1
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 March 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. 1-12942
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.)
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,
Vice President--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. Yes X No
----- -----
There were 33,415,780 shares of Common Stock, par value $.01 per share,
outstanding at March 31, 2001.
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31 September 30
2001 2000
(Unaudited) (Audited)
----------- ---------
ASSETS
CURRENT ASSETS
Cash $ 2,085,000 $ 905,000
Trade accounts receivable:
Billed 34,264,000 53,907,000
Unbilled 16,242,000 18,525,000
Notes receivable and advances 424,000 201,000
Notes receivable - related party 154,000
Inventory 381,000 438,000
Accumulated costs of uncompleted programs 6,281,000 3,744,000
Deferred tax asset 614,000 899,000
Refundable federal income tax 3,100,000
Other current assets 1,333,000 761,000
------------ ------------
Total Current Assets 64,878,000 79,380,000
LONG-TERM PORTION OF NOTES RECEIVABLE - Related Parties 1,065,000 921,000
PROPERTY,PLANT AND EQUIPMENT (Net) 21,402,000 22,394,000
DEFERRED TAX ASSET 2,101,000 830,000
Investment in Available-for-Sale Securities 2,229,000 7,131,000
INVESTMENTS 4,239,000 4,190,000
GOODWILL-NET 1,069,000 1,283,000
------------ ------------
Total Assets $ 96,983,000 $116,129,000
============ ============
3
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31 September 30
2001 2000
(Unaudited) (Audited)
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 343,000 $ 552,000
Notes payable - Related party 946,000 3,420,000
Trade accounts payable 9,980,000 23,479,000
Notes payable to bank 39,750,000 35,214,000
Accrued liabilities 3,966,000 3,970,000
Federal income tax payable -- 2,139,000
Advances from customers for
uncompleted projects 553,000 375,000
----------- ------------
Total Current Liabilities 55,538,000 69,149,000
LONG-TERM LIABILITIES
Notes payable - Related parties 11,898,000 12,337,000
Long-term debt - Other 7,018,000 7,092,000
----------- ------------
Total Long-Term Liabilities 18,916,000 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 March 31, 2001 and 33,580,000 at
September 30, 2000 338,000 336,000
Treasury stock, (at cost) 400,000 shares at March 31, 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 (3,211,000) 730,000
Retained Earnings 18,160,000 20,270,000
----------- ------------
Total Stockholders' Equity 22,529,000 27,551,000
Total Liabilities and Stockholders' Equity $96,983,000 $116,129,000
=========== ============
See Notes to Consolidated Financial Statements
4
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Three Months Ended
March 31 March 31
2001 2000
(Unaudited) (Unaudited)
----------- -----------
REVENUE $ 32,884,000 $44,689,000
EXPENSES
Cost of revenue 13,727,000 21,906,000
Operating expenses 24,418,000 18,886,000
------------ -----------
Total Expenses 38,145,000 40,792,000
------------ -----------
OPERATING INCOME (LOSS) (5,261,000) 3,897,000
OTHER EXPENSES
Interest income and other income and expense 324,000 (566,000)
Interest expense (806,000) (1,134,000)
------------ -----------
Total Other Expenses (482,000) (1,700,000)
INCOME (LOSS) - Before income taxes (5,743,000) 2,197,000
PROVISION FOR (BENEFIT FROM) INCOME TAXES (2,195,000) 746,000
------------ -----------
NET INCOME (LOSS) $ (3,548,000) $ 1,451,000
============ ===========
OTHER COMPREHENSIVE INCOME
Foreign Currency Translation Adjustment (105,000) (34,000)
Unrealized loss on Securities, net of tax expense (benefit) of $346,000 and
$(120,000), for the three months ended March 31, 2001 and 2000,
respectively (1,092,000) (234,000)
------------ -----------
TOTAL OTHER COMPREHENSIVE LOSS $ (1,197,000) $ (268,000)
------------ -----------
COMPREHENSIVE INCOME (LOSS) $ (4,745,000) $ 1,183,000
============ ===========
See Notes to Consolidated Financial Statements
5
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME - CONTINUED
