UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ___X___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1999 _______ 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. 1-12942 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.) 2100 North Woodward Avenue 201 West 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 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. Yes__X___ No______ There were 32,880,555 shares of Common Stock, par value $.01 per share, outstanding at June 30, 1999. The Company held 270,250 of these shares as treasury stock. PART 1. FINANCIAL INFORMATION Item 1. Financial Statements VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30 September 30 1999 1998 (Unaudited) (Audited) ASSETS CURRENT ASSETS Cash $ 643,000 $ 463,000 Cash in escrow 2,690,000 1,797,000 Trade accounts receivable: Billed 29,681,000 36,081,000 Unbilled 18,220,000 13,485,000 Notes receivable and advances: Related party 29,000 319,000 Other 230,000 800,000 Inventory 458,000 409,000 Accumulated costs of uncompleted programs 5,624,000 3,220,000 Deferred tax asset 759,000 1,336,000 Other current assets 3,229,000 1,158,000 __________ __________ Total Current Assets 61,563,000 59,068,000 LONG-TERM PORTION OF NOTES RECEIVABLE - Related Parties 777,000 804,000 PROPERTY, PLANT AND EQUIPMENT (NET) 21,825,000 24,182,000 DEFERRED TAX ASSET 194,000 194,000 INVESTMENTS 9,617,000 1,021,000 GOODWILL-NET 4,061,000 4,286,000 __________ __________ Total Assets $98,037,000 $89,555,000 =========== =========== VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30 September 30 1999 1998 (Unaudited) (Audited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long term debt $ 559,000 $ 461,000 Trade accounts payable 14,921,000 11,926,000 Notes payable to related parties 1,361,000 - Notes payable to bank 31,776,000 25,139,000 Accrued liabilities 2,387,000 3,817,000 Federal income tax payable - 4,562,000 Advances from customers for uncompleted projects 5,938,000 4,042,000 __________ __________ Total Current Liabilities 56,942,000 49,947,000 LONG-TERM LIABILITIES Notes payable - Related parties 11,595,000 11,494,000 Long-term debt - Other 7,740,000 6,012,000 Redeemable Common Stock - 1,960,000 __________ __________ Total Long-Term Liabilities 19,335,000 19,466,000 STOCKHOLDERS' EQUITY Preferred stock - $1.00 par value $ - $ - per share, 2,000,000 shares authorized, no shares issued Common stock - $.01 par value 329,000 407,000 per share, 60,000,000 shares authorized, 32,881,000 shares issued at June 30, 1999 and 40,741,000 at September 30, 1998 Treasury stock, (at cost) - (1,406,000) (3,643,000) 270,000 shares at June 30, 1999, 7,888,000 shares at September 30, 1998 Additional paid-in capital 6,485,000 8,208,000 Stock Subscriptions Receivable - (25,000) Accumulated Other Comprehensive Income Translation Account (25,000) (23,000) Unrealized Gain on Securities, Net of Tax of $275,000 534,000 - Retained Earnings 15,843,000 15,218,000 __________ __________ Total Stockholders' Equity 21,760,000 20,142,000 Total Liabilities and $98,037,000 $89,555,000 Stockholders' Equity =========== =========== See Notes to Consolidated Financial Statements VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME Three Months Ended June 30 June 30 1999 1998 (Unaudited) (Unaudited) REVENUE $28,439,000 $37,817,000 EXPENSES Cost of revenue 12,444,000 17,061,000 Operating expenses 18,742,000 16,779,000 __________ __________ Total Expenses 31,186,000 33,840,000 OPERATING INCOME (LOSS) (2,747,000) 3,977,000 OTHER EXPENSES Interest and other income (expense) (181,000) 45,000 Interest expense (692,000) (505,000) __________ __________ Total Other Expenses (873,000) (460,000) INCOME (LOSS) - Before income taxes (3,620,000) 3,517,000 PROVISION FOR INCOME TAXES (BENEFIT) (1,293,000) 1,195,000 __________ __________ INCOME (LOSS) FROM CONTINUING OPERATIONS $(2,327,000) $ 2,322,000 =========== =========== Discontinued Operations Loss from Discontinued Operations - - $ (66,000) Net of Income Tax Benefit of $33,000 for the three months ended June 30,1998 NET INCOME (LOSS) $(2,327,000) $ 2,256,000 =========== =========== OTHER COMPREHENSIVE LOSS Foreign Currency Translation Adjustment (9,000) - Unrealized loss on Securities, Net (226,000) - of Tax Benefit of $117,000 ____________ ___________ TOTAL OTHER COMPREHENSIVE LOSS $ (235,000) $ - COMPREHENSIVE INCOME (LOSS) $(2,562,000) $ 2,256,000 See Notes to Consolidated Financial Statements VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME - Continued Three Months Ended June 30 June 30 1999 1998 (Unaudited) (Unaudited) EARNINGS (LOSS) PER SHARE: Basic: Income (Loss) from Continuing Operations $(0.07) $ 0.07 Loss from Discontinued Operations - (0.00) _________ __________ Net Income (Loss) $(0.07) $ 0.07 ========= ========== Fully Diluted: Income (Loss) from Continuing Operations $(0.07) $ 0.07 Loss from Discontinued Operations - (0.00) _________ __________ Net Income (Loss) $(0.07) $ 0.07 ========= ========== Weighted Average Shares Basic 32,623,000 32,959,000 Dilutive 33,286,000 34,219,000 See Notes to Consolidated Financial Statements VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME Nine Months Ended June 30 June 30 1999 1998 (Unaudited) (Unaudited) REVENUE $104,289,000 $104,442,000 EXPENSES Cost of revenue 50,779,000 49,755,000 Operating expenses 50,329,000 43,018,000 ___________ ___________ Total Expenses 101,108,000 92,773,000 OPERATING INCOME 3,181,000 11,669,000 OTHER EXPENSES Interest and other income (expense) (68,000) 507,000 Interest expense (1,999,000) (1,242,000) ___________ ____________ Total Other Expenses (2,067,000) (735,000) INCOME - Before income taxes 1,114,000 10,934,000 PROVISION FOR INCOME TAXES 487,000 3,717,000 ___________ ___________ INCOME FROM CONTINUING OPERATIONS $ 627,000 $ 7,217,000 ============ ============ Discontinued Operations Loss from Discontinued Operations - - $ (429,000) Net of Income Tax Benefit of $221,000 for the nine months ended June 30,1998 NET INCOME $ 627,000 $ 6,788,000 ============ ============ OTHER COMPREHENSIVE INCOME Foreign Currency Translation Adjustment (25,000) - Unrealized gain on Securities, Net 534,000 - of Tax of $275,000 ___________ ___________ TOTAL OTHER COMPREHENSIVE INCOME $ 509,000 $ - COMPREHENSIVE INCOME $ 1,136,000 $ 6,788,000 See Notes to Consolidated Financial Statements VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME - Continued Nine Months Ended June 30 June 30 1999 1998 (Unaudited) (Unaudited) EARNINGS PER SHARE: Basic: Income from Continuing Operations $ 0.02 $ 0.22 Loss from Discontinued Operations - (0.01) _________ _________ Net Income $ 0.02 $ 0.21 ========= ========= Fully Diluted: Income from Continuing Operations $ 0.02 $ 0.22 Loss from Discontinued Operations - (0.01) _________ _________ Net Income $ 0.02 $ 0.20 ========= ========= Weighted Average Shares Basic 32,849,000 32,804,000 Dilutive 33,531,000 33,487,000 See Notes to Consolidated Financial Statements VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months Ended June 30 June 30 1999 1998 (Unaudited) (Unaudited) Cash Flows from Operating Activities Net Income $ 627,000 $ 6,788,000 Adjustments to reconcile net income to Net cash from operating activities: Depreciation and amortization 4,616,000 2,750,000 Equity in losses of unconsolidated investee 109,000 12,000 Deferred income taxes 577,000 - (Increase) decrease in assets: Trade accounts receivable 1,665,000 (10,253,000) Inventory (49,000) 436,000 Other Current Assets (2,071,000) 1,986,000 Accumulated costs of uncompleted programs (2,404,000) (6,601,000) Increase (decrease) in liabilities: Trade accounts payable 1,035,000 18,004,000 Accrued liabilities (5,192,000) (523,000) Advances from customers for uncompleted projects 1,003,000 2,127,000 __________ __________ Net cash provided by (used in) operating activities (84,000) 14,726,000 Cash Flows from Investing Activities Changes notes receivable 570,000 (117,000) Changes notes receivable Related Party 317,000 9,416,000 Changes property and equipment (2,034,000) (8,723,000) Investment in unconsolidated investments (7,896,000) - Acquisition of PSG International - (2,525,000) __________ __________ Net cash provided by (used in) investing activities (9,043,000) (1,949,000) VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS - Continued Cash Flows from Financing Activities Changes Long Term Debt 1,826,000 11,509,000 Change to related party debt 1,462,000 (9,694,000) Net borrowings Notes Payable 6,637,000 (2,843,000) Proceeds from exercise of stock options 23,000 3,000 Proceeds from issuance of stock 30,000 48,000 Purchase of treasury stock (669,000) - Distributions to shareholders - (11,346,000) __________ __________ Net cash provided by (used in) financing activities 9,309,000 (12,323,000) Effect of Exchange Rate Changes on Cash (2,000) - Net Increase (Decrease)in Cash 180,000 454,000 Cash - Beginning of Period 463,000 235,000 __________ __________ Cash - End of Period $ 643,000 $ 689,000 ========== ========== See Notes to Consolidated Financial Statements VSI Holdings, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. 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. Examples include provisions for bad debts and the length of product life cycles and buildings' lives. 