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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1999 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from_______to_______ |
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incorporation or organization) Identification No.) |
Bloomfield Hills, MI 48304-2263 |
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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 33,560,531 shares of Common Stock, par value $.01 per
share, outstanding at December 31, 1999. The Company held 300,250
of these shares as treasury stock.
Item 1. FINANCIAL STATEMENTS
1999 (Unaudited) |
1999 (Audited) |
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CURRENT ASSETS | ||
Cash |
$ 469,000 |
$ 552,000 |
Cash in escrow |
3,282,000 |
2,930,000 |
Trade accounts receivable: | ||
Billed |
42,054,000 |
39,820,000 |
Unbilled |
5,507,000 |
9,548,000 |
Notes receivable and advances |
235,000 |
92,000 |
Inventory |
450,000 |
410,000 |
Accumulated costs of uncompleted programs |
5,391,000 |
4,883,000 |
Deferred tax asset |
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207,000 |
Prepaid federal income tax |
777,000 |
1,451,000 |
Investment in available-for-sale securities | 10,355,000 | 5,259,000 |
Other current assets |
1,049,000 |
609,000 |
Total Current Assets |
69,569,000 |
65,761,000 |
LONG-TERM PORTION OF NOTES RECEIVABLE - Related Parties |
857,000 |
777,000 |
PROPERTY,PLANT AND EQUIPMENT (NET) |
20,630,000 |
21,575,000 |
DEFERRED TAX ASSET |
715,000 |
715,000 |
INVESTMENTS |
4,534,000 |
7,764,000 |
GOODWILL-NET |
1,603,000 |
1,710,000 |
Total Assets |
$97,908,000 |
$98,302,000 |
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(Unaudited) |
1999 (Audited) |
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CURRENT LIABILITIES | ||
Current portion of long-term debt |
$ 576,000 |
$ 516,000 |
Trade accounts payable |
14,201,000 |
18,452,000 |
Notes payable to bank |
30,439,000 |
28,426,000 |
Accrued liabilities |
2,259,000 |
3,318,000 |
Advances from customers for uncompleted projects |
6,045,000 | 5,975,000 |
Total Current Liabilities |
53,520,000 |
56,687,000 |
LONG-TERM LIABILITIES | ||
Notes payable - Related parties |
11,678,000 |
11,636,000 |
Long-term debt - Other |
7,469,000 |
7,660,000 |
Total Long-Term Liabilities |
19,147,000 |
19,296,000 |
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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, 33,561,000 shares issued at December 31, 1999 and 32,960,000 at September 30, 1999 | 336,000 | 330,000 |
Treasury stock, (at cost) 300,000 shares at December 31, 1999, and September 30, 1999 | (1,535,000) | (1,535,000) |
Additional paid-in capital |
8,055,000 |
6,949,000 |
Accumulated Other Comprehensive Income | 2,809,000 | 1,855,000 |
Retained Earnings |
15,576,000 |
14,720,000 |
Total Stockholders' Equity |
25,241,000 |
22,319,000 |
Total Liabilities and Stockholders' Equity |
$97,908,000 |
$98,302,000 |
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See Notes to Consolidated Financial Statements
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1999 (Unaudited) |
1998 (Unaudited) |
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REVENUE |
$38,100,000 |
$35,337,000 |
EXPENSES | ||
Cost of revenue |
16,654,000 |
17,071,000 |
Operating expenses |
19,316,000 |
15,477,000 |
Total Expenses |
35,970,000 |
32,548,000 |
OPERATING INCOME (LOSS) |
2,130,000 |
2,789,000 |
OTHER EXPENSES | ||
Interest and other income (expense) | (41,000) | 180,000 |
Interest expense |
(791,000) |
(604,000) |
Total Other Expenses |
(832,000) |
(424,000) |
INCOME (LOSS) - Before income taxes | 1,298,000 | 2,365,000 |
PROVISION FOR INCOME TAXES (BENEFIT) | 442,000 | 855,000 |
INCOME (LOSS) FROM CONTINUING OPERATIONS |
$ 856,000 |
$ 1,510,000 |
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NET INCOME (LOSS) |
$ 856,000 |
$ 1,510,000 |
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OTHER COMPREHENSIVE INCOME | ||
Foreign Currency Translation Adjustment |
(66,000) |
- |
Unrealized gain on Securities, Net of Tax of $526,000 |
1,021,000 |
- |
TOTAL OTHER COMPREHENSIVE INCOME |
$ 955,000 |
$ - |
COMPREHENSIVE INCOME |
$ 1,811,000 |
$ 1,510,000 |
See Notes to Consolidated Financial Statements
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1999 (Unaudited) |
1998 (Unaudited) |
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EARNINGS (LOSS) PER SHARE: | ||
Basic: |
$ 0.03 |
$ 0.05 |
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Fully Diluted: |
$ 0.03 |
$ 0.05 |
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Weighted Average Shares Basic |
32,761,000 |
32,822,000 |
Dilutive |
32,972,000 |
33,448,000 |
See Notes to Consolidated Financial Statements
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1999 (Unaudited) |
1998 (Unaudited) |
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Cash Flows from Operating Activities | ||
Net Income |
$ 856,000 |
$ 1,510,000 |
Adjustments to reconcile net income to Net cash from operating activities: | ||
Depreciation and amortization |
1,462,000 |
1,534,000 |
Equity in losses of unconsolidated investee | 203,000 | 61,000 |
Deferred income taxes |
207,000 |
804,000 |
(Increase) decrease in assets: | ||