Three Months Ended
March 31 March 31
2001 2000
(Unaudited) (Unaudited)
----------- -----------
EARNINGS (LOSS) PER SHARE:
Basic: $ (0.11) $ 0.04
Fully Diluted: $ (0.11) $ 0.04
Weighted Average Shares Basic 33,393,000 33,261,000
Dilutive 33,393,000 33,430,000
Six Months Ended
March 31 March 31
2001 2000
(Unaudited) (Unaudited)
------------- -------------
REVENUE $76,957,000 $ 82,789,000
EXPENSES
Cost of revenue 32,128,000 35,142,000
Operating expenses 46,562,000 41,620,000
------------- ------------
Total Expenses 78,690,000 76,762,000
------------- ------------
OPERATING INCOME (LOSS) (1,733,000) 6,027,000
OTHER EXPENSES
Interest income and other income and expense (3,000) (607,000)
Interest expense (1,770,000) (1,925,000)
------------- ------------
Total Other Expenses (1,773,000) (2,532,000)
INCOME (LOSS) - Before income taxes (3,506,000) 3,495,000
PROVISION (BENEFIT FROM) FOR INCOME TAXES (1,396,000) 1,188,000
------------- ------------
NET INCOME (LOSS) $ (2,110,000) $ 2,307,000
============= ============
OTHER COMPREHENSIVE INCOME
Foreign Currency Translation Adjustment (106,000) (100,000)
Unrealized gain (loss) on Securities, Net of tax expense (benefit) of
$(1,067,000) and $406,000 for the six months ended March 31, 2001 and
2000, respectively (3,835,000) 787,000
------------- ------------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) $ (3,941,000) $ 687,000
------------- ------------
COMPREHENSIVE INCOME (LOSS) $ (6,051,000) $ 2,994,000
============= ============
Six Months Ended
March 31 March 31
2001 2000
(Unaudited) (Unaudited)
----------- -----------
EARNINGS (LOSS) PER SHARE:
Basic: $ (0.06) $ 0.04
Fully Diluted: $ (0.06) $ 0.04
Weighted Average Shares Basic 33,234,000 33,261,000
Dilutive 33,234,000 33,430,000
See Notes to Consolidated Financial Statements
6
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
March 31 March 31
2001 2000
(Unaudited) (Unaudited)
----------- -----------
Cash Flows from Operating Activities
Net Income (Loss) $ (2,110,000) $ 2,307,000
Adjustments to reconcile net income to Net cash from operating
activities:
Depreciation and amortization 2,651,000 2,248,000
Equity in losses of unconsolidated investee 507,000 633,000
Deferred income taxes 81,000 207,000
(Increase) decrease in assets:
Trade accounts receivable 20,526,000 (275,000)
Inventory 57,000 (30,000)
Other Current Assets (3,672,000) 902,000
Accumulated costs of uncompleted programs (2,537,000) (4,849,000)
Increase (decrease) in liabilities:
Trade accounts payable (13,499,000) (6,619,000)
Accrued liabilities (1,202,000) 427,000
Advances from customers for uncompleted projects 178,000 (309,000)
------------- -----------
Net cash provided by (used in)
operating activities 980,000 (5,358,000)
Cash Flows from Investing Activities
Changes notes receivable (223,000) 18,000
Changes notes receivable Related Party (298,000) (987,000)
Changes property and equipment (1,445,000) (833,000)
Investment in unconsolidated investments (556,000) (115,000)
------------- -----------
Net cash used in investing activities (2,522,000) (1,917,000)
Cash Flows from Financing Activities
Changes Long Term Debt (283,000) (265,000)
Change to related party debt (1,513,000) 84,000
Net borrowings Notes Payable 4,536,000 8,732,000
Proceeds from exercise of stock options 88,000 65,000
Proceeds from issuance of stock - 1,000
------------- -----------
Net cash provided by financing activities 2,828,000 8,617,000
Effect of Exchange Rate Changes on Cash (106,000) (100,000)
Net Increase in Cash 1,180,000 1,242,000
Cash - Beginning of Period 905,000 552,000
------------- -----------
Cash - End of Period $ 2,085,000 $ 1,794,000
============= ===========
See Notes to Consolidated Financial Statements
7
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. 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. Results for interim periods should not be
considered indicative of the results that may be expected for the year ended
September 30, 2001.
