1UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON,
Washington, D.C. 20549
FORM10-Q/A (Amendment No. 1) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF ----- THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 TRANSITION REPORT PURSUANT TO SECTION 13 OR ----- 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to ------- -------10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from_______to_______
Commission File No. 1-12942VSI HOLDINGS, INC. ------------------ (Exact name of Registrant as specified in its charter) Georgia 22-2135522 ---------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 41000 Woodward Avenue Bloomfield Hills, MI 48304-2263 ---------------------------------------- (Address of principal executive offices) (248) 644-0500 ----------------------------- (Registrant's telephone number, including area code)
VSI HOLDINGS, INC. (Exact name of Registrant as specified in its charter)
Georgia 22-2135522 (State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
41000 Woodward Avenue
Bloomfield Hills, MI 48304-2263(Address of principal executive offices)
(248) 644-0500 (Registrant's telephone number, including area code)
For information regarding this filing, contact:
Peggy Toth, VP Investor Relations / Corporate Communications
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, and (2) has been subject to such filing requirements for the past 90 days. YesX__X__ No----- ------______
There were 33,415,780 shares of Common Stock, par value $.01 per share, outstanding atAugust 2, 2001.2December 31, 2001, excluding 400,250 treasury shares.PART 1. FINANCIAL INFORMATION ITEM
Item 1. FINANCIAL STATEMENTS
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30 September 30 2001 2000 (Unaudited) (Audited) ----------- ---------ASSETS CURRENT ASSETS Cash $ 2,635,000 $ 905,000 Accounts Receivable Trade accounts receivable: Billed 22,919,000 48,117,000 Unbilled 15,707,000 18,525,000 Service contracts accounts receivable 21,786,000 5,790,000 Notes receivable and advances 356,000 201,000 Notes receivable - related party 83,000 Inventory 353,000 438,000 Accumulated costs of uncompleted programs 7,374,000 3,744,000 Deferred tax asset 401,000 899,000 Refundable Federal Income Tax 3,738,000 - Other current assets 933,000 761,000 ------------- ------------ Total Current Assets 76,285,000 79,380,000 Long-Term Portion Of Notes Receivable - Related Parties 244,000 921,000 Property, Plant And Equipment (Net) 20,331,000 22,394,000 Deferred Tax Asset 3,046,000 830,000 Investment In Available-for-Sale Securities 1,931,000 7,131,000 Investments 4,254,000 4,190,000 Goodwill-Net 962,000 1,283,000 ------------- ------------ Total Assets $ 107,053,000 $116,129,000 ============= ============3
December 31
2001
(Unaudited)September 30
2001
(Audited)ASSETS CURRENT ASSETS Cash $ 4,098 ,000
$ 4,719,000
Trade accounts receivable: Billed 10,775,000
25,555,000
Unbilled 6,032,000
5,674,000
Purchased receivables 31,056,000
27,012,000
Notes receivable and advances 139,000
167,000
Notes receivable - related party 130,000
Inventory 282,000
307,000
Accumulated costs of uncompleted programs 3,869,000
2,822,000
Deferred tax asset 1,574,000
1,574,000
Refundable federal income tax 3,906,000
5,625,000
Other current assets 966,000
1,239,000
Total Current Assets 62,827,000
74,694,000
PURCHASED RECEIVABLES 5,480,000
4,779,000
LONG-TERM PORTION OF NOTES RECEIVABLE - Related Parties 341,000
1,065,000 PROPERTY,PLANT AND EQUIPMENT (NET) 14,763,000
15,858,000
PROPERTY HELD FOR SALE 3,310,000
3,310,000
DEFERRED TAX ASSET 7,783,000
6,002,000
INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES 1,673,000
1,885,000
INVESTMENTS 589,000
624,000
GOODWILL-NET 748,000
855,000
Total Assets $97,514,000
$109,072,000
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===========
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30 September 30 2001 2000 (Unaudited) (Audited) ----------- ---------LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 248,000 $ 552,000 Notes payable - Related party 2,255,000 3,420,000 Trade accounts payable 12,889,000 22,944,000 Service contracts accounts payable 6,611,000 535,000 Notes payable to bank 42,648,000 35,214,000 Accrued liabilities 2,065,000 3,970,000 Federal income tax payable - 2,139,000 Advances from customers for uncompleted projects 649,000 375,000 ------------- ------------ Total Current Liabilities 67,365,000 69,149,000 LONG-TERM LIABILITIES Notes payable - Related parties 11,945,000 12,337,000 Long-term debt - Other 6,968,000 7,092,000 ------------- ------------ Total Long-Term Liabilities 18,913,000 19,429,000 STOCKHOLDERS' EQUITY Preferred stock - $1.00 par value per share, 2,000,000 shares authorized, no shares issued - - Common stock - $.01 par value per share, 60,000,000 shares authorized, 33,816,000 shares issued at June 30, 2001 and 33,580,000 at September 30, 2000 338,000 336,000 Treasury stock, (at cost) 400,000 shares at June 30, 2001, and September 30, 2000 (1,856,000) (1,856,000) Additional paid-in capital 9,098,000 8,071,000 Accumulated Other Comprehensive Income (1,469,000) 730,000 Retained Earnings 14,664,000 20,270,000 ------------- ------------ Total Stockholders' Equity 20,775,000 27,551,000 Total Liabilities and Stockholders' Equity $ 107,053,000 $116,129,000 ============= ============
December 31, 2001
(Unaudited)September 30
2001
(Audited)LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 7,029,000
$ 7,102,000 Notes payable - Related party 1,644,000
1,644,000
Trade accounts payable 26,077,000
21,714,000
Notes payable to bank 38,172,000
51,068,000
Accrued liabilities 3,073,000
2,742,000
Advances from customers for
uncompleted projects7,733,000 7,682,000 Total Current Liabilities 83,728,000
91,952,000
LONG-TERM LIABILITIES Notes payable - Related parties 11,327,000
11,993,000
Total Long-Term Liabilities 11,327,000
11,993,000
STOCKHOLDERS' EQUITY Preferred stock - $1.00 par value per share, 2,000,000 shares authorized, no shares issued - - Common stock - $.01 par value per share, 60,000,000 shares authorized, 33,816,000 shares issued at December 31, 2001 and September 30, 2001 338,000 338,000 Treasury stock, (at cost) 400,000 shares at December 31, 2001, and September 30, 2001 (1,856,000) (1,856,000) Additional paid-in capital 9,057,000
9,057,000