Trade accounts receivable |
1,807,000 |
11,349,000 |
Inventory |
(40,000) |
(31,000) |
Other Current Assets |
234,000 |
(163,000) |
Accumulated costs of uncompleted programs | (508,000) | (2,611,000) |
Increase (decrease) in liabilities: | ||
Trade accounts payable |
(4,251,000) |
(614,000) |
Accrued liabilities |
(538,000) |
(5,197,000) |
Advances from customers for uncompleted projects | (282,000) | 409,000 |
Net cash provided by (used in) operating activities |
(850,000) | 7,051,000 |
Cash Flows from Investing Activities | ||
Changes notes receivable |
(80,000) |
(458,000) |
Changes notes receivable Related Party | (143,000) | 382,000 |
Changes property and equipment |
(410,000) |
(945,000) |
Investment in unconsolidated investments |
(523,000) | (5,300,000) |
Net cash provided by (used in) investing activities | (1,156,000) | (6,321,000) |
Cash Flows from Financing Activities | ||
Changes Long Term Debt |
(131,000) |
(89,000) |
Change to related party debt |
42,000 |
927,000 |
Net borrowings Notes Payable |
2,013,000 |
(1,198,000) |
Proceeds from exercise of stock options | 65,000 | (1,000) |
Proceeds from issuance of stock |
- |
19,000 |
Payments for stock redemption |
- |
(397,000) |
Distributions to shareholders |
- |
- |
Net cash provided by (used in) financing activities |
1,989,000 | (739,000) |
Effect of Exchange Rate Changes on Cash | (66,000) | (3,000) |
Net Increase (Decrease)in Cash |
(83,000) |
(12,000) |
Cash - Beginning of Period |
552,000 |
463,000 |
Cash - End of Period |
$ 469,000 |
$ 451,000 |
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See 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, 1999.
Results for interim periods should not be considered indicative
of the results that may be expected for the year ended September
30, 2000.
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
BUSINESS DESCRIPTION:
VSI Holdings, Inc. (the "Company", "we", "our",
"us") presently consists of wholly-owned subsidiaries
in the Marketing Services and Entertainment business sectors under
the following trade names:
Visual Services, Inc., a broad-based provider of educational curriculums
and product training; interactive technology-based distance learning
systems; product launches; Web site development, internet, intranet,
and extranet solutions; direct-response and site-based marketing;
change process and cultural change consulting.
Vispac, Inc., integrated logistics and call center operations.
Performance Systems Group; in-field consulting and change process
sustainment services.
Advanced Animations, Inc., a manufacturer of product simulators,
animatronic figures and displays for theme parks, casinos, and
retail.
We are attempting to position ourselves to take advantage of opportunities
created by changes in technology. One of our practices has been
the usage of a wide variety of technologies, without overdependence
on any one technology. 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.,
and PSG International, Inc. Inter-company balances and transactions
have been eliminated in consolidation.
OPERATING RESULTS
Revenues were $ 38,100,000 for the three months ended December
31,1999, compared to $35,337,000 for the same period last year.
This increase of 8% for the three months is attributable to some
projects which had previously slipped from expected performance
dates. Revenues for the quarter included work done on a large
scale ride-and-drive (the opportunity for consumers to drive and
compare competitive vehicles in a neutral environment). Revenues
in the Entertainment segment were down $800,000 from the prior
year as production shifted to building a touring exhibit that
we will own and operate, temporarily reducing our revenues; this
property is described further in our discussion of investments.
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 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. Such factors make it difficult to
project full year financial results.
Operating Expense. Our operating expenses have grown to $19,316,000
for the three months ended December 31, 1999 from $15,477,000
in the three months ended December 31, 1998. This increase of
25% is mainly attributable to the following factors: (1) wage
escalations for computer-industry and other professionals; (2)
Michigan's extremely tight and competitive contract labor supply;
and (3) 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.
LIQUIDITY AND CAPITAL RESOURCES
We have various bank lines of credit totaling $45,000,000, which
mature in February and November of 2000. At December 31, 1999,
we had borrowed $30,439,000 (including outstanding checks, less
cash balances) against these lines. Interest on these lines is
primarily based on LIBOR (London Inter-Bank Offered Rate) plus
1.5%. The rate at December 31, 1999 was 7.33%.
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. We fully expect that Grossology
will expand worldwide as it appeals to a variety of venues including
science centers, children's museums, theme parks, malls and zoos.
This fiscal year, the initial exhibition design and construction
required capital investment of approximately $800,000. Additional
capital will be committed in the future based on the number of
exhibits to be built.
