1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-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
------- -------
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, 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. Yes X No
----- ------
There were 33,415,780 shares of Common Stock, par value $.01 per share,
outstanding at August 2, 2001.
2
PART 1. FINANCIAL INFORMATION
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
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
============= ============
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
See Notes to Consolidated Financial Statements
5
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME - CONTINUED
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) $ 2,468,000
Nine 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
See Notes to Consolidated Financial Statements
6
VSI 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
=============== ===============
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.
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") presently consists of
subsidiaries operating in the marketing services and entertainment/edutainment
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., an integrated logistics and call center operation;
Performance Systems 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
approximately 950 employees.
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. Inter-company balances and transactions have been
eliminated in consolidation.
8
FINANCIAL CONDITION
Our total assets decreased from $116,129,000 at September 30, 2000 to
$107,053,000 at June 30, 2001. This decrease in total assets was due primarily
to a 17% decrease in our accounts receivable. Those receivables decreased
$12,020,000 from $72,432,000 at September 30, 2000 to $60,412,000 at June 30,
2001.
The decrease in the Company's accounts receivable reflected a $25,198,000, or
52%, decrease in billed trade accounts receivable, a $2,818,000, or 15%,
decrease in unbilled trade account receivables, and a $15,996,000, or 276%,
increase in service contracts accounts receivable. The decrease in billed trade
account receivables was primarily attributable to cyclically high billings in
September 2000 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 account
receivables will decrease during the remainder of the year as several large jobs
are completed and subsequently billed.
Service contract accounts receivable reflects installment payments owed by
consumers on automotive extended service contracts purchased by the Company from
an automotive manufacturer and its 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 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.
The Company's total current liabilities decreased $1,784,000, or 3%, from
$69,149,000 at September 30, 2000 to $67,365,000 at June 30, 2001. This decrease
was attributable to a $10,055,000 decrease in accounts payable, a $6,076,000
increase in service contracts payable, a $7,434,000 increase in notes payable to
bank, a decrease of $2,139,000 in federal income tax payable, and a decrease of
$1,905,000 in accrued liabilities.
The decline in trade accounts payable is associated with lower sales in the
third quarter. Service contracts accounts payable reflects the current month's
liability for purchases of Service contracts accounts receivable from automotive
manufacturers and their dealers. In addition, current notes payable-related
party and long-term notes payable-related party decreased $1,165,000 and
$392,000, respectively, 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 bank
increased approximately $7.4 million due to the purchasing and financing of
Service contract accounts receivable and the timing of payments to suppliers.
Total stockholder's equity decreased approximately $6.8 million from $27,551,000
at September 30, 2000 to $20,775,000 at June 30, 2001. This decline was
primarily attributable to a total comprehensive loss of $7,805,000 for the nine
months ended June 30, 2001. Approximately $2 million of such 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.
9
OPERATING RESULTS
Revenue Recognition Policies. The Company operates in two segments, a
marketing services segment and an entertainment/edutainment segment. The
marketing services segment provides marketing services and customer 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.
Visual Services, Inc., Vispac, Inc, PSG International, Inc. and eCity
Studios, Inc. provide 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.
Advanced Animations, Inc. 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 had 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.
10
Three Months Ended June 30, 2001 compared to Three Months Ended June 30, 2000
Revenues. Revenues were $33,445,000 for the three months ended June 30, 2001,
compared to $45,636,000 for the same period last year. The 26.7% 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 in the prior year to
$13,105,000. As a percentage of revenue, it declined from 46% to 39%. This is
primarily attributable to the loss of lower margin business at our Vispac
subsidiary.
Operating Expense. Our operating expenses have increased to $22,404,000 for the
three months ended June 30, 2001 from $19,720,000 in the three months ended June
30, 2000. This increase of 14% is mainly attributable to the following factors:
(1) professional expenses and other costs incurred as a result of the proposed
merger with SPX; (2) increased depreciation expense as a result of assets placed
into service in the prior year; (3) wage escalations for computer-industry and
other professionals; and (4) 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.
Net Loss. Primarily as a result of the foregoing, the Company had a net loss of
$3,497,000 during the three months ended June 30, 2001 as compared to net income
of $2,195,000 for the same period in the prior fiscal year. The Company also had
other comprehensive income of $1,758,000 during the three months ended June 30,
2001 as compared to other comprehensive loss of $2,721,000 for the same period
in the prior fiscal year 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 fiscal year.
Nine Months Ended June 30, 2001 compared to Nine Months Ended June 30, 2000
11
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.
LIQUIDITY AND CAPITAL RESOURCES
We have various bank lines of credit totaling $42,000,000, which mature in
August, 2001 and March, 2002. At June 30, 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 to fund purchases of service
contracts accounts receivable as we had not yet completed a separate line of
credit for that activity. We have subsequently arranged a $25 million line of
credit as a bridge to an asset securitization of $50 million to $60 million
which is expected to close in our fourth quarter. This bridge line of credit was
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 possible to effect such securitization either at
all or on terms acceptable to us or (ii) that such securitization will in fact
result in relatively lower borrowing costs. If we are unable to effect such
securitization, other sources of
12
financing will be sought, although there can be no assurance that it will be
possible to obtain this financing.
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. 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 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.
Stock and Stock Options Granted
This year, we granted 20,000 shares of restricted stock to certain key
employees. 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
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. 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 this
fiscal year, and 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.
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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
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 paid $49,500 to
acquire 4,500 shares of their stock during their initial public offering. At
August 2, 2001, our investment had a market value of $1,913,000.
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, 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
investment at June 30, 2001. This impairment increased our net loss before
income taxes by $2,006,000, and left us with an investment balance in Navidec of
$444,000. At August 2, 2001, these shares had a market value of $380,000.
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 months ended June 30, 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.
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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 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,"
"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) management's ability to maintain proper
contract and employee staffing levels; (13) value of investments of the Company;
(14) our ability to timely bill and collect trade accounts receivables; (15)
cutbacks in client budgets, project deferrals and cancellations; (16) our
ability to manage our growth and profitability; 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
15
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 the
next 12 months, the adverse impact on our results of operations would be
approximately $264,000 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 $459,000 decrease in fair value in our
available-for-sale securities, based upon August 2, 2001 closing market prices
for Navidec and eCollege.com.
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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 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.
On June 29, 2001, the Company filed a current report on Form 8-K disclosing that
the Company saw no reason for SPX Corporation to terminate 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.
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SIGNATURES
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 there unto 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