Accumulated Other Comprehensive Income (1,623,000) (1,473,000) Retained Earnings (3,457,000)
(939,000)
Total Stockholders' Equity 2,459,000
5,127,000
Total Liabilities and Stockholders' Equity $97,514,000
$109,072,000
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===========
See Notes to Consolidated Financial Statements
4
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended ------------------ June 30 June 30 2001 2000 (Unaudited) (Unaudited) ----------- -----------REVENUE $ 33,445,000 $ 45,636,000 EXPENSES Cost of revenue 13,105,000 20,894,000 Operating expenses 22,404,000 19,720,000 ------------- ------------- Total Expenses 35,509,000 40,614,000 OPERATING INCOME (LOSS) (2,064,000) 5,022,000 OTHER EXPENSES Impairment From Investment in Available-for-Sale Securities (2,006,000) - Interest Income and Other Income and Expenses (86,000) (120,000) Interest expense (677,000) (640,000) ------------- ------------- Total Other Expenses (2,769,000) (760,000) INCOME (LOSS) - Before income taxes (4,833,000) 4,262,000 PROVISION FOR (BENEFIT FROM) INCOME TAXES (1,336,000) 2,067,000 ------------- ------------- NET INCOME (LOSS) $ (3,497,000) $ 2,195,000 ============= ============= OTHER COMPREHENSIVE INCOME Foreign Currency Translation Adjustment 31,000 (15,000) Unrealized gain/(loss) on Securities, Net of tax expense (benefit) of $(19,000) and $(1,394,000), for the three months ended June 30, 2001 and 2000, respectively 1,727,000 (2,706,000) ------------- ------------- TOTAL OTHER COMPREHENSIVE INCOME/(LOSS) $ 1,758,000 $ (2,721,000) COMPREHENSIVE LOSS $ (1,739,000) $ (526,000)
Three Months Ended ------------------ June 30 June 30 2001 2000 (Unaudited) (Unaudited) ----------- -----------EARNINGS (LOSS) PER SHARE: Basic: $ (0.10) $ 0.07 Fully Diluted: $ (0.10) $ 0.07 Weighted Average Shares Basic 33,416,000 33,198,000 Dilutive 33,416,000 33,397,000
Three Months Ended December 31
2001
(Unaudited)December 31
2000
(Unaudited)REVENUE $23,281,000
$43,329,000
EXPENSES Cost of revenue 12,043,000
15,643,000
Operating expenses 14,514,000
24,158,000
Total Expenses 26,557,000
39,801,000
OPERATING INCOME (LOSS) (3,276,000)
3,528,000
OTHER EXPENSES Interest income and other income and expense 48,000 (327,000) Interest expense (505,000)
(964,000)
Total Other Expenses (457,000)
(1,291,000)
INCOME (LOSS) - Before income taxes (3,733,000) 2,237,000 PROVISION FOR (BENEFIT FROM) INCOME TAXES (1,215,000) 799,000 NET INCOME (LOSS) $ (2,518,000)
$ 1,438,000
============
===========
OTHER COMPREHENSIVE LOSS Foreign Currency Translation Adjustment (10,000)
(1,000)
Unrealized loss on Securities, Net of Tax Benefit of $72,000 and $1,413,000 for the three months ended December 31, 2001 and 2000, respectively (140,000)
(2,743,000
TOTAL OTHER COMPREHENSIVE LOSS $ (150,000)
$ (2,744,000)
COMPREHENSIVE LOSS $ (2,668,000)
$ (1,306,000)
See Notes to Consolidated Financial Statements
5
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME -CONTINUEDContinued
Nine Months Ended ----------------- June 30 June 30 2001 2000 (Unaudited) (Unaudited) ----------- -----------REVENUE $ 110,403,000 $128,425,000 EXPENSES Cost of revenue 45,233,000 56,036,000 Operating expenses 68,966,000 61,340,000 ------------- ------------ Total Expenses 114,199,000 117,376,000 OPERATING INCOME (LOSS) (3,796,000) 11,049,000 OTHER EXPENSES Impairment From Investment in Available-for-Sale Securities (2,006,000) Interest income and other income and expense (89,000) (727,000) Interest expense (2,447,000) (2,565,000) ------------- ------------ Total Other Expenses (4,542,000) (3,292,000) INCOME (LOSS) - Before income taxes (8,338,000) 7,757,000 PROVISION FOR (BENEFIT FROM) INCOME TAXES (2,732,000) 3,255,000 ------------- ------------ NET INCOME (LOSS) $ (5,606,000) $ 4,502,000 ============= ============ OTHER COMPREHENSIVE INCOME Foreign Currency Translation Adjustment (91,000) (115,000) Unrealized loss on Securities, Net of tax benefit of $1,086,000 and $406,000 for the nine months ended June 30, 2001 and 2000, respectively (2,108,000) (1,919,000) ------------- ------------ TOTAL OTHER COMPREHENSIVE LOSS $ (2,199,000) $ (2,034,000) COMPREHENSIVE INCOME (LOSS) $ (7,805,000) $ 2,468,000Nine Months Ended ----------------- June 30 June 30 2001 2000 (Unaudited) (Unaudited) ----------- -----------EARNINGS (LOSS) PER SHARE: Basic: $ (0.17) $ 0.14 Fully Diluted: $ (0.17) $ 0.14 Weighted Average Shares Basic 33,280,000 33,032,000 Dilutive 33,280,000 33,248,000
Three Months Ended December 31
2001
(Unaudited)December 31
2000
(Unaudited)EARNINGS (LOSS) PER SHARE: Basic: $ (0.07)
$ 0.04
Fully Diluted: $ (0.07)
$ 0.04
Weighted Average Shares Basic 33,816,000
33,180,000
Dilutive 33,816,000
33,279,000
See Notes to Consolidated Financial Statements
6VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended ----------------- June 30 June 30 2001 2000 (Unaudited) (Unaudited) ----------- -----------Cash Flows from Operating Activities Net Income (Loss) $ (5,606,000) $ 4,502,000 Adjustments to reconcile net income (loss) to net cash Used in operating activities: Depreciation and amortization 4,060,000 3,094,000 Unrealized loss from impairment in available-for-sale securities 2,006,000 - Equity in losses of unconsolidated investee 697,000 678,000 Deferred income taxes (632,000) (684,000) (Increase) decrease in assets: Trade accounts receivable 26,616,000 (11,204,000) Service contract accounts receivable (15,996,000) (304,000) Inventory 85,000 (57,000) Refundable federal income tax (3,738,000) Other current assets (172,000) 1,008,000 Accumulated costs of uncompleted programs (3,630,000) (1,250,000) Increase (decrease) in liabilities: Trade accounts payable (10,055,000) 437,000 Service contract accounts payable 6,076,000 1,000 Accrued liabilities (3,102,000) 3,841,000 Advances from customers for uncompleted projects 274,000 (2,167,000) --------------- -------------- Net cash used in operating activities (3,117,000) (2,105,000) Cash Flows from Investing Activities Changes in notes receivable (155,000) (21,000) Changes in notes receivable related party 594,000 (144,000) Changes in property and equipment (1,676,000) (4,861,000) Investment in unconsolidated investments (762,000) (286,000) --------------- -------------- Net cash used in investing activities (1,999,000) (5,312,000) Cash Flows from Financing Activities Changes in long term debt (428,000) (360,000) Change to related party debt (157,000) 128,000 Net borrowings Notes payable 7,434,000 10,935,000 Proceeds from exercise of stock options 88,000 65,000 Payments for stock redemption - (321,000) Proceeds from issuance of stock - 11,000 --------------- -------------- Net cash provided by financing activities 6,937,000 10,458,000 Effect of exchange rate changes on cash (91,000) (115,000) Net Increase in Cash 1,730,000 2,926,000 Cash - Beginning of Period 905,000 552,000 --------------- -------------- Cash - End of Period $ 2,635,000 $ 3,478,000 =============== ===============