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.
8
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. 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. (See the disclosures under "Cautionary
Statement for the Purpose of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995.")
BUSINESS DESCRIPTION:
VSI Holdings, Inc. (the "Company", "we", "our", or "us") conducts its activities
in the marketing services and entertainment/edutainment business sectors through
five subsidiaries:
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;
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, 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. This
allows us to meet client needs with whatever technology is most appropriate.
We serve our global customers from our Bloomfield Hills, Michigan headquarters
and other offices in Michigan, California, Vermont, and Canada. We employ more
than 1,000 professionals.
The accompanying consolidated financial statements include the accounts of the
Company and its 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.
FINANCIAL CONDITION
9
Our total assets decreased from $116,129,000 at September 30, 2000 to
$96,983,000 at March 31, 2001. This decrease in total assets was due primarily
to a 30% decrease in our trade accounts receivable. Those receivables decreased
$21,926,000 from $72,432,000 at September 30, 2000 to $50,506,000 at March 31,
2001.
The decrease in the Company's trade accounts receivable reflected a $19,643,000,
or 36%, decrease in billed trade accounts receivable and a $2,283,000 or 12%
decrease in unbilled trade account receivables. The decrease in billed trade
accounts receivable was primarily attributable to relatively high billings in
September 2000 that were collected subsequently and lower sales in the second
quarter. The decrease in unbilled trade accounts receivable was primarily the
result of billing upon the completion of work and receipt of purchase orders
on some projects. The amount of unbilled trade accounts receivable is expected
to decrease during the remainder of the year as those accounts receivable are
billed in accordance with the terms of the particular project to which they
relate. Upon such billing, those trade accounts receivable will become billed
trade accounts receivable.
The change in the Company's total assets also reflects a $2,537,000 increase in
accumulated costs of uncompleted programs. This item, which represents project
start-up costs and activities, increased as a result of a 20% increase in the
number of projects in the start-up phase.
The Company's total current liabilities decreased $13,611,000, or 20%, from
$69,149,000 at September 30, 2000 to $55,538,000 at March 31, 2001. This
decrease was primarily attributable to a $13,499,000 decrease in trade accounts
payable.
The decline in trade accounts payable is associated with lower sales in the
second quarter and reflects lower purchases of items for those sales. In
addition, notes payable-related party decreased $2,474,000 as a result of the
partial repayment of that indebtedness, and notes payable to bank increased
approximately $4.5 million due to the timing of payments to suppliers.
Total stockholder's equity decreased approximately $5.0 million from $27,551,000
at September 30, 2000 to $22,529,000 at March 31, 2001. This decline was
primarily attributable to a total comprehensive loss of $6,051,000 for the six
months ended March 31, 2001. Approximately 63% of such loss was attributable to
an unrealized loss on securities, net of tax benefit, of $3,835,000 for the six
month period ended March 31, 2001. Such loss was partially offset by a
$1,027,000 increase in additional paid in capital.
OPERATING RESULTS
Revenue Recognition Policies. The Company operates in two segments, a marketing
services segment and a entertainment /edutainment segment. The marketing
services segment provides marketing services and customers relationship
management, organizational training and development services primarily to the
automotive and pharmaceutical industries. The entertainment /edutainment segment
provides entertaining and educational animatronic displays and other
entertainment /edutainment products primarily to theme parks, casinos and
museums.
