. Such duties may be revised from time to time at the sole discretion of the Company. Employee agrees to devote his or her full time and energy to the furtherance of the business of the Company and shall not during the term hereof work or perform services in any advisory or other capacity for any individual, firm, company, or corporation other than for the Company, except as otherwise agreed to by the Company. 3. COMPENSATION. The Company shall pay as compensation for all the services to be rendered the salary and additional compensation, if any, described in the transmittal letter (the "Employee Compensation") and as the Employee Compensation may be determined by the Company in its sole discretion from time to time. The Company's obligation to pay Employee any Employee Compensation shall cease upon termination of Employee's employment with the Company. Employee's annual salary shall be prorated on a daily basis for the years in which Employee commences and terminates his or her employment relationship with the Company. 4. TERM AND TERMINATION. This Agreement shall be effective upon execution by the parties and shall remain in full force and effect thereafter, until terminated as provided herein. Either party may terminate this Agreement at any time for any reason, whether for cause or not for cause, by providing written notice to the other party on or prior to the proposed date of termination. This Agreement shall terminate immediately upon the death of Employee. Upon termination of employment for any reason, Employee shall return immediately to the Company all documents, property, and other records of the Company, and all copies thereof, within Employee's possession, custody or control, including but not limited to any materials containing any Trade Secrets or Confidential Information (as defined below) or any portion thereof. 5. OWNERSHIP. For purposes of this Agreement, "Work Product" shall mean the data, materials, documentation, computer programs, inventions (whether or not patentable), and all works of authorship, including all worldwide rights therein under patent, copyright, trade secret, confidential information, or other property right, created or developed in whole or in part by Employee, whether prior to the date of this Agreement or in the future, either (i) while retained by the Company and that have been or will be paid for by the Company, or (ii) while employed by the Company (whether developed during work hours or not). All Work Product shall be considered work made for hire by the Employee and owned by the Company. If any of the Work Product may not, by operation of law, be considered work made for hire by Employee for the Company, or if ownership of all right, title, and interest of the intellectual property rights therein shall not otherwise vest exclusively in the Company, Employee hereby assigns to the Company, and upon the future creation thereof automatically assigns to the Company, without further consideration, the ownership of all Work Product. The Company shall have the right to obtain and hold in its own name copyrights, registrations, and any other protection available in the Work Product. Employee agrees to perform, during or after Employee's employment, such further acts as may be necessary or desirable to transfer, perfect, and defend the Company's ownership of the Work Product that are reasonably requested by the Company. 6. TRADE SECRETS AND CONFIDENTIAL INFORMATION. (a) The Company may disclose to Employee certain Trade Secrets and Confidential Information (defined below). Employee acknowledges and agrees that the Trade Secrets and Confidential Information are the sole and exclusive property of the Company (or a third party providing such information to the Company) and that the Company or such third party owns all worldwide rights therein under patent, copyright, trade secret, confidential information, or other property right. Employee acknowledges and agrees that the disclosure of the Trade Secrets and Confidential Information to Employee does not confer upon Employee any license, interest or rights of any kind in or to the Trade Secrets or Confidential Information. Employee may use the Trade Secrets and Confidential Information solely for the benefit of the Company while Employee is employed or retained by the Company. Except in the performance of services for the Company, Employee will hold in confidence and not reproduce, distribute, transmit, reverse engineer, decompile, disassemble, or transfer, directly or indirectly, in any form, by any means, or for any purpose, the Trade Secrets or the Confidential Information or any portion thereof. Employee agrees to return to the Company, upon request by the Company, the Trade Secrets and Confidential Information and