Three Months Ended December 31
2001
(Unaudited)December 31 2000
(Unaudited)Cash Flows from Operating Activities Net Income (Loss) $(2,518,000)
$ 1,438,000
Adjustments to reconcile net income (loss) to Net cash from operating activities: Depreciation and amortization 1,202,000
1,273,000
Equity in losses of unconsolidated investee 35,000 254,000 Deferred income taxes (1,709,000)
521,000
Refundable Federal Income Tax 1,719,000
-
(Increase) decrease in assets: Inventory 25,000
80,000
Trade accounts receivable 9,677,000
3,956,000
Other Current Assets 273,000
528,000
Accumulated costs of uncompleted programs (1,047,000) (1,732,000) Increase (decrease) in liabilities: Trade accounts payable 4,363,000
(6,618,000)
Accrued liabilities 331,000
(3,029,000)
Advances from customers for uncompleted projects 51,000 351,000 Net cash provided by (used in) operating activities 12,402,000 (2,978,000) Cash Flows from Investing Activities Changes notes receivable 28,000
30,000
Changes notes receivable Related Party 594,000 (264,000) Changes property and equipment -
(426,000)
Investment in unconsolidated investments -
(254,000) Net cash provided by (used in) investing activities 622,000 (914,000) Cash Flows from Financing Activities Changes Long Term Debt (73,000)
(139,000)
Change to related party debt (666,000)
(515,000)
Net borrowings Notes Payable (12,896,000)
6,887,000
Proceeds from issuance of stock -
5,000
Net cash provided by (used in) financing activities (13,635,000) 6,238,000 Effect of Exchange Rate Changes on Cash (10,000) (1,000) Net Change in Cash (621,000)
2,345,000
Cash - Beginning of Period 4,719,000
905,000
Cash - End of Period $ 4,098,000
$ 3,250,000
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=========
See Notes to Consolidated Financial Statements
7
VSIHOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTSHoldings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements1. The consolidated financial statements included herein have been prepared by the Company without audit pursuant to the rules of the Securities and Exchange Commission. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results may differ from these estimates. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the accompanying consolidated balance sheet and consolidated statements of income and cash flows include all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the results for the interim period, in conformity with generally accepted accounting principles.
2. The interim financial information presented herein should be read in conjunction with Management's Discussion and Analysis and financial statements and related notes included in the Registrant's Annual Report on Form 10-K for the year ended September 30,2000.2001. Results for interim periods should not be considered indicative of the results that may be expected for the year ended September 30,2001.2002.
3. Certain amounts for prior periods were reclassified to conform with present period presentation.
4. We evaluate the carrying value of long-lived assets for potential impairment on an ongoing basis. Such evaluations consider management's plans for future operations, recent operating results, undiscounted annual cash flows and other economic factors related to the operation to which the asset applies.ITEM
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this report and the Company's Annual Report on Form 10-K for the fiscal year ended September 30,2000.2001. The following discussion contains certain forward-looking statements relating to our anticipated future financial conditions and operating results and our current business plans. In the future, our financial condition and operating results could differ materially from those discussed herein and our current business plans could be altered in response to market conditions and other factors beyond our control. Important factors that could cause or contribute to such difference or changes include those discussed elsewhere in this report and the Company's Annual Report on Form 10-K for the fiscal year ended September 30,2000. See2001 (see the disclosures under "Cautionary Statement for the Purpose of theSafe Harbor"Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995").
BUSINESS DESCRIPTION:
VSI Holdings, Inc. (the "Company", "we", "our", or "us") presently consists of subsidiariesoperatingin the marketing services and entertainment/edutainment business sectors, operating under the following trade names:
Visual Services, Inc., a broad-based provider of educational curriculums and product training; interactive technology-based distance learning systems; product launches; Web site development, internet, intranet, and extranet solutions; direct-response and site-based marketing; change process and cultural change consulting;
Vispac, Inc., an integrated logistics and call center operation;
Performance SystemsGroup;Group, a provider of in-field consulting and change process sustainment services;
eCity Studios, Inc., a web site development company; and
Advanced Animations, Inc., a manufacturer of product simulators, animatronic figures and displays for theme parks, casinos, museums, and retail.We are attempting to position ourselves to take advantage of opportunities created by changes in technology. One of our practices has been to use a variety of technologies, without relying on any one technology. This allows us to use the most appropriate technology to meet our clients' client needs.
We serve our global customers from our Bloomfield Hills, Michigan headquarters and other offices in Michigan, California, Vermont, and Canada. We have approximately950700 employees.