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 balance sheets and 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 notes thereto included in the Registrant's Annual Report on Form 10-K for the year ended September 30, 1998. Results for interim periods should not be considered indicative of the results that may be expected for the year ended September 30, 1999. 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. 5. We adopted SFAS number 130, "Reporting Comprehensive Income", as of October 1, 1998. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, however, such as foreign currency translation adjustments and unrealized gains on available-for-sale securities, are reported as a direct adjustment to the equity section of the balance sheet. Such items, along with net income, are considered components of comprehensive income under the new standard. The adoption of SFAS number 130 had no effect on our net income or stockholders equity. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS DESCRIPTION: VSI Holdings, Inc. (the "Company", "we", "our", "us") is a full service supplier to businesses; providing imaginative and integrated applications of technology and systems encompassing marketing initiatives, communications, education and training, and entertainment. The Company consists of wholly-owned subsidiaries in the Marketing Services and Entertainment business sectors 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., integrated logistics and call center operations. Performance Systems Group; in-field consulting and change process sustainment services. Advanced Animations, Inc., a manufacturer of product simulators, animatronic figures and displays for theme parks, casinos, and retail. We are attempting to position ourselves to take advantage of opportunities created by changes in technology. One of our practices has been the usage of a wide variety of technologies, without overdependence on any one technology. Over the last three years, we have spent over $20 million to enhance our competitive position. This allows us to meet client needs with whatever technology is most appropriate. We have negotiated the rights to design worldwide touring and permanent exhibitions based on the series of Grossology-themed books authored by science teacher Sylvia Branzei. We fully expect that Grossology will expand worldwide as it appeals to a variety of venues including science centers, children's museums, theme parks, malls and zoos. Revenues are expected to begin in the next fiscal year. This fiscal year, the initial exhibition design and construction will require capital investment of approximately $1,000,000, and will increase in future years based on the number of exhibits built. In response to an automotive client's direction that their employees acquire a "consumer headset" (learn how to develop an intuitive feel for the people who buy their products), VSI has developed training sessions for this need. We plan to execute 60 sessions this calendar year for over 8,000 participants. All participants spend time actually "one-on-one" listening to consumers. Beginning in late September, VSI will roll out 36 sessions in England and Germany for more than 5,000 of their European employees. These European sessions are designed to recreate the current U.S. program, by keeping the content and flavor of the current consumer-focused curriculum while incorporating a more global perspective. Both the U.S. and European training have sessions planned well into 2000. We serve our global customers from our Bloomfield Hills, Michigan headquarters and offices in California, Vermont, and Canada. The Company employs more than 1,000 professionals. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, consisting of Advanced Animations, Inc., Vispac, Inc., Visual Services, Inc., and PSG International, Inc. Inter-company balances and transactions have been eliminated in consolidation. Stock and Stock Options Granted In the current fiscal year, we issued options for 110,000 shares of our common stock. One-half of the options are exercisable two years from the date of the grant, with the remaining options exercisable three years from the date of the grant. The options have an exercise price ranging from $5.75 to $8.20 and expire five years from the date of grant. OPERATING RESULTS Revenues were $28,439,000 for the three months ended June 30, 1999, compared to $37,817,000 for the same period last year. Revenues were $104,289,000 for the nine months ended June 30, 1999, compared to $104,442,000 for the same period last year. This decrease of 25% for the three