all materials relating thereto. (b) Employee's obligations under this Agreement with regard to the Trade Secrets shall remain in effect for as long as such 3 information shall remain a trade secret under applicable law. Employee acknowledges that its obligations with regard to the Confidential Information shall remain in effect while Employee is employed or retained by the Company and for three (3) years thereafter. As used herein, "Trade Secrets" means information of the Company, its licensors, suppliers, customers or prospective licensors or customers, including, but not limited to, technical or nontechnical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans, or a list of actual or potential customers or suppliers, which (a) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (c) Employee acknowledges that existing or prospective customers of the Company may be companies which are publicly traded and subject to various rules and regulations of the Securities and Exchange Commission. Employee acknowledges that the Company has a policy that no one associated with the Company may trade in securities of any customer of the Company based on material, nonpublic information concerning the customer. Additionally, the Company expressly forbids the unauthorized disclosure of any nonpublic information acquired by anyone associated with the Company relating to a customer of the Company. Employee shall notify the Company prior to trading the securities of any customer of the Company. 7. CUSTOMER NON-SOLICITATION. Employee agrees that for a period of eighteen (18) months immediately following termination of Employee's employment with the Company for any reasons, including, without limitation, voluntary resignation from employment by Employee ("Non-Solicitation Period"), Employee shall not, on Employee's own behalf or on behalf of any person, firm, partnership, association, corporation or business organization, entity or enterprise, solicit, contact, call upon, communicate with or attempt to communicate with any customer or prospect of the Company, or any representative of any customer or prospect of the Company, with a view to sale or providing of any deliverable or service sold or provided or under development by the Company during the time of two (2) years immediately preceding cessation of Employee's employment with the Company, provided that the restrictions set forth in this paragraph shall apply only to customers or prospects of the Company, or representatives of customers or prospects of the Company, with which Employee had material contact during such two (2) year period. The actions prohibited by this paragraph shall not be engaged in by Employee directly or indirectly, whether as manager, salesperson, agent, technical support, sales, or service representative, or otherwise. Employee acknowledges that the Company provides products and services to small and large customers throughout the United States and internationally and that a territorial restriction on the non-solicitation provisions of this paragraph would not adequately protect the legitimate interests of the Company. 8. EMPLOYEE NON-SOLICITATION. Employee agrees that Employee shall not call upon, solicit, recruit, or assist others in calling upon, recruiting or soliciting any person who is or was an employee of the Company within the Non-Solicitation Period, for the purposes of having such person work in any other corporation, association, entity, or business engaged in providing video conferencing or satellite downlink services of the same or similar kind as offered by the Company. 9. EQUITABLE RELIEF. The parties to this Agreement acknowledge that a breach by Employee of any of the terms or conditions of this Agreement will result in irrevocable harm to the Company and that the remedies at law for such breach may not adequately compensate the Company for damages suffered. Accordingly, Employee agrees that in the event of such breach, the Company shall be entitled to injunctive relief or such other equitable remedy as a court of competent jurisdiction may provide. Nothing contained herein will be construed to limit the Company's right to any remedies at law, including the recovery of damages for breach of this Agreement. 10. SEVERABILITY. If any provision or part of any provision of this Agreement is held invalid or unenforceable by a court of competent jurisdiction, such holding shall not affect the enforceability of any other provisions or parts thereof, and all other provisions and parts thereof shall continue in full force and effect. 11. MISCELLANEOUS. This Agreement shall not be amended or modified except by a writing executed by both parties. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns. Due to the personal nature of this Agreement, Employee shall not have the right to assign Employee's rights or obligations under this Agreement without the prior written consent of Company. This Agreement shall be governed by the laws of the State of Georgia without regard to its rules governing conflicts of law. This Agreement and the attached Exhibits represent the entire understanding of the parties concerning the subject matter hereof and supersede all prior communications, agreements and understandings, whether oral or written, relating to the subject matter hereof. All communications required or otherwise provided under this Agreement shall be in writing and shall be deemed given when delivered to the address provided below such party's signature (as may be amended by notice from time to time), by hand, by courier or express mail, or by registered or certified Unites States mail, return receipt requested, postage prepaid. The transmittal letter and organization chart, attached hereto, are incorporated herein by this reference. 4 IN WITNESS WHEREOF, the parties hereto have executed this Agreement and affixed their hands and seals effective as of the date first above written. EMPLOYEE: VSI ENTERPRISES, INC. /s/ Judi North By:/s/ R. K. Snelling - --------------------------------- --------------------------- Signature Chairman & CEO Date: Date: 8-4-97 ---------------------------- ------------------------- Address: 76 Brighton Drive, N.E. 5801 Goshen Springs Road - -------------------------- Norcross, Georgia 30071 - -------------------------- Atlanta, GA 30309 - -------------------------- EX-23.1 4 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT NUMBER 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in this Form 10-K of our report dated March 18, 1998, included in this Annual Report into VSI Enterprises, Inc. previously filed Registration Statement No. 33-44036 on Form S-8 dated November 14, 1991, Registration Statement No. 33-44035 on Form S-8 dated November 14, 1991, Registration Statement No. 33-55094 on Form S-3 dated November 25, 1992, Registration Statement No. 33-56856 on Form S-8 dated January 8, 1993, Registration Statement No. 33-72512 on Form S-8 dated December 3, 1993, Registration Statement No. 33-81314 on Form S-8 dated July 7, 1994, Registration Statement No. 333-728 on Form S-3 dated January 30, 1996, Registration Statement No. 33-85754 on Form S-3 dated January 30, 1996 (Post-Effective Amendment No. 1), Registration Statement No. 333-15123 on Form S-3 dated October 30, 1996, Registration Statement No. 333-18237 on Form S-8 dated December 19, 1996, Registration Statement No. 333-18239 on Form S-8 dated December 19, 1996. Registration Statement No. 333-30597 on Form S-3 dated June 30, 1997 and Registration Statement No. 333-44407 on Form S-3 dated January 14, 1998. /s/ Arthur Andersen LLP Atlanta, Georgia March 18, 1998 EX-23.2 5 CONSENT OF GRANT THORTON LLP 1 EXHIBIT NUMBER 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Board of Directors VSI Enterprises, Inc. We hereby consent to the incorporation by reference in the Registration Statement No. 33-44036 on Form S-8 dated November 14, 1991, Registration Statement No. 33-44035 on Form S-8 dated November 14, 1991, Registration Statement No. 33-55094 on Form S-3 dated November 25, 1992, Registration Statement No. 33-56856 on Form S-8 dated January 8, 1993, Registration Statement No. 33-72512 on Form S-8 dated December 3, 1993, Registration Statement No. 33-81314 on Form S-8 dated July 7, 1994, Registration Statement No. 333-728 on Form S-3 dated January 30, 1996, Registration Statement No. 33-85754 on Form S-3 dated January 30, 1996 (Post-Effective Amendment No. One), Registration Statement No. 333-15123 on Form S-3 dated October 30, 1996, Registration Statement No. 333-18237 on Form S-8 dated December 19, 1996, Registration Statement No. 333-18239 on Form S-8 dated December 19, 1996, Registration Statement No. 333-30597 on Form S-3 dated June 30, 1997 and Registration Statement No. 333-44407 on Form S-3 dated January 14, 1998, of our report dated February 21, 1997, relating to the 1995 and 1996 consolidated financial statements of VSI Enterprises, Inc. and subsidiaries appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. /s/ Grant Thornton LLP Atlanta, Georgia March 20, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 866 0 6,454 178 2,542 10,979 1,195 0 22,880 7,290 0 0 0 12 15,591 22,880 21,765 21,765 11,342 27,313 76 0 0 (5,624) 193 (5,817) 0 0 0 (5,817) (0.13) (0.13)
EX-27.2 7 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 2,260 0 5,913 414 2,810 12,398 1,356 0 24,832 6,764 4,250 0 0 10 13,809 24,832 17,056 17,056 12,102 23,505 258 0 0 (6,707) 0 (6,707) 0 0 0 (6,707) (0.18) (0.18)
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