Since we are a net borrower of funds, minimal cash balances are
kept on hand. At any point in time, we may have more money in
checks outstanding than the cash balance. When checks are presented
for payment, the bank notifies us. We borrow on our lines of credit
to cover the checks.
We believe that cash flows from operations, along with bank borrowings,
will be sufficient to finance our activities in 2000. 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 2000.
Stock and Stock Options Granted
In the current fiscal year, we issued options for 38,000 shares
of our common stock. One-half of the options are exercisable two
years from the date of the grant, with the remaining options exercisable
three years from the date of the grant. The options have an exercise
price ranging from $4.00 to $5.25 and expire five years from the
date of grant.
Also this year, we granted 31,000 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 2000. During the quarter, 174,000 shares vested and were issued, the rights to which had been granted in prior years.
During the quarter our majority stockholder exercised the option
to purchase 425,000 shares of common stock at $0.15625 per share.
These options were granted in 1993 at market price.
INVESTMENTS
At September 30, 1999, we had invested $4 million in a limited
partnership (as a limited partner) which will develop a theme
park, located in Kansas, based on the icon story "The Wizard
of Oz". In the current fiscal year we invested an additional
$500,000. The park is estimated to be a $770 million project,
with approved support exceeding $250 million from the state of
Kansas in the form of Sales Tax Revenue bonds.
Our Advanced Animations subsidiary has been designated as the
exclusive supplier of all animatronic character elements for the
park, which is scheduled to open in 2003. Our Visual Services,
Inc. subsidiary is the exclusive marketing agency of record for
the time period through the opening of the park.
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. These shares cannot be sold until June, 2000. In addition,
we invested $49,500 to acquire 4,500 shares of their stock during
their initial public offering. At December 31, 1999, our investment
had a market value of $5,177,000. The unrealized gain on this
investment is recorded as part of Comprehensive Income.
During the prior fiscal year, we exercised options to purchase
431,525 shares of Navidec, Inc. (NASDAQ - NVDC) for $2,450,000.
177,175 of these shares cannot be sold until April, 2000. The
balance of the shares cannot be sold until October, 2000. At December
31, 1999, these shares had a market value of $5,178,000.
We have committed to invest up to $375,000 in Visual Learning Systems (VLS). Through December 31, 1999, we have invested $50,000. Also, we will make available through a line of credit, up to an additional $1,125,000. VLS, based in Boston, Massachusetts, is a learning technologies start-up company focusing on training and performance support solutions for both the corporate and career development education markets.
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.
Year 2000
The year 2000 issue, as widely reported, could cause malfunctions in certain computer-related applications with respect to dates on or after January 1, 2000. We expect most material year 2000 compliance problems to have arisen on or immediately after January 1, 2000. As of January 31, 2000, we are not aware of any material year 2000-related problems associated with our internal systems or software or with the software and systems of our vendors, customers or suppliers. It is possible, however, that year 2000-related problems could arise at a later date. While we do not have plans at this time to complete additional work, we do not expect to experience any material adverse effects on our business, financial condition or results of operations from any vendor, customer or supplier who may experience year 2000 problems.
We have primarily utilized internal resources to assess, test, remediate and implement software and equipment related to the year 2000. The total cost of our year 2000 program, excluding employee salaries, was approximately $400,000, primarily attributable to software upgrades and modifications.
We do not have a formal contingency plan established in the
event that the worst-case scenario arose in the future related
to the year 2000 issue. The potential liability and loss of revenue
from these issues is not determinable.
"CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE
HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995"
Certain statements in Management Discussion and Analysis of Financial
Condition and Results of Operations and certain other sections
of this report are forward-looking. These may be identified by
the use of forward-looking words or phrases such as "believe,"
"expect," "anticipate," "should,"
"planned," "intend," "estimated,"
and "potential," among others. These forward-looking
statements are based on 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 our operations, performance, development and results
include but are not limited to: (1) the complexity and uncertainty
regarding the development of new products and services; (2) the
loss of market share through competition; (3) the introduction
of competing products or service technologies by other companies;
(4) pricing pressures from competitors and/or customers; (5) our
inability to protect proprietary information and technology; (6)
the ability to hire and retain key employees; (7) successful completion
and integration of future acquisitions; (8) uncertainties relating
to business and economic conditions; (9) uncertainties relating
to customer plans and commitments; (10) dependence on the automotive
industry; (11) changes in our capital structure and cost of capital.
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 the next
12 months, the adverse impact on our results of operations would
be approximately $201,000, 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 $2,071,000 decrease in fair value
in our available-for-sale securities, based upon December 31,
1999 closing market prices for Navidec and eCollege.com. Although
classified as available-for-sale, contractual restriction prevent
us from being able to sell any of these shares until various dates
in 2000, as noted in the investments section. Management is undecided
whether or not it will maintain or reduce our positions when the
contractual restrictions expire.
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
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 |
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February 11, 2000 |
/S/Steve Toth, Jr. |
February 11, 2000 |
/S/Thomas W. Marquis |
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