months is attributable to some program cancellations, reductions, and schedule slippage. We also expect a revenue decrease in this year's fourth quarter compared to last year's fourth quarter, although it is expected to exceed this year's third quarter. Management expects to return to profitability in the fourth quarter, and for that trend to continue next fiscal year. Operating Expense. Our operating expenses have grown to $18,742,000 for the three months ended June 30, 1999 from $16,779,000 in the three months ended June 30, 1998. Our operating expenses have grown to $50,329,000 for the nine months ended June 30, 1999 from $43,018,000 in the nine months ended June 30, 1998. This increase is mainly attributable to the following factors: (1) the wage escalations for computer-industry and other professionals; (2) Michigan's extremely tight and competitive contract labor supply; (3) start up costs associated with new projects in the Internet and E-Commerce areas; (4) growth in fixed costs due to facility and equipment acquisitions in the prior year; (5) growth in the number of employees to handle an anticipated growth in sales. We compete in very competitive and volatile markets. The Marketing Services sector is subject to intense competition, as well as delays in project fulfillment due to matters beyond its control, such as delayed product launches, strikes at clients, and other factors. The Entertainment sector's sales represent discretionary spending on the part of its customers, and their customers. Some projects, which in aggregate are significant, have been postponed from this spring to the fourth quarter, or next year. If these projects end up being deferred from this fiscal year to next fiscal year or canceled, it could have an adverse effect on operating results. Such factors make it difficult to project full year financial results. Our future operating results will depend in part on management's ability to manage any future growth and control expenses. The Company intends to pursue the continued growth of its business, however, 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. Liquidity and Capital Resources We have various bank lines of credit totaling $45,000,000, which mature in February and November of 2000. At June 30, 1999, we had borrowed $31,776,000 (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%. The rate at June 30, 1999 was 6.4425%. We have had a long-term relationship with our current bank. Through the years, it has provided financing and lines of credit for us. There can, however, be no assurances that the 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, primarily lines of credit from another banking institution. Since we are a net borrower of funds, minimal cash balances are kept on hand. 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 borrow on our lines of credit to cover the checks. We believe that cash flows from operations, along with bank borrowings, will be sufficient to finance our activities in 1999. On a long-term basis, increased financing may be necessary to fund any large project awarded to us, or any acquisitions we may make. We have no current plans to conduct an offering of our shares to the public in fiscal year 1999. During the nine months ended June 30,1999, $6,137,000 was paid in federal income taxes. Most of this amount was for the year ended September 30, 1998 and is the first full year of federal income tax paid by us compared to prior years where these subsidiaries were taxed as subchapter S Corporations, and Federal Income Taxes were paid by the individual shareholders. During the current year, we have retired 8,024,000 shares of treasury stock with a cost of $4,866,000. During the current year, 127,000 shares of the Company were purchased in the open market for a total price of $669,000. We have no plan to purchase additional shares. INVESTMENTS Recent material investments are listed in the next paragraphs. In the summer of 1998, we committed to a $4 million investment in a limited partnership (as a limited partner) which will develop a theme park, located in Kansas, based on the icon story "The Wizard of Oz". In September 1998, we invested $400,000. In the current fiscal year we invested the remaining $3.6 million. The limited partnership currently owns 25.6% of the park, which will be built on 1,900 acres. We have a 22.2% interest in the limited partnership, which also owns 7,100 acres surrounding the park, with development rights for that land. The park is estimated to be a $770 million project, with approved support exceeding $250 million from the state of Kansas and other governmental