The accompanying consolidated financial statements include the accounts of the Company and itssubsidiaries.subsidiaries, consisting of Advanced Animations, Inc., Vispac, Inc., Visual Services, Inc., eCity Studios, Inc. and PSG International, Inc. Inter-company balances and transactions have been eliminated in consolidation.8
FINANCIAL CONDITIONOur total assets decreased from
$116,129,000$109,072,000 at September 30,20002001 to$107,053,000$97,514,000 atJune 30,December 31, 2001. This decrease in total assets was due primarily to a17%15% decrease in our accounts receivable. Those receivables decreased$12,020,000$9,677,000 from$72,432,000$63,020,000 at September 30,20002001 to$60,412,000$53,343,000 atJune 30,December 31, 2001.The decrease in the Company's accounts receivable reflected a
$25,198,000,$14,780,000, or52%58%, decrease in billed trade accounts receivable, a$2,818,000,$358,000, or15%6%,decreaseincrease in unbilled trade account receivables, and a$15,996,000,$4,745,000, or276%15%, increase in purchased receivables. The increase in purchased receivables reflects continued growth in the extended servicecontracts accounts receivable.contract business for our largest customer. See the Liquidity and Capital Resources section for details. The decrease in billed trade account receivables was primarily attributable to cyclically high billings in September20002001 that were collected in the subsequent quarter. The decrease in trade accounts receivable is attributable to lower revenue associated with the softening economy and lower marketing expenditures by the automotive industry.Unbilled trade accounts receivable continued to decline, reflecting more expeditious billing. It is expected that the amount of unbilled trade accountPurchased receivables
will decrease during the remainder of the year as several large jobs are completed and subsequently billed. Service contract accounts receivablereflects installment payments owed by consumers on automotive extended service contracts purchased by the Company fromanautomotivemanufacturermanufacturers anditstheir dealers. Payments on these contracts are collected over a period of time, not exceeding 18 months.The Company presently intends to securitize this asset.See the Liquidity and Capital Resources section for details.
The change in the Company's total assets also reflects a$3,630,000$1,047,000 increase in accumulated costs of uncompleted programs. This item, which represents project start-up costs and activities, increased as a result of an increase in the number of projects in the start-up phase.This is up by approximately $1.2 million from the same point in the prior fiscal year, and it reflects our efforts to expand our sales in the area of web-based training. Historically, this is the time of year when this is highest, as we are working with our automotive clients on new vehicle model year introduction activities. The Company's investment in available-for-sale securities decreased approximately $5.2 million. See the Investment section for more details.Refundable Federal Income Tax reflects overpayments and anticipated benefit from current year losses. We anticipate receiving approximately $3.9 million shortly in refunds of income taxes prevously paid. In October, 2001 a refund of $1.3 million was received.
The Company's total current liabilities decreased
$1,784,000,$8,224,000, or3%9%, from$69,149,000$91,952,000 at September 30,20002001 to$67,365,000$83,728,000 atJune 30,December 31, 2001. This decrease was primarily attributable to a$10,055,000$12,969,000 decreasein accounts payable, a $6,076,000 increase in service contracts payable, a $7,434,000 increasein notes payable to bank that was partially offset by adecrease of $2,139,000$4,363,000 increase infederal income taxaccounts payable, anda decreasean increase of$1,905,000$51,000 inaccrued liabilities.advances from customers for uncompleted projects.The
declineincrease in trade accounts payable is primarily associated withlower sales in the third quarter. Service contracts accounts payable reflectsthe current month's liability for purchases ofService contracts accounts receivablepurchased receivables from automotive manufacturers and their dealers. See the Liquidity and Capital Resources section for details. In addition,current notes payable-related party andlong-term notes payable-related party decreased$1,165,000 and $392,000, respectively,$666,000, as a result of the partial repayment of that indebtedness.The decrease in accrued liabilities reflects the payment in December 2000 of bonuses and stock compensation that were accrued in the fiscal year ended September 30, 2000. The decrease in federal income taxes payable reflects the payment of previously anticipated federal income tax liabilities and the lack of taxable income in the current fiscal year.Notes payable to bankincreaseddecreased approximately$7.4$13.0 million due primarily to thepurchasing and financingcollection ofService contracttrade accounts receivableandwhich were used to repay thetimingbank lines ofpayments to suppliers.credit.Total stockholder's equity decreased approximately
$6.8$2.7 million from$27,551,000$5,127,000 at September 30,20002001 to$20,775,000$2,459,000 atJune 30,December 31, 2001. This decline wasprimarilyattributable to a total comprehensive loss of$7,805,000$2,668,000 for theninethree months endedJune 30,December 31, 2001.Approximately $2 millionComprehensive loss includes our net loss and change in market value ofsuch loss was attributable to the impairment of an investment. See the Investment section for details. Such loss was partially offset by a $1,027,000 increase in additional paid-in capital attributable to certain stock grants and stock options exercised. See the Liquidity and Capital Resources section for details.9available-for-sale securities.
OPERATING RESULTS
Revenue Recognition Policies. The Company operates in two segments, a marketing services segment andan entertainment/edutainmenta entertainment /edutainment segment. The marketing services segment provides marketing services andcustomercustomers relationship management, organizational training and development services primarily to the automotive and pharmaceutical industries. Theentertainment/edutainmententertainment /edutainment segment provides entertaining and educational animatronic displays and otherentertainment/edutainmententertainment /edutainment products primarily to theme parks, casinos, museums, andmuseums.retail.The Company's marketing services segment is comprised of Visual Services, Inc., Vispac,
Inc,Inc., PSG International, Inc., and eCity Studios, Inc.provide, which provides marketing services under single or multiple phase contractual arrangements with customers for projects generally ranging from 3 months to 24 months in duration. Following execution of a written contract obligating the customer to pay for services rendered, revenue is recognized on completion of each project phase or otherwise as the services are rendered, in each case as specified in the agreement with the customer. Such revenue is recognized at the estimated realizable amount attributable under the agreement with the customer to the completed project phase or the service rendered, as applicable. Revenue for services attributable to customer changes to project specifications is recognized when the customer has executed a written change order and the services contemplated by the change order have been rendered or the applicable project phase has been completed, whichever occurs later. Unbilled trade accounts receivable result from revenue recognized for completed project phases in advance of customer billings.The Company's entertainment/edutainment segment reflects the activities of Advanced Animations, Inc., which manufactures product simulators, animatronic figures and displays for theme parks, casinos and retailers under written display contracts of varying duration. It recognizes revenue on each of those contracts based on its estimate of the percentage of work under the contract that has been completed. A percentage of the contract price, determined by the ratio of incurred costs to total estimated costs, is included in revenue and the incurred costs are charged against this revenue. Revisions in cost and profit estimates during the course of a contract are reflected in the accounting period in which the facts that require the revision become known. Billings are made in accordance with contract terms. At the time a loss on a contract becomes known, the entire amount of the estimated loss is accrued.