The Company's marketing services segment reflects the activities of
Visual Services, Inc., Vispac, Inc., PSG International, Inc., and eCity Studios,
Inc. In accordance with generally accepted accounting principles, these entities
recognize revenue over the lives of their projects as individually indentifiable
phases of those projects are completed. (The phases of a project are indentified
in advance of the commencement of work on the project and are based on either
the nature of the work to be performed during a particular phase or the time
periods within which work is to be performed.) Amounts recognized as revenue
that, due to the arrangement with the customer, cannot be billed at the time
they are recognized as revenue are accumulated in unbilled accounts receivable
until such time as billing is contemplated by the arrangement with the customer.
Following such billing, which typically occurs upon the customer's issuance of a
confirming purchase order, such amounts become billed accounts receivable.
The Company's entertainment /edutainment segment reflects the activities of its
animatronics subsidiary. In accordance with generally accepted accounting
principles, Advanced Animations, Inc. recognizes revenue on display contracts of
varying duration on the basis of the Company's estimates of the percentage of
completion of individual contracts. 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 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
10
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. In addition, 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 a negative impact on the Company's results of operations and
financial condition. 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.
Three Months Ended March 31, 2001 compared to Three Months Ended March 31, 2000
Revenues. Revenues were $32,884,000 for the three months ended March 31, 2001,
compared to $44,689,000 for the same period last year. The 26.4% decline in
revenues compared to the same period in the prior fiscal year was primarily
attributable to a softening economy and lower marketing expenditures by the
automotive industry that are associated with lower domestic vehicle sales. The
reduction in marketing expenditures by the automotive industry has 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, and that delays in new projects will be reduced or eliminated, as
general economic conditions improve and domestic vehicle sales increase, 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.
Operating Expense. Our operating expenses have increased to $24,418,000 for the
three months ended March 31, 2001 from $18,886,000 in the three months ended
March 31, 2000. This increase of 29% is mainly attributable to the following
factors: (1) professional expenses and other costs incurred as a result of the
proposed merger with SPX; (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 is in
process, and is expected to intensify in the third quarter.
Net Loss. Primarily as a result of the foregoing, the Company had a net loss of
$3,548,000 during the three months ended March 31, 2001 as compared to net
income of $1,451,000 for the same period in the prior fiscal year. The Company
also had an other comprehensive loss of $1,197,000 during the three months ended
March 31, 2001 as compared to an other comprehensive loss of $268,000 for the
same period in the prior fiscal year. As a result, the Company had a
comprehensive loss of $4,745,000 for the three months ended March 31, 2001 as
compared to comprehensive income of $1,183,000 for the same period in the prior
fiscal year.
Six Months Ended March 31, 2001 compared to Six Months Ended March 31, 2000
Revenues. Revenues were $76,957,000 for the six months ended March 31, 2001,
compared to $82,789,000 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 fiscal
quarter.
Operating Expense. Operating expenses increased to $46,562,000 for the six
months ended March 31, 2001 from $41,620,000 in the six months ended March 31,
2000. This increase of 12% was primarily attributable to: (1) professional
expenses and other costs incurred as a result of the proposed merger with SPX;
(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 is in process, and is
expected to intensify in the third quarter.
Net Loss. Primarily as a result of the foregoing, the Company had a net loss of
$2,110,000 during the six months ended March 31, 2001 as compared to net income
of $2,307,000 for the same period in the prior fiscal year. The Company also had
an other comprehensive loss of $3,941,000 during the six months ended March 31,
2001 as compared to other comprehensive income of $687,000 for the same period
in the prior fiscal year. Of such other comprehensive loss, $3,835,000 was
attributable to an unrealized loss on securities, net of tax benefit. As a
result, the Company had a
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comprehensive loss of $6,051,000 for the six months ended March 31, 2001 as
compared to comprehensive income of $2,994,000 for the same period in the prior
fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
We have various bank lines of credit totaling $42,000,000, which mature in June,
2001 and March, 2002. At March 31, 2001, we had borrowed an aggregate of
$37,665,000 (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 March 31, 2001 was 6.64%.
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
assurance 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 often
borrow on our lines of credit to cover the checks.
We believe that cash flows from operations, along with borrowings, will be
sufficient to finance our activities in 2001. 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 2001.
