10-Q/A 1 k64844e10-qa.txt AMENDMENT NO. 1 TO QUARTERLY REPORT DATED 12/31/00 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 DECEMBER 31, 2000 [ ] 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 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 33,742,410 shares of Common Stock, par value $.01 per share, outstanding at December 31, 2000. The Company held 400,250 of these shares as treasury stock. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET

See Notes to Consolidated Financial Statements 1 3 VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME

See Notes to Consolidated Financial Statements 2 4 VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS

See Notes to Consolidated Financial Statements 3 5 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 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. 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. See the disclosures under "Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995". BUSINESS DESCRIPTION: VSI Holdings, Inc. (the "Company," "we," "our," "us") presently consists of subsidiaries 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. 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 variety of technologies, without over dependence 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 wholly-owned 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 The Company's total assets decreased from $116,129,000 at September 30, 2000 to $107,056,000 at December 31, 2000. This decrease in total assets was due primarily to a 13.0% decrease in the Company's net trade account receivables. Those receivables decreased $9,407,000 from $72,432,000 at September 30, 2000 to $63,025,000 at December 31, 2000. 4 6 The decrease in the Company's net trade account receivables reflected a $12,209,000, or 22.6%, decrease in billed trade account receivables and a $2,802,000, or 15.1%, increase in unbilled trade account receivables. 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 increase in unbilled trade account receivables was primarily the result of delays in billing a number of projects. Some of these delays in billing were attributable to delays in the receipt and accumulation of information from third party vendors and subcontractors necessary to support the final billing on a number of completed projects. The effected projects were ultimately billed in January 2001. Other delays in billing were attributable to delays in the receipt of necessary invoicing information from a significant customer. Currently, as an accommodation to that customer and to facilitate the customer's internal bill processing and payment functions, no project for that customer is billed to that customer until that customer has issued to the Company such invoicing information as the customer reasonably deems appropriate. In an effort to reduce the unbilled accounts receivable associated with delays by the customer in issuing such invoicing information, the customer and the Company are developing an invoicing process that would apply to approximately 25% of the work performed for that customer and would provide in advance the invoicing information desired by the customer with respect to the projects covered thereby. It is expected that this invoicing process will result in more expeditious billing with respect to all projects covered by it and will reduce the amount of unbilled trade account receivables associated with that customer. It is also expected that the amount of unbilled trade account receivables will decrease during the remainder of the year as a result of several large jobs being completed and subsequently billed upon receipt of appropriate invoicing information from the customer. The Company's total current liabilities decreased $8,205,000, or 11.9%, from $69,149,000 at September 30, 2000 to $60,944,000 at December 31, 2000. This decrease was primarily attributable to a $1,432,000 decrease in notes payable to related parties, a $1,756,000 decrease in accrued liabilities, and a $2,215,000 decrease in federal income taxes payable. It also reflects a $9,927,000 decrease in trade accounts payable and a $6,887,000 increase in notes payable to bank. The decreases in notes payable to related parties reflects the partial repayment of such 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 anticipated federal income tax liabilities. The changes in trade accounts payable and notes payable to bank were primarily attributable to the timing of payments to suppliers. A large check was received from a client at the end of the quarter, but had not yet cleared our bank; this caused the Company's cash balance to rise and its accounts receivable balance to decline. 5 7 Although the Company had net income of $1,438,000 for the quarterly period ended December 31, 2000, it experienced a total comprehensive loss of $1,306,000 due to an unrealized loss on securities, net of tax benefit, of $2,743,000. The associated reduction in accumulated other comprehensive income, which was partially offset by a $946,000 increase in additional paid-in capital, caused total stockholders' equity to decrease from $27,551,000 at September 30, 2000 to $27,192,000 at December 31, 2000. 