The Company operates in very competitive markets and its sales are derived primarily from the automotive industry. The business areas in which the Company and its customers operate are subject to general economic cycles and industry specific business cycles. Accordingly, any downturn in the economy in general or in the business areas in which the Company and its customers operate could have
and has hada negative impact on the Company's results of operations and financial condition. The Company is currently experiencing the negative impact of this economic environment. Such negative impact may be magnified, especially in a given quarter, if negative changes in the economy and in the business cycles of the Company's different operations occur contemporaneously or suddenly and the Company is not able to implement a timely response of sufficient magnitude.10Three Months Ended
June 30,December 31, 2001 compared to Three Months EndedJune 30,December 31, 2000Revenues. Revenues were
$33,445,000$23,281,000 for the three months endedJune 30,December 31, 2001, compared to$45,636,000$43,329,000 for the same period last year. The26.7%46% decline in revenues compared to the same period in the prior fiscal year was primarily attributable to a softening economy and the cancellation and reduction of expenditures by our automotive clients for marketing support and other services, all of which resulted in curtailments and deferrals of existing Company projects and delays in new Company projects. Although the Company believes that existing projects will be restored as general economic conditions improve, there can be no assurances that such results will be achieved.In connection with the foregoing, and as part of an effort to enhance the Company's financial performance, the Company has accelerated its cost reduction efforts. These cost reduction efforts include employee and contract labor reductions, layoffs, and salary reductions for employees and are expected to result in savings of approximately $17.0 million (pre-tax) in the next fiscal year. Approximately 75 jobs have been eliminated. Salary reductions, effective June 1, 2001 to September 30, 2001, ranged from approximately 5% to 35% of salary, with highly compensated employees seeing the largest reductions. While many cost reduction efforts have been undertaken in the third quarter, the financial impact of those efforts is not expected to be realized until the fourth quarter. This situation is being monitored closely to facilitate the Company's goal of returning to profitability as quickly as possible.Cost of Revenue. Cost of Revenue decreased from
$20,894,000$15,643,000 in the prior year to$13,105,000.$12,043,000. As a percentage of revenue, itdeclinedincreased from46%36% to39%52%. This is primarily attributable to the loss of discounts and efficiencies associated with lowermargin business at our Vispac subsidiary.revenue.Operating Expense. Our operating expenses have
increaseddecreased to$22,404,000$14,514,000 for the three months endedJune 30,December 31, 2001 from$19,720,000$24,158,000 in the three months endedJune 30, 2000.December 31, 2001. Thisincreasedecrease of14%40% is mainly attributable to the following factors: (1) professional expenses and other costs incurred in the prior year as a result of the proposed merger with SPX; (2)increased depreciation expensewage reductions ranging from 2% to 8% of salaries; (3) fewer employees as a result ofassets placed into service in the prior year; (3) wage escalations for computer-industry and other professionals;layoffs; and (4)increaseddecreased dependence on contract labor, resulting inhigherlower labor costs.A significant reduction in the usage of contract labor occurred in the third quarter, and is expected to continue.Net Loss. Primarily as a result of the foregoing, the Company had a net loss of
$3,497,000$2,518,000 during the three months endedJune 30,December 31, 2001 as compared to net income of$2,195,000$1,438,000 for the same period in the prior fiscal year. The Companyalsohadothera total comprehensiveincomeloss of$1,758,000$2,668,000 during the three months endedJune 30,December 31, 2001 as compared toothera total comprehensive loss of$2,721,000$1,306,000 for the same period in the prior fiscalyear reflecting the impairment of an investment. See the Investment section for more details of the impairment of available-for-sale securities. As a result, the Company had a comprehensive loss of $1,739,000 for the three months ended June 30, 2001 as compared to comprehensive loss of $526,000 for the same period in the prior fiscalyear.Nine Months Ended June 30, 2001 compared to Nine Months Ended June 30, 200011 Revenues. Revenues were $110,403,000 for the nine months ended June 30, 2001, compared to $128,425,000 for the same period in the prior fiscal year. As indicated above, the decline reflects a softening economy and lower marketing expenditures by the automotive industry, especially during the last two fiscal quarters. Cost of Revenue. Cost of Revenue decreased from $56,036,000 in the prior year to $45,233,000. As a percentage of revenue, it declined from 44% to 41%. This is primarily attributable to the loss of lower margin business at our Vispac subsidiary. Operating Expense. Operating expenses increased to $68,966,000 for the nine months ended June 30, 2001 from $61,340,000 in the nine months ended June 30, 2000. This increase of 12% was primarily attributable to (1) increased depreciation expense as a result of assets placed into service in the prior year; (2) wage escalations for computer-industry and other professionals; and (3) increased dependence on contract labor, resulting in higher labor costs. A significant reduction in the usage of contract labor occurred in the third quarter, and is expected to continue. This increase in operating expenses also reflects approximately $1.85 million (pre-tax) in professional expenses and other costs incurred as a result of the proposed merger with SPX. Net Loss. Primarily as a result of the foregoing, the Company had a net loss of $5,606,000 during the nine months ended June 30, 2001 as compared to net income of $4,502,000 for the same period in the prior fiscal year. The Company also had an other comprehensive loss of $2,199,000 during the nine months ended June 30, 2001 as compared to other comprehensive loss of $2,034,000 for the same period in the prior fiscal year. Of such other comprehensive loss, $2,108,000 was attributable to an unrealized loss on securities, net of tax benefit for the nine months ended June 30, 2001. As a result, the Company had a comprehensive loss of $7,805,000 for the nine months ended June 30, 2001 as compared to comprehensive income of $2,468,000 for the same period in the prior fiscal year.Our future operating results will depend in part on management's ability to properly control expenses in light of anticipated revenues, and profitably manage any future growth. While we intend to pursue the continued growth of our business, there can be no assurance that such growth will be achieved. A decline in revenues, without a corresponding and timely reduction in staffing and other expenses, or a staffing increase that is not accompanied by a corresponding increase in revenues, could have a material adverse effect on our operating results.
Due to the significant losses experienced in the prior year, the Company has implemented a strategic plan that includes a significant amount of cost reduction, improvement to cash collection procedures, sale of assets, and business divestiture. During the prior year ended September 30, 2001, the Company reduced its current workforce and realized cost savings. The Company is also in the process of analyzing certain aspects of its business for future viability and upon conclusion of such analysis will decide to cease those which it concludes will not be profitable.