We have sold a new project involving the sale and financing of vehicle service
contracts to consumers. As sales of such contracts increase, we anticipate that
it will be necessary to either securitize those contracts or arrange additional
financing. There can be no assurance that it will be possible to effect such
securitization or to obtain financing either at all or on terms acceptable to
us.
Stock and Stock Options Granted
This year, we granted 20,000 shares of restricted stock to certain key
employees. The shares vest one, two, and three years from the date of grant in
three equal parts. We do not expect the exercise of stock options, or purchase
of shares, by employees to be a material source of capital in fiscal year 2001.
During 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.
INVESTMENTS
As of March 31, 2001, we had invested $4.5 million in Oz Entertainment Company
("OEC") and in a limited partnership (as a limited partner) which will develop a
theme park, located in Kansas, based on the story "The Wizard of Oz". We have
recognized losses totaling $1,188,000 prior to this fiscal year, and an
additional $300,000 in the first six months of this year. We expect to see
continued losses until the opening of the park, 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. It is anticipated that the first
authority will vote to approve the project in autumn, 2001. 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, financing arranged through governmental agencies, and
additional public or private financing. If the park does not open, the entire
investment, currently valued at $3,012,000, 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.
Prior to the current fiscal year, we invested $3.5 million in convertible
preferred stock in a private placement offering of eCollege.com (NASDAQ - ECLG),
a company engaged in developing Internet-based education for colleges and
12
universities. Through relationships with its educational partners, it develops,
manages and markets on-line courses and degree programs. Upon completion of
their initial public offering of common stock in December, 1999, our investment
was converted to 468,808 shares of common stock. In addition, we invested
$49,500 to acquire 4,500 shares of their stock during their initial public
offering. At April 25, 2001, our investment had a market value of $1,126,000.
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. Their primary product, referred
to as Drive off.com, was sold during 2000 to CarPoint, which is majority-owned
by Microsoft. At April 25, 2001, these shares had a market value of $729,000.
The unrealized losses on the Company's investments in eCollege.com and Navidec
are the primary cause of the Company's unrealized loss on securities recorded
during the three months and six months ended March 31, 2001. Those losses were
also the primary factors for the increase in deferred tax asset for the same
periods.
While we have no current plans for further investments, management expects to
make future investment in promising companies in their early development which
are in a related line of business.
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 Corporation has given
the Company notice of circumstances that SPX Corporation claims would entitle it
to terminate the merger agreement between the two companies if such
circumstances are not reasonably cured or possible to cure. The Company is
investigating the circumstances described in SPX Corporation's notice and
whether such circumstances would entitle SPX Corporation to terminate the merger
agreement.
"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 Annual 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," 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 complete
the timely construction of the park, and to operate it profitably once the park
opens; (11) uncertainties relating to business and economic conditions;
(12) management's ability to maintain proper contract and employee staffing
levels; (13) future investments of the Company; (14) our ability to convert
unbilled trade accounts receivables into billed trade accounts receivables;
(15) cutbacks in client budgets, project deferrals and cancellations; (16) our
ability to profitability manage growth; and (17) completion of our planned
merger with SPX Corporation.
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 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 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
13
the next 12 months, the adverse impact on our results of operations would be
approximately $249,000 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
entertainment areas 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 $446,000 decrease in fair value in our
available-for-sale securities, based upon April 25, 2001 closing market prices
for Navidec and eCollege.com.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
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
14
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, 2001 the Company filed a current report on Form 8-K disclosing that
SPX Corporation has given VSI Holdings notice of circumstances that SPX
Corporation claims would entitle it to terminate the merger agreement between
the two companies if such circumstances are not reasonably cured or possible
to cure.
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
May 14, 2001
/S/Steve Toth, Jr.
------------------
Steve Toth, Jr., Director,
President and Chief Executive
Officer
May 14, 2001
/S/Thomas W. Marquis
--------------------
Thomas W. Marquis, Director,
Treasurer, Chief Accounting
and Financial Officer