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. Revenues. Revenues were $43,329,000 for the three months ended December 31, 2000, compared to $38,100,000 for the same period last year. This increase of 14% for 6 8 the three months is attributable to additional business with the Company's primary clients. Revenues for the quarter included work done on a large scale ride-and-drive project (the opportunity for consumers to drive and compare competitive vehicles in a neutral environment), certification programs for automotive dealerships and other work. In the prior year, a continuing contract with annual revenue of approximately $15 million was lost. The Company did not expect to see the entire impact of this in the current year, as it was being phased out; however, the business was largely phased out by the end of December 2000. Unless management is able to replace the business or make cost cutting measures in a timely manner, this could lead to an adverse impact on our operating results. We compete in very competitive and volatile markets. The marketing services segment 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/edutainment segment's sales represent discretionary spending on the part of its customers, and their customers. In either sector, if projects end up being deferred from this fiscal year to next fiscal year or canceled, it could have an adverse effect on operating results. Operating Expense. Our operating expenses have grown to $24,158,000 for the three months ended December 31, 2000 from $22,265,000 in the three months ended December 31, 1999. This increase of 9% is mainly attributable to the following factors: (1) additional personnel needs due to incremental business; (2) wage escalations for computer-industry and other professionals; (3) Michigan's extremely tight and competitive contract labor supply; and (4) increased dependence on contract labor to staff additional business, resulting in higher labor costs. Our future operating results will depend in part on management's ability to manage any future growth and control expenses. We intend to pursue the continued growth of our 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. 7 9 LIQUIDITY AND CAPITAL RESOURCES We have various bank lines of credit totaling $42,000,000, which mature in March, 2001 and March, 2002. At December 31, 2000, we had borrowed $38,851,000 (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 December 31, 2000 was 8.20%. 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. We have the rights to design worldwide touring and permanent exhibitions based on the series of Grossology-themed books authored by science teacher Sylvia Branzei. The first touring exhibition debuted in February, 2000 in Vancouver, British Columbia. The exhibition promotes the scientific discovery of the human body based on the theory that the best way to get kids interested in science is to present it with a dose of entertainment and in terms that they find most appealing. Thus far, the exhibition has been successful in museums, science centers, and theme parks. Bookings for these exhibits cover the next four years. We have made an investment of approximately $2.5 million. We do not anticipate any additional material investment on these existing exhibits. 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 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 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 quarter, 160,000 shares vested and were issued, the rights to which had been granted in prior years. This issuance caused a reduction in Accrued Liabilities and an increase in Stockholders' Equity for approximately $900,000. INVESTMENTS As of December 31, 2000, we had invested $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 $150,000 in the first three 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 $3,162,000, is at risk. Although projections provided and prepared by the management of OEC forecast 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. 8 10 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 invested $49,500 to acquire 4,500 shares of their stock during their initial public offering. At February 7, 2001, our investment had a market value of $2,574,000. The unrealized loss on this investment is recorded as part of Comprehensive Income. 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 product, referred to as Driveoff.com, was sold during 2000 to CarPoint, which is majority-owned by Microsoft. At February 7, 2001, these shares had a market value of $1,483,000. We have committed to a joint venture with Learning Byte, International (LBI). LBI, based in Minneapolis, Minnesota, is a web based provider of training content and curriculum. As part of our commitment, subsequent to December 31, 2000, we have advance funded approximately $400,000, with a total commitment of $1,000,000 . Our plan is to offset these amounts with future usage of their services. If we do not have sufficient business activity with LBI, the funding amounts will be written off. At December 31, 2000, we had invested approximately $650,000 in a joint venture in PerforMaps, L.L.C. PerforMaps, based in Minneapolis, Minnesota, is a provider of goods and services related to specific projects associated with cultural change initiatives. 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 to business. CAUTIONARY STATEMENT FOR 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) the loss of key employees and/or customers; (7) our customers continued reliance on outsourcing; (8) changes in our capital structure and cost of capital, and ability to borrow sufficient funds at reasonable rates (9) 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; (10) uncertainties relating to business and economic conditions; (11) management's ability to maintain proper contract and employee staffing levels; (12) the value of investments of the Company; (13) our ability to timely bill and collect trade accounts receivables; (14) cutbacks in client budgets, project deferrals and cancellations; and (15) our ability to manage our growth and profitability. 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 9 11 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 $256,000, 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. 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 $811,000 decrease in fair value in our available-for-sale securities, based upon February 7, 2001 closing market prices for Navidec and eCollege.com. 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 None ITEM 5. OTHER INFORMATION None 10 12 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

VSI HOLDINGS INC 10-Q/A