In connection with the foregoing, and as part of an effort to enhance the Company's financial performance, the Company has accelerated its cost reduction efforts. These cost reduction efforts include employee and contract labor reductions, layoffs, and salary reductions for employees, and are expected to result in savings of approximately $30.0 million (pre-tax) in the next fiscal year. Approximately 300 jobs have been eliminated. Salary reductions, effective November 16, 2001, ranged from 2% to 8% of salary, with highly compensated employees seeing the largest reductions. While many cost reduction efforts have been undertaken in the first quarter, the financial impact of those efforts is not expected to be more fully realized until the second quarter. This situation is being monitored closely.
LIQUIDITY AND CAPITAL RESOURCES
We have various bankAt December 31, 2001, we had three lines of credit totaling
$42,000,000, which$56,000,000; interest on these lines were at London Inter-Bank Offered Rate ("LIBOR") plus 1.50% to 2.75%; at December 31, 2001 the interest rate was 3.38% and the outstanding balances were $38,172,000. These lines of credit mature inAugust,June and July, 2002. These lines of credit have covenants restricting us from borrowing elsewhere, loaning or guaranteeing a loan of another company without the prior written consent of the bank; transferring assets except in the ordinary course of business; and declaring dividends. Other covenants mandate certain levels of net worth and working capital, and that the ratio of total liabilities to net worth, debt service ratio and current ratio do not exceed certain amounts. At December 31, 2001, andMarch, 2002. At June 30,at February 11, 2002, the Company was not in compliance with the latter covenants. As a result, all long-term bank debt has been classified as a current liability.As a result of our financial performance and condition, as well as the fact that we are not in compliance with a number of our loan covenants, this lender has required us to devise a financial plan to improve the Company's financial performance. On February 13, 2002 the Company signed a loan modification agreement with this lender, which modified slightly our borrowing formula, and, subject to certain conditions, including that there not occur any other defaults, provide for the lender to forbear exercising its remedies as a result of the existing defaults up to July 1, 2002 to permit us to seek a sale of the Company. The acceleration of the credit lines by the lender or a failure to obtain alternate financing on commercially acceptable terms could have a material adverse effect on the Company.
During the prior year, we signed a new $25,000,000 credit line (included in the totals above), which was designed for our extended service contract business for an automobile manufacturer and its dealership affiliates. We purchase and administer the loans used for consumers to purchase extended service contracts on their automobiles. This business started during the prior year and at December 31, 2001, we had borrowed
an aggregate of $40,013,000 (including outstanding checks, less cash balances) against these lines. Interest on these lines is primarily based on LIBOR (London Inter-Bank Offered Rate) plus 1.5%. Our borrowing rate at June 30, 2001 was 5.43%. At June 30, 2001, we had utilized approximately $8 million$24,285,000 to fundpurchasesthe purchase ofservice contracts accounts receivable as we had not yet completed a separatepurchased receivables. In order to continue this business, it will be necessary to increase our line of credit forthatthis activity.We have subsequently arranged a $25 millionThis line of creditas a bridgecarries similar covenants toan asset securitizationour other lines of$50 million to $60 million which is expected to closecredit. As of December 31, 2001, and February 11, 2002, we were inour fourth quarter. This bridgedefault on those covenants. There can be no assurances that this lender will not accelerate the loan, or that this lender will increase the line of creditwas made on July 12, 2001. It is anticipated that by securitizing our service contracts accounts receivable, we will achieve lower borrowing costs than those associated with our traditional bank financing. However, there can be no assurance (i) that it will be possibletoeffect such securitization either at all or on terms acceptableallow us tous or (ii) that such securitization willcontinue infact result in relatively lower borrowing costs.this business, and this would materially adversely affect the Company. If we are unable toeffect such securitization, other sources of12 financing will be sought, although there can be no assurance that it will be possible to obtainincrease thisfinancing. We have had a long-term relationship with our current bank. Through the years, it has provided financing and linesline of credit,for us.or effect a securitization in a suitable time frame, we may have to discontinue this business. This business is expected to generate approximately $5 million in revenue during the current fiscal year.There can, however, be no assurance that
theour lines of credit will be renewed when they mature. If we are unable to renew the lines of credit, other sources of financing would be sought,primarilythrough lines of credit from another bankinginstitution.institution or sale of part or all of the Company.As previously disclosed, the Company has obtained an advisor to assist it in considering alternatives to maximize shareholder value, which may include a sale of all or part of the Company. There can be no assurance that any alternative that may be considered will be available to the Company or will be realized.
Since we are a net borrower of funds, minimal cash balances are kept on hand. As a result, at any point in time, we may have more money in checks outstanding than the cash balance. When checks are presented for payment, the bank notifies us. We often borrow on our lines of credit to cover the checks.
We
Subject to reaching agreement with our lenders, we believe that cash flows from operations, along with borrowings, and sales of assets not used in the Company's daily operations will be sufficient to finance our activitiesin 2001.through July 1, 2002. On a long-term basis, increased financing or sale or merger of the Company may be necessary to fundany large project awarded to us, or any acquisitions we may make.the business. We have no current plans to conduct an offering of our shares to the public in fiscal year2001.2002.
Stock and Stock Options Granted
This year,we granted 20,000no shares of restricted stock were granted tocertain keyemployees. During the first quarter, 37,000 shares vested, the rights to which had been granted in prior years. The shares vest in three equal installments, one, two, and three years from the date of grant. We do not expect the exercise of stock options, or purchase of shares, by employees to be a material source of capital in fiscal year2001.2002.