authorities, primarily in the form of Sales Tax Revenue bonds. Our Advanced Animations subsidiary has been designated as the exclusive supplier of all animatronic character elements for the park, which is scheduled to open in 2002. Our Visual Services, Inc. subsidiary is the exclusive marketing agency of record for the time period through the opening of the park. In December 1998, we invested $3.5 million in convertible preferred stock in a private placement offering of eCollege.com, a company engaged in developing Internet-based education for colleges and universities. Through relationships with its educational partners, it develops, manages and markets on-line courses and degree programs. It has filed registration documents with the Securities and Exchange Commission pursuant to an initial public offering of common stock. The registration statement indicates that upon completion of the offering, our holdings will be converted to 703,213 shares of common stock. It is anticipated that these shares will have certain restrictions on near-term sale. During the second quarter, we paid $797,287.50 to exercise its option to acquire 177,175 shares of Navidec, Inc. at $4.50 each. The shares received cannot be sold for one year from the time of purchase. Navidec is traded on the NASDAQ system; as of June 30, 1999, the shares were at $9.06 each. As part of Comprehensive Income, we recorded an Unrealized Gain of $534,000 net of income taxes of $275,000 for the nine months ended June 30, 1999. For the quarter, we recorded an Unrealized Loss of $226,000 net of income tax benefit of $117,000. We also have options on an additional 254,350 shares at $6.50; this option expires September 30, 1999. Management expects to exercise these options before September 30. Year 2000 (Y2K) Most computer systems were originally designed to utilize a two- character field (or string of data) to reference any given year in the 20th century. If not corrected, many computer systems could fail or produce erroneous results. On January 1, 2000 computer systems may confuse "00" (meant to be 2000) as 1900. A product defined as being Year-2000 compliant will not produce errors in date data related to the year change from December 31, 1999 to January 1, 2000. State of Readiness Our plans for preparing and testing its computer systems for Y2K compliance have been approved by its management, and the project is being funded in the normal course of our operations. We expect to complete remediation of the Year 2000 issue for all Information Systems by September 1999, although no assurance can be given of the timely completion of this project. We estimate that the software remediation phase is more than 90 percent complete at July 30, 1999, and the remaining conversions are on schedule to be completed by autumn of 1999. We have identified 5 distinct areas for Year 2000 compliance efforts which involve all areas of the business: Critical Business Computer Systems: These include computer systems and applications relating to operations such as financial reporting, human resources, sales, purchasing and new business development. Suppliers: We are taking steps to determine the status of the Y2K compliance plans of our significant vendors. For instance, surveys have been sent to all significant vendors with whom we interact, requesting that they report their respective level of Y2K compliance. We are currently monitoring the progress of those business-critical vendors who are still working towards achieving compliance. End-User Computing: Our plans include Y2K compliance of desktop and laptop computers used throughout the Company and replace or repair all non-complaint computers and related software. Application Development: We are addressing the compliance regarding all applications development for internal and external clients by modifying or replacing existing applications. Technical Infrastructure: We have established a testing facility for testing system infrastructures, internal phone systems, local area networks, electronic data center, e-mail systems and web hosting. Components are tested in the lab following Y2K compliance certification with suppliers. This should be the last step in Y2K verification. Y2K Programming Timing Plan Date Present Status Critical Business Computer Systems 9/99 85% Suppliers 2/99 100% End-User computing 1/99 100% Application Development 9/99 90% Technical Infrastructure 6/99 100% Y2K Costs We estimate that we will spend about $400,000 during the current fiscal year for its Y2K compliance efforts. This estimate is as of July 30, 1999, and excludes the time that may be spent by management and administrative staff in guiding and assisting the information technology effort described above. All Y2K related costs are expected to be funded through operating cash flows. The cost of the project is based on our estimates. Y2K Risks The most reasonably likely worst case scenario for us with respect to the Y2K problem is the failure of a third parties such as: energy, computer and component hardware, as well as other potential product or service suppliers failing to provide products and/or services. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect our results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third-party suppliers and customers, we are unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on our results of operations, liquidity or financial condition. The Year 2000 Project is expected to reduce our level of uncertainty about the Year 2000 problem, and in particular, about the Year 2000 compliance and readiness of its material third parties. We believe, but can not assure that with the completion of the Project as scheduled, the possibility of significant interruptions of normal operations should be reduced. Readers are cautioned that forward-looking statements contained in the Year 2000 update should be read in conjunction with our disclosures under the heading: "CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995". Y2K Contingency Plan: Currently, we do not anticipate the need for a contingency plan. If necessary, a decision to create and implement a contingency plan is expected to be made by late summer 1999. "CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995" 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," "intend," "estimated," and "potential," among others. These forward- looking statements are based on the Company's 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 results of the Company include but are not limited to: (1) the complexity and uncertainty regarding the development 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) the Company's inability to protect proprietary information and technology; (6) the Company's and its significant third parties inability to complete the implementation of its Year 2000 plans timely; (7) the ability to hire and retain key employees; (8) successful completion and integration of future acquisitions; (9) uncertainties relating to business and economic conditions; (10) uncertainties relating to customer plans and commitments; (11) dependence on the automotive industry; (12) changes in our capital structure and cost of capital. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our earnings are affected by changes in short-term interest rates as a result of our revolving credit agreements, which bear interest at a floating rate. We do not use derivative or other financial instruments to mitigate the interest rate risk. 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 $210,000, 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. 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 to hedge the effects of adverse fluctuations in foreign currency exchange rates. PART II. OTHER INFORMATION Item 1. Legal Proceedings. We are periodically involved in routine proceedings. There are no legal matters, existing, pending, or threatened, which management presently believes could result in a material loss to us. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders Our shareholders approved the election of the Board of Directors at the Annual Meeting of Shareholders held on April 20, 1999. In addition, the shareholders approved amendments to the 1997 Restricted Stock Plan, the 1997 Incentive Stock Option Plan, and the 1997 Employee Stock Purchase Plan. Voting was as follows: Item For Against Abstained A. Directors Steve Toth, Jr. 31,331,613 0 3,000 Martin S. Suchik 31,331,613 0 3,000 Thomas W. Marquis 31,331,613 0 3,000 Terry Sparks 31,331,613 0 3,000 Jerry L. Barton 31,331,613 0 3,000 Dr. Kenneth L. Bernhardt 31,331,613 0 3,000 Robert F. Sui 31,331,613 0 3,000 B. 1997 Incentive Stock Option Plan 31,297,527 14,718 22,368 C. 1997 Restricted Stock Plan 31,295,471 14,774 24,368 D. 1997 Employee Stock Purchase Plan 31,302,927 7,218 24,468 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a. Exhibits None b. Reports on Form 8-K None Pursuant 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 thereunto duly authorized. VSI Holdings, Inc. Registrant August 11, 1999 /S/Steve Toth, Jr. Steve Toth, Jr., Director, President and Chief Executive Officer August 11, 1999 /S/Thomas W. Marquis Thomas W. Marquis, Director, Treasurer, Chief Accounting and Financial Officer