INVESTMENTSDuring
the first quarter, 160,000 shares vested and were issued, the rights to which had been granted in prior years. This issuance, along with the exercise of previously issued stock options and certain employee stock purchases, caused an increase in additional paid-in capital for approximately $1,027,000. This was accomplished by a reduction in accrued liabilities and an increase in additional paid-in capital. INVESTMENTS As of June 30, 2001, we had invested an aggregate of $4.5 million in Oz Entertainment Company ("OEC") and in a limited partnership (as a limited partner) which plans to develop a theme park in Kansas based on the story "The Wizard of Oz." We have recognized losses totaling $1,188,000 prior to thisfiscal yearand have recognized additional losses totaling $450,000 in the first nine months of this fiscal year. We expect to see continued losses until the opening of the park, which is currently scheduled for 2004. The park is planned to be constructed on 9,000 acres of land currently owned by the federal government. It is necessary to receive title to the land before construction can begin. In order to receive title to the land, approval must be received from two governmental authorities. The first authority has met twice to consider granting approval and both times there has been a tie vote, preventing immediate approval. It is anticipated that the first authority will vote to approve the project in fall, 2001. The second authority will not consider the matter until the first authority approves the project. If the two approvals are not timely received, the rights to construct a park using the "Oz" theme on that land may expire before construction could begin. The success of the park as an investment is dependent upon, among other things, receipt of title to the land, certain infrastructure improvements being completed by or paid for by governmental agencies, the availability of financing arranged through governmental agencies, and the availability of additional public or private financing. If the park does not open, the entire investment, currently valued at $2,862,000, is at risk. Although projections provided and prepared by the management of OEC forecasts that the park will be profitable upon opening, there can be no assurance that the park will be opened or that such result will be achieved. During this fiscal year, $1.4 million of accounts receivable from OEC was collected from additional funds invested by a related party.13 Prior to the current fiscal year,1999, we invested $3.5 million in convertible preferred stock in a private placement offering of eCollege.com,(NASDAQ - ECLG),a company engaged indeveloping Internet-based education forproviding technology and services that enable colleges anduniversities. Through relationships withuniversities to offer an online environment for distance and off-campus virtual learning. eCollege.com sold 4.5 million shares of itseducational partners, it develops, manages and markets on-line courses and degree programs. Upon completion of theircommon stock in an initial public offering which took place during our fiscal year 2000. As part ofcommon stock in December, 1999,the offering, our investmentwasconvertedtointo 468,808 shares of common stock.In addition,During fiscal year 2000, wepaid $49,500also invested an additional $50,000 to acquire 4,500 shares oftheir stock during their initial public offering.eCollege.com. AtAugust 2, 2001,February 4, 2002 our investment in eCollege.com (NASDAQ - ECLG) had a fair market value of$1,913,000.$1,387,000.
Prior to the current fiscal year, we exercised options to purchase 431,525 shares of Navidec, Inc. (NASDAQ - NVDC) for $2,450,000. Navidec is a developer of web sites and web based complete automotive purchase transaction and information services for prospective customers. In 2000, Navidec's primary product, referred to as Drive off.com, was sold to CarPoint in exchange for an equity interest in CarPoint. Subsequently, Navidec recognized an impairment of its equity investment in CarPoint, which is majority-owned by Microsoft (NASDAQ - MSFT). As a result of Navidec's performance, and condition, and believing their stock price decline to be other-than-temporary, we recognized an impairment on our investmentat June 30, 2001.last fiscal year. This impairment increased our net loss before income taxes during the fiscal year ended September 30, 2001 by $2,006,000, and left us with an investment balance in Navidec of $444,000. AtAugust 2, 2001,February 4, 2002, these shares had a market value of$380,000.$173,000.The unrealized losses on the Company's investments in eCollege.com and Navidec are the primary cause of the Company's unrealized gains and losses on securities recorded during the three months
and nine monthsendedJune 30,December 31, 2001.Those gains and losses were also the primary factors for the change in deferred tax asset for the same periods. On March 24, 2001 SPX Corporation and the Company entered into a merger agreement providing for the merger of the Company with and into SPX Corporation. A registration statement on Form S-4, as amended (registration no. 333-59050), was filed by SPX Corporation with the Securities and Exchange Commission regarding the proposed merger of the Company into SPX Corporation. On May 8, 2001 SPX Corporation and the Company announced that SPX had given the Company notice of circumstances that SPX Corporation claimed would entitle it to terminate the merger agreement between the two companies if such circumstances were not reasonably cured or possible to cure. On the same date, the Company announced that it would investigate SPX Corporation's claims. On June 28, 2001 the Company notified SPX Corporation that the Company's investigations concluded that the claims specified in SPX Corporation's notice arose out of temporary changes in the Company's revenues and profits that were attributable to a temporary deterioration of the Company's business resulting from customer marketing budget cuts in response to an industry-wide economic downturn. The Company also notified SPX Corporation that SPX Corporation was not entitled to terminate the merger agreement on those bases. Accordingly, the Company requested SPX Corporation to withdraw its notice and to proceed to complete the merger. The Company also extended the closing deadline set forth in the merger agreement and requested a meeting with SPX Corporation to discuss the merger. On July 2, 2001 SPX Corporation responded by letter to the effect that it disagreed with the Company's conclusions and that it intended to terminate the merger agreement on the basis of its May 8th notice. SPX also indicated its willingness to meet with the Company to further consider evidence that its claims had been resolved.14 On July 13, 2001 representatives of the Company and SPX Corporation met to discuss SPX Corporation's claims, the Company's conclusion that SPX Corporation is not entitled to terminate the merger agreement, actions taken by the Company in response to the industry downturn, and the Company's request that the parties proceed to complete the merger. At the conclusion of the meeting SPX Corporation advised the Company that it would consider the information presented and get back to the Company in the near future. Not having any response from SPX Corporation, on July 27, 2001, the Company provided additional information to SPX Corporation and requested SPX Corporation to amend the registration statement so that a meeting of the Company's shareholders could be called to consider approval of the merger agreement. On August 3, 2001 SPX Corporation advised the Company by letter that SPX Corporation intends to stand on its May 8th notice and to terminate the merger in its present form and withdraw the pending registration statement filed with the Securities and Exchange Commission."CAUTIONARY STATEMENT FOR THE PURPOSES OF THE
SAFE HARBOR"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF19951995"
Certain statements in Management Discussion and Analysis of Financial Condition and Results of Operations and certain other sections of this Report are forward-looking. These may be identified by the use of forward-looking words or phrases such as "believe," "expect," "anticipate," "should," "planned," "estimated," "goal," and "potential," among others. These forward-looking statements are based on our reasonable current expectations. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results or experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and our results include but are not limited to: (1) the complexity and uncertainty regarding the development and customer acceptance of new products and services; (2) the loss of market share through competition; (3) the introduction of competing products or service technologies by other companies; (4) pricing pressures from competitors and/or customers; (5) our inability to protect proprietary information and technology; (6)usage of advance funded services; (7) the loss of key employees and / or customers; (8) our customers continued reliance on out sourcing; (9) changes in our capital structure and cost of capital, and ability to borrow sufficient funds at reasonable rates (10)inability of the developers of the "Wonderful World of Oz" theme park to obtain final transfer of the property, to timely complete construction of the park, and to operate it profitably once the park opens; (11)uncertainties relating to business and economic conditions;(12)(11) management's ability to maintain proper contract and employee staffing levels;(13)(12) value of investments of the Company;(14)(13) our ability totimely bill and collectconvert unbilled trade accounts receivables into billed trade accounts receivables;(15)(14) cutbacks in client budgets, project deferrals and cancellations;(16)(15) our ability to manage our growth and profitability; and(17) completion(16) timely refund ofour planned merger with SPX Corporation. ITEMtaxes previously paid.Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest Rate Risk. Our earnings are affected by changes in short-term interest rates as a result of our15revolving credit agreements, which bear interest at a floating rate. We do not use derivative or other financial instruments to mitigate the interest rate risk or for trading purposes. Risk can be estimated by measuring the impact of a near-term adverse movement of 100 basis points in short-term market interest rates. If short-term market interest rates average 100 basis points more in the next 12 months, the adverse impact on our results of operations would be approximately$264,000$252,000 net of income tax benefit. We do not anticipate any material near-term future earnings or cash flow expenses from changes in interest rates related to our long-term debt obligations as all of our long-term debt obligations have fixed rates.Foreign Currency Risk. Although we conduct business in foreign countries, principally Canada and Australia, foreign currency translation gains and losses are not material to our consolidated financial position, results of operation or cash flows. Accordingly, we are not currently subject to material foreign currency exchange rate risks from the effects that exchange rate movements of foreign currencies would have on our future costs or on future cash flows we would receive from our foreign investment. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments for trading purposes or to hedge the effects of adverse fluctuations in foreign currency exchange rates.
Investment Risk for Privately Held Companies. We invest in equity instruments of privately-held companies in the internet information technology
and entertainmentareas for business and strategic purposes.See e.g., the disclosures above regarding our theme park investments.These investments are included in long-term assets, and are accounted for under the cost method or the equity method. For these non-quoted investments, our policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. We identify and record impairment losses on these investments when events and circumstances indicate that such assets are permanently impaired. To date, no such impairment has been recorded.Investment Risk for Publicly Traded Companies. We are also exposed to equity price risk on our investments in publicly traded companies. Our available-for-sale securities include our equity positions in Navidec, Inc., and eCollege.com, both of which have experienced significant volatility in their stock prices since going public. We do not attempt to reduce or eliminate our market exposure on these securities. A 20% adverse change in equity price would result in an approximate
$459,000$312,000 decrease in fair value in our available-for-sale securities, based uponAugust 2, 2001February 4, 2002 closing market prices for Navidec and eCollege.com.16
PART II. OTHER INFORMATIONITEM
Item 1. Legal ProceedingsThe Company is periodically involved in routine proceedings. Except as described in the following paragraph, there are no legal matters, existing, pending, or threatened, which management presently believes could result in a material loss to the Company.
On September 21, 2001, the Company filed a class action lawsuit, on its own behalf and on behalf of a plaintiff class consisting of the Company's approximately 1,600 shareholders and optionholders, against SPX Corporation and its directors alleging that such corporation had failed to perform its obligations under an agreement and plan of merger between the Company and such corporation. The Company's suit asks that the court either require SPX Corporation to complete the proposed merger with the Company or award the Company and the plaintiff class damages. In late December 2001, the defendants in this action filed an answer denying the Company's allegations and a counterclaim alleging breach of contract and seeking recovery of damages and a termination fee of approximately $9,000,000. As this matter is in a very preliminary stage and its outcome is not presently determinable, the Company has not recorded any contingent receivable or liability related to its outcome.
Item 3. Defaults upon Senior Securities
See Part I, Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, and the disclosures contained therein as to defaults under the Company's credit facilities, which discloses are incorporated by reference herein.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. ExhibitsNone
Exhibits: + signifies exhibit filed herewith
+10.1 Loan Modification Agreement dated February 13, 2002, between VSI Holdings, Inc. and Standard Federal Bank, N.A.b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated March 30, 2001 disclosing the execution of a definitive merger agreement with SPX Corporation pursuant to which the Company was to be merged with and into SPX. A registration statement on Form S-4, as amended (Registration No. 333-59050), was filed by SPX Corporation with the Securities and Exchange Commission regarding the proposed merger of VSI Holdings into SPX Corporation.On
May 10,November 15, 2001 the Company filed a current report on Form 8-K dated November 14, 2001, disclosingthat SPX Corporation has giventhe letter to shareholders of VSI Holdings,noticeInc. The shareholder letter reported on the results ofcircumstances thatVSI Holdings, Inc. fiscal year 2000 annual shareholder meeting held on October 11, 2001, certain information as to the Company's 2001 fiscal year, and an update on the Company's merger dispute with SPXCorporation claims would entitle it to terminate the merger agreement between the two companies if such circumstances are not reasonably cured or possible to cure.Corporation.On
June 29,December 21, 2001 the Company filed a current report on Form 8-K dated December 21, 2001, disclosing VSI Holdings, Inc. preliminary 2001 fiscal year-end results and that the Companysaw no reason for SPX Corporationis exploring alternatives toterminate the merger agreement between the two companies. The Company disclosed that the circumstances described by SPX Corporation were not cause to terminate the merger agreement. The Company has requested that SPX withdraw its notice and for the parties to proceed toward closing the merger. The Company also gave notice to SPX of its extension of the closing deadline set forth in the Merger Agreement. On August 6, 2001, the Company filed a current report on Form 8-K disclosing that the Company had received notice that SPX Corporation was terminating the merger in its present form and withdrawing the pending registration statement filed with the Securities and Exchange Commission.17maximize shareholder value.
SIGNATURESPursuant to the requirement of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
there untothereunto duly authorized.VSI Holdings, Inc. ------------------ Registrant August 27, 2001 /S/Steve Toth, Jr. ------------------ Steve Toth, Jr., Director, President and Chief Executive Officer August 27, 2001 /S/Thomas W. Marquis -------------------- Thomas W. Marquis, Director, Treasurer, Chief Accounting and Financial Officer
| VSI Holdings, Inc. Registrant | |
| February 19, 2002 | /S/Steve Toth, Jr. |
| February 19, 2002 | /S/Thomas W. Marquis |
| Exhibit Number | |
| Exhibits: + signifies exhibit filed herewith | |
| +10.1 | Loan Modification Agreement dated February 13, 2002, between VSI Holdings, Inc. and Standard Federal Bank, N.A. |